Fidelity D & D Bancorp, Inc. — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022. The Pennsylvania bank holding company operates The Fidelity Deposit and Discount Bank, primarily in northeastern and eastern Pennsylvania. Results include Landmark, acquired July 1, 2021; therefore, year-over-year comparisons are affected by the acquisition.
Financial performance and condition
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Interest income | $20.1 million | $18.2 million | $57.4 million | $46.7 million |
| Net interest income | $18.5 million | $17.2 million | $53.9 million | $44.0 million |
| Provision for loan losses | $0.5 million | $0.5 million | $1.6 million | $1.6 million |
| Net income | $7.7 million | $4.9 million | $22.9 million | $16.2 million |
| Diluted EPS | $1.36 | $0.85 | $4.03 | $3.09 |
- Revenue and earnings drivers: Non-interest income was $3.9 million in Q3 and $12.7 million year to date, versus $4.0 million and $14.1 million in the comparable 2021 periods. Q3 net income increased mainly from higher net interest income and $2.2 million less merger expense. Year-to-date net interest income growth more than offset lower non-interest income and higher expenses.
- Margins and operating efficiency: Fully taxable-equivalent net interest margin was 3.32% for Q3 (3.22% prior year) and 3.28% year to date (3.23%). The non-GAAP efficiency ratio was 56.38% for Q3 and 56.01% year to date, compared with 69.79% and 62.98%, respectively.
- Balance sheet at September 30: Assets were $2.44 billion, up $16.7 million from year-end 2021. Gross loans were $1.52 billion, up $90.2 million (6%); deposits were $2.25 billion, up $83.4 million (4%). Cash and cash equivalents totaled $134.0 million.
- Securities and equity: Available-for-sale securities were $413.4 million; held-to-maturity securities were $222.4 million at amortized cost, with disclosed fair value of $182.2 million. After-tax accumulated other comprehensive loss was $82.3 million, versus $0.2 million of accumulated other comprehensive income at year-end 2021. Shareholders’ equity fell to $146.5 million from $211.7 million, principally due to securities valuation losses, dividends and share repurchases. Tangible book value per share, a non-GAAP measure, was $22.24 versus $32.57.
- Cash flow and funding: Nine-month operating cash flow was $40.3 million (prior year $13.9 million); investing used $76.9 million and financing provided $73.8 million. Cash increased $37.2 million. Total borrowings were low: $7.7 million secured borrowings and $10,000 short-term borrowings; no FHLB advances were outstanding.
- Credit quality and capital: Allowance for loan losses was $16.8 million, or 1.10% of loans, versus $15.6 million and 1.09% at year-end. Non-performing assets were $4.5 million (0.19% of assets), down from $6.4 million (0.27%). Consolidated total risk-based capital was 14.3%, and Tier 1 leverage was 8.5%.
Material changes, outlook and risks
- Management expected a rising-rate environment and slower net interest income growth for the remainder of 2022. It identified faster deposit-rate increases and resulting funding-cost pressure as a key risk; the company also expected deposit balances to weaken, including the anticipated year-end departure of $38.4 million in deposits from one public customer.
- Management reported approximately $1.1 billion of estimated uninsured deposits and $426.8 million of public deposits. Securities pledged for public and trust deposits totaled $468.4 million, or 74% of securities.
- Interest-rate movements produced substantial unrealized securities losses. The company transferred $245.5 million of securities from available-for-sale to held-to-maturity in Q2 to reduce the effect of future fair-value changes on equity. Management attributed the losses to interest rates, reported no intent to sell loss-position securities, and identified no other-than-temporary impairment at quarter-end.
- Loan balances grew, particularly residential and consumer lending. Non-accrual loans were $3.0 million; management stated its allowance was adequate but noted estimates may change with economic conditions. Net charge-offs were $420,000 year to date, up from $150,000 in the prior-year period.
- The company planned to adopt CECL on January 1, 2023 and expected an allowance change; the amount was not yet clear. It also reported about $46 million in LIBOR-linked loans and was working to modify those contracts.
- Construction and facilities spending included a planned Scranton headquarters project. Management estimated remaining net costs of $15.8 million over approximately two years beginning in Q4 2022; $4.0 million of state redevelopment grants were expected to support the project. A new Wilkes-Barre branch and administrative office was planned for December.
- The board authorized repurchases of up to 3% of outstanding common shares, subject to a $5 million purchase limit or an August 9, 2023 end date. By September 30, 31,839 shares had been repurchased for about $1.2 million.
- Management reported no material change in previously disclosed risk factors, no material pending legal proceedings, and effective disclosure controls. Forward-looking risks include economic conditions, inflation, interest rates, deposit competition, credit losses, cybersecurity, regulation and acquisition integration.
Important facts for investors to verify
- How deposit pricing, public-account volatility and the expected $38.4 million outflow affect funding costs, liquidity and net interest margin.
- The size and timing of the CECL transition adjustment, and the assumptions used for forecasts and qualitative reserves.
- The securities portfolio’s duration, unrealized losses, pledged balance and liquidity implications if rates remain elevated or deposits run off.
- Whether loan growth is sustained without deterioration in delinquency, non-accrual, charge-off or allowance metrics.
- Actual headquarters project costs and timing, and the final availability of expected grant and tax-credit benefits.