fdbc 20150930 10Q Q3

FIDELITY D & D BANCORP, INC.

Form 10-Q September 30, 2015

Index


Part I. Financial Information		Page
Item 1.	Financial Statements (unaudited):
	Consolidated Balance Sheets as of September 30, 2015 and December 31, 2014	3
	Consolidated Statements of Income for the three and nine months ended September 30, 2015 and 2014	4
	Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2015 and 2014	5
	Consolidated Statements of Changes in Shareholders’ Equity for the nine months ended September 30, 2015 and 2014	6
	Consolidated Statements of Cash Flows for the nine months ended September 30, 2015 and 2014	7
	Notes to Consolidated Financial Statements (Unaudited)	8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	28
Item 3.	Quantitative and Qualitative Disclosure about Market Risk	45
Item 4.	Controls and Procedures	50

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	51
Signatures		53
Exhibit index		54

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PART I – Financial Information

Item 1: Financial Statements


Fidelity D & D Bancorp, Inc. and Subsidiary
Consolidated Balance Sheets
(Unaudited)
(dollars in thousands)	September 30, 2015		December 31, 2014
Assets:
Cash and due from banks	$	13,408	$	11,808
Interest-bearing deposits with financial institutions		12,282		14,043
Total cash and cash equivalents		25,690		25,851
Available-for-sale securities		126,782		97,896
Held-to-maturity securities (fair value of $0 in 2015, $0 in 2014)		-		-
Federal Home Loan Bank stock		1,085		1,306
Loans and leases, net (allowance for loan losses of
$9,149 in 2015; $9,173 in 2014)		533,234		506,327
Loans held-for-sale (fair value $1,133 in 2015, $1,186 in 2014)		1,114		1,161
Foreclosed assets held-for-sale		1,024		1,972
Bank premises and equipment, net		16,875		14,846
Cash surrender value of bank owned life insurance		10,995		10,741
Accrued interest receivable		2,154		2,086
Other assets		10,255		14,299
Total assets	$	729,208	$	676,485
Liabilities:
Deposits:
Interest-bearing	$	492,289	$	457,574
Non-interest-bearing		150,714		129,370
Total deposits		643,003		586,944
Accrued interest payable and other liabilities		3,829		3,353
Short-term borrowings		6,743		3,969
Long-term debt		-		10,000
Total liabilities		653,575		604,266
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; 2,439,905 in 2015; and 2,427,767 in 2014)		26,551		26,272
Retained earnings		46,549		43,204
Accumulated other comprehensive income		2,533		2,743
Total shareholders' equity		75,633		72,219
Total liabilities and shareholders' equity	$	729,208	$	676,485

See notes to unaudited consolidated financial statements

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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, 2015		September 30, 2014		September 30, 2015		September 30, 2014
Interest income:
Loans and leases:
Taxable	$	5,764	$	5,521	$	16,914	$	16,191
Nontaxable		170		135		471		397
Interest-bearing deposits with financial institutions		5		3		22		14
Investment securities:
U.S. government agency and corporations		310		281		843		783
States and political subdivisions (nontaxable)		336		323		978		977
Other securities		27		31		126		79
Federal funds sold		-		1		-		1
Total interest income		6,612		6,295		19,354		18,442
Interest expense:
Deposits		574		507		1,639		1,495
Securities sold under repurchase agreements		3		5		15		17
Other short-term borrowings and other		3		2		15		8
Long-term debt		-		216		255		638
Total interest expense		580		730		1,924		2,158
Net interest income		6,032		5,565		17,430		16,284
Provision for loan losses		200		210		500		810
Net interest income after provision for loan losses		5,832		5,355		16,930		15,474
Other income:
Service charges on deposit accounts		433		466		1,260		1,320
Interchange fees		337		333		976		970
Fees from trust fiduciary activities		166		156		580		492
Fees from financial services		142		114		379		405
Service charges on loans		264		189		664		613
Fees and other revenue		218		196		629		558
Earnings on bank-owned life insurance		86		86		255		252
Gain (loss) on sale or disposal of:
Loans		404		209		871		462
Investment securities		8		-		26		301
Premises and equipment		(35)		(1)		(34)		(66)
Total other income		2,023		1,748		5,606		5,307
Other expenses:
Salaries and employee benefits		2,696		2,460		7,992		7,424
Premises and equipment		939		837		2,755		2,634
Advertising and marketing		276		198		926		804
Professional services		406		405		1,221		1,044
FDIC assessment		104		85		298		263
Loan collection		48		60		144		177
Other real estate owned		43		187		190		276
Office supplies and postage		95		112		308		318
Automated transaction processing		150		168		408		473
FHLB prepayment fee		-		-		570		-
Data processing and communication		187		100		395		295
Other		295		298		863		748
Total other expenses		5,239		4,910		16,070		14,456
Income before income taxes		2,616		2,193		6,466		6,325
Provision for income taxes		687		562		1,184		1,611
Net income	$	1,929	$	1,631	$	5,282	$	4,714
Per share data:
Net income - basic	$	0.79	$	0.68	$	2.17	$	1.96
Net income - diluted	$	0.79	$	0.67	$	2.16	$	1.95
Dividends	$	0.27	$	0.25	$	0.79	$	0.75

See notes to unaudited consolidated financial statements

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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)	2015		2014		2015		2014

Net income	$	1,929	$	1,631	$	5,282	$	4,714

Other comprehensive income (loss), before tax:
Unrealized holding gain (loss) on available-for-sale securities		949		97		(292)		2,437
Reclassification adjustment for net gains realized in income		(8)		-		(26)		(301)
Net unrealized gain (loss)		941		97		(318)		2,136
Tax effect		(320)		(33)		108		(726)
Unrealized gain (loss), net of tax		621		64		(210)		1,410
Other comprehensive income (loss), net of tax		621		64		(210)		1,410
Total comprehensive income, net of tax	$	2,550	$	1,695	$	5,072	$	6,124

See notes to unaudited consolidated financial statements

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Fidelity D & D Bancorp, Inc. and Subsidiary
Consolidated Statements of Changes in Shareholders' Equity
For the nine months ended September 30, 2015 and 2014
(Unaudited)							Accumulated
							other
	Capital stock				Retained		comprehensive
(dollars in thousands)	Shares		Amount		earnings		income		Total
Balance, December 31, 2013		2,391,617	$	25,302	$	39,519	$	1,239	$	66,060
Net income						4,714				4,714
Other comprehensive income								1,410		1,410
Issuance of common stock through Employee Stock Purchase Plan		4,373		80						80
Issuance of common stock through Dividend Reinvestment Plan		18,347		448						448
Issuance of common stock from vested restricted share grants through stock compensation plans		5,250
Stock-based compensation expense				162						162
Cash dividends declared						(1,816)				(1,816)
Balance, September 30, 2014		2,419,587	$	25,992	$	42,417	$	2,649	$	71,058

Balance, December 31, 2014		2,427,767	$	26,272	$	43,204	$	2,743	$	72,219
Net income						5,282				5,282
Other comprehensive loss								(210)		(210)
Issuance of common stock through Employee Stock Purchase Plan		4,358		102						102
Issuance of common stock from vested restricted share grants through stock compensation plans		7,780
Stock-based compensation expense				177						177
Cash dividends declared						(1,937)				(1,937)
Balance, September 30, 2015		2,439,905	$	26,551	$	46,549	$	2,533	$	75,633

See notes to unaudited consolidated financial statements

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Fidelity D & D Bancorp, Inc. and Subsidiary
Consolidated Statements of Cash Flows
(Unaudited)	Nine months ended September 30,
(dollars in thousands)	2015		2014

Cash flows from operating activities:
Net income	$	5,282	$	4,714
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation, amortization and accretion		2,652		2,321
Provision for loan losses		500		810
Deferred income tax expense (benefit)		816		(111)
Stock-based compensation expense		177		162
Proceeds from sale of loans held-for-sale		37,663		25,125
Originations of loans held-for-sale		(34,350)		(25,222)
Earnings from bank-owned life insurance		(255)		(252)
Net gain from sales of loans		(871)		(462)
Net gain from sales of investment securities		(26)		(301)
Net loss from sale and write-down of foreclosed assets held-for-sale		42		70
Net loss from disposal of equipment		34		64
Change in:
Accrued interest receivable		(68)		13
Other assets		1,532		(1,396)
Accrued interest payable and other liabilities		476		310
Net cash provided by operating activities		13,604		5,845

Cash flows from investing activities:
Held-to-maturity securities:
Proceeds from sales		-		187
Proceeds from maturities, calls and principal pay-downs		-		3
Available-for-sale securities:
Proceeds from sales		12,614		4,877
Proceeds from maturities, calls and principal pay-downs		14,435		10,350
Purchases		(57,456)		(30,929)
Decrease in FHLB stock		221		358
Net increase in loans and leases		(30,765)		(26,671)
Acquisition of bank premises and equipment		(1,214)		(2,159)
Proceeds from sale of bank premises and equipment		38		-
Proceeds from sale of foreclosed assets held-for-sale		1,364		1,142
Net cash used in investing activities		(60,763)		(42,842)

Cash flows from financing activities:
Net increase in deposits		56,060		42,170
Net increase in short-term borrowings		2,773		2,583
Repayment of long-term debt		(10,000)		-
Proceeds from employee stock purchase plan participants		102		80
Dividends paid, net of dividends reinvested		(1,937)		(1,473)
Proceeds from dividend reinvestment plan participants		-		104
Net cash provided by financing activities		46,998		43,464
Net (decrease) increase in cash and cash equivalents		(161)		6,467
Cash and cash equivalents, beginning		25,851		13,218

Cash and cash equivalents, ending	$	25,690	$	19,685

See notes to unaudited consolidated financial statements

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FIDELITY D & D BANCORP, INC.

Notes to 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 under the law of the Commonwealth of Pennsylvania and a wholly-owned subsidiary of Fidelity D & D Bancorp, Inc. (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.

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, 2014.

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, 2015 and December 31, 2014 and the related consolidated statements of income and consolidated statements of comprehensive income for the three and nine months ended September 30, 2015 and 2014, and consolidated statements of changes in shareholders’ equity and consolidated statements of cash flows for the nine months ended September 30, 2015 and 2014 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 2014 financial statements to conform to the 2015 presentation.

In preparing these consolidated financial statements, the Company evaluated the events and transactions that occurred after September 30, 2015 through the date these consolidated financial 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, 2014, and the notes included therein, included within the Company’s Annual Report filed on Form 10-K.

Critical accounting policies

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.

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, 2015 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.

Another material estimate is the calculation of fair values of the Company’s investment securities. Fair values of 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. 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

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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) (AOCI).

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 residential mortgage loans are transferred at the lower of cost or market value and simultaneously sold. For other loans transferred to HFS, pricing may be obtained from other entities or modeled and the other loans are transferred at the lower of cost or market value and then sold. As of December 31, 2014, loans classified as HFS consisted of residential mortgage loans. As of September 30, 2015, $0.5 million of the loans classified as HFS were residential mortgage loans and $0.6 million was a commercial loan.

Financing of automobiles, provided to customers under lease arrangements of varying terms, are accounted for as direct finance leases. Interest income 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, any rental income received 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, 2015 and 2014, the Company paid interest of $1.9 million and $2.2 million, respectively. The Company made income tax payments of $0.1 million and $1.1 million during the first nine months of 2015 and 2014. Transfers from loans to foreclosed assets held-for-sale amounted to $0.6 million and $1.2 million during the nine months ended September 30, 2015 and 2014, respectively. During the same respective periods, transfers from loans to loans HFS amounted to $2.9 million and $0 and from loans to bank premises and equipment amounted to $0 and $1.0 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 an exposure draft issued in the fourth quarter of 2012, the Financial Accounting Standards Board (FASB) proposed changes to the accounting guidance related to the impairment of financial assets and the recognition of credit losses. The FASB proposal would require financial institutions to reserve for losses for the duration of the credit exposure as opposed to reserving for probable losses. The new methodology would be known as the “current expected credit losses” (CECL) methodology. The FASB is currently in the process of re-deliberating significant issues raised through feedback received from comment letters and outreach activities. Among other things, the guidance in the proposed update regarding an entity’s estimate of expected credit losses will be clarified as follows:

An entity should revert to a historical average loss experience for the future periods beyond which the entity is able to make or obtain reasonable and supportable forecasts;

An entity should consider all contractual cash flows over the life of the related financial assets;

When determining the contractual cash flows and the life of the related financial assets:

An entity should consider expected prepayments;

An entity should not consider expected extensions, renewals, and modifications unless the entity reasonably expects that it will execute a troubled debt restructuring with a borrower;

An entity’s estimate of expected credit losses should always reflect the risk of loss, even when that risk is remote. However, an entity would not be required to recognize a loss on a financial asset in which the risk of nonpayment is greater than zero yet the amount of loss would be zero;

In addition to using a discounted cash flow model to estimate expected credit losses, an entity would not be prohibited from developing an estimate of credit losses using loss-rate methods, probability-of-default methods or a provision matrix using loss factors;

The final guidance on expected credit losses will include implementation guidance describing the factors that an entity should consider to adjust historical loss experience for current conditions and reasonable and supportable forecast.

FASB expects to issue this proposed accounting standard update in late 2015. An effective date has yet to be discussed. Upon adoption, the change in this accounting guidance could result in an increase in the Company's allowance for loan losses and require the Company to record loan losses more rapidly. Upon final issuance of the standard, the Company will be able to better evaluate the potential impact of this new standard on its consolidated financial statements.

In August 2014, the FASB issued an accounting standard update (ASU 2014-14) related to; Receivables – Troubled Debt Restructurings by Creditors (Subtopic 310-40) Classification of Certain Government-Guaranteed Mortgage Loans upon Foreclosure.

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The update requires that a mortgage loan be derecognized and that a separate other receivable be recognized upon foreclosure if the following conditions are met: (1) The loan has a government guarantee that is not separable from the loan before foreclosure; (2) At the time of foreclosure, the creditor has the intent to convey the real estate property to the guarantor and make a claim on the guarantee, and the creditor has the ability to recover under that claim; (3) At the time of foreclosure, any amount of the claim that is determined on the basis of the fair value of the real estate is fixed. Upon foreclosure, the separate other receivable should be measured based on the amount of the loan balance (principal and interest) expected to be recovered from the guarantor. The amendments in the update are effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2014. The Company adopted this accounting standard during the first quarter of 2015 and it did not have a material impact on its consolidated financial statements.

In June 2014, the FASB issued ASU 2014-12, Compensation – Stock Compensation (Topic 718) Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period, an amendment to the stock compensation accounting guidance to clarify that a performance target that affects vesting of a share-based payment and that could be achieved after the requisite service period be treated as a performance condition. As such, the performance target should not be reflected in estimating the grant-date fair value of the award. Compensation cost should be recognized in the period in which it becomes probable that the performance target will be achieved and should represent the compensation cost attributable to the period(s) for which the requisite service has already been rendered. This amendment is effective for annual reporting periods, including interim periods within those annual periods, beginning after December 15, 2015. Early adoption is permitted. Entities may apply the amendments in this update either (a) prospectively to all awards granted or modified after the effective date or (b) retrospectively to all awards with performance targets that are outstanding as of the beginning of the earliest annual period presented in the financial statements and to all new or modified awards thereafter. The Company does not expect this amendment to have a material impact on its consolidated financial statements.

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers, which supersedes nearly all existing revenue recognition guidance under U.S. GAAP. The core principle of ASU 2014-09 is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration to which an entity expects to be entitled for those goods or services. ASU 2014-09 defines a five step process to achieve this core principle and, in doing so, more judgment and estimates may be required within the revenue recognition process than are required under existing U.S. GAAP: identify the contract(s) with a customer; identify the performance obligations in the contract; determine the transaction price; allocate the transaction price to the performance obligations in the contract; recognize revenue when (or as) the entity satisfies a performance obligation. The standard is effective for annual periods beginning after December 15, 2017, and interim periods therein, using either of the following transition methods: a full retrospective approach reflecting the application of the standard in each prior reporting period with the option to elect certain practical expedients, or a retrospective approach with the cumulative effect of initially adopting ASU 2014-09 recognized at the date of adoption (which includes additional footnote disclosures). The Company is evaluating the impact of the adoption of ASU 2014-09 on its consolidated financial statements and has not yet determined the method by which it will adopt the standard effective in the first quarter of 2018.

In January 2014, the FASB issued ASU 2014-04 related to; Receivables – Troubled Debt Restructurings by Creditors (Subtopic 310-40) Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure. The update applies to all creditors who obtain physical possession of residential real estate property collateralizing a consumer mortgage loan in satisfaction of a receivable. The amendments in this update clarify when an in-substance repossession or foreclosure occurs and requires disclosure of both (1) the amount of foreclosed residential real estate property held by a creditor and (2) the recorded investment in consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure according to local requirements of the applicable jurisdiction. The amendments in the update are effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2014. The Company adopted this accounting standard during the first quarter of 2015 and it did not have a material impact on its consolidated financial statements.

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3. Accumulated other comprehensive income

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



As of and for the nine months ended September 30, 2015

	Unrealized gains
	on available-for-
(dollars in thousands)	sale securities		Total
Beginning balance	$	2,743	$	2,743

Other comprehensive loss before reclassifications, net of tax		(193)		(193)
Amounts reclassified from accumulated other comprehensive income, net of tax		(17)		(17)
Net current-period other comprehensive loss		(210)		(210)
Ending balance	$	2,533	$	2,533



As of and for the three months ended September 30, 2015

	Unrealized gains
	on available-for-
(dollars in thousands)	sale securities		Total
Beginning balance	$	1,912	$	1,912

Other comprehensive income before reclassifications, net of tax		626		626
Amounts reclassified from accumulated other comprehensive income, net of tax		(5)		(5)
Net current-period other comprehensive income		621		621
Ending balance	$	2,533	$	2,533



As of and for the nine months ended September 30, 2014

	Unrealized gains
	on available-for-
(dollars in thousands)	sale securities		Total
Beginning balance	$	1,239	$	1,239

Other comprehensive income before reclassifications, net of tax		1,609		1,609
Amounts reclassified from accumulated other comprehensive income, net of tax		(199)		(199)
Net current-period other comprehensive income		1,410		1,410
Ending balance	$	2,649	$	2,649


As of and for the three months ended September 30, 2014

	Unrealized gains
	on available-for-
(dollars in thousands)	sale securities		Total
Beginning balance	$	2,585	$	2,585

Other comprehensive income before reclassifications, net of tax		64		64
Amounts reclassified from accumulated other comprehensive income, net of tax		-		-
Net current-period other comprehensive income		64		64
Ending balance	$	2,649	$	2,649

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Details about accumulated other
comprehensive income components	Amount reclassified from accumulated								Affected line item in the statement
(dollars in thousands)	other comprehensive income								where net income is presented
	Three months ended				Nine months ended
	September 30,				September 30,
	2015		2014		2015		2014

Unrealized gains on AFS securities	$	8	$	-	$	26	$	301	Gain on sale of investment securities
		(3)		-		(9)		(102)	Provision for income taxes
Total reclassifications for the period	$	5	$	-	$	17	$	199	Net income

4. Investment securities

Agency – Government-sponsored enterprise (GSE) and MBS - GSE residential

Agency – GSE and MBS – GSE residential securities consist of short- to long-term notes issued by Federal Home Loan Mortgage Corporation (FHLMC), Federal National Mortgage Association (FNMA), Federal Home Loan Bank (FHLB) and Government National Mortgage Association (GNMA). These securities have interest rates that are fixed and adjustable, have varying short- to long-term maturity dates and have contractual cash flows guaranteed by the U.S. government or agencies of the U.S. government.

Obligations of states and political subdivisions

The municipal securities are bank qualified or bank eligible, general obligation and revenue bonds rated as investment grade by various credit rating agencies and have fixed rates of interest with mid- to long-term maturities. Fair values of these securities are highly driven by interest rates. Management performs ongoing credit quality reviews on these issues.

The amortized cost and fair value of investment securities at September 30, 2015 and December 31, 2014 are summarized as follows:



			Gross		Gross
	Amortized		unrealized		unrealized		Fair
(dollars in thousands)	cost		gains		losses		value
September 30, 2015
Held-to-maturity securities:
MBS - GSE residential	$	-	$	-	$	-	$	-

Available-for-sale securities:
Agency - GSE	$	18,421	$	165	$	8	$	18,578
Obligations of states and political subdivisions		36,269		2,139		93		38,315
MBS - GSE residential		67,959		1,449		47		69,361

Total debt securities		122,649		3,753		148		126,254

Equity securities - financial services		294		234		-		528

Total available-for-sale securities	$	122,943	$	3,987	$	148	$	126,782

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