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Note 11 - Fair Value of Financial Instruments

6 Months Ended

Jun. 30, 2019

Notes to Financial Statements

Fair Value Disclosures [Text Block]

11. 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. GAAP permits entities to choose to measure many financial instruments and certain other items at fair value. At June 30, 2019, the Company carried financial assets and financial liabilities under the fair value option with fair values of $14.2 million and $43.4 million, respectively. At December 31, 2018, the Company carried financial assets and financial liabilities under the fair value option with fair values of $13.8 million and $41.8 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 six months ended June 30, 2019 and 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 June 30,				at December 31,				Three Months Ended								Six Months Ended
(In thousands)		2019				2018				June 30, 2019				June 30, 2018				June 30, 2019				June 30, 2018

Mortgage-backed securities		$	848			$	967			$	1			$	-			$	2			$	(11	)
Other securities			13,346				12,843				184				(62	)			363				(200	)
Borrowed funds			43,414				41,849				(544	)			(867	)			(1,754	)			(2,548	)
Net loss from fair value adjustments⁽¹⁾⁽²⁾										$	(359	)		$	(929	)		$	(1,389	)		$	(2,759	)

(1)

The net loss from fair value adjustments presented in the above table does not include net (losses) gains of ($1.6) million and $0.7 million for the three months ended June 30, 2019 and 2018, 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 (losses) gains of ($2.6) million and $2.4 million for the six months ended June 30, 2019 and 2018, 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 June 30, 2019 and December 31, 2018. The fair value of borrowed funds includes accrued interest payable of $0.2 million at both June 30, 2019 and December 31, 2018, 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 June 30, 2019 and December 31, 2018, 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 June 30, 2019 and December 31, 2018, 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 June 30, 2019 and December 31, 2018, 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 June 30, 2019 and December 31, 2018:

		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
		2019				2018				2019				2018				2019				2018				2019				2018
		(In thousands)

Assets:
Mortgage-backed Securities		$	-			$	-			$	554,481			$	557,953			$	-			$	-			$	554,481			$	557,953
Other securities			12,042				11,586				240,827				251,860				1,303				1,256				254,172				264,702
Interest rate swaps			-				-				1,635				15,961				-				-				1,635				15,961

Total assets		$	12,042			$	11,586			$	796,943			$	825,774			$	1,303			$	1,256			$	810,288			$	838,616

Liabilities:
Borrowings		$	-			$	-			$	-			$	-			$	43,414			$	41,849			$	43,414			$	41,849
Interest rate swaps			-				-				20,147				2,239				-				-				20,147				2,239

Total liabilities		$	-			$	-			$	20,147			$	2,239			$	43,414			$	41,849			$	63,561			$	44,088

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
		June 30, 2019								June 30, 2018
		Trust preferred				Junior subordinated				Trust preferred				Junior subordinated
		securities				debentures				securities				debentures
		(In thousands)

Beginning balance		$	1,289			$	42,941			$	1,162			$	38,692
Net gain from fair value adjustment of financial assets ⁽¹⁾			15				-				25				-
Net loss from fair value adjustment of financial liabilities ⁽¹⁾			-				543				-				867
Increase (decrease) in accrued interest receivable			(1	)			-				1				-
Increase (decrease) in accrued interest payable			-				(21	)			-				26
Change in unrealized gains included in other comprehensive income			-				(49	)			-				(19	)
Ending balance		$	1,303			$	43,414			$	1,188			$	39,566

Changes in unrealized gains held at period end		$	-			$	1,425			$	-			$	1,248

For the six months ended

June 30, 2019

June 30, 2018

Trust preferred

Junior subordinated

Trust preferred

Junior subordinated

securities

debentures

securities

debentures

(In thousands)

Beginning balance
$ 1,256 $ 41,849 $ 1,110 $ 36,986

Net gain from fair value adjustment of financial assets ⁽¹⁾
47 - 77 -

Net loss from fair value adjustment of financial liabilities ⁽¹⁾
- 1,753 - 2,548

Increase in accrued interest receivable
- - 1 -

Increase (decrease) in accrued interest payable
- (11 ) - 51

Change in unrealized gains included in other comprehensive income
- (177 ) - (19 )

Ending balance
$ 1,303 $ 43,414 $ 1,188 $ 39,566

Changes in unrealized gains held at period end
$ - $ 1,425 $ - $ 1,248

(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 six months ended June 30, 2019 and 2018, 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:

June 30, 2019

Fair Value

Valuation Technique

Unobservable Input

Range

Weighted Average

(Dollars in thousands)

Assets:

Trust preferred securities

$

1,303

Discounted cash flows

Discount rate

n/a

4.4%

Liabilities:

Junior subordinated debentures

$

43,414

Discounted cash flows

Discount rate

n/a

4.4%

December 31, 2018

Fair Value

Valuation Technique

Unobservable Input

Range

Weighted Average

(Dollars in thousands)

Assets:

Trust preferred securities

$

1,256

Discounted cash flows

Discount rate

n/a

4.9%

Liabilities:

Junior subordinated debentures

$

41,849

Discounted cash flows

Discount rate

n/a

4.9%

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 June 30, 2019 and December 31, 2018, 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 June 30, 2019 and December 31, 2018:

		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 non-recurring basis
		2019				2018				2019				2018				2019				2018				2019				2018
		(In thousands)

Assets
Impaired loans		$	-			$	-			$	-			$	-			$	1,458			$	4,111			$	1,458			$	4,111
Other repossesed assets			-				-				-				-				239				35				239				35

Total assets		$	-			$	-			$	-			$	-			$	1,697			$	4,146			$	1,697			$	4,146

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:

June 30, 2019

Fair Value

Valuation Technique

Unobservable Input

Range

Weighted Average

(Dollars in thousands)

Assets:

Impaired loans

$

896

Sales approach

Reduction for planned expedited disposal

46.6% to 89.8%

59.2%

Impaired loans

$

562

Blended income and sales approach

Adjustment to sales comparison value to reconcile differences between comparable sales

-15.0% to 15.0%

-3.2%

Capitalization rate

9.0% to 9.5%

9.2%

Reduction for planned expedited disposal

15.0%

15.0%

Other real estate owned

$

239

Sales approach

Adjustment to sales comparison value to reconcile differences between comparable sales

0.5% to 12.5%

6.5%

		At December 31, 2018
		Fair Value			Valuation Technique	Unobservable Input		Range			Weighted Average
		(Dollars in thousands)
Assets:

Impaired loans		$	204		Income approach	Capitalization rate			8.5%			8.5%
						Reduction for planned expedited disposal			15.0%			15.0%

Impaired loans		$	2,724		Sales approach	Adjustment to sales comparison value to reconcile differences between comparable sales			0.0%			0.0%
						Reduction for planned expedited disposal			-36.5% to 15.0%			10.4%

Impaired loans		$	1,183		Blended income and sales approach	Adjustment to sales comparison value to reconcile differences between comparable sales			-30.0% to 10.0%			-7.8%
						Capitalization rate			7.4% to 9.8%			8.7%
						Reduction for planned expedited disposal			15.0%			15.0%

Other repossesed assets		$	35		Sales approach	Reduction for planned expediated disposal			0.0%			0.0%

The Company did not have any liabilities that were carried at fair value on a non-recurring basis at June 30, 2019 and December 31, 2018.

The methods and assumptions used to estimate fair value at June 30, 2019 and December 31, 2018 are as follows:

Securities:

The fair values of securities are contained in Note 4 (“Securities”) of the 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. See Note 5 (“Loans”) of the Notes to the Consolidated Financial Statements.

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:

		June 30, 2019
		Carrying				Fair
		Amount				Value				Level 1				Level 2				Level 3
		(In thousands)
Assets:
Cash and due from banks		$	56,484			$	56,484			$	56,484			$	-			$	-
Securities held-to-maturity
Mortgage-backed securities			7,944				8,038				-				8,038				-
Other securities			52,242				54,131				-				-				54,131
Securities available for sale
Mortgage-backed securities			554,481				554,481				-				554,481				-
Other securities			254,172				254,172				12,042				240,827				1,303
Loans			5,638,413				5,625,107				-				-				5,625,107
FHLB-NY stock			63,029				63,029				-				63,029				-
Accrued interest receivable			26,552				26,563				34				3,055				23,474
Interest rate swaps			1,635				1,635				-				1,635				-



Liabilities:
Deposits		$	4,877,917			$	4,882,473			$	3,333,800			$	1,548,673			$	-
Borrowings			1,371,890				1,371,479				-				1,328,065				43,414
Accrued interest payable			7,106				7,106				-				7,106				-
Interest rate swaps			20,147				20,147				-				20,147				-

December 31, 2018

Carrying

Fair

Amount

Value

Level 1

Level 2

Level 3

(In thousands)

Assets:

Cash and due from banks
$ 118,561 $ 118,561 $ 118,561 $ - $ -

Securities held-to-maturity

Mortgage-backed securities
7,953 7,366 - 7,366 -

Other securities
24,065 22,508 - - 22,508

Securities available for sale

Mortgage-backed securities
557,953 557,953 - 557,953 -

Other securities
264,702 264,702 11,586 251,860 1,256

Loans
5,551,484 5,496,266 - - 5,496,266

FHLB-NY stock
57,282 57,282 - 57,282 -

Accrued interest receivable
25,485 25,485 54 2,756 22,675

Interest rate swaps
15,961 15,961 - 15,961 -

Liabilities:

Deposits
$ 4,960,784 $ 4,955,077 $ 3,397,474 $ 1,557,603 $ -

Borrowings
1,250,843 1,241,745 - 1,199,896 41,849

Accrued interest payable
5,890 5,890 - 5,890 -

Interest rate swaps
2,239 2,239 - 2,239 -

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

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