(9)Disclosures About Fair Value of Financial Instruments

Fair value information about financial instruments, whether or not recognized in the consolidated statement of financial condition, is required to be disclosed. These requirements exclude certain financial instruments and all nonfinancial instruments. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Company.

Financial assets and liabilities recognized or disclosed at fair value on a recurring basis and certain financial assets and liabilities on a non-recurring basis are accounted for using a three-level hierarchy of valuation techniques based on whether the inputs to those valuation techniques are observable or unobservable. This hierarchy gives the highest priority to quoted prices with readily available independent data in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable market inputs (Level 3). When various inputs for measurement fall within different levels of the fair value hierarchy, the lowest level input that has a significant impact on fair value measurement is used.

Financial assets and liabilities are categorized based upon the following characteristics or inputs to the valuation techniques:

Level 1 — Financial assets and liabilities for which inputs are observable and are obtained from reliable quoted prices for identical assets or liabilities in actively traded markets. This is the most reliable fair value measurement and includes, for example, active exchange-traded equity securities.

Level 2 — Financial assets and liabilities for which values are based on quoted prices in markets that are not active or for which values are based on similar assets or liabilities that are actively traded. Level 2 also includes pricing models in which the inputs are corroborated by market data, for example, matrix pricing.

Level 3 — Financial assets and liabilities for which values are based on prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement. Level 3 inputs include the following:

Quotes from brokers or other external sources that are not considered binding;

Quotes from brokers or other external sources where it cannot be determined that market participants would in fact transact for the asset or liability at the quoted price;

Quotes and other information from brokers or other external sources where the inputs are not deemed observable.

We are responsible for the valuation process and as part of this process may use data from outside sources in establishing fair value. We perform due diligence to understand the inputs used or how the data was calculated or derived. We also corroborate the reasonableness of external inputs in the valuation process.

The carrying amounts reported in the consolidated statement of financial condition approximate fair value for the following financial instruments: cash on hand, interest-earning deposits in other institutions, federal funds sold and other short-term investments, accrued interest receivable, accrued interest payable, and marketable securities available-for-sale.

Marketable Securities

Where available, market values are based on quoted market prices, dealer quotes, and prices obtained from independent pricing services.

Debt securities — available for sale - Generally, debt securities are valued using pricing for similar securities, recently executed transactions and other pricing models utilizing observable inputs. The valuation for most debt securities is classified as Level 2. Securities within Level 2 include corporate bonds, municipal bonds, mortgage-backed securities and US government obligations. Certain corporate debt securities do not have an active market and as such the broker pricing received uses alternative methods. The fair value of these corporate debt securities is determined by using a discounted cash flow model using market assumptions, which generally include cash flow, collateral and other market assumptions. As such, these securities are included herein as Level 3 assets.

Equity securities — available for sale - Level 1 securities include publicly traded securities valued using quoted market prices. We consider the financial condition of the issuer to determine if the securities have indicators of impairment.

Debt securities — held to maturity - The fair value of debt securities held to maturity is determined in the same manner as debt securities available for sale.

Loans Receivable

Loans with comparable characteristics including collateral and re-pricing structures are segregated for valuation purposes. Characteristics include remaining term, coupon interest, and estimated prepayment speeds. Delinquent loans are separately evaluated given the impact delinquency has on the projected future cash flow of the loan and the approximate discount or market rate. Each loan pool is separately valued utilizing a discounted cash flow analysis. Projected monthly cash flows are discounted to present value using a market rate for comparable loans, which is not considered an exit price.

Federal Home Loan Bank of Pittsburgh (“FHLB”) Stock

Due to the restrictions placed on the transferability of FHLB stock it is not practical to determine the fair value.

Deposit Liabilities

The estimated fair value of deposits with no stated maturity, which includes demand deposits, money market, and other savings accounts, is the amount payable on demand. Although market premiums paid for depository institutions reflect an additional value for these low-cost deposits, adjusting fair value for any value expected to be derived from retaining those deposits for a future period of time or from the benefit that results from the ability to fund interest-earning assets with these deposit liabilities is prohibited. The fair value estimates of deposit liabilities do not include the benefit that results from the low-cost funding provided by these deposits compared to the cost of borrowing funds in the market. Fair values for time deposits are estimated using a discounted cash flow calculation that applies contractual cost currently being offered in the existing portfolio to current market rates being offered locally for deposits of similar remaining maturities. The valuation adjustment for the portfolio consists of the present value of the difference of these two cash flows, discounted at the assumed market rate of the corresponding maturity.

Borrowed Funds

Fixed rate advances are valued by comparing their contractual cost to the prevailing market cost. The carrying amount of collateralized borrowings approximates the fair value.

Junior Subordinated Debentures

The fair value of junior subordinated debentures is calculated using the discounted cash flows at the prevailing rate of interest.

Cash flow hedges — Interest rate swap agreements (“swaps”)

The fair value of the swaps is the amount we would expect to pay to terminate the agreements and is based upon the present value of the expected future cash flows using the LIBOR swap curve, the basis for the underlying interest rate.

Off-Balance Sheet Financial Instruments

These financial instruments generally are not sold or traded, and estimated fair values are not readily available. However, the fair value of commitments to extend credit and standby letters of credit is estimated using the fees currently charged to enter into similar agreements. Commitments to extend credit are generally short-term in nature and, if drawn upon, are issued under current market terms. At March 31, 2015 and December 31, 2014, there was no significant unrealized appreciation or depreciation on these financial instruments.

The following table sets forth the carrying amount and estimated fair value of our financial instruments included in the consolidated statement of financial condition at March 31, 2015:

	Carrying		Estimated
	amount		fair value	Level 1	Level 2	Level 3
Financial assets:
Cash and cash equivalents	$	297,101	297,101	297,101	—	—
Securities available-for-sale	916,423		916,423	2,924	903,193	10,306
Securities held-to-maturity	90,825		92,989	—	92,989	—
Loans receivable, net	5,997,566		6,323,248	—	—	6,323,248
Accrued interest receivable	19,753		19,753	19,753	—	—
FHLB Stock	36,292		36,292	—	—	—
Total financial assets	$	7,357,960	7,685,806	319,778	996,182	6,333,554

Financial liabilities:
Savings and checking deposits	$	4,253,299	4,253,299	4,253,299	—	—
Time deposits	1,428,768		1,446,470	—	—	1,446,470
Borrowed funds	943,842		975,867	143,460	—	832,407
Junior subordinated debentures	103,094		109,373	—	—	109,373
Cash flow hedges - swaps	6,205		6,205	—	6,205	—
Accrued interest payable	1,336		1,336	1,336	—	—
Total financial liabilities	$	6,736,544	6,792,550	4,398,095	6,205	2,388,250

The following table sets forth the carrying amount and estimated fair value of our financial instruments included in the consolidated statement of financial condition at December 31, 2014:

	Carrying		Estimated
	amount		fair value	Level 1	Level 2	Level 3
Financial assets:
Cash and cash equivalents	$	240,706	240,706	240,706	—	—
Securities available-for-sale	912,371		912,371	3,157	898,617	10,597
Securities held-to-maturity	103,695		106,292	—	106,292	—
Loans receivable, net	5,922,373		6,240,079	—	—	6,240,079
Accrued interest receivable	18,623		18,623	18,623	—	—
FHLB Stock	33,293		33,293	—	—	—
Total financial assets	$	7,231,061	7,551,364	262,486	1,004,909	6,250,676

Financial liabilities:
Savings and checking accounts	$	4,154,228	4,154,228	4,154,228	—	—
Time deposits	1,478,314		1,498,539	—	—	1,498,539
Borrowed funds	888,109		919,612	162,714	—	756,898
Junior subordinated debentures	103,094		109,435	—	—	109,435
Cash flow hedges - swaps	6,273		6,273	—	6,273	—
Accrued interest payable	936		936	936	—	—
Total financial liabilities	$	6,630,954	6,689,023	4,317,878	6,273	2,364,872

Fair value estimates are made at a point-in-time, based on relevant market data and information about the instrument. The methods and assumptions detailed above were used in estimating the fair value of financial instruments at both March 31, 2015 and December 31, 2014. There were no transfers of financial instruments between Level 1 and Level 2 during the quarter ended March 31, 2015.

The following table represents assets and liabilities measured at fair value on a recurring basis at March 31, 2015 (in thousands):

						Total
						assets at
	Level 1		Level 2		Level 3	fair value

Equity securities	$	2,924	—		—	2,924

Debt securities:
U.S. government and agencies	—		23		—	23
Government sponsored enterprises	—		364,252		—	364,252
States and political subdivisions	—		67,279		—	67,279
Corporate	—		9,976		10,306	20,282
Total debt securities	—		441,530		10,306	451,836

Residential mortgage-backed securities:
GNMA	—		28,192		—	28,192
FNMA	—		70,503		—	70,503
FHLMC	—		39,611		—	39,611
Non-agency	—		626		—	626
Collateralized mortgage obligations:
GNMA	—		7,679		—	7,679
FNMA	—		132,706		—	132,706
FHLMC	—		169,614		—	169,614
SBA	—		9,419		—	9,419
Non-agency	—		3,313		—	3,313
Total mortgage-backed securities	—		461,663		—	461,663

Interest rate swaps	—		(6,205	)	—	(6,205	)

Total assets and liabilities	$	2,924	896,988		10,306	910,218

The following table represents assets and liabilities measured at fair value on a recurring basis at December 31, 2014 (in thousands):

						Total
						assets at
	Level 1		Level 2		Level 3	fair value

Equity securities	$	3,157	—		—	3,157

Debt securities:
U.S. government and agencies	—		25		—	25
Government sponsored enterprises	—		333,505		—	333,505
States and political subdivisions	—		70,145		—	70,145
Corporate	—		9,830		10,597	20,427
Total debt securities	—		413,505		10,597	424,102

Residential mortgage-backed securities:
GNMA	—		29,216		—	29,216
FNMA	—		73,497		—	73,497
FHLMC	—		42,119		—	42,119
Non-agency	—		643		—	643
Collateralized mortgage obligations:
GNMA	—		8,329		—	8,329
FNMA	—		139,150		—	139,150
FHLMC			178,698			178,698
SBA	—		10,052		—	10,052
Non-agency	—		3,408		—	3,408
Total mortgage-backed securities	—		485,112		—	485,112

Interest rate swaps	—		(6,273	)	—	(6,273	)

Total assets and liabilities	$	3,157	892,344		10,597	906,098

The table below presents a reconciliation of all assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the periods indicated (in thousands):

	Quarter ended
	March 31, 2015			March 31, 2014

Beginning balance	$	10,597		12,251

Total net realized investment gains/ (losses) and net change in unrealized appreciation/(depreciation):
Included in net income as OTTI	—			—
Included in other comprehensive income	(291		)	140

Purchases	—			—
Sales	—			—
Transfers in to Level 3	—			—
Transfers out of Level 3	—			—

Ending balance	$	10,306		12,391

Certain assets and liabilities are measured at fair value on a nonrecurring basis after initial recognition such as loans measured for impairment and real estate owned. The following table represents the fair value measurement for nonrecurring assets at March 31, 2015 (in thousands):

					Total
					assets at
	Level 1		Level 2	Level 3	fair value

Loans measured for impairment	$	—	—	52,926	52,926

Real estate owned	—		—	15,346	15,346

Total assets	$	—	—	68,272	68,272

					Total
					assets at
	Level 1		Level 2	Level 3	fair value

Loans measured for impairment	$	—	—	54,729	54,729

Real estate owned	—		—	16,759	16,759

Total assets	$	—	—	71,488	71,488

Impaired loans — A loan is considered to be impaired as described in the Overview of Critical Accounting Policies Involving Estimates, Allowance for Loan Losses section. We classify loans individually evaluated for impairment that require a specific or TDR reserve as nonrecurring Level 3.

Real Estate Owned — Real estate owned is comprised of property acquired through foreclosure or voluntarily conveyed by delinquent borrowers. These assets are recorded on the date acquired at the lower of the related loan balance or fair value, less estimated disposition costs, with the fair value being determined by appraisal. Subsequently, foreclosed assets are valued at the lower of the amount recorded at acquisition date or fair value, less estimated disposition costs. We classify all real estate owned as nonrecurring Level 3.

The table presents additional quantitative information about assets measured at fair value on a recurring and nonrecurring basis and for which we have utilized Level 3 inputs to determine fair value at March 31, 2015 (dollar amounts in thousands):

	Fair value		Valuation techniques	Significant unobservable inputs	Range (weighted average)

Debt securities	$	10,306	Discounted cash flow	Discount margin	0.35% to 2.1% (0.69)%
				Default rates	1.00%
				Prepayment speeds	1.00% annually

Loans measured for impairment	52,926		Appraisal value (1)	Estimated cost to sell	10%

Real estate owned	15,346		Appraisal value (1)	Estimated cost to sell	10%

(1) Fair value is generally determined through independent appraisals of the underlying collateral, which may include level 3 inputs that are not identifiable, or by using the discounted cash flow method if the loan is not collateral dependent.

The significant unobservable inputs used in the fair value measurement of our debt securities are discount margins, default rates and prepayment speeds. Significant increases in any of those rates would result in a significantly lower fair value measurement.