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, 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. 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 year ended

December 31, 2017

included the call of

one

security for

$6.0

million and the sale of

one

security for

$3.0

million. The Company did

not

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

December 31, 2017

and

2016

and did

not

sell any financial assets or liabilities under the fair value option during the year ended

December 31, 2016.

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, 2017

and

2016,

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, 2017,

2016

and

2015:

	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	2017		2016		2017			2016			2015
(Dollars in thousands)
Mortgage-backed securities	$	1,590	$	2,016	$	(26	)	$	(25	)	$	(59	)
Other securities		12,685		28,429		134			(38	)		53
Borrowed funds		36,986		33,959		(2,993	)		(4,908	)		(238	)
Net loss from fair value adjustments (1)					$	(2,885	)	$	(4,971	)	$	(244	)

(

)

The net loss from fair value adjustments presented in the above table does

not

include net (losses) gains of (

$0.6

) million,

$1.5

million and (

$1.6

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

December 31, 2017,

2016

and

2015,

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, 2017

and

2016.

The fair value of borrowed funds includes accrued interest payable of

$0.2

million and

$0.1

million at

December 31, 2017

and

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: (

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

); (

) significant other observable inputs (Level

); or (

) significant unobservable inputs (Level

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. At

December 31, 2017,

Level

included

one

mutual fund. At

December 31, 2016,

the Company did

not

value any of its assets or liabilities that are carried at fair value on a recurring basis as Level

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, 2017

and

2016,

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, 2017,

Level

included trust preferred securities owned by and junior subordinated debentures issued by the Company. At

December 31, 2016,

Level

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 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
	2017		2016		2017		2016		2017		2016		2017		2016
	(In thousands)
Assets:
Securities available for sale
Mortgage-backed Securities	$	-	$	-	$	509,650	$	516,476	$	-	$	-	$	509,650	$	516,476
Other securities		11,575		-		216,019		337,544		1,110		7,361		228,704		344,905
Interest rate swaps		-		-		7,388		6,350		-		-		7,388		6,350

Total assets	$	11,575	$	-	$	733,057	$	860,370	$	1,110	$	7,361	$	745,742	$	867,731


Liabilities:
Borrowings	$	-	$	-	$	-	$	-	$	36,986	$	33,959	$	36,986	$	33,959
Interest rate swaps		-		-		3,758		3,386		-		-		3,758		3,386

Total liabilities	$	-	$	-	$	3,758	$	3,386	$	36,986	$	33,959	$	40,744	$	37,345

During the year ended

December 31, 2017,

one

mutual fund security for

$11.6

million was transferred from Level

into Level

There were

other transfers between Levels

and

during the years ended

December 31, 2017

and

2016.

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, 2017					December 31, 2016
	Trust preferred securities			Junior subordinated debentures		Trust preferred securities		Junior subordinated debentures
	(In thousands)


Beginning balance	$	7,361		$	33,959	$	7,212	$	29,018
Security call		(6,300	)		-		-		-
Net gain from fair value adjustment of financial assets (1)		134			-		149		-
Net loss from fair value adjustment of financial liabilities (1)		-			2,993		-		4,908
Increase(Decrease) in accrued interest		(87	)		34		-		33
Change in unrealized losses included in other comprehensive loss		2			-		-		-
Ending balance	$	1,110		$	36,986	$	7,361	$	33,959

Changes in unrealized held at period end	$	-		$	-	$	-	$	-

(

) 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

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

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

	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		n/a				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

December 31, 2017

and

2016,

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 recurring basis
	2017		2016		2017		2016		2017		2016		2017		2016
	(In thousands)
Assets:
Impaired loans	$	-	$	-	$	-	$	-	$	16,027	$	14,968	$	16,027	$	14,968
Other real estate owned		-		-		-		-		-		533		-		533

Total assets	$	-	$	-	$	-	$	-	$	16,027	$	15,501	$	16,027	$	15,501

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

fair value measurements of financial instruments at the periods indicated:

	At December 31, 2017
	Fair Value		Valuation Technique	Unobservable Input	Range				Weighted Average
	(Dollars in thousands)
Assets:

Impaired loans	$	1,818	Income approach	Capitalization rate		6.5%	to	7.5%		6.8	%
				Reduction for planned expedited disposal			15.0%			15.0	%

Impaired loans	$	10,003	Sales approach	Adjustment to sales comparison value to reconcile differences between comparable sales		-50.0%	to	16.2%		-0.8	%
				Reduction for planned expedited disposal		-30.9%	to	15.0%		8.7	%

Impaired loans	$	4,206	Blended income and sales approach	Adjustment to sales comparison value to reconcile differences between comparable sales		-30.0%	to	25.0%		-1.2	%
				Capitalization rate		5.0%	to	9.8%		7.2	%
				Reduction for planned expedited disposal			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

December 31, 2017

and

2016.

The fair value of each material class of financial instruments at

December 31, 2017

and

2016

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

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 sales transaction. When there is

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, 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

December 31, 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 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, 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		-

Total assets	$	6,086,667	$	6,077,589	$	63,137	$	802,872	$	5,211,580

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		-

Total liabilities	$	5,699,348	$	5,697,078	$	3,031,345	$	2,628,747	$	36,986

	December 31, 2016
	Carrying Amount		Fair 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