Fidelity D & D Bancorp, Inc. — Q2 2021 Form 10-Q
Business context and period: Pennsylvania-based bank holding company operating The Fidelity Deposit and Discount Bank. This unaudited report covers the quarter and six months ended June 30, 2021, compared with the corresponding 2020 periods; balance-sheet comparisons are with December 31, 2020. The Landmark Bancorp acquisition closed July 1, 2021, after quarter-end.
Financial results and position
| Metric | Q2 2021 | Six months 2021 | Comparable 2020 |
|---|---|---|---|
| Net interest income | $13.3 million | $26.8 million | $10.8 million Q2; $18.8 million first half |
| Net income | $5.7 million | $11.4 million | $0.3 million Q2; $2.9 million first half |
| Diluted EPS | $1.13 | $2.26 | $0.05 Q2; $0.68 first half |
| Net interest margin, FTE | 3.10% | 3.24% | 3.34% Q2; 3.39% first half |
| Efficiency ratio, non-GAAP | 59.01% | 59.06% | 82.29% Q2; 75.37% first half |
At June 30, total assets were $1.95 billion, loans and leases net of allowance were $1.11 billion, deposits were $1.76 billion, and shareholders’ equity was $172.2 million. Cash and cash equivalents totaled $170.1 million. The company had no FHLB advances or short-term borrowings outstanding; reported additional borrowing capacity included $431.4 million from the FHLB. The allowance for loan losses was $15.2 million, or 1.35% of total loans.
First-half operating cash flow was $41.4 million; investing activities used $181.0 million and financing activities provided $240.4 million. Cash increased $100.7 million to $170.1 million. Regulatory capital ratios remained above stated minimum requirements; consolidated total risk-based capital was 16.3%.
Material changes versus comparable periods
- Q2 net income rose $5.4 million year over year, reflecting higher net interest income and other income and a $1.6 million lower loan-loss provision. First-half net income increased $8.5 million.
- First-half net interest income increased $7.9 million, supported by growth in average earning assets and lower funding costs; lower asset yields compressed margin.
- First-half other income rose to $10.1 million from $5.5 million, including $3.5 million in gains on loan sales versus $0.7 million a year earlier. Q2 loan-sale gains were $1.1 million.
- First-half non-interest expense increased 20% to $22.3 million, mainly due to personnel, premises, professional services and marketing costs. Merger expenses and an FHLB prepayment fee affected comparability.
- Assets grew 15% from year-end, primarily from deposit growth and purchases of securities. Deposits rose 16%; loans and leases increased about 1%. The AFS securities portfolio grew to $555.0 million, while its net unrealized gain declined to $6.7 million before tax.
- Non-performing assets were $6.0 million, or 0.31% of assets, compared with $6.7 million and 0.39% at year-end. Non-accrual loans declined to $3.2 million.
Outlook, commentary and risks
Management expected a relatively low, flat rate environment for the remainder of 2021, with potential margin compression until sustained yield-curve steepening. Its stated priorities included controlling loan and deposit pricing, growing loans and low-cost deposits, and investing excess cash in securities. Management expected the Landmark acquisition to contribute to asset and interest-income growth. It anticipated $2.4 million of additional Landmark-related merger and integration costs in the second half of 2021; total 2021 non-recurring costs were estimated at $3.4 million, including $0.9 million incurred in the first half.
The July 1 Landmark transaction involved issuing 647,990 shares and paying $7.8 million in cash. Management reported that the combined organization would have approximately $2.3 billion in assets, $2.1 billion in deposits and $1.4 billion in loans; purchase accounting was still being assessed at the filing date.
Management cited continuing uncertainty from COVID-19 and its possible effect on borrowers, loan demand and credit losses. It also identified interest-rate and securities-value risk, deposit volatility (including public deposits and pandemic-related balances), acquisition integration, competition, regulatory changes and technology or cybersecurity risks. Management considered the allowance adequate, but acknowledged estimation uncertainty. The filing reported no material pending legal proceedings and no material change to previously disclosed risk factors.
Important facts for investors to verify
- How much earnings growth is sustainable after separating core results from loan-sale gains, PPP fee recognition, purchase-accounting effects and merger-related items.
- Landmark’s final acquired asset and liability values, integration costs, and post-close contribution to earnings, capital and credit quality.
- Whether loan performance and the $15.2 million allowance remain adequate as pandemic-related effects and commercial delinquencies evolve.
- Exposure to deposit outflows and seasonal public-fund movements, and the effect of reinvesting excess cash on margins.
- Interest-rate sensitivity and potential AOCI or capital effects from changes in the fair value of the securities portfolio.