FIDELITY D & D BANCORP INC

Fidelity expects to incur costs associated with combining the operations of the two companies. Fidelity is formulating detailed integration plans to deliver planned synergies. Additional unanticipated costs may be incurred in the integration of the businesses of Fidelity and MNB. Whether or not the merger is consummated, Fidelity will incur substantial expenses, such as legal, accounting, printing, contract termination fees, and financial advisory fees, in pursuing the merger. Although Fidelity expects that the elimination of duplicative costs, as well as the realization of other efficiencies related to the integration of the businesses, may offset incremental transaction and merger-related costs over time, the net benefit may not be achieved in the near term, or at all.

The success of the merger will depend, in part, on Fidelity’s ability to realize the estimated cost savings from combining the businesses of Fidelity and MNB. While Fidelity believes that the cost savings estimates are achievable, it is possible that the potential cost savings could be more difficult to achieve than Fidelity anticipates. Fidelity’s cost savings estimates also depend on its ability to combine the businesses of Fidelity and MNB in a manner that permits those cost savings to be realized. If Fidelity’s estimates are incorrect or it is unable to combine the two companies successfully, the anticipated cost savings may not be realized fully or at all or may take longer to realize than expected.

We generated $11.6 million in net income in 2019, up $0.6 million, or 5%, from $11.0 million in 2018.  In 2019, our larger and well diversified balance sheet contributed to the success of our earnings performance.  Excluding the $0.4 million in merger-related acquisition expenses incurred in conjunction with the acquisition of MNB Corporation and Merchants Bank of Bangor as well as the corresponding tax impact at the marginal tax rate, adjusted net income (non-GAAP) for the year ended December 31, 2019, would have been $12.0 million, or $3.14 diluted earnings per share, respectively, which represents an increase of 9% compared to the year ended December 31, 2018.  The 2020 focus is to manage net interest income through a declining rate cycle by managing interest expense to maintain a reasonable spread.  Federal Open Market Committee (FOMC) officials began increasing interest rates at the end of 2015 in an attempt to return to a “normal” stance.  After over three years of operating in a rising rate cycle, the FOMC dropped rates in July, September and October 2019 and again in March 2020 in an attempt to prevent a weakening in the economy.  The pressure on deposit costs in the rising rate environment is still being felt as deposit pricing has lagged the recent rate cuts.  From a financial condition and performance perspective, our mission for 2020 will be to continue to strengthen our capital position from strategic growth oriented objectives, implement creative marketing and revenue enhancing strategies, grow and cultivate more of our wealth management and business services and to manage credit risk at tolerable levels thereby maintaining overall asset quality. 

portfolios: commercial & industrial, owner occupied commercial real estate, non-owner occupied commercial real estate, commercial construction, residential real estate, HELOC, consumer auto, and consumer other.  Estimated credit losses are anticipated to decline for commercial and residential real estate secured loans as lower interest rates improve real estate valuations due to the inverse relationship between capitalization rates and the market values of real estate.  Lower rates also reduce debt service requirements for variable rate loans in all portfolios, which is particularly impactful for the commercial construction, HELOC, and consumer other portfolios due to the high concentration of variable rate loans within these portfolios.  Portfolios with a high concentration of fixed rate loans, such as residential real estate and consumer auto, are also likely to observe a positive change in estimated credit losses as new customers lock in lower rates than existing customers.

In December 2019, the Company announced an agreement and plan of reorganization to acquire MNB Corporation (“MNB”) in a transaction valued on December 6, 2019 at $78.5 million.  Under the terms of the agreement, MNB shareholders will receive as consideration 1.039 shares of Fidelity common stock for each share of MNB common stock that they own as of the closing date.  MNB is the holding company of Merchants Bank of Bangor (“Merchants Bank”) which operates 9 retail community banking offices in Northeastern and Eastern Pennsylvania.  Subject to the terms and conditions of the agreement, MNB will merge with and into the Company and Merchants Bank will merger with and into the Bank.  The merger which is subject to shareholder approval of the Company, MNB shareholder approval, regulatory approvals and other customary closing conditions, is currently expected to close in the second quarter of 2020.  In 2019, the Corporation incurred merger-related expenses totaling $440 thousand related to the planned acquisition of  MNB Corporation.  Non-recurring costs to facilitate the anticipated merger and integrate systems in 2020 are currently estimated to be $2.4 million.