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 June 30, 2016, the Company carried financial assets and financial liabilities under the fair value option with fair values of $30.8 million and $27.5 million, respectively. 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. The Company did not elect to carry any additional financial assets or financial liabilities under the fair value option during the three and six months ended June 30, 2016.

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)	2016		2015		June 30, 2016			June 30, 2015			June 30, 2016		June 30, 2015

Mortgage-backed securities	$	2,292	$	2,527	$	(3	)	$	(28	)	$	2	$	(36	)
Other securities		28,514		28,205		90			(108	)		186		89
Borrowed funds		27,485		29,018		492			(1,229	)		1,546		(705	)
Net gain (loss) from fair value adjustments (1) (2)					$	579		$	(1,365	)	$	1,734	$	(652	)

(1)

The net gain from fair value adjustments presented in the above table does not include net gains (losses) of ($1.7) million and $2.1 million for the three months ended June 30, 2016 and 2015, 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 gains (losses) of ($3.8) million and $0.8 million for the six months ended June 30, 2016 and 2015, 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, 2016 and December 31, 2015. The fair value of borrowed funds includes accrued interest payable of $0.1 million at June 30, 2016 and December 31, 2015.

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, 2016 and December 31, 2015.

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, 2016 and December 31, 2015, 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, 2016 and December 31, 2015, 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, 2016 and December 31, 2015:

	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
	2016		2015		2016		2015		2016		2015		2016		2015
	(In thousands)

Assets:
Mortgage-backed Securities	$	-	$	-	$	580,500	$	668,740	$	-	$	-	$	580,500	$	668,740
Other securities		-		-		361,444		317,445		7,167		7,212		368,611		324,657
Interest rate swaps		-		-		-		48		-		-		-		48

Total assets	$	-	$	-	$	941,944	$	986,233	$	7,167	$	7,212	$	949,111	$	993,445

Liabilities:
Borrowings	$	-	$	-	$	-	$	-	$	27,485	$	29,018	$	27,485	$	29,018
Interest rate swaps		-		-		16,201		4,314		-		-		16,201		4,314

Total liabilities	$	-	$	-	$	16,201	$	4,314	$	27,485	$	29,018	$	43,686	$	33,332

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 June 30, 2016
	Trust preferred securities		Junior subordinated debentures
	(In thousands)

Beginning balance	$	7,150	$	27,977
Net gain from fair value adjustment of financial assets (1)		15		-
Net gain from fair value adjustment of financial liabilities (1)		-		(491	)
Decrease in accrued interest payable		-		(1	)
Change in unrealized gains included in other comprehensive income		2		-
Ending balance	$	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.

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 June 30, 2015
	Municipals			Trust preferred securities		Junior subordinated debentures
	(In thousands)

Beginning balance	$	14,464		$	7,189	$	28,245
Transfer to held-to-maturity		(4,510	)		-		-
Principal repayments		(55	)		-		-
Maturities		(2,000	)		-		-
Net gain from fair value adjustment of financial assets included in earnings (1)		-			37		-
Net loss from fair value adjustment of financial liabilities included in earnings (1)		-			-		1,229
Increase in accrued interest payable		-			-		2
Change in unrealized gains included in other comprehensive income		-			-		-
Ending balance	$	7,899		$	7,226	$	29,476

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

(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 six months ended June 30, 2016
	Trust preferred securities			Junior subordinated debentures

Beginning balance	$	7,212		$	29,018
Net loss from fair value adjustment of financial assets included in earnings (1)		(45	)		-
Net gain from fair value adjustment of financial liabilities included in earnings (1)		-			(1,547	)
Increase in accrued interest payable		-			14
Change in unrealized gains (losses) included in other comprehensive income		-			-
Ending balance	$	7,167		$	27,485

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

(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 six months ended June 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		(110	)		-		-
Maturities		(4,000	)		-		-
Net gain from fair value adjustment of financial assets included in earnings (1)		-			131		-
Net loss from fair value adjustment of financial liabilities included in earnings (1)		-			-		705
Decrease in accrued interest payable		-			-		-
Change in unrealized gains (losses) included in other comprehensive income		-			5		-
Ending balance	$	7,899		$	7,226	$	29,476

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.

During the three and six months ended June 30, 2016 and 2015, 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, 2016

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

Trust preferred securities	$	7,167	Discounted cash flows	Discount rate		7.0%	-	7.07%		7.1	%

Liabilities:

Junior subordinated debentures	$	27,485	Discounted cash flows	Discount rate			7.0%			7.0	%

	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 at June 30, 2016 and December 31, 2015, 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, 2016 and December 31, 2015:

	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
	2016		2015		2016		2015		2016		2015		2016		2015
	(In thousands)
Assets:
Impaired loans	$	-	$	-	$	-	$	-	$	13,381	$	15,360	$	13,381	$	15,360
Other real estate owned		-		-		-		-		3,668		4,932		3,668		4,932

Total assets	$	-	$	-	$	-	$	-	$	17,049	$	20,292	$	17,049	$	20,292

The following tables present the quantitative information about non-recurring Level 3 fair value of financial instruments and the fair value measurements at the periods indicated:

	June 30, 2016

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

Impaired loans	$	3,231	Income approach	Capitalization rate		6.3%	to	7.7%		7.2	%
				Reduction for planned expedited disposal		9.3%	to	15.0%		14.3	%

Impaired loans	$	4,433	Sales approach	Adjustment to sales comparison value to reconcile differences between comparable sales		-50.0%	to	16.2%		-3.9	%
				Reduction for planned expedited disposal			15.0%			15.0	%


Impaired loans	$	5,717	Blended income and sales approach	Adjustment to sales comparison value to reconcile differences between comparable sales		-50.0%	to	25.0%		-2.5	%
				Capitalization rate		5.6%	to	9.0%		7.3	%
				Reduction for planned expedited disposal		6.9%	to	15.0%		13.9	%


Other real estate owned	$	2,905	Income approach	Capitalization rate			9.0%			9.0	%


Other real estate owned	$	763	Sales approach	Adjustment to sales comparison value to reconcile differences between comparable sales		-5.0%	to	25.0%		11.0	%

	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 Company did not have any liabilities that were carried at fair value on a non-recurring basis at June 30, 2016 and December 31, 2015.

The fair value of each material class of financial instruments at June 30, 2016 and December 31, 2015 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 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:

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.

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 June 30, 2016 and December 31, 2015, 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, 2016
	Carrying Amount		Fair Value		Level 1		Level 2		Level 3
	(In thousands)
Assets:

Cash and due from banks	$	50,165	$	50,165	$	50,165	$	-	$	-
Securities held-to-maturity
Other securities		28,410		28,410		-		-		28,410
Securities available for sale
Mortgage-backed securities		580,500		580,500		-		580,500		-
Other securities		368,611		368,611		-		361,444		7,167
Loans		4,696,279		4,740,014		-		-		4,740,014
FHLB-NY stock		67,195		67,195		-		67,195		-

Total assets	$	5,791,160	$	5,834,895	$	50,165	$	1,009,139	$	4,775,591


Liabilities:
Deposits	$	3,941,224	$	3,962,871	$	2,529,674	$	1,433,197	$	-
Borrowings		1,444,751		1,458,537		-		1,431,052		27,485
Interest rate swaps		16,201		16,201		-		16,201		-

Total liabilities	$	5,402,176	$	5,437,609	$	2,529,674	$	2,880,450	$	27,485

	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