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Estimated Fair Values
12 Months Ended
Dec. 31, 2017
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 to these valuation techniques are subjective in nature, involve uncertainties and require significant judgment and therefore cannot be determined with precision. Accordingly, the derived fair value estimates presented below are not necessarily indicative of the amounts BancShares could 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 generated from model-based techniques that use at least one significant assumption not observable in the market. These unobservable 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 justified, 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. There have been no changes for 2017 or 2016.
The methodologies used to estimate the fair value of financial assets and financial liabilities are discussed below:
Investment securities available for sale. U.S. Treasury, government agency, mortgage-backed securities, municipal securities, corporate bonds and trust preferred securities are generally measured at fair value using a third party pricing service or recent comparable market transactions in similar or identical securities and are classified as Level 2 instruments. 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 on a heavily 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 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. An additional valuation adjustment is made for liquidity. 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 asset 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 fixed rate trust preferred securities, the fair values are determined based on recent trades of the actual security if available. For other long-term obligations, 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 December 31, 2017 and 2016. 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. Lastly, the receivable from the FDIC for shared-loss agreements is designated as Level 3.
 
December 31, 2017
 
December 31, 2016
(Dollars in thousands)
Carrying value
 
Fair value
 
Carrying value
 
Fair value
Cash and due from banks
$
336,150

 
$
336,150

 
$
539,741

 
$
539,741

Overnight investments
1,387,927

 
1,387,927

 
1,872,594

 
1,872,594

Investment securities available for sale
7,180,180

 
7,180,180

 
7,006,580

 
7,006,580

Investment securities held to maturity
76

 
81

 
98

 
104

Loans held for sale
51,179

 
51,179

 
74,401

 
74,401

Net loans and leases
23,374,932

 
22,257,803

 
21,519,083

 
20,614,548

Receivable from the FDIC for shared-loss agreements
2,223

 
2,223

 
4,172

 
4,172

Income earned not collected
95,249

 
95,249

 
79,839

 
79,839

Federal Home Loan Bank stock
52,685

 
52,685

 
43,495

 
43,495

Mortgage servicing rights
21,945

 
26,170

 
20,415

 
24,446

Deposits
29,266,275

 
29,230,768

 
28,161,343

 
28,135,698

Short-term borrowings
693,807

 
693,807

 
603,487

 
603,487

Long-term obligations
870,240

 
852,112

 
832,942

 
832,201

Payable to the FDIC for shared-loss agreements
101,342

 
102,684

 
97,008

 
100,069

Accrued interest payable
3,952

 
3,952

 
3,797

 
3,797



Among BancShares’ assets and liabilities, investment securities available for sale 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 December 31, 2017 and December 31, 2016.
 
December 31, 2017
 
 
 
Fair value measurements using:
(Dollars in thousands)
Fair value
 
Level 1
 
Level 2
 
Level 3
Assets measured at fair value
 
 
 
 
 
 
 
Investment securities available for sale
 
 
 
 
 
 
 
U.S. Treasury
$
1,657,864

 
$

 
$
1,657,864

 
$

Mortgage-backed securities
5,349,426

 

 
5,349,426

 

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

 
$

 
 
 
 
 
 
 
 
 
December 31, 2016
 
 
 
Fair value measurements using:
 
Fair value
 
Level 1
 
Level 2
 
Level 3
Assets measured at fair value
 
 
 
 
 
 
 
Investment securities available for sale
 
 
 
 
 
 
 
U.S. Treasury
$
1,650,319

 
$

 
$
1,650,319

 
$

Government agency
40,398

 

 
40,398

 

Mortgage-backed securities
5,175,425

 

 
5,175,425

 

Equity securities
83,507

 
29,145

 
54,362

 

Corporate bonds
49,562

 

 
49,562

 

Other
7,369

 

 
7,369

 

Total investment securities available for sale
$
7,006,580

 
$
29,145

 
$
6,977,435

 
$

Loans held for sale
$
74,401

 
$

 
$
74,401

 
$



There were no transfers between levels during the years ended December 31, 2017 and 2016.

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 Statements 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 were gains of $2.9 million and $176 thousand for the years ended December 31, 2017 and 2015, respectively, and a loss of $2.4 million for the year ended December 31, 2016.
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 December 31, 2017 and 2016.
 
December 31, 2017
(Dollars in thousands)
Fair Value
 
Aggregate Unpaid Principal Balance
 
Difference
Originated loans held for sale
$
51,179

 
$
49,796

 
$
1,383

 
 
 
 
 
 
 
December 31, 2016
 
Fair Value
 
Aggregate Unpaid Principal Balance
 
Difference
Originated loans held for sale
$
74,401

 
$
75,893

 
$
(1,492
)
No originated loans held for sale were 90 or more days past due or on nonaccrual status as of December 31, 2017 and 2016.
 
 
 
 
 
 

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 holding and 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 holding and 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.
Mortgage servicing rights are carried at the lower of cost or market and are, therefore, carried at fair value only when fair value is less than the amortized asset cost. The fair value of mortgage servicing rights is performed 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.
For financial assets and liabilities carried at fair value on a nonrecurring basis, the following table provides fair value information as of December 31, 2017 and December 31, 2016.
 
December 31, 2017
 
 
 
Fair value measurements using:
(Dollars in thousands)
Fair value
 
Level 1
 
Level 2
 
Level 3
Impaired loans
$
72,539

 
$

 
$

 
$
72,539

Other real estate remeasured during current year
40,167

 

 

 
40,167

 
 
 
 
 
 
 
 
 
December 31, 2016
 
 
 
Fair value measurements using:
 
Fair value
 
Level 1
 
Level 2
 
Level 3
Impaired loans
$
70,977

 
$

 
$

 
$
70,977

Other real estate remeasured during current year
45,402

 

 

 
45,402

Mortgage servicing rights
342

 

 

 
342



No financial liabilities were carried at fair value on a nonrecurring basis as of December 31, 2017 and December 31, 2016.