Fidelity D & D Bancorp, Inc. — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023. Amounts are in U.S. dollars; financial statement figures are in millions unless otherwise noted. The company is a Pennsylvania bank holding company whose subsidiary serves consumer, commercial and trust customers, primarily in Northeastern and Eastern Pennsylvania.
Financial performance and position
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Interest income | $23.7 | $20.1 | $69.0 | $57.4 |
| Net interest income | $14.6 | $18.5 | $47.1 | $53.9 |
| Net income | $5.3 | $7.7 | $17.7 | $22.9 |
| Diluted EPS | $0.93 | $1.36 | $3.11 | $4.03 |
| Non-interest income | $4.3 | $3.9 | $13.3 | $12.7 |
| Non-interest expense | $12.8 | $13.0 | $39.1 | $38.5 |
- Profitability and margins: Q3 net income fell 31% year over year; nine-month income fell about 22%. Fully taxable equivalent net interest margin was 2.63% for Q3 (3.32% a year earlier) and 2.86% year to date (3.28% a year earlier). The nine-month efficiency ratio was 62.33%, versus 56.01%.
- Balance sheet at September 30: Total assets were $2.477 billion, up $98.4 million from December 31, 2022. Gross loans and leases were $1.647 billion, up 5%; deposits were $2.152 billion, down $15.2 million. Cash and cash equivalents were $110.5 million, compared with $29.1 million at year-end. Investment securities were $576.7 million, down from $643.6 million.
- Funding and capital: Short-term borrowings rose to $124.0 million from $12.9 million at year-end; secured borrowings were $7.4 million. Shareholders’ equity was $165.4 million. Accumulated other comprehensive loss was $81.5 million, compared with $71.2 million at year-end, reflecting securities valuation changes. The Bank’s total risk-based capital ratio was 14.7%; management reported that the Company and Bank exceeded applicable capital requirements.
- Credit: The allowance for credit losses on loans was $18.8 million, or 1.14% of loans, versus $17.1 million and 1.10% at year-end. Non-performing loans were $3.28 million (0.20% of loans); net charge-offs were $516,000 for the first nine months. The filing states that CECL adoption in January 2023 affects comparability with earlier periods.
- Cash flows, nine months: Operating activities provided $21.4 million, investing activities used $30.7 million, and financing activities provided $90.7 million. Cash and cash equivalents increased $81.4 million during the period to $110.5 million.
Material changes versus comparable periods
- Interest expense increased sharply as deposit costs rose and the company used more short-term borrowing. For Q3, interest expense was $9.0 million versus $1.6 million; for nine months, it was $21.8 million versus $3.4 million. Higher asset yields and loan growth did not offset the funding-cost increase.
- Loans grew, particularly residential real estate and commercial construction. Deposits declined as some customers shifted to higher-yielding products, spent balances or withdrew public funds; certificates of deposit increased $85.6 million from year-end while non-interest-bearing deposits declined $52.9 million.
- AFS securities’ gross unrealized losses were $82.7 million at September 30, versus $68.4 million at year-end. Management attributed losses primarily to interest rates, and reported no credit-loss allowance on the investment portfolio.
- Net income was lower despite modestly higher non-interest income and slightly lower Q3 non-interest expense. Year-to-date non-interest expense increased modestly, with premises, professional services and fraud losses among the increases.
Outlook, commentary, risks and unusual items
- Management provided no specific numerical earnings guidance. It expects loan growth to continue, with borrowing capacity funding growth until deposit growth can reduce short-term borrowings. It plans to manage loan pricing and deposit costs, while noting uncertainty about interest rates and continued pressure on deposit pricing.
- A subsequent event is significant: in November 2023, the company sold AFS securities with a $35.6 million carrying value for a $6.5 million loss. The $29.1 million proceeds were used to repay short-term borrowings. The loss will adversely affect Q4 2023 results. Management said the sale reduces reliance on short-term funding, improves net interest margin by more than 5 basis points, and is expected to reduce 2023 regulatory ratios by 25–30 basis points.
- Liquidity resources included $110.5 million of cash, $355.2 million of AFS securities and loans held for sale, and stated borrowing capacity through several sources. The filing reports estimated uninsured deposits of $896.4 million, or 42% of deposits; uninsured and non-collateralized deposits were approximately 22% of deposits.
- Interest-rate sensitivity remains material: management reported a negative one-year cumulative gap of $177 million, or 7% of assets. Its model estimated that an immediate 200-basis-point rate increase would reduce 12-month net interest income by 8.0%; a 200-basis-point decrease would reduce it by 3.6%. These are model estimates, not forecasts.
- Other risks include regional economic and real estate conditions, commercial real estate exposure, deposit volatility, bank-sector confidence and funding pressures, cybersecurity, competition, regulation, and uncertainty in credit-loss estimates. Management reported no material legal proceedings and concluded disclosure controls were effective.
- The company is undertaking headquarters and branch projects. It estimated remaining net headquarters costs of $15–$20 million, subject to cost and timing uncertainty, and anticipated about $2.6 million of additional premises and equipment investment for planned leased-property construction.
Important facts for investors to verify
- Subsequent filings and reported results for the $6.5 million securities-sale loss, borrowing repayment, and expected margin and capital effects.
- Deposit balances and mix, uninsured-deposit exposure, short-term borrowing levels, and realized availability of stated liquidity sources.
- Net interest margin, deposit pricing and sensitivity to interest-rate changes compared with management’s model assumptions.
- Loan performance and concentrations, especially commercial real estate and construction, non-performing loans, and allowance adequacy under CECL.
- Actual project spending, remaining headquarters costs and branch expansion or consolidation plans.