UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

Forthe quarterly period ended September 30, 2013

OR

[  ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the transition period from ______________to______________________

Commission file number: 333-90273

FIDELITY D & D BANCORP, INC.

STATE OF INCORPORATION:  IRS EMPLOYER IDENTIFICATION NO:

PENNSYLVANIA                                     23-3017653

Address of principal executive offices:

BLAKELY & DRINKER ST.

DUNMORE, PENNSYLVANIA 18512

TELEPHONE:

570-342-8281

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subjected to such filing requirements for the past 90 days.  [X] YES [ ] NO

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post suchfiles).  [X] YES [  ] NO

Indicate by check mark whether the registrant is a large accelerated filer, anaccelerated filer, a non-accelerated filer, or a smaller reporting company. Seethe definitions of “large accelerated filer,” “accelerated filer” and “smallerreporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer [  ] Accelerated filer [  ]

Non-accelerated filer [  ]Smaller reporting company [X]

(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). 

[ ] YES[X] NO

The number of outstanding shares of Common Stock of Fidelity D & D Bancorp, Inc. on October 31, 2013, the latest practicable date, was 2,371,171 shares.

FIDELITY D & D BANCORP, INC.

Form 10-Q September 30, 2013

Index

Part I.  Financial Information	Page
Item 1.Financial Statements (unaudited): Consolidated Balance Sheets as of September 30, 2013     and December 31, 2012	3
Consolidated Statements of Income for the three- and nine-months     ended September 30, 2013 and 2012	4
Consolidated Statements of Comprehensive Income     for the three- and nine-months ended September 30, 2013 and 2012	5
Consolidated Statements of Changes in Shareholders’ Equity     for the nine months ended September 30, 2013 and 2012	6
Consolidated Statements of Cash Flows for the nine months     ended September 30, 2013 and 2012	7
Notes to Consolidated Financial Statements (Unaudited)	8
Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations	30
Item 3.Quantitative and Qualitative Disclosure about Market Risk	46
Item 4.Controls and Procedures	51
Part II.  Other Information
Item 1.Legal Proceedings	51
Item 1A.Risk Factors	51
Item 2.Unregistered Sales of Equity Securities and Use of Proceeds	51
Item 3.Defaults upon Senior Securities	51
Item 4.Mine Safety Disclosures	51
Item 5.Other Information	51
Item 6.Exhibits	52
Signatures	53
Exhibit index	54

1

PART I – Financial Information

Item 1: Financial Statements

Fidelity D & D Bancorp, Inc. and Subsidiary
Consolidated Balance Sheets
(Unaudited)
(dollars in thousands)	September 30, 2013		December 31, 2012
Assets:
Cash and due from banks	$	13,951	$	12,657
Interest-bearing deposits with financial institutions		21,934		9,189
Total cash and cash equivalents		35,885		21,846
Available-for-sale securities		102,921		100,441
Held-to-maturity securities		190		289
Federal Home Loan Bank stock		2,160		2,624
Loans and leases, net (allowance for loan losses of
$8,405 in 2013; $8,972 in 2012)		454,700		424,584
Loans held-for-sale (fair value $920 in 2013, $10,824 in 2012)		903		10,545
Foreclosed assets held-for-sale		2,966		1,607
Bank premises and equipment, net		13,709		14,127
Cash surrender value of bank owned life insurance		10,316		10,065
Accrued interest receivable		1,973		1,985
Other assets		14,571		13,412
Total assets	$	640,294	$	601,525
Liabilities:
Deposits:
Interest-bearing	$	410,716	$	388,625
Non-interest-bearing		134,114		126,035
Total deposits		544,830		514,660
Accrued interest payable and other liabilities		3,471		3,863
Short-term borrowings		14,197		8,056
Long-term debt		16,000		16,000
Total liabilities		578,498		542,579
Shareholders' equity:
Preferred stock authorized 5,000,000 shares with no par
value; none issued		-		-
Capital stock, no par value (10,000,000 shares authorized;
shares issued and outstanding; 2,371,171 in 2013; and
2,323,248 in 2012)		24,805		23,711
Retained earnings		37,644		34,999
Accumulated other comprehensive (loss) income		(653)		236
Total shareholders' equity		61,796		58,946
Total liabilities and shareholders' equity	$	640,294	$	601,525
See notes to unaudited consolidated financial statements

2

Fidelity D & D Bancorp, Inc. and Subsidiary
Consolidated Statements of Income
(Unaudited)		Three months ended				Nine months ended
(dollars in thousands except per share data)	September 30, 2013		September 30, 2012		September 30, 2013		September 30, 2012
Interest income:
Loans and leases:
Taxable	$	5,329	$	5,313	$	16,034	$	15,885
Nontaxable		126		107		346		359
Interest-bearing deposits with financial institutions		5		12		19		55
Investment securities:
U.S. government agency and corporations		167		226		483		747
States and political subdivisions (nontaxable)		303		298		893		917
Other securities		24		18		59		54
Total interest income		5,954		5,974		17,834		18,017
Interest expense:
Deposits		525		585		1,551		1,886
Securities sold under repurchase agreements		5		4		18		27
Other short-term borrowings and other		3		-		8		-
Long-term debt		215		215		638		667
Total interest expense		748		804		2,215		2,580
Net interest income		5,206		5,170		15,619		15,437
Provision for loan losses		450		700		1,600		2,000
Net interest income after provision for loan losses		4,756		4,470		14,019		13,437
Other income:
Service charges on deposit accounts		492		470		1,403		1,313
Interchange fees		319		276		899		798
Fees from trust fiduciary activities		139		140		480		447
Fees from financial services		148		155		444		441
Service charges on loans		162		195		744		846
Fees and other revenue		122		88		343		257
Earnings on bank-owned life insurance		85		83		251		244
Gain (loss) on sale, recovery, or disposal of:
Loans		313		500		1,207		1,329
Investment securities		138		3		266		264
Premises and equipment		(10)		(16)		(10)		(17)
Impairment losses on investment securities:
Other-than-temporary impairment on investment securities		-		(1)		(61)		(242)
Non-credit-related losses on investment securities not expected
to be sold (recognized in other comprehensive income (loss))		-		1		61		106
Net impairment losses on investment securities		-		-		-		(136)
Total other income		1,908		1,894		6,027		5,786
Other expenses:
Salaries and employee benefits		2,248		2,116		7,145		6,767
Premises and equipment		837		889		2,496		2,593
Advertising and marketing		513		552		980		947
Professional services		314		292		891		963
FDIC assessment		105		130		353		379
Loan collection		84		197		447		498
Other real estate owned		40		67		224		226
Office supplies and postage		116		103		332		315
Automated transaction processing		186		105		426		286
Other		201		28		837		965
Total other expenses		4,644		4,479		14,131		13,939
Income before income taxes		2,020		1,885		5,915		5,284
Provision for income taxes		515		486		1,503		1,311
Net income	$	1,505	$	1,399	$	4,412	$	3,973
Per share data:
Net income - basic	$	0.64	$	0.61	$	1.88	$	1.74
Net income - diluted	$	0.64	$	0.61	$	1.88	$	1.74
Dividends	$	0.25	$	0.25	$	0.75	$	0.75
See notes to unaudited consolidated financial statements

3

Fidelity D & D Bancorp, Inc. and Subsidiary
Consolidated Statements of Comprehensive Income		Three months ended				Nine months ended
(Unaudited)		September 30,				September 30,
(dollars in thousands)		2013		2012		2013		2012
Net income	$	1,505	$	1,399	$	4,412	$	3,973
Other comprehensive income (loss), before tax:
Unrealized holding gain (loss) on available-for-sale
securities		925		1,182		(1,302)		2,195
Reclassification adjustment for net gains realized in
income		(138)		(3)		(266)		(264)
Net impairment losses on investment securities		-		-		-		136
Net unrealized gain (loss)		787		1,179		(1,568)		2,067
Tax effect		(268)		(401)		533		(703)
Unrealized gain (loss), net of tax		519		778		(1,035)		1,364
Non-credit-related impairment gain on
investment securities not expected to be sold		168		76		221		358
Tax effect		(57)		(26)		(75)		(122)
Net non-credit-related impairment gain on investment securities		111		50		146		236
Other comprehensive income (loss), net of tax		630		828		(889)		1,600
Total comprehensive income, net of tax	$	2,135	$	2,227	$	3,523	$	5,573
See notes to unaudited consolidated financial statements

4

Fidelity D & D Bancorp, Inc. and Subsidiary
Consolidated Statements of Changes in Shareholders' Equity
For the nine months ended September 30, 2013 and 2012
(Unaudited)							Accumulated
							other
	Capital stock				Retained		comprehensive
(dollars in thousands)	Shares		Amount		earnings		income (loss)		Total
Balance, December 31, 2011		2,254,542	$	22,354	$	32,380	$	(1,110)	$	53,624
Net income						3,973				3,973
Other comprehensive income								1,600		1,600
Issuance of common stock through Employee Stock
Purchase Plan		3,874		67						67
Issuance of common stock through Dividend
Reinvestment Plan		49,190		980						980
Stock-based compensation expense				15						15
Cash dividends declared						(1,706)				(1,706)
Balance, September 30, 2012		2,307,606	$	23,416	$	34,647	$	490	$	58,553
Balance, December 31, 2012		2,323,248	$	23,711	$	34,999	$	236	$	58,946
Net income						4,412				4,412
Other comprehensive loss								(889)		(889)
Issuance of common stock through Employee Stock
Purchase Plan		4,256		78						78
Issuance of common stock through Dividend
Reinvestment Plan		43,533		928						928
Issuance of common stock from vested restricted
share grants through stock compensation plans		134
Stock-based compensation expense				88						88
Cash dividends declared						(1,767)				(1,767)
Balance, September 30, 2013		2,371,171	$	24,805	$	37,644	$	(653)	$	61,796
See notes to unaudited consolidated financial statements

5

Fidelity D & D Bancorp, Inc. and Subsidiary
Consolidated Statements of Cash Flows
(Unaudited)	Nine months ended September 30,
(dollars in thousands)		2013		2012
Cash flows from operating activities:
Net income	$	4,412	$	3,973
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation, amortization and accretion		2,546		2,612
Provision for loan losses		1,600		2,000
Deferred income tax expense (benefit)		598		(253)
Stock-based compensation expense		88		15
Proceeds from sale of loans held-for-sale		72,449		64,605
Originations of loans held-for-sale		(59,848)		(58,395)
Earnings on bank-owned life insurance		(251)		(244)
Net gain from sales of loans		(1,207)		(1,329)
Net gain from sales of investment securities		(104)		(251)
Net loss on sale and write-down of foreclosed assets held-for-sale		97		107
Loss on disposal of equipment		10		17
Other-than-temporary impairment on securities		-		136
Change in:
Accrued interest receivable		7		90
Other assets		(731)		(249)
Accrued interest payable and other liabilities		(351)		(4,086)
Net cash provided by operating activities		19,315		8,748
Cash flows from investing activities:
Held-to-maturity securities:
Proceeds from maturities, calls and principal pay-downs		100		88
Available-for-sale securities:
Proceeds from sales		8,461		3,571
Proceeds from maturities, calls and principal pay-downs		21,771		24,029
Purchases		(35,098)		(20,891)
Decrease FHLB stock		464		680
Net increase in loans and leases		(36,430)		(28,898)
Acquisition of bank premises and equipment		(810)		(1,809)
Proceeds from sale of foreclosed assets held-for-sale		716		719
Net cash used by investing activities		(40,826)		(22,511)
Cash flows from financing activities:
Net increase in deposits		30,170		8,318
Net increase in short-term borrowings		6,141		4,561
Repayments of long-term debt		-		(5,000)
Proceeds from employee stock purchase plan participants		78		67
Dividends paid, net of dividends reinvested		(1,090)		(1,124)
Proceeds from dividend reinvestment plan participants		251		398
Net cash provided by financing  activities		35,550		7,220
Net increase (decrease) in cash and cash equivalents		14,039		(6,543)
Cash and cash equivalents, beginning		21,846		52,165
Cash and cash equivalents, ending	$	35,885	$	45,622
See notes to unaudited consolidated financial statements

6

FIDELITY D & D BANCORP, INC.

Notesto  Consolidated Financial Statements

(Unaudited)

1.   Nature of operations and critical accounting policies

Nature of operations

Fidelity Deposit and Discount Bank (the Bank) is a commercial bank chartered in the Commonwealth of Pennsylvania and a wholly-owned subsidiary of Fidelity D & D Bancorp, Inc. (the Company or collectively, the Company).  Having commenced operations in 1903, the Bank is committed to provide superior customer service, while offering a full range of banking products and financial and trust services to both our consumer and commercial customers from our main office located in Dunmore and other branches located throughout Lackawanna and Luzerne counties.

Principles of consolidation

The accompanying unaudited consolidated financial statements of the Company and the Bank have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) for interim financial information and with the instructions to this Form 10-Q and Rule 8-03 of Regulation S-X.  Accordingly, they do not include all of the information and footnote disclosures required by GAAP for complete financial statements.  In the opinion of management, all normal recurring adjustments necessary for a fair presentation of the financial condition and results of operations for the periods have been included.  All significant inter-company balances and transactions have been eliminated in consolidation.

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported periods.  Actual results could differ from those estimates.  For additional information and disclosures required under GAAP, refer to the Company’s Annual Report on Form 10-K for the year ended December 31, 2012.

Management is responsible for the fairness, integrity and objectivity of the unaudited financial statements included in this report.  Management prepared the unaudited financial statements in accordance with GAAP.  In meeting its responsibility for the financial statements, management depends on the Company's accounting systems and related internal controls.  These systems and controls are designed to provide reasonable but not absolute assurance that the financial records accurately reflect the transactions of the Company, the Company’s assets are safeguarded and that the financial statements present fairly the financial condition and results of operations of the Company.

In the opinion of management, the consolidated balance sheets as of September 30, 2013 and December 31, 2012 and the related consolidated statements of income and consolidated statements of comprehensive income for the three- and nine-months ended September 30, 2013 and 2012, and consolidated statements of changes in shareholders’ equity and consolidated statements of cash flows for the nine months ended September 30, 2013 and 2012 present fairly the financial condition and results of operations of the Company.  All material adjustments required for a fair presentation have been made.  These adjustments are of a normal recurring nature.  Certain reclassifications have been made to the 2012 financial statements to conform to the 2013 presentation. 

In preparing these consolidated financial statements, the Company evaluated the events and transactions that occurred after September 30, 2013 through the date these consolidated financials statements were issued.

This Quarterly Report on Form 10-Q should be read in conjunction with the Company’s audited financial statements for the year ended December 31, 2012, and the notes included therein, included within the Company’s Annual Report filed on Form 10-K.

Critical accounting policies

The presentation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect many of the reported amounts and disclosures.  Actual results could differ from these estimates.

A material estimate that is particularly susceptible to significant change relates to the determination of the allowance for loan losses.  Management believes that the allowance for loan losses at September 30, 2013 is adequate and reasonable.  Given the subjective nature of identifying and valuing loan losses, it is likely that well-informed individuals could make different assumptions and could, therefore, calculate a materially different allowance value.  While management uses available information to recognize losses on loans, changes in economic conditions may necessitate revisions in the future.  In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Company’s allowance for loan losses.  Such agencies may require the Company to recognize adjustments to the allowance based on their judgment of information available to them at the time of their examination.

7

Another material estimate is the calculation of fair values of the Company’s investment securities.  Except for the Company’s investment in corporate bonds, consisting of pooled trust preferred securities, fair values of the other investment securities are determined by pricing provided by a third-party vendor, who is a provider of financial market data, analytics and related services to financial institutions.  For the Company’s investment in pooled trust preferred securities, management is unable to obtain readily attainable and realistic pricing from market traders due to a lack of active market participants and therefore management has determined the market for these securities to be inactive.  In order to determine the fair value of the pooled trust preferred securities, management relied on the use of an income valuation approach (present value technique) that maximizes the use of relevant observable inputs and minimizes the use of unobservable inputs, the results of which are more representative of fair value than the market approach valuation technique used for the other investment securities.

Based on experience, management is aware that estimated fair values of investment securities tend to vary among valuation services.  Accordingly, when selling investment securities, price quotes may be obtained from more than one source.  The majority of the Company’s investment securities are classified as available-for-sale (AFS).  AFS securities are carried at fair value on the consolidated balance sheets, with unrealized gains and losses, net of income tax, reported separately within shareholders’ equity as a component of accumulated other comprehensive income (loss) (OCI).

The fair value of residential mortgage loans, classified as held-for-sale (HFS), is obtained from the Federal National Mortgage Association (FNMA) or the Federal Home Loan Bank (FHLB).  Generally, the market to which the Company sells residential mortgages it originates for sale is restricted and price quotes from other sources are not typically obtained.  On occasion, the Company may transfer loans from the loan portfolio to loans HFS.  Under these circumstances, pricing may be obtained from other entities and the loans are transferred at the lower of cost or market value and simultaneously sold.  As of September 30, 2013 and December 31, 2012, loans classified as HFS consisted of residential mortgage loans. 

During the first quarter of 2013, the Company commenced its automobile leasing operations, a component of auto loans and leases in the consumer segment of the loan portfolio.  Financing of automobiles, provided to customers under lease arrangements of varying terms, are accounted for as direct finance leases.  Interest on automobile direct finance leasing is determined using the interest method.  Generally, the interest method is used to arrive at a level effective yield over the life of the lease.

Foreclosed assets held-for-sale includes other real estate acquired through foreclosure (ORE) and may, from time-to-time, include repossessed assets such as automobiles.  ORE is carried at the lower of cost (principal balance at date of foreclosure) or fair value less estimated cost to sell.  Any write-downs at the date of foreclosure or within a reasonable period of time after foreclosure are charged to the allowance for loan losses.  Expenses incurred to maintain ORE properties, subsequent write downs to the asset’s fair value and gains or losses on disposal are included as components of other real estate owned expense in the consolidated statements of income.   

For purposes of the consolidated statements of cash flows, cash and cash equivalents includes cash on hand, amounts due from banks and interest-bearing deposits with financial institutions.  For the nine months ended September 30, 2013 and 2012, the Company paid interest of $2.2 million and $2.6 million, respectively.  The Company was required to pay income taxes of $1.1 million and $1.8 million during the first nine months of 2013 and 2012, respectively.  Transfers from loans to foreclosed assets held-for-sale amounted to $2.2 million and $1.4 million during the nine months ended September 30, 2013 and 2012.  During the same respective periods, transfers from loans to loans HFS amounted to $2.9 million and $2.8 million.  Expenditures for construction in process, a component of other assets in the consolidated balance sheets, are included in acquisition of bank premises and equipment.

2.  New Accounting Pronouncements

In February 2013, the Financial Accounting Standards Board (FASB) issued the accounting update related to; Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income.  The update requires entities to present information about reclassification adjustments from accumulated other comprehensive income in their annual financial statements in a single note or on the face of the financial statements. The new requirement is effective prospectively for interim and annual reporting periods beginning after December 15, 2012.  The provisions of this accounting update require expanded financial reporting disclosures.

3.  Accumulated other comprehensive income (loss)

The following tables illustrate the changes in accumulated other comprehensive income (loss) by component and the details about the components of accumulated comprehensive income (loss) as of and for the periods indicated:

8

As of and for the nine months ended September 30, 2013
			Non-credit-related
	Unrealized gains		impairment losses
	on available-for-		on investment
(dollars in thousands)	sale securities		securities		Total
Beginning balance	$	1,905	$	(1,669)	$	236
Other comprehensive (loss) income before reclassifications		(859)		146		(713)
Amounts reclassified from accumulated other
comprehensive income		(176)		-		(176)
Net current-period other comprehensive (loss) income		(1,035)		146		(889)
Ending balance	$	870	$	(1,523)	$	(653)

As of and for the three months ended September 30, 2013
			Non-credit-related
	Unrealized gains		impairment losses
	on available-for-		on investment
(dollars in thousands)	sale securities		securities		Total
Beginning balance	$	351	$	(1,634)	$	(1,283)
Other comprehensive income before reclassifications		610		111		721
Amounts reclassified from accumulated other
comprehensive income		(91)		-		(91)
Net current-period other comprehensive income		519		111		630
Ending balance	$	870	$	(1,523)	$	(653)

In the tables above, all amounts are net of tax at 34%. Amounts in parentheses indicate debits.

Details about accumulated other	Amount reclassified from
comprehensive income components	accumulated other		Affected line item in the statement
(dollars in thousands)	comprehensive income		where net income is presented
For the nine months ended September 30, 2013
Unrealized gains on AFS securities	$	266	Gain on sale, recovery, or disposal of investment securities
		-	Net impairment losses on investment securities
		266	Income before income taxes
		(90)	Provision for income taxes
Total reclassifications for the period	$	176	Net income
For the three months ended September 30, 2013
Unrealized gains on AFS securities	$	138	Gain on sale, recovery, or disposal of investment securities
		-	Net impairment losses on investment securities
		138	Income before income taxes
		(47)	Provision for income taxes
Total reclassifications for the period	$	91	Net income

9

4. Investment securities

The amortized cost and fair value of investment securities at September 30, 2013 and December 31, 2012 are summarized as follows:

			Gross		Gross
	Amortized		unrealized		unrealized		Fair
(dollars in thousands)	cost		gains		losses		value
September 30, 2013
Held-to-maturity securities:
MBS - GSE residential	$	190	$	17	$	-	$	207
Available-for-sale securities:
Agency - GSE	$	15,715	$	34	$	40	$	15,709
Obligations of states and