Fidelity D & D Bancorp, Inc. — 2014 Form 10-K
Business context and reporting period. Annual report for the fiscal year ended December 31, 2014; the filing was signed March 17, 2015. The company is a Pennsylvania bank holding company whose wholly owned bank serves individuals and businesses mainly in Lackawanna and Luzerne Counties. The bank operates 11 full-service offices.
Financial performance and condition
Amounts are in millions of dollars except per-share data and ratios.
| Metric | 2014 | 2013 | Change / context |
|---|---|---|---|
| Total assets | $676.5 | $623.8 | Up 8% |
| Total deposits | $586.9 | $529.7 | Up 11%; transaction-account growth offset lower certificates of deposit |
| Net loans | $506.3 | $469.2 | Up 8%; loan growth across commercial, consumer, and residential portfolios |
| Net interest income | $21.9 | $20.9 | Up 5% |
| Net interest margin | 3.75% | 3.80% | Down 5 basis points |
| Net income | $6.35 | $7.12 | Down 11%; 2013 benefited from a securities-sale gain |
| Diluted earnings per share | $2.62 | $3.02 | Down 13% |
| Return on average assets / equity | 0.96% / 9.12% | 1.15% / 11.70% | Both lower |
| Operating cash flow | $7.9 | $23.1 | Lower year over year |
| Cash and cash equivalents | $25.9 | $13.2 | Up $12.6; net cash provided by financing was $44.7 and investing used $39.9 |
| Long-term debt | $10.0 | $16.0 | Paid down $6.0 in December; remaining FHLB advance bears 5.26% and matures in 2016 |
| Shareholders’ equity | $72.2 | $66.1 | Equity-to-assets ratio rose to 10.68% from 10.59% |
Credit quality and capital. Provision for loan losses fell to $1.06 million from $2.55 million; net charge-offs declined to $0.82 million from $2.59 million. Non-performing assets were $8.0 million, or 1.18% of assets, versus $9.0 million, or 1.44%, a year earlier. The allowance was $9.17 million, equal to 1.78% of loans. At year-end, consolidated total risk-based capital was 15.3%, Tier 1 risk-based capital 14.0%, and leverage capital 10.0%; the company reported exceeding applicable requirements.
Liquidity. Management reported $25.9 million in cash and cash equivalents and $99.1 million in available-for-sale securities and loans held for sale. It cited $181.5 million of available FHLB borrowing capacity, plus capacity from correspondent banks, the Federal Reserve, and CDARS, for stated combined liquidity sources of $391.1 million, or 58% of assets. Deposit growth funded loan expansion, facility projects, and debt reduction.
Material changes and unusual items
- Net income declined despite higher net interest income and lower credit-loss provision. 2013 included a $2.9 million pretax gain from selling the entire pooled trust preferred securities portfolio; 2014 did not have a comparable sale.
- 2014 other income fell 30% to $7.35 million, mainly reflecting lower securities-sale gains and a $0.76 million decline in mortgage-loan sale gains as mortgage activity slowed.
- Other operating expense increased 3% to $19.70 million. It included a $457,000 FHLB debt prepayment fee on the $6.0 million paydown; management expected the paydown to reduce 2015 interest expense by about $0.3 million.
- Available-for-sale securities had a $4.21 million pretax net unrealized gain at year-end, compared with $1.88 million in 2013. No investment-security impairment charge was recorded in 2014.
- Commercial real estate and commercial and industrial lending expanded, while certificates of deposit declined $9.1 million. Public deposits contributed materially to deposit growth.
Outlook, risks, and contingencies
Management expected 2015 earnings to increase from 2014, citing growth in interest-earning assets, improving credit quality, and expense discipline. It anticipated moderate asset and loan growth funded primarily by deposits, a slightly lower net interest margin, and a low but gradually rising rate environment. Plans included growing the investment portfolio with a greater emphasis on mortgage-backed securities and relocating the West Pittston branch to Pittston, with the new facility expected to open in 2015. These are forward-looking expectations, not guarantees.
Key risks include the bank’s concentration in northeastern Pennsylvania and sensitivity to local employment and property values; borrower defaults and uncertainty in the allowance estimate; interest-rate changes affecting margins, asset values, deposits, and loan demand; competition; regulatory and compliance costs, including Basel III and Dodd-Frank implementation; cybersecurity and technology disruption; and dependence of the holding company on bank dividends. Management described the local housing market as soft, with regional median home values down 1.1% year over year, despite a lower reported local unemployment rate.
Off-balance-sheet exposures included $92.1 million of commitments to extend credit and $6.9 million of standby letters of credit; the filing notes commitments may not be drawn. Routine litigation was disclosed, but management and counsel said no pending proceeding was expected to have a material effect. The 2013 federal tax return was under IRS review; management expected recovery of taxes paid in 2011 and 2012 after carrying back a tax loss, but the review outcome remained pending.
The independent auditor gave an unqualified opinion on the consolidated financial statements. Management concluded disclosure controls and internal control over financial reporting were effective; the auditor did not provide an internal-control attestation.
Most important facts for investors to verify
- Whether 2015 earnings and loan-growth expectations were achieved, and whether margin pressure or deposit repricing altered results.
- Subsequent credit performance, collateral values, foreclosed-property disposition, and the adequacy of the $9.17 million loan-loss allowance.
- Deposit composition and stability, including public deposits and the maturity and repricing of CDs; verify the stated borrowing capacity and liquidity availability.
- The realized cost and benefit of the FHLB debt prepayment, including the disclosed fee and expected interest savings.
- The outcome of the IRS review and any effects of tax refunds or accounting-standard changes.
- Regulatory capital and dividend capacity under phased-in Basel III requirements; the company stated future dividends depend on earnings, capital, and regulatory factors.