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.
CRITICAL ACCOUNTING POLICIES
In preparing the consolidated financial statements, management has made estimates, judgments and assumptions that affect the reported amounts of assets and liabilities as of the date of the consolidated statements of condition and results of operations for the periods indicated. Actual results could differ significantly from those estimates. FNCB's accounting policies are fundamental to understanding management's discussion and analysis of its financial condition and results of operations. Management has identified the policies on the determination of the allowance for loan and lease losses ("ALLL"), securities' valuation and impairment evaluation, the valuation of other real estate owned ("OREO") and income taxes to be critical, as management is required to make subjective and/or complex judgments about matters that are inherently uncertain and could be subject to revision as new information becomes available. The judgments used by management in applying the critical accounting policies discussed below may be affected by changes and/or deterioration in the economic environment, which may impact future financial results. Specifically, subsequent evaluations of the loan portfolio, in light of the factors then prevailing, may result in significant changes in the ALLL in future periods, and the inability to collect on outstanding loans could result in increased loan losses. In addition, the valuation of certain securities in FNCB's investment portfolio could be negatively impacted by illiquidity or dislocation in marketplaces resulting in significantly depressed market prices thus leading to impairment losses.
Allowance for Loan and Lease Losses
Management evaluates the credit quality of FNCB's loan portfolio on an ongoing basis, and performs a formal review of the adequacy of the ALLL on a quarterly basis. The ALLL is established through a provision for loan losses charged to earnings and is maintained at a level management considers adequate to absorb estimated probable losses inherent in the loan portfolio as of the evaluation date. Loans, or portions of loans, determined by management to be uncollectible are charged off against the ALLL, while recoveries of amounts previously charged off are credited to the ALLL. Determining the amount of the ALLL is considered a critical accounting estimate because it requires significant judgment and the use of estimates related to the amount and timing of expected future cash flows on impaired loans, estimated losses on pools of homogeneous loans based on historical loss experience, qualitative factors, and consideration of current economic trends and conditions, all of which may be susceptible to significant change. Banking regulators, as an integral part of their examination of FNCB, also review the ALLL, and may require, based on their judgments about information available to them at the time of their examination, that certain loan balances be charged off or require that adjustments be made to the ALLL. Additionally, the ALLL is determined, in part, by the composition and size of the loan portfolio. 23
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The ALLL consists primarily of two components, a specific component and a general component. The specific component relates to loans that are classified as impaired. For such loans, an allowance is established when the discounted cash flows, collateral value or observable market price of the impaired loan is lower than the carrying value of that loan. The general component covers all other loans and is based on historical loss experience adjusted by qualitative factors. The general reserve component of the ALLL is based on pools of unimpaired loans segregated by loan segment and risk rating categories of "Pass", "Special Mention" or "Substandard and Accruing." Historical loss factors and various qualitative factors are applied based on the risk profile in each risk rating category to determine the appropriate reserve related to those loans. Substandard loans on non-accrual status above the
$100 thousandloan relationship threshold and all loans considered troubled debt restructurings ("TDRs") are classified as impaired. Based on its evaluations, management may establish an unallocated component that is used to cover any inherent losses that exist as of the evaluation date, but which may not have been identified under the methodology. See Note 2, "Summary of Significant Accounting Policies" and Note 4, "Loans" of the notes to consolidated financial statements included in Item 8, "Financial Statements and Supplementary Data" to this Annual Report on Form 10-K for additional information about the ALLL.
Securities Valuation and Evaluation for Impairment
Management utilizes various inputs to determine the fair value of its investment portfolio. To the extent they exist, unadjusted quoted market prices in active markets (Level 1) or quoted prices for similar assets or models using inputs that are observable, either directly or indirectly (Level 2) are utilized to determine the fair value of each investment in the portfolio. In the absence of observable inputs or if markets are illiquid, valuation techniques are used to determine fair value of any investments that require inputs that are both unobservable and significant to the fair value measurement (Level 3). For Level 3 inputs, valuation techniques are based on various assumptions, including, but not limited to, cash flows, discount rates, adjustments for nonperformance and liquidity, and liquidation values. A significant degree of judgment is involved in valuing investments using Level 3 inputs. The use of different assumptions could have a positive or negative effect on FNCB's financial condition or results of operations. See Note 3, "Securities" and Note 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. On a quarterly basis, management evaluates individual investment securities in an unrealized loss position for other than temporary impairment ("OTTI"). The evaluation for OTTI requires the use of various assumptions, including but not limited to, the length of time an investment's fair value is less than book value, the severity of the investment's decline, any credit deterioration of the issuer, whether management intends to sell the security, and whether it is more-likely-than-not that FNCB will be required to sell the security prior to recovery of its amortized cost basis. Debt investment securities deemed to have OTTI are written down by the impairment related to the estimated credit loss, and the non-credit related impairment loss is recognized in other comprehensive income. FNCB did not recognize any OTTI charges on investment securities for years ended
December 31, 2021and 2020 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 valuation of securities and management's evaluation for OTTI. Other Real Estate Owned OREO consists of property acquired by foreclosure, abandonment or conveyance of deed in-lieu of foreclosure of a loan, and bank premises that are no longer used for operation or for future expansion. OREO is held for sale and is initially recorded at fair value less estimated costs to sell at the date of acquisition or transfer, which establishes a new cost basis. Upon acquisition of the property through foreclosure, or deed-in-lieu of foreclosure, any adjustment to fair value less estimated selling costs is recorded to the ALLL. The determination is made on an individual asset basis. Bank premises no longer used for operations or future expansion are transferred to OREO at fair value less estimated selling costs with any related write-down included in non-interest expense. Subsequent to acquisition, valuations are periodically performed, and the assets are carried at the lower of cost or fair value less estimated cost to sell. Fair value is determined through external appraisals, current letters of intent, broker price opinions or executed agreements of sale, unless management determines that conditions exist that warrant an adjustment to the value. Costs relating to the development and improvement of the OREO properties may be capitalized; holding period costs and any subsequent changes to the valuation allowance are charged to expense as incurred. Income Taxes The objectives of accounting for income taxes are to recognize the amount of taxes payable or refundable for the current year and deferred tax liabilities and assets for the future tax consequences of events that have been recognized in an entity's financial statements or tax returns. Judgment is required in assessing the future tax consequences of events that have been recognized in FNCB's consolidated financial statements or tax returns. Fluctuations in the actual outcome of these future tax consequences could impact our consolidated financial condition or results of operations. FNCB records an income tax provision or benefit based on the amount of tax currently payable or receivable and the change in deferred tax assets and liabilities. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial and tax reporting purposes. Management conducts quarterly assessments of all available positive and negative evidence to determine the amount of deferred tax assets that will more likely than not be realized. FNCB establishes a valuation allowance for deferred tax assets and records a charge to income if management determines, based on available evidence at the time the determination is made, that it is more likely than not that some portion or all of the deferred tax assets will not be realized. In evaluating the need for a valuation allowance, management considers past operating results, estimates of future taxable income based on approved business plans, future capital requirements and ongoing tax planning strategies. This evaluation process involves significant management judgment about assumptions that are subject to change from period to period depending on the related circumstances. The recognition of deferred tax assets requires management to make significant assumptions and judgments about future earnings, the periods in which items will impact taxable income, future corporate tax rates, and the application of inherently complex tax laws. The use of different estimates can result in changes in the amounts of deferred tax items recognized, which may result in equity and earnings volatility because such changes are reported in current period earnings. Management's evaluation as of December 31, 2021and 2020 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, 2021and 2020, management determined that FNCB did not have any uncertain tax positions or tax strategies and that no liability was required to be recorded. See Note 2, "Summary of Significant Accounting Policies" and Note 10, "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. 24
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New Authoritative Accounting Guidance and Accounting Guidance to be Adopted in
For information regarding new authoritative accounting guidance adopted by FNCB during the year ended
December 31, 2021and 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
Results of Operations FNCB exhibited strong earnings performance in 2021, consistent with our mission to provide a simply better banking experience to our customers, while adapting to changing market demands. Net income in 2021 amounted to
$21.4 million, or $1.06per diluted common share, an increase of $6.0 million, or 39.3%, compared to $15.3 million, or $0.76per diluted common share, in 2020. The increase in 2021 net income compared to 2020 was primarily attributable to increases in net interest income and a decrease in the provision for loan and lease losses. These positive factors were partially offset by a decrease in non-interest income and an increase in non-interest expense. Net interest income was $49.0 millionin 2021, an increase of $8.8 million, or 21.9%, from $40.2 millionin 2020, which resulted from a $5.4 million, or 11.6%, increase in total interest income and a $3.4 million, or 56.1% reduction in total interest expense. The increase in interest income was driven by strong earning asset growth, while the reduction in interest expense was largely due to a significant reduction in funding costs. Interest income in 2021 was also favorably impacted by a $3.6 millionincrease in net loan origination fees associated with PPP loans that were recognized upon forgiveness. The provision for loan and lease losses decreased $1.8 millionto $166 thousandin 2021, from $1.9 millionin 2020. The elevated amount of credit provisioning in 2020 was in response to uncertainty brought on by the COVID-19 global pandemic. Non-interest income decreased $982 thousand, or 10.6%, to $8.3 millionin 2021 from $9.2 millionin 2020. The year over year decrease in non-interest income largely reflected decreases in net gains on equity securities, net gains on the sales of available-for-sale debt securities and mortgage loans held for sale, partially offset by increases in deposit service charges, higher income from bank-owned life insurance and loan referral fees/interest rate swap revenue. Non-interest expense increased $2.2 million, or 7.4%, to $31.1 millionin 2021 from $28.9 millionin 2020, which primarily reflected higher salaries and employee benefits, data processing costs, regulatory assessments and bank shares tax, partially offset by decreases in occupancy, equipment and professional fee expenses. Income tax expense increased $1.4 million, or 44.4%, to $4.6 millionin 2021 as compared to $3.2 millionin 2020. Return on average assets and return on average shareholders' equity equaled 1.36% and 13.46%, respectively, in 2021, compared to 1.13% and 10.66%, respectively, in 2020. FNCB paid dividends to holders of common stock of $0.27per share in 2021, an increase of $0.05per share, or 22.7%, compared to $0.22per share in 2020. Total dividends declared and paid in 2021 equated to a dividend yield of approximately 2.92% based on the closing stock price of $9.24per share on December 31, 2021. The dividend payout ratio was 25.4% in 2021 compared to 29.0% in 2020. Balance Sheet Profile Total assets increased $198.6 million, or 13.6%, to $1.664 billionat December 31, 2021from $1.465 billionat December 31, 2020. The balance sheet expansion primarily reflected substantial increases in available-for-sale debt securities, and loans and leases, net of deferred origination fees and unearned income. Available-for-sale debt securities increased $172.5 million, or 49.3%, to $522.6 millionat December 31, 2021from $350.0 millionat December 31, 2020. Loans and leases, net of net deferred origination fees and unearned income, increased $78.3 million, or 8.7%, to $979.4 millionat December 31, 2021from $901.1 millionat December 31, 2020Excluding activity related to the origination and forgiveness of PPP loans, loans and leases, net of net deferred origination fees, increased $133.4 million, or 16.2%. Cash and cash equivalents decreased $56.8 million, or 36.4%, to $99.0 millionat December 31, 2021from $155.8 millionat December 31, 2020, as excess liquidity was redeployed to the loan and investment portfolios. Total deposits increased $167.6 million, or 13.0%, to $1.455 billionat December 31, 2021from $1.287 billionat December 31, 2020. Borrowed funds increased $20.0 million, or 194%, to $30.3 millionat December 31, 2021, compared to $10.3 millionat December 31, 2020. The increase in borrowed funds reflected the transition of $20.0 millionthat was part of a cash flow hedge from brokered time deposits to advances through the Federal Home Loan Bank("FHLB") of Pittsburgh. Total shareholders' equity increased $6.6 million, or 4.2%, to $162.5 millionat December 31, 2021from $155.9 millionat December 31, 2020. Contributing to the increase in capital was net income in 2021 of $21.4 millionpartially offset by a $7.5 milliondecrease in accumulated other comprehensive income related primarily to depreciation in the fair value of available-for-sale debt securities, net of deferred taxes, and year-to-date dividends declared and paid of $5.4 million. The repurchase of 330,759 common shares under the board-authorized 2021 stock repurchase program also reduced shareholder's equity by $2.4 million. At December 31, 2021, FNCB Bank'stotal risk-based capital ratio and the Tier 1 leverage ratio were 14.64% and 8.92%, respectively, which exceeded the 10.00% and 5.00% required to be well capitalized under the prompt corrective action provisions of the Basel III capital framework for U.S.banking organizations. FNCB's tangible book value improved $0.43per share, or 5.6%, to $8.13per share at December 31, 2021from $7.70per share at December 31, 2020. Management's Focus in 2021 COVID-19 Considerations Management continued to navigate and respond to the many challenges brought on by the COVID-19 pandemic, with prioritizing the health and safety of FNCB's customers and employees at the forefront. Throughout 2021, FNCB operated under its pandemic preparedness plan and continued to manage the many challenges brought on by the COVID-19 pandemic. FNCB continues to follow CDC and Commonwealth of Pennsylvaniaguidance and take additional precautions to ensure the safety of its customers and its employees. As of the date of this report, FNCB branches are open and are fully operational with lobbies open for consumer traffic.Widespread availability and distribution of vaccines, including boosters, has led to improved economic growth across the United Statesand more specifically within our market area. However, lingering effects from the COVID-19 pandemic, including the effects of the Delta and Omicron variants, and the potential for additional variants, continue to adversely impact employment markets and supply-chains affecting national, regional and local economies, which has resulted in pronounced price inflation in 2021 and continuing into 2022. Additionally, FNCB focused on originating PPP loans under the second round of funding, in addition to assisting customers through the loan forgiveness process. In 2020, FNCB implemented a digital, cloud-based management tool to facilitate the entire PPP loan origination and forgiveness process, providing customers with direct access to educational materials and the ability to easily upload required documents. FNCB's response to the second round of funding resulted in the origination of 679 PPP loans totaling $76.3 millionin 2021. FNCB received $3.6 millionin related loan origination fees associated with this second round of originations, which was deferred and is being recognized upon forgiveness or repayment. During the year ended December 31, 2021, FNCB received forgiveness for PPP loans totaling $130.3 millionand recognized $4.8 millionin net PPP loans origination fees, which is included in interest income in the consolidated statements of income. At December 31, 2021, FNCB had PPP loans still outstanding of $20.9 million, net of $1.0 millionin net deferred origination fees, compared to $76.0 million, net of $2.6 millionin net deferred origination fees at December 31, 2020. 25
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Regarding our banking operations, commercial activity within our market area, while improving , remains volatile and has not returned to pre-pandemic levels. Economic restrictions adopted in 2020, caused many borrowers to request payment deferrals and other payment accommodations. As of
December 31, 2021, all borrowers that previously received payment accommodations have resumed making contractual principal and interest payments. While positive developments have occurred, management is keenly aware that uncertainty regarding the pandemic may still exist. Additionally, FNCB's commercial customer base includes businesses in industries such as automobile, hotel/lodging, restaurants, hospitality, and retail and commercial real estate, all of which has been significantly and adversely impacted in 2021 and 2020 by economic restrictions and employment and supply-chain constraints related to the COVID-19 pandemic. Management continues to closely monitor customers within these industries as the economic recovery continues to unfold. Management expects the COVID-19 pandemic, as well as certain provisions of legislative and regulatory relief efforts, to continue to impact FNCB's operations. At this time, management cannot determine or estimate the full magnitude of the impact and cannot provide any assurances as to the effect on FNCB's results of operations or financial position. The FNCB team will continue to work diligently to address any issues related to the COVID-19 pandemic in a safe and sound manner as they arise. Management believes that FNCB's balance sheet and capital position are strong and will allow FNCB to withstand any further challenges that may be presented. General Banking Operations Outside of navigating the challenges of the pandemic, during 2021, management focused several key strategic initiatives including: enhancing future net interest income run rates through the redeployment of excess liquidity into the investment and loan portfolios and effectively managing funding costs; improving the customer experience by further expanding and enhancing FNCB's digital and traditional product and service offerings; continuing to create efficiency within FNCB's branch network and delivery channels; and investing in strategic business alliances and opportunities to advance financial performance over the long-term. In the fourth quarter of 2021, management expanded FNCB's commercial credit product offerings to include commercial equipment financing, through direct finance leases, tax-free municipal leases and simple interest loans. FNCB hired a team of professionals highly-experienced with this type of financing to launch this new product line, which are doing business under the name 1st Equipment Finance and operating out of FNCB's community office located in Exeter, Luzerne County. Pennsylvania. The new product line officially launched on November 1, 2022. Originations for the remainder of the year were in line with budget expectations. As of December 31, 2021gross loans and municipal leases originated under this initiative were $9.8 million. FNCB expects to originate approximately $50.0 millionannually under this product line. Management regularly evaluates FNCB's branch network and delivery channels for opportunities to improve customer reach or consolidate underutilized locations. With customer banking preferences rapidly evolving to a digital-based approach, management decided to consolidate FNCB's Dunmore-Wheeler community office in its state-of-the-art, recently constructed Main Office, which were located within a mile of each other. On December 16, 2021, FNCB received regulatory approval for the consolidation. The consolidation, which was completed on February 18, 2022, had minimal impact to customers and is expected to reduce operating expense run rates going forward by approximately $230 thousandannually. Focus for 2022 Looking ahead to 2022, FNCB will focus on expanding its comprehensive digital strategy to respond to evolving customer demands and create operational and delivery channel efficiencies. Specific initiatives include enhancement to the existing online banking platforms, integration of a new commercial lending origination platform and utilizing artificial intelligence and robotics to streamline workflows. Additional areas of focus for 2022 include: outsourcing the origination and underwriting of residential mortgage loans through a third party to create efficiencies and improve customer service; building and strengthening our core customer base including increasing existing customer wallet share; and continuing to assist business customers through the PPP loan forgiveness process as well as seeking opportunities to provide for the future banking needs of these customers. In 2022, FNCB expects to benefit from the recognition of approximately $1.0 millionin remaining net loan origination fees from the outstanding PPP loans. Furthermore, in response to a recent increase in inflation, the Federal Open Market Committee(' FOMC") has indicated a potential tightening of monetary policy, including several increases in the federal funds target rate in 2022. With the anticipated increase in market interest rates, management will focus on balance sheet management, controlling funding costs and continuing to evaluate opportunities to enhance net interest income and non-interest income run rates going forward.
Stock Repurchase Program/Subsequent Event
January 26, 2022, FNCB's Board of Directors authorized a stock repurchase program under which up to 750,000 shares of FNCB's outstanding common stock may be acquired in the open market commencing no earlier than March 4, 2022and expiring December 31, 2022pursuant to a trading plan that may be adopted in accordance with Rule 10b5-1 of the Securities Exchange Act of 1934, as amended. In 2021, the Board of Directors had authorized a similar program under which 330,759 common shares were repurchased. The 2021 plan expired on December 31, 2021. The repurchase of shares under the programs are administered through an independent broker. Repurchases may occur from time to time at prevailing market prices, through open market transactions depending upon market conditions, and are subject to SECregulations as well as certain price, market volume and timing constraints specified in the trading plan. Under the program, the purchases will be funded from working capital presently available to FNCB, and the repurchased shares will be returned to the status of authorized but unissued shares of Common Stock. There is not a guarantee as to the exact number of shares that will be repurchased by FNCB, and FNCB may discontinue purchases at any time that management determines additional repurchases are no longer warranted. As of December 31, 2021, FNCB had approximately 20.0 million shares outstanding.
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 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 2021, 2020 and 2019. In 2020, in response to economic fallout from the global pandemic, the
Federal Open Market Committee("FOMC") reduced the federal funds target rate a total of 150 basis points in two emergency actions: a 50-basis point decrease on March 3, 2020followed by another 100 basis point decrease on March 16, 2020. The federal funds target rate remained at 0.00% to 0.25% from this point through the remainder of 2020 and 2021. These actions resulted in a corresponding decrease in the national prime rate to 3.25% at December 31, 2021and December 31, 2020. Despite the decreases, FNCB experienced an increase in yields on taxable loans throughout 2021, compared to 2020. Origination and funding of low-yielding PPP loans with a rate of 1.0%, were offset by the recognition of net origination fees associated with a portion of these loans that were forgiven by the SBA. The Bank remained competitive in deposit rate offerings, parallel to market conditions and a surplus of liquidity within the industry. As a result, FNCB experienced a decrease in funding costs across interest-bearing deposits. 26
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Tax-equivalent net interest income increased
$8.9 million, or 21.8%, to $49.9 millionin 2021 compared to $41.0 millionin 2020. The increase in tax-equivalent net interest income was due to an increase in tax-equivalent interest income due primarily to higher earning asset volumes coupled with a decrease in interest expense due primarily to a reduction in funding costs. Additionally, net interest income was favorably impacted by an increase in net loan origination fees recognized on forgiven PPP loans of $3.6 millionto $4.8 millionin 2021 compared to $1.2 millionin 2020. Tax-equivalent net interest margin, a key measurement used in the banking industry to measure income from earning assets relative to the cost to fund those assets, is calculated by dividing tax-equivalent net interest income by average interest-earning assets. FNCB's tax-equivalent net interest margin improved 10 basis points to 3.45% in 2021 compared to 3.35% in 2020. Additionally, 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, increased 17 basis points to 3.38% in 2021 compared to 3.21% in 2020. Tax-equivalent interest income increased $5.5 million, or 11.6%, to $52.6 millionin 2021 from $47.1 millionin 2020, which reflected higher volumes of average earning assets and higher loan yields, partially offset by a decrease in investment yields. Average earning assets increased $226.2 million, or 18.5%, to $1.449 billionin 2021 from $1.223 billionin 2020, resulting in a corresponding increase to tax-equivalent interest income of $6.1 million. Specifically, average loans increased $39.1 million, or 4.3%, to $950.4 millionin 2021 from $911.4 millionin 2020, which reflected strong organic loan demand and the purchase of loan pools from third party originators. Investment securities averaged $429.6 millionin 2021, an increase of $127.4 million, or 42.1%, compared to $302.2 millionin 2020. FNCB's tax-equivalent yield on loans increased 18 basis points to 4.36% in 2021 compared to 4.18% in 2020, resulting in a corresponding increase in tax-equivalent interest income of $1.7 million. The impact on changes in loan volumes and rates largely reflected the origination of PPP loans. PPP loans, which carry an interest rate of 1.00%, averaged $76.4 millionin 2021. Including amortization of net origination fees associated with PPP loans of $4.8 million, the yield on PPP loans was 7.18% in 2021, compared to 2.61% in 2020. Partially counteracting these positive factors, was a decrease in the tax-equivalent yield on investment securities which decreased 41 basis points to 2.59% in 2021 from 3.00% in 2020 and caused a corresponding decrease to tax-equivalent interest income of $2.1 million. The tax-equivalent yield on average interest-bearing deposits decreased 17 basis points to 0.13% in 2021 from 0.30% in 2020, resulting in a $219 thousanddecrease in tax equivalent interest income, which was more than entirely offset by the $59.7 million, or 649.0%, increase in volume to $68.9 millionin 2021 from $9.2 millionin 2020. The low interest rate environment and continued oversupply of deposits in the market resulted in a further reduction in the cost of funds. As a result, interest expense decreased $3.5 million, or 56.1%, to $2.7 millionin 2021 from $6.2 millionin 2020. Specifically, rates paid on interest-bearing deposits decreased 36 basis points to 0.24% in 2021 from 0.59% in 2020, resulting in a corresponding decrease to interest expense of $3.3 million. The decrease in interest expense due to changes in deposit rates was concentrated in rates paid on interest-bearing demand deposits and time deposits. The rate paid on interest-bearing demand deposits, decreased 32 basis points to 0.16% in 2021 as compared to 0.48% in 2020. In addition, the rate paid on time deposits decreased 55 basis points to 0.66% in 2021, compared to 1.22% in 2020. The reduction in rates paid on interest-bearing demand deposits and time deposits resulted in corresponding reductions to interest expense due to changes in rates of $2.3 millionand $1.0 million, respectively. The rate paid on savings deposits decreased only 3 basis points to 0.07% in 2021 compared to 0.10% in 2020 and had minimal impact on interest expense. Also contributing to the decrease to interest expense was a $39.1 million, or 76.2%, decrease in the average balance of other borrowed funds to $12.2 millionin 2021 from $51.3 millionin 2020, which led to a corresponding decrease in interest expense of $623 thousand. Partially offsetting this decrease, was a 14-basis point increase in the rate paid on borrowed funds to 1.61% in 2021 from 1.47% in 2020, which resulted in a corresponding increase in interest expense of $64 thousand. While FNCB experienced significant deposit growth, changes in average volumes of interest-bearing deposits resulted in only a negligible increase to interest expense, as much of the growth was concentrated in low-costing interest-bearing demand deposits. Additionally, FNCB continued to experience deposit migration as higher-costing time deposits migrated to non-maturity deposits at the end of their term. Total average interest-bearing deposits increased $157.6 million, or 17.3%, to $1.066 billionin 2021 from $908.5 millionin 2020, which resulted in a $409 thousandcorresponding increase in interest expense. The average balance of time deposits decreased $18.9 million, or 9.7%, to $176.2 millionin 2021 from $195.1 millionin 2020, which resulted in a corresponding decrease to interest expense of $212 thousandthat was more than entirely offset by an increase to interest expense of $602 thousanddue to a $153.3 million, or 25.1%, increase in average interest-bearing demand deposits to $764.8 millionin 2021 from $611.5 millionin 2020. Additionally, FNCB experienced strong demand for its non-interest-bearing deposit products as average non-interest-bearing demand deposits increased $73.2 million, or 30.2%, to $315.2 millionin 2021 from $242.0 millionin 2020. 27
Table of Contents Non-accrual loans The interest income that would have been earned on non-accrual and restructured loans, had these loans performed in accordance with their original terms approximated to
$215 thousandand $353 thousandfor the years ended December 31, 2021and 2020, respectively. Additionally, interest income recognized on impaired loans based on payments received approximated to $305 thousandand $351 thousandfor the years ended December 31, 2021and 2020, respectively.
The following table presents the components of net interest income for the three
Summary of Net Interest Income
For the Year Ended December 31, 2021 2020 2019 Average Yield/ Average Yield/ Average Yield/ (dollars in thousands) Balance Interest Cost Balance Interest Cost Balance Interest Cost Assets: Earning assets (2)(3) Loans and leases-taxable (4)
$ 905,237 $ 39,6454.38 % $ 863,702 $ 35,9804.17 % $ 784,124 $ 36,3324.63 % Loans and leases-tax free (4) 45,217 1,777 3.93 47,669 2,070 4.34 45,246 1,881 4.16 Total loans and leases (1)(2) 950,454 41,422 4.36 911,371 38,050 4.18 829,370 38,213 4.61 Securities-taxable 346,204 8,476 2.45 250,881 7,322 2.92 274,739 7,901 2.88 Securities-tax free 83,437 2,641 3.17 51,367 1,738 3.38 4,618 189 4.09 Total securities (1)(5) 429,641 11,117 2.59 302,248 9,060 3.00 279,357 8,090 2.90 Interest-bearing deposits in other banks and federal funds sold (8) 68,932 88 0.13 9,203 28 0.30 7,910 188 2.38 Total earning assets (8) 1,449,027 52,627 3.63 % 1,222,822 47,138 3.85 % 1,116,637 46,491 4.16 % Non-earning assets (8) 129,386 145,227 101,273 Allowance for loan and lease losses (12,311 ) (10,867 ) (9,359 ) Total assets $ 1,566,102 $ 1,357,182 $ 1,208,551Liabilities and Shareholders' Equity: Interest-bearing liabilities Interest-bearing demand deposits $ 764,7981,252 0.16 % $ 611,5112,933 0.48 % $ 513,5424,167 0.81 % Savings deposits 125,022 87 0.07 % 101,847 97 0.10 93,114 124 0.13 Time deposits 176,245 1,169 0.66 % 195,140 2,374 1.22 238,145 3,810 1.60 Total interest-bearing deposits 1,066,065 2,508 0.24 % 908,498 5,404 0.59 844,801 8,101 0.96 Borrowed funds and other interest-bearing liabilities 12,228 197 1.61 51,287 756 1.47 63,640 1,695 2.66 Total interest-bearing liabilities 1,078,293 2,705 0.25 % 959,785 6,160 0.64 % 908,441 9,796 1.08 % Demand deposits 315,181 242,017 164,035 Other liabilities 13,892 11,368 11,395 Shareholders' equity 158,736 144,012 124,680 Total liabilities and shareholders' equity $ 1,566,102 $ 1,357,182 $ 1,208,551Net interest income/interest rate spread (6) (8) 49,922 3.38 % 40,978 3.21 % 36,695 3.08 % Tax equivalent adjustment (928 ) (800 ) (435 ) Net interest income as reported $ 48,994 $ 40,178 $ 36,260Net interest margin (7) (8) 3.45 % 3.35 % 3.29 %
(1) Interest income is presented on a tax-equivalent basis using a 21% rate.
(2) Loans are stated net of unearned income.
(3) Non-accrual loans are included in loans within earning assets.
(4) Interest income on loans includes net loan fees of
2020, and net loan costs of
(5) The yields for securities that are classified as available for sale are
based on the average historical amortized cost.
(6) Interest rate spread represents the difference between the average yield on
interest-earning assets and the cost of average interest-bearing liabilities
and is presented on a tax equivalent basis.
(7) Net interest income as a percentage of total average interest earning
(8) Information for 2019 includes revisions to average balances to reclassify
certain average deposits in other banks from interest-bearing deposits in
other banks to non-earning assets in the amount of
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The most significant impact on net income between periods is derived from the interaction of changes in the volume and rates earned or paid on interest-earning assets and interest-bearing liabilities. The volume of earning assets, specifically loans and investments, compared to the volume of interest-bearing liabilities represented by deposits and borrowings, combined with the spread, produces the changes in net interest income between periods. The following table summarizes the effect that changes in volumes of earning assets and interest-bearing liabilities and the interest rates earned and paid on these assets and liabilities have on net interest income. The net change or mix component attributable to the combined impact of rate and volume changes has been allocated proportionately to the change due to volume and the change due to rate. Rate Volume Analysis For the Year Ended December 31, 2021 vs. 2020 2020 vs. 2019 Increase (Decrease) Due to Change in Increase (Decrease) Due to Change in (in thousands) Volume Rate Total Volume Rate Total Interest income: Loans and leases-taxable
$ 1,773 $ 1,892 $ 3,665 $ 3,501 $ (3,853 ) $ (352 )Loans and leases-tax free (110 ) (183 ) (293 ) 103 86 189 Total loans and leases 1,663 1,709 3,372 3,604 (3,767 ) (163 ) Securities-taxable 3,097 (1,943 ) 1,154 (695 ) 116 (579 ) Securities-tax free 1,022 (119 ) 903 1,587 (38 ) 1,549 Total securities 4,119 (2,062 ) 2,057 892 78 970 Interest-bearing deposits in other banks and federal funds sold 279 (219 ) 60 35 (195 ) (160 ) Total interest income 6,061 (572 ) 5,489 4,531 (3,884 ) 647 Interest expense: Interest-bearing demand deposits 602 (2,283 ) (1,681 ) 692 (1,926 ) (1,234 ) Savings deposits 19 (29 ) (10 ) 11 (38 ) (27 ) Time deposits (212 ) (993 ) (1,205 ) (617 ) (819 ) (1,436 ) Total interest-bearing deposits 409 (3,305 ) (2,896 ) 86 (2,783 ) (2,697 ) Borrowed funds and other interest-bearing liabilities (623 ) 64 (559 ) (284 ) (655 ) (939 ) Total interest expense (214 ) (3,241 ) (3,455 ) (198 ) (3,438 ) (3,636 ) Net interest income $ 6,275 $ 2,669 $ 8,944 $ 4,729 $ (446 ) $ 4,283
Provision for Loan and Lease Losses
The provision for loan and lease losses is an expense charged against net interest income to provide for probable losses attributable to uncollectible loans and is based on management's analysis of the adequacy of the ALLL. A credit to loan and lease losses reflects the reversal of amounts previously charged to the ALLL. Management closely monitors the loan portfolio and the adequacy of the ALLL by considering the underlying financial performance of the borrower, collateral values and associated credit risks. Future material adjustments may be necessary to the provision for loan and lease losses and the ALLL if economic conditions or loan performance differ substantially from the assumptions management considered in its evaluation of the ALLL. FNCB recorded a provision for loan and lease losses of
$166 thousandfor the year ended December 31, 2021, a decrease of $1.8 million, or 91.5%, compared to $1.9 millionfor the year ended December 31, 2020. The elevated amount credit provisioning in 2020 was primarily related to the economic disruption and uncertainty caused by the COVID-19 pandemic, as management took into consideration the potential adverse impact that the COVID-19 pandemic had on economic conditions, at the time, in its application of FNCB's methodology on the allowance for loan and lease losses. Specifically, management tried to address this adverse impact by adjusting the qualitative factor associated with changes in national, local and business economic conditions and developments. In addition, management increased the unallocated portion of the ALLL to a maximum of 10.0% of the total allowance. Both actions resulted in higher credit provisioning during the year ended December 31, 2020. 29
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The following table presents the components of non-interest income for the years
Components of Non-Interest Income
Year Ended December 31, (in thousands) 2021 2020 Deposit service charges
$ 3,877 $ 3,252Net gain on the sale of available-for-sale debt securities 213
Net gain on equity securities 701
Net gain on the sale of mortgage loans held for sale 352 653 Net gain on the sale of other real estate owned 11 - Loan-related fees 390 348 Income from bank-owned life insurance 541 482 Bank-owned life insurance settlement 426 - Loan referral fees 72 390 Merchant services revenue 593 565 Other 1,092 861 Total non-interest income
$ 8,268 $ 9,250For the year ended December 31, 2021, non-interest income decreased $1.0 millionto $8.3 millioncompared to $9.3 millionfor the year ended December 31, 2020. The 10.6% decrease in non-interest income primarily reflected decreases in net gains on the sale of available-for-sale debt securities, net gains on equity securities, net gains on the sale of mortgage loans held for sale, and loan referral fees, partially offset by increases in deposit services charges and a settlement received on a bank-owned life insurance policy. Net gains on the sale of available-for-sale debt securities decreased to $213 thousandin 2021, compared to $1.5 millionin 2020, while net gains on equity securities that decreased $470 thousand, to $701 thousandin 2021, from $1.2 millionin 2020. Net gains on equity securities in 2020 included a $1.1 thousandgain recognized on FNCB's investment in the common stock of a privately held bank holding company as part of the completion of a merger and acquisition. Also contributing to the lower level of non-interest income were decreases in the net gains realized on the sale of mortgage loans held for sale. As part of an asset/liability management initiative to enhance future interest income run rates, management elected to hold higher-quality saleable mortgage loans in the loan portfolio. This initiative contributed to a $301 thousand, or 46.1%, decrease in net gains on the sale of mortgages held for sale to $352 thousandin 2021, compared to $653 thousandin 2020. Loan referral fees decreased $318 thousand, or 81.5%, to $72 thousandin 2021 from $390 thousandin 2020. Loan referral fees include fees received from third-party counterparties related to various commercial loan interest rate swap transactions and fees received for the referral of FHA residential mortgage loans to a third-party broker. The decrease in these fees reflected a reduction in the number and volume of such transactions in 2021 as compared to 2020. Partially offsetting the decreases to non-interest income was a $625 thousand, or 19.2%, increase in deposit service charges, resulting primarily from an increase in debit card usage. FNCB also received a $426 thousandsettlement from bank-owned life insurance death benefit, that was recognized in 2021 and recorded in other non-interest income. Non-Interest Expense
The following table presents the major components of non-interest expense for
the years ended
Components of Non-Interest Expense
Year Ended December 31, (in thousands) 2021 2020 Salaries and employee benefits
$ 16,697 $ 15,246Occupancy expense 2,039 2,052 Equipment expense 1,338 1,477 Advertising expense 712 685 Data processing expense 3,689 2,933 Regulatory assessments 609 387 Bank shares tax 975 786 Professional fees 674 999 Other operating expenses 4,336 4,350 Total non-interest expense $ 31,069 $ 28,915Non-interest expense totaled $31.1 millionin 2021, an increase of $2.2 million, or 7.5%, from $28.9 millionin 2020. The increase resulted primarily from increases in salaries and employee benefits, data processing expenses, regulatory assessments and bank shares tax. Partially offsetting these increases were decreases in occupancy costs, equipment expenses and professional fee expenses. Salaries and employee benefits increased $1.5 million, or 9.5%, to $16.7 millionin 2021 from $15.2 millionin 2020. The increase in salaries and employee benefits was primarily due to higher full-time salaries, payroll taxes and benefits associated with staff additions, including the onboarding of the 1st Equipment Financing team of professionals. Also factoring into the increase in salaries and employee benefits were increases in employment retirement plan contributions and incentive pay. Data processing expenses increased $756 thousand, or 25.8%, to $3.7 millionin 2021, compared to $2.9 millionin 2020, resulting from additional costs associated with a remote work environment, enhancements made to FNCB's digital banking services, including cybersecurity protection, and higher software costs. Regulatory assessments increased $222 thousand, or 57.4%, to $609 thousandin 2021 from $387 thousandin 2020, which reflected the utilization of the remaining FDICsmall bank assessment credit in 2020. Bank shares tax also increased in 2021, to $975 thousand, up $189 thousand, or 24.1%, from $786 thousandrecorded at December 31, 2020, due to an increase in capital at the Bank level. 30
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These increases were slightly offset by the decreases in professional fees and equipment expense. Professional fees decreased
$325 thousand, or 32.5%, to $674 thousandin 2021 from $999 thousandin 2020. Equipment expenses decreased $139 thousand, or 9.4%, to $1.3 millionin 2021, compared to $1.5 millionin 2020. The reduction in professional fees in 2021 was largely due to the expiration of a revenue-share agreement with a third-party consultant, while the decrease in equipment expenses was primarily due to a decrease in depreciation related to office and computer equipment. Other operating expenses of $4.3 millionin 2021 included $300 thousandin losses associated with the transfer of two bank-owned properties to other real estate owned. As part of management's ongoing initiative to optimize its branch network, on December 16, 2021, FNCB received regulatory approval to consolidate a community office located in the Borough of Dunmore, Lackawanna County, Pennsylvaniawith its main office located in the same Borough. The consolidation is expected to be completed in the first quarter of 2022 and is expected to generate annual operating cost savings of approximately $230 thousand. Additionally, with the continuing evolution of digital banking and declining utilization of brick-and-mortar branches, management entered into a sales agreement to sell land located in Lackawanna Countythat FNCB was holding for future branch expansion. Provision for Income Taxes FNCB recorded income tax expense of $4.6 millionin 2021, an increase of $1.4 million, or 44.4%, compared to $3.2 millionin 2020. The increase in income tax expense was due to higher taxable income in 2021 as compared to 2020. 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 deferred tax asset will not be realized in future periods, a valuation allowance is calculated and recorded. These determinations are inherently subjective and depend upon management's estimates and judgments used in their evaluation of both positive and negative evidence. 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, 2021taking 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, 2021or 2020. FINANCIAL CONDITION Total assets were $1.664 billionat December 31, 2021, an increase of $198.6 million, or 13.6%, from $1.465 billionat December 31, 2020. The increase in total assets primarily reflected substantial increases in available-for-sale debt securities, and loans and leases, net of deferred origination fees and unearned income. Available-for-sale debt securities increased $172.5 million, or 49.3%, to $522.6 millionat December 31, 2021from $350.0 millionat December 31, 2020. Loans and leases, net of net deferred origination fees and unearned income, increased $78.3 million, or 8.7%, to $979.4 millionat December 31, 2021from $901.1 millionat December 31, 2020. Excluding activity related to the origination and forgiveness of PPP loans, loans and leases, net of net deferred origination fees, increased $133.4 million, or 16.2%. The increases in the investment and loan portfolios were funded primarily by deposit growth, as total deposits increased $167.6 million, or 13.0%, to $1.455 billionat December 31, 2021from $1.287 billionat December 31, 2020. The increase in deposits was primarily attributable to increases in both interest-bearing and non-interest-bearing deposits. Total borrowed funds increased $20.0 million, or 194.0%, to $30.3 millionat December 31, 2021, compared to $10.3 millionat December 31, 2020. Cash and cash equivalents decreased $56.8 million, or 36.4%, to $99.0 millionat December 31, 2021from $155.8 millionat December 31, 2020, as excess liquidity was redeployed to the loan and investment portfolios. FNCB had $20.0 millionin borrowings through the Federal Home Loan Bank("FHLB") of Pittsburghoutstanding at December 31, 2021. Total shareholders ' equity increased $6.6 million, or 4.2%, to $162.5 millionat December 31, 2021from $155.9 millionat December 31, 2020. Contributing to the increase in capital was net income in 2021 of $21.4 millionpartially offset by a $7.5 milliondecrease in accumulated other comprehensive income related primarily to depreciation in the fair value of available-for-sale debt securities, net of deferred taxes, and year-to-date dividends declared and paid of $5.4 million. The repurchase of 330,759 common shares under the board-authorized 2021 stock repurchase program also reduced shareholder's equity by $2.4 million. FNCB's tangible book value was $8.13per share at December 31, 2021, an increase of $0.43per share, or 5.6%, from $7.70per share at December 31, 2020. 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, 2021and 2020, 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 Pittsburghstock, 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. 31
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December 31, 2021, 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. Treasurysecurities. 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, 2021. The investment portfolio is predominantly fixed rate in nature. As such, FNCB's debt securities are inherently subject to interest rate risk, defined as the risk that an investment's value will change due to a change in interest rates, in the spread between two rates and in the shape of the yield curve. U.S. Treasuryrates fell significantly in the first quarter of 2020 in response to the outbreak of COVID-19, declaration of a national emergency and economic shutdown in March 2020. U.S. Treasuryrates fluctuated slightly but hovered near historic lows for the remainder of 2020. In 2021, longer-term U.S. Treasuryrates gradually increased over the course of the year, however short-term rates remained at historic lows throughout most of 2021, before increasing considerably in the fourth quarter due to talk of potential tightening of monetary policy by the FOMCin early 2022. The 10-year Treasuryrate, which was 0.93% at December 31, 2020, increased 59 basis points to 1.52% at December 31, 2021, while the 2-year Treasuryrate, which was 0.13% at December 31, 2020, increased 15 basis points 0.28% at September 30, 2022before jumping another 45 basis point to 0.73% at December 31, 2021. Additionally, the spread between the 2-year and 10-year treasury, which was 80 basis points at December 31, 2020, fluctuated throughout 2021 and widened to 158 basis points at March 31, 2021then gradually narrowed to 79 basis points at December 31, 2021, indicating flattening of the yield curve. Generally, a security's value reacts inversely with changes in interest rates. Due to the increase in rates comparing December 31, 2021and 2020, FNCB experienced significant depreciation in the fair value of its investment portfolio. FNCB reported a net unrealized holding gain on its investment portfolio of $6.1 million, net of income taxes of $1.6 millionat December 31, 2021, compared to a $14.0 millionnet unrealized holding gain, net of income taxes of $3.7 million, at December 31, 2020. Any further increase in interest rates could result in further depreciation in the fair value of FNCB's securities portfolio and capital position.
The following table presents the carrying value of available-for-sale debt
securities and equity securities, at fair value at
Composition of the Investment Portfolio
December 31, 2021 2020 2019 (dollars in thousands) Fair Value % of Portfolio Fair Value % of Portfolio Fair Value % of Portfolio Available-for-sale debt securities U.S. Treasuries
$ 36,3556.96 % $ - - % $ - - % Obligations of state and political subdivisions 244,372 46.76 205,828 58.80 117,763 43.16 U.S. Government-sponsored agency: Collateralized mortgage obligations - residential 100,710 19.27 56,972 16.28 80,294 29.43 Collateralized mortgage obligations - commercial 3,727 0.71 3,904 1.12 17,723 6.50 Residential mortgage-backed securities 25,506 4.88 13,026 3.72 18,485 6.78 Private Collateralized mortgage obligations 67,165 12.85 38,199 10.91 25,075 9.19 Corporate debt securities 32,063 6.14 24,580 7.02 7,182 2.63 Asset backed securities 11,932 2.28 7,526 2.15 5,621 2.06 Negotiable certificates of deposit 736 0.14 - - 696 0.26 Total available-for-sale debt securities $ 522,566100.00 % $ 350,035100.00 % $ 272,839100.00 % Equity securities, at fair value $ 4,922 $ 3,026 $ 920Management monitors the investment portfolio regularly and adjusts the investment strategy to reflect changes in liquidity needs, asset/liability strategy and tax-planning requirements. The composition of FNCB's investment portfolio shifted in 2020, reflecting the change in its income tax position, as the majority of available NOL carryforwards were consumed in 2020, this resulted in FNCB increasing its holdings of tax-free investments in 2020 and 2021. 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%. 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 security is compared to their Portfolio Credit Benchmark to identify which securities may contain more than a minimal risk of payment default. As of December 31, 2021, the third-party report concluded that each security held within the portfolio met or exceeded the benchmark and that none of the securities required further review. The next third-party review is scheduled for June 30, 2022. Management also monitors municipal securities monthly using a third-party surveillance report that indicates changes in issuer status, credit downgrades, rating changes and other pertinent events. FNCB sold available-for-sale securities in 2021 with an aggregate amortized cost of $2.8 millionand a weighted-average yield of 2.78%. Gross proceeds received on the sales totaled $3.0 million, with net gains of $0.2 millionrealized upon the sales and included in non-interest income. Given the economic climate during 2021, characterized by historically low interest rates and high liquidity due to the pandemic, FNCB's investment strategy included a focus on yield maintenance and utilizing excess liquidity to purchase investments within the Bank's risk tolerance in order to enhance interest income streams. FNCB purchased 137 securities with an aggregate cost of $224.0 millionand a weighted-average yield of 1.63% during the year ended December 31, 2021. Securities purchased were diversified across all major sectors, including $79.2 millionin CMOs of U.S.government-sponsored agencies, $36.8in U.S. Treasurysecurities, $40.3 millionin private CMOs, $27.3 millionin taxable obligations of state and political subdivisions, $24.7 millionin tax-free obligations of state and political subdivisions, $8.5 millionin corporate debt securities, $6.5 millionin asset-backed securities and $744 thousandin negotiable certificates of deposit. 32
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The following table presents the weighted-average yields on available-for-sale
debt securities by major category and maturity period at
December 31, 2021 Collateralized Mortgage Obligations, Mortgage-Backed and Asset-Backed Within One Year > 1 - 5 Years 6-10 Years Over 10 Years Securities Total Weighted-average yield U.S. Treasury - % 1.11 % 1.18 % - % - % 1.17 % Obligations of state and political subdivisions 2.67 2.95 2.34 2.78 - 2.77
agencies: Collateralized mortgage obligations - residential - - - - 1.62 1.62 Collateralized mortgage obligations - commercial - - - - 1.98 1.98 Mortgage-backed securities - - - - 2.23 2.33 Private collateralized mortgage obligations - - - - 2.32 2.32 Corporate debt securities - - 4.79 - - 4.79 Asset-backed securities - - - - 1.46 1.46 Negotiable certificates of deposit - 1.02 - - - 1.02 Weighted-average yield 2.67 % 2.80 %
2.77 % 2.78 % 1.92 % 2.43 % OTTI Evaluation There was no OTTI recognized during the years ended
December 31, 2021and 2020. For additional information regarding management's evaluation of securities for OTTI, see Note 3, "Securities" of the notes to consolidated financial statements included in Item 8, "Financial Statements and Supplementary Data" to this Annual Report on Form 10-K.
Management noted no indicators of impairment for the FHLB of
Loans and Leases Total loans and leases, gross increased by
$78.1 million, or 8.6%, to $981.4 millionat December 31, 2021from $903.3 millionat December 31, 2020. The growth in the loan and lease portfolio primarily reflected increases in residential and commercial real estate loans, and loans to state and political subdivisions. Partially offsetting these increases were reductions in commercial and industrial loans, construction, land acquisition and development loans and consumer loans. With respect to commercial and industrial loans, on January 19, 2021, the SBA fully reopened the loan portal and began accepting applications for a second round of PPP loans through May 31, 2021when the application period ended and the portal closed. During the first half of 2021, FNCB originated and received funding for 679 PPP loans totaling $76.3 million. FNCB also continued to assist PPP customers in applying for forgiveness. At December 31, 2021, PPP loans outstanding were $21.9 million, a decrease of $54.3 million, compared to $78.6 millionat December 31, 2020. In 2021, FNCB received forgiveness on PPP loans of $132.9 millionand expects to receive forgiveness for the remaining PPP loans in early 2022. In addition to PPP loan activity, in the fourth quarter of 2021, FNCB expanded its commercial credit product offerings to include commercial equipment financing, including simple interest loans and direct finance and municipal leases. The majority of equipment financing originations under this product line is expected to come through indirect, third-party dealers. As of December 31, 2021, simple interest loans and municipal leases originated under this initiative were $7.9 millionand $2.4 million, respectively. To assist in deploying excess liquidity, enhance interest income and further diversify the loan portfolio, FNCB purchased individual loans and loan pools originated by third-party originators, including $14.3 millionin commercial equipment loans, $1.8 millionin unsecured commercial loans, and $7.4 millionin unsecured personal loans. The pools have relatively short average lives to provide cash flow. Commercial equipment loans are secured by UCCs and titles, while credit enhancement features including reserve funds provide credit protection for the personal and commercial unsecured pools. FNCB has reviewed individual loan files, if feasible, or reviewed a random sample of loan files and credit metrics to ensure underwriting was aligned with FNCB's internal underwriting standards. Historically, commercial lending activities have represented a significant portion of FNCB's loan portfolio. Commercial lending includes commercial and industrial loans, including commercial equipment financing and purchased loans, commercial real estate loans, and construction, land acquisition and development loans, and represented 61.2% and 63.3% of total loans at December 31, 2021and December 31, 2020, respectively. The decrease in commercial lending was largely due to the decreases in commercial and industrial loans, specifically PPP loans, due to loan forgiveness, and construction, land acquisition and development loans. Excluding PPP loans, commercial lending represented 59.0% of total loans at December 31, 2021compared to 54.6% at December 31, 2020. From a collateral standpoint, a majority of FNCB's loan portfolio consists of loans secured by real estate. Real estate secured loans, which include commercial real estate, construction, land acquisition and development, and residential real estate loans increased by $111.8 million, or 21.1%, to $641.8 millionat December 31, 2021from $530.0 millionat December 31, 2020. The increase was concentrated in commercial and residential real estate loans. Real estate secured loans represents 65.4% and 58.7% at December 31, 2021and December 31, 2020, respectively. Commercial real estate loans, which include long-term commercial mortgage financing and are primarily secured by first or second lien mortgages, increased $92.1 million, or 33.6%, to $366.0 millionat December 31, 2021, from $273.9 millionat December 31, 2020. While, commercial and industrial loans decreased $45.3 million, or 19.0%, during the year to $193.1 millionat December 31, 2021from $238.4 millionat December 31, 2020. Commercial and industrial loans consist primarily of equipment loans, including purchased commercial equipment loans, working capital financing, revolving lines of credit and loans secured by cash and marketable securities and PPP loans. Commercial and industrial loans decreased $45.3 million, or 19.0%, to $193.1 millionat December 31, 2021from $238.4 millionat December 31, 2020. The decline was largely due to PPP loan forgiveness. Excluding PPP loans, commercial and industrial loans increased $11.1 million, or 7.1%, reflecting an increase in loan demand, loan purchases and the launch of the new equipment financing product line. 33
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Residential real estate loans include fixed-rate and variable-rate, amortizing mortgage loans, home equity term loans and home equity lines of credit ("HELOCs"). FNCB primarily underwrites fixed-rate purchase and refinance of residential mortgage loans for sale in the secondary market to reduce interest rate risk and provide funding for additional loans. Additionally, FNCB offers a "WOW" mortgage product, which is a non-saleable mortgage with maturity terms of 7.5 to 19.5 years, that offers customers an attractive fixed interest rate and low closing costs. Residential real estate loans totaled
$234.1 millionat December 31, 2021, an increase of $37.8 million, or 19.2%, from $196.3 millionat December 31, 2020. In 2021, FNCB experienced strong demand for its proprietary WOW mortgage product, which increased $28.0 million, or 38.5%, to $100.9 millionat December 31, 2021from $72.9 millionat December 31, 2020. Consumer loans totaled $85.5 millionat December 31, 2021, a decrease of $0.4 million, or 0.4%, from $85.9 millionat December 31, 2020. The reduction in consumer loans was concentrated within the indirect auto loan portfolio, which decreased $7.6 million, or 9.2%, to $74.9 millionat December 31, 2021from $82.5 millionat December 31, 2020. The decrease in indirect automobile loans reflected automobile supply-chain constraints for new automobiles, coupled with a reduction in supply of pre-owned automobiles. The purchase of $7.4 millionin consumer loan pools partially counteracted the reduction in indirect automobile loans. Loans to state and municipal governments increased $12.1 million, or 24.6%, to $61.1 millionat December 31, 2021from $49.0 millionat December 31, 2020.
The following table presents loans receivable, net by major category at
Loan and Lease Portfolio Detail
December 31, 2021 2020 % of Total % of Total (in thousands) Amount Loans, Gross Amount Loans, Gross Residential real estate
$ 234,11323.86 % $ 196,32821.73 % Commercial real estate 366,009 37.29 273,903 30.32 Construction, land acquisition and development 41,646 4.24 59,785 6.62 Commercial and industrial 193,086 19.67 238,435 26.39 Consumer 85,522 8.72 85,881 9.51 State and political subdivisions 61,071 6.22 49,009 5.43 Total loans, gross 981,447 100.00 % 903,341 100.00 % Unearned income (1,442 ) (110 ) Net deferred loan and lease fees (566 ) (2,129 ) Allowance for loan and lease losses (12,416 ) (11,950 ) Loans and leases, net $ 967,023 $ 889,152
The following tables present the maturity distribution and interest rate
information of the loan and lease portfolio by major category as of
Loans and Leases by Maturity and Interest Rate Sensitivity
December 31, 2021 Five to Within One One to Five Fifteen Over Fifteen (in thousands) Year Years Years Years Total Residential real estate
$ 6,630 $ 13,348 $ 112,233 $ 101,902 $ 234,113Commercial real estate 23,596 54,900 203,205 84,308 366,009 Construction, land acquisition and development 5,336 15,438 5,281 15,591 41,646 Commercial and industrial 63,122 109,857 20,107 - 193,086 Consumer 1,713 58,089 25,148 572 85,522 State and political subdivisions 152 8,734 35,834 16,351 61,071 Total loans and leases, gross $ 100,549 $ 260,366 $ 401,808 $ 218,724 $ 981,447December 31, 2021 Five to Within One One to Five Fifteen Over Fifteen (in thousands) Year Years Years Years Total Loans with fixed rates Residential real estate $ 1,338 $ 11,607 $ 78,778 $ 84,328 $ 176,051Commercial real estate 5,778 38,908 18,249 - 62,935 Construction, land acquisition and development 2,428 1,168 586 3,910 8,092 Commercial and industrial 7,893 101,194 15,367 - 124,454 Consumer 1,647 57,994 25,070 - 84,711 State and political subdivisions 152 716 31,821 715 33,404 Total loans and leases with fixed rates $ 19,236 $ 211,587 $ 169,871 $ 88,953 $ 489,647Loans with floating rates Residential real estate $ 5,292 $ 1,741 $ 33,455 $ 17,574 $ 58,062Commercial real estate 17,818 15,992 184,956 84,308 303,074 Construction, land acquisition and development 2,908 14,270 4,695 11,681 33,554 Commercial and industrial 55,229 8,663 4,741 - 68,632 Consumer 66 95 78 572 811 State and political subdivisions - 8,018 4,013 15,636 27,667 Total loans and leases with floating rates $ 81,313 $ 48,779 $ 231,938 $ 129,771 $ 491,80034
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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, 2021and 2020. 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, 2021and 2020: Loan Concentrations December 31, 2021 2020 % of Gross % of Gross (dollars in thousands) Amount Loans Amount Loans Retail space/shopping centers $ 48,5904.95 % $ 43,9264.86 % 1-4 family residential investment properties 92,745 9.45 % 58,114 6.43 %
Modifications Related to COVID-19
March 2020, the federal banking regulators issued guidance encouraging banks to work prudently with and provide short-term payment accommodations to borrowers affected by COVID-19. Additionally, Section 4013 of the CARES Act addressed COVID-19 related modifications and specified that such modifications made on loans that were current as of December 31, 2019do not need to be classified as TDRs. In 2020, FNCB had applied this guidance and made 922 such modifications, with 843 loans having an aggregate recorded investment of $151.4 millionoutstanding at December 31, 2020. These initial modifications provided borrowers with a short-term, typically three-month, interest-only period or full payment deferral. FNCB extended a second payment deferral modification for 79 loans with an aggregate recorded investment of $22.0 million. Management closely monitored all loans for which a payment deferral was granted and as of December 31, 2021, there were no loans that were still under deferral. Asset Quality Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are stated at the amount of unpaid principal, net of unearned interest, deferred loan fees and costs, and reduced by the ALLL. The ALLL is established through a provision for loan and lease losses charged to earnings. FNCB has established and consistently applies loan policies and procedures designed to foster sound underwriting and credit monitoring practices. Credit risk is managed through the efforts of loan officers, the Chief Credit Officer, the loan review function, and the Credit Risk Management and the ALLL committees, as well as oversight from the Board of Directors, including the Director's Loan Committee. Management continually evaluates its credit risk management practices to ensure problems in the loan portfolio are addressed in a timely manner, although, as is the case with any financial institution, a certain degree of credit risk is dependent in part on local and general economic conditions that are beyond management's control. Under FNCB's risk rating system, loans that are rated pass, special mention, substandard, doubtful, or loss are reviewed regularly as part of the risk management practices. The Credit Risk Management Committee, which consists of key members of management from the finance, legal, retail lending and credit administration units, meets monthly, or more often as necessary, to review individual problem credits and workout strategies and provides monthly reports to the Director's Loan Committee and full Board of Directors. A loan is considered impaired when it is probable that FNCB will be unable to collect all amounts due (including principal and interest) according to the contractual terms of the note and loan agreement. For purposes of the analysis, all TDRs, loan relationships with an aggregate outstanding balance greater than $100 thousandrated substandard and non-accrual, and loans that are identified as doubtful or loss are considered impaired. Impaired loans are analyzed individually to determine the amount of impairment. For collateral-dependent loans, impairment is measured based on the fair value of the collateral supporting the loans. A loan is determined to be collateral dependent when repayment of the loan is expected to be provided through the operation or liquidation of the collateral held. For impaired loans that are secured by real estate, management obtains external appraisals annually, or more frequently as warranted, to ascertain a fair value so that the impairment analysis can be updated. Should a current appraisal not be available at the time of impairment analysis, management may use other valuations sources, including current letters of intent, broker price opinions or executed agreements of sale. Under the fair value of collateral method, the impaired amount of the loan is deemed to be the difference between the loan amount and the fair value of the collateral, less the estimated costs to sell. For real estate secured loans, management generally estimates selling costs using a factor of 10%, which is based on typical cost factors, such as a 6% broker commission, 1% transfer taxes, and 3% various other miscellaneous costs associated with the sales process. If the valuation indicates that the fair value has deteriorated below the carrying value of the loan, the difference between the fair value and the principal balance is either charged off or a specific reserve is established. For impaired loans for which the value of the collateral less estimated costs to sell exceeds the loan value, the impairment is determined to be zero. For non-collateral-dependent loans, impairment is measured based on the present value of expected future cash flows, net of any deferred fees and costs, discounted at the loan's original effective interest rate. Loans to borrowers that are experiencing financial difficulty that are modified and result in the granting of concessions to the borrowers are classified as TDRs and are considered to be impaired. Such concessions generally involve an extension of a loan's stated maturity date, a reduction of the stated interest rate, payment modifications, capitalization of property taxes with respect to mortgage loans or a combination of these modifications. Non-accrual TDRs are returned to accrual status if principal and interest payments, under the modified terms, are brought current, are performing under the modified terms for six consecutive months, and management believes that collection of the remaining interest and principal is probable. Non-performing loans are monitored on an ongoing basis as part of FNCB's loan review process. Additionally, work-out for non-performing loans and OREO are actively monitored through the Credit Risk Management Committee. A potential loss on a non-performing asset is generally determined by comparing the outstanding loan balance to the fair market value of the pledged collateral, less estimated cost to sell. 35
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Loans are placed on non-accrual when a loan is specifically determined to be impaired or when management believes that the collection of interest or principal is doubtful. This generally occurs when a default of interest or principal has existed for 90 days or more, unless the loan is well secured and in the process of collection, or when management becomes aware of facts or circumstances that the loan would default before 90 days. FNCB determines delinquency status based on the number of days since the date of the borrower's last required contractual loan payment. When the interest accrual is discontinued, all unpaid interest income is reversed and charged back against current earnings. Any subsequent cash payments received are applied, first to the outstanding loan amounts, then to the recovery of any charged-off loan amounts, with any excess treated as a recovery of lost interest. A non-accrual loan is returned to accrual status when the loan is current as to principal and interest payments, is performing according to contractual terms for six consecutive months and future payments are reasonably assured.
The following table presents information about non-performing assets and
accruing TDRs as of
Non-performing Assets and Accruing TDRs
December 31, (dollars in thousands) 2021 2020 2019 2018 2017 Non-accrual loans, including non-accrual TDRs
$ 3,863 $ 5,581 $ 9,084 $ 4,696 $ 2,578Loans past due 90 days or more and still accruing - - - - - Total non-performing loans 3,863 5,581 9,084 4,696 2,578 Other real estate owned 920 58 289 919 1,023 Other non-performing assets 1,773 1,900 1,900
Total non-performing assets
$ 6,666 $ 6,975 $ 7,745 $ 8,457 $ 9,299Non-performing loans as a percentage of total loans, gross 0.39 % 0.62 % 1.10 % 0.56 % 0.34 % FNCB's asset quality metrics continued to improve throughout 2021. Total non-performing assets decreased $1.0 million, or 13.0%, to $6.5 millionat December 31, 2021from $7.5 millionat December 31, 2020. The decrease was due primarily to a decrease in non-accrual loans, partially offset by an increase in OREO. Nonaccrual loans decreased $1.7 million, or 30.8%, to $3.9 millionat December 31, 2021from $5.6 millionat December 31, 2020. The reduction in non-accrual loans primarily reflected strong repayment activity and the return of several smaller balance loans to accrual status. FNCB's ratio of non-performing loans to total gross loans decreased to 0.39% at December 31, 2021from 0.62% at December 31, 2020. Similarly, FNCB's ratio of non-performing assets as a percentage of shareholders' equity decreased to 4.0% at December 31, 2021from 4.8% at December 31, 2020. Other non-performing assets at December 31, 2021and 2020 was comprised solely of a classified account receivable, the balance of which was $1.8 millionat December 31, 2021and $1.9 millionat December 31, 2020. The receivable is secured by an evergreen letter of credit that was received in 2011 as part of a settlement agreement for a large construction, land acquisition and development loan for a residential development project in the Poconoregion of Monroe County. The agreement provides for payment to FNCB as real estate building lots are sold. The project was stalled due to a decline in real estate values in this area following the financial crisis of 2008. In 2019, economic development in this market area started to improve and management had confirmed that the developer for this project had resumed construction activity, including the completion of substantial infrastructure, and had increased marketing and sales initiatives related to the project. 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 thousandin the second quarter of 2021. Management continues to closely monitor the project. While the repayment plan has commenced, economic uncertainty and volatility associated with the COVID-19 pandemic are still unknown and could negatively impact the timing of sales and payments. TDRs at December 31, 2021and 2020 were $6.9 millionand $7.7 million, respectively. Accruing and non-accruing TDRs were $6.7 millionand $0.2 million, respectively at December 31, 2021and $7.0 millionand $0.7 million, respectively at December 31, 2020. There was one loan that was modified as a TDR during the year ended December 31, 2021. The modification involved a commercial and industrial loan that was granted a principal forbearance. The pre- and post-modification recorded investment for this loan was $235 thousand. There were four loans that were modified as TDRs during the year ended December 31, 2020. There was one residential real estate loan for which the original terms were extended, and three commercial and industrial loans that were each granted a principal forbearance. The residential real estate loan had a pre- and post-modification recorded investment of $93 thousand. The three commercial and industrial loans had an aggregate pre- and post-modification recorded investment of $196 thousand.
The average balance of impaired loans, including TDRs was
respectively. FNCB recognized interest on impaired loans of
The additional interest income that would have been earned on non-accrual and
restructured loans had the loans been performing in accordance with their
original terms approximated
Management actively manages impaired loans in an effort to mitigate loss to FNCB by working with customers to develop strategies to resolve borrower difficulties, through sale or liquidation of collateral, foreclosure, and other appropriate means. In addition, management monitors employment and economic conditions within FNCB's market area, as weakening of conditions could result in real estate devaluations and an increase in loan delinquencies, which could negatively impact asset quality and cause an increase in the provision for loan and lease losses. Employment conditions in FNCB's market area, at
December 31, 2021although elevated, improved as compared to December 31, 2020, as the economy re-opened and economic activity increased amid widespread vaccine distribution. The seasonally-adjusted unemployment rate for the Scranton- Wilkes-Barre- Hazletonmetropolitan statistical area, FNCB's primary market area, improved to 6.4% at December 31, 2021, compared to 7.7% at December 2020. Additionally, in response to continuing inflationary pressures, the FOMChas indicated that they will begin tightening monetary policy by increasing short-term interest rates as early as their meeting in March of 2022. Rising interest rates, coupled with elevated unemployment levels, may pose debt service constraints for borrowers with floating-rate loans, which could result in an increase in loan delinquencies and general asset quality deterioration. Management continues to monitor the loan portfolio in light of the any continued effects of the pandemic to proactively addresses any potential impact to the credit quality of FNCB's loan portfolio For additional information about impaired loans and TDRs, see Note 4, "Loans" of the notes to consolidated financial statements included in Item 8, "Financial Statements and Supplementary Data" to this Annual Report on Form 10-K. 36
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The following table presents the changes in non-performing loans for the years
investment at time of foreclosure not including the effect of any guarantees.
Changes in Non-performing Loans
Year ended December 31, (in thousands) 2021 2020 Balance, January 1
$ 5,581 $ 9,084Loans newly placed on non-accrual 1,375 2,352 Change in loans past due 90 days or more and still accruing - - Loans transferred to OREO (138 ) - Loans returned to performing status (388 ) (1,573 ) Loans charged-off (735 ) (1,514 ) Loan payments received (1,832 ) (2,768 ) Balance, December 31 $ 3,863 $ 5,581
The following table presents accruing loan delinquencies and non-accrual loans
as a percentage of gross loans at
Loan Delinquencies and Non-accrual Loans
December 31, 2021 2020 Accruing: 30-59 days 0.13 % 0.31 % 60-89 days 0.03 0.06 90+ days 0.00 0.00 Non-accrual 0.39 0.62 Total delinquencies 0.55 % 0.99 % Total delinquencies as a percent of gross loans decreased to 0.55% at
December 31, 2021from 0.99% at December 31, 2020. The most predominant factor contributing to the decrease in total delinquencies was the $1.7 milliondecrease in non-accrual loans, along with decreases in the balance of accruing loans past due 30-59 days and 60-89 days.
Allowance for Loan and Lease Losses
The ALLL represents management's estimate of probable loan losses inherent in the loan portfolio. The ALLL is analyzed in accordance with GAAP and is maintained at a level that is based on management's evaluation of the adequacy of the ALLL in relation to the risks inherent in the loan portfolio.
As part of its evaluation, management considers qualitative and environmental
factors, including, but not limited to:
? changes in national, local, and business economic conditions and developments,
including the condition of various market segments; ? changes in the nature and volume of the loan portfolio;
? changes in lending policies and procedures, including underwriting standards,
collection, charge-off and recovery practices and results;
? changes in the experience, ability and depth of lending management and staff;
? changes in the quality of the loan review system and the degree of oversight
by the Board of Directors;
? changes in the trend of the volume and severity of past due and classified
loans, including trends in the volume of non-accrual loans, TDRs and other
? the existence and effect of any concentrations of credit and changes in the
level of such concentrations;
? the effect of external factors such as competition and legal and regulatory
requirements on the level of estimated credit losses in the current loan
? analysis of customers’ credit quality, including knowledge of their operating
environment and financial condition.
Evaluations are intrinsically subjective, as the results are estimated based on
management knowledge and experience and are subject to interpretation and
modification as information becomes available or as future events occur.
Management monitors the loan portfolio on an ongoing basis with emphasis on
weakness in both the real estate market and the economy in general and its
effect on repayment. Adjustments to the ALLL are made based on management’s
assessment of the factors noted above.
For purposes of management's analysis of the ALLL, all loan relationships with an aggregate balance greater than
$100 thousandthat are rated substandard and non-accrual, identified as doubtful or loss, and all TDRs are considered impaired and are analyzed individually to determine the amount of impairment. Circumstances such as construction delays, declining real estate values, and the inability of the borrowers to make scheduled payments have resulted in these loan relationships being classified as impaired. FNCB utilizes the fair value of collateral method for collateral-dependent loans and TDRs for which repayment depends on the sale of collateral. For non-collateral-dependent loans and TDRs, FNCB measures impairment based on the present value of expected future cash flows discounted at the loan's original effective interest rate. With regard to collateral-dependent loans, appraisals are received at least annually to ensure that impairment measurements reflect current market conditions. Should a current appraisal not be available at the time of impairment analysis, other valuation sources including current letters of intent, broker price opinions or executed agreements of sale may be used. Only downward adjustments are made based on these supporting values. Included in all impairment calculations is a cost to sell adjustment of approximately 10%, which is based on typical cost factors, including a 6% broker commission, 1% transfer taxes and 3% various other miscellaneous costs associated with the sales process. Sales costs are periodically reviewed and revised based on actual experience. The ALLL analysis is adjusted for subsequent events that may arise after the end of the reporting period but before the financial reports are filed. The ALLL equaled $12.4 millionat December 31, 2021, an increase of $0.5 million, or 3.9%, from $11.9 millionat December 31, 2020. The increase resulted from a provision for loan and lease losses of $166 thousandcoupled with net recoveries of $300 thousandfor the year ended December 31, 2021. In 2020, Management adjusted the qualitative factors for the potential effect of economic and employment uncertainty and disruption due to the global pandemic into its evaluation. 37
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The ALLL consists of both specific and general components. The component of the ALLL that is related to impaired loans that are individually evaluated for impairment, the guidance for which is provided by ASC 310 "Impairment of a Loan" ("ASC 310"), was
$26 thousand, or 0.2%, of the total ALLL at December 31, 2021, compared to $416 thousand, or 3.5%, of the total ALLL at December 31, 2020. A general reserve of $12.4 millionwas established for loans analyzed collectively under ASC 450 "Contingencies" ("ASC 450"), which represented 99.8% of the total ALLL of $12.4 millionat December 31, 2021. Included in the general component of the ALLL were unallocated reserves of $1.1 million, for both years ended December 31, 2021and 2020. Based on its evaluations, management may establish an unallocated component to cover any inherent losses that exist as of the evaluation date, but which may not have been identified under the methodology. In 2020, management increased the unallocated reserve as part of an overall increase in credit provisioning due to the economic disruption caused by the COVID-19 pandemic. Based on continued economic uncertainty related to the pandemic, management believes the level of the unallocated reserve continues to be appropriate at December 31, 2021. The ratio of the ALLL to total loans at December 31, 2021and December 31, 2020was 1.27% and 1.33%, respectively, based on loans, net of net deferred origination fees and unearned income of $979.4 millionand $901.1 million, respectively. The following table presents an allocation of the ALLL by major loan category and percent of loans in each category to total loans at December 31, for each of the last five years: Allocation of the ALLL December 31, 2021 2020 2019 2018 2017 Percentage of Percentage of Percentage of Percentage of Percentage Loans in Each Loans in Each Loans in Each Loans in Each of Loans in Category to Category to Category to Category to Each (dollars in Total Total Total Total Category to thousands) Allowance Loans Allowance Loans
Allowance Loans Allowance Loans
Allowance Total Loans Residential real estate
$ 2,08123.86 % $ 1,71521.73 % $ 1,14722.73 % $ 1,17522.09 % $ 1,23623.36 % Commercial real estate 4,530 37.29 4,268 30.32 3,198 33.69 3,107 31.46 3,499 34.08 Construction, land acquisition and development 392 4.24 538 6.62 271 5.75 188 2.49 209 2.73 Commercial and industrial 2,670 19.67 2,619 26.39 1,997 17.86 2,552 18.08 2,340 19.54 Consumer 1,159 8.72 1,319 9.51 1,658 14.66 2,051 18.81 1,395 14.75 State and political subdivisions 455 6.22 405 5.43 253 5.31 417 7.07 355 5.54 Unallocated 1,129 - 1,086 - 426 - 29 - - - Total $ 12,416100.00 % $ 11,950100.00 % $ 8,950100.00 % $ 9,519100.00
$ 9,034100.00 % 38
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The following table presents an analysis of changes in the ALLL and the ratio of net (recoveries) charge-offs to average loans by major loan category and certain credit ratios for each of the last five years: Reconciliation of the ALLL For the Year Ended December 31, (dollars in thousands) 2021 2020 2019 2018 2017 Balance, January 1,
$ 11,950 $ 8,950 $ 9,519 $ 9,034 $ 8,419Charge-offs: Residential real estate 14 - 27 63 192 Commercial real estate 11 336 - 1,845 159 Construction, land acquisition and - - 18 - - development Commercial and industrial 218 254 1,258 97 495 Consumer 543 975 1,311 1,134 603 State and political subdivision - - - - - Total charge-offs 786 1,565 2,614 3,139 1,449 Recoveries of charged-off loans: Residential real estate 17 43 9 135 29 Commercial real estate 467 846 32 42 45 Construction, land acquisition and 13 - 82 30 480 development Commercial and industrial 74 1,220 364 291 360 Consumer 515 515 761 576 381 State and political subdivision - - - - - Total recoveries 1,086 2,624 1,248 1,074 1,295 Net (recoveries) charge-offs (300) (1,059) 1,366 2,065 154 Provision for loan and lease 166 1,941 797 2,550 769 losses Balance, December 31, $ 12,416 $ 11,950 $ 8,950 $ 9,519 $ 9,034Net (recoveries) charge-offs to average loans and leases Residential real estate (0.00) % (0.03) % 0.01 % (0.05) % 0.11 % Commercial real estate (0.13) (0.16) (0.01) 0.62 0.04 Construction, land acquisition and (0.02) - (0.21) (0.13) (2.53) development Commercial and industrial 0.06 (0.43) 0.59 (0.12) 0.10 Consumer 0.03 0.42 0.37 0.35 0.19 State and political subdivision - - - - -
Net (recoveries) charge-offs to (0.03) % (0.12) % 0.16 % 0.25 % 0.02 %
average loans and leases
Ratios: Allowance for loan and lease losses to gross loans at period end 1.27 % 1.33 % 1.08 % 1.13 % 1.17 % Allowance for loan and lease losses to nonaccrual loans 321.41 % 214.12 % 98.52 % 202.70 % 350.43 % 39
Table of Contents Other Real Estate Owned The balance of OREO was
$920 thousandat December 31, 2021, which included two bank-owned properties that were transferred from bank premises to OREO. Comparatively, OREO at December 31, 2020included one piece of commercial land with a carrying value of $58 thousand. FNCB recorded a valuation adjustment to the carrying value of $4 thousandprior to selling the land in 2021. The land was subsequently sold for $65 thousandwith a gain of $11 thousandrecognized at the time of sale. In 2021, FNCB also obtained a deed in lieu of foreclosure for a residential mortgage with a recorded investment of $138 thousand. The property immediately went under contract at a selling price of $205thosuand. FNCB transferred the property to OREO at the selling price less cost to sell of $178 thousandand recorded a positive valuation adjustment of $40 thousand, which is included in non-interest income for the year ended December 31, 2021. The sale of this property was finalized in 2021. On December 16, 2021, FNCB received approval from its primary regulator to consolidate the Bank's Wheeler Avenue Community Office into its Main Office effective February 18, 2022. Both offices are located in Dunmore, Lackawanna County, Pennsylvania. FNCB is obligated under a land lease through December 2024for the Wheeler Avenueproperty and FNCB received an independent third-party appraisal of the building and improvements, which it owns. Upon regulatory approval, FNCB transferred the building and improvements to OREO at fair value less estimated cost to sell of $228 thousandand recorded a loss on the transfer of $242 thousandwhich is included in other operating expense in the consolidated statement of income for the year ended December 31, 2021. In addition, in the fourth quarter of 2021, FNCB accepted an offer on a parcel of commercial land originally held in bank premises for future branch expansion. Upon acceptance FNCB transferred the property to OREO at $692 thousand, the selling price less estimated cost to sell. A loss of $68 thousandwas recorded on the transfer and included in other operating expense in the consolidated statements of income. The sale of the land is expected to close by the end of the first quarter of 2022. FNCB actively markets OREO properties for sale through a variety of channels including internal marketing and the use of outside brokers/realtors. The carrying value of OREO is generally calculated at an amount not greater than 90% of the most recent fair market appraised value unless specific conditions warrant an exception. A 10% factor is generally used to estimate costs to sell, which is based on typical cost factors, such as 6% broker commission, 1% transfer taxes, and 3% various other miscellaneous costs associated with the sales process. This fair value is updated on an annual basis or more frequently if new valuation information is available. Deterioration in the real estate market could result in additional losses on these properties. Valuation adjustments related to OREO included a positive valuation adjustment of $36 thousandfor the year ended December 31, 2021and a write-down of $27 thousandfor the year ended December 31, 2020. The following table presents the activity in OREO for the years ended December 31, 2021and 2020: Activity in OREO For the Years Ended December 31, (in thousands) 2021 2020 Balance, January 1 $ 58 $ 289 Real estate foreclosures 138 - Transfer from bank premises 920 - Valuation adjustments 36 (27 ) Carrying value of OREO sold (232 ) (204 ) Balance, December 31 $ 920 $ 58 40
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The following table presents a distribution of OREO at
December 31, for the past five years: Distribution of OREO December 31, (in thousands) 2021 2020 2019 2018 2017 Land / lots $ 692 $ 58 $ 85 $ 436 $ 516Commercial real estate 228 - - 438 427 Residential real estate - - 204 45 80
Total other real estate owned
The expenses related to maintaining OREO include the subsequent write-downs of the properties related to declines in value since foreclosure, net of any income received. OREO expenses amounted to
$25 thousandand $164 thousandand are included in other operating expense in the consolidated statements of income, for the years ended December 31, 2021and 2020, respectively. 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. FNCB experienced strong deposit demand in 2021 and 2020, which was concentrated primarily in non-maturity deposits. The strong demand was generally caused by factors related to the COVID-19 pandemic including among others, various government stimulus initiatives, PPP funding, and changes in consumer and saving habits and business investment in response to economic uncertainty. FNCB did experience some deposit migration during both 2021 and 2020 as maturing time deposits were redirected into non-maturity deposits. Total deposits in creased $167.6 million, or 13.0%, to $1.455 billionat December 31, 2021from $1.287 billionat December 31, 2020. Interest-bearing deposits increased $119.0 million, or 11.7%, to $1.135 billionat December 31, 2021from $1.016 billionat December 31, 2020. In addition, non-interest-bearing deposits increased $48.6 million, or 17.9%, to $320.1 millionat December 31, 2021from $271.5 millionat December 31, 2020. The increase in non-interest-bearing deposits was due primarily to increases in consumer and small business demand deposit accounts, including residual balances retained from PPP loan funding. With regard to interest-bearing deposits, the increase was primarily concentrated in interest-bearing demand accounts, specifically money market transaction accounts, interest-bearing public funds and interest-bearing business checking accounts. In total, interest-bearing demand deposits increased $144.6 million, or 20.2%, to $857.9 millionat December 31, 2021from $713.4 millionat December 31, 2020. Savings accounts increased $24.6 million, or 22.4%, to $134.2 millionat December 31, 2021from $109.7 millionat December 31, 2020. Time deposits with balances $250 thousandand over decreased $9.7 million, or 26.7%, to $26.5 milliona t December 31, 2021, from $36.2 millionat December 31, 2020, and other time deposits decreased $40.3 million, or 25.7%, to $116.3 millionat December 31, 2021from $156.7 millionat December 31, 2020. At December 31, 2021other time deposits included $10 millionin brokered time deposits outstanding that are part of an interest rate swap transaction, compared to $20 millionat December 31, 2020. Total deposits averaged $1.381 billionin 2021, an increase of $230.7 million, or 20.1%, compared to $1.151 billionin 2020. The changes in average deposit balances reflected the migration of time deposits into non-maturity deposits, and continued oversupply of deposits in the market. Non-interest-bearing demand deposits averaged $73.2 million, or 30.2%, higher at $315.2 millionin 2021 as compared to $242.0 millionin 2020. Interest-bearing deposits averaged $1.066 billionin 2021, an increase of $157.6 million, or 17.3%, from $908.5 millionin 2020. The increase was concentrated in average interest-bearing demand deposits which increased $153.3 million, or 25.1% comparing 2021 and 2020. Average savings deposits increased $23.2 million, or 22.8%, to $125.0 millionin 2021 from $101.9 millionin 2020. Partially offsetting these increases was a decrease of $18.9 million, or 9.7%, in average time deposits, to $176.2 millionin 2021 from $195.1 millionin 2020. FNCB's deposit funding costs decreased 35 basis points, to 0.24% in 2021 from 0.59% in 2020. Rates on interest-bearing demand and time deposits decreased by 32 basis points and 55 basis points, respectively, while savings deposit rates decreased to a lesser extent, by 3 basis points, comparing 2021 and 2020. The decrease in deposit costs reflected sustained low market interest rates due to deposit oversupply within the industry in 2021.
The average balance of, and the rate paid on, the major classifications of
deposits for the past three years are summarized in the following table:
Deposit Distribution For the Year Ended December 31, 2021 2020 2019 Average Average Average (dollars in thousands) Balance Rate Balance Rate Balance Rate Interest-bearing deposits: Demand
$ 764,7980.16 % $ 611,5110.48 % $ 513,5420.81 % Savings 125,022 0.07 101,847 0.10 93,114 0.13 Time 176,245 0.66 195,140 1.22 238,145 1.60 Total interest-bearing deposits 1,066,065 0.24 % 908,498 0.59 % 844,801 0.96 % Non-interest-bearing deposits 315,181 242,017 164,035 Total deposits $ 1,381,246 $ 1,150,515 $ 1,008,83641
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The following table presents the maturity distribution of time deposits in
excess of insurance limit at
Maturity Distribution of Time Deposits
December 31, (in thousands) 2021 2020 3 months or less
$ 10,740 $ 13,022Over 3 through 6 months 5,354 5,476 Over 6 through 12 months 8,431 14,913 Over 12 months 2,006 2,805 Total $ 26,531 $ 36,216Borrowings FNCB has an agreement with the FHLB of Pittsburghwhich 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 Pittsburghstock based upon the amount of credit extended. Loans that were pledged to collateralize borrowings under this agreement were $478.3 millionat December 31, 2021and $500.1 millionat December 31, 2020. FNCB's maximum borrowing capacity was $391.7 millionat December 31, 2021. There was $7.5 millionin letters of credit to secure municipal deposits outstanding at December 31, 2021under this agreement. There were $20.0 millionin term advances through the FHLB of Pittsburghoutstanding at December 31, 2021that were hedged under interest-rate swaps. There were no overnight borrowings or term advances through the FHLB of Pittsburghat December 31, 2020. Advances through the Federal Reserve Bank Discount Window generally include short-term advances which are fully collateralized by certain pledged loans of $18 millionunder the Federal Reserve Bank'sBorrower-in-Custody ("BIC") program. There were no advances under the BIC program outstanding at December 31, 2021and December 31, 2020. FNCB had available borrowing capacity of $10.6 millionunder this program at December 31, 2021. FNCB also had $10.3 millionof junior subordinated debentures outstanding at December 31, 2021and 2020. The interest rate on these debentures resets quarterly at a spread of 1.67% above the current 3-month LIBOR rate. The average interest rate paid on the junior subordinated debentures in 2021 was 1.85%, compared to 2.43% in 2020. Average borrowed funds decreased $39.1 million, or 14.0%, to $12.2 millionin 2021 from $51.3 millionin 2020. The average rate paid on borrowed funds increased 14 basis points to 1.61% in 2021 from 1.47% in 2020. The increase in rate on borrowed funds reflected lower average volumes of overnight and short-term borrowings through the FHLB of Pittsburghand Federal Reserve Bankin 2021 as compared to 2020, as short-term borrowing rates were at historical lows. Average borrowed funds in 2021 was comprised mainly of the junior subordinated debentures, which carry an adjustable rate tied to 3-Month LIBOR plus 1.67%. See Note 7, "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 fund, 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 Pittsburghas 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 $99.0 millionat December 31, 2021, a decrease of $56.8 million, or 36.4%, from $155.8 millionat December 31, 2020, as net cash outflows for investing activities more than offset net cash inflows from operating and financing activities. Net cash outflows from investing activities used $260.8 millionof cash and cash equivalents during the year ended December 31, 2021, which primarily reflected the deployment of excess liquidity into the investment and loan portfolios. Specifically, cash outflows for purchases of available-for-sale debt securities, net of inflows for sales, maturities, calls and repayments, were $184.3 millionin 2021. Additionally, FNCB recorded a net increase in loans and leases of $73.2 million, resulting from increased demand, ALCO initiatives to hold in portfolio saleable 1-4 family residential mortgages, and the purchase of individual loans and loan pools from third-party originators. Also, contributing to the net cash outflow for investing activities were purchases of new BOLI policies and bank premises and equipment of $2.5 millionand $1.3 million, respectively. Financing activities provided $179.8 millionin net cash, which resulted primarily from a $167.6 millionnet increase in deposits in 2021, coupled with $20.0 millionin proceeds received from term advances through FHLB of Pittsburgh. These inflows were slightly offset by net cash used to pay dividends to shareholder dividends of $5.4 millionand to repurchase shares of common stock totaling $2.4 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 2021 operating activities provided FNCB with $24.2 millionin net cash, which reflected net income of $21.4 millionand non-cash adjustments to income of $2.8 million. 42
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Management is actively monitoring FNCB's liquidity position and capital adequacy in light of the changing circumstances related to economic uncertainty brought on by the COVID-19 pandemic. While management believes FNCB's liquidity position is favorable, they are keenly aware that changes in general economic conditions, including inflation, rising interest rates and situations related to the pandemic, among others, could pose potential stress on liquidity should deposits begin exiting the Bank or FNCB's asset quality deteriorates. Additionally, FNCB could experience an increase in the utilization of existing lines of credit as customers manage their own liquidity needs during this time of economic uncertainty. Management believes that FNCB's current liquidity position is sufficient to meet its cash flow needs as of
December 31, 2021. In addition to cash and cash equivalents of $99.0 millionat December 31, 2021, FNCB had ample sources of additional liquidity including approximately $391.7 millionin available borrowing capacity with the FHLB of Pittsburgh, and available borrowing capacity through The Federal Reserve Discount Window of $10.6 millionunder the BIC program. In addition, FNCB had $72.0 millionin federal fund lines of credit available through correspondent banks at December 31, 2021, as well as access to wholesale deposit markets. 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 14, "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
Minimum Minimum Required To Minimum Required For Be Well Required Capital Capitalized For Adequacy Under Prompt Capital Purposes with Corrective Adequacy Conservation Action FNCB Bank Purposes Buffer Regulations (dollars in thousands) Amount Ratio Ratio Ratio Ratio
Total capital (to risk-weighted assets)
$ 161,95714.64 % 8.00 % 10.50 % 10.00 % Tier I capital (to risk-weighted assets) 148,958 13.46 % 6.00 % 8.50 % 8.00 % Tier I common equity (to risk-weighted assets) 148,958 13.46 % 4.50 % 7.00 % 6.50 % Tier I capital (to average assets) 148,958 8.92 % 4.00 % 4.00 % 5.00 % Total risk-weighted assets 1,106,636 Total average assets 1,669,932 Minimum Minimum Required To Minimum Required For Be Well Required Capital Capitalized For Adequacy Under Prompt Capital Purposes with Corrective Adequacy Conservation Action FNCB Bank Purposes Buffer Regulations (dollars in thousands) Amount Ratio Ratio Ratio Ratio
Total capital (to risk-weighted assets)
$ 149,17315.79 % 8.00 % 10.50 % 10.00 % Tier I capital (to risk-weighted assets) 137,356 14.54 % 6.00 % 8.5 % 8.00 % Tier I common equity (to risk-weighted assets) 137,356 14.54 % 4.50 % 7.00 % 6.50 % Tier I capital (to average assets) 137,356 9.57 % 4.00 % 4.00 % 5.00 % Total risk-weighted assets 944,546 Total average assets 1,434,776 43
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FNCB's total regulatory capital increased
$12.8 millionto $162.0 millionat December 31, 2021from $149.2 millionat December 31, 2020. 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, 2021and 2020. There are no conditions or events since this notification that management believes have changed this category. As of December 31, 2021, FNCB had 30,010,125 shares of common stock available for future sale or share dividends. Quarterly market highs and lows, dividends paid and known market makers are highlighted in Part I, Item 5, "Market for Registrant's Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities" of this Annual Report on Form 10-K. For further discussion of FNCB's capital requirements and dividend limitations, refer to Note 14, "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
January 27, 2021, FNCB's Board of Directors authorized a stock repurchase program under which up to 975,000 shares of FNCB's outstanding common stock may be acquired in the open market pursuant to a trading plan that was adopted in accordance with Rule 10b5-1 of the Securities Exchange Act of 1934, as amended. The repurchase program commenced on February 3, 2021and expired on December 31, 2021. On January 26, 2022, FNCB's Board of Directors authorized the repurchase of up to 750,000 shares of FNCB's outstanding common stock under a similar program, which is anticipated to commence on March 4, 2022. Repurchases under both programs are administered through an independent broker and are subjected to SECregulations as well as certain price, market volume and timing constraints specified in the trading plan. In 2021, FNCB repurchased 330,759 shares at a weighted-average price per share of $7.21, or $2.4 millionin aggregate. Repurchases are funded from available working capital and the repurchased shares were returned to the status of authorized but unissued shares of common stock. FNCB's ability to pay dividends to its shareholders is largely dependent on the Bank's ability to pay dividends to FNCB. Bankregulations 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 2021 and 2020 were $0.27per share and $0.22per share, respectively. FNCB offers a Dividend Reinvestment and Stock Purchase plan ("DRP") to its shareholders. For the years ended December 31, 2021and 2020 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 12,189 and 10,271 for the years ended December 31, 2021and 2020, respectively. Subsequent to December 31, 2021, on January 26, 2022, FNCB declared a $0.075per share dividend payable on March 15, 2022to shareholders of record on March 1, 2022.
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, 2021, FNCB did not engage in any off-balance sheet transactions that would have or would be reasonably likely to have a material effect on its consolidated financial condition. For a further discussion of FNCB's off-balance sheet arrangements, refer to Note 12, "Commitments, Contingencies, and Concentrations" to the notes to the 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, 2021and 2020. 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, 2021expire within one year of their respective contract dates. Off-Balance Sheet Commitments December 31, (in thousands) 2021 2020 Commitments to extend credit $ 273,883 $ 227,908Standby letters of credit 17,179 18,914
In order to provide for probable losses inherent in these instruments, FNCB
recorded reserves for unfunded commitments of
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 in 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 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. 44
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