Fidelity D & D Bancorp, Inc. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017. The company is a Pennsylvania bank holding company serving customers primarily in Lackawanna and Luzerne Counties through Fidelity Deposit and Discount Bank. Financial statements are unaudited.
Financial performance and position
| Metric | Q1 2017 / March 31, 2017 | Comparable period / prior year-end |
|---|---|---|
| Net income | $1.980 million; diluted EPS $0.80 | Q1 2016: $1.701 million; diluted EPS $0.69 |
| Net interest income | $6.678 million | Q1 2016: $6.138 million |
| Other income | $2.105 million | Q1 2016: $1.687 million |
| Provision for loan losses | $325,000 | Q1 2016: $150,000 |
| Other expenses | $5.797 million | Q1 2016: $5.388 million |
| Return on average assets / equity | 0.99% / 9.85% | Q1 2016: 0.92% / 8.83% |
| Net interest margin, fully taxable equivalent | 3.72%; spread 3.58% | Q1 2016: 3.70%; spread 3.58% |
| Efficiency ratio | 64.33% | Q1 2016: 66.49% |
| Total assets | $852.686 million | December 31, 2016: $792.944 million |
| Loans and leases, net | $611.621 million | December 31, 2016: $588.130 million |
| Total deposits | $733.926 million | December 31, 2016: $703.459 million |
| Borrowings | $31.699 million, including $14.699 million short-term and $17.000 million long-term debt | December 31, 2016: $4.223 million short-term; no long-term debt |
| Shareholders’ equity | $82.193 million | December 31, 2016: $80.631 million |
Cash flow for Q1 2017 was $4.836 million from operating activities, $(45.160) million from investing activities and $43.597 million from financing activities. Cash and cash equivalents increased $3.273 million to $29.116 million. The filing reports $486.8 million of cash, securities, loans held for sale and stated borrowing capacity as available liquidity resources, equal to 57% of assets.
Material changes and notable items
- Net income rose 16% year over year, as higher net interest and non-interest income more than offset higher expenses and loan-loss provision. Loan growth increased average earning assets; gains on loan sales also contributed to other income.
- Gross loans grew $23.7 million from year-end, led by commercial and industrial lending, auto loans and leases, and residential real estate lending. Deposits increased $30.5 million; the company also increased borrowings to fund asset and securities growth.
- On March 17, the company acquired Wayne Bank’s West Scranton branch deposits, certain loans and real estate, then consolidated the acquired business into a nearby branch. Deposits assumed were $13.809 million; acquisition-related costs were $34,000. Management expects the transaction to expand its West Scranton customer base.
- The company purchased $8.0 million of bank-owned life insurance (BOLI) in March; BOLI cash surrender value was $19.542 million at quarter-end, versus $11.435 million at December 31, 2016.
- New supplemental executive retirement and split-dollar life insurance arrangements were implemented in 2017. The company recorded $38,000 of SERP expense and $3,000 of split-dollar benefit expense by March 31.
Outlook, risks and contingencies
- Management expects net interest income to improve in 2017 as earning assets grow, while noting that faster increases in short-term rates, deposit repricing and a flatter yield curve could compress margins. Its simulation estimates net interest income would change by +5.8% under an immediate 200-basis-point rate increase and −6.7% under a 200-basis-point decrease over 12 months.
- Management expects overall loan growth in 2017, but at a slower pace than Q1, and anticipates a large commercial real estate loan payoff and loan participations sales. The company’s original anticipated commercial portfolio growth estimate was 4%.
- Credit quality requires monitoring: non-performing loans were $7.909 million, or 1.27% of total loans, compared with 1.23% at year-end and 1.60% a year earlier. Non-accrual loans were $7.851 million; troubled debt restructurings increased to $4.236 million from $3.354 million at year-end. The allowance for loan losses was $9.548 million. Management considers it adequate but notes estimates may change with economic conditions.
- Management identifies regional economic conditions, borrower repayment capacity, interest-rate changes, securities valuations, deposit competition, regulation, technology and cybersecurity, and acquisition integration among key risks. Local unemployment was 6.1% at March 31, up from 5.4% at December 31, 2016, but down from 6.6% a year earlier.
- The company reported that it and the Bank exceeded applicable regulatory capital requirements. Consolidated total risk-based capital was 14.4%; the Tier 1 leverage ratio was 9.9%. Management reported no liquidity emergency, no material change in risk factors from the 2016 Form 10-K, and no pending legal matter expected to materially affect financial condition. Disclosure controls were considered effective.
- New expected-credit-loss accounting guidance could increase the allowance and accelerate loss recognition; the company was evaluating its impact. Management said the lease standard could materially affect the balance sheet and was also under evaluation.
Key facts for investors to verify
- Whether loan growth, especially commercial lending, continues without deterioration in non-accrual loans, TDRs or criticized credits.
- How the $17.0 million of new long-term FHLB borrowing and higher short-term borrowings affect funding costs and net interest margin as rates change.
- Whether deposit growth is sustained after accounting for seasonal public deposits and the acquired branch, and how maturing CDs reprice.
- Whether the Wayne Bank branch acquisition delivers the expected customer and financial benefits, and whether BOLI and new executive benefit arrangements generate the intended returns relative to their costs.
- How adoption of credit-loss and lease accounting standards affects reported reserves, earnings and balance-sheet measures.