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Loans and Allowance for Probable Loan Losses
 9 Months Ended
Sep. 30, 2019
Receivables [Abstract]  
Loans and Allowance for Probable Loan Losses Loans and Allowance for Loan Losses

Loans in the accompanying consolidated balance sheets are classified as follows (in thousands):    
 
September 30, 2019
 
December 31, 2018
Real estate loans:
 
 
 
Construction
$
621,040

 
$
507,732

1-4 family residential
792,638

 
794,499

Commercial
1,236,307

 
1,194,118

Commercial loans
382,077

 
356,649

Municipal loans
366,906

 
353,370

Loans to individuals
100,949

 
106,431

Total loans
3,499,917

 
3,312,799

Less: Allowance for loan losses (1)
25,129

 
27,019

Net loans
$
3,474,788

 
$
3,285,780



(1)
The allowance for loan losses recorded on purchased credit impaired (“PCI”) loans totaled $141,000 and $302,000 as of September 30, 2019 and December 31, 2018, respectively.
Construction Real Estate Loans
Our construction loans are collateralized by property located primarily in or near the market areas we serve. A number of our construction loans will be owner occupied upon completion. Construction loans for non-owner occupied projects are financed, but these typically have cash flows from leases with tenants, secondary sources of repayment, and in some cases, additional 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.
1-4 Family Residential Real Estate 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 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.
Commercial Real Estate Loans
Commercial real estate loans as of September 30, 2019 consisted of $1.12 billion of owner and non-owner occupied real estate, $97.0 million of loans secured by multi-family properties and $20.0 million of loans secured by farmland. Commercial real estate loans primarily include loans collateralized by retail, commercial office buildings, multi-family residential buildings, medical facilities and offices, senior living, assisted living and skilled nursing facilities, warehouse facilities, hotels and churches. Management does not consider there to be a risk in any one industry type. 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. Commercial 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. 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 primarily throughout the state of Texas, with a small percentage originating outside of the state.  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. Lending money directly to these municipalities allows us to earn a higher yield than we could if we purchased municipal securities for similar durations.
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 assists in limiting our exposure.
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, we utilize historical net charge-off 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 not reflected in the historical data. 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 on a monthly basis.  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 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 at the time of the review we determine it is probable we will not collect the principal and interest cash flows contractually due on the loan, estimates of future expected cash flows or appraisals of the collateral securing the debt are used to determine the necessary allowance.  The internal loan review department maintains a list (“Watch 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 loans.
We calculate historical loss ratios for pools of loans with similar characteristics based on the proportion of actual charge-offs experienced, consistent with the characteristics of remaining loans, to the total population of loans in the pool. The historical gross loss ratios are updated quarterly based on actual charge-off experience and adjusted for qualitative factors. All loans are subject to individual analysis if determined to be impaired with the exception of consumer loans and loans secured by 1-4 family residential loans.
Industry and our own experience indicates that a portion of our loans will become delinquent and a portion of our loans will require partial or full charge-off.  Regardless of the underwriting criteria utilized, losses may occur 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 worthiness 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 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 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.
•
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.
•
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 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 non-PCI purchased loan portfolio specifically in regards to changes in credit quality, past due, nonaccrual and charge-off trends.
The following tables detail activity in the allowance for loan losses by portfolio segment for the periods presented (in thousands):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended September 30, 2019
 
Real Estate
 
 
 
 
 
 
 
 
 
Construction
 
1-4 Family
Residential
 
Commercial
 
Commercial
Loans
 
Municipal
Loans
 
Loans to
Individuals
 
Total
Balance at beginning of period
$
3,599

 
$
3,522

 
$
10,534

 
$
5,546

 
$
530

 
$
974

 
$
24,705

Provision (reversal) for loan losses (2)
(35
)
 
18

 
27

 
618

 
17

 
360

 
1,005

Loans charged off
—

 
(24
)
 
—

 
(394
)
 
—

 
(582
)
 
(1,000
)
Recoveries of loans charged off
12

 
40

 
21

 
82

 
—

 
264

 
419

Balance at end of period
$
3,576

 
$
3,556

 
$
10,582

 
$
5,852

 
$
547

 
$
1,016

 
$
25,129

 
Nine Months Ended September 30, 2019
 
Real Estate
 
 
 
 
 
 
 
 
 
Construction
 
1-4 Family
Residential
 
Commercial
 
Commercial
Loans
 
Municipal
Loans
 
Loans to
Individuals
 
Total
Balance at beginning of period
$
3,597

 
$
3,844

 
$
13,968

 
$
3,974

 
$
525

 
$
1,111

 
$
27,019

Provision (reversal) for loan losses (2)
(33
)
 
(292
)
 
(569
)
 
2,618

 
22

 
847

 
2,593

Loans charged off
—

 
(42
)
 
(2,876
)
 
(975
)
 
—

 
(1,789
)
 
(5,682
)
Recoveries of loans charged off
12

 
46

 
59

 
235

 
—

 
847

 
1,199

Balance at end of period
$
3,576

 
$
3,556

 
$
10,582

 
$
5,852

 
$
547

 
$
1,016

 
$
25,129


 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended September 30, 2018
 
Real Estate
 
 
 
 
 
 
 
 
 
Construction
 
1-4 Family
Residential
 
Commercial
 
Commercial
Loans 
 
Municipal
Loans
 
Loans to
Individuals
 
Total
Balance at beginning of period
$
3,841

 
$
2,730

 
$
14,036

 
$
2,560

 
$
859

 
$
1,046

 
$
25,072

Provision (reversal) for loan losses (2)
(717
)
 
585

 
290

 
533

 
5

 
279

 
975

Loans charged off
—

 
(8
)
 
—

 
(13
)
 
—

 
(641
)
 
(662
)
Recoveries of loans charged off
—

 
331

 
5

 
105

 
—

 
266

 
707

Balance at end of period
$
3,124

 
$
3,638

 
$
14,331

 
$
3,185

 
$
864

 
$
950

 
$
26,092

 
Nine Months Ended September 30, 2018
 
Real Estate
 
 
 
 
 
 
 
 
 
Construction
 
1-4 Family
Residential
 
Commercial
 
Commercial
Loans
 
Municipal
Loans
 
Loans to
Individuals
 
Total
Balance at beginning of period (1)
$
3,676

 
$
2,445

 
$
10,821

 
$
2,094

 
$
860

 
$
885

 
$
20,781

Provision (reversal) for loan losses (2)
(538
)
 
906

 
3,499

 
1,194

 
4

 
926

 
5,991

Loans charged off
(14
)
 
(65
)
 
—

 
(270
)
 
—

 
(1,997
)
 
(2,346
)
Recoveries of loans charged off
—

 
352

 
11

 
167

 
—

 
1,136

 
1,666

Balance at end of period
$
3,124

 
$
3,638

 
$
14,331

 
$
3,185

 
$
864

 
$
950

 
$
26,092


(1) Loans acquired with the Diboll acquisition were measured at fair value on November 30, 2017 with no carryover of allowance for loan losses.
(2)
Of the $1.0 million provision for loan losses for the three months ended September 30, 2019, $2,000 related to provision expense on PCI loans. Of the $2.6 million provision for loan losses for the nine months ended September 30, 2019, $161,000 related to provision expense reversed on PCI loans. Of the $975,000 and $6.0 million recorded in provision for loan losses for the three and nine months ended September 30, 2018, $466,000 and $824,000 related to provision expense on PCI loans, respectively.

The following tables present the balance in the allowance for loan losses by portfolio segment based on impairment method (in thousands):
 
September 30, 2019
 
Real Estate
 
 
 
 
 
 
 
 
 
Construction
 
1-4 Family
Residential
 
Commercial
 
Commercial
Loans
 
Municipal
Loans
 
Loans to
Individuals
 
Total
Ending balance – individually evaluated for impairment (1)
$
25

 
$
71

 
$
1,394

 
$
560

 
$
—

 
$
79

 
$
2,129

Ending balance – collectively evaluated for impairment
3,551

 
3,485

 
9,188

 
5,292

 
547

 
937

 
23,000

Balance at end of period
$
3,576

 
$
3,556

 
$
10,582

 
$
5,852

 
$
547

 
$
1,016

 
$
25,129


 
December 31, 2018
 
Real Estate
 
 
 
 
 
 
 
 
 
Construction
 
1-4 Family
Residential
 
Commercial
 
Commercial
Loans
 
Municipal
Loans
 
Loans to
Individuals
 
Total
Ending balance – individually evaluated for impairment (1)
$
13

 
$
40

 
$
5,337

 
$
368

 
$
1

 
$
149

 
$
5,908

Ending balance – collectively evaluated for impairment
3,584

 
3,804

 
8,631

 
3,606

 
524

 
962

 
21,111

Balance at end of period
$
3,597

 
$
3,844

 
$
13,968

 
$
3,974

 
$
525

 
$
1,111

 
$
27,019



(1)
The allowance for loan losses on PCI loans totaled $141,000 and $302,000 as of September 30, 2019 and December 31, 2018, respectively.

The following tables present the recorded investment in loans by portfolio segment based on impairment method (in thousands):
 
September 30, 2019
 
Real Estate
 
 
 
 
 
 
 
 
 
Construction
 
1-4 Family
Residential
 
Commercial
 
Commercial
Loans
 
Municipal
Loans
 
Loans to
Individuals
 
Total
Loans individually evaluated for impairment
$
412

 
$
1,231

 
$
21,180

 
$
2,182

 
$
352

 
$
120

 
$
25,477

Loans collectively evaluated for impairment
620,497

 
783,504

 
1,185,138

 
378,635

 
366,554

 
100,673

 
3,435,001

Purchased credit impaired loans
131

 
7,903

 
29,989

 
1,260

 
—

 
156

 
39,439

Total ending loan balance
$
621,040

 
$
792,638

 
$
1,236,307

 
$
382,077

 
$
366,906

 
$
100,949

 
$
3,499,917

 
December 31, 2018
 
Real Estate
 
 
 
 
 
 
 
 
 
Construction
 
1-4 Family
Residential
 
Commercial
 
Commercial
Loans
 
Municipal
Loans
 
Loans to
Individuals
 
Total
Loans individually evaluated for impairment
$
12

 
$
1,215

 
$
33,013

 
$
1,394

 
$
429

 
$
184

 
$
36,247

Loans collectively evaluated for impairment
507,564

 
782,614

 
1,128,220

 
353,036

 
352,941

 
105,775

 
3,230,150

Purchased credit impaired loans
156

 
10,670

 
32,885

 
2,219

 
—

 
472

 
46,402

Total ending loan balance
$
507,732

 
$
794,499

 
$
1,194,118

 
$
356,649

 
$
353,370

 
$
106,431

 
$
3,312,799



The following tables set forth credit quality indicators by class of loans for the periods presented (in thousands):
 
September 30, 2019
 
Pass
 
Pass Watch (1)
 
Special Mention (1)
 
Substandard (1)
 
Doubtful (1)
 
Total
Real estate loans:
 
 
 
 
 
 
 
 
 
 
 
Construction
$
620,593

 
$
24

 
$
—

 
$
333

 
$
90

 
$
621,040

1-4 family residential
782,534

 
1,408

 
165

 
7,833

 
698

 
792,638

Commercial
1,178,388

 
16,979

 
10,021

 
30,700

 
219

 
1,236,307

Commercial loans
367,835

 
654

 
6,645

 
6,927

 
16

 
382,077

Municipal loans
366,906

 
—

 
—

 
—

 
—

 
366,906

Loans to individuals
100,436

 
—

 
—

 
305

 
208

 
100,949

Total
$
3,416,692

 
$
19,065

 
$
16,831

 
$
46,098

 
$
1,231

 
$
3,499,917


 
December 31, 2018
 
Pass
 
Pass Watch (1)
 
Special Mention (1)
 
Substandard (1)
 
Doubtful (1)
 
Total
Real estate loans:
 
 
 
 
 
 
 
 
 
 
 
Construction
$
507,529

 
$
163

 
$
—

 
$
28

 
$
12

 
$
507,732

1-4 family residential
787,516

 
37

 
100

 
5,489

 
1,357

 
794,499

Commercial
1,067,874

 
11,479

 
26,490

 
87,767

 
508

 
1,194,118

Commercial loans
349,495

 
520

 
3,189

 
2,988

 
457

 
356,649

Municipal loans
353,370

 
—

 
—

 
—

 
—

 
353,370

Loans to individuals
105,536

 
4

 
4

 
678

 
209

 
106,431

Total
$
3,171,320

 
$
12,203

 
$
29,783

 
$
96,950

 
$
2,543

 
$
3,312,799



(1)
Includes PCI loans comprised of $15,000 pass watch, $55,000 special mention, $2.3 million substandard and $236,000 doubtful as of September 30, 2019. 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.

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 or that are delinquent less than 90 days may be placed on nonaccrual status if it is probable that we will not receive contractual principal and interest payments in accordance with the terms of the respective loan agreement. 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 when the timing and amount of expected cash flows can be reasonably estimated, 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. However, subsequent to acquisition, we reassess PCI loans for additional impairment and record additional impairment in the event we conclude it is probable that we will be unable to collect all cash flows originally expected to be collected at acquisition plus any additional cash flows expected to be collected due to changes in estimates after acquisition. All such PCI loans for which we recognize subsequent impairment are reported as impaired loans in the financial statements.

The following table sets forth nonperforming assets for the periods presented (in thousands):
 
September 30, 2019
 
December 31, 2018
Nonaccrual loans (1) (2)
$
17,148

 
$
35,770

Accruing loans past due more than 90 days (1)
—

 
—

Restructured loans (3)
11,683

 
5,930

Other real estate owned
912

 
1,206

Repossessed assets
4

 
—

Total nonperforming assets
$
29,747

 
$
42,906



(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 $8.9 million and $10.9 million of restructured loans as of September 30, 2019 and December 31, 2018, respectively.
(3)
Includes $757,000 and $3.1 million in PCI loans restructured as of September 30, 2019 and December 31, 2018, respectively.

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. There were $781,000 and $147,000 in loans secured by 1-4 family residential properties for which formal foreclosure proceedings were in process as of September 30, 2019 and December 31, 2018, respectively.

The following table sets forth the recorded investment in nonaccrual loans by class of loans for the periods presented (in thousands). The table excludes PCI loans measured at fair value at acquisition:        
 
Nonaccrual Loans
 
September 30, 2019
 
December 31, 2018
Real estate loans:
 
 
 
Construction
$
412

 
$
12

1-4 family residential
2,500

 
2,202

Commercial
13,237

 
32,599

Commercial loans
747

 
639

Loans to individuals
252

 
318

Total
$
17,148

 
$
35,770


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 larger loans. The measurement of loss on impaired loans is generally based on the fair value of the collateral less selling costs 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, including the unpaid contractual principal balance, the recorded investment and the related allowance for loan losses for the periods presented (in thousands). Impaired loans include restructured and nonaccrual loans for which the allowance was measured in accordance with section 310-10 of ASC Topic 310, “Receivables.” There were no impaired loans recorded without an allowance as of September 30, 2019 or December 31, 2018.
 
September 30, 2019
 
Unpaid Contractual Principal Balance
 
Recorded Investment
 
Related
 Allowance for
 Loan Losses
Real estate loans:
 
 
 
 
 
Construction
$
566

 
$
529

 
$
25

1-4 family residential
8,350

 
7,051

 
71

Commercial
26,285

 
22,889

 
1,394

Commercial loans
3,600

 
2,970

 
560

Municipal loans
352

 
352

 
—

Loans to individuals
616

 
289

 
79

Total (1)
$
39,769

 
$
34,080

 
$
2,129


 
December 31, 2018
 
Unpaid
Contractual
Principal
Balance
 
Recorded
Investment
 
Related
 Allowance for
 Loan Losses
Real estate loans:
 
 
 
 
 
Construction
$
182

 
$
148

 
$
13

1-4 family residential
6,507

 
5,923

 
40

Commercial
36,457

 
34,744

 
5,337

Commercial loans
2,874

 
2,366

 
368

Municipal loans
429

 
429

 
1

Loans to individuals
825

 
657

 
149

Total (1)
$
47,274

 
$
44,267

 
$
5,908



(1)
Includes $8.6 million and $8.0 million of PCI loans that experienced deterioration in credit quality subsequent to the acquisition date as of September 30, 2019 and December 31, 2018, respectively.

The following tables present the aging of the recorded investment in past due loans by class of loans (in thousands):
 
September 30, 2019
 
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
$
478

 
$
207

 
$
346

 
$
1,031

 
$
620,009

 
$
621,040

1-4 family residential
1,638

 
1,429

 
1,009

 
4,076

 
788,562

 
792,638

Commercial
282

 
9,179

 
—

 
9,461

 
1,226,846

 
1,236,307

Commercial loans
1,496

 
584

 
474

 
2,554

 
379,523

 
382,077

Municipal loans
—

 
—

 
—

 
—

 
366,906

 
366,906

Loans to individuals
698

 
90

 
64

 
852

 
100,097

 
100,949

Total
$
4,592

 
$
11,489

 
$
1,893

 
$
17,974

 
$
3,481,943

 
$
3,499,917

 
December 31, 2018
 
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
$
627

 
$
307

 
$
—

 
$
934

 
$
506,798

 
$
507,732

1-4 family residential
7,441

 
1,258

 
1,335

 
10,034

 
784,465

 
794,499

Commercial
10,663

 
7,655

 
—

 
18,318

 
1,175,800

 
1,194,118

Commercial loans
1,946

 
705

 
591

 
3,242

 
353,407

 
356,649

Municipal loans
—

 
—

 
—

 
—

 
353,370

 
353,370

Loans to individuals
1,289

 
351

 
146

 
1,786

 
104,645

 
106,431

Total
$
21,966

 
$
10,276

 
$
2,072

 
$
34,314

 
$
3,278,485

 
$
3,312,799



(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.

The following table sets forth average recorded investment and interest income recognized on impaired loans by class of loans for the periods presented (in thousands). The table excludes PCI loans measured at fair value at acquisition that have not experienced further deterioration in credit quality subsequent to the acquisition date:
 
 
 
 
 
 
 
 
 
Three Months Ended
 
September 30, 2019
 
September 30, 2018
 
Average Recorded Investment
 
Interest Income Recognized
 
Average Recorded Investment 
 
Interest Income Recognized
Real estate loans:
 
 
 
 
 
 
 
Construction
$
490

 
$
3

 
$
252

 
$
3

1-4 family residential
7,322

 
124

 
3,976

 
49

Commercial
23,018

 
166

 
32,580

 
16

Commercial loans
3,195

 
45

 
2,543

 
21

Municipal loans
391

 
6

 
466

 
6

Loans to individuals
314

 
4

 
244

 
1

Total
$
34,730

 
$
348

 
$
40,061

 
$
96

 
Nine Months Ended
 
September 30, 2019
 
September 30, 2018
 
Average Recorded Investment
 
Interest Income Recognized
 
Average Recorded
Investment
 
Interest Income Recognized
Real estate loans:
 
 
 
 
 
 
 
Construction
$
304

 
$
12

 
$
150

 
$
4

1-4 family residential
6,569

 
304

 
3,951

 
138

Commercial
28,549

 
589

 
24,149

 
36

Commercial loans
2,822

 
162

 
2,073

 
51

Municipal loans
414

 
18

 
488

 
20

Loans to individuals
452

 
13

 
223

 
3

Total
$
39,110

 
$
1,098

 
$
31,034

 
$
252



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. We may provide a combination of concessions which may include an extension of the amortization period, interest rate reduction and/or converting the loan to interest-only for a limited period of time.

The following tables set forth the recorded balance of loans considered to be TDRs that were restructured and the type of concession by class of loans during the periods presented (dollars in thousands):
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended September 30, 2019
 
Extend Amortization
 Period
 
Interest Rate Reductions
 
Combination
 
Total Modifications
 
Number of Loans
Real estate loans:
 
 
 
 
 
 
 
 
 
1-4 family residential
$
—

 
$
—

 
$
14

 
$
14

 
1

Commercial loans
—

 
—

 
181

 
181

 
3

Total
$
—

 
$
—

 
$
195

 
$
195

 
4

 
Nine Months Ended September 30, 2019
 
Extend Amortization
 Period
 
Interest Rate Reductions
 
Combination
 
Total Modifications
 
Number of Loans
Real estate loans:
 
 
 
 
 
 
 
 
 
1-4 family residential
$
—

 
$
—

 
$
123

 
$
123

 
2

Commercial
7,561

 
—

 
94

 
7,655

 
2

Commercial loans
54

 
—

 
659

 
713

 
8

Loans to individuals
—

 
—

 
26

 
26

 
3

Total
$
7,615

 
$
—

 
$
902

 
$
8,517

 
15

 
 
 
 
 
 
 
 
 
 
 
Three Months Ended September 30, 2018
 
Extend Amortization
 Period
 
Interest Rate Reductions
 
Combination
 
Total Modifications
 
Number of Loans
Real estate loans:
 
 
 
 
 
 
 
 
 
Commercial
$
—

 
$
—

 
$
283

 
$
283

 
2

Commercial loans
142

 
—

 
56

 
198

 
4

Loans to individuals
—

 
35

 
—

 
35

 
1

Total
$
142

 
$
35

 
$
339

 
$
516

 
7

 
Nine Months Ended September 30, 2018
 
Extend Amortization
 Period
 
Interest Rate Reductions
 
Combination
 
Total Modifications
 
Number of Loans
Real estate loans:
 
 
 
 
 
 
 
 
 
1-4 family residential
$
—

 
$
80

 
$
—

 
$
80

 
1

Commercial
—

 
—

 
283

 
283

 
2

Commercial loans
244

 
—

 
135

 
379

 
9

Loans to individuals
8

 
35

 
13

 
56

 
4

Total
$
252

 
$
115

 
$
431

 
$
798

 
16


The majority of loans restructured as TDRs during the nine months ended September 30, 2019 and 2018 were modified with 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 nine months ended September 30, 2019 and 2018 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 nine months ended September 30, 2019 and 2018, the amount of TDRs in default was not significant. Payment defaults for TDRs did not significantly impact the determination of the allowance for loan losses in the periods presented.
At September 30, 2019 and 2018, 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):
 
September 30, 2019
 
December 31, 2018
Outstanding principal balance
$
43,654

 
$
51,388

Carrying amount
$
39,439

 
$
46,402



The following table presents the changes in the accretable yield for PCI loans during the periods presented (in thousands):
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2019
 
2018
 
2019
 
2018
Balance at beginning of period
$
14,556

 
$
16,105

 
$
15,054

 
$
18,721

Changes in expected cash flows not affecting non-accretable differences
—

 
—

 
—

 
(1,445
)
Reclassifications (to) from nonaccretable discount
258

 
620

 
1,332

 
1,389

Accretion
(723
)
 
(733
)
 
(2,295
)
 
(2,673
)
Balance at end of period
$
14,091

 
$
15,992

 
$
14,091

 
$
15,992