FIDELITY D & D BANCORP INC Fair Value Disclosure

13.	FAIR VALUE MEASUREMENTS

 

The accounting guidelines establish a framework for measuring and disclosing information about fair value measurements. The guidelines of fair value reporting instituted a valuation hierarchy for disclosure of the inputs used to measure fair value. This hierarchy prioritizes the inputs into three broad levels as follows:

 

Level 1 - inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities;

 

Level 2 - inputs are quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; or inputs that are observable for the asset or liability, either directly or indirectly through market corroboration, for substantially the full term of the financial instrument;

 

Level 3 - inputs are unobservable and are based on the Company’s own assumptions to measure assets and liabilities at fair value. Level 3 pricing for securities may also include unobservable inputs based upon broker-traded transactions.

 

A financial asset or liability’s classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement.

 

The Company uses fair value to measure certain assets and, if necessary, liabilities on a recurring basis when fair value is the primary measure for accounting. Thus, the Company uses fair value for AFS securities. Fair value is used on a non-recurring basis to measure certain assets when adjusting carrying values to market values, such as collateral dependent individually evaluated loans, other real estate owned (ORE) and other repossessed assets.

 

The following table represents the carrying amount and estimated fair value of the Company’s financial instruments:

 

December 31, 2025
										Quoted prices				Significant				Significant
										in active				other				other
		Carrying				Estimated				markets				observable inputs				unobservable inputs
(dollars in thousands)		amount				fair value				(Level 1)				(Level 2)				(Level 3)
Financial assets:
Cash and cash equivalents		$	148,060			$	148,060			$	148,060			$	-			$	-
Held-to-maturity securities			227,339				203,137				-				203,137				-
Available-for-sale debt securities			296,607				296,607				-				296,607				-
Restricted investments in bank stock			4,373				4,373				-				4,373				-
Loans and leases, net			1,890,983				1,798,610				-				-				1,798,610
Loans held-for-sale			573				588				-				588				-
Accrued interest receivable			9,673				9,673				-				9,673				-
Interest rate swaps			147				147				-				147				-
Financial liabilities:
Deposits with no stated maturities			2,114,377				2,114,377				-				2,114,377				-
Time deposits			352,976				351,984				-				351,984				-
Short-term borrowings			20				20				-				20				-
Secured borrowings			5,995				5,738				-				-				5,738
Accrued interest payable			5,707				5,707				-				5,707				-
Interest rate swaps			1,011				1,011				-				1,011				-

 

December 31, 2024
										Quoted prices				Significant				Significant
										in active				other				other
		Carrying				Estimated				markets				observable inputs				unobservable inputs
(dollars in thousands)		amount				fair value				(Level 1)				(Level 2)				(Level 3)
Financial assets:
Cash and cash equivalents		$	83,353			$	83,353			$	83,353			$	-			$	-
Held-to-maturity securities			225,764				194,575				-				194,575				-
Available-for-sale debt securities			331,457				331,457				-				331,457				-
Restricted investments in bank stock			3,961				3,961				-				3,961				-
Loans and leases, net			1,779,136				1,672,690				-				-				1,672,690
Loans held-for-sale			2,054				2,089				-				2,089				-
Accrued interest receivable			9,632				9,632				-				9,632				-
Interest rate swaps			209				209				-				209				-
Financial liabilities:
Deposits with no stated maturities			2,001,920				2,001,920				-				2,001,920				-
Time deposits			338,900				337,629				-				337,629				-
Secured borrowings			6,266				5,723				-				-				5,723
Accrued interest payable			4,988				4,988				-				4,988				-
Interest rate swaps			1,224				1,224				-				1,224				-

 

The carrying value of short-term financial instruments, as listed below, approximates their fair value. These instruments generally have limited credit exposure, no stated or short-term maturities, carry interest rates that approximate market and generally are recorded at amounts that are payable on demand:

 

●

Cash and cash equivalents;

●

Non-interest bearing deposit accounts;

●

Savings, interest-bearing checking and money market accounts

	●	Short-term borrowings and
	●	Accrued interest.

 

Securities: Fair values on investment securities are determined by prices provided by a third-party vendor, who is a provider of financial market data, analytics and related services to financial institutions.

 

Accruing loans and leases: The fair value of accruing loans is estimated by calculating the net present value of the future expected cash flows discounted at current offering rates for similar loans. Current offering rates consider, among other things, credit risk. 

 

The carrying value that fair value is compared to is net of the allowance for credit losses and since there is significant judgment included in evaluating credit quality, loans are classified within Level 3 of the fair value hierarchy.

 

Non-accrual loans: Loans which the Company has measured as non-accruing are generally based on the fair value of the loan’s collateral. Fair value is generally determined based upon independent third-party appraisals of the properties. These loans are classified within Level 3 of the fair value hierarchy. The fair value consists of loan balances less the valuation allowance.

 

Loans held-for-sale: The fair value of loans held-for-sale is estimated using rates currently offered for similar loans and is typically obtained from the Federal National Mortgage Association (FNMA) or the Federal Home Loan Bank of Pittsburgh (FHLB).

 

Interest rate swaps: Fair values on derivative instruments are determined by valuations provided by a third-party vendor, who is a provider of financial market data, analytics and related services to financial institutions.

 

Certificates of deposit: The fair value of certificates of deposit is based on discounted cash flows using rates which approximate market rates for deposits of similar maturities.

 

Secured borrowings: The fair value for these obligations uses an income approach based on expected cash flows on a pooled basis.

 

The following tables illustrate the financial instruments measured at fair value on a recurring basis segregated by hierarchy fair value levels as of the periods indicated:

 

		Total carrying value				Quoted prices in active markets				Significant other observable inputs				Significant other unobservable inputs
(dollars in thousands)		December 31, 2025				(Level 1)				(Level 2)				(Level 3)
Assets:
Available-for-sale securities:
Agency - GSE		$	24,622			$	-			$	24,622			$	-
Obligations of states and political subdivisions			102,820				-				102,820				-
MBS - GSE residential			169,165				-				169,165				-
Total available-for-sale debt securities		$	296,607			$	-			$	296,607			$	-
Interest rate swaps			147				-				147				-
Total assets		$	296,754			$	-			$	296,754			$	-
Liabilities:
Interest rate swaps		$	1,011			$	-			$	1,011			$	-
Total liabilities		$	1,011			$	-			$	1,011			$	-

 

		Total carrying value				Quoted prices in active markets				Significant other observable inputs				Significant other unobservable inputs
(dollars in thousands)		December 31, 2024				(Level 1)				(Level 2)				(Level 3)
Assets:
Available-for-sale securities:
Agency - GSE		$	28,200			$	-			$	28,200			$	-
Obligations of states and political subdivisions			119,258				-				119,258				-
MBS - GSE residential			183,999				-				183,999				-
Total available-for-sale debt securities		$	331,457			$	-			$	331,457			$	-
Interest rate swaps			209				-				209				-
Total assets		$	331,666			$	-			$	331,666			$	-
Liabilities:
Interest rate swaps		$	1,224			$	-			$	1,224			$	-
Total liabilities		$	1,224			$	-			$	1,224			$	-

 

Debt securities in the AFS portfolio are measured at fair value using market quotations provided by a third-party vendor, who is a provider of financial market data, analytics and related services to financial institutions. Assets classified as Level 2 use valuation techniques that are common to bond valuations. That is, in active markets whereby bonds of similar characteristics frequently trade, quotes for similar assets are obtained.

 

There were no changes in Level 3 financial instruments measured at fair value on a recurring basis as of and for the periods ending December 31, 2025 and 2024, respectively.

 

From time-to-time, the Company may be required to record at fair value financial instruments on a non-recurring basis, such as individually evaluated loans, ORE and other repossessed assets. These non-recurring fair value adjustments involve the application of lower-of-cost-or-market accounting on write downs of individual assets. The following table illustrates the financial instruments measured at fair value on a non-recurring basis segregated by hierarchy fair value levels as of the periods indicated:

 

							Quoted prices in				Significant other				Significant other
			Total carrying value				active markets				observable inputs				unobservable inputs
(dollars in thousands)	Valuation techniques		at December 31, 2025				(Level 1)				(Level 2)				(Level 3)
Individually evaluated loans	Fair value of collateral appraised value		$	40			$	-			$	-			$	40
Other real estate owned	Fair value of asset less selling costs			324				-				-				324
Other repossessed assets	Fair value of asset less selling costs			2				-				-				2
Total			$	366			$	-			$	-			$	366

 

							Quoted prices in				Significant other				Significant other
			Total carrying value				active markets				observable inputs				unobservable inputs
(dollars in thousands)	Valuation techniques		at December 31, 2024				(Level 1)				(Level 2)				(Level 3)
Individually evaluated loans	Fair value of collateral appraised value		$	2,810			$	-			$	-			$	2,810
Other repossessed assets	Fair value of asset less selling costs			1				-				-				1
Total			$	2,811			$	-			$	-			$	2,811

 

The following describes valuation methodologies used for financial instruments measured at fair value on a non-recurring basis. Individually evaluated loans that are collateral dependent are written down to fair value through the establishment of specific reserves, a component of the allowance for credit losses, and as such are carried at the lower of net recorded investment or the estimated fair value. Estimates of fair value of the collateral are determined based on a variety of information, including available valuations from certified appraisers for similar assets, present value of discounted cash flows and inputs that are estimated based on commonly used and generally accepted industry liquidation advance rates and estimates and assumptions developed by management.

 

Valuation techniques for individually evaluated, collateral dependent loans are typically determined through independent appraisals of the underlying collateral or may be determined through present value of discounted cash flows. Both techniques include various Level 3 inputs which are not readily observable. The valuation technique may be adjusted by management for estimated liquidation expenses and qualitative factors such as economic conditions. If real estate is not the primary source of repayment, present value of discounted cash flows and estimates using generally accepted industry liquidation advance rates and other factors may be utilized to determine fair value.

 

At December 31, 2025, the net realizable values of all individually evaluated, real estate secured collateral dependent loans were higher than the amortized costs, therefore, there were no observable discounts.  At December 31, 2024, the range of liquidation expenses and other valuation adjustments applied to individually evaluated, collateral dependent loans ranged from -13.81% to -31.19%. At December 31, 2024, the weighted average of liquidation expenses and other valuation adjustments applied to individually evaluated, collateral dependent loans amounted to -24.85% as of December 31, 2024, respectively. Due to the multitude of assumptions, many of which are subjective in nature, and the varying inputs and techniques used to determine fair value, the Company recognizes that valuations could differ across a wide spectrum of techniques employed. Accordingly, fair value estimates for individually evaluated, collateral dependent loans are classified as Level 3.

 

For ORE, fair value is generally determined through independent appraisals of the underlying properties which generally include various Level 3 inputs which are not readily observable. Appraisals form the basis for determining the net realizable value from these properties. Net realizable value is the result of the appraised value less certain costs or discounts associated with liquidation which occurs in the normal course of business. Management’s assumptions may include consideration of the location and occupancy of the property, along with current economic conditions. Subsequently, as these properties are actively marketed, the estimated fair values may be periodically adjusted through incremental subsequent write-downs. These write-downs usually reflect decreases in estimated values resulting from sales price observations as well as changing economic and market conditions. At  December 31, 2025 and 2024, the net realizable values of properties in ORE were higher than the carrying value.

 

At December 31, 2025, there was one other repossessed asset totaling $2 thousand. At December 31, 2024, there was one repossessed asset totaling $1 thousand. The Company refers to the National Automobile Dealers Association (NADA) guide to determine a vehicle’s fair value.

 

Financial Instruments with Off-Balance Sheet Risk

 

The Company is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. Those instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the balance sheet. The contract or notional amounts of those instruments reflect the extent of the Company’s involvement in particular classes of financial instruments. Because of the nature of these instruments, the fair values of these off-balance sheet items are not material.

 

The notional amount of the Company’s financial instruments with off-balance sheet risk was as follows:

 

		December 31,
(dollars in thousands)		2025				2024
Off-balance sheet financial instruments:
Commitments to extend credit		$	511,017			$	455,510
Standby letters of credit			28,005				30,552

 

Commitments to Extend Credit and Standby Letters of Credit

 

The Company’s exposure to credit loss from nonperformance by the other party to the financial instruments for commitments to extend credit and standby letters of credit is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments.

 

Commitments to extend credit are legally binding agreements to lend to customers. Commitments generally have fixed expiration dates or other termination clauses and may require payment of fees. Since commitments may expire without being drawn upon, the total commitment amounts do not necessarily represent future liquidity requirements. The Company evaluates each customer’s credit-worthiness on a case-by-case basis. The amount of collateral obtained, if considered necessary by the Company on extension of credit, is based on management’s credit assessment of the customer.

 

Financial standby letters of credit are conditional commitments issued by the Company to guarantee performance of a customer to a third party. Those guarantees are issued primarily to support public and private borrowing arrangements, including commercial paper, bond financing, and similar transactions. The Company’s performance under the guarantee is required upon presentation by the beneficiary of the financial standby letter of credit. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The Company was not required to recognize any liability in connection with the issuance of these financial standby letters of credit.

 

The following table summarizes outstanding financial letters of credit, by maturity, as of December 31, 2025:

 

						More than
		Less than				one year to				Over five
(dollars in thousands)		one year				five years				years				Total
Secured by:
Collateral		$	18,732			$	2,810			$	1,122			$	22,664
Bank lines of credit			3,380				60				347				3,787
Other			657				—				—				657
			22,769				2,870				1,469				27,108
Unsecured			897				—				—				897
Total		$	23,666			$	2,870			$	1,469			$	28,005

 

The Company has not incurred losses on its commitments in 2025 and 2024.