Fidelity D & D Bancorp, Inc. — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014; balance-sheet comparisons are to December 31, 2013. The company operates Fidelity Deposit and Discount Bank, a Pennsylvania community bank serving Lackawanna and Luzerne counties. Amounts are in millions except per-share data and percentages.
Financial performance and condition
| Metric | Q1 2014 / March 31, 2014 | Comparable period / December 31, 2013 |
|---|---|---|
| Net interest income | $5.295 | $5.233 in Q1 2013 |
| Provision for loan losses | $0.300 | $0.550 in Q1 2013 |
| Other income | $1.738 | $2.068 in Q1 2013 |
| Other expenses | $4.785 | $4.880 in Q1 2013 |
| Income before taxes | $1.948 | $1.871 in Q1 2013 |
| Net income / diluted EPS | $1.456 / $0.61 | $1.394 / $0.60 in Q1 2013 |
| FTE net interest margin | 3.79% | 3.84% in Q1 2013 |
| Return on average assets / equity | 0.92% / 8.80% | 0.91% / 9.49% in Q1 2013 |
| Total assets | $654.4 | $623.8 |
| Net loans and leases | $474.7 | $469.2 |
| Total deposits | $554.8 | $529.7 |
| Cash and cash equivalents | $32.1 | $13.2 |
| Short-term borrowings / long-term debt | $12.3 / $16.0 | $8.6 / $16.0 |
| Shareholders’ equity | $67.8 | $66.1 |
- Cash flow: Operating activities provided $1.6 million, investing activities used $11.2 million, and financing activities provided $28.5 million. Cash increased $18.9 million to $32.1 million. The company attributed significant deposit growth in part to the timing of public tax deposits.
- Asset quality: Non-performing loans were $3.7 million, down from $5.8 million at year-end; non-performing assets were $7.0 million, or 1.07% of assets, versus $9.0 million, or 1.44%. The allowance for loan losses was $8.9 million, 1.84% of loans. Q1 net charge-offs were $0.329 million, compared with $1.286 million in Q1 2013.
- Liquidity and capital: Management reported $32.1 million in cash, $102.7 million in available-for-sale securities and loans held-for-sale, plus stated borrowing availability across FHLB, correspondent banks, the Federal Reserve discount window and CDARS; total identified liquidity sources were approximately $381.4 million. Consolidated total risk-based capital was 15.5%, Tier 1 risk-based capital 14.2%, and Tier 1 leverage 10.3%. The bank exceeded applicable capital requirements.
- Dividends: $0.25 per share was declared, unchanged from Q1 2013.
Material changes versus comparable periods
- Net income rose approximately 4% year over year. Higher net interest income, lower loan-loss provision and lower expenses more than offset reduced non-interest income.
- Net interest income increased 1%, while the FTE margin declined five basis points. Average earning assets grew, but loan yields fell; lower deposit costs partly cushioned the pressure.
- Other income fell 16%, mainly because mortgage originations and refinancing slowed and loan-sale gains declined to $0.128 million from $0.504 million. Investment-security gains increased to $0.207 million from $0.119 million.
- Assets increased 5% from year-end, funded primarily by $25.1 million of deposit growth and $3.7 million of additional short-term borrowings. Loans grew $5.4 million and available-for-sale securities increased to $102.2 million.
- Non-performing assets improved substantially year over year, also reflecting the prior-period non-accrual pooled trust preferred securities. The company sold its entire pooled trust preferred securities portfolio in Q4 2013.
Outlook, commentary and risks
- Management expected 2014 net interest income to stabilize or improve marginally, with moderate deposit growth and marginal investment-portfolio growth. Its strategy emphasized commercial lending, selected consumer lending and low-cost business and retail deposits. These are expectations, not guaranteed results.
- Management cited rising intermediate- and long-term rates as potentially beneficial to reinvestment yields but adverse to bond values; higher deposit competition or funding costs could pressure margins. Its rate simulation estimated net interest income would change by +7.0% under an immediate 200-basis-point rise and -2.7% under a 200-basis-point decline.
- Credit risks include continued weakness in the local economy and real estate market, elevated local unemployment, borrower repayment capacity, collateral values, and uncertainty in loss estimates. Management said credit quality was improving but retained a provision to cover loan growth and inherent risk.
- Other disclosed risks include regulatory and capital requirements, competition, technology, litigation, market disruption, and changes in interest rates. Management reported no material change in previously disclosed risk factors and no pending legal proceeding expected to materially harm the company.
- Management reported disclosure controls were effective and no material change in internal control over financial reporting during the quarter. A new foreclosure-related accounting standard was under analysis; its impact was not yet determined.
Important facts for investors to verify
- Track whether loan growth and deposit retention support the stated outlook without further margin compression, particularly as rates and deposit competition change.
- Review credit trends, charge-offs, non-performing loans, foreclosed property balances and the adequacy of the $8.9 million allowance; the allowance relies on estimates and changed methodology in Q4 2013.
- Assess the quality and interest-rate sensitivity of the $102.2 million securities portfolio, including unrealized gains and losses and management’s ability to hold securities through recovery.
- Confirm the durability of Q1 cash and deposit growth, given the filing’s attribution of part of the increase to seasonal public tax deposits.
- Reconcile TDR disclosures: the notes cite $1.8 million in one passage, while other tables and MD&A report approximately $1.7 million; the filing text does not provide a single consistent value.