Note 6 - Fair Value

6 Months Ended

Jun. 30, 2012

Fair Value Disclosures [Text Block]

NOTE 6 – FAIR VALUE

The measurement of fair value under U.S. GAAP 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:

1. Level 1 – Inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in markets;

2. 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

3. Level 3 – Inputs to the valuation methodology are unobservable and significant to the fair value measurement.

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, 2012 or 2011.

Assets measured at fair value on a recurring basis comprise the following at June 30, 2012 and December 31, 2011:

			Fair Value Measurements at Reporting Date Using
	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
June 30, 2012:
Securities available for sale:
U.S. govt. sponsored agency securities	$	389,599,752	$	-	$	389,599,752	$	-
Residential mortgage-backed and related securities		165,827,201		-		165,827,201		-
Municipal securities		81,071,908		-		81,071,908		-
Trust preferred securities		102,000		-		102,000		-
Other securities		1,536,975		215,189		1,321,786		-
	$	638,137,836	$	215,189	$	637,922,647	$	-
December 31, 2011:
Securities available for sale:
U.S. govt. sponsored agency securities	$	428,955,220	$	-	$	428,955,220	$	-
Residential mortgage-backed and related securities		108,853,749		-		108,853,749		-
Municipal securities		25,689,364		-		25,689,364		-
Trust preferred securities		80,800		-		80,800		-
Other securities		1,450,158		191,506		1,258,652		-
	$	565,029,291	$	191,506	$	564,837,785	$	-

A small portion of the securities available for sale portfolio consists of common stock issued by various unrelated bank holding companies.  The fair values used by the Company are obtained from an independent pricing service and represent quoted market prices for the identical securities (Level 1 inputs).

The large majority of the securities available for sale portfolio consists of U.S. government sponsored agency securities for which 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).

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, 2012 and December 31, 2011:

			Fair Value Measurements at Reporting Date Using
	Fair Value		Level 1		Level 2		Level 3
June 30, 2012:
Impaired loans/leases	$	12,832,751	$	-	$	-	$	12,832,751
Other real estate owned		9,866,918		-		-		9,866,918
	$	22,699,669	$	-	$	-	$	22,699,669
December 31, 2011:
Impaired loans/leases	$	18,361,757	$	-	$	-	$	18,361,757
Other real estate owned		9,056,619		-		-		9,056,619
	$	27,418,376	$	-	$	-	$	27,418,376

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 may be 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.  

Other real estate owned in the table above consists of property acquired through foreclosures and settlements of loans.  Property acquired is carried at the lower of the principal amount of loans outstanding, or the estimated fair value of the property, less disposal costs, and is classified as Level 3 in the fair value hierarchy.

For the impaired loans/leases and other real estate owned, 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, 2012 or 2011.

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:

	As of June 30, 2012				As of December 31, 2011
	Carrying Value		Estimated Fair Value		Carrying Value		Estimated Fair Value
Cash and due from banks	$	51,639,674	$	51,639,674	$	53,136,710	$	53,136,710
Federal funds sold		3,625,000		3,625,000		20,785,000		20,785,000
Interest-bearing deposits at financial institutions		28,452,429		28,452,429		26,750,602		26,750,602
Investment securities:
Held to maturity		700,000		700,000		200,000		200,000
Available for sale		638,137,836		638,137,836		565,029,291		565,029,291
Loans/leases receivable, net		1,194,579,266		1,214,239,000		1,181,956,235		1,202,817,000
Accrued interest receivable		6,735,326		6,735,326		6,510,021		6,510,021
Deposits		1,315,470,499		1,318,758,000		1,205,457,788		1,209,197,000
Short-term borrowings		185,399,038		185,399,038		213,536,450		213,536,450
Federal Home Loan Bank advances		203,750,000		222,454,000		204,750,000		223,678,000
Other borrowings		138,235,713		153,872,000		136,231,663		151,813,000
Junior subordinated debentures		36,085,000		18,670,000		36,085,000		18,444,000
Accrued interest payable		1,397,572		1,397,572		1,551,842		1,551,842

The methodologies for estimating the fair value of financial assets and liabilities that are measured at fair value on a recurring or non-recurring basis are discussed above.  For certain financial assets and liabilities, carrying value approximates fair value due to the nature of the financial instrument.  These instruments include:  cash and due from banks, federal funds sold, interest-bearing deposits at financial institutions, accrued interest receivable and payable, demand and other non-maturity deposits, and short-term borrowings.  The Company used the following methods and assumptions in estimating the fair value of the following instruments:

Loans/leases receivable:  The fair values for variable rate loans equal their carrying values.  The fair values for all other types of loans/leases are estimated using discounted cash flow analyses, using interest rates currently being offered for loans/leases with similar terms to borrowers with similar credit quality.  The fair value of loans held for sale is based on quoted market prices of similar loans sold on the secondary market.  All of the above are classified as Level 2 in the fair value hierarchy as presented in the table below.

Deposits:  The fair values disclosed for demand and other non-maturity deposits equal their carrying amounts, which represent the amount payable on demand.  Fair values for time deposits are estimated using a discounted cash flow calculation that applies interest rates currently being offered on time deposits to a schedule of aggregate expected monthly maturities on time deposits, and are classified as Level 2 in the fair value hierarchy as presented in the table below.

Federal Home Loan Bank advances and junior subordinated debentures:  The fair value of these instruments is estimated using discounted cash flow analyses, based on the Company’s current incremental borrowing rates for similar types of borrowing arrangements, and are classified as Level 2 in the fair value hierarchy as presented in the table below.
 

Other borrowings:  The fair value for the wholesale repurchase agreements and fixed rate other borrowings is estimated using rates currently available for debt with similar terms and remaining maturities.  The fair value for variable rate other borrowings is equal to its carrying value.  All of the above are classified as Level 2 in the fair value hierarchy as presented in the table below.

Commitments to extend credit:  The fair value of these instruments is not material.

The following table presents the level in the fair value hierarchy for the estimated fair values of the Company’s financial instruments that are not already on the Consolidated Balance Sheet at fair value at June 30, 2012.

	Fair Value		Level 1		Level 2		Level 3
Loans/leases receivable, net *	$	1,201,406,249	$	-	$	1,201,406,249	$	-
Time deposits		371,942,000		-		371,942,000		-
Federal Home Loan Bank advances		222,454,000		-		222,454,000		-
Other borrowings		153,872,000		-		153,872,000		-
Junior subordinated debentures		18,670,000		-		18,670,000		-

*Excludes impaired loans/leases totaling $12,832,751 measured at fair value on a non-recurring basis and reported separately.