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Section 1: 10-Q (10-Q)

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Table of Contents


 
 
 
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549
FORM 10-Q
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2018
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ____________ to ____________
 
Commission file number: 0-12247
SOUTHSIDE BANCSHARES, INC.
(Exact name of registrant as specified in its charter)

TEXAS
 
75-1848732
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
 
 
1201 S. Beckham Avenue, Tyler, Texas
 
75701
(Address of principal executive offices)
 
(Zip Code)
903-531-7111
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  x    No  o
 
Indicate by check mark whether the registrant has submitted electronically, if any, every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes  x    No  o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company.  See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer x
Accelerated filer o
Non-accelerated filer o
Smaller reporting company o
 
Emerging growth company o
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o  No x
The number of shares of the issuer’s common stock, par value $1.25, outstanding as of October 22, 2018 was 35,159,939 shares.
 



TABLE OF CONTENTS
 
PART I.  FINANCIAL INFORMATION
 
PART II.  OTHER INFORMATION
 


Table of Contents


PART I.   FINANCIAL INFORMATION
ITEM 1.  FINANCIAL STATEMENTS
SOUTHSIDE BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(in thousands, except share amounts)
 
 
September 30,
2018
 
December 31,
2017
 
 
ASSETS
 
 
 
 
Cash and due from banks
 
$
85,103

 
$
79,171

Interest earning deposits
 
70,685

 
111,541

Federal funds sold
 
18,284

 
7,980

Total cash and cash equivalents
 
174,072

 
198,692

Securities available for sale, at estimated fair value
 
1,939,277

 
1,538,755

Securities held to maturity, at carrying value (estimated fair value of $156,472 and $921,800, respectively)
 
163,365

 
909,506

FHLB stock, at cost
 
32,291

 
55,729

Equity investments
 
12,029

 
5,821

Loans held for sale
 
954

 
2,001

Loans:
 
 

 
 

Loans
 
3,274,524

 
3,294,356

Less:  Allowance for loan losses
 
(26,092
)
 
(20,781
)
Net loans
 
3,248,432

 
3,273,575

Premises and equipment, net
 
133,939

 
133,640

Goodwill
 
201,116

 
201,246

Other intangible assets, net
 
19,009

 
22,993

Interest receivable
 
22,456

 
28,491

Deferred tax asset, net
 
16,433

 
12,204

Unsettled trades to sell securities
 
14,602

 

Unsettled issuances of brokered certificates of deposit
 
10,000

 

Bank owned life insurance
 
97,611

 
100,368

Other assets
 
19,768

 
15,076

Total assets
 
$
6,105,354

 
$
6,498,097

 
 
 

 
 

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 

 
 

Deposits:
 
 

 
 

Noninterest bearing
 
$
1,033,572

 
$
1,037,401

Interest bearing
 
3,519,940

 
3,478,046

Total deposits
 
4,553,512

 
4,515,447

Federal funds purchased and repurchase agreements
 
8,975

 
9,498

FHLB borrowings
 
561,267

 
1,017,361

Subordinated notes, net of unamortized debt issuance costs
 
98,366

 
98,248

Trust preferred subordinated debentures, net of unamortized debt issuance costs
 
60,244

 
60,241

Unsettled trades to purchase securities
 
28,662

 

Other liabilities
 
41,822

 
43,162

Total liabilities
 
5,352,848

 
5,743,957

 
 
 

 
 

Off-balance-sheet arrangements, commitments and contingencies (Note 13)
 


 


 
 
 

 
 
Shareholders’ equity:
 
 

 
 

Common stock:  ($1.25 par value, 80,000,000 shares authorized and 37,832,989 shares issued at September 30, 2018 and 40,000,000 shares authorized and 37,802,352 shares issued at December 31, 2017)
 
47,291

 
47,253

Paid-in capital
 
761,594

 
757,439

Retained earnings
 
58,578

 
32,851

Treasury stock, shares at cost (2,673,050 at September 30, 2018 and 2,802,019 at December 31, 2017)
 
(45,966
)
 
(47,105
)
Accumulated other comprehensive loss
 
(68,991
)
 
(36,298
)
Total shareholders’ equity
 
752,506

 
754,140

Total liabilities and shareholders’ equity
 
$
6,105,354

 
$
6,498,097

The accompanying notes are an integral part of these consolidated financial statements.


1

Table of Contents


SOUTHSIDE BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(in thousands, except per share data)
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2018
 
2017
 
2018
 
2017
Interest income
 
 
 
 
 
 
 
Loans
$
39,831

 
$
29,322

 
$
117,962

 
$
84,666

Investment securities – taxable
36

 
58

 
314

 
702

Investment securities – tax-exempt
6,331

 
5,670

 
19,065

 
18,381

Mortgage-backed securities
10,086

 
10,567

 
31,190

 
31,430

FHLB stock and equity investments
377

 
329

 
1,202

 
926

Other interest earning assets
491

 
527

 
1,410

 
1,265

Total interest income
57,152

 
46,473

 
171,143

 
137,370

Interest expense
 

 
 

 
 

 
 

Deposits
9,497

 
5,420

 
25,529

 
14,839

FHLB borrowings
3,108

 
4,156

 
9,747

 
11,171

Subordinated notes
1,423

 
1,413

 
4,228

 
4,204

Trust preferred subordinated debentures
684

 
520

 
1,911

 
1,481

Other borrowings
30

 
4

 
74

 
11

Total interest expense
14,742

 
11,513

 
41,489

 
31,706

Net interest income
42,410

 
34,960

 
129,654

 
105,664

Provision for loan losses
975

 
960

 
5,991

 
3,404

Net interest income after provision for loan losses
41,435

 
34,000

 
123,663

 
102,260

Noninterest income
 

 
 

 
 

 
 

Deposit services
6,317

 
5,476

 
18,757

 
15,845

Net (loss) gain on sale of securities available for sale
(741
)
 
627

 
(1,900
)
 
874

Gain on sale of loans
303

 
347

 
591

 
1,553

Trust income
1,568

 
873

 
5,259

 
2,662

Bank owned life insurance income
552

 
636

 
2,369

 
1,905

Brokerage services
532

 
561

 
1,488

 
1,790

Other
1,491

 
888

 
4,075

 
3,745

Total noninterest income
10,022

 
9,408

 
30,639

 
28,374

Noninterest expense
 

 
 

 
 

 
 

Salaries and employee benefits
17,628

 
14,472

 
52,820

 
45,463

Occupancy expense
3,396

 
2,981

 
10,339

 
8,741

Acquisition expense
437

 
405

 
2,295

 
878

Advertising, travel & entertainment
648

 
487

 
2,108

 
1,618

ATM and debit card expense
251

 
1,024

 
840

 
2,840

Professional fees
824

 
996

 
2,846

 
2,985

Software and data processing expense
977

 
732

 
2,939

 
2,145

Telephone and communications
354

 
459

 
1,370

 
1,461

FDIC insurance
435

 
441

 
1,416

 
1,327

Amortization expense on intangibles
1,279

 
388

 
3,985

 
1,229

Other
2,733

 
2,622

 
8,945

 
7,715

Total noninterest expense
28,962

 
25,007

 
89,903

 
76,402

Income before income tax expense
22,495

 
18,401

 
64,399

 
54,232

Income tax expense
2,192

 
3,890

 
7,642

 
10,251

Net income
$
20,303

 
$
14,511

 
$
56,757

 
$
43,981

 
 
 
 
 
 
 
 
Earnings per common share – basic
$
0.58

 
$
0.49

 
$
1.62

 
$
1.50

Earnings per common share – diluted
$
0.58

 
$
0.49

 
$
1.61

 
$
1.49

Dividends paid per common share
$
0.30

 
$
0.28

 
$
0.88

 
$
0.81

The accompanying notes are an integral part of these consolidated financial statements.

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Table of Contents


SOUTHSIDE BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
(in thousands)
 
Three Months Ended
 
Nine Months Ended

September 30,
 
September 30,
 
2018
 
2017
 
2018
 
2017
Net income
$
20,303

 
$
14,511

 
$
56,757

 
$
43,981

Other comprehensive (loss) income:
 

 
 

 
 

 
 

Securities available for sale and transferred securities:
 
 
 
 
 
 
 
Change in net unrealized holding (losses) gains on available for sale securities during the period
(16,885
)
 
344

 
(65,039
)
 
18,450

Unrealized net gain on securities transferred from held to maturity to available for sale under the transition guidance enumerated in ASU 2017-12

 

 
11,881

 

Change in net unrealized losses on securities transferred from held to maturity to available for sale

 

 
401

 

Reclassification adjustment for net loss on equity investments, reclassified to retained earnings with adoption of ASU 2016-01

 

 
107

 

Reclassification adjustment for amortization related to available for sale and held to maturity debt securities
(661
)
 
490

 
729

 
1,191

Reclassification adjustment for net loss (gain) on sale of available for sale securities, included in net income
741

 
(627
)
 
1,900

 
(874
)
Derivatives:
 
 
 
 
 
 
 
Change in net unrealized gain (loss) on effective cash flow hedge interest rate swap derivatives
1,894

 
(236
)
 
7,864

 
(2,084
)
Change in net unrealized gains on interest rate swap derivatives terminated during the period

 

 

 
273

Reclassification adjustment from other comprehensive income (loss) related to derivatives designated as cash flow hedge
(406
)
 
101

 
(864
)
 
694

Pension plans:
 
 
 
 
 
 
 
Amortization of net actuarial loss and prior service credit, included in net periodic benefit cost
546

 
402

 
1,637

 
1,205

Other comprehensive (loss) income, before tax
(14,771
)
 
474

 
(41,384
)
 
18,855

Income tax benefit (expense) related to items of other comprehensive income (loss)
3,102

 
(166
)
 
8,691

 
(6,599
)
Other comprehensive (loss) income, net of tax
(11,669
)
 
308

 
(32,693
)
 
12,256

Comprehensive income
$
8,634

 
$
14,819

 
$
24,064

 
$
56,237


The accompanying notes are an integral part of these consolidated financial statements.

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SOUTHSIDE BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(UNAUDITED)
(in thousands, except share and per share data)
 
Common
Stock
 
Paid In
Capital
 
Retained
Earnings
 
Treasury
Stock
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Total
Shareholders’
Equity
Balance at December 31, 2016
$
39,320

 
$
535,240

 
$
30,098

 
$
(47,891
)
 
$
(38,493
)
 
$
518,274

Net income

 

 
43,981

 

 

 
43,981

Other comprehensive income

 

 

 

 
12,256

 
12,256

Issuance of common stock for dividend reinvestment plan (33,000 shares)
41

 
1,057

 

 

 

 
1,098

Stock compensation expense

 
1,393

 

 

 

 
1,393

Net issuance of common stock under employee stock plans (138,035 shares)
61

 
1,802

 
(73
)
 
600

 

 
2,390

Cash dividends paid on common stock ($0.81 per share)

 

 
(23,369
)
 

 

 
(23,369
)
Stock dividend declared (719,515 shares)
899

 
24,061

 
(24,960
)
 

 

 

Balance at September 30, 2017
$
40,321

 
$
563,553

 
$
25,677

 
$
(47,291
)
 
$
(26,237
)
 
$
556,023

 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2017
$
47,253

 
$
757,439

 
$
32,851

 
$
(47,105
)
 
$
(36,298
)
 
$
754,140

Net income

 

 
56,757

 

 

 
56,757

Other comprehensive loss

 

 

 

 
(32,693
)
 
(32,693
)
Issuance of common stock for dividend reinvestment plan (30,637 shares)
38

 
1,051

 

 

 

 
1,089

Stock compensation expense

 
1,626

 

 

 

 
1,626

Net issuance of common stock under employee stock plans (128,969 shares)

 
1,478

 
(87
)
 
1,139

 

 
2,530

Cash dividends paid on common stock ($0.88 per share)

 

 
(30,858
)
 

 

 
(30,858
)
Cumulative effect of ASU 2016-01

 

 
(85
)
 

 

 
(85
)
Balance at September 30, 2018
$
47,291

 
$
761,594

 
$
58,578

 
$
(45,966
)
 
$
(68,991
)
 
$
752,506


The accompanying notes are an integral part of these consolidated financial statements.

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SOUTHSIDE BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
(UNAUDITED)
(in thousands)
 
Nine Months Ended
 
September 30,
 
2018
 
2017
OPERATING ACTIVITIES:
 
 
 
Net income
$
56,757

 
$
43,981

Adjustments to reconcile net income to net cash provided by operations:
 

 
 

Depreciation and net amortization
10,571

 
7,251

Securities premium amortization (discount accretion), net
10,875

 
13,502

Loan (discount accretion) premium amortization, net
(2,021
)
 
(818
)
Provision for loan losses
5,991

 
3,404

Stock compensation expense
1,626

 
1,393

Deferred tax expense
4,535

 
453

Net loss (gain) on sale of securities available for sale
1,900

 
(874
)
Net loss on premises and equipment
379

 
77

Gross proceeds from sales of loans held for sale
19,612

 
50,689

Gross originations of loans held for sale
(18,565
)
 
(45,225
)
Net loss (gain) on other real estate owned
411

 
(1
)
Net gain on sale of customer receivables
(124
)
 

Net change in:
 

 
 

Interest receivable
6,035

 
6,391

Other assets
(1,672
)
 
2,696

Interest payable
(839
)
 
(923
)
Other liabilities
7,639

 
(4,639
)
Net cash provided by operating activities
103,110

 
77,357

 
 
 
 
INVESTING ACTIVITIES:
 

 
 

Securities available for sale:
 
 
 
Purchases
(228,281
)
 
(371,555
)
Sales
394,232

 
486,460

Maturities, calls and principal repayments
122,135

 
87,096

Securities held to maturity:
 

 
 

Purchases

 
(1,521
)
Maturities, calls and principal repayments
2,656

 
25,455

Proceeds from redemption of FHLB stock and other investments
24,360

 
114

Purchases of FHLB stock and other investments
(1,174
)
 
(761
)
Net loan paydowns (originations)
15,892

 
(127,240
)
Proceeds from sales of customer receivables
4,300

 

Purchases of premises and equipment
(8,863
)
 
(7,090
)
Proceeds from sales of premises and equipment
1,905

 
8

Proceeds from sales of other real estate owned
771

 
134

Proceeds from sales of repossessed assets
378

 
341

Net cash provided by investing activities
328,311

 
91,441

 
 
 
 
(continued)
 
 
 

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SOUTHSIDE BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
(UNAUDITED) (continued)
(in thousands)
 
Nine Months Ended
 
September 30,
 
2018
 
2017
FINANCING ACTIVITIES:
 
 
 
Net change in deposits
$
27,809

 
$
31,031

Net (decrease) increase in federal funds purchased and repurchase agreements
(523
)
 
1,986

Proceeds from FHLB borrowings
2,569,000

 
2,366,476

Repayment of FHLB borrowings
(3,025,088
)
 
(2,533,551
)
Proceeds from stock option exercises
2,655

 
2,527

Cash paid to tax authority related to tax withholding on share-based awards
(125
)
 
(137
)
Proceeds from the issuance of common stock for dividend reinvestment plan
1,089

 
1,098

Cash dividends paid
(30,858
)
 
(23,369
)
Net cash used in financing activities
(456,041
)
 
(153,939
)
 
 
 
 
Net (decrease) increase in cash and cash equivalents
(24,620
)
 
14,859

Cash and cash equivalents at beginning of period
198,692

 
169,654

Cash and cash equivalents at end of period
$
174,072

 
$
184,513

 
 
 
 
SUPPLEMENTAL DISCLOSURES FOR CASH FLOW INFORMATION:
 

 
 


 
 
 
Interest paid
$
42,209

 
$
32,629

Income taxes paid
$
2,000

 
$
8,300

 
 
 
 
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES:
 

 
 


 
 
 
Loans transferred to other repossessed assets and real estate through foreclosure
$
1,220

 
$
407

Loans transferred from portfolio to held for sale
$
3,984

 
$

Transfer of held to maturity securities to available for sale securities
$
743,421

 
$

Adjustment to pension liability
$
1,637

 
$
(1,205
)
Stock dividend (2.5% for 2017)
$

 
$
24,960

Unsettled trades to purchase securities
$
(28,662
)
 
$
(16,673
)
Unsettled trades to sell securities
$
14,602

 
$
11,843

Unsettled issuances of brokered CDs
$
10,000

 
$


The accompanying notes are an integral part of these consolidated financial statements.


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Table of Contents


SOUTHSIDE BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


1.    Summary of Significant Accounting and Reporting Policies
Basis of Presentation
In this report, the words “the Company,” “we,” “us,” and “our” refer to the combined entities of Southside Bancshares, Inc. and its subsidiaries.  The words “Southside” and “Southside Bancshares” refer to Southside Bancshares, Inc.  The words “Southside Bank” and “the Bank” refer to Southside Bank. “Omni” refers to OmniAmerican Bancorp, Inc., a bank holding company, and its wholly-owned subsidiary, OmniAmerican Bank, acquired by Southside on December 17, 2014. “Diboll” refers to Diboll State Bancshares, Inc., a bank holding company and its wholly-owned subsidiary, First Bank & Trust East Texas, acquired by Southside on November 30, 2017.
The accompanying unaudited consolidated financial statements have been prepared in accordance with United States (“U.S.”) generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, not all information required by GAAP for complete financial statements is included in these interim statements. In the opinion of management, all adjustments necessary for a fair presentation of such financial statements have been included.  Such adjustments consisted only of normal recurring items.  The preparation of these consolidated financial statements in accordance with GAAP requires the use of management’s estimates.  These estimates are subjective in nature and involve matters of judgment.  Actual amounts could differ from these estimates.
Interim results are not necessarily indicative of results for a full year.  These financial statements should be read in conjunction with the financial statements and notes thereto in our Annual Report on Form 10-K for the year ended December 31, 2017.  
Accounting Changes and Reclassifications
Certain prior period amounts have been reclassified to conform to current year presentation.
We adopted Accounting Standards Update (“ASU”) 2014-09, “Revenue from Contracts with Customers (Topic 606)” as modified by subsequently issued ASUs 2015-14, 2016-08, 2016-10, 2016-12 and 2016-20, on January 1, 2018, the effective date of the guidance, using the modified retrospective approach. As the majority of the Company’s revenues are not subject to the new guidance, the adoption of ASU 2014-09 did not have a material impact on the Company’s consolidated financial position, results of operations, equity or cash flows. As a result of the guidance, we adjusted the presentation of revenue received from our brokerage services, merchant services, as well as our interchange income associated with debit card services, which were all deemed to be services offered in an agent capacity. These lines of revenue will now be presented on a net basis with the fee income disclosed net of the related costs in the noninterest income section of the consolidated statements of income. In connection with the adoption, for the three and nine months ended September 30, 2018, we netted $1.0 million and $2.8 million of debit card expense against deposit services income and $172,000 and $474,000 of brokerage services expense against brokerage services income, respectively. Due to the implementation of the guidance under the modified retrospective method, prior periods have not been adjusted and are not comparative. Refer to our revenue recognition discussion below and “Note 1 - Summary of Significant Accounting and Reporting Policies” in our Annual Report on Form 10-K for the year ended December 31, 2017 for more information related to our revenue recognition policies.
We adopted ASU 2016-01, “Financial Instruments – Overall (Subtopic 825-10) – Recognition and Measurement of Financial Assets and Financial Liabilities,” on January 1, 2018, the effective date of the guidance.  ASU 2016-01, among other things, (i) requires equity investments, with certain exceptions, to be measured at fair value with changes in fair value recognized in net income, (ii) simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment, (iii) eliminates the requirement for public business entities to disclose the methods and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet, (iv) requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes, (v) requires an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments, (vi) requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset on the balance sheet or the accompanying notes to the financial statements and (vii) clarifies that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available for sale (“AFS”) securities in combination with the entity’s other deferred tax assets. The guidance requires companies to apply the requirements in the year of adoption, through cumulative adjustment, while the guidance related to equity securities without readily determinable fair values should be applied prospectively. Adoption of this guidance resulted in a cumulative adjustment to retained earnings of $85,000, net of tax, on January 1, 2018 and an equity security with a carrying value of $5.9 million that was previously recognized in securities AFS, at estimated fair value

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on our consolidated balance sheet to instead be recognized in equity investments, with subsequent changes in fair value being recognized in income. Also in conjunction with the adoption, our fair value measurement of financial instruments will be based upon an exit price notion as required in ASC 820.  The guidance was applied on a prospective approach resulting in prior periods no longer being comparable.
We adopted ASU 2017-07, “Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost,” on January 1, 2018. ASU 2017-07 requires employers to present the service cost component of net periodic postretirement benefit cost in the same income statement line item as other employee compensation costs arising from services rendered during the period. Employers are required to present the other components of the net periodic benefit cost separately from the line item that includes the service cost and outside of any subtotal of operating income, if one is presented. The guidance requires companies to apply the requirements retrospectively to all prior periods presented. We elected to use the practical expedient that permits us to use the amounts in our pension plan disclosures in our employee benefit footnote for the prior comparative periods as the estimation basis for applying the retrospective presentation requirements, which resulted in an increase of $77,000 and $234,000 in salaries and employee benefits expense and a decrease of $77,000 and $234,000 in other noninterest expense for the three and nine months ended September 30, 2017, respectively.
We early adopted ASU 2017-12, “Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities,” on January 1, 2018. ASU 2017-12 (i) expands hedge accounting for nonfinancial and financial risk components and amends measurement methodologies to more closely align hedge accounting with a company’s risk management activities, (ii) decreases the complexity of preparing and understanding hedge results by eliminating the separate measurement and reporting of hedge ineffectiveness, (iii) enhances transparency, comparability and understanding of hedge results through enhanced disclosures and changing the presentation of hedge results to align the effects of the hedging instrument and the hedged item and (iv) reduces the cost and complexity of applying hedge accounting by simplifying the manner in which assessments of hedge effectiveness may be performed. The guidance also permits a transition election to reclassify held to maturity (“HTM”) securities to AFS securities if a portion of those securities would qualify to be hedged under the new “last-of-layer” approach. The guidance requires companies to apply the requirements to existing hedging relationships on the date of adoption, and the effect of the adoption should be reflected as of the beginning of the fiscal year of adoption. The guidance did not have an impact on our derivatives that qualified as hedges on the date of adoption and thus no adjustment was made to retained earnings. In conjunction with the adoption of ASU 2017-12, we made the transition election to reclassify approximately $743.4 million in book value of securities from HTM to AFS that qualified for the last-of-layer method described in ASU 2017-12.
During the second quarter of 2018, we entered into partial term fair value hedges, as allowed under the recently adopted ASU 2017-12, for certain of our fixed rate callable AFS municipal securities. These hedges are expected to be effective in offsetting changes in the fair value of the hedged securities. Gains and losses on derivative instruments designated as fair value hedges, as well as the change in fair value on the hedged item, are recorded in interest income in the consolidated statements of income.
Revenue Recognition
Our revenue consists of net interest income on financial assets and financial liabilities and noninterest income.  The classifications of our revenue are presented in the consolidated statements of income. On January 1, 2018, we adopted ASU 2014-09, “Revenue from Contracts with Customers (Topic 606)” using the modified retrospective method. The revenue recognition principle in ASU 2014-09 is that an entity should recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.
ASU 2014-09 permits an entity to recognize the incremental costs of obtaining a contract as an expense when incurred if the amortization period of the asset would have been one year or less. We generally expense sales commissions when incurred because the amortization period is within one year or less. These costs are recorded within salaries and employee benefits on the consolidated statements of income.
Revenue is recognized when obligations under the terms of a contract with our customer are satisfied; generally this occurs with the transfer of control of goods or services. Under ASU 2014-09’s practical expedient to recognize revenue equal to the amounts for which we have a right to invoice, revenue is measured as the amount of consideration we expect to receive in exchange for the transfer of those goods or services.
The following summarizes our revenue recognition policies as they relate to revenue from contracts with customers under ASU 2014-09:
Deposit services. Service charges on deposit accounts include fees for banking services provided, overdrafts and non-sufficient funds. Revenue is generally recognized in accordance with published deposit account agreements for retail accounts or contractual agreements for commercial accounts. Our deposit services also include our ATM and debit card interchange revenue that is presented net of the associated costs. Interchange revenue is generated by our deposit customers’ usage and volume of activity. Interchange rates are not controlled by the Company, which effectively acts as processor that collects and remits payments associated with customer debit card transactions.

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Trust income. Trust income includes fees and commissions from investment management, administrative and advisory services primarily for individuals, and to a lesser extent, partnerships and corporations. Revenue is recognized on an accrual basis at the time the services are performed and when we have a right to invoice and are based on either the market value of the assets managed or the services provided.
Brokerage services. Brokerage services income includes fees and commissions charged when we arrange for another party to transfer brokerage services to a customer. The fees and commissions under this agent relationship are based upon stated fee schedules based upon the type of transaction, volume and value of the services provided.
Other noninterest income. Other noninterest income includes among other things, merchant services income. Merchant services revenue is derived from third party vendors that process credit card transactions on behalf of our merchant customers. Merchant services revenue is primarily comprised of residual fee income based on the referred merchant’s processing volumes and/or margin.
Securities
Available for Sale (“AFS”).  Debt securities that will be held for indefinite periods of time, including securities that may be sold in response to changes in market interest or prepayment rates, needs for liquidity and changes in the availability of and the yield on alternative investments are classified as AFS.  These assets are carried at fair value with changes recorded in other comprehensive income.  Fair value is determined using quoted market prices as of the close of business on the balance sheet date.  If quoted market prices are not available, fair values are based on quoted market prices for similar securities or estimates from independent pricing services. Securities that are hedged with qualifying derivatives are carried at fair value with the change in fair value on both the hedged instrument and the securities recorded in interest income in the consolidated statements of income.
Held to Maturity (“HTM”). Debt securities that management has the positive intent and ability to hold until maturity are classified as HTM and are carried at their remaining unpaid principal balance, net of unamortized premiums or unaccreted discounts.
Equity Investments. Beginning January 1, 2018, upon adoption of ASU 2016-01, equity investments with readily determinable fair values are stated at fair value with unrealized gains and losses reported in income. For periods prior to January 1, 2018, certain equity investments were classified as AFS and stated at fair value with unrealized gains and losses reported as a separate component of accumulated other comprehensive income (“AOCI”), net of tax. Equity investments without readily determinable fair values are recorded at cost less impairment, if any.
Accounting Pronouncements
In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842).” ASU 2016-02 requires a lessee to recognize assets and liabilities for leases with lease terms of more than 12 months. Consistent with current GAAP, the recognition, measurement and presentation of expenses and cash flows arising from a lease by a lessee primarily will depend on its classification as a finance or operating lease. However, unlike current GAAP which requires only capital leases to be recognized on the balance sheet, the new ASU 2016-02 will require both finance (formerly known as “capital”) and operating leases to be recognized on the balance sheet. ASU 2016-02 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted. The guidance originally required companies to apply the requirements in the year of adoption using a modified retrospective approach; however, in July 2018, the FASB issued ASU 2018-11 “Leases (Topic 842): Targeted Improvements,” which provides lessees the option to apply the new leasing standard by recognizing a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. We plan to select this transition option. We are currently evaluating the impact this guidance will have on our consolidated financial statements, and we anticipate our assessment to be completed during the fiscal year 2018. 
In June 2016, the FASB issued ASU 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” ASU 2016-13 introduces an approach based on expected losses to estimate credit losses on certain types of financial instruments. ASU 2016-13 also modifies the impairment model for AFS debt securities and provides for a simplified accounting model for purchased financial assets with credit deterioration since their origination. ASU 2016-13 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. The guidance requires companies to apply the requirements in the year of adoption through cumulative adjustment with some aspects of the update requiring a prospective transition approach. We are currently evaluating the potential impact of the pending adoption of ASU 2016-13 on our consolidated financial statements. We plan to adopt on January 1, 2020, the effective date. We have developed a project plan and have assigned a project team to complete the analysis needed to implement the guidance. The team is currently completing the data collection and anticipates running parallel models in early 2019.
In January 2017, the FASB issued ASU 2017-04, “Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment.” ASU 2017-04 is intended to simplify goodwill impairment testing by eliminating the second step of the analysis which requires the calculation of the implied fair value of goodwill to measure a goodwill impairment charge. The update requires entities to compare the fair value of a reporting unit with its carrying amount and recognize an impairment charge for any amount

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by which the carrying amount exceeds the reporting unit’s fair value, to the extent that the loss recognized does not exceed the amount of goodwill allocated to that reporting unit. ASU 2017-04 is effective for annual and interim goodwill impairment tests performed in periods beginning after December 15, 2019. Early adoption is permitted for annual and interim goodwill impairment testing dates after January 1, 2017. The guidance requires companies to apply the requirements prospectively in the year of adoption. ASU 2017-04 is not expected to have a significant impact on our consolidated financial statements.
In March 2017, the FASB issued ASU 2017-08, “Receivables - Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities.” Under current GAAP, premiums on callable debt securities are generally amortized over the contractual life of the security. ASU 2017-08 requires the premium on callable debt securities to be amortized to the earliest call date. If the debt security is not called at the earliest call date, the holder of the debt security would be required to reset the effective yield on the debt security based on the payment terms required by the debt security. ASU 2017-08 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. We have elected to adopt on January 1, 2019. The guidance requires companies to apply the requirements on a modified retrospective basis through a cumulative adjustment directly to retained earnings as of the beginning of the period of adoption. We have evaluated an estimate of the potential impact of the pending adoption of ASU 2017-08 on our consolidated financial statements. Based on our existing municipal securities portfolio, the preliminary estimate of amortizing premiums to the earliest call date will increase amortization expense recorded through interest income for the year ended December 31, 2019 by approximately $2.9 million. Our preliminary estimate of the cumulative adjustment to retained earnings, at the date of adoption, is estimated to reduce retained earnings by $14.4 million, before tax.

2.    Acquisition
On November 30, 2017, we acquired 100% of the outstanding stock of Diboll State Bancshares, Inc. and its wholly-owned subsidiary First Bank & Trust East Texas (collectively, “Diboll”), headquartered in Diboll, Texas. Diboll operated 17 banking offices in Diboll and surrounding areas. We acquired Diboll to further expand our presence in the East Texas market. The operations of Diboll were merged into the Company as of the date of the acquisition.
The Diboll acquisition was accounted for using the acquisition method of accounting and accordingly, purchased assets, including identifiable intangible assets and assumed liabilities were recorded at their respective acquisition date fair values.  The purchase price allocation is preliminary and is subject to final determination and valuation of the fair value of assets acquired and liabilities assumed. Subsequent to filing our Annual Report on Form 10-K for the year ended December 31, 2017, we continue to evaluate the assets and liabilities assumed. This evaluation has resulted in an immaterial adjustment to goodwill at September 30, 2018, based on the filing of the short-period Federal Income Tax return for Diboll and its subsidiaries. The impact of the adjustments to goodwill, net of deferred tax, is reflected below. For more information concerning the fair value of the assets acquired and liabilities assumed in relation to the acquisition of Diboll, see “Note 2 - Acquisition” in our Annual Report on Form 10-K for the year ended December 31, 2017.
The following table reflects the changes in the carrying amount of goodwill for the three months ended September 30, 2018 (in thousands):
 
 
Goodwill
 
 
 
Balance as of December 31, 2017
 
$
201,246

Less: measurement period adjustments
 
(130
)
Balance as of September 30, 2018
 
$
201,116



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3.     Earnings Per Share
Earnings per share on a basic and diluted basis are calculated as follows (in thousands, except per share amounts).
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2018
 
2017
 
2018
 
2017
Basic and Diluted Earnings:
 
 
 
 
 
 
 
Net income
$
20,303

 
$
14,511

 
$
56,757

 
$
43,981

Basic weighted-average shares outstanding
35,114

 
29,370

 
35,066

 
29,326

Add:   Stock awards
174

 
200

 
175

 
205

Diluted weighted-average shares outstanding
35,288

 
29,570

 
35,241

 
29,531

Basic Earnings Per Share:
 
 
 
 
 
 
 
Net Income
$
0.58

 
$
0.49

 
$
1.62

 
$
1.50

Diluted Earnings Per Share:
 
 
 
 
 
 
 
Net Income
$
0.58

 
$
0.49

 
$
1.61

 
$
1.49

For the three- and nine-month periods ended September 30, 2018, there were approximately 84,000 and 61,000 anti-dilutive shares, respectively. For the three- and nine-month periods ended September 30, 2017, there were approximately 45,000 and 49,000 anti-dilutive shares, respectively.


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4.     Accumulated Other Comprehensive Income (Loss)

The changes in accumulated other comprehensive income (loss) by component are as follows (in thousands):

 
Three Months Ended September 30, 2018
 
 
 
 
Pension Plans
 
 
 
Unrealized Gains (Losses) on Securities
 
Unrealized Gains (Losses) on Derivatives
 
Net Prior
 Service
 (Cost)
 Credit
 
Net Gain (Loss)
 
Total
Beginning balance, net of tax
$
(42,536
)
 
$
10,753

 
$
(135
)
 
$
(25,404
)
 
$
(57,322
)
Other comprehensive income (loss):
 
 
 
 
 
 
 
 
 
Other comprehensive (loss) income before reclassifications
(16,885
)
 
1,894

 

 

 
(14,991
)
Reclassified from accumulated other comprehensive income
80

 
(406
)
 
(1
)
 
547

 
220

Income tax benefit (expense)
3,529

 
(312
)
 

 
(115
)
 
3,102

Net current-period other comprehensive (loss) income, net of tax
(13,276
)
 
1,176

 
(1
)
 
432

 
(11,669
)
Ending balance, net of tax
$
(55,812
)
 
$
11,929

 
$
(136
)
 
$
(24,972
)
 
$
(68,991
)
 
 
 
 
 
 
 
 
 
 
 
Nine Months Ended September 30, 2018
 

 
 
Pension Plans
 
 
 
Unrealized Gains (Losses) on Securities
 
Unrealized Gains (Losses) on Derivatives
 
Net Prior
Service
(Cost)
Credit
 
Net Gain (Loss)
 
Total
Beginning balance, net of tax
$
(16,295
)
 
$
6,399

 
$
(133
)
 
$
(26,269
)
 
$
(36,298
)
Other comprehensive income (loss):
 
 
 
 
 
 
 
 
 
Other comprehensive (loss) income before reclassifications
(52,757
)
 
7,864

 

 

 
(44,893
)
Reclassified from accumulated other comprehensive income (1)
2,736

 
(864
)
 
(5
)
 
1,642

 
3,509

Income tax benefit (expense)
10,504

 
(1,470
)
 
2

 
(345
)
 
8,691

Net current-period other comprehensive (loss) income, net of tax
(39,517
)
 
5,530

 
(3
)
 
1,297

 
(32,693
)
Ending balance, net of tax
$
(55,812
)
 
$
11,929

 
$
(136
)
 
$
(24,972
)
 
$
(68,991
)

(1)
As discussed in “Note 1 – Summary of Significant Accounting and Reporting Policies,” the Company adopted ASU 2016-01 on January 1, 2018. This amount includes a reclassification for the cumulative adjustment to retained earnings of $107,000 ($85,000, net of tax).


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Three Months Ended September 30, 2017
 
 
 
 
Pension Plans
 
 
 
Unrealized Gains (Losses) on Securities
 
Unrealized Gains (Losses) on Derivatives
 
Net Prior
 Service
 (Cost)
 Credit
 
Net Gain (Loss)
 
Total
Beginning balance, net of tax
$
(11,644
)
 
$
3,957

 
$
(136
)
 
$
(18,722
)
 
$
(26,545
)
Other comprehensive income (loss):
 
 
 
 
 
 
 
 
 
Other comprehensive income (loss) before reclassifications
344

 
(236
)
 

 

 
108

Reclassified from accumulated other comprehensive income
(137
)
 
101

 
(1
)
 
403

 
366

Income tax (expense) benefit
(72
)
 
47

 

 
(141
)
 
(166
)
Net current-period other comprehensive income (loss), net of tax
135

 
(88
)
 
(1
)
 
262

 
308

Ending balance, net of tax
$
(11,509
)
 
$
3,869

 
$
(137
)
 
$
(18,460
)
 
$
(26,237
)
 
 
 
 
 
 
 
 
 
 
 
Nine Months Ended September 30, 2017
 

 
 
Pension Plans
 
 
 
Unrealized Gains (Losses) on Securities
 
Unrealized Gains (Losses) on Derivatives
 
Net Prior
 Service
 (Cost)
 Credit
 
Net Gain (Loss)
 
Total
Beginning balance, net of tax
$
(23,708
)
 
$
4,595

 
$
(133
)
 
$
(19,247
)
 
$
(38,493
)
Other comprehensive income (loss):
 
 
 
 
 
 
 
 
 
Other comprehensive income (loss) before reclassifications
18,450

 
(1,811
)
 

 

 
16,639

Reclassified from accumulated other comprehensive income
317

 
694

 
(5
)
 
1,210

 
2,216

Income tax (expense) benefit
(6,568
)
 
391

 
1

 
(423
)
 
(6,599
)
Net current-period other comprehensive income (loss), net of tax
12,199

 
(726
)
 
(4
)
 
787

 
12,256

Ending balance, net of tax
$
(11,509
)
 
$
3,869

 
$
(137
)
 
$
(18,460
)
 
$
(26,237
)

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The reclassifications out of accumulated other comprehensive income (loss) into net income are presented below (in thousands):
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2018
 
2017
 
2018
 
2017
 
 
 
 
 
 
 
 
Unrealized losses on securities transferred:
 
 
 
 
 
 
 
Amortization of unrealized losses (1)
$
661

 
$
(490
)
 
$
(729
)
 
$
(1,191
)
Tax (expense) benefit
(139
)
 
172

 
153

 
417

Net of tax
$
522

 
$
(318
)
 
$
(576
)
 
$
(774
)
 
 
 
 
 
 
 
 
Unrealized gains and losses on available for sale securities:
 
 
 
 
 
 
 
Realized net (loss) gain on sale of securities (2)
$
(741
)
 
$
627

 
$
(1,900
)
 
$
874

Tax benefit (expense)
156

 
(220
)
 
399

 
(306
)
Net of tax
$
(585
)
 
$
407

 
$
(1,501
)
 
$
568

 
 
 
 
 
 
 
 
Derivatives:
 
 
 
 
 
 
 
Realized net gain (loss) on interest rate swap derivatives (3)
$
384

 
$
(122
)
 
$
799

 
$
(746
)
Tax (expense) benefit
(81
)
 
43

 
(168
)
 
261

Net of tax
$
303

 
$
(79
)
 
$
631

 
$
(485
)
 
 
 
 
 
 
 
 
Amortization of unrealized gains on terminated interest rate swap derivatives (3)
$
22

 
$
21

 
$
65

 
$
52

Tax expense
(5
)
 
(7
)
 
(14
)
 
(18
)
Net of tax
$
17

 
$
14

 
$
51

 
$
34

 
 
 
 
 
 
 
 
Amortization of pension plan:
 
 
 
 
 
 
 
Net actuarial loss (4)
$
(547
)
 
$
(403
)
 
$
(1,642
)
 
$
(1,210
)
Prior service credit (4)
1

 
1

 
5

 
5

Total before tax
(546
)
 
(402
)
 
(1,637
)
 
(1,205
)
Tax benefit
115

 
141

 
343

 
422

Net of tax
(431
)
 
(261
)
 
(1,294
)
 
(783
)
Total reclassifications for the period, net of tax
$
(174
)
 
$
(237
)
 
$
(2,689
)
 
$
(1,440
)
(1)    Included in interest income on the consolidated statements of income.
(2)    Listed as net (loss) gain on sale of securities available for sale on the consolidated statements of income.
(3)    Included in interest expense for FHLB borrowings on the consolidated statements of income.
(4)
These accumulated other comprehensive income components are included in the computation of net periodic pension cost (income) presented in “Note 8 - Employee Benefit Plans.”

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5.     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 September 30, 2018 and December 31, 2017 are reflected in the tables below (in thousands):
 
 
September 30, 2018

 
Amortized
 
Gross
Unrealized
 
Gross Unrealized
 
Estimated
AVAILABLE FOR SALE
 
Cost
 
Gains
 
Losses
 
Fair Value
Investment Securities:
 
 
 
 
 
 
 
 
U.S. Treasury
 
$
19,706

 
$
42

 
$

 
$
19,748

State and Political Subdivisions
 
718,237

 
4,666

 
23,834

 
699,069

Other Stocks and Bonds
 
3,000

 
27

 

 
3,027

Mortgage-backed Securities: (1)
 
 

 
 

 
 

 
 
Residential
 
708,137

 
1,997

 
22,536

 
687,598

Commercial

544,993

 
244

 
15,402

 
529,835

Total
 
$
1,994,073

 
$
6,976

 
$
61,772

 
$
1,939,277

 
 
 
 
 
 
 
 
 
HELD TO MATURITY
 
 
 
 
 
 
 
 
Investment Securities:
 
 
 
 
 
 
 
 
State and Political Subdivisions
 
$
3,087

 
$

 
$
57

 
$
3,030

Mortgage-backed Securities: (1)
 
 
 
 
 
 
 
 
Residential
 
59,679

 
143

 
3,015

 
56,807

Commercial
 
100,599

 
65

 
4,029

 
96,635

Total
 
$
163,365

 
$
208

 
$
7,101

 
$
156,472




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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 $15.8 million ($12.5 million, net of tax) at September 30, 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 nine months ended September 30, 2018 or the year ended December 31, 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.

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The following tables represent the estimated fair value and unrealized loss on investment and mortgage-backed securities AFS and HTM as of September 30, 2018 and December 31, 2017 (in thousands):
 
As of September 30, 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
$
287,571

 
$
7,728

 
$
244,510

 
$
16,106

 
$
532,081

 
$
23,834

Mortgage-backed Securities:
 
 
 
 
 
 
 
 
 
 
 
Residential
332,230

 
8,003

 
285,356

 
14,533

 
617,586

 
22,536

Commercial
415,196

 
12,991

 
45,485

 
2,411

 
460,681

 
15,402

Total
$
1,034,997

 
$
28,722

 
$
575,351

 
$
33,050

 
$
1,610,348

 
$
61,772

HELD TO MATURITY
 

 
 

 
 

 
 

 
 

 
 

Investment Securities:
 
 
 
 
 
 
 
 
 
 
 
State and Political Subdivisions
$
1,761

 
$
23

 
$
1,269

 
$
34

 
$
3,030

 
$
57

Mortgage-backed Securities:
 
 
 
 
 
 
 
 
 
 
 
Residential
48,022

 
2,473

 
6,781

 
542

 
54,803

 
3,015

Commercial
50,276

 
1,578

 
37,995

 
2,451

 
88,271

 
4,029

Total
$
100,059

 
$
4,074

 
$
46,045

 
$
3,027

 
$
146,104

 
$
7,101

 
 
 
 
 
 
 
 
 
 
 
 
 
As of 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.


17

Table of Contents


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 September 30, 2018.
The majority of the securities in an unrealized loss position are highly rated Texas municipal securities and U.S. Agency mortgage-backed securities (“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