Fair Value

9 Months Ended

Sep. 30, 2023

Fair Value Disclosures [Abstract]

FAIR VALUE

NOTE 14 — FAIR VALUE

Fair Value Hierarchy

BancShares measures certain financial assets and liabilities at fair value. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. GAAP also establishes a fair value hierarchy, which prioritizes the inputs to valuation techniques used to measure fair value into three levels.

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 1 inputs are quoted prices in active markets for identical assets and liabilities.

•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.

•Level 3 inputs are unobservable inputs for the asset or liability. These unobservable inputs and assumptions reflect the estimates market participants would use in pricing the asset or liability.

Assets and Liabilities Measured at Fair Value on a Recurring Basis

The following table summarizes BancShares’ assets and liabilities measured at estimated fair value on a recurring basis:

Assets and Liabilities Measured at Fair Value - Recurring Basis

dollars in millions	September 30, 2023
	Total		Level 1		Level 2		Level 3
Assets
Investment securities available for sale
U.S. Treasury	$	8,647	$	—	$	8,647	$	—
Government agency	129		—		129		—
Residential mortgage-backed securities	5,600		—		5,600		—
Commercial mortgage-backed securities	1,797		—		1,797		—
Corporate bonds	478		—		326		152
Municipal bonds	10		—		10		—
Total investment securities available for sale	$	16,661	$	—	$	16,509	$	152
Marketable equity securities	75		31		44		—
Loans held for sale	22		—		22		—
Derivative assets (1)
Interest rate contracts — non-qualifying hedges	$	748	$	—	$	747	$	1
Foreign exchange contracts — non-qualifying hedges	151		—		151		—
Other derivative contracts — non-qualifying hedges	5		—		—		5
Total derivative assets	$	904	$	—	$	898	$	6
Liabilities
Derivative liabilities (1)
Interest rate contracts — non-qualifying hedges	$	781	$	—	$	781	$	—
Foreign exchange contracts — non-qualifying hedges	130		—		130		—
Other derivative contracts — non-qualifying hedges	1		—		—		1
Total derivative liabilities	$	912	$	—	$	911	$	1
	December 31, 2022
	Total		Level 1		Level 2		Level 3
Assets
Investment securities available for sale
U.S. Treasury	$	1,898	$	—	$	1,898	$	—
Government agency	162		—		162		—
Residential mortgage-backed securities	4,795		—		4,795		—
Commercial mortgage-backed securities	1,604		—		1,604		—
Corporate bonds	536		—		362		174
Total investment securities available for sale	$	8,995	$	—	$	8,821	$	174
Marketable equity securities	95		32		63		—
Loans held for sale	4		—		4		—
Derivative assets (1)
Interest rate contracts — non-qualifying hedges	$	158	$	—	$	158	$	—
Foreign exchange contracts — non-qualifying hedges	1		—		1		—
Total derivative assets	$	159	$	—	$	159	$	—
Liabilities
Derivative liabilities (1)
Interest rate contracts — non-qualifying hedges	$	482	$	—	$	482	$	—
Foreign exchange contracts — non-qualifying hedges	4		—		4		—
Total derivative liabilities	$	486	$	—	$	486	$	—

(1)     Derivative fair values include accrued interest.

The methods and assumptions used to estimate the fair value of each class of financial instruments measured at fair value on a recurring basis are as follows:

Investment securities available for sale. The fair value of U.S. Treasury, government agency, mortgage-backed securities, municipal bonds, and a portion of the 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 classified as 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 for sale 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.

Derivative Assets and Liabilities. Derivatives were valued using models that incorporate inputs depending on the type of derivative. Other than the fair value of equity warrants and credit derivatives, which were estimated using Level 3 inputs, most derivative instruments were valued using Level 2 inputs based on observed pricing for similar assets and liabilities and model-based valuation techniques for which all significant assumptions are observable in the market. See Note 12—Derivative Financial Instruments for notional amounts and fair values.

The following tables summarize information about significant unobservable inputs related to BancShares’ categories of Level 3 financial assets and liabilities measured on a recurring basis:

Quantitative Information About Level 3 Fair Value Measurements - Recurring Basis

dollars in millions
Financial Instrument	Estimated Fair Value		Valuation Technique(s)	Significant Unobservable Inputs
September 30, 2023
Assets
Corporate bonds	$	152	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.
Interest rate & other derivative — non-qualifying hedges	$	5	Internal valuation model	Not material
Liabilities
Interest rate & other derivative — non-qualifying hedges	$	1	Internal valuation model	Not material
December 31, 2022
Assets
Corporate bonds	$	174	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.

The following table summarizes the changes in estimated fair value for all assets and liabilities measured at estimated fair value on a recurring basis using significant unobservable inputs (Level 3):

Changes in Estimated Fair Value of Level 3 Financial Assets and Liabilities - Recurring Basis

dollars in millions	Nine Months Ended September 30, 2023						Nine Months Ended September 30, 2022
	Corporate Bonds		Other Derivative Assets — Non-Qualifying		Other Derivative Liabilities — Non-Qualifying		Corporate Bonds		Other Derivative Assets — Non-Qualifying		Other Derivative Liabilities — Non-Qualifying
Beginning balance	$	174	$	—	$	—	$	207	$	—	$	—
Purchases	—		—		—		—		—		1
Changes in FV included in earnings	—		5		—		—		1		(1)
Changes in FV included in comprehensive income	(13)		—		—		(17)		—		—
Transfers in	—		—		1		—		—		—
Transfers out	—		—		—		(14)		—		—
Maturity and settlements	(9)		—		—		—		—		—
Ending balance	$	152	$	5	$	1	$	176	$	1	$	—

Fair Value Option

The following table summarizes the difference between the aggregate fair value and the UPB for residential real estate loans originated for sale measured at fair value as of September 30, 2023 and December 31, 2022:

Aggregate Fair Value and UPB - Residential Real Estate Loans

dollars in millions	September 30, 2023
	Fair Value		Unpaid Principal Balance		Difference
Originated loans held for sale	$	22	$	22	$	—
	December 31, 2022
	Fair Value		Unpaid Principal Balance		Difference
Originated loans held for sale	$	4	$	4	$	—

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 were recorded as a component of mortgage income and included $0 million and a loss of $1 million for the three months ended September 30, 2023 and 2022, respectively, and $0 million and a loss of $3 million for the nine months ended September 30, 2023 and 2022, respectively. Interest earned on loans held for sale is recorded within interest income on loans and leases in the Consolidated Statements of Income.

No originated loans held for sale were 90 or more days past due or on non-accrual status as of September 30, 2023 or December 31, 2022.

Assets Measured at Estimated Fair Value on a Non-recurring Basis

Certain assets or liabilities are required to be measured at estimated fair value on a non-recurring basis subsequent to initial recognition. Generally, these adjustments are the result of LOCOM or other impairment accounting. The following table presents carrying value of assets measured at estimated fair value on a non-recurring basis for which gains and losses have been recorded in the periods. The gains and losses reflect amounts recorded for the respective periods, regardless of whether the asset is still held at period end.

Assets Measured at Fair Value - Non-recurring Basis

dollars in millions	Fair Value Measurements
	Total		Level 1		Level 2		Level 3		Total Gains (Losses)
September 30, 2023
Assets held for sale - loans	$	22	$	—	$	—	$	22	$	(5)
Loans - collateral dependent loans	249		—		—		249		(96)
Other real estate owned	15		—		—		15		2
Total	$	286	$	—	$	—	$	286	$	(99)
December 31, 2022
Assets held for sale - loans	$	23	$	—	$	—	$	23	$	(1)
Loans - collateral dependent loans	149		—		—		149		(24)
Other real estate owned	43		—		—		43		14
Mortgage servicing rights	—		—		—		—		1
Total	$	215	$	—	$	—	$	215	$	(10)

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 (“MSRs”), 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.

The methods and assumptions used to estimate the fair value of each class of financial instruments measured at fair value on a non-recurring basis are as follows:

Assets held for sale - loans. Loans held for investment subsequently transferred to held for sale are carried at the LOCOM. When available, 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. The fair value of Level 2 assets was primarily estimated based on prices of recent trades of similar assets. For other loans held for sale, the fair value of Level 3 assets was primarily measured under the income approach using the discounted cash flow model based on Level 3 inputs including discount rate or the price of committed trades.

Loans - collateral dependent loans. The population of Level 3 loans measured at fair value on a non-recurring basis includes 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, and adjustments for other external factors that may impact the marketability of the collateral.

Other real estate owned. OREO is carried at LOCOM. OREO asset valuations are determined by using appraisals or other third-party value estimates of the subject property with discounts, generally between 6% and 11%, applied for estimated selling costs and other external factors that may impact the marketability of the property. At September 30, 2023 and December 31, 2022, the weighted average discount applied was 8.52% and 9.31%, respectively. 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. MSRs are initially recorded at 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 MSRs is determined 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 MSRs are considered Level 3 inputs.

Financial Instruments Fair Value

The table below presents the carrying values and estimated fair values for financial instruments, excluding leases and certain other assets and liabilities for which these disclosures are not required.

Carrying Values and Fair Values of Financial Assets and Liabilities

dollars in millions	September 30, 2023
			Estimated Fair Value
	Carrying Value		Level 1		Level 2		Level 3		Total
Financial Assets
Cash and due from banks	$	791	$	791	$	—	$	—	$	791
Interest earning deposits at banks	36,704		36,704		—		—		36,704
Securities purchased under agreements to resell	549		—		549		—		549
Investment in marketable equity securities	75		31		44		—		75
Investment securities available for sale	16,661		—		16,509		152		16,661
Investment securities held to maturity	10,082		—		8,152		—		8,152
Loans held for sale	54		—		22		32		54
Net loans	129,466		—		1,506		124,367		125,873
Accrued interest receivable	833		—		833		—		833
Federal Home Loan Bank stock	19		—		19		—		19
Mortgage servicing rights	25		—		—		47		47
Derivative assets	904		—		898		6		904
Financial Liabilities
Deposits with no stated maturity	129,197		—		129,197		—		129,197
Time deposits	17,036		—		16,990		—		16,990
Credit balances of factoring clients	1,282		—		—		1,282		1,282
Securities sold under customer repurchase agreements	453		—		453		—		453
Long-term borrowings	37,250		—		36,296		—		36,296
Accrued interest payable	146		—		146		—		146
Derivative liabilities	912		—		911		1		912
	December 31, 2022
			Estimated Fair Value
	Carrying Value		Level 1		Level 2		Level 3		Total
Financial Assets
Cash and due from banks	$	518	$	518	$	—	$	—	$	518
Interest earning deposits at banks	5,025		5,025		—		—		5,025
Investment in marketable equity securities	95		32		63		—		95
Investment securities available for sale	8,995		—		8,821		174		8,995
Investment securities held to maturity	10,279		—		8,795		—		8,795
Loans held for sale	52		—		4		45		49
Net loans	67,720		—		1,679		62,633		64,312
Accrued interest receivable	329		—		329		—		329
Federal Home Loan Bank stock	197		—		197		—		197
Mortgage servicing rights	25		—		—		47		47
Derivative assets	159		—		159		—		159
Financial Liabilities
Deposits with no stated maturity	78,798		—		78,798		—		78,798
Time deposits	10,610		—		10,504		—		10,504
Credit balances of factoring clients	995		—		—		995		995
Securities sold under customer repurchase agreements	436		—		436		—		436
Other short-term borrowings	1,750		—		1,750		—		1,750
Long-term borrowings	4,452		—		4,312		18		4,330
Accrued interest payable	57		—		57		—		57
Derivative liabilities	486		—		486		—		486

The methods and assumptions used to estimate the fair value of each class of financial instruments not discussed elsewhere are as follows:

Net loans. The carrying value of net loans is net of the ALLL. Loans are generally valued by discounting expected cash flows using market inputs with adjustments based on cohort level assumptions for certain loan types as well as internally developed estimates at a business segment level. Due to the significance of the unobservable market inputs and assumptions, as well as the absence of a liquid secondary market for most loans, these loans are classified as Level 3. Certain loans are measured based on observable market prices sourced from external data providers and classified as Level 2. Nonaccrual loans are written down and reported at their estimated recovery value which approximates their fair value and classified as Level 3.

Securities Purchased Under Agreement to Resell. The fair value of securities purchased under agreement to resell equal the carrying value due to the short term nature, generally overnight, and therefore present an insignificant risk of change in fair value due to changes in market interest rate, and classified as Level 2.

Investment securities held to maturity. BancShares’ portfolio of held to maturity debt securities consists of mortgage-backed securities issued by government agencies and government sponsored entities, U.S. Treasury notes, unsecured bonds issued by government agencies and government sponsored entities, and securities issued by the Supranational Entities and Multilateral Development Banks. We primarily use prices obtained from pricing services to determine the fair value of securities, which are Level 2 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 the FHLB stock are considered Level 2 inputs.

Deposits. The estimated fair value of deposits with no stated maturity, such as demand deposit accounts, money market accounts, and savings accounts was the amount payable on demand at the reporting date. The fair value of time deposits was estimated based on a discounted cash flow technique using Level 2 inputs appropriate to the contractual maturity.

Credit balances of factoring clients. The impact of the time value of money from the unobservable discount rate for credit balances of factoring clients is inconsequential due to the short term nature of these balances, therefore, the fair value approximated carrying value, and the credit balances were classified as Level 3.

Short-term borrowed funds. Includes repurchase agreements and certain other short-term borrowings. The fair value approximates carrying value and are classified as Level 2.

Long-term borrowings. For certain long-term senior and subordinated unsecured borrowings, the fair values are sourced from a third-party pricing service. The fair value of other long-term borrowings are determined by discounting future cash flows using current interest rates for similar financial instruments. The inputs used in the fair value measurement for FHLB borrowings, senior and subordinated debentures, and other borrowings are classified as Level 2. The fair value of other secured borrowings are estimated based on unobservable inputs and therefore classified as Level 3.

For all other financial assets and financial liabilities, the carrying value is a reasonable estimate of the fair value as of September 30, 2023 and December 31, 2022. 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, and interest earning deposits at banks, are classified on the fair value hierarchy as Level 1. Accrued interest receivable and accrued interest payable are classified as Level 2.