LOANS AND CREDIT QUALITY

6 Months Ended

Jun. 30, 2020

4. LOANS AND CREDIT QUALITY

Loans, excluding loans held for sale, net of ACL under ASC 326 as of June 30, 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)	June 30, 2020		December 31, 2019
Commercial, financial and agricultural:
Small Business Administration Paycheck Protection Program	$	543,653	$	—
Other	547,768		570,089
Real estate:
Construction	103,826		96,139
Residential mortgage	1,653,632		1,595,801
Home equity	510,188		490,239
Commercial mortgage	1,131,959		1,124,911
Consumer	527,100		569,516

Gross loans and leases	5,018,126		4,446,695
Net deferred (fees) costs	(14,688)		2,845
Total loans, net of deferred fees and costs	5,003,438		4,449,540
Allowance for credit losses	(67,339)		(47,971)
Total loans, net of allowance for credit losses	$	4,936,099	$	4,401,569

Section 1102 of the CARES Act includes an allocation of $349 billion for loans to be issued by financial institutions through the Small Business Administration (“SBA”). This program is known as the Paycheck Protection Program (“PPP”). An additional $310 billion was allocated to the PPP with the enactment of the Paycheck Protection Program and Healthcare Enhancement Act (“CARES 2.0”) on April 21, 2020. Subsequently, on June 5, 2020, the Paycheck Protection Flexibility Act of 2020 (“Flexibility Act”) was signed into law, amending the CARES Act. Loans under the PPP are forgivable, in whole or in part, if the proceeds are used for payroll and other permitted purposes in accordance with the requirements of the PPP. These loans carry a fixed interest rate of 1.00%. The Flexibility Act and new guidance issued by the U.S. Department of the Treasury and the SBA on June 17, 2020, provides a maturity of two years for PPP loans made before June 5, 2020, unless the borrower and lender mutually agree to extend the maturity of such loans to five years, and a maturity of five years for those PPP loans made on or after June 5, 2020. Through June 30, 2020, the Company did not mutually agree to extend any of the PPP loans to borrowers with two-year terms. Under the original PPP guidelines, payments of principal and interest are deferred for the first six months of the loan. The Flexibility Act extends the deferral period until the date the lender receives the applicable forgiven amount from the SBA. In addition, it clarifies that if a borrower fails to apply for forgiveness within 10 months after the end of the covered period, the deferral period for that loan will end on the date that is 10 months after the last day of the covered period. The loans are 100% guaranteed by the SBA. The SBA pays the originating bank a processing fee ranging from 1% to 5%, based on the size of the loan. From April 3, 2020, the date the SBA began accepting submissions for the initial round of PPP loans through June 30, 2020, the Company received approval from the SBA on over 7,200 loans totaling over $550 million. Certain PPP loans paid-off shortly after funding resulting in a total balance as of June 30, 2020 of $544 million. Certain PPP loans approved by the SBA may be cancelled or withdrawn prior to closing and funding. Although the Company believes that the majority of these loans will ultimately be forgiven by the SBA in accordance with the terms of the program, there could be risks and liability to the Company associated with participation in the program that cannot be determined at this time. As of June 30, 2020, the Company's PPP loan portfolio totaled $526.4 million, net of deferred fees and costs.

The Company did not transfer any loans to the held-for-sale category during the six months ended June 30, 2020 and 2019.

The Company did not sell any loans originally held for investment during the six months ended June 30, 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 June 30, 2020
Purchases:
Outstanding balance	$	11,359
Purchase premium (discount)	(503)
Purchase price	$	10,856

Six Months Ended June 30, 2020
Purchases:
Outstanding balance	$	34,312
Purchase premium (discount)	(1,116)
Purchase price	$	33,196

Three Months Ended June 30, 2019
Purchases:
Outstanding balance	$	31,041
Purchase premium (discount)	—
Purchase price	$	31,041

Six Months Ended June 30, 2019
Purchases:
Outstanding balance	$	49,327
Purchase premium (discount)	—
Purchase price	$	49,327

Note: Purchases of unsecured consumer loans were made under forward flow purchase agreements.

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 June 30, 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
June 30, 2020
Commercial, financial and agricultural	$	—	$	—	$	736	$	736	$	223
Real estate:

Residential mortgage	8,504		—		—		8,504		—
Home equity	538		—		—		538		—
Commercial mortgage	—		711		—		711		—


Total	$	9,042	$	711	$	736	$	10,489	$	223

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 and six months ended June 30, 2019, as determined in accordance with ASC 310 prior to the adoption of ASU 2016-13:


	Three Months Ended						Six Months Ended
	June 30, 2019						June 30, 2019
(dollars in thousands)	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
Commercial, financial and agricultural	$	185	$	2	$	199	$	5
Real estate:
Construction	1,434		32		1,890		62
Residential mortgage	8,583		607		9,289		713
Home equity	254		13		393		13
Commercial mortgage	2,138		23		2,222		46

Total	$	12,594	$	677	$	13,993	$	839

For the three and six months ended June 30, 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 and six months ended June 30, 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 $0.9 million and $0.6 million of residential mortgage loans collateralized by residential real estate property that were in the process of foreclosure at June 30, 2020 and December 31, 2019, respectively.

The Company did not foreclose on any loans during the six months ended June 30, 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 June 30, 2020 and December 31, 2019. The following tables also present the amortized cost of loans on nonaccrual status for which there was no related ACL under ASC 326 as of June 30, 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
June 30, 2020
Commercial, financial and agricultural - SBA PPP	$	—	$	—	$	—	$	—	$	—	$	526,408	$	526,408	$	—
Commercial, financial and agricultural - Other	979		176		—		934		2,089		545,769		547,858		—
Real estate:
Construction	—		—		—		—		—		103,518		103,518		—
Residential mortgage	—		1,375		726		3,215		5,316		1,652,242		1,657,558		3,215
Home equity	366		—		—		538		904		510,058		510,962		538
Commercial mortgage	—		—		—		—		—		1,130,169		1,130,169		—


Consumer	1,673		964		444		54		3,135		523,830		526,965		—

Total	$	3,018	$	2,515	$	1,170	$	4,741	$	11,444	$	4,991,994	$	5,003,438	$	3,753


(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

In accordance with the "Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus (Revised)" issued in April 2020, loans with deferrals granted because of COVID-19 are not considered past due and/or reported as nonaccrual during the deferral period.

Troubled Debt Restructurings

Troubled debt restructurings ("TDRs") included in nonperforming assets at June 30, 2020 consisted of one Hawaii residential mortgage loan with a principal balance of $0.3 million. There were $7.5 million of TDRs still accruing interest at June 30, 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 were no commitments to lend additional funds to the borrower during the three and six months ended June 30, 2020 and 2019.

As discussed in Note 1 to these financial statements, Section 4013 of CARES Act and the "Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus (Revised)" 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 and at the time of modification program implementation, respectively, and meets other applicable criteria. The Company identified nine consumer loans totaling $0.1 million that were modified during the quarter and did not meet the criteria under Section 4013 of CARES Act or the "Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus (Revised)". As a result, these loans are included in the TDRs disclosed above. The remaining TDRs disclosed above were not related to COVID-19 modifications. The Company executed loan deferrals on outstanding balances of approximately $567.9 million resulting from the COVID-19 pandemic that were not classified as a TDR at June 30, 2020.

The following table presents by class, information related to loans modified in a TDR during the three and six months ended June 30, 2020:


(dollars in thousands)	Number of Contracts	Recorded Investment (as of Period End)		Increase in the ACL
Three Months Ended June 30, 2020

Real estate: Commercial mortgage	1	$	285	$	—
Consumer	9	145		—
Total	10	$	430	$	—

Six Months Ended June 30, 2020

Real estate: Commercial mortgage	1	$	285	$	—
Consumer	9	145
Total	10	$	430	$	—

No loans were modified in a TDR during the three and six months ended June 30, 2019.

No loans were modified as a TDR within the previous twelve months that subsequently defaulted during the three and six months ended June 30, 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 June 30, 2020. Revolving loans converted to term as of and during the three and six months ended June 30, 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)
June 30, 2020
Commercial, financial and agricultural - SBA PPP:
Risk Rating
Pass	$	526,408	$	—	$	—	$	—	$	—	$	—	$	—	$	526,408




Commercial, financial and agricultural - Other:
Risk Rating
Pass	73,563		70,052		64,647		53,927		46,574		99,703		82,204		490,670
Special Mention	2,740		8,796		5,490		15,034		550		9,632		1,520		43,762
Substandard	—		7,362		595		1,220		2,407		1,842		—		13,426

Subtotal	76,303		86,210		70,732		70,181		49,531		111,177		83,724		547,858
Construction:
Risk Rating
Pass	12,308		15,026		46,092		7,164		2,239		20,689		—		103,518




Residential mortgage:
Risk Rating
Pass	252,833		335,607		163,136		181,703		210,585		506,943		—		1,650,807
Special Mention	—		—		—		1,437		153		1,145		—		2,735
Substandard	—		—		545		895		888		1,688		—		4,016

Subtotal	252,833		335,607		163,681		184,035		211,626		509,776		—		1,657,558
Home equity:
Risk Rating
Pass	9,200		18,464		19,080		457		298		4,923		457,792		510,214
Special Mention	—		—		—		—		—		—		210		210
Substandard	—		—		—		—		206		332		—		538

Subtotal	9,200		18,464		19,080		457		504		5,255		458,002		510,962
Commercial mortgage:
Risk Rating
Pass	42,505		149,625		155,100		171,513		113,485		383,327		17,363		1,032,918
Special Mention	—		2,602		18,508		12,718		10,369		24,984		—		69,181
Substandard	—		4,593		—		—		4,513		18,964		—		28,070

Subtotal	42,505		156,820		173,608		184,231		128,367		427,275		17,363		1,130,169
Consumer:
Risk Rating
Pass	61,790		136,956		73,808		57,622		25,622		99,447		71,221		526,466

Substandard	11		27		14		48		4		256		—		360
Loss	—		—		—		79		45		15		—		139
Subtotal	61,801		136,983		73,822		57,749		25,671		99,718		71,221		526,965
Total	$	981,358	$	749,110	$	547,015	$	503,817	$	417,938	$	1,173,890	$	630,310	$	5,003,438

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