LOANS AND CREDIT QUALITY

3 Months Ended

Mar. 31, 2020

4. LOANS AND CREDIT QUALITY

Loans, excluding loans held for sale, net of ACL under ASC 326 as of March 31, 2020 and loans, excluding loans held for sale, net of ACL under previous GAAP as of December 31, 2019 consisted of the following:


(dollars in thousands)	March 31, 2020		December 31, 2019
Commercial, financial and agricultural	$	575,169	$	570,089
Real estate:
Construction	100,959		96,139
Residential mortgage	1,628,502		1,595,801
Home equity	504,061		490,239
Commercial mortgage	1,140,611		1,124,911


Consumer	559,765		569,516

Gross loans and leases	4,509,067		4,446,695
Net deferred costs	2,931		2,845
Loans	4,511,998		4,449,540
Allowance for credit losses	(59,645)		(47,971)
Loans, net of allowance for credit losses	$	4,452,353	$	4,401,569

The Company did not transfer any loans to the held-for-sale category during the three months ended March 31, 2020 and 2019.

The Company did not sell any loans originally held for investment during the three months ended March 31, 2020 and 2019.

The Company has purchased loan portfolios, none of which were credit deteriorated since origination, at the time of purchase.

The following table presents loans purchased by class for the periods presented:


(dollars in thousands)	Consumer - Unsecured
Three Months Ended March 31, 2020
Purchases:
Outstanding balance	$	22,953
Purchase premium (discount)	(613)
Purchase price	$	22,340

Three Months Ended March 31, 2019
Purchases:
Outstanding balance	$	18,286
Purchase premium (discount)	—
Purchase price	$	18,286

Collateral-Dependent Loans

In accordance with ASC 326, a loan is considered collateral-dependent when the borrower is experiencing financial difficulty and repayment is expected to be provided substantially through the operation or sale of the collateral. The following table presents the amortized cost basis of collateral-dependent loans by class, which are individually evaluated to determine expected credit losses, and the related ACL allocated to these loans as of March 31, 2020:


(dollars in thousands)	Secured by 1-4 Family Residential Properties		Secured by Nonfarm Nonresidential Properties		Secured by Real Estate and Business Assets		Total		Allocated ACL
Three Months Ended March 31, 2020
Commercial, financial and agricultural	$	—	$	—	$	667	$	667	$	231
Real estate:

Residential mortgage	7,718		—		—		7,718		—
Home equity	545		—		—		545		—
Commercial mortgage	—		512		—		512		—


Total	$	8,263	$	512	$	667	$	9,442	$	231

The following table presents by class, information related to impaired loans as of December 31, 2019, as determined in accordance with ASC 310 prior to the adoption of ASU 2016-13:


	December 31, 2019
(dollars in thousands)	Unpaid Principal Balance		Recorded Investment		ACL Allocated
Impaired loans:
Commercial, financial and agricultural	$	246	$	135	$	—
Real estate:

Residential mortgage	7,230		6,516		—
Home equity	92		92		—
Commercial mortgage	1,839		1,839		—
Total	9,407		8,582		—

Impaired loans with an ACL recorded:
Commercial, financial and agricultural	467		467		218





Consumer	17		17		17
Total	484		484		235
Total impaired loans	$	9,891	$	9,066	$	235

The following table presents by class, the average recorded investment and interest income recognized on impaired loans for the three months ended March 31, 2019, as determined in accordance with ASC 310 prior to the adoption of ASU 2016-13:


	Three Months Ended
	March 31, 2019
(dollars in thousands)	Average Recorded Investment		Interest Income Recognized
Commercial, financial and agricultural	$	209	$	3
Real estate:
Construction	2,233		30
Residential mortgage	9,818		106
Home equity	497		—
Commercial mortgage	2,285		23

Total	$	15,042	$	162

For the three months ended March 31, 2019, 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 three months ended March 31, 2019, 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 $0.6 million of residential mortgage loans collateralized by residential real estate property that were in the process of foreclosure at March 31, 2020 and December 31, 2019, respectively.

The Company did not foreclose on any loans during the three months ended March 31, 2020 and 2019.

Nonaccrual and Past Due Loans

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 March 31, 2020 and December 31, 2019. The following tables also present the amortized cost of loans on onaccrual status for which there was no related ACL under ASC 326 as of March 31, 2020 and under previous GAAP as of December 31, 2019.


(dollars in thousands)	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		Nonaccrual Loans With No ACL
March 31, 2020
Commercial, financial and agricultural	$	7,050	$	712	$	—	$	667	$	8,429	$	566,895	$	575,324	$	—
Real estate:
Construction	478		—		—		—		478		100,139		100,617		—
Residential mortgage	4,371		82		1,221		2,287		7,961		1,624,575		1,632,536		2,287
Home equity	573		—		—		545		1,118		503,568		504,686		545
Commercial mortgage	287		—		—		—		287		1,138,850		1,139,137		—


Consumer	4,739		1,167		352		48		6,306		553,392		559,698		—

Total	$	17,498	$	1,961	$	1,573	$	3,547	$	24,579	$	4,487,419	$	4,511,998	$	2,832


(dollars in thousands)	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		Nonaccrual Loans With No ACL
December 31, 2019
Commercial, financial and agricultural	$	476	$	865	$	—	$	467	$	1,808	$	568,496	$	570,304	$	—
Real estate:
Construction	643		—		—		—		643		95,211		95,854		—
Residential mortgage	1,830		589		724		979		4,122		1,595,679		1,599,801		979
Home equity	759		207		—		92		1,058		489,676		490,734		92
Commercial mortgage	—		397		—		—		397		1,123,018		1,123,415		—


Consumer	3,223		943		286		17		4,469		564,963		569,432		—

Total	$	6,931	$	3,001	$	1,010	$	1,555	$	12,497	$	4,437,043	$	4,449,540	$	1,071

Troubled Debt Restructurings

Troubled debt restructurings ("TDRs") included in nonperforming assets at March 31, 2020 consisted of one Hawaii residential mortgage loan with a principal balance of $0.3 million. There were $7.3 million of TDRs still accruing interest at March 31, 2020, none of which were more than 90 days delinquent. At December 31, 2019, there were $7.5 million of TDRs still accruing interest, none of which were more than 90 days delinquent.

The Company offers various types of concessions when modifying a loan. Concessions made to the original contractual terms of the loan typically consists of the deferral of interest and/or principal payments due to deterioration in the borrowers' financial condition. In these cases, the principal balance on the TDR had matured and/or was in default at the time of restructure, and there are no commitments to lend additional funds to the borrower.

As discussed in Note 1 to these financial statements, the CARES Act provided banks an option to elect to not account for certain loan modifications related to COVID-19 as TDRs as long as the borrowers were not more than 30 days past due as of December 31, 2019. The TDRs disclosed above were not related to COVID-19 modifications. The Company executed loan deferrals on outstanding balances of approximately $65 million resulting from the COVID-19 pandemic that were not classified as a TDR at March 31, 2020.

No loans were modified in a TDR during the three months ended March 31, 2020 and 2019.

No loans were modified as a TDR within the previous twelve months that subsequently defaulted during the three months ended March 31, 2020 and 2019.

We had no commitments on TDRs during the three months ended March 31, 2020 and 2019.

Credit Quality Indicators

The Company categorizes loans 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 individually by classifying the loans by credit risk. This analysis includes non-homogeneous loans, such as commercial and commercial real estate loans. This analysis is performed on a quarterly basis. The Company uses the following definitions for risk rating of loans. Loans not meeting the following criteria that are analyzed individually as part of the described process are considered to be pass-rated loans.

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 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.

The following table presents the amortized cost basis of the Company's loans by class, credit quality indicator and origination year as of March 31, 2020. Revolving loans converted to term as of and during the three months ended March 31, 2020 were not material to the total loan portfolio.


	Amortized Cost of Term Loans by Origination Year
	2020		2019		2018		2017		2016		Prior		Amortized Cost of Revolving Loans		Total
	(dollars in thousands)
March 31, 2020
Commercial, financial and agricultural
Risk Rating
Pass	$	40,976	$	77,593	$	64,288	$	59,642	$	50,144	$	125,599	$	97,073	$	515,315
Special Mention	2,865		9,777		5,627		15,376		1,006		9,153		3,280		47,084
Substandard	—		7,497		526		1,229		2,097		1,576		—		12,925

Subtotal	43,841		94,867		70,441		76,247		53,247		136,328		100,353		575,324
Construction
Risk Rating
Pass	7,923		12,157		50,181		6,920		2,277		21,159		—		100,617




Residential mortgage
Risk Rating
Pass	80,293		364,858		186,851		201,685		227,341		566,829		—		1,627,857
Special Mention	—		—		—		—		159		835		—		994
Substandard	—		—		550		929		302		1,904		—		3,685

Subtotal	80,293		364,858		187,401		202,614		227,802		569,568		—		1,632,536
Home equity
Risk Rating
Pass	4,927		21,426		22,858		493		249		3,951		450,237		504,141

Substandard	—		—		—		—		207		338		—		545

Subtotal	4,927		21,426		22,858		493		456		4,289		450,237		504,686
Commercial mortgage
Risk Rating
Pass	36,503		153,355		170,779		172,937		118,087		396,221		17,463		1,065,345
Special Mention	—		—		2,392		12,597		13,220		32,666		—		60,875
Substandard	—		7,434		—		—		—		5,483		—		12,917

Subtotal	36,503		160,789		173,171		185,534		131,307		434,370		17,463		1,139,137
Consumer
Risk Rating
Pass	47,522		206,573		111,490		68,480		31,287		17,520		76,277		559,149
Special Mention	—		—		—		—		—		—		150		150
Substandard	—		11		26		11		—		237		—		285
Loss	—		—		—		—		—		114		—		114
Subtotal	47,522		206,584		111,516		68,491		31,287		17,871		76,427		559,698
Total	$	221,009	$	860,681	$	615,568	$	540,299	$	446,376	$	1,183,585	$	644,480	$	4,511,998

The following table presents the Company's loans by class and credit quality indicator as of December 31, 2019:


(dollars in thousands)	Pass		Special Mention		Substandard		Loss		Subtotal		Net Deferred Costs (Income)		Total
December 31, 2019
Commercial, financial and agricultural	$	523,342	$	20,677	$	26,070	$	—	$	570,089	$	215	$	570,304
Real estate:
Construction	96,139		—		—		—		96,139		(285)		95,854
Residential mortgage	1,593,072		840		1,889		—		1,595,801		4,000		1,599,801
Home equity	490,147		—		92		—		490,239		495		490,734
Commercial mortgage	1,094,364		17,440		13,107		—		1,124,911		(1,496)		1,123,415


Consumer	569,212		—		193		111		569,516		(84)		569,432

Total	$	4,366,276	$	38,957	$	41,351	$	111	$	4,446,695	$	2,845	$	4,449,540