Fidelity D & D Bancorp, Inc. — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020; balance sheet comparisons are with December 31, 2019. Unless noted otherwise, amounts are in millions of dollars. The company is a Pennsylvania bank holding company. It completed its acquisition of MNB Corporation on May 1, 2020, expanding its presence into Northampton County and the Lehigh Valley.
Financial performance
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Net interest income | $12.5 | $8.0 | $31.4 | $23.7 |
| Provision for loan losses | $1.5 | $0.3 | $3.7 | $0.8 |
| Other income | $4.4 | $2.6 | $9.8 | $7.6 |
| Other expenses | $9.5 | $6.6 | $28.1 | $19.8 |
| Net income | $5.0 | $3.1 | $7.9 | $8.9 |
| Diluted EPS | $0.99 | $0.80 | $1.75 | $2.32 |
| Net interest margin, FTE | 3.20% | 3.49% | 3.31% | 3.55% |
| Efficiency ratio, non-GAAP | 55.08% | 61.41% | 67.04% | 62.34% |
Third-quarter net income rose 63%, supported by higher net interest income and other income, partly offset by increased expenses and credit-loss provision. Nine-month net income declined about 11%, as higher expenses and provisions more than offset revenue growth. Management reported nine-month adjusted net income of $10.3 million and adjusted diluted EPS of $2.29, excluding merger-related expenses and an FHLB prepayment penalty; these are non-GAAP measures.
Financial position, cash flow and capital
- Assets: $1,711.0 at September 30, up 69% from $1,009.9 at year-end 2019. Net loans and leases were $1,124.8; available-for-sale securities were $340.3; cash and cash equivalents were $131.8.
- Deposits and borrowings: Deposits grew 82% to $1,517.1, including $408.8 of non-interest-bearing deposits. Short-term borrowings were zero versus $37.8 at year-end; FHLB advances were $5.0 versus $15.0.
- Equity and regulatory capital: Shareholders’ equity rose 51% to $161.6, including $45.4 of stock issued for the MNB acquisition. Consolidated total risk-based capital was 16.4%; Tier 1 common equity was 15.1%. The company and bank exceeded applicable capital requirements.
- Cash flow, nine months: Operating activities provided $8.1; investing activities used $118.6; financing activities provided $226.6. Cash increased $116.1 to $131.8. Financing included $152.8 of PPPLF proceeds and an equal repayment.
- Liquidity: Management reported $131.8 of cash and approximately $353.6 of available-for-sale securities and loans held for sale. Additional disclosed borrowing capacity included $421.1 from the FHLB, $31.0 from correspondent banks, $89.5 from the Federal Reserve and $267.4 through the Promontory program. Management characterized liquidity as strong and adequate.
Material changes and operating developments
- The MNB acquisition contributed approximately $224 million of acquired loans and $395.6 million of deposits; the company issued 1,176,970 shares valued at $45.4 million. Acquisition accounting and fair-value estimates remained preliminary and subject to refinement.
- Total loans and leases increased 51% to $1,138.8, mainly reflecting MNB loans and $159.1 of PPP originations. Excluding acquired and PPP loans, management said the loan portfolio was approximately unchanged from year-end.
- The company originated 1,551 PPP loans and received approximately $5.6 million in fees; $3.5 million of net fees remained unearned at quarter-end. PPP loans carry a 100% SBA guarantee, subject to program requirements.
- Loan-loss allowance rose to $12.9 from $9.7, while the allowance-to-loans ratio decreased to 1.13% from 1.29%, partly because acquired loans and guaranteed PPP loans increased the loan base. Nine-month net charge-offs were $0.6.
- Non-performing assets were $7.0, up from $5.0 at year-end, but represented 0.41% of total assets versus 0.50%. Non-accrual loans were $3.9; accruing troubled debt restructurings were $2.6.
- COVID-related temporary modifications had fallen to 212 loans totaling $25.1 at September 30, down 88% from $201.8 at June 30. Of the quarter-end total, $11.8 related to second requests for forbearance.
- Mortgage activity increased: nine-month residential mortgage sales totaled $106.5, generating $2.0 in gains, compared with $36.5 in sales and $0.6 in gains a year earlier.
Outlook, commentary and risks
- No formal earnings or financial guidance was provided. Management expected a low-rate environment for the remainder of 2020, with potential further margin pressure; it planned to manage deposit costs, grow lending and low-cost deposits, and recognize remaining PPP fees over future quarters.
- Management expected continued residential loan growth, but said COVID-19’s effects on borrower repayment capacity and local economic conditions remained uncertain. It indicated that worsening economic impacts could require further loan-loss provisioning.
- Management cited elevated unemployment, business restrictions, possible recession, and concentrated lending exposure in Northeastern and Eastern Pennsylvania. It also identified interest-rate and securities valuation risk, acquisition integration risk, and risks from deposit volatility and seasonal public funds.
- The filing highlights potential PPP-related litigation and the risk that the SBA could deny or recover a guarantee if it finds deficiencies in origination, underwriting, borrower certification, funding or servicing.
- Unusual or non-recurring items included $2.4 of nine-month merger-related costs and a $0.5 FHLB prepayment penalty. Management also reported about $0.2 of pandemic-response expenses during the first nine months.
Key facts for investors to verify
- Whether acquired-loan fair values and related credit-loss estimates are refined, and how reserves develop on acquired loans; the company had not recorded an allowance on acquired non-PCI loans at quarter-end.
- Whether credit quality, forbearance requests and borrower performance change as COVID-19 relief and temporary modifications expire.
- PPP forgiveness progress, recognition of remaining fees, and any SBA guarantee or compliance issues.
- Post-acquisition integration costs, realized operating benefits and deposit retention, especially the durability of acquired and pandemic-related deposit growth.
- Margin trends, deposit repricing, seasonal public-deposit outflows, and sensitivity to interest-rate and securities-value changes.