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 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.

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 June 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.


(Dollars in thousands)	June 30, 2021				December 31, 2020
	Carrying value		Fair value		Carrying value		Fair value
Assets
Cash and due from banks	$	395,364	$	395,364	$	362,048	$	362,048
Overnight investments	7,871,382		7,871,382		4,347,336		4,347,336
Investment in marketable equity securities	118,540		118,540		91,680		91,680
Investment securities available for sale	7,381,083		7,381,083		7,014,243		7,014,243
Investment securities held to maturity	3,394,604		3,377,085		2,816,982		2,838,499
Loans held for sale	107,768		107,768		124,837		124,837
Net loans and leases	32,500,558		32,786,935		32,567,661		33,298,166
Income earned not collected	133,043		133,043		145,694		145,694
Federal Home Loan Bank stock	40,450		40,450		45,392		45,392

Mortgage and other servicing rights	22,702		23,155		19,628		20,283
Liabilities
Deposits with no stated maturity	45,789,354		45,789,354		40,542,596		40,542,596
Time deposits	2,621,242		2,626,322		2,889,013		2,905,577
Securities sold under customer repurchase agreements	692,604		692,604		641,487		641,487

Federal Home Loan Bank borrowings	646,667		662,606		655,175		677,579
Subordinated debt	497,290		523,423		504,518		525,610
Other borrowings	80,531		81,201		88,470		89,263
FDIC shared-loss payable	—		—		15,601		15,843
Accrued interest payable	8,811		8,811		9,414		9,414


	June 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	$	825,450	$	—	$	825,450	$	—
Residential mortgage-backed securities	4,785,256		—		4,785,256		—
Commercial mortgage-backed securities	1,148,530		—		1,148,530		—
Corporate bonds	621,847		—		296,399		325,448

Total investment securities available for sale	$	7,381,083	$	—	$	7,055,635	$	325,448
Marketable equity securities	$	118,540	$	49,293	$	69,247	$	—
Loans held for sale	$	107,768	$	—	$	107,768	$	—



	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	$	—


	Corporate bonds
	Three months ended June 30				Six months ended June 30
(Dollars in thousands)	2021		2020		2021		2020
Beginning balance	$	318,116	$	67,016	$	316,624	$	69,685
Purchases	7,000		100,595		7,000		100,595
Unrealized net losses (gains) included in other comprehensive income	1,340		2,449		3,491		(1,917)
Amounts included in net income	92		(83)		183		(168)
Transfers in	—		—		—		1,782
Sales / Calls	(1,100)		—		(1,850)		—
Ending balance	$	325,448	$	169,977	$	325,448	$	169,977

During the three months ended June 30, 2021 and 2020, there were no transfers between levels. During the six months ended June 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.

(Dollars in thousands)

June 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

325,448

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 gains of $0.4 million and $2.4 million for the three months ended June 30, 2021 and 2020, respectively. The changes in fair value included a loss of $2.3 million and a gain of $3.6 million for six months ended June 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.


	June 30, 2021
(Dollars in thousands)	Fair value		Aggregate unpaid principal balance		Difference
Originated loans held for sale	$	107,768	$	104,167	$	3,601

	December 31, 2020
	Fair value		Aggregate unpaid principal balance		Difference
Originated loans held for sale	$	124,837	$	118,902	$	5,935

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 7.88%.

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 June 30, 2021, the weighted average discount applied was 6%. 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, 2021
			Fair value measurements using:
(Dollars in thousands)	Fair value		Level 1 inputs		Level 2 inputs		Level 3 inputs
Collateral-dependent loans	$	6,183	$	—	$	—	$	6,183
Other real estate owned	32,128		—		—		32,128
Mortgage servicing rights	20,045		—		—		20,045

	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