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Note 18 - Fair Value of Financial Instruments

12 Months Ended

Dec. 31, 2015

Fair Value Disclosures [Abstract]

Fair Value Disclosures [Text Block]

18. 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 December 31, 2015, the Company carried financial assets and financial liabilities under the fair value option with fair values of $30.7 million and $29.0 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 elected to measure at fair value, securities with a cost of $5.0 million that were purchased during the year ended December 31, 2014. During the year ended December 31, 2014, the Company sold financial assets carried under the fair value option totaling $6.2 million. The Company did not purchase or sell any financial assets or liabilities under the fair value option during the year ended December 31, 2015.

Management selected the fair value option for certain investment securities, and certain borrowed funds as the yield, at the time of election, on the financial assets was below-market, while the rate on the financial liabilities was above-market rate. Management also considered the average duration of these instruments, which, for investment securities, was longer than the average for the portfolio of securities, and, for borrowings, primarily represented the longer-term borrowings of the Company. Choosing these instruments for the fair value option adjusted the carrying value of these financial assets and financial liabilities to their current fair value, and more closely aligned the financial performance of the Company with the economic value of these financial instruments. Management believed that electing the fair value option for these financial assets and financial liabilities allows them to better react to changes in interest rates. At the time of election, Management did not elect the fair value option for investment securities and borrowings with shorter duration, adjustable rates, and yields that approximated the then current market rate, as management believed that these financial assets and financial liabilities approximated their economic value.

The following table presents the financial assets and financial liabilities reported at fair value under the fair value option at December 31, 2015 and 2014, and the changes in fair value included in the Consolidated Statement of Income – Net gain (loss) from fair value adjustments, for the years ended December 31, 2015, 2014 and 2013:

		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 December 31,				at December 31,				For the year ended December 31,
Description		2015				2014				2015				2014				2013
(Dollars in thousands)
Mortgage-backed securities		$	2,527			$	4,678			$	(59	)		$	75			$	(725	)
Other securities			28,205				27,915				53				598				241
Borrowed funds			29,018				28,771				(238	)			802				(5,651	)
Net gain (loss) from fair value adjustments ⁽¹⁾										$	(244	)		$	1,475			$	(6,135	)

(1)

The net gain (loss) from fair value adjustments presented in the above table does not include net gains and (losses) of ($1.6) million, ($4.0) million and $3.6 million from the change in fair value of derivative instruments during the years ended December 31, 2015, 2014 and 2013, respectively.

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 have a contractual principal amount of $61.9 million at December 31, 2015 and 2014. The fair value of borrowed funds includes accrued interest payable of $0.1 million at December 31, 2015 and 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 December 31, 2015 and 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 December 31, 2015 and 2014, Level 2 included mortgage related securities, corporate debt 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 December 31, 2015 and 2014, Level 3 included trust preferred securities owned by and junior subordinated debentures issued by the Company. Additionally, at December 31, 2014, Level 3 included certain municipal securities.

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 Company's 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 December 31:

		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

Assets:
Securities available for sale
Mortgage-backed Securities		$	-			$	-			$	668,740			$	704,933			$	-			$	-			$	668,740			$	704,933
Other securities			-				-				317,445				245,768				7,212				22,609				324,657				268,377
Interest rate swaps			-				-				48				84				-				-				48				84

Total assets		$	-			$	-			$	986,233			$	950,785			$	7,212			$	22,609			$	993,445			$	973,394


Liabilities:
Borrowings		$	-			$	-			$	-			$	-			$	29,018			$	28,771			$	29,018			$	28,771
Interest rate swaps			-				-				4,314				2,649				-				-				4,314				2,649

Total liabilities		$	-			$	-			$	4,314			$	2,649			$	29,018			$	28,771			$	33,332			$	31,420

The following tables set 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 year ended December 31, 2015
		Municipals				Trust preferred securities				Junior subordinated debentures
		(In thousands)

Beginning balance		$	15,519			$	7,090			$	28,771
Transfers to held-to-maturity			(4,510	)			-				-
Purchases			1,000				-				-
Principal repayments			(8,009	)			-				-
Maturities			(4,000	)			-				-
Sales			-				-				-
Net gain from fair value adjustment of financial assets⁽¹⁾			-				117				-
Net loss from fair value adjustment of financial liabilities⁽¹⁾			-				-				238
Increase in accrued interest payable			-				-				9
Change in unrealized gains included in other comprehensive income			-				5				-
Ending balance		$	-			$	7,212			$	29,018

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

		For the year ended December 31, 2014
		Municipals				Trust preferred securities				Junior subordinated debentures
		(In thousands)

Beginning balance		$	9,223			$	14,935			$	29,570
Purchases			7,595				-				-
Principal repayments			(214	)			-				-
Maturities			(1,085	)			-				-
Sales			-				(11,133	)			-
Net gain from fair value adjustment of financial assets ⁽¹⁾			-				71				-
Net gain from fair value adjustment of financial liabilities ⁽¹⁾			-				-				(801	)
Increase in accrued interest payable			-				-				2
Change in unrealized gains included in other comprehensive income			-				3,217				-
Ending balance		$	15,519			$	7,090			$	28,771

Changes in unrealized held at period end		$	-			$	3,217			$	-

(1)

These totals in the tables above are presented in the Consolidated Statement of Income under net gains (losses) from fair value adjustments.

During the years ended December 31, 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 measurements of financial instruments as of December 31, 2015:

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

Trust preferred securities		$	7,212			Discounted cash flows		Discount rate			7.0%	-	7.07%				7.1	%

Liabilities:

Junior subordinated debentures		$	29,018			Discounted cash flows		Discount rate				7.0%					7.0	%

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 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 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 inputs used in the fair value measurement of the Company’s municipal securities, trust preferred securities and junior subordinated debentures valued under Level 3 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 December 31:

		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

Assets:
Impaired loans		$	-			$	-			$	-			$	-			$	15,360			$	22,174			$	15,360			$	22,174
Other real estate owned			-				-				-				-				4,932				6,326				4,932				6,326

Total assets		$	-			$	-			$	-			$	-			$	20,292			$	28,500			$	20,292			$	28,500

The following table presents the quantitative information about non-recurring Level 3 fair value measurements of financial instruments as of December 31, 2015:

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

Impaired loans		$	3,878			Income approach		Capitalization rate			7.3%	to	8.5%				7.7	%
								Loss severity discount				15.0%					15.0	%

Impaired loans		$	5,555			Sales approach		Adjustment to sales comparison value to reconcile differences between comparable sales			-50.0%	to	40.0%				-2.2	%
								Loss severity discount				15.0%					15.0	%


Impaired loans		$	5,927			Blended income and sales approach		Adjustment to sales comparison value to reconcile differences between comparable sales			-50.0%	to	25.0%				-2.2	%
								Capitalization rate			5.3%	to	9.0%				7.0	%
								Loss severity discount			5.2%	to	15.0%				13.7	%


Other real estate owned		$	3,750			Income approach		Capitalization rate				9.0%					9.0	%


Other real estate owned		$	366			Sales approach		Adjustment to sales comparison value to reconcile differences between comparable sales			-5.0%	to	25.0%				12.0	%


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	%

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 did not have any liabilities that were carried at fair value on a non-recurring basis at December 31, 2015 and 2014.

The fair value of each material class of financial instruments at December 31, 2015 and 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 fair values of securities are contained in Note 6 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:

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.

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.

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.

Accrued Interest Payable:

The carrying amount is a reasonable estimate of fair value due to its short-term nature.

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 December 31, 2015 and 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 fair values of selected financial instruments based on the assumptions described above used by the Company in estimating fair value at December 31, 2015:

		December 31, 2015
		Carrying Amount				Fair Value				Level 1				Level 2				Level 3
		(in thousands)
Assets:

Cash and due from banks		$	42,363			$	42,363			$	42,363			$	-			$	-
Securities held-to-maturity
Other securities			6,180				6,180				-				-				6,180
Securities available for sale
Mortgage-backed securities			668,740				668,740				-				668,740				-
Other securities			324,657				324,657				-				317,445				7,212
Loans			4,387,979				4,434,079				-				-				4,434,079
FHLB-NY stock			56,066				56,066				-				56,066				-
Interest rate swaps			48				48				-				48				-

Total assets		$	5,486,033			$	5,532,133			$	42,363			$	1,042,299			$	4,447,471


Liabilities:
Deposits		$	3,892,547			$	3,902,888			$	2,489,245			$	1,413,643			$	-
Borrowings			1,271,676				1,279,946				-				1,250,928				29,018
Interest rate swaps			4,314				4,314				-				4,314				-

Total liabilities		$	5,168,537			$	5,187,148			$	2,489,245			$	2,668,885			$	29,018

The following table sets forth the carrying amounts and 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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