FIDELITY D & D BANCORP, INC.

Form 10-Q September 30, ~~2017~~2019

Index


Part I. Financial Information		Page
Item 1.	Financial Statements (unaudited):
	Consolidated Balance Sheets as of September 30, ~~2017~~2019 and December 31, ~~2016~~2018	3
	Consolidated Statements of Income for the three and nine months ended September 30, ~~2017~~2019 and ~~2016~~2018	4
	Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, ~~2017~~2019 and ~~2016~~2018	5
	Consolidated Statements of Changes in Shareholders’ Equity for the three and nine months ended September 30, ~~2017~~2019 and ~~2016~~2018	6
	Consolidated Statements of Cash Flows for the nine months ended September 30, ~~2017~~2019 and ~~2016~~2018	78
	Notes to Consolidated Financial Statements (Unaudited)	910
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	3336
Item 3.	Quantitative and Qualitative Disclosure about Market Risk	5155
Item 4.	Controls and Procedures	5660

Part II. Other Information
Item 1.	Legal Proceedings	5761
Item 1A.	Risk Factors	5761
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	5761
Item 3.	Defaults upon Senior Securities	5761
Item 4.	Mine Safety Disclosures	5761
Item 5.	Other Information	5761
Item 6.	Exhibits	5761
Signatures		5963

Table Of Contents

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		September 30, 2019		December 31, 2018
Assets:
Cash and due from banks	$	11,835	$	12,856	$	17,292	$	16,025
Interest-bearing deposits with financial institutions		30,046		12,987		1,395		1,460
Total cash and cash equivalents		41,881		25,843		18,687		17,485
Available-for-sale securities		151,995		130,037		189,246		182,810
Federal Home Loan Bank stock		2,543		2,606		3,818		6,339
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
$9,441 in 2019; $9,747 in 2018)						739,278		718,317
Loans held-for-sale (fair value $1,778 in 2019, $5,789 in 2018)						1,751		5,707
Foreclosed assets held-for-sale		927		1,306		685		190
Bank premises and equipment, net		16,899		17,164		18,149		18,289
Leased property under finance leases, net						293		333
Right-of-use assets						5,515		-
Cash surrender value of bank owned life insurance		19,857		11,435		23,094		20,615
Accrued interest receivable		2,769		2,246		3,436		3,271
Goodwill		209		-		209		209
Other assets		14,446		11,323		7,263		7,537
Total assets	$	878,266	$	792,944	$	1,011,424	$	981,102
Liabilities:
Deposits:
Interest-bearing	$	562,719	$	492,306	$	648,506	$	575,452
Non-interest-bearing		185,858		211,153		203,816		194,731
Total deposits		748,577		703,459		852,322		770,183
Accrued interest payable and other liabilities		6,781		4,631		8,604		8,956
Finance lease obligation						299		336
Operating lease liabilities						6,055		-
Short-term borrowings		12,920		4,223		24,355		76,366
FHLB advances		23,704		-		15,000		31,704
Total liabilities		791,982		712,313		906,635		887,545
Shareholders' equity:
Preferred stock authorized 5,000,000 shares with no par value; none issued		-		-		-		-
Capital stock, no par value (10,000,000 shares authorized; shares issued and outstanding; 3,729,978 in 2017; and 2,453,805 in 2016)		28,200		27,155
Capital stock, no par value (10,000,000 shares authorized; shares issued and outstanding; 3,781,500 in 2019; and 3,759,426 in 2018)						30,633		29,715
Retained earnings		56,163		52,095		70,721		64,937
Accumulated other comprehensive income		1,921		1,381
Accumulated other comprehensive income (loss)						3,435		(1,095)
Total shareholders' equity		86,284		80,631		104,789		93,557
Total liabilities and shareholders' equity	$	878,266	$	792,944	$	1,011,424	$	981,102

See notes to unaudited consolidated financial statements


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, 2019		September 30, 2018		September 30, 2019		September 30, 2018
Interest income:
Loans and leases:
Taxable	$	8,229	$	7,524	$	24,065	$	21,251
Nontaxable		270		256		785		689
Interest-bearing deposits with financial institutions		12		10		40		94
Restricted regulatory securities		157		44		342		122
Investment securities:
U.S. government agency and corporations		908		799		2,789		2,377
States and political subdivisions (nontaxable)		432		395		1,299		1,162
Other securities		-		-		-		11
Total interest income		10,008		9,028		29,320		25,706
Interest expense:
Deposits		1,683		981		4,489		2,671
Securities sold under repurchase agreements		-		3		-		13
Other short-term borrowings and other		210		260		742		324
FHLB advances		115		73		385		205
Total interest expense		2,008		1,317		5,616		3,213
Net interest income		8,000		7,711		23,704		22,493
Provision for loan losses		320		400		830		1,125
Net interest income after provision for loan losses		7,680		7,311		22,874		21,368
Other income:
Service charges on deposit accounts		586		573		1,688		1,666
Interchange fees		555		506		1,600		1,480
Fees from trust fiduciary activities		342		305		1,012		1,032
Fees from financial services		262		187		727		559
Service charges on loans		317		136		804		443
Fees and other revenue		183		252		675		731
Earnings on bank-owned life insurance		168		150		480		448
Gain (loss) on write-down, sale or disposal of:
Loans		224		168		602		522
Available-for-sale debt securities		(2)		4		(6)		10
Equity securities		-		-		-		44
Premises and equipment		(3)		2		(4)		2
Total other income		2,632		2,283		7,578		6,937
Other expenses:
Salaries and employee benefits		3,699		3,454		10,988		10,241
Premises and equipment		1,007		918		3,117		2,815
Advertising and marketing		233		250		923		872
Professional services		436		355		978		1,237
Data processing and communication		469		377		1,360		1,099
Automated transaction processing		220		202		659		580
Office supplies and postage		114		85		316		293
FDIC assessment		2		70		131		203
PA shares tax		217		196		474		432
Loan collection		28		31		211		82
Other real estate owned		62		63		78		127
Other		156		171		613		561
Total other expenses		6,643		6,172		19,848		18,542
Income before income taxes		3,669		3,422		10,604		9,763
Provision for income taxes		611		559		1,742		1,604
Net income	$	3,058	$	2,863	$	8,862	$	8,159
Per share data :
Net income - basic	$	0.82	$	0.76	$	2.35	$	2.17
Net income - diluted	$	0.80	$	0.75	$	2.32	$	2.15
Dividends	$	0.26	$	0.24	$	0.78	$	0.72

See notes to unaudited consolidated financial statements

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



Fidelity D & D Bancorp, Inc. and Subsidiary
Consolidated Statements of Comprehensive Income	Three months ended				Nine months ended				Three months ended				Nine months ended
(Unaudited)	September 30,				September 30,				September 30,				September 30,
(dollars in thousands)	2017		2016		2017		2016		2019		2018		2019		2018

Net income	$	2,226	$	2,035	$	6,389	$	5,664	$	3,058	$	2,863	$	8,862	$	8,159

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)
Unrealized holding gain (loss) on available-for-sale debt securities										1,366		(1,591)		5,728		(4,960)
Reclassification adjustment for net losses (gains) realized in income										2		(4)		6		(10)
Net unrealized gain (loss)		104		(361)		818		1,923		1,368		(1,595)		5,734		(4,970)
Tax effect		(35)		123		(278)		(654)		(287)		335		(1,204)		1,044
Unrealized gain (loss), net of tax		69		(238)		540		1,269		1,081		(1,260)		4,530		(3,926)
Other comprehensive income (loss), net of tax		69		(238)		540		1,269		1,081		(1,260)		4,530		(3,926)
Total comprehensive income, net of tax	$	2,295	$	1,797	$	6,929	$	6,933	$	4,139	$	1,603	$	13,392	$	4,233

See notes to unaudited consolidated financial statements



Fidelity D & D Bancorp, Inc. and Subsidiary	Fidelity D & D Bancorp, Inc. and Subsidiary										Fidelity D & D Bancorp, Inc. and Subsidiary
Consolidated Statements of Changes in Shareholders' Equity	Consolidated Statements of Changes in Shareholders' Equity										Consolidated Statements of Changes in Shareholders' Equity
For the nine months ended September 30, 2017 and 2016
For the nine months ended September 30, 2019 and 2018											For the nine months ended September 30, 2019 and 2018
(Unaudited)							Accumulated										Accumulated
							other										other
	Capital stock				Retained		comprehensive				Capital stock				Retained		comprehensive
(dollars in thousands)	Shares		Amount		earnings		income		Total		Shares		Amount		earnings		income (loss)		Total
Balance, December 31, 2015		2,443,405	$	26,700	$	47,463	$	2,188	$	76,351
Balance, December 31, 2017												3,734,478	$	28,361	$	57,218	$	1,804	$	87,383
Net income						5,664				5,664						8,159				8,159
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
Other comprehensive loss																		(3,926)		(3,926)
Effect of adopting ASU 2016-01																421		(421)		-
Issuance of common stock through Employee Stock Purchase Plan		4,085		126						126		6,783		149						149
Issuance of common stock through Dividend Reinvestment Plan		7,744		331						331		5,486		311						311
Issuance of common stock from vested restricted share grants through stock compensation plans		9,657										9,994
Issuance of common stock through exercise of stock options		11,500		332						332		750		14						14
Stock-based compensation expense				256						256				685						685
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)						(2,723)				(2,723)
Balance, September 30, 2017		3,729,978	$	28,200	$	56,163	$	1,921	$	86,284
Balance, September 30, 2018												3,757,491	$	29,520	$	63,075	$	(2,543)	$	90,052

See notes to unaudited consolidated financial statements
Balance, December 31, 2018												3,759,426	$	29,715	$	64,937	$	(1,095)	$	93,557
Net income																8,862				8,862
Other comprehensive income																		4,530		4,530
Effect of adopting ASU 2016-02																(107)				(107)
Issuance of common stock through Employee Stock Purchase Plan												4,535		175						175
Issuance of common stock from vested restricted share grants through stock compensation plans												15,574
Issuance of common stock through exercise of SSARs												1,965
Stock-based compensation expense														743						743
Cash dividends declared																(2,971)				(2,971)
Balance, September 30, 2019												3,781,500	$	30,633	$	70,721	$	3,435	$	104,789

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



For the three months ended September 30, 2019 and 2018
(Unaudited)							Accumulated
							other
	Capital stock				Retained		comprehensive
(dollars in thousands)	Shares		Amount		earnings		income (loss)		Total
Balance, June 30, 2018		3,752,005	$	29,016	$	61,119	$	(1,283)	$	88,852
Net income						2,863				2,863
Other comprehensive loss								(1,260)		(1,260)
Issuance of common stock through Dividend Reinvestment Plan		5,486		311						311
Stock-based compensation expense				193						193
Cash dividends declared						(907)				(907)
Balance, September 30, 2018		3,757,491	$	29,520	$	63,075	$	(2,543)	$	90,052

Balance, June 30, 2019		3,781,500	$	30,419	$	68,653	$	2,354	$	101,426
Net income						3,058				3,058
Other comprehensive income								1,081		1,081
Stock-based compensation expense				214						214
Cash dividends declared						(990)				(990)
Balance, September 30, 2019		3,781,500	$	30,633	$	70,721	$	3,435	$	104,789

See notes to unaudited consolidated financial statements

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



Fidelity D & D Bancorp, Inc. and Subsidiary
Consolidated Statements of Cash Flows
(Unaudited)	Nine months ended September 30,
(dollars in thousands)	2019		2018

Cash flows from operating activities:
Net income	$	8,862	$	8,159
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation, amortization and accretion		2,407		2,252
Provision for loan losses		830		1,125
Deferred income tax expense		254		779
Stock-based compensation expense		638		590
Excess tax benefit from exercise of stock options/SSARs		23		4
Proceeds from sale of loans held-for-sale		36,688		25,509
Originations of loans held-for-sale		(26,882)		(25,622)
Earnings from bank-owned life insurance		(480)		(448)
Net gain from sales of loans		(602)		(522)
Net loss (gain) from sales of investment securities		6		(54)
Net loss from sale and write-down of foreclosed assets held-for-sale		16		52
Net loss (gain) from write-down and disposal of bank premises and equipment		4		(2)
Operating lease payments		42		-
Change in:
Accrued interest receivable		(165)		(514)
Other assets		(207)		(2,244)
Accrued interest payable and other liabilities		147		1,205
Net cash provided by operating activities		21,581		10,269

Cash flows from investing activities:
Available-for-sale securities:
Proceeds from sales		8,408		13,514
Proceeds from maturities, calls and principal pay-downs		28,010		15,579
Purchases		(37,880)		(48,931)
Decrease (increase) in FHLB stock		2,521		(1,885)
Net increase in loans and leases		(30,004)		(65,624)
Principal portion of lease payments received under direct finance leases		1,681		-
Purchase of life insurance policies		(2,000)		-
Purchases of bank premises and equipment		(2,313)		(1,869)
Proceeds from sale of bank premises and equipment		240		8
Proceeds from sale of foreclosed assets held-for-sale		384		1,125
Net cash used in investing activities		(30,953)		(88,083)

Cash flows from financing activities:
Net increase in deposits		82,139		48,915
Net (decrease) increase in short-term borrowings		(52,011)		21,767
Proceeds from issuance of FHLB advances		-		15,000
Repayment of FHLB advances		(16,704)		(4,500)
Repayment of finance lease obligation		(54)		-
Proceeds from employee stock purchase plan participants		175		149
Exercise of stock options		-		14
Dividends paid		(2,971)		(2,412)
Net cash provided by financing activities		10,574		78,933
Net increase in cash and cash equivalents		1,202		1,119
Cash and cash equivalents, beginning		17,485		15,825

Cash and cash equivalents, ending	$	18,687	$	16,944

See notes to unaudited consolidated financial statements

Fidelity D & D Bancorp, Inc. (the Company) is a bank holding company and the parent of Fidelity Deposit and Discount Bank (the 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).~~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.

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.~~2018.

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

In the opinion of management, the consolidated balance sheets as of September 30, ~~2017~~2019 and December 31, ~~2016~~2018 and the related consolidated statements of income, ~~and~~ consolidated statements of comprehensive income and consolidated statements of changes in shareholders’ equity for the three and nine months ended September 30, ~~2017~~2019 and ~~2016, and consolidated statements of changes in shareholders’ equity~~2018, and consolidated statements of cash flows for the nine months ended September 30, ~~2017~~2019 and ~~2016~~2018 present fairly the financial condition and results of operations of the Company. All material adjustments required for a fair presentation have been made. These adjustments are of a normal recurring nature. Certain reclassifications have been made to the ~~2016~~2018 financial statements to conform to the ~~2017~~2019 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~~2019 through the date these consolidated financial statements were issued.

This Quarterly Report on Form 10-Q should be read in conjunction with the Company’s audited financial statements for the year ended December 31, ~~2016,~~2018, and the notes included therein, included within the Company’s Annual Report filed on Form 10-K.

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~~2019 is adequate and ~~reasonable.~~reasonable to cover incurred losses. Given the subjective nature of identifying and estimating loan losses, it is likely that well-informed individuals could make different assumptions and could, therefore, calculate a materially different allowance amount. While management uses available information to recognize losses on loans, changes in economic conditions may necessitate revisions in the future. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Company’s allowance for loan losses. Such agencies may require the Company to recognize adjustments to the allowance based on their judgment of information available to them at the time of their examination.

Another material estimate is the calculation of fair values of the Company’s investment securities. Fair values of investment securities are determined by pricing provided by a third-party vendor, who is a provider of financial market data, analytics and related services to financial institutions. Based on experience, management is aware that estimated fair values of investment securities tend to vary among valuation services. Accordingly, when selling investment securities, price quotes may be obtained from more than one source. All of the Company’s ~~investment~~debt securities are classified as available-for-sale (AFS). AFS debt 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~~2019 and December 31, ~~2016,~~2018, loans classified as HFS consisted of residential mortgage loans.

Financing of automobiles, provided to customers under lease arrangements of varying terms, are accounted for as direct finance leases. Interest income on automobile direct finance leasing is determined using the interest method to arrive at a level effective yield over the life of the lease.

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

Goodwill is recorded on the consolidated balance sheets as the excess of liabilities assumed over identifiable assets acquired on the acquisition date. Goodwill is recorded at its net carrying value which represents estimated fair value. The goodwill is deductible for tax purposes over a ~~15 year~~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~~four executives providing post-retirement benefits and accrues monthly expense for this benefit. The split dollar life insurance expense is not deductible for tax purposes. Monthly expenses for the SERP and post-retirement split dollar life benefit are recorded as components of salaries and employee benefit expense on the consolidated statements of income.

For purposes of the consolidated statements of cash flows, cash and cash equivalents includes cash on hand, amounts due from banks and interest-bearing deposits with financial institutions. Expenditures for construction in process, a component of other assets in the consolidated balance sheets, are included in acquisition of premises and equipment.

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 (CECL). The amendments in this update require financial assets measured at amortized cost basis to be presented at the net amount expected to be collected, through an allowance for credit losses that is deducted from the amortized cost basis. Previously, when credit losses were measured under GAAP, an entity only considered past events and current conditions when measuring the incurred loss. The amendments in this update broaden the information that an entity must consider in developing its expected credit loss estimate for assets measured either collectively or individually. The measurement of expected credit losses is based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. An entity must use judgement in determining the relevant information and estimation methods that are appropriate under the circumstances. The amendments in this update also require that credit losses on available-for-sale debt securities be presented as an allowance for credit losses rather than a writedown.

In November 2018, the FASB issued ASU 2018-19, Codification Improvements to Topic 326, which clarifies that receivables arising from operating leases are not within the scope of Topic 326. In December 2018, regulators issued a final rule related to regulatory capital (Regulatory Capital Rule: Implementation and Transition of the Current Expected Credit Losses Methodology for Allowances and Related Adjustments to the Regulatory Capital Rule and Conforming Amendments to Other Regulations) which is intended to provide regulatory capital relief for entities transitioning to CECL. In April 2019, the FASB issued ASU 2019-04, Codification Improvements to Topic 326, Financial Instruments – Credit Losses, Topic 815, Derivatives and Hedging and Topic 825, Financial Instruments. As it relates to CECL, this guidance amends certain provisions contained in ASU 2016-13, particularly in regards to the inclusion of accrued interest in the definition of amortized cost, as well as clarifying that extension and renewal options that are not unconditionally cancelable by the entity that are included in the original or modified contract should be considered in the entity’s determination of expected credit losses. 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

~~losses and~~ require the Company to record loan losses more rapidly. The Company has engaged the services of a qualified third-party service provider to assist management in estimating credit allowances under this standard and is currently evaluating the impact of ASU 2016-13 on its consolidated financial statements.

~~In March 2016,~~On October 16, 2019, the FASB ~~issued ASU 2016-09,~~ ~~Compensation – Stock Compensation (Topic 718) Improvements~~decided 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 adjustmentmove forward with finalizing its proposal 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) anddefer 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,for ASU 2016-13 for smaller reporting companies 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:~~

~~The amendments are effective for public business entities for~~ fiscal years beginning after December ~~15, 2017,~~31, 2022, including interim periods within those fiscal ~~years. The~~periods. Since the Company ~~is evaluating~~currently meets the ~~impact~~SEC definition of a smaller reporting company, the ~~adoption of ASU 2016-01 on its consolidated financial statements, but does not expect it~~delay will be applicable to ~~have a significant impact.~~the Company.

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

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

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

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

~~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, 2017,2019 and interim periods within those fiscal years. Early adoption is ~~permitted, including adoption in an interim period.~~permitted. 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 during the first quarter of 2019 and it ~~will~~did not have anany significant effect on ~~its consolidated~~the Company’s financial statements.

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:

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

Agency – Government-sponsored enterprise (GSE) and ~~MBS~~Mortgage-backed securities (MBS) - GSE residential

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

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~~2019 and December 31, ~~2016~~2018 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
September 30, 2019
Available-for-sale debt securities:
Agency - GSE	$	5,937	$	238	$	-	$	6,175
Obligations of states and political subdivisions		51,489		3,037		(7)		54,519
MBS - GSE residential		127,472		1,309		(229)		128,552

Total available-for-sale debt securities	$	184,898	$	4,584	$	(236)	$	189,246

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



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

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

The amortized cost and fair value of debt securities at September 30, ~~2017~~2019 by contractual maturity are summarized below:

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~~debt securities aggregated by investment type, the length of time and the number of securities that have been in a continuous unrealized loss position as of September 30, ~~2017~~2019 and December 31, ~~2016:~~ 2018:



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

September 30, 2017
September 30, 2019
Obligations of states and political subdivisions													$	2,506	$	(7)	$	-	$	-	$	2,506	$	(7)
MBS - GSE residential														5,822		(6)		30,550		(223)		36,372		(229)
Total													$	8,328	$	(13)	$	30,550	$	(223)	$	38,878	$	(236)
Number of securities														7				23				30

December 31, 2018
Agency - GSE	$	5,051	$	(29)	$	3,022	$	(48)	$	8,073	$	(77)	$	3,937	$	(17)	$	-	$	-	$	3,937	$	(17)
Obligations of states and political subdivisions		2,416		(41)		2,254		(39)		4,670		(80)		6,123		(91)		8,447		(196)		14,570		(287)
MBS - GSE residential		34,146		(208)		4,740		(86)		38,886		(294)		25,612		(353)		74,864		(2,262)		100,476		(2,615)
Total	$	41,613	$	(278)	$	10,016	$	(173)	$	51,629	$	(451)	$	35,672	$	(461)	$	83,311	$	(2,458)	$	118,983	$	(2,919)
Number of securities		29				9				38				31				69				100

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~~30 debt securities in an unrealized loss position at September 30, ~~2017,~~2019, including ~~eight agency securities, twenty-two~~twenty-eight mortgage-backed securities and ~~eight~~two 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%~~2019: 0.63% for total MBS-GSE; and ~~1.69%~~0.26% for municipals. ~~In addition, three agency~~Of these securities, ~~three~~twenty-three mortgage-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 in an unrealized loss position in excess of 12 months are the result of interest rate movement and management believes they are temporary in nature.

Management believes the cause of the unrealized losses is related to changes in interest rates, instability in the capital markets or the limited trading activity due to illiquid conditions in the debt market and is not directly related to credit quality. Quarterly, management conducts a formal review of investment securities for the presence of ~~other-than-temporary~~other than temporary impairment (OTTI). The accounting guidance related to OTTI requires the Company to assess whether OTTI is present when the fair value of a debt security is less than its amortized cost as of the balance sheet date. Under those circumstances, OTTI is considered to have occurred if: (1) the entity has the intent to sell the security; (2) more likely than not the entity will be required to sell the security before recovery of its amortized cost basis; or (3) the present value of expected cash flows is not sufficient to recover the entire amortized cost. The accounting guidance requires that credit-related OTTI be recognized in earnings while non-credit-related OTTI on securities not expected to be sold be recognized in other comprehensive income (OCI). Non-credit-related OTTI is based on other factors affecting 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,~~debt securities, as of September 30, ~~2017,~~2019, the Company applied the criteria provided in the recognition and presentation guidance related to OTTI. That is, management has no intent to sell the securities and nonor any conditions were identified by management that, more likely than not, would require the Company to sell the securities before recovery of their amortized cost basis. The results indicated there was no presence of OTTI in the Company’s security portfolio. In addition, management believes the change in fair value is attributable to changes in interest rates.

The classifications of loans and leases at September 30, ~~2017~~2019 and December 31, ~~2016~~2018 are summarized as follows:

Net deferred loan costs of ~~$2.0~~$2.8 million and ~~$1.8~~$2.6 million have been included in the carrying values of loans at September 30, ~~2017~~2019 and December 31, ~~2016,~~2018, respectively.

Direct finance leases include the lease receivable and the guaranteed lease residual. 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~~$301.5 million as of September 30, ~~2017~~2019 and ~~$285.2~~$304.9 million as of December 31, ~~2016.~~2018. Mortgage servicing rights amounted to ~~$1.3~~$1.0 million ~~both~~and $1.1 million as of September 30, ~~2017~~2019 and December 31, ~~2016,~~2018, 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.

The decision to place loans on non-accrual status is made on an individual basis after considering factors pertaining to each specific loan. ~~Commercial~~C&I and ~~industrial (C&I) and commercial real estate (CRE)~~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~~2019 and December 31, ~~2016,~~2018, were as follows:

A modification of a loan constitutes a ~~troubled debt restructuring (TDR)~~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~~typically considers the following concessions when modifying a loan, ~~however, forgiveness of principal is rarely granted. C&I loans modified in a TDR often involve~~which may include lowering interest rates below the market rate, temporary interest-only ~~payments,~~payment periods, 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~~at interest ~~rate for the remaining term of the loan, extending the maturity date at an interest rate~~rates lower than the current market rate for new debt with similar risk and/or ~~substituting or adding a new borrower or guarantor. Commercial real estate construction loans modified in~~converting revolving credit lines to term loans. The Company typically does not forgive principal when granting 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.modification. Of the TDRs outstanding as of September 30, ~~2017~~2019 and ~~December 31, 2016,~~2018, 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~~for the three months ended September 30, ~~2017~~2019 and ~~2016.~~2018. 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


	Loans modified as TDRs for the nine months ended:
(dollars in thousands)	September 30, 2019						September 30, 2018

			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)
Consumer home equity installment		-	$	-	$	-	1	$	413	$	356
Residential real estate		-		-		-	1		316		-
Total		-	$	-	$	-	2	$	729	$	356

In the above ~~table,~~tables, 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:~~

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

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~~2019 and ~~2016,~~2018, respectively, the allowance for impaired loans that have been modified in a TDR was ~~$0.8~~$0.2 million and ~~$0.4~~$0.8 million, respectively.

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															Recorded
					Past due									investment past						Past due									investment past
	30 - 59 Days		60 - 89 Days		90 days		Total				Total			due ≥ 90 days		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
September 30, 2019																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		$	-	$	25	$	201	$	206	$	432	$	121,697	$	122,129		$	-
Commercial real estate:
Non-owner occupied		528		658		584		1,770		91,628		93,398			-		259		348		428		1,035		97,507		98,542			-
Owner occupied		54		-		1,148		1,202		108,396		109,598			-		263		92		1,791		2,146		129,252		131,398			-
Construction		-		-		169		169		5,954		6,123			-		-		-		-		-		4,819		4,819			-
Consumer:
Home equity installment		156		26		15		197		28,085		28,282			-		94		6		44		144		33,491		33,635			-
Home equity line of credit		61		72		513		646		52,531		53,177			-		50		144		260		454		49,562		50,016			-
Auto loans and leases		181		102		-		283		78,702		78,985	(2)		-
Auto loans																	236		59		75		370		107,925		108,295			7
Direct finance leases																	106		44		-		150		15,211		15,361	(2)		-
Other		88		12		-		100		5,684		5,784			-		44		2		-		46		5,677		5,723			-
Residential:
Real estate		-		334		1,421		1,755		136,954		138,709			-		-		505		1,061		1,566		161,126		162,692			-
Construction		-		-		-		-		8,315		8,315			-		-		-		-		-		16,109		16,109			-
Total	$	1,124	$	1,320	$	3,864	$	6,308	$	628,159	$	634,467		$	-	$	1,077	$	1,401	$	3,865	$	6,343	$	742,376	$	748,719		$	7

(1) Includes $3.9 million of non-accrual loans. (2) Net of unearned lease revenue of ~~$0.6~~$0.9 million. (3) Includes net deferred loan costs of ~~$2.0~~$2.8 million.



														Recorded															Recorded
					Past due									investment past						Past due									investment past
	30 - 59 Days		60 - 89 Days		90 days		Total				Total			due ≥ 90 days		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
December 31, 2018																past due		past due		or more (1)		past due		Current		loans (3)			and accruing

Commercial and industrial	$	208	$	-	$	11	$	219	$	98,258	$	98,477		$	-	$	1,711	$	135	$	156	$	2,002	$	124,882	$	126,884		$	-
Commercial real estate:
Non-owner occupied		180		-		1,407		1,587		85,633		87,220			-		388		113		472		973		94,542		95,515			-
Owner occupied		13		776		3,078		3,867		109,237		113,104			-		263		513		1,634		2,410		121,682		124,092			-
Construction		-		-		193		193		3,794		3,987			-		-		-		-		-		6,761		6,761			-
Consumer:
Home equity installment		213		25		31		269		28,197		28,466			-		50		182		463		695		32,034		32,729			-
Home equity line of credit		-		-		737		737		50,872		51,609			-		725		175		34		934		51,583		52,517			-
Auto loans and leases		293		59		44		396		55,963		56,359	(2)		19
Auto loans																	262		86		25		373		105,203		105,576			-
Direct finance leases																	116		-		-		116		15,860		15,976	(2)		-
Other		37		2		6		45		13,256		13,301			-		79		10		1		90		6,224		6,314			1
Residential:
Real estate		14		421		1,882		2,317		132,158		134,475			-		557		573		1,514		2,644		143,307		145,951			-
Construction		-		-		-		-		10,496		10,496			-		-		-		-		-		15,749		15,749			-
Total	$	958	$	1,283	$	7,389	$	9,630	$	587,864	$	597,494		$	19	$	4,151	$	1,787	$	4,299	$	10,237	$	717,827	$	728,064		$	1

(1) Includes ~~$7.4~~$4.3 million of non-accrual loans. (2) Net of unearned lease revenue of ~~$0.5~~$1.0 million. (3)Includes net deferred loan costs of ~~$1.8~~$2.6 million.

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,~~2019, impaired loans ~~consisted~~totaled $4.8 million consisting of $0.9 million in accruing TDRs ~~of $1.9 million,~~and $3.9 million in non-accrual ~~loans and $1.5 million in accruing impaired~~ loans. At December 31, ~~2016,~~2018, impaired loans ~~consisted of accruing TDRs~~totaled $6.1 million consisting of $1.8 million ~~$7.4~~in accruing TDRs and $4.3 million in non-accrual ~~loans and $2.2 million in accruing~~ loans. As of September 30, ~~2017,~~2019, the non-accrual loans included three TDRs to three unrelated borrowers totaling $0.8 million compared with four TDRs to three unrelated borrowers totaling ~~$2.0 million compared with two TDRs totaling $1.5~~$1.7 million as of December 31, ~~2016.~~ 2018.

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



			Recorded		Recorded								Recorded		Recorded
	Unpaid		investment		investment		Total				Unpaid		investment		investment		Total
	principal		with		with no		recorded		Related		principal		with		with no		recorded		Related
(dollars in thousands)	balance		allowance		allowance		investment		allowance		balance		allowance		allowance		investment		allowance
September 30, 2017
September 30, 2019
Commercial and industrial	$	228	$	204	$	24	$	228	$	193	$	297	$	150	$	56	$	206	$	75
Commercial real estate:
Non-owner occupied		2,405		1,997		288		2,285		612		955		712		100		812		145
Owner occupied		2,769		2,452		254		2,706		464		3,113		966		1,405		2,371		111
Construction		392		-		169		169		-
Consumer:
Home equity installment		48		-		15		15		-		77		24		20		44		-
Home equity line of credit		809		81		432		513		53		318		14		246		260		15
Auto loans and leases		8		-		-		-		-
Other		-		-		-		-		-
Auto loans												96		28		40		68		13
Residential:
Real estate		1,439		1,158		263		1,421		317		1,140		835		226		1,061		92
Construction		-		-		-		-		-
Total	$	8,098	$	5,892	$	1,445	$	7,337	$	1,639	$	5,996	$	2,729	$	2,093	$	4,822	$	451

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												For the three months ended
	September 30, 2017						September 30, 2016						September 30, 2019						September 30, 2018
					Cash basis						Cash basis						Cash basis						Cash basis
	Average		Interest		interest		Average		Interest		interest		Average		Interest		interest		Average		Interest		interest
	recorded		income		income		recorded		income		income		recorded		income		income		recorded		income		income
(dollars in thousands)	investment		recognized		recognized		investment		recognized		recognized		investment		recognized		recognized		investment		recognized		recognized

Commercial and industrial	$	232	$	7	$	-	$	502	$	12	$	-	$	218	$	-	$	-	$	158	$	1	$	-
Commercial real estate:
Non-owner occupied		3,054		114		-		5,030		93		-		849		6		-		2,179		26		-
Owner occupied		4,393		223		-		3,562		107		-		2,512		11		-		2,455		21		-
Construction		184		-		-		217		-		-		-		-		-		103		-		-
Consumer:
Home equity installment		19		-		-		119		3		-		32		-		-		479		-		-
Home equity line of credit		722		5		-		772		25		-		260		-		-		37		-		-
Auto		21		4		-		40		-		-
Other		4		1		-		6		-		-
Auto loans														65		-		-		57		-		-
Residential:
Real estate		1,428		77		-		750		4		-		1,170		10		-		1,389		-		-
Construction		-		-		-		-		-		-
Total	$	10,057	$	431	$	-	$	10,998	$	244	$	-	$	5,106	$	27	$	-	$	6,857	$	48	$	-


	For the three months ended												For the nine months ended
	September 30, 2017						September 30, 2016						September 30, 2019						September 30, 2018
					Cash basis						Cash basis						Cash basis						Cash basis
	Average		Interest		interest		Average		Interest		interest		Average		Interest		interest		Average		Interest		interest
	recorded		income		income		recorded		income		income		recorded		income		income		recorded		income		income
(dollars in thousands)	investment		recognized		recognized		investment		recognized		recognized		investment		recognized		recognized		investment		recognized		recognized

Commercial and industrial	$	223	$	3	$	-	$	255	$	3	$	-	$	198	$	1	$	-	$	202	$	2	$	-
Commercial real estate:
Non-owner occupied		2,588		52		-		3,336		47		-		1,168		21		-		2,236		89		-
Owner occupied		3,521		152		-		5,068		29		-		2,589		32		-		2,534		62		-
Construction		173		-		-		204		-		-		9		-		-		140		-		-
Consumer:
Home equity installment		15		-		-		51		-		-		209		1		-		283		5		-
Home equity line of credit		659		5		-		871		8		-		134		-		-		236		8		-
Auto		-		-		-		30		-		-
Auto Loans														48		-		-		27		-		-
Other		3		-		-		6		-		-		-		-		-		4		-		-
Residential:
Real estate		1,421		54		-		770		2		-		1,319		19		-		1,303		31		-
Construction		-		-		-		-		-		-
Total	$	8,603	$	266	$	-	$	10,591	$	89	$	-	$	5,674	$	74	$	-	$	6,965	$	197	$	-

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:

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

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.

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.

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.

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~~history in assessing performance. Non-performing loans are ~~considered to be~~comprised of non-accrual loans and loans past due 90 days or more and ~~accruing and non-accrual loans.~~accruing. All loans not classified as non-performing are considered performing.

The following table presents loans including ~~$2.0~~$2.8 million and ~~$1.8~~$2.6 million of deferred costs, segregated by class, categorized into the appropriate credit quality indicator category as of September 30, ~~2017~~2019 and December 31, ~~2016,~~2018, respectively:



	September 30, 2017						September 30, 2019
(dollars in thousands)	Performing		Non-performing		Total		Performing		Non-performing		Total

Consumer
Home equity installment	$	28,267	$	15	$	28,282	$	33,591	$	44	$	33,635
Home equity line of credit		52,664		513		53,177		49,756		260		50,016
Auto loans and leases (1)		78,985		-		78,985
Auto loans								108,220		75		108,295
Direct finance leases (1)								15,361		-		15,361
Other		5,784		-		5,784		5,723		-		5,723
Total consumer	$	165,700	$	528	$	166,228		212,651		379		213,030
Residential
Real estate	$	137,288	$	1,421	$	138,709		161,631		1,061		162,692
Construction		8,315		-		8,315		16,109		-		16,109
Total residential	$	145,603	$	1,421	$	147,024		177,740		1,061		178,801
Total consumer & residential	$	311,303	$	1,949	$	313,252	$	390,391	$	1,440	$	391,831

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:

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~~quarterly 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
As of and for the nine months ended September 30, 2019														As of and for the nine months ended September 30, 2019
	Commercial &		Commercial					Residential						Commercial &		Commercial					Residential
(dollars in thousands)	industrial		real estate		Consumer			real estate		Unallocated		Total		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	$	1,432	$	3,901	$	2,548		$	1,844	$	22	$	9,747
Charge-offs		(76)		(416)		(505)			(38)		-		(1,035)		(131)		(531)		(255)			(330)		-		(1,247)
Recoveries		5		44		53			-		-		102		17		28		58			8		-		111
Provision		395		(232)		587			215		(40)		925		(42)		377		(268)			716		47		830
Ending balance	$	1,399	$	4,102	$	1,969		$	1,799	$	87	$	9,356	$	1,276	$	3,775	$	2,083		$	2,238	$	69	$	9,441
Ending balance: individually evaluated for impairment	$	193	$	1,076	$	53		$	317	$	-	$	1,639	$	75	$	256	$	28		$	92	$	-	$	451
Ending balance: collectively evaluated for impairment	$	1,206	$	3,026	$	1,916		$	1,482	$	87	$	7,717	$	1,201	$	3,519	$	2,055		$	2,146	$	69	$	8,990
Loans Receivables:
Ending balance (2)	$	112,096	$	209,119	$	166,228	(1)	$	147,024	$	-	$	634,467	$	122,129	$	234,759	$	213,030	(1)	$	178,801	$	-	$	748,719
Ending balance: individually evaluated for impairment	$	228	$	5,160	$	528		$	1,421	$	-	$	7,337	$	206	$	3,183	$	372		$	1,061	$	-	$	4,822
Ending balance: collectively evaluated for impairment	$	111,868	$	203,959	$	165,700		$	145,603	$	-	$	627,130	$	121,923	$	231,576	$	212,658		$	177,740	$	-	$	743,897

(1) Net of unearned lease revenue of ~~$0.6~~$0.9 million. (2) Includes ~~$2.0~~$2.8 million of net deferred loan costs.

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



As of and for the year ended December 31, 2018
	Commercial &		Commercial					Residential
(dollars in thousands)	industrial		real estate		Consumer			real estate		Unallocated		Total
Allowance for Loan Losses:
Beginning balance	$	1,374	$	4,060	$	2,063		$	1,608	$	88	$	9,193
Charge-offs		(196)		(268)		(391)			(371)		-		(1,226)
Recoveries		77		42		211			-		-		330
Provision		177		67		665			607		(66)		1,450
Ending balance	$	1,432	$	3,901	$	2,548		$	1,844	$	22	$	9,747
Ending balance: individually evaluated for impairment	$	41	$	595	$	382		$	2	$	-	$	1,020
Ending balance: collectively evaluated for impairment	$	1,391	$	3,306	$	2,166		$	1,842	$	22	$	8,727
Loans Receivables:
Ending balance (2)	$	126,884	$	226,368	$	213,112	(1)	$	161,700	$	-	$	728,064
Ending balance: individually evaluated for impairment	$	180	$	3,912	$	522		$	1,514	$	-	$	6,128
Ending balance: collectively evaluated for impairment	$	126,704	$	222,456	$	201,506		$	160,186	$	-	$	710,852

(1) Net of unearned lease revenue of ~~$0.5~~1.0 million. (2) Includes ~~$1.8~~$2.6 million of net deferred loan costs.

On January 1, 2019, the Company adopted ASU 2016-02, Leases (Topic 842), and subsequent related updates to revise the accounting for leases. Additionally, the Company early adopted ASU 2019-01, Codification Improvements, as of January 1, 2019. See Footnote 2, “New accounting pronouncements,” for additional information about adoption of these standards. Lessor accounting was largely unchanged as a result of the standard. Upon adoption of the standard, the lease residual was reclassified from other assets to direct finance leases within loans and leases in the current period and all comparative periods. Additional disclosures required under the standard are included in this section and in Footnote 11, “Leases”.

The Company originates direct finance leases through two automobile dealerships. The carrying amount of the Company’s lease receivables, net of unearned income, was $4.6 million and $4.9 million as of September 30, 2019 and December 31, 2018. The residual value of the direct finance leases is fully guaranteed by the dealerships. Residual values amounted to $10.8 million and $11.1 million at September 30, 2019 and December 31, 2018, respectively.

The undiscounted cash flows to be received on an annual basis for the direct finance leases are as follows:

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,~~2019, there were ~~16,707~~32,589 and ~~12,237~~30,805 potentially dilutive shares related to issued and unexercised stock options and SSARs compared to ~~2,925~~32,608 and ~~2,592~~28,621 for the same ~~2016~~2018 periods, respectively. For restricted stock, dilution would occur from the Company’s previously granted but unvested shares. There were ~~9,504~~10,412 and ~~8,130~~9,766 potentially dilutive shares related to unvested restricted share grants as of the three and nine months ended September 30, ~~2017~~2019 compared to ~~8,747~~15,655 and ~~6,482~~12,795 for the ~~three and nine months ended September 30, 2016,~~same 2018 periods, 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:~~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:

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)~~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~~awarded 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~~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 and in February 2018 based on 2017 performance and 2015-2017 3-year cumulative performance. During the first quarter of 2019, the Company approved a 1 year LTIP and awarded restricted stock and SSARs to senior officers and managers in February 2019 based on 2018 performance.

The following table summarizes the weighted-average fair value and vesting of restricted stock grants awarded during the periods ended September 30, ~~2017~~2019 and ~~2016~~2018 under the 2012 stock incentive plans:

(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~~5,600 and 7,251 shares granted on February ~~7, 2017~~5, 2019 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~~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~~$59.70 and the discount of ~~8.548%~~8.393% was calculated using an interest rate of ~~1.841%~~2.494% and a ~~5 year~~5-year historical volatility of ~~18.556%~~19.411%.

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:

The Company granted ~~24,346~~11,073 SSARs under the Omnibus Plan on February ~~7, 2017.~~5, 2019. 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~~$16.79 per share, based on a risk-free interest rate of ~~2.386%~~2.692%, a dividend yield of ~~3.110%~~1.628% and a volatility of ~~23.434%~~23.732% 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:

Of the SSARs outstanding at September 30, ~~2017, 9,668~~2019, 52,112 vested and were exercisable. SSARs vest over a ~~three year~~three-year period – 33% per year.

During the first nine months of 2019, there were 3,059 SSARs exercised. The intrinsic value recorded for these SSARs was $10,631. The tax deduction realized from the exercise of these SSARs was $108,134 resulting in a tax benefit of $22,708.

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~~2019 and ~~2016~~2018 and the unrecognized stock-based compensation expense as of September 30, ~~2017:~~2019:

In addition, during the three and nine months ended September 30, ~~2017~~2019, the Company ~~accrued $54 thousand~~reversed accruals of ($36 thousand) and ~~$163 thousand, respectively,~~($106 thousand) 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~~During the three and nine months ended September 30, ~~2016.~~2018, the Company reversed accruals of ($35 thousand) and ($95 thousand) in stock-based compensation expense.

The unrecognized stock-based compensation expense as of September 30, ~~2017~~2019 will be recognized ratably over the periods ended January ~~2019~~2022 and January ~~2020~~2022 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:~~

During the first ~~nine months~~quarter 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 2016,2018, 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~~$2,585. The tax deduction realized from the exercise of these options was ~~$2,375~~$22,875 resulting in a tax benefit of ~~$808. The Company has not issued~~$4,804. As of September 30, 2019, there were no stock options ~~since 2008.~~outstanding.

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~~2019, 81,019 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.

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
September 30, 2019											September 30, 2019
					Quoted prices		Significant		Significant						Quoted prices		Significant		Significant
					in active		other		other						in active		other		other
	Carrying		Estimated		markets		observable inputs		unobservable inputs		Carrying		Estimated		markets		observable inputs		unobservable inputs
(dollars in thousands)	amount		fair value		(Level 1)		(Level 2)		(Level 3)		amount		fair value		(Level 1)		(Level 2)		(Level 3)

Financial assets:
Cash and cash equivalents	$	25,843	$	25,843	$	25,843	$	-	$	-	$	18,687	$	18,687	$	18,687	$	-	$	-
Available-for-sale securities		130,037		130,037		633		129,404		-
Available-for-sale debt securities												189,246		189,246		-		189,246		-
FHLB stock		2,606		2,606		-		2,606		-		3,818		3,818		-		3,818		-
Loans and leases, net		588,130		590,688		-		-		590,688		739,278		732,367		-		-		732,367
Loans held-for-sale		2,854		2,907		-		2,907		-		1,751		1,778		-		1,778		-
Accrued interest receivable		2,246		2,246		-		2,246		-		3,436		3,436		-		3,436		-
Financial liabilities:
Deposits with no stated maturities		610,706		610,706		-		610,706		-		733,554		733,554		-		733,554		-
Time deposits		92,753		91,969		-		91,969		-		118,768		118,537		-		118,537		-
Short-term borrowings		4,223		4,223		-		4,223		-		24,355		24,355		-		24,355		-
FHLB advances												15,000		15,471		-		15,471		-
Accrued interest payable		181		181		-		181		-		553		553		-		553		-


December 31, 2018
					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	$	17,485	$	17,485	$	17,485	$	-	$	-
Available-for-sale debt securities		182,810		182,810		-		182,810		-
FHLB stock		6,339		6,339		-		6,339		-
Loans and leases, net		718,317		697,729		-		-		697,729
Loans held-for-sale		5,707		5,789		-		5,789		-
Accrued interest receivable		3,271		3,271		-		3,271		-
Financial liabilities:
Deposits with no stated maturities		653,897		653,897		-		653,897		-
Time deposits		116,286		114,876		-		114,876		-
Short-term borrowings		76,366		76,366		-		76,366		-
FHLB advances		31,704		31,698		-		31,698		-
Accrued interest payable		530		530		-		530		-

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 :~~demand:

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 accruing loans is estimated by calculating the net present value of the future expected cash flows discounted atusing the exit price notion. The discount rate is based upon current offering rates, with an additional discount for ~~similar loans. Current offering rates consider, among other things,~~expected potential charge-offs. Additionally, an environmental general credit ~~risk.~~ risk adjustment is subtracted from the net present value to arrive at the total estimated fair value of the accruing loan portfolio.

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.

Loans which the Company has measured as non-accruing are generally based on the fair value of the loan’s collateral. Fair value is generally determined based upon independent third-party appraisals of the properties. These 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 consists of loan balances less the ~~loans.~~valuation allowance.

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:

~~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~~2019 and December 31, ~~2016,~~2018, 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~~2019 and December 31, ~~2016,~~2018, respectively.

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

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~~2019 and December 31, ~~2016,~~2018, the range of liquidation expenses and other valuation adjustments applied to impaired loans ranged from ~~-20.54%~~-21.98% to ~~-53.00%~~-81.71% and from ~~-22.72%~~-16.70% to ~~-57.49%~~-57.89%, respectively. The ~~weighted-average~~weighted average of liquidation expenses and other valuation adjustments applied to impaired loans amounted to ~~-30.71% and -32.47%~~-36.44% as of September 30, ~~2017~~2019 and -44.42% as of December 31, ~~2016,~~2018, 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~~2019 and December 31, ~~2016,~~2018, the discounts applied to the appraised values of ORE ranged from ~~-17.95%~~-2.83% and -89.48% and from -18.47% to ~~-99.00% and -21.74% to -99.00%~~-68.96%, respectively. As of September 30, ~~2017~~2019, and December 31, ~~2016,~~2018, the ~~weighted-average~~weighted average of discount to the appraisal values of ORE amounted to ~~-28.19%~~-29.79% and ~~-32.38%~~-45.83%, respectively.

~~As of~~At September 30, ~~2017, the Company had one automobile in~~2019, other repossessed assets ~~with a balance~~consisted of ~~$4 thousand. As of December 31, 2016, the Company had~~ one automobile, intotaling $2 thousand. The Company refers to the National Automobile Dealers Association (NADA) guide to determine a vehicle’s fair value. There were no other repossessed assets ~~with a balance of $8 thousand. There were no adjustments to the carrying value of these automobiles.~~at December 31, 2018.

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:~~

~~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.

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,~~2019, the Company purchased an additional ~~$8.0~~$2.0 million of BOLI. The policies’ cash surrender value totaled ~~$19.9~~$23.1 million and ~~$11.4~~$20.6 million, respectively, as of September 30, ~~2017~~2019 and December 31, ~~2016~~2018 and is reflected as an asset on the consolidated balance sheets. ~~As of~~For the nine months ended September 30, ~~2017~~2019 and ~~2016,~~2018, the Company has recorded income of ~~$422~~$480 thousand and ~~$264~~$448 thousand, respectively.

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. In March 2019, the Bank entered into a new Split Dollar Agreement with one officer. 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,~~2019, the policies had total death benefits of ~~$20.6~~$23.1 million of which ~~$4.0~~$4.1 million would have been paid to the officer’s beneficiaries and the remaining ~~$16.6~~$19.0 million would have been paid to the Bank. In addition, ~~three~~four 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,~~2019, the Company accrued expenses of ~~$21~~$96 thousand for the split dollar benefit.

On March 29, 2017, the Bank entered into separate supplemental executive retirement agreements (individually the “SERP Agreement”) with ~~five~~four 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. On March 20,

2019, the Bank entered into a SERP Agreement with one officer, pursuant to which the Bank will credit an amount to a SERP account established for the participant’s behalf while they are actively employed by the Bank for each calendar month from March 1, 2019 until normal retirement age. As of September 30, ~~2017,~~2019, the Company accrued expenses of ~~$268 thousand~~$1.3 million in connection with the SERP.

As of January 1, 2018, the Company adopted ASU 2014-09, Revenue from Contracts with Customers (Topic 606) and all subsequent ASUs that modified Topic 606. The Company has elected to use the modified retrospective approach with prior period financial statements unadjusted and presented with historical revenue recognition methods. The implementation of the new standard had no material impact on the measurement or recognition of revenue; as such, a cumulative effect adjustment to opening retained earnings was not deemed necessary.

The majority of the Company’s revenues are generated through interest earned on securities and loans, which is explicitly excluded from the scope of the guidance. In addition, certain non-interest income streams such as fees associated with mortgage servicing rights, loan service charges, life insurance earnings, rental income and gains/losses on the sale of loans and securities are not in the scope of the new guidance. The main types of contracts with customers that are in the scope of the new guidance are:

A contract asset balance occurs when an entity performs a service for a customer before the customer pays consideration (resulting in a contract receivable) or before the payment is due (resulting in a contract asset). A contract liability balance is an entity’s obligation to transfer a service to a customer for which the entity already received payment (or payment is due) from the customer. The Company’s non-interest income streams are largely based on transactional activity, or standard month-end revenue accruals such as asset management fees based on month-end market values. Consideration is often received immediately or shortly after the Company satisfies its performance obligation and revenue is recognized. The Company typically does not enter into long-term revenue contracts with customers, and therefore, does not experience significant contract balances. As of September 30, 2019 and December 31, 2018, the Company did not have any significant contract balances.

The Company’s performance obligations have an original expected duration of less than one year and follow the relevant guidance for recognizing revenue over time. There is no variable consideration subject to constraint that is not included in information about transaction price.

In connection with the adoption of Topic 606, an entity is required to capitalize and subsequently amortize into expense, certain incremental costs of obtaining a contract if these costs are expected to be recovered. The incremental costs of obtaining a contract are those costs that an entity incurs to obtain a contract with a customer that it would not have incurred if the contract had not been obtained (for example, sales commission). The Company utilizes the practical expedient which allows entities to immediately expense contract acquisition costs when the asset that would have resulted from capitalizing these costs would have been amortized in one year or less. Upon adoption of Topic 606, the Company did not capitalize any contract acquisition costs.

ASU 2016-02 Leases (Topic 842) became effective for the Company on January 1, 2019. For all operating lease contracts where the Company is lessee, a right-of-use (ROU) asset and lease liability was recorded as of the effective date. The Company assumed all

renewal terms will be exercised when calculating the ROU assets and lease liabilities. For leases existing at the transition date, any prepaid or deferred rent was added to the ROU asset to calculate the lease liability. The discount rate used to calculate the present value of future payments at the transition date was the Company’s incremental borrowing rate. The Company used the FHLB fixed rate borrowing rates on December 29, 2018 as the discount rate at transition. For all classes of underlying assets, the Company has elected not to record short-term leases (leases with a term of 12 months or less) on the balance sheet when the Company is lessee. Instead, the Company will recognize the lease payment on a straight-line basis over the lease term and variable lease payments in the period in which the obligation for those payments is incurred. For all asset classes, the Company has elected, as a lessee, not to separate nonlease components from lease components and instead to account for each separate lease component and nonlease components associated with that lease component as a single lease component.

Management determines if an arrangement is or contains a lease at contract inception. If an arrangement is determined to be or contains a lease, the Company recognizes a ROU asset and a lease liability when the asset is placed in service.

The Company’s operating leases, where the Company is lessee, include property, land and equipment. As of September 30, 2019, five of the Company’s branch properties were leased under operating leases. In April 2018, the Company entered into an agreement to lease a branch in Mountaintop, PA expected to open in October 2019. In three of the current branch leases and the branch under construction, the Company leases the land from an unrelated third party, and the buildings are the Company’s own capital improvement. The Company also leases three standalone ATMs under operating leases. Additionally, the Company has two equipment leases classified as finance leases.

The following is a schedule of future minimum lease payments under finance leases together with the present value of the net minimum lease payments as of September 30, 2019:

As of September 30, 2019, the Company leased its Green Ridge, Pittston, Peckville, Back Mountain, Mountaintop and Abington branches under the terms of operating leases. The Abington branch has variable lease payments which are calculated as a percentage of the national prime rate of interest which are expensed as incurred and are not included in the ROU assets and operating lease liabilities.

During the first nine months of 2019, $374 thousand of the total lease cost is included in premises and equipment expense and $26 thousand is included in other expenses on the consolidated statements of income. Operating lease expense is recognized on a straight-line basis over the lease term. We recognized both the interest expense and amortization expense for finance leases in premises and equipment expense since the interest expense portion was immaterial.

The future minimum lease payments for the Company’s branch network and equipment under operating leases that have lease terms in excess of one year as of September 30, 2019 are as follows:

The Company leases seven properties, where the Company is lessor, under operating leases to unrelated parties. Four are residential properties surrounding the Main Branch that the Company leases on a month-to-month basis and are considered short-term leases. The undiscounted cash flows to be received on an annual basis for the remaining three properties under long-term operating leases are as follows:

The Company also indirectly originates automobile leases classified as direct finance leases. See Footnote 5, “Loans and leases”, for more information about the Company’s direct finance leases.

Lease income recognized from direct finance leases was included in interest income from loans and leases on the consolidated statements of income. Lease income related to operating leases is included in fees and other revenue on the consolidated statements of income. The Company only receives a variable payment for taxes from one of its lessees, but the amount is immaterial and excluded from rental income. The amount of lease income recognized on the consolidated statements of income was as follows for the periods indicated:

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~~2019 compared to December 31, ~~2016~~2018 and a comparison of the results of operations for the three and nine months ended September 30, ~~2017~~2019 and ~~2016.~~2018. Current performance may not be indicative of future results. This discussion should be read in conjunction with the Company’s ~~2016~~2018 Annual Report filed on Form 10-K.

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 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.

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

maintaining strong asset quality and controlling operating expenses. We continue to implement strategies to diversify earning assets (see “Funds Deployed” section of this management’s discussion and analysis) and to increase low cost core ~~deposits.~~deposits (see “Funds Provided” section of this management’s discussion and analysis). 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~~12-branch network. ~~Currently, the~~The Company ~~is constructing~~opened a new branch location in ~~Dallas,~~Mountain Top, PA in ~~order~~October 2019. We are expecting over $2.0 million in investment related to ~~expand our presence~~the construction of this new branch in 2019. The Company is committed to selectively expanding branch banking and wealth management locations in Lackawanna and 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.Counties as opportunities arrive going forward.

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~~challenging due to the ~~near-term, we expect to continue to operate in a low, but slowly-rising interest~~lagging unemployment rate ~~environment. A rising rate environment positions the Company to improve its net interest income performance.~~and strong local competition. The Federal Open Market Committee (FOMC) ~~adjusted~~had been adjusting the short-term federal funds rate up during 2018, but the outlook looks different for the remainder of 2019 and 2020. The FOMC lowered the federal funds rate 50 basis points ~~so far~~ during ~~2017. Expectations~~the third quarter of 2019 and expectations are ~~for~~that the Federal Reserve will continue to ease the federal funds rate which will cause short-term rates to ~~rise once more this year, potentially pressuring deposit rate pricing. The~~decline. According to the U.S. Bureau of Labor Statistics, the national unemployment rate for September ~~2017~~2019 was ~~4.2%~~3.5%, down 0.4 percentage points from ~~4.7% at~~ December ~~2016.~~2018. The unemployment rate in Scranton - Wilkes-Barre Metropolitan Statistical Area (local) decreased during the first nine months of ~~2017 as well,~~2019 but continued to lag behind the unemployment rates of the state and nation. ~~According to the U.S. Bureau of Labor Statistics, the~~The local unemployment rate at September 30, ~~2017~~2019 was ~~5.0%~~4.6%, a decrease of ~~0.4~~0.1 percentage points from ~~5.4%~~4.7% at December 31, ~~2016. Although~~2018 and unchanged from September 30, 2018. However, the local unemployment rate decreased ~~during~~over the ~~first nine months of 2017, it was~~nine-month period due to ~~a drop in~~ the shrinking 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~~According to Zillow, an online database advertising firm providing access to its real estate search engines to various media outlets, the median home values ~~are expected to rise 2.2% within~~in the ~~next~~region have risen 4.1% over the past 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~~Our efforts and focus continue on building relationships concentrating on loans, deposits, wealth management, business services and retail opportunities with clients and prospects with the ~~third quarter of 2017, the Company’s loan growth was negated~~goal to exceed expectations 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 CDs during the third quarter of 2017.providing a valued service.

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~~2018 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~~became effective for ~~us began~~the Company on January 1, ~~2015.~~2015 and were fully phased in on January 1, 2019. 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~~of the continuing implementation of the Dodd-Frank Act and the Basel III capital standards, and related rulemaking will have on our business, financial condition and results of operations.

The following are non-GAAP financial measures which provide useful insight to the reader of the consolidated financial statements but should be supplemental to GAAP used to prepare the Company’s financial statements and should not be read in isolation or relied upon as a substitute for GAAP measures. In addition, the Company’s non-GAAP measures may not be comparable to non-GAAP measures of other companies. The Company’s tax rate used to calculate the fully-taxable equivalent (FTE) adjustment was 21% at September 30, 2019 and 2018.

The following table reconciles the non-GAAP financial measures of FTE net interest income:

The efficiency ratio is non-interest expenses as a percentage of FTE net interest income plus non-interest income. The following table reconciles the non-GAAP financial measures of the efficiency ratio to GAAP:

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.

For the third quarter of ~~2017,~~2019, the Company generated ~~$2.2 million in~~ net income of $3.1 million, or ~~$0.60~~$0.80 per diluted share, ~~an increase of $0.2~~compared to $2.9 million, or ~~9%, over the $2.0 million, or $0.55~~$0.75 per diluted share, ~~generated~~ for the third quarter of ~~2016. Net~~2018. The $0.2 million, or 7%, increase in net income ~~also~~stemmed from $0.3 million more net interest income plus $0.3 million higher non-interest income and a $0.1 million reduction in provision for loan losses which more than offset a $0.5 million rise in non-interest expenses. In the year-to-date comparison, net income grew ~~during~~$0.7 million, or 9%, to $8.9 million, or $2.32 per diluted share, for the first nine months of ~~2017 to $6.4~~2019 from $8.2 million, or ~~$1.72 per diluted share, an increase of $0.7 million, or 13%, compared to $5.7 million, or $1.54~~$2.15 per diluted share, for the ~~same 2016 period. In~~first nine months of 2018. As in the ~~both the quarter~~quarterly comparison, higher net interest income 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~~income combined with a lower provision for loan ~~losses.~~ losses were partially offset by higher non-interest expenses.

Return on average assets (ROA) was ~~1.03% and 1.07%~~1.22% for both the third quarters of ~~2017~~2019 and ~~2016,~~2018, respectively, and ~~1.02% and 1.01%~~1.21% for both the nine months ended September 30, ~~2017~~2019 and ~~2016,~~2018, respectively. InDuring 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. Returnsame time periods, return on average shareholders’ equity (ROE) was ~~10.36%~~11.77% and ~~9.99% for the third quarters of 2017 and 2016,~~12.65%, respectively, and ~~10.24%~~11.96% and ~~9.55% for~~12.34%, respectively. ROA remained unchanged because 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~~grew with average ~~shareholders’~~assets while ROE declined as net income grew at a slower pace than average equity.

For the third quarter of ~~2017,~~2019, net interest income increased ~~$0.6~~$0.3 million, or ~~10%~~4%, to ~~$7.0~~$8.0 million from ~~$6.4~~$7.7 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~~2018. The $1.0 million ~~in additional interest income from growth of $90.3 million in average interest-earning assets. This~~ growth in interest income was ~~primarily driven~~produced by the addition of $50.1 million in average interest-earning assets combined with a 20 basis point higher FTE yield earned on those assets. The loan portfolio ~~with~~contributed $0.7 million to this interest income growth due to $30.7 million more average loans earning a higher yield. In the investment portfolio, a larger average balance of higher yielding mortgage-backed securities was the biggest driver of interest income growth of ~~$69.6~~$0.1 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~~grew $51.4 million, ~~higher~~on average, with a ~~fourteen~~34 basis point increase in ~~average~~ rates paid ~~which~~thereon. Growth of $76.2 million in average interest-bearing deposits with a 36 basis point increase in rates paid on these deposits resulted in ~~$0.3~~$0.7 million more interest expense from deposits for the third quarter ~~ended September 30, 2017~~of 2019 compared to the ~~2016~~2018 like period.

Net interest income increased ~~$2.1~~$1.2 million, or ~~11%~~5%, ~~to $20.8~~from $22.5 million for the nine months ended September 30, ~~2017 compared~~2018 to ~~$18.7~~$23.7 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~~2019, due to higher interest income which more than offset the additional interest expense. Total average interest-earning assets increased $62.7 million along with a 25 basis point ~~because~~increase in the FTE yields earned thereon resulting in $3.7 million of growth in FTE interest income. In the loan portfolio, the Company experienced average balance growth of $49.0 million combined with higher yields in each loan portfolio, which had the effect of producing $2.9 million more interest income. In the investment portfolio, an increase in the yields on a higher average balance of mortgage-backed securities and a higher average balance of municipal securities produced interest income growth of $0.5 million. On the liability side, total interest-bearing liabilities grew $56.7 million, on average, with a 42 basis point increase in rates paid on these interest-bearing liabilities. Growth in average interest-bearing deposits of $48.7 million combined with a 34 basis point increase in the rates paid on deposits contributed $1.8 million in additional interest expense. In addition, the Company utilized $8.0 million more in average borrowings during the first nine months of 2019 at higher rates which resulted in $0.6 million more interest expense.

The FTE net interest rate spread decreased by 14 and 17 basis points, respectively, for the three and nine months ended September 30, 2019 compared to the same 2018 periods. Over the same periods, the FTE net interest margin decreased by 7 and 6 basis points, respectively. The rates paid on interest-bearing liabilities ~~increased~~rose faster than the ~~yield~~yields earned on interest-earning ~~assets. The FTE~~assets causing the decline in net interest rate margin decreased 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.spread. The overall cost of funds, which includes the impact of non-interest bearing deposits, increased ~~eleven~~28 and ~~seven~~34 basis points for the three and nine months ended September 30, ~~2017, respectively,~~2019 compared to the same ~~2016 periods.~~periods in 2018. The primary reason for the ~~increase~~rise was ~~higher average borrowings which were used to fund asset growth along with an~~the increase in ~~average interest-bearing deposits and the~~ rates paid ~~thereon.~~on interest-bearing liabilities compared to the prior year’s periods, respectively.

For the ~~remainder~~last quarter of ~~2017,~~2019, the Company expects to operate in a ~~gradually increasing~~declining interest rate environment. A rate environment with ~~rising~~falling interest rates positions the Company to ~~improve~~reduce 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~~FOMC completed gradually increasing the short-term federal funds rate ~~since~~at the end of ~~2015, but~~2018, and it ~~had a minimal effect on~~effected the rates paid on funding sources. Currently, the FOMC began easing the federal funds rate during the second half of 2019 which is expected to eventually result in reduced rates paid on interest-bearing liabilities. On the asset side, the prime interest rate, the benchmark rate that banks use as a base rate for adjustable rate loans, rose 25100 basis points in ~~March 2017 and another 25~~2018, but was cut 50 basis points in ~~June 2017.~~the third quarter of 2019. The focus for ~~the last quarter of 2017~~2019 is to manage net interest income ~~after years of~~through a ~~sustained low interest~~declining rate environment by ~~maintaining~~managing interest-bearing deposit costs to maintain a reasonable spread. Interest ~~expense~~income is projected to ~~continue~~decline for the remainder of 2019 from floating rate loans and repricing of our assets. Management expects to ~~grow in~~actively reduce the ~~fourth quarter~~cost of ~~2017 from growth in deposits and borrowings and an increase in rates~~

~~paid on both.~~funds to partially mitigate spread compression throughout this declining rate cycle. 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~~1.17% and ~~54 basis points~~1.12% for the three and nine months ended September 30, ~~2017, respectively,~~2019, or 34 and 4542 basis points ~~for both~~higher than the ~~three and nine months ended September 30, 2016, respectively. The primary reason~~cost for the same 2018 periods. Quarter-over-quarter, the increase ~~in both periods was higher average borrowings. Increases~~resulted from the growth in the average balance of interest-bearing deposits and the higher rates paid thereon. In the year-to-date comparison, the increase in average borrowings and average interest-bearing deposits combined with higher rates paid on ~~these deposits also contributed~~both led 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.~~liabilities. Interest rates along the treasury yield curve have been volatile with shorter-term rates rising faster than long-term rates producing ~~a flatter~~an inverted yield curve ~~during 2017.~~in early 2019. Competition ~~among banks has already begun to pressure~~had been pressuring banks to increase deposit rates. IfWe expect this trend to begin to reverse as the FOMC reduces the federal funds rate leading to the short-to-intermediate portion of the yield curve to flatten, but the reduction in rates ~~continue to rise in~~paid on deposits will lag the ~~last quarter of 2017,~~lower yields earned over 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.~~upcoming year. 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 is actively addressing the Company's sensitivity to a declining rate environment to ensure interest rate risks are contained within acceptable levels. 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 FTE adjusted, ~~to a tax-equivalent basis (FTE),~~ using the corporate federal tax rate of ~~34%~~21% for September 30, 2019 and 2018, 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~~See “Non-GAAP Financial Measures” within this management’s discussion and ~~$285 thousand~~analysis 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.~~FTE adjustments. This treatment allows a uniform comparison among yields on interest-earning assets. Loans include loans ~~HFS~~held-for-sale (HFS) and non-accrual loans but exclude the allowance for loan losses. Home equity lines of credit (HELOC) are included in the residential real estate category since they are secured by real estate. Net deferred loan cost amortization of ~~$113~~$179 thousand and ~~$117~~$182 thousand ~~for~~during the third quarters of ~~2017~~2019 and ~~2016,~~2018, respectively, and ~~$354~~$525 thousand and ~~$353~~$485 thousand for the ~~first~~ nine months ~~of 2017~~ended September 30, 2019 and ~~2016,~~2018, respectively, are included in interest income from loans. Average balances are based on amortized cost and do not

reflect net unrealized gains or losses. Residual values for direct finance leases are included in the average balances for consumer loans. Net interest margin is calculated by dividing ~~annualized~~ net interest ~~income - FTE~~income-FTE by total average interest-earning assets. Cost of funds includes the effect of average non-interest bearing deposits as a funding source:



	Three months ended
(dollars in thousands)	September 30, 2019						September 30, 2018
	Average				Yield /		Average				Yield /
Assets	balance		Interest		rate		balance		Interest		rate

Interest-earning assets
Interest-bearing deposits	$	2,355	$	12	2.12	%	$	2,142	$	10	1.77	%
Restricted regulatory securities		4,038		157	15.41			4,374		44	4.03
Investments:
Agency - GSE		5,935		40	2.69			5,920		40	2.69
MBS - GSE residential		130,180		868	2.64			116,126		759	2.59
State and municipal (nontaxable)		50,276		546	4.31			44,801		510	4.51
Total investments		186,391		1,454	3.10			166,847		1,309	3.11
Loans and leases:
C&I and CRE (taxable)		318,332		4,163	5.19			303,581		3,755	4.91
C&I and CRE (nontaxable)		34,156		342	3.97			33,196		323	3.86
Consumer		162,681		1,582	3.86			157,029		1,463	3.70
Residential real estate		221,929		2,484	4.44			212,572		2,306	4.30
Total loans and leases		737,098		8,571	4.61			706,378		7,847	4.41
Total interest-earning assets		929,882		10,194	4.35	%		879,741		9,210	4.15	%
Non-interest earning assets		65,337						50,194
Total assets	$	995,219					$	929,935

Liabilities and shareholders' equity

Interest-bearing liabilities
Deposits:
Interest-bearing checking	$	239,471	$	474	0.79	%	$	198,166	$	287	0.57	%
Savings and clubs		108,714		36	0.13			131,637		60	0.18
MMDA		162,518		616	1.50			112,264		265	0.94
Certificates of deposit		120,107		557	1.84			112,585		369	1.30
Total interest-bearing deposits		630,810		1,683	1.06			554,652		981	0.70
Repurchase agreements		-		-	-			9,662		3	0.14
Overnight borrowings		34,096		210	2.44			45,479		260	2.26
FHLB advances		15,000		115	3.05			18,725		73	1.54
Total interest-bearing liabilities		679,906		2,008	1.17	%		628,518		1,317	0.83	%
Non-interest bearing deposits		198,188						203,530
Non-interest bearing liabilities		14,008						8,077
Total liabilities		892,102						840,125
Shareholders' equity		103,117						89,810
Total liabilities and shareholders' equity	$	995,219					$	929,935
Net interest income - FTE			$	8,186					$	7,893

Net interest spread					3.18	%					3.32	%
Net interest margin					3.49	%					3.56	%
Cost of funds					0.91	%					0.63	%

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
%

~~Table Of Contents~~



		Nine months ended														Nine months ended
(dollars in thousands)	(dollars in thousands)	September 30, 2017							September 30, 2016							September 30, 2019						September 30, 2018
		Average					Yield /		Average					Yield /		Average				Yield /		Average				Yield /
Assets	Assets	balance		Interest			rate		balance		Interest			rate		balance		Interest		rate		balance		Interest		rate

Interest-earning assets	Interest-earning assets
Interest-bearing deposits	Interest-bearing deposits	$	2,604	$	22		1.15	%	$	14,892	$	59		0.53	%	$	2,437	$	40	2.23	%	$	7,540	$	94	1.66	%
Restricted regulatory securities		4,366		342		10.48			3,228		122		5.06
Investments:	Investments:
Agency - GSE	Agency - GSE		17,982		191		1.42			18,305		173		1.26			5,931		120	2.70			6,205		110	2.37
MBS - GSE residential	MBS - GSE residential		88,742		1,696		2.56			69,334		1,063		2.05			128,216		2,669	2.78			115,219		2,267	2.63
State and municipal (nontaxable)	State and municipal (nontaxable)		41,397		1,700		5.49			35,359		1,495		5.65			49,462		1,648	4.46			44,231		1,499	4.53
Other	Other		3,598		119		4.40			1,575		63		5.40			-		-	-			252		13	6.85
Total investments	Total investments		151,719		3,706		3.27			124,573		2,794		3.00			183,609		4,437	3.23			165,907		3,889	3.13
Loans and leases:	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
C&I and CRE (taxable)		315,293		12,225		5.18			294,645		10,679		4.85
C&I and CRE (nontaxable)		33,298		994		3.99			31,464		872		3.71
Consumer	Consumer		101,323		3,175		4.19			70,712		2,817		5.32			158,712		4,604	3.88			140,941		3,893	3.69
Residential real estate	Residential real estate		200,047		5,989		4.00			191,111		5,619		3.93			216,655		7,236	4.47			207,957		6,679	4.29
Total loans and leases	Total loans and leases		628,283		20,379		4.34			564,051		18,449		4.37			723,958		25,059	4.63			675,007		22,123	4.38
Federal funds sold			-		-		-			-		-		-
Total interest-earning assets	Total interest-earning assets		782,606		24,107		4.12	%		703,516		21,302		4.04	%		914,370		29,878	4.37	%		851,682		26,228	4.12	%
Non-interest earning assets	Non-interest earning assets		56,515							49,216							61,232						50,528
Total assets	Total assets	$	839,121						$	752,732						$	975,602					$	902,210

Liabilities and shareholders' equity	Liabilities and shareholders' equity

Interest-bearing liabilities	Interest-bearing liabilities
Deposits:	Deposits:
Interest-bearing checking	Interest-bearing checking	$	185,093	$	548		0.40	%	$	155,543	$	342		0.29	%	$	228,281	$	1,161	0.68	%	$	206,905	$	822	0.53	%
Savings and clubs	Savings and clubs		125,787		122		0.13			119,577		113		0.13			114,185		109	0.13			134,404		181	0.18
MMDA	MMDA		117,596		578		0.66			132,381		621		0.63			148,661		1,669	1.50			110,871		684	0.83
Certificates of deposit	Certificates of deposit		100,829		723		0.96			99,589		651		0.87			119,509		1,550	1.73			109,736		984	1.20
Total interest-bearing deposits	Total interest-bearing deposits		529,305		1,971		0.50			507,090		1,727		0.45			610,636		4,489	0.98			561,916		2,671	0.64
Repurchase agreements	Repurchase agreements		10,068		15		0.20			10,874		16		0.20			-		-	-			10,792		13	0.16
Overnight borrowings	Overnight borrowings		23,892		197		1.10			975		14		1.92			37,968		742	2.61			19,443		324	2.22
FHLB advances	FHLB advances		19,096		174		1.21			-		-		-			19,109		385	2.70			18,876		205	1.45
Total interest-bearing liabilities	Total interest-bearing liabilities		582,361		2,357		0.54	%		518,939		1,757		0.45	%		667,713		5,616	1.12	%		611,027		3,213	0.70	%
Non-interest bearing deposits	Non-interest bearing deposits		167,313							149,724							195,757						195,392
Non-interest bearing liabilities	Non-interest bearing liabilities		6,021							4,841							13,094						7,384
Total liabilities	Total liabilities		755,695							673,504							876,564						813,803
Shareholders' equity	Shareholders' equity		83,426							79,228							99,038						88,407
Total liabilities and shareholders' equity	Total liabilities and shareholders' equity	$	839,121						$	752,732						$	975,602					$	902,210
Net interest income - FTE	Net interest income - FTE			$	21,750						$	19,545						$	24,262					$	23,015

Net interest spread	Net interest spread						3.58	%						3.59	%					3.25	%					3.42	%
Net interest margin	Net interest margin						3.72	%						3.71	%					3.55	%					3.61	%
Cost of funds	Cost of funds						0.42	%						0.35	%					0.87	%					0.53	%

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:


	Nine months ended September 30,												Nine months ended September 30,
(dollars in thousands)	2017 compared to 2016						2016 compared to 2015						2019 compared to 2018						2018 compared to 2017
	Increase (decrease) due to												Increase (decrease) due to
	Volume		Rate		Total		Volume		Rate		Total		Volume		Rate		Total		Volume		Rate		Total
Interest income:
Interest-bearing deposits	$	(72)	$	35	$	(37)	$	9	$	28	$	37	$	(78)	$	24	$	(54)	$	58	$	14	$	72
Restricted regulatory securities														55		165		220		(2)		28		26
Investments:
Agency - GSE		(3)		21		18		6		(1)		5		(5)		15		10		(166)		85		(81)
MBS - GSE residential		336		297		633		84		304		388		266		136		402		522		49		571
State and municipal		157		(30)		127		(4)		(20)		(24)		137		-		137		74		7		81
Other		65		(10)		55		(11)		(57)		(68)		(11)		-		(11)		(3)		(3)		(6)
Total investments		555		278		833		75		226		301		387		151		538		427		138		565
Loans and leases:
Residential real estate		265		104		369		341		(30)		311		285		272		557		241		449		690
Commercial and CRE		801		367		1,168		653		(204)		449
C&I and CRE														811		831		1,642		(27)		514		487
Consumer		1,042		(684)		358		128		(123)		5		506		205		711		871		(153)		718
Total loans and leases		2,108		(213)		1,895		1,122		(357)		765		1,602		1,308		2,910		1,085		810		1,895
Total interest income		2,591		100		2,691		1,206		(103)		1,103		1,966		1,648		3,614		1,568		990		2,558

Interest expense:
Deposits:
Interest-bearing checking		71		136		207		50		67		117		91		248		339		72		202		274
Savings and clubs		9		-		9		6		(50)		(44)		(24)		(47)		(71)		9		50		59
Money market		(70)		27		(43)		65		16		81		289		695		984		(34)		140		106
Certificates of deposit		8		63		71		(39)		(27)		(66)		94		472		566		68		193		261
Total deposits		18		226		244		82		6		88		450		1,368		1,818		115		585		700
Repurchase agreements		(1)		-		(1)		(1)		2		1		(13)		-		(13)		1		(3)		(2)
Overnight borrowings		191		(8)		183		(20)		19		(1)		353		65		418		(42)		169		127
FHLB advances		174		-		174		(255)		-		(255)		2		178		180		(2)		33		31
Total interest expense		382		218		600		(194)		27		(167)		792		1,611		2,403		72		784		856
Net interest income	$	2,209	$	(118)	$	2,091	$	1,400	$	(130)	$	1,270	$	1,174	$	37	$	1,211	$	1,496	$	206	$	1,702

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:

For the ~~three~~third quarter of 2019, the provision for loan losses decreased $0.1 million to $0.3 million from $0.4 million for the third quarter of 2018. For the nine months ended September 30, ~~2017~~2019 and ~~2016,~~2018, 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.

~~For~~$0.8 million and $1.1 million, respectively, a $0.3 million, or 26%, decrease. This decrease in the provision for loan losses in both periods was due primarily to a deceleration in the Company’s loan growth along with strong asset quality. The provision for loan losses derives from the reserve required from the allowance for loan losses calculation. The Company continued provisioning 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~~2019 in order to ~~net growth in the loan portfolio but also to fund the expected~~maintain an allowance ~~requirements implied from certain macroeconomic and other business factors.~~level that management deemed adequate.

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.

For the third quarter of ~~2017,~~2019, non-interest income amounted to ~~$2.2~~$2.6 million, an increase of ~~$0.2~~$0.3 million, ~~from $2.0~~or 15%, compared to $2.3 million recorded for the same 2018 period. Service charges on loans, which increased the most, was almost $0.2 million higher than the third quarter of ~~2016. Increases in trust income of~~2018 driven by mortgage loan service charges. Financial service fees also increased $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.~~quarter-over-quarter.

Non-interest income ~~amounted to $6.5~~totaled $7.5 million for the nine months ended September 30, ~~2017,~~2019, an increase of ~~$0.7~~$0.6 million, or ~~12%~~9%, from the ~~$5.8~~$6.9 million recorded for the same ~~2016~~2018 period. Service charges on loans were up $0.4 million primarily due to service charges on commercial loans and mortgages. There were also increases in financial service fees of $0.2 million and debit card interchange fees of $0.1 million. These increases were partially offset by $0.1 million lower gains on the sale of securities.

For the quarter ended September 30, 2019, total non-interest operating expenses were $6.6 million, an increase of $0.5 million, or 8%, compared to $6.1 million for the same 2018 quarter. Salary and employee benefits rose $0.2 million, or 7%, to $3.7 million for the third quarter of 2019 from $3.5 million for the third quarter of 2018. The increase was primarily due to ~~$0.2 million in~~higher salaries from additional ~~trust revenue, an increase of $0.2 million in BOLI earnings, $0.1 million more service charges on deposits,~~employees, including bankers at the 2 new branches, plus merit increases partially offset by lower expenses for bonuses and group insurance. Premises and equipment expense was $0.1 million higher ~~interchange fees.~~

~~For the three months ended September 30, 2017, non-interest expenses increased $0.6 million, or 12%, compared~~primarily due to depreciation related to the ~~three months ended September 30, 2016 from $5.4 million to $6.0 million. Salaries~~branch that was opened during December 2018 and ~~employee benefits grew $0.3~~higher equipment maintenance and rental expenses. Data processing and communications expense and professional service expenses also both increased $0.1 million during the third quarter of ~~2017~~2019 compared 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~~2018. These increases ~~increased incentive compensation plus additional expenses for~~were partially offset by 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.FDIC assessment reduction.

For the nine months ended September 30, ~~2017,~~2019, non-interest operating expenses increased ~~$1.7~~$1.3 million, or ~~11%~~7%, compared to the nine months ended September 30, ~~2016,~~2018, from ~~$16.2~~$18.5 million to ~~$17.9~~$19.8 million. Salaries and employee ~~benefits increased $0.9~~benefit expenses contributed the most to the increase growing $0.7 million, ~~from $8.7 million for the first nine months of 2016 to $9.6 million for the same 2017 period.~~or 7%. 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~~additional 401k contributions and higher post-retirement benefit expenses partially offset by less bonuses and group insurance. Premises and equipment expenses increased $0.3 million, or 11%, due to ~~certain employees in the normal course of performance management, increased incentive compensation~~higher depreciation and ~~added retirement benefits.~~expenses for equipment maintenance. Data processing and communications expense also 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$0.3 million. Loan collection 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. Automatedautomated transaction processing both 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.million. Partially offsetting these increases was a$0.3 million less professional service fees and $0.1 million ~~decrease in the~~less FDIC ~~assessment.~~ assessment expenses.

The ratios of non-interest expense less non-interest income to average assets, known as the expense ratio, ~~at September 30, 2017~~were 1.68% 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, adjusted1.72% 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.~~

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~~2019 and 2018. The expense ratio decreased because 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. Duringhigher average assets 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 20172019 compared to the same ~~2016~~2018 period. The efficiency ratio increased from 61.91% at September 30, 2018 to 62.34% at September 30, 2019. For more information on the calculation of the efficiency ratio, see “Non-GAAP Financial Measures” located within this management’s discussion and analysis.

The provision for income taxes increased $0.1 million for both the three and nine months ended September 30, 2019 and 2018 due to higher income before taxes. The Company's effective tax rate was 16.4% at September 30, 2019 compared to 16.4% at September 30, 2018.

Consolidated assets increased ~~$85.3~~$30.3 million, or ~~11%~~3%, to ~~$878.2 million~~$1.0 billion as of September 30, ~~2017~~2019 from ~~$792.9~~$981.1 million at December 31, ~~2016.~~2018. The increase in assets occurred principally 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~~portfolio. Cash inflow from growth in deposits of ~~$45.1~~$82.1 million was used to pay down borrowings ~~of $32.4~~which declined $68.7 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.~~growth.

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~~Debt 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). Beginning on January 1, 2018, equity securities were carried at fair value on the consolidated balance sheets with unrealized gains and losses, net of deferred income taxes, reported separately within ~~shareholders’ equity~~the consolidated statements of income as a component of ~~accumulated other comprehensive income (AOCI).~~non-interest income. The Company sold all of its remaining equity securities during the first half of 2018. 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,~~2019, the carrying value of investment securities amounted to ~~$152.0~~$189.2 million, or ~~17%~~19% of total assets, compared to ~~$130.0~~$182.8 million, or ~~16%~~19% of total assets, at December 31, ~~2016. On~~2018. As of September 30, ~~2017, 60%~~2019, 68% 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.~~2019 and December 31, 2018. The AFS securities were recorded with a net unrealized gain of ~~$2.9 million and $2.1~~$4.3 million as of September 30, ~~2017~~2019 and a net unrealized loss of $1.4 million as of December 31, ~~2016, or a~~2018. Of the net improvement in the unrealized gain position of ~~$0.8~~$5.7 million, ~~during the first nine months of 2017.~~$3.4 million was net unrealized gains on mortgage-backed securities, $2.1 million was net unrealized gains on municipal securities and $0.2 million was net unrealized gains on agency securities. 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~~maintain above 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,~~2019, the Company had ~~$130.6~~$142.5 million in public deposits, or 17% of total deposits. Pennsylvania state law requires the Company to maintain pledged securities on these public ~~deposits.~~deposits or otherwise obtain a FHLB letter of credit or FDIC insurance for these customers. As of September 30, ~~2017,~~2019, the balance of pledged securities required for deposit ~~and repurchase agreement~~ accounts was ~~$141.6 million.~~$75.5 million, or 40% of total securities.

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 until or sell prior 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~~quarter ended September 30, ~~2017,~~2019, the Company did not incur other-than-temporary impairment charges from its investment securities portfolio.

During the ~~first~~ nine months ~~of 2017,~~ended September 30, 2019, the carrying value of total investments increased ~~$22.0~~$6.4 million, or ~~17%~~4%. 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 intermediate to long-term rates rise, the strategy ~~will~~is expected to 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.

A comparison of investment securities at September 30, ~~2017~~2019 and December 31, ~~2016~~2018 is as follows:

As of September 30, ~~2017,~~2019, 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~~2019 are as follows:



					More than				More than				More than												More than				More than				More than
	One year or less				one year to five years				five years to ten years				ten years				Total				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	%	$	-	-	%	$	85	5.90	%	$	6,137	3.44	%	$	122,330	3.38	%	$	128,552	3.39	%
State & municipal subdivisions		-	-			914	6.44			2,649	5.24			40,172	5.10			43,735	5.13			1,015	4.22			1,490	5.82			1,007	3.64			51,007	4.45			54,519	4.47
Agency - GSE		4,007	1.37			12,206	1.48			-	-			-	-			16,213	1.45			-	-			6,175	2.70			-	-			-	-			6,175	2.70
Total debt securities	$	4,007	1.37	%	$	15,382	2.05	%	$	6,994	4.34	%	$	124,836	3.84	%	$	151,219	3.62	%	$	1,015	4.22	%	$	7,750	3.32	%	$	7,144	3.47	%	$	173,337	3.68	%	$	189,246	3.66	%

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%~~21%. In addition, average yields on securities AFS are based on amortized cost and do not reflect unrealized gains or losses.

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~~declined to a predetermined level. In addition, the Company earns a return or dividend based on the amount invested. The dividends received from the FHLB totaled $82 thousand and $267 thousand for the three and nine months ended September 30, 2019 and $44 thousand and $122 thousand for the three and nine months ended September 30, 2018, respectively. The balance in FHLB stock was ~~$2.5~~$3.8 million and ~~$2.6~~$6.3 million as of September 30, ~~2017~~2019 and December 31, ~~2016,~~2018, respectively.

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~~2019 and December 31, ~~2016,~~2018, loans HFS consisted of residential mortgages with carrying amounts of ~~$1.6~~$1.8 million and ~~$2.9~~$5.7 million, respectively, which approximated their fair values. During the nine months ended September 30, ~~2017,~~2019, residential mortgage loans with principal balances of ~~$30.9~~$36.5 million were sold into the secondary market and the Company recognized net gains of $0.6 million, compared to ~~$34.4~~$24.9 million and ~~$0.6~~$0.5 million, respectively, during the nine months ended September 30, ~~2016.~~2018. During ~~2017,~~the nine months ended September 30, 2018, the Company also sold one SBA guaranteed loan with a principal balance of ~~$2.4~~$0.4 million and recognized a net gain on the sale of ~~$0.1 million. The Company did not sell any SBA guaranteed loans in 2016.~~$47 thousand.

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~~2019 and December 31, ~~2016,~~2018, the servicing portfolio balance of sold residential mortgage loans was ~~$296.9~~$301.5 million and ~~$285.2~~$304.9 million, respectively. At September 30, ~~2017~~2019 and December 31, ~~2016,~~2018, the servicing portfolio balance of sold SBA loans was ~~$5.7~~$5.1 million and ~~$4.1~~$5.5 million, respectively.

As of September 30, ~~2017,~~2019, the Company ~~has~~had gross loans and leases totaling ~~$635.1~~$749.6 million compared to ~~$598.0~~$729.1 million at December 31, ~~2016.~~2018 which represented an increase of $20.5 million, or 3%. The loan growth was primarily driven by residential real estate activity during the third quarter of 2019.

As of September 30, 2019, the commercial loan portfolio, which consisted of commercial and industrial (C&I) and commercial real estate (CRE) loans, increased $3.6 million, or 1%, compared to December 31, 2018. This increase was attributed to growth of ~~$37.1~~$7.3 million in owner occupied CRE loans and $3.0 million in non-owner occupied CRE loans, partially offset by reductions of $4.8 million in C&I loans and $1.9 million in commercial construction loans. CRE loan growth activity can be attributed to new client acquisition and expansion of existing relationships.

The consumer loan portfolio experienced a slight reduction, decreasing $0.2 million, or 6%less than 1%, compared to December 31, 2018. This reduction in the consumer loan portfolio was ~~largely~~ attributed to ~~the Company’s continued efforts to grow the commercial and~~a decline of $2.5 million in home equity lines of credit

~~industrial portfolio through opportunities with local government entities including counties, townships, boroughs, cities~~(HELOC), $0.7 million in direct finance leases and school districts. The Company attributes customer loyalty to being a trusted financial advisor to clients. Additionally, the indirect auto and lease portfolio continues to grow, as planned, due to new relationships with automobile dealerships$0.6 million in ~~Northeastern Pennsylvania.~~

~~The commercial and industrial (C&I) portfolio and commercial real estate (CRE) portfolio compared to December 31, 2016, had~~consumer other loans, partially offset by 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 expanded commercial 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 2017 due 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.

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$2.7 million in auto loans and ~~leases. Additional support was realized from $1.6~~$0.9 million in home equity ~~line~~installment loans.

Demand for HELOCs decreased during the first three quarters of 2019 because of homeowners’ preference for conventional mortgage loan products, which had longer terms and lower rates. This trend drove the $2.5 million, or 5%, year-to-date reduction for the Company’s HELOC portfolio, as well as challenged growth in the HEIL portfolio.

During the last quarter of 2019, management expects increased demand for fixed rate home equity installment loans to offset the decline in home equity lines of credit.

Direct finance leases also declined $0.7 million as originations did not replace amortization. For the last quarter of 2019, the Company’s strategy is to offer competitive terms on direct finance leases to drive demand for high 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.~~ quality borrowers.

The residential loan portfolio grew ~~approximately $2.0~~$17.1 million, or 1%11%, ~~from $145.0~~during the first three quarters of 2019. This growth was driven by a $16.7 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~~increase in residential real estate ~~mortgages,~~loans and a $0.4 million increase in residential construction loans. The Company’s mortgage loan modification program which ~~make up roughly 94%,~~offered refinancing to qualified customers predominantly caused the lift in residential real estate loans. Homeowners’ aforementioned preference for residential mortgage products supplemented the growth from the mortgage modification program. Management expects continued growth in residential loans for the last quarter of ~~this category grew $4.2 million.~~2019.

The composition of the loan portfolio at September 30, ~~2017~~2019 and December 31, ~~2016~~2018 is summarized as follows:


	September 30, 2017				December 31, 2016				September 30, 2019				December 31, 2018
(dollars in thousands)	Amount		%		Amount		%		Amount		%		Amount		%

Commercial and industrial	$	112,096	17.6	%	$	98,477	16.5	%	$	122,129	16.3	%	$	126,884	17.4	%
Commercial real estate:
Non-owner occupied		93,398	14.7			87,220	14.5			98,542	13.1			95,515	13.1
Owner occupied		109,598	17.3			113,104	18.9			131,398	17.6			124,092	17.0
Construction		6,123	1.0			3,987	0.7			4,819	0.6			6,761	0.9
Consumer:
Home equity installment		28,282	4.5			28,466	4.8			33,635	4.5			32,729	4.5
Home equity line of credit		53,177	8.4			51,609	8.6			50,016	6.7			52,517	7.2
Auto and leases		79,629	12.5			56,841	9.5
Auto										108,295	14.4			105,576	14.5
Direct finance leases										16,284	2.2			17,004	2.3
Other		5,784	0.9			13,301	2.2			5,723	0.8			6,314	0.9
Residential:
Real estate		138,709	21.9			134,475	22.5			162,692	21.7			145,951	20.0
Construction		8,315	1.2			10,496	1.8			16,109	2.1			15,749	2.2
Gross loans		635,111	100.0	%		597,976	100.0	%		749,642	100.0	%		729,092	100.0	%
Less:
Allowance for loan losses		(9,356)				(9,364)				(9,441)				(9,747)
Unearned lease revenue		(644)				(482)				(923)				(1,028)
Net loans	$	625,111			$	588,130			$	739,278			$	718,317

Loans held-for-sale	$	1,629			$	2,854			$	1,751			$	5,707

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.

•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~~quarterly 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 following tables set forth the activity in the allowance for loan losses ~~was $9.4 million at September 30, 2017~~ and ~~$9.4 million~~certain key ratios 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.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, 2019			December 31, 2018			September 30, 2018

Balance at beginning of period	$	9,747		$	9,193		$	9,193

Charge-offs:
Commercial and industrial		(131)			(196)			(106)
Commercial real estate		(531)			(268)			(166)
Consumer		(255)			(391)			(275)
Residential		(330)			(371)			(117)
Total		(1,247)			(1,226)			(664)

Recoveries:
Commercial and industrial		17			77			67
Commercial real estate		28			42			36
Consumer		58			211			187
Residential		8			-			-
Total		111			330			290
Net charge-offs		(1,136)			(896)			(374)
Provision for loan losses		830			1,450			1,125
Balance at end of period	$	9,441		$	9,747		$	9,944

Allowance for loan losses to total loans		1.26	%		1.34	%		1.40	%
Net charge-offs to average total loans outstanding		0.21	%		0.13	%		0.07	%
Average total loans	$	723,958		$	687,853		$	675,007
Loans 30 - 89 days past due and accruing	$	2,478		$	5,938		$	4,013
Loans 90 days or more past due and accruing	$	7		$	1		$	14
Non-accrual loans	$	3,858		$	4,298		$	3,777
Allowance for loan losses to non-accrual loans		2.45	x		2.27	x		2.63	x
Allowance for loan losses to non-performing loans		2.44	x		2.27	x		2.62	x

For 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~~2019, the allowance ~~decreased relative~~declined by $0.3 million, or 3%, to $9.4 million from $9.7 million at December 31, 2018. Total loans, ~~the Company reported improving asset quality. At~~which represent gross loans less unearned lease revenue, increased by $20.6 million, or 3%, to $748.7 million at September 30, ~~2017, fewer non-performing loans reduced the ratio of non-performing loans~~2019 from $728.1 million at December 31, 2018. The allowance for loan losses decreased as a percentage of total loans to ~~0.61%~~1.26% at September 30, ~~2017 versus 1.23%~~2019 from 1.34% at December 31, ~~2016. Further, allowance levels at September 30, 2017 were sufficient~~2018 due 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~~loan growth 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 foreclosedimproved 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.quality.

Management believes that the current balance in the allowance for loan losses is sufficient to ~~withstand~~meet 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~~

During the first quarter of 2019, management increased the qualitative factors associated with its consumer and residential portfolios related to changes in national and local economic and business conditions and developments that will ultimately affect the collectability of these portfolios. The justification for the increase in these qualitative factors was an economic summary report indicating a weakening consumer financial wherewithal. Based upon management’s judgement, this consumer weakness will cause estimated credit losses associated with the Company’s existing portfolio to differ from historical loss experience, which ~~become identified in future periods that may require additional charge-offs and/or increases~~necessitated increasing the qualitative factors for the loan portfolios deemed most sensitive to this development, which are its consumer and residential portfolios.

During the ~~allowance~~second quarter of 2019, management decreased the qualitative factor for its home equity installment loans and residential construction loans. The reduction was due to ~~continued sluggishness~~a decreasing trend in delinquency for the home equity installment portfolio. Further, 0% delinquency in the ~~economy~~residential construction portfolio over the past several quarters with no expectation for future delinquency in this portfolio for the foreseeable future justified the decrease in this qualitative factor.

During the third quarter of 2019, management decreased the qualitative factor for its C&I loans because of an improving delinquency trend along with a history of low delinquency levels, attributed mainly to high quality municipal loans within the C&I portfolio.

Management also reduced qualitative factors to reflect the positive impact the Federal Reserve’s decision to cut the federal funds rate 0.25% twice during the third quarter of 2019 will have on estimated credit losses for the following portfolios: commercial & industrial, owner occupied commercial real estate, non-owner occupied commercial real estate, commercial construction, residential real estate, HELOC, consumer auto, and ~~pressure on property values. In contrast, an abrupt significant~~consumer other. Estimated credit losses are anticipated to decline for commercial and residential real estate secured loans as lower interest rates improve real estate valuations due to the inverse relationship between capitalization rates and the market values of real estate. Lower rates also reduce debt service requirements for variable rate loans in all portfolios, which is particularly impactful for the commercial construction, HELOC, and consumer other portfolios due to the high concentration of variable rate loans within these portfolios. Portfolios with a high concentration of fixed rate loans, such as residential real estate and consumer auto, are also likely to observe a positive change in estimated credit losses as new customers lock in lower rates than existing customers.

The allocation of net charge-offs among major categories of loans are as follows for the periods indicated:

For the nine months ended September 30, 2019, net charge-offs against the allowance totaled $1.1 million compared with $0.4 million for the nine months ended September 30, 2018, representing a $0.7 million increase. This increase was primarily attributed to a $0.4 million charge-off to a single commercial borrower occurring in the ~~U.S. Prime lending rate~~first quarter of 2019. During the third quarter of 2019, the Company also charged-off an aggregate of $0.3 million in collection expenses incurred since 2016 on 14 residential loans sold to Fannie Mae but serviced by the Company. The Company will pursue recovery of these costs. During the fourth quarter of 2019, the Company anticipates completing resolution of one commercial borrower on non-accrual status which, upon payoff, could ~~adversely impact the debt service capacity~~lead to a recovery of ~~existing borrowers' ability to repay.~~$0.3 million as well as $0.1 million in lost interest.

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

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.

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				September 30, 2019				December 31, 2018				September 30, 2018
			Category				Category				Category				Category				Category				Category
			% of				% of				% of				% of				% of				% of
(dollars in thousands)	Allowance		Loans		Allowance		Loans		Allowance		Loans		Allowance		Loans		Allowance		Loans		Allowance		Loans
Category
Commercial real estate	$	4,102	33	%	$	4,706	34	%	$	4,808	35	%	$	3,775	32	%	$	3,901	31	%	$	4,030	31	%
Commercial and industrial		1,399	18			1,075	17			1,131	16			1,276	16			1,432	18			1,334	17
Consumer		1,969	26			1,834	25			1,788	24			2,083	28			2,548	29			2,674	29
Residential real estate		1,799	23			1,622	24			1,357	25			2,238	24			1,844	22			1,777	23
Unallocated		87	-			127	-			112	-			69	-			22	-			129	-
Total	$	9,356	100	%	$	9,364	100	%	$	9,196	100	%	$	9,441	100	%	$	9,747	100	%	$	9,944	100	%

The allocation of the allowance for the commercial loan portfolio, which is comprised of commercial real estate and commercial & industrial loans, accounted for approximately 54% of the total allowance for loan losses at September 30, 2019, which represents a one percentage point decrease from 55% of the total allowance for loan losses at December 31, 2018.

The allocation of the allowance for the consumer loan portfolio, accounted for approximately 22% of the total allowance for loan losses at September 30, 2019, which represents a four percentage point decrease from 26% of the total allowance for loan losses at December 31, 2018. This reduction in the allowance allocated to the consumer loan portfolio was mostly related to the payoff of a consumer installment troubled debt restructured (TDR) loan with a large specific impairment that occurred during the first quarter of 2019.

The allocation of the allowance for the residential real estate portfolio, accounted for approximately 24% of the total allowance for loan losses at September 30, 2019, which represents a five percentage point increase from 19% of the total allowance for loan losses at December 31, 2018. The year-to-date increase in the allowance allocated to residential real estate was attributed to an increase in the residential loan portfolio relative to the overall loan portfolio. The residential portfolio grew by $17.1 million, or 11%, to $178.8 million at September 30, 2019 from $161.7 million at December 31, 2018 compared to year-to-date total loan growth of 3%.

The unallocated amount represents the portion of the allowance not specifically identified with a loan or groups of loans. The unallocated reserve was less than 1% of the total allowance for loan losses at September 30, 2019, unchanged from less than 1% of the total allowance for loan losses at December 31, 2018.

The Company defines non-performing assets as accruing loans past due 90 days or more, non-accrual loans, ~~troubled debt restructured loans (TDRs),~~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:

* In the table above, the amount includes non-accrual TDRs of ~~$2.0~~$0.8 million as of September 30, ~~2017, $1.5~~2019, $1.7 million as of December 31, ~~2016~~2018 and ~~$20 thousand~~$1.9 million as of September 30, ~~2016.~~ 2018.

In the review of loans for both delinquency and collateral sufficiency, management concluded that there were ~~a number of~~several 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~~Non-performing assets represented 0.55% of total assets at September 30, ~~2016~~2019 compared with 0.65% at December 31, 2018. The non-performing assets ratio improved due 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 changethe net reduction in non-performing ~~loans was the result of charge-offs, transfers~~assets by $0.8 million (13%) to ~~ORE, payments, and miscellaneous transfers back~~$5.5 million along with a $30.3 million (3%) increase in total assets to ~~accrual from all loan types. This decrease~~$1.0 billion. The improvement in non-performing ~~loans was driven by a $2.9 million net decrease in non-accrual commercial loans due to~~assets resulted primarily from the payoff of two ~~CRE loans for~~TDRs to a single borrower totaling ~~$2.5~~$0.7 million and $0.3 million in ~~the third quarter of 2017. The net decrease in non-accrual~~charge-offs for two commercial ~~loans was partially offset by~~TDRs to a ~~$0.6 million net increase of residential mortgage non-accrual loans and a $0.3 million net increase in consumer non-accrual loans.~~

From December 31, ~~2016~~2018 to September 30, ~~2017, non-performing~~2019, non-accrual loans decreased by $0.4 million, or 10%, from ~~$7.4~~$4.3 million to $3.9 ~~million,~~million. At December 31, 2018, there were a ~~$3.5 million, or 48% decrease. This decrease~~total of 40 loans to 34 unrelated borrowers with balances that ranged from less than $1 thousand to $0.6 million. At September 30, 2019, there were a total of 40 loans to 35 unrelated borrowers with balances that ranged from less than $1 thousand to $0.7 million. The decline in non-accrual loans was ~~driven by~~attributed to payments received of ~~$3.3~~$1.4 million, charge-offs of $0.7 million, transfers back to accrual of ~~$1.0~~$0.1 million and transfers to ORE of ~~$0.2~~$0.9 million. These ~~reductions~~decreases were partially offset by ~~additions and miscellaneous~~the addition of $2.5 million of loans to non-accrual status along with expenses ~~totaling $1.7~~added to balances of $0.2 million.

From December 31, ~~2016~~2018 to September 30, ~~2017, the portion of~~2019, accruing loans that ~~was~~were over 90 days past due ~~decreased~~increased from ~~$19 thousand to zero. Accruing~~three loans ~~over 90 days past due at December 31, 2016 consisted of four loans to four unrelated borrowers ranging from~~totaling $1 thousand to $9one loan totaling $7 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~~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~~fourth quarter of ~~2017,~~2019, despite the ~~Company foreclosed on~~fact that all interest is and expects to be paid as agreed, a significant commercial relationship has the ~~collateral for these loans and sold the foreclosed assets.~~potential to deteriorate from Special Mention to Substandard.

The composition of non-performing loans as of September 30, ~~2017~~2019 is as follows:




			Past due									Past due
	Gross		90 days or		Non-		Total non-		% of	Gross		90 days or		Non-		Total non-		% of
	loan		more and		accrual		performing		gross	loan		more and		accrual		performing		gross
(dollars in thousands)	balances		still accruing		loans		loans		loans	balances		still accruing		loans		loans		loans
Commercial and industrial	$	112,096	$	-	$	14	$	14	0.01%	$	122,129	$	-	$	206	$	206	0.17%
Commercial real estate:
Non-owner occupied		93,398		-		584		584	0.63%		98,542		-		428		428	0.43%
Owner occupied		109,598		-		1,148		1,148	1.05%		131,398		-		1,791		1,791	1.36%
Construction		6,123		-		169		169	2.76%		4,819		-		-		-	-
Consumer:
Home equity installment		28,282		-		15		15	0.05%		33,635		-		44		44	0.13%
Home equity line of credit		53,177		-		513		513	0.96%		50,016		-		260		260	0.52%
Auto loans and leases *		78,985		-		-		-	-
Auto loans											108,295		7		68		75	0.07%
Direct finance leases *											15,361		-		-		-	-
Other		5,784		-		-		-	-		5,723		-		-		-	-
Residential:
Real estate		138,709		-		1,421		1,421	1.02%		162,692		-		1,061		1,061	0.65%
Construction		8,315		-		-		-	-		16,109		-		-		-	-
Loans held-for-sale		1,629		-		-		-	-		1,751		-		-		-	-

Total	$	636,096	$	-	$	3,864	$	3,864	0.61%	$	750,470	$	7	$	3,858	$	3,865	0.52%

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~~2019 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.~~$172 thousand.



As of and for the year ended December 31, 2018
	Accruing				Non-accruing
	Commercial		Commercial		Consumer		Commercial			Residential		Consumer
(dollars in thousands)	& industrial		real estate		HELOC		real estate			real estate		installment	Total

Troubled Debt Restructures:
Beginning balance	$	24	$	1,847	$	395	$	542	$	636	$	-	$	3,444
Additions		-		-		-		-		365		414		779
Transfers		-		-		(395)		-				-		(395)
Pay downs / payoffs		-		(41)		-		(22)		-		(1)		(64)
Charge offs		-		-		-		-		(237)		-		(237)
Ending balance	$	24	$	1,806	$	-	$	520	$	764		413	$	3,527
Number of loans		1		10		-		1		2		1		15

The Company, on a regular basis, reviews changes to loans to determine if they meet the definition of a ~~troubled debt restructure (TDR).~~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~~2018 to September 30, ~~2017,~~2019, TDRs ~~increased~~decreased by $1.8 million, or 50%, from ~~nine loans totaling $3.3~~$3.5 million to ~~fifteen loans totaling $3.9~~$1.7 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~~2018, there were a total of 15 TDRs ~~consisted of six CRE loans totaling $1.8 million, one C&I loan totaling $25~~by 11 unrelated borrowers with balances that ranged from $24 thousand ~~one residential mortgage totaling $0.9 million, and one HELOC totaling $0.6~~to $0.5 million. At September 30, ~~2017,~~2019, there were a total of 9 TDRs by 8 unrelated borrowers with balances that ranged from $80 thousand to $0.5 million. The decrease was driven by the ~~fifteen~~payoff of two TDRs ~~consisted of twelve CRE loans~~by a single borrower totaling ~~$2.6~~$0.7 million, ~~one C&I loan~~$0.3 million in additional paydowns/payoffs, charge-offs to a single unrelated borrower totaling ~~$25 thousand, one residential mortgage loan totaling $0.9~~$0.4 million and ~~one HELOC totaling~~a $0.4 ~~million.~~million transfer to ORE of a residential real estate TDR in 2019.

Loans modified in a TDR may or may not be placed on non-accrual status. At December 31, ~~2016, two~~2018, four TDRs totaling ~~$1.5~~$1.7 million were on non-accrual. ~~These consisted of one residential mortgage and one HELOC.~~ At September 30, ~~2017, four~~2019, three TDRs totaling ~~$2.0~~$0.8 million were on non-accrual. ~~These consisted~~During the first quarter of ~~two CRE loans, one~~2019, a non-accrual residential ~~mortgage~~real estate TDR and ~~one HELOC.~~

~~The following tables set forth~~a non-accrual consumer installment TDR, both to the ~~activity in TDRs as and for~~same borrower, were paid off. During the ~~periods indicated:~~

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.

From December 31, ~~2016~~2018 to September 30, ~~2017,~~2019, foreclosed assets held-for-sale (ORE) ~~decreased~~increased from ~~$1.3~~$0.2 million to ~~$0.9~~$0.7 million, a ~~$0.4~~$0.5 million ~~or 29%, decrease.~~increase. The following table sets forth the activity in the ORE component of foreclosed assets held-for-sale:

As of September 30, ~~2017,~~2019, ORE consisted of ~~eleven~~seven properties from ~~eleven~~seven unrelated borrowers totaling ~~$0.9~~$0.7 million.

~~Three~~Two of these properties ($~~0.1~~0.6 million) were added in ~~2017; three~~2019; two of these properties ($61 thousand) were added in ~~2016~~2018; two of these properties ($~~0.5 million);~~10 thousand) were added in 2017; and 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)~~. OfAll seven of the ~~eleven~~ properties ~~seven totaling $0.6 million were~~are currently listed for ~~sale, while the four remaining properties totaling $0.3 million were either in negotiations for sale or in process for disposition.~~sale.

As of September 30, ~~2017,~~2019, the Company had one other repossessed asset held-for-sale, with a balance of $4$2 thousand. There was ~~one~~no other repossessed asset held-for-sale at December 31, ~~2016, with a balance of $8 thousand.~~2018.

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,~~2019, the Company invested ~~$8.0~~$2.0 million in additional BOLI as a source of funding for additional life insurance benefits that provides for payments upon death for officers and employee benefit expenses related to the Company’s non-qualified ~~Supplemental Executive Retirement Plan (SERP)~~SERP implemented for certain executive ~~officers that provides for payments upon death.~~officers. 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.

Net of depreciation, premises and equipment decreased $0.1 million during the first nine months of 2019. The Company recorded $1.1 million in depreciation expense which was partially offset by $1.0 million in additions to fixed assets. For the last quarter of 2019, we expect premises and equipment to increase due to the opening of the new Mountaintop branch in October 2019.

~~The $3.1~~During the first nine months of 2019, the $0.3 million, ~~increase~~or 4%, decrease in other assets was due mostly to ~~$1.9~~a $1.4 million larger net deferred tax liability, $0.2 million less prepaid dealer reserve, $0.2 million reduction from the sale of a building held for sale, $0.2 million decrease in non-accrual borrowing receivables, $0.4 million less negative escrow receivable and $0.1 million less mortgage servicing rights partially offset by $1.4 million in ~~higher residual values associated with recording new automobile leases, net of lease disposals, $0.5~~additional construction in process and $0.8 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.expenses.

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 1012 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:

Total deposits increased ~~$45.1~~$82.1 million, or 6%11%, from ~~$703.5~~$770.2 million at December 31, ~~2016~~2018 to ~~$748.6~~$852.3 million at September 30, ~~2017. The increase primarily came from growth in interest-bearing checking~~2019. Money market accounts ~~of $40.5 million. Most of~~contributed the ~~growth in interest-bearing checking accounts was from public deposits which fluctuate throughout~~most to 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~~with an increase of ~~2017. CDs contributed $15.7~~$57.0 million, ~~to deposit growth~~mostly due to ~~CDs acquired~~increases in ~~a branch acquisition during~~ the ~~first quarter~~balances of ~~2017 and $5.0 million in CDs to one public customer during~~existing accounts. Additionally, the ~~second quarter of 2017. Additionally,~~Company added new money market accounts and customers also shifted money from savings and ~~clubs both~~checking accounts to earn higher rates. Interest-bearing checking accounts increased ~~by $5.5 million and $8.7 million, respectively. Non-interest bearing deposits fell $25.3~~$26.9 million due to an increase in balances from existing business and public customers. Non-interest bearing checking accounts increased $9.1 million primarily from existing business accounts despite shifts to interest-bearing accounts. The Company focused on obtaining a ~~temporary deposit~~full-banking relationship with existing customers as well as forming new customer relationships. Savings and club accounts declined $13.4 million due to customers’ preference for products with higher earnings potential. Most of ~~$48.7 million received at~~ the ~~end of 2016 that~~decline in savings accounts was ~~transferred~~due 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.shifts to money market accounts. The Company will continue to execute on its relationship development strategy, explore the demographics within its marketplace and develop ~~deposit gathering~~creative programs for its customers. ~~The~~For the remainder of 2019, the Company ~~expects~~will focus on deposit growth to fund asset growth ~~for 2017 funded primarily by growth~~and pay down short-term borrowings. Growth in deposits ~~plus utilization of available borrowing capacity. Transactional deposit and CD growth~~from new markets is ~~projected as~~expected from a ~~result of~~full year with the

~~our relationship strategy.~~Back Mountain branch plus the Mountaintop branch opening during the fourth quarter of 2019. 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~~Additionally, CDs also increased $2.5 million mostly due to ~~$11.5 million in~~an ongoing 15-month CD promotion and customers’ desire for higher-yielding deposit alternatives. During 2019, deposit customers moved some money from savings and interest-bearing checking accounts to CDs. Demand for higher rate money market accounts and 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~~may continue to ~~rise, demand for CDs may also increase~~grow 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 and Insured Cash Sweep (ICS) reciprocal program to obtain FDIC insurance protection for customers who have large deposits that at times may exceed the FDIC maximum insured amount of ~~$250,000 per person.~~$250,000. 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. The Company did not have any CDARs as of September 30, 2019 and December 31, 2018. As of September 30, ~~2017~~2019 and December 31, ~~2016, CDARS~~2018, ICS reciprocal deposits represented ~~$1.1~~$29.9 million and $4.7 million, or ~~less than~~4% and 1%, of total ~~deposits.~~deposits which are included in interest-bearing checking accounts in the table above. The increase in ICS deposits is primarily due to an account opened by a public customer during the third quarter of 2019 that had a balance of $13.4 million at September 30, 2019.

The maturity distribution of certificates of deposit at September 30, ~~2017~~2019 is as follows:

Certificates of deposit of $250,000 or more amounted to ~~$31.4~~$44.4 million and ~~$25.7~~$38.4 million as of September 30, ~~2017~~2019 and December 31, ~~2016,~~2018, respectively.

~~Including CDARS, approximately 13%~~Approximately 11% of the CDs, with a weighted-average interest rate of ~~0.74%~~1.59%, are scheduled to mature induring the ~~fourth quarter~~remainder of ~~2017~~2019 and an additional ~~43%~~67%, with a weighted-average interest rate of ~~0.90%~~2.06%, are scheduled to mature ~~in 2018.~~during 2020. 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~~to continue during ~~2017, but~~2019, and will develop CD promotional programs when the Company deems that it is economically feasible to do so or when demand exists. The Company currently expects the cost of deposit funds to slowly decline due to the current decreasing interest rate environment. As with all promotions, the Company will consider the needs of the customers and simultaneously be mindful of the liquidity levels, borrowing rates and the interest rate sensitivity exposure of the Company.

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 fromAt the end of ~~2016.~~2018, the Company transferred all repurchase agreement accounts to interest-bearing checking accounts. In addition, short-term borrowings may include overnight balances with FHLB line of credit and/or correspondent bank’s federal funds lines 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~~Short-term 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~~decreased $52.0 million ~~temporary deposit at~~during the ~~end~~first nine months of ~~2016.~~2019 as deposits grew.

During the first quarter of ~~2017,~~2019, the Company ~~borrowed $17~~paid off $10 million ~~from the~~in FHLB ~~to purchase securities. The borrowings were laddered out~~advances with ~~maturities ranging from July 2017 to January 2019 and~~an interest ~~rates ranging from 0.64% to~~rate of 1.34%. During the second quarter of ~~2017,~~2019, the Company ~~borrowed another~~paid off $6.7 million in FHLB advances with an interest rate of 1.43%. As of September 30, 2019, the Company had the ability to borrow an additional $204.7 million from the ~~FHLB to fund loan growth and replace seasonal~~FHLB.

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:

The original maturity dates of FHLB advances as of September 30, 2019 are as follows:

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,~~2019, the Company maintained a one-year cumulative gap of positive (asset sensitive) ~~$75.2~~$45.0 million, or 9%4%, 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

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:~~2019:



			More than three		More than								More than three		More than
	Three months		months to		one year		More than				Three months		months to		one year		More than
(dollars in thousands)	or less		twelve months		to three years		three years		Total		or less		twelve months		to three years		three years		Total

Cash and cash equivalents	$	30,066	$	-	$	-	$	11,815	$	41,881	$	1,395	$	-	$	-	$	17,292	$	18,687
Investment securities (1)(2)		5,807		16,666		51,025		81,040		154,538		8,511		27,010		42,495		115,048		193,064
Loans and leases(2)		193,914		115,094		170,889		146,843		626,740		190,506		145,070		229,740		175,713		741,029
Fixed and other assets		-		19,857		-		35,250		55,107		-		23,094		-		35,550		58,644
Total assets	$	229,787	$	151,617	$	221,914	$	274,948	$	878,266	$	200,412	$	195,174	$	272,235	$	343,603	$	1,011,424
Total cumulative assets	$	229,787	$	381,404	$	603,318	$	878,266			$	200,412	$	395,586	$	667,821	$	1,011,424

Non-interest-bearing transaction deposits (3)	$	-	$	18,604	$	51,074	$	116,180	$	185,858	$	-	$	20,402	$	56,008	$	127,406	$	203,816
Interest-bearing transaction deposits (3)		190,785		22,528		164,088		76,914		454,315		222,442		-		153,648		153,648		529,738
Certificates of deposit		14,270		40,079		46,544		7,511		108,404		13,397		70,022		30,851		4,498		118,768
Repurchase agreements		12,920		-		-		-		12,920
Short-term borrowings												24,355		-		-		-		24,355
FHLB advances		2,500		4,500		16,704		-		23,704		-		-		10,000		5,000		15,000
Other liabilities		-		-		-		6,781		6,781		-		-		-		14,958		14,958
Total liabilities	$	220,475	$	85,711	$	278,410	$	207,386	$	791,982	$	260,194	$	90,424	$	250,507	$	305,510	$	906,635
Total cumulative liabilities	$	220,475	$	306,186	$	584,596	$	791,982			$	260,194	$	350,618	$	601,125	$	906,635

Interest sensitivity gap	$	9,312	$	65,906	$	(56,496)	$	67,562			$	(59,782)	$	104,750	$	21,728	$	38,093
Cumulative gap	$	9,312	$	75,218	$	18,722	$	86,284			$	(59,782)	$	44,968	$	66,696	$	104,789

Cumulative gap to total assets		1.1%		8.6%		2.1%		9.8%				-5.9%		4.4%		6.6%		10.4%

(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.

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~~2019 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~~2019 levels:

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,~~2019, the Company’s risk-based capital ratio was ~~14.8%~~15.56%.

The table below summarizes estimated changes in net interest income over a twelve-month period beginning October 1, ~~2017,~~2019, under alternate interest rate scenarios using the income simulation model described above:

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 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

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,~~2019, 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,~~2019, the Company ~~acquired $16.0~~generated $1.2 million of cash. During the period, the Company’s operations provided approximately ~~$11.5~~$21.5 million mostly from ~~$21.3~~$24.3 million of net cash inflow from the components of net interest income and ~~$4.2~~$9.8 million in proceeds of loans HFS over originations; partially offset by net non-interest expense/income related payments of ~~$10.8~~$11.2 million ~~$1.3~~and $1.4 million in estimated tax ~~payments and a $1.9 million increase in the residual value from the Company’s automobile leasing activities.~~payments. Cash inflow from interest-earning assets, deposits, ~~borrowings~~loan payments and the ~~acquisition~~sale of ~~a bank branch~~securities were used to purchase investment securities and replace maturing and cash runoff of securities, ~~purchase bank owned life insurance,~~ fund the loan portfolio, pay down FHLB advances and overnight borrowings, purchase bank-owned life insurance, invest in bank premises and equipment and make net dividend payments. The Company received a large amount of public deposits over the past ~~two~~three 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. During 2019, the Company made an effort to open new public accounts as ICS accounts and transfer some existing public accounts to ICS accounts in order to provide the customer with FDIC insurance and to free up the Company’s unencumbered securities to improve liquidity. 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.~~commitments.

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,~~2019, the Company maintained ~~$41.9~~$18.7 million in cash and cash equivalents and ~~$153.6~~$191.0 million of investments AFS and loans HFS. Also as of September 30, ~~2017,~~2019, the Company had approximately ~~$200.2~~$204.7 million available to borrow from the FHLB, $21.0 million from correspondent banks, ~~$65.2~~$96.0 million from the FRB and ~~$44.0~~$150.0 million from the ~~CDARS~~Promontory One-Way Buy program. The combined total of ~~$525.9~~$681.4 million represented ~~60%~~67% of total assets at September 30, ~~2017.~~2019. Management believes this level of liquidity to be strong and adequate to support current operations.

During the nine months ended September 30, ~~2017,~~2019, total shareholders' equity increased ~~$5.7~~$11.2 million, or 7%12%, due principally from the ~~$6.4~~$8.9 million in net income added into retained earnings. ~~Capital~~The Company’s capital position was further enhanced by the ~~$0.5~~$4.5 million, after tax improvement in the net unrealized gain position in the Company’s investment portfolio, ~~$0.1~~$0.2 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~~$0.7 million from stock-based compensation expense from the ESPP and unvested restricted ~~stock.~~stock and SSARs. These items were partially offset by ~~$2.3~~$3.0 million of cash dividends declared on the Company’s common ~~stock.~~stock and a $0.1 million adjustment to retained earnings resulting from adoption of ASU 2016-02. The Company’s dividend payout ratio, defined as the rate at which current earnings are paid to shareholders, was ~~36.2%~~33.5% for the nine months ended September 30, ~~2017.~~2019. The balance of earnings is retained to further strengthen the Company’s capital position.

As of September 30, ~~2017,~~2019, the Company reported a net unrealized gain position of ~~$1.9~~$3.4 million, net of tax, from the debt securities AFS portfolio compared to a net unrealized ~~gain~~loss of ~~$1.4~~$1.1 million as of December 31, ~~2016.~~2018. The ~~improvement~~increase during the first nine months of ~~2017~~2019 was ~~from all security types.~~due to $2.7 million in net unrealized gains on mortgage-backed securities, $1.6 million in net unrealized gains on municipal securities and $0.2 million in net unrealized gains on agency securities. 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~~declining rate environment is ~~inevitable~~expected and during the period of ~~rising~~falling rates, the Company expects pricing in the bond portfolio to ~~decline.~~improve. There is no assurance that future realized and unrealized losses will not be ~~recognized from the Company’s portfolio of~~

recognized from the Company’s portfolio of 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. During the first nine months of 2019, the Company acquired shares in the open market to fulfill the needs of the DRP. 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 capital ratios represent capital as a percentage of total risk-weighted ~~assets and certain off-balance sheet items.~~assets. 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~~of 2.50% ~~by 2019.~~. As of September 30, ~~2017~~2019 and December 31, ~~2016,~~2018, 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~~consolidated basis, and the Bank as of September 30, ~~2017~~2019 and December 31, ~~2016:~~2018:



										To be well capitalized														For capital adequacy				To be well capitalized
				For capital						under prompt corrective								For capital						purposes with capital				under prompt corrective
	Actual			adequacy purposes						action provisions					Actual			adequacy purposes						conservation buffer*				action provisions
(dollars in thousands)	Amount		Ratio	Amount			Ratio			Amount			Ratio		Amount		Ratio	Amount			Ratio			Amount		Ratio		Amount			Ratio
As of September 30, 2017:
As of September 30, 2019:

Total capital (to risk-weighted assets)
Consolidated	$	91,967	14.8%	≥	$	57,672	≥	9.3%	(1)			N/A		N/A	$	109,990	15.6%	≥	$	56,554		8.0%	≥	$	74,227		10.5%			N/A		N/A
Bank	$	91,152	14.7%	≥	$	57,274	≥	9.3%	(1)	≥	$	61,918	≥	10.0%	$	109,939	15.6%	≥	$	56,548		8.0%	≥	$	74,219		10.5%	≥	$	70,685		10.0%

Tier 1 common equity (to risk-weighted assets)
Consolidated	$	84,154	13.5%	≥	$	35,850	≥	5.8%	(1)			N/A		N/A	$	101,145	14.3%	≥	$	31,812		4.5%	≥	$	49,485		7.0%			N/A		N/A
Bank	$	83,392	13.5%	≥	$	35,603	≥	5.8%	(1)	≥	$	40,247	≥	6.5%	$	101,095	14.3%	≥	$	31,808		4.5%	≥	$	49,479		7.0%	≥	$	45,945		6.5%

Tier I capital (to risk-weighted assets)
Consolidated	$	84,154	13.5%	≥	$	45,203	≥	7.3%	(1)			N/A		N/A	$	101,145	14.3%	≥	$	42,415		6.0%	≥	$	60,088		8.5%			N/A		N/A
Bank	$	83,392	13.5%	≥	$	44,891	≥	7.3%	(1)	≥	$	49,535	≥	8.0%	$	101,095	14.3%	≥	$	42,411		6.0%	≥	$	60,082		8.5%	≥	$	56,548		8.0%

Tier I capital (to average assets)
Consolidated	$	84,154	9.8%	≥	$	34,365	≥	4.0%				N/A		N/A	$	101,145	10.2%	≥	$	39,650		4.0%	≥	$	39,650		4.0%			N/A		N/A
Bank	$	83,392	9.7%	≥	$	34,333	≥	4.0%		≥	$	42,917	≥	5.0%	$	101,095	10.2%	≥	$	39,650		4.0%	≥	$	39,650		4.0%	≥	$	49,563		5.0%


As of December 31, 2016:
As of December 31, 2018:

Total capital (to risk-weighted assets)
Consolidated	$	86,702	14.9%	≥	$	46,550	≥	8.6%	(2)			N/A		N/A	$	103,201	14.8%	≥	$	55,975	8.0%	≥	$	69,094	9.9%			N/A	N/A
Bank	$	86,332	14.8%	≥	$	46,538	≥	8.6%	(2)	≥	$	58,172	≥	10.0%	$	103,313	14.8%	≥	$	55,970	8.0%	≥	$	69,088	9.9%	≥	$	69,962	10.0%

Tier 1 common equity (to risk-weighted assets)
Consolidated	$	79,250	13.6%	≥	$	26,184	≥	5.1%	(2)			N/A		N/A	$	94,442	13.5%	≥	$	31,486	4.5%	≥	$	44,605	6.4%			N/A	N/A
Bank	$	79,033	13.6%	≥	$	26,178	≥	5.1%	(2)	≥	$	37,812	≥	6.5%	$	94,554	13.5%	≥	$	31,483	4.5%	≥	$	44,601	6.4%	≥	$	45,475	6.5%

Tier I capital (to risk-weighted assets)
Consolidated	$	79,250	13.6%	≥	$	34,912	≥	6.6%	(2)			N/A		N/A	$	94,442	13.5%	≥	$	41,981	6.0%	≥	$	55,100	7.9%			N/A	N/A
Bank	$	79,033	13.6%	≥	$	34,903	≥	6.6%	(2)	≥	$	46,538	≥	8.0%	$	94,554	13.5%	≥	$	41,977	6.0%	≥	$	55,095	7.9%	≥	$	55,970	8.0%

Tier I capital (to average assets)
Consolidated	$	79,250	10.3%	≥	$	30,717	≥	4.0%				N/A		N/A	$	94,442	9.8%	≥	$	38,593	4.0%	≥	$	38,593	4.0%			N/A	N/A
Bank	$	79,033	10.3%	≥	$	30,650	≥	4.0%		≥	$	38,313	≥	5.0%	$	94,554	9.8%	≥	$	38,591	4.0%	≥	$	38,591	4.0%	≥	$	48,238	5.0%

~~(2)~~ ~~Includes a~~* The minimums under Basel III increased by 0.625% (the capital conservation ~~buffer.~~buffer) annually until 2019.

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~~2018 Form 10-K for a discussion on the regulatory environment and recent legislation and rulemaking.

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.~~2019.

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.~~condition, operations or the results of such operations. 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 or regulatory actions against the Company or the Bank.

Management of the Company does not believe there have been any material changes to the risk factors that were disclosed in the ~~2016~~2018 Form 10-K filed with the Securities and Exchange Commission on March ~~10, 2017.~~14, 2019.

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

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,~~2019, is formatted in XBRL (eXtensible Business Reporting Language): Consolidated Balance Sheets as of September 30, ~~2017~~2019 and December 31, ~~2016;~~2018; Consolidated Statements of Income for the three and nine months ended September 30, ~~2017~~2019 and ~~2016;~~2018; Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, ~~2017~~2019 and ~~2016;~~2018; Consolidated Statements of Changes in Shareholders’ Equity for the three and nine months ended September 30, ~~2017~~2019 and ~~2016;~~2018; Consolidated Statements of Cash Flows for the nine months ended September 30, ~~2017~~2019 and ~~2016~~2018 and the Notes to the Consolidated Financial Statements. **

** 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.

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.


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


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




	September 30, 2017										September 30, 2019
(dollars in thousands)	Pass		Special mention		Substandard		Doubtful		Total		Pass		Special mention		Substandard		Doubtful		Total

Commercial and industrial	$	110,839	$	535	$	722	$	-	$	112,096	$	116,410	$	4,117	$	1,602	$	-	$	122,129
Commercial real estate - non-owner occupied		86,159		817		6,422		-		93,398		92,936		1,731		3,875		-		98,542
Commercial real estate - owner occupied		103,288		2,692		3,618		-		109,598		122,714		3,040		5,644		-		131,398
Commercial real estate - construction		5,954		-		169		-		6,123		4,050		769		-		-		4,819
Total commercial	$	306,240	$	4,044	$	10,931	$	-	$	321,215	$	336,110	$	9,657	$	11,121	$	-	$	356,888


	December 31, 2016										December 31, 2018
(dollars in thousands)	Pass		Special mention		Substandard		Doubtful		Total		Pass		Special mention		Substandard		Doubtful		Total

Commercial and industrial	$	97,308	$	479	$	690	$	-	$	98,477	$	125,272	$	334	$	1,278	$	-	$	126,884
Commercial real estate - non-owner occupied		83,962		1,811		7,591		-		93,364		90,373		938		4,204		-		95,515
Commercial real estate - owner occupied		99,981		1,075		5,904		-		106,960		116,577		1,685		5,830		-		124,092
Commercial real estate - construction		3,794		-		193		-		3,987		6,761		-		-		-		6,761
Total commercial	$	285,045	$	3,365	$	14,378	$	-	$	302,788	$	338,983	$	2,957	$	11,312	$	-	$	353,252


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


Fidelity D & D Bancorp, Inc. and Subsidiary	��
Consolidated Statements of Cash Flows (continued)
(Unaudited)	Nine months ended September 30,
(dollars in thousands)	2019		2018
Supplemental Disclosures of Cash Flow Information
Cash payments for:
Interest	$	5,593	$	3,150
Income tax		1,350		300
Supplemental Disclosures of Non-cash Investing Activities:
Net change in unrealized gains on available-for-sale securities		5,734		(4,970)
Transfers from loans to foreclosed assets held-for-sale		894		781
Transfers from loans to loans held-for-sale		5,653		1,541
Right-of-use asset		5,634		-

See notes to unaudited consolidated financial statements



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



Details about accumulated other
comprehensive income components	Amount reclassified from accumulated								Affected line item in the statement	Amount reclassified from accumulated								Affected line item in the statement
(dollars in thousands)	other comprehensive income								where net income is presented	other comprehensive income								where net income is presented
	Three months ended				Nine months ended					For the three months				For the nine months
	September 30,				September 30,					ended September 30,				ended September 30,
	2017		2016		2017		2016			2019		2018		2019		2018

Unrealized gains on AFS securities	$	-	$	-	$	-	$	9	Gain on sale of investment securities
		-		-		-		(3)	Provision for income taxes
Unrealized (losses) gains on AFS debt securities										$	(2)	$	4	$	(6)	$	10	Gain (loss) on sale of investment securities
Income tax effect											-		(1)		1		(2)	Provision for income taxes
Total reclassifications for the period	$	-	$	-	$	-	$	6	Net income	$	(2)	$	3	$	(5)	$	8	Net income


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



	Three months ended September 30,				Nine months ended September 30,				Three months ended September 30,				Nine months ended September 30,
	2017		2016		2017		2016		2019		2018		2019		2018
(dollars in thousands except per share data)
Basic EPS:
Net income available to common shareholders	$	2,226	$	2,035	$	6,389	$	5,664	$	3,058	$	2,863	$	8,862	$	8,159
Weighted-average common shares outstanding		3,712,297		3,680,707		3,704,859		3,679,104		3,781,500		3,753,138		3,778,936		3,750,652
Basic EPS	$	0.60	$	0.55	$	1.72	$	1.54	$	0.82	$	0.76	$	2.35	$	2.17

Diluted EPS:
Net income available to common shareholders	$	2,226	$	2,035	$	6,389	$	5,664	$	3,058	$	2,863	$	8,862	$	8,159
Weighted-average common shares outstanding		3,712,297		3,680,707		3,704,859		3,679,104		3,781,500		3,753,138		3,778,936		3,750,652
Potentially dilutive common shares		26,211		11,672		20,367		9,074		43,001		48,263		40,571		41,416
Weighted-average common and potentially dilutive shares outstanding		3,738,508		3,692,379		3,725,226		3,688,178		3,824,501		3,801,401		3,819,507		3,792,068
Diluted EPS	$	0.60	$	0.55	$	1.72	$	1.54	$	0.80	$	0.75	$	2.32	$	2.15



	2012 Stock incentive plans					2012 Stock incentive plans
	Director	Omnibus	Total		Weighted- average grant date fair value	Director	Omnibus	Total		Weighted- average grant date fair value
Non-vested balance at December 31, 2016	8,400	13,562	21,962	$	20.31
Non-vested balance at December 31, 2018						12,600	17,360	29,960	$	38.99
Granted	8,400	4,824	13,224		25.36	5,600	7,301	12,901		54.70
Forfeited	-	-	-			-	(126)	(126)		54.69
Vested	(8,400)	(6,082)	(14,482)		20.47	(7,000)	(8,574)	(15,574)		33.81
Non-vested balance at September 30, 2017	8,400	12,304	20,704	$	23.59
Non-vested balance at September 30, 2019						11,200	15,961	27,161	$	49.48



	Awards		Weighted-average grant date fair value	Weighted-average remaining contractual term (years)	Awards		Weighted-average grant date fair value	Weighted-average remaining contractual term (years)
Outstanding December 31, 2016	29,014	$	3.48	9.1
Outstanding December 31, 2018					89,250	$	8.36	8.2
Granted	24,346		5.06	9.3	11,073		16.79	10.0
Exercised	-		-		(3,059)		3.48
Forfeited	-		-		-		-
Outstanding September 30, 2017	53,360	$	4.20	8.8
Outstanding September 30, 2019					97,264	$	9.47	7.7


	As of
(dollars in thousands)	September 30, ~~2017~~2019
Unrecognized stock-based compensation expense:
Director plan	$	~~146~~424
Omnibus plan		~~330~~936
Total unrecognized stock-based compensation expense	$	~~476~~1,360



	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



			Quoted prices in		Significant other		Significant other				Quoted prices in		Significant other		Significant other
	Total carrying value		active markets		observable inputs		unobservable inputs		Total carrying value		active markets		observable inputs		unobservable inputs
(dollars in thousands)	at September 30, 2017		(Level 1)		(Level 2)		(Level 3)		at September 30, 2019		(Level 1)		(Level 2)		(Level 3)

Impaired loans	$	4,253	$	-	$	-	$	4,253	$	2,278	$	-	$	-	$	2,278
Other real estate owned		764		-		-		764		683		-		-		683
Other repossessed assets										2		-		-		2
Total	$	5,017	$	-	$	-	$	5,017	$	2,963	$	-	$	-	$	2,963



~~(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~~


		Asset Balance at
		September 30,
(dollars in thousands)	2019		2018

Equipment	$	392	$	-
Less accumulated depreciation and amortization		(99)		-
Leased property under finance leases, net	$	293	$	-


(dollars in thousands)		September 30, 2019
Lease cost
Finance lease cost:
Amortization of right-of-use assets	$	56
Interest on lease liabilities		7
Operating lease cost		290
Short-term lease cost		14
Variable lease cost		33
Total lease cost	$	400

Other information
Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows from finance leases	$	7
Operating cash flows from operating leases (Fixed payments)	$	218
Operating cash flows from operating leases (Liability reduction)	$	78
Financing cash flows from finance leases	$	54
Right-of-use assets obtained in exchange for new finance lease liabilities	$	17
Right-of-use assets obtained in exchange for new operating lease liabilities	$	5,634
Weighted-average remaining lease term - finance leases		3.92 yrs
Weighted average remaining lease term - operating leases		24.80 yrs
Weighted-average discount rate - finance leases		3.07%
Weighted-average discount rate - operating leases		3.78%


	For the nine		% of Total		For the nine		% of Total
	months ended		Net		months ended		Net
(dollars in thousands)	September 30, 2019		Charge-offs		September 30, 2018		Charge-offs

Net charge-offs
Commercial and industrial	$	(113)	10	%	$	(39)	10	%
Commercial real estate		(503)	44			(130)	35
Consumer		(198)	18			(88)	24
Residential		(322)	28			(117)	31
Total net charge-offs	$	(1,136)	100	%	$	(374)	100	%


			More than		More than		More						More than		More than		More
	Three months		three months		six months to		than twelve				Three months		three months		six months to		than twelve
(dollars in thousands)	or less		to six months		twelve months		months		Total		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	$	7,125	$	15,940	$	31,694	$	16,847	$	71,606
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		6,272		9,005		13,373		18,512		47,162
Total CDs	$	14,270	$	11,343	$	28,736	$	54,055	$	108,404	$	13,397	$	24,945	$	45,067	$	35,359	$	118,768



(dollars in thousands)	Amount		Weighted average rate

Maturity date 1 year or less	$	-	-	%
After 1 but within 2		5,000	2.95
After 2 but within 3		5,000	2.99
After 3 but within 4		5,000	3.07
After 4 years		-	-
Total	$	15,000	3.01	%



	% change				% change
	Rates +200		Rates -200		Rates +200		Rates -200
Earnings at risk:
Net interest income	5.5	%	(7.8)	%	4.9	%	(5.2)	%
Net income	12.9		(17.1)		12.3		(12.7)
Economic value at risk:
Economic value of equity	0.5		(29.8)		7.7		(42.8)
Economic value of equity as a percent of total assets	0.1		(4.5)		1.1		(5.2)



	Net interest		$		%		Net interest		$		%
(dollars in thousands)	income		variance		variance		income		variance		variance
Simulated change in interest rates
+200 basis points	$	30,609	$	1,584	5.5	%	$	34,314	$	1,597	4.9	%
+100 basis points		29,873		848	2.9			33,643		926	2.8
Flat rate		29,025		-	-			32,717		-	-
-100 basis points		27,302		(1,723)	(5.9)			31,496		(1,221)	(3.7)
-200 basis points		26,757		(2,268)	(7.8)			31,022		(1,695)	(5.2)


	Fidelity D & D Bancorp, Inc.

Date: November ~~8, 2017~~6, 2019	/s/Daniel J. Santaniello
	Daniel J. Santaniello, President and Chief Executive Officer

	Fidelity D & D Bancorp, Inc.

Date: November ~~8, 2017~~6, 2019	/s/Salvatore R. DeFrancesco, Jr.
	Salvatore R. DeFrancesco, Jr., Treasurer and Chief Financial Officer