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FAIR VALUE

9 Months Ended

Sep. 30, 2014

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:

o Level 1 – Quoted prices in active markets for identical securities

o Level 2 – Other significant observable inputs (including quoted prices in active markets for similar securities)

o 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, 2014 or December 31, 2013. The Company has assets measured by fair value measurements on a non-recurring basis during 2014. At September 30, 2014, these assets include 15 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 and one property classified as OREO valued under Level 2 inputs.

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

	(Dollars in Thousands)
									Fair
	Level 1		Level 2			Level 3			Value
December 31, 2013
Recurring:
Investment securities available for sale (AFS)	$	574	$	73,516		$	224		$	74,314

Non-recurring:
Maryland Financial Bank stock		-		-			30			30
Impaired loans		-		-			4,745			4,745
OREO		-		1,171			-			1,171
		574		74,687			4,999			80,260

Activity:
Investment securities AFS
Purchases of investment securities		-		28,954			-			28,954
Sales, calls and maturities of investment securities		-		(19,578	)		-			(19,578	)
Amortization/accretion of premium/discount		-		(407	)		-			(407	)
Increase (decrease) in market value		46		3,475			(126	)		3,395

Loans
New impaired loans		-		-			3,819			3,819
Payments and other loan reductions		-		-			(1,444	)		(1,444	)
Change in total provision		-		-			447			447

OREO
Sales of OREO		-		(917	)		-			(917	)
Loss on disposal of OREO		-		(16	)		-			(16	)
Write-down of OREO		-		(75	)		-			(75	)

September 30, 2014
Recurring:
Investment securities AFS		620		85,960			98			86,678

Non-recurring:
Maryland Financial Bank stock		-		-			30			30
Impaired loans		-		-			7,567			7,567
OREO		-		163			-			163
	$	620	$	86,123		$	7,695		$	94,438

The estimated fair values of the Company’s financial instruments at September 30, 2014 and December 31, 2013 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, 2014				December 31, 2013
(In Thousands)	Carrying		Fair		Carrying		Fair
	Amount		Value		Amount		Value
Financial assets:
Cash and due from banks	$	7,112	$	7,112	$	9,214	$	9,214
Interest-bearing deposits		5,702		5,702		1,636		1,636
Federal funds sold		6,512		6,512		103		103
Investment securities		86,678		86,678		74,314		74,314
Investments in restricted stock		1,328		1,328		1,453		1,453
Ground rents		169		169		169		169
Loans, net		280,235		274,896		270,684		270,684
Accrued interest receivable		1,211		1,211		1,509		1,509

Financial liabilities:
Deposits		349,449		317,821		323,803		291,046
Long-term borrowings		20,000		20,924		20,000		21,032
Dividends payable		276		276		275		275
Accrued interest payable		40		40		29		29

Off-balance sheet commitments		23,551		23,551		23,901		23,901

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, 2014 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	$	5,410	$	37	$	-	$	-	$	5,410	$	37
State and Municipal		-		-		5,113		79		5,113		79
Corporate Trust Preferred		-		-		98		149		98		149
Mortgage Backed		14,707		73		20,744		998		35,451		1,071
	$	20,117	$	110	$	25,955	$	1,226	$	46,072	$	1,336

At September 30, 2014, 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, 2014 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, 2014 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 150 basis points applied annually with a 0% recovery on both current and future defaulting financial institutions. No write-down was taken in the first nine months of 2014. There was a write-down of $15,312 done on the larger portion of the security during the third quarter of 2013 and a write-down of $269 done on the larger portion of the security during the fourth quarter of 2013.

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, 2014, 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, 2014, the Bank held 39 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, 2014, management believes the impairments detailed in the table above are temporary and no impairment loss has been realized 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,
	2014		2013
	(Dollars in Thousands)

Estimated credit losses, beginning of year	$	3,262	$	3,247
Credit losses - no previous OTTI recognized		-		-
Credit losses - previous OTTI recognized		-		15

Estimated credit losses, end of period	$	3,262	$	3,262

- 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.

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