Fidelity D & D Bancorp(FDBC) - 2019 Q2 - Quarterly Report

Part I. Financial Information Financial Statements The unaudited consolidated financial statements for Fidelity D & D Bancorp, Inc. as of June 30, 2019, show total assets at $997.0 million and Q2 2019 net income at $3.0 million Consolidated Balance Sheets Total assets reached $997.0 million by June 30, 2019, a 1.6% increase, primarily due to a $69.4 million rise in deposits Consolidated Balance Sheet Highlights (Unaudited, in thousands) | (In thousands) | June 30, 2019 | December 31, 2018 | | :--- | :--- | :--- | | Total Assets | $997,039 | $981,102 | | Available-for-sale securities | $189,899 | $182,810 | | Loans and leases, net | $724,658 | $718,317 | | Total deposits | $839,623 | $770,183 | | Total Liabilities | $895,613 | $887,545 | | Total Shareholders' Equity | $101,426 | $93,557 | Consolidated Statements of Income Net income for Q2 2019 increased 8.5% to $3.0 million, with diluted EPS at $0.79, driven by higher net interest income Income Statement Highlights (Unaudited, in thousands except per share data) | Metric | Q2 2019 | Q2 2018 | Six Months 2019 | Six Months 2018 | | :--- | :--- | :--- | :--- | :--- | | Net Interest Income | $7,794 | $7,523 | $15,704 | $14,782 | | Provision for loan losses | $255 | $425 | $510 | $725 | | Net Income | $3,002 | $2,768 | $5,804 | $5,296 | | Net Income - basic (per share) | $0.79 | $0.74 | $1.53 | $1.41 | | Net Income - diluted (per share) | $0.79 | $0.73 | $1.52 | $1.40 | Consolidated Statements of Comprehensive Income Total comprehensive income for Q2 2019 significantly increased to $4.5 million, primarily due to positive unrealized gains on debt securities Comprehensive Income (Unaudited, in thousands) | Metric | Q2 2019 | Q2 2018 | Six Months 2019 | Six Months 2018 | | :--- | :--- | :--- | :--- | :--- | | Net Income | $3,002 | $2,768 | $5,804 | $5,296 | | Other comprehensive income (loss), net of tax | $1,458 | $(704) | $3,449 | $(2,666) | | Total Comprehensive Income | $4,460 | $2,064 | $9,253 | $2,630 | Consolidated Statements of Changes in Shareholders' Equity Shareholders' equity increased to $101.4 million by June 30, 2019, driven by net income and other comprehensive income, offset by dividends Changes in Shareholders' Equity (Six months ended June 30, 2019, in thousands) | Description | Amount | | :--- | :--- | | Balance, December 31, 2018 | $93,557 | | Net income | $5,804 | | Other comprehensive income | $3,449 | | Cash dividends declared | $(1,981) | | Stock-based compensation & other | $600 | | Balance, June 30, 2019 | $101,426 | Consolidated Statements of Cash Flows Net cash provided by operating activities was $12.8 million, with a $1.7 million net increase in cash and cash equivalents for H1 2019 Cash Flow Summary (Six months ended June 30, in thousands) | Activity | 2019 | 2018 | | :--- | :--- | :--- | | Net cash provided by operating activities | $12,846 | $7,546 | | Net cash used in investing activities | $(14,774) | $(60,409) | | Net cash provided by financing activities | $3,633 | $55,010 | | Net increase in cash and cash equivalents | $1,705 | $2,147 | Notes to Consolidated Financial Statements The notes detail accounting policies, including allowance for loan losses, fair valuation, and new lease accounting standards adoption - A material estimate susceptible to significant change is the determination of the allowance for loan losses. Management believes the allowance of $9.5 million at June 30, 2019 is adequate[26] - The company adopted ASU 2016-02 (Leases) on January 1, 2019, which resulted in adding a $4.1 million right-of-use-asset and a $4.6 million lease liability to the consolidated balance sheet[31] - The company's loan portfolio is primarily composed of Commercial Real Estate (31.6%), Residential Real Estate (22.4%), Commercial & Industrial (17.4%), and Auto loans (14.2%) as of June 30, 2019[40] Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses financial performance, highlighting Q2 2019 net income of $3.0 million and total asset growth to $997.0 million Executive Summary and Strategy The company aims to enhance shareholder value by growing core lending and deposits, with strategic branch expansion planned - The company's goals are to enhance shareholder value by growing its core business of retail and business lending and deposit gathering[102] - A new branch location in Mountain Top, PA, is under construction and scheduled to open in Q3 2019, with an expected investment of $1.5 million[102] Comparison of Results of Operations (Q2 & H1 2019 vs 2018) Net income for Q2 2019 rose 8% to $3.0 million, with net interest margin decreasing due to rising liability costs Quarterly Performance Summary (in thousands) | Metric | Q2 2019 | Q2 2018 | Change | | :--- | :--- | :--- | :--- | | Net Income | $3,002 | $2,768 | +8% | | Net Interest Income | $7,794 | $7,523 | +4% | | Provision for Loan Losses | $255 | $425 | -40% | | Non-interest Income | $2,489 | $2,371 | +5% | | Non-interest Expenses | $6,435 | $6,162 | +4% | - The FTE net interest margin decreased by 11 basis points to 3.54% in Q2 2019 compared to Q2 2018, as the cost of funds rose faster than asset yields[112][117] - The provision for loan losses decreased by $0.2 million (30%) for the first six months of 2019 compared to the same period in 2018, primarily due to a deceleration in loan growth and strong asset quality[124] Comparison of Financial Condition (June 30, 2019 vs Dec 31, 2018) Total assets increased to $997.0 million, funded by a $69.4 million rise in deposits, with strong asset quality maintained - Total deposits increased by $69.4 million (9%) since year-end 2018, driven by growth in money market and non-interest bearing accounts, allowing for a $47.3 million reduction in short-term borrowings and a $16.7 million paydown of FHLB advances[168][172] - The investment securities portfolio increased by $7.1 million and shifted from a net unrealized loss of $1.4 million at year-end 2018 to a net unrealized gain of $3.0 million at June 30, 2019, due to declining interest rates[130] - Non-performing assets improved to 0.62% of total assets, down from 0.64% at year-end 2018, with non-accrual loans decreasing by $0.2 million to $4.1 million[154][156] - The allowance for loan losses decreased to $9.5 million from $9.7 million at year-end, representing 1.29% of total loans, which management deems sufficient[145][149] Capital Shareholders' equity increased by $7.9 million to $101.4 million, driven by net income and comprehensive income, maintaining strong capital ratios - Total shareholders' equity increased by $7.9 million, or 8%, during the first six months of 2019, primarily due to $5.8 million in net income and a $3.4 million improvement in the net unrealized gain position of the investment portfolio[186] Consolidated Capital Ratios (Actual vs. Required with Buffer) | Ratio | Actual (June 30, 2019) | Required for Adequacy with Buffer | | :--- | :--- | :--- | | Total capital (to risk-weighted assets) | 15.0% | ≥ 10.5% | | Tier 1 common equity (to risk-weighted assets) | 13.8% | ≥ 7.0% | | Tier I capital (to risk-weighted assets) | 13.8% | ≥ 8.5% | | Tier I capital (to average assets) | 10.3% | ≥ 4.0% | Quantitative and Qualitative Disclosure about Market Risk The company manages interest rate risk through ALCO, maintaining an asset-sensitive position and strong liquidity with $662.9 million in funding sources - The company maintained a one-year cumulative positive (asset sensitive) gap of $66.7 million, or 6.7% of total assets, as of June 30, 2019, which may expose it to risk in a falling rate environment[177][178] Simulated Impact of Interest Rate Changes (as of June 30, 2019) | Scenario | % Change in Net Interest Income | % Change in Net Income | | :--- | :--- | :--- | | Rates +200 bps | +0.1% | +0.8% | | Rates -200 bps | -6.5% | -15.1% | - The company maintains strong liquidity, with total available funding sources of $662.9 million, representing 66% of total assets as of June 30, 2019[185] Controls and Procedures Management concluded that the company's disclosure controls and procedures were effective as of June 30, 2019 - Management, including the CEO and CFO, concluded that the Company's disclosure controls and procedures are effective as of the end of the period covered by the report[192] Part II. Other Information Legal Proceedings Management believes no pending legal proceedings will materially adversely affect the company's financial condition or operations - No legal proceedings are pending that would have a material adverse effect on the Company's financial condition or operations[194] Risk Factors No material changes to the risk factors previously disclosed in the company's 2018 Form 10-K have occurred - There have been no material changes to the risk factors disclosed in the 2018 Form 10-K[194] Unregistered Sales of Equity Securities and Use of Proceeds There were no unregistered sales of equity securities or use of proceeds to report for the period - None[194] Defaults upon Senior Securities There were no defaults upon senior securities to report for the period - None[194] Other Information There was no other information to report for the period - None[194] Exhibits This section lists exhibits filed with or incorporated by reference into the Form 10-Q, including required certifications - Exhibits filed with the report include CEO and CFO certifications (31.1, 31.2, 32.1, 32.2) and Interactive Data Files (101)[196]