Fair value measurements are determined based on the assumptions that market participants would use in pricing the asset or liability. As a basis for considering market participant assumptions in fair value measurements, United uses a fair value hierarchy that distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity (observable inputs that are classified within Levels 1 and 2 of the hierarchy) and the reporting entity’s own assumptions about market participant assumptions (unobservable inputs classified within Level 3 of the hierarchy). United has processes in place to review the significant valuation inputs and to reassess how the instruments are classified in the valuation framework.

Level 2 Valuation is based upon quoted prices for similar assets and liabilities in active markets, as well as inputs that are observable for the asset or liability (other than quoted prices), such as interest rates, foreign exchange rates, and yield curves that are observable at commonly quoted intervals.

In instances where the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety. United’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset or liability.

Debt securities available-for-sale and equity securities with readily determinable fair values are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted prices, if available. If quoted prices are not available, fair values are measured using independent pricing models or other model-based valuation techniques such as the present value of future cash flows, adjusted for the security’s credit rating, prepayment assumptions and other factors such as credit loss assumptions. Level 1 securities include those traded on an active exchange, such as the New York Stock Exchange, U.S. Treasury securities that are traded by dealers or brokers in active over-the-counter markets and money market funds. Level 2 securities include mortgage-backed securities issued by government sponsored entities, municipal bonds, corporate debt securities and asset-backed securities and are valued based on observable inputs that include: quoted market prices for similar assets, quoted market prices that are not in an active market, or other inputs that are observable in the market and can be corroborated by observable market data for substantially the full term of the securities. Securities classified as Level 3 include those traded in less liquid markets and are valued based on estimates obtained from broker-dealers that are not directly observable.

Included in other assets in the consolidated balance sheets are assets related to employee deferred compensation plans. The assets associated with these plans are invested in mutual funds and classified as Level 1. Deferred compensation liabilities, also classified as Level 1, are carried at the fair value of the obligation to the employee, which mirrors the fair value of the invested assets and is included in other liabilities in the consolidated balance sheets.

United has elected the fair value option for newly originated mortgage loans held for sale in order to reduce certain timing differences and better match changes in fair values of the loans with changes in the value of derivative instruments used to economically hedge them. The fair value of mortgage loans held for sale is determined using quoted prices for a similar asset, adjusted for specific attributes of that loan (Level 2).

United uses interest rate swaps and interest rate floors to manage its interest rate risk. The valuation of these instruments is typically determined using widely accepted valuation techniques including discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves and implied volatilities. The fair values of interest rate swaps are determined using the market standard methodology of netting the discounted future fixed cash receipts and the discounted expected variable cash payments. The variable cash payments are based on an expectation of future interest rates (forward curves) derived from observable market interest rate curves. United also uses best effort and mandatory delivery forward loan sale commitments to hedge risk in its mortgage lending business.

To comply with the provisions of ASC 820, management incorporates credit valuation adjustments to appropriately reflect both its own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements. In adjusting the fair value of its derivative contracts for the effect of nonperformance risk, management has considered the effect of netting and any applicable credit enhancements, such as collateral postings, thresholds, mutual puts, and guarantees.

Although management has determined that the majority of the inputs used to value its derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with its derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by itself and its counterparties. However, as of December 31, 2019, management had assessed the significance of the effect of the credit valuation adjustments on the overall valuation of its derivative positions and determined that the credit valuation adjustments are not significant to the overall valuation of its derivatives. Derivatives classified as Level 3 included structured derivatives for which broker quotes, used as a key valuation input, were not observable consistent with a Level 2 disclosure. The fair value of risk participations incorporates Level 3 inputs to evaluate the likelihood of customer default. The fair value of interest rate lock commitments, which is related to mortgage loan commitments, is categorized as Level 3 based on unobservable inputs for commitments that United does not expect to fund.

United recognizes servicing rights upon the sale of residential mortgage and SBA/USDA loans sold with servicing retained. Management has elected to carry these assets at fair value. Given the nature of the assets, the key valuation inputs are unobservable and management considers these Level 3 assets. For disclosure regarding the fair value of servicing rights, see Note 10.



December 31, 2019	Level 1		Level 2		Level 3		Total
Assets:
Debt securities available for sale:
U.S. Treasuries	$	154,618	$	—	$	—	$	154,618
U.S. Government agencies	—		3,035		—		3,035
State and political subdivisions	—		226,490		—		226,490
Residential mortgage-backed securities	—		1,299,025		—		1,299,025
Commercial mortgage-backed securities	—		284,953		—		284,953
Corporate bonds	—		202,093		998		203,091
Asset-backed securities	—		103,369		—		103,369
Equity securities with readily determinable fair values	1,973		—		—		1,973
Mortgage loans held for sale	—		58,484		—		58,484
Deferred compensation plan assets	8,133		—		—		8,133
Servicing rights for SBA/USDA loans	—		—		6,794		6,794
Residential mortgage servicing rights	—		—		13,565		13,565
Derivative financial instruments	—		27,769		7,238		35,007
Total assets	$	164,724	$	2,205,218	$	28,595	$	2,398,537

Liabilities:
Deferred compensation plan liability	$	8,132	$	—	$	—	$	8,132
Derivative financial instruments	—		6,957		8,559		15,516
Total liabilities	$	8,132	$	6,957	$	8,559	$	23,648



December 31, 2018	Level 1		Level 2		Level 3		Total
Assets:
Securities available for sale:
U.S. Treasuries	$	149,307	$	—	$	—	$	149,307
U.S. Government agencies	—		25,553		—		25,553
State and political subdivisions	—		233,941		—		233,941
Residential mortgage-backed securities	—		1,445,910		—		1,445,910
Commercial mortgage-backed securities	—		391,917		—		391,917
Corporate bonds	—		198,168		995		199,163
Asset-backed securities	—		182,676		—		182,676
Equity securities with readily determinable fair values	1,076		—		—		1,076
Mortgage loans held for sale	—		18,935		—		18,935
Deferred compensation plan assets	6,404		—		—		6,404
Servicing rights for SBA/USDA loans	—		—		7,510		7,510
Residential mortgage servicing rights	—		—		11,877		11,877
Derivative financial instruments	—		12,864		11,841		24,705
Total assets	$	156,787	$	2,509,964	$	32,223	$	2,698,974

Liabilities:
Deferred compensation plan liability	$	6,404	$	—	$	—	$	6,404
Derivative financial instruments	—		10,701		15,732		26,433
Total liabilities	$	6,404	$	10,701	$	15,732	$	32,837

For disclosure regarding the fair value of servicing rights, see Note 10. The following table shows a reconciliation of the beginning and ending balances for all other assets measured at fair value on a recurring basis using significant unobservable inputs that are classified as Level 3 values (in thousands):



	Derivative Asset			Derivative Liability			Debt Securities Available- for-Sale
December 31, 2016	$	11,777		$	16,347		$	675
Sales and settlements	(1,744		)	(2,423		)	—
Other comprehensive income	—			—			225
Amounts included in earnings - fair value adjustments	2,174			2,820			—
December 31, 2017	12,207			16,744			900
Sales and settlements	(1,029		)	(1,347		)	—
Other comprehensive income	—			—			95
Amounts included in earnings - fair value adjustments	663			335			—
December 31, 2018	11,841			15,732			995
Sales and settlements	(1,135		)	(2,330		)	—
Other comprehensive income	—			—			3
Amounts included in earnings - fair value adjustments	(3,468		)	(4,843		)	—
December 31, 2019	$	7,238		$	8,559		$	998



	Fair Value				Weighted Average
	December 31,		Valuation Technique		December 31,
Level 3 Assets	2019	2018	Valuation Technique	Unobservable Inputs	2019		2018
Corporate bonds	998	995	Indicative bid provided by a broker	Multiple factors, including but not limited to, current operations, financial condition, cash flows, and recently executed financing transactions related to the company	N/A		N/A
Derivative assets - mortgage	1,970	1,190	Internal model	Pull through rate	83.6	%	80.7	%
Derivative assets - other	5,268	10,651	Dealer priced	Dealer priced	N/A		N/A
Derivative liabilities - risk participations	12	8	Internal model	Probable exposure rate	0.36	%	0.44	%
				Probability of default rate	1.80	%	1.80	%
Derivative liabilities - other	8,547	15,724	Dealer priced	Dealer priced	N/A		N/A

At December 31, 2019, mortgage loans held for sale for which the fair value option was elected had an aggregate fair value and outstanding principal balance of $58.5 million and $56.6 million, respectively. At December 31, 2018, mortgage loans held for sale for which the fair value option was elected had an aggregate fair value and outstanding principal balance of $18.9 million and $18.2 million, respectively. Interest income on these loans is calculated based on the note rate of the loan and is recorded in interest revenue. During 2019, 2018, and 2017 changes in fair value of these loans resulted in net gains of $1.18 million, net losses of $133,000, and net gains of $505,000 respectively, which were recorded in mortgage loan and other related fees. These changes in fair value were mostly offset by hedging activities. An immaterial portion of these amounts was attributable to changes in instrument-specific credit risk.

United may be required, from time to time, to measure certain assets at fair value on a nonrecurring basis. These adjustments to fair value usually result from the application of lower of amortized cost or fair value accounting or write-downs of individual assets due to impairment.

Loans that are reported above as being measured at fair value on a nonrecurring basis are generally impaired loans that have either been partially charged off or have specific reserves assigned to them. Nonaccrual impaired loans that are collateral dependent are generally written down to 80% of appraised value which considers the estimated costs to sell. Specific reserves are established for impaired loans based on appraised value of collateral or discounted cash flows, although only those specific reserves based on the fair value of collateral are considered nonrecurring fair value adjustments. When the fair value of the collateral is based on an observable market price or a current appraised value, United records the impaired loan as nonrecurring Level 2. When an appraised value is not available or management determines the fair value is further impaired below the appraised value and there is no observable market price, United records the impaired loan as nonrecurring Level 3.

For financial instruments that have quoted market prices in active markets, those quotes are used to determine fair value. Financial instruments that have no defined maturity, have a remaining maturity of 180 days or less, or have variable interest rates that reset frequently to a market rate are assumed to have a fair value that approximates reported book value, after taking into consideration any applicable credit risk. If no market quotes are available, financial instruments are valued by discounting the expected cash flows using an estimated current market interest rate for the financial instrument.

Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates do not reflect the premium or discount on any particular financial instrument that could result from the sale of United’s entire holdings. Because no ready market exists for a significant portion of United’s financial instruments, fair value estimates are based on many judgments. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates. In addition, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in the estimates.

Off-balance sheet instruments (commitments to extend credit and standby letters of credit) for which draws can be reasonably predicted are generally short-term and at variable rates. Therefore, both the carrying amount and the estimated fair value associated with these instruments are immaterial.



	Carrying Amount		Fair Value Level
December 31, 2019	Carrying Amount		Level 1		Level 2		Level 3		Total
Assets:
Securities held to maturity	$	283,533	$	—	$	287,904	$	—	$	287,904
Loans, net	8,750,464		—		—		8,714,592		8,714,592

Liabilities:
Deposits	10,897,244		—		10,897,465		—		10,897,465
Long-term debt	212,664		—		—		217,665		217,665

December 31, 2018
Assets:
Securities held to maturity	$	274,407	$	—	$	268,803	$	—	$	268,803
Loans, net	8,322,198		—		—		8,277,387		8,277,387

Liabilities:
Deposits	10,534,513		—		10,528,834		—		10,528,834
Federal Home Loan Bank advances	160,000		—		159,988		—		159,988
Long-term debt	267,189		—		—		278,996		278,996