SECURITIES

Debt securities

The amortized cost, gross unrealized gains and losses, and estimated fair value of investment and mortgage-backed securities available for sale and held to maturity as of December 31, 2018 and 2017 are reflected in the tables below (in thousands):



	December 31, 2018
	Amortized		Gross Unrealized		Gross Unrealized		Estimated
AVAILABLE FOR SALE	Cost		Gains		Losses		Fair Value
Investment Securities:
State and Political Subdivisions	$	728,142	$	6,115	$	17,656	$	716,601
Other Stocks and Bonds	3,000		—		291		2,709
Mortgage-backed Securities: ⁽¹⁾
Residential	738,585		3,498		9,111		732,972
Commercial	543,758		941		7,545		537,154
Total	$	2,013,485	$	10,554	$	34,603	$	1,989,436

HELD TO MATURITY
Investment Securities:
State and Political Subdivisions	$	3,083	$	5	$	42	$	3,046
Mortgage-backed Securities: ⁽¹⁾
Residential	59,655		154		1,140		58,669
Commercial	100,193		201		2,328		98,066
Total	$	162,931	$	360	$	3,510	$	159,781



	December 31, 2017
	Amortized		Gross Unrealized		Gross Unrealized		Estimated
AVAILABLE FOR SALE	Cost		Gains		Losses		Fair Value
Investment Securities:
U.S. Government Agency Debentures	$	108,869	$	—	$	—	$	108,869
State and Political Subdivisions	392,760		3,895		3,991		392,664
Other Stocks and Bonds	5,024		31		—		5,055
Other Equity Securities ⁽²⁾	6,027		—		107		5,920
Mortgage-backed Securities: ⁽¹⁾
Residential	720,930		4,476		7,377		718,029
Commercial	308,357		761		900		308,218
Total	$	1,541,967	$	9,163	$	12,375	$	1,538,755

HELD TO MATURITY
Investment Securities:
State and Political Subdivisions	$	413,632	$	10,879	$	2,583	$	421,928
Mortgage-backed Securities: ⁽¹⁾
Residential	129,044		1,631		239		130,436
Commercial	366,830		3,812		1,206		369,436
Total	$	909,506	$	16,322	$	4,028	$	921,800


(1)	All mortgage-backed securities issued and/or guaranteed by U.S. government agencies or U.S. government-sponsored enterprises.


(2)	See “Note 1 - Summary of Significant Accounting and Reporting Policies” for further information.

From time to time, we have transferred securities from AFS to HTM due to overall balance sheet strategies. The remaining net unamortized, unrealized loss on the transferred securities included in AOCI in the accompanying balance sheets totaled $15.3 million ($12.1 million, net of tax) at December 31, 2018 and $17.4 million ($13.8 million, net of tax) at December 31, 2017. Any net unrealized gain or loss on the transferred securities included in AOCI at the time of transfer will be amortized over the remaining life of the underlying security as an adjustment to the yield on those securities. Securities transferred with losses included in AOCI continue to be included in management’s assessment for other-than-temporary impairment for each individual security. There were no securities transferred from AFS to HTM during the years ended December 31, 2018 or 2017.

On January 1, 2018, we early-adopted ASU 2017-12, “Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities,” and in conjunction with the adoption took the one-time transition election to reclassify approximately $743.4 million book value of securities from HTM to AFS that qualified for hedging under the last-of-layer approach. The unrealized gain of $11.9 million ($9.4 million, net of tax) on the transferred securities was recognized in other comprehensive income on the date of transfer.

The following tables represent the estimated fair value and unrealized loss on investment and mortgage-backed securities AFS and HTM as of December 31, 2018 and December 31, 2017 (in thousands):



	December 31, 2018
	Less Than 12 Months				More Than 12 Months				Total
	Fair Value		Unrealized Loss		Fair Value		Unrealized Loss		Fair Value		Unrealized Loss
AVAILABLE FOR SALE
Investment Securities:
State and Political Subdivisions	$	98,112	$	899	$	399,205	$	16,757	$	497,317	$	17,656
Other Stocks and Bonds	2,709		291		—		—		2,709		291
Mortgage-backed Securities:
Residential	5,552		27		488,334		9,084		493,886		9,111
Commercial	9,529		30		457,704		7,515		467,233		7,545
Total	$	115,902	$	1,247	$	1,345,243	$	33,356	$	1,461,145	$	34,603
HELD TO MATURITY
Investment Securities:
State and Political Subdivisions	$	235	$	1	$	2,022	$	41	$	2,257	$	42
Mortgage-backed Securities:
Residential	4,826		60		51,046		1,080		55,872		1,140
Commercial	399		2		89,168		2,326		89,567		2,328
Total	$	5,460	$	63	$	142,236	$	3,447	$	147,696	$	3,510

	December 31, 2017
	Less Than 12 Months				More Than 12 Months				Total
	Fair Value		Unrealized Loss		Fair Value		Unrealized Loss		Fair Value		Unrealized Loss
AVAILABLE FOR SALE
Investment Securities:
State and Political Subdivisions	$	32,341	$	121	$	172,006	$	3,870	$	204,347	$	3,991
Other Equity Securities ⁽¹⁾	5,920		107		—		—		5,920		107
Mortgage-backed Securities:
Residential	429,742		3,232		102,973		4,145		532,715		7,377
Commercial	146,796		419		13,134		481		159,930		900
Total	$	614,799	$	3,879	$	288,113	$	8,496	$	902,912	$	12,375
HELD TO MATURITY
Investment Securities:
State and Political Subdivisions	$	85,608	$	807	$	56,736	$	1,776	$	142,344	$	2,583
Mortgage-backed Securities:
Residential	24,707		157		2,736		82		27,443		239
Commercial	136,491		782		13,552		424		150,043		1,206
Total	$	246,806	$	1,746	$	73,024	$	2,282	$	319,830	$	4,028


(1)	See “Note 1 – Summary of Significant Accounting and Reporting Policies” for further information.

We review those securities in an unrealized loss position for significant differences between fair value and the cost basis to evaluate if a classification of other-than-temporary impairment is warranted. In estimating other-than-temporary impairment losses, management considers, among other things, the length of time and the extent to which the fair value has been less than cost and the financial condition and near-term prospects of the issuer. We consider an other-than-temporary impairment to have occurred when there is an adverse change in expected cash flows. When it is determined that a decline in fair value of AFS and HTM securities is other-than-temporary, the carrying value of the security is reduced to its estimated fair value, with a corresponding charge to earnings for the credit portion and a charge to other comprehensive income for the noncredit portion. Based upon the length of time and the extent to which fair value is less than cost, we believe that none of the securities with an unrealized loss have other-than-temporary impairment at December 31, 2018.

The majority of the securities in an unrealized loss position are highly rated Texas municipal securities and U.S. Agency MBS where the unrealized loss is a direct result of the change in interest rates and spreads. For those securities in an unrealized loss position, we do not currently intend to sell the securities, and it is not more likely than not that we will be required to sell the securities before the anticipated recovery of their amortized cost basis. To the best of management’s knowledge and based on our consideration of the qualitative factors associated with each security, there were no securities in our investment and MBS portfolio with an other-than-temporary impairment at December 31, 2018.

The following tables reflect interest income recognized on securities for the periods presented (in thousands):



	Years Ended December 31,
	2018		2017		2016
U.S. Treasury	$	218	$	519	$	739
U.S. Government Agency Debentures	89		178		—
State and Political Subdivisions	24,960		24,530		22,654
Other Stocks and Bonds	110		125		195
Other Equity Securities ⁽¹⁾	—		116		123
Mortgage-backed Securities	41,584		41,361		37,450
Total interest income on securities	$	66,961	$	66,829	$	61,161


(1)	See “Note 1 - Summary of Significant Accounting and Reporting Policies” for further information.

Of the $1.8 million in net securities loss from the AFS portfolio for the year ended December 31, 2018, there were $3.8 million in realized loss position and $2.0 million in a realized gain position. Of the $625,000 in net securities gains from the AFS portfolio for the year ended December 31, 2017, there were $5.0 million in realized gain position and $4.4 million in realized loss position. Of the $2.8 million in net securities gains from the AFS portfolio for the year ended December 31, 2016, there were $6.3 million in a realized gain position and $3.4 million in a realized loss position. There were no sales from the HTM portfolio during the years ended December 31, 2018, 2017 or 2016. We calculate realized gains and losses on sales of securities under the specific identification method.

The amortized cost and estimated fair value of AFS and HTM securities at December 31, 2018, are presented below by contractual maturity (in thousands). Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations. MBS are presented in total by category due to the fact that MBS typically are issued with stated principal amounts, and the securities are backed by pools of mortgages that have loans with varying maturities. The characteristics of the underlying pool of mortgages, such as fixed-rate or adjustable-rate, as well as prepayment risk, are passed on to the security holder. The term of a mortgage-backed pass-through security thus approximates the term of the underlying mortgages and can vary significantly due to prepayments.



	December 31, 2018
	Amortized Cost		Fair Value
AVAILABLE FOR SALE
Investment Securities:
Due in one year or less	$	3,559	$	3,602
Due after one year through five years	39,169		40,055
Due after five years through ten years	176,316		175,181
Due after ten years	512,098		500,472
	731,142		719,310
Mortgage-backed Securities	1,282,343		1,270,126
Total	$	2,013,485	$	1,989,436



	December 31, 2018
	Amortized Cost		Fair Value
HELD TO MATURITY
Investment Securities:
Due in one year or less	$	116	$	115
Due after one year through five years	1,696		1,674
Due after five years through ten years	1,271		1,257
Due after ten years	—		—
	3,083		3,046
Mortgage-backed Securities:	159,848		156,735
Total	$	162,931	$	159,781

Investment securities and MBS with carrying values of $1.08 billion and $1.24 billion were pledged as of December 31, 2018 and 2017, respectively, to collateralize Federal Home Loan Bank of Dallas (“FHLB”) borrowings, repurchase agreements and public funds or for other purposes as required by law.

Equity Investments

Equity investments on our consolidated balance sheet include Community Reinvestment Act funds with a readily determinable fair value as well as equity investments without readily determinable fair values. At December 31, 2018, we had equity investments recorded in our consolidated balance sheet of $12.1 million. At December 31, 2017, we had $5.8 million in equity investments without readily determinable fair values recorded at cost.

Beginning January 1, 2018, upon adoption of ASU 2016-01, equity investments with readily determinable fair values are stated at fair value with realized and unrealized gains and losses reported in income. For periods prior to January 1, 2018, these equity investments were classified as AFS and stated at fair value with unrealized gains and losses reported as a separate component of AOCI, net of tax. Equity investments without readily determinable fair values are recorded at cost less impairment, if any.

At December 31, 2017, we had $5.9 million in equity investments included in AFS securities and recorded at fair value, with net unrealized losses of $85,000, net of tax, recognized in AOCI. On January 1, 2018, these unrealized losses were reclassified out of AOCI and into retained earnings with subsequent changes in fair value being recognized in net income. The following is a summary of unrealized and realized gains and losses on equity investments recognized in other noninterest income in the consolidated statements of income during the year ended December 31, 2018 (in thousands):



	Year Ended
	December 31, 2018
Net losses recognized during the period on equity investments	$	(117	)
Less: Net gains (losses) recognized during the period on equity investments sold during the period	—
Unrealized losses recognized during the reporting period on equity investments still held at the reporting date	$	(117	)

Equity investments are assessed quarterly for other-than-temporary impairment. Based upon that evaluation, management does not consider any of our equity investments to be other-than-temporarily impaired at December 31, 2018.

Federal Home Loan Bank Stock

Our FHLB stock, which has limited marketability, is carried at cost.