Executive Summary / Key Takeaways

• Fidelity D & D Bancorp (NASDAQ:FDBC) demonstrates robust financial performance, with net income surging 35% year-to-date through Q3 2025, driven by strong net interest income growth and improved asset quality.
• The company's core investment thesis is anchored in its community-centric banking model, disciplined loan portfolio management, and strategic focus on relationship-driven deposits, which collectively enhance profitability and asset quality.
• FDBC is actively investing in its physical and digital infrastructure, including a new corporate headquarters, to support long-term operational efficiency and deliver innovative financial solutions, reinforcing its competitive position.
• Despite a moderately declining interest rate environment and intense competition from larger regional banks and fintechs, FDBC maintains a clear strategy for margin enhancement and loan growth, supported by prudent liquidity and capital management.
• Key risks include sensitivity to interest rate fluctuations, potential impacts from evolving trade policies on its local customer base, and the ongoing need for technological adaptation to maintain competitiveness.

A Community Bank's Enduring Foundation and Strategic Evolution

Fidelity D & D Bancorp, Inc. stands as a testament to enduring community banking, with its roots tracing back to its founding in 1902 and the commencement of operations in 1903. Headquartered in Dunmore, Pennsylvania, the company's wholly-owned subsidiary, The Fidelity Deposit and Discount Bank, has historically served as a trusted financial advisor, offering a comprehensive suite of banking, trust, and financial services to consumers and businesses across Lackawanna, Northampton, and Luzerne Counties. This deep-seated community presence has been a cornerstone of its operational philosophy, fostering strong local relationships that differentiate it in a competitive landscape.

The company's journey has been marked by strategic expansion, notably through acquisitions that have broadened its market footprint and diversified its asset base. Significant reorganizations with Merchants Bank of Bangor in December 2019 and Landmark Community Bank in February 2021 underscore a deliberate strategy to enhance shareholder value by optimizing its franchise footprint, which currently spans 21 full-service branches across Lackawanna, Luzerne, Lehigh, and Northampton Counties, alongside specialized wealth management offices. This expansion has been coupled with a consistent focus on growing core retail and business lending and deposit gathering, while rigorously maintaining asset quality and controlling operating expenses.

In the broader financial services industry, FDBC operates amidst formidable competition. Larger regional banks like PNC Financial Services Group (PNC), Citizens Financial Group (CFG), and KeyCorp (KEY) leverage their scale, extensive resources, and advanced digital capabilities to offer a wide array of products and services. These larger players often boast faster processing for online transactions and broader product accessibility. Simultaneously, the rise of fintech companies, such as PayPal (PYPL) or Square (now Block) (SQ), and online banks like Ally Financial (ALLY), presents indirect competition by offering accessible, often cheaper, digital-first financial solutions. FDBC's strategic response emphasizes its personalized, relationship-based banking model, which cultivates greater customer loyalty in its core regions, particularly among small businesses and individuals who prioritize local expertise over the scale-driven efficiency of larger institutions.

Technological Edge and Operational Innovation

Fidelity D & D Bancorp recognizes the imperative of technological advancement in modern banking. The company provides a robust digital banking experience, including online banking, a mobile banking app, and a Client Care Center. These offerings are designed to meet evolving customer expectations for convenience and accessibility, ensuring that FDBC remains competitive against digitally native financial service providers. The benefits of this technology are tangible: it enhances the customer experience by providing seamless access to banking services and contributes to operational efficiency by streamlining internal processes.

Beyond digital platforms, FDBC is making substantial investments in its physical infrastructure to support long-term operational capabilities. The ongoing construction of its new corporate headquarters in downtown Scranton, involving the renovation and rehabilitation of the historic Scranton Electric Building, is a significant undertaking. As of September 30, 2025, the company had incurred $16.6 million in costs for this project, which is expected to be completed by mid-2026. This initiative includes an estimated $0.6 million for technology equipment and infrastructure, alongside $2 million for furniture and office equipment. The project has also secured $8 million in Redevelopment Assistance Capital Program (RACP) grant funding and is estimated to qualify for $3.4 million in state and federal historic tax credits, partially offsetting the total construction costs, which could range from an additional $12 million to $14 million. This investment in a modern, technologically equipped headquarters underscores FDBC's commitment to providing an advanced work environment for its employees and a solid operational foundation for future growth.

For investors, these technological and infrastructure investments are critical. They contribute to FDBC's competitive moat by enabling the company to offer services that align with contemporary banking trends while reinforcing its community presence. The enhanced operational efficiency and capacity for innovation, supported by these upgrades, are expected to translate into improved financial performance through potentially lower operating costs and a stronger ability to attract and retain customers who value both personalized service and modern banking tools.

Financial Performance: Resilience and Growth in a Shifting Landscape

Fidelity D & D Bancorp has delivered a compelling financial performance, reflecting its disciplined approach to growth and balance sheet management. For the nine months ended September 30, 2025, net income surged to $20.3 million, a substantial 35% increase compared to $15 million in the prior year. Diluted earnings per share followed suit, reaching $3.50 for the nine-month period and $1.27 for the third quarter of 2025, up from $2.59 and $0.86, respectively, in 2024. This robust profitability was primarily driven by a $7.9 million increase in net interest income and a $1.3 million rise in non-interest income.

Net interest income (NII) for the third quarter of 2025 grew by 19% to $18.4 million, while the nine-month period saw NII increase by $7.9 million. This expansion was largely attributable to a $3.4 million increase in interest income, stemming from a $196.9 million higher average balance of interest-earning assets and a 15 basis point increase in the fully tax-equivalent (FTE) yield. The loan portfolio was a significant contributor, generating an additional $2.6 million in interest income from $129.2 million in higher quarterly average balances and a 17 basis point increase in FTE loan yield. The company's FTE net interest margin improved to 2.95% for the third quarter of 2025, up from 2.70% in the prior year, primarily due to growth in higher-yielding taxable commercial loans.

Non-interest income also showed positive trends, increasing by $0.1 million (3%) to $5.1 million in the third quarter of 2025, and by $1.2 million (9%) to $15.4 million for the nine-month period. This growth was fueled by higher trust fees and interchange fees, alongside a $0.2 million gain from a Bank-Owned Life Insurance (BOLI) death benefit. Operating expenses, while increasing by $0.8 million (6%) in Q3 2025 and $2.8 million (7%) for the nine-month period, were managed effectively, with the efficiency ratio (non-GAAP) improving to 61% from 66.44% in the prior year, reflecting the leverage gained from increasing net interest income.

Asset quality remained strong, with the provision for credit losses on loans and unfunded commitments decreasing for both the three and nine months ended September 30, 2025, a testament to improved asset quality and a significant 61% decline in non-performing assets to just 0.11% of total assets. The Allowance for Credit Losses (ACL) increased by $0.5 million (3%) to $20.2 million, reflecting prudent provisioning in line with loan portfolio growth and evolving economic forecasts. The balance sheet expanded, with total assets rising by $152.1 million to $2.7 billion, driven by $113.5 million growth in the loans and leases portfolio and a $126.1 million increase in deposits. Shareholders' equity strengthened by $25.3 million (12%) to $229.2 million, supported by retained earnings and an $11 million after-tax improvement in Accumulated Other Comprehensive Income (AOCI). The tangible common equity (TCE) ratio stood at 7.69%, further underscoring the bank's solid capital position, which comfortably exceeds all regulatory requirements.

Strategic Initiatives and Competitive Dynamics

FDBC's strategic initiatives are deeply intertwined with its community banking ethos and its commitment to disciplined growth. The company's loan portfolio strategy prioritizes areas offering better risk-adjusted returns and opportunities to deepen customer relationships. This is evident in the $130 million increase in its commercial portfolio and a $4.8 million rise in the residential portfolio, while strategically reducing its indirect auto portfolio by $32 million. This targeted approach allows FDBC to allocate capital efficiently and focus on segments where its relationship-based model provides a distinct advantage.

On the funding side, FDBC's deposit strategy centers on attracting and retaining relationship-driven core deposits. The company's success is highlighted by an 87% retention rate for maturing Certificates of Deposit (CDs) for the nine months ended September 30, 2025, achieved through competitive rate offers and personalized relationship pricing. The growth in money market accounts ($95.3 million increase) and time deposits ($16.5 million increase) further demonstrates the effectiveness of this strategy. FDBC also leverages reciprocal programs like CDARS and ICS to provide FDIC insurance protection for clients with large deposits, a key offering in a competitive deposit-gathering environment.

The company's commitment to robust risk management is reinforced by the recent appointment of Charles Hangen as Senior Vice President and Chief Risk Officer in November 2025. This strategic hire emphasizes safeguarding the bank's integrity and proactively addressing competitive, regulatory, and technological risks, which is crucial for navigating the complexities of the financial sector.

In the competitive arena, FDBC's strengths lie in its strong community presence, personalized service, and deep local market penetration. These attributes foster customer loyalty and can lead to more stable deposit bases and lending relationships, potentially resulting in superior margins in niche segments. However, its smaller scale compared to major regional players like PNC, Citizens, and KeyCorp presents certain vulnerabilities, including potentially higher operating costs per customer and slower innovation cycles. While FDBC's digital banking offerings are a strategic response to the rise of fintechs, continuous investment is necessary to match the efficiency and breadth of services offered by these digital-first competitors. The regulatory landscape, with its inherent barriers to entry, provides a degree of protection for FDBC but also favors larger institutions that can more easily absorb compliance costs and leverage scale for resource allocation.

Outlook and Risks: Navigating Future Currents

Fidelity D & D Bancorp anticipates operating in a moderately declining interest rate environment for the remainder of 2025, with the Federal Open Market Committee (FOMC) forecasting one more 25 basis point decrease in the federal funds rate by December 2025, and an additional 50 basis points in rate cuts by the end of 2026. This outlook informs the company's strategy to enhance margins by reallocating cash flow to higher-yielding assets, proactive loan pricing, and diligent management of deposit costs. Loan growth is expected to continue, funded by excess cash holdings and, if necessary, strategic borrowings. Management also expects home prices to stabilize in this declining rate environment.

The company faces several pertinent risks. Interest rate sensitivity remains a key concern, as FDBC maintains a negative liability-sensitive one-year cumulative gap of -$25 million, or -0.90% of total assets. While a declining rate environment could positively impact net interest income, rising rates could pose challenges. Management is actively evaluating balance sheet hedging opportunities to mitigate these risks. Furthermore, changes in trade policies and tariffs represent a newly emphasized risk factor, potentially impacting local businesses and, consequently, loan delinquencies and credit losses. The seasonal volatility of public deposits also requires careful liquidity management, though FDBC's strong liquidity position, with $1.8 billion in available borrowing capacity, provides a substantial buffer.

In conclusion, Fidelity D & D Bancorp presents a compelling investment thesis rooted in its community-focused model and disciplined financial management. The company's recent financial performance, marked by significant net income growth and improved asset quality, underscores its operational effectiveness. Strategic investments in technology and infrastructure, coupled with a proactive approach to risk management, position FDBC to adapt to evolving market dynamics. While challenges from a competitive landscape and interest rate fluctuations persist, FDBC's commitment to its core strategy, supported by its strong capital base and local market expertise, suggests a resilient path toward sustained shareholder value creation.