Note 10 - Fair Value of Financial Instruments

9 Months Ended

Sep. 30, 2014

Fair Value Disclosures [Abstract]

Fair Value Disclosures [Text Block]

10. Fair Value of Financial Instruments

The Company carries certain financial assets and financial liabilities at fair value in accordance with ASC Topic 825, “Financial Instruments” (“ASC Topic 825”) and values those financial assets and financial liabilities in accordance with ASC Topic 820, “Fair Value Measurements and Disclosures” (“ASC Topic 820”). ASC Topic 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, establishes a framework for measuring fair value and expands disclosures about fair value measurements. ASC Topic 825 permits entities to choose to measure many financial instruments and certain other items at fair value. At September 30, 2014, the Company carried financial assets and financial liabilities under the fair value option with fair values of $38.7 million and $29.5 million, respectively. At December 31, 2013, the Company carried financial assets and financial liabilities under the fair value option with fair values of $37.3 million and $29.6 million, respectively. The Company elected to measure at fair value, securities with a cost of $5.0 million that were purchased during the nine months ended September 30, 2014. The Company did not elect to carry any additional financial assets or financial liabilities under the fair value option during the nine months ended September 30, 2013. During the nine months ended September 30, 2014, the Company sold financial assets carried under the fair value option totaling $1.9 million.

The following table presents the financial assets and financial liabilities reported at fair value under the fair value option, and the changes in fair value included in the Consolidated Statement of Income – Net gain (loss) from fair value adjustments, at or for the periods ended as indicated:

	Fair Value		Fair Value		Changes in Fair Values For Items Measured at Fair Value Pursuant to Election of the Fair Value Option
	Measurements		Measurements		Three Months Ended						Nine Months Ended
(Dollars in thousands)	at September 30, 2014		at December 31, 2013		September 30, 2014			September 30, 2013			September 30, 2014		September 30, 2013
Mortgage-backed securities	$	4,893	$	7,119	$	(16	)	$	(95	)	$	56	$	(626	)
Other securities		33,799		30,163		14			(381	)		511		(328	)
Borrowed funds		29,535		29,570		(144	)		(272	)		35		(2,547	)
Net gain (loss) from fair value adjustments(1) (2)					$	(146	)	$	(748	)	$	602		(3,501	)

(1) The net gain (loss) from fair value adjustments presented in the above table does not include net gains (losses) of ($0.3) million and $0.6 million for the three months ended September 30, 2014 and 2013, respectively, from the change in the fair value of interest rate caps/Swaps.

(2) The net gain (loss) from fair value adjustments presented in the above table does not include net gains (losses) of ($2.1) million and $2.9 million for the nine months ended September 30, 2014 and 2013, respectively, from the change in the fair value of interest rate caps/Swaps.

Included in the fair value of the financial assets and financial liabilities selected for the fair value option is the accrued interest receivable or payable for the related instrument. The Company accrues on the financial instruments and reports, as interest income or interest expense in the Consolidated Statement of Income, the interest receivable or payable on the financial instruments selected for the fair value option at their respective contractual rates.

The borrowed funds had a contractual principal amount of $61.9 million at both September 30, 2014 and December 31, 2013. The fair value of borrowed funds includes accrued interest payable of $0.1 million at September 30, 2014 and December 31, 2013.

The Company generally holds its earning assets, other than securities available for sale, to maturity and settles its liabilities at maturity. However, fair value estimates are made at a specific point in time and are based on relevant market information. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company’s entire holdings of a particular instrument. Accordingly, as assumptions change, such as interest rates and prepayments, fair value estimates change and these amounts may not necessarily be realized in an immediate sale.

Disclosure of fair value does not require fair value information for items that do not meet the definition of a financial instrument or certain other financial instruments specifically excluded from its requirements. These items include core deposit intangibles and other customer relationships, premises and equipment, leases, income taxes and equity.

Further, fair value disclosure does not attempt to value future income or business. These items may be material and accordingly, the fair value information presented does not purport to represent, nor should it be construed to represent, the underlying “market” or franchise value of the Company.

Financial assets and financial liabilities reported at fair value are required to be measured based on either: (1) quoted prices in active markets for identical financial instruments (Level 1); (2) significant other observable inputs (Level 2); or (3) significant unobservable inputs (Level 3).

A description of the methods and significant assumptions utilized in estimating the fair value of the Company’s assets and liabilities that are carried at fair value on a recurring basis are as follows:

Level 1 – where quoted market prices are available in an active market. The Company did not value any of its assets or liabilities that are carried at fair value on a recurring basis as Level 1 at September 30, 2014 and December 31, 2013.

Level 2 – when quoted market prices are not available, fair value is estimated using quoted market prices for similar financial instruments and adjusted for differences between the quoted instrument and the instrument being valued. Fair value can also be estimated by using pricing models, or discounted cash flows. Pricing models primarily use market-based or independently sourced market parameters as inputs, including, but not limited to, yield curves, interest rates, equity or debt prices and credit spreads. In addition to observable market information, models also incorporate maturity and cash flow assumptions. At September 30, 2014 and December 31, 2013, Level 2 included mortgage related securities, corporate debt and interest rate caps/Swaps.

Level 3 – when there is limited activity or less transparency around inputs to the valuation, financial instruments are classified as Level 3. At September 30, 2014 and December 31, 2013, Level 3 included municipal securities and trust preferred securities owned by and junior subordinated debentures issued by the Company.

The methods described above may produce fair values that may not be indicative of net realizable value or reflective of future fair values. While the Company believes its valuation methods are appropriate and consistent with those of other market participants, the use of different methodologies, assumptions and models to determine fair value of certain financial instruments could produce different estimates of fair value at the reporting date.

The following table sets forth the assets and liabilities that are carried at fair value on a recurring basis and the method that was used to determine their fair value, at September 30, 2014 and December 31, 2013:

	Quoted Prices in Active Markets for Identical Assets (Level 1)				Significant Other Observable Inputs (Level 2)				Significant Other Unobservable Inputs (Level 3)				Total carried at fair value on a recurring basis
	September 30, 2014		December 31, 2013		September 30, 2014		December 31, 2013		September 30, 2014		December 31, 2013		September 30, 2014		December 31, 2013
Assets:
Mortgage-backed Securities	$	-	$	-	$	696,209	$	756,156	$	-	$	-	$	696,209	$	756,156
Other securities		-		-		262,097		237,476		26,071		24,158		288,168		261,634
Interest rate swaps		-		-		174		2,081		-		-		174		2,081
Total assets	$	-	$	-	$	958,480	$	995,713	$	26,071	$	24,158	$	984,551	$	1,019,871
Liabilities:
Borrowings	$	-	$	-	$	-	$	-	$	29,535	$	29,570	$	29,535	$	29,570
Interest rate swaps		-		-		535		-		-		-		535		-
Total liabilities	$	-	$	-	$	535	$	-	$	29,535	$	29,570	$	30,070	$	29,570

The following table sets forth the Company's assets and liabilities that are carried at fair value on a recurring basis, classified within Level 3 of the valuation hierarchy for the period indicated:

	For the three months ended   September 30, 2014
	Municipals			Trust preferred  securities		Junior subordinated  debentures
	(In thousands)
Beginning balance	$	10,592		$	13,361	$	29,388
Transfer into Level 3		-			-		-
Purchases		2,000			-		-
Maturities		(85	)		-		-
Principal repayments		(54	)		-		-
Net gain from fair value adjustment of financial assets		-			45		-
Net loss from fair value adjustment of financial liabilities		-			-		145
Increase in accrued interest payable		-			-		2
Change in unrealized gains (losses) included in other comprehensive income		-			212		-
Ending balance	$	12,453		$	13,618	$	29,535
Changes in unrealized held at period end	$	-		$	212	$	-

The following table sets forth the Company's assets and liabilities that are carried at fair value on a recurring basis, classified within Level 3 of the valuation hierarchy for the period indicated:

	For the three months ended   September 30, 2013
	REMIC and  CMO			Municipals			Trust preferred  securities			Junior subordinated  debentures
	(In thousands)
Beginning balance	$	22,930		$	9,327		$	8,367		$	26,192
Transfer into Level 3		-			-			-			-
Net gain from fair value adjustment of financial assets		-			-			(361	)		-
Net loss from fair value adjustment of financial liabilities		-			-			-			272
Increase in accrued interest payable		-			-			-			1
Other-than-temporary impairment charge		(916	)		-			-			-
Change in unrealized gains (losses) included in other comprehensive income		(1,820	)		(52	)		(500	)		-
Ending balance	$	20,194		$	9,275		$	7,506		$	26,465
Changes in unrealized held at period end	$	(1,820	)	$	(52	)	$	(500	)	$	-

The following table sets forth the Company's assets and liabilities that are carried at fair value on a recurring basis, classified within Level 3 of the valuation hierarchy for the period indicated:

	For the nine months ended   September 30, 2014
	Municipals			Trust preferred  securities			Junior subordinated  debentures
	(In thousands)
Beginning balance	$	9,223		$	14,935		$	29,570
Transfer into Level 3		-			-			-
Purchases		4,475			-			-
Maturities		(1,085	)		-			-
Principal repayments		(160	)		-			-
Sales		-			(1,871	)		-
Net gain from fair value adjustment of financial assets		-			99			-
Net gain from fair value adjustment of financial liabilities		-			-			(34	)
Decrease in accrued interest payable		-			-			(1	)
Change in unrealized gains (losses) included in other comprehensive income		-			455			-
Ending balance	$	12,453		$	13,618		$	29,535
Changes in unrealized held at period end	$	-		$	455		$	-

The following table sets forth the Company's assets and liabilities that are carried at fair value on a recurring basis, classified within Level 3 of the valuation hierarchy for the period indicated:

	For the nine months ended   September 30, 2013
	REMIC and  CMO			Municipals			Trust preferred  securities		Junior subordinated  debentures
	(In thousands)
Beginning balance	$	23,475		$	9,429		$	6,650	$	23,922
Transfer into Level 3		-			-			-		-
Net gain from fair value adjustment of financial assets		-			-			150		-
Net loss from fair value adjustment of financial liabilities		-			-			-		2,547
Increase in accrued interest payable		-			-			-		(4	)
Other-than-temporary impairment charge		(1,419	)		-			-		-
Change in unrealized gains (losses) included in other comprehensive income		(1,862	)		(154	)		706		-
Ending balance	$	20,194		$	9,275		$	7,506	$	26,465
Changes in unrealized held at period end	$	(1,862	)	$	(154	)	$	706	$	-

During three and nine months ended September 30, 2014, purchases added to Level 3 were due to illiquidity and reduced price transparency. There were no purchases added to level 3 during the three and nine months ended September 30, 2013. During the three and nine months ended September 30, 2014 and 2013, there were no transfers between Levels 1, 2 and 3.

The following table presents the quantitative information about recurring Level 3 fair value of financial instruments and the fair value measurements as of September 30, 2014:

September 30, 2014	Fair Value		Valuation Technique	Unobservable Input	Range (Weighted Average)
	(Dollars in thousands)
Assets:
Municipals	$	12,453	Discounted cash flows	Discount rate	0.2%	-	4.0%	(2.8%)
				Discount rate	7.0%	-	10.4%	(8.4%)
				Prepayment assumptions	30.4%	-	39.7%	(35.0%)
Trust Preferred Securities	$	13,618	Discounted cash flows	Defaults	0.2%	-	20.5%	(10.5%)
Liabilities:
Junior subordinated debentures	$	29,535	Discounted cash flows	Discount rate			7.0%	(7.0%)

The significant unobservable inputs used in the fair value measurement of the Company’s municipal securities valued under Level 3 are the securities’ effective yield. Significant increases or decreases in the effective yield in isolation would result in a significantly lower or higher fair value measurement.

The significant unobservable inputs used in the fair value measurement of the Company’s trust preferred securities valued under Level 3 are the securities’ prepayment assumptions and default rate. Significant increases or decreases in any of the inputs in isolation would result in a significantly lower or higher fair value measurement.

The significant unobservable inputs used in the fair value measurement of the Company’s junior subordinated debentures under Level 3 are effective yield. Significant increases or decreases in the effective yield in isolation would result in a significantly lower or higher fair value measurement.

The following table sets forth the Company’s assets and liabilities that are carried at fair value on a non-recurring basis and the method that was used to determine their fair value, at September 30, 2014 and December 31, 2013:

	Quoted Prices in Active Markets for Identical Assets (Level 1)				Significant Other Observable Inputs (Level 2)				Significant Other Unobservable Inputs (Level 3)				Total carried at fair value on a recurring basis
	September 30, 2014		December 31, 2013		September 30, 2014		December 31, 2013		September 30, 2014		December 31, 2013		September 30, 2014		December 31, 2013
Assets:
Loans held for sale	$	-	$	-	$	-	$	-	$	1,150	$	425	$	1,150	$	425
Impaired loans		-		-		-		-		26,847		23,544		26,847		23,544
Other real estate owned		-		-		-		-		5,792		2,985		5,792		2,985
Total assets	$	-	$	-	$	-	$	-	$	33,789	$	26,954	$	33,789	$	26,954

The following table presents the quantitative information about non-recurring Level 3 fair value of financial instruments and the fair value measurements as of September 30, 2014:

September 30, 2014	Fair Value		Valuation Technique	Unobservable Input	Range (Weighted Average)
	(Dollars in thousands)
Assets:
Loans held for sale	$	1,150	Fair value of collateral	Loss severity discount			48.6%	(48.6%)
Impaired loans	$	26,847	Fair value of collateral	Loss severity discount	0.5%	-	89.5%	(29.1%)
Other real estate owned	$	5,792	Fair value of collateral	Loss severity discount	0.0%	-	24.6%	(1.6%)

The Company carries its Loans held for sale and OREO at the expected sales price less selling costs.

The Company carries its impaired collateral dependent loans at 85% of the appraised or internally estimated value of the underlying property.

The Company did not have any liabilities that were carried at fair value on a non-recurring basis at September 30, 2014 and December 31, 2013.

The estimated fair value of each material class of financial instruments at September 30, 2014 and December 31, 2013 and the related methods and assumptions used to estimate fair value are as follows:

Cash and Due from Banks, Overnight Interest-Earning Deposits and Federal Funds Sold:

The fair values of financial instruments that are short-term or reprice frequently and have little or no risk are considered to have a fair value that approximates carrying value (Level 1).

FHLB-NY stock:

The fair value is based upon the par value of the stock which equals its carrying value (Level 2).

Securities Available for Sale:

The estimated fair values of securities available for sale are contained in Note 6 of Notes to Consolidated Financial Statements. Fair value is based upon quoted market prices (Level 1 input), where available. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities and adjusted for differences between the quoted instrument and the instrument being valued (Level 2 input). When there is limited activity or less transparency around inputs to the valuation, securities are valued using (Level 3 input).

Loans held for sale:

The fair value of non-performing loans held for sale is estimated through bids received on the loans and, as such, are classified as a Level 3 input.

Loans:

The estimated fair value of loans is estimated by discounting the expected future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and remaining maturities (Level 3 input).

For impaired loans, fair value is generally estimated by discounting management’s estimate of future cash flows with a discount rate commensurate with the risk associated with such assets or for collateral dependent loans 85% of the appraised or internally estimated value of the property (Level 3 input).

Due to Depositors:

The fair values of demand, passbook savings, NOW, money market deposits and escrow deposits are, by definition, equal to the amount payable on demand at the reporting dates (i.e. their carrying value) (Level 1). The fair value of fixed-maturity certificates of deposits are estimated by discounting the expected future cash flows using the rates currently offered for deposits of similar remaining maturities (Level 2 input).

Borrowings:

The estimated fair value of borrowings are estimated by discounting the contractual cash flows using interest rates in effect for borrowings with similar maturities and collateral requirements (Level 2 input) or using a market-standard model (Level 3 input).

Interest Rate Caps:

The estimated fair value of interest rate caps is based upon broker quotes (Level 2 input).

Interest Rate Swaps:

The estimated fair value of interest rate swaps is based upon broker quotes (Level 2 input).

Other Real Estate Owned:

OREO are carried at fair value less selling costs. The fair value is based on appraised value through a current appraisal, or sometimes through an internal review, additionally adjusted by the estimated costs to sell the property (Level 3 input).

Other Financial Instruments:

The fair values of commitments to sell, lend or borrow are estimated using the fees currently charged or paid to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties or on the estimated cost to terminate them or otherwise settle with the counterparties at the reporting date. For fixed-rate loan commitments to sell, lend or borrow, fair values also consider the difference between current levels of interest rates and committed rates (where applicable).

At September 30, 2014 and December 31, 2013, the fair values of the above financial instruments approximate the recorded amounts of the related fees and were not considered to be material.

The following table sets forth the carrying amounts and estimated fair values of selected financial instruments based on the assumptions described above used by the Company in estimating fair value at September 30, 2014:

	September 30, 2014
	Carrying Amount		Fair  Value		Level 1		Level 2		Level 3
	(in thousands)
Assets:
Cash and due from banks	$	30,499	$	30,499	$	30,499	$	-	$	-
Mortgage-backed Securities		696,209		696,209		-		696,209		-
Other securities		288,168		288,168		-		262,097		26,071
Loans held for sale		1,150		1,150		-		-		1,150
Loans		3,645,634		3,718,239		-		-		3,718,239
FHLB-NY stock		45,776		45,776		-		45,776		-
Interest rate swaps		174		174		-		174		-
OREO		5,792		5,792		-		-		5,792
Total assets	$	4,713,402	$	4,786,007	$	30,499	$	1,004,256	$	3,751,252
Liabilities:
Deposits	$	3,363,561		3,377,468	$	2,063,629	$	1,313,839	$	-
Borrowings		1,031,633		1,045,653		-		1,016,118		29,535
Interest rate swaps		535		535		-		535		-
Total liabilities	$	4,395,729	$	4,423,656	$	2,063,629	$	2,330,492	$	29,535

The following table sets forth the carrying amounts and estimated fair values of selected financial instruments based on the assumptions described above used by the Company in estimating fair value at December 31, 2013:

	December 31, 2013
	Carrying Amount		Fair  Value		Level 1		Level 2		Level 3
	(in thousands)
Assets:
Cash and due from banks	$	33,485	$	33,485	$	33,485	$	-	$	-
Mortgage-backed  Securities		756,156		756,156		-		756,156		-
Other securities		261,634		261,634		-		237,476		24,158
Loans held for sale		425		425		-		-		425
Loans		3,434,178		3,502,792		-		-		3,502,792
FHLB-NY stock		46,025		46,025		-		46,025		-
Interest rate caps		-		-		-		-		-
Interest rate swaps		2,081		2,081		-		2,081		-
OREO		2,985		2,985		-		-		2,985
Total assets	$	4,536,969	$	4,605,583	$	33,485	$	1,041,738	$	3,530,360
Liabilities:
Deposits	$	3,232,780	$	3,253,261	$	2,111,825	$	1,141,436	$	-
Borrowings		1,012,122		1,034,799		-		1,005,229		29,570
Total liabilities	$	4,244,902	$	4,288,060	$	2,111,825	$	2,146,665	$	29,570