Fidelity D & D Bancorp, Inc. — 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. This is an annual filing, not a standalone fourth-quarter report; quarterly figures below are included where relevant. The company is a Pennsylvania bank holding company operating The Fidelity Deposit and Discount Bank, primarily in Lackawanna and Luzerne Counties.
Key financial metrics
| Metric | 2018 | 2017 |
|---|---|---|
| Total assets | $981.1 million | $863.6 million |
| Total deposits | $770.2 million | $730.1 million |
| Net loans and leases | $707.2 million | $628.8 million |
| Net income | $11.0 million | $8.7 million |
| Diluted earnings per share | $2.90 | $2.33 |
| Net interest income (GAAP) | $30.5 million | $27.8 million |
| Net interest margin (FTE, non-GAAP) | 3.64% | 3.70% |
| Return on average assets / equity | 1.20% / 12.36% | 1.03% / 10.34% |
| Shareholders’ equity | $93.6 million | $87.4 million |
Fourth-quarter 2018 net income was $2.85 million, or $0.75 per diluted share, compared with $2.33 million, or $0.61 per diluted share, in fourth-quarter 2017.
- Growth and earnings: Assets increased 14%; gross loans grew 12% to $718.0 million and investments increased 16% to $182.8 million. Net income rose 26%, principally as higher net interest income and other income outweighed modestly higher operating expenses and taxes.
- Margins and expenses: Net interest income increased 9%, while interest expense rose 51% to $4.9 million. The FTE net interest margin declined six basis points, reflecting funding costs rising faster than asset yields and a lower tax-equivalent adjustment. The efficiency ratio improved to 62.10% from 66.25%.
- Credit quality: The allowance for loan losses was $9.7 million, or 1.36% of loans, versus $9.2 million, or 1.44%, a year earlier. Net charge-offs fell to $0.9 million from $1.6 million. Non-performing assets were nearly unchanged at $6.3 million, but declined to 0.64% of assets from 0.73%; non-performing loans increased to $4.3 million from $3.4 million.
- Cash flow and liquidity: Operating activities provided $13.7 million; investing activities used $117.1 million and financing activities provided $105.1 million. Cash and cash equivalents increased $1.7 million to $17.5 million. Management reported $490.9 million of cash, available-for-sale investments, loans held for sale and borrowing capacity, equal to 50% of assets. This includes undrawn facilities and is not equivalent to cash on hand.
- Funding and capital: Deposits grew 5% to $770.2 million. Short-term borrowings increased to $76.4 million from $18.5 million, and FHLB advances rose to $31.7 million from $21.2 million. Total risk-based capital was 14.8%, Tier 1 capital 13.5%, and leverage capital 9.8%; the company and bank exceeded applicable capital requirements. Equity-to-assets declined to 9.54% from 10.12%.
Material changes, outlook and risks
- Management expects continued loan and deposit growth in 2019, but anticipates net interest margin to decline as deposit and borrowing costs rise. It expects interest expense to increase, plans to reduce short-term borrowings, and expects to roll over $16.7 million of maturing FHLB advances.
- Planned 2019 investment includes approximately $1.5 million for a new Mountaintop branch and $1.7 million for Main Branch remodeling. The Mountaintop location was expected to open in the third quarter of 2019.
- Credit growth was led by auto loans and leases, which rose 34% and represented 15.5% of gross loans. Management said it would limit further auto portfolio growth relative to capital and continue monitoring local economic and credit conditions.
- Available-for-sale securities shifted from a $2.3 million net unrealized gain in 2017 to a $1.4 million net unrealized loss in 2018; the after-tax decline reduced equity. Management attributed the losses mainly to interest rates and reported no other-than-temporary impairment charge.
- The 2017 tax provision included a $1.1 million benefit from remeasuring deferred taxes after federal corporate tax reform. The 2018 effective tax rate was 16.2%, compared with 12.2% in 2017; the year-over-year tax comparison is therefore affected by this unusual prior-year benefit.
- CECL credit-loss accounting was scheduled to take effect for the company in 2020; management had not determined its impact. The company also adopted new lease accounting on January 1, 2019, recording a $4.1 million right-of-use asset and $4.6 million lease liability, with no significant income-statement effect expected.
- Key risks include rising funding costs and interest-rate sensitivity, local economic weakness, loan-loss estimation and commercial real-estate/consumer credit exposure, securities valuation changes, regulatory costs, and cyber or technology disruption. The business is geographically concentrated in northeastern Pennsylvania.
- Management reported no pending litigation expected to have a material effect. The independent auditor issued an unqualified opinion on the financial statements and internal controls; management also concluded disclosure controls and internal control over financial reporting were effective.
Important facts for investors to verify
- Whether deposit growth and lower-cost funding can offset rising deposit and borrowing costs, particularly given the sharp increase in year-end short-term borrowings.
- Subsequent trends in non-performing loans, delinquencies, charge-offs and allowance coverage as the loan portfolio expands.
- The sensitivity of earnings and capital to interest-rate changes, securities values and deposit repricing; reported rate-shock simulations estimated lower net interest income under both +200 and -200 basis-point scenarios.
- The eventual CECL adoption impact and any further effects from lease accounting, regulatory requirements or tax changes.
- Progress, cost and returns from the Mountaintop branch and Main Branch remodeling, alongside the company’s 2019 growth and margin expectations.