fdbc 20160630 10Q Q2

FIDELITY D & D BANCORP, INC.

Form 10-Q June 30, 2016

Index


Part I. Financial Information		Page
Item 1.	Financial Statements (unaudited):
	Consolidated Balance Sheets as of June 30, 2016 and December 31, 2015	3
	Consolidated Statements of Income for the three and six months ended June 30, 2016 and 2015	4
	Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2016 and 2015	5
	Consolidated Statements of Changes in Shareholders’ Equity for the six months ended June 30, 2016 and 2015	6
	Consolidated Statements of Cash Flows for the six months ended June 30, 2016 and 2015	7
	Notes to Consolidated Financial Statements (Unaudited)	8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	29
Item 3.	Quantitative and Qualitative Disclosure about Market Risk	46
Item 4.	Controls and Procedures	52

Part II. Other Information
Item 1.	Legal Proceedings	53
Item 1A.	Risk Factors	53
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	53
Item 3.	Defaults upon Senior Securities	53
Item 4.	Mine Safety Disclosures	53
Item 5.	Other Information	53
Item 6.	Exhibits	53
Signatures		55
Exhibit index		56

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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)	June 30, 2016		December 31, 2015
Assets:
Cash and due from banks	$	10,801	$	12,259
Interest-bearing deposits with financial institutions		17,052		18
Total cash and cash equivalents		27,853		12,277
Available-for-sale securities		129,760		125,232
Federal Home Loan Bank stock		1,140		2,120
Loans and leases, net (allowance for loan losses of
$9,207 in 2016; $9,527 in 2015)		551,997		546,682
Loans held-for-sale (fair value $1,591 in 2016, $1,444 in 2015)		1,554		1,421
Foreclosed assets held-for-sale		1,555		1,074
Bank premises and equipment, net		16,455		16,723
Cash surrender value of bank owned life insurance		11,257		11,082
Accrued interest receivable		2,187		2,210
Other assets		12,718		10,537
Total assets	$	756,476	$	729,358
Liabilities:
Deposits:
Interest-bearing	$	505,524	$	477,901
Non-interest-bearing		157,776		142,774
Total deposits		663,300		620,675
Accrued interest payable and other liabilities		5,522		4,128
Short-term borrowings		7,258		28,204
Total liabilities		676,080		653,007
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; 2,453,805 in 2016; and 2,443,405 in 2015)		26,992		26,700
Retained earnings		49,709		47,463
Accumulated other comprehensive income		3,695		2,188
Total shareholders' equity		80,396		76,351
Total liabilities and shareholders' equity	$	756,476	$	729,358

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				Six months ended
(dollars in thousands except per share data)	June 30, 2016		June 30, 2015		June 30, 2016		June 30, 2015
Interest income:
Loans and leases:
Taxable	$	5,796	$	5,651	$	11,611	$	11,150
Nontaxable		193		162		384		301
Interest-bearing deposits with financial institutions		24		1		46		17
Investment securities:
U.S. government agency and corporations		366		273		736		533
States and political subdivisions (nontaxable)		316		329		633		642
Other securities		20		22		41		99
Total interest income		6,715		6,438		13,451		12,742
Interest expense:
Deposits		567		508		1,147		1,065
Securities sold under repurchase agreements		4		4		12		12
Other short-term borrowings and other		3		11		13		12
Long-term debt		-		124		-		255
Total interest expense		574		647		1,172		1,344
Net interest income		6,141		5,791		12,279		11,398
Provision for loan losses		275		150		425		300
Net interest income after provision for loan losses		5,866		5,641		11,854		11,098
Other income:
Service charges on deposit accounts		515		412		1,003		827
Interchange fees		381		337		737		639
Fees from trust fiduciary activities		193		197		363		414
Fees from financial services		206		110		310		237
Service charges on loans		293		224		471		400
Fees and other revenue		195		215		392		411
Earnings on bank-owned life insurance		88		84		175		169
Gain on sale or disposal of:
Loans		220		238		327		467
Investment securities		9		16		9		18
Premises and equipment		-		-		-		1
Total other income		2,100		1,833		3,787		3,583
Other expenses:
Salaries and employee benefits		2,893		2,643		5,768		5,296
Premises and equipment		826		875		1,744		1,816
Advertising and marketing		203		263		458		650
Professional services		399		477		788		815
FDIC assessment		112		87		237		194
Loan collection		81		66		125		96
Other real estate owned		67		48		89		147
Office supplies and postage		123		112		242		213
Automated transaction processing		154		138		281		258
FHLB prepayment fee		-		570		-		570
Data processing and communication		271		103		459		208
PA shares tax		164		145		306		150
Other		76		217		260		418
Total other expenses		5,369		5,744		10,757		10,831
Income before income taxes		2,597		1,730		4,884		3,850
Provision (credit) for income taxes		669		(50)		1,255		497
Net income	$	1,928	$	1,780	$	3,629	$	3,353
Per share data:
Net income - basic	$	0.79	$	0.73	$	1.48	$	1.38
Net income - diluted	$	0.79	$	0.73	$	1.48	$	1.37
Dividends	$	0.29	$	0.27	$	0.56	$	0.52

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				Six months ended
(Unaudited)	June 30,				June 30,
(dollars in thousands)	2016		2015		2016		2015

Net income	$	1,928	$	1,780	$	3,629	$	3,353

Other comprehensive income (loss), before tax:
Unrealized holding gain (loss) on available-for-sale securities		1,209		(1,476)		2,293		(1,241)
Reclassification adjustment for net gains realized in income		(9)		(16)		(9)		(18)
Net unrealized gain (loss)		1,200		(1,492)		2,284		(1,259)
Tax effect		(408)		507		(777)		428
Unrealized gain (loss), net of tax		792		(985)		1,507		(831)
Other comprehensive income (loss), net of tax		792		(985)		1,507		(831)
Total comprehensive income, net of tax	$	2,720	$	795	$	5,136	$	2,522

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 six months ended June 30, 2016 and 2015
(Unaudited)							Accumulated
							other
	Capital stock				Retained		comprehensive
(dollars in thousands)	Shares		Amount		earnings		income		Total
Balance, December 31, 2014		2,427,767	$	26,272	$	43,204	$	2,743	$	72,219
Net income						3,353				3,353
Other comprehensive loss								(831)		(831)
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				131						131
Cash dividends declared						(1,275)				(1,275)
Balance, June 30, 2015		2,439,905	$	26,505	$	45,282	$	1,912	$	73,699

Balance, December 31, 2015		2,443,405	$	26,700	$	47,463	$	2,188	$	76,351
Net income						3,629				3,629
Other comprehensive income								1,507		1,507
Issuance of common stock through Employee Stock Purchase Plan		3,695		111						111
Issuance of common stock from vested restricted share grants through stock compensation plans		6,205
Issuance of common stock through exercise of stock options		500		14						14
Stock-based compensation expense				167						167
Cash dividends declared						(1,383)				(1,383)
Balance, June 30, 2016		2,453,805	$	26,992	$	49,709	$	3,695	$	80,396

See notes to unaudited consolidated financial statements

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Fidelity D & D Bancorp, Inc. and Subsidiary
Consolidated Statements of Cash Flows
(Unaudited)	Six months ended June 30,
(dollars in thousands)	2016		2015

Cash flows from operating activities:
Net income	$	3,629	$	3,353
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation, amortization and accretion		1,765		1,741
Provision for loan losses		425		300
Deferred income tax expense		1,110		453
Stock-based compensation expense		252		131
Proceeds from sale of loans held-for-sale		18,931		22,179
Originations of loans held-for-sale		(17,301)		(22,123)
Earnings from bank-owned life insurance		(175)		(169)
Net gain from sales of loans		(327)		(467)
Net gain from sales of investment securities		(9)		(18)
Net loss from sale and write-down of foreclosed assets held-for-sale		24		30
Change in:
Accrued interest receivable		23		(112)
Other assets		(2,466)		2,484
Accrued interest payable and other liabilities		44		354
Net cash provided by operating activities		5,925		8,136

Cash flows from investing activities:
Available-for-sale securities:
Proceeds from sales		2,884		10,420
Proceeds from maturities, calls and principal pay-downs		9,301		10,593
Purchases		(15,231)		(46,959)
Decrease (increase) in FHLB stock		980		(682)
Net increase in loans and leases		(8,235)		(24,676)
Acquisition of bank premises and equipment		(802)		(1,028)
Proceeds from sale of foreclosed assets held-for-sale		332		1,019
Net cash used in investing activities		(10,771)		(51,313)

Cash flows from financing activities:
Net increase in deposits		42,626		19,942
Net (decrease) increase in short-term borrowings		(20,946)		30,294
Repayment of long-term debt		-		(10,000)
Proceeds from employee stock purchase plan participants		111		102
Exercise of stock options		14		-
Dividends paid, net of dividends reinvested		(1,383)		(1,275)
Net cash provided by financing activities		20,422		39,063
Net increase (decrease) in cash and cash equivalents		15,576		(4,114)
Cash and cash equivalents, beginning		12,277		25,851

Cash and cash equivalents, ending	$	27,853	$	21,737

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, 2015.

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 June 30, 2016 and December 31, 2015 and the related consolidated statements of income and consolidated statements of comprehensive income for the three and six months ended June 30, 2016 and 2015, and consolidated statements of changes in shareholders’ equity and consolidated statements of cash flows for the six months ended June 30, 2016 and 2015 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 2015 financial statements to conform to the 2016 presentation.

In preparing these consolidated financial statements, the Company evaluated the events and transactions that occurred after June 30, 2016 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, 2015, 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 June 30, 2016 is adequate and reasonable. Given the subjective nature of identifying and estimating loan losses, it is likely that well-informed individuals could make different assumptions and could, therefore, calculate a materially different allowance amount. 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. All of the Company’s investment securities are classified as available-for-sale (AFS). AFS securities are carried at fair value on the

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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 (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 June 30, 2016 and December 31, 2015, loans classified as HFS consisted of residential mortgage loans.

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 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 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 each of the six months ended June 30, 2016 and 2015, the Company paid interest of $1.1 million and $1.3 million, respectively. The Company made an income tax payment of $0.2 million during the first half of 2016 and did not make any income tax payment during the first half of 2015. For the six months ended June 30, 2016 and 2015, the Company had a net change in unrealized gains on available for sale securities of $2.3 million and $(1.3 million), respectively.

Transfers from loans to foreclosed assets held-for-sale amounted to $0.8 million and $0.6 million during the six months ended June 30, 2016 and 2015, respectively. During the same respective periods, transfers from loans to loans held-for-sale amounted to $1.7 million and $1.8 million. Expenditures for construction in process, a component of other assets in the consolidated balance sheets, are included in acquisition of premises and equipment.

2. New accounting pronouncements

In June 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standard Update (ASU) 2016-13, Financial Instruments – Credit Losses (Topic 326) Measurement of Credit Losses on Financial Instruments. The amendments in this update require financial assets measured at amortized cost basis to be presented at the net amount expected to be collected, through an allowance for credit losses that is deducted from the amortized cost basis. Previously, when credit losses were measured under GAAP, an entity only considered past events and current conditions when measuring the incurred loss. The amendments in this update broaden the information that an entity must consider in developing its expected credit loss estimate for assets measured either collectively or individually. The measurement of expected credit losses is based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. An entity must use judgement in determining the relevant information and estimation methods that are appropriate under the circumstances. The amendments in this update also require that credit losses on available-for-sale debt securities be presented as an allowance for credit losses rather than a writedown. The amendments in this update are effective for fiscal years, including interim periods within those fiscal years, beginning after December 15, 2019 for public companies. Early adoption is permitted beginning after December 15, 2018, including interim periods within those fiscal years. An entity will apply the amendments in this update through a cumulative-effect adjustment to retained earnings as of the beginning of the period of adoption (modified-retrospective approach). 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. The Company is currently evaluating the impact of ASU 2016-13 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 adopted this

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accounting standard update during the first quarter of 2016 and does not expect this amendment to have a material impact on its consolidated financial statements.

In March 2016, the FASB issued ASU 2016-09, Compensation – Stock Compensation (Topic 718) Improvements to Employee Share-Based Payment Accounting. The areas for simplification in the update involve several aspects of accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The amendments in this update are effective for annual reporting periods, including interim periods within those annual periods, beginning after December 15, 2016. Early adoption is permitted. Amendments should be applied using either a modified retrospective transition method by means of a cumulative-effect adjustment to equity as of the beginning of the period in which the guidance is adopted, retrospectively, prospectively, or using either a prospective transition method or a retrospective transition method. 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.

Subsequently, the FASB issued additional guidance to clarify certain implementation issues. Specifically, the FASB issued Principal versus Agent Considerations, Identifying Performance Obligations and Licensing and Narrow-Scope Improvements and Practical Expedients in March, April and May 2016, respectively. These amendments do not change the core principle in Revenue from Contracts with Customers (Topic 606) and the effective date and transition requirements are consistent with those in Topic 606.

In January 2016, the FASB issued ASU 2016-01 related to Financial Instruments - Overall (Subtopic 825-10) Recognition and Measurement of Financial Assets and Financial Liabilities. The update applies to all entities that hold financial assets or owe financial liabilities. The amendments in this update make targeted improvements to U.S. GAAP as follows:

Require equity investments to be measured at fair value with changes in fair value recognized in net income;

Simplify the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment;

Require public business entities to use the exit price notion when measuring fair value of financial instruments for disclosure purposes;

Require separate presentation of financial assets and financial liabilities by measurement category and form of financial asset;

Clarify that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities.

The amendments are effective for public business entities for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Company is evaluating the impact of the adoption of ASU 2016-01 on its consolidated financial statements, but does not expect it to have a significant impact.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. ASU 2016-02 requires the recognition of a right-of-use asset and related lease liability by lessees for leases classified as operating leases under GAAP. The amendments in this update are effective for the Company for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption of the amendments in this update are permitted. A modified retroactive approach must be applied for leases existing at, or entered into after, the beginning of the earliest comparative period. The Company is currently evaluating the impact of adopting this new guidance on the 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 six months ended June 30, 2016
	Unrealized gains
	(losses) on
	available-for-sale
(dollars in thousands)	securities		Total
Beginning balance	$	2,188	$	2,188

Other comprehensive income before reclassifications, net of tax		1,513		1,513
Amounts reclassified from accumulated other comprehensive income, net of tax		(6)		(6)
Net current-period other comprehensive income		1,507		1,507
Ending balance	$	3,695	$	3,695



As of and for the three months ended June 30, 2016
	Unrealized gains
	(losses) on
	available-for-sale
(dollars in thousands)	securities		Total
Beginning balance	$	2,903	$	2,903

Other comprehensive income before reclassifications, net of tax		798		798
Amounts reclassified from accumulated other comprehensive income, net of tax		(6)		(6)
Net current-period other comprehensive income		792		792
Ending balance	$	3,695	$	3,695



As of and for the six months ended June 30, 2015
	Unrealized gains
	(losses) on
	available-for-sale
(dollars in thousands)	securities		Total
Beginning balance	$	2,743	$	2,743

Other comprehensive loss before reclassifications, net of tax		(819)		(819)
Amounts reclassified from accumulated other comprehensive income, net of tax		(12)		(12)
Net current-period other comprehensive loss		(831)		(831)
Ending balance	$	1,912	$	1,912


As of and for the three months ended June 30, 2015
	Unrealized gains
	(losses) on
	available-for-sale
(dollars in thousands)	securities		Total
Beginning balance	$	2,897	$	2,897

Other comprehensive loss before reclassifications, net of tax		(974)		(974)
Amounts reclassified from accumulated other comprehensive income, net of tax		(11)		(11)
Net current-period other comprehensive loss		(985)		(985)
Ending balance	$	1,912	$	1,912

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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				Six months ended
	June 30,				June 30,
	2016		2015		2016		2015

Unrealized gains on AFS securities	$	9	$	16	$	9	$	18	Gain on sale of investment securities
		(3)		(5)		(3)		(6)	Provision for income taxes
Total reclassifications for the period	$	6	$	11	$	6	$	12	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 June 30, 2016 and December 31, 2015 are summarized as follows:



			Gross		Gross
	Amortized		unrealized		unrealized		Fair
(dollars in thousands)	cost		gains		losses		value
June 30, 2016
Available-for-sale securities:
Agency - GSE	$	18,346	$	202	$	-	$	18,548
Obligations of states and political subdivisions		34,912		3,374		-		38,286
MBS - GSE residential		70,607		1,807		(31)		72,383

Total debt securities		123,865		5,383		(31)		129,217

Equity securities - financial services		295		248		-		543

Total available-for-sale securities	$	124,160	$	5,631	$	(31)	$	129,760



			Gross		Gross
	Amortized		unrealized		unrealized		Fair
(dollars in thousands)	cost		gains		losses		value
December 31, 2015
Available-for-sale securities:
Agency - GSE	$	18,374	$	36	$	(24)	$	18,386
Obligations of states and political subdivisions		34,599		2,310		(24)		36,885
MBS - GSE residential		68,648		1,066		(299)		69,415

Total debt securities		121,621		3,412		(347)		124,686

Equity securities - financial services		295		251		-		546


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