Fair value is the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the measurement date. The Corporation determines the fair value of financial instruments based on the fair value hierarchy. The Corporation maximizes the use of observable inputs and minimizes the use of unobservable inputs when measuring fair value. Observable inputs are inputs that market participants would use in pricing the asset or liability developed based on market data obtained from sources independent of the Corporation. Unobservable inputs are inputs that reflect the Corporation’s assumptions that market participants would use in pricing the asset or liability based on the best information available in the circumstances, including assumptions about risk. Three levels of inputs are used to measure fair value. A financial instrument’s level within the fair value hierarchy is based on the lowest level of input significant to the fair value measurement. Transfers between levels were recognized at the end of the reporting period for the year ended December 31, 2019.

Level 1: Valuations are based on quoted prices in active markets for identical assets or liabilities that the Corporation can access at the measurement date. Since valuations are based on quoted prices that are readily and regularly available in an active market, valuation of these products does not entail a significant degree of judgment.

Level 3: Valuations are based on inputs that are unobservable and significant to the overall fair value measurement. Assets and liabilities utilizing Level 3 inputs include: financial instruments whose value is determined using pricing models, discounted cash-flow methodologies, or similar techniques, as well as instruments for which the fair value calculation requires significant management judgment or estimation.

Where quoted prices are available in an active market for identical instruments, investment securities are classified within Level 1 of the valuation hierarchy. Level 1 investment securities include U.S. Treasury securities, most equity securities and money market mutual funds. Mutual funds are registered investment companies which are valued at net asset value of shares on a market exchange at the end of each trading day. Level 2 of the valuation hierarchy includes securities issued by U.S. Government sponsored enterprises, mortgage-backed securities, collateralized mortgage obligations, corporate and municipal bonds and certain equity securities. If quoted market prices are not available, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics or discounted cash flows. In cases where there is limited activity or less transparency around inputs to the valuation, investment securities are classified within Level 3 of the valuation hierarchy.

Fair values for securities are determined using independent pricing services and market-participating brokers. The Corporation’s independent pricing service utilizes evaluated pricing models that vary by asset class and incorporate available trade, bid and other market information for structured securities, cash flow and, when available, loan performance data. Because many fixed income securities do not trade on a daily basis, the pricing service’s evaluated pricing applications apply information as applicable through processes, such as benchmarking of like securities, sector groupings, and matrix pricing, to prepare evaluations. If at any time, the pricing service determines that it does not have sufficient verifiable information to value a particular security, the Corporation will utilize valuations from another pricing service. Management has a sufficient understanding of the third-party service’s valuation models, assumptions and inputs used in determining the fair value of securities to enable management to maintain an appropriate system of internal control.

On a quarterly basis, the Corporation reviews changes, as submitted by the pricing service, in the market value of its security portfolio. Individual changes in valuations are reviewed for consistency with general interest rate movements and any known credit concerns for specific securities. If, upon the Corporation’s review or in comparing with another service, a material difference between pricing evaluations were to exist, the Corporation may submit an inquiry to the current pricing service regarding the data used to determine the valuation of a particular security. If the Corporation determines there is market information that would support a different valuation than from the current pricing service’s evaluation, the Corporation may utilize and change the security's valuation. There were no material differences in valuations noted at September 30, 2020.

The fair values of derivative financial instruments are based upon the estimated amount the Corporation would receive or pay to terminate the contracts or agreements, taking into account current interest rates and, when appropriate, the current creditworthiness of the counterparties. Interest rate swaps and mortgage banking derivative financial instruments are classified within Level 2 of the valuation hierarchy. Credit derivatives are valued based on credit worthiness of the underlying borrower which is a significant unobservable input and therefore classified in Level 3 of the valuation hierarchy.

One commercial loan associated with an interest rate swap is classified in Level 3 of the valuation hierarchy at September 30, 2020 since lending credit risk is not an observable input for this loan. The unrealized gain on the one loan was $9 thousand at September 30, 2020.

The Corporation estimates the fair value of the contingent consideration liability by using a discounted cash flow model of future contingent payments based on projected revenue related to the acquired business. The estimated fair value of the contingent consideration liability is reviewed on a quarterly basis and any valuation adjustments resulting from a change of estimated future contingent payments based on projected revenue of the acquired business affecting the contingent consideration liability will be recorded through noninterest expense. Due to the significant unobservable input related to the projected revenue, the contingent consideration liability is classified within Level 3 of the valuation hierarchy. An increase in the projected revenue may result in a higher fair value of the contingent consideration liability. Alternatively, a decrease in the projected revenue may result in a lower estimated fair value of the contingent consideration liability.


	At September 30, 2020
(Dollars in thousands)	Level 1		Level 2		Level 3		Assets/ Liabilities at Fair Value
Assets:
Available-for-sale securities:


State and political subdivisions	$	—	$	15,187	$	—	$	15,187
Residential mortgage-backed securities	—		81,671		—		81,671
Collateralized mortgage obligations	—		5,830		—		5,830
Corporate bonds	—		86,539		—		86,539
Total available-for-sale securities	—		189,227		—		189,227
Equity securities:
Equity securities - financial services industry	683		—		—		683
Money market mutual funds	2,103		—		—		2,103
Total equity securities	2,786		—		—		2,786
Loans*	—		—		221		221

Interest rate locks with customers*	—		4,896		—		4,896

Total assets	$	2,786	$	194,123	$	221	$	197,130
Liabilities:
Contingent consideration liability	$	—	$	—	$	83	$	83
Interest rate swaps*	—		624		—		624
Credit derivatives*	—		—		716		716

Forward loan sale commitments*	—		474		—		474
Total liabilities	$	—	$	1,098	$	799	$	1,897

The Corporation recorded no unrealized gains and losses within other comprehensive income for recurring Level 3 fair value measurements held at September 30, 2020. The $716 thousand of credit derivatives liability represents the Credit Valuation Adjustment (CVA), which is obtained from real-time financial market data, of seventy-seven interest rate swaps with a current notional amount of $552.2 million. The September 30, 2020 CVA assumes a zero-deal recovery percentage based on the most recent index credit curve.


	At December 31, 2019
(Dollars in thousands)	Level 1		Level 2		Level 3		Assets/ Liabilities at Fair Value
Assets:
Available-for-sale securities:

U.S. government corporations and agencies	$	—	$	300	$	—	$	300
State and political subdivisions	—		34,595		—		34,595
Residential mortgage-backed securities	—		118,460		—		118,460
Collateralized mortgage obligations	—		2,361		—		2,361
Corporate bonds	—		91,208		—		91,208
Total available-for-sale securities	—		246,924		—		246,924
Equity securities:
Equity securities - financial services industry	1,004		—		—		1,004
Money market mutual funds	1,619		—		—		1,619
Total equity securities	2,623		—		—		2,623
Loans*	—		—		317		317

Interest rate locks with customers*	—		399		—		399

Total assets	$	2,623	$	247,323	$	317	$	250,263
Liabilities:
Contingent consideration liability	$	—	$	—	$	160	$	160
Interest rate swaps*	—		249		—		249
Credit derivatives*	—		—		176		176
Forward loan sale commitments*	—		19		—		19
Total liabilities	$	—	$	268	$	336	$	604


	Nine Months Ended September 30, 2020
(Dollars in thousands)	Balance at December 31, 2019		Additions		Payments received		Increase in value		Balance at September 30, 2020

Loans	$	317	$	—	$	(91)	$	(5)	$	221
Credit derivatives	(176)		(4,683)		—		4,143		(716)
Net total	$	141	$	(4,683)	$	(91)	$	4,138	$	(495)


	Nine Months Ended September 30, 2019
(Dollars in thousands)	Balance at December 31, 2018		Additions		Payments received		Increase in value		Balance at September 30, 2019
Corporate bonds	$	25,729	$	—	$	—	$	675	$	26,404
Loans	1,779		—		(1,432)		2		349
Credit derivatives	(72)		(958)		—		767		(263)
Net total	$	27,436	$	(958)	$	(1,432)	$	1,444	$	26,490

The following table presents the change in the balance of the contingent consideration liability related to acquisitions for which the Corporation utilized Level 3 inputs to determine fair value on a recurring basis for the nine months ended September 30, 2020 and 2019:


	Nine Months Ended September 30, 2020
(Dollars in thousands)	Balance at December 31, 2019		Contingent Consideration from New Acquisition		Payment of Contingent Consideration		Adjustment of Contingent Consideration		Balance at September 30, 2020
Girard Partners	$	160	$	—	$	91	$	14	$	83
Total contingent consideration liability	$	160	$	—	$	91	$	14	$	83


	Nine Months Ended September 30, 2019
(Dollars in thousands)	Balance at December 31, 2018		Contingent Consideration from New Acquisition		Payment of Contingent Consideration		Adjustment of Contingent Consideration		Balance at September 30, 2019
Girard Partners	$	259	$	—	$	97	$	24	$	186
Total contingent consideration liability	$	259	$	—	$	97	$	24	$	186

The Corporation may be required to periodically measure certain assets and liabilities at fair value on a non-recurring basis in accordance with GAAP. These adjustments to fair value usually result from the application of lower of cost or market accounting or changes in the value of loans held for investment analyzed on an individual basis. The following table represents assets measured at fair value on a non-recurring basis at September 30, 2020 and December 31, 2019:


	At December 31, 2019
(Dollars in thousands)	Level 1		Level 2		Level 3		Assets at Fair Value
Impaired loans held for investment	$	—	$	—	$	36,018	$	36,018
Impaired leases held for investment	—		—		277		277
Other real estate owned	—		—		516		516
Total	$	—	$	—	$	36,811	$	36,811

The following table presents assets and liabilities not measured at fair value on a recurring or non-recurring basis in the Corporation’s condensed consolidated balance sheets but for which the fair value is required to be disclosed at September 30, 2020 and December 31, 2019. The disclosed fair values are classified using the fair value hierarchy.


	At September 30, 2020
(Dollars in thousands)	Level 1		Level 2		Level 3		Fair Value		Carrying Amount
Assets:
Cash and short-term interest-earning assets	$	387,676	$	—	$	—	$	387,676	$	387,676

Held-to-maturity securities	—		182,376		—		182,376		176,817
Federal Home Loan Bank, Federal Reserve Bank and other stock	NA		NA		NA		NA		29,723
Loans held for sale	—		14,612		—		14,612		14,465
Net loans and leases held for investment	—		—		5,253,500		5,253,500		5,091,090
Servicing rights	—		—		6,404		6,404		6,279

Total assets	$	387,676	$	196,988	$	5,259,904	$	5,844,568	$	5,706,050
Liabilities:
Deposits:
Demand and savings deposits, non-maturity	$	4,655,384	$	—	$	—	$	4,655,384	$	4,655,384
Time deposits	—		567,257		—		567,257		556,219
Total deposits	4,655,384		567,257		—		5,222,641		5,211,603
Short-term borrowings	—		17,681		—		17,681		17,681
Long-term debt	—		209,494		—		209,494		205,010
Subordinated notes	—		199,473		—		199,473		193,413
Total liabilities	$	4,655,384	$	993,905	$	—	$	5,649,289	$	5,627,707


	At December 31, 2019
(Dollars in thousands)	Level 1		Level 2		Level 3		Fair Value		Carrying Amount
Assets:
Cash and short-term interest-earning assets	$	125,128	$	—	$	—	$	125,128	$	125,128
Held-to-maturity securities	—		194,886		—		194,886		192,052
Federal Home Loan Bank, Federal Reserve Bank and other stock	NA		NA		NA		NA		28,254
Loans held for sale	—		5,560		—		5,560		5,504
Net loans and leases held for investment	—		—		4,309,208		4,309,208		4,314,893
Servicing rights	—		—		9,340		9,340		6,626

Total assets	$	125,128	$	200,446	$	4,318,548	$	4,644,122	$	4,672,457
Liabilities:
Deposits:
Demand and savings deposits, non-maturity	$	3,754,065	$	—	$	—	$	3,754,065	$	3,754,065
Time deposits	—		609,387		—		609,387		606,010
Total deposits	3,754,065		609,387		—		4,363,452		4,360,075
Short-term borrowings	—		18,680		—		18,680		18,680
Long-term debt	—		151,343		—		151,343		150,098
Subordinated notes	—		96,663		—		96,663		94,818
Total liabilities	$	3,754,065	$	876,073	$	—	$	4,630,138	$	4,623,671

The following valuation methods and assumptions were used by the Corporation in estimating the fair value for financial instruments measured at fair value on a non-recurring basis and financial instruments not measured at fair value on a recurring or non-recurring basis in the Corporation’s condensed consolidated balance sheets but for which the fair value is required to be disclosed:

Cash and short-term interest-earning assets: The carrying amounts reported in the balance sheet for cash and due from banks, interest-earning deposits with other banks and other short-term investments is their stated value. Cash and short-term interest-earning assets are classified within Level 1 in the fair value hierarchy.

Loans held for sale: Loans held for sale are carried at the lower of cost or estimated fair value. The fair value of the Corporation’s mortgage loans held for sale are generally determined using a pricing model based on current market information obtained from external sources, including interest rates, bids or indications provided by market participants on specific loans that are actively marketed for sale. These loans are primarily residential mortgage loans and are generally classified in Level 2 due to the observable pricing data.

Loans and leases held for investment: The fair values for loans and leases held for investment are estimated using discounted cash flow analyses, using a discount rate based on current interest rates at which similar loans with similar terms would be made to borrowers, adjusted as appropriate to consider credit, liquidity and marketability factors to arrive at a fair value that represents the Corporation's exit price at which these instruments would be sold or transferred. Loans and leases are classified within Level 3 in the fair value hierarchy since credit risk is not an observable input.

Individually analyzed loans and leases held for investment: For individually analyzed loans and leases, the Corporation uses a variety of techniques to measure fair value, such as using the current appraised value of the collateral, agreements of sale, discounting the contractual cash flows, and analyzing market data that the Corporation may adjust due to specific characteristics of the loan/lease or collateral. At September 30, 2020, individually analyzed loans held for investment had a carrying amount of $29.8 million with a valuation allowance of $1.1 million. At December 31, 2019, impaired loans held for investment had a

Servicing rights: The Corporation estimates the fair value of servicing rights using discounted cash flow models that calculate the present value of estimated future net servicing income. The model uses readily available prepayment speed assumptions for the interest rates of the portfolios serviced. Servicing rights are classified within Level 3 in the fair value hierarchy based upon management's assessment of the inputs. The Corporation reviews the servicing rights portfolio on a quarterly basis for impairment and the servicing rights are carried at the lower of amortized cost or estimated fair value. At September 30, 2020, servicing rights had a net carrying amount of $6.3 million which included a valuation allowance of $206 thousand. At December 31, 2019, servicing rights carrying amount of $6.6 million with no valuation allowance.

Goodwill and other identifiable assets: Certain non-financial assets subject to measurement at fair value on a non-recurring basis include goodwill and other identifiable intangible assets. During the nine months ended September 30, 2020, there were no required valuation adjustments of goodwill and other identifiable intangible assets.

Other real estate owned: The fair value of other real estate owned (OREO) is originally estimated based upon the appraised value less estimated costs to sell. The fair value less cost to sell becomes the "original cost" of the OREO asset. Subsequently, OREO is reported at the lower of the original cost or the current fair value less cost to sell. Capital improvement expenses associated with the construction or repair of the property are capitalized as part of the cost of the OREO asset; however, the capitalized expenses may not increase the OREO asset's recorded value to an amount greater than the asset's fair value after improvements and less cost to sell. New appraisals are generally obtained on an annual basis if an agreement of sale does not exist. During the nine months ended September 30, 2020, one property was transferred to OREO with a carrying balance of $8.1 million, one property had a write-down totaling $300 thousand, and one property sold with total proceeds of $75 thousand for a net gain of $4 thousand. At September 30, 2020 and December 31, 2019, OREO had a carrying amount of $8.3 million and $540 thousand, respectively. Other real estate owned is classified within Level 3 of the valuation hierarchy due to the unique characteristics of the collateral for each loan.

Deposit liabilities: The fair values for demand and savings accounts, with no stated maturities, is the amount payable on demand at the reporting date (carrying value) and are classified within Level 1 in the fair value hierarchy. The fair values for time deposits with fixed maturities are estimated by discounting the final maturity using interest rates currently offered for deposits with similar remaining maturities. Time deposits are classified within Level 2 in the fair value hierarchy.