Note

. Derivative and Hedging Transactions

Risk Management Objective of Using Derivatives

FNCB is exposed to certain risks arising from both its business operations and economic conditions. It principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. FNCB manages economic risks, including interest rate, liquidity, and credit risk primarily by managing the amount, sources, and duration of its assets and liabilities and the use of derivative financial instruments. Specifically, FNCB enters into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates. Derivative financial instruments are used to manage differences in the amount, timing, and duration of known or expected cash receipts and its known or expected cash payments principally related to FNCB's borrowings.

Cash Flow Hedges of Interest Rate Risk

FNCB’s objectives in using interest rate derivatives are to add stability to interest expense and to manage its exposure to interest rate movements. To accomplish this objective, FNCB primarily uses interest rate swaps as part of its interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable amounts from a counterparty in exchange for FNCB making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount. During

2020,

such derivatives were used to hedge the variable cash flows associated with forecasted issuances of debt.

For derivatives designated and that qualify as cash flow hedges of interest rate risk, the gain or loss on the derivative is recorded in accumulated other comprehensive income and subsequently reclassified into interest expense in the same period during which the hedged transaction affects earnings. Amounts reported in accumulated other comprehensive income related to derivatives will be reclassified to interest expense as interest payments are made on FNCB’s variable-rate debt. During

2020,

it is estimated that an additional

thousand will be reclassified as a reduction to interest expense.

Fair Values of Derivative Instruments on the Balance Sheet

The table below presents the fair value of FNCB’s derivative financial instruments and the classification on the consolidated statements of financial condition at

March 31, 2020

and

December 31, 2019.

			Derivative Assets								Derivative Liabilities
			As of March 31, 2020			As of December 31, 2019					As of March 31, 2020			As of December 31, 2019
(in thousands)	Notional Amount		Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value		Notional Amount		Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value
Derivatives designated as hedging instruments
Interest rate products	$	-	Other assets	$	-	Other assets	$	-	$	10,000	Other liabilities	$	14	Other liabilities	$	-
Total derivatives designated as hedging instruments					-			-					14			-

Netting adjustments (1)					-			-					-			-
Net derivatives in the balance sheet					-			-					14			-

Cash and other collateral (2)					-			-					-			-
Net derivative amounts				$	-		$	-				$	14		$	-

(1) Netting adjustments represents the amounts recorded to convert derivatives assets and liabilities from a gross basis to a net basis in accordance with the applicable accounting guidance.
(2) Other collateral represents the amount that cannot be used to offset our derivative assets and liabilities from a gross basis to a net basis in accordance with the applicable accounting guidance. The other collateral consist of securities and is exchanged under bilateral collateral and master netting agreements that allow us to offset the net derivative position with the related collateral. The application of the other collateral cannot reduce the net derivative position below zero. Therefore, excess other collateral, if any, is not reflected above.

Effect of Fair Value and Cash Flow Hedge Accounting on Accumulated Other Comprehensive Loss

The table below presents the effect of fair value and cash flow hedge accounting on Accumulated Other Comprehensive Income as of

March 31, 2020

and

December 31, 2019.

Derivatives in Subtopic 815-20 Hedging Relationships	Amount of Gain or (Loss) Recognized in OCI on Derivative			Amount of Gain or (Loss) Recognized in OCI Included Component			Amount of Gain or (Loss) Recognized in OCI Excluded Component		Location of Gain or (Loss) Recognized from Accumulated Other Comprehensive Income into Income	Amount of Gain or (Loss) Reclassified from Accumulated OCI into Income		Amount of Gain or (Loss) Reclassified from Accumulated OCI into Income Included Component		Amount of Gain or (Loss) Reclassified from Accumulated OCI into Income Excluded Component
(in thousands)		March 31, 2020									March 31, 2020
Derivatives in Cash Flow Hedging Relationships
Interest rate products	$	(14	)	$	(14	)	$	-	Interest income	$	2	$	2	$	-
Total	$	(14	)	$	(14	)	$	-		$	2	$	2	$	-

Effect of Fair Value and Cash Flow Hedge Accounting on the Consolidated Statements of Income and Comprehensive Income

There were

derivative financial instruments outstanding during the

three

months ended

March 31, 2019.

The table below presents the effect of the FNCB’s derivative financial instruments on the Income Statement for the

three

months ended

March 31, 2020.

	Location and Amount of Gain or (Loss) Recognized in Income on Fair Value and Cash Flow Hedging Relationships
	Three Months Ended March 31, 2020
(in thousands)		Interest Income		Interest Expense
Total amounts of income and expense line items presented in the cash flow statement of financial performance in which the effects of fair value or hedges are recorded	$	-	$	2

The effects of fair value and cash flow hedging:
Gain or (loss) on cash flow hedging relationships in Subtopic 815-20
Interest contracts:
Amount of gain or (loss) reclassified from accumulated other comprehensive income into income	$	-	$	2
Amount of gain or (loss) reclassified from accumulated other comprehensive income into income as a result that a forecasted transaction is no longer probable of occurring	$	-	$	-

Amount of gain or (loss) reclassified from accumulated OCI into income - included component	$	-	$	2
Amount of gain or (loss) reclassified from accumulated OCI into income - excluded component	$	-	$	-

Credit-risk-related Contingent Features

FNCB has agreements with each of its derivative counterparties that contain a provision where if FNCB defaults or is capable of being declared in default on any of its indebtedness, then it could also be declared in default on its derivative obligations.

FNCB has agreements with certain of its derivative counterparties that contain a provision where if it fails to maintain its status as a

well

capitalized institution, then it could be required to post additional collateral.

As of

March 31, 2020,

the fair value of derivatives in a net liability position, which includes accrued interest but excludes any adjustment for nonperformance risk, related to these agreements was

$14

thousand. As of

March 31, 2020,

FNCB has

not

posted any collateral related to these agreements. If FNCB had breached any of these provisions at

March 31, 2020,

it could have been required to settle its obligations under the agreements at the termination value of

$14

thousand.