FIDELITY D & D BANCORP INC (FDBC) stock intrinsic value fair value estimate & owner earnings analysis

Fidelity D & D Bancorp owns Fidelity Deposit and Discount Bank, a Dunmore, Pennsylvania community bank with about $2.97 billion of assets at June 30, 2026. It takes deposits and makes commercial, real estate and consumer loans in Lackawanna and Luzerne counties and the wider Scranton-Wilkes-Barre-Hazleton and Allentown-Bethlehem-Easton markets. The bank roughly doubled in 2020-2021 by buying MNB Corporation (Merchants Bank of Bangor) and Landmark Community Bank with shares, so we judge its earning power from 2022, the first full year of the combined bank. Earning power. Owner earnings, the cash profit left after the costs of staying in business, were $5.58 per share in 2022, $3.96 in 2023, $3.60 in 2024 and $5.22 in 2025. The swing is the interest-rate cycle: deposit costs caught up with loan yields in 2023-2024 and eased in 2025, when net interest income rose from $61.9 million to $72.7 million. 2022 still carried ultra-low deposit costs that have since reversed, so we set it aside and take the middle of 2023-2025: owner earnings of roughly 1.03% of assets, which on today's larger balance sheet is about $5.20 per share. That is our starting level. Owner earnings grew 45% in 2025, but most of that was the rate squeeze unwinding, so year one of the base case starts flat with 2025 rather than continuing that pace. The first half of 2026 supports the level without lifting it: net income of $15.3 million versus $12.9 million a year earlier and net interest income of $40.2 million versus $35.0 million. Two accounting judgements matter: a $6.5 million loss from selling low-yielding bonds in 2023 was treated as one-time, and about $15.9 million spent in 2025 on a new downtown Scranton headquarters (partly offset by $9 million of state grants, with the old building to be sold) was treated as a one-time project rather than an ongoing cost. Growth has a cost for a bank. Every dollar of new loans needs shareholder capital behind it, so in every case we charge each year's growth with the capital it ties up (about $46 of tangible capital per share today, before unrealized bond losses) and value only the cash left over. After year ten we hold earnings flat, on the strength of a deposit franchise that has operated in the same markets since 1902; we do not assume further growth beyond that point. Base case ($96.41 per share): earnings of $5.20 per share next year, growing 3.5% a year for ten years, below the roughly 4.9% a year the balance sheet grew from 2022 to 2025 on its own retained earnings; about a third of earnings is retained to fund it. We did not credit the unusually fast 2026 loan growth (loans rose from $1.89 billion at year-end to $2.07 billion at June 30, partly funded with $119.8 million of short-term borrowings) because that pace has not been sustained before, and we assumed no acquisitions because none is pending. Bear case ($69.22 per share): a rate squeeze like 2024 returns at once, holding earnings at that year's trough level of about $4.12 per share for two years with no growth. Then a credit downturn hits over years three to five, with loan losses of 0.6%, 1.1% and 0.8% of today's $2.07 billion loan book - about $52 million before tax, or about $6.93 per share after tax. That is deliberately harsher than the bank's own worst recent run of losses (0.56% of loans a year in the early 2010s) because the loan book has just grown quickly and loans made in a burst are untested. In the same stretch the bank sells underwater bonds to meet withdrawals, realizing about $12.6 million, or $2.14 per share. That liquidity risk is real: about 39% of deposits (an estimated $954 million at the end of 2025) were uninsured, largely business and municipal accounts, and the bond portfolio still carried about $37.8 million of after-tax unrealized losses at June 30, 2026. Earnings stay positive every year, so no emergency share issue is needed; they recover only to the 2023 level of about $4.68 per share and grow 1.5% a year. Bull case ($113.50 per share): the bank holds 2025's return on assets, about $5.72 per share next year, and grows 5% a year for ten years, in line with its 2022-2025 pace, retaining the capital that growth needs. Credit stays as clean as it has been (net charge-offs of 0.03% of loans in both 2024 and 2025). We did not credit savings from the new headquarters or a return to 2022 deposit costs, since neither can be measured from the filings. What it is worth and what it owes. For a bank, deposits and borrowings are the material it lends out and their interest is already inside owner earnings, so nothing is subtracted again. There is no holding-company debt or preferred stock ahead of the common: bear worth $69.22 per share, owes $0 ahead of shareholders, value $69.22; base $96.41, $0, $96.41; bull $113.50, $0, $113.50. All on about 5.89 million diluted shares. Tangible book value is about $40 per share, so even the bear case values the deposit franchise well above its capital, because in that case the bank still earns more than its funding costs every year. Compared with our last look, the base value is essentially unchanged ($96.49 then, $96.41 now); the bear value is a little lower because we now size a heavier credit loss on the fast-grown 2026 loan book; and the bull value is higher because it now starts from the earnings the bank actually produced in 2025. Margin-of-safety price. We are fairly confident of the earnings level: four years of the combined bank bracket it, and the middle of the rate cycle sits close to what the first half of 2026 is producing. The worst plausible event is a deposit run like 2023's forcing large bond sales at the same time as losses surface in the newly grown loan book; the bank's 120-year local deposit base, absence of holding-company debt and clean credit record suggest it would survive that, but shareholders would lose several years of earnings. If we are wrong about the earning level (the 2024 trough is the real norm) and about credit, the shares are worth roughly the bear case's $69. The bank pays about $1.72 a share a year in dividends during the holding period. From $52, with those dividends over a five-year holding period, the base case implies about 20.5% a year (about 24% a year over four), and the bear case implies around 12% a year, so in a bad outcome the shortfall is in return rather than capital. The margin-of-safety price is $52. Our previous margin-of-safety price was set higher; on our own base case it did not reach a 20% annual return over a five-year holding period, so it has been lowered.