FDBC

Business Context and Reporting Period

Fidelity D & D Bancorp, Inc. (FDBC) is a Pennsylvania-based bank holding company and parent of The Fidelity Deposit and Discount Bank. The company operates as a community bank with 21 branches primarily in Lackawanna, Northampton, and Luzerne Counties. This Form 10-Q covers the quarterly period ended June 30, 2025.

Key Financial Metrics

Key Ratios (YTD 2025):

• Return on Average Assets (ROA): 0.98%
• Return on Average Equity (ROE): 12.35%
• Efficiency Ratio (Non-GAAP): 61.42%
• Net Interest Margin (FTE): 2.91%

Material Changes vs. Prior Period

• Profitability Surge: Net income increased 40% quarter-over-quarter and 29% year-over-year, driven primarily by a $2.8 million increase in net interest income and a $0.8 million increase in non-interest income.
• Asset Growth: Total assets grew $114 million to $2.70 billion, fueled by an $82 million increase in cash and cash equivalents and a $38 million increase in the loan portfolio.
• Deposit Expansion: Total deposits increased $94.5 million, with significant growth in money market accounts ($37.2 million) and non-interest-bearing checking ($24.1 million).
• Loan Portfolio Shift: The commercial portfolio grew $48.5 million, while the consumer portfolio decreased $14.2 million due to a strategic reduction in the indirect auto loan portfolio.
• Asset Quality Improvement: Non-performing assets declined 55% to $3.5 million, largely due to the sale of a $1.3 million commercial loan and paydowns in the commercial and industrial portfolio.

Guidance, Outlook, and Risks

Management Outlook: Management expects to operate in a moderately declining interest rate environment for the remainder of 2025, anticipating two 25 basis point rate cuts in the second half of the year. The company plans to fund loan growth using excess cash holdings and will borrow only if cash is depleted and deposit growth is insufficient.

Strategic Initiatives: The company is focusing on reallocating cash flow to higher-yielding assets, proactive loan pricing, and managing deposit costs to maintain spreads. A major corporate headquarters construction project in Scranton is underway, with completion expected in mid-2026.

Risks and Contingencies:

• Interest Rate Risk: The company maintains an asset-sensitive position (positive gap), which exposes it to risk in falling rate environments. Management is evaluating balance sheet hedging opportunities.
• Trade Policy: New risk factors include potential adverse impacts from tariffs and trade wars, which could affect local businesses in agriculture, manufacturing, and retail.
• Investment Portfolio: The company holds significant unrealized losses on available-for-sale securities ($47.8 million) and held-to-maturity securities ($31.1 million), though management attributes these to interest rate changes rather than credit quality.

Investor Verification Checklist

• Loan Concentration: Verify the impact of the $48.5 million commercial loan growth on credit quality, specifically within the non-owner occupied CRE segment.
• Unrealized Losses: Review the $50.7 million net unrealized loss in accumulated other comprehensive income (AOCI) and its potential impact on tangible common equity if securities are sold.
• Construction Project: Monitor the $11.3 million incurred to date for the new headquarters against the estimated total cost range of $28.6 million to $30.6 million.
• Deposit Stability: Assess the sustainability of the $94.5 million deposit growth, particularly the reliance on money market and non-interest-bearing accounts.
• Consumer Portfolio Strategy: Confirm the execution of the strategic reduction in the auto loan portfolio and the associated impact on fee income.