Estimated Fair Values

3 Months Ended

Mar. 31, 2013

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 flow or other valuation techniques. Inputs to these valuation methods 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.

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 of an asset or liability within the fair value hierarchy is based on the lowest 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.

The methodologies used to estimate the fair value of financial assets and financial liabilities are discussed below:

Investment securities. Investment securities are measured based on quoted market prices, when available. For certain residential mortgage-backed securities and state, county and municipal securities, fair values are determined using broker prices based on recent sales of similar securities. The inputs used in the fair value measurement of investment securities are considered level 1 or level 2 inputs. The details of investment securities available for sale and the corresponding level of inputs are provided in the table of assets measured at fair value on a recurring basis.

Loans held for sale. Fair value for loans held for sale is generally based on market prices for loans with similar characteristics or external valuations. The inputs used in the fair value measurements for loans held for sale are considered level 2 inputs.

Loans and leases. For variable rate loans, carrying value is a reasonable estimate of fair value. For fixed rate loans, fair values are 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. Additional valuation adjustments are made for liquidity and credit risk. The inputs used in the fair value measurements for loans and leases are considered level 3 inputs.

Receivable from the FDIC for loss share agreements. Fair value is estimated based on discounted future cash flows using current discount rates. Due to post-acquisition improvements in expected losses, significant portions of the FDIC receivable will be recovered through amortization of the receivable over the remaining life of the loss share agreement rather than by cash flows from the FDIC. The estimated amounts to be amortized in future periods have no fair value. The inputs used in the fair value measurements for the receivable from the FDIC are considered level 3 inputs. The FDIC loss share agreements are not transferable and, accordingly, there is no market for this receivable.

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.

Preferred stock issued under the TARP program. Preferred securities issued under the Troubled Asset Recovery Program are recorded at cost and are evaluated quarterly for impairment based on the ultimate recoverability of the purchase price. The fair value of these securities is derived from a third-party proprietary model that is considered to be a level 3 input.

Deposits. For non-time deposits and variable rate time deposits, carrying value is a reasonable estimate of fair value. The fair value of fixed rate 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 measurements 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. 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 measurements for long-term obligations are considered level 2 inputs.

Payable to the FDIC for loss share agreements. The fair value of the payable to the FDIC for loss share agreements is determined by the projected cash flows based on expected payments to the FDIC in accordance with the loss share agreements. Cash flows are discounted to reflect the timing of the estimated amounts due to the FDIC. The inputs used in the fair value measurements for the payable to the FDIC are considered level 3 inputs. See Note J for more information on the payable to the FDIC.

Interest Rate Swap. Under the terms of the existing cash flow hedge, BancShares pays a fixed payment to the counterparty in exchange for receipt of a variable payment that is determined based on the three-month LIBOR rate. The fair value of the cash flow hedge is, therefore, based on projected LIBOR rates for the duration of the hedge, values that, while observable in the market, are subject to adjustment due to pricing considerations for the specific instrument. If the fair value of the swap is a net asset, the risk of default by the counterparty is considered in the determination of fair value and is considered a level 3 input. The inputs used in the fair value measurements of the interest rate swap are considered level 2 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 March 31, 2013, December 31, 2012, and March 31, 2012. 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 relating to them that would cause the fair value to differ from the carrying value.

	March 31, 2013				December 31, 2012				March 31, 2012
	Carrying value		Fair value		Carrying value		Fair value		Carrying value		Fair value
Cash and due from banks	$	460,217	$	460,217	$	639,730	$	639,730	$	552,663	$	552,663
Overnight investments	954,232		954,232		443,180		443,180		752,334		752,334
Investment securities available for sale	5,279,678		5,279,678		5,226,228		5,226,228		4,457,739		4,457,739
Investment securities held to maturity	1,229		1,322		1,342		1,448		1,688		1,844
Loans held for sale	86,351		88,116		86,333		87,654		73,457		75,342
Loans covered by loss share agreements, net of allowance for loan and lease losses	1,524,854		1,494,357		1,669,263		1,635,878		2,097,752		2,055,797
Loans and leases not covered by loss share agreements, net of allowance for loan and lease losses	11,332,534		11,298,475		11,397,069		11,238,597		11,303,146		11,171,217
Receivable from the FDIC for loss share agreements (1)	195,942		104,684		270,192		100,161		492,384		297,963
Income earned not collected	47,255		47,255		47,666		47,666		52,406		52,406
Stock issued by:
Federal Home Loan Bank of Atlanta	28,789		28,789		36,139		36,139		41,043		41,043
Federal Home Loan Bank of San Francisco	9,092		9,092		10,107		10,107		12,356		12,356
Federal Home Loan Bank of Seattle	4,370		4,370		4,410		4,410		4,490		4,490
Preferred stock	46,397		47,624		40,768		40,793		—		—
Deposits	18,064,921		18,099,371		18,086,025		18,126,893		17,759,492		17,810,831
Short-term borrowings	573,102		573,102		568,505		568,505		677,993		677,993
Long-term obligations	444,252		469,980		444,921		472,642		649,818		679,727
Payable to the FDIC for loss share agreements	98,870		119,473		101,641		125,065		82,033		95,643
Accrued interest payable	6,653		6,653		9,353		9,353		21,486		21,486
Interest rate swap	9,583		9,583		10,398		10,398		10,325		10,325

(1) The fair value of the receivable from FDIC for loss share agreements excludes receivable related to accretable yield in prospective periods.

Among BancShares’ assets and liabilities, investment securities available for sale and interest rate swaps accounted for as cash flow hedges are reported at their fair values on a recurring basis. Certain other assets are adjusted to their fair value on a nonrecurring basis, including loans held for sale, which are carried at the lower of cost or fair value. Impaired loans, OREO, goodwill and other intangible assets are periodically tested for impairment. Loans held for investment, deposits, short-term borrowings and long-term obligations are not reported at fair value. BancShares did not elect to voluntarily report any assets or liabilities at fair value.

For assets and liabilities carried at fair value on a recurring basis, the following table provides fair value information as of March 31, 2013, December 31, 2012, and March 31, 2012:

			Fair value measurements using:
Description	Fair value		Level 1		Level 2		Level 3
March 31, 2013
Assets measured at fair value
Investment securities available for sale
U.S. Treasury	$	749,757	$	749,757	$	—	$	—
Government agency	3,150,041		3,150,041		—		—
Other	828		828		—		—
Residential mortgage-backed securities	1,358,102		—		1,358,102		—
Equity securities	20,403		20,403		—		—
State, county, municipal	547		—		547		—
Total	$	5,279,678	$	3,921,029	$	1,358,649	$	—
Liabilities measured at fair value
Interest rate swaps accounted for as cash flow hedges	$	9,583	$	—	$	9,583	$	—
December 31, 2012
Assets measured at fair value
Investment securities available for sale
U.S. Treasury	$	823,632	$	823,632	$	—	$	—
Government agency	3,055,204		3,055,204		—		—
Other	820		820		—		—
Residential mortgage-backed securities	1,329,657		—		1,329,657		—
Equity securities	16,365		16,365		—		—
State, county, municipal	550		—		550		—
Total	$	5,226,228	$	3,896,021	$	1,330,207	$	—
Liabilities measured at fair value
Interest rate swaps accounted for as cash flow hedges	$	10,398	$	—	$	10,398	$	—
March 31, 2012
Assets measured at fair value
Investment securities available for sale
U.S. Treasury	$	1,065,036	$	1,065,036	$	—	$	—
Government agency	2,855,385		2,855,385		—		—
Corporate bonds	226,428		226,428		—		—
Residential mortgage-backed securities	290,908		—		290,908		—
Equity securities	18,943		18,943		—		—
State, county, municipal	1,039		—		1,039		—
Total	$	4,457,739	$	4,165,792	$	291,947	$	—
Liabilities measured at fair value
Interest rate swaps accounted for as cash flow hedges	$	10,325	$	—	$	10,325	$	—

Prices for US Treasury securities, government agency securities, corporate bonds and equity securities are readily available in the active markets in which those securities are traded and the resulting fair values are derived from level 1 inputs. Prices for residential mortgage-backed securities and state, county and municipal securities are obtained using the fair values of similar

assets, which are deemed to be level 2 inputs. There were no assets or liabilities valued on a recurring basis using level 3 inputs at March 31, 2013, December 31, 2012, or March 31, 2012, and there were no transfers between level 1 and level 2 categories during the three-month periods ended March 31, 2013, and 2012.

Certain financial assets and liabilities are carried at fair value on a nonrecurring basis. Loans held for sale are carried at the lower of aggregate cost or fair value and are, therefore, carried at fair value only when fair value is less than the asset cost. Certain impaired loans are also carried at fair value. OREO not covered by loss share agreements that has been recently remeasured is deemed to be at fair value. For financial assets and liabilities carried at fair value on a nonrecurring basis, the following table provides fair value information as of March 31, 2013, December 31, 2012, and March 31, 2012:

			Fair value measurements using:
Description	Fair value		Level 1		Level 2		Level 3
March 31, 2013
Loans held for sale	$	65,164	$	—	$	65,164	$	—
Impaired loans not covered by loss share agreements	39,937		—		—		39,937
Other real estate not covered by loss share agreements remeasured during current year	1,970		—		—		1,970
December 31, 2012
Loans held for sale	65,244		—		65,244		—
Impaired loans not covered by loss share agreements	51,644		—		—		51,644
Other real estate not covered by loss share agreements remeasured during current year	21,113		—		—		21,113
March 31, 2012
Loans held for sale	45,146		—		45,146		—
Impaired loans not covered by loss share agreements	82,882		—		—		82,882
Other real estate not covered by loss share agreements remeasured during current year	8,048		—		—		8,048

The values of loans held for sale are generally based on market prices for loans with similar characteristics or external valuations.

The values of impaired loans are 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 10 and 14 percent applied for estimated holding and selling costs and other external factors that may impact the marketability of the property. Impaired loans are assigned to an asset manager and monitored monthly for significant changes since the last valuation. If significant changes are noted, the asset manager orders a new valuation or adjusts the valuation accordingly. Expected cash flows are determined using expected loss rates developed from historic experience for loans with similar risk characteristics.

OREO is measured and reported at fair value using level 3 inputs for valuations based on unobservable criteria. The values of OREO are determined by collateral valuations. Collateral values are determined using appraisals or other third-party value estimates of the subject property with discounts generally between 10 and 14 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. The asset manager uses the information gathered from brokers and other market sources to identify any significant changes in the market or the subject property as they occur. Valuations are then adjusted or new appraisals are ordered to ensure the reported values reflect the most current information.

No financial liabilities were carried at fair value on a nonrecurring basis as of March 31, 2013, December 31, 2012, or March 31, 2012.