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Note 6 - Fair Value | 6 Months Ended
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Jun. 30, 2018
Fair Value. |
FAIR VALUE | NOTE 6 – FAIR VALUE Accounting guidance on fair value measurement uses a hierarchy intended to maximize the use of observable inputs and minimize the use of unobservable inputs. This hierarchy includes three levels and is based upon the valuation techniques used to measure assets and liabilities. The three levels are as follows:
| · |  | Level 1 – Inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in markets;
| · |  | Level 2 – Inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument; and
| · |  | Level 3 – Inputs to the valuation methodology are unobservable and significant to the fair value measurement.
Assets and liabilities measured at fair value on a recurring basis comprise the following at June 30, 2018 and December 31, 2017:
|  |  |  |  | Fair Value Measurements at Reporting Date Using
|  |  |  |  | Quoted Prices |  | Significant |  |  |
|  |  |  |  | in Active |  | Other |  | Significant
|  |  |  |  | Markets for |  | Observable |  | Unobservable
|  |  |  |  | Identical Assets |  | Inputs |  | Inputs
|  | Fair Value |  | (Level 1) |  | (Level 2) |  | (Level 3)
June 30, 2018: |  |  |  |  |  |  |  |  |  |  |  |
Securities AFS: |  |  |  |  |  |  |  |  |  |  |  |
U.S. govt. sponsored agency securities |  | $ | 35,666,536 |  | $ | — |  | $ | 35,666,536 |  | $ | —
Residential mortgage-backed and related securities |  |  | 158,534,448 |  |  | — |  |  | 158,534,448 |  |  | —
Municipal securities |  |  | 59,507,267 |  |  | — |  |  | 59,507,267 |  |  | —
Other securities |  |  | 4,236,420 |  |  | — |  |  | 4,236,420 |  |  | —
Interest rate caps |  |  | 706,291 |  |  | — |  |  | 706,291 |  |  | —
Interest rate swaps - assets |  |  | 6,171,740 |  |  | — |  |  | 6,171,740 |  |  |
Total assets measured at fair value |  | $ | 264,822,702 |  | $ | — |  | $ | 264,822,702 |  | $ | —
Interest rate swaps - liabilities |  | $ | 6,543,790 |  | $ | — |  | $ | 6,543,790 |  | $ | —
Total liabilities measured at fair value |  | $ | 6,543,790 |  | $ | — |  | $ | 6,543,790 |  | $ | —
December 31, 2017: |  |  |  |  |  |  |  |  |  |  |  |
Securities AFS: |  |  |  |  |  |  |  |  |  |  |  |
U.S. govt. sponsored agency securities |  | $ | 38,096,534 |  | $ | — |  | $ | 38,096,534 |  | $ | —
Residential mortgage-backed and related securities |  |  | 163,301,304 |  |  | — |  |  | 163,301,304 |  |  | —
Municipal securities |  |  | 66,625,496 |  |  | — |  |  | 66,625,496 |  |  | —
Other securities |  |  | 4,884,573 |  |  | 1,028 |  |  | 4,883,545 |  |  | —
Interest rate caps |  |  | 506,700 |  |  | — |  |  | 506,700 |  |  | —
Interest rate swaps - assets |  |  | 4,397,238 |  |  | — |  |  | 4,397,238 |  |  |
Total assets measured at fair value |  | $ | 277,811,845 |  | $ | 1,028 |  | $ | 277,810,817 |  | $ | —
Interest rate swaps - liabilities |  | $ | 4,397,238 |  | $ | — |  | $ | 4,397,238 |  | $ | —
Total liabilities measured at fair value |  | $ | 4,397,238 |  | $ | — |  | $ | 4,397,238 |  | $ | —
There were no transfers of assets or liabilities between Levels 1, 2, and 3 of the fair value hierarchy for the three and six months ended June 30, 2018 or 2017. The securities AFS portfolio consists of securities whereby the Company obtains fair values from an independent pricing service. The fair values are determined by pricing models that consider observable market data, such as interest rate volatilities, LIBOR yield curve, credit spreads and prices from market makers and live trading systems (Level 2 inputs). Interest rate caps are used for the purpose of hedging interest rate risk. The fair values are determined by pricing models that consider observable market data for derivative instruments with similar structures (Level 2 inputs). Interest rate swaps are executed for select commercial customers. The interest rate swaps are further described in Note 1 to the Consolidated Financial Statements included in the Company's Annual Report on Form 10‑K for the year ended December 31, 2017. The fair values are determined by comparing the contract rate on the swap with the then-current market rate for the remaining term of the transaction (Level 2 inputs). Interest rate swaps are also used for the purpose of hedging interest rate risk on junior subordinated debt. The fair values are determined by comparing the contract rate on the swap with the then-current market rate for the remaining term of the transaction (Level 2 inputs). Certain financial assets are measured at fair value on a non-recurring basis; that is, the assets are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment). Assets measured at fair value on a non-recurring basis comprise the following at June 30, 2018 and December 31, 2017:
|  |  |  |  | Fair Value Measurements at Reporting Date Using
|  |  |  |  | Quoted Prices |  | Significant |  |  |
|  |  |  |  | in Active |  | Other |  | Significant
|  |  |  |  | Markets for |  | Observable |  | Unobservable
|  |  |  |  | Identical Assets |  | Inputs |  | Inputs
|  | Fair Value |  | Level 1 |  | Level 2 |  | Level 3
June 30, 2018: |  |  |  |  |  |  |  |  |  |  |  |
Impaired loans/leases |  | $ | 4,674,218 |  | $ | — |  | $ | — |  | $ | 4,674,218
OREO |  |  | 13,770,025 |  |  | — |  |  | — |  |  | 13,770,025
|  | $ | 18,444,243 |  | $ | — |  | $ | — |  | $ | 18,444,243
December 31, 2017: |  |  |  |  |  |  |  |  |  |  |  |
Impaired loans/leases |  | $ | 8,972,337 |  | $ | — |  | $ | — |  | $ | 8,972,337
OREO |  |  | 14,642,973 |  |  | — |  |  | — |  |  | 14,642,973
|  | $ | 23,615,310 |  | $ | — |  | $ | — |  | $ | 23,615,310
Impaired loans/leases are evaluated and valued at the time the loan/lease is identified as impaired, at the lower of cost or fair value, and are classified as Level 3 in the fair value hierarchy. Fair value is measured based on the value of the collateral securing these loans/leases. Collateral may be real estate and/or business assets, including equipment, inventory and/or accounts receivable, and is determined based on appraisals by qualified licensed appraisers hired by the Company. Appraised and reported values are discounted based on management's historical knowledge, changes in market conditions from the time of valuation, and/or management's expertise and knowledge of the client and client's business. OREO in the table above consists of property acquired through foreclosures and settlements of loans. Property acquired is carried at the estimated fair value of the property, less disposal costs, and is classified as Level 3 in the fair value hierarchy. The estimated fair value of the property is determined based on appraisals by qualified licensed appraisers hired by the Company. Appraised and reported values are discounted based on management's historical knowledge, changes in market conditions from the time of valuation, and/or management's expertise and knowledge of the property. The following table presents additional quantitative information about assets measured at fair value on a non-recurring basis for which the Company has utilized Level 3 inputs to determine fair value:
|  | Quantitative Information about Level Fair Value Measurements |
|  | Fair Value |  | Fair Value |  |  |  |  |  |  |  |  |  |  |
|  | June 30, |  | December 31, |  |  |  |  |  |  |  |  |  |  |
|  | 2018 |  | 2017 |  | Valuation Technique |  | Unobservable Input |  | Range |
Impaired loans/leases |  | $ | 4,674,218 |  | $ | 8,972,337 |  | Appraisal of collateral |  | Appraisal adjustments |  | (10.00) | % | to |  | (30.00) | %
OREO |  |  | 13,770,025 |  |  | 14,642,973 |  | Appraisal of collateral |  | Appraisal adjustments |  | 0.00 | % | to |  | (35.00) | %
For the impaired loans/leases and OREO, the Company records carrying value at fair value less disposal or selling costs. The amounts reported in the tables above are fair values before the adjustment for disposal or selling costs. There have been no changes in valuation techniques used for any assets measured at fair value during the three and six months ended June 30, 2018 and 2017. The following table presents the carrying values and estimated fair values of financial assets and liabilities carried on the Company's consolidated balance sheets, including those financial assets and liabilities that are not measured and reported at fair value on a recurring basis or non-recurring basis:
|  | Fair Value |  | As of June 30, 2018 |  | As of December 31, 2017
|  | Hierarchy |  | Carrying |  | Estimated |  | Carrying |  | Estimated
|  | Level |  | Value |  | Fair Value |  | Value |  | Fair Value
Cash and due from banks |  | Level 1 |  | $ | 69,069,403 |  | $ | 69,069,403 |  | $ | 75,721,663 |  | $ | 75,721,663
Federal funds sold |  | Level 2 |  |  | 10,866,000 |  |  | 10,866,000 |  |  | 30,197,000 |  |  | 30,197,000
Interest-bearing deposits at financial institutions |  | Level 2 |  |  | 40,801,388 |  |  | 40,801,388 |  |  | 55,765,012 |  |  | 55,765,012
Investment securities: |  |  |  |  |  |  |  |  |  |  |  |  |  |
HTM |  | Level 2 |  |  | 400,052,344 |  |  | 397,252,368 |  |  | 379,474,205 |  |  | 379,749,804
AFS |  | See Previous Table |  |  | 257,944,671 |  |  | 257,944,671 |  |  | 272,907,907 |  |  | 272,907,907
Loans/leases receivable, net |  | Level 3 |  |  | 4,327,980 |  |  | 4,674,218 |  |  | 8,307,719 |  |  | 8,972,337
Loans/leases receivable, net |  | Level 2 |  |  | 3,072,919,367 |  |  | 3,020,805,000 |  |  | 2,921,821,953 |  |  | 2,892,963,000
Interest rate caps |  | Level 2 |  |  | 706,291 |  |  | 706,291 |  |  | 506,700 |  |  | 506,700
Interest rate swaps - assets |  | Level 2 |  |  | 6,171,740 |  |  | 6,171,740 |  |  | 4,397,238 |  |  | 4,397,238
Deposits: |  |  |  |  |  |  |  |  |  |  |  |  |  |
Nonmaturity deposits |  | Level 2 |  |  | 2,622,243,626 |  |  | 2,622,243,626 |  |  | 2,670,583,178 |  |  | 2,670,583,178
Time deposits |  | Level 2 |  |  | 676,032,401 |  |  | 677,799,000 |  |  | 596,071,878 |  |  | 591,772,000
Short-term borrowings |  | Level 2 |  |  | 17,585,605 |  |  | 17,585,605 |  |  | 13,993,122 |  |  | 13,993,122
FHLB advances |  | Level 2 |  |  | 254,100,000 |  |  | 254,008,000 |  |  | 192,000,000 |  |  | 192,115,000
Other borrowings |  | Level 2 |  |  | 71,125,000 |  |  | 71,645,000 |  |  | 66,000,000 |  |  | 66,520,000
Junior subordinated debentures |  | Level 2 |  |  | 37,580,881 |  |  | 29,851,237 |  |  | 37,486,487 |  |  | 29,253,624
Interest rate swaps - liabilities |  | Level 2 |  |  | 6,543,790 |  |  | 6,543,790 |  |  | 4,397,238 |  |  | 4,397,238

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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://fasb.org/us-gaap/role/ref/legacyRef -Publisher FASB -Name Accounting Standards Codification -Topic 820 -URI http://asc.fasb.org/topic&trid=2155941 + Details
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