Fair Value of Financial Instruments | 3 Months Ended |
Mar. 31, 2015 |
Fair Value of Financial Instruments [Abstract] | |
Fair Value of Financial Instruments | Note 4. Fair Value of Financial Instruments |
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Fair value is the exchange price that would be received for an asset or paid to transfer a liability (exit price) in an orderly transaction between market participants on the measurement date. There are three levels of inputs that may be used to measure fair value: |
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Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date. |
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Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data. |
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Level 3: Significant unobservable inputs that reflect a reporting entity's own assumptions about the assumptions that market participants would use in pricing an asset or liability. |
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The fair values of investment securities are determined by quoted market prices, if available (Level 1). For securities where quoted prices are not available, fair values of investment securities are determined by matrix pricing, which is a mathematical technique widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities' relationship to other benchmark quoted securities (Level 2 inputs). As the Corporation is responsible for the determination of fair value, it performs quarterly analyses on the prices received from the pricing service to determine whether the prices are reasonable estimates of fair value. Specifically, the Corporation compares the prices received from the pricing service to a secondary pricing source. The Corporation's internal price verification procedures have not historically resulted in adjustment in the prices obtained from the pricing service. |
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The interest rate swaps are reported at fair values obtained from brokers who utilize internal models with observable market data inputs to estimate the values of these instruments (Level 2 inputs). |
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The Corporation measures impairment of collateralized loans and other real estate owned (“OREO”) based on the estimated fair value of the collateral less estimated costs to sell the collateral, incorporating assumptions that experienced parties might use in estimating the value of such collateral (Level 3 inputs). At the time a loan or OREO is considered impaired, it is valued at the lower of cost or fair value. Generally, impaired loans carried at fair value have been partially charged-off or receive specific allocations of the allowance for loan losses. OREO is initially recorded at fair value less estimated selling costs. For collateral dependent loans and OREO, fair value is commonly based on real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available. Such adjustments typically result in a Level 3 classification of the inputs for determining fair value. Non-real estate collateral may be valued using an appraisal, the net book value recorded for the collateral on the borrower's financial statements, or aging reports. Collateral is then adjusted or discounted based on management's historical knowledge, changes in market conditions from the time of the valuation, and management's expertise and knowledge of the borrower and borrower's business, resulting in a Level 3 fair value classification. Impaired loans are evaluated on a quarterly basis for additional impairment and adjusted accordingly. |
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Appraisals are generally obtained to support the fair value of collateral. Appraisals for both collateral-dependent impaired loans and OREO are performed by licensed appraisers whose qualifications and licenses have been reviewed and verified by the Corporation. The Corporation utilizes a third party to order appraisals and, once received, reviews the assumptions and approaches utilized in the appraisal as well as the resulting fair value in comparison with independent data sources such as recent market data or industry-wide statistics. |
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Real estate appraisals typically incorporate measures such as recent sales prices for comparable properties. In addition, appraisers may make adjustments to the sales price of the comparable properties as deemed appropriate based on the age, condition or general characteristics of the subject property. Management generally applies a 12% discount to real estate appraised values to cover disposition / selling costs and to reflect the potential price reductions in the market necessary to complete an expedient transaction and to factor in the impact of the perception that a transaction being completed by a bank may result in further price reduction pressure. |
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Assets and Liabilities Measured on a Recurring Basis |
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Assets and liabilities measured at fair value on a recurring basis are summarized below: |
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| | Fair Value Measurements Using: | |
| | | | Quoted Prices in | | | Significant | | | | | |
| | | | Active Markets | | | Other | | | Significant | |
| | | | for Identical | | | Observable | | | Unobservable | |
| | Carrying | | | Assets | | | Inputs | | | Inputs | |
| | Value | | | (Level 1) | | | (Level 2) | | | (Level 3) | |
| | At March 31, 2015 | |
Assets: | | | | | | | |
Available for sale securities | | | | | | |
U.S. government - | | | | | | | | | | |
sponsored agencies | | $ | 24,710,000 | | | $ | — | | | $ | 24,710,000 | | | $ | — | |
Obligations of state and | | | | | | | | |
political subdivisions | | | 1,417,000 | | | | — | | | | 1,417,000 | | | | — | |
Mortgage-backed | | | | | | | | |
securities - residential | | | 51,876,000 | | | | — | | | | 51,876,000 | | | | — | |
Asset-backed securities | | | 9,920,000 | | | | — | | | | 9,920,000 | | | | — | |
Corporate debt | | | 3,002,000 | | | | — | | | | 3,002,000 | | | | — | |
Other equity investments | | | 3,628,000 | | | | 3,568,000 | | | | 60,000 | | | | — | |
Total available for | | | | | | | | | | | | | | | | |
sale securities | | $ | 94,553,000 | | | $ | 3,568,000 | | | $ | 90,985,000 | | | $ | — | |
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Liabilities: | | | | | | | | | | | | | | | | |
Interest rate swap | | $ | 257,000 | | | $ | — | | | $ | 257,000 | | | $ | — | |
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| | At December 31, 2014 | |
Assets: | | | | | | | | | | | | | | | | |
Available for sale securities | | | | | | | | | | | | | | | | |
U.S. government - | | | | | | | | |
sponsored agencies | | $ | 30,274,000 | | | $ | — | | | $ | 30,274,000 | | | $ | — | |
Obligations of state and | | | | | | | | |
political subdivisions | | | 1,400,000 | | | | — | | | | 1,400,000 | | | | — | |
Mortgage-backed | | | | | | | | |
securities - residential | | | 76,743,000 | | | | — | | | | 76,743,000 | | | | — | |
Asset-backed securities | | | 9,915,000 | | | | — | | | | 9,915,000 | | | | — | |
Corporate debt | | | 2,997,000 | | | | — | | | | 2,997,000 | | | | — | |
Other equity investments | | | 3,589,000 | | | | 3,529,000 | | | | 60,000 | | | | — | |
Total available for | | | | | | | | | | | | | | | | |
sale securities | | $ | 124,918,000 | | | $ | 3,529,000 | | | $ | 121,389,000 | | | $ | — | |
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Liabilities: | | | | | | | | | | | | | | | | |
Interest rate swap | | $ | 314,000 | | | $ | — | | | $ | 314,000 | | | $ | — | |
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There were no transfers of assets between Level 1 and Level 2 during the three months ended March 31, 2015 or during the year ended December 31, 2014. There were no changes to the valuation techniques for fair value measurements as of March 31, 2015 and December 31, 2014. |
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Assets and Liabilities Measured on a Non-Recurring Basis |
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There were no assets or liabilities measured at fair value on a non-recurring basis at March 31, 2015. At March 31, 2014, assets and liabilities measured at fair value on a non-recurring basis are summarized below: |
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| | Fair Value Measurements Using: | |
| | | | Quoted Prices in | | | Significant | | | | |
| | | | Active Markets | | | Other | | | Significant | |
| | | | for Identical | | | Observable | | | Unobservable | |
| | Carrying | | | Assets | | | Inputs | | | Inputs | |
| | Value | | | (Level 1) | | | (Level 2) | | | (Level 3) | |
| | At December 31, 2014 | |
Assets: | | | | | | | | | | | | | | | | |
Impaired loans | | | | | | | | | | | | | | | | |
Commercial: | | | | | | | | | | | | | | | | |
Secured by real estate | | $ | 1,348,000 | | | $ | — | | | $ | — | | | $ | 1,348,000 | |
Commercial real estate | | | 205,000 | | | | — | | | | — | | | | 205,000 | |
Consumer | | | | | | | | | | | | | | | | |
Secured by real estate | | | 49,000 | | | | — | | | | — | | | | 49,000 | |
Other Real Estate Owned | | | 1,117,000 | | | | — | | | | — | | | | 1,117,000 | |
| | $ | 2,719,000 | | | $ | — | | | $ | — | | | $ | 2,719,000 | |
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Collateral-dependent impaired loans measured for impairment using the fair value of the collateral had a recorded investment of $1,690,000, with a valuation allowance of $88,000, resulting in an increase of the provision for loan losses of $155,000 for the year ended December 31, 2014. |
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At December 31, 2014, other real estate owned had a recorded investment of $1,375,000 with a $67,000 valuation allowance. No additional valuation allowances were recorded during the three months ended March 31, 2015 or March 31, 2014. |
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For the Level 3 assets measured at fair value on a non-recurring basis at December 31, 2014, the significant unobservable inputs used in the fair value measurements were as follows: |
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31-Dec-14 | | | | |
| | Fair | | | | | | | | | | | |
Assets | | Value | | | Valuation Technique | | Unobservable Inputs | | Range | | | | |
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Impaired loans | | $ | 1,602,000 | | | Comparable real estate sales | | Adjustments for differences | | 5% - 25% | | | | |
| | | | | | and / or the income approach. | | between comparable sales | | | | | | |
| | | | | | | | and income data available. | | | | | | |
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| | | | | | | | Estimated selling costs. | | 7% | | | | |
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Other real estate owned | | $ | 1,117,000 | | | Comparable real estate sales | | Adjustments for differences | | 0% - 62% | | | | |
| | | | | | and / or the income approach. | | between comparable sales | | | | | | |
| | | | | | | | and income data available. | | | | | | |
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| | | | | | | | Estimated selling costs. | | 7% | | | | |
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Fair value estimates for the Corporation's financial instruments are summarized below: |
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| | | | | | Fair Value Measurements Using: | |
| | | | Quoted Prices | | Significant | | | | |
| | | | in Active | | Other | | Significant | |
| | | | Markets for | | Observable | | Unobservable | |
| | Carrying | | Identical Assets | | Inputs | | Inputs | |
| | Value | | (Level 1) | | (Level 2) | | (Level 3) | |
| | At March 31, 2015 | |
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Financial assets: | | | | | | | | | | | | | | | |
Cash and cash equivalents | | $ | 21,035,000 | | | $ | 21,035,000 | | | $ | — | | | $ | — | |
Securities available for sale | | | 94,553,000 | | | | 3,568,000 | | | | 90,985,000 | | | | — | |
Securities held to maturity | | | 55,811,000 | | | | — | | | | 57,190,000 | | | | — | |
FHLB-NY stock | | | 3,026,000 | | | | N/A | | | | N/A | | | | N/A | |
Mortgage loans held for sale | | | 798,000 | | | | — | | | | — | | | | 798,000 | |
Loans, net | | | 480,480,000 | | | | — | | | | — | | | | 491,123,000 | |
Accrued interest receivable | | | 1,867,000 | | | | 1,000 | | | | 459,000 | | | | 1,407,000 | |
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Financial liabilities: | | | | | | | | | | | | | | | | |
Deposits | | | 566,322,000 | | | | 430,508,000 | | | | 136,282,000 | | | | — | |
FHLB-NY advances | | | 50,000,000 | | | | — | | | | 50,523,000 | | | | — | |
Subordinated debentures | | | 7,217,000 | | | | — | | | | — | | | | 7,204,000 | |
Accrued interest payable | | | 306,000 | | | | 1,000 | | | | 287,000 | | | | 18,000 | |
Interest rate swap | | | 257,000 | | | | — | | | | 257,000 | | | | — | |
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| | | | Fair Value Measurements Using: | |
| | | | Quoted Prices | | Significant | | | | |
| | | | in Active | | Other | | Significant | |
| | | | Markets for | | Observable | | Unobservable | |
| | Carrying | | Identical Assets | | Inputs | | Inputs | |
| | Value | | (Level 1) | | (Level 2) | | (Level 3) | |
| | At December 31, 2014 | |
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Financial assets: | | | | | | | | | | | | | | | |
Cash and cash equivalents | | $ | 10,086,000 | | | $ | 10,086,000 | | | $ | — | | | $ | — | |
Securities available for sale | | | 124,918,000 | | | | 3,345,000 | | | | 165,066,000 | | | | — | |
Securities held to maturity | | | 55,097,000 | | | | — | | | | 27,221,000 | | | | — | |
FHLB-NY stock | | | 3,777,000 | | | | N/A | | | | N/A | | | | N/A | |
Loans, net | | | 467,699,000 | | | | — | | | | — | | | | 478,451,000 | |
Accrued interest receivable | | | 1,994,000 | | | | — | | | | 646,000 | | | | 1,348,000 | |
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Financial liabilities: | | | | | | | | | | | | | | | | |
Deposits | | | 556,476,000 | | | | 424,117,000 | | | | 132,513,000 | | | | — | |
FHLB-NY advances | | | 66,700,000 | | | | — | | | | 67,087,000 | | | | — | |
Subordinated debentures | | | 7,217,000 | | | | — | | | | — | | | | 7,203,000 | |
Accrued interest payable | | | 308,000 | | | | 1,000 | | | | 288,000 | | | | 19,000 | |
Interest rate swap | | | 314,000 | | | | — | | | | 314,000 | | | | — | |
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The following methods and assumptions were used to estimate the fair value of each class of financial instrument: |
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Cash and cash equivalents – The carrying amount approximates fair value and is classified as Level 1. |
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Securities available-for-sale and held to maturity – The methods for determining fair values were described previously. |
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Mortgage loans held for sale – Loans in this category have been committed for sale to third party investors at the current carrying amount resulting in a Level 3 classification. |
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Loans, net – Fair values are estimated for portfolios of loans with similar financial characteristics. Loans are segregated by type such as residential and commercial mortgages, commercial and other installment loans. The fair value of loans is estimated by discounting cash flows using estimated market discount rates which reflect the credit and interest rate risk inherent in the loans resulting in a Level 3 classification. Fair values estimated in this manner do not fully incorporate an exit-price approach to fair value, but instead are based on a comparison to current market rates for comparable loans. |
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FHLB-NY stock - It is not practicable to determine the fair value of FHLB-NY stock due to restrictions placed on the transferability of the stock. |
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Accrued interest receivable – The carrying amount approximates fair value. |
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Deposits – The fair value of deposits, with no stated maturity, such as noninterest-bearing demand deposits, savings, NOW and money market accounts, is equal to the amount payable on demand resulting in a Level 1 classification. The fair value of certificates of deposit is based on the discounted value of cash flows resulting in a Level 2 classification. The discount rate is estimated using market discount rates which reflect interest rate risk inherent in the certificates of deposit. Fair values estimated in this manner do not fully incorporate an exit-price approach to fair value, but instead are based on a comparison to current market rates for comparable deposits. |
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FHLB-NY advances – With respect to FHLB-NY borrowings, the fair value is based on the discounted value of cash flows. The discount rate is estimated using market discount rates which reflect the interest rate risk and credit risk inherent in the term borrowings resulting in a Level 2 classification. |
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Securities sold under agreements to repurchase – The carrying value approximates fair value due to the relatively short time before maturity resulting in a Level 2 classification. |
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Subordinated debentures – The fair value of the debentures is based on the discounted value of the cash flows. The discount rate is estimated using market rates which reflect the interest rate and credit risk inherent in the debentures resulting in a Level 3 classification. |
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Accrued interest payable – The carrying amount approximates fair value. |
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Interest rate swap – The fair value of derivatives, which is included in Accrued Expenses and Other Liabilities on the Consolidated Statements of Financial Condition, are based on valuation models using observable market data as of the measurement date (Level 2). |
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Commitments to extend credit – The fair value of commitments is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present credit worthiness of the counter parties. At March 31, 2015 and December 31, 2014 the fair value of such commitments were not material. |
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Limitations |
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The preceding fair value estimates were made at March 31, 2015 and December 31, 2014 based on pertinent market data and relevant information concerning the financial instruments. These estimates do not include any premiums or discounts that could result from an offer to sell at one time the Corporation's entire holdings of a particular financial instrument or category thereof. Since no market exists for a substantial portion of the Corporation's financial instruments, fair value estimates were necessarily based on judgments with respect to future expected loss experience, current economic conditions, risk assessments of various financial instruments, and other factors. Given the subjective nature of these estimates, the uncertainties surrounding them and the matters of significant judgment that must be applied, these fair value estimates cannot be calculated with precision. Modifications in such assumptions could meaningfully alter these estimates. |
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Since these fair value approximations were made solely for on- and off-balance sheet financial instruments at March 31, 2015 and December 31, 2014, no attempt was made to estimate the value of anticipated future business. Furthermore, certain tax implications related to the realization of unrealized gains and losses could have a substantial impact on these fair value estimates and have not been incorporated into the estimates. |
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