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Estimated Fair Values | 9 Months Ended
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Sep. 30, 2021
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. Accuracy of the levels of the fair value hierarchy are validated and 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 and held to maturity. The fair value of U.S. Treasury, government agency and mortgage-backed securities, municipal securities, as well as a portion of corporate bonds, is generally estimated 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. The remaining corporate bonds held are generally measured at fair value based on indicative bids from broker-dealers which are unadjusted and are not directly observable. These securities are considered Level 3. Investment in marketable equity securities. Equity securities are measured at fair value using observable closing prices and the market activity. 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. Management elects the fair value option on certain residential real estate loans originated to be sold to investors. The loans 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. Loans held for investment subsequently transferred to held for sale are carried at the lower of cost or market. Transfers occur when management intends to sell a pool of loans in the secondary market. This typically occurs when a firm commitment to purchase from a counterparty exists. The fair value of the transferred loans is based on the quoted prices and is considered a Level 1 input. Net loans and leases. 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 and other servicing rights. Mortgage and other servicing rights are carried at the lower of amortized cost or market value and are, therefore, carried at fair value only when fair value is less than the amortized cost. The fair value of mortgage and other 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 and other 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 with similar remaining maturities. The inputs used in the fair value measurement for deposits are considered Level 2 inputs. Borrowings. For borrowings, 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 FHLB borrowings, subordinated debentures, and other borrowings 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 was determined based on payments to the FDIC in accordance with the shared-loss agreements. Cash flows were 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 were 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 liabilities, the carrying value is a reasonable estimate of the fair value as of September 30, 2021 and December 31, 2020. 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, securities sold under customer repurchase agreements, 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, 2021 and December 31, 2020:
(Dollars in thousands) | September 30, 2021 |  | December 31, 2020
Carrying value |  | Fair value |  | Carrying value |  | Fair value
Assets |  |  |  |  |  |  |
Cash and due from banks | $ | 337,450 |  |  | $ | 337,450 |  |  | $ | 362,048 |  |  | $ | 362,048 |
Overnight investments | 9,875,063 |  |  | 9,875,063 |  |  | 4,347,336 |  |  | 4,347,336 |
Investment in marketable equity securities | 123,147 |  |  | 123,147 |  |  | 91,680 |  |  | 91,680 |
Investment securities available for sale | 7,371,129 |  |  | 7,371,129 |  |  | 7,014,243 |  |  | 7,014,243 |
Investment securities held to maturity | 3,381,078 |  |  | 3,353,078 |  |  | 2,816,982 |  |  | 2,838,499 |
Loans held for sale | 98,451 |  |  | 98,451 |  |  | 124,837 |  |  | 124,837 |
Net loans and leases | 32,332,995 |  |  | 32,349,172 |  |  | 32,567,661 |  |  | 33,298,166 |
Income earned not collected | 132,911 |  |  | 132,911 |  |  | 145,694 |  |  | 145,694 |
Federal Home Loan Bank stock | 40,450 |  |  | 40,450 |  |  | 45,392 |  |  | 45,392 |
Mortgage and other servicing rights | 22,263 |  |  | 22,624 |  |  | 19,628 |  |  | 20,283 |
Liabilities |  |  |  |  |  |  |
Deposits with no stated maturity | 47,492,194 |  |  | 47,492,194 |  |  | 40,542,596 |  |  | 40,542,596 |
Time deposits | 2,573,568 |  |  | 2,573,131 |  |  | 2,889,013 |  |  | 2,905,577 |
Securities sold under customer repurchase agreements | 663,575 |  |  | 663,575 |  |  | 641,487 |  |  | 641,487 |
Federal Home Loan Bank borrowings | 645,663 |  |  | 659,625 |  |  | 655,175 |  |  | 677,579 |
Subordinated debt | 497,427 |  |  | 520,871 |  |  | 504,518 |  |  | 525,610 |
Other borrowings | 76,139 |  |  | 76,643 |  |  | 88,470 |  |  | 89,263 |
FDIC shared-loss payable | — |  |  | — |  |  | 15,601 |  |  | 15,843 |
Accrued interest payable | 6,560 |  |  | 6,560 |  |  | 9,414 |  |  | 9,414 |
For assets and liabilities carried at fair value on a recurring basis, the following table provides fair value information as of September 30, 2021 and December 31, 2020:
| September 30, 2021
|  |  | 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 |  |  |  |  |  |  |
Government agency | $ | 853,728 |  |  | $ | — |  |  | $ | 853,728 |  |  | $ | — |
Residential mortgage-backed securities | 4,801,646 |  |  | — |  |  | 4,801,646 |  |  | — |
Commercial mortgage-backed securities | 1,090,652 |  |  | — |  |  | 1,090,652 |  |  | — |
Corporate bonds | 625,103 |  |  | — |  |  | 316,968 |  |  | 308,135 |
Total investment securities available for sale | $ | 7,371,129 |  |  | $ | — |  |  | $ | 7,062,994 |  |  | $ | 308,135 |
Marketable equity securities | $ | 123,147 |  |  | $ | 52,991 |  |  | $ | 70,156 |  |  | $ | — |
Loans held for sale | $ | 98,451 |  |  | $ | — |  |  | $ | 98,451 |  |  | $ | — |
| December 31, 2020
|  |  | 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 | $ | 499,933 |  |  | $ | — |  |  | $ | 499,933 |  |  | $ | — |
Government agency | 701,391 |  |  | — |  |  | 701,391 |  |  | — |
Residential mortgage-backed securities | 4,438,103 |  |  | — |  |  | 4,438,103 |  |  | — |
Commercial mortgage-backed securities | 771,537 |  |  | — |  |  | 771,537 |  |  | — |
Corporate bonds | 603,279 |  |  | — |  |  | 286,655 |  |  | 316,624 |
Total investment securities available for sale | $ | 7,014,243 |  |  | $ | — |  |  | $ | 6,697,619 |  |  | $ | 316,624 |
Marketable equity securities | $ | 91,680 |  |  | $ | 32,855 |  |  | $ | 58,825 |  |  | $ | — |
Loans held for sale | $ | 124,837 |  |  | $ | — |  |  | $ | 124,837 |  |  | $ | — |
The following tables summarize activity for Level 3 assets carried at fair value on a recurring basis:
| Corporate bonds
| Three months ended September 30 |  | Nine months ended September 30
(Dollars in thousands) | 2021 |  | 2020 |  | 2021 |  | 2020
Beginning balance | $ | 325,448 |  |  | $ | 169,977 |  |  | $ | 316,624 |  |  | $ | 69,685 |
Purchases | 23,878 |  |  | 78,000 |  |  | 30,878 |  |  | 178,595 |
Unrealized net losses (gains) included in other comprehensive income | 436 |  |  | 2,818 |  |  | 3,927 |  |  | 901 |
Amounts included in net income | 2,504 |  |  | (81) |  |  | 2,687 |  |  | (249) |
Transfers in | — |  |  | — |  |  | — |  |  | 1,782 |
Sales / Calls | (44,131) |  |  | — |  |  | (45,981) |  |  | — |
Ending balance | $ | 308,135 |  |  | $ | 250,714 |  |  | $ | 308,135 |  |  | $ | 250,714 |
During the three months ended September 30, 2021 and 2020, there were no transfers between levels. During the nine months ended September 30, 2021 there were no transfers from Level 2 to Level 3, compared to $1.8 million for the same period of 2020. The transfers were due to a lack of observable inputs and trade activity for those securities. The following table presents quantitative information about Level 3 fair value measurements for fair value on a recurring basis at September 30, 2021:
(Dollars in thousands) |  |  |  | September 30, 2021
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 issuer |  | $ | 308,135 |
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 were recorded as a component of mortgage income and included losses of $0.6 million and gains of $0.6 million for the three months ended September 30, 2021 and 2020, respectively. The changes in fair value included a loss of $2.9 million and a gain of $4.2 million for nine months ended September 30, 2021 and 2020, respectively. Interest earned on loans held for sale is recorded within interest income on loans and leases in the consolidated statements of income. 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, 2021 and December 31, 2020:
| September 30, 2021
(Dollars in thousands) | Fair value |  | Aggregate unpaid principal balance |  | Difference
Originated loans held for sale | $ | 98,451 |  |  | $ | 95,396 |  |  | $ | 3,055 |
| December 31, 2020
| Fair value |  | Aggregate unpaid principal balance |  | Difference
Originated loans held for sale | $ | 124,837 |  |  | $ | 118,902 |  |  | $ | 5,935 |
No originated loans held for sale were 90 or more days past due or on nonaccrual status as of September 30, 2021 or December 31, 2020. BancShares may be required to measure certain financial assets at fair value on a nonrecurring basis. These adjustments to fair value usually result from the application of lower of amortized cost or fair value accounting or write-downs of individual assets due to impairment. The population of loans measured at fair value on a non-recurring basis is limited to collateral-dependent loans evaluated individually. These collateral-dependent loans are deemed to be at fair value if there is an associated ACL or if a charge-off has been recorded in the previous 12 months. A large majority of collateral for these loans is real property. Collateral values are determined using appraisals or other third-party value estimates of the subject property discounted based on estimated selling costs, generally between 5% and 10%, and immaterial adjustments for other external factors that may impact the marketability of the collateral. The weighted average discount for estimated selling costs applied to real estate collateral was 8%. OREO acquired or written down within the previous 12 months is deemed to be at fair value. Asset valuations are determined by using appraisals or other third-party value estimates of the subject property with discounts generally between 6% and 15% applied for estimated selling costs and other external factors that may impact the marketability of the property. At September 30, 2021, the weighted average discount applied was 8%. 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, 2021 and December 31, 2020:
| September 30, 2021
|  |  | Fair value measurements using:
(Dollars in thousands) | Fair value |  | Level 1 inputs |  | Level 2 inputs |  | Level 3 inputs
Collateral-dependent loans | $ | 12,185 |  |  | $ | — |  |  | $ | — |  |  | $ | 12,185 |
Other real estate owned | 32,391 |  |  | — |  |  | — |  |  | 32,391 |
Mortgage servicing rights | 20,210 |  |  | — |  |  | — |  |  | 20,210 |
| December 31, 2020
|  |  | Fair value measurements using:
| Fair value |  | Level 1 inputs |  | Level 2 inputs |  | Level 3 inputs
Collateral-dependent loans | $ | 11,779 |  |  | $ | — |  |  | $ | — |  |  | $ | 11,779 |
Other real estate owned | 40,115 |  |  | — |  |  | — |  |  | 40,115 |
Mortgage servicing rights | 16,966 |  |  | — |  |  | — |  |  | 16,966 |
No financial liabilities were carried at fair value on a nonrecurring basis as of September 30, 2021 and December 31, 2020.

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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://www.xbrl.org/2003/role/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 820 -SubTopic 10 -Section 50 -Paragraph 2 -URI http://asc.fasb.org/extlink&oid=117815213&loc=d3e19207-110258 + Details
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