Note 4 - Interest-bearing Time Deposits in Banks and Securities

Interest-bearing time deposits in banks totaled $1,458,000 at September 30, 2018 and 2017 and December 31, 2017, respectively, and have original maturities within twelve months.

Management classifies debt and equity securities as held-to-maturity, available-for-sale, or trading based on its intent. Debt securities that management has the positive intent and ability to hold to maturity are classified as held-to-maturity and recorded at cost, adjusted for amortization of premiums and accretion of discounts, which are recognized as adjustments to interest income using the interest method. Securities not classified as held-to-maturity or trading are classified as available-for-sale and recorded at fair value, with all unrealized gains and unrealized losses judged to be temporary, net of deferred income taxes, excluded from earnings and reported in the consolidated statements of comprehensive earnings. Available-for-sale securities that have unrealized losses that are judged other-than-temporary are included in gain (loss) on sale of securities and a new cost basis is established. Securities classified as trading are recorded at fair value with unrealized gains and losses included in earnings.

The Company records its available-for-sale and trading securities portfolio at fair value. Fair values of these securities are determined based on methodologies in accordance with current authoritative accounting guidance. Fair values are volatile and may be influenced by a number of factors, including market interest rates, prepayment speeds, discount rates, credit ratings and yield curves. Fair values for investment securities are based on quoted market prices, where available. If quoted market prices are not available, fair values are based on the quoted prices of similar instruments or an estimate of fair value by using a range of fair value estimates in the market place as a result of the illiquid market specific to the type of security.

When the fair value of a security is below its amortized cost, and depending on the length of time the condition exists and the extent the fair value is below amortized cost, additional analysis is performed to determine whether an other-than-temporary impairment condition exists. Available-for-sale and held-to-maturity securities are analyzed quarterly for possible other-than-temporary impairment. The analysis considers (i) whether we have the intent to sell our securities prior to recovery and/or maturity, (ii) whether it is more likely than not that we will have to sell our securities prior to recovery and/or maturity, (iii) the length of time and extent to which the fair value has been less than amortized cost, and (iv) the financial condition of the issuer. Often, the information available to conduct these assessments is limited and rapidly changing, making estimates of fair value subject to judgment. If actual information or conditions are different than estimated, the extent of the impairment of the security may be different than previously estimated, which could have a material effect on the Company’s results of operations and financial condition.

The Company’s investment portfolio consists of U.S. Treasury securities, obligations of U.S. government sponsored enterprises and agencies, obligations of states and political subdivisions, mortgage pass-through securities, corporate bonds and general obligation or revenue based municipal bonds. Pricing for such securities is generally readily available and transparent in the market. The Company utilizes independent third-party pricing services to value its investment securities, which the Company reviews as well as the underlying pricing methodologies for reasonableness and to ensure such prices are aligned with pricing matrices. The Company validates quarterly, on a sample basis, prices supplied by the independent pricing services by comparison to prices obtained from other third-party sources.

A summary of the Company’s available-for-sale securities follows (in thousands):


	September 30, 2018
	Amortized Cost Basis		Gross Unrealized Holding Gains		Gross Unrealized Holding Losses			Estimated Fair Value
U.S. Treasury Securities	$	9,964	$	—	$	(35	)	$	9,929
Obligations of U.S. government sponsored enterprises and agencies		303		—		(1	)		302
Obligations of states and political subdivisions		1,174,320		21,664		(4,097	)		1,191,887
Corporate bonds and other		4,860		—		(121	)		4,739
Residential mortgage-backed securities		1,533,302		912		(39,908	)		1,494,306
Commercial mortgage-backed securities		453,495		8		(10,299	)		443,204

Total securities available-for-sale	$	3,176,244	$	22,584	$	(54,461	)	$	3,144,367


	September 30, 2017
	Amortized Cost Basis		Gross Unrealized Holding Gains		Gross Unrealized Holding Losses			Estimated Fair Value
Obligations of U.S. government sponsored enterprises and agencies	$	73,583	$	35	$	(30	)	$	73,588
Obligations of states and political subdivisions		1,379,117		56,671		(1,594	)		1,434,194
Corporate bonds and other		19,439		118		(2	)		19,555
Residential mortgage-backed securities		1,024,615		8,466		(3,797	)		1,029,284
Commercial mortgage-backed securities		328,806		945		(889	)		328,862

Total securities available-for-sale	$	2,825,560	$	66,235	$	(6,312	)	$	2,885,483


	December 31, 2017
	Amortized Cost Basis		Gross Unrealized Holding Gains		Gross Unrealized Holding Losses			Estimated Fair Value
Obligations of U.S. government sponsored enterprises and agencies	$	60,516	$	—	$	(186	)	$	60,330
Obligations of states and political subdivisions		1,369,295		52,491		(936	)		1,420,850
Corporate bonds and other		11,421		43		(5	)		11,459
Residential mortgage-backed securities		1,223,452		4,561		(8,916	)		1,219,097
Commercial mortgage-backed securities		377,934		263		(2,460	)		375,737

Total securities available-for-sale	$	3,042,618	$	57,358	$	(12,503	)	$	3,087,473

The Company invests in mortgage-backed securities that have expected maturities that differ from their contractual maturities. These differences arise because borrowers may have the right to call or prepay obligations with or without a prepayment penalty. These securities include collateralized mortgage obligations (CMOs) and other asset backed securities. The expected maturities of these securities at September 30, 2018 were computed by using scheduled amortization of balances and historical prepayment rates. At September 30, 2018 and 2017, and December 31, 2017, the Company did not hold CMOs that entail higher risks than standard mortgage-backed securities.

The amortized cost and estimated fair value of available-for-sale securities at September 30, 2018, by contractual and expected maturity, are shown below (in thousands):


	Amortized Cost Basis		Estimated Fair Value
Due within one year	$	187,577	$	189,177
Due after one year through five years		552,075		565,059
Due after five years through ten years		448,087		450,670
Due after ten years		1,708		1,951
Mortgage-backed securities		1,986,797		1,937,510

Total	$	3,176,244	$	3,144,367

The following tables disclose the Company’s investment securities that have been in a continuous unrealized-loss position for less than 12 months and for 12 or more months (in thousands):


	Less than 12 Months				12 Months or Longer				Total
September 30, 2018	Fair Value		Unrealized Loss		Fair Value		Unrealized Loss		Fair Value		Unrealized Loss
U.S. Treasury Securities	$	9,929	$	35	$	—	$	—	$	9,929	$	35
Obligations of U.S. government sponsored enterprises and agencies		302		1		—		—		302		1
Obligations of states and political subdivisions		184,265		2,165		44,750		1,932		229,015		4,097
Corporate bonds and other		4,399		110		449		11		4,848		121
Residential mortgage-backed securities		962,320		20,850		461,227		19,058		1,423,547		39,908
Commercial mortgage-backed securities		270,375		5,908		167,368		4,391		437,743		10,299

Total	$	1,431,590	$	29,069	$	673,794	$	25,392	$	2,105,384	$	54,461


	Less than 12 Months				12 Months or Longer				Total
September 30, 2017	Fair Value		Unrealized Loss		Fair Value		Unrealized Loss		Fair Value		Unrealized Loss
Obligations of U.S. government sponsored enterprises and agencies	$	45,050	$	30	$	—	$	—	$	45,050	$	30
Obligations of states and political subdivisions		54,983		309		45,217		1,285		100,200		1,594
Corporate bonds and other		—		—		240		2		240		2
Residential mortgage-backed securities		225,369		1,531		131,849		2,266		357,218		3,797
Commercial mortgage-backed securities		170,146		751		21,001		138		191,147		889

Total	$	495,548	$	2,621	$	198,307	$	3,691	$	693,855	$	6,312


	Less than 12 months				12 months or longer				Total
December 31, 2017	Fair Value		Unrealized Loss		Fair Value		Unrealized Loss		Fair Value		Unrealized Loss
Obligations of U.S. government sponsored enterprises and agencies	$	60,329	$	186	$	—	$	—	$	60,329	$	186
Obligations of state and political subdivisions		66,361		219		44,938		717		111,299		936
Corporate bonds and other		224		2		237		3		461		5
Residential mortgage-backed securities		701,252		3,988		239,641		4,928		940,893		8,916
Commercial mortgage-backed securities		239,548		1,500		92,549		960		332,097		2,460

Total	$	1,067,714	$	5,895	$	377,365	$	6,608	$	1,445,079	$	12,503

The number of investments in an unrealized loss position totaled 484 at September 30, 2018. We do not believe these unrealized losses are “other-than-temporary” as (i) we do not have the intent to sell our securities prior to recovery and/or maturity and (ii) it is more likely than not that we will not have to sell our securities prior to recovery and/or maturity. In making this determination, we also consider the length of time and extent to which fair value has been less than cost and the financial condition of the issuer. The unrealized losses noted are interest rate related due to the level of interest rates at September 30, 2018 compared to the time of purchase. We have reviewed the ratings of the issuers and have not identified any issues related to the ultimate repayment of principal as a result of credit concerns on these securities. Our mortgage related securities are backed by GNMA, FNMA and FHLMC or are collateralized by securities backed by these agencies. At September 30, 2018, 83.26% of our available-for-sale securities that are obligations of states and political subdivisions were issued within the State of Texas, of which 31.30% are guaranteed by the Texas Permanent School Fund.

At September 30, 2018, $1,820,197,000 of the Company’s securities were pledged as collateral for public or trust fund deposits, repurchase agreements and for other purposes required or permitted by law.

During the quarters ended September 30, 2018 and 2017, sales of investment securities that were classified as available-for-sale totaled $71,134,000 and $83,605,000, respectively. Gross realized gains from security sales during the third quarter of 2018 and 2017 totaled $348,000 and $1,750,000, respectively. Gross realized losses from security sales during the third quarter of 2018 and 2017 totaled $290,000 and $675,000, respectively. During the nine months ended September 30, 2018 and 2017, sale of investment securities were classified as available-for-sale totaled $220,259,000 and $120,576,000, respectively. Gross realized gains from security sales during the nine-month period ended September 30, 2018 and 2017 totaled $1,877,000 and totaled $2,550,000, respectively. Gross realized losses from security sales during the nine-month periods ended September 30, 2018 and 2017 totaled $531,000 and $725,000, respectively.

The specific identification method was used to determine cost in order to compute the realized gains and losses.