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Note 10 - Fair Value of Financial Instruments

6 Months Ended

Jun. 30, 2017

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

June 30, 2017,

the Company carried financial assets and financial liabilities under the fair value option with fair values of

$30.5

million and

$35.1

million, respectively. At

December 31, 2016,

the Company carried financial assets and financial liabilities under the fair value option with fair values of

$30.4

million and

$34.0

million, respectively. The Company did

not

elect to carry any additional financial assets or financial liabilities under the fair value option during the

six

months ended

June 30, 2017.

The following table presents the financial assets and financial liabilities reported at fair value under the fair value option, and the changes in fair value included in the Consolidated Statement of Income – Net gain (loss) from fair value adjustments, at or for the periods ended as indicated:

		Fair Value				Fair Value				Changes in Fair Values For Items Measured at Fair Value
		Measurements				Measurements				Pursuant to Election of the Fair Value Option
		at June 30,				at December 31,				Three Months Ended								Six Months Ended
(Dollars in thousands)		2017				2016				June 30, 2017				June 30, 2016				June 30, 2017				June 30, 2016
Mortgage-backed securities		$	1,801			$	2,016			$	(3	)		$	(3	)		$	(10	)		$	2
Other securities			28,706				28,429				112				90				144				186
Junior subordinated debentures			35,137				33,959				(595	)			492				(1,165	)			1,546
Net gain (loss) from fair value adjustments (1) (2)										$	(486	)		$	579			$	(1,031	)		$	1,734

(1 ) The net gain (loss) from fair value adjustments presented in the above table does not include net losses of $0.7 million and $1.7 million for the three months ended June 30, 2017 and 2016, respectively, from the change in the fair value of interest rate swaps.

(2 ) The net gain (loss) from fair value adjustments presented in the above table does not include net losses of $0.5 million and $3.8 million for the six months ended June 30, 2017 and 2016, respectively, from the change in the fair value of interest rate swaps.

Included in the fair value of the financial assets and financial liabilities selected for the fair value option is the accrued interest receivable or payable for the related instrument. The Company reports as interest income or interest expense in the Consolidated Statement of Income, the interest receivable or payable on the financial instruments selected for the fair value option at their respective contractual rates.

The borrowed funds had a contractual principal amount of

$61.9

million at both

June 30, 2017

and

December 31, 2016.

The fair value of borrowed funds includes accrued interest payable of

$0.2

million and

$0.1

million at

June 30, 2017

and

December 31, 2016,

respectively.

The Company generally holds its earning assets, other than securities available for sale, to maturity and settles its liabilities at maturity. However, fair value estimates are made at a specific point in time and are based on relevant market information. These estimates do

not

reflect any premium or discount that could result from offering for sale at

one

time the Company’s entire holdings of a particular instrument. Accordingly, as assumptions change, such as interest rates and prepayments, fair value estimates change and these amounts

may

not

necessarily be realized in an immediate sale.

Disclosure of fair value does

not

require fair value information for items that do

not

meet the definition of a financial instrument or certain other financial instruments specifically excluded from its requirements. These items include core deposit intangibles and other customer relationships, premises and equipment, leases, income taxes and equity.

Further, fair value disclosure does

not

attempt to value future income or business. These items

may

be material and accordingly, the fair value information presented does

not

purport to represent, nor should it be construed to represent, the underlying “market” or franchise value of the Company.

Financial assets and financial liabilities reported at fair value are required to be measured based on either: (

1

) quoted prices in active markets for identical financial instruments (Level

1

); (

2

) significant other observable inputs (Level

2

); or (

3

) significant unobservable inputs (Level

3

).

A description of the methods and significant assumptions utilized in estimating the fair value of the Company’s assets and liabilities that are carried at fair value on a recurring basis are as follows:

Level

1

– where quoted market prices are available in an active market. 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

June 30, 2017

and

December 31, 2016.

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, 2017

and

December 31, 2016,

Level

2

included mortgage related securities, corporate debt, municipals and interest rate swaps.

Level

3

– when there is limited activity or less transparency around inputs to the valuation, financial instruments are classified as Level

3.

At

June 30, 2017

and

December 31, 2016,

Level

3

included trust preferred securities owned and junior subordinated debentures issued by the Company and a single issuer trust preferred security.

The methods described above

may

produce fair values that

may

not

be indicative of net realizable value or reflective of future fair values. While the Company believes, its valuation methods are appropriate and consistent with those of other market participants, the use of different methodologies, assumptions and models to determine fair value of certain financial instruments could produce different estimates of fair value at the reporting date.

The following table sets forth the assets and liabilities that are carried at fair value on a recurring basis and the method that was used to determine their fair value, at

June 30, 2017

and

December 31, 2016:

		Quoted Prices
		in Active Markets								Significant Other								Significant Other
		for Identical Assets								Observable Inputs								Unobservable Inputs								Total carried at fair value
		(Level 1)								(Level 2)								(Level 3)								on a recurring basis
		2017				2016				2017				2016				2017				2016				2017				2016
		(In thousands)
Assets:
Mortgage-backed Securities		$	-			$	-			$	520,012			$	516,476			$	-			$	-			$	520,012			$	516,476
Other securities			-				-				310,249				337,544				7,444				7,361				317,693				344,905
Interest rate swaps			-				-				5,648				6,350				-				-				5,648				6,350
Total assets		$	-			$	-			$	835,909			$	860,370			$	7,444			$	7,361			$	843,353			$	867,731
Liabilities:
Junior subordinated debentures		$	-			$	-			$	-			$	-			$	35,137			$	33,959			$	35,137			$	33,959
Interest rate swaps			-				-				4,624				3,386				-				-				4,624				3,386
Total liabilities		$	-			$	-			$	4,624			$	3,386			$	35,137			$	33,959			$	39,761			$	37,345

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 three months ended
		June 30, 2017								June 30, 2016
		Trust preferred				Junior subordinated				Trust preferred				Junior subordinated
		securities				debentures				securities				debentures
		(In thousands)
Beginning balance		$	7,394			$	34,536			$	7,150			$	27,977
Net gain from fair value adjustment of financial assets (1)			48				-				15				-
Net loss (gain) from fair value adjustment of financial liabilities (1)			-				594				-				(491	)
Decrease in accrued interest payable			-				7				-				(1	)
Change in unrealized gains included in other comprehensive income			2				-				2				-
Ending balance		$	7,444			$	35,137			$	7,167			$	27,485
Changes in unrealized gains held at period end		$	2			$	-			$	2			$	-

		For the six months ended
		June 30, 2017								June 30, 2016
		Trust preferred				Junior subordinated				Trust preferred				Junior subordinated
		securities				debentures				securities				debentures
		(In thousands)
Beginning balance		$	7,361			$	33,959			$	7,212			$	29,018
Net gain (loss) from fair value adjustment of financial assets (1)			81				-				(45	)			-
Net loss (gain) from fair value adjustment of financial liabilities (1)			-				1,165				-				(1,547	)
Increase in accrued interest payable			-				13				-				14
Change in unrealized gains included in other comprehensive income			2				-				-				-
Ending balance		$	7,444			$	35,137			$	7,167			$	27,485
Changes in unrealized gains held at period end		$	2			$	-			$	-			$	-

(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

six

months ended

June 30, 2017

and

2016,

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, 2017
		Fair Value				Valuation Technique				Unobservable Input				Range				Weighted Average
		(Dollars in thousands)
Assets:
Trust preferred securities		$	7,444				Discounted cash flows				Discount rate			6.0%	-	6.9%			6.8	%
Liabilities:
Junior subordinated debentures		$	35,137				Discounted cash flows				Discount rate				6.0%				6.0	%

		December 31, 2016
		Fair Value				Valuation Technique				Unobservable Input				Range				Weighted Average
		(Dollars in thousands)
Assets:
Trust preferred securities		$	7,361				Discounted cash flows				Discount rate			6.3%	-	7.1%			7.0	%
Liabilities:
Junior subordinated debentures		$	33,959				Discounted cash flows				Discount rate				6.3%				6.3	%

The significant unobservable inputs used in the fair value measurement of the Company’s trust preferred securities and junior subordinated debentures valued under Level

3

at

June 30, 2017

and

December 31, 2016,

is 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

June 30, 2017

and

December 31, 2016:

		Quoted Prices
		in Active Markets								Significant Other								Significant Other
		for Identical Assets								Observable Inputs								Unobservable Inputs								Total carried at fair value
		(Level 1)								(Level 2)								(Level 3)								on a recurring basis
		2017				2016				2017				2016				2017				2016				2017				2016
		(In thousands)
Assets:
Impaired loans		$	-			$	-			$	-			$	-			$	14,418			$	14,968			$	14,418			$	14,968
Other real estate owned			-				-				-				-				-				533				-				533
Total assets		$	-			$	-			$	-			$	-			$	14,418			$	15,501			$	14,418			$	15,501

The following tables present the quantitative information about non-recurring Level

3

fair value of financial instruments and the fair value measurements at the dates indicated:

		At June 30, 2017
		Fair Value				Valuation Technique		Unobservable Input		Range				Weighted Average
		(Dollars in thousands)
Assets:
Impaired loans		$	1,773			Income approach		Capitalization rate		6.0%	to	7.5%		6.8%
								Reduction for planned expedited disposal			15.0%			15.0%
Impaired loans		$	7,674			Sales approach		Adjustment to sales comparison value to reconcile differences between comparable sales		-40.0%	to	16.2%		-2.0%
								Reduction for planned expedited disposal		0%	to	15.0%		7.7%
Impaired loans		$	4,971			Blended income and sales approach		Adjustment to sales comparison value to reconcile differences between comparable sales		-30.0%	to	25.0%		-1.6%
								Capitalization rate		5.0%	to	9.8%		7.4%
								Reduction planned for expedited disposal		14.5%	to	15.0%		15.0%

		At December 31, 2016
		Fair Value				Valuation Technique		Unobservable Input		Range				Weighted Average
		(Dollars in thousands)
Assets:
Impaired loans		$	2,007			Income approach		Capitalization rate		6.0%	to	7.5%		7.0%
								Reduction for planned expedited disposal			15.0%			15.0%
Impaired loans		$	8,703			Sales approach		Adjustment to sales comparison value to reconcile differences between comparable sales		-40.0%	to	16.2%		-1.5%
								Reduction for planned expedited disposal		0%	to	15.0%		7.7%
Impaired loans		$	4,258			Blended income and sales approach		Adjustment to sales comparison value to reconcile differences between comparable sales		-50.0%	to	25.0%		-0.6%
								Capitalization rate		5.3%	to	9.5%		7.2%
								Reduction planned for expedited disposal			15.0%			15.0%
Other real estate owned		$	533			Sales approach		Adjustment to sales comparison value to reconcile differences between comparable sales		3.3%	to	18.6%		11.0%

The Company did

not

have any liabilities that were carried at fair value on a non-recurring basis at

June 30, 2017

and

December 31, 2016.

The methods and assumptions used to estimate fair value at

June 30, 2017

and

December 31, 2016

are as follows:

Cash and Due from Banks, Overnight Interest-Earning Deposits and Federal Funds Sold:

The fair values of financial instruments that are short-term or reprice frequently and have little or

no

risk are considered to have a fair value that approximates carrying value.

FHLB-NY stock:

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

Securities:

The fair values of securities are contained in Note

4

of Notes to Consolidated Financial Statements. Fair value is based upon quoted market prices, where available. If a quoted market price is

not

available, fair value is estimated using quoted market prices for similar securities and adjusted for differences between the quoted instrument and the instrument being valued. When there is limited activity or less transparency around inputs to the valuation, securities are valued using discounted cash flows.

Loans held for sale:

The fair value of non-performing loans held for sale is estimated through a negotiated sales price.

Loans:

The fair value of loans is estimated by discounting the expected future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and remaining maturities.

For non-accruing loans, fair value is generally estimated by discounting management’s estimate of future cash flows with a discount rate commensurate with the risk associated with such assets or for collateral dependent loans

85%

of the appraised or internally estimated value of the property, except for taxi medallion loans. The fair value of the underlying collateral of taxi medallion loans is the most recent reported arm’s length transaction. When there is

no

recent sale activity, the fair value is calculated using capitalization rates.

Other Real Estate Owned:

OREO are carried at fair value less selling costs. The fair value is based on appraised value through a current appraisal, or sometimes through an internal review, additionally adjusted by the estimated costs to sell the property.

Accrued Interest Receivable:

The carrying amount is a reasonable estimate of fair value due to its short-term nature and is valued at the input level for its underlying financial asset.

Due to Depositors:

The fair values of demand, passbook savings, NOW, money market deposits and escrow deposits are, by definition, equal to the amount payable on demand at the reporting dates (i.e. their carrying value). The fair value of certificates of deposits are estimated by discounting the expected future cash flows using the rates currently offered for deposits of similar remaining maturities.

Borrowings:

The fair value of borrowings is estimated by discounting the contractual cash flows using interest rates in effect for borrowings with similar maturities and collateral requirements or using a market-standard model. The fair value of the junior subordinated debentures was developed using a credit spread based on the subordinated debt issued by the Company adjusting for differences in the junior subordinated debt’s credit rating, liquidity and time to maturity.

Accrued Interest Payable:

The carrying amount is a reasonable estimate of fair value due to its short-term nature and is valued at the input level for its underlying financial liability.

Interest Rate Swaps:

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

Other Financial Instruments:

The fair values of commitments to sell, lend or borrow are estimated using the fees currently charged or paid to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties or on the estimated cost to terminate them or otherwise settle with the counterparties at the reporting date. For fixed-rate loan commitments to sell, lend or borrow, fair values also consider the difference between current levels of interest rates and committed rates (where applicable). At

June 30, 2017

and

December 31, 2016,

the fair values of the above financial instruments approximate the recorded amounts of the related fees and were

not

considered to be material.

The following tables set forth the carrying amounts and estimated fair values of selected financial instruments based on the assumptions described above used by the Company in estimating fair value at the periods indicated:

		June 30, 2017
		Carrying				Fair
		Amount				Value				Level 1				Level 2				Level 3
		(In thousands)
Assets:
Cash and due from banks		$	48,539				48,539			$	48,539			$	-			$	-
Securities held-to-maturity
Mortgage-backed securities			7,983				7,816				-				7,816				-
Other securities			24,451				22,777				-				-				22,777
Securities available for sale
Mortgage-backed securities			520,012				520,012				-				520,012				-
Other securities			317,693				317,693				-				310,249				7,444
Loans held for sale			30,565				30,565												30,565
Loans			5,045,680				5,021,555				-				-				5,021,555
FHLB-NY stock			66,630				66,630				-				66,630				-
Accrued interest receivable			21,439				21,439				-				21,439				-
Interest rate swaps			5,648				5,648				-				5,648				-
Total assets		$	6,088,640			$	6,062,674			$	48,539			$	931,794			$	5,082,341
Liabilities:
Deposits		$	4,254,803			$	4,256,788			$	2,922,426			$	1,334,362			$	-
Borrowings			1,425,779				1,422,040				-				1,386,903				35,137
Accrued interest payable			2,587				2,587				-				2,587				-
Interest rate swaps			4,624				4,624				-				4,624				-
Total liabilities		$	5,687,793			$	5,686,039			$	2,922,426			$	2,728,476			$	35,137

		December 31, 2016
		Carrying				Fair
		Amount				Value				Level 1				Level 2				Level 3
		(In thousands)
Assets:
Cash and due from banks		$	35,857			$	35,857			$	35,857			$	-			$	-
Securities held-to-maturity
Other securities			37,735				35,408				-				-				35,408
Securities available for sale
Mortgage-backed securities			516,476				516,476				-				516,476				-
Other securities			344,905				344,905				-				337,544				7,361
Loans			4,835,693				4,814,840				-				-				4,814,840
FHLB-NY stock			59,173				59,173				-				59,173				-
Interest rate swaps			6,350				6,350				-				6,350				-
Total assets		$	5,836,189			$	5,813,009			$	35,857			$	919,543			$	4,857,609
Liabilities:
Deposits		$	4,205,631			$	4,213,714			$	2,833,516			$	1,380,198			$	-
Borrowings			1,266,563				1,255,283				-				1,221,324				33,959
Interest rate swaps			3,386				3,386				-				3,386				-
Total liabilities		$	5,475,580			$	5,472,383			$	2,833,516			$	2,604,908			$	33,959

X

- References

No definition available.

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X

- Definition

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.

+ References

Reference 1: http://www.xbrl.org/2003/role/presentationRef
-Publisher FASB
-Name Accounting Standards Codification
-Topic 820
-URI http://asc.fasb.org/topic&trid=2155941

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