| FAIR VALUE | NOTE 4 – FAIR VALUE ASC 820-10 defines fair value, establishes a framework for measuring fair value and expands disclosure of fair value measurements. Fair Value Hierarchy ASC 820-10 specifies a hierarchy of valuation techniques based on whether the inputs to those valuation techniques are observable or unobservable. In accordance with ASC 820-10, these inputs are summarized in the three broad levels listed below: ¨ Level 1 – Quoted prices in active markets for identical securities ¨ Level 2 – Other significant observable inputs (including quoted prices in active markets for similar securities) ¨ Level 3 – Significant unobservable inputs (including the Company’s own assumptions in determining the fair value of investments) In determining the appropriate levels, the Company performs a detailed analysis of the assets and liabilities that are subject to ASC 820-10. The Company’s bond holdings in the investment securities portfolio are the only asset or liability subject to fair value measurements on a recurring basis. At September 30, 2016, these assets include 25 loans, excluding $408,000 of consumer and indirect loans, classified as impaired, which include nonaccrual, past due 90 days or more and still accruing, and a homogeneous pool of indirect loans all considered to be impaired loans, which are valued under Level 3 inputs. Loans which are deemed to be impaired ($3.7 million of loans with $413,000 of specific reserves as of September 30, 2016) and foreclosed real estate assets are primarily valued on a nonrecurring basis at the fair values of the underlying real estate collateral.
The Company is predominantly a cash flow lender with real estate serving as collateral on a majority of loans ($3.0 million of the total impaired loans as of September 30, 2016). On a quarterly basis, the Company determines such fair values through a variety of data points and mostly rely on appraisals from independent appraisers. We obtain an appraisal on properties when they become impaired and have new appraisals at least every year. Typically, these appraisals do not include an inside inspection of the property as our loan documents do not require the borrower to allow access to the property. Therefore the most significant unobservable inputs is the details of the amenities included within the property and the condition of the property. Further, we cannot always accurately assess the amount of time it takes to gain ownership of our collateral through the foreclosure process and the damage, as well as potential looting, of the property further decreasing our value. Thus, in determining the fair values we discount the current independent appraisals, with a range from 0% to 16%, based on individual circumstances. The remaining impaired loans ($641,000 with $286,000 of specific reserves as of September 30, 2016) include mobile homes, commercial, consumer, and indirect auto loans, which are valued based on the value of the underlying collateral. The changes in the assets subject to fair value measurements are summarized below by Level: Fair Level 1 Level 2 Level 3 Value September 30, 2016 Recurring: Securities available for sale U.S. Treasury $ - $ 3,028,230 $ - $ 3,028,230 State and Municipal - 33,545,006 - 33,545,006 Mortgaged-backed - 61,958,555 - 61,958,555 Non-recurring: Maryland Financial Bank stock - - 30,000 30,000 Impaired loans - - 3,658,727 3,658,727 OREO - - - - $ - $ 98,531,791 $ 3,688,727 $ 102,220,518 December 31, 2015 Recurring: Securities available for sale U.S. Treasury $ - $ 2,991,485 $ - $ 2,991,485 State and Municipal - 29,996,099 - 29,996,099 Mortgaged-backed - 65,802,426 - 65,802,426 Non-recurring: Maryland Financial Bank stock - - 30,000 30,000 Impaired loans - - 4,023,092 4,023,092 OREO - 74,400 - 74,400 $ - $ 98,864,410 $ 4,053,092 $ 102,917,502 The estimated fair values of the Company’s financial instruments at September 30, 2016 and December 31, 2015 are summarized below. The fair values of a significant portion of these financial instruments are estimates derived using present value techniques and may not be indicative of the net realizable or liquidation values. Also, the calculation of estimated fair values is based on market conditions at a specific point in time and may not reflect current or future fair values. September 30, 2016 December 31, 2015 (In Thousands) Carrying Fair Carrying Fair Amount Value Amount Value Financial assets: Cash and due from banks $ 9,003 $ 9,003 $ 7,493 $ 7,493 Interest-bearing deposits 825 825 2,308 2,308 Federal funds sold 6,848 6,848 2,570 2,570 Investment securities 98,532 98,532 98,790 98,790 Investments in restricted stock 1,200 1,200 1,203 1,203 Ground rents 164 164 164 164 Loans, net 257,779 258,623 259,637 252,239 Cash Value of life insurance 9,519 9,519 9,358 9,358 Accrued interest receivable 1,100 1,100 1,121 1,121 Financial liabilities: Deposits 335,669 326,125 335,191 307,924 Long-term borrowings 20,000 20,630 20,000 20,688 Dividends payable - - - - Accrued interest payable 35 35 40 40 The following presents the carrying amount, fair value, and placement in the fair value hierarchy of the Company’s financial instruments. Carrying Fair September 30, 2016 Amount Value Level 1 Level 2 Level 3 Financial instruments - Assets Cash and cash equivalents $ 16,675,962 $ 16,675,962 $ 16,675,962 $ - $ - Loans receivable, net 257,778,938 258,623,000 - - 258,623,000 Cash value of life insurance 9,518,791 9,518,791 - 9,518,791 - Financial instruments - Liabilities Deposits 335,668,874 326,125,000 217,284,000 108,841,000 - Long-term debt 20,000,000 20,630,000 - 20,630,000 - Fair values are based on quoted market prices for similar instruments or estimated using discounted cash flows. The discounts used are estimated using comparable market rates for similar types of instruments adjusted to be commensurate with the credit risk, overhead costs and optionality of such instruments. The fair value of cash and due from banks, federal funds sold, investments
in restricted stocks and accrued interest receivable are equal to the carrying amounts. The fair values of investment securities are determined using market quotations. The fair value of loans receivable is estimated using discounted cash flow analysis. The fair value of non-interest bearing deposits, interest-bearing checking, savings, and money market deposit accounts, securities sold under agreements to repurchase, and accrued interest payable are equal to the carrying amounts. The fair value of fixed-maturity time deposits is estimated using discounted cash flow analysis. The gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at September 30, 2016 are as follows: Securities available for sale: Less than 12 months 12 months or more Total (Dollars in Thousands) Fair Unrealized Fair Unrealized Fair Unrealized Value Loss Value Loss Value Loss Obligations of U.S. Govt Agencies $ - $ - $ - $ - $ - $ - State and Municipal 5,373 71 503 2 5,876 73 Corporate Trust Preferred - - - - Mortgage Backed 6,155 47 8,622 76 14,777 123 $ 11,528 $ 118 $ 9,125 $ 78 $ 20,653 $ 196 Declines in the fair value of held to maturity and available for sale securities below their cost that are deemed to be other than temporary are reflected in earnings as realized losses. In estimating other-than-temporary-impairment losses, management considers, among other things, (i) the length of time and the extent to which the fair value has been less than cost, (ii) the financial condition and near-term prospects of the issuer, and (iii) the intent and ability of the Company to retain it’s investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. As of September 30, 2016, management had the ability and intent to hold the securities classified as available for sale for a period of time sufficient for a recovery of cost. On September 30, 2016, the Bank held 16 investment securities having continuous unrealized loss positions for more than 12 months. Management has determined that all unrealized losses are either due to increases in market interest rates over the yields available at the time the underlying securities were purchased, current call features that are nearing, and the effect the sub-prime market has had on all mortgage-backed securities. The Bank has no mortgage-backed securities collateralized by sub-prime mortgages. The fair value is expected to recover as the bonds approach their maturity date or repricing date or if market yields for such investments decline. Management does not believe any of the securities are impaired due to reasons of credit quality. Except as noted above, as of September 30, 2016, management believes the impairments detailed in the table above are temporary and no impairment loss has been recognized in the Company’s consolidated income statement. A rollforward of the cumulative other-than-temporary credit losses recognized in earnings for all debt securities for which a portion of an other-than-temporary loss is recognized in accumulated other comprehensive loss is as follows: At At September 30, December 31, 2016 2015 (Dollars in Thousands) Estimated credit losses, beginning of year $ - $ 3,262 Sales of securities with previous OTTI recognized (3,262 ) Credit losses - no previous OTTI recognized - - Credit losses - previous OTTI recognized - - Estimated credit losses, end of period $ - $ - |
