Note

12.

COMMITMENTS, CONTINGENCIES AND CONCENTRATIONS

Leases

FNCB is obligated under operating leases for certain bank branches, office space, automobiles and equipment. Operating lease right of use ("ROU") assets represent FNCB's right to use an underlying asset during the lease term and operating liabilities represent its obligation to make lease payments under the lease agreement. ROU assets and operating lease liabilities are recognized at lease commencement based on the present value of the remaining lease payments using a discount rate that represents FNCB's incremental borrowings rate at the commencement date. ROU assets are included in other assets and operating lease liabilities are included in other liabilities in the consolidated statements of financial condition. As of

December 31,

2019

ROU assets and lease liabilities were

$3.1

million and

$3.5

million, respectively.

The following table summarizes the components of FNCB's operating lease expense for the year ended

December 31, 2019.

Operating lease expense associated with bank branches and office space is included in occupancy expense, while operating lease expense associated with automobiles and office equipment are included in equipment expense in the consolidated statements of income. Total rental expense under leases amounted to

$418

thousand in

2019.

(in thousands)	For the Year Ended December 31, 2019
Operating lease cost - bank branches	$	343
Operating lease cost - automobiles and equipment		31
Short-term lease cost - office space		42
Short-term lease cost - automobiles and equipment		2
Variable lease cost		-
Total lease cost	$	418

The following table summarizes the maturity of remaining operating lease liabilities as of

December 31, 2019:

(in thousands)	December 31, 2019
2020	$	387
2021		353
2022		331
2023		323
2024		287
2025 and thereafter		2,813
Total lease payments		4,494
Less: imputed interest		1,023
Present value of operating lease liabilities	$	3,471

The following table presents other information related to FNCB's operating leases:

(dollars in thousands)	December 31, 2019
Weighted-average remaining lease term	14.3 years
Weighted-average discount rate		3.45	%
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	385

The following table presents the minimum future obligations under non-cancelable leases in effect at

December 31, 2018:

	Minimum Future Lease Payments
	December 31, 2018
(in thousands)	Facilities		Vehicles & Equipment		Total
2019	$	385	$	13	$	398
2021		313		1		314
2022		287		-		287
2023		265		-		265
2024		223		-		223
2025 and thereafter		820		-		820
Total	$	2,293	$	14	$	2,307

Total rental expense under leases amounted to

$492

thousand in

2018.

Financial Instruments with off-balance sheet commitments

FNCB is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit that involve varying degrees of credit, interest rate or liquidity risk in excess of the amount recognized in the balance sheet. FNCB

’s exposure to credit loss from nonperformance by the other party to the financial instruments for commitments to extend credit and standby letters of credit is represented by the contractual amount of those instruments.

Financial instruments whose contract amounts represent credit risk at

December 31,

2019

and

2018

are as follows:

	December 31,
(in thousands)	2019		2018
Commitments to extend credit	$	275,891	$	181,322
Standby letters of credit		15,081		15,121

In order to provide for probable losses inherent in these instruments, FNCB recorded reserves for unfunded commitments of

$703

thousand and

$255

thousand at

December 31, 2019

and

2018,

respectively, which were included in other liabilities on the consolidated balance sheets.

Commitments to extend credit are agreements to lend to customers in accordance with contractual provisions. These commitments usually are for specific periods or contain termination clauses and

may

require the payment of a fee. The total amounts of unused commitments do

not

necessarily represent future cash requirements, in that commitments often expire without being drawn upon.

Letters of credit and financial guarantees are agreements whereby FNCB guarantees the performance of a customer to a

third

party. Collateral

may

be required to support letters of credit in accordance with management

’s evaluation of the creditworthiness of each customer. The credit exposure assumed in issuing letters of credit is essentially equal to that in other lending activities.

Federal Home Loan Bank

— Mortgage Partnership Finance

(“MPF”)

Program

Under a secondary market loan servicing program with the FHLB, FNCB, in exchange for a monthly fee, provides a credit enhancement guarantee to the FHLB for foreclosure losses in excess of a defined First Loss Account (“FLA”) balance, up to specified amounts.

December

31,

2019,

FNCB serviced payments on

$21.5

million of

first

lien residential loan principal under these terms for the FHLB. At

December

31,

2019,

the maximum credit enhancement obligation for such guarantees by FNCB would be approximately

$902

thousand if total foreclosure losses on the entire pool of loans exceed the FLA of approximately

$64

thousand

There was

reserve established for this guarantee at

December 31, 2019

and

2018.

Concentrations of Credit Risk

Cash Concentrations: The Bank maintains cash balances at several correspondent banks. FNCB engages in a primary correspondent banking relationship with Compass Bank. At

December 31, 2019

and

2018,

FNCB had balances with Compass Bank of

$1.1

million and

$2.7

million, respectively. There were

other due from bank accounts in excess of the

$250

thousand limit covered by the Federal Deposit Insurance Corporation (“FDIC”) at

December 31,

2019

and

2018

Loan Concentrations: FNCB attempts to limit its exposure to concentrations of credit risk by diversifying its loan portfolio and closely monitoring any concentrations of credit risk. The commercial real estate and construction, land acquisition and development portfolios comprise

$325.6

million, or

39.4

% of gross loans at

December 31, 2019.

Geographic concentrations exist because FNCB provides its services in its primary market area of

Northeastern Pennsylvania a

nd the Lehigh Valley and conducts limited activities outside of that area. FNCB had loans and loan commitments secured by real estate outside of its primary market area of

$24.3

million, or

2.9

of gross loans at

December 31, 2019.

FNCB considers an industry concentration within the loan portfolio to exist if the aggregate loan balance outstanding for that industry exceeds

25.0%

of capital. The following table summarizes the concentration within FNCB

’s loan portfolio by industry at

December 31, 2019

and

2018:

	December 31, 2019						December 31, 2018
				% of					% of
(in thousands)	Amount			Gross Loans			Amount		Gross Loans
Retail space/shopping centers	$	43,865			5.31	%	$	48,021		5.75	%
1-4 family residential investment properties		38,122			4.61	%		38,756		4.64	%
Physicians		26,739	*		3.24	%		25,379		3.04	%

Not

considered a concentration, shown for comparative purposes only.

Litigation

FNCB has been subject to tax audits, and is also a party to routine litigation involving various aspects of its business, such as employment practice claims, workers compensation claims, claims to enforce liens, condemnation proceedings on properties in which FNCB holds security interests, claims involving the making and servicing of real property loans and other issues incident to its business,

none

of which has or is expected to have a material adverse impact on the consolidated financial condition, results of operations or liquidity of FNCB.