We use fair value measurements when recording and disclosing certain financial assets and liabilities. Debt securities, equity securities and derivative financial instruments are recorded at fair value on a recurring basis. Additionally, from time to time, we may be required to record other assets at fair value on a nonrecurring basis, such as loans held for sale, loans held for investment, other real estate owned, or OREO, and other repossessed assets, mortgage servicing rights, or MSRs, and certain other assets.

Fair value is the price that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market in an orderly transaction between market participants at the measurement date. An orderly transaction is a transaction that assumes exposure to the market for a period prior to the measurement date to allow for marketing activities that are usual and customary for transactions involving such assets or liabilities; it is not a forced transaction. In determining fair value, we use various valuation approaches, including market, income and cost approaches. The fair value standard establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that observable inputs be used when available. Observable inputs are inputs that market participants would use in pricing an asset or liability, which are developed based on market data that we have obtained from independent sources. Unobservable inputs reflect our estimates of assumptions that market participants would use in pricing an asset or liability, which are developed based on the best information available in the circumstances.

The fair value hierarchy gives the highest priority to unadjusted quoted market prices in active markets for identical assets or liabilities (Level 1 measurement) and the lowest priority to unobservable inputs (Level 3 measurement). The fair value hierarchy is broken down into three levels based on the reliability of inputs as follows:

Level 2: valuation is based upon quoted market prices for similar instruments traded in active markets, quoted market prices for identical or similar instruments traded in markets that are not active and model-based valuation techniques for which all significant assumptions are observable in the market or can be corroborated by market data.

Level 3: valuation is derived from other valuation methodologies, including discounted cash flow models and similar techniques that use significant assumptions not observable in the market. These unobservable assumptions reflect estimates of assumptions that market participants would use in determining fair value.

A financial instrument’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. Our policy is to recognize transfers between any of the fair value hierarchy levels at the end of the reporting period in which the transfer occurred.

We obtain fair values for debt securities from a third-party pricing service which utilizes several sources for valuing fixed-income securities. We validate prices received from our pricing service through comparison to a secondary pricing service and broker quotes. We review the methodologies of the pricing services which provide us with a sufficient understanding of the valuation models, assumptions, inputs and pricing to reasonably measure the fair value of our debt securities. The market valuation sources for debt securities include observable inputs rather than significant unobservable inputs and are classified as Level 2. The service provider utilizes pricing models that vary by asset class and include available trade, bid and other market information. Generally, the methodologies include broker quotes, proprietary models, vast descriptive terms and conditions databases, and extensive quality control programs.

Marketable equity securities that have an active, quotable market are classified as Level 1. Marketable equity securities that are quotable, but are thinly traded or inactive, are classified as Level 2. Marketable equity securities that are not readily traded and do not have a quotable market are classified as Level 3.

We use quoted market prices to determine the fair value of our equity security assets. These securities are reported at fair value with the gains and losses included in noninterest income in our Consolidated Statements of Comprehensive Income. These assets are held in a deferred compensation plan and are invested in readily quoted mutual funds. Accordingly, these assets are classified as Level 1. Deferred compensation plan assets are reported in other assets in the Consolidated Balance Sheets.

We use derivative instruments, including interest rate swaps for commercial loans with our customers, interest rate lock commitments and the sale of mortgage loans in the secondary market. We calculate the fair value for derivatives using accepted valuation techniques, including discounted cash flow analysis on the expected cash flows of each derivative. Each valuation considers the contractual terms of the derivative, including the period to maturity, and uses observable market-based inputs, such as interest rate curves and implied volatilities. Accordingly, derivatives are classified as Level 2. We incorporate credit valuation adjustments into the valuation models to appropriately reflect both our own nonperformance risk and the respective counterparties’ nonperformance risk in calculating fair value measurements. In adjusting the fair value of our derivative contracts for the effect of nonperformance risk, we have considered the impact of netting and any applicable credit enhancements and collateral postings.

Loans held for sale consist of 1-4 family residential loans originated for sale in the secondary market and, from time to time, certain loans are transferred from the loan portfolio to loans held for sale, all of which are carried at the lower of cost or fair value. The fair value of 1-4 family residential loans is based on the principal or most advantageous market currently offered for similar loans using observable market data. The fair value of the loans transferred from the loan portfolio is based on the amounts offered for these loans in currently pending sales transactions. Loans held for sale carried at fair value are classified as Level 3.

Loans that are individually evaluated to determine whether a specific allocation of ACL is needed are reported at fair value. Fair value is determined using the following methods: 1) the present value of expected future cash flows discounted at the loan’s original effective interest rate; 2) the loan’s observable market price; or 3) the fair value of the collateral less estimated selling costs when the loan is collateral dependent and we expect to liquidate the collateral. However, if repayment is expected to come from the operation of the collateral, rather than liquidation, then we do not consider estimated selling costs in determining the fair value of the collateral. Collateral values are generally based upon appraisals by approved, independent state certified appraisers. Appraisals may be discounted based on our historical knowledge, changes in market conditions from the time of appraisal or our knowledge of the borrower and the borrower’s business. Loans carried at fair value are classified as Level 3.

OREO and other repossessed assets obtained in partial or total satisfaction of a loan are recorded at the lower of recorded investment in the loan or fair value less cost to sell. Subsequent to foreclosure, these assets are carried at the lower of the amount recorded at acquisition date or fair value less cost to sell. Accordingly, it may be necessary to record nonrecurring fair value adjustments. Fair value, when recorded, is generally based upon appraisals by approved, independent state certified appraisers. Appraisals on OREO may be discounted based on our historical knowledge, changes in market conditions from the time of appraisal or other information available to us. OREO and other repossessed assets carried at fair value are classified as Level 3.

The fair value of MSRs is determined by calculating the present value of estimated future net servicing cash flows, considering expected mortgage loan prepayment rates, discount rates, servicing costs and other economic factors, which are determined based on current market conditions. The expected rate of mortgage loan prepayments is the most significant factor driving the value of MSRs. MSRs are considered impaired if the carrying value exceeds fair value. Since the valuation model includes significant unobservable inputs as listed above, MSRs are classified as Level 3. MSRs are reported in other assets in the Consolidated Balance Sheets and are amortized into mortgage banking income in the Consolidated Statements of Comprehensive Income.

We measure certain other assets at fair value on a nonrecurring basis. Fair value is based on the application of lower of cost or fair value accounting, or write-downs of individual assets. Valuation methodologies used to measure fair value are consistent with overall principles of fair value accounting and consistent with those described above.

In addition to financial instruments recorded at fair value in our financial statements, fair value accounting guidance requires disclosure of the fair value of all of an entity’s assets and liabilities that are considered financial instruments. The majority of our assets and liabilities are considered financial instruments. Many of these instruments lack an available trading market as characterized by a willing buyer and a willing seller engaged in an exchange transaction. Also, it is our general practice and intent to hold our financial instruments to maturity and to not engage in trading or sales activities with respect to such financial instruments. For fair value disclosure purposes, we substantially utilize the fair value measurement criteria as required and explained above. In cases where quoted fair values are not available, we use present value methods to determine the fair value of our financial instruments.

The fair value of variable rate loans that may reprice frequently at short-term market rates is based on carrying values adjusted for liquidity and credit risk. The fair value of variable rate loans that reprice at intervals of one year or longer, such as adjustable rate mortgage products, is estimated using discounted cash flow analyses that utilize interest rates currently being offered for similar loans and adjusted for liquidity and credit risk. The fair value of fixed rate loans is estimated using a discounted cash flow analysis that utilizes interest rates currently being offered for similar loans adjusted for liquidity and credit risk.

The fair values disclosed for deposits without defined maturities (e.g., noninterest and interest-bearing demand, money market and savings accounts) are by definition equal to the amounts payable on demand. The carrying amounts for variable rate, fixed-term time deposits approximate their fair values. Estimated fair values for fixed rate and other time deposits are based on discounted cash flow analysis using interest rates currently offered for time deposits with similar terms. The carrying amount of accrued interest approximates fair value.

The fair values disclosed for fixed rate long-term borrowings are determined by discounting their contractual cash flows using current interest rates for long-term borrowings of similar remaining maturities. The carrying amounts of variable rate long-term borrowings approximate their fair values.

Off-balance sheet financial instruments consist of commitments to extend credit and letters of credit. Except for interest rate lock commitments, estimates of the fair value of these off-balance sheet items are not made because of the short-term nature of these arrangements and the credit standing of the counterparties.

The following tables present our assets and liabilities that are measured at fair value on a recurring basis by fair value hierarchy level at March 31, 2020 and December 31, 2019. There were no transfers between Level 1 and Level 2 for items measured at fair value on a recurring basis during the periods presented.



	March 31, 2020
(dollars in thousands)	Level 1		Level 2		Level 3		Total
ASSETS
Available-for-sale debt securities:
U.S. Treasury securities	$	—	$	10,372	$	—	$	10,372
Obligations of U.S. government corporations and agencies	—		137,982		—		137,982
Collateralized mortgage obligations of U.S. government corporations and agencies	—		189,472		—		189,472
Residential mortgage-backed securities of U.S. government corporations and agencies	—		21,193		—		21,193
Commercial mortgage-backed securities of U.S. government corporations and agencies	—		284,679		—		284,679
Corporate Bonds	—		7,551		—		7,551
Obligations of states and political subdivisions	—		144,717		—		144,717
Total Available-for-sale Debt Securities	—		795,966		—		795,966
Marketable equity securities	3,504		62		—		3,566
Total Securities	3,504		796,028		—		799,532
Securities held in a deferred compensation plan	4,782		—		—		4,782
Derivative financial assets:
Interest rate swaps	—		88,135		—		88,135
Interest rate lock commitments	—		2,927		—		2,927
Total Assets	$	8,286	$	887,090	$	—	$	895,376
LIABILITIES
Derivative financial liabilities:
Interest rate swaps	$	—	$	87,989	$	—	$	87,989
Forward sale contracts	—		1,292		—		1,292
Total Liabilities	$	—	$	89,281	$	—	$	89,281



	December 31, 2019
(dollars in thousands)	Level 1		Level 2		Level 3		Total
ASSETS
Available-for-sale debt securities:
U.S. Treasury securities	$	—	$	10,040	$	—	$	10,040
Obligations of U.S. government corporations and agencies	—		157,697		—		157,697
Collateralized mortgage obligations of U.S. government corporations and agencies	—		189,348		—		189,348
Residential mortgage-backed securities of U.S. government corporations and agencies	—		22,418		—		22,418
Commercial mortgage-backed securities of U.S. government corporations and agencies	—		275,870		—		275,870
Corporate Bonds	—		7,627		—		7,627
Obligations of states and political subdivisions	—		116,133		—		116,133
Total Available-for-Sale Debt Securities	—		779,133		—		779,133
Marketable equity securities	5,078		72		—		5,150
Total Securities	5,078		779,205		—		784,283
Securities held in a deferred compensation plan	5,987		—		—		5,987
Derivative financial assets:
Interest rate swaps	—		25,647		—		25,647
Interest rate lock commitments	—		321		—		321
Forward sale contracts	—		1		—		1
Total Assets	$	11,065	$	805,174	$	—	$	816,239
LIABILITIES
Derivative financial liabilities:
Interest rate swaps	$	—	$	25,615	$	—	$	25,615
Total Liabilities	$	—	$	25,615	$	—	$	25,615

We may be required to measure certain assets and liabilities at fair value on a nonrecurring basis. Nonrecurring assets are recorded at the lower of cost or fair value in our financial statements. There were no liabilities measured at fair value on a nonrecurring basis at either March 31, 2020 or December 31, 2019.



	March 31, 2020		Valuation Technique(s)		Significant Unobservable Inputs	Range
(dollars in thousands)
Loans held for investment	$	20,926	Collateral Method	Third party appraisal	Costs to sell	0% - 17%
			Discounted cash flow method	Discount rate	Contractual loan rate	3.25%
Other real estate owned	3,045		Collateral method	Third party appraisal	Costs to sell	7%
Mortgage servicing rights	3,929		Discounted cash flow method	Third party service provider	Discount rate	9.39% - 12.54%
					Constant prepayment rates	7.46% - 12.74%
Total Assets	$	27,900



	December 31, 2019		Valuation Technique(s)		Significant Unobservable Inputs	Range
(dollars in thousands)
Impaired loans	$	38,697	Collateral Method	Third party appraisal	Costs to sell	0% - 20%
			Discounted cash flow method	Discount rate	Contractual loan rate	4.75% - 5.50%
Other real estate owned	3,231		Collateral method	Third party appraisal	Costs to sell	7%
Mortgage servicing rights	1,134		Discounted cash flow method	Third party service provider	Discount rate	9.39% - 12.54%
					Constant prepayment rates	7.46% - 12.74%
Total Assets	$	43,062



	Carrying Value⁽¹⁾		Fair Value Measurements at March 31, 2020
(dollars in thousands)	Carrying Value⁽¹⁾		Total		Level 1		Level 2		Level 3
ASSETS
Cash and due from banks, including interest-bearing deposits	$	187,684	$	187,684	$	187,684	$	—	$	—
Securities	799,532		799,532		3,504		796,028		—
Loans held for sale	7,309		7,309		—		—		7,309
Portfolio loans, net	7,149,895		7,090,570		—		—		7,090,570
Bank owned life insurance	80,978		80,798		—		80,798		—
FHLB and other restricted stock	28,253		28,253		—		—		28,253
Securities held in a deferred compensation plan	4,782		4,782		4,782		—		—
Mortgage servicing rights	3,979		3,982		—		—		3,982
Interest rate swaps	88,135		88,135		—		88,135		—
Interest rate lock commitments	2,927		2,927		—		2,927		—
LIABILITIES
Deposits	$	7,057,879	$	7,065,896	$	5,469,826	$	1,596,070	$	—
Securities sold under repurchase agreements	69,644		69,644		69,644		—		—
Short-term borrowings	410,240		410,240		410,240		—		—
Long-term borrowings	50,180		51,675		4,630		47,045		—
Junior subordinated debt securities	64,038		64,038		64,038		—		—
Interest rate swaps	87,989		87,989		—		87,989		—
Forward sales contracts	1,292		1,292		—		1,292		—
⁽¹⁾ As reported in the Consolidated Balance Sheets



	Carrying Value⁽¹⁾		Fair Value Measurements at December 31, 2019
(dollars in thousands)	Carrying Value⁽¹⁾		Total		Level 1		Level 2		Level 3
ASSETS
Cash and due from banks, including interest-bearing deposits	$	197,823	$	197,823	$	197,823	$	—	$	—
Securities	784,283		784,283		5,078		779,205		—
Loans held for sale	5,256		5,256		—		—		5,256
Portfolio loans, net	7,074,928		6,940,875		—		—		6,940,875
Bank owned life insurance	80,473		80,473		—		80,473		—
FHLB and other restricted stock	22,977		22,977		—		—		22,977
Securities held in a Deferred Compensation Plan	5,987		5,987		5,987		—		—
Mortgage servicing rights	4,662		4,650		—		—		4,650
Interest rate swaps	25,647		25,647		—		25,647		—
Interest rate lock commitments	321		321		—		321		—
Forward sale contracts	1		1		—		1		—
LIABILITIES
Deposits	$	7,036,576	$	7,034,595	$	5,441,143	$	1,593,452	$	—
Securities sold under repurchase agreements	19,888		19,888		19,888		—		—
Short-term borrowings	281,319		281,319		281,319		—		—
Long-term borrowings	50,868		51,339		4,678		46,661		—
Junior subordinated debt securities	64,277		64,277		64,277		—		—
Interest rate swaps	25,615		25,615		—		25,615		—
⁽¹⁾ As reported in the Consolidated Balance Sheets