Fair value is defined as the exchange 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 reflecting assumptions that a market participant would use when pricing an asset or liability. The hierarchy uses three levels of inputs to measure the fair value of assets and liabilities as follows:

Assets and liabilities measured and recorded at fair value, including financial assets for which the Company has elected the fair value option, on a recurring and nonrecurring basis as of March 31, 2020 and December 31, 2019, are summarized below:


	March 31, 2020
			Quoted prices
			in active		Significant
			markets		other		Significant
			for identical		observable		unobservable
			assets		inputs		inputs
(dollars in thousands)	Total		(Level 1)		(Level 2)		(Level 3)
Assets and liabilities measured at fair value on a recurring basis:
Assets
Investment securities available for sale:
U.S. government sponsored entities and U.S. agency securities	$	47,357	$	—	$	47,357	$	—
Mortgage-backed securities - agency		326,700		—		326,700		—
Mortgage-backed securities - non-agency		27,281		—		27,281		—
State and municipal securities		116,094		—		116,094		—
Corporate securities		138,822		—		137,897		925
Equity securities		5,640		—		5,640		—
Loans held for sale		113,852		—		113,852		—
Interest rate lock commitments		4,305		—		4,305		—
Interest rate swap contracts		888		—		888		—
Total	$	780,939	$	—	$	780,014	$	925
Liabilities
Interest rate swap contracts	$	888	$	—	$	888	$	—

Assets measured at fair value on a non-recurring basis:
Loan servicing rights	$	44,566	$	—	$	—	$	44,566
Mortgage servicing rights held for sale		1,460		—		—		1,460
Nonperforming loans		15,972		—		15,450		522
Other real estate owned		909		—		909		—
Assets held for sale		3,790		—		3,790		—


	December 31, 2019
			Quoted prices
			in active		Significant
			markets		other		Significant
			for identical		observable		unobservable
			assets		inputs		inputs
(dollars in thousands)	Total		(Level 1)		(Level 2)		(Level 3)
Assets and liabilities measured at fair value on a recurring basis:
Assets
Investment securities available for sale:
U.S. government sponsored entities and U.S. agency securities	$	60,020	$	—	$	60,020	$	—
Mortgage-backed securities - agency		324,974		—		324,974		—
Mortgage-backed securities - non-agency		17,148		—		17,148		—
State and municipal securities		124,555		—		124,555		—
Corporate securities		122,736		—		121,781		955
Equity securities		5,621		—		5,621		—
Loans held for sale		16,431		—		16,431		—
Interest rate lock commitments		3,350		—		3,350		—
Interest rate swap contracts		306		—		306		—
Total	$	675,141	$	—	$	674,186	$	955
Liabilities
Interest rate swap contracts	$	306	$	—	$	306	$	—

Assets measured at fair value on a non-recurring basis:
Loan servicing rights	$	53,824	$	—	$	—	$	53,824
Mortgage servicing rights held for sale		1,972		—		—		1,972
Nonperforming loans		14,693		—		12,518		2,175
Assets held for sale		3,974		—		3,974		—

The following table provides a reconciliation of activity for assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three months ended March 31, 2020 and 2019:


	Three Months Ended
	March 31,
(dollars in thousands)	2020		2019
Balance, beginning of period	$	955	$	1,923
Total realized in earnings ⁽¹⁾		2		22
Total unrealized in other comprehensive income⁽²⁾		(30)		7
Net settlements (principal and interest)		(2)		(22)
Balance, end of period	$	925	$	1,930

(1)	Amounts included in interest income from investment securities taxable in the consolidated statements of income.

(2)	Represents change in unrealized gains or losses for the period included in other comprehensive income for assets held at the end of the reporting period.

The following table provides quantitative information about significant unobservable inputs used in fair value measurements of Level 3 assets measured at fair value on a recurring basis at March 31, 2020 and December 31, 2019:


			Valuation	Unobservable
(dollars in thousands)		Fair Value	technique	input / assumptions	Range (weighted average)⁽¹⁾
March 31, 2020
Corporate securities	$	925	Consensus pricing	Net market price	-1.5% - 2.0% (1.0%)

December 31, 2019
Corporate securities	$	955	Consensus pricing	Net market price	-2.0% - 2.5% (1.5%)

(1)	Unobservable inputs were weighted by the relative fair value of the instruments.

The significant unobservable inputs used in the fair value measurement of the Company’s corporate securities is net market price. The corporate securities are not actively traded, and as a result, fair value is determined utilizing third-party valuation services through consensus pricing. Significant changes in any of the inputs in isolation would result in a significant change to the fair value measurement. Generally, net market price increases when market interest rates decline and declines when market interest rates increase.

The following table presents losses recognized on assets measured on a nonrecurring basis for the three months ended March 31, 2020 and 2019:


	Three Months Ended
	March 31,
(dollars in thousands)	2020		2019
Loan servicing rights	$	8,468	$	25
Mortgage servicing rights held for sale		496		—
Nonperforming loans		12,919		981
Other real estate owned		605		16
Assets held for sale		146		—
Total losses on assets measured on a nonrecurring basis	$	22,634	$	1,022

The following tables present quantitative information about significant unobservable inputs used in fair value measurements of Level 3 assets measured on a nonrecurring basis at March 31, 2020 and December 31, 2019:

Valuation

Unobservable

(dollars in thousands)

Fair Value

technique

input / assumptions

Range (weighted average)⁽¹⁾

March 31, 2020

Loan servicing rights:

Commercial MSR

43,497

Discounted cash flow

Prepayment speed

8.00% - 22.50% (8.38%)

Discount rate

10.00% - 27.00% (11.43%)

SBA servicing rights

1,069

Discounted cash flow

Prepayment speed

8.31% - 9.21% (8.60%)

Discount rate

No range (11.70%)

MSR held for sale

1,460

Discounted cash flow

Prepayment speed

14.04% - 26.28% (16.92%)

Discount rate

9.00% - 11.50% (10.13%)

Other:

Nonperforming loans

522

Fair value of collateral

Discount for type of property,

No range (4.50%)

age of appraisal and current status


December 31, 2019
Loan servicing rights:
Commercial MSR	$	52,693	Discounted cash flow	Prepayment speed	8.00% - 18.00% (8.20%)
				Discount rate	10.00% - 14.00% (11.02%)

SBA servicing rights	$	1,131	Discounted cash flow	Prepayment speed	8.31% - 9.21% (8.60%)
				Discount rate	No range (11.70%)

MSR held for sale	$	1,972	Discounted cash flow	Prepayment speed	8.64% - 26.28% (12.42%)
				Discount rate	9.50% - 12.50% (10.75%)

Other:
Nonperforming loans	$	2,175	Fair value of collateral	Discount for type of property,	4.32% - 8.00% (5.22%)
				age of appraisal and current status

(1)	Unobservable inputs were weighted by the relative fair value of the instruments.

Loan Servicing Rights. In accordance with GAAP, the Company must record impairment charges on loan servicing rights on a non-recurring basis when the carrying value exceeds the estimated fair value. The fair value of our servicing rights is estimated by using a cash flow valuation model, which calculates the present value of estimated future net servicing cash flows, taking into consideration expected loan prepayment rates, discount rates, servicing costs, replacement reserves and other economic factors which are estimated based on current market conditions. The determination of fair value of servicing rights relies upon Level 3 inputs.

Nonperforming loans. Nonperforming loans are measured and recorded at fair value on a non-recurring basis. All of our nonaccrual loans and restructured loans are considered nonperforming and are reviewed individually for the amount of impairment, if any. Most of our loans are collateral dependent and, accordingly, we measure nonperforming loans based on the estimated fair value of such collateral. The fair value of each loan’s collateral is generally based on estimated market prices from an independently prepared appraisal, which is then adjusted for the cost related to liquidating such collateral; such valuation inputs result in a nonrecurring fair value measurement that is categorized as a Level 2 measurement. When adjustments are made to an appraised value to reflect various factors such as the age of the appraisal or known changes in the market or the collateral, such valuation inputs are considered unobservable and the fair value measurement is categorized as a Level 3 measurement. The nonperforming loans categorized as Level 3 also include unsecured loans and other secured loans whose fair values are based significantly on unobservable inputs such as the strength of a guarantor, cash flows discounted at the effective loan rate, and management’s judgment.

ASC Topic 825, Financial Instruments, requires disclosure of the estimated fair value of certain financial instruments and the methods and significant assumptions used to estimate such fair values. Additionally, certain financial instruments and all nonfinancial instruments are excluded from the applicable disclosure requirements.

The Company has elected the fair value option for newly originated commercial and residential loans held for sale. These loans are intended for sale and are hedged with derivative instruments. We have elected the fair value option

to mitigate accounting mismatches in cases where hedge accounting is complex and to achieve operational simplification.

The following table presents the difference between the aggregate fair value and the aggregate remaining principal balance for loans for which the fair value option has been elected as of March 31, 2020 and December 31, 2019:


	March 31, 2020						December 31, 2019
	Aggregate				Contractual		Aggregate				Contractual
(dollars in thousands)	fair value		Difference		principal		fair value		Difference		principal
Commercial loans held for sale	$	1,706	$	48	$	1,658	$	8,236	$	206	$	8,030
Residential loans held for sale		12,458		667		11,791		8,195		446		7,749
Consumer loans held for sale		99,688		—		99,688		—		—		—
Total loans held for sale	$	113,852	$	715	$	113,137	$	16,431	$	652	$	15,779

The following table presents the amount of gains and losses from fair value changes included in income before income taxes for financial assets carried at fair value for the three months ended March 31, 2020 and 2019:


	Three Months Ended
	March 31,
(dollars in thousands)	2020		2019
Commercial loans held for sale	$	(158)	$	(328)
Residential loans held for sale		255		(57)
Total loans held for sale	$	97	$	(385)

The carrying values and estimated fair value of certain financial instruments not carried at fair value at March 31, 2020 and December 31, 2019 were as follows:


	March 31, 2020
					Quoted prices
					in active		Significant
					markets		other		Significant
					for identical		observable		unobservable
	Carrying				assets		inputs		inputs
(dollars in thousands)	Amount		Fair Value		(Level 1)		(Level 2)		(Level 3)
Assets
Cash and due from banks	$	445,097	$	445,097	$	445,097	$	—	$	—
Federal funds sold		4,299		4,299		4,299		—		—
Nonmarketable equity securities		46,068		46,068		—		46,068		—
Loans, net		4,337,659		4,387,244		—		—		4,387,244
Accrued interest receivable		16,532		16,532		—		16,532		—

Liabilities
Deposits	$	4,650,640	$	4,661,375	$	—	$	4,661,375	$	—
Short-term borrowings		43,578		43,578		—		43,578		—
FHLB and other borrowings		593,089		631,450		—		631,450		—
Subordinated debt		169,505		160,344		—		160,344		—
Trust preferred debentures		48,420		42,391		—		42,391		—
Accrued interest payable		7,078		7,078		—		7,078		—


	December 31, 2019
					Quoted prices
					in active		Significant
					markets		other		Significant
					for identical		observable		unobservable
	Carrying				assets		inputs		inputs
(dollars in thousands)	Amount		Fair Value		(Level 1)		(Level 2)		(Level 3)
Assets
Cash and due from banks	$	392,694	$	392,694	$	392,694	$	—	$	—
Federal funds sold		1,811		1,811		1,811		—		—
Nonmarketable equity securities		44,505		44,505		—		44,505		—
Loans, net		4,373,382		4,385,768		—		—		4,385,768
Accrued interest receivable		16,346		16,346		—		16,346		—

Liabilities
Deposits	$	4,544,254	$	4,548,327	$	—	$	4,548,327	$	—
Short-term borrowings		82,029		82,029		—		82,029		—
FHLB and other borrowings		493,311		506,832		—		506,832		—
Subordinated debt		176,653		182,189		—		182,189		—
Trust preferred debentures		48,288		53,811		—		53,811		—
Accrued interest payable		6,400		6,400		—		6,400		—