Fidelity D & D Bancorp, Inc. — 2021 Form 10-K
Reporting period: Fiscal year ended December 31, 2021; comparisons are primarily with 2020. The company is a Pennsylvania bank holding company operating through The Fidelity Deposit and Discount Bank, with 23 branches. It completed its acquisition of Landmark Bancorp on July 1, 2021; the acquired operations contributed to year-end balance-sheet growth and results from the acquisition date.
Financial performance and condition
| Metric | 2021 | 2020 |
|---|---|---|
| Net income | $24.0 million | $13.0 million |
| Diluted earnings per share | $4.48 | $2.82 |
| Net interest income (GAAP) | $61.8 million | $44.2 million |
| Net interest income (FTE, non-GAAP) | $64.0 million | $45.3 million |
| Net interest margin (FTE) | 3.23% | 3.30% |
| Net interest spread (FTE) | 3.16% | 3.16% |
| Non-interest income | $18.3 million | $14.7 million |
| Non-interest expense | $50.1 million | $38.3 million |
| Provision for loan losses | $2.0 million | $5.3 million |
| Return on average assets / equity | 1.13% / 12.69% | 0.87% / 9.06% |
Net income rose 84%. Higher net interest income, non-interest income and lower loan-loss provision more than offset higher operating expenses and taxes. The 2021 results included $3.0 million of Landmark merger costs and a $369,000 FHLB prepayment penalty. Excluding those items, management reported adjusted net income of $26.8 million and adjusted diluted EPS of $5.00 (non-GAAP). PPP fees contributed $5.4 million of income in 2021.
- Assets: $2.42 billion, up 42%; loans and leases, net, $1.42 billion, up from $1.11 billion; available-for-sale securities, $739.0 million, up from $392.4 million.
- Funding and debt: Deposits were $2.17 billion, up 44%. There were no year-end short-term borrowings or FHLB advances; secured borrowings were $10.6 million. Management did not expect short-term or FHLB borrowings in 2022.
- Credit quality: Allowance for loan losses was $15.6 million, or 1.09% of loans, versus $14.2 million, or 1.27%, in 2020. Net charge-offs were $578,000. Non-performing assets were $6.4 million, or 0.27% of assets, versus $6.7 million, or 0.39%.
- Liquidity and capital: Cash and cash equivalents were $96.9 million. Management reported $1.92 billion of cash, securities, loans held for sale and available borrowing capacity—79% of assets—and described liquidity as strong. Consolidated total risk-based capital was 14.5%; shareholders’ equity was $211.7 million.
- Cash flow: Operating activities provided $7.2 million, investing activities used $303.2 million, and financing activities provided $323.6 million. Cash increased $27.5 million to $96.9 million.
Material changes and outlook
The Landmark acquisition expanded the company’s footprint in Northeastern Pennsylvania and added $298.9 million of loans and $308.5 million of deposits at acquisition; goodwill recorded was $12.6 million. Total shareholders’ equity increased 27%, including $35.1 million of stock issued for the merger. Deposit growth and acquisition-related additions funded loan and securities growth. The investment portfolio’s after-tax unrealized gain position fell by $8.8 million during 2021 as interest rates rose; management attributed the decline to rate movements and reported no other-than-temporary impairment charge.
Management expected loan and deposit growth in 2022 and anticipated that rising rates could support net interest income. It also cautioned that deposit costs may rise and stated that net interest margin was expected to decline. The filing’s outlook thus distinguishes anticipated net interest income improvement from expected margin compression. Management expected 2022 loan-loss provision to approximate the 2021 amount, subject to lending activity and credit conditions.
Risks, contingencies and unusual items
- Key risks include local economic and real-estate conditions, borrower repayment capacity, inflation, interest-rate movements, deposit competition, cybersecurity, technology, regulatory change and the effects of COVID-19.
- Interest-rate simulations estimated net interest income would change by -1.8% under an immediate 200-basis-point increase and -4.2% under a 200-basis-point decrease; the modeled economic value of equity fell 33.6% in the -200-basis-point scenario.
- Management identified allowance estimation and valuation of acquired loans as critical audit matters. The auditor issued an unmodified opinion on the financial statements; the auditor did not express an opinion on internal-control effectiveness. Management reported effective internal controls.
- The company had no COVID-related loan modifications outstanding at year-end. PPP-related litigation and SBA-guarantee risks were disclosed; the filing reported no material pending legal proceedings.
- The company expected CECL adoption on January 1, 2023 and was evaluating its effect; the eventual allowance impact was not yet clear. It also had approximately $43 million of LIBOR-linked loans and planned to modify the contracts by December 31, 2022.
Most important facts for investors to verify
- Whether Landmark integration delivers expected cost savings and revenue growth, and how acquisition accounting adjustments develop.
- Whether loan and deposit growth, funding costs and interest-rate movements produce the anticipated net interest income and margin outcomes.
- Whether credit quality and the allowance remain adequate as PPP balances run off and local economic conditions evolve.
- The effect of CECL adoption on reserves, earnings and regulatory capital, and the sensitivity of securities values to further rate increases.
- How much of reported earnings growth is sustainable after merger costs, PPP-related fees and other nonrecurring items.