10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION      

Washington, D.C. 20549

FORM 10-Q

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

SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2017

OR

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

SECURITIES EXCHANGE ACT OF 1934

For the transition period from ______________to______________________

Commission file number: 001-38229

FIDELITY D & D BANCORP, INC.

STATE OF INCORPORATION:  IRS EMPLOYER IDENTIFICATION NO:

PENNSYLVANIA                                     23-3017653

Address of principal executive offices:

BLAKELY & DRINKER ST.

DUNMORE, PENNSYLVANIA 18512

TELEPHONE:

570-342-8281

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

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer [  ]	Accelerated filer [  ]
Non-accelerated filer   [  ]	Smaller reporting company [X]
(Do not check if a smaller reporting company)	Emerging growth company [  ]

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  [  ]

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

[  ] YES [X] NO

The number of outstanding shares of Common Stock of Fidelity D & D Bancorp, Inc. on October 31, 2017, the latest practicable date, was 3,729,978 shares.

FIDELITY D & D BANCORP, INC.

Form 10-Q September 30, 2017

Index

Part I.  Financial Information		Page
Item 1.	Financial Statements (unaudited):
	Consolidated Balance Sheets as of September 30, 2017 and December 31, 2016	3
	Consolidated Statements of Income for the three and nine  months ended September 30, 2017 and 2016	4
	Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2017 and 2016	5
	Consolidated Statements of Changes in Shareholders’ Equity for the nine months ended September 30, 2017 and 2016	6
	Consolidated Statements of Cash Flows for the nine months ended September 30, 2017 and 2016	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	51
Item 4.	Controls and Procedures	56
Part II.  Other Information
Item 1.	Legal Proceedings	57
Item 1A.	Risk Factors	57
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	57
Item 3.	Defaults upon Senior Securities	57
Item 4.	Mine Safety Disclosures	57
Item 5.	Other Information	57
Item 6.	Exhibits	57
Signatures		59

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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, 2017		December 31, 2016
Assets:
Cash and due from banks	$	11,835	$	12,856
Interest-bearing deposits with financial institutions		30,046		12,987
Total cash and cash equivalents		41,881		25,843
Available-for-sale securities		151,995		130,037
Federal Home Loan Bank stock		2,543		2,606
Loans and leases, net (allowance for loan losses of
$9,356 in 2017; $9,364 in 2016)		625,111		588,130
Loans held-for-sale (fair value $1,662 in 2017, $2,907 in 2016)		1,629		2,854
Foreclosed assets held-for-sale		927		1,306
Bank premises and equipment, net		16,899		17,164
Cash surrender value of bank owned life insurance		19,857		11,435
Accrued interest receivable		2,769		2,246
Goodwill		209		-
Other assets		14,446		11,323
Total assets	$	878,266	$	792,944
Liabilities:
Deposits:
Interest-bearing	$	562,719	$	492,306
Non-interest-bearing		185,858		211,153
Total deposits		748,577		703,459
Accrued interest payable and other liabilities		6,781		4,631
Short-term borrowings		12,920		4,223
FHLB advances		23,704		-
Total liabilities		791,982		712,313
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; 3,729,978 in 2017; and 2,453,805 in 2016)		28,200		27,155
Retained earnings		56,163		52,095
Accumulated other comprehensive income		1,921		1,381
Total shareholders' equity		86,284		80,631
Total liabilities and shareholders' equity	$	878,266	$	792,944
See notes to unaudited consolidated financial statements

3

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, 2017		September 30, 2016		September 30, 2017		September 30, 2016
Interest income:
Loans and leases:
Taxable	$	6,672	$	5,960	$	19,398	$	17,571
Nontaxable		220		195		647		579
Interest-bearing deposits with financial institutions		12		13		22		59
Investment securities:
U.S. government agency and corporations		610		500		1,887		1,236
States and political subdivisions (nontaxable)		368		321		1,081		954
Other securities		46		17		113		58
Total interest income		7,928		7,006		23,148		20,457
Interest expense:
Deposits		742		580		1,971		1,727
Securities sold under repurchase agreements		3		4		15		16
Other short-term borrowings and other		60		1		197		14
FHLB advances		77		-		174		-
Total interest expense		882		585		2,357		1,757
Net interest income		7,046		6,421		20,791		18,700
Provision for loan losses		375		225		925		650
Net interest income after provision for loan losses		6,671		6,196		19,866		18,050
Other income:
Service charges on deposit accounts		582		564		1,674		1,567
Interchange fees		431		378		1,256		1,115
Fees from trust fiduciary activities		253		176		756		539
Fees from financial services		169		126		434		436
Service charges on loans		201		194		597		665
Fees and other revenue		222		201		661		593
Earnings on bank-owned life insurance		158		89		422		264
Gain (loss) on sale or disposal of:
Loans		232		302		684		629
Investment securities		-		-		-		9
Premises and equipment		-		(6)		-		(6)
Total other income		2,248		2,024		6,484		5,811
Other expenses:
Salaries and employee benefits		3,235		2,892		9,559		8,660
Premises and equipment		919		898		2,816		2,642
Advertising and marketing		270		198		850		656
Professional services		404		334		1,330		1,122
FDIC assessment		68		98		201		335
Loan collection		84		16		191		141
Other real estate owned		37		69		183		158
Office supplies and postage		109		110		339		352
Automated transaction processing		185		179		543		460
Data processing and communication		297		261		880		720
PA shares tax		183		165		394		471
Other		244		189		597		449
Total other expenses		6,035		5,409		17,883		16,166
Income before income taxes		2,884		2,811		8,467		7,695
Provision for income taxes		658		776		2,078		2,031
Net income	$	2,226	$	2,035	$	6,389	$	5,664
Per share data:
Net income - basic (1)	$	0.60	$	0.55	$	1.72	$	1.54
Net income - diluted (1)	$	0.60	$	0.55	$	1.72	$	1.54
Dividends (1)	$	0.21	$	0.19	$	0.62	$	0.57
See notes to unaudited consolidated financial statements

(1) On August 15, 2017, the Company declared a three-for-two stock split effected in the form of a 50% stock dividend. Per share data for the three and nine months ended September 30, 2016 has been restated for the effects thereof.

4

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)	2017		2016		2017		2016
Net income	$	2,226	$	2,035	$	6,389	$	5,664
Other comprehensive income (loss), before tax:
Unrealized holding gain (loss) on available-for-sale securities		104		(361)		818		1,932
Reclassification adjustment for net gains realized in income		-		-		-		(9)
Net unrealized gain (loss)		104		(361)		818		1,923
Tax effect		(35)		123		(278)		(654)
Unrealized gain (loss), net of tax		69		(238)		540		1,269
Other comprehensive income (loss), net of tax		69		(238)		540		1,269
Total comprehensive income, net of tax	$	2,295	$	1,797	$	6,929	$	6,933
See notes to unaudited consolidated financial statements

5

Fidelity D & D Bancorp, Inc. and Subsidiary
Consolidated Statements of Changes in Shareholders' Equity
For the nine months ended September 30, 2017 and 2016
(Unaudited)							Accumulated
							other
	Capital stock				Retained		comprehensive
(dollars in thousands)	Shares		Amount		earnings		income		Total
Balance, December 31, 2015		2,443,405	$	26,700	$	47,463	$	2,188	$	76,351
Net income						5,664				5,664
Other comprehensive income								1,269		1,269
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				248						248
Cash dividends declared						(2,098)				(2,098)
Balance, September 30, 2016		2,453,805	$	27,073	$	51,029	$	3,457	$	81,559
Balance, December 31, 2016		2,453,805	$	27,155	$	52,095	$	1,381	$	80,631
Net income						6,389				6,389
Other comprehensive income								540		540
Issuance of common stock through Employee Stock Purchase Plan		4,085		126						126
Issuance of common stock through Dividend Reinvestment Plan		7,744		331						331
Issuance of common stock from vested restricted share grants through stock compensation plans		9,657
Issuance of common stock through exercise of stock options		11,500		332						332
Stock-based compensation expense				256						256
Issuance of common stock from stock split		1,243,187
Cash in lieu of fractional shares paid due to the stock split						(11)				(11)
Cash dividends declared						(2,310)				(2,310)
Balance, September 30, 2017		3,729,978	$	28,200	$	56,163	$	1,921	$	86,284
See notes to unaudited consolidated financial statements

6

Fidelity D & D Bancorp, Inc. and Subsidiary
Consolidated Statements of Cash Flows
(Unaudited)	Nine months ended September 30,
(dollars in thousands)	2017		2016
Cash flows from operating activities:
Net income	$	6,389	$	5,664
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation, amortization and accretion		2,324		2,519
Provision for loan losses		925		650
Deferred income tax expense		1,070		1,192
Stock-based compensation expense		419		385
Excess tax benefit from exercise of stock options		66		-
Proceeds from sale of loans held-for-sale		33,498		34,623
Originations of loans held-for-sale		(29,342)		(32,155)
Earnings from bank-owned life insurance		(422)		(264)
Net gain from sales of loans		(684)		(629)
Net gain from sales of investment securities		-		(9)
Net loss from sale and write-down of foreclosed assets held-for-sale		83		57
Net loss from disposal of equipment		-		6
Change in:
Accrued interest receivable		(519)		97
Other assets		(4,262)		(2,760)
Accrued interest payable and other liabilities		1,928		906
Net cash provided by operating activities		11,473		10,282
Cash flows from investing activities:
Available-for-sale securities:
Proceeds from sales		-		2,884
Proceeds from maturities, calls and principal pay-downs		14,795		15,139
Purchases		(36,786)		(20,707)
Decrease in FHLB stock		63		919
Net increase in loans and leases		(39,271)		(20,584)
Purchase of life insurance policies		(8,000)		-
Acquisition of bank premises and equipment		(747)		(1,075)
Net cash acquired in acquisition of bank branch		11,817		-
Proceeds from sale of bank premises and equipment		6		-
Proceeds from sale of foreclosed assets held-for-sale		511		354
Net cash used in investing activities		(57,612)		(23,070)
Cash flows from financing activities:
Net increase in deposits		31,308		51,132
Net increase (decrease) in short-term borrowings		8,697		(17,208)
Proceeds from issuance of FHLB advances		25,704		-
Repayment of FHLB advances		(2,000)		-
Proceeds from employee stock purchase plan participants		126		111
Exercise of stock options		332		14
Dividends paid, net of dividends reinvested		(1,979)		(2,098)
Cash paid in lieu of fractional shares		(11)		-
Net cash provided by financing  activities		62,177		31,951
Net increase in cash and cash equivalents		16,038		19,163
Cash and cash equivalents, beginning		25,843		12,277
Cash and cash equivalents, ending	$	41,881	$	31,440
See notes to unaudited consolidated financial statements

7

Fidelity D & D Bancorp, Inc. and Subsidiary
Consolidated Statements of Cash Flows (continued)
(Unaudited)	Nine months ended September 30,
(dollars in thousands)	2017		2016
Supplemental Disclosures of Cash Flow Information
Cash payments for:
Interest	$	2,219	$	1,793
Income tax		1,300		500
Supplemental Disclosures of Non-cash Investing Activities:
Net change in unrealized gains on available-for-sale securities		818		1,923
Transfers from loans to foreclosed assets held-for-sale		216		1,104
Transfers from loans to loans held-for-sale		2,752		3,306
Acquisition of West Scranton Branch from Wayne Bank	March 17, 2017
Non-cash assets acquired:
Loans	$	1,574
Bank premises and equipment		264
Goodwill		209
Accrued interest receivable and other assets		4
Total non-cash assets acquired	$	2,051
Liabilities assumed:
Deposits	$	13,809
Accrued interest payable and other liabilities		59
Total liabilities assumed	$	13,868
See notes to unaudited consolidated financial statements

8

FIDELITY D & D BANCORP, INC.

Notesto  Consolidated Financial Statements

(Unaudited)

1.   Nature of operations and critical accounting policies

Nature of operations

Fidelity Deposit and Discount Bank (the Bank) is a commercial bank chartered 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, 2016.

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, 2017 and December 31, 2016 and the related consolidated statements of income and consolidated statements of comprehensive income for the three and ninemonths ended September 30, 2017 and 2016, and consolidated statements of changes in shareholders’ equity and consolidated statements of cash flows for the nine months ended September 30, 2017 and 2016 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 2016 financial statements to conform to the 2017 presentation. 

On August 15, 2017, the Company declared a three-for-two stock split effected in the form of a 50%stock dividend on its common stock outstanding to shareholders as of September 18, 2017 and distributed on September 28, 2017.  All share and per share information included in the accompanying consolidated financial statements and footnotes has been retroactively adjusted to reflect this stock split.

In preparing these consolidated financial statements, the Company evaluated the events and transactions that occurred after September 30, 2017 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, 2016, 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, 2017 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.

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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 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 September 30, 2017 and December 31, 2016, 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 maintains bank owned life insurance policies (BOLI) for a selected group of employees,  namely its officers where the Company is the owner and sole beneficiary of the policies.  The earnings from the BOLI are recognized as a component of other income in the consolidated statements of income.  The BOLI is an asset that can be liquidated, if necessary, with tax consequences.  However, the Company intends to hold these policies and accordingly, the Company has not provided for deferred taxes on the earnings from the increase in the cash surrender value.

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 three executives providing post-retirement benefits and accrues monthly expense for this benefit.  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.  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

10

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 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 adopted this accounting standard during the first quarter of 2017 and 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 modified retrospective approach with the cumulative effect of initially adopting ASU 2014-09 recognized at the date of adoption. 

Subsequently, the FASB issued additional guidance to clarify certain implementation issues. Specifically, the FASB issued Principal versus Agent Considerations, Identifying Performance Obligations and Licensing, Narrow-Scope Improvements and Practical Expedients and Technical Corrections and Improvements in March, April, May and December 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.The Company’s revenue is comprised of net interest income, which is explicitly excluded from the scope of the guidance, and non-interest income.  The Company is currently assessing our revenue streams that are within the scope of the standard; including wealth management fees, deposit related fees and gains on the sale of other real estate owned.  The Company expects that this guidance may change how certain non-interest income is recognized but does not expect the new standard, or any of its amendments, to have a material effect on its consolidated financial statements.  The Company does anticipate the guidance will require expanded footnote disclosures.The Company plans to adopt this guidance on January 1, 2018 using the modified retrospective approach with a cumulative adjustment to opening retained earnings, if such adjustment is deemed to be material.

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 Company is expected to make an election to exclude leases less than 12 months from the provisions of this ASU.  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.  Upon adoption, this change in accounting guidance could have a significant impact on the consolidated balance sheets and could potentially impact debt covenant agreements with our customers.  The Company is currently evaluating the amount of the impact of

11

ASU 2016-02 on its consolidated financial statements.

In August 2016, the FASB released ASU 2016-15, Statement of Cash Flows (Topic 230) to clarify the presentation of certain cash receipts and payments on the statement of cash flows.  The update addressed eight specific cash flow issues with the objective of reducing the existing diversity in practice.  The amendments in this update are effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years.  Early adoption is permitted, including adoption in an interim period.  The amendments in this update should be applied using a retrospective transition method to each period presented.  The Company is currently evaluating the impact of the adoption of ASU 2016-15 on its consolidated financial statements, but does not expect it to have a significant impact.

In January 2017, the FASB issued ASU 2017-04, Intangibles-Goodwill and Other (Topic 350) to simplify the test for goodwill impairment.  To simplify the subsequent measurement of goodwill, the Board eliminated Step 2 from the goodwill impairment test.  Under the amendments in this update, an entity should perform its annual goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount.  An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting units fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit.  An entity should apply the amendments in his update on a prospective basis.  The amendments in this update are effective for the Company for its annual goodwill impairment tests in fiscal years beginning after December 15, 2019.  Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017.  The Company will early adopt this standard and it will not have an impact on its consolidated financial statements.

In March 2017, the FASB issued ASU 2017-08, Receivables-Nonrefundable Fees and Other Costs (Subtopic 310-20) Premium Amortization on Purchased Callable Debt Securities to amend the amortization period for certain purchased callable debt securities held at a premium.  The amendments in this update shorten the amortization period for the premium to the earliest call date.  The amendments in this update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018.  Early adoption is permitted, including adoption in an interim period.  An entity should apply the amendments in this update on a modified retrospective basis through a cumulative effect adjustment directly to retained earnings as of the beginning of the period of adoption.  The Company has adopted this standard and it will not have an effect on its consolidated 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 nine months ended September 30, 2017
	Unrealized gains
	(losses) on
	available-for-sale
(dollars in thousands)	securities		Total
Beginning balance	$	1,381	$	1,381
Other comprehensive income before reclassifications, net of tax		540		540
Amounts reclassified from accumulated other comprehensive income, net of tax		-		-
Net current-period other comprehensive income		540		540
Ending balance	$	1,921	$	1,921

As of and for the three months ended September 30, 2017
	Unrealized gains
	(losses) on
	available-for-sale
(dollars in thousands)	securities		Total
Beginning balance	$	1,852	$	1,852
Other comprehensive income before reclassifications, net of tax		69		69
Amounts reclassified from accumulated other comprehensive income, net of tax		-		-
Net current-period other comprehensive income		69		69
Ending balance	$	1,921	$	1,921

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As of and for the nine months ended September 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		1,275		1,275
Amounts reclassified from accumulated other comprehensive income, net of tax		(6)		(6)
Net current-period other comprehensive income		1,269		1,269
Ending balance	$	3,457	$	3,457

As of and for the three months ended September 30, 2016
	Unrealized gains
	(losses) on
	available-for-sale
(dollars in thousands)	securities		Total
Beginning balance	$	3,695	$	3,695
Other comprehensive loss before reclassifications, net of tax		(238)		(238)
Amounts reclassified from accumulated other comprehensive income, net of tax		-		-
Net current-period other comprehensive loss		(238)		(238)
Ending balance	$	3,457	$	3,457

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,
	2017		2016		2017		2016
Unrealized gains on AFS securities	$	-	$	-	$	-	$	9	Gain on sale of investment securities
		-		-		-		(3)	Provision for income taxes
Total reclassifications for the period	$	-	$	-	$	-	$	6	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.

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The amortized cost and fair value of investment securities at September 30, 2017 and December 31, 2016 are summarized as follows:

			Gross		Gross
	Amortized		unrealized		unrealized		Fair
(dollars in thousands)	cost		gains		losses		value
September 30, 2017
Available-for-sale securities:
Agency - GSE	$	16,269	$	21	$	(77)	$	16,213
Obligations of states and political subdivisions		41,759		2,056		(80)		43,735
MBS - GSE residential		90,761		804		(294)		91,271
Total debt securities		148,789		2,881		(451)		151,219
Equity securities - financial services		294		482		-		776
Total available-for-sale securities	$	149,083	$	3,363	$	(451)	$	151,995

			Gross		Gross
	Amortized		unrealized		unrealized		Fair
(dollars in thousands)	cost		gains		losses		value
December 31, 2016
Available-for-sale securities:
Agency - GSE	$	18,362	$	58	$	(144)	$	18,276
Obligations of states and political subdivisions		38,648		1,803		(260)		40,191
MBS - GSE residential		70,639		851		(553)		70,937
Total debt securities		127,649		2,712		(957)		129,404
Equity securities - financial services		294		339		-		633
Total available-for-sale securities	$	127,943	$	3,051	$	(957)	$	130,037

The amortized cost and fair value of debt securities at September 30, 2017 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	$	4,004	$	4,007
Due after one year through five years		13,084		13,120
Due after five years through ten years		2,556		2,649
Due after ten years		38,384		40,172
Total debt securities		58,028		59,948
MBS - GSE residential		90,761		91,271
Total available-for-sale debt securities	$	148,789	$	151,219

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.

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The following table presents the fair value and gross unrealized losses of investment 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 September 30, 2017 and December 31, 2016:  

	Less than 12 months				More than 12 months				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
(dollars in thousands)	value		losses		value		losses		value		losses
September 30, 2017
Agency - GSE	$	5,051	$	(29)	$	3,022	$	(48)	$	8,073	$	(77)
Obligations of states and political subdivisions		2,416		(41)		2,254		(39)		4,670		(80)
MBS - GSE residential		34,146		(208)		4,740		(86)		38,886		(294)
Total	$	41,613	$	(278)	$	10,016	$	(173)	$	51,629	$	(451)
Number of securities		29				9				38
December 31, 2016
Agency - GSE	$	6,032	$	(144)	$	-	$	-	$	6,032	$	(144)
Obligations of states and political subdivisions		8,690		(260)		-		-		8,690		(260)
MBS - GSE residential		41,111		(553)		-		-		41,111		(553)
Total	$	55,833	$	(957)	$	-	$	-	$	55,833	$	(957)
Number of securities		48				-				48

The Company had thirty-eight securities in an unrealized loss position at September 30, 2017, including eight agency securities, twenty-two mortgage-backed securities and eight municipal securities. The severity of these unrealized losses based on their underlying cost basis was as follows at September 30, 2017:  0.94% for agencies; 0.75% for total MBS-GSE; and 1.69% for municipals. In addition, three agency securities, threemortgage-backed securities and three municipal securitieshad been in an unrealized loss position in excess of 12 months. The changes in the prices on these securities 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 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 market value, including illiquidity.

The Company’s OTTI evaluation process also follows the guidance set forth in topics related to debt and equity 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 and equity securities.

For all security types, as of September 30, 2017, 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 no 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.

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5.  Loans and leases

The classifications of loans and leases at September 30, 2017 and December 31, 2016 are summarized as follows:

(dollars in thousands)	September 30, 2017		December 31, 2016
Commercial and industrial	$	112,096	$	98,477
Commercial real estate:
Non-owner occupied		93,398		87,220
Owner occupied		109,598		113,104
Construction		6,123		3,987
Consumer:
Home equity installment		28,282		28,466
Home equity line of credit		53,177		51,609
Auto loans and leases		79,629		56,841
Other		5,784		13,301
Residential:
Real estate		138,709		134,475
Construction		8,315		10,496
Total		635,111		597,976
Less:
Allowance for loan losses		(9,356)		(9,364)
Unearned lease revenue		(644)		(482)
Loans and leases, net	$	625,111	$	588,130

Net deferred loan costs of $2.0 million and $1.8 millionhave been included in the carrying values of loans at September 30, 2017 and December 31, 2016, respectively.

Unearned lease revenue represents the difference between the lessor’s investment in the property and the gross investment in the lease.  Unearned revenue is accrued over the life of the lease using the effective interest method.

The Company services real estate loans for investors in the secondary mortgage market which are not included in the accompanying consolidated balance sheets.  The approximate unpaid principal balance of mortgages serviced amounted to $296.9 million as ofSeptember 30, 2017 and $285.2million as of December 31, 2016.  Mortgage servicing rights amounted to $1.3 million both as of September 30, 2017 and December 31, 2016, respectively.

Management is responsible for conducting the Company’s credit risk evaluation process, which includes credit risk grading of individual commercial and industrial and commercial real estate loans. Commercial and industrial and commercial real estate loans are assigned credit risk grades based on the Company’s assessment of conditions that affect the borrower’s ability to meet its contractual obligations under the loan agreement. That process includes reviewing borrowers’ current financial information, historical payment experience, credit documentation, public information and other information specific to each individual borrower. Upon review, the commercial loan credit risk grade is revised or reaffirmed as the case may be. The credit risk grades may be changed at any time management feels an upgrade or downgrade may be warranted.  The Company utilizes an external independent loan review firm that reviews and validates the credit risk program on at least an annual basis. Results of these reviews are presented to management and the board of directors. The loan review process complements and reinforces the risk identification and assessment decisions made by lenders and credit personnel, as well as the Company’s policies and procedures.

Non-accrual loans

The decision to place loans on non-accrual status is made on an individual basis after considering factors pertaining to each specific loan.  Commercial and industrial (C&I) and commercial real estate (CRE) loans are placed on non-accrual status when management has determined that payment of all contractual principal and interest is in doubt or the loan is past due 90 days or more as to principal and interest, unless well-secured and in the process of collection.  Consumer loans secured by real estate and residential mortgage loans are placed on non-accrual status at 120 days past due as to principal and interest and unsecured consumer loans are charged-off when the loan is 90 days or more past due as to principal and interest. The Company considers all non-accrual loans to be impaired loans.

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Non-accrual loans, segregated by class, at September 30, 2017 and December 31, 2016, were as follows:

(dollars in thousands)	September 30, 2017		December 31, 2016
Commercial and industrial	$	14	$	11
Commercial real estate:
Non-owner occupied		584		1,407
Owner occupied		1,148		3,078
Construction		169		193
Consumer:
Home equity installment		15		31
Home equity line of credit		513		737
Auto loans and leases		-		25
Other		-		6
Residential:
Real estate		1,421		1,882
Total	$	3,864	$	7,370

Troubled Debt Restructuring

A modification of a loan constitutes a troubled debt restructuring (TDR) when a borrower is experiencing financial difficulty and the modification constitutes a concession.  The Company considers all TDRs to be impaired loans.  The Company offers various types of concessions when modifying a loan, however, forgiveness of principal is rarely granted.  C&I loans modified in a TDR often involve temporary interest-only payments, term extensions, and converting revolving credit lines to term loans.  Additional collateral, a co-borrower, or a guarantor is often requested.  CRE loans modified in a TDR can involve reducing the interest rate for the remaining term of the loan, extending the maturity date at an interest rate lower than the current market rate for new debt with similar risk, or substituting or adding a new borrower or guarantor.  Commercial real estate construction loans modified in a TDR may also involve extending the interest-only payment period.  Residential mortgage loans modified in a TDR are primarily comprised of loans where monthly payments are lowered to accommodate the borrowers’ financial needs for an extended period of time.  After the lowered monthly payment period ends, the borrower would revert back to paying principal and interest pursuant to the original terms with the maturity date adjusted accordingly.  Consumer loan modifications are typically not granted and therefore standard modification terms do not exist for loans of this type.

Loans modified in a TDR may or may not be placed on non-accrual status.  As of September 30, 2017, total TDRs amounted to $3.9  million, consisting of 15 loans (12 CRE loans, 1 C&I loan, 1 HELOC and 1 residential mortgage to 10 unrelated borrowers), of which two CRE loans, totaling $0.7 million, one HELOC, totaling $0.4 million, and one residential mortgage, totaling $0.9 million, were on non-accrual status.  The September 30, 2017 balance represented a $0.6 million increase over the December 31, 2016 balance, which amounted to $3.3 million consisting of 9 loans (6 CRE loans, 1 C&I loan, 1 HELOC and 1 residential mortgage to 6 unrelated borrowers), of which the HELOC, totaling $0.6 million, and the residential mortgage, totaling $0.9 million, were on non-accrual status.  This increase in TDRs was attributed to the addition of the six accruing TDRs in the category of CRE, totaling $1.0 million in the first nine months of 2017.  Of the TDRs outstanding as of September 30, 2017 and December 31, 2016, when modified, the concessions granted consisted of temporary interest-only payments, extensions of maturity date, or a reduction in the rate of interest to a below-market rate for a contractual period of time.  Other than the TDRs that were placed on non-accrual status, the TDRs were performing in accordance with their modified terms.

17

There were no loans modified in a TDR during the three months ended September 30, 2017 and 2016.  The following presents by class, information related to loans modified in a TDR:

	Loans modified as TDRs for the nine months ended:
(dollars in thousands)	September 30, 2017						September 30, 2016
			Recorded		Increase in			Recorded		Increase in
		Number	investment		allowance		Number	investment		allowance
		of	(as of		(as of		of	(as of		(as of
		contracts	period end)		period end)		contracts	period end)		period end)
Commercial real estate - non-owner occupied		1	$	119	$	4	-	$	-	$	-
Commercial real estate - owner occupied		5		926		187	-		-		-
Consumer home equity line of credit		-		-		-	1		650		105
Total		6	$	1,045	$	191	1	$	650	$	105

In the above table, the period end balance is inclusive of all partial pay downs and charge-offs since the modification date.  For all loans modified in a TDR, the pre-modification recorded investment was the same as the post-modification recorded investment.

The following presents by class, loans modified as a TDR that subsequently defaulted (i.e. 90 days or more past due following a modification) during the periods indicated:

Loans modified as a TDR within the previous twelve months that subsequently defaulted during the:
(dollars in thousands)	Nine months ended September 30, 2017				Nine months ended September 30, 2016
		Number of		Recorded		Number of		Recorded
		contracts		investment		contracts		investment
Commercial real estate - owner occupied			$	-		1	$	20

In the above table, the period end balances are inclusive of all partial pay downs and charge-offs since the modification date.

Loans modified in a TDR are closely monitored for delinquency as an early indicator of possible future default.  If loans modified in a TDR subsequently default, the Company evaluates the loan for possible further impairment. 

The allowance for loan losses (allowance) may be increased, adjustments may be made in the allocation of the allowance or partial charge-offs may be taken to further write-down the carrying value of the loan.  An allowance for impaired loans that have been modified in a TDR is measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate or the loan’s observable market price.  If the loan is collateral dependent, the estimated fair value of the collateral is used to establish the allowance.  As of September 30, 2017 and 2016, respectively, the allowance for impaired loans that have been modified in a TDR was $0.8 million and $0.4 million, respectively.

Past due loans

Loans are considered past due when the contractual principal and/or interest is not received by the due date.  An aging analysis of past due loans, segregated by class of loans, as of the period indicated is as follows (dollars in thousands):

														Recorded
					Past due									investment past
	30 - 59 Days		60 - 89 Days		90 days		Total				Total			due ≥ 90 days
September 30, 2017	past due		past due		or more(1)		past due		Current		loans (3)			and accruing
Commercial and industrial	$	56	$	116	$	14	$	186	$	111,910	$	112,096		$	-
Commercial real estate:
Non-owner occupied		528		658		584		1,770		91,628		93,398			-
Owner occupied		54		-		1,148		1,202		108,396		109,598			-
Construction		-		-		169		169		5,954		6,123			-
Consumer:
Home equity installment		156		26		15		197		28,085		28,282			-
Home equity line of credit		61		72		513		646		52,531		53,177			-
Auto loans and leases		181		102		-		283		78,702		78,985	(2)		-
Other		88		12		-		100		5,684		5,784			-
Residential:
Real estate		-		334		1,421		1,755		136,954		138,709			-
Construction		-		-		-		-		8,315		8,315			-
Total	$	1,124	$	1,320	$	3,864	$	6,308	$	628,159	$	634,467		$	-

(1)Includes $3.9 million of non-accrual loans.  (2) Net of unearned lease revenue of $0.6 million. (3) Includes net deferred loan costs of $2.0 million.

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														Recorded
					Past due									investment past
	30 - 59 Days		60 - 89 Days		90 days		Total				Total			due ≥ 90 days
December 31, 2016	past due		past due		or more (1)		past due		Current		loans (3)			and accruing
Commercial and industrial	$	208	$	-	$	11	$	219	$	98,258	$	98,477		$	-
Commercial real estate:
Non-owner occupied		180		-		1,407		1,587		85,633		87,220			-
Owner occupied		13		776		3,078		3,867		109,237		113,104			-
Construction		-		-		193		193		3,794		3,987			-
Consumer:
Home equity installment		213		25		31		269		28,197		28,466			-
Home equity line of credit		-		-		737		737		50,872		51,609			-
Auto loans and leases		293		59		44		396		55,963		56,359	(2)		19
Other		37		2		6		45		13,256		13,301			-
Residential:
Real estate		14		421		1,882		2,317		132,158		134,475			-
Construction		-		-		-		-		10,496		10,496			-
Total	$	958	$	1,283	$	7,389	$	9,630	$	587,864	$	597,494		$	19

(1)Includes $7.4 million of non-accrual loans.  (2) Net of unearned lease revenueof $0.5 million.  (3) Includes net deferred loan costs of $1.8 million.

Impaired loans

A loan is considered impaired when, based on current information and events; it is probable that the Company will be unable to collect the scheduled payments in accordance with the contractual terms of the loan.  Factors considered in determining impairment include payment status, collateral value and the probability of collecting payments when due.  The significance of payment delays and/or shortfalls is determined on a case-by-case basis.  All circumstances surrounding the loan are taken into account.  Such factors include the length of the delinquency, the underlying reasons and the borrower’s prior payment record.  Impairment is measured on these loans on a loan-by-loan basis.  Impaired loans include non-accrual loans, TDRs and other loans deemed to be impaired based on the aforementioned factors.

At September 30, 2017, impaired loans consisted of accruing TDRs of $1.9 million, $3.9 million in non-accrual loans and $1.5 million in accruing impaired loans.  At December 31, 2016, impaired loans consisted of accruing TDRs of $1.8 million, $7.4 million in non-accrual loans and $2.2 million in accruing loans.  As of September 30, 2017, the non-accrual loans included four TDRs to three unrelated borrowers totaling $2.0 million compared with two TDRs totaling $1.5 million as of December 31, 2016.

Impaired loans, segregated by class, as of the period indicated are detailed below:

			Recorded		Recorded
	Unpaid		investment		investment		Total
	principal		with		with no		recorded		Related
(dollars in thousands)	balance		allowance		allowance		investment		allowance
September 30, 2017
Commercial and industrial	$	228	$	204	$	24	$	228	$	193
Commercial real estate:
Non-owner occupied		2,405		1,997		288		2,285		612
Owner occupied		2,769		2,452		254		2,706		464
Construction		392		-		169		169		-
Consumer:
Home equity installment		48		-		15		15		-
Home equity line of credit		809		81		432		513		53
Auto loans and leases		8		-		-		-		-
Other		-		-		-		-		-
Residential:
Real estate		1,439		1,158		263		1,421		317
Construction		-		-		-		-		-
Total	$	8,098	$	5,892	$	1,445	$	7,337	$	1,639

19

			Recorded		Recorded
	Unpaid		investment		investment		Total
	principal		with		with no		recorded		Related
(dollars in thousands)	balance		allowance		allowance		investment		allowance
December 31, 2016
Commercial and industrial	$	235	$	206	$	29	$	235	$	193
Commercial real estate:
Non-owner occupied		3,346		2,611		405		3,016		993
Owner occupied		5,363		4,351		876		5,227		1,389
Construction		416		-		193		193		-
Consumer:
Home equity installment		64		-		31		31		-
Home equity line of credit		778		650		87		737		167
Auto		25		25		-		25		3
Other		6		6		-		6		1
Residential:
Real estate		1,949		1,466		416		1,882		315
Construction		-		-		-		-		-
Total	$	12,182	$	9,315	$	2,037	$	11,352	$	3,061

The following table presents the average recorded investments in impaired loans and related amount of interest income recognized during the periods indicated below.  The average balances are calculated based on the quarter-end balances of impaired loans.  Payments received from non-accruing impaired loans are first applied against the outstanding principal balance, then to the recovery of any charged-off amounts.  Any excess is treated as a recovery of interest income.  Payments received from accruing impaired loans are applied to principal and interest, as contractually agreed upon.

	For the nine months ended
	September 30, 2017						September 30, 2016
					Cash basis						Cash basis
	Average		Interest		interest		Average		Interest		interest
	recorded		income		income		recorded		income		income
(dollars in thousands)	investment		recognized		recognized		investment		recognized		recognized
Commercial and industrial	$	232	$	7	$	-	$	502	$	12	$	-
Commercial real estate:
Non-owner occupied		3,054		114		-		5,030		93		-
Owner occupied		4,393		223		-		3,562		107		-
Construction		184		-		-		217		-		-
Consumer:
Home equity installment		19		-		-		119		3		-
Home equity line of credit		722		5		-		772		25		-
Auto		21		4		-		40		-		-
Other		4		1		-		6		-		-
Residential:
Real estate		1,428		77		-		750		4		-
Construction		-		-		-		-		-		-
Total	$	10,057	$	431	$	-	$	10,998	$	244	$	-

20

	For the three months ended
	September 30, 2017						September 30, 2016
					Cash basis						Cash basis
	Average		Interest		interest		Average		Interest		interest
	recorded		income		income		recorded		income		income
(dollars in thousands)	investment		recognized		recognized		investment		recognized		recognized
Commercial and industrial	$	223	$	3	$	-	$	255	$	3	$	-
Commercial real estate:
Non-owner occupied		2,588		52		-		3,336		47		-
Owner occupied		3,521		152		-		5,068		29		-
Construction		173		-		-		204		-		-
Consumer:
Home equity installment		15		-		-		51		-		-
Home equity line of credit		659		5		-		871		8		-
Auto		-		-		-		30		-		-
Other		3		-		-		6		-		-
Residential:
Real estate		1,421		54		-		770		2		-
Construction		-		-		-		-		-		-
Total	$	8,603	$	266	$	-	$	10,591	$	89	$	-

Credit Quality Indicators

Commercial and industrial and commercial real estate

The Company utilizes a loan grading system and assigns a credit risk grade to its loans in the C&I and CRE portfolios.  The grading system provides a means to measure portfolio quality and aids in the monitoring of the credit quality of the overall loan portfolio.  The credit risk grades are arrived at using a risk rating matrix to assign a grade to each of the loans in the C&I and CRE portfolios.

The following is a description of each risk rating category the Company uses to classify each of its C&I and CRE loans:

Pass

Loans in this category have an acceptable level of risk and are graded in a range of one to five.  Secured loans generally have good collateral coverage.  Current financial statements reflect acceptable balance sheet ratios, sales and earnings trends.  Management is considered to be competent, and a reasonable succession plan is evident.  Payment experience on the loans has been good with minor or no delinquency experience.  Loans with a grade of one are of the highest quality in the range.  Those graded five are of marginally acceptable quality.

Special Mention

Loans in this category are graded a six and may be protected but are potentially weak.  They constitute a credit risk to the Company, but have not yet reached the point of adverse classification.  Some of the following conditions may exist: little or no collateral coverage; lack of current financial information; delinquency problems; highly leveraged; available financial information reflects poor balance sheet ratios and profit and loss statements reflect uncertain trends; and document exceptions.  Cash flow may not be sufficient to support total debt service requirements.

Substandard

Loans in this category are graded a seven and have a well-defined weakness which may jeopardize the ultimate collectability of the debt.  The collateral pledged may be lacking in quality or quantity.  Financial statements may indicate insufficient cash flow to service the debt; and/or do not reflect a sound net worth.  The payment history indicates chronic delinquency problems.  Management is considered to be weak.  There is a distinct possibility that the Company may sustain a loss.  All loans on non-accrual are rated substandard.  Other loans that are included in the substandard category can be accruing, as well as loans that are current or past due.  Loans 90 days or more past due, unless otherwise fully supported, are classified substandard. Also, borrowers that are bankrupt or have loans categorized as TDRs can be graded substandard.

Doubtful

Loans in this category are graded an eight and have a better than 50% possibility of the Company sustaining a loss, but the loss cannot be determined because of specific reasonable factors which may strengthen credit in the near-term.  Many of the weaknesses present in a substandard loan exist.  Liquidation of collateral, if any, is likely.  Any loan graded lower than an eight is considered to be uncollectible and charged-off.

21

Consumer and residential

The consumer and residential loan segments are regarded as homogeneous loan pools and as such are not risk rated.  For these portfolios, the Company utilizes payment activity, history and recency of payment in assessing performance.  Non-performing loans are considered to be loans past due 90 days or more and accruing and non-accrual loans.  All loans not classified as non-performing are considered performing.

The following table presents loans including $2.0 million and $1.8 million of deferred costs, segregated by class, categorized into the appropriate credit quality indicator category as of September 30, 2017 and December 31, 2016, respectively:

Commercial credit exposure

Credit risk profile by creditworthiness category

	September 30, 2017
(dollars in thousands)	Pass		Special mention		Substandard		Doubtful		Total
Commercial and industrial	$	110,839	$	535	$	722	$	-	$	112,096
Commercial real estate - non-owner occupied		86,159		817		6,422		-		93,398
Commercial real estate - owner occupied		103,288		2,692		3,618		-		109,598
Commercial real estate - construction		5,954		-		169		-		6,123
Total commercial	$	306,240	$	4,044	$	10,931	$	-	$	321,215

Consumer & Mortgage lending credit exposure

Credit risk profile based on payment activity

	September 30, 2017
(dollars in thousands)	Performing		Non-performing		Total
Consumer
Home equity installment	$	28,267	$	15	$	28,282
Home equity line of credit		52,664		513		53,177
Auto loans and leases (1)		78,985		-		78,985
Other		5,784		-		5,784
Total consumer	$	165,700	$	528	$	166,228
Residential
Real estate	$	137,288	$	1,421	$	138,709
Construction		8,315		-		8,315
Total residential	$	145,603	$	1,421	$	147,024
Total consumer & residential	$	311,303	$	1,949	$	313,252

(1)Net of unearned lease revenue of $0.6 million.

Commercial credit exposure

Credit risk profile by creditworthiness category

	December 31, 2016
(dollars in thousands)	Pass		Special mention		Substandard		Doubtful		Total
Commercial and industrial	$	97,308	$	479	$	690	$	-	$	98,477
Commercial real estate - non-owner occupied		83,962		1,811		7,591		-		93,364
Commercial real estate - owner occupied		99,981		1,075		5,904		-		106,960
Commercial real estate - construction		3,794		-		193		-		3,987
Total commercial	$	285,045	$	3,365	$	14,378	$	-	$	302,788

22

Consumer & Mortgage lending credit exposure

Credit risk profile based on payment activity

	December 31, 2016
(dollars in thousands)	Performing		Non-performing		Total
Consumer
Home equity installment	$	28,435	$	31	$	28,466
Home equity line of credit		50,872		737		51,609
Auto loans and leases (2)		56,315		44		56,359
Other		13,295		6		13,301
Total consumer	$	148,917	$	818	$	149,735
Residential
Real estate	$	132,593	$	1,882	$	134,475
Construction		10,496		-		10,496
Total residential	$	143,089	$	1,882	$	144,971
Total consumer & residential	$	292,006	$	2,700	$	294,706

(2)Net of unearned lease revenue of $0.5 million.

Allowance for loan losses

Management continually evaluates the credit quality of the Company’s loan portfolio and performs a formal review of the adequacy of the allowance on a quarterly basis.  The allowance reflects management’s best estimate of the amount of credit losses in the loan portfolio.  Management’s judgment is based on the evaluation of individual loans, past experience, the assessment of current economic conditions and other relevant factors including the amounts and timing of cash flows expected to be received on impaired loans.  Those estimates may be susceptible to significant change.  Loan losses are charged directly against the allowance when loans are deemed to be uncollectible.  Recoveries from previously charged-off loans are added to the allowance when received.

Management applies two primary components during the loan review process to determine proper allowance levels.  The two components are a specific loan loss allocation for loans that are deemed impaired and a general loan loss allocation for those loans not specifically allocated.  The methodology to analyze the adequacy of the allowance for loan losses is as follows:

§ identification of specific impaired loans by loan category;

§ identification of specific loans that are not impaired, but have an identified potential for loss;

§ calculation of specific allowances where required for the impaired loans based on collateral and other objective and quantifiable evidence;

§ determination of loans with similar credit characteristics within each class of the loan portfolio segment and eliminating the impaired loans;

§ application of historical loss percentages (trailing twelve-quarter average) to pools to determine the allowance allocation;

§ application of qualitative factor adjustment percentages to historical losses for trends or changes in the loan portfolio.

§ Qualitative factor adjustments include:

o levels of and trends in delinquencies and non-accrual loans;

o levels of and trends in charge-offs and recoveries;

o trends in volume and terms of loans;

o changes in risk selection and underwriting standards;

o changes in lending policies and legal and regulatory requirements;

o experience, ability and depth of lending management;

o national and local economic trends and conditions; and

o changes in credit concentrations.

Allocation of the allowance for different categories of loans is based on the methodology as explained above.  A key element of the methodology to determine the allowance is the Company’s credit risk evaluation process, which includes credit risk grading of individual C&I and CRE loans.  C&I and CRE loans are assigned credit risk grades based on the Company’s assessment of conditions that affect the borrower’s ability to meet its contractual obligations under the loan agreement.  That process includes reviewing borrowers’ current financial information, historical payment experience, credit documentation, public information and other information specific to each individual borrower.  Upon review, the commercial loan credit risk grade is revised or reaffirmed as the case may be.  The credit risk grades may be changed at any time management feels an upgrade or downgrade may be warranted.  The credit risk grades for the C&I and CRE loan portfolios are taken into account in the reserve methodology and loss factors are applied based upon the credit risk grades.  The loss factors applied are based upon the Company’s historical experience as well as what we believe to be best practices and common industry standards.  Historical experience reveals there is a direct correlation between the credit risk grades and loan charge-offs.  The changes in allocations in the C&I and CRE loan portfolio from period to period are based upon the credit risk grading system and from periodic reviews of the loan portfolio.  An unallocated component is maintained to cover uncertainties that could affect management’s estimate of probable losses.  The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies.

23

Each quarter, management performs an assessment of the allowance.  The Company’s Special Assets Committee meets monthly and the applicable lenders discuss each relationship under review and reach a consensus on the appropriate estimated loss amount, if applicable, based on current accounting guidance.  The Special Assets Committee’s focus is on ensuring the pertinent facts are considered regarding not only loans considered for specific reserves, but also the collectability of loans that may be past due in payment.  The assessment process also includes the review of all loans on a non-accruing basis as well as a review of certain loans to which the lenders or the Company’s Credit Administration function have assigned a criticized or classified risk rating.

The Company’s policy is to charge-off unsecured consumer loans when they become 90 days or more past due as to principal and interest.  In the other portfolio segments, amounts are charged-off at the point in time when the Company deems the balance, or a portion thereof, to be uncollectible.

Information related to the change in the allowance and the Company’s recorded investment in loans by portfolio segment as of the period indicated is as follows: 

As of and for the nine months ended September 30, 2017
	Commercial &		Commercial					Residential
(dollars in thousands)	industrial		real estate		Consumer			real estate		Unallocated		Total
Allowance for Loan Losses:
Beginning balance	$	1,075	$	4,706	$	1,834		$	1,622	$	127	$	9,364
Charge-offs		(76)		(416)		(505)			(38)		-		(1,035)
Recoveries		5		44		53			-		-		102
Provision		395		(232)		587			215		(40)		925
Ending balance	$	1,399	$	4,102	$	1,969		$	1,799	$	87	$	9,356
Ending balance: individually evaluated for impairment	$	193	$	1,076	$	53		$	317	$	-	$	1,639
Ending balance: collectively evaluated for impairment	$	1,206	$	3,026	$	1,916		$	1,482	$	87	$	7,717
Loans Receivables:
Ending balance (2)	$	112,096	$	209,119	$	166,228	(1)	$	147,024	$	-	$	634,467
Ending balance: individually evaluated for impairment	$	228	$	5,160	$	528		$	1,421	$	-	$	7,337
Ending balance: collectively evaluated for impairment	$	111,868	$	203,959	$	165,700		$	145,603	$	-	$	627,130

(1) Net of unearned lease revenue of $0.6 million.(2)Includes $2.0 million of net deferred loan costs.

As of and for the three months ended September 30, 2017
	Commercial &		Commercial				Residential
(dollars in thousands)	industrial		real estate		Consumer		real estate		Unallocated		Total
Allowance for Loan Losses:
Beginning balance	$	1,383	$	4,510	$	1,939	$	1,511	$	63	$	9,406
Charge-offs		(46)		(48)		(345)		-		-		(439)
Recoveries		2		3		9		-		-		14
Provision		60		(363)		366		288		24		375
Ending balance	$	1,399	$	4,102	$	1,969	$	1,799	$	87	$	9,356

As of and for the year ended December 31, 2016
	Commercial &		Commercial					Residential
(dollars in thousands)	industrial		real estate		Consumer			real estate		Unallocated		Total
Allowance for Loan Losses:
Beginning balance	$	1,336	$	5,014	$	1,533		$	1,407	$	237	$	9,527
Charge-offs		(224)		(592)		(504)			(60)		-		(1,380)
Recoveries		55		37		100			-		-		192
Provision		(92)		247		705			275		(110)		1,025
Ending balance	$	1,075	$	4,706	$	1,834		$	1,622	$	127	$	9,364
Ending balance: individually evaluated for impairment	$	193	$	2,382	$	171		$	315	$	-	$	3,061
Ending balance: collectively evaluated for impairment	$	882	$	2,324	$	1,663		$	1,307	$	127	$	6,303
Loans Receivables:
Ending balance (2)	$	98,477	$	204,311	$	149,735	(1)	$	144,971	$	-	$	597,494
Ending balance: individually evaluated for impairment	$	235	$	8,436	$	799		$	1,882	$	-	$	11,352
Ending balance: collectively evaluated for impairment	$	98,242	$	195,875	$	148,936		$	143,089	$	-	$	586,142

(1)Net of unearned lease revenue of $0.5 million.  (2) Includes $1.8 million of net deferred loan costs.

24

As of and for the nine months ended September 30, 2016
	Commercial &		Commercial				Residential
(dollars in thousands)	industrial		real estate		Consumer		real estate		Unallocated		Total
Allowance for Loan Losses:
Beginning balance	$	1,336	$	5,014	$	1,533	$	1,407	$	237	$	9,527
Charge-offs		(199)		(526)		(356)		(60)		-		(1,141)
Recoveries		39		36		85		-		-		160
Provision		(45)		284		526		10		(125)		650
Ending balance	$	1,131	$	4,808	$	1,788	$	1,357	$	112	$	9,196

As of and for the three months ended September 30, 2016
	Commercial &		Commercial				Residential
(dollars in thousands)	industrial		real estate		Consumer		real estate		Unallocated		Total
Allowance for Loan Losses:
Beginning balance	$	1,231	$	4,880	$	1,692	$	1,365	$	39	$	9,207
Charge-offs		(30)		(183)		(91)		-		-		(304)
Recoveries		18		3		47		-		-		68
Provision		(88)		108		140		(8)		73		225
Ending balance	$	1,131	$	4,808	$	1,788	$	1,357	$	112	$	9,196

6.  Earnings per share

Basic earnings per share (EPS) is computed by dividing net income available to common shareholders by the weighted-average number of common shares outstanding for the period.  Diluted EPS is computed in the same manner as basic EPS but also reflects the potential dilution that could occur from the grant of stock-based compensation awards.  The Company maintains two active share-based compensation plans that may generate additional potentially dilutive common shares.  For granted and unexercised stock options and stock-settled stock appreciation rights (SSARs), dilution would occur if Company-issued stock options or SSARs were exercised and converted into common stock.  As of the three and nine months ended September 30, 2017, there were 16,707 and 12,237 potentially dilutive shares related to issued and unexercised stock options and SSARs compared to 2,925 and 2,592 for the same 2016 periods, respectively.  For restricted stock, dilution would occur from the Company’s previously granted but unvested shares.  There were 9,504 and 8,130 potentially dilutive shares related to unvested restricted share grants as of the three and nine months ended September 30, 2017 compared to 8,747 and 6,482 for the three and nine months ended September 30, 2016, respectively.

In the computation of diluted EPS, the Company uses the treasury stock method to determine the dilutive effect of its granted but unexercised stock options and SSARs and unvested restricted stock.  Under the treasury stock method, the assumed proceeds, as defined, received from shares issued in a hypothetical stock option exercise or restricted stock grant, are assumed to be used to purchase treasury stock.  Proceeds include: amounts received from the exercise of outstanding stock options and compensation cost for future service that the Company has not yet recognized in earnings.  The Company does not consider awards from share-based grants in the computation of basic EPS.

The following table illustrates the data used in computing basic and diluted EPS for the periods indicated:

	Three months ended September 30,				Nine months ended September 30,
	2017		2016		2017		2016
(dollars in thousands except per share data)
Basic EPS:
Net income available to common shareholders	$	2,226	$	2,035	$	6,389	$	5,664
Weighted-average common shares outstanding		3,712,297		3,680,707		3,704,859		3,679,104
Basic EPS	$	0.60	$	0.55	$	1.72	$	1.54
Diluted EPS:
Net income available to common shareholders	$	2,226	$	2,035	$	6,389	$	5,664
Weighted-average common shares outstanding		3,712,297		3,680,707		3,704,859		3,679,104
Potentially dilutive common shares		26,211		11,672		20,367		9,074
Weighted-average common and potentially dilutive shares outstanding		3,738,508		3,692,379		3,725,226		3,688,178
Diluted EPS	$	0.60	$	0.55	$	1.72	$	1.54

25

7.  Stock plans

The Company has two stock-based compensation plans (the stock compensation plans) from which it can grant stock-based compensation awards, and applies the fair value method of accounting for stock-based compensation provided under current accounting guidance.  The guidelines require the cost of share-based payment transactions (including those with employees and non-employees) be recognized in the financial statements.  The Company’s stock compensation plans were shareholder-approved and permit the grant of share-based compensation awards to its employees and directors.  The Company believes that the stock-based compensation plans will advance the development, growth and financial condition of the Company by providing incentives through participation in the appreciation in the value of the Company’s common stock.  In return, the Company hopes to secure, retain and motivate the employees and directors who are responsible for the operation and the management of the affairs of the Company by aligning the interest of its employees and directors with the interest of its shareholders.  In the stock compensation plans, employees and directors are eligible to be awarded stock-based compensation grants which can consist of stock options (qualified and non-qualified), stock appreciation rights (SARs) and restricted stock.

At the 2012 annual shareholders’ meeting, the Company’s shareholders approved and the Company adopted the 2012 Omnibus Stock Incentive Plan and the 2012 Director Stock Incentive Plan (collectively, the 2012 stock incentive plans).  The 2012 stock incentive plans replaced both the expired 2000 Independent Directors Stock Option Plan and the 2000 Stock Incentive Plan (collectively, the 2000 stock incentive plans).  Unless terminated by the Company’s board of directors, the 2012 stock incentive plans will expire on, and no stock-based awards shall be granted after the year 2022.

In each of the 2012 stock incentive plans, the Company has reserved 750,000 shares of its no-par common stock for future issuance.  The Company recognizes share-based compensation expense over the requisite service or vesting period.  During 2015, the Company created a Long-Term Incentive Plan (LTIP) that awards restricted stock and stock-settled stock appreciation rights (SSARs) to senior officers based on the attainment of performance goals.  The service requirement is the participant’s continued employment throughout the LTIP with a three-year vesting period.  The restricted stock has a two-year post vesting holding period requirement. The SSAR awards have a ten year term from the date of each grant.  The Company granted restricted stock and SSARs in February 2016 based on 2015 performance and in February 2017 based on 2016 performance.

The following table summarizes the weighted-average fair value and vesting of restricted stock grants awarded during the periods ended September 30, 2017 and 2016 under the 2012 stock incentive plans:

	September 30, 2017				September 30, 2016
			Weighted-				Weighted-
			average				average
	Shares		grant date		Shares		grant date
	granted		fair value		granted		fair value
Director plan	8,400	(2)	$	26.17	8,400	(1)	$	21.60
Omnibus plan	4,749	(3)		23.93	4,734	(3)		19.48
Omnibus plan	75	(1)		26.17	75	(1)		21.00
Total	13,224		$	25.36	13,209		$	20.84

(1) Vest after 1 year  (2) Vest after 2 years – 50% each year(3)Vest after 3 years – 33% each year

The fair value of the 4,749 shares granted on February 7, 2017 was calculated using the grant date stock price with a discount valuation.  The Chaffe model was used to calculate the discount. Since the shares vest over three years and then have a further two-year holding period, the historical volatility of the five years prior to the issue date was used to estimate volatility.  The five year treasury yield was used as the interest rate. The Company does pay a dividend, but since the shareholder will receive the dividends during vesting and the post-vest restriction period, no dividend yield was used in the calculation as not to inflate the discount.  The grant date stock price was $26.17 and the discount of 8.548%was calculated using an interest rate of 1.841% and a 5 year historical volatility of 18.556%.

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A summary of the status of the Company’s non-vested restricted stock as of and changes during the period indicated are presented in the following table:

	2012 Stock incentive plans
	Director	Omnibus	Total		Weighted- average grant date fair value
Non-vested balance at December 31, 2016	8,400	13,562	21,962	$	20.31
Granted	8,400	4,824	13,224		25.36
Forfeited	-	-	-
Vested	(8,400)	(6,082)	(14,482)		20.47
Non-vested balance at September 30, 2017	8,400	12,304	20,704	$	23.59

The Company granted 24,346SSARs under the Omnibus Plan on February 7, 2017.  The Company estimated the fair value of SSARs using the Black-Scholes-Merton valuation model on the grant date.  The Company used the following assumptions: the risk-free interest rate is the rate equivalent to the expected term of the option interpolated from the U.S. Treasury Yield Curve on the valuation date and historical volatility is calculated by taking the standard deviation of historical returns using weekly and monthly data.  The fair value of these SSARs was $5.06 per share, based on a risk-free interest rate of 2.386%, a dividend yield of 3.110% and a volatility of 23.434% using an expected term of ten years.

A summary of the status of the Company’s SSARs as of and changes during the period indicated are presented in the following table:

	Awards		Weighted-average grant date fair value	Weighted-average remaining contractual term (years)
Outstanding December 31, 2016	29,014	$	3.48	9.1
Granted	24,346		5.06	9.3
Exercised	-		-
Forfeited	-		-
Outstanding September 30, 2017	53,360	$	4.20	8.8

Of  the SSARs outstanding at September 30, 2017, 9,668 vested and were exercisable. SSARs vest over a three year period – 33% per year.

Share-based compensation expense is included as a component of salaries and employee benefits in the consolidated statements of income.  The following tables illustrate stock-based compensation expense recognized on non-vested equity awards during the three and ninemonths ended September 30, 2017 and 2016and the unrecognized stock-based compensation expense as of September 30, 2017:

		Three months ended			Nine months ended
		September 30,			September 30,
(dollars in thousands)	2017		2016		2017			2016
Stock-based compensation expense:
Director stock incentive plan	$	28	$	45	$	89	$	129
Omnibus stock incentive plan		49		36		144		104
Employee stock purchase plan		-		-		23		15
Total stock-based compensation expense	$	77	$	81	$	256	$	248

In addition, during the three and nine months ended September 30, 2017 the Company accrued $54 thousand and $163 thousand, respectively, in stock-based compensation expense for restricted stock and SSARs to be awarded under the Omnibus Plan.  The Company accrued$51 thousand and $137 thousand, respectively, in stock-based compensation expense during the three and nine months ended September 30, 2016.

	As of
(dollars in thousands)	September 30, 2017
Unrecognized stock-based compensation expense:
Director plan	$	146
Omnibus plan		330
Total unrecognized stock-based compensation expense	$	476

The unrecognized stock-based compensation expense as of September 30, 2017 will be recognized ratably over the periods ended January 2019 and January 2020 for the Director Plan and the Omnibus Plan, respectively.

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Transactions under the Company’s stock option plan for the nine months ended September 30, 2017 are presented in the following table:

	Options		Weighted-average exercise price	Weighted-average remaining contractual term (years)
Outstanding and exercisable, December 31, 2016	22,500	$	19.12	1.0
Granted	-		-
Exercised	(17,250)		19.27
Forfeited	-		-
Outstanding and exercisable, September 30, 2017	5,250	$	18.62	0.3

During the first nine months of 2017, there were 17,250 stock options exercised at a price of $19.27 per share.  The intrinsic value of these stock options was $64,055.  The tax deduction realized from the exercise of these options was $257,492 resulting in a tax benefit of $87,547.  During the first nine months of 2016, there were 750 stock options exercised at a price of $18.50 per share.  The intrinsic value of these stock options was $2,585 and the tax deduction realized from the exercise of these options was $2,375 resulting in a tax benefit of $808.  The Company has not issued stock options since 2008.

In addition to the 2012 stock incentive plans, the Company established the 2002 Employee Stock Purchase Plan (the ESPP) and reserved 165,000 shares of its un-issued capital stock for issuance under the plan.  The ESPP was designed to promote broad-based employee ownership of the Company’s stock and to motivate employees to improve job performance and enhance the financial results of the Company.  Under the ESPP, participation is voluntary whereby employees use automatic payroll withholdings to purchase the Company’s capital stock at a discounted price based on the fair market value of the capital stock as measured on either the commencement or termination dates, as defined.  As of September 30,  2017,  69,701 shares have been issued under the ESPP.  The ESPP is considered a compensatory plan and is required to comply with the provisions of current accounting guidance.  The Company recognizes compensation expense on its ESPP on the date the shares are purchased and it is included as a component of salaries and employee benefits in the consolidated statements of income.

8.  Fair value measurements

The accounting guidelines establish a framework for measuring and disclosing information about fair value measurements.  The guidelines of fair value reporting instituted a valuation hierarchy for disclosure of the inputs used to measure fair value.  This hierarchy prioritizes the inputs into three broad levels as follows:

Level 1 - inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities; 

Level 2 - inputs are quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; or inputs that are observable for the asset or liability, either directly or indirectly through market corroboration, for substantially the full term of the financial instrument;

Level 3 - inputs are unobservable and are based on the Company’s own assumptions to measure assets and liabilities at fair value.  Level 3 pricing for securities may also include unobservable inputs based upon broker-traded transactions.

A financial asset or liability’s classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement.

The Company uses fair value to measure certain assets and, if necessary, liabilities on a recurring basis when fair value is the primary measure for accounting.  Thus, the Company uses fair value for AFS securities.  Fair value is used on a non-recurring basis to measure certain assets when adjusting carrying values to market values, such as impaired loans, other real estate owned (ORE) and other repossessed assets.

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The following table represents the carrying amount and estimated fair value of the Company’s financial instruments as of the periods indicated:

September 30, 2017
					Quoted prices		Significant		Significant
					in active		other		other
	Carrying		Estimated		markets		observable inputs		unobservable inputs
(dollars in thousands)	amount		fair value		(Level 1)		(Level 2)		(Level 3)
Financial assets:
Cash and cash equivalents	$	41,881	$	41,881	$	41,881	$	-	$	-
Available-for-sale securities		151,995		151,995		776		151,219		-
FHLB stock		2,543		2,543		-		2,543		-
Loans and leases, net		625,111		623,567		-		-		623,567
Loans held-for-sale		1,629		1,662		-		1,662		-
Accrued interest receivable		2,769		2,769		-		2,769		-
Financial liabilities:
Deposits with no stated maturities		640,173		640,173		-		640,173		-
Time deposits		108,404		107,564		-		107,564		-
Short-term borrowings		12,920		12,920		-		12,920		-
FHLB advances		23,704		23,617		-		23,617		-
Accrued interest payable		319		319		-		319		-

December 31, 2016
					Quoted prices		Significant		Significant
					in active		other		other
	Carrying		Estimated		markets		observable inputs		unobservable inputs
(dollars in thousands)	amount		fair value		(Level 1)		(Level 2)		(Level 3)
Financial assets:
Cash and cash equivalents	$	25,843	$	25,843	$	25,843	$	-	$	-
Available-for-sale securities		130,037		130,037		633		129,404		-
FHLB stock		2,606		2,606		-		2,606		-
Loans and leases, net		588,130		590,688		-		-		590,688
Loans held-for-sale		2,854		2,907		-		2,907		-
Accrued interest receivable		2,246		2,246		-		2,246		-
Financial liabilities:
Deposits with no stated maturities		610,706		610,706		-		610,706		-
Time deposits		92,753		91,969		-		91,969		-
Short-term borrowings		4,223		4,223		-		4,223		-
Accrued interest payable		181		181		-		181		-

The carrying value of short-term financial instruments, as listed below, approximates their fair value.  These instruments generally have limited credit exposure, no stated or short-term maturities, carry interest rates that approximate market and generally are recorded at amounts that are payable on demand :

· Cash and cash equivalents;

· Non-interest bearing deposit accounts;

· Savings, interest-bearing checking and money market accounts and

· Short-term borrowings.

Securities:  Fair values on investment securities are determined by prices provided by a third-party vendor, who is a provider of financial market data, analytics and related services to financial institutions. 

Loans and leases:  The fair value of loans is estimated by the net present value of the future expected cash flows discounted at current offering rates for similar loans.  Current offering rates consider, among other things, credit risk.  The carrying value that fair value is compared to is net of the allowance for loan losses and since there is significant judgment included in evaluating credit quality, loans

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are classified within Level 3 of the fair value hierarchy.  The net carrying value of loans acquired through the Wayne Bank branch acquisition approximates the fair value of the loans.

Loans held-for-sale:  The fair value of loans held-for-sale is estimated using rates currently offered for similar loans and is typically obtained from the Federal National Mortgage Association (FNMA) or the Federal Home Loan Bank of Pittsburgh (FHLB).

Certificates of deposit:  The fair value of certificates of deposit is based on discounted cash flows using rates which approximate market rates for deposits of similar maturities.The fair value of certificates of deposit acquired through the Wayne Bank branch acquisition represents the estimated fair value of these deposits.

FHLB advances:  Fair value is estimated using the rates currently offered for similar borrowings.

The following tables illustrate the financial instruments measured at fair value on a recurring basis segregated by hierarchy fair value levels as of the periods indicated:

			Quoted prices
			in active		Significant other		Significant other
	Total carrying value		markets		observable inputs		unobservable inputs
(dollars in thousands)	September 30, 2017		(Level 1)		(Level 2)		(Level 3)
Available-for-sale securities:
Agency - GSE	$	16,213	$	-	$	16,213	$	-
Obligations of states and political subdivisions		43,735		-		43,735		-
MBS - GSE residential		91,271		-		91,271		-
Equity securities - financial services		776		776		-		-
Total available-for-sale securities	$	151,995	$	776	$	151,219	$	-

			Quoted prices
			in active		Significant other		Significant other
	Total carrying value		markets		observable inputs		unobservable inputs
(dollars in thousands)	December 31, 2016		(Level 1)		(Level 2)		(Level 3)
Available-for-sale securities:
Agency - GSE	$	18,276	$	-	$	18,276	$	-
Obligations of states and political subdivisions		40,191		-		40,191		-
MBS - GSE residential		70,937		-		70,937		-
Equity securities - financial services		633		633		-		-
Total available-for-sale securities	$	130,037	$	633	$	129,404	$	-

Equity securities in the AFS portfolio are measured at fair value using quoted market prices for identical assets and are classified within Level 1 of the valuation hierarchy.  Debt securities in the AFS portfolio are measured at fair value using market quotations provided by a third-party vendor, who is a provider of financial market data, analytics and related services to financial institutions.  Assets classified as Level 2 use valuation techniques that are common to bond valuations.  That is, in active markets whereby bonds of similar characteristics frequently trade, quotes for similar assets are obtained.  For the periods ending September 30, 2017 and December 31, 2016, there were no transfers to or from Level 1 and Level 2 fair value measurements for financial assets measured on a recurring basis.

There were no changes in Level 3 financial instruments measured at fair value on a recurring basis as of and for the periods ending September 30, 2017 and December 31, 2016, respectively.

The following table illustrates the financial instruments newlymeasured at fair value on a non-recurring basis segregated by hierarchy fair value levels as of the periods indicated:

			Quoted prices in		Significant other		Significant other
	Total carrying value		active markets		observable inputs		unobservable inputs
(dollars in thousands)	at September 30, 2017		(Level 1)		(Level 2)		(Level 3)
Impaired loans	$	4,253	$	-	$	-	$	4,253
Other real estate owned		764		-		-		764
Total	$	5,017	$	-	$	-	$	5,017

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			Quoted prices in		Significant other		Significant other
	Total carrying value		active markets		observable inputs		unobservable inputs
(dollars in thousands)	at December 31, 2016		(Level 1)		(Level 2)		(Level 3)
Impaired loans	$	6,254	$	-	$	-	$	6,254
Other real estate owned		872		-		-		872
Total	$	7,126	$	-	$	-	$	7,126

From time-to-time, the Company may be required to record at fair value financial instruments on a non-recurring basis, such as impaired loans, ORE and other repossessed assets.  These non-recurring fair value adjustments involve the application of lower-of-cost-or-market accounting on write downs of individual assets.

The following describes valuation methodologies used for financial instruments measured at fair value on a non-recurring basis.

Impaired loans that are collateral dependent are written down to fair value through the establishment of specific reserves, a component of the allowance for loan losses, and as such are carried at the lower of net recorded investment or the estimated fair value.

Estimates of fair value of the collateral are determined based on a variety of information, including available valuations from certified appraisers for similar assets, present value of discounted cash flows and inputs that are estimated based on commonly used and generally accepted industry liquidation advance rates and estimates and assumptions developed by management.

Valuation techniques for impaired loans are typically determined through independent appraisals of the underlying collateral or may be determined through present value of discounted cash flows.  Both techniques include various Level 3 inputs which are not identifiable.  The valuation technique may be adjusted by management for estimated liquidation expenses and qualitative factors such as economic conditions.  If real estate is not the primary source of repayment, present value of discounted cash flows and estimates using generally accepted industry liquidation advance rates and other factors may be utilized to determine fair value.

At September 30, 2017 and  December 31, 2016, the range of liquidation expenses and other valuation adjustments applied to impaired loans ranged from -20.54% to -53.00% and from -22.72% to -57.49% respectively.  The weighted-average of liquidation expenses and other valuation adjustments applied to impaired loans amounted to -30.71% and -32.47% as of September 30, 2017 and December 31, 2016, respectively.  Due to the multitude of assumptions, many of which are subjective in nature, and the varying inputs and techniques used to determine fair value, the Company recognizes that valuations could differ across a wide spectrum of techniques employed.  Accordingly, fair value estimates for impaired loans are classified as Level 3.

For ORE, fair value is generally determined through independent appraisals of the underlying properties which generally include various Level 3 inputs which are not identifiable.  Appraisals form the basis for determining the net realizable value from these properties.  Net realizable value is the result of the appraised value less certain costs or discounts associated with liquidation which occurs in the normal course of business.  Management’s assumptions may include consideration of the location and occupancy of the property, along with current economic conditions.  Subsequently, as these properties are actively marketed, the estimated fair values may be periodically adjusted through incremental subsequent write-downs.  These write-downs usually reflect decreases in estimated values resulting from sales price observations as well as changing economic and market conditions.  At September 30, 2017 and December 31, 2016, the discounts applied to the appraised values of ORE ranged from -17.95% to -99.00% and-21.74% to -99.00%, respectively.  As of September 30, 2017 and December 31, 2016, the weighted-average of discount to the appraisal values of ORE amounted to -28.19% and-32.38%, respectively.

As of September 30, 2017, the Company had one automobile in other repossessed assets with a balance of $4 thousand.  As of December 31, 2016, the Company had one automobile in other repossessed assets with a balance of $8 thousand.  There were no adjustments to the carrying value of these automobiles.

9.  Acquisition

On March 17, 2017, the Company completed the acquisition of the West Scranton branch of Wayne Bank, the wholly owned banking subsidiary of Norwood Financial Corp., pursuant to the terms of the Branch Purchase and Deposit Assumption Agreement dated September 29, 2016.  The Company purchased all of the deposit liabilities associated with the branch, certain loans, and the branch real estate, and immediately closed the branch and consolidated the acquired deposits and loans into its nearby West Scranton branch office.  The Company expects this transaction to expand its customer base in West Scranton.

The transaction has been accounted for using the acquisition method of accounting.  The acquired assets and assumed liabilities were recorded at book value which also represented estimated fair value at the date of acquisition.  Management made significant estimates and exercised significant judgement in estimating fair value, but the fair value adjustments were deemed immaterial to the financial statements. 

The Company recognized $41 thousand of acquisition-related costs during the first nine months of 2017.  These costs are being

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expensed as incurred and are presented in non-interest expenses on the consolidated statements of income.  Costs incurred in 2017 consist principally of legal feesand other professional fees.

The following table summarizes the estimated fair value of the assets acquired and liabilities assumed at the date of acquisition:

(dollars in thousands)	March 17, 2017
Cash and cash equivalents	$	11,817
Loans		1,574
Bank premises and equipment		264
Goodwill		209
Accrued interest receivable and other assets		4
Total assets acquired	$	13,868
Deposits	$	13,809
Accrued interest payable and other liabilities		59
Total liabilities assumed	$	13,868

The Company acquired $1.6 million in residential and consumer loans.  None of the loans that were acquired had evidence of credit quality deterioration.

The Company recorded goodwill associated with the acquisition of the West Scranton branch of Wayne bank totaling $0.2 million.  Goodwill is not amortized, but is periodically evaluated for impairment.  The Company did not recognize any impairment during the nine months ended September 30, 2017.  For income tax purposes, goodwill will be deducted over a 15 year period.

10.  Employee Benefits

Bank-Owned Life Insurance (BOLI)

The Company has purchased single premium BOLI policies on certain officers.  The policies are recorded at their cash surrender values.  Increases in cash surrender values are included in non-interest income in the consolidated statements of income.  In March 2017, the Company purchased an additional $8.0 million of BOLI.  The policies’ cash surrender value totaled $19.9 million and $11.4 million, respectively, as of September 30, 2017 and December 31, 2016 and is reflected as an asset on the consolidated balance sheets.  As of September 30, 2017 and 2016, the Company has recorded income of $422 thousand and $264 thousand, respectively.

Officer Life Insurance

In 2017, the Bank entered into separate split dollar life insurance arrangements (Split Dollar Agreements) with eleven officers.  This plan provides each officer a specified death benefit should the officer die while in the Bank’s employ.  The Bank paid the insurance premiums in March 2017 and the arrangements were effective in March 2017.  The Bank owns the policies and all cash values thereunder.  Upon death of the covered employee, the agreed-upon amount of death proceeds from the policies will be paid directly to the insured’s beneficiary.  As of September 30, 2017, the policies had total death benefits of $20.6 million ofwhich $4.0 million would have been paid to the officer’s beneficiaries and the remaining $16.6 million would have been paid to the Bank.  In addition, three executive officers have the opportunity to retain a split dollar benefit equal to two times their highest base salary after separation from service if the vesting requirements are met.  As of September 30, 2017, the Company accrued expenses of $21 thousand for the split dollar benefit.

Supplemental Executive Retirement plan (SERP)

On March 29, 2017, the Bank entered into separate supplemental executive retirement agreements (individually the “SERP Agreement”) with fiveofficers, pursuant to which the Bank will credit an amount to a SERP account established on each participant’s behalf while they are actively employed by the Bank for each calendar month from March 1, 2017 until retirement.  As of September 30, 2017, the Company accrued expenses of $268 thousand in connection with the SERP.

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Item 2:  Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following is management's discussion and analysis of the significant changes in the consolidated financial condition of the Company as of September 30, 2017 compared to December 31, 2016 and a comparison of the results of operations for the three and nine months ended September 30, 2017 and 2016.  Current performance may not be indicative of future results.  This discussion should be read in conjunction with the Company’s 2016 Annual Report filed on Form 10-K.

Forward-looking statements

Certain of the matters discussed in this Quarterly Report on Form 10-Q may constitute forward-looking statements for purposes of the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended, and as such may involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of the Company to be materially different from future results, performance or achievements expressed or implied by such forward-looking statements.  The words “expect,” “anticipate,” “intend,” “plan,” “believe,” “estimate,” and similar expressions are intended to identify such forward-looking statements.

The Company’s actual results may differ materially from the results anticipated in these forward-looking statements due to a variety of factors, including, without limitation:

§ the effects of economic conditions on current customers, specifically the effect of the economy on loan customers’ ability to repay loans;

§ the costs and effects of litigation and of unexpected or adverse outcomes in such litigation;

§ the impact of new or changes in existing laws and regulations, including the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 and the regulations promulgated there under;

§ impacts of the capital and liquidity requirements of the Basel III standards and other regulatory pronouncements, regulations and rules;

§ governmental monetary and fiscal policies, as well as legislative and regulatory changes;

§ effects of short- and long-term federal budget and tax negotiations and their effect on economic and business conditions;

§ the effect of changes in accounting policies and practices, as may be adopted by the regulatory agencies, as well as the Financial Accounting Standards Board and other accounting standard setters;

§ the risks of changes in interest rates on the level and composition of deposits, loan demand, and the values of loan collateral, securities and interest rate protection agreements, as well as interest rate risks;

§ the effects of competition from other commercial banks, thrifts, mortgage banking firms, consumer finance companies, credit unions, securities brokerage firms, insurance companies, money market and other mutual funds and other financial institutions operating in our market area and elsewhere, including institutions operating locally, regionally, nationally and internationally, together with such competitors offering banking products and services by mail, telephone, computer and the internet;

§ technological changes;

§ the interruption or breach in security of our information systems and other technological risks and attacks resulting in failures or disruptions in customer account management, general ledger processing and loan or deposit updates and potential impacts resulting therefrom including additional costs, reputational damage, regulatory penalties, and financial losses;

§ acquisitions and integration of acquired businesses;

§ the failure of assumptions underlying the establishment of reserves for loan losses and estimations of values of collateral and various financial assets and liabilities;

§ volatilities in the securities markets;

§ acts of war or terrorism;

§ disruption of credit and equity markets; and

§ the risk that our analyses of these risks and forces could be incorrect and/or that the strategies developed to address them could be unsuccessful.

The Company cautions readers not to place undue reliance on forward-looking statements, which reflect analyses only as of the date of this document.  The Company has no obligation to update any forward-looking statements to reflect events or circumstances after the date of this document.

Readers should review the risk factors described in other documents that we file or furnish, from time to time, with the Securities and Exchange Commission, including Annual Reports to Shareholders, Annual Reports filed on Form 10-K and other current reports filed or furnished on Form 8-K.

Executive Summary

The Company is a Pennsylvania corporation and a bank holding company, whose wholly-owned state chartered commercial bank is The Fidelity Deposit and Discount Bank.  The Company is headquartered in Dunmore, Pennsylvania.  We consider Lackawanna and Luzerne Counties our primary marketplace.

As a leading Northeastern Pennsylvania community bank, our goals are to enhance shareholder value while continuing to build a full-service community bank.  We focus on growing our core business of retail and business lending and deposit gathering while

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maintaining strong asset quality and controlling operating expenses.  We continue to implement strategies to diversify earning assets and to increase low cost core deposits.  These strategies include a greater level of commercial lending and the ancillary business products and services supporting our commercial customers’ needs as well as residential lending strategies and an array of consumer products.  We focus on developing a full banking relationship with existing, as well as new, small- and middle-sized business prospects.  In addition, we explore opportunities to selectively expand our franchise footprint, consisting presently of our 10-branch network.  Currently, the Company is constructing a new branch in Dallas, PA in order to expand our presence in Luzerne County, which is expected to open in the third quarter of 2018.

On August 15, 2017, the Company declared  a three-for-two stock split to  shareholders effected in the form of a 50% stock dividend.  All share and per share information included in the accompanying management’s discussion and analysis has been retroactively adjusted to reflect this stock split.

We are impacted by both national and regional economic factors, with commercial, commercial real estate and residential mortgage loans concentrated in Northeastern Pennsylvania, primarily in Lackawanna and Luzerne counties.  Although the U.S. economy has shown signs of modest improvement, the general operating environment and our local market area continue to remain challenging.  For the near-term, we expect to continue to operate in a low, but slowly-rising interest rate environment.  A rising rate environment positions the Company to improve its net interest income performance. The Federal Open Market Committee (FOMC) adjusted the short-term federal funds rate up 50 basis points so far during 2017.  Expectations are for short-term rates to rise once more this year, potentially pressuring deposit rate pricing.  The national unemployment rate for September 2017 was 4.2%, down from 4.7% at December 2016.  The unemployment rate in Scranton - Wilkes-Barre Metropolitan Statistical Area (local) decreased during the first nine months of 2017 as well,but continued to lag behind the unemployment rates of the state and nation.  According to the U.S. Bureau of Labor Statistics, the local unemployment rate at September 30, 2017 was 5.0%, a decrease of 0.4 percentage points from 5.4% at December 31, 2016.  Although the local unemployment rate decreased during the first nine months of 2017, it was due to a drop in the labor force rather than an increase in jobs.  Seasonal fluctuations in unemployment are expected. The median home values in the region have gone up 4.4% over the past year, and according to Zillow, an online database advertising firm providing access to its real estate search engines to various media outlets, values are expected to rise 2.2% within the next year.  In light of these expectations, we will continue to monitor the economic climate in our region and scrutinize growth prospects with credit quality as a principal consideration.

During the third quarter of 2017, the Company’s loan growth was negated by approximately $6 million in cash inflow from the satisfaction of two commercial real estate loans.  Management focused on growing business and public deposits during the third quarter of 2017 to pay down short-term borrowings.  The Company was successful and was able to grow non-interest bearing business accounts by $11.7 million, interest-bearing business accounts by $8.3 million, interest-bearing public accounts by $7.7 million,  business money market accounts by $6.3 million and $6.1 million in CDsduring the third quarter of 2017.

In addition to the challenging economic environment in which we compete, the regulation and oversight of our business has changed significantly in recent years.  As described more fully in Part I, Item 1A, “Risk Factors,” and in the “Supervisory and Regulation” section of management’s discussion and analysis of financial condition and results of operations in our 2016 Annual Report filed on Form 10-K, certain aspects of the Dodd-Frank Wall Street Reform Act (Dodd-Frank Act) continue to have a significant impact on us.  In addition, final rules to implement Basel III regulatory capital reform, approved by the federal bank regulatory agencies in 2013, subject many banks including the Company, to capital requirements which will be phased in.  The initial provisions effective for us began on January 1, 2015.  The rules also revise the minimum risk-based and leverage capital ratio requirements applicable to the Company and revise the calculation of risk-weighted assets to enhance their risk sensitivity.  We will continue to prepare for the impacts that the Dodd-Frank Act and the Basel III capital standards, and related rulemaking will have on our business, financial condition and results of operations.

General

The Company’s earnings depend primarily on net interest income.  Net interest income is the difference between interest income and interest expense.  Interest income is generated from yields earned on interest-earning assets, which consist principally of loans and investment securities.  Interest expense is incurred from rates paid on interest-bearing liabilities, which consist of deposits and borrowings.  Net interest income is determined by the Company’s interest rate spread (the difference between the yields earned on its interest-earning assets and the rates paid on its interest-bearing liabilities) and the relative amounts of interest-earning assets and interest-bearing liabilities.  Interest rate spread is significantly impacted by: changes in interest rates and market yield curves and their related impact on cash flows; the composition and characteristics of interest-earning assets and interest-bearing liabilities; differences in the maturity and re-pricing characteristics of assets compared to the maturity and re-pricing characteristics of the liabilities that fund them and by the competition in the marketplace.

The Company’s earnings are also affected by the level of its non-interest income and expenses and by the provisions for loan losses and income taxes.  Non-interest income mainly consists of: service charges on the Company’s loan and deposit products; interchange fees; trust and asset management service fees; increases in the cash surrender value of the bank owned life insurance and from net gains or losses from sales of loans and securities.  Non-interest expense consists of: compensation and related employee benefit costs; occupancy; equipment; data processing; advertising and marketing; FDIC insurance premiums; professional fees; loan collection; net other real estate owned (ORE) expenses; supplies and other operating overhead.

34

Comparison of the results of operations

Three and nine months ended September 30, 2017 and 2016

Overview

For the third quarter of 2017, the Company generated $2.2 million in net income, or $0.60 per diluted share, an increase of $0.2 million, or 9%, over the $2.0 million, or $0.55 per diluted share, generated for the third quarter of 2016.  Net income also grew during the first nine months of 2017 to $6.4 million, or $1.72 per diluted share, an increase of $0.7 million, or 13%,compared to $5.7 million, or $1.54 per diluted share, for the same 2016 period.  In the both the quarter and year-to-date comparisons, the increase was due to higher revenue which more than offset additional non-interest expenses and an increase in the provision for loan losses. 

Return on average assets (ROA) was 1.03% and 1.07% for the third quarters of 2017 and 2016, respectively, and 1.02% and 1.01% for the nine months ended September 30, 2017 and 2016, respectively.  In the quarterly comparison, the decrease in ROA was the result of the growth in average assets outpacing net income growth.  In the year-to-date comparison, ROA increased by one basis point due to continuous growth in net income.  Return on average shareholders’ equity (ROE) was10.36% and 9.99%for the third quarters of 2017 and 2016, respectively, and 10.24% and 9.55% for the nine months ended September 30, 2017 and 2016, respectively.  In both periods, ROE increased primarily from the leverage growth in 2017 and also net income growth outpacing the increase in average shareholders’ equity. 

Net interest income and interest sensitive assets / liabilities

For the third quarter of 2017, net interest income increased $0.6 million, or 10%, to $7.0 million from $6.4 million for the third quarter of 2016,  due to higher interest income partially offset by increased interest expenses.  Although the yield on interest-earning assets remained flat, the Company produced $0.9 million in additional interest income from growth of  $90.3 million in average interest-earning assets.This growth in interest income was primarily driven by the loan portfolio with average balance growth of $69.6 million which contributed an additional $0.8 million to interest income.  In conjunction, average balances of securities increased $27.0 million which produced $0.2 million more interest income from investments.  On the liability side, total average interest-bearing liabilities were $76.1 million higher with a fourteen basis point increase in average rates paid which resulted in $0.3 million more interest expense for the quarter ended September 30, 2017 compared to the 2016 like period. 

Net interest income increased $2.1 million, or 11%, to $20.8 million for the nine months ended September 30, 2017 compared to $18.7 million for the same 2016 period.  Growth in average interest-earning assets and the higher yields earned thereon produced $2.8 million more in interest income.  The loan portfolio experienced average balance growth of $64.2 million which had the effect of producing $1.9 million in income despite the negative impact of a three basis point decline in yield.  The average balance of total investments grew $27.1 million, mostly in higher yielding mortgage-backed securities, resulting in another $0.9 million in interest income.  Interest income growth was partially offset by $0.6 million in additional interest expense.  The higher interest expense was primarily attributable to $42.0 million more in average borrowings which resulted in $0.4 million more interest expense.  Of the increase in average borrowings, $19.1 million was FHLB advances used mostly to purchase securities and $22.9 million was overnight borrowings used to fund loan growth.  Larger average interest-bearing deposits of $22.2 million with a five basis point increase in rates contributed another $0.2 million to interest expense.

The fully-taxable equivalent (FTE) net interest rate spread decreased by fourteen basis points for the three months ended September 30, 2017,  compared to the same 2016 period as a result of the higher rates paid on interest-bearing liabilities while the yield on interest-earning assets was unchanged.  For the nine months ended September 30, 2017, the spread was 3.58% compared to 3.59% for the nine months ended September 30, 2016.  The spread fell one basis point because rates paid on interest-bearing liabilities increased faster than the yield earned on interest-earning assets.  The FTE net interest rate margindecreased by eleven basis points to 3.67% for the third quarter of 2017 compared to 3.78% for the third quarter of 2016 due to the larger average balance of interest-earning assets.  For the nine months ended September 30, 2017, margin increased to 3.72% compared to 3.71% for the same 2016 period.  Margin growth resulted from growth of $17.6 million in average non-interest-bearing deposits mitigating the increase in the cost of funds.  The overall cost of funds, which includes the impact of non-interest bearing deposits, increased eleven and seven basis points for the three and nine months ended September 30, 2017, respectively, compared to the same 2016 periods.  The primary reason for the increase was higher average borrowings which were used to fund asset growth along with an increase in average interest-bearing deposits and the rates paid thereon. 

For the remainder of 2017, the Company expects to operate in a gradually increasing interest rate environment.  A rate environment with rising interest rates positions the Company to improve its interest income performance from new and maturing earning assets.  Until there is a sustained period of yield curve steepening, with rates rising more sharply at the long end, the interest rate margin may experience compression.  However for the rest of 2017, the Company anticipates net interest income to improve as growth in interest-earning assets would help mitigate an adverse impact of rate movements on cost of funds.  The Federal Open Market Committee (FOMC) has been gradually increasing the short-term federal funds rate since the end of 2015, but it had a minimal effect on rates paid on funding sources.  On the asset side, the prime interest rate, the benchmark rate that banks use as a base rate for adjustable rate loans, rose 25 basis points in March 2017 and another 25 basis points in June 2017.  The focus for the last quarter of 2017 is to manage net interest income after years of a sustained low interest rate environment by maintaining a reasonable spread.  Interest expense is projected to continue to grow in the fourth quarter of 2017 from growth in deposits and borrowings and an increase in rates

35

paid on both.  Continued growth in the loan portfolios complemented with investment security growth is expected to boost interest income, and when coupled with a proactive relationship approach to deposit cost setting strategies should help contain the interest rate margin at acceptable levels.

The Company’s cost of interest-bearing liabilities was 59 basis points and 54 basis points for the three and nine months ended September 30, 2017, respectively, and 45 basis pointsfor both the three and nine months ended September 30, 2016, respectively.  The primary reason for the increase in both periods was higher average borrowings.  Increases in the average balance of interest-bearing deposits and the rates paid on these deposits also contributed to the higher cost of interest-bearing liabilities in both periods.  During the third quarter of 2017, rates paid on interest-bearing deposits started to inch up from historic low levels over the past four years.  Interest rates along the treasury yield curve have been volatile with shorter-term rates rising faster than long-term rates producing a flatter yield curve during 2017.  Competition among banks has already begun to pressure banks to increase deposit rates.  If  rates continue to rise in the last quarter of 2017, the effect could pressure net interest income if short-term rates rise more rapidly than longer-term interest rates, thereby compressing the interest rate spread.  To help mitigate the impact of the imminent change to the economic landscape, the Company has successfully developed and will continue to strengthen its association with existing customers, develop new business relationships, generate new loan volumes, and retain and generate higher levels of average non-interest bearing deposit balances.  Strategically deploying no- and low-cost deposits into interest earning-assets is an effective margin-preserving strategy that the Company expects to continue to pursue and expand to help stabilize net interest margin.

The Company’s Asset Liability Management (ALM) team meets regularly to discuss among other things, interest rate risk and when deemed necessary adjusts interest rates.  ALM also discusses revenue enhancing strategies to help combat the potential for a decline in net interest income. The Company’s marketing department, together with ALM, lenders and deposit gatherers, continue to develop prudent strategies that will grow the loan portfolio and accumulate low-cost deposits to improve net interest income performance.

The table that follows sets forth a comparison of average balances of assets and liabilities and their related net tax equivalent yields and rates for the periods indicated.  Within the table, interest income was adjusted to a tax-equivalent basis (FTE), using the corporate federal tax rate of 34% to recognize the income from tax-exempt interest-earning assets as if the interest was taxable.  The FTE adjustment to interest income was $325 thousand and $285 thousand for the third quarters of 2017 and 2016, respectively, and $959 thousand and $845 thousand for the nine months ended September 30, 2017 and 2016, respectively.  This treatment allows a uniform comparison among yields on interest-earning assets.  Loans include loans HFS and non-accrual loans but exclude the allowance for loan losses.  Net deferred loan cost amortization of $113 thousand and $117 thousand for the third quarters of 2017 and 2016, respectively, and $354 thousand and $353 thousand for the first nine months  of 2017 and 2016, respectively, are included in interest income from loans.  Average balances are based on amortized cost and do not reflect net unrealized gains or losses.  Net interest margin is calculated by dividing annualized net interest income - FTE by total average interest-earning assets.  Cost of funds includes the effect of average non-interest bearing deposits as a funding source:

36

	Three months ended
(dollars in thousands)	September 30, 2017						September 30, 2016
	Average				Yield /		Average				Yield /
Assets	balance		Interest		rate		balance		Interest		rate
Interest-earning assets
Interest-bearing deposits	$	3,646	$	12	1.30	%	$	9,980	$	13	0.53	%
Investments:
Agency - GSE		17,481		63	1.43			18,102		61	1.34
MBS - GSE residential		88,928		547	2.44			69,146		439	2.53
State and municipal (nontaxable)		41,880		578	5.48			36,100		505	5.56
Other		3,549		48	5.31			1,485		18	4.81
Total investments		151,838		1,236	3.23			124,833		1,023	3.26
Loans and leases:
Commercial and commercial real estate (taxable)		298,598		3,515	4.67			271,865		3,064	4.48
Commercial and commercial real estate (nontaxable)		32,318		333	4.09			26,770		295	4.38
Consumer		108,513		1,123	4.10			77,933		983	5.02
Residential real estate		202,003		2,034	4.00			195,229		1,913	3.90
Total loans and leases		641,432		7,005	4.33			571,797		6,255	4.35
Total interest-earning assets		796,916		8,253	4.11	%		706,610		7,291	4.11	%
Non-interest earning assets		59,987						50,349
Total assets	$	856,903					$	756,959
Liabilities and shareholders' equity
Interest-bearing liabilities
Deposits:
Interest-bearing checking	$	189,037	$	208	0.44	%	$	156,545	$	129	0.33	%
Savings and clubs		126,768		42	0.13			121,829		39	0.13
MMDA		119,705		216	0.72			130,745		199	0.61
Certificates of deposit		106,761		276	1.03			96,554		213	0.88
Total interest-bearing deposits		542,271		742	0.54			505,673		580	0.46
Repurchase agreements		7,269		3	0.18			9,108		4	0.18
Overnight borrowings		17,817		60	1.33			158		1	2.91
FHLB advances		23,704		77	1.28			-		-	-
Total interest-bearing liabilities		591,061		882	0.59	%		514,939		585	0.45	%
Non-interest bearing deposits		173,627						155,516
Non-interest bearing liabilities		6,942						5,409
Total liabilities		771,630						675,864
Shareholders' equity		85,273						81,095
Total liabilities and shareholders' equity	$	856,903					$	756,959
Net interest income - FTE			$	7,371					$	6,706
Net interest spread					3.52	%					3.66	%
Net interest margin					3.67	%					3.78	%
Cost of funds					0.46	%					0.35	%

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	Nine months ended
(dollars in thousands)	September 30, 2017						September 30, 2016
	Average				Yield /		Average				Yield /
Assets	balance		Interest		rate		balance		Interest		rate
Interest-earning assets
Interest-bearing deposits	$	2,604	$	22	1.15	%	$	14,892	$	59	0.53	%
Investments:
Agency - GSE		17,982		191	1.42			18,305		173	1.26
MBS - GSE residential		88,742		1,696	2.56			69,334		1,063	2.05
State and municipal (nontaxable)		41,397		1,700	5.49			35,359		1,495	5.65
Other		3,598		119	4.40			1,575		63	5.40
Total investments		151,719		3,706	3.27			124,573		2,794	3.00
Loans and leases:
Commercial and commercial real estate (taxable)		295,520		10,234	4.63			275,133		9,135	4.43
Commercial and commercial real estate (nontaxable)		31,393		981	4.18			27,095		878	4.33
Consumer		101,323		3,175	4.19			70,712		2,817	5.32
Residential real estate		200,047		5,989	4.00			191,111		5,619	3.93
Total loans and leases		628,283		20,379	4.34			564,051		18,449	4.37
Federal funds sold		-		-	-			-		-	-
Total interest-earning assets		782,606		24,107	4.12	%		703,516		21,302	4.04	%
Non-interest earning assets		56,515						49,216
Total assets	$	839,121					$	752,732
Liabilities and shareholders' equity
Interest-bearing liabilities
Deposits:
Interest-bearing checking	$	185,093	$	548	0.40	%	$	155,543	$	342	0.29	%
Savings and clubs		125,787		122	0.13			119,577		113	0.13
MMDA		117,596		578	0.66			132,381		621	0.63
Certificates of deposit		100,829		723	0.96			99,589		651	0.87
Total interest-bearing deposits		529,305		1,971	0.50			507,090		1,727	0.45
Repurchase agreements		10,068		15	0.20			10,874		16	0.20
Overnight borrowings		23,892		197	1.10			975		14	1.92
FHLB advances		19,096		174	1.21			-		-	-
Total interest-bearing liabilities		582,361		2,357	0.54	%		518,939		1,757	0.45	%
Non-interest bearing deposits		167,313						149,724
Non-interest bearing liabilities		6,021						4,841
Total liabilities		755,695						673,504
Shareholders' equity		83,426						79,228
Total liabilities and shareholders' equity	$	839,121					$	752,732
Net interest income - FTE			$	21,750					$	19,545
Net interest spread					3.58	%					3.59	%
Net interest margin					3.72	%					3.71	%
Cost of funds					0.42	%					0.35	%

Changes in net interest income are a function of both changes in interest rates and changes in volume of interest-earning assets and interest-bearing liabilities.  The following table presents the extent to which changes in interest rates and changes in volumes of interest-earning assets and interest-bearing liabilities have affected the Company’s interest income and interest expense during the periods indicated.  Information is provided in each category with respect to (1) the changes attributable to changes in volume (changes in volume multiplied by the prior period rate), (2) the changes attributable to changes in interest rates (changes in rates multiplied by prior period volume) and (3) the net change.  The combined effect of changes in both volume and rate has been allocated proportionately to the change due to volume and the change due to rate.  Tax-exempt income was not converted to a tax-equivalent basis on the rate/volume analysis:

38

	Nine months ended September 30,
(dollars in thousands)	2017 compared to 2016						2016 compared to 2015
	Increase (decrease) due to
	Volume		Rate		Total		Volume		Rate		Total
Interest income:
Interest-bearing deposits	$	(72)	$	35	$	(37)	$	9	$	28	$	37
Investments:
Agency - GSE		(3)		21		18		6		(1)		5
MBS - GSE residential		336		297		633		84		304		388
State and municipal		157		(30)		127		(4)		(20)		(24)
Other		65		(10)		55		(11)		(57)		(68)
Total investments		555		278		833		75		226		301
Loans and leases:
Residential real estate		265		104		369		341		(30)		311
Commercial and CRE		801		367		1,168		653		(204)		449
Consumer		1,042		(684)		358		128		(123)		5
Total loans and leases		2,108		(213)		1,895		1,122		(357)		765
Total interest income		2,591		100		2,691		1,206		(103)		1,103
Interest expense:
Deposits:
Interest-bearing checking		71		136		207		50		67		117
Savings and clubs		9		-		9		6		(50)		(44)
Money market		(70)		27		(43)		65		16		81
Certificates of deposit		8		63		71		(39)		(27)		(66)
Total deposits		18		226		244		82		6		88
Repurchase agreements		(1)		-		(1)		(1)		2		1
Overnight borrowings		191		(8)		183		(20)		19		(1)
FHLB advances		174		-		174		(255)		-		(255)
Total interest expense		382		218		600		(194)		27		(167)
Net interest income	$	2,209	$	(118)	$	2,091	$	1,400	$	(130)	$	1,270

Provision for loan losses

The provision for loan losses represents the necessary amount to charge against current earnings, the purpose of which is to increase the allowance for loan losses (the allowance) to a level that represents management’s best estimate of known and inherent losses in the Company’s loan portfolio.  Loans determined to be uncollectible are charged off against the allowance. The required amount of the provision for loan losses, based upon the adequate level of the allowance, is subject to the ongoing analysis of the loan portfolio.  The Company’s Special Assets Committee meets periodically to review problem loans.  The committee is comprised of management, including credit administration officers, loan officers, loan workout officers and collection personnel.  The committee reports quarterly to the Credit Administration Committee of the board of directors.

Management continuously reviews the risks inherent in the loan portfolio.  Specific factors used to evaluate the adequacy of the loan loss provision during the formal process include:

•specific loans that could have loss potential;

•levels of and trends in delinquencies and non-accrual loans;

•levels of and trends in charge-offs and recoveries;

•trends in volume and terms of loans;

•changes in risk selection and underwriting standards;

•changes in lending policies and legal and regulatory requirements;

•experience, ability and depth of lending management;

•national and local economic trends and conditions; and

•changes in credit concentrations.

For the three months ended September 30, 2017 and 2016, the Company recorded a provision for loan losses of $0.4 million and $0.2 million respectively, a $0.2 million increase.  Macroeconomic factors, particularly anticipated regulatory requirements due to the Company’s asset growth and default rates for residential properties in the Company’s operating area, supported the increase. 

39

For the nine months ended September 30, 2017 and 2016, the Company recorded a provision for loan losses of $0.9 million and $0.6 million, respectively, a $0.3 million increase.  This increase was due primarily to net growth in the loan portfolio but also to fund the expected allowance requirements implied from certain macroeconomic and other business factors.

For a discussion on the allowance for loan losses, see “Allowance for loan losses,” located in the comparison of financial condition section of management’s discussion and analysis contained herein.

Other income

For the third quarter of 2017, non-interest income amounted to $2.2 million, an increase of $0.2 million, from $2.0 million recorded for the third quarter of 2016.  Increases in trust income of $0.1 million, $0.1 million of interchange fees and earnings on bank owned life insurance (BOLI) of $0.1 million partially offset $0.1 million fewer gains on loan sales.

Non-interest income amounted to $6.5 million for the nine months ended September 30, 2017, an increase of $0.7 million, or 12%, from the $5.8 million recorded for the same 2016 period.  The increase was due to $0.2 million in additional trust revenue, an increase of $0.2 million in BOLI earnings, $0.1 million more service charges on deposits, and $0.1 million higher interchange fees.  

Other operating expenses

For the three months ended September 30, 2017, non-interest expenses increased $0.6 million, or 12%, compared to the three months ended September 30, 2016 from $5.4 million to $6.0 million.  Salaries and employee benefits grew $0.3 million during the third quarter of 2017 to $3.2 million from $2.9 million during the third quarter of 2016. The increase resulted from additional full-time employees hired, more summer staff requirements, annual merit increases, increased incentive compensation plus additional expenses for a retirement benefit plan that was implemented in the first quarter of 2017.  Advertising and marketing expenses increased $0.1 million due to television advertising during the third quarter of 2017 that the Company did not have during the third quarter of 2016.  Professional fees were $0.1 million higher during the third quarter of 2017 due to stock split processing expenses and increased legal expenses.  Loan collection expense increased $0.1 million due primarily to expenses related to one large property that went into foreclosure that was subsequently sold.

For the nine months ended September 30, 2017, non-interest expenses increased $1.7 million, or 11%, compared to the nine months ended September 30, 2016, from $16.2 million to $17.9 million.  Salaries and employee benefits increased $0.9 million, from $8.7 million for the first nine months of 2016 to $9.6 million for the same 2017 period.  The increase stemmed from full-time staff additions or replacements to previously vacant positions, more seasonal hires, annual merit increases, one-time salary increases awarded to certain employees in the normal course of performance management, increased incentive compensation and added retirement benefits.  Data processing and communications increased $0.2 million due to additional costs related to a new integrated dealer lending program and higher data center costs incurred during 2017.  Premises and equipment increased $0.2 million due mostly to additional building maintenance expenses and higher lease payments from the construction of a new branch.  Professional fees were $0.2 million higher due primarily to a one-time NASDAQ listing fee incurred in 2017 and increased legal expenses in the normal course of business.  Automated transaction processing also increased $0.1 million for the nine months ended September 30, 2017 compared to the 2016 like period due to expenses incurred related to updating customer debit cards with the new chip technology and increased debit card  activity during 2017.  Advertising and marketing was up $0.2 million during the nine months ended September 30, 2017 because of donations made through the Educational Improvement Tax Credit program in the second quarter of 2017 which were not made in 2016 that were partially offset by a corresponding $0.1 million decrease in the PA shares tax.  Partially offsetting these increases was a $0.1 million decrease in the FDIC assessment. 

The ratios of non-interest expense less non-interest income to average assets, known as the expense ratio, at September 30, 2017 and 2016 were 1.79% and 1.84%, respectively.  The expense ratio decreased due to higher average assets which were able to absorb the higher non-interest expenses.  The efficiency ratio is non-interest expenses as a percentage of fully tax equivalent net interest income plus non-interest income, adjusted for non-recurring items.The efficiency ratio also decreased from 63.75% at September 30, 2016 to 62.79% at September 30, 2017 due to higher revenue.

Provision for income taxes

For the quarter ended September 30, 2017, the provision for income taxes decreased $0.1 million to $0.7 million from $0.8 million for the quarter ended September 30, 2016 despite an increase in pre-tax income.  For the nine months ended September 30, 2017, the provision for income taxes remained unchanged at approximately $2.0 million despite a $0.8 million increase in income before taxes.  During the first nine months of 2017, there was a $0.2 million tax deduction recorded, the majority of which was recorded in the third quarter, related to the excess tax benefit realized from the increase in the fair value of stock options exercised.  During the nine months ended September 30, 2017, there were 17,250 stock options exercised, 16,472 during the third quarter, compared to 750 stock options exercised in the same 2016 period, none of which were exercised during the third quarter.  There was also more tax-free income recorded for the first nine months of 2017 compared to the same 2016 period.

40

Comparison of financial condition at

September 30, 2017 and December 31, 2016

Overview

Consolidated assets increased $85.3 million, or 11%, to $878.2 million as of September 30, 2017 from $792.9 million at December 31, 2016.  The increase in assets occurred in the loan and investment portfolios of $35.8 million and $22.0 million, respectively, and bank-owned life insurance of $8.4 million utilizing growth in deposits of $45.1 million, borrowings of$32.4 million and $4.1 million in retained earnings, net of dividends declared.  Borrowings consisted of $23.7 million in FHLB advances and  $8.7 million in additional short-term borrowings.  For the last quarter of 2017, the Company expects to continue using deposit growth to fund loan growth and pay down borrowings.

Funds Deployed:

Investment securities

At the time of purchase, management classifies investment securities into one of three categories: trading, available-for-sale (AFS) or held-to-maturity (HTM).  To date, management has not purchased any securities for trading purposes.  All of the securities the Company purchases are classified as AFS even though there is no immediate intent to sell them.  The AFS designation affords management the flexibility to sell securities and position the balance sheet in response to capital levels, liquidity needs or changes in market conditions.  Securities AFS are carried at fair value on the consolidated balance sheets with unrealized gains and losses, net of deferred income taxes, reported separately within shareholders’ equity as a component of accumulated other comprehensive income (AOCI).  Securities designated as HTM are carried at amortized cost and represent debt securities that the Company has the ability and intent to hold until maturity.

As of September 30, 2017, the carrying value of investment securities amounted to $152.0 million, or 17% of total assets, compared to $130.0 million, or 16% of total assets, at December 31, 2016.  On September 30, 2017, 60% of the carrying value of the investment portfolio was comprised of U.S. Government Sponsored Enterprise residential mortgage-backed securities (MBS – GSE residential or mortgage-backed securities) that amortize and provide monthly cash flow that the Company can use for reinvestment, loan demand, unexpected deposit outflow, facility expansion or operations.

Investment securities were comprised of AFS securities as of September 30, 2017.  The AFS securities were recorded with a net unrealized gain of $2.9 million and $2.1 million as of September 30, 2017 and December 31, 2016, or a net improvement of $0.8 million during the first nine months of 2017.  The direction and magnitude of the change in value of the Company’s investment portfolio is attributable to the direction and magnitude of the change in interest rates along the treasury yield curve.  Generally, the values of debt securities move in the opposite direction of the changes in interest rates.  As interest rates along the treasury yield curve decline, especially at the intermediate and long end, the values of debt securities tend to rise.  Whether or not the value of the Company’s investment portfolio will continue to exceed its amortized cost will be largely dependent on the direction and magnitude of interest rate movements and the duration of the debt securities within the Company’s investment portfolio.  When interest rates rise, the market values of the Company’s debt securities portfolio could be subject to market value declines.

As of September 30, 2017, the Company had $130.6 million in public deposits, or 17% of total deposits.  Pennsylvania state law requires the Company to maintain pledged securities on these public deposits.  As of September 30, 2017, the balance of pledged securities required for deposit and repurchase agreement accounts was $141.6 million.

Quarterly, management performs a review of the investment portfolio to determine the causes of declines in the fair value of each security.  The Company uses inputs provided by independent third parties to determine the fair value of its investment securities portfolio.  Inputs provided by the third parties are reviewed and corroborated by management.  Evaluations of the causes of the unrealized losses are performed to determine whether impairment exists and whether the impairment is temporary or other-than-temporary.  Considerations such as the Company’s intent and ability to hold the securities to maturity, recoverability of the invested amounts over the intended holding period, the length of time and the severity in pricing decline below cost, the interest rate environment, the receipt of amounts contractually due and whether or not there is an active market for the securities, for example, are applied, along with an analysis of the financial condition of the issuer for management to make a realistic judgment of the probability that the Company will be unable to collect all amounts (principal and interest) due in determining whether a security is other-than-temporarily impaired.  If a decline in value is deemed to be other-than-temporary, the amortized cost of the security is reduced by the credit impairment amount and a corresponding charge to current earnings is recognized.  During the nine months ended September 30, 2017, the Company did not incur other-than-temporary impairment charges from its investment securities portfolio.

During the first nine months of 2017, the carrying value of total investments increased $22.0 million, or 17%.  The Company attempts to maintain a well-diversified and proportionate investment portfolio that is structured to complement the strategic direction of the Company.  Its growth typically supplements the lending activities but also considers the current and forecasted economic conditions, the Company’s liquidity needs and interest rate risk profile.  The Company expects to grow the portfolio and increase its relative size with a preference toward mortgage-backed securities.  If rates rise, the strategy will provide a good source of cash flow to reinvest into higher yielding interest-sensitive assets.  During the first quarter of 2017, the Company purchased approximately $20 million of securities, primarily MBS - GSE residential, funded mostly by $10 million in debt maturing in two years and another $7 million in borrowings laddered out from six months to one year matching a spread expected to produce a suitable after-tax return.

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A comparison of investment securities at September 30, 2017 and December 31, 2016 is as follows:

	September 30, 2017				December 31, 2016
(dollars in thousands)	Amount		%		Amount		%
MBS - GSE residential	$	91,271	60.0	%	$	70,937	54.5	%
State & municipal subdivisions		43,735	28.8			40,191	30.9
Agency - GSE		16,213	10.7			18,276	14.1
Equity securities - financial services		776	0.5			633	0.5
Total	$	151,995	100.0	%	$	130,037	100.0	%

As of September 30, 2017, there were no investments from any one state and municipal issuer with an aggregate book value that exceeded 10% of the Company’s shareholders’ equity.

The distribution of debt securities by stated maturity and tax-equivalent yield at September 30, 2017 are as follows:

					More than				More than				More than
	One year or less				one year to five years				five years to ten years				ten years				Total
(dollars in thousands)	$		%		$		%		$		%		$		%		$		%
MBS - GSE residential	$	-	-	%	$	2,262	3.59	%	$	4,345	3.80	%	$	84,664	3.27	%	$	91,271	3.31	%
State & municipal subdivisions		-	-			914	6.44			2,649	5.24			40,172	5.10			43,735	5.13
Agency - GSE		4,007	1.37			12,206	1.48			-	-			-	-			16,213	1.45
Total debt securities	$	4,007	1.37	%	$	15,382	2.05	%	$	6,994	4.34	%	$	124,836	3.84	%	$	151,219	3.62	%

In the above table, the book yields on state & municipal subdivisions were adjusted to a tax-equivalent basis using the corporate federal tax rate of 34%.  In addition, average yields on securities AFS are based on amortized cost and do not reflect unrealized gains or losses.

Federal Home Loan Bank Stock

Investment in Federal Home Loan Bank (FHLB) stock is required for membership in the organization and is carried at cost since there is no market value available.  The amount the Company is required to invest is dependent upon the relative size of outstanding borrowings the Company has with the FHLB of Pittsburgh.  Excess stock is repurchased from the Company at par if the amount of borrowings decline to a predetermined level.  In addition, the Company earns a return or dividend based on the amount invested.  The balance in FHLB stock was $2.5 million and $2.6 million as of September 30, 2017 and December 31, 2016, respectively. 

Loans held-for-sale (HFS)

Upon origination, most residential mortgages and certain Small Business Administration (SBA) guaranteed loans may be classified as held-for-sale (HFS).  In the event of market rate increases, fixed-rate loans and loans not immediately scheduled to re-price would no longer produce yields consistent with the current market.  In declining interest rate environments, the Company would be exposed to prepayment risk as rates on fixed-rate loans decrease, and customers look to refinance loans.  Consideration is given to the Company’s current liquidity position and projected future liquidity needs.  To better manage prepayment and interest rate risk, loans that meet these conditions may be classified as HFS.  Occasionally, residential mortgage and/or other nonmortgage loans may be transferred from the loan portfolio to HFS.  The carrying value of loans HFS is based on the lower of cost or estimated fair value.  If the fair values of these loans decline below their original cost, the difference is written down and charged to current earnings.  Subsequent appreciation in the portfolio is credited to current earnings but only to the extent of previous write-downs.

As of September 30, 2017 and December 31, 2016, loans HFS consisted of residential mortgages with carrying amounts of $1.6 million and $2.9 million, respectively, which approximated their fair values.  During the nine months ended September 30, 2017, residential mortgage loans with principal balances of $30.9 million were sold into the secondary market and the Company recognized net gains of $0.6 million, compared to $34.4 million and $0.6 million, respectively during the nine months ended September 30, 2016.  During 2017, the Company also sold one SBA guaranteed loan with a principal balance of $2.4 million and recognized a net gain on the sale of $0.1 million.  The Company did not sell any SBA guaranteed loans in 2016. 

The Company retains mortgage servicing rights (MSRs) on loans sold into the secondary market.  MSRs are retained so that the Company can foster personal relationships.  At September 30, 2017 and December 31, 2016, the servicing portfolio balance of sold residential mortgage loans was $296.9 million and $285.2 million, respectively.  At September 30, 2017 and December 31, 2016, the servicing portfolio balance of sold SBA loans was $5.7 million and $4.1 million, respectively.

Loans and leases

As of September 30, 2017, the Company has gross loans and leases totaling $635.1 million compared to $598.0 million at December 31, 2016.  The growth of $37.1 million, or 6%, was largely attributed to the Company’s continued efforts to grow the commercial and

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industrial portfolio through opportunities with local government entities including counties, townships, boroughs, cities and school districts.   The Companyattributes customer loyalty to being a trusted financial advisor to clients.  Additionally, theindirect auto and lease portfolio continues to grow, as planned, due to new relationships with automobile dealerships in Northeastern Pennsylvania.

Commercial and industrial and commercial real estate

The commercial and industrial (C&I) portfolio and commercial real estate (CRE) portfolio compared to December 31, 2016, had growth of $13.6 million, or 14%, and $4.8 million, or 2%, respectively.  The major contributors to the growth in the C&I portfolio were local government entities.  These opportunities continue through developing influential relationships utilized through the Company’s strategy.  The Company also expandedcommercial real estate secured lending.  Growth in owner occupied CRE loans was offset by expected payoffs of $3.9 million received during the third quarter of 2017due to the sale of a company. Furthermore, during this quarter, the Company foreclosed on one large owner occupied CRE collateral, which was subsequently sold. In addition, the increase in CRE construction loans was due to loans added during the third quarter of 2017 to one customer for several construction projects.  The Company expects modest growth for the remainder of 2017.

Consumer

The consumer loan portfolio grew 11%, or approximately $16.7 million, from $150.2 million on December 31, 2016 to $166.9 million at September 30, 2017.  The growth was largely driven by an increase of $22.8 million in auto loans and leases.  Additional support was realized from $1.6 million in home equity line of credit usage from new and existing clients.  These increases more than offset a $7.5 million reduction in other consumer loans that was directly related to a temporary overdraft at the end of 2016.  

Residential

The residential loan portfolio grew approximately $2.0 million, or 1%, from $145.0 million at December 31, 2016 to $147.0 million at September 30, 2017.  Construction loans realized a reduction of $2.2 million while held-for-investment real estate mortgages, which make up roughly 94%, of this category grew $4.2 million.

The composition of the loan portfolio at September 30, 2017 and December 31, 2016 is summarized as follows:

	September 30, 2017				December 31, 2016
(dollars in thousands)	Amount		%		Amount		%
Commercial and industrial	$	112,096	17.6	%	$	98,477	16.5	%
Commercial real estate:
Non-owner occupied		93,398	14.7			87,220	14.5
Owner occupied		109,598	17.3			113,104	18.9
Construction		6,123	1.0			3,987	0.7
Consumer:
Home equity installment		28,282	4.5			28,466	4.8
Home equity line of credit		53,177	8.4			51,609	8.6
Auto and leases		79,629	12.5			56,841	9.5
Other		5,784	0.9			13,301	2.2
Residential:
Real estate		138,709	21.9			134,475	22.5
Construction		8,315	1.2			10,496	1.8
Gross loans		635,111	100.0	%		597,976	100.0	%
Less:
Allowance for loan losses		(9,356)				(9,364)
Unearned lease revenue		(644)				(482)
Net loans	$	625,111			$	588,130
Loans held-for-sale	$	1,629			$	2,854

Allowance for loan losses

Management evaluates the credit quality of the Company’s loan portfolio and performs a formal review of the adequacy of the allowance for loan losses (the allowance) on a quarterly basis.  The allowance reflects management’s best estimate of the amount of credit losses in the loan portfolio.  Management’s judgment is based on the evaluation of individual loans, past experience, the assessment of current economic conditions and other relevant factors including the amounts and timing of cash flows expected to be received on impaired loans.  Those estimates may be susceptible to significant change.  The provision for loan losses represents the amount necessary to maintain an appropriate allowance.  Loan losses are charged directly against the allowance when loans are deemed to be uncollectible.  Recoveries from previously charged-off loans are added to the allowance when received.

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Management applies two primary components during the loan review process to determine proper allowance levels.  The two components are a specific loan loss allocation for loans that are deemed impaired and a general loan loss allocation for those loans not specifically allocated.  The methodology to analyze the adequacy of the allowance for loan losses is as follows:

•identification of specific impaired loans by loan category;

•calculation of specific allowances where required for the impaired loans based on collateral and other objective and quantifiable evidence;

•determination of loans with similar credit characteristics within each class of the loan portfolio segment and eliminating the impaired loans;

•application of historical loss percentages (trailing twelve-quarter average) to pools to determine the allowance allocation;

•application of qualitative factor adjustment percentages to historical losses for trends or changes in the loan portfolio, regulations, and/or current economic conditions.

A key element of the methodology to determine the allowance is the Company’s credit risk evaluation process, which includes credit risk grading of individual commercial loans.  Commercial loans are assigned credit risk grades based on the Company’s assessment of conditions that affect the borrower’s ability to meet its contractual obligations under the loan agreement.  That process includes reviewing borrowers’ current financial information, historical payment experience, credit documentation, public information and other information specific to each individual borrower.  Upon review, the commercial loan credit risk grade is revised or reaffirmed.  The credit risk grades may be changed at any time management determines an upgrade or downgrade may be warranted.  The credit risk grades for the commercial loan portfolio are taken into account in the reserve methodology and loss factors are applied based upon the credit risk grades.  The loss factors applied are based upon the Company’s historical experience as well as what management believes to be best practices and within common industry standards.  Historical experience reveals there is a direct correlation between the credit risk grades and loan charge-offs.  The changes in allocations in the commercial loan portfolio from period-to-period are based upon the credit risk grading system and from periodic reviews of the loan portfolio.

Each quarter, management performs an assessment of the allowance for loan losses.  The Company’s Special Assets Committee meets monthly and the applicable lenders discuss each relationship under review and reach a consensus on the appropriate estimated loss amount, if applicable, based on current accounting guidance.  The Special Assets Committee’s focus is on ensuring the pertinent facts are considered regarding not only loans considered for specific reserves, but also the collectability of loans that may be past due.  The assessment process also includes the review of all loans on non-accrual status as well as a review of certain loans to which the lenders or the Credit Administration function have assigned a criticized or classified risk rating.

The allowance for loan losses was $9.4 million at September 30, 2017 and $9.4 million for the year ended December 31, 2016.  Relative to the loan portfolio, which grew $37.1 million through September 30, 2017, the allowance decreased from 1.56% of total loans at December 31, 2016 to 1.47% at September 30, 2017.

During the nine months ended September 30, 2017, management increased qualitative factor loss estimates due to certain macroeconomic and business factors.  One factor identified the inverse effect of rising interest rates on commercial real estate values.  Another involved relatively higher delinquency rates on urban residential properties (3.1% regionally vs. 1.6% nationally) within the Company’s operating area on properties that were relatively more likely to have negative equity (29.1% regionally vs. 10.4% nationally).  Lastly, management identified potentially increased legal and regulatory requirements as the result of the Company’s growing asset size.

Although the allowance decreased relative to loans, the Company reported improving asset quality.  At September 30, 2017, fewer non-performing loans reduced the ratio of non-performing loans as a percentage of total loans to 0.61% at September 30, 2017 versus 1.23% at December 31, 2016.  Further, allowance levels at September 30, 2017 were sufficient to cover non-accrual loans 2.42x, a substantial increase over 1.27x reported at December 31, 2016.

Net charge-offs against the allowance totaled $0.9 million for the nine months ended September 30, 2017.  This compared with $1.0 million as of September 30, 2016 and $1.2 million for the year ended December 31, 2016. 

For the nine months ended September 30, 2017, commercial loan charge-offs were $0.5 million or about 48% of total charge-offs.  Significant commercial charge-offs totaled $0.3 million, which comprised 32% of total year-to-date charge-offs, and occurred in the CRE portfolio from a single borrower in both the second and third quarters of 2017.  The Company anticipates no further losses, as these loans were satisfied at the end of the third quarter from the sale of the foreclosed asset serving as collateral.  Also for the nine months ended September 30, 2017, consumer charge-offs were $0.5 million or about 49% of total charge-offs.  A substantial charge-off for $0.3 million occurred for a single borrower in the HELOC portfolio during the third quarter of 2017.  This charge-off was in anticipation of the credit being moved to ORE in the fourth quarter. 

Management believes that the current balance in the allowance for loan losses is sufficient to withstand the identified potential credit quality issues that may arise and other issues unidentified but inherent to the portfolio.  Potential problem loans are those where there is known information that leads management to believe repayment of principal and/or interest is in jeopardy and the loans are currently neither on non-accrual status nor past due 90 days or more.  There could be additional instances which become identified in future periods that may require additional charge-offs and/or increases to the allowance due to continued sluggishness in the economy

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and pressure on property values. In contrast, an abrupt significant increase in the U.S. Prime lending rate could adversely impact the debt service capacity of existing borrowers' ability to repay.

For a discussion on the provision for loan losses, see the “Provision for loan losses,” located in the results of operations section of management’s discussion and analysis contained herein.

The following tables set forth the activity in the allowance for loan losses and certain key ratios for the period indicated:

	As of and for the			As of and for the			As of and for the
	nine months ended			twelve months ended			nine months ended
(dollars in thousands)	September 30, 2017			December 31, 2016			September 30, 2016
Balance at beginning of period	$	9,364		$	9,527		$	9,527
Charge-offs:
Commercial and industrial		(76)			(224)			(199)
Commercial real estate		(416)			(592)			(526)
Consumer		(505)			(504)			(356)
Residential		(38)			(60)			(60)
Total		(1,035)			(1,380)			(1,141)
Recoveries:
Commercial and industrial		5			55			39
Commercial real estate		44			37			36
Consumer		53			100			85
Residential		-			-			-
Total		102			192			160
Net charge-offs		(933)			(1,188)			(981)
Provision for loan losses		925			1,025			650
Balance at end of period	$	9,356		$	9,364		$	9,196
Allowance for loan losses to total loans		1.47	%		1.57	%		1.61	%
Net charge-offs to average total loans outstanding		0.20	%		0.21	%		0.23	%
Average total loans	$	628,283		$	568,953		$	564,051
Loans 30 - 89 days past due and accruing	$	2,444		$	2,241		$	4,074
Loans 90 days or more past due and accruing	$	-		$	19		$	66
Non-accrual loans	$	3,864		$	7,370		$	5,861
Allowance for loan losses to loans 90 days or more past due and accruing		N/A	*		492.84	x		139.33	x
Allowance for loan losses to non-accrual loans		2.42	x		1.27	x		1.57	x
Allowance for loan losses to non-performing loans		2.42	x		1.27	x		1.55	x

*N/A – Ratio is not applicable because numerator is zero.

The allowance for loan losses can generally absorb losses throughout the loan portfolio.  However, in some instances an allocation is made for specific loans or groups of loans.  Allocation of the allowance for loan losses for different categories of loans is based on the methodology used by the Company, as previously explained.  The changes in the allocations from period-to-period are based upon quarter-end reviews of the loan portfolio.

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Allocation of the allowance among major categories of loans for the periods indicated, as well as the percentage of loans in each category to total loans, is summarized in the following table.  This table should not be interpreted as an indication that charge-offs in future periods will occur in these amounts or proportions, or that the allocation indicates future charge-off trends.  When present, the portion of the allowance designated as unallocated is within the Company’s guidelines:

	September 30, 2017				December 31, 2016				September 30, 2016
			Category				Category				Category
			% of				% of				% of
(dollars in thousands)	Allowance		Loans		Allowance		Loans		Allowance		Loans
Category
Commercial real estate	$	4,102	33	%	$	4,706	34	%	$	4,808	35	%
Commercial and industrial		1,399	18			1,075	17			1,131	16
Consumer		1,969	26			1,834	25			1,788	24
Residential real estate		1,799	23			1,622	24			1,357	25
Unallocated		87	-			127	-			112	-
Total	$	9,356	100	%	$	9,364	100	%	$	9,196	100	%

Non-performing assets

The Company defines non-performing assets as accruing loans past due 90 days or more, non-accrual loans, troubled debt restructured loans (TDRs), other real estate owned (ORE) and repossessed assets.  At September 30, 2017, non-performing assets represented 0.76% of total assets compared with 1.33% as of December 31, 2016 and 1.32% as of September 30, 2016.  The improvement resulted from a combination of $107.8 million in total asset growth and a $3.5 million net reduction of total non-performing assets year-over-year.

The following table sets forth non-performing assets data as of the period indicated:

(dollars in thousands)	September 30, 2017		December 31, 2016		September 30, 2016
Loans past due 90 days or more and accruing	$	-	$	19	$	66
Non-accrual loans *		3,864		7,370		5,861
Total non-performing loans		3,864		7,389		5,927
Troubled debt restructurings		1,881		1,823		2,478
Other real estate owned and repossessed assets		927		1,306		1,752
Total non-performing assets	$	6,672	$	10,518	$	10,157
Total loans, including loans held-for-sale	$	636,096	$	600,348	$	573,898
Total assets	$	878,266	$	792,944	$	770,423
Non-accrual loans to total loans		0.61%		1.23%		1.02%
Non-performing loans to total loans		0.61%		1.23%		1.03%
Non-performing assets to total assets		0.76%		1.33%		1.32%

* In the table above, the amount includes non-accrual TDRs of $2.0 million as ofSeptember 30, 2017, $1.5 million as of December 31, 2016 and $20 thousand as of September 30, 2016.

In the review of loans for both delinquency and collateral sufficiency, management concluded that there were a number of loans that lacked the ability to repay in accordance with contractual terms.  The decision to place loans on non-accrual status is made on an individual basis after considering factors pertaining to each specific loan.  Generally, commercial loans are placed on non-accrual status when management has determined that payment of all contractual principal and interest is in doubt or the loan is past due 90 days or more as to principal and interest, unless well-secured and in the process of collection.  Consumer loans secured by residential real estate and residential mortgage loans are placed on non-accrual status at 120 days past due as to principal and interest, and unsecured consumer loans are charged-off when the loan is 90 days or more past due as to principal and interest.  Uncollected interest income accrued on all loans placed on non-accrual is reversed and charged to interest income.

From September 30, 2016 to September 30, 2017, non-performing loans, which consists of accruing loans that are over 90 days past due as well as all non-accrual loans, decreased from $5.9 million to $3.9 million, a $2.0 million, or a 35% decrease.  The change in non-performing loans was the result of charge-offs, transfers to ORE, payments, and miscellaneous transfers back to accrual from all loan types. This decrease in non-performing loans was driven by a $2.9 million net decrease in non-accrual commercial loans due to the payoff of two CRE loans for a single borrower, totaling $2.5 million, in the third quarter of 2017. The net decrease in non-accrual commercial loans was partially offset by a $0.6 million net increase of residential mortgage non-accrual loans and a $0.3 million net increase in consumer non-accrual loans.

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From December 31, 2016 to September 30, 2017, non-performing loans decreased from $7.4 million to $3.9 million, a $3.5 million, or 48% decrease.  This decrease was driven by payments received of $3.3 million, charge-offs of $0.7 million, transfers back to accrual of $1.0 million and transfers to ORE of $0.2 million.  These reductions were partially offset by additions and miscellaneous expenses totaling $1.7 million.

From December 31, 2016 to September 30, 2017, the portion of accruing loans that was over 90 days past due decreased from $19 thousand to zero.  Accruing loans over 90 days past due at December 31, 2016 consisted of four loans to four unrelated borrowers ranging from $1 thousand to $9 thousand.  The Company seeks payments from all past due customers through an aggressive customer communication process.  A past due loan will be placed on non-accrual at the 90 day point when it is deemed that a customer is non-responsive and uncooperative to collection efforts.

From December 31, 2016 to September 30, 2017, non-accruing loans of all types decreased by $3.5 million, or 48%, from $7.4 million to $3.9 million.  At December 31, 2016, there were a total of 46 loans to 39 unrelated borrowers with balances that ranged from less than $1 thousand to $2.3 million.  At September 30, 2017, there were a total of 35 loans to 28 unrelated borrowers with balances that ranged from less than $1 thousand to $0.9 million.  The decrease in non-accruing loans is primarily attributable to the payoff of two significant non-accrual owner-occupied CRE loans to one borrower with balances totaling $2.5 million.  During the third quarter of 2017, the Company foreclosed on the collateral for these loans and sold the foreclosed assets.

The composition of non-performing loans as of September 30, 2017 is as follows:

			Past due
	Gross		90 days or		Non-		Total non-		% of
	loan		more and		accrual		performing		gross
(dollars in thousands)	balances		still accruing		loans		loans		loans
Commercial and industrial	$	112,096	$	-	$	14	$	14	0.01%
Commercial real estate:
Non-owner occupied		93,398		-		584		584	0.63%
Owner occupied		109,598		-		1,148		1,148	1.05%
Construction		6,123		-		169		169	2.76%
Consumer:
Home equity installment		28,282		-		15		15	0.05%
Home equity line of credit		53,177		-		513		513	0.96%
Auto loans and leases *		78,985		-		-		-	-
Other		5,784		-		-		-	-
Residential:
Real estate		138,709		-		1,421		1,421	1.02%
Construction		8,315		-		-		-	-
Loans held-for-sale		1,629		-		-		-	-
Total	$	636,096	$	-	$	3,864	$	3,864	0.61%

*Net of unearned lease revenue of $0.6 million.

Payments received from non-accrual loans are recognized on a cost recovery method.  Payments are first applied to the outstanding principal balance, then to the recovery of any charged-off loan amounts.  Any excess is treated as a recovery of interest income.  If the non-accrual loans that were outstanding as of September 30, 2017 had been performing in accordance with their original terms, the Company would have recognized interest income with respect to such loans of $0.2 million.

The Company, on a regular basis, reviews changes to loans to determine if they meet the definition of a troubled debt restructure (TDR).  TDRs arise when a borrower experiences financial difficulty and the Company grants a concession that it would not otherwise grant based on current underwriting standards in order to maximize the Company’s recovery.

From December 31, 2016 to September 30, 2017, TDRs increased from nine loans totaling $3.3 million to fifteen loans totaling $3.9 million.  This increase of $0.6 million, or 16%, was primarily due to the addition of six CRE loans to four unrelated borrowers totaling $1.1 million during the first nine months of 2017.  At December 31, 2016, the nine TDRs consisted of six CRE loans totaling $1.8 million, one C&I loan totaling $25 thousand, one residential mortgage totaling $0.9 million, and one HELOC totaling $0.6 million.  At September 30, 2017, the fifteen TDRs consisted of twelve CRE loans totaling $2.6 million, one C&I loan totaling $25 thousand, one residential mortgage loan totaling $0.9 million and one HELOC totaling $0.4 million.

At December 31, 2016, two TDRs totaling $1.5 million were on non-accrual.  These consisted of one residential mortgage and one HELOC.  At September 30, 2017, four TDRs totaling $2.0 million were on non-accrual.  These consisted of two CRE loans, one residential mortgage and one HELOC.

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The following tables set forth the activity in TDRs as and for the periods indicated:

As of and for the nine months ended September 30, 2017
	Accruing				Non-accruing
	Commercial &		Commercial		Consumer		Commercial			Residential
(dollars in thousands)	industrial		real estate		HELOC		real estate			real estate	Total
Troubled Debt Restructures:
Beginning balance	$	25	$	1,798	$	650	$	-	$	881	$	3,354
Additions		-		1,059		-		-		-		1,059
Transfers		-		(969)		-		969		-		-
Pay downs / payoffs		-		(32)		-		(227)		(18)		(277)
Charge offs		-		-		(255)		-		-		(255)
Ending balance	$	25	$	1,856	$	395	$	742	$	863	$	3,881

As of and for the year ended December 31, 2016
	Accruing				Non-accruing
	Commercial &		Commercial		Consumer			Commercial		Residential
(dollars in thousands)	industrial		real estate		HELOC			real estate		real estate	Total
Troubled Debt Restructures:
Beginning balance	$	525	$	1,898	$	-	$	-	$	-	$	2,423
Additions		-		4		650		-		881		1,535
Transfers		-		(20)		-		20		-		-
Pay downs / payoffs		(500)		(84)		-		-		-		(584)
Charge offs		-		-		-		(20)		-		(20)
Ending balance	$	25	$	1,798	$	650	$	-	$	881	$	3,354

If applicable, a TDR loan classified as non-accrual would require a minimum of six months of payments before consideration for a return to accrual status.  The concessions granted consisted of temporary interest-only payments or a reduction in the rate of interest to a below-market rate for a contractual period of time.  The Company believes concessions have been made in the best interests of the borrower and the Company.  If loans characterized as a TDR perform according to the restructured terms for a satisfactory period of time, the TDR designation may be removed in a new calendar year if the loan yields a market rate of interest.

Foreclosedassets held-for-sale

From December 31, 2016 to September 30, 2017, foreclosed assets held-for-sale (ORE) decreased from $1.3 million to $0.9 million, a $0.4 million, or 29%, decrease.  The following table sets forth the activity in the ORE component of foreclosed assets held-for-sale:

	September 30, 2017			December 31, 2016
(dollars in thousands)	Amount		#	Amount		#
Balance at beginning of period	$	1,298	13	$	1,074	14
Additions		207	4		1,056	11
Pay downs		(18)			(18)
Write downs		(91)			(80)
Sold		(474)	(6)		(734)	(12)
Balance at end of period	$	922	11	$	1,298	13

As of September 30, 2017, ORE consisted of eleven properties from eleven unrelated borrowers totaling $0.9 million. 

Three of these properties ($0.1 million) were added in 2017; three were added in 2016 ($0.5 million); one was added in 2015 ($0.1 million); two were added in 2014 ($42 thousand); one was added in 2012 ($100); and one was added in 2011 ($0.2 million).  Of the eleven properties, seven totaling $0.6 million were listed for sale, while the four remaining properties totaling $0.3 million were either in negotiations for sale or in process for disposition.

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As of September 30, 2017, the Company had one other repossessed asset held-for-sale, with a balance of $4 thousand. There was one repossessed asset held-for-sale at December 31, 2016, with a balance of $8 thousand.

Cash surrender value of bank owned life insurance

The Company maintains bank owned life insurance (BOLI) for a chosen group of employees at the time of purchase, namely its officers, where the Company is the owner and sole beneficiary of the policies.  BOLI is classified as a non-interest earning asset.  Increases in the cash surrender value are recorded as components of non-interest income.  The BOLI is profitable from the appreciation of the cash surrender values of the pool of insurance and its tax-free advantage to the Company.  This profitability is used to offset a portion of current and future employee benefit costs.  In March 2017, the Company invested $8.0 million in additional BOLI as a source of funding for additional life insurance benefits for officers and employee benefit expenses related to the Company’s non-qualified Supplemental Executive Retirement Plan (SERP) implemented for certain executive officers that provides for payments upon death.  The BOLI can be liquidated if necessary with associated tax costs.  However, the Company intends to hold this pool of insurance, because it provides income that enhances the Company’s capital position.  Therefore, the Company has not provided for deferred income taxes on the earnings from the increase in cash surrender value.

Other assets

The $3.1 million increase in other assets was due mostly to $1.9 million in higher residual values associated with recording new automobile leases, net of lease disposals, $0.5 million higher prepaid expenses, $0.4 million increase in the prepaid dealer reserve and $0.2 million more in construction-in-process.  Over the next twelve months, construction-in-process is expected to increase by approximately $2.0 million for construction of a new Dallas branch.

Funds Provided:

Deposits

The Company is a community based commercial depository financial institution, member FDIC, which offers a variety of deposit products with varying ranges of interest rates and terms.  Generally, deposits are obtained from consumers, businesses and public entities within the communities that surround the Company’s 10 branch offices and all deposits are insured by the FDIC up to the full extent permitted by law.  Deposit products consist of transaction accounts including: savings; clubs; interest-bearing checking; money market and non-interest bearing checking (DDA).  The Company also offers short- and long-term time deposits or certificates of deposit (CDs).  CDs are deposits with stated maturities which can range from seven days to ten years.  Cash flow from deposits is influenced by economic conditions, changes in the interest rate environment, pricing and competition.  To determine interest rates on its deposit products, the Company considers local competition, spreads to earning-asset yields, liquidity position and rates charged for alternative sources of funding such as short-term borrowings and FHLB advances.

The following table represents the components of deposits as of the date indicated:

	September 30, 2017				December 31, 2016
(dollars in thousands)	Amount		%		Amount		%
Interest-bearing checking	$	202,096	27.0	%	$	161,563	23.0	%
Savings and clubs		129,199	17.3			120,512	17.1
Money market		123,020	16.4			117,478	16.7
Certificates of deposit		108,404	14.5			92,753	13.2
Total interest-bearing		562,719	75.2			492,306	70.0
Non-interest bearing		185,858	24.8			211,153	30.0
Total deposits	$	748,577	100.0	%	$	703,459	100.0	%

Total deposits increased $45.1 million, or 6%, from $703.5 million at December 31, 2016 to $748.6 million at September 30, 2017.The increase primarily came from growth in interest-bearing checking accounts of $40.5 million.  Most of the growth in interest-bearing checking accounts was from public deposits which fluctuate throughout the year and business deposits.  The increased lending to local government entities along with a focus on obtaining a full banking relationship with these customers has caused public deposit growth during the first nine months of 2017.  CDs contributed $15.7 million to deposit growth due to CDs acquired in a branch acquisition during the first quarter of 2017 and $5.0 million in CDs to one public customer during the second quarter of 2017.  Additionally, money market accounts and savings and clubs both increased by $5.5 million and $8.7 million, respectively.  Non-interest bearing deposits fell $25.3 million due to a temporary deposit of $48.7 million received at the end of 2016 that was transferred to a trust escrow account in January.  Excluding this temporary deposit, the Company experienced growth in non-interest-bearing deposits.  During the first quarter of 2017, the Company completed the acquisition of Wayne Bank’s West Scranton branch which increased deposits by $13.9 million.  For a discussion on the acquisition, see “Acquisition” located in the financial statement footnotes.  The Company will continue to execute on its relationship development strategy, explore the demographics within its marketplace and develop deposit gathering programs for its customers.  The Company expects asset growth for 2017 funded primarily by growth in deposits plus utilization of available borrowing capacity.  Transactional deposit and CD growth is projected as a result of

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our relationship strategy.  Seasonal public deposit fluctuations are expected to remain volatile and at times may partially offset this deposit growth.

Customers’ interest in long-term time deposit products continues to be weak with a sustaining preference for non-maturing transaction deposits.  The Company’s portfolio of CDs increasedmostly due to $11.5 million in CDs acquired from the West Scranton branch of Wayne Bank during the first quarter of 2017.  The Company expects CDs to increase 14% in 2017 mostly as a result of this acquisition.  If rates continue to rise, demand for CDs may also increase thereby possibly increasing funding costs.  The Company will continue to pursue strategies to grow and retain retail and business customers with an emphasis on deepening and broadening existing and creating new relationships.

The Company uses the Certificate of Deposit Account Registry Service (CDARS) reciprocal program to obtain FDIC insurance protection for customers who have large deposits that at times may exceed the FDIC maximum amount of $250,000 per person.  In the CDARS program, deposits with varying terms and interest rates, originated in the Company’s own markets, are exchanged for deposits of other financial institutions that are members in the CDARS network.  By placing the deposits in other participating institutions, the deposits of our customers are fully insured by the FDIC.  In return for deposits placed with network institutions, the Company receives from network institutions deposits that are approximately equal in amount and are comprised of terms similar to those placed for our customers.  Deposits the Company receives from other institutions are considered reciprocal deposits by regulatory definitions.  As of September 30, 2017 and December 31, 2016, CDARS represented $1.1 million, or less than 1%, of total deposits.

The maturity distribution of certificates of deposit at September 30, 2017 is as follows:

			More than		More than		More
	Three months		three months		six months to		than twelve
(dollars in thousands)	or less		to six months		twelve months		months		Total
CDs of $100,000 or more	$	7,641	$	4,933	$	19,794	$	25,381	$	57,749
CDARS		1,136		-		-		-		1,136
Total CDs of $100,000 or more		8,777		4,933		19,794		25,381		58,885
CDs of less than $100,000		5,493		6,410		8,942		28,674		49,519
Total CDs	$	14,270	$	11,343	$	28,736	$	54,055	$	108,404

Certificates of deposit of $250,000 or more amounted to $31.4 million and $25.7 million as of September 30, 2017 and December 31, 2016, respectively.

Including CDARS, approximately 13% of the CDs, with a weighted-average interest rate of 0.74%, are scheduled to mature in the fourth quarter of 2017 and an additional 43%, with a weighted-average interest rate of 0.90%, are scheduled to mature in 2018.  Renewing CDs may re-price to lower or higher market rates depending on the rate on the maturing CD, the pace and direction of interest rate movements, the shape of the yield curve, competition, the rate profile of the maturing accounts and depositor preference for alternative, non-term products.  As noted, the widespread preference continues for customers with maturing CDs to hold their deposits in readily available transaction accounts.  The Company does not expect significant CD growth other than from the branch purchase during 2017, but will develop CD promotional programs when the Company deems that it is economically feasible to do so or when demand exists.  As with all promotions, the Company will consider the needs of the customers and simultaneously be mindful of the liquidity levels and the interest rate sensitivity exposure of the Company.

Borrowings

Borrowings are used as a complement to deposit generation as an alternative funding source whereby the Company will borrow under customer repurchase agreements in the local market, advances from the FHLB of Pittsburgh and other correspondent banks for asset growth and liquidity needs.

Repurchase agreements are non-insured interest-bearing liabilities that have a perfected security interest in qualified investments of the Company as required by the FDIC Depositor Protection Act of 2009.  Repurchase agreements are offered through a sweep product.  A sweep account is designed to ensure that on a daily basis, an attached DDA is adequately funded and excess funds are transferred, or swept, into an interest-bearing overnight repurchase agreement account.  Due to the constant inflow and outflow of funds of the sweep product, their balances tend to be somewhat volatile, similar to a DDA.  Customer liquidity is the typical cause for variances in repurchase agreements, which during the first nine months of 2017 increased $8.7 million from the end of 2016.  In addition, short-term borrowings may include overnight balances which the Company may require to fund daily liquidity needs such as deposit and repurchase agreement cash outflow, loan demand and operations.  The Company did not require any overnight borrowings at September 30, 2017 and December 31, 2016, respectively.  The Company would have had to use overnight borrowings at December 31, 2016 if not for a $48.7 million temporary deposit at the end of 2016.

During the first quarter of 2017, the Company borrowed $17 million from the FHLB to purchase securities.  The borrowings were laddered out with maturities ranging from July 2017 to January 2019 and interest rates ranging from 0.64% to 1.34%.  During the second quarter of 2017, the Company borrowed another $6.7 million from the FHLB to fund loan growth and replace seasonal

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deposits. The borrowing matures in May 2019 and has an interest rate of 1.43%.  During the third quarter of 2017, $2.0 million that was borrowed in January 2017 matured and was rolled into a new $2.0 million advance from the FHLB that matures July 2018 and has an interest rate of 1.52%.

The following table represents the components of borrowings as of the date indicated:

	September 30, 2017				December 31, 2016
(dollars in thousands)	Amount		%		Amount		%
Overnight borrowings	$	-	-	%	$	-	-	%
Securities sold under repurchase agreements		12,920	35.3			4,223	100.0
FHLB advances		23,704	64.7			-	-
Total	$	36,624	100.0	%	$	4,223	100.0	%

Item 3.  Quantitative and Qualitative Disclosure About Market Risk

Management of interest rate risk and market risk analysis.

The adequacy and effectiveness of an institution’s interest rate risk management process and the level of its exposures are critical factors in the regulatory evaluation of an institution’s sensitivity to changes in interest rates and capital adequacy.  Management believes the Company’s interest rate risk measurement framework is sound and provides an effective means to measure, monitor, analyze, identify and control interest rate risk in the balance sheet.

The Company is subject to the interest rate risks inherent in its lending, investing and financing activities.  Fluctuations of interest rates will impact interest income and interest expense along with affecting market values of all interest-earning assets and interest-bearing liabilities, except for those assets or liabilities with a short term remaining to maturity.  Interest rate risk management is an integral part of the asset/liability management process.  The Company has instituted certain procedures and policy guidelines to manage the interest rate risk position.  Those internal policies enable the Company to react to changes in market rates to protect net interest income from significant fluctuations.  The primary objective in managing interest rate risk is to minimize the adverse impact of changes in interest rates on net interest income along with creating an asset/liability structure that maximizes earnings.

Asset/Liability Management.  One major objective of the Company when managing the rate sensitivity of its assets and liabilities is to stabilize net interest income.  The management of and authority to assume interest rate risk is the responsibility of the Company’s Asset/Liability Committee (ALCO), which is comprised of senior management and members of the board of directors.  ALCO meets quarterly to monitor the relationship of interest sensitive assets to interest sensitive liabilities.  The process to review interest rate risk is a regular part of managing the Company.  Consistent policies and practices of measuring and reporting interest rate risk exposure, particularly regarding the treatment of non-contractual assets and liabilities, are in effect.  In addition, there is an annual process to review the interest rate risk policy with the board of directors which includes limits on the impact to earnings from shifts in interest rates.

Interest Rate Risk Measurement. Interest rate risk is monitored through the use of three complementary measures: static gap analysis, earnings at risk simulation and economic value at risk simulation.  While each of the interest rate risk measurements has limitations, collectively, they represent a reasonably comprehensive view of the magnitude of interest rate risk in the Company and the distribution of risk along the yield curve, the level of risk through time and the amount of exposure to changes in certain interest rate relationships.

Static Gap.  The ratio between assets and liabilities re-pricing in specific time intervals is referred to as an interest rate sensitivity gap.  Interest rate sensitivity gaps can be managed to take advantage of the slope of the yield curve as well as forecasted changes in the level of interest rate changes.

To manage this interest rate sensitivity gap position, an asset/liability model commonly known as cumulative gap analysis is used to monitor the difference in the volume of the Company’s interest sensitive assets and liabilities that mature or re-price within given time intervals.  A positive gap (asset sensitive) indicates that more assets will re-price during a given period compared to liabilities, while a negative gap (liability sensitive) indicates the opposite effect.  The Company employs computerized net interest income simulation modeling to assist in quantifying interest rate risk exposure.  This process measures and quantifies the impact on net interest income through varying interest rate changes and balance sheet compositions.  The use of this model assists the ALCO to gauge the effects of the interest rate changes on interest-sensitive assets and liabilities in order to determine what impact these rate changes will have upon the net interest spread.  At September 30, 2017, the Company maintained a one-year cumulative gap of positive (asset sensitive) $75.2 million, or 9%, of total assets.  The effect of this positive gap position provided a mismatch of assets and liabilities which may expose the Company to interest rate risk during periods of falling interest rates.  Conversely, in an increasing interest rate environment, net interest income could be positively impacted because more assets than liabilities will re-price upward during the one-year period.

Certain shortcomings are inherent in the method of analysis discussed above and presented in the next table.  Although certain assets and liabilities may have similar maturities or periods of re-pricing, they may react in different degrees to changes in market interest

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rates.  The interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types of assets and liabilities may lag behind changes in market interest rates.  Certain assets, such as adjustable-rate mortgages, have features which restrict changes in interest rates on a short-term basis and over the life of the asset.  In the event of a change in interest rates, prepayment and early withdrawal levels may deviate significantly from those assumed in calculating the table amounts.  The ability of many borrowers to service their adjustable-rate debt may decrease in the event of an interest rate increase.

The following table illustrates the Company’s interest sensitivity gap position at September 30, 2017:

			More than three		More than
	Three months		months to		one year		More than
(dollars in thousands)	or less		twelve months		to three years		three years		Total
Cash and cash equivalents	$	30,066	$	-	$	-	$	11,815	$	41,881
Investment securities (1)(2)		5,807		16,666		51,025		81,040		154,538
Loans and leases(2)		193,914		115,094		170,889		146,843		626,740
Fixed and other assets		-		19,857		-		35,250		55,107
Total assets	$	229,787	$	151,617	$	221,914	$	274,948	$	878,266
Total cumulative assets	$	229,787	$	381,404	$	603,318	$	878,266
Non-interest-bearing transaction deposits (3)	$	-	$	18,604	$	51,074	$	116,180	$	185,858
Interest-bearing transaction deposits (3)		190,785		22,528		164,088		76,914		454,315
Certificates of deposit		14,270		40,079		46,544		7,511		108,404
Repurchase agreements		12,920		-		-		-		12,920
FHLB advances		2,500		4,500		16,704		-		23,704
Other liabilities		-		-		-		6,781		6,781
Total liabilities	$	220,475	$	85,711	$	278,410	$	207,386	$	791,982
Total cumulative liabilities	$	220,475	$	306,186	$	584,596	$	791,982
Interest sensitivity gap	$	9,312	$	65,906	$	(56,496)	$	67,562
Cumulative gap	$	9,312	$	75,218	$	18,722	$	86,284
Cumulative gap to total assets		1.1%		8.6%		2.1%		9.8%

(1)   Includes FHLB stock and the net unrealized gains/losses on available-for-sale securities.

(2)   Investments and loans are included in the earlier of the period in which interest rates were next scheduled to adjust or the period in which they are due.  In addition, loans were included in the periods in which they are scheduled to be repaid based on scheduled amortization.  For amortizing loans and MBS – GSE residential, annual prepayment rates are assumed reflecting historical experience as well as management’s knowledge and experience of its loan products.

(3)  The Company’s demand and savings accounts were generally subject to immediate withdrawal.  However, management considers a certain amount of such accounts to be core accounts having significantly longer effective maturities based on the retention experiences of such deposits in changing interest rate environments.  The effective maturities presented are the recommended maturity distribution limits for non-maturing deposits based on historical deposit studies.

Earnings at Risk and Economic Value at Risk Simulations.  The Company recognizes that more sophisticated tools exist for measuring the interest rate risk in the balance sheet that extend beyond static re-pricing gap analysis.  Although it will continue to measure its re-pricing gap position, the Company utilizes additional modeling for identifying and measuring the interest rate risk in the overall balance sheet.  The ALCO is responsible for focusing on “earnings at risk” and “economic value at risk”, and how both relate to the risk-based capital position when analyzing the interest rate risk.

Earnings at Risk.  An earnings at risk simulation measures the change in net interest income and net income should interest rates rise and fall.  The simulation recognizes that not all assets and liabilities re-price one-for-one with market rates (e.g., savings rate).  The ALCO looks at “earnings at risk” to determine income changes from a base case scenario under an increase and decrease of 200 basis points in interest rate simulation models.

Economic Value at Risk. An earnings at risk simulation measures the short-term risk in the balance sheet.  Economic value (or portfolio equity) at risk measures the long-term risk by finding the net present value of the future cash flows from the Company’s existing assets and liabilities.  The ALCO examines this ratio quarterly utilizing an increase and decrease of 200 basis points in interest rate simulation models.  The ALCO recognizes that, in some instances, this ratio may contradict the “earnings at risk” ratio.

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The following table illustrates the simulated impact of an immediate 200 basis points upward or downward movement in interest rates on net interest income, net income and the change in the economic value (portfolio equity).  This analysis assumed that the adjusted interest-earning asset and interest-bearing liability levels at September 30, 2017 remained constant.  The impact of the rate movements was developed by simulating the effect of the rate change over a twelve-month period from the September 30, 2017 levels:

	% change
	Rates +200		Rates -200
Earnings at risk:
Net interest income	5.5	%	(7.8)	%
Net income	12.9		(17.1)
Economic value at risk:
Economic value of equity	0.5		(29.8)
Economic value of equity as a percent of total assets	0.1		(4.5)

Economic value has the most meaning when viewed within the context of risk-based capital.  Therefore, the economic value may normally change beyond the Company’s policy guideline for a short period of time as long as the risk-based capital ratio (after adjusting for the excess equity exposure) is greater than 10%.  At September 30, 2017, the Company’s risk-based capital ratio was 14.8%.

The table below summarizes estimated changes in net interest income over a twelve-month period beginning October 1, 2017, under alternate interest rate scenarios using the income simulation model described above:

	Net interest		$		%
(dollars in thousands)	income		variance		variance
Simulated change in interest rates
+200 basis points	$	30,609	$	1,584	5.5	%
+100 basis points		29,873		848	2.9
Flat rate		29,025		-	-
-100 basis points		27,302		(1,723)	(5.9)
-200 basis points		26,757		(2,268)	(7.8)

Simulation models require assumptions about certain categories of assets and liabilities.  The models schedule existing assets and liabilities by their contractual maturity, estimated likely call date or earliest re-pricing opportunity.  MBS – GSE residential securities and amortizing loans are scheduled based on their anticipated cash flow including estimated prepayments.  For investment securities, the Company uses a third-party service to provide cash flow estimates in the various rate environments.  Savings, money market and interest-bearing checking accounts do not have stated maturities or re-pricing terms and can be withdrawn or re-price at any time.  This may impact the margin if more expensive alternative sources of deposits are required to fund loans or deposit runoff.  Management projects the re-pricing characteristics of these accounts based on historical performance and assumptions that it believes reflect their rate sensitivity.  The model reinvests all maturities, repayments and prepayments for each type of asset or liability into the same product for a new like term at current product interest rates.  As a result, the mix of interest-earning assets and interest bearing-liabilities is held constant.

Liquidity

Liquidity management ensures that adequate funds will be available to meet customers’ needs for borrowings, deposit withdrawals and maturities, facility expansion and normal operating expenses.  Sources of liquidity are cash and cash equivalents, asset maturities and pay-downs within one year, loans HFS, investments AFS, growth of core deposits and repurchase agreements, utilization of borrowing capacities from the FHLB, correspondent banks, CDARs, the Discount Window of the Federal Reserve Bank of Philadelphia (FRB) and proceeds from the issuance of capital stock.  Though regularly scheduled investment and loan payments are dependable sources of daily liquidity, sales of both loans HFS and investments AFS, deposit activity and investment and loan prepayments are significantly influenced by general economic conditions including the interest rate environment.  During low and declining interest rate environments, prepayments from interest-sensitive assets tend to accelerate and provide significant liquidity that can be used to invest in other interest-earning assets but at lower market rates.  Conversely, in periods of high or rising interest rates, prepayments from interest-sensitive assets tend to decelerate causing prepayment cash flows from mortgage loans and mortgage-backed securities to decrease.  Rising interest rates may also cause deposit inflow but priced at higher market interest rates or could also cause deposit outflow due to higher rates offered by the Company’s competition for similar products.  The Company closely monitors activity in the capital markets and takes appropriate action to ensure that the liquidity levels are adequate for funding, investing and operating activities.

The Company’s contingency funding plan (CFP) sets a framework for handling liquidity issues in the event circumstances arise which the Company deems to be less than normal.  The Company established guidelines for identifying, measuring, monitoring and

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managing the resolution of potentially serious liquidity crises.  The CFP outlines required monitoring tools, acceptable alternative funding sources and required actions during various liquidity scenarios.  Thus, the Company has implemented a proactive means for the measurement and resolution for handling potentially significant adverse liquidity conditions.  At least quarterly, the CFP monitoring tools, current liquidity position and monthly projected liquidity sources and uses are presented and reviewed by the Company’s Asset/Liability Committee.  As of September 30, 2017, the Company had not experienced any adverse issues that would give rise to its inability to raise liquidity in an emergency situation.

During the nine months ended September 30, 2017, the Company acquired $16.0 million of cash.  During the period, the Company’s operations provided approximately $11.5 million mostly from $21.3 million of net cash inflow from the components of net interest income and $4.2 million in proceeds of loans HFS over originations; partially offset by net non-interest expense/income related payments of $10.8 million, $1.3 million in estimated tax payments and a $1.9 million increase in the residual value from the Company’s automobile leasing activities.  Cash inflow from interest-earning assets, deposits, borrowings and the acquisition of a bank branch were used to purchase investment securities and replace maturing and cash runoff of securities, purchase bank owned life insurance, fund the loan portfolio and make net dividend payments.  The Company received a large amount of public deposits over the past two years.  The seasonal nature of deposits from municipalities and other public funding sources requires the Company to be prepared for the inherent volatility and the unpredictable timing of cash outflow from this customer base, including maintaining the requirements to pledge investment securities.  Accordingly, the use of short-term overnight borrowings could be used to fulfill funding gap needs.  The CFP is a tool to help the Company ensure that alternative funding sources are available to meet its liquidity needs.

The Company is a party to financial instruments with off-balance sheet risk in the normal course of business in order to meet the financing needs of its customers and in connection with the overall interest rate management strategy.  These instruments involve, to a varying degree, elements of credit, interest rate and liquidity risk.  In accordance with GAAP, these instruments are either not recorded in the consolidated financial statements or are recorded in amounts that differ from the notional amounts.  Such instruments primarily include lending commitments and lease obligations. 

Lending commitments include commitments to originate loans and commitments to fund unused lines of credit.  Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract.  Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee.  Since some of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements.

In addition to lending commitments, the Company has contractual obligations related to operating lease commitments.  Operating lease commitments are obligations under various non-cancelable operating leases on buildings and land used for office space and banking purposes.  The Company’s position with respect to lending commitments and significant contractual lease obligations, both on a short- and long-term basis has not changed materially from December 31, 2016.  

During the third quarter of 2016, the Company entered into an agreement to acquire all the deposits, certain loans and fixed assets of a bank branch.  The transaction was completed in March 2017.  As a result of this transaction, the Company experienced an increase of $13.9 million in deposits in March 2017.

As of September 30,  2017, the Company maintained $41.9 million in cash and cash equivalents and $153.6 million of investments AFS and loans HFS.  Also as of September 30, 2017, the Company had approximately $200.2 million available to borrow from the FHLB, $21.0 million from correspondent banks, $65.2 million from the FRB and $44.0 million from the CDARS program.  The combined total of $525.9 million represented 60% of total assets at September 30, 2017.  Management believes this level of liquidity to be strong and adequate to support current operations.

Capital

During the nine months ended September 30, 2017, total shareholders' equity increased $5.7 million, or 7%, due principally from the $6.4 million in net income added into retained earnings.  Capital was further enhanced by the $0.5 million, after tax, improvement in the net unrealized gain position in the Company’s investment portfolio, $0.1 million from investments in the Company’s common stock via the Employee Stock Purchase Plan (ESPP), $0.3 million from issuance of common stock through the dividend reinvestment plan, $0.3 million from the issuance of common stocks through the exercise of stock options and $0.3 million from stock-based compensation expense from the ESPP and unvested restricted stock.  These items were partially offset by $2.3 million of cash dividends declared on the Company’s common stock.  The Company’s dividend payout ratio, defined as the rate at which current earnings are paid to shareholders, was 36.2% for the nine months ended September 30, 2017.  The balance of earnings is retained to further strengthen the Company’s capital position.

As of September 30, 2017, the Company reported a net unrealized gain position of $1.9 million, net of tax, from the securities AFS portfolio compared to a net unrealized gain of $1.4 million as of December 31, 2016.The improvement during the first nine months of 2017 was from all security types.  Management believes that changes in fair value of the Company’s securities are due to changes in interest rates and not in the creditworthiness of the issuers.  Generally, when U.S. Treasury rates rise, investment securities’ pricing declines and fair values of investment securities also decline.  While volatility has existed in the yield curve within the past twelve months, a rising rate environment is inevitable and during the period of rising rates, the Company expects pricing in the bond portfolio to decline.  There is no assurance that future realized and unrealized losses will not be recognized from the Company’s portfolio of

54

investment securities.  To help maintain a healthy capital position, the Company can issue stock to participants in the DRP and ESPP plans.  The DRP affords the Company the option to acquire shares in open market purchases and/or issue shares directly from the Company to plan participants.  Both the DRP and the ESPP plans have been a consistent source of capital from the Company’s loyal employees and shareholders and their participation in these plans will continue to help strengthen the Company’s balance sheet. 

The Company (on a consolidated basis) and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies.  Failure to meet minimum capital requirements can initiate certain mandatory and possible additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s and the Bank’s financial statements.  Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of their assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices.  The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk-weightings and other factors.  Prompt corrective action provisions are not applicable to bank holding companies.

Under these guidelines, assets and certain off-balance sheet items are assigned to broad risk categories, each with appropriate weights.  The resulting ratios represent capital as a percentage of total risk-weighted assets and certain off-balance sheet items.  The guidelines require all banks and bank holding companies to maintain a minimum ratio of total risk-based capital to total risk-weighted assets (Total Risk Adjusted Capital) of 8%, including Tier I common equity to total risk-weighted assets (Tier I Common Equity) of 4.5%, Tier I capital to total risk-weighted assets (Tier I Capital) of 6% and Tier I capital to average total assets (Leverage Ratio) of at least 4%.  A capital conservation buffer, comprised of common equity Tier I capital, is also established above the regulatory minimum capital requirements rising up to 2.50% by 2019.  As of September 30, 2017 and December 31, 2016, the Company and the Bank exceeded all capital adequacy requirements to which it was subject.

The Company continues to closely monitor and evaluate alternatives to enhance its capital ratios as the regulatory and economic environments change.  The following table depicts the capital amounts and ratios of the Company, on a combined basis, and the Bank as of September 30, 2017 and December 31, 2016:

										To be well capitalized
				For capital						under prompt corrective
	Actual			adequacy purposes						action provisions
(dollars in thousands)	Amount		Ratio	Amount			Ratio			Amount			Ratio
As of September 30, 2017:
Total capital (to risk-weighted assets)
Consolidated	$	91,967	14.8%	≥	$	57,672	≥	9.3%	(1)			N/A		N/A
Bank	$	91,152	14.7%	≥	$	57,274	≥	9.3%	(1)	≥	$	61,918	≥	10.0%
Tier 1 common equity (to risk-weighted assets)
Consolidated	$	84,154	13.5%	≥	$	35,850	≥	5.8%	(1)			N/A		N/A
Bank	$	83,392	13.5%	≥	$	35,603	≥	5.8%	(1)	≥	$	40,247	≥	6.5%
Tier I capital (to risk-weighted assets)
Consolidated	$	84,154	13.5%	≥	$	45,203	≥	7.3%	(1)			N/A		N/A
Bank	$	83,392	13.5%	≥	$	44,891	≥	7.3%	(1)	≥	$	49,535	≥	8.0%
Tier I capital (to average assets)
Consolidated	$	84,154	9.8%	≥	$	34,365	≥	4.0%				N/A		N/A
Bank	$	83,392	9.7%	≥	$	34,333	≥	4.0%		≥	$	42,917	≥	5.0%

(1) Includes 1.25% capital conservation buffer.

55

As of December 31, 2016:
Total capital (to risk-weighted assets)
Consolidated	$	86,702	14.9%	≥	$	46,550	≥	8.6%	(2)			N/A		N/A
Bank	$	86,332	14.8%	≥	$	46,538	≥	8.6%	(2)	≥	$	58,172	≥	10.0%
Tier 1 common equity (to risk-weighted assets)
Consolidated	$	79,250	13.6%	≥	$	26,184	≥	5.1%	(2)			N/A		N/A
Bank	$	79,033	13.6%	≥	$	26,178	≥	5.1%	(2)	≥	$	37,812	≥	6.5%
Tier I capital (to risk-weighted assets)
Consolidated	$	79,250	13.6%	≥	$	34,912	≥	6.6%	(2)			N/A		N/A
Bank	$	79,033	13.6%	≥	$	34,903	≥	6.6%	(2)	≥	$	46,538	≥	8.0%
Tier I capital (to average assets)
Consolidated	$	79,250	10.3%	≥	$	30,717	≥	4.0%				N/A		N/A
Bank	$	79,033	10.3%	≥	$	30,650	≥	4.0%		≥	$	38,313	≥	5.0%

(2) Includes a 0.625% capital conservation buffer.

The Company advises readers to refer to the Supervision and Regulation section of Management’s Discussion and Analysis of Financial Condition and Results of Operation, of its 2016 Form 10-K for a discussion on the regulatory environment and recent legislation and rulemaking.

Item 4.  Controls and Procedures

As of the end of the period covered by this Quarterly Report on Form 10-Q, an evaluation was carried out by the Company’s management, with the participation of its President and Chief Executive Officer and Chief Financial Officer, of the effectiveness of the Company’s disclosure controls and procedures, as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934.  Based on such evaluation, the President and Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are designed to ensure that information required to be disclosed in the reports the Company files or furnishes under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and regulations, and are effective.  The Company made no changes in its internal controls over financial reporting or in other factors that materially affected, or are reasonably likely to materially affect, these controls during the last fiscal quarter ended September 30, 2017.

56

PART II - Other Information

Item 1.  Legal Proceedings

The nature of the Company’s business generates some litigation involving matters arising in the ordinary course of business.  However, in the opinion of the Company after consultation with legal counsel, no legal proceedings are pending, which, if determined adversely to the Company or the Bank, would have a material adverse effect on the Company’s undivided profits or financial condition.  No legal proceedings are pending other than ordinary routine litigation incidental to the business of the Company and the Bank.  In addition, to management’s knowledge, no governmental authorities have initiated or contemplated any material legal actions against the Company or the Bank.

Item 1A.  Risk Factors

Management of the Company does not believe there have been any material changes to the risk factors that were disclosed in the 2016 Form 10-K filed with the Securities and Exchange Commission on March 10, 2017.

Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds

None

Item 3.  Default Upon Senior Securities

None                                                                                               

Item 4.  Mine Safety Disclosures

Not applicable                                                                                               

Item 5.  Other Information

None                                                                                               

Item 6.  Exhibits

The following exhibits are filed herewith or incorporated by reference as a part of this Form 10-Q:

3(i) Amended and Restated Articles of Incorporation of Registrant. Incorporated by reference to Annex B of the Proxy Statement/Prospectus included in Registrant’s Amendment 4 to its Registration Statement No. 333-90273 on Form S-4, filed with the SEC on April 6, 2000.

3(ii) Amended and Restated Bylaws of Registrant. Incorporated by reference to Exhibit 3(ii) to Registrant’s Form 8-K filed with the SEC on November 21, 2007.

*10.1 Registrant’s 2012 Dividend Reinvestment and Stock Repurchase Plan.  Incorporated by reference to Exhibit 4.1 to Registrant’s Registration Statement No. 333-183216 on Form S-3 filed with the SEC on August 10, 2012 as amended February 3, 2014.

*10.2 Registrant’s 2000 Independent Directors Stock Option Plan.  Incorporated by reference to Exhibit 4.3 to Registrant’s Registration Statement No. 333-64356 on Form S-8 filed with the SEC on July 2, 2001.

*10.3 Amendment, dated October 2, 2007, to the Registrant’s 2000 Independent Directors Stock Option Plan.  Incorporated by reference to Exhibit 10.2 to Registrant’s Form 8-K filed with the SEC on October 4, 2007.

*10.4 Registrant’s 2000 Stock Incentive Plan.  Incorporated by reference to Exhibit 4.4 to Registrant’s Registration Statement No. 333-64356 on Form S-8 filed with the SEC on July 2, 2001.

*10.5 Amendment, dated October 2, 2007, to the Registrant’s 2000 Stock Incentive Plan.  Incorporated by reference to Exhibit 10.1 to Registrant’s Form 8-K filed with the SEC on October 4, 2007.

*10.6 Registrant’s 2002 Employee Stock Purchase Plan.  Incorporated by reference to Appendix A to Definitive proxy Statement filed with the SEC on March 28, 2002.

*10.7 Amended and Restated Executive Employment Agreement between Fidelity D & D Bancorp, Inc., The Fidelity Deposit and Discount Bank and Daniel J. Santaniello, dated March 23, 2011.  Incorporated by reference to Exhibit 99.1 to Registrant’s Current Report on Form 8-K filed with the SEC on March 29, 2011.

*10.8 Amended and Restated Executive Employment Agreement between Fidelity D & D Bancorp, Inc., The Fidelity Deposit and Discount Bankand Timothy P. O’Brien, dated March 23, 2011.  Incorporated by reference to Exhibit 99.2 to Registrant’s Current Report on Form 8-K filed with the SEC on March 29, 2011.

*10.9 2012 Omnibus Stock Incentive Plan.  Incorporated by reference to Appendix A to Registrant’s Definitive Proxy Statement filed with the SEC on March 30, 2012.

*10.10 2012 Director Stock Incentive Plan.  Incorporated by reference to Appendix B to Registrant’s Definitive Proxy Statement filed with the SEC on March 30, 2012.

57

*10.11Employment Agreement between Fidelity D & D Bancorp, Inc., The Fidelity Deposit and Discount Bank and Salvatore R. DeFrancesco, Jr. dated as of March 17, 2016.  Incorporated by reference to Exhibit 99.1 to Registrant’s Current Report on Form 8-K filed with the SEC on March 18, 2016.

*10.12 Change in Control and Severance Agreement between the Registrant, The Fidelity Deposit and Discount Bank and Michael J. Pacyna dated as of March 29, 2017.  Incorporated by reference to Exhibit 99.1 to Registrant’s Current Report on Form 8-K filed with the SEC on April 4, 2017.

*10.13 Employment Agreement between Fidelity D & D Bancorp, Inc., The Fidelity Deposit and Discount Bank and Eugene J. Walsh dated as of March 29, 2017.  Incorporated by reference to Exhibit 99.1 to Registrant’s Current Report on Form 8-K filed with the SEC on April 4, 2017.

*10.14 Form of Supplemental Executive Retirement Plan – Applicable to Daniel J. Santaniello and Salvatore R. DeFrancesco, Jr. Incorporated by reference to Exhibit 99.1 to Registrant’s Current Report on Form 8-K filed with the SEC on April 4, 2017.

*10.15 Form of Supplemental Executive Retirement Plan – Applicable to Eugene J. Walsh and Timothy P O’Brien. Incorporated by reference to Exhibit 99.2 to Registrant’s Current Report on Form 8-K filed with the SEC on April 4, 2017.

*10.16 Form of Split Dollar Life Insurance Agreement – Applicable to Daniel J. Santaniello, Salvatore R. DeFrancesco, Jr. and Eugene J. Walsh. Incorporated by reference to Exhibit 99.3 to Registrant’s Current Report on Form 8-K filed with the SEC on April 4, 2017.

*10.17 Form of Split Dollar Life Insurance Agreement – Applicable to Timothy P O’Brien and Michael Pacyna. Incorporated by reference to Exhibit 99.4 to Registrant’s Current Report on Form 8-K filed with the SEC on April 4, 2017.

31.1 Rule 13a-14(a) Certification of Principal Executive Officer, filed herewith.

31.2 Rule 13a-14(a) Certification of Principal Financial Officer, filed herewith.

32.1 Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, filed herewith.

32.2 Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, filed herewith.

101 Interactive data files: The following, from Fidelity D&D Bancorp, Inc.’s. Quarterly Report on Form 10-Q for the quarter ended September 30, 2017, is formatted in XBRL (eXtensible Business Reporting Language): Consolidated Balance Sheets as of September 30, 2017 and December 31, 2016;  Consolidated Statements of Income for the three and nine months ended September 30, 2017 and 2016; Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2017 and 2016; Consolidated Statements of Changes in Shareholders’ Equity for the nine months ended September 30, 2017 and 2016; Consolidated Statements of Cash Flows for the nine months ended September 30, 2017 and 2016 and the Notes to the Consolidated Financial Statements. **

________________________________________________

*   Management contract or compensatory plan or arrangement.

** Pursuant to Rule 406T of Regulation S-T, the interactive data files in Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.

58

Signatures

FIDELITY D & D BANCORP, INC.

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	Fidelity D & D Bancorp, Inc.
Date: November 8, 2017	/s/Daniel J. Santaniello
	Daniel J. Santaniello,     President and Chief Executive Officer
	Fidelity D & D Bancorp, Inc.
Date: November 8, 2017	/s/Salvatore R. DeFrancesco, Jr.
	Salvatore R. DeFrancesco, Jr.,      Treasurer and Chief Financial Officer

59

EX-31.1

Exhibit 31.1

CERTIFICATION

I, Daniel J. Santaniello, certify that:

1.I have reviewed this quarterly report on Form 10-Q of Fidelity D & D Bancorp, Inc.;

2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions);

(a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b)Any fraud, whether or not material, that involves management or other employees, who have a significant role in the registrant’s internal control over financial reporting.

Date:  November8, 2017
	/s/Daniel J. Santaniello
	Daniel J. Santaniello,
	President and Chief Executive Officer

EX-31.2

Exhibit 31.2

CERTIFICATION

I, Salvatore R. DeFrancesco, Jr., certify that:

1.I have reviewed this quarterly report on Form 10-Q of Fidelity D & D Bancorp, Inc.;

2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions);

(a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b)Any fraud, whether or not material, that involves management or other employees, who have a significant role in the registrant’s internal control over financial reporting.

Date:   November8, 2017	/s/Salvatore R. DeFrancesco, Jr.
	Salvatore R. DeFrancesco, Jr.,
	Treasurer and Chief Financial Officer

EX-32.1

Exhibit 32.1

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350

AS ADDED BY

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report on Form 10-Q of Fidelity D & D Bancorp, Inc. (the “Company”) for the period ended September 30, 2017, as filed with the Securities and Exchange Commission (the “Report”), I, Daniel J. Santaniello, President and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. §1350, as added by §906 of the Sarbanes-Oxley Act of 2002, that:

1.The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

2.To my knowledge, the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company as of and for the period covered by the Report.

Date:November  8, 2017	By:/s/ Daniel J. Santaniello
	Daniel J. Santaniello
	President and Chief Executive Officer

EX-32.2

Exhibit 32.2

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350

AS ADDED BY

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report on Form 10-Q of Fidelity D & D Bancorp, Inc. (the “Company”) for the period ended September 30, 2017, as filed with the Securities and Exchange Commission (the “Report”), I, Salvatore R. DeFrancesco, Jr.,Treasurer and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. §1350, as added by §906 of the Sarbanes-Oxley Act of 2002, that:

1.The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

2.To my knowledge, the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company as of and for the period covered by the Report.

Date:November8, 2017	By:/s/ Salvatore R. DeFrancesco, Jr.
	Salvatore R. DeFrancesco, Jr.,
	Treasurer and Chief Financial Officer

XML

Document and Entity Information - shares	9 Months Ended
	Sep. 30, 2017	Oct. 31, 2017
Document and Entity Information [Abstract]
Document Type	10-Q
Amendment Flag	false
Document Period End Date	Sep. 30, 2017
Document Fiscal Year Focus	2017
Document Fiscal Period Focus	Q3
Entity Registrant Name	FIDELITY D & D BANCORP INC
Entity Central Index Key	0001098151
Trading Symbol	fdbc
Current Fiscal Year End Date	--12-31
Entity Filer Category	Smaller Reporting Company
Entity Common Stock, Shares Outstanding		3,729,978

XML

Consolidated Balance Sheets - USD ($) $ in Thousands	Sep. 30, 2017	Dec. 31, 2016
Assets:
Cash and due from banks	$ 11,835	$ 12,856
Interest-bearing deposits with financial institutions	30,046	12,987
Total cash and cash equivalents	41,881	25,843
Available-for-sale securities	151,995	130,037
Federal Home Loan Bank stock	2,543	2,606
Loans and leases, net (allowance for loan losses of $9,356 in 2017; $9,364 in 2016)	625,111	588,130
Loans held-for-sale (fair value $1,662 in 2017, $2,907 in 2016)	1,629	2,854
Foreclosed assets held-for-sale	927	1,306
Bank premises and equipment, net	16,899	17,164
Cash surrender value of bank owned life insurance	19,857	11,435
Accrued interest receivable	2,769	2,246
Goodwill	209
Other assets	14,446	11,323
Total assets	878,266	792,944
Liabilities:
Deposits: Interest-bearing	562,719	492,306
Deposits: Non-interest-bearing	185,858	211,153
Total deposits	748,577	703,459
Accrued interest payable and other liabilities	6,781	4,631
Short-term borrowings	12,920	4,223
FHLB advances	23,704
Total liabilities	791,982	712,313
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; 3,729,978 in 2017; and 2,453,805 in 2016)	28,200	27,155
Retained earnings	56,163	52,095
Accumulated other comprehensive income	1,921	1,381
Total shareholders' equity	86,284	80,631
Total liabilities and shareholders' equity	$ 878,266	$ 792,944

XML

Consolidated Balance Sheets (Parenthetical) - USD ($) $ in Thousands	Sep. 30, 2017	Dec. 31, 2016
Consolidated Balance Sheets [Abstract]
Loans, allowance for loan losses	$ 9,356	$ 9,364
Loans held-for-sale, fair value	$ 1,662	$ 2,907
Preferred stock, shares authorized	5,000,000	5,000,000
Preferred stock, no par value
Preferred stock, shares issued	0	0
Capital stock, no par value
Capital stock, shares authorized	10,000,000	10,000,000
Capital stock, shares issued	3,729,978	2,453,805
Capital stock, shares outstanding	3,729,978	2,453,805

XML

Consolidated Statements of Income - USD ($) $ in Thousands		3 Months Ended		9 Months Ended
		Sep. 30, 2017	Sep. 30, 2016	Sep. 30, 2017	Sep. 30, 2016
Interest income:
Loans and leases: Taxable		$ 6,672	$ 5,960	$ 19,398	$ 17,571
Loans and leases: Nontaxable		220	195	647	579
Interest-bearing deposits with financial institutions		12	13	22	59
Investment securities:
U.S. government agency and corporations		610	500	1,887	1,236
States and political subdivisions (nontaxable)		368	321	1,081	954
Other securities		46	17	113	58
Total interest income		7,928	7,006	23,148	20,457
Interest expense:
Deposits		742	580	1,971	1,727
Securities sold under repurchase agreements		3	4	15	16
Other short-term borrowings and other		60	1	197	14
FHLB advances		77		174
Total interest expense		882	585	2,357	1,757
Net interest income		7,046	6,421	20,791	18,700
Provision for loan losses		375	225	925	650
Net interest income after provision for loan losses		6,671	6,196	19,866	18,050
Other income:
Service charges on deposit accounts		582	564	1,674	1,567
Interchange fees		431	378	1,256	1,115
Fees from trust fiduciary activities		253	176	756	539
Fees from financial services		169	126	434	436
Service charges on loans		201	194	597	665
Fees and other revenue		222	201	661	593
Earnings on bank-owned life insurance		158	89	422	264
Gain (loss) on sale or disposal of:
Loans		232	302	684	629
Investment securities					9
Premises and equipment			(6)		(6)
Total other income		2,248	2,024	6,484	5,811
Other expenses:
Salaries and employee benefits		3,235	2,892	9,559	8,660
Premises and equipment		919	898	2,816	2,642
Advertising and marketing		270	198	850	656
Professional services		404	334	1,330	1,122
FDIC assessment		68	98	201	335
Loan collection		84	16	191	141
Other real estate owned		37	69	183	158
Office supplies and postage		109	110	339	352
Automated transaction processing		185	179	543	460
Data processing and communication		297	261	880	720
PA shares tax		183	165	394	471
Other		244	189	597	449
Total other expenses		6,035	5,409	17,883	16,166
Income before income taxes		2,884	2,811	8,467	7,695
Provision for income taxes		658	776	2,078	2,031
Net income		$ 2,226	$ 2,035	$ 6,389	$ 5,664
Per share data:
Net income - basic (1)	[1]	$ 0.60	$ 0.55	$ 1.72	$ 1.54
Net income - diluted (1)	[1]	0.60	0.55	1.72	1.54
Dividends (1)	[1]	$ 0.21	$ 0.19	$ 0.62	$ 0.57

[1] On August 15, 2017, the Company declared a three-for-two stock split effected in the form of a 50% stock dividend. Per share data for the three and nine months ended September 30, 2016 has been restated for the effects thereof.

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Consolidated Statements of Income (Parenthetical)			9 Months Ended
	Sep. 28, 2017	Aug. 15, 2017	Sep. 30, 2017
Consolidated Statements of Income [Abstract]
Dividend declared			Aug. 15, 2017
Stock split ratio	1.5	1.5
Stock dividend, percentage	50.00%	50.00%

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Consolidated Statements of Comprehensive Income - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2017	Sep. 30, 2016	Sep. 30, 2017	Sep. 30, 2016
Consolidated Statements of Comprehensive Income [Abstract]
Net income	$ 2,226	$ 2,035	$ 6,389	$ 5,664
Other comprehensive income (loss), before tax:
Unrealized holding gain (loss) on available-for-sale securities	104	(361)	818	1,932
Reclassification adjustment for net gains realized in income				(9)
Net unrealized gain (loss)	104	(361)	818	1,923
Tax effect	(35)	123	(278)	(654)
Unrealized gain (loss), net of tax	69	(238)	540	1,269
Other comprehensive income (loss), net of tax	69	(238)	540	1,269
Total comprehensive income, net of tax	$ 2,295	$ 1,797	$ 6,929	$ 6,933

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Consolidated Statements of Changes in Shareholders' Equity - USD ($) $ in Thousands	Capital Stock [Member]	Retained earnings [Member]	Accumulated other comprehensive income [Member]	Total
Balance at Dec. 31, 2015	$ 26,700	$ 47,463	$ 2,188	$ 76,351
Balance, shares at Dec. 31, 2015	2,443,405
Net income		5,664		5,664
Other comprehensive income			1,269	1,269
Issuance of common stock through Employee Stock Purchase Plan	$ 111			111
Issuance of common stock through Employee Stock Purchase Plan, shares	3,695
Issuance of common stock from vested restricted share grants through stock compensation plans, shares	6,205
Issuance of common stock through exercise of stock options	$ 14			$ 14
Issuance of common stock through exercise of stock options, shares	500			750
Stock-based compensation expense	$ 248			$ 248
Cash dividends declared		(2,098)		(2,098)
Balance, shares at Sep. 30, 2016	2,453,805
Balance at Sep. 30, 2016	$ 27,073	51,029	3,457	81,559
Balance at Dec. 31, 2016	$ 27,155	52,095	1,381	80,631
Balance, shares at Dec. 31, 2016	2,453,805
Net income		6,389		6,389
Other comprehensive income			540	540
Issuance of common stock through Employee Stock Purchase Plan	$ 126			126
Issuance of common stock through Employee Stock Purchase Plan, shares	4,085
Issuance of common stock through Dividend Reinvestment Plan	$ 331			331
Issuance of common stock through Dividend Reinvestment Plan, shares	7,744
Issuance of common stock from vested restricted share grants through stock compensation plans, shares	9,657
Issuance of common stock through exercise of stock options	$ 332			$ 332
Issuance of common stock through exercise of stock options, shares	11,500			17,250
Stock-based compensation expense	$ 256			$ 256
Issuance of common stock from stock split	1,243,187
Cash in lieu of fractional shares paid due to the stock split		(11)		(11)
Cash dividends declared		(2,310)		(2,310)
Balance, shares at Sep. 30, 2017	3,729,978
Balance at Sep. 30, 2017	$ 28,200	$ 56,163	$ 1,921	$ 86,284

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Consolidated Statements of Cash Flows $ in Thousands	9 Months Ended
	Sep. 30, 2017 USD ($)	Sep. 30, 2016 USD ($)
Cash flows from operating activities:
Net income	$ 6,389	$ 5,664
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, amortization, and accretion	2,324	2,519
Provision for loan losses	925	650
Deferred income tax expense	1,070	1,192
Stock-based compensation expense	419	385
Excess tax benefit from exercise of stock options	66
Proceeds from sale of loans held-for-sale	33,498	34,623
Originations of loans held-for-sale	(29,342)	(32,155)
Earnings from bank-owned life insurance	(422)	(264)
Net gain from sales of loans	(684)	(629)
Net gain from sales of investment securities		(9)
Net loss from sale and write-down of foreclosed assets held-for-sale	83	57
Net loss from disposal of equipment		6
Change in:
Accrued interest receivable	(519)	97
Other assets	(4,262)	(2,760)
Accrued interest payable and other liabilities	1,928	906
Net cash provided by operating activities	11,473	10,282
Available-for-sale securities:
Proceeds from sales		2,884
Proceeds from maturities, calls and principal pay-downs	14,795	15,139
Purchases	(36,786)	(20,707)
Decrease in FHLB stock	63	919
Net increase in loans and leases	(39,271)	(20,584)
Purchase of life insurance policies	(8,000)
Acquisition of bank premises and equipment	(747)	(1,075)
Net cash acquired in acquisition of bank branch	11,817
Proceeds from sale of bank premises and equipment	6
Proceeds from sale of foreclosed assets held-for-sale	511	354
Net cash used in investing activities	(57,612)	(23,070)
Cash flows from financing activities:
Net increase in deposits	31,308	51,132
Net increase (decrease) in short-term borrowings	8,697	(17,208)
Proceeds from issuance of FHLB advances	25,704
Repayment of FHLB advances	(2,000)
Proceeds from employee stock purchase plan participants	126	111
Exercise of stock options	332	14
Dividends paid, net of dividends reinvested	(1,979)	(2,098)
Cash paid in lieu of fractional shares	(11)
Net cash provided by financing activities	62,177	31,951
Net increase in cash and cash equivalents	16,038	19,163
Cash and cash equivalents, beginning	25,843	12,277
Cash and cash equivalents, ending	41,881	31,440
Supplemental Disclosures of Cash Flow Information, Cash payments for:
Interest	2,219	1,793
Income tax	1,300	500
Supplemental Disclosures of Non-cash Investing Activities:
Net change in unrealized gains on available-for-sale securities	818	1,923
Transfers from loans to foreclosed assets held-for-sale	216	1,104
Transfers from loans to loans held-for-sale	2,752	$ 3,306
Acquisition of West Scranton Branch from Wayne Bank
Goodwill	$ 209

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Nature Of Operations And Critical Accounting Policies

9 Months Ended

Sep. 30, 2017

Nature Of Operations And Critical Accounting Policies [Abstract]

Nature Of Operations And Critical Accounting Policies

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, 2016.

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, 2017 and December 31, 2016 and the related consolidated statements of income and consolidated statements of comprehensive income for the three and nine months ended September 30, 2017 and 2016, and consolidated statements of changes in shareholders’ equity and consolidated statements of cash flows for the nine months ended September 30, 2017 and 2016 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 2016 financial statements to conform to the 2017 presentation. 

On August 15, 2017, the Company declared a three-for-two stock split effected in the form of a 50% stock dividend on its common stock outstanding to shareholders as of September 18, 2017 and distributed on September 28, 2017.  All share and per share information included in the accompanying consolidated financial statements and footnotes has been retroactively adjusted to reflect this stock split.

In preparing these consolidated financial statements, the Company evaluated the events and transactions that occurred after September 30, 2017 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, 2016, 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, 2017 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 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 September 30, 2017 and December 31, 2016, 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 maintains bank owned life insurance policies (BOLI) for a selected group of employees, namely its officers where the Company is the owner and sole beneficiary of the policies.  The earnings from the BOLI are recognized as a component of other income in the consolidated statements of income.  The BOLI is an asset that can be liquidated, if necessary, with tax consequences.  However, the Company intends to hold these policies and accordingly, the Company has not provided for deferred taxes on the earnings from the increase in the cash surrender value. 

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 three executives providing post-retirement benefits and accrues monthly expense for this benefit.  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.

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New Accounting Pronouncements

9 Months Ended

Sep. 30, 2017

New Accounting Pronouncements [Abstract]

New Accounting Pronouncements

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 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 adopted this accounting standard during the first quarter of 2017 and 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 modified retrospective approach with the cumulative effect of initially adopting ASU 2014-09 recognized at the date of adoption. 

Subsequently, the FASB issued additional guidance to clarify certain implementation issues. Specifically, the FASB issued Principal versus Agent Considerations, Identifying Performance Obligations and Licensing, Narrow-Scope Improvements and Practical Expedients and Technical Corrections and Improvements in March, April, May and December 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.  The Company’s revenue is comprised of net interest income, which is explicitly excluded from the scope of the guidance, and non-interest income.  The Company is currently assessing our revenue streams that are within the scope of the standard; including wealth management fees, deposit related fees and gains on the sale of other real estate owned.   The Company expects that this guidance may change how certain non-interest income is recognized but does not expect the new standard, or any of its amendments, to have a material effect on its consolidated financial statements.  The Company does anticipate the guidance will require expanded footnote disclosures.  The Company plans to adopt this guidance on January 1, 2018 using the modified retrospective approach with a cumulative adjustment to opening retained earnings, if such adjustment is deemed to be material.

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 Company is expected to make an election to exclude leases less than 12 months from the provisions of this ASU.  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.  Upon adoption, this change in accounting guidance could have a significant impact on the consolidated balance sheets and could potentially impact debt covenant agreements with our customers.  The Company is currently evaluating the amount of the impact of ASU 2016-02 on its consolidated financial statements.

In August 2016, the FASB released ASU 2016-15, Statement of Cash Flows (Topic 230) to clarify the presentation of certain cash receipts and payments on the statement of cash flows.  The update addressed eight specific cash flow issues with the objective of reducing the existing diversity in practice.  The amendments in this update are effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years.  Early adoption is permitted, including adoption in an interim period.  The amendments in this update should be applied using a retrospective transition method to each period presented.  The Company is currently evaluating the impact of the adoption of ASU 2016-15 on its consolidated financial statements, but does not expect it to have a significant impact.

In January 2017, the FASB issued ASU 2017-04, Intangibles-Goodwill and Other (Topic 350) to simplify the test for goodwill impairment.  To simplify the subsequent measurement of goodwill, the Board eliminated Step 2 from the goodwill impairment test.  Under the amendments in this update, an entity should perform its annual goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount.  An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting units fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit.  An entity should apply the amendments in his update on a prospective basis.  The amendments in this update are effective for the Company for its annual goodwill impairment tests in fiscal years beginning after December 15, 2019.  Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017.  The Company will early adopt this standard and it will not have an impact on its consolidated financial statements.

In March 2017, the FASB issued ASU 2017-08, Receivables-Nonrefundable Fees and Other Costs (Subtopic 310-20) Premium Amortization on Purchased Callable Debt Securities to amend the amortization period for certain purchased callable debt securities held at a premium.  The amendments in this update shorten the amortization period for the premium to the earliest call date.  The amendments in this update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018.  Early adoption is permitted, including adoption in an interim period.  An entity should apply the amendments in this update on a modified retrospective basis through a cumulative effect adjustment directly to retained earnings as of the beginning of the period of adoption.  The Company has adopted this standard and it will not have an effect on its consolidated financial statements.

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Accumulated Other Comprehensive Income

9 Months Ended

Sep. 30, 2017

Accumulated Other Comprehensive Income [Abstract]

Accumulated Other Comprehensive Income

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, 2017
	Unrealized gains
	(losses) on
	available-for-sale
(dollars in thousands)	securities		Total
Beginning balance	$	1,381	$	1,381
Other comprehensive income before reclassifications, net of tax		540		540
Amounts reclassified from accumulated other comprehensive income, net of tax		-		-
Net current-period other comprehensive income		540		540
Ending balance	$	1,921	$	1,921

As of and for the three months ended September 30, 2017
	Unrealized gains
	(losses) on
	available-for-sale
(dollars in thousands)	securities		Total
Beginning balance	$	1,852	$	1,852
Other comprehensive income before reclassifications, net of tax		69		69
Amounts reclassified from accumulated other comprehensive income, net of tax		-		-
Net current-period other comprehensive income		69		69
Ending balance	$	1,921	$	1,921

As of and for the nine months ended September 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		1,275		1,275
Amounts reclassified from accumulated other comprehensive income, net of tax		(6)		(6)
Net current-period other comprehensive income		1,269		1,269
Ending balance	$	3,457	$	3,457

As of and for the three months ended September 30, 2016
	Unrealized gains
	(losses) on
	available-for-sale
(dollars in thousands)	securities		Total
Beginning balance	$	3,695	$	3,695
Other comprehensive loss before reclassifications, net of tax		(238)		(238)
Amounts reclassified from accumulated other comprehensive income, net of tax		-		-
Net current-period other comprehensive loss		(238)		(238)
Ending balance	$	3,457	$	3,457

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,
	2017		2016		2017		2016
Unrealized gains on AFS securities	$	-	$	-	$	-	$	9	Gain on sale of investment securities
		-		-		-		(3)	Provision for income taxes
Total reclassifications for the period	$	-	$	-	$	-	$	6	Net income

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Investment Securities

9 Months Ended

Sep. 30, 2017

Investment Securities [Abstract]

Investment Securities

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, 2017 and December 31, 2016 are summarized as follows:

			Gross		Gross
	Amortized		unrealized		unrealized		Fair
(dollars in thousands)	cost		gains		losses		value
September 30, 2017
Available-for-sale securities:
Agency - GSE	$	16,269	$	21	$	(77)	$	16,213
Obligations of states and political subdivisions		41,759		2,056		(80)		43,735
MBS - GSE residential		90,761		804		(294)		91,271
Total debt securities		148,789		2,881		(451)		151,219
Equity securities - financial services		294		482		-		776
Total available-for-sale securities	$	149,083	$	3,363	$	(451)	$	151,995

			Gross		Gross
	Amortized		unrealized		unrealized		Fair
(dollars in thousands)	cost		gains		losses		value
December 31, 2016
Available-for-sale securities:
Agency - GSE	$	18,362	$	58	$	(144)	$	18,276
Obligations of states and political subdivisions		38,648		1,803		(260)		40,191
MBS - GSE residential		70,639		851		(553)		70,937
Total debt securities		127,649		2,712		(957)		129,404
Equity securities - financial services		294		339		-		633
Total available-for-sale securities	$	127,943	$	3,051	$	(957)	$	130,037

The amortized cost and fair value of debt securities at September 30, 2017 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	$	4,004	$	4,007
Due after one year through five years		13,084		13,120
Due after five years through ten years		2,556		2,649
Due after ten years		38,384		40,172
Total debt securities		58,028		59,948
MBS - GSE residential		90,761		91,271
Total available-for-sale debt securities	$	148,789	$	151,219

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 investment 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 September 30, 2017 and December 31, 2016:  

	Less than 12 months				More than 12 months				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
(dollars in thousands)	value		losses		value		losses		value		losses
September 30, 2017
Agency - GSE	$	5,051	$	(29)	$	3,022	$	(48)	$	8,073	$	(77)
Obligations of states and political subdivisions		2,416		(41)		2,254		(39)		4,670		(80)
MBS - GSE residential		34,146		(208)		4,740		(86)		38,886		(294)
Total	$	41,613	$	(278)	$	10,016	$	(173)	$	51,629	$	(451)
Number of securities		29				9				38
December 31, 2016
Agency - GSE	$	6,032	$	(144)	$	-	$	-	$	6,032	$	(144)
Obligations of states and political subdivisions		8,690		(260)		-		-		8,690		(260)
MBS - GSE residential		41,111		(553)		-		-		41,111		(553)
Total	$	55,833	$	(957)	$	-	$	-	$	55,833	$	(957)
Number of securities		48				-				48

The Company had thirty-eight securities in an unrealized loss position at September 30, 2017, including eight agency securities, twenty-two mortgage-backed securities and eight municipal securities. The severity of these unrealized losses based on their underlying cost basis was as follows at September 30, 2017: 0.94% for agencies; 0.75% for total MBS-GSE; and 1.69% for municipals. In addition, three agency securities, threemortgage-backed securities and three municipal securities had been in an unrealized loss position in excess of 12 months. The changes in the prices on these securities 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 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 market value, including illiquidity.

The Company’s OTTI evaluation process also follows the guidance set forth in topics related to debt and equity 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 and equity securities.

For all security types, as of September 30, 2017, 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 no 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.

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Loans And Leases

9 Months Ended

Sep. 30, 2017

Loans And Leases [Abstract]

Loans And Leases

5.  Loans and leases

The classifications of loans and leases at September 30, 2017 and December 31, 2016 are summarized as follows:

(dollars in thousands)	September 30, 2017		December 31, 2016
Commercial and industrial	$	112,096	$	98,477
Commercial real estate:
Non-owner occupied		93,398		87,220
Owner occupied		109,598		113,104
Construction		6,123		3,987
Consumer:
Home equity installment		28,282		28,466
Home equity line of credit		53,177		51,609
Auto loans and leases		79,629		56,841
Other		5,784		13,301
Residential:
Real estate		138,709		134,475
Construction		8,315		10,496
Total		635,111		597,976
Less:
Allowance for loan losses		(9,356)		(9,364)
Unearned lease revenue		(644)		(482)
Loans and leases, net	$	625,111	$	588,130

Net deferred loan costs of $2.0 million and $1.8 millionhave been included in the carrying values of loans at September 30, 2017 and December 31, 2016, respectively.

Unearned lease revenue represents the difference between the lessor’s investment in the property and the gross investment in the lease.  Unearned revenue is accrued over the life of the lease using the effective interest method.

The Company services real estate loans for investors in the secondary mortgage market which are not included in the accompanying consolidated balance sheets.  The approximate unpaid principal balance of mortgages serviced amounted to $296.9 million as ofSeptember 30, 2017 and $285.2million as of December 31, 2016.  Mortgage servicing rights amounted to $1.3 million both as of September 30, 2017 and December 31, 2016, respectively.

Management is responsible for conducting the Company’s credit risk evaluation process, which includes credit risk grading of individual commercial and industrial and commercial real estate loans. Commercial and industrial and commercial real estate loans are assigned credit risk grades based on the Company’s assessment of conditions that affect the borrower’s ability to meet its contractual obligations under the loan agreement. That process includes reviewing borrowers’ current financial information, historical payment experience, credit documentation, public information and other information specific to each individual borrower. Upon review, the commercial loan credit risk grade is revised or reaffirmed as the case may be. The credit risk grades may be changed at any time management feels an upgrade or downgrade may be warranted.  The Company utilizes an external independent loan review firm that reviews and validates the credit risk program on at least an annual basis. Results of these reviews are presented to management and the board of directors. The loan review process complements and reinforces the risk identification and assessment decisions made by lenders and credit personnel, as well as the Company’s policies and procedures.

Non-accrual loans

The decision to place loans on non-accrual status is made on an individual basis after considering factors pertaining to each specific loan.  Commercial and industrial (C&I) and commercial real estate (CRE) loans are placed on non-accrual status when management has determined that payment of all contractual principal and interest is in doubt or the loan is past due 90 days or more as to principal and interest, unless well-secured and in the process of collection.  Consumer loans secured by real estate and residential mortgage loans are placed on non-accrual status at 120 days past due as to principal and interest and unsecured consumer loans are charged-off when the loan is 90 days or more past due as to principal and interest. The Company considers all non-accrual loans to be impaired loans.

Non-accrual loans, segregated by class, at September 30, 2017 and December 31, 2016, were as follows:

(dollars in thousands)	September 30, 2017		December 31, 2016
Commercial and industrial	$	14	$	11
Commercial real estate:
Non-owner occupied		584		1,407
Owner occupied		1,148		3,078
Construction		169		193
Consumer:
Home equity installment		15		31
Home equity line of credit		513		737
Auto loans and leases		-		25
Other		-		6
Residential:
Real estate		1,421		1,882
Total	$	3,864	$	7,370

Troubled Debt Restructuring

A modification of a loan constitutes a troubled debt restructuring (TDR) when a borrower is experiencing financial difficulty and the modification constitutes a concession.  The Company considers all TDRs to be impaired loans.  The Company offers various types of concessions when modifying a loan, however, forgiveness of principal is rarely granted.  C&I loans modified in a TDR often involve temporary interest-only payments, term extensions, and converting revolving credit lines to term loans.  Additional collateral, a co-borrower, or a guarantor is often requested.  CRE loans modified in a TDR can involve reducing the interest rate for the remaining term of the loan, extending the maturity date at an interest rate lower than the current market rate for new debt with similar risk, or substituting or adding a new borrower or guarantor.  Commercial real estate construction loans modified in a TDR may also involve extending the interest-only payment period.  Residential mortgage loans modified in a TDR are primarily comprised of loans where monthly payments are lowered to accommodate the borrowers’ financial needs for an extended period of time.  After the lowered monthly payment period ends, the borrower would revert back to paying principal and interest pursuant to the original terms with the maturity date adjusted accordingly.  Consumer loan modifications are typically not granted and therefore standard modification terms do not exist for loans of this type.

Loans modified in a TDR may or may not be placed on non-accrual status.  As of September 30, 2017, total TDRs amounted to $3.9  million, consisting of 15 loans (12 CRE loans, 1 C&I loan, 1 HELOC and 1 residential mortgage to 10 unrelated borrowers), of which two CRE loans, totaling $0.7 million, one HELOC, totaling $0.4 million, and one residential mortgage, totaling $0.9 million, were on non-accrual status.  The September 30, 2017 balance represented a $0.6 million increase over the December 31, 2016 balance, which amounted to $3.3 million consisting of 9 loans (6 CRE loans, 1 C&I loan, 1 HELOC and 1 residential mortgage to 6 unrelated borrowers), of which the HELOC, totaling $0.6 million, and the residential mortgage, totaling $0.9 million, were on non-accrual status.  This increase in TDRs was attributed to the addition of the six accruing TDRs in the category of CRE, totaling $1.0 million in the first nine months of 2017.  Of the TDRs outstanding as of September 30, 2017 and December 31, 2016, when modified, the concessions granted consisted of temporary interest-only payments, extensions of maturity date, or a reduction in the rate of interest to a below-market rate for a contractual period of time.  Other than the TDRs that were placed on non-accrual status, the TDRs were performing in accordance with their modified terms.

There were no loans modified in a TDR during the three months ended September 30, 2017 and 2016.  The following presents by class, information related to loans modified in a TDR:

	Loans modified as TDRs for the nine months ended:
(dollars in thousands)	September 30, 2017						September 30, 2016
			Recorded		Increase in			Recorded		Increase in
		Number	investment		allowance		Number	investment		allowance
		of	(as of		(as of		of	(as of		(as of
		contracts	period end)		period end)		contracts	period end)		period end)
Commercial real estate - non-owner occupied		1	$	119	$	4	-	$	-	$	-
Commercial real estate - owner occupied		5		926		187	-		-		-
Consumer home equity line of credit		-		-		-	1		650		105
Total		6	$	1,045	$	191	1	$	650	$	105

In the above table, the period end balance is inclusive of all partial pay downs and charge-offs since the modification date.  For all loans modified in a TDR, the pre-modification recorded investment was the same as the post-modification recorded investment.

The following presents by class, loans modified as a TDR that subsequently defaulted (i.e. 90 days or more past due following a modification) during the periods indicated:

Loans modified as a TDR within the previous twelve months that subsequently defaulted during the:
(dollars in thousands)	Nine months ended September 30, 2017				Nine months ended September 30, 2016
		Number of		Recorded		Number of		Recorded
		contracts		investment		contracts		investment
Commercial real estate - owner occupied			$	-		1	$	20

In the above table, the period end balances are inclusive of all partial pay downs and charge-offs since the modification date.

Loans modified in a TDR are closely monitored for delinquency as an early indicator of possible future default.  If loans modified in a TDR subsequently default, the Company evaluates the loan for possible further impairment. 

The allowance for loan losses (allowance) may be increased, adjustments may be made in the allocation of the allowance or partial charge-offs may be taken to further write-down the carrying value of the loan.  An allowance for impaired loans that have been modified in a TDR is measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate or the loan’s observable market price.  If the loan is collateral dependent, the estimated fair value of the collateral is used to establish the allowance.  As of September 30, 2017 and 2016, respectively, the allowance for impaired loans that have been modified in a TDR was $0.8 million and $0.4 million, respectively.

Past due loans

Loans are considered past due when the contractual principal and/or interest is not received by the due date.  An aging analysis of past due loans, segregated by class of loans, as of the period indicated is as follows (dollars in thousands):

														Recorded
					Past due									investment past
	30 - 59 Days		60 - 89 Days		90 days		Total				Total			due ≥ 90 days
September 30, 2017	past due		past due		or more(1)		past due		Current		loans (3)			and accruing
Commercial and industrial	$	56	$	116	$	14	$	186	$	111,910	$	112,096		$	-
Commercial real estate:
Non-owner occupied		528		658		584		1,770		91,628		93,398			-
Owner occupied		54		-		1,148		1,202		108,396		109,598			-
Construction		-		-		169		169		5,954		6,123			-
Consumer:
Home equity installment		156		26		15		197		28,085		28,282			-
Home equity line of credit		61		72		513		646		52,531		53,177			-
Auto loans and leases		181		102		-		283		78,702		78,985	(2)		-
Other		88		12		-		100		5,684		5,784			-
Residential:
Real estate		-		334		1,421		1,755		136,954		138,709			-
Construction		-		-		-		-		8,315		8,315			-
Total	$	1,124	$	1,320	$	3,864	$	6,308	$	628,159	$	634,467		$	-

(1)Includes $3.9 million of non-accrual loans.  (2) Net of unearned lease revenue of $0.6 million. (3) Includes net deferred loan costs of $2.0 million.

														Recorded
					Past due									investment past
	30 - 59 Days		60 - 89 Days		90 days		Total				Total			due ≥ 90 days
December 31, 2016	past due		past due		or more (1)		past due		Current		loans (3)			and accruing
Commercial and industrial	$	208	$	-	$	11	$	219	$	98,258	$	98,477		$	-
Commercial real estate:
Non-owner occupied		180		-		1,407		1,587		85,633		87,220			-
Owner occupied		13		776		3,078		3,867		109,237		113,104			-
Construction		-		-		193		193		3,794		3,987			-
Consumer:
Home equity installment		213		25		31		269		28,197		28,466			-
Home equity line of credit		-		-		737		737		50,872		51,609			-
Auto loans and leases		293		59		44		396		55,963		56,359	(2)		19
Other		37		2		6		45		13,256		13,301			-
Residential:
Real estate		14		421		1,882		2,317		132,158		134,475			-
Construction		-		-		-		-		10,496		10,496			-
Total	$	958	$	1,283	$	7,389	$	9,630	$	587,864	$	597,494		$	19

(1)Includes $7.4 million of non-accrual loans.  (2) Net of unearned lease revenueof $0.5 million.  (3) Includes net deferred loan costs of $1.8 million.

Impaired loans

A loan is considered impaired when, based on current information and events; it is probable that the Company will be unable to collect the scheduled payments in accordance with the contractual terms of the loan.  Factors considered in determining impairment include payment status, collateral value and the probability of collecting payments when due.  The significance of payment delays and/or shortfalls is determined on a case-by-case basis.  All circumstances surrounding the loan are taken into account.  Such factors include the length of the delinquency, the underlying reasons and the borrower’s prior payment record.  Impairment is measured on these loans on a loan-by-loan basis.  Impaired loans include non-accrual loans, TDRs and other loans deemed to be impaired based on the aforementioned factors.

At September 30, 2017, impaired loans consisted of accruing TDRs of $1.9 million, $3.9 million in non-accrual loans and $1.5 million in accruing impaired loans.  At December 31, 2016, impaired loans consisted of accruing TDRs of $1.8 million, $7.4 million in non-accrual loans and $2.2 million in accruing loans.  As of September 30, 2017, the non-accrual loans included four TDRs to three unrelated borrowers totaling $2.0 million compared with two TDRs totaling $1.5 million as of December 31, 2016.

Impaired loans, segregated by class, as of the period indicated are detailed below:

			Recorded		Recorded
	Unpaid		investment		investment		Total
	principal		with		with no		recorded		Related
(dollars in thousands)	balance		allowance		allowance		investment		allowance
September 30, 2017
Commercial and industrial	$	228	$	204	$	24	$	228	$	193
Commercial real estate:
Non-owner occupied		2,405		1,997		288		2,285		612
Owner occupied		2,769		2,452		254		2,706		464
Construction		392		-		169		169		-
Consumer:
Home equity installment		48		-		15		15		-
Home equity line of credit		809		81		432		513		53
Auto loans and leases		8		-		-		-		-
Other		-		-		-		-		-
Residential:
Real estate		1,439		1,158		263		1,421		317
Construction		-		-		-		-		-
Total	$	8,098	$	5,892	$	1,445	$	7,337	$	1,639

			Recorded		Recorded
	Unpaid		investment		investment		Total
	principal		with		with no		recorded		Related
(dollars in thousands)	balance		allowance		allowance		investment		allowance
December 31, 2016
Commercial and industrial	$	235	$	206	$	29	$	235	$	193
Commercial real estate:
Non-owner occupied		3,346		2,611		405		3,016		993
Owner occupied		5,363		4,351		876		5,227		1,389
Construction		416		-		193		193		-
Consumer:
Home equity installment		64		-		31		31		-
Home equity line of credit		778		650		87		737		167
Auto		25		25		-		25		3
Other		6		6		-		6		1
Residential:
Real estate		1,949		1,466		416		1,882		315
Construction		-		-		-		-		-
Total	$	12,182	$	9,315	$	2,037	$	11,352	$	3,061

The following table presents the average recorded investments in impaired loans and related amount of interest income recognized during the periods indicated below.  The average balances are calculated based on the quarter-end balances of impaired loans.  Payments received from non-accruing impaired loans are first applied against the outstanding principal balance, then to the recovery of any charged-off amounts.  Any excess is treated as a recovery of interest income.  Payments received from accruing impaired loans are applied to principal and interest, as contractually agreed upon.

	For the nine months ended
	September 30, 2017						September 30, 2016
					Cash basis						Cash basis
	Average		Interest		interest		Average		Interest		interest
	recorded		income		income		recorded		income		income
(dollars in thousands)	investment		recognized		recognized		investment		recognized		recognized
Commercial and industrial	$	232	$	7	$	-	$	502	$	12	$	-
Commercial real estate:
Non-owner occupied		3,054		114		-		5,030		93		-
Owner occupied		4,393		223		-		3,562		107		-
Construction		184		-		-		217		-		-
Consumer:
Home equity installment		19		-		-		119		3		-
Home equity line of credit		722		5		-		772		25		-
Auto		21		4		-		40		-		-
Other		4		1		-		6		-		-
Residential:
Real estate		1,428		77		-		750		4		-
Construction		-		-		-		-		-		-
Total	$	10,057	$	431	$	-	$	10,998	$	244	$	-

	For the three months ended
	September 30, 2017						September 30, 2016
					Cash basis						Cash basis
	Average		Interest		interest		Average		Interest		interest
	recorded		income		income		recorded		income		income
(dollars in thousands)	investment		recognized		recognized		investment		recognized		recognized
Commercial and industrial	$	223	$	3	$	-	$	255	$	3	$	-
Commercial real estate:
Non-owner occupied		2,588		52		-		3,336		47		-
Owner occupied		3,521		152		-		5,068		29		-
Construction		173		-		-		204		-		-
Consumer:
Home equity installment		15		-		-		51		-		-
Home equity line of credit		659		5		-		871		8		-
Auto		-		-		-		30		-		-
Other		3		-		-		6		-		-
Residential:
Real estate		1,421		54		-		770		2		-
Construction		-		-		-		-		-		-
Total	$	8,603	$	266	$	-	$	10,591	$	89	$	-

Credit Quality Indicators

Commercial and industrial and commercial real estate

The Company utilizes a loan grading system and assigns a credit risk grade to its loans in the C&I and CRE portfolios.  The grading system provides a means to measure portfolio quality and aids in the monitoring of the credit quality of the overall loan portfolio.  The credit risk grades are arrived at using a risk rating matrix to assign a grade to each of the loans in the C&I and CRE portfolios.

The following is a description of each risk rating category the Company uses to classify each of its C&I and CRE loans:

Pass

Loans in this category have an acceptable level of risk and are graded in a range of one to five.  Secured loans generally have good collateral coverage.  Current financial statements reflect acceptable balance sheet ratios, sales and earnings trends.  Management is considered to be competent, and a reasonable succession plan is evident.  Payment experience on the loans has been good with minor or no delinquency experience.  Loans with a grade of one are of the highest quality in the range.  Those graded five are of marginally acceptable quality.

Special Mention

Loans in this category are graded a six and may be protected but are potentially weak.  They constitute a credit risk to the Company, but have not yet reached the point of adverse classification.  Some of the following conditions may exist: little or no collateral coverage; lack of current financial information; delinquency problems; highly leveraged; available financial information reflects poor balance sheet ratios and profit and loss statements reflect uncertain trends; and document exceptions.  Cash flow may not be sufficient to support total debt service requirements.

Substandard

Loans in this category are graded a seven and have a well-defined weakness which may jeopardize the ultimate collectability of the debt.  The collateral pledged may be lacking in quality or quantity.  Financial statements may indicate insufficient cash flow to service the debt; and/or do not reflect a sound net worth.  The payment history indicates chronic delinquency problems.  Management is considered to be weak.  There is a distinct possibility that the Company may sustain a loss.  All loans on non-accrual are rated substandard.  Other loans that are included in the substandard category can be accruing, as well as loans that are current or past due.  Loans 90 days or more past due, unless otherwise fully supported, are classified substandard. Also, borrowers that are bankrupt or have loans categorized as TDRs can be graded substandard.

Doubtful

Loans in this category are graded an eight and have a better than 50% possibility of the Company sustaining a loss, but the loss cannot be determined because of specific reasonable factors which may strengthen credit in the near-term.  Many of the weaknesses present in a substandard loan exist.  Liquidation of collateral, if any, is likely.  Any loan graded lower than an eight is considered to be uncollectible and charged-off.

Consumer and residential

The consumer and residential loan segments are regarded as homogeneous loan pools and as such are not risk rated.  For these portfolios, the Company utilizes payment activity, history and recency of payment in assessing performance.  Non-performing loans are considered to be loans past due 90 days or more and accruing and non-accrual loans.  All loans not classified as non-performing are considered performing.

The following table presents loans including $2.0 million and $1.8 million of deferred costs, segregated by class, categorized into the appropriate credit quality indicator category as of September 30, 2017 and December 31, 2016, respectively:

Commercial credit exposure

Credit risk profile by creditworthiness category

	September 30, 2017
(dollars in thousands)	Pass		Special mention		Substandard		Doubtful		Total
Commercial and industrial	$	110,839	$	535	$	722	$	-	$	112,096
Commercial real estate - non-owner occupied		86,159		817		6,422		-		93,398
Commercial real estate - owner occupied		103,288		2,692		3,618		-		109,598
Commercial real estate - construction		5,954		-		169		-		6,123
Total commercial	$	306,240	$	4,044	$	10,931	$	-	$	321,215

Consumer & Mortgage lending credit exposure

Credit risk profile based on payment activity

	September 30, 2017
(dollars in thousands)	Performing		Non-performing		Total
Consumer
Home equity installment	$	28,267	$	15	$	28,282
Home equity line of credit		52,664		513		53,177
Auto loans and leases (1)		78,985		-		78,985
Other		5,784		-		5,784
Total consumer	$	165,700	$	528	$	166,228
Residential
Real estate	$	137,288	$	1,421	$	138,709
Construction		8,315		-		8,315
Total residential	$	145,603	$	1,421	$	147,024
Total consumer & residential	$	311,303	$	1,949	$	313,252

(1)Net of unearned lease revenue of $0.6 million.

Commercial credit exposure

Credit risk profile by creditworthiness category

	December 31, 2016
(dollars in thousands)	Pass		Special mention		Substandard		Doubtful		Total
Commercial and industrial	$	97,308	$	479	$	690	$	-	$	98,477
Commercial real estate - non-owner occupied		83,962		1,811		7,591		-		93,364
Commercial real estate - owner occupied		99,981		1,075		5,904		-		106,960
Commercial real estate - construction		3,794		-		193		-		3,987
Total commercial	$	285,045	$	3,365	$	14,378	$	-	$	302,788

Consumer & Mortgage lending credit exposure

Credit risk profile based on payment activity

	December 31, 2016
(dollars in thousands)	Performing		Non-performing		Total
Consumer
Home equity installment	$	28,435	$	31	$	28,466
Home equity line of credit		50,872		737		51,609
Auto loans and leases (2)		56,315		44		56,359
Other		13,295		6		13,301
Total consumer	$	148,917	$	818	$	149,735
Residential
Real estate	$	132,593	$	1,882	$	134,475
Construction		10,496		-		10,496
Total residential	$	143,089	$	1,882	$	144,971
Total consumer & residential	$	292,006	$	2,700	$	294,706

(2)Net of unearned lease revenue of $0.5 million.

Allowance for loan losses

Management continually evaluates the credit quality of the Company’s loan portfolio and performs a formal review of the adequacy of the allowance on a quarterly basis.  The allowance reflects management’s best estimate of the amount of credit losses in the loan portfolio.  Management’s judgment is based on the evaluation of individual loans, past experience, the assessment of current economic conditions and other relevant factors including the amounts and timing of cash flows expected to be received on impaired loans.  Those estimates may be susceptible to significant change.  Loan losses are charged directly against the allowance when loans are deemed to be uncollectible.  Recoveries from previously charged-off loans are added to the allowance when received.

Management applies two primary components during the loan review process to determine proper allowance levels.  The two components are a specific loan loss allocation for loans that are deemed impaired and a general loan loss allocation for those loans not specifically allocated.  The methodology to analyze the adequacy of the allowance for loan losses is as follows:

§ identification of specific impaired loans by loan category;

§ identification of specific loans that are not impaired, but have an identified potential for loss;

§ calculation of specific allowances where required for the impaired loans based on collateral and other objective and quantifiable evidence;

§ determination of loans with similar credit characteristics within each class of the loan portfolio segment and eliminating the impaired loans;

§ application of historical loss percentages (trailing twelve-quarter average) to pools to determine the allowance allocation;

§ application of qualitative factor adjustment percentages to historical losses for trends or changes in the loan portfolio.

§ Qualitative factor adjustments include:

o levels of and trends in delinquencies and non-accrual loans;

o levels of and trends in charge-offs and recoveries;

o trends in volume and terms of loans;

o changes in risk selection and underwriting standards;

o changes in lending policies and legal and regulatory requirements;

o experience, ability and depth of lending management;

o national and local economic trends and conditions; and

o changes in credit concentrations.

Allocation of the allowance for different categories of loans is based on the methodology as explained above.  A key element of the methodology to determine the allowance is the Company’s credit risk evaluation process, which includes credit risk grading of individual C&I and CRE loans.  C&I and CRE loans are assigned credit risk grades based on the Company’s assessment of conditions that affect the borrower’s ability to meet its contractual obligations under the loan agreement.  That process includes reviewing borrowers’ current financial information, historical payment experience, credit documentation, public information and other information specific to each individual borrower.  Upon review, the commercial loan credit risk grade is revised or reaffirmed as the case may be.  The credit risk grades may be changed at any time management feels an upgrade or downgrade may be warranted.  The credit risk grades for the C&I and CRE loan portfolios are taken into account in the reserve methodology and loss factors are applied based upon the credit risk grades.  The loss factors applied are based upon the Company’s historical experience as well as what we believe to be best practices and common industry standards.  Historical experience reveals there is a direct correlation between the credit risk grades and loan charge-offs.  The changes in allocations in the C&I and CRE loan portfolio from period to period are based upon the credit risk grading system and from periodic reviews of the loan portfolio.  An unallocated component is maintained to cover uncertainties that could affect management’s estimate of probable losses.  The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies.

Each quarter, management performs an assessment of the allowance.  The Company’s Special Assets Committee meets monthly and the applicable lenders discuss each relationship under review and reach a consensus on the appropriate estimated loss amount, if applicable, based on current accounting guidance.  The Special Assets Committee’s focus is on ensuring the pertinent facts are considered regarding not only loans considered for specific reserves, but also the collectability of loans that may be past due in payment.  The assessment process also includes the review of all loans on a non-accruing basis as well as a review of certain loans to which the lenders or the Company’s Credit Administration function have assigned a criticized or classified risk rating.

The Company’s policy is to charge-off unsecured consumer loans when they become 90 days or more past due as to principal and interest.  In the other portfolio segments, amounts are charged-off at the point in time when the Company deems the balance, or a portion thereof, to be uncollectible.

Information related to the change in the allowance and the Company’s recorded investment in loans by portfolio segment as of the period indicated is as follows: 

As of and for the nine months ended September 30, 2017
	Commercial &		Commercial					Residential
(dollars in thousands)	industrial		real estate		Consumer			real estate		Unallocated		Total
Allowance for Loan Losses:
Beginning balance	$	1,075	$	4,706	$	1,834		$	1,622	$	127	$	9,364
Charge-offs		(76)		(416)		(505)			(38)		-		(1,035)
Recoveries		5		44		53			-		-		102
Provision		395		(232)		587			215		(40)		925
Ending balance	$	1,399	$	4,102	$	1,969		$	1,799	$	87	$	9,356
Ending balance: individually evaluated for impairment	$	193	$	1,076	$	53		$	317	$	-	$	1,639
Ending balance: collectively evaluated for impairment	$	1,206	$	3,026	$	1,916		$	1,482	$	87	$	7,717
Loans Receivables:
Ending balance (2)	$	112,096	$	209,119	$	166,228	(1)	$	147,024	$	-	$	634,467
Ending balance: individually evaluated for impairment	$	228	$	5,160	$	528		$	1,421	$	-	$	7,337
Ending balance: collectively evaluated for impairment	$	111,868	$	203,959	$	165,700		$	145,603	$	-	$	627,130

(1) Net of unearned lease revenue of $0.6 million.(2)Includes $2.0 million of net deferred loan costs.

As of and for the three months ended September 30, 2017
	Commercial &		Commercial				Residential
(dollars in thousands)	industrial		real estate		Consumer		real estate		Unallocated		Total
Allowance for Loan Losses:
Beginning balance	$	1,383	$	4,510	$	1,939	$	1,511	$	63	$	9,406
Charge-offs		(46)		(48)		(345)		-		-		(439)
Recoveries		2		3		9		-		-		14
Provision		60		(363)		366		288		24		375
Ending balance	$	1,399	$	4,102	$	1,969	$	1,799	$	87	$	9,356

As of and for the year ended December 31, 2016
	Commercial &		Commercial					Residential
(dollars in thousands)	industrial		real estate		Consumer			real estate		Unallocated		Total
Allowance for Loan Losses:
Beginning balance	$	1,336	$	5,014	$	1,533		$	1,407	$	237	$	9,527
Charge-offs		(224)		(592)		(504)			(60)		-		(1,380)
Recoveries		55		37		100			-		-		192
Provision		(92)		247		705			275		(110)		1,025
Ending balance	$	1,075	$	4,706	$	1,834		$	1,622	$	127	$	9,364
Ending balance: individually evaluated for impairment	$	193	$	2,382	$	171		$	315	$	-	$	3,061
Ending balance: collectively evaluated for impairment	$	882	$	2,324	$	1,663		$	1,307	$	127	$	6,303
Loans Receivables:
Ending balance (2)	$	98,477	$	204,311	$	149,735	(1)	$	144,971	$	-	$	597,494
Ending balance: individually evaluated for impairment	$	235	$	8,436	$	799		$	1,882	$	-	$	11,352
Ending balance: collectively evaluated for impairment	$	98,242	$	195,875	$	148,936		$	143,089	$	-	$	586,142

(1)Net of unearned lease revenue of $0.5 million.  (2) Includes $1.8 million of net deferred loan costs.

As of and for the nine months ended September 30, 2016
	Commercial &		Commercial				Residential
(dollars in thousands)	industrial		real estate		Consumer		real estate		Unallocated		Total
Allowance for Loan Losses:
Beginning balance	$	1,336	$	5,014	$	1,533	$	1,407	$	237	$	9,527
Charge-offs		(199)		(526)		(356)		(60)		-		(1,141)
Recoveries		39		36		85		-		-		160
Provision		(45)		284		526		10		(125)		650
Ending balance	$	1,131	$	4,808	$	1,788	$	1,357	$	112	$	9,196

As of and for the three months ended September 30, 2016
	Commercial &		Commercial				Residential
(dollars in thousands)	industrial		real estate		Consumer		real estate		Unallocated		Total
Allowance for Loan Losses:
Beginning balance	$	1,231	$	4,880	$	1,692	$	1,365	$	39	$	9,207
Charge-offs		(30)		(183)		(91)		-		-		(304)
Recoveries		18		3		47		-		-		68
Provision		(88)		108		140		(8)		73		225
Ending balance	$	1,131	$	4,808	$	1,788	$	1,357	$	112	$	9,196

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Earnings Per Share

9 Months Ended

Sep. 30, 2017

Earnings Per Share [Abstract]

Earnings Per Share

6.  Earnings per share

Basic earnings per share (EPS) is computed by dividing net income available to common shareholders by the weighted-average number of common shares outstanding for the period.  Diluted EPS is computed in the same manner as basic EPS but also reflects the potential dilution that could occur from the grant of stock-based compensation awards.  The Company maintains two active share-based compensation plans that may generate additional potentially dilutive common shares.  For granted and unexercised stock options and stock-settled stock appreciation rights (SSARs), dilution would occur if Company-issued stock options or SSARs were exercised and converted into common stock.As of the three and nine months ended September 30, 2017, there were 16,707 and 12,237 potentially dilutive shares related to issued and unexercised stock options and SSARs compared to 2,925 and 2,592 for the same 2016 periods, respectively.  For restricted stock, dilution would occur from the Company’s previously granted but unvested shares.  There were 9,504 and 8,130 potentially dilutive shares related to unvested restricted share grants as of the three and nine months ended September 30, 2017 compared to 8,747 and 6,482 for the three and nine months ended September 30, 2016, respectively.

In the computation of diluted EPS, the Company uses the treasury stock method to determine the dilutive effect of its granted but unexercised stock options and SSARs and unvested restricted stock.  Under the treasury stock method, the assumed proceeds, as defined, received from shares issued in a hypothetical stock option exercise or restricted stock grant, are assumed to be used to purchase treasury stock.  Proceeds include: amounts received from the exercise of outstanding stock options and compensation cost for future service that the Company has not yet recognized in earnings.  The Company does not consider awards from share-based grants in the computation of basic EPS.

The following table illustrates the data used in computing basic and diluted EPS for the periods indicated:

	Three months ended September 30,				Nine months ended September 30,
	2017		2016		2017		2016
(dollars in thousands except per share data)
Basic EPS:
Net income available to common shareholders	$	2,226	$	2,035	$	6,389	$	5,664
Weighted-average common shares outstanding		3,712,297		3,680,707		3,704,859		3,679,104
Basic EPS	$	0.60	$	0.55	$	1.72	$	1.54
Diluted EPS:
Net income available to common shareholders	$	2,226	$	2,035	$	6,389	$	5,664
Weighted-average common shares outstanding		3,712,297		3,680,707		3,704,859		3,679,104
Potentially dilutive common shares		26,211		11,672		20,367		9,074
Weighted-average common and potentially dilutive shares outstanding		3,738,508		3,692,379		3,725,226		3,688,178
Diluted EPS	$	0.60	$	0.55	$	1.72	$	1.54

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Stock Plans

9 Months Ended

Sep. 30, 2017

Stock Plans [Abstract]

Stock Plans

7.  Stock plans

The Company has two stock-based compensation plans (the stock compensation plans) from which it can grant stock-based compensation awards, and applies the fair value method of accounting for stock-based compensation provided under current accounting guidance.  The guidelines require the cost of share-based payment transactions (including those with employees and non-employees) be recognized in the financial statements.  The Company’s stock compensation plans were shareholder-approved and permit the grant of share-based compensation awards to its employees and directors.  The Company believes that the stock-based compensation plans will advance the development, growth and financial condition of the Company by providing incentives through participation in the appreciation in the value of the Company’s common stock.  In return, the Company hopes to secure, retain and motivate the employees and directors who are responsible for the operation and the management of the affairs of the Company by aligning the interest of its employees and directors with the interest of its shareholders.  In the stock compensation plans, employees and directors are eligible to be awarded stock-based compensation grants which can consist of stock options (qualified and non-qualified), stock appreciation rights (SARs) and restricted stock.

At the 2012 annual shareholders’ meeting, the Company’s shareholders approved and the Company adopted the 2012 Omnibus Stock Incentive Plan and the 2012 Director Stock Incentive Plan (collectively, the 2012 stock incentive plans).  The 2012 stock incentive plans replaced both the expired 2000 Independent Directors Stock Option Plan and the 2000 Stock Incentive Plan (collectively, the 2000 stock incentive plans).  Unless terminated by the Company’s board of directors, the 2012 stock incentive plans will expire on, and no stock-based awards shall be granted after the year 2022.

In each of the 2012 stock incentive plans, the Company has reserved 750,000 shares of its no-par common stock for future issuance.  The Company recognizes share-based compensation expense over the requisite service or vesting period.  During 2015, the Company created a Long-Term Incentive Plan (LTIP) that awards restricted stock and stock-settled stock appreciation rights (SSARs) to senior officers based on the attainment of performance goals.  The service requirement is the participant’s continued employment throughout the LTIP with a three-year vesting period.  The restricted stock has a two-year post vesting holding period requirement. The SSAR awards have a ten year term from the date of each grant.  The Company granted restricted stock and SSARs in February 2016 based on 2015 performance and in February 2017 based on 2016 performance.

The following table summarizes the weighted-average fair value and vesting of restricted stock grants awarded during the periods ended September 30, 2017 and 2016 under the 2012 stock incentive plans:

	September 30, 2017				September 30, 2016
			Weighted-				Weighted-
			average				average
	Shares		grant date		Shares		grant date
	granted		fair value		granted		fair value
Director plan	8,400	(2)	$	26.17	8,400	(1)	$	21.60
Omnibus plan	4,749	(3)		23.93	4,734	(3)		19.48
Omnibus plan	75	(1)		26.17	75	(1)		21.00
Total	13,224		$	25.36	13,209		$	20.84

(1) Vest after 1 year  (2) Vest after 2 years – 50% each year(3)Vest after 3 years – 33% each year

The fair value of the 4,749 shares granted on February 7, 2017 was calculated using the grant date stock price with a discount valuation.  The Chaffe model was used to calculate the discount. Since the shares vest over three years and then have a further two-year holding period, the historical volatility of the five years prior to the issue date was used to estimate volatility.  The five year treasury yield was used as the interest rate. The Company does pay a dividend, but since the shareholder will receive the dividends during vesting and the post-vest restriction period, no dividend yield was used in the calculation as not to inflate the discount.  The grant date stock price was $26.17 and the discount of 8.548% was calculated using an interest rate of 1.841% and a 5 year historical volatility of 18.556%.

A summary of the status of the Company’s non-vested restricted stock as of and changes during the period indicated are presented in the following table:

	2012 Stock incentive plans
	Director	Omnibus	Total		Weighted- average grant date fair value
Non-vested balance at December 31, 2016	8,400	13,562	21,962	$	20.31
Granted	8,400	4,824	13,224		25.36
Forfeited	-	-	-
Vested	(8,400)	(6,082)	(14,482)		20.47
Non-vested balance at September 30, 2017	8,400	12,304	20,704	$	23.59

The Company granted 24,346 SSARs under the Omnibus Plan on February 7, 2017.  The Company estimated the fair value of SSARs using the Black-Scholes-Merton valuation model on the grant date.  The Company used the following assumptions: the risk-free interest rate is the rate equivalent to the expected term of the option interpolated from the U.S. Treasury Yield Curve on the valuation date and historical volatility is calculated by taking the standard deviation of historical returns using weekly and monthly data.  The fair value of these SSARs was $5.06 per share, based on a risk-free interest rate of 2.386%, a dividend yield of 3.110% and a volatility of 23.434% using an expected term of ten years.

A summary of the status of the Company’s SSARs as of and changes during the period indicated are presented in the following table:

	Awards		Weighted-average grant date fair value	Weighted-average remaining contractual term (years)
Outstanding December 31, 2016	29,014	$	3.48	9.1
Granted	24,346		5.06	9.3
Exercised	-		-
Forfeited	-		-
Outstanding September 30, 2017	53,360	$	4.20	8.8

Of the SSARs outstanding at September 30, 2017, 9,668 vested and were exercisable. SSARs vest over a three year period – 33% per year.

Share-based compensation expense is included as a component of salaries and employee benefits in the consolidated statements of income.  The following tables illustrate stock-based compensation expense recognized on non-vested equity awards during the three and nine months ended September 30, 2017 and 2016 and the unrecognized stock-based compensation expense as of September 30, 2017:

		Three months ended			Nine months ended
		September 30,			September 30,
(dollars in thousands)	2017		2016		2017			2016
Stock-based compensation expense:
Director stock incentive plan	$	28	$	45	$	89	$	129
Omnibus stock incentive plan		49		36		144		104
Employee stock purchase plan		-		-		23		15
Total stock-based compensation expense	$	77	$	81	$	256	$	248

In addition, during the three and nine months ended September 30, 2017 the Company accrued $54 thousand and $163 thousand, respectively, in stock-based compensation expense for restricted stock and SSARs to be awarded under the Omnibus Plan.  The Company accrued $51 thousand and $137 thousand, respectively, in stock-based compensation expense during the three and nine months ended September 30, 2016.

	As of
(dollars in thousands)	September 30, 2017
Unrecognized stock-based compensation expense:
Director plan	$	146
Omnibus plan		330
Total unrecognized stock-based compensation expense	$	476

The unrecognized stock-based compensation expense as of September 30, 2017 will be recognized ratably over the periods ended January 2019 and January 2020 for the Director Plan and the Omnibus Plan, respectively.

Transactions under the Company’s stock option plan for the nine months ended September 30, 2017 are presented in the following table:

	Options		Weighted-average exercise price	Weighted-average remaining contractual term (years)
Outstanding and exercisable, December 31, 2016	22,500	$	19.12	1.0
Granted	-		-
Exercised	(17,250)		19.27
Forfeited	-		-
Outstanding and exercisable, September 30, 2017	5,250	$	18.62	0.3

During the first nine months of 2017, there were 17,250 stock options exercised at a price of $19.27 per share.  The intrinsic value of these stock options was $64,055.  The tax deduction realized from the exercise of these options was $257,492 resulting in a tax benefit of $87,547.  During the first nine months of 2016, there were 750 stock options exercised at a price of $18.50 per share.  The intrinsic value of these stock options was $2,585 and the tax deduction realized from the exercise of these options was $2,375 resulting in a tax benefit of $808.  The Company has not issued stock options since 2008.

In addition to the 2012 stock incentive plans, the Company established the 2002 Employee Stock Purchase Plan (the ESPP) and reserved 165,000 shares of its un-issued capital stock for issuance under the plan.  The ESPP was designed to promote broad-based employee ownership of the Company’s stock and to motivate employees to improve job performance and enhance the financial results of the Company.  Under the ESPP, participation is voluntary whereby employees use automatic payroll withholdings to purchase the Company’s capital stock at a discounted price based on the fair market value of the capital stock as measured on either the commencement or termination dates, as defined.  As of September 30, 2017, 69,701 shares have been issued under the ESPP.  The ESPP is considered a compensatory plan and is required to comply with the provisions of current accounting guidance.  The Company recognizes compensation expense on its ESPP on the date the shares are purchased and it is included as a component of salaries and employee benefits in the consolidated statements of income.

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Fair Value Measurements

9 Months Ended

Sep. 30, 2017

Fair Value Measurements [Abstract]

Fair Value Measurements

8.  Fair value measurements

The accounting guidelines establish a framework for measuring and disclosing information about fair value measurements.  The guidelines of fair value reporting instituted a valuation hierarchy for disclosure of the inputs used to measure fair value.  This hierarchy prioritizes the inputs into three broad levels as follows:

Level 1 - inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities; 

Level 2 - inputs are quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; or inputs that are observable for the asset or liability, either directly or indirectly through market corroboration, for substantially the full term of the financial instrument;

Level 3 - inputs are unobservable and are based on the Company’s own assumptions to measure assets and liabilities at fair value.  Level 3 pricing for securities may also include unobservable inputs based upon broker-traded transactions.

A financial asset or liability’s classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement.

The Company uses fair value to measure certain assets and, if necessary, liabilities on a recurring basis when fair value is the primary measure for accounting.  Thus, the Company uses fair value for AFS securities.  Fair value is used on a non-recurring basis to measure certain assets when adjusting carrying values to market values, such as impaired loans, other real estate owned (ORE) and other repossessed assets.

The following table represents the carrying amount and estimated fair value of the Company’s financial instruments as of the periods indicated:

September 30, 2017
					Quoted prices		Significant		Significant
					in active		other		other
	Carrying		Estimated		markets		observable inputs		unobservable inputs
(dollars in thousands)	amount		fair value		(Level 1)		(Level 2)		(Level 3)
Financial assets:
Cash and cash equivalents	$	41,881	$	41,881	$	41,881	$	-	$	-
Available-for-sale securities		151,995		151,995		776		151,219		-
FHLB stock		2,543		2,543		-		2,543		-
Loans and leases, net		625,111		623,567		-		-		623,567
Loans held-for-sale		1,629		1,662		-		1,662		-
Accrued interest receivable		2,769		2,769		-		2,769		-
Financial liabilities:
Deposits with no stated maturities		640,173		640,173		-		640,173		-
Time deposits		108,404		107,564		-		107,564		-
Short-term borrowings		12,920		12,920		-		12,920		-
FHLB advances		23,704		23,617		-		23,617		-
Accrued interest payable		319		319		-		319		-

December 31, 2016
					Quoted prices		Significant		Significant
					in active		other		other
	Carrying		Estimated		markets		observable inputs		unobservable inputs
(dollars in thousands)	amount		fair value		(Level 1)		(Level 2)		(Level 3)
Financial assets:
Cash and cash equivalents	$	25,843	$	25,843	$	25,843	$	-	$	-
Available-for-sale securities		130,037		130,037		633		129,404		-
FHLB stock		2,606		2,606		-		2,606		-
Loans and leases, net		588,130		590,688		-		-		590,688
Loans held-for-sale		2,854		2,907		-		2,907		-
Accrued interest receivable		2,246		2,246		-		2,246		-
Financial liabilities:
Deposits with no stated maturities		610,706		610,706		-		610,706		-
Time deposits		92,753		91,969		-		91,969		-
Short-term borrowings		4,223		4,223		-		4,223		-
Accrued interest payable		181		181		-		181		-

The carrying value of short-term financial instruments, as listed below, approximates their fair value.  These instruments generally have limited credit exposure, no stated or short-term maturities, carry interest rates that approximate market and generally are recorded at amounts that are payable on demand :

· Cash and cash equivalents;

· Non-interest bearing deposit accounts;

· Savings, interest-bearing checking and money market accounts and

· Short-term borrowings.

Securities:  Fair values on investment securities are determined by prices provided by a third-party vendor, who is a provider of financial market data, analytics and related services to financial institutions. 

Loans and leases:  The fair value of loans is estimated by the net present value of the future expected cash flows discounted at current offering rates for similar loans.  Current offering rates consider, among other things, credit risk.  The carrying value that fair value is compared to is net of the allowance for loan losses and since there is significant judgment included in evaluating credit quality, loans are classified within Level 3 of the fair value hierarchy.  The net carrying value of loans acquired through the Wayne Bank branch acquisition approximates the fair value of the loans.

Loans held-for-sale:  The fair value of loans held-for-sale is estimated using rates currently offered for similar loans and is typically obtained from the Federal National Mortgage Association (FNMA) or the Federal Home Loan Bank of Pittsburgh (FHLB).

Certificates of deposit:  The fair value of certificates of deposit is based on discounted cash flows using rates which approximate market rates for deposits of similar maturities. The fair value of certificates of deposit acquired through the Wayne Bank branch acquisition represents the estimated fair value of these deposits.

FHLB advances:  Fair value is estimated using the rates currently offered for similar borrowings.

The following tables illustrate the financial instruments measured at fair value on a recurring basis segregated by hierarchy fair value levels as of the periods indicated:

			Quoted prices
			in active		Significant other		Significant other
	Total carrying value		markets		observable inputs		unobservable inputs
(dollars in thousands)	September 30, 2017		(Level 1)		(Level 2)		(Level 3)
Available-for-sale securities:
Agency - GSE	$	16,213	$	-	$	16,213	$	-
Obligations of states and political subdivisions		43,735		-		43,735		-
MBS - GSE residential		91,271		-		91,271		-
Equity securities - financial services		776		776		-		-
Total available-for-sale securities	$	151,995	$	776	$	151,219	$	-

			Quoted prices
			in active		Significant other		Significant other
	Total carrying value		markets		observable inputs		unobservable inputs
(dollars in thousands)	December 31, 2016		(Level 1)		(Level 2)		(Level 3)
Available-for-sale securities:
Agency - GSE	$	18,276	$	-	$	18,276	$	-
Obligations of states and political subdivisions		40,191		-		40,191		-
MBS - GSE residential		70,937		-		70,937		-
Equity securities - financial services		633		633		-		-
Total available-for-sale securities	$	130,037	$	633	$	129,404	$	-

Equity securities in the AFS portfolio are measured at fair value using quoted market prices for identical assets and are classified within Level 1 of the valuation hierarchy.  Debt securities in the AFS portfolio are measured at fair value using market quotations provided by a third-party vendor, who is a provider of financial market data, analytics and related services to financial institutions.  Assets classified as Level 2 use valuation techniques that are common to bond valuations.  That is, in active markets whereby bonds of similar characteristics frequently trade, quotes for similar assets are obtained.  For the periods ending September 30, 2017 and December 31, 2016, there were no transfers to or from Level 1 and Level 2 fair value measurements for financial assets measured on a recurring basis.

There were no changes in Level 3 financial instruments measured at fair value on a recurring basis as of and for the periods ending September 30, 2017 and December 31, 2016, respectively. 

The following table illustrates the financial instruments newlymeasured at fair value on a non-recurring basis segregated by hierarchy fair value levels as of the periods indicated:

			Quoted prices in		Significant other		Significant other
	Total carrying value		active markets		observable inputs		unobservable inputs
(dollars in thousands)	at September 30, 2017		(Level 1)		(Level 2)		(Level 3)
Impaired loans	$	4,253	$	-	$	-	$	4,253
Other real estate owned		764		-		-		764
Total	$	5,017	$	-	$	-	$	5,017

			Quoted prices in		Significant other		Significant other
	Total carrying value		active markets		observable inputs		unobservable inputs
(dollars in thousands)	at December 31, 2016		(Level 1)		(Level 2)		(Level 3)
Impaired loans	$	6,254	$	-	$	-	$	6,254
Other real estate owned		872		-		-		872
Total	$	7,126	$	-	$	-	$	7,126

From time-to-time, the Company may be required to record at fair value financial instruments on a non-recurring basis, such as impaired loans, ORE and other repossessed assets.  These non-recurring fair value adjustments involve the application of lower-of-cost-or-market accounting on write downs of individual assets.

The following describes valuation methodologies used for financial instruments measured at fair value on a non-recurring basis.

Impaired loans that are collateral dependent are written down to fair value through the establishment of specific reserves, a component of the allowance for loan losses, and as such are carried at the lower of net recorded investment or the estimated fair value.

Estimates of fair value of the collateral are determined based on a variety of information, including available valuations from certified appraisers for similar assets, present value of discounted cash flows and inputs that are estimated based on commonly used and generally accepted industry liquidation advance rates and estimates and assumptions developed by management.

Valuation techniques for impaired loans are typically determined through independent appraisals of the underlying collateral or may be determined through present value of discounted cash flows.  Both techniques include various Level 3 inputs which are not identifiable.  The valuation technique may be adjusted by management for estimated liquidation expenses and qualitative factors such as economic conditions.  If real estate is not the primary source of repayment, present value of discounted cash flows and estimates using generally accepted industry liquidation advance rates and other factors may be utilized to determine fair value.

At September 30, 2017 and  December 31, 2016, the range of liquidation expenses and other valuation adjustments applied to impaired loans ranged from -20.54% to -53.00% and from -22.72% to -57.49% respectively.  The weighted-average of liquidation expenses and other valuation adjustments applied to impaired loans amounted to -30.71% and -32.47% as of September 30, 2017 and December 31, 2016, respectively.  Due to the multitude of assumptions, many of which are subjective in nature, and the varying inputs and techniques used to determine fair value, the Company recognizes that valuations could differ across a wide spectrum of techniques employed.  Accordingly, fair value estimates for impaired loans are classified as Level 3.

For ORE, fair value is generally determined through independent appraisals of the underlying properties which generally include various Level 3 inputs which are not identifiable.  Appraisals form the basis for determining the net realizable value from these properties.  Net realizable value is the result of the appraised value less certain costs or discounts associated with liquidation which occurs in the normal course of business.  Management’s assumptions may include consideration of the location and occupancy of the property, along with current economic conditions.  Subsequently, as these properties are actively marketed, the estimated fair values may be periodically adjusted through incremental subsequent write-downs.  These write-downs usually reflect decreases in estimated values resulting from sales price observations as well as changing economic and market conditions.  At September 30, 2017 and December 31, 2016, the discounts applied to the appraised values of ORE ranged from -17.95% to -99.00% and-21.74% to -99.00%, respectively.  As of September 30, 2017 and December 31, 2016, the weighted-average of discount to the appraisal values of ORE amounted to -28.19% and-32.38%, respectively.

As of September 30, 2017, the Company had one automobile in other repossessed assets with a balance of $4 thousand.  As of December 31, 2016, the Company had one automobile in other repossessed assets with a balance of $8 thousand.  There were no adjustments to the carrying value of these automobiles.

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Acquisition

9 Months Ended

Sep. 30, 2017

Acquisition [Abstract]

Acquistion

9.  Acquisition

On March 17, 2017, the Company completed the acquisition of the West Scranton branch of Wayne Bank, the wholly owned banking subsidiary of Norwood Financial Corp., pursuant to the terms of the Branch Purchase and Deposit Assumption Agreement dated September 29, 2016.  The Company purchased all of the deposit liabilities associated with the branch, certain loans, and the branch real estate, and immediately closed the branch and consolidated the acquired deposits and loans into its nearby West Scranton branch office.  The Company expects this transaction to expand its customer base in West Scranton.

The transaction has been accounted for using the acquisition method of accounting.  The acquired assets and assumed liabilities were recorded at book value which also represented estimated fair value at the date of acquisition.  Management made significant estimates and exercised significant judgement in estimating fair value, but the fair value adjustments were deemed immaterial to the financial statements. 

The Company recognized $41 thousand of acquisition-related costs during the first nine months of 2017.  These costs are being expensed as incurred and are presented in non-interest expenses on the consolidated statements of income.  Costs incurred in 2017 consist principally of legal fees and other professional fees.

The following table summarizes the estimated fair value of the assets acquired and liabilities assumed at the date of acquisition:

(dollars in thousands)	March 17, 2017
Cash and cash equivalents	$	11,817
Loans		1,574
Bank premises and equipment		264
Goodwill		209
Accrued interest receivable and other assets		4
Total assets acquired	$	13,868
Deposits	$	13,809
Accrued interest payable and other liabilities		59
Total liabilities assumed	$	13,868

The Company acquired $1.6 million in residential and consumer loans.  None of the loans that were acquired had evidence of credit quality deterioration.

The Company recorded goodwill associated with the acquisition of the West Scranton branch of Wayne bank totaling $0.2 million.  Goodwill is not amortized, but is periodically evaluated for impairment.  The Company did not recognize any impairment during the nine months ended September 30, 2017.  For income tax purposes, goodwill will be deducted over a 15 year period.

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Employee Benefits

9 Months Ended

Sep. 30, 2017

Employee Benefits [Abstract]

Employee Benefits

10.  Employee Benefits

Bank-Owned Life Insurance (BOLI)

The Company has purchased single premium BOLI policies on certain officers.  The policies are recorded at their cash surrender values.  Increases in cash surrender values are included in non-interest income in the consolidated statements of income.  In March 2017, the Company purchased an additional $8.0 million of BOLI.  The policies’ cash surrender value totaled $19.9 million and $11.4 million, respectively, as of September 30, 2017 and December 31, 2016 and is reflected as an asset on the consolidated balance sheets.  As of September 30, 2017 and 2016, the Company has recorded income of $422 thousand and $264 thousand, respectively.

Officer Life Insurance

In 2017, the Bank entered into separate split dollar life insurance arrangements (Split Dollar Agreements) with eleven officers.  This plan provides each officer a specified death benefit should the officer die while in the Bank’s employ.  The Bank paid the insurance premiums in March 2017 and the arrangements were effective in March 2017.  The Bank owns the policies and all cash values thereunder.  Upon death of the covered employee, the agreed-upon amount of death proceeds from the policies will be paid directly to the insured’s beneficiary.  As of September 30, 2017, the policies had total death benefits of $20.6 million ofwhich $4.0 million would have been paid to the officer’s beneficiaries and the remaining $16.6 million would have been paid to the Bank.  In addition, three executive officers have the opportunity to retain a split dollar benefit equal to two times their highest base salary after separation from service if the vesting requirements are met.  As of September 30, 2017, the Company accrued expenses of $21 thousand for the split dollar benefit.

Supplemental Executive Retirement plan (SERP)

On March 29, 2017, the Bank entered into separate supplemental executive retirement agreements (individually the “SERP Agreement”) with five officers, pursuant to which the Bank will credit an amount to a SERP account established on each participant’s behalf while they are actively employed by the Bank for each calendar month from March 1, 2017 until retirement.  As of September 30, 2017, the Company accrued expenses of $268 thousand in connection with the SERP.

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Nature Of Operations And Critical Accounting Policies (Policy)

9 Months Ended

Sep. 30, 2017

Nature Of Operations And Critical Accounting Policies [Abstract]

Nature Of Operations

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

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, 2016.

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, 2017 and December 31, 2016 and the related consolidated statements of income and consolidated statements of comprehensive income for the three and nine months ended September 30, 2017 and 2016, and consolidated statements of changes in shareholders’ equity and consolidated statements of cash flows for the nine months ended September 30, 2017 and 2016 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 2016 financial statements to conform to the 2017 presentation. 

On August 15, 2017, the Company declared a three-for-two stock split effected in the form of a 50% stock dividend on its common stock outstanding to shareholders as of September 18, 2017 and distributed on September 28, 2017.  All share and per share information included in the accompanying consolidated financial statements and footnotes has been retroactively adjusted to reflect this stock split.

In preparing these consolidated financial statements, the Company evaluated the events and transactions that occurred after September 30, 2017 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, 2016, and the notes included therein, included within the Company’s Annual Report filed on Form 10-K.

Use Of Estimates

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, 2017 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.

Investment Securities

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 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).

Loans Held-For-Sale

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 September 30, 2017 and December 31, 2016, loans classified as HFS consisted of residential mortgage loans.

Automobile Leasing

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

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

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.

Bank Owned Life Insurance

The Company maintains bank owned life insurance policies (BOLI) for a selected group of employees, namely its officers where the Company is the owner and sole beneficiary of the policies.  The earnings from the BOLI are recognized as a component of other income in the consolidated statements of income.  The BOLI is an asset that can be liquidated, if necessary, with tax consequences.  However, the Company intends to hold these policies and accordingly, the Company has not provided for deferred taxes on the earnings from the increase in the cash surrender value. 

Supplemental Executive Retirement

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 three executives providing post-retirement benefits and accrues monthly expense for this benefit.  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.

Cash Flows

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.

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Earnings Per Share (Policy)

9 Months Ended

Sep. 30, 2017

Earnings Per Share [Abstract]

Earnings Per Share

Basic earnings per share (EPS) is computed by dividing net income available to common shareholders by the weighted-average number of common shares outstanding for the period.  Diluted EPS is computed in the same manner as basic EPS but also reflects the potential dilution that could occur from the grant of stock-based compensation awards.  The Company maintains two active share-based compensation plans that may generate additional potentially dilutive common shares.  For granted and unexercised stock options and stock-settled stock appreciation rights (SSARs), dilution would occur if Company-issued stock options or SSARs were exercised and converted into common stock.As of the three and nine months ended September 30, 2017, there were 16,707 and 12,237 potentially dilutive shares related to issued and unexercised stock options and SSARs compared to 2,925 and 2,592 for the same 2016 periods, respectively.  For restricted stock, dilution would occur from the Company’s previously granted but unvested shares.  There were 9,504 and 8,130 potentially dilutive shares related to unvested restricted share grants as of the three and nine months ended September 30, 2017 compared to 8,747 and 6,482 for the three and nine months ended September 30, 2016, respectively.

In the computation of diluted EPS, the Company uses the treasury stock method to determine the dilutive effect of its granted but unexercised stock options and SSARs and unvested restricted stock.  Under the treasury stock method, the assumed proceeds, as defined, received from shares issued in a hypothetical stock option exercise or restricted stock grant, are assumed to be used to purchase treasury stock.  Proceeds include: amounts received from the exercise of outstanding stock options and compensation cost for future service that the Company has not yet recognized in earnings.  The Company does not consider awards from share-based grants in the computation of basic EPS.

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Accumulated Other Comprehensive Income (Tables)

9 Months Ended

Sep. 30, 2017

Accumulated Other Comprehensive Income [Abstract]

Schedule Of Accumulated Other Comprehensive Income

As of and for the nine months ended September 30, 2017
	Unrealized gains
	(losses) on
	available-for-sale
(dollars in thousands)	securities		Total
Beginning balance	$	1,381	$	1,381
Other comprehensive income before reclassifications, net of tax		540		540
Amounts reclassified from accumulated other comprehensive income, net of tax		-		-
Net current-period other comprehensive income		540		540
Ending balance	$	1,921	$	1,921

As of and for the three months ended September 30, 2017
	Unrealized gains
	(losses) on
	available-for-sale
(dollars in thousands)	securities		Total
Beginning balance	$	1,852	$	1,852
Other comprehensive income before reclassifications, net of tax		69		69
Amounts reclassified from accumulated other comprehensive income, net of tax		-		-
Net current-period other comprehensive income		69		69
Ending balance	$	1,921	$	1,921

As of and for the nine months ended September 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		1,275		1,275
Amounts reclassified from accumulated other comprehensive income, net of tax		(6)		(6)
Net current-period other comprehensive income		1,269		1,269
Ending balance	$	3,457	$	3,457

As of and for the three months ended September 30, 2016
	Unrealized gains
	(losses) on
	available-for-sale
(dollars in thousands)	securities		Total
Beginning balance	$	3,695	$	3,695
Other comprehensive loss before reclassifications, net of tax		(238)		(238)
Amounts reclassified from accumulated other comprehensive income, net of tax		-		-
Net current-period other comprehensive loss		(238)		(238)
Ending balance	$	3,457	$	3,457

Schedule Of Reclassification From Accumulated Other Comprehensive Income

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,
	2017		2016		2017		2016
Unrealized gains on AFS securities	$	-	$	-	$	-	$	9	Gain on sale of investment securities
		-		-		-		(3)	Provision for income taxes
Total reclassifications for the period	$	-	$	-	$	-	$	6	Net income

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Investment Securities (Tables)

9 Months Ended

Sep. 30, 2017

Investment Securities [Abstract]

Amortized Cost And Fair Value Of Investment Securities

			Gross		Gross
	Amortized		unrealized		unrealized		Fair
(dollars in thousands)	cost		gains		losses		value
September 30, 2017
Available-for-sale securities:
Agency - GSE	$	16,269	$	21	$	(77)	$	16,213
Obligations of states and political subdivisions		41,759		2,056		(80)		43,735
MBS - GSE residential		90,761		804		(294)		91,271
Total debt securities		148,789		2,881		(451)		151,219
Equity securities - financial services		294		482		-		776
Total available-for-sale securities	$	149,083	$	3,363	$	(451)	$	151,995

			Gross		Gross
	Amortized		unrealized		unrealized		Fair
(dollars in thousands)	cost		gains		losses		value
December 31, 2016
Available-for-sale securities:
Agency - GSE	$	18,362	$	58	$	(144)	$	18,276
Obligations of states and political subdivisions		38,648		1,803		(260)		40,191
MBS - GSE residential		70,639		851		(553)		70,937
Total debt securities		127,649		2,712		(957)		129,404
Equity securities - financial services		294		339		-		633
Total available-for-sale securities	$	127,943	$	3,051	$	(957)	$	130,037

Investments Classified By Contractual Maturity Date

	Amortized		Fair
(dollars in thousands)	cost		value
Available-for-sale securities:
Debt securities:
Due in one year or less	$	4,004	$	4,007
Due after one year through five years		13,084		13,120
Due after five years through ten years		2,556		2,649
Due after ten years		38,384		40,172
Total debt securities		58,028		59,948
MBS - GSE residential		90,761		91,271
Total available-for-sale debt securities	$	148,789	$	151,219

Available-For-Sale Securities, Continuous Unrealized Loss Position, Fair Value

	Less than 12 months				More than 12 months				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
(dollars in thousands)	value		losses		value		losses		value		losses
September 30, 2017
Agency - GSE	$	5,051	$	(29)	$	3,022	$	(48)	$	8,073	$	(77)
Obligations of states and political subdivisions		2,416		(41)		2,254		(39)		4,670		(80)
MBS - GSE residential		34,146		(208)		4,740		(86)		38,886		(294)
Total	$	41,613	$	(278)	$	10,016	$	(173)	$	51,629	$	(451)
Number of securities		29				9				38
December 31, 2016
Agency - GSE	$	6,032	$	(144)	$	-	$	-	$	6,032	$	(144)
Obligations of states and political subdivisions		8,690		(260)		-		-		8,690		(260)
MBS - GSE residential		41,111		(553)		-		-		41,111		(553)
Total	$	55,833	$	(957)	$	-	$	-	$	55,833	$	(957)
Number of securities		48				-				48

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Loans And Leases (Tables)

9 Months Ended

Sep. 30, 2017

Loans And Leases [Abstract]

Loan Classifications

(dollars in thousands)	September 30, 2017		December 31, 2016
Commercial and industrial	$	112,096	$	98,477
Commercial real estate:
Non-owner occupied		93,398		87,220
Owner occupied		109,598		113,104
Construction		6,123		3,987
Consumer:
Home equity installment		28,282		28,466
Home equity line of credit		53,177		51,609
Auto loans and leases		79,629		56,841
Other		5,784		13,301
Residential:
Real estate		138,709		134,475
Construction		8,315		10,496
Total		635,111		597,976
Less:
Allowance for loan losses		(9,356)		(9,364)
Unearned lease revenue		(644)		(482)
Loans and leases, net	$	625,111	$	588,130

Non-Accrual Loans, Segregated By Class

(dollars in thousands)	September 30, 2017		December 31, 2016
Commercial and industrial	$	14	$	11
Commercial real estate:
Non-owner occupied		584		1,407
Owner occupied		1,148		3,078
Construction		169		193
Consumer:
Home equity installment		15		31
Home equity line of credit		513		737
Auto loans and leases		-		25
Other		-		6
Residential:
Real estate		1,421		1,882
Total	$	3,864	$	7,370

Information Related To Loans Modified In Troubled Debt Restructuring, By Class

There were no loans modified in a TDR during the three months ended September 30, 2017 and 2016.  The following presents by class, information related to loans modified in a TDR:

	Loans modified as TDRs for the nine months ended:
(dollars in thousands)	September 30, 2017						September 30, 2016
			Recorded		Increase in			Recorded		Increase in
		Number	investment		allowance		Number	investment		allowance
		of	(as of		(as of		of	(as of		(as of
		contracts	period end)		period end)		contracts	period end)		period end)
Commercial real estate - non-owner occupied		1	$	119	$	4	-	$	-	$	-
Commercial real estate - owner occupied		5		926		187	-		-		-
Consumer home equity line of credit		-		-		-	1		650		105
Total		6	$	1,045	$	191	1	$	650	$	105

In the above table, the period end balance is inclusive of all partial pay downs and charge-offs since the modification date.  For all loans modified in a TDR, the pre-modification recorded investment was the same as the post-modification recorded investment.

The following presents by class, loans modified as a TDR that subsequently defaulted (i.e. 90 days or more past due following a modification) during the periods indicated:

Loans modified as a TDR within the previous twelve months that subsequently defaulted during the:
(dollars in thousands)	Nine months ended September 30, 2017				Nine months ended September 30, 2016
		Number of		Recorded		Number of		Recorded
		contracts		investment		contracts		investment
Commercial real estate - owner occupied			$	-		1	$	20

In the above table, the period end balances are inclusive of all partial pay downs and charge-offs since the modification date.

Past Due Loans

														Recorded
					Past due									investment past
	30 - 59 Days		60 - 89 Days		90 days		Total				Total			due ≥ 90 days
September 30, 2017	past due		past due		or more(1)		past due		Current		loans (3)			and accruing
Commercial and industrial	$	56	$	116	$	14	$	186	$	111,910	$	112,096		$	-
Commercial real estate:
Non-owner occupied		528		658		584		1,770		91,628		93,398			-
Owner occupied		54		-		1,148		1,202		108,396		109,598			-
Construction		-		-		169		169		5,954		6,123			-
Consumer:
Home equity installment		156		26		15		197		28,085		28,282			-
Home equity line of credit		61		72		513		646		52,531		53,177			-
Auto loans and leases		181		102		-		283		78,702		78,985	(2)		-
Other		88		12		-		100		5,684		5,784			-
Residential:
Real estate		-		334		1,421		1,755		136,954		138,709			-
Construction		-		-		-		-		8,315		8,315			-
Total	$	1,124	$	1,320	$	3,864	$	6,308	$	628,159	$	634,467		$	-

(1)Includes $3.9 million of non-accrual loans.  (2) Net of unearned lease revenue of $0.6 million. (3) Includes net deferred loan costs of $2.0 million.

														Recorded
					Past due									investment past
	30 - 59 Days		60 - 89 Days		90 days		Total				Total			due ≥ 90 days
December 31, 2016	past due		past due		or more (1)		past due		Current		loans (3)			and accruing
Commercial and industrial	$	208	$	-	$	11	$	219	$	98,258	$	98,477		$	-
Commercial real estate:
Non-owner occupied		180		-		1,407		1,587		85,633		87,220			-
Owner occupied		13		776		3,078		3,867		109,237		113,104			-
Construction		-		-		193		193		3,794		3,987			-
Consumer:
Home equity installment		213		25		31		269		28,197		28,466			-
Home equity line of credit		-		-		737		737		50,872		51,609			-
Auto loans and leases		293		59		44		396		55,963		56,359	(2)		19
Other		37		2		6		45		13,256		13,301			-
Residential:
Real estate		14		421		1,882		2,317		132,158		134,475			-
Construction		-		-		-		-		10,496		10,496			-
Total	$	958	$	1,283	$	7,389	$	9,630	$	587,864	$	597,494		$	19

(1)Includes $7.4 million of non-accrual loans.  (2) Net of unearned lease revenueof $0.5 million.  (3) Includes net deferred loan costs of $1.8 million.

Impaired Loans

Impaired loans, segregated by class, as of the period indicated are detailed below:

			Recorded		Recorded
	Unpaid		investment		investment		Total
	principal		with		with no		recorded		Related
(dollars in thousands)	balance		allowance		allowance		investment		allowance
September 30, 2017
Commercial and industrial	$	228	$	204	$	24	$	228	$	193
Commercial real estate:
Non-owner occupied		2,405		1,997		288		2,285		612
Owner occupied		2,769		2,452		254		2,706		464
Construction		392		-		169		169		-
Consumer:
Home equity installment		48		-		15		15		-
Home equity line of credit		809		81		432		513		53
Auto loans and leases		8		-		-		-		-
Other		-		-		-		-		-
Residential:
Real estate		1,439		1,158		263		1,421		317
Construction		-		-		-		-		-
Total	$	8,098	$	5,892	$	1,445	$	7,337	$	1,639

			Recorded		Recorded
	Unpaid		investment		investment		Total
	principal		with		with no		recorded		Related
(dollars in thousands)	balance		allowance		allowance		investment		allowance
December 31, 2016
Commercial and industrial	$	235	$	206	$	29	$	235	$	193
Commercial real estate:
Non-owner occupied		3,346		2,611		405		3,016		993
Owner occupied		5,363		4,351		876		5,227		1,389
Construction		416		-		193		193		-
Consumer:
Home equity installment		64		-		31		31		-
Home equity line of credit		778		650		87		737		167
Auto		25		25		-		25		3
Other		6		6		-		6		1
Residential:
Real estate		1,949		1,466		416		1,882		315
Construction		-		-		-		-		-
Total	$	12,182	$	9,315	$	2,037	$	11,352	$	3,061

The following table presents the average recorded investments in impaired loans and related amount of interest income recognized during the periods indicated below.  The average balances are calculated based on the quarter-end balances of impaired loans.  Payments received from non-accruing impaired loans are first applied against the outstanding principal balance, then to the recovery of any charged-off amounts.  Any excess is treated as a recovery of interest income.  Payments received from accruing impaired loans are applied to principal and interest, as contractually agreed upon.

	For the nine months ended
	September 30, 2017						September 30, 2016
					Cash basis						Cash basis
	Average		Interest		interest		Average		Interest		interest
	recorded		income		income		recorded		income		income
(dollars in thousands)	investment		recognized		recognized		investment		recognized		recognized
Commercial and industrial	$	232	$	7	$	-	$	502	$	12	$	-
Commercial real estate:
Non-owner occupied		3,054		114		-		5,030		93		-
Owner occupied		4,393		223		-		3,562		107		-
Construction		184		-		-		217		-		-
Consumer:
Home equity installment		19		-		-		119		3		-
Home equity line of credit		722		5		-		772		25		-
Auto		21		4		-		40		-		-
Other		4		1		-		6		-		-
Residential:
Real estate		1,428		77		-		750		4		-
Construction		-		-		-		-		-		-
Total	$	10,057	$	431	$	-	$	10,998	$	244	$	-

	For the three months ended
	September 30, 2017						September 30, 2016
					Cash basis						Cash basis
	Average		Interest		interest		Average		Interest		interest
	recorded		income		income		recorded		income		income
(dollars in thousands)	investment		recognized		recognized		investment		recognized		recognized
Commercial and industrial	$	223	$	3	$	-	$	255	$	3	$	-
Commercial real estate:
Non-owner occupied		2,588		52		-		3,336		47		-
Owner occupied		3,521		152		-		5,068		29		-
Construction		173		-		-		204		-		-
Consumer:
Home equity installment		15		-		-		51		-		-
Home equity line of credit		659		5		-		871		8		-
Auto		-		-		-		30		-		-
Other		3		-		-		6		-		-
Residential:
Real estate		1,421		54		-		770		2		-
Construction		-		-		-		-		-		-
Total	$	8,603	$	266	$	-	$	10,591	$	89	$	-

Credit Quality Indicator Loan Categories

Commercial credit exposure

Credit risk profile by creditworthiness category

	September 30, 2017
(dollars in thousands)	Pass		Special mention		Substandard		Doubtful		Total
Commercial and industrial	$	110,839	$	535	$	722	$	-	$	112,096
Commercial real estate - non-owner occupied		86,159		817		6,422		-		93,398
Commercial real estate - owner occupied		103,288		2,692		3,618		-		109,598
Commercial real estate - construction		5,954		-		169		-		6,123
Total commercial	$	306,240	$	4,044	$	10,931	$	-	$	321,215

Consumer & Mortgage lending credit exposure

Credit risk profile based on payment activity

	September 30, 2017
(dollars in thousands)	Performing		Non-performing		Total
Consumer
Home equity installment	$	28,267	$	15	$	28,282
Home equity line of credit		52,664		513		53,177
Auto loans and leases (1)		78,985		-		78,985
Other		5,784		-		5,784
Total consumer	$	165,700	$	528	$	166,228
Residential
Real estate	$	137,288	$	1,421	$	138,709
Construction		8,315		-		8,315
Total residential	$	145,603	$	1,421	$	147,024
Total consumer & residential	$	311,303	$	1,949	$	313,252

(1)Net of unearned lease revenue of $0.6 million.

Commercial credit exposure

Credit risk profile by creditworthiness category

	December 31, 2016
(dollars in thousands)	Pass		Special mention		Substandard		Doubtful		Total
Commercial and industrial	$	97,308	$	479	$	690	$	-	$	98,477
Commercial real estate - non-owner occupied		83,962		1,811		7,591		-		93,364
Commercial real estate - owner occupied		99,981		1,075		5,904		-		106,960
Commercial real estate - construction		3,794		-		193		-		3,987
Total commercial	$	285,045	$	3,365	$	14,378	$	-	$	302,788

Consumer & Mortgage lending credit exposure

Credit risk profile based on payment activity

	December 31, 2016
(dollars in thousands)	Performing		Non-performing		Total
Consumer
Home equity installment	$	28,435	$	31	$	28,466
Home equity line of credit		50,872		737		51,609
Auto loans and leases (2)		56,315		44		56,359
Other		13,295		6		13,301
Total consumer	$	148,917	$	818	$	149,735
Residential
Real estate	$	132,593	$	1,882	$	134,475
Construction		10,496		-		10,496
Total residential	$	143,089	$	1,882	$	144,971
Total consumer & residential	$	292,006	$	2,700	$	294,706

(2)Net of unearned lease revenue of $0.5 million.

Allowance For Loan Losses

As of and for the nine months ended September 30, 2017
	Commercial &		Commercial					Residential
(dollars in thousands)	industrial		real estate		Consumer			real estate		Unallocated		Total
Allowance for Loan Losses:
Beginning balance	$	1,075	$	4,706	$	1,834		$	1,622	$	127	$	9,364
Charge-offs		(76)		(416)		(505)			(38)		-		(1,035)
Recoveries		5		44		53			-		-		102
Provision		395		(232)		587			215		(40)		925
Ending balance	$	1,399	$	4,102	$	1,969		$	1,799	$	87	$	9,356
Ending balance: individually evaluated for impairment	$	193	$	1,076	$	53		$	317	$	-	$	1,639
Ending balance: collectively evaluated for impairment	$	1,206	$	3,026	$	1,916		$	1,482	$	87	$	7,717
Loans Receivables:
Ending balance (2)	$	112,096	$	209,119	$	166,228	(1)	$	147,024	$	-	$	634,467
Ending balance: individually evaluated for impairment	$	228	$	5,160	$	528		$	1,421	$	-	$	7,337
Ending balance: collectively evaluated for impairment	$	111,868	$	203,959	$	165,700		$	145,603	$	-	$	627,130

(1) Net of unearned lease revenue of $0.6 million.(2)Includes $2.0 million of net deferred loan costs.

As of and for the three months ended September 30, 2017
	Commercial &		Commercial				Residential
(dollars in thousands)	industrial		real estate		Consumer		real estate		Unallocated		Total
Allowance for Loan Losses:
Beginning balance	$	1,383	$	4,510	$	1,939	$	1,511	$	63	$	9,406
Charge-offs		(46)		(48)		(345)		-		-		(439)
Recoveries		2		3		9		-		-		14
Provision		60		(363)		366		288		24		375
Ending balance	$	1,399	$	4,102	$	1,969	$	1,799	$	87	$	9,356

As of and for the year ended December 31, 2016
	Commercial &		Commercial					Residential
(dollars in thousands)	industrial		real estate		Consumer			real estate		Unallocated		Total
Allowance for Loan Losses:
Beginning balance	$	1,336	$	5,014	$	1,533		$	1,407	$	237	$	9,527
Charge-offs		(224)		(592)		(504)			(60)		-		(1,380)
Recoveries		55		37		100			-		-		192
Provision		(92)		247		705			275		(110)		1,025
Ending balance	$	1,075	$	4,706	$	1,834		$	1,622	$	127	$	9,364
Ending balance: individually evaluated for impairment	$	193	$	2,382	$	171		$	315	$	-	$	3,061
Ending balance: collectively evaluated for impairment	$	882	$	2,324	$	1,663		$	1,307	$	127	$	6,303
Loans Receivables:
Ending balance (2)	$	98,477	$	204,311	$	149,735	(1)	$	144,971	$	-	$	597,494
Ending balance: individually evaluated for impairment	$	235	$	8,436	$	799		$	1,882	$	-	$	11,352
Ending balance: collectively evaluated for impairment	$	98,242	$	195,875	$	148,936		$	143,089	$	-	$	586,142

(1)Net of unearned lease revenue of $0.5 million.  (2) Includes $1.8 million of net deferred loan costs.

As of and for the nine months ended September 30, 2016
	Commercial &		Commercial				Residential
(dollars in thousands)	industrial		real estate		Consumer		real estate		Unallocated		Total
Allowance for Loan Losses:
Beginning balance	$	1,336	$	5,014	$	1,533	$	1,407	$	237	$	9,527
Charge-offs		(199)		(526)		(356)		(60)		-		(1,141)
Recoveries		39		36		85		-		-		160
Provision		(45)		284		526		10		(125)		650
Ending balance	$	1,131	$	4,808	$	1,788	$	1,357	$	112	$	9,196

As of and for the three months ended September 30, 2016
	Commercial &		Commercial				Residential
(dollars in thousands)	industrial		real estate		Consumer		real estate		Unallocated		Total
Allowance for Loan Losses:
Beginning balance	$	1,231	$	4,880	$	1,692	$	1,365	$	39	$	9,207
Charge-offs		(30)		(183)		(91)		-		-		(304)
Recoveries		18		3		47		-		-		68
Provision		(88)		108		140		(8)		73		225
Ending balance	$	1,131	$	4,808	$	1,788	$	1,357	$	112	$	9,196

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Earnings Per Share (Tables)

9 Months Ended

Sep. 30, 2017

Earnings Per Share [Abstract]

Schedule Of Earnings Per Share, Basic And Diluted

	Three months ended September 30,				Nine months ended September 30,
	2017		2016		2017		2016
(dollars in thousands except per share data)
Basic EPS:
Net income available to common shareholders	$	2,226	$	2,035	$	6,389	$	5,664
Weighted-average common shares outstanding		3,712,297		3,680,707		3,704,859		3,679,104
Basic EPS	$	0.60	$	0.55	$	1.72	$	1.54
Diluted EPS:
Net income available to common shareholders	$	2,226	$	2,035	$	6,389	$	5,664
Weighted-average common shares outstanding		3,712,297		3,680,707		3,704,859		3,679,104
Potentially dilutive common shares		26,211		11,672		20,367		9,074
Weighted-average common and potentially dilutive shares outstanding		3,738,508		3,692,379		3,725,226		3,688,178
Diluted EPS	$	0.60	$	0.55	$	1.72	$	1.54

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Stock Plans (Tables)

9 Months Ended

Sep. 30, 2017

Stock Plans [Abstract]

Summary Of Weighted-Average Fair-Value And Vesting Of Restricted Stock Grants

	September 30, 2017				September 30, 2016
			Weighted-				Weighted-
			average				average
	Shares		grant date		Shares		grant date
	granted		fair value		granted		fair value
Director plan	8,400	(2)	$	26.17	8,400	(1)	$	21.60
Omnibus plan	4,749	(3)		23.93	4,734	(3)		19.48
Omnibus plan	75	(1)		26.17	75	(1)		21.00
Total	13,224		$	25.36	13,209		$	20.84

(1) Vest after 1 year  (2) Vest after 2 years – 50% each year(3)Vest after 3 years – 33% each year

Schedule Of Non-Vested Restricted Stock Units Activity

	2012 Stock incentive plans
	Director	Omnibus	Total		Weighted- average grant date fair value
Non-vested balance at December 31, 2016	8,400	13,562	21,962	$	20.31
Granted	8,400	4,824	13,224		25.36
Forfeited	-	-	-
Vested	(8,400)	(6,082)	(14,482)		20.47
Non-vested balance at September 30, 2017	8,400	12,304	20,704	$	23.59

Schedule Of SSARs Activity

	Awards		Weighted-average grant date fair value	Weighted-average remaining contractual term (years)
Outstanding December 31, 2016	29,014	$	3.48	9.1
Granted	24,346		5.06	9.3
Exercised	-		-
Forfeited	-		-
Outstanding September 30, 2017	53,360	$	4.20	8.8

Of the SSARs outstanding at September 30, 2017, 9,668 vested and were exercisable. SSARs vest over a three year period – 33% per year.

Schedule Of Compensation Cost For Share-Based Payment Arrangements, Allocation Of Share-Based Compensation Costs By Plan

		Three months ended			Nine months ended
		September 30,			September 30,
(dollars in thousands)	2017		2016		2017			2016
Stock-based compensation expense:
Director stock incentive plan	$	28	$	45	$	89	$	129
Omnibus stock incentive plan		49		36		144		104
Employee stock purchase plan		-		-		23		15
Total stock-based compensation expense	$	77	$	81	$	256	$	248

In addition, during the three and nine months ended September 30, 2017 the Company accrued $54 thousand and $163 thousand, respectively, in stock-based compensation expense for restricted stock and SSARs to be awarded under the Omnibus Plan.  The Company accrued $51 thousand and $137 thousand, respectively, in stock-based compensation expense during the three and nine months ended September 30, 2016.

Schedule Of Unrecognized Compensation Cost, Non-Vested Awards

	As of
(dollars in thousands)	September 30, 2017
Unrecognized stock-based compensation expense:
Director plan	$	146
Omnibus plan		330
Total unrecognized stock-based compensation expense	$	476

The unrecognized stock-based compensation expense as of September 30, 2017 will be recognized ratably over the periods ended January 2019 and January 2020 for the Director Plan and the Omnibus Plan, respectively.

Summary Of Stock Option Activity

	Options		Weighted-average exercise price	Weighted-average remaining contractual term (years)
Outstanding and exercisable, December 31, 2016	22,500	$	19.12	1.0
Granted	-		-
Exercised	(17,250)		19.27
Forfeited	-		-
Outstanding and exercisable, September 30, 2017	5,250	$	18.62	0.3

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Fair Value Measurements (Tables)

9 Months Ended

Sep. 30, 2017

Fair Value Measurements [Abstract]

Carrying Amount And Estimated Fair Value By Balance Sheet Grouping

September 30, 2017
					Quoted prices		Significant		Significant
					in active		other		other
	Carrying		Estimated		markets		observable inputs		unobservable inputs
(dollars in thousands)	amount		fair value		(Level 1)		(Level 2)		(Level 3)
Financial assets:
Cash and cash equivalents	$	41,881	$	41,881	$	41,881	$	-	$	-
Available-for-sale securities		151,995		151,995		776		151,219		-
FHLB stock		2,543		2,543		-		2,543		-
Loans and leases, net		625,111		623,567		-		-		623,567
Loans held-for-sale		1,629		1,662		-		1,662		-
Accrued interest receivable		2,769		2,769		-		2,769		-
Financial liabilities:
Deposits with no stated maturities		640,173		640,173		-		640,173		-
Time deposits		108,404		107,564		-		107,564		-
Short-term borrowings		12,920		12,920		-		12,920		-
FHLB advances		23,704		23,617		-		23,617		-
Accrued interest payable		319		319		-		319		-

December 31, 2016
					Quoted prices		Significant		Significant
					in active		other		other
	Carrying		Estimated		markets		observable inputs		unobservable inputs
(dollars in thousands)	amount		fair value		(Level 1)		(Level 2)		(Level 3)
Financial assets:
Cash and cash equivalents	$	25,843	$	25,843	$	25,843	$	-	$	-
Available-for-sale securities		130,037		130,037		633		129,404		-
FHLB stock		2,606		2,606		-		2,606		-
Loans and leases, net		588,130		590,688		-		-		590,688
Loans held-for-sale		2,854		2,907		-		2,907		-
Accrued interest receivable		2,246		2,246		-		2,246		-
Financial liabilities:
Deposits with no stated maturities		610,706		610,706		-		610,706		-
Time deposits		92,753		91,969		-		91,969		-
Short-term borrowings		4,223		4,223		-		4,223		-
Accrued interest payable		181		181		-		181		-

Financial Instruments Measured At Fair Value On Recurring Basis

			Quoted prices
			in active		Significant other		Significant other
	Total carrying value		markets		observable inputs		unobservable inputs
(dollars in thousands)	September 30, 2017		(Level 1)		(Level 2)		(Level 3)
Available-for-sale securities:
Agency - GSE	$	16,213	$	-	$	16,213	$	-
Obligations of states and political subdivisions		43,735		-		43,735		-
MBS - GSE residential		91,271		-		91,271		-
Equity securities - financial services		776		776		-		-
Total available-for-sale securities	$	151,995	$	776	$	151,219	$	-

			Quoted prices
			in active		Significant other		Significant other
	Total carrying value		markets		observable inputs		unobservable inputs
(dollars in thousands)	December 31, 2016		(Level 1)		(Level 2)		(Level 3)
Available-for-sale securities:
Agency - GSE	$	18,276	$	-	$	18,276	$	-
Obligations of states and political subdivisions		40,191		-		40,191		-
MBS - GSE residential		70,937		-		70,937		-
Equity securities - financial services		633		633		-		-
Total available-for-sale securities	$	130,037	$	633	$	129,404	$	-

Fair Value Measurements At Fair Value Segregated By Hierarchy Fair Value Levels

			Quoted prices in		Significant other		Significant other
	Total carrying value		active markets		observable inputs		unobservable inputs
(dollars in thousands)	at September 30, 2017		(Level 1)		(Level 2)		(Level 3)
Impaired loans	$	4,253	$	-	$	-	$	4,253
Other real estate owned		764		-		-		764
Total	$	5,017	$	-	$	-	$	5,017

			Quoted prices in		Significant other		Significant other
	Total carrying value		active markets		observable inputs		unobservable inputs
(dollars in thousands)	at December 31, 2016		(Level 1)		(Level 2)		(Level 3)
Impaired loans	$	6,254	$	-	$	-	$	6,254
Other real estate owned		872		-		-		872
Total	$	7,126	$	-	$	-	$	7,126

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Acquisition (Tables)

9 Months Ended

Sep. 30, 2017

Acquisition [Abstract]

Summary Of Estimated Fair Value Of Assets Acquired And Liabilities Assumed

(dollars in thousands)	March 17, 2017
Cash and cash equivalents	$	11,817
Loans		1,574
Bank premises and equipment		264
Goodwill		209
Accrued interest receivable and other assets		4
Total assets acquired	$	13,868
Deposits	$	13,809
Accrued interest payable and other liabilities		59
Total liabilities assumed	$	13,868

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Nature Of Operations And Critical Accounting Policies (Narrative) (Details) - employee			9 Months Ended
	Sep. 28, 2017	Aug. 15, 2017	Sep. 30, 2017
Organization, Consolidation and Presentation of Financial Statements Disclosure and Significant Accounting Policies [Line Items]
Year founded			1903
Dividend declared			Aug. 15, 2017
Stock split ratio	1.5	1.5
Stock dividend, percentage	50.00%	50.00%
Executives [Member]
Organization, Consolidation and Presentation of Financial Statements Disclosure and Significant Accounting Policies [Line Items]
Number of individuals with split dollar life insurance arrangement			3

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Accumulated Other Comprehensive Income (Schedule Of Accumulated Other Comprehensive Income) (Details) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2017	Sep. 30, 2016	Sep. 30, 2017	Sep. 30, 2016
Accumulated Other Comprehensive Income (Loss) [Line Items]
Beginning balance	$ 1,852	$ 3,695	$ 1,381	$ 2,188
Other comprehensive income before reclassifications, net of tax	69	(238)	540	1,275
Amounts reclassified from accumulated other comprehensive income, net of tax				(6)
Net current-period other comprehensive income (loss)	69	(238)	540	1,269
Ending balance	1,921	3,457	1,921	3,457
Unrealized Gains (Losses) On Available-For-Sale Securities [Member]
Accumulated Other Comprehensive Income (Loss) [Line Items]
Beginning balance	1,852	3,695	1,381	2,188
Other comprehensive income before reclassifications, net of tax	69	(238)	540	1,275
Amounts reclassified from accumulated other comprehensive income, net of tax				(6)
Net current-period other comprehensive income (loss)	69	(238)	540	1,269
Ending balance	$ 1,921	$ 3,457	$ 1,921	$ 3,457

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Accumulated Other Comprehensive Income (Schedule Of Reclassifications From Accumulated Other Comprehensive Income) (Details) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2017	Sep. 30, 2016	Sep. 30, 2017	Sep. 30, 2016
Reclassification Adjustment out of Accumulated Other Comprehensive Income [Line Items]
Provision for income taxes	$ (658)	$ (776)	$ (2,078)	$ (2,031)
Net income	$ 2,226	$ 2,035	$ 6,389	5,664
Reclassification Out Of Accumulated Other Comprehensive Income [Member]
Reclassification Adjustment out of Accumulated Other Comprehensive Income [Line Items]
Provision for income taxes				(3)
Net income				6
Unrealized Gains (Losses) On Available-For-Sale Securities [Member] | Reclassification Out Of Accumulated Other Comprehensive Income [Member]
Reclassification Adjustment out of Accumulated Other Comprehensive Income [Line Items]
Gain on sale of investment securities				$ 9

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Investment Securities (Narrative) (Details) - security	9 Months Ended
	Sep. 30, 2017	Dec. 31, 2016
Schedule of Available-for-sale Securities [Line Items]
Number of securities in unrealized loss position	38	48
Number of securities in unrealized loss position, more than 12 months	9
Agency - GSE [Member]
Schedule of Available-for-sale Securities [Line Items]
Number of securities in unrealized loss position	8
Severity of unrealized losses	0.94%
Number of securities in unrealized loss position, more than 12 months	3
MBS - GSE Residential [Member]
Schedule of Available-for-sale Securities [Line Items]
Number of securities in unrealized loss position	22
Severity of unrealized losses	0.75%
Number of securities in unrealized loss position, more than 12 months	3
Obligations Of States And Political Subdivisions [Member]
Schedule of Available-for-sale Securities [Line Items]
Number of securities in unrealized loss position	8
Severity of unrealized losses	1.69%
Number of securities in unrealized loss position, more than 12 months	3

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Investment Securities (Amortized Cost And Fair Value Of Investment Securities) (Details) - USD ($) $ in Thousands	Sep. 30, 2017	Dec. 31, 2016
Schedule of Held-to-maturity Securities And Available-for-sale Securities [Line Items]
Total Available-for-sale securities, Amortized cost	$ 149,083	$ 127,943
Available-for-sale securities, Gross unrealized gains	3,363	3,051
Available-for-sale securities, Gross unrealized losses	(451)	(957)
Total Available-for-sale securities, Fair value	151,995	130,037
Agency - GSE [Member]
Schedule of Held-to-maturity Securities And Available-for-sale Securities [Line Items]
Total Available-for-sale securities, Amortized cost	16,269	18,362
Available-for-sale securities, Gross unrealized gains	21	58
Available-for-sale securities, Gross unrealized losses	(77)	(144)
Total Available-for-sale securities, Fair value	16,213	18,276
Obligations Of States And Political Subdivisions [Member]
Schedule of Held-to-maturity Securities And Available-for-sale Securities [Line Items]
Total Available-for-sale securities, Amortized cost	41,759	38,648
Available-for-sale securities, Gross unrealized gains	2,056	1,803
Available-for-sale securities, Gross unrealized losses	(80)	(260)
Total Available-for-sale securities, Fair value	43,735	40,191
MBS - GSE Residential [Member]
Schedule of Held-to-maturity Securities And Available-for-sale Securities [Line Items]
Total Available-for-sale securities, Amortized cost	90,761	70,639
Available-for-sale securities, Gross unrealized gains	804	851
Available-for-sale securities, Gross unrealized losses	(294)	(553)
Total Available-for-sale securities, Fair value	91,271	70,937
Debt Securities [Member]
Schedule of Held-to-maturity Securities And Available-for-sale Securities [Line Items]
Total Available-for-sale securities, Amortized cost	148,789	127,649
Available-for-sale securities, Gross unrealized gains	2,881	2,712
Available-for-sale securities, Gross unrealized losses	(451)	(957)
Total Available-for-sale securities, Fair value	151,219	129,404
Equity Securities - Financial Services [Member]
Schedule of Held-to-maturity Securities And Available-for-sale Securities [Line Items]
Total Available-for-sale securities, Amortized cost	294	294
Available-for-sale securities, Gross unrealized gains	482	339
Total Available-for-sale securities, Fair value	$ 776	$ 633

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Investment Securities (Investment Classified By Contractual Maturity Date) (Details) $ in Thousands	Sep. 30, 2017 USD ($)
Investment Securities [Abstract]
Amortized cost: Due in one year or less	$ 4,004
Amortized cost: Due after one year through five years	13,084
Amortized cost: Due after five years through ten years	2,556
Amortized cost: Due after ten years	38,384
Total debt securities, Amortized Cost	58,028
MBS - GSE residential, Amortized cost	90,761
Total available-for-sale debt securities, Amortized cost	148,789
Fair value: Due in one year or less	4,007
Fair value: Due after one year through five years	13,120
Fair value: Due after five years through ten years	2,649
Fair value: Due after ten years	40,172
Total debt securities, Fair value	59,948
MBS - GSE residential, Fair value	91,271
Total available-for-sale debt securities, Fair value	$ 151,219

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Investment Securities (Available-For-Sale Securities, Continuous Unrealized Loss Position, Fair Value) (Details) $ in Thousands	Sep. 30, 2017 USD ($) security	Dec. 31, 2016 USD ($) security
Schedule of Available-for-sale Securities [Line Items]
Less than 12 months: Fair value	$ 41,613	$ 55,833
Less than 12 months: Unrealized losses	(278)	(957)
More than 12 months: Fair value	10,016
More than 12 months: Unrealized losses	(173)
Total: Fair value	51,629	55,833
Total: Unrealized losses	$ (451)	$ (957)
Less than 12 months: Number of securities | security	29	48
More than 12 months: Number of securities | security	9
Total: Number of securities | security	38	48
Agency - GSE [Member]
Schedule of Available-for-sale Securities [Line Items]
Less than 12 months: Fair value	$ 5,051	$ 6,032
Less than 12 months: Unrealized losses	(29)	(144)
More than 12 months: Fair value	3,022
More than 12 months: Unrealized losses	(48)
Total: Fair value	8,073	6,032
Total: Unrealized losses	$ (77)	(144)
More than 12 months: Number of securities | security	3
Total: Number of securities | security	8
Obligations Of States And Political Subdivisions [Member]
Schedule of Available-for-sale Securities [Line Items]
Less than 12 months: Fair value	$ 2,416	8,690
Less than 12 months: Unrealized losses	(41)	(260)
More than 12 months: Fair value	2,254
More than 12 months: Unrealized losses	(39)
Total: Fair value	4,670	8,690
Total: Unrealized losses	$ (80)	(260)
More than 12 months: Number of securities | security	3
Total: Number of securities | security	8
MBS - GSE Residential [Member]
Schedule of Available-for-sale Securities [Line Items]
Less than 12 months: Fair value	$ 34,146	41,111
Less than 12 months: Unrealized losses	(208)	(553)
More than 12 months: Fair value	4,740
More than 12 months: Unrealized losses	(86)
Total: Fair value	38,886	41,111
Total: Unrealized losses	$ (294)	$ (553)
More than 12 months: Number of securities | security	3
Total: Number of securities | security	22

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Loans And Leases (Narrative) (Details) $ in Thousands	3 Months Ended		9 Months Ended		12 Months Ended
	Sep. 30, 2017 USD ($) loan	Sep. 30, 2016 loan	Sep. 30, 2017 USD ($) contract loan item	Sep. 30, 2016 contract	Dec. 31, 2016 USD ($) loan item
Accounts, Notes, Loans and Financing Receivable [Line Items]
Deferred loan costs	$ 2,000		$ 2,000		$ 1,800
Mortgages serviced	296,900		296,900		285,200
Mortgage servicing rights	$ 1,300		$ 1,300		1,300
Number of loans modified as TDR	0	0	6	1
Allowance for impaired loans that have been modified in a TDR	$ 800		$ 800		400
Troubled Debt Status [Member]
Accounts, Notes, Loans and Financing Receivable [Line Items]
Troubled Debt Restructuring balance	3,900		$ 3,900		$ 3,300
Number of loans classified as TDRs | loan			15		9
Number of unrelated borrowers that had loans modified in a TDR | item			10		6
Increase in TDRs	600		$ 600
Accruing TDR Balance [Member]
Accounts, Notes, Loans and Financing Receivable [Line Items]
Troubled Debt Restructuring balance	1,900		1,900		$ 1,800
Non-Accrual Status [Member]
Accounts, Notes, Loans and Financing Receivable [Line Items]
Financing receivable, net	3,900		3,900		7,400
Impaired Loan Status [Member]
Accounts, Notes, Loans and Financing Receivable [Line Items]
Recorded investment in financing receivables that are not 90 days or more past due	1,500		1,500		2,200
TDR Non-Accrual Status [Member]
Accounts, Notes, Loans and Financing Receivable [Line Items]
Troubled Debt Restructuring balance	$ 2,000		$ 2,000		$ 1,500
Number of loans classified as TDRs | loan			4		2
Number of unrelated borrowers that had loans modified in a TDR | item			3
Commercial Real Estate [Member]
Accounts, Notes, Loans and Financing Receivable [Line Items]
Number of loans classified as TDRs | loan			12		6
Increase in number of loans classified as TDRs | loan	6		6
Increase in Troubled Debt Restructuring balance	$ 1,000		$ 1,000
Commercial Real Estate [Member] | Non-Accrual Status [Member]
Accounts, Notes, Loans and Financing Receivable [Line Items]
Troubled Debt Restructuring balance	700		$ 700
Number of loans classified as TDRs | loan			2
Commercial And Industrial [Member]
Accounts, Notes, Loans and Financing Receivable [Line Items]
Number of loans classified as TDRs | loan			1		1
Financing receivable, net	112,096		$ 112,096		$ 98,477
Consumer: Home Equity Line Of Credit [Member]
Accounts, Notes, Loans and Financing Receivable [Line Items]
Number of loans classified as TDRs | loan			1		1
Financing receivable, net	53,177		$ 53,177		$ 51,609
Number of loans modified as TDR | contract				1
Consumer: Home Equity Line Of Credit [Member] | Non-Accrual Status [Member]
Accounts, Notes, Loans and Financing Receivable [Line Items]
Troubled Debt Restructuring balance	400		$ 400		$ 600
Number of loans classified as TDRs | loan			1		1
Residential Mortgages [Member]
Accounts, Notes, Loans and Financing Receivable [Line Items]
Number of loans classified as TDRs | loan			1		1
Financing receivable, net	147,024		$ 147,024		$ 144,971
Residential Mortgages [Member] | Non-Accrual Status [Member]
Accounts, Notes, Loans and Financing Receivable [Line Items]
Troubled Debt Restructuring balance	900		$ 900		$ 900
Number of loans classified as TDRs | loan			1		1
Commercial Real Estate: Owner Occupied [Member]
Accounts, Notes, Loans and Financing Receivable [Line Items]
Number of contracts modified by TDR with subsequent default | contract				1
Financing receivable, net	$ 109,598		$ 109,598		$ 106,960
Number of loans modified as TDR | contract			5

XML

Loans And Leases (Loan Classifications) (Details) - USD ($) $ in Thousands	Sep. 30, 2017	Jun. 30, 2017	Dec. 31, 2016	Sep. 30, 2016	Jun. 30, 2016	Dec. 31, 2015
Accounts, Notes, Loans and Financing Receivable [Line Items]
Total	$ 635,111		$ 597,976
Less: Allowance for loan losses	(9,356)	$ (9,406)	(9,364)	$ (9,196)	$ (9,207)	$ (9,527)
Less: Unearned lease revenue	(644)		(482)
Loans and leases, net	625,111		588,130
Commercial And Industrial [Member]
Accounts, Notes, Loans and Financing Receivable [Line Items]
Total	112,096		98,477
Less: Allowance for loan losses	(1,399)	$ (1,383)	(1,075)	$ (1,131)	$ (1,231)	$ (1,336)
Commercial Real Estate: Non-Owner Occupied [Member]
Accounts, Notes, Loans and Financing Receivable [Line Items]
Total	93,398		87,220
Commercial Real Estate: Owner Occupied [Member]
Accounts, Notes, Loans and Financing Receivable [Line Items]
Total	109,598		113,104
Commercial Real Estate: Construction [Member]
Accounts, Notes, Loans and Financing Receivable [Line Items]
Total	6,123		3,987
Consumer: Home Equity Installment [Member]
Accounts, Notes, Loans and Financing Receivable [Line Items]
Total	28,282		28,466
Consumer: Home Equity Line Of Credit [Member]
Accounts, Notes, Loans and Financing Receivable [Line Items]
Total	53,177		51,609
Consumer: Auto Loans And Leases [Member]
Accounts, Notes, Loans and Financing Receivable [Line Items]
Total	79,629		56,841
Consumer: Other [Member]
Accounts, Notes, Loans and Financing Receivable [Line Items]
Total	5,784		13,301
Residential: Real Estate [Member]
Accounts, Notes, Loans and Financing Receivable [Line Items]
Total	138,709		134,475
Residential: Construction [Member]
Accounts, Notes, Loans and Financing Receivable [Line Items]
Total	$ 8,315		$ 10,496

XML

Loans And Leases (Non-Accrual Loans, Segregated By Class) (Details) - USD ($) $ in Thousands	Sep. 30, 2017	Dec. 31, 2016
Financing Receivable, Recorded Investment, Past Due [Line Items]
Non-accrual loans	$ 3,864	$ 7,370
Commercial And Industrial [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Non-accrual loans	14	11
Commercial Real Estate: Non-Owner Occupied [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Non-accrual loans	584	1,407
Commercial Real Estate: Owner Occupied [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Non-accrual loans	1,148	3,078
Commercial Real Estate: Construction [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Non-accrual loans	169	193
Consumer: Home Equity Installment [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Non-accrual loans	15	31
Consumer: Home Equity Line Of Credit [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Non-accrual loans	513	737
Consumer: Auto Loans And Leases [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Non-accrual loans		25
Consumer: Other [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Non-accrual loans		6
Residential: Real Estate [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Non-accrual loans	$ 1,421	$ 1,882

XML

Loans and Leases (Information Related To Loans Modified In Troubled Debt Restructuring, By Class) (Details) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2017 loan	Sep. 30, 2016 loan	Sep. 30, 2017 USD ($) contract	Sep. 30, 2016 USD ($) contract
Financing Receivable, Modifications [Line Items]
Number of contracts	0	0	6	1
Recorded investment (as of period end)			$ 1,045	$ 650
Increase in allowance (as of period end)			$ 191	$ 105
Commercial Real Estate: Non-Owner Occupied [Member]
Financing Receivable, Modifications [Line Items]
Number of contracts | contract			1
Recorded investment (as of period end)			$ 119
Increase in allowance (as of period end)			$ 4
Commercial Real Estate: Owner Occupied [Member]
Financing Receivable, Modifications [Line Items]
Number of contracts | contract			5
Recorded investment (as of period end)			$ 926
Increase in allowance (as of period end)			$ 187
Number of contracts, subsequent default | contract				1
Recorded investment (as of period end), subsequent default				$ 20
Consumer: Home Equity Line Of Credit [Member]
Financing Receivable, Modifications [Line Items]
Number of contracts | contract				1
Recorded investment (as of period end)				$ 650
Increase in allowance (as of period end)				$ 105

XML

Loans And Leases (Past Due Loans) (Details) - USD ($) $ in Thousands	Sep. 30, 2017	Dec. 31, 2016
Financing Receivable, Recorded Investment, Past Due [Line Items]
Total past due	$ 6,308	$ 9,630
Current	628,159	587,864
Total loans	634,467	597,494
Recorded investment past due >=90 days and accruing		19
Non-accrual loans	3,864	7,370
Unearned lease revenue	644	482
Deferred loan costs	2,000	1,800
30 - 59 Days Past Due [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Total past due	1,124	958
60 - 89 Days Past Due [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Total past due	1,320	1,283
Past Due 90 Days Or More [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Total past due	3,864	7,389
Commercial And Industrial [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Total past due	186	219
Current	111,910	98,258
Total loans	112,096	98,477
Non-accrual loans	14	11
Commercial And Industrial [Member] | 30 - 59 Days Past Due [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Total past due	56	208
Commercial And Industrial [Member] | 60 - 89 Days Past Due [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Total past due	116
Commercial And Industrial [Member] | Past Due 90 Days Or More [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Total past due	14	11
Commercial Real Estate: Non-Owner Occupied [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Total past due	1,770	1,587
Current	91,628	85,633
Total loans	93,398	87,220
Non-accrual loans	584	1,407
Commercial Real Estate: Non-Owner Occupied [Member] | 30 - 59 Days Past Due [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Total past due	528	180
Commercial Real Estate: Non-Owner Occupied [Member] | 60 - 89 Days Past Due [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Total past due	658
Commercial Real Estate: Non-Owner Occupied [Member] | Past Due 90 Days Or More [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Total past due	584	1,407
Commercial Real Estate: Owner Occupied [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Total past due	1,202	3,867
Current	108,396	109,237
Total loans	109,598	113,104
Non-accrual loans	1,148	3,078
Commercial Real Estate: Owner Occupied [Member] | 30 - 59 Days Past Due [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Total past due	54	13
Commercial Real Estate: Owner Occupied [Member] | 60 - 89 Days Past Due [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Total past due		776
Commercial Real Estate: Owner Occupied [Member] | Past Due 90 Days Or More [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Total past due	1,148	3,078
Commercial Real Estate: Construction [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Total past due	169	193
Current	5,954	3,794
Total loans	6,123	3,987
Non-accrual loans	169	193
Commercial Real Estate: Construction [Member] | Past Due 90 Days Or More [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Total past due	169	193
Consumer: Home Equity Installment [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Total past due	197	269
Current	28,085	28,197
Total loans	28,282	28,466
Non-accrual loans	15	31
Consumer: Home Equity Installment [Member] | 30 - 59 Days Past Due [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Total past due	156	213
Consumer: Home Equity Installment [Member] | 60 - 89 Days Past Due [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Total past due	26	25
Consumer: Home Equity Installment [Member] | Past Due 90 Days Or More [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Total past due	15	31
Consumer: Home Equity Line Of Credit [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Total past due	646	737
Current	52,531	50,872
Total loans	53,177	51,609
Non-accrual loans	513	737
Consumer: Home Equity Line Of Credit [Member] | 30 - 59 Days Past Due [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Total past due	61
Consumer: Home Equity Line Of Credit [Member] | 60 - 89 Days Past Due [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Total past due	72
Consumer: Home Equity Line Of Credit [Member] | Past Due 90 Days Or More [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Total past due	513	737
Consumer: Auto Loans And Leases [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Total past due	283	396
Current	78,702	55,963
Total loans	78,985	56,359
Recorded investment past due >=90 days and accruing		19
Non-accrual loans		25
Consumer: Auto Loans And Leases [Member] | 30 - 59 Days Past Due [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Total past due	181	293
Consumer: Auto Loans And Leases [Member] | 60 - 89 Days Past Due [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Total past due	102	59
Consumer: Auto Loans And Leases [Member] | Past Due 90 Days Or More [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Total past due		44
Consumer: Other [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Total past due	100	45
Current	5,684	13,256
Total loans	5,784	13,301
Non-accrual loans		6
Consumer: Other [Member] | 30 - 59 Days Past Due [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Total past due	88	37
Consumer: Other [Member] | 60 - 89 Days Past Due [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Total past due	12	2
Consumer: Other [Member] | Past Due 90 Days Or More [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Total past due		6
Residential: Real Estate [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Total past due	1,755	2,317
Current	136,954	132,158
Total loans	138,709	134,475
Non-accrual loans	1,421	1,882
Residential: Real Estate [Member] | 30 - 59 Days Past Due [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Total past due		14
Residential: Real Estate [Member] | 60 - 89 Days Past Due [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Total past due	334	421
Residential: Real Estate [Member] | Past Due 90 Days Or More [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Total past due	1,421	1,882
Residential: Construction [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Current	8,315	10,496
Total loans	$ 8,315	$ 10,496

XML

Loans And Leases (Impaired Loans) (Details) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2017	Sep. 30, 2016	Sep. 30, 2017	Sep. 30, 2016	Dec. 31, 2016
Financing Receivable, Impaired [Line Items]
Unpaid principal balance	$ 8,098		$ 8,098		$ 12,182
Recorded investment with allowance	5,892		5,892		9,315
Recorded investment with no allowance	1,445		1,445		2,037
Total recorded investment	7,337		7,337		11,352
Related allowance	1,639		1,639		3,061
Average recorded investment	8,603	$ 10,591	10,057	$ 10,998
Interest income recognized	266	89	431	244
Cash basis interest income recognized
Commercial And Industrial [Member]
Financing Receivable, Impaired [Line Items]
Unpaid principal balance	228		228		235
Recorded investment with allowance	204		204		206
Recorded investment with no allowance	24		24		29
Total recorded investment	228		228		235
Related allowance	193		193		193
Average recorded investment	223	255	232	502
Interest income recognized	3	3	7	12
Cash basis interest income recognized
Commercial Real Estate: Non-Owner Occupied [Member]
Financing Receivable, Impaired [Line Items]
Unpaid principal balance	2,405		2,405		3,346
Recorded investment with allowance	1,997		1,997		2,611
Recorded investment with no allowance	288		288		405
Total recorded investment	2,285		2,285		3,016
Related allowance	612		612		993
Average recorded investment	2,588	3,336	3,054	5,030
Interest income recognized	52	47	114	93
Cash basis interest income recognized
Commercial Real Estate: Owner Occupied [Member]
Financing Receivable, Impaired [Line Items]
Unpaid principal balance	2,769		2,769		5,363
Recorded investment with allowance	2,452		2,452		4,351
Recorded investment with no allowance	254		254		876
Total recorded investment	2,706		2,706		5,227
Related allowance	464		464		1,389
Average recorded investment	3,521	5,068	4,393	3,562
Interest income recognized	152	29	223	107
Cash basis interest income recognized
Commercial Real Estate: Construction [Member]
Financing Receivable, Impaired [Line Items]
Unpaid principal balance	392		392		416
Recorded investment with no allowance	169		169		193
Total recorded investment	169		169		193
Average recorded investment	173	204	184	217
Interest income recognized
Cash basis interest income recognized
Consumer: Home Equity Installment [Member]
Financing Receivable, Impaired [Line Items]
Unpaid principal balance	48		48		64
Recorded investment with no allowance	15		15		31
Total recorded investment	15		15		31
Average recorded investment	15	51	19	119
Interest income recognized				3
Cash basis interest income recognized
Consumer: Home Equity Line Of Credit [Member]
Financing Receivable, Impaired [Line Items]
Unpaid principal balance	809		809		778
Recorded investment with allowance	81		81		650
Recorded investment with no allowance	432		432		87
Total recorded investment	513		513		737
Related allowance	53		53		167
Average recorded investment	659	871	722	772
Interest income recognized	5	8	5	25
Cash basis interest income recognized
Consumer: Auto Loans And Leases [Member]
Financing Receivable, Impaired [Line Items]
Unpaid principal balance	8		8		25
Recorded investment with allowance					25
Total recorded investment					25
Related allowance					3
Average recorded investment		30	21	40
Interest income recognized			4
Cash basis interest income recognized
Consumer: Other [Member]
Financing Receivable, Impaired [Line Items]
Unpaid principal balance					6
Recorded investment with allowance					6
Total recorded investment					6
Related allowance					1
Average recorded investment	3	6	4	6
Interest income recognized			1
Cash basis interest income recognized
Residential: Real Estate [Member]
Financing Receivable, Impaired [Line Items]
Unpaid principal balance	1,439		1,439		1,949
Recorded investment with allowance	1,158		1,158		1,466
Recorded investment with no allowance	263		263		416
Total recorded investment	1,421		1,421		1,882
Related allowance	317		317		$ 315
Average recorded investment	1,421	770	1,428	750
Interest income recognized	$ 54	$ 2	77	4
Cash basis interest income recognized
Residential: Construction [Member]
Financing Receivable, Impaired [Line Items]
Average recorded investment
Interest income recognized
Cash basis interest income recognized

XML

Loans And Leases (Credit Quality Indicator Loan Categories) (Details) - USD ($) $ in Thousands	Sep. 30, 2017	Dec. 31, 2016
Financing Receivable, Recorded Investment [Line Items]
Unearned lease revenue	$ 644	$ 482
Commercial And Industrial [Member]
Financing Receivable, Recorded Investment [Line Items]
Financing receivable, net	112,096	98,477
Commercial Real Estate: Non-Owner Occupied [Member]
Financing Receivable, Recorded Investment [Line Items]
Financing receivable, net	93,398	93,364
Commercial Real Estate: Owner Occupied [Member]
Financing Receivable, Recorded Investment [Line Items]
Financing receivable, net	109,598	106,960
Commercial Real Estate: Construction [Member]
Financing Receivable, Recorded Investment [Line Items]
Financing receivable, net	6,123	3,987
Commercial Loan [Member]
Financing Receivable, Recorded Investment [Line Items]
Financing receivable, net	321,215	302,788
Consumer: Home Equity Installment [Member]
Financing Receivable, Recorded Investment [Line Items]
Financing receivable, net	28,282	28,466
Consumer: Home Equity Line Of Credit [Member]
Financing Receivable, Recorded Investment [Line Items]
Financing receivable, net	53,177	51,609
Consumer: Auto Loans And Leases [Member]
Financing Receivable, Recorded Investment [Line Items]
Financing receivable, net	78,985	56,359
Consumer: Other [Member]
Financing Receivable, Recorded Investment [Line Items]
Financing receivable, net	5,784	13,301
Consumer Loans [Member]
Financing Receivable, Recorded Investment [Line Items]
Financing receivable, net	166,228	149,735
Residential: Real Estate [Member]
Financing Receivable, Recorded Investment [Line Items]
Financing receivable, net	138,709	134,475
Residential: Construction [Member]
Financing Receivable, Recorded Investment [Line Items]
Financing receivable, net	8,315	10,496
Residential Mortgages [Member]
Financing Receivable, Recorded Investment [Line Items]
Financing receivable, net	147,024	144,971
Consumer And Residential [Member]
Financing Receivable, Recorded Investment [Line Items]
Financing receivable, net	313,252	294,706
Pass [Member] | Commercial And Industrial [Member]
Financing Receivable, Recorded Investment [Line Items]
Financing receivable, net	110,839	97,308
Pass [Member] | Commercial Real Estate: Non-Owner Occupied [Member]
Financing Receivable, Recorded Investment [Line Items]
Financing receivable, net	86,159	83,962
Pass [Member] | Commercial Real Estate: Owner Occupied [Member]
Financing Receivable, Recorded Investment [Line Items]
Financing receivable, net	103,288	99,981
Pass [Member] | Commercial Real Estate: Construction [Member]
Financing Receivable, Recorded Investment [Line Items]
Financing receivable, net	5,954	3,794
Pass [Member] | Commercial Loan [Member]
Financing Receivable, Recorded Investment [Line Items]
Financing receivable, net	306,240	285,045
Special mention [Member] | Commercial And Industrial [Member]
Financing Receivable, Recorded Investment [Line Items]
Financing receivable, net	535	479
Special mention [Member] | Commercial Real Estate: Non-Owner Occupied [Member]
Financing Receivable, Recorded Investment [Line Items]
Financing receivable, net	817	1,811
Special mention [Member] | Commercial Real Estate: Owner Occupied [Member]
Financing Receivable, Recorded Investment [Line Items]
Financing receivable, net	2,692	1,075
Special mention [Member] | Commercial Loan [Member]
Financing Receivable, Recorded Investment [Line Items]
Financing receivable, net	4,044	3,365
Substandard [Member] | Commercial And Industrial [Member]
Financing Receivable, Recorded Investment [Line Items]
Financing receivable, net	722	690
Substandard [Member] | Commercial Real Estate: Non-Owner Occupied [Member]
Financing Receivable, Recorded Investment [Line Items]
Financing receivable, net	6,422	7,591
Substandard [Member] | Commercial Real Estate: Owner Occupied [Member]
Financing Receivable, Recorded Investment [Line Items]
Financing receivable, net	3,618	5,904
Substandard [Member] | Commercial Real Estate: Construction [Member]
Financing Receivable, Recorded Investment [Line Items]
Financing receivable, net	169	193
Substandard [Member] | Commercial Loan [Member]
Financing Receivable, Recorded Investment [Line Items]
Financing receivable, net	10,931	14,378
Performing [Member] | Consumer: Home Equity Installment [Member]
Financing Receivable, Recorded Investment [Line Items]
Financing receivable, net	28,267	28,435
Performing [Member] | Consumer: Home Equity Line Of Credit [Member]
Financing Receivable, Recorded Investment [Line Items]
Financing receivable, net	52,664	50,872
Performing [Member] | Consumer: Auto Loans And Leases [Member]
Financing Receivable, Recorded Investment [Line Items]
Financing receivable, net	78,985	56,315
Performing [Member] | Consumer: Other [Member]
Financing Receivable, Recorded Investment [Line Items]
Financing receivable, net	5,784	13,295
Performing [Member] | Consumer Loans [Member]
Financing Receivable, Recorded Investment [Line Items]
Financing receivable, net	165,700	148,917
Performing [Member] | Residential: Real Estate [Member]
Financing Receivable, Recorded Investment [Line Items]
Financing receivable, net	137,288	132,593
Performing [Member] | Residential: Construction [Member]
Financing Receivable, Recorded Investment [Line Items]
Financing receivable, net	8,315	10,496
Performing [Member] | Residential Mortgages [Member]
Financing Receivable, Recorded Investment [Line Items]
Financing receivable, net	145,603	143,089
Performing [Member] | Consumer And Residential [Member]
Financing Receivable, Recorded Investment [Line Items]
Financing receivable, net	311,303	292,006
Non-performing [Member] | Consumer: Home Equity Installment [Member]
Financing Receivable, Recorded Investment [Line Items]
Financing receivable, net	15	31
Non-performing [Member] | Consumer: Home Equity Line Of Credit [Member]
Financing Receivable, Recorded Investment [Line Items]
Financing receivable, net	513	737
Non-performing [Member] | Consumer: Auto Loans And Leases [Member]
Financing Receivable, Recorded Investment [Line Items]
Financing receivable, net		44
Non-performing [Member] | Consumer: Other [Member]
Financing Receivable, Recorded Investment [Line Items]
Financing receivable, net		6
Non-performing [Member] | Consumer Loans [Member]
Financing Receivable, Recorded Investment [Line Items]
Financing receivable, net	528	818
Non-performing [Member] | Residential: Real Estate [Member]
Financing Receivable, Recorded Investment [Line Items]
Financing receivable, net	1,421	1,882
Non-performing [Member] | Residential Mortgages [Member]
Financing Receivable, Recorded Investment [Line Items]
Financing receivable, net	1,421	1,882
Non-performing [Member] | Consumer And Residential [Member]
Financing Receivable, Recorded Investment [Line Items]
Financing receivable, net	$ 1,949	$ 2,700

XML

Loans And Leases (Allowance For Loan Losses) (Details) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended		12 Months Ended
	Sep. 30, 2017	Sep. 30, 2016	Sep. 30, 2017	Sep. 30, 2016	Dec. 31, 2016
Financing Receivable, Allowance for Credit Losses [Line Items]
Allowance for Loan Losses: Beginning balance	$ 9,406	$ 9,207	$ 9,364	$ 9,527	$ 9,527
Charge-offs	(439)	(304)	(1,035)	(1,141)	(1,380)
Recoveries	14	68	102	160	192
Provisions	375	225	925	650	1,025
Allowance for Loan Losses: Ending balance	9,356	9,196	9,356	9,196	9,364
Allowance for Loan Losses: Ending balance: individually evaluated for impairment	1,639		1,639		3,061
Allowance for Loan Losses: Ending balance: collectively evaluated for impairment	7,717		7,717		6,303
Loan Receivables: Ending balance	634,467		634,467		597,494
Loans Receivable: Ending balance: individually evaluated for impairment	7,337		7,337		11,352
Loans Receivable: Ending balance: collectively evaluated for impairment	627,130		627,130		586,142
Unearned lease revenue	644		644		482
Deferred loan costs	2,000		2,000		1,800
Commercial And Industrial [Member]
Financing Receivable, Allowance for Credit Losses [Line Items]
Allowance for Loan Losses: Beginning balance	1,383	1,231	1,075	1,336	1,336
Charge-offs	(46)	(30)	(76)	(199)	(224)
Recoveries	2	18	5	39	55
Provisions	60	(88)	395	(45)	(92)
Allowance for Loan Losses: Ending balance	1,399	1,131	1,399	1,131	1,075
Allowance for Loan Losses: Ending balance: individually evaluated for impairment	193		193		193
Allowance for Loan Losses: Ending balance: collectively evaluated for impairment	1,206		1,206		882
Loan Receivables: Ending balance	112,096		112,096		98,477
Loans Receivable: Ending balance: individually evaluated for impairment	228		228		235
Loans Receivable: Ending balance: collectively evaluated for impairment	111,868		111,868		98,242
Commercial Real Estate [Member]
Financing Receivable, Allowance for Credit Losses [Line Items]
Allowance for Loan Losses: Beginning balance	4,510	4,880	4,706	5,014	5,014
Charge-offs	(48)	(183)	(416)	(526)	(592)
Recoveries	3	3	44	36	37
Provisions	(363)	108	(232)	284	247
Allowance for Loan Losses: Ending balance	4,102	4,808	4,102	4,808	4,706
Allowance for Loan Losses: Ending balance: individually evaluated for impairment	1,076		1,076		2,382
Allowance for Loan Losses: Ending balance: collectively evaluated for impairment	3,026		3,026		2,324
Loan Receivables: Ending balance	209,119		209,119		204,311
Loans Receivable: Ending balance: individually evaluated for impairment	5,160		5,160		8,436
Loans Receivable: Ending balance: collectively evaluated for impairment	203,959		203,959		195,875
Consumer [Member]
Financing Receivable, Allowance for Credit Losses [Line Items]
Allowance for Loan Losses: Beginning balance	1,939	1,692	1,834	1,533	1,533
Charge-offs	(345)	(91)	(505)	(356)	(504)
Recoveries	9	47	53	85	100
Provisions	366	140	587	526	705
Allowance for Loan Losses: Ending balance	1,969	1,788	1,969	1,788	1,834
Allowance for Loan Losses: Ending balance: individually evaluated for impairment	53		53		171
Allowance for Loan Losses: Ending balance: collectively evaluated for impairment	1,916		1,916		1,663
Loan Receivables: Ending balance	166,228		166,228		149,735
Loans Receivable: Ending balance: individually evaluated for impairment	528		528		799
Loans Receivable: Ending balance: collectively evaluated for impairment	165,700		165,700		148,936
Residential Real Estate [Member]
Financing Receivable, Allowance for Credit Losses [Line Items]
Allowance for Loan Losses: Beginning balance	1,511	1,365	1,622	1,407	1,407
Charge-offs			(38)	(60)	(60)
Recoveries
Provisions	288	(8)	215	10	275
Allowance for Loan Losses: Ending balance	1,799	1,357	1,799	1,357	1,622
Allowance for Loan Losses: Ending balance: individually evaluated for impairment	317		317		315
Allowance for Loan Losses: Ending balance: collectively evaluated for impairment	1,482		1,482		1,307
Loan Receivables: Ending balance	147,024		147,024		144,971
Loans Receivable: Ending balance: individually evaluated for impairment	1,421		1,421		1,882
Loans Receivable: Ending balance: collectively evaluated for impairment	145,603		145,603		143,089
Unallocated [Member]
Financing Receivable, Allowance for Credit Losses [Line Items]
Allowance for Loan Losses: Beginning balance	63	39	127	237	237
Charge-offs
Recoveries
Provisions	24	73	(40)	(125)	(110)
Allowance for Loan Losses: Ending balance	87	$ 112	87	$ 112	127
Allowance for Loan Losses: Ending balance: collectively evaluated for impairment	$ 87		$ 87		$ 127

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Earnings Per Share (Narrative) (Details)	3 Months Ended		9 Months Ended
	Sep. 30, 2017 shares	Sep. 30, 2016 shares	Sep. 30, 2017 item shares	Sep. 30, 2016 shares
Earnings Per Share, Basic, by Common Class, Including Two Class Method [Line Items]
Number of active share-based compensation plans | item			2
Potentially dilutive common shares	26,211	11,672	20,367	9,074
Employee Stock Option [Member]
Earnings Per Share, Basic, by Common Class, Including Two Class Method [Line Items]
Potentially dilutive common shares	16,707	2,925	12,237	2,592
Restricted Stock [Member]
Earnings Per Share, Basic, by Common Class, Including Two Class Method [Line Items]
Potentially dilutive common shares	9,504	8,747	8,130	6,482

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Earnings Per Share (Schedule Of Earnings Per Share, Basic And Diluted) (Details) - USD ($) $ / shares in Units, $ in Thousands		3 Months Ended		9 Months Ended
		Sep. 30, 2017	Sep. 30, 2016	Sep. 30, 2017	Sep. 30, 2016
Earnings Per Share [Abstract]
Net income available to common shareholders		$ 2,226	$ 2,035	$ 6,389	$ 5,664
Weighted-average common shares outstanding		3,712,297	3,680,707	3,704,859	3,679,104
Basic EPS	[1]	$ 0.60	$ 0.55	$ 1.72	$ 1.54
Potentially dilutive common shares		26,211	11,672	20,367	9,074
Weighted-average common and potentially dilutive shares outstanding		3,738,508	3,692,379	3,725,226	3,688,178
Diluted EPS	[1]	$ 0.60	$ 0.55	$ 1.72	$ 1.54

[1] On August 15, 2017, the Company declared a three-for-two stock split effected in the form of a 50% stock dividend. Per share data for the three and nine months ended September 30, 2016 has been restated for the effects thereof.

XML

Stock Plans (Narrative) (Details)		9 Months Ended
	Feb. 07, 2017 $ / shares shares	Sep. 30, 2017 USD ($) $ / shares item shares	Sep. 30, 2016 USD ($) $ / shares shares
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Number of active share-based compensation plans | item		2
Shares granted
Options exercised		17,250	750
Options exercised, price per share | $ / shares		$ 19.27	$ 18.50
Options exercised, intrinsic value | $		$ 64,055	$ 2,585
Optioins exercised, realized tax deduction | $		257,492	2,375
Options exercised, tax benefit | $		$ 87,547	$ 808
Number of shares issued		0
Restricted Stock [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Non-option shares granted		13,224	13,209
Stock-Settled Stock Appreciation Rights (SSARs) [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Shares granted		24,346
Vesting period		3 years
Expected term		10 years
Options exercised
Options exercised, price per share | $ / shares
Omnibus Plan [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Number of shares authorized		750,000
Omnibus Plan [Member] | Stock-Settled Stock Appreciation Rights (SSARs) [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Shares granted	24,346
Expected term	10 years
Dividend rate	3.11%
Grant date fair value stock price | $ / shares	$ 5.06
Interest rate	2.386%
Volatility rate	23.434%
Director Plan [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Number of shares authorized		750,000
Director Plan [Member] | Restricted Stock [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Non-option shares granted		8,400	8,400
Vesting period		2 years	1 year
Long-Term Incentive Plan [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Vesting period		3 years
Long-Term Incentive Plan [Member] | Restricted Stock [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Holding period		2 years
Employee Stock Purchase Plan [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Number of shares authorized		165,000
Number of shares issued		69,701
Award Date One [Member] | Omnibus Plan [Member] | Restricted Stock [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Non-option shares granted	4,749	4,749	4,734
Vesting period	3 years	3 years	3 years
Holding period	2 years
Term used to determine historical volatility	5 years
Treasury yield	5 years
Dividend rate	0.00%
Grant date stock price | $ / shares	$ 26.17
Discount rate	8.548%
Interest rate	1.841%
Volatility rate	18.556%
Award Date Two [Member] | Omnibus Plan [Member] | Restricted Stock [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Non-option shares granted		75	75
Vesting period		1 year	1 year

XML

Stock Plans (Summary Of Weighted-Average Fair-Value And Vesting Of Restricted Stock Grants) (Details) - Restricted Stock [Member] - $ / shares		9 Months Ended
	Feb. 07, 2017	Sep. 30, 2017	Sep. 30, 2016
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Shares granted		13,224	13,209
Weighted average grant date fair value		$ 25.36	$ 20.84
Director Plan [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Shares granted		8,400	8,400
Weighted average grant date fair value		$ 26.17	$ 21.60
Vesting period		2 years	1 year
Director Plan [Member] | Share-based Compensation Award, Tranche One [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Vesting period, percentage per year		50.00%
Award Date One [Member] | Omnibus Plan [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Shares granted	4,749	4,749	4,734
Weighted average grant date fair value		$ 23.93	$ 19.48
Vesting period	3 years	3 years	3 years
Award Date One [Member] | Omnibus Plan [Member] | Share-based Compensation Award, Tranche One [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Vesting period, percentage per year		33.00%	33.00%
Award Date Two [Member] | Omnibus Plan [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Shares granted		75	75
Weighted average grant date fair value		$ 26.17	$ 21.00
Vesting period		1 year	1 year

XML

Stock Plans (Schedule Of Non-Vested Restricted Stock Units Activity) (Details) - Restricted Stock [Member] - $ / shares	9 Months Ended
	Sep. 30, 2017	Sep. 30, 2016
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Non-vested balance at December 31, 2016	21,962
Granted	13,224
Forfeited
Vested	(14,482)
Non-vested balance at September 30, 2017	20,704
Weighted average grant date fair value, Non-vested balance at December 31, 2016	$ 20.31
Weighted average grant date fair value, Granted	25.36	$ 20.84
Weighted average grant date fair value, Vested	20.47
Weighted average grant date fair value, Non-vested balance at September 30, 2017	$ 23.59
Director Plan [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Non-vested balance at December 31, 2016	8,400
Granted	8,400
Forfeited
Vested	(8,400)
Non-vested balance at September 30, 2017	8,400
Weighted average grant date fair value, Granted	$ 26.17	$ 21.60
Omnibus Plan [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Non-vested balance at December 31, 2016	13,562
Granted	4,824
Forfeited
Vested	(6,082)
Non-vested balance at September 30, 2017	12,304

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Stock Plans (Schedule Of SSARs Activity) (Details) - $ / shares	9 Months Ended		12 Months Ended
	Sep. 30, 2017	Sep. 30, 2016	Dec. 31, 2016
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Outstanding and exercisable, December 31, 2016	22,500
Granted
Exercised	(17,250)	(750)
Forfeited
Outstanding and exercisable, September 30, 2017	5,250		22,500
Weighted-average exercise price, Outstanding and exercisable, December 31, 2016	$ 19.12
Weighted-average exercise price - Granted
Weighted-average exercise price - Exercised	19.27	$ 18.50
Weighted-average exercise price - Forfeited
Weighted-average exercise price, Outstanding and exercisable, September 30, 2017	$ 18.62		$ 19.12
Weighted-average remaining contractual term (years), Outstanding and exercisable	3 months 18 days		1 year
Stock-Settled Stock Appreciation Rights (SSARs) [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Outstanding and exercisable, December 31, 2016	29,014
Granted	24,346
Exercised
Forfeited
Outstanding and exercisable, September 30, 2017	53,360		29,014
Weighted-average exercise price, Outstanding and exercisable, December 31, 2016	$ 3.48
Weighted-average exercise price - Granted	5.06
Weighted-average exercise price - Exercised
Weighted-average exercise price - Forfeited
Weighted-average exercise price, Outstanding and exercisable, September 30, 2017	$ 4.20		$ 3.48
Weighted-average remaining contractual term (years), Granted	9 years 3 months 18 days
Weighted-average remaining contractual term (years), Outstanding and exercisable	8 years 9 months 18 days		9 years 1 month 6 days
Exercisable	9,668
Vesting period	3 years
Stock-Settled Stock Appreciation Rights (SSARs) [Member] | Share-based Compensation Award, Tranche One [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Vesting period, percentage per year	33.00%

XML

Stock Plans (Schedule Of Compensation Cost For Share-Based Payment Arrangements, Allocation Of Share-Based Compensation Costs By Plan) (Details) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2017	Sep. 30, 2016	Sep. 30, 2017	Sep. 30, 2016
Non-Vested Equity Awards [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Stock-based compensation expense	$ 77	$ 81	$ 256	$ 248
Non-Vested Equity Awards [Member] | Director Plan [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Stock-based compensation expense	28	45	89	129
Non-Vested Equity Awards [Member] | Omnibus Plan [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Stock-based compensation expense	49	36	144	104
Non-Vested Equity Awards [Member] | Employee Stock Purchase Plan [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Stock-based compensation expense			23	15
Restricted Stock And Stock-Settled Stock Appreciation Rights [Member] | Omnibus Plan [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Stock-based compensation expense	$ 54	$ 51	$ 163	$ 137

XML

Stock Plans (Schedule Of Unrecognized Compensation Cost, Non-Vested Awards) (Details) - Stock-Based Compensation Plan [Member] $ in Thousands	Sep. 30, 2017 USD ($)
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Unrecognized stock-based compensation expense	$ 476
Director Plan [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Unrecognized stock-based compensation expense	146
Omnibus Plan [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Unrecognized stock-based compensation expense	$ 330

XML

Stock Plans (Summary Of Stock Option Activity) (Details) - $ / shares	9 Months Ended		12 Months Ended
	Sep. 30, 2017	Sep. 30, 2016	Dec. 31, 2016
Stock Plans [Abstract]
Outstanding and exercisable, December 31, 2016	22,500
Granted
Exercised	(17,250)	(750)
Forfeited
Outstanding and exercisable, September 30, 2017	5,250		22,500
Weighted-average exercise price, Outstanding and exercisable, December 31, 2016	$ 19.12
Weighted-average exercise price - Granted
Weighted-average exercise price - Exercised	19.27	$ 18.50
Weighted-average exercise price - Forfeited
Weighted-average exercise price, Outstanding and exercisable, September 30, 2017	$ 18.62		$ 19.12
Weighted-average remaining contractual term (years), Outstanding and exercisable	3 months 18 days		1 year

XML

Fair Value Measurements (Narrative) (Details)	9 Months Ended	12 Months Ended
	Sep. 30, 2017 USD ($) item	Dec. 31, 2016 USD ($) item
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Transfers between Level 1 and Level 2	$ 0	$ 0
Transfers into (out of) Level 3	$ 0	$ 0
Other Repossessed Assets [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Number of repossessed automobiles | item	1	1
Other assets fair value	$ 4,000	$ 8,000
Adjustments to carrying value	$ 0	$ 0
Minimum [Member] | Impaired Loans [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Fair value inputs, comparability adjustments	(20.54%)	(22.72%)
Minimum [Member] | Other Real Estate Owned [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Fair value inputs, comparability adjustments	(17.95%)	(21.74%)
Maximum [Member] | Impaired Loans [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Fair value inputs, comparability adjustments	(53.00%)	(57.49%)
Maximum [Member] | Other Real Estate Owned [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Fair value inputs, comparability adjustments	(99.00%)	(99.00%)
Weighted Average [Member] | Impaired Loans [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Fair value inputs, comparability adjustments	(30.71%)	(32.47%)
Weighted Average [Member] | Other Real Estate Owned [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Fair value inputs, comparability adjustments	(28.19%)	(32.38%)

XML

Fair Value Measurements (Carrying Amount And Estimated Fair Value By Balance Sheet Grouping) (Details) - USD ($) $ in Thousands	Sep. 30, 2017	Dec. 31, 2016
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]
Available-for-sale Securities	$ 151,995	$ 130,037
Loans held-for-sale	1,662	2,907
Carrying Amount [Member]
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]
Cash and cash equivalents	41,881	25,843
Available-for-sale Securities	151,995	130,037
FHLB stock	2,543	2,606
Loans and leases, net	625,111	588,130
Loans held-for-sale	1,629	2,854
Accrued interest receivable	2,769	2,246
Short-term borrowings	12,920	4,223
Repayment of FHLB advances	23,704
Accrued interest payable	319	181
Carrying Amount [Member] | Deposits With No Stated Maturities [Member]
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]
Deposit liabilities	640,173	610,706
Carrying Amount [Member] | Time Deposits [Member]
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]
Deposit liabilities	108,404	92,753
Estimated Fair Value [Member]
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]
Cash and cash equivalents	41,881	25,843
Available-for-sale Securities	151,995	130,037
FHLB stock	2,543	2,606
Loans and leases, net	623,567	590,688
Loans held-for-sale	1,662	2,907
Accrued interest receivable	2,769	2,246
Short-term borrowings	12,920	4,223
Repayment of FHLB advances	23,617
Accrued interest payable	319	181
Estimated Fair Value [Member] | Deposits With No Stated Maturities [Member]
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]
Deposit liabilities	640,173	610,706
Estimated Fair Value [Member] | Time Deposits [Member]
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]
Deposit liabilities	107,564	91,969
Quoted Prices In Active Markets (Level 1) [Member]
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]
Cash and cash equivalents	41,881	25,843
Available-for-sale Securities	776	633
Significant Other Observable Inputs (Level 2) [Member]
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]
Available-for-sale Securities	151,219	129,404
FHLB stock	2,543	2,606
Loans held-for-sale	1,662	2,907
Accrued interest receivable	2,769	2,246
Short-term borrowings	12,920	4,223
Repayment of FHLB advances	23,617
Accrued interest payable	319	181
Significant Other Observable Inputs (Level 2) [Member] | Deposits With No Stated Maturities [Member]
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]
Deposit liabilities	640,173	610,706
Significant Other Observable Inputs (Level 2) [Member] | Time Deposits [Member]
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]
Deposit liabilities	107,564	91,969
Significant Other Unobservable Inputs (Level 3) [Member]
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]
Loans and leases, net	$ 623,567	$ 590,688

XML

Fair Value Measurements (Financial Instruments Measured At Fair Value On Recurring Basis) (Details) - USD ($) $ in Thousands	Sep. 30, 2017	Dec. 31, 2016
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Total Available-for-sale securities, Fair value	$ 151,995	$ 130,037
Agency - GSE [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Total Available-for-sale securities, Fair value	16,213	18,276
Obligations Of States And Political Subdivisions [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Total Available-for-sale securities, Fair value	43,735	40,191
MBS - GSE Residential [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Total Available-for-sale securities, Fair value	91,271	70,937
Equity Securities - Financial Services [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Total Available-for-sale securities, Fair value	776	633
Quoted Prices In Active Markets (Level 1) [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Total Available-for-sale securities, Fair value	776	633
Quoted Prices In Active Markets (Level 1) [Member] | Equity Securities - Financial Services [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Total Available-for-sale securities, Fair value	776	633
Significant Other Observable Inputs (Level 2) [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Total Available-for-sale securities, Fair value	151,219	129,404
Significant Other Observable Inputs (Level 2) [Member] | Agency - GSE [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Total Available-for-sale securities, Fair value	16,213	18,276
Significant Other Observable Inputs (Level 2) [Member] | Obligations Of States And Political Subdivisions [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Total Available-for-sale securities, Fair value	43,735	40,191
Significant Other Observable Inputs (Level 2) [Member] | MBS - GSE Residential [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Total Available-for-sale securities, Fair value	$ 91,271	$ 70,937

XML

Fair Value Measurements (Fair Value Measurements At Fair Value Segregated By Hierarchy Fair Value Levels) (Details) - USD ($) $ in Thousands	Sep. 30, 2017	Dec. 31, 2016
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Assets, Fair Value Disclosure, Nonrecurring	$ 5,017	$ 7,126
Impaired Loans [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Assets, Fair Value Disclosure, Nonrecurring	4,253	6,254
Other Real Estate Owned [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Assets, Fair Value Disclosure, Nonrecurring	764	$ 872
Significant Other Unobservable Inputs (Level 3) [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Assets, Fair Value Disclosure, Nonrecurring	5,017
Significant Other Unobservable Inputs (Level 3) [Member] | Impaired Loans [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Assets, Fair Value Disclosure, Nonrecurring	4,253
Significant Other Unobservable Inputs (Level 3) [Member] | Other Real Estate Owned [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Assets, Fair Value Disclosure, Nonrecurring	$ 764

XML

Acquisition (Narrative) (Details) - USD ($)	9 Months Ended
	Sep. 30, 2017	Mar. 17, 2017
Business Acquisition [Line Items]
Acquisition costs	$ 41,000
Goodwill	209,000
Goodwill impairment	$ 0
West Scranton branch of Wayne Bank [Member]
Business Acquisition [Line Items]
Loans acquired		$ 1,574,000
Goodwill		$ 209,000

XML

Acquisition (Summary Of Estimated Fair Value Of Assets Acquired And Liabilities Assumed) (Details) - USD ($) $ in Thousands	Sep. 30, 2017	Mar. 17, 2017
Business Acquisition [Line Items]
Goodwill	$ 209
West Scranton branch of Wayne Bank [Member]
Business Acquisition [Line Items]
Cash and cash equivalents		$ 11,817
Loans		1,574
Bank premises and equipment		264
Goodwill		209
Accrued interest receivable and other assets		4
Total assets acquired		13,868
Deposits		13,809
Accrued interest payable and other liabilities		59
Total liabilities assumed		$ 13,868

XML

Employee Benefits (Narrative) (Details) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2017 USD ($) employee	Sep. 30, 2016 USD ($)	Sep. 30, 2017 USD ($) employee	Sep. 30, 2016 USD ($)	Mar. 29, 2017 item	Dec. 31, 2016 USD ($)
Defined Benefit Plan Disclosure [Line Items]
Purchase of life insurance policies			$ 8,000
Cash surrender value of bank owned life insurance	$ 19,857		19,857			$ 11,435
Earnings on bank-owned life insurance	$ 158	$ 89	$ 422	$ 264
Number of officers with split dollar life insurance arrangement | employee	11		11
Split dollar life insurance arrangement, death benefit	$ 20,600		$ 20,600
Split dollar life insurance arrangement, death benefit to be paid to insured's beneficiary	4,000		4,000
Split dollar life insurance arrangement, death benefit to be paid to Company	$ 16,600		$ 16,600
Number of officers with opportunity to retain benefit equal to two times highest base salary after separation | employee	3		3
Split dollar life insurance arrangement, accrued expense	$ 21		$ 21
Supplemental Executive Retirement Plan [Member]
Defined Benefit Plan Disclosure [Line Items]
Number of officers who entered into supplemental executive retirement agreement | item					5
Defined benefit plan, accrued expense	$ 268		$ 268

XML

Label	Element	Value
West Scranton Branch Of Wayne Bank [Member]
Business Combination, Recognized Identifiable Assets Acquired and Liabilities Assumed, Non-cash Assets	fdbc_BusinessCombinationRecognizedIdentifiableAssetsAcquiredAndLiabilitiesAssumedNonCashAssets	$ 2,051,000