fdbc 20190331 10Q Q1

FIDELITY D & D BANCORP, INC.

Form 10-Q March 31, 2019

Index


Part I. Financial Information		Page
Item 1.	Financial Statements (unaudited):
	Consolidated Balance Sheets as of March 31, 2019 and December 31, 2018	3
	Consolidated Statements of Income for the three months ended March 31, 2019 and 2018	4
	Consolidated Statements of Comprehensive Income for the three months ended March 31, 2019 and 2018	5
	Consolidated Statements of Changes in Shareholders’ Equity for the three months ended March 31, 2019 and 2018	6
	Consolidated Statements of Cash Flows for the three months ended March 31, 2019 and 2018	7
	Notes to Consolidated Financial Statements (Unaudited)	9
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	33
Item 3.	Quantitative and Qualitative Disclosure about Market Risk	50
Item 4.	Controls and Procedures	55

Part II. Other Information
Item 1.	Legal Proceedings	56
Item 1A.	Risk Factors	56
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	56
Item 3.	Defaults upon Senior Securities	56
Item 4.	Mine Safety Disclosures	56
Item 5.	Other Information	56
Item 6.	Exhibits	56
Signatures		58

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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)	March 31, 2019		December 31, 2018
Assets:
Cash and due from banks	$	12,997	$	16,025
Interest-bearing deposits with financial institutions		2,313		1,460
Total cash and cash equivalents		15,310		17,485
Available-for-sale securities		182,496		182,810
Federal Home Loan Bank stock		3,663		6,339
Loans and leases, net (allowance for loan losses of
$9,522 in 2019; $9,747 in 2018)		703,018		718,317
Loans held-for-sale (fair value $1,240 in 2019, $5,789 in 2018)		1,222		5,707
Foreclosed assets held-for-sale		420		190
Bank premises and equipment, net		18,186		18,289
Leased property under finance leases, net		330		333
Right-of-use assets		4,100		-
Cash surrender value of bank owned life insurance		22,761		20,615
Accrued interest receivable		3,322		3,271
Goodwill		209		209
Other assets		9,183		7,537
Total assets	$	964,220	$	981,102
Liabilities:
Deposits:
Interest-bearing	$	594,675	$	575,452
Non-interest-bearing		230,610		194,731
Total deposits		825,285		770,183
Accrued interest payable and other liabilities		8,735		8,956
Finance lease obligation		334		336
Operating lease liabilities		4,514		-
Short-term borrowings		5,906		76,366
FHLB advances		21,704		31,704
Total liabilities		866,478		887,545
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; 3,780,975 in 2019; and 3,759,426 in 2018)		30,204		29,715
Retained earnings		66,642		64,937
Accumulated other comprehensive income (loss)		896		(1,095)
Total shareholders' equity		97,742		93,557
Total liabilities and shareholders' equity	$	964,220	$	981,102

See notes to unaudited consolidated financial statements

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Fidelity D & D Bancorp, Inc. and Subsidiary
Consolidated Statements of Income
(Unaudited)
(dollars in thousands except per share data)	March 31, 2019		March 31, 2018
Interest income:
Loans and leases:
Taxable	$	7,891	$	6,699
Nontaxable		267		212
Interest-bearing deposits with financial institutions		15		42
Restricted regulatory securities		100		40
Investment securities:
U.S. government agency and corporations		960		775
States and political subdivisions (nontaxable)		422		370
Other securities		-		5
Total interest income		9,655		8,143
Interest expense:
Deposits		1,331		804
Securities sold under repurchase agreements		-		7
Other short-term borrowings and other		271		7
FHLB advances		143		66
Total interest expense		1,745		884
Net interest income		7,910		7,259
Provision for loan losses		255		300
Net interest income after provision for loan losses		7,655		6,959
Other income:
Service charges on deposit accounts		539		553
Interchange fees		494		469
Fees from trust fiduciary activities		294		401
Fees from financial services		235		177
Service charges on loans		280		172
Fees and other revenue		256		232
Earnings on bank-owned life insurance		146		152
Net losses on equity securities		-		(64)
Gain (loss) on write-down, sale or disposal of:
Loans		218		186
Available-for-sale debt securities		(4)		6
Premises and equipment		(1)		(1)
Total other income		2,457		2,283
Other expenses:
Salaries and employee benefits		3,704		3,367
Premises and equipment		1,075		968
Advertising and marketing		399		405
Professional services		385		402
Data processing and communication		411		354
Automated transaction processing		186		185
Office supplies and postage		105		105
FDIC assessment		67		68
PA shares tax		40		40
Loan collection		41		23
Other real estate owned		51		59
Other		306		232
Total other expenses		6,770		6,208
Income before income taxes		3,342		3,034
Provision for income taxes		540		506
Net income	$	2,802	$	2,528
Per share data :
Net income - basic	$	0.74	$	0.67
Net income - diluted	$	0.73	$	0.67
Dividends	$	0.26	$	0.24

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
(Unaudited)	March 31,
(dollars in thousands)	2019		2018

Net income	$	2,802	$	2,528

Other comprehensive income (loss), before tax:
Unrealized holding gain (loss) on available-for-sale debt securities		2,516		(2,477)
Reclassification adjustment for net losses (gains) realized in income		4		(6)
Net unrealized gain (loss)		2,520		(2,483)
Tax effect		(529)		521
Unrealized gain (loss), net of tax		1,991		(1,962)
Other comprehensive income (loss), net of tax		1,991		(1,962)
Total comprehensive income, net of tax	$	4,793	$	566

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 three months ended March 31, 2019 and 2018
(Unaudited)							Accumulated
							other
	Capital stock				Retained		comprehensive
(dollars in thousands)	Shares		Amount		earnings		income (loss)		Total
Balance, December 31, 2017		3,734,478	$	28,361	$	57,218	$	1,804	$	87,383
Net income						2,528				2,528
Other comprehensive loss								(1,962)		(1,962)
Effect of adopting ASU 2016-01						421		(421)		-
Issuance of common stock through Employee Stock Purchase Plan		6,783		149						149
Issuance of common stock from vested restricted share grants through stock compensation plans		9,469
Issuance of common stock through exercise of stock options		750		14						14
Stock-based compensation expense				298						298
Cash dividends declared						(908)				(908)
Balance, March 31, 2018		3,751,480	$	28,822	$	59,259	$	(579)	$	87,502

Balance, December 31, 2018		3,759,426	$	29,715	$	64,937	$	(1,095)	$	93,557
Net income						2,802				2,802
Other comprehensive income								1,991		1,991
Effect of adopting ASU 2016-02						(107)				(107)
Issuance of common stock through Employee Stock Purchase Plan		4,535		175						175
Issuance of common stock from vested restricted share grants through stock compensation plans		15,049
Issuance of common stock through exercise of SSARs		1,965		-						-
Stock-based compensation expense				314						314
Cash dividends declared						(990)				(990)
Balance, March 31, 2019		3,780,975	$	30,204	$	66,642	$	896	$	97,742

See notes to unaudited consolidated financial statements

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Fidelity D & D Bancorp, Inc. and Subsidiary
Consolidated Statements of Cash Flows
(Unaudited)	Three months ended March 31,
(dollars in thousands)	2019		2018

Cash flows from operating activities:
Net income	$	2,802	$	2,528
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation, amortization and accretion		740		755
Provision for loan losses		255		300
Deferred income tax expense		218		378
Stock-based compensation expense		279		273
Excess tax benefit from exercise of stock options		23		4
Proceeds from sale of loans held-for-sale		12,702		8,168
Originations of loans held-for-sale		(6,231)		(7,150)
Earnings from bank-owned life insurance		(146)		(152)
Net gain from sales of loans		(218)		(186)
Net unrealized loss on equity securities		-		64
Net loss (gain) from sales of investment securities		4		(6)
Net loss from sale and write-down of foreclosed assets held-for-sale		21		30
Net loss from write-down and disposal of bank premises and equipment		1		1
Operating lease payments		7		-
Change in:
Accrued interest receivable		(50)		(55)
Other assets		(633)		(1,684)
Accrued interest payable and other liabilities		(1,583)		140
Net cash provided by operating activities		8,191		3,408

Cash flows from investing activities:
Available-for-sale securities:
Proceeds from sales		4,705		10,806
Proceeds from maturities, calls and principal pay-downs		9,052		5,493
Purchases		(11,145)		(27,510)
Decrease in FHLB stock		2,676		512
Net decrease (increase) in loans and leases		12,298		(4,079)
Principal portion of lease payments received under direct finance leases		548		-
Purchase of life insurance policies		(2,000)		-
Purchases of bank premises and equipment		(334)		(214)
Proceeds from sale of foreclosed assets held-for-sale		26		24
Net cash provided by (used in) investing activities		15,826		(14,968)

Cash flows from financing activities:
Net increase in deposits		55,102		45,145
Net decrease in short-term borrowings		(70,460)		(9,860)
Repayment of FHLB advances		(10,000)		(2,500)
Repayment of finance lease obligation		(19)		-
Proceeds from employee stock purchase plan participants		175		149
Exercise of stock options		-		14
Dividends paid		(990)		(908)
Net cash (used in) provided by financing activities		(26,192)		32,040
Net (decrease) increase in cash and cash equivalents		(2,175)		20,480
Cash and cash equivalents, beginning		17,485		15,825

Cash and cash equivalents, ending	$	15,310	$	36,305

See notes to unaudited consolidated financial statements

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Fidelity D & D Bancorp, Inc. and Subsidiary
Consolidated Statements of Cash Flows (continued)
(Unaudited)	Three months ended March 31,
(dollars in thousands)	2019		2018
Supplemental Disclosures of Cash Flow Information
Cash payments for:
Interest	$	1,626	$	872
Income tax		-		-
Supplemental Disclosures of Non-cash Investing Activities:
Net change in unrealized gains on available-for-sale securities		2,521		(2,483)
Transfers from loans to foreclosed assets held-for-sale		277		481
Transfers from loans to loans held-for-sale		1,925		320
Security settlement pending		1,698		760
Right-of-use asset		4,133		-

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, 2018.

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 March 31, 2019 and December 31, 2018 and the related consolidated statements of income and consolidated statements of comprehensive income for the three months ended March 31, 2019 and 2018, and consolidated statements of changes in shareholders’ equity and consolidated statements of cash flows for the three months ended March 31, 2019 and 2018 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 2018 financial statements to conform to the 2019 presentation.

In preparing these consolidated financial statements, the Company evaluated the events and transactions that occurred after March 31, 2019 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, 2018, 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 March 31, 2019 is adequate and reasonable to cover incurred losses. 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 debt securities are classified as available-for-sale (AFS). AFS debt 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 March 31, 2019 and December 31, 2018, 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.

Goodwill is recorded on the consolidated balance sheets as the excess of liabilities assumed over identifiable assets acquired on the acquisition date. Goodwill is recorded at its net carrying value which represents estimated fair value. The goodwill is deductible for tax purposes over a 15 year period.

The Company holds separate supplemental executive retirement (SERP) agreements for certain officers and an amount is credited to each participant’s SERP account monthly while they are actively employed by the bank until retirement. A deferred tax asset is provided for the non-deductible SERP expense. The Company also entered into separate split dollar life insurance arrangements with four executives providing post-retirement benefits and accrues monthly expense for this benefit. The split dollar life insurance expense is not deductible for tax purposes. Monthly expenses for the SERP and post-retirement split dollar life benefit are recorded as components of salaries and employee benefit expense on 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. 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. In November 2018, the FASB issued ASU 2018-19, Codification Improvements to Topic 326, which clarifies that receivables arising from operating leases are not within the scope of Topic 326. In December 2018, regulators issued a final rule related to regulatory capital (Regulatory Capital Rule: Implementation and Transition of the Current Expected Credit Losses Methodology for Allowances and Related Adjustments to the Regulatory Capital Rule and Conforming Amendments to Other Regulations) which is intended to provide regulatory capital relief for entities transitioning to CECL. 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 has engaged the services of a qualified third party service provider to assist management in estimating credit allowances under this standard and is currently evaluating the impact of ASU 2016-13 on its consolidated financial statements.

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

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as operating leases under GAAP. The Company made an election to exclude leases less than 12 months from the provisions of this ASU. The Company also elected the “package of practical expedients” which allowed us not to reassess, under the new standard, lease classification, lease identification and initial direct costs. The Company had several lease agreements, such as branch locations, which were considered operating leases, and therefore not recognized on the Company’s consolidated balance sheets. The Company adopted this standard on January 1 2019 and made an adjustment to add $4.1 million to the consolidated balance sheet as a right-of-use-asset, $4.6 million as a lease liability and reduced equity by ($0.1 million). There was not any significant effect on the consolidated statements of income. See Footnote 11, Leases, for more information regarding the adoption of this standard.

In July 2018, the FASB issued ASU 2018-10, Codification Improvements to Topic 842, Leases and ASU 2018-11, Leases (Topic 842) Targeted Improvements to clarify how to apply certain aspects of ASU 2016-02 and to simplify adoption and reduce costs. ASU 2018-11 allows companies the option to apply the provisions of the new lease standard prospectively as of the effective date, without adjusting comparative periods, and recognizes a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. The Company used this additional transition method. The amendments in this update are effective upon adoption of Topic 842.

In December 2018, the FASB issued ASU 2018-20, Leases (Topic 842): Narrow-Scope Improvements for Lessors to assist stakeholders with implementation questions and issues on certain issues. The amendments in this update are effective upon adoption of Topic 842.

In March 2019, the FASB issued ASU 2019-01, Leases (Topic 842): Codification Improvements to clarify three issues brought to the FASB’s attention through interactions with stakeholders: Determining the fair value of the underlying assets by lessors that are not manufacturers or dealers; presentation on the statement of cash flows –sales-type and direct financing leases; and transition disclosures related to Topic 250, Accounting Changes and Error Corrections. The transition and effective date provisions for this update apply to issue 1 and 2. The amendments in this update are effective for the Company for fiscal years beginning after December 15, 2019 and interim periods within those fiscal years. Early adoption is permitted. The Company adopted this standard during the first quarter of 2019 and it did not have any significant effect on the Company’s financial statements.

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 three months ended March 31, 2019
	Unrealized gains
	(losses) on
	available-for-sale
(dollars in thousands)	debt securities
Beginning balance	$	(1,095)

Other comprehensive income before reclassifications, net of tax		1,988
Amounts reclassified from accumulated other comprehensive income, net of tax		3
Net current-period other comprehensive income		1,991
Ending balance	$	896


As of and for the three months ended March 31, 2018
	Unrealized gains
	(losses) on
	available-for-sale
(dollars in thousands)	securities
Beginning balance	$	1,804

Other comprehensive loss before reclassifications, net of tax		(1,957)
Amounts reclassified from accumulated other comprehensive income, net of tax		(5)
Effect of adopting ASU 2016-01, net of tax*		(421)
Net current-period other comprehensive loss		(2,383)
Ending balance	$	(579)

*The Company adopted ASU 2016-01 on January 1, 2018. As a result, unrealized gains on equity securities were reclassified from accumulated other comprehensive income to retained earnings.

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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
	For the three months ended
	March 31,
	2019		2018

Unrealized (losses) gains on AFS debt securities	$	(4)	$	6	Gain (loss) on sale of investment securities
Income tax effect		1		(1)	Provision for income taxes
Total reclassifications for the period	$	(3)	$	5	Net income

4. Investment securities

Agency – Government-sponsored enterprise (GSE) and Mortgage-backed securities (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), FNMA, 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 March 31, 2019 and December 31, 2018 are summarized as follows:



			Gross		Gross
	Amortized		unrealized		unrealized		Fair
(dollars in thousands)	cost		gains		losses		value
March 31, 2019
Available-for-sale debt securities:
Agency - GSE	$	5,929	$	105	$	-	$	6,034
Obligations of states and political subdivisions		49,170		1,788		(65)		50,893
MBS - GSE residential		126,263		574		(1,268)		125,569

Total available-for-sale debt securities	$	181,362	$	2,467	$	(1,333)	$	182,496



			Gross		Gross
	Amortized		unrealized		unrealized		Fair
(dollars in thousands)	cost		gains		losses		value
December 31, 2018
Available-for-sale debt securities:
Agency - GSE	$	5,926	$	8	$	(17)	$	5,917
Obligations of states and political subdivisions		51,603		1,259		(287)		52,575
MBS - GSE residential		126,667		266		(2,615)		124,318

Total available-for-sale debt securities	$	184,196	$	1,533	$	(2,919)	$	182,810

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The amortized cost and fair value of debt securities at March 31, 2019 by contractual maturity are summarized below:



	Amortized		Fair
(dollars in thousands)	cost		value
Available-for-sale securities:
Debt securities:
Due in one year or less	$	4,770	$	4,791
Due after one year through five years		8,318		8,546
Due after five years through ten years		2,008		2,017
Due after ten years		40,003		41,573

MBS - GSE residential		126,263		125,569

Total available-for-sale debt securities	$	181,362	$	182,496

Actual maturities will differ from contractual maturities because issuers and borrowers may have the right to call or repay obligations with or without call or prepayment penalty. Agency – GSE and municipal securities are included based on their original stated maturity. MBS – GSE residential, which are based on weighted-average lives and subject to monthly principal pay-downs, are listed in total. Most of the securities have fixed rates or have predetermined scheduled rate changes and many have call features that allow the issuer to call the security at par before its stated maturity without penalty.

The following table presents the fair value and gross unrealized losses of debt securities aggregated by investment type, the length of time and the number of securities that have been in a continuous unrealized loss position as of March 31, 2019 and December 31, 2018:



	Less than 12 months				More than 12 months				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
(dollars in thousands)	value		losses		value		losses		value		losses

March 31, 2019
Agency - GSE	$	-	$	-	$	-	$	-	$	-	$	-
Obligations of states and political subdivisions		379		(2)		3,780		(63)		4,159		(65)
MBS - GSE residential		3,036		(13)		86,187		(1,255)		89,223		(1,268)
Total	$	3,415	$	(15)	$	89,967	$	(1,318)	$	93,382	$	(1,333)
Number of securities		3				68				71

December 31, 2018
Agency - GSE	$	3,937	$	(17)	$	-	$	-	$	3,937	$	(17)
Obligations of states and political subdivisions		6,123		(91)		8,447		(196)		14,570		(287)
MBS - GSE residential		25,612		(353)		74,864		(2,262)		100,476		(2,615)
Total	$	35,672	$	(461)	$	83,311	$	(2,458)	$	118,983	$	(2,919)
Number of securities		31				69				100

The Company had 71 debt securities in an unrealized loss position at March 31, 2019, including sixty-two mortgage-backed securities and nine municipal securities. The severity of these unrealized losses based on their underlying cost basis was as follows at March 31, 2019: 1.40% for total MBS-GSE; and 1.54% for municipals. Of these securities, sixty mortgage-backed securities and eight municipal securities had been in an unrealized loss position in excess of 12 months. The changes in the prices on these securities in an unrealized loss position in excess of 12 months are the result of interest rate movement and management believes they are temporary in nature.

Management believes the cause of the unrealized losses is related to changes in interest rates, instability in the capital markets or the limited trading activity due to illiquid conditions in the debt market and is not directly related to credit quality. Quarterly, management conducts a formal review of investment securities for the presence of other than temporary impairment (OTTI). The accounting guidance related to OTTI requires the Company to assess whether OTTI is present when the fair value of a debt security is less than its amortized cost as of the balance sheet date. Under those circumstances, OTTI is considered to have occurred if: (1) the entity has the intent to sell the security; (2) more likely than not the entity will be required to sell the security before recovery of its amortized cost basis; or (3) the present value of expected cash flows is not sufficient to recover the entire amortized cost. The accounting guidance requires that credit-related OTTI be recognized in earnings while non-credit-related OTTI on securities not expected to be sold be recognized in other comprehensive income (OCI). Non-credit-related OTTI is based on other factors affecting

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market value, including illiquidity.

The Company’s OTTI evaluation process also follows the guidance set forth in topics related to debt securities. The guidance set forth in the pronouncements require the Company to take into consideration current market conditions, fair value in relationship to cost, extent and nature of changes in fair value, issuer rating changes and trends, volatility of earnings, current analysts’ evaluations, all available information relevant to the collectability of debt securities, the ability and intent to hold investments until a recovery of fair value which may be to maturity and other factors when evaluating for the existence of OTTI. The guidance requires that credit-related OTTI be recognized as a realized loss through earnings when there has been an adverse change in the holder’s expected cash flows such that the full amount (principal and interest) will probably not be received. This requirement is consistent with the impairment model in the guidance for accounting for debt securities.

For all debt securities, as of March 31, 2019, the Company applied the criteria provided in the recognition and presentation guidance related to OTTI. That is, management has no intent to sell the securities and nor any conditions were identified by management that, more likely than not, would require the Company to sell the securities before recovery of their amortized cost basis. The results indicated there was no presence of OTTI in the Company’s security portfolio. In addition, management believes the change in fair value is attributable to changes in interest rates.

5. Loans and leases

The classifications of loans and leases at March 31, 2019 and December 31, 2018 are summarized as follows:



(dollars in thousands)	March 31, 2019		December 31, 2018

Commercial and industrial	$	120,815	$	126,884
Commercial real estate:
Non-owner occupied		97,605		95,515
Owner occupied		122,721		124,092
Construction		4,266		6,761
Consumer:
Home equity installment		32,311		32,729
Home equity line of credit		51,228		52,517
Auto loans		101,710		105,576
Direct finance leases


Title of each class	Trading Symbols(s)	Name of each exchange on which registered
Common stock, without par value	FDBC	The NASDAQ Stock Market, LLC


Large accelerated filer ☐	Non-accelerated filer ☐	Accelerated filer ☒		Smaller reporting company ☒	Emerging growth company ☐