Fidelity D & D Bancorp, Inc. — 2022 Form 10-K
Business context and reporting period
Fidelity D & D Bancorp is a Pennsylvania bank holding company whose principal subsidiary, The Fidelity Deposit and Discount Bank, provides banking, trust and financial services. Its primary markets are Lackawanna, Luzerne and Northampton Counties, Pennsylvania. This filing covers the fiscal year ended December 31, 2022, with comparisons primarily to 2021. The 2021 results included the Landmark acquisition; no merger-related expenses were reported in 2022.
Key financial results and condition
| Metric | 2022 | 2021 | Change / context |
|---|---|---|---|
| Net income | $30.0 million | $24.0 million | Up 25% |
| Diluted EPS | $5.29 | $4.48 | Up 18% |
| Net interest income (GAAP) | $72.3 million | $61.8 million | Up $10.4 million; FTE net interest income was $75.0 million, up 17% |
| Net interest margin (FTE) | 3.28% | 3.23% | Up 5 basis points; net interest spread remained 3.16% |
| Non-interest income | $16.6 million | $18.3 million | Down 9%, mainly due to lower loan-sale gains and loan service charges |
| Non-interest expense | $51.3 million | $50.1 million | Up 2%; 2021 included $3.0 million in merger costs and $0.4 million in FHLB prepayment fees |
| Efficiency ratio (non-GAAP) | 56.02% | 60.92% | Improved as revenue grew faster than expenses |
| ROA / ROE | 1.25% / 17.37% | 1.13% / 12.69% | Both improved |
| Total assets | $2.38 billion | $2.42 billion | Down 2% |
| Gross loans | $1.57 billion | $1.43 billion | Up 9% |
| Total deposits | $2.17 billion | $2.17 billion | Down less than 1% |
| Shareholders’ equity | $163.0 million | $211.7 million | Down 23%, principally due to investment-security valuation losses in AOCI |
| Cash and cash equivalents | $29.1 million | $96.9 million | Down $67.8 million |
Net cash provided by operating activities was $49.4 million; investing activities used $115.4 million and financing activities used $1.8 million. The resulting net decrease in cash was $67.8 million. The company reported $7.6 million of secured borrowings and $12.9 million of short-term borrowings at year-end, with no FHLB advances. It reported regulatory total capital of 14.4% and Tier 1 common equity of 13.3% of risk-weighted assets, above applicable minimums.
Material changes versus the prior comparable period
- Earnings benefited from higher interest income as rates rose and average loan and securities balances increased. Interest expense also rose, including higher deposit costs.
- Loans grew $131.4 million. Residential real estate and consumer loans contributed substantially to growth; the commercial portfolio also expanded excluding declining PPP balances.
- Deposits were broadly flat, but balances shifted among products and customers. Interest-bearing checking declined, while money-market and non-interest-bearing balances increased. Management cited customer movement of funds to higher-yielding alternatives.
- Investment securities fell to $643.6 million from $739.0 million. The company transferred $245.5 million of securities from available-for-sale (AFS) to held-to-maturity (HTM) in April 2022. At year-end, AFS securities had a $67.9 million net unrealized loss and HTM securities had a $35.5 million fair-value deficit versus carrying value. No other-than-temporary impairment charge was recorded.
- After-tax accumulated other comprehensive loss worsened by $71.3 million during 2022, contributing to lower equity and tangible book value per share, which declined from $33.68 to $25.18.
- Non-performing assets declined to $4.1 million, or 0.17% of assets, from $6.4 million, or 0.27%. Net charge-offs were $575,000, or 0.04% of average loans, versus $578,000, also 0.04%, in 2021.
Outlook, risks, contingencies and unusual items
- Management expected a higher-rate environment in 2023 and forecast net interest margin to remain unchanged. It anticipated slower net interest income growth, loan growth funded mainly by deposits with short-term borrowing as needed, and a decline in the investment portfolio. Deposit pricing and competition could compress spreads.
- Management identified inflation, rising rates, local economic conditions, deposit outflows, real estate values and credit deterioration as risks. The company has a negative one-year cumulative repricing gap of $105.5 million; its model estimated net interest income would decline 4.4% under an immediate 200-basis-point rate increase.
- Uninsured deposits were estimated at $985.2 million. Public deposits were $350.7 million, and approximately $97 million of American Rescue Plan Act funds in public accounts could be disbursed during 2023. Management reported available liquidity sources of approximately $1.56 billion, including cash, securities and lending facilities.
- The company estimated CECL adoption on January 1, 2023 would increase the allowance for loan losses by approximately $0.7 million and add a $1.1 million reserve for unfunded commitments; the estimates were to be finalized in the first quarter of 2023.
- The company estimated net remaining costs for its planned Scranton headquarters at $15 million to $20 million, with completion expected in 2025. It cited $4 million in state grant funding and intended to pursue a federal historic-preservation tax credit.
- Off-balance-sheet commitments included $390.6 million of commitments to extend credit and $16.6 million of standby letters of credit. The filing states these amounts do not necessarily represent future cash requirements.
- The independent auditor issued an unqualified opinion on the financial statements and identified allowance-for-loan-loss qualitative factors as a critical audit matter. The auditor did not express an opinion on internal-control effectiveness; management concluded controls were effective.
Important facts for investors to verify
- How the AFS and HTM valuation losses, securities transfer and interest-rate changes affect tangible equity, future flexibility and reported capital.
- Whether deposits remain stable as rates rise, including the behavior of uninsured, public and government-stimulus-related balances and the cost of replacing any runoff.
- Actual 2023 net interest margin, deposit costs, loan growth, asset quality and results of CECL adoption compared with management’s estimates.
- Whether the stated liquidity facilities remain available under stress and how much of the securities portfolio is pledged or otherwise encumbered.
- Final Scranton headquarters costs, project funding and any tax-credit proceeds, as well as the execution and economics of planned branch and loan growth.