Fidelity D & D Bancorp, Inc. — 2015 Form 10-K
Reporting period: Fiscal year ended December 31, 2015; comparisons are primarily with 2014. This is an annual report, not a standalone quarterly filing. The company is a Pennsylvania bank holding company operating The Fidelity Deposit and Discount Bank, serving Lackawanna and Luzerne counties.
Financial performance and condition
| Metric | 2015 | 2014 |
|---|---|---|
| Total assets | $729.4 million | $676.5 million |
| Net loans and leases | $546.7 million | $506.3 million |
| Deposits | $620.7 million | $586.9 million |
| Net interest income | $23.5 million | $21.9 million |
| Net income | $7.1 million | $6.4 million |
| Diluted earnings per share | $2.90 | $2.62 |
| Return on average assets / equity | 1.00% / 9.55% | 0.96% / 9.12% |
| Net interest margin | 3.70% | 3.75% |
| Allowance for loan losses / gross loans | $9.5 million / 1.71% | $9.2 million / 1.78% |
| Shareholders’ equity | $76.4 million | $72.2 million |
- Revenue and earnings: Interest income rose to $26.0 million from $24.8 million, while interest expense fell to $2.5 million from $2.9 million. Net interest income increased 7%. Other income was $7.5 million, up modestly; total operating expenses rose 7% to $21.0 million.
- Cash flow: Operating activities provided $15.7 million; investing activities used $74.6 million; financing activities provided $45.3 million. Cash and cash equivalents declined $13.6 million to $12.3 million.
- Debt and liquidity: Long-term debt was repaid in 2015. Short-term borrowings increased to $28.2 million from $4.0 million, including $22.3 million of overnight borrowings. The company reported $413.5 million of combined cash, liquid assets and available borrowing capacity, or 57% of assets, and described liquidity as strong.
- Capital: Consolidated total risk-based capital was 15.0%, Tier 1 common equity 13.7%, and leverage ratio 10.2% at year-end. The annual dividend was $1.16 per share, including a special dividend; the payout ratio was 40%.
Material changes versus 2014
- Assets increased 8%; loans and leases grew about 8%, while deposits increased 6%. Commercial and industrial loans grew 28% to $102.7 million.
- Net income increased $0.8 million. Higher net interest income and loan-sale gains, along with lower income taxes, more than offset higher expenses.
- Net interest margin narrowed five basis points. Management attributed the rise in net interest income primarily to growth in average earning assets and lower borrowing costs after repaying high-cost debt.
- Asset quality weakened: non-performing assets rose to $12.9 million, or 1.76% of assets, from $8.0 million, or 1.18%. Non-accrual loans increased to $9.0 million from $4.2 million, mostly reflecting one large commercial real estate loan. Net charge-offs decreased to $0.7 million from $0.8 million.
- Available-for-sale securities increased to $125.2 million from $97.9 million. Their net unrealized gain declined, and other comprehensive income was a $0.6 million loss, compared with $1.5 million of income in 2014.
Outlook, commentary and risks
- Management expected moderate asset growth in 2016, with loan growth focused mainly on commercial and consumer lending and funding principally from deposit growth. It anticipated net interest income to improve but net interest margin to decline slightly amid a slowly rising, potentially flattening yield curve.
- The company planned to grow mortgage-backed securities, revise deposit fees, strengthen capital and improve asset quality. It expected to close its Eynon branch in the first quarter of 2016 and transfer customers to Peckville.
- Management cited improving local unemployment but continued softness in regional housing, intense competition, and dependence on the local economy. Key risks include credit deterioration, concentration in real-estate-secured lending, interest-rate and deposit-pricing changes, liquidity needs, regulatory requirements, cybersecurity, and uncertainty in the loan-loss allowance.
- Unusual items included a $0.6 million long-term debt prepayment fee and a $0.4 million income-tax credit related to correcting the tax basis of trust preferred securities sold in 2013. The allowance methodology was revised; management said the changes reduced the reserve requirement by approximately $0.5 million net, before other portfolio effects.
- Management reported no material pending litigation. The independent auditor gave an unqualified opinion on the financial statements; the auditor was not engaged to attest to internal-control effectiveness. Management concluded disclosure controls and internal control over financial reporting were effective.
Most important facts for investors to verify
- Whether the large commercial real estate non-accrual loan is resolved, and whether non-performing assets decline as management anticipated.
- Whether the allowance remains adequate given the rise in non-accrual loans and the 2015 methodology changes.
- Whether deposit growth can support loan growth without materially higher funding costs or reliance on short-term borrowings.
- How rising rates and a flatter yield curve affect net interest income, margin, securities values and capital.
- Whether the reported liquidity resources and regulatory capital remain sufficient under adverse conditions, and whether dividends remain supported by earnings and bank-subsidiary distributions.
- Whether the 2015 tax credit and debt prepayment costs are nonrecurring, and how the branch closure and planned fee changes affect costs and customer retention.