10-Q 1 fncb20230930_10q.htm FORM 10-Q fncb20230930_10q.htm
0001035976 FNCB BANCORP, INC. false --12-31 Q3 2023 12,149 14,193 1.25 1.25 20,000,000 20,000,000 0 0 0 0 1.25 1.25 50,000,000 50,000,000 19,780,317 19,780,317 19,681,644 19,681,644 0.090 4,712 0.090 2,381 0.240 15,545 0.270 1,904 0 500 1 0 3 0 0 21.0 21.0 21.0 0 0 December 15, 2023 December 1, 2023 0 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 September 30, 2023, the amortized cost basis of the closed portfolios used in these hedging relationships was 95.8 million; the cumulative basis adjustments associated with these hedging relationships was (0.7) million; and the amounts of the designated hedged items were 25 million. There were no such hedging relationships at September 30, 2022.) Interest income represents income recognized on performing TDRs. Other collateral represents the amount that cannot be used to offset our derivative assets and liabilities from a gross basis to a net basis in accordance with the applicable accounting guidance. The other collateral consist of securities and is exchanged under bilateral collateral and master netting agreements that allow us to offset the net derivative position with the related collateral. The application of the other collateral cannot reduce the net derivative position below zero. 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Table of Contents



UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C.  20549

 


 

FORM 10-Q

 

(Mark One)

 

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

 

For the quarterly period ended September 30, 2023

 

OR

 

 

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

 

For the transition period from           to       

 

Commission File No. 001-38408

 

FNCB BANCORP, INC.

(Exact Name of Registrant as Specified in Its Charter)

 

Pennsylvania

 

23-2900790

(State or Other Jurisdiction

of Incorporation or Organization)

 

(I.R.S. Employer

Identification No.)

   

102 E. Drinker St., Dunmore, PA

 

18512

(Address of Principal Executive Offices)

 

(Zip Code)

(570) 346-7667

Registrant’s telephone number, including area code 

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each classTrading Symbol(s)Name of each exchange on which registered
Common stock, $1.25 par valueFNCBNasdaq Capital Market

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or emerging growth company.  See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer ☐

 

Accelerated filer ☐

Non-accelerated filer ☒ 

 Smaller reporting company

 

 

 

Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  No ☒

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date: 19,783,031 shares as of November 3, 2023.

 

 

 
Contents  
PART I. Financial Information 1
Item 1. Financial Statements (unaudited) 1
Consolidated Statements of Financial Condition 1
Consolidated Statements of Income 2
Consolidated Statements of Comprehensive (Loss) Income 3
Consolidated Statements of Changes in Shareholders’ Equity 4
Consolidated Statements of Cash Flows 5
Notes to Consolidated Financial Statements 6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 33
Item 3. Quantitative and Qualitative Disclosures about Market Risk 52
Item 4. Controls and Procedures 52
PART II.  Other Information 53
Item 1. Legal Proceedings. 53
Item 1A. Risk Factors. 53
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds. 54
Item 3. Defaults upon Senior Securities. 54
Item 4. Mine Safety Disclosures. 54
Item 5. Other Information. 54
Item 6. Exhibits. 55

     

 

 

Part I - Financial Information

Item 1 - Financial Statements

FNCB BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

 

  

September 30,

  

December 31,

 
  2023  2022 

(in thousands, except share data)

 

(Unaudited)

  

(Audited)

 

Assets

        

Cash and cash equivalents:

        

Cash and due from banks

 $42,081  $26,588 

Interest-bearing deposits in other banks

  34,990   15,328 

Total cash and cash equivalents

  77,071   41,916 

Available-for-sale debt securities, at fair value

  437,142   476,091 

Equity securities, at fair value

  6,104   7,717 

Restricted stock, at cost

  8,842   8,545 

Loans held for sale

  -   60 

Loans and leases, net of allowance for credit losses of $12,149 and $14,193

  1,193,603   1,110,124 

Bank premises and equipment, net

  14,790   15,616 

Accrued interest receivable

  6,599   5,957 

Bank-owned life insurance

  37,111   36,499 

Other assets

  45,511   43,005 

Total assets

 $1,826,773  $1,745,530 
         

Liabilities

        

Deposits:

        

Demand (non-interest-bearing)

 $297,740  $305,850 

Interest-bearing

  1,204,635   1,114,797 

Total deposits

  1,502,375   1,420,647 

Borrowed funds:

        

Federal Home Loan Bank of Pittsburgh advances

  176,423   172,050 

Junior subordinated debentures

  10,310   10,310 

Total borrowed funds

  186,733   182,360 

Accrued interest payable

  1,001   171 

Other liabilities

  18,862   23,403 

Total liabilities

  1,708,971   1,626,581 
         

Shareholders' equity

        

Preferred shares ($1.25 par)

        

Authorized: 20,000,000 shares at September 30, 2023 and December 31, 2022

        

Issued and outstanding: 0 shares at September 30, 2023 and December 31, 2022

  -   - 

Common shares ($1.25 par)

        

Authorized: 50,000,000 shares at September 30, 2023 and December 31, 2022

        

Issued and outstanding: 19,780,317 shares at September 30, 2023 and 19,681,644 shares at December 31, 2022

  24,725   24,602 

Additional paid-in capital

  78,050   77,502 

Retained earnings

  70,221   64,873 

Accumulated other comprehensive loss

  (55,194)  (48,028)

Total shareholders' equity

  117,802   118,949 

Total liabilities and shareholders’ equity

 $1,826,773  $1,745,530 

 

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

 

 

 

 

FNCB BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(unaudited)

 

   

Three Months Ended September 30,

   

Nine Months Ended September 30,

 

(in thousands, except share data)

 

2023

   

2022

   

2023

   

2022

 

Interest income

                               

Interest and fees on loans and leases

  $ 17,224     $ 12,270     $ 47,642     $ 33,472  

Interest and dividends on securities:

                               

Taxable

    3,063       2,633       9,204       7,425  

Tax-exempt

    539       691       1,670       1,961  

Dividends

    248       163       744       353  

Total interest and dividends on securities

    3,850       3,487       11,618       9,739  

Interest on interest-bearing deposits in other banks

    243       19       672       34  

Total interest income

    21,317       15,776       59,932       43,245  

Interest expense

                               

Interest on deposits

    6,446       1,001       16,968       1,671  

Interest on borrowed funds:

                               

Federal Reserve Discount Window advances

    205       -       297       -  

Federal Home Loan Bank of Pittsburgh advances

    2,268       736       6,715       1,009  

Junior subordinated debentures

    191       99       531       220  

Total interest on borrowed funds

    2,664       835       7,543       1,229  

Total interest expense

    9,110       1,836       24,511       2,900  

Net interest income before (credit to) provision for credit losses - loans and leases

    12,207       13,940       35,421       40,345  

(Credit to) provision for credit losses - loans and leases

    (270 )     513       1,504       1,334  

Net interest income after (credit to) provision for credit losses - loans and leases

    12,477       13,427       33,917       39,011  

Non-interest income

                               

Deposit service charges

    1,132       1,133       3,319       3,248  

Net gain (loss) on the sale of available-for-sale debt securities

    -       -       252       (35 )

Net (loss) gain on equity securities

    (233 )     86       (1,773 )     (121 )

Net gain on the sale of mortgage loans held for sale

    1       91       2       123  

Loan-related fees

    64       54       235       161  

Income from cash surrender value of bank-owned life insurance

    210       200       612       542  

Merchant services revenue

    146       173       464       544  

Wealth management services revenue

    237       109       720       345  

Other

    137       295       482       781  

Total non-interest income

    1,694       2,141       4,313       5,588  

Non-interest expense

                               

Salaries and employee benefits

    4,935       4,581       14,859       13,758  

Occupancy expense

    516       517       1,587       1,512  

Equipment expense

    229       314       733       954  

Advertising expense

    198       202       595       561  

Data processing expense

    1,034       974       2,984       3,046  

Regulatory assessments

    283       230       808       651  

Insurance expense

    175       167       518       477  

Bank shares tax

    264       375       676       1,091  

Professional fees

    265       297       781       837  

Director Fees

    248       229       416       388  

(Credit) provision for unfunded commitments

    (235 )     338       (729 )     461  

Merger and acquisition expenses

    537       -       537       -  

Other operating expenses

    851       808       2,558       2,072  

Total non-interest expense

    9,300       9,032       26,323       25,808  

Income before income tax expense

    4,871       6,536       11,907       18,791  

Income tax expense

    709       1,101       2,277       3,265  

Net income

  $ 4,162     $ 5,435     $ 9,630     $ 15,526  
                                 

Earnings per share

                               

Basic

  $ 0.21     $ 0.28     $ 0.49     $ 0.79  

Diluted

  $ 0.21     $ 0.28     $ 0.49     $ 0.79  
                                 

Cash dividends declared per common share

  $ 0.090     $ 0.090     $ 0.270     $ 0.240  

WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING:

                               

Basic

    19,776,342       19,687,766       19,724,956       19,765,814  

Diluted

    19,776,360       19,697,047       19,727,790       19,786,855  

 

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

 

 

 

FNCB BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME 

(unaudited)

 

   

Three Months Ended September 30,

   

Nine Months Ended September 30,

 

(in thousands)

 

2023

   

2022

   

2023

   

2022

 

Net income

  $ 4,162     $ 5,435     $ 9,630     $ 15,526  

Other comprehensive loss:

                               

Unrealized losses on available-for-sale debt securities

    (12,457 )     (22,652 )     (9,526 )     (74,938 )

Taxes

    2,616       4,757       2,000       15,737  

Net of tax amount

    (9,841 )     (17,895 )     (7,526 )     (59,201 )
                                 

Reclassification adjustment (gains) losses included in net income

    -       -       (252 )     35  

Taxes

    -       -       53       (7 )

Net of tax amount

    -       -       (199 )     28  
                                 

Derivative adjustments

    1,118       214       708       880  

Taxes

    (235 )     (45 )     (149 )     (185 )

Net of tax amount

    883       169       559       695  

Total other comprehensive loss

    (8,958 )     (17,726 )     (7,166 )     (58,478 )

Comprehensive (loss) income

  $ (4,796 )   $ (12,291 )   $ 2,464     $ (42,952 )

 

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

 

 

 

FNCB BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

For the Three and Nine Months Ended September 30, 2023 and 2022

(unaudited)

 

(in thousands, except per share data)

 

Number of Common Shares

  

Common Stock

  

Additional Paid-in Capital

  

Retained Earnings

  

Accumulated Other Comprehensive (Loss) Income

  

Total Shareholders' Equity

 

For the three months ended:

                        

Balances, June 30, 2022

  19,675,557  $24,594  $77,233  $58,085  $(34,400) $125,512 

Net income for the period

  -   -   -   5,435   -   5,435 

Cash dividends paid, $0.090 per share

  -   -   -   (1,772)  -   (1,772)

Restricted stock awards

  -   -   112   -   -   112 

Repurchase of common shares

  (13,454)  (17)  (89)  -   -   (106)

Common shares issued under long-term incentive compensation plan

  16,821   21   114   -   -   135 

Common shares issued through dividend reinvestment/optional cash purchase plan

  1,550   2   11   (11)  -   2 

Other comprehensive loss, net of tax of $4,712

  -   -   -   -   (17,726)  (17,726)

Balances, September 30, 2022

  19,680,474  $24,600  $77,381  $61,737  $(52,126) $111,592 
                         

Balances, June 30, 2023

  19,750,092  $24,687  $77,757  $67,851  $(46,236) $124,059 

Net income for the period

  -   -   -   4,162   -   4,162 

Cash dividends paid, $0.090 per share

  -   -   -   (1,781)  -   (1,781)

Restricted stock awards

  -   -   142   -   -   142 

Common shares issued in consideration of an asset purchase

  2,046   3   14   -   -   17 

Common shares issued under long-term incentive compensation plan

  26,740   33   130   -   -   163 

Common shares issued through dividend reinvestment/optional cash purchase plan

  1,439   2   7   (11)  -   (2)

Other comprehensive loss, net of tax of $2,381

  -   -   -   -   (8,958)  (8,958)

Balances, September 30, 2023

  19,780,317  $24,725  $78,050  $70,221  $(55,194) $117,802 
                         

For the nine months ended:

                        

Balances, December 31, 2021

  19,989,875  $24,987  $80,128  $50,990  $6,352  $162,457 

Net income for the period

  -   -   -   15,526   -   15,526 

Cash dividends paid, $0.240 per share

  -   -   -   (4,748)  -   (4,748)

Restricted stock awards

  -   -   334   -   -   334 

Repurchase of common shares

  (384,830)  (481)  (3,155)  -   -   (3,636)

Common shares issued under long-term incentive compensation plan

  71,510   89   46   -   -   135 

Common shares issued through dividend reinvestment/optional cash purchase plan

  3,919   5   28   (31)  -   2 

Other comprehensive loss, net of tax of $15,545

  -   -   -   -   (58,478)  (58,478)

Balances, September 30, 2022

  19,680,474  $24,600  $77,381  $61,737  $(52,126) $111,592 
                         

Balances, December 31, 2022

  19,681,644  $24,602  $77,502  $64,873  $(48,028) $118,949 

Cumulative effect adjustment due to adoption of ASU 2016-13

           1,080      1,080 

Net income for the period

  -   -   -   9,630   -   9,630 

Cash dividends paid, $0.270 per share

  -   -   -   (5,329)  -   (5,329)

Restricted stock awards

  -   -   416   -   -   416 

Common shares issued in consideration of an asset purchase

  4,694   6   32   -   -   38 

Common shares issued under long-term incentive compensation plan

  85,165   106   57   -   -   163 

Common shares issued through dividend reinvestment/optional cash purchase plan

  8,814   11   43   (33)  -   21 

Other comprehensive income, net of tax of $1,904

  -   -   -   -   (7,166)  (7,166)

Balances, September 30, 2023

  19,780,317  $24,725  $78,050  $70,221  $(55,194) $117,802 

 

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

 

 

 

FNCB BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

 

   

Nine Months Ended September 30,

 

(in thousands)

 

2023

   

2022

 

Cash flows from operating activities:

               

Net income

  $ 9,630     $ 15,526  

Adjustments to reconcile net income to net cash provided by operating activities:

               

Investment securities amortization, net

    1,474       2,260  

Equity in trust

    (16 )     (7 )

Depreciation of bank premises and equipment

    988       1,163  

Amortization of loan origination costs (fees)

    640       (637 )

Valuation adjustment for loan servicing rights

    -       (3 )

Stock-based compensation expense

    579       469  

Provision for credit losses - loans and leases

    1,504       1,334  

(Credit) provision for unfunded commitments

    (729 )     461  

Net (gain) loss on the sale of available-for-sale debt securities

    (252 )     35  

Net loss on equity securities

    1,773       121  

Net gain on the sale of mortgage loans held for sale

    (2 )     (123 )

Net gain on the sale of other real estate owned

    -       (3 )

Income from cash surrender value of bank-owned life insurance

    (612 )     (542 )

Proceeds from the sale of mortgage loans held for sale

    252       6,888  

Funds used to originate mortgage loans held for sale

    (190 )     (7,013 )

Loss on disposition of assets

    25       -  

Increase in accrued interest receivable

    (642 )     (986 )

Decrease (increase) in other assets

    508       (520 )

Increase in accrued interest payable

    830       52  

Decrease in other liabilities

    (5,778 )     (3,652 )

Total adjustments

    352       (703 )

Net cash provided by operating activities

    9,982       14,823  
                 

Cash flows from investing activities:

               

Maturities, calls and principal payments of available-for-sale debt securities

    32,521       31,942  

Proceeds from the sale of available-for-sale debt securities

    10,394       2,372  

Purchases of available-for-sale debt securities

    (14,966 )     (61,397 )

Purchases of equity securities

    (160 )     (695 )

Purchase of restricted stock

    (297 )     (2,927 )

Net increase in loans and leases to customers

    (82,925 )     (131,015 )

Proceeds from the sale of other real estate owned

    -       695  

Purchase of bank-owned life insurance

    -       (3,000 )

Purchases of bank premises and equipment

    (187 )     (607 )

Net cash used in investing activities

    (55,620 )     (164,632 )
                 

Cash flows from financing activities:

               

Net increase in deposits

    81,728       47,598  

Net (decrease) increase in Federal Home Loan Bank of Pittsburgh advances - overnight

    (104,400 )     65,700  

Proceeds from Federal Home Loan Bank of Pittsburgh advances - term

    303,873       10,000  

Repayment of Federal Home loan Bank of Pittsburgh advances - term

    (195,100 )     (30,000 )

Proceeds from Federal Reserve Discount Window advances

    25,000       -  

Repayment of Federal Reserve Discount Window advances

    (25,000 )     -  

Repurchase of common shares

    -       (3,636 )

Proceeds from issuance of common shares, net of discount

    21       2  

Cash dividends paid

    (5,329 )     (4,748 )

Net cash provided by financing activities

    80,793       84,916  

Net increase (decrease) in cash and cash equivalents

    35,155       (64,893 )

Cash and cash equivalents at beginning of period

    41,916       99,020  

Cash and cash equivalents at end of period

  $ 77,071     $ 34,127  
                 

Supplemental cash flow information

               

Cash paid during the period for:

               

Interest

  $ 23,681     $ 2,848  

Taxes

    2,500       3,350  

Other transactions:

               

Lease liabilities from obtaining right-of use assets

    19       -  

Common shares issued in consideration of an asset purchase

    38       -  

 

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

 

 

FNCB BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

Note 1.   Basis of Presentation

 

The consolidated financial statements of FNCB Bancorp, Inc. are comprised of the accounts of FNCB Bancorp, Inc., a registered bank holding company under the Bank Holding Company Act of 1956, and its wholly owned subsidiary, FNCB Bank (the “Bank”), (and collectively, “FNCB”). The accounting and reporting policies of FNCB conform to accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10-01 of Regulation S-X. Accordingly, they do not include all of the information and accompanying notes required by GAAP for complete financial statements. In the opinion of management, all adjustments necessary for a fair presentation of the financial position and the results of operations for the periods presented have been included in the consolidated financial statements. All intercompany balances and transactions have been eliminated in consolidation. Prior period amounts have been reclassified when necessary to conform to the current period’s presentation. Such reclassifications did not have an impact on the operating results or financial position of FNCB. The operating results and financial position of FNCB for the three and nine months ended September 30, 2023  may not be indicative of future results of operations and financial position.

 

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

 

Since 2021, the Bank has provided commercial equipment financing under the brand 1st Equipment Finance. On June 5, 2023, the Bank filed a Bank Subsidiary Notice with the Pennsylvania Department of Banking and Supervision (“PADOBS”) to inform the PADOBS that the Bank plans to establish 1st Equipment Finance, Inc. as a wholly-owned subsidiary for the purpose of providing commercial equipment loans and leases to customers. On July 5, 2023, the Bank received written notification from the PADOBS that it does not object to the establishment of the subsidiary pursuant to Section 203(d) of the Pennsylvania Banking Code of 1965, and the establishment of the subsidiary must be completed by January 2, 2024. 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 the outstanding balance of loans and leases previously originated under this brand, accrued interest and furniture and equipment totaling $160.5 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, with 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 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 merger to be consummated by April 1, 2024, however, there can be no assurance that the transaction will be consummated by such date, or at all.

 

Subsequent Events:

 

In addition to the establishment of 1st Equipment Finance, Inc. as a subsidiary of the Bank mentioned above, FNCB has evaluated events and transactions occurring subsequent to September 30, 2023, the balance sheet date, for items that could potentially be recognized or disclosed in these consolidated financial statements. The evaluation was conducted through the issuance date of these consolidated financial statements. See Note 12, “Regulatory Matters” for information about events and transactions that have occurred subsequent to the balance sheet date.

 

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

 

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

 

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

 

ACL on Debt Securities: The ACL is a valuation account that is deducted from the amortized cost basis to present the net amount expected to be collected on the held-to-maturity portfolio. At September 30, 2023, FNCB had no securities classified as held-to-maturity.

 

Upon adoption of ASU 2016-13, management no longer evaluates securities for other than temporary impairment ("OTTI"), as ASC Subtopic 326-30, "Financial Instruments—Credit Losses—Available-for-Sale Debt Securities," changes the accounting for recognizing impairment on available-for-sale debt securities. Each quarter management evaluates impairment where there has been a decline in fair value below the amortized cost basis of a security to determine whether there is a credit loss associated with the decline in fair value. Management considers the nature of the collateral, potential future changes in collateral values, default rates, delinquency rates, third-party credit support, credit ratings, interest rate changes since purchase, volatility of the security’s fair value and historical loss information for financial assets secured with similar collateral among other factors. Credit losses are calculated individually, rather than collectively, using a discounted cash flow ("DCF")

 

 

6

 

method, whereby management compares the present value of expected cash flows with the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance on available-for-sale debt securities is recorded for the credit loss, limited by the amount that the fair value is less than the amortized cost basis. Any impairment that has not been recorded through an allowance is recognized in other comprehensive (loss) income.

 

FNCB’s estimate of expected credit losses includes a measure of the expected risk of credit loss even if that risk is remote. However, FNCB does not measure expected credit losses on an investment security in which historical credit loss information adjusted for current conditions and reasonable and supportable forecast results in an expectation that nonpayment of the amortized cost basis is zero. Management does not expect nonpayment of the amortized cost basis to be zero solely on the basis of the current value of collateral securing the security but, instead, also considers the nature of the collateral, potential future changes in collateral values, default rates, delinquency rates, third-party guarantees, credit ratings, interest rate changes since purchase, volatility of the security’s fair value and historical loss information for financial assets secured with similar collateral. FNCB performed an analysis that determined that the following securities have a zero expected credit loss: U.S. government agencies, mortgage-backed securities of U.S. government and government-sponsored agencies, as all of the U.S. government agencies and U.S. government agency backed securities have the full faith and credit backing of the United States Government or one of its agencies. 

 

The allowance on available-for-sale debt securities may be in full or a portion hereof and is recorded as an expense (credit) within the provision for credit losses on the consolidated statements of income. Losses are charged against the allowance when management believes the uncollectibility of an available-for-sale debt security is confirmed based on the above-described analysis. As of September 30, 2023 and January 1, 2023 (i.e. ASU 2016-13 adoption), there was no allowance established for FNCB's available-for-sale debt securities.

 

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

 

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

 

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

 

ACL on Loans and Leases: The ACL on the loan portfolio is a significant accounting estimate used in the preparation of the FNCB's consolidated financial statements. Upon adoption of ASU 2016-13, FNCB replaced the incurred loss impairment model that recognizes losses when it becomes probable that a credit loss will be incurred, with a requirement to recognize lifetime expected credit losses immediately when a financial asset is originated or purchased. The ACL is a valuation account that is deducted from the amortized cost basis of loans to present the net amount expected to be collected on the loans. Loans, or portions thereof, are charged off against the allowance when they are deemed uncollectible. Expected recoveries do not exceed the aggregate of amounts previously charged off and expected to be charged off.  The allowance is comprised of reserves measured on a collective 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.

 

FNCB estimates expected credit losses using the 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 instrument level. A default rate and loss given default assumption are applied to the pool’s projective model of cash flows taking into consideration the effects of prepayments and principal curtailment effects. The analysis produces expected cash flows for each instrument in the pool by pairing loan-level term information (maturity date, payment amount, interest rate, etc.) with top-down pool assumptions (default rates and prepayment speeds).

 

 

7

 

Management has determined that peer loss experience provides the best basis for its assessment of expected credit losses to determine the ACL. FNCB utilizes peer call report data to measure historical credit loss experience with similar risk characteristics within the segments over an economic cycle. Management reviews the historical loss information to appropriately adjust for differences in current asset specific risk characteristics. Management also considered further adjustments to historical loss information for current conditions and reasonable and supportable forecasts that differ from the conditions that existed for the period over which historical information was evaluated. For all segment models for collectively evaluated loans, FNCB incorporates one macroeconomic driver, the national unemployment rate, using a statistical regression modeling methodology. Management determined that four quarters currently represents a reasonable and supportable forecast period. For the contractual term that extend beyond the reasonable and supportable forecast period, FNCB reverts to historical loss information within eight quarters using a straight-line approach. Management may apply different reversion techniques depending on the economic environment for the financial asset portfolio and as of the current period has utilized a linear reversion technique.

 

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

 

Individually Evaluated Loans:  Prior to the adoption of ASU 2016-13 on January 1, 2023, a loan was individually evaluated when the loan was considered impaired.  A loan was considered to be impaired when based on current information and events, it was probable that FNCB would not be able to collect all amounts due from the borrower in accordance with the contractual terms of the loan, including scheduled interest payments.

 

With the adoption of ASU 2016-13, loans that do not share risk characteristics with existing pools are evaluated on an individual basis.  FNCB considers a loan to be collateral dependent when management has determined that foreclosure of the collateral is probable, or where the borrower is experiencing financial difficulty and repayment of the financial asset to expected to be provided substantially through the operation or sale of the collateral.  When repayment is expected to be from the operation of the collateral, the specific credit loss reserve is calculated as the amount by which the amortized cost basis of the financial asset exceeds the 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.

 

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

 

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

 

New Authoritative Accounting Guidance

 

On January 1, 2023, FNCB adopted ASU 2016-13. ASU 2016-13 significantly 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 applied the new guidance using the modified-retrospective approach. Related to the implementation of ASU 2016-13, FNCB recorded a reduction in the ACL on loans and leases of $2.6 million, additional reserves for unfunded commitments of $1.3 million, a reduction in deferred tax assets of $287 thousand, and an increase to retained earnings of $1.1 million. The adoption of ASU 2013-16 did not have a material effect on FNCB's available-for-sale debt securities. 

 

8

 

The following table below presents the impact of ASU 2016-13 on the consolidated statements of financial condition:

 

  

January 1, 2023

 

(in thousands)

 

As reported Under ASU 2016-13

  

Pre-ASU 2016-13

  

Impact of ASU 2016-13

 

Assets:

            

ACL on loans and leases:

            

Residential real estate

 $(1,187) $(2,215) $1,028 

Commercial real estate

  (2,579)  (4,193)  1,614 

Construction, land acquisition and development

  (1,814)  (747)  (