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:

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.

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.

Investment in 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 fair value when a firm commitment from a counterparty exists. 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 and other servicing rights. Mortgage and other 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 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 of 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 long-term 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 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 June 30, 2019 and December 31, 2018. 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.



(Dollars in thousands)	June 30, 2019				December 31, 2018
	Carrying value		Fair value		Carrying value		Fair value
Cash and due from banks	$	284,147	$	284,147	$	327,440	$	327,440
Overnight investments	1,640,264		1,640,264		797,406		797,406
Investment securities available for sale	4,366,041		4,366,041		4,557,110		4,557,110
Investment securities held to maturity	2,218,048		2,285,283		2,184,653		2,201,502
Investment in marketable equity securities	111,489		111,489		92,599		92,599
Loans held for sale	52,837		52,837		45,505		45,505
Net loans and leases	26,501,654		26,791,041		25,299,564		24,845,060
Income earned not collected	115,303		115,303		109,903		109,903
Federal Home Loan Bank stock	25,545		25,545		25,304		25,304
Mortgage and other servicing rights	22,809		25,129		24,066		27,435
Deposits	32,719,671		31,461,196		30,672,460		30,623,214
Securities sold under customer repurchase agreements	544,527		544,527		543,936		543,936
Federal Home Loan Bank borrowings	197,131		203,464		193,556		195,374
Subordinated debentures	154,277		166,374		140,741		151,670
Other borrowings	18,446		18,625		13,921		13,985
FDIC shared-loss payable	108,892		111,298		105,618		105,846
Accrued interest payable	14,197		14,197		3,712		3,712

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 June 30, 2019 and December 31, 2018:



	June 30, 2019
			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	$	948,402	$	—	$	948,402	$	—
Government agency	534,804		—		534,804		—
Mortgage-backed securities	2,733,698		—		2,733,698		—
Corporate bonds	149,137		—		—		149,137
Total investment securities available for sale	$	4,366,041	$	—	$	4,216,904	$	149,137
Marketable equity securities	$	111,489	$	24,991	$	86,498	$	—
Loans held for sale	$	52,837	$	—	$	52,837	$	—

	December 31, 2018
			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	$	1,247,710	$	—	$	1,247,710	$	—
Government agency	256,835		—		256,835		—
Mortgage-backed securities	2,909,339		—		2,909,339		—
Corporate bonds	143,226		—		—		143,226
Total investment securities available for sale	$	4,557,110	$	—	$	4,413,884	$	143,226
Marketable equity securities	$	92,599	$	17,887	$	74,712	$	—
Loans held for sale	$	45,505	$	—	$	45,505	$	—

During the three and six months ended June 30, 2019, there were no transfers between levels. For the three months ended June 30, 2018, there were no transfers between levels and for the six ended June 30, 2018, there were transfers from Level 2 to Level 3 of $65.3 million for corporate bonds available for sale. The transfers were due to a lack of observable inputs and trade activity for those securities.



	Six months ended June 30, 2019
(Dollars in thousands)	Corporate bonds
Balance at January 1, 2019	$	143,226
Amounts included in net income	82
Unrealized net gains included in other comprehensive income	1,838
Purchases	3,991
Balance at June 30, 2019	$	149,137



(Dollars in thousands)			June 30, 2019
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	$	149,137

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 a loss of $82 thousand and a gain of $700 thousand for the three months ended June 30, 2019 and June 30, 2018, respectively. The changes in fair value included a gain of $167 thousand and $245 thousand for six months ended June 30, 2019 and June 30, 2018, respectively.



	June 30, 2019
(Dollars in thousands)	Fair Value		Aggregate Unpaid Principal Balance		Difference
Originated loans held for sale	$	52,837	$	51,237	$	1,600

	December 31, 2018
	Fair Value		Aggregate Unpaid Principal Balance		Difference
Originated loans held for sale	$	45,505	$	44,073	$	1,432

We 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.

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% 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%.

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 11% 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.



	June 30, 2019
			Fair value measurements using:
(Dollars in thousands)	Fair value		Level 1 inputs		Level 2 inputs		Level 3 inputs
Impaired loans	$	120,783	$	—	$	—	$	120,783
Other real estate remeasured during the previous 12 months	20,079		—		—		20,079

	December 31, 2018
			Fair value measurements using:
	Fair value		Level 1 inputs		Level 2 inputs		Level 3 inputs
Impaired loans	$	105,994	$	—	$	—	$	105,994
Other real estate remeasured during the previous 12 months	35,344		—		—		35,344