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:

The Company used the following methods and significant assumptions to estimate the fair value of each type of financial instrument:

Investment securities available for sale. The fair value of investment securities available for sale are determined by quoted market prices, if available (Level 1). For investment securities available for sale where quoted prices are not available, fair values are calculated based on market prices of similar securities (Level 2). For investment securities available for sale where quoted prices or market prices of similar securities are not available, fair values are calculated using discounted cash flows or other market indicators (Level 3). Securities classified as Level 3 are not actively traded, and as a result, fair value is determined utilizing third-party valuation services through consensus pricing. There were no transfers between Levels 1, 2 or 3 during the years ended December 31, 2019 or 2018 for assets measured at fair value on a recurring basis.

Equity securities. The fair value of equity securities is determined using quoted prices or market prices for similar securities (Level 2).

Loans held for sale. The fair value of loans held for sale is determined using quoted prices for a similar asset, adjusted for specific attributes of that loan (Level 2).

Interest rate lock commitments. The fair value of interest rate lock commitments is determined based on derivative valuation models using observable market data as of the measurement date (Level 2).

Interest rate swap contracts. The fair value of interest rate swap contracts is valued by a third party based models that use observable market data as of the measurement date (Level 2).

Loan servicing rights. In accordance with GAAP, the Company records 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 mortgage loan prepayment rates, discount rates, servicing costs, replacement reserves and other economic factors which are estimated based on current market conditions (Level 3).

Mortgage servicing rights held for sale. The fair value of mortgage servicing rights held for sale is determined by using a cash flow valuation model which calculates the present value of estimated future net servicing cash flows, taking into consideration expected mortgage loan prepayment rates, discount rates, servicing costs and other economic factors which are estimated based on current market conditions, less costs to sell (Level 3). In 2018, the fair value of mortgage servicing rights held for sale was determined by quoted market prices less costs to sell (Level 1).

Impaired loans. Impaired loans are measured and recorded at fair value on a non-recurring basis. All of our nonaccrual loans and restructured loans are considered impaired and are reviewed individually for the amount of impairment, if any. Most of our loans are collateral dependent and, accordingly, we measure impaired 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

(Level 2). 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 (Level 3). The impaired 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.

Assets held for sale. Assets held for sale represent the fair value of the banking facilities that are expected to be sold. The fair value of the assets held for sale was based on estimated market prices from independently prepared current appraisals (Level 2).

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 non-recurring basis at December 31, 2019 and 2018, are summarized below:


	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
Impaired loans		14,693		—		12,518		2,175
Assets held for sale		3,974		—		3,974		—


	2018
			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. Treasury securities	$	24,650	$	24,650	$	—	$	—
U.S. government sponsored entities and U.S. agency securities		75,684		—		75,684		—
Mortgage-backed securities - agency		326,305		—		326,305		—
State and municipal securities		159,262		—		159,262		—
Corporate securities		71,550		—		69,627		1,923
Equity securities		3,334		—		3,334		—
Loans held for sale		30,401		—		30,401		—
Interest rate lock commitments		4,492		—		4,492		—
Interest rate swap contracts		145		—		145		—
Total	$	695,823	$	24,650	$	669,250	$	1,923
Liabilities
Interest rate swap contracts	$	145	$	—	$	145	$	—

Assets measured at fair value on a non-recurring basis:
Loan servicing rights	$	53,447	$	—	$	—	$	53,447
Mortgage servicing rights held for sale		3,545		3,545		—		—
Impaired loans		11,238		—		9,226		2,012
Other real estate owned		1,439		—		1,439		—
Assets held for sale		1,687		—		1,687		—

The following table presents (gains) losses recognized on assets measured on a non-recurring basis for the years ended December 31, 2019, 2018 and 2017:




(dollars in thousands)	2019		2018		2017
Loan servicing rights	$	2,139	$	—	$	2,324
Mortgage servicing rights held for sale		(490)		458		4,059
Impaired loans		10,259		5,800		7,096
Other real estate owned		16		301		253
Assets held for sale		3,577		—		1,516
Total loss on assets measured on a nonrecurring basis	$	15,501	$	6,559	$	15,248

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 years ended December 31, 2019 and 2018:


	Corporate Securities
(dollars in thousands)	2019		2018
Balance, beginning of period	$	1,923	$	4,779
Total realized in earnings ⁽¹⁾		52		242
Total unrealized in other comprehensive income		32		(36)
Net settlements (principal and interest)		(1,052)		(3,062)
Balance, end of period	$	955	$	1,923

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

The following table presents quantitative information about significant unobservable inputs used in the fair value measurements of Level 3 assets measured on a non-recurring basis at December 31, 2019 and 2018:

Valuation

Unobservable

(dollars in thousands)

Fair Value

technique

input / assumptions

Range (weighted average)

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:

Impaired loans

2,175

Fair value of collateral

Discount for type of property,

4.32% - 8.00% (5.22%)

age of appraisal and current status

December 31, 2018

Loan servicing rights:

Commercial MSR

53,447

Discounted cash flow

Prepayment speed

8.00% - 18.00% (8.24%)

Discount rate

10.00% - 27.00% (11.12%)

Other:

Impaired loans

2,012

Fair value of collateral

Discount for type of property,

5.00% - 7.26% (5.26%)

age of appraisal and current status

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 residential and commercial 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 at December 31, 2019 and 2018:


	2019						2018
	Aggregate				Contractual		Aggregate				Contractual
(dollars in thousands)	fair value		Difference		principal		fair value		Difference		principal
Commercial loans held for sale	$	8,236	$	206	$	8,030	$	22,280	$	595	$	21,685
Residential loans held for sale		8,195		446		7,749		8,121		484		7,637
Total loans held for sale	$	16,431	$	652	$	15,779	$	30,401	$	1,079	$	29,322

The following table presents the amount of gains (losses) from fair value changes included in income before income taxes for financial assets carried at fair value for the years ended December 31, 2019, 2018 and 2017:


(dollars in thousands)	2019		2018		2017
Commercial loans held for sale	$	(389)	$	252	$	(650)
Residential loans held for sale		7		6		(74)
Total loans held for sale	$	(382)	$	258	$	(724)

The carrying values and estimated fair value of financial instruments not carried at fair value at December 31, 2019 and 2018 were as follows:


	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		—


	2018
					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	$	210,780	$	210,780	$	210,780	$	—	$	—
Federal funds sold		2,920		2,920		2,920		—		—
Nonmarketable equity securities		42,472		42,472		—		42,472		—
Loans, net		4,116,648		4,091,438		—		—		4,091,438
Accrued interest receivable		16,560		16,560		—		16,560		—

Liabilities
Deposits	$	4,074,170	$	4,069,098	$	—	$	4,069,098	$	—
Short-term borrowings		124,235		124,235		—		124,235		—
FHLB and other borrowings		640,631		641,050		—		641,050		—
Subordinated debt		94,134		91,926		—		91,926		—
Trust preferred debentures		47,794		56,805		—		56,805		—
Accrued interest payable		4,855		4,855		—		4,855		—

In accordance with our adoption of ASU 2016-01 in 2018, the methods utilized to measure the fair value of financial instruments at December 31, 2019 and 2018 represent an approximation of exit price; however, an actual exit price may differ.