Generally accepted accounting principles establish a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:

Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.

Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

Level 3: Significant unobservable inputs that reflect a reporting entity’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.

The fair values of available for sale debt securities are determined by obtaining quoted prices on nationally recognized securities exchanges (Level 1 inputs) or matrix pricing, which is a mathematical technique widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities (Level 2 inputs). U.S. Treasury securities are valued using quoted market prices. Valuation adjustments are not applied (Level 1). The fair values of corporate debt securities are calculated using market indicators such as broker quotes (Level 2).

The fair values of trading securities are determined as follows: (1) for those securities that have traded prior to the date of the consolidated balance sheet but have not settled (date of sale) until after such date, the sales price is used as the fair value; and, (2) for those securities which have not traded as of the date of the consolidated balance sheet, the fair value was determined by broker price indications of similar or same securities.

The Company accounts for mortgage loans held for sale under the fair value option with changes in fair value recognized in current period earnings. These loans are intended for sale and the Company believes that the fair value is the best indicator of the resolution of these loans (Level 2). In conjunction with the fair value election on loans held for sale, Mortgage banking uses derivative forward sales contracts and Interest Rate Lock Commitments (“IRLCs”) on residential mortgage loans. Fair values of these mortgage derivatives are estimated based on changes in market prices for mortgage forward trades and mortgage interest rates (Level 2) and estimated pull through percentages from the date the interest on the loan is locked (Level 3). The fair values of IRLCs are derived by a valuation model using various unobservable inputs, such as an estimate of the fair value of the servicing rights expected to be recorded upon sale of the loans, estimated costs to originate the loans, and the pull through rate. At March 31, 2020, the estimated gain on sale before the pull through rate ranged from (1.45%) to 9.34% with an average of 3.19%. The costs to originate ranged from 0.70% to 0.89% with an average of 0.82%. The pull through rates ranged from 47.00% to 100.00% with an average of 85.19%. At December 31, 2019, the estimated gain on sale before the pull through rate ranged from (2.41%) to 8.21% with an average of 2.54%. The costs to originate ranged from 0.70% to 0.89% with an average of 0.82%. The pull through rates ranged from 58.00% to 100.00% with an average of 89.00%.

The Company has the rights to service a portfolio of Fannie Mae and other government guaranteed loans sold on a servicing retained basis. Mortgage servicing assets are measured at fair value when the loan is sold and subsequently measured at fair value on a recurring basis utilizing Level 2 inputs. Management uses a model operated and maintained by a third party to calculate the present value of future cash flows using the third party's market-based assumptions. The future cash flows for each asset are based on the asset's unique characteristics and the third party's market-based assumptions for prepayment speeds, default and voluntary prepayments. Adjustments to fair value are recorded as a component of Mortgage Banking Revenue in the Condensed Consolidated Statements of Income and Comprehensive Income.

The fair value of interest rate swap derivatives is based on valuation models using observable market data as of the measurement date (Level 2). The derivatives are traded in an over-the-counter market where quoted market prices are not always available. Therefore, fair values of derivatives are determined using quantitative models that utilize multiple market inputs. The inputs will vary based on the type of derivative, but could include interest rates, prices and indices to generate continuous yield or pricing curves, prepayment rates, and volatility factors to value the position. The majority of market inputs are actively quoted and can be validated through external sources, including brokers, market transactions and third-party pricing services.

The fair value of impaired loans with specific valuation allowance for credit losses and other real estate owned is based on recent real estate appraisals. For residential real estate impaired loans and other real estate owned, appraised values are based on the comparative sales approach. For commercial and commercial real estate impaired loans, and other real estate owned, appraisers may use either a single valuation approach or a combination of approaches such as comparative sales, cost or the income approach. A significant unobservable input in the income approach is the estimated income capitalization rate for a given piece of collateral. At March 31, 2020, the range of capitalization rates utilized to determine the fair value of the underlying collateral ranged from 5% to 13%. Adjustments to appraisals may be made by the appraiser to reflect local market conditions or other economic factors and may result in changes in the fair value of a given asset over time. As such, the fair value of impaired loans, other real estate owned and bank property held for sale are considered a Level 3 in the fair value hierarchy.

Assets and liabilities measured at fair value on a recurring basis are summarized below.

		Fair value measurements using
		Quoted prices	Significant
		in active	other	Significant
		markets for	observable	unobservable
	Carrying	identical assets	inputs	inputs
	value	(Level 1)	(Level 2)	(Level 3)
at March 31,2020
Assets:
Trading securities	$8,432	$ —	$8,432	$ —
Available for sale debt securities
Corporate debt securities	5,757	—	5,757	—
Obligations of U.S. government sponsored entities and agencies	147,959	—	147,959	—
Mortgage-backed securities	1,787,846	—	1,787,846	—
U.S. treasuries	99,997	—	99,997	—
Municipal securities	96,883	—	96,883	—
Loans held for sale	188,316	—	188,316	—
Mortgage servicing assets	1,038	—	1,038	—
Mortgage banking derivatives	6,436	—	57	6,379
Interest rate swap derivatives	831,891	—	831,891	—

Liabilities:
Mortgage banking derivatives	6,126	—	6,032	94
Interest rate swap derivatives	842,451	—	842,451	—

at December 31,2019
Assets:
Trading securities	$4,987	$ —	$4,987	$ —
Available for sale debt securities
Corporate debt securities	5,657	—	5,657	—
Obligations of U.S. government sponsored entities and agencies	19,930	—	19,930	—
Mortgage-backed securities	1,767,242	—	1,767,242	—
Municipal securities	93,895	—	93,895	—
Loans held for sale	142,801	—	142,801	—
Mortgage servicing assets	1,332	—	1,332	—
Mortgage banking derivatives	1,761	—	14	1,747
Interest rate swap derivatives	273,068	—	273,068	—

Liabilities:
Mortgage banking derivatives	305	—	288	17
Interest rate swap derivatives	275,033	—	275,033	—

Assets and liabilities measured at fair value on a non-recurring basis are summarized below.

		Fair value measurements using
		Quoted prices	Significant
		in active	other	Significant
		markets for	observable	unobservable
	Carrying	identical assets	inputs	inputs
	value	(Level 1)	(Level 2)	(Level 3)
at March 31,2020
Assets:
Impaired loans, non-PCD
Residential real estate	$1,916	$ —	$ —	$1,916
Commercial real estate	12,748	—	—	12,748
Land, land development and construction	725	—	—	725
Commercial	4,944	—	—	4,944
Consumer	47	—	—	47
Impaired loans, PCD
Commercial real estate	9,694	—	—	9,694
Commercial	766	—	—	766
Other real estate owned
Residential real estate	363	—	—	363
Commercial real estate	2,129	—	—	2,129
Land, land development and construction	289	—	—	289
Bank property held for sale	2,834	—	—	2,834

at December 31,2019
Assets:
Impaired loans
Residential real estate	$2,213	$ —	$ —	$2,213
Commercial real estate	8,177	—	—	8,177
Land, land development and construction	847	—	—	847
Commercial	5,564	—	—	5,564
Consumer	47	—	—	47
Other real estate owned
Residential real estate	—	—	—	—
Commercial real estate	2,129	—	—	2,129
Land, land development and construction	340	—	—	340
Bank property held for sale	4,160	—	—	4,160

Non-PCD impaired loans measured at fair value had a recorded investment of $22,169, with a valuation allowance of $1,789 at March 31, 2020, and a recorded investment of $18,556, with a valuation allowance of $1,708 at December 31, 2019. The Company recorded a provision for credit loss expense of $911 and $1,124 on non-PCD impaired loans carried at fair value during the three-month periods ending March 31, 2020 and 2019, respectively. Beginning in 2020, the Company began accounting for PCD loans under ASC Topic 326 and as a result several loans previously evaluated on a pool level basis were individually evaluated for impairment during the current period. PCD impaired loans measured at fair value had a recorded investment of $22,776, with a valuation allowance of $12,316 at March 31, 2020. The Company recorded a provision for credit loss expense of $2,870 on PCD impaired loans carried at fair value during the three-month periods ending March 31, 2020.

Other real estate owned had a decline in fair value of $95 and $108 during the three-month periods ending March 31, 2020 and 2019, respectively. Changes in fair value were recorded directly to current earnings through non-interest expense.

Bank property held for sale represents certain branch office buildings which the Company has closed and consolidated with other existing branches. The real estate was transferred out of the Bank Premises and Equipment category into Bank Property Held for Sale at the lower of amortized cost or fair value less estimated costs to sell. The fair values were based upon appraisals. The Company recognized an impairment charge of $31 and $107 during the three-month periods ending March 31, 2020 and 2019, respectively, related to bank properties held for sale.

The methods and assumptions, not previously presented, used to estimate fair value are described as follows:

Cash and Cash Equivalents: The carrying amounts of cash and cash equivalents approximate fair values and are classified as Level 1.

FHLB, FRB and Other Stock: It is not practical to determine the fair value of FHLB, FRB and other stock due to restrictions placed on their transferability.

Investment securities held to maturity: The fair values of securities held to maturity are determined by obtaining quoted prices on nationally recognized securities exchanges (Level 1 inputs) or matrix pricing, which is a mathematical technique widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities (Level 2 inputs).

Loans, net: For performing loans, the fair value is determined based on a discounted cash flow analysis (income approach). The discounted cash flow was based on contractual maturity of the loan and market indications of rates, prepayment speeds, defaults and credit risk resulting in Level 3 classification. For non-performing loans, the fair value is determined based on the estimated values of the underlying collateral or individual analysis of receipts (asset approach) resulting in Level 3 classification. Tables below present additional information on assumptions ranges and methods used for the Level 3 fair value measurements for loans.

	Quantitative information about Level 3 fair value measurements
	Fair value	Valuation	Unobservable	Range
	at March 31, 2020	technique	inputs	(weighted average rate)
Loan, net	$12,008,094	Discounted cash flow	Probability of default (PD)	0.51% - 100.00% (1.43%)
			Loss given default (LGD)	0% - 100.00% (17.95%)
			Prepayment rate	0.00% - 34.47% (20.76%)
			Discount rate	3.03% - 8.28% (4.5%)

	Quantitative information about Level 3 fair value measurements
	Fair value	Valuation	Unobservable	Range
	at December 31, 2019	technique	inputs	(average) ⁽¹⁾
Loan, net	$11,925,693	Discounted cash flow	Probability of default (PD)	1.04% - 2.79% (1.83%)
			Loss given default (LGD)	6.44% - 46.26% (22.02%)
			Prepayment rate	10.00% - 34.47% (19.19%)
			Discount rate	1.48% - 2.39% (1.62%)

Accrued Interest Receivable: The carrying amount of accrued interest receivable approximates fair value and is classified as Level 2 for accrued interest receivable related to investment securities and Level 3 for accrued interest receivable related to loans.

Deposits: The fair values disclosed for demand deposits (e.g., interest and non-interest checking, savings, and money market accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amount) resulting in Level 1 classification. Fair values for fixed rate certificates of deposit are estimated using a discounted cash flows calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits resulting in a Level 2 classification.

Short-term Borrowings: The carrying amounts of federal funds purchased, borrowings under repurchase agreements, and other short-term borrowings, generally maturing within ninety days, approximate their fair values resulting in a Level 2 classification.

Corporate and Subordinated Debentures: The fair values of the Company’s corporate and subordinated debentures are estimated using discounted cash flow analyses based on the current borrowing rates for similar types of borrowing arrangements resulting in a Level 3 classification.

Accrued Interest Payable: The carrying amount of accrued interest payable approximates fair value resulting in a Level 2 classification.

Off-balance Sheet Instruments: The fair value of off-balance-sheet items is not considered material.

The following table presents the carry amounts and estimated fair values of the Company’s financial instruments:

		Fair value measurements
	Carrying amount	Level 1	Level 2	Level 3	Total
at March 31,2020
Financial assets:
Cash and cash equivalents	$1,146,691	$1,146,691	$ —	$ —	$1,146,691
Trading securities	8,432	—	8,432	—	8,432
Available for sale debt securities	2,138,442	—	2,138,442	—	2,138,442
Held to maturity debt securities	195,948	—	205,458	—	205,458
Loans held for sale, at fair value	188,316	—	188,316	—	188,316
Loans, net	11,868,498	—	—	12,008,094	12,008,094
Mortgage servicing assets	1,038	—	1,038	—	1,038
Mortgage banking derivatives	6,436	—	57	6,379	6,436
Interest rate swap derivatives	831,891	—	831,891	—	831,891
Accrued interest receivable	43,382	—	7,594	35,788	43,382

Financial liabilities:
Deposits - without stated maturities	$11,228,116	$11,228,116	$ —	$ —	$11,228,116
Deposits - with stated maturities	2,893,383	—	2,918,615	—	2,918,615
Securities sold under agreement to repurchase	81,736	—	81,736	—	81,736
Federal funds purchased and other borrowings	466,433	—	466,433	—	466,433
Corporate and subordinated debentures	71,356	—	—	66,669	66,669
Mortgage banking derivatives	6,126	—	6,032	94	6,126
Interest rate swap derivatives	842,451	—	842,451	—	842,451
Accrued interest payable	4,334	—	4,334	—	4,334

		Fair value measurements
	Carrying amount	Level 1	Level 2	Level 3	Total
at December 31,2019
Financial assets:
Cash and cash equivalents	$490,058	$490,058	$ —	$ —	$490,058
Trading securities	4,987	—	4,987	—	4,987
Available for sale debt securities	1,886,724	—	1,886,724	—	1,886,724
Held to maturity debt securities	202,903	—	208,852	—	208,852
Loans held for sale, at fair value	142,801	—	142,801	—	142,801
Loans, net	11,943,288	—	—	11,925,693	11,925,693
Mortgage servicing assets	1,332	—	1,332	—	1,332
Mortgage banking derivatives	1,761	—	14	1,747	1,761
Interest rate swap derivatives	273,068	—	273,068	—	273,068
Accrued interest receivable	40,945	—	7,547	33,398	40,945

Financial liabilities:
Deposits - without stated maturities	$10,879,837	$10,879,837	$ —	$ —	$10,879,837
Deposits - with stated maturities	2,256,555	—	2,271,497	—	2,271,497
Securities sold under agreement to repurchase	93,141	—	93,141	—	93,141
Federal funds purchased and other borrowings	540,193	—	540,193	—	540,193
Corporate and subordinated debentures	71,343	—	—	66,964	66,964
Mortgage banking derivatives	305	—	288	17	305
Interest rate swap derivatives	275,033	—	275,033	—	275,033
Accrued interest payable	3,998	—	3,998	—	3,998