Loans and Allowance for Probable Loan Losses

Loans in the accompanying consolidated balance sheets are classified as follows (in thousands):



	June 30, 2015		December 31, 2014
Real Estate Loans:
Construction	$	295,633	$	267,830
1-4 Family Residential	683,944		690,895
Other	500,906		468,171
Commercial Loans	228,789		226,460
Municipal Loans	256,492		257,492
Loans to Individuals	214,099		270,285
Total Loans⁽¹⁾	2,179,863		2,181,133
Less: Allowance for Loan Losses	16,822		13,292
Net Loans	$	2,163,041	$	2,167,841

(1) Includes approximately $679.7 million and $763.3 million of loans acquired with the Omni acquisition as of June 30, 2015 and December 31, 2014, respectively. These loans were measured at fair value at the acquisition date with no carryover of allowance for loan loss. The allowance for loan loss recorded on acquired loans for the six months ended June 30, 2015 was not significant.

Real Estate Construction Loans

Our construction loans are collateralized by property located primarily in the market areas we serve. A majority of our construction loans will be owner-occupied upon completion. Construction loans for speculative projects are financed, but these typically have secondary sources of repayment and collateral. Our construction loans have both adjustable and fixed interest rates during the construction period. Construction loans to individuals are typically priced and made with the intention of granting the permanent loan on the property. Speculative and commercial construction loans are subject to underwriting standards similar to that of the commercial portfolio. Owner occupied 1-4 family residential construction loans are subject to the underwriting standards of the permanent loan.

Real Estate 1-4 Family Residential Loans

Residential loan originations are generated by our loan officers, in-house origination staff, marketing efforts, present customers, walk-in customers and referrals from real estate agents and builders. We focus our lending efforts primarily on the origination of loans secured by first mortgages on owner-occupied, 1-4 family residences. Substantially all of our 1-4 family residential loan originations are secured by properties located in or near our market areas.

Our 1-4 family residential loans generally have maturities ranging from five to 30 years. These loans are typically fully amortizing with monthly payments sufficient to repay the total amount of the loan. Our 1-4 family residential loans are made at both fixed and adjustable interest rates.

Underwriting for 1-4 family residential loans includes debt-to-income analysis, credit history analysis, appraised value and down payment considerations. Changes in the market value of real estate can affect the potential losses in the portfolio.

Other Real Estate Loans

Other Real Estate loans primarily include loans collateralized by commercial office buildings, retail, medical facilities and offices, warehouse facilities, hotels and churches. In determining whether to originate commercial real estate loans, we generally consider such factors as the financial condition of the borrower and the debt service coverage of the property. Other real estate loans are made at both fixed and adjustable interest rates for terms generally up to 20 years.

Commercial Loans

Our commercial loans are diversified loan types including short-term working capital loans for inventory and accounts receivable and short- and medium-term loans for equipment or other business capital expansion. Management does not consider there to be a concentration of risk in any one industry type, other than the medical industry. Loans to borrowers in the medical industry include all loan types listed above for commercial loans. Collateral for these loans varies depending on the type of loan and financial strength of the borrower. The primary source of repayment for loans in the medical community is cash flow from continuing operations.

In our commercial loan underwriting, we assess the creditworthiness, ability to repay, and the value and liquidity of the collateral being offered. Terms of commercial loans are generally commensurate with the useful life of the collateral offered.

Municipal Loans

We have a specific lending department that makes loans to municipalities and school districts throughout the state of Texas. The majority of the loans to municipalities and school districts have tax or revenue pledges and in some cases are additionally supported by collateral. Municipal loans made without a direct pledge of taxes or revenues are usually made based on some type of collateral that represents an essential service.

Loans to Individuals

Substantially all originations of our loans to individuals are made to consumers in our market areas. The majority of loans to individuals are collateralized by titled equipment, which are primarily automobiles. Loan terms vary according to the type and value of collateral, length of contract and creditworthiness of the borrower. The underwriting standards we employ for consumer loans include an application, a determination of the applicant's payment history on other debts, with the greatest weight being given to payment history with us, and an assessment of the borrower's ability to meet existing obligations and payments on the proposed loan. Although creditworthiness of the applicant is a primary consideration, the underwriting process also includes a comparison of the value of the collateral, if any, in relation to the proposed loan amount. Most of our loans to individuals are collateralized, which management believes should assist in limiting our exposure.

On October 3, 2014, we announced that we intended to sell all of our subprime automobile loans purchased through SFG, as well as the repossessed assets held by SFG. During the fourth quarter of 2014, the sale of the subprime automobile loans and repossessed assets held by SFG was completed. As a result, the carrying amount of SFG loans totaling $70.3 million were sold and were therefore not included in our loan portfolio as of December 31, 2014. There have been no subsequent loan pool purchases through SFG since December 2014 and there will be no additional loan pool purchases through SFG. For the six months ended June 30, 2014, SFG purchased loan pools of approximately $30.4 million, net of discount.

Allowance for Loan Losses

The allowance for loan losses is based on the most current review of the loan portfolio and is a result of multiple processes. First, the bank utilizes historical data to establish general reserve amounts for each class of loans. The historical charge off figure is further adjusted through qualitative factors that include general trends in past dues, nonaccruals and classified loans to more effectively and promptly react to both positive and negative movements. Second, our lenders have the primary responsibility for identifying problem loans based on customer financial stress and underlying collateral. These recommendations are reviewed by senior loan administration, the special assets department, and the loan review department. Third, the loan review department independently reviews the portfolio on an annual basis. The loan review department follows a board-approved annual loan review scope. The loan review scope encompasses a number of considerations including the size of the loan, the type of credit extended, the seasoning of the loan and the performance of the loan. The loan review scope, as it relates to size, focuses more on larger dollar loan relationships, typically, for example, aggregate debt of $500,000 or greater. The loan review officer also reviews specific reserves compared to general reserves to determine trends in comparative reserves as well as losses not reserved for prior to charge-off to determine the effectiveness of the specific reserve process.

At each review, a subjective analysis methodology is used to grade the respective loan. Categories of grading vary in severity from loans that do not appear to have a significant probability of loss at the time of review to loans that indicate a probability that the entire balance of the loan will be uncollectible. If full collection of the loan balance appears unlikely at the time of review, estimates of future expected cash flows or appraisals of the collateral securing the debt are used to determine the necessary allowances. The internal loan review department maintains a list of all loans or loan relationships that are graded as having more than the normal degree of risk associated with them. In addition, a list of specifically reserved loans or loan relationships of $150,000 or more is updated on a quarterly basis in order to properly determine necessary allowances and keep management informed on the status of attempts to correct the deficiencies noted with respect to the loan.

We calculate historical loss ratios for pools of similar loans with similar characteristics based on the proportion of actual charge-offs experienced to the total population of loans in the pool. The historical gross loss ratios are updated based on actual charge-off experience quarterly and adjusted for qualitative factors. Our pools of similar loans include consumer loans and loans secured by 1-4 residential family loans.

Prior to September 30, 2014, SFG loans included in loans to individuals that experienced past due status or extension of maturity characteristics were reserved for at higher levels based on the circumstances associated with each specific loan. In general, the reserves for SFG were calculated based on the past due status of the loan. For reserve purposes, the portfolio was segregated by past due status and by the remaining term variance from the original contract. During repayment, loans that paid late took longer to repay than the original contract. Additionally, some loans may have been granted extensions for extenuating payment circumstances and evaluated for troubled debt classification. The remaining term extensions increased the risk of collateral deterioration and, accordingly, reserves were increased to recognize this risk.

Industry and our own experience indicates that a portion of our loans will become delinquent and a portion of the loans will require partial or full charge-off. Regardless of the underwriting criteria utilized, losses may be experienced as a result of various factors beyond our control, including, among other things, changes in market conditions affecting the value of properties used as collateral for loans and problems affecting the credit of the borrower and the ability of the borrower to make payments on the loan. Our determination of the appropriateness of the allowance for loan losses is based on various considerations, including an analysis of the risk characteristics of various classifications of loans, previous loan loss experience, specific loans which would have loan loss potential, delinquency trends, estimated fair value of the underlying collateral, current economic conditions, and geographic and industry loan concentration.

Credit Quality Indicators

We categorize loans into risk categories on an ongoing basis based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. We use the following definitions for risk ratings:


•	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 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 must be accorded such credits due 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.

•

Special Mention (Rating 6) – A Special Mention asset 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 asset or in the institution’s credit position at some future date. Special Mention assets are not adversely classified and do not expose an institution to sufficient risk to warrant adverse classification.

•

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.

All accruing loans are reserved for as a group of similar type credits and included in the general portion of the allowance for loan losses. Loans to individuals and 1-4 family residential loans, including loans not accruing, are collectively evaluated and included in the general portion of the allowance for loan losses. All loans considered troubled debt restructurings ("TDR") are evaluated individually for further impairment.

The general portion of the loan loss allowance is reflective of historical charge-off levels for similar loans adjusted for changes in current conditions and other relevant factors. These factors are likely to cause estimated losses to differ from historical loss experience and include:


•	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.

These factors are also considered for the Omni purchased portfolio specifically in regards to changes in past due, nonaccrual and charge-off trends.

The following table details activity in the allowance for loan losses by portfolio segment for the periods presented (in thousands):



	Three Months Ended June 30, 2015
	Real Estate
	Construction		1-4 Family Residential			Other		Commercial Loans			Municipal Loans		Loans to Individuals			Total
Balance at beginning of period	$	2,774	$	3,400		$	3,360	$	5,316		$	824	$	1,252		$	16,926
Provision (reversal) for loan losses	86		93			162		(308		)	9		226			268
Loans charged off	—		(40		)	—		(50		)	—		(803		)	(893		)
Recoveries of loans charged off	49		15			7		55			—		395			521
Balance at end of period	$	2,909	$	3,468		$	3,529	$	5,013		$	833	$	1,070		$	16,822



	Six Months Ended June 30, 2015
	Real Estate
	Construction		1-4 Family Residential			Other		Commercial Loans			Municipal Loans		Loans to Individuals			Total
Balance at beginning of period⁽¹⁾	$	2,456	$	2,822		$	3,025	$	3,279		$	716	$	994		$	13,292
Provision (reversal) for loan losses	361		666			431		1,757			117		784			4,116
Loans charged off	—		(46		)	—		(107		)	—		(1,826		)	(1,979		)
Recoveries of loans charged off	92		26			73		84			—		1,118			1,393
Balance at end of period	$	2,909	$	3,468		$	3,529	$	5,013		$	833	$	1,070		$	16,822

(1) Loans acquired with the Omni acquisition were measured at fair value on December 17, 2014 with no carryover of allowance for loan loss.



	Three Months Ended June 30, 2014
	Real Estate
	Construction		1-4 Family Residential		Other		Commercial Loans			Municipal Loans			Loans to Individuals			Total
Balance at beginning of period	$	2,130	$	3,797	$	2,411	$	2,031		$	777		$	7,641		$	18,787
Provision (reversal) for loan losses	319		92		24		(322		)	(114		)	2,651			2,650
Loans charged off	—		—		—		(5		)	—			(3,541		)	(3,546		)
Recoveries of loans charged off	47		26		1		53			—			390			517
Balance at end of period	$	2,496	$	3,915	$	2,436	$	1,757		$	663		$	7,141		$	18,408



	Six Months Ended June 30, 2014
	Real Estate
	Construction			1-4 Family Residential			Other			Commercial Loans			Municipal Loans			Loans to Individuals			Total
Balance at beginning of period	$	2,142		$	3,277		$	2,572		$	1,970		$	668		$	8,248		$	18,877
Provision (reversal) for loan losses	309			628			(140		)	(319		)	(5		)	6,310			6,783
Loans charged off	(14		)	(22		)	—			(5		)	—			(8,273		)	(8,314		)
Recoveries of loans charged off	59			32			4			111			—			856			1,062
Balance at end of period	$	2,496		$	3,915		$	2,436		$	1,757		$	663		$	7,141		$	18,408

The following tables present the balance in the allowance for loan losses by portfolio segment based on impairment method (in thousands):



	As of June 30, 2015
	Real Estate
	Construction		1-4 Family Residential		Other		Commercial Loans		Municipal Loans		Loans to Individuals		Total
Ending balance – individually evaluated for impairment	$	45	$	28	$	121	$	3,274	$	201	$	46	$	3,715
Ending balance – collectively evaluated for impairment	2,864		3,440		3,408		1,739		632		1,024		13,107
Balance at end of period	$	2,909	$	3,468	$	3,529	$	5,013	$	833	$	1,070	$	16,822



	As of December 31, 2014
	Real Estate
	Construction		1-4 Family Residential		Other		Commercial Loans		Municipal Loans		Loans to Individuals		Total
Ending balance – individually evaluated for impairment	$	43	$	102	$	26	$	242	$	14	$	103	$	530
Ending balance – collectively evaluated for impairment	2,413		2,720		2,999		3,037		702		891		12,762
Balance at end of period	$	2,456	$	2,822	$	3,025	$	3,279	$	716	$	994	$	13,292

The following tables present the recorded investment in loans by portfolio segment based on impairment method (in thousands):



	June 30, 2015
	Real Estate
	Construction		1-4 Family Residential		Other		Commercial Loans		Municipal Loans		Loans to Individuals		Total
Loans individually evaluated for impairment	$	2,342	$	1,793	$	4,099	$	14,987	$	949	$	179	$	24,349
Loans collectively evaluated for impairment	293,061		675,039		493,344		204,826		255,543		213,410		2,135,223
Purchased credit impaired loans	230		7,112		3,463		8,976		—		510		20,291
Total ending loan balance	$	295,633	$	683,944	$	500,906	$	228,789	$	256,492	$	214,099	$	2,179,863



	December 31, 2014
	Real Estate
	Construction		1-4 Family Residential		Other		Commercial Loans		Municipal Loans		Loans to Individuals		Total
Loans individually evaluated for impairment	$	2,461	$	2,936	$	1,605	$	1,011	$	699	$	310	$	9,022
Loans collectively evaluated for impairment ⁽¹⁾	264,584		680,658		463,564		216,272		256,793		268,894		2,150,765
Purchased credit impaired loans ⁽²⁾	785		7,301		3,002		9,177		—		1,081		21,346
Total ending loan balance	$	267,830	$	690,895	$	468,171	$	226,460	$	257,492	$	270,285	$	2,181,133

(1) Includes purchased non impaired loans which were measured at fair value at acquisition and did not have an associated allowance for loan loss as of December 31, 2014.

(2) PCI loans were measured at fair value at acquisition and did not have an associated allowance for loan loss as of December 31, 2014.

The following table sets forth loans by credit quality indicator for the periods presented (in thousands):



	June 30, 2015
	Pass		Pass Watch		Special Mention ⁽¹⁾		Substandard ⁽¹⁾		Doubtful ⁽¹⁾		Total
Real Estate Loans:
Construction	$	290,038	$	29	$	1,366	$	4,174	$	26	$	295,633
1-4 Family Residential	670,852		1,428		1,664		6,305		3,695		683,944
Other	489,166		—		83		11,657		—		500,906
Commercial Loans	200,583		751		962		17,910		8,583		228,789
Municipal Loans	255,543		—		—		699		250		256,492
Loans to Individuals	212,757		11		—		469		862		214,099
Total	$	2,118,939	$	2,219	$	4,075	$	41,214	$	13,416	$	2,179,863

(1) Includes $0.1 million special mention, $4.4 million substandard, and $10.4 million doubtful of PCI loans as of June 30, 2015.



	December 31, 2014
	Pass		Pass Watch		Special Mention ⁽¹⁾		Substandard⁽¹⁾		Doubtful		Total
Real Estate Loans:
Construction	$	260,183	$	862	$	1,394	$	5,363	$	28	$	267,830
1-4 Family Residential	677,559		1,453		1,706		9,167		1,010		690,895
Other	455,394		2,416		2,569		7,792		—		468,171
Commercial Loans	199,306		781		1,044		25,102		227		226,460
Municipal Loans	256,543		—		—		949		—		257,492
Loans to Individuals	269,204		16		—		871		194		270,285
Total	$	2,118,189	$	5,528	$	6,713	$	49,244	$	1,459	$	2,181,133

(1) Includes $0.7 million special mention and $17.8 million substandard of PCI loans as of December 31, 2014.

Nonperforming Assets and Past Due Loans

Nonaccrual loans are loans 90 days or more delinquent and collection in full of both the principal and interest is not expected. Additionally, some loans that are not delinquent may be placed on nonaccrual status due to doubts about full collection of principal or interest. When a loan is categorized as nonaccrual, the accrual of interest is discontinued and any accrued balance is reversed for financial statement purposes. Payments received on nonaccrual loans are applied to the outstanding principal balance. Payments of contractual interest are recognized as income only to the extent that full recovery of the principal balance of the loan is reasonably certain. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured. Other factors, such as the value of collateral securing the loan and the financial condition of the borrower, are considered in judgments as to potential loan loss.

Nonaccrual loans and accruing loans past due more than 90 days include both smaller balance homogeneous loans that are collectively evaluated for impairment and individually classified impaired loans.

PCI loans are recorded at fair value at acquisition date. Although the PCI loans may be contractually delinquent, we do not classify these loans as past due or nonperforming as the loans were written down to fair value at the acquisition date and the accretable yield is recognized in interest income over the remaining life of the loan. Subsequent to acquisition, we re-assess PCI loans for additional impairment.

The following table sets forth nonperforming assets for the periods presented (in thousands):



	At June 30, 2015		At December 31, 2014
Nonaccrual loans⁽¹⁾	$	21,223	$	4,096
Accruing loans past due more than 90 days ⁽¹⁾	30		4
Restructured loans ⁽¹⁾	5,667		5,874
Other real estate owned	787		1,738
Repossessed assets	87		565
Total Nonperforming Assets	$	27,794	$	12,277

(1) Excludes PCI loans measured at fair value at acquisition.

Foreclosed assets include other real estate owned and repossessed assets. For 1-4 family residential real estate properties, a loan is recognized as a foreclosed property once legal title to the real estate property has been received upon completion of foreclosure or the borrower has conveyed all interest in the residential property through a deed in lieu of foreclosure. Loans secured by 1-4 family residential properties for which formal foreclosure proceedings were in process as of June 30, 2015 were $170,000.

The following table sets forth the recorded investment in nonaccrual loans by class of loans for the periods presented (in thousands):



	Nonaccrual Loans ⁽¹⁾
	June 30, 2015		December 31, 2014
Real Estate Loans:
Construction	$	597	$	716
1-4 Family Residential	1,972		2,017
Other	3,204		675
Commercial Loans	14,249		416
Municipal Loans	249		—
Loans to Individuals	952		272
Total	$	21,223	$	4,096

(1) Excludes PCI loans measured at fair value at acquisition.

Accruing loans past due more than 90 days were not significant.

Loans are considered impaired if, based on current information and events, it is probable we will be unable to collect the scheduled payments of principal and interest when due according to the contractual terms of the loan agreement. Impairment is evaluated in total for smaller-balance loans of a similar nature and on an individual loan basis for other loans. The measurement of loss on impaired loans is generally based on the fair value of the collateral if repayment is expected solely from the collateral or the present value of the expected future cash flows discounted at the historical effective interest rate stipulated in the loan agreement. In measuring the fair value of the collateral, in addition to relying on third party appraisals, we use assumptions, such as discount rates, and methodologies, such as comparison to the recent selling price of similar assets, consistent with those that would be utilized by unrelated third parties performing a valuation. Loans that are evaluated and determined not to meet the definition of an impaired loan are reserved for at the general reserve rate for its appropriate class.

At the time a loss is probable in the collection of contractual amounts, specific reserves are allocated. Loans are charged off to the liquidation value of the collateral net of liquidation costs, if any, when deemed uncollectible or as soon as collection by liquidation is evident.

The following tables set forth impaired loans by class of loans for the periods presented (in thousands):



	June 30, 2015
	Unpaid Contractual Principal Balance		Recorded Investment With Allowance		Related Allowance for Loan Losses
Real Estate Loans:
Construction	$	3,093	$	2,342	$	45
1-4 Family Residential	1,877		1,793		28
Other	4,587		4,532		121
Commercial Loans	16,597		14,987		3,274
Municipal Loans	949		949		201
Loans to Individuals	199		179		46
Total ⁽¹⁾	$	27,302	$	24,782	$	3,715



	December 31, 2014
	Unpaid Contractual Principal Balance		Recorded Investment With Allowance		Related Allowance for Loan Losses
Real Estate Loans:
Construction	$	3,183	$	2,461	$	43
1-4 Family Residential	4,023		3,854		108
Other	1,622		1,605		26
Commercial Loans	1,162		1,011		242
Municipal Loans	699		699		14
Loans to Individuals	321		310		103
Total ⁽¹⁾	$	11,010	$	9,940	$	536

(1) PCI loans are excluded from this table as there was no evidence of further deterioration in credit quality subsequent to the acquisition date that would indicate it is probable that our recorded investment in these loans would not be recoverable.

There were no impaired loans recorded without an allowance as of June 30, 2015 or December 31, 2014.

The following tables present the aging of the recorded investment in past due loans by class of loans (in thousands):



	June 30, 2015
	30-59 Days Past Due		60-89 Days Past Due		Greater than 90 Days Past Due		Total Past Due		Current ⁽¹⁾		Total
Real Estate Loans:
Construction	$	561	$	55	$	550	$	1,166	$	294,467	$	295,633
1-4 Family Residential	458		1,541		455		2,454		681,490		683,944
Other	53		218		1,346		1,617		499,289		500,906
Commercial Loans	408		924		122		1,454		227,335		228,789
Municipal Loans	—		—		250		250		256,242		256,492
Loans to Individuals	2,952		760		299		4,011		210,088		214,099
Total	$	4,432	$	3,498	$	3,022	$	10,952	$	2,168,911	$	2,179,863



	December 31, 2014
	30-59 Days Past Due		60-89 Days Past Due		Greater than 90 Days Past Due		Total Past Due		Current ⁽¹⁾		Total
Real Estate Loans:
Construction	$	376	$	42	$	716	$	1,134	$	266,696	$	267,830
1-4 Family Residential	3,511		509		2,017		6,037		684,858		690,895
Other	1,203		—		675		1,878		466,293		468,171
Commercial Loans	397		3		416		816		225,644		226,460
Municipal Loans	—		—		—		—		257,492		257,492
Loans to Individuals	362		66		276		704		269,581		270,285
Total	$	5,849	$	620	$	4,100	$	10,569	$	2,170,564	$	2,181,133

(1) Includes PCI loans measured at fair value at acquisition.

The following table sets forth interest income recognized on impaired loans by class of loans for the periods presented. Average recorded investment of impaired loans is reported on a year-to-date basis (in thousands):



	Three Months Ended
	June 30, 2015				June 30, 2014
	Average Recorded Investment ⁽¹⁾		Interest Income Recognized ⁽¹⁾		Average Recorded Investment		Interest Income Recognized
Real Estate Loans:
Construction	$	2,361	$	23	$	1,643	$	9
1-4 Family residential	3,692		14		3,418		21
Other	3,586		13		2,838		22
Commercial loans	15,163		9		1,444		12
Municipal loans	949		10		759		21
Loans to individuals	881		1		2,144		23
Total	$	26,632	$	70	$	12,246	$	108



	Six Months Ended
	June 30, 2015				June 30, 2014
	Average Recorded Investment ⁽¹⁾		Interest Income Recognized ⁽¹⁾		Average Recorded Investment		Interest Income Recognized
Real Estate Loans:
Construction	$	2,382	$	46	$	1,578	$	11
1-4 Family Residential	3,855		29		2,982		65
Other	2,731		25		2,362		75
Commercial Loans	9,070		18		1,446		19
Municipal Loans	842		19		759		21
Loans to Individuals	670		1		2,679		103
Total	$	19,550	$	138	$	11,806	$	294

(1) Excludes PCI loans measured at fair value at acquisition.

Troubled Debt Restructurings

The restructuring of a loan is considered a TDR if both (i) the borrower is experiencing financial difficulties and (ii) the creditor has granted a concession. Concessions may include interest rate reductions or below market interest rates, restructuring amortization schedules and other actions intended to minimize potential losses.

The following tables set forth the recorded balance at June 30, 2015 and 2014 of loans considered to be TDRs that were restructured during the periods presented (dollars in thousands):




	Three Months Ended June 30, 2015
	Extend Amortization Period		Interest Rate Reductions		Combination ₍₁₎		Total Modifications		Number of Loans
Real Estate Loans:
Commercial Loans	$	300	$	—	$	—	$	300	1
Loans to Individuals	4		—		58		62		7
Total	$	304	$	—	$	58	$	362	8



	Six Months Ended June 30, 2015
	Extend Amortization Period		Interest Rate Reductions		Combination ₍₁₎		Total Modifications		Number of Loans
Real Estate Loans:
1-4 Family Residential	$	—	$	—	$	262	$	262	2
Other	30		—		—		30		1
Commercial Loans	300		—		762		1,062		2
Loans to Individuals	4		—		84		88		9
Total	$	334	$	—	$	1,108	$	1,442	14



	Three Months Ended June 30, 2014
	Extend Amortization Period		Interest Rate Reductions		Combination ₍₁₎		Total Modifications		Number of Loans
Real Estate Loans:
Other	$	—	$	—	$	388	$	388	1
Commercial Loans	60		—		—		60		2
Total	$	60	$	—	$	388	$	448	3



	Six Months Ended June 30, 2014
	Extend Amortization Period		Interest Rate Reductions		Combination ₍₁₎		Total Modifications		Number of Loans
Real Estate Loans:
1-4 Family Residential	$	—	$	284	$	—	$	284	1
Other	—		—		413		413		2
Commercial Loans	313		—		56		369		5
Loans to Individuals	—		15		45		60		4
Total	$	313	$	299	$	514	$	1,126	12

(1) These modifications include an extension of the amortization period and interest rate reduction.

The majority of loans restructured as TDRs during the six months ended June 30, 2015 were modified with a combination of interest rate reductions and maturity extensions. Interest continues to be charged on principal balances outstanding during the extended term. Therefore, the financial effects of the recorded investment of loans restructured as TDRs during the three and six months ended June 30, 2015 and June 30, 2014 were not significant. Generally, the loans identified as TDRs were previously reported as impaired loans prior to restructuring and therefore the modification did not impact our determination of the allowance for loan losses.

On an ongoing basis, the performance of the TDRs is monitored for subsequent payment default. Payment default for TDRs is recognized when the borrower is 90 days or more past due. For the three and six months ended June 30, 2015 and 2014, there were no material defaults. Payment defaults for TDRs did not significantly impact the determination of the allowance for loan loss in either period presented.

At June 30, 2015 and 2014, there were no commitments to lend additional funds to borrowers whose terms had been modified in TDRs.

Purchased Credit Impaired Loans

The following table presents the outstanding principal balance and carrying value for PCI loans for the periods presented (in thousands):



	June 30, 2015		December 31, 2014
Outstanding principal balance	$	30,215	$	32,572
Carrying amount	$	20,291	$	21,346

The following table presents the changes of the accretable yield during the periods for PCI loans (in thousands):



	Three Months Ended			Six Months Ended
	June 30, 2015
Balance at beginning of period	$	1,296		$	1,820
Additions	—			—
Additions due to acquisition	—			—
Accretion	(618		)	(1,142		)
Balance at end of period	$	678		$	678