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 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.

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.

Valuation adjustments, such as those pertaining to counterparty and BancShares' own credit quality and liquidity, may be necessary to ensure that assets and liabilities are recorded at fair value. Credit valuation adjustments are made when market pricing does not accurately reflect the counterparty's credit quality. As determined by BancShares management, liquidity valuation adjustments may be made to the fair value of certain assets to reflect the uncertainty in the pricing and trading of the instruments when recent market transactions for identical or similar instruments are not observed.

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.

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, which are carried at fair value as BancShares elected the fair value option on loans held for sale. The fair value is based on quoted market prices for similar types of loans. Accordingly, the inputs used to calculate fair value of residential real estate loans held for sale are classified as level 2 inputs.

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 March 31, 2017 and December 31, 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.



(Dollars in thousands)	March 31, 2017				December 31, 2016
	Carrying value		Fair value		Carrying value		Fair value
Cash and due from banks	$	502,273	$	502,273	$	539,741	$	539,741
Overnight investments	2,736,514		2,736,514		1,872,594		1,872,594
Investment securities available for sale	7,119,861		7,119,861		7,006,580		7,006,580
Investment securities held to maturity	83		89		98		104
Loans held for sale	49,952		49,952		74,401		74,401
Net loans and leases	21,685,506		20,727,792		21,519,083		20,614,548
Receivable from the FDIC for shared-loss agreements	3,981		3,981		4,172		4,172
Income earned not collected	80,456		80,456		79,839		79,839
Federal Home Loan Bank stock	43,495		43,495		43,495		43,495
Mortgage servicing rights	20,771		25,690		20,415		24,446
Deposits	29,002,768		28,976,211		28,161,343		28,135,698
Short-term borrowings	795,587		795,587		603,487		603,487
Long-term obligations	727,500		713,402		832,942		832,201
Payable to the FDIC for shared-loss agreements	98,013		100,948		97,008		100,069
Accrued interest payable	3,947		3,947		3,797		3,797

Among BancShares' assets and liabilities, investment securities available for sale, loans held for sale and interest rates swaps accounted for as cash flow hedges 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 March 31, 2017 and December 31, 2016.



	March 31, 2017
			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	$	1,618,168	$	—	$	1,618,168	$	—
Government agency	40,221		—		40,221		—
Mortgage-backed securities	5,306,107		—		5,306,107		—
Equity securities	94,265		30,345		63,920		—
Corporate bonds	49,565		—		49,565		—
Other	11,535		—		11,535		—
Total investment securities available for sale	$	7,119,861	$	30,345	$	7,089,516	$	—
Loans held for sale	$	49,952	$	—	$	49,952	$	—

	December 31, 2016
			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	$	1,650,319	$	—	$	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 three months ended March 31, 2017.

Fair Value Option

BancShares has elected the fair value option for residential real estate loans held for sale. 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 following table summarizes the difference between the aggregate fair value and the aggregate unpaid principal balance for residential real estate loans held for sale measured at fair value as of March 31, 2017 and December 31, 2016.



	March 31, 2017
(Dollars in thousands)	Fair Value		Aggregate Unpaid Principal Balance		Difference
Loans held for sale	$	49,952	$	48,283	$	1,669

	December 31, 2016
	Fair Value		Aggregate Unpaid Principal Balance		Difference
Loans held for sale	$	74,401	$	75,893	$	(1,492	)

No loans held for sale were 90 or more days past due or on nonaccrual status as of March 31, 2017 or December 31, 2016.

The changes in fair value for residential real estate loans held for sale for which the fair value option was elected are recorded as a component of mortgage income on the Consolidated Statements of Income and are included in the table below for the three months ended March 31, 2017 and 2016.



	Three months ended March 31
(Dollars in thousands)	2017		2016
Gains from fair value changes on loans held for sale	$	3,161	$	763

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 8 and 12 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 16 percent.

OREO is measured and reported at fair value using asset valuations. Asset values are determined using appraisals or other third-party value estimates of the subject property with discounts generally between 8 and 12 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. OREO that has been acquired or written down in the current year is deemed to be at fair value and included in the table below.

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 March 31, 2017 and December 31, 2016.



	March 31, 2017
			Fair value measurements using:
(Dollars in thousands)	Fair value		Level 1 inputs		Level 2 inputs		Level 3 inputs
Impaired loans	$	67,235	$	—	$	—	$	67,235
Other real estate not covered under shared-loss agreements remeasured during current year	12,874		—		—		12,874
Other real estate covered under shared-loss agreements remeasured during current year	122		—		—		122

	December 31, 2016
			Fair value measurements using:
	Fair value		Level 1 inputs		Level 2 inputs		Level 3 inputs
Impaired loans	$	70,977	$	—	$	—	$	70,977
Other real estate not covered under shared-loss agreements remeasured during current year	44,963		—		—		44,963
Other real estate covered under shared-loss agreements remeasured during current year	439		—		—		439
Mortgage servicing rights	342		—		—		342

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