FNCB BANCORP, INC. Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) (form 10-Q)

This Quarterly Report on Form 10-Q should be read in conjunction with the more
detailed and comprehensive disclosures included in the Annual Report on Form
10-K for the year ended December 31, 2021 for FNCB Bancorp, Inc. In addition,
please read this section in conjunction with the consolidated financial
statements and notes to consolidated financial statements contained elsewhere
herein.



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



FORWARD-LOOKING STATEMENTS AND OTHER INFORMATION




FNCB may from time to time make written or oral "forward-looking statements,"
including statements contained in its filings with the Securities and Exchange
Commission ("SEC"), in its reports to shareholders, and in its other
communications, which are made in good faith by us pursuant to the "safe harbor"
provisions of the Private Securities Litigation Reform Act of 1995.



These forward-looking statements include statements with respect to FNCB's
beliefs, plans, objectives, goals, expectations, anticipations, estimates and
intentions, that are subject to significant risks and uncertainties, and are
subject to change based on various factors (some of which are beyond our
control). The words "may," "could," "should," "will," "would," "believe,"
"anticipate," "estimate," "expect," "intend," "plan," "project," "future" and
similar expressions are intended to identify forward-looking statements. The
following factors, among others, could cause FNCB's financial performance to
differ materially from the plans, objectives, expectations, estimates and
intentions expressed in such forward-looking statements: the effect of the novel
Coronavirus Disease 2019 ("COVID-19") pandemic on FNCB and its customers, the
Commonwealth of Pennsylvania and the United States, related to the economy,
overall financial stability and the global supply chain; the COVID-19 pandemic
and measures taken to control its spread; government intervention in the U.S.
financial system including the effects of interest rate actions taken by the
Federal Open Market Committee ("FOMC"); recent legislative, tax, accounting and
regulatory actions and reforms, including, but not limited to, the Coronavirus
Aid, Relief, and Economic Security Act (the "CARES Act"), the Dodd-Frank Wall
Street Reform and Consumer Protection Act (the "Dodd-Frank Act") and the Tax
Cuts and Jobs Act; political instability; the ability of FNCB to manage credit
risk; weakness in the economic environment, in general, and within FNCB's market
area; the deterioration of one or a few of the commercial real estate loans with
relatively large balances contained in FNCB's loan portfolio; greater risk of
loan defaults and losses from concentration of loans held by FNCB, including
those to insiders and related parties; if FNCB's portfolio of loans to small and
mid-sized community-based businesses increases its credit risk; if FNCB's ALLL
is not sufficient to absorb actual losses or if increases to the allowance for
loan and lease losses ("ALLL") were required; FNCB is subject to interest-rate
risk and any changes in interest rates could negatively impact net interest
income or the fair value of FNCB's financial assets; if management concludes
that the decline in value of any of FNCB's investment securities is
other-than-temporary could result in FNCB recording an impairment loss; if
FNCB's risk management framework is ineffective in mitigating risks or losses
to FNCB; if FNCB is unable to successfully compete with others for business; a
loss of depositor confidence resulting from changes in either FNCB's financial
condition or in the general banking industry; if FNCB is unable to retain or
grow its core deposit base; inability or insufficient dividends from its
subsidiary, FNCB Bank; if FNCB loses access to wholesale funding sources;
interruptions or security breaches of FNCB's information systems; any systems
failures or interruptions in information technology and telecommunications
systems of third parties on which FNCB depends; security breaches; if FNCB's
information technology is unable to keep pace with growth or industry
developments or if technological developments result in higher costs or less
advantageous pricing; the loss of management and other key personnel; dependence
on the use of data and modeling in both its management's decision-making
generally and in meeting regulatory expectations in particular; additional risk
arising from new lines of business, products, product enhancements or services
offered by FNCB; inaccuracy of appraisals and other valuation techniques FNCB
uses in evaluating and monitoring loans secured by real property and other real
estate owned; unsoundness of other financial institutions; damage to FNCB's
reputation; defending litigation and other actions; dependence on the accuracy
and completeness of information about customers and counterparties; risks
arising from future expansion or acquisition activity; environmental risks and
associated costs on its foreclosed real estate assets; any remediation ordered,
or adverse actions taken, by federal and state regulators, including requiring
FNCB  to act as a source of financial and managerial strength for the FNCB Bank
in times of stress;  costs arising from extensive government regulation,
supervision and possible regulatory enforcement actions; new or changed
legislation or regulation and regulatory initiatives; noncompliance and
enforcement action with the Bank Secrecy Act and other anti-money laundering
statutes and regulations; failure to comply with numerous "fair and responsible
banking" laws; any violation of laws regarding privacy, information security and
protection of personal information or another incident involving personal,
confidential or proprietary information of individuals; any rulemaking changes
implemented by the Consumer Financial Protection Bureau; non-compliance with the
Paycheck Protection Act and its rules and regulations; inability to attract and
retain its highest performing employees due to potential limitations on
incentive compensation contained in proposed federal agency rulemaking; any
future increases in FNCB Bank's FDIC deposit insurance premiums and assessments;
and the success of FNCB at managing the risks involved in the foregoing and
other risks and uncertainties, including those detailed in FNCB's filings with
the SEC.



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



Readers should carefully review the risk factors described in the documents that
FNCB periodically files with the SEC, including its Annual Report on Form 10-K
for the year ended December 31, 2021 and Quarterly Report on Form 10-Q for the
period ended March 31, 2022.


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

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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 ALLL, the
valuation of securities and evaluation of securities for impairment, and income
taxes to be critical, as management is required to make subjective and/or
complex judgments about matters that are inherently uncertain and could be most
subject to revision as new information becomes available.



The judgments used by management in applying the critical accounting policies
discussed below may be affected by changes and/or deterioration in the economic
environment, which may impact future financial results. Specifically, subsequent
evaluations of the loan portfolio, in light of the factors then prevailing, may
result in significant changes in the 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.



The ALLL consists 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.



See Note 4, “Loans and Leases” of the notes to consolidated financial statements included in Item 1 hereof 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 12, "Fair Value
Measurements" of the notes to consolidated financial statements included in Item
1 hereof for additional information about FNCB's securities valuation
techniques.



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
the three and six months ended June 30, 2022 and 2021 within the consolidated
statements of income.


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




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Income Taxes



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



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



In connection with determining the income tax provision or benefit, management
considers maintaining liabilities for uncertain tax positions and tax strategies
that it believes contain an element of uncertainty. Periodically, management
evaluates each of FNCB's tax positions and strategies to determine whether a
liability for uncertain tax benefits is required. As of June 30, 2022
and December 31, 2021, management determined that FNCB did not have any
uncertain tax positions or tax strategies and that no liability was required to
be recorded.


Refer to Note 7, “Income Taxes,” of the notes to consolidated financial statements included in Item 1 hereof for additional information about income taxes.

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




Refer to Note 2, "New Authoritative Accounting Guidance," of the notes to
consolidated financial statements included in Item 1 hereof for information
about new authoritative accounting guidance adopted by FNCB as of June 30, 2022,
as well as new accounting guidance issued, but not previously reported, that
will be adopted by FNCB in future periods.



Overview of Operating Environment




Management continues to navigate and respond to the many challenges brought on
by the COVID-19 pandemic and the war in Ukraine, including economic uncertainty,
supply-chain and employment market constraints, inflation and rising interest
rates. FNCB branches are open, and while fully operational, FNCB continues to
follow CDC and Commonwealth of Pennsylvania guidance and take the
necessary precautions to ensure the safety of its customers and its
employees. During 2021, widespread availability and distribution of vaccines,
including boosters, resulted in the lifting of restrictions, the reopening of
the economy and improvement in 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 new variants, continue to
adversely impact employment markets and supply-chains affecting global,
national, regional and local economies. The effects of the COVID-19 pandemic,
along with other factors such as the war in Ukraine, have resulted in pronounced
price inflation beginning in 2021, which has escalated in 2022. As a result, the
FOMC has adjusted its accommodative monetary policy stance and began raising the
target rate for federal funds in order to attempt to lower inflation. Policy
actions to tighten the economy included a 25-basis point increase on March 17,
2022, a 50-basis point increase on May 5, 2022 and a 75-basis point increase on
June 16, 2022 for a total increase of 150 basis points. These increases resulted
in a corresponding 150-basis point increase in the prime rate, which was 4.75%
at June 30, 2022. These actions also impacted U.S. treasury rates and has
resulted in yield curve flattening, due to narrowing spreads. Subsequent to June
30, 2022, the FOMC raised short-term interest rates another 75 basis points at
its meeting on July 27, 2022, bringing the target range for federal funds to
2.25%-2.50% and the prime rate to 5.50%. The FOMC also indicated that it
anticipates additional increases in the target range may be appropriate.



At June 30, 2022, FNCB had Paycheck Protection Program ("PPP") loans still
outstanding of $1.7 million, net of $0.1 million in net deferred origination
fees, compared to $21.0 million outstanding in loans at December 31, 2021, net
of $0.9 million in net deferred origination fees.  As of June 30, 2022, FNCB
has received forgiveness for the majority of  PPP loans, with the remaining
balance of $1.7 million now amortizing. Regarding our banking operations,
commercial activity within our market area, while improving, remains volatile
and has not returned to pre-pandemic levels. Management expects the effects
of COVID-19 pandemic, as well as other matters, on the economy, overall
financial stability and global supply chains, as well as increased or decreased
governmental intervention in the U.S. financial system, 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 this challenging
operating environment 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 challenges that may be presented.



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Executive Summary


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




FNCB recorded consolidated net income of $5.7 million, or $0.29 per basic and
diluted common share, for the three months ended June 30, 2022, an increase of
$0.5 million, or 9.7%, compared to $5.2 million, or $0.26 per basic and diluted
common share, for the three months ended June 30, 2021. The increase in
the second quarter 2022 earnings was caused by increases in net interest income
and a decrease in the provision for loan and lease losses, partially offset by a
decrease in total non-interest income and an increase in non-interest expense.
Net interest income increased $1.6 million, or 13.2%, to $13.6 million for the
three months ended June 30, 2022 from $12.0 million for the same three months of
2021, primarily due to higher earning asset volumes.  The provision for loan and
lease losses decreased $93 thousand, or 60.0% to $62 thousand for the three
months ended June 30, 2022 from $155 thousand for the same period of 2021, which
reflected favorable asset quality metrics and a large recovery received in the
second quarter of 2022. Non-interest income for the three months ended June 30,
2022, decreased $52 thousand, or 3.0%, to $1.6 million from $1.7 million for the
three months ended June 30, 2021. The decrease in non-interest revenue was
largely caused by a net loss on equity securities, a net loss on the sale of
available-for-sale debt securities and a reduction in loan-related fees, which
were partially offset by increases in deposit service charges and income from
bank owned life insurance ("BOLI"). Non-interest expense increased $1.0 million
or 13.9% to $8.2 million for the three months ended June 30, 2022, compared to
$7.2 million for the three months ended June 30, 2021, resulting from increases
in salaries and employee benefits, data processing expense and professional
fees.



Net income for the six months ended June 30, 2022 totaled $10.1 million, or $
0.51 per basic and diluted share, a decrease of $1.0 million, or 8.8% compared
to $11.1 million, or $0.55 per basic and diluted shares, for the same six months
of 2021. The decrease in year-to-date net income was caused primarily by
increases in non-interest expense and the provision for loan and lease losses
and a decrease in non-interest income, partially mitigated by an increase in net
interest income. Non-interest expense increased $2.4 million, or 16.5%, to $16.8
million for the six months ended June 30, 2022 from $14.4 million in 2021,
primarily due to increases in personnel-related costs, data processing expense,
professional fees and regulatory assessments. For the six months ended June 30,
the provision for loan and lease losses increased $0.5 million to $0.8 million
in 2022 from $0.3 million in 2021, reflecting higher loan volumes. Non-interest
income for the six months ended June 30, 2022 decreased $1.0 million, or 23.1%,
to $3.5 million, compared to $4.5 million for the same six months of 2021.
Despite a $1.4 million reduction in net loan origination fees recognized on
forgiven PPP loans, net interest income increased $3.0 million, or 12.7%, to
$26.4 million for the six months ended June 30, 2022 from $23.4 million for the
comparable period of 2021, reflecting strong loan growth and the increase in
market interest rates.



For the three and six months ended June 30, 2022, the annualized return on
average assets was 1.37% and 1.23%, respectively, and 1.38% and 1.49%,
respectively, for the same period of 2021. The annualized return on average
equity was 17.57% and 14.18%, respectively, for the three and six months ended
June 30, 2022, compared to 13.37% and 14.31%, for the comparable periods of
2021. FNCB declared and paid dividends to holders of common stock of $0.075 per
share for the second quarter of 2022 totaling $0.150 per share for the six
months ended June 30, 2022, compared to $0.060 and $0.120 per share for the same
periods of 2021, a 25.0% increase for both the quarter-to-date and year-to-date
periods.



Total assets increased $28.8 million, or 1.7%, to $1.693 billion at June 30,
2022 from $1.664 billion at December 31, 2021. The change in total assets
primarily reflected increases in loans and leases, partially offset by
decreases in cash and cash equivalents and available-for-sale debt securities.
Loans and leases, net of the allowance for loan and lease losses, increased
$108.3 million, or 11.2%, to $1.075 billion at June 30, 2022 from $967.0 million
at December 31, 2021. FNCB experienced increases across all major loan
categories due to strong organic demand, the new equipment finance product
offering and the acquisition of loans pools from third-party originators. Cash
and cash equivalents decreased $71.6 million, or 72.3%, to $27.4 million at June
30, 2022 from $99.0 million at December 31, 2021. Available-for-sale debt
securities decreased $27.0 million, or 5.2%, to $495.6 million at June 30,
2022 from $522.6 million at December 31, 2021. Total deposits decreased $28.1
million, or 1.9%, to $1.427 billion at June 30, 2022 from $1.455 billion
at December 31, 2021. Total borrowed funds increased $98.1 million, to
$128.4 million, at June 30, 2022 from $30.3 million at December 31, 2021. The
increase in borrowed funds was entirely due to an increase in Federal Home Loan
Bank ("FHLB") of Pittsburgh advances to $118.1 million at June 30, 2022 from
$20.0 million at December 31, 2021.



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 was adopted in
accordance with Rule 10b5-1 of the Securities Exchange Act of 1934, as amended
(the "Exchange Act"). Under the program, shares are purchased from time to time
at prevailing market prices, through open market transactions depending upon
market conditions and administered through an independent broker. Repurchases
are subject to SEC regulations as well as certain price, market volume and
timing constraints specified in the trading plan. Under the program, the
purchases will be funded from available working capital presently available to
FNCB, and the repurchased shares will be returned to the status of authorized
but unissued shares of Common Stock. There is not a guarantee as to the exact
number of shares that will be repurchased by FNCB, and FNCB may discontinue at
any time that management determines additional repurchases are no longer
warranted. As of June 30, 2022, FNCB repurchased 371,376 shares, at an average
price per share of $9.51, or $3.5 million in aggregate.



Total shareholders' equity decreased $37.0 million, or 22.7%, to $125.5 million
at June 30, 2022 from $162.5 million at December 31, 2021.  The decrease in
capital was primarily due market value depreciation of FNCB's available-for-sale
debt securities, net of deferred taxes, which resulted in an accumulated other
comprehensive loss of $34.4 million at June 30, 2022, compared to accumulated
other comprehensive income of $6.3 million at December 31, 2021. Also impacting
capital were common share repurchases totaling $3.5 million and year-to-date
dividend declared of $3.0 million for the six months ended June 30, 2022. These
reductions were partially offset by net income for the six months ended June 30,
2022 of $10.1 million. FNCB Bank was considered well capitalized with total
risk-based capital and Tier 1 leverage ratios were 13.90% and 9.32% at June 30,
2022, respectively.



Management continues to focus on expanding FNCB's comprehensive digital strategy
to respond to evolving customer demands and create operational and delivery
channel efficiencies. Specifically, in the fourth quarter of 2021, FNCB engaged
a third-party service provider for the origination and underwriting of
residential mortgages through their web-based platform. FNCB completed the
implementation of this new platform during the second quarter of 2022, providing
customers with secure, state-of-art technology that guides them through the
entire mortgage origination process from application to closing and allows FNCB
to focus on attracting new customers and deepening existing customer
relationships. FNCB is also in the process of fully integrating a new business
lending software, which is a fully digital infrastructure that supports future
growth, allowing FNCB to expand market penetration, improve borrower response
time, and enhance governance related to credit administration and
underwriting. Lastly, FNCB has partnered with a FinTech company formed
by veteran community bank executives and implemented its proprietary cloud-based
data analytic platform. This analytic platform provides timely and unique
insight into FNCB's deposit, loan and revenue demographics, allowing FNCB's
management team to make informed decisions to drive revenue, manage risk and
create operational efficiencies. During the second half of 2022, FNCB will
begin integrating a new comprehensive budgetary application into this data
analytic platform and will utilize this collaborative application to build
its 2023-2025 budget and assist management in the strategic and capital planning
process.



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Summary of Performance



Net Interest Income



Net interest income, defined as the difference between (i) interest income,
interest and fees on interest-earning assets, and (ii) interest expense,
interest paid on deposits and borrowed funds, is the primary source of earnings
for commercial banks. As such, it is the primary determinant of profitability
for FNCB. Net interest income is impacted by variations in the volume, rate and
composition of earning assets and interest-bearing liabilities, changes in
general market rates and the level of non-performing assets. Interest income is
presented on a fully tax-equivalent basis using the statutory corporate tax rate
of 21.0% in 2022 and 2021.



In response to the economic fallout from the global COVID-19 pandemic, the
Federal Open Market Committee ("FOMC") lowered the federal funds target rate 150
basis points in two emergency actions in March 2020. As a result, the target
range for federal funds fell from 1.50%-1.75% at December 31, 2019 to
0.00%-0.25% at March 31, 2020 and had remained at these historically low
levels through March 15, 2022. However, fallout from the pandemic, supply chain
constraints and effects from the war in Ukraine has resulted in rapid rise in
price inflation. As a result, the FOMC, in an effort to lower inflation to its
2.0% objective, began tightening economic policy with three actions taken during
the first half of 2022. Specifically, on March 17, 2022, the FOMC increased the
target range for the federal funds rate 25 basis points, which was then followed
by a 50-basis point increase on May 5, 2022 and an additional 75-basis
point increase on June 16, 2022. The increases in the federal funds target rate
resulted in a corresponding a total 150-basis point increase in the national
prime rate, which was 4.75% at June 30, 2022. In addition to these actions, the
FOMC has indicated additional rate increases may be required throughout the
remainder of 2022. This shift from an accommodating stance to a tightening
stance has resulted in a rise in general market interest rates. Additionally,
net interest income, earning-asset yields and the net interest margin for the
three and six months ending June 30, 2022 and 2021 were impacted by the activity
related to PPP loans, including the timing of forgiveness and recognition of net
loan origination fees.



Net interest income on a tax-equivalent basis increased $1.6 million, or 13.3%,
to $13.9 million for the three months ended June 30, 2022 from $12.3 million for
the comparable period of 2021. The improvement in tax-equivalent net interest
income primarily reflected an increase in tax-equivalent interest income of
$1.5 million, or 11.7%, to $14.5 million for the second quarter of 2022 from
$13.0 million for the same quarter of 2021, coupled with a decrease in interest
expense of $0.1 million, or 14.1%, to $0.7 million from $0.8 million, primarily
due to the reduction in funding costs. The tax-equivalent net interest margin, a
key measurement used in the banking industry to measure income from earning
assets relative to the cost to fund those assets, is calculated by dividing
tax-equivalent net interest income by average interest-earning assets.  FNCB's
tax-equivalent net interest margin decreased 16 basis points to 3.42% for the
second quarter of 2022 from 3.58% for the same quarter of 2021. Additionally,
rate spread, the difference between the average yield on interest-earning assets
and the average cost of interest-bearing liabilities shown on a fully
tax-equivalent basis, declined 14 basis points to 3.36% for the three months
ended June 30, 2022 from 3.50% for the same three months of 2021.



For the three months ended June 30, 2022, tax-equivalent interest income
increased $1.5 million, or 11.7%, to $14.5 million from $13.0 million for the
three months ended June 30, 2021, which largely reflected higher volumes of
average earning assets, partially offset by reductions in the tax-equivalent
yields on earning assets. Total average earning assets increased $254.2 million,
or 18.5%, to $1.625 billion for the three months ended June 30, 2022 from
$1.371 billion for the same three months of 2021, which resulted in a
corresponding increase in tax-equivalent interest income of $2.1 million.
Specifically, total securities averaged $552.9 million for the second quarter of
2022, an increase of $143.8 million, or 35.1%, from $409.1 million for the
second quarter of 2021. Additionally, average total loans and leases increased
$113.0 million, or 11.8%, to $1.067 billion for the second quarter of 2022 from
$954.4 million for the same quarter of 2021, which largely reflected strong
organic loan demand, the new commercial equipment financing product offering,
and purchases of loan pools from third-party originators. Increases in the
average balances of securities and loans resulted in corresponding increases to
tax-equivalent interest income of $0.9 million and $1.2 million, respectively,
comparing the three months ended June 30, 2022 and 2021. Partially offsetting
the positive impact on interest income due to increases in earning asset volumes
was a 22-basis point decrease in the tax-equivalent yield on average earning
assets for the second quarter of 2022 to 3.58% from 3.80% for the same quarter
of 2021, which resulted in a corresponding $0.6 million decrease
to tax-equivalent interest income.


The $0.1 million, or 14.1%, decrease in interest expense was primarily due to a
8-basis point reduction in the cost of funds to 0.22% for the three months ended
June 30, 2022 from 0.30% for the same three months of 2021. Specifically, the
average rate paid for interest-bearing deposits decreased 15 basis points to
0.13% for the second quarter of 2022 from 0.28% for the same period of 2021,
resulting in a corresponding decrease to interest expense of $0.4 million. The
average rates paid for interest-bearing demand and time deposits, which
reflected the reduction in market interest rates and repricing of higher-costing
time deposit upon maturity, decreased 7 basis points and 53 basis points,
respectively, comparing the three months ended June 30, 2022 and 2021. The
decrease in the cost of interest-bearing demand deposits and time deposits
caused corresponding reductions to interest expense of $0.1 million and $0.2
million, respectively. Changing customer deposit preferences due to continued
economic uncertainty coupled with supply-chain constraints and general rate
environment, factored into deposit migration from time deposits into
non-maturity deposits. Specifically, average interest-bearing deposits increased
$82.3 million, or 8.1%, to $1.102 billion from $1.020 billion comparing the
second quarters of 2022 and 2021, respectively. Average interest-bearing demand
deposits increased $84.0 million, or 11.8%, to $796.8 million for the second
quarter of 2022 compared to $712.8 million for the same quarter of 2021, while
average savings deposits increased $20.6 million, or 16.7%, to $143.9 million
from $123.3 million comparing the second quarters of 2022 and 2021,
respectively. Conversely, average time deposits decreased $22.4 million, or
12.2%, to $161.2 million for the three months ended June 30, 2022 from $183.6
million for the same three months of 2021.

On a year-to-date basis, tax-equivalent net interest income increased
$3.0 million, or 12.7%, to $26.9 million for the six months ended June 30,
2022 from $23.9 million for the comparable period of 2021. The improvement in
tax-equivalent net interest income was due to a $2.5 million, or 9.7%, increase
in tax-equivalent interest income, coupled with a $0.5 million, or
34.0%, decrease in interest expense. The increase in tax-equivalent interest
income for the year-to-date period resulted primarily from the $239.9 million,
or 17.7%, increase in average earning asset balances. Average total security
balances increased $161.3 million, or 41.8%, to $547.0 million for the six
months ended June 30, 2022 from $385.7 million for the same period of 2021,
resulting in an increase of $2.0 million in interest income. In addition,
average loan balances increased $96.5 million, or 10.3%, to $1.034 billion for
the six months ended June 30, 2022, compared to $937.5 million for the same six
months of 2021, resulting in an increase of $2.0 million in interest income. Tax
equivalent yield on average earning assets on a year-to-date basis decreased 25
basis points to 3.52% from 3.77%, which resulted in a $1.5 million decrease to
tax-equivalent interest income.

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The $0.5 million, or 34.0%, decrease in interest expense resulted primarily from
a decrease in funding costs, partially offset by an increase in average borrowed
funds. FNCB's total cost of funds decreased 14 basis points to 0.18% for the six
months ended June 30, 2022 from 0.32% for the same six months of 2021, resulting
in a corresponding decrease to interest expense of $0.9 million.  The cost of
interest-bearing deposits decreased 18 basis points to 0.12% from 0.30%,
respectively, comparing the six months ended June 30, 2022 and 2021.
Specifically, comparing the year-to-date periods of 2022 and 2021, the rates
paid on time deposits, interest-bearing demand deposits and savings deposits
decreased 54 basis points, 10 basis points and 1 basis point, respectively.
Additionally, the cost of borrowed funds decreased 89 basis points to 0.97% for
the six months ended June 30, 2022 from 1.86% for the same six months of 2021.
Partially offsetting the decrease in interest expense due to the reduction in
funding costs was an $70.5 million, or 683.9%, increase in average borrowed fund
to $80.8 million for the six months ended June 30, 2022 from $10.3 million for
the same period of 2021, which resulted in a corresponding increase in interest
expense of $0.3 million. Total interest-bearing deposits averaged $1.107 billion
for the first half of 2022, an increase of $97.4 million, or 9.7%, from $1.009
billion for the same period of 2021, reflecting increases in average
interest-bearing demand deposits and savings deposits, partially offset by a
reduction in time deposits. The increase in average deposit volumes had only a
minor effect on interest expense, as the reduction in higher-costing time
deposits more than mitigated the impact of increases in lower-costing
non-maturity deposits.

The following tables present the average balances of assets and liabilities,
corresponding interest income and expense and resulting average yields or rates
paid for the three and six months ended June 30, 2022 and 2021. Average balances
are derived from average daily balances. The loan yields include amortization of
deferred origination fees and costs which are considered adjustments to yields.



                                                                  Three Months Ended
                                               June 30, 2022                              June 30, 2021
                                     Average                      Yield/        Average                      Yield/
(dollars in thousands)               Balance       Interest        Cost         Balance       Interest        Cost
Assets
Earning assets (2)(3)
Loans and leases - taxable (4)     $ 1,013,899     $  10,743         4.24 %   $   909,833     $   9,897         4.35 %
Loans and leases - tax free (4)         53,471           452         3.38 %        44,583           437         3.92 %
Total loans (1)(2)                   1,067,370        11,195         4.20 %       954,416        10,334         4.33 %
Securities-taxable                     442,998         2,514         2.27 %       326,848         2,039         2.50 %
Securities-tax free                    109,948           833         3.03 %        82,304           653         3.17 %
Total securities (1)(5)                552,946         3,347         2.42 %       409,152         2,692         2.63 %
Interest-bearing deposits in
other banks and federal funds
sold                                     4,488             8         0.71 %         7,042             1         0.06 %
Total earning assets                 1,624,804        14,550         3.58 %     1,370,610        13,027         3.80 %
Non-earning assets                      68,873                                    158,239
Allowance for loan and lease
losses                                 (13,570 )                                  (12,378 )
Total assets                       $ 1,680,107                                $ 1,516,471

Liabilities and Shareholders'
Equity
Interest-bearing liabilities
Interest-bearing demand deposits   $   796,819           215         0.11 %   $   712,760           327         0.18 %
Savings deposits                       143,881            24         0.07 %       123,261            22         0.07 %
Time deposits                          161,247           107         0.27 %       183,591           369         0.80 %
Total interest-bearing deposits      1,101,947           346         0.13 %     1,019,612           718         0.28 %
Borrowed funds and other
interest-bearing liabilities           113,932           312         1.10 %        10,310            48         1.86 %
Total interest-bearing
liabilities                          1,215,879           658         0.22 %     1,029,922           766         0.30 %
Demand deposits                        319,505                                    317,670
Other liabilities                       13,730                                     11,998
Shareholders' equity                   130,993                                    156,881
Total liabilities and
shareholder's equity               $ 1,680,107                                $ 1,516,471

Net interest income/interest
rate spread (6)                                       13,892         3.36 %                      12,261         3.50 %
Tax equivalent adjustment                               (270 )                                     (229 )
Net interest income as reported                    $  13,622                                  $  12,032

Net interest margin (7)                                              3.42 %                                     3.58 %



(1) Interest income is presented on a tax equivalent basis using a 21% rate.

(2) Loans and leases are stated net of unearned income.

(3) Non-accrual loans are included in loans within earning assets.

(4) Interest income on loans and leases include net loan fees of $117 thousand

and $1.1 million for the three months ended June 30, 2022 and 2021,

respectively.

(5) The yields for securities that are classified as available for sale is based

on the average historical amortized cost.

(6) Interest rate spread represents the difference between the average yield on

interest earning assets and the cost of interest-bearing liabilities and is

      presented on a tax equivalent basis.
  (7) Net interest income as a percentage of total average interest earning
      assets.




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                                                                   Six Months Ended
                                               June 30, 2022                              June 30, 2021
                                     Average                      Yield/        Average                      Yield/
(dollars in thousands)               Balance       Interest        Cost         Balance       Interest        Cost
Assets
Earning assets (2)(3)
Loans and leases - taxable (4)     $   983,445     $  20,498         4.17 %   $   891,789     $  19,298         4.33 %
Loans and leases - tax free (4)         50,575           891         3.49 %        45,733           924         4.04 %
Total loans (1)(2)                   1,034,020        21,389         4.14 %       937,522        20,222         4.31 %
Securities-taxable                     440,490         4,982         2.26 %       306,601         4,007         2.61 %
Securities-tax free                    106,536         1,608         3.02 %        79,108         1,268         3.21 %
Total securities (1)(5)                547,026         6,590         2.41 %       385,709         5,275         2.74 %
Interest-bearing deposits in
other banks and federal funds
sold                                    10,940            15         0.27 %        28,904             4         0.03 %
Total earning assets                 1,591,986        27,994         3.52 %     1,352,135        25,501         3.77 %
Non-earning assets                      79,916                                    154,128
Allowance for loan and lease
losses                                 (13,132 )                                  (12,284 )
Total assets                       $ 1,658,770                                  1,493,979

Liabilities and Shareholders'
Equity
Interest-bearing liabilities
Interest-bearing demand deposits   $   811,591           410         0.10 %   $   704,324           707         0.20 %
Savings deposits                       142,193            46         0.06 %       118,830            42         0.07 %
Time deposits                          152,998           214         0.28 %       186,252           767         0.82 %
Total interest-bearing deposits      1,106,782           670         0.12 %     1,009,406         1,516         0.30 %
Borrowed funds and other
interest-bearing liabilities            80,823           394         0.97 %        10,310            96         1.86 %
Total interest-bearing
liabilities                          1,187,605         1,064         0.18 %     1,019,716         1,612         0.32 %
Demand deposits                        314,197                                    306,161
Other liabilities                       13,483                                     12,205
Shareholders' equity                   143,485                                    155,897
Total liabilities and
shareholder's equity               $ 1,658,770                                $ 1,493,979

Net interest income/interest
rate spread (6)                                       26,930         3.34 %                      23,889         3.45 %
Tax equivalent adjustment                               (525 )                                     (460 )
Net interest income as reported                    $  26,405                                  $  23,429

Net interest margin (7)                                              3.38 %                                     3.53 %



(1) Interest income is presented on a tax equivalent basis using a 21% rate.

(2) Loans and leases are stated net of unearned income.

(3) Non-accrual loans are included in loans within earning assets.

(4) Interest income on loans and leases include net loan fees of $519 thousand

and $2.1 million for the three months ended June 30, 2022 and 2021,

respectively.

(5) The yields for securities that are classified as available for sale is based

on the average historical amortized cost.

(6) Interest rate spread represents the difference between the average yield on

interest earning assets and the cost of interest-bearing liabilities and is

      presented on a tax equivalent basis.
  (7) Net interest income as a percentage of total average interest earning
      assets.




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Rate Volume Analysis



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



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



                               Three Months Ended June 30,                  Six Months Ended June 30,
                                      2022 vs. 2021                               2022 vs. 2021
                                   Increase (Decrease)                         Increase (Decrease)
                          Due to           Due to         Total         Due to        Due to         Total
(in thousands)            Volume            Rate         Change         Volume         Rate         Change
Interest income:
Loans and leases -
taxable                 $    1,108       $     (262 )   $     846     $    1,930     $    (730 )   $   1,200
Loans and leases -
tax free                        80              (65 )          15             92          (125 )         (33 )
Total loans                  1,188             (327 )         861          2,022          (855 )       1,167
Securities - taxable           672             (197 )         475          1,570          (595 )         975
Securities - tax free          211              (31 )         180            418           (78 )         340
Total securities               883             (228 )         655          1,988          (673 )       1,315
Interest-bearing
deposits in other
banks and federal
funds sold                       -                7             7             (4 )          15            11
Total interest income        2,071             (548 )       1,523          4,006        (1,513 )       2,493

Interest expense:
Interest-bearing
demand deposits                 35             (147 )        (112 )           95          (392 )        (297 )
Savings deposits                 4               (2 )           2              8            (4 )           4
Time deposits                  (40 )           (222 )        (262 )         (118 )        (435 )        (553 )
Total
interest-bearing
deposits                        (1 )           (371 )        (372 )          (15 )        (831 )        (846 )
Borrowed funds and
other
interest-bearing
liabilities                    292              (28 )         264            364           (66 )         298
Total interest
expense                        291             (399 )        (108 )          349          (897 )        (548 )
Net interest income     $    1,780       $     (149 )   $   1,631     $    3,657     $    (616 )   $   3,041



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 leases and is based on management's analysis of the adequacy of the
ALLL. A release of reserves, resulting in a credit for 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. Despite continued economic
uncertainty, global supply chain issues and inflationary pressures due to the
COVID-19 pandemic, supply chain constraints and other factors such as the war in
Ukraine, FNCB's asset quality metrics have remained favorable throughout 2021
and during the first six months of 2022. Management will continue to closely
monitor FNCB's asset quality and adjust credit provisioning as appropriate. FNCB
recorded a provision for loan and lease losses of $62 thousand for the
three-month period ended June 30, 2022 compared to a $155 thousand provision for
loan and lease losses for the three months ended June 30, 2021 The provision for
loan and lease losses totaled $821 thousand for the six months ended June 30,
2022, an increase of $480 thousand, from $341 thousand for the same six months
of 2021, primarily attributable to the increase in loan volumes.



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Non-interest Income



For the three months ended June 30, 2022, non-interest income decreased $52
thousand, or 3.0%, to $1.6 million from $1.7 million for the three months ended
June 30, 2021. The decrease was largely due to a net loss on equity securities,
a net loss on the sale of available-for-sale debt securities and a reduction in
loan-related fees, partially offset by an increase in deposit service charges
and BOLI income. For the three months ended June 30, 2022, a net loss on equity
securities totaled $82 thousand, an unfavorable change of $118 thousand, or
327.7%, compared to a recorded gain on equity securities of $36 thousand for the
same three months of 2021. Additionally, there was a net loss of $35 thousand
realized on the sale of available-for-sale debt securities during the three
months ended June 30, 2022. There was no net gain or loss on the sale of
available-for-sale debt securities recognized for the second quarter of 2021. In
addition, loan-related fees decreased $54 thousand, or 51.9%, to $50 thousand
from $104 thousand for the three months ended June 30, 2022 and 2021,
respectively, which was largely due to a reduction in fees received on the
servicing of loans under the Federal Reserve Bank's Main Street lending
program. These reductions were partially offset by a $109 thousand, or
11.4%, increase in deposit service charges to $1.1 million for the three months
ended June 30, 2022 compared to $1.0 million for the same three months of 2021.
Additionally, FNCB purchased another $3.0 million in BOLI policies, which
contributed to a $55 thousand, or 38.7%, in BOLI income to $0.2 million for the
three months ended June 30, 2022 from $0.1 million for the same three months of
2021.



For the six months ended June 30, 2022, non-interest income decreased $1.0
million, or 23.1%, to $3.5 million from $4.5 million for the same period of
2021. Similar to the quarterly period, the reduction in non-interest income
resulted primarily from an unfavorable change in the market value of equity
securities resulting in a net loss on equity securities of $0.2 million for the
six months ended June 30, 2022 compared to a net gain on equity securities of
$0.4 million for the six months ended June 30, 2021.  In addition, non-interest
income for the six-month period of 2021 included a $0.4 million settlement from
a bank-owned life insurance death benefit claim. Comparing the year-to-date
periods ended June 30, 2022 and 2021, FNCB also experienced reductions in the
net gain recognized on the sale of mortgages held for sale and loan related
fees, which decreased $0.2 million, or 88.0%, and $0.1 million, or 54.9%,
respectively, and a net loss on the sale of available-for-sale debt securities
of $35 thousand in 2022 compared to a $0.2 million net gain in 2021. These
decreases to non-interest income were partially offset by a $0.3 million, or
15.6%, increase in deposit service charges, to $2.1 million for the six months
ended June 30, 2022 compared to $1.8 million for the same period of 2021.



Non-interest Expense



Non-interest expense increased $1.0 million, or 13.9%, to $8.2 million for the
three months ended June 30, 2022 from $7.2 million for the three months ended
June 30, 2021, which primarily reflected increases in salaries and employee
benefits, data processing expense, professional fees and regulatory assessments.
Salaries and employee benefits increased $0.5 million, or 11.9%, which included
the increased costs of onboarding the 1st Equipment Finance team of lending
professionals in the Bank's efforts to expand its equipment loan and lease
portfolios. Data processing expense increased $0.1 million, or 14.0%, to $1.0
million for the three months ended June 30, 2022, compared to $0.9 million for
the same three months of 2021. Professional fees increased $0.1 million, or
90.2%, to $0.2 million from $0.1 million, respectively, comparing the second
quarters of 2022 and 2021. The increases in data processing expense and
professional fees reflected additional costs associated with FNCB's initiatives
to expand its digital banking platforms. FNCB also experienced a $0.1 million,
or 75.0%, increase in regulatory assessments to $0.2 million for the three
months ended June 30, 2022 from $0.1 million for the same three months of 2021
due primarily to balance sheet growth.



For the six months ended June 30, 2022, non-interest expense increased $2.4
million or 16.5%, to $16.8 million compared to $14.4 million for the same six
month period of 2021, primarily due to similar increases seen in the quarterly
period.  Salaries and employee benefits, increased $1.4 million, or 18.1%, to
$9.2 million for the six months ended June 30, 2022, compared to $7.8 million
for the six months ended June 30, 2021.  The increase in personnel-related
expenses was coupled with a $0.4 million, or 21.6%, increase in data processing
fees to $2.1 million from $1.7 million, respectively, for the same year-to-date
comparative periods of 2022 and 2021.  Professional fees increased $0.2 million,
or 45.5%, to $0.6 million for the six months ended June 30, 2022 from $0.4
million for the same six months of 2021, while regulatory assessments increased
$0.1 million, or 40.4%, to $0.4 million from $0.3 million,
respectively, comparing the six months ended June 30, 2022 and 2021.





Provision for Income Taxes



FNCB recorded income tax expense of $2.2 million for the six months ended June
30, 2022, an increase of $52 thousand, or 2.5%, compared to income tax expense
of $2.1 million for the same period of 2021. FNCB's effective tax rate increased
to 17.66% at June 30, 2022 compared to 16.03% for the same period of 2021. The
increase in income tax expense and the effective tax rate primarily reflected a
timing difference related to the loss on equity securities recorded in the first
half of 2022, compared to a gain on equity securities recorded in the comparable
period of 2021. The lower effective tax rate for 2021 reflected the recognition
of $422 thousand of non-taxable income from a BOLI settlement received on a
death benefit claim.



FINANCIAL CONDITION



Assets



Total assets increased $28.8 million, or 1.7%, to $1.693 billion at June 30,
2022 from $1.664 billion at December 31, 2021. The change in total assets
primarily reflected increases in loans and leases, partially offset by
decreases in cash and cash equivalents and available-for-sale debt securities.
Loans and leases, net of the allowance for loan and lease losses, increased
$108.3 million, or 11.2%, to $1.075 billion at June 30, 2022 from $967.0 million
at December 31, 2021, as increases were experienced across all loan
categories due to strong organic demand, FNCB's new equipment financing product
offering and the acquisition of loan pools from third-party originators. Cash
and cash equivalents decreased $71.6 million, or 72.3%, to $27.4 million at June
30, 2022 from $99.0 million at December 31, 2021. Available-for-sale debt
securities decreased $27.0 million, or 5.2%, to $495.6 million at June 30,
2022 from $522.6 million at December 31, 2021. The reduction in
available-for-sale debt securities was primarily the result of depreciation in
the fair value of the portfolio of $52.3 million due to changes in market
interest rates, partially offset by net growth in the portfolio of  $25.3
million. Total deposits decreased $28.1 million, or 1.9%, to $1.427 billion at
June 30, 2022 from $1.455 billion at December 31, 2021. Total borrowed
funds increased $98.1 million, to $128.4 million, at June 30, 2022, from $30.3
million at December 31, 2021. The increase in borrowed funds was entirely due to
an increase in FHLB of Pittsburgh advances to $118.1 million at June 30, 2022
from $20.0 million at December 31, 2021.



Cash and Cash Equivalents



Cash and cash equivalents decreased $71.6 million, or 72.3%, to $27.4 million at
June 30, 2022 from $99.0 million at December 31, 2021. The decrease in cash and
cash equivalents resulted primarily from cash used to fund loan demand and
security purchases, coupled with cyclical deposit outflows, partially offset by
an increase in borrowed funds. Additionally, FNCB paid cash dividends totaling
$3.0 million, or $0.150 per share, for the six months ended June  30, 2022, and
$3.5 million for the purchase of common shares under the repurchase program.



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Securities



FNCB's investment securities portfolio provides a source of liquidity needed to
meet expected loan demand and interest income to increase profitability.
Additionally, the investment securities portfolio is used to meet pledging
requirements to secure public deposits and for other purposes. Debt securities
are classified as either held-to-maturity or available-for-sale at the time of
purchase based on management's intent. Held-to-maturity securities are carried
at amortized cost, while available-for-sale securities are carried at fair
value, with unrealized holding gains and losses reported as a component of
shareholders' equity in accumulated other comprehensive income (loss), net of
tax. At June 30, 2022 and December 31, 2021, all debt securities were classified
as available-for-sale. Equity securities with readily determinable fair values
are carried at fair value, with gains and losses due to fluctuations in market
value included in non-interest income in the consolidated statements of income.
Securities with limited marketability and/or restrictions, such as FHLB of
Pittsburgh stock, are carried at cost. Management monitors the investment
portfolio regularly. Decisions to purchase or sell investment securities are
based upon management's current assessment of long- and short-term economic and
financial conditions, including the interest rate environment and
asset/liability management, liquidity and tax-planning strategies.



At June 30, 2022, FNCB's investment portfolio was comprised principally of
available-for-sale debt securities including, fixed-rate, taxable and tax-exempt
obligations of state and political subdivisions, and fixed-rate and
floating-rate securities issued by U.S. government or U.S. government-sponsored
agencies, which include mortgage-backed securities and residential and
commercial collateralized mortgage obligations ("CMOs"). FNCB also holds fixed-
and floating-rate investments, 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 and privately-held bank holding companies. Except for
U.S. government and government-sponsored agencies, there were no securities of
any individual issuer that exceeded 10.0% of shareholders' equity at June 30,
2022.



The majority of FNCB's debt securities are fixed-rate instruments and inherently
subject to interest rate risk, as the value of fixed-rate securities fluctuate
with changes in interest rates. U.S. Treasury rates continued to increase
through the second quarter of 2022 as the FOMC started to tighten monetary
policy. Additionally, the yield curve flattened as, the spread between the
2-year and 10-year U.S. Treasury rates narrowed. The 2-year U.S. Treasury rate
increased 219 basis points to 2.92% at June 30, 2022 from 0.73% at December 31,
2021, while the 10-year U.S. Treasury rate increased 146 basis points to 2.98%
at June 30, 2022 from 1.52% at December 31, 2021. These increases resulted in a
73-basis point narrowing of the spread between the 2-year and 10-year U.S.
Treasury rate to just 0.06% at June 30, 2022 from 0.79% at December 31, 2021.
Generally, a security's value reacts inversely with changes in interest rates.
Available-for-sale securities are carried at fair value, with unrealized gains
or losses reported in the accumulated other comprehensive income or loss
component of shareholder's equity net of deferred income taxes. At June 30,
2022, FNCB reported a net unrealized loss, included in accumulated other
comprehensive loss, of $35.2 million, net of deferred income taxes of $9.3
million, a decrease of $41.2 million, or 675.4%, compared to a net unrealized
holding gain of $6.1 million, net of deferred income taxes of $1.6 million, at
December 31, 2021. Any further increase in interest rates could result in
further depreciation in the fair value of FNCB's securities portfolio and
capital position. However, accumulated other comprehensive income and loss
related to available-for-sale debt securities is excluded from regulatory
capital and does not have an impact on FNCB's regulatory capital ratios.



The following table presents the composition of available-for-sale debt securities at June 30, 2022 and December 31, 2021:

Composition of Available-for-Sale Debt Securities



                                                    June 30, 2022                      December 31, 2021
(dollars in thousands)                      Fair Value      % of Portfolio       Fair Value      % of Portfolio
Available-for-sale debt securities:
U.S. treasuries                            $     34,032                6.87 %   $     36,355                6.96 %
Obligations of state and political
subdivisions                                    235,868               47.59 %        244,372               46.76 %
U.S. government/government-sponsored
agencies:
Collateralized mortgage obligations -
residential                                      89,739               18.11 %        100,710               19.27 %
Collateralized mortgage obligations -
commercial                                        3,459                0.70 %          3,727                0.71 %
Mortgage-backed securities                       21,251                4.29 %         25,506                4.88 %
Private collateralized mortgage
obligations                                      67,096               13.54 %         67,165               12.85 %
Corporate debt securities                        31,153                6.28 %         32,063                6.14 %
Asset-backed securities                          12,329                2.49 %         11,932                2.28 %
Negotiable certificates of deposit                  677                0.13 %            736                0.14 %
Total available-for-sale debt securities   $    495,604              100.00 %   $    522,566              100.00 %





Activity related to available-for-sale debt securities during the six months
ended June 30, 2022 included the purchase of 51 debt securities with
an aggregate principal balance of $52.5 million and a weighted-average yield of
3.00%.  The purchases were diversified across all major investment categories.
Principal repayments and a decrease in the fair value of the available-for-sale
portfolio due to an increase in market interest rates entirely offset the
increase due to the purchases. FNCB sold one private CMO available-for-sale
debt security, with an amortized cost of $2.406 million with a weighted average
yield of 4.19%, during the six months ended June 30, 2022  FNCB received gross
proceeds of $2.372 million and realized a net loss of $35 thousand upon the
sale, which is included in non-interest income.





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



The following table presents the weighted-average yields of available-for-sale
debt securities by major category and maturity period at June 30, 2022. Yields
are calculated on the basis of the amortized cost and weighted for the scheduled
maturity of each security. The yields on tax-exempt obligations of state and
political subdivisions are presented on a tax-equivalent basis using the federal
corporate income tax rate of 21.0%. Because residential, commercial and private
collateralized mortgage obligations, mortgage-backed securities and asset-backed
securities are not due at a single maturity date, they are not included in the
maturity categories in the following summary.



Maturity Distribution of Available-for-Sale Debt Securities



                                                                                  June 30, 2022
                                                                                                                  Collateralized
                                                                                                                     Mortgage
                                                                                                                   Obligations,
                                                                                                                 Mortgage-Backed
                                                                                                                 and Asset-Backed
                                  Within One Year       >1 - 5 Years       6 - 10 Years       Over 10 Years         Securities          Total
Available-for-sale debt
securities:
U.S. treasuries                                  -               1.18 %             1.20 %                 -                    -          1.19 %
Obligations of state and
political subdivisions                        2.85 %             2.99 %             2.34 %              2.88 %                  -          2.79 %
U.S.

government/government sponsored

agencies:
Collateralized mortgage
obligations - residential                        -                  -                  -                   -                 1.88 %        1.88 %
Collateralized mortgage
obligations - commercial                         -                  -                  -                   -                 1.99 %        1.99 %
Mortgage-backed securities                       -                  -                  -                   -                 2.33 %        2.33 %
Private collateralized mortgage
obligations                                      -                  -                  -                   -                 2.59 %        2.59 %
Corporate debt securities                        -                  -               4.58 %                 -                    -          4.58 %
Asset-backed securities                          -                  -                  -                   -                 3.00 %        3.00 %
Negotiable certificates of
deposit                                          -               1.02 %                -                   -                    -          1.02 %
Weighted average yield                        2.85 %             2.65 %             2.76 %              2.88 %               2.25 %        2.58 %




OTTI Evaluation


There was no OTTI recognized during the three or six months ended June 30, 2022
or 2021. 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 1 to this Quarterly Report on Form 10-Q.




Equity Securities



Equity securities with readily determinable fair values totaled $5.3 million at
June 30, 2022 and $4.9 million at December 31, 2021 and were comprised of the
common or preferred stock of publicly traded bank holding companies held at the
holding company level and an investment in a mutual fund comprised of 1-4 family
residential mortgage-backed securities collateralized by properties within
FNCB's market area held at the Bank. Equity securities with readily determinable
fair values are reported at fair value with net unrealized gains and losses
recognized in the consolidated statements of income.



Restricted Securities



The following table presents the investment in FNCB's restricted securities,
which have limited marketability and are carried at cost, at June 30, 2022
and December 31, 2021. Management noted no indicators of impairment for the FHLB
of Pittsburgh or Atlantic Community Banker's Bank stock at June 30, 2022
and December 31, 2021.



                                                 June 30,      December 31,
(in thousands)                                     2022            2021

Stock in Federal Home Loan Bank of Pittsburgh $5.777 $1,901
Stock in Atlantic Community Banker’s Bank

               10                

10

Total restricted securities, at cost            $    5,787     $       1,911






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Loans and Leases



Total loans and leases, gross, increased $106.6 million, or 10.9%, to $1.088
billion at June 30, 2022 from $981.4 million at December 31, 2021. The growth in
the loan portfolio reflected increases in all major loan categories, which was
primarily due to strong organic demand and the new commercial equipment
financing product line. In addition, FNCB purchased individual loans and loan
pools originated by third-party originators, to enhance interest income revenue
streams and diversify the loan portfolio. Loan purchases during the first half
of 2022 included commercial equipment financing, residential mortgage loans and
secured and unsecured consumer installment loans.



FNCB expanded its commercial credit product offerings to include commercial
equipment financing, through simple interest loans, and direct finance and
municipal leases. FNCB hired a team of experienced professionals to initiate
this lending program, which is doing business under the name of 1st Equipment
Finance. The majority of equipment financing is originated through indirect,
third-party dealers. As of June 30, 2022, simple interest loans and finance
leases originated under this initiative were $42.4 million and $0.4 million,
respectively. Municipal leases under this initiative were $3.6 million at June
30, 2022. Simple interest loans and direct finance leases are included in
commercial and industrial loans and leases, while municipal leases are included
in state and municipal subdivision loans and leases.



Also, included in commercial and industrial loans and leases at June 30,
2022 and December 31, 2021 were $1.7 million and $21.9 million, respectively, in
outstanding balances of loans originated under the Small Business Administration
("SBA") PPP. Included in net deferred loan fees at June 30, 2022 and December
31, 2021, were $0.1 million and $1.0 million, respectively, in deferred loan
origination fees, net of deferred loan origination costs, associated with the
PPP loans. PPP loans are 100.0% guaranteed and may be forgiven by the SBA.
Accordingly, there was no ALLL established for PPP loans at June 30, 2022 and
December 31, 2021.



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 $39.7 million, or 6.2%, to $681.4
million at June 30, 2022 from $641.7 million at December 31, 2021. Despite the
increase, real estate secured loans represented 62.6% of gross loans at June 30,
2022 compared to 65.4% at December 31, 2021, which resulted from management's
efforts to diversify the portfolio.



Commercial real estate loans increased $2.4 million, or 0.7%, to $368.4 million
at June 30, 2022 from $366.0 million at December 31, 2021. Commercial real
estate loans include long-term commercial mortgage financing and are primarily
secured by first or second lien mortgages. Commercial and industrial loans and
leases, consist primarily of equipment loans, working capital financing,
revolving lines of credit and loans secured by cash and marketable securities.
In addition, commercial and industrial loans and leases include PPP loans.
Commercial and industrial loans and leases increased $37.0 million, or 19.2%, to
$230.1 million at June 30, 2022 from $193.1 million at December 31, 2021, which
was primarily due to equipment loan and lease origination through 1st Equipment
Finance and the purchase of loan pools through third-party originators during
the six months ended June 30, 2022, partially offset by forgiveness of PPP
loans. Construction, land acquisition and development loans increased
$20.9 million, or 50.2%, to $62.5 million at June 30, 2022 from $41.6 million at
December 31, 2021.



Residential real estate loans include fixed-rate and variable-rate,
amortizing mortgage loans, home equity term loans and home equity lines of
credit ("HELOCs"). FNCB primarily underwrites fixed-rate residential mortgage
loans for sale in the secondary market to reduce interest rate risk and provide
funding for additional loans. Additionally, FNCB offers its proprietary "WOW"
mortgage product, which is a non-saleable mortgage with maturity terms of 7.5 to
19.5 years that provides customers with an attractive fixed interest rate and
low closing costs. Residential real estate loans totaled $250.5 million at June
30, 2022, an increase of $16.4 million, or 7.0%, from $234.1 million at December
31, 2021. The increase was largely due to strong demand for the WOW mortgage
product, the balance of which increased $6.5 million, or 6.4%, to $107.4 million
at June 30, 2022 from $100.9 million at December 31, 2021, coupled with the
purchase of two pools of third-party originated residential mortgage loans
totaling $4.8 million during the six months ended June 30, 2022.



Consumer loans primarily include indirect automobile loans and secured and
unsecured personal loans. Consumer loans increased by $13.4 million, or
15.7%, to $98.9 million at June 30, 2022 from $85.5 million at December 31,
2021. The increase in consumer loans was largely due to the purchase of
individual loans and pools of personal installment loans of from third-party
originators including unsecured loans and loans secured by chattel paper. Loans
and leases to state and political subdivisions increased $16.5 million, or
27.0%, to $77.6 million at June 30, 2022 from $61.1 million at December 31,
2021.





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The following table presents loans and leases receivable, net by major category at June 30, 2022 and December 31, 2021:

Loan and Lease Portfolio Detail



                                                  June 30, 2022                 December 31, 2021
                                                            % of Total                     % of Total
(in thousands)                               Amount        Loans, Gross      Amount       Loans, Gross
Residential real estate                    $   250,480            23.02 %   $ 234,113            23.86 %
Commercial real estate                         368,423            33.86 %     366,009            37.29 %
Construction, land acquisition and
development                                     62,495             5.74 %      41,646             4.24 %
Commercial and industrial                      230,089            21.15 %     193,086            19.67 %
Consumer                                        98,905             9.09 %      85,522             8.72 %
State and political subdivisions                77,644             7.14 %      61,071             6.22 %
Total loans and leases, gross                1,088,036           100.00 %     981,447           100.00 %
Unearned income                                   (719 )                       (1,442 )
Net deferred loan origination costs
(fees)                                           1,431                           (566 )
Allowance for loan and lease losses            (13,381 )                      (12,416 )
Loans and leases, net                      $ 1,075,367                      $ 967,023




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 the Chief Banking Officer, Chief Lending
Officer and loan officers, the Chief Credit Officer, the loan review function,
and the Credit Risk Management, ALLL, Officers Loan and Directors
Loan Committees, as well as through oversight of the Board of Directors.
Management continually evaluates its credit risk management practices to ensure
it is reacting to problems in the loan portfolio in a timely manner, although,
as is the case with any financial institution, a certain degree of credit risk
is dependent in part on local and general economic conditions that are beyond
management's control.



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



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 liquidation of the
collateral held. For impaired loans that are secured by real estate, collateral
evaluations and external appraisals are obtained annually, or more frequently as
warranted, to ascertain a fair value so that the impairment analysis can be
updated. Should a collateral evaluation or current appraisal not be available at
the time of impairment analysis, other sources of valuation may be used,
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 charged off. For impaired
loans for which the value of the collateral less 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.



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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 cost to sell.



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.



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.


The following table presents information about non-performing assets and accruing TDRs at June 30, 2022 and December 31, 2021:

Non-performing Assets and Accruing TDRs



                                                       June 30,      December 31,
(dollars in thousands)                                   2022            2021
Non-accrual loans                                     $    2,764     $       3,863
Loans past due 90 days or more and still accruing             14                 -
Total non-performing loans                                 2,778             3,863
Other real estate owned                                      228               920
Other non-performing assets                                1,773             1,773
Total non-performing assets                           $    4,779     $       6,556

Accruing TDRs                                         $    6,329     $       6,666

Non-performing loans as a percentage of gross loans 0.26%

  0.39 %




FNCB's asset quality was favorable during the first half of 2022. Total
non-performing assets decreased $1.8 million, or 27.3%, to $4.8 million at June
30, 2022 from $6.6 million at December 31, 2021. The improvement reflected
decreases in non-accrual loans and OREO. Non-accrual loans decreased $1.1
million, or 28.5% decrease in non-accrual loans, comparing June 30, 2022 to
December 31, 2021, which was largely the result of the sale of two non-accrual
loans to one commercial borrower totaling $925 thousand during the second
quarter of 2022. The sale was to another commercial bank with no gain or loss
realized on the sale. The $692 thousand decrease in OREO resulted from sale of
one bank-owned property that was held in OREO during the first quarter of
2022. FNCB's ratio of non-performing loans to total gross loans improved
to 0.25% at June 30, 2022 from 0.39% at December 31, 2021. Additionally, there
were no loans modified as TDRs during the three and six months ended June 30,
2022 and 2021.



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. At June 30, 2022, OREO consisted
of one, bank-owned commercial property with a carrying value of $228 thousand.
At December 31, 2021, OREO consisted of two, bank-owned properties with an
aggregate carrying value of $920 thousand. In the first quarter of 2022, FNCB
sold one of the properties, a parcel of land that was previously held for future
expansion. FNCB realized a gain of $3 thousand on the sale, which is included in
other income in the consolidated statements of income for the six months ended
June 30, 2022.



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Other non-performing assets was comprised solely of a classified account
receivable, the balance of which was $1.8 million at both June 30, 2022 and at
December 31, 2021. The receivable is secured by an evergreen letter of credit
that was received in 2011 as part of a settlement agreement for a large
construction, land acquisition and development loan for a residential
development project in the Pocono region of Monroe County, Pennsylvania. The
agreement provides for payment to FNCB as real estate building lots are sold.
The project was stalled due to a decline in real estate values in this area
following the financial crisis of 2008. In 2019, economic development in this
market area began improving and the developer for this project had resumed
construction activity, including the completion of substantial infrastructure,
and had increased marketing and sales initiatives related to the project. To
date, no single-unit lots have been sold, however, the developer completed the
construction of a seven-unit building that houses timeshare units and owners
began occupying the units in the fourth quarter of 2020. In 2020,
management negotiated a repayment plan with the developer. FNCB received the
first payment of $127 thousand in the second quarter of 2021. Management
continues to closely monitor this project and has noted an increase in
construction activity related to this project including the construction of two
additional six-eight unit buildings and further site development including
building pads for a new six-seven unit building and pool/spa building during the
first half of 2022. Additionally, the developer has increased marketing and
sales initiatives for the project. Management anticipates receiving another
payment in the fourth quarter of 2022. However, while the repayment plan has
commenced, the impact of economic uncertainty, supply-chain constraints,
inflation and other factors are still unknown and could negatively affect the
timing of sales and payments.



The following table presents the changes in non-performing loans for the three
and six months ended June 30, 2022 and 2021. Loans transferred to OREO represent
the recorded investment of loans at time of foreclosure not including the effect
of any guarantees.


Changes in Non-Performing Loans




                                              Three Months Ended June 30,           Six Months Ended June 30,
(in thousands)                                 2022                2021              2022               2021
Balance, beginning of period               $       3,864       $       4,842     $      3,863       $      5,581
Loans newly placed on non-accrual                    464                 525              698                916
Change in loans past due 90 days or more
and still accruing                                    14                   -               14                  -
Loans returned to performing status                    -                (244 )              -               (468 )
Loans transferred to OREO                              -                (133 )              -               (133 )
Loans charged-off                                   (291 )              (125 )           (366 )             (471 )
Loans sold                                          (925 )                 -             (925 )                -
Loan payments received                              (348 )              (310 )           (506 )             (870 )
Balance, end of period                     $       2,778       $       4,555     $      2,778       $      4,555




The average balance of impaired loans was $8.6 million and $9.3 million,
respectively, for the three and six months ended June 30, 2022 and $11.3 million
for both the three and six months ended June 30, 2021. FNCB recognized
$79 thousand and $152 thousand of interest income on impaired loans,
respectively, for the three and six months ended June 30, 2022, and $76 thousand
and $154 thousand, respectively for the same periods of 2021.



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 for the three and six months ended June 30,
2022 approximated $43 thousand and $86 thousand, respectively, compared to $55
thousand and $115 thousand, respectively, for the three and six months ended
June 30, 2021.


The following table presents accruing loan delinquencies and non-accrual loans as a percentage of gross loans at June 30, 2022 and December 31, 2021:

Loan Delinquencies and Non-Accrual Loans



                       June 30,       December 31,
                         2022             2021
Accruing:
30-59 days                  0.10 %             0.13 %
60-89 days                  0.03 %             0.03 %
90+ days                    0.00 %             0.00 %
Non-accrual                 0.25 %             0.39 %
Total delinquencies         0.38 %             0.55 %




Total delinquent loans, including non-accrual loans, were $4.2 million, or 0.38%
of gross loans, at June 30, 2022, and $5.4 million, or 0.55% of gross loans, at
December 31, 2021. The decrease in delinquent loan balances, was due to a $1.1
million, or 28.2% decrease in non-accrual loans, coupled with a modest decline
in accruing loans past due 30-59 days, when comparing balances at June 30, 2022
and December 31, 2021.



While FNCB's asset quality has remained favorable, management believes continued
economic uncertainty associated with the COVID-19 pandemic, supply-chain
constraints and further increases in inflation could have a negative impact on
asset quality. These factors, including further disruption to economic activity
due to an acceleration in COVID-19 cases, the effects of new variants, and any
related actions taken to mitigate spread, could affect borrowers' ability to
repay loans, which may result in increases in loan delinquencies, non-performing
loans and loan charge-offs.





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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 ALL 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.
Regarding collateral-dependent loans, appraisals or collateral evaluations are
received at least annually to ensure that impairment measurements reflect
current market conditions. Should a current appraisal or collateral
evaluation 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 $13.4 million at June 30, 2022, compared to $12.4 million at
December 31, 2021. The increase resulted from a provision for loan and lease
losses of $821 thousand, coupled with $144 thousand in net recoveries for the
six months ended June 30, 2022. 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 $23 thousand at June 30, 2022,
compared to $26 thousand at December 31, 2021. A general allocation of
$13.4 million was calculated for loans analyzed collectively under ASC 450
"Contingencies" ("ASC 450"), which represented nearly 100% of the total ALLL of
$13.4 million. Comparatively, at December 31, 2021, the general allocation for
loans collectively analyzed for impairment amounted to $12.4 million, or 99.8%,
of the total ALLL. Included in the general component of the ALLL was an
unallocated reserve of $1.1 million, at both June 30, 2022 and December 31,
2021. 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
established an unallocated reserve for the potential effect of economic and
employment uncertainty and disruption due to the global pandemic into its
evaluation. Based on continued economic uncertainty related to the pandemic,
global supply-chain issues, the war in Ukraine, among other factors, management
believes the level of the unallocated reserve continues to be appropriate at
June 30, 2022. As of June 30, 2022, management is not aware of any asset quality
deterioration and FNCB has not experienced an increase in credit losses related
to these factors. Management continues to monitor the loan portfolio for any
potential adverse impact to FNCB's asset quality. The ratio of the ALLL to total
loans decreased to 1.23% of total loans, net of net deferred loan origination
fees and unearned income at  June 30, 2022 from 1.27% of total loans at December
31, 2021.



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The following table presents an allocation of the ALLL by major loan category
and percent of loans in each category to total loans at June 30, 2022
and December 31, 2021:



Allocation of the ALLL



                                                  June 30, 2022                   December 31, 2021
                                                            Percentage                        Percentage
                                                             of Loans                          of Loans
                                                             in Each                           in Each
                                                             Category                          Category
                                            Allowance        to Total        Allowance         to Total
(dollars in thousands)                       Amount           Loans            Amount           Loans
Residential real estate                    $     2,208            23.02 %   $      2,081            23.86 %
Commercial real estate                           4,082            33.86 %          4,530            37.29 %
Construction, land acquisition and
development                                        746             5.74 %            392             4.24 %
Commercial and industrial                        3,304            21.15 %          2,670            19.67 %
Consumer                                         1,307             9.09 %          1,159             8.72 %
State and political subdivisions                   605             7.14 %            455             6.22 %
Unallocated                                      1,129                -            1,129                -
Total                                      $    13,381           100.00 %   $     12,416           100.00 %



The following table presents an analysis of the ALLL by loan category for the three and six months ended June 30, 2022 and 2021:




Reconciliation of the ALLL



                                            For the Three Months Ended June
                                                          30,                        For the Six Months Ended June 30,
(dollars in thousands)                        2022                  2021               2022                    2021
Balance at beginning of period             $    13,129           $    12,076      $        12,416         $        11,950
Charge-offs:
Residential real estate                              -                     6                    3                       6
Commercial real estate                               -                     -                    -                       -
Construction, land acquisition and
development                                          -                     -                    -                       -
Commercial and industrial                           13                    11                   32                      30
Consumer                                           290                   119                  363                     461
State and political subdivisions                     -                     -                    -                       -
Total charge-offs                                  303                   136                  398                     497
Recoveries of charged-off loans:
Residential real estate                              -                    13                    -                      16
Commercial real estate                             224                     -                  224                      46
Construction, land acquisition and
development                                          -                     -                    -                       -
Commercial and industrial                            7                     7                   11                      32
Consumer                                           262                   170                  307                     397
State and political subdivisions                     -                     -                    -                       -
Total recoveries                                   493                   190                  542                     491
Net (recoveries) charge-offs                      (190 )                 (54 )               (144 )                     6
Provision for loan and lease losses                 62                   155                  821                     341
Balance at end of period                   $    13,381           $    

12,285 $13,381 $12,285


Net (recoveries) charge-offs as a
percentage of average loans                      (0.02 )%              (0.01 )%             (0.01 )%                 0.00 %

Allowance for loan and lease losses as a
percentage of loans, net                          1.23 %                1.26 %               1.23 %                  1.26 %

Allowance for loan and lease losses to
nonaccrual loans                                481.68 %              269.70 %             481.68 %                269.70 %




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Liabilities



Total liabilities consist primarily of total deposits and borrowed funds. Total
liabilities increased $65.7 million, or 4.4%, to $1.568 billion at June 30,
2022 from $1.502 billion at December 31, 2021, primarily due to the increase in
borrowed funds, partially offset by a reduction in total deposits. Total
deposits were $1.427 billion at June 30, 2022, a decrease of $28.1 million, or
19.3%, from $1.455 billion at December 31, 2021. Interest-bearing deposits
decreased $25.6 million, or 2.3%, to $1.109 billion at June 30, 2022 from $1.135
billion at December 31, 2021. Specifically, interest-bearing demand deposits
decreased $61.4 million, or 7.2%, to $796.5 million at June 30, 2022, compared
to $857.8 million at December 31, 2021, which primarily reflected cyclical
deposit trends of FNCB's municipal customers. Partially offsetting
this decrease was a $10.9 million, or 8.2%, increase in savings deposits,
coupled with a $24.7 million, or 1.7%, increase in time deposits at June 30,
2022 compared to December 31, 2021. The increase in time deposits was primarily
concentrated in wholesale deposits originated through the IntraFi® Network and
Qwickrate, a national listing service. FNCB utilized these wholesale sources as
an alternative to additional advances through the FHLB of Pittsburgh.
Non-interest-bearing demand deposits decreased $2.4 million, or 0.7%, to
$317.7 million at June 30, 2022 from $320.1 million at December 31, 2021. Total
borrowed funds increased $98.1 million, or 323.5%, to $128.4 million at June 30,
2022 from $30.3 million at December 31, 2021, which was comprised of $118.1
million in FHLB of Pittsburgh advances and $10.3 million in junior subordinated
debentures.



Equity



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. Repurchases are subject to SEC regulations as
well as certain price, market volume and timing constraints specified in the
trading plan, and the repurchased shares will be returned to the status of
authorized but unissued shares of Common Stock. During the six months ended June
30, 2022, FNCB repurchased 371,376 shares at a weighted-average price per share
of $9.51, or $3.5 million in aggregate. There is not a guarantee as to the exact
number of shares that will be repurchased by FNCB, and FNCB may discontinue at
any time that management determines additional repurchases are no longer
warranted.



Total shareholders' equity decreased $37.0 million, or 22.7%, to $125.5 million
at June 30, 2022 from $162.5 million at December 31, 2021.  The decrease in
capital was primarily due to an accumulated other comprehensive loss of $34.4
million at June 30, 2022, compared to accumulated other comprehensive income of
$6.3 million at December 31, 2021, which was principally caused by the
depreciation in the fair value of FNCB's available-for-sale debt securities, net
of deferred taxes, reflecting the increase in market interest rates. Also
contributing to the reduction in capital was $3.5 million for the repurchase of
common shares under the stock repurchase program and $3.0 million in dividends
declared and paid for the six months ended June 30, 2022. These reductions were
partially offset by net income for the six months ended June 30, 2022 of $10.1
million. On a per share basis, dividends declared totaled $0.150 per share for
the six months ended June 30, 2022, an increase of 25.0% compared to $0.120 for
the six months ended June 30, 2021. On July 27, 2022, FNCB's Board of Directors
declared a dividend of $0.090 per share, an increase of $0.015 per share, or
20.0% from the $0.075 per share declared for both the second quarter of 2022 and
the same quarter of 2021.



The Bank's total regulatory capital increased $11.5 million to $173.5 million at
June 30, 2022 from $162.0 million at December 31, 2021. FNCB Bank's total
risk-based capital and Tier 1 leverage ratios were 13.90% and 9.32% at June 30,
2022, respectively, compared to 14.64% and 8.92% at December 31, 2021,
respectively. The Bank's risk-based capital ratios exceeded the minimum
regulatory capital ratios required for well capitalized under prompt corrective
action regulations. Based on the most recent notification from its primary
regulator, the Bank was considered well capitalized at June 30, 2022
and December 31, 2021. There were no conditions or events since that
notification that management believes would have changed this capital
designation.



Liquidity



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



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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. At June 30, 2022, cash and cash
equivalents totaled $27.4 million, a decrease of $71.6 million compared to $99.0
million at December 31, 2021. For the six months ended June 30, 2022 net cash
outflows used in investing activities were only partially offset by net cash
inflows provided by operating and financing activities. Net cash used in
investing activities totaled $142.4 million for the six months ended June 30,
2022. Specifically, FNCB's net lending activities used $108.4 million in net
cash. This cash outflow was coupled with cash used for purchases of
available-for-sale debt securities of $52.5 million, $3.9 million on the
purchase of restricted stock and $3.0 million for the purchase of bank-owned
life insurance. Partially offsetting these outflows were cash inflows received
from sales, maturities, calls and repayments of available-for-sale debt
securities totaling $25.6 million and $0.7 million from the proceeds from the
sale of other real estate owned. Regarding FNCB's operating activities, net
income of $10.1 million for the six months ended June 30, 2022 was slightly
offset by reconciling adjustments, providing net cash of $7.3 million. Financing
activities for the six months ended June 30, 2022 provided $63.5 million in net
cash, which resulted primarily from the net proceeds from borrowed funds of
$98.1 million, offset by a $28.1 million decline in total deposits coupled with
$3.5 million in FNCB stock repurchases and $3.0 million in cash dividends paid.



Management is actively monitoring FNCB's liquidity position and capital adequacy
in light of the changing circumstances related to economic uncertainty due to
the ongoing pandemic, supply chain constraints, global implications from the war
in Ukraine, higher levels of inflation, and rising interest rates. While FNCB's
liquidity position is favorable, management is 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. Bank liquidity has returned to normal
cyclical manner, placing the Bank in a borrowing position for the first half of
2022. Management believes FNCB's current liquidity position and available
sources of liquidity were sufficient to meet its cash flow needs and fulfill its
obligations at June 30, 2022. In addition to cash and cash equivalents of
$27.4 million at June 30, 2022, FNCB had ample sources of additional liquidity
including approximately $392.1 million in available borrowing capacity from the
FHLB of Pittsburgh and $20.2 million under the borrower-in-custody program
through the Federal Reserve Bank of Philadelphia. FNCB also has
available unsecured federal funds lines of credit totaling $75.0 million at June
30, 2022, as well as access to various wholesale deposit markets.



Impact of Inflation and Changing Prices




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



Interest Rate Risk



Interest Rate Sensitivity



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



LIBOR Replacement



The Alternative Reference Rates Committee ("ARRC") had proposed that the Secured
Overnight Funding Rate ("SOFR") replace USD-LIBOR, with the transition to SOFR
from USD-LIBOR to take place by the end of 2021. FNCB has various loans,
investments, borrowings and interest rate swap contracts that are indexed to
USD-LIBOR. On November 30, 2020 the ICE Benchmark Administration ("IBA"), which
complies and oversees LIBOR, announced its intention to extend most of the
USD-LIBOR tenors to June 30, 2023, with U.S. banking regulators supporting the
extension. As of December 31, 2021, most LIBOR tenors, with the exception of
the overnight, 1-,3-, 6- and 12-month LIBOR tenors which have been extended
through June 30, 2023, have ceased to be published. Additionally, beginning
January 1, 2022, no new financial instruments can be written with terms tied to
LIBOR. FNCB has various loans, investments, borrowings and interest rate swap
contracts that are indexed to USD-LIBOR, and management is actively monitoring
its LIBOR exposures and evaluating any risks involved.



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Asset and Liability Management




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



The major objectives of ALCO are to:

? manage exposure to changes in the interest rate environment by limiting the

changes in net interest margin to an acceptable level within a reasonable

    range of interest rates;


  ? ensure adequate liquidity and funding;


  ? maintain a strong capital base; and


  ? maximize net interest income opportunities.




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



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



Earnings at Risk and Economic Value at Risk Simulations



Earnings at Risk



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



Economic Value at Risk



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



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



  ? asset and liability levels using June 30, 2022 as a starting point;

? cash flows are based on contractual maturity and amortization schedules with

applicable prepayments derived from internal historical data and external

    sources; and


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




The following table illustrates the simulated impact of parallel and
instantaneous interest rate shocks of +400 basis points, +200 basis points, and
-100 basis points on net interest income and the change in economic value over a
one-year time horizon from the June 30, 2022 levels:



                                   Rates +200                            Rates +400                            Rates -100
                         Simulation                            Simulation                            Simulation
                           Results         Policy Limit          Results         Policy Limit          Results         Policy Limit
Earnings at risk:
Percent change in net
interest income                  (7.4 )%           (12.5 )%           (14.9 )%           (20.0 )%            (2.3 )%           (10.0 )%

Economic value at
risk:
Percent change in
economic value of
equity                           (8.2 )%           (20.0 )%           (17.6 )%           (35.0 )%            (1.6 )%           (10.0 )%




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Model results from the simulation at June 30, 2022 indicated that FNCB was
liability sensitive in the near term, exhibiting some interest sensitivity to
changes in interest rates over the next twelve months. According to the model
results at June 30, 2022, in comparison to the base case, net interest income is
expected to decrease 7.4% under a +200-basis point interest rate shock.
Additionally, under a parallel shift in interest rates of +200 basis points,
FNCB's economic value of equity ("EVE") is expected to decrease 8.2%.
Comparatively, model results at March 31, 2022 were similar with estimated
decreases in net interest income and EVE of 7.9% and 8.5%, respectively, under a
+200-basis point interest rate shock. All modeled exposures to net interest
income and EVE for the next twelve-month horizon are within internal ALCO policy
guidelines.



In response to the recent increase in inflation caused by continued economic
uncertainty from the COVID-19 pandemic, global supply-chain constraints and the
war in the Ukraine, among other factors, the FOMC raised the federal funds
target rate 150 basis points during the six months ended June 30, 2022, with an
additional 75-basis point increase on July 27, 2022. Additionally, the FOMC has
indicated that additional rate increases would likely be necessary to control
inflation. Model results at June 30, 2022 indicate that FNCB's asset/liability
position becomes asset sensitive in Years 3-5 of the model, which would imply
that net interest income would benefit from rising interest rates. This analysis
does not represent a forecast for FNCB and should not be relied upon as being
indicative of expected operating results. These simulations are based on
numerous assumptions, including but not limited to, the nature and timing of
interest rate levels, prepayments on loans and securities, deposit decay rates,
pricing decisions on loans and deposits, reinvestment/replacements of asset and
liability cash flows, and other factors. While assumptions reflect current
economic and local market conditions, FNCB cannot make any assurances as to the
predictive nature of these assumptions, including changes in interest rates,
customer preferences, competition and liquidity needs, or what actions ALCO
might take in responding to these changes.



As previously mentioned, as part of its ongoing monitoring, ALCO requires
quarterly back testing of modeling results, which involves after-the-fact
comparisons of projections with FNCB's actual performance to measure the
validity of assumptions used in the modeling techniques. As part of its
quarterly review, management compared tax-equivalent net interest income
recorded for the three months ended June 30, 2022 with tax-equivalent net
interest income that was projected for the same three-month period. There was a
negative variance between actual and projected tax-equivalent net interest
income for the three-month period ended June 30, 2022 of  approximately $321
thousand, or 2.54%. The variance primarily reflected lower actual income
recorded on the investment portfolio as compared to projections, coupled with
higher actual interest expense on borrowed funds than projections. ALCO performs
a detailed rate/volume analysis between actual and projected results in order to
continue to improve the accuracy of its simulation models.





Off-Balance Sheet Arrangements




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



For the three and six months ended June 30, 2022, 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.

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