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FAIR VALUE
 6 Months Ended
Jun. 30, 2015
Fair Value Disclosures [Abstract]  
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. Two assets are valued under Level 1 inputs at June 30, 2015 or December 31, 2014. The Company has assets measured by fair value measurements on a non-recurring basis during 2015. At June 30, 2015, these assets include 33 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 and one property classified as OREO valued under Level 2 inputs.

 

The changes in the assets subject to fair value measurements are summarized below by Level:

 

    (Dollars in Thousands)        
                      Fair  
    Level 1     Level 2     Level 3     Value  
December 31, 2014                        
Recurring:                        
Investment securities available for sale (AFS)   $ 790     $ 86,815     $ 388     $ 87,993  
                                 
Non-recurring:                                
Maryland Financial Bank stock     -       -       30       30  
Impaired loans     -       -       5,176       5,176  
OREO     -       45       -       45  
      790       86,860       5,594       93,244  
                                 
Activity:                                
Investment securities AFS                                
Purchases of investment securities     -       41,910       -       41,910  
Sales, calls and maturities of investment securities     -       (21,382 )     -       (21,382 )
Amortization/accretion of premium/discount     -       (290 )     -       (290 )
Increase (decrease) in market value     25       (685 )     (62 )     (722 )
Transfer to Level 2     (573 )     797       (224 )     -  
                                 
Loans                                
New impaired loans     -       -       2,400       2,400  
Payments and other loan reductions     -       -       (105 )     (105 )
Change in total provision     -       -       (596 )     (596 )
                                 
OREO                                
Sales of OREO     -       -       -       -  
Loss on disposal of OREO     -       -       -       -  
Write-down of OREO     -       -       -       -  
                                 
June 30, 2015                                
Recurring:                                
Investment securities AFS     242       107,165       102       107,509  
                                 
Non-recurring:                                
Maryland Financial Bank stock     -       -       30       30  
Impaired loans     -       -       6,875       6,875  
OREO     -       45       -       45  
    $ 242     $ 107,210     $ 7,007     $ 114,459  

 

The estimated fair values of the Company’s financial instruments at June 30, 2015 and December 31, 2014 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.

  

                         
    June 30, 2015     December 31, 2014  
(In Thousands)  

Carrying
Amount

    

Fair
Value

    

Carrying
Amount

    

Fair
Value

  
Financial assets:                        
Cash and due from banks   $ 8,155     $ 8,155     $ 7,101     $ 7,101  
Interest-bearing deposits     1,890       1,890       2,155       2,155  
Federal funds sold     334       334       4,024       4,024  
Investment securities     107,509       107,509       87,993       87,993  
Investments in restricted stock     1,203       1,203       1,328       1,328  
Ground rents     169       169       169       169  
Loans, net     265,796       260,395       273,986       268,536  
Accrued interest receivable     1,181       1,181       1,274       1,274  
                                 
Financial liabilities:                                
Deposits     348,603       316,359       338,877       310,239  
Long-term borrowings     20,000       20,930       20,000       20,951  
Dividends payable     277       277       276       276  
Accrued interest payable     39       39       40       40  
                                 
Off-balance sheet commitments     23,541       23,541       21,430       21,430  

 

 

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 June 30, 2015 are as follows: 

 

Securities available for sale:   Less than 12 months   12 months or more   Total
(Dollars in Thousands)    
   

Fair
Value

  

Unrealized
Loss

  

Fair
Value

  

Unrealized
Loss

  

Fair
Value

  

Unrealized
Loss
                                     
Obligations of U.S. Govt Agencies   $ -     $ -     $ -     $ -     $ -     $ -  
State and Municipal     21,321       645       808       18       22,129       663  
Corporate Trust Preferred     -       -       102       87       102       87  
Mortgage Backed     36,464       320       19,183       551       55,647       871  
    $ 57,785     $ 965     $ 20,093     $ 656     $ 77,878     $ 1,621  

  

At June 30, 2015, the company owned one pooled trust preferred security issued by Regional Diversified Funding, Senior Notes with a Moody’s rating of Ca. The market for this security (two different portions) at June 30, 2015 was not active and markets for similar securities were also not active. As a result, the Company had cash flow testing performed as of June 30, 2015 by an unrelated third party specialist 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. No write-down was taken in the first six months of 2015.

 

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 June 30, 2015, 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 June 30, 2015, the Bank held 29 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 June 30, 2015, management believes the impairments detailed in the table above are temporary and no impairment loss has been realized 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 
June 30,
2015

  

At 
December 31,
2014
    (Dollars in Thousands)
             
Estimated credit losses, beginning of year   $ 3,262     $ 3,262  
Credit losses - no previous OTTI recognized     -       -  
Credit losses - previous OTTI recognized     -       -  
                 
Estimated credit losses, end of period   $ 3,262     $ 3,262