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Estimated Fair Values | 9 Months Ended
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Sep. 30, 2018
Fair Value Disclosures [Abstract] |
Estimated Fair Values | ESTIMATED FAIR VALUES Fair value estimates are intended to represent the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants as of the measurement date. Where there is no active market for a financial instrument, BancShares has made estimates using discounted cash flows or other valuation techniques. Inputs used in these valuation techniques are subjective in nature, involve uncertainties and require significant judgment and therefore can only be derived within a range of precision. Accordingly, the derived fair value estimates presented below are not necessarily indicative of the amounts BancShares would realize in a current market exchange. ASC 820, Fair Value Measurements and Disclosures, indicates that assets and liabilities are recorded at fair value according to a fair value hierarchy comprised of three levels. The levels are based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. The level within the fair value hierarchy for an asset or liability is based on the highest level of input that is significant to the fair value measurement (with Level 1 considered highest and Level 3 considered lowest). A brief description of each level follows:
• | Level 1 values are based on quoted prices for identical instruments in active markets.
• | Level 2 values are based on quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active and model-based valuation techniques for which all significant assumptions are observable in the market.
• | Level 3 values are derived from valuation techniques in which one or more significant inputs or assumptions are not observable in the market. These unobservable inputs and assumptions reflect estimates that market participants would use in pricing the asset or liability. Valuation techniques include the use of discounted cash flow models and similar techniques.
BancShares' management reviews any changes to its valuation methodologies to ensure they are appropriate and supportable, and refines valuation methodologies as more market-based data becomes available. Transfers between levels of the fair value hierarchy are recognized at the end of the reporting period. The methodologies used to estimate the fair value of financial assets and financial liabilities are discussed below: Investment securities available for sale. Investment securities available for sale are carried at fair value. U.S. Treasury, government agency and mortgage-backed securities are generally measured at fair value using a third party pricing service. The third party provider evaluates securities based on comparable investments with trades and market data and will utilize pricing models that use a variety of inputs, such as benchmark yields, reported trades, broker-dealer quotes, issuer spreads, benchmark securities, bids and offers as needed. These securities are generally classified as Level 2. Corporate bonds and trust preferred securities are generally measured at fair value based on indicative bids from broker-dealers and are not directly observable. These securities are considered Level 3. Marketable equity securities. Equity securities are measured at fair value using observable closing prices and the valuation also considers the amount of market activity by examining the trade volume of each security. Equity securities are classified as Level 1 if they are traded in an active market and as Level 2 if the observable closing price is from a less than active market. Loans held for sale. Certain residential real estate loans that are originated to be sold to investors are carried at fair value based on quoted market prices for similar types of loans. Accordingly, the inputs used to calculate fair value of originated residential real estate loans held for sale are classified as Level 2 inputs. Portfolio loans that are subsequently transferred to held for sale to be sold in the secondary market are carried at the lower of amortized cost or fair value. The fair value of the transferred portfolio loans is based on the quoted prices and is considered a Level 1 input. Net loans and leases (PCI and Non-PCI). Fair value is estimated based on discounted future cash flows using the current interest rates at which loans with similar terms would be made to borrowers of similar credit quality. The inputs used in the fair value measurements for loans and leases are considered Level 3 inputs. FHLB stock. The carrying amount of FHLB stock is a reasonable estimate of fair value as these securities are not readily marketable and are evaluated for impairment based on the ultimate recoverability of the par value. BancShares considers positive and negative evidence, including the profitability and asset quality of the issuer, dividend payment history and recent redemption experience, when determining the ultimate recoverability of the par value. BancShares believes its investment in FHLB stock is ultimately recoverable at par. The inputs used in the fair value measurement for the FHLB stock are considered Level 2 inputs. Mortgage servicing rights. Mortgage servicing rights are carried at the lower of amortized cost or market and are, therefore, carried at fair value only when fair value is less than the amortized cost. The fair value of mortgage servicing rights is performed using a pooling methodology. Similar loans are pooled together and a model that relies on discount rates, estimates of prepayment rates and the weighted average cost to service the loans is used to determine the fair value. The inputs used in the fair value measurement for mortgage servicing rights are considered Level 3 inputs. Deposits. For non-time deposits, carrying value is a reasonable estimate of fair value. The fair value of time deposits is estimated by discounting future cash flows using the interest rates currently offered for deposits of similar remaining maturities. The inputs used in the fair value measurement for deposits are considered Level 2 inputs. Long-term obligations. For long-term obligations, the fair values are determined based on recent trades or sales of the actual security if available, otherwise, fair values are estimated by discounting future cash flows using current interest rates for similar financial instruments. The inputs used in the fair value measurement for long-term obligations are considered Level 2 inputs. Payable to the FDIC for shared-loss agreements. The fair value of the payable to the FDIC for shared-loss agreements is determined by the projected cash flows based on expected payments to the FDIC in accordance with the shared-loss agreements. Cash flows are discounted using current discount rates to reflect the timing of the estimated amounts due to the FDIC. The inputs used in the fair value measurement for the payable to the FDIC are considered Level 3 inputs. Off-balance-sheet commitments and contingencies. Carrying amounts are reasonable estimates of the fair values for such financial instruments. Carrying amounts include unamortized fee income and, in some cases, reserves for any credit losses from those financial instruments. These amounts are not material to BancShares' financial position. For all other financial assets and financial liabilities, the carrying value is a reasonable estimate of the fair value as of September 30, 2018 and December 31, 2017. The carrying value and fair value for these assets and liabilities are equivalent because they are relatively short term in nature and there is no interest rate or credit risk that would cause the fair value to differ from the carrying value. Cash and due from banks is classified on the fair value hierarchy as Level 1. Overnight investments, income earned not collected, short-term borrowings and accrued interest payable are considered Level 2. The table presents the carrying values and estimated fair values for financial instruments as of September 30, 2018 and December 31, 2017.
(Dollars in thousands) | September 30, 2018 |  | December 31, 2017
Carrying value |  | Fair value |  | Carrying value |  | Fair value
Cash and due from banks | $ | 262,525 |  |  | $ | 262,525 |  |  | $ | 336,150 |  |  | $ | 336,150 |
Overnight investments | 943,025 |  |  | 943,025 |  |  | 1,387,927 |  |  | 1,387,927 |
Investment securities available for sale | 4,677,351 |  |  | 4,677,351 |  |  | 7,180,180 |  |  | 7,180,180 |
Investment securities held to maturity | 2,253,416 |  |  | 2,238,664 |  |  | 76 |  |  | 81 |
Marketable equity securities | 109,907 |  |  | 109,907 |  |  | — |  |  | — |
Loans held for sale | 46,082 |  |  | 46,082 |  |  | 51,179 |  |  | 51,179 |
Net loans and leases | 24,667,150 |  |  | 23,955,732 |  |  | 23,374,932 |  |  | 22,257,803 |
Income earned not collected | 105,616 |  |  | 105,616 |  |  | 95,249 |  |  | 95,249 |
Federal Home Loan Bank stock | 28,438 |  |  | 28,438 |  |  | 52,685 |  |  | 52,685 |
Mortgage servicing rights | 21,633 |  |  | 28,829 |  |  | 21,945 |  |  | 26,170 |
Deposits | 30,163,537 |  |  | 30,115,380 |  |  | 29,266,275 |  |  | 29,230,768 |
Short-term borrowings | 687,749 |  |  | 687,749 |  |  | 693,807 |  |  | 693,807 |
Long-term obligations | 297,487 |  |  | 303,935 |  |  | 870,240 |  |  | 852,112 |
Payable to the FDIC for shared-loss agreements | 104,576 |  |  | 104,615 |  |  | 101,342 |  |  | 102,684 |
Accrued interest payable | 2,400 |  |  | 2,400 |  |  | 3,952 |  |  | 3,952 |
Among BancShares' assets and liabilities, investment securities available for sale, marketable equity securities and loans held for sale are reported at their fair values on a recurring basis. For assets and liabilities carried at fair value on a recurring basis, the following table provides fair value information as of September 30, 2018 and December 31, 2017.
| September 30, 2018
|  |  | Fair value measurements using:
(Dollars in thousands) | Fair value |  | Level 1 inputs |  | Level 2 inputs |  | Level 3 inputs
Assets measured at fair value |  |  |  |  |  |  |
Investment securities available for sale |  |  |  |  |  |  |
U.S. Treasury | $ | 1,505,434 |  |  | $ | — |  |  | $ | 1,505,434 |  |  | $ | — |
Government agency | 127,545 |  |  | — |  |  | 127,545 |  |  | — |
Mortgage-backed securities | 2,919,796 |  |  | — |  |  | 2,919,796 |  |  | — |
Corporate bonds | 119,933 |  |  | — |  |  | — |  |  | 119,933 |
Other | 4,643 |  |  | — |  |  | — |  |  | 4,643 |
Total investment securities available for sale | $ | 4,677,351 |  |  | $ | — |  |  | $ | 4,552,775 |  |  | $ | 124,576 |
Marketable equity securities | $ | 109,907 |  |  | $ | 20,242 |  |  | $ | 89,665 |  |  | $ | — |
Loans held for sale | $ | 46,082 |  |  | $ | — |  |  | $ | 46,082 |  |  | $ | — |
| December 31, 2017
|  |  | Fair value measurements using:
| Fair value |  | Level 1 inputs |  | Level 2 inputs |  | Level 3 inputs
Assets measured at fair value |  |  |  |  |  |  |
Investment securities available for sale |  |  |  |  |  |  |
U.S. Treasury | $ | 1,657,864 |  |  | $ | — |  |  | $ | 1,657,864 |  |  | $ | — |
Government agency | 8,670 |  |  | — |  |  | 8,670 |  |  | — |
Mortgage-backed securities | 5,340,756 |  |  | — |  |  | 5,340,756 |  |  | — |
Equity securities | 105,208 |  |  | 19,341 |  |  | 85,867 |  |  | — |
Corporate bonds | 59,963 |  |  | — |  |  | 59,963 |  |  | — |
Other | 7,719 |  |  | — |  |  | 7,719 |  |  | — |
Total investment securities available for sale | $ | 7,180,180 |  |  | $ | 19,341 |  |  | $ | 7,160,839 |  |  | $ | — |
Loans held for sale | $ | 51,179 |  |  | $ | — |  |  | $ | 51,179 |  |  | $ | — |
During the three months ended September 30, 2018, there were no transfers between levels. For the nine months ended September 30, 2018, there were transfers from Level 2 to Level 3 of $59.7 million and $5.6 million of corporate bonds and other investment securities available for sale, respectively. The transfers were due to a lack of observable inputs and trade activity for those securities. There were no transfers between levels for the three and nine months ended September 30, 2017. The following tables summarize activity for Level 3 assets:
|  | Three months ended September 30, 2018
(Dollars in thousands) |  | Corporate bonds |  | Other
Balance at July 1, 2018 |  | $ | 108,790 |  |  | $ | 5,643 |
Amounts included in net income |  | 69 |  |  | 7 |
Unrealized net gains (losses) included in other comprehensive income |  | 74 |  |  | (7 | )
Purchases |  | 11,000 |  |  | — |
Sales / Calls |  | — |  |  | (1,000 | )
Balance at September 30, 2018 |  | $ | 119,933 |  |  | $ | 4,643 |
|  | Nine months ended September 30, 2018
(Dollars in thousands) |  | Corporate bonds |  | Other
Balance at January 1, 2018 |  | $ | — |  |  | $ | — |
Transfers in |  | 59,653 |  |  | 5,618 |
Amounts included in net income |  | 117 |  |  | 14 |
Unrealized net (losses) gains included in other comprehensive income |  | (23 | ) |  | 11 |
Purchases |  | 62,591 |  |  | — |
Sales / Calls |  | (2,405 | ) |  | (1,000 | )
Balance at September 30, 2018 |  | $ | 119,933 |  |  | $ | 4,643 |
The following table presents quantitative information about Level 3 fair value measurements for fair value on a recurring basis at September 30, 2018.
(Dollars in thousands) |  |  |  | September 30, 2018
Level 3 assets |  | Valuation technique |  | Significant unobservable input |  | Fair Value
Corporate bonds |  | Indicative bid provided by broker |  | Multiple factors, including but not limited to, current operations, financial condition, cash flows, and recently executed financing transactions related to the company |  | $ | 119,933 |
Other |  | Indicative bid provided by broker |  | Multiple factors, including but not limited to, current operations, financial condition, cash flows, and recently executed financing transactions related to the company |  | 4,643 |
Fair Value Option BancShares has elected the fair value option for residential real estate loans originated to be sold. This election reduces certain timing differences in the Consolidated Statement of Income and better aligns with the management of the portfolio from a business perspective. The changes in fair value are recorded as a component of mortgage income and included a loss of $773 thousand and a gain of $104 thousand for the three months ended September 30, 2018 and September 30, 2017, respectively. For the nine months ended September 30, 2018 and 2017, the changes in fair value were a loss of $528 thousand and a gain of $3.6 million, respectively. The following table summarizes the difference between the aggregate fair value and the aggregate unpaid principal balance for residential real estate originated for sale measured at fair value as of September 30, 2018 and December 31, 2017.
| September 30, 2018
(Dollars in thousands) | Fair Value |  | Aggregate Unpaid Principal Balance |  | Difference
Originated loans held for sale | $ | 46,082 |  |  | $ | 45,221 |  |  | $ | 861 |
| December 31, 2017
| Fair Value |  | Aggregate Unpaid Principal Balance |  | Difference
Originated loans held for sale | $ | 51,179 |  |  | $ | 49,796 |  |  | $ | 1,383 |
No originated loans held for sale were 90 or more days past due or on nonaccrual status as of September 30, 2018 or December 31, 2017. Certain other assets are adjusted to their fair value on a nonrecurring basis, including impaired loans, OREO, and goodwill, which are periodically tested for impairment, and mortgage servicing rights, which are carried at the lower of amortized cost or market. Non-impaired loans held for investment, deposits, short-term borrowings and long-term obligations are not reported at fair value. Impaired loans are deemed to be at fair value if an associated allowance or current period charge-off has been recorded. The value of impaired loans is determined by either collateral valuations or discounted present value of the expected cash flow calculations. Collateral values are determined using appraisals or other third-party value estimates of the subject property with discounts generally between 6 and 11 percent applied for estimated selling costs and other external factors that may impact the marketability of the property. Expected cash flows are determined using expected payment information at the individual loan level, discounted using the effective interest rate. The effective interest rate generally ranges between 2 and 18 percent. OREO that has been acquired or written down in the current year is deemed to be at fair value, which uses asset valuations. Asset values are determined using appraisals or other third-party value estimates of the subject property with discounts generally between 6 and 11 percent applied for estimated selling costs and other external factors that may impact the marketability of the property. Changes to the value of the assets between scheduled valuation dates are monitored through continued communication with brokers and monthly reviews by the asset manager assigned to each asset. If there are any significant changes in the market or the subject property, valuations are adjusted or new appraisals ordered to ensure the reported values reflect the most current information. For financial assets and liabilities carried at fair value on a nonrecurring basis, the following table provides fair value information as of September 30, 2018 and December 31, 2017.
| September 30, 2018
|  |  | Fair value measurements using:
(Dollars in thousands) | Fair value |  | Level 1 inputs |  | Level 2 inputs |  | Level 3 inputs
Impaired loans | $ | 107,614 |  |  | $ | — |  |  | $ | — |  |  | $ | 107,614 |
Other real estate remeasured during current year | 27,027 |  |  | — |  |  | — |  |  | 27,027 |
| December 31, 2017
|  |  | Fair value measurements using:
| Fair value |  | Level 1 inputs |  | Level 2 inputs |  | Level 3 inputs
Impaired loans | $ | 72,539 |  |  | $ | — |  |  | $ | — |  |  | $ | 72,539 |
Other real estate remeasured during current year | 40,167 |  |  | — |  |  | — |  |  | 40,167 |
No financial liabilities were carried at fair value on a nonrecurring basis as of September 30, 2018 and December 31, 2017.

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- Definition The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information. + References Reference 1: http://fasb.org/us-gaap/role/ref/legacyRef -Publisher FASB -Name Accounting Standards Codification -Topic 820 -URI http://asc.fasb.org/topic&trid=2155941 + Details
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