Note 21. Fair Value

Accounting guidance on fair value measurements 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 comprised the following at December 31, 2018 and 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)
December 31, 2018:
Securities AFS:
U.S. govt. sponsored agency securities	$	36,411,391	$	—	$	36,411,391	$	—
Residential mortgage-backed and related securities		159,249,260		—		159,249,260		—
Municipal securities		58,546,022		—		58,546,022		—
Other securities		6,849,775		—		6,849,775		—
Interest rate caps		458,812		—		458,812		—
Interest rate swaps - assets		22,195,713		—		22,195,713		—
Total assets measured at fair value	$	283,710,973	$	—	$	283,710,973	$	—

Interest rate swaps - liabilities	$	23,346,887	$	—	$	23,346,887	$	—
Total liabilities measured at fair value	$	23,346,887	$	—	$	23,346,887	$	—


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 during the years ended December 31, 2018 or 2017.

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).

Note 21. Fair Value (continued)

Interest rate caps are used for the purpose of hedging interest rate risk. See Note 7 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).

Interest rate swaps are executed for select commercial customers. See Note 7 to the Consolidated Financial Statements for the detail of these instruments. The fair values are determined by comparing the contractual 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. See Note 7 to the Consolidated Financial Statements for the details of these instruments. 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 comprised the following at December 31, 2018 and 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
December 31, 2018:
Impaired loans/leases	$	9,656,912	$	—	$	—	$	9,656,912
OREO		10,127,954		—		—		10,127,954
	$	19,784,866	$	—	$	—	$	19,784,866

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 a 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.

Note 21. Fair Value (continued)

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
	December 31,		December 31,
	2018		2017		Valuation Technique	Unobservable Input	Range
Impaired loans/leases	$	9,656,912	$	8,972,337	Appraisal of collateral	Appraisal adjustments	(10.00)	%	to	(30.00)	%
OREO		10,127,954		14,642,973	Appraisal of collateral	Appraisal adjustments	0.00	%	to	(35.00)	%

For 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 years ended December 31, 2018 or 2017.

The following table presents the carrying values and estimated fair values of financial assets and liabilities carried on the Company’s consolidated balance sheet, 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 December 31, 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	$	85,522,685	$	85,522,685	$	75,721,663	$	75,721,663
Federal funds sold	Level 2		26,398,000		26,398,000		30,197,000		30,197,000
Interest-bearing deposits at financial institutions	Level 2		133,198,095		133,198,095		55,765,012		55,765,012
Investment securities:
HTM	Level 2		401,912,885		400,770,583		379,474,205		379,749,804
AFS	See Previous Table		261,056,448		261,056,448		272,907,907		272,907,907
Loans/leases receivable, net	Level 3		8,941,585		9,656,912		8,307,719		8,972,337
Loans/leases receivable, net	Level 2		3,683,965,349		3,639,329,000		2,921,821,953		2,892,963,000
Interest rate caps	Level 2		458,812		458,812		506,700		506,700
Interest rate swaps - assets	Level 2		22,195,713		22,195,713		4,397,238		4,397,238
Deposits:
Nonmaturity deposits	Level 2		3,002,326,538		3,002,326,538		2,670,583,178		2,670,583,178
Time deposits	Level 2		974,704,036		968,906,000		596,071,878		591,772,000
Short-term borrowings	Level 2		28,774,157		28,774,157		13,993,122		13,993,122
FHLB advances	Level 2		266,492,039		265,926,000		192,000,000		192,115,000
Other borrowings	Level 2		72,032,318		72,703,000		66,000,000		66,520,000
Junior subordinated debentures	Level 2		37,670,043		29,992,198		37,486,487		29,253,624
Interest rate swaps - liabilities	Level 2		23,346,887		23,346,887		4,397,238		4,397,238