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Note 4 - Loans and Leases

12 Months Ended

Dec. 31, 2022

Loans, Notes, Trade and Other Receivables Disclosure [Text Block]

Note 4. LOANS AND LEASES

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

	*December 31,*
(in thousands)	*2022*			*2021*
Residential real estate	$	250,221		$	234,113
Commercial real estate		376,976			366,009
Construction, land acquisition and development		66,555			41,646
Commercial and industrial		272,024			193,086
Consumer		92,612			85,522
State and political subdivisions		64,955			61,071
Total loans and leases, gross		1,123,343			981,447
Unearned income		(810	)		(1,442	)
Net deferred origination fees		1,784			(566	)
Allowance for loan and lease losses		(14,193	)		(12,416	)
Loans and leases, net	$	1,110,124		$	967,023

Included in commercial and industrial loans and leases at December 31, 2022 and December 31, 2021 were $1.3 million and $21.9 million, respectively, of loans originated under the Small Business Administration ("SBA") Payment Protection Program ("PPP"). Included in net deferred origination fees at December 31, 2022 and December 31, 2021, were $40 thousand and $1.0 million, respectively, in deferred origination fees, net of deferred loan origination costs, associated with the PPP Loans. PPP loans are 100.0% guaranteed and may be forgiven by the SBA. Accordingly, there was no ALLL established for PPP loans at December 31, 2022 and 2021.

In 2021, management expanded FNCB's commercial credit product offerings to include commercial equipment financing, through simple interest loans, direct finance leases and municipal leases. Simple interest loans and direct finance leases originated under this initiative are included in commercial and industrial loans, tax-free municipal leases originated under this initiative are included in state and political subdivision loans. Simple interest loans and direct finance leases were $79.3 million and $7.9 million, respectively at December 31, 2022 and 2021. Tax-free municipal leases were $4.4 million at December 31, 2022 and $2.4 million at December 31, 2021.

FNCB has granted loans, letters of credit and lines of credit to certain of its executive officers and directors as well as to certain of their related parties. For more information about related party transactions, refer to Note 12, “Related Party Transactions” to these consolidated financial statements.

For information about credit concentrations within FNCB’s loan portfolio, refer to Note 13, “Commitments, Contingencies and Concentrations” to these consolidated financial statements.

FNCB originates 1- 4 family residential mortgage loans for sale in the secondary market. The aggregate principal balance of 1-4 family residential mortgages sold on the secondary market were $9.2 million for the year ended December 31, 2022 and $9.4 million for the year ended December 31, 2021. Net gains on the sale of residential mortgage loans were $205 thousand in 2022 and $352 thousand in 2021. FNCB retains servicing rights on mortgages sold in the secondary market. At December 31, 2022, there were $60 thousand in 1-4 family residential mortgage loans held for sale. There were no 1-4 family residential mortgage loans held for sale at December 31, 2021.

The unpaid principal balance of loans serviced for others, including residential mortgages and SBA-guaranteed loans were $78.7 million and $77.2 million at December 31, 2022 and 2021, respectively.

FNCB does not have any lending programs commonly referred to as "subprime lending". Subprime lending generally targets borrowers with weakened credit histories typically characterized by payment delinquencies, previous charge-offs, judgements, and bankruptcies, or borrowers with questionable repayment capacity as evidenced by low credit scores or high debt-burden ratios.

FNCB provides for loan and lease losses based on the consistent application of its documented ALLL methodology. Loan and lease losses are charged to the ALLL and recoveries are credited to it. Additions to the ALLL are provided by charges against income based on various factors which, in management’s judgement, deserve current recognition of estimated probable losses. Loan and lease losses are charged-off in the period the loans, or portions thereof, are deemed uncollectible. Generally, FNCB will record a loan charge-off (including a partial charge-off) to reduce a loan to the estimated recoverable amount based on its methodology detailed below. Management regularly reviews the loan portfolio and makes adjustments for loan losses in order to maintain the ALLL in accordance with GAAP. The ALLL consists primarily of the following two components:

(1)

Specific allowances are established for impaired loans, which FNCB defines as all loan relationships with an aggregate outstanding balance greater than $100 thousand rated substandard and on non-accrual, loans rated doubtful or loss, and all TDRs. The amount of impairment provided for as an allowance is represented by the deficiency, if any, between the carrying value of the loan and either (a) the present value of expected future cash flows discounted at the loan’s effective interest rate, (b) the loan’s observable market price, or (c) the fair value of the underlying collateral, less estimated costs to sell, for collateral dependent loans. Impaired loans that have no impairment losses are not considered in the establishment of general valuation allowances as described below. If management determines that collection of the impairment amount is remote, a charge-off will be recorded for the impairment amount.

(2)

General allowances are established for loan losses on a portfolio basis for loans that do not meet the definition of impaired. FNCB divides its portfolio into loan segments for loans exhibiting similar characteristics. Loans rated special mention or substandard and accruing, which are embedded in these loan segments, are then separated from these loan segments, as these loans are subject to an analysis that emphasizes the credit risk associated with these loans. An estimated loss rate is then applied to each loan segment, which are based on FNCB’s own historical loss experience for each respective loan segment. In addition, management evaluates and applies to each loan segment certain qualitative or environmental factors that are likely to cause estimated credit losses associated with FNCB’s existing portfolio to differ from historical experience, which are discussed below. For loans that have an internal credit rating of special mention or substandard, the qualitative and environmental factors are further adjusted for the increased risk.

In addition to the specific and general components, management may establish an unallocated allowance that is used to cover any inherent losses that exist as of the evaluation date, but which may have not been identified under the methodology.

As part of its evaluation, management considers qualitative and environmental factors, including, but not limited to:

●

changes in national, local, and business economic conditions and developments, including the condition of various market segments;

●

changes in the nature and volume of the loan portfolio;

●

changes in lending policies and procedures, including underwriting standards, collection, charge-off and recovery practices and results;

●

changes in the experience, ability and depth of lending management and staff;

●

changes in the quality of the loan review system and the degree of oversight by the Board of Directors;

●

changes in the trend of the volume and severity of past due and classified loans, including trends in the volume of non-accrual loans, TDRs and other loan modifications;

●

the existence and effect of any concentrations of credit and changes in the level of such concentrations;

●

the effect of external factors such as competition and legal and regulatory requirements on the level of estimated credit losses in the current loan portfolio; and

●

analysis of customers’ credit quality, including knowledge of their operating environment and financial condition.

Management evaluates the credit quality of the loan portfolio on an ongoing basis and performs a formal review of the adequacy of the ALLL on a quarterly basis. This evaluation is inherently subjective, as it requires material estimates that may be susceptible to significant revisions based upon changes in economic and real estate market conditions. However, actual loan losses may be significantly more than the established ALLL, which could have a material negative effect on FNCB’s operating results or financial condition. While management uses the best information available to make its evaluations, future adjustments to the ALLL may be necessary if conditions differ substantially from the information used in making the evaluations. Banking regulators, as an integral part of their examination of FNCB, also review the ALLL, and may require, based on their judgments about information available to them at the time of their examination, that certain loan balances be charged off or require that adjustments be made to the ALLL.

The following table summarizes activity in the ALLL by major category for the years ended December 31, 2022 and 2021:

*Allowance for Loan and Lease Losses by Loan Category*
*December 31, 2022*
(in thousands)	*Residential Real Estate*			*Commercial Real Estate*			*Construction, Land Acquisition and Development*		*Commercial and Industrial*			*Consumer*			*State and Political Subdivisions*		*Unallocated*		*Total*
Allowance for loan and lease losses:
Beginning balance, January 1, 2022	$	2,081		$	4,530		$	392	$	2,670		$	1,159		$	455	$	1,129	$	12,416
Charge-offs		(3	)		-			-		(69	)		(1,234	)		-		-		(1,306	)
Recoveries		3			293			10		30			785			-		-		1,121
Provisions (credits)		134			(630	)		345		1,468			597			48		-		1,962
Ending balance, December 31, 2022	$	2,215		$	4,193		$	747	$	4,099		$	1,307		$	503	$	1,129	$	14,193

Specific reserve	$	17		$	15		$	-	$	2		$	-		$	-	$	-	$	34

General reserve	$	2,198		$	4,178		$	747	$	4,097		$	1,307		$	503	$	1,129	$	14,159

Loans and leases receivable:
Individually evaluated for impairment	$	1,472		$	5,766		$	-	$	362		$	-		$	-	$	-	$	7,600
Collectively evaluated for impairment		248,749			371,210			66,555		271,662			92,612			64,955		-		1,115,744
Total loans and leases, gross at December 31, 2022	$	250,221		$	376,976		$	66,555	$	272,024		$	92,612		$	64,955	$	-	$	1,123,343

Allowance for Loan and Lease Losses by Loan Category
December 31, 2021
(in thousands)	Residential Real Estate			Commercial Real Estate			Construction, Land Acquisition and Development			Commercial and Industrial			Consumer			State and Political Subdivisions		Unallocated		Total
Allowance for loan and lease losses:
Beginning balance, January 1, 2021	$	1,715		$	4,268		$	538		$	2,619		$	1,319		$	405	$	1,086	$	11,950
Charge-offs		(14	)		(11	)		-			(218	)		(543	)		-		-		(786	)
Recoveries		17			467			13			74			515			-		-		1,086
Provisions (credits)		363			(194	)		(159	)		195			(132	)		50		43		166
Ending balance, December 31, 2021	$	2,081		$	4,530		$	392		$	2,670		$	1,159		$	455	$	1,129	$	12,416

Specific reserve	$	9		$	6		$	-		$	11		$	-		$	-	$	-	$	26

General reserve	$	2,072		$	4,524		$	392		$	2,659		$	1,159		$	455	$	1,129	$	12,390

Loans and leases receivable:
Individually evaluated for impairment	$	1,681		$	7,530		$	-		$	762		$	-		$	-	$	-	$	9,973
Collectively evaluated for impairment		232,432			358,479			41,646			192,324			85,522			61,071		-		971,474
Total loans and leases, gross at December 31, 2021	$	234,113		$	366,009		$	41,646		$	193,086		$	85,522		$	61,071	$	-	$	981,447

Credit Quality Indicators – Commercial Loans

Management continuously monitors and evaluates the credit quality of FNCB’s commercial loans and leases by regularly reviewing certain credit quality indicators. Management utilizes credit risk ratings as the key credit quality indicator for evaluating the credit quality of FNCB’s loan and lease receivables.

FNCB’s commercial loan classification and credit grading processes are part of the lending, underwriting, and credit administration functions to ensure an ongoing assessment of credit quality. FNCB maintains a formal, written loan classification and credit grading system that includes a discussion of the factors used to assign appropriate classifications of credit grades to loans. The risk grade groupings provide a mechanism to identify risk within the loan portfolio and provide management and the board of directors with periodic reports by risk category. The process also identifies groups of loans that warrant the special attention of management. Accurate and timely loan classification and credit grading is a critical component of loan portfolio management. Loan officers are required to review their loan portfolio risk ratings regularly for accuracy. In addition, the credit risk ratings play an important role in the loan review function, as well as the establishment and evaluation of the provision for loan and lease losses and the ALLL.

The loan review function uses the same risk rating system in the loan review process. Quarterly, FNCB engages an independent third party to assess the quality of the loan portfolio and evaluate the accuracy of ratings with the loan officer’s and management’s assessment.

FNCB’s loan rating system assigns a degree of risk to commercial loans based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information and current economic trends, among other factors. Management analyzes these non-homogeneous loans individually by grading the loans as to credit risk and probability of collection for each type of loan. Commercial and industrial loans include commercial indirect auto loans which are not individually risk rated, and construction, land acquisition and development loans include residential construction loans which are also not individually risk rated. These loans are monitored on a pool basis due to their homogeneous nature as described in “Credit Quality Indicators – Other Loans” below. FNCB risk rates certain residential real estate loans and consumer loans that are part of a larger commercial relationship using a credit grading system as described in “Credit Quality Indicators – Commercial Loans.” The grading system contains the following basic risk categories:

1. Minimal Risk

2. Above Average Credit Quality

3. Average Risk

4. Acceptable Risk

5. Pass - Watch

6. Special Mention

7. Substandard - Accruing

8. Substandard - Non-Accrual

9. Doubtful

10. Loss

This analysis is performed on a quarterly basis using the following definitions for risk ratings:

Pass – Assets rated 1 through 5 are considered pass ratings. These assets show no current or potential problems and are considered fully collectible. All such loans are evaluated collectively for ALLL calculation purposes. However, accruing loans restructured under a TDR that have been performing for an extended period, do not represent a higher risk of loss, and have been upgraded to a pass rating are evaluated individually for impairment.

Special Mention – Assets classified as special mention do not currently expose FNCB to a sufficient degree of risk to warrant an adverse classification but do possess credit deficiencies or potential weaknesses deserving close attention. Special mention assets have a potential weakness or pose an unwarranted financial risk which, if not corrected, could weaken the asset and increase risk in the future.

Substandard – Assets classified as substandard have well defined weaknesses based on objective evidence and are characterized by the distinct possibility that FNCB will sustain some loss if the deficiencies are not corrected.

Doubtful – Assets classified as doubtful have all the weaknesses inherent in those classified as substandard with the added characteristic that such weaknesses make collection or liquidation in full highly questionable and improbable based on current circumstances.

Loss – Assets classified as loss are those considered uncollectible and of such little value that their continuance as assets is not warranted.

Credit Quality Indicators – Other Loans

Certain residential real estate loans, consumer loans, and commercial and municipal indirect auto loans are monitored on a pool basis due to their homogeneous nature. Loans that are delinquent 90 days or more are placed on non-accrual status unless collection of the loan is in process and reasonably assured. FNCB utilizes accruing versus non-accrual status as the credit quality indicator for these loan pools.

The following tables present the recorded investment in loans and leases receivable by major category and credit quality indicator at December 31, 2022 and 2021:

*Credit Quality Indicators*
*December 31, 2022*
	*Commercial Loans*												*Other Loans*
			*Special*								*Subtotal*		*Accruing*		*Non-accrual*		*Subtotal*		*Total*
(in thousands)	*Pass*		*Mention*		*Substandard*		*Doubtful*		*Loss*		*Commercial*		*Loans*		*Loans*		*Other*		*Loans*
Residential real estate	$	43,188	$	434	$	99	$	-	$	-	$	43,721	$	205,887	$	613	$	206,500	$	250,221
Commercial real estate		367,866		7,082		2,028		-		-		376,976		-		-		-		376,976
Construction, land acquisition and development		62,965		797		-		-		-		63,762		2,793		-		2,793		66,555
Commercial and industrial		260,358		829		8,875		-		-		270,062		1,962		-		1,962		272,024
Consumer		-		-		-		-		-		-		92,251		361		92,612		92,612
State and political subdivisions		64,955		-		-		-		-		64,955		-		-		-		64,955
Total	$	799,332	$	9,142	$	11,002	$	-	$	-	$	819,476	$	302,893	$	974	$	303,867	$	1,123,343

*Credit Quality Indicators*
*December 31, 2021*
	*Commercial Loans*												*Other Loans*
			*Special*								*Subtotal*		*Accruing*		*Non-accrual*		*Subtotal*		*Total*
(in thousands)	*Pass*		*Mention*		*Substandard*		*Doubtful*		*Loss*		*Commercial*		*Loans*		*Loans*		*Other*		*Loans*
Residential real estate	$	42,028	$	530	$	77	$	-	$	-	$	42,635	$	190,919	$	559	$	191,478	$	234,113
Commercial real estate		350,904		8,232		6,873		-		-		366,009		-		-		-		366,009
Construction, land acquisition and development		34,869		-		-		-		-		34,869		6,777		-		6,777		41,646
Commercial and industrial		187,554		1,877		1,343		-		-		190,774		2,312		-		2,312		193,086
Consumer		-		-		-		-		-		-		85,291		231		85,522		85,522
State and political subdivisions		61,066		-		-		-		-		61,066		5		-		5		61,071
Total	$	676,421	$	10,639	$	8,293	$	-	$	-	$	695,353	$	285,304	$	790	$	286,094	$	981,447

Included in loans and leases receivable are loans for which the accrual of interest income has been discontinued due to deterioration in the financial condition of the borrowers. The recorded investment in these non-accrual loans was $2.8 million at December 31, 2022 and $3.9 million at December 31, 2021. Generally, loans are placed on non-accrual status when they become 90 days or more delinquent. Once a loan is placed on non-accrual status it remains on non-accrual status until it has been brought current, has six months of performance under the loan terms, and factors indicating reasonable doubt about the timely collection of payments no longer exists. Therefore, loans may be current in accordance with their loan terms, or may be less than 90 days delinquent, and still be on a non-accrual status. There were $79 thousand in consumer loans that were past 90 days or more and still accruing at December 31, 2022, which comprise entirely of unsecured personal loans purchased from a third-party originator. There were no loans past due 90 days or more and still accruing at December 31, 2021.

The following tables present the delinquency status of past due and non-accrual loans and leases at December 31, 2022 and 2021:

	December 31, 2022
	Delinquency Status
	0-29 Days		30-59 Days		60-89 Days		>/= 90 Days
(in thousands)	Past Due		Past Due		Past Due		Past Due		Total
Performing (accruing) loans and leases:
Residential real estate	$	248,953	$	555	$	-	$	-	$	249,508
Commercial real estate		375,431		-		-		-		375,431
Construction, land acquisition and development		66,555		-		-		-		66,555
Commercial and industrial		271,767		113		-		-		271,880
Consumer		90,794		965		413		79		92,251
State and political subdivisions		64,955		-		-		-		64,955
Total performing (accruing) loans and leases		1,118,455		1,633		413		79		1,120,580

Non-accrual loans and leases:
Residential real estate		156		84		16		457		713
Commercial real estate		218		-		-		1,327		1,545
Construction, land acquisition and development		-		-		-		-		-
Commercial and industrial		144		-		-		-		144
Consumer		96		26		53		186		361
State and political subdivisions		-		-		-		-		-
Total non-accrual loans and leases		614		110		69		1,970		2,763
Total loans and leases receivable	$	1,119,069	$	1,743	$	482	$	2,049	$	1,123,343

	December 31, 2021
	Delinquency Status
	0-29 Days		30-59 Days		60-89 Days		>/= 90 Days
(in thousands)	Past Due		Past Due		Past Due		Past Due		Total
Performing (accruing) loans and leases:
Residential real estate	$	233,054	$	406	$	17	$	-	$	233,477
Commercial real estate		363,394		116		-		-		363,510
Construction, land acquisition and development		41,646		-		-		-		41,646
Commercial and industrial		192,584		4		1		-		192,589
Consumer		84,333		754		204		-		85,291
State and political subdivisions		61,071		-		-		-		61,071
Total performing (accruing) loans and leases		976,082		1,280		222		-		977,584

Non-accrual loans and leases:
Residential real estate		67		27		87		455		636
Commercial real estate		1,172		-		-		1,327		2,499
Construction, land acquisition and development		-		-		-		-		-
Commercial and industrial		497		-		-		-		497
Consumer		117		85		15		14		231
State and political subdivisions		-		-		-		-		-
Total non-accrual loans and leases		1,853		112		102		1,796		3,863
Total loans and leases receivable	$	977,935	$	1,392	$	324	$	1,796	$	981,447

The following tables present a distribution of the recorded investment, unpaid principal balance and the related allowance for FNCB’s impaired loans, which have been analyzed for impairment under ASC 310, at December 31, 2022 and 2021. Non-accrual loans, other than TDRs, with balances less than the $100 thousand loan relationship threshold are not evaluated individually for impairment and accordingly, are not included in the following tables. However, these loans are evaluated collectively for impairment as homogeneous pools in the general allowance under ASC 450. Total non-accrual loans, other than TDRs, with balances less than the $100 thousand loan relationship threshold that were evaluated under ASC 450 amounted to $0.7 million and $0.6 million at December 31, 2022 and 2021, respectively.

	December 31, 2022
	Recorded		Unpaid Principal		Related
(in thousands)	Investment		Balance		Allowance
With no allowance recorded:
Residential real estate	$	431	$	509	$	-
Commercial real estate		1,071		1,339		-
Construction, land acquisition and development		-		-		-
Commercial and industrial		218		218		-
Consumer		-		-		-
State and political subdivisions		-		-		-
Total impaired loans with no related allowance recorded		1,720		2,066		-

With a related allowance recorded:
Residential real estate		1,041		1,041		17
Commercial real estate		4,695		4,695		15
Construction, land acquisition and development		-		-		-
Commercial and industrial		144		362		2
Consumer		-		-		-
State and political subdivisions		-		-		-
Total impaired loans with a related allowance recorded		5,880		6,098		34

Total of impaired loans:
Residential real estate		1,471		1,550		17
Commercial real estate		5,766		6,034		15
Construction, land acquisition and development		-		-		-
Commercial and industrial		363		580		2
Consumer		-		-		-
State and political subdivisions		-		-		-
Total impaired loans	$	7,600	$	8,164	$	34

	December 31, 2021
	Recorded		Unpaid Principal		Related
(in thousands)	Investment		Balance		Allowance
With no allowance recorded:
Residential real estate	$	395	$	463	$	-
Commercial real estate		2,499		4,230		-
Construction, land acquisition and development		-		-		-
Commercial and industrial		314		347		-
Consumer		-		-		-
State and political subdivisions		-		-		-
Total impaired loans with no related allowance recorded		3,208		5,040		-

With a related allowance recorded:
Residential real estate		1,286		1,285		9
Commercial real estate		5,031		5,031		6
Construction, land acquisition and development		-		-		-
Commercial and industrial		448		666		11
Consumer		-		-		-
State and political subdivisions		-		-		-
Total impaired loans with a related allowance recorded		6,765		6,982		26

Total of impaired loans:
Residential real estate		1,681		1,748		9
Commercial real estate		7,530		9,261		6
Construction, land acquisition and development		-		-		-
Commercial and industrial		762		1,013		11
Consumer		-		-		-
State and political subdivisions		-		-		-
Total impaired loans	$	9,973	$	12,022	$	26

The following table presents the average balance and interest income by loan category recognized on impaired loans for the years ended December 31, 2022 and 2021:

	Year Ended December 31,
	2022				2021
	Average		Interest		Average		Interest
(in thousands)	Balance		Income (1)		Balance		Income (1)
Residential real estate	$	1,640	$	65	$	1,966	$	71
Commercial real estate		6,614		251		8,052		223
Construction, land acquisition and development		-		-		33		2
Commercial and industrial		482		19		969		9
Consumer		-		-		-		-
State and political subdivisions		-		-		-		-
Total impaired loans	$	8,736	$	335	$	11,020	$	305

(1) Interest income represents income recognized on performing TDRs.

The additional interest income that would have been earned on non-accrual and restructured loans had these loans performed in accordance with their original terms approximated to $175 thousand and $215 thousand, respectively, for years ended December 31, 2022 and 2021.

Troubled Debt Restructured Loans

TDRs at December 31, 2022 and 2021 were $5.7 million and $6.9 million, respectively. Accruing and non-accruing TDRs were $5.5 million and $0.2 million, respectively at December 31, 2022 and $6.7 million and $0.2 million, respectively at December 31, 2021. There were approximately $26 thousand in specific reserves established for TDRs at both December 31, 2022 and 2021. FNCB was not committed to lend additional funds to any loan classified as a TDR at December 31, 2022 and 2021.

The modification of the terms of loans classified as TDRs may include one or a combination of the following, among others: a reduction of the stated interest rate of the loan, an extension of the maturity date, capitalization of real estate taxes, a payment modification under a forbearance agreement, or a permanent reduction of the recorded investment in the loan. There were no loans modified as TDRs during the year ended December 31, 2022.

There was one loan that was modified as a TDR during the year ended December 31, 2021. The modification involved a commercial and industrial loan that was granted a principal forbearance. The pre- and post-modification recorded investment for this loan at the time of modification was $235 thousand.

There were no TDRs modified within the previous 12 months that defaulted during the years ended December 31, 2022 and 2021.

Residential Real Estate Loan Foreclosures

There were three residential real estate loans with an aggregate recorded investment of $215 thousand that were in the process of foreclosure at December 31, 2022. There were two residential real estate loans with an aggregate recorded investment of $98 thousand that were in the process of foreclosure at December 31, 2021. FNCB did not have any residential real estate properties in OREO at December 31, 2022.

In 2021, FNCB obtained a deed in lieu of foreclosure for a residential mortgage with a recorded investment of $138 thousand. FNCB accepted an offer of $205 thousand at which time the property went under agreement of sale and the sale closed prior to December 31, 2021. At the time of acceptance, FNCB transferred the property to OREO at the selling price less cost to sell of $178 thousand and recorded a positive valuation adjustment of $40 thousand, which is included in non-interest income for the year ended December 31, 2021.