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Investment Securities | 12 Months Ended
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Dec. 31, 2011
Investment Securities | Note 3. Investment Securities Investment securities are summarized as follows:
|  |  |  |  | Gross |  |  | Gross |  |  |  |
|  | Amortized |  |  | Unrealized |  |  | Unrealized |  |  | Fair |
December 31, 2011 |  | Cost |  |  | Gains |  |  | Losses |  |  | Value |
Available for sale: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
U.S. Government agencies |  | $ | 28,360 |  |  | $ | - |  |  | $ | - |  |  | $ | 28,360 |
State and municipal |  |  | 37,165,358 |  |  |  | 1,808,576 |  |  |  | 46,811 |  |  |  | 38,927,123 |
Corporate trust preferred |  |  | 635,239 |  |  |  | - |  |  |  | 200,015 |  |  |  | 435,224 |
Mortgage-backed |  |  | 61,972,542 |  |  |  | 1,606,338 |  |  |  | 103,032 |  |  |  | 63,475,848 |
|  | $ | 99,801,499 |  |  | $ | 3,414,914 |  |  | $ | 349,858 |  |  | $ | 102,866,555 |
|  |  |  |  | Gross |  |  | Gross |  |  |  |
|  | Amortized |  |  | Unrealized |  |  | Unrealized |  |  | Fair |
December 31, 2010 |  | Cost |  |  | Gains |  |  | Losses |  |  | Value |
Available for sale: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
U.S. Government agencies |  | $ | 1,028,360 |  |  | $ | 51,640 |  |  | $ | 200 |  |  | $ | 1,079,800 |
State and municipal |  |  | 34,775,927 |  |  |  | 54,285 |  |  |  | 1,960,277 |  |  |  | 32,869,935 |
Corporate trust preferred |  |  | 1,793,287 |  |  |  | 64,898 |  |  |  | 717,115 |  |  |  | 1,141,070 |
Mortgage-backed |  |  | 51,337,038 |  |  |  | 984,851 |  |  |  | 144,335 |  |  |  | 52,177,554 |
|  | $ | 88,934,612 |  |  | $ | 1,155,674 |  |  | $ | 2,821,927 |  |  | $ | 87,268,359 |
|  |  |  |  | Gross |  |  | Gross |  |  |  |
|  | Amortized |  |  | Unrealized |  |  | Unrealized |  |  | Fair |
December 31, 2009 |  | Cost |  |  | Gains |  |  | Losses |  |  | Value |
Available for sale: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
U.S. Government agencies |  | $ | 3,180,360 |  |  | $ | 14,060 |  |  | $ | 135,330 |  |  | $ | 3,059,090 |
State and municipal |  |  | 30,073,170 |  |  |  | 335,146 |  |  |  | 664,647 |  |  |  | 29,743,669 |
Corporate trust preferred |  |  | 2,080,282 |  |  |  | 33,521 |  |  |  | 1,102,874 |  |  |  | 1,010,929 |
Mortgage-backed |  |  | 50,849,527 |  |  |  | 368,642 |  |  |  | 569,252 |  |  |  | 50,648,917 |
|  | $ | 86,183,339 |  |  | $ | 751,369 |  |  | $ | 2,472,103 |  |  | $ | 84,462,605 |
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 December 31, 2011 are as follows:
|  | Less than 12 months |  |  | 12 months or more |  |  | Total |
|  | Fair |  |  | Unrealized |  |  | Fair |  |  | Unrealized |  |  | Fair |  |  | Unrealized |
|  | Value |  |  | Loss |  |  | Value |  |  | Loss |  |  | Value |  |  | Loss |
Obligations of U.S. |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Government agencies |  | $ | - |  |  | $ | - |  |  | $ | - |  |  | $ | - |  |  | $ | - |  |  | $ | - |
State and Municipal |  |  | 408,048 |  |  |  | 3,701 |  |  |  | 512,670 |  |  |  | 43,110 |  |  |  | 920,718 |  |  |  | 46,811 |
Corporate trust preferred |  |  | - |  |  |  | - |  |  |  | 435,249 |  |  |  | 200,015 |  |  |  | 435,249 |  |  |  | 200,015 |
Mortgaged-backed |  |  | 10,066,939 |  |  |  | 91,792 |  |  |  | 715,338 |  |  |  | 11,240 |  |  |  | 10,782,277 |  |  |  | 103,032 |
|  | $ | 10,474,987 |  |  | $ | 95,493 |  |  | $ | 1,663,257 |  |  | $ | 254,365 |  |  | $ | 12,138,244 |  |  | $ | 349,858 |
At December 31, 2011, the Company owned one pooled trust preferred security issued by Regional Diversified Funding, Senior notes with a Fitch credit rating of B, which is included in the securities described above. The market for these securities at December 31, 2011 was not active and markets for similar securities were also not active. The market values for these securities (and any securities other than those issued or guaranteed by the U.S. Treasury) are very depressed relative to historical levels. Therefore, a low market price for a particular security may only provide evidence of stress in the credit markets overall rather than being an indicator of credit problems with a particular issuer. During the first quarter of 2011, the Company took an additional write down of $21,928 on the trust preferred securities to bring the book value into alignment with the net present value of $635,228 which was arrived at as the result of cash flow testing performed by an unrelated third party in order to measure the extent of other-than-temporary-impairment (“OTTI”). This testing assumed future defaults on the currently performing financial institutions of 75 basis points applied annually with a 15% recovery after a two year lag on both current and future defaulting financial institutions. At year-end, the Company retested for possible OTTI by using a more stringent test by recalculating the net present value using a default rate of 150 basis points applied annually with a 0% recovery. The testing resulted in a net present value above the current book value. The stock of Maryland Financial Bank is not readily marketable. During 2011, the stock was written down $70,000 due to the price of a new stock offering, which price was a discount to par. During 2010, the Company also took a write down of $110,208 on the same trust preferred securities, with the present value of $838,136 which was arrived at as the result of cash flow testing performed by an unrelated third party in order to measure the extent of other-than-temporary-impairment (“OTTI”). This testing assumed defaults of 75 basis points applied annually with a 15% recovery. During 2010, the Company also took an additional write down of $152,000 on the Freddie Mac and Fannie Mae securities already written down in 2008. In management’s judgment the decline in the market value of these securities are permanent in nature and therefore were written down to the current market value as provided by third party repricing provider. During 2009, the Company took a write down of $76,779 on the same trust preferred securities above to bring the book value into alignment with the current and performing principal balance outstanding, which we considered to be a prudent action to take in the current environment based on defaults by three of the twenty-nine financial institutions in the pool. In addition, cash flow testing was performed by an unrelated third party in order to measure the extent of other-than-temporary-impairment (“OTTI”). This testing, assumed a 15% recovery with a two year lag on two of the previously defaulting financial institutions, with future defaults on the currently performing financial institutions of 150 basis points applied annually with no future recovery. This testing resulted in a net present value of $1,142,047, compared to the book value of $1,127,965 at December 31, 2009. 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 its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. As of December 31, 2011, 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 December 31, 2011, the Bank held 5 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 mortgaged-backed securities. The Bank has no mortgaged-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. Accordingly, as of December 31, 2011, management believes the impairments detailed in the table above are temporary and no additional impairment loss is required to be realized in the Company’s consolidated income statement. A rollforward of the cumulative other-than-temporary credit losses recognized in earnings for all debt and equity securities for which a portion of an other-then-temporary loss is recognized in accumulated other comprehensive loss is as follows:
|  | 2011 |  |  | 2010 |  |  | 2009 |
Estimated credit losses, beginning of year |  | $ | 3,154,987 |  |  | $ | 2,892,779 |  |  | $ | 2,816,000 |
Credit losses - no previous OTTI recognized |  |  | 70,000 |  |  |  | - |  |  |  | 76,779 |
Credit losses - previous OTTI recognized |  |  | 21,928 |  |  |  | 262,208 |  |  |  | - |
Estimated credit losses, end of year |  | $ | 3,246,915 |  |  | $ | 3,154,987 |  |  | $ | 2,892,779 |
Contractual maturities of investment securities at December 31, 2011, 2010, and 2009 are shown below. Actual maturities may differ from contractual maturities because debtors may have the right to call or prepay obligations with or without call or prepayment penalties. Mortgage-backed securities have no stated maturity and primarily reflect investments in various Pass-through and Participation Certificates issued by the Federal National Mortgage Association and the Government National Mortgage Association. Repayment of mortgage-backed securities is affected by the contractual repayment terms of the underlying mortgages collateralizing these obligations and the current level of interest rates.
|  | Available for Sale |
|  | Amortized |  |  | Fair |
December 31, 2011 |  | Cost |  |  | Value |
Due within one year |  | $ | - |  |  | $ | - |
Due over one to five years |  |  | 1,032,792 |  |  |  | 1,046,248 |
Due over five to ten years |  |  | 304,998 |  |  |  | 334,044 |
Due over ten years |  |  | 36,491,167 |  |  |  | 38,010,415 |
Mortgage-backed, due in monthly installments |  |  | 61,972,542 |  |  |  | 63,475,848 |
|  | $ | 99,801,499 |  |  | $ | 102,866,555 |
December 31, 2010 |  |  |  |  |  |  |  |
Due within one year |  | $ | - |  |  | $ | - |
Due over one to five years |  |  | 1,589,004 |  |  |  | 1,609,925 |
Due over five to ten years |  |  | 304,997 |  |  |  | 312,135 |
Due over ten years |  |  | 35,703,573 |  |  |  | 33,168,745 |
Mortgage-backed, due in monthly installments |  |  | 51,337,038 |  |  |  | 52,177,554 |
|  | $ | 88,934,612 |  |  | $ | 87,268,359 |
December 31, 2009 |  |  |  |  |  |
Due within one year |  | $ | 649,998 |  |  | $ | 650,982 |
Due over one to five years |  |  | 1,825,146 |  |  |  | 1,850,726 |
Due over five to ten years |  |  | 565,946 |  |  |  | 571,123 |
Due over ten years |  |  | 32,292,722 |  |  |  | 30,740,857 |
Mortgage-backed, due in monthly installments |  |  | 50,849,527 |  |  |  | 50,648,917 |
|  | $ | 86,183,339 |  |  | $ | 84,462,605 |
Proceeds from sales of available for sale securities prior to maturity totaled $21,796,185, $9,073,406, and $24,920,635 for the years ended December 31, 2011, 2010, and 2009, respectively. The Bank realized gains of $434,113 and losses of $25,467 on those sales for 2011. The Bank realized gains of $176,046 and losses of $882 on those sales for 2010. The Bank realized gains of $600,696 and losses of $14,815 on those sales for 2009. Realized gains and losses were calculated based on the amortized cost of the securities at the date of trade. Income tax expense relating to net gains on sales of investment securities totaled $161,190, $69,674, and $233,034 for the years ended December 31, 2011, 2010, and 2009, respectively.
|  | The Bank has no derivative financial instruments required to be disclosed under ASC Topic 815, formerly SFAS No. 149, Disclosure about Derivative Financial Instruments and Fair Value of Financial Instruments.

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- Definition Tabular disclosure of investments in certain debt and equity securities (and certain other trading assets) which include all debt and equity securities (other than those equity securities accounted for under the equity or cost methods of accounting) with readily determinable fair values. Other trading assets include assets that are carried on the balance sheet at fair value and held for trading purposes. A debt security represents a creditor relationship with an enterprise that is in the form of a security. Debt securities include, among other items, US Treasury securities, US government securities, municipal securities, corporate bonds, convertible debt, commercial paper, and all securitized debt instruments. An equity security represents an ownership interest in an enterprise or the right to acquire or dispose of an ownership interest in an enterprise at fixed or determinable prices. Equity securities include, among other things, common stock, certain preferred stock, warrant rights, call options, and put options, but do not include convertible debt. An entity may opt to provide the reader with additional narrative text to better understand the nature of investments in debt and equity securities (and other trading assets). + References Reference 1: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 320 -SubTopic 10 -Section 50 -Paragraph 10 -URI http://asc.fasb.org/extlink&oid=6872113&loc=d3e27405-111563 Reference 2: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 310 -SubTopic 30 -Section 50 -Paragraph 2 -URI http://asc.fasb.org/extlink&oid=6379141&loc=d3e15032-111544 Reference 3: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Glossary Equity Security -URI http://asc.fasb.org/extlink&oid=6511694 -Topic 320 Reference 4: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 320 -SubTopic 10 -Section 50 -Paragraph 2 -URI http://asc.fasb.org/extlink&oid=6872113&loc=d3e27161-111563 Reference 5: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Glossary Debt Security -URI http://asc.fasb.org/extlink&oid=6509901 -Topic 320 Reference 6: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Statement of Financial Accounting Standard (FAS) -Number 115 -Paragraph 3, 19, 20, 21, 22, 137 -LegacyDoc This reference is SUPERSEDED by the Accounting Standards Codification effective for interim and annual periods ending after September 15, 2009. This reference is included to help users transition from the previous accounting hierarchy and will be removed from future versions of this taxonomy. Reference 7: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 320 -SubTopic 10 -Section 50 -Paragraph 5 -URI http://asc.fasb.org/extlink&oid=6872113&loc=d3e27232-111563 Reference 8: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 320 -SubTopic 10 -Section 50 -Paragraph 9 -URI http://asc.fasb.org/extlink&oid=6872113&loc=d3e27357-111563 Reference 9: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 942 -SubTopic 320 -Section 50 -Paragraph 2 -URI http://asc.fasb.org/extlink&oid=6957658&loc=d3e62557-112803 Reference 10: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 320 -SubTopic 10 -Section 50 -Paragraph 6 -URI http://asc.fasb.org/extlink&oid=6872113&loc=d3e27290-111563 + Details
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