Fidelity D & D Bancorp, Inc. — Q3 2016 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2016. Unaudited consolidated results for the Pennsylvania-based bank holding company and its wholly owned bank, serving Lackawanna and Luzerne Counties.
Financial performance
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Net interest income | $6.42 million | $6.03 million | $18.70 million | $17.43 million |
| Provision for loan losses | $225,000 | $200,000 | $650,000 | $500,000 |
| Other income | $2.02 million | $2.02 million | $5.81 million | $5.61 million |
| Other expenses | $5.41 million | $5.24 million | $16.17 million | $16.07 million |
| Income before taxes | $2.81 million | $2.62 million | $7.70 million | $6.47 million |
| Net income | $2.04 million | $1.93 million | $5.66 million | $5.28 million |
| Diluted EPS | $0.82 | $0.79 | $2.30 | $2.16 |
- Q3 net income rose about 5%; nine-month net income rose about 7%. Nine-month net interest income increased about 7%, supported by growth in average earning assets and lower borrowing costs.
- FTE net interest margin was 3.78% for Q3 versus 3.72% a year earlier, and 3.71% for nine months versus 3.69%. Nine-month FTE net interest spread was 3.59% versus 3.56%.
- Reported ROA/ROE were 1.07%/9.99% in Q3 2016 and 1.06%/10.26% in Q3 2015; nine-month ROA/ROE were 1.01%/9.55% versus 1.00%/9.57%.
- For the first nine months, operating cash flow was $10.3 million, investing cash outflow $23.1 million and financing cash inflow $32.0 million. Cash and cash equivalents increased $19.2 million to $31.4 million.
Financial position and material changes
- Total assets grew 6% from year-end 2015 to $770.4 million. Net loans and leases were $562.2 million, up from $546.7 million; available-for-sale securities were $128.8 million, up from $125.2 million.
- Deposits increased 8% to $671.8 million, including growth in non-interest-bearing deposits to $160.1 million from $142.8 million. Short-term borrowings declined to $11.0 million from $28.2 million. The company reported no long-term debt at September 30, 2016.
- Shareholders’ equity rose 7% to $81.6 million. The nine-month dividend was $0.85 per share; declared cash dividends totaled $2.1 million.
- Loan portfolio growth was led by auto loans and leases, which increased to $46.3 million from $29.8 million, and residential real estate lending. Commercial and industrial loans declined to $93.2 million from $102.7 million, primarily from repayments of larger credits.
- Credit indicators were mixed: non-accrual loans fell to $5.9 million from $9.0 million at year-end, and non-performing assets declined to $10.2 million from $12.9 million. However, net charge-offs for the nine months increased to $981,000 from $524,000 in the comparable period; the allowance was $9.2 million, or 1.61% of total loans.
Outlook, risks and unusual items
- Management expected Q4 2016 net interest income to improve, supported by earning-asset growth, continued lending and deposit-gathering efforts. It cautioned that margin compression could persist absent a sustained steepening of the yield curve and that competition could push deposit costs higher.
- Management anticipated further commercial loan payoffs that could reduce balances despite a strong pipeline. It expected deposit growth in Q4, partly from a planned branch acquisition, offset in part by seasonal public-deposit fluctuations.
- During Q3 the company agreed to acquire deposits, certain loans and fixed assets of a bank branch, subject to regulatory approval; closing was expected in Q4 2016. A new branch lease was also signed, with expenses expected to begin in Q4.
- Interest-rate modeling estimated that an immediate 200-basis-point increase would raise 12-month net interest income 6.0%, while a 200-basis-point decline would reduce it 1.9%. Economic value of equity was modeled to decline 28.2% under the down-rate scenario. These are model estimates based on stated assumptions, not forecasts.
- Management cited regional economic uncertainty, loan repayment and collateral risks, interest-rate changes, competition, regulation, technology and cybersecurity among material risks. It stated that the allowance is an estimate subject to change and that future losses or additional provisions may be required.
- There were no reported investment-security impairment charges. The quarter included a $238,000 after-tax unrealized loss on available-for-sale securities, while year-to-date other comprehensive income was positive $1.27 million after tax. The 2015 comparison included a $570,000 FHLB prepayment fee and a $255,000 long-term debt interest expense, neither reported in 2016.
- The company reported effective disclosure controls, no material changes to internal control over financial reporting, no material change in risk factors from its 2015 Form 10-K, and no pending legal proceeding expected to have a material adverse effect.
Important facts for investors to verify
- Whether the proposed branch acquisition received regulatory approval, closed as planned, and delivered the expected deposits and costs.
- Whether loan growth, repayments and credit performance support management’s outlook, particularly given increased year-to-date charge-offs and regional economic conditions.
- Deposit concentration and seasonal public-fund volatility, funding costs, and the company’s ability to preserve margin as rates and competition change.
- Assumptions underlying the allowance for loan losses and the interest-rate sensitivity simulations, including potential collateral value changes.
- Future results of the branch expansion, auto lending growth and operating expense trends.