Fair Value Measurements

The fair value of an asset or liability is the price that would be received to sell that asset or paid to transfer that liability in an orderly transaction occurring in the principal market (or most advantageous market in the absence of a principal market) for such asset or liability. In estimating fair value, we utilize valuation techniques that are consistent with the market approach, the income approach and/or the cost approach. Such valuation techniques are consistently applied. Inputs to valuation techniques include the assumptions that market participants would use in pricing an asset or liability. ASC Topic 820 establishes a three-level fair value hierarchy for valuation inputs that gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. See our 2017 Form 10-K for additional information regarding the fair value hierarchy and a description of our valuation techniques.

Financial Assets and Financial Liabilities. The table below summarizes financial assets and financial liabilities measured at fair value on a recurring basis as of September 30, 2018 and December 31, 2017, segregated by the level of the valuation inputs within the fair value hierarchy of ASC Topic 820 utilized to measure fair value.



	Level 1 Inputs		Level 2 Inputs		Level 3 Inputs		Total Fair Value
September 30, 2018
Securities available for sale:
U.S. Treasury	$	3,402,879	$	—	$	—	$	3,402,879
Residential mortgage-backed securities	—		756,371		—		756,371
States and political subdivisions	—		6,976,690		—		6,976,690
Other	—		42,651		—		42,651
Trading account securities:
U.S. Treasury	21,804		—		—		21,804
States and political subdivisions	—		434		—		434
Derivative assets:
Interest rate swaps, caps and floors	—		14,430		—		14,430
Commodity swaps and options	—		35,813		1,296		37,109
Foreign currency forward contracts	263		—		—		263
Derivative liabilities:
Interest rate swaps, caps and floors	—		26,867		—		26,867
Commodity swaps and options	—		36,848		—		36,848
Foreign currency forward contracts	189		—		—		189
December 31, 2017
Securities available for sale:
U.S. Treasury	$	3,445,153	$	—	$	—	$	3,445,153
Residential mortgage-backed securities	—		665,086		—		665,086
States and political subdivisions	—		6,336,209		—		6,336,209
Other	—		42,561		—		42,561
Trading account securities:
U.S. Treasury	19,210		—		—		19,210
States and political subdivisions	—		1,888		—		1,888
Derivative assets:
Interest rate swaps, caps and floors	—		20,022		—		20,022
Commodity swaps and options	—		14,408		1,233		15,641
Foreign currency forward contracts	415		—		—		415
Derivative liabilities:
Interest rate swaps, caps and floors	—		18,754		—		18,754
Commodity swaps and options	—		15,327		—		15,327
Foreign currency forward contracts	239		—		—		239

Derivative assets, measured at fair value on a recurring basis using significant unobservable (Level 3) inputs during the reported periods consist of commodity swaps sold to loan customers. The significant unobservable (Level 3) inputs used in the fair value measurement of these commodity swaps sold to loan customers primarily relate to the probability of default and loss severity in the event of default. The probability of default is determined by the underlying risk grade of the loan (see Note 3 - Loans) underlying the commodity swap in that the probability of default increases as a loan’s risk grade deteriorates, while the loss severity is estimated through an analysis of the collateral supporting both the underlying loan and commodity swap. Generally, a change in the assumption used for the probability of default is accompanied by a directionally similar change in the assumption used for the loss severity. The weighted-average risk grade of loans underlying commodity swaps measured at fair value using significant unobservable (Level 3) inputs was 12.0 at both September 30, 2018 and December 31, 2017. The weighted-average loss severity in the event of default on the commodity swaps was 19.7% and 15.4% at September 30, 2018 and December 31, 2017, respectively. A reconciliation of the beginning and ending balances of derivative assets measured at fair value on a recurring basis using significant unobservable (Level 3) inputs is not presented as such amounts were not significant during the reported periods.

Certain financial assets and financial liabilities are measured at fair value on a nonrecurring basis; that is, the instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment). Financial assets measured at fair value on a non-recurring basis during the reported periods include certain impaired loans reported at the fair value of the underlying collateral if repayment is expected solely from the collateral. The following table presents impaired loans that were remeasured and reported at fair value through a specific valuation allowance allocation of the allowance for loan losses based upon the fair value of the underlying collateral during the reported periods.



	Nine Months Ended September 30, 2018					Nine Months Ended September 30, 2017
	Level 2			Level 3		Level 2		Level 3
Carrying value of impaired loans before allocations	$	12,876		$	28,638	$	—	$	64,287
Specific valuation allowance (allocations) reversals of prior allocations	(2,599		)	4,256		—		(13,477		)
Fair value	$	10,277		$	32,894	$	—	$	50,810

Non-Financial Assets and Non-Financial Liabilities. We do not have any non-financial assets or non-financial liabilities measured at fair value on a recurring basis. Non-financial assets measured at fair value on a non-recurring basis during the reported periods include certain foreclosed assets which, upon initial recognition, were remeasured and reported at fair value through a charge-off to the allowance for loan losses and certain foreclosed assets which, subsequent to their initial recognition, were remeasured at fair value through a write-down included in other non-interest expense. The following table presents foreclosed assets that were remeasured and reported at fair value during the reported periods:



	Nine Months Ended September 30,
	2018			2017
Foreclosed assets remeasured at initial recognition:
Carrying value of foreclosed assets prior to remeasurement	$	2,898		$	—
Charge-offs recognized in the allowance for loan losses	—			—
Fair value	$	2,898		$	—
Foreclosed assets remeasured subsequent to initial recognition:
Carrying value of foreclosed assets prior to remeasurement	$	1,823		$	89
Write-downs included in other non-interest expense	(473		)	(16		)
Fair value	$	1,350		$	73

Financial Instruments Reported at Amortized Cost. The estimated fair values of financial instruments that are reported at amortized cost in our consolidated balance sheets, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value, were as follows:



	September 30, 2018				December 31, 2017
	Carrying Amount		Estimated Fair Value		Carrying Amount		Estimated Fair Value
Financial assets:
Level 2 inputs:
Cash and cash equivalents	$	3,419,489	$	3,419,489	$	5,053,047	$	5,053,047
Securities held to maturity	1,111,762		1,116,845		1,432,098		1,455,791
Cash surrender value of life insurance policies	182,603		182,603		180,477		180,477
Accrued interest receivable	137,553		137,553		167,508		167,508
Level 3 inputs:
Loans, net	13,677,260		13,621,005		12,990,301		12,981,165
Financial liabilities:
Level 2 inputs:
Deposits	26,348,854		26,342,071		26,872,389		26,866,676
Federal funds purchased and repurchase agreements	1,083,777		1,083,777		1,147,824		1,147,824
Junior subordinated deferrable interest debentures	136,227		137,115		136,184		137,115
Subordinated notes payable and other borrowings	98,669		98,875		98,552		105,311
Accrued interest payable	4,904		4,904		3,358		3,358

Under ASC Topic 825, entities may choose to measure eligible financial instruments at fair value at specified election dates. The fair value measurement option (i) may be applied instrument by instrument, with certain exceptions, (ii) is generally irrevocable and (iii) is applied only to entire instruments and not to portions of instruments. Unrealized gains and losses on items for which the fair value measurement option has been elected must be reported in earnings at each subsequent reporting date. During the reported periods, we had no financial instruments measured at fair value under the fair value measurement option.