Fidelity D & D Bancorp, Inc. — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023; balance-sheet comparisons are against December 31, 2022. The unaudited consolidated results cover the Pennsylvania bank holding company and its bank subsidiary. Dollar amounts below are in millions unless noted.
Financial performance and position
| Metric | Q2 / June 30, 2023 | Prior comparable period / date |
|---|---|---|
| Net income | $5.36; diluted EPS $0.94 | Q2 2022: $7.66; $1.35 diluted EPS |
| Six-month net income | $12.40; diluted EPS $2.18 | Six months 2022: $15.19; $2.67 diluted EPS |
| Total interest income | Q2: $22.98; first half: $45.32 | Q2 2022: $19.07; first half 2022: $37.24 |
| Net interest income (GAAP) | Q2: $15.48; first half: $32.51 | Q2 2022: $18.15; first half 2022: $35.44 |
| Net interest margin (FTE) | Q2: 2.82%; first half: 2.97% | Q2 2022: 3.34%; first half 2022: 3.26% |
| Non-interest income / expense | Q2: $4.54 / $13.43; first half: $9.02 / $26.28 | Q2 2022: $4.26 / $12.81; first half 2022: $8.81 / $25.47 |
| Total assets | $2,441.2 | $2,378.4 at Dec. 31, 2022 |
| Loans and leases, net | $1,611.3 | $1,547.0 at Dec. 31, 2022 |
| Deposits | $2,152.0 | $2,166.9 at Dec. 31, 2022 |
| Cash and cash equivalents | $69.6 | $29.1 at Dec. 31, 2022 |
| Short-term borrowings | $76.1 | $12.9 at Dec. 31, 2022 |
| Shareholders’ equity | $177.7 | $163.0 at Dec. 31, 2022 |
For the first half, operating cash flow was $15.1, investing cash outflow was $19.4, and financing cash inflow was $44.9, producing a $40.5 increase in cash and cash equivalents. The filing reports no formal earnings guidance. Q2 return on average assets was 0.89% and return on average equity was 12.19%; first-half figures were 1.04% and 14.52%. The first-half efficiency ratio was 61.10% (non-GAAP), versus 55.86% a year earlier.
Material changes and key drivers
- Q2 net income declined 30% year over year; first-half net income fell $2.8 million. Management attributed the declines primarily to lower net interest income as funding costs rose faster than asset yields.
- Q2 net interest income fell $2.7 million year over year despite higher interest income: deposit interest expense rose $5.7 million and short-term borrowing expense rose $0.8 million. First-half interest expense increased $11.0 million, partly offset by $8.1 million more interest income.
- Loans grew $65.6 million (4%) from year-end, led by residential real estate growth of $37.5 million and commercial portfolio growth of $19.7 million. Deposits declined $14.9 million (1%); non-interest-bearing deposits fell $20.1 million while certificates of deposit increased $63.2 million.
- The investment portfolio declined $39.3 million to $604.3 million. The company sold $31.2 million of securities in January at approximately breakeven and used the proceeds to reduce overnight borrowings.
- Net charge-offs were $0.4 million for the first half, versus $0.1 million in the prior-year period; a $0.3 million charge-off to one commercial borrower was a notable factor. Non-accrual loans increased to $3.5 million from $2.5 million at year-end, partly because $1.5 million of acquired loans were classified as non-accrual upon CECL adoption.
Liquidity, capital, risks and outlook
- The allowance for credit losses on loans was $18.35 million, or 1.13% of loans, at June 30. The company adopted CECL on January 1, recording a $1.3 million after-tax reduction to retained earnings; the filing says estimates depend on forecasts and may change.
- Unrealized losses on available-for-sale securities were $61.6 million before tax; held-to-maturity securities had a $31.4 million unrealized loss and fair value of $192.1 million versus $223.5 million amortized cost. Management attributed the losses primarily to interest rates, reported no intent to sell securities in a loss position, and recorded no securities credit-loss allowance.
- Estimated uninsured deposits were $878.7 million, or 41% of deposits; uninsured and non-collateralized deposits were approximately 23% of deposits. Public and trust deposits require pledged collateral; $382.0 million of securities were pledged.
- Available liquidity sources reported by management totaled approximately $1.65 billion, including cash, eligible securities and loans, and borrowing capacity through the FHLB, Federal Reserve, correspondent banks and IntraFi programs. The company also used $32 million from the Federal Reserve Bank Term Funding Program. Management described liquidity as adequate, while noting deposit flows and public-fund balances can be volatile.
- Regulatory capital ratios exceeded stated minimums. At June 30, the consolidated total risk-based capital ratio was 14.7%, Tier 1 common equity ratio 13.5%, and leverage ratio 9.1%. Tangible common equity was 6.48% (non-GAAP), or 5.45% after adjusting for after-tax HTM unrealized losses.
- In a modeled immediate 200-basis-point rate increase, twelve-month net interest income was estimated to decline 8.4%; a 100-basis-point increase implied a 3.6% decline. Management noted deposit repricing pressure, a liability-sensitive one-year cumulative gap of $181.6 million, and was evaluating potential balance-sheet hedges subject to Board approval.
- Management expects deposit mix shifts and public-deposit volatility to continue, and said higher deposit costs may further pressure margins. It expects loan growth and relationship-based deposit strategies to help, but described the rate outlook as uncertain. Rising rates and reduced home-purchase activity may affect mortgage demand; management said it will continue to prioritize credit quality.
- Other risks include regional and broader economic conditions, inflation, interest-rate and securities-value volatility, banking-sector confidence and deposit outflows, cybersecurity, regulatory changes, and credit-loss estimate uncertainty. The company disclosed no pending legal matter expected to have a material adverse effect.
- Unusual or notable items include a $0.2 million branch-property write-down in Q2, higher fraud losses, and a branch closure in Hazle Township. The company is remodeling its Dunmore main branch and developing a Scranton headquarters; estimated remaining headquarters costs were $15–$20 million, with timing and cost subject to supply-chain, pricing and planning uncertainty.
Most important facts for investors to verify
- Whether deposit pricing, deposit mix, and short-term borrowing needs continue to compress net interest margin.
- Trends in uninsured and public deposits, deposit outflows, and the actual availability and cost of reported contingent funding sources.
- Credit quality changes, including non-accrual loans, commercial real estate exposure, charge-offs, and CECL allowance assumptions.
- The sensitivity and potential capital impact of the securities portfolio’s unrealized losses if rates or liquidity conditions change.
- Actual costs and timing of branch and headquarters projects, and progress on any proposed interest-rate hedges.