Note

Loans

The following table summarizes loans receivable, net, by category at

March 31, 2019

and

December 31, 2018:

	March 31,			December 31,
(in thousands)	2019			2018
Residential real estate	$	161,938		$	164,833
Commercial real estate		266,617			262,778
Construction, land acquisition and development		22,388			20,813
Commercial and industrial		156,521			150,962
Consumer		168,119			176,784
State and political subdivisions		59,784			59,037
Total loans, gross		835,367			835,207
Unearned income		(68	)		(70	)
Net deferred loan costs		3,565			3,963
Allowance for loan and lease losses		(9,253	)		(9,519	)
Loans, net	$	829,611		$	829,581

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

, “Related Party Transactions” to these consolidated financial statements.

FNCB originates

one

- to

four

-family mortgage loans for sale in the secondary market. During the quarter ended

March 31, 2019,

one

-to

four

-family mortgages sold on the secondary market were

$1.9

million. Net gains on the sale of residential mortgage loans for the

three

months ended

March 31, 2019

and

2018

were

$56

thousand and

$49

thousand, respectively. FNCB retains servicing rights on mortgages sold on the secondary market. At

March 31, 2019

and

December 31, 2018,

there were

$609

thousand and

$820

thousand in

one

-to

four

-family residential mortgage loans held for sale, respectively.

There were

sales of guaranteed loans during the

three

months ended

March 31, 2019.

During the

three

months ended

March 31, 2018,

FNCB sold the guaranteed principal balance of loans that were guaranteed by the Small Business Administration (“SBA”) totaling

$5.0

million. Net gains realized upon the sales for the period ended

March 31, 2018

and included in non-interest income totaled

$251

thousand. FNCB retained the servicing rights on these loans.

The unpaid principal balance of loans serviced for others, including residential mortgages and SBA guaranteed loans were

$107.6

million at

March 31, 2019

and

$108.4

million at

December 31, 2018.

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, judgments, and bankruptcies, or borrowers with questionable repayment capacity as evidenced by low credit scores or high debt-burden ratios.

There were

material changes to the risk characteristics of FNCB’s loan segments, loan classification and credit grading systems and methodology for determining the adequacy of the ALLL during the

three

months ended

March 31, 2019.

Refer to Note

“Summary of Significant Accounting Policies” to FNCB’s consolidated financial statements included in the

2018

Annual Report on Form

-K for information about the risk characteristics related to FNCB’s loan segments, loan classification and credit grading systems and methodology for determining the adequacy of the ALLL.

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. 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 loan category for the

three

months ended

March 31, 2019

and

2018.

							Construction,
							Land									State and
	Residential			Commercial			Acquisition and			Commercial						Political
(in thousands)	Real Estate			Real Estate			Development			and Industrial			Consumer			Subdivisions		Unallocated		Total
Three months ended March 31, 2019:
Allowance for loan losses:
Beginning balance, January 1, 2019	$	1,175		$	3,107		$	188		$	2,552		$	2,051		$	417	$	29	$	9,519
Charge-offs		-			-			-			(139	)		(315	)		-		-		(454	)
Recoveries		4			-			81			84			173			-		-		342
Provisions (credits)		(24	)		(56	)		(163	)		2			54			6		27		(154	)
Ending balance, March 31, 2019	$	1,155		$	3,051		$	106		$	2,499		$	1,963		$	423	$	56	$	9,253

Three months ended March 31, 2018:
Allowance for loan losses:
Beginning balance, January 1, 2018	$	1,236		$	3,499		$	209		$	2,340		$	1,395		$	355	$	-	$	9,034
Charge-offs		(63	)		-			-			(77	)		(260	)		-		-		(400	)
Recoveries		6			1			30			72			99			-		-		208
Provisions (credits)		70			(158	)		17			170			588			33		-		720
Ending balance, March 31, 2018	$	1,249		$	3,342		$	256		$	2,505		$	1,822		$	388	$	-	$	9,562

The following table represents the allocation of the ALLL and the related loan balance, by loan category, disaggregated based on the impairment methodology at

March 31, 2019

and

December 31, 2018:

					Construction,
					Land						State and
	Residential		Commercial		Acquisition and		Commercial				Political
(in thousands)	Real Estate		Real Estate		Development		and Industrial		Consumer		Subdivisions		Unallocated		Total
March 31, 2019
Allowance for loan losses:
Individually evaluated for impairment	$	13	$	40	$	-	$	851	$	2	$	-	$	-	$	906
Collectively evaluated for impairment		1,142		3,011		106		1,648		1,961		423		56		8,347
Total	$	1,155	$	3,051	$	106	$	2,499	$	1,963	$	423	$	56	$	9,253

Loans receivable:
Individually evaluated for impairment	$	1,834	$	9,631	$	81	$	1,546	$	380	$	-	$	-	$	13,472
Collectively evaluated for impairment		160,104		256,986		22,307		154,975		167,739		59,784		-		821,895
Total	$	161,938	$	266,617	$	22,388	$	156,521	$	168,119	$	59,784	$	-	$	835,367

December 31, 2018
Allowance for loan losses:
Individually evaluated for impairment	$	14	$	41	$	-	$	600	$	2	$	-	$	-	$	657
Collectively evaluated for impairment		1,161		3,066		188		1,952		2,049		417		29		8,862
Total	$	1,175	$	3,107	$	188	$	2,552	$	2,051	$	417	$	29	$	9,519

Loans receivable:
Individually evaluated for impairment	$	1,847	$	9,408	$	82	$	697	$	383	$	-	$	-	$	12,417
Collectively evaluated for impairment		162,986		253,370		20,731		150,265		176,401		59,037		-		822,790
Total	$	164,833	$	262,778	$	20,813	$	150,962	$	176,784	$	59,037	$	-	$	835,207

Credit Quality Indicators – Commercial Loans

Management continuously monitors and evaluates the credit quality of FNCB’s commercial loans 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 receivables.

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

through

are considered pass ratings. These assets show

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 troubled debt restructuring (“TDRs”) 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 indirect auto loans are monitored on a pool basis due to their homogeneous nature. Loans that are delinquent

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 receivable by loan category and credit quality indicator at

March 31, 2019

and

December 31, 2018:

	Credit Quality Indicators
	March 31, 2019
	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	$	31,536	$	252	$	235	$	-	$	-	$	32,023	$	129,194	$	721	$	129,915	$	161,938
Commercial real estate		254,254		1,661		10,702		-		-		266,617		-		-		-		266,617
Construction, land acquisition and development		20,343		-		-		-		-		20,343		2,027		18		2,045		22,388
Commercial and industrial		147,059		463		3,028		-		-		150,550		5,971		-		5,971		156,521
Consumer		2,389		-		-		-		-		2,389		165,290		440		165,730		168,119
State and political subdivisions		57,993		1,760		-		-		-		59,753		31		-		31		59,784
Total	$	513,574	$	4,136	$	13,965	$	-	$	-	$	531,675	$	302,513	$	1,179	$	303,692	$	835,367

	Credit Quality Indicators
	December 31, 2018
	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	$	33,573	$	291	$	154	$	-	$	-	$	34,018	$	130,132	$	683	$	130,815	$	164,833
Commercial real estate		250,674		1,858		10,246		-		-		262,778		-		-		-		262,778
Construction, land acquisition and development		17,704		-		757		-		-		18,461		2,352		-		2,352		20,813
Commercial and industrial		137,888		4,193		2,448		-		-		144,529		6,421		12		6,433		150,962
Consumer		2,024		-		-		-		-		2,024		174,373		387		174,760		176,784
State and political subdivisions		57,345		1,665		27		-		-		59,037		-		-		-		59,037
Total	$	499,208	$	8,007	$	13,632	$	-	$	-	$	520,847	$	313,278	$	1,082	$	314,360	$	835,207

Included in loans 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

$6.2

million and

$4.7

million at

March 31, 2019

and

December 31, 2018,

respectively. Generally, loans are placed on non-accrual status when they become

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

longer exist. Therefore, loans

may

be current in accordance with their loan terms, or

may

be less than

days delinquent and still be on a non-accrual status. There were

loans past due

days or more and still accruing at

March 31, 2019

and

December 31, 2018.

The following tables present the delinquency status of past due and non-accrual loans at

March 31, 2019

and

December 31, 2018:

	March 31, 2019
	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:
Residential real estate	$	160,753	$	219	$	156	$	-	$	161,128
Commercial real estate		262,514		774		-		-		263,288
Construction, land acquisition and development		22,219		151		-		-		22,370
Commercial and industrial		153,731		1,177		35		-		154,943
Consumer		165,683		1,804		192		-		167,679
State and political subdivisions		59,784		-		-		-		59,784
Total performing (accruing) loans		824,684		4,125		383		-		829,192

Non-accrual loans:
Residential real estate		569		-		109		132		810
Commercial real estate		1,160		434		-		1,735		3,329
Construction, land acquisition and development		-		-		18		-		18
Commercial and industrial		1,296		-		278		4		1,578
Consumer		163		52		13		212		440
State and political subdivisions		-		-		-		-		-
Total non-accrual loans		3,188		486		418		2,083		6,175

Total loans receivable	$	827,872	$	4,611	$	801	$	2,083	$	835,367

	December 31, 2018
	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:
Residential real estate	$	163,690	$	319	$	136	$	-	$	164,145
Commercial real estate		259,904		-		-		-		259,904
Construction, land acquisition and development		20,813		-		-		-		20,813
Commercial and industrial		150,108		87		20		-		150,215
Consumer		173,890		2,221		286		-		176,397
State and political subdivisions		59,037		-		-		-		59,037
Total performing (accruing) loans		827,442		2,627		442		-		830,511

Non-accrual loans:
Residential real estate		443		-		136		109		688
Commercial real estate		1,061		-		-		1,813		2,874
Construction, land acquisition and development		-		-		-		-		-
Commercial and industrial		677		50		-		20		747
Consumer		91		61		74		161		387
State and political subdivisions		-		-		-		-		-
Total non-accrual loans		2,272		111		210		2,103		4,696

Total loans receivable	$	829,714	$	2,738	$	652	$	2,103	$	835,207

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,

March 31, 2019

and

December 31, 2018.

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 Topic

450.

Total non-accrual loans, other than TDRs, with balances less than the

$100

thousand loan relationship threshold that were evaluated under ASC Topic

450

amounted to

$0.9

million at

March 31, 2019

and

$0.7

million at

December 31, 2018.

	March 31, 2019
			Unpaid
	Recorded		Principal		Related
(in thousands)	Investment		Balance		Allowance
With no allowance recorded:
Residential real estate	$	342	$	407	$	-
Commercial real estate		7,401		9,154		-
Construction, land acquisition and development		81		81		-
Commercial and industrial		228		228		-
Consumer		25		27		-
State and political subdivisions		-		-		-
Total impaired loans with no related allowance recorded		8,077		9,897		-

With a related allowance recorded:
Residential real estate		1,492		1,492		13
Commercial real estate		2,230		2,230		40
Construction, land acquisition and development		-		-		-
Commercial and industrial		1,318		1,318		851
Consumer		355		355		2
State and political subdivisions		-		-		-
Total impaired loans with a related allowance recorded		5,395		5,395		906

Total impaired loans:
Residential real estate		1,834		1,899		13
Commercial real estate		9,631		11,384		40
Construction, land acquisition and development		81		81		-
Commercial and industrial		1,546		1,546		851
Consumer		380		382		2
State and political subdivisions		-		-		-
Total impaired loans	$	13,472	$	15,292	$	906

	December 31, 2018
			Unpaid
	Recorded		Principal		Related
(in thousands)	Investment		Balance		Allowance
With no allowance recorded:
Residential real estate	$	313	$	375	$	-
Commercial real estate		7,149		8,795		-
Construction, land acquisition and development		82		82		-
Commercial and industrial		-		-		-
Consumer		26		28		-
State and political subdivisions		-		-		-
Total impaired loans with no related allowance recorded		7,570		9,280		-

With a related allowance recorded:
Residential real estate		1,534		1,534		14
Commercial real estate		2,259		2,259		41
Construction, land acquisition and development		-		-		-
Commercial and industrial		697		697		600
Consumer		357		357		2
State and political subdivisions		-		-		-
Total impaired loans with a related allowance recorded		4,847		4,847		657

Total impaired loans:
Residential real estate		1,847		1,909		14
Commercial real estate		9,408		11,054		41
Construction, land acquisition and development		82		82		-
Commercial and industrial		697		697		600
Consumer		383		385		2
State and political subdivisions		-		-		-
Total impaired loans	$	12,417	$	14,127	$	657

The following table presents the average balance and interest income by loan category recognized on impaired loans for the

three

months ended

March 31, 2019

and

2018:

	Three months ended March 31,
	2019				2018
	Average		Interest		Average		Interest
(in thousands)	Balance		Income (1)		Balance		Income (1)
Residential real estate	$	1,839	$	21	$	1,868	$	21
Commercial real estate		9,630		77		7,839		77
Construction, land acquisition and development		82		1		84		1
Commercial and industrial		1,047		-		795		-
Consumer		380		5		393		4
State and political subdivisions		-		-		-		-
Total impaired loans	$	12,978	$	104	$	10,979	$	103

(

) 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

$82

thousand and

$40

thousand for the

three

months ended

March 31, 2019

and

2018,

respectively.

Troubled Debt Restructured Loans

TDRs at

March 31, 2019

and

December 31, 2018

were

$8.9

million and

$9.2

million, respectively. Accruing and non-accruing TDRs were

$8.2

million and

$0.7

million, respectively, at

March 31, 2019,

and

$8.5

million and

$0.7

million, respectively, at

December 31, 2018.

Approximately

650

thousand in specific reserves have been established for TDRs as of

March 31, 2019

and

December 31, 2018,

respectively. FNCB was

not

committed to lend additional funds to any loan classified as a TDR at

March 31, 2019.

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

loans modified as TDRs during the

three

months ended March

31,

2019

2018

There were

TDRs modified within the previous

months that defaulted (defined as past due

days or more) during the

three

months ended

March 31, 2019 or 2018.

Residential Real Estate Loan Foreclosures

There were

three

consumer mortgage loans secured by residential real estate properties in the process of foreclosure at

March 31, 2019. There was no aggregate recorded investment to FNCB for these three loans at March 31, 2019. The balance of one loan was previously charged-off in entirety and two loans were sold to an investor on the secondary market. There were no residential real estate properties foreclosed upon for the three months ended March 31, 2019, and there was

one

residential real estate property with a carrying value of $

thousand included in OREO at March 31, 2019.

There were

four

consumer mortgage loans secured by residential real estate properties with

aggregate recorded investment in the process of foreclosure at

March 31, 2018.

For the

three

months ended

March 31, 2018,

there were

residential real estate properties foreclosed upon, and there were

two

residential real estate properties with an aggregate carrying value of

$75

thousand included in OREO at

March 31, 2018.