Business context and reporting period
Fidelity D & D Bancorp, Inc. is a Pennsylvania bank holding company whose subsidiary, The Fidelity Deposit and Discount Bank, provides banking, trust and financial services, principally in Lackawanna, Luzerne and Northampton counties. This Form 10-K reports the fiscal year ended December 31, 2023, compared with 2022; it is not a standalone fourth-quarter report.
Unless otherwise stated, dollar amounts below are in millions. The independent auditor issued an unqualified opinion on the 2023 financial statements. The adoption of CECL on January 1, 2023 was a change in accounting principle.
Financial performance and condition
| Metric | 2023 | 2022 |
|---|---|---|
| Net interest income, GAAP | $62.0 | $72.3 |
| Net interest income, FTE (non-GAAP) | $64.9 | $75.0 |
| Net income | $18.2 | $30.0 |
| Diluted earnings per share | $3.19 | $5.29 |
| Net interest margin, FTE | 2.81% | 3.28% |
| Return on average assets / equity | 0.76% / 10.56% | 1.25% / 17.37% |
- Total assets rose 5% to $2.50 billion. Gross loans increased 8% to $1.69 billion; deposits declined less than 1% to $2.16 billion.
- Cash and cash equivalents were $111.9 million, versus $29.1 million a year earlier. Shareholders’ equity was $189.5 million, up from $163.0 million.
- Short-term borrowings increased to $117.0 million from $12.9 million. These included $57 million under the Federal Reserve Bank Term Funding Program and $60 million in other overnight borrowing. The Bank had no FHLB advances at year-end and reported substantial additional borrowing capacity.
- Operating cash flow was $29.7 million; investing activities used $35.3 million and financing activities provided $88.4 million. Cash increased $82.9 million during the year.
- Non-interest income was $11.4 million, down from $16.6 million, including a $6.5 million loss on an AFS securities sale. Non-interest expense was $51.9 million, up 1%. The efficiency ratio rose to 62.67% from 56.04% (non-GAAP).
- The allowance for credit losses on loans was $18.8 million, or 1.12% of loans, versus $17.1 million and 1.10%. Net charge-offs were $0.6 million, or 0.04% of average loans, in both years. Non-performing assets were $3.3 million, 0.13% of assets, compared with $2.7 million, or 0.12%.
- Estimated uninsured deposits were $820.6 million, or 38% of deposits; uninsured and non-collateralized deposits were approximately 23% of deposits. Management reported total liquidity sources of about $1.6 billion, or 63% of assets.
- The Bank’s regulatory capital ratios were 14.6% total risk-based capital, 13.3% Tier 1 common equity and 9.1% leverage. The Bank exceeded applicable capital requirements.
Material changes versus the prior year
- Net income fell 39%. Interest income increased, but interest expense rose substantially as deposit costs repriced upward; FTE net interest income declined 13% and the FTE spread narrowed to 2.25% from 3.16%.
- In November, the Company sold securities with a $35.6 million carrying value, realizing a $6.5 million loss, and used $29.1 million of proceeds to repay short-term borrowings. Management said the transaction removed a negative funding spread and was intended to improve future net interest income and liquidity capacity.
- Deposit composition shifted: certificates of deposit rose 82% to $213.0 million, while non-interest-bearing deposits declined $66.5 million. Short-term borrowing reliance increased amid deposit fluctuations and loan growth.
- Loan growth was concentrated in commercial and residential real estate. Total originations, including lines of credit, declined 16% to $531.0 million.
- Unrealized securities losses improved: after-tax AOCI improved by $14.7 million. Tangible book value per share increased to $29.57 from $25.18 (non-GAAP).
Outlook, risks and unusual items
- Management expected modestly declining rates in the second half of 2024, while acknowledging uncertainty about the timing and pace of rate cuts. It expected 2024 net interest margin to remain around the 2023 level and anticipated continued deposit-cost pressure.
- Management expected loan growth in 2024, funded principally by deposit growth and supplemented by short-term borrowing as needed; it did not expect to use long-term FHLB advances. It also targeted capital strengthening through retained earnings, improved loan yields, deposit-cost management, revenue growth and disciplined credit oversight. These are expectations, not guaranteed results.
- Key risks include interest-rate and funding sensitivity, deposit competition and volatility, local economic concentration, commercial real estate exposure, credit-loss estimation, securities valuation, inflation, regulatory requirements, cybersecurity and third-party technology risks. The one-year cumulative gap was liability-sensitive by $185.5 million; modeled net interest income declined 7.7% under a 200-basis-point rate increase.
- The Company adopted CECL in 2023, recording a $1.3 million after-tax cumulative reduction to retained earnings. Management’s allowance estimate was also identified as a critical audit matter.
- The Scranton headquarters project had incurred $5.4 million by year-end; estimated net remaining costs were $19–$24 million, subject to construction and other cost uncertainty. A $4 million state redevelopment grant had been awarded, and the Company was pursuing a federal historic-preservation tax credit.
- Management reported effective disclosure controls and internal control over financial reporting. Routine litigation was disclosed; management did not expect pending proceedings to have a material effect.
Important facts for investors to verify
- Whether deposit balances and mix stabilize, and whether higher deposit costs or borrowing needs continue to pressure margins.
- Whether the securities-sale strategy delivers the expected recurring funding-cost savings and how the remaining securities unrealized losses evolve.
- Credit trends in commercial real estate and other loan portfolios, including non-accrual balances, criticized loans and CECL reserve assumptions.
- Uninsured deposit concentration, collateral availability, borrowing capacity and liquidity under stress scenarios.
- Actual headquarters project costs, completion timing, grant proceeds and eligibility for the anticipated tax credit.