FIDELITY D & D BANCORP INC quarterly report, Q1 FY2020

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Fidelity D & D Bancorp, Inc. — Q1 2020 Form 10-Q

Reporting period: Three months ended March 31, 2020; balance-sheet comparisons are with December 31, 2019. The company is a Pennsylvania bank holding company operating Fidelity Deposit and Discount Bank, focused primarily on Northeastern Pennsylvania. Financial statements are unaudited.

Financial results and condition

  • Earnings: Net interest income was $8.0 million, up 1% year over year; provision for loan losses was $0.3 million. Noninterest income rose 12% to $2.8 million, while noninterest expense increased 8% to $7.3 million. Net income declined 6% to $2.6 million; diluted EPS was $0.69 versus $0.73. Adjusted for merger expenses, management reported non-GAAP net income of $2.9 million and diluted EPS of $0.76.
  • Margins and returns: Net interest margin was 3.47%, down from 3.62%; net interest spread was 3.21%, down from 3.33%. The efficiency ratio increased to 66.69% from 64.15%. ROA was 1.04% versus 1.18%, and ROE was 9.74% versus 11.98%.
  • Assets and loans: Total assets increased 5% to $1.062 billion. Gross loans and leases fell 1% to $746.1 million; net loans and leases were $735.1 million. Residential loans grew, while commercial and consumer balances declined.
  • Credit quality: The allowance for loan losses rose to $10.0 million, or 1.34% of loans, from $9.7 million, or 1.29%. Nonperforming assets were $4.8 million, 0.45% of assets, compared with $5.0 million, 0.50%, at year-end. Loans 30–89 days past due increased to $8.3 million from $1.4 million. Management increased qualitative reserve factors for COVID-19 uncertainty; the filing cautions that estimates may change materially.
  • Deposits, debt and liquidity: Deposits grew 10% to $919.7 million, including a $51.9 million increase in noninterest-bearing deposits, primarily seasonal public tax deposits. Short-term borrowings fell from $37.8 million to zero; FHLB advances remained $15.0 million. Cash and cash equivalents were $59.0 million, up from $15.7 million. The company reported $276.6 million of additional FHLB borrowing capacity and total stated liquidity sources of approximately $815 million, or 77% of assets.
  • Cash flow and capital: Operating cash flow was $4.9 million; investing activities used $6.8 million; financing activities provided $45.2 million. Cash increased $43.3 million during the quarter. Shareholders’ equity rose to $112.1 million, including a $3.2 million after-tax increase in unrealized securities gains. The company’s total risk-based capital ratio was 15.8%; management said the company and bank exceeded applicable capital requirements.

Material changes, outlook and risks

  • Management attributed lower earnings mainly to a $0.5 million increase in noninterest expense, partly offset by higher noninterest income and net interest income. Merger-related expense was $0.3 million in Q1; another $1.8 million of merger and integration costs was estimated for the remainder of 2020.
  • COVID-19 disrupted operations and the regional economy. The bank implemented continuity and customer-support measures, including remote work and modified branch access. Through April 17, it had received 1,324 loan-forbearance requests covering $165 million in principal, including $93 million commercial and $72 million consumer. These requests were reported after quarter-end.
  • The MNB Corporation acquisition closed May 1, 2020, after the reporting date. The company issued 1,176,993 shares; management projected the combined organization would have approximately $1.6 billion in assets, $1.4 billion in deposits and $1.1 billion in loans.
  • After quarter-end, the company originated $130 million of PPP loans to 652 borrowers in the initial funding round and another $24 million to 679 borrowers in the subsequent round. Management expected more than $4.0 million of net SBA processing fees, primarily in Q2 and Q3, and anticipated most PPP loans would be repaid before year-end. PPP funding and related deposits are not reflected in March 31 balances.
  • Management expected a declining-rate environment to pressure asset yields and potentially compress margins, while pursuing deposit-cost reductions. It expected residential loan growth and identified MNB loans and PPP fees as potential offsets. COVID-19 duration and severity, borrower repayment capacity, credit losses, market volatility, deposit behavior, interest rates and acquisition integration remain key uncertainties.
  • Management said the allowance was adequate based on information available through filing, but acknowledged that a longer or more severe downturn could require increased provisions. It cited no material securities impairment at March 31 and no material pending litigation. The company deferred CECL adoption under the applicable smaller-reporting-company effective-date deferral.

Investor verification priorities

  1. Track COVID-19-related forbearances, delinquencies, charge-offs and changes to the allowance, particularly given the quarter-end rise in loans 30–89 days past due.
  2. Verify realized PPP fee income, repayment timing, funding and deposit effects, and whether projected fee benefits offset margin pressure.
  3. Review post-close MNB purchase accounting, integration costs, asset quality and realized synergies against the disclosed estimates.
  4. Monitor deposit growth and retention, seasonal public-fund volatility, borrowing capacity and liquidity as pandemic-related balances change.
  5. Compare reported and adjusted earnings, net interest margin, efficiency ratio and capital ratios in subsequent filings; adjusted results exclude merger expenses and are non-GAAP.