LOANS AND LEASES

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



	December 31,
	2015		2014
	(Dollars in thousands)
Commercial, financial & agricultural	$	520,457	$	463,070
Real estate:
Construction	85,196		115,023
Mortgage - residential	1,433,862		1,280,089
Mortgage - commercial	761,566		704,099
Consumer	408,024		365,662
Leases	1,028		3,140
	3,210,133		2,931,083
Net deferred costs	1,399		1,115
Total loans and leases	$	3,211,532	$	2,932,198

There are different types of risk characteristics for the loans in each portfolio segment. The construction and real estate segment’s predominant risk characteristics are the collateral and the geographic location of the property collateralizing the loan, as well as the operating cash flow for the commercial real estate properties. The commercial and industrial (including leases) segment’s predominant risk characteristics are the cash flows of the business we lend to, the global cash flows and liquidity of the guarantors of such losses, as well as economic and market conditions. The consumer segment’s predominant risk characteristics are employment and income levels as they relate to the consumer.

During the year ended December 31, 2015, we transferred the collateral in eight portfolio loans with a carrying value of $2.2 million to other real estate. In the second quarter of 2015, we transferred two portfolio loans with a carrying value of $6.6 million to the held-for-sale category, and later sold the two loans in the second quarter of 2015 at its carrying value. In 2015, we purchased two auto loan portfolios totaling $52.8 million, which included a $1.7 million premium over the $51.1 million outstanding balance. At the time of purchase, the auto loan portfolios had a weighted average remaining term of 74 months. In 2015, we also purchased unsecured consumer loans totaling $15.9 million, which represented the outstanding balance at the time of purchases. At the time of purchases, the unsecured consumer loans had a weighted average remaining term of 37 months.

During the year ended December 31, 2014, we transferred the collateral in six portfolio loans with a carrying value of $2.8 million to other real estate. We did not transfer any portfolio loans to the held-for-sale category and we did not sell any portfolio loans in 2014. In 2014, we purchased auto loan portfolios for $11.2 million, which included a $0.3 million premium over the $10.9 million outstanding balance. At the time of purchase, the auto loan portfolios had a weighted average remaining term of 71 months. In 2014, we also purchased participation interests in student loans totaling $51.5 million, which represented the outstanding balance at the time of purchases. At the time of purchases, the student loans had a weighted average remaining term of 123 months.

In the normal course of business, our bank makes loans to certain directors, executive officers and their affiliates. An analysis of the activity of such loans follows:



	December 31,
	2015			2014
	(Dollars in thousands)
Balance, beginning of year	$	29,231		$	12,942
Additions	10,392			19,448
Repayments	(20,863		)	(3,159		)
Other changes	$	(8,285	)	$	—
Balance, end of year	$	10,475		$	29,231

Other changes represent changes in the composition of directors, executive officers and their affiliates that occurred during the year.

Impaired Loans

The following table presents by class, the balance in the Allowance and the recorded investment in loans and leases based on the Company’s impairment method as of December 31, 2015 and 2014:



	Commercial,		Real estate
	Financial & Agricultural		Construction			Mortgage - Residential		Mortgage - Commercial			Consumer			Leases		Total
	(Dollars in thousands)
December 31, 2015
Allowance for loan and lease losses:
Ending balance attributable to loans:
Individually evaluated for impairment	$	—	$	—		$	—	$	51		$	—		$	—	$	51
Collectively evaluated for impairment	6,905		8,454			17,738		21,796			6,230			—		61,123
	6,905		8,454			17,738		21,847			6,230			—		61,174
Unallocated																2,140
Total ending balance	$	6,905	$	8,454		$	17,738	$	21,847		$	6,230		$	—	$	63,314

Loans and leases:
Individually evaluated for impairment	$	1,044	$	4,126		$	22,716	$	10,318		$	—		$	—	$	38,204
Collectively evaluated for impairment	519,413		81,070			1,411,146		751,248			408,024			1,028		3,171,929
	520,457		85,196			1,433,862		761,566			408,024			1,028		3,210,133
Net deferred costs (income)	629		(311		)	2,443		(817		)	(545		)	—		1,399
Total ending balance	$	521,086	$	84,885		$	1,436,305	$	760,749		$	407,479		$	1,028	$	3,211,532

December 31, 2014
Allowance for loan and lease losses:
Ending balance attributable to loans:
Individually evaluated for impairment	$	1,533	$	—		$	—	$	—		$	—		$	—	$	1,533
Collectively evaluated for impairment	7,421		14,969			17,927		20,869			7,314			7		68,507
	8,954		14,969			17,927		20,869			7,314			7		70,040
Unallocated																4,000
Total ending balance	$	8,954	$	14,969		$	17,927	$	20,869		$	7,314		$	7	$	74,040

Loans and leases:
Individually evaluated for impairment	$	13,369	$	4,888		$	30,893	$	23,126		$	—		$	—	$	72,276
Collectively evaluated for impairment	449,701		110,135			1,249,196		680,973			365,662			3,140		2,858,807
	463,070		115,023			1,280,089		704,099			365,662			3,140		2,931,083
Net deferred costs (income)	693		(469		)	2,235		(826		)	(518		)	—		1,115
Total ending balance	$	463,763	$	114,554		$	1,282,324	$	703,273		$	365,144		$	3,140	$	2,932,198

The following table presents by class, impaired loans as of December 31, 2015 and 2014:



	Unpaid Principal Balance		Recorded Investment		Allowance Allocated
	(Dollars in thousands)
December 31, 2015
Impaired loans with no related allowance recorded:
Commercial, financial & agricultural	$	1,155	$	1,044	$	—
Real estate:
Construction	10,472		4,126		—
Mortgage - residential	24,792		22,716		—
Mortgage - commercial	10,010		9,152		—
Total impaired loans with no related allowance recorded	46,429		37,038		—
Impaired loans with an allowance recorded:
Real estate: Mortgage - commercial	1,166		1,166		51
Total impaired loans with an allowance recorded	1,166		1,166		51
Total	$	47,595	$	38,204	$	51

December 31, 2014
Impaired loans with no related allowance recorded:
Commercial, financial & agricultural	$	738	$	738	$	—
Real estate:
Construction	11,275		4,888		—
Mortgage - residential	34,131		30,893		—
Mortgage - commercial	30,249		23,126		—
Total impaired loans with no related allowance recorded	76,393		59,645		—
Impaired loans with an allowance recorded:
Commercial, financial & agricultural	16,630		12,631		1,533
Total impaired loans with an allowance recorded	16,630		12,631		1,533
Total	$	93,023	$	72,276	$	1,533

The following table presents by class, the average recorded investment and interest income recognized on impaired loans as of December 31, 2015, 2014 and 2013:



	Average Recorded Investment		Interest Income Recognized
	(Dollars in thousands)
December 31, 2015
Commercial, financial & agricultural	$	6,273	$	17
Real estate:
Construction	4,428		190
Mortgage - residential	26,101		78
Mortgage - commercial	14,240		373
Total	$	51,042	$	658

December 31, 2014
Commercial, financial & agricultural	$	14,303	$	22
Real estate:
Construction	5,517		163
Mortgage - residential	33,102		627
Mortgage - commercial	18,692		397
Total	$	71,614	$	1,209

December 31, 2013
Commercial, financial & agricultural	$	4,138	$	24
Real estate:
Construction	24,545		1,442
Mortgage - residential	38,325		586
Mortgage - commercial	21,160		833
Leases	33		—
Total	$	88,201	$	2,885

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 December 31, 2015 and 2014:



	30 - 59 Days Past Due		60 - 89 Days Past Due		Accruing Loans Greater Than 90 Days Past Due		Nonaccrual Loans		Total Past Due		Loans and Leases Not Past Due		Total
	(Dollars in thousands)
December 31, 2015
Commercial, financial & agricultural	$	276	$	140	$	—	$	1,044	$	1,460	$	519,626	$	521,086
Real estate:
Construction	—		—		—		—		—		84,885		84,885
Mortgage - residential	3,834		545		—		6,130		10,509		1,425,796		1,436,305
Mortgage - commercial	54		—		—		7,094		7,148		753,601		760,749
Consumer	1,443		521		273		—		2,237		405,242		407,479
Leases	—		—		—		—		—		1,028		1,028
Total	$	5,607	$	1,206	$	273	$	14,268	$	21,354	$	3,190,178	$	3,211,532

December 31, 2014
Commercial, financial & agricultural	$	183	$	85	$	—	$	13,007	$	13,275	$	450,488	$	463,763
Real estate:
Construction	—		—		—		310		310		114,244		114,554
Mortgage - residential	3,078		379		—		13,048		16,505		1,265,819		1,282,324
Mortgage - commercial	68		—		—		12,722		12,790		690,483		703,273
Consumer	1,500		417		77		—		1,994		363,150		365,144
Leases	—		—		—		—		—		3,140		3,140
Total	$	4,829	$	881	$	77	$	39,087	$	44,874	$	2,887,324	$	2,932,198

Interest income totaling $0.5 million, $0.4 million, and $0.4 million was recognized on nonaccrual loans, including loans held for sale, in 2015, 2014 and 2013, respectively. Additional interest income of $1.5 million, $4.0 million, and $4.9 million would have been recognized in 2015, 2014 and 2013, respectively, had these loans been accruing interest throughout those periods. Additionally, interest income of $0.8 million, $0.2 million, and $2.5 million was collected and recognized on charged-off loans in 2015, 2014 and 2013, respectively.

Modifications

TDRs included in nonperforming assets at December 31, 2015 consisted of 22 Hawaii residential mortgage loans with a combined principal balance of $3.5 million, one Hawaii commercial mortgage loan with a principal balance of $2.1 million, and three Hawaii commercial loans with a combined principal balance of $1.0 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 $20.3 million of TDRs still accruing interest at December 31, 2015, none of which were more than 90 days delinquent. At December 31, 2014, there were $29.5 million of TDRs still accruing interest, none of which were more than 90 days delinquent.

Some loans modified in a TDR may already be on nonaccrual status and partial charge-offs may have already been taken against the outstanding loan balance. Thus, these loans have already been identified as impaired and have already been evaluated under the Company’s Allowance methodology. As a result, some loans modified in a TDR may have the financial effect of increasing the specific allowance associated with the loan. The loans modified in a TDR did not have a material effect on our Provision and Allowance during the years ended December 31, 2015 and 2014.

The following table presents by class, information related to loans modified in a TDR during the years ended December 31, 2015 and 2014:



	Number of Contracts	Recorded Investment (as of period end)		Increase in the Allowance
	(Dollars in thousands)
Year ended December 31, 2015
Commercial, financial & agricultural	1	$	488	$	—
Real estate: mortgage - residential	3	4,131		—
	4	4,619		—

Year ended December 31, 2014
Real estate: mortgage - residential	12	$	790	$	—

The following table presents by class, loans modified as a TDR within the previous twelve months that subsequently defaulted during the years ended December 31, 2015 and 2014:



	Year Ended December 31,
	2015			2014
	Number of Contracts	Recorded Investment (as of period end)		Number of Contracts	Recorded Investment (as of period end)
	(Dollars in thousands)
Real estate: mortgage - residential	—	$	—	1	$	25
Total	—	$	—	1	$	25

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 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 of 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 estimate 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 December 31, 2015 and 2014:



	Pass		Special Mention		Substandard		Subtotal		Net Deferred Costs (Income)			Total
	(Dollars in thousands)
December 31, 2015
Commercial, financial & agricultural	$	514,971	$	2,168	$	3,318	$	520,457	$	629		$	521,086
Real estate:
Construction	83,601		808		787		85,196		(311		)	84,885
Mortgage - residential	1,427,732		—		6,130		1,433,862		2,443			1,436,305
Mortgage - commercial	705,520		41,335		14,711		761,566		(817		)	760,749
Consumer	407,778		95		151		408,024		(545		)	407,479
Leases	1,028		—		—		1,028		—			1,028
Total	$	3,140,630	$	44,406	$	25,097	$	3,210,133	$	1,399		$	3,211,532

December 31, 2014
Commercial, financial & agricultural	$	432,892	$	14,655	$	15,523	$	463,070	$	693		$	463,763
Real estate:
Construction	111,370		—		3,653		115,023		(469		)	114,554
Mortgage - residential	1,265,470		352		14,267		1,280,089		2,235			1,282,324
Mortgage - commercial	660,492		10,498		33,109		704,099		(826		)	703,273
Consumer	365,332		294		36		365,662		(518		)	365,144
Leases	3,140		—		—		3,140		—			3,140
Total	$	2,838,696	$	25,799	$	66,588	$	2,931,083	$	1,115		$	2,932,198

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 December 31, 2015 and 2014, we did not have any loans that we considered to be subprime.