FNCB BANCORP, INC. 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 endedDecember 31, 2022 forFNCB 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 theSecurities 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, including statements with respect to future changes in monetary policy or interest rates, or new product offerings, 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: government intervention in theU.S. financial system including the effects of recent legislative, tax, accounting and regulatory actions and reforms; 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 allowance for credit losses ("ACL") is not sufficient to absorb actual losses or if increases to the ACL 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 caused by a credit-related event 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 theFNCB 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 theConsumer Financial Protection Bureau ; 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 inFNCB 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 theSEC . 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 theSEC , including its Annual Report on Form 10-K for the year endedDecember 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 Allowance for
Credit Losses ("ACL"), the valuation of securities and evaluation of securities
for credit 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 ACL in future periods, and the inability to
collect on outstanding loans could result in increased loan losses. In addition,
the valuation of certain securities in FNCB's investment portfolio could be
negatively impacted by illiquidity or dislocation in marketplaces resulting in
significantly depressed market prices thus leading to impairment losses.
Allowance for Credit Losses
As of January 1, 2023 , FNCB adopted ASU 2016-13, Financial Instruments - Credit
Losses (Topic 326): "Measurement of Credit Losses on Financial Instruments,"
which replaced the current loss impairment methodology under GAAP with a
methodology that reflects expected credit losses and requires consideration of a
broader range of reasonable and supportable information to form credit loss
estimates in an effort to provide financial statement users with more
decision-useful information about the expected credit losses on financial
instruments and other commitments to extend credit. ASU 2016-13, commonly
referred to as Current Expected Credit Losses ("CECL") requires a financial
asset (or a group of financial assets) to be measured at an amortized cost basis
and presented at the net amount expected to be collected. The amendments in this
update affect financial assets and net investment in leases that
are not accounted for at fair value through net income, including such financial
assets as loans, debt securities, trade receivables, net investments in leases,
off-balance-sheet credit exposures, reinsurance receivables, and any other
financial assets not excluded from the scope that have the contractual right to
receive cash. Upon adoption of ASU 2016-13 on January 1, 2023 , FNCB recorded an
incremental decrease in the ACL through a cumulative effect adjustment to equity
with subsequent adjustments charged to earnings through a provision for credit
losses.
Management evaluates the credit quality of FNCB's loan portfolio on an ongoing
basis and performs a formal review of the adequacy of the ACL on a quarterly
basis. The ACL is established through a provision for credit losses charged to
earnings and is maintained at a level the management considers to be an estimate
of the lifetime expected credit losses of the portfolio as of the evaluation
date. Loans, or portions of loans, determined by management to be uncollectible
are charged off against the ACL, while recoveries of amounts previously charged
off are credited to the ACL.
Determining the amount of the ACL 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, estimated losses on pools of
homogeneous loans based on peer-based historical loss experience, reasonable and
supportable forecasts and qualitative factors, as well as consideration of
current economic trends and conditions, all of which may be susceptible to
significant change. Banking regulators, as an integral part of their examination
of FNCB, also review the ACL, and may require, based on their judgments about
information available to them at the time of their examination, that certain
loan balances be charged off or require that adjustments be made to the ACL.
Additionally, the ACL is determined, in part, by the composition and size of the
loan portfolio.
The ACL consists of two components, a specific component and a general
component. The specific component relates to loans that are individually
analyzed for impairment. 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 ACL 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 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 ACL.
Securities Valuation and Evaluation for Impairment
Management utilizes various inputs to determine the fair value of its investment
portfolio. To the extent they exist, unadjusted quoted market prices in active
markets (Level 1) or quoted prices for similar assets or models using inputs
that are observable, either directly or indirectly (Level 2) are utilized to
determine the fair value of each investment in the portfolio. In the absence of
observable inputs or if markets are illiquid, valuation techniques are used to
determine fair value of any investments that require inputs that are both
unobservable and significant to the fair value measurement (Level 3). For Level
3 inputs, valuation techniques are based on various assumptions, including, but
not limited to, cash flows, discount rates, adjustments for nonperformance and
liquidity, and liquidation values. A significant degree of judgment is involved
in valuing investments using Level 3 inputs. The use of different assumptions
could have a positive or negative effect on FNCB's financial condition or
results of operations. See Note 3, "Securities" and Note 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.
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Quarterly, or more frequently if market conditions warrant, management evaluates securities for impairment where there has been a decline in fair value of a security below its amortized cost basis to determine whether the decline in fair value has resulted from a credit loss, or if it is entirely the result of noncredit factors. As part of it's evaluation, management first considers whether, FNCB intends to sell, or if it more likely than not that it would be required to sell, any security in an unrealized loss position prior to recovery of its amortized cost. If either of those selling events is expected, FNCB would be required to write down the amortized cost basis of the security to its fair value. If either of those selling events is not expected, FNCB must determine whether any of the decline in fair value has resulted from a credit loss, or if it is entirely the results of noncredit factors. As part of its evaluation, management considers, among other things, the length of time a security's fair value is less than its amortized cost, the severity of decline, any adverse conditions related to the security, an industry or geographic area, any adverse changes to the rating of any security by a rating agency, whether or not any issuer has failed to make contractual principal and interest payments, or if there are any indications that an issuer would not be able to make future contractual principal and interest payments. Based on the results of its review as ofMarch 31, 2023 , management concluded that changes in the fair values of the securities were consistent with movements in market interest rates and spreads relative to when the securities were purchased and not due to the credit quality of the securities or issuers. Accordingly, management determined that FNCB was not required to establish an ACL for any security in an unrealized loss position atMarch 31, 2023 .
See Note 3, "Securities," of the notes to consolidated financial statements included in Item 1 hereof for additional information about valuation of securities.
Income Taxes The objectives of accounting for income taxes are to recognize the amount of taxes payable or refundable for the current year and deferred tax liabilities and assets for the future tax consequences of events that have been recognized in an entity's financial statements or tax returns. 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 ofMarch 31, 2023 andDecember 31, 2022 , 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 8, "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
Executive Summary
The following overview should be read in conjunction with this MD&A in its entirety.
Overview In the first quarter of 2023, theFederal Open Market Committee ("FOMC") continued to tighten monetary policy with two 25-basis point increases to the federal funds target rate at both its February and March meetings. These increases brought the total number of rate increases from the period beginningMarch 17, 2022 throughMarch 31, 2023 to nine and the total basis point movement to 475. This dramatic shift in monetary policy has resulted in a rapid rise in general market interest rates. Additionally, FNCB has experienced an uptick in competition for deposits within its market area, reflective of industry-wide liquidity pressures and rate sensitivity of depositors. Higher interest rates and competition have resulted in an increase in deposit and wholesale funding costs. FNCB recorded consolidated net income of$2.7 million , or$0.14 per basic and diluted common share, for the three months endedMarch 31, 2023 , a decrease of$1.7 million , or 38.8%, compared to$4.4 million , or$0.22 per basic and diluted common share, for the three months endedMarch 31, 2022 . The decrease in the first quarter 2023 earnings reflected decreases in net interest income and non-interest income, coupled with increases in non-interest expense and the provision for credit losses. Net interest income decreased$1.2 million , or 9.4%, as a$6.7 million increase in interest expense was partially mitigated by$5.5 million increase in interest income. Non-interest income decreased by$119 thousand , or 6.6%, to$1.7 million for the three months endedMarch 31, 2023 from$1.8 million for the three months endedMarch 31, 2022 , which primarily reflected a$383 thousand increase in net losses on equity securities, partially offset by net gains on the sale of available-for-sale debt securities of$163 thousand . Non-interest expense increased$377 thousand , or 4.4%, to$8.9 million for the three months endedMarch 31, 2023 , compared to$8.5 million for the three months endedMarch 31, 2022 , primarily due to increases in salaries and employee benefits. The provision for credit losses was$975 thousand for the three months endedMarch 31, 2023 , an increase of$216 thousand , or 28.4%, compared to a$759 thousand provision for the same period of 2022. Income tax expense was$697 thousand for the three months endedMarch 31, 2023 , a decrease of$220 thousand , or 24.0%, from$917 thousand for the same three months of 2022. 32
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For the three months endedMarch 31, 2023 , the annualized return on average assets and the return on average equity was 0.62% and 8.84%, respectively, and 1.08% and 11.31%, respectively, for the same periods of 2022. FNCB declared and paid dividends to holders of common stock of$0.090 per share for the first quarter of 2023, an increase of$0.015 per share, or 20.0%, compared to$0.075 per share for the same period of 2022. Total assets increased$64.0 million , or 3.7%, to$1.809 billion atMarch 31, 2023 from$1.746 billion atDecember 31, 2022 . The change in total assets primarily reflected increases in loans and leases and cash and cash equivalents, partially offset by a decrease in available-for-sale debt securities. Loans and leases, net of the allowance for credit losses, increased$41.4 million , or 3.7%, to$1.152 billion atMarch 31, 2023 from$1.110 billion atDecember 31, 2022 . FNCB experienced increases in the commercial and industrial loans and state and political subdivisions loan categories, primarily reflecting strong demand for equipment financing in each of these sectors. Cash and cash equivalents increased$27.7 million , or 66.0%, to$69.6 million atMarch 31, 2023 , from$41.9 million atDecember 31, 2022 . Available-for-sale debt securities decreased$3.0 million , or 0.6%, to$473.1 million atMarch 31, 2023 from$476.1 million atDecember 31, 2022 . Total deposits increased$42.7 million , or 3.0%, to$1.463 billion atMarch 31, 2023 from$1.421 billion atDecember 31, 2022 . Total borrowed funds increased$14.3 million , to$196.7 million , atMarch 31, 2023 from$182.4 million atDecember 31, 2022 , due entirely to an increase inFederal Home Loan Bank ("FHLB") ofPittsburgh advances. OnJanuary 25, 2023 , FNCB's Board of Directors authorized a stock repurchase program under which up to 750,000 shares of FNCB's outstanding common stock may be acquired in the open market commencing no earlier thanMarch 3, 2023 and expiringDecember 31, 2023 , 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 may be 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 toSEC 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 the plan at any time that management determines additional repurchases are no longer warranted. As ofMarch 31, 2023 , FNCB did not repurchase any shares under this program. Total shareholders' equity increased$7.6 million , or 6.3%, to$126.5 million atMarch 31, 2023 from$118.9 million atDecember 31, 2022 . The increase in capital was primarily due market value appreciation of FNCB's available-for-sale debt securities, net of deferred taxes, which resulted in a$5.4 million , or 11.3%, reduction in accumulated other comprehensive loss to$42.6 million atMarch 31, 2023 from$48.0 million atDecember 31, 2022 , coupled with net income for the three months endedMarch 31, 2023 , of$2.7 million . Partially offsetting these increases to capital were dividends declared and paid of$1.8 million for the three months endedMarch 31, 2023 .FNCB Bank was considered well capitalized with total risk-based capital and Tier 1 leverage ratios were 12.97% and 8.96% atMarch 31, 2023 , respectively. Management Focus in 2023 Management remains focused on balance sheet management, managing interest rate risk and controlling funding costs in a rising market rate environment. Additionally, management continues to evaluate opportunities to enhance net interest income and non-interest income run rates, as well as controlling non-interest expense. FNCB will continue to expand its comprehensive digital strategy to respond to evolving customer demands and create operational and delivery channel efficiencies. Specifically, initiatives include enhancements to the existing online banking platforms, continued utilization of our retail and commercial lending origination platforms and utilizing artificial intelligence and robotics to streamline workflows. Additional areas of focus for 2023 include: bank-wide staff development, building and strengthening our core customer base including increasing existing customer wallet share. 33
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Table of Contents 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 2023 and 2022. In response to the economic uncertainty from the global COVID-19 pandemic, theFOMC lowered the federal funds target rate 150 basis points in two emergency actions inMarch 2020 . As a result, the target range for federal funds fell from 1.50%-1.75% atDecember 31, 2019 to 0.00%-0.25% atMarch 31, 2020 , and had remained at these historically low levels throughMarch 15, 2022 . Lingering effects from the COVID-19 pandemic, supply chain constraints and effects from the war inUkraine , among others, have resulted in rapid rise in price inflation. As a result, theFOMC , in an effort to lower inflation to its 2.0% objective, began tightening economic policy in 2022. Specifically, theFOMC increased the target range for the federal funds rate a total of 475 basis points throughMarch 31, 2023 , which included an additional two 25-basis point increases in the first quarter of 2023, one onFebruary 1, 2023 , and one onMarch 2, 2023 . The increases in the federal funds target rate resulted in a corresponding total 475-basis point increase in the national prime rate, which was 8.00% atMarch 31, 2023 , compared to 7.50% atDecember 31, 2022 , and 3.50% atMarch 31, 2022 . In addition to these actions, theFOMC has indicated additional rate increases may be required throughout 2023. This dramatic shift in monetary policy has resulted in a rapid rise in general market interest rates. Competition for deposits within FNCB's market area has intensified, reflective of industry-wide liquidity pressures and rate sensitivity of depositors. Higher interest rates, coupled with the increased competition, has resulted in significant increases in deposit and wholesale funding costs that have surpassed increases in earning assets yields, which has caused interest margin and rate spread compression. Management has noted that competition for deposits within FNCB's market area started to increase in the second half of 2022, which has continued into the first quarter of 2023. Management recognizes that additional tightening actions by theFOMC in 2023, could result in further contraction of FNCB's tax-equivalent net interest margin and rate spread. Net interest income on a tax-equivalent basis decreased$1.2 million , or 9.1%, to$11.8 million for the three months endedMarch 31, 2023 from$13.0 million for the comparable period of 2022. The decrease in tax-equivalent net interest income primarily reflected an increase in interest expense of$6.7 million , to$7.1 million for the first quarter of 2023 from$0.4 million for the same quarter of 2022, partially offset by an increase in tax equivalent interest income of$5.5 million , or 40.9%, to$18.9 million from$13.4 million , comparing the first quarters of 2023 and 2022, respectively. 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 57 basis points to 2.78% for the first quarter of 2023 from 3.35% for the same quarter of 2023. 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 101 basis points to 2.30% for the three months endedMarch 31, 2023 from 3.31% for the same three months of 2022. The$5.5 million , or 40.9%, increase in tax-equivalent interest income largely reflected growth in average earning assets, coupled with increases in the tax-equivalent yields on earning assets. Total average earning assets increased$144.3 million , or 9.2%, to$1.703 billion for the three months endedMarch 31, 2023 , from$1.559 billion for the same three months of 2022, which resulted in a corresponding increase in tax-equivalent interest income of$1.6 million . Specifically, average total loans and leases increased$136.6 million , or 13.7%, to$1.137 billion for the first quarter of 2023 from$1.000 billion for the same quarter of 2022, which largely reflected strong organic loan demand, commercial equipment financing product offerings, and purchases of loan pools from third-party originators. In addition, total securities averaged$549.2 million for the first quarter of 2023, an increase of$8.1 million , or 1.5%, from$541.0 million for the first quarter of 2022. Increases in the average balances of loans and securities resulted in corresponding increases to tax-equivalent interest income of$1.5 million and$42 thousand , respectively, comparing the three months endedMarch 31, 2023 , and 2022. The positive impact from higher earning asset volumes was coupled a 100-basis point increase in the tax-equivalent yield on average earning assets to 4.45% for the first quarter of 2023 from 3.45% for the same quarter of 2022, which resulted in a corresponding$3.9 million increase to tax-equivalent interest income. The$6.7 million , or 1647.3%, increase in interest expense was primarily due to an increase in average interest-bearing liabilities, specifically average borrowed funds, coupled with higher funding costs. Average interest-bearing liabilities increased$161.4 million , or 13.9%, to$1.320 billion for the three months endedMarch 31, 2023 , from$1.159 billion for the same three months of 2022. The increase in average interest-bearing liabilities resulted in a corresponding increase to interest expense of$1.0 million , which was almost entirely due to a$176.3 million , or 372.5%, increase in average borrowed funds to$223.7 million for the first quarter of 2023 from$47.3 million for the same quarter of 2022, as FNCB was more reliant on wholesale funding. This was coupled with a 417-basis point increase in the cost of wholesale funding, in the first quarter of 2023, compared to the same period of 2022, which resulted in a corresponding increase to interest expense of$1.7 million . Average interest-bearing deposits decreased$14.9 million , or 1.3%, to$1.097 billion from$1.112 billion comparing the first quarters of 2023 and 2022, respectively. The decline in average interest-bearing deposits had little impact on interest expense. Average interest-bearing demand deposits decreased$112.5 million , or 13.6%, to$714.0 million for the first quarter of 2023 compared to$826.5 million for the same quarter of 2022, coupled with average savings deposits decreasing$2.6 million , or 1.8%, to$143.1 million from$140.5 million comparing the first quarters of 2023 and 2022, respectively. Conversely, average time deposits increased$95.0 million , or 65.7%, to$239.7 million for the three months endedMarch 31, 2023 , from$144.7 million for the same three months of 2022, as changing customer deposit preferences due to the economic and rate environment continued to result in deposit migration from non-maturity deposits to higher-costing time deposits. FNCB increased deposit rates, in response to rising market interest rates and increased competition for deposits. As a result, FNCB experienced a 201-basis point increase in the cost of funds to 2.15% for the three months endedMarch 31, 2023 , from 0.14% for the same three months of 2022, which resulted in a corresponding increase in interest expense of$5.6 million . Specifically, the average rate paid for interest-bearing deposits increased 148 basis points to 1.60% for the first quarter of 2023 from 0.12% for the same period of 2022, resulting in a corresponding increase to interest expense of$4.0 million . The average rates paid on interest bearing demand deposits increased 162 basis points, resulting in a corresponding increase to interest expense of$2.9 million . Comparing the first quarters of 2023 and 2022, the average rates paid for time deposits and savings deposits, increased 117 basis points and 17 basis points, respectively, resulting in corresponding increases to interest expense of$1.0 million and$59 thousand , respectively. 34
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The following tables present the average balances of assets and liabilities, corresponding interest income and expense and resulting average yields or rates paid for the three months endedMarch 31, 2023 and 2022. Average balances are derived from average daily balances. The loan and lease yields include amortization of deferred origination fees and costs which are considered adjustments to yields. Three Months Ended March 31, 2023 March 31, 2022 Average Yield/ Average Yield/ (dollars in thousands) Balance Interest Cost Balance Interest Cost Assets Earning assets (2)(3) Loans and leases - taxable (4)$ 1,082,830 $ 14,145 5.23 %$ 946,201 $ 9,755 4.12 % Loans and leases - tax free (4) 54,045 532 3.94 % 54,096 439 3.25 % Total loans (1)(2) 1,136,875 14,677 5.16 % 1,000,297 10,194 4.08 % Securities-taxable 449,351 3,350 2.98 % 437,955 2,468 2.25 % Securities-tax free 99,836 743 2.98 % 103,086 775 3.01 % Total securities (1)(5) 549,187 4,093 2.98 % 541,041 3,243 2.40 % Interest-bearing deposits in other banks and federal funds sold 17,069 177 4.15 % 17,464 7 0.16 % Total earning assets 1,703,130 18,947 4.45 % 1,558,802 13,444 3.45 % Non-earning assets 65,292 91,083 Allowance for credit losses (13,362 ) (12,689 ) Total assets$ 1,755,060 $ 1,637,196 Liabilities and Shareholders' Equity Interest-bearing liabilities Interest-bearing demand deposits$ 714,001 3,057 1.71 %$ 826,528 195 0.09 % Savings deposits 143,070 81 0.23 % 140,487 22 0.06 % Time deposits 239,687 1,239 2.07 % 144,656 107 0.30 %
Total interest-bearing deposits 1,096,758 4,377 1.60 %
1,111,671 324 0.12 %
Borrowed funds and other
interest-bearing liabilities 223,694 2,717 4.86 % 47,346 82 0.69 %
Total interest-bearing
liabilities 1,320,452 7,094 2.15 % 1,159,017 406 0.14 %
Demand deposits 287,975 308,830
Other liabilities 24,487 13,234
Shareholders' equity 122,146 156,115
Total liabilities and
shareholder's equity $ 1,755,060 $ 1,637,196
Net interest income/interest
rate spread (6) 11,853 2.30 % 13,038 3.31 %
Tax equivalent adjustment (268 ) (255 )
Net interest income as reported $ 11,585 $ 12,783
Net interest margin (7) 2.78 % 3.35 %
(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 the amortization of loan (costs)
fees of
31, 2023 and 2022, 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 March 31,
2023 vs. 2022
Increase (Decrease)
Due to Due to Total
(in thousands) Volume Rate Change
Interest income:
Loans and leases - taxable $ 1,541 $ 2,849 $ 4,390
Loans and leases - tax free - 93 93
Total loans 1,541 2,942 4,483
Securities - taxable 66 816 882
Securities - tax free (24 ) (8 ) (32 )
Total securities 42 808 850
Interest-bearing deposits in other banks and
federal funds sold - 170 170
Total interest income 1,583 3,920 5,503
Interest expense:
Interest-bearing demand deposits (30 ) 2,892 2,862
Savings deposits - 59 59
Time deposits 112 1,020 1,132
Total interest-bearing deposits 82 3,971 4,053
Borrowed funds and other interest-bearing
liabilities 1,008 1,627 2,635
Total interest expense 1,090 5,598 6,688
Net interest income $ 493 $ (1,678 ) $ (1,185 )
Provision for Credit Losses
The provision for credit 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 ACL. A
release of reserves, resulting in a credit for credit losses, reflects the
reversal of amounts previously charged to the ACL. Management closely monitors
the loan portfolio and the adequacy of the ACL by considering the underlying
financial performance of the borrower, collateral values and associated credit
risks. Future material adjustments may be necessary to the provision for credit
losses and the ACL if economic conditions or loan performance differ
substantially from the assumptions management considered in its evaluation of
the ACL. Management will continue to closely monitor FNCB's asset quality and
adjust credit provisioning as appropriate. FNCB recorded a provision for
credit losses of $975 thousand for the three-month period ended March 31,
2023 compared to a $759 thousand provision for credit losses for the three
months ended March 31, 2022 , which was primarily attributable to an increase in
loan volumes.
Non-interest Income
For the three months ended March 31, 2023 , non-interest income decreased
$119 thousand , or 6.6%, to $1.7 million from $1.8 million for the three months
ended March 31, 2022 . The decrease was largely due to recognized net losses on
equity securities and a decrease in merchant services revenue. Net losses on
equity securities totaled $508 thousand for the three months ended March 31,
2023 , a $282 thousand , or 306.1%, increase, compared to $125 thousand in losses
on equity securities recorded for the same quarter of 2022. Merchant services
revenue decreased $38 thousand , or 19.3%, to $161 thousand for the first quarter
of 2023, compared to $199 thousand for the comparable period of 2022. This was
slightly offset by increases in net gains on the sale of available-for-sale debt
securities, income from bank-owned life insurance ("BOLI") and loan-related
fees. Net gains realized on the sale of available-for-sale debt securities
totaled $163 thousand for the three months ended March 31, 2023 . There were no
sales of available-for-sale debt securities for the first quarter of 2022. BOLI
income increased $52 thousand , or 36.0%, to $197 thousand for the three months
ended March 31, 2023 , from $145 thousand for the same three-month period of
2022. Loan-related fees totaled $119 thousand for the three months ended March
31, 2023 , an increase of $62 thousand , or 108.5%, from $57 thousand recorded for
the same quarter of 2022.
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Table of Contents Non-interest Expense Non-interest expense increased$377 thousand , or 4.4%, to$8.9 million for the three months endedMarch 31, 2023 , from$8.5 million for the three months endedMarch 31, 2022 , which primarily reflected increases in salaries and employee benefits and other non-interest expenses. Salaries and employee benefits increased$737 thousand , or 15.8%, to$5.4 million for the first quarter of 2023 from$4.7 million for the same quarter of 2022, which primarily reflected higher full-time salaries and benefits associated with staff additions, in addition to an increase in starting salaries and salary ranges, to stay competitive in attracting and retaining qualified staff. Other non-interest expenses increased$253 thousand , or 28.8%, to$1.1 million for the three months endedMarch 31, 2023 , compared to$0.9 million for the same three months in 2022, which was largely due to increases in correspondent bank charges and servicing costs associated with purchased loan pools. These increases were partially offset by decreases in the provision for off-balance sheet commitments, occupancy and equipment expenses, data processing expenses, and professional fees. During the first quarter of 2023, FNCB recorded a credit for unfunded commitments of$269 thousand compared to a provision for off-balance sheet commitments of$48 thousand for the respective quarter of 2022. Occupancy and equipment expenses, decreased$27 thousand and$52 thousand , respectively, comparing the first quarters of 2023 and 2022. While data processing expenses totaled$1.0 million for the three months endedMarch 31, 2023 , a$65 thousand , or 6.1%, decrease from$1.1 million for the same three-month period in 2022. Professional fees decreased$25 thousand , or 7.8%, to$302 thousand from$327 thousand comparing the first quarters of 2023 and 2022, respectively. Provision for Income Taxes FNCB recorded income tax expense of$0.7 million for the three months endedMarch 31, 2023 , a decrease of$220 thousand , or 24.0%, compared to income tax expense of$0.9 million for the same period of 2022. FNCB's effective tax rate increased to 20.7% atMarch 31, 2023 , compared to 17.40% for the same period of 2022. 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 three months of 2023, compared to the same period of 2022. FINANCIAL CONDITION Assets Total assets increased$64.0 million , or 3.7%, to$1.809 billion atMarch 31, 2023 from$1.746 billion atDecember 31, 2022 . The change in total assets primarily reflected increases in loans and leases and cash and cash equivalents, partially offset by a decrease in available-for-sale debt securities. Loans and leases, net of the allowance for credit losses, increased$41.4 million , or 3.3%, to$1.152 billion atMarch 31, 2023 from$1.110 billion atDecember 31, 2022 . FNCB experienced increases across the commercial and industrial and state and political subdivision loan categories primarily due to the new equipment finance product offerings. Cash and cash equivalents increased$27.7 million , or 66.0%, to$69.6 million atMarch 31, 2023 , from$41.9 million atDecember 31, 2022 . Available-for-sale debt securities decreased$3.0 million , or 0.6%, to$473.0 million atMarch 31, 2023 from$476.0 million atDecember 31, 2022 . Total deposits increased$42.7 million , or 3.0%, to$1.463 billion atMarch 31, 2023 from$1.421 billion atDecember 31, 2022 . Total borrowed funds increased$14.3 million , to$196.7 million , atMarch 31, 2023 from$182.4 million atDecember 31, 2022 , due entirely to an increase inFederal Home Loan Bank ("FHLB") ofPittsburgh advances to$186.3 million atMarch 31, 2023 , from$172.0 million atDecember 31, 2022 . Cash and Cash Equivalents Cash and cash equivalents increased$27.7 million , or 66.0%, to$69.6 million atMarch 31, 2023 from$41.9 million atDecember 31, 2022 . The increase in cash and cash equivalents resulted primarily from an increase of$42.7 million in total deposits, including brokered deposits, and an increase of$14.3 million in advances through the FHLB ofPittsburgh . Funds received from deposits and borrowed funds were used to fund an increase loans and leases, net of net deferred loan origination fees and unearned income, of$39.5 million . 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. AtMarch 31, 2023 andDecember 31, 2022 , all debt securities were classified as available-for-sale. Equity securities with readily determinable fair values are carried at fair value, with gains and losses due to fluctuations in market value included in non-interest income in the consolidated statements of income. Securities with limited marketability and/or restrictions, such as FHLB ofPittsburgh 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-term and short-term economic and financial conditions, including the interest rate environment and asset/liability management, liquidity and tax-planning strategies. AtMarch 31, 2023 , 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 byU.S. government orU.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 in private CMO's, corporate debt securities, asset-backed securities andU.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 forU.S. government and government-sponsored agencies, there were no securities of any individual issuer that exceeded 10.0% of shareholders' equity atMarch 31, 2023 . 37
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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 in the first quarter of 2023 as theFOMC continued to tighten monetary policy. Additionally, as short-term interest rates moved up sharply, the yield curve was inverted atMarch 31, 2023 , due to a negative spread between the 2-year and 10-yearU.S. Treasury rates. The 2-yearU.S. Treasury rate decreased 35 basis points to 4.06% atMarch 31, 2023 from 4.41% atDecember 31, 2022 , while the 10-yearU.S. Treasury rate decreased 40 basis points to 3.48% atMarch 31,2023 from 3.88% atDecember 31, 2022 . These movements resulted in a negative spread of 58-basis points between the 2-year and 10-yearU.S. Treasury , compared to a negative spread of 0.53% atDecember 31, 2022 . 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. AtMarch 31, 2023 , FNCB reported a net unrealized loss, included in accumulated other comprehensive loss, of$42.0 million , net of deferred income taxes of$11.2 million , a decrease of$6.8 million , or 13.9%, compared to a net unrealized holding loss of$48.8 million , net of deferred income taxes of$13.0 million , atDecember 31, 2022 . 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
Composition of
March 31, 2023 December 31, 2022
(dollars in thousands) Fair Value % of Portfolio Fair Value % of Portfolio
Available-for-sale debt securities:
U.S. treasuries $ 32,845 6.94 % $ 32,134 6.75 %
Obligations of state and political
subdivisions 219,483 46.39 % 220,782 46.37 %
U.S. government/government-sponsored
agencies:
Collateralized mortgage obligations -
residential 80,750 17.07 % 80,407 16.89 %
Collateralized mortgage obligations -
commercial 3,358 0.71 % 3,329 0.70 %
Mortgage-backed securities 19,970 4.22 % 20,663 4.34 %
Private collateralized mortgage
obligations 69,740 14.74 % 72,507 15.23 %
Corporate debt securities 32,040 6.77 % 30,672 6.44 %
Asset-backed securities 14,278 3.02 % 14,941 3.14 %
Negotiable certificates of deposit 655 0.14 % 656 0.14 %
Total available-for-sale debt securities $ 473,119 100.00 % $ 476,091 100.00 %
Activity related to available-for-sale debt securities during the three months
ended March 31, 2023 included the purchase of one corporate debt security with
an aggregate principal balance of $1.5 million and a weighted-average yield of
8.5%. 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 slight increase due to the purchases. FNCB sold seven
tax-exempt municipal debt securities, with an amortized cost of $6.9 million
with a weighted average yield of 3.83%, during the three months ended March 31,
2023 . FNCB received gross proceeds of $7.1 million and realized a net gains of
$163 thousand upon the sale, which is included in non-interest income.
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 December 31, 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 June 30, 2023 . 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 first quarter of 2023.
The following table presents the weighted-average yields of available-for-sale
debt securities by major category and maturity period at March 31, 2023 . Yields
are calculated on the basis of the amortized cost and weighted for the scheduled
maturity of each security. The yields on tax-exempt obligations of 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.
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Maturity Distribution of
March 31, 2023
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 - 1.14 % 1.19 % - - 1.17 %
Obligations of state and
political subdivisions 2.91 % 3.01 % 2.29 % 2.64 % - 2.66 %
U.S. government/government-sponsored
agencies: Collateralized mortgage obligations - residential - - - - 2.45 % 2.45 % Collateralized mortgage obligations - commercial - - - - 2.00 % 2.00 % Mortgage-backed securities - - - - 2.80 % 2.80 % Private collateralized mortgage obligations - - - - 3.53 % 3.53 % Corporate debt securities - 8..5 % 4.61 % - - 4.77 % Asset-backed securities - - - - 5.77 % 5.77 % Negotiable certificates of deposit - 1.02 % - - - 1.02 % Weighted average yield 2.91 % 2.65 % 2.81 % 2.64 % 3.11 % 2.87 %
Evaluation for Credit Impairment
Management performed a review of all securities in an unrealized loss position as ofMarch 31, 2023 and noted that there was no material change in the credit quality of any of the issuers or any other event or circumstance that may cause a significant adverse effect on the fair value of these securities. Moreover, to date, FNCB has received all scheduled principal and interest payments and expects to fully collect all future contractual principal and interest payments on all securities in an unrealized loss position atMarch 31, 2023 . Based on the results of its review and considering the attributes of these debt securities, management concluded that changes in the fair values of the securities were consistent with movements in market interest rates and spreads relative to when the securities were purchased and not due to the credit quality of the securities or issuers. Accordingly, management determined that FNCB was not required to establish an ACL for any security in an unrealized loss position atMarch 31, 2023 .
See Note 3, "Securities," of the notes to consolidated financial statements included in Item 1 hereof for additional information about valuation of securities for credit impairment.
Loans and Leases Total loans and leases, net of deferred fees and costs and unearned income, increased$40.4 million , or 3.6%, to$1.164 billion atMarch 31, 2023 from$1.123 billion atDecember 31, 2022 . The growth in the loan portfolio reflected increases in all commercial and industrial loans and state and political subdivision loan categories, which was primarily due to commercial equipment financing product lines including simple interest loans and direct finance and municipal leases. 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 atMarch 31, 2023 andDecember 31, 2022 were$0.6 million and$1.3 million , respectively, in outstanding balances of PPP loans, which are 100.0% guaranteed by the SBA. Accordingly, management excluded PPP loans in its evaluations of the ACL and there was no ACL established for PPP loans atMarch 31, 2023 andDecember 31, 2022 . 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, decreased$8.8 million , or 1.3%, to$684.9 million atMarch 31, 2023 from$693.8 million atDecember 31, 2022 . Real estate secured loans to total loans and leases represented 58.9% of total loans atMarch 31, 2023 compared to 61.8% atDecember 31, 2022 , which resulted from management's efforts to diversify the portfolio. Commercial real estate loans decreased$2.6 million , or 0.7%, to$373.6 million atMarch 31, 2023 from$376.3 million atDecember 31, 2022 . 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. Commercial and industrial loans and leases increased$44.7 million , or 16.4%, to$317.1 million atMarch 31, 2023 from$272.4 million atDecember 31, 2022 , which was primarily due to equipment loan and lease origination through 1st Equipment Finance during the three months endedMarch 31, 2023 . The majority of equipment financing was originated through indirect, third-party dealers. AtMarch 31, 2023 , simple interest loans totaled$107.1 million , compared to$78.4 million atDecember 31, 2022 . Direct finance leases outstanding under this initiative were$0.9 million , respectively, at bothMarch 31, 2023 , andDecember 31, 2022 . Municipal leases under this initiative were$4.8 million atMarch 31, 2023 , an increase of$0.4 million , or 9.1%, from$4.4 million atDecember 31, 2022 . Construction, land acquisition and development loans decreased$1.3 million , or 2.0%, to$64.9 million atMarch 31, 2023 from$66.2 million atDecember 31, 2022 . 39
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Residential real estate loans include fixed-rate and variable-rate,
amortizing mortgage loans, home equity term loans and home equity lines of
credit ("HELOCs"). FNCB primarily underwrites fixed-rate 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 $246.4 million at March
31, 2023 , a decrease of $3.8 million , or 1.5%, from $250.2 million at December
31, 2022 .
Consumer loans primarily include indirect automobile loans and secured and
unsecured personal loans. Consumer loans decreased by $1.0 million , or 1.0%, to
$91.6 million at March 31, 2023 from $92.6 million at December 31, 2022 , largely
due to the run-off of the indirect loan portfolio. Loans and leases to state and
political subdivisions increased $5.1 million , or 7.9%, to $70.1 million at
March 31, 2023 from $65.0 million at December 31, 2022 .
The following table presents loans and leases receivable, net by segment at
Loan and Lease Portfolio Detail
March 31, 2023 December 31, 2022
% of Total % of Total
(dollars in thousands) Amount Loans, Gross Amount Loans, Gross
Residential real estate $ 246,428 21.17 % $ 250,221 22.28 %
Commercial real estate 373,630 32.10 % 376,976 33.56 %
Construction, land acquisition and
development 64,890 5.58 % 66,555 5.92 %
Commercial and industrial 317,830 27.31 % 272,024 24.22 %
Consumer 91,644 7.88 % 92,612 8.24 %
State and political subdivisions 69,367 5.96 % 64,955 5.78 %
Total loans and leases (1) 1,163,789 100.00 % 1,123,343 100.00 %
Unearned income - (810 )
Net deferred origination fees - 1,784
Allowance for credit losses (12,279 ) (14,193 )
Loans and leases, net $ 1,151,510 $ 1,110,124
(1) In accordance with the adoption of
ASU 2016-13, March 31, 2023 balances are
reported at the amortized cost basis, to
include net deferred origination fees
and unearned income.
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 ACL.
The ACL is established through a provision for credit losses charged to
earnings.
FNCB has established and consistently applies loan policies and procedures
designed to foster sound underwriting and credit monitoring practices. Credit
risk is managed through the efforts of the Chief Banking Officer, Chief Lending
Officer and loan officers, the Chief Credit Officer, the loan review function,
and the Credit Risk Management, ACL, 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.
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 other real
estate owned ("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.
Management actively manages loans rated special mention and substandard in an
effort to mitigate loss to FNCB by working with customers to develop strategies
to resolve borrower difficulties, through sale or liquidation of collateral,
foreclosure, and other appropriate means. In addition, management monitors
employment and economic conditions within FNCB's market area, as weakening of
conditions could result in real estate devaluations and an increase in loan
delinquencies, which could negatively impact asset quality and cause an increase
in the provision for loan and lease losses.
The following table presents information about non-performing assets at
Non-performing Assets
March 31, December 31,
(dollars in thousands) 2023 2022
Non-accrual loans $ 2,601 $ 2,763
Loans past due 90 days or more and still accruing 52 79
Total non-performing loans 2,653 2,842
Other real estate owned - -
Other non-performing assets 1,773 1,773
Total non-performing assets $ 4,426 $ 4,615 Non-performing loans as a percentage of total loans 0.23 %
0.25 %
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FNCB's asset quality remained favorable through the first quarter of 2023. Total non-performing assets decreased$0.2 million , or 4.1%, to$4.4 million atMarch 31, 2023 from$4.6 million atDecember 31, 2022 . The improvement reflected decreases in non-accrual loans. Non-performing loans, which include non-accrual loans and loans past due 90 days or more and still accruing, decreased$0.2 million , or 6.7%, to$2.6 million atMarch 31, 2023 from$2.8 million atDecember 31, 2022 . FNCB's ratio of non-performing loans to total gross loans improved to 0.23% atMarch 31, 2023 from 0.25% atDecember 31, 2022 .
The following table presents the changes in non-performing loans for the three
months ended
Changes in Non-Performing Loans
Three Months Ended March 31,
(in thousands) 2023 2022
Balance, beginning of period $ 2,842 $ 3,863
Loans newly placed on non-accrual 988 234
Change in loans past due 90 days or more and still accruing (27 ) -
Loans charged-off (740 ) (75 )
Loan payments received (410 ) (158 )
Balance, end of period $ 2,653 $ 3,864 The following table presents accruing loan delinquencies and non-accrual loans
as a percentage of gross loans at
Loan Delinquencies and Non-Accrual Loans
March 31, December 31,
2023 2022
Accruing:
30-89 days 0.18 % 0.19 %
90+ days 0.00 % 0.01 %
Non-accrual 0.22 % 0.25 %
Total delinquencies 0.40 % 0.45 %
Total delinquent loan balances, including non-accrual loans, increased $0.1
million to $2.2 million at March 31, 2023 , from $2.1 million at December 31,
2022 . However, total delinquencies as a percentage of total loans and leases,
decreased 5 basis points to 0.40% at March 31, 2023 , compared to 0.45% at
December 31, 2022 .
Other non-performing assets was comprised solely of a classified account
receivable, the balance of which was $1.8 million at both March 31, 2023 and at
December 31, 2022 . 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- or eight-unit buildings and further site development including
building pads for a new six-seven unit building and pool/spa building during
2022. Accordingly FNCB anticipates receiving additional payments during the
remainder of 2023.
While FNCB's asset quality has remained favorable, management believes continued
economic uncertainty related to supply-chain constraints, inflation, and the
resulting increase in interest rates could affect borrowers' ability to repay
loans, which may have a negative impact on asset quality including, increases in
loan delinquencies, non-performing loans, loan charge-offs and foreclosures.
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Table of Contents Allowance for Credit Losses The ACL equaled$12.3 million atMarch 31, 2023 , compared to$14.2 million atDecember 31, 2022 . The decrease resulted from a$2.6 million adjustment from the impact of the adoption of ASU 2016-13, onJanuary 1, 2023 , in addition to$253 thousand in net charge-offs, that were offset by a provision for credit losses of$975 thousand , for the three months endedMarch 31, 2023 . The ratio of the ACL to total loans and leases decreased to 1.06% of total loans and leases, net of net deferred loan origination fees and unearned income atMarch 31, 2023 from 1.26% of total loans atDecember 31, 2022 . The following table presents an allocation of the ACL by major loan category and percent of loans in each category to total loans atMarch 31, 2023 andDecember 31, 2022 : Allocation of the ACL March 31, 2023 December 31, 2022 Percentage Percentage of Loans of Loans in Each in Each Category Category Allowance to Total Allowance to Total (dollars in thousands) Amount Loans Amount Loans Residential real estate$ 1,164 21.17 %$ 2,215 22.28 % Commercial real estate 2,509 32.10 % 4,193 33.55 % Construction, land acquisition and development 1,722 5.58 % 747 5.92 % Commercial and industrial 4,875 27.31 % 4,099 24.22 % Consumer 1,597 7.88 % 1,307 8.25 % State and political subdivisions 412 5.96 % 503 5.78 % Unallocated - - 1,129 - Total$ 12,279 100.00 %$ 14,193 100.00 %
The following table presents an analysis of the ACL by loan category for the
three months ended
Reconciliation of the ACL
For the Three Months Ended March 31,
(dollars in thousands) 2023 2022
Balance at beginning of period $ 14,193 $ 12,416
Impact of ASU 2016-13 (2,636 ) -
Charge-offs:
Residential real estate - 3
Commercial real estate - -
Construction, land acquisition and development - -
Commercial and industrial 53 19
Consumer 723 73
State and political subdivisions - -
Total charge-offs 776 95
Recoveries of charged-off loans:
Residential real estate - -
Commercial real estate 54 -
Construction, land acquisition and development - -
Commercial and industrial 11 4
Consumer 458 45
State and political subdivisions - -
Total recoveries 523 49
Net charge-offs 253 46
Provision for credit losses 975 759
Balance at end of period $ 12,279 $ 13,129
Net charge-offs as a percentage of average loans and leases (annualized)
0.09 % 0.02 %
Allowance for credit losses as a percentage of loans and leases, net
1.06 % 1.27 %
Allowance for credit losses to nonaccrual loans and
leases 472.09 % 339.78 %
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Table of Contents Liabilities Total liabilities, which consist primarily of total deposits and borrowed funds, increased$54.9 million , or 3.4%, to$1.682 billion atMarch 31, 2023 from$1.627 billion atDecember 31, 2022 . The increase was due primarily to deposit growth, coupled with an increase in FHLB ofPittsburgh advances. Total deposits were$1.463 billion atMarch 31, 2023 , an increase of$42.7 million , or 3.0%, from$1.421 billion atDecember 31, 2022 . The increase was in total interest -bearing deposits that increased$67.4 million , or 6.1%, to$1.182 billion atMarch 31, 2023 , from$1.115 billion atDecember 31, 2022 . Specifically, total time deposits increased$201.1 million , or 14.2%, to$359.0 million atMarch 31, 2023 , compared to$157.9 million atDecember 31, 2022 . The increase in total time deposits was primarily concentrated in wholesale deposits originated through the IntraFi® Network, Qwickrate, a national listing service, and brokered certificates of deposit. FNCB utilized these wholesale sources as an alternative to additional advances through the FHLB ofPittsburgh . Additionally, in response to the general increase in interest rates and market demand, FNCB initiated several certificate of deposit specials in the first quarter of 2023. This was offset by decreases in non-interesting bearing demand deposits, interest-bearing demand deposits and savings deposits. Non-interest-bearing demand deposits decreased$24.7 million , or 8.1%, to$281.1 million atMarch 31, 2023 , from$305.9 million atDecember 31, 2022 . Interest-bearing demand deposits totaled$683.7 million atMarch 31, 2023 , a decrease of$124.8 million , or 15.4%, compared to$808.5 million atDecember 31, 2022 . While, savings deposits decreased$8.9 million , or 6.0%, to$139.5 million atMarch 31, 2023 , compared to$148.4 million atDecember 31, 2022 . Total borrowed funds increased$14.3 million , or 7.8%, to$196.6 million atMarch 31, 2023 , from$182.4 million atDecember 31, 2022 , which was comprised of$186.4 million in FHLB ofPittsburgh advances and$10.3 million in junior subordinated debentures. Equity OnJanuary 25, 2023 , FNCB's Board of Directors authorized a stock repurchase program under which up to 750,000 shares of FNCB's outstanding common stock may be acquired in the open market. Repurchases are subject toSEC 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. There is not a guarantee as to the exact number of shares that will be repurchased by FNCB, and FNCB may discontinue the plan at any time that management determines additional repurchases are no longer warranted. During the three months endedMarch 31, 2023 , FNCB did not repurchase any shares under this initiative. Total shareholders' equity increased$7.6 million , or 6.3%, to$126.5 million atMarch 31, 2023 from$118.9 million atDecember 31, 2022 . The increase in capital was primarily due market value appreciation of FNCB's available-for-sale debt securities, net of deferred taxes, which resulted in a decrease in the accumulated other comprehensive loss to$42.6 million atMarch 31, 2023 , compared to an accumulated other comprehensive loss of$48.0 million atDecember 31, 2022 . This was coupled with net income for the three months endedMarch 31, 2023 of$2.7 million . This was partially offset by dividends declared and paid of$1.8 million for the three months endedMarch 31, 2023 .FNCB Bank was considered well capitalized with total risk-based capital and Tier 1 leverage ratios were 12.92% and 8.92% atMarch 31, 2023 , respectively. On a per share basis, dividends declared totaled$0.090 per share for the three months endedMarch 31, 2023 , an increase of$0.015 per share, or 20.0%, compared to$0.075 for the three months endedMarch 31, 2022 . OnApril 26, 2023 , FNCB's Board of Directors declared a dividend of$0.090 per share for the second quarter of 2023, the same was declared for the second quarter of 2022. The Bank's total regulatory capital increased$3.4 million , or 2.0%, to$173.4 million atMarch 31, 2023 from$170.0 million atDecember 31, 2022 .FNCB Bank's total risk-based capital and Tier 1 leverage ratios were 12.97% and 8.96%, respectively, atMarch 31, 2023 , compared to 13.11% and 8.77%, respectively, atDecember 31, 2022 . 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 atMarch 31, 2023 andDecember 31, 2022 . 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 ofPittsburgh as wholesale sources of funds to supplement its deposit gathering initiatives. 43
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The consolidated 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. AtMarch 31, 2023 , cash and cash equivalents totaled$69.6 million , an increase of$27.7 million compared to$41.9 million atDecember 31, 2022 . For the three months endedMarch 31, 2023 , net cash inflows, provided by operating and financing activities were only partially offset by net cash outflows provided used in investing activities. Operating activities include net income, adjusted for the effects of non-cash transactions including, among others, depreciation and amortization and the provision for credit losses, and is the primary source of cash flows from operations. In the first quarter of 2023, operating activities provided FNCB with$1.2 million in net cash, which reflected net income of$2.7 million , net of a reduction for non-cash negative adjustments of$1.4 million . This was coupled with$55.2 million in cash provided by financing activities, which resulted primarily from a net increase in deposits of$42.7 million and the net proceeds from overnight and term advances through FHLB ofPittsburgh , of$14.3 million , slightly offset by the$1.8 million in cash dividends paid. Partially offsetting these net inflows were net cash outflows used in investing activities that totaled$28.7 million for the three months endedMarch 31, 2023 . Specifically, FNCB's net lending activities used$39.9 million in net cash and$1.5 million was utilized in the purchase of available-for-sale debt securities. These investing cash outflows were slightly offset by$7.1 million in cash proceeds received from the sale of available-for-sale debt securities, and$5.7 million of cash provided from maturities, calls and principal payments of available-for-sale debt securities. Management is actively monitoring FNCB's liquidity position and capital adequacy in light of the changing circumstances related to economic uncertainty, liquidity constraints, current inflation levels, rising interest rates and increased competition. Management believes FNCB's current liquidity position and available sources of liquidity were sufficient to meet its cash flow needs and fulfill its obligations atMarch 31, 2023 . In addition to cash and cash equivalents of$69.6 million atMarch 31, 2023 , FNCB had ample sources of additional liquidity including approximately$482.1 million in available borrowing capacity from the FHLB ofPittsburgh and$17.9 million under the borrower-in-custody ("BIC") program through theFederal Reserve Bank of Philadelphia . FNCB also has available unsecured federal funds lines of credit totaling$75.0 million atMarch 31, 2023 , as well as access to various wholesale deposit markets. While management believes FNCB has adequate liquidity to meet its cash flow needs, they are keenly aware that changes in general economic conditions, including inflation, further increases in interest rates and competition, among other factors, could pose potential stress on liquidity should deposits begin exiting the Bank or FNCB's asset quality deteriorates. Additionally, FNCB could experience an increase in the utilization of existing lines of credit as customers manage their own liquidity needs during this time of economic uncertainty. Management continually monitors FNCB's liquidity positions and sources of available liquidity in relation to funding and cash flow needs and evaluates potential sources of additional liquidity. In response to industry-wide liquidity constraints, onMarch 12, 2023 , theFederal Reserve Bank established a new Bank Term Funding Program ("BTFP") to provide additional funding to eligible depository institutions. The BTFP is an additional source of liquidity collateralized by high-quality securities valued at par includingU.S. Treasury securities,U.S. government agency debt and mortgage-backed securities and other qualifying securities. FNCB had$25.3 million in available funding under the BTFP atMarch 31, 2023 . As ofMarch 31, 2023 , FNCB did not utilize this funding source.
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 and 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. Accordingly, FNCB has not written any loans with terms tied to LIBOR
during the three-months ended March 31, 2023 or during the year ended December
31, 2022 . 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, evaluating any risks involved and has amended loan
documents as necessary.
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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 usingMarch 31, 2023 as a starting point;
? cash flows are based on contractual maturity and amortization schedules with
applicable prepayments derived from internal historical data and external
sources; and
? cash flows are reinvested into similar instruments 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
-200 basis points on net interest income and the change in economic value over a
one-year time horizon from the March 31, 2023 levels:
Rates +200 Rates +400 Rates -200
Simulation Simulation Simulation
Results Policy Limit Results Policy Limit Results Policy Limit
Earnings at risk:
Percent change in net
interest income (7.2 )% (12.5 )% (13.1 )% (20.0 )% 0.4 % (12.5 )%
Economic value at
risk:
Percent change in
economic value of
equity (7.6 )% (20.0 )% (16.6 )% (35.0 )% 0.7 % (10.0 )%
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Model results from the simulation atMarch 31, 2023 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 atMarch 31, 2023 , in comparison to the base case, net interest income is expected to decrease 7.2% 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 7.6%. Comparatively, model results atDecember 31, 2022 were estimated decreases in net interest income and EVE of 14.2% and 9.3%, 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. DespiteFOMC actions in 2022, inflation remained elevated in the first quarter of 2023. TheFOMC responded with two additional 25-basis point rate increases, one onFebruary 1, 2023 and another onMarch 2, 2023 . Additionally, theFOMC has indicated that additional rate increases in 2023 would likely be necessary to control inflation. Model results atMarch 31, 2023 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 endedMarch 31, 2023 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 endedMarch 31, 2023 of approximately$715 thousand , or 6.25%. The variance primarily reflected higher actual interest expense due to increases to deposit rates, including certificate of deposit rate special employed and higher brokered deposit rates than modeled. 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 months ended
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