Fidelity D & D Bancorp, Inc. — Q3 2021 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2021. The Pennsylvania bank holding company operates The Fidelity Deposit and Discount Bank, serving northeastern and eastern Pennsylvania. Results include Landmark Bancorp from its July 1, 2021 acquisition; comparisons therefore reflect both acquisition effects and underlying performance.
Financial performance and position
| Metric | Q3 2021 / Sept. 30, 2021 | Comparable period / prior date |
|---|---|---|
| Net income | $4.9 million; diluted EPS $0.85 | Q3 2020: $5.0 million; $0.99 |
| Nine-month net income | $16.2 million; diluted EPS $3.09 | 2020: $7.9 million; $1.75 |
| Net interest income | Q3: $17.2 million; nine months: $44.0 million | Q3 2020: $12.5 million; nine months 2020: $31.4 million |
| Net interest margin, FTE | Q3: 3.22%; nine months: 3.23% | Q3 2020: 3.20%; nine months 2020: 3.31% |
| Efficiency ratio, non-GAAP | Q3: 69.79%; nine months: 62.98% | Q3 2020: 55.08%; nine months 2020: 67.04% |
| Total assets | $2.412 billion | $1.700 billion at Dec. 31, 2020 |
| Loans and leases, net | $1.373 billion | $1.105 billion at Dec. 31, 2020 |
| Deposits | $2.163 billion | $1.510 billion at Dec. 31, 2020 |
| Shareholders’ equity | $205.6 million | $166.7 million at Dec. 31, 2020 |
For the first nine months, net cash from operating activities was $13.9 million; investing activities used $241.2 million, principally reflecting securities purchases; financing activities provided $325.3 million, mainly from deposit growth. Cash and cash equivalents ended at $167.4 million, up from $69.3 million at year-end 2020. The company reported $16.9 million in secured borrowings and no FHLB advances at September 30. It reported $452.6 million of additional FHLB borrowing capacity and stated total available liquidity sources were approximately $1.8 billion, or 73% of assets.
Regulatory capital ratios remained above stated minimums: consolidated total risk-based capital was 14.5%, Tier 1 common equity 13.4%, and Tier 1 leverage 7.9%. The allowance for loan losses was $15.6 million, or 1.12% of loans, versus $14.2 million and 1.27% at year-end 2020. Nine-month net charge-offs were $0.15 million; non-performing assets were $6.1 million, or 0.25% of assets.
Changes and drivers
- Landmark added approximately $375.5 million of assets, $298.9 million of loans, and $308.5 million of deposits. The company issued 647,990 shares and paid approximately $7.8 million cash; acquisition goodwill was $12.6 million.
- Q3 net income declined $0.1 million year over year. Higher net interest income and lower loan-loss provision were more than offset by higher expenses, including Landmark-related merger costs, and lower non-interest income.
- Nine-month net income rose $8.4 million year over year, supported by higher revenue and lower loan-loss provision. Provision expense fell to $1.55 million from $3.70 million, which management attributed largely to COVID-related provisioning in 2020.
- Nine-month non-interest income increased 43% to $14.1 million, aided by mortgage-sale gains, interchange fees, and trust and financial-services fees. Non-interest expense increased 33% to $37.5 million, including higher staffing, occupancy, marketing, professional, and merger costs.
- Unrealized gains on available-for-sale securities fell by $11.1 million before tax during the first nine months; after-tax AOCI declined $8.8 million. Management attributed the change primarily to interest-rate movements, not credit deterioration, and reported no other-than-temporary impairment.
Outlook, risks, and unusual items
- Management expected a relatively low-rate environment and warned that net interest margin could compress absent sustained yield-curve steepening. It expected asset growth and investment of low-yielding cash to support interest income, while lower deposit costs could partly offset pressure. No specific earnings or margin guidance was provided.
- The company expected about $0.6 million of additional non-recurring Landmark integration and premises-disposal costs in Q4 2021. It reported $3.1 million of Landmark-related merger expenses for the first nine months.
- Management said pandemic effects on borrowers remained uncertain and could impair repayment capacity. Other highlighted risks include local economic conditions, interest-rate and securities-price changes, deposit outflows, public-deposit seasonality, acquisition integration, competition, credit-loss estimation, and cybersecurity or systems disruptions.
- Interest-rate simulations estimated net interest income declines of 1.5% under an immediate +200-basis-point shock and 3.7% under a -200-basis-point shock. The filing also reported a 32.1% decline in economic value of equity in the -200-basis-point scenario. These are model estimates subject to assumptions, not forecasts.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. It reported no material pending legal proceedings and no material changes to previously disclosed risk factors.
Important facts for investors to verify
- How much of loan, deposit, and earnings growth reflects Landmark rather than organic activity, and how integration costs and anticipated synergies develop.
- Whether deposit balances remain elevated or run off as pandemic-related support and restrictions change, including seasonal public-fund movements and large-depositor concentration.
- Credit quality, the adequacy of the allowance, and borrower performance as pandemic effects evolve; acquired loans were recorded at fair value and had no acquisition-date allowance.
- The sensitivity of net interest income and securities values to rate movements, and the effect of unrealized AFS losses on reported equity.
- Whether mortgage-sale volume, PPP fee recognition, and other non-interest income sources persist; management held more mortgages in Q3 to earn interest income.
- Non-GAAP adjusted earnings exclude merger expenses and FHLB prepayment penalties; compare these measures with GAAP results and review the company’s reconciliations.