Accounting standards establish a framework for measuring fair value and require certain disclosures about such fair value instruments. It defines fair value as the 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 (i.e. exit price). Inputs used to measure fair value are classified into the following hierarchy:

A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The following tables set forth the Company’s financial assets and liabilities that were accounted for at fair value on a recurring basis. There were no transfers between any of the levels for the periods presented.


	September 30, 2021
							Total Fair
(000’s omitted)	Level 1		Level 2		Level 3		Value
Available-for-sale investment securities:
U.S. Treasury and agency securities	$	3,293,134	$	100,126	$	0	$	3,393,260
Obligations of state and political subdivisions		0		421,965		0		421,965
Government agency mortgage-backed securities		0		510,676		0		510,676
Corporate debt securities		0		8,078		0		8,078
Government agency collateralized mortgage obligations		0		24,392		0		24,392
Total available-for-sale investment securities		3,293,134		1,065,237		0		4,358,371
Equity securities		459		0		0		459
Mortgage loans held for sale		0		117		0		117
Commitments to originate real estate loans for sale		0		0		45		45
Forward sales commitments		0		53		0		53
Interest rate swap agreements asset		0		335		0		335
Interest rate swap agreements liability		0		(5)		0		(5)
Total	$	3,293,593	$	1,065,737	$	45	$	4,359,375


	December 31, 2020
							Total Fair
(000’s omitted)	Level 1		Level 2		Level 3		Value
Available-for-sale investment securities:
U.S. Treasury and agency securities	$	2,359,912	$	141,470	$	0	$	2,501,382
Obligations of state and political subdivisions		0		475,660		0		475,660
Government agency mortgage-backed securities		0		522,638		0		522,638
Corporate debt securities		0		4,635		0		4,635
Government agency collateralized mortgage obligations		0		43,577		0		43,577
Total available-for-sale investment securities		2,359,912		1,187,980		0		3,547,892
Equity securities		445		0		0		445
Mortgage loans held for sale		0		1,622		0		1,622
Commitments to originate real estate loans for sale		0		0		14		14
Forward sales commitments		0		2		0		2
Interest rate swap agreements asset		0		1,572		0		1,572
Interest rate swap agreements liability		0		(1,074)		0		(1,074)
Total	$	2,360,357	$	1,190,102	$	14	$	3,550,473

The valuation techniques used to measure fair value for the items in the table above are as follows:

●

Available-for-sale investment securities and equity securities – The fair values of available-for-sale investment securities are based upon quoted prices, if available. If quoted prices are not available, fair values are measured using quoted market prices for similar securities or model-based valuation techniques. Level 1 securities include U.S. Treasury obligations and marketable equity securities that are traded by dealers or brokers in active over-the-counter markets. Level 2 securities include U.S. agency securities, mortgage-backed securities issued by government-sponsored entities, municipal securities and corporate debt securities that are valued by reference to prices for similar securities or through model-based techniques in which all significant inputs, such as reported trades, trade execution data, LIBOR swap yield curve, market prepayment speeds, credit information, market spreads, and security’s terms and conditions, are observable. See Note D for further disclosure of the fair value of investment securities.

●

Mortgage loans held for sale – The Company has elected to value loans held for sale at fair value in order to more closely match the gains and losses associated with loans held for sale with the gains and losses on forward sales contracts. Accordingly, the impact on the valuation will be recognized in the Company’s consolidated statements of income. All mortgage loans held for sale are current and in performing status. The fair value of mortgage loans held for sale is determined using quoted secondary-market prices of loans with similar characteristics and, as such, has been classified as a Level 2 valuation. The unpaid principal value of mortgage loans held for sale was approximately $0.1 million at September 30, 2021. The unpaid principal value of mortgage loans held for sale was approximately $1.6 million at December 31, 2020. The unrealized gain on mortgage loans held for sale was recognized in mortgage banking revenues in the consolidated statements of income and is immaterial.

●

Forward sales commitments – The Company enters into forward sales commitments to sell certain residential real estate loans. Such commitments are considered to be derivative financial instruments and, therefore, are carried at estimated fair value in the other asset or other liability section of the consolidated statements of condition. The fair value of these forward sales commitments is primarily measured by obtaining pricing from certain government-sponsored entities and reflects the underlying price the entity would pay the Company for an immediate sale on these mortgages. As such, these instruments are classified as Level 2 in the fair value hierarchy.

●

Commitments to originate real estate loans for sale – The Company enters into various commitments to originate residential real estate loans for sale. Such commitments are considered to be derivative financial instruments and, therefore, are carried at estimated fair value in the other asset or other liability section of the consolidated statements of condition. The estimated fair value of these commitments is determined using quoted secondary market prices obtained from certain government-sponsored entities. Additionally, accounting guidance requires the expected net future cash flows related to the associated servicing of the loan to be included in the fair value measurement of the derivative. The expected net future cash flows are based on a valuation model that calculates the present value of estimated net servicing income. The valuation model incorporates assumptions that market participants would use in estimating future net servicing income. Such assumptions include estimates of the cost of servicing loans, appropriate discount rate and prepayment speeds. The determination of expected net cash flows is considered a significant unobservable input contributing to the Level 3 classification of commitments to originate real estate loans for sale.

●

Interest rate swaps – The interest rate swaps are reported at their fair value utilizing Level 2 inputs from third parties. The fair value of the interest rate swaps are determined using prices obtained from a third party advisor. The fair value measurement of the interest rate swap is determined by netting the discounted future fixed cash payments and the discounted expected variable cash receipts. The variable cash receipts are based on the expectation of future interest rates derived from observed market interest rate curves.

The changes in Level 3 assets measured at fair value on a recurring basis are immaterial.

The fair value information of assets and liabilities measured on a non-recurring basis presented below is not as of the period-end, but rather as of the date the fair value adjustment was recorded closest to the date presented.


	September 30, 2021								December 31, 2020
							Total Fair								Total Fair
(000's omitted)	Level 1		Level 2		Level 3		Value		Level 1		Level 2		Level 3		Value
Individually assessed loans	$	0	$	0	$	18,794	$	18,794	$	0	$	0	$	25,063	$	25,063
Other real estate owned		0		0		891		891		0		0		883		883
Mortgage servicing rights		0		0		794		794		0		0		682		682
Contingent consideration		0		0		2,900		2,900		0		0		0		0
Total	$	0	$	0	$	23,379	$	23,379	$	0	$	0	$	26,628	$	26,628

Loans are generally not recorded at fair value on a recurring basis. Periodically, the Company records nonrecurring adjustments to the carrying value of loans based on fair value measurements for partial charge-offs of the uncollectible portions of those loans. Nonrecurring adjustments also include certain adjustments for collateral-dependent loans calculated when establishing the allowance for credit losses. Such amounts are generally based on the fair value of the underlying collateral supporting the loan and, as a result, the carrying value of the loan less the calculated valuation amount does not necessarily represent the fair value of the loan. Real estate collateral is typically valued using independent appraisals or other indications of value based on recent comparable sales of similar properties or assumptions generally observable in the marketplace, adjusted for non-observable inputs. Thus, the resulting nonrecurring fair value measurements are generally classified as Level 3. Estimates of fair value used for other collateral supporting commercial loans generally are based on assumptions not observable in the marketplace and, therefore, such valuations classify as Level 3.

Other real estate owned (“OREO”) is valued at the time the loan is foreclosed upon and the asset is transferred to OREO. The value is based primarily on third party appraisals, less costs to sell. The appraisals are sometimes further discounted based on management’s historical knowledge, changes in market conditions from the time of valuation, and/or management’s expertise and knowledge of the customer and customer’s business. Such discounts are significant, ranging from 9.0% to 46.7% at September 30, 2021 and result in a Level 3 classification of the inputs for determining fair value. OREO is reviewed and evaluated on at least a quarterly basis for additional impairment and adjusted accordingly, based on the same factors identified above. The Company recovers the carrying value of OREO through the sale of the property. The ability to affect future sales prices is subject to market conditions and factors beyond the Company’s control and may impact the estimated fair value of a property.

Originated mortgage servicing rights are recorded at their fair value at the time of sale of the underlying loan, and are amortized in proportion to and over the estimated period of net servicing income. The fair value of mortgage servicing rights is based on a valuation model incorporating inputs that market participants would use in estimating future net servicing income. Such inputs include estimates of the cost of servicing loans, appropriate discount rate and prepayment speeds and are considered to be unobservable and contribute to the Level 3 classification of mortgage servicing rights. In accordance with GAAP, the Company must record impairment charges, on a nonrecurring basis, when the carrying value of a stratum exceeds its estimated fair value. Impairment is recognized through a valuation allowance. There was no valuation allowance at September 30, 2021. There was a valuation allowance of approximately $0.2 million at December 31, 2020.

The Company has recorded contingent consideration liabilities that arise from acquisition activity. The contingent consideration is recorded at fair value at the date of acquisition. The valuation of contingent consideration is calculated using an income approach method, which provides an estimation of the fair value of an asset or liability based on future cash flows over a discrete projection period, discounted to present value using an appropriate rate of return. The assumptions used in the valuation calculation are based on significant unobservable inputs, therefore such valuations classify as Level 3.

The Company determines fair values based on quoted market values, where available, estimates of present values, or other valuation techniques. Those techniques are significantly affected by the assumptions used, including, but not limited to, the discount rate and estimates of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, may not be realized in immediate settlement of the instrument. The significant unobservable inputs used in the determination of fair value of assets classified as Level 3 on a recurring or non-recurring basis are as follows:


					Significant
					Unobservable Input
	Fair Value at				Range
(000's omitted, except per loan data)	September 30, 2021		Valuation Technique	Significant Unobservable Inputs	(Weighted Average)
Individually assessed loans	$	18,794	Fair value of collateral	Estimated cost of disposal/market adjustment		9.0% - 78.7% (53.5%)
Other real estate owned		891	Fair value of collateral	Estimated cost of disposal/market adjustment		9.0% - 46.7% (33.7%)
Commitments to originate real estate loans for sale		45	Discounted cash flow	Embedded servicing value		1.0	%
Mortgage servicing rights		794	Discounted cash flow	Weighted average constant prepayment rate		15.2% - 24.9% (16.6%)
				Weighted average discount rate		2.3% - 2.8% (2.7%)
				Adequate compensation	$	7/loan
Contingent consideration		2,900	Discounted cash flow	Discount rate		0.8% - 1.1% (1.0%)
				Probability adjusted level of retained		$2.3 million - $5.8
				revenue		million


					Significant
					Unobservable Input
	Fair Value at				Range
(000's omitted, except per loan data)	December 31, 2020		Valuation Technique	Significant Unobservable Inputs	(Weighted Average)
Individually assessed loans	$	25,063	Fair value of collateral	Estimated cost of disposal/market adjustment		9.0% - 78.4% (52.7%)
Other real estate owned		883	Fair value of collateral	Estimated cost of disposal/market adjustment		11.3% - 52.9% (34.0%)
Commitments to originate real estate loans for sale		14	Discounted cash flow	Embedded servicing value		1.0	%
Mortgage servicing rights		682	Discounted cash flow	Weighted average constant prepayment rate		9.8% - 18.8% (17.6%)
				Weighted average discount rate		1.7% - 2.2% (2.1%)
				Adequate compensation	$	7/loan

The significant unobservable inputs used in the determination of the fair value of assets classified as Level 3 have an inherent measurement uncertainty that if changed could result in higher or lower fair value measurements of these assets as of the reporting date. The weighted average of the estimated cost of disposal/market adjustment for individually assessed loans was calculated by dividing the total of the book value of the collateral of the individually assessed loans classified as Level 3 by the total of the fair value of the collateral of the individually assessed loans classified as Level 3. The weighted average of the estimated cost of disposal/market adjustment for OREO was calculated by dividing the total of the differences between the appraisal values of the real estate and the book values of the real estate divided by the totals of the appraisal values of the real estate. The weighted average of the constant prepayment rate for mortgage servicing rights was calculated by adding the constant prepayment rates used in each loan pool weighted by the balance in each loan pool. The weighted average of the discount rate for mortgage servicing rights was calculated by adding the discount rates used in each loan pool weighted by the balance in each loan pool. The weighted average of the discount rate for the contingent consideration was calculated by adding the discount rates used for the calculation of the fair value of each payment of contingent consideration, weighted by the amount of the payment as part of the total fair value of contingent consideration.

Certain financial instruments and all nonfinancial instruments are excluded from fair value disclosure requirements. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Company. The carrying amounts and estimated fair values of the Company’s other financial instruments that are not accounted for at fair value at September 30, 2021 and December 31, 2020 are as follows:


	September 30, 2021				December 31, 2020
	Carrying		Fair		Carrying		Fair
(000's omitted)	Value		Value		Value		Value
Financial assets:
Net loans	$	7,233,083	$	7,608,456	$	7,355,083	$	7,655,044
Financial liabilities:
Deposits		12,723,821		12,730,674		11,224,974		11,239,628
Securities sold under agreement to repurchase, short-term		316,763		316,763		284,008		284,008
Other Federal Home Loan Bank borrowings		2,912		2,956		6,658		6,758
Subordinated notes payable		3,283		3,283		3,303		3,303
Subordinated debt held by unconsolidated subsidiary trusts		0		0		77,320		77,320

The following is a further description of the principal valuation methods used by the Company to estimate the fair values of its financial instruments.

Loans have been classified as a Level 3 valuation. Fair values for loans are estimated using discounted cash flows and interest rates currently being offered for loans with similar terms to borrowers of similar credit quality.

Deposits have been classified as a Level 2 valuation. The fair value of demand deposits, interest-bearing checking deposits, savings accounts, and money market deposits is the amount payable on demand at the reporting date. The fair value of time deposit obligations are based on current market rates for similar products.

Borrowings and subordinated debt held by unconsolidated subsidiary trusts have been classified as a Level 2 valuation. The fair value of short-term borrowings and securities sold under agreement to repurchase, short-term, is the amount payable on demand at the reporting date. Fair values for long-term debt and subordinated debt held by unconsolidated subsidiary trusts are estimated using discounted cash flows and interest rates currently being offered on similar securities. The difference between the carrying values of long-term borrowings and subordinated debt held by unconsolidated subsidiary trusts, and their fair values, are not material as of the reporting dates.

Other financial assets and liabilities – Cash and cash equivalents have been classified as a Level 1 valuation, while accrued interest receivable and accrued interest payable have been classified as a Level 2 valuation. The fair values of each approximate the respective carrying values because the instruments are payable on demand or have short-term maturities and present relatively low credit risk and interest rate risk.