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

Interest-bearing time deposits in banks totaled $1,458,000, $2,427,000 and $1,707,000 at June 30, 2017 and 2016 and December 31, 2016, respectively, and have original maturities generally ranging from one to two years.

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):


	June 30, 2017
	Amortized Cost Basis		Gross Unrealized Holding Gains		Gross Unrealized Holding Losses			Estimated Fair Value
U.S. Treasury securities	$	10,578	$	—	$	(5	)	$	10,573
Obligations of U.S. government sponsored enterprises and agencies		73,666		60		(21	)		73,705
Obligations of states and political subdivisions		1,476,714		58,707		(3,548	)		1,531,873
Corporate bonds and other		30,079		163		(2	)		30,240
Residential mortgage-backed securities		971,557		8,083		(4,558	)		975,082
Commercial mortgage-backed securities		342,651		1,202		(813	)		343,040

Total securities available-for-sale	$	2,905,245	$	68,215	$	(8,947	)	$	2,964,513


	June 30, 2016
	Amortized Cost Basis		Gross Unrealized Holding Gains		Gross Unrealized Holding Losses			Estimated Fair Value
U.S. Treasury securities	$	10,721	$	90	$	—		$	10,811
Obligations of U.S. government sponsored enterprises and agencies		121,174		1,178		—			122,352
Obligations of states and political subdivisions		1,418,342		97,980		(10	)		1,516,312
Corporate bonds and other		71,687		1,723		—			73,410
Residential mortgage-backed securities		787,451		18,928		(606	)		805,773
Commercial mortgage-backed securities		261,662		5,068		(32	)		266,698

Total securities available-for-sale	$	2,671,037	$	124,967	$	(648	)	$	2,795,356


	December 31, 2016
	Amortized Cost Basis		Gross Unrealized Holding Gains		Gross Unrealized Holding Losses			Estimated Fair Value
U.S. Treasury securities	$	10,649	$	19	$	—		$	10,668
Obligations of U.S. government sponsored enterprises and agencies		113,450		253		—			113,703
Obligations of states and political subdivisions		1,534,095		40,194		(10,013	)		1,564,276
Corporate bonds and other		51,920		476		(3	)		52,393
Residential mortgage-backed securities		848,614		8,260		(5,513	)		851,361
Commercial mortgage-backed securities		269,044		622		(1,230	)		268,436

Total securities available-for-sale	$	2,827,772	$	49,824	$	(16,759	)	$	2,860,837

Disclosures related to the Company’s held-to-maturity securities, which totaled $105,000, $137,000 and $121,000 at June 30, 2017 and 2016, and December 31, 2016, respectively, have not been presented due to insignificance.

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 June 30, 2017 were computed by using scheduled amortization of balances and historical prepayment rates. At June 30, 2017 and 2016, and December 31, 2016, 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 June 30, 2017, by contractual and expected maturity, are shown below (in thousands):


	Amortized Cost Basis		Estimated Fair Value
Due within one year	$	177,217	$	178,504
Due after one year through five years		671,763		700,451
Due after five years through ten years		740,378		765,419
Due after ten years		1,679		2,017
Mortgage-backed securities		1,314,208		1,318,122

Total	$	2,905,245	$	2,964,513

The following tables disclose, as of June 30, 2017 and 2016, and December 31, 2016, 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
June 30, 2017	Fair Value		Unrealized Loss		Fair Value		Unrealized Loss		Fair Value		Unrealized Loss
U.S. Treasury securities	$	10,321	$	5	$	—	$	—	$	10,321	$	5
Obligations of U.S. government sponsored enterprises and agencies		30,062		21		—		—		30,062		21
Obligations of states and political subdivisions		110,706		1,906		37,851		1,642		148,557		3,548
Corporate bonds and other		241		2		—		—		241		2
Residential mortgage-backed securities		422,087		3,387		60,410		1,171		482,497		4,558
Commercial mortgage-backed securities		150,805		745		20,120		68		170,925		813

Total	$	724,222	$	6,066	$	118,381	$	2,881	$	842,603	$	8,947


	Less than 12 Months				12 Months or Longer				Total
June 30, 2016	Fair Value		Unrealized Loss		Fair Value		Unrealized Loss		Fair Value		Unrealized Loss
Obligations of states and political subdivisions	$	5,959	$	7	$	745	$	3	$	6,704	$	10
Residential mortgage-backed securities		16,085		14		60,360		592		76,445		606
Commercial mortgage-backed securities		—		—		14,152		32		14,152		32

Total	$	22,044	$	21	$	75,257	$	627	$	97,301	$	648


	Less than 12 Months				12 Months or Longer				Total
December 31, 2016	Fair Value		Unrealized Loss		Fair Value		Unrealized Loss		Fair Value		Unrealized Loss
Obligations of state and political subdivisions	$	446,052	$	9,997	$	1,209	$	16	$	447,261	$	10,013
Corporate bonds and other		244		3		—		—		244		3
Residential mortgage-backed securities		372,331		4,532		33,227		981		405,558		5,513
Commercial mortgage-backed securities		193,495		1,180		13,263		50		206,758		1,230

Total	$	1,012,122	$	15,712	$	47,699	$	1,047	$	1,059,821	$	16,759

The number of investments in an unrealized loss position totaled 215 at June 30, 2017. 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 June 30, 2017 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 June 30, 2017, 81.61% of our available-for-sale securities that are obligations of states and political subdivisions were issued within the State of Texas, of which 33.14% are guaranteed by the Texas Permanent School Fund.

At June 30, 2017, $1,865,800,000 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 June 30, 2017 and 2016, sales of investment securities that were classified as available-for-sale totaled $30,791,000 and $12,829,000, respectively. Gross realized gains from security sales during the second quarter of 2017 and 2016 totaled $795,000 and $912,000, respectively. Gross realized losses from security sales during the second quarter of 2017 totaled $48,000. There were no gross realized losses during the second quarter of 2016. During the six months ended June 30, 2017 and 2016, sale of investment securities were classified as available-for-sale totaled $36,971,000 and $13,382,000, respectively. Gross realized gains from security sales during the six-month period ended June 30, 2017 and 2016 totaled $800,000 and $919,000, respectively. Gross realized losses from security sales during the six-month periods ended June 30, 2017 and 2016 totaled $50,000 and $5,000, respectively.

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