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FAIR VALUE | 9 Months Ended
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Sep. 30, 2019
FAIR VALUE |
FAIR VALUE | NOTE 6 – FAIR VALUE ASC Topic 820 provides a framework for measuring and disclosing fair value under GAAP. ASC 820 requires disclosures about the fair value of assets and liabilities recognized in the balance sheet in periods subsequent to initial recognition, whether the measurements are made on a recurring basis (for example, available-for-sale investment securities) or a nonrecurring basis (for example, impaired loans). ASC 820 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC 820 also establishes a fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The 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 – Unadjusted quoted prices in active markets for identical assets or liabilities that the entity has the ability to access at the measurement date.
| · |  | 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).
The following is a description of valuation methodologies used for assets and liabilities recorded at fair value: Investment Securities Available-for-Sale and Interest Rate Swaps. Investment securities available-for-sale and interest rate swap contracts are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted prices, if available. If quoted prices are not available, fair values are measured using independent pricing models or other model-based valuation techniques such as present value of future cash flows, adjusted for the security’s credit rating, prepayment assumptions and other factors such as credit loss assumptions. Level 1 securities include those traded on an active exchange such as the New York Stock Exchange, Treasury securities that are traded by dealers or brokers in active over-the-counter markets and money market funds. Level 2 securities include mortgage backed securities issued by government sponsored entities, municipal bonds and corporate debt securities, and interest rate swap contracts. Securities classified as Level 3 include asset-backed securities in illiquid markets. The Bank may 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. Loans. At September 30, 2019, these assets included 19 loans, excluding $0.2 million of residential real estate, consumer and indirect loans. They have been classified as impaired and 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. Impaired loans totaled $4.8 million with $210,000 of specific reserves as of September 30, 2019. 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. These loans totaled $4.6 million of the total impaired loans as of September 30, 2019. 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 ($374,000 with $210,000 of specific reserves as of September 30, 2019) 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, 2019 |  |  |  |  |  |  |  |  |  |  |  |
Recurring: |  |  |  |  |  |  |  |  |  |  |  |
Securities available for sale |  |  |  |  |  |  |  |  |  |  |  |
Collateralized mortgage obligations |  | $ | — |  | $ | 23,583 |  | $ | — |  | $ | 23,583
Agency mortgage-backed securities |  |  | — |  |  | 25,006 |  |  | — |  |  | 25,006
Municipal securities |  |  | — |  |  | 13,229 |  |  | — |  |  | 13,229
U.S. Government agency securities |  |  | — |  |  | 1,999 |  |  | — |  |  | 1,999
U.S. Treasury securities |  |  | — |  |  | 1,000 |  |  | — |  |  | 1,000
Interest rate swap |  |  | — |  |  | (460) |  |  | — |  |  | (460)
Non-recurring: |  |  |  |  |  |  |  |  |  |  |  |
Maryland Financial Bank stock |  |  | — |  |  | — |  |  | 4 |  |  | 4
Impaired loans |  |  | — |  |  | — |  |  | 4,775 |  |  | 4,775
OREO |  |  | — |  |  | 705 |  |  | — |  |  | 705
|  | $ | — |  | $ | 65,062 |  | $ | 4,779 |  | $ | 69,840
December 31, 2018 |  |  |  |  |  |  |  |  |  |  |  |
Recurring: |  |  |  |  |  |  |  |  |  |  |  |
Securities available for sale |  |  |  |  |  |  |  |  |  |  |  |
Collateralized mortgage obligations |  | $ | — |  | $ | 19,806 |  | $ | — |  | $ | 19,806
Agency mortgage-backed securities |  |  | — |  |  | 24,987 |  |  | — |  |  | 24,987
Municipal securities |  |  | — |  |  | 33,830 |  |  | — |  |  | 33,830
U.S. Government agency securities |  |  | — |  |  | 1,959 |  |  | — |  |  | 1,959
U.S. Treasury securities |  |  | — |  |  | 990 |  |  | — |  |  | 990
Interest rate swap |  |  | — |  |  | 295 |  |  | — |  |  | 295
Non-recurring: |  |  |  |  |  |  |  |  |  |  |  |
Maryland Financial Bank stock |  |  | — |  |  | — |  |  | 5 |  |  | 5
Impaired loans |  |  | — |  |  | — |  |  | 2,501 |  |  | 2,501
OREO |  |  |  |  |  | 705 |  |  |  |  |  | 705
|  | $ | — |  | $ | 82,572 |  | $ | 2,506 |  | $ | 85,078
The estimated fair values of the Company’s financial instruments at September 30, 2019 and December 31, 2018 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, 2019 |  | December 31, 2018 |
(dollars in thousands) |  | Carrying |  | Fair |  | Carrying |  | Fair |
|  | Amount |  | Value |  | Amount |  | Value |
Financial assets: |  |  |  |  |  |  |  |  |  |  |  |  |
Cash and due from banks |  | $ | 3,678 |  | $ | 3,678 |  | $ | 2,605 |  | $ | 2,605 |
Interest-bearing deposits in other financial institutions |  |  | 14,991 |  |  | 14,991 |  |  | 12,468 |  |  | 12,468 |
Federal funds sold |  |  | 902 |  |  | 902 |  |  | 881 |  |  | 881 |
Investment securities available for sale |  |  | 64,817 |  |  | 64,817 |  |  | 81,572 |  |  | 81,572 |
Investments in restricted stock |  |  | 1,225 |  |  | 1,225 |  |  | 2,481 |  |  | 2,481 |
Ground rents |  |  | 143 |  |  | 143 |  |  | 143 |  |  | 143 |
Loans, less allowance for credit losses |  |  | 281,582 |  |  | 277,175 |  |  | 296,579 |  |  | 293,175 |
Accrued interest receivable |  |  | 976 |  |  | 976 |  |  | 1,198 |  |  | 1,198 |
Cash value of life insurance |  |  | 7,982 |  |  | 7,982 |  |  | 7,860 |  |  | 7,860 |
Financial liabilities: |  |  |  |  |  |  |  |  |  |  |  |  |
Deposits |  |  | 325,266 |  |  | 324,759 |  |  | 322,453 |  |  | 307,271 |
Short-term borrowings |  |  | 20,000 |  |  | 20,004 |  |  | 55,000 |  |  | 55,851 |
Accrued interest payable |  |  | 120 |  |  | 120 |  |  | 152 |  |  | 152 |
Unrecognized financial instruments: |  |  |  |  |  |  |  |  |  |  |  |  |
Commitments to extend credit |  |  | 33,503 |  |  | 33,503 |  |  | 23,494 |  |  | 23,494 |
Standby letters of credit |  |  | 1,059 |  |  | 1,059 |  |  | 1,059 |  |  | 1,059 |
The following table presents the carrying amount, fair value, and placement in the fair value hierarchy of the Company’s financial instruments that were estimated using an exit pricing notion.
(dollars in thousands) |  |  |  |  |  |  |  |  |  |  |  |
|  | Carrying |  | Fair |  |  |  |  |  |  |  |
September 30, 2019 |  | Amount |  | Value |  | Level 1 |  | Level 2 |  | Level 3
Financial instruments - Assets |  |  |  |  |  |  |  |  |  |  |  |  |  |
Cash and cash equivalents |  | $ | 19,571 |  | $ | 19,571 |  | $ | 19,571 |  | — |  | $ | —
Loans receivable, net |  |  | 281,582 |  |  | 277,175 |  |  | — |  | — |  |  | 277,175
Cash value of life insurance |  |  | 7,982 |  |  | 7,982 |  |  | — |  | 7,982 |  |  | —
Financial instruments - Liabilities |  |  |  |  |  |  |  |  |  |  |  |  |  |
Deposits |  |  | 325,266 |  |  | 324,759 |  |  | 111,535 |  | 213,224 |  |  | —
Short-term debt |  |  | 20,000 |  |  | 20,004 |  |  | — |  | 20,004 |  |  | —
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 if available, or measured using pricing models or other model-based valuation techniques such as present value and future value cash flows. The fair value of loans receivable is estimated using discounted cash flow analysis. For cash surrender value of life insurance, the carrying value is a reasonable estimate of fair value. Cash surrender value of life insurance is reported in the Level 2 fair value category. The fair value of FHLB borrowings is estimated based upon discounted future cash flows using a discounted rate comparable to the current market rate for such borrowings. FHLB borrowings are reported in the Level 2 fair value category. 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.

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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/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 820 -SubTopic 10 -Section 50 -Paragraph 2 -URI http://asc.fasb.org/extlink&oid=117815213&loc=d3e19207-110258 + Details
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