Table of ContentsUNITED STATESSECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C. 20549FORM 10-K ☒ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended December 31, 2023 OR ☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the transition period from to Commission File No. 001-38408FNCB BANCORP, INC.(Exact Name of Registrant as Specified in Its Charter) Pennsylvania23-2900790(State or Other Jurisdictionof Incorporation or Organization)(I.R.S. EmployerIdentification No.) 102 E. Drinker St., Dunmore, PA18512(Address of Principal Executive Offices)(Zip Code) Registrant’s telephone number, including area code (570) 346-7667 Securities registered pursuant to Section 12(b) of the Act: Title of Each Class Trading Symbol(s)Name of Each Exchange on Which Registered Common Stock $1.25 Par ValueFNCB Nasdaq Capital Market Securities registered pursuant to Section 12(g) of the Act: NONE Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒ Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or section 15(d) of the Act. Yes ☐ No ☒ Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 duringthe 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 forthe 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 ofRegulation 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 emerginggrowth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” inRule 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 orrevised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐ Indicate by check mark whether the registrant has filed a report on and attestation to its management's assessment of the effectiveness of its interest controlover financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issuedits audit report. ☐ If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filingreflect the correction of an error to previously issued financial statements. ☐ Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received byany of the registrant's executive officers during the relevant recovery periods pursuant to §240.10D-1(b). ☐ Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
The aggregate market value of the voting and non-voting common stock of the registrant, held by non-affiliates was $96,406,863 at June 30, 2023.
State the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date: 19,794,996 shares of common stock
as of March 8, 2024.
Table of Contents
Contents
Business
Unresolved Staff Comments
Cybersecurity
Properties
Legal Proceedings
Mine Safety Disclosures
PART I
Item 1.
Item 1A. Risk Factors
Item 1B.
Item 1C.
Item 2.
Item 3.
Item 4.
PART II
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
Item 9C.
PART III
Item 10. Directors, Executive Officers and Corporate Governance
Item 11.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 13. Certain Relationships and Related Transactions, and Director Independence
Item 14. Principal Accounting Fees and Services
PART IV
Item 15.
Item 16.
Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities
Reserved
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Quantitative and Qualitative Disclosures About Market Risk
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Controls and Procedures
Other Information
Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
Exhibits and Financial Statement Schedules
Form 10-K Summary
Executive Compensation
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Cautionary Note Regarding Forward-Looking Statements.
This Annual Report on Form 10-K contains statements which are forward-looking statements within the meaning of Section 27A of the Securities Act, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These statements are based on assumptions and may describe future plans,
strategies, financial conditions, results of operations and expectations of FNCB Bancorp, Inc. and its direct and indirect subsidiaries (collectively, “FNCB”),
including statements with respect to the proposed merger between Peoples Financial Services Corp. ("PFIS") and FNCB Bancorp, Inc. under the Agreement
and Plan of Merger, dated September 27, 2023 (the "Merger Agreement"), pursuant to which FNCB Bancorp, Inc. will merger with and into PFIS, with PFIS as
the surviving entity (the "merger"), along with the transaction occurring immediately after such merger, whereby FNCB Bancorp, Inc.'s wholly owned
subsidiary, FNCB Bank, will merger with and into PFIS's wholly owned subsidiary, Peoples Security Bank and Trust Company ("Peoples Bank"), with Peoples
Bank as the surviving bank and a wholly owned subsidiary of PFIS (collectively, with the merger, the "mergers"). These forward-looking statements are
generally identified by use of the words “may”, “should”, “will”, “could”, “believe,” “expect,” “intend,” “anticipate,” “estimate,” “project”, “plan”, “future” or
similar expressions. All statements in this report, other than statements of historical facts, are forward-looking statements.
These forward-looking statements are not guarantees of future performance and are subject to risks and uncertainties, some of which are beyond FNCB’s
control and ability to predict, that could cause actual results to differ materially from those expressed in the forward-looking statements. Important factors that
could cause actual results of FNCB to differ materially from those in the forward-looking statements include, but are not limited to:
● Weakness in the economic environment, in general, and within FNCB's market area could pose significant challenges for FNCB and could adversely
affect FNCB's financial condition and results of operations;
● FNCB is subject to credit risk, and FNCB's financial condition and results of operations could be negatively impacted by changes in economic and
market conditions and other factors that adversely affect FNCB's borrowers;
● FNCB’s commercial lending activities, including loans to insiders and their related parties, generally have relatively large balances and are
concentrated in the Northeastern Pennsylvania market, which may present greater risks that other types of loans;
● The appraisals and other valuation techniques FNCB uses in evaluating and monitoring loans secured by real property and other real estate owned
may not accurately reflect the net value of the asset;
● FNCB’s financial condition and results of operations would be adversely affected if the allowance for credit losses ("ACL") is not sufficient to absorb
actual losses or if increases to the ACL were required;
● The CECL model for determining the ACL could add volatility to FNCB's provision for credit losses and results of operations;
● If management concludes that the decline in value of any of FNCB’s investment securities is other-than-temporary, FNCB is required to write down
the security to reflect credit-related impairments through a charge to earnings;
● FNCB’s risk management framework may not be effective in mitigating FNCB's risks or losses;
● FNCB is subject to interest rate risk, changes in interest rates could reduce income, cash flows and asset values, which could adversely affect its
profitability;
● FNCB may not be able to successfully compete with others for business;
● FNCB could be subject to credit risk related to derivative obligations;
● FNCB may not be able to retain or grow its core deposit base, which could adversely impact its funding costs;
● FNCB is a bank holding company and depends on dividends for its subsidiary, FNCB Bank, to operate.
● If FNCB loses access to wholesale funding sources, it may not be able to meet the cash flow requirements of its deposits, creditors, and borrowers, or
have the operating cash needed to fund corporate expansion and other corporate activities;
● Interruptions or security breaches of FNCB's information systems could negatively affect its financial performance or reputation;
● FNCB depends on information technology and telecommunications systems of third parties, and any systems failures or interruptions could adversely
affect FNCB's operations and financial condition;
● FNCB is subject to cybersecurity risks and security breaches and may incur increasing costs in an effort to minimize those risks and to respond to
cyber incidents, and FNCB may experience harm to its reputation and liability exposure from security breaches;
● If FNCB's information technology is unable to keep pace with growth or industry developments or if technological developments result in higher costs
or less advantageous pricing, financial performance may suffer;
● FNCB relies on management and other key personnel and the loss of any of them may adversely affect its operations;
● New lines of business, products, product enhancements or services may subject FNCB to additional risk;
● Damage to FNCB’s reputation could significantly harm its businesses, competitive position and prospects for growth;
● FNCB may be a defendant from time to time in a variety of litigation and other actions, which could have a material adverse effect on its financial
condition, results of operations and cash flows;
● FNCB may face risks with respect to future expansion of acquisition activity;
● FNCB may be adversely affected by the soundness of other financial institutions;
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● FNCB may be required to act as a source of financial and managerial strength for FNCB Bank in times of stress;
● FNCB is subject to extensive government regulation, supervision and possible regulatory enforcement actions, as well as "fair and responsible
banking" laws designed to protect consumers, which may subject FNCB to higher costs and lower shareholder returns;
● New or changed legislation or regulation, updated guidance regarding current regulation and regulatory initiatives could adversely affect FNCB
through increased regulation and increased costs of doing business;
● External events, including natural disasters, national or global health emergencies, events of armed conflict in other countries, and terrorist threats,
among others, could impact FNCB's ability to do business or other adversely affect FNCB's business, operations and financial condition;
● Because the market price of PFIS common stock will fluctuate, the value of the merger consideration to be received by our shareholders in the merger
of FNCB with and into PFIS may change;
● Regulatory approvals may not be received, may take longer than expected or may impose conditions that are not presently anticipated or cannot be
met;
● Failure of the merger to be completed, the termination of the Merger Agreement or a significant delay in the consummation of the merger could
negatively impact FNCB;
● FNCB will be subject to business uncertainties and contractual restrictions while the mergers are pending;
● The Merger Agreement contains provisions that may discourage other companies from pursuing, announcing or submitting a business combination
proposal to FNCB that might result in greater value to FNCB shareholders;
● Litigation against FNCB or PFIS, or the members of FNCB's or PFIS's board of directors, could prevent or delay the completion of the mergers;
● Combining PFIS and FNCB may be more difficult, costly or time-consuming than expected, and PFIS and FNCB may fail to realize the anticipated
benefits of the mergers;
● FNCB may need to raise additional capital in the future, but that capital may not be available when it is needed and on terms favorable to
shareholders;
● An investment in FNCB’s common stock is not an insured deposit;
● Shareholders may not receive dividends on FNCB's common stock or have their shares repurchased by FNCB;
● An entity holding as little as a 5% interest in FNCB's outstanding securities could, under certain circumstances, be subject to regulation as a “bank
holding company;”
● Any deficiencies in FNCB’s financial reporting or internal controls could materially and adversely affect its business and the market price of FNCB’s
common stock;
● Changes in accounting standards could impact FNCB’s reported earnings;
● Anti-takeover provisions in FNCB's charter documents could discourage, delay or prevent a change of control of FNCB's company and diminish the
value of FNCB's common stock; and
● Other factors and risks described in Part II, Item 1A of this Annual Report on Form 10-K under the caption “Risk Factors.”
These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements.
FNCB undertakes no obligation, other than as required by law, to update or revise any forward-looking statements, whether as a result of new information,
future events or otherwise.
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PART I
Item 1.
Business
Overview
The Company
FNCB Bancorp, Inc. is a Pennsylvania business corporation and a registered bank holding company headquartered in Dunmore, Pennsylvania. FNCB Bancorp,
Inc. was incorporated in 1997 under its former name, First National Community Bancorp, Inc. and became an active bank holding company on July 1, 1998
when it acquired 100% ownership of FNCB Bank, formerly First National Community Bank (the "Bank"). In this report, the terms “FNCB,” "the Company,"
“we,” “us,” and “our” refer to FNCB Bancorp, Inc. and its subsidiaries, unless the context requires otherwise. In certain circumstances, however, FNCB
Bancorp, Inc. uses the term “FNCB” to refer to itself.
FNCB’s primary activity consists of owning and operating the Bank, which provides substantially all of FNCB’s earnings from its banking services.
FNCB had net income of $13.0 million, $20.4 million, and $21.4 million in 2023, 2022 and2021, respectively. Total assets were $1.881 billion at December 31,
2023, $1.746 billion at December 31, 2022 and $1.664 billion at December 31, 2021.
The Bank
Established as a national banking association in 1910, as of December 31, 2023 the Bank operated 16 full-service branch offices within its primary market area,
Northeastern Pennsylvania.
Mission, Vision and Values
FNCB's mission is to make your banking experience simply better. We strive to be an evolving, independent, community-focused bank that is a leader through
the power of a strong team with a commitment to excellence for our employees, customers and shareholders. We take pride in our core values:
● Simplicity - Simplifying processes, systems and products to create better banking experiences.
● Integrity - Maintaining the highest ethical standards and practices.
● Mission - To make your banking experience simply better.
● People - A strong team of employees dedicated to the community, our customers, our shareholders and each other.
● Leadership - An organization that prospers under the guidance of focused and dedicated leaders.
● You - Our values equal YOU!
Recent Developments
On September 27, 2023, FNCB entered into the Merger Agreement with PFIS pursuant to which FNCB will merge with and into PFIS, with PFIS as the
surviving entity. Immediately after such merger, the Bank will merge with and into Peoples Bank, with Peoples Bank as the surviving bank and a wholly-
owned subsidiary of PFIS. Under the terms of the Merger Agreement, which has been unanimously approved by the boards of directors of both companies,
shareholders of FNCB will be entitled to receive a fixed exchange ratio of 0.1460 shares of PFIS common stock for each share of the FNCB’s common stock.
On October 27, 2023, FNCB filed a Federal Deposit Insurance Corporation ("FDIC") Interagency Bank Merger Application with the FDIC New York and a
Pennsylvania Bank Merger Application with the Pennsylvania Department of Banking and Securities. Completion of the merger requires, among other things,
the approval from these regulatory authorities, as well as FNCB’s shareholders.
The Merger Agreement provides certain termination rights for both PFIS and FNCB and further provides that a termination fee of $4.8 million will be payable
by either PFIS or FNCB, as applicable, upon termination of the Merger Agreement under certain circumstances. The foregoing summary is not complete and is
qualified in all respects by reference to the actual language of the Definitive Merger Agreement filed by FNCB as Exhibit 2.1 to the Current Report on Form 8-
K on September 27, 2023. Pending regulatory and shareholder approvals, FNCB expects the consummation of the mergers to be completed by the third quarter
of 2024, however, there can be no assurance that the transaction will be consummated by such date, or at all.
Products and Services
Retail Banking
FNCB fulfills its mission and vision by offering a wide range of banking products and services tailored for both individuals and businesses.
For personal customers, the Bank provides various deposit products including savings, money markets, certificates of deposit and checking accounts, along
with a line of preferred relationship products that offer premium benefits for higher-balance customers.
FNCB is also a member of IntraFi Network and participates in their Certificate of Deposit Account Registry (“CDARs”) and Insured Cash Sweep (“ICS”)
programs, which allow customers to secure FDIC insurance on balances in excess of the standard limitations.
FNCB offers customers the convenience of 24/7 banking through online (www.fncb.com), mobile and telephone banking channels. Via fncb.com, customers
can access their accounts directly, deposit checks, pay bills, open new accounts, apply for consumer or mortgage loans and obtain loan pre-qualification
approvals. FNCB also provides various mobile payment alternatives including Apple Pay®, Samsung Pay®, Google Pay® and Zelle®.
Customers can access funds from their deposit accounts by using their debit card to make purchases or withdraw cash from any automated teller machines
("ATMs") including ATMs located in each of the Bank’s branch offices and several offsite locations. FNCB is a member of the AllPoint network, providing
customers with access to over 55,000 surcharge-free ATMs worldwide. Additionally, FNCB offers its customers with Card Manager, allowing debit cardholders
the ability to receive fraud alert messages and manage their debit card usage, including when, where and how their debit card is used, as well as My Rewards
cash-back offers on debit card purchases.
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In addition to traditional deposit and loan products, FNCB offers business customers a suite of service options including, remote deposit capture, Merchant
Services, Treasury Services, and purchasing cards ("PCards"). Remote deposit capture enables customers to process daily check deposits to their accounts
through an online image capture environment. Merchant Services offers customers payment processing solutions, including credit card terminals, integrated
payment systems and a dedicated account manager. Treasury Services include ACH origination, ACH and check positive pay, sweep services, wire services and
Safepoint by Loomis. PCards allow business customers the ability to earn a cash rebate on credit card purchases, along with additional functionality and
reporting to effectively manage their expenses and procurement. FNCB Business Online Banking provides customers the ability to perform wire transfers and
payments through ACH transactions, as well as process direct deposit payroll transactions for employees, all available 24/7.
Lending Activities
FNCB offers a variety of financing alternatives to individuals and businesses generally in its primary market area through the origination of loans and
leases including residential real estate loans, construction, land acquisition and development loans, commercial real estate loans, commercial and industrial
loans, loans to state and political subdivisions, and consumer loans. FNCB also offers specialized equipment financing alternatives including simple loans,
direct finance leases and municipal leases to businesses within and outside its primary market area under its wholly owned subsidiary, 1st Equipment Finance
Inc. Simple interest loans and direct finance leases are included in commercial equipment financing subsidiary loans, while municipal leases are included in
state and political subdivision loans. In addition to originating loans, FNCB from time to time purchases individual and pools of commercial, residential
mortgage and consumer loans originated by third parties, which are included in the respective loan category.
Residential Mortgage Loans and Home Equity Term Loans and Lines of Credit
FNCB offers a variety of 1- 4 family residential loans, home equity lines of credit ("HELOCs") and HELOCs with a carve-out feature. FNCB’s suite of
residential mortgage products include First Time Homebuyer mortgages, FHA and Home Possible® mortgages with low down payments to meet the home
financing needs of customers. HELOCs have adjustable interest rates based on the prime interest rate for the United States and are offered up to a maximum
combined loan-to-value ratio of 90%, based on the property’s appraised value. The carve out feature of a HELOC allows borrowers to access up to three
simultaneous fixed-rate amortizing loans without having to reapply. The rate for each amortizing loan is based on the National Prime Rate as published on the
day of the carve out plus a spread that is determined by the length of the loan term. FNCB also offers a proprietary “WOW” mortgage, a first-lien, fixed-rate
mortgage product with maturity terms ranging from 10 to 19.5 years. At December 31, 2023, 1- 4 family residential mortgage loans, including home equity
term loans and HELOCs totaled $245.3 million, or 20.1%, of FNCB's total loan portfolio. Except for the WOW mortgage, 1- 4 family mortgage loans are
originated generally for sale in the secondary market. However, FNCB may hold in portfolio 1- 4 family residential mortgages as deemed necessary according
to current asset/liability strategies.
Construction, Land Acquisition and Development Loans
FNCB offers interim construction financing secured by residential property for the purpose of constructing 1- 4 family homes. FNCB also offers interim
construction financing for the purpose of constructing residential developments and various commercial properties including shopping centers, office
complexes and single purpose owner-occupied structures and for land acquisition. At December 31, 2023, construction, land acquisition and development loans
amounted to $59.9 million and represented 4.9% of FNCB's total loan portfolio.
Commercial Real Estate Loans
Commercial real estate loans represent the largest portion of FNCB’s total loan portfolio and loans in this portfolio generally have larger loan balances. These
loans are secured by a broad range of real estate, including but not limited to, office complexes, shopping centers, hotels, warehouses, gas stations, convenience
markets, residential care facilities, nursing care facilities, restaurants, multifamily housing, farms and land subdivisions. At December 31, 2023, commercial
real estate loans totaled $408.1 million, or 33.5%, of FNCB's total loan portfolio.
Commercial and Industrial Loans
Generally, FNCB offers commercial loans to sole proprietors and businesses located in its primary market area. The commercial loan portfolio includes, but is
not limited to, lines of credit, dealer floor plan lines, equipment loans, vehicle loans and term loans. These loans are primarily secured by vehicles, machinery
and equipment, inventory, accounts receivable, marketable securities and deposit accounts. At December 31, 2023, commercial and industrial loans totaled
$183.8 million, or 15.1%, of FNCB's total loan portfolio.
Commercial Equipment Financing
FNCB offers equipment financing alternatives, including direct finance loans and leases and municipal leases, to businesses and governmental units within and
outside its primary market area, through the Bank's wholly-owned subsidiary, 1st Equipment Finance, Inc. In addition, this loan segment includes
purchased pools of secured and unsecured loans. These loans are primarily secured by vehicles, machinery and equipment. At December 31, 2023 , commercial
equipment financing loans under the subsidiary totaled $163.6 million, or 13.4%, of FNCB's total loan portfolio.
Consumer Loans
Consumer loans include indirect automobile loans originated through various auto dealers in the Bank's market area, secured and unsecured installment loans,
direct new and used automobile financing, personal lines of credit and overdraft protection loans. At December 31, 2023, consumer loans totaled $85.7
million, or 7.0%, of FNCB's total loan portfolio.
State and Political Subdivision Loans and Leases
FNCB originates state and political subdivision loans and leases, including general obligation, tax anticipation notes and municipal leases, primarily to
municipalities in the Bank’s market area. At December 31, 2023, state and political subdivision loans and leases totaled $73.8 million, or 6.1%, of FNCB's total
loan portfolio.
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Purchased Loans
FNCB purchases individual loans and loan pools originated by several third-party originators to diversify the loan portfolio and enhance net interest income.
Purchase loans include pooled commercial equipment loans, unsecured commercial, residential mortgage loans and secured and unsecured consumer individual
loans and loan pools. The pools have relatively short average lives and provide steady cash flows. Commercial equipment loans are secured under the Uniform
Commercial Code by titles, secured consumer loans are collateralized by chattel paper, while credit enhancement features including reserve funds provide
credit protection for the consumer and commercial unsecured pools. FNCB has reviewed individual loan files, if feasible, or reviewed random samples of loan
files and credit metrics to ensure underwriting was aligned with FNCB's internal underwriting standards. FNCB does not provide servicing of purchased loans.
See Note 2, “Summary of Significant Accounting Policies” and Note 4, "Loans" to the consolidated financial statements included in Item 8, "Financial
Statements and Supplementary Data," to this Annual Report on Form 10-K for additional information regarding FNCB's loan portfolio and lending policies.
Wealth Management
FNCB offers customers wealth management services through its division, 1st Investment Services and a revenue share agreement with a third-party provider.
Customers are able to access alternative deposit products such as mutual funds, annuities, stocks, and bonds directly for purchase from an outside provider.
FNCB receives a percentage of the commission revenue generated from these transactions.
Deposit Activities
In general, deposits, borrowings and loan and investment repayments are the major sources of funding for lending and other investment purposes. FNCB relies
primarily on marketing, product innovation, technology and service to attract, grow and retain its deposits. Deposit account terms vary according to the
minimum balance required, the time periods the funds must remain on deposit and the interest rate, among other factors. In determining the terms of deposit
accounts, management considers the interest rates offered by its competitors, the interest rates available on Federal Home Loan Bank ("FHLB") of Pittsburgh
advances and other wholesale funding, its liquidity needs and customer preferences. Management regularly reviews FNCB’s deposit mix and deposit pricing as
part of its asset/liability management, taking into consideration rates offered by competitors in its market area and balance sheet interest-rate sensitivity.
Competition
The banking and financial services industries are highly competitive. FNCB faces direct competition in originating loans and in attracting deposits from a
significant number of financial institutions operating in its market area, many with a statewide or regional presence, and in some cases, a national presence, as
well as other financial and non-financial institutions outside of its market area through online loan and deposit product offerings. Competition comes
principally from other banks, savings institutions, credit unions, mortgage banking companies, internet-based financial technology (“FinTech”) companies and,
with respect to deposits, institutions offering investment alternatives, including money market funds and online deposit accounts. The increased competition
has resulted from changes in the legal and regulatory guidelines, as well as from economic conditions. The cost of regulatory compliance remains high for
community banks as compared to their larger competitors that are able to achieve economies of scale.
As a result of consolidation in the banking industry, some of the Bank’s competitors and their respective affiliates are larger and may enjoy advantages such as
greater financial resources, a wider geographic presence, a wider array of services, or more favorable pricing alternatives and lower origination and operating
costs. FNCB considers its major competitors to be local commercial banks as well as other commercial banks with branches in its market area. Competitors
may offer deposits at higher rates and loans with lower fixed rates, more attractive terms and less stringent credit structures than FNCB has been able to offer.
The growth and profitability of FNCB depends on its continued ability to successfully compete. Management believes interest rates on deposits, especially
money market and time deposits, and interest rates and fees charged on loans within FNCB’s market area to be very competitive.
Supervision and Regulation
FNCB and the Bank operate in a highly regulated industry and are subject to a variety of statutes, regulations, and policies, as well as ongoing regulatory
supervision and review. Federal statutes that apply to FNCB and the Bank include the Gramm Leach Bliley Act (“GLB Act”), the Bank Holding Company Act
(“BHCA”), the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), the USA Patriot Act, the Federal Reserve Act and the
Federal Deposit Insurance Act. The Bank is subject primarily to the provisions of the Federal Deposit Insurance Act and, as a state-chartered financial
institution, to the Pennsylvania Banking Code of 1965. In general, these statutes, regulations promulgated in accordance with these statutes, and interpretations
of the statutes and regulations by the banking regulatory agencies establish the eligible business activities of FNCB and the Bank, certain acquisition and
merger restrictions, limitations on intercompany transactions, such as loans and dividends, and capital adequacy requirements, among other things. These laws,
regulations and policies are subject to frequent change and FNCB takes measures to comply with applicable requirements. The following summarizes some of
the more significant provisions of these laws as they relate to FNCB and the Bank.
FNCB
FNCB is a bank holding company within the meaning of the BHCA and is registered with, and subject to regulation and examination by, the Board of
Governors of the Federal Reserve System (“FRB”). FNCB is required to file annual and quarterly reports with the FRB and to provide the FRB with such
additional information that they may require. BHCA and other federal laws subject bank holding companies to restrictions on the types of activities in which
they may engage, and to a range of supervisory requirements and activities, including regulatory enforcement actions for violations of laws and regulations and
unsafe and unsound banking practices.
The BHCA requires approval of the FRB for, among other things, the acquisition of direct or indirect ownership or control of more than five percent (5%) of
the voting securities or substantially all the assets of any bank or bank holding company, or before the merger or consolidation with another bank holding
company.
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With certain limited exceptions, a bank holding company is prohibited from acquiring control of any voting shares of any company which is not a bank or bank
holding company and from engaging directly or indirectly in any activity other than banking or managing or controlling banks or furnishing services to or
performing services for its authorized subsidiaries. A bank holding company may, however, engage in, or acquire an interest in a company that engages in,
activities that the FRB has determined by order or regulation to be so closely related to banking or managing or controlling banks as to be properly incidental
thereto. In making such a determination, the FRB is required to consider whether the performance of such activities can reasonably be expected to produce
benefits to the public, such as convenience, increased competition, or gains in efficiency, which outweigh possible adverse effects, such as undue concentration
of resources, decreased or unfair competition, conflicts of interest or unsound banking practices. The FRB is also empowered to differentiate between activities
commenced de novo and activities commenced by the acquisition, in whole or in part, of a going concern. Some of the activities that the FRB has determined
by regulation to be closely related to banking include making or servicing loans, performing certain data processing services, acting as a fiduciary or
investment or financial advisor, and making investments in corporations or projects designed primarily to promote community welfare.
Subsidiary banks of a bank holding company are subject to certain restrictions imposed by the Federal Reserve Act on any extensions of credit to the bank
holding company or any of its subsidiaries or affiliates, or investments in the stock or other securities thereof, and on the taking of such stock or securities as
collateral for loans to any borrower. Further, a holding company and any subsidiary bank are prohibited from engaging in certain tie-in arrangements in
connection with the extension of credit.
The GLB Act allows a bank holding company or other company to certify status as a financial holding company, which allows such company to engage in
activities that are financial in nature, that are incidental to such activities, or are complementary to such activities without further approval. The GLB Act
enumerates certain activities that are deemed financial in nature, such as underwriting insurance or acting as an insurance principal, agent or broker,
underwriting, dealing in or making markets in securities, and engaging in merchant banking under certain restrictions. The GLB Act also authorizes the FRB to
determine by regulation what other activities are financial in nature, or incidental or complementary thereto. FNCB has not elected to be treated as a financial
holding company.
FNCB also is subject to the periodic reporting requirements and anti-fraud regulations of the Securities and Exchange Commission (“SEC”) under the
Securities Exchange Act of 1934, as amended (the "Exchange Act") and, in connection with the offer and sale of securities, including FNCB's securities, the
Securities Act of 1933, as amended.
FNCB’s shares of common stock are listed on the Nasdaq Stock Market under the symbol "FNCB." Accordingly, FNCB is subject to certain financial, liquidity
and corporate governance requirements imposed by Nasdaq. Non-compliance of these requirements could subject FNCB to potential denial of listing, or
additional conditions, as necessary, to protect investors and the public interest.
The Bank
Effective June 30, 2016, upon its conversion to a state charter, the Bank is regulated by the Pennsylvania Department of Banking and Securities (“PADOBS”).
The Bank’s deposit accounts are insured up to the maximum legal limit by the Deposit Insurance Fund of the FDIC and accordingly, the Bank is also regulated
by the FDIC. The regulations of the PADOBS and the FDIC govern most aspects of the Bank’s business, including required reserves against deposits, loans,
investments, mergers and acquisitions, borrowings, dividends and location and number of branch offices. The laws and regulations governing the Bank
generally have been promulgated to protect depositors and the Deposit Insurance Fund, and not to protect shareholders.
Branching and Interstate Banking. The federal banking agencies are generally authorized to approve interstate bank merger transactions.
The Dodd-Frank Act amended federal banking law to permit banks to establish de novo branches in other states to the same extent as a bank chartered by that
state would be so permitted. The interstate banking and branching provisions of the federal banking laws would permit the Bank to merge with banks in other
states and branch into other states and would also permit banks from other states to acquire banks in the Bank's market area and to establish de novo branches
in the Bank’s market area.
USA Patriot Act and the Bank Secrecy Act (“BSA”). Under the BSA, a financial institution is required to have systems in place to detect certain transactions,
based on the size and nature of the transaction. Financial institutions are generally required to report cash transactions involving more than $10,000 to the
United States Treasury. In addition, financial institutions are required to file suspicious activity reports for transactions that involve more than $5,000 and that
the financial institution knows, suspects or has reason to suspect, involve illegal funds, are designed to evade the requirements of the BSA or have no lawful
purpose. Under the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act, commonly referred
to as the “USA Patriot Act” or the “Patriot Act,” financial institutions are subject to prohibitions against specified financial transactions and account
relationships, as well as enhanced due diligence standards intended to detect, and prevent, the use of the United States financial system for money laundering
and terrorist financing activities. The Patriot Act requires financial institutions, including banks, to establish anti-money laundering programs, including
employee training and independent audit requirements, meet minimum specified standards, follow minimum standards for customer identification and
maintenance of customer identification records, and regularly compare customer lists against lists of suspected terrorists, terrorist organizations and money
launderers.
Capital Adequacy Requirements. Federal banking agencies have adopted risk-based capital adequacy and leverage capital adequacy requirements pursuant to
which they assess the adequacy of capital in examining and supervising banks and bank holding companies and in analyzing bank regulatory applications.
Risk-based capital requirements determine the adequacy of capital based on the risk inherent in various classes of assets and off-balance sheet items.
Financial institutions are subject to extensive and detailed capital requirements, which generally follow a framework of rules adopted by the Basel Committee
on Banking Supervision commonly referred to as Basel III. Basel III calls for the following capital requirements:
● A minimum ratio of common equity tier I (“CET I”) capital to risk-weighted assets of 4.5%.
● A minimum ratio of tier I capital to risk-weighted assets of 6%.
● A minimum ratio of total capital to risk-weighted assets of 8%.
● A minimum leverage ratio of 4%.
Basel III provides for a "capital conservation buffer" of 2.5% above the regulatory minimum capital requirements for each of the CET I, tier I capital, and total
capital ratios. The buffer must consist entirely of CET I capital. As a result, if a banking organization does not have a CET I, Tier I capital, and total capital
ratios of at least 7.0%, 8.5% and 10.5%, respectively, its ability to make or commit to discretionary dividends and discretionary bonus payments to "executive
officers" or engage in share repurchases or redemptions generally will be restricted in accordance with a pre-determined "maximum payout ratio." Under the
maximum payout ratio formula, a banking organization with a capital conservation buffer of less than 2.5% of risk-weighted assets would become subject to
increasingly restrictive limitations on covered distributions (as a percentage of eligible retained income) as the capital conservation buffer decreases.
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In 2018, the FRB raised the threshold of its "Small Bank Holding Company" exemption to the application of consolidated capital requirements for qualifying
small bank holding companies from $1 billion to $3 billion of consolidated assets. Consequently, qualifying bank holding companies having less than $3 billion
of consolidated assets are not subject to the consolidated capital requirements unless otherwise directed by the FRB. As of December 31, 2023, FNCB qualifies
as a small bank holding company and is therefore not subject to the consolidated capital requirements.
Under the Economic Growth, Regulatory Relief, and Consumer Protection Act enacted in May 2018, federal banking agencies adopted the community bank
leverage ratio (“CBLR”) framework available to depository institutions having less than $10 billion in total assets and meeting certain other qualifying criteria.
The CBLR rules provide that qualifying community banking organizations that adopt the CBLR framework and that maintain a CBLR in excess of 9% will be
considered to have met the generally applicable leverage and risk-based capital requirements under the banking agencies’ capital rules and the capital ratio
requirements necessary to be considered “well capitalized.” FNCB has not elected to use the CBLR framework at this time.
Prompt Corrective Action. Under Section 38 of the Federal Deposit Insurance Act ("FDIA"), each federal banking agency is required to implement a system of
prompt corrective action for an insured institution which it regulates. The federal banking agencies have promulgated substantially similar regulations, which
integrate Basel III capital requirements, to implement the system of prompt corrective action established by Section 38 of the FDIA.
The following are the capital requirements under Basel III as integrated into the prompt corrective action category definitions. As of December 31, 2023, the
following capital requirements were applicable to the Bank for purposes of Section 38 of the FDIA.
Total
Tier I
Risk-Based
Risk-Based
CET I
Leverage Tangible Equity
Capital Category
Well capitalized
Adequately capitalized with conservation buffer
Adequately capitalized
Undercapitalized
Significantly undercapitalized
Critically undercapitalized
Capital Ratio Capital Ratio Capital Ratio
>/= 6.5%
>/= 7.0%
>/= 4.5%
< 4.5%
< 3.0%
N/A
>/= 10.0%
>/= 10.5%
>/= 8.0%
< 8.0%
< 6.0%
N/A
>/= 8.0%
>/= 8.5%
>/= 6.0%
< 6.0%
< 4.0%
N/A
Ratio
>/= 5.0%
>/= 4.0%
>/= 4.0%
< 4.0%
< 3.0%
N/A
to Assets
N/A
N/A
N/A
N/A
N/A
Less than 2.0%
At December 31, 2023, the Bank was “well capitalized” under the applicable requirements with a CET I capital and Tier I capital to risk-weighted assets ratios
(for the Bank only) of 11.69%, a total capital to risk-weighted assets ratio of 12.66% and a leverage ratio of 8.76%. Similarly, at December 31, 2022, the Bank
exceeded capital requirements for an institution to be considered "well capitalized" with CET I capital and Tier I capital to risk-weighted assets ratios of
11.94%, a total capital to risk-weighted assets ratio of 13.11% and a leverage ratio of 8.77%.
Regulatory Enforcement Authority. Federal banking law grants substantial enforcement powers to federal banking regulators. This enforcement authority
includes, among other things, the ability to assess civil money penalties, to issue cease-and-desist or removal orders and to initiate injunctive actions against
banking organizations and institution-affiliated parties. In general, these enforcement actions may be initiated for violations of laws and regulations and unsafe
or unsound practices. Other actions or inactions may provide the basis for enforcement action, including misleading or untimely reports filed with regulatory
authorities.
The Bank and its “institution-affiliated parties,” including its management, employees, agents, independent contractors, consultants such as attorneys and
accountants and others who participate in the conduct of the financial institution’s affairs, are subject to potential civil and criminal penalties for violations of
law, regulations or written orders of a governmental agency. In addition, regulators are provided with greater flexibility to commence enforcement actions
against institutions and institution-affiliated parties. Possible enforcement actions include the termination of deposit insurance and cease-and-desist orders.
Such orders may, among other things, require affirmative action to correct any harm resulting from a violation or practice, including restitution, reimbursement,
indemnifications or guarantees against loss. A financial institution may also be ordered to restrict its growth, dispose of certain assets, rescind agreements or
contracts, or take other actions as determined by the ordering agency to be appropriate.
Under provisions of the federal securities laws, a determination by a court or regulatory agency that certain violations have occurred at a company, or its
affiliates can result in fines, restitution, a limitation of permitted activities, disqualification to continue to conduct certain activities and an inability to rely on
certain favorable exemptions. Certain types of infractions and violations can also affect a public company in its timing and ability to expeditiously issue new
securities into the capital markets.
The regulatory structure also gives the regulatory authorities extensive discretion in connection with their supervisory and enforcement activities and
examination policies, including policies with respect to the classification of assets and the establishment of adequate loan loss allowances for regulatory
purposes.
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The Dodd-Frank Act. The Dodd-Frank Act made significant changes to the bank regulatory structure and affects the lending, deposit, investment, trading and
operating activities of financial institutions and their holding companies. To date, the following provisions of the Dodd-Frank Act are considered to be of the
greatest significance to FNCB:
● expands the authority of the FRB to examine bank holding companies and their subsidiaries, including insured depository institutions;
● requires a bank holding company to be well capitalized and well managed to receive approval of an interstate bank acquisition;
● provides mortgage reform provisions regarding a customer’s ability to pay and making more loans subject to provisions for higher-cost loans and new
disclosures;
● created the Consumer Financial Protection Bureau (the “CFPB”) that has rulemaking authority for a wide range of consumer protection laws that
apply to all banks and has broad powers to supervise and enforce consumer protection laws;
● made permanent the $250 thousand limit for federal deposit insurance at all insured depository institutions;
● includes additional corporate governance and executive compensation requirements on companies subject to the Exchange Act;
● permits FDIC-insured banks to pay interest on business demand deposits;
● requires that holding companies and other companies that directly or indirectly control an insured depository institution serve as a source of financial
strength;
● created the Financial Stability Oversight Council with authority to identify institutions and practices that might pose a systemic risk; and
● permits national and state banks to establish interstate branches to the same extent as the branch host state allows establishment of in-state branches.
Consumer Financial Protection Bureau and Consumer Lending Regulation. The Dodd-Frank Act created the CFPB, which is granted broad rulemaking,
supervisory and enforcement powers under various federal consumer financial protection laws, including the Equal Credit Opportunity Act, Truth in Lending
Act (“TILA”), Real Estate Settlement Procedures Act (“RESPA”), Fair Credit Reporting Act, Fair Debt Collection Practices Act, Consumer Financial Privacy
provisions of the Gramm-Leach-Bliley Act, and certain other statutes. The CFPB has examination and primary enforcement authority with respect to
depository institutions with $10 billion or more in assets. Smaller institutions are subject to rules promulgated by the CFPB but continue to be examined and
supervised by federal banking regulators for consumer compliance purposes. The CFPB has authority to prevent unfair, deceptive or abusive practices in
connection with the offering of consumer financial products. For example, the Dodd-Frank Act authorizes the CFPB to establish certain minimum standards for
the origination of residential mortgages including, in certain circumstances, a determination of the borrower’s ability to repay. In addition, the Dodd-Frank Act
allows certain borrowers to raise certain defenses to foreclosure if they receive any loan other than a “qualified mortgage” as defined by the CFPB. The Dodd-
Frank Act permits states to adopt consumer protection laws and standards that are more stringent than those adopted at the federal level and, in certain
circumstances, permits state attorneys general to enforce compliance with both the state and federal laws and regulations.
The CFPB’s rulemaking, examination and enforcement authority has and will continue to significantly affect financial institutions offering consumer financial
products and services, including FNCB and the Bank. These regulatory activities may limit the types of financial services and products the Bank may offer,
which in turn may reduce FNCB’s revenues.
Privacy and Data Security. The financial privacy provisions of the GLB Act generally prohibit financial institutions, including the Bank, from disclosing non-
public personal financial information about customers to non-affiliated third parties unless customers have the opportunity to “opt out” of the disclosure and
have not elected to do so. The Bank is required to comply with state laws regarding consumer privacy if they are more protective than the GLB Act.
The federal banking agencies have adopted guidelines for safeguarding confidential, personal customer information. The guidelines require each financial
institution, under the supervision and ongoing oversight of its board of directors or an appropriate committee thereof, to create, implement and maintain a
comprehensive written information security program designed to ensure the security and confidentiality of customer information, protect against any
anticipated threats or hazards to the security or integrity of such information and protect against unauthorized access to or use of such information that could
result in substantial harm or inconvenience to any customer. In addition, various U.S. regulators have increased their focus on cyber security through guidance,
examinations and regulations. Banking organizations are required to notify their primary federal regulator within 36 hours of becoming aware of a “computer-
security incident” that rises to the level of a “notification incident.”
In February 2018, the SEC published interpretive guidance to assist public companies in preparing disclosures about cybersecurity risks and incidents. These
SEC guidelines, and any other regulatory guidance, are in addition to notification and disclosure requirements under state and federal banking law and
regulations.
In July 2023, the SEC issued a final rule to enhance and standardize disclosures regarding cybersecurity risk management, strategy, governance, and incident
reporting by public companies that are subject to the reporting requirements of the Securities Exchange Act of 1934. Specifically, the final rule requires current
reporting about material cybersecurity incidents, periodic disclosures about a registrant’s policies and procedures to identify and manage cybersecurity risk,
management’s role in implementing cybersecurity policies and procedures, and the board of directors’ oversight of cybersecurity risk. See Item 1C.
Cybersecurity for a discussion of FNCB’s cybersecurity risk management, strategy and governance.
Privacy and data security are expected to continue to receive increased attention at the federal level. An increasing number of state laws and regulations have
been enacted in recent years to implement privacy and cybersecurity standards and regulations, including data breach notification and data privacy
requirements. This trend of activity is expected to continue to expand, requiring continual monitoring of developments in the states in which FNCB’s customers
are located and ongoing investments in its information systems and compliance capabilities.
Community Reinvestment Act. The Community Reinvestment Act of 1977 (the “CRA”) requires depository institutions to assist in meeting the credit needs of
their market areas consistent with safe and sound banking practice. Under the CRA, each depository institution is required to help meet the credit needs of its
market areas by, among other things, providing credit, making investments and providing community development services to low- and moderate-income
individuals and communities. Depository institutions are periodically examined for compliance with the CRA and are assigned one of four ratings. The Bank is
subject to examination by the FDIC.
On October 24, 2023, the Office of the Comptroller of the Currency (“OCC”), Federal Reserve, and FDIC issued a final rule, effective April 1, 2024, to
modernize their respective CRA regulations. The revised rules substantially alter the methodology for assessing compliance with the CRA, with most
provisions of the new rule taking effect January 1, 2026 and revised data reporting requirements taking effect January 1, 2027. Among other things, the revised
rules evaluate lending outside traditional assessment areas generated by the growth of non-branch delivery systems, such as online and mobile banking, apply a
metrics-based benchmarking approach to assessment, and clarify eligible CRA activities. The final rules may make it more challenging and/or costly for the
Bank to receive a rating of at least “satisfactory” on its CRA exam.
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FDIC Insurance Premiums. The Bank’s deposits are insured through the Deposit Insurance Fund ("DIF"), which is administered by the FDIC, up to limits
established by applicable law, currently $250,000 per depositor, per account ownership category, per bank. A bank’s assessment is calculated by multiplying its
individual assessment rate by its assessment base (average consolidated total assets less average tangible equity), determined quarterly. Banks with assets less
than $10 billion, such as the Bank, are assigned an individual rate based on a formula using financial data and the bank’s CAMELS (capital adequacy, assets,
management capability, earnings, liquidity, and sensitivity) ratings. The FDIC has the discretion to adjust an institution’s risk rating and may terminate its
insurance of deposits upon a finding that the institution engaged or is engaging in unsafe and unsound practices, is in an unsafe or unsound condition to
continue operations, or violated any applicable law, regulation, rule, order or condition imposed by the FDIC or written agreement entered into with the FDIC.
The FDIC may also prohibit any FDIC-insured institution from engaging in any activity it determines to pose a serious risk to the DIF.
As of June 30, 2020, the DIF reserve ratio had fallen to 1.30%, below the statutory minimum of 1.35%. The FDIC, as required under the Federal Deposit
Insurance Act, established a plan on September 15, 2020 to restore the DIF reserve ratio to meet or exceed the statutory minimum of 1.35% within eight years.
On October 18, 2022, the FDIC adopted an amended restoration plan to increase the likelihood that the reserve ratio would be restored to at least 1.35% by
September 30, 2028. The FDIC’s amended restoration plan increased the initial base deposit insurance assessment rate schedules uniformly by 2 basis points,
which began the first quarterly assessment period of 2023. The FDIC could further increase the deposit insurance assessments for certain insured depository
institutions, including the Bank, if the DIF reserve ratio is not restored as projected.
At December 31, 2023, the Bank was considered in the lowest risk category, for deposit insurance assessments and paid an annual assessment rate ranging
from 2.5 basis points to 18 basis points on the assessment base of average consolidated total assets less the average tangible equity during the assessment
period.
Dividend and Share Repurchase Restrictions
FNCB is a legal entity separate and distinct from the Bank. FNCB’s revenues (on a parent company only basis) and its ability to pay dividends to its
shareholders, or repurchase shares from its shareholders, are almost entirely dependent upon the receipt of dividends from the Bank. The right of FNCB, and
consequently the rights of its creditors and shareholders to participate in any distribution of the assets or earnings of any subsidiary through the payment of
such dividends or otherwise is necessarily subject to the prior claims of creditors of the subsidiary (including depositors) except to the extent that claims of
FNCB, in its capacity as a creditor, may be recognized. Additionally, the ability of the Bank to pay dividends to FNCB is subject to Pennsylvania state law and
various regulatory restrictions.
The declaration of cash dividends on FNCB’s common stock, or the repurchase of shares of its common stock, is at the discretion of its board of directors, and
any decision to declare a dividend, or repurchase shares, is based on a number of factors, including, but not limited to, earnings, prospects, financial condition,
regulatory capital levels, applicable covenants under any credit agreements, notes and other contractual restrictions, Pennsylvania law, federal bank regulatory
law, and other factors deemed relevant.
Human Capital Resources
FNCB's employees support its vision to be a leader in the community with a commitment to financial excellence for customers and shareholders and deliver its
mission to make your banking experience simply better. With this in mind, FNCB recognizes that the success of our organization is highly correlated to the
effectiveness of the FNCB team. In order to attract, motivate and retain high-quality staff, the Bank must have a competitive, broad-based compensation
plan. FNCB focuses on ensuring top talent is compensated appropriately and entry-level starting salaries are competitive and provide an opportunity for
advancement.
As FNCB’s leadership culture and business model evolves, FNCB's policies, practices and programs must also evolve and support and reinforce our desired
culture and business needs. The Compensation Committee of the Board of Directors evaluates and modifies policies, practices and programs on an ongoing
basis to ensure compensation plans are competitive and do not encourage inappropriate risk taking. Market competitive and risk appropriate incentive plans
have been fully implemented for management, commercial lending, branch banking, specialty sales functions and all staff positions. FNCB also has a Long-
Term Incentive Plan designed to align shareholder goals with employee goals and to encourage retention of key officers.
FNCB is an Equal Opportunity and Affirmative Action Employer. We recruit, employ, train, compensate, and promote without regard to race, religion, creed,
color, national origin, age, gender, sexual orientation, gender identity, marital status, disability, veteran status, or any other basis protected by applicable federal,
state or local law.
In 2023, FNCB Bank was voted "The Best Place to Work" in northeastern Pennsylvania for the seventh consecutive year, as part of the annual Reader's Choice
Awards survey conducted by a local newspaper. As of December 31, 2023, FNCB, including the Bank, employed 222 persons, including 21 part-time
employees.
Available Information
FNCB files reports, proxy and information statements and other information electronically with the SEC. The SEC maintains an Internet site that contains
reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. The SEC’s website site address is
https://www.sec.gov. FNCB makes its Annual Report on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K and amendments
thereto available through its website at https://www.fncb.com. The information contained on our website is not included as a part of, or incorporated by
reference in, this Annual Report on Form 10-K. These reports may also be obtained free of charge as soon as practicable after filing or furnishing them to the
SEC upon request by sending an email to corporatesecretary@fncb.com. Information may also be obtained via written request to FNCB Bancorp, Inc.
Attention: Chief Financial Officer, 102 East Drinker Street, Dunmore, PA 18512.
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Item 1A.
Risk Factors
The operations and financial results of FNCB are subject to various risks and uncertainties, including those described below. The risks and
uncertainties described below are not the only ones FNCB faces. Additional risks and uncertainties FNCB is unaware of, or currently believes are not material,
may also become important factors affecting FNCB. If any of the following risks occur, FNCB’s business, financial condition, operating results and prospects
could be materially and adversely affected. In that event, the price of the FNCB’s common stock could decline.
Risks Related to FNCB’s Business
Weakness in the economic environment, in general, and within FNCB’s market area could pose significant challenges for FNCB and could adversely
affect its financial condition and results of operations.
FNCB’s success depends primarily on the general economic conditions in the Commonwealth of Pennsylvania and the specific local markets in which it
operates. Unlike larger national or other regional banks that are more geographically diversified, FNCB provides banking and financial services to customers
primarily in the Lackawanna, Luzerne, and Wayne County markets. The local economic conditions in these areas have a significant impact on the demand for
FNCB’s products and services as well as the ability of customers to repay loans, the value of the collateral securing loans, and the stability of deposit funding
sources. A significant decline in general economic conditions, caused by inflation, recession, acts of terrorism, severe weather or natural disasters, outbreak of
hostilities or other international or domestic occurrences, unemployment, changes in securities markets or other factors could impact these local economic
conditions and, in turn, have a material adverse effect on FNCB’s financial condition and results of operations. Specifically, weakness in economic conditions
could result in one or more of the following:
● A decrease in the demand for FNCB's loans and other products and services;
● A decrease in customer savings generally and in the demand for FNCB's savings and other deposit products; and
● An increase in the number of customers and counterparties who become delinquent, file for protection under bankruptcy laws, or default on their loans
or other obligations.
An increase in the number of delinquencies, bankruptcies, or defaults could result in a higher level of non-performing assets, net charge-offs, and provision for
loan and lease losses. The markets FNCB serves are dependent on retail and service-related businesses and, thus, are particularly vulnerable to adverse changes
in economic conditions affecting these sectors.
To the extent that economic conditions deteriorate, business and individual borrowers may be less able to meet their obligations to the Bank in full, in a timely
manner, resulting in decreased earnings or losses to the Bank. To the extent that loans are secured by real estate, adverse conditions in the real estate market
may reduce the ability of the borrowers to generate the necessary cash flow for repayment of the loan and reduce the ability to collect the full amount of the
loan upon a default. To the extent that the Bank makes fixed-rate loans, general increases in interest rates will tend to reduce its spread as the interest rates
FNCB must pay for deposits would increase while interest income is flat. Economic conditions and interest rates may also adversely affect the value of
property pledged as security for loans.
FNCB is subject to credit risk, and FNCB's financial condition and results of operations could be negatively impacted by changes in economic and market
conditions and other factors that adversely affect FNCB's borrowers.
FNCB’s business depends on its ability to successfully measure and manage credit risk. As a lender, FNCB is exposed to the risk that the principal of, or
interest on, a loan will not be paid timely or at all or that the value of any collateral supporting a loan will be insufficient to cover FNCB’s outstanding
exposure. In addition, FNCB is exposed to risks with respect to the period of time over which the loan may be repaid, risks relating to loan underwriting, risks
resulting from changes in economic and industry conditions, and risks inherent in dealing with individual loans and borrowers. The creditworthiness of a
borrower is affected by many factors including local market conditions and general economic conditions. If the overall economic climate in the United States
generally, or in the market areas in which FNCB operates specifically, experiences material disruption, FNCB’s borrowers may experience difficulties in
repaying their loans, the collateral FNCB holds may decrease in value or become illiquid, and FNCB’s level of nonperforming loans, charge-offs and
delinquencies could rise and require significant additional provisions for credit losses.
FNCB’s risk management practices, such as monitoring the concentrations of its loans and its credit approval, review and administrative practices, may not
adequately reduce credit risk, and FNCB’s credit administration personnel, policies and procedures may not adequately adapt to changes in economic or any
other conditions affecting related customers and the quality of the loan portfolio. Many of FNCB’s loans are made to small businesses and middle market
customers. These businesses generally have fewer financial resources in terms of capital and borrowing capacity than larger entities and may have a heightened
vulnerability to economic conditions and be less able to withstand competitive, economic and financial pressures. Changes in general economic conditions in
the market area in which FNCB operates may negatively impact this important customer sector. Additionally, FNCB may have significant exposure if any of
these borrowers becomes unable to pay their loan obligations as a result of personal circumstances, such as divorce, unemployment or death. Consequently,
FNCB's financial condition and results of operations may be adversely affected. A failure to effectively measure and limit the credit risk associated with
FNCB’s loan portfolio may result in loan defaults, foreclosures and additional charge-offs, and may necessitate that FNCB significantly increase its allowance
for credit losses ("ACL"), which could adversely affect FNCB’s net income and profitability. As a result, FNCB’s inability to successfully manage credit risk
could have a material adverse effect on its business, financial condition and results of operations.
FNCB’s commercial lending activities, including loans to insiders and their related parties, generally have relatively larger balances and are concentrated
within the Northeastern Pennsylvania market, which may present great risks than other types of loans.
Commercial real estate, commercial and industrial and construction, land acquisition and development loans tend to have larger balances than single family
mortgage loans and other consumer loans. Because FNCB’s loan portfolio contains a significant number of commercial and industrial loans, commercial real
estate loans and construction, land acquisition and development loans with relatively large balances, the deterioration of one or a few of these loans may cause
a significant increase in non-performing assets. All non-performing loans totaled $5.4 million, or 0.44% of total gross loans and leases, as of December 31,
2023, and $2.8 million, or 0.25%, of total gross loans and leases at December 31, 2022. Specifically, commercial real estate loans that were non-performing
totaled $3.1 million, or 0.26%, of total gross loans and leases at December 31, 2023 and $1.5 million, or 0.14%, of total gross loans and leases at December 31,
2022. An increase in non-performing loans could result in a loss of earnings from these loans, an increase in the provision for credit losses, or an increase in
loan charge-offs, which could have an adverse impact on FNCB’s results of operations and financial condition.
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A substantial portion of FNCB’s loans are secured by real estate in the Northeastern Pennsylvania market, and substantially all of its loans are to borrowers in
that area. FNCB also has a significant amount of commercial real estate, commercial and industrial, construction, land acquisition and development loans and
land-related loans for residential and commercial developments. At December 31, 2023, $713.3 million, or 58.5%, were secured by real estate, primarily
commercial real estate, in Northeastern Pennsylvania. Management has taken steps to mitigate commercial real estate concentration risk through diversification
of the types and characteristics of real estate collateral properties, sound underwriting practices, and ongoing portfolio monitoring and market analysis. Of total
outstanding loans and leases, $59.9 million, or 4.9%, were construction, land acquisition and development loans. Based on FNCB's historical records,
construction, land acquisition and development loans have had the highest risk of not being collected. An additional $183.8 million, or 15.1%, of portfolio
loans were commercial and industrial loans not secured by real estate. Historically, commercial and industrial loans generally have had a higher risk of default
than other categories of loans, such as single-family residential mortgage loans. The repayment of these loans often depends on the successful operation of a
business and are more likely to be adversely affected by adverse economic conditions. While management believes that the loan portfolio is well diversified in
terms of borrowers and industries, these concentrations expose FNCB to the risk that adverse developments in the real estate market, or in the general
economic conditions in its market area, could adversely affect the quality and collectability of its loans and could increase the level of non-performing loans.
An increase in non-performing loans could result in loss of earnings from these loans and increases in loan charge-offs and the provision for credit losses, all of
which could have a material adverse effect on FNCB's financial condition and results of operations. Additionally, if, for any reason, economic conditions in its
market area deteriorate, or there is significant volatility or weakness in the economy or any significant sector of the area’s economy, FNCB’s ability to develop
business relationships may be diminished, loan demand may be reduced and collateral values supporting loans may decline, which could also adversely
affect FNCB's financial condition and results of operations.
Guidance adopted by federal banking regulators provides that banks having concentrations in construction, land development or commercial real estate loans
are expected to have and maintain higher levels of risk management and, potentially, higher levels of capital, which may adversely affect shareholder returns,
or require FNCB to obtain additional capital sooner than it otherwise would. Excluded from the scope of this guidance are loans secured by non-farm
nonresidential properties where the primary source of repayment is the cash flow from the ongoing operations and activities conducted by the party, or affiliate
of the party, who owns the property.
Outstanding loans and line of credit balances to directors, officers and their related parties totaled $79.3 million as of December 31, 2023. At December 31,
2023, there were no loans to directors, officers and their related parties that were categorized as criticized loans within the Bank’s risk rating system, meaning
they are not considered to present a higher risk of collection than other loans. See Note 12, “Related Party Transactions” of the notes to consolidated financial
statements included in Item 8, "Financial Statements and Supplementary Data" and Item 13, “Certain Relationships and Related Transactions, and Director
Independence” to this Annual Report on Form 10-K for more information regarding loans to officers and directors and/or their related parties.
The appraisals and other valuation techniques FNCB uses in evaluating and monitoring loans secured by real property and other real estate owned may
not accurately reflect the net value of the asset.
In considering whether to make a loan secured by real property, FNCB generally requires an appraisal of the property. However, an appraisal is only an
estimate of the value of the property at the time the appraisal is made, and, as real estate values may change significantly in relatively short periods of time
(especially in periods of heightened economic uncertainty), this estimate may not accurately reflect the net value of the collateral after the loan is made. As a
result, FNCB may not be able to realize the full amount of any remaining indebtedness when FNCB forecloses on and sells the relevant property. In addition,
FNCB relies on appraisals and other valuation techniques to establish the value of other real estate owned (“OREO”) and other repossessed assets, to determine
asset impairments. If any of these valuations are inaccurate, FNCB’s financial statements may not reflect the correct value of FNCB’s OREO, if any, and
FNCB’s ACL may not reflect accurate loan impairments. Inaccurate valuation of OREO, other repossessed assets or inaccurate provisioning for credit losses
could have a material adverse effect on FNCB’s business, financial condition and results of operations.
FNCB’s financial condition and results of operations would be adversely affected if the ACL is not sufficient to absorb actual losses or if increases to the
ACL were required.
The lending activities in which the Bank engages carry the risk that the borrowers will be unable to meet their obligations, and that the collateral securing the
payment of their obligations may be insufficient to assure repayment. FNCB may experience significant credit losses, which could have a material adverse
effect on its operating results. Management makes various assumptions and judgments about the collectability of FNCB’s loan portfolio, including the
creditworthiness of its borrowers and the value of the real estate and other assets serving as collateral for the repayment of many of its loans, which it uses as a
basis to estimate and establish its reserves for losses. In determining the amount of the ACL, management reviews loans, loss and delinquency experience, and
evaluates current economic conditions. If these assumptions prove to be incorrect, the ACL may not cover assumed losses in FNCB’s loan portfolio at the date
of its financial statements. Material additions to FNCB’s allowance or extensive charge-offs would materially decrease its net income. At December 31, 2023,
the ACL totaled $12.0 million, representing 0.98% of loans, net of unearned income and net deferred loan origination costs.
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Although management believes FNCB’s underwriting standards are adequate to manage normal lending risks, it is difficult to assess the future performance of
its loan portfolio due to the ongoing economic environment and the state of the real estate market. The assessment of future performance of the loan portfolio is
inherently uncertain. FNCB can give no assurance that non-performing loans will not increase or that non-performing or delinquent loans will not adversely
affect its future performance.
In addition, federal and state regulators periodically review the ACL and may require increases to the ACL or further loan charge-offs. Any increase in ACL or
loan charge-offs as required by these regulatory agencies could have a material adverse effect on FNCB’s business, financial condition and results of operation.
The CECL model for determining the ACL could add volatility to FNCB's provision for credit losses and results of operations.
FNCB adopted the CECL model for calculating the ACL on January 1, 2023. Under GAAP, the CECL model requires financial institutions to present certain
financial assets carried at amortized cost, including loans and held-to-maturity debt securities, at the net amount expected to be collected. Additionally, the
CECL model requires the ACL for certain financial assets, including loans, held-to-maturity securities and certain off-balance sheet credit exposures, to be
calculated based on current expected credit losses over the lives of the assets rather than incurred losses as of a point in time. FNCB estimation process is
subject to risks and uncertainties, including a reliance on historical loss and trend information that may not be representative of current conditions and
indicative of future performance. Accordingly, actual lifetime credit losses may be materially different than the amounts reported in the ACL due to the inherent
uncertainty in the estimation process, including future loss estimates based upon FNCB's reasonable and supportable economic forecasts. Also, future credit
losses could differ materially from those estimates due to changes in values and circumstances after the balance sheet date. Changes in such estimates could
significantly impact FNCB's ACL, provision for credit losses and results of operations.
If management concludes that the decline in value of any of FNCB’s investment securities is impaired, FNCB is required to write down the security to
reflect credit-related impairments through a charge to earnings.
Management reviews FNCB’s investment securities portfolio at each quarter-end reporting period to determine whether the fair value is below the current
carrying value. When the fair value of any of FNCB’s available-for-sale debt securities has declined below its carrying value, management is required to assess
whether the decline represents impairment. Changes in the expected cash flows of securities in FNCB’s portfolio and/or prolonged price declines in future
periods may result in impairment, which may require a charge to earnings. Due to the complexity of the calculations and assumptions used in determining
whether an asset is impaired, any impairment disclosed may not accurately reflect the actual impairment in the future. In addition, to the extent that the value of
any of FNCB’s investment securities is sensitive to fluctuations in interest rates, any increase in interest rates may result in a decline in the value of such
investment securities.
FNCB’s risk management framework may not be effective in mitigating FNCB's risks or losses.
FNCB’s risk management framework is comprised of various processes, systems and strategies, and is designed to manage the types of risk to which FNCB is
subject, including, among others, credit, market, liquidity, interest rate and compliance. FNCB’s framework also includes financial or other modeling
methodologies that involve management assumptions and judgment. FNCB’s risk management framework may not be effective under all circumstances and
may not adequately mitigate any risk or loss to FNCB. If FNCB’s risk management framework is not effective, FNCB could suffer unexpected losses which
could have a material adverse effect on FNCB's business, financial condition, results of operations or growth prospects. FNCB may also be subject to
potentially adverse regulatory consequences.
FNCB is subject to interest rate risk, changes in interest rates could reduce income, cash flows and asset values, which could adversely
affect its profitability.
FNCB’s earnings and cash flows, like that of most financial institutions, depends to a large extent on its net interest income, which is the difference between its
interest income on interest-earning assets, such as loans and investment securities, and its interest expense on interest-bearing liabilities, such as deposits and
borrowings.
Interest rates are highly sensitive to many factors that are beyond FNCB’s control, including general economic conditions and policies of various governmental
and regulatory agencies and, in particular, the FRB. Changes in monetary policy, including changes in interest rates, could influence not only the interest FNCB
receives on loans and securities and the interest FNCB pays on deposits and borrowings, but such changes could affect FNCB’s ability to originate loans and
obtain deposits, the fair value of FNCB’s financial assets and liabilities, and the average duration of FNCB’s assets. If the interest rates paid on deposits and
other borrowings increase at a faster rate than the interest rates received on loans and other investments, FNCB’s net interest income, and therefore earnings,
could be adversely affected. Earnings could also be adversely affected if the interest rates received on loans and other investments fall more quickly than the
interest rates paid on deposits and other borrowings. Any substantial, unexpected or prolonged change in market interest rates could have a material adverse
impact on FNCB’s business, financial condition and results of operations.
FNCB uses simulation analysis to model net interest income for various interest rate scenarios over a five-year time horizon. Based on the simulation analysis,
FNCB’s interest sensitivity profile at December 31, 2023 was characterized by maturities or repricing of assets and liabilities that were liability sensitive over
the next 18 to 24 months, moving to an asset sensitivity position in subsequent years of the model. These simulations are based on numerous assumptions,
including but not limited to: the nature and timing of interest rate levels, prepayments on loans and securities, deposit decay rates, pricing decisions on loans
and deposits, reinvestment of asset and liability cash flows, customer behavior in a rising rate environment and other factors. When short-term interest rates
rise, the rate of interest FNCB pays on its interest-bearing liabilities may rise more quickly than the rate of interest that FNCB receives on its interest-earning
assets, which may cause FNCB’s net interest income to decrease.
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Additionally, a shrinking yield premium, or negative spread, between short-term and long-term market interest rates, a pattern usually indicative of investors'
waning expectations of future growth and inflation, commonly referred to as a flattening of the yield curve, or inversion of the yield curve, typically reduces
FNCB’s profit margin as FNCB borrows at shorter terms than the terms at which FNCB lends and invests.
In addition, an increase in interest rates could also have a negative impact on FNCB’s results of operations by reducing the ability of borrowers to repay their
current loan obligations. These circumstances could not only result in increased loan defaults, foreclosures and charge-offs, but also reduce collateral values
and necessitate further increases to the ACL, which could have a material adverse effect on FNCB’s business, financial condition and results of operations.
FNCB may not be able to successfully compete with others for business.
FNCB competes for loans, deposits and investments with numerous regional and national banks and other community banking institutions, online divisions of
banks located in other markets as well as other kinds of financial institutions and enterprises, such as securities firms, insurance companies, savings
associations, credit unions, mortgage brokers, private lenders and Fintech companies. There is also competition for banking business from competitors outside
of its market area. As noted above, FNCB and the Bank are subject to extensive regulations and supervision, including, in many cases, regulations that limit the
type and scope of activities. Many competitors have substantially greater resources and may offer certain services that FNCB and the Bank does not provide
and operate under less stringent regulatory environments. The differences in available resources and applicable regulations may make it harder for FNCB to
compete profitably, reduce the rates that it can earn on loans and investments, increase the rates it must offer on deposits and other funds, and adversely affect
its overall financial condition and results of operation. Refer to the section entitled “Competition” included in Item 1, "Business" to this Annual Report on
Form 10-K for an additional discussion of FNCB's competitive environment.
FNCB could be subject credit risk related to derivative obligations.
FNCB has agreements with each of its derivative counterparties that contain a provision where if FNCB defaults or is capable of being declared in default on
any of its indebtedness, then it could also be declared in its derivative obligations. FNCB has agreements with certain of its derivatives counterparties that
contain a provision where if it fails to maintain its status as a well-capitalized institution, then it could be required to post additional collateral.
FNCB has minimum collateral posting thresholds with certain of its derivative counterparties for derivatives in a net liability position. As of December 31,
2023, FNCB had derivatives in a net liability position of $2.7 million. The termination value of derivatives in a net liability position, which includes accrued
interest but excluded any adjustments for non-performance risk related to these agreements, was $259 thousand, FNCB has posted collateral of $400 thousand
against its obligations under these agreements as of December 31, 2023.
FNCB may not be able to retain or grow its core deposit base, which could adversely impact its funding costs.
Like many financial institutions, FNCB relies on customer deposits as its primary source of funding for its lending activities, and FNCB continues to seek
customer deposits to maintain this funding base. FNCB’s future growth will largely depend on its ability to retain and grow its deposit base. As of December
31, 2023, FNCB had $1.529 billion in deposits. FNCB’s deposits are subject to potentially dramatic fluctuations in availability or price due to certain factors
outside of its control, such as increasing competitive pressures for deposits, changes in interest rates and returns on other investment classes, customer
perceptions of its financial health and general reputation, and a loss of confidence by customers in FNCB or the banking sector generally, which could result in
significant outflows of deposits within short periods of time or significant changes in pricing necessary to maintain current customer deposits or attract
additional deposits. The availability of deposits can also be impacted by regulatory changes (e.g., changes in FDIC insurance, the liquidity coverage ratio, etc.),
changes in the financial condition of FNCB, or the banking industry in general, and other events which can impact the perceived safety and soundness or
economic benefits of bank deposits. Any loss by FNCB of its deposit base could limit its lending ability resulting in lower loan originations, which could have
a material adverse effect on FNCB’s business, financial condition and results of operations.
FNCB is a bank holding company and depends on dividends from its subsidiary, FNCB Bank, to operate.
FNCB is an entity separate and distinct from the Bank. The Bank conducts most of FNCB’s operations and FNCB depends upon dividends from the Bank to
service its debt, pay its expenses, to repurchase shares of FNCB stock and to pay dividends to FNCB's shareholders. The availability of dividends from the
Bank is limited by various statutes and regulations. It is possible, depending upon the financial condition including liquidity and capital adequacy of the Bank
and other factors, that the Bank’s regulators could limit the payment of dividends or other payments to FNCB by the Bank. In the event that the Bank was
unable to pay dividends and would be unable to repurchase its shares, FNCB in turn would likely have to reduce or stop paying dividends to its shareholders.
Failure to pay dividends to FNCB shareholders could have a material adverse effect on the market price of FNCB’s Common Stock. For additional information
regarding dividend restrictions, refer to the section entitled “Regulatory Matters” included in Item 1 of this Annual Report on Form 10-K.
If FNCB loses access to wholesale funding sources, it may not be able to meet the cash flow requirements of its depositors, creditors, and borrowers, or
have the operating cash needed to fund corporate expansion and other corporate activities.
Wholesale funding sources include brokered deposits, one-way CDARS and ICS deposits, federal funds lines of credit, securities sold under repurchase
agreements, non-core deposits, and long-term debt. The Bank is also a member of the FHLB of Pittsburgh, which provides members access to funding through
advances collateralized with certain qualifying assets within the Bank’s loan portfolio. In addition, FNCB’s available-for-sale securities provide an additional
source of liquidity. Disruptions in the availability of wholesale funding can directly impact the liquidity of FNCB and the Bank. The inability to access capital
markets funding sources as needed could adversely impact FNCB’s financial condition, results of operations, cash flows, and level of regulatory-qualifying
capital.
FNCB held approximately $8.8 million in capital stock of the FHLB of Pittsburgh as of December 31, 2023. FNCB must own such capital stock to qualify for
membership in the FHLB of Pittsburgh which enables it to borrow funds under the FHLB of Pittsburgh advance program. If the FHLB of Pittsburgh were to
cease operations, FNCB’s business, financial condition, results of operation, liquidity, and capital may be materially and adversely affected.
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Interruptions or security breaches of FNCB’s information systems could negatively affect its financial performance or reputation.
In conducting its business, FNCB relies heavily on its information systems. FNCB collects and stores sensitive data, including proprietary business information
and personally identifiable information of its customers and employees, in its data centers and on its networks. The secure processing, maintenance and
transmission of this information is critical to FNCB’s operations and business strategy. Maintaining and protecting those systems is difficult and expensive, as
is dealing with any failure, interruption or breach of those systems. Despite security measures, FNCB’s information technology and infrastructure may be
vulnerable to security breaches, cyber-attacks by hackers or breaches due to employee error, malfeasance or other disruptions. Any damage, failure or breach
could cause an interruption in operations. Computer break-ins, phishing and other disruptions could also jeopardize the security of information stored in and
transmitted through FNCB’s computer systems and network infrastructure. The occurrence of any failures, interruptions or breaches could damage FNCB’s
reputation, disrupt operations and the services provided to customers, cause a loss of confidence in the products and the services provided, cause FNCB to
incur additional expenses, result in a loss of customer business and data, result in legal claims or proceedings, result in liability under laws that protect the
privacy of personal information, result in regulatory penalties, or expose FNCB to other liability, any of which could have a material adverse effect on its
business, financial condition and results of operations and competitive position.
FNCB depends on information technology and telecommunications systems of third parties, and any systems failures or interruptions could adversely
affect FNCB’s operations and financial condition.
FNCB’s business depends on the successful and uninterrupted functioning of its information technology and telecommunications systems. FNCB outsources
many of its major systems, such as data processing, deposit processing, loan origination, email and anti-money laundering monitoring systems. The failure of
these systems, or the termination of a third-party software license or service agreement on which any of these systems is based, could interrupt FNCB’s
operations, and FNCB could experience difficulty in implementing replacement solutions. In many cases, FNCB’s operations rely heavily on secured
processing, storage and transmission of information and the monitoring of a large number of transactions on a minute-by-minute basis, and even a short
interruption in service could have significant consequences. Because FNCB’s information technology and telecommunications systems interface with and
depend on third party systems, FNCB could experience service denials if demand for such services exceeds capacity, or such third-party systems fail or
experience interruptions. If significant, sustained or repeated, a system failure or service denial could compromise FNCB’s ability to operate effectively,
damage FNCB’s reputation, result in a loss of customer business and subject FNCB to additional regulatory scrutiny and possible financial liability, any of
which could have a material adverse effect on FNCB’s business, financial condition and results of operations. In addition, the failure of third parties to comply
with applicable laws and regulations, or fraud or misconduct on the part of employees of any of these third parties, could disrupt FNCB’s operations or
adversely affect FNCB’s reputation.
FNCB is subject to cybersecurity risks and security breaches and may incur increasing costs in an effort to minimize those risks and to respond to cyber
incidents, and FNCB may experience harm to its reputation and liability exposure from security breaches.
FNCB’s business involves the storage and transmission of customers' proprietary information and security breaches could expose FNCB to a risk of loss or
misuse of this information, litigation and potential liability. While FNCB has not incurred a material cyber-attack or security breach to date, a number of other
financial services and other companies have disclosed cyber-attacks and security breaches, some of which have involved intentional attacks. Attacks may be
targeted at FNCB, including its third-party service providers, its customers or both. Although FNCB devotes significant resources to maintain, regularly update
and backup its systems and processes that are designed to protect the security of FNCB’s computer systems, software, networks and other technology assets
and the confidentiality, integrity and availability of information belonging to FNCB or its customers, its security measures may not be effective against all
potential cyber-attacks or security breaches. Despite FNCB’s efforts to ensure the integrity of its systems, it is possible that FNCB may not be able to
anticipate, or implement effective preventive measures against, all security breaches of these types, especially because the techniques used change frequently or
are not recognized until launched, and because cyber-attacks can originate from a wide variety of sources, including persons who are involved with organized
crime or associated with external service providers or who may be linked to terrorist organizations or hostile foreign governments. These risks may increase in
the future as FNCB continues to increase FNCB’s internet-based product offerings and expand its internal usage of web-based products and applications. If an
actual or perceived security breach occurs, customer perception of the effectiveness of FNCB’s security measures could be harmed and could result in the loss
of customers.
A successful penetration or circumvention of the security of FNCB’s systems, including those of third party providers or other financial institutions, or the
failure to meet regulatory requirements for security of its systems, could cause serious negative consequences, including significant disruption of FNCB’s
operations, misappropriation of FNCB’s confidential information or that of FNCB’s customers, or damage to FNCB’s computers or systems or those of
FNCB’s customers or counterparties, significant increases in compliance costs (such as repairing systems or adding new personnel or protection technologies),
and could result in violations of applicable privacy and other laws, financial loss to FNCB or to its customers, loss of confidence in its security measures,
customer dissatisfaction, significant litigation and regulatory exposure, and harm to FNCB’s reputation, all of which could have a material adverse effect on
FNCB’s business, financial condition and results of operations.
If FNCB’s information technology is unable to keep pace with growth or industry developments or if technological developments result in higher costs or
less advantageous pricing, financial performance may suffer.
Effective and competitive delivery of FNCB’s products and services increasingly depends on information technology resources and processes, both those
provided internally as well as those provided through third party vendors. In addition to better serving customers, the effective use of technology can improve
efficiency and help reduce costs. FNCB’s future success will depend, in part, upon its ability to address the needs of its customers by using technology to
provide products and services to enhance customer convenience, as well as to create efficiencies in its operations. There is increasing pressure to provide
products and services at lower prices. This can reduce net interest income and non-interest income from fee-based products and services. In addition, the
widespread adoption of new technologies could require FNCB to make substantial capital expenditures to modify or adapt existing products and services or
develop new products and services. FNCB may not be successful in introducing new products and services in response to industry trends or developments in
technology, or those new products may not achieve market acceptance. Many of FNCB’s competitors have greater resources to invest in technological
improvements. Additionally, as technology in the financial services industry changes and evolves, keeping pace becomes increasingly complex and expensive.
There can be no assurance that FNCB will be able to effectively implement new technology-driven products and services, which could reduce its ability to
compete effectively. As a result, FNCB could lose business, be forced to price products and services on less advantageous terms to retain or attract customers or
be subject to cost increases.
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FNCB relies on management and other key personnel and the loss of any of them may adversely affect its operations.
FNCB believes each member of the executive management team is important to its success and the unexpected loss of any of these people could impair day-to-
day operations as well as its strategic direction.
FNCB’s success depends, in large part, on its ability to attract and retain key people. Competition for the best people in most activities engaged in by FNCB
can be intense and it may not be able to hire people or retain them. The unexpected loss of services of one or more of FNCB’s key personnel could have a
material adverse impact on its business due to the loss of their skills, knowledge of its market, years of industry experience and to the difficulty of promptly
finding qualified replacement personnel.
New lines of business, products, product enhancements or services may subject FNCB to additional risk.
From time to time, FNCB may implement new lines of business or offer new products and product enhancements as well as new services within FNCB’s
existing lines of business. There are substantial risks and uncertainties associated with these efforts. In developing, implementing or marketing new lines of
business, products, product enhancements or services, FNCB may invest significant time and resources. FNCB may underestimate the appropriate level of
resources or expertise necessary to make new lines of business or products successful to realize their expected benefits. FNCB may not achieve the milestones
set in initial timetables for the development and introduction of new lines of business, products, product enhancements or services, and price and profitability
targets may not prove feasible. External factors, such as compliance with regulations, competitive alternatives and shifting market preferences, may also
impact the ultimate implementation of a new line of business or offering of new products, product enhancements or services. Any new line of business,
product, product enhancement or service could have a significant impact on the effectiveness of FNCB’s system of internal controls. FNCB may also decide to
discontinue business or products due to lack of customer acceptance or unprofitability. Failure to successfully manage these risks in the development and
implementation of new lines of business or offerings of new products, product enhancements or services could have a material adverse effect on FNCB’s
business, financial condition and results of operations.
Damage to FNCB’s reputation could significantly harm its business, competitive position and prospects for growth.
FNCB’s ability to attract and retain investors, customers, clients, and employees could be adversely affected by damage to its reputation resulting from various
sources, including environmental, social and governance ("ESG") related issues, employee misconduct, litigation, or regulatory outcomes; failure to deliver
minimum standards of service and quality; compliance failures; unethical behavior; unintended breach of confidential information; and the activities of
FNCB’s clients, customers, or counterparties. Actions by the financial services industry in general, or by certain entities or individuals within it, also could have
a significantly adverse impact on FNCB’s reputation.
FNCB’s actual or perceived failure to identify and address various issues, including failure to properly address operational and ESG risks, could also give rise
to reputation risk that could negatively impact business prospects. These issues include, among others, legal and regulatory requirements; consumer protection,
fair lending, and privacy issues; properly maintaining customer and associated personal information; record keeping; protecting against money laundering;
sales and trading practices; and ethical issues.
FNCB may be a defendant from time to time in a variety of litigation and other actions, which could have a material adverse effect on its financial
condition, results of operations and cash flows.
FNCB has been and may continue to be involved from time to time in a variety of litigation matters arising out of its business. An increased number of
lawsuits, including purported class action lawsuits and other consumer driven litigation, have been filed and will likely continue to be filed against financial
institutions, which may involve substantial compensatory and/or punitive damages. Management believes the risk of litigation generally increases during
downturns in the national and local economies. FNCB’s insurance may not cover all claims that may be asserted against it, and any claims asserted against it,
regardless of merit or eventual outcome, may harm its reputation and may cause it to incur significant expense. Should the ultimate judgments or settlements in
any litigation exceed insurance coverage, they could have a material adverse effect on its financial condition, results of operations and cash flows. In addition,
FNCB may not be able to obtain appropriate types or levels of insurance in the future, nor may it be able to obtain adequate replacement policies with
acceptable terms, if at all. Refer to Item 3, “Legal Proceedings” to this Annual Report on Form 10-K for an additional discussion of FNCB's current material
legal matters.
FNCB may face risks with respect to future expansion or acquisition activity.
FNCB may selectively seek to expand its banking operations through limited de novo branching or opportunistic acquisition activities. FNCB cannot be certain
that any expansion activity, through de novo branching, acquisition of branches of another financial institution or a whole institution, or the establishment or
acquisition of nonbanking financial service companies, will prove profitable or will increase shareholder value. The success of any acquisition will depend, in
part, on FNCB’s ability to realize the estimated cost savings and revenue enhancements from combining its business and that of the target company. FNCB’s
ability to realize increases in revenue will depend, in part, on its ability to retain customers and employees, and to capitalize on existing relationships for the
provision of additional products and services. If FNCB estimates turn out to be incorrect or FNCB is not able to successfully combine companies, the
anticipated cost savings and increased revenues may not be realized fully or at all or may take longer to realize than expected. It is possible that the integration
process could result in the loss of key employees, the disruption of each company’s ongoing business, diversion of management attention, or inconsistencies in
standards, controls, procedures and policies that adversely affect FNCB’s ability to maintain relationships with clients and employees or to achieve the
anticipated benefits of the merger. As with any combination of banking institutions, there also may be disruptions that cause FNCB to lose customers or cause
customers to withdraw their deposits. Customers may not readily accept changes to their banking arrangements that FNCB makes as part of, or following, an
acquisition. Additionally, the value of an acquisition to FNCB is dependent on its ability to successfully identify and estimate the magnitude of any asset
quality issues of acquired companies.
FNCB may not be successful in overcoming these risks or other problems encountered in connection with potential acquisitions or other expansion activity.
FNCB’s inability to overcome these risks could have an adverse effect on FNCB’s ability to implement its business strategy and enhance shareholder value,
which, in turn, could have a material adverse effect on FNCB’s business, financial condition or results of operations. Additionally, if FNCB records goodwill in
connection with any acquisition, FNCB’s financial condition and results of operation may be adversely affected if that goodwill is determined to be impaired,
which would require FNCB to take an impairment charge.
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Risks Related to FNCB’s Industry
FNCB may be adversely affected by the actions and lack of commercial soundness of other financial institutions.
FNCB’s ability to engage in routine funding transactions could be adversely affected by the actions and lack of commercial soundness of other financial
institutions. Financial services companies are interrelated as a result of trading, clearing, counterparty and other relationships. As a result, defaults by, or even
rumors or questions about, one or more financial services companies, or the financial services industry generally, could lead to market-wide liquidity problems
and losses or defaults by FNCB or other institutions. These losses could have a material adverse effect on FNCB’s business, financial condition and results of
operations.
FNCB may be required to act as a source of financial and managerial strength for the Bank in times of stress.
FNCB, as a bank holding company, is required to act as a source of financial and managerial strength to the Bank and to commit resources to support the Bank
if necessary. FNCB may be required to commit additional resources to the Bank at times when FNCB may not be in a financial position to provide such
resources or when it may not be in FNCB’s, or its shareholders’ or creditors’, best interests to do so. A requirement to provide such support is more likely
during times of financial stress for FNCB and the Bank, which may make any capital FNCB is required to raise to provide such support more expensive than it
might otherwise be. In addition, any capital loans FNCB makes to the Bank are subordinate in right of repayment to deposit liabilities of the Bank.
FNCB is subject to extensive government regulation, supervision and possible regulatory enforcement actions, as well as "fair and responsible banking''
laws designed to protect consumers, which may subject it to higher costs and lower shareholder returns.
The banking industry is subject to extensive regulation and supervision that govern almost all aspects of its operations. The extensive regulatory framework is
primarily intended to protect the federal deposit insurance fund and depositors, not shareholders. Compliance with applicable laws and regulations can be
difficult and costly and, in some instances, may put banks at a competitive disadvantage compared to less regulated competitors such as finance companies,
mortgage banking companies, leasing companies and internet-based Fintech companies. FNCB’s regulatory authorities have extensive discretion in their
supervisory and enforcement activities, including with respect to the imposition of restrictions on the operation of a bank or a bank holding company, the
imposition of significant fines, the ability to delay or deny merger or other regulatory applications, the classification of assets by a bank, and the adequacy of a
bank’s allowance for loan losses, among other matters. If they deem FNCB to be operating in a manner inconsistent with safe and sound banking practices,
these regulatory authorities can require the entry into informal and formal supervisory agreements, including board resolutions, memorandum of understanding,
settlement agreements and consent or cease and desist orders, pursuant to which FNCB would be required to implement identified corrective actions to address
cited concerns and/or to refrain from taking certain actions in the form of injunctive relief. In recent years, the banking industry has faced increased regulation
and scrutiny; for instance, areas such as BSA compliance (including BSA and related anti-money laundering regulations) and real estate-secured consumer
lending (such as Truth-in-Lending regulations, changes in Real Estate Settlement Procedures Act regulations, implementation of licensing and registration
requirements for mortgage originators and more recently, heightened regulatory attention to mortgage and foreclosure-related activities and exposures) are
being confronted with escalating regulatory expectations and scrutiny. In addition, the Community Reinvestment Act, the Equal Credit Opportunity Act, the
Fair Housing Act and other fair lending laws and regulations, including state laws and regulations, prohibit discriminatory lending practices by financial
institutions. The Federal Trade Commission Act and the Dodd-Frank Act prohibit unfair, deceptive, or abusive acts or practices by financial institutions. The
U.S. Department of Justice, or DOJ, federal banking agencies, and other federal and state agencies are responsible for enforcing these fair and responsible
banking laws and regulations. A challenge to an institution’s compliance with fair and responsible banking laws and regulations could result in a wide variety
of sanctions, including damages and civil money penalties, injunctive relief, restrictions on mergers and acquisitions activity, restrictions on expansion and
restrictions on entering new business lines. Private parties may also have the ability to challenge an institution’s performance under fair lending laws in private
class action litigation. Such actions could have a material adverse effect on FNCB’s reputation, business, financial condition and results of operations.
Non-compliance with laws and regulations such as these, even in cases of inadvertent non-compliance, could result in litigation, significant fines and/or
sanctions. Any failure to comply with, or any change in, any applicable regulation and supervisory requirement, or change in regulation or enforcement by such
authorities, whether in the form of policies, regulations, legislation, rules, orders, enforcement actions, or decisions, could have a material impact on FNCB, the
Bank and other affiliates, and its operations. Federal economic and monetary policy may also affect FNCB’s ability to attract deposits and other funding
sources, make loans and investments, and achieve satisfactory interest spreads. Any failure to comply with such regulation or supervision could result in
sanctions by regulatory agencies, civil money penalties and/or reputation damage, which could have a material adverse effect on FNCB’s business, financial
condition and results of operations. In addition, compliance with any such action could distract management’s attention from FNCB’s operations, cause it to
incur significant expenses, restrict it from engaging in potentially profitable activities and limit its ability to raise capital.
New or changed legislation or regulation, updated guidance regarding current regulation and regulatory initiatives could adversely affect FNCB through
increased regulation and increased costs of doing business.
Changes in federal and state legislation and regulation may affect FNCB’s operations. Laws and regulations, such as the Dodd-Frank Act and Basel III, may
have unforeseen or unintended consequences on the banking industry. The Dodd-Frank Act has implemented significant changes to the U.S. financial system,
including the creation of new regulatory agencies (such as the Financial Stability Oversight Council to oversee systemic risk and the CFPB to develop and
enforce rules for consumer financial products), changes in retail banking regulations, and changes to deposit insurance assessments. For example, the Dodd-
Frank Act has implemented new requirements with respect to “qualified mortgages” and new mortgage servicing standards have, and may continue to, increase
costs associated with this business. Refer to the section entitled “Business – The Bank – Consumer Financial Protection Bureau” included in Item 1,
"Business" to this Annual Report on Form 10-K for a more detailed description of new or changed legislation or regulation and regulatory initiatives.
One example of updated guidance regarding legislation is that on October 26, 2022, the CFPB issued supervisory guidance which warned financial institutions
that levying overdraft fees to consumers who would not reasonably anticipate the fees may constitute an unfair act or practice under the Consumer Financial
Protection Act of 2010 ("CFPA"). In addition, the CFPB issued a compliance bulletin warning that certain depositor fees may similarly violate the CFPA. This
guidance comes as a next step in the CFPB’s “junk fee” initiative, launched in January 2022, through which the CFPB has endeavored to identify and take
certain steps to curb potentially exploitative fees charged by banks and other financial institutions. While management does not believe that FNCB's overdraft
fees are in violation of the CFPA, many larger financial institutions have eliminated overdraft charges on consumer accounts and the banking industry has
recently announced a significant decrease in overdraft fee income in 2022. Competition from large banks and the imposition of restrictions on overdraft fees by
the federal government, may result in FNCB having to change its overdraft fee structure, which could negatively impact future non-interest income run rates.
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External events, including natural disasters, national or global health emergencies, and events of armed conflict in other countries, and terrorist threats
could impact FNCB's ability to do business or otherwise adversely affect FNCB's business, operations or financial condition.
Financial institutions, like other businesses, are susceptible to the effects of external events that can compromise operating and communications systems and
otherwise have adverse effects. Such events, should they occur, can cause significant damage, impact the stability of FNCB's operations or facilities, result in
additional expense, or impair the ability of FNCB's borrowers to repay their loans. Although we have established and regularly test disaster recovery
procedures, the occurrence of any such event could have a material adverse effect on our business, financial condition and results of operations. In addition,
other external events, including natural disasters, health emergencies and epidemics or pandemics, such as the COVID-19 pandemic, and events of armed
conflict in other parts of the world, such as the present armed conflict involving Ukraine and Russia, or the Middle East, could adversely affect the global or
regional economies resulting in unfavorable economic conditions in the United States. Any such development could have an adverse effect on FNCB's
business.
Risks related to the mergers
Because the market price of PFIS common stock will fluctuate, the value of the merger consideration to be received by our shareholders may change.
On September 27, 2023, FNCB announced the signing of the Merger Agreement with PFIS, pursuant to which FNCB will merge with and into PFIS, with PFIS
as the surviving entity. Under the terms of the Merger Agreement, each share of FNCB common stock (other than certain shares held by FNCB or PFIS), will
be converted into the right to receive 0.1460 shares of common stock of PFIS. The closing price of PFIS common stock on the date that the merger is
completed may vary from the closing price of PFIS common stock on the date PFIS and FNCB announced the signing of the PFIS Merger Agreement and the
date of the special meeting of FNCB shareholders regarding the merger. Because the merger consideration is determined by a fixed exchange ratio, FNCB
shareholders will not know or be able to calculate the value of the shares of PFIS common stock they will receive upon completion of the merger. Any change
in the market price of PFIS common stock prior to completion of the merger may affect the value of the merger consideration. Stock price changes may result
from a variety of factors, including general market and economic conditions, changes in the companies’ respective businesses, operations and prospects, and
regulatory considerations, among other things. Many of these factors are beyond the control of PFIS and FNCB.
Regulatory approvals may not be received, may take longer than expected or may impose conditions that are not presently anticipated or cannot be met.
Before the transactions contemplated by the Merger Agreement may be completed, various approvals must be obtained from bank regulatory authorities. In
determining whether to grant these approvals, the applicable regulatory authorities consider a variety of factors, including the competitive impact of the
proposal in the relevant geographic markets; financial, managerial and other supervisory considerations of each party; convenience and needs of the
communities to be served and the record of the insured depository institution subsidiaries under the Community Reinvestment Act of 1977 and the regulations
promulgated thereunder; effectiveness of the parties in combating money laundering activities; any significant outstanding supervisory matters; and the extent
to which the proposal would result in greater or more concentrated risks to the stability of the United States banking or financial system. These regulatory
authorities may impose conditions on the granting of such approvals. Such conditions or changes and the process of obtaining regulatory approvals could have
the effect of delaying completion of the mergers or of imposing additional costs or limitations on the combined companies following the mergers. The
regulatory approvals may not be received at all, may not be received in a timely fashion, or may contain conditions on the completion of the mergers that are
not anticipated or cannot be met. Furthermore, such conditions or changes may constitute a burdensome condition that may allow PFIS to terminate the Merger
Agreement and PFIS may exercise its right to terminate the Merger Agreement. If the consummation of the mergers is delayed, including by a delay in receipt
of necessary regulatory approvals, the business, financial condition and results of operations of FNCB may also be materially and adversely affected.
Failure of the merger to be completed, the termination of the Merger Agreement or a significant delay in the consummation of the merger could negatively
impact FNCB.
The Merger Agreement is subject to a number of conditions which must be fulfilled in order to complete the mergers. These conditions to the consummation of
the mergers may not be fulfilled and, accordingly, the mergers may not be completed. In addition, if the mergers are not completed by September 27, 2024,
either PFIS or FNCB may choose to terminate the Merger Agreement at any time after that date if the failure of the effective time to occur on or before that
date is not caused by any breach of the Merger Agreement by the party electing to terminate the Merger Agreement. If the mergers are not consummated, the
ongoing business, financial condition and results of operations of FNCB may be materially adversely affected and the market price of FNCB’s common stock
may decline significantly, particularly to the extent that the current market price reflects a market assumption that the mergers will be consummated.
In addition, FNCB has incurred and will incur substantial expenses in connection with the negotiation and completion of the transactions contemplated by the
Merger Agreement. If the mergers are not completed, FNCB would have to recognize these expenses without realizing the expected benefits of the mergers.
Any of the foregoing, or other risks arising in connection with the failure of or delay in consummating the merger, including the diversion of management
attention from pursuing other opportunities and the constraints in the Merger Agreement on the ability to make significant changes to FNCB’s ongoing business
during the pendency of the mergers, could have a material adverse effect on FNCB’s business, financial condition and results of operations. If the Merger
Agreement is terminated and FNCB’s board of directors seeks another merger or business combination, FNCB shareholders cannot be certain that FNCB will
be able to find a party willing to engage in a transaction on more attractive terms than the merger with PFIS.
FNCB will be subject to business uncertainties and contractual restrictions while the mergers are pending.
Uncertainty about the effect of the merger on employees, customers (including depositors and borrowers), suppliers and vendors may have an adverse effect on
the business, financial condition and results of operations of FNCB. These uncertainties may impair FNCB’s ability to attract, retain and motivate key
personnel and customers (including depositors and borrowers) pending the consummation of the mergers, as such personnel and customers may experience
uncertainty about their future roles and relationships following the consummation of the mergers. Additionally, these uncertainties could cause customers
(including depositors and borrowers), suppliers, vendors and others who deal with FNCB to seek to change existing business relationships with FNCB or fail to
extend an existing relationship with FNCB. In addition, competitors may target FNCB’s existing customers by highlighting potential uncertainties and
integration difficulties that may result from the mergers.
The pursuit of the mergers and the preparation for the integration may place a burden on FNCB’s management and internal resources. Any significant diversion
of management attention away from ongoing business concerns and any difficulties encountered in the transition and integration process could have a material
adverse effect on FNCB’s business, financial condition and results of operations. In addition, the Merger Agreement restricts each party from taking certain
actions without the other party’s consent while the mergers are pending. These restrictions could have a material adverse effect on FNCB’s business, financial
condition and results of operations.
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The Merger Agreement contains provisions that may discourage other companies from pursuing, announcing or submitting a business combination
proposal to FNCB that might result in greater value to FNCB shareholders.
The Merger Agreement contains provisions that may discourage a third party from pursuing, announcing or submitting a business combination proposal to
FNCB that might result in greater value to FNCB shareholders than the merger with PFIS. These provisions include a general prohibition on FNCB from
soliciting, or, subject to certain exceptions, entering into discussions with any third party regarding any acquisition proposal or offers for competing
transactions. Furthermore, if the Merger Agreement is terminated, under certain circumstances, FNCB may be required to pay PFIS a termination fee equal to
$4.8 million. FNCB also has an obligation to submit its merger-related proposals to a vote by its shareholders, including if FNCB receives an unsolicited
proposal that FNCB board of directors believes is superior to the mergers, unless the Merger Agreement is terminated by FNCB under certain conditions
described in the Merger Agreement.
Litigation against FNCB or PFIS, or the members of FNCB’s or PFIS’s board of directors, could prevent or delay the completion of the mergers.
Shareholder plaintiffs or purported shareholder plaintiffs have asserted legal claims related to the pending mergers or may assert legal claims related to the
mergers. The results of any such legal proceeding would be difficult to predict and such legal proceedings could delay or prevent the mergers from being
completed in a timely manner. Moreover, any litigation could be time consuming and expensive, and could divert attention of FNCB’s and PFIS’s respective
management teams away from their companies’ regular business. Any lawsuit adversely resolved against FNCB, PFIS or members of their respective boards of
directors, could have a material adverse effect on each party’s business, financial condition and results of operations.
One of the conditions to the consummation of the mergers is the absence of any law, order, decree or injunction (whether temporary, preliminary or permanent)
or other action taken by the governmental authority of competent jurisdiction that restricts, enjoins or prohibits or makes illegal the consummation of the
transactions contemplated by the Merger Agreement, including the mergers. Consequently, if a settlement or other resolution is not reached in any lawsuit that
is filed or any regulatory proceeding and a claimant secures injunctive or other relief or a governmental authority issues an order or other directive restricting,
prohibiting or making illegal the completion of the transactions contemplated by the Merger Agreement, including the mergers, then such injunctive or other
relief may prevent the mergers from being completed in a timely manner or at all.
Combining PFIS and FNCB may be more difficult, costly or time-consuming than expected, and PFIS and FNCB may fail to realize the anticipated
benefits of the mergers.
An inability to realize the full extent of the anticipated benefits of the mergers and the other transactions contemplated by the Merger Agreement, as well as any
delays encountered in the integration process, could have an adverse effect upon the revenues, levels of expenses and operating results of the surviving
corporation following the completion of the mergers, which may adversely affect the value of the common stock of the surviving corporation following the
completion of the mergers. It is possible that the integration process could result in loss of key employees, the disruption of each company's ongoing business
or inconsistencies in standards, controls, procedures and policies that adversely affect the companies' ability to maintain relationships with clients, customers,
depositors and employees or to achieve the anticipated benefits and cost savings of the mergers.
Following the mergers, the size of the business of the surviving corporation will increase beyond the current size of either PFIS' or FNCB's respective business.
The surviving corporation's future success will depend, in part, upon its ability to manage the expanded business, which may pose challenges for management,
including challenges related to the management and monitoring of new operations and associated increased costs and complexity. In connection with the
mergers, PFIS will assume FNCB's outstanding indebtedness. PFIS' existing debt, together with any future incurrence of additional indebtedness, and the
assumption of FNCB's outstanding indebtedness, could have important consequences for the surviving corporation's creditors and the surviving corporation's
shareholders, potentially limiting PFIS's capital and liquidity. There can be no assurances that the surviving corporation will be successful or that it will realize
the expected operating efficiencies, revenue enhancements or other benefits currently anticipated from the mergers.
Risks Related to FNCB’s Common Stock
FNCB may need to raise additional capital in the future, but that capital may not be available when it is needed and on terms favorable to current
shareholders.
Laws, regulations and banking regulators require FNCB and the Bank to maintain adequate levels of capital to support their operations. In addition, capital
levels are determined by FNCB’s management and Board of Directors based on capital levels that they believe are necessary to support business operations.
Management regularly evaluates its present and future capital requirements and needs and analyzes capital raising alternatives and options. Although FNCB
succeeded in meeting its current regulatory capital requirements, it may need to raise additional capital in the future to support growth, possible loan losses or
potential impairment during future periods, to meet future regulatory capital requirements or for other reasons.
The Board of Directors may determine from time to time that FNCB needs to raise additional capital by issuing additional shares of common stock or other
securities. FNCB is not restricted from issuing additional shares of common stock, including securities that are convertible into or exchangeable for, or that
represent the right to receive, common stock. Because FNCB’s decision to issue securities in any future offering will depend on market conditions and other
factors beyond its control, FNCB cannot predict or estimate the amount, timing or nature of any future offerings, or the prices at which such offerings may be
affected. Such offerings will likely be dilutive to common shareholders from ownership, earnings and book value perspectives. New investors also may have
rights, preferences and privileges that are senior to, and that adversely affect, its then current common shareholders. Additionally, if FNCB raises additional
capital by making additional offerings of debt or preferred equity securities, upon liquidation, holders of its debt securities and shares of preferred shares, and
lenders with respect to other borrowings, will receive distributions of available assets prior to the holders of common stock. Additional equity offerings may
dilute the holdings of existing shareholders or reduce the market price of FNCB’s common stock, or both. Holders of FNCB’s common stock are not entitled to
preemptive rights or other protections against dilution.
FNCB cannot provide any assurance that additional capital will be available on acceptable terms or at all. Any occurrence that may limit access to the capital
markets may adversely affect FNCB’s capital costs and its ability to raise capital and, in turn, its liquidity. Moreover, if FNCB needs to raise capital, it may
have to do so when many other financial institutions are also seeking to raise capital and would have to compete with those institutions for investors. An
inability to raise additional capital on acceptable terms when needed could have a material adverse effect on FNCB’s business, financial condition and results
of operations.
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An investment in FNCB’s common stock is not an insured deposit.
FNCB’s common stock is not a bank deposit and, therefore, is not insured against loss by the FDIC, any other deposit insurance fund or by any other public or
private entity. Investment in FNCB’s common stock is inherently risky for the reasons described in this “Risk Factors” section, and elsewhere in FNCB’s
reports filed with the SEC, including under heading “Risk Factors” in this Annual Report on Form 10-K, or any subsequent report filed by FNCB. Investment
in FNCB’s common stock is also subject to the market forces that affect the price of common stock in any company. As a result, shareholders may lose some or
all of their investment in FNCB’s common stock.
Shareholders may not receive dividends on FNCB’s common stock or have their shares repurchased by FNCB.
Although FNCB has historically declared quarterly cash dividends on its common stock, and has from time-to-time implemented a share repurchase program
for the repurchase of shares of its common stock, FNCB is not required to do so and may reduce or cease to pay common stock dividends, or repurchase shares,
in the future. If FNCB reduces or ceases to pay common stock dividends, or terminates its stock repurchase program, the market price of its common stock
could be adversely affected.
The principal source of funds from which FNCB pays cash dividends, and repurchase shares, are the dividends received from the Bank. Banking laws and
regulations of the Commonwealth of Pennsylvania restrict the amount of dividends and loans a bank may make to its parent company. In addition, under The
Federal Deposit Insurance Corporation Improvement Act of 1991, banks may not pay a dividend, or repurchase shares if, after paying the dividend, or
repurchasing such shares, the bank would be undercapitalized.
If FNCB fails to pay dividends, capital appreciation, if any, of its common stock may be the sole opportunity for gains on an investment in its common stock.
In addition, in the event the Bank becomes unable to pay dividends to FNCB, FNCB may not be able to service its debt or pay its other obligations, pay
dividends on, or repurchase shares of, its common stock. Accordingly, FNCB’s inability to receive dividends from the Bank could also have a material adverse
effect on its business, financial condition and results of operations and the value of a shareholder’s investment in FNCB’s common stock.
An entity holding as little as a 5% interest in FNCB’s outstanding securities could, under certain circumstances, be subject to regulation as a “bank
holding company.”
Any entity, including a “group” composed of natural persons, owning or controlling with the power to vote 25% or more of FNCB’s outstanding securities, or
5% or more if the holder otherwise exercises a “controlling influence” over FNCB, may be subject to regulation as a “bank holding company” in accordance
with the Bank Holding Company Act of 1956, as amended, or the BHC Act. In addition, (a) any bank holding company or foreign bank with a U.S. presence
may be required to obtain the approval of the Federal Reserve under the BHC Act to acquire or retain 5% or more of FNCB’s outstanding securities and (b) any
person not otherwise defined as a company by the BHC Act and its implementing regulations may be required to obtain the approval of the Federal Reserve
under the Change in Bank Control Act to acquire or retain 10% or more of FNCB’s outstanding securities. Becoming a bank holding company imposes
statutory and regulatory restrictions and obligations, such as providing managerial and financial strength for its bank subsidiaries. Regulation as a bank holding
company could require the holder to divest all or a portion of the holder’s investment in FNCB’s securities or those nonbanking investments that may be
deemed impermissible or incompatible with bank holding company status, such as a material investment in a company unrelated to banking.
Any deficiencies in FNCB’s financial reporting or internal controls could materially and adversely affect its business and the market price of FNCB’s
common stock.
During the course of FNCB’s testing it may identify deficiencies that would have to be remediated to satisfy the SEC rules for certification of FNCB’s internal
control over financial reporting. These controls may not achieve their intended objectives. Control processes that involve human diligence and compliance,
such as its disclosure controls and procedures and internal controls over financial reporting, are subject to lapses in judgment and breakdowns resulting from
human failures. Controls can also be circumvented by collusion or improper management override. Because of such limitations, there are risks that material
misstatements due to error or fraud may not be prevented or detected and that information may not be reported on a timely basis. Moreover, effective internal
controls are necessary to produce reliable financial reports and to prevent fraud. If FNCB has deficiencies in its disclosure controls and procedures or internal
control over financial reporting, it may materially and adversely affect FNCB.
A material weakness is defined by the standards issued by the PCAOB as a deficiency, or combination of deficiencies, in internal control over financial
reporting that results in a reasonable possibility that a material misstatement of FNCB’s annual or interim financial statements will not be prevented or detected
on a timely basis. As a consequence, FNCB would have to disclose in periodic reports it files with the SEC any material weakness in its internal control over
financial reporting. The existence of a material weakness would preclude management from concluding that FNCB’s internal control over financial reporting is
effective and would preclude its independent auditors from expressing an unqualified opinion on the effectiveness of its internal control over financial
reporting. In addition, disclosures of deficiencies of this type in FNCB’s SEC reports could cause investors to lose confidence in its financial reporting and may
negatively affect the market price of its common stock and could result in the delisting of its securities from the securities exchanges on which they trade.
Anti-takeover provisions in FNCB’s charter documents could discourage, delay or prevent a change of control of FNCB’s company and diminish the value
of FNCB’s common stock.
Some of the provisions of FNCB’s amended and restated articles of incorporation, as amended, and amended and restated bylaws, as amended, could make it
difficult for its shareholders to change the composition of its board of directors, preventing them from changing the composition of management. In addition,
the same provisions may discourage, delay or prevent a merger or acquisition that FNCB’s shareholders may consider favorable. These provisions include:
● classifying FNCB’s board of directors into three classes of directors with staggered three-year terms;
● authorizing FNCB’s board of directors to issue preferred shares without shareholder approval;
● prohibiting cumulative voting in the election of directors;
● requiring the approval of 75% of FNCB’s shareholders to approve any merger or sale of all, or substantially all, unless approval of such proposed
transaction is recommended by at least a majority of FNCB’s entire board of directors;
● authorizing FNCB’s board of directors to, if it deems advisable, oppose a tender or other offer for FNCB’s securities; and
● requiring the approval of 75% of FNCB’s shareholders to amend certain provisions relating to business combinations not approved by the board of
directors.
In addition, pursuant to the Pennsylvania Business Corporation Law (the “PBCL”), in the case of a merger or share exchange, with some exceptions, FNCB’s
board of directors must submit the plan of merger or share exchange to the shareholders for approval, and the approval of the plan of merger or share exchange
generally requires the approval of the shareholders at a meeting at which a quorum consisting of at least a majority of the shares entitled to vote on the plan
exists.
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Provisions of the PBCL, applicable to FNCB provide, among other things, that:
● FNCB may not engage in a business combination with an “interested shareholder,” generally defined as a holder of 20% of a corporation’s voting
stock, during the five-year period after the interested shareholder became such except under certain specified circumstances;
● holders of FNCB’s common stock may object to a “control transaction” involving FNCB (a control transaction is defined as the acquisition by a
person or group of persons acting in concert of at least 20% of the outstanding voting stock of a corporation), and demand that they be paid a cash
payment for the “fair value” of their shares from the “controlling person or group”;
● holders of “control shares” will not be entitled to voting rights with respect to any shares in excess of specified thresholds, including 20% voting
control, until the voting rights associated with such shares are restored by the affirmative vote of a majority of disinterested shares and the outstanding
voting shares of the Company; and
● any “profit,” as defined in the PBCL, realized by any person or group who is or was a “controlling person or group” with respect to FNCB from the
disposition of any equity securities of within 18 months after the person or group became a “controlling person or group” shall belong to and be
recoverable by FNCB.
These anti-takeover provisions could impede the ability of FNCB’s common shareholders to benefit from a change of control and, as a result, could have a
material adverse effect on the market price of FNCB’s common stock and shareholders’ ability to realize any potential change-in-control premium.
Item 1B.
Unresolved Staff Comments.
None.
Item 1C.
Cybersecurity.
Cybersecurity Risk Management and Strategy
Cybersecurity risks are constantly evolving and becoming increasingly pervasive across all industries. To mitigate these risks and protect sensitive customer
data, financial transactions and its information systems, FNCB has implemented a comprehensive cybersecurity risk management program, which is a
component of its overarching Information Security Program. Key components of the Information Security Program include:
● Information Security Risk
Assessment.
● Information Security Strategy.
An information security risk assessment is a process designed to identify and assess new and existing threats,
vulnerabilities, attacks, probabilities of occurrence and outcomes;
The information security strategy, which is updated by management and reviewed and approved by the board of
directors annually, seeks to mitigate risk by integrating technology with robust policies, procedures and training;
● Security Controls Implementation. Implementing security controls is a company-wide process that ensures that the acquisition, deployment and operation
● Security Controls Training.
● Security Monitoring.
● Security Process Updating.
● Incident Response Plan.
of technology to include risk appropriate controls through the assignment of specific duties and responsibilities to
management and staff;
Training is provided for managers and staff to ensure that all parties understand their responsibilities and have the
knowledge and skills necessary to fulfill their duties. Training also includes an awareness program that keeps
employees informed about cybersecurity threats and how to safely use electronic platforms such as email, internet and
cloud-based environments;
Security monitoring utilizes various methodologies, including the use of third-party services as necessary, to gain
assurance that risk are appropriately assessed and mitigated, and to verify that significant controls are effective and
performing as intended;
This updating process is a continuous system of gathering and analyzing information regarding new threats and
vulnerabilities, actual attacks on FNCB or others combined with the effectiveness of existing security controls that are
maintained. Through monitoring and updating, the information security program becomes a continuous process rather
than a one-time event; and
The incident response plan, which is modeled after the framework established by the National Institute of Standards
and Technology, outlines the steps FNCB will take to respond to a cybersecurity incident. The incident response plan
is tested on a periodic basis.
FNCB engages reputable third-party assessors to conduct various independent risk assessments on a regular basis, including but not limited to, maturity
assessments and various tests. FNCB leverages both in-house resources and third-party service providers to implement and maintain processes and controls to
manage and mitigate any identified risks.
FNCB's has a Vendor Risk Management Program that is designed to ensure that vendors providing services to FNCB meet its cybersecurity requirements. This
includes conducting periodic risk assessments of vendors, requiring vendors to implement appropriate cybersecurity controls and monitoring vendor
compliance with our cybersecurity requirements.
FNCB’s cybersecurity risk management program and strategy are designed to ensure that FNCB's information and information systems are appropriately
protected from a variety of threats, both natural and man-made. Periodic risk assessments are performed to validate control requirements and ensure that
FNCB’s information is protected at a level commensurate with its sensitivity, value, and criticality. Preventative and detective security controls are employed
on all media where information is stored, the systems that process it, and infrastructure components that facilitate its transmission to ensure the confidentiality,
integrity, and availability of FNCB's information. These controls include, but are not limited to access control, data encryption, data loss prevention, incident
response, security monitoring, third party risk management, and vulnerability management.
FNCB's cybersecurity risk management program and strategy are regularly reviewed and updated to ensure that they are aligned with FNCB's business
objectives and are designed to address evolving cybersecurity threats and satisfy regulatory requirements and industry standards.
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Material Effects of Cybersecurity Threats
While cybersecurity risks have the potential to materially affect FNCB's business, financial condition, and results of operations, FNCB does not believe that
risks from cybersecurity threats or attacks, including as a result of any previous cybersecurity incidents, have had a material affect on FNCB, including its
business strategy, results of operations or financial condition. However, the sophistication of cyber threats continues to increase and evolve, and FNCB’s
cybersecurity risk management and strategy may be insufficient or may not be successful in protecting against all cyber incidents. Accordingly, no matter how
well designed or implemented FNCB’s controls are, it will not be able to anticipate all cyber security breaches, and it may not be able to implement effective
preventive measures against such security breaches in a timely manner. For more information on how cybersecurity risk may materially affect FNCB’s business
strategy, results of operations or financial condition, refer to Part I, Item 1A. "Risk Factors" to this Annual Report on Form 10-K.
Governance
Board of Directors Oversight
FNCB’s Board of Directors is charged with overseeing the establishment and execution of FNCB’s risk management framework and monitoring adherence to
related policies required by applicable statutes, regulations and principles of safety and soundness. Consistent with this responsibility the Board has delegated
primary oversight responsibility over FNCB's risk management framework, including oversight of cybersecurity risk and cybersecurity risk management, to
the Risk Management Committee of the Board of Directors. The Risk Management Committee has appointed the Executive Vice President and General
Counsel, who serves as the Chairperson of FNCB's Enterprise Risk Management ("ERM") Committee, as the principal management-level designee for
oversight of its risk management. Additionally, the Executive Vice President and Chief Financial Officer oversees FNCB's Technology Services Division. The
Board of Directors receives regular updates on cybersecurity risks and incidents and the cybersecurity program through direct interaction with either of these
two individuals who provide periodic updates regarding cybersecurity risks and the cybersecurity program. Additionally, awareness and training on
cybersecurity topics is provided to the Board on an annual basis.
Management's Role
FNCB has an Information Technology Advisory Committee ("ITAC") that is responsible for implementing and maintaining its Information Security Program.
Certain members of the IT Oversight Committee, a sub-committee of ITAC, have been designated collectively as FNCB's Information Security
Officer. These members include, the Senior Vice President and Physical Security Officer who serves as Chairperson, the Executive Vice President and Chief
Financial Officer and certain Technology Services Division personnel. The primary responsibility of the IT Oversight Committee, which meets monthly, is to
ensure that information technology initiatives meet FNCB's cybersecurity objectives and are implemented securely, timely and transparently and for ensuring
the protection of electronic and physical information through the identification and management of risk activities. As a governance and oversight function, the
ITAC meets quarterly and measures and reports on the quality of information and cyber risk management across all functional areas of FNCB. The Executive
Vice President and Chief Financial Officer presents information related to FNCB's Information Security Program to the Board of Directors at regular monthly
meetings. Any breach or incident would be reported through ITAC, the ERM Committee and then to the Board of Directors. The IT Oversight
Committeemakes a formal presentation to the Board of Directors on FNCB's Information Security Program at least annually.
Item 2.
Properties.
FNCB currently conducts business from its headquarters located at 102 E. Drinker Street, Dunmore, Pennsylvania, which now also houses the Bank’s
Commercial Lending and Retail Banking Units. The Bank's main office is located at 100 S. Blakely Street, Dunmore, Pennsylvania, 18512. At December 31,
2023, FNCB also operated fifteen additional community banking offices located throughout Lackawanna, Luzerne and Wayne counties, two administrative
offices and another lending center located in Dunmore, Lackawanna County, Pennsylvania. Eight of the offices are leased and the balance are owned by the
Bank. Except for potential remodeling of certain facilities to provide for the efficient use of workspace and/or to maintain an appropriate appearance, each
property is considered reasonably suitable and adequate for current and immediate future purposes except as discussed below.
See Note 5, "Bank Premises and Equipment" of the notes to consolidated financial statements included in Item 8, "Financial Statements and Supplementary
Data" to this Annual Report on Form 10-K for additional information about FNCB's properties.
Item 3.
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.
Item 4.
Mine Safety Disclosures.
Not Applicable.
PART II
Item 5.
Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities.
Market Prices of Stock and Dividends Paid
FNCB’s common shares are traded on The Nasdaq Stock Market LLC ("Nasdaq") under the symbol "FNCB."
On January 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 pursuant to a trading plan that was adopted in accordance with Rule 10b5-1 of the Securities Exchange Act of 1934,
as amended (the "Exchange Act"). The repurchase program commenced on March 3, 2023 and was terminated in the third quarter of 2023, pursuant to a
trading plan that may be adopted in accordance with Rule 10b5-1 of the Exchange Act of 1934. During 2023 no shares were repurchased under this plan. In
2022 and 2021, the Board of Directors authorized similar programs under which 384,830 and 330,759 shares were purchased at weighted-average prices per
share of $9.45 and $7.21, respectively. Repurchases are funded from available working capital and the repurchased shares are returned to the status of
authorized but unissued shares of common stock.
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Holders
As of February 29, 2024, there were approximately 1,586 holders of record of FNCB’s common shares. Because many of FNCB’s shares are held by brokers
and other institutions on behalf of shareholders, FNCB is unable to estimate the total number of shareholders represented by these record holders.
Dividends
Dividends declared and paid were $7.1 million, or $0.36 per share, in 2023 and $6.5 million, or $0.33 per share, in 2022. The dividend payout ratio was 54.8%
for the year ended December 31, 2023 and 32.0% for the year ended December 31, 2022. FNCB’s ability to declare and pay future dividends is dependent upon
earnings, financial position, appropriate restrictions under applicable laws, legal and regulatory restrictions and other factors relevant at the time FNCB’s Board
of Directors considers any declaration of any dividends. For a further discussion of FNCB’s and the Bank’s dividend restrictions, refer to Note 15, “Regulatory
Matters/Subsequent Events” in the notes to consolidated financial statements in this Annual Report on Form 10-K.
On January 24, 2024, the Board of Directors declared a dividend of $0.090 per share for the first quarter of 2024. The dividend is payable on March 15, 2024 to
shareholders of record as of March 1, 2024.
Equity Compensation Plans
For more information regarding FNCB ’s equity compensation plans, see Part III, Item 12, “Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters” in this Annual Report on Form 10-K.
Recent Sales of Unregistered Securities
None.
Purchase of Equity Securities by the Issuer and Affiliated Purchaser s
None.
Item 6.
Reserved
None.
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Management’s discussion and analysis (“MD&A”) represents an overview of the financial condition and results of operations of FNCB and should be read in
conjunction with our consolidated financial statements and notes thereto included in Item 8, "Financial Statements and Supplementary Data" and Item
1A, "Risk Factors" of Part I to this Annual Report on Form 10-K.
FNCB is in the business of providing customary retail and commercial banking services to individuals, businesses and local governments and municipalities
through 16 full-service branch offices operated by FNCB Bank, FNCB's wholly-owned subsidiary, within its primary market area, Northeastern Pennsylvania.
FORWARD-LOOKING STATEMENTS
FNCB may from time to time make written or oral “forward-looking statements,” including statements contained in our filings with the SEC, in our reports to
shareholders, and in our other communications, which are made in good faith by us pursuant to the “safe harbor” provisions of the Private Securities Litigation
Reform Act of 1995.
These forward-looking statements include statements with respect to FNCB’s beliefs, plans, objectives, goals, expectations, anticipations, estimates and
intentions, that are subject to significant risks and uncertainties, and are subject to change based on various factors (some of which are beyond our control).
The words “may,” “could,” “should,” "will," “would,” “believe,” “anticipate,” “estimate,” “expect,” “intend,” “plan,” "project," "future" and similar
expressions are intended to identify forward-looking statements.
Readers are cautioned that these forward-looking statements are only predictions and are subject to risks, uncertainties, and assumption that are difficult to
predict, including those under Part I, Item 1A. "Risk Factors," and elsewhere in this Annual Report on Form 10-K. Therefore, actual results may differ
materially and adversely from those expressed in any forward-looking statements. Readers are also cautioned not to place undue reliance on any forward-
looking statements, which reflect management’s analysis only as of the date of this report, even if subsequently made available by FNCB on its website or
otherwise. FNCB does not undertake to update any forward-looking statement, whether written or oral, that may be made from time to time by or on behalf of
FNCB to reflect events or circumstances occurring after the date of this report.
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CRITICAL ACCOUNTING ESTIMATES AND POLICIES
In preparing the consolidated financial statements, management has made estimates, judgments and assumptions that affect the reported amounts of assets and
liabilities as of the date of the consolidated statements of condition and results of operations for the periods indicated. Actual results could differ significantly
from those estimates.
FNCB’s accounting policies are fundamental to understanding management’s discussion and analysis of its financial condition and results of operations.
Management has identified the policies on the determination of the allowance for credit losses (“ACL”), securities’ valuation and impairment evaluation and
income taxes to be critical, as management is required to make subjective and/or complex judgments about matters that are inherently uncertain and could be
subject to revision as new information becomes available.
The judgments used by management in applying the critical accounting policies discussed below may be affected by changes and/or deterioration in the
economic environment, which may impact future financial results. Specifically, subsequent evaluations of the loan portfolio, in light of the factors then
prevailing, may result in significant changes in the 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 loan losses charged to earnings and is maintained at a level management considers adequate to
absorb estimated probable losses inherent in the loan portfolio as of the evaluation date. Loans, or portions of loans, determined by management to be
uncollectible are charged off against the ACL, while recoveries of amounts previously charged off are credited to the ACL.
The ACL consists primarily of two components, a specific component and a general component. The specific component relates to loans and loan relationships
in excess of $100 thousand that do not share risk characteristics with existing pools and are individually evaluated for impairment. The amount of impairment
provided for as an allowance is represented by the deficiency, if any, between the carrying value of the loan and either (a) the present value of expected future
cash flows discounted at the loan’s effective interest rate, (b) the loan’s observable market price, or (c) the fair value of the underlying collateral, less estimated
costs to sell, for collateral dependent loans. The general component of the ACL covers all other loans is based on pools of unimpaired loans segregated by loan
segment. FNCB estimates expected credit losses using the discounted cash flow ("DCF") method for all loan portfolio segments measured on a collective or
pool basis. For each loan segment, a cash flow projection is generated at the loan level. Probability of default and loss given default assumptions are applied to
the pool’s projected model of cash flows taking into consideration the effects of prepayments and principal curtailment effects. The analysis produces expected
cash flows for each loan in the pool by pairing loan-level term information (maturity date, payment amount, interest rate, etc.) with top-down pool assumptions
(default rates and prepayment speeds).
Determining the amount of the ACL is considered a critical accounting estimate because it requires significant judgement and the use of estimates related to the
amount and timing of expected future cash flows on impaired loans, estimated losses on pools of homogeneous loans based on historical loss experience,
qualitative factors, and consideration of current economic trends and conditions, all of which may be susceptible to significant change. Banking regulators, as
an integral part of their examination of FNCB, also review the 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.
See Note 2, “Summary of Significant Accounting Policies” and Note 4, “Loans and Leases” of the Notes to Consolidated Financial Statements included in Item
8, “Financial Statements and Supplementary Data” to this Annual Report on Form 10-K for additional information about 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 15, “Fair Value Measurements” of the
notes to consolidated financial statements included in Item 8, “Financial Statements and Supplementary Data” to this Annual Report on Form 10-K for
additional information about FNCB’s securities valuation techniques.
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On a quarterly basis, management evaluates individual investment securities in an unrealized loss position. The evaluation requires the use of various
assumptions, including but not limited to, the length of time an investment ’s fair value is less than book value, the severity of the investment’s decline, any
credit deterioration of the issuer, whether management intends to sell the security, and whether it is more-likely-than-not that FNCB will be required to sell the
security prior to recovery of its amortized cost basis. Debt investment securities deemed to be impaired are written down by the impairment related to the
estimated credit loss, and the non-credit related impairment loss is recognized in other comprehensive income. FNCB did not recognize any impairment on
investment securities for years ended December 31, 2023 and 2022 within the consolidated statements of income.
See Note 2, “Summary of Significant Accounting Policies” and Note 3, “Securities” of the Notes to Consolidated Financial Statements included in Item 8,
“Financial Statements and Supplementary Data” to this Annual Report on Form 10-K for additional information about Management's 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. Judgement 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 judgement
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 judgements about future earnings, the periods in which items will impact taxable income, future corporate
tax rates, and the application of inherently complex tax laws. The use of different estimates can result in changes in the amounts of deferred tax items
recognized, which may result in equity and earnings volatility because such changes are reported in current period earnings. Management’s evaluation as
of December 31, 2023 and 2022 concluded that no valuation allowance was necessary for net deferred tax assets.
In connection with determining the income tax provision or benefit, management considers maintaining liabilities for uncertain tax positions and tax strategies
that it believes contain an element of uncertainty. Periodically, management evaluates each of FNCB’s tax positions and strategies to determine whether a
liability for uncertain tax benefits is required. As of December 31, 2023 and 2022, management determined that FNCB did not have any uncertain tax positions
or tax strategies and that no liability was required to be recorded.
See Note 2, “Summary of Significant Accounting Policies” and Note 11, “Income Taxes” of the Notes to Consolidated Financial Statements included in Item 8,
“Financial Statements and Supplementary Data” to this Annual Report on Form 10-K for additional information about the accounting for income taxes.
New Authoritative Accounting Guidance and Accounting Guidance to be Adopted in Future Periods
For information regarding new authoritative accounting guidance adopted by FNCB during the year ended December 31, 2023 and accounting guidance that
FNCB will adopt in future periods, see Note 2, “Summary of Significant Accounting Policies” of the notes to consolidated financial statements included in
Item 8, “Financial Statements and Supplementary Data” to this Annual Report on Form 10-K.
EXECUTIVE OVERVIEW
The following overview should be read in conjunction with this MD&A in its entirety.
On September 27, 2023, FNCB and Peoples Financial Services Corp. ("PFIS") (NASDAQ:PFIS) announced that both companies had entered into a strategic
combination and executed an Agreement and Plan of Merger (the "Merger Agreement") pursuant to which FNCB will merge with and into PFIS, with PFIS as
the surviving entity. Immediately after the merger, the Bank will merge with and into Peoples Security Bank and Trust Company ("Peoples Bank") with
Peoples Bank as the surviving bank and a wholly-owned subsidiary of PFIS. Pending regulatory and shareholder approvals, FNCB expects the consummation
of the merger to be completed in the third quarter of 2024, however, there can be no assurance that the transaction will be consummated during this time period,
or at all.
Monetary policy tightening actions by the Federal Open Market Committee ("FOMC"), changes in market interest rates and volatility within the financial
services industry all impacted FNCB's operations and profitability in 2023 and financial position at December 31, 2023 as compared to the prior
year. Management continued to navigate and adapt through a challenging rate environment. Additionally competition for deposits within FNCB's market
area intensified as depositors became increasingly rate-sensitive. Management focused on prudent balance sheet, liquidity and funding cost management in
2023 to mitigate pressure on FNCB's net interest margin.
Results of Operations
Net income in 2023 amounted to $13.0 million, or $0.66 per diluted common share, a decrease of $7.5 million, or 36.5%, compared to $20.4 million, or
$1.03 per diluted common share, in 2022. The decrease in 2023 net income compared to 2022 was primarily due to a decrease in net interest income, coupled
with a reduction in non-interest income and an increase in non-interest expense. The magnitude and velocity of market rate increases, coupled with greater
utilization of wholesale funding, resulted in a steep increase in interest expense of $27.4 million, or 406.9%, to $34.1 million in 2023, compared to $2.8 million
in 2022. The increase in interest expense overshadowed a $21.2 million, or 35.0%, increase in interest income to $82.0 million in 2023 from $60.8 million in
2022. Non-interest income decreased $1.3 million, or 16.7%, to $6.6 million in 2023, from $7.9 million in 2022, primarily due to a $1.6 million net loss on
equity securities, compared to a $34 thousand net loss on securities in 2022. Non-interest expense was $36.9 million in 2023, an increase of $1.4 million, or
4.1%, from 35.5 million in 2022, which largely reflected $1.5 million in merger and acquisition expenses recorded in 2023 associated with the pending merger
with PFIS. The provision for credit losses decreased $82 thousand to $1.9 million in 2023, from $2.0 million in 2022. Income tax expense decreased $1.4
million, or 33.5%, to $2.7 million in 2023 as compared to $4.1 million in 2022 due primarily to the reduction in pre-tax net income.
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Return on average assets and return on average shareholders’ equity equaled 0.72% and 10.59%, respectively, in 2023, compared to 1.21% and 15.55%,
respectively, in 2022. FNCB paid dividends to holders of common stock of $0.36 per share in 2023, an increase of $0.03 per share, or 9.1%, compared to
$0.33 per share in 2022. Total dividends declared and paid in 2023 equated to a dividend yield of approximately 5.3% based on the closing stock price of $6.79
per share on December 31, 2023. The dividend payout ratio was 54.8% in 2023 compared to 31.9% in 2022.
Balance Sheet Profile
Total assets increased $135.5 million, or 7.8% , to $1.881 billion at December 31, 2023 from $1.746 billion at December 31, 2022. The balance sheet
expansion primarily reflected increases in loans and leases, net of ACL, and cash and cash equivalents, partially offset by decreases in available-for-sale debt
securities as security repayments were used to fund loan originations. Loans and leases, net of ACL, increased $98.2 million, or 8.8%, to $1.208 billion at
December 31, 2023 from $1.110 billion at December 31, 2022. The increase in loans in leases was largely concentrated in commercial equipment financing
loans. Cash and cash equivalents increased $66.0 million, or 157.3%, to $107.9 million at December 31, 2023, from $41.9 million at December 31, 2022.
Meanwhile, available-for-sale debt securities decreased $25.3 million, or 5.3%, to $450.8 million at December 31, 2023 from $476.1 million at December 31,
2022. Total deposits increased $108.3 million, or 7.6%, to $1.529 billion at December 31, 2023 from $1.421 billion at December 31, 2022. FNCB experienced
migration from non-maturity deposits, non-interest-bearing and interest-bearing demand and savings deposits, into time deposits, as customers have become
increasingly rate-sensitive. In addition, to secure liquidity and for interest rate risk management purposes, FNCB increased utilization of brokered deposits.
Total non-maturity deposits decreased $92.0 million, or 7.3%, to $1.171 billion at December 31, 2023 from $1.263 billion at December 31, 2022. Meanwhile,
total time deposits increased $200.3 million, or 126.9%, to $358.2 million at December 31, 2023, from $157.9 million at December 31, 2022. Included in total
time deposits were brokered deposits of $148.7 million at December 31, 2023, which was an increase of $124.8 million as compared to $23.9 million at
December 31, 2022. Borrowed funds increased $17.9 million to $200.3 million at December 31, 2023, from $182.4 million at December 31, 2022, which
included a $25.0 million advance under the Federal Reserve Bank's Bank Term Funding program ("BTFP").
Total shareholders’ equity increased $15.7 million, or 13.2%, to $134.6 million at December 31, 2023 from $118.9 million at December 31, 2022. Tangible
book value increased $0.76 per share, or 12.6%, to $6.80 per share at December 31, 2023 from $6.04 per share at December 31, 2022. The increases in capital
and tangible book value were primarily due to a $7.8 million, or 16.4%, decrease in the accumulated other comprehensive loss, coupled with year-to-date net
income of $13.0 million and a cumulative effect adjustment related to the adoption of ASU 2016-13 of $1.1 million. This was partially offset by year-to-date
dividends declared and paid of $7.1 million. At December 31, 2023, FNCB Bank’s total risk-based capital ratio and the Tier 1 leverage ratio were 12.66% and
8.76%, respectively, which exceeded the 10.00% and 5.00% thresholds required to be well capitalized under the prompt corrective action provisions of the
Basel III capital framework for U.S. banking organizations.
In the fourth quarter of 2021, FNCB began offering commercial equipment financing including direct finance loans and leases and tax-exempt municipal leases
to commercial and municipal customers under the brand 1st Equipment Finance. The product line has been very successful with outstanding loans and leases,
net of unearned income and net deferred loan origination costs, of $163.6 million at December 31, 2023. On October 1, 2023, FNCB established 1st Equipment
Finance, Inc. as a wholly owned subsidiary of the Bank. 1st Equipment Finance, Inc. operates out of the Exeter Community Office, located in Exeter, Luzerne
County, Pennsylvania and services customers both within and outside FNCB's primary market area.
Focus for 2024
Management will continue to focus on balance sheet and interest rate risk management, while controlling funding costs and non-interest expenses. FNCB is
working to satisfy the remaining conditions to closing the merger with PFIS, and is working with PFIS' team in accordance with the Merger Agreement to
prepare for consummation of the merger and integration of our businesses.
SUMMARY OF FINANCIAL PERFORMANCE
Net Interest Income
Net interest income is the difference between (i) interest income, interest and fees on interest-earning assets, and (ii) interest expense, interest paid on deposits
and borrowed funds. Net interest income represents the largest component of FNCB’s operating income and, as such, is the primary determinant of
profitability. Net interest income is impacted by variations in the volume, rate and composition of earning assets and interest-bearing liabilities, changes in
general market interest rates and the level of non-performing assets. Interest income is shown on a fully tax-equivalent basis using the corporate statutory tax
rate of 21.0% in 2023, 2022 and 2021.
In response to the economic uncertainty from the global COVID-19 pandemic, the FOMC lowered the federal funds 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, 2022, and had
remained at these historically low levels through March 15, 2022. Supply chain constraints, the war in Ukraine, as well as increasing tension and unrest
worldwide, has resulted in rapid rise in price inflation and these factors, as well as the recent conflict in the Middle East, could drive further inflation, placing
additional strain on economic conditions in the United States, the banking industry and global markets. Thus far, as a result, the FOMC, in an effort to lower
inflation to its 2.0% objective, began tightening U.S. monetary policy in 2022. Specifically, the FOMC increased the target range for the federal funds rate
eleven times for a total of 525 basis points from March 15, 2022 through July 26, 2023, which included an additional four 25-baisis point increases in 2023, on
February 1, 2023, March 2, 2023, May 3, 2023 and July 26, 2023. Corresponding with the increases in federal funds target rate, the national prime rate
increased 525 basis points from 3.25% on March 15, 2022 to 8.50% on July 26, 2023 and has remaining at this level through December 31, 2023. This
dramatic shift to tighten 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. Additionally, FNCB has experienced margin compression in 2023,
as higher interest rates and increased competition have caused deposit and wholesale funding costs to increase at a faster pace and greater magnitude
than earning asset yields.
FNCB responded to competition within its market area and rate-sensitivity of depositors mentioned above by offering various promotional deposit products
including certificate of deposit and money market products having promotional rates. Additionally, FNCB increased its utilization of wholesale funding,
including brokered deposits and borrowing arrangements with FHLB of Pittsburgh and the FRB, as deposit gathering has been pressured by industry-wide
liquidity constraints. FNCB's cost of funds may continue to increase as a result of further tightening by the FOMC and increased competition within FNCB's
market area. Additionally, the replacement rates of existing certificates of deposit, other deposit products and wholesale funding instruments may be higher
than current rates, which could negatively impact FNCB's cost of funds and result in further net interest margin and spreads contraction. Further contraction in
margin and spread could have an unfavorable impact on profitability and future net interest levels. Management monitors FNCB's interest rate risk and
sensitivity to changes in market interest rates through the Asset Liability Committee ("ALCO") and is committed to prudent and proactive balance sheet
management with a focus on controlling funding costs in relation to funding needs and yields on earning assets in order to mitigate any potential unfavorable
impact to FNCB's earnings and profitability.
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Recent economic data suggest that the FOMC's goals for employment and inflation are more balanced. The FOMC as indicated that it remains attentive to
inflation risks and does not expect to reduce the federal funds target range until there is greater confidence that inflation is moving sustainably towards its goal
of 2.0%. However, there is no assurance that these trends with respect to employment and inflation will continue, or forecasts for these metrics will be
indicative of actual results. The recent onset of conflict in the Middle East, as well as increasing tension and unrest worldwide, could drive further inflation
and place additional strain on economic conditions in the United States, the banking industry and global markets. Should inflationary pressures persist, the
FOMC may need to continue to increase interest rates which could result in higher funding costs and further contraction of FNCB's tax-equivalent net interest
margin and rate spread.
Tax-equivalent net interest income de creased $6.2 million, or 11.2%, to $49.0 million in 2023 compared to $55.2 million in 2022. The decrease in tax-
equivalent net interest income was due to an increase in tax-equivalent interest expense which resulted primarily from increased utilization of wholesale
funding and higher funding costs that overshadowed the increase in interest income. The steep and rapid rise in market interest rates sustained in 2023 caused
significant increases in funding costs and margin contraction throughout the banking industry. 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 declined 57 basis points to 2.81% in 2023 compared to 3.38% in
2022. Additionally, the magnitude and velocity of the rate increases in 2023 has led to a decrease in FNCB's rate spread, the difference between the average
yield on interest-earning assets shown on a fully tax-equivalent basis and the average cost of interest-bearing liabilities, as funding costs increased to a greater
extent than asset yields. FNCB's rate spread was 2.27% in 2023, a decrease of 97 basis points as compared to 3.24% in 2022.
Tax-equivalent interest income increased $21.2 million , or 6.6%, to $83.1 million in 2023 from $61.9 million in 2022, which was largely caused by an increase
in the tax-equivalent yield on average earning assets, coupled with growth in average earning assets. The tax-equivalent yield on earning assets increased
98 basis points to 4.77% in 2023 from 3.79%, which resulted in a corresponding increase in tax-equivalent interest income of $16.0 million. Specifically,
FNCB's tax-equivalent yield on loans and leases increased 112 basis points to 5.55% in 2023 compared to 4.43% in 2022, resulting in a corresponding increase
in tax-equivalent interest income of $12.8 million. In addition, the tax-equivalent yield on investment securities increased 47 basis points to 3.05% in
2023 from 2.58% in 2022 and caused a corresponding increase to tax-equivalent interest income of $2.5 million. Average earning assets increased $107.9
million, or 6.6%, to $1.740 billion in 2023 from $1.633 billion in 2022, resulting in a corresponding increase to tax-equivalent interest income of $5.2 million.
Specifically, average loans and leases increased $112.9 million, or 10.5%, to $1.187 billion in 2023 from $1.074 million in 2022, which reflected strong growth
in commercial equipment financing loans. Partially offsetting the increase in average loan volumes was a $17.6 million, or 3.2%, decrease in average
investment securities to $532.5 million in 2023 from $550.1 million in 2022.
Meanwhile, interest expense increased $27.4 million, or 406.9%, to $34.1 million in 2023 from $6.7 million in 2022, which more than offset the increase in
tax-equivalent interest income. The increase in interest expense was primarily due to higher funding costs, coupled with an increase in average borrowed funds.
In 2023, following the rapid rise in market interest rates and change in overall market liquidity, competition for deposits intensified and depositors had become
increasingly rate sensitive. FNCB responded to competitive pressures with increases in deposit rates and offered time deposit specials with promotional rates
and terms. The cost of interest-bearing deposits increased 174 basis points to 2.10% in 2023 from 0.36% in 2022. Specifically, the cost of interest-bearing
demand deposits increased 158 basis points while the cost of time deposit increased 280 basis points comparing 2023 and 2022, which resulted in
corresponding increases to interest expense of $11.1 million and $8.5 million, respectively. In addition, liquidity constraints within the industry caused FNCB
to increase utilization of wholesale funding, that typically carry higher interest rates. As a result, FNCB's cost of wholesale borrowings increased 237 basis
points to 4.89% in 2023 from 2.52% in 2022, causing a corresponding increase to interest expense of $3.7 million. Overall, FNCB's cost of funds increased 196
basis points to 2.51% for the year-ended December 31, 2023 from 0.55% for the year ended December 31, 2022, which resulted in a corresponding increase in
tax-equivalent interest expense of $23.6 million. Borrowed funds averaged $197.6 million in 2023, an increase of $88.0 million, or 80.4%, from $109.5 million
in 2022, which resulted in a corresponding increase in interest expense of $3.2 million. Total interest-bearing deposits increased $44.9 million, or 4.0%, to
$1.163 billion for 2023, compared to $1.118 billion for 2022, which resulted in a corresponding increase to interest expense of $651 thousand. FNCB
experienced deposit migration from non-maturity deposits into time deposits. Additionally, FNCB utilized brokered deposits for various ALCO strategies to
manage interest rate risk and to secure liquidity. Specifically, average time deposits increased $164.4 million, or 104.1%, to $322.4 million in 2023 from
$158.0 million in 2022. Brokered time deposits averaged $116.9 million in 2023, an increase of $92.0 million, or 370.0%, from $24.9 million in 2022.
Conversely, average interest-bearing demand deposits decreased $111.5 million, or 13.7%, to $704.1 million in 2023, compared to $815.6 million in 2022.
Savings deposits averaged $136.3 million in 2023, a decrease of $8.0 million, or 5.5%, from $144.3 million in 2022.
26
Table of Contents
The following table presents the components of net interest income for the three years ended December 31, 2023, 2022 and 2021:
Summary of Net Interest Income
Average
Balance
2023
Interest
For the Year Ended December 31,
2022
Yield/
Cost
Average
Balance
Interest
Yield/
Cost
Average
Balance
2021
Interest
Yield/
Cost
(dollars in thousands)
Assets:
Earning assets (2)(3)
Loans and leases-taxable (4)
Loans and leases-tax free (4)
Total loans and leases (1)(2)
$
$
$
Securities-taxable
Securities-tax free
Total securities (1)(5)
Interest-bearing deposits in other
banks and federal funds sold
Total earning assets
Non-earning assets
Allowance for credit losses
Total assets
Liabilities and Shareholders'
Equity:
Interest-bearing liabilities
Interest-bearing demand deposits
Savings deposits
Time deposits
Total interest-bearing deposits
Borrowed funds and other interest-
bearing liabilities
Total interest-bearing
liabilities
Demand deposits
Other liabilities
Shareholders' equity
Total liabilities and
shareholders' equity
Net interest income/interest rate
spread (6)
Tax equivalent adjustment
Net interest income as reported
Net interest margin (7)
63,553
2,293
65,846
13,442
2,794
16,236
1,011
83,093
13,867
381
10,213
24,461
9,666
34,127
$
1,131,072
56,118
1,187,190
436,774
95,743
532,517
20,669
1,740,376
65,679
(12,846)
1,793,209
704,118
136,354
322,354
1,162,826
197,563
1,360,389
287,471
22,696
122,653
5.62% $
4.09
5.55
3.08
2.92
3.05
4.89
4.77%
$
$
1,019,254
55,058
1,074,312
439,824
110,238
550,062
8,152
1,632,526
69,602
(13,497)
1,688,631
1.97% $
0.28
3.17
2.10
815,579
144,343
157,991
1,117,913
4.89
109,515
2.51%
1,227,428
314,105
15,609
131,489
45,696
1,895
47,591
10,830
3,370
14,200
91
61,882
3,215
174
581
3,970
2,762
6,732
4.48% $
3.44
4.43
2.46
3.06
2.58
1.12
3.79%
$
$
905,237
45,217
950,454
346,204
83,437
429,641
68,932
1,449,027
129,386
(12,311)
1,566,102
0.39% $
0.12
0.37
0.36
764,798
125,022
176,245
1,066,065
2.52
0.55%
12,228
1,078,293
315,181
13,892
158,736
39,645
1,777
41,422
8,476
2,641
11,117
88
52,627
1,252
87
1,169
2,508
197
2,705
$
1,793,209
$
1,688,631
$
1,566,102
48,966
(1,069)
47,897
$
2.27%
2.81%
55,150
(1,106)
54,044
$
3.24%
3.38%
49,922
(928)
48,994
$
4.38%
3.93
4.36
2.45
3.17
2.59
0.13
3.63%
0.16%
0.07
0.66
0.24
1.61
0.25%
3.38%
3.45%
Interest income is presented on a tax-equivalent basis using a 21% rate.
(1)
(2) Loans and leases are stated net of unearned income.
(3) Non-accrual loans are included in loans within earning assets.
(4)
(5) The yields for securities that are classified as available for sale are based on the average historical amortized cost.
(6)
(7) Net interest income as a percentage of total average interest earning assets.
Interest income on loans and leases includes net loan costs of $1,286 in 2023 and net loan fees of $68 in 2022, and $4,612 in 2021.
Interest rate spread represents the difference between the average yield on interest-earning assets and the cost of average interest-bearing liabilities and is presented on a tax equivalent basis.
27
Table of Contents
The most significant impact on net income between periods is derived from the interaction of changes in the volume and rates earned or paid on interest-
earning assets and interest-bearing liabilities. The volume of earning assets, specifically loans and investments, compared to the volume of interest-bearing
liabilities represented by deposits and borrowings, combined with the spread, produces the changes in net interest income between periods.
The following table summarizes the effect that changes in volumes of earning assets and interest-bearing liabilities and the interest rates earned and paid on
these assets and liabilities have on net interest income. The net change or mix component attributable to the combined impact of rate and volume changes has
been allocated proportionately to the change due to volume and the change due to rate.
Rate Volume Analysis
(in thousands)
Interest income:
Loans and leases-taxable
Loans and leases-tax free
Total loans and leases
Securities-taxable
Securities-tax free
Total securities
Interest-bearing deposits in other banks and
federal funds sold
Total interest income
Interest expense:
Interest-bearing demand deposits
Savings deposits
Time deposits
Total interest-bearing deposits
Borrowed funds and other interest-bearing
liabilities
Total interest expense
Net interest income
Provision for Credit Losses
For the Year Ended December 31,
2023 vs. 2022
Increase (Decrease) Due to Change in
Total
Rate
Volume
2022 vs. 2021
Increase (Decrease) Due to Change in
Total
Rate
Volume
$
$
5,397 $
37
5,434
(76)
(428)
(504)
287
5,217
(497)
(10)
1,158
651
3,183
3,834
1,383 $
12,460 $
361
12,821
2,688
(148)
2,540
17,857 $
398
18,255
2,612
(576)
2,036
633
15,994
920
21,211
11,149
217
8,474
19,840
3,721
23,561
(7,567) $
10,652
207
9,632
20,491
6,904
27,395
(6,184) $
5,093 $
356
5,449
2,305
822
3,127
(139)
8,437
88
15
(111)
(8)
2,395
2,387
6,050 $
958 $
(238)
720
49
(93)
(44)
142
818
1,875
72
(477)
1,470
170
1,640
(822) $
6,051
118
6,169
2,354
729
3,083
3
9,255
1,963
87
(588)
1,462
2,565
4,027
5,228
The level of the ACL is a critical accounting estimate, which is subject to uncertainty. The provision for credit losses is a charge to earnings in an amount
sufficient enough to maintain the ACL at a level deemed adequate by management. A credit to the provision 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. FNCB recorded a provision for credit losses of $1.9 million for the year ended
December 31, 2023, a decrease of $0.1 million, compared to $2.0 million for the year ended December 31, 2022. Future material adjustments may be necessary
to the provision for credit losses and the ACL if economic conditions or loan performance differ substantially from the assumptions management considered in
its evaluation of the ACL.
28
Table of Contents
Non-Interest Income
The following table presents the components of non-interest income for the years ended December 31, 2023 and 2022:
Components of Non-Interest Income
(in thousands)
Deposit service charges
Net gain (loss) on the sale of available-for-sale debt securities
Net loss on equity securities
Net gain on the sale of mortgage loans held for sale
Loan-related fees
Income from bank-owned life insurance
Bank-owned life insurance settlement
Merchant services revenue
Wealth management services revenue
Loan referral fees
Other
Total non-interest income
Year Ended December 31,
Change
2023
2022
$
%
$
$
4,537 $
252
(1,601)
6
398
752
-
592
944
362
403
6,645 $
4,415 $
(223)
(34)
205
243
710
273
712
564
191
925
7,981 $
122
475
(1,567)
(199)
155
42
(273)
(120)
380
171
(522)
(1,336)
2.8%
(213.0)
4,608.8
(97.1)
63.8
5.9
(100.0)
(16.9)
67.3
89.5
(56.4)
(16.7)%
For the year ended December 31, 2023 , non-interest income decreased $1.3 million, or 16.7%, to $6.6 million compared to $7.9 million for the year ended
December 31, 2022. The 16.7% decrease in non-interest income primarily from an unfavorable change in market value of equity securities, coupled with
reductions in net gains on the sale of mortgages held for sale, and decreases in merchant services revenue and other non-interest income. FNCB's holdings of
equity securities are comprised primarily of common stock of publicly traded bank holding companies. Stock market volatility, due to rising interest rates and
several bank failures in early 2023, negatively impacted equity prices within this sector and resulted in FNCB recording a net loss on equity securities of $1.6
million in 2023, compared to a net loss of only $34 thousand recorded in 2022. Net gains on the sale of mortgages held for sale decreased $199 thousand, or
97.1%, to $6 thousand for the year ended December 31, 2023, compared to $205 thousand for the year ended December 31, 2022, as pricing margins on loans
and the volume of loan sales decreased due to the rapid rise in market interest rates. Merchant services revenues and other non-interest income decreased $120
thousand, or 16.9%, to $592 thousand in 2023 from $712 thousand in 2022, while other non-interest income decreased $351 thousand, or 31.5%, to $765
thousand in 2023 from $1.1 million in 2022. Additionally, FNCB recorded income associated with BOLI death benefit claims of $273 thousand in 2022. There
was no such BOLI claim in 2023.
Partially offsetting these decreases in non-interest income were increases in wealth management services revenue, deposit service charges, net gains on the sale
of available-for-sale debt securities and loan related fees. Revenue generated from wealth management services increased $380 thousand, or 67.3%, to $944
thousand in 2023 from $564 thousand in 2022, which reflected FNCB's purchase of Chiaro Investment Services, LLC on September 30, 2022. Deposit service
charges increased $122 thousand, or 2.8%, to $4.5 million in 2023, compared to $4.4 million in 2022, which was primarily due to increases in transactional-
related charges, check card fees and wire transfer fees. FNCB recorded a net gain on the sale of available-for sale debt securities of $252 thousand in 2023,
compared to a net loss of $223 thousand in 2022, an increase of $475 thousand, or 213.0%. Loan-related fees increased $155 thousand, or 63.8%, to $398
thousand in 2023 from $243 thousand in 2022.
29
Table of Contents
Non-Interest Expense
The following table presents the major components of non-interest expense for the years ended December 31, 2023 and 2022:
Components of Non-Interest Expense
(in thousands)
Salaries and employee benefits
Occupancy expense
Equipment expense
Advertising expense
Data processing expense
Regulatory assessments
Bank shares tax
Professional fees
(Credit) provision for unfunded commitments
Merger and acquisition expenses
Other operating expenses
Total non-interest expense
Year Ended December 31,
Change
2023
2022
$
%
$
$
20,234 $
2,156
963
836
4,008
1,115
509
1,093
(803)
1,480
5,331
36,922 $
19,283 $
2,093
1,295
801
4,027
811
915
1,273
366
-
4,610
35,474 $
951
63
(332)
35
(19)
304
(406)
(180)
(1,169)
1,480
721
1,448
4.9%
3.0
(25.6)
4.4
(0.5)
37.5
(44.4)
(14.1)
(319.4)
-
15.6
4.1%
Non-interest expense totaled $36.9 million in 2023, an increase of $1.4 million, or 4.1%, from $35.5 million in 2022. The increase was primarily due to the
recognition of $1.5 million in merger and acquisition expenses in 2023. FNCB also experienced increases in salaries and employee benefits, regulatory
assessments and other operating expenses, which were partially offset by a credit for unfunded commitments and reductions in equipment expense and bank
shares tax.
Salaries and employee benefits increased $951 thousand, or 4.9%, to $20.2 million in 2023 from $19.3 million in 2022. The increase in salaries and employee
benefits was primarily due to increases in starting salaries and salary ranges to remain competitive in attracting and retaining quality staff, annual merit
increases and higher payroll taxes, health insurance premiums and retirement contributions, partially offset by a reduction in incentive compensation. At the
end of 2022, management engaged a third-party consultant to conduct a comprehensive evaluation of FNCB's salary and benefit structure and industry
comparison. As a result of this study, FNCB had increased the minimum starting salary for new employees and adjusted salary ranges as appropriate to be
competitive with its peers within its market area. Additionally, FNCB increased the 2023 annual cost of living/merit increase for employees.
Comparing 2023 and 2022, regulatory assessments increased $304 thousand, or 37.5%, due largely to balance sheet growth. Other operating expenses
increased $721 thousand, or 15.6%, to $5.3 million in 2023, from $4.6 million in 2022, which reflected increases in insurance costs, legal fees, correspondent
bank fees and servicing costs of purchased loans. These increases were slightly offset by a credit for unfunded commitments and a reduction in equipment
expenses and bank shares tax expense. At December 31, 2023, FNCB recorded a credit for unfunded commitments of $803 thousand, compared to a provision
for unfunded commitments of $366 thousand at December 31, 2022. Equipment expenses and bank shares tax expense decreased $332 thousand, or 25.6%, and
$406 thousand, or 44.4%, respectively, comparing 2023 and 2022.
Provision for Income Taxes
FNCB recorded income tax expense of $2.8 million in 2023, a decrease of $1.4 million, or 33.5%, compared to $4.2 million in 2022. The decrease in income
tax expense was due to lower taxable income in 2023 as compared to 2022. FNCB's effective tax rate increased to 17.52% at December 31, 2023, compared to
16.85% at December 31, 2022, which resulted primarily from a decrease in tax-exempt income and an increase in non-deductible interest expense.
Management evaluates the carrying amount of its deferred tax assets on a quarterly basis, or more frequently, as necessary, in accordance with guidance set
forth in ASC Topic 740 “Income Taxes,” and applies the criteria in the guidance to determine whether it is more likely than not that some portion, or all, of the
deferred tax asset will not be realized within its life cycle, based on the weight of available evidence. If management determines based on available evidence,
both positive and negative, that it is more likely than not that some portion or all of the net deferred tax assets will not be realized in future periods, a valuation
allowance is calculated and recorded. These determinations are inherently subjective and depend upon management’s estimates and judgments used in their
evaluation of both positive and negative evidence.
In evaluating available evidence, management considers, among other factors, historical financial performance, expectation of future earnings, the ability to
carry back losses to recoup taxes previously paid, length of statutory carry forward periods, experience with operating loss and tax credit carry forwards not
expiring unused, tax planning strategies and timing of reversals of temporary differences. In assessing the need for a valuation allowance, management
carefully weighs both positive and negative evidence currently available.
Management performed an evaluation of FNCB’s deferred tax assets at December 31, 2023 taking into consideration both positive and negative evidence as of
that date. Based on this evaluation, management believes that FNCB's future taxable income will be sufficient to utilize deferred tax assets. Accordingly,
management concluded that no valuation allowance for deferred tax assets was required at December 31, 2023 or 2022.
30
Table of Contents
FINANCIAL CONDITION
Total assets increased $135.5 million, or 7.8%, to $1.881 billion at December 31, 2023 from $1.746 billion at December 31, 2022. The balance sheet
expansion primarily reflected increases in loans and leases, net of ACL, and cash and cash equivalents, partially offset by decreases in available-for-sale debt
securities as security repayments were used to fund loan originations. Loans and leases, net of ACL, increased $98.2 million, or 8.8%, to$1.208 billion at
December 31, 2023 from $1.110 billion at December 31, 2022. FNCB experienced strong loan demand in the commercial sector with the majority of the
increase in loans and leases concentrated in commercial equipment financing loans. Cash and cash equivalents increased $66.0 million, or 157.3%, to $107.9
million at December 31, 2023, from $41.9 million at December 31, 2022. Meanwhile, available-for-sale debt securities decreased $25.3 million, or 5.3%, to
$450.8 million at December 31, 2023 from $476.1 million at December 31, 2022. Total deposits increased $108.3 million, or 7.6%, to $1.529 billion
a December 31, 2023 from $1.421 billion at December 31, 2022. FNCB experienced migration from non-maturity deposits, non-interest-bearing and interest-
bearing demand and savings deposits, into time deposits, as customers have become increasingly rate-sensitive. In addition, FNCB increased utilization of
brokered deposits to secure liquidity and for interest rate risk management purposes. Total non-maturity deposits decreased $92.0 million, or 7.3%, to $1.171
billion at December 31, 2023 from $1.263 billion at December 21, 2022. Total time deposits increased $200.3 million, or 126.9%, to $358.2 million at the end
of 2023, from $157.9 million at December 31, 2022. Included in time deposits were brokered deposits of $148.7 million at December 31, 2023, an increase of
$124.8 million from $23.9 million at December 31, 2022. Borrowed funds increased $17.9 million to $200.3 million at December 31, 2023, compared to
$182.4 million at December 31, 2022, which included a $25 million advance under the Federal Reserve Bank's Bank Term Funding Program ("BTFP").
Total shareholders ’ equity increased $15.7 million, or 13.2%, to $134.6 million at December 31, 2023 from $118.9 million at December 31, 2022. Tangible
book value increased $0.76 per share, or 12.6%, to $6.80 per share at December 31, 2023 from $6.04 per share at December 31, 2022. The increases in capital
and tangible book value were primarily due to a $7.8 million, or 16.4%, decrease in the accumulated other comprehensive loss, coupled with year-to-date net
income of $13.0 million and a cumulative effect adjustment related to the adoption of ASU 2016-13 of $1.1 million. These increases to capital were partially
offset by year-to-date dividends declared and paid of $7.1 million. At December 31, 2023 , FNCB Bank’s total risk-based capital ratio and the Tier 1 leverage
ratio were 12.66% and 8.76%, respectively, which exceeded the 10.00% and 5.00% thresholds required to be well capitalized under the prompt corrective
action provisions of the Basel III capital framework for U.S. banking organizations.
Cash and Cash Equivalents
Cash and cash equivalents increased $66.0 million, or 157.3%, to $ 107.9 million at December 31, 2023, from $41.9 million at December 31, 2022. The
increase in cash and cash equivalents resulted primarily from cash provided by operating and financing activities, primarily an increase of $108.4 million in
deposits, including brokered deposits, and net activity related to available-for-sale debt securities of $34.7 million. Funds received from deposits and
investment activity were used to fund demand for FNCB's lending products, resulting in an increase in loans and leases, net of deferred loan origination fees
and costs and unearned income, of $98.1 million. Partially offsetting this, FNCB paid cash dividends totaling $7.1 million, or $0.360 per share in 2023
compared to $6.5 million, or $0.330 per share, in 2022.
Securities
FNCB’s investment securities portfolio provides a source of liquidity needed to meet expected loan demand and interest income to increase profitability.
Additionally, the investment securities portfolio is used to meet pledging requirements to secure public deposits and for other purposes. Debt securities are
classified as either available-for-sale or held-to-maturity at the time of purchase based on management's intent. 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,
while held-to-maturity securities are carried at amortized cost. At December 31, 2023 and 2022, all debt securities were classified as available-for-sale. Equity
securities with readily determinable fair values are carried at fair value, with gains and losses due to fluctuations in market value included in the consolidated
statements of income. Securities with limited marketability and/or restrictions, such as FHLB of Pittsburgh stock, are carried at cost. Decisions to purchase or
sell investment securities are based upon management’s current assessment of long- and short-term economic and financial conditions, including the interest
rate environment and asset/liability management, liquidity and tax-planning strategies.
At December 31, 2023, the investment portfolio was comprised principally of available-for-sale debt securities including, fixed-rate, taxable and tax-exempt
obligations of state and political subdivisions and fixed-rate and floating-rate securities issued by U.S. government or U.S. government-sponsored agencies,
which include mortgage-backed securities and residential and commercial collateralized mortgage obligations ("CMOs"). FNCB also holds investments, to a
lesser extent, in private CMO's, corporate debt securities, asset-backed securities and U.S. Treasury securities. Additionally, FNCB holds equity investments in
the common and preferred stock of certain publicly traded bank holding companies. Except for U.S. government and government-sponsored agencies, there
were no securities of any individual issuer that exceeded 10.0% of shareholders’ equity as of December 31, 2023.
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. The 10-year Treasury rate was unchanged at 3.88% at both December 31, 2023 and 2022, while the 2-year Treasury rate, which was
4.41% at December 31, 2022 , decreased 18 basis points to 4.23% at December 31, 2023 . 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 December 31, 2023, FNCB reported a net unrealized loss, included in accumulated other
comprehensive loss, of $40.0 million, net of deferred income taxes of $10.6 million, a decrease of $8.8 million compared to the net unrealized holding loss of
$48.8 million, net of deferred income taxes of $13.0 million, at December 31, 2022. Despite the improvement in the value of available-for-sale debt securities,
market interest rate volatility remains. Any increases in interest rates could result in further depreciation in the fair value of FNCB’s securities portfolio and
capital position. However, accumulated other comprehensive income and loss related to available-for-sale debt securities is excluded from regulatory capital
and does not have an impact on FNCB's regulatory capital ratios.
31
Table of Contents
The following table presents the carrying value of available-for-sale debt securities and equity securities, at fair value at December 31, 2023, 2022 and 2021:
Composition of the Investment Portfolio
(dollars in thousands)
Available-for-sale debt securities
U.S. Treasuries
Obligations of state and political
subdivisions
U.S. Government-sponsored agency:
Collateralized mortgage obligations -
residential
Collateralized mortgage obligations -
commercial
Residential mortgage-backed securities
Private Collateralized mortgage obligations
Corporate debt securities
Asset backed securities
Negotiable certificates of deposit
Total available-for-sale debt securities $
Fair Value
2023
% of Portfolio
December 31,
2022
% of Portfolio
Fair Value
Fair Value
2021
% of Portfolio
$
33,177
7.36% $
32,134
6.75% $
36,355
6.96%
199,796
44.32
220,782
46.37
244,372
46.76
74,207
16.46
80,407
16.89
100,710
19.27
3,386
16,446
70,152
31,286
21,690
674
450,814
0.75
3.65
15.56
6.94
4.81
0.15
100.00% $
3,329
20,663
72,507
30,672
14,941
656
476,091
0.70
4.34
15.23
6.44
3.14
0.14
100.00% $
3,727
25,506
67,165
32,063
11,932
736
522,566
0.71
4.88
12.85
6.14
2.28
0.14
100.00%
Equity securities, at fair value
$
4,786
$
7,717
$
4,922
FNCB purchased 11 securities with an aggregate cost of $17.2 million and a weighted-average yield of 7.99% during the year ended December 31, 2023.
Securities purchased included $9.0 million in private asset-backed securities, $6.6 million in private CMOs and $1.5 million in corporate debt securities.
Principal repayments and a decrease in the fair value of the available-for-sale portfolio due to an increase in market interest rates entirely offset the increase due
to the purchases. In 2023, FNCB also sold available-for-sale securities with an aggregate amortized cost of $10.1 million and a weighted-average yield of
3.85%. Gross proceeds received on the sales totaled $10.4 million and a realized net gain of $252 thousand upon the sale is included in non-interest income in
2023. The investment portfolio averaged $532.5 million in 2023, a decrease of $17.4 million, or 3.2%, from $550.1 million in 2023, as the majority of proceeds
received from repayments were used to fund loan demand. The tax-equivalent yield on the investment securities increased 47 basis points to 3.05% in 2023
from 2.58% in 2022.
Management continually monitors the investment portfolio for credit worthiness, value, and yield. Semiannually, 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 municipal security
is compared to a portfolio credit benchmark to identify which securities may contain more than a minimal risk of payment default. As of December 31, 2023,
the third-party report concluded that each municipal security held within the portfolio met or exceeded the benchmark and that none of the securities required
further review. Management also monitors municipal securities monthly using a third-party surveillance report that identifies events related to the issuer that
may indicate a deterioration in credit quality. Management noted no such events during 2023.
32
Table of Contents
The following table presents the weighted-average yields on available-for-sale debt securities by major category and maturity period at December 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 states
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.
December 31, 2023
Within One
Year
> 1 – 5 Years
6-10 Years
Over 10 Years
Collateralized
Mortgage
Obligations,
Mortgage-
Backed and
Asset-Backed
Securities
Total
-%
1.17%
-%
-%
2.96
2.97
2.27
2.35
-%
-
-
-
-
-
2.63
-
-
-
-
-
-
2.96%
-
-
-
5.42
-
1.02
2.28%
-
-
-
4.84
-
-
3.13%
-
-
-
-
-
-
2.35%
2.00
2.70
3.98
-
7.08
-
3.59%
1.17%
2.48
2.63
2.00
2.70
3.98
4.93
7.08
1.02
3.01%
Weighted-average yield
U.S. Treasury
Obligations of state and political
subdivisions
U.S. government/government-sponsored
agencies:
Collateralized mortgage obligations -
residential
Collateralized mortgage obligations -
commercial
Mortgage-backed securities
Private collateralized mortgage obligations
Corporate debt securities
Asset-backed securities
Negotiable certificates of deposit
Weighted-average yield
Evaluation for Credit Impairment
Management performed a review of all securities in an unrealized loss position as of December 31, 2023 and noted that there were no material change in the
credit quality of any of the issuers or any other event or circumstance that may cause a significant adverse effect on the fair value if these securities. Moreover,
to date, FNCB has received all scheduled principal and interest payments and expects to fully collect all future contractual principal and interest payments on
all securities in an unrealized loss position at December 31, 2023. Based on the results of its review and considering the attributes of these debt securities,
management concluded that changes in the fair value of the securities were consistent with movements in market interest rates and spreads relative to when the
securities were purchased and not due to the credit quality of the securities or issuers. Accordingly, management determined that FNCB was not required to
establish an ACL for any security in an unrealized loss position at December 31, 2023.
See Note 3, “Securities,” of the Notes to Consolidated Financial Statements included in Item 8, “Financial Statements and Supplementary Data” to this Annual
Report on Form 10-K for additional information about management's credit impairment evaluation of available-for-sale debt securities.
Loans and Leases
For comparative purposes, loan and lease balances by loan segment at December 31, 2023 and 2022 are presented at amortized cost, net of deferred loan
origination fees and costs and unearned income, in the following narrative analysis.
Total loans and leases, gross increased by $96.0 million, or 8.5%, to $1.220 billion at December 31, 2023 from $1.124 billion at December 31, 2022. The
growth in the loan and lease portfolio primarily reflected strong demand for equipment financing under the 1st Equipment Finance brand, coupled with
moderate organic growth in commercial real estate and state and political subdivision loan categories. Loans originated under the 1st
Equipment Finance brand, were previously reported under commercial and industrial loans. On October 1, 2023, 1st Equipment Finance, Inc. was established
as a wholly owned subsidiary of the Bank and is now reported as a separate loan segment, commercial equipment financing. The majority of equipment
financing loans are transactional in nature and originated through indirect, third-party dealers. At December 31, 2023, simple interest loans and direct finance
leases outstanding totaled $163.6 million, an increase of $83.1 million, or 103.2%, from $80.5 million at December 31, 2022. Municipal leases originated
under this initiative were $4.7 million and 3.7 million, respectively, at December 31, 2023 and 2022 and are included in state and municipal subdivision loans
and leases.
From a collateral standpoint, the majority of FNCB’s loan portfolio consists of loans secured by real estate. Real estate secured loans, which include
commercial real estate, construction, land acquisition and development, and residential real estate loans increased by $20.7 million, or 3.0%, to $713.3 million
at December 31, 2023 from $692.6 million at December 31, 2022. However, the percentage of real estate secured loans to total loans and leases decreased
to 58.5% at December 31, 2023 from 61.6% at December 31, 2022, which primarily reflected diversification of the portfolio into commercial equipment
financing.
Commercial real estate loans, which include long-term commercial mortgage financing and are primarily secured by first or second lien mortgages, increased
$31.8 million, or 8.5%, to $408.1 million at December 31, 2023, from $376.3 million at December 31, 2022. Commercial and industrial loans consist primarily
of working capital financing, revolving lines of credit and loans secured by cash and marketable securities. Commercial and industrial loans, excluding the
commercial equipment financing loans decreased $8.0 million, or 4.2%, to $183.8 million at December 31, 2023 from $191.8 million at December 31, 2022.
Construction, land acquisition and development loans decreased $6.3 million, or 9.5%, to $59.9 million at December 31, 2023 from $66.2 million at December
31, 2022.
33
Table of Contents
Residential real estate loans include fixed-rate and variable-rate, amortizing mortgage loans, home equity lines of credit ("HELOCs") and HELCOs with a
carve out feature. FNCB primarily underwrites fixed-rate purchase and refinance of residential mortgage loans for sale in the secondary market to reduce
interest rate risk and provide funding for additional loans. Additionally, FNCB offers a propriety non-saleable mortgage product branded as the WOW
mortgage. The WOW mortgage has maturity terms of 10 to 19.5 years and offers customers an attractive fixed interest rate and low closing costs. Due to the
increase in market rates, demand mortgages declined significantly in 2023. As a result, residential real estate loans outstanding decreased $4.8 million, or 1.9%,
to $245.3 million at December 31, 2023, from $250.1 million at December 31, 2022.
Consumer loans totaled $85.7 million at December 31, 2023, a decrease of $8.8 million, or 9.3%, from $94.5 million at December 31, 2022. The decrease in
consumer loans was largely due to runoff of individual loans and pools of personal installment loans purchased through third-party originators in 2022. FNCB
did not purchase any consumer loans or loan pools in 2023. Loans to state and municipal governments increased $9.0 million, or 13.9%, to $73.9 million at
December 31, 2023 from $64.9 million at December 31, 2022.
The following table presents loans and leases receivable, net by major category at December 31, 2023 and 2022:
Loan and Lease Portfolio Detail
(in thousands)
Residential real estate
Commercial real estate
Construction, land acquisition and development
Commercial and industrial
Commercial equipment financing
Consumer
State and political subdivisions
Total loans and leases
Allowance for credit losses
Loans and leases, net
December 31,
2023
% of Total
Loans, Gross
2022
% of Total
Loans, Gross
Amount
Amount
$
$
245,282
408,135
59,876
183,794
163,605
85,730
73,843
1,220,265
(11,986)
1,208,279
20.10% $
33.45
4.91
15.06
13.41
7.02
6.05
100.00%
$
250,106
376,275
66,230
272,361
-
94,493
64,852
1,124,317
(14,193)
1,110,124
23.86%
37.29
4.24
19.67
-
8.72
6.22
100.00%
The following tables present the maturity distribution and interest rate information of the loan and lease portfolio by major category as of December 31, 2023:
Loans and Leases by Maturity and Interest Rate Sensitivity
(in thousands)
Residential real estate
Commercial real estate
Construction, land acquisition and development
Commercial and industrial
Commercial equipment financing
Consumer
State and political subdivisions
Total loans and leases
(in thousands)
Loans and leases with fixed rates
Residential real estate
Commercial real estate
Construction, land acquisition and development
Commercial and industrial
Commercial equipment financing
Consumer
State and political subdivisions
Total loans and leases with fixed rates
Loans and leases with floating rates
Residential real estate
Commercial real estate
Construction, land acquisition and development
Commercial and industrial
Commercial equipment financing
December 31, 2023
Within One One to Five Five to Fifteen Over Fifteen
Year
Years
Years
Years
Total
$
$
3,290 $
15,356
12,528
79,237
636
3,888
2,053
116,989 $
9,113 $
72,711
18,131
60,116
133,566
42,933
13,859
350,429 $
100,846 $
187,368
19,302
44,441
29,403
37,813
31,446
450,619 $
132,033 $
132,700
9,914
-
-
1,096
26,485
302,228 $
245,282
408,135
59,876
183,794
163,605
85,730
73,843
1,220,265
Within One One to Five Five to Fifteen Over Fifteen
Year
Years
Years
Years
Total
December 31, 2023
$
$
$
580 $
1,728
88
9,116
636
3,850
20
16,018 $
2,710 $
13,628
12,441
70,121
-
7,842 $
66,943
10,908
49,938
133,566
42,847
7,377
319,421 $
1,271 $
5,768
7,223
10,178
-
70,257 $
16,584
8,078
14,370
29,403
37,745
29,387
205,824 $
30,589 $
170,784
11,224
30,071
-
99,031 $
361
310
-
-
1,096
11,620
112,418 $
33,002 $
132,339
9,604
-
-
177,710
85,616
19,384
73,423
163,605
85,538
48,404
653,681
67,572
322,519
40,491
110,371
-
Consumer
State and political subdivisions
Total loans and leases with floating rates
$
38
2,033
100,971 $
34
86
6,482
31,008 $
68
2,059
244,795 $
-
14,865
189,810 $
192
25,439
566,584
Table of Contents
Under industry regulations, a concentration is considered to exist when there are loans extended to a multiple number of borrowers engaged in similar activities
which would cause them to be similarly impacted by economic or other conditions. Typically, industry guidelines require disclosure of concentrations of loans
exceeding 10.0% of total loans outstanding. FNCB had no such concentrations at December 31, 2023 and 2022. In addition to industry guidelines, FNCB’s
internal policy considers a concentration to exist in its loan portfolio if an aggregate loan balance outstanding to borrowers within a specific industry exceeds
25.0% of capital. However, management regularly reviews loans in all industry categories to determine if a potential concentration exists.
The following table presents loans by industry, the percentage to gross loans and indicates concentrations greater than 25% of capital at December 31, 2023 and
2022:
Loan Concentrations
(dollars in thousands)
General freight trucking
Retail space/shopping centers
1-4 family residential investment properties
Asset Quality
December 31,
2023
% of Gross
2022
% of Gross
Amount
Loans
Amount
Loans
$
48,477
58,517
119,393
3.97% $
4.80%
9.78%
25,052
54,461
113,746
2.23%
4.85%
10.13%
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 loan officers, the Chief Credit Officer, the loan review function, and the Credit Risk Management and the ACL committees,
as well as oversight from the Board of Directors, including the Director's Loan Committee. Management continually evaluates its credit risk management
practices to ensure problems in the loan portfolio are addressed in a timely manner, although, as is the case with any financial institution, a certain degree of
credit risk is dependent in part on local and general economic conditions that are beyond management’s control.
Under FNCB’s risk rating system, loans that are rated pass, special mention, substandard, doubtful, or loss are reviewed regularly as part of the risk
management practices. The Credit Risk Management Committee, which consists of key members of management from the finance, legal, retail lending and
credit administration units, meets monthly, or more often as necessary, to review individual problem credits and workout strategies and provides monthly
reports to the Director's Loan Committee and full Board of Directors.
Non-performing loans are monitored on an ongoing basis as part of FNCB’s loan review process. Additionally, work-out for non-performing loans, OREO and
other repossessed assets are actively monitored through the Credit Risk Management Committee. A potential loss on a non-performing asset is generally
determined by comparing the outstanding loan balance to the fair market value of the pledged collateral, less estimated cost to sell.
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 credit losses.
35
Table of Contents
The following table presents information about non-performing assets at of December 31, for each of the last five years:
Non-performing Assets
(dollars in thousands)
Non-accrual loans
Loans past due 90 days or more and still accruing
Total non-performing loans
Other real estate owned
Other non-performing assets
Total non-performing assets
$
$
Non-performing loans as a percentage of total loans
Non-performing assets as a percentage of total assets
Allowance for credit losses as a percentage of total loans and
leases, net
Allowance for credit losses to non-accrual loans and leases
Allowance for credit losses to non-performing loans and
leases
Allowance for credit losses to non-performing assets
2023
2022
December 31,
2021
2020
2019
5,338
38
5,376
-
2,067
7,443
$
$
0.44%
0.40%
0.98%
224.54%
222.95%
161.04%
2,763
79
2,842
-
1,773
4,615
$
$
0.25%
0.26%
1.26%
513.68%
499.40%
307.54%
3,863
-
3,863
920
1,773
6,556
$
$
0.39%
0.39%
1.27%
321.41%
321.41%
189.38%
5,581
-
5,581
58
1,900
7,539
$
$
0.62%
0.51%
1.33%
214.12%
214.12%
158.51%
9,084
-
9,084
289
1,900
11,273
1.10%
0.94%
1.08%
98.52%
98.52%
79.39%
Total non-performing assets increased $2.8 million, or 61.3%, to $7.4 million at December 31, 2023 from $4.6 million at December 31, 2022. The higher level
of non-performing assets reflected increases in non-accrual loans and other non-performing assets. Non-performing loans, which include non-accrual loans and
loans past due 90 days or more and still accruing, increased $2.6 million, or 89.2%, to $5.4 million at December 31, 2023 from $2.8 million at December 31,
2022. The increase in non-performing loans was primarily due to increases in non-accrual commercial real estate loans of $1.6 million, which involved three
commercial loan relationships. In addition, FNCB experienced increases of $0.5 million in both non-accrual residential real estate loans and commercial
equipment financing loans. With respect to commercial equipment financing loans, there were five loans secured by trucking equipment were on non-accrual
status at December 31, 2023, while the increase non-accrual residential real estate loans was largely related to one borrower. At December 31, 2023, other non-
performing assets was comprised primarily of a classified account receivable of $1.6 million and repossessed assets of $0.5 million, primarily tractor-trailers.
At December 31, 2022, other non-performing assets was comprised solely of the classified account receivable of $1.8 million.
FNCB experienced some moderate asset quality stress as evidenced by an increase in total delinquent loan balances of $4.3 million to $9.2 million at December
31, 2023, from $4.9 million at December 31, 2022. Total delinquencies as a percentage of total loans and leases, increased to 0.75% at December 31, 2023,
compared to 0.45% at December 31, 2022. In addition, net loan charge-offs increased $1.3 million to $1.5 million, or 0.12% of average loans and leases,
compared to net charge-offs of $185 thousand, or 0.02% of average loans and leases for the same period of 2022. The increase in net charged-offs was
primarily concentrated in the consumer and commercial equipment financing loan segments. Charge-offs of consumer loans were concentrated in third-party
originated unsecured personal loans, reflective of inflationary pressures and higher interest rates, while charge-offs of commercial equipment financing loans
were concentrated in loans collateralized by tractor-trailers following notable weakness within the transportation industry. In response to the stress, FNCB
ceased purchasing unsecured personal loans from third-party originators and has tightened underwriting criteria in originating commercial equipment financing
loans and leases through 1st Equipment Finance, Inc. FNCB’s ratio of non-performing loans to total gross loans increased to 0.44% at December 31, 2023 from
0.25% at December 31, 2022. Similarly, FNCB’s ratio of non-performing assets as a percentage of total assets increased to 0.40% at December 31, 2023 from
0.26% at December 31, 2022.
With regard to the classified account receivable, the balance outstanding of $1.6 million at December 31, 2023 is secured by an evergreen letter of credit that
was received as part of a settlement agreement for a large construction, land acquisition and development loan for a residential development project in the
Pocono region of Monroe County, Pennsylvania. The agreement provides for payment to FNCB as real estate building lots are sold. The project was stalled due
to a decline in real estate values in this area following the financial crisis of 2008. In 2019, economic development in this market area began improving and the
developer for this project had resumed construction activity, including the completion of substantial infrastructure, and had increased marketing and sales
initiatives related to the project. To date, no single-unit lots have been sold, however, the developer completed the construction of a seven-unit building that
houses timeshare units and owners began occupying the units in the fourth quarter of 2020. In 2020, management negotiated a repayment plan with the
developer. FNCB received the first payment of $127 thousand in the second quarter of 2021. A second payment was received in the amount of $127 thousand
in the second quarter if 2023. Management continues to closely monitor this project and has noted an increase in construction activity related to this project
including the construction of two additional six- or eight-unit buildings and further site development including building pads for a new six-seven unit building
and pool/spa building. Additionally, the developer has increased marketing and sales initiatives for the project. Subsequent to December 31, 2023, FNCB
received a third payment of $127 thousand on February 1, 2024.
While FNCB's asset quality has remained favorable, management believes continued economic uncertainty related to supply-chain constraints, inflation, and
the resulting increase in interest rates could affect borrower's ability to repay loans, which may have a negative impact on asset quality including, increases in
loan delinquencies, non-performing loans, loan charge-offs and foreclosures. Additionally, as mentioned above, management is aware of weakness within the
transportation industry, specifically trucking and freight hauling. Demand within this industry, which was inflated during the COVID-19 pandemic, fell sharply
during 2023 reverting back to pre-pandemic levels. However, the drop and demand has caused a spike in unemployment within this industry marked by a
decline in employment opportunities and fewer jobs for displaced drivers. Management is closely monitoring loans secured by trucking equipment and has
tightened underwriting standards for lending to borrowers within this industry segment. The amortized cost of loans within the general freight trucking industry
totaled $48.5 million, or 3.97% of total loans and leases, at December 31, 2023. Further weakness and stress within this industry could result in additional asset
quality weakness including, increases in loan delinquencies, non-performing loans and loan charge-offs. Additional asset quality weakness could result in
increases in the provision for credit losses which could have an adverse affect on FNCB's financial condition and results of operations.
36
Table of Contents
The following table presents the changes in non-performing loans and leases for the years ended December 31, 2023 and 2022 .
Changes in Non-performing Loans and Leases
(in thousands)
Balance, January 1
Loans newly placed on non-accrual
Change in loans past due 90 days or more and still accruing
Loans returned to performing status
Loans charged-off
Loans sold
Loan payments received
Balance, December 31
Year ended December 31,
2022
2023
$
$
2,842 $
7,235
(41)
-
(3,238)
-
(1,421)
5,376 $
3,863
2,325
79
-
(1,237)
(925)
(1,263)
2,842
The following table presents accruing loan delinquencies and non-accrual loans as a percentage of total loans and leases at December 31, 2023 and 2022 :
Loan Delinquencies and Non-accrual Loans
Accruing:
30-59 days
60-89 days
90+ days
Non-accrual
Total delinquencies
December 31,
2023
2022
0.27%
0.04
0.00
0.44
0.75%
0.15%
0.05
0.01
0.25
0.45%
Total delinquencies as a percentage of gross loans increased to 0.75% at December 31, 2023 from 0.45% at December 31, 2022. The most predominant factor
contributing to the increase in total delinquencies was the $2.6 million increase in non-accrual loans.
Allowance for Credit Losses
The ACL is analyzed in accordance with GAAP and is maintained at a level that is based on management’s evaluation of the adequacy of the ACL in relation to
the risks inherent in the loan portfolio. Evaluations are intrinsically subjective, as the results are estimated based on management knowledge and experience
and are subject to interpretation and modification as information becomes available or as future events occur. Management monitors the loan portfolio on an
ongoing basis with emphasis on weakness in both the real estate market and the economy in general and its effect on repayment.
The ACL equaled $12.0 million at December 31, 2023, a decrease of $2.2 million, or 15.6%, from $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, coupled with a net charge-offs of $1.5 million, partially
offset by a provision for credit losses of $1.9 million for the year ended December 31, 2023. The ratio of ACL as a percentage of total loans and leases, net of
deferred origination fees and costs and unearned income, decreased to 0.98% at December 31, 2023 from 1.26% of total loans and leases at December 31,
2022.
The following table presents an allocation of the ACL by major loan category at December 31, for each of the last five years:
Allocation of the ACL
(dollars in
thousands)
Residential real
estate
Commercial real
estate
Construction, land
acquisition and
development
Commercial and
industrial
Commercial
equipment
financing
subsidiary
Consumer
State and political
subdivisions
Unallocated
Total
2023
2022
December 31,
2021
2020
2019
Allowance Percentage
Allowance Percentage
Allowance Percentage
Allowance Percentage
Allowance Percentage
$
1,157
9.65% $
2,215
15.61% $
2,081
16.76% $
1,715
14.35% $
1,147
12.81%
2,831
23.62
4,193
29.54
4,530
36.49
4,268
35.71
3,198
35.73
1,154
2,198
3,129
1,118
399
-
11,986
9.63
18.34
26.11
9.32
3.33
-
100.00% $
747
4,099
-
1,307
503
1,129
14,193
$
5.26
28.88
-
9.21
3.54
7.95
100.00% $
392
2,670
-
1,159
455
1,129
12,416
37
3.16
21.51
-
9.33
3.66
9.09
100.00% $
538
2,619
-
1,319
405
1,086
11,950
4.50
21.92
-
11.04
3.39
9.09
100.00% $
271
3.03
1,997
22.31
-
1,658
253
426
8,950
-
18.53
2.83
4.76
100.00%
Table of Contents
The following table presents an analysis of changes in the ACL and the ratio of net charge-offs (recoveries) to average loans by major loan category and certain
credit ratios for each of the last five years:
Reconciliation of the ACL
(dollars in thousands)
Balance, January 1,
Impact of ASC 326
Balance at beginning of period, after adoption of ASC 326
Charge-offs:
Residential real estate
Commercial real estate
Construction, land acquisition and development
Commercial and industrial
Commercial equipment financing
Consumer
State and political subdivision
Total charge-offs
Recoveries of charged-off loans:
Residential real estate
Commercial real estate
Construction, land acquisition and development
Commercial and industrial
Commercial equipment financing
Consumer
State and political subdivision
Total recoveries
Net charge-offs (recoveries)
Provision for credit losses
Balance, December 31,
Net charge-offs (recoveries) to average loans and leases
Residential real estate
Commercial real estate
Construction, land acquisition and development
Commercial and industrial
Commercial equipment financing
Consumer
State and political subdivision
Net charge-offs (recoveries) to average loans and leases
Ratios:
Allowance for credit losses to gross loans at period end
2023
For the Year Ended December 31,
2021
2020
2022
$
14,193
$
(2,636)
11,557
$
12,416
-
12,416
$
11,950
-
11,950
67
-
-
496
629
2,149
-
3,341
-
495
-
148
-
1,247
-
1,890
1,451
1,880
11,986
$
3
-
-
69
-
1,234
-
1,306
3
293
10
30
-
785
-
1,121
185
1,962
14,193
$
14
11
-
218
-
543
-
786
17
467
13
74
-
515
-
1,086
(300)
166
12,416
$
-%
(0.04)
-
0.03
0.05
0.08
-
0.12%
-%
(0.02)
-
0.36
-
0.04
-
0.02%
-%
(0.13)
(0.02)
0.06
-
0.03
-
(0.03)%
$
8,950
-
8,950
-
336
-
254
-
975
-
1,565
43
846
-
1,220
-
515
-
2,624
(1,059)
1,941
11,950
$
$
(0.03)%
(0.16)
-
(0.43)
-
0.42
-
(0.12)%
2019
9,519
-
9,519
27
-
18
1,258
-
1,311
-
2,614
9
32
82
364
-
761
-
1,248
1,366
797
8,950
0.01%
(0.01)
(0.21)
0.59
-
0.37
-
0.16%
0.98%
1.26%
1.27%
1.33%
1.08%
Allowance for credit losses to non-accrual loans and leases
224.54%
513.68%
321.41%
214.12%
98.52%
Deposits
Management recognizes the importance of deposit growth as its primary funding source for loan products and regularly evaluates new products and strategies
focused on growing commercial, consumer and municipal deposit relationships. Deposit gathering shifted in 2023 and posed many challenges, as FNCB
experienced a return of cyclicality with respect to its municipal customers, while liquidity pressures throughout the industry and heightened competition were
the primary factors that caused an increase in deposit rates.
38
Table of Contents
Total deposits in creased $108.3 million, or 7.6%, to $1.529 billion at December 31, 2023 from $1.421 billion at December 31, 2022. Interest-bearing deposits
increased $128.6 million, or 11.5%, to $1.243 billion at December 31, 2023 from $1.115 billion at December 31, 2022. Meanwhile, non-interest-bearing
deposits decreased $20.3 million, or 6.6%, to $285.5 million at December 31, 2023 from $305.8 million at December 31, 2022. With regard to interest-
bearing deposits, the increase was primarily concentrated in time deposits due to increased utilization of brokered deposits and some deposit migration from
non-maturity deposits into certificates of deposit. Time deposits with balances of $250 thousand and over increased $28.4 million, or 114.1%, to $53.3 million
at December 31, 2023, from $24.9 million at December 31, 2022, while other time deposits increased $171.9 million, or 129.3%, to $304.9 million at
December 31, 2023 from $133.0 million at December 31, 2022. At December 31, 2023, other time deposits included $148.7 million in brokered time deposits
outstanding, compared to $23.9 million at December 31, 2022. In total, interest-bearing demand deposits decreased $54.2 million, or 6.7%, to $754.3 million at
December 31, 2023 from $808.5 million at December 31, 2022. Savings accounts decreased $17.5 million, or 11.8%, to $130.9 million at December 31,
2023 from $148.4 million at December 31, 2022.
Total deposits averaged $1.450 billion in 2023, an increase of $18.3 million, or 1.3%, compared to $1.432 billion in 2022. Non-interest-bearing demand
deposits averaged $287.5 million in 2023, a decrease of $26.6 million, or 8.5% compared to $314.1 million in 2022. Interest-bearing deposits averaged $1.163
billion in 2023, an increase of $44.9 million, or 4.0%, from $1.118 billion in 2022. The increase was concentrated in average time deposits which increased
$164.4 million, or 104.1%, to $322.4 million in 2023 from $158.0 million in 2022. Meanwhile, average interest-bearing demand deposits, decreased $111.5
million, or 13.7%, to $704.1 million, from $815.6 million in 2022. Average savings deposits decreased $8.0 million, or 5.5%, to $136.4 million in 2023 from
$144.3 million in 2022. FNCB’s deposit funding costs increased 174 basis points, to 2.10% in 2023 from 0.36% in 2022. Rates on interest-bearing demand and
savings deposits increased by 158 basis points and 16 basis points, respectively, while time deposit rates increased by 280 basis points, comparing 2023 and
2022. Should competition for deposits within FNCB's market area intensify, management anticipates that FNCB's funding costs may continue to increase.
The average balance of, and the rate paid on, the major classifications of deposits for the past three years are summarized in the following table:
Deposit Distribution
(dollars in thousands)
Interest-bearing deposits:
Demand
Savings
Time
Total interest-bearing deposits
Non-interest-bearing deposits
2023
Average
Balance
Rate
For the Year Ended December 31,
2022
Average
Balance
Rate
2021
Average
Balance
Rate
$
704,118
136,354
322,354
1,162,826
287,471
1.97% $
0.28
3.17
2.10%
815,579
144,343
157,991
1,117,913
314,105
0.39% $
0.12
0.37
0.36%
764,798
125,022
176,245
1,066,065
0.16%
0.07
0.66
0.24%
315,181
Total deposits
$
1,450,297
$
1,432,018
$
1,381,246
The following table presents the maturity distribution of time deposits in excess of insurance limit at December 31, 2023 and 2022:
Maturity Distribution of Time Deposits $250,000 or More
(in thousands)
3 months or less
Over 3 through 6 months
Over 6 through 12 months
Over 12 months
Total
December 31,
2023
2022
$
$
31,708 $
13,966
6,979
666
53,319 $
10,009
4,524
7,362
3,007
24,902
39
Table of Contents
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 with the FHLB of Pittsburgh were
$506.2 million at December 31, 2023 and $482.1 million at December 31, 2022. FNCB’s maximum borrowing capacity was $373.6 million at December 31,
2023. At December 31, 2023 and 2022, there were $91.5 million and $47.5 million, respectively, in letters of credit to secure municipal deposits outstanding
under this agreement. There were $16.0 million in overnight advances and $149.0 million in term advances through the FHLB of Pittsburgh outstanding at
December 31, 2023. At December 31, 2022, there were $139.4 million in overnight advances and $32.7 million in term advances outstanding, through the
FHLB of Pittsburgh. FNCB had a remaining borrowing availability at the FHLB of Pittsburgh of $115.7 million at December 31, 2023.
Advances through the Federal Reserve Bank Discount Window generally include short-term advances which are fully collateralized by certain pledged loans
under the Federal Reserve Bank's Borrower-in-Custody ("BIC") program. At December 31, 2023, FNCB had loans pledged under the BIC program of $187.0
million. There were no advances outstanding under the BIC program at December 31, 2023 and 2022. At December 31, 2023, FNCB had borrowing capacity
available under the BIC program of $158.4 million. On March 12, 2023, the Federal Reserve Bank established the Bank Term Funding Program (“BTFP”), a
program through the Discount Window designed to provide additional funding to eligible depository institutions during a period of stress. The BTFP is
collateralized by high-quality securities valued at par including U.S. Treasury securities, U.S. government agency debt and mortgage-backed securities and
other qualifying securities. At December 31, 2023, FNCB had securities pledged of $27.8 million and an outstanding advance under the BTFP of $25.0 million.
On January 24, 2024, the Federal Reserve Bank announced that it would cease making new loans under this program on March 11, 2024.
FNCB also had $10.3 million of junior subordinated debentures outstanding at December 31, 2023 and 2022. The interest rate on the debentures will reset
quarterly at a spread of 1.67% above 3-month CME Term SOFR plus 0.26161%. CME Term SOFR are administered by CME Group Benchmark
Administration Limited (CBA) which is registered under Benchmarks (Amendment and Transitional Provision) (EU Exit) Regulations 2019 (SI 2019/657) is
authorized and supervised by the UK Financial Conduct Authority (FCA) and is aligned to the IOSCO Principles for Financial Benchmarks. The average
interest rate paid on the junior subordinated debentures in 2023 was 7.02%, compared to 3.47% in 2022.
Average borrowed funds increased $88.1 million to $197.6 million in 2023 from 109.5 million in 2022. The average rate paid on borrowed funds increased 237
basis points to 4.89% in 2023 from 2.52% in 2022. The increase in rate on borrowed funds reflected higher average volumes of overnight and short-term
borrowings through the FHLB of Pittsburgh and advances through the Federal Reserve BTFP program in 2023 as compared to 2022. Average borrowed funds
in 2022 was comprised mainly of overnight advances through the FHLB of Pittsburgh.
See Note 8, “Borrowed Funds” of the Notes to Consolidated Financial Statements included in Item 8, "Financial Statements and Supplementary Data" to this
Annual Report on Form 10-K for additional information about FNCB's borrowed funds.
Liquidity
The term liquidity refers to the ability to generate sufficient amounts of cash to meet cash flow needs. Liquidity is required to fulfill the borrowing needs of
FNCB’s credit customers and the withdrawal and maturity requirements of its deposit customers, as well as to meet other financial commitments. FNCB’s
liquidity position is impacted by several factors, which include, among others, loan and lease origination volumes, loan, lease and investment maturity structure
and cash flows, deposit demand and time deposit maturity structure and retention. FNCB has liquidity and contingent funding policies in place that are
designed with controls in place to provide advanced detection of potentially significant funding shortfalls, establish methods for assessing and monitoring risk
levels, and institute prompt responses that may alleviate a potential liquidity crisis. Management monitors fluctuations in FNCB’s liquidity position daily
and forecasts future liquidity needs. Additionally, management performs periodic stress tests on FNCB's liquidity position that attempt to model in varying
degrees of stress in order to proactively develop strategies to ensure adequate liquidity at all times. Additionally, management regularly monitors FNCB's
wholesale funding sources taking into consideration the cost of funds, diversification between funding sources and asset/liability management strategies. FNCB
utilizes brokered deposits, including one-way purchases through the IntraFiSM Network, deposits acquired through a national listing service, as well as
overnight and term advances through the FHLB of Pittsburgh as wholesale sources of funds to supplement its deposit gathering initiatives.
The statements of cash flows present the change in cash and cash equivalents from operating, investing and financing activities. Cash and due from banks and
interest-bearing deposits in other banks, which comprise cash and cash equivalents, are FNCB’s most liquid assets. Cash and cash equivalents totaled $107.9
million at December 31, 2023, an increase of $66.0 million, or 157.3%, from $41.9 million at December 31, 2022, as net cash inflows from operating and
financing activities more than offset net cash outflows for investing activities.
Financing activities provided $119.2 million in net cash, which resulted primarily from the $108.3 million increase in deposits. The proceeds from net
term advances through the FHLB of Pittsburgh, of $116.3 million were more than entirely offset by $123.4 million in net repayments of overnight advances
through the FHLB of Pittsburgh. In addition, net proceeds from the Federal Reserve Discount Window advances totaled $25 million. These inflows were
slightly offset by net cash used to pay dividends to shareholder dividends of $7.1 million. Operating activities include net income, adjusted for the effects of
non-cash transactions including, among others, depreciation and amortization and the provision for loan and lease losses, and is the primary source of cash
flows from operations. In 2023, operating activities provided FNCB with $15.8 million in net cash, which reflected net income of $13.0 million, net of a
reduction for non-cash positive adjustments of $2.8 million.
Net cash outflows from investing activities used $69.0 million of cash and cash equivalents during the year ended December 31, 2023. Accounting for the
majority of the net cash outflow was a net increase in loans and leases of $98.1 million, which reflected strong organic loan demand. Also contributing to the
net cash outflow for investing activities were purchases of $269 thousand in restricted stock, $245 thousand in premises and equipment, $160 thousand in
equity securities, and $6.6 million for an investment in a Federal Low-Income Housing Tax Credit program. Partially offsetting these cash outflows was a
net cash inflow of $34.9 million related to activity from FNCB's portfolio of available-for-sale debt securities and proceeds from the sale of equity securities of
$1.5 million.
40
Table of Contents
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 that FNCB’s current liquidity position is
sufficient to meet its cash flow needs as of December 31, 2023. In addition to cash and cash equivalents of $107.9 million at December 31, 2023, FNCB had
ample sources of additional liquidity including approximately $115.1 million in available borrowing capacity with the FHLB of Pittsburgh, and available
borrowing capacity through The Federal Reserve Discount Window of $158.4 million under the BIC program. In addition, FNCB had $75.0 million in federal
fund lines of credit available through correspondent banks at December 31, 2023, as well as access to wholesale deposit markets. While management believes
FNCB 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 and/or FNCB's
asset quality deteriorates. Additionally, FNCB could experience an increase in the utilization of existing lines of credit as customers manage their own liquidity
needs during this time of economic uncertainty. Management continually monitors FNCB's liquidity positions and sources of available liquidity in relation to
funding and cash flow need and evaluates potential sources of additional liquidity.
Capital
A strong capital base is essential to the continued growth and profitability of FNCB and is therefore a management priority. Management’s principal capital
planning goals include providing an adequate return to shareholders, retaining a sufficient base from which to provide for future growth, and complying with
applicable regulatory standards. As more fully described in Note 15, “Regulatory Matters” to the notes to the consolidated financial statements included in Item
8 of this Annual Report on Form 10-K, regulatory authorities have prescribed specified minimum capital ratios as guidelines for determining capital adequacy
to help assure the safety and soundness of financial institutions.
The following schedules present information regarding the Bank’s risk-based capital at December 31, 2023 and 2022, and selected other capital ratios:
(dollars in thousands)
December 31, 2023
FNCB Bank
Amount
Ratio
Minimum
Required For
Capital
Adequacy
Purposes with
Conservation
Buffer
Ratio
Minimum
Required To
Be Well
Capitalized
Under Prompt
Corrective
Action
Regulations
Ratio
Minimum
Required For
Capital
Adequacy
Purposes
Ratio
Total capital (to risk-weighted assets)
$
175,296
12.66%
8.00%
10.50%
10.00%
Tier I capital (to risk-weighted assets)
161,896
11.69%
6.00%
8.50%
Tier I common equity (to risk-weighted assets)
161,896
11.69%
4.50%
7.00%
Tier I capital (to average assets)
161,896
8.76%
4.00%
4.00%
8.00%
6.50%
5.00%
Total risk-weighted assets
Total average assets
1,384,710
1,848,752
(dollars in thousands)
December 31, 2022
FNCB Bank
Amount
Ratio
Minimum
Required For
Capital
Adequacy
Purposes with
Conservation
Buffer
Ratio
Minimum
Required To
Be Well
Capitalized
Under Prompt
Corrective
Action
Regulations
Ratio
Minimum
Required For
Capital
Adequacy
Purposes
Ratio
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%
Tier I common equity (to risk-weighted assets)
154,842
11.94%
4.50%
7.00%
Tier I capital (to average assets)
154,842
8.77%
4.00%
4.00%
8.00%
6.50%
5.00%
Total risk-weighted assets
Total average assets
1,296,618
1,765,251
41
Table of Contents
FNCB’s total regulatory capital increased $5.3 million to $175.3 million at December 31, 2023 from $170.0 million at December 31, 2022. The Bank’s risk-
based capital ratios exceeded the minimum regulatory capital ratios required for adequately capitalized institutions. Based on the most recent notification from
its primary regulators, the Bank was categorized as well capitalized at December 31, 2023 and 2022. There are no conditions or events since this notification
that management believes have changed this category.
As of December 31, 2023, FNCB had 30,212,969 shares of common stock available for future sale or share dividends. For further discussion of FNCB’s capital
requirements and dividend limitations, refer to Note 15, “Regulatory Matters,” of the Notes to Consolidated Financial Statements included in Item 8, “Financial
Statements and Supplementary Data” of this Annual Report on Form 10-K.
Additionally, FNCB has available 20,000,000 authorized shares of preferred stock. There were no preferred shares issued and outstanding at December 31,
2023 and 2022.
On January 25, 2023, FNCB's Board of Directors authorized the repurchase of up to 750,000 shares of FNCB's outstanding common stock may be acquired in
the open market commencing on March 3, 2023 and expiring on December 31, 2023 pursuant to a trading plan that was adopted in accordance with rule 10b5-1
of the Exchange Act. The repurchase program was terminated in the third quarter of 2023. Repurchases under this program are administered through an
independent broker and are subjected to SEC regulations as well as certain price, market volume and timing constraints specified in the trading plan. In 2022
and 2021, the Board of Directors had authorized a similar program under which 384,830 and 330,759 common shares were repurchased, respectively. No
shares were repurchased in 2023 under this plan.
FNCB’s ability to pay dividends to its shareholders is largely dependent on the Bank’s ability to pay dividends to FNCB. Bank regulations limit the amount of
dividends that may be paid without prior approval of the Bank’s regulatory agency. Cash dividends declared and paid by FNCB during 2023 and 2022 were
$0.36 per share and $0.23 per share, respectively. FNCB offers a Dividend Reinvestment and Stock Purchase plan ("DRP") to its shareholders. For the years
ended December 31, 2023 and 2022 dividend reinvestment shares were purchased in open market transactions, while shares under the optional cash purchase
feature of the DRP were issued from authorized but unissued common shares. Shares of common stock issued under the DRP totaled 13,348 and 5,089 for the
years ended December 31, 2023 and 2022, respectively. Subsequent to December 31, 2023, on January 24, 2024, FNCB declared a $0.090 per share dividend
payable on March 15, 2024 to shareholders of record on March 1, 2024.
Off-Balance Sheet Arrangements
In the ordinary course of operations, FNCB engages in a variety of financial transactions that, in accordance with GAAP, are not recorded in our consolidated
financial statements or are recorded in amounts that differ from the notional amounts. These transactions involve, to varying degrees, elements of credit,
interest rate and liquidity risk. Such transactions may be used for general corporate purposes or for customer needs. Corporate purpose transactions would be
used to help manage credit, interest rate and liquidity risk or to optimize capital. Customer transactions are used to manage customers' requests for funding.
For the year ended December 31, 2023, FNCB did not engage in any off-balance sheet transactions that would have or would be reasonably likely to have a
material effect on its consolidated financial condition. For a further discussion of FNCB’s off-balance sheet arrangements, refer to Note 13, “Commitments,
Contingencies, and Concentrations” to the Notes to Consolidated Financial Statements included in Item 8, “Financial Statements and Supplementary Data,” of
this Annual Report on Form 10-K.
The following table presents off-balance financial instruments whose contractual amounts represent credit risk at December 31, 2023 and 2022. With the
exception of credit availability for certain commercial construction, land acquisition and development loans having a 24-month draw period, all of the off-
balance sheet financial instruments outstanding at December 31, 2023 expire within one year of their respective contract dates.
Off-Balance Sheet Commitments
(in thousands)
Commitments to extend credit
Standby letters of credit
December 31,
2023
2022
$
335,032 $
16,908
301,300
17,923
In order to provide for probable losses inherent in these instruments, FNCB recorded reserves for unfunded commitments of $803 thousand and $949 thousand
at December 31, 2023 and 2022, respectively, which were included in other liabilities in the consolidated statements of financial condition.
Impact of Inflation and Changing Prices
The preparation of financial statements in conformity with GAAP requires management to measure the FNCB’s financial position and operating results
primarily in terms of historic dollars. Changes in the relative value of money due to inflation or recession are generally not considered. The primary effect of
inflation on FNCB's operations is primarily related to increases in operating expenses. Management considers changes in interest rates to impact our financial
condition and results of operations to a far greater degree than changes in prices due to inflation. Although interest rates are greatly influenced by changes in
the inflation rate, they do not necessarily change at the same rate or to the same magnitude as the inflation rate. FNCB manages interest rate risk in several
ways. Refer to “Interest Rate Risk” in Item 7A for further discussion. There can be no assurance that FNCB will not be materially adversely affected by future
changes in interest rates, as interest rates are highly sensitive to many factors that are beyond its 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.
42
Table of Contents
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Interest Rate Risk
Interest Rate Sensitivity
Market risk is the risk to earnings and/or financial position resulting from adverse changes in market rates or prices, such as interest rates, foreign exchange
rates or equity prices. FNCB’s exposure to market risk is primarily interest rate risk associated with our lending, investing and deposit gathering activities, all
of which are other than trading. Changes in interest rates affect earnings by changing net interest income and the level of other interest-sensitive income and
operating expenses. In addition, variations in interest rates affect the underlying economic value of our assets, liabilities and off-balance sheet items.
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:
● manage exposure to changes in the interest rate environment by limiting the changes in net interest margin to an acceptable level within a reasonable
range of interest rates;
● ensure adequate liquidity and funding;
● maintain a strong capital base; and
● maximize net interest income opportunities.
ALCO monitors FNCB’s exposure to changes in net interest income over both a one-year planning horizon and a longer-term strategic horizon. ALCO uses net
interest income simulations and economic value of equity (“EVE”) simulations as the primary tools in measuring and managing FNCB’s position and considers
balance sheet forecasts, FNCB's liquidity position, the economic environment, anticipated direction of interest rates and FNCB’s earnings sensitivity to changes
in these rates in its modeling. In addition, ALCO has established policy tolerance limits for acceptable negative changes in net interest income. Furthermore, as
part of its ongoing monitoring, ALCO requires quarterly back testing of modeling results, which involves after-the-fact comparisons of projections with
FNCB’s actual performance to measure the validity of assumptions used in the modeling techniques.
Earnings at Risk and Economic Value at Risk Simulations:
Earnings at Risk
Earnings-at-risk simulation measures the change in net interest income and net income under various interest rate scenarios. Specifically, given the current
market rates, ALCO looks at “earnings at risk” to determine anticipated changes in net interest income from a base case scenario with scenarios of + 200, +400
and -100 basis points for simulation purposes. The simulation takes into consideration that not all assets and liabilities re-price equally and simultaneously with
market rates (i.e., savings rate).
Economic Value at Risk
While earnings-at-risk simulation measures the short-term risk in the balance sheet, economic value (or portfolio equity) at risk measures the long-term risk by
finding the net present value of the future cash flows from FNCB’s existing assets and liabilities. ALCO examines this ratio regularly, and given the current rate
environment, has utilized rate shocks of +200, +400 and -100 basis points for simulation purposes. Management recognizes that, in some instances, this ratio
may contradict the “earnings at risk” ratio.
43
Table of Contents
While ALCO regularly performs a wide variety of simulations under various strategic balance sheet and treasury yield curve scenarios, the following results
reflect FNCB’s sensitivity over the subsequent twelve months based on the following assumptions:
● asset and liability levels as of December 31, 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 to keep interest-earning asset and interest-bearing liability levels constant.
The following table illustrates the simulated impact of parallel and instantaneous interest rate shocks of +400 basis points, +200 basis points and -100 basis
points on net interest income and the change in economic value over a one-year time horizon from the December 31, 2023 levels:
Rates +200
Rates +400
Rates -100
Simulation
Results
Policy
Limit
Simulation
Results
Policy
Limit
Simulation
Results
Policy
Limit
Earnings at risk:
Percent change in net interest income
(2.9)%
(12.5)%
(4.8)%
(20.0)%
(0.3)%
(10.0)%
Economic value at risk:
Percent change in economic value of equity
(3.1)%
(20.0)%
(7.2)%
(35.0)%
(0.3)%
(10.0)%
Model results at December 31, 2023 indicated that FNCB's asset/liability position was liability-rate sensitive over the next 18-24 months. At December 31,
2023, the model indicated that FNCB’s net interest income is expected to decrease 2.9% under a +200-basis point interest rate shock, as compared to the base
case, caused by spread compression due to increased wholesale funding and deposit migration into higher-yielding alternatives and certificate of deposit
specials. Under this scenario, projected net interest income is expected to improve in years 3 through 5 of the 5-year simulation driven by asset cashflows
replaced into higher assumed replacement rates outpacing the increase in funding costs from certificate of deposit maturities rolling into higher-costing
specials. The percentage change in net interest income in under the +200 and +400-basis point shock scenarios exceed policy guidelines at December 31, 2023.
As part of its ALCO initiatives, management is currently evaluating various strategies to reduce FNCB's liability sensitivity and will execute such strategies as
appropriate. Model results also indicate a 0.3% decrease to net interest income from the base case over the next 12 months under a rate shock of -100 basis
points, as asset yields less of a decline as compared to overnight funding costs. Additionally, with respect to FNCB's EVE, all modeled exposures are within
policy guidelines.
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 December 31, 2023 with tax-equivalent net interest
income that was projected for the period. There was a positive variance between actual and projected tax-equivalent net interest income for the three
months ended December 31, 2023 of approximately $0.1 million, or 0.50%. The minor variance primarily reflected a difference in the assumption for applying
the effect of interest rate hedges on net interest income. ALCO performs a detailed rate/volume analysis between actual and projected results to continue to
improve the accuracy of its simulation models.
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Item 8. Financial Statements and Supplementary Data.
Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Directors of
FNCB Bancorp, Inc. and Subsidiaries
Opinion on the Financial Statements
We have audited the accompanying consolidated statements of financial condition of FNCB Bancorp, Inc. and Subsidiaries (the "Company") as of December
31, 2023 and 2022, and the related consolidated statements of income, comprehensive income (loss), changes in shareholders’ equity, and cash flows, for the
years then ended and the related notes (collectively, the "consolidated financial statements"). In our opinion, the consolidated financial statements present
fairly, in all material respects, the financial position of the Company as of December 31, 2023 and 2022, and the results of its operations and its cash flows for
the years then ended, in conformity with accounting principles generally accepted in the United States of America.
Change in Accounting Principle
As discussed in Note 2 to the consolidated financial statements, the Company has changed its method of accounting for the recognition and measurement of
credit losses as of January 1, 2023 due to the adoption of ASC Topic 326, Financial Instruments – Credit Losses. Our opinion is not modified with respect to
this matter.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company's
consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board
(United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the
applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding
of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud,
and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in
the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as
well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated
or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements
and (2) involved our especially challenging, subjective, or complex judgments. The communication of the critical audit matter does not alter in any way our
opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing separate
opinions on the critical audit matter or on the accounts or disclosures to which it relates.
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Allowance for Loan Losses – Qualitative Factor Adjustments
Critical Audit Matter Description
As discussed above, on January 1, 2023, the Company adopted ASC Topic 326, Financial Instruments – Credit Losses, which resulted in a decrease in the
allowance for credit losses (ACL) for loans and leases of $2.6 million, an increase in the ACL for unfunded commitments of $1.3 million, and an increase in
retained earnings, net of deferred taxes, by $1.3 million through a cumulative-effect adjustment. As described in Notes 2 and 4 to the consolidated financial
statements, management estimates the ACL for loans and leases based on information about past events, including historical experience, current conditions and
reasonable and supportable forecasts that affect the collectability of the reported amount.
The ACL is made up of both a quantitative modeled component as well as a qualitative component. The methodology for determining the quantitative
component includes (1) a pooled component for loans and leases that exhibit similar risk characteristics and (2) identifying loans and leases that do not share
risk characteristics with existing pools that are evaluated on an individual basis. For loans and leases exhibiting similar risk characteristics, the Company uses a
discounted cash flow (“DCF”) methodology for all loan and lease portfolio segments measured on a collective or pool basis to estimate credit losses over the
expected life of the loan and lease. For each loan and lease segment, a cash flow projection is generated at the instrument level. The DCF methodology
combines the probability of default, and loss given default assumption that are applied to the pool’s projective model of cash flows taking into consideration the
effects of prepayments and principal curtailment effects to estimate a reserve for each loan and lease. Loss given default is estimated based on peer loss
experience. Probability of default is estimated utilizing a statistical regression model that incorporates a macroeconomic driver, the national unemployment
rate. The model utilizes the forecast factor with a four quarter reasonable and supportable forecast period and different reversion techniques in order to estimate
the probability of default for each loan and lease portfolio segment.
Quantitative loss factors are also supplemented by certain qualitative risk factors reflecting management’s evaluation of various conditions. Management
applies judgment in determining the extent of qualitative factors used in the qualitative component to adjust the loss rates for loan and lease segments to reflect
the impact these factors may have on expected losses in the loan and lease portfolio. Management’s evaluation of these factors includes a weighted rate and risk
range category assigned to each factor. The qualitative factors include (1) changes in the credit quality trends of a respective segment which may be measured
by risk ratings, FICO scores, delinquency rates, and payment performance, (2) changes in independent third-party loan reviews and regulatory exam ratings, (3)
changes in local unemployment rates, (4) portfolio segment growth rates and concentrations, and (5) other external factors that may affect bank lending and
operations such as a pandemic, natural disaster, or loss of a major employer, among others. The Company’s loan and lease portfolio totaled $1.2 billion as of
December 31, 2023, and the associated ACL was $12.0 million.
We identified the qualitative factor component of the ACL on loans and leases collectively evaluated for credit loss as a critical audit matter as auditing the
underlying qualitative factors required significant auditor judgment as amounts determined by management rely on analysis that is highly subjective and
includes significant estimation uncertainty.
The primary procedures we performed to address this critical audit matter included:
● Obtaining an understanding of the relevant controls related to the ACL on loans and leases and tested such controls for design and operating
effectiveness, including controls related to management's establishment, review, and approval of the qualitative factors, and the completeness
and accuracy of data used in determining qualitative factors.
● Evaluation of the appropriateness of management's methodology for estimating the ACL on loans and leases.
● Testing of the completeness and accuracy of data used by management in determining qualitative factor adjustments.
● Evaluating the reasonableness of management's judgments related to the qualitative loss factors to determine if the loss factors are calculated in
accordance with management's policies and were consistently applied from the point of adoption to year end.
/s/ Baker Tilly US, LLP
We have served as the Company’s auditor since 2014.
Baker Tilly US, LLP
Iselin, New Jersey
March 8, 2024
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FNCB BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(in thousands, except share data)
Assets
Cash and cash equivalents:
Cash and due from banks
Interest-bearing deposits in other banks
Total cash and cash equivalents
Available-for-sale debt securities
Equity securities, at fair value
Restricted stock, at cost
Loans held for sale
Loans and leases, net of allowance for credit losses of $11,986 and $14,193
Bank premises and equipment, net
Accrued interest receivable
Bank-owned life insurance
Other assets
Total assets
Liabilities
Deposits:
Demand (non-interest-bearing)
Interest-bearing
Total deposits
Borrowed funds:
Federal Reserve Discount Window advances
Federal Home Loan Bank of Pittsburgh advances
Junior subordinated debentures
Total borrowed funds
Accrued interest payable
Other liabilities
Total liabilities
Shareholders' equity
Preferred stock ($1.25 par)
Authorized: 20,000,000 shares at December 31, 2023 and December 31, 2022
Issued and outstanding: 0 shares at December 31, 2023 and December 31, 2022
Common stock ($1.25 par)
Authorized: 50,000,000 shares at December 31, 2023 and December 31, 2022
Issued and outstanding: 19,787,031 shares at December 31, 2023 and 19,681,644 shares at December 31,
2022
Additional paid-in capital
Retained earnings
Accumulated other comprehensive loss
Total shareholders' equity
Total liabilities and shareholders’ equity
December 31,
2023
December 31,
2022
$
$
$
$
27,819 $
80,049
107,868
450,814
4,786
8,814
-
1,208,279
14,546
7,085
37,251
41,543
1,880,986 $
285,548 $
1,243,434
1,528,982
25,000
164,962
10,310
200,272
1,355
15,778
1,746,387
26,588
15,328
41,916
476,091
7,717
8,545
60
1,110,124
15,616
5,957
36,499
43,005
1,745,530
305,850
1,114,797
1,420,647
-
172,050
10,310
182,360
171
23,403
1,626,581
-
-
24,733
78,253
71,782
(40,169)
134,599
1,880,986 $
24,602
77,502
64,873
(48,028)
118,949
1,745,530
The accompanying notes to consolidated financial statements are an integral part of these statements.
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FNCB BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except share data)
Interest income
Interest and fees on loans and leases
Interest and dividends on securities:
Taxable
Tax-exempt
Dividends
Total interest and dividends on securities
Interest on interest-bearing deposits in other banks
Total interest income
Interest expense
Interest on deposits
Interest on borrowed funds:
Federal Reserve Bank Discount Window advances
Federal Home Loan Bank of Pittsburgh advances
Junior subordinated debentures
Total interest on borrowed funds
Total interest expense
Net interest income before provision for credit losses
Provision for credit losses
Net interest income after provision for credit losses
Non-interest income
Deposit service charges
Net gain (loss) on the sale of available-for-sale debt securities
Net loss on equity securities
Net gain on the sale of mortgage loans held for sale
Loan-related fees
Income from bank-owned life insurance
Bank-owned life insurance settlement
Merchant services revenue
Wealth management services revenue
Other
Total non-interest income
Non-interest expense
Salaries and employee benefits
Occupancy expense
Equipment expense
Advertising expense
Data processing expense
Regulatory assessments
Bank shares tax
Professional fees
(Credit) provision for unfunded commitments
Merger and acquisition expenses
Other operating expenses
Total non-interest expense
Income before income tax expense
Income tax expense
Net income
Earnings per share
Basic
Diluted
Cash dividends declared per common share
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING:
Basic
Diluted
For the Year Ended December 31,
2023
2022
$
65,364 $
12,451
2,207
991
15,649
1,011
82,024
24,461
308
8,634
724
9,666
34,127
47,897
1,880
46,017
4,537
252
(1,601)
6
398
752
-
592
944
765
6,645
20,234
2,156
963
836
4,008
1,115
509
1,093
(803)
1,480
5,331
36,922
15,740
2,757
12,983 $
0.66 $
0.66 $
0.36 $
$
$
$
$
47,193
10,281
2,662
549
13,492
91
60,776
3,970
3
2,401
358
2,762
6,732
54,044
1,962
52,082
4,415
(223)
(34)
205
243
710
273
712
564
1,116
7,981
19,283
2,093
1,295
801
4,027
811
915
1,273
366
-
4,610
35,474
24,589
4,144
20,445
1.04
1.03
0.33
19,740,493
19,742,618
19,744,477
19,762,566
The accompanying notes to consolidated financial statements are an integral part of these statements.
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FNCB BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in thousands)
Net income
Other comprehensive income (loss):
Unrealized gains (losses) on available-for-sale debt securities
Taxes
Net of tax amount
Reclassification adjustment for (gains) losses included in net income
Taxes
Net of tax amount
Derivative adjustments
Taxes
Net of tax amount
Total other comprehensive income (loss)
Comprehensive income (loss)
For the Year Ended December 31,
2023
2022
$
12,983 $
11,485
(2,412)
9,073
(252)
53
(199)
(1,285)
270
(1,015)
7,859
20,842 $
$
20,445
(69,809)
14,660
(55,149)
223
(47)
176
750
(157)
593
(54,380)
(33,935)
The accompanying notes to consolidated financial statements are an integral part of these statements.
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FNCB BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(in thousands, except share data)
Balances, December 31, 2021
Net income
Cash dividends paid, $0.33 per share
Restricted stock awards
Repurchase of common shares
Common shares issued under long-term
incentive compensation plan
Common shares issued through dividend
reinvestment/optional cash purchase plan
Other comprehensive loss net of tax
benefit of $14,456
Balances, December 31, 2022
Cumulative effect adjustment due to
adoption of ASU 2016-13
Net income
Cash dividends paid, $0.36 per share
Restricted stock awards
Common shares issued as consideration
for an asset purchase
Common shares issued under long-term
incentive compensation plan
Common shares issued through dividend
reinvestment/optional cash purchase plan
Other comprehensive income, net of tax
expense of $2,089
Balances, December 31, 2023
Number
of Common
Shares
19,989,875 $
-
-
-
(384,830)
71,510
5,089
For the Years Ended December 31, 2023 and 2022
Additional
Common
Stock
Paid-in
Capital
Accumulated
Other
Total
Retained
Earnings
Comprehensive Shareholders'
Income (Loss)
Equity
24,987 $
-
-
-
(481)
89
7
80,128 $
-
-
448
(3,155)
46
35
50,990 $
20,445
(6,520)
-
-
-
(42)
6,352 $
-
-
-
-
-
-
162,457
20,445
(6,520)
448
(3,636)
135
-
-
19,681,644 $
-
24,602 $
-
77,502 $
-
64,873 $
(54,380)
(48,028) $
(54,380)
118,949
-
-
-
-
6,874
-
-
-
-
8
85,165
106
13,348
17
-
-
-
583
46
57
65
1,080
12,983
(7,110)
-
-
(44)
-
-
-
-
-
-
1,080
12,983
(7,110)
583
54
163
38
-
19,787,031 $
-
24,733 $
-
78,253 $
-
71,782 $
7,859
(40,169) $
7,859
134,599
The accompanying notes to consolidated financial statements are an integral part of these statements.
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FNCB BANCORP, INC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
Investment securities amortization, net
Equity in trust
Depreciation of bank premises and equipment
Amortization of loan origination fees
Valuation adjustment for loan servicing rights
Stock-based compensation expense
Provision for credit losses
(Credit) provision for unfunded commitments
Net (gain) loss on the sale of available-for-sale debt securities
Net loss on equity securities
Net gain on the sale of mortgage loans held for sale
Net gain on other real estate owned
Loss on the disposition of bank premises and equipment
Bank-owned life insurance settlement
Income from bank-owned life insurance
Proceeds from the sale of mortgage loans held for sale
Funds used to originate mortgage loans held for sale
Increase in net deferred tax assets
Increase in accrued interest receivable
Increase in other assets
Increase in accrued interest payable
Decrease in other liabilities
Total adjustments
Net cash provided by operating activities
Cash flows from investing activities:
Maturities, calls and principal payments of available-for-sale debt securities
Proceeds from the sale of available-for-sale debt securities
Purchases of available-for-sale debt securities
Purchase of equity securities
Purchase of restricted stock
Proceeds from the sale of equity securities
Net increase in loans and leases to customers
Proceeds from the sale of other real estate owned
Proceeds received from bank-owned life insurance settlement
Purchase of bank-owned life insurance
Investment in low-income housing tax credit program
Purchases of bank premises and equipment
Net cash used in investing activities
Cash flows from financing activities:
Net increase (decrease) in deposits
Proceeds from Federal Reserve Discount Window advances
Repayment of Federal Reserve Discount Window advances
(Repayment) proceeds from Federal Home Loan Bank of Pittsburgh advances - overnight
Proceeds from Federal Home Loan Bank of Pittsburgh advances - term
Repayment of Federal Home Loan Bank of Pittsburgh advances - term
Repurchase of common shares
Proceeds from issuance of common shares, net of discount
Cash dividends paid
Net cash provided by financing activities
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
Supplemental cash flow information
Cash paid during the period for:
Interest
For the Year Ended December 31,
2023
2022
$
12,983 $
1,906
(22)
1,290
918
-
746
1,880
(803)
(252)
1,601
(6)
-
25
-
(752)
426
(360)
(129)
(1,128)
(432)
1,184
(3,252)
2,840
15,823
41,612
10,394
(17,150)
(160)
(269)
1,490
(98,108)
-
-
-
(6,610)
(245)
(69,046)
108,335
50,000
(25,000)
(123,400)
452,015
(335,703)
-
38
(7,110)
119,175
65,952
41,916
107,868 $
20,445
2,883
(11)
1,565
(466)
(3)
583
1,962
366
223
34
(205)
(3)
-
(273)
(710)
9,444
(9,299)
(573)
(1,314)
(1,163)
122
(3,637)
(475)
19,970
37,876
14,004
(78,097)
(3,188)
(6,634)
359
(144,506)
695
978
(3,000)
(2,203)
(871)
(184,587)
(34,381)
-
139,400
42,650
(30,000)
(3,636)
-
(6,520)
107,513
(57,104)
99,020
41,916
$
$
32,943 $
6,610
Taxes
Other transactions:
Commitment in low-income housing tax credit program
OREO transferred to bank premises and equipment
Common shares issued as consideration for asset purchase
Lease liabilities arising from obtaining right-of-use assets
3,570
-
-
54
19
4,616
8,811
228
-
559
The accompanying notes to consolidated financial statements are an integral part of these statements.
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Notes to Consolidated Financial Statements
Note 1. ORGANIZATION
FNCB Bancorp, Inc. is a registered bank holding company under the Bank Holding Company Act of 1956, incorporated under the laws of the Commonwealth
of Pennsylvania in 1997. It is the parent company of FNCB Bank (the “Bank”) and the Bank’s wholly owned subsidiaries 1st Equipment Finance, Inc., FNCB
Realty Company, Inc., FNCB Realty Company I, LLC, and FNCB Realty Company II, LLC. Unless the context otherwise requires, the term “FNCB” is used to
refer to FNCB Bancorp, Inc., and its subsidiaries. In certain circumstances, however, the term “FNCB” refers to FNCB Bancorp, Inc., itself.
The Bank provides customary retail and commercial banking services to individuals, businesses and local governments and municipalities through its 16 full-
service branch locations, as of December 31, 2023, within its primary market area, Northeastern Pennsylvania.
FNCB Realty Company, Inc., FNCB Realty Company I, LLC, and FNCB Realty Company II, LLC, which were formed to hold real estate and/or operate
businesses acquired in exchange for debt settlement or foreclosure, were inactive at December 31, 2023 and 2022.
In December 2006, First National Community Statutory Trust I (“Issuing Trust”), which is wholly owned by FNCB, was formed under Delaware law to
provide FNCB with an additional funding source through the issuance of pooled trust preferred securities. FNCB has adopted Accounting Standards
Codification (“ASC”) 810-10, Consolidation, for the Issuing Trust. Accordingly, the Issuing Trust has not been consolidated with the accounts of FNCB,
because FNCB is not the primary beneficiary of the trust.
On June 5, 2023, the Bank filed a Bank Subsidiary Notice with the Pennsylvania Department of Banking and Securities ("PADOBS") to inform the PADOBS
that the Bank planned to establish 1 st Equipment Finance, Inc. as a wholly-owned subsidiary for the purpose of providing commercial equipment loans and
leases to customers. The Bank began offering these products to customer in 2021 under the brand, 1 st Equipment Finance. On July 5, 2023, the Bank received
written notification from the PADOBS that it did not object to the establishment of the subsidiary pursuant to Section 203(d) of the Pennsylvania Banking Code
of 1965, and the establishment for the subsidiary must be completed by January 2, 2024. On October 1, 2023, 1 st Equipment Finance, Inc., was established as
a wholly-owned subsidiary of the Bank. Upon establishment of the subsidiary, the Bank contributed capital to the new subsidiary which included the
outstanding balance of loans and leases, net of deferred origination fees and costs and unearned income, previously originated under this brand, an allowance
for credit losses ("ACL"), accrued interest, premises and equipment, net deferred tax assets and other assets totaling $158.5 million.
Agreement and Plan of Merger
On September 27, 2023, FNCB entered into an Agreement and Plan of Merger (the "Merger Agreement") with Peoples Financial Services Corp. ("PFIS")
pursuant to which FNCB will merge with and into PFIS as the surviving entity. Immediately after such merger, the Bank will merge with and into Peoples
Security Bank and Trust Company ("Peoples Bank"), with Peoples Bank as the surviving bank and a wholly-owned subsidiary of the PFIS. Under the terms of
the Merger Agreement, which has been unanimously approved by the boards of directors of both companies, shareholders of FNCB will be entitled to receive a
fixed exchange ratio of 0.1460 shares of PFIS common stock for each share of FNCB's common stock. On October 27, 2023, FNCB filed a Federal Deposit
Insurance Corporation ("FDIC") Interagency Bank Merger Application with the FDIC New York and a Pennsylvania Bank Merger Application with the
PADOBS. The PADOBS approved the merger application on February 1, 2024. Completion of the merger requires, among other things, the approval from the
FDIC, as well as FNCB's shareholders.
The Merger Agreement provides certain termination rights for both PFIS and FNCB and further provides that a termination fee of
$4.8 million will be payable by either PFIS or FNCB, as applicable, upon termination of the Merger Agreement under certain circumstances. The foregoing
summary is not complete and is qualified in all respects by reference to the actual language of the Definitive Merger Agreement filed by FNCB as Exhibit
2.1 to the Current Report on Form 8-K on September 27, 2023. Pending regulatory and shareholder approvals, FNCB expects the consummation of the
merger to be completed in the third quarter of 2024, however, there can be no assurance that the transaction will be consummated during this time
period, or at all.
Note 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The consolidated financial statements of FNCB are comprised of the accounts of FNCB Bancorp, Inc., and its wholly-owned subsidiary, FNCB Bank, as well
as the Bank’s wholly-owned subsidiaries. All intercompany transactions and balances have been eliminated in consolidation. The accounting and reporting
policies of FNCB conform to accounting principles generally accepted in the United States of America (“GAAP”), Regulation S-X and general practices within
the banking industry. Prior period amounts have been reclassified when necessary to conform to the current year’s presentation. Such reclassifications did not
have a material impact on the operating results or financial position of FNCB.
The preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ significantly from those estimates. Material estimates that are particularly susceptible to
change in the near term are the ACL, the valuation and impairment evaluation of FNCB's investments, and income taxes.
Cash Equivalents
For purposes of reporting cash flows, cash equivalents include cash on hand and amounts due from banks. FNCB maintains compensating balances at
correspondent banks, most of which are not required, but are used to offset specific charges for services. At December 31, 2023 and 2022, the amount of these
balances were $1.6 million and $2.1 million, respectively.
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Securities
Debt Securities and Equity Securities with Readily Determinable Fair Values
FNCB classifies its investments in debt securities as either available-for-sale or held-to-maturity at the time of purchase. Debt securities that are classified as
available-for-sale are carried at fair value with unrealized holding gains and losses recognized as a component of shareholders’ equity in accumulated other
comprehensive (loss) income, net of tax. Debt securities that are classified as held-to-maturity are carried at amortized cost when management has the positive
intent and ability to hold them to maturity. Premiums on callable debt securities are amortized to the earliest call date. Amortization of premiums and accretion
of discounts on noncallable debt securities is recognized over the life of the related security as an adjustment to yield using the interest method. Realized gains
and losses on sales of debt securities are based on amortized cost using the specific identification method on the trade date. All of FNCB's debt securities were
classified as available-for-sale at December 31, 2023 and 2022.
Equity securities with readily determinable fair values are reported at fair value with net unrealized gains and losses recognized in non-interest income in the
consolidated statements of income.
Fair values for debt securities and equity securities with readily determinable fair values are based upon quoted market prices, where available. If quoted
market prices are not available, fair values are based upon quoted market prices of comparable instruments, or a discounted cash flow model using market
estimates of interest rates and volatility.
Restricted Stock
Investments in restricted securities have limited marketability, are carried at cost and are evaluated for impairment based on FNCB’s determination of the
ultimate recoverability of the par value of the stock. FNCB’s investment in restricted securities is comprised of stock in the Federal Home Loan
Bank ("FHLB") of Pittsburgh and Atlantic Community Bankers Bank ("ACBB").
Equity Securities without Readily Determinable Fair Values
Equity securities without readily determinable fair values generally consist of common and/or preferred stock of privately held financial institutions, which are
carried at cost and included in other assets in the consolidated statements of financial condition. On a quarterly basis, management performs a qualitative
assessment to determine if the securities are impaired. If the qualitative assessment indicates impairment, the security is written down to its fair value, with the
charge for impairment included in net income.
ACL on Available-for-Sale Debt Securities
Upon adoption of CECL, effective January 1, 2023, management evaluates available-for-sale securities in an unrealized loss position quarterly for credit
impairment. As part of its evaluation, management first assesses whether FNCB intends to sell, or would be more likely than not required to sell the security
before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the amortized cost basis of the security is
written down to fair value through income. For available-for-sale securities that do not meet either criteria, management evaluates whether the decline in fair
value has resulted from a credit loss or other factors. In making its assessment, management considers, among other
factors, 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. The
assessment involves a high degree of subjectivity and judgment that is based on the information available to management at a point in time. If management
determines that the decline in fair value of a security resulted from a credit loss, the present value of the cash flows expected to be collected from the security
are compared to the amortized cost basis of the security. If the present value of the cash flows expected to be collected from the security is less than its
amortized cost basis, a credit loss exists and an ACL is recorded. The ACL recorded is limited by the amount that the fair value is less than the amortized cost
basis. Any impairment that has not been recorded through an allowance is recognized in other comprehensive income (loss).
FNCB's estimate of expected credit losses includes a measure of the expected risk of credit loss even if that risk is remote. However, FNCB does not measure
expected credit losses on an investment security in which historical credit loss information adjusted for current conditions and reasonable and supportable
forecast results in an expectation that nonpayment of the amortized cost basis is zero. Management does not expect nonpayment of the amortized cost basis to
be zero solely on the basis of the current value of collateral securing the security but instead, also considers the nature of the collateral, potential future changes
in collateral values, default rates, delinquency rates, third-party guarantees, credit ratings, interest rate changes since purchase, volatility of the security's fair
value and historical loss information for financial assets secured with similar collateral. FNCB performed an analysis that determined that the following
securities have a zero expected credit loss: U.S. government agencies, mortgage-backed securities of U.S. government and government sponsored agencies, as
all the U.S. government agencies and U.S. government agency backed securities have the full faith and credit backing of the United States Government or one
of its agencies.
Changes in the ACL are recorded as a provision for (or reversal of) credit losses in the consolidated statements of income. Losses are charged against the
allowance when management believes the uncollectibility of an available-for-sale debt security is confirmed based on the above-described analysis or when
either of the criteria regarding the intent or requirement to sell is met. As of December 31, 2023, and January 1, 2023 (i.e. ASU 2016-13 adoption), no
allowance was required for FNCB's available-for-sale debt securities.
Accrued interest receivable on available-for-sale debt securities, included in accrued interest receivable on the consolidated statements of condition, is excluded
from the estimate of credit losses.
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Loans and Leases
Loans and leases that FNCB has the intent and ability to hold for the foreseeable future or until maturity or payoff are stated at their outstanding unpaid
principal balance, net of unamortized deferred loan fees and costs, unamortized premiums or discounts on loans purchased through third-party originators,
unearned income and partial charge-offs. Loans and leases receivable are presented net of the allowance for credit losses in the consolidated statements of
financial condition. Interest income on all loans is recognized using the effective interest method. Nonrefundable loan origination fees, as well as certain direct
loan origination costs, are deferred and the net amount amortized over the contractual life of the related loan as an adjustment to yield using the effective
interest method. Amortization of deferred loan fees or costs is discontinued when a loan is placed on non-accrual status.
Loans are placed on non-accrual status generally, when the become 90 days past due and/or when management believes that the collection of principal and
interest is doubtful. FNCB determines delinquency status based on the number of days since the date of the borrower’s last required contractual loan payment.
When the interest accrual is discontinued, all unpaid interest income is reversed and charged back against current earnings. Any subsequent cash payments
received are applied, first to the outstanding principal balance, then to the recovery of any previously charged-off principal, with any excess treated as a
recovery of lost interest. A non-accrual loan is returned to accrual status when the loan is current as to principal and interest payments, is performing according
to contractual terms for six consecutive months and factors indicating reasonable doubt about the timely collection of payments no longer exist.
ACL on Loans and Leases
The ACL on the loan portfolio is a significant accounting estimate used in the preparation of FNCB's consolidated financial statements. Upon adoption of ASU
2016-13, FNCB replaced the incurred loss impairment model that recognized losses when it became probable that a credit loss would be incurred, with 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. Loans and leases, 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 or 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.
When establishing the ACL, management categorizes loans into the following loan segments that are based generally on the nature of the collateral and basis of
repayment. The risk characteristics of FNCB’s loan segments are as follows:
Construction, Land Acquisition and Development - These loans consist of loans secured by real estate, with the purpose of constructing one- to four-family
homes, residential developments and various commercial properties including shopping centers, hotels, office complexes and single-purpose, owner-occupied
structures. Additionally, loans in this category include loans for land acquisition, secured by raw land. FNCB’s construction program offers either short-term,
interest-only loans that require the borrower to pay only interest during the construction phase with a balloon payment of the principal outstanding at the end of
the construction period or only interest during construction with a conversion to amortizing principal and interest when the construction is complete. Loans for
undeveloped real estate are subject to a loan-to-value ratio not to exceed 65%. Construction loans are treated similarly to the developed real estate loans and are
subject to a maximum loan to value ratio of 85% based upon an “as-completed” appraised value. Construction loans generally yield a higher interest rate than
other mortgage loans but also carry more risk.
Commercial Real Estate - These loans represent the largest portion of FNCB’s total loan portfolio and loans in this portfolio generally carry larger loan
balances. The commercial real estate mortgage loan portfolio consists of owner-occupied and non-owner-occupied properties that are secured by a broad range
of real estate, including but not limited to, office complexes, shopping centers, hotels, warehouses, gas stations, convenience markets, residential care facilities,
nursing care facilities, restaurants and multifamily housing. FNCB offers commercial real estate loans at various rates and terms that do not exceed 25 years.
These types of loans are subject to specific loan-to-value guidelines prior to the time of closing. The policy limits for developed real estate loans are subject to
a maximum loan-to-value ratio of 85%. Commercial mortgage loans must also meet specific criteria that include the capacity, capital, credit worthiness and
cash flow of the borrower and the project being financed. Potential borrower(s) and guarantor(s) are required to provide FNCB with historical and current
financial data. As part of the underwriting process for commercial real estate loans, management performs a review of the cash flow analysis of the
borrower(s), guarantor(s) and the project in addition to considering the borrower’s expertise, credit history, net worth and the value of the underlying property.
Commercial and Industrial - FNCB offers commercial loans at various rates and terms to businesses located in its primary market area. The commercial loan
portfolio includes revolving lines of credit, automobile floor plans, equipment loans, vehicle loans, improvement loans and term loans. These loans generally
carry a higher risk than commercial real estate loans by the nature of the underlying collateral, which can be machinery and equipment, inventory, accounts
receivable, vehicles or marketable securities. Generally, a collateral lien is placed on the collateral supporting the loan. To reduce the risk associated with these
loans, management may attempt to secure real estate as collateral and obtain personal guarantees of the borrower as deemed necessary.
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Commercial Equipment Financing - These loans and leases consist of various equipment financing originated through the Bank's wholly-owned subsidiary, 1st
Equipment Finance, Inc. The majority of the loans and leases are originated through third party dealers or equipment manufacturers located outside FNCB's
primary market area. Generally, a collateral lien is placed on the collateral supporting the loan. Prior to establishing the subsidiary on October 1, 2023, these
loans and leases were included in the commercial and industrial loan segment for establishing the ACL.
State and Political Subdivision - FNCB originates general obligation notes, municipal leases and tax anticipation loans to state and political subdivisions, which
are primarily municipalities in FNCB’s market area.
Residential Real Estate - FNCB offers fixed-rate 1 - 4 family residential loans. Residential first lien mortgages are generally subject to an 80% loan to value
ratio based on the appraised value of the property. FNCB will generally require the mortgagee to purchase Private Mortgage Insurance if the amount of the loan
exceeds the 80% loan to value ratio. Residential mortgage loans are generally smaller in size and are considered homogeneous as they exhibit similar
characteristics. FNCB offers home equity loans, home equity lines of credit (“HELOCs”) and HELOCs with a "carve out" feature with a maximum combined
loan-to-value ratio of 90% based on the appraised value of the property. Home equity loans have fixed rates of interest and carry terms up to 15 years. HELOCs
have adjustable interest rates and are based upon the national prime interest rate. Residential mortgage loans, including these home equity loan products, are
generally smaller in size and are considered homogeneous as they exhibit similar characteristics.
Consumer – FNCB offers both secured and unsecured installment loans, personal lines of credit and overdraft protection loans. FNCB is in the business of
underwriting indirect auto loans which are originated through various auto dealers in northeastern Pennsylvania and dealer floor plan loans. Consumer loans
are generally smaller in size and exhibit homogeneous characteristics.
FNCB estimates expected credit losses using the discounted cash flow ("DCF") method for all loan portfolio segments measured on a collective or pool basis.
For each loan segment, a cash flow projection is generated at the loan level. Probability of default ("PD") and loss given default ("LGD") assumptions are
applied to the pool’s projective model of cash flows taking into consideration the effects of prepayments and principal curtailment effects. The analysis
produces expected cash flows for each loan in the pool by pairing loan-level term information (maturity date, payment amount, interest rate, etc.) with top-
down pool assumptions (default rates and prepayment speeds).
For LGD assumptions, management has determined that peer loss experience provides the best basis for its assessment of expected credit losses to determine
the ACL. FNCB utilizes peer call report data to measure historical credit loss experience with similar risk characteristics within the segments over an economic
cycle. Management reviews the historical loss information to appropriately adjust for differences in current asset specific risk characteristics. With regard to PD
assumptions, management also considered further adjustments to historical loss information for current conditions and reasonable and supportable forecasts
that differ from the conditions that existed for the period over which historical information was evaluated. For all segment models for collectively evaluated
loans, FNCB incorporates one macroeconomic driver, the national unemployment rate, using a statistical regression modeling methodology. Management
determined that four quarters currently represents a reasonable and supportable forecast period. For the contractual term that extend beyond the reasonable and
supportable forecast period, FNCB reverts to historical loss information within eight quarters using a straight-line approach. Management may apply different
reversion techniques depending on the economic environment for the financial asset portfolio and as of the current period has utilized a linear reversion
technique.
Management also considers the following qualitative factors in its evaluation of expected credit losses for each of the major portfolio segments: (i) changes in
the credit quality a respective segment which are measured by risk ratings for commercial loans and FICO scores for residential real estate loans and consumer
loans, (ii) changes in independent third-party loan reviews and regulatory exam ratings, (iii) changes in local unemployment rates, (iv) changes in the level of
delinquent loans and nonaccrual loans as a percentage of the portfolio segment, (v) segment growth rates, (vi) concentrations as a percentage of Tier I Capital
plus the ACL, and (vii) other external factors that may affect bank lending and operations such as a pandemic, natural disaster, or loss of a major employer,
among others. For the commercial and industrial loans, commercial real estate loans, construction, land acquisition and development loans, commercial
equipment finance loans and leases and state and political subdivision loans and leases management also considers the percentage of criticized loans to total
loans by segment. For commercial equipment financing loans and leases management considers concentrations of loan deliquencies by NACIS code.
Qualitative factors are weighted equally and stratified by no risk, minor risk and major risk for each portfolio segment.
Accrued interest receivable on loans and leases, included in accrued interest receivable on the consolidated statements of condition, is excluded from the
estimate of credit losses.
Individually Evaluated Loans
Prior to the adoption of ASU 2016-13 on January 1, 2023, a loan was individually evaluated when the loan was considered impaired. A loan was considered to
be impaired when based on current information and events, it was probable that FNCB would not be able to collect all amounts due from the borrower in
accordance with the contractual terms of the loan, including scheduled interest payments.
With the adoption of ASU 2016-13, loans that do not share risk characteristics with existing pools are evaluated on an individual basis. FNCB considers a loan
to be collateral dependent when management has determined that foreclosure of the collateral is probable, or where the borrower is experiencing financial
difficulty and repayment of the financial asset to expected to be provided substantially through the operation or sale of the collateral. When repayment is
expected to be from the operation of the collateral, the specific credit loss reserve is calculated as the amount by which the amortized cost basis of the financial
asset exceeds the net present value from the operation of the collateral. When repayment is expected to be from the sale of the collateral, the specific credit loss
reserve is calculated as the amount by which the amortized cost basis of the financial asset exceeds the fair value of the underlying collateral less estimated cost
to sell. The allowance may be zero if the fair value of the collateral at the measurement date exceeds the amortized cost basis of the financial asset.
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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.
Impact of Adoption of ASU 2016-13
The following table below presents the impact of the adoption of ASU 2016-13 on the consolidated statements of financial condition:
(in thousands)
Assets:
ACL on loans and leases:
Residential real estate
Commercial real estate
Construction, land acquisition and development
Commercial and industrial
Consumer
State and political subdivisions
Unallocated
Total ACL on loans
Deferred income taxes
Liabilities:
Liability for credit losses for unfunded commitments
Shareholders' equity:
Retained earnings
January 1, 2023
As reported Under
ASU 2016-13
Pre-ASU 2016-13
Impact of ASU
2016-13
$
$
$
$
$
(1,187) $
(2,579)
(1,814)
(3,887)
(1,677)
(413)
-
(11,557)
(2,215) $
(4,193)
(747)
(4,099)
(1,307)
(503)
(1,129)
(14,193) $
15,759 $
16,046 $
1,028
1,614
(1,067)
212
(370)
90
1,129
2,636
(287)
(2,217) $
(948) $
(1,269)
(65,953) $
(64,873) $
(1,080)
Concurrently with adopting ASU 2016-13, FNCB adopted ASU 2022-02, Financial Instruments—Credit Losses (Topic 326): "Troubled Debt Restructurings
and Vintage Disclosures." ASU 2022-02 eliminated the troubled debt restructuring ("TDR") recognition and measurement guidance and, instead, requires that
an entity evaluate (consistent with the accounting for other loan modifications) whether the modification represents a new loan or a continuation of an existing
loan. This guidance also enhances existing disclosure requirements and introduces new requirements related to certain modifications of receivables made to
borrowers experiencing financial difficulty. For public business entities, including FNCB, ASU 2022-02 requires that an entity disclose current-period gross
charge-offs by year of origination for financing receivables and net investment in 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.
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Mortgage Banking Activities, Loan Sales and Servicing
FNCB originates 1- 4 family mortgage loans for sale on the secondary market. Mortgage loans originated and held for sale are carried at the lower of aggregate
cost or fair value determined on an individual loan basis. In 2023, FNCB entered into a correspondent relationship with a third-party mortgage company and
began selling 1- 4 family mortgage loans through this company with servicing released. Net unrealized losses are recorded as a valuation allowance and
charged to earnings. Gains and losses on sales of mortgage loans are based on the difference between the selling price and the carrying value of the related loan
sold and include the value assigned to the rights to service the loan.
FNCB may also elect to sell the guaranteed principal balance of loans that are guaranteed by the Small Business Administration (“SBA”) and retain the
servicing on those loans.
Servicing rights on 1- 4 family mortgages originated and sold prior to 2023 were recorded at fair value upon sale of the loan and reported in other assets on the
consolidated statements of financial condition. Servicing rights are amortized in proportion to and over the period during which estimated servicing income
will be received. Fair value is based on market prices for comparable servicing contracts, when available, or alternately, is based on a valuation model that
calculates the present value of estimated future net servicing income. The valuation model incorporates assumptions that market participants would use in
estimating future net servicing income, such as the cost to service, the discount rate, the custodial earnings rate, an inflation rate, ancillary income, prepayment
speeds and default rates and losses.
Servicing rights are evaluated for impairment at each reporting date based upon the fair value of the rights as compared to amortized cost. Impairment is
determined by stratifying rights into tranches based on predominant risk characteristics, such as interest rate, loan type and investor type. Impairment is
recognized through a valuation allowance for an individual tranche, to the extent that fair value is less than the capitalized amount for the tranche. If
management later determines that all or a portion of the impairment no longer exists for a particular tranche, a reduction of the allowance may be recorded as
an increase to income.
Other Real Estate Owned
OREO consists of property acquired by foreclosure, abandonment or conveyance of deed in-lieu of foreclosure of a loan, and bank premises that are no longer
used for operations or for future expansion. OREO is held for sale and is initially recorded at fair value less estimated costs to sell at the date of acquisition or
transfer, which establishes a new cost basis. Upon acquisition of the property through foreclosure or deed in-lieu of foreclosure, any adjustment to fair value
less estimated selling costs is recorded to the ACL. The determination is made on an individual asset basis. Bank premises no longer used for operations or
future expansion are transferred to OREO at fair value less estimated selling costs with any related write-down included in non-interest expense. Subsequent to
acquisition, valuations are periodically performed, and the assets are carried at the lower of cost or fair value less estimated cost to sell. Fair value is
determined through external appraisals, current letters of intent, broker price opinions or executed agreements of sale, unless management determines that
conditions exist that warrant an adjustment to the value. Costs relating to the development and improvement of the OREO properties may be capitalized;
holding period costs and any subsequent changes to the valuation allowance are charged to expense as incurred. There were no properties held in OREO at
December 31, 2023 and 2022.
Bank Premises and Equipment
Land is stated at cost. Bank premises, equipment and leasehold improvements are stated at cost less accumulated depreciation. Costs for routine maintenance
and repairs are expensed as incurred, while significant expenditures for improvements are capitalized. Depreciation expense is computed generally using the
straight-line method over the following ranges of estimated useful lives, or in the case of leasehold improvements, to the expected terms of the leases, if
shorter:
Buildings and improvements (years)
Furniture, fixtures and equipment (years)
Leasehold improvements (years)
Long-lived Assets
5 to 40
3 to 20
3 to 35
Intangible assets and bank premises and equipment are reviewed by management at least annually for potential impairment and whenever events or
circumstances indicate that carrying amounts may not be recoverable.
Income Taxes
FNCB recognizes income taxes under the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases.
Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences
are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that
includes the enactment date. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that all or
some portion of the deferred tax assets will not be realized.
FNCB files a consolidated federal income tax return. Under tax sharing agreements, each subsidiary provides for and settles income taxes with FNCB as if it
would have filed on a separate return basis. Interest and penalties, if any, as a result of a taxing authority examination are recognized within non-interest
expense. FNCB is not currently subject to an audit by any of its tax authorities and with limited exception is no longer subject to federal and state income tax
examinations by taxing authorities for years before 2020.
When tax returns are filed, it is highly certain that some positions taken would be sustained upon examination by the taxing authorities, while others are subject
to uncertainty about the merits of the position taken or the amount of the position that would be ultimately sustained. The benefit of a tax position is recognized
in the financial statements in the period during which, based on all available evidence, management believes it is more-likely-than-not that the position will be
sustained upon examination, including the resolution of appeals or litigation processes, if any. Tax positions taken are not offset or aggregated with other
positions. Tax positions that meet the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that is more than 50% likely
of being realized upon settlement with the applicable taxing authority. The portion of the benefits associated with tax positions taken that exceeds the amount
measured as described above is reflected as a liability for unrecognized tax benefits along with any associated interest and penalties that would be payable to
the taxing authorities upon examination. Management determined that FNCB had no liabilities for uncertain tax positions at December 31, 2023 and 2022.
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Earnings per Share
Earnings per share is calculated on the basis of the weighted-average number of common shares outstanding during the year. Basic earnings per share excludes
dilution and is computed by dividing net income available to common shareholders by the weighted-average common shares outstanding during the period.
Diluted earnings per share reflect additional shares that would have been outstanding if dilutive potential common shares had been issued. Potential common
shares that may be issued by FNCB relate to shares of unvested restricted stock for which the dilutive effect is calculated using the treasury stock method.
Stock-Based Compensation
FNCB recognizes all share-based payments for compensation in the consolidated statements of income based on their fair values on the grant date. The fair
value of shares of unrestricted and restricted stock and awarded under the FNCB Bancorp, Inc. Equity Incentive Plan ("EIP"), formerly the Long Term
Incentive Compensation Plan (“LTIP”), is determined using an average of the high and low prices for FNCB’s common stock for the 10 days preceding the
grant date. Stock-based compensation expense for unrestricted stock is recognized on the grant date. For restricted stock, stock-based compensation expense is
recognized ratably over the vesting period, adjusted for forfeitures during the period in which they occur.
Bank-Owned Life Insurance
Bank-owned life insurance (“BOLI”) represents the cash surrender value of life insurance policies on certain current and former directors and officers of
FNCB. FNCB purchased the insurance as a tax-deferred investment and future source of funding for liabilities, including the payment of employee benefits
such as health care. BOLI is carried in the consolidated statements of financial condition at its cash surrender value. Increases in the cash value of the policies,
as well as proceeds received, are recorded in non-interest income. Under some of these policies, the beneficiaries receive a portion of the death benefit. The net
present value of the future death benefits scheduled to be paid to the beneficiaries was $104 thousand and $101 thousand at December 31, 2023 and 2022,
respectively, and is reflected in other liabilities on the consolidated statements of financial condition.
Fair Value Measurement
FNCB uses fair value measurements to record fair value adjustments to certain financial assets and liabilities and to determine fair value disclosures. Available-
for-sale debt securities and derivative contracts are recorded at fair value on a recurring basis. Additionally, from time to time, FNCB may be required to
recognize adjustments to other assets at fair value on a nonrecurring basis, such as collateral-dependent loans, other securities, OREO and other repossessed
assets.
Fair value is the price that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market in an orderly transaction
between market participants at the measurement date. An orderly transaction is a transaction that assumes exposure to the market for a period prior to the
measurement date to allow for marketing activities that are usual and customary for transactions involving such assets or liabilities; it is not a forced
transaction.
Accounting standards define fair value, establish a framework for measuring fair value, establish a three-level hierarchy for disclosure of fair value
measurement and provide disclosure requirements about fair value measurements. The valuation hierarchy is based upon the transparency of inputs to the
valuation of an asset or liability as of the measurement date.
The three levels of the fair value hierarchy are:
● Level 1 valuation is based upon unadjusted quoted market prices for identical instruments traded in active markets;
● Level 2 valuation is based upon quoted market prices for similar instruments traded in active markets, quoted market prices for identical or similar
instruments traded in markets that are not active and model-based valuation techniques for which all significant assumptions are observable in the
market or can be corroborated by market data; and
● Level 3 valuation is derived from other valuation methodologies including discounted cash flow models and similar techniques that use significant
assumptions not observable in the market. These unobservable assumptions reflect estimates of assumptions that market participants would use in
determining fair value.
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Revenue Recognition
FNCB records revenue from contracts with customers in accordance with ASC 606, "Revenue from Contracts with Customers." FNCB recognizes revenues as
they are earned based on contractual terms, as transactions occur, or as services are provided and collectability is reasonably assured. FNCB's primary source
of revenue is interest income from the Bank's loans, investment securities and other financial instruments, which are not within the scope of ASC 606. FNCB
has evaluated the nature of its contracts with customers and determined that further disaggregation of revenue from contracts with customers into more granular
categories beyond what is presented in the consolidated statements of income was not necessary. In general, FNCB fully satisfies its performance obligations
on its contracts with customers as services are rendered and the transaction prices are typically fixed and charged either on a periodic basis or based on activity.
FNCB earns non-interest income from various banking services offered by the Bank and other transactions that are within the scope of ASC 606 as follows:
● Deposit service charges - include general service fees for monthly account maintenance, account analysis fees, non-sufficient funds fees, wire transfer
fees and other deposit account related fees. Revenue is recognized when FNCB’s performance obligation is completed which is generally monthly for
account maintenance services or when a transaction has been completed (such as a wire transfer). Payment for service charges on deposit accounts is
received immediately or in the following month through a direct charge to customers’ accounts. Also included in deposit service charges is income
from ATM surcharges and debit card services income. ATM surcharges are generated when an FNCB cardholder uses an ATM that is not within the
AllPoint ATM network or a non-FNCB cardholder uses an FNCB ATM. Card services income is primarily comprised of interchange fees earned
whenever a customer uses an FNCB debit card as payment for goods and/or services through a card payment network. FNCB’s performance
obligation is satisfied on a daily basis as transactions are processed. FNCB recognizes ATM surcharges and card services income as transactions with
merchants are settled, generally on a daily basis.
Net gains (losses) on the sale of available-for-sale debt securities - Gains or losses realized from the sale of available-for-sale debt securities are
recorded to non-interest income on the settlement date.
Net gains (losses) on the sale of equity securities - Gains or losses realized from the sale of equity securities are recorded to non-interest income on the
settlement date.
Net gains (losses) on the sale of mortgage loans held for sale - Gains or losses realized on the sale of mortgages held for sale are recorded to non-
interest income on the settlement date.
Loan-related fees - include servicing fees received on loans sold for which FNCB has retained the servicing, net of amortization for mortgage
servicing rights.
●
●
●
●
● Merchant services revenue - Merchant services fees represent interchange revenue generated from the processing of merchant card payments on behalf
of certain business customers. Merchant services fee income is transactional in nature and is recognized in income monthly when FNCB’s
performance obligation is complete, which is generally the time that payment is received.
● Wealth management services revenue - Wealth management services revenue represents fees received from a third-party broker-dealer as part of a
revenue-sharing agreement for fees earned from customers that we refer to the third party. Wealth management services revenue is transactional in
nature and is recognized in income monthly when FNCB’s performance obligation is complete, which is generally the time that payment is received.
● Other income – primarily includes interest rate swap revenue and title insurance revenue. Interest rate swap revenue represents net fees FNCB
receives from a counterparty for completing loan swap transactions, which FNCB receives at the time the loan closes. Interest rate swap revenue is
non-refundable, is not tied to the loan and FNCB has no future obligation to the counterparty related to such fees. Accordingly, FNCB records interest
rate swap revenue in non-interest income upon receipt. With regard to title insurance revenue, FNCB is a member in a limited liability company that
provides title insurance services to customers referred by member financial institutions. In accordance with an operating agreement, the title insurance
company makes quarterly discretionary distributions to member institutions on a pro-rata basis based on their respective membership interest
percentage at the time of distribution. FNCB’s performance obligation under the operating agreement was satisfied with its capital contribution. There
are no future minimum referral quotas required under the operating agreement. FNCB records revenue from quarterly distributions at the time of
receipt.
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Comprehensive Income (Loss)
Accounting principles generally require that recognized revenue, expenses, gains and losses be included in net income. Although certain changes in assets and
liabilities, such as unrealized gains and losses on available-for-sale securities, are reported as a separate component of the shareholders’ equity section of the
statement of financial condition, such items, along with net income, are components of comprehensive income (loss).
Recent Accounting Pronouncements
Accounting Standards Update ("ASU") 2016-13, Financial Instruments – Credit Losses (Topic 326): “Measurement of Credit Losses on Financial
Instruments,” 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 is commonly
referred to as CECL and requires that a financial asset (or a group of financial assets) measured at amortized cost basis to be presented at the net amount
expected to be collected. The amendments in this update affect entities holding financial assets and net investment in leases that are not accounted for at fair
value through net income, including such financial assets as loans, debt securities, trade receivables, net investments in leases, off-balance-sheet credit
exposures, reinsurance receivables, and any other financial assets not excluded from the scope that have the contractual right to receive cash. ASU 2016-13 was
originally effective for public business entities that are registered with the U.S. Securities and Exchange Commission (“SEC”) under the Securities and
Exchange Act of 1934, as amended, including smaller reporting companies, for fiscal years beginning after December 15, 2019, including interim periods
within those fiscal years. All entities may adopt the amendments in this ASU earlier as of the fiscal years beginning after December 15, 2018, including
interim periods within those fiscal years. On November 15, 2019, the Financial Accounting Standards Board ("FASB") issued ASU 2019-10, "Credit Losses
(Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842): Effective Dates," which finalized various effective dates delay for private
companies, not-for-profit organizations, and certain smaller reporting companies. Specifically, under ASU 2019-10 the effective date for implementation of
CECL for smaller reporting companies, private companies and not-for-profits was extended to fiscal years, and interim periods within those years, beginning
after December 15, 2022. As a smaller reporting company, FNCB adopted this guidance on January 1, 2023. The adoption of ASU 2016-13 primarily changed
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 completed implementation including the development of formal policies and procedures and governance and internal control
documentation. In addition, FNCB had the model tested and validated by an independent third-party consultant pre- and post-implementation. FNCB applied
the new guidance using the modified-retrospective approach. Related to the implementation, FNCB recorded a reduction in the ACL on loans and leases of
$2.6 million, additional reserves for unfunded commitments of $1.3 million, a reduction in deferred tax assets of $287 thousand, and an increase to retained
earnings of $1.1 million. The adoption of ASU 2016-13 did not have a material effect on FNCB's available-for-sale debt securities.
ASU 2022-02, Financial Instruments—Credit Losses (Topic 326): "Troubled Debt Restructurings and Vintage Disclosures," eliminates the TDR recognition
and measurement guidance and, instead, requires that an entity evaluate (consistent with the accounting for other loan modifications) whether the modification
represents a new loan or a continuation of an existing loan. The amendments also enhance existing disclosure requirements and introduce new requirements
related to certain modifications of receivables made to borrowers experiencing financial difficulty. For public business entities, these amendments require that
an entity disclose current-period gross charge-offs by year of origination for financing receivables and net investment in leases within the scope of Subtopic
326-20. Gross charge-off information must be included in the vintage disclosures required for public business entities in accordance with paragraph 326-20-50-
6, which requires that an entity disclose the amortized cost basis of financing receivables by credit quality indicator and class of financing receivable by year of
origination. The amendments in this update are effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal
years. These amendments should be applied prospectively, except for the transition method related to the recognition and measurement of TDRs, which an
entity has the option to apply a modified retrospective transition method resulting in a cumulative-effect adjustment to retained earnings in the period of
adoption. Early adoption is permitted if an entity has adopted ASU No. 2016-13, including adoption in an interim period. If an entity elects to early adopt ASU
No. 2022-02 in an interim period, the guidance should be applied as of the beginning of the fiscal year that includes the interim period. An entity may elect to
early adopt the amendments about TDRs and related disclosure enhancements separately from the amendments related to vintage disclosures. FNCB adopted
ASU 2022-02 on January 1, 2023. The adoption of these guidance did not have a material impact on FNCB's operating results or financial or financial
position.
ASU No. 2023-02 “Investments-Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Tax Credit Structures Using the Proportional
Amortization Method” (“ASU 2023-02”) permits companies to account for tax equity investments, regardless of the tax credit program from which the income
tax credits are received, using the proportional amortization method if certain conditions are met. The amendments in this standard will be effective for FNCB
on January 1, 2024. FNCB does not believe this standard will have a material impact on its consolidated financial statements.
ASU No. 2023-06 “Disclosure Improvements - Codification Amendments in Response to the SEC’s Disclosure Update and Simplification Initiative” (“ASU
2023-06”) amends the ASC to incorporate certain disclosure requirements from SEC Release No. 33-10532 - Disclosure Update and Simplification that was
issued in 2018. The effective date for each amendment will be the date on which the SEC’s removal of that related disclosure from Regulation S-X or
Regulation S-K becomes effective, with early adoption prohibited. FNCB does not believe this standard will have a material impact on its consolidated
financial statements.
ASU No. 2023-07 “Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures” (“ASU 2023-07”) improves reportable segment
disclosure requirements, primarily through enhanced disclosures about significant segment expenses. The amendments in this standard will be effective for
FNCB for the fiscal year ended December 31, 2024 and subsequent interim periods. The amendments will be applied retrospectively to all prior periods in the
consolidated financial statements. FNCB does not believe this standard will have a material impact on its consolidated financial statements and related
disclosures.
ASU No. 2023-09 “Income Taxes (Topic 740): Improvements to Income Tax Disclosures” (“ASU 2023-09”) requires enhanced income tax disclosures
primarily related to the rate reconciliation and income taxes paid information to provide more transparency by requiring (i) consistent categories and greater
disaggregation of information in the rate reconciliation table and (ii) income taxes paid, net of refunds, to be disaggregated by jurisdiction based on an
established threshold. The amendments in this standard will be effective for FNCB on January 1, 2025. FNCB is currently evaluating the impact the
amendments will have on its consolidated financial statements and related disclosures.
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Note 3. SECURITIES
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 December
31, 2023 and 2022:
(in thousands)
Available-for-sale debt securities:
U.S. Treasury
Obligations of state and political subdivisions
U.S. government/government-sponsored agencies:
Collateralized mortgage obligations - residential
Collateralized mortgage obligations - commercial
Mortgage-backed securities
Private collateralized mortgage obligations
Corporate debt securities
Asset-backed securities
Negotiable certificates of deposit
Total available-for-sale debt securities
(in thousands)
Available-for-sale debt securities:
U.S. Treasury
Obligations of state and political subdivisions
U.S. government/government-sponsored agencies:
Collateralized mortgage obligations - residential
Collateralized mortgage obligations - commercial
Mortgage-backed securities
Private collateralized mortgage obligations
Corporate debt securities
Asset-backed securities
Negotiable certificates of deposit
Total available-for-sale debt securities
December 31, 2023
Gross
Gross
Unrealized Unrealized
Amortized
Cost
Holding
Gains
Holding
Losses
Fair
Value
$
$
36,852 $
220,181
87,405
3,613
18,872
76,912
35,055
21,768
744
501,402 $
- $
52
-
-
4
78
-
67
-
201 $
3,675 $
20,437
13,198
227
2,430
6,838
3,769
145
70
50,789 $
33,177
199,796
74,207
3,386
16,446
70,152
31,286
21,690
674
450,814
December 31, 2022
Gross
Gross
Unrealized Unrealized
Amortized
Cost
Holding
Gains
Holding
Losses
Fair
Value
$
$
36,801 $
250,244
93,577
3,649
23,332
80,648
33,630
15,287
744
537,912 $
- $
90
-
-
1
-
-
5
-
96 $
4,667 $
29,552
13,170
320
2,670
8,141
2,958
351
88
61,917 $
32,134
220,782
80,407
3,329
20,663
72,507
30,672
14,941
656
476,091
Except for securities of U.S. government and government-sponsored agencies, there were no securities of any individual issuer that exceeded 10.0% of
shareholders’ equity at December 31, 2023 or 2022.
Investment securities with a carrying value of $326.9 million at December 31, 2023 and $357.2 million at December 31, 2022 were pledged to collateralize
certain municipal deposits. In addition, FNCB obtains letters of credit from the FHLB of Pittsburgh to secure certain municipal deposits of school district
customers who agree to the use of the FHLB letters of credit. These FHLB letters of credit totaled $91.5 million and $47.5 million at December 31, 2023 and
2022, respectively.
The following table presents the maturity information of FNCB’s available-for-sale debt securities at December 31, 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.
(in thousands)
Available -for-sale debt securities:
Amounts maturing in:
One year or less
After one year through five years
After five years through ten years
After ten years
December 31, 2023
Amortized
Cost
Fair
Value
$
16,143 $
80,109
90,632
105,948
15,954
75,005
78,161
95,813
Collateralized mortgage obligations
Mortgage-backed securities
Asset-backed securities
Total
167,930
18,872
21,768
501,402 $
147,745
16,446
21,690
450,814
$
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The following table presents the gross proceeds received and gross realized gains and losses on the sale and redemption of available-for-sale debt securities
for the years ended December 31, 2023 and 2022:
(in thousands)
Available-for-sale debt securities:
Gross proceeds received on sales
Gross realized gains on sales
Gross realized losses on sales
Year Ended December 31,
2022
2023
$
10,394 $
252
-
14,004
78
(301)
The following tables present the number, fair value and gross unrealized losses of available-for-sale debt securities in an unrealized loss position at December
31, 2023 and 2022, aggregated by investment category and length of time the securities have been in an unrealized loss position:
(dollars in thousands)
U.S. Treasuries
Obligations of state and political
subdivisions
U.S. government/government-
sponsored agencies:
Collateralized mortgage obligations -
residential
Collateralized mortgage obligations -
commercial
Mortgage-backed securities
Private collateralized mortgage
obligations
Corporate debt securities
Asset-backed securities
Negotiable certificates of deposit
Total
(dollars in thousands)
U.S. Treasuries
Obligations of state and political
subdivisions
U.S. government/government-
sponsored agencies:
Collateralized mortgage obligations -
residential
Collateralized mortgage obligations -
commercial
Mortgage-backed securities
Private collateralized mortgage
obligations
Corporate debt securities
Asset-backed securities
Negotiable certificates of deposit
Total
Less than 12 Months
December 31, 2023
12 Months or Longer
Number
of
Fair
Securities Value Losses
- $
- $
Gross
Unrealized
Number
of
Gross
Unrealized
Number
of
Fair
Total
Fair
Gross
Unrealized
Securities Value Losses
17 $ 33,177 $
-
Securities Value Losses
17 $ 33,177 $
3,675
3,675
1
2,121
16
193 195,153
20,421
194 197,274
20,437
-
-
-
42 74,207
13,198
42 74,207
13,198
-
1
-
3,800
5,670
3
1,467
1
3,482
2
-
-
8 $ 16,540 $
-
54
131
33
15
-
249
3
3,386
12 12,552
227
2,376
3
3,386
13 16,352
227
2,430
52 58,846
29 29,819
9,660
10
674
3
361 $ 417,474 $
6,707
3,736
130
70
50,540
55 64,516
30 31,286
12 13,142
674
3
369 $ 434,014 $
6,838
3,769
145
70
50,789
Less than 12 Months
December 31, 2022
12 Months or Longer
Number
of
Fair
Securities Value Losses
- $
- $
Gross
Unrealized
Number
of
Gross
Unrealized
Number
of
Fair
Total
Fair
Gross
Unrealized
Securities Value Losses
17 $ 32,134 $
-
Securities Value Losses
17 $ 32,134 $
4,667
4,667
128 146,932
12,751
94 69,872
16,801
222 216,804
29,552
16 26,826
3,407
26 53,581
9,763
42 80,407
13,170
2
7
1,911
8,569
94
219
1
1,418
7 11,998
226
2,451
3
3,329
14 20,567
320
2,670
29 27,705
18 21,325
7,295
-
205 $ 240,563 $
5
-
1,213
1,805
179
-
19,668
28 42,819
9,347
11
3,988
5
656
3
192 $ 225,813 $
6,928
1,153
172
88
42,249
57 70,524
29 30,672
10 11,283
656
3
397 $ 466,376 $
8,141
2,958
351
88
61,917
Evaluation for Credit Impairment - Available-for-Sale Debt Securities
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-
related factors. At December 31, 2023, there were 369 available-for-sale debt securities in an unrealized loss position. As part of its quarterly evaluation of
these securities for impairment at December 31, 2023, management first determined that FNCB did not intend to sell, nor was it more likely than not that it
would be required to sell, any security in an unrealized loss position prior to recovery of its amortized cost. Management then considered, among other things,
the length of time a security’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. Management also
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. FNCB has received all scheduled principal and interest payments and expects to fully collect all future contractual principal
and interest payments on all securities in an unrealized loss position at December 31, 2023. Based on the results of its review and considering the attributes of
these debt securities, management concluded that changes in the fair 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 on available-for-sale debt securities in an unrealized loss position at December 31, 2023.
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Equity Securities
Included in equity securities with readily determinable fair values at December 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 security
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.
The following table presents unrealized and realized gains and losses recognized in net income on equity securities for the years ended December 31, 2023 and
2022:
(in thousands)
Net loss recognized on equity securities
Less: net (loss) gain recognized on equity securities sold/acquired
Unrealized loss recognized on equity securities
Equity Securities and Equity Securities without Readily Determinable Fair Value
Year Ended December 31,
2022
2023
$
$
(1,601) $
(278)
(1,323) $
(34)
118
(152)
At December 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. As part of its qualitative assessment, management engaged
an independent third party to provide valuations of this investment as of December 31, 2023 and 2022. Based on the results of its assessment, management
determined that no adjustment for impairment was required at December 31, 2023 and December 31, 2022.
Restricted Stock
The following table presents FNCB's investment in restricted securities at December 31, 2023 and 2022. Restricted securities have limited marketability and
are carried at cost. Management noted no indicators of impairment for FHLB of Pittsburgh or ACBB stock at December 31, 2023 and 2022:
(in thousands)
Stock in Federal Home Loan Bank of Pittsburgh
Stock in Atlantic Community Bankers Bank
Total restricted securities, at cost
Note 4. LOANS AND LEASES
December 31,
2023
2022
$
$
8,804 $
10
8,814 $
8,535
10
8,545
The following table summarizes loans and leases by portfolio segment at December 31, 2023 and 2022. In accordance with the adoption of ASC 2016-13, as of
December 31, 2023, the table presents the amortized cost basis of each portfolio segment, which includes net deferred costs of $2.4 million, unearned income
of $921 thousand and unamortized premiums on purchased loans of $170 thousand. FNCB does not include accrued interest receivable in amortized cost basis
for loans disclosed throughout this footnote. As of December 31, 2023 and 2022, accrued interest receivable for loans was $3.6 and $2.6 million, respectively,
and is included in "accrued interest receivable" in the consolidated statements of financial condition.
(in thousands)
Residential real estate
Commercial real estate
Construction, land acquisition and development
Commercial and industrial
Commercial equipment financing
Consumer
State and political subdivisions
Total loans and leases, gross
Unearned income
Net deferred origination fees
Allowance for credit losses
Loans and leases, net
December 31,
2023
2022
$
$
245,282 $
408,135
59,876
183,794
163,605
85,730
73,843
1,220,265
-
-
(11,986)
1,208,279 $
250,221
376,976
66,555
272,024
-
92,612
64,955
1,123,343
(810)
1,784
(14,193)
1,110,124
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In 2021, the Bank began offering commercial equipment financing under the brand 1st Equipment Finance. On October 1, 2023, 1st Equipment Finance Inc.,
was established as a wholly-owned subsidiary of the Bank. Upon establishment of the subsidiary, the Bank contributed capital to the new subsidiary which
included, among other assets, the outstanding amortized cost of loans and leases previously originated under this brand, a corresponding ACL and accrued
interest. The amortized cost of loans and leases transferred upon establishment of the subsidiary were $160.5 million with a corresponding ACL of $2.4
million.
1st Equipment Finance Inc. continues to offer commercial equipment financing, through simple interest loans, direct finance leases and municipal
leases. Simple interest loans and direct finance leases were $163.6 million at December 31, 2023, and included under the commercial equipment
financing segment. Prior to October 1, 2023, these loans and leases were included in commercial and industrial loans and totaled $79.3 million at December 31,
2022. Tax-free municipal leases were $4.7 million at December 31, 2023 and $4.4 million at December 31, 2022.
FNCB has granted loans, letters of credit and lines of credit to certain of its executive officers and directors as well as to certain of their related parties. For
more information about related party transactions, refer to Note 12, “Related Party Transactions” to these Notes to Consolidated Financial Statements.
For information about credit concentrations within FNCB’s loan portfolio, refer to Note 13, “Commitments, Contingencies and Concentrations” to these Notes
to Consolidated Financial Statements.
FNCB originates 1- 4 family residential mortgage loans for sale in the secondary market. In 2023, FNCB entered into a correspondent relationship with a third-
party mortgage company and began selling 1- 4 family residential mortgage loans with servicing released through this company. The aggregate principal
balance of 1- 4 family residential mortgages sold on the secondary market were $0.4 million for the year ended December 31, 2023. Prior to 2023, FNCB sold
1- 4 family mortgage loans directly on a secondary market and retained servicing. The principal balance of 1- 4 family mortgages sold for the year ended
December 31, 2022 totaled $9.2 million. Net gains on the sale of residential mortgage loans were $6 thousand in 2023 and $205 thousand in 2022. FNCB
retains servicing rights on mortgages sold in the secondary market. At December 31, 2023, there were no 1 - 4 family residential mortgage loans held for sale.
At December 31, 2022 there were $60 thousand in 1- 4 family residential mortgage loans held for sale.
The unpaid principal balance of loans serviced for others, including residential mortgages and SBA-guaranteed loans were $75.8 million and $78.7 million at
December 31, 2023 and 2022, respectively.
FNCB does not have any lending programs commonly referred to as "subprime lending". Subprime lending generally targets borrowers with weakened credit
histories typically characterized by payment delinquencies, previous charge-offs, judgements, and bankruptcies, or borrowers with questionable repayment
capacity as evidenced by low credit scores or high debt-burden ratios.
FNCB provides for loan and lease losses based on the consistent application of its documented ACL methodology. Loan and lease losses are charged to the
ACL and recoveries are credited to it. Additions to the ACL are provided by charges against income based on various factors which, in management’s
judgement, deserve current recognition of estimated probable losses. Loan and lease losses are charged-off in the period the loans, or portions thereof, are
deemed uncollectible. Generally, FNCB will record a loan charge-off (including a partial charge-off) to reduce a loan to the estimated recoverable amount
based on its methodology detailed below. Management regularly reviews the loan portfolio and makes adjustments for loan losses in order to maintain the ACL
in accordance with GAAP. The ACL consists primarily of the following two components:
(1) Specific allowances are established for loans and loan relationships in excess of $100 thousand, that do not share risk characteristics with existing
pools and are independently evaluated for impairment. The amount of impairment provided for as an allowance is represented by the deficiency, if
any, between the carrying value of the loan and either (a) the present value of expected future cash flows discounted at the loan’s effective interest
rate, (b) the loan’s observable market price, or (c) the fair value of the underlying collateral, less estimated costs to sell, for collateral dependent loans.
Impaired loans that have no impairment losses are not considered in the establishment of general valuation allowances as described below. If
management determines that collection of the impairment amount is remote, a charge-off will be recorded for the impairment amount.
(2) General allowances are established for loan losses on a pool basis for loans that are collectively evaluated for impairment. FNCB divides its portfolio
into the previously defined seven loan segments for loans exhibiting similar risk characteristics.
For additional information about FNCB's ACL methodology, see Note 2, "Summary of Significant Accounting Policies - ACL on Loans and Leases" of these
Notes to Consolidated Financial Statements.
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Management evaluates the credit quality of the loan portfolio on an ongoing basis and performs a formal review of the adequacy of the ACL on a quarterly
basis. This evaluation is inherently subjective, as it requires material estimates that may be susceptible to significant revisions based upon changes in economic
and real estate market conditions. However, actual loan losses may be significantly more than the established ACL, which could have a material negative effect
on FNCB’s operating results or financial condition. While management uses the best information available to make its evaluations, future adjustments to the
ACL may be necessary if conditions differ substantially from the information used in making the evaluations. Banking regulators, as an integral part of their
examination of FNCB, also review the 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.
Credit Risk Profiles – Commercial Loans
Management continuously monitors and evaluates the credit quality of FNCB’s commercial loans and leases by regularly reviewing certain credit quality
indicators. Management utilizes credit risk ratings as the key credit quality indicator for evaluating the credit quality of FNCB’s loan and lease receivables.
FNCB’s commercial loan classification and credit grading processes are part of the lending, underwriting, and credit administration functions to ensure an
ongoing assessment of credit quality. FNCB maintains a formal, written loan classification and credit grading system that includes a discussion of the factors
used to assign appropriate classifications of credit grades to loans. The risk grade groupings provide a mechanism to identify risk within the loan portfolio and
provide management and the board of directors with periodic reports by risk category. The process also identifies groups of loans that warrant the special
attention of management. Accurate and timely loan classification and credit grading is a critical component of loan portfolio management. Loan officers are
required to review their loan portfolio risk ratings regularly for accuracy. In addition, the credit risk ratings play an important role in the loan review function,
as well as the establishment and evaluation of the provision for credit losses and the ACL.
The loan review function uses the same risk rating system in the loan review process. Quarterly, FNCB engages an independent third party to assess the quality
of the loan portfolio and evaluate the accuracy of ratings with the loan officer’s and management’s assessment.
FNCB’s loan rating system assigns a degree of risk to commercial loans based on relevant information about the ability of borrowers to service their debt such
as: current financial information, historical payment experience, credit documentation, public information and current economic trends, among other factors.
Management analyzes these non-homogeneous loans individually by grading the loans as to credit risk and probability of collection for each type of loan.
Commercial and industrial loans include commercial indirect auto loans which are not individually risk rated, and construction, land acquisition and
development loans include residential construction loans which are also not individually risk rated. These loans are monitored on a pool basis due to their
homogeneous nature as described in “Credit Quality Indicators – Other Loans” below. FNCB risk rates certain residential real estate loans and consumer loans
that are part of a larger commercial relationship using a credit grading system as described in “Credit Quality Indicators – Commercial Loans.” The grading
system contains the following basic risk categories:
1. Minimal Risk
2. Above Average Credit Quality
3. Average Risk
4. Acceptable Risk
5. Pass - Watch
6. Special Mention
7. Substandard - Accruing
8. Substandard - Non-Accrual
9. Doubtful
10. Loss
This analysis is performed on a quarterly basis using the following definitions for risk ratings:
Pass – Assets rated 1 through 5 are considered pass ratings. These assets show no current or potential problems and are considered fully collectible.
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.
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Credit Risk Profiles – Other Loans
Certain residential real estate loans, consumer loans, and commercial and municipal indirect auto loans are monitored on a pool basis due to their homogeneous
nature. Loans that are delinquent 90 days or more are placed on non-accrual status unless collection of the loan is in process and reasonably assured. FNCB
utilizes accruing versus non-accrual status as the credit quality indicator for these loan pools.
The following tables presents the credit risk profile of loans and leases summarized by portfolio segment and year of origination at December 31, 2023:
Credit Risk Profiles
For Year Ended December 31, 2023
Term Loans By Origination Fiscal Year
2023
2022
2021
2020
2019
Prior
Revolving
Total
Loans
35,520 $
-
156
-
-
35,676
99,392 $
-
287
-
-
99,679
75,005 $
4,703
497
-
-
80,205
38,562 $
99
-
-
-
38,661
66,065 $
27
-
-
-
66,092
71,664 $
4,552
2,728
-
-
78,944
7,102 $
1,776
-
-
-
8,878
393,310
11,157
3,668
-
-
408,135
14,027
-
-
-
-
18,832
-
-
-
-
24,815
184
-
-
-
208
-
-
-
-
323
-
-
-
-
893
-
-
-
-
594
-
-
-
-
59,692
184
-
-
-
14,027
18,832
24,999
208
323
893
594
59,876
42,104
493
45
-
-
42,642
20,644
19
2,588
-
-
23,251
22,898
318
-
-
-
23,216
9,522
595
1,200
-
-
11,317
10,730
24
-
-
-
10,754
10,098
137
211
-
-
10,446
55,939
4,108
2,121
-
-
62,168
171,935
5,694
6,165
-
-
183,794
94,967
628
342
-
-
63,807
15
135
-
-
3,711
-
-
-
-
95,937
63,957
3,711
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
162,485
643
477
-
-
-
163,605
16,025
-
-
-
-
11,659
-
-
-
-
21,606
-
-
-
-
2,389
-
-
-
-
15,852
-
-
-
-
4,279
-
-
-
-
2,033
-
-
-
-
73,843
-
-
-
-
16,025
11,659
21,606
2,389
15,852
4,279
2,033
73,843
11,878
-
11,878
41,104
67
41,171
76,574
142
76,716
37,162
-
37,162
11,748
229
11,977
42,181
699
42,880
23,387
111
23,498
244,034
1,248
245,282
$
(in thousands)
Commercial real estate
Risk rating
Pass
Special mention
Substandard
Doubtful
Loss
Total commercial real state
Construction, land
acquisition and development
Risk rating
Pass
Special mention
Substandard
Doubtful
Loss
Total construction, land
acquisition and development
Commercial and industrial
Risk rating
Pass
Special mention
Substandard
Doubtful
Loss
Total commercial and industrial
Commercial equipment
financing
Risk rating
Pass
Special mention
Substandard
Doubtful
Loss
Total commercial equipment
financing
State and political
subdivisions
Risk rating
Pass
Special mention
Substandard
Doubtful
Loss
Total state and political
subdivisions
Credit Risk Profiles - Other
Loans
Residential real estate
Performing
Non-performing
Total residential real estate
Consumer
Performing
Non-performing
Total consumer
Total loans and leases
27,180
-
27,180
243,365 $
30,098
89
30,187
288,736 $
18,994
72
19,066
249,519 $
3,060
22
3,082
92,819 $
1,609
123
1,732
106,730 $
4,401
47
4,448
141,890 $
35
-
35
85,377
353
85,730
97,206 $ 1,220,265
$
66
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The following table presents gross charge-offs by portfolio segment and year of origination at December 31, 2023:
Gross Charge-Offs by Origination Year
For the Year Ended December 31, 2023
$
(in thousands)
Residential real estate
Commercial real estate
Construction land acquisition
and development
Commercial and industrial
Commercial equipment
financing
Consumer
State and political subdivision
loans
Total gross charge-offs
$
2023
2022
2021
2020
2019
Prior
Revolving
Total
- $
-
-
284
309
67
-
660 $
63 $
-
-
108
316
1,205
-
1,692 $
- $
-
-
-
4
765
-
769 $
- $
-
-
-
-
22
-
22 $
- $
-
-
-
-
22
-
22 $
4 $
-
-
-
-
68
-
72 $
- $
-
-
104
-
-
-
104 $
67
-
-
496
629
2,149
-
3,341
The following table presents the recorded investment in loans and leases receivable by major category and credit and credit quality indicators at December 31,
2022, prior to the adoption of ASU 2016.13:
Credit Quality Indicators
December 31, 2022
Commercial Loans
Special
Mention Substandard Doubtful
Pass
Subtotal
Accruing
Loss
Commercial Loans
Subtotal
Other
Total
Loans
Other Loans
Non-
accrual
Loans
(in thousands)
Residential real
estate
Commercial
real estate
Construction,
land
acquisition and
development
Commercial
and industrial
Consumer
State and
political
subdivisions
Total
$
43,188 $
434 $
99 $
367,866
7,082
2,028
62,965
797
-
260,358
-
64,955
$ 799,332 $
829
-
8,875
-
-
9,142 $
-
11,002 $
- $
43,721 $ 205,887 $
613 $ 206,500 $ 250,221
-
376,976
-
-
-
376,976
-
63,762
2,793
-
2,793
66,555
-
-
270,062
-
1,962
92,251
-
361
1,962
92,612
272,024
92,612
-
- $
-
64,955
819,476 $ 302,893 $
-
64,955
974 $ 303,867 $ 1,123,343
-
- $
-
-
-
-
-
- $
67
Table of Contents
The following table summarizes activity in the ACL by major category for the years ended December 31, 2023:
Allowance for Credit Losses by Loan Category
December 31, 2023
Residential
Real
Estate
Commercial
Real Estate
Construction,
Land
Acquisition
and
Development
Commercial
and
Industrial
Commercial
Equipment
Financing Consumer
State and
Political
Subdivisions Unallocated
Total
$
2,215 $
4,193 $
747 $
4,099 $
- $
1,307 $
503 $
1,129 $
14,193
(1,028)
-
(67)
-
37
(1,614)
-
-
495
(243)
1,067
-
-
-
(660)
(212)
(2,390)
(496)
148
1,049
-
2,390
(629)
-
1,368
370
-
(2,149)
1,247
343
(90)
-
-
-
(14)
(1,129)
-
-
-
-
(2,636)
-
(3,341)
1,890
1,880
1,157 $
2,831 $
1,154 $
2,198 $
3,129 $
1,118 $
399 $
- $
11,986
- $
51 $
- $
- $
70 $
- $
- $
- $
121
1,157 $
2,780 $
1,154 $
2,198 $
3,059 $
1,118 $
399 $
- $
11,865
$
$
$
$
830 $
2,663 $
- $
104 $
308 $
337 $
- $
- $
4,242
244,452
405,472
59,876
183,690
163,297
85,393
73,843
- 1,216,023
(in thousands)
Allowance for credit
losses:
Beginning balance,
January 1, 2023
Impact of ASU-2016-
13
Reclassification (1)
Charge-offs
Recoveries
Provisions (credits)
Ending balance,
December 31, 2023
Specific reserve
General reserve
Loans and leases
receivable:
Individually evaluated
for impairment
Collectively evaluated
for impairment
Total loans and
leases, gross at
December 31, 2023 $
245,282 $
408,135 $
59,876 $
183,794 $
163,605 $
85,730 $
73,843 $
- $1,220,265
(1) Represents ACL associated with loans and leases originated under the brand, 1st Equipment Finance, and included in capital contributed to 1st Equipment
Finance, Inc. on October 1, 2023, the date it was established as a wholly-owned subsidiary of the Bank.
The following table summarizes activity in the ALLL for the year ending December 31, 2022, ending loan and lease balances and related ALLL by portfolio
segment and impairment methodology at December 31, 2022, prior to the adoption of ASU 2016-13.
Allowance for Loan and Lease Losses by Loan Category
December 31, 2022
Construction,
Land
Acquisition
and
Development
Commercial
Real Estate
Commercial
and
Industrial Consumer
Residential
Real
Estate
State and
Political
Subdivisions Unallocated
Total
2,081 $
(3)
3
134
2,215 $
4,530 $
-
293
(630)
4,193 $
392 $
-
10
345
747 $
2,670 $
(69)
30
1,468
4,099 $
1,159 $
(1,234)
785
597
1,307 $
455 $
-
-
48
503 $
1,129 $
-
-
-
1,129 $
12,416
(1,306)
1,121
1,962
14,193
17 $
15 $
- $
2 $
- $
- $
- $
34
2,198 $
4,178 $
747 $
4,097 $
1,307 $
503 $
1,129 $
14,159
(in thousands)
Allowance for credit losses:
Beginning balance, January 1, 2022 $
Charge-offs
Recoveries
Provisions (credits)
Ending balance, December 31, 2022 $
Specific reserve
General reserve
$
$
Loans and leases receivable:
Individually evaluated for
impairment
Collectively evaluated for
impairment
Total loans and leases, gross at
December 31, 2022
$
1,472 $
5,766 $
- $
362 $
- $
- $
- $
7,600
248,749
371,210
66,555
271,662
92,612
64,955
- 1,115,744
$
250,221 $
376,976 $
66,555 $
272,024 $
92,612 $
64,955 $
- $ 1,123,343
68
Table of Contents
The following table presents the amortized cost of collateral-dependent loans and leases by portfolio segment and type of collateral as of December 31, 2023:
(in thousands)
Loans and leases:
Residential real estate
Commercial real estate
Construction, land acquisition and development
Commercial and industrial
Commercial equipment financing
Consumer
State and political subdivisions
Total collateral dependent loans and leases
December 31, 2023
Residential
Real Estate
Type of Collateral
Commercial
Real Estate
Business
Assets
$
$
830 $
-
-
-
-
-
-
830 $
- $
2,663
-
-
-
-
-
2,663 $
- $
-
-
-
308
-
-
308 $
Total
830
2,663
-
-
308
-
-
3,801
The following tables present the delinquency status of past due and non-accrual loans and leases at December 31, 2023 and 2022:
(in thousands)
Loans and leases:
Residential real estate
Commercial real estate
Construction, land acquisition and
development
Commercial and industrial
Commercial equipment financing
Consumer
State and political subdivisions
Total loans and leases
(in thousands)
Loans and leases:
Residential real estate
Commercial real estate
Construction, land acquisition and
development
Commercial and industrial
Consumer
State and political subdivisions
Total loans and leases
$
$
$
$
30-89 Days
Past Due
>/= 90 Days Nonaccrual
Past Due
Loans
Total
Past Due
Current
Total
December 31, 2023
Delinquency Status
580 $
117
-
211
1,811
1,095
-
3,814 $
- $
-
-
-
-
38
-
38 $
1,248 $
3,113
-
148
477
352
-
5,338 $
1,828 $
3,230
-
359
2,288
1,485
-
9,190 $
243,454 $
404,905
245,282
408,135
59,876
183,435
161,317
84,245
73,843
1,211,075 $
59,876
183,794
163,605
85,730
73,843
1,220,265
30-89 Days
Past Due
>/= 90 Days Nonaccrual
Past Due
loans
Total
Past Due
Current
Total
December 31, 2022
Delinquency Status
555 $
-
-
113
1,378
-
2,046 $
- $
-
-
-
79
-
79 $
713 $
1,545
-
144
361
-
2,763 $
1,268 $
1,545
-
257
1,818
-
4,888 $
248,953 $
375,431
250,221
376,976
66,555
271,767
90,794
64,955
1,118,455 $
66,555
272,024
92,612
64,955
1,123,343
Included in loans and leases receivable are loans for which the accrual of interest income has been discontinued due to deterioration in the financial condition
of the borrowers. The recorded investment in these non-accrual loans was $5.3 million at December 31, 2023 and $2.8 million at December 31,
2022. Generally, loans are placed on non-accrual status when they become 90 days or more delinquent. Once a loan is placed on non-accrual status it remains
on non-accrual status until it has been brought current, has six months of performance under the loan terms, and factors indicating reasonable doubt about the
timely collection of payments no longer exists. Therefore, loans may be current in accordance with their loan terms, or may be less than 90 days delinquent,
and still be on a non-accrual status. There were $38 thousand and $79 thousand, in consumer loans that were past 90 days or more and still accruing at
December 31, 2023, and December 31, 2022, respectively, which comprise entirely of unsecured personal loans purchased from a third-party originator.
Total non-accrual loans, with balances less than the $100 thousand loan relationship threshold that were evaluated collectively for impairment were $1.1
million at December 31, 2023 and $0.7 million at December 31, 2022.
69
Table of Contents
The following tables present a distribution of the recorded investment, unpaid principal balance and the related allowance for FNCB’s impaired loans, which
have been analyzed for impairment under ASC 310, at December 31, 2022, prior to the adoption of ASU 2016-13. Non-accrual loans, with balances less than
the $100 thousand loan relationship threshold were not evaluated individually for impairment and accordingly, are not included in the following tables.
However, these loans are evaluated collectively for impairment as homogeneous pools in the general allowance under ASC 450.
(in thousands)
With no allowance recorded:
Residential real estate
Commercial real estate
Construction, land acquisition and development
Commercial and industrial
Consumer
State and political subdivisions
Total impaired loans with no related allowance recorded
With a related allowance recorded:
Residential real estate
Commercial real estate
Construction, land acquisition and development
Commercial and industrial
Consumer
State and political subdivisions
Total impaired loans with a related allowance recorded
Total of impaired loans:
Residential real estate
Commercial real estate
Construction, land acquisition and development
Commercial and industrial
Consumer
State and political subdivisions
Total impaired loans
Recorded
Investment
December 31, 2022
Unpaid Principal
Balance
Related
Allowance
$
$
431 $
1,071
-
218
-
-
1,720
1,041
4,695
-
144
-
-
5,880
1,471
5,766
-
363
-
-
7,600 $
509 $
1,339
-
218
-
-
2,066
1,041
4,695
-
362
-
-
6,098
1,550
6,034
-
580
-
-
8,164 $
-
-
-
-
-
-
-
17
15
-
2
-
-
34
17
15
-
2
-
-
34
The following table presents the average balance and interest income by loan segment recognized on impaired loans for the year ended December 31, 2022:
(in thousands)
Residential real estate
Commercial real estate
Construction, land acquisition and development
Commercial and industrial
Consumer
State and political subdivisions
Total impaired loans
(1) Interest income represents income recognized on performing TDRs.
2022
Average
Balance
Interest
Income (1)
$
$
1,640 $
6,614
-
482
-
-
8,736 $
65
251
-
19
-
-
335
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 to $175 thousand for year ended December 31, 2022.
Loan Modifications to Borrowers Experiencing Financial Difficulty
ASU 2022-02 eliminated the accounting guidance for TDRs while enhancing disclosure requirements for certain loan refinancing and restructuring by creditors
when a borrower is experiencing financial difficulty. In accordance with the new guidance, FNCB no longer evaluates loans with modifications made to
borrowers experiencing financial difficulty individually for impairment, nor establishes a related specific reserve for such loans, but rather these loans are
included in their respective portfolio segment and evaluated collectively for impairment to establish an ACL.
There was one modification made to a borrower experiencing financial difficulty during the year ended December 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. There were no loan modifications made to
borrowers experiencing financial difficulty during the year ended December 31, 2022.
Residential Real Estate Loan Foreclosures
There were three residential real estate loans with an aggregate recorded investment of $202 thousand that were in the process of foreclosure at December 31,
2023. There were three residential real estate loans with an aggregate recorded investment of $215 thousand that were in the process of foreclosure at
December 31, 2022. FNCB did not have any residential real estate properties in OREO at December 31, 2023 and 2022.
70
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Note 5. BANK PREMISES AND EQUIPMENT
The following table summarizes bank premises and equipment at December 31, 2023 and 2022:
(in thousands)
Land
Buildings and improvements
Furniture, fixtures and equipment
Leasehold improvements
Total
Accumulated depreciation
Net
December 31,
2023
2022
$
$
2,930 $
14,416
11,216
3,328
31,890
(17,344)
14,546 $
2,930
14,408
11,048
3,328
31,714
(16,098)
15,616
Depreciation and amortization expense of premises and equipment amounted to $1.3 million for 2023 and $1.6 million for 2022.
Note 6. OTHER ASSETS
The following table summarizes the major components of other assets at December 31, 2023 and 2022:
(in thousands)
Investment in low-income housing tax credit program
Right of use assets
Mortgage servicing rights
Interest rate swaps
Net deferred tax assets
Equity securities without readily determined fair value
Repossessed assets
Other assets
Total
Note 7. DEPOSITS
The following table summarizes deposits by major category at December 31, 2023 and 2022:
(in thousands)
Demand (non-interest bearing)
Interest-bearing:
Interest-bearing demand
Savings
Time ($250,000 and over)
Other time
Total interest-bearing
Total deposits
December 31,
2023
2022
$
$
11,014 $
2,933
175
1,919
14,579
500
420
10,003
41,543 $
11,014
3,226
254
1,946
16,827
500
-
9,238
43,005
December 31,
2023
2022
$
285,548 $
305,850
754,296
130,957
53,319
304,862
1,243,434
1,528,982 $
808,497
148,426
24,902
132,972
1,114,797
1,420,647
$
Included in other time deposits were brokered deposits of $148.7 million at December 31, 2023 and $23.9 million at December 31, 2022.
The aggregate amount of deposits reclassified as loans was $75 thousand at December 31, 2023 and $124 thousand at December 31, 2022. Management
evaluates transaction accounts that are overdrawn for collectability as part of its evaluation for credit losses. During 2023 and 2022, no deposits were received
on terms other than those available in the normal course of business.
The following table summarizes scheduled maturities of time deposits, including certificates of deposit and individual retirement accounts, at December 31,
2023:
(in thousands)
2024
2025
2026
2027
2028
$
$250,000
and Over
Other
Time Deposits
Total
52,653 $
666
-
-
-
208,053 $
59,190
15,303
12,093
10,223
260,706
59,856
15,303
12,093
10,223
Total
53,319 $
304,862 $
358,181
$
71
Table of Contents
Note 8. BORROWED FUNDS
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 $506.2 million at December
31, 2023 and $482.1 million at December 31, 2022. FNCB’s maximum borrowing capacity was $373.6 million at December 31, 2023. At December 31, 2023
and 2022, there were $91.5 million and $47.5 million, respectively, in letters of credit to secure municipal deposits outstanding under this agreement. There
were $16.0 million in overnight advances and $149.0 million in term advances through the FHLB of Pittsburgh outstanding at December 31, 2023. At
December 31, 2022, there were $139.4 million in overnight advances and $32.7 million in term advances outstanding, through the FHLB of Pittsburgh. FNCB
had a remaining borrowing availability at the FHLB of Pittsburgh of $115.7 million at December 31, 2023.
Advances through the Federal Reserve Bank Discount Window generally include short-term advances which are fully collateralized by certain pledged loans
under the Federal Reserve Bank's Borrower-in-Custody ("BIC") program. At December 31, 2023, FNCB had loans pledged under the BIC program of $187.0
million. There were no advances outstanding under the BIC program at December 31, 2023 and 2022. At December 31, 2023, FNCB had borrowing capacity
available under the BIC program of $158.4 million. On March 12, 2023, the Federal Reserve Bank established the Bank Term Funding Program (“BTFP”), a
program through the Discount Window designed to provide additional funding to eligible depository institutions during a period of stress. The BTFP is
collateralized by high-quality securities valued at par including U.S. Treasury securities, U.S. government agency debt and mortgage-backed securities and
other qualifying securities. At December 31, 2023, FNCB had securities pledged of $27.8 million and an outstanding advance under the BTFP of $25.0 million.
On January 24, 2024, the Federal Reserve Bank announced that it would cease making new loans under this program on March 11, 2024.
The following tables present borrowings, by type, outstanding at December 31, 2023 and 2022.
(dollars in thousands)
FHLB of Pittsburgh advances - term
FHLB of Pittsburgh advances - overnight
Federal Reserve discount window BIC advances
Federal Reserve discount window BTFP advances
Junior subordinated debentures
(dollars in thousands)
FHLB of Pittsburgh advances - term
FHLB of Pittsburgh advances - overnight
Federal Reserve discount window BIC advances
Junior subordinated debentures
As of and for the Year Ended December 31, 2023
Ending
Balance
Average
Balance
Maximum
Month-End
Balance
Weighted
Average
Rate for
the Year
Weighted
Average
Rate at
Period End
148,962 $
16,000
-
25,000
10,310
109,979 $
69,792
85
1,164
10,310
148,962
196,900
-
25,000
10,310
4.78%
5.20
4.98
4.89
7.02
5.01%
5.68
-
4.89
7.32
As of and for the Year Ended December 31, 2022
Ending
Balance
Average
Balance
Maximum
Month-End
Balance
Weighted
Average
Rate for
the Year
Weighted
Average
Rate at
Period End
32,650 $
139,400
-
10,310
5,830 $
93,309
66
10,310
32,650
170,350
-
10,310
4.51%
2.56
3.77
3.47
4.45%
4.45
-
6.44
$
$
On December 14, 2006, the Issuing Trust issued $10.0 million of trust preferred securities (the “Trust Securities”) at a variable interest rate, initially equal
to 7.02%, with a scheduled maturity of December 15, 2036. FNCB owns 100.0% of the ownership interest in the Issuing Trust. The proceeds from the issue
were invested in $10.3 million, 7.02% Junior Subordinated Debentures (the “Debentures”) issued by FNCB. The interest rate on the Trust Securities and the
Debentures resets quarterly to 3-month CME Term SOFR plus a spread adjustment of 0.26161% and a margin of 1.67%. The average interest rate paid on the
Debentures was 7.02% in 2023 and 3.47% in 2022. The Debentures are unsecured and rank subordinate and junior in right to all indebtedness, liabilities and
obligations of FNCB. The Debentures represent the sole assets of the Trust. Interest on the Trust Securities is deferrable until a period of twenty consecutive
quarters has elapsed. FNCB has the option to prepay the Trust Securities beginning December 15, 2011. FNCB has, under the terms of the Debentures and the
related Indenture, as well as the other operative corporate documents, agreed to irrevocably and unconditionally guarantee the Trust’s obligations under the
Debentures. FNCB has reflected this investment on a deconsolidated basis. As a result, the Debentures totaling $10.3 million, have been reflected in borrowed
funds in the consolidated statements of financial condition at December 31, 2023 and 2022 under the caption “Junior Subordinated Debentures”. FNCB records
interest expense on the Debentures in its consolidated statements of income. FNCB also records its common stock investment issued by First National
Community Statutory Trust I in other assets in its consolidated statements of financial condition at December 31, 2023 and 2022. At December 31, 2023 and
2022, accrued and unpaid interest associated with the Debentures amounted to $36 thousand and $31 thousand, respectively.
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The following table presents the contractual maturities of borrowed funds at December 31, 2023:
(in thousands)
2024
2025
2026
2027
2028
2029 and thereafter
Total
December 31, 2023
118,850
$
29,567
5,000
22,357
14,188
10,310
200,272
$
Note 9. DERIVATIVE AND HEDGING TRANSACTIONS
Risk Management Objective of Using Derivatives
FNCB is exposed to certain risks arising from both its business operations and economic conditions. It principally manages its exposures to a wide variety of bu
and operational risks through management of its core business activities. FNCB manages economic risks, including interest rate, liquidity, and credit risk
primarily by managing the amount, sources, and duration of its assets and liabilities and the use of derivative financial instruments.
Specifically, FNCB enters into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of
future unknown and uncertain cash amounts, the value of which are determined by interest rates. Derivative financial instruments are used to manage
differences in the amount, timing, and duration of known or expected cash payments primarily related to FNCB's borrowings. FNCB's existing credit
derivatives result from loan participations arrangements, therefore, are not used to manage interest rate risk in FNCB's assets or liabilities.
Cash Flow Hedges of Interest Rate Risk
FNCB's objectives in using interest rate derivatives are to add stability to interest expense and to manage its exposure to interest rate movements. To
accomplish this objective, FNCB primarily uses interest rate swaps as part of its interest rate risk management strategy. Interest rate swaps designated as cash
flow hedges involve the receipt of variable amounts from a counterparty in exchange for FNCB making fixed-rate payments over the life of the agreements
without exchange of the underlying notional amount, 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 loss 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 $604 thousand will be reclassified as a decrease to interest expense.
Fair Value Hedges of Interest Rate Risk
FNCB is exposed to changes in the fair value of pools of fixed-rate assets due to changes in benchmark interest rates. FNCB uses interest rate swaps to manage
its exposure to changes in fair value on these instruments attributable to changes in the designated benchmark interest rate. Interest rate swaps designated as
fair value hedges involve the payment of fixed-rate amounts to a counterparty in exchange for FNCB receiving variable-rate payments over the life of the
agreements without the exchange of the underlying notional amount.
For derivatives designated and that qualify as fair value hedges, the gain or loss on the derivative as well as the offsetting loss or gain on the hedged item
attributable to the hedged risk are recognized in interest income.
The following table presents amounts recorded in the consolidated statements of financial condition related to the carrying amount and cumulative basis
adjustment for fair value hedges at December 31, 2023:
Carrying Amount of the Hedged
Assets (Liabilities)
December 31,
Cumulative Amount of Fair
Value Hedging Adjustment
Included in the Carrying
Amount of the Hedged Assets
(Liabilities)
December 31,
(in thousands)
Line Item in the Statement of Financial Condition in Which the Hedged Item is Included
Fixed Rate Loans (1)
Total
$
$
2023
2022
2023
2022
35,549
35,549
- $
- $
549
549
-
-
(1) These amounts include the amortized cost basis of closed portfolios of fixed rate loans used to designate hedging relationships in which the hedged item is
the stated amount of assets in the closed portfolio anticipated to be outstanding for the designated hedged period. At December 31, 2023, the amortized cost
basis of the closed portfolios used in these hedging relationships was $90.0 million; the cumulative basis adjustments associated with these hedging
relationships was $549 thousand; and the amounts of the designated hedged items were $35 million. There were no such hedging relationships at December
31, 2022.
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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, 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 December 31, 2023 and December 31, 2022:
Derivative Assets
As of December 31,
2023
As of December 31,
2022
Balance
Sheet
Balance
Sheet
Location Fair Value
Location Fair Value
Notional
Amount
Derivative Liabilities
As of December 31,
2023
As of December 31,
2022
Notional
Amount
Balance
Sheet
Balance
Sheet
Location Fair Value
Location Fair Value
$
10,000
Other
assets $
650
650
Other
assets $
1,173 $
85,000
liabilities $
1,253
liabilities $
Other
Other
1,173
1,253
(in thousands)
Derivatives designated as
hedging instruments
Interest rate products
Total derivatives designated
as hedging instruments
Derivatives not designated
as hedging instruments
Interest rate swaps
$
Risk participation transaction $
Total derivatives not
designated as hedging
instruments
Net Derivatives on the
Balance Sheet
Gross amounts not offset in
the Statement of Financial
Position
Financial instruments
Cash collateral (1)
Net derivative amounts
Other
assets
38,828
13,672
Other
assets
1,438
-
931 $
-
Other
liabilities
38,828
Other
liabilities
1,438
-
1,438
931
2,088
2,104
1,438
2,691
-
-
2,088
$
-
1,946
158
$
-
-
2,691
$
$
(1) Cash collateral represents the amount that cannot be used to offset our derivative assets and liabilities from a gross basis to a net basis in accordance with
the applicable accounting guidance. Cash collateral is exchanged under bilateral collateral and master netting agreements that allow us to offset the net
derivative position with the related collateral. The application of the collateral cannot reduce the net derivative position below zero. Therefore, excess other
collateral, if any, is not reflected above.
74
-
-
931
-
931
931
-
-
931
Table of Contents
Effect of Fair Value and Cash Flow Hedge Accounting on Accumulated Other Comprehensive Income
The following table presents the effect of fair value and cash flow hedge accounting on accumulated other comprehensive income as of December 31, 2023 and
2022. Amounts disclosed are gross and not net of taxes:
(in thousands)
Derivatives in cash flow hedging
relationships
Interest rate products
Total
Year Ended December 31, 2023
Amount of
Gain or
(Loss)
Recognized
in OCI on
Derivative
Amount of
Gain or
(Loss)
Recognized
in OCI
Included
Component
Amount of
Gain or
(Loss)
Recognized in
OCI
Excluded
Component
Location of Gain
or (Loss)
Recognized from
Accumulated
Other
Comprehensive
Income into
Income
Amount of
Gain or
(Loss)
Reclassified
from
Accumulated
OCI into
Income
Amount of
Gain or
(Loss)
Reclassified
from
Accumulated
OCI into
Income
Included
Component
Amount of
Gain or
(Loss)
Reclassified
from
Accumulated
OCI into
Income
Excluded
Component
$
$
(1,513) $
(1,513) $
(1,513) $
(1,513) $
- Interest expense
-
$
$
302 $
302 $
302 $
302 $
-
-
Year Ended December 31, 2022
Amount of
Gain or
(Loss)
Recognized
in OCI on
Derivative
Amount of
Gain or
(Loss)
Recognized
in OCI
Included
Component
Amount of
Gain or
(Loss)
Recognized in
OCI
Excluded
Component
Location of Gain
or (Loss)
Recognized from
Accumulated
Other
Comprehensive
Income into
Income
Amount of
Gain or
(Loss)
Reclassified
from
Accumulated
OCI into
Income
Amount of
Gain or
(Loss)
Reclassified
from
Accumulated
OCI into
Income
Included
Component
Amount of
Gain or
(Loss)
Reclassified
from
Accumulated
OCI into
Income
Excluded
Component
(in thousands)
Derivatives in cash flow
hedging relationships
Interest rate products
Total
$
$
46 $
46 $
46 $
46 $
- Interest expense
-
$
$
176 $
176 $
176 $
176 $
-
-
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 December
31, 2023 and 2022:
(in thousands)
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
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
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
Amount of gain or (loss) reclassified from accumulated OCI into income - excluded component
75
Location and Amount of Gain or (Loss)
Recognized in Income on Fair Value and
Cash Flow Hedging Relationships
Year Ended December 31,
2022
2023
Interest Expense
Interest Expense
$
302 $
176
302
-
302
-
176
-
176
-
Table of Contents
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 years ended
December 31, 2023 and 2022.
Credit-risk-related Contingent Features
FNCB has agreements with each of its derivative counterparties that contain a provision where if FNCB defaults or is capable of being declared in default on
any of its indebtedness, then it could also be declared in its derivative obligations.
FNCB has agreements with certain of its derivatives counterparties that contain a provision where if it fails to maintain its status as a well-capitalized
institution, then it could be required to post additional collateral.
FNCB has minimum collateral posting thresholds with certain of its derivative counterparties for derivatives in a net liability position. As of December 31,
2023, the termination value of derivatives in a net liability position, which includes accrued interest but excludes any adjustments for nonperformance risk,
related to these agreements was $259 thousand, FNCB has minimum collateral posting thresholds with certain of its derivative counterparties and has posted
cash collateral of $400 thousand against its obligations under these agreements at December 31, 2023. As of December 31, 2022, FNCB had no derivatives in
a net liability position and accordingly was not required to post any collateral with its counterparts.
Note 10. BENEFIT PLANS
The Bank has a defined contribution profit sharing plan (“Profit Sharing Plan”) which includes the provision under section 401(k) of the Internal Revenue
Code (“401(k)”) and covers all eligible employees. The Bank’s contribution to the Profit Sharing Plan is determined at management’s discretion at the end of
each year and funded. The 401(k) feature of the Profit Sharing Plan permits employees to make voluntary salary deferrals, either pre-tax or Roth, up to the
dollar limit prescribed by law. FNCB may make discretionary matching contributions equal to a uniform percentage of employee salary deferrals. Discretionary
matching contributions are determined each year by management and approved by the Board of Directors. There were no discretionary annual contributions
made to the Profit Sharing Plan in 2023 and 2022. Discretionary matching contributions under the 401(k) feature of the Profit Sharing Plan totaled
$580 thousand in 2023 and $481 thousand in 2022.
The Bank has an unfunded non-qualified deferred compensation plan covering all eligible Bank officers and directors as defined by the plan. This plan permits
eligible participants to elect to defer a portion of their compensation. Elective deferred compensation and accrued earnings, included in other liabilities in the
accompanying consolidated statements of financial condition, aggregated to $1.1 million and $1.3 million at December 31, 2023 and December 31, 2022,
respectively.
The Bank has a Supplemental Executive Retirement Plan (“SERP”) for a select group of management or highly compensated employees within the meaning of
Sections 201(2), 301(a)(3) and 401(a)(1) of The Employee Retirement Income Security Act of 1974. The general provisions of the SERP provide for annual
year-end contributions, performance contingent contributions and discretionary contributions. The SERP contributions are unfunded for Federal tax purposes
and constitute an unsecured promise by the Bank to pay benefits in the future and are included in other liabilities in the accompanying consolidated statements
of financial condition. Participants in the SERP have the status of general unsecured creditors of the Bank. SERP contributions totaled $181 thousand in
2023 and $370 thousand in 2022. The total liability associated with the SERP was $1.9 million at December 31, 2023 and $1.5 million at December 31, 2022.
Note 11. INCOME TAXES
The following table summarizes the current and deferred amounts of the provision for income tax expense (benefit) for each of the two years ended December
31, 2023 and 2022:
(in thousands)
Current tax provision
Federal
State
Total current tax provision
Deferred tax expense (benefit)
Federal
State
Total deferred tax benefit
Total tax expense
For the Year Ended December 31,
2023
2022
$
$
2,785 $
101
2,886
23
(152)
(129)
2,757 $
4,569
77
4,646
(502)
-
(502)
4,144
76
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The following table presents a reconciliation between the effective income tax expense and the income tax expense that would have been provided at
the federal statutory tax rate of 21.0% for the years ended December 31, 2023 and December 31, 2022:
(dollars in thousands)
Provision at statutory tax rates
Add (deduct):
Tax effects of tax free interest income
Non-deductible interest expense
Bank-owned life insurance
Other items, net
Income tax provision
For the Year Ended December 31,
2023
2022
Amount
%
Amount
%
$
3,305
21.00% $
5,164
21.00%
(819)
408
(158)
21
2,757
(5.20)%
2.59%
(1.00)%
0.13%
17.52% $
(874)
85
(206)
(25)
4,144
(3.55)%
0.35%
(0.84)%
(0.11)%
16.85%
$
The following table summarizes the components of net deferred tax assets at December 31, 2023 and 2022:
(in thousands)
Allowance for credit losses
Deferred compensation
Lease liability
Other real estate owned valuation
Employee benefits
Accrued interest
Deferred income
Derivative liabilities
Unrealized holding losses on securities available-for-sale
Unrealized holding losses on equity securities
Other deferred tax assets
Gross deferred tax assets
Deferred loan origination costs
Right of use asset
Derivative assets
Mortgage servicing rights
Depreciation
Gross deferred tax liabilities
Net deferred tax assets
December 31,
2023
2022
$
$
2,814 $
756
672
72
22
7
5
54
10,624
278
184
15,488
(149)
(616)
-
(37)
(107)
(909)
14,579 $
3,180
650
736
72
352
7
29
-
12,982
32
-
18,040
(137)
(677)
(215)
(53)
(130)
(1,213)
16,827
Management evaluates the carrying amount of its deferred tax assets on a quarterly basis, or more frequently if necessary, in accordance with guidance set forth
in ASC Topic 740 “Income Taxes,” and applies the criteria in the guidance to determine whether it is more likely than not that some portion, or all, of the
deferred tax asset will not be realized within its life cycle, based on the weight of available evidence. Management performed an evaluation of FNCB's deferred
tax assets at December 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 at
December 31, 2023 and December 31, 2022.
77
Table of Contents
Note 12. RELATED PARTY TRANSACTIONS
In conducting its business, FNCB has engaged in, and intends to continue to engage in, banking and financial transactions with directors, executive officers and
their related parties.
FNCB has granted loans, letters of credit and lines of credit to directors, executive officers and their related parties. The following table summarizes the
changes in the total amounts of such outstanding loans, advances under lines of credit, net of any participations sold, as well as repayments during the years
ended December 31, 2023 and 2022:
(in thousands)
Balance January 1,
Additions, new loans and advances
Repayments
Balance December 31,
For the Year Ended December 31,
2023
2022
$
$
79,144 $
229,481
(229,298)
79,327 $
71,437
96,978
(89,271)
79,144
Advances and repayments on commercial lines of credit to related parties are presented gross in the above table. At December 31, 2023 and 2022 there were no
loans made to directors, executive officers and their related parties that were not performing in accordance with the terms of the loan agreements.
Deposits from directors, executive officers and their related parties held by the Bank at December 31, 2023 and 2022 amounted to $114.1 million and
$133.0 million, respectively. Interest paid on the deposits amounted to $1.9 million in 2023 and $502 thousand in 2022.
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 legal services, rent, vehicle repair services and dealer reserve payments. For 2022, goods and services acquired from related parties also
included fidelity bond and errors and omissions insurance. FNCB recorded payments to related parties for goods and services of $134 thousand and $526
thousand for the years ending December 31, 2023 and 2022, respectively.
Note 13. COMMITMENTS, CONTINGENCIES AND CONCENTRATIONS
Leases
FNCB is obligated under operating leases for certain bank branches, office space, automobiles and equipment. Operating lease right of use ("ROU") assets
represent FNCB's right to use an underlying asset during the lease term and operating liabilities represent its obligation to make lease payments under the lease
agreement. ROU assets and operating lease liabilities are recognized at lease commencement based on the present value of the remaining lease payments using
a discount rate that represents FNCB's incremental borrowings rate at the commencement date. ROU assets are included in other assets and operating lease
liabilities are included in other liabilities in the consolidated statements of financial condition. ROU assets and lease liabilities were $2.9 million and
$3.2 million, respectively, at December 31, 2023 and $3.2 million and $3.5 million, respectively, at December 31, 2022.
Operating lease expense associated with bank branches and office space is included in occupancy expense, while operating lease expense associated with
automobiles and office equipment is included in equipment expense in the consolidated statements of income. Total rental expense under leases amounted to
$408 thousand and $391 thousand, respectively, at December 31, 2023 and 2022.
The following table summarizes the maturity of remaining operating lease liabilities as of December 31, 2023:
(in thousands)
2024
2025
2026
2027
2028
2029 and thereafter
Total lease payments
Less: imputed interest
Present value of operating lease liabilities
The following table presents other information related to FNCB's operating leases:
(dollars in thousands)
Weighted-average remaining lease term (in years)
Weighted-average discount rate
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases
78
December 31, 2023
417
$
388
387
388
370
1,901
3,851
649
3,202
$
December 31, 2023
10.7
3.26%
December 31, 2022
9.9
3.33%
$
423
$
402
Table of Contents
Commitments
On October 1, 2022, FNCB issued a signed letter of intent to make an equity investment of approximately $11.0 million in a limited partnership interest, to
build and operate a senior low-income housing development located in Scranton, Lackawanna County, Pennsylvania. One hundred percent (100.0%) of the
rental units will qualify for Federal Low-Income Housing Tax Credits as provided for in Section 42 of the Internal Revenue Code of 1986, as amended. FNCB
made an initial contribution of $2.2 million in the fourth quarter of 2022, upon closing the partnership agreement. In 2023, contributions totaled $6.6 million, in
accordance with the construction schedule. The remaining obligation of $2.2 million, which is included in other liabilities in the consolidated statements of
financial condition at December 31, 2023, will be contributed over a series of draws over the remaining 6-month period according to the construction schedule.
Financial Instruments with unfunded commitments
FNCB is a party to financial instruments with unfunded commitments risk in the normal course of business to meet the financing needs of its customers. These
financial instruments include commitments to extend credit and standby letters of credit that involve varying degrees of credit, interest rate or liquidity risk in
excess of the amount recognized in the consolidated statements of financial condition. FNCB’s exposure to credit loss from nonperformance by the other party
to the financial instruments for commitments to extend credit and standby letters of credit is represented by the contractual amount of those instruments.
The following table summarizes financial instruments whose contract amounts represent credit risk at December 31, 2023 and 2022:
(in thousands)
Commitments to extend credit
Standby letters of credit
December 31,
2023
2022
$
335,032 $
16,908
301,300
17,923
In order to provide for probable losses inherent in these instruments, FNCB established reserves for unfunded commitments of $1.4 million and $949 thousand
at December 31, 2023 and 2022, respectively, which were included in other liabilities on the consolidated statements of financial condition. FNCB recorded a
credit for unfunded commitments of $803 thousand in 2023 and a provision for unfunded commitments of $366 thousand in 2022.
Commitments to extend credit are agreements to lend to customers in accordance with contractual provisions. These commitments usually are for specific
periods or contain termination clauses and may require the payment of a fee. The total amounts of unused commitments do not necessarily represent future
cash requirements, in that commitments often expire without being drawn upon.
Letters of credit and financial guarantees are agreements whereby FNCB guarantees the performance of a customer to a third party. Collateral may be required
to support letters of credit in accordance with management’s evaluation of the creditworthiness of each customer. The credit exposure assumed in issuing letters
of credit is essentially equal to that in other lending activities.
Federal Home Loan Bank — Mortgage Partnership Finance (“MPF”) Program
Under a secondary market loan servicing program with the FHLB, FNCB, in exchange for a monthly fee, provides a credit enhancement guarantee to the
FHLB for foreclosure losses in excess of a defined First Loss Account (“FLA”) balance, up to specified amounts. At December 31, 2023, FNCB serviced
payments on $11.7 million of first lien residential loan principal under these terms for the FHLB. At December 31, 2023, the maximum credit enhancement
obligation for such guarantees by FNCB would be approximately $655 thousand if total foreclosure losses on the entire pool of loans exceed the FLA of
approximately $70 thousand. There was no reserve established for this guarantee at December 31, 2023 and 2022.
Concentrations of Credit Risk
Cash Concentrations: The Bank maintains cash balances at several correspondent banks. FNCB engages in a primary correspondent banking relationship with
PNC Bank. At December 31, 2023 and 2022, FNCB had balances with PNC Bank of $1.4 million and $1.7 million, respectively. There were no other due
from bank accounts in excess of the $250 thousand limit covered by the Federal Deposit Insurance Corporation (“FDIC”) at December 31, 2023 and 2022.
Loan and Lease Concentrations: FNCB attempts to limit its exposure to concentrations of credit risk by diversifying its loan and lease portfolios and closely
monitoring any concentrations of credit risk. The commercial real estate and construction, land acquisition and development portfolios
comprised $468.0 million, or 38.4% of total outstanding loans and leases at December 31, 2023 and $443.5 million, or 39.5% of outstanding loans and leases,
at December 31, 2022. Geographic concentrations exist because FNCB provides its services in its primary market area of Northeastern
Pennsylvania and conducts limited activities outside of that area. FNCB had loans and loan commitments secured by collateral outside its primary market area
of $188.0 million, or 15.4%, of total outstanding loans and leases at December 31, 2023 and $123.4 million, or 11.0% of outstanding loans and leases at
December 31, 2022.
FNCB considers an industry concentration within the loan portfolio to exist if the aggregate loan balance outstanding for that industry exceeds 25.0% of
capital. The following table summarizes the concentration within FNCB’s loan portfolio by industry at December 31, 2023 and 2022:
(in thousands)
General freight trucking
Retail space/shopping centers
1-4 family residential investment properties
Litigation
December 31, 2023
December 31, 2022
Amount
% of
Gross Loans
Amount
% of
Gross Loans
$
48,477
58,517
119,393
3.97% $
4.80%
9.78%
25,052
54,461
113,746
2.23%
4.85%
10.13%
FNCB has been subject to tax audits, and is also a party to routine litigation involving various aspects of its business, such as employment practice claims,
workers compensation claims, claims to enforce liens, condemnation proceedings on properties in which FNCB holds security interests, claims involving the
making and servicing of real property loans and other issues incident to its business, none of which has or is expected to have a material adverse impact on the
consolidated financial condition, results of operations or liquidity of FNCB.
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Table of Contents
Note 14. STOCK COMPENSATION PLANS
FNCB had a Long-Term Incentive Compensation Plan (“LTIP”) for directors, executive officers and key employees that authorized 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 units, performance units and performance shares. During the years ended December 31, 2023 and 2022, the
Board of Directors granted 140,445 and 71,860 shares of restricted stock, respectively, under the LTIP. Upon adoption of the Equity Plan (as defined below),
FNCB will make no further awards under the LTIP. For the years ended December 31, 2023 and 2022, stock-based compensation expense, which is included in
salaries and benefits expense in the consolidated statements of income, totaled $583 thousand and $448 thousand, respectively. Total unrecognized
compensation expense related to unvested restricted stock awards was $1.6 million and $1.2 million at December 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 3.6 years.
On March 22, 2023, the Board of Directors formally approved and adopted the EIP, which replaced the LTIP. The EIP authorizes 2,000,000 shares of FNCB's
common stock plus 455,584 shares of FNCB's common shares that were remaining reserved but unissued under the LTIP. The EIP provides the Compensation
Committee or the Board of Directors with the authority to offer several types of awards including stock options, stock appreciation rights, restricted stock,
restricted stock units, performance shares and performance units. The EIP was approved by a majority vote by FNCB shareholders at the Annual Meeting of
Shareholders on May 17, 2023.
On July 3, 2023, 2,454 shares of FNCB's common stock were granted under the EIP to each of the Bank's ten non-employee directors or 24,540 shares in
aggregate. The shares vested immediately to each director upon grant, and the fair value per share on the grant date was $6.11. Directors' fees totaling $150
thousand associated with this grant were recognized on July 3, 2023.
In addition, on July 3, 2023, 100 shares of FNCB's common stock were granted under the EIP to each of the Bank's twenty-two advisory board members or
2,200 shares in aggregate. The shares vested immediately to each director upon grant, and the fair value per share on the grant date was $6.11. FNCB
recognized advisory board fees of $13 thousand associated with this grant on July 3, 2023.
At December 31, 2023, there were 2,435,076 shares of FNCB common stock available for award under the EIP.
The following table summarizes the activity related to FNCB ’s unvested restricted stock awards during the years ended December 31, 2023 and 2022:
(dollars in thousands)
Unvested restricted stock awards:
Total outstanding, beginning of period
Awards granted
Forfeitures
Shares vested
Total outstanding, end of period
Note 15. REGULATORY MATTERS
For the Years Ended December 31,
2023
2022
Restricted
Shares
Weighted-
Average
Grant Date
Fair Value
Restricted
Shares
Weighted-
Average
Grant Date
Fair Value
185,965 $
140,445
(6,232)
(58,425)
261,753 $
8.22
7.51
7.87
8.01
7.89
174,297 $
71,860
(5,503)
(54,689)
185,965 $
7.37
9.64
8.17
7.38
8.22
FNCB’s ability to pay dividends to its shareholders, or repurchase shares of its common stock, is largely dependent on the Bank’s ability to pay dividends to
FNCB. Bank regulations limit the amount of dividends that may be paid, or shares that may be repurchased, without prior approval of the Bank’s
principal regulatory agency. Cash dividends declared and paid by FNCB during 2023 and 2022 were $0.36 per share and $0.33 per share, respectively. FNCB
offers a Dividend Reinvestment and Stock Purchase plan ("DRP") to its shareholders. For the years ended December 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. Shares of common stock issued under the DRP totaled 13,348 and 5,089 for the years ended December 31, 2023 and
2022, respectively. Subsequent to December 31, 2023, on January 24, 2024, FNCB declared a $0.090 per share dividend payable on March 15, 2024 to
shareholders of record as of March 1, 2024.
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 that as of December 31, 2023, FNCB and the Bank meet all applicable capital adequacy
requirements.
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Current quantitative measures established by regulation to ensure capital adequacy require FNCB Bank to maintain minimum amounts and ratios (set forth in
the table below) of Total capital, Tier I capital, and Tier I common equity (as defined in the regulations) to risk-weighted assets (as defined), and of Tier I
capital (as defined) to average assets (as defined). The following tables present summary information regarding the Bank’s risk-based capital and related ratios
at December 31, 2023 and 2022:
Minimum
Required For
Capital
Adequacy
Purposes with
Conservation
Buffer
Ratio
Minimum
Required To
Be Well
Capitalized
Under Prompt
Corrective
Action
Regulations
Ratio
Minimum
Required For
Capital
Adequacy
Purposes
Ratio
FNCB Bank
Amount
Ratio
$
175,296
12.66%
8.00%
10.50%
10.00%
(dollars in thousands)
December 31, 2023
Total capital (to risk-weighted assets)
Tier I capital (to risk-weighted assets)
161,896
11.69%
6.00%
8.50%
Tier I common equity (to risk-weighted assets)
161,896
11.69%
4.50%
7.00%
Tier I capital (to average assets)
161,896
8.76%
4.00%
4.00%
8.00%
6.50%
5.00%
Total risk-weighted assets
Total average assets
1,384,710
1,848,752
Minimum
Required For
Capital
Adequacy
Purposes with
Conservation
Buffer
Ratio
Minimum
Required To
Be Well
Capitalized
Under Prompt
Corrective
Action
Regulations
Ratio
Minimum
Required For
Capital
Adequacy
Purposes
Ratio
FNCB Bank
Amount
Ratio
$
169,984
13.11%
8.00%
10.50%
10.00%
(dollars in thousands)
December 31, 2022
Total capital (to risk-weighted assets)
Tier I capital (to risk-weighted assets)
154,842
11.94%
6.00%
8.50%
Tier I common equity (to risk-weighted assets)
154,842
11.94%
4.50%
7.00%
Tier I capital (to average assets)
154,842
8.77%
4.00%
4.00%
8.00%
6.50%
5.00%
Total risk-weighted assets
Total average assets
1,296,618
1,765,251
Note 16. FAIR VALUE MEASUREMENTS
In determining fair value, FNCB uses various valuation approaches, including market, income and cost approaches. Accounting standards establish a hierarchy
for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that observable
inputs be used when available. Observable inputs are inputs that market participants would use in pricing the asset or liability, which are developed based on
market data obtained from sources independent of FNCB. Unobservable inputs reflect FNCB’s knowledge about the assumptions the market participants would
use in pricing an asset or liability, which are developed based on the best information available in the circumstances.
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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, and for estimating fair value of financial instruments not recorded at fair
value, is set forth below.
Available-for-Sale Debt Securities
The estimated fair values for FNCB’s investments in obligations of the U.S. government, obligations of state and political subdivisions, government-sponsored
agency CMOs and mortgage-backed securities, private collateralized mortgage obligations, asset-backed securities, negotiable certificates of deposit and
certain corporate debt securities are obtained by FNCB from a nationally-recognized pricing service. This pricing service develops estimated fair values by
analyzing like securities and applying available market information through processes such as benchmark curves, benchmarking of like securities, sector
groupings and matrix pricing (Level 2 inputs), to prepare valuations. Matrix pricing is a mathematical technique widely used in the industry to value debt
securities without relying exclusively on quoted prices for the specific securities, but rather by relying on the securities’ relationship to other benchmark quoted
securities. The fair value measurements consider observable data that may include, among other things, dealer quotes, market spreads, cash flows, the U.S.
Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the bond’s terms and conditions,
and are based on market data obtained from sources independent from FNCB. The Level 2 investments in FNCB’s portfolio are priced using those inputs that,
based on the analysis prepared by the pricing service, reflect the assumptions that market participants would use to price the assets. Management has
determined that the Level 2 designation is appropriate for these securities because, as with most fixed-income securities, those in FNCB’s portfolio are not
exchange-traded, and such non-exchange-traded fixed income securities are typically priced by correlation to observed market data. FNCB has reviewed the
pricing service’s methodology to confirm its understanding that such methodology results in a valuation based on quoted market prices for similar instruments
traded in active markets, quoted markets for identical or similar instruments traded in markets that are not active and model-based valuation techniques for
which the significant assumptions can be corroborated by market data as appropriate to a Level 2 designation.
For those securities for which the inputs used by an independent pricing service were derived from unobservable market information, FNCB evaluated the
appropriateness and quality of each price. Management reviewed the volume and level of activity for all classes of securities and attempted to identify
transactions which may not be orderly or reflective of a significant level of activity and volume. For securities meeting these criteria, the quoted prices
received from either market participants or an independent pricing service may be adjusted, as necessary, to estimate fair value (fair values based on Level 3
inputs). If applicable, the adjustment to fair value was derived based on present value cash flow model projections obtained from third party providers using
assumptions similar to those incorporated by market participants.
At December 31, 2023, FNCB owned 30 corporate debt securities with an aggregate amortized cost and fair value of $35.1 million and $31.3 million,
respectively. The market for four of these securities at December 31, 2023 was not active and markets for similar securities are also not active. FNCB obtained
valuations for these securities from a third-party service provider that prepared the valuations using a market approach that incorporates identifying a
population of transactions for similar instruments and an evaluation to capture credit risk associated with these bonds. Management takes measures to validate
the service provider’s analysis and is actively involved in the valuation process, including reviewing and verifying the 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 yield. Management believes the valuation results from this market approach to be consistent with pricing and data for similar
deals at December 31, 2023. FNCB considers the inputs used in the market approach to be observable 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 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, interest rates, forward rates and rate volatility. Derivative contracts create
exposure to interest rate movements as well as risks from the potential of non-performance of the counterparty.
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Assets and Liabilities Measured at Fair Value on a Recurring Basis
The following tables present the financial assets and liabilities that are measured at fair value on a recurring basis at December 31, 2023 and 2022, and the fair
value hierarchy of the respective valuation techniques utilized to determine the fair value:
(in thousands)
Financial assets:
Available-for-sale debt securities:
U.S. Treasury securities
Obligations of state and political subdivisions
U.S. government/government-sponsored agencies:
Collateralized mortgage obligations - residential
Collateralized mortgage obligations - commercial
Mortgage-backed securities
Private collateralized mortgage obligations
Corporate debt securities
Asset-backed securities
Negotiable certificates of deposit
Total available-for-sale debt securities
Equity securities, at fair value
Derivative assets
Total financial assets
Financial liabilities:
Derivative liabilities
Total financial liabilities
(in thousands)
Financial assets:
Available-for-sale debt securities:
U.S. Treasury securities
Obligations of state and political subdivisions
U.S. government/government-sponsored agencies:
Collateralized mortgage obligations - residential
Collateralized mortgage obligations - commercial
Mortgage-backed securities
Private collateralized mortgage obligations
Corporate debt securities
Asset-backed securities
Negotiable certificates of deposit
Total available-for-sale debt securities
Equity Securities, at fair value
Derivative assets
Total financial assets
Financial liabilities:
Derivative liabilities
Total financial liabilities
$
$
$
$
$
$
$
$
Fair Value Measurements at December 31, 2023
Quoted Prices
in Active Markets
for Identical Assets
(Level 1)
Fair Value
Significant
Observable
Inputs
(Level 2)
33,177 $
199,796
74,207
3,386
16,446
70,151
31,286
21,690
674
450,814
4,786
2,088
457,688 $
2,691 $
2,691 $
- $
-
-
-
-
-
-
-
-
-
4,786
-
4,786 $
33,177 $
199,796
74,207
3,386
16,446
70,151
24,312
21,690
674
443,840
-
2,088
445,928 $
- $
- $
2,691 $
2,691 $
Fair Value Measurements at December 31, 2022
Quoted Prices
in Active Markets
for Identical Assets
(Level 1)
Fair Value
Significant
Observable
Inputs
(Level 2)
32,134 $
220,782
80,407
3,329
20,663
72,507
30,672
14,941
656
476,091
7,717
2,104
485,912 $
931 $
931 $
- $
-
-
-
-
-
-
-
-
-
7,717
-
7,717 $
- $
- $
32,134 $
220,782
80,407
3,329
20,663
72,507
22,736
14,941
656
468,155
-
2,104
470,259 $
931 $
931 $
Significant
Unobservable
Inputs
(Level 3)
-
-
-
-
-
-
6,974
-
-
6,974
-
-
6,974
Significant
Unobservable
Inputs
(Level 3)
-
-
-
-
-
-
-
-
7,936
-
-
7,936
-
-
7,936
-
-
There were two corporate debt security transferred from Level 3 hierarchy to Level 2 during the year ended, December 31, 2023 and there was one corporate
debt security transferred from Level 3 hierarchy to Level 2 during the year ended December 31, 2022. Prior to the transfer from Level 3 to Level 2, the market
for the transferred securities was not active and management obtained fair values of the securities from an independent third party. The valuation method
employed utilized significant other unobservable inputs in determining fair values. Subsequently, in the period of transfer, management was able to obtain fair
values for these securities from the independent pricing service used to price the remainder of the portfolio using significant other observable inputs.
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Table of Contents
The following table presents a reconciliation and statement of operations classification of gains and losses for all assets measured at fair value on a recurring
basis using significant unobservable inputs (Level 3), which consisted entirely of corporate debt securities, for the years ended December 31, 2023 and 2022:
Fair Value Measurements
Using Significant Unobservable Inputs (Level 3)
(in thousands)
Balance at January 1,
Additions
Redemptions
Transfer to Level 2
Total gains or losses (realized/unrealized):
Included in earnings
Included in other comprehensive income
Balance at December 31,
Assets Measured at Fair Value on a Non-Recurring Basis
Corporate Debt Securities
For the Year Ended December 31,
2023
2022
7,936 $
-
-
(853)
-
(109)
6,974 $
12,345
-
(2,066)
(756)
-
(1,587)
7,936
$
$
The following tables present assets and liabilities measured at fair value on a non-recurring basis at December 31, 2023 and additional quantitative information
about the valuation techniques and inputs utilized by FNCB to determine fair value. All such assets and liabilities were measured using Level 3 inputs:
Fair Value Measurement
Quantitative Information
December 31, 2023
Recorded Valuation
Investment Allowance
Fair
Value
Valuation
Technique
Unobservable
Inputs
Value/
Range
(in thousands)
Individually evaluated loans -
collateral dependent
$
Individually evaluated loans - other
Repossessed assets
3,801 $
441
420
121 $
-
-
3,680 Appraisal of collateral
441 Discounted cash flows
420 Discounted cash flows
Selling costs
Discount rate
Discount rate
10.0%
0.00% -
16.06%
10.0%
The following table presents assets and liabilities measured at fair value on a non-recurring basis at December 31, 2022, prior to the adoption of ASU 2016-3,
and additional quantitative information about the valuation techniques and inputs utilized by FNCB to determine fair value. ALL assets were measured using
Level 3 inputs.
(in thousands)
Impaired loans - collateral
dependent
Impaired loans - other
Fair Value Measurement
Quantitative Information
Recorded Valuation
Investment Allowance
Fair
Value
Valuation
Technique
Unobservable
Inputs
Value/
Range
December 31, 2022
$
1,902 $
5,698
8 $
26
1,894 Appraisal of collateral
5,672 Discounted cash flows
Selling costs
Discount rate
10.0%
3.00% -
10.25%
The fair value of collateral-dependent impaired loans is determined through independent appraisals or other reasonable offers, which generally include various
Level 3 inputs which are not identifiable. Management reduces the appraised value by the estimated costs to sell the property and may make adjustments to the
appraised values as necessary to consider any declines in real estate values since the time of the appraisal. For impaired loans that are not collateral-dependent,
fair value is determined using the discounted cash flow method. When the measure of the impaired loan is less than the recorded investment in the loan, the
impairment is recorded through a valuation allowance or is charged off. The amount shown is the balance of impaired loans, net of any charge-offs and the
related allowance for loan losses.
Repossessed assets include business assets and equipment and are recorded at the liquidation value, less estimated cost to sell, obtained from an independent
third party. Liquidation values are obtained from independent third party when FNCB takes possession of, or receives title to, the asset. Subsequent to
acquisition of the assets, the balance may be written down further.
84
Table of Contents
The following table summarizes the estimated fair values of FNCB’s financial instruments at December 31, 2023 and 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 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.
(in thousands)
Financial assets:
Cash and short term investments
Available-for-sale debt securities
Equity securities
Restricted stock
Loans held for sale
Loans, net
Accrued interest receivable
Servicing rights
Derivative assets
Financial liabilities:
Deposits
Borrowed funds
Accrued interest payable
Derivative liabilities
Note 17. EARNINGS PER SHARE
Fair Value
December 31, 2023
December 31, 2022
Measurement
Carrying
Value
Fair Value
Carrying
Value
Fair Value
Level 1
See previous
table
Level 1
Level 2
Level 2
Level 3
Level 2
Level 3
Level 2
$
107,868 $
107,868 $
41,916 $
41,916
450,814
4,786
8,814
-
1,208,279
7,085
175
1,919
450,814
4,786
8,814
-
1,152,257
7,085
570
2,088
476,091
7,717
8,545
60
1,110,124
5,957
254
1,946
476,091
7,717
8,545
60
1,079,266
5,957
621
2,104
Level 2
Level 2
Level 2
Level 2
1,528,982
200,272
1,355
2,726
1,526,672
200,724
1,355
2,691
1,420,647
182,360
171
921
1,416,272
182,108
171
931
For FNCB, the numerator of both the basic and diluted earnings per share of common stock is net income available to common shareholders. The weighted
average number of common shares outstanding used in the denominator for basic earnings per common share is increased to determine the denominator used
for diluted earnings per common share by the effect of potentially dilutive common share equivalents utilizing the treasury stock method. For each of the years
ended December 31, 2023 and 2022 common stock equivalents reflected in the table above were related entirely to the incremental shares of unvested
restricted stock.
The following table presents the calculation of both basic and diluted earnings per share of common stock for the years ended December 31, 2023 and 2022:
(in thousands, except share data)
Net income
Basic weighted-average number of common stock outstanding
Plus: common share equivalents
Diluted weighted-average number of common stock outstanding
Income per share of common stock:
Basic
Diluted
85
For the Year Ended December 31,
2023
2022
$
12,983 $
20,445
19,740,493
2,125
19,742,618
19,744,477
18,089
19,762,566
$
$
0.66 $
0.66 $
1.04
1.03
Table of Contents
Note 18. OTHER COMPREHENSIVE INCOME (LOSS)
The following tables summarize the reclassifications out of accumulated other comprehensive income (loss) for the years ended December 31, 2023 and 2022:
(in thousands)
Available-for-sale debt securities:
Reclassification adjustment for net gains reclassified into net
income
Taxes
Net of tax amount
(in thousands)
Available-for-sale debt securities:
Reclassification adjustment for net losses reclassified into net
income
Taxes
Net of tax amount
For the year Ended December 31, 2023
Amount Reclassified
from Accumulated
Other Comprehensive
Income (Loss)
Affected Line Item
in the Consolidated
Statements of Income
$
$
(252) Net gain (loss) on the sale of available-for-sale securities
53 Income taxes
(199)
For the year Ended December 31, 2022
Amount Reclassified
from Accumulated
Other Comprehensive
Income (Loss)
Affected Line Item
in the Consolidated
Statements of Income
$
$
223 Net gain (loss) on the sale of available-for-sale securities
(47) Income taxes
176
The following table summarizes the changes in accumulated other comprehensive income (loss), net of tax, for the years ended December 31, 2023 and 2022:
(in thousands)
Balance, January 1,
Other comprehensive income (loss) before reclassifications
Amounts reclassified from accumulated other comprehensive income (loss)
Net other comprehensive income (loss) during the period
Balance, December 31,
Note 19. CONDENSED FINANCIAL INFORMATION — PARENT COMPANY ONLY
The following tables present condensed parent company only financial information:
Condensed Statements of Financial Condition
(in thousands)
Assets:
Cash
Investment in statutory trust
Investment in subsidiary (equity method)
Equity securities, at fair value
Other assets
Total assets
Liabilities and Shareholders’ Equity:
Junior subordinated debentures
Accrued interest payable
Other liabilities
Total liabilities
Shareholders’ equity
Total liabilities and shareholders’ equity
86
For the Year Ended December 31,
2023
2022
(48,028) $
8,058
(199)
7,859
(40,169) $
6,352
(54,556)
176
(54,380)
(48,028)
December 31,
2023
2022
15,515 $
464
121,742
3,996
3,850
145,567 $
10,310 $
36
622
10,968
134,599
145,567 $
12,779
442
106,837
6,937
2,409
129,404
10,310
31
114
10,455
118,949
129,404
$
$
$
$
$
$
Table of Contents
Condensed Statements of Income
(in thousands)
Income:
Dividends from subsidiaries
Interest and dividend income
(Losses) gains on equity securities
Trust income
Other income
Total income
Expense:
Interest on junior subordinated debt
Merger and acquisition expenses
Other operating expenses
Total expenses
Income before income tax benefit
Income tax benefit
Income before equity in undistributed net income of subsidiary
Equity in undistributed net income of subsidiary
Net income
Condensed Statements of Cash Flows
(in thousands)
Cash flows from operating activities:
For the Year Ended December 31,
2023
2022
$
$
10,000 $
680
(1,611)
22
49
9,140
724
1,480
536
2,740
6,400
(616)
7,016
5,967
12,983 $
15,000
204
92
11
-
15,307
358
-
513
871
14,436
(133)
14,569
5,876
20,445
For the Year Ended December 31,
2023
2022
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
$
12,983 $
Equity in undistributed income of subsidiary
Equity in trust
Loss (gain) on equity securities
Increase in other assets
Increase in accrued interest payable
Increase (decrease) in other liabilities
Net cash provided by operating activities
Cash flows from investing activities:
Sale of equity securities
Purchases of equity securities
Net cash provided by (used in) investing activities
Cash flows from financing activities:
Proceeds from issuance of common shares
Repurchase of common shares
Cash dividends paid
Net cash used in financing activities
Net increase in cash
Cash at beginning of year
Cash at end of year
(5,967)
(22)
1,611
(694)
5
562
8,478
1,490
(160)
1,330
38
-
(7,110)
(7,072)
2,736
12,779
15,515 $
$
87
20,445
(5,876)
(11)
(92)
(25)
22
(122)
14,341
359
(3,188)
(2,829)
-
(3,636)
(6,520)
(10,156)
1,356
11,423
12,779
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Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
FNCB’s management, with the participation of the Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation
of FNCB’s disclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as
amended, as of December 31, 2023.
Based on that evaluation, FNCB’s Chief Executive Officer and Chief Financial Officer concluded FNCB’s disclosure controls and procedures were effective as
of December 31, 2023.
There were no changes made to FNCB’s internal control over financial reporting that occurred during the most recent fiscal quarter that have materially
affected, or are reasonably likely to materially affect, FNCB’s internal control over financial reporting.
Management’s Report on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting for FNCB Bancorp, Inc. (the “Company”).
Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation
of financial statements for external purposes in accordance with generally accepted accounting principles in the United States and is not intended to provide
absolute assurance that a misstatement of the Company’s financial statements would be prevented or detected.
Internal control over financial reporting includes those policies and procedures that pertain to the maintenance of records that in reasonable detail accurately
and fairly reflect the transactions and dispositions of the assets of the Company; provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are
only being made in accordance with authorizations of management and directors of the Company; and provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the financial statements.
Any control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system
are met. The design of a control system inherently has limitations and the benefits of controls must be weighed against their costs. Additionally, controls can be
circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. Therefore, no assessment
of a cost-effective system of internal controls can provide absolute assurance that all control issues and instances of fraud, if any, will be detected.
As of December 31, 2023, management of the Company conducted an assessment of the effectiveness of the Company’s internal control over financial
reporting based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the
Treadway Commission. Management’s assessment included extensive documenting, evaluating and testing the design and operating effectiveness of our
internal control over financial reporting.
Based on this evaluation under the criteria in the Framework, management concluded that the Company’s system of internal control over financial reporting
was effective as of December 31, 2023.
/s/ Gerard A. Champi
Gerard A. Champi
President and Chief Executive Officer
/s/ James M. Bone, Jr., CPA
James M. Bone, Jr., CPA
Executive Vice President and Chief Financial Officer
Item 9B.
Other Information
(a) None
(b) None
Item 9C.
Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
Not applicable
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PART III
Item 10.
Directors, Executive Officers and Corporate Governance.
In accordance with Section 2.02 of FNCB’s bylaws, FNCB has a classified Board of Directors with staggered three-year terms of office. The Board is divided
into three classes, with each class to be as nearly equal in number as possible. The terms of the separate classes expire in successive years. Thus, at each annual
meeting of shareholders, successors to the class of directors whose term then expires are elected to hold office for a term of three years. Therefore, the term of
office of one class of directors expires in each year. The Board of Directors is authorized to change the number of directors that constitutes the whole Board of
Directors provided that the total number of directors in each class remains relatively proportionate to the others. The Board of Directors currently consists of
eleven (11) members and is divided into three classes, with one class of directors elected each year.
The table below sets forth certain information regarding members of our Board of Directors and executive officers who are not directors, including the terms of
office of board members.
Position(s) Held with FNCB Bancorp, Inc.
Director
President and Chief Executive Officer
Secretary
Name
BOARD MEMBERS
William G. Bracey
Gerard A. Champi
Joseph Coccia
William P. Conaboy,
Esquire
Dominick L. DeNaples
Joseph L. DeNaples,
Esquire
Louis A. DeNaples
Louis A. DeNaples, Jr.,
M.D.
Keith W. Eckel
Kathleen McCarthy
Lambert, CPA
Director
Thomas J. Melone, CPA Director
Director
Director
Director
Chairman of the Board
Vice Chairman of the Board
Director
EXECUTIVE OFFICERS WHO ARE NOT BOARD MEMBERS
James M. Bone, Jr., CPA
James F. Burke
James P. Chiaro, CMFC
Mary Griffin Cummings,
Esquire
Aaron J. Cunningham
Richard D. Drust
Mary Ann Gardner,
CRCM
Dawn D. Gronski
Lisa L. Kinney
Cathy Loomis
Brian C. Mahlstedt
William A. McGuigan,
CPA
Stephanie A. Westington,
CPA
Donna Yanuzzi
Executive Vice President and Chief Financial
Officer/Treasurer and PFO
Executive Vice President and Chief Banking Officer
Executive Vice President and Chief Investment Services
Officer
Executive Vice President and General Counsel
Executive Vice President and Chief Credit Officer
Senior Vice President and Retail Banking Officer
Senior Vice President and Compliance Officer
Senior Vice President and Human Resources Officer
Senior Vice President and Retail Lending Officer
Senior Vice President and Credit Administration Officer
Executive Vice President and Chief Lending Officer
Senior Vice President and Audit Officer
Senior Vice President and Chief Accounting Officer
Executive Vice President and Equipment Finance
Officer
Age (1)
Director Since
Class
Current Term
Expires
69
63
69
65
86
45
83
56
77
62
65
62
55
48
61
47
63
66
53
54
50
64
74
58
63
2014
2016
1998
2022
2023
2017
2013
2008
2014
2017
2011
B
A
C
C
B
C
A
B
A
A
B
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
2024
2026
2025
2025
2024
2025
2026
2024
2026
2026
2024
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
The biographies of each of the board members and executive officers are set forth below. With respect to directors, the biographies also contain information
regarding the person's business experience and the experiences, qualifications, attributes or skills that caused the Nominating Committee to determine that the
person should serve as a director. Each director of FNCB Bancorp, Inc. is also a director of FNCB Bank.
Directors
Mr. William G. Bracey has served on the Board of Directors since 2014. Mr. Bracey owns and operates three ShopRite Supermarkets, one in Daleville,
Pennsylvania, one in Moosic, Pennsylvania and one in Mount Pocono, Pennsylvania, as well as several retail businesses including two Ace Hardware Stores,
one in Daleville, Pennsylvania and one in Moosic, Pennsylvania, one Hallmark Gold Crown Store, and Plociniak Fuel Services. Mr. Bracey is an active
member of several business and community organizations, including a current board member and past Chairman of the Pennsylvania Food Merchants, current
board member of Johnson College, past board member and Chairman of Affiliated Foods, past board member and Co-Chairman of Associated Wholesale and
past board member of Scranton Preparatory School. Mr. Bracey’s over 40 years of entrepreneurial and corporate management experience, strong network of
community relationships and partnerships, and significant knowledge of the retail business climate in the region qualifies him to serve as director of FNCB.
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Mr. Gerard A. Champi has been President and Chief Executive Officer and a member of the Board of Directors of FNCB and the Bank since July 1, 2016.
Prior to holding this position, Mr. Champi was Chief Operating Officer of the Bank from March 2011 to June 2016. Mr. Champi also served as Interim
President and Chief Executive Officer of FNCB and the Bank and as a director of the Bank from March 2010 until February 2011. Mr. Champi has been with
the Bank since 1991 and has served in various leadership roles in the Retail, Commercial Sales and Executive Divisions. He currently serves as a Board
member of Leadership Northeast, the Lackawanna Blind Association, the Pennsylvania Bankers Association, and as an Advisory Board member of Penn State
Worthington Scranton, a campus of the Pennsylvania State University. He also serves on the Wilkes-Barre Law & Library Association's Executive Committee's
Lay Advisory Committee and is a lifetime member of Pennsylvania State University Alumni Association. Mr. Champi has been appointed as President of
Lackawanna Industrial Fund Enterprises (LIFE) and serves on the Board of Directors of the Greater Scranton Chamber of Commerce and the Executive
Committee of the Chamber. Jerry is also past President of the Boards of Directors of the Northeastern Pennsylvania Council Boy Scouts of America, the
Greater Pittston Chamber of Commerce, and the Luzerne County Community College Foundation. Mr. Champi's extensive knowledge of FNCB and the Bank,
his time as President and Chief Executive Officer and other various leadership positions with the Bank and extensive community and charitable involvement
qualify him to serve as a director of FNCB.
Mr. Joseph Coccia has served on the Board of Directors since 1998. Mr. Coccia is President of Coccia Ford, Inc. (doing business as Coccia Ford Lincoln), a
car dealership in Wilkes-Barre, Pennsylvania. Mr. Coccia is a member of the Board of Directors of AllOne Charities and NEPA Highmark's Advisory Board.
Mr. Coccia also served on the Lincoln Mercury Dealer Association Board. Mr. Coccia’s strong business background and knowledge of owning and operating a
large local business, his broad community involvement, and his service as a director of FNCB and Bank since 1998 qualify him to serve as a director of FNCB.
Attorney William P. Conaboy, Esquire has served on the Board of Directors since October 2022. Attorney Conaboy currently serves as President and Chief
Executive Officer of Allied Services Integrated Health System and has served in this role since 2009. Prior to serving as President and Chief Executive Officer
of Allied Services Integrated Health System between 1992 and 2008 he served in various capacities including Senior Vice President and General Counsel,
Chief Corporate Compliance Officer and Chief Operations Officer. Attorney Conaboy serves as a member of the Board of Directors for Pennsylvania
Rehabilitation and Community Providers Association and a member of the Board of Directors of The Scranton Area Foundation. He serves as Chairman of the
Board at Northeast Regional Cancer Institution. Attorney Conaboy’s strong business leadership background and extensive community and charitable
involvement qualify him to serve as a director of FNCB.
Mr. Dominick L. DeNaples previously served as the Chairman of the Board of Directors of FNCB and Bank from May 2010 until May 2019. Mr. DeNaples
was appointed and served as Director Emeritus from May 2019 until February 2023, when he was reappointed as a director. Mr. DeNaples also served as Vice
Chairman of the Boards of Directors of FNCB and Bank from December 2009 until he was elected Chairman in May 2010. Mr. DeNaples is President of Rail
Realty Corporation, Vice President of DeNaples Auto Parts Inc., and Vice President of Keystone Landfill, Inc., each of which he is also co-owner with his
brother Louis A. DeNaples. Mr. DeNaples currently serves on the Board and Finance Committee of St. Joseph’s Center and St. Joseph’s Foundation. He also
serves on the Board of Geisinger Health Services, Hospice of the Sacred Heart and on the Advisory Board of Penn State University – Worthington campus. He
formerly served as Chairman of the Board and Chairman of the Finance Committee of Lackawanna College, President of the Council and Chairman of Finance
of the Northeastern Pennsylvania Council of Boy Scouts of America, and currently serves as a Board member. He also served as former Vice Chairman of the
Board and Finance Committee of Scranton Preparatory School. Mr. DeNaples’ extensive business background, years of community and charitable involvement
and service as a Director of FNCB and the Bank for many years qualify him to serve as Director of FNCB. Mr. DeNaples is the father of director, Joseph L.
DeNaples, Esq., brother of director, Louis A. DeNaples, and the uncle of director, Louis A. DeNaples, Jr. M.D.
Attorney Joseph L. DeNaples, Esquire has served on the Board of Directors since 2017. Attorney DeNaples is a partner at the law firm of Cipriani & Werner,
PC and is Director of Risk Management for Mount Airy Resort and Casino. He focuses his law practice in banking, commercial, real estate, gaming, corporate,
secured transactions and bankruptcy law. Attorney DeNaples also serves as Solicitor for both the Lackawanna County Sheriff’s Office and the County of
Lackawanna Transit System Authority. Attorney DeNaples is a member of the Lackawanna County Bar Association and is admitted to practice in Pennsylvania
as well as the United States District Court for the Middle District of Pennsylvania and the United States Bankruptcy Court for the Middle District of
Pennsylvania. Attorney DeNaples serves on the Boards of Northeastern Pennsylvania Council Boy Scouts of America and the Saint Francis of Assisi Kitchen.
Attorney DeNaples received his Juris Doctorate degree from the Villanova University School of Law. Attorney DeNaples extensive business and legal
background, and community and charitable involvement qualify him to serve as a director of FNCB. Attorney DeNaples is the son of director, Dominick L.
DeNaples, the nephew of director and Chairman of the Board of Directors, Louis A. DeNaples and cousin of director and Vice Chairman of the Board of
Directors, Louis A. DeNaples, Jr., M.D.
Mr. Louis A. DeNaples has been a director of the Bank since 1972 and served as Chairman of the Board of Directors of FNCB from 1998 until he took a leave
of absence from involvement with FNCB and the Bank in February 2008. In 2013, Mr. DeNaples returned from a leave of absence and rejoined the Bank’s
Board on December 23, 2013. He was re-elected to FNCB's Board of Directors on May 21, 2014 and was appointed Chairman of the Boards of FNCB and the
Bank on May 15, 2019. Mr. DeNaples is President of DeNaples Auto Parts, Inc., President of Keystone Landfill Inc. and Vice President of Rail Realty, Inc.,
each of which he co-owns with his brother, Dominick L. DeNaples. Mr. DeNaples serves on the boards of AllOne Foundation, AllOne Charities, AllOne Health
Resources and Allied Services Foundation. Mr. DeNaples also serves as Chairman of the Community Advisory Board for Geisinger Commonwealth School of
Medicine, a member of NEPA Highmark's Advisory Board and was past Chairman of the University of Scranton Board of Trustees. Mr. DeNaples’ extensive
business knowledge, community and charitable involvement, and association with the Bank for many years qualify him to serve as a director of FNCB.
Mr. DeNaples is the brother of director, Dominick L. DeNaples, the father of director and Vice Chairman of the Board of Directors, Louis A. DeNaples, Jr.,
M.D. and uncle of director, Joseph L. DeNaples, Esquire.
Dr. Louis A. DeNaples, Jr., M.D. has served on the Board of Directors since 2008. Dr. DeNaples is a board-certified emergency physician and practices
emergency medicine at Geisinger-Community Medical Center Emergency Department in Scranton, Pennsylvania. Dr. DeNaples serves as board member of the
Goodwill Industries of Northeastern Pennsylvania and the Scranton Preparatory School. Dr. DeNaples also serves as a Board Member on the Council of The
Pennsylvania Society and is a volunteer staff member at the Geisinger Commonwealth School of Medicine. Dr. DeNaples’ understanding of the medical
industry, and considerable community and charitable involvement qualifies him to serve as director of FNCB. Dr. DeNaples is the son of director and Chairman
of the Board of Directors, Louis A. DeNaples, the nephew of director, Dominick L. DeNaples and cousin of director, Joseph L. DeNaples, Esquire.
Mr. Keith W. Eckel is the sole owner and Chief Executive Officer of Fred W. Eckel and Sons and President of Eckel Farms, Inc. Mr. Eckel serves as an
Emeritus Trustee of The Pennsylvania State University and serves a chair of Trustees of Countryside Community Church. Mr. Eckel formerly served as Board
member and Chairman of Nationwide Mutual Insurance Company, a Fortune 100 insurance provider, and Allied Group, Inc., a subsidiary of Nationwide
Mutual Insurance Company. Mr. Eckel also previously served as Board Member of International Food and Agricultural Development, an organization that
advises the United States Agency for International Development on agricultural priorities and issues, former President of the Pennsylvania Farm Bureau, and
Board Member and Chairman of Gartmore Global Asset Management Trust. Mr. Eckel’s strong business background, extensive knowledge in the insurance
industry and agribusiness, and community and charitable involvement qualify him to serve as a director of FNCB.
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Mrs. Kathleen McCarthy Lambert, CPA has served on the Board of Directors since 2017. Mrs. Lambert is an owner of McCarthy Tire Service Company
and Subsidiaries where she serves as Chief Financial Officer and Corporate Secretary. She also serves as Chairperson of the Board for Wilkes-Barre General
Hospital, Vice Chairperson of the Board of King’s College, and Board Member of the Beatrice Eck Foundation. Mrs. Lambert is a member of the Executive
Committee and past Chairman of the Board of Northeast Sight Services and past Board Member of the Greater Wilkes-Barre Chamber of Business and
Industry and the Scranton Diocesan Financial Council. Mrs. Lambert is also actively involved in fundraising activities for numerous non-profit organizations,
including the United Way, American Heart Association, St. Vincent DePaul Soup Kitchen, King’s College, the Catholic Youth Center, Holy Redeemer High
School, John Heinz Rehab, Big Brothers/Big Sisters and Volunteers in Medicine. Mrs. Lambert, a licensed Certified Public Accountant and a graduate of
King’s College, is a past recipient of the Athena Award and Top 25 Businesswomen in Northeastern Pennsylvania Award. Mrs. Lambert’s extensive business
background and community and charitable involvement qualify her to serve as a director of FNCB.
Mr. Thomas J. Melone, CPA has served on the Board of Directors since 2011. Mr. Melone is a Partner with the Albert B. Melone Company Certified Public
Accountants, a leading provider of accounting, tax and consulting services throughout the Northeastern Pennsylvania region. Mr. Melone, who has been with
this firm since 1981, leads the firm’s Tax Preparation and Advisory Services line as well as its Small Business Advisory and Consulting Services line.
Additionally, he has extensive experience in the financial management of public-school districts operating in the Commonwealth of Pennsylvania. Mr. Melone
is also an owner of Pro-Data Processing, Inc. Mr. Melone is an active member of several professional, business and community organizations including the
American Institute of Certified Public Accountants, Pennsylvania Institute of Certified Public Accountants and the Allied Services Board, an integrated health
system, specifically serving as Chairman of the Allied Institute of Rehabilitation Medicine and the John Heinz Institute of Rehabilitation Medicine, and as Vice
Chairman of the Allied Services Foundation. Mr. Melone’s community involvement, extensive business and accounting experience and service as a director of
FNCB and the Bank qualify him to serve as a director of FNCB.
Executive Officers Who Are Not Directors
Mr. James M. Bone, Jr., CPA is Executive Vice President and Chief Financial Officer/Treasurer of FNCB and the Bank, a position he has held since
September 2012. Mr. Bone has been with the Bank since 1986 and has served in various leadership roles in Finance, Retail and Commercial Sales,
Compliance, Operations and Technology and Internal Audit. Mr. Bone is a licensed Certified Public Accountant and is an active member of several
professional, business and community organizations including the American Institute of Certified Public Accountants and Pennsylvania Institute of Certified
Public Accountants. Mr. Bone is a former member of the Issuer Advisory Council of the OTCQX and a former member of the Advisory Board for the Federal
Home Loan Bank of Pittsburgh. Mr. Bone is also active in the community with King’s College and currently serves as Vice President of Finance and Board
Member of the Northeastern Pennsylvania Council Boy Scouts of America.
Mr. James F. Burke is Executive Vice President and Chief Banking Officer, a position he has held since February 2021. Mr. Burke has more than 29 years of
managerial and sales experience in banking. Prior to joining the Bank, he was the Executive Vice President, Chief Lending Officer at Wayne Bank from
October 2013 to February 2021 where he was responsible for the overall sales, service, and operations of the Commercial Banking Division in Pennsylvania
and New York. Mr. Burke currently serves as Chairperson to Jay S. Sidhu School of Business and Leadership Advisory Board at Wilkes University.
Mr. James P. Chiaro, CMFC is Executive Vice President and Chief Investment Officer, a position he has held since September 2022. Mr. Chiaro has 20 years
of experience in the financial services industry and prior to joining FNCB, Mr. Chiaro was the principal of Chiaro Investment Services, LLC. Mr. Chiaro holds
the following professional designations and registrations (securities registrations held through LPL Financial): Series 7, General Securities Representative;
Series 65, Uniform Investment Advisor Representative; Series 6, Investment Company Products/Variable Contracts Representative; Series 63, Uniform
Securities Agent State Law; Pennsylvania Life Insurance License CMFC; Chartered Mutual Fund Counselor; and College for Financial Planning.
Ms. Mary Griffin Cummings, Esquire is Executive Vice President and General Counsel of the Bank, a position she has held since October 1, 2012. Prior to
joining the Bank, she was Associate General Counsel, Resident Counsel and General Counsel for Wyoming Valley Health Care System, Inc. (“WVHCS”), a
large health care system previously located in Wilkes-Barre, Pennsylvania, from May 2000 to May 2009. From May 2009 through October 2012,
Ms. Cummings practiced law both in her own private practice and for Wyoming Valley Health and Education Foundation and WVHCS Retention Company.
Ms. Cummings is a licensed attorney and admitted to practice law in the Courts of the Commonwealth of Pennsylvania and the United States District Court for
the Middle District of Pennsylvania. She is a member of the Wilkes-Barre Law and Library Association and the Pennsylvania Bar Association. Ms. Cummings
serves on the Board of Directors of the Pennsylvania Bankers Association Services Corporation and the Board of Governors, serving as Chairperson, of
Bankers Settlement Services–Capital Region, a title agency wherein FNCB Bank has an equity interest. Ms. Cummings serves as Chair and Board member of
the Catherine McAuley Center, Scranton, PA and Board Member and Chair of the Nominating and Governance Committee of the McGlynn Learning Center,
Wilkes-Barre, PA. Ms. Cummings serves on the Northeastern PA Board of Directors of the American Red Cross and is a life-time member of the Pennsylvania
State University Alumni Association.
Mr. Aaron J. Cunningham is Executive Vice President and Chief Credit Officer of the Bank, a position he has held since June 7, 2018. Prior to joining the
Bank, he was employed by Penns Woods Bancorp, Inc., a bank holding company operating Jersey Shore State Bank and Luzerne Bank. He served as Senior
Vice President and Chief Credit Officer of Penns Woods Bancorp, Inc. from November 2015 through May 2018, and Vice President/Credit Department
Manager from 2010 through November 2015. In total, he has 25 years banking experience in various roles. Mr. Cunningham served in various leadership roles
with Leadership Lycoming, Habitat for Humanity and Valley Prevention Services, and contributed as a business partner with Lock Haven University’s Business
Program.
Mr. Richard D. Drust is Senior Vice President and Retail Banking Officer of the Bank, a position he has held since February 2014. Mr. Drust has over
35 years of banking experience serving in various retail banking management positions for several different banks. Mr. Drust serves on the board of Wyoming
Valley Challenger Baseball and NEPA Inclusive both serving individuals in the community with intellectual disabilities.
Ms. Mary Ann Gardner is Senior Vice President and Compliance Officer of the Bank, a position she has held since April 2013. Ms. Gardner also serves as the
Bank Secrecy Act (“BSA”) Officer and Community Reinvestment Act (“CRA”) Officer for the Bank. Ms. Gardner is a Certified Regulatory Compliance
Manager (“CRCM”) and has been an employee of the Bank since 1976 with previous roles including Vice President and Compliance, BSA and CRA Officer
from April 2013 to April 2014, Assistant Vice President, Compliance and CRA Officer from June 2011 to April 2013 and Assistant Vice President and
Regulatory Compliance Manager from June 2010 to June 2011.
Ms. Dawn D. Gronski is Senior Vice President and Human Resources Officer, a position she has held since March 2017. Ms. Gronski has been an employee
of the Bank since 1998, with her previous roles including Vice President and Compensation and Benefits Officer from April 2013 to March 2017; and Assistant
Vice President and Payroll/HRIS Administrator from June 2010 to March 2013. Ms. Gronski serves as the treasurer of the Scranton Civic Ballet Company and
has served as a member of its Board since 2009.
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Ms. Lisa L. Kinney is Senior Vice President and Retail Lending Officer of the Bank, a position she has held since September 2008. Ms. Kinney has been an
employee of the Bank since 1994, with her previous roles including Vice President and Indirect Lending Manager from January 2007 to September 2008; Vice
President and Indirect Lending Officer from December 2005 to December 2006; and Assistant Cashier and Indirect Lending Officer from May 1998 to
November 2005. Ms. Kinney serves as a Board Member of the Dunmore Lions Club and has served as Past-President.
Ms. Cathy J. Loomis is Senior Vice President and Credit Administration Officer of the Bank, a position she has held since September 2013. Ms. Loomis has
been with the Bank since 1995. Her previous roles include Senior Vice President and Credit Administration Manager from 2010 until September 2013 and Vice
President, Credit Department Manager from 2004 to 2009.
Mr. Brian C. Mahlstedt is Executive Vice President and Chief Lending Officer of the Bank, a position he has held since September 2013. Mr. Mahlstedt first
joined the Bank in 1999 and served as Senior Vice President and Commercial Loan Officer until 2009. From 2011 to September 2013, when he rejoined the
Bank, Mr. Mahlstedt was a Senior Vice President, Senior Commercial Loan Officer at Wayne Bank. Mr. Mahlstedt also served as Vice President, Senior Loan
Officer at Pennstar Bank from 2009 to 2011.
Mr. William A. McGuigan, CPA is Senior Vice President and Audit Officer of the Bank, a position he has held since June 2016. Previously, Mr. McGuigan
was Audit Manager of the Bank from March 2012 to June 2016. Prior to joining the Bank, Mr. McGuigan was a partner in a local public accounting firm
serving the Banking and Small Business sectors. He also spent 10 years leading corporate audit and accounting departments. Mr. McGuigan is a licensed
Certified Public Accountant.
Ms. Stephanie A. Westington, CPA is Senior Vice President and Chief Accounting Officer of the Bank, a position she has held since January 2022. Ms.
Westington has been an employee of the Bank since July 2012, with her previous role as Senior Vice President and Controller until January 2022. Prior to
joining the Bank, Ms. Westington was Director of Finance for Physicians Health Alliance, a physician’s group that was a member of the former Moses Taylor
Health Care System, from March 2011 to July 2012. Ms. Westington is a licensed Certified Public Accountant and has previous banking experience from her
time as Vice President of Finance at the former Community Bank and Trust Company from January 1998 to March 2011 and Assistant Vice President and
Controller at the former LA Bank, N.A. from September 1990 to December 1997. Ms. Westington currently serves as President of the Board of Trustees of the
Howard Gardner Multiple Intelligence Charter School, Scranton, PA.
Ms. Donna Yanuzzi is Senior Vice President and Director of Equipment Finance of the Bank, a position she has held since November 2021 when she joined
the Bank. Prior to joining the Bank, Ms. Yanuzzi was Managing Director of Sales and Marketing for F.N.B. Equipment Finance from July 2020 to November
2021, and Director of Vendor and Small Business Banking at F.N.B. Equipment Finance from September 2016 to July 2020. Ms. Yanuzzi is a member of the
Board of Trustees of the Equipment Leasing and Finance Foundation.
Code of Ethics
FNCB has adopted a Code of Business Conduct and Ethics (the “Code”) that applies to FNCB’s directors and employees, including the President and Principal
Executive Officer (“PEO”), Principal Financial Officer (“PFO”) and Principal Accounting Officer (“PAO”). The Code includes guidelines relating to
compliance with laws, the ethical handling of actual or potential conflicts of interest, the use of corporate opportunities, protection and use of FNCB’s
confidential information, accepting gifts and business courtesies, accurate financial and regulatory reporting, and procedures for promoting compliance with,
and reporting violations of, the Code. The Code is available on FNCB’s website at www.fncb.com/investorrelations/ under the heading “Governance
Documents.” FNCB intends to post any amendments to the Code on its website and also to disclose any waivers (to the extent applicable to FNCB’s President,
PEO, PFO or PAO) on a Form 8-K within the prescribed time period.
Audit Committee
The Board of Directors has a standing Audit Committee established in accordance with Section 3(a)(58)(A) of the Exchange Act. The Board of Directors has
determined that each of the members of the Audit Committee is independent, as that term is defined by the SEC and in the NASDAQ listing standards related
to audit committees. The current Audit Committee charter is available in the Investor Relations section on FNCB’s website at investors.fncb.com by clicking on
Governance, Governance Documents and then selecting “Audit Committee Charter.” The principal duties of the Audit Committee, as set forth in its charter,
include reviewing and discussing the audited financial statements with management and the independent registered public accounting firm and, based on such
reviews and discussions, recommending to the Board of Directors that the audited financial statement be included in FNCB’s annual report on Form 10-K;
reviewing significant audit and accounting principles, policies and practices; reviewing the effectiveness of the internal audit function and internal controls over
financial reporting; reviewing reports of examination received from regulatory authorities; and reviewing the performance and independence of and
recommending, annually, to the Board of Directors the engagement of an independent registered public accounting firm.
Currently, the Board has identified Thomas J. Melone, CPA and Kathleen McCarthy Lambert, CPA as Audit Committee financial experts. Mr. Melone qualifies
as a financial expert based on his extensive accounting experience as a certified public accountant and as a partner of the Albert B. Melone Company Certified
Public Accountants. Ms. Lambert qualifies as a financial expert based on her extensive accounting experience as a certified public accountant and as Chief
Financial Officer of McCarthy Tire Service Company and its subsidiaries.
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Item 11.
Executive Compensation.
Executive Officer Compensation
Summary Compensation Table.
The following table sets forth the total compensation paid to Gerard A. Champi, who served as principal executive officer of FNCB Bancorp, Inc Shown below
is also information concerning the total compensation awarded to, earned by, or paid to each of the and the total compensation paid to FNCB's two other most
highly compensated executive officers who earned total compensation in excess of $100,000 for the year ended December 31, 2023. Each individual listed in
the table below is referred to as a named executive officer (“NEO”).
Non-qualified
Deferred
Non Equity
Incentive
Plan
Stock
Compensation All Other
Name and Principal Position
Gerard A. Champi, President and Chief 2023 $
Year
Salary
Bonus
Awards (1) Awards (2) Earnings (3)
Compensation
(4)
416,448 $
25,000 $
121,990 $
- $
53,624 $
57,402 $
Total
674,464
Executive Officer of FNCB and the
Bank
James M. Bone, Jr., Executive Vice
President
and Chief Financial Officer/Treasurer
of FNCB and the Bank
James F. Burke, Executive Vice
President
2022 $
384,899 $
- $
115,583 $
153,500 $
38,891 $
176,417 $
869,290
2023 $
289,791 $
30,000 $
69,896 $
- $
20,586 $
46,647 $
456,920
2022 $
266,346 $
- $
48,007 $
65,000 $
14,766 $
85,685 $
479,804
2023 $
263,521 $
25,000 $
63,249 $
- $
5,735 $
41,834 $
399,338
and Chief Banking Officer of the
Bank
- $
(1) The amounts listed represent the grant date fair market value of the shares computed in accordance with ASC Topic 718. Additional information about
241,963 $
43,621 $
59,500 $
78,575 $
2,759 $
2022 $
426,418
FNCB’s accounting for stock-based compensation is contained in Note 2, "Summary of Significant Accounting Policies" and Note 14, "Stock
Compensation Plans" to the Notes to Consolidated Financial Statements included in Item 8 "Financial Statements and Supplementary Data" to this Annual
Report on Form 10-K.
(2) 2023 performance metrics did not meet required thresholds; therefore, no award was earned under the EIP for the 2023 fiscal year.
(3)The amounts listed reflect on the earnings on the balances in the named executive officers non-qualified deferred compensation plan and supplemental
retirement plan accounts.
(4) The following table provides the detail for the amount presented under “All Other Compensation” paid to or earned by each of FNCB’s named executive
officers for the 2023 fiscal year.
Benefits and Perquisites
FNCB annual contributions to SERP
FNCB contributions to 401 (k) Plan
Automobile allowance
Country club dues
Other
Total
Gerard A.
Champi
James M.
Bone, Jr.
James F.
Burke
$
$
35,000 $
10,001
3,782
8,327
292
57,402 $
25,000 $
11,210
3,687
6,490
260
46,647 $
20,000
12,688
3,726
5,420
-
41,834
Outstanding Equity Awards at Fiscal Year End. The following table summarizes the equity awards FNCB has made to our 2023 NEOs which were
outstanding at December 31, 2023. All options were granted with an exercise or base price of 100% of market value as determined in accordance with the
applicable plan. The number of shares subject to each award as well as the exercise and/or base price has been adjusted to reflect all stock dividends and stock
splits effected after the date of such award but have not otherwise been modified.
Outstanding Equity Awards at Fiscal Year End
Option Awards
Stock Awards
Number of
Securities
Underlying
Unexercised
Options
Number of
Securities
Underlying
Unexercised
Options
Exercisable
Unexercisable
Option
Exercise Price
Option
Expiration
Date
Number of
Shares or
Units of Stock
that Have Not
Vested (#) (1)
Market Value
of Shares or
Units of Stock
that Have Not
Vested ($) (2)
-
- $
-
42,174 $
286,361
Name and Principal Position
Gerard A. Champi, President and Chief Executive
Officer
James M. Bone, Jr., Executive Vice President and
Chief Financial Officer
-
- $
-
20,215 $
137,260
James F. Burke, Executive Vice President and Chief
Banking Officer
86,858
(1)Shares of restricted stock granted to all the named executive officers generally vest in five equal installments over a five-year period on May 15 of each year.
12,792 $
- $
-
-
(2)
Based on the closing market value of FNCB’s common stock on December 29, 2023, of $6.79 per share, as reported on Nasdaq for the last trading day of the
year.
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Securities Authorized for Issuance Under Equity Compensation Plans. The following table summarizes information, as of December 31, 2023, with respect
to compensation plans under which equity securities of FNCB are authorized for issuance:
Number of
Securities to be
Issued upon
Exercise of
Outstanding
Options, Warrants
and Rights (a)
Weighted-average
Exercise Price of
Outstanding
Options, Warrants
and Rights (b)
Number of
Securities
Remaining
Available for
Future Issuance
Under Equity
Compensation
Plans (Excluding
Securities
Reflected in
Column (a)) (c)
-
N/A
-
N/A
N/A
N/A
2,435,076
N/A
2,435,076
Plan Category
Equity compensation plans approved by security holders
Equity compensation plans not approved by security holders
Total
Employment Arrangements
FNCB and the Bank have entered into an Employment Agreement with named executive officer, Mr. Bone, and the Bank has entered into Employment
Agreements with named executive officer, Mr. Champi, and FNCB Bank’s Chief Lending Officer, Brian J. Mahlstedt. Employment Agreements are commonly
used by the banking industry and by FNCB’s peer group to retain key executives and define an overall compensation package that is aligned with shareholder
interests. Below is a summary of each named executive officer’s and Mr. Mahlstedt’s Employment Agreement.
The provisions under the Employment Agreements include the named executive officer’s initial base salary, subject to annual review adjustments by the
Compensation Committee and the Board. Each of the Employment Agreements also state that the named executive officer is eligible to participate in FNCB’s
Executive Incentive Plan and Long-Term Incentive Plan according to the terms of those Plans. Each such Employment Agreement also states that each named
executive officer will be provided with a Supplemental Retirement Plan. Each such Employment Agreement specifies that each named executive officer will be
reimbursed for annual country club dues and use of a Bank provided automobile. Each named executive officer’s Employment Agreement has a term of three
years, with consideration for an annual renewal of an additional three years on March 31st of each calendar year. Each named executive officer’s Employment
Agreement includes a non-compete clause which will be in effect for twelve months after an involuntary separation by the Bank or after a Change of Control
termination as defined in his Agreement.
On September 27, 2023, the compensation committee of the board of directors of FNCB approved an Amendment to Employment Agreement (the “Bone
Employment Agreement Amendment”) among FNCB, FNCB Bank and Mr. Bone. The Bone Employment Agreement Amendment amends that certain
Employment Agreement entered into by Mr. Bone, FNCB, and FNCB Bank as of October 1, 2015 (the “Original Bone Employment Agreement”). Pursuant to
the Bone Employment Agreement Amendment, Mr. Bone’s severance is amended such that, in the event of a termination of his employment by FNCB and
FNCB Bank other than for “Cause” (as defined in the Original Bone Employment Agreement) or a resignation by Mr. Bone for “Good Reason” (as defined in
the Bone Employment Agreement Amendment), Mr. Bone would receive a total severance payment equal to two (2) years base salary at the highest rate in
effect during the twelve (12) month period immediately preceding his last day of employment plus the average cash award paid to him over the last three
preceding years from the Executive Incentive Plan. In addition, the Bone Employment Agreement Amendment also provides that, in the event Mr. Bone is not
named Chief Financial Officer of PFIS within fourteen (14) months following the closing of the merger with PFIS, he would receive a total severance payment
equal to 2.99 years base salary at the highest rate in effect during the twelve (12) month period immediately preceding his last day of employment plus the
average cash award paid to him over the last three preceding years from the Executive Incentive Plan.
Executive Incentive Plan
FNCB has a formal Executive Incentive Plan that links cash bonus awards to Bank-specific targets and individual performance factors. Under the terms of the
Executive Incentive Plan, each year the Board of Directors establishes the Bank-wide financial targets which are utilized to trigger funding of the Executive
Incentive Plan. Under the Executive Incentive Plan, Mr. Champi is eligible for a bonus of 30.0% of his base salary at target levels and each of the other named
executive officers is eligible for a bonus of 18.0% of his or her base salary at target levels. For 2023, the Board of Directors approved net income, weighted
95.0%, and individual performance, weighted 5.0%, as the bank wide performance factors. The Board of Directors believe that these performance factors align
the interests of our executives with those of our shareholders and FNCB’s Strategic Plan. For 2023, the net income target was not achieved and no cash bonus
awards were paid under the Executive Incentive Plan.
Potential Payments upon Termination or Change in Control
In the event of a Change of Control during which his employment with the Bank is terminated “without cause” (as defined in the Employment Agreements), i)
within 120 days immediately prior to and in conjunction with a Change in Control or within one year following consummation of a Change in Control or ii) the
terms and conditions of his position are substantially altered as defined in the Employment Agreement, each named executive officer will receive a total
severance payment equal to 2.99 years base salary at the highest rate in effect during the 12-month period immediately preceding his last day of employment
plus the average Executive Incentive Plan cash award received over the last three preceding years. Each named executive officer will remain eligible to
participate in the Bank’s medical benefits program while receiving severance. Pursuant to the employment agreement of Mr. Bone, in the event (x) of (i) a
termination of his employment without cause within the 120-day period immediately prior to the closing of a Change in Control or within one year following
the consummation of a Change in Control or (ii) within one year following a Change in Control the terms and conditions of his position are substantially
altered as described in his employment agreement or (y) Mr. Bone is not named Chief Financial Officer of PFIS within 14 months following the closing of the
Merger, he would receive (a) total severance payments equal to 2.99 years base salary at the highest rate in effect during the 12 month period immediately
preceding his last day of employment plus the average cash award paid to him over the last three preceding years from the Executive Incentive Plan, and
(b) health and medical insurance benefits substantially similar to those which Mr. Bone receives immediately prior to the closing.
In the event that the named executive officer is released “without cause” while the Employment Agreement is in effect, he will receive a total severance
payment equal to 2.99 years base salary at the highest rate in effect during the 12-month period immediately preceding his last day of employment plus the
average cash award paid to him over the last three preceding years from the Executive Incentive Plan.
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Each named executive officer will remain eligible to participate in the Bank’s medical benefits program while receiving severance from either involuntary
separation not for cause or because of a Change of Control (as defined in the Employment Agreements).
Each named executive officer’s Employment Agreement would terminate upon his death except that any remaining separation payments due to the named
executive officer as a result of a change of control or involuntary separation not for cause will be paid to the named executive officer’s beneficiary.
Mr. Burke entered into a Change In Control Agreement (“CIC Agreement”) with the Bank. In the event of a Change In Control as defined in the CIC
Agreement, Mr. Burke shall be entitled to a cash compensation equal to two (2) year’s salary at the highest rate in effect during the twelve (12) month period
immediately preceding his last day of employment plus any average cash award paid to him over the last three (3) years from the Executive Incentive Plan.
Mr. Burke will remain eligible to participate in the Bank’s medical benefits program while receiving severance.
Notwithstanding any other provisions of the EIP, and except as otherwise provided in an award agreement, if there is a change in control, all stock-based
awards granted under the EIP will immediately vest 100% for each Participant, including incentive stock options, nonqualified stock options, stock
appreciation rights, restricted stock and restricted stock units. However, no stock-based award granted or made during a period when FNCB is subject to FDIC
Part 359 golden parachute requirements will be subject to acceleration of vesting pursuant to the EIP. In addition, no stock-based awards, whenever granted or
made, will vest if the Change in Control occurs during a period when FNCB is subject to FDIC Part 359.
The foregoing narrative regarding payments on a change in control or other termination of employment does not reflect payments that would be provided to
each named executive officer under the 401(k) Plan following termination of employment, or under FNCB’s disability or life insurance plan in the event of
death or disability, as applicable, on the last business day of the fiscal year ended December 31, 2023 because these plans are generally available to all regular
salaried employees.
Director Compensation
The following table sets forth information regarding compensation paid to, or earned by, non-employee directors of FNCB during the fiscal year ended
December 31, 2023 for service as members of FNCB’s and the Bank’s Boards of Directors as applicable. Directors who also are FNCB or Bank employees
(currently Mr. Champi) do not receive any compensation or other fees for service as a Board member.
Name
William G. Bracey
Gerard A. Champi
Joseph Coccia
William P. Conaboy, Esquire
Dominick L. DeNaples (1)
Joseph L. DeNaples, Esquire
Louis A. DeNaples
Louis A. DeNaples, Jr., M.D.
Keith W. Eckel
Kathleen McCarthy Lambert
Thomas J. Melone, CPA
$
Fees Earned or
Cash Paid
Stock Awards (2)
Total
32,500 $
-
32,500
30,000
28,750
30,500
32,000
30,000
37,500
34,500
37,000
15,000 $
-
15,000
15,000
15,000
15,000
15,000
15,000
15,000
15,000
15,000
47,500
-
47,500
45,000
43,750
45,500
47,000
45,000
52,500
49,500
52,000
(1)
Dominick L. DeNaples was re-appointed to the Board on February 22, 2023. Prior to this date. Mr. DeNaples served as Director Emeritus and received a
monthly stipend of $1,250.
(2) The amounts listed represent the grant date fair market value of the shares computed in accordance with ASC Topic 718. Additional information about
FNCB’s accounting for stock-based compensation is contained in Note 2, “Summary of Significant Accounting Policies” and Note 14, "Stock
Compensation Plans" to the consolidated financial statements included in Item 8, "Financial Statements and Supplementary Data," to this Annual Report on
Form 10-K.
Directors are not paid for their attendance at FNCB’s board meetings. All non-employee members of the Bank’s Board of Directors receive an annual retainer
of $30,000 paid on a per month basis, for each month or portion thereof that the director serves as a director of the Bank. Non-employee directors who are
members of the Bank's Director's Loan Committee receive an annual retainer of $2,000, paid on a per month basis for each month or portion thereof that he/she
serves on the committee. Additionally, non-employee directors who serve as committee chairperson receive the following annual retainers, which are paid on a
per month basis for each month or portion thereof that he/she serves as chairperson: 1) Audit Committee and Director's Loan Committee chairpersons each
receive $5,000; and 2) ALCO Committee, Compensation Committee, Nominating and Governance Committee and Risk Management Committee chairpersons
each received $2,500. The aggregate amount of director fees, including stock awards and advisory board and director emeritus fees, paid in 2023 was $501,131.
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Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
The following table sets forth certain information regarding ownership of FNCB’s common stock as of February 29, 2024 by: (i) each director; (ii) each of
FNCB’s named executive officers; and (iii) all executive officers and directors of FNCB as a group. The address of each of the beneficial owners identified is
102 E. Drinker Street, Dunmore, PA 18512. Except as otherwise indicated, each person included in this table owns his or her shares directly and possesses sole
voting and sole investment power with respect to all such shares, none of which are pledged as security. Persons and groups who beneficially own in excess of
5.0% of shares of FNCB's common stock are required to file certain reports with the SEC regarding such ownership. Except as set forth below, FNCB knows of
no other person or persons who beneficially owns more than 5.0% of FNCB’s common stock.
Name of Beneficial Owner
Position
Total Shares
Beneficially Owned
William G. Bracey (1)
Joseph Coccia (2)
William P. Conaboy, Esquire (3)
Dominick L. DeNaples (4)
Joseph L. DeNaples, Esquire
Louis A. DeNaples (5)
Louis A. DeNaples, Jr., M.D. (6)
Keith W. Eckel
Kathleen McCarthy Lambert, CPA (7)
Thomas J. Melone, CPA
Gerard A. Champi (8)
James M. Bone, Jr., CPA (9)
James F. Burke
All current directors and executive officers as a
group (25 persons)
* Indicates ownership of less than 1%.
Director
Director, Secretary
Director
Director, Former Director Emeritus and Former
Chairman of the Board
Director
Director, Chairman of the Board
Director, Vice Chairman of the Board
Director
Director
Director
Director, President and Chief Executive Officer
Executive Vice President and Chief Financial
Officer/Treasurer
Executive Vice President and Chief Banking
Officer
Percentage of Total Shares
Beneficially Owned (10)
*
1.21%
*
*
1.73%
10.87%
1.65%
*
*
*
*
*
*
178,445
240,067
4,454
99,605
341,688
2,151,716
326,079
22,323
17,968
15,267
93,025
49,339
1,474
3,696,899
18.91%
(1) Includes: 30,159 shares held individually by Mr. Bracey; and 148,286 shares held by a business which is 100.00% owned by Mr. Bracey.
(2) Includes: 24,764 shares held individually by Mr. Coccia; and 215,303 shares held by a family limited partnership.
(3) Shares held jointly with Attorney Conaboy’s spouse.
(4)Includes: 9,040 shares held individually by Mr. DeNaples; 88,126 shares held jointly with Mr. DeNaples’ spouse; and 2,439 shares held by a business in
which he is a 33.33% owner with his brother, Louis A. DeNaples.
(5)Includes: 2,124,521 shares held individually by Mr. DeNaples; 18,553 shares owned individually by his spouse; 6,203 shares owned jointly with
Mr. DeNaples’ spouse; and 2,439 shares held by a business in which he is a 33.33% owner with his brother, Dominick L. DeNaples.
(6)Includes: 290,274 shares held individually by Dr. DeNaples, Jr.; 30,643 shares held jointly with Mr. DeNaples’ spouse and children; 3,558 shares as
custodian for Dr. DeNaples’ children under the Uniform Transfer to Minors Act (“UTMA”); and 1,604 shares as custodian for Dr. DeNaples’ nephew under
UTMA.
(7)Includes: 15,468 shares held individually by Mrs. Lambert; and 2,500 shares owned jointly with Mrs. Lambert’s spouse.
(8)Includes: 56,046 shares held individually by Mr. Champi; and 36,979 shares held jointly with Mr. Champi’s spouse.
(9) Includes: 23,141 shares held individually by Mr. Bone; 19,115 shares held jointly with Mr. Bone’s spouse; 6,100 shares held jointly with Mr. Bone’s father
and three of his siblings; and 983 shares held individually by Mr. Bone’s spouse.
(11) Percentages are calculated in accordance with Rule 13d-3 under the Exchange Act, and represent a percentage of the sum of 19,787,031 shares issued,
outstanding and entitled to vote as of February 29, 2024. Certain shares beneficially owned by FNCB’s directors and executive officers may be held in
accounts with third-party firms, where such shares may from time to time be subject to a security interest for margin credit provided in accordance with
such firm’s policies.
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Item 13.
Certain Relationships and Related Transactions, and Director Independence.
Certain Relationships and Related Transactions
FNCB and the Bank have engaged in and intend to continue to engage in banking and financial transactions in the ordinary course of business with directors
and officers of FNCB and the Bank and their affiliates on comparable terms and with similar interest rates as those prevailing from time to time for other
customers not related to FNCB or the Bank. FNCB’s Code of Business Conduct and Ethics applies to all directors, officers, and employees of FNCB and
provides guidelines for those covered persons who may have a potential or apparent conflict of interest. Pursuant to the Code, a “conflict of interest” exists any
time a covered person’s private interest interferes/conflicts, or even appears to interfere/conflict, in any way with the interests of FNCB and the Bank. Under
the Code, if a conflict of interest arises, the Board must act with care to avoid even the appearance that any actions were not in the best interest of FNCB and
the Bank.
Board of Directors’ approval is required for FNCB to do business with a company in which a member of the Board of Directors, an officer, an employee or a
family member of a director, officer or employee owns, directly or indirectly, an interest. To identify related party transactions, each year, FNCB submits and
requires its directors and officers to complete Director and Officer Questionnaires identifying any transaction with FNCB or any of its subsidiaries in which the
officer or director or their family members have an interest. The Board of Directors reviews related party transactions due to the potential for a conflict of
interest. Each year, FNCB’s directors and executive officers also review our Code.
Additionally, FNCB has further obligations for the review and approval of loans that are made to directors and officers pursuant to Regulation O (Loans to
Executive Officers, Directors and Principal Shareholders of Member Banks) and FNCB’s written Loan Policy. Any business dealing, including extensions of
credit, between FNCB or the Bank and a director or officer of FNCB or the Bank, or with an affiliate of a director or officer, other than a deposit, trust service
or other product or service provided by a bank in the ordinary course of business, is required to be approved by a majority of disinterested directors. In
considering a proposed insider transaction, the disinterested directors are to reasonably determine whether the transaction would be in the best interest of
FNCB or the Bank and whether the terms and conditions, including price, are substantially the same as those prevailing at the time for comparable transactions
with non-insiders. The responsibility for monitoring compliance with Regulation O rests with the Bank’s Credit Administration Unit and Internal Auditor as
required by the Bank’s Loan Policy.
There were no loan transactions originated during 2023 which were required to be reported where such policy and procedures were not followed. Loans to
directors, executive officers and their related parties (i) were made in the ordinary course of business, (ii) were made on substantially the same terms, including
interest rates and collateral, as those prevailing at the time for comparable transactions with other persons not related to FNCB or Bank and (iii) did not involve
more than the normal risk of collection or present other unfavorable features.
In the course of its operations, FNCB acquires goods and services from and transacts business with various companies of related parties. FNCB believes these
transactions were made on the same terms as those for comparable transactions with unaffiliated parties. FNCB recorded aggregate payments for these services
of $0.5 million in 2023 and $0.5 million in 2022. None of these transactions exceeded $120 thousand, except as described below.
Independence of the Board of Directors
Currently, the Board of Directors has eleven (11) members. FNCB evaluates the independence of directors under the SEC and Nasdaq stock market’s standards
for independence. The Nasdaq standards require the Board of Directors be comprised of a majority of independent directors. The Nasdaq standards also require
that, except for exceptional and limited circumstances, the Board of Directors maintain an audit committee comprised only of independent directors and that
director nominees must be selected either by independent directors comprising a majority of the Board’s independent directors in a vote in which only
independent directors participate, or by a nominations committee comprised solely of independent directors. The Nominating and Governance Committee of
FNCB’s Board has responsibility for selecting director nominees and is comprised solely of independent directors. Nasdaq corporate governance standards also
require that the Board maintain a Compensation Committee comprised of at least two members, each of whom is an independent director. The Board of
Directors of FNCB has appointed a Compensation Committee, currently comprised of four directors, each of whom the Board has determined is independent.
Independence is reviewed at least annually to determine whether all existing and potential committee members are independent. The Board of Directors has
determined that William G. Bracey, Joseph Coccia, William P. Conaboy, Esq., Dominick L. DeNaples, Joseph L. DeNaples, Esq., Louis A. DeNaples, Louis A.
DeNaples, Jr. M.D., Keith W. Eckel, Kathleen McCarthy Lambert, CPA, and Thomas J. Melone, CPA met the standards for independence.
In making its independence determinations, the Board considers all relevant facts and circumstances, and not merely from the standpoint of the director, but
also from that of persons or organizations with which the director has an affiliation. The Board considered that in the ordinary course of business FNCB and the
Bank may provide commercial banking and other services to some of the independent directors and to business organizations and to individuals associated with
them. The Board also considered that in the ordinary course of business some business organizations with which an independent director is associated may
provide products and services to FNCB and the Bank. The Board has determined that, based on the information available to the Board, none of these
relationships were material.
Joseph L. DeNaples, Esquire, a director, is a partner at the law firm of Cipriani & Werner, which provided legal services to FNCB during 2023. The Board has
considered this relationship and determined that it did not impair Mr. DeNaples’ independence as it relates to his membership as a Director on the Boards of
FNCB and the Bank and membership on the Compensation and Nominating and Governance Committees.
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Item 14.
Principal Accounting Fees and Services.
The following table sets forth the aggregate fees billed to FNCB by Baker Tilly US, LLP for services rendered for the fiscal years ended December 31, 2023
and 2022.
Description
Audit fees (1)
Audit-related fees
Tax fees
All other fees
$
2023
2022
362,152 $
-
61,775
-
295,171
-
27,060
-
The Audit Committee has considered whether, and determined that, the provision of services rendered above was compatible with maintaining the
independence of Baker Tilly US, LLP in 2023 and 2022 as the independent registered public accounting firm. The Audit Committee concluded that the
independence of the firm was maintained.
Pursuant to the Audit Committee Charter, FNCB is required to obtain pre-approval by the Audit Committee for all audit and permissible non-audit services
obtained from its independent registered public accounting firm to the extent required by applicable law. In accordance with this pre-approval policy, the Audit
Committee pre-approved all audit and tax services for fiscal years 2023 and 2022.
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PART IV
Item 15.
Exhibits and Financial Statement Schedules
1.
Financial Statements
The following financial statements are included by reference in Part II, Item 8 hereof:
Report of Independent Registered Public Accounting Firm (PCAOB ID 23)
Consolidated Statements of Financial Condition
Consolidated Statements of Income
Consolidated Statements of Comprehensive Income
Consolidated Statements of Changes in Shareholders’ Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
2.
Financial Statement Schedules
Financial Statement Schedules are omitted because the required information is either not applicable, not required or is shown in the respective financial
statements or in the notes thereto.
3.
The following exhibits are filed herewith or incorporated by reference.
EXHIBIT 2.1
EXHIBIT 3.1
EXHIBIT 3.2
EXHIBIT 3.3
EXHIBIT 4.1
EXHIBIT 4.2
EXHIBIT 4.3
EXHIBIT 4.4
EXHIBIT 10.1
EXHIBIT 10.2
Agreement and Plan of Merger, dated September 27, 2023 - filed as Exhibit 2.1 to FNCB's Current Report on Form 8-K
September 27, 2023, is hereby incorporated by reference.
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.
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 11, 2016, is hereby incorporated by reference.
Amended and Restated Bylaws – filed as Exhibit 3.3 to FBNCB’s Form 10-K for the year ended December 31, 2022, as filed on
March 10, 2023, is hereby incorporated by reference.
Form of Common Stock Certificate – filed as Exhibit 4.1 to FNCB’s Form 10-Q for the quarter ended September 30, 2016, as filed
on November 4, 2016, is hereby incorporated by reference.
Form of Amended and Restated Subordinated Note – filed as Exhibit 4.2 to FNCB’s Quarterly Report on Form 10-Q for the
quarter ended June 30, 2015, as filed on August 7, 2015, is hereby incorporated by reference.
Indenture by and between First National Community Bancorp, Inc. and Wilmington Trust Company, dated as of December 14,
2006 - filed as Exhibit 10.2 to FNCB's Current Report on Form 8-K on December 19, 2006, SEC file number 333-24121, is hereby
incorporated by reference.
Description of Securities – filed as Exhibit 4.4 to FNCB’s Form 10-K for the year ended December 31, 2022, as filed on March 10,
2023, is hereby incorporated by reference.
Amended and Restated Declaration of Trust by and among Wilmington Trust Company First National Community Bancorp, Inc.
and with individuals as administrators, dated as of December 14, 2006 – filed as Exhibit 10.1 to FNCB’s 8-K on December 19,
2006 is hereby incorporated by reference.
Guarantee Agreement by and between First National Community Bancorp, Inc. and Wilmington Trust Company, dated as of
December 14, 2006 - filed as Exhibit 10.4 to FNCB’s Current Report on Form 8-K on December 19, 2006, SEC file number 333-
24121, is hereby incorporated by reference.
EXHIBIT 10.3*+
Directors’ and Officers’ Deferred Compensation Plan
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EXHIBIT 10.4+
EXHIBIT 10.5+
EXHIBIT 10.6+
EXHIBIT 10.7+
EXHIBIT 10.8+
EXHIBIT 10.9+
EXHIBIT 10.10+
2013 Long-Term Incentive Compensation Plan – filed as Exhibit 10.1 to FNCB’s Current Report on Form 8-K on December 27,
2013, is hereby incorporated by reference.
Executive Incentive Plan – filed as Exhibit 10.14 to FNCB’s Form 10-K for the year ended December 31, 2012, as filed on March
28, 2013, is hereby incorporated by reference.
Form of Restricted Stock Award Agreement – filed as Exhibit 4.2 to FNCB’s Form S-8 on January 24, 2014 is hereby incorporated
by reference.
Form of Stock Option Award Agreement – filed as Exhibit 4.3 to FNCB’s Form S-8 on January 24, 2014 is hereby incorporated by
reference.
First National Community Bank Supplemental Executive Retirement Plan – filed as Exhibit 10-8 to FBNCB’s Form 10-K for the
year ended December 31, 2022, as filed on March 10, 2023, is hereby incorporated by reference.
Employment Agreement Between First National Community Bank and Gerard A. Champi, COO – filed as Exhibit 10.17 to
FNCB’s Current Report on Form 8-K on October 2, 2015, is hereby incorporated by reference.
Amendment to Employment Agreement, dated September 27, 2023 by and among FNCB Bancorp, Inc., FNCB Bank and James
M. Bone, Jr. CPA – filed as Exhibit 10.1 to FNCB’s Current Report on Form 8-K on September 27, 2023 is hereby incorporated by
reference.
EXHIBIT 10.11+
Employment Agreement Between First National Community Bank and Brian C. Mahlstedt, CLO – filed as Exhibit 10.19 to
FNCB’s Current Report on Form 8-K on October 2, 2015, is hereby incorporated by reference.
EXHIBIT 10.12+
Form of Change in Control Agreement - filed as Exhibit 10.12 to FNCB's Annual Report on Form 10-K for the year ended
December 31, 2021, as filed on March 11, 2022, is hereby incorporated by reference.
EXHIBIT 10.13+
FNCB Bancorp, Inc. 2023 Equity Incentive Plan - filed as Exhibit 99.1 to FNCB's Registration Statement on Form S-8 on June 23,
2023, is hereby incorporated by reference.
EXHIBIT 21
Subsidiaries– filed as Exhibit 21.1 to FNCB’s Registration Statement on Form S-3 , as filed on September 28, 2018, is hereby
incorporated by reference.
EXHIBIT 23*
Consent of Baker Tilly US, LLP
EXHIBIT 31.1*
Certification of Chief Executive Officer
EXHIBIT 31.2*
Certification of Chief Financial Officer
EXHIBIT 32*
Section 1350 Certification — Chief Executive Officer and Chief Financial Officer
EXHIBIT 97.1*
FNCB Bancorp, Inc. Clawback Policy, adopted by the Board of Directors on November 30, 2023
EXHIBIT 101.INS
INLINE XBRL INSTANCE DOCUMENT (THE INSTANCE DOCUMENT DOES NOT APPEAR IN THE INTERACTIVE
DATA FILE BECAUSE ITS XBRL TAGS ARE EMBEDDED WITHIN THE INLINE XBRL DOCUMENT)
EXHIBIT 101.SCH
INLINE XBRL TAXONOMY EXTENSION SCHEMA
EXHIBIT 101.CAL
INLINE XBRL TAXONOMY EXTENSION CALCULATION LINKBASE
EXHIBIT 101.DEF
INLINE XBRL TAXONOMY EXTENSION DEFINITION LINKBASE
EXHIBIT 101.LAB
INLINE XBRL TAXONOMY EXTENSION LABLE LINKBASE
EXHIBIT 101.PRE
INLINE XBRL TAXONOMY EXTENSION PRESENTATION LINKBASE
EXHIBIT 104
_____________________________
COVER PAGE INTERATIVE DATA FILE (FORMATTED AS INLINE XBRL AND CONTAINED IN EXHIBIT 101)
* Filed herewith
** Furnished herewith
+ Management contract, compensatory plan or arrangement
Item 16. Form 10-K Summary
None.
100
Table of Contents
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized:
Registrant: FNCB BANCORP, INC.
/s/ Gerard A. Champi
Gerard A. Champi
President and Chief Executive Officer
March 8, 2024
Date
101
Table of Contents
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Gerard A. Champi and James M.
Bone, Jr., jointly and severally, his or her attorney-in-fact, each with the full power of substitutes, for such person, in any and all capacities, to sign any and all
amendments to this Annual Report on Form 10-K, and to file the same, with all exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorney-in-fact and agent full power and authority to do and perform each and every act and thing
requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he might do or could do in person hereby ratifying and
confirming all that each of said attorneys-in-fact and agents, or his substitute, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated:
/s/ Gerard A. Champi
Gerard A. Champi
President and Chief Executive Officer
/s/ James M. Bone, Jr.
James M. Bone, Jr., CPA
Executive Vice President and Chief Financial Officer
Principal Financial Officer
/s/ Stephanie A. Westington
Stephanie A. Westington, CPA
Senior Vice President and Chief Accounting Officer
Principal Accounting Officer
March 8, 2024
Date
March 8, 2024
Date
March 8, 2024
Date
102
Table of Contents
Directors:
/s/ William G. Bracey
William G, Bracey
March 8, 2024
Date
/s/ Gerard A. Champi
Gerard A. Champi
March 8, 2024
Date
/s/ Joseph Coccia
Joseph Coccia
March 8, 2024
Date
/s/ William P. Conaboy
William P. Conaboy
March 8, 2024
Date
/s/ Dominick L. DeNaples
Dominick L. DeNaples
March 8, 2024
Date
/s/ Joseph L. DeNaples
Joseph L. DeNaples
March 8, 2024
Date
/s/Louis A. DeNaples
Louis A. DeNaples
March 8, 2024
Date
/s/ Louis A. DeNaples, Jr.
Louis A. DeNaples, Jr.
March 8, 2024
Date
/s/ Keith W. Eckel
Keith W. Eckel
March 8, 2024
Date
/s/ Kathleen McCarthy Lambert
Kathleen McCarthy Lambert
March 8, 2024
Date
/s/ Thomas J. Melone
Thomas J. Melone
March 8, 2024
Date
103
THE FIRST NATIONAL COMMUNITY BANK
AMENDED AND RESTATED
DIRECTORS’ AND OFFICERS' DEFERRED COMPENSATION PLAN
EXHIBIT 10.3
THE FIRST NATIONAL COMMUNITY BANK, whose principal office is located at 102 East Drinker Street, Dunmore, PA (“Bank”) hereby
establishes this Amended and Restated Directors’ and Officers’ Deferred Compensation Plan effective January 1, 2005, for the purpose of promoting in its
Directors and Officers the strongest interest in the successful operation of the Bank and to provide its Directors and Officers with deferred benefits upon
retirement.
WHEREAS, the Bank established a Directors’ and Officers’ Deferred Compensation Plan effective April 1, 1994 (“Plan”); and
WHEREAS, the Plan was subsequently amended effective July 1, 2003; and
WHEREAS, the Bank intends hereby to make certain modifications to the Plan to ensure its continuing compliance with all applicable provisions of the tax
WITNESSETH:
laws, including Internal Revenue Code Section 409A (“Section 409A”).
NOW, THEREFORE, effective January 1, 2005, the Plan is restated in its entirety as follows:
ARTICLE I
Definitions
1.1 Bonus Deferral Agreement – “Bonus Deferral Agreement” shall mean a written agreement between a Participant and the Bank, whereby a
Participant agrees to defer a portion of bonus Compensation pursuant to the provisions of the Plan.
1.2 Compensation – “Compensation” shall mean a Director’s fee, including but not limited to, annual fees, meeting fees, committee fees, bonuses and
other payments for services rendered by a Director to the Bank during a calendar year. With regard to Officers, Compensation shall include all salary and bonus
amounts earned during a calendar year.
1.3 Deferral Agreement – “Deferral Agreement” shall mean a written agreement between a Participant and the Bank, whereby a Participant agrees to
defer a portion of Compensation, excluding bonus Compensation, pursuant to the provisions of the Plan.
1.4 Disability – “Disability” shall mean the Participant’s inability to engage in any substantial gainful activity by reason of any medically determinable
physical or mental impairment that can be expected to result in death or can be expected to last for a continuous period of not less than twelve (12) months.
1.5 Distribution Election – “Distribution Election” shall mean a written agreement between a Participant and the Bank, whereby a Participant elects
the method of payment of the amounts deferred by the Participant under the Plan.
1.6 Normal Retirement Date – “Normal Retirement Date” shall mean the date on which a Participant reaches age sixty (60) or the Participant’s
Termination of Service, whichever is later.
1.7 Participant – “Participant” shall mean a Director or Officer of the Bank who has entered into a Deferral Agreement, Bonus Deferral Agreement
and/or, under the terms of the Plan prior to this amendment and restatement, a Deferred Compensation Agreement, with the Bank.
1.8 Plan Year – “Plan Year” shall mean the calendar year.
1.9 Specified Employee – “Specified Employee” shall mean a key employee, as defined in Internal Revenue Code Section 416(i) (without regard to
Internal Revenue Code Section 416(i)(5)), of the Bank.
1.10 Stated Deferral – “Stated Deferral” shall mean the amount of Compensation the Participant agrees to defer under a Deferral Agreement or Bonus
Deferral Agreement, or had previously deferred under a Deferred Compensation Agreement.
1.11 Termination of Service – “Termination of Service” shall mean the Participant’s ceasing to serve as a Director or Officer of the Bank for any
reason whatsoever, voluntary or involuntary; provided, however, that such shall be construed consistent with the definition of “separation from service” under
Section 409A.
ARTICLE II
Eligibility
All Directors serving on the Bank’s Board of Directors shall be entitled to participate in the Plan as of the January 1 coincident with or next following the
Director’s commencement of service on the Board. All Officers who have been employed at the beginning of a Plan Year for at least two (2) years in any
capacity by the Bank and whose annualized pay for the Plan Year exceeds $40,000 shall be entitled to participate as of the January 1 coincident with or next
following the Officer’s second anniversary date of employment with the Bank. Nothing shall preclude an individual from participating both as an Officer and a
Director in this Plan. A Participant, including a newly eligible Participant, must execute a Deferral Agreement prior to the beginning of the Plan Year for which
any part of the Participant’s Compensation is to be deferred.
ARTICLE III
Compensation Deferrals
3.1 Deferrals – Any election to defer Compensation hereunder shall be made no later than December 31 of the year prior to the Plan Year in which the
Compensation to be deferred is earned; provided, however, that elections to defer bonuses constituting performance-based compensation under the rules of
Section 409A shall be made no later than June 30 of the Plan Year with respect to which the bonus is earned. Notwithstanding the foregoing, an election to
defer bonus Compensation cannot be made after such bonus Compensation has become both substantially certain to be paid and readily ascertainable in
amount. Further, an election to defer bonus Compensation with respect to a Plan Year may be made only if the amount of, or entitlement to, the bonus
Compensation is contingent on the satisfaction of organizational or individual performance criteria relating to the entire Plan Year in which the Participant
performs services and such criteria are established in writing within the first ninety (90) days of the Plan Year, provided the outcome is substantially uncertain
at the time the criteria are established.
3.2 Procedure for Deferral – The Participant shall make the elections provided for in Section 3.1 by executing a Deferral Agreement or a Bonus
Deferral Agreement, as applicable, in the form provided by the Bank. The Deferral Agreement or Bonus Deferral Agreement shall set forth the Stated Deferral.
The Stated Deferral shall be subtracted from the Compensation otherwise payable to the Participant during the Plan Year of the deferral; provided, however,
that bonus Compensation shall in all events be paid, and any Stated Deferral amount relating to such bonus Compensation subtracted, after December 31 of the
Plan Year in which the services giving rise to the bonus Compensation were performed. Further, all bonus Compensation shall be paid, and any Stated Deferral
amount relating to such bonus Compensation subtracted, on or before March 15 of the year following the Plan Year in which the services giving rise to the
bonus Compensation were performed. Deferral Agreement elections shall remain effective for future Plan Years, and shall become irrevocable as of December
31 of each immediately preceding Plan Year, until such time as the Participant changes the Stated Deferral by execution of another Deferral Agreement;
provided, however, that any such change shall not be effective until the Plan Year following the year in which the new Deferral Agreement is made. A
Participant must execute a Bonus Deferral Agreement every year for which any portion of bonus Compensation is to be deferred.
3.3 Limitation on Deferral –
Directors – A participating Director may defer up to 50% of Compensation in any Plan Year.
Officers – A participating Officer who has been employed at the beginning of a Plan Year for at least ten (10) years in any capacity by the
Bank may defer up to 25% of Compensation for such Plan Year. Any other participating Officer may defer up to 15% of Compensation for
the Plan Year.
Nothing shall preclude an individual from participating both as a Director and an Officer.
3.4 Election to Defer Irrevocable – A Participant’s election to defer Compensation shall be irrevocable during the period for which it is made;
provided, however, that in the event of an unforeseeable emergency constituting a severe financial hardship of the Participant or the Participant’s beneficiary
resulting from an illness or accident of the Participant or beneficiary, the Participant’s or beneficiary’s spouse or the Participant’s or beneficiary’s dependent (as
defined in Code Section 152(a)); loss of the Participant’s or beneficiary’s property due to casualty; or other similar extraordinary and unforeseeable
circumstances arising as a result of events beyond the control of the Participant or beneficiary, the Participant, by written instructions to the Bank, may cancel
future deferrals under the Plan. Subsequent to such cancellation, the Participant may elect to make additional deferrals upon filing a new Deferral Agreement
setting forth the amounts to be deferred; provided, however, that any such new election will not be effective before the beginning of the Plan Year following the
year in which such election is made.
ARTICLE IV
Deferred Compensation Accounts
4.1 Deferred Compensation Account – The Bank shall establish a bookkeeping account (“Deferred Compensation Account”) for each Participant
which shall be credited with the Stated Deferral on the date such Compensation would have been paid to the Participant had no election to defer been made.
4.2 Interest on the Deferred Compensation Account – Each Participant’s Deferred Compensation Account shall be credited with interest on
December 31 of each Plan Year on the amount in the Participant’s Deferred Compensation Account as of said December 31. In addition, any Stated Deferral of
bonus Compensation relating to services performed during the Plan Year and paid after December 31 of the Plan Year shall be credited with interest for the
period of the Plan Year.
4.3 Interest Rate − The rate of interest credited on the amounts described in Section 4.2 shall be 200% of the one-year Treasury Bill rate in effect
not more than thirty (30) days nor less than fifteen (15) days prior to the last day of the Plan Year to which the interest applies; provided, however, that in no
event shall the rate be less than 8% per annum. Beginning with the sixth Plan Year of a Participant’s participation in the Plan, the rate of interest shall be
increased to 1% above the rate determined under the foregoing formula or 9%, whichever is greater.
4.4 Purpose of Deferred Compensation Account – The purpose of the Deferred Compensation Account shall be to determine the amount of benefits to
be paid to the Participant at times hereinafter specified, and the Bank shall not segregate any asset in order to satisfy any obligations under the Plan. A
Participant’s Deferred Compensation Account shall not constitute nor be treated as a trust fund of any kind. It is expressly understood that all amounts credited
to any Deferred Compensation Account shall be for the sole and exclusive purpose of bookkeeping; that all amounts shall remain the sole property of the Bank;
and that the Participant shall have no ownership rights thereto. The Participant’s rights are expressly limited to the right to receive payments as hereinafter
provided, and the Participant’s rights with respect thereto are merely those of a general unsecured creditor of the Bank.
4.5 Vesting – Each Participant shall at all times be one hundred percent (100%) vested in the Participant’s Deferred Compensation Account.
5.1 Election as to Method of Payment – On or before the date of the Participant’s first Stated Deferral election pursuant to a Deferral Agreement or a
ARTICLE V
Payment of Benefits
Bonus Deferral Agreement executed after January 1, 2006, the Participant must complete and submit to the Bank a Distribution Election electing one of the
following methods of payment of the Participant’s entire Deferred Compensation Account:
a. Equal annual payments for five (5) years.
b. Equal annual payments for ten (10) years.
c. Equal annual payments for fifteen (15) years.
d. Equal annual payments for twenty (20) years.
e. Equal annual payments for twenty-five (25) years.
f. Equal annual payments for thirty (30) years.
g. Equal monthly payments for sixty (60) months.
h. Equal monthly payments for one hundred twenty (120) months.
i. Equal monthly payments for one hundred eighty (180) months.
j. Equal monthly payments for two hundred forty (240) months.
k. Equal monthly payments for three hundred (300) months.
l. Equal monthly payments for three hundred sixty (360) months.
m. Single lump sum payment.
Notwithstanding the foregoing, a Participant may not make any election that would have the effect of deferring payment to a later year of an amount that would
otherwise be payable in 2006 or that would have the effect of causing a payment to be made in 2006 that would otherwise be paid after 2006, and any such
purported election by a Participant shall be ineffective to the extent of any such proscribed acceleration or postponement. Any financial health payment triggers
are hereby voided for all Deferred Compensation Account amounts, regardless of when credited. A separate election from among the foregoing options may be
made on the Distribution Election by a Participant for payments in the event of the Participant’s Disability.
5.2 Change in Election of Payment Method – A Participant may change a distribution election established pursuant to Section 5.1 with respect to the
Participant’s entire Deferred Compensation Account, and earnings thereon, provided that such change (i) may not take effect until at least twelve (12) months
after the date on which the new election is made; (ii) defers payment for a period of not less than five (5) years from the date such payment would otherwise
have been made; and (iii) in the case of any election related to a payment based upon a specified time or fixed schedule may not be made less than twelve (12)
months prior to the date of the first scheduled payment. For purposes of changing a Participant’s distribution election, if the Participant had elected an
installment form of payment, the installments shall be treated as a single payment occurring on the date of the first installment, and subject to the other rules for
changes in distribution elections as set forth above, the Participant may elect to receive a lump sum payment five years after the first installment payment
would otherwise have been made.
5.3 Amount of Payments – A Participant electing installment payments shall receive equal monthly or annual installments over the period elected
pursuant to Section 5.1, the amount of such payments being determined by annuitizing the Participant’s Deferred Compensation Account, including interest at
an annual rate as established under Section 4.3 until such account is fully paid.
5.4 Time of Payments – The benefit payments to be made pursuant to a Participant’s election shall begin on the first business day of the month after the
Participant’s Normal Retirement Date. Notwithstanding the foregoing, in the event that the Participant is determined to be a Specified Employee, any payment
that is made on account of a Termination of Service shall be delayed until the first business day of the month after six months from the date of the Participant’s
Termination of Service. In the event that any installment payments are delayed pursuant to this Section 5.4, such delayed payments will be accumulated and
paid in one lump sum on the delayed payment date and any remaining payments shall be made in accordance with the otherwise applicable schedule of
payments.
5.5 Recipients of Payments: Designation of Beneficiary – All payments to be made pursuant to this Plan shall be made to the Participant, if living. If a
Participant dies before receiving all payments the Participant would be entitled to receive, all remaining payments shall be paid to the designated beneficiary or
beneficiaries of the Participant. The participant shall designate a beneficiary by filing a written notice of such designation with the Bank in such form as the
Bank prescribes. A Participant may change a beneficiary designation at any time. The Participant’s beneficiary designation shall be deemed automatically
revoked in the event of the death of the beneficiary or in the event of dissolution of marriage, if the beneficiary is the Participant’s spouse. If no designation is
in effect when benefits due under this Plan are payable, the beneficiary shall be the Participant’s spouse, if living, and if the spouse is deceased, the legal
representative of the Participant’s estate. Any payments made pursuant to this paragraph shall begin within sixty (60) days after the Participant’s death.
5.6 Pre-Retirement Death Benefit – If a Participant’s Termination of Service prior to the Normal Retirement Date is due to death, the Participant’s
beneficiary, or the legal representative of the Participant’s estate if no beneficiary designation is in effect, shall be paid the Participant’s Deferred Compensation
Account as of the date of death, together with interest as provided in Section 5.3, pursuant to the election made by the Participant in Section 5.1 or, if
applicable, Section 5.2. Payment of the Participant’s Deferred Compensation Account in the event of the Participant’s death prior to the Normal Retirement
Date shall begin within sixty (60) days after the Participant’s death.
5.7 Hardship Distribution – Upon the Bank’s determination (following petition by the Participant) that the Participant has suffered an unforeseeable
emergency, as described in Section 3.4, the Participant shall be paid all or a portion of the Participant’s Deferred Compensation Account balance, as determined
by the Bank, but in no event shall the distribution amount exceed the amount reasonably necessary to satisfy the emergency need (which may include amounts
necessary to pay any federal, state or local income taxes or penalties reasonably anticipated to result from the distribution). A distribution on account of an
unforeseeable emergency may not be made to the extent that such emergency is or may be relieved through reimbursement or compensation from insurance or
otherwise, by liquidation of the Participant's assets (to the extent the liquidation of such assets would not cause severe financial hardship) or by cessation of
deferrals under Section 3.4, and determination of the amount reasonably necessary to satisfy the emergency need shall take into account any additional
compensation available to the Participant as a result of a cessation of deferrals.
5.8 Disability Distribution – Upon certification by the Bank of a Participant’s Disability, as defined in Section 1.4, prior to the Normal Retirement
Date, the Participant will receive payment of the Participant’s Deferred Compensation Account pursuant to the method elected by the Participant for
distributions in the event of Disability. Payment of the Participant’s Deferred Compensation Account in the event of the Participant’s Disability prior to the
Normal Retirement Date shall commence beginning the first day of the month following certification of the Participant’s Disability.
5.9 De Minimis Distributions – Notwithstanding anything in this Plan to the contrary, upon a Participant’s Termination of Service, the entire amount of
the Participant’s Deferred Compensation Account will be paid in a lump sum on or before the later of (i) December 31 of the calendar year in which the
Termination of Service occurs or (ii) the fifteenth day of the third month following the Participant’s Termination of Service, provided the amount of the
Participant’s Deferred Compensation Account on such payment date does not exceed ten thousand dollars ($10,000) and such payment is accompanied by the
termination of the Participant’s entire interest in the Plan and in any similar arrangement constituting a non-qualified deferred compensation plan under Section
409A. Furthermore, if a Participant’s Deferred Compensation Account balance exceeds ten thousand dollars ($10,000) at the time payments are to commence
under the otherwise applicable terms of the Plan, the entire amount of the Participant’s Deferred Compensation Account will be paid in a lump sum at that time,
provided the amount of the Participant’s Deferred Compensation Account on such date does not exceed twenty-five thousand dollars ($25,000).
5.10 Plan Failure – Notwithstanding anything in this Plan to the contrary, in the event that a Participant must include in income any portion of the
Participant’s Deferred Compensation Account as a result of the Plan’s failure to meet the requirements of Section 409A, distribution of the amount so
includible shall be made to the Participant within sixty (60) days after the Bank determines that such a failure has occurred and that such income inclusion is
necessary.
ARTICLE VI
Funding and Life Insurance
6.1 Funding – The Bank’s obligation under the Plan shall be an unfunded and unsecured promise to pay. The Bank shall not be obligated to fund any
obligations arising hereunder, but the Bank may, in its sole discretion, elect to segregate assets for the purpose of paying Plan benefits. Any such assets shall
remain solely the property of the Bank until paid to the Participant or the Participant’s beneficiary.
6.2 Insurance Policies – The Bank in its discretion may apply for and procure, as owner and for its own benefit, insurance on the life of the Participant,
in such amounts and in such form as the Bank may choose. The Participant shall have no interest whatsoever in any such policy or policies, but at the request
of the Bank shall submit to medical examinations and supply such information and execute such documents as may be required by the insurance company or
companies to whom the Bank has applied for insurance. The rights of the Participant, or the Participant’s beneficiary or estate, to benefits under the Plan shall
be solely those of an unsecured creditor of the Bank. Any insurance policy or other assets acquired by or held by the Bank in connection with the liabilities
assumed by it pursuant to the Plan shall not be deemed to be held under any trust for the benefit of the Participant, or the Participant’s beneficiary or estate, or
to be security for the performance of the obligations of the Bank, but shall be and remain, a general, unpledged and unrestricted asset of the Bank.
ARTICLE VII
Administration and Interpretation of the Plan
7.1 Administrative Committee – The Board of Directors shall appoint an Administrative Committee comprising the same persons serving on the
Retirement (Profit Sharing) Plan Committee to administer and interpret the Plan. Interpretation by the Administrative Committee shall be final and binding
upon a Participant. The Administrative Committee may adopt rules and regulations relating to the administration of the Plan as it may deem necessary.
7.2 Claims Procedure – If a Participant or a Participant’s beneficiary (hereinafter referred to as a “Claimant”) is denied all or a portion of an expected
benefit under this Plan for any reason, he or she may file a claim with the Administrative Committee. The Administrative Committee shall notify the Claimant
within sixty (60) calendar days (forty-five (45) calendar days in the event of a claim for Disability payments) of allowance or denial of the claim, unless the
Claimant receives written notice from the Administrative Committee prior to the end of such period stating that special circumstances require an extension of
the time for decision, as well as the date by which a decision is expected. In no event may such an extension exceed an additional sixty (60) calendar days
(thirty (30) calendar days for Disability claims). The notice of the Administrative Committee’s decision shall be in writing, sent by mail to the Claimant’s last
known address, and, if a denial of the claim, must contain the following information:
a. the specific reasons for the denial;
b. a specific reference to pertinent provisions of the Plan upon which the denial is based; and
c. if applicable, a description of any additional information or material necessary to perfect the claim, an explanation of why such information
or material is necessary and an explanation of the claims review procedure.
7.3 Review Procedure – A Claimant is entitled to request a review of any denial of a claim by the Administrative Committee. The request for review
must be submitted in writing within sixty (60) days (one hundred eighty (180) days for Disability claims) of receipt of the notice of the denial. Absent a request
for review within such period, the claim will be deemed to be conclusively denied. The Claimant or the Claimant’s representative shall be entitled to review all
pertinent documents, and to submit issues and comments orally and in writing. If the request for review by a Claimant concerns the interpretation and
application of the provisions of the Plan and the Bank’s obligations, then the review shall be conducted by a separate committee consisting of three persons
designated or appointed by the Administrative Committee. The separate committee shall afford the Claimant a hearing and the opportunity to review all
pertinent documents and submit issues and comments orally and in writing and shall render a review decision in writing, all within sixty (60) days (forty-five
(45) days for Disability claims) after receipt of a request for review, provided that, in special circumstances (such as the necessity of holding a hearing) the
committee may extend the time for decision by not more than sixty (60) days upon written notice to the Claimant. The Claimant shall receive written notice of
the separate committee’s review decision, together with specific reasons for the decision and reference to the pertinent provisions of the Plan.
ARTICLE VIII
Taxes
The Company shall deduct from all payments made hereunder all applicable federal and state taxes required by law to be withheld from such payments.
ARTICLE IX
Governing Law
The Plan shall be construed according to the laws of the Commonwealth of Pennsylvania. Further, the provisions of this Plan shall be construed consistent
with Section 409A and all applicable guidance thereunder so as not to result in the inclusion in the Participant’s income of any benefit under this Plan by reason
of the application of such section.
ARTICLE X
Forms of Communication
Any election, application, claim, notice or other communication required or permitted to be made by a Participant to the Bank shall be made in writing and in
such form as the Bank shall prescribe. Such communication shall be effective upon mailing, if sent by first class mail, postage pre-paid, and addressed to the
Bank’s office at 102 East Drinker St., Dunmore, PA 18512.
Nothing contained in this Plan shall affect the right of the Participant to participate in or be covered by any qualified or non-qualified pension, profit sharing,
group bonus or other supplemental compensation or fringe benefit plans constituting a part of the Bank’s existing or future compensation structure.
ARTICLE XI
Effect on Other Bank Benefit Plans
ARTICLE XII
Assignment or Pledge
The Participant’s Deferred Compensation Account and any amount payable at any time pursuant to this Plan shall not be assignable or subject to pledge or
hypothecation nor shall said payments be subject to seizure for the payment of any debts, judgments, alimony or separate maintenance, or be transferable by
operation of law in the event of bankruptcy, insolvency or otherwise except to the extent as provided by law. Upon the occurrence of any event in violation or
attempted violation of this paragraph, any payments thereafter payable hereunder shall, in the sole discretion of the Bank, be subject to cancellation;
whereupon, the Bank may, but need not, make such payments to someone else deemed by it to be a natural object of the bounty of the Participant.
Neither this Plan nor the payment of any benefits hereunder shall be construed as giving to the Participant any rights to be retained as a member of the Board
of Directors or continue as an Officer of the Bank.
ARTICLE XIII
Continuation as Director or Officer
ARTICLE XIV
Plan Termination
The Bank is instituting this Plan upon the assumption that certain existing tax laws will continue in effect in substantially their current form. If there are any
changes in the laws relating to the allowance of tax-free accumulation of earnings within a life insurance policy, the income tax-free payment of proceeds from
life insurance policies or the deduction from income of interest payments on certificates of deposits issued by banking institutions, the Bank shall have the
option to terminate or modify this Plan; provided, however, that in the event of such a Plan termination, a Participant shall receive payment of amounts credited
to the Participant’s Deferred Compensation Account under the same terms and conditions as though the Plan were still in effect. In addition, the Bank may
terminate the Plan in its discretion and distribute Participants’ Deferred Compensation Accounts in the following circumstances: (i) within twelve (12) months
of a corporate dissolution taxed under Internal Revenue Code Section 331, or with the approval of a bankruptcy court pursuant to 11 U.S.C. 503(b)(1)(A),
provided that each Participant’s Deferred Compensation Account is distributed by the later of the end of the Plan Year in which the Plan termination occurs or
the first Plan Year in which such distribution is administratively practicable; (ii) within the thirty (30) days preceding or the twelve (12) months following a
change in control (as defined under Section 409A) of the Bank, provided that all substantially similar arrangements sponsored by the Bank are terminated, such
that each Participant and all participants under any substantially similar arrangements will receive all amounts of deferred compensation and earnings under the
terminated arrangements within twelve (12) months of the date of termination of the arrangements; or (iii) where (a) all arrangements that would be (if a
Participant also participated in such other arrangements) aggregated with the Plan for purposes of Section 409A are also terminated; (b) no payments other than
payments that would otherwise have been made under the Plan or other arrangements (had they not been terminated) are made within twelve (12) months of
their terminations; (c) all amounts payable under the Plan and the other arrangements are distributed within twenty-four (24) months of their terminations; and
(d) the Bank does not adopt a new arrangement that would be aggregated with any terminated arrangement under the rules of Section 409A (if any individual
participated in more than one such arrangement) at any time within five (5) years following the date of termination of the Plan.
Any changes to the Plan must be in writing and executed by an authorized representative of the Bank.
ARTICLE XV
Modification
ARTICLE XVI
Captions
The captions at the head of an Article or a paragraph of this Plan are designed for convenience of reference only and are not to be resorted to for the purpose
of interpreting any provision of this Plan.
ARTICLE XVII
Severability
The invalidity of any provision of this Plan shall not invalidate the remainder thereof, and said remainder shall continue in full force and effect.
Dated this ____ day of _______________, 2006.
THE FIRST NATIONAL COMMUNITY BANK
By: ____________________________________
Signature
_____________________________________
Print Name
______________________________________
Title
_______________________________
Secretary
:192030
FIRST AMENDMENT TO THE FIRST NATIONAL COMMUNITY BANK AMENDED AND RESTATED DIRECTORS’ AND OFFICERS’
DEFERRED COMPENSATION PLAN
This Amendment to The First National Community Bank (“Bank”) Amended and Restated Directors’ and Officers’ Deferred Compensation Plan is
made this 28th day of March, 2007.
WHEREAS, The First National Community Bank established a Directors’ and Officers’ Deferred Compensation Plan (“the Plan”) effective April 1,
1994, for the purpose of promoting in its Directors and Officers the strongest interest in the successful operation of the Bank and to provide the Directors and
Officers with deferred benefits upon retirement;
WHEREAS, the Plan was subsequently amended on July 1, 2003;
WHEREAS, to make certain modifications to the Plan to ensure its continuing compliance with all applicable provisions of the Internal Revenue
Code and the regulations promulgated thereunder, the Plan, effective January 1, 2005, was restated in its entirety;
WHEREAS, the Bank wishes to clarify certain provisions of the Amended and Restated Directors’ and Officers’ Deferred Compensation Plan;
NOW, THEREFORE, in accordance with Article XV of Amended and Restated Directors’ and Officers’ Deferred Compensation Plan, the Plan is
amended, effective the date hereof, as follows:
1. Article IV, Deferred Compensation Accounts, Section 4.3 Interest Rate shall be amended to read as follows:
4.3 Interest Rate- The rate of interest credited on the amounts described in Section 4.2 shall be 200% of the one-year Treasury Bill rate in effect not
more than thirty (30) days nor less than fifteen (15) days prior to the last day of the Plan Year to which the interest applies; provided, however, that in no event
shall the rate be less than 8% per annum. Beginning with the sixth Plan Year of a Participant’s participation in the Plan, the rate of interest shall be increased to
1% above the rate determined under the foregoing formula or 9%, whichever is greater.
Upon the retirement of a director or officer, interest shall continue to accrue in accordance with paragraphs 4.2 and this 4.3.
2. Article V Payments of Benefits, Section 5.1 shall be amended in its entirety to read as follows:
5.1 Election as to Method of Payment – On or before the date of the Participant’s first Stated Deferral election pursuant to a Deferral
Agreement or a Bonus Deferral Agreement executed after January 1, 2006, the Participant must complete and submit to the Bank a Distribution Election
electing one of the following methods of payment of the Participant’s entire Deferred Compensation Account:
a. Annual payments for five (5) years.
b. Annual payments for ten (10) years.
c. Annual payments for fifteen (15) years.
d. Annual payments for twenty (20) years.
e. Annual payments for twenty-five (25) years.
f. Annual payments for thirty (30) years.
g. Monthly payments for sixty (60) months.
h. Monthly payments for one hundred twenty (120) months.
i. Monthly payments for one hundred eighty (180) months.
j. Monthly payments for two hundred forty (240) months.
k. Monthly payments for three hundred (300) months.
l. Monthly payments for three hundred sixty (360) months.
m. Single lump sum payment.
Notwithstanding the foregoing, a Participant may not make any election that would have the effect of deferring payment to a later year of an amount that would
otherwise be payable in 2006 or that would have the effect of causing a payment to be made in 2006 that would otherwise be paid after 2006, and any such
purported election by a Participant shall be ineffective to the extent of any such proscribed acceleration or postponement. Any financial health payment triggers
are hereby voided for all Deferred Compensation Account amounts, regardless of when credited. A separate election from among the foregoing options may be
made on the Distribution Election by a Participant for payments in the event of the Participant’s Disability.
3. Article V Payments of Benefits, Section 5.3 Amount of Payments shall be amended as follows:
5.3 Amount of Payments -- Each year after interest is credited to a Participant’s account under Section 4.2, the amount of a Participant’s monthly
payments or annual installments shall be recalculated to reflect the current interest credited. A Participant electing installment payments shall receive monthly
or annual installments over the period elected pursuant to Section 5.1, the amount of such payments being determined by annuitizing the Participant’s Deferred
Compensation Account after considering the current year interest crediting.
4. The Distribution Election, as defined in Section 1.5, shall be amended to reflect the amendment of Section 5.1 by removing the word “equal” from the
election of payments.
Robert J. Mancuso
SECOND AMENDMENT TO THE FIRST NATIONAL COMMUNITY BANK AMENDED AND RESTATED DIRECTORS’ AND
OFFICERS’
DEFERRED COMPENSATION PLAN
This Amendment to The First National Community Bank (“Bank”) Amended and Restated Directors’ and Officers’ Deferred Compensation Plan is
made this 25th day of March, 2009.
WHEREAS, The First National Community Bank established a Directors’ and Officers’ Deferred Compensation Plan (“the Plan”) effective April 1,
1994, for the purpose of promoting in its Directors and Officers the strongest interest in the successful operation of the Bank and to provide the Directors and
Officers with deferred benefits upon retirement;
WHEREAS, the Plan was amended and restated on January 1, 2005 and subsequently amended on March 28, 2007;
WHEREAS, the Bank wishes to clarify a provision of the Amended and Restated Directors’ and Officers’ Deferred Compensation Plan;
NOW, THEREFORE, in accordance with Article XV of Amended and Restated Directors’ and Officers’ Deferred Compensation Plan, the Plan is
amended, effective the date hereof, as follows:
1. Article IV, Deferred Compensation Accounts, Section 4.2 Interest on the Deferred Compensation Amount shall be amended to read as follows:
4.2 Interest on the Deferred Compensation Amount – Each Participant’s Deferred Compensation Account shall be credited with interest on December 31st
of each Plan Year on the amount in the Participant’s Deferred Compensation Account as of December 31st ; provided that if any withdrawals, for any reason,
are made from the Participant’s Account throughout the Plan Year the amount of such withdrawal is not taken into account in determining the balance of the
Participant’s Account as of December 31st for the calculation of interest. Any Stated Deferral of bonus Compensation relating to services performed during the
Plan Year and paid after December 31st of the Plan Year shall be credited with interest for the period of the Plan Year. Should a Participant die, each
Participant’s Deferred Compensation Account shall be credited with interest as of the Participant’s date of death on the amount in the Participant’s Deferred
Compensation Account as of the Participant’s date of death; provided that if any withdrawals, for any reason, are made from the Participant’s Account during
the Plan Year but prior to death the amount of such withdrawal is not taken into account in determining the balance of the Participant’s Account as of the date
of death.
Robert J. Mancuso
THIRD AMENDMENT TO THE FIRST NATIONAL COMMUNITY BANK AMENDED AND RESTATED DIRECTORS’ AND OFFICERS’
DEFERRED COMPENSATION PLAN
This Amendment to the First National Community Bank (the “Bank”) Amended and Restated Directors’ and Officers’ Deferred Compensation Plan
(the “Plan”) is made this 29th day of December, 2010.
WHEREAS, the Bank established the Plan effective April 1, 1994, for the purpose of promoting in its Directors and Officers the strongest interest in
the successful operation of the Bank and to provide the Directors and Officers with deferred benefits upon retirement;
WHEREAS, the Plan was amended and restated on January 1, 2005 and subsequently amended on March 28, 2007 and December 25, 2009;
WHEREAS, the Bank wishes to modify the rate of interest to be credited to Deferred Compensation Accounts under the Plan;
WHEREAS, interest is credited to Deferred Compensation Accounts on December 31st of each Plan Year;
WHEREAS, the Bank wishes to modify the rate of interest to be credited with respect to the entire 2010 Plan Year and for Plan Years thereafter;
NOW, THEREFORE, in accordance with Article XV of Amended and Restated Directors’ and Officers’ Deferred Compensation Plan, the Plan is
amended, effective for the 2010 Plan Year and for Plan Years thereafter, as follows:
1. Article IV, Deferred Compensation Accounts, Section 4.3 Interest Rate shall be amended to read as follows—
4.3 Interest Rate – The rate of interest credited on the amounts described in Section 4.2 for the Plan Year ending December 31, 2010 and for
Plan Years thereafter shall be equal to the sum of (i) 1% and (ii) the average of the one-year Treasury Bill rates in effect on and between December 1 and
December 15 of the Plan Year to which the rate of interest applies.
Upon the retirement of a director or officer, interest shall continue to accrue in accordance with paragraphs 4.2 and this 4.3.
2. In all other respects, the terms of the Plan are hereby affirmed.
FOURTH AMENDMENT TO THE
FIRST NATIONAL COMMUNITY BANK
AMENDED AND RESTATED DIRECTORS’ AND OFFICERS’ DEFERRED COMPENSATION PLAN
THIS FOURTH AMENDMENT to the First National Community Bank Amended and Restated Directors’ and Officers’ Deferred Compensation
Plan (the “Plan”) is made this 15th day of January, 2017, by FNCB Bank (the “Bank”), formerly known as First National Community Bank, a state-chartered
bank organized and existing under the laws of the Commonwealth of Pennsylvania.
RECITALS:
WHEREAS, First National Community Bank established the initial plan on April 1, 1994, and subsequently amended and restated the Plan on
January 1, 2005, with further amendments on March 28,
2007; December 25, 2009; and December 29, 2010; and
WHEREAS, First National Community Bank converted to a Pennsylvania state-chartered bank and changed its name to FNCB Bank on June 29,
2016; and
WHEREAS, the conversion and name change will have no impact on the Plan and the Bank will continue to perform all obligations under the Plan
as the plan sponsor; and
WHEREAS, the Bank has the authority to amend the Plan under Article X; and
WHEREAS, the Bank now deems it desirable to amend the Plan to: (i) reflect the change of sponsorship of the Plan from First National Community
Bank to the Bank; (ii) revise Plan eligibility requirements; and (iii) modify the rate of interest to be credited with respect to the entire 2017 Plan Year and for
Plan Years thereafter;
NOW, THEREFORE, the Plan is hereby amended as follows:
1. By renaming the Plan the “FNCB Bank Amended and Restated Directors’ and Officers’ Deferred
Compensation Plan;”
2. By deleting the phrase “First National Community Bank Amended and Restated Directors’ and Officers’ Deferred Compensation Plan” and
inserting in its place “FNCB Bank Amended and Restated Directors’ and Officers’ Deferred Compensation Plan” wherever the former phrase
occurs in the Plan;
3. By deleting the phrase “First National Community Bank” and inserting in its place “FNCB Bank”
wherever the former phrase occurs in the Plan.
4. By amended and restating Article II in its entirety as follows:
All Directors serving on the Bank’s Board of Directors shall be entitled to participate in the Plan
as of the January 1 coincident with or next following the Director’s commencement of service on the
ARTICLE II Eligibility
Board. All Officers who are eligible to participate in the Bank’s Executive Incentive Plan and who have been employed at the beginning of a Plan Year for at
least two (2) years shall be entitled to participate in the Plan as of the January 1 coincident with or next following the Officer’s second anniversary date of
employment with the Bank. Nothing shall preclude an individual from participating both as an Officer and a Director in this Plan. A Participant, including a
newly eligible Participant, must execute a Deferral Agreement prior to the beginning of a Plan Year for which any part of the Participant’s Compensation is to
be deferred.
5. By amending and restating Section 4.3 in its entirety as follows:
4.3 Interest Rate – The rate of interest credited on the amounts described in Section 4.2 for the Plan Year ending December 31, 2017, and
for all subsequent Plan Years, shall be a rate determined by the Bank in its sole and absolute discretion. The Bank shall review the interest rate
described in this section on an annual basis at the end of each Plan Year and may prospectively change the rate for a subsequent Plan Year(s).
Except as otherwise amended by this Fourth Amendment, all provisions of the Plan shall remain in full force and effect and the Plan and this Fourth Amendment shall be construed
together and considered one and the same agreement.
IN WITNESS WHEREOF, the Bank executes this Fourth Amendment as of the date first written above.
FNCB BANK:
By: ________________________________
Printed Name: _______________________________
Title: ____________________________
FIFTH AMENDMENT
TO THE
FNCB BANK AMENDED AND RESTATED DIRECTORS’ AND OFFICERS’ DEFERRED COMPENSATION PLAN
THIS FIFTH AMENDMENT to the FNCB Bank Amended and Restated Directors’ and Officers’
Deferred Compensation Plan (the “Plan”) is made November 30, 2022, by FNCB Bank (the “Bank”), a statechartered bank organized and existing under the
laws of the Commonwealth of Pennsylvania.
RECITALS:
A. The Plan was established on April 1, 1994, and subsequently amended and restated on January 1, 2005, with further amendments on March
28, 2007; December 25, 2009; December 29, 2010; and February 22, 2017.
B. The Bank changed its name from First National Community Bank to FNCB Bank on June 29, 2016.
C. The Bank has the authority to amend the Plan under Article X.
D. The Bank desires to amend the Plan to modify the Disability definition.
NOW, THEREFORE, the Plan is hereby amended as follows:
Section 1.4 is deleted in its entirety and replaced with the following:
1.4 Disability – “Disability” shall be defined as a condition of a Participant whereby he or she either: (a) has been deemed disabled by the Social
Security Administration or (b) determined to be disabled in accordance with a disability insurance program of the Bank that covers the Participant,
provided that the definition of disability applied under such disability insurance program complies with Code Section 409A. Upon the request of the
Plan Administrator, the Participant must submit proof to the Plan Administrator of the Social Security Administration’s or insurance provider’s
determination.
Section 5.8 is deleted in its entirety and replaced with the following:
5.8 Disability Distribution – Upon a Participant’s Disability, as defined in Section 1.4, prior to the Normal Retirement Date, the Participant will
receive payment of the Participant’s Deferred Compensation Account pursuant to the method elected by the Participant for distributions in the event of
a Disability. Payment of the Participant’s Deferred Compensation Account in the event of the Participant’s Disability prior to the Normal Retirement
Date shall commence on the first day of the month following the Participant’s Disability determination.
Except as otherwise amended by this Fifth Amendment, all provisions of the Plan shall remain in full force and effect and the Plan and all
amendments shall be construed together and considered one and the same agreement.
The Bank executes this Fifth Amendment as of the date first written above.
FNCB BANK:
By: ________________________________
Printed Name:
Title: ________________________________
Consent of Independent Registered Public Accounting Firm
EXHIBIT 23
We consent to the incorporation by reference in the Registration Statements on Form S-8 (No. 333-193545) and Forms S-3 (Nos. 333-260114 and 333-145032)
of FNCB Bancorp, Inc. and Subsidiaries of our report dated March 8, 2024, relating to the consolidated financial statements, which appears in this annual
report on Form 10-K for the year ended December 31, 2023.
/s/ Baker Tilly US, LLP
Baker Tilly US, LLP
Iselin, New Jersey
March 8, 2024
EXHIBIT 31.1
I, Gerard A. Champi, certify that:
1. I have reviewed this annual report on Form 10-K of FNCB Bancorp, Inc.;
CERTIFICATION
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the
registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent
fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the
registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the
registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal
control over financial reporting.
Date: March 8, 2024
By:
/s/ Gerard A. Champi
Gerard A. Champi
President and Chief Executive Officer
EXHIBIT 31.2
I, James M. Bone, Jr., certify that:
1. I have reviewed this annual report on Form 10-K of FNCB Bancorp, Inc.;
CERTIFICATION
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the
registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent
fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the
registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the
registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal
control over financial reporting.
Date: March 8, 2024
By:
/s/ James M. Bone, Jr.
James M. Bone, Jr., CPA
Executive Vice President and Chief Financial Officer
CERTIFICATION OF CEO AND CFO PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
EXHIBIT 32
In connection with the Annual Report of FNCB Bancorp, Inc. (“the Company”) on Form 10-K for the year ended December 31, 2023 as filed with the
Securities and Exchange Commission on the date hereof (the “Report”), I, Gerard A. Champi, President and Chief Executive Officer of the Company, and I,
James M. Bone, Jr., Executive Vice President and Chief Financial Officer of the Company, pursuant to 18 U.S.C. section 1350, as adopted pursuant to Section
906 of the Sarbanes –Oxley Act of 2002, that to the best of our knowledge:
1. the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o (d)); and
2. the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company for the
year ended December 31, 2023.
Date: March 8, 2024
Date: March 8, 2024
By:
By:
/s/ Gerard A. Champi
Gerard A. Champi
President and Chief Executive Officer
/s/ James M. Bone, Jr.
James M. Bone, Jr., CPA
Executive Vice President and Chief Financial Officer
The foregoing certification is being furnished solely pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Section 1350 of Chapter 63 of Title 18 of the
United States Code) and is not being filed as part of the Report or as a separate disclosure document.
FNCB Bancorp, Inc.
Clawback Policy
EXHIBIT 97.1
The Board of Directors (the “Board”) of FNCB Bancorp, Inc. (the “Company”) believes that it is in the best interests of the Company and its shareholders to
adopt this Clawback Policy (this “Policy”), which provides for the recovery of certain incentive-based compensation upon the occurrence of certain events,
including an Accounting Restatement (as defined below). This Policy is designed to comply with, and shall be interpreted to be consistent with, Section 10D of
the Securities Exchange Act of 1934, as amended (the “Exchange Act”), Rule 10D-1 promulgated under the Exchange Act (“Rule 10D-1”) and Nasdaq Listing
Rule 5608 (the “Listing Standards”).
1. Administration. Except as specifically set forth herein, this Policy shall be administered by the Compensation Committee of the Board or, if so
designated by the Board via a duly adopted resolution of the Board, the Board or another committee of the Board (the Board or such committee
charged with administration of this Policy, the “Administrator”). The Administrator is authorized to interpret and construe this Policy and to make all
determinations necessary, appropriate or advisable for the administration of this Policy. Any determinations made by the Administrator shall be final
and binding on all affected individuals and need not be uniform with respect to each individual covered by the Policy. In the administration of this
Policy, the Administrator is authorized and directed to consult with the full Board or such other committees of the Board, such as the Audit
Committee, as may be necessary or appropriate as to matters within the scope of such other committee’s responsibility and authority. Subject to any
limitation at applicable law, the Administrator may authorize and empower any officer or employee of the Company or any authorized agent of the
Company to take any and all actions necessary or appropriate to carry out the purpose and intent of this Policy (other than with respect to any recovery
under this Policy involving such officer or employee)
2. Definitions. As used in this Policy, the following definitions shall apply:
● “Accounting Restatement” means an accounting restatement of the Company’s financial statements due to the Company’s material
noncompliance with any financial reporting requirement under the securities laws, including any required accounting restatement to correct
an error in previously issued financial statements that is material to the previously issued financial statements, or that would result in a
material misstatement if the error were corrected in the current period or left uncorrected in the current period. Notwithstanding the
foregoing, the following types of changes to the Company’s financial statements do not represent error corrections, and therefore would
likewise not trigger application of this Policy:
o Retrospective application of a change in accounting principle;
o Retrospective revision to reportable segment information due to a change in the structure of the Company’s internal organization;
o Retrospective reclassification due to a discontinued operation;
o Retrospective application of a change in reporting entity, such as from a reorganization of entities under common control; and
o Retrospective revision for stock splits, reverse stock splits, stock dividends or other changes in capital structure.
● “Administrator” has the meaning set forth in Section 1 hereof.
● “Applicable Period” means the three completed fiscal years immediately preceding the date on which the Company is required to prepare an
Accounting Restatement, as well as any transition period (that results from a change in the Company’s fiscal year) within or immediately
following those three completed fiscal years (except that a transition period that comprises a period of at least nine months shall count as a
completed fiscal year).
● The “date on which the Company is required to prepare an Accounting Restatement” is the earlier to occur of (a) the date the Board, an
authorized committee of the Board (e.g., the Audit Committee), or the officer or officers of the Company authorized to take such action if
Board action is not required concludes, or reasonably should have concluded, that the Company is required to prepare an Accounting
Restatement or (b) the date a court, regulator or other legally authorized body directs the Company to prepare an Accounting Restatement, in
each case regardless of if or when the restated financial statements are filed.
● “Commission” means the U.S. Securities and Exchange Commission.
● “Covered Executives” means the Company’s current and former executive officers, as determined by the Administrator in accordance with
the definition of executive officer set forth in Rule 10D-1 and the Listing Standards.
● “Erroneously Awarded Compensation” has the meaning set forth in Section 5 of this Policy.
● A “Financial Reporting Measure” is any measure that is determined and presented in accordance with the accounting principles used in
preparing the Company’s financial statements, and any measure that is derived wholly or in part from such measure, whether or not such
Financial Reporting Measure is included in a filing with the Commission. Financial Reporting Measures include but are not limited to the
following (and any measures derived from the following): price of the Company’s securities listed on a securities exchange; total shareholder
return (“TSR”); revenues; net income; operating income; profitability of one or more reportable segments; financial ratios (e.g., accounts
receivable turnover and inventory turnover rates); earnings before interest, taxes, depreciation and amortization (“EBITDA”); funds from
operations and adjusted funds from operations; liquidity measures (e.g., working capital, operating cash flow); return measures (e.g., return
on invested capital, return on assets); earnings measures (e.g., earnings per share); sales per square foot or same store sales, where sales is
subject to an Accounting Restatement; revenue per user, or average revenue per user, where revenue is subject to an Accounting Restatement;
cost per employee, where cost is subject to an Accounting Restatement; any of such Financial Reporting Measures relative to a peer group,
where the Company’s Financial Reporting Measure is subject to an Accounting Restatement; and tax basis income. A Financial Reporting
Measure need not be presented within the Company’s financial statements or included in a filing with the Commission.
● “Incentive-Based Compensation” means any compensation that is granted, earned or vested based wholly or in part upon the attainment of a
Financial Reporting Measure, including, without limitation, (i) non-equity incentive plan awards that are earned based wholly or in part on
satisfying a Financial Reporting Measure performance goal; (ii) bonuses paid from a “bonus pool,” the size of which is determined based
wholly or in part on satisfying a Financial Reporting Measure performance goal; (iii) other cash awards based on satisfaction of a Financial
Reporting Measure performance goal; (iv) restricted stock, restricted stock units, performance share units, stock options, and stock
appreciation rights that are granted or become vested based wholly or in part on satisfying a Financial Reporting Measure performance goal;
and (v) proceeds received upon the sale of shares acquired through an incentive plan that were granted or vested based wholly or in part on
satisfying a Financial Reporting Measure performance goal.
● Incentive-Based Compensation is “received” for purposes of this Policy in the Company’s fiscal period during which the Financial Reporting
Measure specified in the Incentive-Based Compensation award is attained, even if the payment or grant of such Incentive-Based
Compensation occurs after the end of that period. All conditions to an award for Incentive-Based Compensation need not be satisfied for the
Incentive-Based Compensation to be deemed received under this Policy. Incentive-Based Compensation is deemed received even if there is a
contingent right to payment at that time or payment remains subject to ministerial acts, such as calculating the amount earned or obtaining the
approval of the Administrator or the Board.
3. Covered Executives Incentive-Based Compensation. Except as set forth in Section 11 of this Policy, this Policy applies to Incentive-Based
Compensation received by a Covered Executive (a) after beginning services as a Covered Executive; (b) if that person served as a Covered Executive
at any time during the performance period for such Incentive-Based Compensation; and (c) while the Company had a listed class of securities on a
national securities exchange.
4. Required Recoupment of Erroneously Awarded Compensation in the Event of an Accounting Restatement. In the event the Company is
required to prepare an Accounting Restatement, the Company shall promptly recoup the amount of any Erroneously Awarded Compensation received
by any Covered Executive, as calculated pursuant to Section 5 hereof, during the Applicable Period.
5. Erroneously Awarded Compensation: Amount Subject to Recovery. The amount of “Erroneously Awarded Compensation” subject to recovery
under this Policy, as determined by the Administrator, is the amount of Incentive-Based Compensation received by the Covered Executive that
exceeds the amount of Incentive-Based Compensation that would have been received by the Covered Executive had it been determined based on the
restated amounts. Erroneously Awarded Compensation shall be computed by the Administrator without regard to any taxes paid by the Covered
Executive in respect of the Erroneously Awarded Compensation. With respect to any compensation plans or programs that take into account Incentive-
Based Compensation, the amount of Erroneously Awarded Compensation subject to recovery hereunder includes, but is not limited to, the amount
contributed to any notional account based on Erroneously Awarded Compensation and any earnings accrued to date on that notional amount.
For Incentive-Based Compensation based on stock price or TSR: (a) the Administrator shall determine the amount of Erroneously Awarded
Compensation based on a reasonable estimate of the effect of the Accounting Restatement on the stock price or TSR upon which the Incentive-
Based Compensation was received; and (b) the Company shall maintain documentation of the determination of that reasonable estimate and
provide such documentation to The Nasdaq Stock Market (“Nasdaq”).
6. Method of Recoupment. The Administrator shall determine, in its sole discretion, the timing and method for promptly recouping Erroneously
Awarded Compensation hereunder, as well as a reasonable amount of interest, as determined by the Administrator, to compensate the Company for the
time-value of the Erroneously Awarded Compensation and reimbursement of direct expenses to recover the Erroneously Awarded Compensation,
including without limitation any legal fees incurred by the Company, which may include without limitation (a) seeking reimbursement of all or part of
any cash or equity-based award, (b) cancelling prior cash or equity-based awards, whether vested or unvested or paid or unpaid, (c) cancelling or
offsetting against any planned future cash or equity-based awards, (d) forfeiture of deferred compensation, subject to compliance with Section 409A of
the Internal Revenue Code and the regulations promulgated thereunder and (e) any other method authorized by applicable law or contract. Subject to
compliance with any applicable law, the Administrator may affect recovery under this Policy from any amount otherwise payable to the Covered
Executive, including amounts payable to such individual under any otherwise applicable Company plan or program, including base salary, bonuses or
commissions and compensation previously deferred by the Covered Executive.
The Company is authorized and directed pursuant to this Policy to recoup Erroneously Awarded Compensation in compliance with this Policy
unless the Administrator has determined that recovery would be impracticable solely for the following limited reasons, and subject to the
following procedural and disclosure requirements:
● The direct expense paid to a third party to assist in enforcing the Policy would exceed the amount to be recovered. Before concluding that it
would be impracticable to recover any amount of Erroneously Awarded Compensation based on expense of enforcement, the Administrator
must make a reasonable attempt to recover such erroneously awarded compensation, document such reasonable attempt(s) to recover and
provide that documentation to Nasdaq;
● Recovery would violate home country law of the Company where that law was adopted prior to November 28, 2022. Before concluding that
it would be impracticable to recover any amount of Erroneously Awarded Compensation based on violation of home country law of the
Company, the Administrator must satisfy the applicable opinion and disclosure requirements of Rule 10D-1 and the Listing Standards; or
● Recovery would likely cause an otherwise tax-qualified retirement plan, under which benefits are broadly available to employees of the
Company, to fail to meet the requirements of 26 U.S.C. 401(a)(13) or 26 U.S.C. 411(a) and regulations thereunder.
7. No Indemnification of Covered Executives. Notwithstanding the terms of any indemnification or insurance policy or any contractual arrangement
with any Covered Executive that may be interpreted to the contrary, the Company shall not indemnify any Covered Executives against the loss of any
Erroneously Awarded Compensation, including any payment or reimbursement for the cost of third-party insurance purchased by any Covered
Executives to fund potential clawback obligations under this Policy.
8. Administrator Indemnification. Any members of the Administrator, and any other members of the Board who assist in the administration of this
Policy, shall not be personally liable for any action, determination or interpretation made with respect to this Policy and shall be fully indemnified by
the Company to the fullest extent under applicable law and Company policy with respect to any such action, determination or interpretation. The
foregoing sentence shall not limit any other rights to indemnification of the members of the Board under applicable law or Company policy.
9. Effective Date; Retroactive Application. This Policy shall be effective as of October 2, 2023 (the “Effective Date”). The terms of this Policy shall
apply to any Incentive-Based Compensation that is received by Covered Executives on or after the Effective Date, even if such Incentive-Based
Compensation was approved, awarded, granted or paid to Covered Executives prior to the Effective Date. Without limiting the generality of Section
6 hereof, and subject to applicable law, the Administrator may affect recovery under this Policy from any amount of compensation approved, awarded,
granted, payable or paid to the Covered Executive prior to, on or after the Effective Date.
10. Amendment; Termination. The Board may amend, modify, supplement, rescind or replace all or any portion of this Policy at any time and from time
to time in its discretion, and shall amend this Policy as it deems necessary to comply with applicable law or any rules or standards adopted by a
national securities exchange on which the Company’s securities are listed.
11. Other Recoupment Rights; Company Claims. The Board intends that this Policy shall be applied to the fullest extent of the law. Any right of
recoupment under this Policy is in addition to, and not in lieu of, any other remedies or rights of recoupment that may be available to the Company
under applicable law or pursuant to the terms of any similar policy in any employment agreement, equity award agreement, or similar agreement and
any other legal remedies available to the Company.
Nothing contained in this Policy, and no recoupment or recovery as contemplated by this Policy, shall limit any claims, damages or other legal
remedies the Company or any of its affiliates may have against a Covered Executive arising out of or resulting from any actions or omissions by
the Covered Executive.
Notwithstanding anything set forth in this Policy, by signing the acknowledgement below, the Company’s Chief Executive Officer and Chief
Financial Officer acknowledge that in the event the Company is required to prepare an accounting restatement subject to Section 304 of the
Sarbanes-Oxley Act of 2002, as amended (“Section 304”), she or he shall forfeit such amounts required pursuant to Section 304.
12. Successors. This Policy shall be binding and enforceable against all Covered Executives and their beneficiaries, heirs, executors, administrators or
other legal representatives.
13. Governing Law, Dispute Resolution and Venue. This Policy and all acts and transactions pursuant hereto and the rights and obligations of the
Parties hereto will be governed, construed and interpreted in accordance with the laws of the Commonwealth of Pennsylvania, without giving effect to
such state’s conflict of laws rules.
Any and all disputes relating to, concerning or arising from this Policy, or relating to, concerning or arising from the relationship between the
parties evidenced by this Policy, will be brought and heard exclusively in the United States District Court for the Eastern District of Pennsylvania
or the state courts of the Commonwealth of Pennsylvania in and for Lackawanna County. Each of the Company and each person subject to this
Policy hereby represents and agrees that such party is subject to the personal jurisdiction of said courts; hereby irrevocably consents to the
jurisdiction of such courts in any legal or equitable proceedings related to, concerning, or arising from such dispute, and waives, to the fullest
extent permitted by law, any objection which such party may now or hereafter have that the laying of the venue of any legal or equitable
proceedings related to, concerning, or arising from such dispute which is brought in such courts is improper or that such proceedings have been
brought in an inconvenient forum.
14. Exhibit Filing Requirement. A copy of this Policy and any amendments thereto shall be posted on the Company’s website and filed as an exhibit to
the Company’s annual report on Form 10-K.
[TO BE SIGNED BY THE COMPANY’S EXECUTIVE OFFICERS:]
Clawback Policy Acknowledgment
I, the undersigned, agree and acknowledge that, in consideration of good a valuable consideration, I am fully bound by, and subject to, all of the terms and
conditions of the FNCB Bancorp, Inc.’s Clawback Policy (as may be amended, restated, supplemented or otherwise modified from time to time, the “Policy”).
In the event of any inconsistency between the Policy and the terms of any employment agreement, offer letter or similar arrangement to which I am a party, or
the terms of any compensation plan, program or agreement under which any compensation has been granted, awarded, earned or paid, the terms of the Policy
shall govern. In the event it is determined by the Administrator that any amounts granted, awarded, earned or paid to me must be forfeited or reimbursed to the
Company, I will promptly take any action necessary to effectuate such forfeiture and/or reimbursement. Any capitalized terms used in this Acknowledgment
without definition shall have the meaning set forth in the Policy.
By:
[Name]
[Title]