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,

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

December

31,

2016

and

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,

2016

and

2015,

and the changes in fair value included in the Consolidated Statement of Income – Net loss from fair value adjustments, for the years ended

December

31,

2016,

2015

and

2014:

	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	2016		2015		2016			2015			2014
(Dollars in thousands)
Mortgage-backed securities	$	2,016	$	2,527	$	(25	)	$	(59	)	$	75
Other securities		28,429		28,205		(38	)		53			598
Borrowed funds		33,959		29,018		(4,908	)		(238	)		802
Net gain (loss) from fair value adjustments (1)					$	(4,971	)	$	(244	)	$	1,475

(1)

The net gain (loss) from fair value adjustments presented in the above table does not include net gains and (losses) of

$1.5

million,

($1.6)

million and

($4.0)

million from the change in fair value of derivative instruments during the years ended

December

31,

2016,

2015

and

2014,

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,

2016

and

2015.

The fair value of borrowed funds includes accrued interest payable of

$0.1

million at

December

31,

2016

and

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);

(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

– 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

December

31,

2016

and

2015.

Level

– 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,

2016

and

2015,

Level

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

Level

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

December

31,

2016

and

2015,

Level

included trust preferred securities owned by and junior subordinated debentures issued by the Company. Additionally, at

December

31,

2014,

Level

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 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				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
	2016		2015		2016		2015		2016		2015		2016		2015

Assets:
Securities available for sale
Mortgage-backed Securities	$	-	$	-	$	516,476	$	668,740	$	-	$	-	$	516,476	$	668,740
Other securities		-		-		337,544		317,445		7,361		7,212		344,905		324,657
Interest rate swaps		-		-		6,350		48		-		-		6,350		48

Total assets	$	-	$	-	$	860,370	$	986,233	$	7,361	$	7,212	$	867,731	$	993,445


Liabilities:
Borrowings	$	-	$	-	$	-	$	-	$	33,959	$	29,018	$	33,959	$	29,018
Interest rate swaps		-		-		3,386		4,314		-		-		3,386		4,314

Total liabilities	$	-	$	-	$	3,386	$	4,314	$	33,959	$	29,018	$	37,345	$	33,332

The following tables set forth the Company's assets and liabilities that are carried at fair value on a recurring basis, classified within Level

of the valuation hierarchy for the periods indicated:

	For the year ended December 31, 2016
	Trust preferred		Junior subordinated
	securities		debentures

Beginning balance	$	7,212	$	29,018
Net gain from fair value adjustment of financial assets (1)		149		-
Net loss from fair value adjustment of financial liabilities (1)		-		4,908
Increase in accrued interest payable		-		33
Change in unrealized gains included in other comprehensive income		-		-
Ending balance	$	7,361	$	33,959

Changes in unrealized held at period end	$	-	$	-

	For the year ended December 31, 2015
				Trust preferred		Junior subordinated
	Municipals			securities		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	$	-

(1)

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

During the years ended

December

31,

2016

and

2015,

there were no transfers between Levels

and

The following tables present the quantitative information about recurring Level

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

	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	%

	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

December

31,

2016

and

2015,

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				Significant Other				Significant Other
	for Identical Assets				Observable Inputs				Unobservable Inputs				Total carried at fair value
	(Level 1)				(Level 2)				(Level 3)				on a non-recurring basis
	2016		2015		2016		2015		2016		2015		2016		2015

Assets:
Impaired loans	$	-	$	-	$	-	$	-	$	14,968	$	15,360	$	14,968	$	15,360
Other real estate owned		-		-		-		-		533		4,932		533		4,932

Total assets	$	-	$	-	$	-	$	-	$	15,501	$	20,292	$	15,501	$	20,292

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

fair value measurements of financial instruments at the periods indicated:

	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	%

	At 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

December

31,

2016

and

2015.

The fair value of each material class of financial instruments at

December

31,

2016

and

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

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. 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.

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,

2016

and

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 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, 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

	December 31, 2015
	Carrying		Fair
	Amount		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