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. GAAP permits entities to choose to measure many financial instruments and certain other items at fair value. At September 30, 2020, the Company carried financial assets and financial liabilities under the fair value option with fair values of $14.5 million and $38.3 million, respectively. At December 31, 2019, the Company carried financial assets and financial liabilities under the fair value option with fair values of $14.3 million and $44.4 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 nine months ended September 30, 2020 and 2019.

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:

(1)	The net gain (loss) from fair value adjustments presented in the above table does not include net gains (losses) of $0.6 million and ($1.6) million for the three months ended September 30, 2020 and 2019, 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 losses of $3.2 million and $4.3 million for the nine months ended September 30, 2020 and 2019, 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 September 30, 2020 and December 31, 2019. The fair value of borrowed funds includes accrued interest payable of $0.1 million and $0.2 million at September 30, 2020 and December 31, 2019, 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: (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 – when quoted market prices are available in an active market. At September 30, 2020 and December 31, 2019, 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 September 30, 2020 and December 31, 2019, Level 2 included mortgage-backed securities, CLO’s, 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 September 30, 2020 and December 31, 2019, Level 3 included trust preferred securities owned 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 September 30, 2020 and December 31, 2019:


	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
	2020		2019		2020		2019		2020		2019		2020		2019

	(In thousands)
Assets:
Securities available for sale
Mortgage-backed Securities	$	—	$	—	$	386,235	$	523,849	$	—	$	—	$	386,235	$	523,849
Other securities		12,691		12,216		220,881		235,103		1,149		1,332		234,721		248,651
Interest rate swaps		—		—		416		2,352		—		—		416		2,352

Total assets	$	12,691	$	12,216	$	607,532	$	761,304	$	1,149	$	1,332	$	621,372	$	774,852


Liabilities:
Borrowings	$	—	$	—	$	—	$	—	$	38,287	$	44,384	$	38,287	$	44,384
Interest rate swaps		—		—		69,595		19,653		—		—		69,595		19,653

Total liabilities	$	—	$	—	$	69,595	$	19,653	$	38,287	$	44,384	$	107,882	$	64,037

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 three months ended
	September 30, 2020				September 30, 2019
	Trust preferred		Junior subordinated		Trust preferred		Junior subordinated
	securities		debentures		securities		debentures

	(In thousands)

Beginning balance	$	1,068	$	35,570	$	1,303	$	43,414
Net (loss) gain from fair value adjustment of financial assets ⁽¹⁾		82		—		15		—
Net (gain) loss from fair value adjustment of financial liabilities ⁽¹⁾		—		2,897		—		599
Decrease in accrued interest receivable		(1)		—		—		—
Decrease in accrued interest payable		—		(19)		—		(15)
Change in unrealized gains included in other comprehensive income		—		(161)		—		(88)
Ending balance	$	1,149	$	38,287	$	1,318	$	43,910

Changes in unrealized gains held at period end	$	—		2,384		—		1,513

(1)	Totals in the table above are presented in the Consolidated Statements of Income under net gain (loss) from fair value adjustments.


	For the nine months ended
	September 30, 2020				September 30, 2019
	Trust preferred		Junior subordinated		Trust preferred		Junior subordinated
	securities		debentures		securities		debentures

	(In thousands)
Beginning balance	$	1,332	$	44,384	$	1,256	$	41,849
Net (loss) gain from fair value adjustment of financial assets ⁽¹⁾		(180)		—		64		—
Net (gain) loss from fair value adjustment of financial liabilities⁽¹⁾		—		(5,086)		—		2,353
Decrease in accrued interest receivable		(3)		—		(2)		—
Decrease in accrued interest payable		—		(104)		—		(27)
Change in unrealized gains included in other comprehensive income		—		(907)		—		(265)
Ending balance	$	1,149	$	38,287	$	1,318	$	43,910

Changes in unrealized gains held at period end	$	—		2,384		—		1,513

(1)	Totals in the table above are presented in the Consolidated Statements of Income under net gain (loss) from fair value adjustments.

During the three and nine months ended September 30, 2020 and 2019, 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:

September 30, 2020

Fair Value

Valuation Technique

Unobservable Input

Range

Weighted Average

(Dollars in thousands)

Assets:

Trust preferred securities

1,149

Discounted cash flows

Discount rate

n/a

5.0

Liabilities:

Junior subordinated debentures

38,287

Discounted cash flows

Discount rate

n/a

5.0

December 31, 2019

Fair Value

Valuation Technique

Unobservable Input

Range

Weighted Average

(Dollars in thousands)

Assets:

Trust preferred securities

1,332

Discounted cash flows

Discount rate

n/a

4.2

Liabilities:

Junior subordinated debentures

44,384

Discounted cash flows

Discount rate

n/a

4.2

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 September 30, 2020 and December 31, 2019, 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 and liabilities that are carried at fair value on a non-recurring basis and the level that was used to determine their fair value at September 30, 2020 and December 31, 2019:


	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
	2020		2019		2020		2019		2020		2019		2020		2019

	(In thousands)
Assets
Non-accrual loans	$	—	$	—	$	—	$	—	$	4,167	$	1,081	$	4,167	$	1,081
Other real estate owned		—		—		—		—		—		239		—		239

Total assets	$	—	$	—	$	—	$	—	$	4,167	$	1,320	$	4,167	$	1,320

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


	September 30, 2020
	Fair Value		Valuation Technique	Unobservable Input	Range	Weighted Average

	(Dollars in thousands)
Assets:

Non-accrual loans	$	2,112	Sales approach	Reduction for planned expedited disposal	(100.0%) to 15.0%	(74.0%)



Non-accrual loans	$	2,055	Discounted Cash flow	Discount Rate	4.3% to 6.4%	5.1%
				Probability of Default	20.0% to 35.0%	29.0%


	At December 31, 2019
	Fair Value		Valuation Technique	Unobservable Input	Range	Weighted Average

	(Dollars in thousands)
Assets:

Impaired loans	$	809	Discounted Cash flow	Discount Rate	6.4%	6.4%
				Probability of Default	20.0%	20.0%

Impaired loans	$	272	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	9.5%	9.5%
				Reduction for planned expedited disposal	15.0%	15.0%

Other real estate owned	$	239	Sales approach	Reduction for planned expedited disposal	0.5% to 12.5%	6.5%

The Company did not have any liabilities that were carried at fair value on a non-recurring basis at September 30, 2020 and December 31, 2019.

The methods and assumptions used to estimate fair value at September 30, 2020 and December 31, 2019 are as follows:

Securities:

The fair values of securities are contained in Note 4 (“Securities”) of the 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.

Non-accrual 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. See Note 5 (“Loans”) of the Notes to the Consolidated Financial Statements.

Junior Subordinated Debentures:

The fair value of the junior subordinated debentures was developed using a credit spread based on stated spreads for recently issued subordinated debt instruments for issuers of similar asset size and credit quality of the Company and with similar durations 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.

Other Real Estate Owned and Other Repossessed Assets:

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.

Interest Rate Swaps:

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

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:


	September 30, 2020
	Carrying		Fair
	Amount		Value		Level 1		Level 2		Level 3

	(In thousands)
Assets:

Cash and due from banks	$	75,560	$	75,560	$	75,560	$	—	$	—
Securities held-to-maturity
Mortgage-backed securities		7,919		9,198		—		9,198		—
Other securities		50,654		53,268		—		—		53,268
Securities available for sale
Mortgage-backed securities		386,235		386,235		—		386,235		—
Other securities		234,721		234,721		12,691		220,881		1,149
Loans		5,941,398		6,030,154		—		—		6,030,154
FHLB-NY stock		57,119		57,119		—		57,119		—
Accrued interest receivable		36,068		36,068		1		1,473		34,594
Interest rate swaps		416		416		—		416		—

Liabilities:
Deposits	$	4,963,495	$	4,970,920	$	3,911,851	$	1,059,069	$	—
Borrowings		1,323,975		1,333,147		—		1,294,860		38,287
Accrued interest payable		6,111		6,111		—		6,111		—
Interest rate swaps		69,595		69,595		—		69,595		—


	December 31, 2019
	Carrying		Fair
	Amount		Value		Level 1		Level 2		Level 3

	(In thousands)
Assets:

Cash and due from banks	$	49,787	$	49,787	$	49,787	$	—	$	—
Securities held-to-maturity
Mortgage-backed securities		7,934		8,114		—		8,114		—
Other securities		50,954		53,998		—		—		53,998
Securities available for sale
Mortgage-backed securities		523,849		523,849		—		523,849		—
Other securities		248,651		248,651		12,216		235,103		1,332
Loans		5,772,206		5,822,124		—		—		5,822,124
FHLB-NY stock		56,921		56,921		—		56,921		—
Accrued interest receivable		25,722		25,722		9		2,519		23,194
Interest rate swaps		2,352		2,352		—		2,352		—

Liabilities:
Deposits	$	5,066,424	$	5,070,046	$	3,628,534	$	1,441,512	$	—
Borrowings		1,237,231		1,389,883		—		1,345,499		44,384
Accrued interest payable		6,752		6,752		—		6,752		—
Interest rate swaps		19,653		19,653		—		19,653		—