Note 16. Fair Values of Financial Instruments

ASC Topic 825, Disclosure about Fair Value of Financial Instruments, requires the disclosure of the estimated fair values of financial instruments. Quoted market prices, where available, are shown as estimates of fair values. Because no quoted market prices are available or a significant part of the Company’s financial instruments, the fair values of such instruments have been derived based on the amount and timing of future cash flows and estimated discount rates.

Present value techniques used in estimating the fair value of the Company’s financial instruments are significantly affected by the assumptions used. Fair values derived from using present value techniques are not substantiated by comparisons to independent markets, and in many cases, could not be realized in immediate settlement of the instruments.

ASC Topic 825 excludes certain financial instruments and all nonfinancial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Company.

The following table shows the estimated fair value and the related carrying values of the Company’s financial instruments as December 31, 2015, 2014, and 2013. Items that are not financial instruments are not included.

	2015				2014				2013
	Carrying		Fair		Carrying		Fair		Carrying		Fair
	Amount		Value		Amount		Value		Amount		Value
Financial assets:
Cash and due from banks	$	7,493,524	$	7,493,524	$	7,101,352	$	7,101,352	$	9,214,503	$	9,214,503
Interest-bearing deposits in other financial institutions		2,308,117		2,308,117		2,154,817		2,154,817		1,636,194		1,636,194
Federal funds sold		2,569,767		2,569,767		4,024,065		4,024,065		102,772		102,772
Investment securities available for sale		98,790,010		98,790,010		87,993,145		87,993,145		74,313,682		74,313,682
Federal Home Loan Bank Stock		1,203,100		1,203,100		1,327,800		1,327,800		1,452,900		1,452,900
Maryland Financial Bank Stock		30,000		30,000		30,000		30,000		30,000		30,000
Ground rents		163,638		163,638		169,200		169,200		169,200		169,200
Loans, less allowance for credit losses		259,636,706		252,239,000		273,986,237		268,536,000		270,684,120		270,684,120
Accrued interest receivable		1,121,405		1,121,405		1,274,137		1,274,137		1,509,238		1,509,238
Cash value of life insurance		9,357,712		9,357,712		9,138,658		9,138,658		8,914,817		8,914,817

Financial liabilities:
Deposits		335,191,530		307,924,000		338,877,292		310,239,000		323,803,356		291,046,000
Long-term borrowings		20,000,000		20,688,000		20,000,000		20,951,000		20,000,000		21,032,000
Dividends payable		-		-		276,096		276,096		274,737		274,737
Accrued interest payable		39,855		39,855		39,823		39,823		28,523		28,523
Unrecognized financial instruments:
Commitments to extend credit		21,385,509		21,385,509		21,372,092		21,372,092		23,868,826		23,868,826
Standby letters of credit		47,580		47,580		57,580		57,580		32,000		32,000

The following presents the carrying amount, fair value, and placement in the fair value hierarchy of the Company’s financial instruments.

	Carrying		Fair
December 31, 2015	Amount		Value		Level 1		Level 2		Level 3

Financial instruments - Assets
Cash and cash equivalents	$	12,371,408	$	12,371,408	$	-	$	12,371,408	$	-
Loans receivable, net		259,636,706		252,239,000		-		-		252,239,000
Cash value of life insurance		9,357,712		9,357,712		-		9,357,712		-
Financial instruments - Liabilities
Deposits		335,191,530		307,924,000		192,746,000		115,178,000		-
Long-term debt		20,000,000		20,688,000		-		20,688,000		-

For purposes of the disclosures of estimated fair value, the following assumptions were used.

Loans:

The estimated fair value for loans is determined by discounting future cash flows using current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities.

Investment securities:

Fair values for investment securities are based on quoted market prices, where applicable. When quoted market prices are not available, fair values are based on quoted market prices of comparable instruments.

Deposits:

The estimated fair value of deposits with no stated maturity, such as noninterest-bearing demand deposits, savings, NOW accounts and money market accounts, is equal to the amount payable on demand at the reporting date (that is, their carrying amounts). The fair value of certificates of deposit is based on the rates currently offered for deposits of similar maturities. The fair value estimates do not include the benefit that results from the low-cost funding provided by the deposit liabilities compared to the cost of borrowing funds in the market.

Borrowings:

The estimated fair value approximates carrying value for short-term borrowings. The fair value of long-term fixed rate borrowings is estimated by discounting future cash flows using current interest rates currently offered for similar financial instruments over the same maturities.

Other assets and liabilities:

The estimated fair values for cash and due from banks, interest-bearing deposits in other financial institutions, Federal funds sold, accrued interest receivable and payable, and short-term borrowings are considered to approximate cost because of their short-term nature.

Other assets and liabilities of the Bank that are not defined as financial instruments are not included in the above disclosures, such as property and equipment. In addition, non-financial instruments typically not recognized in the financial statements nevertheless may have value but are not included in the above disclosures. These include, among other items, the estimated earnings power of core deposit accounts, the trained work force, customer goodwill, and similar items.