NOTE 15. Fair Value Measurements:

Certain of the Company’s assets are carried at fair value. Fair value is defined 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.

The Company categorizes its assets and liabilities carried at fair value using a three-level hierarchy for fair value measurements that distinguishes between market participant assumptions developed based on market data obtained from sources independent of the reporting entity (observable inputs) and the reporting entity’s own assumptions about market participant assumptions developed based on the best information available in the circumstances (unobservable inputs). The hierarchy for inputs used in determining fair value maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that observable inputs be used when available. The hierarchy level assigned to the assets and liabilities is based on management’s assessment of the transparency and reliability of the inputs used to estimate the fair values at the measurement date. The three hierarchy levels are defined as follows:

Level 1—Valuations based on unadjusted quoted market prices in active markets for identical assets or liabilities.

Level 2—Valuations based on observable inputs (other than Level 1 prices), such as quoted prices for similar assets or liabilities at the measurement date; quoted prices in markets that are not active; or other inputs that are observable, either directly or indirectly.

Level 3—Valuations based on inputs that are unobservable and significant to the overall fair value measurement, and involve management judgment.

If the inputs used to measure fair value fall into different levels of the fair value hierarchy, the hierarchy level assigned is based upon the lowest level of input that is significant to the fair value measurement.

Assets measured at fair value on a recurring basis

The valuation techniques and inputs used by the Company to estimate the fair value of assets measured on a recurring basis, are summarized as follows:

Debt securities

The fair value of debt securities was based on the market values obtained from independent pricing services that were evaluated using pricing models that vary by asset class and incorporate available trade, bid and other market information and price quotes from well-established independent broker-dealers. The independent pricing services monitor market indicators, industry and economic events, and for broker-quoted only securities, obtain quotes from market makers or broker-dealers that they recognize to be market participants. The pricing services utilize the market approach in determining the fair value of the debt securities held by the Company. The Company obtains an understanding of the valuation models and assumptions utilized by the services and has controls in place to determine that the values provided represent fair value. The Company’s validation procedures include comparing prices received from the pricing services to quotes received from other third party sources for certain securities with market prices that are readily verifiable. If the price comparison results in differences over a predefined threshold, the Company will assess the reasonableness of the changes relative to prior periods given the prevailing market conditions and assess changes in the issuers’ credit worthiness, performance of any underlying collateral and prices of the instrument relative to similar issuances. To date, the Company has not made any material adjustments to the fair value measurements provided by the pricing services.

Typical inputs and assumptions to pricing models used to value the Company’s U.S. Treasury bonds, municipal bonds, foreign bonds, governmental agency bonds, governmental agency mortgage-backed securities and corporate debt securities include, but are not limited to, benchmark yields, reported trades, broker-dealer quotes, credit spreads, credit ratings, bond insurance (if applicable), benchmark securities, bids, offers, reference data and industry and economic events. For mortgage-backed securities, inputs and assumptions may also include the structure of issuance, characteristics of the issuer, collateral attributes and prepayment speeds. The fair value of non-agency mortgage-backed securities was obtained from the independent pricing services referenced above and subject to the Company’s validation procedures discussed above. However, since these securities were not actively traded and there were fewer observable inputs available requiring the pricing services to use more judgment in determining the fair value of the securities, they were classified as Level 3.

The significant unobservable inputs used in the fair value measurement of the Company’s non-agency mortgage-backed securities include prepayment rates, default rates and loss severity in the event of default. Significant increases (decreases) in any of those inputs in isolation would result in a significantly lower (higher) fair value measurement. Generally, a change in the assumption used for default rates is accompanied by a directionally similar change in the assumption used for the loss severity and a directionally opposite change in the assumption used for prepayment rates.

Equity securities

The fair value of equity securities, including preferred and common stocks, were based on quoted market prices for identical assets that are readily and regularly available in an active market.

The following table presents the fair value of the Company’s assets measured on a recurring basis as of December 31, 2014 and 2013:

(in thousands)	Total		Level 1		Level 2		Level 3
December 31, 2014
Assets:
Debt securities:
U.S. Treasury bonds	$	64,982	$	—	$	64,982	$	—
Municipal bonds		587,677		—		587,677		—
Foreign bonds		196,750		—		196,750		—
Governmental agency bonds		197,874		—		197,874		—
Governmental agency mortgage- backed securities		1,812,162		—		1,812,162		—
Non-agency mortgage-backed securities		16,538		—		—		16,538
Corporate debt securities		574,269		—		574,269		—
		3,450,252		—		3,433,714		16,538
Equity securities:
Preferred stocks		15,525		15,525		—		—
Common stocks		386,887		386,887		—		—
		402,412		402,412		—		—
Total assets	$	3,852,664	$	402,412	$	3,433,714	$	16,538

(in thousands)	Total		Level 1		Level 2		Level 3
December 31, 2013
Assets:
Debt securities:
U.S. Treasury bonds	$	66,384	$	—	$	66,384	$	—
Municipal bonds		485,965		—		485,965		—
Foreign bonds		222,508		—		222,508		—
Governmental agency bonds		262,545		—		262,545		—
Governmental agency mortgage- backed securities		1,403,309		—		1,403,309		—
Non-agency mortgage-backed securities		19,022		—		—		19,022
Corporate debt securities		360,084		—		360,084		—
		2,819,817		—		2,800,795		19,022
Equity securities:
Preferred stocks		11,085		11,085		—		—
Common stocks		346,958		346,958		—		—
		358,043		358,043		—		—
Total assets	$	3,177,860	$	358,043	$	2,800,795	$	19,022

The Company did not have any transfers in and out of Level 1, Level 2 and Level 3 measurements during the years ended December 31, 2014 and 2013. The Company’s policy is to recognize transfers between levels in the fair value hierarchy at the end of the reporting period.

The following table presents a summary of the changes in fair value of Level 3 assets measured on a recurring basis for the years ended December 31, 2014 and 2013:

	Year Ended December 31,
(in thousands)	2014			2013
Non-agency mortgage-backed securities:
Fair value at beginning of year	$	19,022		$	21,846
Total gains/(losses) (realized and unrealized):
Included in earnings:
Net other-than-temporary impairment losses recognized in earnings		(1,701	)		—
Included in other comprehensive income		1,225			4,174
Settlements		(2,008	)		(6,998	)
Fair value as of December 31	$	16,538		$	19,022
Unrealized gains (losses) included in earnings for the period relating to Level 3 available-for-sale investments that were still held at the end of the period:
Net other-than-temporary impairment losses recognized in earnings	$	(1,701	)	$	—

The Company did not purchase or sell any non-agency mortgage-backed securities during the years ended December 31, 2014 and 2013.

Financial instruments not measured at fair value

In estimating the fair value of its financial instruments not measured at fair value, the Company used the following methods and assumptions:

Cash and cash equivalents

The carrying amount for cash and cash equivalents is a reasonable estimate of fair value due to the short-term maturity of these investments.

Deposits with banks

The fair value of deposits with banks is estimated based on rates currently offered for deposits of similar remaining maturities, where applicable.

Notes receivable, net

The fair value of notes receivable, net is estimated based on the discounted value of the future cash flows using approximate current market rates being offered for notes with similar maturities and similar credit quality.

Deposits

The carrying value of escrow and other deposit accounts approximates fair value due to the short-term nature of this liability.

Notes and contracts payable

The fair value of notes and contracts payable are estimated based on current rates offered to the Company for debt of the same remaining maturities.

The following table presents the carrying amounts and estimated fair values of the Company’s financial instruments not measured at fair value as of December 31, 2014 and 2013:

	Carrying		Estimated fair value
(in thousands)	Amount		Total		Level 1		Level 2		Level 3
December 31, 2014
Assets:
Cash and cash equivalents	$	1,190,080	$	1,190,080	$	1,190,080	$	—	$	—
Deposits with banks	$	21,445	$	21,540	$	4,068	$	17,472	$	—
Notes receivable, net	$	6,130	$	3,930	$	—	$	—	$	3,930
Liabilities:
Deposits	$	2,332,714	$	2,332,714	$	2,332,714	$	—	$	—
Notes and contracts payable	$	587,337	$	595,087	$	—	$	588,542	$	6,545

	Carrying		Estimated fair value
(in thousands)	Amount		Total		Level 1		Level 2		Level 3
December 31, 2013
Assets:
Cash and cash equivalents	$	834,837	$	834,837	$	834,837	$	—	$	—
Deposits with banks	$	23,492	$	23,601	$	2,070	$	21,531	$	—
Notes receivable, net	$	10,542	$	9,953	$	—	$	—	$	9,953
Liabilities:
Deposits	$	1,692,932	$	1,693,138	$	1,666,336	$	26,802	$	—
Notes and contracts payable	$	310,285	$	301,007	$	—	$	294,221	$	6,786