FAIR VALUE

3 Months Ended

Mar. 31, 2017

Fair Value Disclosures [Abstract]

FAIR VALUE

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:

·       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 March 31, 2017, these assets include 28 loans, excluding $323,000 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 million of loans with $522,000 of specific reserves as of March 31, 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 ($2.9 million of the total impaired loans as of March 31, 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 ($2.1 million with $270,000 of specific reserves as of March 31, 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:

(Dollars in Thousands)							Fair
	Level 1		Level 2		Level 3		Value
March 31, 2017
Recurring:
Securities available for sale
U.S. Treasury	$	-	$	1,506	$	-	$	1,506
State and Municipal		-		33,519		-		33,519
Mortgaged-backed		-		56,072		-		56,072
Non-recurring:
Maryland Financial Bank stock		-		-		30		30
Impaired loans		-		-		5,005		5,005
OREO		-		114		-		114
	$	-	$	91,211	$	5,035	$	96,246
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 March 31, 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.

	March 31, 2017				December 31, 2016
(In Thousands)	Carrying		Fair		Carrying		Fair
	Amount		Value		Amount		Value
Financial assets:
Cash and due from banks	$	6,600	$	6,600	$	6,946	$	6,946
Interest-bearing deposits		6,139		6,139		479		479
Federal funds sold		4,591		4,591		3,197		3,197
Investment securities		91,097		91,097		94,607		94,607
Investments in restricted stock		1,198		1,198		1,200		1,200
Ground rents		159		159		164		164
Loans, net		267,105		265,146		262,574		259,017
Cash Value of life insurance		9,377		9,377		9,328		9,328
Accrued interest receivable		1,115		1,115		1,135		1,135
Financial liabilities:
Deposits		340,574		339,757		333,237		315,418
Long-term borrowings		20,000		20,321		20,000		20,445
Dividends payable		-		-		-		-
Accrued interest payable		31		31		34		34

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

(In Thousands)
	Carrying		Fair
March 31, 2017	Amount		Value		Level 1		Level 2		Level 3
Financial instruments - Assets
Cash and cash equivalents	$	17,330	$	17,330	$	17,330	$	-	$	-
Loans receivable, net		267,105		265,146		-		-		265,146
Cash value of life insurance		9,377		9,377		-		9,377		-
Financial instruments - Liabilities
Deposits		340,574		339,757		236,515		103,242		-
Long-term debt		20,000		20,321		-		20,321		-

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 March 31, 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
State and Municipal	$	16,370	$	500	$	468	$	20	$	16,838	$	520
Mortgage Backed		50,171		893		-		-		50,171		893
	$	66,541	$	1,393	$	468	$	20	$	67,009	$	1,413

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 March 31, 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 March 31, 2017, the Bank held 1 investment security having continuous unrealized loss position for more than 12 months. Management does not believe the security is impaired due to reasons of credit quality. As of March 31, 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.