Note 10 - Derivative Instruments

9 Months Ended

Sep. 30, 2025

Derivative Instruments and Hedging Activities Disclosure [Text Block]

10. Derivative Instruments

The Company is exposed to certain risks relating to its ongoing business operations and economic conditions. The Company uses derivative financial instruments primarily to manage risks to the Company associated with changing interest rates and to assist customers with their risk management objectives. All derivative instruments are recognized as either assets or liabilities at fair value in the statement of financial position.

Interest rate derivative - no hedge designation

The Company is a party to interest rate derivatives that are not designated as hedging instruments. The Company enters into interest rate swaps that allow certain commercial loan customers to effectively convert a variable-rate commercial loan agreement to a fixed-rate commercial loan agreement. These interest rate swaps with customers are simultaneously offset by interest rate swaps that the Company executes with a third-party financial institution, such that the Company minimizes its net interest rate risk exposure resulting from such transactions. The interest rate swap agreements are free-standing derivatives and are recorded at fair value in the Company’s consolidated balance sheets (asset positions are included in other assets and liability positions are included in other liabilities). As the interest rate swaps are structured to offset each other, changes to the underlying benchmark interest rates considered in the valuation of these instruments do not result in an impact to earnings; however, there may be fair value adjustments related to credit-quality variations between counterparties, which may impact earnings as required by FASB ASC 820. There was no effect on earnings in any periods presented.

Weighted

Notional

Average Maturity

Interest Rate

(dollars in thousands)

Amount

(Years)

Paid

Received

Fair Value

September 30, 2025

Classified in Other assets:

Customer interest rate swaps

1,708

12.16

30 Day SOFR + Margin

Fixed

144

Classified in Accrued interest payable and other liabilities:

Third party interest rate swaps

1,708

12.16

Fixed

30 Day SOFR + Margin

144

Interest rate derivative - fair value hedge designation

The Company’s objectives in using interest rate derivatives are to add stability to interest income and expense and to manage its exposure to interest rate movements. To accomplish this objective, the Company has entered into interest rate swaps as part of its interest rate risk management strategy. This interest rate swap is designated as a fair value hedge and limits the risk to the investment portfolio of rising interest rates. The Company entered into an interest rate swap with a third-party financial institution to convert fixed rate investment securities to an adjustable rate to produce a more asset sensitive profile. The Company recorded the fair value of the fair value hedge in other assets and accrued interest payable and other liabilities on the consolidated balance sheet. The hedged items (fixed rate securities available-for-sale) are also recorded at fair value which offsets the adjustment to the fair value hedge. The related gains and losses are reported in interest income investment securities - U.S. government agencies and corporations and interest income investment securities - state and political subdivisions (nontaxable) in the consolidated statements of income. For the nine months ended September 30, 2025, there was a $108 thousand reduction in interest income investment securities - U.S. government agencies and corporations and a $108 thousand reduction in interest income investment securities - state and political subdivisions (nontaxable). For the nine months ended September 30, 2024, there was a $265 thousand increase to interest income from investment securities - U.S. government agencies and corporations and a $265 thousand increase to interest income from investment securities - state and political subdivisions (nontaxable). A qualitative assessment of hedge effectiveness was applied at inception of the hedge. Future hedge effectiveness will be determined on a qualitative basis at least annually. The hedge is expected to remain effective as long as the balance of the hedged item is projected to remain at or above the notional amount of the swap.

			Weighted
	Notional		Average Maturity
(dollars in thousands)	Amount		(Years)		Fair Value
September 30, 2025
Pay-fixed interest rate swap agreements - securities AFS	$	100,000		0.99	$	(1,017	)

The Company had investment securities with a book value of $2.6 million pledged as collateral on its interest rate swaps with a third-party financial institution as of September 30, 2025.

- Definition

The entire disclosure for derivative instruments and hedging activities including, but not limited to, risk management strategies, non-hedging derivative instruments, assets, liabilities, revenue and expenses, and methodologies and assumptions used in determining the amounts.

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+ Details

FIDELITY D & D BANCORP INC 10-Q