XML 79 R12.htm IDEA: XBRL DOCUMENT v2.4.0.6
Investment Securities
 12 Months Ended
Dec. 31, 2012
Investments, Debt and Equity Securities [Abstract]  
Investment Securities

Note 3. Investment Securities

 

Investment securities are summarized as follows:

 

          Gross     Gross        
    Amortized     Unrealized     Unrealized     Fair  
December 31, 2012   Cost     Gains     Losses     Value  
                         
Available for sale:                                
U.S. Government agencies   $ 28,360     $ -     $ 320     $ 28,040  
State and municipal     38,528,451       2,623,768       14,797       41,137,422  
Corporate trust preferred     349,646       -       65,116       284,530  
Mortgage-backed     57,494,784       1,597,567       52,076       59,040,275  
                                 
    $ 96,401,241     $ 4,221,335     $ 132,309     $ 100,490,267  

  

          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  

 

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, 2012 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   $ 3,840     $ 320     $ -     $ -     $ 3,840     $ 320  
State and Municipal     249,595       403       285,606       14,394       535,201       14,797  
Corporate trust preferred     -       -       284,550       65,116       284,550       65,116  
Mortgaged-backed     10,489,794       52,076       -       -       10,489,794       52,076  
                                                 
    $ 10,743,229     $ 52,799     $ 570,156     $ 79,510     $ 11,313,385     $ 132,309  

 

At December 31, 2012, the Company owned one pooled trust preferred security issued by Regional Diversified Funding, Senior notes with a Fitch credit rating of C, which is included in the securities described above. The market for these securities at December 31, 2012 was not active and markets for similar securities were also not active. As a result, the Company had cash flow testing performed as of December 31, 2012 by an unrelated third party in order to measure the possible extent of other-than-temporary-impairment (“OTTI”). This testing assumed future defaults on the currently performing financial institutions of 150 basis points applied annually with a 0% recovery on both current and future defaulting financial institutions. As a result of this testing, no write-down was required in 2012. A write-down of $21,928 was taken on this security in the first quarter of 2011.

 

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.

 

As noted above, 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.

 

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, 2012, 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, 2012, the

Bank held 3 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, 2012, 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:

 

    2012     2011     2010  
                   
Estimated credit losses, beginning of year   $ 3,246,915     $ 3,154,987     $ 2,892,779  
Credit losses - no previous OTTI recognized     -       70,000       -  
Credit losses - previous OTTI recognized     -       21,928       262,208  
                         
Estimated credit losses, end of year   $ 3,246,915     $ 3,246,915     $ 3,154,987  

 

Contractual maturities of investment securities at December 31, 2012, 2011, and 2010 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, 2012   Cost     Value  
             
Due within one year   $ 125,021     $ 125,745  
Due over one to five years     -       -  
Due over five to ten years     400,000       415,028  
Due over ten years     38,353,076       40,881,179  
Mortgage-backed, due in monthly installments     57,523,144       59,068,315  
                 
    $ 96,401,241     $ 100,490,267  

 

    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  

  

    Available for Sale  
    Amortized     Fair  
December 31, 2010   Cost     Value  
             
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  

 

Proceeds from sales of available for sale securities prior to maturity totaled $18,656,622, $21,796,185, and $9,073,406 for the years ended December 31, 2012, 2011, and 2010, respectively. The Bank realized gains of $282,069 and losses of $119,475 on those sales for 2012. 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. 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 $64,135, $161,190, and $69,674 for the years ended December 31, 2012, 2011, and 2010, respectively.

 

The Bank has no derivative financial instruments required to be disclosed under ASC Topic 815, Disclosure about Derivative Financial Instruments and Fair Value of Financial Instruments.