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FAIR VALUE
 6 Months Ended
Jun. 30, 2017
Fair Value Disclosures [Abstract]  
FAIR VALUE

NOTE 5 – 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. 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 June 30, 2017, these assets include 28 loans, excluding $155,000 of consumer and indirect 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. Loans which are deemed to be impaired ($4.7 million of loans with $738,000 of specific reserves as of June 30, 2017) and foreclosed real estate assets are primarily valued on a nonrecurring basis at the fair values of the underlying real estate collateral. The Company is predominantly a cash flow lender with real estate serving as collateral on a majority of loans ($2.8 million of the total impaired loans as of June 30, 2017). On a quarterly basis, the Company determines such fair values through a variety of data points and mostly rely on appraisals from independent appraisers. We obtain an appraisal on properties when they become impaired and have new appraisals at least every year. Typically, these appraisals do not include an inside inspection of the property as our loan documents do not require the borrower to allow access to the property. Therefore the most significant unobservable inputs is the details of the amenities included within the property and the condition of the property. Further, we cannot always accurately assess the amount of time it takes to gain ownership of our collateral through the foreclosure process and the damage, as well as potential looting, of the property further decreasing our value. Thus, in determining the fair values we discount the current independent appraisals, with a range from 0% to 16%, based on individual circumstances. The remaining impaired loans ($1.92 million with $288,000 of specific reserves as of June 30, 2017) include mobile homes, commercial, consumer, and indirect auto loans, which are valued based on the value of the underlying collateral.

 

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

 

                Fair  
(dollars in thousands)   Level 1     Level 2     Level 3     Value  
June 30, 2017                                
Recurring:                                
Securities available for sale                                
 U.S. Treasury   $ -     $ 1,506     $ -     $ 1,506  
 State and Municipal     -       35,710       -       35,710  
 Mortgaged-backed     -       53,413       -       53,413  
                                 
Non-recurring:                                
Maryland Financial Bank stock     -       -       30       30  
Impaired loans     -       -       4,733       4,733  
OREO     -       114       -       114  
    $ -     $ 90,743     $ 4,763     $ 95,506  
                                 
December 31, 2016                                
Recurring:                                
Securities available for sale                                
 U.S. Treasury   $ -     $ 1,507     $ -     $ 1,507  
 State and Municipal     -       33,845       -       33,845  
 Mortgaged-backed     -       59,255       -       59,255  
                                 
Non-recurring:                                
Maryland Financial Bank stock     -       -       30       30  
Impaired loans     -       -       2,891       2,891  
OREO     -       114       -       114  
    $ -     $ 94,721     $ 2,921     $ 97,642  


 

 

The estimated fair values of the Company’s financial instruments at June 30, 2017 and December 31, 2016 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, 2017     December 31, 2016  
(dollars in thousands)   Carrying     Fair     Carrying     Fair  
    Amount     Value     Amount     Value  
Financial assets:                                
Cash and due from banks   $ 14,487     $ 14,487     $ 6,946     $ 6,946  
Interest-bearing deposits     728       728       479       479  
Federal funds sold     2,123       2,123       3,197       3,197  
Investment securities     90,629       90,629       94,607       94,607  
Investments in restricted stock     1,410       1,410       1,230       1,230  
Ground rents     156       156       164       164  
Loans, net     268,421       266,740       262,574       259,017  
Cash Value of life insurance     9,428       9,428       9,328       9,328  
Accrued interest receivable     1,092       1,092       1,134       1,134  
                                 
Financial liabilities:                                
Deposits     335,481       317,448       333,237       315,418  
Long-term borrowings     10,000       10,165       10,000       10,257  
Short-term borrowings     15,000       15,065       10,000       10,188  
Dividends payable     -       -       -       -  

 

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

 

(dollars in thousands)                              
    Carrying     Fair                    
June 30, 2017   Amount     Value     Level 1     Level 2     Level 3  
                               
Financial instruments - Assets                                        
Cash and cash equivalents   $ 17,338     $ 17,338     $ 17,338     $ -     $ -  
Loans receivable, net     268,421       266,740       -       -       266,740  
Cash value of life insurance     9,428       9,428       -       9,428       -  
Financial instruments - Liabilities                                        
Deposits     335,481       317,448       217,906       99,542       -  
Long-term debt     10,000       10,165       -       10,165       -  
Short-term debt     15,000       15,065       -       15,065       -  

 

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, 2017 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  
                                     
U.S. Agency   $ 500     $ 1     $ -     $ -     $ 500     $ 1  
State and Municipal     7,461       178       1,398       45       8,859       223  
Mortgage Backed     44,590       591       -       -       44,590       591  
    $ 52,551     $ 770     $ 1,398     $ 45     $ 53,949     $ 815  

 

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, 2017, 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, 2017, the Bank held 4 investment securities that were in a continuous unrealized loss position for more than 12 months. Management does not believe the securities are impaired due to reasons of credit quality. As of June 30, 2017, management believes the impairment detailed in the table above is temporary and no impairment loss has been recognized in the Company’s consolidated income statement.