Fidelity D & D Bancorp, Inc. — 2020 Form 10-K
Business context and reporting period. This annual report covers the fiscal year ended December 31, 2020. Fidelity D & D Bancorp is a Pennsylvania bank holding company operating The Fidelity Deposit and Discount Bank, serving communities in Lackawanna, Luzerne, and Northampton counties. The May 1, 2020 acquisition of MNB Corporation expanded its footprint into Northampton County and the Lehigh Valley.
Key financial results
Amounts are in millions, except per-share data and ratios. Comparisons are with 2019.
| Metric | 2020 | 2019 |
|---|---|---|
| Total assets | $1,699.5 | $1,009.9 |
| Total deposits | $1,509.5 | $835.7 |
| Net loans and leases | $1,105.5 | $743.7 |
| Net interest income | $44.2 | $31.7 |
| Provision for loan losses | $5.3 | $1.1 |
| Net income | $13.0 | $11.6 |
| Diluted earnings per share | $2.82 | $3.03 |
| Net interest margin (FTE) | 3.30% | 3.52% |
| Return on average assets | 0.87% | 1.18% |
| Return on average equity | 9.06% | 11.49% |
- Revenue and expenses: Interest income was $49.5 million and interest expense $5.3 million. Other income rose 44% to $14.7 million, aided by loan-sale gains, interchange fees, loan service charges, and trust fees. Operating expenses increased 42% to $38.3 million, including $2.5 million in merger-related costs and a $0.5 million FHLB prepayment fee.
- Cash flow: Operating activities provided $0.3 million, compared with $25.8 million in 2019. Cash and cash equivalents increased $53.7 million to $69.3 million, primarily reflecting deposit growth and financing cash flows, partly offset by investment purchases and loan funding.
- Debt and liquidity: Year-end short-term borrowings were zero and FHLB advances were $5.0 million, down from $15.0 million in 2019. Management reported $69.3 million of cash, $422.2 million of available-for-sale securities and loans held for sale, and $806.6 million of stated borrowing capacity across the FHLB, correspondent banks, Federal Reserve, and Promontory program. Management characterized liquidity as strong.
- Capital: Shareholders’ equity was $166.7 million, or 9.8% of assets. The Bank’s total risk-based capital ratio was 16.5%; the filing states the Company and Bank exceeded applicable capital requirements. Book value per share was $33.48.
Material changes versus 2019
- Assets grew 68%, deposits 81%, and net loans and leases 49%, principally due to the MNB acquisition and deposit growth. The company issued approximately 1.18 million shares for the acquisition.
- Net income increased 13%, but diluted EPS fell to $2.82 from $3.03, reflecting a substantially higher weighted-average share count following the acquisition.
- FTE net interest income rose 39% as average earning assets expanded, while net interest margin declined 22 basis points to 3.30% as earning-asset yields fell faster than funding costs.
- The allowance for loan losses rose to $14.2 million from $9.7 million. Provision expense increased to $5.3 million, primarily reflecting pandemic-related uncertainty and higher qualitative risk adjustments.
- Non-performing assets increased to $6.7 million from $5.0 million, although non-performing assets as a percentage of total assets declined to 0.39% from 0.50%, partly because of substantial acquisition-driven asset growth.
Outlook, risks, and unusual items
- Management expects net interest margin to decline in 2021 amid low rates, potentially lower asset yields, and possible deposit inflows from economic impact payments. Management expects PPP loan forgiveness to reduce reported loan balances, while excluding PPP loans it anticipates loan growth funded mainly by deposits.
- The company originated $159.1 million of PPP loans in 2020; $132.1 million remained outstanding at year-end. It recognized $3.3 million of related fee income, with $2.2 million of net unearned fees remaining. Through February 28, 2021, it had originated another $65.9 million of PPP loans.
- COVID-19 is a central credit and operating risk. Management expects non-performing assets relative to assets may increase as pandemic effects emerge. The allowance depends on judgment-sensitive estimates and economic assumptions. Year-end temporary COVID-related loan modifications totaled $2.2 million.
- In February 2021, the company agreed to acquire Landmark Bancorp in a transaction valued at $43.4 million as of February 25, subject to shareholder and regulatory approvals and other conditions. Closing was expected in the third quarter of 2021; management expected $3.7 million of merger-related costs in 2021.
- Other notable items: the company recorded $3.5 million of net gains on residential mortgage sales and approximately $5.6 million of PPP lender fees; it also invested $11.0 million in BOLI during the fourth quarter. Management’s non-GAAP adjusted net income was $15.4 million and adjusted diluted EPS $3.34, excluding merger expenses and the FHLB prepayment fee.
- The independent auditor issued an unqualified opinion on the financial statements. Critical audit matters included allowance qualitative factors and MNB acquired-loan and core-deposit-intangible valuations. The auditor did not express an opinion on internal control; management reported its controls were effective.
Important facts for investors to verify
- Track credit quality and allowance adequacy as pandemic-related borrower stress develops, including commercial real estate exposure, TDRs, and acquired MNB loans.
- Assess whether deposit balances remain elevated and whether margin pressure offsets loan growth and lower funding costs.
- Monitor PPP forgiveness, fee recognition, and the pace and quality of underlying non-PPP loan growth.
- Verify Landmark transaction approvals, final consideration, integration costs, and expected benefits; also assess execution of MNB integration.
- Review capital and liquidity after acquisitions, dividends, investment-security valuation changes, and any increase in credit losses.