UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
☒ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 20202023
OR
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File No. 001-38408
FNCB BANCORP, INC.
(Exact Name of Registrant as Specified in Its Charter)
Pennsylvania | 23-2900790 |
(State or Other Jurisdiction | (I.R.S. Employer |
102 E. Drinker St., Dunmore, PA | 18512 |
(Address of Principal Executive Offices) | (Zip Code) |
Registrant’s telephone number, including area code (570) 346-7667
Securities registered pursuant to Section 12(b) of the Act:
| Title of Each Class | Trading Symbol(s) | Name of Each Exchange on Which Registered |
| Common Stock $1.25 Par Value | FNCB | Nasdaq Capital Market |
Securities registered pursuant to Section 12(g) of the Act: NONE
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or section 15(d) of the Act. Yes ☐ No ☒
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer ☐ | Accelerated Filer ☐ |
Non-Accelerated Filer ☒ | Smaller reporting company ☒ |
| Emerging growth company ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management's assessment of the effectiveness of its interest control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☐
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. ☐
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant's executive officers during the relevant recovery periods pursuant to §240.10D-1(b). ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
The aggregate market value of the voting and non-voting common stock of the registrant, held by non-affiliates was $97,621,290$96,406,863 at June 30, 2020.2023.
State the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date: 20,238,120 19,794,996 shares of common stock as of March 12, 2021.8, 2024.
DOCUMENTS INCORPORATED BY REFERENCE
Certain information required by Items 10, 11, 12, 13 and 14 is incorporated by reference into Part III hereof from portions of the Proxy Statement for the registrant’s 2021 Annual Meeting of Shareholders.
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| Item 1C. | Cybersecurity | |
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Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | |
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Item 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure | |
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| Item 9C. | Disclosure Regarding Foreign Jurisdictions that Prevent Inspections | 88 |
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Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters | |
Item 13. | Certain Relationships and Related Transactions, and Director Independence | |
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| Item 16. | Form 10-K Summary |
Cautionary Note Regarding Forward-Looking Statements.
This Annual Report on Form 10-K contains statements which are forward-looking statements within the meaning of Section 27A of the Securities Act, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements include statements relating to the outlook for which are subject to risks and uncertainties. These statements are based on assumptions and may describe future plans, strategies, financial conditions, results of operations and expectations of FNCB Bancorp, Inc. and its direct and indirect subsidiaries (collectively, “FNCB”), including statements with respect to the proposed merger between Peoples Financial Services Corp. ("PFIS") and FNCB Bancorp, Inc. under the Agreement and Plan of Merger, dated September 27, 2023 (the "Merger Agreement"), pursuant to which FNCB Bancorp, Inc. will merger with and into PFIS, with PFIS as the surviving entity (the "merger"), along with the transaction occurring immediately after such merger, whereby FNCB Bancorp, Inc.'s wholly owned subsidiary, FNCB Bank, will merger with and into PFIS's wholly owned subsidiary, Peoples Security Bank and Trust Company ("Peoples Bank"), with Peoples Bank as the surviving bank and a wholly owned subsidiary of PFIS (collectively, with the merger, the "mergers"). These forward-looking statements are generally identified by use of the words “may”, “should”, “will”, “could”, “believe,” “expect,” “intend,” “anticipate,” “estimate,” “project”, “plan”, “future” or similar expressions. All statements in this report, other than statements of historical facts, are forward-looking statements.
These forward-looking statements are not guarantees of future performance and are subject to risks and uncertainties, some of which are beyond FNCB’s control and ability to predict, that could cause actual results to differ materially from those expressed in the forward-looking statements. Important factors that could cause actual results of FNCB to differ materially from those in the forward-looking statements include, but are not limited to:
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| ● | FNCB is subject to credit risk, | |
● | FNCB’s | |
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● | FNCB’s financial condition and results of operations would be adversely affected if the allowance for | |
| ● | The CECL model for determining the ACL could add volatility to FNCB's provision for credit losses and results of operations; | |
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| ● | FNCB’s risk management framework may not be effective in mitigating FNCB's risks or | |
● | FNCB is subject to interest rate risk, | |
changes in interest rates could reduce income, cash flows and asset | ||
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| ● | FNCB may not be able to successfully compete with others for business; | |
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● | FNCB may not be able to retain or grow its core deposit base, which could adversely impact its funding costs; | |
● | FNCB is a bank holding company and depends on dividends for its subsidiary, FNCB Bank, to operate. | |
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| ● | FNCB depends on information technology and telecommunications systems of third parties, and any systems failures or interruptions could adversely affect FNCB's operations and financial condition; | |
| ● | FNCB is subject to cybersecurity risks and security breaches and may incur increasing costs in an effort to minimize those risks and to respond to cyber incidents, and FNCB may experience harm to its reputation and liability exposure from security breaches; | |
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| ● | FNCB relies on management and other key personnel and the loss of any of them may adversely affect its operations; | |
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| ● | FNCB may be a defendant from time to time in a variety of litigation and other actions, which could have a material adverse effect on its financial condition, results of operations and cash flows; | |
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● | FNCB may face risks with respect to future expansion of acquisition activity; | |
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● | FNCB may be required to act as a source of financial and managerial strength for FNCB Bank in times of stress; |
| ● | FNCB is subject to extensive government regulation, supervision and possible regulatory enforcement actions, as well as "fair and responsible banking" laws designed to protect consumers, which may subject FNCB to higher costs and lower shareholder returns; | |
| ● | New or changed legislation or regulation, updated guidance regarding current regulation and regulatory initiatives could adversely affect FNCB through increased regulation and increased costs of doing business; | |
| ● | External events, including natural disasters, national or global health emergencies, events of armed conflict in other countries, and terrorist threats, among others, could impact FNCB's ability to do business or other adversely affect FNCB's business, operations and financial condition; | |
| ● | Because the market price of PFIS common stock will fluctuate, the value of the merger consideration to be received by our shareholders in the merger of FNCB with and into PFIS may change; | |
| ● | Regulatory approvals may not be received, may take longer than expected or may impose conditions that are not presently anticipated or cannot be met; | |
| ● | Failure of the merger to be completed, the termination of the Merger Agreement or a significant delay in the consummation of the merger could negatively impact FNCB; | |
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| ● | The Merger Agreement contains provisions that may discourage other companies from pursuing, announcing or submitting a business combination proposal to FNCB | |
| ● | Litigation against FNCB | |
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FNCB may need to raise additional capital in the future, but that capital may not be available when it is needed and on terms favorable to shareholders; | ||
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● | Shareholders may not receive dividends on FNCB's common stock or have their shares repurchased by FNCB; | |
| ● | An entity holding as little as a | |
| ● | Any deficiencies in FNCB’s financial reporting or internal controls could materially and adversely affect its business and the market price of FNCB’s common stock; | |
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These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. FNCB undertakes no obligation, other than as required by law, to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
Business |
Overview
The Company
FNCB Bancorp, Inc. is a Pennsylvania business corporation and a registered bank holding company headquartered in Dunmore, Pennsylvania. FNCB Bancorp, Inc. was incorporated in 1997 under its former name, First National Community Bancorp, Inc. and became an active bank holding company on July 1, 1998 when it acquired 100% ownership of FNCB Bank, formerly First National Community Bank (the "Bank"). In this report, the terms “FNCB,” "the Company," “we,” “us,” and “our” refer to FNCB Bancorp, Inc. and its subsidiaries, unless the context requires otherwise. In certain circumstances, however, FNCB Bancorp, Inc. uses the term “FNCB” to refer to itself.
FNCB’s primary activity consists of owning and operating the Bank, which provides substantially all of FNCB’s earnings from its banking services.
FNCB had net income of $15.313.0 million, $11.1$20.4 million, and $13.3$21.4 million in 2020, 2019 and2018,2023, 2022 and2021, respectively. Total assets were $1.466$1.881 billion at December 31, 2020, $1.2042023, $1.746 billion at December 31, 20192022 and $1.238$1.664 billion at December 31, 2018.2021.
The Bank
Established as a national banking association in 1910, as of December 31, 20202023 the Bank operated 1716 full-service branch offices within its primary market area, Northeastern Pennsylvania.
Mission, Vision and Values
FNCB's mission is to make your banking experience simply better. We strive to be a growing,an evolving, independent, community-focused bank that is a leader in our community through the power of a strong team with a commitment to financial excellence for our employees, customers and shareholders. We take pride in our core values:
● | Simplicity - Simplifying processes, systems and products to create |
● | Integrity - Maintaining the highest ethical standards and practices. |
● | Mission - To make your banking experience simply better. |
● | People - A strong team of employees dedicated to the community, our customers, our shareholders and each other. |
● | Leadership - An organization that |
● | You - Our values equal YOU! |
Recent Developments
On September 27, 2023, FNCB entered into the Merger Agreement with PFIS pursuant to which FNCB will merge with and into PFIS, with PFIS as the surviving entity. Immediately after such merger, the Bank will merge with and into Peoples Bank, with Peoples Bank as the surviving bank and a wholly-owned subsidiary of PFIS. Under the terms of the Merger Agreement, which has been unanimously approved by the boards of directors of both companies, shareholders of FNCB will be entitled to receive a fixed exchange ratio of 0.1460 shares of PFIS common stock for each share of the FNCB’s common stock. On October 27, 2023, FNCB filed a Federal Deposit Insurance Corporation ("FDIC") Interagency Bank Merger Application with the FDIC New York and a Pennsylvania Bank Merger Application with the Pennsylvania Department of Banking and Securities. Completion of the merger requires, among other things, the approval from these regulatory authorities, as well as FNCB’s shareholders.
The Merger Agreement provides certain termination rights for both PFIS and FNCB and further provides that a termination fee of $4.8 million will be payable by either PFIS or FNCB, as applicable, upon termination of the Merger Agreement under certain circumstances. The foregoing summary is not complete and is qualified in all respects by reference to the actual language of the Definitive Merger Agreement filed by FNCB as Exhibit 2.1 to the Current Report on Form 8-K on September 27, 2023. Pending regulatory and shareholder approvals, FNCB expects the consummation of the mergers to be completed by the third quarter of 2024, however, there can be no assurance that the transaction will be consummated by such date, or at all.
Products and Services
Retail Banking
FNCB accomplishesfulfills its mission and vision by providingoffering a wide varietyrange of traditional banking products and services totailored for both individuals and businesses,businesses.
For personal customers, the Bank provides various deposit products including online, mobile and telephone banking, debit cards, check imaging and electronic statements. Deposit products include various checking, savings, money market and certificatemarkets, certificates of deposit products, includingand checking accounts, along with a line of preferred relationship products that offer premium benefits for higher-balance customers. The Bank
FNCB is also a member of IntraFi Network, formerly the Promontory Interfinancial Network and participates in their Certificate of Deposit Account Registry (“CDARs”) and Insured Cash Sweep (“ICS”) programs, which provideallow customers with the ability to secure Federal Deposit Insurance Corporation (“FDIC”)FDIC insurance on balances in excess of the standard limitations.
The BankFNCB offers customers the convenience of 24-hour24/7 banking seven days a week, through FNCB Online Banking (“FNCB Online”)online (www.fncb.com), mobile and FNCB Business Online Banking via a secure website, https://www.fncb.com. FNCB’s online product suite includes bill payment, internal and external funds transfer, and Purchase Rewards such as cash-back rewards and other offers. Through FNCB Online,telephone banking channels. Via fncb.com, customers can directly access their accounts directly, deposit checks, pay bills, open new accounts, and apply for aconsumer or mortgage orloans and obtain aloan pre-qualification approval through the Bank’s mortgage center. Customers can also access FNCB Online through the Bank’s mobile applications. Additionally, through SMS (Text) Message Banking customers can check their account balances, view their last five transactions, transfer funds between eligible accounts and receive alerts. Telephone banking (“Account Link”), a service that provides customers with the ability to access account information and perform related account transfers through the use of a touch tone telephone is also available. FNCB’s mobile deposit, available to personal and business banking customers with online access and an eligible deposit account, allows customers to deposit checks, electronically from start to finish, from anywhere at any time.approvals. FNCB also offers its customersprovides various mobile payment solutionsalternatives including Apple Pay®, Samsung Pay® and, Google Pay® and electronic transfer solutions through Zelle®, a fast, secure and contact free way to send and receive money between trusted parties. FNCB Business Online Banking also provides business customers the ability to perform wire transfers and payments through ACH transactions, and process direct deposit payroll transactions for employees, 24 hours a day, 7 days a week, from their place of business..
In addition, customersCustomers can access moneyfunds from their deposit accounts by using their debit card to make purchases or withdraw cash from any automated teller machines (“ATMs”("ATMs") including ATMs located in each of the Bank’s branch offices as well as additionaland several offsite locations. FNCB is a member of the AllPoint the largest surcharge-free ATM network. AllPoint provides FNCBnetwork, providing customers with access to over 55,000 surcharge-free ATMs free of charge worldwide, as well as a convenient mobile application to find the location of ATMs within the network.worldwide. Additionally, FNCB also providesoffers its customers with CardValet®, a mobile application that allows FNCBCard Manager, allowing debit cardholders the ability to receive fraud alert messages and manage their debit card usage, including when, where and how their debit card is used.used, as well as My Rewards cash-back offers on debit card purchases.
The Bank alsoIn addition to traditional deposit and loan products, FNCB offers business customers remotea suite of service options including, remote deposit capture, Merchant Services, Treasury Services, and merchant services, as well as business debit cards and Purchasingpurchasing cards ("PCards"). Remote deposit capture provides businessenables customers the ability to process daily check deposits to their accounts through an online image capture environment. The BankMerchant Services offers business customers merchant payment processing solutions, including state-of-the-art credit card terminals, integrated payment systems and a dedicated account manager. Business customers can also access money from their deposit accountTreasury Services include ACH origination, ACH and check positive pay, sweep services, wire services and Safepoint by using their “business” debit card, providing a faster, more convenient way to make purchases, track business expenses and manage finances.Loomis. PCards offerallow business customers the ability to earn a cash rebate on allcredit card purchases, as well asalong with additional functionality and reporting to effectively manage their expenses and procurement.
The Bank offers its retail FNCB Business Online Banking provides customers the ability to perform wire transfers and business customers FNCB Bank Overdraft Protection to protect against the cost and inconvenience of returned checks. Customers can also applypayments through ACH transactions, as well as process direct deposit payroll transactions for an Instant Money loan or transfer from another FNCB checking or savings account, which provide customers with an added level of protection against unanticipated overdrafts due to cash flow emergencies and account reconciliation errors.employees, all available 24/7.
Lending Activities
FNCB offers a variety of financing alternatives to individuals and businesses generally in its primary market area through the origination of loans and leases including residential real estate loans, construction, land acquisition and development loans, commercial real estate loans, commercial and industrial loans, loans to state and political subdivisions, and consumer loans. FNCB also offers specialized equipment financing alternatives including simple loans, generallydirect finance leases and municipal leases to individualsbusinesses within and businesses inoutside its primary market area. These lending activitiesarea under its wholly owned subsidiary, 1st Equipment Finance Inc. Simple interest loans and direct finance leases are describedincluded in further detail below.commercial equipment financing subsidiary loans, while municipal leases are included in state and political subdivision loans. In addition to originating loans, FNCB from time to time purchases individual and pools of commercial, residential mortgage and consumer loans originated by third parties, which are included in the respective loan category.
Residential Mortgage Loans and Home Equity Term Loans and Lines of Credit
FNCB offers a variety of 1-41- 4 family residential loans,, home equity term loans and home equity lines of credit ("HELOCs"). and HELOCs with a carve-out feature. FNCB’s suite of residential mortgage products include First Time Homebuyer mortgages, FHA and Home Possible® mortgages with low down payments to meet the home financing needs of customers. Home equity term loans have fixed interest rates with terms of up to 15 years. HELOCs have adjustable interest rates based on the prime interest rate for the United States and are offered up to a maximum combined loan-to-value ratio of 90%, based on the property’s appraised value. The carve out feature of a HELOC allows borrowers to access up to three simultaneous fixed-rate amortizing loans without having to reapply. The rate for each amortizing loan is based on the National Prime Rate as published on the day of the carve out plus a spread that is determined by the length of the loan term. FNCB also offers a proprietary “WOW” mortgage, a first-lien, fixed-rate mortgage product with maturity terms ranging from 7.510 to 19.5 years. At December 31, 2020, 1-42023, 1- 4 family residential mortgage loans, including home equity term loans and HELOCs totaled $196.3$245.3 million, or 21.7%20.1%, of theFNCB's total loan portfolio. Except for the WOW mortgage, 1-41- 4 family mortgage loans are originated generally for sale in the secondary market. However, FNCB may hold in portfolio 1-41- 4 family residential mortgage loansmortgages as deemed necessary according to current asset/liability management strategies. During the year ended December 31, 2020, the Bank sold $13.9 million of 1-4 family mortgages. FNCB retains servicing rights on these mortgages.
Construction, Land Acquisition and Development Loans
FNCB offers interim construction financing secured by residential property for the purpose of constructing 1-41- 4 family homes. FNCB also offers interim construction financing for the purpose of constructing residential developments and various commercial properties including shopping centers, office complexes and single purpose owner-occupied structures and for land acquisition. At December 31, 2020,2023, construction, land acquisition and development loans amounted to $59.8$59.9 million and represented 6.6%4.9% of theFNCB's total loan portfolio.
Commercial Real Estate Loans
Commercial real estate loans represent the largest portion of FNCB’s total loan portfolio and loans in this portfolio generally have larger loan balances. These loans are secured by a broad range of real estate, including but not limited to, office complexes, shopping centers, hotels, warehouses, gas stations, convenience markets, residential care facilities, nursing care facilities, restaurants, multifamily housing, farms and land subdivisions. At December 31, 2020, FNCB’s2023, commercial real estate loans totaled $273.9$408.1 million, or 30.3%33.5%, of theFNCB's total loan portfolio.
Commercial and Industrial Loans
Generally, FNCB generally offers commercial loans to sole proprietors and businesses located in its primary market area. The commercial loan portfolio includes, but is not limited to, lines of credit, dealer floor plan lines, equipment loans, vehicle loans and term loans. These loans are primarily secured by vehicles, machinery and equipment, inventory, accounts receivable, marketable securities and deposit accounts. At December 31, 2020, FNCB’s2023, commercial and industrial loans totaled $238.4$183.8 million, or 26.4%15.1%, of theFNCB's total loan portfolio. Also included in commercial
Consumer Loans
Consumer loans include indirect automobile loans originated through various auto dealers in the Bank's market area, secured and unsecured installment loans, direct new and used automobile financing, personal lines of credit and overdraft protection loans. At December 31, 2020, FNCB’s2023, consumer loans totaled $85.985.7 million, or 9.5%7.0%, of theFNCB's total loan portfolio.
State and Political Subdivision Loans and Leases
FNCB originates state and political subdivision loans and leases, including general obligation, and tax anticipation notes and municipal leases, primarily to municipalities in the Bank’s market area. At December 31, 2020, FNCB’s2023, state and political subdivision loans and leases totaled $49.0$73.8 million, or 5.4%6.1%, of theFNCB's total loan portfolio.
Purchased Loans
FNCB purchases individual loans and loan pools originated by several third-party originators to diversify the loan portfolio and enhance net interest income. Purchase loans include pooled commercial equipment loans, unsecured commercial, residential mortgage loans and secured and unsecured consumer individual loans and loan pools. The pools have relatively short average lives and provide steady cash flows. Commercial equipment loans are secured under the Uniform Commercial Code by titles, secured consumer loans are collateralized by chattel paper, while credit enhancement features including reserve funds provide credit protection for the consumer and commercial unsecured pools. FNCB has reviewed individual loan files, if feasible, or reviewed random samples of loan files and credit metrics to ensure underwriting was aligned with FNCB's internal underwriting standards. FNCB does not provide servicing of purchased loans.
See Note 2, “Summary of Significant Accounting Policies” and Note 5,4, "Loans" to the consolidated financial statements included in Item 8, "Financial Statements and Supplementary Data," to this Annual Report on Form 10-K for additional information regarding FNCB's loan portfolio and lending policies.
Wealth Management
FNCB offers customers wealth management services through its division, 1st Investment Services and a revenue share agreement with a third-party provider. Customers are able to access alternative deposit products such as mutual funds, annuities, stocks, and bonds directly for purchase from an outside provider. FNCB receives a percentage of the commission revenue generated from these transactions.
Deposit Activities
In general, deposits, borrowings and loan and investment repayments are the major sources of funding for lending and other investment purposes. FNCB relies primarily on marketing, product innovation, technology and service to attract, grow and retain its deposits. Deposit account terms vary according to the minimum balance required, the time periods the funds must remain on deposit and the interest rate, among other factors. In determining the terms of deposit accounts, management considers the interest rates offered by its competitors, the interest rates available on Federal Home Loan Bank ("FHLB") of Pittsburgh ("FHLB") advances and other wholesale funding, its liquidity needs and customer preferences. Management regularly reviews FNCB’s deposit mix and deposit pricing as part of its asset/liability management, taking into consideration rates offered by competitors in its market area and balance sheet interest-rate sensitivity.
Competition
The banking and financial services industries are highly competitive. FNCB faces direct competition in originating loans and in attracting deposits from a significant number of financial institutions operating in its market area, many with a statewide or regional presence, and in some cases, a national presence, as well as other financial and non-financial institutions outside of its market area through online loan and deposit product offerings. Competition comes principally from other banks, savings institutions, credit unions, mortgage banking companies, internet-based financial technology (“FinTech”) companies and, with respect to deposits, institutions offering investment alternatives, including money market funds and online deposit accounts. The increased competition has resulted from changes in the legal and regulatory guidelines, as well as from economic conditions. The cost of regulatory compliance remains high for community banks as compared to their larger competitors that are able to achieve economies of scale.
As a result of consolidation in the banking industry, some of the Bank’s competitors and their respective affiliates are larger and may enjoy advantages such as greater financial resources, a wider geographic presence, a wider array of services, or more favorable pricing alternatives and lower origination and operating costs. FNCB considers its major competitors to be local commercial banks as well as other commercial banks with branches in its market area. Competitors may offer deposits at higher rates and loans with lower fixed rates, more attractive terms and less stringent credit structures than FNCB has been able to offer. The growth and profitability of FNCB depends on its continued ability to successfully compete. Management believes interest rates on deposits, especially money market and time deposits, and interest rates and fees charged on loans within FNCB’s market area to be very competitive.
Supervision and Regulation
FNCB and the Bank operate in a highly regulated industry and are subject to a variety of statutes, regulations, and policies, as well as ongoing regulatory supervision and review. Federal statutes that apply to FNCB and the Bank include the Gramm Leach Bliley Act (“GLB Act”), the Bank Holding Company Act (“BHCA”), the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), the USA Patriot Act, the Federal Reserve Act and the Federal Deposit Insurance Act. The Bank is subject primarily to the provisions of the Federal Deposit Insurance Act and, as a state-chartered financial institution, to the Pennsylvania Banking Code of 1965. In general, these statutes, regulations promulgated in accordance with these statutes, and interpretations of the statutes and regulations by the banking regulatory agencies establish the eligible business activities of FNCB and the Bank, certain acquisition and merger restrictions, limitations on intercompany transactions, such as loans and dividends, and capital adequacy requirements, among other things. These laws, regulations and policies are subject to frequent change and FNCB takes measures to comply with applicable requirements. The following summarizes some of the more significant provisions of these laws as they relate to FNCB and the Bank.
FNCB
FNCB is a bank holding company within the meaning of the BHCA and is registered with, and subject to regulation and examination by, the Board of Governors of the Federal Reserve System (“FRB”). FNCB is required to file annual and quarterly reports with the FRB and to provide the FRB with such additional information that they may require. BHCA and other federal laws subject bank holding companies to restrictions on the types of activities in which they may engage, and to a range of supervisory requirements and activities, including regulatory enforcement actions for violations of laws and regulations and unsafe and unsound banking practices.
The BHCA requires approval of the FRB for, among other things, the acquisition of direct or indirect ownership or control of more than five percent (5%) of the voting securities or substantially all the assets of any bank or bank holding company, or before the merger or consolidation with another bank holding company.
With certain limited exceptions, a bank holding company is prohibited from acquiring control of any voting shares of any company which is not a bank or bank holding company and from engaging directly or indirectly in any activity other than banking or managing or controlling banks or furnishing services to or performing services for its authorized subsidiaries. A bank holding company may, however, engage in, or acquire an interest in a company that engages in, activities that the FRB has determined by order or regulation to be so closely related to banking or managing or controlling banks as to be properly incidental thereto. In making such a determination, the FRB is required to consider whether the performance of such activities can reasonably be expected to produce benefits to the public, such as convenience, increased competition, or gains in efficiency, which outweigh possible adverse effects, such as undue concentration of resources, decreased or unfair competition, conflicts of interest or unsound banking practices. The FRB is also empowered to differentiate between activities commenced de novo and activities commenced by the acquisition, in whole or in part, of a going concern. Some of the activities that the FRB has determined by regulation to be closely related to banking include making or servicing loans, performing certain data processing services, acting as a fiduciary or investment or financial advisor, and making investments in corporations or projects designed primarily to promote community welfare.
Subsidiary banks of a bank holding company are subject to certain restrictions imposed by the Federal Reserve Act on any extensions of credit to the bank holding company or any of its subsidiaries or affiliates, or investments in the stock or other securities thereof, and on the taking of such stock or securities as collateral for loans to any borrower. Further, a holding company and any subsidiary bank are prohibited from engaging in certain tie-in arrangements in connection with the extension of credit.
The GLB Act allows a bank holding company or other company to certify status as a financial holding company, which allows such company to engage in activities that are financial in nature, that are incidental to such activities, or are complementary to such activities without further approval. The GLB Act enumerates certain activities that are deemed financial in nature, such as underwriting insurance or acting as an insurance principal, agent or broker, underwriting, dealing in or making markets in securities, and engaging in merchant banking under certain restrictions. The GLB Act also authorizes the FRB to determine by regulation what other activities are financial in nature, or incidental or complementary thereto. FNCB has not elected to be treated as a financial holding company.
FNCB also is subject to the periodic reporting requirements and anti-fraud regulations of the Securities and Exchange Commission (“SEC”) under the Securities Exchange Act of 1934, as amended (the "Exchange Act") and, in connection with the offer and sale of securities, including FNCB's securities, the Securities Act of 1933, as amended.
FNCB’s shares of common stock are listed on the Nasdaq Stock Market under the symbol "FNCB." Accordingly, FNCB is subject to certain financial, liquidity and corporate governance requirements imposed by Nasdaq. Non-compliance of these requirements could subject FNCB to potential denial of listing, or additional conditions, as necessary, to protect investors and the public interest.
The Bank
Effective June 30, 2016, upon its conversion to a state charter, the Bank is regulated by the Pennsylvania Department of Banking and Securities (“PADOBS”). The Bank’s deposit accounts are insured up to the maximum legal limit by the Deposit Insurance Fund of the FDIC and accordingly, the Bank is also regulated by the FDIC. The regulations of the PADOBS and the FDIC govern most aspects of the Bank’s business, including required reserves against deposits, loans, investments, mergers and acquisitions, borrowings, dividends and location and number of branch offices. The laws and regulations governing the Bank generally have been promulgated to protect depositors and the Deposit Insurance Fund, and not to protect shareholders.
Branching and Interstate Banking. The federal banking agencies are generally authorized to approve interstate bank merger transactions.
The Dodd-Frank Act amended federal banking law to permit banks to establish de novo branches in other states to the same extent as a bank chartered by that state would be so permitted. The interstate banking and branching provisions of the federal banking laws would permit the Bank to merge with banks in other states and branch into other states and would also permit banks from other states to acquire banks in the Bank's market area and to establish de novo branches in the Bank’s market area.
USA Patriot Act and the Bank Secrecy Act (“BSA”(“BSA”). Under the BSA, a financial institution is required to have systems in place to detect certain transactions, based on the size and nature of the transaction. Financial institutions are generally required to report cash transactions involving more than $10,000 to the United States Treasury. In addition, financial institutions are required to file suspicious activity reports for transactions that involve more than $5,000 and that the financial institution knows, suspects or has reason to suspect, involve illegal funds, are designed to evade the requirements of the BSA or have no lawful purpose. Under the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act, commonly referred to as the “USA Patriot Act” or the “Patriot Act,” financial institutions are subject to prohibitions against specified financial transactions and account relationships, as well as enhanced due diligence standards intended to detect, and prevent, the use of the United States financial system for money laundering and terrorist financing activities. The Patriot Act requires financial institutions, including banks, to establish anti-money laundering programs, including employee training and independent audit requirements, meet minimum specified standards, follow minimum standards for customer identification and maintenance of customer identification records, and regularly compare customer lists against lists of suspected terrorists, terrorist organizations and money launderers.
Capital Adequacy Requirements. Federal banking agencies have adopted risk-based capital adequacy and leverage capital adequacy requirements pursuant to which they assess the adequacy of capital in examining and supervising banks and bank holding companies and in analyzing bank regulatory applications. Risk-based capital requirements determine the adequacy of capital based on the risk inherent in various classes of assets and off-balance sheet items.
Financial institutions are subject to extensive and detailed capital requirements, which generally follow a framework of rules adopted by the Basel Committee on Banking Supervision commonly referred to as Basel III. Basel III calls for the following capital requirements:
● | A minimum ratio of common equity tier I (“CET I”) capital to risk-weighted assets of 4.5%. | |
● | A minimum ratio of tier I capital to risk-weighted assets of 6%. |
● | A minimum ratio of total capital to risk-weighted assets of 8%. | |
● | A minimum leverage ratio of 4%. |
Basel III provides for a "capital"capital conservation buffer" of 2.5% above the regulatory minimum capital requirements for each of the CET I, tier I capital, and total capital ratios. The buffer must consist entirely of CET I capital. As a result, if a banking organization does not have a CET I, Tier I capital, and total capital ratios of at least 7.0%, 8.5% and 10.5%, respectively, its ability to make or commit to discretionary dividends and discretionary bonus payments to "executive officers" or engage in share repurchases or redemptions generally will be restricted in accordance with a pre-determined "maximum payout ratio." Under the maximum payout ratio formula, a banking organization with a capital conservation buffer of less than 2.5% of risk-weighted assets would become subject to increasingly restrictive limitations on covered distributions (as a percentage of eligible retained income) as the capital conservation buffer decreases.
Basel III also included, as partBasel III provides for new deductions from and adjustments to CET I. These include, for example, under current rules,In 2018, the requirement that mortgage servicing rights, deferred tax assets dependent upon future taxable income and significant investments in non-consolidated financial entities be deducted from CET I to the extent that any one such category exceeds 25.00% of CET I.Basel III also imposed changes to methodologies for determining risk weighted assets, including revisions to recognition of credit risk mitigation, such as a greater recognition of financial collateral and a wider range of eligible guarantors, the risk weighting of equity exposures and past due loans, and higher (greater than 100%) risk weighting for certain commercial real estate exposures that have higher credit risk profiles, including higher loan to value and equity components.As noted in the discussion below relating Economic Growth, Regulatory Relief, and Consumer Protection Act, the FRB effective August 30, 2018, raised the threshold of its "Small Bank Holding Company" exemption to the application of consolidated capital requirements for qualifying small bank holding companies from $1 billion to $3 billion of consolidated assets. Consequently, qualifying bank holding companies having less than $3 billion of consolidated assets are not subject to the consolidated capital requirements unless otherwise directed by the FRB. As of December 31, 2023, FNCB qualifies as a small bank holding company and is therefore not subject to the consolidated capital requirements.
Prompt Corrective Action. Under Section 38 of the Federal Deposit Insurance Act ("FDIA"), each federal banking agency is required to implement a system of prompt corrective action for an insured institution which it regulates. The federal banking agencies have promulgated substantially similar regulations, which integrate Basel III capital requirements, to implement the system of prompt corrective action established by Section 38 of the FDIA.
The following are the capital requirements under Basel III as integrated into the prompt corrective action category definitions.definitions. As of December 31, 2020,2023, the following capital requirements were applicable to the Bank for purposes of Section 38 of the FDIA.
Total | Tier I | |||||||||
Risk-Based | Risk-Based | CET I | Leverage | Tangible Equity | ||||||
Capital Category | Capital Ratio | Capital Ratio | Capital Ratio | Ratio | to Assets | |||||
Well capitalized | >/= 10.0% | >/= 8.0% | >/= 6.5% | >/= 5.0% | N/A | |||||
Adequately capitalized with conservation buffer | >/= 10.5% | >/= 8.5% | >/= 7.0% | >/= 4.0% | N/A | |||||
Adequately capitalized | >/= 8.0% | >/= 6.0% | >/= 4.5% | >/= 4.0% | N/A | |||||
Undercapitalized | < 8.0% | < 6.0% | < 4.5% | < 4.0% | N/A | |||||
Significantly undercapitalized | < 6.0% | < 4.0% | < 3.0% | < 3.0% | N/A | |||||
Critically undercapitalized | N/A | N/A | N/A | N/A | Less than 2.0% |
At December 31, 2020,2023, the Bank was “well capitalized” under the applicable requirements with a CET I capital and Tier I capital to risk-weighted assets ratios (for the Bank only) of 14.54%11.69%, a total capital to risk-weighted assets ratio of 15.79%12.66% and a leverage ratio of 9.57%8.76%. Similarly, at December 31, 2019, FNCB2022, the Bank exceeded capital requirements for an institution to be considered "well capitalized" with CET I capital and Tier I capital to risk-weighted assets ratios of 13.70%11.94%, a total capital to risk-weighted assets ratio of 14.77%13.11% and a leverage ratio of 10.36%8.77%.
Regulatory Enforcement Authority. Federal banking law grants substantial enforcement powers to federal banking regulators. This enforcement authority includes, among other things, the ability to assess civil money penalties, to issue cease-and-desist or removal orders and to initiate injunctive actions against banking organizations and institution-affiliated parties. In general, these enforcement actions may be initiated for violations of laws and regulations and unsafe or unsound practices. Other actions or inactions may provide the basis for enforcement action, including misleading or untimely reports filed with regulatory authorities.
The Bank and its “institution-affiliated parties,” including its management, employees, agents, independent contractors, consultants such as attorneys and accountants and others who participate in the conduct of the financial institution’sinstitution’s affairs, are subject to potential civil and criminal penalties for violations of law, regulations or written orders of a governmental agency. In addition, regulators are provided with greater flexibility to commence enforcement actions against institutions and institution-affiliated parties. Possible enforcement actions include the termination of deposit insurance and cease-and-desist orders. Such orders may, among other things, require affirmative action to correct any harm resulting from a violation or practice, including restitution, reimbursement, indemnifications or guarantees against loss. A financial institution may also be ordered to restrict its growth, dispose of certain assets, rescind agreements or contracts, or take other actions as determined by the ordering agency to be appropriate.
Under provisions of the federal securities laws, a determination by a court or regulatory agency that certain violations have occurred at a company, or its affiliates can result in fines, restitution, a limitation of permitted activities, disqualification to continue to conduct certain activities and an inability to rely on certain favorable exemptions. Certain types of infractions and violations can also affect a public company in its timing and ability to expeditiously issue new securities into the capital markets.
The regulatory structure also gives the regulatory authorities extensive discretion in connection with their supervisory and enforcement activities and examination policies, including policies with respect to the classification of assets and the establishment of adequate loan loss allowances for regulatory purposes.
The Dodd-Frank Act. The Dodd-Frank Act made significant changes to the bank regulatory structure and affects the lending, deposit, investment, trading and operating activities of financial institutions and their holding companies. To date, the following provisions of the Dodd-Frank Act are considered to be of the greatest significance to FNCB:
● | expands the authority of the FRB to examine bank holding companies and their subsidiaries, including insured depository institutions; |
● | requires a bank holding company to be well capitalized and well managed to receive approval of an interstate bank acquisition; |
● | provides mortgage reform provisions regarding a customer’s ability to pay and making more loans subject to provisions for higher-cost loans and new disclosures; |
● | created the Consumer Financial Protection Bureau (the “CFPB”) that has rulemaking authority for a wide range of consumer protection laws that apply to all banks and has broad powers to supervise and enforce consumer protection laws; |
● | made permanent the $250 thousand limit for federal deposit insurance at all insured depository institutions; |
● | includes additional corporate governance and executive compensation requirements on companies subject to the Exchange Act; |
● | permits FDIC-insured banks to pay interest on business demand deposits; |
● | requires that holding companies and other companies that directly or indirectly control an insured depository institution serve as a source of financial strength; |
● | created the Financial Stability Oversight Council with authority to identify institutions and practices that might pose a systemic risk; and |
● | permits national and state banks to establish interstate branches to the same extent as the branch host state allows establishment of in-state branches. |
Consumeronsumer Financial Protection Bureau. Bureau and Consumer Lending Regulation. The Dodd-Frank Act created the CFPB, which is granted broad rulemaking, supervisory and enforcement powers under various federal consumer financial protection laws, including the Equal Credit Opportunity Act, Truth in Lending Act (“TILA”), Real Estate Settlement Procedures Act (“RESPA”), Fair Credit Reporting Act, Fair Debt Collection Practices Act, Consumer Financial Privacy provisions of the Gramm-Leach-Bliley Act, and certain other statutes. The CFPB has examination and primary enforcement authority with respect to depository institutions with $10 billion or more in assets. Smaller institutions are subject to rules promulgated by the CFPB but continue to be examined and supervised by federal banking regulators for consumer compliance purposes. The CFPB has authority to prevent unfair, deceptive or abusive practices in connection with the offering of consumer financial products. For example, the Dodd-Frank Act authorizes the CFPB to establish certain minimum standards for the origination of residential mortgages including, in certain circumstances, a determination of the borrower’s ability to repay. In addition, the Dodd-Frank Act allows certain borrowers to raise certain defenses to foreclosure if they receive any loan other than a “qualified mortgage” as defined by the CFPB. The Dodd-Frank Act permits states to adopt consumer protection laws and standards that are more stringent than those adopted at the federal level and, in certain circumstances, permits state attorneys general to enforce compliance with both the state and federal laws and regulations.
Ability to Repay and Qualified Mortgage Rule. Pursuant to the Dodd-Frank Act in 2014, the CFPB amended Regulation Z, implementing the Truth in Lending Act, requiring mortgage lenders to make a reasonable and good faith determination based on verified and documented information that a consumer applying for certain mortgage loans has a reasonable ability to repay the loan according to its terms. In connection with certain mortgage loan transactions, lenders are required to determine consumers’ ability to repay in one of two ways. The first alternative requires the mortgage lender to consider the following eight underwriting factors when making the credit decision:
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Alternatively, the mortgage lender can originate “qualified mortgages,” which are entitled to a presumption that the creditor making the loan satisfied the ability-to-repay requirements. In general, a “qualified mortgage” is a mortgage loan without negative amortization, interest-only payments, balloon payments, or terms exceeding 30 years. In addition, to be a qualified mortgage, the points and fees paid by a consumer cannot exceed 3% of the total loan amount. Loans which meet these criteria will be considered qualified mortgages, and as a result generally protect lenders from fines or litigation in the event of foreclosure. Qualified mortgages that are “higher-priced” (e.g. subprime loans) garner a rebuttable presumption of compliance with the ability-to-repay rules, while qualified mortgages that are not “higher-priced” (e.g. prime loans) are given a safe harbor of compliance. The rule did not have a material impact on our lending activities or our results of operations or financial condition.
TILA/RESPA Integrated Disclosures (“TRID”). In 2015, the CFPB implemented a rule combining the mortgage disclosures consumers previously received under TILA and RESPA. For more than 30 years, the TILA and RESPA mortgage disclosures had been administered separately by, respectively, the FRB and the U.S. Department of Housing and Urban Development. The rule requires lenders to provide applicants with the new Loan Estimate and Closing Disclosure and generally applies to most closed-end consumer mortgage loans.
The CFPB’sCFPB’s rulemaking, examination and enforcement authority has and will continue to significantly affect financial institutions offering consumer financial products and services, including FNCB and the Bank. These regulatory activities may limit the types of financial services and products the Bank may offer, which in turn may reduce FNCB’s revenues.
FDIC Insurance Premiums.Privacy and Data Security. The financial privacy provisions of the GLB Act generally prohibit financial institutions, including the Bank, from disclosing non-public personal financial information about customers to non-affiliated third parties unless customers have the opportunity to “opt out” of the disclosure and have not elected to do so. The Bank is required to comply with state laws regarding consumer privacy if they are more protective than the GLB Act.
The federal banking agencies have adopted guidelines for safeguarding confidential, personal customer information. The guidelines require each financial institution, under the supervision and ongoing oversight of its board of directors or an appropriate committee thereof, to create, implement and maintain a comprehensive written information security program designed to ensure the security and confidentiality of customer information, protect against any anticipated threats or hazards to the security or integrity of such information and protect against unauthorized access to or use of such information that could result in substantial harm or inconvenience to any customer. In addition, various U.S. regulators have increased their focus on cyber security through guidance, examinations and regulations. Banking organizations are required to notify their primary federal regulator within 36 hours of becoming aware of a “computer-security incident” that rises to the level of a “notification incident.”
In February 2018, the SEC published interpretive guidance to assist public companies in preparing disclosures about cybersecurity risks and incidents. These SEC guidelines, and any other regulatory guidance, are in addition to notification and disclosure requirements under state and federal banking law and regulations.
In July 2023, the SEC issued a final rule to enhance and standardize disclosures regarding cybersecurity risk management, strategy, governance, and incident reporting by public companies that are subject to the reporting requirements of the Securities Exchange Act of 1934. Specifically, the final rule requires current reporting about material cybersecurity incidents, periodic disclosures about a registrant’s policies and procedures to identify and manage cybersecurity risk, management’s role in implementing cybersecurity policies and procedures, and the board of directors’ oversight of cybersecurity risk. See Item 1C. Cybersecurity for a discussion of FNCB’s cybersecurity risk management, strategy and governance.
Privacy and data security are expected to continue to receive increased attention at the federal level. An increasing number of state laws and regulations have been enacted in recent years to implement privacy and cybersecurity standards and regulations, including data breach notification and data privacy requirements. This trend of activity is expected to continue to expand, requiring continual monitoring of developments in the states in which FNCB’s customers are located and ongoing investments in its information systems and compliance capabilities.
Community Reinvestment Act. The Community Reinvestment Act of 1977 (the “CRA”) requires depository institutions to assist in meeting the credit needs of their market areas consistent with safe and sound banking practice. Under the FDIC's risk-based assessment system, insuredCRA, each depository institution is required to help meet the credit needs of its market areas by, among other things, providing credit, making investments and providing community development services to low- and moderate-income individuals and communities. Depository institutions were previouslyare periodically examined for compliance with the CRA and are assigned one of four risk categories basedratings. The Bank is subject to examination by the FDIC.
On October 24, 2023, the Office of the Comptroller of the Currency (“OCC”), Federal Reserve, and FDIC issued a final rule, effective April 1, 2024, to modernize their respective CRA regulations. The revised rules substantially alter the methodology for assessing compliance with the CRA, with most provisions of the new rule taking effect January 1, 2026 and revised data reporting requirements taking effect January 1, 2027. Among other things, the revised rules evaluate lending outside traditional assessment areas generated by the growth of non-branch delivery systems, such as online and mobile banking, apply a metrics-based benchmarking approach to assessment, and clarify eligible CRA activities. The final rules may make it more challenging and/or costly for the Bank to receive a rating of at least “satisfactory” on supervisory evaluations, regulatory capital levels and certain other factors. An institution's assessment rate depended largely on the category to which it was assigned, with institutions deemed less risky paying lower its CRA exam.
FDIC deposit insurance premiums. Insurance Premiums. The Dodd-Frank Act required the FDIC to revise its procedures to base deposit insurance assessments on eachBank’s deposits are insured institution's total assets less tangible equity instead of deposits and also mandated thatthrough the Deposit Insurance Fund achieve("DIF"), which is administered by the FDIC, up to limits established by applicable law, currently $250,000 per depositor, per account ownership category, per bank. A bank’s assessment is calculated by multiplying its individual assessment rate by its assessment base (average consolidated total assets less average tangible equity), determined quarterly. Banks with assets less than $10 billion, such as the Bank, are assigned an individual rate based on a formula using financial data and the bank’s CAMELS (capital adequacy, assets, management capability, earnings, liquidity, and sensitivity) ratings. The FDIC has the discretion to adjust an institution’s risk rating and may terminate its insurance of deposits upon a finding that the institution engaged or is engaging in unsafe and unsound practices, is in an unsafe or unsound condition to continue operations, or violated any applicable law, regulation, rule, order or condition imposed by the FDIC or written agreement entered into with the FDIC. The FDIC may also prohibit any FDIC-insured institution from engaging in any activity it determines to pose a serious risk to the DIF.
As of June 30, 2020, the DIF reserve ratio had fallen to 1.30%, below the statutory minimum of 1.35%. The FDIC, as required under the Federal Deposit Insurance Act, established a plan on September 15, 2020 to restore the DIF reserve ratio to meet or exceed the statutory minimum of 1.35% of insured deposits by September 2020. The FDIC calculates assessments for most banks on certain financial measures and supervisory ratings derived from statistical modeling estimating the probability of failure over three years, and also set maximum rates for institutions with composite CAMELS ratings of 1 or 2 and minimum rates for other institutions. In June 2020,within eight years. On October 18, 2022, the FDIC adopted rulesan amended restoration plan to make certain adjustmentsincrease the likelihood that the reserve ratio would be restored to at least 1.35% by September 30, 2028. The FDIC’s amended restoration plan increased the initial base deposit insurance assessment calculation to mitigaterate schedules uniformly by 2 basis points, which began the effectsfirst quarterly assessment period of 2023. The FDIC could further increase the deposit insurance deposit assessments for certain insured depository institutions, participating inincluding the PPP adopted underBank, if the CARES Act.DIF reserve ratio is not restored as projected.
At December 31, 2020,2023, the Bank was considered in the lowest risk category, for deposit insurance assessments and paid an annual assessment rate ranging from 0.00052.5 basis points to 0.000618 basis points on the assessment base of average consolidated total assets less the average tangible equity during the assessment period.
Economic Growth, Regulatory Relief, and Consumer Protection Act. The Economic Growth. Regulatory Relief, and Consumer Protection Act, enacted in May 2018 (the “Regulatory Relief Act”), amended certain provisions of the Dodd-Frank Act, as well as certain other statutes administered by the federal banking agencies. Some of the key provisions of the Regulatory Relief Act as it relates to community banks and bank holding companies include: (i) designating mortgages held in portfolio as “qualified mortgages” for banks with less than $10 billion in assets, subject to certain documentation and product limitations; (ii) exempting banks with less than $10 billion in assets (and total trading assets and trading liabilities of 5% or less of total assets) from Volcker Rule requirements relating to proprietary trading; (iii) simplifying capital calculations for banks with less than $10 billion in assets by requiring federal banking agencies to establish a community bank leverage ratio of tangible equity to average consolidated assets of not less than 8% or more than 10%, and provide that banks that maintain tangible equity in excess of such ratio will be deemed to be in compliance with risk-based capital and leverage requirements; (iv) assisting smaller banks with obtaining stable funding by providing an exception for reciprocal deposits from FDIC restrictions on acceptance of brokered deposits; (v) raising the eligibility for use of short-form Call Reports from $1 billion to $5 billion in assets; (vi) clarifying definitions pertaining to high volatility commercial real estate loans (HVCRE), which require higher capital allocations, so that only loans with increased risk are subject to higher risk weightings; and (vii) changing the eligibility for use of the small bank holding company policy statement from institutions with under $1 billion in assets to institutions with under $3 billion in assets.
In September 2019, the federal banking agencies approved the final rule to implement the provisions of Section 201 of the Regulatory Relief Act. Under the new rule, which became effective January 1, 2020, a qualifying community banking organization is defined as a depository institution or depository institution holding company with less than $10 billion in assets. A qualifying community banking organization has the option to elect the Community Bank Leverage Ratio ("CBLR") framework if its CBLR is greater than 9%, it has off-balance sheet exposures of 25% or less of consolidated assets, and trading assets and liabilities of 5% or less of total consolidated assets. The leverage ratio for purposes of the CBLR is calculated as Tier I capital divided by average total assets, consistent with the manner banking organizations calculate the leverage ratio under generally applicable capital rules. Qualifying community banking organizations that exceed the CBLR level established by the agencies, and that elect to be covered by the CBLR framework, will be considered to have met: (i) the generally applicable leverage and risk-based capital requirements under the banking agencies’ capital rules; (ii) the capital ratio requirements necessary to be considered “well capitalized” under the banking agencies’ prompt corrective action framework in the case of insured depository institutions; and (iii) any other applicable capital or leverage requirements. For institutions that fall below the 9% capital requirement but remain above 8%, are allowed a two-quarter grace period to either meet the qualifying criteria again or to comply with the generally applicable capital rules.As a result of the CARES Act, during 2020 the CBLR was reduced to 8.0% for the remainder of 2020 and set at 8.5% for 2021. FNCB has not elected to use the CBLR framework at this time and does not believe that the changes resulting from the Regulatory Relief Act, including whether it elects to use the CBLR framework in the future, will materially impact FNCB’s business, operations, or financial results.
Dividend and Share Repurchase Restrictions
FNCB is a legal entity separate and distinct from the Bank. FNCB’s revenues (on a parent company only basis) and its ability to pay dividends to its shareholders, or repurchase shares from its shareholders, are almost entirely dependent upon the receipt of dividends from the Bank. The right of FNCB, and consequently the rights of its creditors and shareholders to participate in any distribution of the assets or earnings of any subsidiary through the payment of such dividends or otherwise is necessarily subject to the prior claims of creditors of the subsidiary (including depositors) except to the extent that claims of FNCB, in its capacity as a creditor, may be recognized. Additionally, the ability of the Bank to pay dividends to FNCB is subject to Pennsylvania state law and various regulatory restrictions.
The declaration of cash dividends on FNCB’s common stock, or the repurchase of shares of its common stock, is at the discretion of its board of directors, and any decision to declare a dividend, or repurchase shares, is based on a number of factors, including, but not limited to, earnings, prospects, financial condition, regulatory capital levels, applicable covenants under any credit agreements, notes and other contractual restrictions, Pennsylvania law, federal bank regulatory law, and other factors deemed relevant.
Human Capital Resources
As of December 31, 2020, FNCB, including the Bank, employed214 persons, including 23 part-time employees. FNCB's employees support its vision to be a leader in the community with a commitment to financial excellence for customers and shareholders and deliver its mission to make your banking experience simply better. With this in mind, FNCB recognizes that the success of our organization is highly correlated to the effectiveness of the FNCB team. In order to attract, motivate and retain high-quality staff, the Bank must have a competitive, broad-based compensation plan. FNCB focuses on ensuring top talent is compensated appropriately and entry-level starting salaries are competitive and provide an opportunity for advancement.
As FNCB’s leadership culture and business model evolves, FNCB's policies, practices and programs must also evolve and support and reinforce our desired culture and business needs. The Compensation Committee of the Board of Directors evaluates and modifies policies, practices and programs on an ongoing basis to ensure compensation plans are competitive and do not encourage inappropriate risk taking. Market competitive and risk appropriate incentive plans have been fully implemented for management, commercial lending, branch banking, specialty sales functions and all staff positions. FNCB also has a Long-Term Incentive Plan designed to align shareholder goals with employee goals and to encourage retention of key officers.
FNCB is an Equal Opportunity and Affirmative Action Employer. We recruit, employ, train, compensate, and promote without regard to race, religion, creed, color, national origin, age, gender, sexual orientation, gender identity, marital status, disability, veteran status, or any other basis protected by applicable federal, state or local law.
In 2023, FNCB Bank was voted "The Best Place to Work" in northeastern Pennsylvania for the seventh consecutive year, as part of the annual Reader's Choice Awards survey conducted by a local newspaper. As of December 31, 2023, FNCB, including the Bank, employed222 persons, including 21 part-time employees.
Available Information
FNCB files reports, proxy and information statements and other information electronically with the SEC. The SEC maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. The SEC’s website site address is https://www.sec.gov. FNCB makes its Annual Report on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K and amendments thereto available through its website at https://www.fncb.com. The information contained on our website is not included as a part of, or incorporated by reference in, this Annual Report on Form 10-K. These reports may also be obtained free of charge as soon as practicable after filing or furnishing them to the SEC upon request by sending an email to corporatesecretary@fncb.com. Information may also be obtained via written request to FNCB Bancorp, Inc. Attention: Chief Financial Officer, 102 East Drinker Street, Dunmore, PA 18512.
Risk Factors |
The operations and financial results of FNCB are subject to various risks and uncertainties, including those described below. The risks and uncertainties described below are not the only ones FNCB faces. Additional risks and uncertainties FNCB is unaware of, or currently believes are not material, may also become important factors affecting FNCB. If any of the following risks occur, FNCB’s business, financial condition, operating results and prospects could be materially and adversely affected. In that event, the price of the FNCB’s common stock could decline.
Risks Related to FNCB’s Business
Weakness in the economic environment, in general, and within FNCB’s market area could pose significant challenges for FNCB and could adversely affect its financial condition and results of operations.
FNCB’s success depends primarily on the general economic conditions in the Commonwealth of Pennsylvania and the specific local markets in which it operates. Unlike larger national or other regional banks that are more geographically diversified, FNCB provides banking and financial services to customers primarily in the Lackawanna, Luzerne, and Wayne County markets. The local economic conditions in these areas have a significant impact on the demand for FNCB’s products and services as well as the ability of customers to repay loans, the value of the collateral securing loans, and the stability of deposit funding sources. A significant decline in general economic conditions, caused by inflation, recession, acts of terrorism, severe weather or natural disasters, outbreak of hostilities or other international or domestic occurrences, unemployment, changes in securities markets or other factors could impact these local economic conditions and, in turn, have a material adverse effect on FNCB’s financial condition and results of operations. Specifically, weakness in economic conditions could result in one or more of the following:
● | A decrease in the demand for FNCB's loans and other products and services; |
● | A decrease in customer savings generally and in the demand for FNCB's savings and other deposit products; and |
● | An increase in the number of customers and counterparties who become delinquent, file for protection under bankruptcy laws, or default on their loans or other obligations. |
An increase in the number of delinquencies, bankruptcies, or defaults could result in a higher level of non-performing assets, net charge-offs, and provision for loan and lease losses. The markets FNCB serves are dependent on retail and service-related businesses and, thus, are particularly vulnerable to adverse changes in economic conditions affecting these sectors.
To the extent that economic conditions deteriorate, business and individual borrowers may be less able to meet their obligations to the Bank in full, in a timely manner, resulting in decreased earnings or losses to the Bank. To the extent that loans are secured by real estate, adverse conditions in the real estate market may reduce the ability of the borrowers to generate the necessary cash flow for repayment of the loan and reduce the ability to collect the full amount of the loan upon a default. To the extent that the Bank makes fixed-rate loans, general increases in interest rates will tend to reduce its spread as the interest rates FNCB must pay for deposits would increase while interest income is flat. Economic conditions and interest rates may also adversely affect the value of property pledged as security for loans.
FNCB is subject to credit risk, whichand FNCB's financial condition and results of operations could be negatively impacted by changes in economic and market conditions and other factors that adversely affect its profitability.FNCB's borrowers.
FNCB’s business depends on its ability to successfully measure and manage credit risk. As a lender, FNCB is exposed to the risk that the principal of, or interest on, a loan will not be paid timely or at all or that the value of any collateral supporting a loan will be insufficient to cover FNCB’s outstanding exposure. In addition, FNCB is exposed to risks with respect to the period of time over which the loan may be repaid, risks relating to loan underwriting, risks resulting from changes in economic and industry conditions, and risks inherent in dealing with individual loans and borrowers. The creditworthiness of a borrower is affected by many factors including local market conditions and general economic conditions. If the overall economic climate in the United States generally, or in the market areas in which FNCB operates specifically, experiences material disruption, FNCB’s borrowers may experience difficulties in repaying their loans, the collateral FNCB holds may decrease in value or become illiquid, and FNCB’s level of nonperforming loans, charge-offs and delinquencies could rise and require significant additional provisions for loancredit losses.
FNCB’s risk management practices, such as monitoring the concentrations of its loans and its credit approval, review and administrative practices, may not adequately reduce credit risk, and FNCB’s credit administration personnel, policies and procedures may not adequately adapt to changes in economic or any other conditions affecting related customers and the quality of the loan portfolio. Many of FNCB’s loans are made to small businesses that areand middle market customers. These businesses generally have fewer financial resources in terms of capital and borrowing capacity than larger entities and may have a heightened vulnerability to economic conditions and be less able to withstand competitive, economic and financial pressures than larger borrowers. Consequently,pressures. Changes in general economic conditions in the market area in which FNCB operates may negatively impact this important customer sector. Additionally, FNCB may have significant exposure if any of these borrowers becomes unable to pay their loan obligations as a result of economic or market conditions, or personal circumstances, such as divorce, unemployment or death. Consequently, FNCB's financial condition and results of operations may be adversely affected. A failure to effectively measure and limit the credit risk associated with FNCB’s loan portfolio may result in loan defaults, foreclosures and additional charge-offs, and may necessitate that FNCB significantly increase its allowance for loancredit losses each of("ACL"), which could adversely affect FNCB’s net income.income and profitability. As a result, FNCB’s inability to successfully manage credit risk could have a material adverse effect on its business, financial condition and results of operations.
FNCB’s loan portfolio contains a significant number of commercial real estate loans with relatively large balances, the deterioration of one or a few of these loans could cause a significant increase in non-performing loans.
As of December 31, 2020, approximately 36.9% of FNCB’s loan portfolio consisted of commercial real estate loans and construction, land acquisition and development loans. These types of loans are generally viewed as having a higher risk of default than residential real estate loans or consumer loans. These types of loans are also typically larger than residential real estate loans and consumer loans. Because FNCB’s loan portfolio contains a significant number of commercial real estate loans with relatively large balances, the deterioration of one or a few of these loans could cause a significant increase in non-performing loans. All non-performing loans totaled $5.6 million, or 0.62% of total gross loans, as of December 31, 2020, and $9.1 million, or 1.10% of total gross loans, as of December 31, 2019. Specifically, commercial real estate loans that were non-performing totaled $3.2 million, or 0.36%, of total gross loans, as of December 31, 2020, and $5.6 million, or 0.68%, of total gross loans, as of December 31, 2019. There were no construction, land acquisition and development loans that were non-performing at December 31, 2020 and 2019. An increase in non-performing loans in the future could result in an increase in the provision for loan and lease losses and an increase in loan charge-offs, both of which could have a material adverse effect on FNCB’s financial condition and results of operations. The lending activities, in which the Bank engages carry the risk that the borrowers will be unable to perform on their obligations. As such, general economic conditions, nationally and in FNCB’s primary market area, will have a significant impact on its results of operations.
FNCB’s concentrations ofincluding loans including those to insiders and their related parties, may create a greater risk of loan defaultsgenerally have relatively larger balances and losses.
A substantial portion of FNCB’s loans are secured by real estate inconcentrated within the Northeastern Pennsylvania market, and substantially all of its loans are to borrowers in that area. FNCB also has a significant amount of commercial real estate, commercial and industrial, construction, land acquisition and development loans and land-related loans for residential and commercial developments. At December 31, 2020, $530.0 million, or 58.7%, of gross loans were secured by real estate, primarily commercial real estate. Management has taken steps to mitigate commercial real estate concentration risk by diversification among the types and characteristics of real estate collateral properties, sound underwriting practices, and ongoing portfolio monitoring and market analysis. Of total gross loans, $59.8 million, or 6.6%, were construction, land acquisition and development loans. Construction, land acquisition and development loans have the highest risk of uncollectability. An additional $238.4 million, or 26.4%, of portfolio loans were commercial and industrial loans not secured by real estate. Historically, commercial and industrial loans generally have had a higher risk of defaultwhich may present great risks than other categoriestypes of loans, such as single family residential mortgage loans. The repayment of these loans often depends on the successful operation of a business and are more likely to be adversely affected by adverse economic conditions. While management believes that the loan portfolio is well diversified in terms of borrowers and industries, these concentrations expose FNCB to the risk that adverse developments in the real estate market, or in the general economic conditions in its general market area, could increase the levels of non-performing loans and charge-offs, and reduce loan demand. In that event, FNCB would likely experience lower earnings or losses. Additionally, if, for any reason, economic conditions in its market area deteriorate, or there is significant volatility or weakness in the economy or any significant sector of the area’s economy, FNCB’s ability to develop business relationships may be diminished, the quality and collectability of its loans may be adversely affected, the value of collateral may decline and loan demand may be reduced.
Commercial real estate, commercial and industrial and construction, land acquisition and development loans tend to have larger balances than single family mortgage loans and other consumer loans. Because FNCB’s loan portfolio contains a significant number of commercial and industrial loans, commercial real estate loans and construction, land acquisition and development loans with relatively large balances, the deterioration of one or a few of these loans may cause a significant increase in non-performing assets. All non-performing loans totaled $5.4 million, or 0.44% of total gross loans and leases, as of December 31, 2023, and $2.8 million, or 0.25%, of total gross loans and leases at December 31, 2022. Specifically, commercial real estate loans that were non-performing totaled $3.1 million, or 0.26%, of total gross loans and leases at December 31, 2023 and $1.5 million, or 0.14%, of total gross loans and leases at December 31, 2022. An increase in non-performing loans could result in a loss of earnings from these loans, an increase in the provision for loan and leasecredit losses, or an increase in loan charge-offs, which could have an adverse impact on FNCB’s results of operations and financial condition.
A substantial portion of FNCB’s loans are secured by real estate in the Northeastern Pennsylvania market, and substantially all of its loans are to borrowers in that area. FNCB also has a significant amount of commercial real estate, commercial and industrial, construction, land acquisition and development loans and land-related loans for residential and commercial developments. At December 31, 2023, $713.3 million, or 58.5%, were secured by real estate, primarily commercial real estate, in Northeastern Pennsylvania. Management has taken steps to mitigate commercial real estate concentration risk through diversification of the types and characteristics of real estate collateral properties, sound underwriting practices, and ongoing portfolio monitoring and market analysis. Of total outstanding loans and leases, $59.9 million, or 4.9%, were construction, land acquisition and development loans. Based on FNCB's historical records, construction, land acquisition and development loans have had the highest risk of not being collected. An additional $183.8 million, or 15.1%, of portfolio loans were commercial and industrial loans not secured by real estate. Historically, commercial and industrial loans generally have had a higher risk of default than other categories of loans, such as single-family residential mortgage loans. The repayment of these loans often depends on the successful operation of a business and are more likely to be adversely affected by adverse economic conditions. While management believes that the loan portfolio is well diversified in terms of borrowers and industries, these concentrations expose FNCB to the risk that adverse developments in the real estate market, or in the general economic conditions in its market area, could adversely affect the quality and collectability of its loans and could increase the level of non-performing loans. An increase in non-performing loans could result in loss of earnings from these loans and increases in loan charge-offs and the provision for credit losses, all of which could have a material adverse effect on FNCB's financial condition and results of operations. Additionally, if, for any reason, economic conditions in its market area deteriorate, or there is significant volatility or weakness in the economy or any significant sector of the area’s economy, FNCB’s ability to develop business relationships may be diminished, loan demand may be reduced and collateral values supporting loans may decline, which could also adversely affect FNCB's financial condition and results of operations.
Guidance adopted by federal banking regulators provides that banks having concentrations in construction, land development or commercial real estate loans are expected to have and maintain higher levels of risk management and, potentially, higher levels of capital, which may adversely affect shareholder returns, or require FNCB to obtain additional capital sooner than it otherwise would. Excluded from the scope of this guidance are loans secured by non-farm nonresidential properties where the primary source of repayment is the cash flow from the ongoing operations and activities conducted by the party, or affiliate of the party, who owns the property.
Outstanding loans and line of credit balances to directors, officers and their related parties totaled $98.9$79.3 million as of December 31, 20202023. At December 31, 20202023, there were no loans to directors, officers and their related parties that were categorized as criticized loans within the Bank’s risk rating system, meaning they are not considered to present a higher risk of collection than other loans. See Note 11,12, “Related Party Transactions” of the notes to the consolidated financial statements included in Item 8, "Financial Statements and Supplementary Data" and Item 13, “Certain Relationships and Related Transactions, and Director Independence” to this Annual Report on Form 10-K for more information regarding loans to officers and directors and/or their related parties.
FNCB’s portfolio of loans to small and mid-sized community-based businesses may increase its credit risk.
Many of FNCB’s commercial business and commercial real estate loans are made to small business or middle market customers. These businesses generally have fewer financial resources in terms of capital or borrowing capacity than larger entities and have a heightened vulnerability to economic conditions. If general economic conditions in the market area in which FNCB operates negatively impact this important customer sector, FNCB’s results of operations and financial condition may be adversely affected. Moreover, a portion of these loans have been made by FNCB in recent years and the borrowers may not have experienced a complete business or economic cycle. The deterioration of FNCB’s borrowers’ businesses may hinder their ability to repay their loans with FNCB, which could have a material adverse effect on FNCB’s financial condition and results of operations.
The appraisals and other valuation techniques FNCB uses in evaluating and monitoring loans secured by real property and other real estate owned may not accurately reflect the net value of the asset.
In considering whether to make a loan secured by real property, FNCB generally requires an appraisal of the property. However, an appraisal is only an estimate of the value of the property at the time the appraisal is made, and, as real estate values may change significantly in relatively short periods of time (especially in periods of heightened economic uncertainty), this estimate may not accurately reflect the net value of the collateral after the loan is made. As a result, FNCB may not be able to realize the full amount of any remaining indebtedness when FNCB forecloses on and sells the relevant property. In addition, FNCB relies on appraisals and other valuation techniques to establish the value of other real estate owned (“OREO”), that FNCB acquires through foreclosure proceedings and other repossessed assets, to determine loanasset impairments. If any of these valuations are inaccurate, FNCB’s financial statements may not reflect the correct value of FNCB’s OREO, if any, and FNCB’s allowance for loan lossesACL may not reflect accurate loan impairments. Inaccurate valuation of OREO, other repossessed assets or inaccurate provisioning for loancredit losses could have a material adverse effect on FNCB’s business, financial condition and results of operations.
FNCB’s financial condition and results of operations would be adversely affected if the ALLLACL is not sufficient to absorb actual losses or if increases to the ALLLACL were required.
The lending activities in which the Bank engages carry the risk that the borrowers will be unable to perform onmeet their obligations, and that the collateral securing the payment of their obligations may be insufficient to assure repayment. FNCB may experience significant credit losses, which could have a material adverse effect on its operating results. Management makes various assumptions and judgments about the collectability of FNCB’s loan portfolio, including the creditworthiness of its borrowers and the value of the real estate and other assets serving as collateral for the repayment of many of its loans, which it uses as a basis to estimate and establish its reserves for losses. In determining the amount of the ALLL,ACL, management reviews loans, loss and delinquency experience, and evaluates current economic conditions. If these assumptions prove to be incorrect, the ALLLACL may not cover inherentassumed losses in FNCB’s loan portfolio at the date of its financial statements. Material additions to FNCB’s allowance or extensive charge-offs would materially decrease its net income. At December 31, 2020,2023, the ALLLACL totaled $11.9$12.0 million, representing 1.33%0.98% of total loans.loans, net of unearned income and net deferred loan origination costs.
Although management believes FNCB’s underwriting standards are adequate to manage normal lending risks, it is difficult to assess the future performance of its loan portfolio due to the ongoing economic environment and the state of the real estate market. The assessment of future performance of the loan portfolio is inherently uncertain. FNCB can give no assurance that non-performing loans will not increase or that non-performing or delinquent loans will not adversely affect its future performance.
In addition, federal and state regulators periodically review the ALLLACL and may require increases to the ALLLACL or further loan charge-offs. Any increase in ALLLACL or loan charge-offs as required by these regulatory agencies could have a material adverse effect on FNCB’s business, financial condition and results of operationsoperation.
The CECL model for determining the ACL could add volatility to FNCB's provision for credit losses and results of operations.
FNCB adopted the CECL model for calculating the ACL on January 1, 2023. Under GAAP, the CECL model requires financial condition.institutions to present certain financial assets carried at amortized cost, including loans and held-to-maturity debt securities, at the net amount expected to be collected. Additionally, the CECL model requires the ACL for certain financial assets, including loans, held-to-maturity securities and certain off-balance sheet credit exposures, to be calculated based on current expected credit losses over the lives of the assets rather than incurred losses as of a point in time. FNCB estimation process is subject to risks and uncertainties, including a reliance on historical loss and trend information that may not be representative of current conditions and indicative of future performance. Accordingly, actual lifetime credit losses may be materially different than the amounts reported in the ACL due to the inherent uncertainty in the estimation process, including future loss estimates based upon FNCB's reasonable and supportable economic forecasts. Also, future credit losses could differ materially from those estimates due to changes in values and circumstances after the balance sheet date. Changes in such estimates could significantly impact FNCB's ACL, provision for credit losses and results of operations.
If management concludes that the decline in value of any of FNCB’s investment securities is other-than-temporary,impaired, FNCB is required to write down the security to reflect credit-related impairments through a charge to earnings.
Management reviews FNCB’s investment securities portfolio at each quarter-end reporting period to determine whether the fair value is below the current carrying value. When the fair value of any of FNCB’s available-for-sale debt investment securities has declined below its carrying value, management is required to assess whether the decline represents an OTTI. If management concludes that the decline is other-than-temporary, it is required to write down the value of that security to reflect the credit-related impairments through a charge to earnings.impairment. Changes in the expected cash flows of securities in FNCB’s portfolio and/or prolonged price declines in future periods may result in OTTI,impairment, which wouldmay require a charge to earnings. Due to the complexity of the calculations and assumptions used in determining whether an asset is impaired, any impairment disclosed may not accurately reflect the actual impairment in the future. In addition, to the extent that the value of any of FNCB’s investment securities is sensitive to fluctuations in interest rates, any increase in interest rates may result in a decline in the value of such investment securities.
FNCB held approximately $1.7 million in capital stock of the FHLB as of December 31, 2020. FNCB must own such capital stock to qualify for membership in the Federal Home Loan Bank system which enables it to borrow funds under the FHLB advance program. If the FHLB were to cease operations, FNCB’s business, financial condition, liquidity, capital and results of operations may be materially and adversely affected.
FNCB’s risk management framework may not be effective in mitigating FNCB's risks or losses.
FNCB’s risk management framework is comprised of various processes, systems and strategies, and is designed to manage the types of risk to which FNCB is subject, including, among others, credit, market, liquidity, interest rate and compliance. FNCB’s framework also includes financial or other modeling methodologies that involve management assumptions and judgment. FNCB’s risk management framework may not be effective under all circumstances and may not adequately mitigate any risk or loss to FNCB. If FNCB’s risk management framework is not effective, FNCB could suffer unexpected losses and itswhich could have a material adverse effect on FNCB's business, financial condition, results of operations or growth prospects could be materially and adversely affected.prospects. FNCB may also be subject to potentially adverse regulatory consequences.
FNCB is subject to interest rate risk, changes in interest rates could reduce income, cash flows and asset values, which could adversely affect its profitability.
FNCB’s profitability,earnings and cash flows, like that of most financial institutions, depends to a large extent on its net interest income, which is the difference between its interest income on interest-earning assets, such as loans and investment securities, and its interest expense on interest-bearing liabilities, such as deposits and borrowings.
Interest rates are highly sensitive to many factors that are beyond FNCB’s control, including general economic conditions and policies of various governmental and regulatory agencies and, in particular, the Board of Governors of the Federal Reserve System, or the Federal Reserve.FRB. Changes in monetary policy, including changes in interest rates, could influence not only the interest FNCB receives on loans and securities and the interest FNCB pays on deposits and borrowings, but such changes could affect FNCB’s ability to originate loans and obtain deposits, the fair value of FNCB’s financial assets and liabilities, and the average duration of FNCB’s assets. If the interest rates paid on deposits and other borrowings increase at a faster rate than the interest rates received on loans and other investments, FNCB’s net interest income, and therefore earnings, could be adversely affected. Earnings could also be adversely affected if the interest rates received on loans and other investments fall more quickly than the interest rates paid on deposits and other borrowings. Any substantial, unexpected or prolonged change in market interest rates could have a material adverse impact on FNCB’s business, financial condition and results of operations.
FNCB uses simulation analysis to model net interest income for various interest rate scenarios over a five-year time horizon. Based on the simulation analysis, FNCB’s interest sensitivity profile at December 31, 20202023 was characterized by maturities or repricing of assets and liabilities that were well matchedliability sensitive over the next 1218 to 24 months, moving to an asset sensitivity position in subsequent years of the model. Accordingly, based on its interest sensitivity profile, FNCB would expect net interest income to remain at current levels if interest rates rise over the next 12 months. However, net interest income is projected to trend upwards over the life of the simulation due primarily to higher replacement rates on loans and securities exceeding funding cost increases quarter over quarter. Conversely, if interest rates decrease over the next 12 months, FNCB would expect net interest income projected to trend downward over the life of the simulation due primarily to lower replacements rates on loans and securities exceeding funding cost decreases quarter over quarter. These simulations are based on numerous assumptions, including but not limited to: the nature and timing of interest rate levels, prepayments on loans and securities, deposit decay rates, pricing decisions on loans and deposits, reinvestment of asset and liability cash flows, customer behavior in a rising rate environment and other factors. When short-term interest rates rise, the rate of interest FNCB pays on its interest-bearing liabilities may rise more quickly than the rate of interest that FNCB receives on its interest-earning assets, which may cause FNCB’s net interest income to decrease.
Additionally, a shrinking yield premium, or negative spread, between short-term and long-term market interest rates, a pattern usually indicative of investors' waning expectations of future growth and inflation, commonly referred to as a flattening of the yield curve, or inversion of the yield curve, typically reduces FNCB’s profit margin as FNCB borrows at shorter terms than the terms at which FNCB lends and invests.
In addition, an increase in interest rates could also have a negative impact on FNCB’s results of operations by reducing the ability of borrowers to repay their current loan obligations. These circumstances could not only result in increased loan defaults, foreclosures and charge-offs, but also reduce collateral values and necessitate further increases to the allowance for loan losses,ACL, which could have a material adverse effect on FNCB’s business, financial condition and results of operations.
Changes in interest rates could reduce income, cash flows and asset values.
FNCB’s earnings and cash flows are largely dependent upon its net interest income. Net interest income is the difference between interest income earned on interest-earning assets such as loans and securities and interest expense paid on interest-bearing liabilities such as deposits and borrowed funds. Interest rates are highly sensitive to many factors that are beyond FNCB’s control, including general economic conditions and policies of various governmental and regulatory agencies and, in particular, the FRB. Changes in monetary policy, including changes in interest rates, could influence not only the interest FNCB receives on loans and securities and the amount of interest it pays on deposits and borrowings, but such changes could also affect (i) FNCB’s ability to originate loans and obtain deposits, (ii) the fair value of FNCB’s financial assets and liabilities, and (iii) the average duration of FNCB’s mortgage-backed securities portfolio.
If the interest rates paid on deposits and other borrowings increase at a faster rate than the interest rates received on loans and investments, FNCB’s net interest income, and therefore earnings, could be adversely affected. Earnings could also be adversely affected if the interest rates received on loans and investments fall more quickly than the interest rates paid on deposits and other borrowings. Any substantial, unexpected, prolonged change in market interest rates could have a material adverse effect on FNCB’s financial condition and results of operations.
Uncertainty relating to the expected phase-out of the London Interbank Offered Rate (“LIBOR”) may adversely affect FNCB.
LIBOR has been used extensively in the United States as a reference rate for various financial contracts, including adjustable-rate loans, asset-backed securities, and interest rate swaps. In 2017, the Chief Executive of the United Kingdom Financial Conduct Authority, which regulates LIBOR, announced that the Financial Conduct Authority ("FCA") will not compel panel banks to submit rates for the calculation of LIBOR after 2021. The announcement means that the continuation of LIBOR on the current basis cannot be guaranteed after 2021. In November 2020, the FCA announced that most tenors of US Dollar LIBOR would continue to be published through June 30, 2023, which would allow additional legacy U.S. Dollar LIBOR contracts to mature before the succession of LIBOR. At this time, no consensus exists as to what rate or rates may become acceptable alternatives to LIBOR, and it is impossible to predict the effect of any such alternatives on the value of LIBOR-based variable rate loans and other securities or financial arrangements, given LIBOR's current role in determining market interest rates globally. The uncertainty as to the nature and effect of such reforms and actions relating to the discontinuance of LIBOR may adversely affect the value of and return on certain of our financial assets and liabilities that are based on or are linked to LIBOR, which may adversely affect FNCB's results of operations or financial condition. In addition, LIBOR-related reforms may also require changes to the agreements that govern these LIBOR-based products, as well as FNCB's internal systems and processes.
FNCB may not be able to successfully compete with others for business.
FNCB competes for loans, deposits and investment dollarsinvestments with numerous regional and national banks and other community banking institutions, online divisions of banks located in other markets as well as other kinds of financial institutions and enterprises, such as securities firms, insurance companies, savings associations, credit unions, mortgage brokers, private lenders and Fintech companies. There is also competition for banking business from competitors outside of its market area. As noted above, FNCB and the Bank are subject to extensive regulations and supervision, including, in many cases, regulations that limit the type and scope of activities. Many competitors have substantially greater resources and may offer certain services that FNCB and the Bank does not provide and operate under less stringent regulatory environments. The differences in available resources and applicable regulations may make it harder for FNCB to compete profitably, reduce the rates that it can earn on loans and investments, increase the rates it must offer on deposits and other funds, and adversely affect its overall financial condition and earnings.results of operation. Refer to the section entitled “Business – Competition”“Competition” included in Item 1, "Business" to this Annual Report on Form 10-K for an additional discussion of FNCB's competitive environment.
ChangesFNCB could be subject credit risk related to derivative obligations.
FNCB has agreements with each of its derivative counterparties that contain a provision where if FNCB defaults or is capable of being declared in either FNCB’s financial condition ordefault on any of its indebtedness, then it could also be declared in the general banking industryits derivative obligations. FNCB has agreements with certain of its derivatives counterparties that contain a provision where if it fails to maintain its status as a well-capitalized institution, then it could resultbe required to post additional collateral.
FNCB has minimum collateral posting thresholds with certain of its derivative counterparties for derivatives in a lossnet liability position. As of depositor confidence.
Liquidity is the abilityDecember 31, 2023, FNCB had derivatives in a net liability position of $2.7 million. The termination value of derivatives in a net liability position, which includes accrued interest but excluded any adjustments for non-performance risk related to meet cash flow needs on a timely basis at a reasonable cost. The Bank usesthese agreements, was $259 thousand, FNCB has posted collateral of $400 thousand against its liquidity to extend credit and to repay liabilitiesobligations under these agreements as they become due or as demanded by customers. The Board of Directors establishes liquidity policies, including contingency funding plans, and limits and management establishes operating guidelines for liquidity. FNCB’s primary source of liquidity is customer deposits. The continued availability of this funding source depends on customer willingness to maintain deposit balances with banks in general and FNCB in particular. The availability of deposits can also be impacted by regulatory changes (e.g. changes in FDIC insurance, the liquidity coverage ratio, etc.), changes in the financial condition of FNCB, or the banking industry in general, and other events which can impact the perceived safety and soundness or economic benefits of bank deposits. While FNCB makes significant efforts to consider and plan for hypothetical disruptions in FNCB’s deposit funding through the use of liquidity stress testing, market related, geopolitical, or other events could impact the liquidity derived from deposits.December 31, 2023.
FNCB may not be able to retain or grow its core deposit base, which could adversely impact its funding costs.
Like many financial institutions, FNCB relies on customer deposits as its primary source of funding for its lending activities, and FNCB continues to seek customer deposits to maintain this funding base. FNCB’s future growth will largely depend on its ability to retain and grow its deposit base. As of December 31, 2020,2023, FNCB had $1.287$1.529 billion in deposits. FNCB’s deposits are subject to potentially dramatic fluctuations in availability or price due to certain factors outside of its control, such as increasing competitive pressures for deposits, changes in interest rates and returns on other investment classes, customer perceptions of its financial health and general reputation, and a loss of confidence by customers in FNCB or the banking sector generally, which could result in significant outflows of deposits within short periods of time or significant changes in pricing necessary to maintain current customer deposits or attract additional deposits. The availability of deposits can also be impacted by regulatory changes (e.g., changes in FDIC insurance, the liquidity coverage ratio, etc.), changes in the financial condition of FNCB, or the banking industry in general, and other events which can impact the perceived safety and soundness or economic benefits of bank deposits. Any such loss by FNCB of fundsits deposit base could resultlimit its lending ability resulting in lower loan originations, which could have a material adverse effect on FNCB’s business, financial condition and results of operations.
FNCB is a bank holding company and depends on dividends from its subsidiary, FNCB Bank, to operate.
FNCB is an entity separate and distinct from the Bank. The Bank conducts most of FNCB’s operations and FNCB depends upon dividends from the Bank to service FNCB'sits debt, pay FNCB’sits expenses, to repurchase shares of FNCB stock and to pay dividends to FNCB's shareholders. The availability of dividends from the Bank is limited by various statutes and regulations. It is possible, depending upon the financial condition including liquidity and capital adequacy of the Bank and other factors, that the Bank’s regulators could limit the payment of dividends or other payments to FNCB by the Bank. In the event that the Bank was unable to pay dividends and would be unable to repurchase its shares, FNCB in turn would likely have to reduce or stop paying dividends to its shareholders. Failure to pay dividends to FNCB shareholders could have a material adverse effect on the market price of FNCB’s Common Stock. For additional information regarding dividend restrictions, refer to the section entitled “Regulatory Matters” included in Item 1 of this Annual Report on Form 10-K.
If FNCB loses access to wholesale funding sources, it may not be able to meet the cash flow requirements of its depositors, creditors, and borrowers, or have the operating cash needed to fund corporate expansion and other corporate activities.
Wholesale funding sources include brokered deposits, one-way CDARS and ICS deposits, federal funds lines of credit, securities sold under repurchase agreements, non-core deposits, and long-term debt. The Bank is also a member of the FHLB of Pittsburgh, which provides members access to funding through advances collateralized with certain qualifying assets within the Bank’s loan portfolio. In addition, FNCB’s available-for-sale securities provide an additional source of liquidity. Disruptions in the availability of wholesale funding can directly impact the liquidity of FNCB and the Bank. The inability to access capital markets funding sources as needed could adversely impact FNCB’s financial condition, results of operations, cash flows, and level of regulatory-qualifying capital.
FNCB held approximately $8.8 million in capital stock of the FHLB of Pittsburgh as of December 31, 2023. FNCB must own such capital stock to qualify for membership in the FHLB of Pittsburgh which enables it to borrow funds under the FHLB of Pittsburgh advance program. If the FHLB of Pittsburgh were to cease operations, FNCB’s business, financial condition, results of operation, liquidity, and capital may be materially and adversely affected.
Interruptions or security breaches of FNCB’s information systems could negatively affect its financial performance or reputation.
In conducting its business, FNCB relies heavily on its information systems. FNCB collects and stores sensitive data, including proprietary business information and personally identifiable information of its customers and employees, in its data centers and on its networks. The secure processing, maintenance and transmission of this information is critical to FNCB’s operations and business strategy. Maintaining and protecting those systems is difficult and expensive, as is dealing with any failure, interruption or breach of those systems. Despite security measures, FNCB’s information technology and infrastructure may be vulnerable to security breaches, cyber-attacks by hackers or breaches due to employee error, malfeasance or other disruptions. Any damage, failure or breach could cause an interruption in operations. Computer break-ins, phishing and other disruptions could also jeopardize the security of information stored in and transmitted through FNCB’s computer systems and network infrastructure. The occurrence of any failures, interruptions or breaches could damage FNCB’s reputation, disrupt operations and the services provided to customers, cause a loss of confidence in the products and the services provided, cause FNCB to incur additional expenses, result in a loss of customer business and data, result in legal claims or proceedings, result in liability under laws that protect the privacy of personal information, result in regulatory penalties, or expose FNCB to other liability, any of which could have a material adverse effect on its business, financial condition and results of operations and competitive position.
FNCB depends on information technology and telecommunications systems of third parties, and any systems failures or interruptions could adversely affect FNCB’s operations and financial condition.
FNCB’s business depends on the successful and uninterrupted functioning of its information technology and telecommunications systems. FNCB outsources many of its major systems, such as data processing, deposit processing, loan origination, email and anti-money laundering monitoring systems. The failure of these systems, or the termination of a third partythird-party software license or service agreement on which any of these systems is based, could interrupt FNCB’s operations, and FNCB could experience difficulty in implementing replacement solutions. In many cases, FNCB’s operations rely heavily on secured processing, storage and transmission of information and the monitoring of a large number of transactions on a minute-by-minute basis, and even a short interruption in service could have significant consequences. Because FNCB’s information technology and telecommunications systems interface with and depend on third party systems, FNCB could experience service denials if demand for such services exceeds capacity, or such third partythird-party systems fail or experience interruptions. If significant, sustained or repeated, a system failure or service denial could compromise FNCB’s ability to operate effectively, damage FNCB’s reputation, result in a loss of customer business and subject FNCB to additional regulatory scrutiny and possible financial liability, any of which could have a material adverse effect on FNCB’s business, financial condition and results of operations. In addition, the failure of third parties to comply with applicable laws and regulations, or fraud or misconduct on the part of employees of any of these third parties, could disrupt FNCB’s operations or adversely affect FNCB’s reputation.
FNCB is subject to cybersecurity risks and security breaches and may incur increasing costs in an effort to minimize those risks and to respond to cyber incidents, and FNCB may experience harm to its reputation and liability exposure from security breaches.
FNCB’s business involves the storage and transmission of customers' proprietary information and security breaches could expose FNCB to a risk of loss or misuse of this information, litigation and potential liability. While FNCB has not incurred a material cyber-attack or security breach to date, a number of other financial services and other companies have disclosed cyber-attacks and security breaches, some of which have involved intentional attacks. Attacks may be targeted at FNCB, including its third-party service providers, its customers or both. Although FNCB devotes significant resources to maintain, regularly update and backup its systems and processes that are designed to protect the security of FNCB’s computer systems, software, networks and other technology assets and the confidentiality, integrity and availability of information belonging to FNCB or its customers, its security measures may not be effective against all potential cyber-attacks or security breaches. Despite FNCB’s efforts to ensure the integrity of its systems, it is possible that FNCB may not be able to anticipate, or implement effective preventive measures against, all security breaches of these types, especially because the techniques used change frequently or are not recognized until launched, and because cyber-attacks can originate from a wide variety of sources, including persons who are involved with organized crime or associated with external service providers or who may be linked to terrorist organizations or hostile foreign governments. These risks may increase in the future as FNCB continues to increase FNCB’s internet-based product offerings and expand its internal usage of web-based products and applications. If an actual or perceived security breach occurs, customer perception of the effectiveness of FNCB’s security measures could be harmed and could result in the loss of customers.
A successful penetration or circumvention of the security of FNCB’s systems, including those of third party providers or other financial institutions, or the failure to meet regulatory requirements for security of its systems, could cause serious negative consequences, including significant disruption of FNCB’s operations, misappropriation of FNCB’s confidential information or that of FNCB’s customers, or damage to FNCB’s computers or systems or those of FNCB’s customers or counterparties, significant increases in compliance costs (such as repairing systems or adding new personnel or protection technologies), and could result in violations of applicable privacy and other laws, financial loss to FNCB or to its customers, loss of confidence in its security measures, customer dissatisfaction, significant litigation and regulatory exposure, and harm to FNCB’s reputation, all of which could have a material adverse effect on FNCB’s business, financial condition and results of operations.
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, financial performance may suffer.
Effective and competitive delivery of FNCB’s products and services increasingly depends on information technology resources and processes, both those provided internally as well as those provided through third party vendors. In addition to better serving customers, the effective use of technology can improve efficiency and help reduce costs. FNCB’s future success will depend, in part, upon its ability to address the needs of its customers by using technology to provide products and services to enhance customer convenience, as well as to create efficiencies in its operations. There is increasing pressure to provide products and services at lower prices. This can reduce net interest income and non-interest income from fee-based products and services. In addition, the widespread adoption of new technologies could require FNCB to make substantial capital expenditures to modify or adapt existing products and services or develop new products and services. FNCB may not be successful in introducing new products and services in response to industry trends or developments in technology, or those new products may not achieve market acceptance. Many of FNCB’s competitors have greater resources to invest in technological improvements. Additionally, as technology in the financial services industry changes and evolves, keeping pace becomes increasingly complex and expensive. There can be no assurance that FNCB will be able to effectively implement new technology-driven products and services, which could reduce its ability to compete effectively. As a result, FNCB could lose business, be forced to price products and services on less advantageous terms to retain or attract customers or be subject to cost increases.
FNCB relies on management and other key personnel and the loss of any of them may adversely affect its operations.
FNCB believes each member of the executive management team is important to its success and the unexpected loss of any of these personspeople could impair day-to-day operations as well as its strategic direction.
FNCB’s success depends, in large part, on its ability to attract and retain key people. Competition for the best people in most activities engaged in by FNCB can be intense and it may not be able to hire people or retain them. The unexpected loss of services of one or more of FNCB’s key personnel could have a material adverse impact on its business due to the loss of their skills, knowledge of its market, years of industry experience and to the difficulty of promptly finding qualified replacement personnel.
FNCB is dependent on the use of data and modeling in both its management’s decision-making generally and in meeting regulatory expectations in particular.
The use of statistical and quantitative models and other quantitatively-based analyses is endemic to bank decision-making and regulatory compliance processes, and the employment of such analyses is becoming increasingly widespread in FNCB’s operations. Liquidity stress testing, interest rate sensitivity analysis, allowance for loan loss measurement, portfolio stress testing and the identification of possible violations of anti-money laundering regulations are examples of areas in which FNCB is dependent on models and the data that underlies them. FNCB anticipates that model-derived insights will be used more widely in FNCB’s decision-making in the future. While these quantitative techniques and approaches improve FNCB’s decision-making, they also create the possibility that faulty data or flawed quantitative approaches could yield adverse outcomes or regulatory scrutiny. Secondarily, because of the complexity inherent in these approaches, misunderstanding or misuse of their outputs could similarly result in suboptimal decision making, which could have a material adverse effect on FNCB’s business, financial condition and results of operations.
New lines of business, products, product enhancements or services may subject FNCB to additional risk.
From time to time, FNCB may implement new lines of business or offer new products and product enhancements as well as new services within FNCB’s existing lines of business. There are substantial risks and uncertainties associated with these efforts. In developing, implementing or marketing new lines of business, products, product enhancements or services, FNCB may invest significant time and resources. FNCB may underestimate the appropriate level of resources or expertise necessary to make new lines of business or products successful to realize their expected benefits. FNCB may not achieve the milestones set in initial timetables for the development and introduction of new lines of business, products, product enhancements or services, and price and profitability targets may not prove feasible. External factors, such as compliance with regulations, competitive alternatives and shifting market preferences, may also impact the ultimate implementation of a new line of business or offering of new products, product enhancements or services. Any new line of business, product, product enhancement or service could have a significant impact on the effectiveness of FNCB’s system of internal controls. FNCB may also decide to discontinue business or products due to lack of customer acceptance or unprofitability. Failure to successfully manage these risks in the development and implementation of new lines of business or offerings of new products, product enhancements or services could have a material adverse effect on FNCB’s business, financial condition and results of operations.
FNCB may be adversely affected by the soundness of other financial institutions.
FNCB’s ability to engage in routine funding transactions could be adversely affected by the actions and commercial soundness of other financial institutions. Financial services companies are interrelated as a result of trading, clearing, counterparty and other relationships. As a result, defaults by, or even rumors or questions about, one or more financial services companies, or the financial services industry generally, could lead to market-wide liquidity problems and losses or defaults by FNCB or other institutions. These losses could have a material adverse effect on FNCB’s business, financial condition and results of operations.
Damage to FNCB’s reputation could significantly harm its businesses,business, competitive position and prospects for growth.
FNCB’s ability to attract and retain investors, customers, clients, and employees could be adversely affected by damage to its reputation resulting from various sources, including environmental, social and governance ("ESG") related issues, employee misconduct, litigation, or regulatory outcomes; failure to deliver minimum standards of service and quality; compliance failures; unethical behavior; unintended breach of confidential information; and the activities of FNCB’s clients, customers, or counterparties. Actions by the financial services industry in general, or by certain entities or individuals within it, also could have a significantly adverse impact on FNCB’s reputation.
FNCB’s actual or perceived failure to identify and address various issues, including failure to properly address operational and ESG risks, could also give rise to reputation risk that could negatively impact business prospects. These issues include, among others, legal and regulatory requirements; consumer protection, fair lending, and privacy issues; properly maintaining customer and associated personal information; record keeping; protecting against money laundering; sales and trading practices; and ethical issues.
FNCB may be a defendant from time to time in a variety of litigation and other actions, which could have a material adverse effect on its financial condition, results of operations and cash flows.
FNCB has been and may continue to be involved from time to time in a variety of litigation matters arising out of its business. An increased number of lawsuits, including purported class action lawsuits and other consumer driven litigation, have been filed and will likely continue to be filed against financial institutions, which may involve substantial compensatory and/or punitive damages. Management believes the risk of litigation generally increases during downturns in the national and local economies. FNCB’s insurance may not cover all claims that may be asserted against it, and any claims asserted against it, regardless of merit or eventual outcome, may harm its reputation and may cause it to incur significant expense. Should the ultimate judgments or settlements in any litigation exceed insurance coverage, they could have a material adverse effect on its financial condition, results of operations and cash flows. In addition, FNCB may not be able to obtain appropriate types or levels of insurance in the future, nor may it be able to obtain adequate replacement policies with acceptable terms, if at all. Refer to Item 3, “Legal Proceedings” to this Annual Report on Form 10-K for an additional discussion of FNCB's current material legal matters.
FNCB depends on the accuracy and completeness of information about customers and counterparties.
In deciding whether to extend credit or enter into other transactions with customers and counterparties, FNCB may rely on information furnished by or on behalf of customers and counterparties, including financial information. FNCB may also rely on representations of customers and counterparties as to the accuracy and completeness of that information. In deciding whether to extend credit, FNCB may rely upon customers' representations that their financial statements conform to GAAP and present fairly, in all material respects, the financial condition, results of operations and cash flows of the customer. FNCB also may rely on customer representations and certifications, or audit or accountants' reports, with respect to the business and financial condition of its customers. FNCB’s financial condition, results of operations, financial reporting and reputation could be negatively affected if FNCB relies on materially misleading, false, inaccurate or fraudulent information.
FNCB may face risks with respect to future expansion or acquisition activity.
FNCB may selectively seek to expand its banking operations through limited de novo branching or opportunistic acquisition activities. FNCB cannot be certain that any expansion activity, through de novo branching, acquisition of branches of another financial institution or a whole institution, or the establishment or acquisition of nonbanking financial service companies, will prove profitable or will increase shareholder value. The success of any acquisition will depend, in part, on FNCB’s ability to realize the estimated cost savings and revenue enhancements from combining its business and that of the target company. FNCB’s ability to realize increases in revenue will depend, in part, on its ability to retain customers and employees, and to capitalize on existing relationships for the provision of additional products and services. If FNCB estimates turn out to be incorrect or FNCB is not able to successfully combine companies, the anticipated cost savings and increased revenues may not be realized fully or at all or may take longer to realize than expected. It is possible that the integration process could result in the loss of key employees, the disruption of each company’s ongoing business, diversion of management attention, or inconsistencies in standards, controls, procedures and policies that adversely affect FNCB’s ability to maintain relationships with clients and employees or to achieve the anticipated benefits of the merger. As with any combination of banking institutions, there also may be disruptions that cause FNCB to lose customers or cause customers to withdraw their deposits. Customers may not readily accept changes to their banking arrangements that FNCB makes as part of, or following, an acquisition. Additionally, the value of an acquisition to FNCB is dependent on its ability to successfully identify and estimate the magnitude of any asset quality issues of acquired companies.
FNCB may not be successful in overcoming these risks or other problems encountered in connection with potential acquisitions or other expansion activity. FNCB’s inability to overcome these risks could have an adverse effect on FNCB’s ability to implement its business strategy and enhance shareholder value, which, in turn, could have a material adverse effect on FNCB’s business, financial condition or results of operations. Additionally, if FNCB records goodwill in connection with any acquisition, FNCB’s financial condition and results of operation may be adversely affected if that goodwill is determined to be impaired, which would require FNCB to take an impairment charge.
FNCB could be subject to environmental risks and associated costs on its foreclosed real estate assets.
A substantial portion of FNCB’s loan portfolio is secured by real property. During the ordinary course of business, FNCB may foreclose on and take title to properties securing loans. There is a risk that hazardous or toxic substances could be found on these properties and that FNCB could be liable for remediation costs, as well as personal injury and property damage. Environmental laws may require FNCB to incur substantial expenses and may materially reduce the affected property's value or limit FNCB’s ability to sell the affected property. The remediation costs and any other financial liabilities associated with an environmental hazard could have a material adverse effect on FNCB’s business, financial condition and results of operations.
The COVID-19 pandemic, and the measures taken to control its spread, will continue to adversely impact our employees, customers, business operations and financial results, and the ultimate impact will depend on future developments, which are highly uncertain and cannot be predicted.
The COVID-19 pandemic has impacted and is likely to continue to impact the national economy and the regional and local markets in which we operate, lower equity market valuations, create significant volatility and disruption in capital and debt markets, and increase unemployment levels. Our business operations may be disrupted if significant portions of our workforce are unable to work effectively, including because of illness, quarantines, government actions, or other restrictions in connection with the pandemic. We are subject to heightened cybersecurity, information security and operational risks as a result of work-from-home arrangements that we have put in place for our employees. Federal Reserve actions to combat the economic contraction caused by the COVID-19 pandemic, including reductions of the target federal funds rate, could, if prolonged, adversely affect our net interest income and margins, and our profitability. Closures of businesses and the institution of social distancing, shelter in place and stay home orders in the communities we serve, have reduced business activity and financial transactions. While certain of these restrictions have been eased and workplaces in the communities we serve are beginning to reopen, the pace of reopening is measured, and these government policies and directives are subject to change as the effects and spread of the COVID-19 pandemic continue to evolve. It is unclear whether any COVID-19 pandemic-related business losses that we or our customers may suffer will be recovered by existing insurance policies. Changes in customer behavior due to worsening business and economic conditions or legislative or regulatory initiatives may impact the demand for our products and services, which could adversely affect our revenue, increase the recognition of credit losses in our loan portfolios and increase our allowance for credit losses. The measures we have taken to aid our customers, including short-term loan payment deferments and other payment accommodations under Section 4013 of the CARES Act, may be insufficient to help our customers who have been negatively impacted by the economic fallout from the COVID-19 pandemic. Loans that are currently in deferral status may become nonperforming loans. Because of adverse economic and market conditions affecting issuers, we may be required to recognize impairments on the securities we hold as well as reductions in other comprehensive income. The extent to which the COVID-19 pandemic will continue to impact our business, results of operations, and financial condition, as well as our regulatory capital and liquidity ratios, will depend on future developments, including the scope and duration of the pandemic and actions taken by governmental authorities and other third parties in response to the pandemic, as well as further actions we may take as may be required by government authorities or that we determine is in the best interests of our employees and customers. There is no certainty that such measures will be sufficient to mitigate the risks posed by the pandemic.
Our participation in the U.S. Small Business Administration (“SBA”) Paycheck Protection Program (“PPP”) may expose us to certain additional risks, including risks relating to alleged noncompliance with PPP rules and regulations, which could have a material adverse impact on FNCB's business, financial condition and results of operations.
The CARES Act, enacted on March 27, 2020, included a $349 billion loan program, the Paycheck Protection Program ("PPP") administered through the Small Business Administration ("SBA"). Additional funding was provided for the PPP in April 2020. Under the PPP, small businesses and other entities and individuals were permitted to apply for loans from existing SBA lenders and other approved lenders. FNCB is a participating lender under the PPP, and, as of December 31, 2020, had processed and received SBA approval for 1,002 loan applications resulting in approximately $118.6 million in loans. The Consolidated Appropriations Act of 2021 that was enacted on December 27, 2020 provides an additional $284.6 billion in PPP funding to small businesses, including borrowers who previously received a PPP loan. On January 19, 2021, FNCB began originating PPP loans as part of this second round of funding and as of February 28, 2021, has processed and received SBA approval for 400 loans representing approximately $52.7 million in funding. It is FNCB's understanding that loans funded through the PPP are fully guaranteed by the United States government. However, there is some ambiguity in the laws, rules, and guidance regarding the operation of the PPP, which may expose us to compliance risks relating to the PPP. We may have credit risk on PPP loans if a determination is later made by the SBA that deficiency exists in the manner in which a particular loan was originated, funded, or serviced, such as an issue with the eligibility of a borrower to receive a PPP loan. In the event of a loss resulting from a default on a PPP loan and a determination by the SBA that there was a deficiency in the manner in which the PPP loan was originated, funded, or serviced, the SBA may deny its liability under the guaranty relating to the loan, reduce the amount of the guaranty, or, if it has already paid under the guaranty, seek recovery of any loss related to the deficiency.
Risks Related to FNCB’s Industry
FederalFNCB may be adversely affected by the actions and state regulators periodically examine FNCB’s business and may require FNCB to remediate adverse examination findings or may take enforcement action against FNCB.lack of commercial soundness of other financial institutions.
The FRB,FNCB’s ability to engage in routine funding transactions could be adversely affected by the FDICactions and the PADOBS, periodically examine FNCB’s business, including its compliance with laws and regulations. If,lack of commercial soundness of other financial institutions. Financial services companies are interrelated as a result of an examination,trading, clearing, counterparty and other relationships. As a result, defaults by, or even rumors or questions about, one or more financial services companies, or the Federal Reserve, FDICfinancial services industry generally, could lead to market-wide liquidity problems and losses or PADOBS were to determine that FNCB’s financial condition, capital resources, asset quality, earnings prospects, management, liquiditydefaults by FNCB or other aspects of any of FNCB’s operations had become unsatisfactory, or that FNCB were in violation of any law or regulation, they may take a number of different remedial actions as they deem appropriate.institutions. These actions include the power to require FNCB to remediate any such adverse examination findings.
In addition, these agencies have the power to take enforcement action against FNCB to enjoin "unsafe or unsound" practices, to require affirmative action to correct any conditions resulting from any violation of law or regulation or unsafe or unsound practice, to issue an administrative order that can be judicially enforced, to direct an increase in FNCB’s capital, to direct the sale of subsidiaries or other assets, to limit dividends and distributions, including the repurchase of common stock, to restrict FNCB’s growth, to assess civil money penalties against FNCB or its officers or directors, to remove officers and directors and, if it is concluded that such conditions cannot be corrected or there is imminent risk of loss to depositors, to terminate FNCB’s deposit insurance and place the Bank into receivership or conservatorship. Any regulatory enforcement action against FNCBlosses could have a material adverse effect on itsFNCB’s business, financial condition and results of operations.
FNCB may be required to act as a source of financial and managerial strength for the Bank in times of stress.
FNCB, as a bank holding company, is required to act as a source of financial and managerial strength to the Bank and to commit resources to support the Bank if necessary. FNCB may be required to commit additional resources to the Bank at times when FNCB may not be in a financial position to provide such resources or when it may not be in FNCB’s, or its shareholders’ or creditors’, best interests to do so. A requirement to provide such support is more likely during times of financial stress for FNCB and the Bank, which may make any capital FNCB is required to raise to provide such support more expensive than it might otherwise be. In addition, any capital loans FNCB makes to the Bank are subordinate in right of repayment to deposit liabilities of the Bank.
FNCB is subject to extensive government regulation, supervision and possible regulatory enforcement actions, as well as "fair and responsible banking'' laws designed to protect consumers, which may subject it to higher costs and lower shareholder returns.
The banking industry is subject to extensive regulation and supervision that govern almost all aspects of its operations. The extensive regulatory framework is primarily intended to protect the federal deposit insurance fund and depositors, not shareholders. Compliance with applicable laws and regulations can be difficult and costly and, in some instances, may put banks at a competitive disadvantage compared to less regulated competitors such as finance companies, mortgage banking companies, leasing companies and internet-based Fintech companies. FNCB’s regulatory authorities have extensive discretion in their supervisory and enforcement activities, including with respect to the imposition of restrictions on the operation of a bank or a bank holding company, the imposition of significant fines, the ability to delay or deny merger or other regulatory applications, the classification of assets by a bank, and the adequacy of a bank’s allowance for loan losses, among other matters. If they deem FNCB to be operating in a manner inconsistent with safe and sound banking practices, these regulatory authorities can require the entry into informal and formal supervisory agreements, including board resolutions, memorandum of understanding, settlement agreements and consent or cease and desist orders, pursuant to which FNCB would be required to implement identified corrective actions to address cited concerns and/or to refrain from taking certain actions in the form of injunctive relief. In recent years, the banking industry has faced increased regulation and scrutiny; for instance, areas such as BSA compliance (including BSA and related anti-money laundering regulations) and real estate-secured consumer lending (such as Truth-in-Lending regulations, changes in Real Estate Settlement Procedures Act regulations, implementation of licensing and registration requirements for mortgage originators and more recently, heightened regulatory attention to mortgage and foreclosure-related activities and exposures) are being confronted with escalating regulatory expectations and scrutiny. In addition, the Community Reinvestment Act, the Equal Credit Opportunity Act, the Fair Housing Act and other fair lending laws and regulations, including state laws and regulations, prohibit discriminatory lending practices by financial institutions. The Federal Trade Commission Act and the Dodd-Frank Act prohibit unfair, deceptive, or abusive acts or practices by financial institutions. The U.S. Department of Justice, or DOJ, federal banking agencies, and other federal and state agencies are responsible for enforcing these fair and responsible banking laws and regulations. A challenge to an institution’s compliance with fair and responsible banking laws and regulations could result in a wide variety of sanctions, including damages and civil money penalties, injunctive relief, restrictions on mergers and acquisitions activity, restrictions on expansion and restrictions on entering new business lines. Private parties may also have the ability to challenge an institution’s performance under fair lending laws in private class action litigation. Such actions could have a material adverse effect on FNCB’s reputation, business, financial condition and results of operations.
Non-compliance with laws and regulations such as these, even in cases of inadvertent non-compliance, could result in litigation, significant fines and/or sanctions. Any failure to comply with, or any change in, any applicable regulation and supervisory requirement, or change in regulation or enforcement by such authorities, whether in the form of policies, regulations, legislation, rules, orders, enforcement actions, or decisions, could have a material impact on FNCB, the Bank and other affiliates, and its operations. Federal economic and monetary policy may also affect FNCB’s ability to attract deposits and other funding sources, make loans and investments, and achieve satisfactory interest spreads. Any failure to comply with such regulation or supervision could result in sanctions by regulatory agencies, civil money penalties and/or reputation damage, which could have a material adverse effect on FNCB’s business, financial condition and results of operations. In addition, compliance with any such action could distract management’s attention from FNCB’s operations, cause it to incur significant expenses, restrict it from engaging in potentially profitable activities and limit its ability to raise capital.
New or changed legislation or regulation, updated guidance regarding current regulation and regulatory initiatives could adversely affect FNCB through increased regulation and increased costs of doing business.
Changes in federal and state legislation and regulation may affect FNCB’s operations. Laws and regulations, such as the Dodd-Frank Act and Basel III, may have unforeseen or unintended consequences on the banking industry. The Dodd-Frank Act has implemented significant changes to the U.S. financial system, including the creation of new regulatory agencies (such as the Financial Stability Oversight Council to oversee systemic risk and the CFPB to develop and enforce rules for consumer financial products), changes in retail banking regulations, and changes to deposit insurance assessments. For example, the Dodd-Frank Act has implemented new requirements with respect to “qualified mortgages” and new mortgage servicing standards have, and may continue to, increase costs associated with this business. Refer to the section entitled “Business – The Bank – Consumer Financial Protection Bureau” included in Item 1, "Business" to this Annual Report on Form 10-K for a more detailed description of new or changed legislation or regulation and regulatory initiatives.
One example of updated guidance regarding legislation is that on October 26, 2022, the CFPB issued supervisory guidance which warned financial institutions that levying overdraft fees to consumers who would not reasonably anticipate the fees may constitute an unfair act or practice under the Consumer Financial Protection Act of 2010 ("CFPA"). In addition, the CFPB issued a compliance bulletin warning that certain depositor fees may similarly violate the CFPA. This guidance comes as a next step in the CFPB’s “junk fee” initiative, launched in January 2022, through which the CFPB has endeavored to identify and take certain steps to curb potentially exploitative fees charged by banks and other financial institutions. While management does not believe that FNCB's overdraft fees are in violation of the CFPA, many larger financial institutions have eliminated overdraft charges on consumer accounts and the banking industry has recently announced a significant decrease in overdraft fee income in 2022. Competition from large banks and the imposition of restrictions on overdraft fees by the federal government, may result in FNCB having to change its overdraft fee structure, which could negatively impact future non-interest income run rates.
Additionally, final rules
External events, including natural disasters, national or global health emergencies, and events of armed conflict in other countries, and terrorist threats could impact FNCB's ability to implement Basel III adopted in July 2013 revise risk-based and leverage capital requirements and limit capital distributions and certain discretionary bonuses if a banking organization does not hold the required “capital conservation buffer.” The rule became effective for FNCB on January 1, 2015, with some additional transition periods. This additional regulation could increase compliance costs anddo business or otherwise adversely affect operations. ReferFNCB's business, operations or financial condition.
Financial institutions, like other businesses, are susceptible to the descriptioneffects of external events that can compromise operating and communications systems and otherwise have adverse effects. Such events, should they occur, can cause significant damage, impact the stability of FNCB's operations or facilities, result in Item 1, "Business"additional expense, or impair the ability of FNCB's borrowers to this Annual Report on Form 10-K underrepay their loans. Although we have established and regularly test disaster recovery procedures, the heading “Capital Adequacy Requirements” for a more detailed description of the final rules. The potential also exists for additional federal or state laws or regulations, or changes in policy or interpretations, affecting many of FNCB’s operations, including capital levels, lending and funding practices, insurance assessments, and liquidity standards. The effectoccurrence of any such changes and their interpretation and application by regulatory authorities cannot be predicted, may increase FNCB’s cost of doing business and otherwise affect FNCB’s operations, may significantly affect the markets in which it does business, andevent could have a materially adverse effect on FNCB.
FNCB is also subject to the guidelines under the GLB Act. The GLB Act guidelines require, among other things, that each financial institution develop, implement and maintain a written, comprehensive information security program containing safeguards that are appropriate to the financial institution’s size and complexity, the nature and scope of the financial institution’s activities and the sensitivity of any customer information at issue. In recent years there also has been increasing enforcement activity in the areas of privacy, information security and data protection in the United States, including at the federal level. Compliance with these laws, rules and regulations regarding the privacy, security and protection of customer and employee data could result in higher compliance and technology costs. In addition, non-compliance could result in potentially significant fines, penalties and damage to FNCB’s reputation and brand.
The Federal Reserve may also set higher capital requirements for holding companies whose circumstances warrant it. For example, holding companies experiencing significant internal growth or making acquisitions are expected to maintain strong capital positions substantially above the minimum supervisory levels, without significant reliance on intangible assets. FNCB’s regulatory capital ratios currently are in excess of the levels established for "well capitalized" institutions. Future regulatory change could impose higher capital standards.
Any new or revised standards adopted in the future may require us to maintain materially more capital, with common equity as a more predominant component, or manage the configuration of our assets and liabilities to comply with formulaic liquidity requirements. We may not be able to raise additional capital at all, or on terms acceptable to us. Failure to maintain capital to meet current or future regulatory requirements could have a significant material adverse effect on our business, financial condition and results of operations. In addition, other external events, including natural disasters, health emergencies and epidemics or pandemics, such as the COVID-19 pandemic, and events of armed conflict in other parts of the world, such as the present armed conflict involving Ukraine and Russia, or the Middle East, could adversely affect the global or regional economies resulting in unfavorable economic conditions in the United States. Any such development could have an adverse effect on FNCB's business.
Risks related to the mergers
Because the market price of PFIS common stock will fluctuate, the value of the merger consideration to be received by our shareholders may change.
On September 27, 2023, FNCB facesannounced the signing of the Merger Agreement with PFIS, pursuant to which FNCB will merge with and into PFIS, with PFIS as the surviving entity. Under the terms of the Merger Agreement, each share of FNCB common stock (other than certain shares held by FNCB or PFIS), will be converted into the right to receive 0.1460 shares of common stock of PFIS. The closing price of PFIS common stock on the date that the merger is completed may vary from the closing price of PFIS common stock on the date PFIS and FNCB announced the signing of the PFIS Merger Agreement and the date of the special meeting of FNCB shareholders regarding the merger. Because the merger consideration is determined by a riskfixed exchange ratio, FNCB shareholders will not know or be able to calculate the value of noncompliancethe shares of PFIS common stock they will receive upon completion of the merger. Any change in the market price of PFIS common stock prior to completion of the merger may affect the value of the merger consideration. Stock price changes may result from a variety of factors, including general market and enforcement action witheconomic conditions, changes in the Bank Secrecy Actcompanies’ respective businesses, operations and prospects, and regulatory considerations, among other things. Many of these factors are beyond the control of PFIS and FNCB.
Regulatory approvals may not be received, may take longer than expected or may impose conditions that are not presently anticipated or cannot be met.
Before the transactions contemplated by the Merger Agreement may be completed, various approvals must be obtained from bank regulatory authorities. In determining whether to grant these approvals, the applicable regulatory authorities consider a variety of factors, including the competitive impact of the proposal in the relevant geographic markets; financial, managerial and other anti-moneysupervisory considerations of each party; convenience and needs of the communities to be served and the record of the insured depository institution subsidiaries under the Community Reinvestment Act of 1977 and the regulations promulgated thereunder; effectiveness of the parties in combating money laundering statutesactivities; any significant outstanding supervisory matters; and regulations.the extent to which the proposal would result in greater or more concentrated risks to the stability of the United States banking or financial system. These regulatory authorities may impose conditions on the granting of such approvals. Such conditions or changes and the process of obtaining regulatory approvals could have the effect of delaying completion of the mergers or of imposing additional costs or limitations on the combined companies following the mergers. The regulatory approvals may not be received at all, may not be received in a timely fashion, or may contain conditions on the completion of the mergers that are not anticipated or cannot be met. Furthermore, such conditions or changes may constitute a burdensome condition that may allow PFIS to terminate the Merger Agreement and PFIS may exercise its right to terminate the Merger Agreement. If the consummation of the mergers is delayed, including by a delay in receipt of necessary regulatory approvals, the business, financial condition and results of operations of FNCB may also be materially and adversely affected.
Failure of the merger to be completed, the termination of the Merger Agreement or a significant delay in the consummation of the merger could negatively impact FNCB.
The Bank Secrecy Act of 1970, the Uniting and Strengthening America by Providing Appropriate Tools to Intercept and Obstruct Terrorism Act of 2001, or the USA Patriot Act or Patriot Act, and other laws and regulations require financial institutions, among other duties, to institute and maintain an effective anti-money laundering program and to file reports such as suspicious activity reports and currency transaction reports. FNCBMerger Agreement is required to comply with these and other anti-money laundering requirements. FNCB’s federal and state banking regulators, the Financial Crimes Enforcement Network (“FinCEN”), and other government agencies are authorized to impose significant civil money penalties for violations of anti-money laundering requirements. FNCB is also subject to increased scrutinya number of complianceconditions which must be fulfilled in order to complete the mergers. These conditions to the consummation of the mergers may not be fulfilled and, accordingly, the mergers may not be completed. In addition, if the mergers are not completed by September 27, 2024, either PFIS or FNCB may choose to terminate the Merger Agreement at any time after that date if the failure of the effective time to occur on or before that date is not caused by any breach of the Merger Agreement by the party electing to terminate the Merger Agreement. If the mergers are not consummated, the ongoing business, financial condition and results of operations of FNCB may be materially adversely affected and the market price of FNCB’s common stock may decline significantly, particularly to the extent that the current market price reflects a market assumption that the mergers will be consummated.
In addition, FNCB has incurred and will incur substantial expenses in connection with the regulations issuednegotiation and enforcedcompletion of the transactions contemplated by the OfficeMerger Agreement. If the mergers are not completed, FNCB would have to recognize these expenses without realizing the expected benefits of Foreign Assets Control (“OFAC”). If FNCB’s program is deemed deficient, FNCB could be subject to liability,the mergers. Any of the foregoing, or other risks arising in connection with the failure of or delay in consummating the merger, including fines, civil money penaltiesthe diversion of management attention from pursuing other opportunities and other regulatory actions, which may include restrictionsthe constraints in the Merger Agreement on FNCB’s business operations and itsthe ability to pay dividends, or repurchase sharesmake significant changes to FNCB’s ongoing business during the pendency of its common stock, restrictions onthe mergers, and acquisitions activity, restrictions on expansion, and restrictions on entering new business lines. Failure to maintain and implement adequate programs to combat money laundering and terrorist financing could also have significant consequences to FNCB's reputation. Any of these circumstances could have a material adverse effect on FNCB’s business, financial condition orand results of operations. If the Merger Agreement is terminated and FNCB’s board of directors seeks another merger or business combination, FNCB shareholders cannot be certain that FNCB will be able to find a party willing to engage in a transaction on more attractive terms than the merger with PFIS.
FNCB iswill be subject to numerous "fairbusiness uncertainties and responsible banking" laws designedcontractual restrictions while the mergers are pending.
Uncertainty about the effect of the merger on employees, customers (including depositors and borrowers), suppliers and vendors may have an adverse effect on the business, financial condition and results of operations of FNCB. These uncertainties may impair FNCB’s ability to protect consumers,attract, retain and failuremotivate key personnel and customers (including depositors and borrowers) pending the consummation of the mergers, as such personnel and customers may experience uncertainty about their future roles and relationships following the consummation of the mergers. Additionally, these uncertainties could cause customers (including depositors and borrowers), suppliers, vendors and others who deal with FNCB to complyseek to change existing business relationships with these laws could leadFNCB or fail to a wide variety of sanctions.extend an existing relationship with FNCB. In addition, competitors may target FNCB’s existing customers by highlighting potential uncertainties and integration difficulties that may result from the mergers.
The Community Reinvestment Act,pursuit of the Equal Credit Opportunity Act, the Fair Housing Act and other fair lending laws and regulations, including state laws and regulations, prohibit discriminatory lending practices by financial institutions. The Federal Trade Commission Actmergers and the Dodd-Frank Act prohibit unfair, deceptive, or abusive acts or practices by financial institutions. The U.S. Departmentpreparation for the integration may place a burden on FNCB’s management and internal resources. Any significant diversion of Justice, or DOJ, federal banking agencies,management attention away from ongoing business concerns and other federalany difficulties encountered in the transition and state agencies are responsible for enforcing these fair and responsible banking laws and regulations. A challenge to an institution’s compliance with fair and responsible banking laws and regulations could result in a wide variety of sanctions, including damages and civil money penalties, injunctive relief, restrictions on mergers and acquisitions activity, restrictions on expansion and restrictions on entering new business lines. Private parties may also have the ability to challenge an institution’s performance under fair lending laws in private class action litigation. Such actionsintegration process could have a material adverse effect on FNCB’s reputation,business, financial condition and results of operations. In addition, the Merger Agreement restricts each party from taking certain actions without the other party’s consent while the mergers are pending. These restrictions could have a material adverse effect on FNCB’s business, financial condition and results of operations.
The Merger Agreement contains provisions that may discourage other companies from pursuing, announcing or submitting a business combination proposal to FNCB is subject to laws regarding the privacy, information security and protection of personal information and any violation of these laws or another incident involving personal, confidential or proprietary information of individuals could damage FNCB’s reputation and otherwise adversely affect FNCB’s business.
FNCB’s business requires the collection and retention of large volumes of customer data, including personally identifiable information (“PII”), in various information systems that FNCB maintains and in those maintained by third party service providers. FNCB also maintains important internal company data such as PII about its employees and information relating to its operations. FNCB is subject to complex and evolving laws and regulations governing the privacy and protection of PII of individuals (including customers, employees and other third parties). For example, FNCB’s business is subject to the Gramm-Leach-Bliley Act, or the GLB Act, which, among other things: (i) imposes certain limitations on FNCB’s ability to share nonpublic PII about FNCB’s customers with nonaffiliated third parties; (ii) requires that FNCB provides certain disclosures to customers about its information collection, sharing and security practices and afford customers the right to "opt out" of any information sharing by FNCB with nonaffiliated third parties (with certain exceptions); and (iii) requires that FNCB develops, implements and maintains a written comprehensive information security program containing appropriate safeguards based on FNCB’s size and complexity, the nature and scope of its activities, and the sensitivity of customer information FNCB processes, as well as plans for responding to data security breaches. Various federal and state banking regulators and states have also enacted data breach notification requirements with varying levels of individual, consumer, regulatory or law enforcement notification in the event of a security breach. Ensuring that FNCB’s collection, use, transfer and storage of PII complies with all applicable laws and regulations can increase FNCB’s costs. Furthermore, FNCB may not be able to ensure that customers and other third parties have appropriate controls in place to protect the confidentiality of the information that they exchange with FNCB, particularly where such information is transmitted by electronic means. If personal, confidential or proprietary information of customers or others were to be mishandled or misused (in situations where, for example, such information was erroneously provided to parties who are not permitted to have the information, or where such information was intercepted or otherwise compromised by third parties), FNCB could be exposed to litigation or regulatory sanctions under privacy and data protection laws and regulations. Concerns regarding the effectiveness of FNCB’s measures to safeguard PII, or even the perception that such measures are inadequate, could cause FNCB to lose customers or potential customers and thereby reduce FNCB’s revenues. Accordingly, any failure, or perceived failure, to comply with applicable privacy or data protection laws and regulations may subject FNCB to inquiries, examinations and investigations that couldmight result in requirementsgreater value to modify or cease certain operations or practices or in significant liabilities, fines or penalties, and could damage FNCB’s reputation and otherwise adversely affect FNCB’s operations, financial condition and results of operations.
Rulemaking changes implemented by the Consumer Financial Protection Bureau may result in higher regulatory and compliance costs that may adversely affect FNCB’s business.FNCB shareholders.
The Dodd-Frank Act createdMerger Agreement contains provisions that may discourage a new, independent federal agency,third party from pursuing, announcing or submitting a business combination proposal to FNCB that might result in greater value to FNCB shareholders than the Consumer Financial Protection Bureau,merger with PFIS. These provisions include a general prohibition on FNCB from soliciting, or, CFPB, which was granted broad rulemaking, supervisory and enforcement powerssubject to certain exceptions, entering into discussions with any third party regarding any acquisition proposal or offers for competing transactions. Furthermore, if the Merger Agreement is terminated, under various federal consumer financial protection laws. The consumer protection provisionscertain circumstances, FNCB may be required to pay PFIS a termination fee equal to $4.8 million. FNCB also has an obligation to submit its merger-related proposals to a vote by its shareholders, including if FNCB receives an unsolicited proposal that FNCB board of directors believes is superior to the mergers, unless the Merger Agreement is terminated by FNCB under certain conditions described in the Merger Agreement.
Litigation against FNCB or PFIS, or the members of FNCB’s or PFIS’s board of directors, could prevent or delay the completion of the Dodd-Frank Act and the examination, supervision and enforcement of those laws and implementing regulations issued by the CFPBmergers.
Shareholder plaintiffs or purported shareholder plaintiffs have created a more intense and complex environment for consumer finance regulation. The ultimate impact of this heightened scrutiny is uncertain but could result in changes to pricing, practices, products and procedures. It could also result in increased costsasserted legal claims related to regulatory oversight, supervisionthe pending mergers or may assert legal claims related to the mergers. The results of any such legal proceeding would be difficult to predict and examination. These changessuch legal proceedings could delay or prevent the mergers from being completed in a timely manner. Moreover, any litigation could be time consuming and expensive, and could divert attention of FNCB’s and PFIS’s respective management teams away from their companies’ regular business. Any lawsuit adversely resolved against FNCB, PFIS or members of their respective boards of directors, could have a material adverse effect on FNCB’seach party’s business, financial condition and results of operations.
One of the conditions to the consummation of the mergers is the absence of any law, order, decree or injunction (whether temporary, preliminary or permanent) or other action taken by the governmental authority of competent jurisdiction that restricts, enjoins or prohibits or makes illegal the consummation of the transactions contemplated by the Merger Agreement, including the mergers. Consequently, if a settlement or other resolution is not reached in any lawsuit that is filed or any regulatory proceeding and a claimant secures injunctive or other relief or a governmental authority issues an order or other directive restricting, prohibiting or making illegal the completion of the transactions contemplated by the Merger Agreement, including the mergers, then such injunctive or other relief may prevent the mergers from being completed in a timely manner or at all.
The Bank’s FDIC deposit insurance premiumsCombining PFIS and assessmentsFNCB may increase.be more difficult, costly or time-consuming than expected, and PFIS and FNCB may fail to realize the anticipated benefits of the mergers.
The Bank’s deposits are insuredAn inability to realize the full extent of the anticipated benefits of the mergers and the other transactions contemplated by the FDIC upMerger Agreement, as well as any delays encountered in the integration process, could have an adverse effect upon the revenues, levels of expenses and operating results of the surviving corporation following the completion of the mergers, which may adversely affect the value of the common stock of the surviving corporation following the completion of the mergers. It is possible that the integration process could result in loss of key employees, the disruption of each company's ongoing business or inconsistencies in standards, controls, procedures and policies that adversely affect the companies' ability to legal limitsmaintain relationships with clients, customers, depositors and accordingly,employees or to achieve the Bank is subjectanticipated benefits and cost savings of the mergers.
Following the mergers, the size of the business of the surviving corporation will increase beyond the current size of either PFIS' or FNCB's respective business. The surviving corporation's future success will depend, in part, upon its ability to insurance assessments based onmanage the Bank’s average consolidated total assets less its average tangible equity. The Bank’s regular assessments are determined by its risk classification,expanded business, which is based on its regulatory capital levelsmay pose challenges for management, including challenges related to the management and monitoring of new operations and associated increased costs and complexity. In connection with the mergers, PFIS will assume FNCB's outstanding indebtedness. PFIS' existing debt, together with any future incurrence of additional indebtedness, and the levelassumption of supervisory concernFNCB's outstanding indebtedness, could have important consequences for the surviving corporation's creditors and the surviving corporation's shareholders, potentially limiting PFIS's capital and liquidity. There can be no assurances that the surviving corporation will be successful or that it poses. Numerous bank failures duringwill realize the financial crisis and increases inexpected operating efficiencies, revenue enhancements or other benefits currently anticipated from the statutory deposit insurance limits increased resolution costs to the FDIC and put significant pressure on the Deposit Insurance Fund. In order to maintain a strong funding position and the reserve ratios of the Deposit Insurance Fund required by statute and FDIC estimates of projected requirements, the FDIC has the power to increase deposit insurance assessment rates and impose special assessments on all FDIC-insured financial institutions. Any future increases or special assessments could reduce FNCB’s profitability and could have a material adverse effect on FNCB’s business, financial condition and results of operations.mergers.
Risks Related to FNCB’s Common Stock
The price of FNCB’s common stock may fluctuate significantly, which may make it difficult for shareholders to resell shares of common stock at a time or price they find attractive.
FNCB’s stock price may fluctuate significantly as a result of a variety of factors, many of which are beyond its control. These factors include, among others:
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In addition, in recent years, the stock market in general has experienced extreme price and volume fluctuations. This volatility has had a significant effect on the market price of securities issued by many companies, including for reasons unrelated to their operating performance. These broad market fluctuations may adversely affect FNCB’s stock price, notwithstanding its operating results. FNCB expects that the market price of its common stock will continue to fluctuate and there can be no assurances about the levels of the market prices for its common stock.
General market fluctuations, industry factors and general economic and political conditions and events, such as economic slowdowns or recessions, interest rate changes or credit loss trends, could also cause FNCB’s stock price to decrease regardless of operating results.
The rights of holders of FNCB’s common stock to receive liquidation payments and dividend payments are junior to FNCB’s existing and future indebtedness and to any senior securities FNCB may issue in the future, and FNCB’s ability to declare dividends on, or repurchase shares of, the common stock may become limited.
Shares of the common stock are equity interests in FNCB and do not constitute indebtedness. As such, shares of FNCB’s common stock rank junior to all current and future indebtedness and other non-equity claims on FNCB with respect to assets available to satisfy claims on FNCB, including in a liquidation of FNCB. FNCB may, and the Bank and FNCB’s other subsidiaries may also, incur additional indebtedness from time to time and may increase FNCB’s aggregate level of outstanding indebtedness.
FNCB’s board of directors is authorized to cause FNCB to issue additional classes or series of preferred stock without any action on the part of the shareholders. If FNCB issues preferred shares in the future that have a preference over its common stock with respect to the payment of dividends or upon liquidation, or if FNCB issues preferred shares with voting rights that dilute the voting power of the common stock, then the rights of holders of FNCB’s common stock or the market price of FNCB’s common stock could be adversely affected.
FNCB’s ability to pay dividend, or repurchase shares of its common stock, may become limited by regulatory restrictions. In addition, the ability of the Bank to pay dividends to FNCB is limited by the Bank’s obligations to maintain sufficient accumulated net earnings and by other general restrictions on dividends that are applicable to state nonmember banks.
Holders of FNCB’s common stock are only entitled to receive the dividends that FNCB’s board of directors may declare out of funds legally available for those payments. In addition, FNCB's board of directors may only repurchase shares out of funds legally available for those repurchases. Although FNCB has historically paid cash dividends on its common stock, and has recently announced a share repurchase program to repurchase shares of its common stock, FNCB is not required to do so. FNCB cannot assure shareholders that it will continue paying dividends, or repurchase shares, in the future. This could adversely affect the market price of FNCB’s common stock. Also, as discussed above, FNCB is a bank holding company and its ability to declare and pay dividends, or repurchase shares, depends in part on federal regulatory considerations, including the guidelines of the Federal Reserve regarding capital adequacy and dividends.
FNCB may need to raise additional capital in the future, but that capital may not be available when it is needed and on terms favorable to current shareholders.
Laws, regulations and banking regulators require FNCB and the Bank to maintain adequate levels of capital to support their operations. In addition, capital levels are determined by FNCB’s management and Board of Directors based on capital levels that they believe are necessary to support business operations. Management regularly evaluates its present and future capital requirements and needs and analyzes capital raising alternatives and options. Although FNCB succeeded in meeting its current regulatory capital requirements, it may need to raise additional capital in the future to support growth, possible loan losses or potential OTTIimpairment during future periods, to meet future regulatory capital requirements or for other reasons.
The Board of Directors may determine from time to time that FNCB needs to raise additional capital by issuing additional shares of common stock or other securities. FNCB is not restricted from issuing additional shares of common stock, including securities that are convertible into or exchangeable for, or that represent the right to receive, common stock. Because FNCB’s decision to issue securities in any future offering will depend on market conditions and other factors beyond its control, FNCB cannot predict or estimate the amount, timing or nature of any future offerings, or the prices at which such offerings may be affected. Such offerings will likely be dilutive to common shareholders from ownership, earnings and book value perspectives. New investors also may have rights, preferences and privileges that are senior to, and that adversely affect, its then current common shareholders. Additionally, if FNCB raises additional capital by making additional offerings of debt or preferred equity securities, upon liquidation, holders of its debt securities and shares of preferred shares, and lenders with respect to other borrowings, will receive distributions of available assets prior to the holders of common stock. Additional equity offerings may dilute the holdings of existing shareholders or reduce the market price of FNCB’s common stock, or both. Holders of FNCB’s common stock are not entitled to preemptive rights or other protections against dilution.
FNCB cannot provide any assurance that additional capital will be available on acceptable terms or at all. Any occurrence that may limit access to the capital markets may adversely affect FNCB’s capital costs and its ability to raise capital and, in turn, its liquidity. Moreover, if FNCB needs to raise capital, it may have to do so when many other financial institutions are also seeking to raise capital and would have to compete with those institutions for investors. An inability to raise additional capital on acceptable terms when needed could have a material adverse effect on FNCB’s business, financial condition and results of operations.
An investment in FNCB’s common stock is not an insured deposit.
FNCB’s common stock is not a bank deposit and, therefore, is not insured against loss by the FDIC, any other deposit insurance fund or by any other public or private entity. Investment in FNCB’s common stock is inherently risky for the reasons described in this “Risk Factors” section, and elsewhere in FNCB’s reports filed with the SEC, including under heading “Risk Factors” in this Annual Report on Form 10-K, or any subsequent report filed by FNCB. Investment in FNCB’s common stock is also subject to the market forces that affect the price of common stock in any company. As a result, shareholders may lose some or all of their investment in FNCB’s common stock.
Shareholders may not receive dividends on FNCB’s common stock.stock or have their shares repurchased by FNCB.
Although FNCB has historically declared quarterly cash dividends on its common stock, and recently announcedhas from time-to-time implemented a share repurchase program for the repurchase of shares of its common stock, FNCB is not required to do so and may reduce or cease to pay common stock dividends, or repurchase shares, in the future. If FNCB reduces or ceases to pay common stock dividends, or terminates its stock repurchase program, the market price of its common stock could be adversely affected.
The principal source of funds from which FNCB pays cash dividends, and repurchase shares, are the dividends received from the Bank. Banking laws and regulations of the Commonwealth of Pennsylvania restrict the amount of dividends and loans a bank may make to its parent company. In addition, under The Federal Deposit Insurance Corporation Improvement Act of 1991, banks may not pay a dividend, or repurchase shares if, after paying the dividend, or repurchasing such shares, the bank would be undercapitalized.
If FNCB fails to pay dividends, capital appreciation, if any, of its common stock may be the sole opportunity for gains on an investment in its common stock. In addition, in the event the Bank becomes unable to pay dividends to FNCB, FNCB may not be able to service its debt or pay its other obligations, pay dividends on, or repurchase shares of, its common stock and preferred stock. Accordingly, FNCB’s inability to receive dividends from the Bank could also have a material adverse effect on its business, financial condition and results of operations and the value of a shareholder’s investment in FNCB’s common stock.
An entity holding as little as a 5% interest in FNCB’s outstanding securities could, under certain circumstances, be subject to regulation as a “bank holding company.”
Any entity, including a “group” composed of natural persons, owning or controlling with the power to vote 25% or more of FNCB’s outstanding securities, or 5% or more if the holder otherwise exercises a “controlling influence” over FNCB, may be subject to regulation as a “bank holding company” in accordance with the Bank Holding Company Act of 1956, as amended, or the BHC Act. In addition, (a) any bank holding company or foreign bank with a U.S. presence may be required to obtain the approval of the Federal Reserve under the BHC Act to acquire or retain 5% or more of FNCB’s outstanding securities and (b) any person not otherwise defined as a company by the BHC Act and its implementing regulations may be required to obtain the approval of the Federal Reserve under the Change in Bank Control Act to acquire or retain 10% or more of FNCB’s outstanding securities. Becoming a bank holding company imposes statutory and regulatory restrictions and obligations, such as providing managerial and financial strength for its bank subsidiaries. Regulation as a bank holding company could require the holder to divest all or a portion of the holder’s investment in FNCB’s securities or those nonbanking investments that may be deemed impermissible or incompatible with bank holding company status, such as a material investment in a company unrelated to banking.
The requirements of being a public company may strain FNCB’s resources and divert management's attention.
FNCB is a public company, subject to the reporting requirements of the Exchange Act, the Sarbanes-Oxley Act and applicable securities rules and regulations. Under FDIC regulations, the Sarbanes-Oxley Act and regulations increase the scope, complexity and cost of corporate governance, reporting and disclosure practices over those of non-public or non-reporting companies. Among other things, the Exchange Act requires that FNCB file annual, quarterly and current reports with respect to its business and operating results and maintain effective disclosure controls and procedures and internal control over financial reporting. As a Nasdaq listed company, FNCB is also required to prepare and file proxy materials which meet the requirements of the Exchange Act and the SEC's proxy rules. Compliance with these rules and regulations increase FNCB’s legal and financial compliance costs, make some activities more difficult, time-consuming or costly, and increase demand on FNCB’s systems and resources, particularly if FNCB becomes ineligible to report as a “smaller reporting company” as defined in the SEC’s regulations. In order to maintain, appropriately document and, if required, improve FNCB’s disclosure controls and procedures and internal control over financial reporting to meet the standards required by the Sarbanes-Oxley Act, significant resources and management oversight may be required. As a result, management's attention may be diverted from other business concerns, which could harm FNCB’s business and operating results. Additionally, any failure by FNCB to file its periodic reports with the SEC in a timely manner could, among other things, harm its reputation, cause its investors and potential investors to lose confidence in FNCB, restrict trading in or reduce the market price of FNCB’s common stock, and potentially limit its ability to access the capital markets.
As a public company, FNCB incurs significant legal, accounting, insurance, compliance and other expenses. Any deficiencies in FNCB’s financial reporting or internal controls could materially and adversely affect its business and the market price of FNCB’s common stock.
As a public company, FNCB incurs significant legal, accounting, insurance and other expenses. These costs and compliance with the rules of the SEC and the rules of Nasdaq increase FNCB’s legal and financial compliance costs and make some activities more time consuming and costly. SEC rules require that FNCB’s Chief Executive Officer and Chief Financial Officer periodically certify the existence and effectiveness of its internal control over financial reporting. In addition, FNCB is required to engage an independent registered public accounting firm to audit and opine on the design and operating effectiveness of its internal control over financial reporting. This process requires significant documentation of policies, procedures and systems, and review of that documentation and testing of FNCB’s internal control over financial reporting by its internal auditing and accounting staff and an independent registered public accounting firm. This process requires considerable time and attention from management, which could prevent FNCB from successfully implementing its business initiatives and improving its business, financial condition and results of operations, which may strain FNCB’s internal resources, and may increase its operating costs. FNCB may experience higher than anticipated operating expenses and outside auditor fees during the implementation of these changes and thereafter.
During the course of FNCB’s testing it may identify deficiencies that would have to be remediated to satisfy the SEC rules for certification of FNCB’s internal control over financial reporting. These controls may not achieve their intended objectives. Control processes that involve human diligence and compliance, such as its disclosure controls and procedures and internal controls over financial reporting, are subject to lapses in judgment and breakdowns resulting from human failures. Controls can also be circumvented by collusion or improper management override. Because of such limitations, there are risks that material misstatements due to error or fraud may not be prevented or detected and that information may not be reported on a timely basis. Moreover, effective internal controls are necessary to produce reliable financial reports and to prevent fraud. If FNCB has deficiencies in its disclosure controls and procedures or internal control over financial reporting, it may materially and adversely affect FNCB.
A material weakness is defined by the standards issued by the PCAOB as a deficiency, or combination of deficiencies, in internal control over financial reporting that results in a reasonable possibility that a material misstatement of FNCB’s annual or interim financial statements will not be prevented or detected on a timely basis. As a consequence, FNCB would have to disclose in periodic reports it files with the SEC any material weakness in its internal control over financial reporting. The existence of a material weakness would preclude management from concluding that FNCB’s internal control over financial reporting is effective and would preclude its independent auditors from expressing an unqualified opinion on the effectiveness of its internal control over financial reporting. In addition, disclosures of deficiencies of this type in FNCB’s SEC reports could cause investors to lose confidence in its financial reporting and may negatively affect the market price of its common stock and could result in the delisting of its securities from the securities exchanges on which they trade. Moreover, effective internal controls are necessary to produce reliable financial reports and to prevent fraud. If FNCB has deficiencies in its disclosure controls and procedures or internal control over financial reporting, it may materially and adversely affect FNCB.
FNCB’s disclosure controls and procedures and internal controls over financial reporting may not achieve their intended objectives.
FNCB maintains disclosure controls and procedures designed to ensure the timely filing of reports as specified in the rules and forms of the SEC. FNCB also maintains a system of internal control over financial reporting. These controls may not achieve their intended objectives. Control processes that involve human diligence and compliance, such as its disclosure controls and procedures and internal controls over financial reporting, are subject to lapses in judgment and breakdowns resulting from human failures. Controls can also be circumvented by collusion or improper management override. Because of such limitations, there are risks that material misstatements due to error or fraud may not be prevented or detected and that information may not be reported on a timely basis. If FNCB’s controls are not effective, it could have a material adverse effect on its financial condition, results of operations, and market for its common stock, and could subject it to additional regulatory scrutiny.
Changes in accounting standards could impact reported earnings.
From time to time there are changes in the financial accounting and reporting standards that govern the preparation of financial statements. These changes can materially impact how FNCB records and reports its financial condition and results of operations. In some instances, FNCB could be required to apply a new or revised standard retroactively, resulting in the restatement of prior period financial statements.
Changes which have been approved for future implementation, or which are currently proposed or expected to be proposed or adopted include requirements that we: (i) calculate the allowance for loan losses on the basis of the current expected credit losses over the lifetime of our loans, referred to as the CECL model, which is expected to be applicable to us beginning in 2023; and (ii) record the value of and liabilities relating to operating leases on our balance sheet, which was implemented in the beginning of 2019. These changes could adversely affect our capital, regulatory capital ratios, ability to make larger loans, earnings and performance metrics. Any such changes could have a material adverse effect on our business, financial condition and results of operations.
Under the CECL model, banks will be required to present certain financial assets carried at amortized cost, such as loans held for investment and held-to-maturity debt securities, at the net amount expected to be collected. The measurement of expected credit losses is to be based on information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. This measurement will take place at the time the financial asset is first added to the balance sheet and periodically thereafter. This differs significantly from the "incurred loss" model required under current GAAP, which delays recognition until it is probable a loss has been incurred. Accordingly, we expect that the adoption of the CECL model will materially affect how we determine our allowance for loan losses, and could require us to significantly increase our allowance. Moreover, the CECL model may create more volatility in the level of the allowance for loan losses. If we are required to materially increase the level of the allowance for loan losses for any reason, such increase could adversely affect our business, financial condition and results of operations. We are evaluating the impact the CECL accounting model will have on our accounting, but expect to recognize a one-time cumulative-effect adjustment to the allowance for loan losses as of the beginning of the first reporting period in which the new standard is effective. We cannot yet determine the magnitude of any such one-time cumulative adjustment or of the overall impact of the new standard on our financial condition or results of operations.
Anti-takeover provisions in FNCB’s charter documents could discourage, delay or prevent a change of control of FNCB’s company and diminish the value of FNCB’s common stock.
Some of the provisions of FNCB’s amended and restated articles of incorporation, as amended, and amended and restated bylaws, as amended, could make it difficult for its shareholders to change the composition of its board of directors, preventing them from changing the composition of management. In addition, the same provisions may discourage, delay or prevent a merger or acquisition that FNCB’s shareholders may consider favorable. These provisions include:
● | classifying FNCB’s board of directors into three classes of directors with staggered three-year terms; |
● | authorizing FNCB’s board of directors to issue preferred shares without shareholder approval; |
● | prohibiting cumulative voting in the election of directors; |
● | requiring the approval of 75% of FNCB’s shareholders to approve any merger or sale of all, or substantially all, unless approval of such proposed transaction is recommended by at least a majority of FNCB’s entire board of directors; |
● | authorizing FNCB’s board of directors to, if it deems advisable, oppose a tender or other offer for FNCB’s securities; and |
● | requiring the approval of 75% of FNCB’s shareholders to amend certain provisions relating to business combinations not approved by the board of directors. |
In addition, pursuant to the Pennsylvania Business Corporation Law (the “PBCL”), in the case of a merger or share exchange, with some exceptions, FNCB’s board of directors must submit the plan of merger or share exchange to the shareholders for approval, and the approval of the plan of merger or share exchange generally requires the approval of the shareholders at a meeting at which a quorum consisting of at least a majority of the shares entitled to vote on the plan exists.
Provisions of the PBCL, applicable to FNCB provide, among other things, that:
● | FNCB may not engage in a business combination with an “interested shareholder,” generally defined as a holder of 20% of a corporation’s voting stock, during the five-year period after the interested shareholder became such except under certain specified circumstances; |
● | holders of FNCB’s common stock may object to a “control transaction” involving FNCB (a control transaction is defined as the acquisition by a person or group of persons acting in concert of at least 20% of the outstanding voting stock of a corporation), and demand that they be paid a cash payment for the “fair value” of their shares from the “controlling person or group”; |
● | holders of “control shares” will not be entitled to voting rights with respect to any shares in excess of specified thresholds, including 20% voting control, until the voting rights associated with such shares are restored by the affirmative vote of a majority of disinterested shares and the outstanding voting shares of the Company; and |
● | any “profit,” as defined in the PBCL, realized by any person or group who is or was a “controlling person or group” with respect to FNCB from the disposition of any equity securities of within 18 months after the person or group became a “controlling person or group” shall belong to and be recoverable by FNCB. |
These anti-takeover provisions could impede the ability of FNCB’s common shareholders to benefit from a change of control and, as a result, could have a material adverse effect on the market price of FNCB’s common stock and shareholders’ ability to realize any potential change-in-control premium.
Short sellers of FNCB’s stock may be manipulative and may drive down the market price of FNCB’s common stock.
Short selling is the practice of selling securities that the seller does not own but rather has borrowed or intends to borrow from a third party with the intention of buying identical securities at a later date to return to the lender. A short seller hopes to profit from a decline in the value of the securities between the sale of the borrowed securities and the purchase of the replacement shares, as the short seller expects to pay less in that purchase than it received in the sale. As it is in the short seller's interest for the price of the stock to decline, some short sellers publish, or arrange for the publication of, opinions or characterizations regarding the relevant issuer, its business practices and prospects and similar matters calculated to or which may create negative market momentum, which may permit them to obtain profits for themselves as a result of selling the stock short. Issuers whose securities have historically had limited trading volumes or have been susceptible to relatively high volatility levels can be particularly vulnerable to such short seller attacks. The publication of any such commentary regarding FNCB in the future may bring about a temporary, or possibly long-term, decline in the market price of FNCB’s common stock. No assurances can be made that declines in the market price of FNCB’s common stock will not occur in the future, in connection with such commentary by short sellers or otherwise. When the market price of a company's stock drops significantly, it is not unusual for stockholder lawsuits to be filed or threatened against the company and its board of directors and for a company to suffer reputational damage. Such lawsuits could cause FNCB to incur substantial costs and divert the time and attention of FNCB’s board and management. In addition, reputational damage may affect FNCB’s ability to attract and retain deposits and may cause FNCB’s deposit costs to increase, which could adversely affect its liquidity and earnings. Reputational damage may also affect FNCB’s ability to attract and retain loan customers and maintain and develop other business relationships, which could likewise adversely affect FNCB’s earnings. Negative reports issued by short sellers could also negatively impact FNCB’s ability to attract and retain employees.
Unresolved Staff Comments. |
None.
Cybersecurity. |
Cybersecurity Risk Management and Strategy
Cybersecurity risks are constantly evolving and becoming increasingly pervasive across all industries. To mitigate these risks and protect sensitive customer data, financial transactions and its information systems, FNCB has implemented a comprehensive cybersecurity risk management program, which is a component of its overarching Information Security Program. Key components of the Information Security Program include:
| ● | Information Security Risk Assessment. | An information security risk assessment is a process designed to identify and assess new and existing threats, vulnerabilities, attacks, probabilities of occurrence and outcomes; | |
| ● | Information Security Strategy. | The information security strategy, which is updated by management and reviewed and approved by the board of directors annually, seeks to mitigate risk by integrating technology with robust policies, procedures and training; | |
| ● | Security Controls Implementation. | Implementing security controls is a company-wide process that ensures that the acquisition, deployment and operation of technology to include risk appropriate controls through the assignment of specific duties and responsibilities to management and staff; | |
| ● | Security Controls Training. | Training is provided for managers and staff to ensure that all parties understand their responsibilities and have the knowledge and skills necessary to fulfill their duties. Training also includes an awareness program that keeps employees informed about cybersecurity threats and how to safely use electronic platforms such as email, internet and cloud-based environments; | |
| ● | Security Monitoring. | Security monitoring utilizes various methodologies, including the use of third-party services as necessary, to gain assurance that risk are appropriately assessed and mitigated, and to verify that significant controls are effective and performing as intended; | |
| ● | Security Process Updating. | This updating process is a continuous system of gathering and analyzing information regarding new threats and vulnerabilities, actual attacks on FNCB or others combined with the effectiveness of existing security controls that are maintained. Through monitoring and updating, the information security program becomes a continuous process rather than a one-time event; and | |
| ● | Incident Response Plan. | The incident response plan, which is modeled after the framework established by the National Institute of Standards and Technology, outlines the steps FNCB will take to respond to a cybersecurity incident. The incident response plan is tested on a periodic basis. |
FNCB engages reputable third-party assessors to conduct various independent risk assessments on a regular basis, including but not limited to, maturity assessments and various tests. FNCB leverages both in-house resources and third-party service providers to implement and maintain processes and controls to manage and mitigate any identified risks.
FNCB's has a Vendor Risk Management Program that is designed to ensure that vendors providing services to FNCB meet its cybersecurity requirements. This includes conducting periodic risk assessments of vendors, requiring vendors to implement appropriate cybersecurity controls and monitoring vendor compliance with our cybersecurity requirements.
FNCB’s cybersecurity risk management program and strategy are designed to ensure that FNCB's information and information systems are appropriately protected from a variety of threats, both natural and man-made. Periodic risk assessments are performed to validate control requirements and ensure that FNCB’s information is protected at a level commensurate with its sensitivity, value, and criticality. Preventative and detective security controls are employed on all media where information is stored, the systems that process it, and infrastructure components that facilitate its transmission to ensure the confidentiality, integrity, and availability of FNCB's information. These controls include, but are not limited to access control, data encryption, data loss prevention, incident response, security monitoring, third party risk management, and vulnerability management.
FNCB's cybersecurity risk management program and strategy are regularly reviewed and updated to ensure that they are aligned with FNCB's business objectives and are designed to address evolving cybersecurity threats and satisfy regulatory requirements and industry standards.
Material Effects of Cybersecurity Threats
While cybersecurity risks have the potential to materially affect FNCB's business, financial condition, and results of operations, FNCB does not believe that risks from cybersecurity threats or attacks, including as a result of any previous cybersecurity incidents, have had a material affect on FNCB, including its business strategy, results of operations or financial condition. However, the sophistication of cyber threats continues to increase and evolve, and FNCB’s cybersecurity risk management and strategy may be insufficient or may not be successful in protecting against all cyber incidents. Accordingly, no matter how well designed or implemented FNCB’s controls are, it will not be able to anticipate all cyber security breaches, and it may not be able to implement effective preventive measures against such security breaches in a timely manner. For more information on how cybersecurity risk may materially affect FNCB’s business strategy, results of operations or financial condition, refer to Part I, Item 1A. "Risk Factors" to this Annual Report on Form 10-K.
Governance
Board of Directors Oversight
FNCB’s Board of Directors is charged with overseeing the establishment and execution of FNCB’s risk management framework and monitoring adherence to related policies required by applicable statutes, regulations and principles of safety and soundness. Consistent with this responsibility the Board has delegated primary oversight responsibility over FNCB's risk management framework, including oversight of cybersecurity risk and cybersecurity risk management, to the Risk Management Committee of the Board of Directors. The Risk Management Committee has appointed the Executive Vice President and General Counsel, who serves as the Chairperson of FNCB's Enterprise Risk Management ("ERM") Committee, as the principal management-level designee for oversight of its risk management. Additionally, the Executive Vice President and Chief Financial Officer oversees FNCB's Technology Services Division. The Board of Directors receives regular updates on cybersecurity risks and incidents and the cybersecurity program through direct interaction with either of these two individuals who provide periodic updates regarding cybersecurity risks and the cybersecurity program. Additionally, awareness and training on cybersecurity topics is provided to the Board on an annual basis.
Management's Role
FNCB has an Information Technology Advisory Committee ("ITAC") that is responsible for implementing and maintaining its Information Security Program. Certain members of the IT Oversight Committee, a sub-committee of ITAC, have been designated collectively as FNCB's Information Security Officer. These members include, the Senior Vice President and Physical Security Officer who serves as Chairperson, the Executive Vice President and Chief Financial Officer and certain Technology Services Division personnel. The primary responsibility of the IT Oversight Committee, which meets monthly, is to ensure that information technology initiatives meet FNCB's cybersecurity objectives and are implemented securely, timely and transparently and for ensuring the protection of electronic and physical information through the identification and management of risk activities. As a governance and oversight function, the ITAC meets quarterly and measures and reports on the quality of information and cyber risk management across all functional areas of FNCB. The Executive Vice President and Chief Financial Officer presents information related to FNCB's Information Security Program to the Board of Directors at regular monthly meetings. Any breach or incident would be reported through ITAC, the ERM Committee and then to the Board of Directors. The IT Oversight Committeemakes a formal presentation to the Board of Directors on FNCB's Information Security Program at least annually.
Properties. |
FNCB currently conducts business from its headquarters located at 102 E. Drinker Street, Dunmore, Pennsylvania, which now also houses the Bank’s Commercial Lending and Retail Banking Units. The Bank's main office is located at 100 S. Blakely Street, Dunmore, Pennsylvania, 18512. At December 31, 2020,2023, FNCB also operated sixteenfifteen additional community banking offices located throughout Lackawanna, Luzerne and Wayne counties, two administrative offices and another lending center located in Dunmore, Lackawanna County, Pennsylvania. Eight of the offices are leased and the balance are owned by the Bank. Except for potential remodeling of certain facilities to provide for the efficient use of workspace and/or to maintain an appropriate appearance, each property is considered reasonably suitable and adequate for current and immediate future purposes except as discussed below.
As part of its responsibilities, management regularly evaluates FNCB’s delivery system and facilities including analyzing each office’s operating efficiency, location, foot traffic, structure and design. FNCB and the Bank have an ongoing comprehensivebranch network improvement program that focuses on strengthening, better positioning and expanding its market coverage by developing new state-of-the-art customer facilities, as well as relocating and consolidating select locations. Initiatives FNCB executed under the branch network improvement program during the years ended December 31, 2020 and 2019 include:
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See Note 6,5, "Bank Premises and Equipment" of the notes to consolidated financial statements included in Item 8, "Financial Statements and Supplementary Data" to this Annual Report on Form 10-K for additional information about FNCB's properties.
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.
Mine Safety Disclosures. |
Not Applicable.
Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities. |
Market Prices of Stock and Dividends Paid
FNCB’s common shares are traded on The Nasdaq Stock Market LLC ("Nasdaq") under the symbol "FNCB."
On January 28, 2019, FNCB announced that it had commenced a public offering of its shares of common stock in a firm commitment underwritten offering. On February 8, 2019, FNCB announced the closing of the public offering of 3,285,550 shares of its common stock, which includes 428,550 shares of common stock issued upon the exercise in full of the option to purchase additional shares granted to the underwriters, at a public offering price of $7.00 per share, less an underwriting discount of $0.35 per share. FNCB received net proceeds after deducting underwriting discounts and offering expenses of $21.3 million.
Following the close of the U.S. Stock Market on June 29, 2020, FNCB was added as member of the Russell 2000® index, when FTSE Russell reconstituted its comprehensive set of U.S. global equity indexes. Previously, FNCB was added to the Russell 3000® index on July 1, 2019. Membership remains in place for one year. Each year, the annual Russell indexes reconstitution captures the 4,000 largest U.S. stocks and ranks them by total market capitalization. Russell indexes are widely used by investment managers and institutional investors for index funds and as benchmarks for active investment strategies. As such, management believes that inclusion in Russell indexes will continue to increase the visibility and liquidity of25, 2023, FNCB's common stock, as well as provide exposure to leading institutional investors.
On January 27, 2021, the Board of Directors of FNCB authorized a stock repurchase program under which up to 975,000750,000 shares of FNCB's outstanding common stock may be acquired in the open market between February 3, 2021 and December 31, 2021 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"). The repurchase program commenced on March 3, 2023 and was terminated in the third quarter of 2023, pursuant to a trading plan that may be adopted in accordance with Rule 10b5-1 of the Exchange Act.Act of 1934. During 2023 no shares were repurchased under this plan. In 2022 and 2021, the Board of Directors authorized similar programs under which 384,830 and 330,759 shares were purchased at weighted-average prices per share of $9.45 and $7.21, respectively. Repurchases are administered through an independent brokerfunded from available working capital and the repurchased shares are subjectreturned to SEC regulations as well as certain price, market and timing constraints specified in the plan. status of authorized but unissued shares of common stock.
Holders
As of February 28 , 2021,29, 2024, there were approximately 1,671 1,586 holders of record of FNCB’s common shares. Because many of FNCB’s shares are held by brokers and other institutions on behalf of shareholders, FNCB is unable to estimate the total number of shareholders represented by these record holders.
Dividends
Dividends declared and paid were $4.4$7.1 million, or $0.22$0.36 per share, in 20202023 and $4.0$6.5 million, or $0.20$0.33 per share, in 2019.2022. The dividend payout ratio was 29.0%54.8% for the year ended December 31, 20202023 and 36.4%32.0% for the year ended December 31, 2019. It is the present intent of the Board of Directors to continue paying quarterly dividends going forward. However,2022. FNCB’s ability to declare and pay future dividends is dependent upon earnings, financial position, appropriate restrictions under applicable laws, legal and regulatory restrictions and other factors relevant at the time FNCB’s Board of Directors considers any declaration of any dividends. For a further discussion of FNCB’s and the Bank’s dividend restrictions, refer to Note 14,15, “Regulatory Matters/Subsequent Events” in the notes to consolidated financial statements in this Annual Report on Form 10-K.
On January 27, 2021,24, 2024, the Board of Directors declared a dividend of $0.06$0.090 per share for the first quarter of 2021.2024. The dividend is payable on March 15, 20212024 to shareholders of record as of March 1, 2021.2024.
None.
The selected consolidated financial and other data and management’s discussion and analysis of financial condition and results of operations set forth below and in Item 7 hereof is derived in part from, and should be read in conjunction with, FNCB’s consolidated financial statements and notes thereto contained elsewhere herein. Certain reclassifications have been made to prior years’ consolidated financial statements to conform to the current year’s presentation. Those reclassifications did not impact net income.None.
For the Years Ended December 31, | ||||||||||||||||||||
(dollars in thousands, except per share data) | 2020 | 2019 | 2018 | 2017 | 2016 | |||||||||||||||
Balance Sheet Data: | ||||||||||||||||||||
Total assets | $ | 1,465,679 | $ | 1,203,541 | $ | 1,237,732 | $ | 1,162,305 | $ | 1,195,599 | ||||||||||
Available-for-sale debt securities | 350,035 | 272,839 | 296,032 | 290,387 | 276,015 | |||||||||||||||
Net loans | 889,152 | 819,529 | 829,581 | 761,609 | 722,860 | |||||||||||||||
Total deposits | 1,287,448 | 1,001,709 | 1,095,629 | 1,002,448 | 1,015,139 | |||||||||||||||
Borrowed funds | 10,310 | 57,219 | 34,240 | 60,278 | 78,847 | |||||||||||||||
Shareholders' equity | 155,860 | 133,607 | 97,219 | 89,191 | 90,371 | |||||||||||||||
Income Statement Data: | ||||||||||||||||||||
Interest income | $ | 46,338 | $ | 46,056 | $ | 45,085 | $ | 37,848 | $ | 34,748 | ||||||||||
Interest expense | 6,160 | 9,796 | 8,578 | 4,800 | 4,197 | |||||||||||||||
Net interest income before provision for loan and lease losses | 40,178 | 36,260 | 36,507 | 33,048 | 30,551 | |||||||||||||||
Provision for loan and lease losses | 1,941 | 797 | 2,550 | 769 | 1,153 | |||||||||||||||
Non-interest income | 9,250 | 7,620 | 11,790 | 7,225 | 6,203 | |||||||||||||||
Non-interest expense | 28,915 | 29,682 | 29,327 | 28,069 | 27,545 | |||||||||||||||
Income before income taxes | 18,572 | 13,401 | 16,420 | 11,435 | 8,056 | |||||||||||||||
Income tax expense | 3,225 | 2,326 | 3,071 | 11,288 | 1,747 | |||||||||||||||
Net income | 15,347 | 11,075 | 13,349 | 147 | 6,309 | |||||||||||||||
Earnings per share, basic and diluted | 0.76 | 0.56 | 0.79 | 0.01 | 0.38 | |||||||||||||||
Capital and Related Ratios: | ||||||||||||||||||||
Cash dividends declared per share | $ | 0.22 | $ | 0.20 | $ | 0.17 | $ | 0.13 | $ | 0.09 | ||||||||||
Book value per share | 7.70 | 6.62 | 5.78 | 5.32 | 5.43 | |||||||||||||||
Tier I leverage ratio (FNCB Bank only) | 9.57 | % | 10.36 | % | 8.27 | % | 8.24 | % | 8.63 | % | ||||||||||
Total risk-based capital to risk-adjusted assets (FNCB Bank only) | 15.79 | % | 13.70 | % | 12.17 | % | 12.49 | % | 12.81 | % | ||||||||||
Average equity to average total assets (1) | 10.61 | % | 10.32 | % | 7.10 | % | 8.36 | % | 8.42 | % | ||||||||||
Tangible equity to tangible assets | 10.63 | % | 11.10 | % | 7.85 | % | 7.67 | % | 7.56 | % | ||||||||||
Selected Performance Ratios: | ||||||||||||||||||||
Return on average assets (1) | 1.13 | % | 0.92 | % | 1.09 | % | 0.01 | % | 0.57 | % | ||||||||||
Return on average equity (1) | 10.66 | % | 8.88 | % | 15.38 | % | 0.15 | % | 6.82 | % | ||||||||||
Net interest margin (2) (3) | 3.35 | % | 3.29 | % | 3.22 | % | 3.23 | % | 3.13 | % | ||||||||||
Noninterest income/operating income (2) | 18.42 | % | 17.19 | % | 20.56 | % | 15.79 | % | 14.88 | % | ||||||||||
Asset Quality Ratios: | ||||||||||||||||||||
Allowance for loan and lease losses/total loans | 1.33 | % | 1.08 | % | 1.13 | % | 1.17 | % | 1.15 | % | ||||||||||
Nonperforming loans/total loans | 0.62 | % | 1.10 | % | 0.56 | % | 0.34 | % | 0.31 | % | ||||||||||
Allowance for loan and lease losses/nonperforming loans | 214.12 | % | 98.53 | % | 202.7 | % | 350.43 | % | 376.86 | % | ||||||||||
Net (recoveries) charge-offs/average loans | (0.12 | )% | 0.16 | % | 0.25 | % | 0.02 | % | 0.21 | % | ||||||||||
| Loan loss provision/net (recoveries) charge-offs | (183.29 | )% | 58.35 | % | 123.49 | % | 499.35 | % | 75.66 | % | ||||||||||
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Management’s Discussion and Analysis of Financial Condition and Results of Operations |
Management’s discussion and analysis (“MD&A”) represents an overview of the financial condition and results of operations of FNCB and should be read in conjunction with our consolidated financial statements and notes thereto included in Item 8, "Financial Statements and Supplementary Data" and Item 1A, "Risk Factors" of Part I to this Annual Report on Form 10-K.
FNCB is in the business of providing customary retail and commercial banking services to individuals, businesses and local governments and municipalities through 1716 full-service branch offices operated by FNCB Bank, FNCB's wholly-owned subsidiary, within its primary market area, Northeastern Pennsylvania.
FORWARD-LOOKING STATEMENTS
FNCB may from time to time make written or oral “forward-looking statements,” including statements contained in our filings with the 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.
Readers are cautioned that these forward-looking statements are only predictions and are subject to risks, uncertainties, and assumption that are difficult to predict, including those under "PartPart I, Item 1A. Risk"Risk Factors," and elsewhere in this Annual Report on Form 10-K. Therefore, actual results may differ materially and adversely from those expressed in any forward-looking statements. 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.
CRITICAL ACCOUNTING ESTIMATES AND 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 allowance for loan and leasecredit losses (“ALLL”ACL”), securities’ valuation and impairment evaluation 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 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 ALLLACL 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 LoanCredit Losses
As of January 1, 2023, FNCB adopted ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): “Measurement of Credit Losses on Financial Instruments,” which replaced the current loss impairment methodology under GAAP with a methodology that reflects expected credit losses and Leaserequires 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, commonly referred to as Current Expected Credit Losses ("CECL") requires a financial asset (or a group of financial assets) to be measured at an amortized cost basis and presented at the net amount expected to be collected. The amendments in this update affect 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. Upon adoption of ASU 2016-13 on January 1, 2023, FNCB recorded an incremental decrease in the ACL through a cumulative effect adjustment to equity with subsequent adjustments charged to earnings through a provision for credit 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 ALLLACL on a quarterly basis. The ALLLACL 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,ACL, while recoveries of amounts previously charged off are credited to the ALLL.ACL.
The ACL consists primarily of two components, a specific component and a general component. The specific component relates to loans and loan relationships in excess of $100 thousand that do not share risk characteristics with existing pools and are individually evaluated for impairment. The amount of impairment provided for as an allowance is represented by the deficiency, if any, between the carrying value of the loan and either (a) the present value of expected future cash flows discounted at the loan’s effective interest rate, (b) the loan’s observable market price, or (c) the fair value of the underlying collateral, less estimated costs to sell, for collateral dependent loans. The general component of the ACL covers all other loans is based on pools of unimpaired loans segregated by loan segment. FNCB estimates expected credit losses using the discounted cash flow ("DCF") method for all loan portfolio segments measured on a collective or pool basis. For each loan segment, a cash flow projection is generated at the loan level. Probability of default and loss given default assumptions are applied to the pool’s projected model of cash flows taking into consideration the effects of prepayments and principal curtailment effects. The analysis produces expected cash flows for each loan in the pool by pairing loan-level term information (maturity date, payment amount, interest rate, etc.) with top-down pool assumptions (default rates and prepayment speeds).
Determining the amount of the ALLLACL is considered a critical accounting estimate because it requires significant judgmentjudgement 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,ACL, 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.ACL. Additionally, the ALLLACL is determined, in part, by the composition and size of the loan portfolio.
The ALLL consists primarily 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. Based on its evaluations, management may establish an unallocated component that is used to cover any inherent losses that exist as of the evaluation date, but which may not have been identified under the methodology.
See Note 2, “Summary of Significant Accounting Policies” and Note 5, “Loans”4, “Loans and Leases” of the notesNotes to consolidated financial statementsConsolidated Financial Statements included in Item 8, “Financial Statements and Supplementary Data” to this Annual Report on Form 10-K for additional information about the ALLL.ACL.
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. JudgmentJudgement 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 judgmentjudgement 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 judgmentsjudgements 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. Management’s evaluation as of December 31, 20202023 and 20192022 concluded that no valuation allowance was necessary for net deferred tax assets.
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 December 31, 20202023 and 2019,2022, management determined that FNCB did not have any uncertain tax positions or tax strategies and that no liability was required to be recorded.
See Note 2, “Summary of Significant Accounting Policies” and Note 10,11, “Income Taxes” of the notesNotes to consolidated financial statementsConsolidated Financial Statements included in Item 8, “Financial Statements and Supplementary Data” to this Annual Report on Form 10-K for additional information about the accounting for income taxes.
Impact of COVID-19 and FNCB's response to the pandemic
In March 2020, the outbreak of the novel Coronavirus Disease 2019 ("COVID-19") was recognized as a pandemic by the World Health Organization. The spread of COVID-19 has created a global public health crisis that has resulted in, and continues to pose, unprecedented uncertainty, volatility and disruption in financial markets and in governmental, commercial and consumer activity in the United States and globally, including the markets that FNCB serves. Federal, state and local authorities have responded to the pandemic by mandating the closure of non-essential businesses and schools, travel restrictions, limitations on public gatherings, and social distancing protocols. These governmental restrictions, coupled with fear of contracting the virus, resulted in a disruption in financial markets including the rapid decline in commercial and consumer activity, loss of revenues by businesses, a severe spike in unemployment, global supply chain and market volatility. The federal government has taken several actions designed to mitigate the impact of the economic disruption. Specifically, the Federal Open Market Committee ("FOMC") responded by aggressively cutting the federal funds target rate 150 basis points in two emergency actions including a 50-basis point reduction on March 3, 2020; and a 100 basis point reduction on March 15, 2020. The federal funds target rate remained at 0.00% to 0.25% from this point through December 31, 2020. Additionally, on March 27, 2020, the Coronavirus Aid, Relief, and Economic Security ("CARES") Act, a $2.0 trillion legislative package, was signed into law. The CARES Act contains substantial tax and spending provisions including direct financial aid to American families, extensive emergency funding for hospitals and medical providers, and economic stimulus to significantly impacted industry sectors. Additionally, on December 27, 2020, the Consolidated Appropriations Act of 2021 ("CA Act") was signed into law and authorized more than $900 billion in additional economic relief to small businesses and consumers.
As a financial institution, FNCB is considered essential and has remained open for business and is operating under its pandemic preparedness plan. To ensure the financial needs of its customers are addressed in a safe and consistent manner, the Bank's offices are open for regular business, with administrative, lending and community branch offices adhering to federal, state, and local governmental guidelines and social distancing mandates. However, in order to limit the spread of COVID-19 customers are encouraged to utilize FNCB's drive-thru facilities, automated teller machines, Customer Care center, remote deposit capture and online banking, including online account opening and chat capabilities, and mobile banking applications. FNCB is also providing the necessary technology, when needed, to its operational staff to work remotely in a secure environment. As of December 31, 2020, FNCB did not face any material resource constraints through the implementation of its pandemic preparedness plan.Throughout the year ended December 31, 2020, FNCB incurred COVID-19-related expenses including stay-at-home pay, computer-related costs, cleaning and sanitizing facilities and safety supplies, none of which were considered material. COVID-19 related expenses are included in non-interest expense in the consolidated statements of income. Additionally, FNCB has not tested for and has not identified any material operational or internal control challenges or risks, nor does it anticipate any significant challenges to its ability to maintain its systems and controls, related to operational changes resulting from the continued implementation of the pandemic preparedness plan.
Bank regulators issued guidance and have encouraged banks to work prudently with, and provide short-term payment accommodations to, borrowers affected by COVID-19. Additionally, provisions under the CARES Act originally allowed banks providing borrowers with a COVID-19 related modification to elect to not classify any such modification as a trouble debt restructuring ("TDR") if the loan was not more than 30 days past due at December 31, 2019 and the modification was executed between March 1, 2020, the date the President of the United States declared the COVID-19 pandemic a national emergency, and the earlier of 60 days after the date of termination of this national emergency, or December 31, 2020. The CA Act extended TDR relief provided under Section 4013 of the CARES Act through January 1, 2022, or 60 days after the termination of the national emergency. FNCB has applied, and continues to apply, the provisions of Section 4013 of the CARES Act and is prudently working with borrowers affected by COVID-19 by providing payment accommodations and other modifications, including but not limited to, payment deferrals involving either interest-only or full payment deferral for periods of up to six months. While interest and fees will still accrue to income, under normal GAAP accounting, should eventual credit losses on these deferred payments emerge, interest income and fees accrued would need to be reversed. As a result, interest income in future periods could be negatively impacted. While FNCB is unable to determine the effect of such an impact on its financial condition or results of operations at this time, it recognizes that the sustained economic impact may affect its borrowers’ ability to repay in future periods.
The CARES Act includes the Paycheck Protection Program ("PPP"), a program administered by the Small Business Administration ("SBA") designed to aid small- and medium-sized businesses through federally guaranteed loans distributed through banks. These loans were intended to guarantee up to 24 weeks of payroll and other costs to help those businesses remain viable and allow their workers to pay their bills. As an SBA Lender, the Bank actively participated in PPP loans assisting our small business community in securing this important funding. As of December 31, 2020, FNCB was able to serve 1,002 small business customers with PPP loans totaling $118.6 million. The CA Act that was enacted on December 27, 2020 provides an additional $284.6 billion in PPP funding to small businesses, including borrowers that previously received a PPP loan under the first round of funding. On January 19, 2021, FNCB began originating PPP loans as part of the second round of funding and as of February 28, 2021, has underwritten, submitted and received SBA approval for 400 loans representing approximately $52.7 million in funding. It is FNCB's understanding that loans funded through the PPP are fully guaranteed by the United States government. Should those circumstances change, FNCB could be required to increase its allowance for loan and lease losses related to these loans resulting in an increase in the provision for loan and lease losses.
The initial draw period of the first round of the PPP closed on August 8, 2020, and the SBA began accepting applications for forgiveness. FNCB notified and began providing ongoing assistance to customers with the forgiveness application process. As of December 31, 2020, FNCB had submitted 338 forgiveness applications to the SBA for PPP loans totaling $53.9 million and had received approval or funding from the SBA associated with a portion of these loans totaling $40.0 million. Additionally, the CA Act contains provisions that have simplified the forgiveness process for PPP loans under $150 thousand.
The Federal Reserve Bank also provided support lending to small and mid-sized businesses and not-for-profit organizations impacted by the COVID-19 pandemic through the Main Street Lending Program. Specifically, the Main Street Business Lending Program provides for five loan facilities with total potential funding of up to $600 billion. The Main Street New Loan Facility ("MSNLF"), the Main Street Priority Loan Facility ("MSPLF") and the Main Street Expanded Loan Facility ("MSELF") are three credit facilities that provide eligible business borrowers impacted by COVID-19 with financing in amounts ranging from $250 thousand to $300 million, depending on the facility. Terms of all three facilities include Federal Reserve Bank participation of 95.0%, lender participation of 5.0%, a maturity of 5 years, principal deferral for two years, interest deferral for one year and an adjustable interest rate based on one- or three-month LIBOR plus 300 basis points. Similarly, the Nonprofit Organization New Loan Facility ("NONLF") and the Nonprofit Organization Expanded Loan Facility ("NOELF") provide eligible not-for-profit organizations with financing in amounts ranging from $250 thousand to $10 million. The Bank had received approval from the Federal Reserve Bank as a participating lender in the Main Street Lending Program. During the second half of 2020, FNCB originated five MSPLF loans with an aggregate principal balance of $85.9 million and retained 5.0% of the outstanding principal balance or $4.3 million which was outstanding as of December 31, 2020. FNCB engaged an independent third-party loan review firm to confirm satisfactory underwriting and risk management practices were employed by management in the origination of these loans.
Fallout from the COVID-19 pandemic continues to impact national, regional and local economies, as the number of confirmed cases spiked at the end of 2020 into early 2021. Management continues to monitor the loan portfolio in order to identify potential weakness and track exposures to borrowers and industries that may be impacted more acutely than others. Additionally, management continues to proactively reach out to specific borrowers to provide guidance and assistance as appropriate. On a portfolio level, management continues to monitor aggregate exposures to highly sensitive segments, such as hotels and hospitality, for changes in asset quality and payment performance, and liquidity levels. Management monitors unfunded commitments such as lines of credit and overdraft protection to determine liquidity and funding issues that may arise with our customers. FNCB engaged an independent third-party consultant to perform a Credit Stress Test analysis of the loan portfolio as of March 31, 2020 to assist management with evaluating the ALLL and capital planning with regard to any potential impacts of COVID-19 on the portfolio. Should economic conditions worsen, FNCB could experience further increases in its required allowance for loan and lease losses and record additional provisions for loan and lease losses. It is possible that FNCB’s asset quality metrics could be materially and adversely impacted in future periods if the effects of COVID-19 are prolonged.
Management expects the COVID-19 pandemic, as well as certain provisions of the CARES Act, CA Act and other recent legislative and regulatory relief efforts, to have a material impact on FNCB's operations. The full impact is unknown, continues to evolve and will be contingent upon the duration and severity of the economic downturn. At this time, management cannot determine or estimate the full magnitude of the impact and cannot provide any assurances as to how the crisis may ultimately affect 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 the challenges that may be presented.
EXECUTIVE OVERVIEW
The following overview should be read in conjunction with this MD&A in its entirety.
On September 27, 2023, FNCB and Peoples Financial Services Corp. ("PFIS") (NASDAQ:PFIS) announced that both companies had entered into a strategic combination and executed an Agreement and Plan of Merger (the "Merger Agreement") pursuant to which FNCB will merge with and into PFIS, with PFIS as the surviving entity. Immediately after the merger, the Bank will merge with and into Peoples Security Bank and Trust Company ("Peoples Bank") with Peoples Bank as the surviving bank and a wholly-owned subsidiary of PFIS. Pending regulatory and shareholder approvals, FNCB expects the consummation of the merger to be completed in the third quarter of 2024, however, there can be no assurance that the transaction will be consummated during this time period, or at all.
Monetary policy tightening actions by the Federal Open Market Committee ("FOMC"), changes in market interest rates and volatility within the financial services industry all impacted FNCB's operations and profitability in 2023 and financial position at December 31, 2023 as compared to the prior year. Management continued to navigate and adapt through a challenging rate environment. Additionally competition for deposits within FNCB's market area intensified as depositors became increasingly rate-sensitive. Management focused on prudent balance sheet, liquidity and funding cost management in 2023 to mitigate pressure on FNCB's net interest margin.
Results of Operations
Return on average assets and return on average shareholders’ equity equaled 1.13%0.72% and 10.66%, respectively, in 2020, compared to 0.92% and 8.88%10.59%, respectively, in 2019.2023, compared to 1.21% and 15.55%, respectively, in 2022. FNCB paid dividends to holders of common stock of $0.22$0.36 per share in 2020,2023, an increase of $0.02$0.03 per share, or 10.0%9.1%, compared to $0.20$0.33 per share in 2019.2022. Total dividends declared and paid in 20202023 equated to a dividend yield of approximately 3.44%5.3% based on the closing stock price of $6.40$6.79 per share on December 31, 2020.2023. The dividend payout ratio was 29.0%54.8% in 20202023 compared to 36.4%31.9% in 2019.2022.
Total shareholders’ equity increased $22.3$15.7 million, or 16.7%13.2%, to $155.9$134.6 million at December 31, 20202023 from $133.6$118.9 million at December 31, 2019. Contributing2022. Tangible book value increased $0.76 per share, or 12.6%, to the increase$6.80 per share at December 31, 2023 from $6.04 per share at December 31, 2022. The increases in capital wasand tangible book value were primarily due to a $7.8 million, or 16.4%, decrease in the accumulated other comprehensive loss, coupled with year-to-date net income in 2020 of $15.3$13.0 million and a $10.8 million increase in accumulated other comprehensive incomecumulative effect adjustment related primarily to appreciation in the fair valueadoption of available-for-sale debt securities, netASU 2016-13 of deferred taxes,$1.1 million. This was partially offset by year-to-date dividends declared and paid of $4.4$7.1 million. At December 31, 20202023, FNCB Bank’s total risk-based capital ratio and the Tier 1 leverage ratio were 15.79%12.66% and 9.57%8.76%, respectively, which exceeded the 10.00% and 5.00% thresholds required to be well capitalized under the prompt corrective action provisions of the Basel III capital framework for U.S. banking organizations.
Management’s Focus in 2020
In 2020,the fourth quarter of 2021, FNCB Bank, FNCB's wholly-owned subsidiary, celebrated its 110th anniversarybegan offering commercial equipment financing including direct finance loans and leases and tax-exempt municipal leases to commercial and municipal customers under the brand 1st Equipment Finance. The product line has been very successful with outstanding loans and leases, net of unearned income and net deferred loan origination costs, of $163.6 million at December 31, 2023. On October 1, 2023, FNCB established 1st Equipment Finance, Inc. as a community bank serving the local communities in northeastern Pennsylvania with its mission to make the banking experience for customers "simply better". The celebration was tempered by COVID-19 as FNCB operated under its pandemic preparedness plan for the majority of 2020, which has continued into 2021. While managing the many challenges brought on by the spreadwholly owned subsidiary of the virus, or by governmental, regulatory and customer response toBank. 1st Equipment Finance, Inc. operates out of the pandemic, FNCB's main focusExeter Community Office, located in 2020 was to protect the health and safety of our customers and employees, provide support and assistance to businesses and others within the community, and respond to the abrupt shift in how bank productsExeter, Luzerne County, Pennsylvania and services are delivered to the customer.customers both within and outside FNCB's primary market area.
FNCB participated in the SBA's PPP, which resulted in the origination of 1,002 loans representing approximately $118.6 million in funding under the initial round of this program, that directly assisted local owners of small- and medium-sized businesses. Additionally, in the second half of 2020 when the SBA began accepting applicationsFocus for forgiveness, FNCB implemented a digital, cloud-based management tool to facilitate the entire forgiveness process, providing customers with direct access to educational materials and the ability to easily upload required documents. As of December 31, 2020, FNCB had received $40.0 million in borrower forgiveness from the SBA and anticipate that the remaining PPP loan balances will qualify for borrower forgiveness under the guidelines of the program in 2021. In addition, FNCB became one of eleven select lenders in the Commonwealth of Pennsylvania approved to participate in the Federal Reserve's Main Street Lending Program. In addition to these governmental programs, FNCB worked directly with borrowers to provide loan payment deferral modifications under Section 1048 of the Cares Act to qualifying commercial and consumer loan customers experiencing financial disruption due to the COVID-19 pandemic.2024
InitiativesManagement will continue to improve the customer experience included expanding and enhancing FNCB's electronic and traditional product and service offerings that became vital to our customers during this unprecedented time. In addition to already providing customers with electronic payment options including Apple Pay®, Google Pay®, and Samsung Pay®, during the third quarter of 2020, the Bank partnered with Zelle®, a fast, secure and contact free way to send and receive money between trusted parties. In addition, FNCB began expanding utilization of online account opening and facilitating the PPP loan origination and forgiveness process through the use of digital signatures. With regard to creating long-term shareholder value, management has been focusedfocus on strategic business market opportunities to drive FNCB's financial performance through efficient balance sheet and interest rate risk management, growthwhile controlling funding costs and diversification of non-interest revenue streams, as well as enhancing the marketability and liquidity of FNCB's stock, which has aided the strong earnings performance.
Focus for 2021
Looking ahead to 2021, maintaining a safe environment for both staff and customers will remain a top priority, as well as continuing to enhance FNCB's digital banking platforms to respond to evolving customer demands. FNCB expanded the digital cloud-based PPP forgiveness tool to include functionality for the application process for additional PPP funding that was approved under the CA Act on December 27, 2020. On January 19, 2021, FNCB began originating loans under the second round of PPP funding and as of February 28, 2021, has underwritten, submitted and received approval for 400 loans representing approximately $52.7 million in funding. FNCB will continue to assist business customers through the forgiveness process and with the second round of funding, as well as work prudently with customers requesting further payment accommodations. In 2021, FNCB expects to benefit from the recognition of approximately $3.0 million in remaining net loan origination fees from the first round of PPP loans, and will continue to focus on improving efficiency and effectively navigating impending margin compression resulting from the low-interest rate environment. Additional areas of focus for 2021 include continuing to enhance the customer experience through implementation of a comprehensive digital strategy, strengthening our customer base and building existing customer wallet share, as well as a renewed focus on leadership and organizational development. To this point, early in 2021, FNCB announced the appointment of a new Chief Banking Officer to its Executive Management Team. The Chief Banking Officer, who has extensive retail financial sales and managerial experience will oversee, FNCB's commercial lending, retail lending and retail banking units.
Stock Repurchase Program
expenses. FNCB is continuously focused on creating long-term shareholder value. With this in mind, on January 27, 2021, FNCB's Board of Directors authorized a stock repurchase program. The program provides forworking to satisfy the purchase of upremaining conditions to 975,000 shares of FNCB's outstanding common stock in open market transactions beginning on February 3, 2021closing the merger with PFIS, and ending on December 31, 2021. Repurchases are made pursuant to a trading plan that was adoptedis working with PFIS' team in accordance with Rule 10b5-1the Merger Agreement to prepare for consummation of the Securities Exchange Actmerger and integration of 1934, as amended. Acquisitions under the program will be administered through an independent broker at prevailing market prices. 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 purchases at any time that management determines additional repurchases are no longer warranted. our businesses.
SUMMARY OF FINANCIAL PERFORMANCE
Net Interest Income
Net interest income is the difference between (i) interest income, interest and fees on interest-earning assets, and (ii) interest expense, interest paid on deposits and borrowed funds. Net interest income represents the largest component of FNCB’s operating income and, as such, is the primary determinant of profitability. Net interest income is impacted by variations in the volume, rate and composition of earning assets and interest-bearing liabilities, changes in general market interest rates and the level of non-performing assets. Interest income is shown on a fully tax-equivalent basis using the corporate statutory tax rate of 21.0% in 2020, 20192023, 2022 and 2018.2021.
In 2020, in response to the economic falloutuncertainty from the global COVID-19 pandemic, the Federal Open Market Committee (“FOMC”) reducedFOMC lowered the federal funds target rate a total of 150 basis points in two emergency actions:actions in March 2020. As a 50result, the target range for federal funds fell from 1.50%-1.75% at December 31, 2019 to 0.00%-0.25% at March 31, 2022, and had remained at these historically low levels through March 15, 2022. Supply chain constraints, the war in Ukraine, as well as increasing tension and unrest worldwide, has resulted in rapid rise in price inflation and these factors, as well as the recent conflict in the Middle East, could drive further inflation, placing additional strain on economic conditions in the United States, the banking industry and global markets. Thus far, as a result, the FOMC, in an effort to lower inflation to its 2.0% objective, began tightening U.S. monetary policy in 2022. Specifically, the FOMC increased the target range for the federal funds rate eleven times for a total of 525 basis points from March 15, 2022 through July 26, 2023, which included an additional four 25-baisis point decreaseincreases in 2023, on February 1, 2023, March 2, 2023, May 3, 2020 followed by another 100 basis point decrease on March 16, 2020. The2023 and July 26, 2023. Corresponding with the increases in federal funds target rate, remained at 0.00% to 0.25% from this point through the remainder of 2020. These actions resulted in a corresponding decrease in the national prime rate increased 525 basis points from 3.25% on March 15, 2022 to 3.25%8.50% on July 26, 2023 and has remaining at this level through December 31, 2020 from 4.75% at December 31, 2019. As2023. This dramatic shift to tighten monetary policy has resulted in a result,rapid rise in general market interest rates. Competition for deposits within FNCB's market area has intensified, reflective of industry-wide liquidity pressures and rate-sensitivity of depositors. Additionally, FNCB has experienced a decreasemargin compression in loan yields throughout 2020, compared to 2019. In addition, loan yields were impacted by the origination2023, as higher interest rates and funding of low-yielding PPP loans with a rate of 1.0%, offset by the recognition of net loan origination fees associated with a portion of these loans that were forgiven by the SBA. The Bank remained competitive inincreased competition have caused deposit rate offerings, parallel to market conditions and a surplus of liquidity within the industry. As a result, FNCB experienced a decrease inwholesale funding costs across interest-bearing deposits.to increase at a faster pace and greater magnitude than earning asset yields.
FNCB responded to competition within its market area and rate-sensitivity of depositors mentioned above by offering various promotional deposit products including certificate of deposit and money market products having promotional rates. Additionally, FNCB increased its utilization of wholesale funding, including brokered deposits and borrowing arrangements with FHLB of Pittsburgh and the FRB, as deposit gathering has been pressured by industry-wide liquidity constraints. FNCB's cost of funds may continue to increase as a result of further tightening by the FOMC and increased competition within FNCB's market area. Additionally, the replacement rates of existing certificates of deposit, other deposit products and wholesale funding instruments may be higher than current rates, which could negatively impact FNCB's cost of funds and result in further net interest margin and spreads contraction. Further contraction in margin and spread could have an unfavorable impact on profitability and future net interest levels. Management monitors FNCB's interest rate risk and sensitivity to changes in market interest rates through the Asset Liability Committee ("ALCO") and is committed to prudent and proactive balance sheet management with a focus on controlling funding costs in relation to funding needs and yields on earning assets in order to mitigate any potential unfavorable impact to FNCB's earnings and profitability.
Recent economic data suggest that the FOMC's goals for employment and inflation are more balanced. The FOMC as indicated that it remains attentive to inflation risks and does not expect to reduce the federal funds target range until there is greater confidence that inflation is moving sustainably towards its goal of 2.0%. However, there is no assurance that these trends with respect to employment and inflation will continue, or forecasts for these metrics will be indicative of actual results. The recent onset of conflict in the Middle East, as well as increasing tension and unrest worldwide, could drive further inflation andplace additional strain on economic conditions in the United States, the banking industry and global markets. Should inflationary pressures persist, the FOMC may need to continue to increase interest rates which could result in higher funding costs and further contraction of FNCB's tax-equivalent net interest margin and rate spread.
A decreasea corresponding increase in funding costs was the driving factor that lead to the$3.6 million, or 37.1%, decrease intax-equivalent interest expense to $6.2 millionin 2020 from $9.8 million in 2019. Rates paidincome of $16.0 million. Specifically, FNCB's tax-equivalent yield on interest-bearing deposits decreased 37loans and leases increased 112 basis points to 0.59%5.55% in 2020 from 0.96%2023 compared to 4.43% in 2019,2022, resulting in a corresponding decrease toincrease in tax-equivalent interest expenseincome of $2.8$12.8 million. Thedecreasein deposit rates was concentrated in other time deposits, which decreased 38In addition, the tax-equivalent yield on investment securities increased 47 basis points to 1.22%3.05% in 2020, compared to 1.60%2023 from 2.58% in 2019. In addition, interest-bearing demand deposits, decreased 33 basis points to 0.48% in 2020 as compared to 0.81% in 2019. The reduction in rates paid on time deposits2022 and interest-bearing demand deposits contributed $1.9 million and $0.8 million to the overall decrease in interest expense due to changes in interest rates. The rate paid on savings deposits decreased slightly to 0.10% in 2020 compared to 0.13% in 2019 but had minimal impact on interest expense. Additionally, the rate paid on borrowed fundsdecreased 119 basis points to 1.47% in 2020 from 2.66% in 2019,contributing $0.6 million to the overall decrease in interest expense. Also contributing to the decrease to interest expense was a $12.3 million, or 19.4%, decrease in the average balance of other borrowed funds to $51.3 million in 2020 from $63.6 million in 2019, which led tocaused a corresponding decrease in interest expense of $0.3 million. While FNCB experienced significant deposit growth, changes in average volumes of interest-bearing deposits resulted in only a negligible increase to interest expense, which reflected the deposit migration experienced in 2020. Total average interest-bearing deposits increased $63.7 million, or 7.5%, to $908.5 million in 2020 from $844.8 million in 2019, which resulted in an $86 thousand increase in interest expense. Specifically, the average balance of time deposits decreased $43.0 million, or 18.1%, to $195.1 million in 2020 from $238.1 million in 2019. The decrease in average time deposits resulted in a corresponding decrease to interest expense of $0.6 million, which was more than entirely offset by a $98.0 million, or 19.1%, increase in average interest-bearing demand deposits to $611.5 million in 2020 as compared to $513.5 million in 2019, which caused an increase to interest expense by $0.7 million.
Tax-equivalentincreased $0.6 million, or 1.4%, to $47.1 million in 2020 from $46.5 million in 2019, which reflected higher volumes of average earning assets, partially offset by lower earning asset yields.$2.5 million. Average earning assets increased $106.2$107.9 million, or 9.5%6.6%, to $1.223$1.740 billion in 20202023 from $1.117$1.633 billion in 2019,2022, resulting in a corresponding increase to tax-equivalent interest income of $4.5$5.2 million. However,Specifically, average loans and leases increased $112.9 million, or 10.5%, to $1.187 billion in 2023 from $1.074 million in 2022, which reflected strong growth in commercial equipment financing loans. Partially offsetting the tax-equivalent yield on earning assets fell 31 basis pointsincrease in average loan volumes was a $17.6 million, or 3.2%, decrease in average investment securities to 3.85%$532.5 million in 20202023 from 4.16%$550.1 million in 2019,2022.
Meanwhile, interest expense increased $27.4 million, or 406.9%, to $34.1 million in 2023 from $6.7 million in 2022, which caused a partially offsetting decrease to tax-equivalent interest income of $3.9 million. Changes inmore than offset the composition of FNCB's investments portfolio was able to mitigate the impact of lower market rates. Overall, changes in volumes and rates on the the investment portfolio contributed $1.0 millionincrease in tax-equivalent interest income. Specifically, average investments increased $22.8 million, or 8.2% to $302.2 millionThe increase in 2020 from $279.4 million in 2019, interest expense was primarily due to thehigher funding costs, coupled with an increase in tax-free securities, which averaged $51.4 millionaverage borrowed funds. In 2023, following the rapid rise in 2020 compared to $4.6 million in 2019. Conversely, taxable securities averaged $250.9 million in 2020, a decrease of $23.8 million, or 8.7%, from $274.7 million in 2019. The shift in composition of FNCB's investment portfolio reflected themarket interest rates and change in its income tax position, as the majorityoverall market liquidity, competition for deposits intensified and depositors had become increasingly rate sensitive. FNCB responded to competitive pressures with increases in deposit rates and offered time deposit specials with promotional rates and terms. The cost of available NOL carryforwards were consumed in 2020. The tax-equivalent yield on the investment portfoliointerest-bearing deposits increased 10174 basis points to 3.00%2.10% in 20202023 from 2.90%0.36% in 2019. Conversely, changes2022. Specifically, the cost of interest-bearing demand deposits increased 158 basis points while the cost of time deposit increased 280 basis points comparing 2023 and 2022, which resulted in volumescorresponding increases to interest expense of $11.1 million and rates on$8.5 million, respectively. In addition, liquidity constraints within the loan portfolio andindustry caused FNCB to increase utilization of wholesale funding, that typically carry higher interest rates. As a result, FNCB's cost of wholesale borrowings increased 237 basis points to 4.89% in 2023 from 2.52% in 2022, causing a corresponding increase to interest expense of $3.7 million. Overall, FNCB's cost of funds increased 196 basis points to 2.51% for the year-ended December 31, 2023 from 0.55% for the year ended December 31, 2022, which resulted in a corresponding increase in tax-equivalent interest expense of $23.6 million. Borrowed funds averaged $197.6 million in 2023, an increase of $88.0 million, or 80.4%, from $109.5 million in 2022, which resulted in a corresponding increase in interest expense of $3.2 million. Total interest-bearing deposits in other banks resulted in decreases to tax-equivalent interest income of $0.2 million each. Specifically, average loans increased $82.0$44.9 million, or 9.9%4.0%, to $911.4 million in 2020$1.163 billion for 2023, compared to $829.4 million in 2019, resulting$1.118 billion for 2022, which resulted in a corresponding increase to tax-equivalent interest incomeexpense of $3.6 million. The tax-equivalent yield earned on the loan portfolio$651 thousand. FNCB experienced deposit migration from non-maturity deposits into time deposits. Additionally, FNCB utilized brokered deposits for various ALCO strategies to manage interest rate risk and to secure liquidity. Specifically, average time deposits increased $164.4 million, or 104.1%, to $322.4 million in 2023 from $158.0 million in 2022. Brokered time deposits averaged $116.9 million in 2023, an increase of $92.0 million, or 370.0%, from $24.9 million in 2022. Conversely, average interest-bearing demand deposits decreased 43 basis points$111.5 million, or 13.7%, to 4.18%$704.1 million in 2020 from 4.61%2023, compared to $815.6 million in 2019, which caused2022. Savings deposits averaged $136.3 million in 2023, a decrease to tax-equivalent interest income of $3.8 million. The impact on changes in loan volumes and rates largely reflected the origination of PPP loans. PPP loans, which carry an interest rate of 1.00%$8.0 million, or 5.5%, averaged $76.9from $144.3 million in 2020. Including amortization of net origination fees associated with PPP loans of $1.2 million, the yield on PPP loans was 2.61% in 2020. Tax-equivalent yield on average interest-bearing deposits decreased 208 basis points to 0.30% in 2020 from 2.38% in 2019, resulting in a $195 thousand decrease in tax equivalent interest income, which was slightly offset by the $1.3 million, or 16.4%, increase in volume to $9.2 million in 2020 from $7.9 million in 2019.
Non-accrual loans2022.
The interest income that would have been earned on non-accrual and restructured loans, had these loans performed in accordance with their original terms approximated $0.4 million for both years ended December 31, 2020 and 2019. Additionally, interest income recognized on impaired loans based on payments received approximated $0.4 million for both years ended December 31, 2020 and 2019.
The following table presents the components of net interest income for the three years ended December 31, 2020, 20192023, 2022 and 20182021:
Summary of Net Interest Income
For the Year Ended December 31, | ||||||||||||||||||||||||||||||||||||
2020 | 2019 | 2018 | ||||||||||||||||||||||||||||||||||
Average | Yield/ | Average | Yield/ | Average | Yield/ | |||||||||||||||||||||||||||||||
(dollars in thousands) | Balance | Interest | Cost | Balance | Interest | Cost | Balance | Interest | Cost | |||||||||||||||||||||||||||
Assets: | ||||||||||||||||||||||||||||||||||||
Earning assets (2)(3) | ||||||||||||||||||||||||||||||||||||
Loans-taxable (4) | $ | 863,702 | $ | 35,980 | 4.17 | % | $ | 784,124 | $ | 36,332 | 4.63 | % | $ | 783,438 | $ | 34,714 | 4.43 | % | ||||||||||||||||||
Loans-tax free (4) | 47,669 | 2,070 | 4.34 | % | 45,246 | 1,881 | 4.16 | % | 52,251 | 2,110 | 4.04 | % | ||||||||||||||||||||||||
Total loans (1)(2) | 911,371 | 38,050 | 4.18 | % | 829,370 | 38,213 | 4.61 | % | 835,689 | 36,824 | 4.41 | % | ||||||||||||||||||||||||
Securities-taxable | 250,881 | 7,322 | 2.92 | % | 274,739 | 7,901 | 2.88 | % | 302,418 | 8,483 | 2.81 | % | ||||||||||||||||||||||||
Securities-tax free | 51,367 | 1,738 | 3.38 | % | 4,618 | 189 | 4.09 | % | 4,087 | 168 | 4.11 | % | ||||||||||||||||||||||||
Total securities (1)(5) | 302,248 | 9,060 | 3.00 | % | 279,357 | 8,090 | 2.90 | % | 306,505 | 8,651 | 2.82 | % | ||||||||||||||||||||||||
Interest-bearing deposits in other banks (6) | 9,203 | 28 | 0.30 | % | 7,910 | 188 | 2.38 | % | 4,667 | 88 | 1.89 | % | ||||||||||||||||||||||||
Total earning assets | 1,222,822 | 47,138 | 3.85 | % | 1,116,637 | 46,491 | 4.16 | % | 1,146,861 | 45,563 | 3.97 | % | ||||||||||||||||||||||||
Non-earning assets | 145,227 | 101,273 | 84,283 | |||||||||||||||||||||||||||||||||
Allowance for loan and lease losses | (10,867 | ) | (9,359 | ) | (9,584 | ) | ||||||||||||||||||||||||||||||
Total assets | $ | 1,357,182 | $ | 1,208,551 | $ | 1,221,560 | ||||||||||||||||||||||||||||||
Liabilities and Shareholders' Equity: | ||||||||||||||||||||||||||||||||||||
Interest-bearing liabilities | ||||||||||||||||||||||||||||||||||||
Interest-bearing demand deposits | $ | 611,511 | 2,933 | 0.48 | % | $ | 513,542 | 4,167 | 0.81 | % | $ | 502,978 | 2,881 | 0.57 | % | |||||||||||||||||||||
Savings deposits | 101,847 | 97 | 0.10 | % | 93,114 | 124 | 0.13 | % | 98,927 | 133 | 0.13 | % | ||||||||||||||||||||||||
Time deposits | 195,140 | 2,374 | 1.22 | % | 238,145 | 3,810 | 1.60 | % | 236,162 | 2,911 | 1.23 | % | ||||||||||||||||||||||||
Total interest-bearing deposits | 908,498 | 5,404 | 0.59 | % | 844,801 | 8,101 | 0.96 | % | 838,067 | 5,925 | 0.71 | % | ||||||||||||||||||||||||
Borrowed funds and other interest-bearing liabilities | 51,287 | 756 | 1.47 | % | 63,640 | 1,695 | 2.66 | % | 119,573 | 2,653 | 2.22 | % | ||||||||||||||||||||||||
Total interest-bearing liabilities | 959,785 | 6,160 | 0.64 | % | 908,441 | 9,796 | 1.08 | % | 957,640 | 8,578 | 0.90 | % | ||||||||||||||||||||||||
Demand deposits | 242,017 | 164,035 | 168,313 | |||||||||||||||||||||||||||||||||
Other liabilities | 11,368 | 11,395 | 8,831 | |||||||||||||||||||||||||||||||||
Shareholders' equity | 144,012 | 124,680 | 86,776 | |||||||||||||||||||||||||||||||||
Total liabilities and shareholders' equity | $ | 1,357,182 | $ | 1,208,551 | $ | 1,221,560 | ||||||||||||||||||||||||||||||
Net interest income/interest rate spread (6)(7) | 40,978 | 3.21 | % | 36,695 | 3.08 | % | 36,985 | 3.07 | % | |||||||||||||||||||||||||||
Tax equivalent adjustment | (800 | ) | (435 | ) | (478 | ) | ||||||||||||||||||||||||||||||
Net interest income as reported | $ | 40,178 | $ | 36,260 | $ | 36,507 | ||||||||||||||||||||||||||||||
Net interest margin (6)(8) | 3.35 | % | 3.29 | % | 3.22 | % | ||||||||||||||||||||||||||||||
For the Year Ended December 31, | ||||||||||||||||||||||||||||||||||||
2023 | 2022 | 2021 | ||||||||||||||||||||||||||||||||||
Average | Yield/ | Average | Yield/ | Average | Yield/ | |||||||||||||||||||||||||||||||
(dollars in thousands) | Balance | Interest | Cost | Balance | Interest | Cost | Balance | Interest | Cost | |||||||||||||||||||||||||||
Assets: | ||||||||||||||||||||||||||||||||||||
Earning assets (2)(3) | ||||||||||||||||||||||||||||||||||||
Loans and leases-taxable (4) | $ | 1,131,072 | $ | 63,553 | 5.62 | % | $ | 1,019,254 | $ | 45,696 | 4.48 | % | $ | 905,237 | $ | 39,645 | 4.38 | % | ||||||||||||||||||
Loans and leases-tax free (4) | 56,118 | 2,293 | 4.09 | 55,058 | 1,895 | 3.44 | 45,217 | 1,777 | 3.93 | |||||||||||||||||||||||||||
Total loans and leases (1)(2) | 1,187,190 | 65,846 | 5.55 | 1,074,312 | 47,591 | 4.43 | 950,454 | 41,422 | 4.36 | |||||||||||||||||||||||||||
Securities-taxable | 436,774 | 13,442 | 3.08 | 439,824 | 10,830 | 2.46 | 346,204 | 8,476 | 2.45 | |||||||||||||||||||||||||||
Securities-tax free | 95,743 | 2,794 | 2.92 | 110,238 | 3,370 | 3.06 | 83,437 | 2,641 | 3.17 | |||||||||||||||||||||||||||
Total securities (1)(5) | 532,517 | 16,236 | 3.05 | 550,062 | 14,200 | 2.58 | 429,641 | 11,117 | 2.59 | |||||||||||||||||||||||||||
Interest-bearing deposits in other banks and federal funds sold | 20,669 | 1,011 | 4.89 | 8,152 | 91 | 1.12 | 68,932 | 88 | 0.13 | |||||||||||||||||||||||||||
Total earning assets | 1,740,376 | 83,093 | 4.77 | % | 1,632,526 | 61,882 | 3.79 | % | 1,449,027 | 52,627 | 3.63 | % | ||||||||||||||||||||||||
Non-earning assets | 65,679 | 69,602 | 129,386 | |||||||||||||||||||||||||||||||||
Allowance for credit losses | (12,846 | ) | (13,497 | ) | (12,311 | ) | ||||||||||||||||||||||||||||||
Total assets | $ | 1,793,209 | $ | 1,688,631 | $ | 1,566,102 | ||||||||||||||||||||||||||||||
Liabilities and Shareholders' Equity: | ||||||||||||||||||||||||||||||||||||
Interest-bearing liabilities | ||||||||||||||||||||||||||||||||||||
Interest-bearing demand deposits | $ | 704,118 | 13,867 | 1.97 | % | $ | 815,579 | 3,215 | 0.39 | % | $ | 764,798 | 1,252 | 0.16 | % | |||||||||||||||||||||
Savings deposits | 136,354 | 381 | 0.28 | 144,343 | 174 | 0.12 | 125,022 | 87 | 0.07 | |||||||||||||||||||||||||||
Time deposits | 322,354 | 10,213 | 3.17 | 157,991 | 581 | 0.37 | 176,245 | 1,169 | 0.66 | |||||||||||||||||||||||||||
Total interest-bearing deposits | 1,162,826 | 24,461 | 2.10 | 1,117,913 | 3,970 | 0.36 | 1,066,065 | 2,508 | 0.24 | |||||||||||||||||||||||||||
Borrowed funds and other interest-bearing liabilities | 197,563 | 9,666 | 4.89 | 109,515 | 2,762 | 2.52 | 12,228 | 197 | 1.61 | |||||||||||||||||||||||||||
Total interest-bearing liabilities | 1,360,389 | 34,127 | 2.51 | % | 1,227,428 | 6,732 | 0.55 | % | 1,078,293 | 2,705 | 0.25 | % | ||||||||||||||||||||||||
Demand deposits | 287,471 | 314,105 | 315,181 | |||||||||||||||||||||||||||||||||
Other liabilities | 22,696 | 15,609 | 13,892 | |||||||||||||||||||||||||||||||||
Shareholders' equity | 122,653 | 131,489 | 158,736 | |||||||||||||||||||||||||||||||||
Total liabilities and shareholders' equity | $ | 1,793,209 | $ | 1,688,631 | $ | 1,566,102 | ||||||||||||||||||||||||||||||
Net interest income/interest rate spread (6) | 48,966 | 2.27 | % | 55,150 | 3.24 | % | 49,922 | 3.38 | % | |||||||||||||||||||||||||||
Tax equivalent adjustment | (1,069 | ) | (1,106 | ) | (928 | ) | ||||||||||||||||||||||||||||||
Net interest income as reported | $ | 47,897 | $ | 54,044 | $ | 48,994 | ||||||||||||||||||||||||||||||
Net interest margin (7) | 2.81 | % | 3.38 | % | 3.45 | % | ||||||||||||||||||||||||||||||
(1) | Interest income is presented on a tax-equivalent basis using a 21% rate. |
(2) | Loans and leases are stated net of unearned income. | |
(3) | Non-accrual loans are included in loans within earning assets. | |
(4) | Interest income on loans and leases includes net loan costs of $1,286 in 2023 and net loan fees of | |
(5) | The yields for securities that are classified as available for sale are based on the average historical amortized cost. | |
| (6) | ||
| Interest rate spread represents the difference between the average yield on | |
| Net interest income as a percentage of total average interest earning assets. |
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.
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.
Rate Volume Analysis
For the Year Ended December 31, | For the Year Ended December 31, | |||||||||||||||||||||||||||||||||||||||||||||||
2020 vs. 2019 | 2019 vs. 2018 | 2023 vs. 2022 | 2022 vs. 2021 | |||||||||||||||||||||||||||||||||||||||||||||
Increase (Decrease) Due to Change in | Increase (Decrease) Due to Change in | Increase (Decrease) Due to Change in | Increase (Decrease) Due to Change in | |||||||||||||||||||||||||||||||||||||||||||||
(in thousands) | Volume | Rate | Total | Volume | Rate | Total | Volume | Rate | Total | Volume | Rate | Total | ||||||||||||||||||||||||||||||||||||
Interest income: | ||||||||||||||||||||||||||||||||||||||||||||||||
Loans-taxable | $ | 3,501 | $ | (3,853 | ) | $ | (352 | ) | $ | 30 | $ | 1,588 | $ | 1,618 | ||||||||||||||||||||||||||||||||||
Loans-tax free | 103 | 86 | 189 | (290 | ) | 61 | (229 | ) | ||||||||||||||||||||||||||||||||||||||||
Total loans | 3,604 | (3,767 | ) | (163 | ) | (260 | ) | 1,649 | 1,389 | |||||||||||||||||||||||||||||||||||||||
Loans and leases-taxable | $ | 5,397 | $ | 12,460 | $ | 17,857 | $ | 5,093 | $ | 958 | $ | 6,051 | ||||||||||||||||||||||||||||||||||||
Loans and leases-tax free | 37 | 361 | 398 | 356 | (238 | ) | 118 | |||||||||||||||||||||||||||||||||||||||||
Total loans and leases | 5,434 | 12,821 | 18,255 | 5,449 | 720 | 6,169 | ||||||||||||||||||||||||||||||||||||||||||
Securities-taxable | (695 | ) | 116 | (579 | ) | (792 | ) | 210 | (582 | ) | (76 | ) | 2,688 | 2,612 | 2,305 | 49 | 2,354 | |||||||||||||||||||||||||||||||
Securities-tax free | 1,587 | (38 | ) | 1,549 | 22 | (1 | ) | 21 | (428 | ) | (148 | ) | (576 | ) | 822 | (93 | ) | 729 | ||||||||||||||||||||||||||||||
Total securities | 892 | 78 | 970 | (770 | ) | 209 | (561 | ) | (504 | ) | 2,540 | 2,036 | 3,127 | (44 | ) | 3,083 | ||||||||||||||||||||||||||||||||
Interest-bearing deposits in other banks | 35 | (195 | ) | (160 | ) | 73 | 27 | 100 | ||||||||||||||||||||||||||||||||||||||||
Interest-bearing deposits in other banks and federal funds sold | 287 | 633 | 920 | (139 | ) | 142 | 3 | |||||||||||||||||||||||||||||||||||||||||
Total interest income | 4,531 | (3,884 | ) | 647 | (957 | ) | 1,885 | 928 | 5,217 | 15,994 | 21,211 | 8,437 | 818 | 9,255 | ||||||||||||||||||||||||||||||||||
Interest expense: | ||||||||||||||||||||||||||||||||||||||||||||||||
Interest-bearing demand deposits | 692 | (1,926 | ) | (1,234 | ) | 62 | 1,224 | 1,286 | (497 | ) | 11,149 | 10,652 | 88 | 1,875 | 1,963 | |||||||||||||||||||||||||||||||||
Savings deposits | 11 | (38 | ) | (27 | ) | (8 | ) | (1 | ) | (9 | ) | (10 | ) | 217 | 207 | 15 | 72 | 87 | ||||||||||||||||||||||||||||||
Time deposits | (617 | ) | (819 | ) | (1,436 | ) | 25 | 874 | 899 | 1,158 | 8,474 | 9,632 | (111 | ) | (477 | ) | (588 | ) | ||||||||||||||||||||||||||||||
Total interest-bearing deposits | 86 | (2,783 | ) | (2,697 | ) | 79 | 2,097 | 2,176 | 651 | 19,840 | 20,491 | (8 | ) | 1,470 | 1,462 | |||||||||||||||||||||||||||||||||
Borrowed funds and other interest-bearing liabilities | (284 | ) | (655 | ) | (939 | ) | (1,415 | ) | 457 | (958 | ) | 3,183 | 3,721 | 6,904 | 2,395 | 170 | 2,565 | |||||||||||||||||||||||||||||||
Total interest expense | (198 | ) | (3,438 | ) | (3,636 | ) | (1,336 | ) | 2,554 | 1,218 | 3,834 | 23,561 | 27,395 | 2,387 | 1,640 | 4,027 | ||||||||||||||||||||||||||||||||
Net interest income | $ | 4,729 | $ | (446 | ) | $ | 4,283 | $ | 379 | $ | (669 | ) | $ | (290 | ) | $ | 1,383 | $ | (7,567 | ) | $ | (6,184 | ) | $ | 6,050 | $ | (822 | ) | $ | 5,228 | ||||||||||||||||||
Provision for Loan and LeaseCredit Losses
The level of the ACL is a critical accounting estimate, which is subject to uncertainty. The provision for loan and leasecredit losses is a charge to earnings in an expense charged against net interest incomeamount sufficient enough to provide for probable losses attributable to uncollectible loans and is based on management’s analysis ofmaintain the adequacy of the ALLL. ACL at a level deemed adequate by management. A credit to loan and leasethe provision for credit losses reflects the reversal of amounts previously charged to the ALLL.ACL. Management closely monitors the loan portfolio and the adequacy of the ALLLACL by considering the underlying financial performance of the borrower, collateral values and associated credit risks. FNCB recorded a provision for credit losses of $1.9 millionfor the year ended December 31, 2023, a decrease of $0.1 million, compared to $2.0 million for the year ended December 31, 2022. Future material adjustments may be necessary to the provision for loan and leasecredit losses and the ALLLACL if economic conditions or loan performance differ substantially from the assumptions management considered in its evaluation of the ALLL.ACL.
During 2020, management took into consideration the potential adverse impact that the COVID-19 pandemic has had on economic conditions in its application of FNCB's methodology on the allowance for loan and lease losses. Specifically, management tried to address this adverse impact by adjusting the qualitative factor associated with changes in national, local and business economic conditions and developments. In addition, management increased the unallocated portion of the ALLL to a maximum of 10.0% of the total allowance. Both actions have resulted in higher credit provisioning during the twelve months ended December 31, 2020. FNCB recorded a provision for loan and lease losses of $1.9 millionfor the year ended December 31, 2020, an increase of $1.1 million compared to $0.8 million for the year ended December 31, 2019.
Non-Interest Income
The following table presents the components of non-interest income for the years ended December 31, 20202023 and 2019:2022:
Components of Non-Interest Income
Year Ended December 31, | ||||||||
(in thousands) | 2020 | 2019 | ||||||
Deposit service charges | $ | 3,252 | $ | 3,035 | ||||
Net gain on the sale of available-for-sale securities | 1,528 | 1,227 | ||||||
Net gain on equity securities | 1,171 | 29 | ||||||
Net gain on the sale of mortgage loans held for sale | 653 | 253 | ||||||
Net gain on the sale of other real estate owned | - | 20 | ||||||
Loan-related fees | 348 | 378 | ||||||
Income from bank-owned life insurance | 482 | 520 | ||||||
Loan referral fees | 390 | 703 | ||||||
| Merchant services revenue | 565 | 536 | ||||||
Other | 861 | 919 | ||||||
| Total non-interest income | $ | 9,250 | $ | 7,620 | ||||
Year Ended December 31, | ||||||||||||||||
Change | ||||||||||||||||
(in thousands) | 2023 | 2022 | $ | % | ||||||||||||
Deposit service charges | $ | 4,537 | $ | 4,415 | $ | 122 | 2.8 | % | ||||||||
Net gain (loss) on the sale of available-for-sale debt securities | 252 | (223 | ) | 475 | (213.0 | ) | ||||||||||
Net loss on equity securities | (1,601 | ) | (34 | ) | (1,567 | ) | 4,608.8 | |||||||||
Net gain on the sale of mortgage loans held for sale | 6 | 205 | (199 | ) | (97.1 | ) | ||||||||||
Loan-related fees | 398 | 243 | 155 | 63.8 | ||||||||||||
Income from bank-owned life insurance | 752 | 710 | 42 | 5.9 | ||||||||||||
Bank-owned life insurance settlement | - | 273 | (273 | ) | (100.0 | ) | ||||||||||
Merchant services revenue | 592 | 712 | (120 | ) | (16.9 | ) | ||||||||||
Wealth management services revenue | 944 | 564 | 380 | 67.3 | ||||||||||||
Loan referral fees | 362 | 191 | 171 | 89.5 | ||||||||||||
Other | 403 | 925 | (522 | ) | (56.4 | ) | ||||||||||
Total non-interest income | $ | 6,645 | $ | 7,981 | $ | (1,336 | ) | (16.7 | )% | |||||||
Partially offsetting the increasessale of available-for sale debt securities of $252 thousand in 2023, compared to non-interest income was a $313net loss of $223 thousand in 2022, an increase of $475 thousand, or 44.5%213.0%. Loan-related fees increased $155 thousand, or 63.8%, decline in loan referral fees/interest rate swap revenue to $390$398 thousand in 20202023 from $703$243 thousand in 2019. Loan referral fees include fees received from third-party counterparties related to various commercial loan interest rate swap transactions and fees received for the referral2022.
Non-Interest Expense
The following table presents the major components of non-interest expense for the years ended December 31, 20202023 and 2019:2022:
Components of Non-Interest Expense
Year Ended December 31, | ||||||||
(in thousands) | 2020 | 2019 | ||||||
Salaries and employee benefits | $ | 15,246 | $ | 15,518 | ||||
Occupancy expense | 2,052 | 1,948 | ||||||
Equipment expense | 1,477 | 1,319 | ||||||
Advertising expense | 685 | 738 | ||||||
Data processing expense | 2,933 | 3,113 | ||||||
Bank shares tax | 786 | 566 | ||||||
Professional fees | 999 | 1,056 | ||||||
Other operating expenses | 4,737 | 5,424 | ||||||
| Total non-interest expense | $ | 28,915 | $ | 29,682 | ||||
Year Ended December 31, | ||||||||||||||||
Change | ||||||||||||||||
(in thousands) | 2023 | 2022 | $ | % | ||||||||||||
Salaries and employee benefits | $ | 20,234 | $ | 19,283 | $ | 951 | 4.9 | % | ||||||||
Occupancy expense | 2,156 | 2,093 | 63 | 3.0 | ||||||||||||
Equipment expense | 963 | 1,295 | (332 | ) | (25.6 | ) | ||||||||||
Advertising expense | 836 | 801 | 35 | 4.4 | ||||||||||||
Data processing expense | 4,008 | 4,027 | (19 | ) | (0.5 | ) | ||||||||||
Regulatory assessments | 1,115 | 811 | 304 | 37.5 | ||||||||||||
Bank shares tax | 509 | 915 | (406 | ) | (44.4 | ) | ||||||||||
Professional fees | 1,093 | 1,273 | (180 | ) | (14.1 | ) | ||||||||||
(Credit) provision for unfunded commitments | (803 | ) | 366 | (1,169 | ) | (319.4 | ) | |||||||||
Merger and acquisition expenses | 1,480 | - | 1,480 | - | ||||||||||||
Other operating expenses | 5,331 | 4,610 | 721 | 15.6 | ||||||||||||
Total non-interest expense | $ | 36,922 | $ | 35,474 | $ | 1,448 | 4.1 | % | ||||||||
Non-interest expense totaled $28.9$36.9 million in 2020, a decrease2023, an increase of $767 thousand,$1.4 million, or 2.6%4.1%, from $29.7$35.5 million in 2019.2022. The decrease resultedincrease was primarily from decreasesdue to the recognition of $1.5 million in merger and acquisition expenses in 2023. FNCB also experienced increases in salaries and employee benefits, data processing expenseregulatory assessments and other operating expenses. Partially offsetting these decreasesexpenses, which were increasespartially offset by a credit for unfunded commitments and reductions in occupancy costs, equipment expensesexpense and bank shares tax.
Salaries and employee benefits decreased $272increased $951 thousand, or 1.75%4.9%, to $15.2$20.2 million in 20202023 from $15.5$19.3 million in 2019.2022. The reductionincrease in salaries and employee benefits was largelyprimarily due to an increaseincreases in payroll-related costs that were deferred and amortized over the life of the loan under ASC 310-20, which primarily reflected the 1,002 PPP loans originated in 2020. Also impacting the decrease instarting salaries and employee benefits wassalary ranges to remain competitive in attracting and retaining quality staff, annual merit increases and higher payroll taxes, health insurance premiums and retirement contributions, partially offset by a 7.5-person reduction in full-time equivalent employees, due primarily to COVID-19 limitations on branch operations. As a result, salary costs decreased $320 thousand, or 2.7%, to $11.7 million in 2020 from $12.0 million in 2019, and payroll taxes decreased $56 thousand, or 5.8%, to $906 thousand in 2020 from $962 thousand in 2019. Partially offsetting these factors were increases in employee incentive costs of $142 thousand, or 20.3%, health insurance expense of $121 thousand, or 10.1%, and retirement costs of $95 thousand, or 19.8%.compensation. At the end of 2020,2022, management engaged a third-party consultant to conduct a comprehensive evaluation of FNCB's salary and benefit structure and industry comparison. As a result of this study, FNCB had increased the Board of Directors approved a special one-time bonusminimum starting salary for new employees and adjusted salary ranges as appropriate to each employee to convey appreciation during this unprecedented time, which included payments of $500 and $250 for each full-time and part-time employee, respectively. The totalbe competitive with its peers within its market area. Additionally, FNCB increased the 2023 annual cost of this one-time incentive payment was $101 thousand, which accountedliving/merit increase for the majority of the increase in incentive costs. In the fourth quarter of 2019, FNCB began self-insuring employee healthcare benefits through a consortium. The increase in health insurance expense reflected first year costs and timing differences of benefit billing and payments associated with the transition. The higher amount of retirement costs was due to increases in supplemental employee retirement plan ("SERP") contributions and changes in FNCB's 401(k) plan including, an increase to the percentage for employer match and institution of an auto-enrollment feature upon hire.employees.
Comparing 2023 and 2022, regulatory assessments increased $304 thousand, or 37.5%, due largely to balance sheet growth. Other operating expenses decreased $687increased $721 thousand, or 12.7%15.6%, to $4.7$5.3 million in 20202023, from $5.4$4.6 million in 2019. The decrease was predominately due to2022, which reflected increases in insurance costs, legal fees, correspondent bank fees and servicing costs of purchased loans. These increases were slightly offset by a $538 thousand favorable swingcredit for unfunded commitments and a reduction in the provision for off-balance sheet commitments due to lower commitment volumes. equipment expenses and bank shares tax expense. At December 31, 2023, FNCB recorded a credit for off-balance sheetunfunded commitments of $90$803 thousand, in 2020 compared to a provision for unfunded commitments of $448$366 thousand in 2019.
Occupancy costs increased $104 thousand, or 5.4%, to $2.0 million in 2020 from $1.9 million in 2019, while equipment expenses increased $158 thousand, or 11.9%, to $1.5 million in 2020, compared to $1.3 million in 2019, reflecting a full-year of depreciation expense for premises and furniture and equipment related to the new offices opened in mid-2019. In addition, COVID-19 related expenses such as the cleaning and sanitization of branch and administrative offices, the installation of health and safety equipment including hand sanitizing stations and plexiglass partitions, computer-related expenses to enable a remote work environment also factored into the increase in occupancy and equipment expense.
Bank shares tax also increased in 2020, to $786 thousand, up $220 thousand from $566 thousand recorded at December 31, 2019, which reflected an increase in capital at the Bank level.2022. Equipment expenses and bank shares tax expense decreased $332 thousand, or 25.6%, and $406 thousand, or 44.4%, respectively, comparing 2023 and 2022.
Provision for Income Taxes
FNCB recorded income tax expense of $3.22.8 million in 2020, an increase2023, a decrease of $899 thousand,$1.4 million, or 38.6%33.5%, compared to $2.3$4.2 million in 2019.2022. The increasedecrease in income tax expense was due to higherlower taxable income in 20202023 as compared to 2019.2022. FNCB's effective tax rate increased to 17.52% at December 31, 2023, compared to 16.85% at December 31, 2022, which resulted primarily from a decrease in tax-exempt income and an increase in non-deductible interest expense.
Management evaluates the carrying amount of its deferred tax assets on a quarterly basis, or more frequently, as 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. If management determines based on available evidence, both positive and negative, that it is more likely than not that some portion or all of the net deferred tax assetassets will not be realized in future periods, a valuation allowance is calculated and recorded. These determinations are inherently subjective and depend upon management’s estimates and judgments used in their evaluation of both positive and negative evidence.
In evaluating available evidence, management considers, among other factors, historical financial performance, expectation of future earnings, the ability to carry back losses to recoup taxes previously paid, length of statutory carry forward periods, experience with operating loss and tax credit carry forwards not expiring unused, tax planning strategies and timing of reversals of temporary differences. In assessing the need for a valuation allowance, management carefully weighs both positive and negative evidence currently available.
Management performed an evaluation of FNCB’s deferred tax assets at December 31, 20202023 taking into consideration both positive and negative evidence as of that date. Based on this evaluation, management believes that FNCB's future taxable income will be sufficient to utilize deferred tax assets. Accordingly, management concluded that no valuation allowance for deferred tax assets was required at December 31, 20202023 or 2019.2022.
FINANCIAL CONDITION
Total assets were $1.466increased $135.5 million, or 7.8%, to $1.881 billion at December 31, 2020, an increase of $262.1 million, or 21.8%,2023 from $1.204$1.746 billion at December 31, 2019.2022. The increasebalance sheet expansion primarily reflected increases in total assets resultedloans and leases, net of ACL, and cash and cash equivalents, partially offset by decreases in available-for-sale debt securities as security repayments were used to fund loan originations. Loans and leases, net of ACL, increased $98.2 million, or 8.8%, to$1.208 billion at December 31, 2023 from $1.110 billion at December 31, 2022. FNCB experienced strong loan demand in the commercial sector with the majority of the increase in interest-earning assets, specifically an increaseloans and leases concentrated in available-for-sale debt securitiesof $77.2 million, or 28.3%, to $350.0million at December 31, 2020 from $272.8 million at December 31, 2019. Loans, net of the allowance for loan and lease losses, also increased by $69.6 million, or 8.5%, to $889.2 million at December 31, 2020 from $819.5 million at December 31, 2019. The increase was largely due to the origination of PPP loans, of which $76.0 million, net of net deferred origination fees, were outstanding at December 31, 2020.commercial equipment financing loans. Cash and cash equivalents increased $121.2$66.0 million, or 350.8%157.3%, to $155.8$107.9 million at December 31, 20202023, from $34.6$41.9 million at December 31, 2019.2022. Meanwhile, available-for-sale debt securities decreased $25.3 million, or 5.3%, to $450.8 million at December 31, 2023 from $476.1 million at December 31, 2022. Total deposits increased $285.7$108.3 million, or 28.5%7.6%, to $1.287$1.529 billion a December 31, 2023 from $1.421 billion at December 31, 20202022. FNCB experienced migration from $1.002non-maturity deposits, non-interest-bearing and interest-bearing demand and savings deposits, into time deposits, as customers have become increasingly rate-sensitive. In addition, FNCB increased utilization of brokered deposits to secure liquidity and for interest rate risk management purposes. Total non-maturity deposits decreased $92.0 million, or 7.3%, to $1.171 billion at December 31, 2019. The increase in2023 from $1.263 billion at December 21, 2022. Total time deposits was primarily attributable to increases in both interest-bearing and non-interest-bearing deposits. Total borrowed funds decreased $46.9increased $200.3 million, or 82.0%126.9%, to $10.3$358.2 million at the end of 2023, from $157.9 million at December 31, 2020 from $57.22022. Included in time deposits were brokered deposits of $148.7 million at December 31, 2019. FNCB had no term or overnight borrowings through the FHLB2023, an increase of Pittsburgh outstanding as of December 31, 2020.
Total shareholders’ equity increased $22.3$124.8 million or 16.7%, to $155.9from $23.9 million at December 31, 2020 from $133.62022. Borrowed funds increased $17.9 million to $200.3 million at December 31, 2019.2023, compared to $182.4 million at December 31, 2022, which included a $25 million advance under the Federal Reserve Bank's Bank Term Funding Program ("BTFP").
Cash and Cash Equivalents
Cash and cash equivalents increased $66.0 million, or 157.3%, to $ 107.9 million at December 31, 2023, from $41.9 million at December 31, 2022. The increase in cash and cash equivalents resulted primarily from cash provided by operating and financing activities, primarily an increase of $108.4 million in deposits, including brokered deposits, and net activity related to available-for-sale debt securities of $34.7 million. Funds received from deposits and investment activity were used to fund demand for FNCB's lending products, resulting in an increase in loans and leases, net of deferred loan origination fees and costs and unearned income, of $98.1 million. Partially offsetting this, FNCB on its common stock totaled $0.22paid cash dividends totaling $7.1 million, or $0.360 per share in 2020, an increase of $0.02 per share, or 10.0%, 2023compared to $0.20$6.5 million, or $0.330 per share, in 2019. On January 27, 2021, the Board of Directors of FNCB declared a $0.06 per share dividend for the first quarter of 2021, which was a 9.1% increase compared to the $0.055 per share dividend declared for the first quarter of 2020. The first quarter 2021 dividend is payable on March 15, 2021 to shareholders of record on March 1, 2021.2022.
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-maturityavailable-for-sale or available-for-saleheld-to-maturity at the time of purchase based on management's intent. Held-to-maturity securities are carried at amortized cost, while available-for-saleAvailable-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.tax, while held-to-maturity securities are carried at amortized cost. At December 31, 20202023 and 2019,2022, 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 the consolidated statements of income. Securities with limited marketability and/or restrictions, such as FHLB of Pittsburgh stock, are carried at cost. 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 December 31, 2020,2023, the 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 CMOs, fixed-rate taxable and tax-freecollateralized mortgage obligations of state and political subdivisions,("CMOs"). FNCB also holds investments, to a lesser extent, in private CMOs andCMO'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 traded 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 as of December 31, 2020.2023.
The investment portfolio is predominantly fixed-rate in nature. As such,majority of FNCB's debt securities are fixed-rate instruments and inherently subject to interest rate risk, defined as the risk that an investment’s value will change due to a changeof fixed-rate securities fluctuate with changes in interest rates, in the spread between two rates and in the shape of the yield curve. A security’s value is usually affected inversely by changes in rates. U.S. Treasury rates fell significantly in the first quarter of 2020 in response to the outbreak of COVID-19, declaration of a national emergency and economic shutdown in March 2020. U.S. Treasury rates fluctuated slightly but hovered near historic lows for the remainder of 2020. Conversely, spreads between short- and long-term rates widened from the narrow margins exhibited in 2019, adding some minor slope to the yield curve. Specifically, the spread between the 2-year andThe 10-year U.S. Treasury rate which was 0.34%unchanged at 3.88% at both December 31, 2019 widened 46 basis points to 0.80% at December 31, 2020. The2023 and 2022, while the 2-year Treasury rate, which was 1.58%4.41% at December 31, 20192022, fell 135decreased 18 basis points to 0.23% at March 31, 2020 and decreased another 10 basis points to 0.13%4.23% at December 31, 20202023. Meanwhile,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 10-year Treasury rate, which was 1.92% at accumulated other comprehensive income or loss component of shareholder's equity net of deferred income taxes. At December 31, 20192023, dropped 122 basis points to 0.70% at March 31, 2020, but rebounded 23 basis points to 0.93% at December 31, 2020. Due to the decrease in rates comparing December 31, 2020 and 2019, FNCB experienced significant appreciation in the fair value of its investment portfolio. FNCB reported a net unrealized holding gain on its investment portfolioloss, included in accumulated other comprehensive loss, of$14.0 $40.0 million, net of deferred income taxes of $3.7$10.6 million,at December 31, 2020, a decrease of $8.8 million compared to a $3.1 millionthe net unrealized holding gain,loss of $48.8 million, net of deferred income taxes of $0.8$13.0 million, at December 31, 2019. However, any further increase2022. Despite the improvement in the value of available-for-sale debt securities, market interest rate volatility remains. Any increases 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.
The following table presents the carrying value of available-for-sale debt securities and equity securities, with readily determinableat fair valuesvalue at December 31, 2020, 20192023, 2022 and 2018:2021:
Composition of the Investment Portfolio
December 31, | December 31, | |||||||||||||||||||||||||||||||||||
(in thousands) | 2020 | 2019 | 2018 | |||||||||||||||||||||||||||||||||
2023 | 2022 | 2021 | ||||||||||||||||||||||||||||||||||
(dollars in thousands) | Fair Value | % of Portfolio | Fair Value | % of Portfolio | Fair Value | % of Portfolio | ||||||||||||||||||||||||||||||
Available-for-sale debt securities | ||||||||||||||||||||||||||||||||||||
U.S. Treasuries | $ | 33,177 | 7.36 | % | $ | 32,134 | 6.75 | % | $ | 36,355 | 6.96 | % | ||||||||||||||||||||||||
Obligations of state and political subdivisions | $ | 205,828 | $ | 117,763 | $ | 152,187 | 199,796 | 44.32 | 220,782 | 46.37 | 244,372 | 46.76 | ||||||||||||||||||||||||
U.S. government/government-sponsored agencies: | ||||||||||||||||||||||||||||||||||||
U.S. Government-sponsored agency: | ||||||||||||||||||||||||||||||||||||
Collateralized mortgage obligations - residential | 56,972 | 80,294 | 34,207 | 74,207 | 16.46 | 80,407 | 16.89 | 100,710 | 19.27 | |||||||||||||||||||||||||||
Collateralized mortgage obligations - commercial | 3,904 | 17,723 | 73,640 | 3,386 | 0.75 | 3,329 | 0.70 | 3,727 | 0.71 | |||||||||||||||||||||||||||
Mortgage-backed securities | 13,026 | 18,485 | 23,934 | |||||||||||||||||||||||||||||||||
Private collateralized mortgage obligations | 38,199 | 25,075 | 2,913 | |||||||||||||||||||||||||||||||||
Residential mortgage-backed securities | 16,446 | 3.65 | 20,663 | 4.34 | 25,506 | 4.88 | ||||||||||||||||||||||||||||||
Private Collateralized mortgage obligations | 70,152 | 15.56 | 72,507 | 15.23 | 67,165 | 12.85 | ||||||||||||||||||||||||||||||
Corporate debt securities | 24,580 | 7,182 | 4,936 | 31,286 | 6.94 | 30,672 | 6.44 | 32,063 | 6.14 | |||||||||||||||||||||||||||
Asset-backed securities | 7,526 | 5,621 | 1,802 | |||||||||||||||||||||||||||||||||
Asset backed securities | 21,690 | 4.81 | 14,941 | 3.14 | 11,932 | 2.28 | ||||||||||||||||||||||||||||||
Negotiable certificates of deposit | - | 696 | 2,413 | 674 | 0.15 | 656 | 0.14 | 736 | 0.14 | |||||||||||||||||||||||||||
Total available-for-sale debt securities | $ | 350,035 | $ | 272,839 | $ | 296,032 | $ | 450,814 | 100.00 | % | $ | 476,091 | 100.00 | % | $ | 522,566 | 100.00 | % | ||||||||||||||||||
| Equity securities, at fair value | $ | 3,026 | $ | 920 | $ | 891 | $ | 4,786 | $ | 7,717 | $ | 4,922 | ||||||||||||||||||||||||
Management monitorsFNCB purchased 11 securities with an aggregate cost of $17.2 million and a weighted-average yield of 7.99% during the year ended December 31, 2023. Securities purchased included $9.0 million in private asset-backed securities, $6.6 million in private CMOs and $1.5 million in corporate debt securities. Principal repayments and a decrease in the fair value of the available-for-sale portfolio due to an increase in market interest rates entirely offset the increase due to the purchases. In 2023, FNCB also sold available-for-sale securities with an aggregate amortized cost of $10.1 million and a weighted-average yield of 3.85%. Gross proceeds received on the sales totaled $10.4 million and a realized net gain of $252 thousand upon the sale is included in non-interest income in 2023. The investment portfolio regularly and adjusts the investment strategy to reflect changesaveraged $532.5 million in liquidity needs, asset/liability strategy and tax-planning requirements. The composition2023, a decrease of FNCB's investment portfolio shifted$17.4 million, or 3.2%, from $550.1 million in 2020, reflecting the change in its income tax position,2023, as the majority of available NOL carryforwardsproceeds received from repayments were consumedused to fund loan demand. The tax-equivalent yield on the investment securities increased 47 basis points to 3.05% in 2020. At December 31, 2020, available2023 from 2.58% in 2022. NOLs were approximately $2.0 million, a decrease of $18.7 million compared to $20.7 million outstanding at December 31, 2019. Because of the change in tax position, FNCB increased its holdings of tax-free investments in 2020.
Market conditionssurveillance report that identifies events related to the issuer that may indicate a deterioration in 2020 allowed management to sell lower-yielding securities at a gain and reinvest a portion of the proceeds into higher yielding securities within FNCB's risk tolerance. FNCB sold available-for-sale securities in 2020 with an aggregate amortized cost of $66.7 million. Gross proceeds received on the sales totaled $68.2 million, with net gains of $1.5 million realized upon the sales and included in non-interest income. The securities sold had a weighted-average yield of 1.63%.
Securities purchasedcredit quality. Management noted no such events during the year ended December 31, 2020 totaled $152.7 million, including $72.9 million in tax-free obligations of state and political subdivisions, $22.8 million in taxable obligations of state and political subdivisions, $19.8 million in private CMOs, $17.8 million in corporate debt securities, $12.1 million in CMOs of U.S. government-sponsored agencies and $7.3 million in asset-backed securities. Securities purchased during 2020 had a weighted-average yield of 2.58%.
December 31, 2023 | ||||||||||||||||||||||||
Within One Year | > 1 – 5 Years | 6-10 Years | Over 10 Years | Collateralized Mortgage Obligations, Mortgage-Backed and Asset-Backed Securities | Total | |||||||||||||||||||
Weighted-average yield | ||||||||||||||||||||||||
U.S. Treasury | - | % | 1.17 | % | - | % | - | % | - | % | 1.17 | % | ||||||||||||
Obligations of state and political subdivisions | 2.96 | 2.97 | 2.27 | 2.35 | - | 2.48 | ||||||||||||||||||
U.S. government/government-sponsored agencies: | ||||||||||||||||||||||||
Collateralized mortgage obligations - residential | - | - | - | - | 2.63 | 2.63 | ||||||||||||||||||
Collateralized mortgage obligations - commercial | - | - | - | - | 2.00 | 2.00 | ||||||||||||||||||
Mortgage-backed securities | - | - | - | - | 2.70 | 2.70 | ||||||||||||||||||
Private collateralized mortgage obligations | - | - | - | - | 3.98 | 3.98 | ||||||||||||||||||
Corporate debt securities | - | 5.42 | 4.84 | - | - | 4.93 | ||||||||||||||||||
Asset-backed securities | - | - | - | - | 7.08 | 7.08 | ||||||||||||||||||
Negotiable certificates of deposit | - | 1.02 | - | - | - | 1.02 | ||||||||||||||||||
Weighted-average yield | 2.96 | % | 2.28 | % | 3.13 | % | 2.35 | % | 3.59 | % | 3.01 | % | ||||||||||||
Evaluation for Credit Impairment
Maturity DistributionManagement performed a review of all securities in an unrealized loss position as of December 31, 2023 and noted that there were no material change in the credit quality of any of the Investment Portfolioissuers or any other event or circumstance that may cause a significant adverse effect on the fair value if 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 December 31, 2023. Based on the results of its review and considering the attributes of these debt securities, management concluded that changes in the fair value of the securities were consistent with movements in market interest rates and spreads relative to when the securities were purchased and not due to the credit quality of the securities or issuers. Accordingly, management determined that FNCB was not required to establish an ACL for any security in an unrealized loss position at December 31, 2023.
December 31, 2020 | ||||||||||||||||||||||||||||
(dollars in thousands) | Within One Year | > 1 – 5 Years | 6-10 Years | Over 10 Years | Collateralized Mortgage Obligations, Mortgage-Backed and Asset-Backed Securities | No Fixed Maturity | Total | |||||||||||||||||||||
Available-for-sale debt securities | ||||||||||||||||||||||||||||
Obligations of state and political subdivisions | $ | 4,718 | $ | 65,429 | $ | 23,821 | $ | 111,860 | $ | - | $ | - | $ | 205,828 | ||||||||||||||
Yield | 2.42 | % | 2.95 | % | 2.92 | % | 2.85 | % | 2.88 | % | ||||||||||||||||||
U.S. government/government-sponsored agencies: | ||||||||||||||||||||||||||||
Collateralized mortgage obligations - residential | - | - | - | - | 56,972 | - | 56,972 | |||||||||||||||||||||
Yield | 2.75 | % | 2.75 | % | ||||||||||||||||||||||||
Collateralized mortgage obligations - commercial | - | - | - | - | 3,904 | - | 3,904 | |||||||||||||||||||||
Yield | 1.98 | % | 1.98 | % | ||||||||||||||||||||||||
Mortgage-backed securities | - | - | - | - | 13,026 | - | 13,026 | |||||||||||||||||||||
Yield | 3.17 | % | 3.17 | % | ||||||||||||||||||||||||
Private collateralized mortgage obligations | - | - | - | - | 38,199 | - | 38,199 | |||||||||||||||||||||
Yield | 2.53 | % | 2.53 | % | ||||||||||||||||||||||||
Corporate debt securities | - | 1,004 | 23,576 | - | - | - | 24,580 | |||||||||||||||||||||
Yield | 6.50 | % | 5.12 | % | 5.18 | % | ||||||||||||||||||||||
Asset-backed securities | - | - | - | - | 7,526 | - | 7,526 | |||||||||||||||||||||
Yield | 1.57 | % | 1.57 | % | ||||||||||||||||||||||||
Total available-for-sale maturities | $ | 4,718 | $ | 66,433 | $ | 47,397 | $ | 111,860 | $ | 119,627 | $ | - | $ | 350,035 | ||||||||||||||
Weighted average yield | 2.42 | % | 3.00 | % | 4.02 | % | 2.85 | % | 2.63 | % | - | % | 2.96 | % | ||||||||||||||
OTTI Evaluation
There was no OTTI recognized during the years ended December 31, 2020 and 2019. For additional information regarding management’s evaluation of securities for OTTI, seeSee Note 4, “Securities”3, “Securities,” of the notesNotes to consolidated financial statementsConsolidated Financial Statements included in Item 8, “Financial Statements and Supplementary Data” to this Annual Report on Form 10-K.10-K for additional information about management's credit impairment evaluation of available-for-sale debt securities.
Management noted no indicators of impairment for the FHLB of Pittsburgh or Atlantic Community Bankers Bank stockLoans and Leases
For comparative purposes, loan and lease balances by loan segment at December 31, 2020, 20192023 and 2018.
Equity Securities2022 are presented at amortized cost, net of deferred loan origination fees and Equity Securities without Readily Determinable Fair Value
At December 31, 2019, FNCB owned 201,000 shares of the common stock of a privately-held bank holding company. The common stock was purchased during 2017 for $8.25 per share, or $1.7 million in aggregate, as part of a private placement pursuant to an exemption from the registration requirements of the Securities Act of 1933, as amended for offerings not involving any public offering. The common stock of this bank holding company was not traded on any established market. FNCB had accounted for this transaction as an equity security without a readily determinable fair value. The $1.7 million investment was included in other assets at December 31, 2019.
On December 29, 2020, FNCB purchased 20,000 shares of the fixed-rate, non-cumulative perpetual preferred stock of a privately-held bank holding company at an offering price of $25.00 per share or $500 thousand in aggregate, which is included in other assets in the consolidated statements of financial condition. The preferred stock pays quarterly dividends at an annual rate of 8.25%, commencing 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 of provide a valuation of this investment as of December 31, 2020, which indicated that the investment was not impaired. Management determined that no adjustment for impairment was required at December 31, 2020.
Loansfollowing narrative analysis.
Total loans and leases, gross increased by $76.9$96.0 million, or 9.3%8.5%, to $903.3$1.220 billion at December 31, 2023 from $1.124 billion at December 31, 2022. The growth in the loan and lease portfolio primarily reflected strong demand for equipment financing under the 1st Equipment Finance brand, coupled with moderate organic growth in commercial real estate and state and political subdivision loan categories. Loans originated under the1st Equipment Finance brand, were previously reported under commercial and industrial loans. On October 1, 2023, 1st Equipment Finance, Inc. was established as a wholly owned subsidiary of the Bank and is now reported as a separate loan segment, commercial equipment financing. The majority of equipment financing loans are transactional in nature and originated through indirect, third-party dealers. At December 31, 2023, simple interest loans and direct finance leases outstanding totaled $163.6 million, an increase of $83.1 million, or 103.2%, from $80.5 million at December 31, 2020 from $826.42022. Municipal leases originated under this initiative were $4.7 million and 3.7 million, respectively, at December 31, 2019. The increase2023 and 2022 and are included in loan balances was largely due to the origination of PPP loans. Gross PPP loans outstanding at December 31, 2020 were $78.6 million. Additionally, FNCB experienced moderate demand for residential real estate loans, construction, land acquisitionstate and development loans, commercial and industrialmunicipal subdivision loans and loans to state and political subdivisions, while commercial real estate loans and consumer loans contracted, comparing December 31, 2020 and 2019.
Historically, commercial lending activities have represented a significant portion of FNCB’s loan portfolio. Commercial lending includes commercial and industrial loans, commercial real estate loans and construction, land acquisition and development loans, and represented 63.3% and 57.3% of total loans at December 31, 2020 and December 31, 2019, respectively. The increase in commercial lending was largely due to increases in commercial and industrial loans, specifically PPP loans, and construction, land acquisition and development loans. Excluding PPP loans, commercial lending represented 59.8% of total loans at December 31, 2020.leases.
From a collateral standpoint, athe 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 by $16.2$20.7 million, or 3.2%3.0%, to $530.0$713.3 million at December 31, 20202023 from $513.8$692.6 million at December 31, 2019. The increase was primarily attributable to strong demand for commercial construction loans, as construction, land acquisition and development loans increased $12.3 million, or 25.9%, to $59.8 million at December 31, 2020 from $47.5 million at December 31, 2019. Real estate secured loans as a2022. However, the percentage of total gross loans decreased to 58.7% at December 31, 2020 from 62.2% at December 31, 2019. Excluding PPP loans, real estate secured loans as a percentage ofto total gross loans and leases decreased to 58.5% at December 31, 2020 was 64.3%.2023 from 61.6% at December 31, 2022, which primarily reflected diversification of the portfolio into commercial equipment financing.
Commercial real estate loans, which include long-term commercial mortgage financing and industrial loans increased $90.8are primarily secured by first or second lien mortgages, increased $31.8 million, or 61.5%8.5%, during the year to $238.4$408.1 million at December 31, 20202023, from $147.6$376.3 million at December 31, 2019. 2022. Commercial and industrial loans consist primarily of equipment loans, working capital financing, revolving lines of credit and loans secured by cash and marketable securities and PPP loans. Excluding PPP loans, commercialsecurities. Commercial and industrial loans, increased $12.2excluding the commercial equipment financing loans decreased $8.0 million, or 8.3%. Loans secured by commercial real estate decreased $4.5 million, or 1.6%4.2%, to $273.9 millionat December 31, 2020 from $278.4$183.8 million at December 31, 2019. Commercial2023 from $191.8 million at December 31, 2022. Construction, land acquisition and development loans decreased $6.3 million, or 9.5%, to $59.9 million at December 31, 2023 from $66.2 million at December 31, 2022.
Residential real estate loans include long-term commercialfixed-rate and variable-rate, amortizing mortgage financingloans, home equity lines of credit ("HELOCs") and are primarily secured by first or second lien mortgages.
HELCOs with a carve out feature. FNCB primarily underwrites fixed-rate purchase and refinance of residential mortgage loans for sale in the secondary market to reduce interest rate risk and provide funding for additional loans. Additionally, FNCB offers a “WOW”propriety non-saleable mortgage product which is a non-saleablebranded as the WOW mortgage. The WOW mortgage withhas maturity terms of 7.510 to 19.5 years and offers customers an attractive fixed interest rate and low closing costs andcosts. Due to the increase in market rates, demand mortgages declined significantly in 2023. As a guaranteed 30-day close. FNCB also offers home equity loans and home equity lines of credit ("HELOC") with a maximum combined loan-to value ratio of 90% based on the appraised value of the property. Home equity loans have fixed rates of interest and carry terms up to 15 years, while HELOCs are variable-rate loans. result, rResidentialesidential real estate loans totaledoutstanding decreased $4.8 million, or 1.9%, to $196.3245.3 million at December 31, 2020, an increase of $8.4 million, or 4.5%,2023, from $187.9$250.1 million at December 31, 2019. In 2020, FNCB experienced strong demand for its proprietary WOW mortgage product, which increased $21.9 million, or 42.9%, to $72.9 million at December 31, 2020 from $51.0 million at December 31, 2019. Partially offsetting this increase were reductions in traditional 1-4 family mortgages, home equity loans and HELOCs.2022.
Consumer loans totaled $85.9$85.7 million at December 31, 2020,2023, a decrease of $35.2$8.8 million, or 29.1%9.3%, from $121.1$94.5 million at December 31, 2019.2022. The majoritydecrease in consumer loans was largely due to runoff of the decrease was concentrated within the indirect auto loan portfolio, asindividual loans and pools of personal installment loans purchased through third-party originators in 2022. FNCB did not aggressively compete for thesepurchase any consumer loans or loan pools in 2020.2023. Loans to state and municipal governments increased $5.1$9.0 million, or 11.6%13.9%, to $49.0$73.9 million at December 31, 20202023 from $43.9$64.9 million at December 31, 2019.2022.
The following table presents loans and leases receivable, net by major category at December 31, for each of the lastfive years:2023 and 2022:
Loan and Lease Portfolio Detail
December 31, | ||||||||||||||||||||
(in thousands) | 2020 | 2019 | 2018 | 2017 | 2016 | |||||||||||||||
Residential real estate | $ | 196,328 | $ | 187,863 | $ | 184,531 | $ | 179,439 | $ | 167,906 | ||||||||||
Commercial real estate | 273,903 | 278,379 | 262,778 | 261,783 | 243,830 | |||||||||||||||
Construction, land acquisition and development | 59,785 | 47,484 | 20,813 | 20,981 | 18,357 | |||||||||||||||
Commercial and industrial | 238,435 | 147,623 | 150,962 | 150,103 | 150,758 | |||||||||||||||
Consumer | 85,881 | 121,099 | 157,086 | 113,234 | 104,198 | |||||||||||||||
State and political subdivisions | 49,009 | 43,908 | 59,037 | 42,529 | 43,709 | |||||||||||||||
Total loans, gross | 903,341 | 826,356 | 835,207 | 768,069 | 728,758 | |||||||||||||||
Unearned income | (110 | ) | (69 | ) | (70 | ) | (80 | ) | (48 | ) | ||||||||||
Net deferred loan (fees) costs | (2,129 | ) | 2,192 | 3,963 | 2,654 | 2,569 | ||||||||||||||
Allowance for loan and lease losses | (11,950 | ) | (8,950 | ) | (9,519 | ) | (9,034 | ) | (8,419 | ) | ||||||||||
Loans, net | $ | 889,152 | $ | 819,529 | $ | 829,581 | $ | 761,609 | $ | 722,860 | ||||||||||
December 31, | ||||||||||||||||
2023 | 2022 | |||||||||||||||
% of Total | % of Total | |||||||||||||||
(in thousands) | Amount | Loans, Gross | Amount | Loans, Gross | ||||||||||||
Residential real estate | $ | 245,282 | 20.10 | % | $ | 250,106 | 23.86 | % | ||||||||
Commercial real estate | 408,135 | 33.45 | 376,275 | 37.29 | ||||||||||||
Construction, land acquisition and development | 59,876 | 4.91 | 66,230 | 4.24 | ||||||||||||
Commercial and industrial | 183,794 | 15.06 | 272,361 | 19.67 | ||||||||||||
Commercial equipment financing | 163,605 | 13.41 | - | - | ||||||||||||
Consumer | 85,730 | 7.02 | 94,493 | 8.72 | ||||||||||||
State and political subdivisions | 73,843 | 6.05 | 64,852 | 6.22 | ||||||||||||
Total loans and leases | 1,220,265 | 100.00 | % | 1,124,317 | 100.00 | % | ||||||||||
Allowance for credit losses | (11,986 | ) | (14,193 | ) | ||||||||||||
Loans and leases, net | $ | 1,208,279 | $ | 1,110,124 | ||||||||||||
The following table presentstables present the maturity distribution and interest rate information of the loan and lease portfolio by major category as of December 31, 2020:2023:
Loans and Leases by Maturity Distribution of the Loan Portfolioand Interest Rate Sensitivity
December 31, 2020 | December 31, 2023 | |||||||||||||||||||||||||||||||||||
Within One | One to Five | Over Five | Within One | One to Five | Five to Fifteen | Over Fifteen | ||||||||||||||||||||||||||||||
(in thousands) | Year | Years | Years | Total | Year | Years | Years | Years | Total | |||||||||||||||||||||||||||
Residential real estate | $ | 6,941 | $ | 14,018 | $ | 175,369 | $ | 196,328 | $ | 3,290 | $ | 9,113 | $ | 100,846 | $ | 132,033 | $ | 245,282 | ||||||||||||||||||
Commercial real estate | 6,844 | 53,756 | 213,303 | 273,903 | 15,356 | 72,711 | 187,368 | 132,700 | 408,135 | |||||||||||||||||||||||||||
Construction, land acquisition and development | 6,378 | 17,168 | 36,239 | 59,785 | 12,528 | 18,131 | 19,302 | 9,914 | 59,876 | |||||||||||||||||||||||||||
Commercial and industrial | 69,098 | 145,835 | 23,502 | 238,435 | 79,237 | 60,116 | 44,441 | - | 183,794 | |||||||||||||||||||||||||||
Commercial equipment financing | 636 | 133,566 | 29,403 | - | 163,605 | |||||||||||||||||||||||||||||||
Consumer | 1,980 | 78,280 | 5,621 | 85,881 | 3,888 | 42,933 | 37,813 | 1,096 | 85,730 | |||||||||||||||||||||||||||
State and political subdivisions | 776 | 3,681 | 44,552 | 49,009 | 2,053 | 13,859 | 31,446 | 26,485 | 73,843 | |||||||||||||||||||||||||||
Total loans, gross | $ | 92,017 | $ | 312,738 | $ | 498,586 | $ | 903,341 | ||||||||||||||||||||||||||||
Loans with predetermined interest rates | $ | 15,859 | $ | 259,444 | $ | 174,935 | $ | 450,238 | ||||||||||||||||||||||||||||
Loans with floating rates | 76,158 | 53,294 | 323,651 | 453,103 | ||||||||||||||||||||||||||||||||
Total loans, gross | $ | 92,017 | $ | 312,738 | $ | 498,586 | $ | 903,341 | ||||||||||||||||||||||||||||
Total loans and leases | $ | 116,989 | $ | 350,429 | $ | 450,619 | $ | 302,228 | $ | 1,220,265 | ||||||||||||||||||||||||||
December 31, 2023 | ||||||||||||||||||||
Within One | One to Five | Five to Fifteen | Over Fifteen | |||||||||||||||||
(in thousands) | Year | Years | Years | Years | Total | |||||||||||||||
Loans and leases with fixed rates | ||||||||||||||||||||
Residential real estate | $ | 580 | $ | 7,842 | $ | 70,257 | $ | 99,031 | $ | 177,710 | ||||||||||
Commercial real estate | 1,728 | 66,943 | 16,584 | 361 | 85,616 | |||||||||||||||
Construction, land acquisition and development | 88 | 10,908 | 8,078 | 310 | 19,384 | |||||||||||||||
Commercial and industrial | 9,116 | 49,938 | 14,370 | - | 73,423 | |||||||||||||||
Commercial equipment financing | 636 | 133,566 | 29,403 | - | 163,605 | |||||||||||||||
Consumer | 3,850 | 42,847 | 37,745 | 1,096 | 85,538 | |||||||||||||||
State and political subdivisions | 20 | 7,377 | 29,387 | 11,620 | 48,404 | |||||||||||||||
Total loans and leases with fixed rates | $ | 16,018 | $ | 319,421 | $ | 205,824 | $ | 112,418 | $ | 653,681 | ||||||||||
Loans and leases with floating rates | ||||||||||||||||||||
Residential real estate | $ | 2,710 | $ | 1,271 | $ | 30,589 | $ | 33,002 | $ | 67,572 | ||||||||||
Commercial real estate | 13,628 | 5,768 | 170,784 | 132,339 | 322,519 | |||||||||||||||
Construction, land acquisition and development | 12,441 | 7,223 | 11,224 | 9,604 | 40,491 | |||||||||||||||
Commercial and industrial | 70,121 | 10,178 | 30,071 | - | 110,371 | |||||||||||||||
Commercial equipment financing | - | - | - | - | - | |||||||||||||||
Consumer | 38 | 86 | 68 | - | 192 | |||||||||||||||
State and political subdivisions | 2,033 | 6,482 | 2,059 | 14,865 | 25,439 | |||||||||||||||
Total loans and leases with floating rates | $ | 100,971 | $ | 31,008 | $ | 244,795 | $ | 189,810 | $ | 566,584 | ||||||||||
Under industry regulations, a concentration is considered to exist when there are amounts loanedloans extended to a multiple number of borrowers engaged in similar activities which would cause them to be similarly impacted by economic or other conditions. Typically, industry guidelines require disclosure of concentrations of loans exceeding 10.0% of total loans outstanding. FNCB had no such concentrations at December 31, 20202023 and 2019.2022. In addition to industry guidelines, FNCB’s internal policy considers a concentration to exist in its loan portfolio if an aggregate loan balance outstanding to borrowers within a specific industry exceeds 25.0% of capital. However, management regularly reviews loans in all industry categories to determine if a potential concentration exists.
The following table presents loans by industry, the percentage to gross loans and indicates concentrations greater than 25% of capital at December 31, 20202023 and 2019:2022:
Loan Concentrations
December 31, | December 31, | |||||||||||||||||||||||||||||||
2020 | 2019 | 2023 | 2022 | |||||||||||||||||||||||||||||
% of Gross | % of Gross | % of Gross | % of Gross | |||||||||||||||||||||||||||||
(dollars in thousands) | Amount | Loans | Amount | Loans | Amount | Loans | Amount | Loans | ||||||||||||||||||||||||
General freight trucking | $ | 48,477 | 3.97 | % | $ | 25,052 | 2.23 | % | ||||||||||||||||||||||||
Retail space/shopping centers | $ | 43,926 | 4.86 | % | $ | 43,865 | 5.31 | % | 58,517 | 4.80 | % | 54,461 | 4.85 | % | ||||||||||||||||||
1-4 family residential investment properties | 58,114 | 6.43 | % | 38,122 | 4.61 | % | 119,393 | 9.78 | % | 113,746 | 10.13 | % | ||||||||||||||||||||
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.ACL. The ALLLACL is established through a provision for loan and leasecredit 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 loan officers, the Chief Credit Officer, the loan review function, and the Credit Risk Management and the ALLLACL committees, as well as oversight from the Board of Directors, including the Director's Loan Committee. Management continually evaluates its credit risk management practices to ensure problems in the loan portfolio are addressed 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 from the finance, legal, retail lending and credit administration units, meets monthly, or more often as necessary, to review individual problem credits and workout strategies and provides monthly reports to the Director's Loan Committee and full 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 operation or liquidation of the collateral held. For impaired loans that are secured by real estate, management obtains external appraisals annually, or more frequently as warranted, to ascertain a fair value so that the impairment analysis can be updated. Should a current appraisal not be available at the time of impairment analysis, management may use other valuations sources, including current letters of intent, broker price opinions or executed agreements of sale. 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 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.
Non-performing loans are monitored on an ongoing basis as part of FNCB’s loan review process. Additionally, work-out for non-performing loans, OREO and OREOother repossessed assets 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 estimated 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 rated special mention and substandard 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’sFNCB'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 leasecredit losses. Employment conditions in FNCB’s market area worsened in 2020 due to the COVID-19 pandemic. Unemployment rates across the United States and the Commonwealth of Pennsylvania spiked soon after the national emergency was declared, and non-essential businesses were required to shutdown or required to operate under capacity limitations. At December 31, 2019 (prior to COVID-19) the seasonally-adjusted unemployment rate for the United States, the Commonwealth of Pennsylvania and the Scranton/Wilkes-Barre/Hazleton Pennsylvania metropolitan statistical area ("MSA") were 3.6%, 4.6% and 6.0%, respectively. For April 2020, amid the closure of non-essential businesses, the unemployment rate for the entire United States jumped to 14.8%. Similarly, the unemployment rates for the Commonwealth of Pennsylvania and the Scranton/Wilkes-Barre/Hazleton Pennsylvania MSA rose to 16.1% and 18.4%, respectively in April 2020. However, later in the year unemployment rates, although still elevated in comparison to December 31, 2019, returned to more normal levels as restrictions were eased. For December 2020, the unemployment rates for both the United States and Commonwealth of Pennsylvania were 6.7%, while the unemployment rate for the Scranton/Wilkes-Barre/Hazleton Pennsylvania MSA was 7.9%. Management will continue to evaluate the effects of the pandemic as they unfold and proactively address any potential impact to the credit quality of FNCB's loan portfolio.
Under the fair value
The following table presents information about non-performing assets and accruing TDRs asat of December 31, for each of the last five years:
Non-performing Assets and Accruing TDRs
December 31, | December 31, | |||||||||||||||||||||||||||||||||||||||
(dollars in thousands) | 2020 | 2019 | 2018 | 2017 | 2016 | 2023 | 2022 | 2021 | 2020 | 2019 | ||||||||||||||||||||||||||||||
Non-accrual loans, including non-accrual TDRs | $ | 5,581 | $ | 9,084 | $ | 4,696 | $ | 2,578 | $ | 2,234 | ||||||||||||||||||||||||||||||
Non-accrual loans | $ | 5,338 | $ | 2,763 | $ | 3,863 | $ | 5,581 | $ | 9,084 | ||||||||||||||||||||||||||||||
Loans past due 90 days or more and still accruing | - | - | - | - | - | 38 | 79 | - | - | - | ||||||||||||||||||||||||||||||
Total non-performing loans | 5,581 | 9,084 | 4,696 | 2,578 | 2,234 | 5,376 | 2,842 | 3,863 | 5,581 | 9,084 | ||||||||||||||||||||||||||||||
| Other real estate owned | 58 | 289 | 919 | 1,023 | 2,048 | - | - | 920 | 58 | 289 | ||||||||||||||||||||||||||||||
Other non-performing assets | 1,900 | 1,900 | 1,900 | 1,900 | 2,160 | 2,067 | 1,773 | 1,773 | 1,900 | 1,900 | ||||||||||||||||||||||||||||||
| Total non-performing assets | $ | 7,539 | $ | 11,273 | $ | 7,515 | $ | 5,501 | $ | 6,442 | $ | 7,443 | $ | 4,615 | $ | 6,556 | $ | 7,539 | $ | 11,273 | ||||||||||||||||||||
Accruing TDRs | $ | 6,975 | $ | 7,745 | $ | 8,457 | $ | 9,299 | $ | 4,176 | ||||||||||||||||||||||||||||||
Non-performing loans as a percentage of total loans, gross | 0.62 | % | 1.10 | % | 0.56 | % | 0.34 | % | 0.31 | % | ||||||||||||||||||||||||||||||
Non-performing loans as a percentage of total loans | 0.44 | % | 0.25 | % | 0.39 | % | 0.62 | % | 1.10 | % | ||||||||||||||||||||||||||||||
Non-performing assets as a percentage of total assets | 0.40 | % | 0.26 | % | 0.39 | % | 0.51 | % | 0.94 | % | ||||||||||||||||||||||||||||||
Allowance for credit losses as a percentage of total loans and leases, net | 0.98 | % | 1.26 | % | 1.27 | % | 1.33 | % | 1.08 | % | ||||||||||||||||||||||||||||||
Allowance for credit losses to non-accrual loans and leases | 224.54 | % | 513.68 | % | 321.41 | % | 214.12 | % | 98.52 | % | ||||||||||||||||||||||||||||||
Allowance for credit losses to non-performing loans and leases | 222.95 | % | 499.40 | % | 321.41 | % | 214.12 | % | 98.52 | % | ||||||||||||||||||||||||||||||
Allowance for credit losses to non-performing assets | 161.04 | % | 307.54 | % | 189.38 | % | 158.51 | % | 79.39 | % | ||||||||||||||||||||||||||||||
Despite economic uncertainty and elevated unemployment due to COVID-19, FNCB's asset quality metrics improved throughout 2020. Total non-performing assets decreasedincreased $3.72.8 million, or 33.1%61.3%, to $7.5$7.4 million at December 31, 20202023 from $11.3$4.6 million at December 31, 2019.2022. The decreasewas due primarily to a decreasehigher level of non-performing assets reflected increases in non-accrual loans of $3.5and other non-performing assets. Non-performing loans, which include non-accrual loans and loans past due 90 days or more and still accruing, increased $2.6 million, coupled with a $231 thousand decreaseor 89.2%, to $5.4 million at December 31, 2023 from $2.8 million at December 31, 2022. The increase in OREO. The reduction in non-accrualnon-performing loans was primarily attributabledue to increases in non-accrual commercial real estate loans of $1.6 million, which involved three commercial loan relationships. In addition, FNCB experienced increases of $0.5 million in both non-accrual residential real estate loans and commercial equipment financing loans. With respect to commercial equipment financing loans, there were five loans secured by trucking equipment were on non-accrual status at December 31, 2023, while the increase non-accrual residential real estate loans was largely related to one borrower. At December 31, 2023, other non-performing assets was comprised primarily of a classified account receivable of $1.6 million and repossessed assets of $0.5 million, primarily tractor-trailers. At December 31, 2022, other non-performing assets was comprised solely of the classified account receivable of $1.8 million.
FNCB experienced some moderate asset quality stress as evidenced by an increase in total delinquent loan balances of $4.3 million to $9.2 million at December 31, 2023, from $4.9 million at December 31, 2022. Total delinquencies as a percentage of total loans and leases, increased to 0.75% at December 31, 2023, compared to 0.45% at December 31, 2022. In addition, net loan charge-offs increased $1.3 million to $1.5 million, or 0.12% of average loans and leases, compared to net charge-offs of $185 thousand, or 0.02% of average loans and leases for the same period of 2022. The increase in net charged-offs was primarily concentrated in the consumer and commercial equipment financing loan segments. Charge-offs of consumer loans were concentrated in third-party originated unsecured personal loans, reflective of inflationary pressures and higher interest rates, while charge-offs of commercial equipment financing loans were concentrated in loans collateralized by tractor-trailers following notable weakness within the transportation industry. In response to the return of several largestress, FNCB ceased purchasing unsecured personal loans from third-party originators and has tightened underwriting criteria in originating commercial relationshipsto accrual status during 2020.equipment financing loans and leases through 1st Equipment Finance, Inc. FNCB’s ratio of non-performing loans to total gross loans decreasedincreased to 0.62%0.44% at December 31, 20202023 from 1.10%0.25% at December 31, 2019.2022. Similarly, FNCB’s ratio of non-performing assets as a percentage of shareholders’ equity decreasedtotal assets increased to 4.8%0.40% at December 31, 20202023 from 8.4%0.26% at December 31, 2019.2022. While credit quality metrics
With regard to the classified account receivable, the balance outstanding of FNCB's loan portfolio improved comparing$1.6 million at December 31, 2023 is secured by an evergreen letter of credit that was received 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. A second payment was received in the amount of $127 thousand in the second quarter if 2023. Management continues to closely monitor this project and has noted an increase in construction activity related to this project including the construction of two additional six- or eight-unit buildings and further site development including building pads for a new six-seven unit building and pool/spa building. Additionally, the developer has increased marketing and sales initiatives for the project. Subsequent to December 31, 2019,2023, FNCB received a third payment of $127 thousand on February 1, 2024.
While FNCB's asset quality has remained favorable, management believes continued economic uncertainty related to supply-chain constraints, inflation, and the resulting increase in interest rates could affect borrower's ability to repay loans, which may have a negative impact on asset quality including, increases in loan delinquencies, non-performing loans, loan charge-offs and foreclosures. Additionally, as mentioned above, management is aware of weakness within the transportation industry, specifically trucking and freight hauling. Demand within this industry, which was inflated during the COVID-19 pandemic, mayfell sharply during 2023 reverting back to pre-pandemic levels. However, the drop and demand has caused a spike in unemployment within this industry marked by a decline in employment opportunities and fewer jobs for displaced drivers. Management is closely monitoring loans secured by trucking equipment and has tightened underwriting standards for lending to borrowers within this industry segment. The amortized cost of loans within the general freight trucking industry totaled $48.5 million, or 3.97% of total loans and leases, at December 31, 2023. Further weakness and stress within this industry could result in additional asset quality weakness including, increases in loan delinquencies, non-performing loans and loan charge-offs. Additional asset quality weakness could result in increases in the provision for credit losses which could have an adverse effectaffect on asset quality in the future. Prolonged disruption to FNCB's customers could result in increased loan delinquencies, defaultsfinancial condition and collateral devaluations. Management actively manages problem credits through workout efforts focused on developing strategies to resolve borrower difficulties through liquidationresults 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.operations.
Year ended December 31, | ||||||||
(in thousands) | 2020 | 2019 | ||||||
Balance, January 1 | $ | 9,084 | $ | 4,696 | ||||
Loans newly placed on non-accrual | 2,352 | 9,030 | ||||||
Change in loans past due 90 days or more and still accruing | - | - | ||||||
Loans transferred to OREO | - | - | ||||||
Loans returned to performing status | (1,573 | ) | (45 | ) | ||||
Loans charged-off | (1,514 | ) | (2,589 | ) | ||||
Loan payments received | (2,768 | ) | (2,008 | ) | ||||
Balance, December 31 | $ | 5,581 | $ | 9,084 | ||||
Year ended December 31, | ||||||||
(in thousands) | 2023 | 2022 | ||||||
Balance, January 1 | $ | 2,842 | $ | 3,863 | ||||
Loans newly placed on non-accrual | 7,235 | 2,325 | ||||||
Change in loans past due 90 days or more and still accruing | (41 | ) | 79 | |||||
Loans returned to performing status | - | - | ||||||
Loans charged-off | (3,238 | ) | (1,237 | ) | ||||
Loans sold | - | (925 | ) | |||||
Loan payments received | (1,421 | ) | (1,263 | ) | ||||
Balance, December 31 | $ | 5,376 | $ | 2,842 | ||||
December 31, | ||||||||
2020 | 2019 | |||||||
Accruing: | ||||||||
30-59 days | 0.31 | % | 0.26 | % | ||||
60-89 days | 0.06 | % | 0.10 | % | ||||
90+ days | 0.00 | % | 0.00 | % | ||||
Non-accrual | 0.62 | % | 1.10 | % | ||||
Total delinquencies | 0.99 | % | 1.46 | % | ||||
December 31, | ||||||||
2023 | 2022 | |||||||
Accruing: | ||||||||
30-59 days | 0.27 | % | 0.15 | % | ||||
60-89 days | 0.04 | 0.05 | ||||||
90+ days | 0.00 | 0.01 | ||||||
Non-accrual | 0.44 | 0.25 | ||||||
Total delinquencies | 0.75 | % | 0.45 | % | ||||
Other non-performing assets at December 31, 2020 and 2019 was comprised solely of a classified account receivable secured by an evergreen letter of credit in the amount of $1.9 million, 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. 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 started to improve and management had confirmed that 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. As of December 31, 2020, no single-unit lots have been sold, however, the construction of a seven-unit building that houses timeshare units has been completed and owners began occupying the units in the fourth quarter of 2020. Management continues to monitor this project closely and is currently in negotiations with with the developer to establish a repayment plan beginning in 2021. However, uncertainty and economic volatility associated with the COVID-19 pandemic are unknown and could negatively impact the timing of sales and payments.
TDRs at December 31, 2020 and 2019 were $7.7 million and $9.1 million, respectively. Accruing and non-accruing TDRs were$7.0 million and $0.7million, respectively at December 31, 2020 and $7.7 million and $1.4 million, respectively at December 31, 2019. Loans modified as TDRs during the year ended December 31, 2020, included three commercial and industrial loans and one residential mortgage loan. The three commercial loans with an aggregate pre- and post-modification recorded investment of $196 thousand, were modified under forbearance agreements. The modification of the residential loan involved an extension of terms and had a pre- and post-modification recorded investment of $93 thousand. In 2019, there were seven loan relationships modified as TDRs during the year, which incorporated a total of ten individual loans. There was one relationship with an aggregate post-modification recorded investment of $865 thousand that was comprised of two commercial real estate loans and one commercial and industrial loan for which terms were extended and taxes capitalized. Additional TDR's included four residential real estate loans with a post-modification recorded investment totaling $289 thousand and three other commercial and industrial loans totaling $712 thousand, involving an extension of terms. Subsequent to modification, FNCB charged-off one of the commercial loans in the amount of $235 thousand.
For additional information about TDRs, see Note 5, "Loans" of the notes to consolidated financial statements included in Item 8, "Financial Statements and Supplementary Data" to this Annual Report on Form 10-K.
The average balance of impaired loans was $13.8million for both the years ended December 31, 2020 and 2019. FNCB recognized interest on impaired loans of $351 thousand in 2020 and $398 thousand in 2019.
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. FNCB has applied this guidance and made 922 such modifications, with 843 loans having an aggregate recorded investment of $151.4 million outstanding as of December 31, 2020. These initial modifications provided borrowers with a short-term, typically three-month, interest-only period or full payment deferral. FNCB extended a second payment deferral modification for 79 loans with an aggregate recorded investment of $22.0 million. Management is closely monitoring all loans for which a payment deferral has been granted and 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. As of December 31, 2020, there were 45 loans with an aggregate recorded investment of $9.5 million, or 1.06% of total loans, that were still under deferral.
The following table presents information about COVID-19 related loan modifications by major loan category as of December 31, 2020.
As of December 31, 2020 | ||||||||||||||||||||||||
Total Loans Modified | Total Number of Loans Still Under Deferral | |||||||||||||||||||||||
(in thousands) | Number of Loans | Recorded Investment | % of Loan Category | Number of Loans | Recorded Investment | % of Loan Category | ||||||||||||||||||
COVID-19 related loan modifications: | ||||||||||||||||||||||||
Residential real estate | 199 | $ | 17,594 | 8.96 | % | 5 | $ | 196 | 0.10 | % | ||||||||||||||
Commercial real estate | 146 | 94,586 | 34.53 | % | 6 | 8,617 | 3.15 | % | ||||||||||||||||
Construction, land acquisition and development | 11 | 11,019 | 18.43 | % | - | - | - | |||||||||||||||||
Commercial and industrial | 106 | 21,659 | 9.08 | % | 1 | 42 | 0.02 | % | ||||||||||||||||
Consumer | 381 | 6,587 | 7.67 | % | 33 | 677 | 0.79 | % | ||||||||||||||||
State and political subdivision | - | - | - | - | - | - | ||||||||||||||||||
Total | 843 | $ | 151,445 | 16.76 | % | 45 | 9,532 | 1.06 | % | |||||||||||||||
Allowance for Loan and LeaseCredit Losses
The ALLL represents management’s estimate of probable loan losses inherent in the loan portfolio. The ALLLACL is analyzed in accordance with GAAP and is maintained at a level that is based on management’s evaluation of the adequacy of the ALLLACL 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:
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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.
The following table presents an allocation of the Allocation of the December 31, December 31, 2020 2019 2018 2017 2016 2023 2022 2021 2020 2019 (dollars in thousands) Allowance Percentage of Loans in Each Category to Total Loans Allowance Percentage of Loans in Each Category to Total Loans Allowance Percentage of Loans in Each Category to Total Loans Allowance Percentage of Loans in Each Category to Total Loans Allowance Percentage of Loans in Each Category to Total Loans Allowance Allowance Allowance Allowance Allowance Residential real estate % % % % % Commercial real estate % % % % % Construction, land acquisition and development % % % % % Commercial and industrial % % % % % Commercial equipment financing subsidiary Consumer % % % % % State and political subdivisions % % % % % Unallocated % % % % % Total % % % % % The following table presents Reconciliation of the For the Year Ended December 31, (dollars in thousands) 2020 2019 2018 2017 2016 Charge-offs: Residential real estate Commercial real estate Construction, land acquisition and development Commercial and industrial Consumer State and political subdivision Total charge-offs Recoveries of charged-off loans: Residential real estate Commercial real estate Construction, land acquisition and development Commercial and industrial Consumer State and political subdivision Total recoveries Net (recoveries) charge-offs Provision for loan and lease losses Balance, December 31, Ratios: Net (recoveries) charge-offs as a percentage of average loans )% % % % % Allowance for loan and lease losses as a percent of gross loans at end of period % % % % % For the Years Ended December 31, (in thousands) 2020 2019 Balance, Janauary 1 Real estate foreclosures Transfer from bank premises Valuation adjustments Carrying value of OREO sold Balance, December 31 December 31, (in thousands) 2020 2019 2018 2017 2016 Land / lots Residential real estate Total other real estate owned For the Year Ended December 31, (dollars in thousands) 2023 2022 2021 2020 2019 Balance, January 1, Impact of ASC 326 Balance at beginning of period, after adoption of ASC 326 Charge-offs: Residential real estate Commercial real estate Construction, land acquisition and development Commercial and industrial Commercial equipment financing Consumer State and political subdivision Total charge-offs Recoveries of charged-off loans: Residential real estate Commercial real estate Construction, land acquisition and development Commercial and industrial Commercial equipment financing Consumer State and political subdivision Total recoveries Net charge-offs (recoveries) Provision for credit losses Balance, December 31, Net charge-offs (recoveries) to average loans and leases Residential real estate Commercial real estate Construction, land acquisition and development Commercial and industrial Commercial equipment financing Consumer State and political subdivision Net charge-offs (recoveries) to average loans and leases Ratios: Allowance for credit losses to gross loans at period end Allowance for credit losses to non-accrual loans and leases Deposits Management recognizes the importance of deposit growth as its primary funding source for loan products and regularly evaluates new products and strategies focused on growing commercial, consumer and municipal deposit relationships. Deposit gathering shifted in 2023 and posed many challenges, as FNCB experienced Total deposits averaged $1.450 billion in 2023, an increase of $18.3 million, or 1.3%, compared to $1.432 billion in 2022. Non-interest-bearing demand deposits averaged The average balance of, and the rate paid on, the major classifications of deposits for the past three years are summarized in the following table: Deposit Distribution For the Year Ended December 31, 2020 2019 2018 Average Average Average (dollars in thousands) Balance Rate Balance Rate Balance Rate Interest-bearing deposits: Demand % % % Savings % % % Time % % % Total interest-bearing deposits % % % Non-interest-bearing deposits Total deposits For the Year Ended December 31, 2023 2022 2021 Average Average Average (dollars in thousands) Balance Rate Balance Rate Balance Rate Interest-bearing deposits: Demand % % % Savings Time Total interest-bearing deposits % % % Non-interest-bearing deposits Total deposits The following table presents the maturity distribution of time deposits in excess of Maturity Distribution of Time Deposits December 31, December 31, (in thousands) 2020 2019 2023 2022 3 months or less Over 3 through 6 months Over 6 through 12 months Over 12 months Total Borrowings Advances through the Federal Reserve Bank Discount Window generally include short-term advances which are fully collateralized by certain pledged loans FNCB also had $10.3 million of junior subordinated debentures outstanding at December 31, Average borrowed funds See Note 8, “Borrowed Funds” of the Notes to 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 and lease origination volumes, loan, lease 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 fluctuations in FNCB’s liquidity position daily and 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. Financing activities provided Net cash outflows from investing activities used Management is actively monitoring FNCB's liquidity position and capital adequacy in light of the changing circumstances related to economic uncertainty, Capital A strong capital base is essential to the continued growth and profitability of FNCB and is therefore a management priority. Management’s principal capital planning goals The following schedules present information regarding the Bank’s risk-based capital at December 31, 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, 2023 Total capital (to risk-weighted assets) % % % % % % % % Tier I capital (to risk-weighted assets) % % % % % % % % Tier I common equity (to risk-weighted assets) % % % % % % % % Tier I capital (to average assets) % % % % % % % % Total risk-weighted assets Total average assets 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, 2019 December 31, 2022 Total capital (to risk-weighted assets) % % % % % % % % Tier I capital (to risk-weighted assets) % % % % % % % % Tier I common equity (to risk-weighted assets) % % % % % % % % Tier I capital (to average assets) % % % % % % % % Total risk-weighted assets Total average assets FNCB’s total regulatory capital increased As of December 31, Additionally, FNCB has available 20,000,000 authorized shares of preferred stock. There were no preferred shares issued and outstanding at December 31, On January 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. Cash dividends declared and paid by FNCB during 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 year ended December 31, The following table presents off-balance financial instruments whose contractual amounts represent credit risk at December 31, Off-Balance Sheet Commitments December 31, December 31, (in thousands) 2020 2019 2023 2022 Commitments to extend credit Standby letters of credit In order to provide for probable losses inherent in these instruments, FNCB recorded reserves for unfunded commitments of The preparation of financial statements in conformity with GAAP requires management to measure the 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. With regard to collateral-dependent loans, appraisals are received at least annually to ensure that impairment measurements reflect current market conditions. Should a current appraisal 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. 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 ALLLACL equaled $11.9$12.0 million at December 31, 2020, an increase2023, a decrease of $3.0$2.2 million, or 33.5%15.6%, from $8.9$14.2 million at December 31, 2019.2022. The increasedecrease resulted from a $2.6 million adjustment from the impact of the adoption of ASU 2016-13, on January 1, 2023, coupled with a net charge-offs of $1.5 million, partially offset by a provision for loan and leasecredit losses of $1.9 million coupled with net recoveries of $1.1 million for the year ended December 31, 2020. The increase in the ALLL was primarily related to economic disruption and uncertainty caused by the COVID-19 pandemic. Management adjusted the qualitative factors for the potential effect of economic and employment uncertainty and disruption due to the global pandemic into its evaluation. 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 $416 thousand, or 3.5%, of the total ALLL at December 31, 2020, compared to $473 thousand, or 5.3%, of the total ALLL at December 31, 2019. A general reserve of $11.5million was established for loans analyzed collectively under ASC 450 “Contingencies” (“ASC 450”), which represented96.5% of the total ALLL of $11.9 million at December 31, 2020. Included in the general component of the ALLL at December 31, 2020 and 2019 were unallocated reserves of $1.1 million and $426 thousand, respectively. 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 the unallocated reserve was directly related to the increase in credit provisioning due to the economic disruption caused by the COVID-19 pandemic. Based on these circumstances, management believes the increase and level of the unallocated reserve to be appropriate at December 31, 2020.2023. The ratio of the ALLL toACL as a percentage of total loans at December 31, 2020 and December 31, 2019 was 1.33% and 1.08%, respectively, based on loans,leases, net of net deferred loanorigination fees and costs and unearned income, decreased to 0.98% at December 31, 2023 from 1.26% of $901.1milliontotal loans and $828.5 million, respectively.ALLLACL by major loan category and percent of loans in each category to total loans at December 31, for each of the last five years:ALLLACL Percentage Percentage Percentage Percentage Percentage $ 1,715 21.73 $ 1,147 22.73 $ 1,175 22.09 $ 1,236 23.36 $ 1,171 23.04 $ 1,157 9.65 % $ 2,215 15.61 % $ 2,081 16.76 % $ 1,715 14.35 % $ 1,147 12.81 % 4,268 30.32 3,198 33.69 3,107 31.46 3,499 34.08 3,297 33.46 2,831 23.62 4,193 29.54 4,530 36.49 4,268 35.71 3,198 35.73 538 6.62 271 5.75 188 2.49 209 2.73 268 2.52 1,154 9.63 747 5.26 392 3.16 538 4.50 271 3.03 2,619 26.39 1,997 17.86 2,552 18.08 2,340 19.54 1,736 20.69 2,198 18.34 4,099 28.88 2,670 21.51 2,619 21.92 1,997 22.31 3,129 26.11 - - - - - - - - 1,319 9.51 1,658 14.66 2,051 18.81 1,395 14.75 1,457 14.30 1,118 9.32 1,307 9.21 1,159 9.33 1,319 11.04 1,658 18.53 405 5.43 253 5.31 417 7.07 355 5.54 490 5.99 399 3.33 503 3.54 455 3.66 405 3.39 253 2.83 1,086 - 426 - 29 - - - - - - - 1,129 7.95 1,129 9.09 1,086 9.09 426 4.76 $ 11,950 100.00 $ 8,950 100.00 $ 9,519 100.00 $ 9,034 100.00 $ 8,419 100.00 $ 11,986 100.00 % $ 14,193 100.00 % $ 12,416 100.00 % $ 11,950 100.00 % $ 8,950 100.00 % anan analysis of changes in the ALLLACL and the ratio of net charge-offs (recoveries) to average loans by major loan category and certain credit ratios for each of the last five years:ALLLACL Balance, January 1, $ 8,950 $ 9,519 $ 9,034 $ 8,419 $ 8,790 - 27 63 192 153 336 - 1,845 159 398 - 18 - - - 254 1,258 97 495 1,107 975 1,311 1,134 603 960 - - - - - 1,565 2,614 3,139 1,449 2,618 43 9 135 29 4 846 32 42 45 6 - 82 30 480 9 1,220 364 291 360 507 515 761 576 381 568 - - - - - 2,624 1,248 1,074 1,295 1,094 (1,059 ) 1,366 2,065 154 1,524 1,941 797 2,550 769 1,153 $ 11,950 $ 8,950 $ 9,519 $ 9,034 $ 8,419 (0.12 0.16 0.25 0.02 0.21 1.33 1.08 1.13 1.17 1.15 Allowance for loan and lease losses as a percent of gross loans at end of period, excluding PPP Loans 1.45 % 1.08 % 1.13 % 1.17 % 1.15 % Other Real Estate OwnedAt December 31, 2020, there was one piece of commercial landwith an aggregate carrying value of $58 thousand held in OREO, compared to two properties with an aggregate balance of $289 thousand at December 31, 2019. The two properties that were held as of December 31, 2019, included the piece of commercial land and a single family residential real estate property with carrying values of $85 thousand and $204 thousand, respectively. FNCB recorded a valuation adjustment to the carrying value of the piece of commercial land of $27 thousand in the third quarter of 2020. The residential real estate property, which was the collateral supporting an investor-owned residential mortgage loan, was sold in 2020. The agreement with the investor requires FNCB to take title of 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.During the year ended December 31, 2019, there were five sales of properties with an aggregate carrying value of $0.8 million. Net gains realized on the sale of these properties was$20 thousand. Net gains on the sale of OREO properties were included in non-interest income for the year ended December 31, 2019.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. Valuation adjustments related to OREO totaled $27 thousandfor the year ended December 31, 2020 and $85 thousand for the year ended December 31, 2019, which are included in other operating expense in the consolidated statements of income. The following table presents the activity in OREO for the years ended December 31, 2020 and 2019:Activity in OREO $ 289 $ 919 - 256 - - (27 ) (85 ) (204 ) (801 ) $ 58 $ 289 The following table presents a distribution of OREO at December 31, for the past five years:Distribution of OREO $ 58 $ 85 $ 436 $ 516 $ 641 Commercial real estate - - 438 427 1,380 - 204 45 80 27 $ 58 $ 289 $ 919 $ 1,023 $ 2,048 The expenses related to maintaining OREO include the subsequent write-downs of the properties related to declines in value since foreclosure, net of any income received. OREO expenses amounted to $164 thousand and $231 thousand and are included in other operating expense in the consolidated statements of income, for the years ended December 31, 2020 and 2019, respectively. $ 14,193 $ 12,416 $ 11,950 $ 8,950 $ 9,519 (2,636 ) - - - - 11,557 12,416 11,950 8,950 9,519 67 3 14 - 27 - - 11 336 - - - - - 18 496 69 218 254 1,258 629 - - - - 2,149 1,234 543 975 1,311 - - - - - 3,341 1,306 786 1,565 2,614 - 3 17 43 9 495 293 467 846 32 - 10 13 - 82 148 30 74 1,220 364 - - - - - 1,247 785 515 515 761 - - - - - 1,890 1,121 1,086 2,624 1,248 1,451 185 (300 ) (1,059 ) 1,366 1,880 1,962 166 1,941 797 $ 11,986 $ 14,193 $ 12,416 $ 11,950 $ 8,950 - % - % - % (0.03 )% 0.01 % (0.04 ) (0.02 ) (0.13 ) (0.16 ) (0.01 ) - - (0.02 ) - (0.21 ) 0.03 0.36 0.06 (0.43 ) 0.59 0.05 - - - - 0.08 0.04 0.03 0.42 0.37 - - - - - 0.12 % 0.02 % (0.03 )% (0.12 )% 0.16 % 0.98 % 1.26 % 1.27 % 1.33 % 1.08 % 224.54 % 513.68 % 321.41 % 214.12 % 98.52 % stronga return of cyclicality with respect to its municipal customers, while liquidity pressures throughout the industry and heightened competition were the primary factors that caused an increase in deposit demand in 2020, which was concentrated primarily in non-maturity deposits. The strong demand was generally caused by factors related to the COVID-19 pandemic including among others, various government stimulus initiatives, PPP funding, and changes in consumer and saving habits and business investment in response to economic uncertainty. FNCB did experience some deposit migration during 2020 as maturing time deposits were redirected into non-maturity deposits.rates.$285.7$108.3 million, or 28.5%7.6%, to $1.287$1.529 billion at December 31, 20202023 from $1.002$1.421 billion at December 31, 2019.2022. Interest-bearing deposits increased $193.7$128.6 million, or 23.6%11.5%, to $1.016$1.243 billion at December 31, 20202023 from $822.2$1.115 billion at December 31, 2022. Meanwhile, non-interest-bearing deposits decreased $20.3 million, or 6.6%, to $285.5 million at December 31, 2019. In addition, non-interest-bearing demand deposits increased $92.0 million, or 51.3%, to $271.52023 from $305.8 million at December 31, 20202022from $179.5 million at December 31, 2019.The increase in non-interest-bearing deposits was due primarily to increases in consumer and small business demand deposit accounts, including residual balances retained from PPP loan funding. With regard to interest-bearing deposits, the increase was primarily concentrated in interest-bearing demand accounts, specifically money market transaction accounts, interest-bearing public fundstime deposits due to increased utilization of brokered deposits and interest-bearing business checking accounts.some deposit migration from non-maturity deposits into certificates of deposit. Time deposits with balances of $250 thousand and over increased $28.4 million, or 114.1%, to $53.3 million at December 31, 2023, from $24.9 million at December 31, 2022, while other time deposits increased $171.9 million, or 129.3%, to $304.9 million at December 31, 2023 from $133.0 million at December 31, 2022. At December 31, 2023, other time deposits included $148.7 million in brokered time deposits outstanding, compared to $23.9 million at December 31, 2022. In total, interest-bearing demand deposits increased $178.7decreased $54.2 million, or 33.4%6.7%, to $713.4 million at December 31, 2020 from $534.7 million at December 31, 2019. Time deposits with balances $250 thousand and over decreased $12.2 million, or 25.2%, to $36.2 million at December 31, 2020, from $48.4$754.3 million at December 31, 2019, while other time deposits increased $12.1 million, or 8.34%, to $156.72023 from $808.5 million at December 31, 2020 from $144.62022. Savings accounts decreased $17.5 million, or 11.8%, to $130.9 million at December 31, 2019. Included in other time deposits was $20.02023 from $148.4 million in brokered time deposits outstanding that are part of an interest rate swap transaction. Excluding brokered deposits, other time deposits would have contracted $7.9 million, or 5.5%. There were no brokered time deposits outstanding at December 31, 20192022.$78.0$287.5 million in 2023, a decrease of $26.6 million, or 47.5%, higher at $242.08.5% compared to $314.1 million in 2020 as compared to $164.0 million in 2019.2022. Interest-bearing deposits averaged $908.5 million$1.163 billion in 2020,2023, an increase of $63.7$44.9 million, or 7.5%4.0%, compared to $844.8 millionfrom $1.118 billion in 2019.2022. The increase was concentrated in average time deposits which increased $164.4 million, or 104.1%, to $322.4 million in 2023 from $158.0 million in 2022. Meanwhile, average interest-bearing demand deposits, which increased $98.0decreased $111.5 million, or 19.1% comparing 2020 and 2019.13.7%, to $704.1 million, from $815.6 million in 2022. Average savings deposits increased $8.7decreased $8.0 million, or 9.3%5.5%, to $101.8$136.4 million in 20202023 from $93.1$144.3 million in 2019. Partially offsetting these increases was a decrease of $43.0 million, or 18.1%, in average time deposits, to $195.1 million in 2020 from $238.1 million in 2019.2022. FNCB’s deposit funding costs decreased 37increased 174 basis points, to 0.59%2.10% in 20202023 from 0.96%0.36% in 2019.2022. Rates on interest-bearing demand and timesavings deposits decreasedincreased by 33158 basis points and 3816 basis points, respectively, while savingstime deposit rates decreased to a lesser extent,increased by 3280 basis points, comparing 2023 and 2022. Should competition for deposits within FNCB's market area intensify, management anticipates that FNCB's funding costs may continue to 0.10% comparing 2020 and 2019. The decrease in deposit costs reflected lower market interest rates and oversupply of bank liquidity in 2020.increase. $ 611,511 0.48 $ 513,542 0.81 $ 502,978 0.57 101,847 0.10 93,114 0.13 98,927 0.13 195,140 1.22 238,145 1.60 236,162 1.23 908,498 0.59 844,801 0.96 838,067 0.71 242,017 164,035 168,313 $ 1,150,515 $ 1,008,836 $ 1,006,380 $ 704,118 1.97 $ 815,579 0.39 $ 764,798 0.16 136,354 0.28 144,343 0.12 125,022 0.07 322,354 3.17 157,991 0.37 176,245 0.66 1,162,826 2.10 1,117,913 0.36 1,066,065 0.24 287,471 314,105 315,181 $ 1,450,297 $ 1,432,018 $ 1,381,246 $100,000 or moreinsurance limit at December 31, 20202023 and 2019:2022:$100,000$250,000 or More $ 20,023 $ 17,471 $ 31,708 $ 10,009 17,180 21,620 13,966 4,524 40,319 35,299 6,979 7,362 10,441 27,371 666 3,007 $ 87,963 $ 101,761 $ 53,319 $ 24,902 $500.1$506.2 million at December 31, 20202023 and $475.3$482.1 million at December 31, 2019.2022. FNCB’s maximum borrowing capacity was $352.2$373.6 million at December 31, 2020. There was $75.02023. At December 31, 2023 and 2022, there were $91.5 million and $47.5 million, respectively, in letters of credit to secure municipal deposits outstanding at December 31, 2020 under this agreement. There were no$16.0 million in overnight borrowings oradvances and $149.0 million in term advances through the FHLB of Pittsburgh outstanding at December 31, 2020.2023. At December 31, 2022, there were $139.4 million in overnight advances and $32.7 million in term advances outstanding, through the FHLB of Pittsburgh. FNCB had a remaining borrowing availability at the FHLB of Pittsburgh of $115.7 million at December 31, 2023.in the amount of $31.5 million under the Federal Reserve Bank’sBank's Borrower-in-Custody (“BIC”("BIC") program. At December 31, 2023, FNCB had loans pledged under the BIC program of $187.0 million. There were no advances outstanding under the BIC program outstanding at December 31, 20202023 and 2022. At December 31, 2019.2023, FNCB had available borrowing capacity of $16.4 million under this program at December 31, 2020.The Paycheck Protection Program Liquidity Facility (“PPPLF”) was established by the Federal Reserve System on April 9, 2020 to provide participating lenders with liquidity to loan moneyavailable under the PPP. PPPLF advances are collateralized by poolsBIC program of PPP loans, have an interest rate of 0.35% and a maturity date equal to the term of the pool of PPP loans securing it. Repayment of PPP loans serving as collateral must be passed on to$158.4 million. On March 12, 2023, the Federal Reserve Bank established the Bank Term Funding Program (“BTFP”), a program through the Discount Window designed to pay down the corresponding PPPLF advance.provide additional funding to eligible depository institutions during a period of stress. The BTFP is collateralized by high-quality securities valued at par including U.S. Treasury securities, U.S. government agency debt and mortgage-backed securities and other qualifying securities. At December 31, 2020, there were no PPPLF advances outstanding and2023, FNCB had liquidity availablesecurities pledged of $58.3$27.8 million throughand an outstanding advance under the BTFP of $25.0 million. On January 24, 2024, the Federal Reserve Bank announced that it would cease making new loans under this facility.program on March 11, 2024.20202023 and 2019.2022. The interest rate on thesethe debentures resetswill reset quarterly at a spread of1.67% above 3-month CME Term SOFR plus 0.26161%. CME Term SOFR are administered by CME Group Benchmark Administration Limited (CBA) which is registered under Benchmarks (Amendment and Transitional Provision) (EU Exit) Regulations 2019 (SI 2019/657) is authorized and supervised by the current 3-month LIBOR rate, currently 1.89% at December 31, 2020. UK Financial Conduct Authority (FCA) and is aligned to the IOSCO Principles for Financial Benchmarks. The average interest rate paid on the junior subordinated debentures in 20202023 was 2.43%7.02%, compared to 4.17%3.47% in 2019.On September 1, 2009, FNCB offered only to accredited investors up to $25.0 million principal amount of unsecured subordinated debentures due September 1, 2019 (the "Notes"). The Notes had a fixed interest rate of 4.50%. On January 30, 2019, the Board of Directors of FNCB approved the acceleration of the final $5.0 million principal repayment on the Notes. The $5.0 million final payment, which was due and payable on September 1, 2019, was paid to Noteholders on February 8, 2019.2022. decreased $12.3increased $88.1 million or 19.4%, to $51.3$197.6 million in 20202023 from $63.6109.5 million in 2019.2022. The average rate paid on borrowed funds decreased 119increased 237 basis points to 1.47%4.89% in 20202023 from 2.66%2.52% in 2019.2022. The decreaseincrease in rate on borrowed funds reflected higher average volumes of overnight and short-term borrowings through the FHLB of Pittsburgh and advances through the Federal Reserve BTFP program in 2023 as compared to 2022. Average borrowed funds in 2022 was due to decreases incomprised mainly of overnight advances through the rates paid for FHLB borrowings and junior subordinated debentures due to lower market interest rates for the majority of 2020.Pittsburgh. consolidated financial statementsConsolidated Financial Statements included in Item 8, "Financial Statements and Supplementary Data" to this Annual Report on Form 10-K for additional information about FNCB's borrowed funds. fluctuations daily, forecasts future liquidity needs,needs. Additionally, management performs periodic stress tests on itsFNCB's liquidity levels and developsposition that attempt to model in varying degrees of stress in order to proactively develop 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 IntraFiSM 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. FNCB's liquidity position improved substantially in 2020, as an influx of cash from financing and operating activities were only partially offset by cash outflows used in investing activities. Cash and cash equivalents totaled $155.8$107.9 million at December 31, 2020,2023, an increase of $121.2$66.0 million, or 157.3%, from $34.6$41.9 million at December 31, 2019.2022, as net cash inflows from operating and financing activities more than offset net cash outflows for investing activities. $234.4$119.2 million in net cash, which resulted primarily from a $285.7the $108.3 million net increase in depositsdeposits. The proceeds from net term advances through the FHLB of Pittsburgh, of $116.3 million were more than entirely offset by $123.4 million in 2020. This increase wasnet repayments of overnight advances through the FHLB of Pittsburgh. In addition, net proceeds from the Federal Reserve Discount Window advances totaled $25 million. These inflows were slightly offset by net cash used to repay FHLBpay dividends to shareholder dividends of Pittsburgh term and overnight advances of $46.9 million and pay quarterly dividends totaling $4.4$7.1 million. Operating activities include net income, adjusted for the effects of non-cash transactions including, among others, depreciation and amortization and the provision for loan and lease losses, and is the primary source for the remaining fundsof cash flows from operations. In 20232020, operating activities provided FNCB with $22.0$15.8 million in net cash, which reflected net income of $15.3$13.0 million, andnet of a reduction for non-cash positive adjustments to income of $6.7$2.8 million. $135.2$69.0 million of cash and cash equivalents during the year ended December 31, 2020, which2023. Accounting for the majority of the net cash outflow was largely due to funding of PPP loans, resulting in a net increase in loans and leases of $98.1 million, which reflected strong organic loan demand. Also contributing to customersthe net cash outflow for investing activities were purchases of $73.3 million. In addition, purchases$269 thousand in restricted stock, $245 thousand in premises and equipment, $160 thousand in equity securities, and $6.6 million for an investment in a Federal Low-Income Housing Tax Credit program. Partially offsetting these cash outflows was a net cash inflow of $34.9 million related to activity from FNCB's portfolio of available-for-sale debt securitiesin 2020 utilized $152.7 million in cash and cash equivalents, which was partially offset by the cash proceeds received from the sale of available-for-sale debtequity securities of $68.3 million and from maturities, calls and principal payments$1.5 million.brought on byliquidity constraints, current inflation levels, rising interest rates and increased competition. Management believes that FNCB’s current liquidity position is sufficient to meet its cash flow needs as of December 31, 2023. In addition to cash and cash equivalents of $107.9 million at December 31, 2023, FNCB had ample sources of additional liquidity including approximately $115.1 million in available borrowing capacity with the COVID-19 pandemic. FHLB of Pittsburgh, and available borrowing capacity through The Federal Reserve Discount Window of $158.4 million under the BIC program. In addition, FNCB had $75.0 million in federal fund lines of credit available through correspondent banks at December 31, 2023, as well as access to wholesale deposit markets. While management believes FNCB'sFNCB has adequate liquidity position is favorable,to meet its cash flow needs, they are keenly aware that changes in general economic conditions, related to COVID-19, orincluding inflation, further increases in general,interest rates and competition, among other factors, could pose potential stress on liquidity should deposits begin exiting the Bank and/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. Management believes that FNCB’scontinually monitors FNCB's liquidity position is sufficientpositions and sources of available liquidity in relation to meet itsfunding and cash flow needs as of December 31, 2020. FNCB generally utilizes core deposits as its primary source of liquidity. Core deposits include non-interest-bearingneed and interest-bearing demand deposits, savings deposits and other time deposits, net of brokered deposits and one-way purchased deposits generated through the IntraFiSM Network, which include time deposits issued under CDARs program and money market accounts issued through the ICS program. Participating in the IntraFiSM Network programs allows FNCB to service and attractevaluates potential high-balance deposits customers who want the security of full-FDIC insurance but want to maintain a local deposit relationship. Reciprocal deposits issued through the IntraFiSM Network program are considered to be core deposits. As of December 31, 2020, FNCB had approximately $24.6 million placed into the reciprocal program.In addition to cash and cash equivalents of $155.8 million, FNCB had ample sources of additional liquidity including approximately $276.0 million in available borrowing capacity with the FHLB of Pittsburgh, and available borrowing capacity through The Federal Reserve Discount Window of $58.3 million under the PPPLF and $16.4 million under the BIC program. In addition, FNCB had $47.0 million in federal fund lines of credit available through correspondent banks at December 31, 2020.liquidity. include:include providing an adequate return to shareholders;shareholders, retaining a sufficient base from which to provide for future growth, and complying with applicable regulatory standards. As more fully described in Note 14,15, “Regulatory Matters” to the notes to the consolidated financial statements included in Item 8 of this Annual Report on Form 10-K, regulatory authorities have prescribed specified minimum capital ratios as guidelines for determining capital adequacy to help assure the safety and soundness of financial institutions.20202023 and 2019,2022, and selected other capital ratios: $ 149,173 15.79 8.00 10.50 10.00 $ 175,296 12.66 8.00 10.50 10.00 137,356 14.54 6.00 8.50 8.00 161,896 11.69 6.00 8.50 8.00 137,356 14.54 4.50 7.00 6.50 161,896 11.69 4.50 7.00 6.50 137,356 9.57 4.00 4.00 5.00 161,896 8.76 4.00 4.00 5.00 944,546 1,384,710 1,434,776 1,848,752 $ 133,406 14.77 8.00 10.50 10.00 $ 169,984 13.11 8.00 10.50 10.00 123,753 13.70 6.00 8.5 8.00 154,842 11.94 6.00 8.50 8.00 �� 123,753 13.70 4.50 7.00 6.50 154,842 11.94 4.50 7.00 6.50 123,753 10.36 4.00 4.00 5.00 154,842 8.77 4.00 4.00 5.00 903,172 1,296,618 1,194,789 1,765,251 $15.8$5.3 million to $149.2$175.3 million at December 31, 20202023 from $133.4$170.0 million at December 31, 2019.2022. The Bank’s risk-based capital ratios exceeded the minimum regulatory capital ratios required for adequately capitalized institutions. Based on the most recent notification from its primary regulators, the Bank was categorized as well capitalized at December 31, 20202023 and 2019.2022. There are no conditions or events since this notification that management believes have changed this category.2020,2023, FNCB had 29,754,35130,212,969 shares of common stock available for future sale or share dividends. The number of shareholders of record at December 31, 2020 was 1,671. Quarterly market highs and lows, dividends paid and known market makers are highlighted in Part I, Item 5, “Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities” of this Annual Report on Form 10-K. For further discussion of FNCB’s capital requirements and dividend limitations, refer to Note 15, “Regulatory Matters,” of the notesNotes to consolidated financial statementsConsolidated Financial Statements included in Item 8, “Financial Statements and Supplementary Data” of this Annual Report on Form 10-K.20202023 and 2019.2022.27, 2021,25, 2023, FNCB's Board of Directors authorized a stockthe repurchase program under whichof up to 975,000750,000 shares of FNCB's outstanding common stock may be acquired in the open market commencing no earlier than Februaryon March 3, 20212023 and expiring on December 31, 20212023 pursuant to a trading plan that was adopted in accordance with Rulerule 10b5-1 of the Securities Exchange ActAct. The repurchase program was terminated in the third quarter of 1934, as amended. The shares will be purchased from time to time at prevailing market prices, through open market transactions depending upon market conditions.2023. Repurchases under the repurchasethis program are administered through an independent broker and are subjectsubjected to SEC regulations as well as certain price, market volume and timing constraints specified in the trading plan. UnderIn 2022 and 2021, the Board of Directors had authorized a similar program the purchases will be funded from available working capital presently available to FNCB,under which 384,830 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 purchases at any time that management determines additional repurchases are no longer warranted. As of December 31, 2020, FNCB had approximately 20,245,649 million shares outstanding. As of February 28, 2021, 8,188330,759 common shares were repurchased, at an average price of $6.81 per share.On February 8, 2019, FNCB completed a public offering of itsrespectively. No shares of common stockwere repurchased in a firm commitment underwritten offering and issued 3,285,550 shares of its common stock, which included 428,550 shares of common stock issued upon the exercise in full of the option to purchase additional shares granted to underwriters, at a public offering price of $7.00 per share, less an underwriting discount of $0.35 per share. FNCB received net proceeds after deducting underwriting discounts and offering expenses of $21.3 million. Following the receipt of the proceeds during the first quarter of 2019, FNCB made a capital investment in FNCB Bank, it's wholly-owned subsidiary of $17.8 million.2023 under this plan.20202023 and 20192022 were $0.22$0.36 per share and $0.20$0.23 per share, respectively. FNCB offers a Dividend Reinvestment and Stock Purchase plan ("DRP") to its shareholders. For the years ended December 31, 20202023 and 20192022 dividend reinvestment shares were purchased in open market transactions. However,transactions, while shares under the optional cash purchase feature of the DRP were issued from authorized but unissued common shares. Shares of common stock issued under the DRP totaled 10,27113,348 and 7,3695,089 for the years ended December 31, 20202023 and 2019,2022, respectively. Subsequent to December 31, 2020,2023, on January 27, 2021,24, 2024, FNCB declared a $0.06$0.090 per share dividend payable on March 15, 20212024 to shareholders of record on March 1, 2021.2024.2020,2023, 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. For a further discussion of FNCB’s off-balance sheet arrangements, refer to Note 12,13, “Commitments, Contingencies, and Concentrations” to the notesNotes to the consolidated financial statementsConsolidated Financial Statements included in Item 8, “Financial Statements and Supplementary Data,” of this Annual Report on Form 10-K.20202023 and 2019.2022. With the exception of credit availability for certain commercial construction, land acquisition and development loans having a 24-month draw period, all of the off-balance sheet financial instruments outstanding at December 31, 20202023 expire within one year of their respective contract dates. $ 227,908 $ 275,891 $ 335,032 $ 301,300 18,914 15,081 16,908 17,923 $613$803 thousand and $703$949 thousand at December 31, 20202023 and 2019,2022, respectively, which were included in other liabilities in the consolidated statements of financial condition.FNCB’s Finance unit proactively monitorsImpact of Inflation and Changing PriceslevelFNCB’s financial position and operating results primarily in terms of unused commitments againsthistoric dollars. Changes in the available sourcesrelative value of liquidity from its investment portfolio, from deposit gathering activities as well as available unused borrowing capacity from the FHLBmoney 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 the Federal Reserve. The Finance unit reports the 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 to the same magnitude as the inflation rate. FNCB manages interest rate risk in several ways. Refer to “Interest Rate Risk” in Item 7A 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 liquidity monitoring regularlycontrol. Additionally, inflation may adversely impact the financial condition of FNCB's borrowers and could impact their ability to FNCB’s Assetrepay their loans, which could negatively affect FNCB's asset quality through higher delinquency rates and Liabilityincreased charge-offs. Management Committee ("ALCO"),will carefully consider the Investmentimpact of inflation and Liquidity Committee,rising interest rates on FNCB borrowers in managing credit risk related to the Executive Management Committeeloan and the Board of Directors.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
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 proposed that the Secured Overnight Funding Rate ("SOFR") replace USD-LIBOR. ARRC has proposed that the transition to SOFR from USD-LIBOR will take place by the end of 2021. FNCB has various loans, investments, borrowings and interest rate swap contracts that are indexed to USD-LIBOR. On December 4, 2020, the ICE Benchmark Administration ("IBA"), which complies and oversees LIBOR, published a proposal announcing that it will hold a consultation through January 25, 2021 on its intention to extend most of the USD-LIBOR tenors to June 30, 2023. No formal announcement has been made, however, U.S. banking regulators have expressed support for the extension, and it is expected that the IBA will reaffirm the extension plans. FNCB is actively monitoring its LIBOR exposures and evaluating the risks involved.
Asset and Liability Management
The ALCO, comprised of members of the Bank's board of directors, executive management ofand 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:
● | 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. |
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 as of December 31, |
● | 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 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 December 31, 20202023 levels:
Rates +200 | Rates +400 | Rates -100 | Rates +200 | Rates +400 | Rates -100 | |||||||||||||||||||||||||||||||||||||||||||
Simulation | Policy | Simulation | Policy | Simulation | Policy | Simulation | Policy | Simulation | Policy | Simulation | Policy | |||||||||||||||||||||||||||||||||||||
Results | Limit | Results | Limit | Results | Limit | Results | Limit | Results | Limit | Results | Limit | |||||||||||||||||||||||||||||||||||||
Earnings at risk: | ||||||||||||||||||||||||||||||||||||||||||||||||
Percent change in net interest income | (1.0 | )% | (12.5 | )% | 0.6 | % | (20.0 | )% | (0.8 | )% | (10.0 | )% | (2.9 | )% | (12.5 | )% | (4.8 | )% | (20.0 | )% | (0.3 | )% | (10.0 | )% | ||||||||||||||||||||||||
Economic value at risk: | ||||||||||||||||||||||||||||||||||||||||||||||||
Percent change in economic value of equity | 10.7 | % | (20.0 | )% | 16.7 | % | (35.0 | )% | (32.9 | )% | (10.0 | )% | (3.1 | )% | (20.0 | )% | (7.2 | )% | (35.0 | )% | (0.3 | )% | (10.0 | )% | ||||||||||||||||||||||||
Model results at December 31, 20202023 indicated that FNCB's asset/liability position was relatively well matched in the near term and exhibited only minor sensitivity to changes in interest ratesliability-rate sensitive over the next twelve18-24 months. Model results atAt December 31, 20202023, the model indicated that FNCB’s net interest income is expected to decrease 1.0%2.9% under a +200-basis point interest rate shock. Additionally, model results indicated that FNCB's economic valueshock, as compared to the base case, caused by spread compression due to increased wholesale funding and deposit migration into higher-yielding alternatives and certificate of equity ("EVE")deposit specials. Under this scenario, projected net interest income is expected to improve in years 3 through 5 of the 5-year simulation driven by asset cashflows replaced into higher assumed replacement rates outpacing the increase 10.7% under a parallel shift in interest ratesfunding costs from certificate of +200 basis points. Under a -100-basis point interest rate shock, model results indicated that FNCB'sdeposit maturities rolling into higher-costing specials. The percentage change in net interest income wouldin under the +200 and +400-basis point shock scenarios exceed policy guidelines at December 31, 2023. As part of its ALCO initiatives, management is currently evaluating various strategies to reduce FNCB's liability sensitivity and will execute such strategies as appropriate. Model results also indicate a 0.3% decrease 0.8% andto net interest income from the EVE would decrease 32.9%, respectively. Withbase case over the exceptionnext 12 months under a rate shock of -100 basis points, as asset yields less of a -100-basis point impact on thedecline as compared to overnight funding costs. Additionally, with respect to FNCB's EVE, all modeled exposures of net interest income and EVE wereare within internal policy guidelines. Management does not believe that the modeled decrease in the EVE, which exceeds the current policy limit of 10.0%, poses any undue interest rate risk at December 31, 2020. Comparatively, model results at December 31, 2019 indicated net interest income would be expected to decrease 4.8% and economic value of equity would be expected to increase 1.7% given a +200-basis point rate shock. Conversely, given a -100- basis point rate shock at December 31, 2019, net interest income would be expected to increase 1.9% and the economic value of equity would decrease 7.1%.
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 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 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 December 31, 20202023 with tax-equivalent net interest income that was projected for the period. There was a negativepositive variance between actual and projected tax-equivalent net interest income for the three months ended December 31, 20202023 of approximately$408 thousand, $0.1 million, or 3.6%0.50%. The minor variance primarily reflected a difference in the assumption for applying the volume and timingeffect of the forgiveness of PPP loans used in the model with that actually experienced. As of December 31, 2020, FNCB has received $39.8 million in borrower forgiveness from the SBA and anticipates that the remaining PPP loan balances will qualify for forgiveness under the guidelines of the program.interest rate hedges on net interest income. ALCO performs a detailed rate/volume analysis between actual and projected results in order to continue to improve the accuracy of its simulation models.
Item 8. Financial Statements and Supplementary Data.
Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Directors of
FNCB Bancorp, Inc. and Subsidiaries
Opinion on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated statements of financial condition of FNCB Bancorp, Inc. and Subsidiaries (the "Company") as of December 31, 20202023 and 2019,2022, and the related consolidated statements of income, comprehensive income (loss), changes in shareholders’ equity, and cash flows, for the years then ended and the related notes (collectively, referred to as the "consolidated financial statements"). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 20202023 and 2019,2022, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.
Change in Accounting Principle
As discussed in Note 2 to the consolidated financial statements, the Company has changed its method of accounting for the recognition and measurement of credit losses as of January 1, 2023 due to the adoption of ASC Topic 326, Financial Instruments – Credit Losses. Our opinion is not modified with respect to this matter.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company's consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB)("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit mattersmatter communicated below are mattersis a matter arising from the current period audit of the consolidated financial statements that werewas communicated or required to be communicated to the audit committee and that: (1) relaterelates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of the critical audit mattersmatter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit mattersmatter below, providing separate opinions on the critical audit mattersmatter or on the accounts or disclosures to which they relate.it relates.
Allowance for Loan Losses – Qualitative Factor Adjustments
Critical Audit Matter Description
As discussed above, on January 1, 2023, the Company adopted ASC Topic 326, Financial Instruments – Credit Losses, which resulted in a decrease in the allowance for credit losses (ACL) for loans and leases of $2.6 million, an increase in the ACL for unfunded commitments of $1.3 million, and an increase in retained earnings, net of deferred taxes, by $1.3 million through a cumulative-effect adjustment. As described in Notes 12 and 54 to the consolidated financial statements, management estimates the allowanceACL for loans and leases based on information about past events, including historical experience, current conditions and reasonable and supportable forecasts that affect the collectability of the reported amount.
The ACL is made up of both a quantitative modeled component as well as a qualitative component. The methodology for determining the quantitative component includes (1) a pooled component for loans and leases that exhibit similar risk characteristics and (2) identifying loans and leases that do not share risk characteristics with existing pools that are evaluated on an individual basis. For loans and leases exhibiting similar risk characteristics, the Company uses a discounted cash flow (“DCF”) methodology for all loan and lease portfolio segments measured on a collective or pool basis to estimate credit losses over the expected life of the loan and lease. For each loan and lease segment, a cash flow projection is generated at the instrument level. The DCF methodology combines the probability of default, and loss given default assumption that are applied to the pool’s projective model of cash flows taking into consideration the effects of prepayments and principal curtailment effects to estimate a reserve for each loan and lease. Loss given default is estimated based on peer loss experience. Probability of default is estimated utilizing a statistical regression model that incorporates a macroeconomic driver, the national unemployment rate. The model utilizes the forecast factor with a four quarter reasonable and supportable forecast period and different reversion techniques in order to estimate the probability of default for each loan and lease portfolio segment.
Quantitative loss factors are also supplemented by certain qualitative risk factors reflecting management’s evaluation of various conditions. Management applies judgment in determining the extent of qualitative factors used in the qualitative component to adjust the loss rates for loan losses represents management’s estimate of probable and reasonable incurred creditlease segments to reflect the impact these factors may have on expected losses inherent in the loan and lease portfolio. Management’s evaluation of these factors includes a weighted rate and risk range category assigned to each factor. The Company's allowance forqualitative factors include (1) changes in the credit quality trends of a respective segment which may be measured by risk ratings, FICO scores, delinquency rates, and payment performance, (2) changes in independent third-party loan losses was $11.95 million atreviews and regulatory exam ratings, (3) changes in local unemployment rates, (4) portfolio segment growth rates and concentrations, and (5) other external factors that may affect bank lending and operations such as a pandemic, natural disaster, or loss of a major employer, among others. The Company’s loan and lease portfolio totaled $1.2 billion as of December 31, 2020, which consisted of specific2023, and general reserve components of $0.42 million and $11.53 million, respectively.the associated ACL was $12.0 million.
In calculatingWe identified the general reserve component, management considered historical loss experience by segment and qualitative factor adjustments for changes not reflected in the historical loss experience. The general reserve component of the Company’s allowanceACL on loans and leases collectively evaluated for loan losses involved consideration of national and local economic conditions, levels of and trends in classified loans, delinquency rates and nonaccrual loans, trends in volumes and terms of loans, changes in lending policies, lending personnel, and collateral,credit loss as wella critical audit matter as concentrations in loan types, industry, and geography. Changes in theseauditing the underlying qualitative factor adjustments could have a material impact on the Company’s financial results.
The allowance for loan losses is an accounting estimate withfactors required significant measurement uncertainty and involves the application of significant judgment by management. Therefore, a high degree of auditor judgment and significant auditor effort was required in evaluating the audit evidence obtained related to the qualitative factor adjustments for the commercial real estate, commercial and industrial, construction, and land acquisition and development segments usedas amounts determined by management in the calculation.rely on analysis that is highly subjective and includes significant estimation uncertainty.
The primary procedures we performed to address this critical audit matter included:
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/s/ Baker Tilly US, LLP
We have served as the Company’s auditor since 2014.
Baker Tilly US, LLP (formerly known as Baker Tilly Virchow Krause, LLP)
Iselin, New Jersey
March 12, 20218, 2024
FNCB BANCORP, INC. AND SUBSIDIARIES | |||||
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION |
December 31, | December 31, | December 31, | December 31, | |||||||||||||
(in thousands, except share data) | 2020 | 2019 | 2023 | 2022 | ||||||||||||
Assets | ||||||||||||||||
Cash and cash equivalents: | ||||||||||||||||
Cash and due from banks | $ | 24,822 | $ | 23,944 | $ | 27,819 | $ | 26,588 | ||||||||
Interest-bearing deposits in other banks | 130,989 | 10,621 | 80,049 | 15,328 | ||||||||||||
Total cash and cash equivalents | 155,811 | 34,565 | 107,868 | 41,916 | ||||||||||||
Available-for-sale debt securities, at fair value | 350,035 | 272,839 | ||||||||||||||
Available-for-sale debt securities | 450,814 | 476,091 | ||||||||||||||
| Equity securities, at fair value | 3,026 | 920 | 4,786 | 7,717 | ||||||||||||
Restricted stock, at cost | 1,745 | 3,804 | 8,814 | 8,545 | ||||||||||||
Loans held for sale | 2,107 | 1,061 | - | 60 | ||||||||||||
Loans, net of allowance for loan and lease losses of $11,950 and $8,950 | 889,152 | 819,529 | ||||||||||||||
Loans and leases, net of allowance for credit losses of $11,986 and $14,193 | 1,208,279 | 1,110,124 | ||||||||||||||
Bank premises and equipment, net | 17,579 | 17,518 | 14,546 | 15,616 | ||||||||||||
Accrued interest receivable | 4,286 | 3,234 | 7,085 | 5,957 | ||||||||||||
Bank-owned life insurance | 31,712 | 31,230 | 37,251 | 36,499 | ||||||||||||
Other assets | 10,226 | 18,841 | 41,543 | 43,005 | ||||||||||||
Total assets | $ | 1,465,679 | $ | 1,203,541 | $ | 1,880,986 | $ | 1,745,530 | ||||||||
Liabilities | ||||||||||||||||
Deposits: | ||||||||||||||||
Demand (non-interest-bearing) | $ | 271,499 | $ | 179,465 | $ | 285,548 | $ | 305,850 | ||||||||
Interest-bearing | 1,015,949 | 822,244 | 1,243,434 | 1,114,797 | ||||||||||||
Total deposits | 1,287,448 | 1,001,709 | 1,528,982 | 1,420,647 | ||||||||||||
Borrowed funds: | ||||||||||||||||
Federal Reserve Discount Window advances | 25,000 | - | ||||||||||||||
Federal Home Loan Bank of Pittsburgh advances | 0 | 46,909 | 164,962 | 172,050 | ||||||||||||
Junior subordinated debentures | 10,310 | 10,310 | 10,310 | 10,310 | ||||||||||||
Total borrowed funds | 10,310 | 57,219 | 200,272 | 182,360 | ||||||||||||
Accrued interest payable | 108 | 258 | 1,355 | 171 | ||||||||||||
Other liabilities | 11,953 | 10,748 | 15,778 | 23,403 | ||||||||||||
Total liabilities | 1,309,819 | 1,069,934 | 1,746,387 | 1,626,581 | ||||||||||||
Shareholders' equity | ||||||||||||||||
Preferred stock ($1.25 par) | ||||||||||||||||
Authorized: 20,000,000 shares at December 31, 2020 and December 31, 2019 | ||||||||||||||||
Issued and outstanding: 0 shares at December 31, 2020 and December 31, 2019 | 0 | 0 | ||||||||||||||
Authorized: 20,000,000 shares at December 31, 2023 and December 31, 2022 | ||||||||||||||||
Issued and outstanding: 0 shares at December 31, 2023 and December 31, 2022 | - | - | ||||||||||||||
Common stock ($1.25 par) | ||||||||||||||||
Authorized: 50,000,000 shares at December 31, 2020 and December 31, 2019 | ||||||||||||||||
Issued and outstanding: 20,245,649 shares at December 31, 2020 and 20,171,408 shares at December 31, 2019 | 25,307 | 25,214 | ||||||||||||||
Authorized: 50,000,000 shares at December 31, 2023 and December 31, 2022 | ||||||||||||||||
Issued and outstanding: 19,787,031 shares at December 31, 2023 and 19,681,644 shares at December 31, 2022 | 24,733 | 24,602 | ||||||||||||||
Additional paid-in capital | 81,587 | 81,130 | 78,253 | 77,502 | ||||||||||||
Retained earnings | 35,080 | 24,207 | 71,782 | 64,873 | ||||||||||||
Accumulated other comprehensive income | 13,886 | 3,056 | ||||||||||||||
Accumulated other comprehensive loss | (40,169 | ) | (48,028 | ) | ||||||||||||
Total shareholders' equity | 155,860 | 133,607 | 134,599 | 118,949 | ||||||||||||
Total liabilities and shareholders’ equity | $ | 1,465,679 | $ | 1,203,541 | $ | 1,880,986 | $ | 1,745,530 | ||||||||
The accompanying notes to consolidated financial statements are an integral part of these statements. |
FNCB BANCORP, INC. AND SUBSIDIARIES |
CONSOLIDATED STATEMENTS OF INCOME |
For the Year Ended December 31, | For the Year Ended December 31, | |||||||||||||||
(in thousands, except share data) | 2020 | 2019 | 2023 | 2022 | ||||||||||||
Interest income | ||||||||||||||||
Interest and fees on loans | $ | 37,615 | $ | 37,818 | ||||||||||||
Interest and fees on loans and leases | $ | 65,364 | $ | 47,193 | ||||||||||||
Interest and dividends on securities: | ||||||||||||||||
U.S. government agencies | 2,336 | 3,545 | ||||||||||||||
State and political subdivisions, tax-free | 1,373 | 149 | ||||||||||||||
State and political subdivisions, taxable | 3,025 | 3,263 | ||||||||||||||
Other securities | 1,961 | 1,093 | ||||||||||||||
Taxable | 12,451 | 10,281 | ||||||||||||||
Tax-exempt | 2,207 | 2,662 | ||||||||||||||
Dividends | 991 | 549 | ||||||||||||||
Total interest and dividends on securities | 8,695 | 8,050 | 15,649 | 13,492 | ||||||||||||
Interest on interest-bearing deposits in other banks | 28 | 188 | 1,011 | 91 | ||||||||||||
Total interest income | 46,338 | 46,056 | 82,024 | 60,776 | ||||||||||||
Interest expense | ||||||||||||||||
Interest on deposits | 5,404 | 8,101 | 24,461 | 3,970 | ||||||||||||
Interest on borrowed funds: | ||||||||||||||||
| Federal Reserve Bank Discount Window advances | 32 | 0 | 308 | 3 | ||||||||||||
Federal Home Loan Bank of Pittsburgh advances | 474 | 1,241 | 8,634 | 2,401 | ||||||||||||
Subordinated debentures | 0 | 24 | ||||||||||||||
Junior subordinated debentures | 250 | 430 | 724 | 358 | ||||||||||||
Total interest on borrowed funds | 756 | 1,695 | 9,666 | 2,762 | ||||||||||||
Total interest expense | 6,160 | 9,796 | 34,127 | 6,732 | ||||||||||||
Net interest income before provision for loan and lease losses | 40,178 | 36,260 | ||||||||||||||
Provision for loan and lease losses | 1,941 | 797 | ||||||||||||||
Net interest income after provision for loan and lease losses | 38,237 | 35,463 | ||||||||||||||
Net interest income before provision for credit losses | 47,897 | 54,044 | ||||||||||||||
Provision for credit losses | 1,880 | 1,962 | ||||||||||||||
Net interest income after provision for credit losses | 46,017 | 52,082 | ||||||||||||||
Non-interest income | ||||||||||||||||
Deposit service charges | 3,252 | 3,035 | 4,537 | 4,415 | ||||||||||||
Net gain on the sale of available-for-sale securities | 1,528 | 1,227 | ||||||||||||||
Net gain on equity securities | 1,171 | 29 | ||||||||||||||
Net gain (loss) on the sale of available-for-sale debt securities | 252 | (223 | ) | |||||||||||||
Net loss on equity securities | (1,601 | ) | (34 | ) | ||||||||||||
Net gain on the sale of mortgage loans held for sale | 653 | 253 | 6 | 205 | ||||||||||||
Net gain on the sale of other real estate owned | 0 | 20 | ||||||||||||||
Loan-related fees | 348 | 378 | 398 | 243 | ||||||||||||
Income from bank-owned life insurance | 482 | 520 | 752 | 710 | ||||||||||||
| Loan referral fees/interest rate swap revenue | 390 | 703 | ||||||||||||||
Bank-owned life insurance settlement | - | 273 | ||||||||||||||
| Merchant services revenue | 565 | 536 | 592 | 712 | ||||||||||||
Wealth management services revenue | 944 | 564 | ||||||||||||||
Other | 861 | 919 | 765 | 1,116 | ||||||||||||
Total non-interest income | 9,250 | 7,620 | 6,645 | 7,981 | ||||||||||||
Non-interest expense | ||||||||||||||||
Salaries and employee benefits | 15,246 | 15,518 | 20,234 | 19,283 | ||||||||||||
Occupancy expense | 2,052 | 1,948 | 2,156 | 2,093 | ||||||||||||
Equipment expense | 1,477 | 1,319 | 963 | 1,295 | ||||||||||||
Advertising expense | 685 | 738 | 836 | 801 | ||||||||||||
Data processing expense | 2,933 | 3,113 | 4,008 | 4,027 | ||||||||||||
Regulatory assessments | 1,115 | 811 | ||||||||||||||
Bank shares tax | 786 | 566 | 509 | 915 | ||||||||||||
Professional fees | 999 | 1,056 | 1,093 | 1,273 | ||||||||||||
(Credit) provision for unfunded commitments | (803 | ) | 366 | |||||||||||||
Merger and acquisition expenses | 1,480 | - | ||||||||||||||
Other operating expenses | 4,737 | 5,424 | 5,331 | 4,610 | ||||||||||||
Total non-interest expense | 28,915 | 29,682 | 36,922 | 35,474 | ||||||||||||
Income before income tax expense | 18,572 | 13,401 | 15,740 | 24,589 | ||||||||||||
Income tax expense | 3,225 | 2,326 | 2,757 | 4,144 | ||||||||||||
Net income | $ | 15,347 | $ | 11,075 | $ | 12,983 | $ | 20,445 | ||||||||
Earnings per share | ||||||||||||||||
Basic | $ | 0.76 | $ | 0.56 | $ | 0.66 | $ | 1.04 | ||||||||
Diluted | $ | 0.76 | $ | 0.56 | $ | 0.66 | $ | 1.03 | ||||||||
Cash dividends declared per common share | $ | 0.22 | $ | 0.20 | $ | 0.36 | $ | 0.33 | ||||||||
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING: | ||||||||||||||||
Basic | 20,210,439 | 19,802,095 | 19,740,493 | 19,744,477 | ||||||||||||
Diluted | 20,212,187 | 19,807,592 | 19,742,618 | 19,762,566 | ||||||||||||
The accompanying notes to consolidated financial statements are an integral part of these statements. |
FNCB BANCORP, INC. AND SUBSIDIARIES | |||||||
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) |
For the Year Ended December 31, | For the Year Ended December 31, | |||||||||||||||
(in thousands) | 2020 | 2019 | 2023 | 2022 | ||||||||||||
Net income | $ | 15,347 | $ | 11,075 | $ | 12,983 | $ | 20,445 | ||||||||
Other comprehensive income: | ||||||||||||||||
Unrealized gains on available-for-sale debt securities | 15,349 | 10,842 | ||||||||||||||
Other comprehensive income (loss): | ||||||||||||||||
Unrealized gains (losses) on available-for-sale debt securities | 11,485 | (69,809 | ) | |||||||||||||
Taxes | (3,223 | ) | (2,277 | ) | (2,412 | ) | 14,660 | |||||||||
Net of tax amount | 12,126 | 8,565 | 9,073 | (55,149 | ) | |||||||||||
Reclassification adjustment for net gains included in net income | (1,528 | ) | (1,227 | ) | ||||||||||||
Reclassification adjustment for (gains) losses included in net income | (252 | ) | 223 | |||||||||||||
Taxes | 321 | 258 | 53 | (47 | ) | |||||||||||
Net of tax amount | (1,207 | ) | (969 | ) | (199 | ) | 176 | |||||||||
| Derivative adjustments | (112 | ) | 0 | (1,285 | ) | 750 | ||||||||||
| Taxes | 23 | 0 | 270 | (157 | ) | |||||||||||
| Net of tax amount | (89 | ) | 0 | (1,015 | ) | 593 | ||||||||||
Total other comprehensive income | 10,830 | 7,596 | ||||||||||||||
Comprehensive income | $ | 26,177 | $ | 18,671 | ||||||||||||
Total other comprehensive income (loss) | 7,859 | (54,380 | ) | |||||||||||||
Comprehensive income (loss) | $ | 20,842 | $ | (33,935 | ) | |||||||||||
The accompanying notes to consolidated financial statements are an integral part of these statements. |
FNCB BANCORP, INC. AND SUBSIDIARIES |
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY |
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For the Years Ended December 31, 2023 and 2022 | ||||||||||||||||||||||||||||||||||||||||||||||||
Accumulated | Accumulated | |||||||||||||||||||||||||||||||||||||||||||||||
Number | Additional | Other | Total | Number | Additional | Other | Total | |||||||||||||||||||||||||||||||||||||||||
of Common | Common | Paid-in | Retained | Comprehensive | Shareholders' | of Common | Common | Paid-in | Retained | Comprehensive | Shareholders' | |||||||||||||||||||||||||||||||||||||
(in thousands, except share data) | Shares | Stock | Capital | Earnings | (Loss) Income | Equity | Shares | Stock | Capital | Earnings | Income (Loss) | Equity | ||||||||||||||||||||||||||||||||||||
Balances, December 31, 2018 | 16,821,371 | $ | 21,026 | $ | 63,547 | $ | 17,186 | $ | (4,540 | ) | $ | 97,219 | ||||||||||||||||||||||||||||||||||||
Balances, December 31, 2021 | 19,989,875 | $ | 24,987 | $ | 80,128 | $ | 50,990 | $ | 6,352 | $ | 162,457 | |||||||||||||||||||||||||||||||||||||
Net income | - | 0 | 0 | 11,075 | 0 | 11,075 | - | - | - | 20,445 | - | 20,445 | ||||||||||||||||||||||||||||||||||||
Cash dividends paid, $0.20 per share | - | 0 | 0 | (4,030 | ) | 0 | (4,030 | ) | ||||||||||||||||||||||||||||||||||||||||
| Common shares issued for capital raise, net | 3,285,550 | 4,107 | 17,201 | 0 | 0 | 21,308 | ||||||||||||||||||||||||||||||||||||||||||
Cash dividends paid, $0.33 per share | - | - | - | (6,520 | ) | - | (6,520 | ) | ||||||||||||||||||||||||||||||||||||||||
Restricted stock awards | - | 0 | 255 | 0 | 0 | 255 | - | - | 448 | - | - | 448 | ||||||||||||||||||||||||||||||||||||
Repurchase of common shares | (384,830 | ) | (481 | ) | (3,155 | ) | - | - | (3,636 | ) | ||||||||||||||||||||||||||||||||||||||
| Common shares issued under long-term incentive compensation plan | 57,118 | 71 | 79 | 0 | 0 | 150 | 71,510 | 89 | 46 | - | - | 135 | ||||||||||||||||||||||||||||||||||||
Common shares issued through dividend reinvestment/optional cash purchase plan | 7,369 | 10 | 48 | (24 | ) | 0 | 34 | 5,089 | 7 | 35 | (42 | ) | - | - | ||||||||||||||||||||||||||||||||||
Other comprehensive income, net of tax of $2,019 | - | 0 | 0 | 0 | 7,596 | 7,596 | ||||||||||||||||||||||||||||||||||||||||||
Balances, December 31, 2019 | 20,171,408 | $ | 25,214 | $ | 81,130 | $ | 24,207 | $ | 3,056 | $ | 133,607 | |||||||||||||||||||||||||||||||||||||
Other comprehensive loss net of tax benefit of $14,456 | - | - | - | - | (54,380 | ) | (54,380 | ) | ||||||||||||||||||||||||||||||||||||||||
Balances, December 31, 2022 | 19,681,644 | $ | 24,602 | $ | 77,502 | $ | 64,873 | $ | (48,028 | ) | $ | 118,949 | ||||||||||||||||||||||||||||||||||||
Cumulative effect adjustment due to adoption of ASU 2016-13 | - | - | - | 1,080 | - | 1,080 | ||||||||||||||||||||||||||||||||||||||||||
Net income | - | 0 | 0 | 15,347 | 0 | 15,347 | - | - | - | 12,983 | - | 12,983 | ||||||||||||||||||||||||||||||||||||
Cash dividends paid, $0.22 per share | - | 0 | 0 | (4,447 | ) | 0 | (4,447 | ) | ||||||||||||||||||||||||||||||||||||||||
Cash dividends paid, $0.36 per share | - | - | - | (7,110 | ) | - | (7,110 | ) | ||||||||||||||||||||||||||||||||||||||||
Restricted stock awards | - | 0 | 336 | 0 | 0 | 336 | - | - | 583 | - | - | 583 | ||||||||||||||||||||||||||||||||||||
Common shares issued as consideration for an asset purchase | 6,874 | 8 | 46 | 54 | ||||||||||||||||||||||||||||||||||||||||||||
Common shares issued under long-term incentive compensation plan | 63,970 | 80 | 70 | 0 | 0 | 150 | 85,165 | 106 | 57 | - | - | 163 | ||||||||||||||||||||||||||||||||||||
Common shares issued through dividend reinvestment/optional cash purchase plan | 10,271 | 13 | 51 | (27 | ) | 0 | 37 | 13,348 | 17 | 65 | (44 | ) | - | 38 | ||||||||||||||||||||||||||||||||||
Other comprehensive income, net of tax of $2,879 | - | 0 | 0 | 0 | 10,830 | 10,830 | ||||||||||||||||||||||||||||||||||||||||||
Balances, December 31, 2020 | 20,245,649 | $ | 25,307 | $ | 81,587 | $ | 35,080 | $ | 13,886 | $ | 155,860 | |||||||||||||||||||||||||||||||||||||
Other comprehensive income, net of tax expense of $2,089 | - | - | - | - | 7,859 | 7,859 | ||||||||||||||||||||||||||||||||||||||||||
Balances, December 31, 2023 | 19,787,031 | $ | 24,733 | $ | 78,253 | $ | 71,782 | $ | (40,169 | ) | $ | 134,599 | ||||||||||||||||||||||||||||||||||||
The accompanying notes to consolidated financial statements are an integral part of these statements. |
FNCB BANCORP, INC AND SUBSIDIARIES |
For the Year Ended December 31, | For the Year Ended December 31, | |||||||||||||||
(in thousands) | 2020 | 2019 | 2023 | 2022 | ||||||||||||
Cash flows from operating activities: | ||||||||||||||||
Net income | $ | 15,347 | $ | 11,075 | $ | 12,983 | $ | 20,445 | ||||||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||||||
Investment securities amortization, net | 879 | 746 | 1,906 | 2,883 | ||||||||||||
Equity in trust | (8 | ) | (13 | ) | (22 | ) | (11 | ) | ||||||||
Depreciation of bank premises and equipment | 1,628 | 1,396 | 1,290 | 1,565 | ||||||||||||
Amortization of loan origination (fees) costs | (626 | ) | 1,591 | |||||||||||||
Amortization of loan origination fees | 918 | (466 | ) | |||||||||||||
Valuation adjustment for loan servicing rights | 16 | 2 | - | (3 | ) | |||||||||||
Stock-based compensation expense | 486 | 405 | 746 | 583 | ||||||||||||
Provision for loan and lease losses | 1,941 | 797 | ||||||||||||||
Valuation adjustment for off-balance sheet commitments | (90 | ) | 448 | |||||||||||||
Net gain on the sale/redemption of available-for-sale debt securities | (1,528 | ) | (1,227 | ) | ||||||||||||
Net gain on equity securities | (1,171 | ) | (29 | ) | ||||||||||||
Provision for credit losses | 1,880 | 1,962 | ||||||||||||||
(Credit) provision for unfunded commitments | (803 | ) | 366 | |||||||||||||
Net (gain) loss on the sale of available-for-sale debt securities | (252 | ) | 223 | |||||||||||||
Net loss on equity securities | 1,601 | 34 | ||||||||||||||
Net gain on the sale of mortgage loans held for sale | (653 | ) | (253 | ) | (6 | ) | (205 | ) | ||||||||
Net gain on the sale of other real estate owned | 0 | (20 | ) | |||||||||||||
Valuation adjustment of other real estate owned | 27 | 85 | ||||||||||||||
Net gain on other real estate owned | - | (3 | ) | |||||||||||||
Loss on the disposition of bank premises and equipment | 0 | 35 | 25 | - | ||||||||||||
| Gain on bank-owned life insurance settlement | 0 | (114 | ) | |||||||||||||
Bank-owned life insurance settlement | - | (273 | ) | |||||||||||||
Income from bank-owned life insurance | (482 | ) | (520 | ) | (752 | ) | (710 | ) | ||||||||
Proceeds from the sale of mortgage loans held for sale | 14,510 | 9,900 | 426 | 9,444 | ||||||||||||
Funds used to originate mortgage loans held for sale | (14,903 | ) | (9,887 | ) | (360 | ) | (9,299 | ) | ||||||||
Decrease in net deferred tax assets | 3,219 | 2,396 | ||||||||||||||
(Increase) decrease in accrued interest receivable | (1,052 | ) | 380 | |||||||||||||
Decrease (increase) in other assets | 1,412 | (2,107 | ) | |||||||||||||
Decrease in accrued interest payable | (150 | ) | (80 | ) | ||||||||||||
Increase (decrease) in other liabilities | 773 | (354 | ) | |||||||||||||
Increase in net deferred tax assets | (129 | ) | (573 | ) | ||||||||||||
Increase in accrued interest receivable | (1,128 | ) | (1,314 | ) | ||||||||||||
Increase in other assets | (432 | ) | (1,163 | ) | ||||||||||||
Increase in accrued interest payable | 1,184 | 122 | ||||||||||||||
Decrease in other liabilities | (3,252 | ) | (3,637 | ) | ||||||||||||
Total adjustments | 4,228 | 3,577 | 2,840 | (475 | ) | |||||||||||
Net cash provided by operating activities | 19,575 | 14,652 | 15,823 | 19,970 | ||||||||||||
Cash flows from investing activities: | ||||||||||||||||
Maturities, calls and principal payments of available-for-sale debt securities | 20,694 | 11,051 | 41,612 | 37,876 | ||||||||||||
Proceeds from the sale/redemption of available-for-sale debt securities | 69,271 | 128,233 | ||||||||||||||
Proceeds from the sale of available-for-sale debt securities | 10,394 | 14,004 | ||||||||||||||
Purchases of available-for-sale debt securities | (152,691 | ) | (105,995 | ) | (17,150 | ) | (78,097 | ) | ||||||||
| Purchase of equity securities | (500 | ) | 0 | (160 | ) | (3,188 | ) | |||||||||
Redemption (purchase) of the stock in Federal Home Loan Bank of Pittsburgh | 2,059 | (681 | ) | |||||||||||||
Proceeds from the sale/transfer of equity securities | 1,223 | 0 | ||||||||||||||
Purchase of equity securities without readily determinable fair values | (500 | ) | 0 | |||||||||||||
Net (increase) decrease in loans to customers | (70,820 | ) | 7,737 | |||||||||||||
Purchase of restricted stock | (269 | ) | (6,634 | ) | ||||||||||||
Proceeds from the sale of equity securities | 1,490 | 359 | ||||||||||||||
Net increase in loans and leases to customers | (98,108 | ) | (144,506 | ) | ||||||||||||
Proceeds from the sale of other real estate owned | 204 | 821 | - | 695 | ||||||||||||
Proceeds received from bank-owned life insurance settlement | 0 | 419 | - | 978 | ||||||||||||
Proceeds received from sale of bank premises and equipment | 0 | 16 | ||||||||||||||
Purchase of bank-owned life insurance | - | (3,000 | ) | |||||||||||||
Investment in low-income housing tax credit program | (6,610 | ) | (2,203 | ) | ||||||||||||
Purchases of bank premises and equipment | (1,689 | ) | (4,540 | ) | (245 | ) | (871 | ) | ||||||||
Net cash (used in) provided by investing activities | (132,749 | ) | 37,061 | |||||||||||||
Net cash used in investing activities | (69,046 | ) | (184,587 | ) | ||||||||||||
Cash flows from financing activities: | ||||||||||||||||
Net increase (decrease) in deposits | 285,739 | (93,920 | ) | 108,335 | (34,381 | ) | ||||||||||
(Repayment of) proceeds from Federal Home Loan Bank of Pittsburgh advances - overnight | (14,100 | ) | 7,500 | |||||||||||||
Proceeds from Federal Reserve Discount Window advances | 50,000 | - | ||||||||||||||
Repayment of Federal Reserve Discount Window advances | (25,000 | ) | ||||||||||||||
(Repayment) proceeds from Federal Home Loan Bank of Pittsburgh advances - overnight | (123,400 | ) | 139,400 | |||||||||||||
Proceeds from Federal Home Loan Bank of Pittsburgh advances - term | 20,000 | 70,000 | 452,015 | 42,650 | ||||||||||||
Repayment of Federal Home Loan Bank of Pittsburgh advances - term | (52,809 | ) | (49,521 | ) | (335,703 | ) | (30,000 | ) | ||||||||
Principal reduction on subordinated debentures | 0 | (5,000 | ) | |||||||||||||
Repurchase of common shares | - | (3,636 | ) | |||||||||||||
Proceeds from issuance of common shares, net of discount | 37 | 21,342 | 38 | - | ||||||||||||
Cash dividends paid | (4,447 | ) | (4,030 | ) | (7,110 | ) | (6,520 | ) | ||||||||
Net cash provided by (used in) financing activities | 234,420 | (53,629 | ) | |||||||||||||
Net cash provided by financing activities | 119,175 | 107,513 | ||||||||||||||
Net increase (decrease) in cash and cash equivalents | 121,246 | (1,916 | ) | 65,952 | (57,104 | ) | ||||||||||
Cash and cash equivalents at beginning of year | 34,565 | 36,481 | 41,916 | 99,020 | ||||||||||||
Cash and cash equivalents at end of year | $ | 155,811 | $ | 34,565 | $ | 107,868 | $ | 41,916 | ||||||||
Supplemental cash flow information | ||||||||||||||||
Cash paid during the period for: | ||||||||||||||||
Interest | $ | 6,310 | $ | 9,876 | $ | 32,943 | $ | 6,610 | ||||||||
Taxes | 3,570 | 4,616 | ||||||||||||||
Other transactions: | ||||||||||||||||
Commitment in low-income housing tax credit program | - | 8,811 | ||||||||||||||
OREO transferred to bank premises and equipment | - | 228 | ||||||||||||||
Common shares issued as consideration for asset purchase | 54 | - | ||||||||||||||
| Lease liabilities arising from obtaining right-of-use assets | 387 | 92 | 19 | 559 | ||||||||||||
Investor loans transferred to other real estate owned | 0 | 256 | ||||||||||||||
The accompanying notes to consolidated financial statements are an integral part of these statements.
Notes to Consolidated Financial Statements
Note 1. ORGANIZATION
FNCB Bancorp, Inc. is a registered bank holding company under the Bank Holding Company Act of 1956, incorporated under the laws of the Commonwealth of Pennsylvania in 1997. It is the parent company of FNCB Bank (the “Bank”) and the Bank’s wholly owned subsidiaries1st Equipment Finance, Inc., FNCB Realty Company, Inc., FNCB Realty Company I, LLC, and FNCB Realty Company II, LLC. Unless the context otherwise requires, the term “FNCB” is used to refer to FNCB Bancorp, Inc., and its subsidiaries. In certain circumstances, however, the term “FNCB” refers to FNCB Bancorp, Inc., itself.
The Bank provides customary retail and commercial banking services to individuals, businesses and local governments and municipalities through its 1716 full-service branch locations, as of December 31, 2023, within its primary market area, Northeastern Pennsylvania.
FNCB Realty Company, Inc., FNCB Realty Company I, LLC, and FNCB Realty Company II, LLC, which were formed to hold real estate and/or operate businesses acquired in exchange for debt settlement or foreclosure, were inactive at December 31, 20202023 and 2019.2022.
In December 2006, First National Community Statutory Trust I (“Issuing Trust”), which is wholly owned by FNCB, was formed under Delaware law to provide FNCB with an additional funding source through the issuance of pooled trust preferred securities. FNCB has adopted Accounting Standards Codification (“ASC”) 810-10, Consolidation, for the Issuing Trust. Accordingly, the Issuing Trust has not been consolidated with the accounts of FNCB, because FNCB is not the primary beneficiary of the trust.
Agreement and Plan of Merger
On September 27, 2023, FNCB entered into an Agreement and Plan of Merger (the "Merger Agreement") with Peoples Financial Services Corp. ("PFIS") pursuant to which FNCB will merge with and into PFIS as the surviving entity. Immediately after such merger, the Bank will merge with and into Peoples Security Bank and Trust Company ("Peoples Bank"), with Peoples Bank as the surviving bank and a wholly-owned subsidiary of the PFIS. Under the terms of the Merger Agreement, which has been unanimously approved by the boards of directors of both companies, shareholders of FNCB will be entitled to receive a fixed exchange ratio of 0.1460 shares of PFIS common stock for each share of FNCB's common stock. On October 27, 2023, FNCB filed a Federal Deposit Insurance Corporation ("FDIC") Interagency Bank Merger Application with the FDIC New York and a Pennsylvania Bank Merger Application with the PADOBS. The PADOBS approved the merger application on February 1, 2024. Completion of the merger requires, among other things, the approval from the FDIC, as well as FNCB's shareholders.
Note 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The consolidated financial statements of FNCB are comprised of the accounts of FNCB Bancorp, Inc., and its wholly-owned subsidiary, FNCB Bank, as well as the Bank’s wholly-owned subsidiaries. All intercompany transactions and balances have been eliminated in consolidation. The accounting and reporting policies of FNCB conform to accounting principles generally accepted in the United States of America (“GAAP”), Regulation S-X and general practices within the banking industry. Prior period amounts have been reclassified when necessary to conform to the current year’s presentation. Such reclassifications did not have a material impact on the operating results or financial position of FNCB.
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’ACL, the valuation and impairment evaluation the valuation of other real estate owned (“OREO”),FNCB's investments, and income taxes.
Cash Equivalents
For purposes of reporting cash flows, cash equivalents include cash on hand and amounts due from banks. FNCB maintains compensating balances at correspondent banks, most of which are not required, but are used to offset specific charges for services. At December 31, 2023 and 2022, the amount of these balances were $1.6 million and $2.1 million, respectively.
Securities
Debt Securities and Equity Securities with Readily Determinable Fair Values
FNCB classifies its investments in debt securities as either held-to-maturityavailable-for-sale or available-for-saleheld-to-maturity at the time of purchase. Debt securities that are classified as held-to-maturity are carried at amortized cost when management has the positive intent and ability to hold them to maturity. Debt securities that are classified as available-for-sale are carried at fair value with unrealized holding gains and losses recognized as a component of shareholders’ equity in accumulated other comprehensive (loss) income, (loss), net of tax. Debt securities that are classified as held-to-maturity are carried at amortized cost when management has the positive intent and ability to hold them to maturity. Premiums on callable debt securities are amortized to the earliest call date. Amortization of premiums and accretion of discounts on noncallable debt securities is recognized over the life of the related security as an adjustment to yield using the interest method. Realized gains and losses on sales of debt securities are based on amortized cost using the specific identification method on the trade date. All of FNCB's debt securities were classified as available-for-sale at December 31, 20202023 and 20192022.
Equity securities with readily determinable fair values are reported at fair value with net unrealized gains and losses recognized in non-interest income in the consolidated statements of income.
Fair values for debt securities and equity securities with readily determinable fair values are based upon quoted market prices, where available. If quoted market prices are not available, fair values are based upon quoted market prices of comparable instruments, or a discounted cash flow model using market estimates of interest rates and volatility.
Restricted SecuritiesStock
Investments in restricted securities have limited marketability, are carried at cost and are evaluated for impairment based on FNCB’s determination of the ultimate recoverability of the par value of the stock. FNCB’s investment in restricted securities is comprised of stock in the Federal Home Loan Bank ("FHLB") of Pittsburgh and Atlantic Community Bankers Bank.Bank ("ACBB").
Equity Securities without Readily Determinable Fair Values
Equity securities without readily determinable fair values generally consist of common and/or preferred stock of privately held financial institutions, which are carried at cost and included in other assets in the consolidated statements of financial condition. On a quarterly basis, management performs a qualitative assessment to determine if the securities are impaired. If the qualitative assessment indicates impairment, the security is written down to its fair value, with the charge for impairment included in net income.
Evaluation for Other Than Temporary Impairment
On a quarterly basis, ACL on Available-for-Sale Debt Securities
Upon adoption of CECL, effective January 1, 2023, management evaluates allavailable-for-sale securities in an unrealized loss position quarterly for other than temporary impairment (“OTTI”). An individual security is considered impaired when its current fair value is less than its amortized cost basis.credit impairment. As part of its evaluation, management considers the following factors, among other things, in determining whether the security’s impairment is other than temporary:
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Based on current authoritative guidance, when a held-to-maturity or available-for-sale security is assessed for OTTI, management must first consider (a)assesses whether itFNCB intends to sell, the security and (b) whether it isor would be more likely than not the FNCB will be required to sell the security prior tobefore recovery of its amortized cost.cost basis. If either of the criteria regarding intent or requirement to sell is met, the amortized cost basis of the security is written down to fair value through income. For available-for-sale securities that do onenot of these circumstances applies to a security, an OTTI loss is recognized in the statement of income equal to the full amount ofmeet either criteria, management evaluates whether the decline in fair value below amortized cost. If neither of these circumstances applies tohas resulted from a security, but FNCB does not expect to recover the entire amortized cost, an OTTI loss has occurred that must be separated into two categories: (a) the amount related to credit loss and (b) the amount related toor other factors. In making its assessment, management considers, among other factors, (such as market risk). In assessing the level of OTTI attributable to credit loss, management compares the present value of cash flows expected to be collected with the amortized costnature of the security. The portioncollateral, potential future changes in collateral values, default rates, delinquency rates, third-party credit support, credit ratings, interest rate changes since purchase, volatility of the total OTTI related to creditsecurity’s fair value and historical loss is identified as the amount of principal cash flows not expected to be received over the remaining term of the security as estimated based on cash flow projections discounted at the applicable original yield of the security, and is recognized in earnings, while the amount related to other factors is recognized in other comprehensive income.information for financial assets secured with similar collateral. The total OTTI loss is presented in the statement of income less the portion recognized in other comprehensive income. When a debt security becomes other-than-temporarily impaired, its amortized cost basis is reduced to reflect the portion of the total impairment related to credit loss. The assessment of whether an OTTI decline exists involves a high degree of subjectivity and judgment that is based on the information available to management at a point in time. If management determines that the decline in fair value of a security resulted from a credit loss, the present value of the cash flows expected to be collected from the security are compared to the amortized cost basis of the security. If the present value of the cash flows expected to be collected from the security is less than its amortized cost basis, a credit loss exists and an ACL is recorded. The ACL recorded is limited by the amount that the fair value is less than the amortized cost basis. Any impairment that has not been recorded through an allowance is recognized in other comprehensive income (loss).
FNCB's estimate of expected credit losses includes a measure of the expected risk of credit loss even if that risk is remote. However, FNCB does not measure expected credit losses on an investment security in which historical credit loss information adjusted for current conditions and reasonable and supportable forecast results in an expectation that nonpayment of the amortized cost basis is zero. Management does not expect nonpayment of the amortized cost basis to be zero solely on the basis of the current value of collateral securing the security but instead, also considers the nature of the collateral, potential future changes in collateral values, default rates, delinquency rates, third-party guarantees, credit ratings, interest rate changes since purchase, volatility of the security's fair value and historical loss information for financial assets secured with similar collateral. FNCB performed an analysis that determined that the following securities have a zero expected credit loss: U.S. government agencies, mortgage-backed securities of U.S. government and government sponsored agencies, as all the U.S. government agencies and U.S. government agency backed securities have the full faith and credit backing of the United States Government or one of its agencies.
Changes in the ACL are recorded as a provision for (or reversal of) credit losses in the consolidated statements of income. Losses are charged against the allowance when management believes the uncollectibility of an available-for-sale debt security is confirmed based on the above-described analysis or when either of the criteria regarding the intent or requirement to sell is met. As of December 31, 2023, and January 1,2023 (i.e. ASU 2016-13 adoption), no allowance was required for FNCB's available-for-sale debt securities.
Accrued interest receivable on available-for-sale debt securities, included in accrued interest receivable on the consolidated statements of condition, is excluded from the estimate of credit losses.
Loans and Loan Origination Fees and CostsLeases
Loans and leases that managementFNCB has the intent and ability to hold for the foreseeable future or until maturity or payoff are stated at their outstanding unpaid principal balance, net of unamortized deferred loan fees and costs, anyunamortized premiums or discounts on loans purchased through third-party originators, unearned income and partial charge-offs. Loans and leases receivable are presented net of the allowance for loan and leasecredit losses in the consolidated statements of financial condition. Interest income on all loans is recognized using the effective interest method. Nonrefundable loan origination fees, as well as certain direct loan origination costs, are deferred and the net amount amortized over the contractual life of the related loan as an adjustment to yield using the effective interest method. Amortization of deferred loan fees or costs is discontinued when a loan is placed on non-accrual status.
Loans are placed on non-accrual status generally, when a loan is specifically determined to be impaired the become 90 days past due and/or when management believes that the collection of principal and 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 principal balance, then to the recovery of any previously charged-off principal, 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 factors indicating reasonable doubt about the timely collection of payments no longer exist.
In accordance
ACL on Loans and Leases
The ACL on the loan portfolio is a significant accounting estimate used in the preparation of FNCB's consolidated financial statements. Upon adoption of ASU 2016-13, FNCB replaced the incurred loss impairment model that recognized losses when it became probable that a credit loss would be incurred, with federal regulations, priora requirement to making, extending, renewingrecognize lifetime expected credit losses immediately when a financial asset is originated or advancing additional funds in excess of $500 thousand onpurchased. The ACL is a loan secured by real estate, FNCB requires an appraisal of the property by an independent, state-certified or state-licensed appraiser (depending upon collateral type and loan amount)valuation account that is approved bydeducted from the Boardamortized cost basis of Directors. Appraisals are reviewed internally or by an independent third party engaged by FNCB. Generally, management obtains a new appraisal when a loan is deemed impaired. These appraisals may be more limited in scope than those obtained atloans to present the initial underwriting of the loan.
Troubled Debt Restructurings
FNCB considers a loan to be a troubled debt restructuring (“TDR”) when it grants a concession to the borrower for legal or economic reasons related to the borrower’s financial difficulties that it would not otherwise consider. Such concessions granted generally involve a reduction of the stated interest rate, an extension of a loan’s stated maturity date, a payment modification under a forbearance agreement, a permanent reduction of the recorded investment in the loan, capitalization of real estate taxes, 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.
Loan Impairment
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 thenet 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 operation or liquidation of the collateral held. For impaired loans that are secured by real estate, external appraisals are generally obtained annually, or more frequently as warranted, to ascertain a fair value so that the impairment analysis can be updated. Should a 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. For non-collateral dependent loans, impairment is measured based on the present value of expected future cash flows, net of any deferred feescollected. Loans and costs, discounted at the loan’s original effective interest rate.
Generally, all loans with balances of $100 thousand or less are considered within homogeneous pools and are not individually evaluated for impairment. However, individual loans with balances of $100 thousand or less are individually evaluated for impairment if that loan is part of a larger impaired loan relationship or the loan is a TDR.
Impaired loans,leases, or portions thereof, are charged-off upon determination that all or a portion of the loan balance is uncollectible and exceeds the fair value of the collateral. A loan is considered uncollectible when the borrower is delinquent with respect to principal or interest repayment and it is unlikely that the borrower will have the ability to pay the debt in a timely manner, collateral value is insufficient to cover the outstanding indebtedness and the guarantors (if applicable) do not provide adequate support for the loan.
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 that 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, whileallowance when they are deemed uncollectible. Expected recoveries do not exceed the aggregate of amounts previously charged off and expected to be charged off. The allowance is comprised of reserves measured on a collective or pool basis based on a lifetime loss-rate model when similar risk characteristics exist. Loans that do not share risk characteristics are creditedevaluated on an individual basis. Arriving at an appropriate level of ACL involves a high degree of judgment. While management uses available information to recognize losses on loans, changing economic conditions and the economic prospects of the borrowers may necessitate future additions or reductions 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.
FNCB's allowance methodology consists primarily 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 TDRs are classified as impaired. Based on its evaluation, management may establish an unallocated component that is used to cover any inherent losses that exist as of the evaluation date, but which may not have been identified under the methodology.allowance.
When establishing the ALLL,ACL, management categorizes loans into the following loan segments that are based generally on the nature of the collateral and basis of repayment. The risk characteristics of FNCB’s loan segments are as follows:
Construction, Land Acquisition and Development Loans - These loans consist of loans secured by real estate, with the purpose of constructing one- to four-family homes, residential developments and various commercial properties including shopping centers, hotels, office complexes and single-purpose, owner-occupied structures. Additionally, loans in this category include loans for land acquisition, secured by raw land. FNCB’s construction program offers either short-term, interest-only loans that require the borrower to pay only interest during the construction phase with a balloon payment of the principal outstanding at the end of the construction period or only interest during construction with a conversion to amortizing principal and interest when the construction is complete. Loans for undeveloped real estate are subject to a loan-to-value ratio not to exceed 65%. Construction loans are treated similarly to the developed real estate loans and are subject to a maximum loan to value ratio of 85% based upon an “as-completed” appraised value. Construction loans generally yield a higher interest rate than other mortgage loans but also carry more risk.
Commercial Real Estate Loans - These loans represent the largest portion of FNCB’s total loan portfolio and loans in this portfolio generally carry larger loan balances. The commercial real estate mortgage loan portfolio consists of owner-occupied and non-owner-occupied properties that are secured by a broad range of real estate, including but not limited to, office complexes, shopping centers, hotels, warehouses, gas stations, convenience markets, residential care facilities, nursing care facilities, restaurants and multifamily housing. FNCB offers commercial real estate loans at various rates and terms that do not exceed 25 years. These types of loans are subject to specific loan-to-value guidelines prior to the time of closing. The policy limits for developed real estate loans are subject to a maximum loan-to-value ratio of 85%. Commercial mortgage loans must also meet specific criteria that include the capacity, capital, credit worthiness and cash flow of the borrower and the project being financed. Potential borrower(s) and guarantor(s) are required to provide FNCB with historical and current financial data. As part of the underwriting process for commercial real estate loans, management performs a review of the cash flow analysis of the borrower(s), guarantor(s) and the project in addition to considering the borrower’s expertise, credit history, net worth and the value of the underlying property.
Commercial and Industrial Loans- FNCB offers commercial loans at various rates and terms to businesses located in its primary market area. The commercial loan portfolio includes revolving lines of credit, automobile floor plans, equipment loans, vehicle loans, improvement loans and term loans. These loans generally carry a higher risk than commercial real estate loans by the nature of the underlying collateral, which can be machinery and equipment, inventory, accounts receivable, vehicles or marketable securities. Generally, a collateral lien is placed on the collateral supporting the loan. In order toTo reduce the risk associated with these loans, management may attempt to secure real estate as collateral and obtain personal guarantees of the borrower as deemed necessary.
Commercial Equipment Financing - These loans and leases consist of various equipment financing originated through the Bank's wholly-owned subsidiary, 1st Equipment Finance, Inc. The majority of the loans and leases are originated through third party dealers or equipment manufacturers located outside FNCB's primary market area. Generally, a collateral lien is placed on the collateral supporting the loan. Prior to establishing the subsidiary on October 1, 2023, these loans and leases were included in the commercial and industrial loan segment for establishing the ACL.
State and Political Subdivision Loans - FNCB originates general obligation notes, municipal leases and tax anticipation loans to state and political subdivisions, which are primarily municipalities in FNCB’s market area.
Residential Real Estate Loans - FNCB offers fixed-rate 1 - 4 family residential loans. Residential first lien mortgages are generally subject to an 80% loan to value ratio based on the appraised value of the property. FNCB will generally require the mortgagee to purchase Private Mortgage Insurance if the amount of the loan exceeds the 80% loan to value ratio. Residential mortgage loans are generally smaller in size and are considered homogeneous as they exhibit similar characteristics. FNCB may sell loans and retain servicing when warranted by market conditions. FNCB offers home equity loans, and home equity lines of credit (“HELOCs”) and HELOCs with a "carve out" feature with a maximum combined loan-to-value ratio of 90% based on the appraised value of the property. Home equity loans have fixed rates of interest and carry terms up to 15 years. HELOCs have adjustable interest rates and are based upon the national prime interest rate. Residential mortgage loans, including these home equity loans,loan products, are generally smaller in size and are considered homogeneous as they exhibit similar characteristics.
Consumer Loans – FNCB offers both secured and unsecured installment loans, personal lines of credit and overdraft protection loans. FNCB is in the business of underwriting indirect auto loans which are originated through various auto dealers in northeastern Pennsylvania and dealer floor plan loans. Consumer loans are generally smaller in size and exhibit homogeneous characteristics.
FNCB estimates expected credit losses using the discounted cash flow ("DCF") method for all loan portfolio segments measured on a collective or pool basis. For each loan segment, a cash flow projection is generated at the loan level. Probability of default ("PD") and loss given default ("LGD") assumptions are applied to the pool’s projective model of cash flows taking into consideration the effects of prepayments and principal curtailment effects. The analysis produces expected cash flows for each loan in the pool by pairing loan-level term information (maturity date, payment amount, interest rate, etc.) with top-down pool assumptions (default rates and prepayment speeds).
For LGD assumptions, management has determined that peer loss experience provides the best basis for its assessment of expected credit losses to determine the ACL. FNCB utilizes peer call report data to measure historical credit loss experience with similar risk characteristics within the segments over an economic cycle. Management reviews the historical loss information to appropriately adjust for differences in current asset specific risk characteristics. With regard to PD assumptions, management also considered further adjustments to historical loss information for current conditions and reasonable and supportable forecasts that differ from the conditions that existed for the period over which historical information was evaluated. For all segment models for collectively evaluated loans, FNCB incorporates one macroeconomic driver, the national unemployment rate, using a statistical regression modeling methodology. Management determined that four quarters currently represents a reasonable and supportable forecast period. For the contractual term that extend beyond the reasonable and supportable forecast period, FNCB reverts to historical loss information within eight quarters using a straight-line approach. Management may apply different reversion techniques depending on the economic environment for the financial asset portfolio and as of the current period has utilized a linear reversion technique.
Management also considers the following qualitative factors in its evaluation of expected credit losses for each of the major portfolio segments: (i) changes in the credit quality a respective segment which are measured by risk ratings for commercial loans and FICO scores for residential real estate loans and consumer loans, (ii) changes in independent third-party loan reviews and regulatory exam ratings, (iii) changes in local unemployment rates, (iv) changes in the level of delinquent loans and nonaccrual loans as a percentage of the portfolio segment, (v) segment growth rates, (vi) concentrations as a percentage of Tier I Capital plus the ACL, and (vii) other external factors that may affect bank lending and operations such as a pandemic, natural disaster, or loss of a major employer, among others. For the commercial and industrial loans, commercial real estate loans, construction, land acquisition and development loans, commercial equipment finance loans and leases and state and political subdivision loans and leases management also considers the percentage of criticized loans to total loans by segment. For commercial equipment financing loans and leases management considers concentrations of loan deliquencies by NACIS code. Qualitative factors are weighted equally and stratified by no risk, minor risk and major risk for each portfolio segment.
Accrued interest receivable on loans and leases, included in accrued interest receivable on the consolidated statements of condition, is excluded from the estimate of credit losses.
Individually Evaluated Loans
Prior to the adoption of ASU 2016-13 on January 1, 2023, a loan was individually evaluated when the loan was considered impaired. A loan was considered to be impaired when based on current information and events, it was probable that FNCB would not be able to collect all amounts due from the borrower in accordance with the contractual terms of the loan, including scheduled interest payments.
With the adoption of ASU 2016-13, loans that do not share risk characteristics with existing pools are evaluated on an individual basis. FNCB considers a loan to be collateral dependent when management has determined that foreclosure of the collateral is probable, or where the borrower is experiencing financial difficulty and repayment of the financial asset to expected to be provided substantially through the operation or sale of the collateral. When repayment is expected to be from the operation of the collateral, the specific credit loss reserve is calculated as the amount by which the amortized cost basis of the financial asset exceeds the net present value from the operation of the collateral. When repayment is expected to be from the sale of the collateral, the specific credit loss reserve is calculated as the amount by which the amortized cost basis of the financial asset exceeds the fair value of the underlying collateral less estimated cost to sell. The allowance may be zero if the fair value of the collateral at the measurement date exceeds the amortized cost basis of the financial asset.
Off-Balance-Sheet Credit-Related Financial InstrumentsACL for Unfunded Commitments
FNCBThe exposure is a party tocomponent of other liabilities on FNCB’s consolidated statement of financial instruments with off-balance sheet riskcondition and represents the estimate for probable credit losses inherent in the normal course of business to meet the financing need of its customers. These financial instruments includeunfunded commitments to extend credit. Unfunded commitments to extend credit include unused portions of lines of credit, including revolving HELOCs,availability on construction and land development loans and standby and commercial letters of credit. FNCB’s exposureThe process used to credit loss indetermine the event of nonperformance byACL for these exposures is consistent with the other partyprocess for determining the allowance for loans, as adjusted for estimated funding probabilities or loan equivalency factors. A charge (credit) to the financial instrument is represented by the contractual notional amount of these instruments. FNCB uses the same credit policies in making these commitments as it does for on-balance sheet instruments. In order to provide for probable losses inherent in these instruments, FNCB records a reserveprovision for unfunded commitments includedon the consolidated statements of income is made to account for the change in other liabilitiesthe ACL on unfunded commitment exposures between reporting periods.
Impact of Adoption of ASU 2016-13
The following table below presents the impact of the adoption of ASU 2016-13 on the consolidated statements of financial condition,condition:
January 1, 2023 | ||||||||||||
(in thousands) | As reported Under ASU 2016-13 | Pre-ASU 2016-13 | Impact of ASU 2016-13 | |||||||||
Assets: | ||||||||||||
ACL on loans and leases: | ||||||||||||
Residential real estate | $ | (1,187 | ) | $ | (2,215 | ) | $ | 1,028 | ||||
Commercial real estate | (2,579 | ) | (4,193 | ) | 1,614 | |||||||
Construction, land acquisition and development | (1,814 | ) | (747 | ) | (1,067 | ) | ||||||
Commercial and industrial | (3,887 | ) | (4,099 | ) | 212 | |||||||
Consumer | (1,677 | ) | (1,307 | ) | (370 | ) | ||||||
State and political subdivisions | (413 | ) | (503 | ) | 90 | |||||||
Unallocated | - | (1,129 | ) | 1,129 | ||||||||
Total ACL on loans | $ | (11,557 | ) | (14,193 | ) | $ | 2,636 | |||||
Deferred income taxes | $ | 15,759 | $ | 16,046 | $ | (287 | ) | |||||
Liabilities: | ||||||||||||
Liability for credit losses for unfunded commitments | $ | (2,217 | ) | $ | (948 | ) | $ | (1,269 | ) | |||
Shareholders' equity: | ||||||||||||
Retained earnings | $ | (65,953 | ) | $ | (64,873 | ) | $ | (1,080 | ) | |||
Concurrently with adopting ASU 2016-13, FNCB adopted ASU 2022-02, Financial Instruments—Credit Losses (Topic 326): "Troubled Debt Restructurings and Vintage Disclosures." ASU 2022-02 eliminated the troubled debt restructuring ("TDR") recognition and measurement guidance and, instead, requires that an entity evaluate (consistent with the offsetting expense recordedaccounting for other loan modifications) whether the modification represents a new loan or a continuation of an existing loan. This guidance also enhances existing disclosure requirements and introduces new requirements related to certain modifications of receivables made to borrowers experiencing financial difficulty. For public business entities, including FNCB, ASU 2022-02 requires that an entity disclose current-period gross charge-offs by year of origination for financing receivables and net investment in other operating expensesleases within the scope of Subtopic 326-20. Gross charge-off information must be included in the consolidated statementsvintage 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 income.financing receivables by credit quality indicator and class of financing receivable by year of origination.
Mortgage Banking Activities, Loan Sales and Servicing
FNCB originates 1- 4 family mortgage loans for sale on the secondary market. Mortgage loans originated and held for sale are carried at the lower of aggregate cost or fair value determined on an individual loan basis. In 2023, FNCB entered into a correspondent relationship with a third-party mortgage company and began selling 1- 4 family mortgage loans through this company with servicing released. Net unrealized losses are recorded as a valuation allowance and charged to earnings. Gains and losses on sales of mortgage loans are based on the difference between the selling price and the carrying value of the related loan sold and include the value assigned to the rights to service the loan.
FNCB may also elect to sell the guaranteed principal balance of loans that are guaranteed by the Small Business Administration (“SBA”) and retain the servicing on those loans.
Servicing rights areon 1- 4 family mortgages originated and sold prior to 2023 were recorded at fair value upon sale of the loan and reported in other assets on the consolidated statements of financial condition. Servicing rights are amortized in proportion to and over the period during which estimated servicing income will be received.
Fair value is based on market prices for comparable servicing contracts, when available, or alternately, is based on a valuation model that calculates the present value of estimated future net servicing income. The valuation model incorporates assumptions that market participants would use in estimating future net servicing income, such as the cost to service, the discount rate, the custodial earnings rate, an inflation rate, ancillary income, prepayment speeds and default rates and losses.
Servicing rights are evaluated for impairment at each reporting date based upon the fair value of the rights as compared to amortized cost. Impairment is determined by stratifying rights into tranches based on predominant risk characteristics, such as interest rate, loan type and investor type. Impairment is recognized through a valuation allowance for an individual tranche, to the extent that fair value is less than the capitalized amount for the tranche. If management later determines that all or a portion of the impairment no longer exists for a particular tranche, a reduction of the allowance may be recorded as an increase to income.
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 operations 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.ACL. 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. There were no properties held in OREO at December 31, 2023 and 2022.
Bank Premises and Equipment
Land is stated at cost. Bank premises, equipment and leasehold improvements are stated at cost less accumulated depreciation. Costs for routine maintenance and repairs are expensed as incurred, while significant expenditures for improvements are capitalized. Depreciation expense is computed generally using the straight-line method over the following ranges of estimated useful lives, or in the case of leasehold improvements, to the expected terms of the leases, if shorter:
Buildings and improvements (years) | 5 | to | 40 |
Furniture, fixtures and equipment (years) | 3 | to | 20 |
Leasehold improvements (years) | 3 | to | 35 |
Long-lived Assets
Intangible assets and bank premises and equipment are reviewed by management at least annually for potential impairment and whenever events or circumstances indicate that carrying amounts may not be recoverable.
Income Taxes
FNCB recognizes income taxes under the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more-likely-than-more likely than not that all or some portion of the deferred tax assets will not be realized.
FNCB files a consolidated federalfederal income tax return. Under tax sharing agreements, each subsidiary provides for and settles income taxes with FNCB as if it would have filed on a separate return basis. Interest and penalties, if any, as a result of a taxing authority examination are recognized within non-interest expense. FNCB is not currently subject to an audit by any of its tax authorities and with limited exception is no longer subject to federal and state income tax examinations by taxing authorities for years before 2017.2020.
When tax returns are filed, it is highly certain that some positions taken would be sustained upon examination by the taxing authorities, while others are subject to uncertainty about the merits of the position taken or the amount of the position that would be ultimately sustained. The benefit of a tax position is recognized in the financial statements in the period during which, based on all available evidence, management believes it is more-likely-than-not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any. Tax positions taken are not offset or aggregated with other positions. Tax positions that meet the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that is more than 50% likely of being realized upon settlement with the applicable taxing authority. The portion of the benefits associated with tax positions taken that exceeds the amount measured as described above is reflected as a liability for unrecognized tax benefits along with any associated interest and penalties that would be payable to the taxing authorities upon examination. Management determined that FNCB had 0no liabilities for uncertain tax positions at December 31, 20202023 and 20192022.
Earnings per Share
Earnings per share is calculated on the basis of the weighted-average number of common shares outstanding during the year. Basic earnings per share excludes dilution and is computed by dividing net income available to common shareholders by the weighted-average common shares outstanding during the period. Diluted earnings per share reflect additional shares that would have been outstanding if dilutive potential common shares had been issued. Potential common shares that may be issued by FNCB relate to shares of unvested restricted stock for which the dilutive effect is calculated using the treasury stock method.
Stock-Based Compensation
FNCB recognizes all share-based payments for compensation in the consolidated statements of income based on their fair values on the grant date. The fair value of shares of unrestricted and restricted stock and awarded under the FNCB Bancorp, Inc. Equity Incentive Plan ("EIP"), formerly the Long Term Incentive Compensation Plan (“LTIP”), is determined using an average of the high and low prices for FNCB’s common stock for the 10 days preceding the grant date. Stock-based compensation expense for unrestricted stock is recognized on the grant date. For restricted stock, stock-based compensation expense is recognized ratably over the vesting period, adjusted for forfeitures during the period in which they occur.
Bank-Owned Life Insurance
Bank-owned life insurance (“BOLI”) represents the cash surrender value of life insurance policies on certain current and former directors and officers of FNCB. FNCB purchased the insurance as a tax-deferred investment and future source of funding for liabilities, including the payment of employee benefits such as health care. BOLI is carried in the consolidated statements of financial condition at its cash surrender value. Increases in the cash value of the policies, as well as proceeds received, are recorded in non-interest income. Under some of these policies, the beneficiaries receive a portion of the death benefit. The net present value of the future death benefits scheduled to be paid to the beneficiaries was $116$104 thousand and $113$101 thousand at December 31, 20202023 and 20192022, respectively, and is reflected in other liabilities on the consolidated statements of financial condition.
Fair Value Measurement
FNCB uses fair value measurements to record fair value adjustments to certain financial assets and liabilities and to determine fair value disclosures. Available-for-sale debt securities and derivative contracts are recorded at fair value on a recurring basis. Additionally, from time to time, FNCB may be required to recognize adjustments to other assets at fair value on a nonrecurring basis, such as impairedcollateral-dependent loans, other securities, OREO and OREO.other repossessed assets.
Fair value is the price that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market in an orderly transaction between market participants at the measurement date. An orderly transaction is a transaction that assumes exposure to the market for a period prior to the measurement date to allow for marketing activities that are usual and customary for transactions involving such assets or liabilities; it is not a forced transaction.
Accounting standards define fair value, establish a framework for measuring fair value, establish a three-level hierarchy for disclosure of fair value measurement and provide disclosure requirements about fair value measurements. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date.
The three levels of the fair value hierarchy are:
● | 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. |
Revenue Recognition
FNCB records revenue from contracts with customers in accordance with ASC 606, "Revenue from Contracts with Customers." FNCB recognizes revenues as they are earned based on contractual terms, as transactions occur, or as services are provided and collectability is reasonably assured. FNCB's primary source of revenue is interest income from the Bank's loans, and investment securities and other financial instruments, which are not within the scope of ASC 606. FNCB has evaluated the nature of its contracts with customers and determined that further disaggregation of revenue from contracts with customers into more granular categories beyond what is recognizedpresented in the consolidated statements of income was not necessary. In general, FNCB fully satisfies its performance obligations on its contracts with customers as services are rendered and the accrualtransaction prices are typically fixed and charged either on a periodic basis primarilyor based on terms in written contracts such as loan agreements or securities contracts.activity. FNCB also earns non-interest income from various banking services offered by the Bank and other transactions that are within the scope of ASC 606 as follows:
● | Deposit service charges - include general service fees for monthly account maintenance, account analysis fees, non-sufficient funds fees, wire transfer fees and other deposit account related fees. Revenue is recognized when FNCB’s performance obligation is completed which is generally monthly for account maintenance services or when a transaction has been completed (such as a wire transfer). Payment for service charges on deposit accounts is received immediately or in the following month through a direct charge to customers’ accounts. Also included in deposit service charges is income from ATM surcharges and debit card services income. ATM surcharges are generated when an FNCB cardholder uses an ATM that is not within the AllPoint ATM network or a non-FNCB cardholder uses an FNCB ATM. Card services income is primarily comprised of interchange fees earned whenever a customer uses an FNCB debit card as payment for goods and/or services through a card payment |
● | Net gains (losses) on the sale of |
| ● | ||
● |
| |
| ● | Loan-related fees - include servicing fees received on loans sold for which FNCB has retained the servicing, net of amortization for mortgage servicing rights. | |
| ● | Merchant services revenue - Merchant services fees represent interchange revenue generated from the processing of merchant card payments on behalf of certain business customers. Merchant services fee income is transactional in nature and | |
| ● | Wealth management |
● | Other income – primarily includes interest rate swap revenue and title insurance revenue. Interest rate swap revenue represents net fees FNCB receives from a counterparty for completing loan swap transactions, which FNCB receives at the time the loan closes. Interest rate swap revenue is non-refundable, is not tied to the loan and FNCB has no future obligation to the counterparty related to such fees. Accordingly, FNCB records interest rate swap revenue in non-interest income upon receipt. With regard to title insurance revenue, FNCB is a member in a limited liability company that provides title insurance services to customers referred by member financial institutions. In accordance with an operating agreement, the title insurance company makes quarterly discretionary distributions to member institutions on a pro-rata basis based on their respective membership interest percentage at the time of distribution. FNCB’s performance obligation under the operating agreement was satisfied with its capital contribution. There are no future minimum referral quotas required under the operating agreement. FNCB records revenue from quarterly distributions at the time of receipt. |
Comprehensive Income
Accounting principles generally require that recognized revenue, expenses, gains and losses be included in net income. Although certain changes in assets and liabilities, such as unrealized gains and losses on available-for-sale securities, are reported as a separate component of the shareholders’ equity section of the statement of financial condition, such items, along with net income, are components of comprehensive income.income (loss).
New AuthoritativeRecent Accounting GuidancePronouncements
Accounting Standards Update (“ASU”("ASU")2020-04, Reference Rate Reform (Topic 848): “Facilitation of the Effects of Reference Rate Reform on Financial Reporting,” provides optional guidance for a limited period of time to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting. It provides optional expedients and exceptions for applying generally accepted accounting principles to contracts, hedging relationships and other transactions affected by reference rate reform if certain criteria are met. The amendments in ASU 2020-04 were effective upon issuance. On January 7, 2021, the FASB issued ASU 2021-01, Reference Rate Reform (Topic 848) that clarifies that certain optional expedients and exceptions provided for in ASU 2020-04 also apply to derivatives that do not reference a rate that is being discontinued but otherwise are affected by reference rate reform. ASU 2021-01 clarifies that changes in the interest rates used for margining, discounting, or contract price alignment for derivative instruments that are being implemented as part of the market-wide transition to new reference rates, commonly referred to as the "discounting transition," are within the scope of Topic 848. ASU 2021-01 was effective upon issuance. As part of its overall evaluation of reference rate reform, management is still evaluating the impact that LIBOR replacement will have on FNCB's operating results and financial position. Any such impacts will be prospective in nature and may affect net interest income and fair value estimates after the effective date of such rate replacement. The LIBOR replacement is not expected to have a material effect on the operating results or financial position of FNCB.
Accounting Guidance to be Adopted in Future Periods
ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): “Measurement of Credit Losses on Financial Instruments,” replacesreplaced 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")CECL and will requirerequires that 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, 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 Financial Accounting Standards Board ("FASB") issued ASU 2019-10, "Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842): Effective Dates," which finalized various effective dates delay 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 isAs a smaller reporting company, and accordingly, will adoptFNCB adopted this guidance on January 1, 2023. FNCB has created 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 provisionsadoption of ASU 2016-13 primarily changed the impairment model for most financial assets that are measured at amortized cost and is currently incertain other instruments from an incurred loss model to an expected loss model. FNCB completed implementation including the processdevelopment of implementingformal policies and procedures and governance and internal control documentation. In addition, FNCB had the model tested and validated by an independent third-party consultant pre- and post-implementation. FNCB applied the new guidance which includes, but isusing the modified-retrospective approach. Related to the implementation, FNCB recorded a reduction in the ACL on loans and leases of $2.6 million, additional reserves for unfunded commitments of $1.3 million, a reduction in deferred tax assets of $287 thousand, and an increase to retained earnings of $1.1 million. The adoption of ASU 2016-13 did not limited to: (1) identifying segments and sub-segments within the loan portfolio that have similar risk characteristics; (2) determining the appropriate methodology for each segment; (3) implementing changes that are necessary to its core operating system and interfaces to be able to capture appropriate data requirements; and (4) evaluating qualitative factors and economic to develop appropriate forecasts for integration into the model. FNCB is currently evaluating thea material effect this guidance may have on its operating results and/or financial position, including assessing any potential impact on its capital.FNCB's available-for-sale debt securities.
ASU 20202022-0102, Investments - Investments-Equity SecuritiesFinancial Instruments—Credit Losses (Topic 321326), Investments-Equity: "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 adopted ASU 2022-02 on January 1, 2023. The adoption of these guidance did not have a material impact on FNCB's operating results or financial or financial position.
ASU No.2023-02 “Investments-Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic: Accounting for Investments in Tax Credit Structures Using the Proportional Amortization Method” (“ASU 8152023-02”). The new guidance addresses accounting permits companies to account for the transition into and outtax equity investments, regardless of the equitytax credit program from which the income tax credits are received, using the proportional amortization method and measuringif certain purchase options and forward contracts to acquire investments. If a company is applying the measurement alternative for an equity investment under ASC 321 and must transition to the equity method, or if applying the equity method and must transition to ASC 321; because of an observable transaction, it will remeasure its investment immediately before transition. If a company holds certain non-derivative forward contracts or purchased call options to acquire equity securities, such instruments generallyconditions are met. The amendments in this standard will be measured using the fair value principles of ASC 321 before settlement or exercise. ASU 2020-01 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020 for public business entities, and for fiscal years, and interim periods within those fiscal years beginning after December 15, 2021 for all other entities. Early adoption is permitted. The adoption of this guidanceFNCB on January 1, 20222024. isFNCB does not expected tobelieve this standard will have a material effectimpact on its consolidated financial statements.
ASU No.2023-06 “Disclosure Improvements - Codification Amendments in Response to the operating resultsSEC’s Disclosure Update and Simplification Initiative” (“ASU 2023-06”) amends the ASC to incorporate certain disclosure requirements from SEC Release No.33-10532 - Disclosure Update and Simplification that was issued in 2018. The effective date for each amendment will be the date on which the SEC’s removal of that related disclosure from Regulation S-X or Regulation S-K becomes effective, with early adoption prohibited. FNCB does not believe this standard will have a material impact on its consolidated financial positionstatements.
ASU No.2023-07 “Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures” (“ASU 2023-07”) improves reportable segment disclosure requirements, primarily through enhanced disclosures about significant segment expenses. The amendments in this standard will be effective for FNCB for the fiscal year ended December 31, 2024 and subsequent interim periods. The amendments will be applied retrospectively to all prior periods in the consolidated financial statements. FNCB does not believe this standard will have a material impact on its consolidated financial statements and related disclosures.
ASU No.2023-09 “Income Taxes (Topic 740): Improvements to Income Tax Disclosures” (“ASU 2023-09”) requires enhanced income tax disclosures primarily related to the rate reconciliation and income taxes paid information to provide more transparency by requiring (i) consistent categories and greater disaggregation of FNCB.information in the rate reconciliation table and (ii) income taxes paid, net of refunds, to be disaggregated by jurisdiction based on an established threshold. The amendments in this standard will be effective for FNCB on January 1, 2025. FNCB is currently evaluating the impact the amendments will have on its consolidated financial statements and related disclosures.
Note 3.3 RESTRICTED CASH BALANCES
On March 26, 2020, the Board of Governors of the Federal Reserve System eliminated the reserve requirement for all depository institutions. Prior to this date, FNCB was required to maintain average reserve balances as established by the Federal Reserve Bank. The required reserve balance was $1.6million at December 31, 2019, which was satisfied through the restriction of vault cash and deposits maintained at the Federal Reserve Bank.
In addition, FNCB maintains compensating balances at correspondent banks, most of which are not required, but are used to offset specific charges for services. At December 31, 2020 and 2019, the amount of these balances were $4.5million and $1.2 million, respectively.
Note 4.. SECURITIES
Debt Securities
The following tables present the amortized cost, gross unrealized gains and losses, and the fair value of FNCB’sFNCB’s available-for-sale debt securities at December 31, 20202023 and 20192022:
December 31, 2020 | December 31, 2023 | |||||||||||||||||||||||||||||||
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 | $ | 36,852 | $ | - | $ | 3,675 | $ | 33,177 | ||||||||||||||||||||||||
Obligations of state and political subdivisions | $ | 192,851 | $ | 13,012 | $ | 35 | $ | 205,828 | 220,181 | 52 | 20,437 | 199,796 | ||||||||||||||||||||
U.S. government/government-sponsored agencies: | ||||||||||||||||||||||||||||||||
Collateralized mortgage obligations - residential | 54,091 | 2,940 | 59 | 56,972 | 87,405 | - | 13,198 | 74,207 | ||||||||||||||||||||||||
Collateralized mortgage obligations - commercial | 3,721 | 183 | 0 | 3,904 | 3,613 | - | 227 | 3,386 | ||||||||||||||||||||||||
Mortgage-backed securities | 12,452 | 588 | 14 | 13,026 | 18,872 | 4 | 2,430 | 16,446 | ||||||||||||||||||||||||
Private collateralized mortgage obligations | 37,926 | 352 | 79 | 38,199 | 76,912 | 78 | 6,838 | 70,152 | ||||||||||||||||||||||||
Corporate debt securities | 23,800 | 790 | 10 | 24,580 | 35,055 | - | 3,769 | 31,286 | ||||||||||||||||||||||||
Asset-backed securities | 7,505 | 46 | 25 | 7,526 | 21,768 | 67 | 145 | 21,690 | ||||||||||||||||||||||||
Negotiable certificates of deposit | 0 | 0 | 0 | 0 | 744 | - | 70 | 674 | ||||||||||||||||||||||||
Total available-for-sale debt securities | $ | 332,346 | $ | 17,911 | $ | 222 | $ | 350,035 | $ | 501,402 | $ | 201 | $ | 50,789 | $ | 450,814 | ||||||||||||||||
December 31, 2019 | December 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 | $ | 36,801 | $ | - | $ | 4,667 | $ | 32,134 | ||||||||||||||||||||||||
Obligations of state and political subdivisions | $ | 115,428 | $ | 2,694 | $ | 359 | $ | 117,763 | 250,244 | 90 | 29,552 | 220,782 | ||||||||||||||||||||
U.S. government/government-sponsored agencies: | ||||||||||||||||||||||||||||||||
Collateralized mortgage obligations - residential | 79,606 | 780 | 92 | 80,294 | 93,577 | - | 13,170 | 80,407 | ||||||||||||||||||||||||
Collateralized mortgage obligations - commercial | 17,414 | 320 | 11 | 17,723 | 3,649 | - | 320 | 3,329 | ||||||||||||||||||||||||
Mortgage-backed securities | 18,142 | 343 | 0 | 18,485 | 23,332 | 1 | 2,670 | 20,663 | ||||||||||||||||||||||||
| Private collateralized mortgage obligations | 25,069 | 49 | 43 | 25,075 | 80,648 | - | 8,141 | 72,507 | ||||||||||||||||||||||||
Corporate debt securities | 7,000 | 182 | 0 | 7,182 | 33,630 | - | 2,958 | 30,672 | ||||||||||||||||||||||||
Asset-backed securities | 5,618 | 4 | 1 | 5,621 | 15,287 | 5 | 351 | 14,941 | ||||||||||||||||||||||||
Negotiable certificates of deposit | 694 | 2 | 0 | 696 | 744 | - | 88 | 656 | ||||||||||||||||||||||||
Total available-for-sale debt securities | $ | 268,971 | $ | 4,374 | $ | 506 | $ | 272,839 | $ | 537,912 | $ | 96 | $ | 61,917 | $ | 476,091 | ||||||||||||||||
Except for securities of U.S. government and government-sponsored agencies, there were no securities of any individual issuer that exceeded 10.0% of shareholders’ equity at December 31, 20202023or 20192022.
$326.9 million at December 31, 2023 and $357.2 million at December 31, 2022 were pledged to collateralize certain municipal deposits. In addition, FNCB obtains letters of credit from the FHLB of Pittsburgh to secure certain municipal deposits of school district customers who agree to the use of the FHLB letters of credit. These FHLB letters of credit totaled $91.5 million and $47.5 million at December 31, 2023 and 2022, respectively.
The following table presents the maturity information of FNCB’s available-for-sale debt securities at December 31, 20202023. Expected maturities will differ from contractual maturitymaturities 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.
December 31, 2020 | ||||||||||||||||
Available-for-Sale | December 31, 2023 | |||||||||||||||
Amortized | Fair | Amortized | Fair | |||||||||||||
(in thousands) | Cost | Value | Cost | Value | ||||||||||||
Available -for-sale debt securities: | ||||||||||||||||
Amounts maturing in: | ||||||||||||||||
One year or less | $ | 4,663 | $ | 4,718 | $ | 16,143 | $ | 15,954 | ||||||||
After one year through five years | 61,851 | 66,433 | 80,109 | 75,005 | ||||||||||||
After five years through ten years | 44,805 | 47,397 | 90,632 | 78,161 | ||||||||||||
After ten years | 105,332 | 111,860 | 105,948 | 95,813 | ||||||||||||
Asset-backed securities | 7,505 | 7,526 | ||||||||||||||
Collateralized mortgage obligations | 95,738 | 99,075 | 167,930 | 147,745 | ||||||||||||
Mortgage-backed securities | 12,452 | 13,026 | 18,872 | 16,446 | ||||||||||||
Asset-backed securities | 21,768 | 21,690 | ||||||||||||||
Total | $ | 332,346 | $ | 350,035 | $ | 501,402 | $ | 450,814 | ||||||||
The following table presents the gross proceeds received and gross realized gains and losses on salesthe sale and redemption of available-for-sale debt securities for the years ended December 31, 20202023 and 20192022.:
Year Ended December 31, | Year Ended December 31, | |||||||||||||||
(in thousands) | 2020 | 2019 | 2023 | 2022 | ||||||||||||
Available-for-sale debt securities: | ||||||||||||||||
Gross proceeds received on sales | $ | 68,256 | $ | 128,233 | $ | 10,394 | $ | 14,004 | ||||||||
| Gross proceeds received on redemption | 1,015 | 0 | ||||||||||||||
Gross realized gains on sales | 1,686 | 1,257 | 252 | 78 | ||||||||||||
| Gross realized losses on sales | (173 | ) | (30 | ) | - | (301 | ) | |||||||||
| Gross realized gain on redemption | 15 | 0 | ||||||||||||||
The following tables present the number, of, fair value and gross unrealized losses of available-for-sale debt securities within an unrealized lossesloss position at December 31, 20202023 and 20192022, aggregated by investment category and length of time the securities have been in an unrealized loss position.position:
December 31, 2020 | December 31, 2023 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Less than 12 Months | 12 Months or Greater | Total | Less than 12 Months | 12 Months or Longer | 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. Treasuries | - | $ | - | $ | - | 17 | $ | 33,177 | $ | 3,675 | 17 | $ | 33,177 | $ | 3,675 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Obligations of state and political subdivisions | 6 | $ | 4,541 | $ | 35 | 0 | $ | 0 | $ | 0 | 6 | $ | 4,541 | $ | 35 | 1 | 2,121 | 16 | 193 | 195,153 | 20,421 | 194 | 197,274 | 20,437 | ||||||||||||||||||||||||||||||||||||||||||||||||
U.S. government/government-sponsored agencies: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Collateralized mortgage obligations - residential | 2 | 7,019 | 59 | 0 | 0 | 0 | 2 | 7,019 | 59 | - | - | - | 42 | 74,207 | 13,198 | 42 | 74,207 | 13,198 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Collateralized mortgage obligations - commercial | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | - | - | - | 3 | 3,386 | 227 | 3 | 3,386 | 227 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Mortgage-backed securities | 1 | 2,103 | 14 | 0 | 0 | 0 | 1 | 2,103 | 14 | 1 | 3,800 | 54 | 12 | 12,552 | 2,376 | 13 | 16,352 | 2,430 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Private collateralized mortgage obligations | 3 | 7,857 | 42 | 1 | 2,256 | 37 | 4 | 10,113 | 79 | 3 | 5,670 | 131 | 52 | 58,846 | 6,707 | 55 | 64,516 | 6,838 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Corporate debt securities | 2 | 1,739 | 10 | 0 | 0 | 0 | 2 | 1,739 | 10 | 1 | 1,467 | 33 | 29 | 29,819 | 3,736 | 30 | 31,286 | 3,769 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Asset-backed securities | 2 | 746 | 13 | 1 | 1,591 | 12 | 3 | 2,337 | 25 | 2 | 3,482 | 15 | 10 | 9,660 | 130 | 12 | 13,142 | 145 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Negotiable certificates of deposit | - | - | - | 3 | 674 | 70 | 3 | 674 | 70 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total | 16 | $ | 24,005 | $ | 173 | 2 | $ | 3,847 | $ | 49 | 18 | $ | 27,852 | $ | 222 | 8 | $ | 16,540 | $ | 249 | 361 | $ | 417,474 | $ | 50,540 | 369 | $ | 434,014 | $ | 50,789 | ||||||||||||||||||||||||||||||||||||||||||
December 31, 2019 | ||||||||||||||||||||||||||||||||||||
Less than 12 Months | 12 Months or Greater | Total | ||||||||||||||||||||||||||||||||||
Number | Gross | Number | Gross | Number | Gross | |||||||||||||||||||||||||||||||
of | Fair | Unrealized | of | Fair | Unrealized | of | Fair | Unrealized | ||||||||||||||||||||||||||||
(dollars in thousands) | Securities | Value | Losses | Securities | Value | Losses | Securities | Value | Losses | |||||||||||||||||||||||||||
Obligations of state and political subdivisions | 10 | $ | 19,436 | $ | 359 | 0 | $ | 0 | $ | 0 | 10 | $ | 19,436 | $ | 359 | |||||||||||||||||||||
U.S. government/government-sponsored agencies: | ||||||||||||||||||||||||||||||||||||
Collateralized mortgage obligations - residential | 4 | 19,934 | 92 | 0 | 0 | 0 | 4 | 19,934 | 92 | |||||||||||||||||||||||||||
Collateralized mortgage obligations - commercial | 1 | 2,500 | 11 | 0 | 0 | 0 | 1 | 2,500 | 11 | |||||||||||||||||||||||||||
Mortgage-backed securities | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | |||||||||||||||||||||||||||
Private collateralized mortgage obligations | 4 | 18,990 | 43 | 0 | 0 | 0 | 4 | 18,990 | 43 | |||||||||||||||||||||||||||
Corporate debt securities | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | |||||||||||||||||||||||||||
Asset-backed securities | 2 | 888 | 1 | 0 | 0 | 0 | 2 | 888 | 1 | |||||||||||||||||||||||||||
Negotiable certificates of deposit | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | |||||||||||||||||||||||||||
Total | 21 | $ | 61,748 | $ | 506 | 0 | $ | 0 | $ | 0 | 21 | $ | 61,748 | $ | 506 | |||||||||||||||||||||
December 31, 2022 | ||||||||||||||||||||||||||||||||||||
Less than 12 Months | 12 Months or Longer | Total | ||||||||||||||||||||||||||||||||||
Number | Gross | Number | Gross | Number | Gross | |||||||||||||||||||||||||||||||
of | Fair | Unrealized | of | Fair | Unrealized | of | Fair | Unrealized | ||||||||||||||||||||||||||||
(dollars in thousands) | Securities | Value | Losses | Securities | Value | Losses | Securities | Value | Losses | |||||||||||||||||||||||||||
U.S. Treasuries | - | $ | - | $ | - | 17 | $ | 32,134 | $ | 4,667 | 17 | $ | 32,134 | $ | 4,667 | |||||||||||||||||||||
Obligations of state and political subdivisions | 128 | 146,932 | 12,751 | 94 | 69,872 | 16,801 | 222 | 216,804 | 29,552 | |||||||||||||||||||||||||||
U.S. government/government-sponsored agencies: | ||||||||||||||||||||||||||||||||||||
Collateralized mortgage obligations - residential | 16 | 26,826 | 3,407 | 26 | 53,581 | 9,763 | 42 | 80,407 | 13,170 | |||||||||||||||||||||||||||
Collateralized mortgage obligations - commercial | 2 | 1,911 | 94 | 1 | 1,418 | 226 | 3 | 3,329 | 320 | |||||||||||||||||||||||||||
Mortgage-backed securities | 7 | 8,569 | 219 | 7 | 11,998 | 2,451 | 14 | 20,567 | 2,670 | |||||||||||||||||||||||||||
Private collateralized mortgage obligations | 29 | 27,705 | 1,213 | 28 | 42,819 | 6,928 | 57 | 70,524 | 8,141 | |||||||||||||||||||||||||||
Corporate debt securities | 18 | 21,325 | 1,805 | 11 | 9,347 | 1,153 | 29 | 30,672 | 2,958 | |||||||||||||||||||||||||||
Asset-backed securities | 5 | 7,295 | 179 | 5 | 3,988 | 172 | 10 | 11,283 | 351 | |||||||||||||||||||||||||||
Negotiable certificates of deposit | - | - | - | 3 | 656 | 88 | 3 | 656 | 88 | |||||||||||||||||||||||||||
Total | 205 | $ | 240,563 | $ | 19,668 | 192 | $ | 225,813 | $ | 42,249 | 397 | $ | 466,376 | $ | 61,917 | |||||||||||||||||||||
ManagementEvaluation for Credit Impairment - Available-for-Sale Debt Securities
Quarterly, or more frequently if market conditions warrant, management evaluates individualsecurities for impairment where there has been a decline in fair value of a security below its amortized cost basis to determine whether the decline in fair value has resulted from a credit loss, or if it is entirely the result of noncredit-related factors. At December 31, 2023, there were 369 available-for-sale debt securities in an unrealized loss position quarterly for OTTI.position. As part of its quarterly evaluation of these securities for impairment at December 31, 2023, management considers,first determined that FNCB did not intend to sell, nor was it more likely than not that it would be required to sell, any security in an unrealized loss position prior to recovery of its amortized cost. Management then considered, among other things, the length of time a security’ssecurity’s fair value is less than its amortized cost, the severity of decline, any credit deteriorationadverse conditions related to the security, an industry or geographic area, any adverse changes to the rating of the issuer,any security by a rating agency, whether or not management intendsany issuer has failed to sell the security,make contractual principal and whether it is more likely thaninterest payments, or if there are any indications that an issuer would not that FNCB will be requiredable to sell the security prior to recovery of its amortized cost.
make future contractual principal and interest payments. Management performed a review of all securities in an unrealized loss position as of December 31, 2020and determined that movements in the fair values of the securities were consistent with changes in market interest rates or market disruption stemming from the COVID-19 global pandemic. In addition, as part of its review, managementalso 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 anunrealized loss position at December 31, 20202023. . 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 changes in the individual unrealized losses were temporary and OTTI did not exist at December 31, 2020.
Equity Securities and Equity Securities without Readily Determinable Fair Value
Equity Securities
Included in equity securities with readily determinable fair values at December 18, 2019,31, this privately held bank holding company had entered into an Agreement2023 and PlanDecember 31, 2022 were investments in the common or preferred stock of Merger (“Merger Agreement”) with a publicly traded bank holding company. The Merger Agreement provided for the privately held bank holding company to merge withcompanies and into the publicly traded bank holding company, the company surviving the merger (“surviving company”). The surviving company's common stock trades on Nasdaq. The acquisition was completed on July 1, 2020. FNCB received $1.2 million in cash for 74,113 of the acquired shares having a cost of $611 thousand. FNCB realized a gain of $611 thousand as part of this transaction. The remaining 126,887 shares with a cost of $1.0 million were converted into 78,822 shares of the surviving company's common stock that had a fair value of $19.90 per share on July 1, 2020 or $1.6 million in aggregate, which exceeded the cost basis of $1.0 million. FNCB recognized an unrealized gain of $522 thousand on the conversion of this stock upon the acquisition.
On September 15, 2020, FNCB purchased 20,000 shares of the fixed-rate non-cumulative perpetual preferred stock of another publicly traded bank holding company pursuant to an underwritten public offering at an offering price of $25.00 per share or $500 thousand in aggregate. The preferred stock, which trades on Nasdaq, pays a quarterly dividend rate of 7.50%. Also included in equity securities at December 31, 2020 and 2019, was a $1.0 million investment in a mutual fund comprised of 1-4 family residential mortgage-backed securitiessecurity collateralized by properties within FNCB's market area.
Equity securities held by FNCB with a readily determinable fair valuevalues are reported at fair value on the consolidated statements of financial condition with net unrealized gains and losses recognized in non-interest income in the consolidated statements of income. At December 31, 2020 and 2019, equity securities had a cost basis of $2.5 million and $1.0 million, respectively. The fair value of equity securities was $3.0 million at December 31, 2020 and $0.9 million at December 31, 2019.
The following table presents unrealized and realized gains and losses recognized in net income on equity securities for the years ended December 31, 20202023 and 20192022.:
Year Ended December 31, | ||||||||
(in thousands) | 2020 | 2019 | ||||||
Net gain recognized on equity securities | $ | 1,171 | $ | 29 | ||||
Less: net gains recognized on equity securities sold/acquired | 611 | 0 | ||||||
Unrealized gain recognized on equity securities held | $ | 560 | $ | 29 | ||||
Year Ended December 31, | ||||||||
(in thousands) | 2023 | 2022 | ||||||
Net loss recognized on equity securities | $ | (1,601 | ) | $ | (34 | ) | ||
Less: net (loss) gain recognized on equity securities sold/acquired | (278 | ) | 118 | |||||
Unrealized loss recognized on equity securities | $ | (1,323 | ) | $ | (152 | ) | ||
Equity Securities and Equity Securities without Readily Determinable Fair Value
At December 29, 2020,31, FNCB purchased 20,000 shares2023 and December 31, 2022, equity securities without readily determinable fair values consisted of thea $500 thousand investment in a fixed-rate, non-cumulative perpetual preferred stock of a privately-held bank holding company, at an offering price of $25.00 per share or $500 thousand in aggregate, 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%, commencing 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 a valuationvaluations of this investment as of December 31, 2020,2023 which indicated thatand 2022. Based on the investment was not impaired. Managementresults of its assessment, management determined that no adjustment for impairment was required at December 31, 2020.
Restricted SecuritiesStock
The following table presents FNCB's investment in restricted securities at December 31, 20202023 and 20192022. Restricted securities have limited marketability and are carried at cost.
December 31, | ||||||||
(in thousands) | 2020 | 2019 | ||||||
Stock in Federal Home Loan Bank of Pittsburgh | $ | 1,735 | $ | 3,794 | ||||
Stock in Atlantic Community Bankers Bank | 10 | 10 | ||||||
Total restricted securities, at cost | $ | 1,745 | $ | 3,804 | ||||
Management noted no indicators of impairment for the Federal Home Loan Bank ("FHLB")FHLB of Pittsburgh or Atlantic Community Bankers BankACBB stock at December 31, 20202023 and 20192022.:
December 31, | ||||||||
(in thousands) | 2023 | 2022 | ||||||
Stock in Federal Home Loan Bank of Pittsburgh | $ | 8,804 | $ | 8,535 | ||||
Stock in Atlantic Community Bankers Bank | 10 | 10 | ||||||
Total restricted securities, at cost | $ | 8,814 | $ | 8,545 | ||||
Note 5.4. LOANS AND LEASES
The following table summarizes loans receivable, net,and leases by categoryportfolio segment at December 31, 20202023 and 20192022.: In accordance with the adoption of ASC 2016-13, as of December 31, 2023, the table presents the amortized cost basis of each portfolio segment, which includes net deferred costs of $2.4 million, unearned income of $921 thousand and unamortized premiums on purchased loans of $170 thousand. FNCB does not include accrued interest receivable in amortized cost basis for loans disclosed throughout this footnote. As of December 31, 2023 and 2022, accrued interest receivable for loans was $3.6 and $2.6 million, respectively, and is included in "accrued interest receivable" in the consolidated statements of financial condition.
December 31, | ||||||||
(in thousands) | 2023 | 2022 | ||||||
Residential real estate | $ | 245,282 | $ | 250,221 | ||||
Commercial real estate | 408,135 | 376,976 | ||||||
Construction, land acquisition and development | 59,876 | 66,555 | ||||||
Commercial and industrial | 183,794 | 272,024 | ||||||
Commercial equipment financing | 163,605 | - | ||||||
Consumer | 85,730 | 92,612 | ||||||
State and political subdivisions | 73,843 | 64,955 | ||||||
Total loans and leases, gross | 1,220,265 | 1,123,343 | ||||||
Unearned income | - | (810 | ) | |||||
Net deferred origination fees | - | 1,784 | ||||||
Allowance for credit losses | (11,986 | ) | (14,193 | ) | ||||
Loans and leases, net | $ | 1,208,279 | $ | 1,110,124 | ||||
In 2021, the Bank began offering commercial equipment financing under the brand 1st Equipment Finance. On October 1, 2023, 1st Equipment Finance Inc., was established as a wholly-owned subsidiary of the Bank. Upon establishment of the subsidiary, the Bank contributed capital to the new subsidiary which included, among other assets, the outstanding amortized cost of loans and leases previously originated under this brand, a corresponding ACL and accrued interest. The amortized cost of loans and leases transferred upon establishment of the subsidiary were $160.5 million with a corresponding ACL of $2.4 million.
December 31, | ||||||||
(in thousands) | 2020 | 2019 | ||||||
Residential real estate | $ | 196,328 | $ | 187,863 | ||||
Commercial real estate | 273,903 | 278,379 | ||||||
Construction, land acquisition and development | 59,785 | 47,484 | ||||||
Commercial and industrial | 238,435 | 147,623 | ||||||
Consumer | 85,881 | 121,099 | ||||||
State and political subdivisions | 49,009 | 43,908 | ||||||
Total loans, gross | 903,341 | 826,356 | ||||||
Unearned income | (110 | ) | (69 | ) | ||||
Net deferred loan (fees) costs | (2,129 | ) | 2,192 | |||||
Allowance for loan and lease losses | (11,950 | ) | (8,950 | ) | ||||
Loans, net | $ | 889,152 | $ | 819,529 | ||||
1st Equipment Finance Inc. continues to offer commercial equipment financing, through simple interest loans, direct finance leases and municipal leases. Simple interest loans and direct finance leases were $163.6 million at December 31, 2023, and included under the commercial equipment financing segment. Prior to October 1, 2023, these loans and leases were included in commercial and industrial loans and totaled $79.3 million at December 31, 2022. Tax-free municipal leases were $4.7 million at December 31, 2023 and $4.4 million at December 31, 2022.
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 12, “Related Party Transactions” to these consolidated financial statements.Notes to Consolidated Financial Statements.
For information about credit concentrations within FNCB’sFNCB’s loan portfolio, refer to Note 13, “Commitments, Contingencies and Concentrations” to these consolidated financial statements.Notes to Consolidated Financial Statements.
FNCB originates 1- 4 family residential mortgage loans for sale in the secondary market. During the years endedIn 2023, FNCB entered into a correspondent relationship with a December 31, 2020 third-party mortgage company and 2019,began selling 1- 4 family residential mortgage loans with servicing released through this company. The aggregate principal balance of 1- 4 family residential mortgages sold on the secondary market were $13.9$0.4 million for the year ended December 31, 2023. Prior to 2023, FNCB sold 1- 4 family mortgage loans directly on a secondary market and $9.6 million, respectively.retained servicing. The principal balance of 1- 4 family mortgages sold for the year ended December 31, 2022 totaled $9.2 million. Net gains on the sale of residential mortgage loans were $653$6 thousand in 20202023 and $253$205 thousand in 20192022. FNCB retains servicing rights on mortgages sold in the secondary market. At December 31, 2023, there were no 1-4 family residential mortgage loans held for sale were $2.1 million at December 31, 2020and $1.1 million atsale. At December 31, 20192022 there were $60 thousand in . 1- 4 family residential mortgage loans held for sale.
There were no sales of SBA guaranteed loans during the years ended December 31, 2020. The unpaid principal balance of loans serviced for others, including residential mortgages and SBA-guaranteed loans were $96.5$75.8 million and $106.0$78.7 million at December 31, 20202023 and 20192022, respectively.
FNCB does not have any lending programs commonly referred to as "subprime lending". Subprime lending generally targets borrowers with weakened credit histories typically characterized by payment delinquencies, previous charge-offs, judgments,judgements, and bankruptcies, or borrowers with questionable repayment capacity as evidenced by low credit scores or high debt-burden ratios.
FNCB provides for loan and lease losses based on the consistent application of its documented ALLLACL methodology. Loan and lease losses are charged to the ALLLACL and recoveries are credited to it. Additions to the ALLLACL are provided by charges against income based on various factors which, in management’s judgment,management’s judgement, deserve current recognition of estimated probable losses. Loan and lease losses are charged-off in the period the loans, or portions thereof, are deemed uncollectible. Generally, FNCB will record a loan charge-off (including a partial charge-off) to reduce a loan to the estimated recoverable amount based on its methodology detailed below. Management regularly reviews the loan portfolio and makes adjustments for loan losses in order to maintain the ALLLACL in accordance with GAAP. The ALLLACL consists primarily of the following two components:
(1) | Specific |
(2) | General allowances are established for loan losses on a |
In additionFor additional information about FNCB's ACL methodology, see Note 2, "Summary of Significant Accounting Policies - ACL on Loans and Leases" of these Notes to the specific and general components, management may establish an unallocated allowance that is used to cover any inherent losses that exist as of the evaluation date, but which may have not been identified under the methodology. Consolidated Financial Statements.
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Management evaluates the credit quality of the loan portfolio on an ongoing basis and performs a formal review of the adequacy of the ALLLACL on a quarterly basis. 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,ACL, which could have a material negative effect on FNCB’sFNCB’s operating results or financial condition. While management uses the best information available to make its evaluations, future adjustments to the ALLLACL 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,ACL, 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. ACL.
The following tables present, by loan category, the activity in the ALLL and the allocation of the ALLL and related loan balance disaggregated based on impairment methodology at December 31, 2020 and 2019.
Allowance for Loan and Lease Losses by Loan Category | ||||||||||||||||||||||||||||||||
December 31, 2020 | ||||||||||||||||||||||||||||||||
(in thousands) | Residential Real Estate | Commercial Real Estate | Construction, Land Acquisition and Development | Commercial and Industrial | Consumer | State and Political Subdivisions | Unallocated | Total | ||||||||||||||||||||||||
Allowance for loan losses: | ||||||||||||||||||||||||||||||||
Beginning balance, January 1, 2020 | $ | 1,147 | $ | 3,198 | $ | 271 | $ | 1,997 | $ | 1,658 | $ | 253 | $ | 426 | $ | 8,950 | ||||||||||||||||
Charge-offs | 0 | (336 | ) | 0 | (254 | ) | (975 | ) | 0 | 0 | (1,565 | ) | ||||||||||||||||||||
Recoveries | 43 | 846 | 0 | 1,220 | 515 | 0 | 0 | 2,624 | ||||||||||||||||||||||||
Provisions (credits) | 525 | 560 | 267 | (344 | ) | 121 | 152 | 660 | 1,941 | |||||||||||||||||||||||
Ending balance, December 31, 2020 | $ | 1,715 | $ | 4,268 | $ | 538 | $ | 2,619 | $ | 1,319 | $ | 405 | $ | 1,086 | $ | 11,950 | ||||||||||||||||
Specific reserve | $ | 13 | $ | 46 | $ | 0 | $ | 357 | $ | 0 | $ | 0 | $ | 0 | $ | 416 | ||||||||||||||||
General reserve | $ | 1,702 | $ | 4,222 | $ | 538 | $ | 2,262 | $ | 1,319 | $ | 405 | $ | 1,086 | $ | 11,534 | ||||||||||||||||
Loans receivable: | ||||||||||||||||||||||||||||||||
Individually evaluated for impairment | $ | 2,321 | $ | 8,448 | $ | 69 | $ | 897 | $ | 0 | $ | 0 | $ | 0 | $ | 11,735 | ||||||||||||||||
Collectively evaluated for impairment | 194,007 | 265,455 | 59,716 | 237,538 | 85,881 | 49,009 | 0 | 891,606 | ||||||||||||||||||||||||
Total loans, gross at December 31, 2020 | $ | 196,328 | $ | 273,903 | $ | 59,785 | $ | 238,435 | $ | 85,881 | $ | 49,009 | $ | 0 | $ | 903,341 | ||||||||||||||||
Allowance for Loan and Lease Losses by Loan Category | ||||||||||||||||||||||||||||||||
December 31, 2019 | ||||||||||||||||||||||||||||||||
(in thousands) | Residential Real Estate | Commercial Real Estate | Construction, Land Acquisition and Development | Commercial and Industrial | Consumer | State and Political Subdivisions | Unallocated | Total | ||||||||||||||||||||||||
Allowance for loan losses: | ||||||||||||||||||||||||||||||||
Beginning balance, January 1, 2019 | $ | 1,175 | $ | 3,107 | $ | 188 | $ | 2,552 | $ | 2,051 | $ | 417 | $ | 29 | $ | 9,519 | ||||||||||||||||
Charge-offs | (27 | ) | 0 | (18 | ) | (1,258 | ) | (1,311 | ) | 0 | 0 | (2,614 | ) | |||||||||||||||||||
Recoveries | 9 | 32 | 82 | 364 | 761 | 0 | 0 | 1,248 | ||||||||||||||||||||||||
Provisions (credits) | (10 | ) | 59 | 19 | 339 | 157 | (164 | ) | 397 | 797 | ||||||||||||||||||||||
Ending balance, December 31, 2019 | $ | 1,147 | $ | 3,198 | $ | 271 | $ | 1,997 | $ | 1,658 | $ | 253 | $ | 426 | $ | 8,950 | ||||||||||||||||
Specific reserve | $ | 10 | $ | 221 | $ | 0 | $ | 242 | $ | 0 | $ | 0 | $ | 0 | $ | 473 | ||||||||||||||||
General reserve | $ | 1,137 | $ | 2,977 | $ | 271 | $ | 1,755 | $ | 1,658 | $ | 253 | $ | 426 | $ | 8,477 | ||||||||||||||||
Loans receivable: | ||||||||||||||||||||||||||||||||
Individually evaluated for impairment | $ | 2,906 | $ | 11,640 | $ | 76 | $ | 1,164 | $ | 0 | $ | 0 | $ | 0 | $ | 15,786 | ||||||||||||||||
Collectively evaluated for impairment | 184,957 | 266,739 | 47,408 | 146,459 | 121,099 | 43,908 | 0 | 810,570 | ||||||||||||||||||||||||
Total loans, gross at December 31, 2019 | $ | 187,863 | $ | 278,379 | $ | 47,484 | $ | 147,623 | $ | 121,099 | $ | 43,908 | $ | 0 | $ | 826,356 | ||||||||||||||||
Credit Quality Indicators Risk Profiles – Commercial Loans
Management continuously monitors and evaluates the credit quality of FNCB’sFNCB’s commercial loans and leases 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 and lease receivables.
FNCB’sFNCB’s commercial loan classification and credit grading processes are part of the lending, underwriting, and credit administration functions to ensure an ongoing assessment of credit quality. FNCB maintains a formal, written loan classification and credit grading system that includes a discussion of the factors used to assign appropriate classifications of credit grades to loans. The risk grade groupings provide a mechanism to identify risk within the loan portfolio and provide management and the board of directors with periodic reports by risk category. The process also identifies groups of loans that warrant the special attention of management. Accurate and timely loan classification and credit grading is a critical component of loan portfolio management. Loan officers are required to review their loan portfolio risk ratings regularly for accuracy. In addition, the credit risk ratings play an important role in the loan review function, as well as the establishment and evaluation of the provision for loan and leasecredit losses and the ALLL.ACL.
The loan review function uses the same risk rating system in the loan review process. Quarterly, FNCB engages an independent third party to assess the quality of the loan portfolio and evaluate the accuracy of ratings with the loan officer’sofficer’s and management’s assessment.
FNCB’sFNCB’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:
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
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 TDR 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.
Credit Quality Indicators Risk Profiles – Other Loans
Certain residential real estate loans, consumer loans, and 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 presentpresents the credit risk profile of loans and leases summarized by portfolio segment and year of origination at December 31, 2023:
Credit Risk Profiles | ||||||||||||||||||||||||||||||||
| For Year Ended December 31, 2023 | ||||||||||||||||||||||||||||||||
| Term Loans By Origination Fiscal Year | ||||||||||||||||||||||||||||||||
Total | ||||||||||||||||||||||||||||||||
(in thousands) | 2023 | 2022 | 2021 | 2020 | 2019 | Prior | Revolving | Loans | ||||||||||||||||||||||||
Commercial real estate | ||||||||||||||||||||||||||||||||
Risk rating | ||||||||||||||||||||||||||||||||
Pass | $ | 35,520 | $ | 99,392 | $ | 75,005 | $ | 38,562 | $ | 66,065 | $ | 71,664 | $ | 7,102 | $ | 393,310 | ||||||||||||||||
Special mention | - | - | 4,703 | 99 | 27 | 4,552 | 1,776 | 11,157 | ||||||||||||||||||||||||
Substandard | 156 | 287 | 497 | - | - | 2,728 | - | 3,668 | ||||||||||||||||||||||||
Doubtful | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||
Loss | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||
Total commercial real state | 35,676 | 99,679 | 80,205 | 38,661 | 66,092 | 78,944 | 8,878 | 408,135 | ||||||||||||||||||||||||
Construction, land acquisition and development | ||||||||||||||||||||||||||||||||
Risk rating | ||||||||||||||||||||||||||||||||
Pass | 14,027 | 18,832 | 24,815 | 208 | 323 | 893 | 594 | 59,692 | ||||||||||||||||||||||||
Special mention | - | - | 184 | - | - | - | - | 184 | ||||||||||||||||||||||||
Substandard | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||
Doubtful | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||
Loss | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||
Total construction, land acquisition and development | 14,027 | 18,832 | 24,999 | 208 | 323 | 893 | 594 | 59,876 | ||||||||||||||||||||||||
Commercial and industrial | ||||||||||||||||||||||||||||||||
Risk rating | ||||||||||||||||||||||||||||||||
Pass | 42,104 | 20,644 | 22,898 | 9,522 | 10,730 | 10,098 | 55,939 | 171,935 | ||||||||||||||||||||||||
Special mention | 493 | 19 | 318 | 595 | 24 | 137 | 4,108 | 5,694 | ||||||||||||||||||||||||
Substandard | 45 | 2,588 | - | 1,200 | - | 211 | 2,121 | 6,165 | ||||||||||||||||||||||||
Doubtful | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||
Loss | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||
Total commercial and industrial | 42,642 | 23,251 | 23,216 | 11,317 | 10,754 | 10,446 | 62,168 | 183,794 | ||||||||||||||||||||||||
Commercial equipment financing | ||||||||||||||||||||||||||||||||
Risk rating | ||||||||||||||||||||||||||||||||
Pass | 94,967 | 63,807 | 3,711 | - | - | - | - | 162,485 | ||||||||||||||||||||||||
Special mention | 628 | 15 | - | - | - | - | - | 643 | ||||||||||||||||||||||||
Substandard | 342 | 135 | - | - | - | - | - | 477 | ||||||||||||||||||||||||
Doubtful | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||
Loss | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||
Total commercial equipment financing | 95,937 | 63,957 | 3,711 | - | - | - | - | 163,605 | ||||||||||||||||||||||||
State and political subdivisions | ||||||||||||||||||||||||||||||||
Risk rating | ||||||||||||||||||||||||||||||||
Pass | 16,025 | 11,659 | 21,606 | 2,389 | 15,852 | 4,279 | 2,033 | 73,843 | ||||||||||||||||||||||||
Special mention | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||
Substandard | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||
Doubtful | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||
Loss | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||
Total state and political subdivisions | 16,025 | 11,659 | 21,606 | 2,389 | 15,852 | 4,279 | 2,033 | 73,843 | ||||||||||||||||||||||||
Credit Risk Profiles - Other Loans | ||||||||||||||||||||||||||||||||
Residential real estate | ||||||||||||||||||||||||||||||||
Performing | 11,878 | 41,104 | 76,574 | 37,162 | 11,748 | 42,181 | 23,387 | 244,034 | ||||||||||||||||||||||||
Non-performing | - | 67 | 142 | - | 229 | 699 | 111 | 1,248 | ||||||||||||||||||||||||
Total residential real estate | 11,878 | 41,171 | 76,716 | 37,162 | 11,977 | 42,880 | 23,498 | 245,282 | ||||||||||||||||||||||||
Consumer | ||||||||||||||||||||||||||||||||
Performing | 27,180 | 30,098 | 18,994 | 3,060 | 1,609 | 4,401 | 35 | 85,377 | ||||||||||||||||||||||||
Non-performing | - | 89 | 72 | 22 | 123 | 47 | - | 353 | ||||||||||||||||||||||||
Total consumer | 27,180 | 30,187 | 19,066 | 3,082 | 1,732 | 4,448 | 35 | 85,730 | ||||||||||||||||||||||||
Total loans and leases | $ | 243,365 | $ | 288,736 | $ | 249,519 | $ | 92,819 | $ | 106,730 | $ | 141,890 | $ | 97,206 | $ | 1,220,265 | ||||||||||||||||
The following table presents gross charge-offs by portfolio segment and year of origination at December 31, 2023:
Gross Charge-Offs by Origination Year | ||||||||||||||||||||||||||||||||
For the Year Ended December 31, 2023 | ||||||||||||||||||||||||||||||||
(in thousands) | 2023 | 2022 | 2021 | 2020 | 2019 | Prior | Revolving | Total | ||||||||||||||||||||||||
Residential real estate | $ | - | $ | 63 | $ | - | $ | - | $ | - | $ | 4 | $ | - | $ | 67 | ||||||||||||||||
Commercial real estate | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||
Construction land acquisition and development | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||
Commercial and industrial | 284 | 108 | - | - | - | - | 104 | 496 | ||||||||||||||||||||||||
Commercial equipment financing | 309 | 316 | 4 | - | - | - | - | 629 | ||||||||||||||||||||||||
Consumer | 67 | 1,205 | 765 | 22 | 22 | 68 | - | 2,149 | ||||||||||||||||||||||||
State and political subdivision loans | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||
Total gross charge-offs | $ | 660 | $ | 1,692 | $ | 769 | $ | 22 | $ | 22 | $ | 72 | $ | 104 | $ | 3,341 | ||||||||||||||||
The following table presents the recorded investment in loans and leases receivable by loanmajor category and credit quality indicatorand credit quality indicators at December 31, 20202022, prior to the adoption of ASU 2016.13:
Credit Quality Indicators | ||||||||||||||||||||||||||||||||||||||||
December 31, 2022 | ||||||||||||||||||||||||||||||||||||||||
Commercial Loans | Other Loans | |||||||||||||||||||||||||||||||||||||||
Special | Subtotal | Accruing | Non-accrual | Subtotal | Total | |||||||||||||||||||||||||||||||||||
(in thousands) | Pass | Mention | Substandard | Doubtful | Loss | Commercial | Loans | Loans | Other | Loans | ||||||||||||||||||||||||||||||
Residential real estate | $ | 43,188 | $ | 434 | $ | 99 | $ | - | $ | - | $ | 43,721 | $ | 205,887 | $ | 613 | $ | 206,500 | $ | 250,221 | ||||||||||||||||||||
Commercial real estate | 367,866 | 7,082 | 2,028 | - | - | 376,976 | - | - | - | 376,976 | ||||||||||||||||||||||||||||||
Construction, land acquisition and development | 62,965 | 797 | - | - | - | 63,762 | 2,793 | - | 2,793 | 66,555 | ||||||||||||||||||||||||||||||
Commercial and industrial | 260,358 | 829 | 8,875 | - | - | 270,062 | 1,962 | - | 1,962 | 272,024 | ||||||||||||||||||||||||||||||
Consumer | - | - | - | - | - | - | 92,251 | 361 | 92,612 | 92,612 | ||||||||||||||||||||||||||||||
State and political subdivisions | 64,955 | - | - | - | - | 64,955 | - | - | - | 64,955 | ||||||||||||||||||||||||||||||
Total | $ | 799,332 | $ | 9,142 | $ | 11,002 | $ | - | $ | - | $ | 819,476 | $ | 302,893 | $ | 974 | $ | 303,867 | $ | 1,123,343 | ||||||||||||||||||||
The following table summarizes activity in the ACL by major category for the years ended December 31, 2023:
Allowance for Credit Losses by Loan Category | ||||||||||||||||||||||||||||||||||||
December 31, 2023 | ||||||||||||||||||||||||||||||||||||
(in thousands) | Residential Real Estate | Commercial Real Estate | Construction, Land Acquisition and Development | Commercial and Industrial | Commercial Equipment Financing | Consumer | State and Political Subdivisions | Unallocated | Total | |||||||||||||||||||||||||||
Allowance for credit losses: | ||||||||||||||||||||||||||||||||||||
Beginning balance, January 1, 2023 | $ | 2,215 | $ | 4,193 | $ | 747 | $ | 4,099 | $ | - | $ | 1,307 | $ | 503 | $ | 1,129 | $ | 14,193 | ||||||||||||||||||
Impact of ASU-2016-13 | (1,028 | ) | (1,614 | ) | 1,067 | (212 | ) | - | 370 | (90 | ) | (1,129 | ) | (2,636 | ) | |||||||||||||||||||||
Reclassification (1) | - | - | - | (2,390 | ) | 2,390 | - | - | - | - | ||||||||||||||||||||||||||
Charge-offs | (67 | ) | - | - | (496 | ) | (629 | ) | (2,149 | ) | - | - | (3,341 | ) | ||||||||||||||||||||||
Recoveries | - | 495 | - | 148 | - | 1,247 | - | - | 1,890 | |||||||||||||||||||||||||||
Provisions (credits) | 37 | (243 | ) | (660 | ) | 1,049 | 1,368 | 343 | (14 | ) | - | 1,880 | ||||||||||||||||||||||||
Ending balance, December 31, 2023 | $ | 1,157 | $ | 2,831 | $ | 1,154 | $ | 2,198 | $ | 3,129 | $ | 1,118 | $ | 399 | $ | - | $ | 11,986 | ||||||||||||||||||
Specific reserve | $ | - | $ | 51 | $ | - | $ | - | $ | 70 | $ | - | $ | - | $ | - | $ | 121 | ||||||||||||||||||
General reserve | $ | 1,157 | $ | 2,780 | $ | 1,154 | $ | 2,198 | $ | 3,059 | $ | 1,118 | $ | 399 | $ | - | $ | 11,865 | ||||||||||||||||||
Loans and leases receivable: | ||||||||||||||||||||||||||||||||||||
Individually evaluated for impairment | $ | 830 | $ | 2,663 | $ | - | $ | 104 | $ | 308 | $ | 337 | $ | - | $ | - | $ | 4,242 | ||||||||||||||||||
Collectively evaluated for impairment | 244,452 | 405,472 | 59,876 | 183,690 | 163,297 | 85,393 | 73,843 | - | 1,216,023 | |||||||||||||||||||||||||||
Total loans and leases, gross at December 31, 2023 | $ | 245,282 | $ | 408,135 | $ | 59,876 | $ | 183,794 | $ | 163,605 | $ | 85,730 | $ | 73,843 | $ | - | $ | 1,220,265 | ||||||||||||||||||
(1) Represents ACL associated with loans and leases originated under the brand, 1st Equipment Finance, and included in capital contributed to 1st Equipment Finance, Inc. on October 1, 2023, the date it was established as a wholly-owned subsidiary of the Bank. |
The following table summarizes activity in the ALLL for the year ending December 31, 2022, ending loan and lease balances and related ALLL by portfolio segment and impairment methodology at December 31, 2022, prior to the adoption of ASU 2016-13.
Allowance for Loan and Lease Losses by Loan Category | ||||||||||||||||||||||||||||||||
December 31, 2022 | ||||||||||||||||||||||||||||||||
(in thousands) | Residential Real Estate | Commercial Real Estate | Construction, Land Acquisition and Development | Commercial and Industrial | Consumer | State and Political Subdivisions | Unallocated | Total | ||||||||||||||||||||||||
Allowance for credit losses: | ||||||||||||||||||||||||||||||||
Beginning balance, January 1, 2022 | $ | 2,081 | $ | 4,530 | $ | 392 | $ | 2,670 | $ | 1,159 | $ | 455 | $ | 1,129 | $ | 12,416 | ||||||||||||||||
Charge-offs | (3 | ) | - | - | (69 | ) | (1,234 | ) | - | - | (1,306 | ) | ||||||||||||||||||||
Recoveries | 3 | 293 | 10 | 30 | 785 | - | - | 1,121 | ||||||||||||||||||||||||
Provisions (credits) | 134 | (630 | ) | 345 | 1,468 | 597 | 48 | - | 1,962 | |||||||||||||||||||||||
Ending balance, December 31, 2022 | $ | 2,215 | $ | 4,193 | $ | 747 | $ | 4,099 | $ | 1,307 | $ | 503 | $ | 1,129 | $ | 14,193 | ||||||||||||||||
Specific reserve | $ | 17 | $ | 15 | $ | - | $ | 2 | $ | - | $ | - | $ | - | $ | 34 | ||||||||||||||||
General reserve | $ | 2,198 | $ | 4,178 | $ | 747 | $ | 4,097 | $ | 1,307 | $ | 503 | $ | 1,129 | $ | 14,159 | ||||||||||||||||
Loans and leases receivable: | ||||||||||||||||||||||||||||||||
Individually evaluated for impairment | $ | 1,472 | $ | 5,766 | $ | - | $ | 362 | $ | - | $ | - | $ | - | $ | 7,600 | ||||||||||||||||
Collectively evaluated for impairment | 248,749 | 371,210 | 66,555 | 271,662 | 92,612 | 64,955 | - | 1,115,744 | ||||||||||||||||||||||||
Total loans and leases, gross at December 31, 2022 | $ | 250,221 | $ | 376,976 | $ | 66,555 | $ | 272,024 | $ | 92,612 | $ | 64,955 | $ | - | $ | 1,123,343 | ||||||||||||||||
The following table presents the amortized cost of collateral-dependent loans and leases by portfolio segment and type of collateral as of December 31, 2023:
December 31, 2023 | ||||||||||||||||
Type of Collateral | ||||||||||||||||
(in thousands) | Residential Real Estate | Commercial Real Estate | Business Assets | Total | ||||||||||||
Loans and leases: | ||||||||||||||||
Residential real estate | $ | 830 | $ | - | $ | - | $ | 830 | ||||||||
Commercial real estate | - | 2,663 | - | 2,663 | ||||||||||||
Construction, land acquisition and development | - | - | - | - | ||||||||||||
Commercial and industrial | - | - | - | - | ||||||||||||
Commercial equipment financing | - | - | 308 | 308 | ||||||||||||
Consumer | - | - | - | - | ||||||||||||
State and political subdivisions | - | - | - | - | ||||||||||||
Total collateral dependent loans and leases | $ | 830 | $ | 2,663 | $ | 308 | $ | 3,801 | ||||||||
The following tables present the delinquency status of past due and non-accrual loans and leases at December 31, 2023 and 20192022:
Credit Quality Indicators | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
December 31, 2020 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Commercial Loans | Other Loans | December 31, 2023 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Special | Subtotal | Accruing | Non-accrual | Subtotal | Total | Delinquency Status | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Pass | Mention | Substandard | Doubtful | Loss | Commercial | Loans | Loans | Other | Loans | 30-89 Days | >/= 90 Days | Nonaccrual | Total | |||||||||||||||||||||||||||||||||||||||||||||||||||
(in thousands) | Past Due | Past Due | Loans | Past Due | Current | Total | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Loans and leases: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Residential real estate | $ | 35,839 | $ | 494 | $ | 209 | $ | 0 | $ | 0 | $ | 36,542 | $ | 158,896 | $ | 890 | $ | 159,786 | $ | 196,328 | $ | 580 | $ | - | $ | 1,248 | $ | 1,828 | $ | 243,454 | $ | 245,282 | ||||||||||||||||||||||||||||||||
Commercial real estate | 256,390 | 4,349 | 13,164 | 0 | 0 | 273,903 | 0 | 0 | 0 | 273,903 | 117 | - | 3,113 | 3,230 | 404,905 | 408,135 | ||||||||||||||||||||||||||||||||||||||||||||||||
Construction, land acquisition and development | 55,697 | 0 | 0 | 0 | 0 | 55,697 | 4,088 | 0 | 4,088 | 59,785 | - | - | - | - | 59,876 | 59,876 | ||||||||||||||||||||||||||||||||||||||||||||||||
Commercial and industrial | 233,370 | 961 | 1,104 | 0 | 0 | 235,435 | 3,000 | 0 | 3,000 | 238,435 | 211 | - | 148 | 359 | 183,435 | 183,794 | ||||||||||||||||||||||||||||||||||||||||||||||||
Commercial equipment financing | 1,811 | - | 477 | 2,288 | 161,317 | 163,605 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Consumer | 0 | 0 | 0 | 0 | 0 | 0 | 85,374 | 507 | 85,881 | 85,881 | 1,095 | 38 | 352 | 1,485 | 84,245 | 85,730 | ||||||||||||||||||||||||||||||||||||||||||||||||
State and political subdivisions | 48,998 | 0 | 0 | 0 | 0 | 48,998 | 11 | 0 | 11 | 49,009 | - | - | - | - | 73,843 | 73,843 | ||||||||||||||||||||||||||||||||||||||||||||||||
Total | $ | 630,294 | $ | 5,804 | $ | 14,477 | $ | 0 | $ | 0 | $ | 650,575 | $ | 251,369 | $ | 1,397 | $ | 252,766 | $ | 903,341 | ||||||||||||||||||||||||||||||||||||||||||||
Total loans and leases | $ | 3,814 | $ | 38 | $ | 5,338 | $ | 9,190 | $ | 1,211,075 | $ | 1,220,265 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Credit Quality Indicators | ||||||||||||||||||||||||||||||||||||||||
December 31, 2019 | ||||||||||||||||||||||||||||||||||||||||
Commercial Loans | Other Loans | |||||||||||||||||||||||||||||||||||||||
Special | Subtotal | Accruing | Non-accrual | Subtotal | Total | |||||||||||||||||||||||||||||||||||
Pass | Mention | Substandard | Doubtful | Loss | Commercial | Loans | Loans | Other | Loans | |||||||||||||||||||||||||||||||
Residential real estate | $ | 35,330 | $ | 177 | $ | 307 | $ | 0 | $ | 0 | $ | 35,814 | $ | 150,715 | $ | 1,334 | $ | 152,049 | $ | 187,863 | ||||||||||||||||||||
Commercial real estate | 266,112 | 1,668 | 10,599 | 0 | 0 | 278,379 | 0 | 0 | 0 | 278,379 | ||||||||||||||||||||||||||||||
Construction, land acquisition and development | 46,361 | 0 | 0 | 0 | 0 | 46,361 | 1,123 | 0 | 1,123 | 47,484 | ||||||||||||||||||||||||||||||
Commercial and industrial | 140,589 | 426 | 1,484 | 0 | 0 | 142,499 | 5,124 | 0 | 5,124 | 147,623 | ||||||||||||||||||||||||||||||
Consumer | 0 | 0 | 0 | 0 | 0 | 0 | 120,451 | 648 | 121,099 | 121,099 | ||||||||||||||||||||||||||||||
State and political subdivisions | 43,908 | 0 | 0 | 0 | 0 | 43,908 | 0 | 0 | 0 | 43,908 | ||||||||||||||||||||||||||||||
Total | $ | 532,300 | $ | 2,271 | $ | 12,390 | $ | 0 | $ | 0 | $ | 546,960 | $ | 277,413 | $ | 1,982 | $ | 279,395 | $ | 826,356 | ||||||||||||||||||||
December 31, 2022 | ||||||||||||||||||||||||
Delinquency Status | ||||||||||||||||||||||||
30-89 Days | >/= 90 Days | Nonaccrual | Total | |||||||||||||||||||||
(in thousands) | Past Due | Past Due | loans | Past Due | Current | Total | ||||||||||||||||||
Loans and leases: | ||||||||||||||||||||||||
Residential real estate | $ | 555 | $ | - | $ | 713 | $ | 1,268 | $ | 248,953 | $ | 250,221 | ||||||||||||
Commercial real estate | - | - | 1,545 | 1,545 | 375,431 | 376,976 | ||||||||||||||||||
Construction, land acquisition and development | - | - | - | - | 66,555 | 66,555 | ||||||||||||||||||
Commercial and industrial | 113 | - | 144 | 257 | 271,767 | 272,024 | ||||||||||||||||||
Consumer | 1,378 | 79 | 361 | 1,818 | 90,794 | 92,612 | ||||||||||||||||||
State and political subdivisions | - | - | - | - | 64,955 | 64,955 | ||||||||||||||||||
Total loans and leases | $ | 2,046 | $ | 79 | $ | 2,763 | $ | 4,888 | $ | 1,118,455 | $ | 1,123,343 | ||||||||||||
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 $5.65.3 million at December 31, 20202023 and $9.1$2.8 million at December 31, 20192022. 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 exists. 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. At December 31,2020, there was one commercial and industrial loan that was past due 90 days or more and still accruing, which has subsequently been brought current. There were no$38 thousand and $79 thousand, in consumer loans that were past due 90 days or more and still accruing at December 31, 2023, and December 31, 2022, respectively, which comprise entirely of unsecured personal loans purchased from a third-party originator.
Total non-accrual loans, with balances less than the $100 thousand loan relationship threshold that were evaluated collectively for impairment were $1.1 million at December 31, 20192023. and $0.7 million at December 31,2022.
The following tables present the delinquency status of past due and non-accrual loans at December 31, 2020 and 2019:
December 31, 2020 | ||||||||||||||||||||
Delinquency Status | ||||||||||||||||||||
0-29 Days | 30-59 Days | 60-89 Days | >/= 90 Days | |||||||||||||||||
(in thousands) | Past Due | Past Due | Past Due | Past Due | Total | |||||||||||||||
Performing (accruing) loans: | ||||||||||||||||||||
Residential real estate | $ | 194,820 | $ | 251 | $ | 159 | $ | 0 | $ | 195,230 | ||||||||||
Commercial real estate | 270,059 | 606 | 0 | 0 | 270,665 | |||||||||||||||
Construction, land acquisition and development | 59,785 | 0 | 0 | 0 | 59,785 | |||||||||||||||
Commercial and industrial | 237,262 | 419 | 16 | 0 | 237,697 | |||||||||||||||
Consumer | 83,486 | 1,485 | 403 | 0 | 85,374 | |||||||||||||||
State and political subdivisions | 49,009 | 0 | 0 | 0 | 49,009 | |||||||||||||||
Total performing (accruing) loans | 894,421 | 2,761 | 578 | 0 | 897,760 | |||||||||||||||
Non-accrual loans: | ||||||||||||||||||||
Residential real estate | 642 | 39 | 0 | 417 | 1,098 | |||||||||||||||
Commercial real estate | 1,484 | 0 | 0 | 1,754 | 3,238 | |||||||||||||||
Construction, land acquisition and development | 0 | 0 | 0 | 0 | 0 | |||||||||||||||
Commercial and industrial | 614 | 0 | 124 | 0 | 738 | |||||||||||||||
Consumer | 114 | 132 | 96 | 165 | 507 | |||||||||||||||
State and political subdivisions | 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 | ||||||||||
December 31, 2019 | ||||||||||||||||||||
Delinquency Status | ||||||||||||||||||||
0-29 Days | 30-59 Days | 60-89 Days | >/= 90 Days | |||||||||||||||||
(in thousands) | Past Due | Past Due | Past Due | Past Due | Total | |||||||||||||||
Performing (accruing) loans: | ||||||||||||||||||||
Residential real estate | $ | 185,871 | $ | 134 | $ | 261 | $ | 0 | $ | 186,266 | ||||||||||
Commercial real estate | 272,561 | 75 | 106 | 0 | 272,742 | |||||||||||||||
Construction, land acquisition and development | 47,484 | 0 | 0 | 0 | 47,484 | |||||||||||||||
Commercial and industrial | 146,221 | 200 | 0 | 0 | 146,421 | |||||||||||||||
Consumer | 118,267 | 1,695 | 489 | 0 | 120,451 | |||||||||||||||
State and political subdivisions | 43,908 | 0 | 0 | 0 | 43,908 | |||||||||||||||
Total performing (accruing) loans | 814,312 | 2,104 | 856 | 0 | 817,272 | |||||||||||||||
Non-accrual loans: | ||||||||||||||||||||
Residential real estate | 873 | 17 | 228 | 479 | 1,597 | |||||||||||||||
Commercial real estate | 2,520 | 893 | 434 | 1,790 | 5,637 | |||||||||||||||
Construction, land acquisition and development | 0 | 0 | 0 | 0 | 0 | |||||||||||||||
Commercial and industrial | 943 | 0 | 114 | 145 | 1,202 | |||||||||||||||
Consumer | 193 | 93 | 38 | 324 | 648 | |||||||||||||||
State and political subdivisions | 0 | 0 | 0 | 0 | 0 | |||||||||||||||
Total non-accrual loans | 4,529 | 1,003 | 814 | 2,738 | 9,084 | |||||||||||||||
Total loans receivable | $ | 818,841 | $ | 3,107 | $ | 1,670 | $ | 2,738 | $ | 826,356 | ||||||||||
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 December 31, 2020 and 20192022, prior to the adoption of ASU 2016-13. Non-accrual loans, other than TDRs, with balances less than the $100$100 thousand loan relationship threshold arewere 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 $1.4 million and $1.0 million atDecember 31, 2020 and 2019, respectively.
December 31, 2020 | ||||||||||||
Recorded | Unpaid Principal | Related | ||||||||||
(in thousands) | Investment | Balance | Allowance | |||||||||
With no allowance recorded: | ||||||||||||
Residential real estate | $ | 859 | $ | 957 | $ | - | ||||||
Commercial real estate | 2,729 | 5,311 | - | |||||||||
Construction, land acquisition and development | 69 | 69 | - | |||||||||
Commercial and industrial | 5 | 5 | - | |||||||||
Consumer | 0 | 0 | - | |||||||||
State and political subdivisions | 0 | 0 | - | |||||||||
Total impaired loans with no related allowance recorded | 3,662 | 6,342 | - | |||||||||
With a related allowance recorded: | ||||||||||||
Residential real estate | 1,462 | 1,462 | 13 | |||||||||
Commercial real estate | 5,719 | 5,719 | 46 | |||||||||
Construction, land acquisition and development | 0 | 0 | 0 | |||||||||
Commercial and industrial | 892 | 1,130 | 357 | |||||||||
Consumer | 0 | 0 | 0 | |||||||||
State and political subdivisions | 0 | 0 | 0 | |||||||||
Total impaired loans with a related allowance recorded | 8,073 | 8,311 | 416 | |||||||||
Total of impaired loans: | ||||||||||||
Residential real estate | 2,321 | 2,419 | 13 | |||||||||
Commercial real estate | 8,448 | 11,030 | 46 | |||||||||
Construction, land acquisition and development | 69 | 69 | 0 | |||||||||
Commercial and industrial | 897 | 1,135 | 357 | |||||||||
Consumer | 0 | 0 | 0 | |||||||||
State and political subdivisions | 0 | 0 | 0 | |||||||||
Total impaired loans | $ | 11,735 | $ | 14,653 | $ | 416 | ||||||
December 31, 2019 | ||||||||||||
Recorded | Unpaid Principal | Related | ||||||||||
(in thousands) | Investment | Balance | Allowance | |||||||||
With no allowance recorded: | ||||||||||||
Residential real estate | $ | 1,240 | $ | 1,329 | $ | - | ||||||
Commercial real estate | 4,548 | 6,007 | - | |||||||||
Construction, land acquisition and development | 76 | 76 | - | |||||||||
Commercial and industrial | 593 | 850 | - | |||||||||
Consumer | 0 | 0 | - | |||||||||
State and political subdivisions | 0 | 0 | - | |||||||||
Total impaired loans with no related allowance recorded | 6,457 | 8,262 | - | |||||||||
With a related allowance recorded: | ||||||||||||
Residential real estate | 1,666 | 1,666 | 10 | |||||||||
Commercial real estate | 7,092 | 7,811 | 221 | |||||||||
Construction, land acquisition and development | 0 | 0 | 0 | |||||||||
Commercial and industrial | 571 | 573 | 242 | |||||||||
Consumer | 0 | 0 | 0 | |||||||||
State and political subdivisions | 0 | 0 | 0 | |||||||||
Total impaired loans with a related allowance recorded | 9,329 | 10,050 | 473 | |||||||||
Total of impaired loans: | ||||||||||||
Residential real estate | 2,906 | 2,995 | 10 | |||||||||
Commercial real estate | 11,640 | 13,818 | 221 | |||||||||
Construction, land acquisition and development | 76 | 76 | 0 | |||||||||
Commercial and industrial | 1,164 | 1,423 | 242 | |||||||||
Consumer | 0 | 0 | 0 | |||||||||
State and political subdivisions | 0 | 0 | 0 | |||||||||
Total impaired loans | $ | 15,786 | $ | 18,312 | $ | 473 | ||||||
December 31, 2022 | ||||||||||||
Recorded | Unpaid Principal | Related | ||||||||||
(in thousands) | Investment | Balance | Allowance | |||||||||
With no allowance recorded: | ||||||||||||
Residential real estate | $ | 431 | $ | 509 | $ | - | ||||||
Commercial real estate | 1,071 | 1,339 | - | |||||||||
Construction, land acquisition and development | - | - | - | |||||||||
Commercial and industrial | 218 | 218 | - | |||||||||
Consumer | - | - | - | |||||||||
State and political subdivisions | - | - | - | |||||||||
Total impaired loans with no related allowance recorded | 1,720 | 2,066 | - | |||||||||
With a related allowance recorded: | ||||||||||||
Residential real estate | 1,041 | 1,041 | 17 | |||||||||
Commercial real estate | 4,695 | 4,695 | 15 | |||||||||
Construction, land acquisition and development | - | - | - | |||||||||
Commercial and industrial | 144 | 362 | 2 | |||||||||
Consumer | - | - | - | |||||||||
State and political subdivisions | - | - | - | |||||||||
Total impaired loans with a related allowance recorded | 5,880 | 6,098 | 34 | |||||||||
Total of impaired loans: | ||||||||||||
Residential real estate | 1,471 | 1,550 | 17 | |||||||||
Commercial real estate | 5,766 | 6,034 | 15 | |||||||||
Construction, land acquisition and development | - | - | - | |||||||||
Commercial and industrial | 363 | 580 | 2 | |||||||||
Consumer | - | - | - | |||||||||
State and political subdivisions | - | - | - | |||||||||
Total impaired loans | $ | 7,600 | $ | 8,164 | $ | 34 | ||||||
The following table presents the average balance of, and interest income by loan segment recognized on impaired loans summarized by loan category for the yearsyear ended December 31, 2020 2022:and 2019:
Year Ended December 31, | ||||||||||||||||
2020 | 2019 | |||||||||||||||
Average | Interest | Average | Interest | |||||||||||||
(in thousands) | Balance | Income (1) | Balance | Income (1) | ||||||||||||
Residential real estate | $ | 2,542 | $ | 78 | $ | 2,400 | $ | 95 | ||||||||
Commercial real estate | 10,111 | 254 | 10,092 | 297 | ||||||||||||
Construction, land acquisition and development | 72 | 5 | 79 | 5 | ||||||||||||
Commercial and industrial | 1,041 | 14 | 1,207 | 1 | ||||||||||||
Consumer | 0 | 0 | 0 | 0 | ||||||||||||
State and political subdivisions | 0 | 0 | 0 | 0 | ||||||||||||
Total impaired loans | $ | 13,766 | $ | 351 | $ | 13,778 | $ | 398 | ||||||||
2022 | ||||||||
Average | Interest | |||||||
(in thousands) | Balance | Income (1) | ||||||
Residential real estate | $ | 1,640 | $ | 65 | ||||
Commercial real estate | 6,614 | 251 | ||||||
Construction, land acquisition and development | - | - | ||||||
Commercial and industrial | 482 | 19 | ||||||
Consumer | - | - | ||||||
State and political subdivisions | - | - | ||||||
Total impaired loans | $ | 8,736 | $ | 335 | ||||
(1) Interest income represents income recognized on performing TDRs. |
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 $0.4 millionto $175 thousand for both years ended December 31, 2020 and 2019.
Troubled Debt Restructured Loans
TDRs at December 31, 2020 and 2019 were $7.7 millionand $9.1 million, respectively. Accruing and non-accruing TDRs were $7.0 million and $0.7 million, respectively at December 31, 2020and $7.7 million and $1.4 million, respectively at December 31, 2019. Approximately $197 thousand and $97 thousand in specific reserves have been established for TDRs as of December 31, 2020 and 2019, respectively. FNCB was not committed to lend additional funds to any loan classified as a TDR at December 31, 2020 and 2019.
The modification of the terms of loans classified as TDRs may include one or a combination of the following, 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.
The following tables present the pre- and post-modification recorded investment in loans modified as TDRs and type of modifications made during the yearsyear ended December 31, 2020 and 2019:2022.
Year Ended December 31, 2020 | ||||||||||||||||||||||||||||
Pre-Modification Outstanding Recorded Investment by | ||||||||||||||||||||||||||||
Type of Modification | ||||||||||||||||||||||||||||
(in thousands) | Number of Contracts | Extension of Term | Extension of Term and Capitalization of Taxes | Capitalization of Taxes | Principal Forbearance | Total | Post-Modification Outstanding Recorded Investment | |||||||||||||||||||||
Loan category: | ||||||||||||||||||||||||||||
| Residential real estate | 1 | $ | 93 | $ | 0 | $ | 0 | $ | 0 | $ | 93 | $ | 93 | |||||||||||||||
Commercial real estate | 0 | 0 | 0 | 0 | 0 | 0 | 0 | |||||||||||||||||||||
Construction, land acquisition and development | 0 | 0 | 0 | 0 | 0 | 0 | 0 | |||||||||||||||||||||
Commercial and industrial | 3 | 0 | 0 | 0 | 196 | 196 | 196 | |||||||||||||||||||||
| Consumer | 0 | 0 | 0 | 0 | 0 | 0 | 0 | |||||||||||||||||||||
State and political subdivisions | 0 | 0 | 0 | 0 | 0 | 0 | 0 | |||||||||||||||||||||
Total modifications | 4 | $ | 93 | $ | 0 | $ | 0 | $ | 196 | $ | 289 | $ | 289 | |||||||||||||||
Loan Modifications to Borrowers Experiencing Financial Difficulty
ASU 2022-02 eliminated the accounting guidance for TDRs while enhancing disclosure requirements for certain loan refinancing and restructuring by creditors when a borrower is experiencing financial difficulty. In accordance with the new guidance, FNCB no longer evaluates loans with modifications made to borrowers experiencing financial difficulty individually for impairment, nor establishes a related specific reserve for such loans, but rather these loans are included in their respective portfolio segment and evaluated collectively for impairment to establish an ACL.
Year Ended December 31, 2019 | ||||||||||||||||||||||||||||
Pre-Modification Outstanding Recorded Investment by | ||||||||||||||||||||||||||||
Type of Modification | ||||||||||||||||||||||||||||
(dollars in thousands) | Number of Contracts | Extension of Term | Extension of Term and Capitalization of Taxes | Extension of Term and Forbearance | Forbearance | Total | Post-Modification Outstanding Recorded Investment | |||||||||||||||||||||
Loan category: | ||||||||||||||||||||||||||||
Residential real estate | 4 | $ | 24 | $ | 0 | $ | 42 | $ | 208 | $ | 274 | $ | 289 | |||||||||||||||
Commercial real estate | 2 | 432 | 178 | 0 | 0 | 610 | 644 | |||||||||||||||||||||
Construction, land acquisition and development | 0 | 0 | 0 | 0 | 0 | 0 | 0 | |||||||||||||||||||||
Commercial and industrial | 4 | 933 | 0 | 0 | 0 | 933 | 932 | |||||||||||||||||||||
Consumer | 0 | 0 | 0 | 0 | 0 | 0 | 0 | |||||||||||||||||||||
State and political subdivisions | 0 | 0 | 0 | 0 | 0 | 0 | 0 | |||||||||||||||||||||
Total modifications | 10 | $ | 1,389 | $ | 178 | $ | 42 | $ | 208 | $ | 1,817 | $ | 1,865 |
| ||||||||||||||
There werewas noone TDRs modified within the previous 12 months that defaultedmodification made to a borrower experiencing financial difficulty during the yearsyear ended December 31, 20202023. andThe modification involved a 201912.
Modifications Related to COVID-19
In late March 2020, the federal banking regulators issued guidance and are encouraging banks to work prudently-month extension of term for a loan secured by residential real estate with and provide short-term payment accommodationsan amortized cost basis of $79 thousand. There were no loan modifications made to borrowers affected by COVID-19. Additionally, Section 4013 ofexperiencing financial difficulty during the CARES Act addressed COVID-19 related modifications and specified that such modifications made on loans were current as ofyear ended December 31, 2019 do not need to be classified as TDRs. FNCB has applied this guidance and made 922 such modifications, with 843 loans having an aggregate recorded investment of $151.4 million outstanding as of December 31, 2020. These initial modifications provided borrowers with a short-term, typically three-month, interest-only period or full payment deferral. FNCB extended a second payment deferral modification for 79 loans with an aggregate recorded investment of $22.0 million. Management is closely monitoring all loans for which a payment deferral has been granted and 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. As of December 31, 2020, there were 45 loans with an aggregate recorded investment of $9.5 million, or 1.06% of total loans, that were still under deferral.
The following table presents information on COVID-19 related loan modifications by major loan category as of December 31, 2020.2022.
As of December 31, 2020 | ||||||||||||||||||||||||
Total Loans Modified | Total Number of Loans Still Under Deferral | |||||||||||||||||||||||
(in thousands) | Number of Loans | Recorded Investment | % of Loan Category | Number of Loans | Recorded Investment | % of Loan Category | ||||||||||||||||||
COVID-19 related loan modifications: | ||||||||||||||||||||||||
Residential real estate | 199 | $ | 17,594 | 8.96 | % | 5 | $ | 196 | 0.10 | % | ||||||||||||||
Commercial real estate | 146 | 94,586 | 34.53 | % | 6 | 8,617 | 3.15 | % | ||||||||||||||||
Construction, land acquisition and development | 11 | 11,019 | 18.43 | % | 0 | 0 | 0 | |||||||||||||||||
Commercial and industrial | 106 | 21,659 | 9.08 | % | 1 | 42 | 0.02 | % | ||||||||||||||||
Consumer | 381 | 6,587 | 7.67 | % | 33 | 677 | 0.79 | % | ||||||||||||||||
State and political subdivision | 0 | 0 | 0 | 0 | 0 | 0 | ||||||||||||||||||
Total | 843 | $ | 151,445 | 16.76 | % | 45 | 9,532 | 1.06 | % | |||||||||||||||
Residential Real Estate Loan Foreclosures
There was onewere three residential real estate propertyloans with aan aggregate recorded investment of $153$202 thousand that waswere in the process of foreclosure as ofat December 31, 2020. 2023. There were three residential real estate loans with an aggregate recorded investment of $215 thousand that were in the process of foreclosure at December 31, 2022. FNCB did nonot have any residential real estate properties in OREO at December 31, 2020. 2023 and 2022.
There was one residential real estate property with a recorded investment
Note 6.5. BANK PREMISES AND EQUIPMENT
The following table summarizes bank premises and equipment at December 31, 20202023 and 20192022:
December 31, | December 31, | |||||||||||||||
(in thousands) | 2020 | 2019 | 2023 | 2022 | ||||||||||||
Land | $ | 3,537 | $ | 3,537 | $ | 2,930 | $ | 2,930 | ||||||||
Buildings and improvements | 13,708 | 12,798 | 14,416 | 14,408 | ||||||||||||
Furniture, fixtures and equipment | 12,114 | 11,551 | 11,216 | 11,048 | ||||||||||||
Leasehold improvements | 3,654 | 3,578 | 3,328 | 3,328 | ||||||||||||
Total | 33,013 | 31,464 | 31,890 | 31,714 | ||||||||||||
Accumulated depreciation | (15,434 | ) | (13,946 | ) | (17,344 | ) | (16,098 | ) | ||||||||
Net | $ | 17,579 | $ | 17,518 | $ | 14,546 | $ | 15,616 | ||||||||
Depreciation and amortization expense of premises and equipment amounted to $1.6 million and $1.4$1.3 million for 2023 and $1.6 million for 2022.
Note 6. OTHER ASSETS
The following table summarizes the years endedmajor components of other assets at December 31, 20202023 and 2019,2022 respectively.:
December 31, | ||||||||
(in thousands) | 2023 | 2022 | ||||||
Investment in low-income housing tax credit program | $ | 11,014 | $ | 11,014 | ||||
Right of use assets | 2,933 | 3,226 | ||||||
Mortgage servicing rights | 175 | 254 | ||||||
Interest rate swaps | 1,919 | 1,946 | ||||||
Net deferred tax assets | 14,579 | 16,827 | ||||||
Equity securities without readily determined fair value | 500 | 500 | ||||||
Repossessed assets | 420 | - | ||||||
Other assets | 10,003 | 9,238 | ||||||
Total | $ | 41,543 | $ | 43,005 | ||||
Note 7.7. DEPOSITS
The following table summarizes deposits by major category at December 31, 20202023 and 20192022:
December 31, | December 31, | |||||||||||||||
(in thousands) | 2020 | 2019 | 2023 | 2022 | ||||||||||||
Demand (non-interest bearing) | $ | 271,499 | $ | 179,465 | $ | 285,548 | $ | 305,850 | ||||||||
Interest-bearing: | ||||||||||||||||
Interest-bearing demand | 713,398 | 534,677 | 754,296 | 808,497 | ||||||||||||
Savings | 109,664 | 94,530 | 130,957 | 148,426 | ||||||||||||
Time ($250,000 and over) | 36,216 | 48,425 | 53,319 | 24,902 | ||||||||||||
Other time | 156,671 | 144,612 | 304,862 | 132,972 | ||||||||||||
Total interest-bearing | 1,015,949 | 822,244 | 1,243,434 | 1,114,797 | ||||||||||||
Total deposits | $ | 1,287,448 | $ | 1,001,709 | $ | 1,528,982 | $ | 1,420,647 | ||||||||
Included in other time deposits were brokered deposits of $148.7 million at December 31, 2023 and $23.9 million at December 31, 2022.
The aggregate amount of deposits reclassified as loans was $86 thousand at December 31, 2020and $62$75 thousand at December 31, 20192023 and $124 thousand at December 31, . 2022.Management evaluates transaction accounts that are overdrawn for collectability as part of its evaluation for credit losses. During 20202023 and 20192022,, no deposits were received on terms other than those available in the normal course of business.
The following table summarizes scheduled maturities of time deposits, including certificates of deposit and individual retirement accounts, at December 31, 20202023:
$250,000 | Other | $250,000 | Other | |||||||||||||||||||||
(in thousands) | and Over | Time Deposits | Total | and Over | Time Deposits | Total | ||||||||||||||||||
2021 | 33,161 | 132,717 | 165,878 | |||||||||||||||||||||
2022 | 3,055 | 13,315 | 16,370 | |||||||||||||||||||||
2023 | 0 | 3,940 | 3,940 | |||||||||||||||||||||
2024 | 0 | 3,753 | 3,753 | $ | 52,653 | $ | 208,053 | $ | 260,706 | |||||||||||||||
| 2025 | 0 | 2,946 | 2,946 | 666 | 59,190 | 59,856 | ||||||||||||||||||
2026 and thereafter | 0 | 0 | 0 | |||||||||||||||||||||
2026 | - | 15,303 | 15,303 | |||||||||||||||||||||
2027 | - | 12,093 | 12,093 | |||||||||||||||||||||
2028 | - | 10,223 | 10,223 | |||||||||||||||||||||
Total | $ | 36,216 | $ | 156,671 | $ | 192,887 | $ | 53,319 | $ | 304,862 | $ | 358,181 | ||||||||||||
Investment securities with a carrying value of $279.7 million and $235.0 million at December 31, 2020 and 2019, respectively, were pledged to collateralize certain municipal deposits. In addition, FNCB had outstanding letters of credit with the FHLB to secure municipal deposits of $75.0 million and $60.0 million at December 31, 2020 and 2019, respectively.
Note 8.8. BORROWED FUNDS
Short-term borrowings available to FNCB include overnight advances through the Federal Home Loan Bank of Pittsburgh ("FHLB") advances, federal funds lines of credit and the Federal Reserve Discount Window, which generally represent overnight or less than 30-day borrowings. FNCB's maximum borrowing capacity under federal funds lines of credit, which are unsecured, was $40.0 million at December 31, 2020.
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 $500.1$506.2 million at December 31, 2020 2023and $475.3$482.1 million at December 31, 2022. FNCB’s maximum borrowing capacity was $373.6 million at December 31, 2019. 2023FNCB’s maximum borrowing capacity was $352.2 million at. At December 31, 2020.2023 There was $75.0and 2022, there were $91.5 million and $47.5 million, respectively, in letters of credit to secure municipal deposits outstanding at December 31, 2020 under this agreement. There were no$16.0 million in overnight borrowings oradvances and $149.0 million in term advances through the FHLB of Pittsburgh outstanding at December 31, 2023. At 2020.December 31, 2022, there were $139.4 million in overnight advances and $32.7 million in term advances outstanding, through the FHLB of Pittsburgh. FNCB had a remaining borrowing availability at the FHLB of Pittsburgh of $115.7 million at December 31, 2023.
Advances through the Federal Reserve Bank Discount Window generally include short-term advances which are fully collateralized by certain pledged loans in the amount of $31.5 million under the Federal Reserve Bank’sBank's Borrower-in-Custody (“BIC”("BIC") program. There were no advancesAt December 31, 2023, FNCB had loans pledged under the BIC program of $187.0 million. There were no advances outstanding at December 31, 2020 and December 31, 2019. FNCB had available borrowing capacity of $16.4 million under thisthe BIC program at December 31, 2020.2023
and 2022. At December 31, 2023, FNCB had borrowing capacity available under the BIC program of $158.4 million. On April 9, 2020March 12, 2023, the Federal Reserve Bank established the Paycheck ProtectionBank Term Funding Program Liquidity Facility (“PPPLF”BTFP”), a program through the Discount Window designed to provide participating lenders with liquidityadditional funding to loan moneyeligible depository institutions during a period of stress. The BTFP is collateralized by high-quality securities valued at par including U.S. Treasury securities, U.S. government agency debt and mortgage-backed securities and other qualifying securities. At December 31, 2023, FNCB had securities pledged of $27.8 million and an outstanding advance under the PPP. PPPLF advances are collateralized by poolsBTFP of PPP loans, have an interest rate of 0.35% and a maturity date equal to the term of the pool of PPP loans securing it. Repayment of PPP loans serving as collateral must be passed on to $25.0 million. On January 24, 2024, the Federal Reserve Bank Discount Window to pay down the corresponding PPPLF advance. Atannounced that it would cease making new loans under this program on March 11, 2024.
The following tables present borrowings, by type, outstanding at December 31, 2020,2023 there were 0 outstanding advances under the PPPLF and FNCB had $58.3 million in availability through this facility. 2022.
As of and for the Year Ended December 31, 2020 | As of and for the Year Ended December 31, 2023 | |||||||||||||||||||||||||||||||||||||||
Weighted | Weighted | Weighted | Weighted | |||||||||||||||||||||||||||||||||||||
Maximum | Average | Average | Maximum | Average | Average | |||||||||||||||||||||||||||||||||||
Ending | Average | Month-End | Rate for | Rate at | Ending | Average | Month-End | Rate for | Rate at | |||||||||||||||||||||||||||||||
(dollars in thousands) | Balance | Balance | Balance | the Year | Period End | Balance | Balance | Balance | the Year | Period End | ||||||||||||||||||||||||||||||
FHLB of Pittsburgh advances - term | $ | 148,962 | $ | 109,979 | $ | 148,962 | 4.78 | % | 5.01 | % | ||||||||||||||||||||||||||||||
FHLB of Pittsburgh advances - overnight | $ | 0 | $ | 5,501 | $ | 35,125 | 1.24 | % | 0 | 16,000 | 69,792 | 196,900 | 5.20 | 5.68 | ||||||||||||||||||||||||||
FHLB of Pittsburgh advances - term | 0 | 26,354 | 52,809 | 1.54 | % | 0 | ||||||||||||||||||||||||||||||||||
| Federal funds | 0 | 26 | 0 | 0.76 | % | 0 | ||||||||||||||||||||||||||||||||||
Federal reserve discount window BIC advances | 0 | 437 | 10,000 | 0.25 | % | 0 | ||||||||||||||||||||||||||||||||||
| Federal reserve discount window PPPLF advances | 0 | 8,659 | 36,272 | 0.35 | % | 0 | ||||||||||||||||||||||||||||||||||
Federal Reserve discount window BIC advances | - | 85 | - | 4.98 | - | |||||||||||||||||||||||||||||||||||
Federal Reserve discount window BTFP advances | 25,000 | 1,164 | 25,000 | 4.89 | 4.89 | |||||||||||||||||||||||||||||||||||
Junior subordinated debentures | 10,310 | 10,310 | 10,310 | 2.43 | % | 1.89 | % | 10,310 | 10,310 | 10,310 | 7.02 | 7.32 | ||||||||||||||||||||||||||||
As of and for the Year Ended December 31, 2019 | As of and for the Year Ended December 31, 2022 | |||||||||||||||||||||||||||||||||||||||
Weighted | Weighted | Weighted | Weighted | |||||||||||||||||||||||||||||||||||||
Maximum | Average | Average | Maximum | Average | Average | |||||||||||||||||||||||||||||||||||
Ending | Average | Month-End | Rate for | Rate at | Ending | Average | Month-End | Rate for | Rate at | |||||||||||||||||||||||||||||||
(dollars in thousands) | Balance | Balance | Balance | the Year | Period End | Balance | Balance | Balance | the Year | Period End | ||||||||||||||||||||||||||||||
FHLB of Pittsburgh advances - term | $ | 32,650 | $ | 5,830 | $ | 32,650 | 4.51 | % | 4.45 | % | ||||||||||||||||||||||||||||||
FHLB of Pittsburgh advances - overnight | $ | 14,100 | $ | 14,971 | $ | 59,825 | 2.58 | % | 1.80 | % | 139,400 | 93,309 | 170,350 | 2.56 | 4.45 | |||||||||||||||||||||||||
FHLB of Pittsburgh advances - term | 32,809 | 37,831 | 65,171 | 2.26 | % | 1.86 | % | |||||||||||||||||||||||||||||||||
Federal funds | 0 | 8 | 0 | 0 | 0 | |||||||||||||||||||||||||||||||||||
Federal reserve discount window BIC advances | 0 | 0 | 0 | 0 | 0 | |||||||||||||||||||||||||||||||||||
Subordinated debentures | 0 | 520 | 5,000 | 4.50 | % | 0 | ||||||||||||||||||||||||||||||||||
Federal Reserve discount window BIC advances | - | 66 | - | 3.77 | - | |||||||||||||||||||||||||||||||||||
Junior subordinated debentures | 10,310 | 10,310 | 10,310 | 4.17 | % | 3.56 | % | 10,310 | 10,310 | 10,310 | 3.47 | 6.44 | ||||||||||||||||||||||||||||
On December 14, 2006, the Issuing Trust issued $10.0 million of trust preferred securities (the “Trust Securities”) at a variable interest rate, ofinitially equal to 7.02%, with a scheduled maturity of December 15, 2036.FNCB owns 100.0% of the ownership interest in the Issuing Trust. The proceeds from the issue were invested in $10.3 million, 7.02% Junior Subordinated Debentures (the “Debentures”) issued by FNCB. The interest rate on the Trust Securities and the Debentures resets quarterly atto 3-month CME Term SOFR plus a spread adjustment of 0.26161% and a margin of 1.67% above the current 3-month LIBOR rate.. The average interest rate paid on the Debentures was 2.43%7.02% in 20202023 and 4.17%3.47% in 20192022. The Debentures are unsecured and rank subordinate and junior in right to all indebtedness, liabilities and obligations of FNCB. The Debentures represent the sole assets of the Trust. Interest on the Trust Securities is deferrable until a period of twenty consecutive quarters has elapsed. FNCB has the option to prepay the Trust Securities beginning December 15, 2011. FNCB has, under the terms of the Debentures and the related Indenture, as well as the other operative corporate documents, agreed to irrevocably and unconditionally guarantee the Trust’s obligations under the Debentures. FNCB has reflected this investment on a deconsolidated basis. As a result, the Debentures totaling $10.3 million, have been reflected in borrowed funds in the consolidated statements of financial condition at December 31, 20202023 and 20192022 under the caption “Junior Subordinated Debentures”. FNCB records interest expense on the Debentures in its consolidated statements of income. FNCB also records its common stock investment issued by First National Community Statutory Trust I in other assets in its consolidated statements of financial condition at December 31, 20202023 and 20192022. At December 31, 20202023 and 20192022, accrued and unpaid interest associated with the Debentures amounted to $9$36 thousand and $16$31 thousand, respectively.
On September 1, 2009, FNCB offered only to accredited investors up to $25.0 million principal amount of unsecured subordinated debentures due September 1, 2019 (the “Notes”). Prior to July 1, 2015, the Notes had a fixed interest rate of 9% per annum. Payments of interest are payable to registered holders of the Notes (the “Noteholders”) quarterly on the first of every third month, subject to the right of FNCB to defer such payment. On June 30, 2015, pursuant to approval from all of the Noteholders and the Reserve Bank, FNCB amended the original terms of the Notes to reduce the interest rate payable from 9.00% to 4.50% effective July 1, 2015. At December 31, 2018, there was $5.0 million in principal outstanding on the Notes. On January 30, 2019, the Board of Directors of FNCB approved the acceleration of the final $5.0 million repayment of principal on the Notes. The $5.0 million principal repayment, which was due and payable on September 1, 2019, along with all outstanding accrued interest for the period December 1, 2018 through February 7, 2019, was paid to Noteholders on February 8, 2019.
The following table presents the contractual maturities of borrowed funds and the weighted-average rate by contractual maturity date at December 31, 20202023:
December 31, 2020 | ||||||||||||
Weighted | ||||||||||||
Average | ||||||||||||
(in thousands) | Amount | Interest Rate | December 31, 2023 | |||||||||
2021 | $ | 0 | 0 | |||||||||
2022 | 0 | 0 | ||||||||||
2023 | 0 | 0 | ||||||||||
2024 | 0 | 0 | $ | 118,850 | ||||||||
2025 | 0 | 0 | 29,567 | |||||||||
2026 and thereafter | 10,310 | 1.89 | % | |||||||||
2026 | 5,000 | |||||||||||
2027 | 22,357 | |||||||||||
2028 | 14,188 | |||||||||||
2029 and thereafter | 10,310 | |||||||||||
Total | $ | 10,310 | 1.89 | % | $ | 200,272 | ||||||
Note 9. DERIVATIVE AND HEDGING TRANSACTIONS
Risk Management Objective of Using Derivatives
FNCB is exposed to certain risks arising from both its business operations and economic conditions. It principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. FNCB manages economic risks, including interest rate, liquidity, and credit risk primarily by managing the amount, sources, and duration of its assets and liabilities and the use of derivative financial instruments. Specifically, FNCB enters into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future unknown and uncertain cash amounts, the value of which are determined by interest rates. Derivative financial instruments are used to manage differences in the amount, timing, and duration of known or expected cash payments primarily related to FNCB's borrowings. FNCB's existing credit derivatives result from loan participations arrangements, therefore, are not used to manage interest rate risk in FNCB's assets or liabilities.
Cash Flow Hedges of Interest Rate Risk
FNCB's objectives in using interest rate derivatives are to add stability to interest expense and to manage its exposure to interest rate movements. To accomplish this objective, FNCB primarily uses interest rate swaps as part of its interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable amounts from a counterparty in exchange for FNCB making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount. During 2020,amount, such derivatives were used to hedge the variable cash flows associated with forecasted issuances of debt.debt in 2023 and 2022.
For derivatives designated and that qualify as cash flow hedges of interest rate risk, the gain or loss on the derivative is recorded in accumulated other comprehensive incomeloss and subsequently reclassified into interest expense in the same period during which the hedged transaction affects earnings. Amounts reported in accumulated other comprehensive income related to derivatives will be reclassified to interest expense as interest payments are made on FNCB's variable-rate debt. During the next twelve months, it is estimated that an additional $69$604 thousand will be reclassified as an increasea decrease to interest expense.
Fair Value Hedges of Interest Rate Risk
FNCB is exposed to changes in the fair value of pools of fixed-rate assets due to changes in benchmark interest rates. FNCB uses interest rate swaps to manage its exposure to changes in fair value on these instruments attributable to changes in the designated benchmark interest rate. Interest rate swaps designated as fair value hedges involve the payment of fixed-rate amounts to a counterparty in exchange for FNCB receiving variable-rate payments over the life of the agreements without the exchange of the underlying notional amount.
For derivatives designated and that qualify as fair value hedges, the gain or loss on the derivative as well as the offsetting loss or gain on the hedged item attributable to the hedged risk are recognized in interest income.
The following table presents amounts recorded in the consolidated statements of financial condition related to the carrying amount and cumulative basis adjustment for fair value hedges at December 31, 2023:
Carrying Amount of the Hedged Assets (Liabilities) | Cumulative Amount of Fair Value Hedging Adjustment Included in the Carrying Amount of the Hedged Assets (Liabilities) | |||||||||||||||
| December 31, | December 31, | |||||||||||||||
(in thousands) | 2023 | 2022 | 2023 | 2022 | ||||||||||||
Line Item in the Statement of Financial Condition in Which the Hedged Item is Included | ||||||||||||||||
Fixed Rate Loans (1) | $ | 35,549 | - | $ | 549 | - | ||||||||||
Total | $ | 35,549 | - | $ | 549 | - | ||||||||||
(1) These amounts include the amortized cost basis of closed portfolios of fixed rate loans used to designate hedging relationships in which the hedged item is the stated amount of assets in the closed portfolio anticipated to be outstanding for the designated hedged period. At December 31, 2023, the amortized cost basis of the closed portfolios used in these hedging relationships was $90.0 million; the cumulative basis adjustments associated with these hedging relationships was $549 thousand; and the amounts of the designated hedged items were $35 million. There were no such hedging relationships at December 31, 2022. | ||||||||||||||||
Non-designated Hedges
Derivatives not designated as hedges are not speculative and result from a service FNCB provides to certain customers. FNCB executes interest rate swaps with commercial banking customers to facilitate their respective risk management strategies. Those interest rate swaps are simultaneously hedged by offsetting interest rate swaps that FNCB executes with a third party, such that FNCB minimizes its net risk exposure resulting from such transactions. As the interest rate swaps associated with this program do not meet the strict hedge accounting requirements, changes in the fair value of both the customer swaps and the offsetting swaps are recognized directly in earnings.
interest rate swaps provided to external lenders as part of loan participation arrangements, therefore, are not used to manage interest rate risk in FNCB's assets or liabilities. Derivatives not designated as hedges are not speculative and result from a service FNCB provides to certain lenders which participate in loans.
Fair Values of Derivative Instruments on the Balance Sheet
The following table below presents the fair value of FNCB's derivative financial instruments and the classification on the consolidated statements of financial condition at December 31, 2020 2023and December 31, 2019.2022:
Derivative Assets | Derivative Liabilities | Derivative Assets | Derivative Liabilities | |||||||||||||||||||||||||||||||||||||||||||||||||||||
As of December 31, 2020 | As of December 31, 2019 | As of December 31, 2020 | As of December 31, 2019 | As of December 31, 2023 | As of December 31, 2022 | As of December 31, 2023 | As of December 31, 2022 | |||||||||||||||||||||||||||||||||||||||||||||||||
(in thousands) | Notional Amount | Balance Sheet Location | Fair Value | Balance Sheet Location | Fair Value | Notional Amount | Balance Sheet Location | Fair Value | Balance Sheet Location | Fair Value | Notional Amount | Balance Sheet Location | Fair Value | Balance Sheet Location | Fair Value | Notional Amount | Balance Sheet Location | Fair Value | Balance Sheet Location | Fair Value | ||||||||||||||||||||||||||||||||||||
Derivatives designated as hedging instruments | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Interest rate products | $ | 0 | Other assets | $ | 0 | Other assets | $ | 0 | $ | 30,000 | Other liabilities | $ | 120 | Other liabilities | $ | 0 | $ | 10,000 | Other assets | $ | 650 | Other assets | $ | 1,173 | $ | 85,000 | Other liabilities | $ | 1,253 | Other liabilities | $ | - | ||||||||||||||||||||||||
Total derivatives designated as hedging instruments | 0 | 0 | 120 | 0 | 650 | 1,173 | 1,253 | - | ||||||||||||||||||||||||||||||||||||||||||||||||
| Derivatives not designated as hedging instruments | Derivatives not designated as hedging instruments | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Interest Rate Products | 2,750 | Other assets | 23 | Other assets | 0 | 2,750 | Other liabilities | 23 | Other liabilities | 0 | ||||||||||||||||||||||||||||||||||||||||||||||
Interest rate swaps | $ | 38,828 | Other assets | 1,438 | Other assets | 931 | $ | 38,828 | Other liabilities | 1,438 | Other liabilities | 931 | ||||||||||||||||||||||||||||||||||||||||||||
Risk participation transaction | $ | 13,672 | - | - | - | - | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Total derivatives not designated as hedging instruments | 23 | 0 | 23 | 0 | 1,438 | 931 | 1,438 | 931 | ||||||||||||||||||||||||||||||||||||||||||||||||
Cash and other collateral (1) | 0 | 0 | 0 | 0 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Net Derivatives on the Balance Sheet | 2,088 | 2,104 | 2,691 | 931 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Gross amounts not offset in the Statement of Financial Position | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Financial instruments | - | - | - | - | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Cash collateral (1) | - | 1,946 | - | - | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Net derivative amounts | $ | 23 | $ | 0 | $ | 143 | $ | 0 | $ | 2,088 | $ | 158 | $ | 2,691 | $ | 931 | ||||||||||||||||||||||||||||||||||||||||
(1) Other collateral represents the amount that cannot be used to offset our derivative assets and liabilities from a gross basis to a net basis in accordance with the applicable accounting guidance. The other collateral consist of securities and is exchanged under bilateral collateral and master netting agreements that allow us to offset the net derivative position with the related collateral. The application of the other collateral cannot reduce the net derivative position below zero. Therefore, excess other collateral, if any, is not reflected above. | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
There were (no1) Cash collateral represents the amount that cannot be used to offset our derivative assets and liabilities from a gross basis to a net basis in accordance with the applicable accounting guidance. Cash collateral is exchanged under bilateral collateral and master netting agreements that allow us to offset the net derivative position with the related collateral. The application of the collateral cannot reduce the net derivative position below zero. Therefore, excess other collateral, if any, is not derivative financial instruments outstanding as of December 31, 2019 or during the year ended December 31, 2019.reflected above.
EffectEffect of Fair Value and Cash Flow Hedge Accounting on Accumulated Other Comprehensive IncomeIncome
The following table below presents the effect of fair value and cash flow hedge accounting on accumulated other comprehensive income as of December 31, 2020.2023 and 2022. Amounts disclosed are gross and not net of taxes.taxes:
Year Ended December 31, 2020 | Year Ended December 31, 2023 | |||||||||||||||||||||||||||||||||||||||||||||||||
(in thousands) | Amount of Gain or (Loss) Recognized in OCI on Derivative | Amount of Gain or (Loss) Recognized in OCI Included Component | Amount of Gain or (Loss) Recognized in OCI Excluded Component | Location of Gain or (Loss) Recognized from Accumulated Other Comprehensive Income into Income | Amount of Gain or (Loss) Reclassified from Accumulated OCI into Income | Amount of Gain or (Loss) Reclassified from Accumulated OCI into Income Included Component | Amount of Gain or (Loss) Reclassified from Accumulated OCI into Income Excluded Component | Amount of Gain or (Loss) Recognized in OCI on Derivative | Amount of Gain or (Loss) Recognized in OCI Included Component | Amount of Gain or (Loss) Recognized in OCI Excluded Component | Location of Gain or (Loss) Recognized from Accumulated Other Comprehensive Income into Income | Amount of Gain or (Loss) Reclassified from Accumulated OCI into Income | Amount of Gain or (Loss) Reclassified from Accumulated OCI into Income Included Component | Amount of Gain or (Loss) Reclassified from Accumulated OCI into Income Excluded Component | ||||||||||||||||||||||||||||||||||||
Derivatives in cash flow hedging relationships | ||||||||||||||||||||||||||||||||||||||||||||||||||
Interest rate products | $ | (102 | ) | $ | (102 | ) | $ | 0 | Interest expense | $ | 11 | $ | 11 | $ | 0 | $ | (1,513 | ) | $ | (1,513 | ) | $ | - | Interest expense | $ | 302 | $ | 302 | $ | - | ||||||||||||||||||||
Total | $ | (102 | ) | $ | (102 | ) | $ | 0 | $ | 11 | $ | 11 | $ | 0 | $ | (1,513 | ) | $ | (1,513 | ) | $ | - | $ | 302 | $ | 302 | $ | - | ||||||||||||||||||||||
Year Ended December 31, 2022 | |||||||||||||||||||||||||
(in thousands) | Amount of Gain or (Loss) Recognized in OCI on Derivative | Amount of Gain or (Loss) Recognized in OCI Included Component | Amount of Gain or (Loss) Recognized in OCI Excluded Component | Location of Gain or (Loss) Recognized from Accumulated Other Comprehensive Income into Income | Amount of Gain or (Loss) Reclassified from Accumulated OCI into Income | Amount of Gain or (Loss) Reclassified from Accumulated OCI into Income Included Component | Amount of Gain or (Loss) Reclassified from Accumulated OCI into Income Excluded Component | ||||||||||||||||||
Derivatives in cash flow hedging relationships | |||||||||||||||||||||||||
Interest rate products | $ | 46 | $ | 46 | $ | - | Interest expense | $ | 176 | $ | 176 | $ | - | ||||||||||||
Total | $ | 46 | $ | 46 | $ | - | $ | 176 | $ | 176 | $ | - | |||||||||||||
Effect of Fair Value and Cash Flow Hedge Accounting on the Statement of Income
The following table below presents the effect of the FNCB's derivative financial instruments on the consolidated statements of income for the yearyears ended December 31, 2023 and 31,2020.2022:
Location and Amount of Gain or (Loss) Recognized in Income on Fair Value and Cash Flow Hedging Relationships | Location and Amount of Gain or (Loss) Recognized in Income on Fair Value and Cash Flow Hedging Relationships | |||||||||||
Year Ended | Year Ended December 31, | |||||||||||
December 31, 2020 | 2023 | 2022 | ||||||||||
(in thousands) | Interest Expense | Interest Expense | Interest Expense | |||||||||
Total amounts of income and expense line items presented in the cash flow statement of financial performance in which the effects of fair value or hedges are recorded | $ | 11 | $ | 302 | $ | 176 | ||||||
The effects of fair value and cash flow hedging: | ||||||||||||
Gain or (loss) on cash flow hedging relationships in Subtopic 815-20 | ||||||||||||
Interest contracts: | ||||||||||||
Amount of gain or (loss) reclassified from accumulated other comprehensive income into income | $ | 11 | 302 | 176 | ||||||||
Amount of gain or (loss) reclassified from accumulated other comprehensive income into income as a result that a forecasted transaction is no longer probable of occurring | $ | 0 | - | - | ||||||||
Amount of gain or (loss) reclassified from accumulated OCI into income - included component | $ | 11 | 302 | 176 | ||||||||
Amount of gain or (loss) reclassified from accumulated OCI into income - excluded component | $ | 0 | - | - |
| |||||||
Effect of Derivatives Not Designated as Hedging Instruments on the Statement of Income
Derivative financial instruments that are not designated as hedging instruments had no effect on the consolidated statements of income for the yearyears ended December 31, 2020.2023 and 2022.
Credit-risk-related Contingent Features
FNCB has agreements with each of its derivative counterparties that contain a provision where if FNCB defaults or is capable of being declared in default on any of its indebtedness, then it could also be declared in its derivative obligations.
FNCB has agreements with certain of its derivatives counterparties that contain a provision where if it fails to maintain its status as a well-capitalized institution, then it could be required to post additional collateral.
FNCB has minimum collateral posting thresholds with certain of its derivative counterparties for derivatives in a net liability position. As of December 31, 2020, 2023, the fairtermination value of derivatives in a net liability position, which includes accrued interest but excludes any adjustments for nonperformance risk, related to these agreements was $135 thousand. $259 thousand, FNCB has minimum collateral posting thresholds with certain of its derivative counterparties and has posted cash collateral of $400 thousand against its obligations under these agreements at December 31, 2023. As of December 31, 2020,2022, FNCB hashad no derivatives in a net liability position and accordingly was not postedrequired to post any collateral related to these agreements. If FNCB had breached any of these provisions at December 31, 2020, it could have been required to settlewith its obligations under the agreements at the termination value of $135 thousand.counterparts.
Note 10. BENEFIT PLANS
The Bank has a defined contribution profit sharing plan (“Profit Sharing Plan”) which includes the provision under section 401(k) of the Internal Revenue Code (“401(k)”) and covers all eligible employees. The Bank’s contribution to the Profit Sharing Plan is determined at management’s discretion at the end of each year and funded. The 401(k) feature of the Profit Sharing Plan permits employees to make voluntary salary deferrals, either pre-tax or Roth, up to the dollar limit prescribed by law. FNCB may make discretionary matching contributions equal to a uniform percentage of employee salary deferrals. Discretionary matching contributions are determined each year by management and approved by the Board of Directors. There were no discretionary annual contributions made to the Profit Sharing Plan in 20202023 and 20192022. Discretionary matching contributions under the 401(k) feature of the planProfit Sharing Plan totaled $332$580 thousand in 20202023 and $305$481 thousand in 20192022.
The Bank has an unfunded non-qualified deferred compensation plan covering all eligible Bank officers and directors as defined by the plan. This plan permits eligible participants to elect to defer a portion of their compensation. Elective deferred compensation and accrued earnings, included in other liabilities in the accompanying consolidated statements of financial condition, aggregated $2.0to $1.1 million and $1.3 million at both December 31, 20202023 and December 31, 2019.2022, respectively.
The Bank has a Supplemental Executive Retirement Plan (“SERP”) for a select group of management or highly compensated employees within the meaning of Sections 201(2), 301(a)(3) and 401(a)(1) of The Employee Retirement Income Security Act of 1974. The general provisions of the SERP provide for annual year-end contributions, performance contingent contributions and discretionary contributions. The SERP contributions are unfunded for Federal tax purposes and constitute an unsecured promise by the Bank to pay benefits in the future and are included in other liabilities in the accompanying consolidated statements of financial condition. Participants in the SERP have the status of general unsecured creditors of the Bank. SERP contributions totaled $240$181 thousand in 20202023 and $173$370 thousand in 20192022. The total liability associated with the SERP was $856 thousand$1.9 million at December 31, 20202023and $657 thousand$1.5 million at December 31, 20192022.
Note 11. INCOME TAXES
The following table summarizes the current and deferred amounts of the provision for income tax expense (benefit) for each of the two years ended December 31, 20202023 and 20192022:
For the Year Ended December 31, | ||||||||
(in thousands) | 2020 | 2019 | ||||||
Current | $ | 6 | $ | 0 | ||||
Deferred | 3,219 | 2,326 | ||||||
Income tax expense | $ | 3,225 | $ | 2,326 | ||||
For the Year Ended December 31, | ||||||||
(in thousands) | 2023 | 2022 | ||||||
Current tax provision | ||||||||
Federal | $ | 2,785 | $ | 4,569 | ||||
State | 101 | 77 | ||||||
Total current tax provision | 2,886 | 4,646 | ||||||
Deferred tax expense (benefit) | ||||||||
Federal | 23 | (502 | ) | |||||
State | (152 | ) | - | |||||
Total deferred tax benefit | (129 | ) | (502 | ) | ||||
Total tax expense | $ | 2,757 | $ | 4,144 | ||||
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 years ended December 31, 20202023 and December 31, 20192022:
For the Year Ended December 31, | ||||||||||||||||
2020 | 2019 | |||||||||||||||
(dollars in thousands) | Amount | % | Amount | % | ||||||||||||
Provision at statutory tax rates | $ | 3,900 | 21.00 | % | $ | 2,814 | 21.00 | % | ||||||||
Add (deduct): | ||||||||||||||||
Tax effects of tax free interest income | (632 | ) | (3.40 | )% | (344 | ) | (2.56 | )% | ||||||||
Non-deductible interest expense | 46 | 0.25 | % | 19 | 0.14 | % | ||||||||||
Bank-owned life insurance | (101 | ) | (0.55 | )% | (109 | ) | (0.81 | )% | ||||||||
Other items, net | 12 | 0.06 | % | (54 | ) | (0.41 | )% | |||||||||
Income tax provision | $ | 3,225 | 17.36 | % | $ | 2,326 | 17.36 | % | ||||||||
For the Year Ended December 31, | ||||||||||||||||
2023 | 2022 | |||||||||||||||
(dollars in thousands) | Amount | % | Amount | % | ||||||||||||
Provision at statutory tax rates | $ | 3,305 | 21.00 | % | $ | 5,164 | 21.00 | % | ||||||||
Add (deduct): | ||||||||||||||||
Tax effects of tax free interest income | (819 | ) | (5.20 | )% | (874 | ) | (3.55 | )% | ||||||||
Non-deductible interest expense | 408 | 2.59 | % | 85 | 0.35 | % | ||||||||||
Bank-owned life insurance | (158 | ) | (1.00 | )% | (206 | ) | (0.84 | )% | ||||||||
Other items, net | 21 | 0.13 | % | (25 | ) | (0.11 | )% | |||||||||
Income tax provision | $ | 2,757 | 17.52 | % | $ | 4,144 | 16.85 | % | ||||||||
The following table summarizes the components of net deferred tax assets at December 31, 20202023 and 20192022:
December 31, | ||||||||
(in thousands) | 2020 | 2019 | ||||||
Allowance for loan and lease losses | $ | 2,638 | $ | 2,027 | ||||
Deferred compensation | 641 | 592 | ||||||
Lease liability | 752 | 729 | ||||||
Other real estate owned valuation | 23 | 33 | ||||||
Deferred intangible assets | 45 | 166 | ||||||
Employee benefits | 210 | 192 | ||||||
| Accrued interest | 2 | 0 | ||||||
Accrued vacation | 56 | 42 | ||||||
Deferred income | 51 | 0 | ||||||
Depreciation | 13 | 10 | ||||||
| Derivative liabilities | 24 | 0 | ||||||
Net operating loss carryover | 418 | 4,348 | ||||||
Gross deferred tax assets | 4,873 | 8,139 | ||||||
Deferred loan origination costs | (173 | ) | (143 | ) | ||||
Unrealized holding gains on securities available-for-sale | (3,715 | ) | (812 | ) | ||||
| Unrealized holding gains on equity securities | (118 | ) | 0 | |||||
Right of use asset | (686 | ) | (660 | ) | ||||
| Deferred income | 0 | (22 | ) | |||||
Accrued interest | 0 | (224 | ) | |||||
Gross deferred tax liabilities | (4,692 | ) | (1,861 | ) | ||||
Net deferred tax assets | $ | 181 | $ | 6,278 | ||||
At December 31, 2020 FNCB had approximately $2.0 million in federal net operating loss ("NOL") carryovers, which expire in 2035 if not used. Deferred taxes associated with these NOL carryovers were $418 thousand at December 31, 2020.
December 31, | ||||||||
(in thousands) | 2023 | 2022 | ||||||
Allowance for credit losses | $ | 2,814 | $ | 3,180 | ||||
Deferred compensation | 756 | 650 | ||||||
Lease liability | 672 | 736 | ||||||
Other real estate owned valuation | 72 | 72 | ||||||
Employee benefits | 22 | 352 | ||||||
Accrued interest | 7 | 7 | ||||||
Deferred income | 5 | 29 | ||||||
Derivative liabilities | 54 | - | ||||||
Unrealized holding losses on securities available-for-sale | 10,624 | 12,982 | ||||||
Unrealized holding losses on equity securities | 278 | 32 | ||||||
Other deferred tax assets | 184 | - | ||||||
Gross deferred tax assets | 15,488 | 18,040 | ||||||
Deferred loan origination costs | (149 | ) | (137 | ) | ||||
Right of use asset | (616 | ) | (677 | ) | ||||
Derivative assets | - | (215 | ) | |||||
Mortgage servicing rights | (37 | ) | (53 | ) | ||||
Depreciation | (107 | ) | (130 | ) | ||||
Gross deferred tax liabilities | (909 | ) | (1,213 | ) | ||||
Net deferred tax assets | $ | 14,579 | $ | 16,827 | ||||
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. In evaluatingManagement performed an evaluation of FNCB's deferred tax assets at December 31,2023 taking into consideration all available evidence, management considers, among other factors, historical financial performance, expectation of future earnings, the ability to carry back losses to recoup taxes previously paid, length of statutory carry forward periods, experience with operating loss and tax credit carry forwards not expiring unused, tax planning strategies and timing of reversals of temporary differences. In assessing the need for a valuation allowance, management carefully weighs both positive and negative evidence currently available. The weight given to the potential effect of positive and negative evidence must be commensurate with the extent to which it can be objectively verified. If management determines based on available evidence, both positive and negative,at that it is more likely than not that some portion or all of the deferred tax asset will not be realized in future periods, a valuation allowance is calculated and recorded. These determinations are inherently subjective and depend upon management’s estimates and judgments used in their evaluation of both positive and negative evidence.time. Based on the most recentthis evaluation, at December 31, 2020, management believes that FNCB’sFNCB's future taxable income will be sufficient to utilize theits deferred tax assets. Management anticipates that FNCB's core earnings will continue to support the utilization of NOL carryovers and recognition ofThere was no valuation allowance for deferred tax assets based on future growth projections.
at December 31, 2023 and December 31, 2022.
Note 12. 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.
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 years ended December 31, 20202023 and 20192022:
For the Year Ended December 31, | For the Year Ended December 31, | |||||||||||||||
(in thousands) | 2020 | 2019 | 2023 | 2022 | ||||||||||||
Balance January 1, | $ | 77,896 | $ | 64,634 | $ | 79,144 | $ | 71,437 | ||||||||
Additions, new loans and advances | 79,325 | 93,871 | 229,481 | 96,978 | ||||||||||||
Repayments | (58,286 | ) | (80,609 | ) | (229,298 | ) | (89,271 | ) | ||||||||
| Balance December 31, | $ | 98,935 | $ | 77,896 | $ | 79,327 | $ | 79,144 | ||||||||
Advances and repayments on commercial lines of credit to related parties are presented gross in the above table. At December 31, 20202023 and 20192022there were 0no loans made to directors, executive officers and their related parties that were not performing in accordance with the terms of the loan agreements.
Deposits from directors, executive officers and their related parties held by the Bank at December 31, 20202023 and 20192022 amounted to $146.2$114.1 million and $84.1$133.0 million, respectively. Interest paid on the deposits amounted to $542$1.9 million in 2023 and $502 thousand in 2020 and $484 thousand in 20192022.
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,legal services, rent, vehicle repair services and dealer reserve payments. For 2022, goods and services acquired from related parties also included fidelity bond and errors and omissions insurance, legal services, and repair of repossessed automobiles for resale.insurance. FNCB recorded payments to related parties for goods and services of $2.0 million$134 thousand and $2.4 million in$526 thousand for the years ending December 202031,2023 and 20192022, respectively.
Note 13. COMMITMENTS, CONTINGENCIES AND CONCENTRATIONS
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 its 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 borrowings 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. ROU assets and lease liabilities were $3.3$2.9 million and $3.6$3.2 million, respectively, at December 31, 20202023 and $3.1$3.2 million and $3.5 million, respectively, at December 31, 2019.2022.
Operating lease expense associated with bank branches and office space is included in occupancy expense, while operating lease expense associated with automobiles and office equipment areis included in equipment expense in the consolidated statements of income. Total rental expense under leases amounted to $408 thousand and $418$391 thousand, respectively, at December 31, 20202023 and 2019.2022.
The following table summarizes the maturity of remaining operating lease liabilities as of December 31, 2020:2023:
(in thousands) | December 31, 2020 | December 31, 2023 | ||||||
2021 | $ | 375 | ||||||
2022 | 372 | |||||||
2023 | 364 | |||||||
2024 | 330 | $ | 417 | |||||
2025 | 335 | 388 | ||||||
2026 and thereafter | 2,742 | |||||||
2026 | 387 | |||||||
2027 | 388 | |||||||
2028 | 370 | |||||||
2029 and thereafter | 1,901 | |||||||
Total lease payments | 4,518 | 3,851 | ||||||
Less: imputed interest | 937 | 649 | ||||||
Present value of operating lease liabilities | $ | 3,581 | $ | 3,202 | ||||
The following table presents other information related to FNCB's operating leases:
(dollars in thousands) | December 31, 2020 | December 31, 2019 | December 31, 2023 | December 31, 2022 | ||||||||||||
Weighted-average remaining lease term (in years) | 13.3 | 14.3 | 10.7 | 9.9 | ||||||||||||
Weighted-average discount rate | 3.25 | % | 3.45 | % | 3.26 | % | 3.33 | % | ||||||||
Cash paid for amounts included in the measurement of lease liabilities: | ||||||||||||||||
Operating cash flows from operating leases | $ | 395 | $ | 385 | $ | 423 | $ | 402 | ||||||||
Commitments
On October 1, 2022, FNCB issued a signed letter of intent to make an equity investment of approximately $11.0 million in a limited partnership interest, to build and operate a senior low-income housing development located in Scranton, Lackawanna County, Pennsylvania. One hundred percent (100.0%) of the rental units will qualify for Federal Low-Income Housing Tax Credits as provided for in Section 42 of the Internal Revenue Code of 1986, as amended. FNCB made an initial contribution of $2.2 million in the fourth quarter of 2022, upon closing the partnership agreement. In 2023, contributions totaled $6.6 million, in accordance with the construction schedule. The remaining obligation of $2.2 million, which is included in other liabilities in the consolidated statements of financial condition at December 31, 2023, will be contributed over a series of draws over the remaining 6-month period according to the construction schedule.
Financial Instruments with off-balance sheetunfunded commitments
FNCB is a party to financial instruments with off-balance sheetunfunded commitments risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit that involve varying degrees of credit, interest rate or liquidity risk in excess of the amount recognized in the balance sheet.consolidated statements of financial condition. FNCB’s exposure to credit loss from nonperformance by the other party to the financial instruments for commitments to extend credit and standby letters of credit is represented by the contractual amount of those instruments.
FinancialThe following table summarizes financial instruments whose contract amounts represent credit risk at December 31, 20202023 and 20192022 are as follows::
December 31, | December 31, | |||||||||||||||
(in thousands) | 2020 | 2019 | 2023 | 2022 | ||||||||||||
Commitments to extend credit | $ | 227,908 | $ | 275,891 | $ | 335,032 | $ | 301,300 | ||||||||
Standby letters of credit | 18,914 | 15,081 | 16,908 | 17,923 | ||||||||||||
In order to provide for probable losses inherent in these instruments, FNCB recordedestablished reserves for unfunded commitments of $613 thousand1.4 million and $703$949 thousand at December 31, 20202023 and 20192022, respectively, which were included in other liabilities on the consolidated balance sheets.statements of financial condition. FNCB recorded a credit for unfunded commitments of $803 thousand in 2023 and a provision for unfunded commitments of $366 thousand in 2022.
Commitments to extend credit are agreements to lend to customers in accordance with contractual provisions. These commitments usually are for specific periods or contain termination clauses and may require the payment of a fee. The total amounts of unused commitments do not necessarily represent future cash requirements, in that commitments often expire without being drawn upon.
Letters of credit and financial guarantees are agreements whereby FNCB guarantees the performance of a customer to a third party. Collateral may be required to support letters of credit in accordance with management’s evaluation of the creditworthiness of each customer. The credit exposure assumed in issuing letters of credit is essentially equal to that in other lending activities.
Federal Home Loan Bank — Mortgage Partnership Finance (“MPF”) Program
Under a secondary market loan servicing program with the FHLB, FNCB, in exchange for a monthly fee, provides a credit enhancement guarantee to the FHLB for foreclosure losses in excess of a defined First Loss Account (“FLA”) balance, up to specified amounts. At December 31, 20202023, FNCB serviced payments on $21.6$11.7 million of first lien residential loan principal under these terms for the FHLB. At December 31, 20202023, the maximum credit enhancement obligation for such guarantees by FNCB would be approximately $975$655 thousand if total foreclosure losses on the entire pool of loans exceed the FLA of approximately $53 thousand. $70 thousand. There was no reserve established for this guarantee at December 31, 20202023 and 20192022.
Concentrations of Credit Risk
Cash Concentrations: The Bank maintains cash balances at several correspondent banks. FNCB engages in a primary correspondent banking relationship with CompassPNC Bank. At December 31, 20202023 and 20192022, FNCB had balances with CompassPNC Bank of $4.4$1.4 million and $1.1$1.7 million, respectively. There were no other due from bank accounts in excess of the $250 thousand limit covered by the Federal Deposit Insurance Corporation (“FDIC”) at December 31, 20202023 and 20192022.
Loan and Lease Concentrations: FNCB attempts to limit its exposure to concentrations of credit risk by diversifying its loan portfolioand lease portfolios and closely monitoring any concentrations of credit risk. The commercial real estate and construction, land acquisition and development portfolios comprise $333.7comprised $468.0 million, or 36.9%38.4% of grosstotal outstanding loans and leases at December 31, 20202023 and $443.5 million, or 39.5% of outstanding loans and leases, at .December 31, 2022. Geographic concentrations exist because FNCB provides its services in its primary market area of Northeastern Pennsylvania and conducts limited activities outside of that area. FNCB had loans and loan commitments secured by real estatecollateral outside of its primary market area of $47.4$188.0 million, or 5.2%15.4%,of grosstotal outstanding loans and leases at December 31, 2020.2023
and $123.4 million, or 11.0% of outstanding loans and leases at December 31, 2022.
FNCB considers an industry concentration within the loan portfolio to exist if the aggregate loan balance outstanding for that industry exceeds 25.0% of capital. The following table summarizes the concentration within FNCB’s loan portfolio by industry at December 31, 20202023 and 20192022:
December 31, 2020 | December 31, 2019 | December 31, 2023 | December 31, 2022 | |||||||||||||||||||||||||||||
% of | % of | % of | % of | |||||||||||||||||||||||||||||
(in thousands) | Amount | Gross Loans | Amount | Gross Loans | Amount | Gross Loans | Amount | Gross Loans | ||||||||||||||||||||||||
General freight trucking | $ | 48,477 | 3.97 | % | $ | 25,052 | 2.23 | % | ||||||||||||||||||||||||
Retail space/shopping centers | $ | 43,926 | 4.86 | % | $ | 43,865 | 5.31 | % | 58,517 | 4.80 | % | 54,461 | 4.85 | % | ||||||||||||||||||
1-4 family residential investment properties | 58,114 | 6.43 | % | 38,122 | 4.61 | % | 119,393 | 9.78 | % | 113,746 | 10.13 | % | ||||||||||||||||||||
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.
Note 14. STOCK COMPENSATION PLANS
The following table summarizesfurther awards under the activity related to FNCB’s unvested restricted stock awards during the years ended December 31, 2020 and 2019.
For the Years Ended December 31, | ||||||||||||||||
2020 | 2019 | |||||||||||||||
Weighted- | Weighted- | |||||||||||||||
Average | Average | |||||||||||||||
Restricted | Grant Date | Restricted | Grant Date | |||||||||||||
Shares | Fair Value | Shares | Fair Value | |||||||||||||
Unvested restricted stock awards at January 1, | 128,150 | $ | 7.76 | 114,702 | $ | 7.50 | ||||||||||
Awards granted | 75,924 | 6.07 | 57,684 | 7.64 | ||||||||||||
Forfeitures | (5,741 | ) | 6.64 | (6,678 | ) | 7.61 | ||||||||||
Vestings | (38,420 | ) | 7.48 | (37,558 | ) | 6.80 | ||||||||||
Unvested restricted stock awards at December 31, | 159,913 | $ | 7.07 | 128,150 | $ | 7.76 | ||||||||||
LTIP. For the years ended December 31, 20202023 and 20192022,, stock-based compensation expense, which is included in salaries and benefits expense in the consolidated statements of income, totaled $336$583 thousand in 2020and $255$448 thousand, in 2019.respectively. Total unrecognized compensation expense related to unvested restricted stock awards was $1.6 million and $1.2 million at December 31, 20202023 and 20192022, was $896 thousand and $809 thousand, respectively. Unrecognized compensation expense related to unvested shares of restricted stock is expected to be recognized over a weighted-average period of 3.43.6 years.
On March 22, 2023, the Board of Directors formally approved and adopted the EIP, which replaced the LTIP. The EIP authorizes 2,000,000 shares of FNCB's common stock plus 455,584 shares of FNCB's common shares that were remaining reserved but unissued under the LTIP. The EIP provides the Compensation Committee or the Board of Directors with the authority to offer several types of awards including stock options, stock appreciation rights, restricted stock, restricted stock units, performance shares and performance units. The EIP was approved by a majority vote by FNCB shareholders at the Annual Meeting of Shareholders on May 17, 2023.
On July 1, 20203, 2023, and 2019, 2,5552,454 shares and 1,956 shares, respectively, of FNCB's common stock were granted under the LTIPEIP to each of the Bank's ten non-employee directors. The total number ofdirectors or 24,540 shares granted to the directors were 25,550 in 2020 and 19,560 in 2020.aggregate. The shares of common stockvested immediately vested to each director upon grant, and the fair value per share on the grant date was $5.87 for the 2020 grant and $7.67 for the 2019 grant. Directors$6.11. Directors' fees totaling $150 thousand associated with these grants wasthis grant were recognized on both July 1, 2020 3, 2023.
In addition, on July 3, 2023, 100 shares of FNCB's common stock were granted under the EIP to each of the Bank's twenty-two advisory board members or 2,200 shares in aggregate. The shares vested immediately to each director upon grant, and 2019 and included in other operating expense in the consolidated statementsfair value per share on the grant date was $6.11. FNCB recognized advisory board fees of income for$13 thousand associated with this grant on December 31, 2020 July 3, 2023.and 2019.
At December 31, 2020,2023, there were 756,3872,435,076 shares of FNCB common stock available for award under the LTIP.EIP.
For the Years Ended December 31, | ||||||||||||||||
2023 | 2022 | |||||||||||||||
Weighted- | Weighted- | |||||||||||||||
Average | Average | |||||||||||||||
Restricted | Grant Date | Restricted | Grant Date | |||||||||||||
(dollars in thousands) | Shares | Fair Value | Shares | Fair Value | ||||||||||||
Unvested restricted stock awards: | ||||||||||||||||
Total outstanding, beginning of period | 185,965 | $ | 8.22 | 174,297 | $ | 7.37 | ||||||||||
Awards granted | 140,445 | 7.51 | 71,860 | 9.64 | ||||||||||||
Forfeitures | (6,232 | ) | 7.87 | (5,503 | ) | 8.17 | ||||||||||
Shares vested | (58,425 | ) | 8.01 | (54,689 | ) | 7.38 | ||||||||||
Total outstanding, end of period | 261,753 | $ | 7.89 | 185,965 | $ | 8.22 | ||||||||||
Note 15. REGULATORY MATTERS/SUBSEQUENT EVENTSMATTERS
On January 28, 2019, FNCB announced that it had commenced a public offering of its shares of common stock in a firm commitment underwritten offering. The offering closed on February 8, 2019, FNCB issued 3,285,550 shares of its common stock, which included 428,550 shares of common stock issued upon the exercise in full of the option to purchase additional shares granted to underwriters, at a public offering price of $7.00 per share, less an underwriting discount of $0.35 per share. FNCB received net proceeds after deducting underwriting discounts and offering expenses of $21.3 million. Following the receipt of the proceeds during the first quarter of 2019, FNCB made a capital investment in FNCB Bank, it's wholly-owned subsidiary of $17.8 million.
FNCB’s ability to pay dividends to its shareholders, or repurchase shares of its common stock, is largely dependent on the Bank’s ability to pay dividends to FNCB. Bank regulations limit the amount of dividends that may be paid, or shares that may be repurchased, without prior approval of the Bank’s principal regulatory agency. Cash dividends declared and paid by FNCB during 20202023 and 20192022 were $0.22$0.36 per share and $0.20$0.33 per share, respectively. FNCB offers a Dividend Reinvestment and Stock Purchase plan ("DRP") to its shareholders. For the years ended December 31, 2020 2023and 20192022, 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. Shares of common stock issued under the DRP totaled 10,27113,348 and 7,3695,089 for the years ended December 31, 20202023 and 20192022, respectively. Subsequent to December 31, 20202023, on January 27, 2021,24, 2024, FNCB declared a $0.06$0.090 per share dividend payable on March 15, 20212024 to shareholders of record onas of March 1, 20212024.
On January 27, 2021, FNCB's Board of Directors authorized a stock repurchase program under which up to 975,000 shares of FNCB's outstanding common stock may be acquired in the open market commencing no earlier than February 3, 2021 and expiring December 31, 2021 pursuant to a trading plan that was adopted in accordance with Rule 10b5-1 of the Securities Exchange Act of 1934, as amended.
Under the program shares will be 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 purchases at any time that management determines additional repurchases are no longer warranted.
Companyholding 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 that as of December 31, 20202023, that FNCB and the Bank meet all applicable capital adequacy requirements.
Current quantitative measures established by regulation to ensure capital adequacy require FNCB Bank to maintain minimum amounts and ratios (set forth in the table 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 December 31, 20202023 and 20192022:
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, 2023 | ||||||||||||||||||||||||||||||||||||||||
Total capital (to risk-weighted assets) | $ | 149,173 | 15.79 | % | 8.00 | % | 10.50 | % | 10.00 | % | $ | 175,296 | 12.66 | % | 8.00 | % | 10.50 | % | 10.00 | % | ||||||||||||||||||||
Tier I capital (to risk-weighted assets) | 137,356 | 14.54 | % | 6.00 | % | 8.50 | % | 8.00 | % | 161,896 | 11.69 | % | 6.00 | % | 8.50 | % | 8.00 | % | ||||||||||||||||||||||
Tier I common equity (to risk-weighted assets) | 137,356 | 14.54 | % | 4.50 | % | 7.00 | % | 6.50 | % | 161,896 | 11.69 | % | 4.50 | % | 7.00 | % | 6.50 | % | ||||||||||||||||||||||
Tier I capital (to average assets) | 137,356 | 9.57 | % | 4.00 | % | 4.00 | % | 5.00 | % | 161,896 | 8.76 | % | 4.00 | % | 4.00 | % | 5.00 | % | ||||||||||||||||||||||
Total risk-weighted assets | 944,546 | 1,384,710 | ||||||||||||||||||||||||||||||||||||||
Total average assets | 1,434,776 | 1,848,752 | ||||||||||||||||||||||||||||||||||||||
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, 2019 | ||||||||||||||||||||||||||||||||||||||||
December 31, 2022 | ||||||||||||||||||||||||||||||||||||||||
Total capital (to risk-weighted assets) | $ | 133,406 | 14.77 | % | 8.00 | % | 10.50 | % | 10.00 | % | $ | 169,984 | 13.11 | % | 8.00 | % | 10.50 | % | 10.00 | % | ||||||||||||||||||||
Tier I capital (to risk-weighted assets) | 123,753 | 13.70 | % | 6.00 | % | 8.50 | % | 8.00 | % | 154,842 | 11.94 | % | 6.00 | % | 8.50 | % | 8.00 | % | ||||||||||||||||||||||
Tier I common equity (to risk-weighted assets) | 123,753 | 13.70 | % | 4.50 | % | 7.00 | % | 6.50 | % | 154,842 | 11.94 | % | 4.50 | % | 7.00 | % | 6.50 | % | ||||||||||||||||||||||
Tier I capital (to average assets) | 123,753 | 10.36 | % | 4.00 | % | 4.00 | % | 5.00 | % | 154,842 | 8.77 | % | 4.00 | % | 4.00 | % | 5.00 | % | ||||||||||||||||||||||
Total risk-weighted assets | 903,172 | 1,296,618 | ||||||||||||||||||||||||||||||||||||||
Total average assets | 1,194,789 | 1,765,251 | ||||||||||||||||||||||||||||||||||||||
Note 16. 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, and for estimating fair value of financial instruments not recorded at fair value, is set forth below.
Available-for-Sale Debt Securities
The estimated fair values for FNCB’s investments in obligations of the 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 and certain corporate debt securities 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 December 31, 20202023, FNCB owned eighteen30corporate debt securities with an aggregate amortized cost and fair value of $23.8$35.1 million and $24.6$31.3 million, respectively. The market for tenfour of the eighteen corporate debtthese securities at December 31, 20202023was not active and markets for similar securities are also not active. FNCB obtained valuations for these securities from a third-party service provider that prepared the valuations using a discounted cash flow approach.market approach that incorporates identifying a population of transactions for similar instruments and an evaluation to capture credit risk associated with these bonds. Management takes measures to validate the service provider’s analysis and is actively involved in the valuation process, including reviewing and verifying the assumptionspopulation and evaluation of credit risk. Management believes this approach to be a conservative approach as it takes into consideration securities that have longer maturities or longer call dates, issuers with smaller asset sizes, and securities with smaller issue amounts. These factors are typically considered to be factors that would add credit spread to a bond, thus resulting in a higher yield. Management believes the valuation results from this market approach to be consistent with pricing and data for similar deals at December 31,2023. FNCB considers the inputs 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 inputsmarket approach to be unobservableobservable Level 3 inputs because, theywhile inputs are based on estimates aboutactual transactions, the assumptions market participants would use in pricing this typerelative number of asset and developed based on the best information availabletransactions in the circumstances rather than on observable inputs. As it relatespopulation is small and subjective assumptions are used in considering factors considered 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 from3.99% to 5.07% were applied to the expected cash flows to estimate fair value.incorporate credit spreads into price determination. 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 itsFNCB's third-party service provider for the period it continues to use an outside valuation 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, LIBORinterest rates, forward rates and rate volatility. Derivative contracts create exposure to interest rate movements a swellas well as risks from the potential of non-performance of the counterparty.
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The following tables present the financial assets and liabilities that are measured at fair value on a recurring basis at December 31, 20202023 and 20192022, and the fair value hierarchy of the respective valuation techniques utilized to determine the fair value:
Fair Value Measurements at December 31, 2020 | Fair Value Measurements at December 31, 2023 | |||||||||||||||||||||||||||||||
Quoted Prices | Significant | Significant | Quoted Prices | Significant | Significant | |||||||||||||||||||||||||||
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 | $ | 33,177 | $ | - | $ | 33,177 | $ | - | ||||||||||||||||||||||||
Obligations of state and political subdivisions | $ | 205,828 | $ | 0 | $ | 205,828 | $ | 0 | 199,796 | - | 199,796 | - | ||||||||||||||||||||
U.S. government/government-sponsored agencies: | ||||||||||||||||||||||||||||||||
Collateralized mortgage obligations - residential | 56,972 | 0 | 56,972 | 0 | 74,207 | - | 74,207 | - | ||||||||||||||||||||||||
Collateralized mortgage obligations - commercial | 3,904 | 0 | 3,904 | 0 | 3,386 | - | 3,386 | - | ||||||||||||||||||||||||
Mortgage-backed securities | 13,026 | 0 | 13,026 | 0 | 16,446 | - | 16,446 | - | ||||||||||||||||||||||||
Private collateralized mortgage obligations | 38,199 | 0 | 38,199 | 0 | 70,151 | - | 70,151 | - | ||||||||||||||||||||||||
Corporate debt securities | 24,580 | 0 | 8,156 | 16,424 | 31,286 | - | 24,312 | 6,974 | ||||||||||||||||||||||||
Asset-backed securities | 7,526 | 0 | 7,526 | 0 | 21,690 | - | 21,690 | - | ||||||||||||||||||||||||
Negotiable certificates of deposit | 674 | - | 674 | - | ||||||||||||||||||||||||||||
| Total available-for-sale debt securities | 350,035 | 0 | 333,612 | 16,424 | 450,814 | - | 443,840 | 6,974 | ||||||||||||||||||||||||
| Equity securities, at fair value | 3,026 | 3,026 | 0 | 0 | 4,786 | 4,786 | - | - | ||||||||||||||||||||||||
Derivative assets | 23 | 0 | 23 | 0 | 2,088 | - | 2,088 | - | ||||||||||||||||||||||||
| Total financial assets | $ | 353,084 | $ | 3,026 | $ | 333,635 | $ | 16,424 | $ | 457,688 | $ | 4,786 | $ | 445,928 | $ | 6,974 | ||||||||||||||||
| Financial liabilities: | ||||||||||||||||||||||||||||||||
Derivative liabilities | $ | 143 | $ | 0 | $ | 143 | $ | 0 | $ | 2,691 | $ | - | $ | 2,691 | $ | - | ||||||||||||||||
| Total financial liabilities | $ | 143 | $ | 0 | $ | 143 | $ | 0 | $ | 2,691 | $ | - | $ | 2,691 | $ | - | ||||||||||||||||
Fair Value Measurements at December 31, 2022 | ||||||||||||||||
Quoted Prices | Significant | Significant | ||||||||||||||
in Active Markets | Observable | Unobservable | ||||||||||||||
for Identical Assets | Inputs | Inputs | ||||||||||||||
(in thousands) | Fair Value | (Level 1) | (Level 2) | (Level 3) | ||||||||||||
Financial assets: | ||||||||||||||||
Available-for-sale debt securities: | ||||||||||||||||
U.S. Treasury securities | $ | 32,134 | $ | - | $ | 32,134 | $ | - | ||||||||
Obligations of state and political subdivisions | 220,782 | - | 220,782 | - | ||||||||||||
U.S. government/government-sponsored agencies: | ||||||||||||||||
Collateralized mortgage obligations - residential | 80,407 | - | 80,407 | - | ||||||||||||
Collateralized mortgage obligations - commercial | 3,329 | - | 3,329 | - | ||||||||||||
Mortgage-backed securities | 20,663 | - | 20,663 | - | ||||||||||||
Private collateralized mortgage obligations | 72,507 | - | 72,507 | - | ||||||||||||
Corporate debt securities | 30,672 | - | 22,736 | 7,936 | ||||||||||||
Asset-backed securities | 14,941 | - | 14,941 | - | ||||||||||||
Negotiable certificates of deposit | 656 | - | 656 | - | ||||||||||||
Total available-for-sale debt securities | 476,091 | - | 468,155 | 7,936 | ||||||||||||
Equity Securities, at fair value | 7,717 | 7,717 | - | - | ||||||||||||
Derivative assets | 2,104 | - | 2,104 | - | ||||||||||||
Total financial assets | $ | 485,912 | $ | 7,717 | $ | 470,259 | $ | 7,936 | ||||||||
Financial liabilities: | ||||||||||||||||
Derivative liabilities | $ | 931 | $ | - | $ | 931 | $ | - | ||||||||
Total financial liabilities | $ | 931 | $ | - | $ | 931 | $ | - | ||||||||
Fair Value Measurements at December 31, 2019 | ||||||||||||||||
Quoted Prices | Significant | Significant | ||||||||||||||
in Active Markets | Observable | Unobservable | ||||||||||||||
for Identical Assets | Inputs | Inputs | ||||||||||||||
(in thousands) | Fair Value | (Level 1) | (Level 2) | (Level 3) | ||||||||||||
| Financial assets: | ||||||||||||||||
Available-for-sale debt securities: | ||||||||||||||||
Obligations of state and political subdivisions | $ | 117,763 | $ | 0 | $ | 117,763 | $ | 0 | ||||||||
U.S. government/government-sponsored agencies: | ||||||||||||||||
Collateralized mortgage obligations - residential | 80,294 | 0 | 80,294 | 0 | ||||||||||||
Collateralized mortgage obligations - commercial | 17,723 | 0 | 17,723 | 0 | ||||||||||||
Mortgage-backed securities | 18,485 | 0 | 18,485 | 0 | ||||||||||||
Private collateralized mortgage obligations | 25,075 | 0 | 25,075 | 0 | ||||||||||||
Corporate debt securities | 7,182 | 0 | 2,032 | 5,150 | ||||||||||||
Asset-backed securities | 5,621 | 0 | 5,621 | 0 | ||||||||||||
Negotiable certificates of deposit | 696 | 0 | 696 | 0 | ||||||||||||
| Total available-for-sale debt securities | 272,839 | 0 | 267,689 | 5,150 | ||||||||||||
| Equity Securities, at fair value | 920 | 920 | 0 | 0 | ||||||||||||
Total financial assets | $ | 273,759 | $ | 920 | $ | 267,689 | $ | 5,150 | ||||||||
FNCB didThere were two corporate debt security transferred from Level not3 have any financial liabilities that were measured at fair value on a recurring basis athierarchy to Level 2 during the year ended, December 31, 2019.2023 There wereand there was one corporate debt security transferred from Level no3 transfers between levels within the fair value hierarchy to Level 2 during the yearsyear ended December 31, 20202022. Prior to the transfer from Level 3 to Level 2, the market for the transferred securities was not active and management obtained fair values of the securities from an independent 2019third. party. The valuation method employed utilized significant other unobservable inputs in determining fair values. Subsequently, in the period of transfer, management was able to obtain fair values for these securities from the independent pricing service used to price the remainder of the portfolio using significant other observable inputs.
The following table presents a reconciliation and statement of operations classification 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 years ended December 31, 20202023 and 20192022.:
Fair Value Measurements | ||||||||
Using Significant Unobservable Inputs (Level 3) | ||||||||
Corporate Debt Securities | ||||||||
For the Year Ended December 31, | ||||||||
(in thousands) | 2020 | 2019 | ||||||
Balance at January 1, | $ | 5,150 | $ | 3,929 | ||||
Additions | 11,800 | 1,000 | ||||||
Redemptions | (1,015 | ) | 0 | |||||
Sales | 0 | 0 | ||||||
Total gains or losses (realized/unrealized): | ||||||||
Included in earnings | 15 | 0 | ||||||
Included in other comprehensive income | 474 | 221 | ||||||
Balance at December 31, | $ | 16,424 | $ | 5,150 | ||||
Fair Value Measurements | ||||||||
Using Significant Unobservable Inputs (Level 3) | ||||||||
Corporate Debt Securities | ||||||||
For the Year Ended December 31, | ||||||||
(in thousands) | 2023 | 2022 | ||||||
Balance at January 1, | $ | 7,936 | $ | 12,345 | ||||
Additions | - | - | ||||||
Redemptions | - | (2,066 | ) | |||||
Transfer to Level 2 | (853 | ) | (756 | ) | ||||
Total gains or losses (realized/unrealized): | ||||||||
Included in earnings | - | - | ||||||
Included in other comprehensive income | (109 | ) | (1,587 | ) | ||||
Balance at December 31, | $ | 6,974 | $ | 7,936 | ||||
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 December 31, 2020 2023and 2019, and additional quantitative information about the valuation techniques and inputs utilized by FNCB to determine fair value. All such assets and liabilities were measured using Level 3 inputs.inputs:
December 31, 2020 | ||||||||||||||||||||
Fair Value Measurement | Quantitative Information | |||||||||||||||||||
Recorded | Valuation | Fair | Valuation | Unobservable | Value/ | |||||||||||||||
(in thousands) | Investment | Allowance | Value | Technique | Inputs | Range | ||||||||||||||
Impaired loans - collateral dependent | $ | 4,244 | $ | 218 | $ | 4,026 | Appraisal of collateral | Selling costs | 10.0% | |||||||||||
Impaired loans - other | 7,491 | 198 | 7,293 | Discounted cash flows | Discount rate | 3.00% | - | 8.75 | % | |||||||||||
Other real estate owned | 58 | 0 | 58 | Appraisal of collateral | Selling costs | 10.0% | ||||||||||||||
December 31, 2023 | ||||||||||||||||||||
Fair Value Measurement | Quantitative Information | |||||||||||||||||||
Recorded | Valuation | Fair | Valuation | Unobservable | Value/ | |||||||||||||||
(in thousands) | Investment | Allowance | Value | Technique | Inputs | Range | ||||||||||||||
Individually evaluated loans - collateral dependent | $ | 3,801 | $ | 121 | $ | 3,680 | Appraisal of collateral | Selling costs | 10.0% | |||||||||||
Individually evaluated loans - other | 441 | - | 441 | Discounted cash flows | Discount rate | 0.00% | - | 16.06% | ||||||||||||
Repossessed assets | 420 | - | 420 | Discounted cash flows | Discount rate | 10.0% | ||||||||||||||
December 31, 2019 | |||||||||||||||||||||
Fair Value Measurement | Quantitative Information | ||||||||||||||||||||
Recorded | Valuation | Fair | Valuation | Unobservable | Value/ | ||||||||||||||||
(in thousands) | Investment | Allowance | Value | Technique | Inputs | Range | |||||||||||||||
Impaired loans - collateral dependent | $ | 7,721 | $ | 376 | $ | 7,345 | Appraisal of collateral | Selling costs | 10.0% | ||||||||||||
Impaired loans - other | 8,065 | 97 | 7,968 | Discounted cash flows | Discount rate | 3.99% | - | 7.49 | % | ||||||||||||
Other real estate owned | 289 | 0 - | 289 | Appraisal of collateral | Selling costs | 10.0% | |||||||||||||||
The following table presents assets and liabilities measured at fair value on a non-recurring basis at December 31, 2022, prior to the adoption of ASU 2016-3, 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.
December 31, 2022 | ||||||||||||||||||||
Fair Value Measurement | Quantitative Information | |||||||||||||||||||
Recorded | Valuation | Fair | Valuation | Unobservable | Value/ | |||||||||||||||
(in thousands) | Investment | Allowance | Value | Technique | Inputs | Range | ||||||||||||||
Impaired loans - collateral dependent | $ | 1,902 | $ | 8 | $ | 1,894 | Appraisal of collateral | Selling costs | 10.0% | |||||||||||
Impaired loans - other | 5,698 | 26 | 5,672 | Discounted cash flows | Discount rate | 3.00% | - | 10.25% | ||||||||||||
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 make adjustments to 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 propertiesRepossessed assets include business assets and equipment and are recorded at fairthe liquidation value, less the estimated cost to sell, atobtained from an independent third party. Liquidation values are obtained from independent third party when FNCB takes possession of, or receives title to, the date of FNCBasset. ’s acquisition of the property. Subsequent to acquisition of the property,assets, the balance may be written down further. It is FNCB’s policy to obtain certified external appraisals of real estate collateral underlying impaired loans and OREO, and estimate fair value using those appraisals. Other valuation sources may be used, including broker price opinions, letters of intent and executed sale agreements.
The following table summarizes the estimated fair values of FNCB’s financial instruments at December 31, 20202023 and 20192022. 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 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 | December 31, 2020 | December 31, 2019 | ||||||||||||||||
(in thousands) | Measurement | Carrying Value | Fair Value | Carrying Value | Fair Value | |||||||||||||
Financial assets: | ||||||||||||||||||
Cash and short term investments | Level 1 | $ | 155,811 | $ | 155,811 | $ | 34,565 | $ | 34,565 | |||||||||
Available-for-sale debt securities | See previous table | 350,035 | 350,035 | 272,839 | 272,839 | |||||||||||||
Equity securities | Level 1 | 3,026 | 3,026 | 920 | 920 | |||||||||||||
Restricted stock | Level 2 | 1,745 | 1,745 | 3,804 | 3,804 | |||||||||||||
Loans held for sale | Level 2 | 2,107 | 2,107 | 1,061 | 1,061 | |||||||||||||
| Loans, net | Level 3 | 889,152 | 891,880 | 819,529 | 810,074 | |||||||||||||
Accrued interest receivable | Level 2 | 4,286 | 4,286 | 3,234 | 3,234 | |||||||||||||
Equity securities without readily determinable fair values | Level 3 | 500 | 500 | 1,658 | 1,658 | |||||||||||||
Servicing rights | Level 3 | 324 | 479 | 356 | 790 | |||||||||||||
| Derivative assets | Level 2 | 23 | 23 | 0 | 0 | |||||||||||||
Financial liabilities: | ||||||||||||||||||
| Deposits | Level 2 | 1,287,448 | 1,288,567 | 1,001,709 | 1,001,829 | |||||||||||||
| Borrowed funds | Level 2 | 10,310 | 10,310 | 57,219 | 57,234 | |||||||||||||
Accrued interest payable | Level 2 | 108 | 108 | 258 | 258 | |||||||||||||
| Derivative liabilities | Level 2 | 135 | 143 | 0 | 0 | |||||||||||||
Fair Value | December 31, 2023 | December 31, 2022 | ||||||||||||||||
(in thousands) | Measurement | Carrying Value | Fair Value | Carrying Value | Fair Value | |||||||||||||
Financial assets: | ||||||||||||||||||
Cash and short term investments | Level 1 | $ | 107,868 | $ | 107,868 | $ | 41,916 | $ | 41,916 | |||||||||
Available-for-sale debt securities | See previous table | 450,814 | 450,814 | 476,091 | 476,091 | |||||||||||||
Equity securities | Level 1 | 4,786 | 4,786 | 7,717 | 7,717 | |||||||||||||
Restricted stock | Level 2 | 8,814 | 8,814 | 8,545 | 8,545 | |||||||||||||
Loans held for sale | Level 2 | - | - | 60 | 60 | |||||||||||||
Loans, net | Level 3 | 1,208,279 | 1,152,257 | 1,110,124 | 1,079,266 | |||||||||||||
Accrued interest receivable | Level 2 | 7,085 | 7,085 | 5,957 | 5,957 | |||||||||||||
Servicing rights | Level 3 | 175 | 570 | 254 | 621 | |||||||||||||
Derivative assets | Level 2 | 1,919 | 2,088 | 1,946 | 2,104 | |||||||||||||
Financial liabilities: | ||||||||||||||||||
Deposits | Level 2 | 1,528,982 | 1,526,672 | 1,420,647 | 1,416,272 | |||||||||||||
Borrowed funds | Level 2 | 200,272 | 200,724 | 182,360 | 182,108 | |||||||||||||
Accrued interest payable | Level 2 | 1,355 | 1,355 | 171 | 171 | |||||||||||||
Derivative liabilities | Level 2 | 2,726 | 2,691 | 921 | 931 | |||||||||||||
Note 17. 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 each of the years ended December 31, 20202023 and 20192022 common stock equivalents reflected in the table above were related entirely to the 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 years ended December 31, 20202023 and 20192022:
For the Year Ended December 31, | For the Year Ended December 31, | |||||||||||||||
(in thousands, except share data) | 2020 | 2019 | 2023 | 2022 | ||||||||||||
Net income | $ | 15,347 | $ | 11,075 | $ | 12,983 | $ | 20,445 | ||||||||
Basic weighted-average number of common stock outstanding | 20,210,439 | 19,802,095 | 19,740,493 | 19,744,477 | ||||||||||||
Plus: common share equivalents | 1,747 | 5,497 | 2,125 | 18,089 | ||||||||||||
Diluted weighted-average number of common stock outstanding | 20,212,187 | 19,807,592 | 19,742,618 | 19,762,566 | ||||||||||||
Income per share of common stock: | ||||||||||||||||
Basic | $ | 0.76 | $ | 0.56 | $ | 0.66 | $ | 1.04 | ||||||||
Diluted | $ | 0.76 | $ | 0.56 | $ | 0.66 | $ | 1.03 |
| |||||||
Note 18. OTHER COMPREHENSIVE INCOME (LOSS)
The following tables summarize the reclassifications out of accumulated other comprehensive income (loss) for the years ended December 31, 20202023 and 20192022.:
For the year Ended December 31, 2020 | For the year Ended December 31, 2023 | |||||||||
Amount Reclassified | Amount Reclassified | |||||||||
from Accumulated | Affected Line Item | from Accumulated | Affected Line Item | |||||||
Other Comprehensive | in the Consolidated | Other Comprehensive | in the Consolidated | |||||||
(in thousands) | Income (Loss) | Statements of Income | Income (Loss) | Statements of Income | ||||||
Available-for-sale debt securities: | ||||||||||
Reclassification adjustment for net gains reclassified into net income | $ | (1,528 | ) | Net gain on the sale of available-for-sale securities | $ | (252 | ) | Net gain (loss) on the sale of available-for-sale securities | ||
Taxes | 321 | Income taxes | 53 | Income taxes | ||||||
Net of tax amount | $ | (1,207 | ) | $ | (199 | ) | ||||
For the year Ended December 31, 2019 | For the year Ended December 31, 2022 | |||||||||
Amount Reclassified | Amount Reclassified | |||||||||
from Accumulated | Affected Line Item | from Accumulated | Affected Line Item | |||||||
Other Comprehensive | in the Consolidated | Other Comprehensive | in the Consolidated | |||||||
(in thousands) | Income (Loss) | Statements of Income | Income (Loss) | Statements of Income | ||||||
Available-for-sale debt securities: | ||||||||||
Reclassification adjustment for net gains reclassified into net income | $ | (1,227 | ) | Net gain on the sale of available-for-sale securities | ||||||
Reclassification adjustment for net losses reclassified into net income | $ | 223 | Net gain (loss) on the sale of available-for-sale securities | |||||||
Taxes | 258 | Income taxes | (47 | ) | Income taxes | |||||
Net of tax amount | $ | (969 | ) | $ | 176 | |||||
The following table summarizes the changes in accumulated other comprehensive income (loss), net of tax, for the years ended December 31, 20202023 and 20192022:
For the Year Ended December 31, | ||||||||
(in thousands) | 2020 | 2019 | ||||||
Balance, January 1, | $ | 3,056 | $ | (4,540 | ) | |||
Other comprehensive income before reclassifications | 12,037 | 8,565 | ||||||
Amounts reclassified from accumulated other comprehensive income | (1,207 | ) | (969 | ) | ||||
Net other comprehensive income during the period | 10,830 | 7,596 | ||||||
Balance, December 31, | $ | 13,886 | $ | 3,056 | ||||
For the Year Ended December 31, | ||||||||
(in thousands) | 2023 | 2022 | ||||||
Balance, January 1, | $ | (48,028 | ) | $ | 6,352 | |||
Other comprehensive income (loss) before reclassifications | 8,058 | (54,556 | ) | |||||
Amounts reclassified from accumulated other comprehensive income (loss) | (199 | ) | 176 | |||||
Net other comprehensive income (loss) during the period | 7,859 | (54,380 | ) | |||||
Balance, December 31, | $ | (40,169 | ) | $ | (48,028 | ) | ||
Note 19. CONDENSED FINANCIAL INFORMATION — PARENT COMPANY ONLY
The following tables present condensed parent company only financial information:
Condensed Statements of Financial Condition
December 31, | December 31, | |||||||||||||||
(in thousands) | 2020 | 2019 | 2023 | 2022 | ||||||||||||
Assets: | ||||||||||||||||
Cash | $ | 11,296 | $ | 10,343 | $ | 15,515 | $ | 12,779 | ||||||||
Investment in statutory trust | 425 | 418 | 464 | 442 | ||||||||||||
Investment in subsidiary (equity method) | 151,700 | 131,194 | 121,742 | 106,837 | ||||||||||||
| Equity securities, at fair value | 2,093 | 0 | 3,996 | 6,937 | ||||||||||||
Other assets | 726 | 2,019 | 3,850 | 2,409 | ||||||||||||
Total assets | $ | 166,240 | $ | 143,974 | $ | 145,567 | $ | 129,404 | ||||||||
Liabilities and Shareholders’ Equity: | ||||||||||||||||
Junior subordinated debentures | $ | 10,310 | $ | 10,310 | $ | 10,310 | $ | 10,310 | ||||||||
Accrued interest payable | 9 | 16 | 36 | 31 | ||||||||||||
Other liabilities | 61 | 41 | 622 | 114 | ||||||||||||
Total liabilities | 10,380 | 10,367 | 10,968 | 10,455 | ||||||||||||
Shareholders’ equity | 155,860 | 133,607 | 134,599 | 118,949 | ||||||||||||
Total liabilities and shareholders’ equity | $ | 166,240 | $ | 143,974 | $ | 145,567 | $ | 129,404 | ||||||||
Condensed Statements of Income
For the Year Ended December 31, | ||||||||
(in thousands) | 2020 | 2019 | ||||||
Income: | ||||||||
Dividends from subsidiaries | $ | 10,000 | $ | 10,000 | ||||
Interest and dividend income | 75 | 77 | ||||||
| Gain on equity securities | 1,158 | 0 | ||||||
Trust income | 8 | 13 | ||||||
Total income | 11,241 | 10,090 | ||||||
Expense: | ||||||||
Interest on subordinated notes | 0 | 24 | ||||||
Interest on junior subordinated debt | 251 | 430 | ||||||
Other operating expenses | 312 | 275 | ||||||
Total expenses | 563 | 729 | ||||||
Income before income taxes | 10,679 | 9,361 | ||||||
Provision for income taxes | 6 | 0 | ||||||
Income before equity in undistributed net income of subsidiary | 10,673 | 9,361 | ||||||
Equity in undistributed net income of subsidiary | 4,675 | 1,714 | ||||||
Net income | $ | 15,347 | $ | 11,075 | ||||
Condensed Statements of Income
For the Year Ended December 31, | ||||||||
(in thousands) | 2023 | 2022 | ||||||
Income: | ||||||||
Dividends from subsidiaries | $ | 10,000 | $ | 15,000 | ||||
Interest and dividend income | 680 | 204 | ||||||
(Losses) gains on equity securities | (1,611 | ) | 92 | |||||
Trust income | 22 | 11 | ||||||
Other income | 49 | - | ||||||
Total income | 9,140 | 15,307 | ||||||
Expense: | ||||||||
Interest on junior subordinated debt | 724 | 358 | ||||||
Merger and acquisition expenses | 1,480 | - | ||||||
Other operating expenses | 536 | 513 | ||||||
Total expenses | 2,740 | 871 | ||||||
Income before income tax benefit | 6,400 | 14,436 | ||||||
Income tax benefit | (616 | ) | (133 | ) | ||||
Income before equity in undistributed net income of subsidiary | 7,016 | 14,569 | ||||||
Equity in undistributed net income of subsidiary | 5,967 | 5,876 | ||||||
Net income | $ | 12,983 | $ | 20,445 | ||||
Condensed Statements of Cash Flows
For the Year Ended December 31, | ||||||||
(in thousands) | 2020 | 2019 | ||||||
Cash flows from operating activities: | ||||||||
Net income | $ | 15,347 | $ | 11,075 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
Equity in undistributed income of subsidiary | (4,675 | ) | (1,714 | ) | ||||
Equity in trust | (8 | ) | (13 | ) | ||||
| Gain on equity securities | (1,158 | ) | 0 | |||||
Decrease in accrued interest payable | (7 | ) | (22 | ) | ||||
Decrease in other assets | 621 | 467 | ||||||
Increase in other liabilities | 20 | 12 | ||||||
Net cash provided by operating activities | 10,140 | 9,805 | ||||||
Cash flows from investing activities: | ||||||||
Investment in Subsidiary | (5,000 | ) | (17,750 | ) | ||||
| Proceeds from the sale/transfer of equity securities | 1,223 | 0 | ||||||
| Purchases of equity securities | (500 | ) | 0 | |||||
| Purchase of equity security without a readily determinable fair value | (500 | ) | 0 | |||||
Net cash used in investing activities | (4,777 | ) | (17,750 | ) | ||||
Cash flows from financing activities: | ||||||||
Principal reduction on subordinated debentures | 0 | (5,000 | ) | |||||
| Proceeds from issuance of common shares | 37 | 21,342 | ||||||
Cash dividends paid | (4,447 | ) | (4,030 | ) | ||||
Net cash (used in) provided by financing activities | (4,410 | ) | 12,312 | |||||
| Net increase in cash | 953 | 4,367 | ||||||
Cash at beginning of year | 10,343 | 5,976 | ||||||
| Cash at end of year | $ | 11,296 | $ | 10,343 | ||||
Note 20. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
2020 | ||||||||||||||||
Quarter Ended | ||||||||||||||||
(in thousands, except share data) | March 31, | June 30, | September 30, | December 31, | ||||||||||||
Interest income | $ | 11,144 | $ | 11,190 | $ | 11,302 | $ | 12,702 | ||||||||
Interest expense | 1,967 | 1,610 | 1,456 | 1,127 | ||||||||||||
Net interest income | 9,177 | 9,580 | 9,846 | 11,575 | ||||||||||||
Provision (credit) for loan and lease losses | 1,151 | 831 | 74 | (115 | ) | |||||||||||
Net interest income after provision (credit) for loan and lease losses | 8,026 | 8,749 | 9,772 | 11,690 | ||||||||||||
Non-interest income | 1,694 | 2,501 | 2,970 | 2,085 | ||||||||||||
Non-interest expense | 7,205 | 6,424 | 7,843 | 7,443 | ||||||||||||
Income before income taxes | 2,515 | 4,826 | 4,899 | 6,332 | ||||||||||||
Income tax expense | 452 | 805 | 792 | 1,176 | ||||||||||||
Net income | $ | 2,063 | $ | 4,021 | $ | 4,107 | $ | 5,156 | ||||||||
Earnings per share: | ||||||||||||||||
Basic | $ | 0.10 | $ | 0.20 | $ | 0.20 | $ | 0.26 | ||||||||
Diluted | $ | 0.10 | $ | 0.20 | $ | 0.20 | $ | 0.26 | ||||||||
2019 | ||||||||||||||||
Quarter Ended | ||||||||||||||||
(in thousands, except share data) | March 31, | June 30, | September 30, | December 31, | ||||||||||||
Interest income | $ | 11,609 | $ | 11,462 | $ | 11,506 | $ | 11,479 | ||||||||
Interest expense | 2,663 | 2,508 | 2,455 | 2,170 | ||||||||||||
Net interest income | 8,946 | 8,954 | 9,051 | 9,309 | ||||||||||||
(Credit) provision for loan and lease losses | (154 | ) | 347 | 637 | (33 | ) | ||||||||||
Net interest income after (credit) provision for loan and lease losses | 9,100 | 8,607 | 8,414 | 9,342 | ||||||||||||
Non-interest income | 1,515 | 1,578 | 1,831 | 2,696 | ||||||||||||
Non-interest expense | 7,425 | 7,122 | 7,329 | 7,806 | ||||||||||||
Income before income taxes | 3,190 | 3,063 | 2,916 | 4,232 | ||||||||||||
Income tax expense | 555 | 514 | 513 | 744 | ||||||||||||
Net income | $ | 2,635 | $ | 2,549 | $ | 2,403 | $ | 3,488 | ||||||||
Earnings per share: | ||||||||||||||||
Basic | $ | 0.14 | $ | 0.13 | $ | 0.12 | $ | 0.17 | ||||||||
Diluted | $ | 0.14 | $ | 0.13 | $ | 0.12 | $ | 0.17 | ||||||||
For the Year Ended December 31, | ||||||||
(in thousands) | 2023 | 2022 | ||||||
Cash flows from operating activities: | ||||||||
Net income | $ | 12,983 | $ | 20,445 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
Equity in undistributed income of subsidiary | (5,967 | ) | (5,876 | ) | ||||
Equity in trust | (22 | ) | (11 | ) | ||||
Loss (gain) on equity securities | 1,611 | (92 | ) | |||||
Increase in other assets | (694 | ) | (25 | ) | ||||
Increase in accrued interest payable | 5 | 22 | ||||||
Increase (decrease) in other liabilities | 562 | (122 | ) | |||||
Net cash provided by operating activities | 8,478 | 14,341 | ||||||
Cash flows from investing activities: | ||||||||
Sale of equity securities | 1,490 | 359 | ||||||
Purchases of equity securities | (160 | ) | (3,188 | ) | ||||
Net cash provided by (used in) investing activities | 1,330 | (2,829 | ) | |||||
Cash flows from financing activities: | ||||||||
Proceeds from issuance of common shares | 38 | - | ||||||
Repurchase of common shares | - | (3,636 | ) | |||||
Cash dividends paid | (7,110 | ) | (6,520 | ) | ||||
Net cash used in financing activities | (7,072 | ) | (10,156 | ) | ||||
Net increase in cash | 2,736 | 1,356 | ||||||
Cash at beginning of year | 12,779 | 11,423 | ||||||
Cash at end of year | $ | 15,515 | $ | 12,779 | ||||
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. 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 Securities Exchange Act of 1934, as amended, as of December 31, 2020.2023.
Based on that evaluation, FNCB’s Chief Executive Officer and Chief Financial Officer concluded FNCB’s disclosure controls and procedures were effective as of December 31, 2020.2023.
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.
Management’s Report on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting for FNCB Bancorp, Inc. (the “Company”). Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles in the United States and is not intended to provide absolute assurance that a misstatement of the Company’s financial statements would be prevented or detected.
Internal control over financial reporting includes those policies and procedures that pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Company; provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are only being made in accordance with authorizations of management and directors of the Company; and provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the financial statements.
Any control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. The design of a control system inherently has limitations and the benefits of controls must be weighed against their costs. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. Therefore, no assessment of a cost-effective system of internal controls can provide absolute assurance that all control issues and instances of fraud, if any, will be detected.
As of December 31, 20202023, management of the Company conducted an assessment of the effectiveness of the Company’s internal control over financial reporting based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Management’s assessment included extensive documenting, evaluating and testing the design and operating effectiveness of our internal control over financial reporting.
Based on this evaluation under the criteria in the Framework, management concluded that the Company’s system of internal control over financial reporting was effective as of December 31, 2020.2023.
| /s/ Gerard A. Champi | /s/ James M. Bone, Jr., CPA |
Gerard A. Champi President and Chief Executive Officer | James M. Bone, Jr., CPA Executive Vice President and Chief Financial Officer |
Other Information |
(a) None
(b) None
Disclosure Regarding Foreign Jurisdictions that Prevent Inspections |
Not applicable
Directors, Executive Officers and Corporate Governance. |
In accordance with Section 2.02 of FNCB’s bylaws, FNCB has a classified Board of Directors with staggered three-year terms of office. The Board is divided into three classes, with each class to be as nearly equal in number as possible. The terms of the separate classes expire in successive years. Thus, at each annual meeting of shareholders, successors to the class of directors whose term then expires are elected to hold office for a term of three years. Therefore, the term of office of one class of directors expires in each year. The Board of Directors is authorized to change the number of directors that constitutes the whole Board of Directors provided that the total number of directors in each class remains relatively proportionate to the others. The Board of Directors currently consists of eleven (11) members and is divided into three classes, with one class of directors elected each year.
The table below sets forth certain information concerning theregarding members of our Board of Directors and executive officers who are not directors, including the terms of office of board members.
Name | Position(s) Held with FNCB Bancorp, Inc. | Age (1) | Director Since | Class | Current Term Expires | ||||||||||||
BOARD MEMBERS | |||||||||||||||||
William G. Bracey | Director | 69 | 2014 | B | 2024 | ||||||||||||
Gerard A. Champi | President and Chief Executive Officer | 63 | 2016 | A | 2026 | ||||||||||||
Joseph Coccia | Secretary | 69 | 1998 | C | 2025 | ||||||||||||
William P. Conaboy, Esquire | Director | 65 | 2022 | C | 2025 | ||||||||||||
Dominick L. DeNaples | Director | 86 | 2023 | B | 2024 | ||||||||||||
Joseph L. DeNaples, Esquire | Director | 45 | 2017 | C | 2025 | ||||||||||||
Louis A. DeNaples | Chairman of the Board | 83 | 2013 | A | 2026 | ||||||||||||
Louis A. DeNaples, Jr., M.D. | Vice Chairman of the Board | 56 | 2008 | B | 2024 | ||||||||||||
Keith W. Eckel | Director | 77 | 2014 | A | 2026 | ||||||||||||
Kathleen McCarthy Lambert, CPA | Director | 62 | 2017 | A | 2026 | ||||||||||||
Thomas J. Melone, CPA | Director | 65 | 2011 | B | 2024 | ||||||||||||
EXECUTIVE OFFICERS WHO ARE NOT BOARD MEMBERS | |||||||||||||||||
James M. Bone, Jr., CPA | Executive Vice President and Chief Financial Officer/Treasurer and PFO | 62 | N/A | N/A | N/A | ||||||||||||
James F. Burke | Executive Vice President and Chief Banking Officer | 55 | N/A | N/A | N/A | ||||||||||||
James P. Chiaro, CMFC | Executive Vice President and Chief Investment Services Officer | 48 | N/A | N/A | N/A | ||||||||||||
Mary Griffin Cummings, Esquire | Executive Vice President and General Counsel | 61 | N/A | N/A | N/A | ||||||||||||
Aaron J. Cunningham | Executive Vice President and Chief Credit Officer | 47 | N/A | N/A | N/A | ||||||||||||
Richard D. Drust | Senior Vice President and Retail Banking Officer | 63 | N/A | N/A | N/A | ||||||||||||
Mary Ann Gardner, CRCM | Senior Vice President and Compliance Officer | 66 | N/A | N/A | N/A | ||||||||||||
Dawn D. Gronski | Senior Vice President and Human Resources Officer | 53 | N/A | N/A | N/A | ||||||||||||
Lisa L. Kinney | Senior Vice President and Retail Lending Officer | 54 | N/A | N/A | N/A | ||||||||||||
Cathy Loomis | Senior Vice President and Credit Administration Officer | 50 | N/A | N/A | N/A | ||||||||||||
Brian C. Mahlstedt | Executive Vice President and Chief Lending Officer | 64 | N/A | N/A | N/A | ||||||||||||
William A. McGuigan, CPA | Senior Vice President and Audit Officer | 74 | N/A | N/A | N/A | ||||||||||||
Stephanie A. Westington, CPA | Senior Vice President and Chief Accounting Officer | 58 | N/A | N/A | N/A | ||||||||||||
Donna Yanuzzi | Executive Vice President and Equipment Finance Officer | 63 | N/A | N/A | N/A | ||||||||||||
The biographies of each of the board members and executive officers are set forth below. With respect to directors, the biographies also contain information regarding the person's business experience and the experiences, qualifications, attributes or skills that caused the Nominating Committee to determine that the person should serve as a director. Each director of FNCB Bancorp, Inc. is also a director of FNCB Bank.
Directors
Mr. William G. Bracey has served on the Board of Directors since 2014. Mr. Bracey owns and operates three ShopRite Supermarkets, one in Daleville, Pennsylvania, one in Moosic, Pennsylvania and one in Mount Pocono, Pennsylvania, as well as several retail businesses including two Ace Hardware Stores, one in Daleville, Pennsylvania and one in Moosic, Pennsylvania, one Hallmark Gold Crown Store, and Plociniak Fuel Services. Mr. Bracey is an active member of several business and community organizations, including a current board member and past Chairman of the Pennsylvania Food Merchants, current board member of Johnson College, past board member and Chairman of Affiliated Foods, past board member and Co-Chairman of Associated Wholesale and past board member of Scranton Preparatory School. Mr. Bracey’s over 40 years of entrepreneurial and corporate management experience, strong network of community relationships and partnerships, and significant knowledge of the retail business climate in the region qualifies him to serve as director of FNCB.
Mr. Gerard A. Champi has been President and Chief Executive Officer and a member of the Board of Directors of FNCB and the Bank since July 1, 2016. Prior to holding this position, Mr. Champi was Chief Operating Officer of the Bank from March 2011 to June 2016. Mr. Champi also served as Interim President and Chief Executive Officer of FNCB and the Bank and as a director of the Bank from March 2010 until February 2011. Mr. Champi has been with the Bank since 1991 and has served in various leadership roles in the Retail, Commercial Sales and Executive Divisions. He currently serves as a Board member of Leadership Northeast, the Lackawanna Blind Association, the Pennsylvania Bankers Association, and as an Advisory Board member of Penn State Worthington Scranton, a campus of the Pennsylvania State University. He also serves on the Wilkes-Barre Law & Library Association's Executive Committee's Lay Advisory Committee and is a lifetime member of Pennsylvania State University Alumni Association. Mr. Champi has been appointed as President of Lackawanna Industrial Fund Enterprises (LIFE) and serves on the Board of Directors of the Greater Scranton Chamber of Commerce and the Executive Committee of the Chamber. Jerry is also past President of the Boards of Directors of the Northeastern Pennsylvania Council Boy Scouts of America, the Greater Pittston Chamber of Commerce, and the Luzerne County Community College Foundation. Mr. Champi's extensive knowledge of FNCB and the Bank, his time as President and Chief Executive Officer and other various leadership positions with the Bank and extensive community and charitable involvement qualify him to serve as a director of FNCB.
Mr. Joseph Coccia has served on the Board of Directors since 1998. Mr. Coccia is President of Coccia Ford, Inc. (doing business as Coccia Ford Lincoln), a car dealership in Wilkes-Barre, Pennsylvania. Mr. Coccia is a member of the Board of Directors of AllOne Charities and NEPA Highmark's Advisory Board. Mr. Coccia also served on the Lincoln Mercury Dealer Association Board. Mr. Coccia’s strong business background and knowledge of owning and operating a large local business, his broad community involvement, and his service as a director of FNCB and Bank since 1998 qualify him to serve as a director of FNCB.
Attorney William P. Conaboy, Esquire has served on the Board of Directors since October 2022. Attorney Conaboy currently serves as President and Chief Executive Officer of Allied Services Integrated Health System and has served in this role since 2009. Prior to serving as President and Chief Executive Officer of Allied Services Integrated Health System between 1992 and 2008 he served in various capacities including Senior Vice President and General Counsel, Chief Corporate Compliance Officer and Chief Operations Officer. Attorney Conaboy serves as a member of the Board of Directors for Pennsylvania Rehabilitation and Community Providers Association and a member of the Board of Directors of The Scranton Area Foundation. He serves as Chairman of the Board at Northeast Regional Cancer Institution. Attorney Conaboy’s strong business leadership background and extensive community and charitable involvement qualify him to serve as a director of FNCB.
Mr. Dominick L. DeNaples previously served as the Chairman of the Board of Directors of FNCB and Bank from May 2010 until May 2019. Mr. DeNaples was appointed and served as Director Emeritus from May 2019 until February 2023, when he was reappointed as a director. Mr. DeNaples also served as Vice Chairman of the Boards of Directors of FNCB and Bank from December 2009 until he was elected Chairman in May 2010. Mr. DeNaples is President of Rail Realty Corporation, Vice President of DeNaples Auto Parts Inc., and Vice President of Keystone Landfill, Inc., each of which he is also co-owner with his brother Louis A. DeNaples. Mr. DeNaples currently serves on the Board and Finance Committee of St. Joseph’s Center and St. Joseph’s Foundation. He also serves on the Board of Geisinger Health Services, Hospice of the Sacred Heart and on the Advisory Board of Penn State University – Worthington campus. He formerly served as Chairman of the Board and Chairman of the Finance Committee of Lackawanna College, President of the Council and Chairman of Finance of the Northeastern Pennsylvania Council of Boy Scouts of America, and currently serves as a Board member. He also served as former Vice Chairman of the Board and Finance Committee of Scranton Preparatory School. Mr. DeNaples’ extensive business background, years of community and charitable involvement and service as a Director of FNCB and the Bank for many years qualify him to serve as Director of FNCB. Mr. DeNaples is the father of director, Joseph L. DeNaples, Esq., brother of director, Louis A. DeNaples, and the uncle of director, Louis A. DeNaples, Jr. M.D.
Attorney Joseph L. DeNaples, Esquire has served on the Board of Directors since 2017. Attorney DeNaples is a partner at the law firm of Cipriani & Werner, PC and is Director of Risk Management for Mount Airy Resort and Casino. He focuses his law practice in banking, commercial, real estate, gaming, corporate, secured transactions and bankruptcy law. Attorney DeNaples also serves as Solicitor for both the Lackawanna County Sheriff’s Office and the County of Lackawanna Transit System Authority. Attorney DeNaples is a member of the Lackawanna County Bar Association and is admitted to practice in Pennsylvania as well as the United States District Court for the Middle District of Pennsylvania and the United States Bankruptcy Court for the Middle District of Pennsylvania. Attorney DeNaples serves on the Boards of Northeastern Pennsylvania Council Boy Scouts of America and the Saint Francis of Assisi Kitchen. Attorney DeNaples received his Juris Doctorate degree from the Villanova University School of Law. Attorney DeNaples extensive business and legal background, and community and charitable involvement qualify him to serve as a director of FNCB. Attorney DeNaples is the son of director, Dominick L. DeNaples, the nephew of director and Chairman of the Board of Directors, Louis A. DeNaples and cousin of director and Vice Chairman of the Board of Directors, Louis A. DeNaples, Jr., M.D.
Mr. Louis A. DeNaples has been a director of the Bank since 1972 and served as Chairman of the Board of Directors of FNCB from 1998 until he took a leave of absence from involvement with FNCB and the Bank in February 2008. In 2013, Mr. DeNaples returned from a leave of absence and rejoined the Bank’s Board on December 23, 2013. He was re-elected to FNCB's Board of Directors on May 21, 2014 and was appointed Chairman of the Boards of FNCB and the Bank on May 15, 2019. Mr. DeNaples is President of DeNaples Auto Parts, Inc., President of Keystone Landfill Inc. and Vice President of Rail Realty, Inc., each of which he co-owns with his brother, Dominick L. DeNaples. Mr. DeNaples serves on the boards of AllOne Foundation, AllOne Charities, AllOne Health Resources and Allied Services Foundation. Mr. DeNaples also serves as Chairman of the Community Advisory Board for Geisinger Commonwealth School of Medicine, a member of NEPA Highmark's Advisory Board and was past Chairman of the University of Scranton Board of Trustees. Mr. DeNaples’ extensive business knowledge, community and charitable involvement, and association with the Bank for many years qualify him to serve as a director of FNCB. Mr. DeNaples is the brother of director, Dominick L. DeNaples, the father of director and Vice Chairman of the Board of Directors, Louis A. DeNaples, Jr., M.D. and uncle of director, Joseph L. DeNaples, Esquire.
Dr. Louis A. DeNaples, Jr., M.D. has served on the Board of Directors since 2008. Dr. DeNaples is a board-certified emergency physician and practices emergency medicine at Geisinger-Community Medical Center Emergency Department in Scranton, Pennsylvania. Dr. DeNaples serves as board member of the Goodwill Industries of Northeastern Pennsylvania and the Scranton Preparatory School. Dr. DeNaples also serves as a Board Member on the Council of The Pennsylvania Society and is a volunteer staff member at the Geisinger Commonwealth School of Medicine. Dr. DeNaples’ understanding of the medical industry, and considerable community and charitable involvement qualifies him to serve as director of FNCB. Dr. DeNaples is the son of director and Chairman of the Board of Directors, Louis A. DeNaples, the nephew of director, Dominick L. DeNaples and cousin of director, Joseph L. DeNaples, Esquire.
Mr. Keith W. Eckel is the sole owner and Chief Executive Officer of Fred W. Eckel and Sons and President of Eckel Farms, Inc. Mr. Eckel serves as an Emeritus Trustee of The Pennsylvania State University and serves a chair of Trustees of Countryside Community Church. Mr. Eckel formerly served as Board member and Chairman of Nationwide Mutual Insurance Company, a Fortune 100 insurance provider, and Allied Group, Inc., a subsidiary of Nationwide Mutual Insurance Company. Mr. Eckel also previously served as Board Member of International Food and Agricultural Development, an organization that advises the United States Agency for International Development on agricultural priorities and issues, former President of the Pennsylvania Farm Bureau, and Board Member and Chairman of Gartmore Global Asset Management Trust. Mr. Eckel’s strong business background, extensive knowledge in the insurance industry and agribusiness, and community and charitable involvement qualify him to serve as a director of FNCB.
Mrs. Kathleen McCarthy Lambert, CPA has served on the Board of Directors since 2017. Mrs. Lambert is an owner of McCarthy Tire Service Company and Subsidiaries where she serves as Chief Financial Officer and Corporate Secretary. She also serves as Chairperson of the Board for Wilkes-Barre General Hospital, Vice Chairperson of the Board of King’s College, and Board Member of the Beatrice Eck Foundation. Mrs. Lambert is a member of the Executive Committee and past Chairman of the Board of Northeast Sight Services and past Board Member of the Greater Wilkes-Barre Chamber of Business and Industry and the Scranton Diocesan Financial Council. Mrs. Lambert is also actively involved in fundraising activities for numerous non-profit organizations, including the United Way, American Heart Association, St. Vincent DePaul Soup Kitchen, King’s College, the Catholic Youth Center, Holy Redeemer High School, John Heinz Rehab, Big Brothers/Big Sisters and Volunteers in Medicine. Mrs. Lambert, a licensed Certified Public Accountant and a graduate of King’s College, is a past recipient of the Athena Award and Top 25 Businesswomen in Northeastern Pennsylvania Award. Mrs. Lambert’s extensive business background and community and charitable involvement qualify her to serve as a director of FNCB.
Mr. Thomas J. Melone, CPA has served on the Board of Directors since 2011. Mr. Melone is a Partner with the Albert B. Melone Company Certified Public Accountants, a leading provider of accounting, tax and consulting services throughout the Northeastern Pennsylvania region. Mr. Melone, who has been with this firm since 1981, leads the firm’s Tax Preparation and Advisory Services line as well as its Small Business Advisory and Consulting Services line. Additionally, he has extensive experience in the financial management of public-school districts operating in the Commonwealth of Pennsylvania. Mr. Melone is also an owner of Pro-Data Processing, Inc. Mr. Melone is an active member of several professional, business and community organizations including the American Institute of Certified Public Accountants, Pennsylvania Institute of Certified Public Accountants and the Allied Services Board, an integrated health system, specifically serving as Chairman of the Allied Institute of Rehabilitation Medicine and the John Heinz Institute of Rehabilitation Medicine, and as Vice Chairman of the Allied Services Foundation. Mr. Melone’s community involvement, extensive business and accounting experience and service as a director of FNCB and the Bank qualify him to serve as a director of FNCB.
Executive Officers Who Are Not Directors
Mr. James M. Bone, Jr., CPA is Executive Vice President and Chief Financial Officer/Treasurer of FNCB required by this Item 10 is incorporated herein by reference toand the sections entitled “Information as to Nominees, Directors and Executive Officers” in FNCB’s Definitive Proxy Statement for its 2020 Annual Meeting of Shareholders, which will be filedBank, a position he has held since September 2012. Mr. Bone has been with the SecuritiesBank since 1986 and Exchange Commission on or about April 13, 2020 (the “Proxy Statement”). Disclosurehas served in various leadership roles in Finance, Retail and Commercial Sales, Compliance, Operations and Technology and Internal Audit. Mr. Bone is a licensed Certified Public Accountant and is an active member of compliance with Section 16(a)several professional, business and community organizations including the American Institute of Certified Public Accountants and Pennsylvania Institute of Certified Public Accountants. Mr. Bone is a former member of the Securities Exchange ActIssuer Advisory Council of 1934, as amended, by FNCB’s Directorsthe OTCQX and Executive Officersa former member of the Advisory Board for the Federal Home Loan Bank of Pittsburgh. Mr. Bone is incorporated by reference to the section entitled “Delinquent Section 16(a) Reports”also active in the Proxy Statement.community with King’s College and currently serves as Vice President of Finance and Board Member of the Northeastern Pennsylvania Council Boy Scouts of America.
Mr. James F. Burke is Executive Vice President and Chief Banking Officer, a position he has held since February 2021. Mr. Burke has more than 29 years of managerial and sales experience in banking. Prior to joining the Bank, he was the Executive Vice President, Chief Lending Officer at Wayne Bank from October 2013 to February 2021 where he was responsible for the overall sales, service, and operations of the Commercial Banking Division in Pennsylvania and New York. Mr. Burke currently serves as Chairperson to Jay S. Sidhu School of Business and Leadership Advisory Board at Wilkes University.
Mr. James P. Chiaro, CMFC is Executive Vice President and Chief Investment Officer, a position he has held since September 2022. Mr. Chiaro has 20 years of experience in the financial services industry and prior to joining FNCB, Mr. Chiaro was the principal of Chiaro Investment Services, LLC. Mr. Chiaro holds the following professional designations and registrations (securities registrations held through LPL Financial): Series 7, General Securities Representative; Series 65, Uniform Investment Advisor Representative; Series 6, Investment Company Products/Variable Contracts Representative; Series 63, Uniform Securities Agent State Law; Pennsylvania Life Insurance License CMFC; Chartered Mutual Fund Counselor; and College for Financial Planning.
Ms. Mary Griffin Cummings, Esquire is Executive Vice President and General Counsel of the Bank, a position she has held since October 1, 2012. Prior to joining the Bank, she was Associate General Counsel, Resident Counsel and General Counsel for Wyoming Valley Health Care System, Inc. (“WVHCS”), a large health care system previously located in Wilkes-Barre, Pennsylvania, from May 2000 to May 2009. From May 2009 through October 2012, Ms. Cummings practiced law both in her own private practice and for Wyoming Valley Health and Education Foundation and WVHCS Retention Company. Ms. Cummings is a licensed attorney and admitted to practice law in the Courts of the Commonwealth of Pennsylvania and the United States District Court for the Middle District of Pennsylvania. She is a member of the Wilkes-Barre Law and Library Association and the Pennsylvania Bar Association. Ms. Cummings serves on the Board of Directors of the Pennsylvania Bankers Association Services Corporation and the Board of Governors, serving as Chairperson, of Bankers Settlement Services–Capital Region, a title agency wherein FNCB Bank has an equity interest. Ms. Cummings serves as Chair and Board member of the Catherine McAuley Center, Scranton, PA and Board Member and Chair of the Nominating and Governance Committee of the McGlynn Learning Center, Wilkes-Barre, PA. Ms. Cummings serves on the Northeastern PA Board of Directors of the American Red Cross and is a life-time member of the Pennsylvania State University Alumni Association.
Mr. Aaron J. Cunningham is Executive Vice President and Chief Credit Officer of the Bank, a position he has held since June 7, 2018. Prior to joining the Bank, he was employed by Penns Woods Bancorp, Inc., a bank holding company operating Jersey Shore State Bank and Luzerne Bank. He served as Senior Vice President and Chief Credit Officer of Penns Woods Bancorp, Inc. from November 2015 through May 2018, and Vice President/Credit Department Manager from 2010 through November 2015. In addition, information concerning Audit Committeetotal, he has 25 years banking experience in various roles. Mr. Cunningham served in various leadership roles with Leadership Lycoming, Habitat for Humanity and Valley Prevention Services, and contributed as a business partner with Lock Haven University’s Business Program.
Mr. Richard D. Drust is Senior Vice President and Retail Banking Officer of the Bank, a position he has held since February 2014. Mr. Drust has over 35 years of banking experience serving in various retail banking management positions for several different banks. Mr. Drust serves on the board of Wyoming Valley Challenger Baseball and NEPA Inclusive both serving individuals in the community with intellectual disabilities.
Ms. Mary Ann Gardner is Senior Vice President and Compliance Officer of the Bank, a position she has held since April 2013. Ms. Gardner also serves as the Bank Secrecy Act (“BSA”) Officer and Community Reinvestment Act (“CRA”) Officer for the Bank. Ms. Gardner is a Certified Regulatory Compliance Manager (“CRCM”) and has been an employee of the Bank since 1976 with previous roles including Vice President and Compliance, BSA and CRA Officer from April 2013 to April 2014, Assistant Vice President, Compliance and CRA Officer from June 2011 to April 2013 and Assistant Vice President and Regulatory Compliance Manager from June 2010 to June 2011.
Ms. Dawn D. Gronski is Senior Vice President and Human Resources Officer, a position she has held since March 2017. Ms. Gronski has been an employee of the Bank since 1998, with her previous roles including Vice President and Compensation and Benefits Officer from April 2013 to March 2017; and Assistant Vice President and Payroll/HRIS Administrator from June 2010 to March 2013. Ms. Gronski serves as the treasurer of the Scranton Civic Ballet Company and has served as a member of its Board since 2009.
Ms. Lisa L. Kinney is Senior Vice President and Retail Lending Officer of the Bank, a position she has held since September 2008. Ms. Kinney has been an employee of the Bank since 1994, with her previous roles including Vice President and Indirect Lending Manager from January 2007 to September 2008; Vice President and Indirect Lending Officer from December 2005 to December 2006; and Assistant Cashier and Indirect Lending Officer from May 1998 to November 2005. Ms. Kinney serves as a Board Member of the Dunmore Lions Club and has served as Past-President.
Ms. Cathy J. Loomis is Senior Vice President and Credit Administration Officer of the Bank, a position she has held since September 2013. Ms. Loomis has been with the Bank since 1995. Her previous roles include Senior Vice President and Credit Administration Manager from 2010 until September 2013 and Vice President, Credit Department Manager from 2004 to 2009.
Mr. Brian C. Mahlstedt is Executive Vice President and Chief Lending Officer of the Bank, a position he has held since September 2013. Mr. Mahlstedt first joined the Bank in 1999 and served as Senior Vice President and Commercial Loan Officer until 2009. From 2011 to September 2013, when he rejoined the Bank, Mr. Mahlstedt was a Senior Vice President, Senior Commercial Loan Officer at Wayne Bank. Mr. Mahlstedt also served as Vice President, Senior Loan Officer at Pennstar Bank from 2009 to 2011.
Mr. William A. McGuigan, CPA is Senior Vice President and Audit Committee Financial ExpertOfficer of the Bank, a position he has held since June 2016. Previously, Mr. McGuigan was Audit Manager of the Bank from March 2012 to June 2016. Prior to joining the Bank, Mr. McGuigan was a partner in a local public accounting firm serving the Banking and Small Business sectors. He also spent 10 years leading corporate audit and accounting departments. Mr. McGuigan is included ina licensed Certified Public Accountant.
Ms. Stephanie A. Westington, CPA is Senior Vice President and Chief Accounting Officer of the Proxy Statement underBank, a position she has held since January 2022. Ms. Westington has been an employee of the caption “Audit Committee Report”Bank since July 2012, with her previous role as Senior Vice President and Controller until January 2022. Prior to joining the Bank, Ms. Westington was Director of Finance for Physicians Health Alliance, a physician’s group that was a member of the former Moses Taylor Health Care System, from March 2011 to July 2012. Ms. Westington is incorporated herein by reference.a licensed Certified Public Accountant and has previous banking experience from her time as Vice President of Finance at the former Community Bank and Trust Company from January 1998 to March 2011 and Assistant Vice President and Controller at the former LA Bank, N.A. from September 1990 to December 1997. Ms. Westington currently serves as President of the Board of Trustees of the Howard Gardner Multiple Intelligence Charter School, Scranton, PA.
Ms. Donna Yanuzzi is Senior Vice President and Director of Equipment Finance of the Bank, a position she has held since November 2021 when she joined the Bank. Prior to joining the Bank, Ms. Yanuzzi was Managing Director of Sales and Marketing for F.N.B. Equipment Finance from July 2020 to November 2021, and Director of Vendor and Small Business Banking at F.N.B. Equipment Finance from September 2016 to July 2020. Ms. Yanuzzi is a member of the Board of Trustees of the Equipment Leasing and Finance Foundation.
Code of Ethics
FNCB has adopted a Code of Business Conduct and Ethics (the “Code”) that applies to FNCB’s directors and employees, including the President and Principal Executive Officer (“PEO”), Principal Financial Officer (“PFO”) and Principal Accounting Officer (“PAO”). The Code includes guidelines relating to compliance with laws, the ethical handling of actual or potential conflicts of interest, the use of corporate opportunities, protection and use of FNCB’s confidential information, accepting gifts and business courtesies, accurate financial and regulatory reporting, and procedures for promoting compliance with, and reporting violations of, the Code. The Code is available on FNCB’s website at www.fncb.com/investorrelations/ under the heading “Governance Documents.” FNCB intends to post any amendments to the Code on its website and also to disclose any waivers (to the extent applicable to FNCB’s President, PEO, PFO or PAO) on a Form 8-K within the prescribed time period.
Audit Committee
The Board of Directors has a standing Audit Committee established in accordance with Section 3(a)(58)(A) of the Exchange Act. The Board of Directors has determined that each of the members of the Audit Committee is independent, as that term is defined by the SEC and in the NASDAQ listing standards related to audit committees. The current Audit Committee charter is available in the Investor Relations section on FNCB’s website at investors.fncb.com by clicking on Governance, Governance Documents and then selecting “Audit Committee Charter.” The principal duties of the Audit Committee, as set forth in its charter, include reviewing and discussing the audited financial statements with management and the independent registered public accounting firm and, based on such reviews and discussions, recommending to the Board of Directors that the audited financial statement be included in FNCB’s annual report on Form 10-K; reviewing significant audit and accounting principles, policies and practices; reviewing the effectiveness of the internal audit function and internal controls over financial reporting; reviewing reports of examination received from regulatory authorities; and reviewing the performance and independence of and recommending, annually, to the Board of Directors the engagement of an independent registered public accounting firm.
Currently, the Board has identified Thomas J. Melone, CPA and Kathleen McCarthy Lambert, CPA as Audit Committee financial experts. Mr. Melone qualifies as a financial expert based on his extensive accounting experience as a certified public accountant and as a partner of the Albert B. Melone Company Certified Public Accountants. Ms. Lambert qualifies as a financial expert based on her extensive accounting experience as a certified public accountant and as Chief Financial Officer of McCarthy Tire Service Company and its subsidiaries.
Executive Compensation. |
Executive Officer Compensation
Summary Compensation Table.
Non-qualified | |||||||||||||||||||||||||||||
Non Equity | Deferred | ||||||||||||||||||||||||||||
| Stock | Incentive Plan | Compensation | All Other | |||||||||||||||||||||||||
Name and Principal Position | Year | Salary | Bonus | Awards (1) | Awards (2) | Earnings (3) | Compensation (4) | Total | |||||||||||||||||||||
Gerard A. Champi, President and Chief | 2023 | $ | 416,448 | $ | 25,000 | $ | 121,990 | $ | - | $ | 53,624 | $ | 57,402 | $ | 674,464 | ||||||||||||||
Executive Officer of FNCB and the Bank | 2022 | $ | 384,899 | $ | - | $ | 115,583 | $ | 153,500 | $ | 38,891 | $ | 176,417 | $ | 869,290 | ||||||||||||||
James M. Bone, Jr., Executive Vice President | 2023 | $ | 289,791 | $ | 30,000 | $ | 69,896 | $ | - | $ | 20,586 | $ | 46,647 | $ | 456,920 | ||||||||||||||
and Chief Financial Officer/Treasurer of FNCB and the Bank | 2022 | $ | 266,346 | $ | - | $ | 48,007 | $ | 65,000 | $ | 14,766 | $ | 85,685 | $ | 479,804 | ||||||||||||||
James F. Burke, Executive Vice President | 2023 | $ | 263,521 | $ | 25,000 | $ | 63,249 | $ | - | $ | 5,735 | $ | 41,834 | $ | 399,338 | ||||||||||||||
and Chief Banking Officer of the Bank | 2022 | $ | 241,963 | $ | - | $ | 43,621 | $ | 59,500 | $ | 2,759 | $ | 78,575 | $ | 426,418 | ||||||||||||||
(1) | The amounts listed represent the grant date fair market value of the shares computed in accordance with ASC Topic 718. Additional information about FNCB’s accounting for stock-based compensation is contained in Note 2, "Summary of Significant Accounting Policies" and Note 14, "Stock Compensation Plans" to the Notes to Consolidated Financial Statements included in Item 8 "Financial Statements and Supplementary Data" to this Annual Report on Form 10-K. |
(2) | 2023 performance metrics did not meet required thresholds; therefore, no award was earned under the EIP for the 2023 fiscal year. |
(3) | The amounts listed reflect on the earnings on the balances in the named executive officers non-qualified deferred compensation plan and supplemental retirement plan accounts. |
(4) | The following table provides the detail for the amount presented under “All Other Compensation” paid to or earned by each of FNCB’s named executive officers for the 2023 fiscal year. |
Gerard A. | James M. | James F. | ||||||||||
Benefits and Perquisites | Champi | Bone, Jr. | Burke | |||||||||
FNCB annual contributions to SERP | $ | 35,000 | $ | 25,000 | $ | 20,000 | ||||||
FNCB contributions to 401 (k) Plan | 10,001 | 11,210 | 12,688 | |||||||||
Automobile allowance | 3,782 | 3,687 | 3,726 | |||||||||
Country club dues | 8,327 | 6,490 | 5,420 | |||||||||
Other | 292 | 260 | - | |||||||||
Total | $ | 57,402 | $ | 46,647 | $ | 41,834 |
| |||||
Outstanding Equity Awards at Fiscal Year End. The following table summarizes the equity awards FNCB has made to our 2023 NEOs which were outstanding at December 31, 2023. All options were granted with an exercise or base price of 100% of market value as determined in accordance with the applicable plan. The number of shares subject to each award as well as the exercise and/or base price has been adjusted to reflect all stock dividends and stock splits effected after the date of such award but have not otherwise been modified.
Outstanding Equity Awards at Fiscal Year End | |||||||||||||||||||||
Option Awards | Stock Awards | ||||||||||||||||||||
Name and Principal Position | Number of Securities Underlying Unexercised Options Exercisable | Number of Securities Underlying Unexercised Options Unexercisable | Option Exercise Price | Option Expiration Date | Number of Shares or Units of Stock that Have Not Vested (#) (1) | Market Value of Shares or Units of Stock that Have Not Vested ($) (2) | |||||||||||||||
Gerard A. Champi, President and Chief Executive Officer | - | - | $ | - | 42,174 | $ | 286,361 | ||||||||||||||
James M. Bone, Jr., Executive Vice President and Chief Financial Officer | - | - | $ | - | 20,215 | $ | 137,260 | ||||||||||||||
James F. Burke, Executive Vice President and Chief Banking Officer | - | - | $ | - | 12,792 | $ | 86,858 | ||||||||||||||
(1) | Shares of restricted stock granted to all the named executive officers generally vest in five equal installments over a five-year period on May 15 of each year. |
(2) | Based on the closing market value of FNCB’s common stock on December 29, 2023, of $6.79 per share, as reported on Nasdaq for the last trading day of the year. |
Securities Authorized for Issuance Under Equity Compensation Plans. The following table summarizes information, as of December 31, 2023, with respect to compensation plans under which equity securities of FNCB are authorized for issuance:
Plan Category | Number of Securities to be Issued upon Exercise of Outstanding Options, Warrants and Rights (a) | Weighted-average Exercise Price of Outstanding Options, Warrants and Rights (b) | Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans (Excluding Securities Reflected in Column (a)) (c) | |||||||||
Equity compensation plans approved by security holders | - | N/A | 2,435,076 | |||||||||
Equity compensation plans not approved by security holders | N/A | N/A | N/A | |||||||||
Total | - | N/A | 2,435,076 | |||||||||
Employment Arrangements
FNCB and the Bank have entered into an Employment Agreement with named executive officer, Mr. Bone, and the Bank has entered into Employment Agreements with named executive officer, Mr. Champi, and FNCB Bank’s Chief Lending Officer, Brian J. Mahlstedt. Employment Agreements are commonly used by referencethe banking industry and by FNCB’s peer group to retain key executives and define an overall compensation package that is aligned with shareholder interests. Below is a summary of each named executive officer’s and Mr. Mahlstedt’s Employment Agreement.
The provisions under the Employment Agreements include the named executive officer’s initial base salary, subject to annual review adjustments by the Compensation Committee and the Board. Each of the Employment Agreements also state that the named executive officer is eligible to participate in FNCB’s Executive Incentive Plan and Long-Term Incentive Plan according to the sectionterms of those Plans. Each such Employment Agreement also states that each named executive officer will be provided with a Supplemental Retirement Plan. Each such Employment Agreement specifies that each named executive officer will be reimbursed for annual country club dues and use of a Bank provided automobile. Each named executive officer’s Employment Agreement has a term of three years, with consideration for an annual renewal of an additional three years on March 31st of each calendar year. Each named executive officer’s Employment Agreement includes a non-compete clause which will be in effect for twelve months after an involuntary separation by the Bank or after a Change of Control termination as defined in his Agreement.
On September 27, 2023, the compensation committee of the board of directors of FNCB approved an Amendment to Employment Agreement (the “Bone Employment Agreement Amendment”) among FNCB, FNCB Bank and Mr. Bone. The Bone Employment Agreement Amendment amends that certain Employment Agreement entered into by Mr. Bone, FNCB, and FNCB Bank as of October 1, 2015 (the “Original Bone Employment Agreement”). Pursuant to the Bone Employment Agreement Amendment, Mr. Bone’s severance is amended such that, in the event of a termination of his employment by FNCB and FNCB Bank other than for “Cause” (as defined in the Original Bone Employment Agreement) or a resignation by Mr. Bone for “Good Reason” (as defined in the Bone Employment Agreement Amendment), Mr. Bone would receive a total severance payment equal to two (2) years base salary at the highest rate in effect during the twelve (12) month period immediately preceding his last day of employment plus the average cash award paid to him over the last three preceding years from the Executive Incentive Plan. In addition, the Bone Employment Agreement Amendment also provides that, in the event Mr. Bone is not named Chief Financial Officer of PFIS within fourteen (14) months following the closing of the merger with PFIS, he would receive a total severance payment equal to 2.99 years base salary at the highest rate in effect during the twelve (12) month period immediately preceding his last day of employment plus the average cash award paid to him over the last three preceding years from the Executive Incentive Plan.
Executive Incentive Plan
FNCB has a formal Executive Incentive Plan that links cash bonus awards to Bank-specific targets and individual performance factors. Under the terms of the Executive Incentive Plan, each year the Board of Directors establishes the Bank-wide financial targets which are utilized to trigger funding of the Executive Incentive Plan. Under the Executive Incentive Plan, Mr. Champi is eligible for a bonus of 30.0% of his base salary at target levels and each of the other named executive officers is eligible for a bonus of 18.0% of his or her base salary at target levels. For 2023, the Board of Directors approved net income, weighted 95.0%, and individual performance, weighted 5.0%, as the bank wide performance factors. The Board of Directors believe that these performance factors align the interests of our executives with those of our shareholders and FNCB’s Strategic Plan. For 2023, the net income target was not achieved and no cash bonus awards were paid under the Executive Incentive Plan.
Potential Payments upon Termination or Change in Control
In the event of a Change of Control during which his employment with the Bank is terminated “without cause” (as defined in the Employment Agreements), i) within 120 days immediately prior to and in conjunction with a Change in Control or within one year following consummation of a Change in Control or ii) the terms and conditions of his position are substantially altered as defined in the Employment Agreement, each named executive officer will receive a total severance payment equal to 2.99 years base salary at the highest rate in effect during the 12-month period immediately preceding his last day of employment plus the average Executive Incentive Plan cash award received over the last three preceding years. Each named executive officer will remain eligible to participate in the Bank’s medical benefits program while receiving severance. Pursuant to the employment agreement of Mr. Bone, in the event (x) of (i) a termination of his employment without cause within the 120-day period immediately prior to the closing of a Change in Control or within one year following the consummation of a Change in Control or (ii) within one year following a Change in Control the terms and conditions of his position are substantially altered as described in his employment agreement or (y) Mr. Bone is not named Chief Financial Officer of PFIS within 14 months following the closing of the Merger, he would receive (a) total severance payments equal to 2.99 years base salary at the highest rate in effect during the 12 month period immediately preceding his last day of employment plus the average cash award paid to him over the last three preceding years from the Executive Incentive Plan, and (b) health and medical insurance benefits substantially similar to those which Mr. Bone receives immediately prior to the closing.
In the event that the named executive officer is released “without cause” while the Employment Agreement is in effect, he will receive a total severance payment equal to 2.99 years base salary at the highest rate in effect during the 12-month period immediately preceding his last day of employment plus the average cash award paid to him over the last three preceding years from the Executive Incentive Plan.
Each named executive officer will remain eligible to participate in the Bank’s medical benefits program while receiving severance from either involuntary separation not for cause or because of a Change of Control (as defined in the Employment Agreements).
Each named executive officer’s Employment Agreement would terminate upon his death except that any remaining separation payments due to the named executive officer as a result of a change of control or involuntary separation not for cause will be paid to the named executive officer’s beneficiary.
Mr. Burke entered into a Change In Control Agreement (“CIC Agreement”) with the Bank. In the event of a Change In Control as defined in the CIC Agreement, Mr. Burke shall be entitled “Executive Compensation”to a cash compensation equal to two (2) year’s salary at the highest rate in effect during the twelve (12) month period immediately preceding his last day of employment plus any average cash award paid to him over the last three (3) years from the Executive Incentive Plan. Mr. Burke will remain eligible to participate in the Bank’s medical benefits program while receiving severance.
Notwithstanding any other provisions of the EIP, and except as otherwise provided in an award agreement, if there is a change in control, all stock-based awards granted under the EIP will immediately vest 100% for each Participant, including incentive stock options, nonqualified stock options, stock appreciation rights, restricted stock and restricted stock units. However, no stock-based award granted or made during a period when FNCB’s Proxy Statement. is subject to FDIC Part 359 golden parachute requirements will be subject to acceleration of vesting pursuant to the EIP. In addition, no stock-based awards, whenever granted or made, will vest if the Change in Control occurs during a period when FNCB is subject to FDIC Part 359.
The foregoing narrative regarding payments on a change in control or other termination of employment does not reflect payments that would be provided to each named executive officer under the 401(k) Plan following termination of employment, or under FNCB’s disability or life insurance plan in the event of death or disability, as applicable, on the last business day of the fiscal year ended December 31, 2023 because these plans are generally available to all regular salaried employees.
Director Compensation
The following table sets forth information regarding compensation paid to, or earned by, non-employee directors of FNCB during the fiscal year ended December 31, 2023 for service as members of FNCB’s and the Bank’s Boards of Directors as applicable. Directors who also are FNCB or Bank employees (currently Mr. Champi) do not receive any compensation or other fees for service as a Board member.
Name | Fees Earned or Cash Paid | Stock Awards (2) | Total | |||||||||
William G. Bracey | $ | 32,500 | $ | 15,000 | $ | 47,500 | ||||||
Gerard A. Champi | - | - | - | |||||||||
Joseph Coccia | 32,500 | 15,000 | 47,500 | |||||||||
William P. Conaboy, Esquire | 30,000 | 15,000 | 45,000 | |||||||||
Dominick L. DeNaples (1) | 28,750 | 15,000 | 43,750 | |||||||||
Joseph L. DeNaples, Esquire | 30,500 | 15,000 | 45,500 | |||||||||
Louis A. DeNaples | 32,000 | 15,000 | 47,000 | |||||||||
Louis A. DeNaples, Jr., M.D. | 30,000 | 15,000 | 45,000 | |||||||||
Keith W. Eckel | 37,500 | 15,000 | 52,500 | |||||||||
Kathleen McCarthy Lambert | 34,500 | 15,000 | 49,500 | |||||||||
Thomas J. Melone, CPA | 37,000 | 15,000 | 52,000 | |||||||||
(1) | Dominick L. DeNaples was re-appointed to the Board on February 22, 2023. Prior to this date. Mr. DeNaples served as Director Emeritus and received a monthly stipend of $1,250. |
(2) | The amounts listed represent the grant date fair market value of the shares computed in accordance with ASC Topic 718. Additional information about FNCB’s accounting for stock-based compensation is contained in Note 2, “Summary of Significant Accounting Policies” and Note 14, "Stock Compensation Plans" to the consolidated financial statements included in Item 8, "Financial Statements and Supplementary Data," to this Annual Report on Form 10-K. |
Directors are not paid for their attendance at FNCB’s board meetings. All non-employee members of the Bank’s Board of Directors receive an annual retainer of $30,000 paid on a per month basis, for each month or portion thereof that the director serves as a director of the Bank. Non-employee directors who are members of the Bank's Director's Loan Committee receive an annual retainer of $2,000, paid on a per month basis for each month or portion thereof that he/she serves on the committee. Additionally, non-employee directors who serve as committee chairperson receive the following annual retainers, which are paid on a per month basis for each month or portion thereof that he/she serves as chairperson: 1) Audit Committee and Director's Loan Committee chairpersons each receive $5,000; and 2) ALCO Committee, Compensation Committee, Nominating and Governance Committee and Risk Management Committee chairpersons each received $2,500. The aggregate amount of director fees, including stock awards and advisory board and director emeritus fees, paid in 2023 was $501,131.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters. |
The following table sets forth certain information regarding security ownership of certainFNCB’s common stock as of February 29, 2024 by: (i) each director; (ii) each of FNCB’s named executive officers; and (iii) all executive officers and directors of FNCB as a group. The address of each of the beneficial owners identified is 102 E. Drinker Street, Dunmore, PA 18512. Except as otherwise indicated, each person included in this table owns his or her shares directly and managementpossesses sole voting and sole investment power with respect to all such shares, none of which are pledged as security. Persons and groups who beneficially own in excess of 5.0% of shares of FNCB's common stock are required by this Item 12 is incorporated herein by reference to file certain reports with the section entitled “Principal Beneficial OwnersSEC regarding such ownership. Except as set forth below, FNCB knows of FNCB’s Common Stock” inno other person or persons who beneficially owns more than 5.0% of FNCB’s Proxy Statement. The information regarding securities authorized for issuance under equity compensation plans by this Item 12 is incorporated by reference to the section entitled "Equity Compensation Plan Information" in FNCB's Proxy Statement.common stock.
Name of Beneficial Owner | Position | Total Shares Beneficially Owned | Percentage of Total Shares Beneficially Owned (10) |
William G. Bracey (1) | Director | 178,445 | * |
Joseph Coccia (2) | Director, Secretary | 240,067 | 1.21% |
William P. Conaboy, Esquire (3) | Director | 4,454 | * |
Dominick L. DeNaples (4) | Director, Former Director Emeritus and Former Chairman of the Board | 99,605 | * |
Joseph L. DeNaples, Esquire | Director | 341,688 | 1.73% |
Louis A. DeNaples (5) | Director, Chairman of the Board | 2,151,716 | 10.87% |
Louis A. DeNaples, Jr., M.D. (6) | Director, Vice Chairman of the Board | 326,079 | 1.65% |
Keith W. Eckel | Director | 22,323 | * |
Kathleen McCarthy Lambert, CPA (7) | Director | 17,968 | * |
Thomas J. Melone, CPA | Director | 15,267 | * |
Gerard A. Champi (8) | Director, President and Chief Executive Officer | 93,025 | * |
James M. Bone, Jr., CPA (9) | Executive Vice President and Chief Financial Officer/Treasurer | 49,339 | * |
James F. Burke | Executive Vice President and Chief Banking Officer | 1,474 | * |
All current directors and executive officers as a group (25 persons) | 3,696,899 | 18.91% |
* Indicates ownership of less than 1%. |
(1) | Includes: 30,159 shares held individually by Mr. Bracey; and 148,286 shares held by a business which is 100.00% owned by Mr. Bracey. |
(2) | Includes: 24,764 shares held individually by Mr. Coccia; and 215,303 shares held by a family limited partnership. |
(3) | Shares held jointly with Attorney Conaboy’s spouse. |
(4) | Includes: 9,040 shares held individually by Mr. DeNaples; 88,126 shares held jointly with Mr. DeNaples’ spouse; and 2,439 shares held by a business in which he is a 33.33% owner with his brother, Louis A. DeNaples. |
(5) | Includes: 2,124,521 shares held individually by Mr. DeNaples; 18,553 shares owned individually by his spouse; 6,203 shares owned jointly with Mr. DeNaples’ spouse; and 2,439 shares held by a business in which he is a 33.33% owner with his brother, Dominick L. DeNaples. |
(6) | Includes: 290,274 shares held individually by Dr. DeNaples, Jr.; 30,643 shares held jointly with Mr. DeNaples’ spouse and children; 3,558 shares as custodian for Dr. DeNaples’ children under the Uniform Transfer to Minors Act (“UTMA”); and 1,604 shares as custodian for Dr. DeNaples’ nephew under UTMA. |
(7) | Includes: 15,468 shares held individually by Mrs. Lambert; and 2,500 shares owned jointly with Mrs. Lambert’s spouse. |
(8) | Includes: 56,046 shares held individually by Mr. Champi; and 36,979 shares held jointly with Mr. Champi’s spouse. |
(9) | Includes: 23,141 shares held individually by Mr. Bone; 19,115 shares held jointly with Mr. Bone’s spouse; 6,100 shares held jointly with Mr. Bone’s father and three of his siblings; and 983 shares held individually by Mr. Bone’s spouse. |
(11) | Percentages are calculated in accordance with Rule 13d-3 under the Exchange Act, and represent a percentage of the sum of 19,787,031 shares issued, outstanding and entitled to vote as of February 29, 2024. Certain shares beneficially owned by FNCB’s directors and executive officers may be held in accounts with third-party firms, where such shares may from time to time be subject to a security interest for margin credit provided in accordance with such firm’s policies. |
Certain Relationships and Related Transactions, and Director Independence. |
The information required by this Item 13 related to certain relationships and related transactions is incorporated herein by reference to the section entitled “CertainCertain Relationships and Related Transactions”Transactions
FNCB and the Bank have engaged in and intend to continue to engage in banking and financial transactions in the ordinary course of business with directors and officers of FNCB’s Proxy Statement. The information required under this Item 13 and the Bank and their affiliates on comparable terms and with similar interest rates as those prevailing from time to time for other customers not related to FNCB or the Bank. FNCB’s Code of Business Conduct and Ethics applies to all directors, officers, and employees of FNCB and provides guidelines for those covered persons who may have a potential or apparent conflict of interest. Pursuant to the Code, a “conflict of interest” exists any time a covered person’s private interest interferes/conflicts, or even appears to interfere/conflict, in any way with the interests of FNCB and the Bank. Under the Code, if a conflict of interest arises, the Board must act with care to avoid even the appearance that any actions were not in the best interest of FNCB and the Bank.
Board of Directors’ approval is required for FNCB to do business with a company in which a member of the Board of Directors, an officer, an employee or a family member of a director, officer or employee owns, directly or indirectly, an interest. To identify related party transactions, each year, FNCB submits and requires its directors and officers to complete Director and Officer Questionnaires identifying any transaction with FNCB or any of its subsidiaries in which the officer or director or their family members have an interest. The Board of Directors reviews related party transactions due to the potential for a conflict of interest. Each year, FNCB’s directors and executive officers also review our Code.
Additionally, FNCB has further obligations for the review and approval of loans that are made to directors and officers pursuant to Regulation O (Loans to Executive Officers, Directors and Principal Shareholders of Member Banks) and FNCB’s written Loan Policy. Any business dealing, including extensions of credit, between FNCB or the Bank and a director or officer of FNCB or the Bank, or with an affiliate of a director or officer, other than a deposit, trust service or other product or service provided by a bank in the ordinary course of business, is required to be approved by a majority of disinterested directors. In considering a proposed insider transaction, the disinterested directors are to reasonably determine whether the transaction would be in the best interest of FNCB or the Bank and whether the terms and conditions, including price, are substantially the same as those prevailing at the time for comparable transactions with non-insiders. The responsibility for monitoring compliance with Regulation O rests with the Bank’s Credit Administration Unit and Internal Auditor as required by the Bank’s Loan Policy.
There were no loan transactions originated during 2023 which were required to be reported where such policy and procedures were not followed. Loans to directors, executive officers and their related parties (i) were made in the ordinary course of business, (ii) were made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other persons not related to FNCB or Bank and (iii) did not involve more than the normal risk of collection or present other unfavorable features.
In the course of its operations, FNCB acquires goods and services from and transacts business with various companies of related parties. FNCB believes these transactions were made on the same terms as those for comparable transactions with unaffiliated parties. FNCB recorded aggregate payments for these services of $0.5 million in 2023 and $0.5 million in 2022. None of these transactions exceeded $120 thousand, except as described below.
Independence of the Board of Directors
Currently, the Board of Directors has eleven (11) members. FNCB evaluates the independence of directors under the SEC and Nasdaq stock market’s standards for independence. The Nasdaq standards require the Board of Directors be comprised of a majority of independent directors. The Nasdaq standards also require that, except for exceptional and limited circumstances, the Board of Directors maintain an audit committee comprised only of independent directors and that director nominees must be selected either by independent directors comprising a majority of the Board’s independent directors in a vote in which only independent directors participate, or by a nominations committee comprised solely of independent directors. The Nominating and Governance Committee of FNCB’s Board has responsibility for selecting director nominees and is comprised solely of independent directors. Nasdaq corporate governance standards also require that the Board maintain a Compensation Committee comprised of at least two members, each of whom is an independent director. The Board of Directors of FNCB has appointed a Compensation Committee, currently comprised of four directors, each of whom the Board has determined is independent.
Independence is incorporated herein by referencereviewed at least annually to determine whether all existing and potential committee members are independent. The Board of Directors has determined that William G. Bracey, Joseph Coccia, William P. Conaboy, Esq., Dominick L. DeNaples, Joseph L. DeNaples, Esq., Louis A. DeNaples, Louis A. DeNaples, Jr. M.D., Keith W. Eckel, Kathleen McCarthy Lambert, CPA, and Thomas J. Melone, CPA met the standards for independence.
In making its independence determinations, the Board considers all relevant facts and circumstances, and not merely from the standpoint of the director, but also from that of persons or organizations with which the director has an affiliation. The Board considered that in the ordinary course of business FNCB and the Bank may provide commercial banking and other services to some of the independent directors and to business organizations and to individuals associated with them. The Board also considered that in the ordinary course of business some business organizations with which an independent director is associated may provide products and services to FNCB and the Bank. The Board has determined that, based on the information available to the section entitled “Corporate Governance” in FNCB’s Proxy Statement.Board, none of these relationships were material.
Joseph L. DeNaples, Esquire, a director, is a partner at the law firm of Cipriani & Werner, which provided legal services to FNCB during 2023. The Board has considered this relationship and determined that it did not impair Mr. DeNaples’ independence as it relates to his membership as a Director on the Boards of FNCB and the Bank and membership on the Compensation and Nominating and Governance Committees.
Principal Accounting Fees and Services. |
The informationfollowing table sets forth the aggregate fees billed to FNCB by Baker Tilly US, LLP for services rendered for the fiscal years ended December 31, 2023 and 2022.
Description | 2023 | 2022 | ||||||
Audit fees (1) | $ | 362,152 | $ | 295,171 | ||||
Audit-related fees | - | - | ||||||
Tax fees | 61,775 | 27,060 | ||||||
All other fees | - | - | ||||||
The Audit Committee has considered whether, and determined that, the provision of services rendered above was compatible with maintaining the independence of Baker Tilly US, LLP in 2023 and 2022 as the independent registered public accounting firm. The Audit Committee concluded that the independence of the firm was maintained.
Pursuant to the Audit Committee Charter, FNCB is required to obtain pre-approval by the Audit Committee for all audit and permissible non-audit services obtained from its independent registered public accounting firm to the extent required by applicable law. In accordance with this Item 14 is incorporated herein by reference topre-approval policy, the section entitled “Fees Paid to Independent Registered Public Accounting Firm” in FNCB’s Proxy Statement.Audit Committee pre-approved all audit and tax services for fiscal years 2023 and 2022.
Exhibits and Financial Statement Schedules |
1. | Financial Statements |
The following financial statements are included by reference in Part II, Item 8 hereof:
Report of Independent Registered Public Accounting Firm (PCAOB ID 23) | |
Consolidated Statements of Financial Condition | |
Consolidated Statements of Income | |
Consolidated Statements of Comprehensive Income | |
Consolidated Statements of Changes in Shareholders’ Equity | |
Consolidated Statements of Cash Flows | |
Notes to Consolidated Financial Statements |
2. | Financial Statement Schedules |
Financial Statement Schedules are omitted because the required information is either not applicable, not required or is shown in the respective financial statements or in the notes thereto.
3. | The following exhibits are filed herewith or incorporated by reference. |
EXHIBIT 10.4+ | |
EXHIBIT 10.5+ | |
EXHIBIT 10.6+ | |
EXHIBIT 10.7+ | |
EXHIBIT 10.8+ | |
EXHIBIT 10.9+ | |
EXHIBIT 10.10+ | |
EXHIBIT 10.11+ | |
| EXHIBIT 10.12+ | Form of Change in Control Agreement - filed as Exhibit 10.12 to FNCB's Annual Report on Form 10-K for the year ended December 31, 2021, as filed on March 11, 2022, is hereby incorporated by reference. |
| EXHIBIT 10.13+ | FNCB Bancorp, Inc. 2023 Equity Incentive Plan - filed as Exhibit 99.1 to FNCB's Registration Statement on Form S-8 on June 23, 2023, is hereby incorporated by reference. |
EXHIBIT 21 | |
EXHIBIT 23* | |
EXHIBIT 31.1* | |
EXHIBIT 31.2* | |
EXHIBIT 32* | Section 1350 Certification — Chief Executive Officer and Chief Financial Officer |
| EXHIBIT 97.1* | FNCB Bancorp, Inc. Clawback Policy, adopted by the Board of Directors on November 30, 2023 |
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 LABLE LINKBASE |
| EXHIBIT 101.PRE | INLINE XBRL TAXONOMY EXTENSION PRESENTATION LINKBASE |
| EXHIBIT 104 | COVER PAGE INTERATIVE DATA FILE (FORMATTED AS INLINE XBRL AND CONTAINED IN EXHIBIT 101) |
_____________________________
* Filed herewith
** Furnished herewith
+ Management contract, compensatory plan or arrangement
None.
Pursuant to the requirements of Section 13 or 15(d) 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.
/s/ Gerard A. Champi | March | ||
Gerard A. Champi | Date | ||
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Gerard A. Champi and James M. Bone, Jr., jointly and severally, his or her attorney-in-fact, each with the full power of substitutes, for such person, in any and all capacities, to sign any and all amendments to this Annual Report on Form 10-K, and to file the same, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorney-in-fact and agent full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he might do or could do in person hereby ratifying and confirming all that each of said attorneys-in-fact and agents, or his substitute, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated:
/s/ Gerard A. Champi | March | ||
Gerard A. Champi | Date | ||
/s/ James M. Bone, Jr. | March | ||
James M. Bone, Jr., CPA Executive Vice President and Chief Financial Officer Principal Financial Officer | Date | ||
/s/ Stephanie A. Westington | March | ||
Stephanie A. Westington, CPA Senior Vice President and Principal Accounting Officer | Date | ||
Directors:
/s/ William G. Bracey | March | /s/ Gerard A. Champi | March | |||||||
William G, Bracey | Date | Gerard A. Champi | Date | |||||||
/s/ Joseph Coccia | March | /s/ | March | |||||||
Joseph Coccia | Date | William P. Conaboy | Date | |||||||
| /s/ Dominick L. DeNaples | March 8, 2024 | /s/ Joseph L. DeNaples | March 8, 2024 | |||||||
Dominick L. DeNaples | Date | Joseph L. DeNaples | Date | |||||||
/s/Louis A. DeNaples | March | /s/ Louis A. DeNaples, Jr. | March | |||||||
Louis A. DeNaples | Date | Louis A. DeNaples, Jr. |
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| Date | |||||||
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/s/ Keith W. Eckel | March 8, 2024 | /s/ Kathleen McCarthy Lambert | March |
| ||||||
| Date |
| Date | |||||||
/s/ | March | |||||||||
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| Thomas J. Melone | Date |