Note 6 - Fair Value

9 Months Ended

Sep. 30, 2014

Fair Value Disclosures [Abstract]

Fair Value Disclosures [Text Block]

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 measured at fair value on a recurring basis comprise the following at September 30, 2014 and December 31, 2013:

			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)
September 30, 2014:
Securities available for sale:
U.S. govt. sponsored agency securities	$	306,004,605	$	-	$	306,004,605	$	-
Residential mortgage-backed and related securities		127,779,749		-		127,779,749		-
Municipal securities		31,260,146		-		31,260,146		-
Other securities		1,900,067		317,021		1,583,046		-
Derivative instruments		1,848,119		-		1,848,119		-
	$	468,792,686	$	317,021	$	468,475,665	$	-
December 31, 2013:
Securities available for sale:
U.S. govt. sponsored agency securities	$	356,472,987	$	-	$	356,472,987	$	-
Residential mortgage-backed and related securities		157,429,451		-		157,429,451		-
Municipal securities		35,958,857		-		35,958,857		-
Other securities		1,897,163		317,698		1,579,465		-
	$	551,758,458	$	317,698	$	551,440,760	$	-

There were no transfers of assets or liabilities between Levels 1, 2, and 3 of the fair value hierarchy for the three and nine months ended September 30, 2014 and 2013.

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 remainder of the securities available for sale 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).

Derivative instruments consist of interest rate caps that are used for the purpose of hedging interest rate risk. See Note 8 to the Consolidated Financial Statements for the details of these instruments. The fair values are determined by pricing models that consider observable market data for derivative instruments with similar structures (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 September 30, 2014 and December 31, 2013:

			Fair Value Measurements at Reporting Date Using
	Fair Value		Level 1		Level 2		Level 3
September 30, 2014:
Impaired loans/leases	$	13,616,631	$	-	$	-	$	13,616,631
Other real estate owned		11,534,235		-		-		11,534,235
	$	25,150,866	$	-	$	-	$	25,150,866
December 31, 2013:
Impaired loans/leases	$	9,009,557	$	-	$	-	$	9,009,557
Other real estate owned		10,507,377		-		-		10,507,377
	$	19,516,934	$	-	$	-	$	19,516,934

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 estimated fair value of the property, less disposal costs, and is classified as a 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:

	Quantitave Information about Level Fair Value Measurments
	Fair Value		Valuation Technique	Unobservable Input	Range
September 30, 2014:
Impaired loans/leases	$	13,616,631	Appraisal of collateral	Appraisal adjustments	-10.00% to -50.00%
Other real estate owned		11,534,235	Appraisal of collateral	Appraisal adjustments	0.00% to -35.00%

	Quantitave Information about Level Fair Value Measurments
	Fair Value		Valuation Technique	Unobservable Input	Range
December 31, 2013:
Impaired loans/leases	$	9,009,557	Appraisal of collateral	Appraisal adjustments	-10.00% to -50.00%
Other real estate owned		10,507,377	Appraisal of collateral	Appraisal adjustments	0.00% to -35.00%

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 nine months ended September 30, 2014 and 2013.

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 September 30, 2014				As of December 31, 2013
	Hierarchy	Carrying		Estimated		Carrying		Estimated
	Level	Value		Fair Value		Value		Fair Value
Cash and due from banks	Level 1	$	42,326,177	$	42,326,177	$	41,950,790	$	41,950,790
Federal funds sold	Level 2		29,760,000		29,760,000		39,435,000		39,435,000
Interest-bearing deposits at financial institutions	Level 2		34,631,773		34,631,773		33,044,917		33,044,917
Investment securities:
Held to maturity	Level 3		185,840,139		185,936,051		145,451,895		138,640,105
Available for sale	See Previous Table		466,944,567		466,944,567		551,758,458		551,758,458
Loans/leases receivable, net	Level 3		12,607,992		13,616,631		8,342,182		9,009,557
Loans/leases receivable, net	Level 2		1,537,493,236		1,544,453,008		1,430,489,328		1,441,952,443
Derivative instruments	Level 2		1,848,119		1,848,119		-		-
Deposits:
Nonmaturity deposits	Level 2		1,298,921,913		1,298,921,913		1,256,209,352		1,256,209,352
Time deposits	Level 2		414,945,479		416,050,000		390,781,891		391,923,000
Short-term borrowings	Level 2		162,186,698		162,186,698		149,292,967		149,292,967
Federal Home Loan Bank advances	Level 2		196,500,000		202,507,000		231,350,000		241,623,000
Other borrowings	Level 2		151,455,209		160,531,000		142,448,362		152,761,000
Junior subordinated debentures	Level 2		40,389,809		28,457,573		40,289,830		28,094,228

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, non-maturity deposits, and short-term borrowings. The Company used the following methods and assumptions in estimating the fair value of the following instruments:

Securities held to maturity: The fair values are estimated using pricing models that consider certain observable market data, however, as most of the securities have limited or no trading activity and are not rated, the fair value is partially dependent upon unobservable inputs.

Loans/leases receivable: The fair values for all 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 in the secondary market.

Deposits: The fair values disclosed for demand 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.

FHLB 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.

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.

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