Note

Securities

During the

third

quarter of

2017,

management identified

two

subordinated notes issued by other financial institutions in the amount of

$1.0

million each and

$1.0

million in mandatory-redeemable preferred stock of a subsidiary of another financial institut

ion that were included in loans receivable at

December 31, 2016

and

2015.

Management determined that these financial instruments are in fact securities and upon identification reclassified the recorded investment in these instruments of

$3.0

million from loans receivable to available-for-sale securities. Management also conducted an assessment of materiality of the reclassification to determine if FNCB’s previously-issued consolidated financial statements should be amended.

Based on its qualitative and quantitative assessment of materiality, management determined that the reclassification did

not

have a material impact to FNCB

’s financial position or results of operations as of and for the years ended

December 31, 2016

and

2015,

including the interim periods within those years. In addition, the reclassification did

not

have a material impact to FNCB’s financial position or results of operations as of and for the interim periods ended

March 31, 2017

and

June 30, 2017.

Accordingly, management concluded that FNCB’s previously-issued consolidated financial statements and notes to the consolidated financial statements could still be relied upon. However, management has elected to correct the error in these current-period consolidated financial statements and notes to the consolidated financial statements by adjusting the prior-period information for comparability. Management engaged an independent

third

party to conduct a valuation of and provide fair values for these available-for-sale securities as of

September 30, 2017,

December 31, 2016,

December 31, 2015

and for each quarterly period-end of

2017

and

2016.

Based on the valuations, management adjusted these available-for-sale securities to fair value at

December 31, 2016

and

2015

and each of the quarter-end periods of

2017

and

2016.

Specifically, these reclassifications and valuations resulted in the following adjustments to balances included in previously-issued consolidated statements of financial position at

December 31, 2016

and

2015

of:

) increases to securities available for sale of

$3.3

million, or

1.22%,

and

$3.3

million, or

1.29%;

) decreases to loans, net of the allowance for loan and lease losses of

$3.0

million, or

0.41%,

for both period ends;

) increases to total capital, specifically accumulated other comprehensive income, net of income taxes, of

$224

thousand, or

0.25%,

and

$178

thousand, or

0.21%;

and

) decreases to net deferred tax assets of

$115

thousand, or

0.43%,

and

$91

thousand, or

0.32%,

respectively. Adjustments to these balances at each of the quarter-end periods of

2017

and

2016

were comparable to those made at

December 31, 2016

and

2015,

which management has deemed to be immaterial. These reclassifications and valuations had

effect on the consolidated statements of income, the consolidated statements of cash flows, or on earnings per share for the annual and interim periods of

2016

and interim periods of

2017.

During the

nine

months ended

September 30, 2017,

FNCB purchased

$2.0

million in the subordinated notes of another financial institution. FNCB has classified the subordinated notes and mandatory-redeemable preferred stock as corporate debt securities withi

n its available-for-sale securities portfolio.

The following tables present t

he amortized cost, gross unrealized gains and losses, and the fair value of FNCB’s securities at

September 30, 2017

and

December 31, 2016:

	September 30, 2017
			Gross		Gross
			Unrealized		Unrealized
	Amortized		Holding		Holding		Fair
(in thousands)	Cost		Gains		Losses		Value
Available-for-sale:
Obligations of U.S. government agencies	$	-	$	-	$	-	$	-
Obligations of state and political subdivisions		144,518		1,207		1,025		144,700
U.S. government/government-sponsored agencies:
Collateralized mortgage obligations - residential		35,216		221		165		35,272
Collateralized mortgage obligations - commercial		67,103		7		651		66,459
Mortgage-backed securities		22,335		258		71		22,522
Corporate debt securities		5,000		445		-		5,445
Asset-backed securities		3,517		6		11		3,512
Negotiable certificates of deposit		3,172		20		-		3,192
Equity securities		1,010		-		75		935
Total available-for-sale securities	$	281,871	$	2,164	$	1,998	$	282,037

	December 31, 2016
			Gross		Gross
			Unrealized		Unrealized
	Amortized		Holding		Holding		Fair
(in thousands)	Cost		Gains		Losses		Value
Available-for-sale:
Obligations of U.S. government agencies	$	12,152	$	36	$	-	$	12,188
Obligations of state and political subdivisions		119,919		257		2,303		117,873
U.S. government/government-sponsored agencies:
Collateralized mortgage obligations - residential		17,969		155		40		18,084
Collateralized mortgage obligations - commercial		100,064		154		868		99,350
Mortgage-backed securities		20,593		159		176		20,576
Corporate debt securities		3,500		339		47		3,792
Asset-backed securities		-		-		-		-
Negotiable certificates of deposit		3,172		44		-		3,216
Equity securities		1,010		-		74		936
Total available-for-sale securities	$	278,379	$	1,144	$	3,508	$	276,015

Except for securities of U.S. government and government-sponsored agencies there were

securities of any individual issuer that exceeded

10.0%

of shareholders

’ equity at

September 30, 2017.

September 30, 2017

and

December

31,

2016,

securities with a carrying amount of

$266.1

million and

$271.3

million, respectively, were pledged as collateral to secure public deposits and for other purposes.

The following table shows the

amortized cost and approximate fair value of FNCB’s available-for-sale debt securities at

September 30, 2017

by contractual maturity. Expected maturities will differ from contractual maturity because issuers

may

have the right to call or prepay obligations with or without call or prepayment penalties. Because 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 maturity summary:

	September 30, 2017
	Amortized		Fair
(in thousands)	Cost		Value
Amounts maturing in:
One year or less	$	248	$	248
After one year through five years		29,192		29,367
After five years through ten years		122,250		122,377
After ten years		1,000		1,345
Asset-backed securities		3,517		3,512
Collateralized mortgage obligations		102,319		101,731
Mortgage-backed securities		22,335		22,522
Total	$	280,861	$	281,102

Gross proceeds from the sale of

available-for-sale securities were

$54.5

million and

$131.0

million for the

three

and

nine

months ended

September 30, 2017,

respectively, with gross gains of

$0.4

million and

$1.4

million, respectively realized upon the sales. Gross losses realized upon the sales were

$24

thousand and

$67

thousand for the

three

and

nine

months ended

September 30, 2017.

There were

sales of available-for-sale securities for the

three

months ended

September 30, 2016.

Gross proceeds from the sale of available-for-sale securities were

$32.6

million for the

nine

months ended

September 30, 2016,

with gross gains of

$960

thousand realized upon the sales. There were

losses realized upon the sales of available-for-sale securities for the

nine

months ended

September 30, 2016.

he following tables present the number, fair value and gross unrealized losses of available-for-sale securities with unrealized losses at

September 30, 2017

and

December 31, 2016,

aggregated by investment category and length of time the securities have been in an unrealized loss position:

	September 30, 2017
	Less than 12 Months						12 Months or Longer						Total
	Number				Gross		Number				Gross		Number				Gross
	of		Fair		Unrealized		of		Fair		Unrealized		of		Fair		Unrealized
(dollars in thousands)	Securities		Value		Losses		Securities		Value		Losses		Securities		Value		Losses
Obligations of US government agencies		-	$	-	$	-		-	$	-	$	-		-	$	-	$	-
Obligations of state and policitical subdivisions		33		36,928		474		16		15,302		551		49		52,230		1,025
U.S. government/government-sponsored agencies:
Collateralized mortgage obligations - residential		6		17,596		165		1		77		-		7		17,673		165
Collateralized mortgage obligations - commercial		19		63,381		651		-		-		-		19		63,381		651
Mortgage-backed securities		5		6,205		71		-		-		-		5		6,205		71
Corporate debt securities		-		-		-		-		-		-		-		-		-
Asset-backed securities		1		2,768		11		-		-		-		1		2,768		11
Negotiable certificates of deposit		-		-		-		-		-		-		-		-		-
Equity securities		-		-		-		1		925		75		1		925		75
Total		64	$	126,878	$	1,372		18	$	16,304	$	626		82	$	143,182	$	1,998

	December 31, 2016
	Less than 12 Months						12 Months or Longer						Total
	Number				Gross		Number				Gross		Number				Gross
	of		Fair		Unrealized		of		Fair		Unrealized		of		Fair		Unrealized
(dollars in thousands)	Securities		Value		Losses		Securities		Value		Losses		Securities		Value		Losses
Obligations of U.S. government agencies		-	$	-	$	-		-	$	-	$	-		-	$	-	$	-
Obligations of state and policitical subdivisions		82		88,479		2,303		-		-		-		82		88,479		2,303
U.S. government/government-sponsored agencies:
Collateralized mortgage obligations - residential		2		4,514		40		1		175		-		3		4,689		40
Collateralized mortgage obligations - commercial		17		70,146		868		-		-		-		17		70,146		868
Mortgage-backed securities		5		6,495		176		-		-		-		5		6,495		176
Corporate debt securities		-		-		-		1		453		47		1		453		47
Asset-backed securities		-		-		-		-		-		-		-		-		-
Negotiable certificates of deposit		-		-		-		-		-		-		-		-		-
Equity securities		-		-		-		1		926		74		1		926		74
Total		106	$	169,634	$	3,387		3	$	1,554	$	121		109	$	171,188	$	3,508

Management evaluates individual securities in an unrealized loss position quarterly for

other than temporary impairment (“OTTI”). 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 credit deterioration of the issuer, whether or

not

management intends to sell the security, and whether it is more likely than

not

that FNCB will be required to sell the security prior to recovery of its amortized cost.

There were

securities in an unrealized loss position at

September 30, 2017,

including

obligations of state and political subdivisions,

securities issued by a U.S. government or government-sponsored agency,

one

asset-backed security, and

one

equity security. Management performed a review of all securities in an unrealized loss position as of

September 30, 2017,

and determined that movements in the fair values of the securities were consistent with the change in market interest rates. In addition, as part of its review, management noted that there was

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 at

September 30, 2017.

FNCB does

not

intend to sell the securities, nor is it more likely than

not

that it will be required to sell the securities, prior to recovery of their amortized cost. Based on the results of its review and considering the attributes of these debt and equity securities, management concluded that the individual unrealized losses were temporary and OTTI did

not

exist at

September 30, 2017.

Investment in

the Federal Home Loan Bank (“FHLB”) of Pittsburgh stock has limited marketability and is carried at cost. FNCB’s investment in FHLB of Pittsburgh stock totaled

$2.5

million and

$3.3

million at

September 30, 2017

and

December

31,

2016,

respectively. Management noted

indicators of impairment for the FHLB of Pittsburgh stock at

September 30, 2017

and

December 31, 2016.

During the

third

quarter of

2017,

FNCB purchased

$1.2

million, representing approximately

4.9%,

of the common stock of a privately-held bank holding company. The common stock was purchased as part of a private placement pursuant to an exemption from the r

egistration requirements of the Securities Act of

1933

for offerings

not

involving any public offering. The common stock is

not

currently traded on any established market, and is

not

expected to be traded in the near future on any securities exchange or established over-the-counter market. FNCB has elected to account for this transaction as an investment in an equity security without a readily determinable fair value. An equity security without a readily determinable fair value shall be written down to its fair value if a qualitative assessment indicates that the investment is impaired and the fair value of the investment is less than its carrying value. The

$1.2

million investment is included in other assets in the consolidated statements of financial condition at

September 30, 2017.

Management engaged an independent

third

party to provide a valuation of this investment as of

September 30, 2017.

The valuation indicated that the investment was

not

impaired and accordingly,

adjustment for impairment is required at

September 30, 2017.