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FAIR VALUE
 9 Months Ended
Sep. 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 September 30, 2015 and December 31, 2014. The Company has assets measured by fair value measurements on a non-recurring basis during 2015. At September 30, 2015, these assets include 35 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.

 

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

 

    (Dollars in Thousands)        
  Level 1     Level 2     Level 3     Fair
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     -       44,131       -       44,131  
Sales, calls and maturities of investment securities     -       (37,917 )     -       (37,917 )
Amortization/accretion of premium/discount     -       (584 )     -       (584 )
Increase (decrease) in market value     79       326       (38 )     367  
Transfer to Level 2     (573 )     797       (224 )     -  
                                 
Loans                                
New impaired loans     -       -       1,779       1,779  
Payments and other loan reductions     -       -       (546 )     (546 )
Change in total provision     -       -       (41 )     (41 )
                                 
OREO                                
Sales of OREO     -       (45 )     -       (45 )
                                 
September 30, 2015                                
Recurring:                                
Investment securities AFS     296       93,568       126       93,990  
                                 
Non-recurring:                                
Maryland Financial Bank stock     -       -       30       30  
Impaired loans     -       -       6,368       6,368  
OREO     -       -       -       -  
    $ 296     $ 93,568     $ 6,524     $ 100,388  

 

The estimated fair values of the Company’s financial instruments at September 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.  

                         
    September 30, 2015     December 31, 2014  
(In Thousands)   Carrying     Fair     Carrying     Fair  
    Amount     Value     Amount     Value  
Financial assets:                                
Cash and due from banks   $ 7,845     $ 7,845     $ 7,101     $ 7,101  
Interest-bearing deposits     1,842       1,842       2,155       2,155  
Federal funds sold     6,870       6,870       4,024       4,024  
Investment securities     93,990       93,990       87,993       87,993  
Investments in restricted stock     1,203       1,203       1,328       1,328  
Ground rents     164       164       169       169  
Loans, net     265,305       263,288       273,986       268,536  
Accrued interest receivable     1,125       1,125       1,274       1,274  
                                 
Financial liabilities:                                
Deposits     340,307       319,798       338,877       310,239  
Long-term borrowings     20,000       20,935       20,000       20,951  
Dividends payable     194       194       276       276  
Accrued interest payable     40       40       40       40  

  

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 September 30, 2015 are as follows:

 

Securities available for sale:   Less than 12 months     12 months or more     Total  
(Dollars in Thousands)                                    
    Fair     Unrealized     Fair     Unrealized     Fair     Unrealized  
    Value     Loss     Value     Loss     Value     Loss  
                                                 
Obligations of U.S. Govt Agencies   $ -     $ -     $ -     $ -     $ -     $ -  
State and Municipal     11,367       194       813       12       12,180       206  
Corporate Trust Preferred     -       -       126       55       126       55  
Mortgage Backed     22,917       113       16,955       315       39,872       428  
    $ 34,284     $ 307     $ 17,894     $ 382     $ 52,178     $ 689  

 

At September 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 September 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 September 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 a range of 75 to 150 basis points applied annually with a 0% recovery on both current and future defaulting financial institutions. No additional write-down was taken in the first nine 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 September 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 September 30, 2015, the Bank held 27 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 September 30, 2015, management believes the impairments detailed in the table above are temporary and no impairment loss has been recognized 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     At  
    September 30,     December 31,  
    2015     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