Fair Value Measurements

12 Months Ended

Dec. 31, 2014

Note 17. Fair Value Measurements

The Company follows ASC Topic 820, Fair Value Measurements which provides a framework for measuring and disclosing fair value under generally accepted accounting principles. ASC Topic 820 requires disclosures about the fair value of assets and liabilities recognized in the balance sheet in periods subsequent to initial recognition, whether the measurements are made on a recurring basis or on a nonrecurring basis.

ASC Topic 820 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC Topic 820 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value.

Fair Value Hierarchy

Level 1 – Quoted prices in active markets for identical assets or liabilities

Level 2 – Other significant observable inputs (including quoted prices in active markets for similar assets or liabilities)

Level 3 – Significant unobservable inputs (including the Bank’s own assumptions in determining the fair value of assets or liabilities)

In determining the appropriate levels, the Company performs a detailed analysis of assets and liabilities that are subject to ASC Topic 820. The Bank’s securities available-for-sale are the only assets or liabilities subject to fair value measurements on a recurring basis. The Bank may also be required,

from time to time, to measure certain other financial and non-financial assets and liabilities at fair value on a non-recurring basis in accordance with GAAP. At December 31, 2014 these non-recurring assets consisted of 28 loans classified as both nonaccrual (11) and accruing loans (17) and a homogeneous pool of indirect and consumer loans considered to be impaired, which are valued under Level 3 inputs and one property classified as OREO valued under Level 2 inputs.

Fair value measurements on a recurring and non-recurring basis at December 31, 2014 are as follows:


									Fair
December 31, 2013	Level 1		Level 2			Level 3			Value
Recurring:
Securities available for sale	$	573,600	$	73,515,807		$	224,275		$	74,313,682

Non-recurring:
Maryland Financial Bank stock		-		-			30,000			30,000
Impaired loans		-		-			4,745,229			4,745,229
OREO		-		1,170,773			-			1,170,773
	$	573,600	$	74,686,580		$	4,999,504		$	80,259,684
Activity:
Securities available for sale:
Purchases of securities		-		50,167,691			-			50,167,691
Sales, calls, and maturities of securities		-		(38,223,651	)		-			(38,223,651	)
Net amortization/accretion of premium/discount		-		(391,144	)		(134	)		(391,278	)
Increase (decrease) in market value		216,944		1,746,303			163,454			2,126,701
OTTI on investments		-		-			-			-
Transfer to level 1		-		-			-			-
Transfer to level 2		-		-			-			-

Maryland Financial Bank stock
OTTI on stock		-		-			-			-

Impaired loans:
New impaired loans		-		-			5,897,664			5,897,664
Payments and other loan reductions		-		-			(5,874,910	)		(5,874,910	)
Change in total provision		-		-			452,709			452,709
Loans converted to OREO		-		-			(45,175	)		(45,175	)

OREO:
OREO converted from loans		-		45,175			-			45,175
Sales of OREO		-		(1,153,883	)		-			(1,153,883	)
Write-down of OREO		-		(16,448	)					(16,448	)
Loss on disposal of OREO		-		(442	)					(442	)

December 31, 2014
Recurring:
Securities available for sale		790,544		86,815,006			387,595			87,993,145

Non-recurring:
Maryland Financial Bank stock		-		-			30,000			30,000
Impaired loans		-		-			5,175,517			5,175,517
OREO		-		45,175			-			45,175

	$	-	$	86,860,181		$	5,593,112		$	93,243,837

Securities available-for-sale are based on quoted market prices, where available. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments.

Measured on a Non-Recurring Basis:

Financial Assets and Liabilities

The Bank is predominantly a cash flow lender with real estate serving as collateral on a majority of loans. Loans which are deemed to be impaired and foreclosed real estate assets are primarily valued on a nonrecurring basis at the fair values of the underlying real estate collateral. The Bank determines such fair values from independent appraisals. Based on these appraisals, management has applied a specific valuation allowance allocation of $1,270,159 to the impaired loans, which management considers to be level 3 inputs. In addition, the Maryland Financial Bank stock was written down to a value of $30,000 due to the price of a new stock offering, which was discounted to par, which management considered level 3 inputs.

Non-Financial Assets and Non-Financial Liabilities

Application of ASC Topic 820 to non-financial assets and non-financial liabilities became effective January 1, 2009. The Corporation has no non-financial assets or non-financial liabilities measured at fair value on a recurring basis. Certain non-financial assets and non-financial liabilities typically measured at fair value on a non-recurring basis include foreclosed assets (upon initial recognition or subsequent impairment), non-financial assets and non-financial liabilities measured at fair value in the second step of a goodwill impairment test, and intangible assets and other non-financial long-lived assets measured at fair value for impairment assessment.

Foreclosed real estate were adjusted to their fair values, resulting in an impairment charge, which was included in earnings for the year. Foreclosed real estate, which are considered to be non-financial assets, have been valued using a market approach. The values were determined using market prices of similar current real estate assets in the same geographical area, which the Bank considers to be level 2 inputs.

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

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