Fidelity D & D Bancorp, Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; balance-sheet comparisons are with December 31, 2022. Financial statements are unaudited. The company is a Pennsylvania bank holding company operating The Fidelity Deposit and Discount Bank, with a community-banking focus in northeastern and eastern Pennsylvania.
Financial performance and condition
Amounts are in millions of dollars unless otherwise stated.
| Metric | Q1 2023 / March 31, 2023 | Comparable period / prior date |
|---|---|---|
| Interest income | $22.3 | $18.2 in Q1 2022 |
| Interest expense | $5.3 | $0.9 in Q1 2022 |
| Net interest income | $17.0 | $17.3 in Q1 2022 |
| Non-interest income | $4.5 | $4.6 in Q1 2022 |
| Non-interest expense | $12.9 | $12.7 in Q1 2022 |
| Net income | $7.0; diluted EPS $1.24 | $7.5; diluted EPS $1.32 in Q1 2022 |
| FTE net interest margin / spread | 3.13% / 2.73% | 3.18% / 3.12% in Q1 2022 |
| Efficiency ratio (non-GAAP) | 57.72% | 56.21% in Q1 2022 |
| Return on average assets / equity | 1.19% / 17.00% | 1.26% / 15.01% in Q1 2022 |
| Assets | $2,443.0 | $2,378.4 at December 31, 2022 |
| Gross loans and leases | $1,628.8 | $1,565.9 at December 31, 2022 |
| Deposits | $2,143.1 | $2,166.9 at December 31, 2022 |
| Cash and cash equivalents | $63.0 | $29.1 at December 31, 2022 |
| Short-term borrowings | $89.0 | $12.9 at December 31, 2022 |
| Shareholders’ equity | $175.9 | $163.0 at December 31, 2022 |
- Net cash provided by operations was $7.1 million, compared with $18.2 million in Q1 2022. Investing activities used $23.8 million; financing activities provided $50.7 million. Cash increased $33.9 million during the quarter.
- The loan allowance was $17.9 million, or 1.10% of loans. Non-performing assets were $3.4 million, 0.14% of assets; non-accrual loans were $3.3 million.
- Unrealized losses on available-for-sale securities were $58.1 million before tax; accumulated other comprehensive loss was $62.9 million after tax. Held-to-maturity securities had $28.9 million of unrealized losses before tax. Management attributed security value declines to interest rates, reported no intent to sell securities in an unrealized loss position, and recorded no securities credit-loss allowance.
- Regulatory capital ratios included total risk-based capital of 14.6%, Tier 1 common equity of 13.4%, and Tier 1 leverage of 8.9%; the filing says the company and bank exceeded applicable minimum requirements. Tangible common equity was 6.39% (non-GAAP); including HTM unrealized losses, adjusted tangible common equity was 5.45%.
Material changes versus comparable periods
- Net income fell about 6% year over year. Management attributed the approximately $0.5 million decline primarily to $0.3 million lower net interest income and $0.2 million higher non-interest expense.
- Interest income increased $4.2 million, led by loan growth and higher asset yields, but interest expense rose $4.4 million. Deposit interest expense increased $3.8 million as deposit rates repriced; the company also incurred $0.6 million of expense on short-term borrowings. FTE margin decreased 5 basis points year over year.
- Gross loans grew $62.9 million, or 4%, from year-end, including $42.1 million growth in municipal loans and $22.0 million in residential loans. Deposits declined $23.8 million, or 1%; certificates of deposit rose $39.1 million while other deposit categories decreased.
- Investment securities declined $29.1 million from year-end, partly reflecting $31.2 million of securities sold at breakeven to repay overnight borrowings. AOCI improved $8.2 million after tax during the quarter as securities’ unrealized losses narrowed.
- CECL accounting was adopted January 1, 2023. The company recorded a $1.3 million after-tax cumulative reduction to retained earnings; the new standard also changed credit-loss measurement and disclosures, limiting direct comparability with prior-period provisions.
Outlook, management commentary, risks and unusual items
- No specific earnings or revenue guidance is provided. Management said it was uncertain about the interest-rate outlook and anticipated pressure on deposit costs and potential further margin compression. It planned to manage loan pricing and deposit costs, grow lending and pursue lower-cost deposits. Management reported that April 2023 interest-bearing liability costs were 1.67%, above Q1’s 1.33%.
- Management expected deposit runoff trends to continue during 2023 and noted seasonal volatility in public deposits. Uninsured deposits were estimated at $857.6 million, or 40% of deposits; uninsured, non-collateralized deposits were approximately 21% of total deposits. The company had $89.0 million of short-term borrowings, including $32.0 million borrowed through the Federal Reserve Bank Term Funding Program.
- The company reported $63.0 million in cash and cash equivalents and access to borrowing and other liquidity sources. It estimated total available liquidity sources of $1.605 billion, or 66% of assets; this figure includes contingent facilities and should not be read as cash on hand. Management considered liquidity adequate.
- Interest-rate simulations showed a 200-basis-point increase could reduce 12-month net interest income by 7.3% and net income by 14.1%; a 200-basis-point decrease could reduce net interest income by 0.7%. The one-year cumulative gap was negative $150.3 million, indicating liability sensitivity under the company’s assumptions.
- The filing identifies recent bank failures and industry instability as risks to customer confidence, deposits, liquidity, securities and loan values, interest rates, potential FDIC assessments, results and stock price. Other stated risks include economic conditions, inflation, rate volatility, credit quality, competition, regulation and cybersecurity.
- Planned property projects include a new Wilkes-Barre branch and headquarters construction. Estimated remaining net headquarters costs were $15–$20 million through the end of 2024, subject to construction costs and planning; the company cited $4 million in state redevelopment grants and was pursuing a historic-preservation tax credit.
- Management reported no material pending legal proceedings and no other material changes to risk factors disclosed in its 2022 Form 10-K. The filing also notes approximately $35 million of LIBOR-linked loans being modified.
Important facts for investors to verify
- Deposit stability, uninsured-deposit concentration, public-fund seasonality, and the extent and cost of reliance on short-term or contingent borrowing.
- Whether deposit-rate increases continue to outpace loan and securities yield increases, and the resulting effect on net interest margin and earnings.
- Credit trends, including the increase in non-accrual loans to $3.3 million, municipal-loan growth, and the adequacy of the CECL allowance and unfunded-commitment reserve.
- Realized liquidity and capital effects if securities must be sold, given the remaining unrealized losses, pledged securities, and 5.45% adjusted tangible common equity ratio.
- Actual costs and timing of the headquarters and branch projects, and whether management’s liquidity and rate-sensitivity assumptions remain appropriate.