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FAIR VALUE | 9 Months Ended
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Sep. 30, 2017
FAIR VALUE. |
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 September 30, 2017, these assets include 29 loans, excluding $226,000 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 ($5.0 million of loans with $810,000 of specific reserves as of September 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 ($3.8 million of the total impaired loans as of September 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 ($1.2 million with $292,000 of specific reserves as of September 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
September 30, 2017 |  |  |  |  |  |  |  |  |  |  |  |
Recurring: |  |  |  |  |  |  |  |  |  |  |  |
Securities available for sale |  |  |  |  |  |  |  |  |  |  |  |
U.S. Treasury |  | $ | — |  | $ | 1,504 |  | $ | — |  | $ | 1,504
Agency |  |  | — |  |  | 1,992 |  |  | — |  |  | 1,992
State and Municipal |  |  | — |  |  | 36,835 |  |  | — |  |  | 36,835
Mortgaged-backed |  |  | — |  |  | 49,572 |  |  | — |  |  | 49,572
Non-recurring: |  |  |  |  |  |  |  |  |  |  |  |
Maryland Financial Bank stock |  |  | — |  |  | — |  |  | 30 |  |  | 30
Impaired loans |  |  | — |  |  | — |  |  | 4,227 |  |  | 4,227
OREO |  |  | — |  |  | 114 |  |  | — |  |  | 114
|  | $ | — |  | $ | 90,017 |  | $ | 4,257 |  | $ | 94,274
December 31, 2016 |  |  |  |  |  |  |  |  |  |  |  |
Recurring: |  |  |  |  |  |  |  |  |  |  |  |
Securities available for sale |  |  |  |  |  |  |  |  |  |  |  |
U.S. Treasury |  | $ | — |  | $ | 1,507 |  | $ | — |  | $ | 1,507
Agency |  |  | — |  |  | — |  |  | — |  |  | —
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 September 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.
|  | September 30, 2017 |  | December 31, 2016 |
(dollars in thousands) |  | Carrying |  | Fair |  | Carrying |  | Fair |
|  | Amount |  | Value |  | Amount |  | Value |
Financial assets: |  |  |  |  |  |  |  |  |  |  |  |  |
Cash and due from banks |  | $ | 4,371 |  | $ | 4,371 |  | $ | 3,195 |  | $ | 3,195 |
Interest-bearing deposits in other financial institutions |  |  | 7,117 |  |  | 7,117 |  |  | 4,230 |  |  | 4,230 |
Federal funds sold |  |  | 9 |  |  | 9 |  |  | 3,197 |  |  | 3,197 |
Investment securities available for sale |  |  | 89,903 |  |  | 89,903 |  |  | 94,607 |  |  | 94,607 |
Investments in restricted stock |  |  | 30 |  |  | 30 |  |  | 1,230 |  |  | 1,230 |
Ground rents |  |  | 156 |  |  | 156 |  |  | 164 |  |  | 164 |
Loans, less allowance for credit losses |  |  | 268,840 |  |  | 266,254 |  |  | 262,574 |  |  | 259,017 |
Accrued interest receivable |  |  | 1,140 |  |  | 1,140 |  |  | 1,134 |  |  | 1,134 |
Cash value of life insurance |  |  | 9,479 |  |  | 9,479 |  |  | 9,328 |  |  | 9,328 |
Financial liabilities: |  |  |  |  |  |  |  |  |  |  |  |  |
Deposits |  |  | 334,105 |  |  | 316,619 |  |  | 333,246 |  |  | 315,418 |
Long-term borrowings |  |  | — |  |  | — |  |  | 10,000 |  |  | 10,257 |
Short-term borrowings |  |  | 20,000 |  |  | 20,917 |  |  | 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 |  |  |  |  |  |  |  |
September 30, 2017 |  | Amount |  | Value |  | Level 1 |  | Level 2 |  | Level 3
Financial instruments - Assets |  |  |  |  |  |  |  |  |  |  |  |  |  |
Cash and cash equivalents |  | $ | 11,497 |  | $ | 11,497 |  | $ | 11,497 |  | — |  | $ | —
Loans receivable, net |  |  | 268,840 |  |  | 266,254 |  |  | — |  | — |  |  | 266,254
Cash value of life insurance |  |  | 9,479 |  |  | 9,479 |  |  | — |  | 9,479 |  |  | —
Financial instruments - Liabilities |  |  |  |  |  |  |  |  |  |  |  |  |  |
Deposits |  |  | 334,105 |  |  | 316,619 |  |  | 219,478 |  | 97,141 |  |  | —
Long-term debt |  |  | — |  |  | — |  |  | — |  | — |  |  | —
Short-term debt |  |  | 20,000 |  |  | 20,917 |  |  | — |  | 20,917 |  |  | —
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, 2017 and December 31, 2016 are as follows:
September 30, 2017 |  | Less than 12 months |  | 12 months or more |  | Total
Securities available for sale: |  | Fair |  | Unrealized |  | Fair |  | Unrealized |  | Fair |  | Unrealized
|  | Value |  | Loss |  | Value |  | Loss |  | Value |  | Loss
|  | (dollars in thousands)
U.S. Treasury |  | $ | 499 |  | $ | 1 |  | $ | — |  | $ | — |  | $ | 499 |  | $ | 1
Agency |  |  | 1,992 |  |  | 7 |  |  | 848 |  |  | 12 |  |  | 2,840 |  |  | 19
State and Municipal |  |  | 5,133 |  |  | 62 |  |  | 4,862 |  |  | 167 |  |  | 9,995 |  |  | 229
Mortgage Backed |  |  | 33,466 |  |  | 422 |  |  | 9,446 |  |  | 232 |  |  | 42,912 |  |  | 654
|  | $ | 41,090 |  | $ | 492 |  | $ | 15,156 |  | $ | 411 |  | $ | 56,246 |  | $ | 903
December 31, 2016 |  | Less than 12 months |  | 12 months or more |  | Total
Securities available for sale: |  | Fair |  | Unrealized |  | Fair |  | Unrealized |  | Fair |  | Unrealized
|  | Value |  | Loss |  | Value |  | Loss |  | Value |  | Loss
|  | (dollars in thousands)
U.S. Treasury |  | $ | — |  | $ | — |  | $ | — |  | $ | — |  | $ | — |  | $ | —
Agency |  |  | — |  |  | — |  |  | 986 |  |  | 16 |  |  | 986 |  |  | 16
State and Municipal |  |  | 19,200 |  |  | 580 |  |  | — |  |  | — |  |  | 19,200 |  |  | 580
Mortgage Backed |  |  | 43,094 |  |  | 575 |  |  | 9,603 |  |  | 277 |  |  | 52,697 |  |  | 852
|  | $ | 62,294 |  | $ | 1,155 |  | $ | 10,589 |  | $ | 293 |  | $ | 72,883 |  | $ | 1,448
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, 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 September 30, 2017, the Bank held 30 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 September 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.

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- 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. + References Reference 1: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 820 -URI http://asc.fasb.org/topic&trid=2155941 + Details
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