Fidelity D & D Bancorp, Inc. — Q2 2018 Form 10-Q
Unaudited results for the quarter and six months ended June 30, 2018. The Pennsylvania bank holding company operates The Fidelity Deposit and Discount Bank, focused primarily on Lackawanna and Luzerne Counties.
Financial performance and condition
| Metric | Q2 2018 / June 30, 2018 | Comparison |
|---|---|---|
| Net income | $2.768 million; diluted EPS $0.73 | Q2 2017: $2.183 million; $0.59 per diluted share |
| Six-month net income | $5.296 million; diluted EPS $1.40 | First half 2017: $4.163 million; $1.12 per diluted share |
| Interest income / net interest income | $8.535 million / $7.523 million | Q2 2017: $7.854 million / $7.067 million |
| Other income | $2.371 million | Q2 2017: $2.131 million |
| Loan-loss provision | $0.425 million | Q2 2017: $0.225 million |
| Net interest margin, FTE | 3.69% | Q2 2017: 3.76%; first-half 2018: 3.68% versus 3.74% |
| Efficiency ratio, non-GAAP | 61.20% | Q2 2017: 63.55%; first-half 2018: 62.55% versus 63.65% |
| Total assets | $922.6 million | $863.6 million at December 31, 2017 |
| Loans and leases, net | $676.2 million; gross loans and leases $686.5 million | Net loans: $628.8 million at December 31, 2017 |
| Deposits | $778.3 million | $730.1 million at December 31, 2017 |
| Borrowings | $29.6 million short-term; $18.7 million FHLB advances | At December 31, 2017: $18.5 million and $21.2 million, respectively |
| Shareholders’ equity | $88.9 million | $87.4 million at December 31, 2017 |
| Cash and cash equivalents | $18.0 million | $15.8 million at December 31, 2017 |
For the first half, operating cash flow was $7.5 million, investing cash outflow was $60.4 million, and financing cash inflow was $55.0 million. Cash increased $2.1 million. The company reported a 14.8% consolidated total risk-based capital ratio and a 10.0% leverage ratio; it said the company and bank exceeded applicable capital adequacy requirements.
Changes versus comparable periods
- Q2 net income rose 27% year over year, supported by higher net interest and other income and lower income-tax expense; higher loan-loss provision and operating expense partly offset the gains. First-half net income also increased 27%.
- First-half net interest income increased $1.0 million. Loan and investment growth and higher asset yields lifted interest income, while higher deposit rates increased interest expense. The FTE margin narrowed six basis points for the half.
- Loans grew $47.9 million from year-end, led by auto loans and leases, residential lending, and a temporary $9.8 million commercial advance that was paid off in July. Deposits increased $48.1 million, including $33.7 million in non-interest-bearing deposits. Short-term borrowings increased $11.1 million.
- The allowance for loan losses was $9.5 million, or 1.39% of loans, versus $9.2 million and 1.44% at year-end. Non-accrual loans declined to $2.8 million from $3.4 million; non-performing assets were $6.0 million, or 0.66% of assets, versus $6.3 million and 0.73% at year-end.
- Accumulated other comprehensive income moved from a $1.8 million gain at year-end to a $1.3 million loss, mainly reflecting unrealized losses on available-for-sale securities amid rising rates. Management reported no other-than-temporary impairment.
Outlook, risks, and notable items
- Management expected net interest income to improve in 2018 as earning assets grow, while cautioning that a flatter yield curve and competition for deposits could compress margins and raise funding costs. Its rate-sensitivity model estimated that a 200-basis-point rise would increase 12-month net interest income 1.3%, while a 200-basis-point fall would reduce it 7.7%.
- Management expected consumer loan growth to soften to about 9% in 2018. It expected the Back Mountain branch to open in Q4 2018, with $0.7 million of construction investment in the first half and another $1.5 million expected in the second half. A Mountain Top branch was expected to open in the first half of 2019.
- Liquidity sources included $18.0 million cash, $165.7 million of available-for-sale securities and loans held for sale, and stated borrowing capacities at the FHLB, correspondent banks, Federal Reserve, and CDARS. The company reported approximately $536 million in combined liquidity sources and said liquidity was adequate. In July, it used approximately $40 million of borrowing capacity to fund growth and replace deposit runoff.
- Key risks include local economic and borrower-credit conditions; rising interest rates, deposit competition, and securities-value declines; concentrations and growth in auto lending; regulatory and capital requirements; cybersecurity and technology disruptions; and execution of branch expansion. Management cited urban housing-market concerns as a factor in credit-loss assumptions.
- The Tax Act reduced the federal corporate tax rate to 21%; the effective tax rate was 16.5% for the first half, versus 25.4% a year earlier. The company adopted revenue-recognition guidance without material financial-statement impact. It was evaluating the expected-credit-loss standard, which could increase the allowance, and lease accounting guidance, which it expected to affect balance-sheet amounts and regulatory capital ratios.
- The filing reported no material pending legal proceedings and no material changes to previously disclosed risk factors. Management said disclosure controls were effective.
Important facts for investors to verify
- Whether loan and deposit growth, particularly non-interest-bearing deposits, persists after the temporary commercial advance and subsequent deposit runoff.
- Whether deposit pricing and borrowing costs outpace asset-yield increases, given margin compression and the flatter yield curve.
- Credit performance and loss reserves in auto, residential, and commercial portfolios, including trends in delinquencies, non-performing loans, and TDRs.
- The effect of rising rates on available-for-sale securities, accumulated other comprehensive loss, capital, and liquidity.
- Actual branch construction costs and opening dates, and the eventual balance-sheet, capital, and allowance effects of pending accounting standards.