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Note 18 - Fair Value of Financial Instruments

12 Months Ended

Dec. 31, 2018

Notes to Financial Statements

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, 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. At

December 31, 2017,

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

$14.3

million and

$37.0

million, respectively. The Company did

not

purchase any financial assets or liabilities under the fair value option during the years ended

December 31, 2018

and

2017

and did

not

sell any financial liabilities under the fair value option during the years ended

December 31, 2018

and

2017.

The Company sold financial assets carried under the fair value option totaling

$0.2

million and

$3.0

million during the years ended

December 31, 2018

and

2017,

respectively.

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, 2018

and

2017,

and the changes in fair value included in the Consolidated Statement of Income – Net loss from fair value adjustments:

		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		2018				2017				2018				2017				2016
(Dollars in thousands)
Mortgage-backed securities		$	967			$	1,590			$	(19	)		$	(26	)		$	(25	)
Other securities			12,843				12,685				(109	)			134				(38	)
Borrowed funds			41,849				36,986				(4,913	)			(2,993	)			(4,908	)
Net loss from fair value adjustments (1)										$	(5,041	)		$	(2,885	)		$	(4,971	)

(1 ) The net loss from fair value adjustments presented in the above table does not include net gains (losses) of $0.9 million, ($0.6 ) million and $1.5 million from the change in fair value of derivative instruments during the years ended December 31, 2018, 2017 and 2016, 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, 2018

and

2017.

The fair value of borrowed funds includes accrued interest payable of

$0.2

million at

December 31, 2018

and

2017.

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

not

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

one

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

may

not

necessarily be realized in an immediate sale.

Disclosure of fair value does

not

require fair value information for items that do

not

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

Further, fair value disclosure does

not

attempt to value future income or business. These items

may

be material and accordingly, the fair value information presented does

not

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

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

1

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

1

); (

2

) significant other observable inputs (Level

2

); or (

3

) significant unobservable inputs (Level

3

).

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

Level

1

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

December 31, 2018

and

2017,

Level

1

included

one

mutual fund.

Level

2

– when quoted market prices are

not

available, fair value is estimated using quoted market prices for similar financial instruments and adjusted for differences between the quoted instrument and the instrument being valued. Fair value can also be estimated by using pricing models, or discounted cash flows. Pricing models primarily use market-based or independently sourced market parameters as inputs, including, but

not

limited to, yield curves, interest rates, equity or debt prices and credit spreads. In addition to observable market information, models also incorporate maturity and cash flow assumptions. At

December 31, 2018

and

2017,

Level

2

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

Level

3

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

3.

At

December 31, 2018

and

2017,

Level

3

included 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 Company's assets and liabilities that are carried at fair value on a recurring basis, including those reported at fair value under the fair value option, and the level 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
		2018				2017				2018				2017				2018				2017				2018				2017
		(In thousands)
Assets:
Securities available for sale
Mortgage-backed Securities		$	-			$	-			$	557,953			$	509,650			$	-			$	-			$	557,953			$	509,650
Other securities			11,586				11,575				251,860				216,019				1,256				1,110				264,702				228,704
Interest rate swaps			-				-				15,961				7,388				-				-				15,961				7,388
Total assets		$	11,586			$	11,575			$	825,774			$	733,057			$	1,256			$	1,110			$	838,616			$	745,742
Liabilities:
Borrowings		$	-			$	-			$	-			$	-			$	41,849			$	36,986			$	41,849			$	36,986
Interest rate swaps			-				-				2,239				3,758				-				-				2,239				3,758
Total liabilities		$	-			$	-			$	2,239			$	3,758			$	41,849			$	36,986			$	44,088			$	40,744

During the year ended

December 31, 2017,

one

mutual fund security for

$11.6

million was transferred from Level

2

into Level

1.

There were

no

other transfers between Levels

1,

2

and

3

during the years ended

December 31, 2018

and

2017.

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, 2018								December 31, 2017
		Trust preferred securities				Junior subordinated debentures				Trust preferred securities				Junior subordinated debentures
		(In thousands)
Beginning balance		$	1,110			$	36,986			$	7,361			$	33,959
Security call			-				-				(6,300	)			-
Net gain from fair value adjustment of financial assets (1)			145				-				134				-
Net loss from fair value adjustment of financial liabilities (1)			-				4,913				-				2,993
Increase(Decrease) in accrued interest			1				66				(87	)			34
Change in unrealized losses included in other comprehensive loss			-				(116	)			2				-
Ending balance		$	1,256			$	41,849			$	1,110			$	36,986
Changes in unrealized held at period end		$	-			$	-			$	-			$	-

(

1

) These totals in the table above are presented in the Consolidated Statement of Income under net loss from fair value adjustments.

The following tables present the qualitative information about recurring Level

3

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

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

%

December 31, 2017

Fair Value

Valuation Technique

Unobservable Input

Range

Weighted Average

(Dollars in thousands)

Assets:

Trust preferred securities

$

1,110

Discounted cash flows

Discount rate

n/a

5.7

%

Liabilities:

Junior subordinated debentures

$

36,986

Discounted cash flows

Discount rate

n/a

5.7

%

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

3

at

December 31, 2018

and

2017,

are the effective yields used in the cash flow models. Significant increases or decreases in the effective yield in isolation would result in a significantly lower or higher fair value measurement.

The following table sets forth the Company's assets that are carried at fair value on a non-recurring basis, and the level 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
		2018				2017				2018				2017				2018				2017				2018				2017
		(In thousands)
Assets:
Impaired loans		$	-			$	-			$	-			$	-			$	4,111			$	8,504			$	4,111			$	8,504
Other repossesed assets			-				-				-				-				35				-				35				-
Total assets		$	-			$	-			$	-			$	-			$	4,146			$	8,504			$	4,146			$	8,504

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

3

fair value measurements of financial instruments at the periods indicated:

		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%

		At December 31, 2017
		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		$	6,868			Sales approach		Adjustment to sales comparison value to reconcile differences between comparable sales		-50.0%	to	15.0%		-0.1%
								Reduction for planned expedited disposal		0.0%	to	15.0%		0.1%
Impaired loans		$	1,432			Blended income and sales approach		Adjustment to sales comparison value to reconcile differences between comparable sales		-30.0%	to	10.0%		-7.6%
								Capitalization rate		7.4%%	to	9.8%		8.8%
								Reduction for planned expedited disposal			0.0%			0.0%

The Company did

not

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

December 31, 2018

and

2017.

The methods and assumptions used to estimate fair value at

December 31, 2018

and

2017

are as follows:

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.

Impaired Loans:

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

85%

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

no

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

Other Real Estate Owned and Other Repossessed Assets:

OREO and other repossessed assets are carried at fair value less selling costs. The fair value for OREO is based on appraised value through a current appraisal, or sometimes through an internal review, additionally adjusted by the estimated costs to sell the property. The fair value for other repossessed assets are based upon the most recently reported arm’s length sales transaction. When there is

no

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

Junior Subordinated Debentures:

The fair value of the junior subordinated debentures was developed using a credit spread based on the subordinated debt issued by the Company adjusting for differences in the junior subordinated debt’s credit rating, liquidity and time to maturity. The unrealized net gain/loss attributable to changes in our own credit risk was determined by adjusting the fair value as determined in the proceeding sentence by the average rate of default on debt instruments with a similar debt rating as our junior subordinated debentures, with the difference from the original calculation and this calculation resulting in the instrument-specific unrealized gain/loss.

Interest Rate Swaps:

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

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

		December 31, 2018
		Carrying Amount				Fair 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				-

		December 31, 2017
		Carrying Amount				Fair Value				Level 1				Level 2				Level 3
		(In thousands)
Assets:
Cash and due from banks		$	51,546			$	51,546			$	51,546			$	-			$	-
Securities held-to-maturity
Mortgage-backed securities			7,973				7,810				-				7,810				-
Other securities			22,913				21,889				-				-				21,889
Securities available for sale
Mortgage-backed securities			509,650				509,650				-				509,650				-
Other securities			228,704				228,704				11,575				216,019				1,110
Loans			5,176,999				5,169,108				-				-				5,169,108
FHLB-NY stock			60,089				60,089				-				60,089				-
Accrued interest receivable			21,405				21,405				16				1,916				19,473
Interest rate swaps			7,388				7,388				-				7,388				-
Liabilities:
Deposits		$	4,383,278			$	4,380,174			$	3,031,345			$	1,348,829			$	-
Borrowings			1,309,653				1,310,487				-				1,273,501				36,986
Accrued interest payable			2,659				2,659				-				2,659				-
Interest rate swaps			3,758				3,758				-				3,758				-

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://fasb.org/us-gaap/role/ref/legacyRef
-Publisher FASB
-Name Accounting Standards Codification
-Topic 820
-URI http://asc.fasb.org/topic&trid=2155941

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