FNCB BANCORP, INC. Management’s Discussion and Analysis of Financial Condition and Results of Operations (form 10-K)

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.



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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 thousand loan
relationship threshold and all loans considered troubled debt restructurings
("TDRs") are classified as impaired. Based on its evaluations, management may
establish an unallocated component that is used to cover any inherent losses
that exist as of the evaluation date, but which may not have been identified
under the methodology.



See Note 2, "Summary of Significant Accounting Policies" and Note 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, 2021 and 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, 2021 and 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, 2021 and
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.



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




For information regarding new authoritative accounting guidance adopted by FNCB
during the year ended December 31, 2021 and accounting guidance that FNCB will
adopt in future periods, see Note 2, "Summary of Significant Accounting
Policies" of the notes to consolidated financial statements included in Item 8,
"Financial Statements and Supplementary Data" to this Annual Report on Form
10-K.



EXECUTIVE OVERVIEW


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




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
$1.06 per diluted common share, an increase of $6.0 million, or 39.3%, compared
to $15.3 million, or $0.76 per 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 million in
2021, an increase of $8.8 million, or 21.9%, from $40.2 million in 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 million increase
in net loan origination fees associated with PPP loans that were recognized upon
forgiveness. The provision for loan and lease losses decreased $1.8 million to
$166 thousand in 2021, from $1.9 million in 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
million in 2021 from $9.2 million in 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 million in 2021 from $28.9 million in 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 million in 2021 as compared to $3.2 million in
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 $0.27
per share in 2021, an increase of $0.05 per share, or 22.7%, compared to
$0.22 per 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 $9.24
per 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 billion at December
31, 2021 from $1.465 billion at 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 million at December 31, 2021 from $350.0 million at 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 million at December 31,
2021 from $901.1 million at 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%. Cash and cash equivalents
decreased $56.8 million, or 36.4%, to $99.0 million at December 31, 2021 from
$155.8 million at 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 billion at December 31, 2021 from $1.287 billion at December
31, 2020. Borrowed funds increased $20.0 million, or 194%, to $30.3 million at
December 31, 2021, compared to $10.3 million at December 31, 2020. The increase
in borrowed funds reflected the transition of $20.0 million that 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 million at
December 31, 2021 from $155.9 million at December 31, 2020. Contributing to the
increase in capital was net income in 2021 of $21.4 million partially offset by
a $7.5 million decrease 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's total 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 $0.43 per share, or 5.6%, to
$8.13 per share at December 31, 2021 from $7.70 per 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 Pennsylvania guidance 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 States and 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 million in 2021.
FNCB received $3.6 million in 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 million and recognized $4.8 million in
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 million in net deferred
origination fees, compared to $76.0 million, net of $2.6 million in net deferred
origination fees at December 31, 2020.



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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, 2021 gross loans and municipal
leases originated under this initiative were $9.8 million. FNCB expects to
originate approximately $50.0 million annually 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 thousand annually.



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 million in 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




On 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, 2022 and
expiring December 31, 2022 pursuant 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 SEC regulations as well as certain price, market
volume and timing constraints specified in the trading plan. Under the program,
the purchases will be funded from 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,
2020 followed 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, 2021 and 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.



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Tax-equivalent net interest income increased $8.9 million, or 21.8%, to $49.9
million in 2021 compared to $41.0 million in 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 million to $4.8
million in 2021 compared to $1.2 million in 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
million in 2021 from $47.1 million in 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 billion in 2021 from $1.223 billion in 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 million in 2021 from
$911.4 million in 2020, which reflected strong organic loan demand and the
purchase of loan pools from third party originators. Investment securities
averaged $429.6 million in 2021, an increase of $127.4 million, or 42.1%,
compared to $302.2 million in 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 million in 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 thousand
decrease 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 million in
2021 from $9.2 million in 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 million in 2021 from
$6.2 million in 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 million and $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 million in 2021 from
$51.3 million in 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 billion in 2021 from $908.5 million in 2020, which resulted in
a $409 thousand corresponding increase in interest expense. The average balance
of time deposits decreased $18.9 million, or 9.7%, to $176.2 million in
2021 from $195.1 million in 2020, which resulted in a corresponding decrease to
interest expense of $212 thousand that was more than entirely offset by an
increase to interest expense of $602 thousand due to a $153.3 million, or
25.1%, increase in average interest-bearing demand deposits to $764.8 million in
2021 from $611.5 million in 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 million in 2021
from $242.0 million in 2020.



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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 thousand and $353 thousand for the years ended December 31,
2021 and 2020, respectively. Additionally, interest income recognized on
impaired loans based on payments received approximated to $305 thousand and $351
thousand for the years ended December 31, 2021 and 2020, respectively.



The following table presents the components of net interest income for the three
years ended December 31, 2021, 2020 and 2019:

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     $  39,645          4.38 %   $   863,702     $  35,980          4.17 %   $   784,124     $  36,332          4.63 %
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                                 $ 1,208,551

Liabilities and
Shareholders'
Equity:
Interest-bearing
liabilities
Interest-bearing
demand deposits        $   764,798         1,252          0.16 %   $   611,511         2,933          0.48 %   $   513,542         4,167          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                                 $ 1,208,551
Net 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                                   $  36,260

Net 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 $4,612 in 2021, $467 in

2020, and net loan costs of $1,467 in 2019 .

(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

assets.

(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 $4,794.




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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 thousand for the
year ended December 31, 2021, a decrease of $1.8 million, or 91.5%, compared to
$1.9 million for 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.



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Non-Interest Income


The following table presents the components of non-interest income for the years
ended December 31, 2021 and 2020:

Components of Non-Interest Income

                                                             Year Ended December 31,
(in thousands)                                              2021                 2020
Deposit service charges                                $        3,877       $        3,252
Net gain on the sale of available-for-sale debt
securities                                                        213       

1,528

Net gain on equity securities                                     701       

1,171

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       $        9,250




For the year ended December 31, 2021, non-interest income decreased $1.0 million
to $8.3 million compared to $9.3 million for 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 thousand in 2021,
compared to $1.5 million in 2020, while net gains on equity securities that
decreased $470 thousand, to $701 thousand in 2021, from $1.2 million in 2020.
Net gains on equity securities in 2020 included a $1.1 thousand gain
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 thousand in
2021, compared to $653 thousand in 2020. Loan referral fees decreased $318
thousand, or 81.5%, to $72 thousand in 2021 from $390 thousand in 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 thousand settlement 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 December 31, 2021 and 2020:

Components of Non-Interest Expense


                                   Year Ended December 31,
(in thousands)                       2021             2020
Salaries and employee benefits   $     16,697       $  15,246
Occupancy 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       $  28,915




Non-interest expense totaled $31.1 million in 2021, an increase of $2.2 million,
or 7.5%, from $28.9 million in 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 million
in 2021 from $15.2 million in 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 million in 2021, compared to $2.9 million in 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 thousand in 2021 from $387 thousand in 2020, which
reflected the utilization of the remaining FDIC small bank assessment credit in
2020. Bank shares tax also increased in 2021, to $975 thousand, up $189
thousand, or 24.1%, from $786 thousand recorded at December 31, 2020, due to an
increase in capital at the Bank level.



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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 thousand in 2021 from $999 thousand in 2020. Equipment expenses decreased
$139 thousand, or 9.4%, to $1.3 million in 2021, compared to $1.5 million in
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 million in 2021 included $300 thousand in
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,
Pennsylvania with 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 County that FNCB was holding for
future branch expansion.



Provision for Income Taxes



FNCB recorded income tax expense of $4.6 million in 2021, an increase of $1.4
million, or 44.4%, compared to $3.2 million in 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, 2021 taking into consideration both positive and negative evidence as of
that date.  Based on this evaluation, management believes that FNCB's future
taxable income will be sufficient to utilize deferred tax assets.  Accordingly,
management concluded that no valuation allowance for deferred tax assets was
required at December 31, 2021 or 2020.


FINANCIAL CONDITION



Total assets were $1.664 billion at December 31, 2021, an increase
of $198.6 million, or 13.6%, from $1.465 billion at 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 million at December 31, 2021 from
$350.0 million at 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 million at December 31, 2021 from $901.1 million at 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 billion at December 31, 2021 from $1.287 billion at
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 million at December
31, 2021, compared to $10.3 million at December 31, 2020. Cash and cash
equivalents decreased $56.8 million, or 36.4%, to $99.0 million at December 31,
2021 from $155.8 million at December 31, 2020, as excess liquidity was
redeployed to the loan and investment portfolios. FNCB had $20.0 million
in borrowings through the Federal Home Loan Bank ("FHLB") of Pittsburgh
outstanding at December 31, 2021.


Total shareholders ' equity increased $6.6 million, or 4.2%, to $162.5 million
at December 31, 2021 from $155.9 million at December 31, 2020. Contributing to
the increase in capital was net income in 2021 of $21.4 million partially offset
by a $7.5 million decrease 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 $8.13 per share at December 31,
2021, an increase of $0.43 per share, or 5.6%, from $7.70 per 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, 2021 and 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 Pittsburgh stock, are carried
at cost. Decisions to purchase or sell investment securities are based upon
management's current assessment of long- and short-term economic and financial
conditions, including the interest rate environment and asset/liability
management, liquidity and tax-planning strategies.



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At 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. Treasury securities. Additionally, FNCB holds
equity investments in the common and preferred stock of certain publicly-traded
bank holding companies. Except for U.S. government and government-sponsored
agencies, there were no securities of any individual issuer that exceeded 10.0%
of shareholders' equity as of December 31, 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. Treasury rates fell significantly in the first quarter of 2020 in response
to the outbreak of COVID-19, declaration of a national emergency and economic
shutdown in March 2020. U.S. Treasury rates fluctuated slightly but hovered near
historic lows for the remainder of 2020. In 2021, longer-term U.S. Treasury
rates 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 FOMC in early 2022. The 10-year Treasury
rate, which was 0.93% at December 31, 2020 , increased 59 basis points to 1.52%
at December 31, 2021, while the 2-year Treasury rate, which was 0.13% at
December 31, 2020 , increased 15 basis points 0.28% at September 30, 2022 before
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, 2021 then 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, 2021 and 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
million at December 31, 2021, compared to a $14.0 million net 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 December 31, 2021, 2020 and
2019:

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            $     36,355                6.96 %   $          -                   - %   $          -                   - %
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            $    522,566              100.00 %   $    350,035              100.00 %   $    272,839              100.00 %

Equity securities, at
fair value                 $      4,922                         $      3,026                         $        920





Management 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 million and a weighted-average yield of 2.78%. Gross proceeds received
on the sales totaled $3.0 million, with net gains of $0.2 million realized 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 million and 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 million in CMOs of U.S.
government-sponsored agencies, $36.8 in U.S. Treasury securities, $40.3 million
in private CMOs, $27.3 million in taxable obligations of state and political
subdivisions, $24.7 million in tax-free obligations of state and political
subdivisions, $8.5 million in corporate debt securities, $6.5 million in
asset-backed securities and $744 thousand in negotiable certificates of
deposit.



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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:



                                                                               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

U.S.

government/government-sponsored

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, 2021 and 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 Pittsburgh or
Atlantic Community Bankers Bank stock at December 31, 2021, 2020 and 2019.



Loans and Leases



Total loans and leases, gross increased by $78.1 million, or 8.6%, to
$981.4 million at December 31, 2021 from $903.3 million at 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, 2021 when 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 million at December 31, 2020. In 2021, FNCB received forgiveness on PPP
loans of $132.9 million and 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 million and $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 million in commercial
equipment loans, $1.8 million in unsecured commercial loans, and $7.4 million
in 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, 2021 and 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, 2021 compared 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
million at December 31, 2021 from $530.0 million at 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, 2021 and
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 million at December 31, 2021, from $273.9
million at December 31, 2020. While, commercial and industrial loans decreased
$45.3 million, or 19.0%, during the year to $193.1 million at December 31,
2021 from $238.4 million at 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 million at December 31, 2021 from
$238.4 million at 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.



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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 million at
December 31, 2021, an increase of $37.8 million, or 19.2%, from $196.3 million
at 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 million at December 31, 2021 from $72.9 million at December 31, 2020.



Consumer loans totaled $85.5 million at December 31, 2021, a decrease of
$0.4 million, or 0.4%, from $85.9 million at 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 million at December 31, 2021 from
$82.5 million at 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 million in
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 million at December 31, 2021 from $49.0 million at December 31,
2020.


The following table presents loans receivable, net by major category at December
31, 2021
and 2020:

Loan and Lease Portfolio Detail



                                                                  December 31,
                                                      2021                            2020
                                                          % of Total                      % of Total
(in thousands)                              Amount       Loans, Gross       Amount       Loans, Gross
Residential real estate                    $ 234,113             23.86 %   $ 196,328             21.73 %
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 December 31,
2021
:

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     $ 234,113
Commercial 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     $ 981,447


                                                                December 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     $ 176,051
Commercial 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     $ 489,647

Loans with floating rates
Residential real estate           $      5,292     $       1,741     $   33,455     $       17,574     $  58,062
Commercial 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     $ 491,800




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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, 2021 and 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, 2021
and 2020:



Loan Concentrations



                                                              December 31,
                                                   2021                           2020
                                                       % of Gross                     % of Gross
(dollars in thousands)                    Amount          Loans          Amount          Loans
Retail space/shopping centers           $   48,590            4.95 %   $   43,926            4.86 %
1-4 family residential investment
properties                                  92,745            9.45 %       58,114            6.43 %



Modifications Related to COVID-19




In late March 2020, the federal banking regulators issued guidance encouraging
banks to work prudently with and provide short-term payment accommodations to
borrowers affected by COVID-19.  Additionally, Section 4013 of the CARES Act
addressed COVID-19 related modifications and specified that such modifications
made on loans that were current as of December 31, 2019 do not need to be
classified as TDRs.  In 2020, FNCB had applied this guidance and made 922 such
modifications, with 843 loans having an aggregate recorded investment of
$151.4 million outstanding 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 thousand rated substandard and non-accrual, and loans that are identified
as doubtful or loss are considered impaired. Impaired loans are analyzed
individually to determine the amount of impairment. For collateral-dependent
loans, impairment is measured based on the fair value of the collateral
supporting the loans. A loan is determined to be collateral dependent when
repayment of the loan is expected to be provided through the operation or
liquidation of the collateral held. For impaired loans that are secured by real
estate, management obtains external appraisals annually, or more frequently as
warranted, to ascertain a fair value so that the impairment analysis can be
updated. Should a current appraisal not be available at the time of impairment
analysis, management may use other valuations sources, including current letters
of intent, broker price opinions or executed agreements of sale. 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.



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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 December 31, for each of the last five years:

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     $   2,578
Loans 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     

1,900 1,900
Total non-performing assets $ 6,556 $ 7,539 $ 11,273 $ 7,515 $ 5,501


Accruing TDRs                     $   6,666     $   6,975     $   7,745     $   8,457     $   9,299
Non-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 million at
December 31, 2021 from $7.5 million at 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 million at
December 31, 2021 from $5.6 million at 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,
2021 from 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,
2021 from 4.8% at December 31, 2020.



Other non-performing assets at December 31, 2021 and 2020 was comprised solely
of a classified account receivable, the balance of which was $1.8 million at
December 31, 2021 and $1.9 million at 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 Pocono region of
Monroe County. The agreement provides for payment to FNCB as real estate
building lots are sold. The project was stalled due to a decline in real estate
values in this area following the financial crisis of 2008. In 2019, economic
development in this market area started to improve and management had confirmed
that the developer for this project had resumed construction activity, including
the completion of substantial infrastructure, and had increased marketing and
sales initiatives related to the project. To date, no single-unit lots have been
sold, however, the  developer completed the construction of a seven-unit
building that houses timeshare units and owners began occupying the units in the
fourth quarter of 2020. In 2020, management negotiated a repayment plan with the
developer. FNCB received the first payment of $127 thousand in the second
quarter of 2021. Management continues to closely monitor 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, 2021 and 2020  were $6.9 million and $7.7 million,
respectively. Accruing and non-accruing TDRs were $6.7 million and $0.2 million,
respectively at December 31, 2021 and $7.0 million and $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 $11.0 million
and $13.8 million for the years ended December 31, 2021 and 2020,
respectively. FNCB recognized interest on impaired loans of $305 thousand in
2021 and $351 thousand in 2020.

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 $215 thousand and $353 thousand for the years
ended December 31, 2021 and 2020, respectively.


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,
2021 although 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-Hazleton metropolitan 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 FOMC
has 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.

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The following table presents the changes in non-performing loans for the years
ended December 31, 2021 and 2020 . Loan foreclosures represent recorded
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       $      9,084
Loans 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 December 31, 2021 and 2020 :

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, 2021 from 0.99% at December 31, 2020. The most predominant factor
contributing to the decrease in total delinquencies was the $1.7 million
decrease 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

loan modifications;

? 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

portfolio; and

? 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 thousand that are rated substandard and
non-accrual, identified as doubtful or loss, and all TDRs are considered
impaired and are analyzed individually to determine the amount of impairment.
Circumstances such as construction delays, declining real estate values, and the
inability of the borrowers to make scheduled payments have resulted in these
loan relationships being classified as impaired. FNCB utilizes the fair value of
collateral method for collateral-dependent loans and TDRs for which repayment
depends on the sale of collateral. For non-collateral-dependent loans and TDRs,
FNCB measures impairment based on the present value of expected future cash
flows discounted at the loan's original effective interest rate. With regard to
collateral-dependent loans, appraisals are received at least annually to ensure
that impairment measurements reflect current market conditions. Should a current
appraisal not be available at the time of impairment analysis, other valuation
sources including current letters of intent, broker price opinions or executed
agreements of sale may be used. Only downward adjustments are made based on
these supporting values. Included in all impairment calculations is a cost to
sell adjustment of approximately 10%, which is based on typical cost factors,
including a 6% broker commission, 1% transfer taxes and 3% various other
miscellaneous costs associated with the sales process. Sales costs are
periodically reviewed and revised based on actual experience. 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 million at December 31, 2021, an increase of $0.5
million, or 3.9%, from $11.9 million at December 31, 2020. The increase resulted
from a provision for loan and lease losses of $166 thousand coupled with net
recoveries of $300 thousand for 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.



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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 million was established for loans analyzed collectively
under ASC 450 "Contingencies" ("ASC 450"), which represented 99.8% of the total
ALLL of $12.4 million at December 31, 2021. Included in the general component of
the ALLL were unallocated reserves of $1.1 million, for both years
ended December 31, 2021 and 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, 2021 and December 31, 2020 was 1.27% and 1.33%, respectively, based
on loans, net of net deferred origination fees and unearned income of
$979.4 million and $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     $     2,081             23.86 %   $     1,715             21.73 %   $     1,147             22.73 %   $     1,175             22.09 %   $     1,236            23.36 %
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           $    12,416            100.00 %   $    11,950            100.00 %   $     8,950            100.00 %   $     9,519            100.00
%   $     9,034           100.00 %




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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     $  8,419
Charge-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     $  9,034

Net (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   %




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Other Real Estate Owned



The balance of OREO was $920 thousand at December 31, 2021, which included two
bank-owned properties that were transferred from bank premises to OREO.
Comparatively, OREO at December 31, 2020 included one piece of commercial land
with a carrying value of $58 thousand. FNCB recorded a valuation adjustment to
the carrying value of $4 thousand prior to selling the land in 2021. The land
was subsequently sold for $65 thousand with a gain of $11 thousand recognized 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 $205 thosuand. FNCB
transferred the property to OREO at the selling price less cost to sell of $178
thousand and 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 2024
for the Wheeler Avenue property 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 thousand and recorded a loss on the transfer
of $242 thousand which 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 thousand was 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
thousand for the year ended December 31, 2021 and a write-down of $27 thousand
for the year ended December 31, 2020.



The following table presents the activity in OREO for the years ended December
31, 2021 and 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




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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     $   516
Commercial real estate            228         -         -       438         427
Residential real estate             -         -       204        45          80

Total other real estate owned $ 920 $ 58 $ 289 $ 919 $ 1,023





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 thousand and $164 thousand and are
included in other operating expense in the consolidated statements of
income, for the years ended December 31, 2021 and 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 billion at
December 31, 2021  from $1.287 billion at December 31, 2020 . Interest-bearing
deposits increased $119.0 million, or 11.7%, to $1.135 billion at December 31,
2021  from $1.016 billion at December 31, 2020 . In addition,
non-interest-bearing deposits increased $48.6 million, or 17.9%, to $320.1
million at December 31, 2021  from $271.5 million at 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 million at December 31, 2021  from $713.4 million at
December 31, 2020 . Savings accounts increased $24.6 million, or 22.4%, to
$134.2 million at December 31, 2021 from $109.7 million at December 31, 2020.
Time deposits with balances $250 thousand and over decreased $9.7 million, or
26.7%, to $26.5 million a t December 31, 2021 , from $36.2 million at December
31, 2020, and other time deposits decreased $40.3 million, or 25.7%, to $116.3
million at December 31, 2021 from $156.7 million at December 31, 2020. At
December 31, 2021 other time deposits included $10 million in brokered time
deposits outstanding that are part of an interest rate swap transaction,
compared to $20 million at December 31, 2020.


Total deposits averaged $1.381 billion in 2021, an increase of $230.7 million,
or 20.1%, compared to $1.151 billion in 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 million in 2021 as
compared to $242.0 million in 2020. Interest-bearing deposits averaged $1.066
billion in 2021, an increase of $157.6 million, or 17.3%, from $908.5 million in
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 million in
2021 from $101.9 million in 2020. Partially offsetting these increases was a
decrease of $18.9 million, or 9.7%, in average time deposits, to $176.2 million
in 2021 from $195.1 million in 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                  $   764,798          0.16 %   $   611,511          0.48 %   $   513,542          0.81 %
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                   $ 1,008,836




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The following table presents the maturity distribution of time deposits in
excess of insurance limit at December 31, 2021 and 2020:

Maturity Distribution of Time Deposits $250,000 or More



                               December 31,
(in thousands)               2021         2020
3 months or less           $ 10,740     $ 13,022
Over 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     $ 36,216




Borrowings



FNCB has an agreement with the FHLB of Pittsburgh which allows for borrowings,
either overnight or term, up to a maximum borrowing capacity based on a
percentage of qualifying loans pledged under a blanket pledge agreement. In
addition to pledging loans, FNCB is required to purchase FHLB of Pittsburgh
stock based upon the amount of credit extended. Loans that were pledged to
collateralize borrowings under this agreement were $478.3 million at December
31, 2021 and $500.1 million at December 31, 2020. FNCB's maximum borrowing
capacity was $391.7 million at December 31, 2021. There was $7.5 million in
letters of credit to secure municipal deposits outstanding at December 31,
2021 under this agreement. There were $20.0 million in term advances through the
FHLB of Pittsburgh outstanding at December 31, 2021 that were hedged under
interest-rate swaps. There were no overnight borrowings or term advances
through the FHLB of Pittsburgh at 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 million under the Federal Reserve Bank's Borrower-in-Custody ("BIC")
program. There were no advances under the BIC program outstanding at December
31, 2021 and December 31, 2020. FNCB had available borrowing capacity of $10.6
million under this program at December 31, 2021.



FNCB also had $10.3 million of junior subordinated debentures outstanding at
December 31, 2021 and 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 million in
2021 from $51.3 million in 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 Pittsburgh and Federal Reserve Bank in
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 Pittsburgh as wholesale
sources of funds to supplement its deposit gathering initiatives.



The statements of cash flows present the change in cash and cash equivalents
from operating, investing and financing activities. Cash and due from banks and
interest-bearing deposits in other banks, which comprise cash and cash
equivalents, are FNCB's most liquid assets. Cash and cash equivalents totaled
$99.0 million at December 31, 2021, a decrease of $56.8 million, or 36.4%, from
$155.8 million at 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 million of 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 million in 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 million and $1.3 million,
respectively.



Financing activities provided $179.8 million in net cash, which resulted
primarily from a $167.6 million net increase in deposits in 2021, coupled with
$20.0 million in 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 million and 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 million in net cash, which reflected net income of $21.4 million and
non-cash adjustments to income of $2.8 million.



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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 million at December 31, 2021, FNCB had ample
sources of additional liquidity including approximately $391.7 million in
available borrowing capacity with the FHLB of Pittsburgh, and available
borrowing capacity through The Federal Reserve Discount Window of $10.6 million
under the BIC program. In addition, FNCB had $72.0 million in 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
capital at December 31, 2021 and 2020, and selected other capital ratios:



                                                                                                    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

December 31, 2021


Total capital (to risk-weighted
assets)                           $   161,957         14.64 %         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

December 31, 2020


Total capital (to risk-weighted
assets)                           $   149,173         15.79 %         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




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FNCB's total regulatory capital increased $12.8 million to $162.0 million at
December 31, 2021 from $149.2 million at 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, 2021 and 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 December 31,
2021
and 2020.




On January 27, 2021, FNCB's Board of Directors authorized a stock repurchase
program under which up to 975,000 shares of FNCB's outstanding common stock may
be acquired in the open market 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, 2021 and 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 SEC regulations 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 million in
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. Bank regulations limit the amount of
dividends that may be paid without prior approval of the Bank's regulatory
agency. Cash dividends declared and paid by FNCB during 2021 and 2020 were
$0.27 per share and $0.22 per share, respectively. FNCB offers a Dividend
Reinvestment and Stock Purchase plan ("DRP") to its shareholders. For the years
ended December 31, 2021 and 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, 2021 and 2020, respectively. Subsequent to December 31, 2021, on
January 26, 2022, FNCB declared a $0.075 per share dividend payable on March 15,
2022 to 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, 2021 and 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, 2021 expire within one year of
their respective contract dates.



Off-Balance Sheet Commitments



                                    December 31,
(in thousands)                   2021          2020
Commitments to extend credit   $ 273,883     $ 227,908
Standby 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 $583 thousand and $613 thousand at
December 31, 2021 and 2020, respectively, which were included in other
liabilities in the consolidated statements of financial condition.

Impact of Inflation and Changing Prices




The preparation of financial statements in conformity with GAAP requires
management to measure the FNCB's financial position and operating results
primarily in terms of historic dollars. Changes in the relative value of money
due to inflation or recession are generally not considered. The primary effect
of inflation on FNCB's operations is primarily related to increases in operating
expenses. Management considers changes in interest rates to impact our financial
condition and results of operations to a far greater degree than changes in
prices due to inflation. Although interest rates are greatly influenced by
changes in the inflation rate, they do not necessarily change at the same rate
or 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.



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