Fidelity D & D Bancorp, Inc. — Q1 2024 Form 10-Q
Reporting period: Three months ended March 31, 2024; balance-sheet comparisons are to December 31, 2023. The company is a Pennsylvania bank holding company operating The Fidelity Deposit and Discount Bank, with a community-banking and trust-services business concentrated in northeastern and eastern Pennsylvania. Amounts below are in millions of dollars unless stated otherwise.
Key financial results and position
| Metric | Q1 2024 / March 31, 2024 | Comparable period / prior year-end |
|---|---|---|
| Interest income | $25.6 | $22.3 in Q1 2023 |
| Net interest income | $14.9; FTE net interest income $15.7 | $17.0 GAAP; $17.8 FTE in Q1 2023 |
| Non-interest income | $4.6 | $4.5 in Q1 2023 |
| Net income / diluted EPS | $5.1 / $0.88 | $7.0 / $1.24 diluted EPS in Q1 2023 |
| Net interest margin (FTE) | 2.69% | 3.13% in Q1 2023 |
| Efficiency ratio (non-GAAP) | 67.56% | 57.72% in Q1 2023 |
| Operating cash flow | $5.3 | $7.1 in Q1 2023 |
| Total assets | $2,468.9 | $2,503.2 at December 31, 2023 |
| Loans and leases, net | $1,678.1 | $1,666.3 at December 31, 2023 |
| Total deposits | $2,216.0 | $2,158.4 at December 31, 2023 |
| Short-term borrowings | $25.0 | $117.0 at December 31, 2023 |
| Shareholders’ equity | $191.6 | $189.5 at December 31, 2023 |
Cash and cash equivalents ended the quarter at $72.7, down from $111.9 at year-end. Cash flow was $5.3 from operations, negative $8.1 from investing and negative $36.5 from financing, for a $39.2 net cash decrease. The company reported $18.9 of loan-loss allowance, equal to 1.11% of total loans. Non-performing assets were $3.8, or 0.15% of assets; non-accrual loans were $3.6. The Bank’s total risk-based capital ratio was 14.7%, above the 10.0% well-capitalized threshold shown in the filing. Tangible common equity was 6.98%; including unrealized HTM securities losses, the adjusted ratio was 5.99% (both non-GAAP).
Material changes versus comparable periods
- Net income fell $2.0, or 28%, year over year. Management attributed the decline primarily to a $2.1 decrease in net interest income; higher non-interest expense also contributed, partly offset by lower taxes and credit-loss provisions.
- Interest income grew $3.3, but interest expense rose $5.4. Deposit expense increased $5.3 as the average rate paid on interest-bearing deposits rose to 2.43% from 1.20%; the overall cost of funds increased to 1.93% from 0.98%.
- Average interest-earning asset yield (FTE) increased to 4.52% from 4.06%, but the FTE net interest spread narrowed to 2.01% from 2.73%. Management reported a 44-basis-point year-over-year decline in FTE net interest margin.
- Non-interest expense rose 6% to $13.7, notably from higher salaries and benefits and FDIC assessments. Trust fiduciary fees increased, helping lift non-interest income 2% to $4.6.
- Loans and leases grew $12.0 during the quarter. Municipal lending increased $18.3, including a $15.0 loan to one municipal borrower; commercial construction loans rose $8.7. Consumer loans declined $12.1, mainly from a planned reduction in indirect auto lending. Deposits grew $57.6, while short-term borrowings declined $92.0.
Outlook, risks and unusual items
- Management expected a flat to modestly declining rate environment in the second half of 2024. It cited continued deposit-rate competition and the risk that funding costs could rise faster than asset yields. The loan pipeline was expected to support loan growth, initially funded using borrowing capacity; management expected deposit growth eventually to help repay short-term borrowings. These are management expectations, not a quantified earnings forecast.
- Interest-rate sensitivity modeling estimated a 6.3% decrease in 12-month net interest income under a +200-basis-point shock and a 4.4% decrease under a -200-basis-point shock. A +300-basis-point scenario showed a 10.0% decrease. The filing cautions that these simulations depend on assumptions about deposit repricing, prepayments and balance-sheet composition.
- Liquidity sources included $72.7 of cash, available-for-sale securities and borrowing capacity. The company reported approximately $675.5 of FHLB capacity, $147.6 from the Federal Reserve, $20.0 from correspondent banks and $353.0 through the IntraFi One-Way Buy program; management described liquidity as strong and adequate. Uninsured deposits were estimated at $742.4, or 34% of deposits; uninsured and non-collateralized deposits were approximately 18% of deposits.
- The investment portfolio had $54.0 of gross unrealized losses on available-for-sale securities and HTM fair value of $194.0 versus $224.6 carrying value. Management attributed losses primarily to interest rates, said it did not intend to sell loss-position securities, and recorded no securities credit-loss allowance. Interest-rate changes could nevertheless affect values and capital.
- Q1 included a $0.2 gain on loan sales; there were no AFS securities sale proceeds in the quarter. A prior November 2023 securities sale generated a $6.5 loss, with proceeds used to repay borrowings; management said the strategy was expected to improve net interest margin over time.
- Management estimated $19–$24 of net remaining costs for the Scranton headquarters project, subject to construction, supply and labor uncertainties. The company had incurred $5.9 through March 31, 2024 and was eligible for a federal historic-preservation tax credit on qualifying improvements.
- Management identified economic conditions, inflation, interest-rate and deposit competition, real-estate values, credit quality, regulatory change, cybersecurity, technology and litigation among the risks. It reported no material change to previously disclosed risk factors, no pending material legal proceedings, and effective disclosure controls.
Important facts for investors to verify
- Whether deposit pricing and mix continue to pressure net interest margin, and whether deposit growth can reduce reliance on borrowings.
- Progress and credit performance in commercial real estate, construction and the $15.0 municipal exposure; changes in delinquencies, non-accruals, charge-offs and the allowance.
- Uninsured deposit levels, seasonal public-deposit movements, pledged and unpledged collateral, and actual availability of the disclosed contingent funding sources.
- Changes in unrealized securities losses, AOCI and tangible capital, including the effect of any securities sales or rate movements.
- Headquarters project spending against the $19–$24 remaining-cost estimate, timing, potential overruns and realization of the tax credit.
- Interpret non-GAAP FTE, efficiency and tangible-capital measures alongside GAAP results and the filing’s reconciliations.