Fair value represents 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. BancShares estimates fair value using discounted cash flows or other valuation techniques when there is no active market for a financial instrument. Inputs used in these valuation techniques are subjective in nature, involve uncertainties and require judgment. Therefore, the derived fair value estimates presented below are not necessarily indicative of the amounts BancShares would 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 within the fair value hierarchy for an asset or liability is based on the lowest level of input significant to the fair value measurement with Level 1 inputs considered highest and Level 3 inputs considered lowest. A brief description of each input level follows:

•Level 2 inputs are quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active and inputs other than quoted prices observable for the assets or liabilities and market corroborated inputs.

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. The fair value of U.S. Treasury, government agency, mortgage-backed and municipal securities and a portion of our corporate bonds are generally estimated using a third-party pricing service. To obtain an understanding of the processes and methodologies used, management reviews correspondence from the third-party pricing service. Management also performs a price variance analysis process to corroborate the reasonableness of prices. The third-party provider evaluates securities based on comparable investments with trades and market data and will utilize pricing models which use a variety of inputs, such as benchmark yields, reported trades, 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 using inputs that are not directly observable. These securities are considered Level 3.

Marketable equity securities. Equity securities are measured at fair value using observable closing prices. 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 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 considered Level 2 inputs. Loans held for investment subsequently transferred to held for sale are carried at the lower of cost or market. The fair values for the transferred loans are based on quoted prices from the purchase commitments for the individual loans being transferred and are considered Level 1 inputs.

Net loans and leases (Non-PCD and PCD). 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’ investment in FHLB stock is ultimately recoverable at par. The inputs used in the fair value measurement for FHLB stock are considered Level 2 inputs.

Mortgage and other servicing rights. Mortgage and other servicing rights are initially recorded and fair value and subsequently carried at the lower of amortized cost or market. Therefore, servicing rights are 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 which 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 deposits with no stated maturity, the 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 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 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 December 31, 2021 and 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 and accrued interest payable are considered Level 2.


	December 31, 2021				December 31, 2020
(Dollars in thousands)	Carrying value		Fair value		Carrying value		Fair value
Assets
Cash and due from banks	$	337,814	$	337,814	$	362,048	$	362,048
Overnight investments	9,114,660		9,114,660		4,347,336		4,347,336
Investment securities available for sale	9,203,427		9,203,427		7,014,243		7,014,243
Investment securities held to maturity	3,809,453		3,759,650		2,816,982		2,838,499
Investment in marketable equity securities	97,528		97,528		91,680		91,680
Loans held for sale	98,741		98,741		124,837		124,837
Net loans and leases	32,193,029		31,889,594		32,567,661		33,298,166
Income earned not collected	134,237		134,237		145,694		145,694
Federal Home Loan Bank stock	40,450		40,450		45,392		45,392

Mortgage and other servicing rights	23,797		23,784		19,628		20,283
Liabilities
Deposits with no stated maturity	48,925,127		48,925,127		40,542,596		40,542,596
Time deposits	2,480,967		2,471,116		2,889,013		2,905,577
Securities sold under customer repurchase agreements	589,101		589,101		641,487		641,487

Federal Home Loan Bank borrowings	644,659		654,694		655,175		677,579
Subordinated debt	477,564		495,483		504,518		525,610
Other borrowings	72,155		72,476		88,470		89,263
FDIC shared-loss payable	—		—		15,601		15,843
Accrued interest payable	7,922		7,922		9,414		9,414

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 December 31, 2021 and 2020.


	December 31, 2021
			Fair value measurements using:
(Dollars in thousands)	Fair value		Level 1		Level 2		Level 3
Assets measured at fair value
Investment securities available for sale
U.S. Treasury	$	2,004,970	$	—	$	2,004,970	$	—
Government agency	798,760		—		798,760		—
Residential mortgage-backed securities	4,728,413		—		4,728,413		—
Commercial mortgage-backed securities	1,062,749		—		1,062,749		—
Corporate bonds	608,535		—		401,133		207,402

Total investment securities available for sale	$	9,203,427	$	—	$	8,996,025	$	207,402
Marketable equity securities	$	97,528	$	33,522	$	64,006	$	—
Loans held for sale	98,741		—		98,741		—



	December 31, 2020
			Fair value measurements using:
	Fair value		Level 1		Level 2		Level 3
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		—

During the year ended December 31, 2021, $102.1 million of corporate bonds available for sale were transferred from Level 3 to Level 2. The transfers were due to the availability of additional observable inputs for those securities. During the year ended December 31, 2020, $1.8 million of corporate bonds available for sale were transferred from Level 2 to Level 3. The transfers were due to a lack of observable inputs and trade activity for those securities.


	2021		2020
(Dollars in thousands)	Corporate bonds		Corporate bonds
Beginning balance	$	316,624	$	69,685
Purchases	30,878		242,595
Unrealized net losses (gains) included in other comprehensive income	6,391		2,898
Amounts included in net income	2,555		(336)
Transfers in	—		1,782
Transfers out	(102,065)		—
Sales / Calls	(46,981)		—
Ending balance	$	207,402	$	316,624

(Dollars in thousands)

December 31, 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

207,402

BancShares has elected the fair value option for residential real estate loans originated for sale. This election reduces certain timing differences in the Consolidated Statements of Income and better aligns with the management of the portfolio from a business perspective. The changes in fair value are recorded as a component of mortgage income and were losses of $3.0 million for the year ended December 31, 2021, and gains of $3.9 million and $289 thousand for the years ended December 31, 2020 and 2019, respectively.


	December 31, 2021
(Dollars in thousands)	Fair Value		Unpaid Principal Balance		Difference
Originated loans held for sale	$	98,741	$	95,852	$	2,889

	December 31, 2020
	Fair Value		Unpaid Principal Balance		Difference
Originated loans held for sale	$	124,837	$	118,902	$	5,935

Certain other assets are adjusted to their fair value on a non-recurring basis, including certain 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. Most loans held for investment, deposits, and borrowings are not reported at fair value.

Following the adoption of ASC 326 on January 1, 2020, the population of loans measured at fair value on a non-recurring basis has greatly diminished and is limited to collateral-dependent loans evaluated individually. Collateral values are determined using appraisals or other third-party value estimates of the subject property discounted based on estimated selling costs, typically between 5% and 10%, and immaterial adjustments for other external factors that may impact the marketability of the collateral. At December 31, 2021, the weighted average discount for estimated selling costs applied was 9.00%.

OREO is carried at the lower of cost or fair value. OREO 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 December 31, 2021, the weighted average discount applied was 8.79%. 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 are ordered to ensure the reported values reflect the most current information.

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 amortized cost. The fair value of mortgage servicing rights is determined 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.


	December 31, 2021
			Fair value measurements using:
(Dollars in thousands)	Fair value		Level 1		Level 2		Level 3
Collateral-dependent loans	$	3,099	$	—	$	—	$	3,099
Other real estate remeasured during the year	34,211		—		—		34,211
Mortgage servicing rights	21,731		—		—		21,731

	December 31, 2020
			Fair value measurements using:
	Fair value		Level 1		Level 2		Level 3
Collateral-dependent loans	$	11,779	$	—	$	—	$	11,779
Other real estate remeasured during the year	40,115		—		—		40,115
Mortgage servicing rights	16,966		—		—		16,966