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FAIR VALUE
 9 Months Ended
Sep. 30, 2024
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 - Recurring Basis
dollars in millionsSeptember 30, 2024
TotalLevel 1Level 2Level 3
Assets
Investment securities available for sale
U.S. Treasury$11,817 $— $11,817 $— 
Government agency85 — 85 — 
Residential mortgage-backed securities13,016 — 13,016 — 
Commercial mortgage-backed securities2,778 — 2,778 — 
Corporate bonds477 — 313 164 
Municipal bonds17 — 17 — 
Total investment securities available for sale$28,190 $— $28,026 $164 
Marketable equity securities82 31 51 — 
Loans held for sale41 — 41 — 
Derivative assets (1)
Interest rate contracts — qualifying hedges$— $— $— $— 
Interest rate contracts — non-qualifying hedges$446 $— $445 $1 
Foreign exchange contracts — non-qualifying hedges93 — 93 — 
Other derivative contracts — non-qualifying hedges14 — — 14 
Total non-qualifying hedge assets$553 $— $538 $15 
Total derivative assets$553 $— $538 $15 
Liabilities
Derivative liabilities (1)
Interest rate contracts — qualifying hedges$— $— $— $— 
Interest rate contracts — non-qualifying hedges$415 $— $415 $— 
Foreign exchange contracts — non-qualifying hedges91 — 91 — 
Other derivative contracts — non-qualifying hedges1 — — 1 
Total non-qualifying hedge liabilities$507 $— $506 $1 
Total derivative liabilities$507 $— $506 $1 

December 31, 2023
TotalLevel 1Level 2Level 3
Assets
Investment securities available for sale
U.S. Treasury$10,508 $— $10,508 $— 
Government agency117 — 117 — 
Residential mortgage-backed securities6,686 — 6,686 — 
Commercial mortgage-backed securities2,131 — 2,131 — 
Corporate bonds482 — 325 157 
Municipal bonds12 — 12 — 
Total investment securities available for sale$19,936 $— $19,779 $157 
Marketable equity securities84 36 48 — 
Loans held for sale38 — 38 — 
Derivative assets (1)
Interest rate contracts — qualifying hedges$— $— $— $— 
Interest rate contracts — non-qualifying hedges$530 $— $529 $1 
Foreign exchange contracts — non-qualifying hedges104 — 104 — 
Other derivative contracts — non-qualifying hedges6 — — 6 
Total non-qualifying hedge assets$640 $— $633 $7 
Total derivative assets$640 $— $633 $7 
Liabilities
Derivative liabilities (1)
Interest rate contracts — qualifying hedges$— $— $— $— 
Interest rate contracts — non-qualifying hedges$518 $— $518 $— 
Foreign exchange contracts — non-qualifying hedges117 — 117 — 
Other derivative contracts — non-qualifying hedges1 — — 1 
Total non-qualifying hedge liabilities$636 $— $635 $1 
Total derivative liabilities$636 $— $635 $1 
(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. Refer to 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 InstrumentEstimated Fair ValueValuation TechniqueSignificant Unobservable Inputs
September 30, 2024December 31, 2023
Assets
Corporate bonds$164 $157 Indicative bid provided by brokerMultiple 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$15 $7 Internal valuation modelMultiple factors, including but not limited to, private company valuation, illiquidity discount, and estimated life of the instrument.
Liabilities
Interest rate & other derivative — non-qualifying hedges$1 $1 Internal valuation modelNot material
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 millionsNine Months Ended September 30, 2024Nine Months Ended September 30, 2023
Corporate BondsOther Derivative Assets — Non-QualifyingOther Derivative Liabilities — Non-QualifyingCorporate BondsOther Derivative Assets — Non-QualifyingOther Derivative Liabilities — Non-Qualifying
Beginning balance$157 $7 $1 $174 $— $— 
Purchases— 7 — — — — 
Changes in fair value included in earnings(1)1 — — 5 — 
Changes in fair value included in comprehensive income8 — — (13)— — 
Transfers in— — — — — 1 
Transfers out— — — — — — 
Maturity and settlements— — — (9)— — 
Ending balance$164 $15 $1 $152 $5 $1 

Fair Value Option
The following table summarizes the difference between the aggregate fair value and the UPB for residential mortgage loans originated for sale measured at fair value as of September 30, 2024 and December 31, 2023:

Aggregate Fair Value and UPB - Residential Mortgage Loans
dollars in millionsSeptember 30, 2024December 31, 2023
Fair ValueUnpaid Principal BalanceDifferenceFair ValueUnpaid Principal BalanceDifference
Originated loans held for sale$41 $40 $1 $38 $37 $1 

BancShares has elected the fair value option for residential mortgage 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 that were recorded as a component of mortgage income were insignificant for the three and nine months ended September 30, 2024 and 2023. 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 nonaccrual status as of September 30, 2024 or December 31, 2023.
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 lower of the cost or market value (“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 millionsFair Value Measurements
TotalLevel 1Level 2Level 3Total Gains (Losses)
September 30, 2024
Assets held for sale - loans$3 $— $— $3 $(4)
Loans - collateral dependent loans314 — — 314 (114)
Other real estate owned13 — — 13 5 
Total$331 $— $— $331 $(113)
December 31, 2023
Assets held for sale - loans$12 $— $— $12 $(4)
Loans - collateral dependent loans265 — — 265 (131)
Other real estate owned16 — — 16 4 
Total$293 $— $— $293 $(131)

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. 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 10%, applied for estimated selling costs and other external factors that may impact the marketability of the property. At September 30, 2024 and December 31, 2023, the weighted average discount applied was 9.41% and 8.59%, 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.
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 millionsSeptember 30, 2024
Estimated Fair Value
Carrying ValueLevel 1Level 2Level 3Total
Financial Assets
Cash and due from banks$862 $862 $— $— $862 
Interest-earning deposits at banks25,640 25,640 — — 25,640 
Securities purchased under agreements to resell455 — 455 — 455 
Investment in marketable equity securities82 31 51 — 82 
Investment securities available for sale28,190 — 28,026 164 28,190 
Investment securities held to maturity10,391 — 9,168 — 9,168 
Loans held for sale65 — 41 24 65 
Net loans135,036 — 1,450 133,464 134,914 
Accrued interest receivable904 — 904 — 904 
Federal Home Loan Bank stock19 — 19 — 19 
Mortgage servicing rights27 — — 42 42 
Derivative assets - qualifying hedges— — — — — 
Derivative assets - non-qualifying hedges553 — 538 15 553 
Financial Liabilities
Deposits with no stated maturity137,445 — 137,445 — 137,445 
Time deposits14,129 — 14,128 — 14,128 
Credit balances of factoring clients1,250 — — 1,250 1,250 
Securities sold under customer repurchase agreements391 — 391 — 391 
Long-term borrowings36,762 — 36,765 — 36,765 
Accrued interest payable149 — 149 — 149 
Derivative liabilities - qualifying hedges— — — — — 
Derivative liabilities - non-qualifying hedges507 — 506 1 507 
December 31, 2023
Estimated Fair Value
Carrying ValueLevel 1Level 2Level 3Total
Financial Assets
Cash and due from banks$908 $908 $— $— $908 
Interest-earning deposits at banks33,609 33,609 — — 33,609 
Securities purchased under agreements to resell473 — 473 — 473 
Investment in marketable equity securities84 36 48 — 84 
Investment securities available for sale19,936 — 19,779 157 19,936 
Investment securities held to maturity9,979 — 8,503 — 8,503 
Loans held for sale73 — 38 35 73 
Net loans129,545 — 1,479 125,217 126,696 
Accrued interest receivable832 — 832 — 832 
Federal Home Loan Bank stock20 — 20 — 20 
Mortgage servicing rights25 — — 42 42 
Derivative assets - qualifying hedges— — — — — 
Derivative assets - non-qualifying hedges640 — 633 7 640 
Financial Liabilities
Deposits with no stated maturity129,427 — 129,427 — 129,427 
Time deposits16,427 — 16,416 — 16,416 
Credit balances of factoring clients1,089 — — 1,089 1,089 
Securities sold under customer repurchase agreements485 — 485 — 485 
Long-term borrowings37,160 — 36,816 — 36,816 
Accrued interest payable137 — 137 — 137 
Derivative liabilities - qualifying hedges— — — — — 
Derivative liabilities - non-qualifying hedges636 — 635 1 636 
The methods and assumptions used to estimate the fair value of each class of financial instruments not discussed elsewhere are as follows:

Interest-earning Deposits at Banks. The carrying value of interest-earning deposits at banks approximates its fair value due to its short-term nature. The balances at September 30, 2024 and December 31, 2023 included $212 million and $211 million, respectively, as a required minimum deposit under the Advance Facility Agreement.

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 debt securities held to maturity 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 & 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.

Mortgage servicing rights (“MSRs”). 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.

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 are 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 values 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.

For all other financial assets and financial liabilities, the carrying value is a reasonable estimate of the fair value as of September 30, 2024 and December 31, 2023. 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.