FNCB Bancorp, Inc. - Quarter Report: 2023 March (Form 10-Q)

fncb20230331_10q.htm

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

☒

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2023

☐

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 of Incorporation or Organization)		(I.R.S. Employer Identification No.)

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

(570) 346-7667

Registrant’s telephone number, including area code

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

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 is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date: 19,683,873 shares as of April 30, 2023.

Table of Contents

Contents
PART I. Financial Information	1
Item 1. Financial Statements (unaudited)	1
Consolidated Statements of Financial Condition	1
Consolidated Statements of Income	2
Consolidated Statements of Comprehensive Income (Loss)	3
Consolidated Statements of Changes in Shareholders’ Equity	4
Consolidated Statements of Cash Flows	5
Notes to Consolidated Financial Statements	6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	30
Item 3. Quantitative and Qualitative Disclosures about Market Risk	46
Item 4. Controls and Procedures	46
PART II. Other Information	47
Item 1. Legal Proceedings.	47
Item 1A. Risk Factors.	47
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.	47
Item 3. Defaults upon Senior Securities.	47
Item 4. Mine Safety Disclosures.	47
Item 5. Other Information.	47
Item 6. Exhibits.	48

Table of Contents

Part I - Financial Information

Item 1 - Financial Statements

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

	*March 31,*			*December 31,*
	2023			2022
(in thousands, except share data)	(Unaudited)			(Audited)
Assets
Cash and cash equivalents:
Cash and due from banks	$	20,418		$	26,588
Interest-bearing deposits in other banks		49,153			15,328
Total cash and cash equivalents		69,571			41,916
Available-for-sale debt securities, at fair value		473,119			476,091
Equity securities, at fair value		7,369			7,717
Restricted stock, at cost		8,482			8,545
Loans held for sale		-			60
Loans and leases, net of allowance for credit losses of $12,279 and $14,193		1,151,510			1,110,124
Bank premises and equipment, net		15,316			15,616
Accrued interest receivable		6,143			5,957
Bank-owned life insurance		36,696			36,499
Other assets		41,275			43,005
Total assets	$	1,809,481		$	1,745,530

Liabilities
Deposits:
Demand (non-interest-bearing)	$	281,114		$	305,850
Interest-bearing		1,182,192			1,114,797
Total deposits		1,463,306			1,420,647
Borrowed funds:
Federal Home Loan Bank of Pittsburgh advances		186,338			172,050
Junior subordinated debentures		10,310			10,310
Total borrowed funds		196,648			182,360
Accrued interest payable		848			171
Other liabilities		22,185			23,403
Total liabilities		1,682,987			1,626,581

Shareholders' equity
Preferred shares ($1.25 par)
Authorized: 20,000,000 shares at March 31, 2023 and December 31, 2022
Issued and outstanding: 0 shares at March 31, 2023 and December 31, 2022		-			-
Common shares ($1.25 par)
Authorized: 50,000,000 shares at March 31, 2023 and December 31, 2022
Issued and outstanding: 19,683,873 shares at March 31, 2023 and 19,681,644 shares at December 31, 2022		24,604			24,602
Additional paid-in capital		77,636			77,502
Retained earnings		66,834			64,873
Accumulated other comprehensive loss		(42,580	)		(48,028	)
Total shareholders' equity		126,494			118,949
Total liabilities and shareholders’ equity	$	1,809,481		$	1,745,530

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

Table of Contents

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

	*Three Months Ended March 31,*
(in thousands, except share data)	*2023*			*2022*
Interest income
Interest and fees on loans and leases	$	14,565		$	10,102
Interest and dividends on securities:
Taxable		3,077			2,390
Tax-exempt		587			612
Dividends		273			78
Total interest and dividends on securities		3,937			3,080
Interest on interest-bearing deposits in other banks		177			7
Total interest income		18,679			13,189
Interest expense
Interest on deposits		4,377			324
Interest on borrowed funds:
Federal Home Loan Bank of Pittsburgh advances		2,551			31
Junior subordinated debentures		166			51
Total interest on borrowed funds		2,717			82
Total interest expense		7,094			406
Net interest income before provision for credit losses		11,585			12,783
Provision for credit losses		975			759
Net interest income after provision for credit losses		10,610			12,024
Non-interest income
Deposit service charges		1,064			1,050
Net gain on the sale of available-for-sale debt securities		162			-
Net loss on equity securities		(508	)		(125	)
Net gain on the sale of mortgage loans held for sale		1			-
Loan-related fees		119			57
Income from bank-owned life insurance		197			145
Merchant services revenue		161			199
Wealth management services revenue		238			121
Other		237			343
Total non-interest income		1,671			1,790
Non-interest expense
Salaries and employee benefits		5,395			4,658
Occupancy expense		521			548
Equipment expense		272			324
Advertising expense		209			132
Data processing expense		998			1,063
Regulatory assessments		213			225
Bank shares tax		149			341
Professional fees		302			327
(Credit) provision for unfunded commitments		(269	)		48
Other operating expenses		1,131			878
Total non-interest expense		8,921			8,544
Income before income tax expense		3,360			5,270
Income tax expense		697			917
Net income	$	2,663		$	4,353

Earnings per share
Basic	$	0.14		$	0.22
Diluted	$	0.14		$	0.22

Cash dividends declared per common share	$	0.090		$	0.075
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING:
Basic		19,682,357			19,935,288
Diluted		19,690,859			19,972,113

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

Table of Contents

FNCB BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(unaudited)

	*Three Months Ended March 31,*
(in thousands)	*2023*			*2022*
Net income	$	2,663		$	4,353
Other comprehensive income (loss):
Unrealized gains (losses) on available-for-sale debt securities		8,774			(30,961	)
Taxes		(1,842	)		6,502
Net of tax amount		6,932			(24,459	)

Reclassification adjustment gains included in net income		(162	)		-
Taxes		34			-
Net of tax amount		(128	)		-

Derivative adjustments		(1,716	)		527
Taxes		360			(111	)
Net of tax amount		(1,356	)		416
Total other comprehensive income (loss)		5,448			(24,043	)
Comprehensive income (loss)	$	8,111		$	(19,690	)

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

Table of Contents

FNCB BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

For the Three Months Ended March 31, 2023 and 2022

(unaudited)

(in thousands, except per share data)	*Number of Common Shares*			*Common Stock*			*Additional Paid-in Capital*			*Retained Earnings*			*Accumulated Other Comprehensive Income (Loss)*			*Total Shareholders' Equity*
For the three months ended:
Balances, December 31, 2021		19,989,875		$	24,987		$	80,128		$	50,990		$	6,352		$	162,457
Net income for the period		-			-			-			4,353			-			4,353
Cash dividends paid, $0.075 per share		-			-			-			(1,499	)		-			(1,499	)
Restricted stock awards		-			-			100			-			-			100
Repurchase of common shares		(307,514	)		(384	)		(2,596	)		-			-			(2,980	)
Common shares issued through dividend reinvestment/optional cash purchase plan		1,310			1			10			(10	)		-			1
Other comprehensive loss, net of tax of $6,391		-			-			-			-			(24,043	)		(24,043	)
Balances, March 31, 2022		19,683,671		$	24,604		$	77,642		$	53,834		$	(17,691	)	$	138,389

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 for the period		-			-			-			2,663			-			2,663
Cash dividends paid, $0.090 per share		-			-			-			(1,771	)		-			(1,771	)
Restricted stock awards		-			-			121			-			-			121
Common shares issued through dividend reinvestment/optional cash purchase plan		2,229			2			13			(11	)		-			4
Other comprehensive income, net of tax of $1,448		-			-			-			-			5,448			5,448
Balances, March 31, 2023		19,683,873		$	24,604		$	77,636		$	66,834		$	(42,580	)	$	126,494

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

Table of Contents

FNCB BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)

	*Three Months Ended March 31,*
(in thousands)	*2023*			*2022*
Cash flows from operating activities:
Net income	$	2,663		$	4,353
Adjustments to reconcile net income to net cash provided by operating activities:
Investment securities amortization, net		484			723
Equity in trust		(5	)		(2	)
Depreciation of bank premises and equipment		352			389
Amortization of loan origination fees		160			(562	)
Valuation adjustment for loan servicing rights		-			(3	)
Stock-based compensation expense		121			100
Provision for credit losses		975			759
Valuation adjustment for unfunded commitments		(269	)		48
Net gain on the sale of available-for-sale debt securities		(162	)		-
Net loss on equity securities		508			125
Net gain on the sale of mortgage loans held for sale		(1	)		-
Net gain on the sale of other real estate owned		-			(3	)
Income from bank-owned life insurance		(197	)		(145	)
Proceeds from the sale of mortgage loans held for sale		61			542
Funds used to originate mortgage loans held for sale		-			(542	)
Increase in accrued interest receivable		(186	)		(227	)
Increase in other assets		(443	)		(441	)
Increase in accrued interest payable		677			8
Decrease in other liabilities		(3,514	)		(5,115	)
Total adjustments		(1,439	)		(4,346	)
Net cash provided by operating activities		1,224			7

Cash flows from investing activities:
Maturities, calls and principal payments of available-for-sale debt securities		5,708			11,216
Proceeds from the sale of available-for-sale debt securities		7,054			-
Purchases of available-for-sale debt securities		(1,500	)		(33,921	)
Purchases of equity securities		(160	)		(221	)
Redemption (purchase) of restricted stock		63			(2,109	)
Net increase in loans and leases to customers		(39,862	)		(56,420	)
Proceeds from the sale of other real estate owned		-			695
Purchase of bank-owned life insurance		-			(3,000	)
Purchases of bank premises and equipment		(52	)		(202	)
Net cash used in investing activities		(28,749	)		(83,962	)

Cash flows from financing activities:
Net increase (decrease) in deposits		42,659			(43,435	)
Net (decrease) increase in Federal Home Loan Bank of Pittsburgh advances - overnight		(49,900	)		66,950
Proceeds from Federal Home Loan Bank of Pittsburgh advances - term		96,688			10,000
Repayment of Federal Home loan Bank of Pittsburgh advances - term		(32,500	)		(20,000	)
Repurchase of common shares		-			(2,980	)
Proceeds from issuance of common shares, net of discount		4			1
Cash dividends paid		(1,771	)		(1,499	)
Net cash provided by financing activities		55,180			9,037
Net increase (decrease) in cash and cash equivalents		27,655			(74,918	)
Cash and cash equivalents at beginning of period		41,916			99,020
Cash and cash equivalents at end of period	$	69,571		$	24,102

Supplemental cash flow information
Cash paid during the period for:
Interest	$	6,417		$	398
Taxes		1,200			1,100
Other transactions:
Available-for-sale debt securities purchased, not settled		-			546

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

Table of Contents

FNCB BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Note 1. Basis of Presentation

The consolidated financial statements of FNCB Bancorp, Inc. are comprised of the accounts of FNCB Bancorp, Inc., a registered bank holding company under the Bank Holding Company Act of 1956, and its wholly owned subsidiary, FNCB Bank (the “Bank”), as well as the Bank’s wholly owned subsidiaries (collectively, “FNCB”). The accounting and reporting policies of FNCB conform to accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10-01 of Regulation S-X. Accordingly, they do not include all the information and accompanying notes required by GAAP for complete financial statements. In the opinion of management, all adjustments necessary for a fair presentation of the financial position and the results of operations for the periods presented have been included in the consolidated financial statements. All intercompany balances and transactions have been eliminated in consolidation. Prior period amounts have been reclassified when necessary to conform to the current period’s presentation. Such reclassifications did not have an impact on the operating results or financial position of FNCB. The operating results and financial position of FNCB for the three months ended March 31, 2023 may not be indicative of future results of operations and financial position.

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

FNCB has evaluated events and transactions occurring subsequent to March 31, 2023, the balance sheet date, for items that could potentially be recognized or disclosed in these consolidated financial statements. The evaluation was conducted through the issuance date of these consolidated financial statements. See Note 12, "Regulatory Matters" for information about events and transactions that have occurred subsequent to the balance sheet date.

These financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in FNCB’s audited financial statements, included in the Annual Report filed on Form 10-K as of and for the year ended December 31, 2022.

Note 2. Summary of Significant Accounting Policies/New Authoritative Accounting Guidance

The disclosures below update and supplement the accounting policies previously disclosed in Note 2, "Summary of Significant Accounting Policies" included in FNCB's Annual Report filed on Form 10-K as of and for the year ended December 31, 2022 and reflect the adoption of Accounting Standards Update ("ASU") 2016-13, Financial Instruments – Credit Losses (Topic 326): “Measurement of Credit Losses on Financial Instruments,” by FNCB on January 1, 2023. ASU 2016-13 is also commonly referred to as Accounting Standards Codification ("ASC") 326 or Current Expected Credit Losses ("CECL").

Allowance for Credit Loss ("ACL") on Debt Securities: The ACL is a valuation account that is deducted from the amortized cost basis to present the net amount expected to be collected on the held-to-maturity portfolio. At March 31, 2023, FNCB had no securities classified as held-to-maturity.

Upon adoption of ASU 2016-13, management no longer evaluates securities for other than temporary impairment ("OTTI"), as ASC Subtopic 326-30, "Financial Instruments—Credit Losses—Available-for-Sale Debt Securities," changes the accounting for recognizing impairment on available-for-sale debt securities. Each quarter management evaluates impairment where there has been a decline in fair value below the amortized cost basis of a security to determine whether there is a credit loss associated with the decline in fair value. Management considers the nature of the collateral, potential future changes in collateral values, default rates, delinquency rates, third-party credit support, 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 among other factors. Credit losses are calculated individually, rather than collectively, using a discounted cash flow ("DCF") method, whereby management compares the present value of expected cash flows with the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance on available-for-sale debt securities is recorded for the credit loss, 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 of 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.

The allowance on available-for-sale debt securities may be in full or a portion thereof, and is recorded as an expense (credit) within the provision for credit losses on 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. As of March 31, 2023 and January 1, 2023 (i.e. ASU 2016-13 adoption), there was no allowance established for FNCB's available-for-sale debt securities.

Loans: FNCB reports loans and leases held for in the portfolio at amortized cost. Amortized cost is the principal balance outstanding net of the unamortized balance of any deferred fees or costs and the unamortized balance of any premiums or discounts on loans purchased through third-party originators.

Generally, for originated loans, loan fees and certain direct origination costs are deferred and amortized into interest income over the contractual term of the loan using the level-yield method over the estimated lives of the related loans. When a loan is paid off, the unamortized portion of deferred fees or costs are recognized in interest income. Interest income on originated loans is accrued based upon the daily principal amount outstanding except for loans on non-accrual status.

For purchased loans, interest income is accrued based upon the daily principal amount outstanding and is then further adjusted by the accretion of any discount or amortization of any premium associated with the loan that was recognized based on the acquisition date fair value. When a loan is paid off, the unamortized portion of any premiums or discounts on loans are recognized in interest income.

Table of Contents

ACL on Loans: The ACL on the loan portfolio is a significant accounting estimate used in the preparation of the FNCB's consolidated financial statements. Upon adoption of ASU 2016-13 FNCB replaced the incurred loss impairment model that recognizes losses when it becomes probable that a credit loss will be incurred, with a requirement to recognize lifetime expected credit losses immediately when a financial asset is originated or purchased. The ACL is a valuation account that is deducted from the amortized cost basis of loans to present the net amount expected to be collected on the loans. Loans, or portions thereof, are charged off against the allowance 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 (pool) basis based on a lifetime loss-rate model when similar risk characteristics exist. Loans that do not share risk characteristics are evaluated 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 allowance.

FNCB estimates expected credit losses using the DCF method for all loan portfolio segments measured on a collective (pool) basis. For each loan segment, a cash flow projection is generated at the instrument level. A default rate and loss given default assumption 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 instrument 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).

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. 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 certain qualitative factors in its evaluation of expected credit losses, these factors include: (i) changes in the credit quality trends of a respective segment which may be measured by risk ratings, FICO scores, delinquency rates, and payment performance, (ii) changes in independent third-party loan reviews and regulatory exam ratings, (iii) changes in local unemployment rates, (iv) portfolio segment growth rates and concentrations, and (v) other external factors that may affect bank lending and operations such as a pandemic, natural disaster, or loss of a major employer, among others.

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 NPV 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.

Accrued Interest: Upon adoption of ASU 2016-13 on January 1, 2023, FNCB made the following elections regarding accrued interest receivable: (i) present accrued interest receivable balances separately on the consolidated statements of condition; (ii) exclude accrued interest from the measurement of the ACL, including investments and loans; and (iii) continue to write-off accrued interest receivable by reversing interest income when a loan is placed on non-accrual. FNCB's policy is to write-off accrued interest when a loan is placed on non-accrual. Historically, FNCB has not experienced uncollectible accrued interest receivable on investment debt securities.

ACL for Unfunded Commitments: The exposure is a component of other liabilities on FNCB’s consolidated statement of financial condition and represents the estimate for probable credit losses inherent in unfunded commitments to extend credit. Unfunded commitments to extend credit include unused portions of lines of credit, availability on construction and land development loans and standby and commercial letters of credit. The process used to determine the ACL for these exposures is consistent with the process for determining the allowance for loans, as adjusted for estimated funding probabilities or loan equivalency factors. A charge (credit) to provision for unfunded commitments on the consolidated statements of income is made to account for the change in the ACL on unfunded commitment exposures between reporting periods.

New Authoritative Accounting Guidance

On January 1, 2023, FNCB adopted ASU 2016-13. ASU 2016-13 significantly changes the impairment model for most financial assets that are measured at amortized cost and certain other instruments from an incurred loss model to an expected loss model. FNCB applied the new guidance using the modified-retrospective approach. Related to the implementation of ASU 2016-13, 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 2013-16 did not have an effect on FNCB's available-for-sale debt securities.

Table of Contents

The following table below presents the impact of ASU 2016-13 on the consolidated balance sheet:

	*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	)

Shareholder's equity:
Retained earnings	$	(65,953	)	$	(64,873	)	$	(1,080	)

On January 1, 2023, FNCB adopted ASU 2022-02, Financial Instruments—Credit Losses (Topic 326): "Troubled Debt Restructurings and Vintage Disclosures." ASU 2022-02 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.

Refer to Note 2 to FNCB’s consolidated financial statements included in the Annual Report on Form 10-K for the fiscal year ended December 31, 2022 (the "2022 Annual Report") for a discussion of additional accounting guidance applicable to FNCB that will be adopted in future periods.

Note 3. Securities

Available-for-Sale Debt Securities

The following tables present the amortized cost, gross unrealized gains and losses, and the fair value of FNCB’s available-for-sale debt securities at March 31, 2023 and December 31, 2022:

	*March 31, 2023*
			*Gross*		*Gross*
			*Unrealized*		*Unrealized*
	*Amortized*		*Holding*		*Holding*		*Fair*
(in thousands)	*Cost*		*Gains*		*Losses*		*Value*
Available-for-sale debt securities:
U.S. treasuries	$	36,813	$	-	$	3,968	$	32,845
Obligations of state and political subdivisions		242,857		106		23,480		219,483
U.S. government/government-sponsored agencies:
Collateralized mortgage obligations - residential		92,338		-		11,588		80,750
Collateralized mortgage obligations - commercial		3,640		-		282		3,358
Mortgage-backed securities		22,331		2		2,363		19,970
Private collateralized mortgage obligations		77,933		16		8,209		69,740
Corporate debt securities		35,110		-		3,070		32,040
Asset-backed securities		14,562		-		284		14,278
Negotiable certificates of deposit		744		-		89		655
Total available-for-sale debt securities	$	526,328	$	124	$	53,333	$	473,119

Table of Contents

	December 31, 2022
			Gross		Gross
			Unrealized		Unrealized
	*Amortized*		*Holding*		*Holding*		*Fair*
(in thousands)	*Cost*		*Gains*		*Losses*		*Value*
Available-for-sale debt securities:
U.S. treasuries	$	36,801	$	-	$	4,667	$	32,134
Obligations of state and political subdivisions		250,244		90		29,552		220,782
U.S. government/government-sponsored agencies:
Collateralized mortgage obligations - residential		93,577		-		13,170		80,407
Collateralized mortgage obligations - commercial		3,649		-		320		3,329
Mortgage-backed securities		23,332		1		2,670		20,663
Private collateralized mortgage obligations		80,648		-		8,141		72,507
Corporate debt securities		33,630		-		2,958		30,672
Asset-backed securities		15,287		5		351		14,941
Negotiable certificates of deposit		744		-		88		656
Total available-for-sale debt securities	$	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 March 31, 2023 and December 31, 2022.

The following table presents the maturity information of FNCB’s available-for-sale debt securities at March 31, 2023. Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties. Because collateralized mortgage obligations, mortgage-backed securities and asset-backed securities are not due at a single maturity date, they are not included in the maturity categories in the following maturity summary.

	*March 31, 2023*
	*Amortized*		*Fair*
(in thousands)	*Cost*		*Value*
Amounts maturing in:
One year or less	$	20,201	$	20,043
After one year through five years		68,798		65,511
After five years through ten years		107,687		94,437
After ten years		118,838		105,032
Mortgage-backed securities		22,331		19,970
Collateralized mortgage obligations		173,911		153,848
Asset-backed securities		14,562		14,278
Total available-for-sale debt securities	$	526,328	$	473,119

The following table presents the gross proceeds received, and gross realized gains and losses, on sales of available-for-sale debt securities for the three months ended March 31, 2023 and 2022. Gains and losses realized on sales of available-for-sale debt securities are included in non-interest income in the consolidated statements of income. There were no sales of available-for-sale debt securities during the three months ended March 31, 2022.

	*Three Months Ended March 31,*
(in thousands)	*2023*		*2022*
Available-for-sale debt securities:
Gross proceeds received on sales	$	7,054	$	-
Gross realized gains		162		-
Gross realized losses		-		-

Table of Contents

The following tables present the number, fair value and gross unrealized losses of available-for-sale debt securities with unrealized losses at March 31, 2023 and December 31, 2022, aggregated by investment category and length of time the securities have been in an unrealized loss position.

	*March 31, 2023*
	*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*
U.S. treasuries		-	$	-	$	-		17	$	32,845	$	3,968		17	$	32,845	$	3,968
Obligations of state and political subdivisions		36		35,281		547		176		178,908		22,933		212		214,189		23,480
U.S. government/government-sponsored agencies:
Collateralized mortgage obligations - residential		1		296		12		41		80,453		11,576		42		80,749		11,588
Collateralized mortgage obligations - commercial		-		-		-		3		3,358		282		3		3,358		282
Mortgage-backed securities		5		7,208		89		8		12,655		2,274		13		19,863		2,363
Private collateralized mortgage obligations		17		15,938		477		38		52,046		7,732		55		67,984		8,209
Corporate debt securities		13		15,921		1,379		17		16,119		1,691		30		32,040		3,070
Asset-backed securities		2		7,268		72		9		7,010		212		11		14,278		284
Negotiable certificates of deposit		-		-		-		3		655		89		3		655		89
Total available-for-sale debt securities		74	$	81,912	$	2,576		312	$	384,049	$	50,757		386	$	465,961	$	53,333

	December 31, 2022
	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
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 available-for-sale debt securities		205	$	240,563	$	19,668		192	$	225,813	$	42,249		397	$	466,376	$	61,917

Evaluation for Credit Impairment

Management performed a review of all securities in an unrealized loss position as of March 31, 2023 and noted that there was no material change in the credit quality of any of the issuers or any other event or circumstance that may cause a significant adverse effect on the fair value of these securities. Moreover, to date, FNCB has received all scheduled principal and interest payments and expects to fully collect all future contractual principal and interest payments on all securities in an unrealized loss position at March 31, 2023. Based on the results of its review and considering the attributes of these debt securities, management concluded that changes in the fair values 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 March 31, 2023.

Equity Securities

Included in equity securities with readily determinable fair values at March 31, 2023 and December 31, 2022 were investments in the common or preferred stock of publicly traded bank holding companies and an investment in a mutual fund comprised of 1-4 family residential mortgage-backed securities collateralized by properties within FNCB’s market area. Equity securities with readily determinable fair values are reported at fair value with net unrealized gains and losses recognized in the consolidated statements of income.

Table of Contents

The following table presents unrealized and realized gains and losses recognized in net income on equity securities for the three months ended March 31, 2023 and 2022.

	*Three Months Ended March 31,*
(in thousands)	*2023*			*2022*
Net losses recognized on equity securities	$	(508	)	$	(125	)
Less: net gains (losses) realized on equity securities sold		-			-
Unrealized losses on equity securities	$	(508	)	$	(125	)

Equity Securities without Readily Determinable Fair Values

At March 31, 2023 and December 31, 2022, equity securities without readily determinable fair values consisted of a $500 thousand investment in a fixed-rate, non-cumulative perpetual preferred stock of a privately-held bank holding company, which is included in other assets in the consolidated statement of financial condition. The preferred stock pays quarterly dividends at an annual rate of 8.25%. The preferred stock of this bank holding company is not traded on any established market and is accounted for as an equity security without a determinable fair value. Under GAAP, an equity security without a readily determinable fair value shall be written down to its fair value if a qualitative assessment indicates that the investment is impaired, and the fair value of the investment is less than its carrying value. As part of its qualitative assessment, management engaged an independent third party to provide valuations of this investment as of March 31, 2023 and December 31, 2022, which indicated that the investment was not impaired. Accordingly, management determined that no adjustment for impairment was required at March 31, 2023 and December 31, 2022.

Restricted Stock

The following table presents FNCB's investment in restricted stock at March 31, 2023 and December 31, 2022. Restricted stock has limited marketability and is carried at cost. Management noted no indicators of impairment for the Federal Home Loan Bank ("FHLB") of Pittsburgh or Atlantic Community Banker’s Bank stock at March 31, 2023 and December 31, 2022.

	March 31,		December 31,
(in thousands)	2023		2022
Stock in Federal Home Loan Bank of Pittsburgh	$	8,472	$	8,535
Stock in Atlantic Community Banker's Bank		10		10
Total restricted securities, at cost	$	8,482	$	8,545

Note 4. Loans and Leases

The following table summarizes loans and leases by portfolio segment at March 31, 2023 and December 31, 2022. In accordance with the adoption of ASU 2016-13, as of March 31, 2023, the table presents the amortized cost basis of each portfolio segment, which includes net deferred costs of $1.9 million, unearned income of $877 thousand and unamortized premiums on purchased loans of $257 thousand. Accrued interest receivable is accounted for separately.

	*March 31,*			*December 31,*
(in thousands)	*2023*			*2022*
Residential real estate	$	246,428		$	250,221
Commercial real estate		373,630			376,976
Construction, land acquisition and development		64,890			66,555
Commercial and industrial		317,830			272,024
Consumer		91,644			92,612
State and political subdivisions		69,367			64,955
Total loans and leases		1,163,789			1,123,343
Unearned income		-			(810	)
Net deferred origination fees		-			1,784
Allowance for credit losses		(12,279	)		(14,193	)
Net loans and leases	$	1,151,510		$	1,110,124

FNCB's commercial credit product offerings include commercial equipment financing, operating under the brand 1st Equipment Finance, that offer simple interest loans, direct finance leases and municipal leases. Simple interest loans and direct finance leases originated under this initiative are included in commercial and industrial loans, tax-free municipal leases originated under this initiative are included in state and political subdivision loans. Simple interest loans and direct finance leases originated under this initiative and included in commercial and industrial loans were $108.0 million at March 31, 2023 and $79.3 million at December 31, 2022. Tax-free municipal leases which are included in state and political subdivision loans were $4.8 million at March 31, 2023 and $4.4 million at December 31, 2022.

Table of Contents

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 9, “Related Party Transactions” to these consolidated financial statements.

FNCB originates 1- 4 family mortgage loans for sale in the secondary market. During the three months ended March 31, 2023, and 2022, the principal balance of 1- 4 family mortgages sold on the secondary market were $0.1 million and $0.5 million, respectively. Net gains on the sale of residential mortgage loans for the three months ended March 31, 2023, totaled $1 thousand. There were no gains recognized on the sale of residential mortgage loans for the three months ended March 31, 2022. FNCB retains servicing rights on mortgages sold on the secondary market. There were no 1- 4 family residential mortgage loans held for sale at March 31, 2023 and 2022.

The unpaid principal balance of loans serviced for others, which includes residential mortgages and SBA-guaranteed loans, was $77.0 million at March 31, 2023 and $78.7 million at December 31, 2022.

Credit Risk Profiles– Commercial Loans

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

FNCB’s loan rating system assigns a degree of risk to commercial loans based on relevant information about the ability of borrowers to service their debt such as current financial information, historical payment experience, credit documentation, public information and current economic trends, among other factors. Management analyzes these non-homogeneous loans individually by grading the loans as to credit risk and probability of collection for each type of loan. Commercial and industrial loans include commercial indirect auto loans which are not individually risk rated, and construction, land acquisition and development loans include residential construction loans which are also not individually risk rated. These loans are monitored on a pool basis due to their homogeneous nature as described in “Credit Risk Profile – 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 Risk Profiles – 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 are contractually current as to principal and interest, are otherwise in compliance with the contractual terms of their respective loan agreement, and are considered fully collectible. Management believes there is a low risk of loss related to loans considered pass-rated.

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 Risk Profiles – Other Loans

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

Collateral Dependent Loans

Loans that do not share risk characteristics are evaluated on an individual basis. Such loans include loans where management has determined that foreclosure of the collateral is probable, or where the borrower is experiencing financial difficulty and the company expects repayment of the financial asset to be provided substantially through the operation or sale of collateral. The ACL is measured based on the difference between the fair value of the collateral and the amortized cost basis of the asset as of the measurement date.

Table of Contents

The following table presents the credit risk profile of loans and leases summarized by portfolio segment and year of origination at March 31, 2023:

	*Credit Risk Profiles*
	Term Loans By Origination Fiscal Year
															*Total*
(in thousands)	*2023*		*2022*		*2021*		*2020*		*2019*		*Prior*		*Revolving*		*Loans*
March 31, 2023
Credit Risk Profiles - Commercial Loans and Leases
Commercial real estate
Risk rating
Pass	$	3,520	$	73,209	$	84,144	$	43,342	$	68,524	$	84,688	$	6,270	$	363,697
Special mention		-		-		2,309		-		-		5,547		99		7,955
Substandard		-		-		-		-		-		1,978		-		1,978
Doubtful		-		-		-		-		-		-		-		-
Loss		-		-		-		-		-		-		-		-
Total commercial real state		3,520		73,209		86,453		43,342		68,524		92,213		6,369		373,630
Construction, land acquisition and development
Risk rating
Pass		1,381		32,118		26,674		1,230		387		997		1,402		64,189
Special mention		123		355		188		-		-		35		-		701
Substandard		-		-		-		-		-		-		-		-
Doubtful		-		-		-		-		-		-		-		-
Loss		-		-		-		-		-		-		-		-
Total construction, land acquisition and development		1,504		32,473		26,862		1,230		387		1,032		1,402		64,890
Commercial and industrial
Risk rating
Pass		42,350		104,536		32,832		13,754		13,017		10,264		90,717		307,470
Special mention		-		23		440		328		49		267		208		1,315
Substandard		157		2,915		30		1,266		-		524		4,153		9,045
Doubtful		-		-		-		-		-		-		-		-
Loss		-		-		-		-		-		-		-		-
Total commercial and industrial		42,507		107,474		33,302		15,348		13,066		11,055		95,078		317,830
State and political subdivisions
Risk rating
Pass		6,565		15,894		22,139		2,495		16,423		5,851		-		69,367
Special mention		-		-		-		-		-		-		-		-
Substandard		-		-		-		-		-		-		-		-
Doubtful		-		-		-		-		-		-		-		-
Loss		-		-		-		-		-		-		-		-
Total state and political subdivisions		6,565		15,894		22,139		2,495		16,423		5,851		-		69,367
Credit Risk Profiles - Other Loans
Residential real estate
Performing		1,238		43,788		82,932		40,061		13,100		49,400		15,444		245,963
Non-performing		-		-		-		-		122		343		-		465
Total residential real estate		1,238		43,788		82,932		40,061		13,222		49,743		15,444		246,428
Consumer
Performing		6,228		41,491		25,962		4,555		3,208		9,878		37		91,359
Non-performing		-		43		56		18		60		108		-		285
Total consumer		6,228		41,534		26,018		4,573		3,268		9,986		37		91,644
Total loans and leases	$	61,562	$	314,372	$	277,706	$	107,049	$	114,890	$	169,880	$	118,330	$	1,163,789

Gross charge-offs	$	-	$	410	$	304	$	-	$	6	$	20	$	36	$	776

Table of Contents

The following table presents the recorded investment in loans and leases receivable by major category and credit quality indicators at December 31, 2022, prior to the adoption of ASU 2016-13:

	Credit Quality Indicators
	December 31, 2022
	Commercial Loans and Leases												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 three months ended March 31, 2023 and 2022.

							*Construction,*
							*Land*									*State and*
	*Residential*			*Commercial*			*Acquisition and*			*Commercial*						*Political*
(in thousands)	*Real Estate*			*Real Estate*			*Development*			*and Industrial*			*Consumer*			*Subdivisions*			*Unallocated*			*Total*
Three months ended March 31, 2023
Allowance for credit losses:
Balance at beginning of period	$	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	)
Charge-offs		-			-			-			(53	)		(723	)		-			-			(776	)
Recoveries		-			54			-			11			458			-			-			523
(Credits) provisions		(23	)		(124	)		(145	)		1,083			185			(1	)		-			975
Balance at end of period	$	1,164		$	2,509		$	1,669		$	4,928		$	1,597		$	412		$	-		$	12,279

Three months ended March 31, 2022
Allowance for loan and lease losses:
Balance at beginning of period	$	2,081		$	4,530		$	392		$	2,670		$	1,159		$	455		$	1,129		$	12,416
Charge-offs		(3	)		-			-			(19	)		(73	)		-			-			(95	)
Recoveries		-			-			-			4			45			-			-			49
Provisions (credits)		118			(106	)		146			437			128			36			-			759
Balance at end of period	$	2,196		$	4,424		$	538		$	3,092		$	1,259		$	491		$	1,129		$	13,129

Table of Contents

The following table presents ending loan and lease balances and related ACL by portfolio segment and impairment methodology at March 31, 2023:

					*Construction,*
					*Land*						*State and*
	*Residential*		*Commercial*		*Acquisition and*		*Commercial*				*Political*
(in thousands)	*Real Estate*		*Real Estate*		*Development*		*and Industrial*		*Consumer*		*Subdivisions*		*Unallocated*		*Total*
March 31, 2023
Allowance for credit losses:
Individually evaluated for impairment	$	-	$	8	$	-	$	32	$	-	$	-	$	-	$	40
Collectively evaluated for impairment		1,164		2,501		1669		4,896		1,597		412		-		12,239
Total	$	1,164	$	2,509	$	1,669	$	4,928	$	1,597	$	412	$	-	$	12,279

Loans and leases receivable:
Individually evaluated for impairment	$	229	$	1,327	$	-	$	291	$	-	$	-	$	-	$	1,847
Collectively evaluated for impairment		246,199		372,303		64,890		317,539		91,644		69,367		-		1,161,942
Total	$	246,428	$	373,630	$	64,890	$	317,830	$	91,644	$	69,367	$	-	$	1,163,789

The table presents ending loan balances and related ALLL by segment and impairment methodology at December 31, 2022, prior to the adoption of ASU 2016-13:

					Construction,
					Land						State and
	*Residential*		*Commercial*		*Acquisition and*		*Commercial*				*Political*
(in thousands)	*Real Estate*		*Real Estate*		*Development*		*and Industrial*		*Consumer*		*Subdivisions*		*Unallocated*		*Total*
December 31, 2022
Allowance for loan and lease losses:
Individually evaluated for impairment	$	17	$	15	$	-	$	2	$	-	$	-	$	-	$	34
Collectively evaluated for impairment		2,198		4,178		747		4,097		1,307		503		1,129		14,159
Total	$	2,215	$	4,193	$	747	$	4,099	$	1,307	$	503	$	1,129	$	14,193

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		-		1,115,743
Total	$	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 March 31, 2023:

	March 31, 2023
	Type of Collateral
(in thousands)	Residential Property		Commercial Property		Business Assets		Total
Loans and leases:
Residential real estate	$	229	$	-	$	-	$	229
Commercial real estate		-		1,327		-		1,327
Construction, land acquisition and development		-		-		-		-
Commercial and industrial		-		-		157		157
Consumer		-		-		-		-
State and political subdivisions		-		-		-		-
Total collateral dependent loans and leases	$	229	$	1,327	$	157	$	1,713

Table of Contents

The following table presents the delinquency status of past due and non-accrual loans and leases at March 31, 2023 and December 31, 2022:

	*March 31, 2023*
	*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	$	480	$	-	$	465	$	945	$	245,483	$	246,428
Commercial real estate		7		-		1,529		1,536		372,094		373,630
Construction, land acquisition and development		-		-		-		-		64,890		64,890
Commercial and industrial		428		-		322		750		317,080		317,830
Consumer		1,204		52		285		1,541		90,103		91,644
State and political subdivisions		-		-		-		-		69,367		69,367
Total loans and leases	$	2,119	$	52	$	2,601	$	4,772	$	1,159,017	$	1,163,789

	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 $2.6 million and $2.8 million at March 31, 2023 and December 31, 2022, respectively. Generally, loans are placed on non-accrual status when they become 90 days or more delinquent. Once a loan is placed on non-accrual status, it remains on non-accrual status until it has been brought current, has six months of performance under the loan terms, and factors indicating reasonable doubt about the timely collection of payments no longer exist. Therefore, loans may be current in accordance with their loan terms, or may be less than 90 days delinquent, and still be on a non-accrual status. Loans past due 90 days or more and still accruing were $52 thousand at March 31, 2023 and $79 thousand at December 31, 2022. and were comprised entirely of unsecured personal loans purchased through and serviced by a third-party originator.

Table of Contents

The following tables present a distribution of the recorded investment and unpaid principal balance of impaired loans and the related allowance at December 31, 2022, prior to the adoption of ASU 2016-13. Non-accrual loans, with balances less than the $100 thousand loan relationship threshold are not evaluated individually for impairment and accordingly, are not included in the following table. However, these loans were evaluated collectively for impairment as homogeneous pools in the general allowance. Total non-accrual loans with balances less than the $100 thousand loan relationship threshold were $0.7 million at December 31, 2022.

	December 31, 2022
			Unpaid
	*Recorded*		*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 impaired loans:
Residential real estate		1,472		1,550		17
Commercial real estate		5,766		6,034		15
Construction, land acquisition and development		-		-		-
Commercial and industrial		362		580		2
Consumer		-		-		-
State and political subdivisions		-		-		-
Total impaired loans	$	7,600	$	8,164	$	34

The following table presents the average balance and interest income by loan segment recognized on impaired loans for the three months ended March 31, 2022:

	For the Three Months Ended
	March 31, 2022
	Average		Interest
(in thousands)	Balance		Income (1)
Residential real estate	$	1,723	$	15
Commercial real estate		7,450		54
Construction, land acquisition and development		-		-
Commercial and industrial		735		4
Consumer		-		-
State and political subdivisions		-		-
Total impaired loans	$	9,908	$	73

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 $43 thousand for the three months ended March 31, 2022, respectively.

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 restructurings 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.

There was one modification made to a borrower experiencing financial difficulty during the three months ended March 31, 2023. The modification involved a 12-month extension of term for a loan secured by residential real estate with an amortized cost basis of $79 thousand, which was immaterial relative to the total period-end amortized cost basis of all loans in the residential real estate portfolio segment. There were no loan modifications made to borrowers experiencing financial difficulty during the three months ended March 31, 2022.

There were no loan modifications made to borrowers experiencing financial difficulty during the quarter ended March 31, 2023 that subsequently defaulted.

Table of Contents

Residential Real Estate Loan Foreclosures

There were three residential real estate properties in the process of foreclosure at March 31, 2023, with an aggregate recorded investment of $212 thousand. There were two residential real estate properties, with an aggregate recorded investment of $98 thousand that were in the process of foreclosure at March 31, 2022. There were no residential real estate properties included in other real estate owned ("OREO") at March 31, 2023 and 2022.

Note 5. Deposits

The following table presents deposits by major category at March 31, 2023 and December 31, 2022:

	*March 31,*		*December 31,*
(in thousands)	*2023*		*2022*
Demand (non-interest bearing)	$	281,114	$	305,850
Interest-bearing:
Interest-bearing demand		683,679		808,497
Savings		139,533		148,426
Time ($250,000 and over)		51,411		24,902
Other time		307,569		132,972
Total interest-bearing		1,182,192		1,114,797
Total deposits	$	1,463,306	$	1,420,647

Note 6. Borrowings

FNCB has an agreement with the FHLB of Pittsburgh which allows for borrowings, either overnight or term, up to a maximum borrowing capacity based on a percentage of qualifying loans pledged under a blanket pledge agreement. In addition to pledging loans, FNCB is required to purchase FHLB of Pittsburgh stock based upon the amount of credit extended. Loans that were pledged to collateralize borrowings under this agreement were $478.4 million at March 31, 2023 and $482.1 million at December 31, 2022. FNCB's maximum borrowing capacity was $391.5 million at March 31, 2023. Overnight advances through the FHLB of Pittsburgh were $89.5 million at March 31, 2023 and $139.4 million at December 31, 2022. FNCB had term advances through the FHLB of Pittsburgh of $96.8 million at March 31, 2023 and $32.7 million at December 31, 2022. Of the $96.8 million in term advances outstanding at March 31, 2023, $50.0 million were hedged under interest rate swaps. There were no term advances through the FHLB of Pittsburgh that were hedged under interest rate swaps at December 31, 2022. At December 31, 2022, there were $47.5 million in letters of credit outstanding which were used to secure municipals deposits. There were no such letters of credit outstanding at March 31, 2023. FNCB had remaining borrowing availability at the FHLB of Pittsburgh of $205.2 million at March 31, 2023.

Advances through the Federal Reserve Bank Discount Window generally include short-term advances which are fully collateralized by certain pledged loans of $24.5 million under the Federal Reserve Bank's Borrower-in-Custody ("BIC") program. There were no advances under the BIC program outstanding at March 31, 2023 and December 31, 2022. FNCB has available borrowing capacity of $17.9 million under this program at March 31, 2023.

On March 12, 2023, the Federal Reserve Bank established a new Bank Term Funding Program (“BTFP”) to provide additional funding to eligible depository institutions. The BTFP is an additional source of liquidity 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. There were no outstanding advances through the BTFP at March 31, 2023. FNCB had $25.3 million in available funding under the BTFP at March 31, 2023.

The following table presents borrowings, by type, outstanding, at March 31, 2023 and December 31, 2022.

	*March 31,*		*December 31,*
(in thousands)	*2023*		*2022*
FHLB of Pittsburgh - overnight	$	89,500	$	139,400
FHLB of Pittsburgh - term		96,838		32,650
Subtotal FHLB of Pittsburgh advances		186,338		172,050
Junior subordinated debentures		10,310		10,310
Total borrowed funds	$	196,648	$	182,360

Note 7. 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, and therefore, are not used to manage interest rate risk in FNCB's assets or liabilities.

Table of Contents

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. Such derivatives were used to hedge the variable cash flows associated with forecasted issuances of 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 income 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 $765 thousand will be reclassified as a decrease to interest expense.

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. FNCB's existing credit derivatives result from participations out of interest rate swaps provided to external lenders as part of loan participation arrangements, and 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 presents the fair value of FNCB's derivative financial instruments and the classification on the consolidated statements of financial condition at March 31, 2023 and December 31, 2022:

			*Derivative Assets*								*Derivative Liabilities*
			*March 31, 2023*			*December 31, 2022*					*March 31, 2023*			*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*
Derivatives designated as hedging instruments
Cash flow hedges	$	20,000	Other assets	$	951	Other assets	$	1,173	$	50,000	Other liabilities	$	1,442	Other liabilities	$	-
Total derivatives designated as hedging instruments					951			1,173					1,442			-
Derivatives not designated as hedging instruments
Interest rate swaps	$	11,040	Other assets	$	761	Other assets	$	931	$	11,040	Other liabilities	$	761	Other liabilities	$	931
Risk participation transaction		4,274			-			-					-			-
Total derivatives not designated as hedging instruments					761			931					761			931

Net Derivatives on the Balance Sheet					1,712			2,104					2,203			931
Gross amounts not offset in the Statement of Financial Position
Financial instruments					-			-					-			-
Cash collateral (1)					1,624			1,946					1,529			-
Net derivative amounts				$	88		$	158				$	674		$	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.

Table of Contents

Effect of Fair Value and Cash Flow Hedge Accounting on Accumulated Other Comprehensive Loss ("AOCL")

The following table presents the effect of fair value and cash flow hedge accounting on AOCL as of March 31, 2023 and 2022. Amounts disclosed are gross and not net of taxes:

	*Three Months Ended March 31, 2023*
(in thousands)	*Amount of Gain or (Loss) Recognized in Other Comprehensive Income (Loss) Derivative*		*Amount of Gain or (Loss) Recognized in Other Comprehensive Income (Loss) Included Component*		*Amount of Gain or (Loss) Recognized in Other Comprehensive Income (Loss) Excluded Component*		*Location of Gain or (Loss) Recognized from AOCL into Income*	*Amount of Gain or (Loss) Reclassified from AOCL into Income*			*Amount of Gain or (Loss) Reclassified from AOCL into Income Included Component*			*Amount of Gain or (Loss) Reclassified from AOCL into Income Excluded Component*
Derivatives in cash flow hedging relationships
Interest rate products	$	1,471	$	1,471	$	-	Interest expense	$	245		$	245		$	-
Total	$	1,471	$	1,471	$	-		$	245		$	245		$	-

	*Three Months Ended March 31, 2022*
(in thousands)	*Amount of Gain or (Loss) Recognized in Other Comprehensive Income (Loss) Derivative*		*Amount of Gain or (Loss) Recognized in Other Comprehensive Income (Loss) Included Component*		*Amount of Gain or (Loss) Recognized in Other Comprehensive Income (Loss) Excluded Component*		*Location of Gain or (Loss) Recognized from AOCL into Income*	*Amount of Gain or (Loss) Reclassified from AOCL into Income*			*Amount of Gain or (Loss) Reclassified from AOCL into Income Included Component*			*Amount of Gain or (Loss) Reclassified from AOCL into Income Excluded Component*
Derivatives in cash flow hedging relationships
Interest rate products	$	514	$	514	$	-	Interest expense	$	(12	)	$	(12	)	$	-
Total	$	514	$	514	$	-		$	(12	)	$	(12	)	$	-

Effect of Fair Value and Cash Flow Hedge Accounting on the Statement of Income

The following table presents the effect of the FNCB's derivative financial instruments on the consolidated statements of income for the years ended March 31, 2023 and 2022:

	*Location and Amount of Gain or (Loss) Recognized in Income on Fair Value and Cash Flow Hedging Relationships*
	*Three Months Ended*		*Three Months Ended*
	*March 31, 2023*		*March 31, 2022*
(in thousands)	*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	$	245	$	(12	)

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	$	245	$	(12	)
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	$	-	$	-

Amount of gain or (loss) reclassified from accumulated OCI into income - included component	$	245	$	(12	)
Amount of gain or (loss) reclassified from accumulated OCI into income - excluded component	$	-	$	-

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 quarter ended March 31, 2023, and year ended December 31, 2022.

Table of Contents

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 March 31, 2023, and December 31, 2022, FNCB had no derivatives in a net liability position and accordingly did not have to post any collateral.

Note 8. Income Taxes

The following table presents a reconciliation between the effective income tax expense and the income tax expense that would have been provided at the federal statutory tax rate of 21.0% for the three months ended March 31, 2023 and 2022.

	*For the Three Months Ended March 31,*
	*2023*						*2022*
(dollars in thousands)	*Amount*			%			*Amount*			%
Provision at statutory tax rates	$	706			21.00	%	$	1,107			21.00	%
Add (deduct) tax effects of:
Tax-free interest income		(212	)		(6.31	)%		(201	)		(3.81	)%
Non-deductible interest expense		21			0.63	%		11			0.21	%
Bank-owned life insurance		(41	)		(1.22	)%		(31	)		(0.59	)%
Unrealized losses (gains) on equity securities		107			3.18	%		26			0.49	%
Other items, net		116			3.45	%		5			0.10	%
Income tax provision	$	697			20.74	%	$	917			17.40	%

Management evaluates the carrying amount of its deferred tax assets on a quarterly basis, or more frequently, if necessary, in accordance with guidance set forth in ASC Topic 740 “Income Taxes,” and applies the criteria in the guidance to determine whether it is more likely than not that some portion, or all, of the deferred tax asset will not be realized within its life cycle, based on the weight of available evidence. Management performed an evaluation of FNCB’s deferred tax assets at March 31, 2023 taking into consideration all available positive and negative evidence at that time. Based on this evaluation, management believes that FNCB’s future taxable income will be sufficient to utilize its deferred tax assets. There was no valuation allowance for deferred tax assets recorded at March 31, 2023 and December 31, 2022.

Note 9. 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 three months ended March 31, 2023 and 2022.

	*Three Months Ended March 31,*
(in thousands)	*2023*			*2022*
Balance, beginning of period	$	79,144		$	71,437
Additions, new loans and advances		49,657			15,362
Repayments		(39,638	)		(10,009	)
Balance, end of period	$	89,163		$	76,790

At March 31, 2023 and December 31, 2022, there were no loans to directors, executive officers and their related parties that were not performing in accordance with the original terms of the loan agreements.

Deposits from directors, executive officers and their related parties held by the Bank at March 31, 2023 and December 31, 2022 amounted to $127.9 million and $133.0 million, respectively. Interest paid on the deposits amounted to $452 thousand and $37 thousand for the three months ended March 31, 2023 and 2022, respectively.

In the course of its operations, FNCB acquires goods and services from, and transacts business with, various companies of related parties, which include, but are not limited to, fidelity bond, errors and omissions and commercial package insurance, legal services, and rent. FNCB recorded payments to related parties for goods and services of $37 thousand and $90 thousand for the three months ended March 31, 2023 and 2022, respectively.

Table of Contents

Note 10. Commitments and Contingencies

Leases

FNCB is obligated under operating leases for certain bank branches, office space, automobiles and equipment. Operating lease right of use ("ROU") assets represent FNCB's right to use an underlying asset during the lease term and operating liabilities represent FNCB's obligation to make lease payments under the lease agreement. ROU assets and operating lease liabilities are recognized at lease commencement based on the present value of the remaining lease payments using a discount rate that represents FNCB's incremental borrowing rate at the commencement date. ROU assets are included in other assets and operating lease liabilities are included in other liabilities in the consolidated statements of financial condition. As of March 31, 2023, ROU assets and lease liabilities were $3.2 million and $3.4 million, respectively.

Operating lease expense associated with bank branches and office space is included in occupancy expense, while operating lease expenses associated with automobiles and office equipment are included in equipment expense in the consolidated statements of income. Rental expense incurred for the three months ended March 31, 2023 and 2022 was $100 thousand and $94 thousand, respectively.

The following table summarizes the maturity of remaining operating lease liabilities as of March 31, 2023:

(in thousands)	*March 31, 2023*
2023	$	284
2024		407
2025		385
2026		387
2027		388
2028 and thereafter		2,271
Total lease payments		4,122
Less: imputed interest		711
Present value of operating lease liabilities	$	3,411

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

(dollars in thousands)	*March 31, 2023*			*March 31, 2022*
Weighted-average remaining lease term (in years)		11.3			12.0
Weighted-average discount rate		3.31	%		3.28	%
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	130		$	125

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 11. Stock Compensation Plans

FNCB has a Long-Term Incentive Compensation Plan (“LTIP”) for directors, executives and key employees. The LTIP authorizes up to 1,200,000 shares of common stock for issuance and provides the Board of Directors with the authority to offer several different types of long-term incentives, including stock options, stock appreciation rights, restricted stock, restricted stock units, performance units and performance shares. During the three months ended March 31, 2023 and 2022, the Board of Directors granted 140,445 and 71,860 shares of restricted stock, respectively, under the LTIP. At March 31, 2023, there were 455,584 shares of common stock available for award under the LTIP. For the three months ended March 31, 2023 and 2022, stock-based compensation expense, which is included in salaries and benefits expense in the consolidated statements of income, totaled $121 thousand and $100 thousand, respectively. Total unrecognized compensation expense related to unvested restricted stock awards was $2.1 million and $1.6 million at March 31, 2023 and 2022, respectively. Unrecognized compensation expense related to unvested shares of restricted stock is expected to be recognized over a weighted-average period of 4.3 years.

Table of Contents

The current LTIP expires on December 31, 2023. On March 22, 2023, the Board of Directors formally approved and adopted the FNCB Bancorp, Inc. 2023 Equity Incentive Plan ("Equity Plan"), which will serve as a successor to the LTIP. The Equity Plan authorizes 2,000,000 shares of FNCB's common stock plus any reserved but unissued shares under the LTIP, and 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 Equity Plan is subject to the approval of FNCB shareholders by a majority vote at the Annual Meeting of Shareholders to be held on May 17, 2023.

The following table summarizes the activity related to FNCB’s unvested restricted stock awards during the three months ended March 31, 2023 and 2022:

	*Three Months Ended March 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		-		-		(1,382	)		7.24
Shares vested		-		-		-			-
Total outstanding, end of period		326,410	$	7.91		244,775		$	8.03

Note 12. Regulatory Matters

FNCB’s ability to pay dividends to its shareholders is largely dependent on the Bank’s ability to pay dividends to FNCB. Bank regulations limit the amount of dividends that may be paid without prior approval of the Bank’s regulatory agency. For the three months ended March 31, 2023, cash dividends declared and paid by FNCB were $0.090 per share and $0.075 per share, for the three months ended March 31, 2022. FNCB offers a Dividend Reinvestment and Stock Purchase Plan (“DRP”) to its shareholders. For the three months ended March 31, 2023 and 2022, dividend reinvestment shares were purchased in open market transactions, however, shares under the optional cash purchase feature of the DRP were issued from authorized but unissued common shares. Common shares issued under the DRP were 2,229 for the three months ended March 31, 2023 and 1,310 for the three months ended March 31, 2022. Subsequent to March 31, 2023, on April 26, 2023 FNCB declared a cash dividend for the second quarter of 2023 of $0.090 per share, which is payable on June 15, 2023 to shareholders of record as of June 1, 2023.

On January 25, 2023, FNCB's Board of Directors authorized a stock repurchase program under which up to 750,000 shares of FNCB's outstanding common stock may be acquired in the open market which commenced on March 3, 2023, and will expire on December 31, 2023, pursuant to a trading plan that was adopted in accordance with Rule 10b5-1 of the Exchange Act. Under the program, shares are purchased from time to time at prevailing market prices, through open market transactions depending upon market conditions and administered through an independent broker. Repurchases are subject to SEC regulations as well as certain price, market volume and timing constraints specified in the trading plan. Under the program, the purchases will be funded from available working capital presently available to FNCB, and the repurchased shares will be returned to the status of authorized but unissued shares of Common Stock. There is not a guarantee as to the exact number of shares that will be repurchased by FNCB, and FNCB may discontinue the plan at any time that management determines additional repurchases are no longer warranted. As of March 31, 2023, FNCB did not repurchase any shares under this program.

The holding company is considered a small bank holding company and is exempt from risk-based capital and leverage rules, including Basel III. FNCB and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material adverse effect on FNCB’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, FNCB and the Bank must meet specific capital guidelines that involve quantitative measures of FNCB's and the Bank's assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. FNCB's and the Bank's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Management believes, as of March 31, 2023 and December 31, 2022, that FNCB and the Bank met all applicable capital adequacy requirements.

Table of Contents

Current quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the tables below) of Total capital, Tier I capital, and Tier I common equity (as defined in the regulations) to risk-weighted assets (as defined), and of Tier I capital (as defined) to average assets (as defined). The following tables present summary information regarding the Bank’s risk-based capital and related ratios at March 31, 2023 and December 31, 2022:

	*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*
March 31, 2023

Total capital (to risk-weighted assets)	$	173,402		12.97	%		8.00	%		10.50	%		10.00	%

Tier I capital (to risk-weighted assets)		159,174		11.90	%		6.00	%		8.50	%		8.00	%

Tier I common equity (to risk-weighted assets)		159,174		11.90	%		4.50	%		7.00	%		6.50	%

Tier I capital (to average assets)		159,174		8.96	%		4.00	%		4.00	%		5.00	%

Total risk-weighted assets		1,337,091

Total average assets		1,775,950

	*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*
December 31, 2022

Total capital (to risk-weighted assets)	$	169,984		13.11	%		8.00	%		10.50	%		10.00	%

Tier I capital (to risk-weighted assets)		154,842		11.94	%		6.00	%		8.50	%		8.00	%

Tier I common equity (to risk-weighted assets)		154,842		11.94	%		4.50	%		7.00	%		6.50	%

Tier I capital (to average assets)		154,842		8.77	%		4.00	%		4.00	%		5.00	%

Total risk-weighted assets		1,296,618

Total average assets		1,765,251

Note 13. 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.

Table of Contents

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

●

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

●

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

●

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

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

Available-for-Sale Debt Securities

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

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

At March 31, 2023, FNCB owned 30 corporate debt securities with an aggregate amortized cost and fair value of $35.1 million and $32.0 million, respectively. At March 31, 2023, the market for six corporate debt securities with an amortized cost and fair value of $9.0 million and $8.0 million, respectively, was not active, based on transaction criteria for similar instruments. FNCB obtained valuations for these securities from a third-party service provider that prepared the valuations using a market approach that incorporates identifying a population of transactions for similar instruments and incorporating an evaluation to capture credit risk associated with these bonds. Management takes measures to validate the service providers’ analysis and is actively involved in the valuation process, including reviewing and the population 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 required yield. Management believes the valuation results from this market approach to be consistent with pricing and data for similar deals at March 31, 2023. FNCB considers the inputs used in the market approach to be unobservable Level 3 inputs because, while inputs are based on actual transactions, the relative number of transactions in the population is small and subjective assumptions are used in considering factors considered to incorporate credit spreads into the 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 FNCB's third-party service provider.

Equity Securities

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

Derivative Contracts

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

Table of Contents

Assets and Liabilities Measured at Fair Value on a Recurring Basis

The following tables present the financial assets and liabilities that were measured at fair value on a recurring basis at March 31, 2023, and December 31, 2022, and the fair value hierarchy of the respective valuation techniques utilized by FNCB to determine the fair value:

	*Fair Value Measurements at March 31, 2023*
					*Significant*		*Significant*
			*Quoted Prices*		*Other*		*Other*
			*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. treasuries	$	32,845	$	-	$	32,845	$	-
Obligations of state and political subdivisions		219,483		-		219,483		-
U.S. government/government-sponsored agencies:
Collateralized mortgage obligations - residential		80,750		-		80,750		-
Collateralized mortgage obligations - commercial		3,358		-		3,358		-
Mortgage-backed securities		19,970		-		19,970		-
Private collateralized mortgage obligations		69,740		-		69,740		-
Corporate debt securities		32,040		-		24,028		8,012
Asset-backed securities		14,278		-		14,278		-
Negotiable certificates of deposit		655		-		655		-
Subtotal available-for-sale debt securities		473,119		-		465,107		8,012
Equity securities, at fair value		7,369		7,369		-		-
Derivative assets		1,712		-		1,712		-
Total financial assets	$	482,200	$	7,369	$	466,819	$	8,012

Financial liabilities:
Derivative liabilities	$	2,203	$	-	$	2,203	$	-
Total financial liabilities	$	2,203	$	-	$	2,203	$	-

	*Fair Value Measurements at December 31, 2022*
					*Significant*		*Significant*
			*Quoted Prices*		*Other*		*Other*
			*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. treasuries	$	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		-
Subtotal 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	$	-

There were no securities transferred between hierarchy levels during the three months ended March 31, 2023. There was one corporate debt security transferred from Level 3 hierarchy to Level 2 during the three months ended March 31, 2022. The market for the transferred securities was previously not active and management obtained fair values from an independent third party that utilized a discounted cash flow model. 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.

Table of Contents

The following table presents a reconciliation and consolidated statement of operations classifications of gains and losses for all assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3), which consisted entirely of corporate debt securities, for the three months ended March 31, 2023 and 2022.

*Fair Value Measurements*
*Using Significant Unobservable Inputs (Level 3)*
	*Corporate Debt Securities*
	*For the Three Months Ended March 31,*
(in thousands)	*2023*		*2022*
Balance at January 1,	$	7,936	$	12,345
Additions		-		-
Redemptions		-		-
Transfer to Level 2		-		(756	)
Sales		-		-
Total gains (losses) (realized/unrealized):
Included in earnings		-		-
Included in other comprehensive loss		76		(324	)
Balance at March 31,	$	8,012	$	11,265

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 March 31, 2023 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.

March 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

1,713

1,673

Appraisal of collateral

Selling cost

10.0

Individually evaluated loans - other

134

Discounted cash flows

Discount rate

3.50% - 9.00%

The following tables present assets and liabilities measured at fair value on a non-recurring basis at December 31, 2022, prior to the adoption of ASU 2016-13, 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

Individually evaluated loans - collateral dependent

1,902

1,894

Appraisal of collateral

Selling cost

10.0

Individually evaluated loans - other

5,698

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 adjust the appraised values as necessary to consider any declines in real estate values since the time of the appraisal. For impaired loans that are not collateral-dependent, fair value is determined using the discounted cash flow method. When the measure of the impaired loan is less than the recorded investment in the loan, the impairment is recorded through a valuation allowance or is charged off. The amount shown is the balance of impaired loans, net of any charge-offs and the related allowance for credit losses.

Table of Contents

The following table summarizes the estimated fair values of FNCB’s financial instruments using an exit price notion at March 31, 2023 and at December 31, 2022. FNCB discloses fair value information about financial instruments, whether or not recognized in the statements of financial condition, for which it is practicable to estimate that value. The fair value of financial instruments that are not measured at fair value in the financial statements were based on the exit price notion. The following estimated fair value amounts have been determined using available market information and appropriate valuation methodologies. However, management judgment is required to interpret data and develop fair value estimates. Accordingly, the estimates below are not necessarily indicative of the amounts FNCB could realize in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.

	*Fair Value*	*March 31, 2023*				*December 31, 2022*
(in thousands)	*Measurement*	*Carrying Value*		*Fair Value*		*Carrying Value*		*Fair Value*
Financial assets:
Cash and cash equivalents	Level 1	$	69,571	$	69,571	$	41,916	$	41,916
Available-for-sale debt securities	See previous table		473,119		473,119		476,091		476,091
Equity securities	Level 1		7,369		7,369		7,717		7,717
Restricted stock	Level 2		8,482		8,482		8,545		8,545
Loans held for sale	Level 2		-		-		60		60
Loans and leases, net	Level 3		1,151,510		1,113,514		1,110,124		1,079,266
Accrued interest receivable	Level 2		6,143		6,143		5,957		5,957
Servicing rights	Level 3		231		601		254		621
Derivative assets	Level 2		1,526		1,712		1,946		2,104

Financial liabilities:
Deposits	Level 2		1,463,306		1,459,050		1,420,647		1,416,272
Borrowed funds	Level 2		196,648		196,853		182,360		182,108
Accrued interest payable	Level 2		848		848		171		171
Derivative liabilities	Level 2		2,217		2,203		921		931

Note 14. Earnings per Share

For FNCB, the numerator of both the basic and diluted earnings per share of common stock is net income available to common shareholders. The weighted-average number of common shares outstanding used in the denominator for basic earnings per common share is increased to determine the denominator used for diluted earnings per common share by the effect of potentially dilutive common share equivalents utilizing the treasury stock method. For the three months ended March 31, 2023 and 2022, common share equivalents consisted entirely of incremental shares of unvested restricted stock.

The following table presents the calculation of both basic and diluted earnings per share of common stock for the three months ended March 31, 2023 and 2022:

	*Three Months Ended March 31,*
(in thousands, except share data)	*2023*		*2022*
Net income	$	2,663	$	4,353

Basic weighted-average number of common shares outstanding		19,682,357		19,935,288
Plus: Common share equivalents		8,502		36,825
Diluted weighted-average number of common shares outstanding		19,690,859		19,972,113

Income per common share:
Basic	$	0.14	$	0.22
Diluted	$	0.14	$	0.22

Note 15. Other Comprehensive Income (Loss)

The following table summarizes the reclassifications out of accumulated other comprehensive income for the three months ended March 31, 2023 and 2022, comprised entirely of unrealized gains and losses on available-for-sale debt securities:

	*For the Three Months Ended March 31, 2023*
(in thousands)	*Amount Reclassified from Accumulated Other Comprehensive Loss*			*Affected Line Item in the Consolidated Statements of Income*
Available-for-sale debt securities:
Reclassification adjustment for net gains reclassified into net income	$	(162	)	Net gain on the sale of available-for-sale debt securities
Taxes		34		Income taxes
Net of tax amount	$	(128	)

Table of Contents

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

The following table summarizes the changes in accumulated other comprehensive (loss) income, net of tax for the three months ended March 31, 2023 and 2022:

	*Three Months Ended March 31,*
(in thousands)	*2023*			*2022*
Balance, beginning of period	$	(48,028	)	$	6,352
Other comprehensive income (loss) before reclassifications		5,576			(24,043	)
Amount reclassified from accumulated other comprehensive income		(128	)		-
Net other comprehensive income (loss) during the period		5,448			(24,043	)
Balance, end of period	$	(42,580	)	$	(17,691	)

Table of Contents

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

This Quarterly Report on Form 10-Q should be read in conjunction with the more detailed and comprehensive disclosures included in the Annual Report on Form 10-K for the year ended December 31, 2022 for FNCB Bancorp, Inc. In addition, please read this section in conjunction with the consolidated financial statements and notes to consolidated financial statements contained elsewhere herein.

FNCB Bancorp, Inc. and its subsidiaries ("FNCB") are in the business of providing customary retail and commercial banking services to individuals, businesses and local governments and municipalities through its wholly-owned subsidiary, FNCB Bank, at its 16 full-service branch offices within its primary market area, Northeastern Pennsylvania.

FORWARD-LOOKING STATEMENTS AND OTHER INFORMATION

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

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

Readers should carefully review the risk factors described in the documents that FNCB periodically files with the SEC, including its Annual Report on Form 10-K for the year ended December 31, 2022.

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

Table of Contents

CRITICAL ACCOUNTING POLICIES

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

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

The judgments used by management in applying the critical accounting policies discussed below may be affected by changes and/or deterioration in the economic environment, which may impact future financial results. Specifically, subsequent evaluations of the loan portfolio, in light of the factors then prevailing, may result in significant changes in the ACL 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 Credit 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 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, 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 ACL on a quarterly basis. The ACL is established through a provision for credit losses charged to earnings and is maintained at a level the management considers to be an estimate of the lifetime expected credit losses of the portfolio as of the evaluation date. Loans, or portions of loans, determined by management to be uncollectible are charged off against the ACL, while recoveries of amounts previously charged off are credited to the ACL.

Determining the amount of the ACL 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, estimated losses on pools of homogeneous loans based on peer-based historical loss experience, reasonable and supportable forecasts and qualitative factors, as well as 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 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 ACL. Additionally, the ACL is determined, in part, by the composition and size of the loan portfolio.

The ACL consists of two components, a specific component and a general component. The specific component relates to loans that are individually analyzed for impairment. 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 ACL 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 are classified as impaired.

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

Securities Valuation and Evaluation for Impairment

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

Table of Contents

Quarterly, or more frequently if market conditions warrant, management evaluates securities 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 factors. As part of it's evaluation, management first considers whether, FNCB intends to sell, or if 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. If either of those selling events is expected, FNCB would be required to write down the amortized cost basis of the security to its fair value. If either of those selling events is not expected, FNCB must determine whether any of the decline in fair value has resulted from a credit loss, or if it is entirely the results of noncredit factors. As part of its evaluation, management considers, among other things, the length of time a security’s fair value is less than its amortized cost, the severity of decline, any adverse conditions related to the security, an industry or geographic area, any adverse changes to the rating of any security by a rating agency, whether or not any issuer has failed to make contractual principal and interest payments, or if there are any indications that an issuer would not be able to make future contractual principal and interest payments. Based on the results of its review as of March 31, 2023, management concluded that changes in the fair values 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 March 31, 2023.

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

Income Taxes

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

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

In connection with determining the income tax provision or benefit, management considers maintaining liabilities for uncertain tax positions and tax strategies that it believes contain an element of uncertainty. Periodically, management evaluates each of FNCB’s tax positions and strategies to determine whether a liability for uncertain tax benefits is required. As of March 31, 2023 and December 31, 2022, management determined that FNCB did not have any uncertain tax positions or tax strategies and that no liability was required to be recorded.

Refer to Note 8, “Income Taxes,” of the notes to consolidated financial statements included in Item 1 hereof for additional information about income taxes.

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

Refer to Note 2, “New Authoritative Accounting Guidance,” of the notes to consolidated financial statements included in Item 1 hereof for information about new authoritative accounting guidance adopted by FNCB as of March 31, 2023, as well as new accounting guidance issued, but not previously reported, that will be adopted by FNCB in future periods.

Executive Summary

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

Overview

In the first quarter of 2023, the Federal Open Market Committee ("FOMC") continued to tighten monetary policy with two 25-basis point increases to the federal funds target rate at both its February and March meetings. These increases brought the total number of rate increases from the period beginning March 17, 2022 through March 31, 2023 to nine and the total basis point movement to 475. This dramatic shift in monetary policy has resulted in a rapid rise in general market interest rates. Additionally, FNCB has experienced an uptick in competition for deposits within its market area, reflective of industry-wide liquidity pressures and rate sensitivity of depositors. Higher interest rates and competition have resulted in an increase in deposit and wholesale funding costs.

FNCB recorded consolidated net income of $2.7 million, or $0.14 per basic and diluted common share, for the three months ended March 31, 2023, a decrease of $1.7 million, or 38.8%, compared to $4.4 million, or $0.22 per basic and diluted common share, for the three months ended March 31, 2022. The decrease in the first quarter 2023 earnings reflected decreases in net interest income and non-interest income, coupled with increases in non-interest expense and the provision for credit losses. Net interest income decreased $1.2 million, or 9.4%, as a $6.7 million increase in interest expense was partially mitigated by $5.5 million increase in interest income. Non-interest income decreased by $119 thousand, or 6.6%, to $1.7 million for the three months ended March 31, 2023 from $1.8 million for the three months ended March 31, 2022, which primarily reflected a $383 thousand increase in net losses on equity securities, partially offset by net gains on the sale of available-for-sale debt securities of $163 thousand. Non-interest expense increased $377 thousand, or 4.4%, to $8.9 million for the three months ended March 31, 2023, compared to $8.5 million for the three months ended March 31, 2022, primarily due to increases in salaries and employee benefits. The provision for credit losses was $975 thousand for the three months ended March 31, 2023, an increase of $216 thousand, or 28.4%, compared to a $759 thousand provision for the same period of 2022. Income tax expense was $697 thousand for the three months ended March 31, 2023, a decrease of $220 thousand, or 24.0%, from $917 thousand for the same three months of 2022.

Table of Contents

For the three months ended March 31, 2023, the annualized return on average assets and the return on average equity was 0.62% and 8.84%, respectively, and 1.08% and 11.31%, respectively, for the same periods of 2022. FNCB declared and paid dividends to holders of common stock of $0.090 per share for the first quarter of 2023, an increase of $0.015 per share, or 20.0%, compared to $0.075 per share for the same period of 2022.

Total assets increased $64.0 million, or 3.7%, to $1.809 billion at March 31, 2023 from $1.746 billion at December 31, 2022. The change in total assets primarily reflected increases in loans and leases and cash and cash equivalents, partially offset by a decrease in available-for-sale debt securities. Loans and leases, net of the allowance for credit losses, increased $41.4 million, or 3.7%, to $1.152 billion at March 31, 2023 from $1.110 billion at December 31, 2022. FNCB experienced increases in the commercial and industrial loans and state and political subdivisions loan categories, primarily reflecting strong demand for equipment financing in each of these sectors. Cash and cash equivalents increased $27.7 million, or 66.0%, to $69.6 million at March 31, 2023, from $41.9 million at December 31, 2022. Available-for-sale debt securities decreased $3.0 million, or 0.6%, to $473.1 million at March 31, 2023 from $476.1 million at December 31, 2022. Total deposits increased $42.7 million, or 3.0%, to $1.463 billion at March 31, 2023 from $1.421 billion at December 31, 2022. Total borrowed funds increased $14.3 million, to $196.7 million, at March 31, 2023 from $182.4 million at December 31, 2022, due entirely to an increase in Federal Home Loan Bank ("FHLB") of Pittsburgh advances.

On January 25, 2023, FNCB's Board of Directors authorized a stock repurchase program under which up to 750,000 shares of FNCB's outstanding common stock may be acquired in the open market commencing no earlier than March 3, 2023 and expiring December 31, 2023, pursuant to a trading plan that was adopted in accordance with Rule 10b5-1 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Under the program, shares may 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 the plan at any time that management determines additional repurchases are no longer warranted. As of March 31, 2023, FNCB did not repurchase any shares under this program.

Management Focus in 2023

Management remains focused on balance sheet management, managing interest rate risk and controlling funding costs in a rising market rate environment. Additionally, management continues to evaluate opportunities to enhance net interest income and non-interest income run rates, as well as controlling non-interest expense. FNCB will continue to expand its comprehensive digital strategy to respond to evolving customer demands and create operational and delivery channel efficiencies. Specifically, initiatives include enhancements to the existing online banking platforms, continued utilization of our retail and commercial lending origination platforms and utilizing artificial intelligence and robotics to streamline workflows. Additional areas of focus for 2023 include: bank-wide staff development, building and strengthening our core customer base including increasing existing customer wallet share.

Table of Contents

Summary of Performance

Net Interest Income

Net interest income, defined as the difference between (i) interest income, interest and fees on interest-earning assets, and (ii) interest expense, interest paid on deposits and borrowed funds, is the primary source of earnings for commercial banks. As such, it is the primary determinant of profitability for FNCB. Net interest income is impacted by variations in the volume, rate and composition of earning assets and interest-bearing liabilities, changes in general market rates and the level of non-performing assets. Interest income is presented on a fully tax-equivalent basis using the statutory corporate tax rate of 21.0% in 2023 and 2022.

In response to the economic uncertainty from the global COVID-19 pandemic, the FOMC lowered the federal funds target rate 150 basis points in two emergency actions in March 2020. As a result, the target range for federal funds fell from 1.50%-1.75% at December 31, 2019 to 0.00%-0.25% at March 31, 2020, and had remained at these historically low levels through March 15, 2022. Lingering effects from the COVID-19 pandemic, supply chain constraints and effects from the war in Ukraine, among others, have resulted in rapid rise in price inflation. As a result, the FOMC, in an effort to lower inflation to its 2.0% objective, began tightening economic policy in 2022. Specifically, the FOMC increased the target range for the federal funds rate a total of 475 basis points through March 31, 2023, which included an additional two 25-basis point increases in the first quarter of 2023, one on February 1, 2023, and one on March 2, 2023. The increases in the federal funds target rate resulted in a corresponding total 475-basis point increase in the national prime rate, which was 8.00% at March 31, 2023, compared to 7.50% at December 31, 2022, and 3.50% at March 31, 2022. In addition to these actions, the FOMC has indicated additional rate increases may be required throughout 2023. This dramatic shift in monetary policy has resulted in a 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. Higher interest rates, coupled with the increased competition, has resulted in significant increases in deposit and wholesale funding costs that have surpassed increases in earning assets yields, which has caused interest margin and rate spread compression. Management has noted that competition for deposits within FNCB's market area started to increase in the second half of 2022, which has continued into the first quarter of 2023. Management recognizes that additional tightening actions by the FOMC in 2023, could result in further contraction of FNCB's tax-equivalent net interest margin and rate spread.

Net interest income on a tax-equivalent basis decreased $1.2 million, or 9.1%, to $11.8 million for the three months ended March 31, 2023 from $13.0 million for the comparable period of 2022. The decrease in tax-equivalent net interest income primarily reflected an increase in interest expense of $6.7 million, to $7.1 million for the first quarter of 2023 from $0.4 million for the same quarter of 2022, partially offset by an increase in tax equivalent interest income of $5.5 million, or 40.9%, to $18.9 million from $13.4 million, comparing the first quarters of 2023 and 2022, respectively. The tax-equivalent net interest margin, a key measurement used in the banking industry to measure income from earning assets relative to the cost to fund those assets, is calculated by dividing tax-equivalent net interest income by average interest-earning assets. FNCB’s tax-equivalent net interest margin decreased 57 basis points to 2.78% for the first quarter of 2023 from 3.35% for the same quarter of 2023. Additionally, rate spread, the difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities shown on a fully tax-equivalent basis, declined 101 basis points to 2.30% for the three months ended March 31, 2023 from 3.31% for the same three months of 2022.

The $5.5 million, or 40.9%, increase in tax-equivalent interest income largely reflected growth in average earning assets, coupled with increases in the tax-equivalent yields on earning assets. Total average earning assets increased $144.3 million, or 9.2%, to $1.703 billion for the three months ended March 31, 2023, from $1.559 billion for the same three months of 2022, which resulted in a corresponding increase in tax-equivalent interest income of $1.6 million. Specifically, average total loans and leases increased $136.6 million, or 13.7%, to $1.137 billion for the first quarter of 2023 from $1.000 billion for the same quarter of 2022, which largely reflected strong organic loan demand, commercial equipment financing product offerings, and purchases of loan pools from third-party originators. In addition, total securities averaged $549.2 million for the first quarter of 2023, an increase of $8.1 million, or 1.5%, from $541.0 million for the first quarter of 2022. Increases in the average balances of loans and securities resulted in corresponding increases to tax-equivalent interest income of $1.5 million and $42 thousand, respectively, comparing the three months ended March 31, 2023, and 2022. The positive impact from higher earning asset volumes was coupled a 100-basis point increase in the tax-equivalent yield on average earning assets to 4.45% for the first quarter of 2023 from 3.45% for the same quarter of 2022, which resulted in a corresponding $3.9 million increase to tax-equivalent interest income.

The $6.7 million, or 1647.3%, increase in interest expense was primarily due to an increase in average interest-bearing liabilities, specifically average borrowed funds, coupled with higher funding costs. Average interest-bearing liabilities increased $161.4 million, or 13.9%, to $1.320 billion for the three months ended March 31, 2023, from $1.159 billion for the same three months of 2022. The increase in average interest-bearing liabilities resulted in a corresponding increase to interest expense of $1.0 million, which was almost entirely due to a $176.3 million, or 372.5%, increase in average borrowed funds to $223.7 million for the first quarter of 2023 from $47.3 million for the same quarter of 2022, as FNCB was more reliant on wholesale funding. This was coupled with a 417-basis point increase in the cost of wholesale funding, in the first quarter of 2023, compared to the same period of 2022, which resulted in a corresponding increase to interest expense of $1.7 million. Average interest-bearing deposits decreased $14.9 million, or 1.3%, to $1.097 billion from $1.112 billion comparing the first quarters of 2023 and 2022, respectively. The decline in average interest-bearing deposits had little impact on interest expense. Average interest-bearing demand deposits decreased $112.5 million, or 13.6%, to $714.0 million for the first quarter of 2023 compared to $826.5 million for the same quarter of 2022, coupled with average savings deposits decreasing $2.6 million, or 1.8%, to $143.1 million from $140.5 million comparing the first quarters of 2023 and 2022, respectively. Conversely, average time deposits increased $95.0 million, or 65.7%, to $239.7 million for the three months ended March 31, 2023, from $144.7 million for the same three months of 2022, as changing customer deposit preferences due to the economic and rate environment continued to result in deposit migration from non-maturity deposits to higher-costing time deposits. FNCB increased deposit rates, in response to rising market interest rates and increased competition for deposits. As a result, FNCB experienced a 201-basis point increase in the cost of funds to 2.15% for the three months ended March 31, 2023, from 0.14% for the same three months of 2022, which resulted in a corresponding increase in interest expense of $5.6 million. Specifically, the average rate paid for interest-bearing deposits increased 148 basis points to 1.60% for the first quarter of 2023 from 0.12% for the same period of 2022, resulting in a corresponding increase to interest expense of $4.0 million. The average rates paid on interest bearing demand deposits increased 162 basis points, resulting in a corresponding increase to interest expense of $2.9 million. Comparing the first quarters of 2023 and 2022, the average rates paid for time deposits and savings deposits, increased 117 basis points and 17 basis points, respectively, resulting in corresponding increases to interest expense of $1.0 million and $59 thousand, respectively.

Table of Contents

The following tables present the average balances of assets and liabilities, corresponding interest income and expense and resulting average yields or rates paid for the three months ended March 31, 2023 and 2022. Average balances are derived from average daily balances. The loan and lease yields include amortization of deferred origination fees and costs which are considered adjustments to yields.

	Three Months Ended
	March 31, 2023									March 31, 2022
	Average						Yield/			Average						Yield/
(dollars in thousands)	Balance			Interest			Cost			Balance			Interest			Cost
Assets
Earning assets (2)(3)
Loans and leases - taxable (4)	$	1,082,830		$	14,145			5.23	%	$	946,201		$	9,755			4.12	%
Loans and leases - tax free (4)		54,045			532			3.94	%		54,096			439			3.25	%
Total loans (1)(2)		1,136,875			14,677			5.16	%		1,000,297			10,194			4.08	%
Securities-taxable		449,351			3,350			2.98	%		437,955			2,468			2.25	%
Securities-tax free		99,836			743			2.98	%		103,086			775			3.01	%
Total securities (1)(5)		549,187			4,093			2.98	%		541,041			3,243			2.40	%
Interest-bearing deposits in other banks and federal funds sold		17,069			177			4.15	%		17,464			7			0.16	%
Total earning assets		1,703,130			18,947			4.45	%		1,558,802			13,444			3.45	%
Non-earning assets		65,292									91,083
Allowance for credit losses		(13,362	)								(12,689	)
Total assets	$	1,755,060								$	1,637,196

Liabilities and Shareholders' Equity
Interest-bearing liabilities
Interest-bearing demand deposits	$	714,001			3,057			1.71	%	$	826,528			195			0.09	%
Savings deposits		143,070			81			0.23	%		140,487			22			0.06	%
Time deposits		239,687			1,239			2.07	%		144,656			107			0.30	%
Total interest-bearing deposits		1,096,758			4,377			1.60	%		1,111,671			324			0.12	%
Borrowed funds and other interest-bearing liabilities		223,694			2,717			4.86	%		47,346			82			0.69	%
Total interest-bearing liabilities		1,320,452			7,094			2.15	%		1,159,017			406			0.14	%
Demand deposits		287,975									308,830
Other liabilities		24,487									13,234
Shareholders' equity		122,146									156,115
Total liabilities and shareholder's equity	$	1,755,060								$	1,637,196

Net interest income/interest rate spread (6)					11,853			2.30	%					13,038			3.31	%
Tax equivalent adjustment					(268	)								(255	)
Net interest income as reported				$	11,585								$	12,783

Net interest margin (7)								2.78	%								3.35	%

	(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 include the amortization of loan (costs) fees of ($251) thousand and $462 thousand for the three months ended March 31, 2023 and 2022, respectively.
	(5)	The yields for securities that are classified as available for sale is based on the average historical amortized cost.
	(6)	Interest rate spread represents the difference between the average yield on interest earning assets and the cost of interest-bearing liabilities and is presented on a tax equivalent basis.
	(7)	Net interest income as a percentage of total average interest earning assets.

Table of Contents

Rate Volume Analysis

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

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

	Three Months Ended March 31,
	2023 vs. 2022
	Increase (Decrease)
	Due to			Due to			Total
(in thousands)	Volume			Rate			Change
Interest income:
Loans and leases - taxable	$	1,541		$	2,849		$	4,390
Loans and leases - tax free		-			93			93
Total loans		1,541			2,942			4,483
Securities - taxable		66			816			882
Securities - tax free		(24	)		(8	)		(32	)
Total securities		42			808			850
Interest-bearing deposits in other banks and federal funds sold		-			170			170
Total interest income		1,583			3,920			5,503

Interest expense:
Interest-bearing demand deposits		(30	)		2,892			2,862
Savings deposits		-			59			59
Time deposits		112			1,020			1,132
Total interest-bearing deposits		82			3,971			4,053
Borrowed funds and other interest-bearing liabilities		1,008			1,627			2,635
Total interest expense		1,090			5,598			6,688
Net interest income	$	493		$	(1,678	)	$	(1,185	)

Provision for Credit Losses

The provision for credit losses is an expense charged against net interest income to provide for probable losses attributable to uncollectible loans and leases and is based on management’s analysis of the adequacy of the ACL. A release of reserves, resulting in a credit for credit losses, reflects the reversal of amounts previously charged to the ACL. Management closely monitors the loan portfolio and the adequacy of the ACL by considering the underlying financial performance of the borrower, collateral values and associated credit risks. Future material adjustments may be necessary to the provision for credit losses and the ACL if economic conditions or loan performance differ substantially from the assumptions management considered in its evaluation of the ACL. Management will continue to closely monitor FNCB's asset quality and adjust credit provisioning as appropriate. FNCB recorded a provision for credit losses of $975 thousand for the three-month period ended March 31, 2023 compared to a $759 thousand provision for credit losses for the three months ended March 31, 2022, which was primarily attributable to an increase in loan volumes.

Non-interest Income

For the three months ended March 31, 2023, non-interest income decreased $119 thousand, or 6.6%, to $1.7 million from $1.8 million for the three months ended March 31, 2022. The decrease was largely due to recognized net losses on equity securities and a decrease in merchant services revenue. Net losses on equity securities totaled $508 thousand for the three months ended March 31, 2023, a $282 thousand, or 306.1%, increase, compared to $125 thousand in losses on equity securities recorded for the same quarter of 2022. Merchant services revenue decreased $38 thousand, or 19.3%, to $161 thousand for the first quarter of 2023, compared to $199 thousand for the comparable period of 2022. This was slightly offset by increases in net gains on the sale of available-for-sale debt securities, income from bank-owned life insurance ("BOLI") and loan-related fees. Net gains realized on the sale of available-for-sale debt securities totaled $163 thousand for the three months ended March 31, 2023. There were no sales of available-for-sale debt securities for the first quarter of 2022. BOLI income increased $52 thousand, or 36.0%, to $197 thousand for the three months ended March 31, 2023, from $145 thousand for the same three-month period of 2022. Loan-related fees totaled $119 thousand for the three months ended March 31, 2023, an increase of $62 thousand, or 108.5%, from $57 thousand recorded for the same quarter of 2022.

Table of Contents

Non-interest Expense

Non-interest expense increased $377 thousand, or 4.4%, to $8.9 million for the three months ended March 31, 2023, from $8.5 million for the three months ended March 31, 2022, which primarily reflected increases in salaries and employee benefits and other non-interest expenses. Salaries and employee benefits increased $737 thousand, or 15.8%, to $5.4 million for the first quarter of 2023 from $4.7 million for the same quarter of 2022, which primarily reflected higher full-time salaries and benefits associated with staff additions, in addition to an increase in starting salaries and salary ranges, to stay competitive in attracting and retaining qualified staff. Other non-interest expenses increased $253 thousand, or 28.8%, to $1.1 million for the three months ended March 31, 2023, compared to $0.9 million for the same three months in 2022, which was largely due to increases in correspondent bank charges and servicing costs associated with purchased loan pools. These increases were partially offset by decreases in the provision for off-balance sheet commitments, occupancy and equipment expenses, data processing expenses, and professional fees. During the first quarter of 2023, FNCB recorded a credit for unfunded commitments of $269 thousand compared to a provision for off-balance sheet commitments of $48 thousand for the respective quarter of 2022. Occupancy and equipment expenses, decreased $27 thousand and $52 thousand, respectively, comparing the first quarters of 2023 and 2022. While data processing expenses totaled $1.0 million for the three months ended March 31, 2023, a $65 thousand, or 6.1%, decrease from $1.1 million for the same three-month period in 2022. Professional fees decreased $25 thousand, or 7.8%, to $302 thousand from $327 thousand comparing the first quarters of 2023 and 2022, respectively.

Provision for Income Taxes

FNCB recorded income tax expense of $0.7 million for the three months ended March 31, 2023, a decrease of $220 thousand, or 24.0%, compared to income tax expense of $0.9 million for the same period of 2022. FNCB's effective tax rate increased to 20.7% at March 31, 2023, compared to 17.40% for the same period of 2022. The increase in income tax expense and the effective tax rate primarily reflected a timing difference related to the loss on equity securities recorded in the first three months of 2023, compared to the same period of 2022.

FINANCIAL CONDITION

Assets

Total assets increased $64.0 million, or 3.7%, to $1.809 billion at March 31, 2023 from $1.746 billion at December 31, 2022. The change in total assets primarily reflected increases in loans and leases and cash and cash equivalents, partially offset by a decrease in available-for-sale debt securities. Loans and leases, net of the allowance for credit losses, increased $41.4 million, or 3.3%, to $1.152 billion at March 31, 2023 from $1.110 billion at December 31, 2022. FNCB experienced increases across the commercial and industrial and state and political subdivision loan categories primarily due to the new equipment finance product offerings. Cash and cash equivalents increased $27.7 million, or 66.0%, to $69.6 million at March 31, 2023, from $41.9 million at December 31, 2022. Available-for-sale debt securities decreased $3.0 million, or 0.6%, to $473.0 million at March 31, 2023 from $476.0 million at December 31, 2022. Total deposits increased $42.7 million, or 3.0%, to $1.463 billion at March 31, 2023 from $1.421 billion at December 31, 2022. Total borrowed funds increased $14.3 million, to $196.7 million, at March 31, 2023 from $182.4 million at December 31, 2022, due entirely to an increase in Federal Home Loan Bank ("FHLB") of Pittsburgh advances to $186.3 million at March 31, 2023, from $172.0 million at December 31, 2022.

Cash and Cash Equivalents

Cash and cash equivalents increased $27.7 million, or 66.0%, to $69.6 million at March 31, 2023 from $41.9 million at December 31, 2022. The increase in cash and cash equivalents resulted primarily from an increase of $42.7 million in total deposits, including brokered deposits, and an increase of $14.3 million in advances through the FHLB of Pittsburgh. Funds received from deposits and borrowed funds were used to fund an increase loans and leases, net of net deferred loan origination fees and unearned income, of $39.5 million.

Securities

FNCB’s investment securities portfolio provides a source of liquidity needed to meet expected loan demand and interest income to increase profitability. Additionally, the investment securities portfolio is used to meet pledging requirements to secure public deposits and for other purposes. Debt securities are classified as either held-to-maturity or available-for-sale at the time of purchase based on management's intent. Held-to-maturity securities are carried at amortized cost, while available-for-sale securities are carried at fair value, with unrealized holding gains and losses reported as a component of shareholders’ equity in accumulated other comprehensive income (loss), net of tax. At March 31, 2023 and December 31, 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 non-interest income in the consolidated statements of income. Securities with limited marketability and/or restrictions, such as FHLB of Pittsburgh stock, are carried at cost. Management monitors the investment portfolio regularly. Decisions to purchase or sell investment securities are based upon management’s current assessment of long-term and short-term economic and financial conditions, including the interest rate environment and asset/liability management, liquidity and tax-planning strategies.

At March 31, 2023, FNCB's investment portfolio was comprised principally of available-for-sale debt securities including, fixed-rate, taxable and tax-exempt obligations of state and political subdivisions, and fixed-rate and floating-rate securities issued by U.S. government or U.S. government-sponsored agencies, which include mortgage-backed securities and residential and commercial collateralized mortgage obligations (“CMOs”). FNCB also holds fixed- and floating-rate investments in private CMO's, corporate debt securities, asset-backed securities and U.S. Treasury securities. Additionally, FNCB holds equity investments in the common and preferred stock of certain publicly-traded and privately-held bank holding companies. Except for U.S. government and government-sponsored agencies, there were no securities of any individual issuer that exceeded 10.0% of shareholders’ equity at March 31, 2023.

Table of Contents

The majority of FNCB's debt securities are fixed-rate instruments and inherently subject to interest rate risk, as the value of fixed-rate securities fluctuate with changes in interest rates. U.S. Treasury rates continued to increase in the first quarter of 2023 as the FOMC continued to tighten monetary policy. Additionally, as short-term interest rates moved up sharply, the yield curve was inverted at March 31, 2023, due to a negative spread between the 2-year and 10-year U.S. Treasury rates. The 2-year U.S. Treasury rate decreased 35 basis points to 4.06% at March 31, 2023 from 4.41% at December 31, 2022, while the 10-year U.S. Treasury rate decreased 40 basis points to 3.48% at March 31,2023 from 3.88% at December 31, 2022. These movements resulted in a negative spread of 58-basis points between the 2-year and 10-year U.S. Treasury, compared to a negative spread of 0.53% at December 31, 2022. Generally, a security's value reacts inversely with changes in interest rates. Available-for-sale securities are carried at fair value, with unrealized gains or losses reported in the accumulated other comprehensive income or loss component of shareholder's equity net of deferred income taxes. At March 31, 2023, FNCB reported a net unrealized loss, included in accumulated other comprehensive loss, of $42.0 million, net of deferred income taxes of $11.2 million, a decrease of $6.8 million, or 13.9%, compared to a net unrealized holding loss of $48.8 million, net of deferred income taxes of $13.0 million, at December 31, 2022. Any further increase in interest rates could result in further depreciation in the fair value of FNCB's securities portfolio and capital position. However, accumulated other comprehensive income and loss related to available-for-sale debt securities is excluded from regulatory capital and does not have an impact on FNCB's regulatory capital ratios.

The following table presents the composition of available-for-sale debt securities at March 31, 2023 and December 31, 2022:

Composition of Available-for-Sale Debt Securities

	March 31, 2023					December 31, 2022
(dollars in thousands)	Fair Value		% of Portfolio			Fair Value		% of Portfolio
Available-for-sale debt securities:
U.S. treasuries	$	32,845		6.94	%	$	32,134		6.75	%
Obligations of state and political subdivisions		219,483		46.39	%		220,782		46.37	%
U.S. government/government-sponsored agencies:
Collateralized mortgage obligations - residential		80,750		17.07	%		80,407		16.89	%
Collateralized mortgage obligations - commercial		3,358		0.71	%		3,329		0.70	%
Mortgage-backed securities		19,970		4.22	%		20,663		4.34	%
Private collateralized mortgage obligations		69,740		14.74	%		72,507		15.23	%
Corporate debt securities		32,040		6.77	%		30,672		6.44	%
Asset-backed securities		14,278		3.02	%		14,941		3.14	%
Negotiable certificates of deposit		655		0.14	%		656		0.14	%
Total available-for-sale debt securities	$	473,119		100.00	%	$	476,091		100.00	%

Activity related to available-for-sale debt securities during the three months ended March 31, 2023 included the purchase of one corporate debt security with an aggregate principal balance of $1.5 million and a weighted-average yield of 8.5%. 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 slight increase due to the purchases. FNCB sold seven tax-exempt municipal debt securities, with an amortized cost of $6.9 million with a weighted average yield of 3.83%, during the three months ended March 31, 2023. FNCB received gross proceeds of $7.1 million and realized a net gains of $163 thousand upon the sale, which is included in non-interest income.

Management continually monitors the investment portfolio for credit worthiness, value, and yield. Semi-annually, management engages a third-party consultant to review the municipal portfolio to determine if there is any undue credit risk within the portfolio. As part of the independent review, each security is compared to their "portfolio credit benchmark" to identify which securities may contain more than a minimal risk of payment default. Based on their semi-annual review as of December 31, 2022, the third-party consultant concluded that each municipal security held within the portfolio met or exceeded the benchmark and that none of the securities required further review. The next third-party review is scheduled for June 30, 2023. Management also monitors municipal securities monthly using a third-party Municipal Surveillance Report that identifies events related to the issuer that may indicate a deterioration in credit quality. Management noted no such events during the first quarter of 2023.

The following table presents the weighted-average yields of available-for-sale debt securities by major category and maturity period at March 31, 2023. Yields are calculated on the basis of the amortized cost and weighted for the scheduled maturity of each security. The yields on tax-exempt obligations of state and political subdivisions are presented on a tax-equivalent basis using the federal corporate income tax rate of 21.0%. Because residential, commercial and private collateralized mortgage obligations, mortgage-backed securities and asset-backed securities are not due at a single maturity date, they are not included in the maturity categories in the following summary.

Table of Contents

Maturity Distribution of Available-for-Sale Debt Securities

	March 31, 2023
	Within One Year			>1 - 5 Years			6 - 10 Years			Over 10 Years			Collateralized Mortgage Obligations, Mortgage-Backed and Asset-Backed Securities			Total
Available-for-sale debt securities:
U.S. treasuries		-			1.14	%		1.19	%		-			-			1.17	%
Obligations of state and political subdivisions		2.91	%		3.01	%		2.29	%		2.64	%		-			2.66	%
U.S. government/government-sponsored agencies:
Collateralized mortgage obligations - residential		-			-			-			-			2.45	%		2.45	%
Collateralized mortgage obligations - commercial		-			-			-			-			2.00	%		2.00	%
Mortgage-backed securities		-			-			-			-			2.80	%		2.80	%
Private collateralized mortgage obligations		-			-			-			-			3.53	%		3.53	%
Corporate debt securities		-			8..5	%		4.61	%		-			-			4.77	%
Asset-backed securities		-			-			-			-			5.77	%		5.77	%
Negotiable certificates of deposit		-			1.02	%		-			-			-			1.02	%
Weighted average yield		2.91	%		2.65	%		2.81	%		2.64	%		3.11	%		2.87	%

Evaluation for Credit Impairment

Management performed a review of all securities in an unrealized loss position as of March 31, 2023 and noted that there was no material change in the credit quality of any of the issuers or any other event or circumstance that may cause a significant adverse effect on the fair value of these securities. Moreover, to date, FNCB has received all scheduled principal and interest payments and expects to fully collect all future contractual principal and interest payments on all securities in an unrealized loss position at March 31, 2023. Based on the results of its review and considering the attributes of these debt securities, management concluded that changes in the fair values 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 March 31, 2023.

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

Loans and Leases

Total loans and leases, net of deferred fees and costs and unearned income, increased $40.4 million, or 3.6%, to $1.164 billion at March 31, 2023 from $1.123 billion at December 31, 2022. The growth in the loan portfolio reflected increases in all commercial and industrial loans and state and political subdivision loan categories, which was primarily due to commercial equipment financing product lines including simple interest loans and direct finance and municipal leases. Simple interest loans and direct finance leases are included in commercial and industrial loans and leases, while municipal leases are included in state and municipal subdivision loans and leases.

Also, included in commercial and industrial loans and leases at March 31, 2023 and December 31, 2022 were $0.6 million and $1.3 million, respectively, in outstanding balances of PPP loans, which are 100.0% guaranteed by the SBA. Accordingly, management excluded PPP loans in its evaluations of the ACL and there was no ACL established for PPP loans at March 31, 2023 and December 31, 2022.

From a collateral standpoint, a majority of FNCB’s loan portfolio consists of loans secured by real estate. Real estate secured loans, which include commercial real estate, construction, land acquisition and development, and residential real estate loans, decreased $8.8 million, or 1.3%, to $684.9 million at March 31, 2023 from $693.8 million at December 31, 2022. Real estate secured loans to total loans and leases represented 58.9% of total loans at March 31, 2023 compared to 61.8% at December 31, 2022, which resulted from management's efforts to diversify the portfolio.

Commercial real estate loans decreased $2.6 million, or 0.7%, to $373.6 million at March 31, 2023 from $376.3 million at December 31, 2022. Commercial real estate loans include long-term commercial mortgage financing and are primarily secured by first or second lien mortgages. Commercial and industrial loans and leases, consist primarily of equipment loans, working capital financing, revolving lines of credit and loans secured by cash and marketable securities. Commercial and industrial loans and leases increased $44.7 million, or 16.4%, to $317.1 million at March 31, 2023 from $272.4 million at December 31, 2022, which was primarily due to equipment loan and lease origination through 1st Equipment Finance during the three months ended March 31, 2023. The majority of equipment financing was originated through indirect, third-party dealers. At March 31, 2023, simple interest loans totaled $107.1 million, compared to $78.4 million at December 31, 2022. Direct finance leases outstanding under this initiative were $0.9 million, respectively, at both March 31, 2023, and December 31, 2022. Municipal leases under this initiative were $4.8 million at March 31, 2023, an increase of $0.4 million, or 9.1%, from $4.4 million at December 31, 2022. Construction, land acquisition and development loans decreased $1.3 million, or 2.0%, to $64.9 million at March 31, 2023 from $66.2 million at December 31, 2022.

Table of Contents

Residential real estate loans include fixed-rate and variable-rate, amortizing mortgage loans, home equity term loans and home equity lines of credit ("HELOCs"). FNCB primarily underwrites fixed-rate residential mortgage loans for sale in the secondary market to reduce interest rate risk and provide funding for additional loans. Additionally, FNCB offers its proprietary “WOW” mortgage product, which is a non-saleable mortgage with maturity terms of 7.5 to 19.5 years that provides customers with an attractive fixed interest rate and low closing costs. Residential real estate loans totaled $246.4 million at March 31, 2023, a decrease of $3.8 million, or 1.5%, from $250.2 million at December 31, 2022.

Consumer loans primarily include indirect automobile loans and secured and unsecured personal loans. Consumer loans decreased by $1.0 million, or 1.0%, to $91.6 million at March 31, 2023 from $92.6 million at December 31, 2022, largely due to the run-off of the indirect loan portfolio. Loans and leases to state and political subdivisions increased $5.1 million, or 7.9%, to $70.1 million at March 31, 2023 from $65.0 million at December 31, 2022.

The following table presents loans and leases receivable, net by segment at March 31, 2023 and December 31, 2022:

Loan and Lease Portfolio Detail

	March 31, 2023						December 31, 2022
(dollars in thousands)	Amount			% of Total Loans, Gross			Amount			% of Total Loans, Gross
Residential real estate	$	246,428			21.17	%	$	250,221			22.28	%
Commercial real estate		373,630			32.10	%		376,976			33.56	%
Construction, land acquisition and development		64,890			5.58	%		66,555			5.92	%
Commercial and industrial		317,830			27.31	%		272,024			24.22	%
Consumer		91,644			7.88	%		92,612			8.24	%
State and political subdivisions		69,367			5.96	%		64,955			5.78	%
Total loans and leases (1)		1,163,789			100.00	%		1,123,343			100.00	%
Unearned income		-						(810	)
Net deferred origination fees		-						1,784
Allowance for credit losses		(12,279	)					(14,193	)
Loans and leases, net	$	1,151,510					$	1,110,124
(1) In accordance with the adoption of ASU 2016-13, March 31, 2023 balances are reported at the amortized cost basis, to include net deferred origination fees and unearned income.

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 ACL. The ACL is established through a provision for credit losses charged to earnings.

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

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

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

Management actively manages 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’s market area, as weakening of conditions could result in real estate devaluations and an increase in loan delinquencies, which could negatively impact asset quality and cause an increase in the provision for loan and lease losses.

The following table presents information about non-performing assets at March 31, 2023 and December 31, 2022:

Non-performing Assets

	March 31,			December 31,
(dollars in thousands)	2023			2022
Non-accrual loans	$	2,601		$	2,763
Loans past due 90 days or more and still accruing		52			79
Total non-performing loans		2,653			2,842
Other real estate owned		-			-
Other non-performing assets		1,773			1,773
Total non-performing assets	$	4,426		$	4,615

Non-performing loans as a percentage of total loans		0.23	%		0.25	%

Table of Contents

FNCB's asset quality remained favorable through the first quarter of 2023. Total non-performing assets decreased $0.2 million, or 4.1%, to $4.4 million at March 31, 2023 from $4.6 million at December 31, 2022. The improvement reflected decreases in non-accrual loans. Non-performing loans, which include non-accrual loans and loans past due 90 days or more and still accruing, decreased $0.2 million, or 6.7%, to $2.6 million at March 31, 2023 from $2.8 million at December 31, 2022. FNCB’s ratio of non-performing loans to total gross loans improved to 0.23% at March 31, 2023 from 0.25% at December 31, 2022.

The following table presents the changes in non-performing loans for the three months ended March 31, 2023 and 2022.

Changes in Non-Performing Loans

	Three Months Ended March 31,
(in thousands)	2023			2022
Balance, beginning of period	$	2,842		$	3,863
Loans newly placed on non-accrual		988			234
Change in loans past due 90 days or more and still accruing		(27	)		-
Loans charged-off		(740	)		(75	)
Loan payments received		(410	)		(158	)
Balance, end of period	$	2,653		$	3,864

The following table presents accruing loan delinquencies and non-accrual loans as a percentage of gross loans at March 31, 2023 and December 31, 2022:

Loan Delinquencies and Non-Accrual Loans

	March 31,			December 31,
	2023			2022
Accruing:
30-89 days		0.18	%		0.19	%
90+ days		0.00	%		0.01	%
Non-accrual		0.22	%		0.25	%
Total delinquencies		0.40	%		0.45	%

Total delinquent loan balances, including non-accrual loans, increased $0.1 million to $2.2 million at March 31, 2023, from $2.1 million at December 31, 2022. However, total delinquencies as a percentage of total loans and leases, decreased 5 basis points to 0.40% at March 31, 2023, compared to 0.45% at December 31, 2022.

Other non-performing assets was comprised solely of a classified account receivable, the balance of which was $1.8 million at both March 31, 2023 and at December 31, 2022. The receivable is secured by an evergreen letter of credit that was received in 2011 as part of a settlement agreement for a large construction, land acquisition and development loan for a residential development project in the Pocono region of Monroe County, Pennsylvania. The agreement provides for payment to FNCB as real estate building lots are sold. The project was stalled due to a decline in real estate values in this area following the financial crisis of 2008. In 2019, economic development in this market area began improving and the developer for this project had resumed construction activity, including the completion of substantial infrastructure, and had increased marketing and sales initiatives related to the project. To date, no single-unit lots have been sold, however, the developer completed the construction of a seven-unit building that houses timeshare units and owners began occupying the units in the fourth quarter of 2020. In 2020, management negotiated a repayment plan with the developer. FNCB received the first payment of $127 thousand in the second quarter of 2021. Management continues to closely monitor this project 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 during 2022. Accordingly FNCB anticipates receiving additional payments during the remainder of 2023.

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 borrowers' 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.

Table of Contents

Allowance for Credit Losses

The ACL equaled $12.3 million at March 31, 2023, compared to $14.2 million at December 31, 2022. The decrease resulted from a $2.6 million adjustment from the impact of the adoption of ASU 2016-13, on January 1, 2023, in addition to $253 thousand in net charge-offs, that were offset by a provision for credit losses of $975 thousand, for the three months ended March 31, 2023. The ratio of the ACL to total loans and leases decreased to 1.06% of total loans and leases, net of net deferred loan origination fees and unearned income at March 31, 2023 from 1.26% of total loans at December 31, 2022.

The following table presents an allocation of the ACL by major loan category and percent of loans in each category to total loans at March 31, 2023 and December 31, 2022:

Allocation of the ACL

	March 31, 2023					December 31, 2022
			Percentage					Percentage
			of Loans					of Loans
			in Each					in Each
			Category					Category
	Allowance		to Total			Allowance		to Total
(dollars in thousands)	Amount		Loans			Amount		Loans
Residential real estate	$	1,164		21.17	%	$	2,215		22.28	%
Commercial real estate		2,509		32.10	%		4,193		33.55	%
Construction, land acquisition and development		1,722		5.58	%		747		5.92	%
Commercial and industrial		4,875		27.31	%		4,099		24.22	%
Consumer		1,597		7.88	%		1,307		8.25	%
State and political subdivisions		412		5.96	%		503		5.78	%
Unallocated		-		-			1,129		-
Total	$	12,279		100.00	%	$	14,193		100.00	%

The following table presents an analysis of the ACL by loan category for the three months ended March 31, 2023 and 2022:

Reconciliation of the ACL

	For the Three Months Ended March 31,
(dollars in thousands)	2023			2022
Balance at beginning of period	$	14,193		$	12,416
Impact of ASU 2016-13		(2,636	)		-
Charge-offs:
Residential real estate		-			3
Commercial real estate		-			-
Construction, land acquisition and development		-			-
Commercial and industrial		53			19
Consumer		723			73
State and political subdivisions		-			-
Total charge-offs		776			95
Recoveries of charged-off loans:
Residential real estate		-			-
Commercial real estate		54			-
Construction, land acquisition and development		-			-
Commercial and industrial		11			4
Consumer		458			45
State and political subdivisions		-			-
Total recoveries		523			49
Net charge-offs		253			46
Provision for credit losses		975			759
Balance at end of period	$	12,279		$	13,129

Net charge-offs as a percentage of average loans and leases (annualized)		0.09	%		0.02	%

Allowance for credit losses as a percentage of loans and leases, net		1.06	%		1.27	%

Allowance for credit losses to nonaccrual loans and leases		472.09	%		339.78	%

Table of Contents

Liabilities

Total liabilities, which consist primarily of total deposits and borrowed funds, increased $54.9 million, or 3.4%, to $1.682 billion at March 31, 2023 from $1.627 billion at December 31, 2022. The increase was due primarily to deposit growth, coupled with an increase in FHLB of Pittsburgh advances. Total deposits were $1.463 billion at March 31, 2023, an increase of $42.7 million, or 3.0%, from $1.421 billion at December 31, 2022. The increase was in total interest -bearing deposits that increased $67.4 million, or 6.1%, to $1.182 billion at March 31, 2023, from $1.115 billion at December 31, 2022. Specifically, total time deposits increased $201.1 million, or 14.2%, to $359.0 million at March 31, 2023, compared to $157.9 million at December 31, 2022. The increase in total time deposits was primarily concentrated in wholesale deposits originated through the IntraFi® Network, Qwickrate, a national listing service, and brokered certificates of deposit. FNCB utilized these wholesale sources as an alternative to additional advances through the FHLB of Pittsburgh. Additionally, in response to the general increase in interest rates and market demand, FNCB initiated several certificate of deposit specials in the first quarter of 2023. This was offset by decreases in non-interesting bearing demand deposits, interest-bearing demand deposits and savings deposits. Non-interest-bearing demand deposits decreased $24.7 million, or 8.1%, to $281.1 million at March 31, 2023, from $305.9 million at December 31, 2022. Interest-bearing demand deposits totaled $683.7 million at March 31, 2023, a decrease of $124.8 million, or 15.4%, compared to $808.5 million at December 31, 2022. While, savings deposits decreased $8.9 million, or 6.0%, to $139.5 million at March 31, 2023, compared to $148.4 million at December 31, 2022. Total borrowed funds increased $14.3 million, or 7.8%, to $196.6 million at March 31, 2023, from $182.4 million at December 31, 2022, which was comprised of $186.4 million in FHLB of Pittsburgh advances and $10.3 million in junior subordinated debentures.

Equity

On January 25, 2023, FNCB's Board of Directors authorized a stock repurchase program under which up to 750,000 shares of FNCB's outstanding common stock may be acquired in the open market. Repurchases are subject to SEC regulations as well as certain price, market volume and timing constraints specified in the trading plan, and the repurchased shares will be returned to the status of authorized but unissued shares of Common Stock. There is not a guarantee as to the exact number of shares that will be repurchased by FNCB, and FNCB may discontinue the plan at any time that management determines additional repurchases are no longer warranted. During the three months ended March 31, 2023, FNCB did not repurchase any shares under this initiative.

Total shareholders’ equity increased $7.6 million, or 6.3%, to $126.5 million at March 31, 2023 from $118.9 million at December 31, 2022. The increase in capital was primarily due market value appreciation of FNCB's available-for-sale debt securities, net of deferred taxes, which resulted in a decrease in the accumulated other comprehensive loss to $42.6 million at March 31, 2023, compared to an accumulated other comprehensive loss of $48.0 million at December 31, 2022. This was coupled with net income for the three months ended March 31, 2023 of $2.7 million. This was partially offset by dividends declared and paid of $1.8 million for the three months ended March 31, 2023. FNCB Bank was considered well capitalized with total risk-based capital and Tier 1 leverage ratios were 12.92% and 8.92% at March 31, 2023, respectively. On a per share basis, dividends declared totaled $0.090 per share for the three months ended March 31, 2023, an increase of $0.015 per share, or 20.0%, compared to $0.075 for the three months ended March 31, 2022. On April 26, 2023, FNCB's Board of Directors declared a dividend of $0.090 per share for the second quarter of 2023, the same was declared for the second quarter of 2022.

The Bank's total regulatory capital increased $3.4 million, or 2.0%, to $173.4 million at March 31, 2023 from $170.0 million at December 31, 2022. FNCB Bank's total risk-based capital and Tier 1 leverage ratios were 12.97% and 8.96%, respectively, at March 31, 2023, compared to 13.11% and 8.77%, respectively, at December 31, 2022. The Bank's risk-based capital ratios exceeded the minimum regulatory capital ratios required for well capitalized under prompt corrective action regulations. Based on the most recent notification from its primary regulator, the Bank was considered well capitalized at March 31, 2023 and December 31, 2022. There were no conditions or events since that notification that management believes would have changed this capital designation.

Liquidity

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

Table of Contents

The consolidated statements of cash flows present the change in cash and cash equivalents from operating, investing and financing activities. Cash and due from banks and interest-bearing deposits in other banks, which comprise cash and cash equivalents, are FNCB’s most liquid assets. At March 31, 2023, cash and cash equivalents totaled $69.6 million, an increase of $27.7 million compared to $41.9 million at December 31, 2022. For the three months ended March 31, 2023, net cash inflows, provided by operating and financing activities were only partially offset by net cash outflows provided used in investing activities. Operating activities include net income, adjusted for the effects of non-cash transactions including, among others, depreciation and amortization and the provision for credit losses, and is the primary source of cash flows from operations. In the first quarter of 2023, operating activities provided FNCB with $1.2 million in net cash, which reflected net income of $2.7 million, net of a reduction for non-cash negative adjustments of $1.4 million. This was coupled with $55.2 million in cash provided by financing activities, which resulted primarily from a net increase in deposits of $42.7 million and the net proceeds from overnight and term advances through FHLB of Pittsburgh, of $14.3 million, slightly offset by the $1.8 million in cash dividends paid. Partially offsetting these net inflows were net cash outflows used in investing activities that totaled $28.7 million for the three months ended March 31, 2023. Specifically, FNCB's net lending activities used $39.9 million in net cash and $1.5 million was utilized in the purchase of available-for-sale debt securities. These investing cash outflows were slightly offset by $7.1 million in cash proceeds received from the sale of available-for-sale debt securities, and $5.7 million of cash provided from maturities, calls and principal payments of available-for-sale debt securities.

Management is actively monitoring FNCB's liquidity position and capital adequacy in light of the changing circumstances related to economic uncertainty, liquidity constraints, current inflation levels, rising interest rates and increased competition. Management believes FNCB's current liquidity position and available sources of liquidity were sufficient to meet its cash flow needs and fulfill its obligations at March 31, 2023. In addition to cash and cash equivalents of $69.6 million at March 31, 2023, FNCB had ample sources of additional liquidity including approximately $482.1 million in available borrowing capacity from the FHLB of Pittsburgh and $17.9 million under the borrower-in-custody ("BIC") program through the Federal Reserve Bank of Philadelphia. FNCB also has available unsecured federal funds lines of credit totaling $75.0 million at March 31, 2023, as well as access to various wholesale deposit markets. While management believes FNCB has adequate liquidity to meet its cash flow needs, they are keenly aware that changes in general economic conditions, including inflation, further increases in interest rates and competition, among other factors, could pose potential stress on liquidity should deposits begin exiting the Bank or FNCB's asset quality deteriorates. Additionally, FNCB could experience an increase in the utilization of existing lines of credit as customers manage their own liquidity needs during this time of economic uncertainty. Management continually monitors FNCB's liquidity positions and sources of

available liquidity in relation to funding and cash flow needs and evaluates potential sources of additional liquidity.

In response to industry-wide liquidity constraints, on March 12, 2023, the Federal Reserve Bank established a new Bank Term Funding Program (“BTFP”) to provide additional funding to eligible depository institutions. The BTFP is an additional source of liquidity 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. FNCB had $25.3 million in available funding under the BTFP at March 31, 2023. As of March 31, 2023, FNCB did not utilize this funding source.

Impact of Inflation and Changing Prices

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

Interest Rate Risk

Interest Rate Sensitivity

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

LIBOR Replacement

The Alternative Reference Rates Committee ("ARRC") had proposed that the Secured Overnight Funding Rate ("SOFR") replace USD-LIBOR, with the transition to SOFR from USD-LIBOR to 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 November 30, 2020 the ICE Benchmark Administration ("IBA"), which complies and oversees LIBOR, announced its intention to extend most of the USD-LIBOR tenors to June 30, 2023, with U.S. banking regulators supporting the extension. As of December 31, 2021, most LIBOR tenors, with the exception of the overnight, 1-,3-, 6- and 12-month LIBOR tenors which have been extended through June 30, 2023, have ceased to be published. Additionally, beginning January 1, 2022, no new financial instruments can be written with terms tied to LIBOR. Accordingly, FNCB has not written any loans with terms tied to LIBOR during the three-months ended March 31, 2023 or during the year ended December 31, 2022. FNCB has various loans, investments, borrowings and interest rate swap contracts that are indexed to USD-LIBOR, and management is actively monitoring its LIBOR exposures, evaluating any risks involved and has amended loan documents as necessary.

Table of Contents

Asset and Liability Management

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

The major objectives of ALCO are to:

●

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

●

ensure adequate liquidity and funding;

●

maintain a strong capital base; and

●

maximize net interest income opportunities.

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

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

Earnings at Risk and Economic Value at Risk Simulations

Earnings at Risk

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

Economic Value at Risk

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

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

●

asset and liability levels using March 31, 2023 as a starting point;

●

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

●

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

The following table illustrates the simulated impact of parallel and instantaneous interest rate shocks of +400 basis points, +200 basis points, and -200 basis points on net interest income and the change in economic value over a one-year time horizon from the March 31, 2023 levels:

	Rates +200						Rates +400						Rates -200
	Simulation Results			Policy Limit			Simulation Results			Policy Limit			Simulation Results			Policy Limit
Earnings at risk:
Percent change in net interest income		(7.2	)%		(12.5	)%		(13.1	)%		(20.0	)%		0.4	%		(12.5	)%

Economic value at risk:
Percent change in economic value of equity		(7.6	)%		(20.0	)%		(16.6	)%		(35.0	)%		0.7	%		(10.0	)%

Table of Contents

Model results from the simulation at March 31, 2023 indicated that FNCB was liability sensitive in the near term, exhibiting some interest sensitivity to changes in interest rates over the next twelve months. According to the model results at March 31, 2023, in comparison to the base case, net interest income is expected to decrease 7.2% under a +200-basis point interest rate shock. Additionally, under a parallel shift in interest rates of +200 basis points, FNCB's economic value of equity ("EVE") is expected to decrease 7.6%. Comparatively, model results at December 31, 2022 were estimated decreases in net interest income and EVE of 14.2% and 9.3%, respectively, under a +200-basis point interest rate shock. All modeled exposures to net interest income and EVE for the next twelve-month horizon are within internal ALCO policy guidelines.

Despite FOMC actions in 2022, inflation remained elevated in the first quarter of 2023. The FOMC responded with two additional 25-basis point rate increases, one on February 1, 2023 and another on March 2, 2023. Additionally, the FOMC has indicated that additional rate increases in 2023 would likely be necessary to control inflation. Model results at March 31, 2023 indicate that FNCB's asset/liability position becomes asset sensitive in Years 3-5 of the model, which would imply that net interest income would benefit from rising interest rates. This analysis does not represent a forecast for FNCB and should not be relied upon as being indicative of expected operating results. These simulations are based on numerous assumptions, including but not limited to, 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.

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 March 31, 2023 with tax-equivalent net interest income that was projected for the same three-month period. There was a negative variance between actual and projected tax-equivalent net interest income for the three-month period ended March 31, 2023 of approximately $715 thousand, or 6.25%. The variance primarily reflected higher actual interest expense due to increases to deposit rates, including certificate of deposit rate special employed and higher brokered deposit rates than modeled. ALCO performs a detailed rate/volume analysis between actual and projected results in order to continue to improve the accuracy of its simulation models.

Off-Balance Sheet Arrangements

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

For the three months ended March 31, 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.

Item 3 — Quantitative and Qualitative Disclosures about Market Risk

There have been no material changes in FNCB’s exposure to market risk during the three months ended March 31, 2023. For discussion of FNCB’s exposure to market risk, refer to Item 7A, Quantitative and Qualitative Disclosures about Market Risk, contained in FNCB’s Form 10-K for the year ended December 31, 2022.

Item 4 — Controls and Procedures

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

Table of Contents

PART II Other Information

Item 1 — Legal Proceedings.

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

There have been no changes in the status of the other litigation, if any, disclosed in FNCB’s Annual Report on Form 10-K for the year ended December 31, 2022.

Item 1A — Risk Factors.

There have been no material changes in the risk factors previously disclosed in FNCB's Annual Report on Form 10-K for the year ended December 31, 2022.

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

Unregistered Sales of Equity Securities

FNCB did not issue any unregistered equity securities during the three months ended March 31, 2023.

Purchases of Equity Securities by the Issuer and Affiliated Purchasers

Pursuant to the share repurchase program announced by FNCB on January 25, 2023, which expires on December 31, 2023, FNCB may repurchase up to 750,000 shares of its issued and outstanding common stock. The share repurchase program is intended to comply with the provisions of the safe harbor under Rule 10b-18 of the Exchange Act. As of March 31, 2023, FNCB had not repurchased any shares under the program.

Item 3 - Defaults upon Senior Securities.

None.

Item 4 — Mine Safety Disclosures.

Not applicable.

Item 5 - Other Information.

None.

Table of Contents

Item 6 — Exhibits.

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

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

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

EXHIBIT 3.3	Amended and Restated Bylaws filed as Exhibit 3.3 to FNCB's Form 10-K for the year ended December 31, 2022, as filed on March 10, 2023, is hereby incorporated by reference.

EXHIBIT 31.1*	Certification of Chief Executive Officer

EXHIBIT 31.2*	Certification of Chief Financial Officer

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

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

EXHIBIT 101.SCH	INLINE XBRL TAXONOMY EXTENSION SCHEMA

EXHIBIT 101.CAL	INLINE XBRL TAXONOMY EXTENSION CALCULATION LINKBASE

EXHIBIT 101.DEF	INLINE XBRL TAXONOMY EXTENSION DEFINITION LINKBASE

EXHIBIT 101.LAB	INLINE XBRL TAXONOMY EXTENSION LABEL LINKBASE

EXHIBIT 101.PRE	INLINE XBRL TAXONOMY EXTENSION PRESENTATION LINKBASE

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

*	Filed herewith

**	Furnished herewith

Table of Contents

SIGNATURES

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

Registrant: FNCB BANCORP, INC.

Date: May 5, 2023	By:	/s/ Gerard A. Champi
	Gerard A. Champi
	President and Chief Executive Officer



Date: May 5, 2023	By:	/s/ James M. Bone, Jr.
	James M. Bone, Jr., CPA
	Executive Vice President and Chief Financial Officer
	Principal Financial Officer



Date: May 5, 2023	By:	/s/ Stephanie A. Westington
	Stephanie A. Westington, CPA
	Senior Vice President and Chief Accounting Officer
	Principal Accounting Officer