Significant Accounting Policies (Policies)

3 Months Ended

Mar. 31, 2023

Accounting Policies [Abstract]

Marketable Securities, Policy [Policy Text Block]

Allowance for Credit Loss ("ACL") on Debt Securities: The ACL is a valuation account that is deducted from the amortized cost basis to present the net amount expected to be collected on the held-to-maturity portfolio. At March 31, 2023, FNCB had no securities classified as held-to-maturity.

Upon adoption of ASU 2016-13, management no longer evaluates securities for other than temporary impairment ("OTTI"), as ASC Subtopic 326-30, "Financial Instruments—Credit Losses—Available-for-Sale Debt Securities," changes the accounting for recognizing impairment on available-for-sale debt securities. Each quarter management evaluates impairment where there has been a decline in fair value below the amortized cost basis of a security to determine whether there is a credit loss associated with the decline in fair value. Management considers the nature of the collateral, potential future changes in collateral values, default rates, delinquency rates, third-party credit support, credit ratings, interest rate changes since purchase, volatility of the security’s fair value and historical loss information for financial assets secured with similar collateral among other factors. Credit losses are calculated individually, rather than collectively, using a discounted cash flow ("DCF") method, whereby management compares the present value of expected cash flows with the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance on available-for-sale debt securities is recorded for the credit loss, limited by the amount that the fair value is less than the amortized cost basis. Any impairment that has not been recorded through an allowance is recognized in other comprehensive income (loss).

FNCB’s estimate of expected credit losses includes a measure of the expected risk of credit loss even if that risk is remote. However, FNCB does not measure expected credit losses on an investment security in which historical credit loss information adjusted for current conditions and reasonable and supportable forecast results in an expectation that nonpayment of the amortized cost basis is zero. Management does not expect nonpayment of the amortized cost basis to be zero solely on the basis of the current value of collateral securing the security but, instead, also considers the nature of the collateral, potential future changes in collateral values, default rates, delinquency rates, third-party guarantees, credit ratings, interest rate changes since purchase, volatility of the security’s fair value and historical loss information for financial assets secured with similar collateral. FNCB performed an analysis that determined that the following securities have a zero expected credit loss: U.S. government agencies, mortgage-backed securities of U.S. government and government-sponsored agencies, as all of the U.S. government agencies and U.S. government agency backed securities have the full faith and credit backing of the United States Government or one of its agencies. 

The allowance on available-for-sale debt securities may be in full or a portion thereof, and is recorded as an expense (credit) within the provision for credit losses on the consolidated statements of income. Losses are charged against the allowance when management believes the uncollectibility of an available-for-sale debt security is confirmed based on the above-described analysis. As of March 31, 2023 and January 1, 2023 (i.e. ASU 2016-13 adoption), there was no allowance established for FNCB's available-for-sale debt securities.

Financing Receivable [Policy Text Block]

Loans:  FNCB reports loans and leases held for in the portfolio at amortized cost.  Amortized cost is the principal balance outstanding net of the unamortized balance of any deferred fees or costs and the unamortized balance of any premiums or discounts on loans purchased through third-party originators.  

Generally, for originated loans, loan fees and certain direct origination costs are deferred and amortized into interest income over the contractual term of the loan using the level-yield method over the estimated lives of the related loans. When a loan is paid off, the unamortized portion of deferred fees or costs are recognized in interest income. Interest income on originated loans is accrued based upon the daily principal amount outstanding except for loans on non-accrual status.  

For purchased loans, interest income is accrued based upon the daily principal amount outstanding and is then further adjusted by the accretion of any discount or amortization of any premium associated with the loan that was recognized based on the acquisition date fair value. When a loan is paid off, the unamortized portion of any premiums or discounts on loans are recognized in interest income.

Loans and Leases Receivable, Allowance for Loan Losses Policy [Policy Text Block]

ACL on Loans: The ACL on the loan portfolio is a significant accounting estimate used in the preparation of the FNCB's consolidated financial statements. Upon adoption of ASU 2016-13 FNCB replaced the incurred loss impairment model that recognizes losses when it becomes probable that a credit loss will be incurred, with a requirement to recognize lifetime expected credit losses immediately when a financial asset is originated or purchased. The ACL is a valuation account that is deducted from the amortized cost basis of loans to present the net amount expected to be collected on the loans. Loans, or portions thereof, are charged off against the allowance when they are deemed uncollectible. Expected recoveries do not exceed the aggregate of amounts previously charged-off and expected to be charged- off.  The allowance is comprised of reserves measured on a collective (pool) basis based on a lifetime loss-rate model when similar risk characteristics exist. Loans that do not share risk characteristics are evaluated on an individual basis.  Arriving at an appropriate level of ACL involves a high degree of judgment. While management uses available information to recognize losses on loans, changing economic conditions and the economic prospects of the borrowers may necessitate future additions or reductions to the allowance.

FNCB estimates expected credit losses using the DCF method for all loan portfolio segments measured on a collective (pool) basis. For each loan segment, a cash flow projection is generated at the instrument level. A default rate and loss given default assumption are applied to the pool’s projective model of cash flows taking into consideration the effects of prepayments and principal curtailment effects. The analysis produces expected cash flows for each instrument in the pool by pairing loan-level term information (maturity date, payment amount, interest rate, etc.) with top-down pool assumptions (default rates and prepayment speeds).

Management has determined that peer loss experience provides the best basis for its assessment of expected credit losses to determine the ACL. FNCB utilizes peer call report data to measure historical credit loss experience with similar risk characteristics within the segments over an economic cycle. Management reviews the historical loss information to appropriately adjust for differences in current asset specific risk characteristics. Management also considered further adjustments to historical loss information for current conditions and reasonable and supportable forecasts that differ from the conditions that existed for the period over which historical information was evaluated. For all segment models for collectively evaluated loans, FNCB incorporates one macroeconomic driver, the national unemployment rate, using a statistical regression modeling methodology. Management determined that four quarters currently represents a reasonable and supportable forecast period. For the contractual term that extend beyond the reasonable and supportable forecast period, FNCB reverts to historical loss information within eight quarters using a straight-line approach. Management may apply different reversion techniques depending on the economic environment for the financial asset portfolio and as of the current period has utilized a linear reversion technique.

Management also considers certain qualitative factors in its evaluation of expected credit losses, these factors include: (i) changes in the credit quality trends of a respective segment which may be measured by risk ratings, FICO scores, delinquency rates, and payment performance, (ii) changes in independent third-party loan reviews and regulatory exam ratings, (iii) changes in local unemployment rates, (iv) portfolio segment growth rates and concentrations, and (v) other external factors that may affect bank lending and operations such as a pandemic, natural disaster, or loss of a major employer, among others.

Impaired Financing Receivable, Policy [Policy Text Block]

Individually Evaluated Loans:  Prior to the adoption of ASU 2016-13 on January 1, 2023, a loan was individually evaluated when the loan was considered impaired.  A loan was considered to be impaired when based on current information and events, it was probable that FNCB would not be able to collect all amounts due from the borrower in accordance with the contractual terms of the loan, including scheduled interest payments.

With the adoption of ASU 2016-13, loans that do not share risk characteristics with existing pools are evaluated on an individual basis.  FNCB considers a loan to be collateral dependent when management has determined that foreclosure of the collateral is probable, or where the borrower is experiencing financial difficulty and  repayment of the financial asset to expected to be provided substantially through the operation or sale of the collateral.  When repayment is expected to be from the operation of the collateral, the specific credit loss reserve is calculated as the amount by which the amortized cost basis of the financial asset exceeds the NPV from the operation of the collateral. When repayment is expected to be from the sale of the collateral, the specific credit loss reserve is calculated as the amount by which the amortized cost basis of the financial asset exceeds the fair value of the underlying collateral less estimated cost to sell.  The allowance may be zero if the fair value of the collateral at the measurement date exceeds the amortized cost basis of the financial asset.

Financing Receivable, Fee and Interest Income [Policy Text Block]

Accrued Interest: Upon adoption of ASU 2016-13 on January 1, 2023, FNCB made the following elections regarding accrued interest receivable: (i) present accrued interest receivable balances separately on the consolidated statements of condition; (ii) exclude accrued interest from the measurement of the ACL, including investments and loans; and (iii) continue to write-off accrued interest receivable by reversing interest income when a loan is placed on non-accrual. FNCB's policy is to write-off accrued interest when a loan is placed on non-accrual.  Historically, FNCB has not experienced uncollectible accrued interest receivable on investment debt securities.

Liability for Off-balance-sheet Credit Related Financial Instruments, Policy [Policy Text Block]

ACL for Unfunded Commitments:  The exposure is a component of other liabilities on FNCB’s consolidated statement of financial condition and represents the estimate for probable credit losses inherent in unfunded commitments to extend credit.  Unfunded commitments to extend credit include unused portions of lines of credit, availability on construction and land development loans and standby and commercial letters of credit. The process used to determine the ACL for these exposures is consistent with the process for determining the allowance for loans, as adjusted for estimated funding probabilities or loan equivalency factors.  A charge (credit) to provision for unfunded commitments on the consolidated statements of income is made to account for the change in the ACL on unfunded commitment exposures between reporting periods.

New Accounting Pronouncements, Policy [Policy Text Block]

New Authoritative Accounting Guidance

On January 1, 2023, FNCB adopted ASU 2016-13. ASU 2016-13 significantly changes the impairment model for most financial assets that are measured at amortized cost and certain other instruments from an incurred loss model to an expected loss model. FNCB applied the new guidance using the modified-retrospective approach. Related to the implementation of ASU 2016-13, FNCB recorded a reduction in the ACL on loans and leases of $2.6 million, additional reserves for unfunded commitments of $1.3 million, a reduction in deferred tax assets of $287 thousand, and an increase to retained earnings of $1.1 million. The adoption of ASU 2013-16 did not have an effect on FNCB's available-for-sale debt securities. 

The following table below presents the impact of ASU 2016-13 on the consolidated balance sheet:

	January 1, 2023
(in thousands)	As reported Under ASU 2016-13			Pre-ASU 2016-13			Impact of ASU 2016-13
Assets:
ACL on loans and leases:
Residential real estate	$	(1,187	)	$	(2,215	)	$	1,028
Commercial real estate		(2,579	)		(4,193	)	$	1,614
Construction, land acquisition and development		(1,814	)		(747	)	$	(1,067	)
Commercial and industrial		(3,887	)		(4,099	)	$	212
Consumer		(1,677	)		(1,307	)	$	(370	)
State and political subdivisions		(413	)		(503	)	$	90
Unallocated		-			(1,129	)	$	1,129
Total ACL on loans		(11,557	)		(14,193	)		2,636
Deferred income taxes	$	15,759		$	16,046		$	(287	)
Liabilities:
Liability for credit losses for unfunded commitments	$	(2,217	)	$	(948	)	$	(1,269	)
Shareholder's equity:
Retained earnings	$	(65,953	)	$	(64,873	)	$	(1,080	)

On January 1, 2023, FNCB adopted ASU 2022-02, Financial Instruments—Credit Losses (Topic 326): "Troubled Debt Restructurings and Vintage Disclosures."  ASU 2022-02 eliminates the TDR recognition and measurement guidance and, instead, requires that an entity evaluate (consistent with the accounting for other loan modifications) whether the modification represents a new loan or a continuation of an existing loan. The amendments also enhance existing disclosure requirements and introduce new requirements related to certain modifications of receivables made to borrowers experiencing financial difficulty. For public business entities, these amendments require that an entity disclose current-period gross charge-offs by year of origination for financing receivables and net investment in leases within the scope of Subtopic 326-20. Gross charge-off information must be included in the vintage disclosures required for public business entities in accordance with paragraph 326-20-50-6, which requires that an entity disclose the amortized cost basis of financing receivables by credit quality indicator and class of financing receivable by year of origination. 

Refer to Note 2 to FNCB’s consolidated financial statements included in the Annual Report on Form 10-K for the fiscal year ended December 31, 2022 (the "2022 Annual Report") for a discussion of additional accounting guidance applicable to FNCB that will be adopted in future periods.