Fidelity D & D Bancorp, Inc. — Q3 2012 Form 10-Q
Reporting period: Three and nine months ended September 30, 2012. The company is a Pennsylvania bank holding company operating Fidelity Deposit and Discount Bank in northeastern Pennsylvania. Financial figures below are in U.S. dollars; unless noted, dollar amounts are in millions.
Financial performance and position
| Metric | Q3 / September 30, 2012 | Comparable period / prior year-end |
|---|---|---|
| Total assets | $615.4 | $606.7 at December 31, 2011 |
| Gross loans | $429.1 | $406.3 at December 31, 2011 |
| Total deposits | $524.1 | $515.8 at December 31, 2011 |
| Shareholders’ equity | $58.6 | $53.6 at December 31, 2011 |
| Cash and cash equivalents | $45.6 | $52.2 at December 31, 2011 |
| Borrowings | $30.1 total: $14.1 short-term and $16.0 long-term | $30.5 at December 31, 2011 |
- Q3 earnings: Net income was $1.399 million, or $0.61 per diluted share, versus $1.327 million, or $0.59, in Q3 2011. Net interest income was $5.170 million; provision for loan losses was $0.700 million; other income was $1.868 million; and other expenses were $4.453 million.
- Nine-month earnings: Net income was $3.973 million, or $1.74 per diluted share, versus $3.843 million and $1.74 in 2011. Net interest income was $15.437 million; provision for loan losses was $2.000 million; other income was $5.691 million; and other expenses were $13.844 million.
- Margins and returns: Q3 net interest margin was 3.79% versus 3.85% a year earlier; nine-month margin was 3.78% versus 3.97%. Q3 ROA and ROE were 0.92% and 9.67%; nine-month ROA and ROE were 0.87% and 9.46%.
- Cash flow, nine months: Operating activities provided $8.735 million; investing activities used $22.498 million; financing activities provided $7.220 million. Cash and equivalents declined $6.543 million to $45.622 million.
- Liquidity and capital: Management reported $362.3 million of available liquidity, including cash, securities and loans held for sale, and available borrowing sources (59% of assets). Consolidated total risk-based capital was 13.6%, Tier 1 risk-based capital 12.3%, and Tier 1 leverage 9.4%; the company and bank met applicable capital requirements.
Material changes versus comparable periods
- Q3 net income increased 5.4%; nine-month net income increased 3.4%, while nine-month diluted EPS was unchanged as average shares outstanding rose.
- Net interest income declined 2% in Q3 and about 2% for the first nine months. Lower asset yields—particularly commercial loan yields—outpaced reductions in funding costs. Interest expense fell 29% in Q3 and 31% year to date.
- Other income rose to $1.9 million in Q3 from $1.5 million and to $5.7 million year to date from $4.2 million. Higher loan-sale gains and mortgage-related activity contributed; nine-month loan-sale gains were $1.329 million versus $0.499 million.
- Provision for loan losses increased to $0.7 million in Q3 from $0.5 million and to $2.0 million year to date from $1.35 million. Nine-month net charge-offs were $1.966 million versus $1.288 million.
- Loans grew $22.8 million from year-end, driven mainly by residential real estate lending. Deposits grew $8.3 million, including an $18.5 million increase in non-interest-bearing deposits, partly offset by declines in money-market balances and certificates of deposit.
- Non-performing assets decreased to $16.8 million, or 2.72% of assets, from $21.7 million, or 3.58%, at year-end. Non-performing loans were $13.1 million, or 3.03% of loans, versus $14.2 million, or 3.46%. The allowance was $8.142 million, 1.89% of gross loans.
Outlook, commentary, risks and unusual items
- Management expected low interest rates to continue pressuring net interest margin through 2012 and into 2013, with limited opportunity for further deposit-rate reductions. No quantified earnings or revenue guidance was provided.
- Management expected commercial and industrial loans to decline in 2012 after a further $6 million facility payoff in October; it anticipated commercial real estate growth in Q4 and slight residential loan growth for the remainder of 2012.
- The local Scranton-Wilkes-Barre unemployment rate was reported at 9.6% in August 2012, and local housing and real estate markets remained soft. Management identified these conditions as potential pressures on borrowers and collateral values.
- The allowance for loan losses depends on estimates and could require revision as economic conditions or loan performance change. Non-performing assets included $12.466 million of non-accrual loans, $1.610 million of foreclosed assets, and $0.965 million of non-accrual securities.
- The bank held $6.366 million amortized cost of pooled trust preferred securities with fair value of $1.663 million. Their market was inactive and valuation used Level 3 assumptions. The company recorded $0.136 million of credit-related impairment in the first half of 2012; none was recorded in Q3. Further impairment was identified as possible.
- In February 2012, the company repaid a $5 million FHLB advance early and incurred a $0.2 million prepayment fee. It also purchased its Moosic and Kingston branches, for $0.5 million and $0.7 million, respectively.
- Management said proposed regulatory capital and risk-weighting changes could affect capital, operations, liquidity and earnings; the company was assessing their impact. Management reported disclosure controls were effective, no material control changes during the quarter, and no material pending legal proceedings.
Important facts for investors to verify
- Whether margin compression and lower commercial lending yields continue, and whether fee income can offset the pressure.
- Subsequent trends in delinquency, non-accrual loans, charge-offs, foreclosed assets and the adequacy of the loan-loss allowance.
- Updated valuation assumptions, cash-flow performance and impairment exposure for pooled trust preferred securities.
- Deposit mix, certificate-of-deposit maturities, borrowing availability and liquidity under adverse conditions.
- The impact and implementation timing of regulatory capital changes, alongside management’s stated loan-growth expectations.