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ITEM 1.	BUSINESS

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•	Creation of the Bureau with centralized authority, including supervisory, examination and enforcement authority, for consumer protection in the banking industry;

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•	New limitations on federal preemption;

•	New prohibitions and restrictions on the ability of a banking entity and nonbank financial company to engage in proprietary trading and have certain interests in, or relationships with, a hedge fund or private equity fund;

•	Application of new regulatory capital requirements, including changes to leverage and risk-based capital standards and changes to the components of permissible tiered capital;

•	Requirement that holding companies and their subsidiary banks be well capitalized and well managed in order to engage in activities permitted for financial holding companies;

•	Impacts to accounting and reporting obligations resulting from the change to corporate income tax rates under the 2017 Tax Cuts and Jobs Act (“Tax Act”);

•	Changes to the assessment base for deposit insurance premiums;

•	Permanently raising the FDIC’s standard maximum deposit insurance amount to $250,000;

•	Repeal of the prohibition on the payment of interest on demand deposits, thereby permitting depository institutions to pay interest on business transaction and other accounts;

•	Restrictions on compensation, including a prohibition on incentive-based compensation arrangements that encourage inappropriate risk taking by covered financial institutions and are deemed to be excessive, or that may lead to material losses;

•	Requirement that sponsors of asset-backed securities retain a percentage of the credit risk underlying the securities; and

•	Requirement that banking regulators remove references to and requirements of reliance upon credit ratings from their regulations and replace them with appropriate alternatives for evaluating creditworthiness.

•	banking or managing or controlling banks;

•	furnishing services to or performing services for our subsidiaries; and

•	any activity that the Federal Reserve determines to be so closely related to banking as to be a proper incident to the business of banking, including:

◦	factoring accounts receivable;

◦	making, acquiring, brokering or servicing loans and usual related activities;

◦	leasing personal or real property;

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◦	operating a nonbank depository institution, such as a savings association;

◦	performing trust company functions;

◦	conducting financial and investment advisory activities;

◦	conducting discount securities brokerage activities;

◦	underwriting and dealing in government obligations and money market instruments;

◦	providing specified management consulting and counseling activities;

◦	performing selected data processing services and support services;

◦	acting as agent or broker in selling credit life insurance and other types of insurance in connection with credit transactions;

◦	performing selected insurance underwriting activities;

◦	providing certain community development activities (such as making investments in projects designed primarily to promote community welfare); and

◦	issuing and selling money orders and similar consumer-type payment instruments.

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Well Capitalized - The insured depository institution exceeds the required minimum level for each relevant capital measure.  Under the 2015 Capital Rules, a well-capitalized insured depository institution is one (1) having a total risk-based capital ratio of 10 percent or greater, (2) having a Tier 1 risk-based capital ratio of 8 percent or greater, (3) having a CET1 capital ratio of 6.5 percent or greater, (4) having a leverage capital ratio of 5 percent or greater and (5) that is not subject to any order or written directive to meet and maintain a specific capital level for any capital measure.

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Adequately Capitalized - The insured depository institution meets the required minimum level for each relevant capital measure.  Under the 2015 Capital Rules, an adequately-capitalized depository institution is one having (1) a total risk based capital ratio of 8 percent or more, (2) a Tier 1 capital ratio of 6 percent or more, (3) a CET1 capital ratio of 4.5 percent or more and (4) a leverage ratio of 4 percent or more.

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Undercapitalized - The insured depository institution fails to meet the required minimum level for any relevant capital measure.  Under the 2015 Capital Rules, an undercapitalized depository institution is one having (1) a total capital ratio of less than 8 percent, (2) a Tier 1 capital ratio of less than 6 percent, (3) a CET1 capital ratio of less than 4.5 percent or (4) a leverage ratio of less than 4 percent.

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Significantly Undercapitalized - The insured depository institution is significantly below the required minimum level for any relevant capital measure.  Under the 2015 Capital Rules, a significantly undercapitalized institution is one having (1) a total risk-based capital ratio of less than 6 percent (2) a Tier 1 capital ratio of less than 4 percent, (3) a CET1 ratio of less than 3 percent or (4) a leverage capital ratio of less than 3 percent.

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•	Critically Undercapitalized - The insured depository institution fails to meet a critical capital level set by the appropriate federal banking agency.  A critically undercapitalized institution is one having a ratio of tangible equity to total assets that is equal to or less than 2 percent.

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•	the Truth In Lending Act and Regulation Z, governing disclosures of credit terms to consumer borrowers;

•	the Home Mortgage Disclosure Act and Regulation C, requiring financial institutions to provide information to enable the public and public officials to determine whether a financial institution is fulfilling its obligation to help meet the housing needs of the community it serves;

•	the Equal Credit Opportunity Act and Regulation B, prohibiting discrimination on the basis of race, creed or other prohibited factors in extending credit;

•	the Fair Credit Reporting Act and Regulation V, governing the use and provision of information to consumer reporting agencies;

•	the Fair Debt Collection Act, governing the manner in which consumer debts may be collected by collection agencies; and

•	the guidance of the various federal agencies charged with the responsibility of implementing such federal laws.

•	the Truth in Savings Act and Regulation DD, governing disclosure of deposit account terms to consumers;

•	the Right to Financial Privacy Act, which imposes a duty to maintain confidentiality of consumer financial records and prescribes procedures for complying with administrative subpoenas of financial records; and

•	the Electronic Fund Transfer Act and Regulation E, which governs automatic deposits to and withdrawals from deposit accounts and customers’ rights and liabilities arising from the use of ATMs and other electronic banking services, which the Bureau has expanded to include a new compliance regime that governs consumer-initiated cross border electronic transfers.

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•	total reported loans for construction, land development and other land represent 100 percent or more of the institution’s total capital, or

•	total commercial real estate loans represent 300 percent or more of the institution’s total capital and the outstanding balance of the institution’s commercial real estate loan portfolio has increased by 50 percent or more during the prior 36 months.

•	establishment of anti-money laundering programs, including adoption of written procedures and an ongoing employee training program, designation of a compliance officer and auditing of the program;

•	establishment of a program specifying procedures for obtaining information from customers seeking to open new accounts, including verifying the identity of customers within a reasonable period of time;

•	establishment of enhanced due diligence policies, procedures and controls designed to detect and report money laundering, for financial institutions that administer, maintain or manage private bank accounts or correspondent accounts for non-U.S. persons;

•	prohibitions on correspondent accounts for foreign shell banks and compliance with recordkeeping obligations with respect to correspondent accounts of foreign banks;

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•	filing of suspicious activities reports if a bank believes a customer may be violating U.S. laws and regulations; and

•	requirements that bank regulators consider bank holding company or bank compliance in connection with merger or acquisition transactions.

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•	our ability to originate loans and obtain deposits;

•	our ability to retain deposits in a rising rate environment;

•	net interest rate spreads and net interest rate margins;

•	our ability to enter into instruments to hedge against interest rate risk;

•	the fair value of our financial assets and liabilities; and

•	the average duration of our loan and mortgage-backed securities portfolio.

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•	increases in loan delinquencies;

•	increases in nonperforming assets and foreclosures;

•	decreases in demand for our products and services, which could adversely affect our liquidity position;

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•	decreases in the value of the collateral securing our loans, especially real estate, which could reduce customers’ borrowing power;

•	decreases in the credit quality of our non-U.S. Government and non-U.S. agency investment securities, corporate and municipal securities;

•	an adverse or unfavorable resolution of the Fannie Mae or Freddie Mac receivership; and

•	decreases in the real estate values subject to ad-valorem taxes by municipalities that impact such municipalities’ ability to repay their debt, which could adversely affect our municipal loans or debt securities.

•	the ability to develop, maintain and build upon long-term customer relationships based on top quality service, high ethical standards and safe, sound assets;

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•	the ability to expand our market position;

•	the scope, relevance and pricing of products and services offered to meet customer needs and demands;

•	the rate at which we introduce new products and services relative to our competitors;

•	our ability to invest in or partner with technology providers offering banking solutions and delivery channels at a level equal to our competitors;

•	customer satisfaction with our level of service; and

•	industry and general economic trends.

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•	actual or anticipated variations in our results of operations, financial conditions or asset quality;

•	recommendations by securities analysts;

•	operating and stock price performance of other companies that investors deem comparable to us;

•	news reports relating to trends, concerns and other issues in the financial services industry;

•	perceptions in the marketplace regarding us and/or our competitors;

•	perceptions in the marketplace regarding the impact of the change in price per barrel of crude oil on the Texas economy;

•	new technology used or services offered by competitors;

•	significant acquisitions or business combinations, strategic partnerships, joint ventures or capital commitments by or involving us or our competitors;

•	failure to integrate acquisitions or realize anticipated benefits from acquisitions;

•	future issuances of our common stock or other securities;

•	additions or departures of key personnel;

•	changes in government regulations; and

•	geopolitical conditions such as acts or threats of terrorism or military conflicts.

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(1)	We completed the acquisition of Diboll on November 30, 2017. Accordingly, our balance sheet data as of December 31, 2017 reflects the effects of the acquisition of Diboll. Income statement data with respect to Diboll includes only the results of Diboll’s operations subsequent to the closing of the acquisition of Diboll on November 30 through December 31, 2017.

(2)	We completed the acquisition of Omni on December 17, 2014. Accordingly, our balance sheet data as of December 31, 2014 reflects the effects of the acquisition of Omni. Income statement data with respect to Omni includes only the results of Omni’s operations subsequent to the closing of the acquisition of Omni on December 17 through December 31, 2014.

(3)	Due to the adoption of certain regulatory guidance adopted under the modified retrospective approach, prior periods may not be comparative. Additionally, the Tax Act was enacted on December 22, 2017. See “Note 1 - Summary of Significant Accounting and Reporting Policies – Accounting Changes and Reclassifications” for further information.

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general economic conditions, either globally, nationally, in the State of Texas, or in the specific markets in which we operate, including, without limitation, the deterioration of the commercial real estate, residential real estate, construction and development, energy, oil and gas, credit and liquidity markets, which could cause an adverse change in our net interest margin, or a decline in the value of our assets, which could result in realized losses;

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current or future legislation, regulatory changes or changes in monetary or fiscal policy that adversely affect the businesses in which we are engaged, including the impact of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (“Dodd-Frank Act”), the Federal Reserve’s actions with respect to interest rates, the capital requirements promulgated by the Basel Committee on Banking Supervision (“Basel Committee”) and other regulatory responses to economic conditions;

•	adverse changes in the status or financial condition of the Government-Sponsored Enterprises (the “GSEs”) which impact the GSEs’ guarantees or ability to pay or issue debt;

•	adverse changes in the credit portfolio of other U.S. financial institutions relative to the performance of certain of our investment securities;

•	economic or other disruptions caused by acts of terrorism in the United States, Europe or other areas;

•	technological changes, including potential cyber-security incidents;

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our ability to identify and address cyber-security risks such as data security breaches, malware, “denial of service” attacks, “hacking” and identity theft, a failure of which could disrupt our business and result in the disclosure of and/or misuse or misappropriation of confidential or proprietary information, disruption or damage of our systems, increased costs, significant losses, or adverse effects to our reputation;

•	the risk that our enterprise risk management framework may not identify or address risks adequately, which may result in unexpected losses;

•	changes in the interest rate yield curve such as flat, inverted or steep yield curves, or changes in the interest rate environment that impact interest margins and may impact prepayments on our mortgage-backed securities (“MBS”) portfolio;

•	increases in our nonperforming assets;

•	our ability to maintain adequate liquidity to fund operations and growth;

•	any applicable regulatory limits or other restrictions on Southside Bank’s ability to pay dividends to us;

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•	the failure of our assumptions underlying allowance for loan losses and other estimates;

•	the failure to maintain an effective system of controls and procedures, including internal control over financial reporting;

•	the effectiveness of our derivative financial instruments and hedging activities to manage risk;

•	unexpected outcomes of, and the costs associated with, existing or new litigation involving us;

•	changes impacting our balance sheet and leverage strategy;

•	risks related to actual mortgage prepayments diverging from projections;

•	risks related to actual U.S. Agency MBS prepayments exceeding projected prepayment levels;

•	risks related to U.S. Agency MBS prepayments increasing due to U.S. Government programs designed to assist homeowners to refinance their mortgage that might not otherwise have qualified;

•	our ability to monitor interest rate risk;

•	risks related to fluctuations in the price per barrel of crude oil;

•	significant increases in competition in the banking and financial services industry;

•	changes in consumer spending, borrowing and saving habits;

•	execution of future acquisitions, reorganization or disposition transactions, including the risk that the anticipated benefits of such transactions are not realized;

•	our ability to increase market share and control expenses;

•	our ability to develop competitive new products and services in a timely manner and the acceptance of such products and services by our customers;

•	the effect of changes in federal or state tax laws;

•	the effect of compliance with legislation or regulatory changes;

•	the effect of changes in accounting policies and practices;

•	credit risks of borrowers, including any increase in those risks due to changing economic conditions;

•	risks related to loans secured by real estate, including the risk that the value and marketability of collateral could decline; and

•	the risks identified in “Part I - Item 1A.  Risk Factors – Risks Related to Our Business” in this report.

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(1)	These amounts are presented on a fully taxable-equivalent basis and are non-GAAP measures.

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(1)	Interest yields on loans and securities that are nontaxable for federal income tax purposes are presented on a fully taxable-equivalent basis assuming a marginal tax rate of 21% for 2018 and 35% for 2017 and 2016. See “Non-GAAP Financial Measures.”

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(1)	Interest on loans includes net fees on loans that are not material in amount.

(2)	For the purpose of calculating the average yield, the average balance of securities is presented at historical cost.

(3)	Note: As of December 31, 2018, 2017 and 2016, loans totaling $35.8 million, $2.9 million and $8.3 million, respectively, were on nonaccrual status. Our policy is to reverse previously accrued but unpaid interest on nonaccrual loans; thereafter, interest income is recorded to the extent received when appropriate.

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(1)	The volume of commercial loans due within one year reflects our general policy of attempting to limit these loans to a short-term maturity.

(2)	Nonaccrual loans totaling $651,000 are reflected in the due after five years column.

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(1)	Excludes PCI loans measured at fair value at acquisition if the timing and amount of cash flows expected to be collected from those sales can be reasonably estimated.

(2)	Includes $3.1 million, $2.9 million, $3.1 million and $7.5 million of PCI loans restructured during the years ended December 31, 2018, 2017, 2016 and 2015, respectively. There were no restructured PCI loans as of December 31, 2014.

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(1)	Includes $8.0 million and $2.9 million of PCI loans that experienced deteriorations in credit quality subsequent to the acquisition date as of December 31, 2018 and 2017, respectively.

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

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

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(1)	The average amount outstanding during the period was computed by dividing the total daily outstanding principal balances by the number of days in the period.

(2)	The maximum amount outstanding at any month-end during the period.

(3)	The weighted average interest rate during the period was computed by dividing the actual interest expense by the average balance outstanding during the period. The weighted average interest rate on the FHLB borrowings include the effect of interest rate swaps.

(4)	Stated rate.

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(1)	Subordinated notes, net of unamortized debt issuance costs, were $98.4 million at December 31, 2018. Trust preferred subordinated debentures, net of unamortized debt issuance costs, were $60.2 million at December 31, 2018. See “Note 10 - Long-Term Debt” for further information.

(2)	See “Note 17 - Off-Balance-Sheet Arrangements, Commitments and Contingencies” for further information.

(3)	See “Note 11 - Employee Benefits” for further information.

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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.

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(1)	The estimated fair value as of the acquisition date, November 30, 2017, as previously reported in our Form 10-K for the year ended December 31, 2017.

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(1)	Cash flows not expected to be collected relate to estimated credit losses and expected prepayments.

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(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).

(2)	Amounts reclassified to retained earnings due to early adoption of ASU 2018-02. See “Note 1 – Summary of Significant Accounting and Reporting Policies” for further information.

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(4)	These accumulated other comprehensive income components are included in the computation of net periodic pension cost (income) presented in “Note 11 - Employee Benefits.”

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(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.

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

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

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(1)	Loans acquired with the Diboll acquisition were measured at fair value on November 30, 2017, with no carryover of allowance for loan loss. The allowance for loan loss recorded on PCI loans totaled $302,000 as of December 31, 2018. There was no allowance for loan loss recorded on PCI loans as of December 31, 2017.

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•	Pass (Rating 1 – 4) – This rating is assigned to all satisfactory loans.  This category, by definition, consists of acceptable credit.  Credit and collateral exceptions should not be present, although their presence would not necessarily prohibit a loan from being rated Pass, if deficiencies are in the process of correction.  These loans are not included in the Watch List.

•	Pass Watch (Rating 5) – These loans require some degree of special treatment but not due to credit quality.  This category does not include loans specially mentioned or adversely classified; however, particular attention is warranted to characteristics such as:

◦	A lack of, or abnormally extended payment program;

◦	A heavy degree of concentration of collateral without sufficient margin;

◦	A vulnerability to competition through lesser or extensive financial leverage; and

◦	A dependence on a single or few customers or sources of supply and materials without suitable substitutes or alternatives.

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Special Mention (Rating 6) – A Special Mention loan has potential weaknesses that deserve management’s close attention.  If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or in our credit position at some future date.  Special Mention loans are not adversely classified and do not expose us to sufficient risk to warrant adverse classification.

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Substandard (Rating 7) – Substandard loans are inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any.  Loans so classified must have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt.  They are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected.

•	Doubtful (Rating 8) – Loans classified as Doubtful have all the weaknesses inherent in those classified Substandard with the added characteristic that the weaknesses make collection or liquidation, in full, on the basis of currently known facts, conditions and values, highly questionable and improbable.

•	Changes in lending policies or procedures, including underwriting, collection, charge-off and recovery procedures;

•	Changes in local, regional and national economic and business conditions, including entry into new markets;

•	Changes in the volume or type of credit extended;

•	Changes in the experience, ability and depth of lending management;

•	Changes in the volume and severity of past due, nonaccrual, restructured or classified loans;

•	Changes in charge-off trends;

•	Changes in loan review or Board oversight;

•	Changes in the level of concentrations of credit; and

•	Changes in external factors, such as competition and legal and regulatory requirements.

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(3)	Of the $11.4 million in commercial charge-offs recorded for the year ended December 31, 2016, $10.9 million relates to the charge-off of two large commercial borrowing relationships.

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(1)	The allowance for loan loss on PCI loans totaled $302,000 as of December 31, 2018. There was no allowance for loan losses associated with PCI loans as of December 31, 2017.

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(1)	Includes PCI loans comprised of $22,000 pass watch, $859,000 special mention, $3.9 million substandard and $1.2 million doubtful as of December 31, 2018. Includes PCI loans comprised of $362,000 pass watch, $6.0 million special mention, $10.5 million substandard and $925,000 doubtful as of December 31, 2017.

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(1)	Excludes PCI loans measured at fair value at acquisition if the timing and amount of cash flows expected to be collected from those sales can be reasonably estimated. The increase in nonaccrual loans was primarily due to the addition of four commercial real estate loans to nonaccrual status during the year, one of which was added during the fourth quarter.

(2)	Includes $10.9 million and $1.3 million of restructured loans as of December 31, 2018 and 2017, respectively.

(3)	Includes $3.1 million and $2.9 million in PCI loans restructured as of December 31, 2018 and 2017, respectively.

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(1)	Includes $8.0 million and $2.9 million of PCI loans that experienced deterioration in credit quality subsequent to the acquisition date as of December 31, 2018 and December 31, 2017, respectively.

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(1)	Includes PCI loans measured at fair value at acquisition if the timing and amount of cash flows expected to be collected from those sales can be reasonably estimated.

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(1)	The average amount outstanding during the period was computed by dividing the total daily outstanding principal balances by the number of days in the period.

(2)	The maximum amount outstanding at any month-end during the period.

(3)	The weighted average interest rate during the period was computed by dividing the actual interest expense by the average amount outstanding during the period. The weighted average interest rate on the FHLB borrowings includes the effect of interest rate swaps.

(4)	Stated rate.

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(1)	This debt consists of subordinated notes with a remaining maturity greater than one year that qualify under the risk-based capital guidelines as Tier 2 capital, subject to certain limitations.

(2)	The unamortized discount and debt issuance costs reflected in the carrying amount of the subordinated notes totaled approximately $1.6 million at December 31, 2018 and $1.8 million at December 31, 2017.

(3)	This debt consists of trust preferred securities that qualify under the risk-based capital guidelines as Tier 1 capital, subject to certain limitations.

(4)	The unamortized debt issuance costs reflected in the carrying amount of the Southside Statutory Trust III junior subordinated debentures totaled $65,000 at December 31, 2018 and $70,000 at December 31, 2017.

(1)	On October 10, 2007, as part of an acquisition we assumed $3.6 million of floating rate junior subordinated debentures issued in 2005 to Magnolia Trust Company I.

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(1)	Amounts reclassified to retained earnings due to early adoption of ASU 2018-02. See “Note 1 – Summary of Significant Accounting and Reporting Policies” for further information.

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(1)	For the defined benefit pension plan, this category is comprised of individual securities that are actively managed and a broadly diversified “passive” mutual fund. The Acquired Plan assets in this category consist of pooled separate accounts invested in mutual funds and domestic stocks.

(2)	For the defined benefit pension plan, this category is comprised of broadly diversified “passive” mutual funds. The Acquired Plan assets in this category consist of pooled separate accounts invested in mutual funds and domestic stocks.

(3)	For the defined benefit pension plan, this category is comprised of broadly diversified “passive” mutual funds and shares of Southside Bancshares stock that is owned in the Plan. The Acquired Plan assets in this category consist of pooled separate accounts invested in mutual funds and domestic stocks.

(4)	This category is comprised of individual securities that are actively managed and a broadly diversified “passive” mutual fund.

(5)	This category is comprised of pooled separate accounts invested in mutual funds and international stocks.

(6)	For the defined benefit pension plan, this category is comprised of individual investment grade securities that are generally held to maturity in the Plan. The Acquired Plan assets in this category consist of pooled separate accounts invested in investment grade and below investment grade bonds.

(7)	This category is comprised of individual securities that are generally not held to maturity.

(8)	This category is mainly comprised of a pooled separate account invested in asset backed securities, residential mortgage backed securities, commercial mortgage backed securities and corporate bonds.

(9)	This category is comprised of a pooled separate account invested in commercial real estate and includes mortgage loans which are backed by the associated properties.

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(10)	This category is comprised of a pooled separate account invested in a single mutual fund invested in a combination of fixed income and equity investment options.

(11)	This category is comprised of a pooled separate account invested in a broad range of instruments including, but not limited to, equities, bonds, currencies, convertible securities and derivatives such as futures, options, swaps and forwards.

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(1)	Notional amounts, which represent the extent of involvement in the derivatives market, are used to determine the contractual cash flows required in accordance with the terms of the agreement. These amounts are typically not exchanged, significantly exceed amounts subject to credit or market risk and are not reflected in the consolidated balance sheets.

(2)

Net derivative assets are included in other assets and net derivative liabilities are included in other liabilities on the consolidated balance sheets. Included in the fair value of net derivative assets and net derivative liabilities are credit valuation adjustments reflecting counterparty credit risk and our credit risk. We had no credit exposure related to interest rate swaps with financial institutions and $1.1 million related to interest rate swaps with customers at December 31, 2018. We had net credit exposure of $30,000 related to interest rate swaps with financial institutions and $612,000 related to interest rate swaps with customers at December 31, 2017. The credit risk associated with customer transactions is partially mitigated as these are generally secured by the non-cash collateral securing the underlying transaction being hedged.

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

(2)	With the adoption of ASU 2016-01 on January 1, 2018, these investments are included in equity investments on our consolidated balance sheets. The guidance was applied on a prospective approach resulting in prior-periods no longer being comparable. See “Note 1 - Summary of Significant Accounting and Reporting Policies” for further information.

(3)	Impaired loans represent collateral-dependent loans with a specific valuation allowance. Losses on these loans represent charge-offs which are netted against the allowance for loan losses.

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(1)	Refers to quarterly average assets as calculated in accordance with policies established by bank regulatory agencies.

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20.	QUARTERLY FINANCIAL INFORMATION OF REGISTRANT

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•	pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets;

•	provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and

•	provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.

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