Fidelity D & D Bancorp, Inc. — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015. The company is a Pennsylvania bank holding company operating through Fidelity Deposit and Discount Bank, with its primary market in Lackawanna and Luzerne Counties. Financial statements are unaudited.
Financial performance and position
| Metric | Q1 2015 / March 31, 2015 | Comparable / prior date |
|---|---|---|
| Net interest income | $5.61 million | $5.30 million, Q1 2014 |
| Net interest margin (FTE) | 3.64% | 3.79%, Q1 2014 |
| Net income | $1.57 million; diluted EPS $0.64 | $1.46 million; diluted EPS $0.61, Q1 2014 |
| Net interest income after loan-loss provision | $5.46 million | $5.00 million, Q1 2014 |
| Total assets | $702.5 million | $676.5 million, Dec. 31, 2014 |
| Loans and leases, net | $510.5 million | $506.3 million, Dec. 31, 2014 |
| Deposits | $601.7 million | $586.9 million, Dec. 31, 2014 |
| Cash and cash equivalents | $19.0 million | $25.9 million, Dec. 31, 2014 |
| Borrowings | $23.8 million total: $13.8 million short-term and $10.0 million long-term | $14.0 million total at Dec. 31, 2014 |
| Shareholders’ equity | $73.5 million | $72.2 million, Dec. 31, 2014 |
- Q1 operating cash flow was $2.2 million; investing activities used $33.1 million, largely reflecting $39.0 million of securities purchases. Financing activities provided $24.1 million. Cash decreased $6.9 million during the quarter.
- Return on average assets was 0.91% and return on average equity was 8.74%, compared with 0.92% and 8.80%, respectively, in Q1 2014.
- The company reported a 1.77% allowance for loan losses to total loans. Nonperforming assets were $8.1 million, or 1.15% of assets; nonperforming loans were $4.3 million. Total troubled debt restructurings were $3.2 million.
- Regulatory capital ratios were above stated minimums: consolidated total risk-based capital was 15.2%, Tier 1 common equity was 13.9%, and leverage capital was 10.1%.
Material changes versus comparable periods
- Net income increased 8% year over year, mainly from higher net interest income and a 50% lower provision for loan losses, partly offset by higher operating expenses.
- Net interest income rose 6%, but FTE net interest margin declined 15 basis points. Average interest-earning assets grew $53.4 million, while their yield fell 19 basis points.
- Noninterest expense increased 6% to $5.09 million, including higher salaries and benefits and advertising costs. Noninterest income was nearly flat at $1.75 million.
- Compared with year-end 2014, assets grew 4%, deposits rose 3%, and net loans increased about 1%. Available-for-sale securities increased to $126.5 million from $97.9 million.
- Nonperforming loans declined from $5.3 million at year-end to $4.3 million, while TDRs increased from $1.6 million to $3.2 million. Nonperforming assets were 1.15% of assets, versus 1.07% a year earlier and 1.18% at year-end.
Outlook, risks, and unusual items
- Management expected moderate asset growth for the remainder of 2015, funded by deposit growth, and anticipated net interest income to improve. It expected rates to rise gradually, likely in the second half of 2015, while noting margin compression could persist until the yield curve steepens.
- Management cited a challenging local economy, including regional unemployment of 6.5% at March 31, 2015 and declining regional home values. It said credit quality would remain a principal consideration in pursuing growth.
- Interest-rate sensitivity modeling estimated that an immediate 200-basis-point increase would raise 12-month net interest income 5.2%, while a 200-basis-point decrease would reduce it 2.3%. Economic value of equity was estimated to decline under either modeled shock. These are model estimates, not forecasts.
- Liquidity sources included $19.0 million in cash, $127.6 million of available-for-sale securities and loans held for sale, and stated borrowing capacity from the FHLB, correspondent banks, Federal Reserve and CDARS. Management reported total available liquidity of $414.4 million, or 59% of assets, and considered it adequate.
- A revised allowance methodology took effect January 1, 2015 and reduced the reserve requirement overall, according to management. The provision was $150,000 versus $300,000 a year earlier, despite new TDRs and loan growth. Management cautioned that allowance estimates are subjective and could change.
- Management reported no other-than-temporary impairment in the securities portfolio. Unrealized losses were attributed primarily to interest rates and market conditions. A one-time $57,000 FHLB bonus dividend contributed to interest income.
- The company identified risks including local economic weakness and borrower repayment capacity, interest-rate changes, competition, regulatory changes, cybersecurity and information-system disruption, and uncertainty in loan-loss and collateral estimates. It reported no pending legal proceedings expected to have a material adverse effect and no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether the lower provision and revised reserve methodology remain appropriate as TDRs increased and nonperforming assets stayed above the year-earlier level.
- The performance and subsequent status of the new and existing TDRs, including the $0.9 million of non-accrual TDRs.
- Whether deposit growth is sustainable and how the increase in short-term borrowings and seasonal public deposits affect funding and liquidity.
- Whether margin and net interest income develop as management expected, given rate sensitivity, deposit pricing competition and the low-rate environment.
- The assumptions underlying the reported $414.4 million of available liquidity and the interest-rate sensitivity model estimates.
- The effects of the local economy, loan growth and collateral values on credit quality, the allowance for loan losses and foreclosed assets.