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Note 10 - Fair Value of Financial Instruments
 9 Months Ended
Sep. 30, 2018
Notes to Financial Statements  
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 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, 2018,
the Company carried financial assets and financial liabilities under the fair value option with fair values of
$13.9
million and
$40.2
million, respectively. At
December 31, 2017,
the Company carried financial assets and financial liabilities under the fair value option with fair values of
$14.3
million and
$37.0
million, respectively. The Company did
not
elect to carry any additional financial assets or financial liabilities under the fair value option during the
three
and
nine
months ended
September 30, 2018.
 
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
(In thousands)   2018   2017   September 30, 2018   September 30, 2017   September 30, 2018   September 30, 2017
                         
Mortgage-backed securities   $
1,330
     $
1,590
     $
(6
 )   $
(5
 )   $
(17
 )   $
(15
 )
Other securities    
12,610
      
12,685
      
(72
 )    
40
      
(272
 )    
184
  
Borrowed funds    
40,151
      
36,986
      
(607
 )    
(925
 )    
(3,155
 )    
(2,090
 )
Net loss from fair value adjustments
(1)(2)
    
 
      
 
     $
(685
 )   $
(890
 )   $
(3,444
 )   $
(1,921
 )
 
 
 
(
1
)
The net loss from fair value adjustments presented in the above table does
not
include net gains (losses) of
$0.5
million and (
$0.4
) million for the
three
months ended
September
30,
2018
and
2017,
respectively, from the change in the fair value of interest rate swaps.
 
(
2
)
The net loss from fair value adjustments presented in the above table does
not
include net gains (losses) of
$2.9
million and (
$0.9
) million for the
nine
months ended
September
30,
2018
and
2017,
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, 2018
and
December 31, 2017.
The fair value of borrowed funds includes accrued interest payable of
$
0.2
million at
September 30, 2018
and
December 31, 2017.
 
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, 2018
and
December 31, 2017,
Level
1
included
one
mutual fund.
 
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, 2018
and
December 31, 2017,
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, 2018
and
December 31, 2017,
Level
3
included trust preferred securities owned 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 their respective category in the fair value hierarchy, at
September 30, 2018
and
December 31, 2017:
 
    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
    2018   2017   2018   2017   2018   2017   2018   2017
    (In thousands)
                                 
Assets:                                                                
Mortgage-backed                                                                
Securities   $
-
     $
-
     $
528,119
     $
509,650
     $
-
     $
-
     $
528,119
     $
509,650
  
Other securities    
11,405
      
11,575
      
220,303
      
216,019
      
1,205
      
1,110
      
232,913
      
228,704
  
Interest rate swaps    
-
      
-
      
32,600
      
7,388
      
-
      
-
      
32,600
      
7,388
  
                                                                 
Total assets   $
11,405
     $
11,575
     $
781,022
     $
733,057
     $
1,205
     $
1,110
     $
793,632
     $
745,742
  
                                                                 
Liabilities:                                                                
Borrowings   $
-
     $
-
     $
-
     $
-
     $
40,151
     $
36,986
     $
40,151
     $
36,986
  
Interest rate swaps    
-
      
-
      
449
      
3,758
      
-
      
-
      
449
      
3,758
  
                                                                 
Total liabilities   $
-
     $
-
     $
449
     $
3,758
     $
40,151
     $
36,986
     $
40,600
     $
40,744
  
 
 
The following tables 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 periods indicated:
 
    For the three months ended
    September 30, 2018   September 30, 2017
    Trust preferred
securities		   Junior subordinated
debentures		   Trust preferred
securities		   Junior subordinated
debentures
    (In thousands)
                 
Beginning balance   $
1,188
     $
39,566
     $
7,444
     $
35,137
  
Security Call    
-
      
-
      
(6,300
 )    
-
  
Net gain from fair value adjustment of financial assets
(1)
    
17
      
-
      
28
      
-
  
Net loss from fair value adjustment of financial liabilities
(1)
    
-
      
607
      
-
      
925
  
Decrease in accrued interest receivable    
-
      
-
      
(89
 )    
-
  
Increase (decrease) in accrued interest payable    
-
      
(9
 )    
-
      
9
  
Change in unrealized gains (losses) included in other comprehensive income    
-
      
(13
 )    
-
      
-
  
Ending balance   $
1,205
     $
40,151
     $
1,083
     $
36,071
  
                                 
Changes in unrealized gains (losses) held at period end   $
-
     $
(13
 )   $
-
     $
-
  
 
    For the nine months ended
    September 30, 2018   September 30, 2017
    Trust preferred 
securities		   Junior subordinated 
debentures		   Trust preferred 
securities		   Junior subordinated 
debentures
    (In thousands)
                 
Beginning balance   $
1,110
     $
36,986
     $
7,361
     $
33,959
  
Security call    
-
      
-
      
(6,300
 )    
-
  
Net gain from fair value adjustment of financial assets
(1)
    
94
      
-
      
108
      
-
  
Net loss from fair value adjustment of financial liabilities
(1)
    
 
      
3,155
      
-
      
2,090
  
Increase (Decrease) in accrued interest receivable    
1
      
-
      
(88
 )    
-
  
Increase in accrued interest payable    
-
      
42
      
-
      
22
  
Change in unrealized gains (losses) included in other comprehensive income    
-
      
(32
 )    
2
      
-
  
Ending balance   $
1,205
     $
40,151
     $
1,083
     $
36,071
  
                                 
Changes in unrealized gains (losses)held at period end   $
-
     $
(32
 )   $
2
     $
-
  
  
(
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, 2018
and
2017,
there were
no
transfers between Levels
1,
2
and
3.
 
 
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, 2018
    Fair Value   Valuation Technique   Unobservable Input   Range   Weighted Average
    (Dollars in thousands)
Assets:                    
                     
Trust preferred securities   $
1,205
    
Discounted cash flows
  
Discount rate
  
n/a
    
5.1
 %
                             
Liabilities:                            
                             
Junior subordinated debentures   $
40,151
    
Discounted cash flows
  
Discount rate
  
n/a
    
5.1
 %
 
 
    December 31, 2017
    Fair Value   Valuation Technique   Unobservable Input   Range   Weighted Average
    (Dollars in thousands)
Assets:                    
                     
Trust preferred securities   $
1,110
    
Discounted cash flows
  
Discount rate
  
n/a
    
5.7
 %
                             
Liabilities:                            
                             
Junior subordinated debentures   $
36,986
    
Discounted cash flows
  
Discount rate
  
n/a
    
5.7
 %
 
 
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, 2018
and
December 31, 2017,
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 their respective category in the fair value hierarchy at
September 30, 2018
and
December 31, 2017:
 
    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
    2018   2017   2018   2017   2018   2017   2018   2017
    (In thousands)
Assets:                                
Impaired loans   $
-
     $
-
     $
-
     $
-
     $
12,798
     $
16,027
     $
12,798
     $
16,027
  
Other repossesed assets    
-
      
-
      
-
      
-
      
35
      
-
      
35
      
-
  
                                                                 
Total assets   $
-
     $
-
     $
-
     $
-
     $
12,833
     $
16,027
     $
12,833
     $
16,027
  
 
 
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, 2018
         
    Fair Value   Valuation Technique   Unobservable Input   Range   Weighted Average
    (Dollars in thousands)
Assets:                    
                     
Impaired loans   $
1,525
    
Income approach
  
Capitalization rate
    
6.5%
to
7.5%
    
7.0%
     
 
    
 
  
Reduction for planned expedited disposal
    
 
15.0%
 
    
15.0%
                             
Impaired loans   $
8,358
    
Sales approach
  
Adjustment to sales comparison value to reconcile differences between comparable sales
    
-50.0%
to
15.0%
    
-2.1%
     
 
    
 
  
Reduction for planned expedited disposal
    
-38.6%
to
15.0%
    
11.1%
                             
Impaired loans   $
2,915
    
Blended income and sales approach
  
Adjustment to sales comparison value to reconcile differences between comparable sales
    
-30.0%
to
25.0%
    
-1.2%
     
 
    
 
  
Capitalization rate
    
5.0%
to
9.8%
    
7.5%
     
 
    
 
  
Reduction for planned expedited disposal
    
 
15.0%
 
    
15.0%
                                 
Other repossesed assets   $
35
    
Sales approach
  
Reduction for planned expediated disposal
    
 
15.0%
 
    
15.0%
 
    December 31, 2017
         
    Fair Value   Valuation Technique   Unobservable Input   Range   Weighted Average
    (Dollars in thousands)
Assets:                    
                     
Impaired loans   $
1,818
    
Income approach
  
Capitalization rate
    
6.5%
to
7.5%
    
6.8%
     
 
    
 
  
Reduction planned for expedited disposal
    
 
15.0%
 
    
15.0%
                             
Impaired loans   $
10,003
    
Sales approach
  
Adjustment to sales comparison value to reconcile differences between comparable sales
    
-50.0%
to
16.2%
    
-0.8%
     
 
    
 
  
Reduction planned for expedited disposal
    
-30.9%
to
15.0%
    
8.7%
                             
                             
Impaired loans   $
4,206
    
Blended income and sales approach
  
Adjustment to sales comparison value to reconcile differences between comparable sales
    
-30.0%
to
25.0%
    
-1.2%
     
 
    
 
  
Capitalization rate
    
5.0%
to
9.8%
    
7.2%
     
 
    
 
  
Reduction planned for expedited disposal
    
 
15.0%
 
    
15.0%
 
 
The Company did
not
have any liabilities that were carried at fair value on a non-recurring basis at
September 30, 2018
and
December 31, 2017.
 
The methods and assumptions used to estimate fair value at
September 30, 2018
and
December 31, 2017
are as follows:
 
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.
 
Impaired Loans:
 
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 and Other Repossessed Assets:
 
OREO and other repossessed assets are carried at fair value less selling costs. The fair value for OREO 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. The fair value for other repossessed assets are based upon the most recently reported arm’s length sales transaction. When there is
no
recent sale activity, the fair value is calculated using capitalization rates.
 
Junior Subordinated Debentures:
 
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. The unrealized net gain/loss attributable to changes in our own credit risk was determined by adjusting the fair value as determined in the proceeding sentence by the average rate of default on debt instruments with a similar debt rating as our junior subordinated debentures, with the difference from the original calculation and this calculation resulting in the instrument-specific unrealized gain/loss.
 
Interest Rate Swaps:
 
The fair value of interest rate swaps is based upon broker quotes.
 
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, 2018
    Carrying
Amount		   Fair 
Value		   Level 1   Level 2   Level 3
    (In thousands)
Assets:                    
                     
Cash and due from banks   $
45,094
     $
45,094
     $
45,094
     $
-
     $
-
  
Securities held-to-maturity                                        
Mortgage-backed securities    
7,958
      
7,221
      
-
      
7,221
      
-
  
Other securities    
23,207
      
20,996
      
-
      
-
      
20,996
  
Securities available for sale                                        
Mortgage-backed securities    
528,119
      
528,119
      
-
      
528,119
      
-
  
Other securities    
232,913
      
232,913
      
11,405
      
220,303
      
1,205
  
Loans    
5,380,062
      
5,301,783
      
-
      
-
      
5,301,783
  
FHLB-NY stock    
54,942
      
54,942
      
-
      
54,942
      
-
  
Accrued interest receivable    
24,673
      
24,673
      
5
      
1,962
      
22,706
  
Interest rate swaps    
32,600
      
32,600
      
-
      
32,600
      
-
  
                                         
                                         
                                         
Liabilities:                                        
Deposits   $
4,716,315
     $
4,706,114
     $
3,153,353
     $
1,552,761
     $
-
  
Borrowings    
1,197,101
      
1,184,589
      
-
      
1,144,438
      
40,151
  
Accrued interest payable    
6,732
      
6,732
      
-
      
6,732
      
-
  
Interest rate swaps    
449
      
449
      
-
      
449
      
-
  
 
    December 31, 2017
    Carrying
Amount		   Fair
Value		   Level 1   Level 2   Level 3
    (In thousands)
Assets:                    
                     
Cash and due from banks   $
51,546
     $
51,546
     $
51,546
     $
-
     $
-
  
Securities held-to-maturity                                        
Mortgage-backed securities    
7,973
      
7,810
      
-
      
7,810
      
-
  
Other securities    
22,913
      
21,889
      
-
      
-
      
21,889
  
Securities available for sale                                        
Mortgage-backed securities    
509,650
      
509,650
      
-
      
509,650
      
-
  
Other securities    
228,704
      
228,704
      
11,575
      
216,019
      
1,110
  
Loans    
5,176,999
      
5,169,108
      
-
      
-
      
5,169,108
  
FHLB-NY stock    
60,089
      
60,089
      
-
      
60,089
      
-
  
Accrued interest receivable    
21,405
      
21,405
      
16
      
1,916
      
19,473
  
Interest rate swaps    
7,388
      
7,388
      
-
      
7,388
      
-
  
                                         
                                         
Liabilities:                                        
Deposits   $
4,383,278
     $
4,380,174
     $
3,031,345
     $
1,348,829
     $
-
  
Borrowings    
1,309,653
      
1,310,487
      
-
      
1,273,501
      
36,986
  
Accrued interest payable    
2,659
      
2,659
      
-
      
2,659
      
-
  
Interest rate swaps    
3,758
      
3,758
      
-
      
3,758
      
-