NOTE 7 – 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 September 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)
September 30, 2018:
Securities AFS:
U.S. govt. sponsored agency securities	$	36,491,749	$	—	$	36,491,749	$	—
Residential mortgage-backed and related securities		155,732,596		—		155,732,596		—
Municipal securities		58,904,207		—		58,904,207		—
Other securities		4,194,890		—		4,194,890		—
Interest rate caps		703,467		—		703,467		—
Interest rate swaps - assets		7,045,220		—		7,045,220		—
Total assets measured at fair value	$	263,072,129	$	—	$	263,072,129	$	—

Interest rate swaps - liabilities	$	6,837,887	$	—	$	6,837,887	$	—
Total liabilities measured at fair value	$	6,837,887	$	—	$	6,837,887	$	—


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 nine months ended September 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 September 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
September 30, 2018:
Impaired loans/leases	$	13,400,072	$	—	$	—	$	13,400,072
OREO		13,180,082		—		—		13,180,082
	$	26,580,154	$	—	$	—	$	26,580,154

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
	September 30,		December 31,
	2018		2017		Valuation Technique	Unobservable Input	Range
Impaired loans/leases	$	13,400,072	$	8,972,337	Appraisal of collateral	Appraisal adjustments	(10.00)	%	to	(30.00)	%
OREO		13,180,082		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 or liabilities measured at fair value during the three and nine months ended September 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 September 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	$	73,406,657	$	73,406,657	$	75,721,663	$	75,721,663
Federal funds sold	Level 2		33,070,000		33,070,000		30,197,000		30,197,000
Interest-bearing deposits at financial institutions	Level 2		96,590,367		96,590,367		55,765,012		55,765,012
Investment securities:
HTM	Level 2		395,421,195		392,621,219		379,474,205		379,749,804
AFS	See Previous Table		255,323,442		255,323,442		272,907,907		272,907,907
Loans/leases receivable, net	Level 3		12,407,474		13,400,072		8,307,719		8,972,337
Loans/leases receivable, net	Level 2		3,597,901,436		3,527,043,000		2,921,821,953		2,892,963,000
Interest rate caps	Level 2		703,467		703,467		506,700		506,700
Interest rate swaps - assets	Level 2		7,045,220		7,045,220		4,397,238		4,397,238
Deposits:
Nonmaturity deposits	Level 2		2,917,002,466		2,917,002,466		2,670,583,178		2,670,583,178
Time deposits	Level 2		871,274,455		863,227,000		596,071,878		591,772,000
Short-term borrowings	Level 2		12,929,499		12,929,499		13,993,122		13,993,122
FHLB advances	Level 2		359,128,925		358,357,000		192,000,000		192,115,000
Other borrowings	Level 2		73,950,426		74,600,000		66,000,000		66,520,000
Junior subordinated debentures	Level 2		37,626,070		29,946,263		37,486,487		29,253,624
Interest rate swaps - liabilities	Level 2		6,837,887		6,837,887		4,397,238		4,397,238