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Note 9 - Fair Value of Financial Instruments
 9 Months Ended
Sep. 30, 2017
Notes to Financial Statements  
Fair Value Disclosures [Text Block]
9.
       
Fair Value of Financial Instruments
 
The Company carries certain financial assets and financial liabilities at fair value in accordance with GAAP which 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. GAAP permits entities to choose to measure many financial instruments and certain other items at fair value. At
September 30, 2017,
the Company carried financial assets and financial liabilities under the fair value option with fair values of
$21.4
million and
$36.1
million, respectively. At
December 31, 2016,
the Company carried financial assets and financial liabilities under the fair value option with fair values of
$30.4
million and
$34.0
million, respectively. 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, 2017.
 
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
    Measurements   Measurements   Pursuant to Election of the Fair Value Option
    at September 30,   at December 31,   Three Months Ended   Nine Months Ended
(Dollars in thousands)   2017   2016   September 30, 2017   September 30, 2016   September 30, 2017   September 30, 2016
                         
Mortgage-backed securities   $
1,696
     $
2,016
     $
(5
 )   $
(6
 )   $
(15
 )   $
(4
 )
Other securities    
19,712
      
28,429
      
40
      
(30
 )    
184
      
156
  
Borrowed funds    
36,071
      
33,959
      
(925
 )    
(296
 )    
(2,090
 )    
1,250
  
Net gain (loss) from fair value adjustments
(1) (2)
    
 
      
 
     $
(890
 )   $
(332
 )   $
(1,921
 )   $
1,402
  
 
 
(
1
)		 The net gain (loss) from fair value adjustments presented in the above table does
not
include net losses of
$0.4
million and
$0.5
million for the
three
months ended
September 30, 2017
and
2016,
respectively, from the change in the fair value of interest rate swaps.
 
(
2
)		 The net gain (loss) from fair value adjustments presented in the above table does
not
include net losses of
$0.9
million and
$4.3
million for the
nine
months ended
September 30, 2017
and
2016,
respectively, from the change in the fair value of interest rate 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 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, 2017
and
December 31, 2016.
The fair value of borrowed funds includes accrued interest payable of
$0.2
million and
$0.1
million at
September 30, 2017
and
December 31, 2016,
respectively.
 
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. At
September 30, 2017,
Level
1
included
one
mutual fund. At
December 31, 2016,
the Company did
not
value any of its assets or liabilities that are carried at fair value on a recurring basis as Level
1.
 
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, 2017
and
December 31, 2016,
Level
2
included mortgage related securities, corporate debt, municipals and interest rate 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, 2017,
Level
3
included trust preferred securities owned and junior subordinated debentures issued by the Company. At
December 31, 2016,
Level
3
included trust preferred securities owned and junior subordinated debentures issued by the Company and a single issuer trust preferred security.
 
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, 2017
and
December 31, 2016:
 
    Quoted Prices                        
    in Active Markets   Significant Other   Significant Other        
    for Identical Assets   Observable Inputs   Unobservable Inputs   Total carried at fair value
    (Level 1)   (Level 2)   (Level 3)   on a recurring basis
    2017   2016   2017   2016   2017   2016   2017   2016
    (In thousands)
                                 
Assets:                                
Mortgage-backed Securities   $
-
     $
-
     $
519,861
     $
516,476
     $
-
     $
-
     $
519,861
     $
516,476
  
Other securities    
11,589
      
-
      
264,026
      
337,544
      
1,083
      
7,361
      
276,698
      
344,905
  
Interest rate swaps    
-
      
-
      
5,410
      
6,350
      
-
      
-
      
5,410
      
6,350
  
                                                                 
Total assets   $
11,589
     $
-
     $
789,297
     $
860,370
     $
1,083
     $
7,361
     $
801,969
     $
867,731
  
                                                                 
Liabilities:                                                                
Borrowings   $
-
     $
-
     $
-
     $
-
     $
36,071
     $
33,959
     $
36,071
     $
33,959
  
Interest rate swaps    
-
      
-
      
4,645
      
3,386
      
-
      
-
      
4,645
      
3,386
  
                                                                 
Total liabilities   $
-
     $
-
     $
4,645
     $
3,386
     $
36,071
     $
33,959
     $
40,716
     $
37,345
  
 
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, 2017   September 30, 2016
 
 		  
 		 Trust preferred
securities		  
 		 Junior subordinated
debentures		  
 		 Trust preferred
securities		  
 		 Junior subordinated
debentures
    (In thousands)
                 
Beginning balance   $
7,444
     $
35,137
     $
7,167
     $
27,485
  
Security call    
(6,300
 )    
-
      
-
      
-
  
Net gain from fair value adjustment of financial assets
(1)
    
28
      
-
      
23
      
-
  
Net loss from fair value adjustment of financial liabilities
(1)
    
-
      
925
      
-
      
296
  
Decrease in accrued interest receivable    
(89
 )    
-
      
-
      
-
  
Increase in accrued interest payable    
-
      
9
      
-
      
10
  
Change in unrealized gains included in other comprehensive income    
-
      
-
      
1
      
-
  
Ending balance   $
1,083
     $
36,071
     $
7,191
     $
27,791
  
                                 
Changes in unrealized gains held at period end   $
-
     $
-
     $
1
     $
-
  
 
(
1
)
Totals in the table above are presented in the Consolidated Statement of Income under net gains (losses) from fair value adjustments.
 
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, 2017   September 30, 2016
 
 		  
 		 Trust preferred
securities		  
 		 Junior subordinated
debentures		  
 		 Trust preferred
securities		  
 		 Junior subordinated
debentures
    (In thousands)
                 
Beginning balance   $
7,361
     $
33,959
     $
7,212
     $
29,018
  
Security call    
(6,300
 )    
-
      
-
      
-
  
Net gain (loss) from fair value adjustment of financial assets
(1)
    
108
      
-
      
(23
 )    
-
  
Net loss (gain) from fair value adjustment of financial liabilities
(1)
    
-
      
2,090
      
-
      
(1,250
 )
Decrease in accrued interest receivable    
(88
 )    
-
      
-
      
-
  
Increase in accrued interest payable    
-
      
22
      
1
      
23
  
Change in unrealized gains included in other comprehensive income    
2
      
-
      
1
      
-
  
Ending balance   $
1,083
     $
36,071
     $
7,191
     $
27,791
  
                                 
Changes in unrealized gains held at period end   $
-
     $
-
     $
1
     $
-
  
 
(
1
)		 Totals in the table above are presented in the Consolidated Statement of Income under net gains (losses) from fair value adjustments.
 
During the
three
and
nine
months ended
September 30, 2017,
one
mutual fund security for
$11.6
million was transferred from Level
2
into Level
1.
There were
no
transfers between Levels
1,
2
and
3
during the
three
and
nine
months ended
September 30, 2016.
 
The following tables present the quantitative information about recurring Level
3
fair value of financial instruments and the fair value measurements at the periods indicated:
 
    September 30, 2017
                     
    Fair Value   Valuation Technique   Unobservable Input   Range   Weighted Average
    (Dollars in thousands)
Assets:                    
                     
Trust preferred securities   $
1,083
    
Discounted cash flows
  
Discount rate
    
n/a
      
5.9
 %
                                 
Liabilities:                                
                                 
Junior subordinated debentures   $
36,071
    
Discounted cash flows
  
Discount rate
    
n/a
      
5.9
 %
 
    December 31, 2016
                     
    Fair Value   Valuation Technique   Unobservable Input   Range   Weighted Average
    (Dollars in thousands)
Assets:                    
                     
Trust preferred securities   $
7,191
    
Discounted cash flows
  
Discount rate
    
6.3%
-
7.1%
      
7.0
 %
                                     
Liabilities:                                    
                                     
Junior subordinated debentures   $
33,959
    
Discounted cash flows
  
Discount rate
    
 
n/a
      
6.3
 %
 
The significant unobservable inputs used in the fair value measurement of the Company’s trust preferred securities and junior subordinated debentures valued under Level
3
at
September 30, 2017
and
December 31, 2016,
are the effective yields used in the cash flow models. 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, 2017
and
December 31, 2016:
 
    Quoted Prices                        
    in Active Markets   Significant Other   Significant Other        
    for Identical Assets   Observable Inputs   Unobservable Inputs   Total carried at fair value
    (Level 1)   (Level 2)   (Level 3)   on a recurring basis
    2017   2016   2017   2016   2017   2016   2017   2016
    (In thousands)
Assets:                                
Impaired loans   $
-
     $
-
     $
-
     $
-
     $
20,159
     $
14,968
     $
20,159
     $
14,968
  
Other real estate owned    
-
      
-
      
-
      
-
      
-
      
533
      
-
      
533
  
                                                                 
Total assets   $
-
     $
-
     $
-
     $
-
     $
20,159
     $
15,501
     $
20,159
     $
15,501
  
 
The following tables present the qualitative information about non-recurring Level
3
fair value of financial instruments and the fair value measurements at the periods indicated:
 
   
September 30, 2017
   
 
 
 
   
Fair Value
 
Valuation Technique
 
Unobservable Input
 
Range
 
Weighted Average
   
(Dollars in thousands)
Assets:  
 
 
 
 
 
 
 
 
 
   
 
 
 
 
 
 
 
 
 
Impaired loans  
$
1,566
 
 
Income approach
 
Capitalization rate
 
 
6.5%
to
7.5%
 
 
 
7.0
%
   
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
   
 
 
 
 
 
 
Reduction for planned expedited disposal
 
 
 
15.0%
 
 
15.0
%
   
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Impaired loans  
$
13,852
 
 
Sales approach
 
Adjustment to sales comparison value to reconcile differences between comparable sales
 
 
-50.0%
to
16.2%
 
 
 
-0.6
%
   
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
   
 
 
 
 
 
 
Reduction for planned expedited disposal
 
 
0.0%
to
15.0% 
 
 
 
3.7
%
   
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Impaired loans  
$
4,741
 
 
Blended income and sales approach
 
Adjustment to sales comparison value to reconcile differences between comparable sales
 
 
-30.0%
to
25.0%
 
 
 
-0.8
%
   
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
   
 
 
 
 
 
 
Capitalization rate
 
 
5.0%
to
9.8% 
 
 
 
7.5
%
   
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
   
 
 
 
 
 
 
Reduction for planned expedited disposal
 
 
14.5%
to
15.0% 
 
 
 
15.0
%
 
    December 31, 2016
         
    Fair Value   Valuation Technique   Unobservable Input   Range   Weighted Average
    (Dollars in thousands)
Assets:                    
                     
Impaired loans   $
2,007
    
Income approach
  
Capitalization rate
    
6.0%
to
7.5%
      
7.0
 %
                       
 
 
          
     
 
    
 
  
Reduction planned for expedited disposal
    
15.0%
 
    
15.0
 %
                       
 
 
          
Impaired loans   $
8,703
    
Sales approach
  
Adjustment to sales comparison value to reconcile differences between comparable sales
    
-40.0%
to
16.2%
      
-1.5
 %
                       
 
 
          
     
 
    
 
  
Reduction planned for expedited disposal
    
0%
to
15.0%
      
7.7
 %
                       
 
 
          
Impaired loans   $
4,258
    
Blended income and sales approach
  
Adjustment to sales comparison value to reconcile differences between comparable sales
    
-50.0%
to
25.0%
      
-0.6
 %
                       
 
 
          
     
 
    
 
  
Capitalization rate
    
5.3%
to
9.5%
      
7.2
 %
                       
 
 
          
     
 
    
 
  
Reduction planned for expedited disposal
    
15.0%
 
    
15.0
 %
                       
 
 
          
Other real estate owned   $
533
    
Sales approach
  
Adjustment to sales comparison value to reconcile differences between comparable sales
    
3.3%
to
18.6%
      
11.0
 %
 
The Company did
not
have any liabilities that were carried at fair value on a non-recurring basis at
September 30, 2017
and
December 31, 2016.
 
The methods and assumptions used to estimate fair value at
September 30, 2017
and
December 31, 2016
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.
 
FHLB-NY stock:
 
The fair value is based upon the par value of the stock, which equals its carrying value.
 
Securities:
 
The fair values of securities are contained in Note
4
of Notes to Consolidated Financial Statements. Fair value is based upon quoted market prices, 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. When there is limited activity or less transparency around inputs to the valuation, securities are valued using discounted cash flows.
 
Loans held for sale:
 
The fair value of non-performing loans held for sale is estimated through a negotiated sales price.
 
Loans:
 
The 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.
 
For non-accruing 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, except for taxi medallion loans. The fair value of the underlying collateral of taxi medallion loans is the most recent reported arm’s length transaction. When there is
no
recent sale activity, the fair value is calculated using capitalization rates.
 
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.
 
Accrued Interest Receivable:
 
The carrying amount is a reasonable estimate of fair value due to its short-term nature and is valued at the input level for its underlying financial asset.
 
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). The fair value of certificates of deposits are estimated by discounting the expected future cash flows using the rates currently offered for deposits of similar remaining maturities.
 
Borrowings:
 
The fair value of borrowings is estimated by discounting the contractual cash flows using interest rates in effect for borrowings with similar maturities and collateral requirements or using a market-standard model. The fair value of the junior subordinated debentures was developed using a credit spread based on the subordinated debt issued by the Company adjusting for differences in the junior subordinated debt’s credit rating, liquidity and time to maturity.
 
Accrued Interest Payable:
 
The carrying amount is a reasonable estimate of fair value due to its short-term nature and is valued at the input level for its underlying financial liability.
 
Interest Rate Swaps:
 
The fair value of interest rate swaps is based upon broker quotes.
 
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, 2017
and
December 31, 2016,
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 tables set 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 the periods indicated:
 
    September 30, 2017
    Carrying   Fair            
    Amount   Value   Level 1   Level 2   Level 3
    (In thousands)
Assets:                    
                     
Cash and due from banks   $
60,161
      
60,161
     $
60,161
     $
-
     $
-
  
Securities held-to-maturity                                        
Mortgage-backed securities    
7,978
      
7,839
      
-
      
7,839
      
-
  
Other securities    
22,952
      
21,542
      
-
      
-
      
21,542
  
Securities available for sale                                        
Mortgage-backed securities    
519,861
      
519,861
      
-
      
519,861
      
-
  
Other securities    
276,698
      
276,698
      
11,589
      
264,026
      
1,083
  
Loans    
5,070,376
      
5,058,558
      
-
      
-
      
5,058,558
  
FHLB-NY stock    
55,228
      
55,228
      
-
      
55,228
      
-
  
Accrued interest receivable    
21,076
      
21,076
      
-
      
21,076
      
-
  
Interest rate swaps    
5,410
      
5,410
      
-
      
5,410
      
-
  
                                         
Total assets   $
6,039,740
     $
6,026,373
     $
71,750
     $
873,440
     $
5,081,183
  
                                         
                                         
Liabilities:                                        
Deposits   $
4,444,448
     $
4,445,811
     $
3,039,893
     $
1,405,918
     $
-
  
Borrowings    
1,200,682
      
1,196,962
      
-
      
1,160,891
      
36,071
  
Accrued interest payable    
3,512
      
3,512
      
-
      
3,512
      
-
  
Interest rate swaps    
4,645
      
4,645
      
-
      
4,645
      
-
  
                                         
Total liabilities   $
5,653,287
     $
5,650,930
     $
3,039,893
     $
2,574,966
     $
36,071
  
 
 
 
    December 31, 2016
    Carrying   Fair            
    Amount   Value   Level 1   Level 2   Level 3
    (In thousands)
Assets:                    
                     
Cash and due from banks   $
35,857
     $
35,857
     $
35,857
     $
-
     $
-
  
Securities held-to-maturity                                        
Other securities    
37,735
      
35,408
      
-
      
-
      
35,408
  
Securities available for sale                                        
Mortgage-backed securities    
516,476
      
516,476
      
-
      
516,476
      
-
  
Other securities    
344,905
      
344,905
      
-
      
337,544
      
7,361
  
Loans    
4,835,693
      
4,814,840
      
-
      
-
      
4,814,840
  
FHLB-NY stock    
59,173
      
59,173
      
-
      
59,173
      
-
  
Interest rate swaps    
6,350
      
6,350
      
-
      
6,350
      
-
  
                                         
Total assets   $
5,836,189
     $
5,813,009
     $
35,857
     $
919,543
     $
4,857,609
  
                                         
Liabilities:                                        
Deposits   $
4,205,631
     $
4,213,714
     $
2,833,516
     $
1,380,198
     $
-
  
Borrowings    
1,266,563
      
1,255,283
      
-
      
1,221,324
      
33,959
  
Interest rate swaps    
3,386
      
3,386
      
-
      
3,386
      
-
  
                                         
Total liabilities   $
5,475,580
     $
5,472,383
     $
2,833,516
     $
2,604,908
     $
33,959