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Fair Value | 9 Months Ended
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Sep. 30, 2022
Fair Value Disclosures [Abstract] |
Fair Value | FAIR VALUE Fair Value Hierarchy BancShares measures certain financial assets and liabilities at fair value. Fair value is defined 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. U.S. GAAP also establishes a fair value hierarchy, which prioritizes the inputs to valuation techniques used to measure fair value into three levels. 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 lowest level of input significant to the fair value measurement with Level 1 inputs considered highest and Level 3 inputs considered lowest. A brief description of each input level follows: •Level 1 inputs are quoted prices in active markets for identical assets and liabilities. •Level 2 inputs are quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active and inputs other than quoted prices observable for the assets or liabilities and market corroborated inputs. •Level 3 inputs are unobservable inputs for the asset or liability. These unobservable inputs and assumptions reflect the estimates market participants would use in pricing the asset or liability. Assets and Liabilities Measured at Fair Value on a Recurring Basis The following table summarizes BancShares’ assets and liabilities measured at estimated fair value on a recurring basis. Assets and Liabilities Measured at Fair Value - Recurring Basis (dollars in millions)
dollars in millions | September 30, 2022
| Total |  | Level 1 |  | Level 2 |  | Level 3
Assets |  |  |  |  |  |  |
Investment securities available for sale |  |  |  |  |  |  |
U.S. Treasury | $ | 1,900 |  |  | $ | — |  |  | $ | 1,900 |  |  | $ | — |
Government agency | 173 |  |  | — |  |  | 173 |  |  | — |
Residential mortgage-backed securities | 4,784 |  |  | — |  |  | 4,784 |  |  | — |
Commercial mortgage-backed securities | 1,673 |  |  | — |  |  | 1,673 |  |  | — |
Corporate bonds | 558 |  |  | — |  |  | 382 |  |  | 176 |
Total investment securities available for sale | $ | 9,088 |  |  | $ | — |  |  | $ | 8,912 |  |  | $ | 176 |
Marketable equity securities | 92 |  |  | 30 |  |  | 62 |  |  | — |
Loans held for sale | 7 |  |  | — |  |  | 7 |  |  | — |
Derivative assets(1) |  |  |  |  |  |  |
Interest rate contracts — non-qualifying hedges | 143 |  |  | — |  |  | 142 |  |  | 1 |
Other derivative — non-qualifying hedges | 6 |  |  | — |  |  | 6 |  |  | — |
Total derivative assets | $ | 149 |  |  | $ | — |  |  | $ | 148 |  |  | $ | 1 |
Liabilities |  |  |  |  |  |  |
Derivative liabilities(1) |  |  |  |  |  |  |
Interest rate contracts — non-qualifying hedges | $ | 500 |  |  | $ | — |  |  | $ | 500 |  |  | $ | — |
Other derivative— non-qualifying hedges | — |  |  | — |  |  | — |  |  | — |
Total derivative liabilities | $ | 500 |  |  | $ | — |  |  | $ | 500 |  |  | $ | — |
| December 31, 2021
dollars in millions | Total |  | Level 1 |  | Level 2 |  | Level 3
Assets |  |  |  |  |  |  |
Investment securities available for sale |  |  |  |  |  |  |
U.S. Treasury | $ | 2,005 |  |  | $ | — |  |  | $ | 2,005 |  |  | $ | — |
Government agency | 221 |  |  | — |  |  | 221 |  |  | — |
Residential mortgage-backed securities | 4,729 |  |  | — |  |  | 4,729 |  |  | — |
Commercial mortgage-backed securities | 1,640 |  |  | — |  |  | 1,640 |  |  | — |
Corporate bonds | 608 |  |  | — |  |  | 401 |  |  | 207 |
Total investment securities available for sale | $ | 9,203 |  |  | $ | — |  |  | $ | 8,996 |  |  | $ | 207 |
Marketable equity securities | 98 |  |  | 34 |  |  | 64 |  |  | — |
Loans held for sale | 99 |  |  | — |  |  | 99 |  |  | — |
(1) Derivative fair values include accrued interest. The methods and assumptions used to estimate the fair value of each class of financial instruments measured at fair value on a recurring basis are as follows: Investment securities available for sale. The fair value of U.S. Treasury, government agency, mortgage-backed securities, and a portion of the corporate bonds are generally estimated using a third-party pricing service. To obtain an understanding of the processes and methodologies used, management reviews correspondence from the third-party pricing service. Management also performs a price variance analysis process to corroborate the reasonableness of prices. The third-party provider evaluates securities based on comparable investments with trades and market data and will utilize pricing models which use a variety of inputs, such as benchmark yields, reported trades, 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 using inputs that are not directly observable. These securities are classified as Level 3. Marketable equity securities. Equity securities are measured at fair value using observable closing prices. 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 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 considered Level 2 inputs. Derivative Assets and Liabilities. Derivatives were valued using models that incorporate inputs depending on the type of derivative. Other than the fair value of credit derivatives, which were estimated using Level 3 inputs, most derivative instruments were valued using Level 2 inputs based on observed pricing for similar assets and liabilities and model-based valuation techniques for which all significant assumptions are observable in the market. See Note 13 — Derivative Financial Instruments for notional principal amounts and fair values. The following tables summarize information about significant unobservable inputs related to BancShares’ categories of Level 3 financial assets and liabilities measured on a recurring basis. Quantitative Information About Level 3 Fair Value Measurements - Recurring Basis
dollars in millions |  |  |  |  |  |  |  |  |
Financial Instrument | Estimated Fair Value |  | Valuation Technique(s) |  | Significant Unobservable Inputs |  |  |  |
September 30, 2022 |  |  |  |  |  |  |  |  |
Assets |  |  |  |  |  |  |  |  |
Corporate bonds | $ | 176 |  |  | 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. |  |  |  |
Interest rate & other derivative — non-qualifying hedges | $ | 1 |  |  | Internal valuation model |  | Not material |  |  |  |
December 31, 2021 |  |  |  |  |  |  |  |  |
Assets |  |  |  |  |  |  |  |  |
Corporate bonds | $ | 207 |  |  | 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. |  |  |  |
The following table summarizes the changes in estimated fair value for all assets and liabilities measured at estimated fair value on a recurring basis using significant unobservable inputs (Level 3). Changes in Estimated Fair Value of Level 3 Financial Assets and Liabilities - Recurring Basis
dollars in millions | Nine Months Ended September 30, 2022 |  | Nine Months Ended September 30, 2021
| Corporate Bonds |  | Other Derivative Assets — Non-Qualifying |  | Other Derivative Liabilities — Non-Qualifying |  | Corporate Bonds
Beginning balance | $ | 207 |  |  | $ | — |  |  | $ | — |  |  | $ | 317 |
Purchases | — |  |  | — |  |  | 1 |  |  | 31 |
Included in earnings | — |  |  | 1 |  |  | (1) |  |  | 2 |
Included in comprehensive income | (17) |  |  | — |  |  | — |  |  | 4 |
Transfers out | (14) |  |  | — |  |  | — |  |  | — |
Maturity and settlements | — |  |  | — |  |  | — |  |  | (46) |
Ending balance | $ | 176 |  |  | $ | 1 |  |  | $ | — |  |  | $ | 308 |
Fair Value Option The following table summarizes the difference between the aggregate fair value and the UPB for residential real estate loans originated for sale measured at fair value as of September 30, 2022 and December 31, 2021.
dollars in millions | September 30, 2022
| Fair Value |  | Unpaid Principal Balance |  | Difference
Originated loans held for sale | $ | 7 |  |  | $ | 7 |  |  | $ | — |
| December 31, 2021
| Fair Value |  | Unpaid Principal Balance |  | Difference
Originated loans held for sale | $ | 99 |  |  | $ | 96 |  |  | $ | 3 |
BancShares has elected the fair value option for residential real estate loans originated for sale. This election reduces certain timing differences in the Consolidated Statements 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 a loss of $1 million for each of the three months ended September 30, 2022 and 2021 and a loss of $3 million for each of the nine months ended September 30, 2022 and 2021. Interest earned on loans held for sale is recorded within interest income on loans and leases in the Consolidated Statements of Income. No originated loans held for sale were 90 or more days past due or on non-accrual status as of September 30, 2022 or December 31, 2021. Assets Measured at Estimated Fair Value on a Non-recurring Basis Certain assets or liabilities are required to be measured at estimated fair value on a non-recurring basis subsequent to initial recognition. Generally, these adjustments are the result of LOCOM or other impairment accounting. The following table presents carrying value of assets measured at estimated fair value on a non-recurring basis for which gains and losses from a non-recurring fair value adjustment have been recorded in the periods. The gains and losses reflect amounts recorded for the respective periods, regardless of whether the asset is still held at period end. Assets Measured at Fair Value - Non-recurring Basis
dollars in millions | Fair Value Measurements |  |
| Total |  | Level 1 |  | Level 2 |  | Level 3 |  | Total Gains (Losses)
September 30, 2022 |  |  |  |  |  |  |  |  |
Assets held for sale - loans | $ | 3 |  |  | $ | — |  |  | $ | — |  |  | $ | 3 |  |  | $ | (1) |
Loans - collateral dependent loans | 78 |  |  | — |  |  | — |  |  | 78 |  |  | (10) |
Other real estate owned | 51 |  |  | — |  |  | — |  |  | 51 |  |  | 13 |
Mortgage servicing rights | — |  |  | — |  |  | — |  |  | — |  |  | 1 |
Total | $ | 132 |  |  | $ | — |  |  | $ | — |  |  | $ | 132 |  |  | $ | 3 |
December 31, 2021 |  |  |  |  |  |  |  |  |
Loans - collateral dependent loans | $ | 3 |  |  | $ | — |  |  | $ | — |  |  | $ | 3 |  |  | $ | (2) |
Other real estate owned | 34 |  |  | — |  |  | — |  |  | 34 |  |  | (4) |
Mortgage servicing rights | 22 |  |  | — |  |  | — |  |  | 22 |  |  | 3 |
Total | $ | 59 |  |  | $ | — |  |  | $ | — |  |  | $ | 59 |  |  | $ | (3) |
Certain other assets are adjusted to their fair value on a non-recurring basis, including certain loans, OREO, and goodwill, which are periodically tested for impairment, and MSRs, which are carried at the lower of amortized cost or market. Most loans held for investment, deposits, and borrowings are not reported at fair value. The methods and assumptions used to estimate the fair value of each class of financial instruments measured at fair value on a non-recurring basis are as follows: Assets held for sale - loans. Loans held for investment subsequently transferred to held for sale are carried at the lower of cost or market. When available, the fair values for the transferred loans are based on quoted prices from the purchase commitments for the individual loans being transferred and are considered Level 1 inputs. The fair value of Level 2 assets was primarily estimated based on prices of recent trades of similar assets. For other loans held for sale, the fair value of Level 3 assets was primarily measured under the income approach using the discounted cash flow model based on Level 3 inputs including discount rate or the price of committed trades. Loans - collateral dependent loans. The population of Level 3 loans measured at fair value on a non-recurring basis includes collateral-dependent loans evaluated individually. Collateral values are determined using appraisals or other third-party value estimates of the subject property discounted based on estimated selling costs, and immaterial adjustments for other external factors that may impact the marketability of the collateral. Other real estate owned. OREO is carried at the lower of cost or fair value. OREO 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, 2022 and December 31, 2021, the weighted average discount applied was 6.82% and 8.79%, respectively. 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 are ordered to ensure the reported values reflect the most current information. Mortgage servicing rights. MSRs are carried at the lower of amortized cost or market and are, therefore, carried at fair value only when fair value is less than amortized cost. The fair value of MSRs is determined using a pooling methodology. Similar loans are pooled together and a discounted cash flow model, which takes into consideration discount rates, prepayment rates, and the weighted average cost to service the loans, is used to determine the fair value. Financial Instruments Fair Value The table below presents the carrying values and estimated fair values for financial instruments, excluding leases and certain other assets and liabilities for which these disclosures are not required. Carrying Values and Fair Values of Financial Assets and Liabilities
dollars in millions | September 30, 2022
|  |  | Estimated Fair Value
| Carrying Value |  | Level 1 |  | Level 2 |  | Level 3 |  | Total
Financial Assets |  |  |  |  |  |  |  |  |
Cash and due from banks | $ | 481 |  |  | $ | 481 |  |  | $ | — |  |  | $ | — |  |  | $ | 481 |
Interest earning deposits at banks | 6,172 |  |  | 6,172 |  |  | — |  |  | — |  |  | 6,172 |
Investment in marketable equity securities | 92 |  |  | 30 |  |  | 62 |  |  | — |  |  | 92 |
Investment securities available for sale | 9,088 |  |  | — |  |  | 8,912 |  |  | 176 |  |  | 9,088 |
Investment securities held to maturity | 9,661 |  |  | — |  |  | 8,166 |  |  | — |  |  | 8,166 |
Loans held for sale | 18 |  |  | — |  |  | 7 |  |  | 14 |  |  | 21 |
Net loans | 66,757 |  |  | — |  |  | 1,612 |  |  | 61,280 |  |  | 62,892 |
Accrued interest receivable | 286 |  |  | — |  |  | 286 |  |  | — |  |  | 286 |
Federal Home Loan Bank stock | 234 |  |  | — |  |  | 234 |  |  | — |  |  | 234 |
Mortgage and other servicing rights | 26 |  |  | — |  |  | — |  |  | 48 |  |  | 48 |
Derivative assets | 149 |  |  | — |  |  | 148 |  |  | 1 |  |  | 149 |
Financial Liabilities |  |  |  |  |  |  |  |  |
Deposits | 87,553 |  |  | — |  |  | 87,435 |  |  | — |  |  | 87,435 |
Credit balances of factoring clients | 1,147 |  |  | — |  |  | — |  |  | 1,147 |  |  | 1,147 |
Securities sold under customer repurchase agreements | 578 |  |  | — |  |  | 578 |  |  | — |  |  | 578 |
Other short-term borrowings | 2,550 |  |  | — |  |  | 2,550 |  |  | — |  |  | 2,550 |
Long-term borrowings | 5,207 |  |  | — |  |  | 5,042 |  |  | 17 |  |  | 5,059 |
Accrued interest payable | 35 |  |  | — |  |  | 35 |  |  | — |  |  | 35 |
Derivative liabilities | 500 |  |  | — |  |  | 500 |  |  | — |  |  | 500 |
| December 31, 2021
|  |  | Estimated Fair Value
| Carrying Value |  | Level 1 |  | Level 2 |  | Level 3 |  | Total
Financial Assets |  |  |  |  |  |  |  |  |
Cash and due from banks | $ | 338 |  |  | $ | 338 |  |  | $ | — |  |  | $ | — |  |  | $ | 338 |
Interest earning deposits at banks | 9,115 |  |  | 9,115 |  |  | — |  |  | — |  |  | 9,115 |
Investment in marketable equity securities | 98 |  |  | 34 |  |  | 64 |  |  | — |  |  | 98 |
Investment securities available for sale | 9,203 |  |  | — |  |  | 8,996 |  |  | 207 |  |  | 9,203 |
Investment securities held to maturity | 3,809 |  |  | — |  |  | 3,759 |  |  | — |  |  | 3,759 |
Loans held for sale | 99 |  |  | — |  |  | 99 |  |  | — |  |  | 99 |
Net loans | 32,193 |  |  | — |  |  | — |  |  | 31,890 |  |  | 31,890 |
Accrued interest receivable | 134 |  |  | — |  |  | 134 |  |  | — |  |  | 134 |
Federal Home Loan Bank stock | 40 |  |  | — |  |  | 40 |  |  | — |  |  | 40 |
Mortgage and other servicing rights | 23 |  |  | — |  |  | — |  |  | 23 |  |  | 23 |
Financial Liabilities |  |  |  |  |  |  |  |  |
Deposits with no stated maturity | 48,925 |  |  | — |  |  | 48,925 |  |  | — |  |  | 48,925 |
Time deposits | 2,481 |  |  | — |  |  | 2,471 |  |  | — |  |  | 2,471 |
Securities sold under customer repurchase agreements | 589 |  |  | — |  |  | 589 |  |  | — |  |  | 589 |
Long-term borrowings | 1,195 |  |  | — |  |  | 1,222 |  |  | — |  |  | 1,222 |
Accrued interest payable | 8 |  |  | — |  |  | 8 |  |  | — |  |  | 8 |
The methods and assumptions used to estimate the fair value of each class of financial instruments not discussed elsewhere are as follows: Net loans. The carrying value of net loans is net of the ACL. Loans are generally valued by discounting expected cash flows using market inputs with adjustments based on cohort level assumptions for certain loan types as well as internally developed estimates at a business segment level. Due to the significance of the unobservable market inputs and assumptions, as well as the absence of a liquid secondary market for most loans, these loans are classified as Level 3. Certain loans are measured based on observable market prices sourced from external data providers and classified as Level 2. Nonaccrual loans are written down and reported at their estimated recovery value which approximates their fair value and classified as Level 3. Investment securities held to maturity. BancShares’ portfolio of held to maturity debt securities consists of mortgage-backed securities issued by government agencies and government sponsored entities, U.S. Treasury notes, unsecured bonds issued by government agencies and government sponsored entities, securities issued by the World Bank and FDIC guaranteed CDs with other financial institutions. We primarily use prices obtained from pricing services to determine the fair value of securities, which are Level 2 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 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 initially recorded at fair value and subsequently carried at the lower of amortized cost or market. Therefore, servicing rights are carried at fair value only when fair value is less than the amortized cost. The fair value of mortgage and other servicing rights is determined using a pooling methodology. Similar loans are pooled together and a model which 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. The estimated fair value of deposits with no stated maturity, such as demand deposit accounts, money market accounts, and savings accounts was the amount payable on demand at the reporting date. The fair value of time deposits was estimated based on a discounted cash flow technique using Level 2 inputs appropriate to the contractual maturity. Credit balances of factoring clients. The impact of the time value of money from the unobservable discount rate for credit balances of factoring clients is inconsequential due to the short term nature of these balances, therefore, the fair value approximated carrying value, and the credit balances were classified as Level 3 Short-term borrowed funds. Includes federal funds purchased, repurchase agreements and certain other short-term borrowings and payables. The fair value approximates carrying value and are classified as Level 2. Long-term 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, senior and subordinated debentures, and other borrowings are considered Level 2 inputs. The fair value of other secured borrowings was estimated based on unobservable inputs and are classified as Level 3. For all other financial assets and financial liabilities, the carrying value is a reasonable estimate of the fair value as of September 30, 2022 and December 31, 2021. 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, and interest earning deposits at banks, are classified on the fair value hierarchy as Level 1. Accrued interest receivable and accrued interest payable are classified as Level 2.

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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 https://asc.fasb.org/extlink&oid=126976982&loc=d3e19207-110258 + Details
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