The accompanying notes to consolidated financial statements are an integral part of these statements.

The consolidated financial statements of FNCB are comprised of the accounts of FNCB Bancorp, Inc., and its wholly owned subsidiary, FNCB Bank (the “Bank”), as well as the Bank’s wholly owned subsidiaries (collectively, “FNCB”). The accounting and reporting policies of FNCB conform to accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10-01 of Regulation S-X. Accordingly, they do not include all the information and accompanying notes required by GAAP for complete financial statements. In the opinion of management, all adjustments necessary for a fair presentation of the financial position and the results of operations for the periods presented have been included in the consolidated financial statements. All intercompany balances and transactions have been eliminated in consolidation. Prior period amounts have been reclassified when necessary to conform to the current period’s presentation. Such reclassifications did not have an impact on the operating results or financial position of FNCB. The operating results and financial position of FNCB for the three ~~and~~ ~~nine~~months ended ~~September 30, 2021~~March 31, 2022 may not be indicative of future results of operations and financial position.

The preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ significantly from those estimates. Material estimates that are particularly susceptible to change in the near term are the allowance for loan and lease losses (“ALLL”), securities’ valuation and impairment evaluation ~~the valuation of other real estate owned (“OREO”),~~ and income taxes.

These financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in FNCB’s audited financial statements, included in the Annual Report filed on Form 10-K as of and for the year ended December 31, ~~2020~~2021.

ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): “Measurement of Credit Losses on Financial Instruments,” replaces the current loss impairment methodology under GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to form credit loss estimates in an effort to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit. ASU 2016-13 is commonly referred to as Current Expected Credit Losses ("CECL") and will require a financial asset (or a group of financial assets) measured at amortized cost basis to be presented at the net amount expected to be collected. The amendments in this update affect entities holding financial assets and net investment in leases that are not accounted for at fair value through net income, including such financial assets as loans, debt securities, trade receivables, net investments in leases, off-balance-sheet credit exposures, reinsurance receivables, and any other financial assets not excluded from the scope that have the contractual right to receive cash. On June 17, 2016, the four federal financial institution regulatory agencies (the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, the National Credit Union Administration, and the Office of the Comptroller of the Currency), issued a joint statement to provide information about ASU 2016-13 and the initial supervisory views regarding the implementation of the new standard. The joint statement applies to all banks, savings associations, credit unions and financial institution holding companies, regardless of asset size. The statement details the key elements of, and the steps necessary for, the successful transition to the new accounting standard. In addition, the statement notifies financial institutions that because the appropriate allowance levels are institution-specific amounts, the agencies will not establish benchmark targets or ranges for the change in institutions’ allowance levels upon adoption of the ASU, or for allowance levels going forward. Due to the importance of ASU 2016-13, the agencies encourage financial institutions to begin planning and preparing for the transition and state that senior management, under the oversight of the board of directors, should work closely with staff in their accounting, lending, credit risk management, internal audit, and information technology functions during the transition period leading up to, and well after, adoption. ASU 2016-13 was originally effective for public business entities that are registered with the U.S. Securities and Exchange Commission (“SEC”) under the Securities and Exchange Act of 1934, as amended (the ~~"Exhange~~"Exchange Act"), including smaller reporting companies, for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. All entities may adopt the amendments in this ASU earlier as of the fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. On November 15, 2019, the FASB issued ASU 2019-10, "Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842): Effective Dates," which finalized various effective date delays for private companies, not-for-profit organizations, and certain smaller reporting companies. Specifically, under ASU 2019-10, the effective date for implementation of CECL for smaller reporting companies, private companies and not-for-profits was extended to fiscal years, and interim periods within those years, beginning after December 15, 2022. FNCB is a smaller reporting company, and accordingly, will adopt this guidance on January 1, 2023. FNCB has a CECL task group comprised of members of its finance, credit administration, lending, internal audit, loan operations and information systems units. The CECL task group understands the provisions of ASU 2016-13 and is currently in the process of implementing the new ~~guidance, which includes, but is~~guidance. As of ~~not~~March 31, 2022, ~~limited to: (~~1~~) identifying~~the CECL task group has selected the segments and sub-segments within the loan portfolio that have similar risk ~~characteristics; (~~2~~) determining~~characteristics that will be utilized for the ~~appropriate methodology for each segment; (~~3~~) implementing~~model and has identified and implemented necessary changes ~~that are necessary~~ to its core operating system and interfaces to be able to capture appropriate data ~~requirements;~~requirements. FNCB has engaged a third-party consultant to assist and (4)provide guidance in determining the appropriate methodology for each segment and evaluating qualitative factors and economic to develop appropriate forecasts for integration into the model. FNCB has also engaged another third-party consultant to perform an independent validation of the model prior to December 31, 2022. FNCB is currently evaluating the effect this guidance may have on its operating results and/or financial position, including assessing any potential impact on its capital.

ASU 2022-02, Financial Instruments—Credit Losses (Topic 326): "Troubled Debt Restructurings and Vintage Disclosures," eliminates the TDR recognition and measurement guidance and, instead, requires that an entity evaluate (consistent with the accounting for other loan modifications) whether the modification represents a new loan or a continuation of an existing loan. The amendments also enhance existing disclosure requirements and introduce new requirements related to certain modifications of receivables made to borrowers experiencing financial difficulty. For public business entities, these amendments require that an entity disclose current-period gross charge-offs by year of origination for financing receivables and net investment in leases within the scope of Subtopic 326-20. Gross charge-off information must be included in the vintage disclosures required for public business entities in accordance with paragraph 326-20-50-6, which requires that an entity disclose the amortized cost basis of financing receivables by credit quality indicator and class of financing receivable by year of origination. The amendments in this update are effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. These amendments should be applied prospectively, except for the transition method related to the recognition and measurement of TDRs, which an entity has the option to apply a modified retrospective transition method resulting in a cumulative-effect adjustment to retained earnings in the period of adoption. Early adoption is permitted if an entity has adopted ASU No.2016-13, including adoption in an interim period. If an entity elects to early adopt ASU No.2022-02 in an interim period, the guidance should be applied as of the beginning of the fiscal year that includes the interim period. An entity may elect to early adopt the amendments about TDRs and related disclosure enhancements separately from the amendments related to vintage disclosures. FNCB will ASU 2022-02 simultaneously with the adoption of CECL on January 1, 2023 and is currently evaluating the impact of adopting the new guidance on the consolidated financial statements.

Refer to Note 2 to FNCB’s consolidated financial statements included in the Annual Report on Form 10-K for the fiscal year ended December 31, ~~2020~~2021 (the "~~2020~~2021 Annual Report") for a discussion of additional accounting guidance applicable to FNCB that will be adopted in future periods.

The following tables present the amortized cost, gross unrealized gains and losses, and the fair value of FNCB’s available-for-sale debt securities at ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020~~2021:

Except for securities of U.S. government and government-sponsored agencies, there were no0 securities of any individual issuer that exceeded 10.0% of shareholders’ equity at ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020~~2021.

~~Securities with carrying amounts of $367.3 million at~~ ~~September 30, 2021~~ ~~and $279.7 million at~~ ~~December 31, 2020~~ ~~were pledged as collateral to secure public deposits and for other purposes.~~

The following table presents the maturity information of FNCB’s available-for-sale debt securities at ~~September 30, 2021~~March 31, 2022. Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties. Because collateralized mortgage obligations, mortgage-backed securities and asset-backed securities are not due at a single maturity date, they are not included in the maturity categories in the following maturity summary.

The following table presents the gross proceeds received, and gross realized gains and losses, on sales of available-for-sale debt securities for the three ~~and~~ ~~nine~~months ended ~~September 30, 2021~~March 31, 2022 and ~~2020~~2021. Gains and losses realized on sales of available-for-sale debt securities are included in non-interest income in the consolidated statements of income.

The following tables present the number, fair value and gross unrealized losses of available-for-sale debt securities with unrealized losses at ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020~~2021, aggregated by investment category and length of time the securities have been in an unrealized loss position.

Management evaluates individual securities in an unrealized loss position quarterly for other than temporary impairment (“OTTI”). As part of its evaluation, management considers, among other things, the length of time a security’s fair value is less than its amortized cost, the severity of decline, any credit deterioration of the issuer, whether management intends to sell the security, and whether it is more likely than not that FNCB will be required to sell the security prior to recovery of its amortized cost.

Management performed a review of all securities in an unrealized loss position as of ~~September 30, 2021~~March 31, 2022 and determined that changes in the fair values of the securities were consistent with movements in market interest rates and spreads or general market conditions. In addition, as part of its review, management noted that there was no material change in the credit quality of any of the issuers or any other event or circumstance that may cause a significant adverse effect on the fair value of these securities. Moreover, to date, FNCB has received all scheduled principal and interest payments and expects to fully collect all future contractual principal and interest payments on all securities in an unrealized loss position at ~~September 30, 2021~~March 31, 2022. FNCB does not intend to sell the securities, nor is it more likely than not that it will be required to sell the securities, prior to recovery of their amortized cost. Based on the results of its review and considering the attributes of these debt securities, management concluded that the individual unrealized losses were temporary and OTTI did not exist at ~~September 30, 2021~~March 31, 2022.

Included in equity securities with readily determinable fair values at ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020~~2021 were investments in the common or preferred stock of publicly traded bank holding companies and an investment in a mutual fund comprised of 1-4 family residential mortgage-backed securities collateralized by properties within FNCB’s market area. Equity securities ~~had a cost basis and fair value of $3.7 million and $4.8 million, respectively, at~~ ~~September 30, 2021~~ ~~and $2.5 million and $3.0 million, respectively, at~~ ~~December 31, 2020.~~ ~~Equity securities~~ with readily determinable fair values are reported at fair value with net unrealized gains and losses recognized in the consolidated statements of income.

The following table presents unrealized and realized gains and losses recognized in net income on equity securities for the three ~~and~~ ~~nine~~months ended ~~September 30, 2021~~March 31, 2022 and ~~2020~~2021.

At ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020,~~2021, equity securities without readily determinable fair values consisted of a $500 thousand investment in a fixed-rate, non-cumulative perpetual preferred stock of a privately-held bank holding company, which is included in other assets in the consolidated statement of financial condition. The preferred stock pays quarterly dividends at an annual rate of 8.25%~~, which commenced on~~ ~~March 30, 2021.~~ . The preferred stock of this bank holding company is not traded on any established market and is accounted for as an equity security without a determinable fair value. Under GAAP, an equity security without a readily determinable fair value shall be written down to its fair value if a qualitative assessment indicates that the investment is impaired, and the fair value of the investment is less than its carrying value. As part of its qualitative assessment, management engaged an independent third party to provide valuations of this investment as of ~~September 30, 2021~~March 31, 2022 and December 31, 2021, ~~2020~~, which indicated that the investment was not impaired. Accordingly, management determined that no adjustment for impairment was required at ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020~~2021.

The following table presents FNCB's investment in restricted stock at ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020~~2021. Restricted stock has limited marketability and is carried at cost. Management noted no indicators of impairment for the Federal Home Loan Bank ("FHLB") of Pittsburgh or Atlantic Community Banker’s Bank stock at ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020~~2021.

The following table summarizes loans and leases receivable, net, by major category at ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020~~2021:

Included in commercial and industrial loans and leases at ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020~~2021 were ~~$49.4~~$8.0 million and ~~$78.6~~$21.9 million, respectively, of loans originated under the Small Business Administration ("SBA") Payment Protection Program ("PPP"). Included in net deferred loan fees at ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020,~~2021, were ~~$2.0~~$0.4 million and ~~$2.6~~$1.0 million, respectively, in deferred loan origination fees, net of deferred loan origination costs, associated with the PPP loans. PPP loans are 100.0% guaranteed and may be forgiven by the SBA. Accordingly, there was 0 ALLL established for PPP loans at ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020.~~2021.

~~During the~~In ~~third~~2021, ~~quarter~~ management expanded FNCB's commercial credit product offerings to include commercial equipment financing, through simple interest loans, direct finance leases and ~~simple~~municipal leases. Simple interest ~~loans. FNCB hired a team of professionals highly-experienced with this type of financing to initiate this lending program, which is doing business under the name of~~ ~~1st~~ ~~Equipment Finance and operating out of FNCB's community office located in Exeter, Luzerne County, Pennsylvania. As of~~ ~~September 30, 2021,~~ ~~leases, net of unearned income,~~loans originated under this initiative ~~were $1.7 million and~~ are included in commercial and industrial loans and ~~leases.~~ totaled $23.0 million at March 31, 2022 and $7.9 million at December 31, 2021. Tax-free municipal leases originated under this initiative are included in state and political subdivision loans and totaled $3.1 million at March 31, 2022 and $2.4 million at December 31, 2021. There were 0 direct finance leases originated under this initiative or outstanding at March 31, 2022 and December 31, 2021.

FNCB has granted loans, letters of credit and lines of credit to certain of its executive officers and directors as well as to certain of their related parties. For more information about related party transactions, refer to Note 6,8, “Related Party Transactions” to these consolidated financial statements.

FNCB originates 1-4 family mortgage loans for sale in the secondary market. During the three ~~and~~ ~~nine~~months ended ~~September~~March 31, 2022 ~~30,~~and 2021, the principal balance of 1-4 family mortgages sold on the secondary market were~~$1.1~~ $0.5 million and ~~$7.0~~$4.3 million, ~~respectively, compared to $4.6 million and $10.5 million~~respectively. There were 0 net gains or losses realized on the sale of residential mortgage loans for the three ~~and~~ ~~nine~~months ended ~~September 30, 2020,~~March 31, 2022. ~~respectively.~~ Net gains on the sale of residential mortgage loans for the three ~~and~~ ~~nine~~months ended ~~September~~March 31, 2021 ~~30,~~~~2021~~were ~~$41 thousand and $312 thousand, respectively, and $186 thousand and $465 thousand, respectively, for the comparable periods of~~ ~~2020.~~$224 thousand. FNCB retains servicing rights on mortgages sold on the secondary market. AtThere were ~~September 30, 2021~~no ~~and~~ ~~December 31, 2020~~~~, there were $0.5 million and $2.1 million, respectively, in~~ 1-4 family residential mortgage loans held for ~~sale.~~sale at March 31, 2022 and December 31, 2021.

The unpaid principal balance of loans serviced for others, which includes residential mortgages and SBA-guaranteed loans, was ~~$81.0~~$71.0 million at ~~September 30, 2021~~March 31, 2022 and ~~$96.5~~$77.2 million at December 31, ~~2020~~2021.

There were no material changes to the risk characteristics of FNCB’s loan segments, loan classification and credit grading systems and methodology for determining the adequacy of the ALLL during the ~~nine~~three months ended ~~September 30, 2021~~March 31, 2022. Refer to Note 2, “Summary of Significant Accounting Policies” to FNCB’s consolidated financial statements included in the ~~2020~~2021 Annual Report on Form 10-K for information about the risk characteristics related to FNCB’s loan segments, loan classification and credit grading systems and methodology for determining the adequacy of the ALLL.

Management evaluates the credit quality of the loan portfolio on an ongoing basis and performs a formal review of the adequacy of the ALLL at the end of each quarter. This evaluation is inherently subjective, as it requires material estimates that may be susceptible to significant revisions based upon changes in economic and real estate market conditions. However, actual loan losses may be significantly more than the established ALLL, which could have a material negative effect on FNCB’s operating results or financial condition. Management continues to monitor the loan portfolio for any potential adverse impact to asset quality related to economic uncertainty and disruption caused by the COVID-19 pandemic. While management uses the best information available to make its evaluations, future adjustments to the ALLL may be necessary if conditions differ substantially from the information used in making the evaluations. Banking regulators, as an integral part of their examination of FNCB, also review the ALLL, and may require, based on their judgments about information available to them at the time of their examination, that certain loan balances be charged off or require that adjustments be made to the ALLL.

The following table summarizes activity in the ALLL by major category for the three ~~and~~ ~~nine~~months ended ~~September 30, 2021~~March 31, 2022 and ~~2020~~2021.

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The following table presents, by major category, the allocation of the ALLL and the related loan balance disaggregated based on the impairment methodology at ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020~~2021:

Management continuously monitors and evaluates the credit quality of FNCB’s commercial loans by regularly reviewing certain credit quality indicators. Management utilizes credit risk ratings as the key credit quality indicator for evaluating the credit quality of FNCB’s loan receivables.

FNCB’s loan rating system assigns a degree of risk to commercial loans based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information and current economic trends, among other factors. Management analyzes these non-homogeneous loans individually by grading the loans as to credit risk and probability of collection for each type of loan. Commercial and industrial loans include commercial indirect auto loans which are not individually risk rated, and construction, land acquisition and development loans include residential construction loans which are also not individually risk rated. These loans are monitored on a pool basis due to their homogeneous nature as described in “Credit Quality Indicators – Other Loans” below. FNCB risk rates certain residential real estate loans and consumer loans that are part of a larger commercial relationship using a credit grading system as described in “Credit Quality Indicators – Commercial Loans.” The grading system contains the following basic risk categories:

This analysis is performed on a quarterly basis using the following definitions for risk ratings:

Pass – Assets rated 1 through 5 are considered pass ratings. These assets show no current or potential problems and are considered fully collectible. All such loans are evaluated collectively for ALLL calculation purposes. However, accruing loans restructured under a troubled debt restructuring (“TDRs”) that have been performing for an extended period, do not represent a higher risk of loss, and have been upgraded to a pass rating are evaluated individually for impairment.

Special Mention – Assets classified as special mention do not currently expose FNCB to a sufficient degree of risk to warrant an adverse classification but do possess credit deficiencies or potential weaknesses deserving close attention. Special mention assets have a potential weakness or pose an unwarranted financial risk which, if not corrected, could weaken the asset and increase risk in the future.

Substandard – Assets classified as substandard have well defined weaknesses based on objective evidence and are characterized by the distinct possibility that FNCB will sustain some loss if the deficiencies are not corrected.

Doubtful – Assets classified as doubtful have all the weaknesses inherent in those classified as substandard with the added characteristic that such weaknesses make collection or liquidation in full highly questionable and improbable based on current circumstances.

Loss – Assets classified as loss are those considered uncollectible and of such little value that their continuance as assets is not warranted.

Certain residential real estate loans, consumer loans, commercial and municipal indirect auto loans are monitored on a pool basis due to their homogeneous nature. Loans that are delinquent 90 days or more are placed on non-accrual status unless collection of the loan is in process and reasonably assured. FNCB utilizes accruing versus non-accrual status as the credit quality indicator for these loan pools.

The following tables present the recorded investment in loans and leases receivable by major category and credit quality indicator at ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020~~2021:

Included in loans and leases receivable are loans for which the accrual of interest income has been discontinued due to deterioration in the financial condition of the borrowers. The recorded investment in these non-accrual loans was ~~$4.5 million and $5.6~~$3.9 million at both ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020~~2021~~, respectively.~~. Generally, loans are placed on non-accrual status when they become 90 days or more delinquent. Once a loan is placed on non-accrual status, it remains on non-accrual status until it has been brought current, has six months of performance under the loan terms, and factors indicating reasonable doubt about the timely collection of payments no longer exist. Therefore, loans may be current in accordance with their loan terms, or may be less than 90 days delinquent, and still be on a non-accrual status. There were 0 loans past due 90 days or more and still accruing at ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020~~2021.

The following tables present the delinquency status of past due and non-accrual loans and leases at ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020~~2021:

The following tables present a distribution of the recorded investment, unpaid principal balance and the related allowance for FNCB’s impaired loans, which have been analyzed for impairment under ASC 310, at ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020~~2021. Non-accrual loans, other than TDRs, with balances less than the $100 thousand loan relationship threshold are not evaluated individually for impairment and accordingly, are not included in the following tables. However, these loans are evaluated collectively for impairment as homogeneous pools in the general allowance under ASC 450. Total non-accrual loans, other than TDRs, with balances less than the $100 thousand loan relationship threshold that were evaluated under ASC 450 amounted to ~~$0.6~~$0.5 million and ~~$1.4~~$0.6 million at ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020~~2021, respectively.

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The following table presents the average balance and interest income by loan category recognized on impaired loans for the three ~~and~~ ~~nine~~months ended ~~September 30, 2021~~March 31, 2022 and ~~2020~~2021:

The additional interest income that would have been earned on non-accrual and restructured loans had these loans performed in accordance with their original terms approximated ~~$52 thousand and $167~~$43 thousand for the three ~~and~~ ~~nine~~months ended ~~September 30, 2021~~March 31, 2022 and ~~$77 thousand and $282~~$60 thousand for the three ~~and~~ ~~nine~~months ended ~~September~~ March 31, 2021.~~30,~~~~2020,~~ ~~respectively.~~

TDRs were ~~$6.9~~$6.7 million and ~~$7.7~~$6.9 million at ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020~~2021, respectively. Accruing and non-accruing TDRs were $6.5 million and $0.2 million, respectively, at March 31, 2022, and $6.7 million and $0.2 million, respectively, at ~~September 30, 2021~~~~, and $7.0 million and $0.7 million, respectively, at~~ December 31, ~~2020~~2021. Approximately ~~$26~~$18 thousand and ~~$197~~$26 thousand in specific reserves were established for TDRs at ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020~~2021, respectively. FNCB was not committed to lend additional funds to any borrower with a loan modified as a TDR at ~~September 30, 2021~~March 31, 2022.

The modification of the terms of loans classified as TDRs may include one or a combination of the following changes, among others: a reduction of the stated interest rate of the loan, an extension of the maturity date, capitalization of real estate taxes, a payment modification under a forbearance agreement, or a permanent reduction of the recorded investment in the loan.

There were 0 loans modified as TDRs during the three ~~and~~ ~~nine~~months ended ~~September~~March 31, 2022 ~~30,~~and 2021. There were 0 loans ~~modified as TDRs during the~~ ~~three~~ ~~months ended~~ ~~September 30, 2020.~~ ~~Loans modified as TDRs for the~~ ~~nine~~ ~~months ended~~ ~~September 30, 2020~~ ~~included 3 commercial and industrial loans and 1 residential loan. The~~ ~~three~~ ~~commercial and industrial loans~~that were ~~modified under forbearance agreements and had an aggregate pre- and post-modification recorded investment of $196 thousand. The~~ ~~one~~ ~~residential mortgage loan that was modified as a TDR involved an extension of terms and the loan had a pre-and post-modification balance of $88 thousand. There were 0 loans~~ modified as a TDR within the previous 12 months that subsequently defaulted ~~defined as~~ 90 ~~days or more past due,~~ during the three ~~and~~ ~~nine~~months ended ~~September 30, 2021~~March 31, 2022 and ~~2020.~~2021.

~~During the~~ ~~nine~~ ~~months ended~~ ~~September~~ ~~30,~~~~2021,~~ ~~FNCB obtained a deed in lieu of foreclosure for a~~There were 2 residential ~~mortgage~~real estate properties with aan aggregate recorded investment of ~~$138 thousand. FNCB accepted an offer of $205 thousand and the property went under an agreement of sale which closed in the~~ ~~third~~ ~~quarter of~~ ~~2021.~~ FNCB transferred the property to OREO at the selling price, less the estimated cost to sell, of $178 thousand and recorded a positive valuation adjustment of $40 thousand which is included in non-interest income for the ~~nine~~ ~~months ended~~ ~~September 30, 2021.~~ ~~Additionally, there was 1 residential mortgage loan with a recorded investment of $68~~$98 thousand that ~~was~~were in the process of foreclosure at ~~September 30,~~March 31, 2022. There were no residential real estate properties included in OREO at March 31, 2022.

There were 2 residential real estate loans with a total recorded investment of $286 thousand that were in the process of foreclosure at March 31, 2021. There were 0 residential real estate properties in OREO at ~~September 30,~~March 31, 2021.

~~There were 0 residential real estate properties foreclosed upon during the~~Note ~~three~~5. Deposits

The following table presents deposits by major category at March 31, 2022 and ~~nine~~ ~~months ended~~ ~~September 30, 2020~~ ~~or included in OREO at~~ ~~September~~ ~~30,~~~~2020.~~December 31, 2021:

Total deposits were $1.412 billion at March 31, 2022 and $1.455 billion at December 31, 2021. Interest-bearing deposits were $1.094 billion at March 31, 2022 and $1.135 billion at December 31, 2021. Non-interest-bearing deposits were $317.5 million at March 31, 2022 and $320.1 million at December 31, 2021.

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Note 6. Borrowings

FNCB has an agreement with the FHLB of Pittsburgh which allows for borrowings, either overnight or term, up to a maximum borrowing capacity based on a percentage of qualifying loans pledged under a blanket pledge agreement. In addition to pledging loans, FNCB is required to purchase FHLB of Pittsburgh stock based upon the amount of credit extended. Loans that were pledged to collateralize borrowings under this agreement were $475.4 million at March 31, 2022 and $478.3 million at December 31, 2021. FNCB's maximum borrowing capacity was $389.4 million at March 31, 2022. There was $67.0 million in overnight advances and $10.0 million in term borrowings through the FHLB of Pittsburgh outstanding at March 31, 2022.

Advances through the Federal Reserve Bank Discount Window generally include short-term advances which are fully collateralized by certain pledged loans of $26.9 million under the Federal Reserve Bank's Borrower-in-Custody ("BIC") program. There were 0 advances under the BIC program outstanding at March 31, 2022 and December 31, 2021. FNCB has available borrowing capacity of $20.4 million under this program at March 31, 2022.

At March 31, 2022 and December 31, 2021, borrowings also included $10.3 million in junior subordinated debentures issued by FNCB, with a scheduled maturity of December 15, 2036.

	*March 31,*		*December 31,*
(in thousands)	*2022*		*2021*
FHLB of Pittsburgh - overnight	$	66,950	$	0
FHLB of Pittsburgh - term		10,000		20,000
Subtotal FHLB of Pittsburgh advances		76,950		20,000
Junior subordinated debentures		10,310		10,310
Total borrowed funds	$	87,260	$	30,310

Note 5.7. Income Taxes

The following table presents a reconciliation between the effective income tax expense and the income tax expense that would have been provided at the federal statutory tax rate of 21.0% for the three ~~and~~ ~~nine~~months ended ~~September 30, 2021~~March 31, 2022 and ~~2020~~2021~~, respectively.~~.

	*For the Three Months Ended September 30,*												*For the Nine Months Ended September 30,*												*For the Three Months Ended March 31,*
	*2021*						*2020*						*2021*						*2020*						*2022*						*2021*
(dollars in thousands)	*Amount*			%			*Amount*			%			*Amount*			%			*Amount*			%			*Amount*			%			*Amount*			%
Provision at statutory tax rates	$	1,594			21.00	%	$	1,029			21.00	%	$	4,361			21.00	%	$	2,570			21.00	%	$	1,107			21.00	%	$	1,431			21.00	%
Add (deduct):
Tax effects of tax free interest income		(178	)		(2.34	)%		(179	)		(3.65	)%		(542	)		(2.61	)%		(450	)		(3.68	)%
Add (deduct) tax effects of:
Tax-free interest income																										(201	)		(3.81	)%		(183	)		(2.68	)%
Non-deductible interest expense		11			0.14	%		5			0.10	%		34			0.16	%		14			0.11	%		11			0.21	%		11			0.17	%
Bank-owned life insurance		(29	)		(0.38	)%		(25	)		(0.51	)%		(174	)		(0.84	)%		(77	)		(0.63	)%		(31	)		(0.59	)%		(114	)		(1.68	)%
Gains on equity securities		(33	)		(0.43	)%		0			0			(117	)		(0.56	)%		0			0
Unrealized losses (gains) on equity securities																										26			0.49	%		(76	)		(1.12	)%
Other items, net		(121	)		(1.61	)%		(38	)		(0.77	)%		(206	)		(0.99	)%		(8	)		(0.06	)%		5			0.10	%		(88	)		(1.29	)%
Income tax provision	$	1,244			16.38	%	$	792			16.17	%	$	3,356			16.16	%	$	2,049			16.74	%	$	917			17.40	%	$	981			14.40	%

Management evaluates the carrying amount of its deferred tax assets on a quarterly basis, or more frequently if necessary, in accordance with guidance set forth in ASC Topic 740 “Income Taxes,” and applies the criteria in the guidance to determine whether it is more likely than not that some portion, or all, of the deferred tax asset will not be realized within its life cycle, based on the weight of available evidence. Management performed an evaluation of FNCB’s deferred tax assets at ~~September 30, 2021~~March 31, 2022 taking into consideration all available positive and negative evidence at that time. Based on this evaluation, management believes that FNCB’s future taxable income will be sufficient to utilize its deferred tax assets. There was 0 valuation allowance for deferred tax assets recorded at ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020~~2021.

Note 6.8. Related Party Transactions

In conducting its business, FNCB has engaged in, and intends to continue to engage in, banking and financial transactions with directors, executive officers and their related parties.

Table of Contents

FNCB has granted loans, letters of credit and lines of credit to directors, executive officers and their related parties. The following table summarizes the changes in the total amounts of such outstanding loans, advances under lines of credit, net of any participations sold, as well as repayments during the three ~~and~~ ~~nine~~months ended ~~September 30, 2021~~March 31, 2022 and ~~2020~~2021.

	*Three Months Ended September 30,*						*Nine Months Ended September 30,*						*Three Months Ended March 31,*
(in thousands)	*2021*			*2020*			*2021*			*2020*			*2022*			*2021*
Balance, beginning of period	$	100,500		$	93,573		$	98,935		$	77,896		$	71,437		$	98,935
Additions, new loans and advances		63,471			17,424			113,150			48,120			15,362			8,210
Repayments		(70,593	)		(7,504	)		(95,050	)		(22,523	)		(10,009	)		(4,647	)
Other (1)		0			0			(23,657	)		0
Balance, end of period	$	93,378		$	103,493		$	93,378		$	103,493		$	76,790		$	102,498
(1) Other represents loans to related parties that ceased being related parties during the year

At ~~September 30, 2021~~March 31, 2022 there were 0 loans to directors, executive officers and their related parties that were not performing in accordance with the original terms of the loan agreements.

Deposits from directors, executive officers and their related parties held by the Bank at ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020~~2021 amounted to $~~152.8~~148.8 million and ~~$146.2~~$152.6 million, respectively. Interest paid on the deposits amounted to ~~$243~~$38 thousand and ~~$417~~$92 thousand for the ~~nine~~three months ended ~~September 30, 2021~~March 31, 2022 and ~~2020~~2021, respectively.

In the course of its operations, FNCB acquires goods and services from, and transacts business with, various companies of related parties, which include, but are not limited to, ~~employee health insurance,~~ fidelity bond and errors and omissions insurance, legal services, rent and repair of repossessed automobiles for resale. For 2021, goods and services acquired from related parties also included employee health insurance. FNCB recorded payments to related parties for goods and services of ~~$834~~$90 thousand and ~~$1.5 million~~$362 thousand for the three ~~and~~ ~~nine~~months ended ~~September 30,~~ March 31, 2022 and 2021,~~, respectively, and $588 thousand and $1.3 million for the respective periods of~~ ~~2020.~~ respectively.

~~Table of Contents~~

Note 79. Commitments and Contingencies

Leases

FNCB is obligated under operating leases for certain bank branches, office space, automobiles and equipment. Operating lease right of use ("ROU") assets represent FNCB's right to use an underlying asset during the lease term and operating liabilities represent FNCB's obligation to make lease payments under the lease agreement. ROU assets and operating lease liabilities are recognized at lease commencement based on the present value of the remaining lease payments using a discount rate that represents FNCB's incremental borrowing rate at the commencement date. ROU assets are included in other assets and operating lease liabilities are included in other liabilities in the consolidated statements of financial condition. As of ~~September 30, 2021~~March 31, 2022, ROU assets and lease liabilities were ~~$3.1~~$2.9 million and ~~$3.4~~$3.2 million, ~~respectively. FNCB entered into~~ ~~three~~ ~~new automobile leases during the~~ ~~nine~~ ~~months ended~~ ~~September 30, 2021~~ ~~with a ROU asset and corresponding lease liability of $46 thousand and $42 thousand,~~ respectively.

Operating lease expense associated with bank branches and office space is included in occupancy expense, while operating lease expenses associated with automobiles and office equipment are included in equipment expense in the consolidated statements of income. Total rental expense under leases amounted to ~~$287~~$98 thousand and ~~$312~~$97 thousand, respectively, at ~~September 30, 2021~~March 31, 2022 and ~~2020.~~2021.

The following table summarizes the maturity of remaining operating lease liabilities as of ~~September 30, 2021~~March 31, 2022:

(in thousands)	*September 30, 2021*		*March 31, 2022*
2021	$	93
2022		397	$	272
2023		366		368
2024		330		323
2025		335		328
2026 and thereafter		2,742
2026				329
2027 and thereafter				2,271
Total lease payments		4,263		3,891
Less: imputed interest		851		731
Present value of operating lease liabilities	$	3,412	$	3,160

The following table presents other information related to our operating leases:

(dollars in thousands)	*September 30, 2021*			March 31, 2022			March 31, 2021
Weighted-average remaining lease term (in years)		12.8			12.03			13.09
Weighted-average discount rate		3.30	%		3.28	%		3.32	%
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	306		$	125		$	108

Litigation

FNCB has been subject to tax audits, and is also a party to routine litigation involving various aspects of its business, such as employment practice claims, workers compensation claims, claims to enforce liens, condemnation proceedings on properties in which FNCB holds security interests, claims involving the making and servicing of real property loans and other issues incident to its business, none of which has or is expected to have a material adverse impact on the consolidated financial condition, results of operations or liquidity of FNCB.

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Note 810. Stock Compensation Plans

FNCB has a Long-Term Incentive Compensation Plan (“LTIP”) for directors, executives and key employees. The LTIP authorizes up to 1,200,000 shares of common stock for issuance and provides the Board of Directors with the authority to offer several different types of long-term incentives, including stock options, stock appreciation rights, restricted stock, restricted stock units, performance units and performance shares. During the ~~nine~~three months ended ~~September 30, 2021~~March 31, 2022 and ~~2020~~2021, the Board of Directors granted ~~66,065~~71,860 and ~~75,924~~66,065 shares of restricted stock, respectively, under the LTIP. At ~~September 30, 2021~~March 31, 2022, there were ~~679,207~~608,729 shares of common stock available for award under the LTIP. For the ~~nine~~three months ended ~~September 30, 2021~~March 31, 2022 and ~~2020~~2021, stock-based compensation expense, which is included in salaries and benefits expense in the consolidated statements of income, totaled $~~277~~100 thousand and ~~$259~~$80 thousand, respectively. Total unrecognized compensation expense related to unvested restricted stock awards was ~~$1.1~~$1.6 million and ~~$1.0~~$1.3 million at ~~September 30, 2021~~March 31, 2022 and ~~2020~~2021, respectively. Unrecognized compensation expense related to unvested shares of restricted stock is expected to be recognized over a weighted-average period of ~~3.56~~4.08 years.

On ~~July 1, 2021,~~ ~~2,062 shares of FNCB's common stock were granted under the LTIP to each of the Bank's~~ ~~nine~~ non-employee directors, or 18,558 shares in aggregate. The shares of stock vested immediately to each director upon grant, and the fair value per share on the grant date was $7.28. Director fees totaling $150 thousand associated with this grant were recognized on ~~July 1, 2021.~~

The following table summarizes the activity related to FNCB’s unvested restricted stock awards during the three ~~and~~ ~~nine~~months ended ~~September 30, 2021~~March 31, 2022 and ~~2020~~2021:

	*Three Months Ended September 30,*									*Nine Months Ended September 30,*										*Three Months Ended March 31,*
	*2021*				*2020*					*2021*					*2020*					*2022*					*2021*
			*Weighted-*					*Weighted-*					*Weighted-*					*Weighted-*					*Weighted-*				*Weighted-*
			*Average*					*Average*					*Average*					*Average*					*Average*				*Average*
	*Restricted*		*Grant Date*		*Restricted*			*Grant Date*		*Restricted*			*Grant Date*		*Restricted*			*Grant Date*		*Restricted*			*Grant Date*		*Restricted*		*Grant Date*
(dollars in thousands)	*Shares*		*Fair Value*		*Shares*			*Fair Value*		*Shares*			*Fair Value*		*Shares*			*Fair Value*		*Shares*			*Fair Value*		*Shares*		*Fair Value*
Unvested restricted stock awards:
Total outstanding, beginning of period		174,297	$	7.37		169,632		$	7.04		159,913		$	7.07		128,150		$	7.76		174,297		$	7.37		159,913	$	7.07
Awards granted		0		0		0			0		66,065			7.98		75,924			6.07		71,860			9.64		66,065		7.98
Forfeitures		0		0		(2,753	)		7.08		(7,443	)		7.38		(5,412	)		6.67		(1,382	)		7.24		0		0
Vestings		0		0		(6,637	)		6.44		(44,238	)		7.20		(38,420	)		7.48
Shares vested																					0			0		0		0
Total outstanding, end of period		174,297	$	7.37		160,242		$	7.06		174,297		$	7.37		160,242		$	7.06		244,775		$	8.03		225,978	$	7.34

Note 911. Regulatory Matters/Subsequent Event

FNCB’s ability to pay dividends to its shareholders is largely dependent on the Bank’s ability to pay dividends to FNCB. Bank regulations limit the amount of dividends that may be paid without prior approval of the Bank’s regulatory agency. For the three ~~and~~ ~~nine~~months ended ~~September 30, 2021~~March 31, 2022, cash dividends declared and paid by FNCB were $0.075 per share and ~~$0.195~~$0.060 per share, ~~respectively, and $0.055 per share and $0.165 per share, respectively,~~ for the three ~~and~~ ~~nine~~months ended ~~September 30, 2020.~~March 31, 2021. FNCB offers a Dividend Reinvestment and Stock Purchase Plan (“DRP”) to its shareholders. For the three ~~and~~ ~~nine~~months ended ~~September 30, 2021~~March 31, 2022 and ~~2020~~2021, dividend reinvestment shares were purchased in open market transactions, however, shares under the optional cash purchase feature of the DRP were issued from authorized but unissued common shares. Common shares issued under the DRP for the three ~~and~~ ~~nine~~ ~~months~~ ended ~~September~~March 31, 2022 ~~30,~~and 2021, totaled ~~1,906~~1,310 and ~~8,151, respectively, and 2,795 and 8,211, respectively for the same periods in~~ ~~2020.~~3,207, respectively. Subsequent to ~~September 30, 2021~~March 31, 2022, on ~~October~~April 27, ~~2021,~~2022 FNCB declared a cash dividend for the ~~fourth~~second quarter of ~~2021~~2022 of $0.075 per share, which is payable on ~~December~~June 15, ~~2021~~2022 to shareholders of record as of ~~December~~June 1, ~~2021~~2022.

On January ~~27, 2021,~~26, 2022, FNCB's Board of Directors authorized a stock repurchase program under which up to ~~975,000~~750,000 shares of FNCB's outstanding common stock may be acquired in the open market ~~commencing~~which commenced on no ~~earlier than~~ ~~February 3, 2021~~March 4, 2022 and ~~expiring~~will expire on December 31, ~~2021,~~2022, pursuant to a trading plan that was adopted in accordance with Rule 10b5-1 of the Exchange Act. Under the program, shares are purchased from time to time at prevailing market prices, through open market transactions depending upon market conditions and administered through an independent broker. Repurchases are subject to SEC regulations as well as certain price, market volume and timing constraints specified in the trading plan. Under the program, the purchases will be funded from available working capital presently available to FNCB, and the repurchased shares will be returned to the status of authorized but unissued shares of Common Stock. There is not a guarantee as to the exact number of shares that will be repurchased by FNCB, and FNCB may discontinue at any time that management determines additional repurchases are no longer warranted. As of ~~September~~March 31, 2022, ~~30,~~~~2021,~~FNCB repurchased ~~330,759~~307,514 shares at a weighted-average price per share of ~~$7.21.~~$9.69.

The holding company is considered a small bank holding company and is exempt from risk-based capital and leverage rules, including Basel III. FNCB and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material adverse effect on FNCB’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, FNCB and the Bank must meet specific capital guidelines that involve quantitative measures of FNCB's and the Bank's assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. FNCB's and the Bank's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Management believes, as of ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020~~2021, that FNCB and the Bank met all applicable capital adequacy requirements.

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Current quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the tables below) of Total capital, Tier I capital, and Tier I common equity (as defined in the regulations) to risk-weighted assets (as defined), and of Tier I capital (as defined) to average assets (as defined). The following tables present summary information regarding the Bank’s risk-based capital and related ratios at ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020~~2021:

	*FNCB Bank*					*Minimum Required For Capital Adequacy Purposes*			*Minimum Required For Capital Adequacy Purposes with Conservation Buffer*			*Minimum Required To Be Well Capitalized Under Prompt Corrective Action Regulations*			*FNCB Bank*					*Minimum Required For Capital Adequacy Purposes*			*Minimum Required For Capital Adequacy Purposes with Conservation Buffer*			*Minimum Required To Be Well Capitalized Under Prompt Corrective Action Regulations*
(dollars in thousands)	*Amount*		*Ratio*			*Ratio*			*Ratio*			*Ratio*			*Amount*		*Ratio*			*Ratio*			*Ratio*			*Ratio*
September 30, 2021
March 31, 2022

Total capital (to risk-weighted assets)	$	167,309		15.91	%		8.00	%		10.50	%		10.00	%	$	167,241		14.10	%		8.00	%		10.50	%		10.00	%

Tier I capital (to risk-weighted assets)		154,891		14.73	%		6.00	%		8.50	%		8.00	%		153,481		12.94	%		6.00	%		8.50	%		8.00	%

Tier I common equity (to risk-weighted assets)		154,891		14.73	%		4.50	%		7.00	%		6.50	%		153,481		12.94	%		4.50	%		7.00	%		6.50	%

Tier I capital (to average assets)		154,891		9.80	%		4.00	%		4.00	%		5.00	%		153,481		9.30	%		4.00	%		4.00	%		5.00	%

Total risk-weighted assets		1,051,709														1,186,085

Total average assets		1,580,457														1,649,636

	*FNCB Bank*					*Minimum Required For Capital Adequacy Purposes*			*Minimum Required For Capital Adequacy Purposes with Conservation Buffer*			*Minimum Required To Be Well Capitalized Under Prompt Corrective Action Regulations*			*FNCB Bank*					*Minimum Required For Capital Adequacy Purposes*			*Minimum Required For Capital Adequacy Purposes with Conservation Buffer*			*Minimum Required To Be Well Capitalized Under Prompt Corrective Action Regulations*
(dollars in thousands)	*Amount*		*Ratio*			*Ratio*			*Ratio*			*Ratio*			*Amount*		*Ratio*			*Ratio*			*Ratio*			*Ratio*
December 31, 2020
December 31, 2021

Total capital (to risk-weighted assets)	$	149,173		15.79	%		8.00	%		10.50	%		10.00	%	$	161,957		14.64	%		8.00	%		10.50	%		10.00	%
																		��
Tier I capital (to risk-weighted assets)		137,356		14.54	%		6.00	%		8.50	%		8.00	%		148,958		13.46	%		6.00	%		8.50	%		8.00	%

Tier I common equity (to risk-weighted assets)		137,356		14.54	%		4.50	%		7.00	%		6.50	%		148,958		13.46	%		4.50	%		7.00	%		6.50	%

Tier I capital (to average assets)		137,356		9.57	%		4.00	%		4.00	%		5.00	%		148,958		8.92	%		4.00	%		4.00	%		5.00	%

Total risk-weighted assets		944,546														1,106,636

Total average assets		1,434,776														1,669,932

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Note 1012. Fair Value Measurements

In determining fair value, FNCB uses various valuation approaches, including market, income and cost approaches. Accounting standards establish a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that observable inputs be used when available. Observable inputs are inputs that market participants would use in pricing the asset or liability, which are developed based on market data obtained from sources independent of FNCB. Unobservable inputs reflect FNCB’s knowledge about the assumptions the market participants would use in pricing an asset or liability, which are developed based on the best information available in the circumstances.

The fair value hierarchy gives the highest priority to unadjusted quoted market prices in active markets for identical assets or liabilities (Level 1 measurement) and the lowest priority to unobservable inputs (Level 3 measurement). A financial asset or liability’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. The fair value hierarchy is broken down into three levels based on the reliability of inputs as follows:

●

Level 1 valuation is based upon unadjusted quoted market prices for identical instruments traded in active markets;

●

Level 2 valuation is based upon quoted market prices for similar instruments traded in active markets, quoted market prices for identical or similar instruments traded in markets that are not active and model-based valuation techniques for which all significant assumptions are observable in the market or can be corroborated by market data; and

●

Level 3 valuation is derived from other valuation methodologies including discounted cash flow models and similar techniques that use significant assumptions not observable in the market. These unobservable assumptions reflect estimates of assumptions that market participants would use in determining fair value.

A description of the valuation methodologies used for assets recorded at fair value is set forth below.

Available-for-Sale Debt Securities

The estimated fair values for FNCB’s investments in obligations of U.S Treasury securities, U.S. government agencies, obligations of state and political subdivisions, government-sponsored agency CMOs and mortgage-backed securities, private collateralized mortgage obligations, asset-backed securities and negotiable certificates of deposit are obtained by FNCB from a nationally-recognized pricing service. This pricing service develops estimated fair values by analyzing like securities and applying available market information through processes such as benchmark curves, benchmarking of like securities, sector groupings and matrix pricing (Level 2 inputs), to prepare valuations. Matrix pricing is a mathematical technique widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities, but rather by relying on the securities’ relationship to other benchmark quoted securities. The fair value measurements consider observable data that may include, among other things, dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the bond’s terms and conditions, and are based on market data obtained from sources independent from FNCB. The Level 2 investments in FNCB’s portfolio are priced using those inputs that, based on the analysis prepared by the pricing service, reflect the assumptions that market participants would use to price the assets. Management has determined that the Level 2 designation is appropriate for these securities because, as with most fixed-income securities, those in FNCB’s portfolio are not exchange-traded, and such non-exchange-traded fixed income securities are typically priced by correlation to observed market data. FNCB has reviewed the pricing service’s methodology to confirm its understanding that such methodology results in a valuation based on quoted market prices for similar instruments traded in active markets, quoted markets for identical or similar instruments traded in markets that are not active and model-based valuation techniques for which the significant assumptions can be corroborated by market data as appropriate to a Level 2 designation.

For those securities for which the inputs used by an independent pricing service were derived from unobservable market information, FNCB evaluated the appropriateness and quality of each price. Management reviewed the volume and level of activity for all classes of securities and attempted to identify transactions which may not be orderly or reflective of a significant level of activity and volume. For securities meeting these criteria, the quoted prices received from either market participants or an independent pricing service may be adjusted, as necessary, to estimate fair value (fair values based on Level 3 inputs). If applicable, the adjustment to fair value was derived based on present value cash flow model projections obtained from third party providers using assumptions similar to those incorporated by market participants.

At ~~September 30, 2021~~March 31, 2022, FNCB owned 2628 corporate debt securities with an aggregate amortized cost and fair value of ~~$29.3~~$33.9 million and ~~$30.1~~$33.7 million, respectively. At ~~September~~March 31, 2022, ~~30,~~~~2021,~~the market for 7corporate debt securities with an amortized cost and fair value of ~~$11.3~~$11.0 million and ~~$11.8~~$11.3 million, respectively, was not active, based on transaction criteria for similar instruments. FNCB obtained valuations for these securities from a third-party service provider that prepared the valuations using a discounted cash flow approach. Management takes measures to validate the service providers’ analysis and is actively involved in the valuation process, including reviewing and verifying the assumptions used in the valuation calculations. Results of a discounted cash flow test are significantly affected by variables such as the estimate of the probability of default, estimates of future cash flows, discount rates, prepayment rates and the creditworthiness of the underlying issuers. FNCB considers these inputs to be unobservable Level 3 inputs because they are based on estimates about the assumptions market participants would use in pricing this type of asset and developed based on the best information available under the circumstances rather than on observable inputs. As it relates to fair value measurements, once each issuer is categorized and the forecasted default rates have been applied, the expected cash flows are modeled using the variables described above. Discount rates ranging from ~~3.33%~~3.62% to ~~4.33%~~4.65% were applied to the expected cash flows to estimate fair value. Management will continue to monitor the market for these securities to assess the market activity and the availability of observable inputs and will continue to apply these controls and procedures to the valuations received from FNCB's third-party service provider.

Equity Securities

The estimated fair values of equity securities are determined by obtaining quoted prices on nationally recognized exchanges (Level 1 inputs).

Derivative Contracts

FNCB's derivative liabilities are reported at fair value utilizing Level 2 inputs. Values of these instruments are obtained through an independent pricing source utilizing information which may include market observed quotations for swaps, LIBOR rates, forward rates and rate volatility. Derivative contracts create exposure to interest rate movements as well as risks from the potential of non-performance of the counterparty.

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Assets and Liabilities Measured at Fair Value on a Recurring Basis

The following tables present the financial assets and liabilities that were measured at fair value on a recurring basis at ~~September 30, 2021~~March 31, 2022, and December 31, ~~2020~~2021, and the fair value hierarchy of the respective valuation techniques utilized by FNCB to determine the fair value:

	*Fair Value Measurements at September 30, 2021*								*Fair Value Measurements at March 31, 2022*
					*Significant*		*Significant*						*Significant*		*Significant*
			*Quoted Prices*		*Other*		*Other*				*Quoted Prices*		*Other*		*Other*
			*in Active Markets*		*Observable*		*Unobservable*				*in Active Markets*		*Observable*		*Unobservable*
			*for Identical Assets*		*Inputs*		*Inputs*				*for Identical Assets*		*Inputs*		*Inputs*
(in thousands)	*Fair Value*		*(Level 1)*		*(Level 2)*		*(Level 3)*		*Fair Value*		*(Level 1)*		*(Level 2)*		*(Level 3)*
Financial assets:
Available-for-sale debt securities:
U.S. Treasury securities	$	19,899	$	0	$	19,899	$	0
U.S. treasuries									$	35,014	$	0	$	35,014	$	0
Obligations of state and political subdivisions		215,773		0		215,773		0		240,859		0		240,859		0
U.S. government/government-sponsored agencies:
Collateralized mortgage obligations - residential		106,131		0		106,131		0		98,248		0		98,248		0
Collateralized mortgage obligations - commercial		3,790		0		3,790		0		3,525		0		3,525		0
Mortgage-backed securities		22,699		0		22,699		0		23,194		0		23,194		0
Private collateralized mortgage obligations		61,048		0		61,048		0		65,679		0		65,679		0
Corporate debt securities		30,093		0		18,314		11,779		33,661		0		22,396		11,265
Asset-backed securities		10,144		0		10,144		0		13,258		0		13,258		0
Negotiable certificates of deposit		746		0		746		0		695		0		695		0
Subtotal available-for-sale debt securities		470,323		0		458,544		11,779		514,133		0		502,868		11,265
Equity securities, at fair value		4,777		4,777		0		0		5,018		5,018		0		0
Derivative assets		212		0		212		0		1,184		0		1,184		0
Total	$	475,312	$	4,777	$	458,756	$	11,779
Total financial assets									$	520,335	$	5,018	$	504,052	$	11,265

Financial liabilities:
Derivative liabilities	$	127	$	0	$	127	$	0	$	386	$	0	$	386	$	0
Total	$	127	$	0	$	127	$	0
Total financial liabilities									$	386	$	0	$	386	$	0

	*Fair Value Measurements at December 31, 2020*								*Fair Value Measurements at December 31, 2021*
					*Significant*		*Significant*						*Significant*		*Significant*
			*Quoted Prices*		*Other*		*Other*				*Quoted Prices*		*Other*		*Other*
			*in Active Markets*		*Observable*		*Unobservable*				*in Active Markets*		*Observable*		*Unobservable*
			*for Identical Assets*		*Inputs*		*Inputs*				*for Identical Assets*		*Inputs*		*Inputs*
(in thousands)	*Fair Value*		*(Level 1)*		*(Level 2)*		*(Level 3)*		*Fair Value*		*(Level 1)*		*(Level 2)*		*(Level 3)*
Financial assets:
Available-for-sale debt securities:
U.S. treasuries									$	36,355	$	0	$	36,355	$	0
Obligations of state and political subdivisions	$	205,828	$	0	$	205,828	$	0		244,372		0		244,372		0
U.S. government/government-sponsored agencies:
Collateralized mortgage obligations - residential		56,972		0		56,972		0		100,710		0		100,710		0
Collateralized mortgage obligations - commercial		3,904		0		3,904		0		3,727		0		3,727		0
Mortgage-backed securities		13,026		0		13,026		0		25,506		0		25,506		0
Private collateralized mortgage obligations		38,199		0		38,199		0		67,165		0		67,165		0
Corporate debt securities		24,580		0		8,156		16,424		32,063		0		19,718		12,345
Asset-backed securities		7,526		0		7,526		0		11,932		0		11,932		0
Negotiable certificates of deposit										736		0		736		0
Subtotal available-for-sale debt securities		350,035		0		333,612		16,424		522,566		0		510,221		12,345
Equity securities, at fair value		3,026		3,026		0		0		4,922		4,922		0		0
Derivative assets		23		0		23		0		363		0		363		0
Total	$	353,084	$	3,026	$	333,635	$	16,424
Total financial assets									$	527,851	$	4,922	$	510,584	$	12,345

Financial liabilities:
Derivative liabilities	$	143	$	0	$	143	$	0	$	99	$	0	$	99	$	0
Total	$	143	$	0	$	143	$	0
Total financial liabilities									$	99	$	0	$	99	$	0

~~During~~There was 1 corporate debt security transferred from Level 3 hierarchy to Level 2 during the ~~nine~~three months ended ~~September 30,~~March 31, 2022. During the three months ended March 31, 2021, 84 corporate debt securities were transferred from ~~the~~ Level 3 hierarchy to Level 2. ~~Previously, the~~The market for ~~these~~the transferred securities was previously not active and management obtained fair values from an independent third party that utilized a discounted cash flow model. ~~The market for~~ ~~four~~ ~~of these securities became active~~Subsequently, in the ~~first~~~~three~~ ~~months~~period of ~~2021,~~ ~~while the other~~ ~~four~~ ~~securities became active during the~~ ~~three~~ ~~months ended~~ ~~September 30, 2021.~~ ~~Accordingly,~~transfer, management was able to obtain fair values for these~~eight~~ securities from the independent pricing service used to price the remainder of the ~~portfolio.~~portfolio using significant other observable inputs.

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The following table presents a reconciliation and statement of operations classifications of gains and losses for all assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3), which consisted entirely of corporate debt securities, for the three months ~~and~~ ~~nine~~ ~~months~~ ended ~~September 30, 2021~~March 31, 2022 and ~~2020~~2021.

*Fair Value Measurements*	*Fair Value Measurements*											*Fair Value Measurements*
*Using Significant Unobservable Inputs (Level 3)*	*Using Significant Unobservable Inputs (Level 3)*											*Using Significant Unobservable Inputs (Level 3)*
		*Corporate Debt Securities*					*Corporate Debt Securities*						*Corporate Debt Securities*
		*For the Three Months Ended September 30,*					*For the Nine Months Ended September 30,*						*For the Three Months Ended March 31,*
(in thousands)		*2021*			*2020*		*2021*			*2020*			*2022*			*2021*
Balance at January 1,		$	16,609		$	11,713	$	16,424		$	5,150		$	12,345		$	16,424
Additions			0			0		4,000			8,800			0			1,750
Redemptions			(1,000	)		0		(1,000	)		0			0			0
Transfer to Level 2			(3,603	)		0		(7,550	)		0			(756	)		(3,947	)
Sales			0			0		0			0			0			0
Total gains or losses (realized/unrealized):
Included in earnings			0			0		0			0			0			0
Included in other comprehensive income			(227	)		2,244		(95	)		7
Balance at September 30,		$	11,779		$	13,957	$	11,779		$	13,957
Included in other comprehensive (loss) income														(324	)		107
Balance at March 31,													$	11,265		$	14,334

Assets Measured at Fair Value on a Non-Recurring Basis

The following tables present assets and liabilities measured at fair value on a non-recurring basis at ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020~~2021, and additional quantitative information about the valuation techniques and inputs utilized by FNCB to determine fair value. All assets were measured using Level 3 inputs.

	*September 30, 2021*											*March 31, 2022*
	*Fair Value Measurement*						*Quantitative Information*					*Fair Value Measurement*						*Quantitative Information*
	*Recorded*		*Valuation*		*Fair*		*Valuation*	*Unobservable*	*Value/*			*Recorded*		*Valuation*		*Fair*		*Valuation*	*Unobservable*	*Value/*
(in thousands)	*Investment*		*Allowance*		*Value*		*Technique*	*Inputs*	*Range*			*Investment*		*Allowance*		*Value*		*Technique*	*Inputs*	*Range*
Impaired loans - collateral dependent	$	4,547	$	12	$	4,535	Appraisal of collateral	Selling cost		10.0	%	$	3,267	$	0	$	3,267	Appraisal of collateral	Selling cost		10.0	%
Impaired loans - other		6,027		24		6,003	Discounted cash flows	Discount rate		3.00% - 8.75%			6,544		18		6,526	Discounted cash flows	Discount rate		3.00% - 8.75%
Other real estate owned		58		4		54	Appraisal of collateral	Selling cost		10.0	%		228		0		228	Appraisal of collateral/Sales contract	Selling cost		1.0	%

	*December 31, 2020*											*December 31, 2021*
	*Fair Value Measurement*						*Quantitative Information*					*Fair Value Measurement*						*Quantitative Information*
	*Recorded*		*Valuation*		*Fair*		*Valuation*	*Unobservable*	*Value/*			*Recorded*		*Valuation*		*Fair*		*Valuation*	*Unobservable*	*Value/*
(in thousands)	*Investment*		*Allowance*		*Value*		*Technique*	*Inputs*	*Range*			*Investment*		*Allowance*		*Value*		*Technique*	*Inputs*	*Range*
Impaired loans - collateral dependent	$	4,244	$	218	$	4,026	Appraisal of collateral	Selling cost		10.0	%	$	3,208	$	0	$	3,208	Appraisal of collateral	Selling cost		10.0	%
Impaired loans - other		7,491		198		7,293	Discounted cash flows	Discount rate		3.00% - 8.75%			6,765		26		6,739	Discounted cash flows	Discount rate		3.00% - 8.75%
Other real estate owned		58		0		58	Appraisal of collateral	Selling cost		10.0	%		920		0		920	Appraisal of collateral/Sales contract	Selling cost		1.0	%

The fair value of collateral-dependent impaired loans is determined through independent appraisals or other reasonable offers, which generally include various Level 3 inputs which are not identifiable. Management reduces the appraised value by the estimated costs to sell the property and may adjust the appraised values as necessary to consider any declines in real estate values since the time of the appraisal. For impaired loans that are not collateral-dependent, fair value is determined using the discounted cash flow method. When the measure of the impaired loan is less than the recorded investment in the loan, the impairment is recorded through a valuation allowance or is charged off. The amount shown is the balance of impaired loans, net of any charge-offs and the related allowance for loan losses.

OREO properties are recorded at fair value less the estimated cost to sell at the date of FNCB’s acquisition of the property. Subsequent to acquisition of the property, the balance may be written down further. ~~It is FNCB’s policy to obtain~~FNCB obtains certified external appraisals of real estate collateral underlying impaired loans and OREO and ~~estimate~~estimates fair value ~~using~~based on those appraisals. Other valuation sources may be used, including broker price opinions, letters of intent and executed sale agreements.

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The following table summarizes the estimated fair values of FNCB’s financial instruments using an exit price notion at ~~September 30, 2021~~March 31, 2022 and at December 31, ~~2020~~2021. FNCB discloses fair value information about financial instruments, whether or not recognized in the statements of financial condition, for which it is practicable to estimate that value. The fair value of financial instruments that are not measured at fair value in the financial statements were based on the exit price notion. The following estimated fair value amounts have been determined using available market information and appropriate valuation methodologies. However, management judgment is required to interpret data and develop fair value estimates. Accordingly, the estimates below are not necessarily indicative of the amounts FNCB could realize in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.

	*Fair Value*	*September 30, 2021*				*December 31, 2020*				*Fair Value*	*March 31, 2022*				*December 31, 2021*
(in thousands)	*Measurement*	*Carrying Value*		*Fair Value*		*Carrying Value*		*Fair Value*		*Measurement*	*Carrying Value*		*Fair Value*		*Carrying Value*		*Fair Value*
Financial assets
Cash and short term investments	Level 1	$	174,193	$	174,193	$	155,811	$	155,811
Financial assets:
Cash and cash equivalents										Level 1	$	24,102	$	24,102	$	99,020	$	99,020
Available-for-sale debt securities	See table on page 21		470,323		470,323		350,035		350,035	See previous table		514,133		514,133		522,566		522,566
Equity securities	Level 1		4,777		4,777		3,026		3,026	Level 1		5,018		5,018		4,922		4,922
Restricted stock	Level 2		1,826		1,826		1,745		1,745	Level 2		4,020		4,020		1,911		1,911
Loans held for sale	Level 2		491		491		2,107		2,107
Loans, net	Level 3		946,390		951,049		889,152		891,880
Loans and leases, net										Level 3		1,023,271		1,015,585		967,023		967,087
Accrued interest receivable	Level 2		4,593		4,593		4,286		4,286	Level 2		4,870		4,870		4,643		4,643
Equity securities without readily determinable fair values	Level 3		500		500		500		500
Servicing rights	Level 3		285		546		324		479	Level 3		249		558		268		526
Derivative assets	Level 2		212		212		23		23	Level 2		1,191		1,184		371		363

Financial liabilities
Financial liabilities:
Deposits	Level 2		1,482,066		1,482,243		1,287,448		1,288,567	Level 2		1,411,593		1,409,971		1,455,028		1,454,812
Borrowed funds	Level 2		10,310		10,310		10,310		10,310	Level 2		87,260		87,247		30,310		30,310
Accrued interest payable	Level 2		56		56		108		108	Level 2		57		57		49		49
Derivative liabilities	Level 2		127		127		135		143	Level 2		388		386		96		99

Note ~~11.~~13. Earnings per Share

For FNCB, the numerator of both the basic and diluted earnings per share of common stock is net income available to common shareholders. The weighted-average number of common shares outstanding used in the denominator for basic earnings per common share is increased to determine the denominator used for diluted earnings per common share by the effect of potentially dilutive common share equivalents utilizing the treasury stock method. For the three ~~and~~ ~~nine~~months ended ~~September 30, 2021~~March 31, 2022 and ~~2020~~2021, common share equivalents consisted entirely of incremental shares of unvested restricted stock.

The following table presents the calculation of both basic and diluted earnings per share of common stock for the three ~~and~~ ~~nine~~months ended ~~September 30, 2021~~March 31, 2022 and ~~2020~~2021:

	*Three Months Ended September 30,*				*Nine Months Ended September 30,*				*Three Months Ended March 31,*
(in thousands, except share data)	*2021*		*2020*		*2021*		*2020*		*2022*		*2021*
Net income	$	6,351	$	4,107	$	17,413	$	10,191	$	4,353	$	5,833

Basic weighted-average number of common shares outstanding		19,997,021		20,235,384		20,152,934		20,199,933		19,935,288		20,242,262
Plus: Common share equivalents		12,366		0		11,397		1,356		36,825		11,344
Diluted weighted-average number of common shares outstanding		20,009,387		20,235,384		20,164,331		20,201,289		19,972,113		20,253,606

Income per common share:
Basic	$	0.31	$	0.20	$	0.86	$	0.50	$	0.22	$	0.29
Diluted	$	0.31	$	0.20	$	0.86	$	0.50	$	0.22	$	0.29

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Note 1214. Other Comprehensive Income

The following table summarizes the reclassifications out of accumulated other comprehensive income for the three ~~and~~ ~~nine~~months ended ~~September 30, 2021~~March 31, 2022 and ~~2020~~2021, comprised entirely of unrealized gains and losses on available-for-sale debt securities:

	*For the Three Months Ended September 30, 2021*			*For the Nine Months Ended September 30, 2021*				For the Three Months Ended March 31, 2022
(in thousands)	*Amount Reclassified from Accumulated Other Comprehensive Income*		*Affected Line Item in the Consolidated Statements of Income*	*Amount Reclassified from Accumulated Other Comprehensive Income*			*Affected Line Item in the Consolidated Statements of Income*	Amount Reclassified from Accumulated Other Comprehensive Income		Affected Line Item in the Consolidated Statements of Income
Available-for-sale debt securities:
Reclassification adjustment for net gains reclassified into net income	$	0	Net gain on the sale of available-for-sale debt securities	$	(213	)	Net gain on the sale of available-for-sale debt securities	$	-	Net gain on the sale of available-for-sale debt securities
Taxes		0	Income taxes		45		Income taxes		0	Income taxes
Net of tax amount	$	0		$	(168	)		$	0

	*For the Three Months Ended September 30, 2020*				*For the Nine Months Ended September 30, 2020*				*For the Three Months Ended March 31, 2021*
(in thousands)	*Amount Reclassified from Accumulated Other Comprehensive Income*			*Affected Line Item in the Consolidated Statements of Income*	*Amount Reclassified from Accumulated Other Comprehensive Income*			*Affected Line Item in the Consolidated Statements of Income*	*Amount Reclassified from Accumulated Other Comprehensive Income*			*Affected Line Item in the Consolidated Statements of Income*
Available-for-sale debt securities:
Reclassification adjustment for net gains reclassified into net income	$	(433	)	Net gain on the sale of available-for-sale debt securities	$	(1,504	)	Net gain on the sale of available-for-sale debt securities	$	(213	)	Net gain on the sale of available-for-sale debt securities
Taxes		91		Income taxes		316		Income taxes		45		Income taxes
Net of tax amount	$	(342	)		$	(1,188	)		$	(168	)

The following table summarizes the changes in accumulated other comprehensive income, net of tax for the three ~~and~~ ~~nine~~months ended ~~September 30, 2021~~March 31, 2022 and ~~2020~~2021:

	*Three Months Ended September 30,*						*Nine Months Ended September 30,*						*Three Months Ended March 31,*
(in thousands)	*2021*			*2020*			*2021*			*2020*			*2022*			*2021*
Balance, beginning of period	$	11,197		$	10,779		$	13,886		$	3,056		$	6,352		$	13,886
Other comprehensive (loss) income before reclassifications		(2,770	)		1,761			(5,291	)		10,330
Other comprehensive loss before reclassifications														(24,043	)		(5,419	)
Amount reclassified from accumulated other comprehensive income		0			(342	)		(168	)		(1,188	)		0			(168	)
Net other comprehensive (loss) income during the period		(2,770	)		1,419			(5,459	)		9,142
Net other comprehensive loss during the period														(24,043	)		(5,587	)
Balance, end of period	$	8,427		$	12,198		$	8,427		$	12,198		$	(17,691	)	$	8,299

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Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”)

This Quarterly Report on Form 10-Q should be read in conjunction with the more detailed and comprehensive disclosures included in the Annual Report on Form 10-K for the year ended December 31, ~~2020~~2021 for FNCB Bancorp, Inc. In addition, please read this section in conjunction with the consolidated financial statements and notes to consolidated financial statements contained elsewhere herein.

FNCB Bancorp, Inc. and its subsidiaries ("FNCB") are in the business of providing customary retail and commercial banking services to individuals, businesses and local governments and municipalities through its wholly-owned subsidiary, FNCB Bank, at its 1716 full-service branch offices within its primary market area, Northeastern Pennsylvania.

FORWARD-LOOKING STATEMENTS AND OTHER INFORMATION

FNCB may from time to time make written or oral “forward-looking statements,” including statements contained in our filings with the Securities and Exchange Commission (“SEC”), in our reports to shareholders, and in our other communications, which are made in good faith by us pursuant to the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995.

These forward-looking statements include statements with respect to FNCB’s beliefs, plans, objectives, goals, expectations, anticipations, estimates and intentions, that are subject to significant risks and uncertainties, and are subject to change based on various factors (some of which are beyond our control). The words “may,” “could,” “should,” “will,” “would,” “believe,” “anticipate,” “estimate,” “expect,” “intend,” “plan,” “project,” “future” and similar expressions are intended to identify forward-looking statements. The following factors, among others, could cause FNCB’s financial performance to differ materially from the plans, objectives, expectations, estimates and intentions expressed in such forward-looking statements: the effect of the novel Coronavirus Disease 2019 ("COVID-19") pandemic on FNCB and its customers, the Commonwealth of Pennsylvania and the United States, related to the economy, overall financial stability and the global supply chain; ~~government and regulatory responses to~~ the COVID-19 ~~pandemic;~~pandemic and measures taken to control its spread; government intervention in the U.S. financial system including the effects of recent legislative, tax, accounting and regulatory actions and reforms, including, but not limited to, the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) and the Tax Cuts and Jobs Act; political instability; the ability of FNCB to manage credit risk; weakness in the economic environment, in general, and within FNCB’s market area; the deterioration of one or a few of the commercial real estate loans with relatively large balances contained in FNCB’s loan portfolio; greater risk of loan defaults and losses from concentration of loans held by FNCB, including those to insiders and related parties; if FNCB’s portfolio of loans to small and mid-sized community-based businesses increases its credit risk; if FNCB’s ALLL is not sufficient to absorb actual losses or if increases to the allowance for loan and lease losses ("ALLL") were required; FNCB is subject to interest-rate risk and any changes in interest rates could negatively impact net interest income or the fair value of FNCB's financial assets; if management concludes that the decline in value of any of FNCB’s investment securities is other-than-temporary could result in FNCB recording an impairment loss; if FNCB’s risk management framework is ineffective in mitigating risks or losses to FNCB; if FNCB is unable to successfully compete with others for business; a loss of depositor confidence resulting from changes in either FNCB’s financial condition or in the general banking industry; if FNCB is unable to retain or grow its core deposit base; inability or insufficient dividends from its subsidiary, FNCB Bank; if FNCB loses access to wholesale funding sources; interruptions or security breaches of FNCB’s information systems; any systems failures or interruptions in information technology and telecommunications systems of third parties on which FNCB depends; security breaches; if FNCB’s information technology is unable to keep pace with growth or industry developments or if technological developments result in higher costs or less advantageous pricing; the loss of management and other key personnel; dependence on the use of data and modeling in both its management’s decision-making generally and in meeting regulatory expectations in particular; additional risk arising from new lines of business, products, product enhancements or services offered by FNCB; inaccuracy of appraisals and other valuation techniques FNCB uses in evaluating and monitoring loans secured by real property and other real estate owned; unsoundness of other financial institutions; damage to FNCB’s reputation; defending litigation and other actions; dependence on the accuracy and completeness of information about customers and counterparties; risks arising from future expansion or acquisition activity; environmental risks and associated costs on its foreclosed real estate assets; any remediation ordered, or adverse actions taken, by federal and state regulators, including requiring FNCB to act as a source of financial and managerial strength for the FNCB Bank in times of stress; costs arising from extensive government regulation, supervision and possible regulatory enforcement actions; new or changed legislation or regulation and regulatory initiatives; noncompliance and enforcement action with the Bank Secrecy Act and other anti-money laundering statutes and regulations; failure to comply with numerous "fair and responsible banking" laws; any violation of laws regarding privacy, information security and protection of personal information or another incident involving personal, confidential or proprietary information of individuals; any rulemaking changes implemented by the Consumer Financial Protection Bureau; non-compliance with the Paycheck Protection Act and its rules and regulations; inability to attract and retain its highest performing employees due to potential limitations on incentive compensation contained in proposed federal agency rulemaking; any future increases in FNCB Bank’s FDIC deposit insurance premiums and assessments; and the success of FNCB at managing the risks involved in the foregoing and other risks and uncertainties, including those detailed in FNCB’s filings with the SEC.

FNCB cautions that the foregoing list of important factors is not all inclusive. Readers are also cautioned not to place undue reliance on any forward-looking statements, which reflect management’s analysis only as of the date of this report, even if subsequently made available by FNCB on its website or otherwise. FNCB does not undertake to update any forward-looking statement, whether written or oral, that may be made from time to time by or on behalf of FNCB to reflect events or circumstances occurring after the date of this report.

Readers should carefully review the risk factors described in the documents that FNCB periodically files with the SEC, including its Annual Report on Form 10-K for the year ended December 31, ~~2020, Quarterly Reports on Form 10-Q for the periods ended March 31, 2021 and June 30, 2021 and this Quarterly Report on Form 10-Q.~~2021.

Any references to FNCB's website, www.fncb.com or any variation thereof, shall not incorporate the contents of such website into this Report.

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CRITICAL ACCOUNTING POLICIES

In preparing the consolidated financial statements, management has made estimates, judgments and assumptions that affect the reported amounts of assets and liabilities as of the date of the consolidated statements of condition and results of operations for the periods indicated. Actual results could differ significantly from those estimates.

FNCB’s accounting policies are fundamental to understanding management’s discussion and analysis of its financial condition and results of operations. Management has identified the policies on the determination of the ALLL, the valuation of securities and evaluation of securities for impairment, ~~the valuation of other real estate owned (“OREO”)~~ and income taxes to be critical, as management is required to make subjective and/or complex judgments about matters that are inherently uncertain and could be most subject to revision as new information becomes available.

The judgments used by management in applying the critical accounting policies discussed below may be affected by changes and/or deterioration in the economic environment, which may impact future financial results. Specifically, subsequent evaluations of the loan portfolio, in light of the factors then prevailing, may result in significant changes in the ALLL in future periods, and the inability to collect on outstanding loans could result in increased loan losses. In addition, the valuation of certain securities in FNCB’s investment portfolio could be negatively impacted by illiquidity or dislocation in marketplaces resulting in significantly depressed market prices thus leading to impairment losses.

Allowance for Loan and Lease Losses

Management evaluates the credit quality of FNCB’s loan portfolio on an ongoing basis and performs a formal review of the adequacy of the ALLL on a quarterly basis. The ALLL is established through a provision for loan losses charged to earnings and is maintained at a level management considers adequate to absorb estimated probable losses inherent in the loan portfolio as of the evaluation date. Loans, or portions of loans, determined by management to be uncollectible are charged off against the ALLL, while recoveries of amounts previously charged off are credited to the ALLL.

Determining the amount of the ALLL is considered a critical accounting estimate because it requires significant judgment and the use of estimates related to the amount and timing of expected future cash flows on impaired loans, estimated losses on pools of homogeneous loans based on historical loss experience, qualitative factors, and consideration of current economic trends and conditions, all of which may be susceptible to significant change. Banking regulators, as an integral part of their examination of FNCB, also review the ALLL, and may require, based on their judgments about information available to them at the time of their examination, that certain loan balances be charged off or require that adjustments be made to the ALLL. Additionally, the ALLL is determined, in part, by the composition and size of the loan portfolio.

The ALLL consists of two components, a specific component and a general component. The specific component relates to loans that are classified as impaired. For such loans, an allowance is established when the discounted cash flows, collateral value or observable market price of the impaired loan is lower than the carrying value of that loan. The general component covers all other loans and is based on historical loss experience adjusted by qualitative factors. The general reserve component of the ALLL is based on pools of unimpaired loans segregated by loan segment and risk rating categories of “Pass,” “Special Mention” or “Substandard and Accruing.” Historical loss factors and various qualitative factors are applied based on the risk profile in each risk rating category to determine the appropriate reserve related to those loans. Substandard loans on non-accrual status above the $100 thousand loan relationship threshold and all loans considered troubled debt restructurings (“TDRs”) are classified as impaired.

See Note 4, “Loans and Leases” of the notes to consolidated financial statements included in Item 1 hereof for additional information about the ALLL.

Securities Valuation and Evaluation for Impairment

Management utilizes various inputs to determine the fair value of its investment portfolio. To the extent they exist, unadjusted quoted market prices in active markets (Level 1) or quoted prices for similar assets or models using inputs that are observable, either directly or indirectly (Level 2) are utilized to determine the fair value of each investment in the portfolio. In the absence of observable inputs or if markets are illiquid, valuation techniques are used to determine fair value of any investments that require inputs that are both unobservable and significant to the fair value measurement (Level 3). For Level 3 inputs, valuation techniques are based on various assumptions, including, but not limited to, cash flows, discount rates, adjustments for nonperformance and liquidity, and liquidation values. A significant degree of judgment is involved in valuing investments using Level 3 inputs. The use of different assumptions could have a positive or negative effect on FNCB’s financial condition or results of operations. See Note 3, “Securities” and Note ~~10,~~12, “Fair Value Measurements” of the notes to consolidated financial statements included in Item 1 hereof for additional information about FNCB’s securities valuation techniques.

On a quarterly basis, management evaluates individual investment securities in an unrealized loss position for other than temporary impairment (“OTTI”). The evaluation for OTTI requires the use of various assumptions, including but not limited to, the length of time an investment’s fair value is less than book value, the severity of the investment’s decline, any credit deterioration of the issuer, whether management intends to sell the security, and whether it is more-likely-than-not that FNCB will be required to sell the security prior to recovery of its amortized cost basis. Debt investment securities deemed to have OTTI are written down by the impairment related to the estimated credit loss, and the non-credit related impairment loss is recognized in other comprehensive income. FNCB did not recognize any OTTI charges on investment securities for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2022 and 2021 ~~and 2020~~ within the consolidated statements of income.

Refer to Note 3, “Securities,” of the notes to consolidated financial statements included in Item 1 hereof for additional information about valuation of securities.

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~~Other Real Estate Owned~~

OREO consists of property acquired by foreclosure, abandonment or conveyance of deed in-lieu of foreclosure of a loan, and bank premises that are no longer used for operation or for future expansion. OREO is held for sale and is initially recorded at fair value less estimated costs to sell at the date of acquisition or transfer, which establishes a new cost basis. Upon acquisition of the property through foreclosure or deed-in-lieu of foreclosure, any adjustment to fair value less estimated selling costs is recorded to the ALLL. The determination is made on an individual asset basis. Bank premises no longer used for operations or future expansion are transferred to OREO at fair value less estimated selling costs with any related write-down included in non-interest expense. Subsequent to acquisition, valuations are periodically performed and the assets are carried at the lower of cost or fair value less estimated cost to sell. Fair value is determined through external appraisals, current letters of intent, broker price opinions or executed agreements of sale, unless management determines that conditions exist that warrant an adjustment to the value. Costs relating to the development and improvement of the OREO properties may be capitalized; holding period costs and any subsequent changes to the valuation allowance are charged to expense as incurred.

Income Taxes

The objectives of accounting for income taxes are to recognize the amount of taxes payable or refundable for the current year and deferred tax liabilities and assets for the future tax consequences of events that have been recognized in an entity’s financial statements or tax returns. Judgment is required in assessing the future tax consequences of events that have been recognized in FNCB’s consolidated financial statements or tax returns. Fluctuations in the actual outcome of these future tax consequences could impact our consolidated financial condition or results of operations.

FNCB records an income tax provision or benefit based on the amount of tax currently payable or receivable and the change in deferred tax assets and liabilities. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial and tax reporting purposes. Management conducts quarterly assessments of all available positive and negative evidence to determine the amount of deferred tax assets that will more likely than not be realized. FNCB establishes a valuation allowance for deferred tax assets and records a charge to income if management determines, based on available evidence at the time the determination is made, that it is more likely than not that some portion or all of the deferred tax assets will not be realized. In evaluating the need for a valuation allowance, management considers past operating results, estimates of future taxable income based on approved business plans, future capital requirements and ongoing tax planning strategies. This evaluation process involves significant management judgment about assumptions that are subject to change from period to period depending on the related circumstances. The recognition of deferred tax assets requires management to make significant assumptions and judgments about future earnings, the periods in which items will impact taxable income, future corporate tax rates, and the application of inherently complex tax laws. The use of different estimates can result in changes in the amounts of deferred tax items recognized, which may result in equity and earnings volatility because such changes are reported in current period earnings.

In connection with determining the income tax provision or benefit, management considers maintaining liabilities for uncertain tax positions and tax strategies that it believes contain an element of uncertainty. Periodically, management evaluates each of FNCB’s tax positions and strategies to determine whether a liability for uncertain tax benefits is required. As of ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020,~~2021, management determined that FNCB did not have any uncertain tax positions or tax strategies and that no liability was required to be recorded.

Refer to Note 5,7, “Income Taxes,” of the notes to consolidated financial statements included in Item 1 hereof for additional information about income taxes.

New Authoritative Accounting Guidance and Accounting Guidance to be Adopted in Future Periods

Refer to Note 2, “New Authoritative Accounting Guidance,” of the notes to consolidated financial statements included in Item 1 hereof for information about new authoritative accounting guidance adopted by FNCB as of ~~September 30, 2021,~~March 31, 2022, as well as new accounting guidance issued, but not previously reported, that will be adopted by FNCB in future periods.

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Impact of the COVID-19 pandemic

~~On December 27, 2020, another COVID-19 relief bill was signed into law that extended~~Management continues to navigate and ~~modified several provisions of~~respond to the Paycheck Protection Program ("PPP") to include an additional allocation of $284 billion in funding. On January 19, 2021, FNCB began originating additional PPP loans under this round of funding. The SBA continued to accept new applications through May 31, 2021. During the first half of 2021, FNCB had generated and received SBA approval and funding for 679 PPP loans totaling $76.2 million and received $3.6 million in related loan origination fees associated with this funding, which was deferred and is being recognized upon forgiveness or repayment. As of September 30, 2021, PPP loans outstanding were $49.4 million. During the nine months ended September 30, 2021, FNCB received forgiveness for PPP loans totaling $105.5 million and expects to receive forgiveness for the majority of the balance PPP loans outstandingmany challenges brought on by the ~~end of 2021.~~

During the first nine months of 2021, widespread availability and distribution of vaccines has led to lifting of restrictions, reopening of the economy and improving economic growth across the United States and more specifically within our market area. In early April 2021, the Governor of Pennsylvania reduced some of the restrictions on certain businesses, primarily restaurants and hospitality-related businesses. However, lingering effects from the COVID-19 ~~pandemic, including the effects of variants, such as the Delta variant, continue to impact employment and supply-chains affecting national, regional and local economies.~~pandemic. FNCB branches are open, and while fully operational, FNCB continues to follow CDC and Commonwealth of Pennsylvania guidance and take ~~additional~~the necessary precautions to ensure the safety of its customers and its employees. During 2021, widespread availability and distribution of vaccines, including boosters, resulted in the lifting of restrictions, the reopening of the economy and improvement in economic growth across the United States and more specifically within our market area. However, lingering effects from the COVID-19 pandemic, including the effects of new variants, such as the X-E variant, continue to adversely impact employment markets and supply-chains affecting global, national, regional and local economies. The effects of the COVID-19 pandemic, along with other factors such as the war in Ukraine, have resulted in pronounced price inflation beginning in 2021 and continuing into 2022.

At March 31, 2022, FNCB had PPP loans still outstanding of $7.6 million, net of $0.4 million in net deferred origination fees, compared to $21.0 million outstanding in loans at December 31, 2021, net of $0.9 million in net deferred origination fees. Management expects to receive forgiveness for the majority of the remaining balance of outstanding PPP loans by the end of the second quarter of 2022. Regarding our banking operations, commercial activity within our market area, while improving, remains volatile and has not returned to pre-pandemic levels. Economic restrictions adopted in 2020 caused many borrowers to request payment deferrals and other payment accomodations. As of the end of the third quarter of 2021, all have resumed making contractual principal and interest payments. While positive developments have occurred, management is keenly aware that uncertainty regarding the pandemic still exists. The reinstitution of restrictions by federal, state and local governments, if adopted, could negatively impact economic recovery, and result in financial distress for FNCB’s business and consumer customers, which could impede loan growth and result in asset quality deterioration. Additionally, FNCB's commercial customer base includes businesses in industries such as hotel/lodging, restaurants, hospitality, and retail and commercial real estate, all of which had been significantly and adversely impacted in 2020 and 2021 by economic restrictions, and employment and supply-chain constraints related to the COVID-19 pandemic. Management continues to closely monitor customers within these industries as the economic recovery unfolds.

Management expects the effects of COVID-19 pandemic on the economy, overall financial stability and global supply chains, as well as ~~certain provisions of legislative and regulatory relief efforts,~~increased or decreased governmental intervention in the U.S. financial system, to continue to impact FNCB's operations. At this time, management cannot determine or estimate the full magnitude of the impact and cannot provide any assurances as to the effect on FNCB's results of operations or financial position. The FNCB team will continue to work diligently to address any issues related to the COVID-19 pandemic in a safe and sound manner as they arise. Management believes that FNCB's balance sheet and capital position are strong and will allow FNCB to withstand any further challenges that may be presented.

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Executive Summary

The following overview should be read in conjunction with this MD&A in its entirety.

FNCB recorded consolidated net income of $~~6.4~~4.4 million, or ~~$0.31~~$0.22 per basic and diluted common share, for the three months ended ~~September 30, 2021, an increase~~March 31, 2022, a decrease of ~~$2.3~~$1.3 million, or ~~54.6%~~25.4%, compared to ~~$4.1~~$5.8 million, or ~~$0.20~~$0.29 per basic and diluted common share, for the three months ended ~~September 30, 2020.~~March 31, 2021. The decrease in first quarter 2022 earnings was caused by increases in non-interest expense and the provision for loan and lease losses and a decrease in non-interest income, partially offset by an increase in ~~third~~net interest income. Non-interest expense increased $1.4 million, or 19.2%, to $8.5 million for the three months ended March 31, 2022 from $7.2 million for the same three months of 2021, which was largely due to costs associated with full implementation of FNCB's new product offering through 1st Equipment Finance. The provision for loan and lease losses increased $573 thousand, or 308.0% to $759 thousand for the first quarter of 2022 from $186 thousand for the same quarter of 2021, which reflected increases in outstanding loan balances. Non-interest income for the three months ended March 31, 2022, decreased $1.0 million, or 35.5%, to $1.8 million from $2.8 million for the three months ended March 31, 2021. The decrease in non-interest revenue primarily reflected reductions in net gains on the sales of available-for-sale debt securities and mortgage loans held for sale of $213 thousand and $224 thousand, respectively. FNCB also recorded a net loss on equity securities of $125 thousand for the first quarter of 2022, a reduction of $489 thousand, as compared to recording net gains of $364 thousand for the same quarter of 2021. Additionally, in the first quarter of 2021, FNCB received non-recurring income of $422 thousand related to a BOLI insurance settlement for a death benefit claim. Partially offsetting these reductions to earnings was ~~primarily due to~~ a ~~$2.9~~$1.4 million, or ~~29.4%~~12.2%, increase in net interest income ~~coupled with a $0.5~~to $12.8 million release of loan and lease loss reserves and a $0.3 million, or 4.4% reduction in non-interest expense. Partially offsetting these positive factors comparing the three months ended September 30, 2021 and 2020 was a $1.1 million, or 38.0%, reduction in non-interest income. Net income for the ~~nine months ended September 30, 2021 totaled $17.4~~first quarter of 2022 from $11.4 million ~~or $0.86 per basic and diluted share, an increase of $7.2 million, or 70.9%, compared to $10.2 million, or $0.50 per basic and diluted shares,~~ for the same ~~nine months~~period of 2020. Similar to the quarterly period, the increase in year-to-date net income was caused primarily by a $7.6 million, or 26.5%, increase in net interest income and a $0.2 million release of reserves in 2021 compared to a $2.1 million provision for loan and lease losses in 2020. These favorable variances were partially offset by an $0.8 million, or 11.7%, decrease in non-interest income and a $0.4 million, or 2.0%, increase in non-interest expense, comparing the nine months ended September 30, 2021 and 2020.2021.

For the three ~~and nine~~ months ended ~~September 30,~~March 31, 2022 and 2021, the annualized return on average assets and the return on average equity was ~~1.58%~~1.08% and ~~1.52%~~11.31%, respectively, and ~~1.15%~~1.61% and ~~1.03%~~15.27%, respectively, for the same period of 2020. The annualized return on average equity was 15.61% and 14.76%, respectively for the three and nine months ended September 30, 2021, compared to 11.05% and 9.63%, for the comparable periods of 2020.2021. FNCB declared and paid dividends to holders of common stock of $0.075 per share for the ~~third quarter of 2021 and $0.195 per share for the nine~~three months ended ~~September 30, 2021,~~March 31, 2022, a 25.0% increase compared to ~~$0.055 and $0.165~~$0.060 per share for the same ~~periods~~period of ~~2020.~~

During the third quarter of 2021, management expanded FNCB's commercial credit product offerings to include commercial equipment financing, through direct finance leases and simple interest loans. FNCB hired a team of professionals highly-experienced with this type of financing to initiate this lending program, which is doing business under the name of 1st Equipment Finance and operating out of FNCB's community office located in Exeter, Luzerne County, Pennsylvania. As of September 30, 2021, leases, net of unearned income, originated under this initiative were $1.7 million and are included in commercial and industrial loans and leases. Management believes this new product offering will positively impact future interest income run rates and enhance FNCB's net interest margin going forward.2021.

Total assets ~~increased $200.2~~decreased $14.8 million, or ~~13.7%~~0.9%, to ~~$1.666~~$1.650 billion at ~~September 30, 2021~~March 31, 2022 from ~~$1.466~~$1.664 billion at December 31, ~~2020.~~2021. The change in total assets primarily reflected ~~increases~~ decreases in ~~net loans~~ cash and ~~leases,~~cash equivalents and available-for-sale debt securities, partially offset by an increase in loans and leases. Cash and cash ~~and cash equivalents. Available-for-sale debt securities increased $120.3~~equivalents decreased $74.9 million, or ~~34.4%~~75.7%, to ~~$470.3~~$24.1 millionat ~~September 30, 2021~~March 31, 2022 from ~~$350.0~~$99.0 million at December 31, ~~2020, which primarily reflected the deployment of excess liquidity into the investment portfolio. Also contributing to balance sheet expansion was a $57.2~~2021. Available-for-sale debt securities decreased $8.5 million, or ~~6.4%~~1.6%, ~~increase in net loans and leases~~ to ~~$946.4~~$514.1 millionat ~~September 30, 2021~~March 31, 2022 from ~~$889.2~~$522.6 million at December 31, ~~2020, primarily due~~2021. Loans and leases, net of the allowance for loan and lease losses, increased to ~~increases in residential and commercial real estate loans. Cash and cash equivalents increased $18.4 million, or 11.8%, to $174.2 million~~$1.023 billion at ~~September 30, 2021~~March 31, 2022 from ~~$155.8~~$967.0 million at December 31, ~~2020.~~2021, as increases were experienced across all loan categories due to strong organic demand, the new product offering and the acquisition of loans pools from third-party originators. Total deposits ~~increased $194.6~~decreased $43.4 million, or ~~15.1%~~3.0%, to ~~$1.482~~$1.412 billion at ~~September 30, 2021~~March 31, 2022 from ~~$1.287~~$1.455 billion at December 31, ~~2020.~~2021. Total borrowed funds increased $57.0 million, to $87.3 million, at March 31, 2022, which was comprised ~~entirely~~ of ~~FNCB's~~$77.0 million in Federal Home Loan Bank ("FHLB") of Pittsburgh advances and $10.3 million in junior subordinated debentures,~~remained constant~~ compared to $30.3 million in outstanding borrowings at ~~$10.3 million at September 30, 2021 and~~ December 31, ~~2020.~~ 2021.

On January ~~27, 2021,~~26, 2022, FNCB's Board of Directors authorized a stock repurchase program under which up to ~~975,000~~750,000 shares of FNCB's outstanding common stock may be acquired in the open market commencing no earlier than ~~February 3, 2021~~March 4, 2022 and expiring December 31, ~~2021,~~2022, pursuant to a trading plan that was adopted in accordance with Rule 10b5-1 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Under the program, shares are purchased from time to time at prevailing market prices, through open market transactions depending upon market conditions and administered through an independent broker. Repurchases are subject to SEC regulations as well as certain price, market volume and timing constraints specified in the trading plan. Under the program, the purchases will be funded from available working capital presently available to FNCB, and the repurchased shares will be returned to the status of authorized but unissued shares of Common Stock. There is not a guarantee as to the exact number of shares that will be repurchased by FNCB, and FNCB may discontinue at any time that management determines additional repurchases are no longer warranted. As of ~~September 30, 2021,~~March 31, 2022, FNCB repurchased ~~330,759~~307,514 shares for an approximate aggregate cost of ~~$2.4~~$3.0 million.

Total shareholders’ equity ~~increased~~decreased $~~6.1~~24.1 million, or ~~4.0%~~14.8%, to ~~$162.0~~$138.4 million at ~~September 30, 2021~~March 31, 2022 from ~~$155.9~~$162.5 million at December 31, ~~2020.~~2021. The ~~increase~~decrease in capital was primarily due to ~~net income for the nine months ended September 30, 2021~~an accumulated other comprehensive loss of ~~$17.4~~$17.7 million ~~partially offset by $3.9 million in dividends declared and paid for the nine months ended September 30, 2021, a $5.5 million decrease in~~at March 31, 2022, compared to accumulated other comprehensive income ~~related primarily to~~of $6.3 million at December 31, 2021, which was principally caused by the depreciation in the fair value of FNCB's available-for-sale debt securities, net of deferred ~~taxes, and $2.4~~taxes. Also contributing to the reduction in capital was $3.0 million for the repurchase of common ~~shares.~~shares and $1.5 million in dividends declared and paid for the three months ended March 31, 2022. These reductions were partially offset by net income for the three months ended March 31, 2022 of $4.4 million. FNCB Bank's total risk-based capital and Tier 1 leverage ratios were ~~15.91%~~14.10% and ~~9.80%~~9.30% at ~~September 30, 2021,~~March 31, 2022, respectively, compared to ~~15.79%~~14.64% and ~~9.57%~~8.92% at December 31, ~~2020,~~2021, respectively.

~~Looking ahead~~Management Focus in 2022

For the remainder of 2022, management will continue to focus on expanding FNCB's comprehensive digital strategy to respond to evolving customer demands and create operational and delivery channel efficiencies. Specifically, in the fourth quarter of 2021, FNCB engaged a third-party service provider for the origination and ~~into~~underwriting of residential mortgages through their web-based platform. This new platform, which was implemented in April 2022, ~~management will continue to invest capital to improve FNCB's future profitability, while continuing to assist~~provides customers with ~~PPP loans~~secure, state-of-art technology to guide them through the ~~forgiveness process; expanding equipment~~entire mortgage origination process from application to closing and allows FNCB to focus on attracting new customers and deepening existing customer relationships. FNCB is also in the process of fully integrating a new business lending software, which is a fully digital infrastructure that supports future growth, allowing FNCB to expand market penetration, improve borrower response time, and enhance governance related to credit administration and underwriting. Lastly, FNCB has partnered with a FinTech company formed by veteran community bank executives and implemented its proprietary cloud-based data analytic platform. This analytic platform provides timely and unique insight into FNCB's deposit, loan and ~~lease financing~~revenue demographics, allowing FNCB's management team to make informed decisions to drive revenue, manage risk and ~~enhancing FNCB’s digital banking platform to continue to improve the customer's experience.~~create operational efficiencies.

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Summary of Performance

Net Interest Income

Net interest income, defined as the difference between (i) interest income, interest and fees on interest-earning assets, and (ii) interest expense, interest paid on deposits and borrowed funds, is the primary source of earnings for commercial banks. As such, it is the primary determinant of profitability for FNCB. Net interest income is impacted by variations in the volume, rate and composition of earning assets and interest-bearing liabilities, changes in general market rates and the level of non-performing assets. Interest income is presented on a fully tax-equivalent basis using the statutory corporate tax rate of 21.0% in ~~2021~~2022 and ~~2020.~~2021.

In response to the ~~significant disruption and uncertainty in~~economic fallout from the ~~economic environment brought on by~~global COVID-19 pandemic, the Federal Open Market Committee ("FOMC") lowered the federal funds target rate 150 basis points in two emergency actions in March 2020. As a result, the target range for federal funds fell from 1.50%-1.75% at December 31, 2019 to 0.00%-0.25% at March 31, 2020 and ~~has~~had remained at ~~that level~~these historically low levels through ~~September 30, 2021.~~March 15, 2022. However, the recent increase in inflation resulted in the FOMC raising the target range for the federal funds rate 25 basis points at its meeting on March 16, 2022. The increase in the federal funds target rate resulted in a corresponding 25-basis point increase in the national prime rate to 3.50% on the same date. These actions, along with the FOMC indicating additional rate increases during 2022, resulted in a rise ingeneral market interest rates at the end of the first quarter of 2022. Previously, the FOMC actions, along with sustained decreases in general market interest rates, ~~have~~had resulted in decreases in yields earned on earning-assets, as well as the rates paid on interest-bearing liabilities ~~comparing the three and nine months ended September 30, 2021 and 2020.~~in 2021. Additionally, net interest income, earning-asset yields and the net interest margin were impacted by the origination, funding and forgiveness of PPP loans.

Net interest income on a tax-equivalent basis increased ~~$2.9~~$1.4 million, or ~~28.7%~~12.1%, to $13.0 million for the three months ended ~~September 30, 2021~~March 31, 2022 from ~~$10.1~~$11.6 million for the comparable period of ~~2020.~~2021. The improvement in tax-equivalent net interest income primarily reflected an increase in tax-equivalent interest income of ~~$2.1~~$1.0 million, or ~~17.9%~~7.8%, to ~~$13.6~~$13.4 million for the ~~third~~first quarter of ~~2021~~2022 from ~~$11.5~~$12.4 million for the same quarter of ~~2020,~~2021, coupled with a decrease in interest expense of $0.4 million, or 52.0%, to $0.4 million from $0.8 million, ~~or 56.8%,~~primarily due to ~~$0.6 million from $1.4 million comparing~~ the ~~third quarters of 2021 and 2020.~~reduction in funding costs. The tax-equivalent net interest margin, a key measurement used in the banking industry to measure income from earning assets relative to the cost to fund those assets, is calculated by dividing tax-equivalent net interest income by average interest-earning assets. FNCB’s tax-equivalent net interest margin ~~improved 27~~decreased 24 basis points to ~~3.46%~~3.35% for the ~~third~~first quarter of ~~2021~~2022 from ~~3.19%~~3.59% for the same quarter of 2020. On a year-to-date basis, the tax-equivalent net interest margin improved 28 basis points to 3.51% for the nine months ended September 30, 2021, from 3.23% for the same nine-month period of 2020. The margin improvement was primarily impacted by activity related to PPP loans, coupled with decreases in funding costs.2021. Additionally, rate spread, the difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities shown on a fully tax-equivalent basis, ~~improved 34~~declined 20 basis points to ~~3.40%~~3.31% for the three months ended ~~September 30, 2021~~March 31, 2022 from ~~3.06%~~3.51% for the same three months of ~~2020. For the year-to-date period ended September 30, 2021, the rate spread improved 36 basis points to 3.43% from 3.07% for the same period of 2020.~~2021.

~~The $2.1 million, or 17.9%, increase in~~For the three months ended March 31, 2022, tax-equivalent interest income ~~comparing~~increased $1.0 million, or 7.8%, to $13.4 million from $12.4 million for the ~~third quarters of~~three months ended March 31, 2021, ~~and 2020~~which largely reflected higher volumes of average earning assets, ~~coupled with a net increase~~partially offset by reductions in the tax-equivalent ~~yield~~yields on ~~the loan portfolio.~~earning assets. Total average earning assets increased ~~$236.3~~$263.0 million, or ~~18.7%~~20.3%, to ~~$1.500~~$1.559 billion for the three months ended ~~September 30, 2021~~March 31, 2022 from ~~$1.263~~$1.296 billion for the same three months of ~~2020,~~2021, which resulted in a corresponding increase in tax-equivalent interest income of ~~$1.0~~$1.9 million. Specifically, total securities averaged ~~$440.4~~$541.0 million for the ~~third~~first quarter of ~~2021,~~2022, an increase of ~~$138.3~~$179.0 million, or ~~45.8%~~49.5%, from ~~$302.1~~$362.0 million for the ~~third~~first quarter of ~~2020, which was largely due to the redeployment of excess cash into the investment portfolio.~~2021. Additionally, average total loans and leases increased ~~$11.8~~$79.9 million, or ~~1.2%~~8.7%, to ~~$964.7 million~~$1.000 billion for the ~~third~~first quarter of ~~2021~~2022 from ~~$952.9~~$920.4 million for the same quarter of ~~2020,~~2021, which largely reflected ~~increases in residential~~strong organic loan demand, the new commercial equipment financing product offering, and ~~commercial real estate loans.~~purchases of loan pools from third-party originators. Increases in the average balances of securities and loans resulted in corresponding increases to tax-equivalent interest income of ~~$0.9~~$1.1 million and ~~$0.1~~$0.8 million, respectively, comparing the three months ended ~~September 30, 2021~~March 31, 2022 and ~~2020.~~2021. The tax-equivalent yield on average earning assets for the ~~third~~first quarter of ~~2021~~2022 was ~~3.63%~~3.45%, a decrease of 240 basis points from ~~3.65%~~3.85% for the same quarter of ~~2020. Despite this decrease~~2021, which resulted in ~~yield, changes in yields on earning assets contributed~~a $1.0 million decrease to tax-equivalent interest income, as a 62-basis point increase the tax-equivalent yield on the loan portfolio more than offset the effect of a 59-basis point reduction in the tax-equivalent yield on the investment portfolio. Loan yields were favorably impacted by the recognition of $1.6 million in net deferred loan origination fees on forgiven PPP loans.income.

The ~~$0.8~~$0.4 million, or ~~56.8%~~52.0%, decrease in interest expense was primarily due to a ~~36-basis~~20-basis point reduction in the cost of funds to ~~0.23%~~0.14% for the three months ended ~~September 30, 2021~~March 31, 2022 from ~~0.59%~~0.34% for the same three months of ~~2020.~~2021. Specifically, the average rate paid for interest-bearing deposits decreased 3320 basis points to ~~0.22%~~0.12% for the ~~third~~first quarter of ~~2021~~2022 from ~~0.55%~~0.32% for the same period of ~~2020,~~2021, resulting in a corresponding decrease to interest expense of ~~$0.8~~$0.5 million. The average rates paid for interest-bearing demand and time deposits, which reflected the reduction in market interest rates and repricing of higher-costing time deposit upon maturity, decreased 2913 basis points and 5154 basis points, respectively, comparing the three months ended ~~September 30, 2021~~March 31, 2022 and ~~2020.~~2021. The decrease in the cost of interest-bearing demand deposits and time ~~deposit~~deposits caused corresponding reductions to interest expense of ~~$0.5 million~~$246 thousand and ~~$0.2 million,~~$214 thousand, respectively. The decrease in interest expense due to changes in deposit rates was coupled with a $41.2 million, or 79.8%, decrease in average borrowed funds comparing the three months ended September 30, 2021 to the same period of 2020, which resulted in a corresponding decrease in interest expense of $0.2 million. FNCB experienced strong deposit growth due to additional fiscal stimulus passed in the first quarter of 2021. Changing customer deposit preferences due to ~~the reduction in~~continued economic ~~activity~~uncertainty coupled with supply-chain constraints and ~~uncertainty related to the COVID-19 pandemic also contributed to the deposit growth, as well as factoring~~general rate environment, factored into deposit migration from time deposits into non-maturity deposits. Specifically, average interest-bearing deposits increased ~~$136.6~~$112.6 million, or ~~14.5%~~11.3%, to ~~$1.080~~$1.112 billion from ~~$943.8~~$999.1 million comparing the ~~third~~first quarters of ~~2021~~2022 and ~~2020,~~2021, respectively. Average interest-bearing demand deposits increased ~~$136.8~~$130.7 million, or ~~21.4%~~18.8%, to ~~$774.9~~$826.5 million for the ~~third~~first quarter of ~~2021~~2022 compared to ~~$638.1~~$695.8 million for the same quarter of ~~2020,~~2021, while average savings deposits increased ~~$24.4~~$26.1 million, or ~~23.2%~~22.9%, to ~~$129.8~~$140.5 million from ~~$105.4~~$114.3 million comparing the ~~third~~first quarters of ~~2021~~2022 and ~~2020,~~2021, respectively. Conversely, average time deposits decreased ~~$24.7~~$44.3 million, or ~~12.3%~~23.4%, to ~~$175.6~~$144.7 million for the three months ended ~~September 30, 2021~~March 31, 2022 from ~~$200.3~~$189.0 million for the same three months of ~~2020. The strong growth in deposit volumes resulted in a combined net increase to interest expense of $0.1 million.~~ 2021.

On a year-to-date basis, tax-equivalent net interest income increased $7.7 million, or 26.3%, to $36.9 million for the nine months ended September 30, 2021 from $29.2 million for the comparable period of 2020. The improvement in tax-equivalent net interest income for the year-to-date period was due to a $4.9 million, or 14.3%, increase in tax-equivalent interest income, coupled with a $2.8 million, or 55.5%, decrease in interest expense. The increase in tax-equivalent interest income for the year-to-date period resulted primarily from the $199.0 million, or 16.5%, increase in average earning asset balances. Average total security balances increased $112.7 million, or 38.5%, to $405.3 million for the nine months ended September 30, 2021 from $292.6 million for the same period of 2020, resulting in an increase of $2.4 million in tax-equivalent interest income. In addition, average loan balances increased $43.7 million, or 4.8%, to $946.7 million for the nine months ended September 30, 2021, compared to $903.0 million for the same nine months of 2020, resulting in an increase of $1.4 million in interest income. Despite a 7-basis point decrease in the tax-equivalent yields on earnings assets to 3.72% for the nine months ended September 30, 2021 from 3.79% for the same nine months of 2020, the change in the tax-equivalent yield on earning assets contributed to a $1.1 million increase in interest income, as a 29 basis point increase in the tax-equivalent yield on the loan portfolio more than offset the effects of a 35-basis point decrease in the tax-equivalent yield on the investment portfolio.

Table of Contents

The ~~$2.8 million, or 55.5%, decrease in interest expense resulted primarily from a decrease in funding costs,~~following table present the average balances of assets and a reduction in average borrowed funds, partially offset by an increase in average interest-bearing deposits. FNCB's total cost of funds decreased 43 basis points to 0.29% for the nine months ended September 30, 2021 from 0.72% for the same nine months of 2020, resulting in aliabilities, corresponding decrease to interest expense of $2.5 million. The cost of interest-bearing deposits decreased 39 basis points to 0.27% from 0.66%, respectively, comparing the nine months ended September 30, 2021 and 2020. Specifically, comparing the year-to-date periods of 2021 and 2020, the rates paid on time deposits, interest-bearing demand deposits and savings deposits decreased 53 basis points, 37 basis points and 3 basis points, respectively. Regarding volumes of interest-bearing liabilities, borrowed funds averaged $10.3 million for the nine months ended September 30, 2021, a decrease of $54.7 million, or 84.1%, from $65.0 million for the same period of 2020, which resulted in a corresponding decrease to interest expense of $0.7 million. Partially offsetting this decrease was a $161.2 million, or 18.5%, increase in average interest-bearing deposits to $1.033 billion for the nine months ended September 30, 2021 compared to $872.1 million for the same period of 2020, which resulted in additional interest expense of $0.4 million.

~~Net~~ interest income ~~depends upon the relative amount of interest-earning assets~~ and ~~interest-bearing liabilities~~expense and ~~the interest rate earned~~resulting average yields or rates paid ~~on them. The following tables present certain information about FNCB’s consolidated statements of financial condition and consolidated statements of income~~ for the three months ended March 31, 2022 and nine-month periods ended September 30, 2021 and 2020 and reflects the average yield on assets and average cost of liabilities for the periods indicated. Such yields and costs are calculated by dividing income or expense by the average balance of assets or liabilities, respectively, for the periods shown.2021. Average balances are derived from average daily balances. The loan yields include amortization of deferred origination fees and costs which are considered adjustments to yields.

	Three Months Ended																		Three Months Ended
	September 30, 2021									September 30, 2020									March 31, 2022									March 31, 2021
	Average						Yield/			Average						Yield/			Average						Yield/			Average						Yield/
(dollars in thousands)	Balance			Interest			Cost			Balance			Interest			Cost			Balance			Interest			Cost			Balance			Interest			Cost
Assets
Earning assets (2)(3)
Loans-taxable (4)	$	921,648		$	10,364			4.50	%	$	908,095		$	8,688			3.83	%	$	946,201		$	9,755			4.12	%	$	873,544		$	9,401			4.30	%
Loans-tax free (4)		43,091			420			3.90	%		44,826			494			4.44	%		54,096			439			3.25	%		46,897			487			4.15	%
Total loans (1)(2)		964,739			10,784			4.47	%		952,921			9,182			3.85	%		1,000,297			10,194			4.08	%		920,441			9,888			4.30	%
Securities-taxable		357,684			2,125			2.38	%		232,081			1,760			3.03	%		437,955			2,468			2.25	%		286,128			1,968			2.75	%
Securities-tax free		82,706			654			3.16	%		69,973			586			3.35	%		103,086			775			3.01	%		75,876			615			3.24	%
Total securities (1)(5)		440,390			2,779			2.52	%		302,054			2,346			3.11	%		541,041			3,243			2.40	%		362,004			2,583			2.85	%
Interest-bearing deposits in other banks and federal funds sold (8)		94,434			31			0.13	%		8,286			1			0.05	%		17,464			7			0.16	%		13,490			3			0.09	%
Total earning assets ~~(8)~~		1,499,563			13,594			3.63	%		1,263,261			11,529			3.65	%		1,558,802			13,444			3.45	%		1,295,935			12,474			3.85	%
Non-earning assets ~~(8)~~		105,912									170,902									91,083									187,490
Allowance for loan and lease losses		(12,461	)								(11,865	)								(12,689	)								(12,189	)
Total assets	$	1,593,014									1,422,298								$	1,637,196								$	1,471,236

Liabilities and Shareholders' Equity
Interest-bearing liabilities
Interest-bearing demand deposits	$	774,906			290			0.15	%	$	638,070			705			0.44	%	$	826,528			195			0.09	%	$	695,794			380			0.22	%
Savings deposits		129,813			24			0.07	%		105,394			24			0.09	%		140,487			22			0.06	%		114,349			20			0.07	%
Time deposits		175,593			268			0.61	%		200,290			562			1.12	%		144,656			107			0.30	%		188,942			398			0.84	%
Total interest-bearing deposits		1,080,312			582			0.22	%		943,754			1,291			0.55	%		1,111,671			324			0.12	%		999,085			798			0.32	%
Borrowed funds and other interest-bearing liabilities		10,419			47			1.80	%		51,629			165			1.28	%		47,346			82			0.69	%		10,310			48			1.86	%
Total interest-bearing liabilities		1,090,731			629			0.23	%		995,383			1,456			0.59	%		1,159,017			406			0.14	%		1,009,395			846			0.34	%
Demand deposits		325,571									267,636									308,830									294,525
Other liabilities		15,258									11,384									13,234									12,413
Shareholders' equity		161,454									147,895									156,115									154,903
Total liabilities and shareholder's equity	$	1,593,014								$	1,422,298								$	1,637,196								$	1,471,236

Net interest income/interest rate spread (6) (8)					12,965			3.40	%					10,073			3.06	%
Net interest income/interest rate spread (6)																							13,038			3.31	%					11,628			3.51	%
Tax equivalent adjustment					(225	)								(227	)								(255	)								(231	)
Net interest income as reported				$	12,740								$	9,846								$	12,783								$	11,397

Net interest margin (7) (8)								3.46	%								3.19	%
Net interest margin (7)																										3.35	%								3.59	%

	(1)	Interest income is presented on a tax equivalent basis using a 21% rate.
	(2)	Loans are stated net of unearned income.
	(3)	Non-accrual loans are included in loans within earning assets.
	(4)	~~Loan~~Interest income on loans include net loan fees ~~included in interest income are not significant.~~of $462 thousand and $1.0 million for the three months ended March 31, 2022 and 2021, respectively.
	(5)	The yields for securities that are classified as available for sale is based on the average historical amortized cost.
	(6)	Interest rate spread represents the difference between the average yield on interest earning assets and the cost of interest-bearing liabilities and is presented on a tax equivalent basis.
	(7)	Net interest income as a percentage of total average interest earning assets.
	~~(8)~~	Reflects revisions to average balances for the three months ended September 30, 2020 to reclassify certain average deposits in other banks from non-interest deposits in other banks to non-earning assets in the amount of $62,315.

Table of Contents

Nine Months Ended

September 30, 2021

September 30, 2020

Average

Yield/

Average

Yield/

(dollars in thousands)

Balance

Interest

Cost

Balance

Interest

Cost

Assets

Earning assets (2)(3)

Loans-taxable (4)
$ 901,851 $ 29,662 4.39 % $ 854,885 $ 26,042 4.06 %
Loans-tax free (4)
44,843 1,344 4.00 % 48,080 1,564 4.34 %
Total loans (1)(2)
946,694 31,006 4.37 % 902,965 27,606 4.08 %
Securities-taxable
324,971 6,132 2.52 % 247,848 5,426 2.92 %
Securities-tax free
80,320 1,923 3.19 % 44,723 1,149 3.43 %
Total securities (1)(5)
405,291 8,055 2.65 % 292,571 6,575 3.00 %
Interest-bearing deposits in other banks and federal funds sold (8)
49,833 35 0.09 % 7,322 25 0.46 %
Total earning assets (8)
1,401,818 39,096 3.72 % 1,202,858 34,206 3.79 %
Non-earning assets (8)
137,879 130,197
Allowance for loan and lease losses
(12,344 ) (10,321 )
Total assets
$ 1,527,353 1,322,734

Liabilities and Shareholders' Equity

Interest-bearing liabilities

Interest-bearing demand deposits
$ 728,110 997 0.18 % $ 577,012 2,363 0.55 %
Savings deposits
122,531 66 0.07 % 99,627 75 0.10 %
Time deposits
182,659 1,035 0.76 % 195,456 1,889 1.29 %
Total interest-bearing deposits
1,033,300 2,098 0.27 % 872,095 4,327 0.66 %
Borrowed funds and other interest-bearing liabilities
10,347 143 1.84 % 65,046 706 1.45 %
Total interest-bearing liabilities
1,043,647 2,241 0.29 % 937,141 5,033 0.72 %
Demand deposits
312,702 232,920
Other liabilities
13,234 11,361
Shareholders' equity
157,770 141,312
Total liabilities and shareholder's equity
$ 1,527,353 $ 1,322,734

Net interest income/interest rate spread (6) (8)
36,855 3.43 % 29,173 3.07 %
Tax equivalent adjustment
(686 ) (570 )
Net interest income as reported
$ 36,169 $ 28,603

Net interest margin (7) (8)
3.51 % 3.23 %

	~~(1)~~	~~Interest income is presented on a tax equivalent basis using a 21% rate.~~
	~~(2)~~	~~Loans are stated net of unearned income.~~
	~~(3)~~	~~Non-accrual loans are included in loans within earning assets.~~
	~~(4)~~	~~Loan fees included in interest income are not significant.~~
	~~(5)~~	~~The yields for securities that are classified as available for sale is based on the average historical amortized cost.~~
	~~(6)~~	~~Interest rate spread represents the difference between the average yield on interest earning assets and the cost of interest-bearing liabilities and is presented on a tax equivalent basis.~~
	~~(7)~~	~~Net interest income as a percentage of total average interest earning assets.~~
	~~(8)~~	~~Reflects revisions to average balances for the ninemonths ended September 30, 2020 to reclassify certain average deposits in other banks from non-interest deposits in other banks to non-earning assets in the amount of $41,526.~~

~~Table of Contents~~

Rate Volume Analysis

The most significant impact on net income between periods is derived from the interaction of changes in the volume and rates earned or paid on interest-earning assets and interest-bearing liabilities. The volume of earning assets, specifically loans and investments, compared to the volume of interest-bearing liabilities represented by deposits and borrowings, combined with the spread, produces the changes in net interest income between periods. Components of interest income and interest expense are presented on a tax-equivalent basis using the corporate federal income tax rate of 21%.

The following table summarizes the effect that changes in volumes of earning assets and interest-bearing liabilities and the interest rates earned and paid on these assets and liabilities have on net interest income. The net change or mix component attributable to the combined impact of rate and volume changes has been allocated proportionately to the change due to volume and the change due to rate.

	Three Months Ended September 30,									Nine Months Ended September 30,									Three Months Ended March 31,
	2021 vs. 2020									2021 vs. 2020									2022 vs. 2021
	Increase (Decrease)									Increase (Decrease)									Increase (Decrease)
	Due to			Due to			Total			Due to			Due to			Total			Due to			Due to			Total
(in thousands)	Volume			Rate			Change			Volume			Rate			Change			Volume			Rate			Change
Interest income:
Loans - taxable	$	131		$	1,545		$	1,676		$	1,477		$	2,143		$	3,620		$	760		$	(406	)	$	354
Loans - tax free		(19	)		(55	)		(74	)		(102	)		(118	)		(220	)		68			(116	)		(48	)
Total loans		112			1,490			1,602			1,375			2,025			3,400			828			(522	)		306
Securities - taxable		805			(440	)		365			1,527			(821	)		706			904			(404	)		500
Securities - tax free		102			(34	)		68			857			(83	)		774			207			(47	)		160
Total securities		907			(474	)		433			2,384			(904	)		1,480			1,111			(451	)		660
Interest-bearing deposits in other banks and federal funds sold		26			4			30			44			(34	)		10			1			3			4
Total interest income		1,045			1,020			2,065			3,803			1,087			4,890			1,940			(970	)		970

Interest expense:
Interest-bearing demand deposits		127			(542	)		(415	)		502			(1,868	)		(1,366	)		61			(246	)		(185	)
Savings deposits		5			(5	)		-			15			(24	)		(9	)		4			(2	)		2
Time deposits		(63	)		(231	)		(294	)		(117	)		(737	)		(854	)		(77	)		(214	)		(291	)
Total interest-bearing deposits		69			(778	)		(709	)		400			(2,629	)		(2,229	)		(12	)		(462	)		(474	)
Borrowed funds and other interest-bearing liabilities		(167	)		49			(118	)		(716	)		153			(563	)		80			(46	)		34
Total interest expense		(98	)		(729	)		(827	)		(316	)		(2,476	)		(2,792	)		68			(508	)		(440	)
Net interest income	$	1,143		$	1,749		$	2,892		$	4,119		$	3,563		$	7,682		$	1,872		$	(462	)	$	1,410

Provision for Loan and Lease Losses

The provision for loan and lease losses is an expense charged against net interest income to provide for probable losses attributable to uncollectible loans and leases and is based on management’s analysis of the adequacy of the ALLL. A release of reserves, resulting in a credit for loan and lease losses, reflects the reversal of amounts previously charged to the ALLL. Management closely monitors the loan portfolio and the adequacy of the ALLL by considering the underlying financial performance of the borrower, collateral values and associated credit risks. Future material adjustments may be necessary to the provision for loan and lease losses and the ALLL if economic conditions or loan performance differ substantially from the assumptions management considered in its evaluation of the ALLL. ~~In 2020, management tried~~Despite continued economic uncertainty, global supply chain issues and inflationary pressures due to ~~address any potential adverse impact~~ the COVID-19 pandemic ~~would have on economic conditions~~and other factors such as the war in its application of FNCB's methodology on the ALLL by adjusting the qualitative factor associated with changes in national, local and business economic conditions and developments and increasing the unallocated portion of the ALLL to a maximum of 10.0% of the total allowance. Both actions resulted in higher credit provisioning in 2020. Although certain borrowers were and continue to be impacted by governmental restrictions, economic uncertainty and supply-chain constraints,Ukraine, FNCB's asset quality metrics have remained favorable ~~through~~throughout 2021 and during the first ~~nine~~three months of ~~2021,~~2022. Management will continue to closely monitor FNCB's asset quality and ~~FNCB is not aware of any losses related to COVID-19~~adjust credit provisioning as of the date of this Report. Although the economy has begun to recover, uncertainty surrounding COVID-19 continues, management has maintained the qualitative factor associated with changes in national, local and business economic conditions and development at the heightened level established in 2020.

appropriate. FNCB recorded a ~~release~~provision for loan and lease losses of ~~reserves of $513~~$759 thousand for the three-month period ended ~~September 30, 2021~~March 31, 2022 compared to a ~~$74~~$186 thousand provision for loan and lease losses for the three months ended ~~September 30, 2020.~~March 31, 2021. The ~~credit for~~increase in provision was primarily attributable to the increase in loan and lease losses was $172 thousand for the nine months ended September 30, 2021, compared to a $2.0 million provision for the same nine months of 2020, reflecting the higher credit provisioning during 2020. The release of reserves for the third quarter and year-to-date periods of 2021 was largely due a large commercial recovery received during the three months ended September 30, 2021, coupled with a reduction in historical loss rates.volumes.

Table of Contents

Non-interest Income

For the three months ended ~~September 30, 2021,~~March 31, 2022, non-interest income decreased ~~$1.1~~$1.0 million, or ~~38.0%~~35.5%, to $1.8 million from ~~$2.9~~$2.8 million for the three months ended ~~September 30, 2020.~~March 31, 2021. The decrease was largely due to reductions in net gains on equity securities, net gains on the sale of available-for-sale debt securities and net gains on the sale of mortgage loans held for sale, partially offset by an increase in deposit service charges. For the three months ended ~~September 30, 2021,~~March 31, 2022, a net ~~gains~~loss on equity securities ~~were $156~~totaled $125 thousand, a decrease of ~~$690~~$489 thousand, or ~~81.6%~~134.3%, compared to ~~$846~~a recorded gain on equity securities of $364 thousand for the same three months of ~~2020.~~2021. Additionally, there were no net gains realized on the sale of available-for-sale debt securities during the three months ended ~~September 30, 2021.~~March 31, 2022. Comparatively, net gains realized on the sale of available-for-sale debt securities were ~~$433~~$213 thousand for the same three-month period of ~~2020. Net~~2021. No net gains on the sale of mortgage loans held for sale were ~~$41 thousand~~recognized for the ~~third~~first quarter of ~~2021, a decrease of $145 thousand, or 78.0%,~~2022, compared to ~~$186~~$224 thousand for the same quarter of ~~2020.~~2021. These reductions were partially offset by a ~~$165~~$176 thousand, or ~~19.6%~~20.1%, increase in deposit service charges to $1.0 million for the three months ended ~~September 30, 2021~~March 31, 2022 compared to ~~$844~~$874 thousand for the three months ended ~~September 30, 2020, which reflected increases in debit card and overdraft fees.~~

~~Table of Contents~~

For the nine months ended September 30, 2021, non-interest income decreased $0.9 million, or 11.7%, to $6.3 million from $7.2 million for the same period of 2020. Similar to the quarterly period, the year-to-date decrease resulted primarily from decreases in net gains on available-for-sale debt securities, net gains on equity securities and net gains on the sale of mortgage loans held for sale. Net gains on the sale of available-for-sale securities decreased $1.3 million, or 85.8%, to $213 thousand for the nine months ended September 30, 2021 compared to $1.5 million for the same nine month period of 2020. This was coupled with a $308 thousand, or 35.7% decrease in net gains on the sale of equity securities and $153 thousand, or 32.9%, decrease in the net gain on the sale of mortgage loans held for sale comparing the nine months ended September 30, 2021 and 2020. In addition, loan referral fees decreased $284 thousand, or 84.1%, to $54 thousand for the nine months ended September 30, 2021 from $338 thousand for the same nine months of 2020. These decreases were partially offset by a $462 thousand, or 19.4%, increase in deposit service charges, resulting primarily from an increase in debit card usage, and a settlement in the amount of $426 thousand from a bank-owned life insurance death benefit claim that was recognized inMarch 31, 2021. Loan-related fees increased $114 thousand, or 57.1%, to $314 thousand for the nine months ended September 30, 2021 from $200 thousand for the same period of 2020. The increase in loan-related fees was due primarily to the recognition of servicing fees on loans originated under the Main Street Lending Program.

Non-interest Expense

Non-interest expense ~~decreased $343 thousand,~~increased $1.3 million, or ~~4.4%~~19.2% to ~~$7.5~~$8.5 million for the three months ended ~~September 30, 2021~~March 31, 2022 from ~~$7.8~~$7.2 million for the three months ended ~~September 30, 2020,~~March 31, 2021, which primarily reflected decreases in other operating expenses and professional fees. Other operating expenses decreased $612 thousand, or 52.4%, to $556 thousand for the third quarter of 2021, compared to $1.2 million for the same quarter of 2020. During the third quarter of 2020, FNCB incurred penalties of $399 thousand related to the prepayment of high-costing FHLB advances. There were no such penalties incurred during 2021. The reduction in other operating expenses was coupled with a $126 thousand, or 45.2%, decrease in professional fees to $153 thousand for the three months ended September 30, 2021 from $279 thousand for the same three-month period of 2020. These decreases were partially offset by increases in salaries and benefits and data processing expenses. Salaries and benefits increased $187 thousand, or 4.9%, to $4.0 million for the three months ended September 30, 2021, from $3.8 million for the same period in 2020. Data processing costs increased $207 thousand, or 27.5%, to $961 thousand for the third quarter of 2021 from $754 thousand, when compared to the same quarter of 2020.

For the nine months ended September 30, 2021, non-interest expense increased $425 thousand, or 2.0%, to $21.9 million compared to $21.5 million for the same nine month period of 2020. The increase was primarily due to the increases salaries and employee benefits, data processing expenses and ~~regulatory assessments, partially offset by a reduction in~~ other operating expenses. Salaries and employee benefits increased ~~$534~~$922 thousand, or ~~4.7%~~24.7%, which included the increased costs of onboarding the 1st Equipment Finance team of lending professionals in the Bank's efforts to ~~$11.8 million at September 30, 2021, compared to $11.3 million for the nine months ended September 30, 2020, reflecting higher full-time salaries, payroll taxes~~expand its equipment loan and ~~benefits associated with staff additions.~~lease portfolios. Data processing expenses increased ~~$477~~$244 thousand, or ~~21.8%~~29.8%, to ~~$2.7~~$1.1 million for the ~~nine~~three months ended ~~September 30, 2021,~~March 31, 2022, compared to ~~$2.2 million~~$819 thousand for the same ~~period~~three months of 2020, which included added costs associated with a remote work environment, enhancements made to FNCB's digital banking services, including cybersecurity protection, and higher software costs. Regulatory assessments2021. Other operating expenses increased ~~$204~~$151 thousand, or ~~79.8%~~19.5%, to ~~$460 thousand at September 30, 2021, from $256~~$926 thousand for the ~~nine months ended September 30, 2020, which reflected~~first quarter of 2022, compared to $775 thousand for the ~~utilization~~same quarter of 2021. These increases were partially offset by decreases of $61 thousand and $29 thousand in occupancy and equipment expenses, respectively, when comparing the ~~remaining FDIC small bank assessment credits in 2020.~~first quarter of 2022 to 2021.

Provision for Income Taxes

FNCB recorded income tax expense of $~~3.4 million~~917 thousand for the ~~nine~~three months ended ~~September 30, 2021, an increase~~March 31, 2022, a decrease of ~~$1.3 million,~~$64 thousand, or ~~63.8%~~6.5%, compared to income tax expense of ~~$2.1 million~~$981 thousand for the same period of ~~2020.~~2021. The ~~increase~~decrease in income tax expense primarily reflected ~~an increase~~a decrease in pre-tax net income of ~~$8.5~~$1.5 million, or ~~69.7%~~22.7%, when comparing the ~~nine~~three months ended ~~September 30, 2021~~March 31, 2022 and ~~2020.~~2021. Despite the ~~increase~~decrease in income tax expense, FNCB's effective tax rate ~~decreased~~increased to ~~16.16%~~17.40% at ~~September 30, 2021~~March 31, 2022 compared to ~~16.74%~~14.40% for the same period of ~~2020, which was primarily caused by higher levels~~2021. The lower effective tax rate for 2021 reflected the recognition of ~~tax-exempt~~$422 thousand of non-taxable income ~~and the bank-owned life insurance~~from a BOLI settlement ~~which is non-taxable.~~received on a death benefit claim.

FINANCIAL CONDITION

Assets

Total assets ~~increased $200.2~~were $1.650 billion at March 31, 2022, a decrease of $14.8 million, or ~~13.7%~~0.9%, ~~to $1.666 billion at September 30, 2021~~ from ~~$1.466~~$1.664 billion at December 31, ~~2020.~~2021. The change in total assets primarily reflected ~~increases~~decreases in ~~net~~cash and cash equivalents and available-for-sale debt securities, partially offset by an increase in loans and leases, ~~available-for-sale debt securities~~net of the ALLL. Cash and cash ~~and cash equivalents. Available-for-sale debt securities increased $120.3~~equivalents decreased $74.9 million, or ~~34.4%~~75.7%, to ~~$470.3~~$24.1 millionat ~~September 30, 2021~~March 31, 2022 from ~~$350.0~~$99.0 million at December 31, ~~2020, which primarily reflected the deployment of excess liquidity into the investment portfolio. Net loans increased $57.2~~2021. Available-for-sale debt securities decreased $8.5 million, or ~~6.4%~~1.6%, to ~~$946.4~~$514.1 millionat ~~September 30, 2021~~March 31, 2022 from ~~$889.2~~$522.6 million at December 31, ~~2020, primarily due~~2021. Loans and leases, net of the ALLL, increased to ~~increases in residential and commercial real estate loans. Cash and cash equivalents increased $18.4 million, or 11.8%, to $174.2 million~~$1.023 billion at ~~September 30, 2021~~March 31, 2022 from ~~$155.8~~$967.0 million at December 31, ~~2020.~~2021, as increases were experienced across all loan categories. Total deposits ~~increased $194.6~~decreased $43.4 million, or ~~15.1%~~3.0%, to ~~$1.482~~$1.412 billion at ~~September 30, 2021~~March 31, 2022 from ~~$1.287~~$1.455 billion at December 31, ~~2020.~~2021. Specifically, interest-bearing deposits ~~increased $144.2~~decreased $40.9 million, or ~~14.2%~~3.6%, to ~~$1.160~~$1.094 billion at ~~September 30, 2021~~March 31, 2022 from ~~$1.016~~$1.135 billion at December 31, ~~2022, which resulted primarily from cyclical inflows of municipal deposits, coupled with additional fiscal stimulus payments associated with the American Rescue Plan Act of 2021, enacted on March 11,~~ 2021. The ~~increase~~decrease in interest-bearing deposits was coupled with ~~an increase~~a decrease in non-interest-bearing deposits of ~~$50.4~~$2.5 million, or ~~18.6%, reflecting changes in consumer and business spending, additional fiscal stimulus and cyclical increases in municipal accounts. Borrowed~~0.8%. Conversely, total borrowed funds ~~remained constant at $10.3~~increased $57.0 million, to $87.3 million, at ~~September 30, 2021 and~~March 31, 2022 from $30.3 million at December 31, ~~2020, which~~2021. The increase was entirely related to an increase in advances through the FHLB of Pittsburgh. Total borrowed funds at March 31, 2022 were comprised ~~entirely~~ of $77.0 million in FHLB of Pittsburgh advances and $10.3 million in ~~FNCB's~~ junior subordinated debentures.

Cash and Cash Equivalents

Cash and cash equivalents ~~increased $18.4~~decreased $74.9 million, or ~~11.8%~~75.7%, to ~~$174.2~~$24.1 million at ~~September 30, 2021~~March 31, 2022 from ~~$155.8~~$99.0 million at December 31, ~~2020.~~2021. The ~~increase~~decrease in cash and cash equivalents ~~was~~results primarily ~~due to~~from the ~~strong growth~~increase in loans and leases, coupled with a reduction in total deposits, partially offset by ~~cash directed into the securities and loan and lease portfolios.~~an increase in borrowed funds. Additionally, FNCB paid cash dividends totaling ~~$0.195~~$0.075 per share for the ~~nine~~three months ended ~~September 30, 2021,~~March 31, 2022, an increase of ~~18.2%~~25.0% compared to dividends of ~~$0.165~~$0.060 per share paid for the same period of ~~2020.~~2021.

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Securities

FNCB’s investment securities portfolio provides a source of liquidity needed to meet expected loan demand and interest income to increase profitability. Additionally, the investment securities portfolio is used to meet pledging requirements to secure public deposits and for other purposes. Debt securities are classified as either held-to-maturity or available-for-sale at the time of purchase based on management's intent. Held-to-maturity securities are carried at amortized cost, while available-for-sale securities are carried at fair value, with unrealized holding gains and losses reported as a component of shareholders’ equity in accumulated other comprehensive income (loss), net of tax. At ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020,~~2021, all debt securities were classified as available-for-sale. Equity securities with readily determinable fair values are carried at fair value, with gains and losses due to fluctuations in market value included in non-interest income in the consolidated statements of income. Securities with limited marketability and/or restrictions, such as FHLB of Pittsburgh stock, are carried at cost. Management monitors the investment portfolio regularly. Decisions to purchase or sell investment securities are based upon management’s current assessment of long- and short-term economic and financial conditions, including the interest rate environment and asset/liability management, liquidity and tax-planning strategies.

At ~~September 30, 2021,~~March 31, 2022, FNCB's investment portfolio was comprised principally of available-for-sale debt securities including, fixed-rate, taxable and tax-exempt obligations of state and political subdivisions, and fixed-rate and floating-rate securities issued by U.S. government or U.S. government-sponsored agencies, which include mortgage-backed securities and residential and commercial collateralized mortgage obligations (“CMOs”). FNCB also holds investments, to a lesser extent, in private CMO's, corporate debt securities, asset-backed securities and U.S. Treasury securities. Additionally, FNCB holds equity investments in the common and preferred stock of certain ~~publicly-~~publicly-traded and ~~privately-traded~~privately-held bank holding companies. Except for U.S. government and government-sponsored agencies, there were no securities of any individual issuer that exceeded 10.0% of shareholders’ equity at ~~September 30, 2021.~~March 31, 2022.

The following table presents the carrying value of available-for-sale debt securities and equity securities with readily determinable fair values at ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020:~~2021:

Composition of the Investment Portfolio

	September 30,		December 31,		March 31, 2022					December 31, 2021
(in thousands)	2021		2020
(dollars in thousands)					Fair Value		% of Portfolio			Fair Value		% of Portfolio
Available-for-sale debt securities:
U.S. Treasury securities	$	19,899	$	-
U.S. treasuries					$	35,014		6.81	%	$	36,355		6.96	%
Obligations of state and political subdivisions		215,773		205,828		240,859		46.85	%		244,372		46.76	%
U.S. government/government-sponsored agencies:
Collateralized mortgage obligations - residential		106,131		56,972		98,248		19.11	%		100,710		19.27	%
Collateralized mortgage obligations - commercial		3,790		3,904		3,525		0.69	%		3,727		0.71	%
Mortgage-backed securities		22,699		13,026		23,194		4.51	%		25,506		4.88	%
Private collateralized mortgage obligations		61,048		38,199		65,679		12.77	%		67,165		12.85	%
Corporate debt securities		30,093		24,580		33,661		6.55	%		32,063		6.14	%
Asset-backed securities		10,144		7,526		13,258		2.58	%		11,932		2.28	%
Negotiable certificates of deposit		746		-		695		0.13	%		736		0.14	%
Total available-for-sale debt securities	$	470,323	$	350,035	$	514,133		100.00	%	$	522,566		100.00	%

Equity securities, at fair value	$	4,777	$	3,026	$	5,018				$	4,922

Activity related to available-for-sale debt securities ~~within the investment portfolio~~ during the ~~nine~~three months ended ~~September 30, 2021 primarily reflected an asset/liability strategy to deploy a portion~~March 31, 2022 included the purchase of excess liquidity into the investment portfolio to enhance net interest income. The deployment was the main factor contributing to a $120.3 million, or 34.4%, increase in available-for-sale debt securities to $470.3 million at September 30, 2021 from $350.0 million at December 31, 2020. Specifically, during the nine months ended September 30, 2021, FNCB purchased 8929 available-for-sale debt securities with an aggregate principal balance of ~~$158.6~~$34.5 million and a weighted-average yield of ~~1.49%~~2.53%. The purchases were diversified across all major investment categories. ~~Security sales, principal~~Principal repayments and a decrease in the market value of the available-for-sale portfolio due to an increase in market interest rates ~~partially~~entirely offset the increase due to the purchases. FNCB did not sell any available-for-sale debt securities during the three months ended March 31, 2022. During the ~~nine~~three months ended ~~September 30,~~March 31, 2021, FNCB sold three ~~taxable obligations of state and political subdivisions~~securities with an aggregate amortized cost of $2.8 million ~~with a weighted-average yield of 2.78%. FNCB received gross proceeds of $3.0 million~~ and realized a net gain on the sales of $213 thousand, ~~upon the sales,~~ which is included in non-interest income for the ~~nine~~three months ended ~~September 30,~~March 31, 2021.

~~Investment securities averaged$405.3million for the nine months ended September 30, 2021, an increase of $112.7 million, or 38.5%, from $292.6 million~~for the same nine months of 2020. Taxable securities averaged $77.1 million, or 31.1%, higher, while average tax-exempt securities increased $35.6 million, or 79.6%. Moreover, the investment portfolio played a more prominent role in FNCB's mix of earning assets, as average investments comprised 28.9% of average earning assets for the year-to-date period ending September 30, 2021 compared to 24.5% for the same year-to-date period of 2020. The tax-equivalent yield on the investment portfolio decreased 35 basis points to 2.65% from 3.00% comparing the nine months ended September 30, 2021 and 2020, respectively, reflecting low market interest rates and the purchases of securities with lower yields.

The majority of FNCB's debt securities are fixed-rate instruments and inherently subject to interest rate risk, as the value of ~~the security fluctuates~~fixed-rate securities fluctuate with changes in interest rates. U.S. Treasury rates ~~rebounded throughout~~continued to increase during the first ~~nine months~~quarter of ~~2021. Specifically,~~2022 as the ~~2-year U.S. Treasury rate increased 15 basis points~~FOMC started to ~~0.28% at September 30, 2021 from 0.13% at December 31, 2020, while~~tighten monetary policy. Additionally, the ~~10-year U.S. Treasury rate increased 59 basis points to 1.52% at September 30, 2021 from 0.93% at December 31, 2020. Additionally,~~yield curve flattened as, the spread between the 2-year and 10-year U.S. Treasury rates ~~widened 44~~narrowed. The 2-year U.S. Treasury rate increased 155 basis points to 2.28% at March 31, 2022 from 0.73% at December 31, 2021, while the 10-year U.S. Treasury rate increased 80 basis points to 2.32% at March 31, 2022 from 1.52% at December 31, ~~2020~~2021. These increases resulted in a 75-basis point narrowing of the spread between the 2-year and 10-year U.S. Treasury rate to ~~124 basis points~~just 0.04% at ~~September 30,~~March 31, 2022 from 0.79% at December 31, 2021. Generally, a security's value reacts inversely with changes in interest rates. Available-for-sale securities are carried at fair value, with unrealized gains or losses reported in the accumulated other comprehensive income or loss component of shareholder's equity net of deferred income taxes. At ~~September 30, 2021,~~March 31, 2022, FNCB reported a net unrealized ~~gains,~~loss, included in accumulated other comprehensive ~~income,~~loss, of ~~$8.4~~$18.3 million, net of deferred income taxes of ~~$2.2~~$4.9 million, a decrease of ~~$5.6~~$24.5 million, or ~~40.2%~~398.7%, compared to net unrealized holding gains of ~~$14.0~~$6.1 million, net of deferred income taxes of ~~$3.7~~$1.6 million, at December 31, ~~2020.~~ 2021. Any further increase in interest rates could result in further depreciation in the fair value of FNCB's securities portfolio and capital position. However, accumulated other comprehensive income and loss related to available-for-sale debt securities is excluded from regulatory capital and does not have an impact on FNCB's regulatory capital ratios.

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Management continually monitors the investment portfolio for credit worthiness, value, and yield. Semi-annually, management engages a third-party consultant to review the municipal portfolio to determine if there is any undue credit risk within the portfolio. As part of the independent review, each security is compared to their ~~Portfolio Credit Benchmark~~"portfolio credit benchmark" to identify which securities may contain more than a minimal risk of payment default. Based on their semi-annual review as of ~~June 30,~~December 31, 2021, the third-party consultant concluded that each municipal security held within the portfolio met or exceeded the benchmark and that none of the securities required further review. The next third-party review is scheduled for ~~December 31, 2021.~~June 30, 2022. Management also monitors municipal securities monthly using a third-party Municipal Surveillance ~~Report.~~ Report that identifies events related to the issuer that may indicate a deterioration in credit quality. Management noted no such events during the first quarter of 2022.

The following table presents the ~~maturities~~weighted-average yields of available-for-sale debt securities ~~based on carrying value~~by major category and maturity period at ~~September 30, 2021 and the weighted-average yields of such securities~~March 31, 2022. Yields are calculated on the basis of the amortized cost and ~~effective yields~~ weighted for the scheduled maturity of each security. The yields on tax-exempt obligations of state and political subdivisions are presented on a tax-equivalent basis using the federal corporate income tax rate of 21.0%. Because residential, commercial and private collateralized mortgage obligations, mortgage-backed securities and asset-backed securities are not due at a single maturity date, they are not included in the maturity categories in the following summary.

Maturity Distribution of Available-for-Sale Debt Securities

September 30, 2021

(dollars in thousands)

< 1 Year

>1 - 5 Years

6 - 10 Years

Over 10 Years

Collateralized Mortgage Obligations, Mortgage-Backed and Asset-Backed Securities

Total

Available-for-sale debt securities:

U.S. Treasury securities
$ - $ - $ 19,899 $ - $ - $ 19,899
Yield
1.13 % 1.13 %
Obligations of state and political subdivisions
1,440 70,452 23,421 120,460 - 215,773
Yield
2.86 % 2.96 % 2.50 % 2.82 % 2.83 %
U.S. government/government-sponsored agencies:

Collateralized mortgage obligations - residential
- - - - 106,131 106,131
Yield
1.66 % 1.66 %
Collateralized mortgage obligations - commercial
- - - - 3,790 3,790
Yield
1.98 % 1.98 %
Mortgage-backed securities
- - - - 22,699 22,699
Yield
2.24 % 2.24 %
Private collateralized mortgage obligations
- - - - 61,048 61,048
Yield
2.32 % 2.32 %
Corporate debt securities
- - 30,093 - - 30,093
Yield
4.84 % 4.84 %
Asset-backed securities
- - - - 10,144 10,144
Yield
1.43 % 1.43 %
Negotiable certificates of deposit
- 746 - - - 746
Yield
1.02 % 1.02 %
Total available-for-sale debt securities
$ 1,440 $ 71,198 $ 73,413 $ 120,460 $ 203,812 $ 470,323
Weighted average yield
2.86 % 2.94 % 3.09 % 2.82 % 1.92 % 2.49 %

	March 31, 2022
	Within One Year			>1 - 5 Years			6 - 10 Years			Over 10 Years			Collateralized Mortgage Obligations, Mortgage-Backed and Asset-Backed Securities			Total
Available-for-sale debt securities:
U.S. treasuries		-			1.26	%		1.18	%		-			-			1.19	%
Obligations of state and political subdivisions		2.67	%		2.98	%		2.23	%		2.79	%		-			2.75	%
U.S. government/government-sponsored agencies:
Collateralized mortgage obligations - residential		-			-			-			-			1.63	%		1.63	%
Collateralized mortgage obligations - commercial		-			-			-			-			1.99	%		1.99	%
Mortgage-backed securities		-			-			-			-			2.29	%		2.29	%
Private collateralized mortgage obligations		-			-			-			-			2.40	%		2.40	%
Corporate debt securities		-			-			4.67	%		-			-			4.67	%
Asset-backed securities		-			-			-			-			1.99	%		1.99	%
Negotiable certificates of deposit		-			1.02	%		-			-			-			1.02	%
Weighted average yield		2.67	%		2.82	%		2.70	%		2.79	%		1.98	%		2.45	%

OTTI Evaluation

There was no OTTI recognized during the ~~nine~~three months ended ~~September 30, 2021~~March 31, 2022 or ~~2020.~~2021. For additional information regarding management’s evaluation of securities for OTTI, see Note 3, “Securities” of the notes to consolidated financial statements included in Item 1 to this Quarterly Report on Form 10-Q.

Restricted Securities

The following table presents the investment in FNCB’s restricted securities, which have limited marketability and are carried at cost, at ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020.~~2021. Management noted no indicators of impairment for the ~~Federal Home Loan Bank~~FHLB of Pittsburgh or Atlantic Community Banker’s Bank stock at ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020.~~2021.

September 30,

December 31,

(in thousands)

2021

2020

Stock in Federal Home Loan Bank of Pittsburgh
$ 1,816 $ 1,735
Stock in Atlantic Community Banker's Bank
10 10
Total restricted securities, at cost
$ 1,826 $ 1,745

	March 31,		December 31,
(in thousands)	2022		2021
Stock in Federal Home Loan Bank of Pittsburgh	$	4,010	$	1,901
Stock in Atlantic Community Banker's Bank		10		10
Total restricted securities, at cost	$	4,020	$	1,911

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~~Equity Securities~~

Included in equity securities with readily determinable fair values at September 30, 2021 and December 31, 2020 were investments in the common or preferred stock of publicly traded bank holding companies and an investment in a mutual fund comprised of 1-4 family residential mortgage-backed securities collateralized by properties within FNCB’s market area. The cost basis and fair value of equity securities totaled $3.7 million and $4.8 million, respectively, at September 30, 2021 and $2.5 million and $3.0 million, respectively, at December 31, 2020. During the first quarter of 2021, FNCB purchased investments in the common stock of two publicly-traded bank holding companies with an aggregate cost of $877 thousand. Equity securities with readily determinable fair values are reported at fair value with net unrealized gains and losses recognized in the consolidated statements of income. FNCB recognized net gains on equity securities included in non-interest income of $556 thousand for the nine months ended September 30, 2021 and $864 thousand for the same nine months of 2020.

~~Equity Securities without Readily Determinable Fair Values~~

At September 30, 2021 and December 31, 2020, equity securities without readily determinable fair values consisted of a $500 thousand investment in a fixed-rate, non-cumulative perpetual preferred stock of a privately-held bank holding company, which is included in other assets in the consolidated statement of financial condition. The preferred stock pays quarterly dividends at an annual rate of 8.25%, which commenced on March 30, 2021. The preferred stock of this bank holding company is not traded on any established market and is accounted for as an equity security without a determinable fair value. Under GAAP, an equity security without a readily determinable fair value shall be written down to its fair value if a qualitative assessment indicates that the investment is impaired, and the fair value of the investment is less than its carrying value. As part of its qualitative assessment, management engaged an independent third party to provide valuations of this investment as of September 30, 2021 and December 31, 2020, which indicated that the investment was not impaired. Management determined that no adjustment for impairment was required at September 30, 2021 and December 31, 2020.

Loans and Leases

Total loans and leases, gross, increased ~~$57.7~~$55.0 million, or ~~6.4%~~5.6%, to ~~$961.0 million~~$1.036 billion at ~~September 30, 2021~~March 31, 2022 from ~~$903.3~~$981.4 million at December 31, ~~2020.~~2021. The growth in the loan portfolio ~~primarily~~ reflected increases in ~~residential~~ all loan categories, which was primarily due to strong organic demandandthe new commercial ~~real estate~~equipment financing product line. In addition, FNCB purchased individual loans and ~~loans~~loan pools originated by third-party originators, to ~~state~~enhance interest income revenue streams and ~~political subdivisions. Partially offsetting these increases were reductions in~~diversify the loan portfolio. Loan purchases during the first quarter of 2022 included commercial ~~and industrial loans, construction, land acquisition and development~~equipment financing, residential mortgage loans and secured and unsecured consumer loans. With respect to commercial and industrial loans, on January 19, 2021, the SBA fully re-opened the loan portal and began accepting applications for a second round of PPP loans, which then ceased to accept applications on May 31, 2021. During the first half of 2021, FNCB originated and received funding for 679 PPP loans totaling $76.2 million. FNCB also continued to assist PPP customers in applying for forgiveness. As of September 30, 2021, PPP loans outstanding were $49.4 million, a decrease of $29.2 million from $78.6 million outstanding at December 31, 2020. FNCB received forgiveness on PPP loans of $105.4 million during the nine months ended September 30, 2021 and expects to receive forgiveness for the majority of the balance PPP loans outstanding by the end of 2021.

During the ~~third~~fourth quarter of 2021, FNCB expanded its commercial credit product offerings to include commercial equipment financing, through simple interest loans, and direct finance ~~leases~~ and ~~simple interest loans.~~municipal leases. FNCB hired a team of experienced professionals ~~highly-experienced with this type of financing~~ to initiate this lending program, which is doing business under the name of 1st Equipment Finance. The majority of equipment financing ~~originations~~ is ~~expected to come~~originated through indirect, third-party dealers. As of ~~September 30, 2021,~~March 31, 2022, simple interest loans and municipal leases ~~net of unearned income,~~ originated under this initiative were ~~$1.7~~$23.0 million and $3.1 million, respectively. Simple interest loans are included in commercial and industrial loans, while municipal leases are included in state and municipal subdivision loans.

Also, included in commercial and industrial loans and ~~leases.~~leases at March 31, 2022 and December 31, 2021 were $8.0 million and $21.9 million, respectively, of loans originated under the Small Business Administration ("SBA") Payment Protection Program ("PPP"). Included in net deferred loan fees at March 31, 2022 and December 31, 2021, were $0.4 million and $1.0 million, respectively, in deferred loan origination fees, net of deferred loan origination costs, associated with the PPP loans. PPP loans are 100.0% guaranteed and may be forgiven by the SBA. Accordingly, there was no ALLL established for PPP loans at March 31, 2022 and December 31, 2021.

From a collateral standpoint, a majority of FNCB’s loan portfolio consists of loans secured by real estate. Real estate secured loans, which include commercial real estate, construction, land acquisition and development, and residential real estate loans, increased ~~$86.0~~$29.4 million, or ~~16.2%~~4.6%, to ~~$616.0 million~~$671.1million at ~~September 30, 2021~~March 31, 2022 from ~~$530.0~~$641.7 million at December 31, ~~2020. The~~2021. Despite the increase, ~~was concentrated in commercial~~ real ~~estate. Real~~ estate secured loans represented ~~64.1% and 58.7%~~64.7% of gross loans at ~~September 30, 2021 and~~March 31, 2022 compared to 65.4% at December 31, ~~2020, respectively.~~2021.

Commercial real estate loans increased ~~$67.7~~$7.6 million, or ~~24.7%~~2.1%, to ~~$341.6~~$373.6 million at ~~September 30, 2021~~March 31, 2022 from $~~273.9~~366.0 million at December 31, ~~2020.~~2021. Commercial real estate loans include long-term commercial mortgage financing and are primarily secured by first or second lien mortgages. Commercial and industrial loans and leases, ~~which~~ consist primarily of equipment loans, working capital financing, revolving lines of credit and loans secured by cash and marketable ~~securities~~securities. In addition, commercial and industrial loans include PPP loans. Commercial and industrial loans ~~dec~~increased ~~$28.6~~$14.0 million, or ~~12.0%~~7.3%, to ~~$209.8~~$207.1 million at ~~September 30, 2021~~March 31, 2022 from ~~$238.4~~$193.1 million at December 31, ~~2020,~~2021, which was primarily due to equipment loan origination through 1st Equipment Finance and the purchase of loan pools through third-party originators during the three months ended March 31, 2022, partially offset by forgiveness ~~received on~~of PPP loans. Construction, land acquisition and development loans ~~decreased $9.7~~increased $8.2 million, or ~~16.2%~~19.7%, to ~~$50.1~~$49.8 million at ~~September 30, 2021~~March 31, 2022 from ~~$59.8~~$41.6 million at December 31, ~~2020.~~2021.

Residential real estate loans include fixed-rate and variable-rate, amortizing mortgage loans, home equity term loans and home equity lines of credit ("HELOCs"). FNCB primarily underwrites fixed-rate residential mortgage loans for sale in the secondary market to reduce interest rate risk and provide funding for additional loans. Additionally, FNCB offers its proprietary “WOW” mortgage product, which is a non-saleable mortgage with maturity terms of 7.5 to 19.5 years that provides customers with an attractive fixed interest rate and low closing costs. Residential real estate loans totaled ~~$224.3~~$248.2 million at ~~September 30, 2021,~~March 31, 2022, an increase of ~~$28.0~~$14.1 million, or ~~14.3%~~6.0%, from ~~$196.3~~$234.1 million at December 31, ~~2020.~~2021. The increase was largely due to strong demand for the WOW mortgage product, the balance of which increased ~~$22.6~~$6.2 million, or ~~31.0%~~6.1%, to ~~$95.5~~$107.2 million at ~~September 30, 2021~~March 31, 2022 from ~~$72.9~~$101.0 million at December 31, ~~2020. Additionally, as part~~2021, coupled with the purchase of ~~an ALCO initiative, FNCB has been holding select~~two pools of third-party originated residential ~~mortgages in portfolio to enhance future net interest income run rates.~~mortgage loans totaling $4.9 million.

Consumer loans ~~which are~~ primarily ~~comprised of~~include indirect automobile loans and secured and unsecured personal loans. Consumer loans ~~decreased~~increased by ~~$6.8~~$9.2 million, or ~~7.9%~~10.8%, to ~~$79.1~~$94.7 million at ~~September 30, 2021~~March 31, 2022 from ~~$85.9~~$85.5 million at December 31, ~~2020.~~2021. The ~~decrease~~increase in ~~indirect automobile~~consumer loans was largely due to ~~low inventory levels~~the purchase of ~~both new~~consumer loan pools from third-party originators including $12.6 million in unsecured consumer loans and ~~used automobiles brought on~~$1.9 million in consumer loans secured by ~~supply chain and employment constraints caused by the pandemic.~~chattel paper, net of principal repayments. Loans to state and political subdivisions increased ~~$7.1~~$2.4 million, or ~~14.5%~~3.9%, to ~~$56.1~~$63.5 million at ~~September 30, 2021~~March 31, 2022 from ~~$49.0~~$61.1 million at December 31, ~~2020.~~2021.

~~Loans and leases, net of net deferred loan origination fees and unearned income, averaged $946.7 million for the nine months ended September 30, 2021, an increase of $43.7~~million, or 4.8%, from $903.0 million for the same nine months of 2020. Taxable loans averaged $47.0 million, or 5.5%, higher due to increased demand for residential and commercial real estate loans. Conversely, average tax-exempt loans decreased $3.2 million, or 6.7%. Average loans comprised 67.5% of average earning assets for the year-to-date period ending September 30, 2021 compared to 74.9% for the same year-to-date period of 2020. The tax-equivalent yield on the loan portfolio increased 29 basis points to 4.37% from 4.08% comparing the nine months ended September 30, 2021 and 2020, respectively, which reflected the recognition of $3.9 million in net loan origination fees for forgiven PPP loans and $0.2 million in net loan origination fees on the early payoff of two Main Street Lending Program loans.

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The following table presents loans and leases receivable, net by major category at ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020:~~2021:

Loan and Lease Portfolio Detail

	September 30,			December 31,			March 31, 2022						December 31, 2021
(in thousands)	2021			2020			Amount			% of Total Loans, Gross			Amount			% of Total Loans, Gross
Residential real estate	$	224,307		$	196,328		$	247,699			23.90	%	$	234,113			23.86	%
Commercial real estate		341,594			273,903			373,559			36.05	%		366,009			37.29	%
Construction, land acquisition and development		50,095			59,785			49,796			4.80	%		41,646			4.24	%
Commercial and industrial		209,809			238,435			207,146			19.99	%		193,086			19.67	%
Consumer		79,136			85,881			94,649			9.13	%		85,522			8.72	%
State and political subdivisions		56,060			49,009			63,527			6.13	%		61,071			6.22	%
Total loans and leases, gross		961,001			903,341			1,036,376			100.00	%		981,447			100.00	%
Unearned income		(939	)		(110	)		(638	)					(1,442	)
Net deferred loan fees		(1,654	)		(2,129	)
Net deferred loan origination costs (fees)								662						(566	)
Allowance for loan and lease losses		(12,018	)		(11,950	)		(13,129	)					(12,416	)
Loans and leases, net	$	946,390		$	889,152		$	1,023,271					$	967,023

~~Modifications Related to COVID-19~~

In late March 2020, the federal banking regulators issued guidance encouraging banks to work prudently with and provide short-term payment accommodations to borrowers affected by COVID-19. Additionally, Section 4013 of the CARES Act addressed COVID-19 related modifications and specified that such modifications made on loans that were current as of December 31, 2019 do not need to be classified as TDRs. These modifications provided borrowers with a short-term, typically three-month, interest-only period or full payment deferral. The provisions under Section 4013 of the CARES Act originally were set to expire on December 31, 2020. The Consolidated Appropriations Act ("CAA") was signed into law on December 27, 2020. Section 541 of the CAA extended the provisions of Section 4013 of the CARES Act to January 1, 2022. Management continues to monitor loans for which a payment deferral was granted. As of September 30, 2021, there wereno loans that were granted a payment modification under the Cares Act that were still under deferral. Management will continue to follow regulatory guidance when working with the borrowers which have been impacted by COVID-19 and apply the provisions of the CARES Act in making any TDR determinations through the remainder of 2021.

Asset Quality

Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are stated at the amount of unpaid principal, net of unearned interest, deferred loan fees and costs, and reduced by the ALLL. The ALLL is established through a provision for loan and lease losses charged to earnings.

FNCB has established and consistently applies loan policies and procedures designed to foster sound underwriting and credit monitoring practices. Credit risk is managed through the efforts of the Chief Banking Officer, Chief Lending Officer and loan officers, the Chief Credit Officer, the loan review function, and the Credit Risk Management, ALLL, Officers Loan and Directors Loan Committees, as well as through oversight of the Board of Directors. Management continually evaluates its credit risk management practices to ensure it is reacting to problems in the loan portfolio in a timely manner, although, as is the case with any financial institution, a certain degree of credit risk is dependent in part on local and general economic conditions that are beyond management’s control.

Under FNCB’s risk rating system, loans that are rated pass, special mention, substandard, doubtful, or loss are reviewed regularly as part of the risk management practices. The Credit Risk Management Committee, which consists of key members of management fromfinance, legal, lending and credit administration, meet monthly or more often as necessary to review individual problem credits and workout strategies and provides monthly reports to the Board of Directors.

A loan is considered impaired when it is probable that FNCB will be unable to collect all amounts due (including principal and interest) according to the contractual terms of the note and loan agreement. For purposes of the analysis, all TDRs, loan relationships with an aggregate outstanding balance greater than $100 thousand rated substandard and non-accrual, and loans that are identified as doubtful or loss are considered impaired. Impaired loans are analyzed individually to determine the amount of impairment. For collateral-dependent loans, impairment is measured based on the fair value of the collateral supporting the loans. A loan is determined to be collateral dependent when repayment of the loan is expected to be provided through the liquidation of the collateral held. For impaired loans that are secured by real estate, collateral evaluations and external appraisals are obtained annually, or more frequently as warranted, to ascertain a fair value so that the impairment analysis can be updated. Should a collateral evaluation or current appraisal not be available at the time of impairment analysis, other sources of valuation may be used, including current letters of intent, broker price opinions or executed agreements of sale. Under the fair value of collateral method, the impaired amount of the loan is deemed to be the difference between the loan amount and the fair value of the collateral, less the estimated costs to sell. For real estate secured loans, management generally estimates selling costs using a factor of 10%, which is based on typical cost factors, such as a 6% broker commission, 1% transfer taxes, and 3% various other miscellaneous costs associated with the sales process. If the valuation indicates that the fair value has deteriorated below the carrying value of the loan, the difference between the fair value and the principal balance is charged off. For impaired loans for which the value of the collateral less costs to sell exceeds the loan value, the impairment is determined to be zero. For non-collateral-dependent loans, impairment is measured based on the present value of expected future cash flows, net of any deferred fees and costs, discounted at the loan’s original effective interest rate.

Loans to borrowers that are experiencing financial difficulty that are modified and result in the granting of concessions to the borrowers are classified as ~~TDRs.~~TDRs and are considered to be impaired. Such concessions generally involve an extension of a loan’s stated maturity date, a reduction of the stated interest rate, payment modifications, capitalization of property taxes with respect to mortgage loans or a combination of these modifications. Non-accrual TDRs are returned to accrual status if principal and interest payments, under the modified terms, are brought current, are performing under the modified terms for six consecutive months, and management believes that collection of the remaining interest and principal is probable. ~~FNCB conservatively considers all TDRs to be impaired.~~

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Non-performing loans are monitored on an ongoing basis as part of FNCB’s loan review process. Additionally, work-out for non-performing loans and OREO are actively monitored through the Credit Risk Management Committee. A potential loss on a non-performing asset is generally determined by comparing the outstanding loan balance to the fair market value of the pledged collateral, less cost to sell.

Loans are placed on non-accrual when a loan is specifically determined to be impaired or when management believes that the collection of interest or principal is doubtful. This generally occurs when a default of interest or principal has existed for 90 days or more, unless the loan is well secured and in the process of collection, or when management becomes aware of facts or circumstances that the loan would default before 90 days. FNCB determines delinquency status based on the number of days since the date of the borrower’s last required contractual loan payment. When the interest accrual is discontinued, all unpaid interest income is reversed and charged back against current earnings. Any subsequent cash payments received are applied, first to the outstanding loan amounts, then to the recovery of any charged-off loan amounts, with any excess treated as a recovery of lost interest. A non-accrual loan is returned to accrual status when the loan is current as to principal and interest payments, is performing according to contractual terms for six consecutive months and future payments are reasonably assured.

Management actively manages impaired loans in an effort to mitigate loss to FNCB by working with customers to develop strategies to resolve borrower difficulties, through sale or liquidation of collateral, foreclosure, and other appropriate means. In addition, management monitors employment and economic conditions within FNCB’s market area, as weakening of conditions could result in real estate devaluations and an increase in loan delinquencies, which could negatively impact asset quality and cause an increase in the provision for loan and lease losses.

Under the fair value of collateral method, the impaired amount of the loan is deemed to be the difference between the loan amount and the fair value of the collateral, less the estimated costs to sell. For real estate secured loans, management generally estimates selling costs using a factor of 10%, which is based on typical cost factors, such as a 6% broker commission, 1% transfer taxes, and 3% various other miscellaneous costs associated with the sales process. If the valuation indicates that the fair value has deteriorated below the carrying value of the loan, the difference between the fair value and the principal balance is charged off. For impaired loans for which the value of the collateral less costs to sell exceeds the loan value, the impairment is determined to be zero.

The following table presents information about non-performing assets and accruing TDRs at ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020:~~2021:

Non-performing Assets and Accruing TDRs

	September 30,			December 31,			March 31,			December 31,
(dollars in thousands)	2021			2020			2022			2021
Non-accrual loans	$	4,475		$	5,581		$	3,864		$	3,863
Loans past due 90 days or more and still accruing		-			-			-			-
Total non-performing loans		4,475			5,581			3,864			3,863
Other real estate owned		54			58			228			920
Other non-performing assets		1,773			1,900			1,773			1,773
Total non-performing assets	$	6,302		$	7,539		$	5,865		$	6,556

Accruing TDRs	$	6,666		$	6,975		$	6,455		$	6,666
Non-performing loans as a percentage of gross loans		0.47	%		0.62	%		0.37	%		0.39	%

FNCB's asset quality ~~metrics continued to improve through out~~was favorable during the first ~~nine months~~quarter of ~~2021.~~2022. Total non-performing assets decreased ~~$1.2~~$0.7 million, or ~~16.4%~~10.5%, to ~~$6.3~~$5.9 million at ~~September 30, 2021~~March 31, 2022 from ~~$7.5~~$6.6 million at December 31, ~~2020.~~2021. The improvement~~was attributable to a decrease in non-accrual loans,~~ which primarily reflected the payoff of one ~~commercial loan relationship, the charge-off of one commercial loan relationship, the return of two commercial loan relationships to accrual status and one residential~~bank owned property that was ~~transferred~~held in OREO with a recorded investment of $692 thousand, while non-accrual loans were relatively constant, comparing March 31, 2022 to ~~OREO.~~December 31, 2021. FNCB’s ratio of non-performing loans to total gross loans improved to ~~0.47%~~0.37% at ~~September 30, 2021~~March 31, 2022 from ~~0.62%~~0.39% at December 31, ~~2020.~~2021. Additionally, ~~FNCB’s ratio~~there were no loans modified as TDRs during the three months ended March 31, 2022 and 2021.

OREO consists of ~~non-performing~~property acquired by foreclosure, abandonment or conveyance of deed in-lieu of foreclosure of a loan, and bank premises that are no longer used for operation or for future expansion. OREO is held for sale and is initially recorded at fair value less estimated costs to sell at the date of acquisition or transfer, which establishes a new cost basis. Upon acquisition of the property through foreclosure or deed-in-lieu of foreclosure, any adjustment to fair value less estimated selling costs is recorded to the ALLL. The determination is made on an individual asset basis. Bank premises no longer used for operations or future expansion are transferred to OREO at fair value less estimated selling costs with any related write-down included in non-interest expense. Subsequent to acquisition, valuations are periodically performed, and the assets are carried at the lower of cost or fair value less estimated cost to sell. Fair value is determined through external appraisals, current letters of intent, broker price opinions or executed agreements of sale, unless management determines that conditions exist that warrant an adjustment to the value. Costs relating to the development and improvement of the OREO properties may be capitalized; holding period costs and any subsequent changes to the valuation allowance are charged to expense as incurred. At March 31, 2022, OREO consisted of one, bank-owned commercial property with a ~~percentage~~carrying value of ~~shareholders’ equityimproved to 3.9% at September 30, 2021 from 4.8% at~~$228 thousand. At December 31, ~~2020, due to~~2021, OREO consisted of two, bank-owned properties with an aggregate carrying value of $920 thousand. During the ~~reduction~~first quarter of 2022, FNCB sold one of the properties, a parcel of land that was previously held for future expansion. FNCB realized a gain of $3 thousand on the sale, which is included in ~~non-performing assets. While asset quality remained favorable, management believes continuing challenges from the COVID-19 pandemic could still have an adverse effect on asset quality~~other income in the future. Any further disruption to economic activity due to an acceleration in COVID-19 cases, and any related actions taken by governments, businesses or individuals, could result in increased loan delinquencies, defaults and collateral devaluations. Management actively manages problem credits through workout efforts focused on developing strategies to resolve borrower difficulties through liquidationconsolidated statements of collateral and other appropriate means. Additionally, management continues to monitor non-accrual loans, delinquency trends and economic conditions within FNCB’s market area on an on-going basis in order to proactively address any collection-related issues and mitigate any potential losses.income for the three months ended March 31, 2022.

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Other non-performing assets was comprised solely of a classified account receivable, the balance of which was $1.8 million at ~~September 30, 2021~~both March 31, 2022 and ~~$1.9 million~~ at December 31, ~~2020.~~2021. The receivable is secured by an evergreen letter of credit that was received in 2011 as part of a settlement agreement for a large construction, land acquisition and development loan for a residential development project in the Pocono region of Monroe County, Pennsylvania. The agreement provides for payment to FNCB as real estate building lots are sold. The project was stalled due to a decline in real estate values in this area following the financial crisis of 2008. In 2019, economic development in this market area began improving and the developer for this project had resumed construction activity, including the completion of substantial infrastructure, and had increased marketing and sales initiatives related to the project. To date, no single-unit lots have been sold, however, the developer completed the construction of a seven-unit building that houses timeshare units and owners began occupying the units in the fourth quarter of 2020. In 2020, management negotiated a repayment plan with the developer. FNCB received the first payment of $127 thousand in the second quarter of 2021. Management continues to closely monitor this ~~project.~~project and became aware that construction on a second seven-unit building has started in early 2022. While the repayment plan has commenced, economic uncertainty and volatility associated with the COVID-19 pandemic and other factors are still unknown and could negatively impact the timing of sales and payments.

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There were no loans modified as TDRs during the three and nine months ended September 30, 2021. There were no loans modified as TDR's during the three months ended September 30, 2020. Loans modified as TDRs for the nine months ended September 30, 2020 included three commercial and industrial loans and one residential mortgage loan. The three commercial and industrial loans were modified under forbearance agreements with an aggregate pre-and post-modification recorded investment of $196 thousand. The modification of the residential mortgage loan involved an extension of terms and the loan has a pre-and post-modification recorded investment of $88 thousand. There were no TDRs modified within the previous 12 months that defaulted during the three and nine months ended September 30, 2021 and 2020.

The following table presents the changes in non-performing loans for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2022 and 2021 ~~and 2020~~. Loan foreclosures represent recorded investment at time of foreclosure not including the effect of any guarantees.

Changes in Non-Performing Loans

	Three Months Ended September 30,						Nine Months Ended September 30,						Three Months Ended March 31,
(in thousands)	2021			2020			2021			2020			2022			2021
Balance, beginning of period	$	4,555		$	6,740		$	5,581		$	9,084		$	3,863		$	5,581
Loans newly placed on non-accrual		445			329			1,366			1,765			234			391
Loans returned to performing status		-			(4	)		(468	)		(1,573	)		-			(224	)
Loans transferred to OREO		-			-			(138	)		-
Loans charged-off		(236	)		(567	)		(707	)		(1,191	)		(75	)		(346	)
Loan payments received		(289	)		(322	)		(1,159	)		(1,909	)		(158	)		(560	)
Balance, end of period	$	4,475		$	6,176		$	4,475		$	6,176		$	3,864		$	4,842

The average balance of impaired loans was ~~$10.5~~$9.9 million and ~~$11.0 million for the three and nine months ended September 30, 2021, respectively, compared to $12.8 million and $14.3~~$11.3 million, respectively, for the three ~~and nine~~ months ended ~~September 30, 2020.~~March 31, 2022 and 2021. FNCB recognized $7573 thousand and ~~$230~~$78 thousand of interest income on impaired loans for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2022 and 2021, ~~respectively and $83 thousand and $272 thousand for the respective periods of 2020.~~respectively.

The additional interest income that would have been earned on non-accrual and restructured loans had the loans been performing in accordance with their original terms for the three ~~and nine~~ months ended ~~September 30, 2021~~March 31, 2022 approximated $5243 thousand and ~~$167 thousand, respectively, and $77 thousand and $282~~$60 thousand for the ~~respective periods~~same quarter of ~~2020.~~2021.

The following table presents accruing loan delinquencies and non-accrual loans as a percentage of gross loans at ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020:~~2021:

Loan Delinquencies and Non-Accrual Loans

	September 30,			December 31,			March 31,			December 31,
	2021			2020			2022			2021
Accruing:
30-59 days		0.13	%		0.31	%		0.17	%		0.13	%
60-89 days		0.01	%		0.06	%		0.01	%		0.03	%
90+ days		0.00	%		0.00	%		0.00	%		0.00	%
Non-accrual		0.47	%		0.62	%		0.37	%		0.39	%
Total delinquencies		0.61	%		0.99	%		0.55	%		0.55	%

FNCB's delinquency rates were relatively stable during the first quarter of 2022. Total delinquent loans, including non-accrual loans, were ~~$5.9~~$5.7 million, or ~~0.61%~~0.55% of gross loans, at ~~September 30, 2021, compared to $8.9~~March 31, 2022, and $5.4 million, or ~~0.99%~~0.55% of gross loans, at December 31, ~~2020.~~2021. The ~~improvement~~slight increase in ~~delinquencies~~delinquent loan balances, was due to ~~primarily to~~an increase in accruing loans past due 30-59 days slightly offset by a decrease in accruing loans past due ~~30-59~~60-89 days, while the level of ~~$1.5 million, coupled with decreases in~~ non-accrual loans remained constant at $3.9 million, comparing balances at March 31, 2022 and ~~accruing~~December 31, 2021.

While FNCB's asset quality has remained favorable, management believes continued economic uncertainty associated with the COVID-19 pandemic, supply-chain constraints and further increases in inflation and supply-chain constraints could have a negative impact on asset quality. These factors, including further disruption to economic activity due to an acceleration in COVID-19 cases, the effects of new variants, and any related actions taken to mitigate spread, could affect borrowers' ability to repay loans, ~~past due 60-89 days of$1.1 million~~which may result in increases in loan delinquencies, non-performing loans and ~~$0.4 million, respectively.~~loan charge-offs.

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Allowance for Loan and Lease Losses

The ALLL represents management’s estimate of probable loan losses inherent in the loan portfolio. The ALLL is analyzed in accordance with GAAP and is maintained at a level that is based on management’s evaluation of the adequacy of the ALLL in relation to the risks inherent in the loan portfolio.

As part of its evaluation, management considers qualitative and environmental factors, including, but not limited to:

•	changes in national, local, and business economic conditions and developments, including the condition of various market segments;

•	changes in the nature and volume of the loan portfolio;

•	changes in lending policies and procedures, including underwriting standards, collection, charge-off and recovery practices and results;

•	changes in the experience, ability and depth of lending management and staff;

•	changes in the quality of the loan review system and the degree of oversight by the Board of Directors;

•	changes in the trend of the volume and severity of past due and classified loans, including trends in the volume of non-accrual loans, TDRs and other loan modifications;

•	the existence and effect of any concentrations of credit and changes in the level of such concentrations;

•	the effect of external factors such as competition and legal and regulatory requirements on the level of estimated credit losses in the current loan portfolio; and

•	analysis of customers’ credit quality, including knowledge of their operating environment and financial condition.

Evaluations are intrinsically subjective, as the results are estimated based on management knowledge and experience and are subject to interpretation and modification as information becomes available or as future events occur. Management monitors the loan portfolio on an ongoing basis with emphasis on weakness in both the real estate market and the economy in general and its effect on repayment. Adjustments to the ALLL are made based on management’s assessment of the factors noted above.

For purposes of management’s analysis of the ALLL, all loan relationships with an aggregate balance greater than $100 thousand that are rated substandard and non-accrual, identified as doubtful or loss, and all TDRs are considered impaired and are analyzed individually to determine the amount of impairment. Circumstances such as construction delays, declining real estate values, and the inability of the borrowers to make scheduled payments have resulted in these loan relationships being classified as impaired. FNCB utilizes the fair value of collateral method for collateral-dependent loans and TDRs for which repayment depends on the sale of collateral. For non-collateral-dependent loans and TDRs, FNCB measures impairment based on the present value of expected future cash flows discounted at the loan’s original effective interest rate. Regarding collateral-dependent loans, appraisals or collateral evaluations are received at least annually to ensure that impairment measurements reflect current market conditions. Should a current appraisal or collateral evaluation not be available at the time of impairment analysis, other valuation sources including current letters of intent, broker price opinions or executed agreements of sale may be used. Only downward adjustments are made based on these supporting values. Included in all impairment calculations is a cost to sell adjustment of approximately 10%, which is based on typical cost factors, including a 6% broker commission, 1% transfer taxes and 3% various other miscellaneous costs associated with the sales process. Sales costs are periodically reviewed and revised based on actual experience. The ALLL analysis is adjusted for subsequent events that may arise after the end of the reporting period but before the financial reports are filed.

The ALLL equaled ~~$12.0~~$13.1 million at ~~September 30, 2021,~~March 31, 2022, compared to ~~$11.9~~$12.4 million at December 31, ~~2020.~~2021. The ~~slight~~ increase resulted from ~~$240 thousand in net recoveries for September 30, 2021, offset by~~ a~~$172 thousand credit to provisions~~ provision for loan and lease losses of $759 thousand, offset by $46 thousand in net charge-offs for ~~the same period.~~March 31, 2022. The ALLL consists of both specific and general components. The component of the ALLL that is related to impaired loans that are individually evaluated for impairment, the guidance for which is provided by ASC 310 “Impairment of a Loan” (“ASC 310”), was ~~$36~~$18 thousand ~~or 0.3%, of the total ALLL~~ at ~~September 30, 2021,~~March 31, 2022, compared to ~~$416~~$26 thousand ~~or 3.5%, of the total ALLL~~ at December 31, 2020. The $380 thousand reduction in the specific component was primarily due to one commercial relationship that was charged-off, coupled with improvement in the collateral positions associated with two additional commercial relationships.2021. A general allocation of $~~12.0~~13.1 million was calculated for loans analyzed collectively under ASC 450 “Contingencies” (“ASC 450”), which represented nearly ~~99.7%~~100% of the total ALLL of ~~$12.0~~$13.1 million. Comparatively, at December 31, ~~2020,~~2021, the general allocation for loans collectively analyzed for impairment amounted to ~~$11.5~~$12.4 million, or ~~96.5%~~99.8%, of the total ALLL. Included in the general component of the ALLL was an unallocated reserve of $1.1 million, at both ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020.~~2021. Based on its evaluations, management may establish an unallocated component to cover any inherent losses that exist as of the evaluation date, but which may not have been identified under the methodology. ~~The increase in~~In 2020, management adjusted the qualitative factors for the potential effect of economic and employment uncertainty and distribution due to the global pandemic into its evaluation. Based on continued economic uncertainty related to the pandemic, management believes the level of the unallocated reserve ~~was directly related~~continues to ~~the increase in credit provisioning during the year ended December~~be appropriate at March 31, 2020 due to the economic disruption caused by the COVID-19 pandemic. Based on its evaluation at September 30, 2021, management decided to maintain the unallocated component at a similar level to the level at December 31, 2020.2022. As of ~~September 30, 2021,~~March 31, 2022, management is not aware of any asset quality deterioration and FNCB has not experienced an increase in credit losses related to the pandemic. Management continues to monitor the loan portfolio for any potential adverse impact to FNCB's asset ~~quality that may develop due to continuing challenges from the pandemic.~~quality. The ratio of the ALLL to total loans ~~decreased to 1.25%~~remained constant at 1.27% of total loans, net of net deferred loan origination fees and unearned income of~~$958.4 million~~ at ~~September 30, 2021 from 1.33% of total loans, net of net deferred loan costs~~both March 31, 2022 and ~~unearned income, of $901.1 million~~ at December 31, ~~2020. Excluding PPP loans, the ALLL as a percentage of gross loans equaled 1.32% at September 30, 2021 and 1.45% at December 31, 2020.~~2021.

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The following table presents an allocation of the ALLL by major loan category and percent of loans in each category to total loans at ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020:~~2021:

Allocation of the ALLL

	September 30, 2021					December 31, 2020					March 31, 2022					December 31, 2021
			Percentage					Percentage					Percentage					Percentage
			of Loans					of Loans					of Loans					of Loans
			in Each					in Each					in Each					in Each
			Category					Category					Category					Category
	Allowance		to Total			Allowance		to Total			Allowance		to Total			Allowance		to Total
(dollars in thousands)	Amount		Loans			Amount		Loans			Amount		Loans			Amount		Loans
Residential real estate	$	1,991		23.34	%	$	1,715		21.73	%	$	2,196		23.90	%	$	2,081		23.86	%
Commercial real estate		4,508		35.55	%		4,268		30.32	%		4,424		36.05	%		4,530		37.29	%
Construction, land acquisition and development		468		5.21	%		538		6.62	%		538		4.80	%		392		4.24	%
Commercial and industrial		2,376		21.83	%		2,619		26.39	%		3,092		19.99	%		2,670		19.67	%
Consumer		1,120		8.24	%		1,319		9.51	%		1,259		9.13	%		1,159		8.72	%
State and political subdivision		462		5.83	%		405		5.43	%
State and political subdivisions												491		6.13	%		455		6.22	%
Unallocated		1,093		-			1,086		-			1,129		-			1,129		-
Total	$	12,018		100.00	%	$	11,950		100.00	%	$	13,129		100.00	%	$	12,416		100.00	%

The following table presents an analysis of the ALLL by loan category for the three ~~and nine~~ months ended ~~September 30, 2021~~March 31, 2022 and ~~2020:~~2021:

Reconciliation of the ALLL

	For the Three Months Ended September 30,						For the Nine Months Ended September 30,						For the Three Months Ended March 31,
(dollars in thousands)	2021			2020			2021			2020			2022			2021
Balance at beginning of period	$	12,285		$	11,024		$	11,950		$	8,950		$	12,416		$	11,950
Charge-offs:
Residential real estate		8			-			14			-			3			-
Commercial real estate		-			280			-			336			-			-
Construction, land acquisition and development		-			-			-			-			-			-
Commercial and industrial		178			81			208			208			19			19
Consumer		69			221			530			683			73			342
State and political subdivisions		-			-			-			-			-			-
Total charge-offs		255			582			752			1,227			95			361
Recoveries of charged-off loans:
Residential real estate		-			3			16			42			-			3
Commercial real estate		392			845			438			846			-			46
Construction, land acquisition and development		13			-			13			-			-			-
Commercial and industrial		10			726			42			1,210			4			25
Consumer		86			179			483			392			45			227
State and political subdivisions		-			-			-			-			-			-
Total recoveries		501			1,753			992			2,490			49			301
Net recoveries		(246	)		(1,171	)		(240	)		(1,263	)
(Credit) provision for loan and lease losses		(513	)		74			(172	)		2,056
Net charge-offs														46			60
Provision for loan and lease losses														759			186
Balance at end of period	$	12,018		$	12,269		$	12,018		$	12,269		$	13,129		$	12,076

Net recoveries as a percentage of average loans		(0.03	)%		(0.12	)%		(0.03	)%		(0.14	)%
Net charge-offs as a percentage of average loans														0.00	%		0.01	%

Allowance for loan and lease losses as a percentage of loans, net		1.25	%		1.28	%		1.25	%		1.28	%		1.27	%		1.30	%
Allowance for loan and lease losses as a percentage of loans, net at period end, excluding PPP Loans		1.32	%		1.45	%		1.32	%		1.45	%

Allowance for loan and lease losses to nonaccrual loans														339.78	%		249.40	%

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~~Other Real Estate Owned~~

~~Other real estate owned was $54 thousand at September 30, 2021 and $58 thousand at December 31, 2020.~~

During the nine months ended September 30, 2021, FNCB obtained a deed in lieu of foreclosure for a residential mortgage with a recorded investment of $138 thousand. FNCB accepted an offer of $205 thousand and the property went under an agreement of sale, which closed in the third quarter of 2021. FNCB transferred the property to OREO at the selling price, less the estimated cost to sell, of $178 thousand and recorded a positive valuation adjustment of $40 thousand which is included in non-interest income for the nine months ended September 30, 2021. FNCB recorded a valuation adjustment to the carrying value of the piece of commercial land of $4 thousand during the three and nine months ended September 30, 2021. Additionally, there was one residential mortgage loan with a recorded investment of $68 thousand that was in the process of foreclosure at September 30, 2021.

During the nine months ended September 30, 2020, FNCB sold an OREO residential real estate property, which was collateral supporting an investor-owned residential mortgage loan with a carrying value of $204 thousand. The agreement with the investor required FNCB to take title to the property upon foreclosure and liquidate the property on behalf of the investor after foreclosure. FNCB did not realize any gain or loss upon the sale. FNCB also recorded a valuation adjustment to the carrying value of the piece of commercial land of $27 thousand during the nine months ended September 30, 2020. There were no residential real estate properties foreclosed upon during the three and nine months ended September 30, 2020 or included in OREO at September 30, 2020.

FNCB actively markets OREO properties for sale through a variety of channels including internal marketing and the use of outside brokers/realtors. The carrying value of OREO is generally calculated at an amount not greater than 90% of the most recent fair market appraised value unless specific conditions warrant an exception. A 10% factor is generally used to estimate costs to sell, which is based on typical cost factors, such as 6% broker commission, 1% transfer taxes, and 3% various other miscellaneous costs associated with the sales process. This fair value is updated on an annual basis or more frequently if new valuation information is available. Deterioration in the real estate market could result in additional losses on these properties.

Liabilities

Total liabilities consist primarily of total deposits and borrowed funds. ~~Throughout~~During the ~~nine~~three months ended ~~September 30, 2021, FNCB experienced strong deposit growth, which was the main factor contributing to a $194.1~~March 31, 2022, total liabilities increased 9.3 million, or ~~14.8%~~0.6%, ~~increase in total liabilities~~ to ~~$1.504~~$1.511 billion at ~~September 30, 2021~~March 31, 2022 from ~~$1.310~~$1.502 billion at December 31, ~~2020.~~2021, primarily due to the increase in borrowed funds, partially offset by a reduction in total deposits. Total deposits were ~~$1.482~~$1.412 billion at ~~September 30, 2021, an increase~~March 31, 2022, a decrease of ~~$194.6~~$43.4 million, or ~~15.1%~~3.0%, from ~~$1.287~~$1.455 billion at December 31, ~~2020.~~2021. Interest-bearing deposits ~~increased $144.2~~decreased $40.9 million, or ~~14.2%~~3.6%, to ~~$1.160~~$1.094 billion at ~~September 30, 2021~~March 31, 2022 from ~~$1.016~~$1.135 billion at December 31, ~~2020, which resulted primarily from cyclical inflows of municipal deposits, coupled with additional fiscal stimulus payments associated with the American Rescue Plan Act of 2021, enacted on March 11,~~ 2021. Specifically, ~~the increase in interest-bearing deposits reflected increases in~~ interest-bearing demand deposits and savings and club accounts, partially offset by a decrease in time deposits, as FNCB experienced the migration of time deposits into non-maturity deposits. Interest-bearing demand deposits increased $147.6decreased $64.8 million, or ~~20.7%~~7.6%, to ~~$861.0~~$793.0 million at ~~September 30, 2021,~~March 31, 2022, compared to ~~$713.4~~$857.8 million at December 31, ~~2020. Additionally, savings and club accounts increased $22.4~~2021, which primarily reflected cyclical deposit trends of FNCB's municipal customers. Partially offsetting this decrease was a $12.4 million, or ~~20.5%~~9.2%, ~~to $132.1 million at September 30, 2021~~ ~~from~~ ~~$109.7 million at December 31, 2020. Partially offsetting these increases was~~increase in savings deposits, coupled with a ~~$25.9~~$11.5 million, or ~~13.5%~~8.1%, ~~decrease~~increase in time deposits ~~to $167.0 million~~ at ~~September 30, 2021 from $192.9 million at~~March 31, 2022 compared to December 31, ~~2020. Non-interest-bearing demand deposits increased $50.5 million, or 18.6%, to $322.0 million at September 30, 2021 from $271.5 million at December 31, 2020.~~2021. The increase in ~~non-interest-bearing~~time deposits was ~~related~~primarily concentrated in wholesale deposits originated through the IntraFi® Network and Qwickrate, a national listing service. FNCB utilized these wholesale sources as an alternative to ~~cyclical increases in public deposits,~~ additional ~~fiscal stimulus payments and a change in consumer and business spending habits. Comprised entirely of junior subordinated debentures, total borrowed fundsremained constant at $10.3million at September 30, 2021 and December 31, 2020. Due to the strong deposit influx and favorable liquidity position, FNCB had no~~ advances through the FHLB of ~~Pittsburgh outstanding~~Pittsburgh. Non-interest-bearing demand deposits decreased $2.6 million, or 0.8%, to $317.5 million at ~~September 30, 2021 and~~March 31, 2022 from $320.1 million at December 31, ~~2020.~~2021. Total borrowed fundsincreased $57.0 million, or 187.9%, to $87.3 million at March 31, 2022 from $30.3 million at December 31, 2021, which was comprised of $77.0 million in FHLB of Pittsburgh advances and $10.3 million in junior subordinated debentures.

Equity

Total shareholders’ equity ~~increased~~decreased $~~6.1~~24.1 million, or ~~4.0%~~14.8%, to ~~$162.0~~$138.4 million at ~~September 30, 2021~~March 31, 2022 from ~~$155.9~~$162.5 million at December 31, ~~2020. Book value per common share was $8.10 at September 30, 2021, an increase of $0.40, or 5.3%, compared to $7.70 at December 31, 2020.~~2021. The ~~increase~~decrease in capital was primarily due to ~~net income for the nine months ended September 30, 2021~~an accumulated other comprehensive loss of ~~$17.4~~$17.7 million ~~partially offset by $3.9 million in dividends declared and paid for the nine months ended September 30, 2021, and a $5.5 million decrease in~~at March 31, 2022, compared to accumulated other comprehensive income ~~related primarily to the~~of $6.3 million at December 31, 2021, which was principally caused by depreciation in the fair value of FNCB's available-for-sale debt securities, net of deferred ~~taxes, and $2.4~~taxes. Also contributing to the reduction in capital was $3.0 million for the repurchase of common ~~shares.~~ shares and $1.5 million in dividends declared and paid for the three months ended March 31, 2022. These reductions were partially offset by net income for the three months ended March 31, 2022 of $4.4 million. FNCB Bank's total risk-based capital and Tier 1 leverage ratios were 14.10% and 9.30% at March 31, 2022, respectively, compared to 14.64% and 8.92% at December 31, 2021, respectively.

On January ~~27, 2021,~~26, 2022, FNCB's Board of Directors authorized a stock repurchase program under which up to ~~975,000~~750,000 shares of FNCB's outstanding common stock may be acquired in the open market. Repurchases are subject to SEC regulations as well as certain price, market volume and timing constraints specified in the trading plan, and the repurchased shares will be returned to the status of authorized but unissued shares of Common Stock. During the ~~nine~~three months ended ~~September 30, 2021,~~March 31, 2022, FNCB repurchased ~~330,759~~307,514 shares at a weighted-average price per share of ~~$7.21,~~$9.69, or ~~$2.4~~$3.0 million in aggregate. There is not a guarantee as to the exact number of shares that will be repurchased by FNCB, and FNCB may discontinue at any time that management determines additional repurchases are no longer warranted.

The Bank's total regulatory capital increased ~~$18.1~~$5.3 million to $167.3 million at ~~September 30, 2021~~March 31, 2022 from ~~$149.2~~$162.0 million at December 31, ~~2020.~~2021. FNCB Bank's total risk-based capital and Tier 1 leverage ratios were ~~15.91%~~14.13% and ~~9.80%~~9.30% at ~~September 30, 2021,~~March 31, 2022, respectively, compared to ~~15.79%~~14.64% and ~~9.57%~~8.92% at December 31, ~~2020,~~2021, respectively. The Bank's risk-based capital ratios exceeded the minimum regulatory capital ratios required for well capitalized under prompt corrective action regulations. Based on the most recent notification from its primary regulator, the Bank was considered well capitalized at ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020.~~2021. There were no conditions or events since that notification that management believes would have changed this capital designation.

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Liquidity

The term liquidity refers to the ability to generate sufficient amounts of cash to meet cash flow needs. Liquidity is required to fulfill the borrowing needs of FNCB’s credit customers and the withdrawal and maturity requirements of its deposit customers, as well as to meet other financial commitments. FNCB’s liquidity position is impacted by several factors, which include, among others, loan origination volumes, loan and investment maturity structure and cash flows, deposit demand and time deposit maturity structure and retention. FNCB has liquidity and contingent funding policies in place that are designed with controls in place to provide advanced detection of potentially significant funding shortfalls, establish methods for assessing and monitoring risk levels, and institute prompt responses that may alleviate a potential liquidity crisis. Management monitors FNCB’s liquidity position and fluctuations daily, forecasts future liquidity needs, performs periodic stress tests on its liquidity levels and develops strategies to ensure adequate liquidity at all times. Additionally, management regularly monitors FNCB's wholesale funding sources taking into consideration the cost of funds, diversification between funding sources and asset/liability management strategies. FNCB utilizes brokered deposits, including one-way purchases through the IntraFi® Network, deposits acquired through a national listing service, as well as overnight and term advances through the FHLB of Pittsburgh as wholesale sources of funds to supplement its deposit gathering initiatives.

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The statements of cash flows present the change in cash and cash equivalents from operating, investing and financing activities. Cash and due from banks and interest-bearing deposits in other banks, which comprise cash and cash equivalents, are FNCB’s most liquid assets. At ~~September 30, 2021,~~March 31, 2022, cash and cash equivalents totaled ~~$174.2~~$24.1 million, ~~an increase~~a decrease of ~~$18.4~~$74.9 million compared to ~~$155.8~~$99.0 million at December 31, ~~2020.~~2021. For the ~~nine~~three months ended ~~September 30, 2021~~March 31, 2022 net cash ~~inflows from operating and financing~~outflows used in investing activities were only partially offset by net cash inflows provided by operating and financing activities. Net cash used in investing activities ~~during that same time frame. Regarding FNCB's operating activities, net income, net of reconciling adjustments,~~totaled $88.0 million for the ~~nine~~three months ended ~~September 30, 2021 provided~~March 31, 2022. Specifically, FNCB's net ~~cash of $14.7 million. Financing~~lending activities f~~or the nine months ended September 30, 2021 provided $188.3~~ used $56.4 million in net cash. This cash which resulted primarily from the net increase in total deposits of $194.6 million, partially offset by cash dividends paid of $3.9 million and the repurchase of common shares of $2.4 million. The net cash inflows from operating and financing activities were partially offset by the $184.6 million in net cash used in FNCB's investing activities for the nine months ended September 30, 2021. Specifically,outflow was coupled with cash used for purchases of available-for-sale debt securities of $33.9 million, $3.0 million for the purchase of bank-owned life insurance and ~~equity securities~~$2.1 million on the purchase of $158.6 million and $1.2 million, respectively, coupled with a net increase in loans to customers of $53.2 million, primarily PPP loan and WOW mortgage originations, were the primary contributors to the net cash used in investing activities.restricted stock. Partially offsetting these outflows were cash inflows received from maturities, calls and repayments of available-for-sale debt securities totaling ~~$27.0~~$11.8 million and $695 thousand from the proceeds from ~~sales~~the sale of ~~available-for-sale securities~~other real estate owned. Regarding FNCB's operating activities, net income of $4.4 million for the three months ended March 31, 2022 was almost entirely offset by reconciling adjustments, providing net cash of just $7 thousand. Financing activitiesfor the three months ended March 31, 2022 provided $9.0 million in net cash, which resulted primarily from the net proceeds from borrowed funds of $56.9 million, offset by a $43.4 million decline in total deposits coupled with $3.0 ~~million.~~million in FNCB stock repurchases and $1.5 million in cash dividends paid.

Management is actively monitoring FNCB's liquidity position and capital adequacy in light of the changing circumstances related to economic uncertainty ~~brought on by~~due to the ~~COVID-19 pandemic.~~ongoing pandemic, higher levels of inflation, rising interest rates and global implications of the war in Ukraine. While FNCB's liquidity position is favorable, management is keenly aware that changes in general economic conditions, including inflation, rising interest rates and situations related to ~~COVID-19, or in general,~~the pandemic, among others, could pose potential stress on liquidity should deposits begin exiting the Bank or FNCB's asset quality deteriorates. Additionally, FNCB could experience an increase in the utilization of existing lines of credit as customers manage their own liquidity needs during this time of economic uncertainty. Bank liquidity has returned to normal cyclical manner, placing the Bank in a borrowing position for the first quarter of 2022. Management believes FNCB's current liquidity position and available sources of liquidity were sufficient to meet its cash flow needs and fulfill its obligations at ~~September 30, 2021.~~March 31, 2022. In addition to cash and cash equivalents of ~~$174.2~~$24.1 million at ~~September 30, 2021,~~March 31, 2022, FNCB had ample sources of additional liquidity including approximately ~~$364.2~~$389.4 million in available borrowing capacity from the FHLB of Pittsburgh and ~~$13.6~~$20.4 million under the borrower-in-custody program through the Federal Reserve Bank of Philadelphia. FNCB also has available unsecured federal funds lines of credit totaling $72.0 million at ~~September 30, 2021.~~March 31, 2022, as well as access to various wholesale deposit markets.

Impact of Inflation and Changing Prices

The preparation of financial statements in conformity with GAAP requires management to measure the FNCB’s financial position and operating results primarily in terms of historic dollars. Changes in the relative value of money due to inflation or recession are generally not considered. The primary effect of inflation on FNCB's operations is primarily related to increases in operating expenses. Management considers changes in interest rates to impact our financial condition and results of operations to a far greater degree than changes in prices due to inflation. Although interest rates are greatly influenced by changes in the inflation rate, they do not necessarily change at the same rate or in the same magnitude as the inflation rate. FNCB manages interest rate risk in several ways. Refer to “Interest Rate ~~Risk ”~~Risk” in Item 3 for further discussion. There can be no assurance that FNCB will not be materially adversely affected by future changes in interest rates, as interest rates are highly sensitive to many factors that are beyond its control. Additionally, inflation may adversely impact the financial condition of FNCB's borrowers and could impact their ability to repay their loans, which could negatively affect FNCB's asset quality through higher delinquency rates and increased charge-offs. Management will carefully consider the impact of inflation and rising interest rates on FNCB borrowers in managing credit risk related to the loan and lease portfolio.

Interest Rate Risk

Interest Rate Sensitivity

Market risk is the risk to earnings and/or financial position resulting from adverse changes in market rates or prices, such as interest rates, foreign exchange rates or equity prices. FNCB’s exposure to market risk is primarily interest rate risk associated with our lending, investing and deposit gathering activities, all of which are other than trading. Changes in interest rates affect earnings by changing net interest income and the level of other interest-sensitive income and operating expenses. In addition, variations in interest rates affect the underlying economic value of our assets, liabilities and off-balance sheet items.

LIBOR Replacement

The Alternative Reference Rates Committee ("ARRC") ~~has~~had proposed that the Secured Overnight Funding Rate ("SOFR") replace ~~USD-LIBOR. ARRC had initially proposed that~~USD-LIBOR, with the transition to SOFR from USD-LIBOR ~~would~~to take place by the end of 2021. ~~At the end of~~FNCB has various loans, investments, borrowings and interest rate swap contracts that are indexed to USD-LIBOR. On November 30, 2020 the ICE Benchmark Administration ("IBA"), which complies and oversees LIBOR, ~~commenced a consultation on~~announced its intention to extend most of the USD-LIBOR tenors to June 30, 2023, ~~and~~with U.S. banking regulators ~~have expressed support for~~supporting the extension. ~~Results~~As of December 31, 2021, most LIBOR tenors, with the ~~consultation, which concluded on January 25, 2021, reaffirmed the extension~~exception of the overnight, 1-~~, 3-~~,3-, 6- and 12-month LIBOR tenors which have been extended through June 30, ~~2023.~~2023, have ceased to be published. Additionally, beginning January 1, 2022, no new financial instruments can be written with terms tied to LIBOR. FNCB has various loans, investments, borrowings and interest rate swap contracts that are indexed to USD-LIBOR, and management is actively monitoring its LIBOR exposures and evaluating ~~the~~any risks involved.

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Asset and Liability Management

The ALCO, comprised of members of the Bank's board of directors, executive management and other appropriate officers, oversees FNCB's interest rate risk management program. Members of ALCO meet quarterly, or more frequently as necessary, to develop balance sheet strategies affecting the future level of net interest income, liquidity and capital. The major objectives of ALCO are to:

The major objectives of ALCO are to:

●

manage exposure to changes in the interest rate environment by limiting the changes in net interest margin to an acceptable level within a reasonable range of interest rates;

●

ensure adequate liquidity and funding;

●

maintain a strong capital base; and

●

maximize net interest income opportunities.

~~Table of Contents~~

FNCB utilizes the pricing and structure of loans and deposits, the size and duration of the investment securities portfolio, the size and duration of the wholesale funding portfolio, and off-balance sheet interest rate contracts to manage interest rate risk. The off-balance sheet interest rate contracts may include interest rate swaps, caps and floors. These interest rate contracts involve, to varying degrees, credit risk and interest rate risk. Credit risk is the possibility that a loss may occur if a counterparty to a transaction fails to perform according to terms of the contract. The notional amount of the interest rate contracts is the amount upon which interest and other payments are based. The notional amount is not exchanged, and therefore, should not be taken as a measure of credit risk.

ALCO monitors FNCB’s exposure to changes in net interest income over both a one-year planning horizon and a longer-term strategic horizon. ALCO uses net interest income simulations and economic value of equity (“EVE”) simulations as the primary tools in measuring and managing FNCB’s position and considers balance sheet forecasts, FNCB's liquidity position, the economic environment, anticipated direction of interest rates and FNCB’s earnings sensitivity to changes in these rates in its modeling. In addition, ALCO has established policy tolerance limits for acceptable negative changes in net interest income. Furthermore, as part of its ongoing monitoring, ALCO requires quarterly back testing of modeling results, which involves after-the-fact comparisons of projections with FNCB’s actual performance to measure the validity of assumptions used in the modeling techniques.

Earnings at Risk and Economic Value at Risk Simulations

Earnings at Risk

Earnings-at-risk simulation measures the change in net interest income and net income under various interest rate scenarios. Specifically, given the current market rates, ALCO looks at “earnings at risk” to determine anticipated changes in net interest income from a base case scenario with scenarios of +200, +400, and -100 basis points for simulation purposes. The simulation takes into consideration that not all assets and liabilities re-price equally and simultaneously with market rates (i.e., savings rate).

Economic Value at Risk

While earnings-at-risk simulation measures the short-term risk in the balance sheet, economic value (or portfolio equity) at risk measures the long-term risk by finding the net present value of the future cash flows from FNCB’s existing assets and liabilities. ALCO examines this ratio regularly, and given the current rate environment, has utilized rate shocks of +200, +400, and -100 basis points for simulation purposes. Management recognizes that, in some instances, this ratio may contradict the “earnings at risk” ratio.

While ALCO regularly performs a wide variety of simulations under various strategic balance sheet and treasury yield curve scenarios, the following results reflect FNCB’s sensitivity over the subsequent twelve months based on the following assumptions:

●

asset and liability levels using ~~September 30, 2021~~March 31, 2022 as a starting point;

●

cash flows are based on contractual maturity and amortization schedules with applicable prepayments derived from internal historical data and external sources; and

●

cash flows are reinvested into similar instruments so as to keep interest-earning asset and interest-bearing liability levels constant.

The following table illustrates the simulated impact of parallel and instantaneous interest rate shocks of +400 basis points, +200 basis points, and -100 basis points on net interest income and the change in economic value over a one-year time horizon from the ~~September 30, 2021~~March 31, 2022 levels:

	Rates +200						Rates +400						Rates -100						Rates +200						Rates +400						Rates -100
	Simulation Results			Policy Limit			Simulation Results			Policy Limit			Simulation Results			Policy Limit			Simulation Results			Policy Limit			Simulation Results			Policy Limit			Simulation Results			Policy Limit
Earnings at risk:
Percent change in net interest income		0.5	%		(12.5	)%		2.4	%		(20.0	)%		(4.4	)%		(10.0	)%		(7.9	)%		(12.5	)%		(14.8	)%		(20.0	)%		(4.6	)%		(10.0	)%

Economic value at risk:
Percent change in economic value of equity		3.0	%		(20.0	)%		2.4	%		(35.0	)%		(25.5	)%		(10.0	)%		(8.5	)%		(20.0	)%		(17.1	)%		(35.0	)%		(4.3	)%		(10.0	)%

4544

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~~Similar to model results at June 30, 2021,~~Model results from the simulation at ~~September 30, 2021~~March 31, 2022 indicated that ~~FNCB's asset/~~FNCB was liability ~~position was relatively well matched~~sensitive in the near term, exhibiting ~~only minor~~some interest sensitivity to changes in interest rates over the next twelve months. According to the model results at ~~September 30, 2021,~~March 31, 2022, in comparison to the base case, net interest income is expected to ~~increase 0.5%~~decrease 7.9% under a +200-basis point interest ~~rate shock and decrease 4.4% under a -100-basis point~~ rate shock. Additionally, under a parallel shift in interest rates of +200 basis points, FNCB's economic value of equity ("EVE") is expected to ~~increase 3.0%~~decrease 8.5%. ~~However, EVE is expected to decrease 25.5% under a parallel shift~~Comparatively, model results at December 31, 2021 estimated decreases in ~~interest rates of -100 basis points, which is outside of ALCO policy guidelines. With the exception of the -100 basis point rate shock on EVE, all modeled exposures of~~ net interest income and EVE ~~were within internal policy guidelines~~of 4.1% and 3.0% under a +200-basis point interest rate shock. The increase in exposure primarily reflected the change in FNCB's liquidity position from having excess cash at December 31, 2021 to a borrowing position at March 31, 2022. All modeled exposures to net interest income and EVE for the next ~~twelve months. Management does not believe that EVE~~twelve-month horizon are within internal ALCO policy ~~exception under the -100-basis point rate shock poses any undue interest rate risk at September 30, 2021. Included~~guidelines. Additionally, included in the model was the assumptions that FNCB would receive forgiveness for remaining PPP loans outstanding at ~~September 30, 2021~~March 31, 2022 and recognize the associated loan origination fees to interest income ~~by the end of~~during the first ~~year~~six month of the model. Accordingly, results of model project a ~~substantial~~ decrease to net interest income in the second half of Year 21 of the model based on these assumptions.

In response to the recent increase in inflation caused by continued economic uncertainty from the COVID-19 pandemic, global supply-chain constraints and the war in the Ukraine, among other factors, the FOMC raised the federal funds target rate 25 basis points on March 16, 2022 and indicated that additional rate increases would likely be necessary to control inflation. Model results at March 31, 2022 indicate that FNCB's asset/liability position becomes asset sensitive in Years 3-5 of the model, which would imply that net interest income would benefit from rising interest rates. This analysis does not represent a forecast for FNCB and should not be relied upon as being indicative of expected operating results. These simulations are based on numerous assumptions, including but not limited ~~to:~~to, the nature and timing of interest rate levels, prepayments on loans and securities, deposit decay rates, pricing decisions on loans and deposits, reinvestment/replacements of asset and liability cash flows, and other factors. While assumptions reflect current economic and local market conditions, FNCB cannot make any assurances as to the predictive nature of these assumptions, including changes in interest rates, customer preferences, competition and liquidity needs, or what actions ALCO might take in responding to these changes. In response to the economic disruption and uncertainty brought on by the COVID-19 pandemic, the FOMC lowered the federal funds target rate a total of 150 basis points in two emergency actions in March 2020, with an expectation that the Committee will maintain a low interest rate environment for the foreseeable future. Given FNCB's current asset/liability position, the significantly lower market interest rates may have a negative impact on FNCB's earning asset yields and variable-rate loans and securities indexed to prime and LIBOR will continue to reprice downward.

As previously mentioned, as part of its ongoing monitoring, ALCO requires quarterly back testing of modeling results, which involves after-the-fact comparisons of projections with FNCB’s actual performance to measure the validity of assumptions used in the modeling techniques. As part of its quarterly review, management compared tax-equivalent net interest income recorded for the three months ended ~~September 30, 2021~~March 31, 2022 with tax-equivalent net interest income that was projected for the same three-month period. There was a positive variance between actual and projected tax-equivalent net interest income for the three-month period ended ~~September 30, 2021~~March 31, 2022 of approximately ~~$1.0 million,~~$159 thousand, or ~~7.68%~~1.25%. The variance primarily reflected additional loan growth actually experienced over that used ~~in the model, coupled with a greater amount of PPP loan origination fees recognized than assumed~~ in the model. ALCO performs a detailed rate/volume analysis between actual and projected results in order to continue to improve the accuracy of its simulation models.

Off-Balance Sheet Arrangements

In the ordinary course of operations, FNCB engages in a variety of financial transactions that, in accordance with GAAP, are not recorded in our consolidated financial statements or are recorded in amounts that differ from the notional amounts. These transactions involve, to varying degrees, elements of credit, interest rate, and liquidity risk. Such transactions may be used for general corporate purposes or for customer needs. Corporate purpose transactions would be used to help manage credit, interest rate and liquidity risk or to optimize capital. Customer transactions are used to manage customers’ requests for funding.

For the three ~~and nine~~ months ended ~~September 30, 2021,~~March 31, 2022, FNCB did not engage in any off-balance sheet transactions that would have or would be reasonably likely to have a material effect on its consolidated financial condition.

Item 3 — Quantitative and Qualitative Disclosures about Market Risk

There have been no material changes in FNCB’s exposure to market risk during the ~~nine~~three months ended ~~September 30, 2021.~~March 31, 2022. For discussion of FNCB’s exposure to market risk, refer to Item 7A, Quantitative and Qualitative Disclosures about Market Risk, contained in FNCB’s Form 10-K for the year ended December 31, ~~2020.~~2021.

Item 4 — Controls and Procedures

FNCB’s management, with the participation of the Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of FNCB’s disclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under the Exchange Act. Based on that evaluation, FNCB’s Chief Executive Officer and Chief Financial Officer concluded FNCB’s disclosure controls and procedures were effective as of ~~September 30, 2021.~~March 31, 2022.

There were no changes made to FNCB’s internal control over financial reporting that occurred during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, FNCB’s internal control over financial reporting.

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PART II Other Information

Item 1 — Legal Proceedings.

FNCB has been subject to tax audits, and is also a party to routine litigation involving various aspects of its business, such as employment practice claims, workers compensation claims, claims to enforce liens, condemnation proceedings on properties in which FNCB holds security interests, claims involving the making and servicing of real property loans and other issues incident to its business, none of which has or is expected to have a material adverse impact on the consolidated financial condition, results of operations or liquidity of FNCB.

There have been no changes in the status of the other litigation, if any, disclosed in FNCB’s Annual Report on Form 10-K for the year ended December 31, ~~2020.~~2021.

Item 1A — Risk Factors.

There have been no material changes in the risk factors previously disclosed in FNCB's Annual Report on Form 10-K for the year ended December 31, ~~2020.~~2021.

Item 2 — Unregistered Sales of Equity Securities and Use of Proceeds.

Unregistered Sales of Equity Securities

FNCB did not issue any unregistered equity securities during the ~~nine~~three months ended ~~September 30, 2021.~~March 31, 2022.

Purchases of Equity Securities by the Issuer and Affiliated Purchasers

Pursuant to the share repurchase program ~~initially~~ announced by FNCB on January ~~27, 2021,~~26, 2022, which expires on December 31, ~~2021,~~2022, FNCB may repurchase up to ~~975,000~~750,000 shares of its issued and outstanding common stock. The share repurchase program is intended to comply with the provisions of the safe harbor under Rule 10b-18 of the Exchange Act. The following table describes purchases by FNCB under the share repurchase program that settled during each period set forth in the table. Prices in column (b) include commissions. Cumulatively, as of ~~September 30, 2021,~~March 31, 2022, FNCB had repurchased ~~330,759~~307,514 of its shares under the program at a weighted average purchase price of ~~$7.21~~$9.69 per share, or ~~$2.4~~$3.0 million thousand in aggregate (including commissions). As of ~~September 30, 2021,~~March 31, 2022, FNCB had the authority to repurchase an additional ~~644,241~~442,486 shares under the stock repurchase program. Shares purchased during the three months ended ~~September 30, 2021~~March 31, 2022 under the repurchase program are summarized by month in the table below:

Total Number

Maximum

of Shares

Number of

Purchased as

Shares that

Total Number

Part of Publicly

May Yet be

of Shares

Average Price

Announced

Purchased under

Purchased

Paid Per Share

Programs

the Program

Period

(a)

(b)

(c)

(d)

July 1, 2021 to July 31, 2021
137,029 7.24 137,029 644,441
August 1, 2021 to August 31, 2021
200 7.59 200 644,241
September 1, 2021 to September 30, 2021
- - - 644,241
Total
137,229 $ 7.24 137,229 644,241


					Total Number		Maximum
					of Shares		Number of
					Purchased as		Shares that
	Total Number				Part of Publicly		May Yet be
	of Shares		Average Price		Announced		Purchased under
	Purchased		Paid Per Share		Programs		the Program
Period	(a)		(b)		(c)		(d)
January 27, 2022 to January 31, 2022		-	$	-		-		750,000
February 1, 2022 to February 28, 2022		-		-		-		750,000
March 1, 2022 to March 31, 2022		307,514		9.69		307,514		442,486
Total		307,514	$	9.69		307,514		442,486

Item 3 - Defaults upon Senior Securities.

None.

Item 4 — Mine Safety Disclosures.

Not applicable.

Item 5 - Other Information.

None.

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Item 6 — Exhibits.

The following exhibits are filed or furnished herewith or incorporated by reference.

EXHIBIT 3.1	Amended and Restated Articles of Incorporation of FNCB Bancorp, Inc. dated May 19, 2010 - filed as Exhibit 3.1 to FNCB's Current Report on Form 8-K on May 19, 2010, is hereby incorporated by reference.

EXHIBIT 3.2	Articles of Amendment to the Amended and Restated Articles of Incorporation dated October 4, 2016 - filed as Exhibit 3.1 to FNCB's Current Report on Form 8-K on October 4, 2016, is hereby incorporated by reference.

EXHIBIT 3.3	Amended and Restated Bylaws of FNCB Bancorp, Inc. as of March 25, 2020 - filed as Exhibit 3.1 to FNCB's Form 10-Q for the quarter ended March 31, 2020, as filed on May 4, 2020, is hereby incorporated by reference.

EXHIBIT 31.1*	Certification of Chief Executive Officer

EXHIBIT 31.2*	Certification of Chief Financial Officer

EXHIBIT 32.1**	Section 1350 Certification —Chief Executive Officer and Chief Financial Officer

EXHIBIT 101.INS	Inline XBRL Instance Document (the Instance Document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document)

EXHIBIT 101.SCH	INLINE XBRL TAXONOMY EXTENSION SCHEMA

EXHIBIT 101.CAL	INLINE XBRL TAXONOMY EXTENSION CALCULATION LINKBASE

EXHIBIT 101.DEF	INLINE XBRL TAXONOMY EXTENSION DEFINITION LINKBASE

EXHIBIT 101.LAB	INLINE XBRL TAXONOMY EXTENSION LABEL LINKBASE

EXHIBIT 101.PRE	INLINE XBRL TAXONOMY EXTENSION PRESENTATION LINKBASE

EXHIBIT 104	Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

*	Filed herewith

**	Furnished herewith

4847

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Registrant: FNCB BANCORP, INC.

Date: ~~November 5, 2021~~May 6, 2022	By:	/s/ Gerard A. Champi
	Gerard A. Champi
	President and Chief Executive Officer



Date: ~~November 5, 2021~~May 6, 2022	By:	/s/ James M. Bone, Jr.
	James M. Bone, Jr., CPA
	Executive Vice President and Chief Financial Officer
	Principal Financial Officer



Date: ~~November 5, 2021~~May 6, 2022	By:	/s/ Stephanie A. Westington
	Stephanie A. Westington, CPA
	Senior Vice President and ~~Controller~~Chief Accounting Officer
	Principal Accounting Officer

4948

Pennsylvania		23-2900790
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification No.)

102 E. Drinker St., Dunmore, PA		18512
(Address of Principal Executive Offices)		(Zip Code)

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common stock, $1.25 par value	FNCB	Nasdaq Capital Market

Contents
PART I. Financial Information	1
Item 1. Financial Statements (unaudited)	1
Consolidated Statements of Financial Condition	1
Consolidated Statements of Income	2
Consolidated Statements of Comprehensive (Loss) Income	3
Consolidated Statements of Changes in Shareholders’ Equity	4
Consolidated Statements of Cash Flows	5
Notes to Consolidated Financial Statements	6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	2526
Item 3. Quantitative and Qualitative Disclosures about Market Risk	4645
Item 4. Controls and Procedures	4645
PART II. Other Information	4746
Item 1. Legal Proceedings.	4746
Item 1A. Risk Factors.	4746
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.	4746
Item 3. Defaults upon Senior Securities.	4746
Item 4. Mine Safety Disclosures.	4746
Item 5. Other Information.	4746
Item 6. Exhibits.	4847

	*September 30,*		*December 31,*		*March 31,*			*December 31,*
(in thousands, except share data)	*2021*		*2020*		*2022*			*2021*
Assets
Cash and cash equivalents:
Cash and due from banks	$	24,612	$	24,822	$	19,383		$	16,651
Interest-bearing deposits in other banks		149,581		130,989		4,719			82,369
Total cash and cash equivalents		174,193		155,811		24,102			99,020
Available-for-sale debt securities, at fair value		470,323		350,035
Available-for-sale debt securities						514,133			522,566
Equity securities, at fair value		4,777		3,026		5,018			4,922
Restricted stock, at cost		1,826		1,745		4,020			1,911
Loans held for sale		491		2,107
Loans and leases, net of allowance for loan and lease losses of $12,018 at September 30, 2021 and $11,950, at December 31, 2020		946,390		889,152
Loans and leases, net of allowance for loan and lease losses of $13,129 and $12,416						1,023,271			967,023
Bank premises and equipment, net		17,269		17,579		15,895			16,082
Accrued interest receivable		4,593		4,286		4,870			4,643
Bank-owned life insurance		33,355		31,712		36,639			33,494
Other assets		12,674		10,226		21,602			14,662
Total assets	$	1,665,891	$	1,465,679	$	1,649,550		$	1,664,323

Liabilities
Deposits:
Demand (non-interest-bearing)	$	321,952	$	271,499	$	317,541		$	320,089
Interest-bearing		1,160,114		1,015,949		1,094,052			1,134,939
Total deposits		1,482,066		1,287,448		1,411,593			1,455,028
Borrowed funds		10,310		10,310
Borrowed funds:
Federal Home Loan Bank of Pittsburgh advances						76,950			20,000
Junior subordinated debentures						10,310			10,310
Total borrowed funds						87,260			30,310
Accrued interest payable		56		108		57			49
Other liabilities		11,509		11,953		12,251			16,479
Total liabilities		1,503,941		1,309,819		1,511,161			1,501,866

Shareholders' equity
Preferred shares ($1.25 par)
Authorized: 20,000,000 shares at September 30, 2021 and December 31, 2020
Issued and outstanding: 0 shares at September 30, 2021 and December 31, 2020		0		0
Common shares ($1.25 par)
Authorized: 50,000,000 shares at September 30, 2021 and December 31, 2020
Issued and outstanding: 19,985,837 shares at September 30, 2021 and 20,245,649 shares at December 31, 2020		24,982		25,307
Preferred shares ($1.25 par)
Authorized: 20,000,000 shares at March 31, 2022 and December 31, 2021
Issued and outstanding: 0 shares at March 31, 2022 and December 31, 2021						0			0
Common shares ($1.25 par)
Authorized: 50,000,000 shares at March 31, 2022 and December 31, 2021
Issued and outstanding: 19,683,671 shares at March 31, 2022 and 19,989,875 shares at December 31, 2021						24,604			24,987
Additional paid-in capital		80,000		81,587		77,642			80,128
Retained earnings		48,541		35,080		53,834			50,990
Accumulated other comprehensive income		8,427		13,886
Accumulated other comprehensive (loss) income						(17,691	)		6,352
Total shareholders' equity		161,950		155,860		138,389			162,457
Total liabilities and shareholders’ equity	$	1,665,891	$	1,465,679	$	1,649,550		$	1,664,323

(in thousands, except per share data)	*Number of Common Shares*			*Common Stock*			*Additional Paid-in Capital*			*Retained Earnings*			*Accumulated Other Comprehensive Income*			*Total Shareholders' Equity*
For the three months ended:
Balances, June 30, 2020		20,208,607		$	25,260		$	81,261		$	28,057		$	10,779		$	145,357
Net income for the period		-			0			0			4,107			0			4,107
Cash dividends paid, $0.055 per share		-			0			0			(1,113	)		0			(1,113	)
Restricted stock awards		-			0			116			0			0			116
Common shares issued under long-term incentive compensation plan		32,187			40			110			0			0			150
Common shares issued through dividend reinvestment/optional cash purchase plan		2,795			4			13			(7	)		0			10
Other comprehensive income, net of tax of $377		-			0			0			0			1,419			1,419
Balances, September 30, 2020		20,243,589		$	25,304		$	81,500		$	31,044		$	12,198		$	150,046

Balances, June 30, 2021		20,102,602		$	25,128		$	80,591		$	43,698		$	11,197		$	160,614
Net income for the period		-			0			0			6,351			0			6,351
Cash dividends paid, $0.075 per share		-			0			0			(1,499	)		0			(1,499	)
Restricted stock awards		-			0			99			0			0			99
Repurchase of common shares		(137,229	)		(171	)		(829	)		0			0			(1,000	)
Common shares issued under long-term incentive compensation plan		18,558			23			127			0			0			150
Common shares issued through dividend reinvestment/optional cash purchase plan		1,906			2			12			(9	)		0			5
Other comprehensive loss, net of tax of $736		-			0			0			0			(2,770	)		(2,770	)
Balances, September 30, 2021		19,985,837		$	24,982		$	80,000		$	48,541		$	8,427		$	161,950

For the nine months ended:
Balances, December 31, 2019		20,171,408		$	25,214		$	81,130		$	24,207		$	3,056		$	133,607
Net income for the period		-			0			0			10,191			0			10,191
Cash dividends paid, $0.165 per share		-			0			0			(3,334	)		0			(3,334	)
Restricted stock awards		-			0			259			0			0			259
Common shares issued under long-term incentive compensation plan		63,970			80			70			0			0			150
Common shares issued through dividend reinvestment/optional cash purchase plan		8,211			10			41			(20	)		0			31
Other comprehensive income, net of tax of $2,430		-			0			0			0			9,142			9,142
Balances, September 30, 2020		20,243,589		$	25,304		$	81,500		$	31,044		$	12,198		$	150,046

Balances, December 31, 2020		20,245,649		$	25,307		$	81,587		$	35,080		$	13,886		$	155,860
Net income for the period		-			0			0			17,413			0			17,413
Cash dividends paid, $0.195 per share		-			0			0			(3,928	)		0			(3,928	)
Restricted stock awards		-			0			277			0			0			277
Repurchase of common shares		(330,759	)		(413	)		(1,984	)		0			0			(2,397	)
Common shares issued under long-term incentive compensation plan		62,796			78			72			0			0			150
Common shares issued through dividend reinvestment/optional cash purchase plan		8,151			10			48			(24	)		0			34
Other comprehensive loss, net of tax of $1,451		-			0			0			0			(5,459	)		(5,459	)
Balances, September 30, 2021		19,985,837		$	24,982		$	80,000		$	48,541		$	8,427		$	161,950

FNCB BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(unaudited)

	*September 30, 2021*								*March 31, 2022*
			*Gross*		*Gross*						*Gross*		*Gross*
			*Unrealized*		*Unrealized*						*Unrealized*		*Unrealized*
	*Amortized*		*Holding*		*Holding*		*Fair*		*Amortized*		*Holding*		*Holding*		*Fair*
(in thousands)	*Cost*		*Gains*		*Losses*		*Value*		*Cost*		*Gains*		*Losses*		*Value*
Available-for-sale debt securities:
U.S. Treasury securities	$	20,073	$	0	$	174	$	19,899
U.S. treasuries									$	37,504	$	0	$	2,490	$	35,014
Obligations of state and political subdivisions		206,549		9,783		559		215,773		250,257		1,222		10,620		240,859
U.S. government/government-sponsored agencies:
Collateralized mortgage obligations - residential		105,571		1,635		1,075		106,131		103,801		7		5,560		98,248
Collateralized mortgage obligations - commercial		3,694		124		28		3,790		3,676		0		151		3,525
Mortgage-backed securities		22,418		390		109		22,699		24,244		91		1,141		23,194
Private collateralized mortgage obligations		61,317		180		449		61,048		69,888		3		4,212		65,679
Corporate debt securities		29,300		876		83		30,093		33,938		374		651		33,661
Asset-backed securities		10,076		75		7		10,144		13,277		51		70		13,258
Negotiable certificates of deposit		744		2		0		746		744		0		49		695
Total available-for-sale debt securities	$	459,742	$	13,065	$	2,484	$	470,323	$	537,329	$	1,748	$	24,944	$	514,133

	*September 30, 2021*																		*March 31, 2022*
	*Less than 12 Months*						*12 Months or Greater*						*Total*						*Less than 12 Months*						*12 Months or Greater*						*Total*
	*Number*				*Gross*		*Number*				*Gross*		*Number*				*Gross*		*Number*				*Gross*		*Number*				*Gross*		*Number*				*Gross*
	of		*Fair*		*Unrealized*		of		*Fair*		*Unrealized*		of		*Fair*		*Unrealized*		of		*Fair*		*Unrealized*		of		*Fair*		*Unrealized*		of		*Fair*		*Unrealized*
(dollars in thousands)	*Securities*		*Value*		*Losses*		*Securities*		*Value*		*Losses*		*Securities*		*Value*		*Losses*		*Securities*		*Value*		*Losses*		*Securities*		*Value*		*Losses*		*Securities*		*Value*		*Losses*
U.S. Treasury securities		9	$	19,899	$	174		0	$	0	$	0		9	$	19,899	$	174
U.S. treasuries																				18	$	35,014	$	2,490		0	$	0	$	0		18	$	35,014	$	2,490
Obligations of state and political subdivisions		35		29,413		559		0		0		0		35		29,413		559		141		155,606		10,185		5		2,793		435		146		158,399		10,620
U.S. government/government-sponsored agencies:
Collateralized mortgage obligations - residential		19		60,209		1,024		1		1,627		51		20		61,836		1,075		30		68,320		2,500		10		28,477		3,060		40		96,797		5,560
Collateralized mortgage obligations - commercial		1		1,657		28		0		0		0		1		1,657		28		2		1,997		10		1		1,528		141		3		3,525		151
Mortgage-backed securities		4		11,900		109		0		0		0		4		11,900		109		6		11,568		845		2		3,924		296		8		15,492		1,141
Private collateralized mortgage obligations		14		27,636		411		2		4,233		38		16		31,869		449		33		55,407		3,835		4		6,958		377		37		62,365		4,212
Corporate debt securities		8		7,417		83		0		0		0		8		7,417		83		14		14,123		516		3		2,865		135		17		16,988		651
Asset-backed securities		2		1,185		4		2		1,404		3		4		2,589		7		7		5,764		32		3		1,734		38		10		7,498		70
Negotiable certificates of deposit ~~(1)~~		1		248		0		0		0		0		1		248		0		3		695		49		0		0		0		3		695		49
Total available-for-sale debt securities		93	$	159,564	$	2,392		5	$	7,264	$	92		98	$	166,828	$	2,484		254	$	348,494	$	20,462		28	$	48,279	$	4,482		282	$	396,773	$	24,944
(1) Unrealized loss is less than $1 thousand.

							*Construction,*																								*Construction,*
							*Land*									*State and*															*Land*									*State and*
	*Residential*			*Commercial*			*Acquisition and*			*Commercial*						*Political*									*Residential*			*Commercial*			*Acquisition and*			*Commercial*						*Political*
(in thousands)	*Real Estate*			*Real Estate*			*Development*			*and Industrial*			*Consumer*			*Subdivisions*			*Unallocated*			*Total*			*Real Estate*			*Real Estate*			*Development*			*and Industrial*			*Consumer*			*Subdivisions*			*Unallocated*		*Total*
Three months ended September 30, 2021
Three months ended March 31, 2022
Allowance for loan and lease losses:
Beginning balance, July, 1 2021	$	1,858		$	4,648		$	493		$	2,483		$	1,177		$	509		$	1,117		$	12,285
Beginning balance, January 1, 2022																									$	2,081		$	4,530		$	392		$	2,670		$	1,159		$	455		$	1,129	$	12,416
Charge-offs		(8	)		0			0			(178	)		(69	)		0			0			(255	)		(3	)		0			0			(19	)		(73	)		0			0		(95	)
Recoveries		0			392			13			10			86			0			0			501			0			0			0			4			45			0			0		49
Provisions (credits)		141			(532	)		(38	)		61			(74	)		(47	)		(24	)		(513	)		118			(106	)		146			437			128			36			0		759
Ending balance, September 30, 2021	$	1,991		$	4,508		$	468		$	2,376		$	1,120		$	462		$	1,093		$	12,018
Ending balance, March 31, 2022																									$	2,196		$	4,424		$	538		$	3,092		$	1,259		$	491		$	1,129	$	13,129

Three months ended September 30, 2020
Allowance for loan and lease losses:
Beginning balance, July, 1 2020	$	1,351		$	3,942		$	360		$	2,343		$	1,689		$	337		$	1,002		$	11,024
Charge-offs		0			(280	)		0			(81	)		(221	)		0			0			(582	)
Recoveries		3			845			0			726			179			0			0			1,753
Provisions (credits)		193			307			53			(634	)		2			40			113			74
Ending balance, September 30, 2020	$	1,547		$	4,814		$	413		$	2,354		$	1,649		$	377		$	1,115		$	12,269

Nine months ended September 30, 2021
Three months ended March 31, 2021
Allowance for loan and lease losses:
Beginning balance, January 1, 2021	$	1,715		$	4,268		$	538		$	2,619		$	1,319		$	405		$	1,086		$	11,950		$	1,715		$	4,268		$	538		$	2,619		$	1,319		$	405		$	1,086	$	11,950
Charge-offs		(14	)		0			0			(208	)		(530	)		0			0			(752	)		0			0			0			(19	)		(342	)		0			0		(361	)
Recoveries		16			438			13			42			483			0			0			992			3			46			0			25			227			0			0		301
Provisions (credits)		274			(198	)		(83	)		(77	)		(152	)		57			7			(172	)		14			207			(22	)		(22	)		15			(18	)		12		186
Ending balance, September 30, 2021	$	1,991		$	4,508		$	468		$	2,376		$	1,120		$	462		$	1,093		$	12,018

Nine months ended September 30, 2020
Allowance for loan and lease losses:
Beginning balance, January 1, 2020	$	1,147		$	3,198		$	271		$	1,997		$	1,658		$	253		$	426		$	8,950
Charge-offs		0			(336	)		0			(208	)		(683	)		0			0			(1,227	)
Recoveries		42			846			0			1,210			392			0			0			2,490
Provisions (credits)		358			1,106			142			(645	)		282			124			689			2,056
Ending balance, September 30, 2020	$	1,547		$	4,814		$	413		$	2,354		$	1,649		$	377		$	1,115		$	12,269
Ending balance, March 31, 2021																									$	1,732		$	4,521		$	516		$	2,603		$	1,219		$	387		$	1,098	$	12,076

1.	Minimal Risk
2.	Above Average Credit Quality
3.	Average Risk
4.	Acceptable Risk
5.	Pass - Watch
6.	Special Mention
7.	Substandard - Accruing
8.	Substandard - Non-Accrual
9.	Doubtful
10.	Loss

	*Credit Quality Indicators*																				*Credit Quality Indicators*
	*September 30, 2021*																				*March 31, 2022*
	*Commercial Loans and Leases*												*Other Loans*								*Commercial Loans and Leases*												*Other Loans*
			*Special*								*Subtotal*		*Accruing*		*Non-accrual*		*Subtotal*		*Total*				*Special*								*Subtotal*		*Accruing*		*Non-accrual*		*Subtotal*		*Total*
(in thousands)	*Pass*		*Mention*		*Substandard*		*Doubtful*		*Loss*		*Commercial*		*Loans*		*Loans*		*Other*		*Loans*		*Pass*		*Mention*		*Substandard*		*Doubtful*		*Loss*		*Commercial*		*Loans*		*Loans*		*Other*		*Loans*
Residential real estate	$	41,181	$	460	$	79	$	0	$	0	$	41,720	$	181,916	$	671	$	182,587	$	224,307	$	41,780	$	506	$	74	$	0	$	0	$	42,360	$	204,659	$	680	$	205,339	$	247,699
Commercial real estate		325,588		3,450		12,556		0		0		341,594		0		0		0		341,594		358,713		8,097		6,749		0		0		373,559		0		0		0		373,559
Construction, land acquisition and development		43,786		0		0		0		0		43,786		6,309		0		6,309		50,095		46,197		0		0		0		0		46,197		3,599		0		3,599		49,796
Commercial and industrial		205,215		819		1,388		0		0		207,422		2,387		0		2,387		209,809		196,487		7,138		1,290		0		0		204,915		2,231		0		2,231		207,146
Consumer		0		0		0		0		0		0		78,909		227		79,136		79,136		0		0		0		0		0		0		94,446		203		94,649		94,649
State and political subdivisions		56,053		0		0		0		0		56,053		7		0		7		56,060		63,523		0		0		0		0		63,523		4		0		4		63,527
Total	$	671,823	$	4,729	$	14,023	$	0	$	0	$	690,575	$	269,528	$	898	$	270,426	$	961,001	$	706,700	$	15,741	$	8,113	$	0	$	0	$	730,554	$	304,939	$	883	$	305,822	$	1,036,376

	*September 30, 2021*										*March 31, 2022*
	*Delinquency Status*										*Delinquency Status*
	*0-29 Days*		*30-59 Days*		*60-89 Days*		*>/= 90 Days*				*0-29 Days*		*30-59 Days*		*60-89 Days*		*>/= 90 Days*
(in thousands)	*Past Due*		*Past Due*		*Past Due*		*Past Due*		*Total*		*Past Due*		*Past Due*		*Past Due*		*Past Due*		*Total*
Performing (accruing) loans and leases:
Residential real estate	$	223,483	$	74	$	0	$	0	$	223,557	$	246,316	$	629	$	0	$	0	$	246,945
Commercial real estate		338,615		0		0		0		338,615		371,121		0		0		0		371,121
Construction, land acquisition and development		50,095		0		0		0		50,095		49,796		0		0		0		49,796
Commercial and industrial		208,976		311		3		0		209,290		206,641		35		1		0		206,677
Consumer		77,904		878		127		0		78,909		93,230		1,117		99		0		94,446
State and political subdivisions		56,060		0		0		0		56,060		63,527		0		0		0		63,527
Total performing (accruing) loans and leases		955,133		1,263		130		0		956,526		1,030,631		1,781		100		0		1,032,512

Non-accrual loans:
Non-accrual loans and leases:
Residential real estate		88		10		236		416		750		67		93		0		594		754
Commercial real estate		1,407		0		0		1,572		2,979		1,111		0		0		1,327		2,438
Construction, land acquisition and development		0		0		0		0		0		0		0		0		0		0
Commercial and industrial		519		0		0		0		519		469		0		0		0		469
Consumer		169		53		2		3		227		102		46		25		30		203
State and political subdivisions		0		0		0		0		0		0		0		0		0		0
Total non-accrual loans		2,183		63		238		1,991		4,475

Total non-accrual loans and leases												1,749		139		25		1,951		3,864
Total loans and leases receivable	$	957,316	$	1,326	$	368	$	1,991	$	961,001	$	1,032,380	$	1,920	$	125	$	1,951	$	1,036,376

	December 31, 2020										*December 31, 2021*
	Delinquency Status										*Delinquency Status*
	0-29 Days		30-59 Days		60-89 Days		>/= 90 Days				*0-29 Days*		*30-59 Days*		*60-89 Days*		*>/= 90 Days*
(in thousands)	Past Due		Past Due		Past Due		Past Due		Total		*Past Due*		*Past Due*		*Past Due*		*Past Due*		*Total*
Performing (accruing) loans:
Performing (accruing) loans and leases:
Residential real estate	$	194,820	$	251	$	159	$	0	$	195,230	$	233,054	$	406	$	17	$	0	$	233,477
Commercial real estate		270,059		606		0		0		270,665		363,394		116		0		0		363,510
Construction, land acquisition and development		59,785		0		0		0		59,785		41,646		0		0		0		41,646
Commercial and industrial		237,262		419		16		0		237,697		192,584		4		1		0		192,589
Consumer		83,486		1,485		403		0		85,374		84,333		754		204		0		85,291
State and political subdivisions		49,009		0		0		0		49,009		61,071		0		0		0		61,071
Total performing (accruing) loans		894,421		2,761		578		0		897,760
Total performing (accruing) loans and leases												976,082		1,280		222		0		977,584

Non-accrual loans:
Non-accrual loans and leases:
Residential real estate		642		39		0		417		1,098		67		27		87		455		636
Commercial real estate		1,484		0		0		1,754		3,238		1,172		0		0		1,327		2,499
Construction, land acquisition and development		0		0		0		0		0		0		0		0		0		0
Commercial and industrial		614		0		124		0		738		497		0		0		0		497
Consumer		114		132		96		165		507		117		85		15		14		231
State and political subdivisions		0		0		0		0		0		0		0		0		0		0
Total non-accrual loans		2,854		171		220		2,336		5,581

Total loans receivable	$	897,275	$	2,932	$	798	$	2,336	$	903,341
Total non-accrual loans and leases												1,853		112		102		1,796		3,863
Total loans and leases receivable											$	977,935	$	1,392	$	324	$	1,796	$	981,447

	*September 30, 2021*						*March 31, 2022*
			*Unpaid*						*Unpaid*
	*Recorded*		*Principal*		*Related*		*Recorded*		*Principal*		*Related*
(in thousands)	*Investment*		*Balance*		*Allowance*		*Investment*		*Balance*		*Allowance*
With no allowance recorded:
Residential real estate	$	597	$	663	$	-	$	534	$	604	$	-
Commercial real estate		2,734		4,427		-		2,438		4,203		-
Construction, land acquisition and development		0		0		-		0		0		-
Commercial and industrial		328		358		-		528		564		-
Consumer		0		0		-		0		0		-
State and political subdivisions		0		0		-		0		0		-
Total impaired loans with no related allowance recorded		3,659		5,448		-		3,500		5,371		-

With a related allowance recorded:
Residential real estate		1,354		1,354		12		1,145		1,145		5
Commercial real estate		5,308		5,309		15		4,971		4,971		5
Construction, land acquisition and development		0		0		0		0		0		0
Commercial and industrial		253		470		9		195		413		8
Consumer		0		0		0		0		0		0
State and political subdivisions		0		0		0		0		0		0
Total impaired loans with a related allowance recorded		6,915		7,133		36		6,311		6,529		18

Total impaired loans:
Residential real estate		1,951		2,017		12		1,679		1,749		5
Commercial real estate		8,042		9,736		15		7,409		9,174		5
Construction, land acquisition and development		0		0		0		0		0		0
Commercial and industrial		581		828		9		723		977		8
Consumer		0		0		0		0		0		0
State and political subdivisions		0		0		0		0		0		0
Total impaired loans	$	10,574	$	12,581	$	36	$	9,811	$	11,900	$	18

	Nine Months Ended
	September 30, 2021									September 30, 2020
	Average						Yield/			Average						Yield/
(dollars in thousands)	Balance			Interest			Cost			Balance			Interest			Cost
Assets
Earning assets (2)(3)
Loans-taxable (4)	$	901,851		$	29,662			4.39	%	$	854,885		$	26,042			4.06	%
Loans-tax free (4)		44,843			1,344			4.00	%		48,080			1,564			4.34	%
Total loans (1)(2)		946,694			31,006			4.37	%		902,965			27,606			4.08	%
Securities-taxable		324,971			6,132			2.52	%		247,848			5,426			2.92	%
Securities-tax free		80,320			1,923			3.19	%		44,723			1,149			3.43	%
Total securities (1)(5)		405,291			8,055			2.65	%		292,571			6,575			3.00	%
Interest-bearing deposits in other banks and federal funds sold (8)		49,833			35			0.09	%		7,322			25			0.46	%
Total earning assets (8)		1,401,818			39,096			3.72	%		1,202,858			34,206			3.79	%
Non-earning assets (8)		137,879									130,197
Allowance for loan and lease losses		(12,344	)								(10,321	)
Total assets	$	1,527,353									1,322,734

Liabilities and Shareholders' Equity
Interest-bearing liabilities
Interest-bearing demand deposits	$	728,110			997			0.18	%	$	577,012			2,363			0.55	%
Savings deposits		122,531			66			0.07	%		99,627			75			0.10	%
Time deposits		182,659			1,035			0.76	%		195,456			1,889			1.29	%
Total interest-bearing deposits		1,033,300			2,098			0.27	%		872,095			4,327			0.66	%
Borrowed funds and other interest-bearing liabilities		10,347			143			1.84	%		65,046			706			1.45	%
Total interest-bearing liabilities		1,043,647			2,241			0.29	%		937,141			5,033			0.72	%
Demand deposits		312,702									232,920
Other liabilities		13,234									11,361
Shareholders' equity		157,770									141,312
Total liabilities and shareholder's equity	$	1,527,353								$	1,322,734

Net interest income/interest rate spread (6) (8)					36,855			3.43	%					29,173			3.07	%
Tax equivalent adjustment					(686	)								(570	)
Net interest income as reported				$	36,169								$	28,603

Net interest margin (7) (8)								3.51	%								3.23	%

	September 30, 2021
(dollars in thousands)	< 1 Year			>1 - 5 Years			6 - 10 Years			Over 10 Years			Collateralized Mortgage Obligations, Mortgage-Backed and Asset-Backed Securities			Total
Available-for-sale debt securities:
U.S. Treasury securities	$	-		$	-		$	19,899		$	-		$	-		$	19,899
Yield								1.13	%								1.13	%
Obligations of state and political subdivisions		1,440			70,452			23,421			120,460			-			215,773
Yield		2.86	%		2.96	%		2.50	%		2.82	%					2.83	%
U.S. government/government-sponsored agencies:
Collateralized mortgage obligations - residential		-			-			-			-			106,131			106,131
Yield														1.66	%		1.66	%
Collateralized mortgage obligations - commercial		-			-			-			-			3,790			3,790
Yield														1.98	%		1.98	%
Mortgage-backed securities		-			-			-			-			22,699			22,699
Yield														2.24	%		2.24	%
Private collateralized mortgage obligations		-			-			-			-			61,048			61,048
Yield														2.32	%		2.32	%
Corporate debt securities		-			-			30,093			-			-			30,093
Yield								4.84	%								4.84	%
Asset-backed securities		-			-			-			-			10,144			10,144
Yield														1.43	%		1.43	%
Negotiable certificates of deposit		-			746			-			-			-			746
Yield					1.02	%											1.02	%
Total available-for-sale debt securities	$	1,440		$	71,198		$	73,413		$	120,460		$	203,812		$	470,323
Weighted average yield		2.86	%		2.94	%		3.09	%		2.82	%		1.92	%		2.49	%