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.