4. LOANS AND LEASES

Loans and leases, excluding loans held for sale, consisted of the following as of December 31, 2018 and 2017:



	December 31,
	2018		2017
	(Dollars in thousands)
Commercial, financial and agricultural	$	581,177	$	503,738
Real estate:
Construction	67,269		64,525
Residential mortgage	1,424,384		1,337,193
Home equity	468,966		412,230
Commercial mortgage	1,041,685		979,239
Consumer	492,268		470,819
Leases	124		362
Subtotal	4,075,873		3,768,106
Net deferred costs	2,493		2,509
Total loans and leases	$	4,078,366	$	3,770,615

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, financial and agricultural (and 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, 2018, we foreclosed on one portfolio loan with a carrying value of $40 thousand, which was sold at a small premium to book value. We did not transfer any loans to the held-for-sale category during the year ended December 31, 2018. In addition, we did not sell any other portfolio loans during the year ended December 31, 2018.

In 2018, we purchased an auto loan portfolio totaling $20.6 million which included a $0.1 million premium over the $20.5 million outstanding balance. At the time of purchase, the auto loans had a weighted average remaining term of 63 months and a weighted average yield, net of the premium paid and servicing costs, of 3.89%. In 2018, we also purchased an unsecured consumer loan portfolio totaling $38.0 million, which represented the outstanding balance at the time of purchase. At the time of purchase, the unsecured consumer loans had a weighted average remaining term of 41 months and a weighted average yield, net of servicing costs, of 6.99%.

In 2017, we purchased three auto loan portfolios totaling $83.8 million, which included a $2.3 million premium over the $81.4 million outstanding balance. At the time of purchase, the auto loan portfolios had a weighted average remaining term of 70 months.

During the year ended December 31, 2017, we foreclosed on one portfolio loan with a carrying value of $0.1 million. We did not transfer any loans to the held-for-sale category during the year ended December 31, 2017. In addition, we did not sell any portfolio loans during the year ended December 31, 2017.

In the normal course of business, our bank makes loans to certain directors, executive officers and their affiliates. These loans are made in the ordinary course of business at normal credit terms. As of December 31, 2018 and December 31, 2017, related party loan balances were $34.0 million and $32.2 million, respectively.

Impaired Loans

The following tables present 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, 2018 and 2017:



			Real Estate
	Comml., Fin. & Ag.		Constr.			Resi. Mortgage		Home Equity		Comml. Mortgage			Consumer			Leases		Total
	(Dollars in thousands)
December 31, 2018
Allowance:
Individually evaluated for impairment	$	—	$	—		$	—	$	—	$	—		$	—		$	—	$	—
Collectively evaluated for impairment	8,027		1,202			14,349		3,788		13,358			7,192			—		47,916
Total ending balance	$	8,027	$	1,202		$	14,349	$	3,788	$	13,358		$	7,192		$	—	$	47,916

Loans and leases:
Individually evaluated for impairment	$	220	$	2,273		$	10,075	$	275	$	2,348		$	—		$	—	$	15,191
Collectively evaluated for impairment	580,957		64,996			1,414,309		468,691		1,039,337			492,268			124		4,060,682
Subtotal	581,177		67,269			1,424,384		468,966		1,041,685			492,268			124		4,075,873
Net deferred costs (income)	483		(342		)	3,821		—		(1,407		)	(62		)	—		2,493
Total ending balance	$	581,660	$	66,927		$	1,428,205	$	468,966	$	1,040,278		$	492,206		$	124	$	4,078,366



			Real Estate
	Comml., Fin. & Ag.		Constr.			Resi. Mortgage		Home Equity		Comml. Mortgage			Consumer			Leases		Total
	(Dollars in thousands)
December 31, 2017
Allowance:
Individually evaluated for impairment	$	—	$	—		$	—	$	—	$	—		$	—		$	—	$	—
Collectively evaluated for impairment	7,594		1,835			14,328		3,317		16,801			6,126			—		50,001
Total ending balance	$	7,594	$	1,835		$	14,328	$	3,317	$	16,801		$	6,126		$	—	$	50,001

Loans and leases:
Individually evaluated for impairment	$	491	$	2,597		$	13,862	$	416	$	3,914		$	—		$	—	$	21,280
Collectively evaluated for impairment	503,247		61,928			1,323,331		411,814		975,325			470,819			362		3,746,826
Subtotal	503,738		64,525			1,337,193		412,230		979,239			470,819			362		3,768,106
Net deferred costs (income)	281		(285		)	4,028		—		(1,442		)	(73		)	—		2,509
Total ending balance	$	504,019	$	64,240		$	1,341,221	$	412,230	$	977,797		$	470,746		$	362	$	3,770,615

The following table presents by class, impaired loans as of December 31, 2018 and 2017:



	December 31, 2018						December 31, 2017
	Unpaid Principal Balance		Recorded Investment		Allowance Allocated		Unpaid Principal Balance		Recorded Investment		Allowance Allocated
	(Dollars in thousands)
Impaired loans with no related Allowance recorded:
Commercial, financial and agricultural	$	330	$	220	$	—	$	602	$	491	$	—
Real estate:
Construction	3,076		2,273		—		7,947		2,597		—
Residential mortgage	11,019		10,075		—		14,920		13,862		—
Home equity	275		275		—		416		416		—
Commercial mortgage	2,348		2,348		—		3,914		3,914		—
Total impaired loans with no related Allowance recorded	17,048		15,191		—		27,799		21,280		—
Total impaired loans	$	17,048	$	15,191	$	—	$	27,799	$	21,280	$	—

The following table presents by class, the average recorded investment and interest income recognized on impaired loans during the years ended December 31, 2018, 2017 and 2016:



	Year Ended				Year Ended				Year Ended
	December 31, 2018				December 31, 2017				December 31, 2016
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
	(Dollars in thousands)
Commercial, financial and agricultural	$	435	$	24	$	1,272	$	24	$	1,891	$	10
Real estate:
Construction	2,436		111		2,760		99		3,509		123
Residential mortgage	12,681		662		17,122		1,843		21,809		236
Home equity	482		—		1,213		69		472		17
Commercial mortgage	3,368		179		4,893		313		8,537		321
Total	$	19,402	$	976	$	27,260	$	2,348	$	36,218	$	707

For the years ended December 31, 2018, 2017 and 2016, the amount of interest income recognized on impaired loans within the period that the loans were impaired were primarily related to loans modified in a troubled debt restructuring ("TDR") that were on accrual status. For the years ended December 31, 2018, 2017 and 2016, the amount of interest income recognized using a cash-based method of accounting during the period that the loans were impaired was not material.

Foreclosure Proceedings

The Company had $0.7 million and $40 thousand of residential mortgage loans collateralized by residential real estate property that were in the process of foreclosure at December 31, 2018 and 2017, respectively.

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 tables present by class, the aging of the recorded investment in past due loans and leases as of December 31, 2018 and 2017:



	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)
December 31, 2018
Commercial, financial and agricultural	$	1,348	$	162	$	—	$	—	$	1,510	$	580,150	$	581,660
Real estate:
Construction	—		—		—		—		—		66,927		66,927
Residential mortgage	3,966		157		—		2,048		6,171		1,422,034		1,428,205
Home equity	433		104		298		275		1,110		467,856		468,966
Commercial mortgage	—		—		—		—		—		1,040,278		1,040,278
Consumer	2,340		872		238		—		3,450		488,756		492,206
Leases	—		—		—		—		—		124		124
Total	$	8,087	$	1,295	$	536	$	2,323	$	12,241	$	4,066,125	$	4,078,366



	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)
December 31, 2017
Commercial, financial and agricultural	$	410	$	355	$	—	$	—	$	765	$	503,254	$	504,019
Real estate:
Construction	—		—		—		—		—		64,240		64,240
Residential mortgage	4,037		2,127		49		2,280		8,493		1,332,728		1,341,221
Home equity	105		264		—		416		785		411,445		412,230
Commercial mortgage	—		—		—		79		79		977,718		977,797
Consumer	2,126		1,056		515		—		3,697		467,049		470,746
Leases	—		—		—		—		—		362		362
Total	$	6,678	$	3,802	$	564	$	2,775	$	13,819	$	3,756,796	$	3,770,615

Interest income totaling $1.2 million, $2.6 million, and $0.6 million was recognized on nonaccrual loans, including loans held for sale, in 2018, 2017 and 2016, respectively. Additional interest income of $0.4 million, $0.4 million, and $1.2 million would have been recognized in 2018, 2017 and 2016, respectively, had these loans been accruing interest throughout those periods. Additionally, interest income of $0.7 million, $0.8 million, and $1.3 million was collected and recognized on charged-off loans in 2018, 2017 and 2016, respectively.

Modifications

TDRs included in nonperforming assets at December 31, 2018 consisted of three Hawaii residential mortgage loans with a combined principal balance of $0.4 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. At December 31, 2017, TDRs included in nonperforming assets consisted of six loans with a combined principal balance of $0.6 million.

There were $12.9 million of TDRs still accruing interest at December 31, 2018, none of which were more than 90 days delinquent. At December 31, 2017, there were $12.6 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, 2018 and 2017.

The following table presents by class, information related to loans modified in a TDR during the years ended December 31, 2018, 2017 and 2016:



	Year Ended December 31, 2018
	Number of Contracts	Recorded Investment (as of period end)		Increase in the Allowance
	(Dollars in thousands)
Real estate: Residential mortgage	3	$	575	$	—
Total	3	$	575	$	—

	Year Ended December 31, 2017
	Number of Contracts	Recorded Investment (as of period end)		Increase in the Allowance
	(Dollars in thousands)
Real estate: Residential mortgage	3	$	104	$	—
Total	3	$	104	$	—

	Year Ended December 31, 2016
	Number of Contracts	Recorded Investment (as of period end)		Increase in the Allowance
	(Dollars in thousands)
Real estate: Residential mortgage	3	$	282	$	—
Total	3	$	282	$	—

No loans were modified as a TDR within the previous twelve months that subsequently defaulted during the years ended December 31, 2018, 2017 and 2016.

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 tables present by class and credit indicator, the recorded investment in the Company's loans and leases as of December 31, 2018 and 2017:



	Pass		Special Mention		Substandard		Loss		Subtotal		Net Deferred Costs (Income)			Total
	(Dollars in thousands)
December 31, 2018
Commercial, financial and agricultural	$	552,706	$	7,961	$	20,510	$	—	$	581,177	$	483		$	581,660
Real estate:
Construction	67,269		—		—		—		67,269		(342		)	66,927
Residential mortgage	1,422,240		—		2,144		—		1,424,384		3,821			1,428,205
Home equity	468,394		—		572		—		468,966		—			468,966
Commercial mortgage	1,029,581		10,412		1,692		—		1,041,685		(1,407		)	1,040,278
Consumer	492,030		—		80		158		492,268		(62		)	492,206
Leases	124		—		—		—		124		—			124
Total	$	4,032,344	$	18,373	$	24,998	$	158	$	4,075,873	$	2,493		$	4,078,366



	Pass		Special Mention		Substandard		Loss		Subtotal		Net Deferred Costs (Income)			Total
	(Dollars in thousands)
December 31, 2017
Commercial, financial and agricultural	$	474,995	$	7,543	$	21,200	$	—	$	503,738	$	281		$	504,019
Real estate:
Construction	55,646		8,879		—		—		64,525		(285		)	64,240
Residential mortgage	1,334,760		—		2,433		—		1,337,193		4,028			1,341,221
Home equity	411,814		—		416		—		412,230		—			412,230
Commercial mortgage	955,865		12,735		10,639		—		979,239		(1,442		)	977,797
Consumer	470,243		—		305		271		470,819		(73		)	470,746
Leases	362		—		—		—		362		—			362
Total	$	3,703,685	$	29,157	$	34,993	$	271	$	3,768,106	$	2,509		$	3,770,615