Fidelity D & D Bancorp, Inc. — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022. Fidelity D & D Bancorp is a Pennsylvania bank holding company operating The Fidelity Deposit and Discount Bank, with a community-banking footprint in northeastern and eastern Pennsylvania. Results include the Landmark acquisition, completed July 1, 2021; therefore, year-over-year comparisons reflect a larger company.
Key financial results
| Metric | Q1 2022 / March 31, 2022 | Comparable / prior date |
|---|---|---|
| Net interest income | $17.3 million | $13.5 million in Q1 2021 |
| Net income; diluted EPS | $7.5 million; $1.32 | $5.7 million; $1.13 in Q1 2021 |
| Net interest margin, FTE | 3.18% | 3.39% in Q1 2021 |
| Efficiency ratio, non-GAAP | 56.21% | 59.11% in Q1 2021 |
| Total assets | $2.421 billion | $2.419 billion at December 31, 2021 |
| Gross loans and leases | $1.474 billion | $1.435 billion at December 31, 2021 |
| Total deposits | $2.210 billion | $2.170 billion at December 31, 2021 |
| Allowance for loan losses | $16.1 million; 1.09% of loans | $15.6 million; 1.09% at December 31, 2021 |
| Cash and cash equivalents | $97.4 million | $96.9 million at December 31, 2021 |
| Shareholders’ equity | $175.2 million | $211.7 million at December 31, 2021 |
Revenue, expenses and margins: Interest income rose $3.8 million year over year, driven mainly by higher average loan and securities balances. Interest expense was nearly flat at $0.9 million. FTE net interest spread was 3.12%, down from 3.30%; margin fell 21 basis points as asset yields declined more than funding costs. Non-interest income decreased $1.0 million to $4.6 million, primarily because mortgage-loan sale gains were lower. Non-interest expense increased $1.2 million to $12.7 million, chiefly from salaries and benefits and the larger operating scale after Landmark. The effective tax rate was 13.2%, versus 15.5%.
Cash flow and liquidity: Operating activities provided $18.2 million; investing activities used $56.1 million; and financing activities provided $38.4 million. Net cash increased $0.5 million. The company reported $97.4 million of cash and cash equivalents and no short-term borrowings or FHLB advances at quarter-end. It reported borrowing capacity of $589.3 million from the FHLB, $111.7 million from the Federal Reserve, $31.0 million from correspondent-bank lines and $363.1 million through the IntraFi Network One-Way Buy program. Management described liquidity as strong and adequate.
Debt and capital: Secured borrowings were $10.6 million, related to acquired loan participations; finance lease obligations were $1.3 million. The consolidated total risk-based capital ratio was 14.2%, and the Tier 1 leverage ratio was 8.1%; the company and bank exceeded applicable capital requirements. The quarterly dividend was $0.33 per share. Tangible common book value per share, a non-GAAP measure, was $27.17, versus $31.00 a year earlier.
Material changes versus comparable periods
- Net income increased $1.9 million year over year, supported by higher net interest income and a $0.3 million lower loan-loss provision; lower non-interest income and higher operating expenses partly offset the gains.
- Loan growth was $39.8 million from year-end, including growth in commercial and industrial and residential loans. Excluding the $18.0 million reduction in PPP loans, the commercial portfolio grew $36.0 million.
- Non-performing assets declined to $4.0 million from $6.4 million at year-end; non-performing assets were 0.17% of total assets. Net charge-offs were $68,000, compared with $163,000 in Q1 2021.
- Available-for-sale securities fell to $711.6 million from $739.0 million. The portfolio moved from a $0.2 million net unrealized gain at year-end to a $53.8 million net unrealized loss before tax; the after-tax AOCI balance was a $42.5 million loss. The decline drove the reduction in shareholders’ equity.
- Mortgage-loan sales were $29.9 million, versus $80.7 million in Q1 2021; gains on loan sales fell to $0.7 million from $2.3 million.
Outlook, commentary and risks
- Management expected net interest income to improve during the remainder of 2022, citing anticipated loan and earning-asset growth and efforts to contain deposit costs. It also cautioned that rising rates could pressure deposit pricing and mortgage demand; these expectations are forward-looking, not guarantees.
- After quarter-end, effective April 1, 2022, the company transferred $245.5 million of securities from available-for-sale to held-to-maturity. The securities’ market value on the transfer date was $221.7 million, including $18.9 million of unrealized losses. Management said the transfer was intended to reduce future AOCI volatility from rising rates.
- Management attributed securities valuation declines primarily to higher interest rates, reported no other-than-temporary impairment, and said it had no intent to sell securities in an unrealized-loss position. Further rate increases could nevertheless reduce market values; there is no assurance future realized or unrealized losses will not occur.
- Management identified inflation and rising costs, economic and pandemic-related uncertainty, interest-rate and deposit sensitivity, loan repayment and collateral risks, competition, cybersecurity, regulatory changes, litigation, and acquisition integration as risks. Local unemployment remained above the national rate, and the company noted uncertainty about local real estate values and the effects of rising rates.
- The company estimated $15.8 million in net remaining costs for its Scranton headquarters project over approximately two years, beginning in Q4 2022, and estimated $3 million for a planned Main Branch remodel. It expected $4.0 million of state redevelopment grants for the headquarters project and was pursuing a potential historic-preservation tax credit.
- The company had approximately $43 million in LIBOR-linked loans and was working to modify the contracts by December 31, 2022. CECL adoption was scheduled for fiscal 2023; management was evaluating the impact and planned parallel model runs during 2022.
Important facts for investors to verify
- Track the effect of rising rates on net interest margin, deposit costs, loan demand and securities values, including the accounting and disclosures for the post-quarter AFS-to-HTM transfer.
- Review subsequent credit performance and reserve adequacy, particularly in commercial real estate and commercial lending; the allowance relies on management estimates and economic assumptions.
- Monitor deposit stability and concentration: estimated uninsured deposits were $955.2 million, and public deposits required $402.8 million of pledged securities.
- Assess execution, funding and final costs of the headquarters and branch projects, including grant proceeds and any historic tax credit.
- Compare actual 2022 results with management’s outlook and confirm progress on LIBOR contract modifications and CECL implementation.