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 institution that were included in loans receivable at

December 31, 2016

and

2015

and the interim periods ended

March 31, 2017

and

June 30, 2017.

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, and interim periods within those years, ended

December 31, 2016

and

2015,

and 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. 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

first

two

interim periods of

2017.

Debt Securities

The following tables present the amortized cost, gross unrealized gains and losses, and the fair value of FNCB’s available-for-sale debt securities at

June 30, 2018

and

December 31, 2017:

	June 30, 2018
			Gross		Gross
			Unrealized		Unrealized
	Amortized		Holding		Holding		Fair
(in thousands)	Cost		Gains		Losses		Value
Available-for-sale debt securities:
Obligations of state and political subdivisions	$	154,461	$	9	$	4,015	$	150,455
U.S. government/government-sponsored agencies:
Collateralized mortgage obligations - residential		35,144		-		1,183		33,961
Collateralized mortgage obligations - commercial		76,219		-		3,145		73,074
Mortgage-backed securities		24,666		21		531		24,156
Corporate debt securities		4,000		-		43		3,957
Asset-backed securities		2,388		-		33		2,355
Negotiable certificates of deposit		2,924		-		19		2,905
Total available-for-sale debt securities	$	299,802	$	30	$	8,969	$	290,863

	December 31, 2017
			Gross		Gross
			Unrealized		Unrealized
	Amortized		Holding		Holding		Fair
(in thousands)	Cost		Gains		Losses		Value
Available-for-sale debt securities:
Obligations of state and political subdivisions	$	146,812	$	567	$	1,380	$	145,999
U.S. government/government-sponsored agencies:
Collateralized mortgage obligations - residential		36,100		73		516		35,657
Collateralized mortgage obligations - commercial		76,396		-		978		75,418
Mortgage-backed securities		22,254		174		117		22,311
Corporate debt securities		4,000		58		-		4,058
Asset-backed securities		3,100		3		17		3,086
Negotiable certificates of deposit		2,924		6		-		2,930
Total available-for-sale debt securities	$	291,586	$	881	$	3,008	$	289,459

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

June 30, 2018.

June 30, 2018

and

December

31,

2017,

securities with a carrying amount of

$284.6

million and

$282.3

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

The following table presents the maturity information of FNCB’s available-for-sale debt securities at

June 30, 2018.

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:

	June 30, 2018
	Amortized		Fair
(in thousands)	Cost		Value
Amounts maturing in:
One year or less	$	496	$	495
After one year through five years		54,566		53,649
After five years through ten years		102,255		99,240
After ten years		4,068		3,933
Asset-backed securities		2,388		2,355
Collateralized mortgage obligations		111,363		107,035
Mortgage-backed securities		24,666		24,156
Total	$	299,802	$	290,863

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

$4.6

million for the

three

and

six

months ended

June 30, 2018,

with gross losses of

thousand realized upon the sales. There were

gains realized upon the sales for the

three

and

six

months ended

June 30, 2018.

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

$53.3

million and

$76.5

million for the

three

and

six

months ended

June 30, 2017,

respectively, with gross gains of

$736

thousand and

$1,014

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

$43

thousand for the

three

and

six

months ended

June 30, 2017.

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

June 30, 2018

and

December 31, 2017,

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

	June 30, 2018
	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 state and political subdivisions		109	$	121,305	$	2,492		27	$	26,559	$	1,523		136	$	147,864	$	4,015
U.S. government/government-sponsored agencies:
Collateralized mortgage obligations - residential		14		32,961		1,183		1		16		-		15		32,977		1,183
Collateralized mortgage obligations - commercial		23		63,283		2,578		2		9,790		567		25		73,073		3,145
Mortgage-backed securities		8		18,650		405		2		1,985		126		10		20,635		531
Corporate debt securities		3		3,957		43		-		-		-		3		3,957		43
Asset-backed securities		1		492		3		1		1,863		30		2		2,355		33
Negotiable certificates of deposit		12		2,905		19		-		-		-		12		2,905		19
Total		170	$	243,553	$	6,723		33	$	40,213	$	2,246		203	$	283,766	$	8,969

	December 31, 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 state and political subdivisions		56	$	65,056	$	497		26	$	24,595	$	883		82	$	89,651	$	1,380
U.S. government/government-sponsored agencies:
Collateralized mortgage obligations - residential		10		24,686		516		1		53		-		11		24,739		516
Collateralized mortgage obligations - commercial		22		64,344		672		2		10,076		306		24		74,420		978
Mortgage-backed securities		4		8,454		56		2		2,058		61		6		10,512		117
Corporate debt securities		-		-		-		-		-		-		-		-		-
Asset-backed securities		1		2,443		17		-		-		-		1		2,443		17
Negotiable certificates of deposit		1		247		-		-		-		-		1		247		-
Total		94	$	165,230	$	1,758		31	$	36,782	$	1,250		125	$	202,012	$	3,008

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

203

securities in an unrealized loss position at

June 30, 2018,

including

136

obligations of state and political subdivisions,

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

negotiable certificates of deposit,

two

asset-backed securities and

three

corporate bonds. Management performed a review of all securities in an unrealized loss position as of

June

30,2018,

and determined that movements in the fair values of the securities were consistent with changes 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

June 30, 2018.

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 securities, management concluded that the individual unrealized losses were temporary and OTTI did

not

exist at

June 30, 2018.

Equity Securities

FNCB’s investment in equity securities is comprised entirely of a mutual fund investment comprised of

one

- to

four

-family residential mortgage-backed securities collateralized by properties within FNCB’s geographical market. At

December 31, 2017,

this mutual fund had an amortized cost of

$1.0

million and an unrealized loss of

$82

thousand, resulting in a fair value of

$918

thousand. In accordance with ASU

2016

01,

Financial Instruments – Overall (Subtopic

825

): “Recognition and Measurement of Financial Assets and Financial Liabilities” which became effective

January 1, 2018,

FNCB will recognize any changes in the fair value of this equity security in the consolidated statements of income on a prospective basis. As a result of the adoption of this new accounting guidance on

January 1, 2018,

FNCB recorded a

one

-time reclassification between retained earnings and accumulated other comprehensive loss for the unrealized loss on this mutual fund, net of taxes, of

$65

thousand. During the

three

and

six

months ended

June 30, 2018,

the fair value of this equity security declined by

thousand and

$26

thousand, respectively, which is included in net loss on equity securities in the consolidated statements of income. The following table presents unrealized and realized gains and losses recognized in net income on equity securities for the

six

months ended

June 30, 2018.

For the Six Months Ended June 30,
(in thousands)	2018
Net losses recognized on equity securities	$	(26	)
Less: net gains (losses) recognized on equity securities sold		-
Unrealized losses on equity securities held	$	(26	)

Restricted Securities

The following table presents FNCB’s investment in restricted securities at

June 30, 2018

and

December 31, 2017.

Restricted securities have limited marketability and are carried at cost:

	June 30,		December 31,
(in thousands)	2018		2017
Stock in Federal Home Loan Bank of Pittsburgh	$	7,954	$	2,753
Stock in Atlantic Community Bankers Bank		10		10
Total restricted securities, at cost	$	7,964	$	2,763

Management noted

indicators of impairment for the Federal Home Loan Bank (“FHLB”) of Pittsburgh or Atlantic Community Bankers Bank stock at

June 30, 2018

and

December 31, 2017.

Equity Securities without Readily Determinable Fair Values

FNCB owns a

$1.7

million investment in the common stock of a privately-held bank holding company. The common stock was purchased during

2017

as part of a private placement pursuant to an exemption from the registration requirements of the Securities Act of

1933

for offerings

not

involving any public offering. The common stock of such bank holding company 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

$1.7

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

June 30, 2018.

As part of its qualitative assessment, management engaged an independent

third

party to provide a valuation of this investment as of

June 30, 2018,

which indicated that the investment was

not

impaired. Management determined that

adjustment for impairment was required at

June 30, 2018.