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Note 11 - Fair Value of Financial Instruments

9 Months Ended

Sep. 30, 2015

Fair Value Disclosures [Abstract]

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, 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, 2015, the Company carried financial assets and financial liabilities under the fair value option with fair values of $32.1 million and $28.5 million, respectively. At December 31, 2014, the Company carried financial assets and financial liabilities under the fair value option with fair values of $32.6 million and $28.8 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, 2015. 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. 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
		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)		2015				2014				September 30, 2015				September 30, 2014				September 30, 2015				September 30, 2014

Mortgage-backed securities		$	3,826			$	4,678			$	-			$	(16	)		$	(36	)		$	56
Other securities			28,242				27,915				59				14				148				511
Borrowed funds			28,491				28,771				987				(144	)			282				35
Net gain (loss) from fair value adjustments^{(1) (2)}										$	1,046			$	(146	)		$	394			$	602

(1)

The net gain (loss) from fair value adjustments presented in the above table does not include net losses of $2.1 million and $0.3 million for the three months ended September 30, 2015 and 2014, respectively, from the change in the fair value of interest rate swaps.

(2)

The net gain from fair value adjustments presented in the above table does not include net losses of $1.3 million and $2.1 million for the nine months ended September 30, 2015 and 2014, 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, 2015 and December 31, 2014. The fair value of borrowed funds includes accrued interest payable of $0.1 million at both September 30, 2015 and December 31, 2014.

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, 2015 and December 31, 2014.

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, 2015 and December 31, 2014, Level 2 included mortgage related securities, corporate debt, certain municipal securities, mutual funds 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, 2015 and December 31, 2014, Level 3 included certain 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, 2015 and December 31, 2014:

		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
		2015				2014				2015				2014				2015				2014				2015				2014
		(In thousands)

Assets:
Mortgage-backed securities		$	-			$	-			$	690,044			$	704,933			$	-			$	-			$	690,044			$	704,933
Other securities			-				-				311,320				245,768				7,181				22,609				318,501				268,377
Interest rate swaps			-				-				-				84				-				-				-				84

Total assets		$	-			$	-			$	1,001,364			$	950,785			$	7,181			$	22,609			$	1,008,545			$	973,394

Liabilities:
Borrowings		$	-			$	-			$	-			$	-			$	28,491			$	28,771			$	28,491			$	28,771
Interest rate swaps			-				-				5,079				2,649				-				-				5,079				2,649

Total liabilities		$	-			$	-			$	5,079			$	2,649			$	28,491			$	28,771			$	33,570			$	31,420

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, 2015
		Municipals				Trust preferred securities				Junior subordinated debentures
		(In thousands)

Beginning balance		$	7,899			$	7,226			$	29,476
Transfer to held-to-maturity			-				-				-
Principal repayments			(7,899	)			-				-
Maturities			-				-				-
Net loss from fair value adjustment of financial assets included in earnings ⁽¹⁾			-				(44	)			-
Net gain from fair value adjustment of financial liabilities included in earnings ⁽¹⁾			-				-				(988	)
Increase in accrued interest payable			-				-				3
Change in unrealized losses included in other comprehensive income			-				(1	)			-
Ending balance		$	-			$	7,181			$	28,491

Changes in unrealized losses held at period end		$	-			$	(1	)		$	-

(1)

These 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 three months ended September 30, 2014
		Municipals				Trust preferred securities				Junior subordinated debentures
		(In thousands)

Beginning balance		$	10,592			$	13,361			$	29,388
Purchases			2,000				-				-
Maturities			(85	)			-				-
Principal repayments			(54	)			-				-
Net gain from fair value adjustment of financial assets included in earnings ⁽¹⁾			-				45				-
Net loss from fair value adjustment of financial liabilities included in earnings ⁽¹⁾			-				-				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 gains held at period end		$	-			$	212			$	-

(1)

These 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, 2015
		Municipals				Trust preferred securities				Junior subordinated debentures
		(In thousands)

Beginning balance		$	15,519			$	7,090			$	28,771
Transfer to held-to-maturity			(4,510	)			-				-
Purchases			1,000				-				-
Principal repayments			(8,009	)			-				-
Maturities			(4,000	)			-				-
Net gain from fair value adjustment of financial assets included in earnings ⁽¹⁾			-				86				-
Net gain from fair value adjustment of financial liabilities included in earnings ⁽¹⁾			-				-				(283	)
Increase in accrued interest payable			-				-				3
Change in unrealized gains (losses) included in other comprehensive income			-				5				-
Ending balance		$	-			$	7,181			$	28,491

Changes in unrealized gains held at period end		$	-			$	5			$	-

(1)

These 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, 2014
		Municipals				Trust preferred securities				Junior subordinated debentures
		(In thousands)

Beginning balance		$	9,223			$	14,935			$	29,570
Purchases			4,475				-				-
Maturities			(1,085	)			-				-
Principal repayments			(160	)			-				-
Sales			-				(1,871	)			-
Net gain from fair value adjustment of financial assets included in earnings ⁽¹⁾			-				99				-
Net gain from fair value adjustment of financial liabilities included in earnings ⁽¹⁾			-				-				(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 gains held at period end		$	-			$	455			$	-

(1)

These 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, 2015 and 2014, 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, 2015:

		Fair Value				Valuation Technique		Unobservable Input		Range						Weighted Average
		(Dollars in thousands)
Assets:



Trust Preferred Securities		$	7,181			Discounted cash flows		Discount rate			7.0%	-	7.1%				7.1%

Liabilities:

Junior subordinated debentures		$	28,491			Discounted cash flows		Discount rate				7.0%					7.0%

The significant unobservable input used in the fair value measurement of the Company’s trust preferred securities valued under Level 3 is 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 input used in the fair value measurement of the Company’s junior subordinated debentures under Level 3 is 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 presents the quantitative information about recurring Level 3 fair value of financial instruments and the fair value measurements as of December 31, 2014:

		Fair Value				Valuation Technique		Unobservable Input		Range						Weighted Average
		(Dollars in thousands)
Assets:

Municipals		$	15,519			Discounted cash flows		Discount rate			0.2%	-	4.0%				2.3%

Trust Preferred Securities		$	7,090			Discounted cash flows		Discount rate			7.0%	-	7.25%				7.2%

Liabilities:

Junior subordinated debentures		$	28,771			Discounted cash flows		Discount rate				7.0%					7.0%

The significant unobservable input used in the fair value measurement of the Company’s municipal securities valued under Level 3 is 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 input used in the fair value measurement of the Company’s trust preferred securities valued under Level 3 is 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 input used in the fair value measurement of the Company’s junior subordinated debentures is 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, 2015 and December 31, 2014:

		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 non-recurring basis
		2015				2014				2015				2014				2015				2014				2015				2014
		(In thousands)
Assets:
Impaired loans		$	-			$	-			$	-			$	-			$	15,418			$	22,174			$	15,418			$	22,174
Other real estate owned			-				-				-				-				4,855				6,326				4,855				6,326

Total assets		$	-			$	-			$	-			$	-			$	20,273			$	28,500			$	20,273			$	28,500

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, 2015:

		Fair Value				Valuation Technique		Unobservable Input		Range						Weighted Average
		(Dollars in thousands)
Assets:

Impaired loans		$	3,890			Income approach		Capitalization rate			6.0%	to	8.0%				7.5%
								Loss severity discount			0.5%	to	55.4%				15.8%

Impaired loans		$	5,534			Sales approach		Adjustment to sales comparison value to reconcile differences between comparable sales			-50.0%	to	40.0%				-4.6%
								Loss severity discount			0.2%	to	89.4%				12.9%


Impaired loans		$	5,994			Blended income and sales approach		Adjustment to sales comparison value to reconcile differences between comparable sales			-50.0%	to	25.0%				-2.3%
								Capitalization rate			5.6%	to	11.0%				7.2%
								Loss severity discount			0.9%	to	51.4%				15.9%


Other real estate owned		$	3,750			Income approach		Capitalization rate				9.0%					9.0%
								Loss severity discount				19.0%					19.0%

Other real estate owned		$	289			Sales approach		Adjustment to sales comparison value to reconcile differences between comparable sales			-5.0%	to	25.0%				10.0%
								Loss severity discount				1.6%					1.6%

Other real estate owned		$	816			Blended income and sales approach		Adjustment to sales comparison value to reconcile differences between comparable sales			-10.0%	to	15.0%				2.5%
								Capitalization rate				8.6%					8.6%
								Loss severity discount				1.3%					1.3%

The following table presents the quantitative information about non-recurring Level 3 fair value of financial instruments and the fair value measurements as of December 31, 2014:

		Fair Value				Valuation Technique		Unobservable Input		Range						Weighted Average
		(Dollars in thousands)
Assets:

Impaired loans		$	6,981			Income approach		Capitalization rate			7.3%	to	8.5%				7.8%
								Loss severity discount			0.5%	to	81.7%				21.3%

Impaired loans		$	6,935			Sales approach		Adjustment to sales comparison value to reconcile differences between comparable sales			-41.5%	to	40.0%				-2.2%
								Loss severity discount			1.8%	to	89.4%				20.0%


Impaired loans		$	8,258			Blended income and sales approach		Adjustment to sales comparison value to reconcile differences between comparable sales			-55.0%	to	25.0%				-6.1%
								Capitalization rate			5.8%	to	11.0%				8.0%
								Loss severity discount			0.9%	to	74.4%				30.0%


Other real estate owned		$	4,768			Income approach		Capitalization rate			9.0%	to	12.0%				9.1%
								Loss severity discount			0.9%	to	4.9%				1.0%

Other real estate owned		$	587			Sales approach		Adjustment to sales comparison value to reconcile differences between comparable sales			-11.9%	to	15.0%				-3.5%
								Loss severity discount			0.0%	to	36.9%				9.6%


Other real estate owned		$	971			Blended income and sales approach		Adjustment to sales comparison value to reconcile differences between comparable sales			-25.0%	to	0.0%				-8.9%
								Capitalization rate			7.5%	to	8.0%				7.7%
								Loss severity discount			0.0%	to	6.2%				3.0%

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, 2015 and December 31, 2014.

The estimated fair value of each material class of financial instruments at September 30, 2015 and December 31, 2014 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.

FHLB-NY stock:

The fair value is based upon the par value of the stock which equals its carrying value.

Securities:

The estimated 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.

Loans held for sale:

The fair value of non-performing loans held for sale is estimated through bids received on the loans. There were no loans held for sale at September 30, 2015 and December 31, 2014.

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.

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 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.

Borrowings:

The 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 or using a market-standard model.

Interest Rate Swaps:

The estimated fair value of interest rate swaps is based upon broker quotes.

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.

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, 2015 and December 31, 2014, 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, 2015:

		September 30, 2015
		Carrying Amount				Fair Value				Level 1				Level 2				Level 3
		(in thousands)
Assets:
Cash and due from banks		$	34,474			$	34,474			$	34,474			$	-			$	-
Securities held-to-maturity			6,220				6,220				-				-				6,220
Mortgage-backed securities available for sale			690,044				690,044				-				690,044				-
Other securities available for sale			318,501				318,501				-				311,320				7,181
Loans			4,200,949				4,243,040				-				-				4,243,040
FHLB-NY stock			53,391				53,391				-				53,391				-

Total assets		$	5,303,579			$	5,345,670			$	34,474			$	1,054,755			$	4,256,441


Liabilities:
Deposits		$	3,727,413			$	3,751,619			$	2,340,468			$	1,411,151			$	-
Borrowings			1,236,577				1,254,194				-				1,225,703				28,491
Interest rate swaps			5,079				5,079				-				5,079				-

Total liabilities		$	4,969,069			$	5,010,892			$	2,340,468			$	2,641,933			$	28,491

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, 2014:

		December 31, 2014
		Carrying Amount				Fair Value				Level 1				Level 2				Level 3
		(in thousands)
Assets:
Cash and due from banks		$	34,265			$	34,265			$	34,265			$	-			$	-
Mortgage-backed Securities			704,933				704,933				-				704,933				-
Other securities			268,377				268,377				-				245,768				22,609
Loans			3,810,373				3,871,087				-				-				3,871,087
FHLB-NY stock			46,924				46,924				-				46,924				-
Interest rate swaps			84				84				-				84				-

Total assets		$	4,864,956			$	4,925,670			$	34,265			$	997,709			$	3,893,696


Liabilities:
Deposits		$	3,508,598			$	3,524,123			$	2,202,775			$	1,321,348			$	-
Borrowings			1,056,492				1,070,428				-				1,041,657				28,771
Interest rate swaps			2,649				2,649				-				2,649				-

Total liabilities		$	4,567,739			$	4,597,200			$	2,202,775			$	2,365,654			$	28,771

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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