Fair Value

9 Months Ended

Sep. 30, 2012

Fair Value

NOTE 4 – FAIR VALUE

ASC 820-10, formerly SFAS No. 157, 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. No assets are valued under Level 1 inputs at September 30, 2012 or December 31, 2011. The Company has assets measured by fair value measurements on a non-recurring basis during 2012. At September 30, 2012, these assets include 25 loans classified as impaired, which include nonaccrual, past due 90 days or more and still accruing, or troubled debt restructuring, and a homogeneous pool of indirect loans all considered to be impaired loans, which are valued under Level 3 inputs and three properties 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
December 31, 2011	Level 1		Level 2			Level 3			Value
Recurring:
Investment securities available for sale (AFS)	$	-	$	102,867		$	-		$	102,867
Non-recurring:
Maryland Financial Bank stock		-		30			-			30
Impaired loans		-		-			8,309			8,309
OREO		-		1,111			-			1,111
		-		104,008			8,309			112,317
Activity:
Investment securities AFS
Purchases of investment securities		-		22,479			-			22,479
Sales, calls and maturities of investment securities		-		(29,987	)		-			(29,987	)
Amortization/accretion of premium/discount		-		(1,234	)		-			(1,234	)
Increase in market value		-		1,336			-			1,336
Loans
New impaired loans		-		-			763			763
Payments and other loan reductions		-		-			(3,134	)		(3,134	)
Change in total provision		-		-			450			450
OREO
OREO converted from loans		-		254			-			254
Sales of OREO		-		(500	)		-			(500	)
September 30, 2012
Recurring:
Investment securities AFS		-		95,461			-			95,461
Non-recurring:
Maryland Financial Bank stock		-		30			-			30
Impaired loans		-		-			6,388			6,388
OREO		-		865			-			865
	$	-	$	96,356		$	6,388		$	102,744

The estimated fair values of the Company’s financial instruments at September 30, 2012 and December 31, 2011 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, 2012				December 31, 2011
(In Thousands)	Carrying		Fair		Carrying		Fair
	Amount		Value		Amount		Value
Financial assets:
Cash and due from banks	$	8,242	$	8,242	$	6,877	$	6,877
Interest-bearing deposits		4,578		4,578		2,423		2,423
Federal funds sold		306		306		654		654
Investment securities		95,461		95,461		102,867		102,867
Investments in restricted stock		1,448		1,448		1,520		1,520
Ground rents		175		175		175		175
Loans, net		251,628		253,324		232,734		231,912
Accrued interest receivable		1,431		1,431		1,542		1,542
Financial liabilities:
Deposits		324,181		306,479		311,945		293,713
Short-term borrowings		-		-		255		255
Long-term borrowings		20,000		21,965		20,000		21,425
Dividends payable		273		273		272		272
Accrued interest payable		66		66		48		48
Off-balance sheet commitments		22,232		22,232		22,736		22,736

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, 2012 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	$	22	$	6	$	-	$	-	$	22	$	6
State and Municipal		-		-		285		15		285		15
Corporate Trust Preferred		-		-		182		164		182		164
Mortgage Backed		1,983		19		-		-		1,983		19
	$	2,005	$	25	$	467	$	179	$	2,472	$	204

At September 30, 2012, the company owned one pooled trust preferred security issued by Regional Diversified Funding, Senior Notes with a Fitch rating of C. The market for these securities at September 30, 2012 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, 2012 by an unrelated third party 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. As a result of this testing, no write-down was required in the third quarter of 2012. A write-down of $22,000 was taken on this security in the first quarter of 2011.

Maryland Financial Bank stock was written down $70,000 in the second quarter of 2011 due to a prospectus that offered stock at a discount from par.

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, 2012, 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, 2012 the Bank held 3 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, 2012, 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,
	2012		2011
	(Dollars in Thousands)
Estimated credit losses, beginning of year	$	3,247	$	3,155
Credit losses - no previous OTTI recognized		-		70
Credit losses - previous OTTI recognized		-		22
Estimated credit losses, end of period	$	3,247	$	3,247