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.

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 June 30, 2022.

The fair value of our loans held for sale is based on estimates using Level 2 inputs. These inputs are based on pricing information obtained from wholesale mortgage banks and brokers and applied to loans with similar interest rates and maturities.

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.

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 June 30, 2022
(Dollars in thousands)	Level 1		Level 2		Level 3		Assets/ Liabilities at Fair Value
Assets:
Available-for-sale securities:


State and political subdivisions	$	—	$	2,305	$	—	$	2,305
Residential mortgage-backed securities	—		262,943		—		262,943
Collateralized mortgage obligations	—		2,705		—		2,705
Corporate bonds	—		83,429		—		83,429
Total available-for-sale securities	—		351,382		—		351,382
Equity securities:
Equity securities - financial services industry	782		—		—		782
Money market mutual funds	2,152		—		—		2,152
Total equity securities	2,934		—		—		2,934

Loans held for sale	—		8,352		—		8,352
Interest rate swaps*	—		882		—		882
Interest rate locks with customers*	—		438		—		438
Forward loan sale commitments*	—		30		—		30
Total assets	$	2,934	$	361,084	$	—	$	364,018
Liabilities:
Contingent consideration liability	$	—	$	—	$	1,698	$	1,698

Credit derivatives*	—		—		447		447


Total liabilities	$	—	$	—	$	2,145	$	2,145

The $447 thousand of credit derivatives liability represented the Credit Valuation Adjustment (CVA), which was obtained from real-time financial market data, of 128 interest rate swaps with a notional amount of $791.6 million. The June 30, 2022 CVA assumed a zero-deal recovery percentage based on the most recent index credit curve.

The contingent consideration liability resulting from the Sheaffer acquisition was $1.6 million, which was calculated using a discount rate of 8.3%. The potential cash payments that could result from the contingent consideration arrangement for the acquisition ranged from $0 to a maximum of $1.9 million over the three-year period ending November 30, 2024.


	At December 31, 2021
(Dollars in thousands)	Level 1		Level 2		Level 3		Assets/ Liabilities at Fair Value
Assets:
Available-for-sale securities:


State and political subdivisions	$	—	$	2,333	$	—	$	2,333
Residential mortgage-backed securities	—		221,105		—		221,105
Collateralized mortgage obligations	—		3,278		—		3,278
Corporate bonds	—		90,291		—		90,291
Total available-for-sale securities	—		317,007		—		317,007
Equity securities:
Equity securities - financial services industry	979		—		—		979
Money market mutual funds	2,020		—		—		2,020
Total equity securities	2,999		—		—		2,999
Loans*	—		—		48		48
Loans held for sale	—		21,600		—		21,600
Interest rate locks with customers*	—		765		—		765
Forward loan sale commitments*	—		87		—		87
Total assets	$	2,999	$	339,459	$	48	$	342,506
Liabilities:
Contingent consideration liability	$	—	$	—	$	1,629	$	1,629
Interest rate swaps*	—		204		—		204
Credit derivatives*	—		—		381		381

Total liabilities	$	—	$	204	$	2,010	$	2,214

The $381 thousand of credit derivatives liability represented the Credit Valuation Adjustment (CVA), which was obtained from real-time financial market data, of 125 interest rate swaps with a notional amount of $755.6 million. The December 31, 2021 CVA assumed a zero-deal recovery percentage based on the most recent index credit curve.

The following table includes a roll forward of corporate bonds, loans and credit derivatives for which the Corporation utilized Level 3 inputs to determine fair value on a recurring basis for the six months ended June 30, 2022 and 2021:


	Six Months Ended June 30, 2022
(Dollars in thousands)	Balance at December 31, 2021		Additions		Payments received		Increase (decrease) in value		Balance at June 30, 2022

Loans	$	48	$	—	$	(48)	$	—	$	—
Credit derivatives	(381)		(1,106)		—		1,040		(447)
Net total	$	(333)	$	(1,106)	$	(48)	$	1,040	$	(447)


	Six Months Ended June 30, 2021
(Dollars in thousands)	Balance at December 31, 2020		Additions		Payments received		Increase (decrease) in value		Balance at June 30, 2021
Corporate bonds	$	9,600	$	—	$	—	$	100	$	9,700
Loans	187		—		(65)		(4)		118
Credit derivatives	(535)		(1,213)		—		1,379		(369)
Net total	$	9,252	$	(1,213)	$	(65)	$	1,475	$	9,449

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 six months ended June 30, 2022 and 2021:


	Six Months Ended June 30, 2022
(Dollars in thousands)	Balance at December 31, 2021		Payment of Contingent Consideration		Adjustment of Contingent Consideration		Balance at June 30, 2022
Paul I. Sheaffer Insurance Agency	$	1,629	$	—	$	69	$	1,698
Total contingent consideration liability	$	1,629	$	—	$	69	$	1,698


	Six Months Ended June 30, 2021
(Dollars in thousands)	Balance at December 31, 2020		Payment of Contingent Consideration		Adjustment of Contingent Consideration		Balance at June 30, 2021
Girard Partners	$	55	$	58	$	3	$	—
Total contingent consideration liability	$	55	$	58	$	3	$	—

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 June 30, 2022 and December 31, 2021:


	At June 30, 2022
(Dollars in thousands)	Level 1		Level 2		Level 3		Assets at Fair Value
Individually analyzed loans held for investment	$	—	$	—	$	12,053	$	12,053

Other real estate owned	—		—		18,604		18,604
Total	$	—	$	—	$	30,657	$	30,657


	At December 31, 2021
(Dollars in thousands)	Level 1		Level 2		Level 3		Assets at Fair Value
Individually analyzed loans held for investment	$	—	$	—	$	33,118	$	33,118

Other real estate owned	—		—		279		279
Total	$	—	$	—	$	33,397	$	33,397

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 June 30, 2022 and December 31, 2021. The disclosed fair values are classified using the fair value hierarchy.


	At June 30, 2022
(Dollars in thousands)	Level 1		Level 2		Level 3		Fair Value		Carrying Amount
Assets:
Cash and short-term interest-earning assets	$	94,777	$	—	$	—	$	94,777	$	94,777

Held-to-maturity securities	—		145,792		—		145,792		159,808
Federal Home Loan Bank, Federal Reserve Bank and other stock	NA		NA		NA		NA		29,116
Net loans and leases held for investment	—		—		5,562,620		5,562,620		5,577,713
Servicing rights	—		—		16,731		16,731		8,372
Total assets	$	94,777	$	145,792	$	5,579,351	$	5,819,920	$	5,869,786
Liabilities:
Deposits:
Demand and savings deposits, non-maturity	$	5,138,438	$	—	$	—	$	5,138,438	$	5,138,438
Time deposits	—		415,301		—		415,301		424,610
Total deposits	5,138,438		415,301		—		5,553,739		5,563,048
Short-term borrowings	—		97,606		—		97,606		97,606
Long-term debt	—		92,491		—		92,491		95,000
Subordinated notes	—		98,750		—		98,750		99,030
Total liabilities	$	5,138,438	$	704,148	$	—	$	5,842,586	$	5,854,684


	At December 31, 2021
(Dollars in thousands)	Level 1		Level 2		Level 3		Fair Value		Carrying Amount
Assets:
Cash and short-term interest-earning assets	$	890,150	$	—	$	—	$	890,150	$	890,150
Held-to-maturity securities	—		178,402		—		178,402		176,983
Federal Home Loan Bank, Federal Reserve Bank and other stock	NA		NA		NA		NA		28,186
Net loans and leases held for investment	—		—		5,244,504		5,244,504		5,204,927
Servicing rights	—		—		11,331		11,331		7,878
Total assets	$	890,150	$	178,402	$	5,255,835	$	6,324,387	$	6,308,124
Liabilities:
Deposits:
Demand and savings deposits, non-maturity	$	5,570,958	$	—	$	—	$	5,570,958	$	5,570,958
Time deposits	—		487,874		—		487,874		484,166
Total deposits	5,570,958		487,874		—		6,058,832		6,055,124
Short-term borrowings	—		20,106		—		20,106		20,106
Long-term debt	—		95,707		—		95,707		95,000
Subordinated notes	—		107,000		—		107,000		98,874
Total liabilities	$	5,570,958	$	710,687	$	—	$	6,281,645	$	6,269,104

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.

Held-to-maturity securities: Fair values for the held-to-maturity investment securities are estimated by using pricing models or quoted prices of securities with similar characteristics and are classified in Level 2 in the fair value hierarchy.

Federal Home Loan Bank, Federal Reserve Bank and other stock: It is not practical to determine the fair values of Federal Home Loan Bank, Federal Reserve Bank and other stock, due to restrictions placed on their transferability.

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 June 30, 2022, individually analyzed loans held for investment had a carrying amount of $13.1 million with a valuation allowance of $1.1 million. At December 31, 2021, individually analyzed loans held for investment had a carrying amount of $33.1 million with a valuation allowance of $11 thousand. The Corporation had no individually analyzed leases at June 30, 2022 or December 31, 2021.

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 June 30, 2022, servicing rights had a net carrying amount of $8.4 million, which included a valuation allowance of $3 thousand. At December 31, 2021, servicing rights had a net carrying amount of $7.9 million, which included a valuation allowance of $13 thousand.

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 six months ended June 30, 2022, there were no required valuation adjustments of goodwill and other identifiable intangible assets.

Other real estate owned: Other real estate owned (OREO) represents properties that the Corporation has acquired through foreclosure by either accepting a deed in lieu of foreclosure, or by taking possession of assets that were used as loan collateral. The Corporation reports OREO at the lower of cost or fair value less cost to sell, adjusted periodically based on a current appraisal or an executed agreement of sale. Capital improvement expenses associated with the construction or repair of the property are capitalized as part of the cost of the OREO asset. Write-downs and any gain or loss upon the sale of OREO is recorded in other noninterest income. OREO is reported in other assets on the condensed consolidated balance sheet. At June 30, 2022 and December 31, 2021, OREO had a carrying amount of $18.6 million and $279 thousand, respectively. During the six months ended June 30, 2022, one property was transferred to OREO with a carrying balance of $18.3 million. Other real estate owned is classified within Level 3 in the fair value hierarchy based on appraisals received from third parties.

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.

Long-term debt: The fair value of long-term debt is estimated by using discounted cash flow analysis, based on current market rates for debt with similar terms and remaining maturities. Long-term debt is classified within Level 2 in the fair value hierarchy.