5. LOANS AND LEASES

Loans and leases, excluding loans held for sale, consisted of the following:

	September 30,			December 31,
	2013			2012
	(Dollars in thousands)

Commercial, financial and agricultural	$	367,923		$	246,278
Real estate:
Construction	73,387			96,240
Mortgage - residential	1,195,847			1,035,273
Mortgage - commercial	614,860			673,506
Consumer	226,338			143,387
Leases	6,539			10,504
	2,484,894			2,205,188
Unearned income	(576		)	(1,244		)
Total loans and leases	$	2,484,318		$	2,203,944

During the nine months ended September 30, 2013, we transferred nine loans with a carrying value of $3.5 million to other real estate. We did not transfer any portfolio loans to the held-for-sale category during the nine months ended September 30, 2013. In June 2013, we purchased an auto loan portfolio for $21.6 million, which represented a $0.8 million premium over the $20.8 million outstanding balance. At the time of purchase, the auto loan portfolio had a weighted average remaining term of 76 months. During the nine months ended September 30, 2013, we also purchased participation interests in student loans totaling $15.5 million, which represented the outstanding balance. At the time of purchases, the student loans had a weighted average remaining term of 122 months.

During the nine months ended September 30, 2012, we transferred three loans, two of which was non-performing, to the held-for-sale category. In addition, we transferred 15 loans with a carrying value of $3.0 million to other real estate. No portfolio loans were purchased during the nine months ended September 30, 2012.

Impaired Loans

The following table presents by class, the balance in the allowance for loan and lease losses and the recorded investment in loans and leases based on the Company’s impairment measurement method as of September 30, 2013 and December 31, 2012:

	Commercial,			Real estate
	Financial & Agricultural			Construction			Mortgage - Residential		Mortgage - Commercial			Consumer			Leases		Total
	(Dollars in thousands)
September 30, 2013
Allowance for loan and lease losses:
Ending balance attributable to loans:
Individually evaluated for impairment	$	403		$	1,576		$	—	$	—		$	—		$	—	$	1,979
Collectively evaluated for impairment	12,534			2,945			26,782		30,112			4,820			56		77,249
	12,937			4,521			26,782		30,112			4,820			56		79,228
Unallocated																	6,000
Total ending balance	$	12,937		$	4,521		$	26,782	$	30,112		$	4,820		$	56	$	85,228

Loans and leases:
Individually evaluated for impairment	$	3,945		$	20,638		$	36,298	$	20,418		$	—		$	—	$	81,299
Collectively evaluated for impairment	363,978			52,749			1,159,549		594,442			226,338			6,539		2,403,595
	367,923			73,387			1,195,847		614,860			226,338			6,539		2,484,894
Unearned income	307			(184		)	1,116		(1,065		)	(750		)	—		(576		)
Total ending balance	$	368,230		$	73,203		$	1,196,963	$	613,795		$	225,588		$	6,539	$	2,484,318

December 31, 2012
Allowance for loan and lease losses:
Ending balance attributable to loans:
Individually evaluated for impairment	$	882		$	1,582		$	272	$	270		$	—		$	5	$	3,011
Collectively evaluated for impairment	4,105			2,928			29,638		48,230			2,421			80		87,402
	4,987			4,510			29,910		48,500			2,421			85		90,413
Unallocated																	6,000
Total ending balance	$	4,987		$	4,510		$	29,910	$	48,500		$	2,421		$	85	$	96,413

Loans and leases:
Individually evaluated for impairment	$	3,957		$	48,264		$	42,865	$	15,911		$	—		$	95	$	111,092
Collectively evaluated for impairment	242,321			47,976			992,408		657,595			143,387			10,409		2,094,096
	246,278			96,240			1,035,273		673,506			143,387			10,504		2,205,188
Unearned income	(60		)	(46		)	124		(1,258		)	(4		)	—		(1,244		)
Total ending balance	$	246,218		$	96,194		$	1,035,397	$	672,248		$	143,383		$	10,504	$	2,203,944

The following table presents by class, impaired loans as of September 30, 2013 and December 31, 2012:

	Unpaid Principal Balance		Recorded Investment		Allowance Allocated
	(Dollars in thousands)
September 30, 2013
Impaired loans with no related allowance recorded:
Commercial, financial & agricultural	$	980	$	980	$	—
Real estate:
Construction	15,429		9,043		—
Mortgage - residential	42,191		36,298		—
Mortgage - commercial	26,395		20,418		—
Total impaired loans with no related allowance recorded	84,995		66,739		—
Impaired loans with an allowance recorded:
Commercial, financial & agricultural	4,445		2,965		403
Real estate:
Construction	13,672		11,595		1,576
Total impaired loans with an allowance recorded	18,117		14,560		1,979
Total	$	103,112	$	81,299	$	1,979

December 31, 2012
Impaired loans with no related allowance recorded:
Commercial, financial & agricultural	$	1,225	$	526	$	—
Real estate:
Construction	52,352		36,664		—
Mortgage - residential	47,364		41,894		—
Mortgage - commercial	13,616		13,211		—
Total impaired loans with no related allowance recorded	114,557		92,295		—
Impaired loans with an allowance recorded:
Commercial, financial & agricultural	4,807		3,431		882
Real estate:
Construction	13,678		11,600		1,582
Mortgage - residential	1,935		971		272
Mortgage - commercial	3,939		2,700		270
Leases	95		95		5
Total impaired loans with an allowance recorded	24,454		18,797		3,011
Total	$	139,011	$	111,092	$	3,011

The following table presents by class, the average recorded investment and interest income recognized on impaired loans as of September 30, 2013 and 2012:

	Three Months Ended September 30,								Nine Months Ended September 30,
	2013				2012				2013				2012
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
	(Dollars in thousands)
Commercial, financial
& agricultural	$	4,104	$	6	$	3,956	$	1	$	4,189	$	18	$	3,304	$	30
Real estate:
Construction	20,812		942		48,412		83		28,149		1,409		58,893		728
Mortgage - residential	36,228		24		46,036		120		38,909		352		48,418		298
Mortgage - commercial	19,436		441		17,994		162		22,286		623		19,589		330
Leases	—		—		252		—		43		—		135		—
Total	$	80,580	$	1,413	$	116,650	$	366	$	93,576	$	2,402	$	130,339	$	1,386

Aging Analysis of Accruing and Non-Accruing Loans and Leases

For all loan types, the Company determines delinquency status by considering the number of days full payments required by the contractual terms of the loan are past due. The following table presents by class, the aging of the recorded investment in past due loans and leases as of September 30, 2013 and December 31, 2012:

	Accruing Loans 30 - 59 Days Past Due		Accruing Loans 60 - 89 Days Past Due		Accruing Loans Greater Than 90 Days Past Due		Nonaccrual Loans		Total Past Due and Nonaccrual		Loans and Leases Not Past Due		Total
	(Dollars in thousands)
September 30, 2013
Commercial, financial & agricultural	$	245	$	104	$	—	$	3,529	$	3,878	$	364,352	$	368,230
Real estate:
Construction	—		—		—		16,497		16,497		56,706		73,203
Mortgage - residential	485		1,893		19		20,703		23,100		1,173,863		1,196,963
Mortgage - commercial	240		—		—		12,559		12,799		600,996		613,795
Consumer	528		140		18		—		686		224,902		225,588
Leases	—		—		—		—		—		6,539		6,539
Total	$	1,498	$	2,137	$	37	$	53,288	$	56,960	$	2,427,358	$	2,484,318

December 31, 2012
Commercial, financial & agricultural	$	123	$	139	$	—	$	3,510	$	3,772	$	242,446	$	246,218
Real estate:
Construction	124		—		—		38,742		38,866		57,328		96,194
Mortgage - residential	8,330		590		387		27,499		36,806		998,591		1,035,397
Mortgage - commercial	219		—		—		9,487		9,706		662,542		672,248
Consumer	249		169		116		—		534		142,849		143,383
Leases	—		—		—		94		94		10,410		10,504
Total	$	9,045	$	898	$	503	$	79,332	$	89,778	$	2,114,166	$	2,203,944

Modifications

Troubled debt restructurings (“TDRs”) included in nonperforming assets at September 30, 2013 consisted of 45 Hawaii residential mortgage loans with a combined principal balance of $13.7 million, a U.S Mainland commercial mortgage loan with a principal balance of $9.1 million, three Hawaii construction loans with a combined principal balance of $1.3 million, and a Hawaii commercial loan with a principal balance of $0.6 million. Concessions made to the original contractual terms of these loans consisted primarily of the deferral of interest and/or principal payments due to deterioration in the borrowers’ financial condition. The principal balances on these TDRs had matured and/or were in default at the time of restructure and we have no commitments to lend additional funds to any of these borrowers. There were $27.8 million of TDRs still accruing interest at September 30, 2013, none of which were more than 90 days delinquent. At December 31, 2012, there were $31.8 million of TDRs still accruing interest, none of which were more than 90 days delinquent.

Loans modified in a TDR are typically on nonaccrual status. Thus, these loans have already been identified as impaired and have already been evaluated under the Company’s allowance for loan and lease losses (the “Allowance”) methodology. As a result, the loans modified in a TDR did not have a material effect to our provision for loan and lease losses expense (the “Provision”) and the Allowance during the three and nine months ended September 30, 2013.

The following table presents by class, information related to loans modified in a TDR during the three and nine months ended September 30, 2013 and 2012:

	Number of Contracts	Recorded Investment (as of period end)		Increase in the Allowance
	(Dollars in thousands)
Three months ended September 30, 2013
Real estate:
Mortgage - residential	1	$	241	$	—
Mortgage - commercial	1	9,099		—
Total	2	$	9,340	$	—

Three months ended September 30, 2012
Commercial, financial & agricultural	1	$	457	$	—
Real estate:
Construction	4	9,838		—
Mortgage - residential	3	1,226		155
Total	8	$	11,521	$	155

Nine months ended September 30, 2013
Commercial, financial & agricultural	1	$	564	$	—
Real estate:
Construction	1	184		—
Mortgage - residential	4	1,860		—
Mortgage - commercial	1	9,099		—
Total	7	$	11,707	$	—

Nine months ended September 30, 2012
Real estate:
Construction	2	$	10,593	$	3,014
Mortgage - residential	26	9,635		447
Total	28	$	20,228	$	3,461

The following table presents by class, loans modified as a TDR within the previous twelve months that subsequently defaulted during the three and nine months ended September 30, 2013 and 2012:

	Three Months Ended September 30,						Nine Months Ended September 30,
	2013			2012			2013			2012
	Number of Contracts	Recorded Investment (as of period end)		Number of Contracts	Recorded Investment (as of period end)		Number of Contracts	Recorded Investment (as of period end)		Number of Contracts	Recorded Investment (as of period end)
	(Dollars in thousands)
Commercial, financial & agricultural	—	$	—	—	$	—	1	$	564	—	$	—
Real estate:
Construction	—	—		3	4,668		1	184		7	6,207
Mortgage - residential	—	—		1	93		3	1,330		4	878
Mortgage - commercial	—	—		—	—		—	—		2	6,212
Total	—	$	—	4	$	4,761	5	$	2,078	13	$	13,297

Credit Quality Indicators

The Company categorizes loans and leases into risk categories 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. The Company analyzes loans and leases individually by classifying the loans and leases as to credit risk. This analysis includes loans and leases with an outstanding balance greater than $0.5 million and non-homogeneous loans and leases, such as commercial and commercial real estate loans. This analysis is performed on a quarterly basis. The Company uses the following definitions for risk ratings:

Special Mention. Loans and leases classified as special mention, while still adequately protected by the borrower’s capital adequacy and payment capability, exhibit distinct weakening trends and/or elevated levels of exposure to external conditions. If left unchecked or uncorrected, these potential weaknesses may result in deteriorated prospects of repayment. These exposures require management’s close attention so as to avoid becoming undue or unwarranted credit exposures.

Substandard. Loans and leases classified as substandard are inadequately protected by the borrower’s current financial condition and payment capability or by the collateral pledged, if any. Loans and leases so classified have a well-defined weakness or weaknesses that jeopardize the orderly repayment of debt. They are characterized by the distinct possibility that the bank will sustain some loss if the deficiencies are not corrected.

Doubtful. Loans and leases classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or orderly repayment in full, on the basis of current existing facts, conditions and values, highly questionable and improbable. Possibility of loss is extremely high, but because of certain important and reasonably specific factors that may work to the advantage and strengthening of the exposure, its classification as an estimated loss is deferred until its more exact status may be determined.

Loss. Loans and leases classified as loss are considered to be non-collectible and of such little value that their continuance as bankable assets is not warranted. This does not mean the loan has absolutely no recovery value, but rather it is neither practical nor desirable to defer writing off the loan, even though partial recovery may be obtained in the future. Losses are taken in the period in which they surface as uncollectible.

Loans and leases not meeting the criteria above are considered to be pass rated loans and leases. The following table presents by class and credit indicator, the recorded investment in the Company’s loans and leases as of September 30, 2013 and December 31, 2012:

	Pass		Special Mention		Substandard		Doubtful		Loss		Less: Unearned Income			Total
	(Dollars in thousands)
September 30, 2013
Commercial, financial
& agricultural	$	355,519	$	6,308	$	6,096	$	—	$	—	$	(307	)	$	368,230
Real estate:
Construction	53,736		—		19,651		—		—		184			73,203
Mortgage - residential	1,171,598		1,044		23,205		—		—		(1,116		)	1,196,963
Mortgage - commercial	555,679		24,081		35,100		—		—		1,065			613,795
Consumer	226,301		—		37		—		—		750			225,588
Leases	6,539		—		—		—		—		—			6,539
Total	$	2,369,372	$	31,433	$	84,089	$	—	$	—	$	576		$	2,484,318

December 31, 2012
Commercial, financial
& agricultural	$	232,062	$	6,609	$	7,607	$	—	$	—	$	60		$	246,218
Real estate:
Construction	42,619		9,635		43,986		—		—		46			96,194
Mortgage - residential	1,003,268		1,109		30,896		—		—		(124		)	1,035,397
Mortgage - commercial	577,638		65,114		30,754		—		—		1,258			672,248
Consumer	143,258		—		129		—		—		4			143,383
Leases	9,860		274		370		—		—		—			10,504
Total	$	2,008,705	$	82,741	$	113,742	$	—	$	—	$	1,244		$	2,203,944

In accordance with applicable Interagency Guidance issued by our primary bank regulators, we define subprime borrowers as typically having weakened credit histories that include payment delinquencies and possibly more severe problems such as charge-offs, judgments, and bankruptcies. They may also display reduced repayment capacity as measured by credit scores, debt-to-income ratios, or other criteria that may encompass borrowers with incomplete credit histories. Subprime loans are loans to borrowers displaying one or more of these characteristics at the time of origination or purchase. Such loans have a higher risk of default than loans to prime borrowers. At September 30, 2013 and December 31, 2012, we did not have any loans that we considered to be subprime.