Loans | Note E — Loans The Company originates loans for sale to other financial institutions which issue commercial mortgage backed securities or to other commercial loan purchasers and to secondary government guaranteed loan markets . The Company has elected the fair value option for the balance of these loans classified as commercial loans held for sale to better reflect the economics of the transactions. At December 31, 201 6 and 201 5, the fair value of these loans was $ 663.1 million and $ 489.9 m illion , and the unpaid principal balance was $660.3 m illion and $484.0 m illion, respectively. Included in gain on sale of loans in the Statement of Operations were changes in fair value resulting in losses of $3.1 million in 2016 a nd gains of $1.7 m illion in 2015 . There were no amounts of changes in fair value related to instrument-specific credit risk. Interest earned on loans held for sale during the period held are recorded in Interest Income – Loans, including fees on the Statement of Operations. In the second quarter of 2016, the Company purchased approximately $60 million of fleet vehicle leases which resulted in a customer intangible of approximately $3.4 million. The balance of the $8.0 million purchase price was allocated to premium which is being amortized over the lives of the purchased leases. The Company analyzes credit risk prior to making loans, on an individual loan basis. The Company considers relevant aspects of the borrowers’ financial position and cash flow, past borrower performance, management’s knowledge of market conditions, collateral and the ratio of the loan amount to estimated collateral value in making its credit determinations. Major classifications of loans are as follows (in thousands): December 31, December 31, 2016 2015 SBA non real estate $ 74,644 $ 68,887 SBA commercial mortgage 126,159 114,029 SBA construction 8,826 6,977 SBA loans * 209,629 189,893 Direct lease financing 346,645 231,514 SBLOC 630,400 575,948 Other specialty lending 11,073 48,315 Other consumer loans 17,374 23,180 1,215,121 1,068,850 Unamortized loan fees and costs 7,790 9,227 Total loans, net of deferred loan costs $ 1,222,911 $ 1,078,077 Included in the table above are demand deposit overdrafts reclassified as loan balances totaling $2.4 mi llion and $2.8 million at December 31, 201 6 and 201 5 , respectively. Overdraft charge-offs and recoveries are reflected in the allowance for loan and lease losses. *The following table shows SBA loans, both guaranteed and non guaranteed, and the guaranteed portion of the SBA loans included in held for sale for the periods indicated (in thousands): December 31, December 31, 2016 2015 SBA loans, including deferred fees and costs $ 215,786 $ 197,966 SBA loans included in held for sale 154,016 109,174 Total SBA loans $ 369,802 $ 307,140 The following table provides information about impaired loans at December 31, 201 6 and 2015 (in thousands): Recorded investment Unpaid principal balance Related allowance Average recorded investment Interest income recognized December 31, 2016 Without an allowance recorded SBA non real estate $ 191 $ 191 $ - $ 336 $ - Direct lease financing - - - - - Consumer - other - - - 259 - Consumer - home equity 1,730 1,730 - 1,187 - With an allowance recorded SBA non real estate 2,183 2,183 938 1,277 - Direct lease financing 734 734 216 147 - Consumer - other - - - - - Consumer - home equity - - - 549 - Total SBA non real estate 2,374 2,374 938 1,613 - Direct lease financing 734 734 216 147 - Consumer - other - - - 259 - Consumer - home equity 1,730 1,730 - 1,736 - 4,838 4,838 1,154 3,755 - December 31, 2015 Without an allowance recorded SBA non real estate $ 263 $ 263 $ - $ 228 $ - Consumer - other 330 330 - 338 - Consumer - home equity 368 368 - 966 - With an allowance recorded SBA non real estate 640 640 123 670 - Consumer - other - - - - - Consumer - home equity 827 927 26 800 - Total SBA non real estate 903 903 123 898 - Consumer - other 330 330 - 338 - Consumer - home equity 1,195 1,295 26 1,766 - 2,428 2,528 149 3,002 - The following table summarizes the Company’s non-accrual loans, loans past due 90 days and other real e state owned at December 31, 2016 and 201 5 , respectively ( the Company had no non-accrual leases at December 31, 2016 or December 31, 2015 ): December 31, 2016 2015 (in thousands) Non-accrual loans SBA non real estate $ 1,530 $ 733 Consumer 1,442 1,194 Total non-accrual loans 2,972 1,927 Loans past due 90 days or more 661 403 Total non-performing loans 3,633 2,330 Other real estate owned 104 - Total non-performing assets $ 3,737 $ 2,330 The Company’s loans that were modified during the years ended December 31 , 2016 and 2015 c onsidered troubled debt restructurings are as follows (in thousands): December 31, 2016 December 31, 2015 Number Pre-modification recorded investment Post-modification recorded investment Number Pre-modification recorded investment Post-modification recorded investment SBA non-real estate 2 $ 844 $ 844 1 $ 171 $ 171 Direct lease financing 1 734 734 - $ - $ - Consumer 1 288 288 2 434 434 Total 4 $ 1,866 $ 1,866 3 $ 605 $ 605 The balances below provide information as to how the loans were modified as troubled debt restructured loans at December 31, 201 6 and 201 5 (in thousands): December 31, 2016 December 31, 2015 Adjusted interest rate Extended maturity Combined rate and maturity Adjusted interest rate Extended maturity Combined rate and maturity SBA non-real estate $ - $ 144 $ 700 $ - $ 171 $ - Direct lease financing - - 734 Consumer - - 288 - 330 104 Total $ - $ 144 $ 1,722 $ - $ 501 $ 104 As of Decembe r 31, 2016 and December 31, 2015 , the Company ha d no commitments to lend additional funds to loan customers whose terms have been modified in troubled debt restructurings. The following table summarizes as of December 31, 201 6 loans that were restructured within the last 12 months that have subsequently defaulted (in thousands) . December 31, 2016 Number Pre-modification recorded investment Consumer 1 $ 315 Total 1 $ 315 A detail of the changes in the allowance for loan and lease losses by loan category is as follows (in thousands): SBA non real estate SBA commercial mortgage SBA construction Direct lease financing SBLOC Other specialty lending Other consumer loans Unallocated Total December 31, 2016 Beginning balance $ 844 $ 408 $ 48 $ 1,022 $ 762 $ 199 $ 936 $ 181 $ 4,400 Charge-offs (128) - - (119) - - (1,211) - (1,458) Recoveries 1 - - 17 12 - 30 Provision (credit) 1,259 329 28 1,074 (447) (167) 1,238 46 3,360 Ending balance $ 1,976 $ 737 $ 76 $ 1,994 $ 315 $ 32 $ 975 $ 227 $ 6,332 Ending balance: Individually evaluated for impairment $ 938 $ - $ - $ 216 $ - $ - $ - $ - $ 1,154 Ending balance: Collectively evaluated for impairment $ 1,038 $ 737 $ 76 $ 1,778 $ 315 $ 32 $ 975 $ 227 $ 5,178 Loans: Ending balance $ 74,644 $ 126,159 $ 8,826 $ 346,645 $ 630,400 $ 11,073 $ 17,374 $ 7,790 $ 1,222,911 Ending balance: Individually evaluated for impairment $ 2,374 $ - $ - $ 734 $ - $ - $ 1,730 $ - $ 4,838 Ending balance: Collectively evaluated for impairment $ 72,270 $ 126,159 $ 8,826 $ 345,911 $ 630,400 $ 11,073 $ 15,644 $ 7,790 $ 1,218,073 December 31, 2015 Beginning balance $ 385 $ 461 $ 114 $ 836 $ 562 $ 66 $ 1,181 $ 33 $ 3,638 Charge-offs (111) - - (30) - - (1,220) - (1,361) Recoveries - - - - - - 23 - 23 Provision (credit) 570 (53) (66) 216 200 133 952 148 2,100 Ending balance $ 844 $ 408 $ 48 $ 1,022 $ 762 $ 199 $ 936 $ 181 $ 4,400 Ending balance: Individually evaluated for impairment $ 123 $ - $ - $ - $ - $ - $ 26 $ - $ 149 Ending balance: Collectively evaluated for impairment $ 721 $ 408 $ 48 $ 1,022 $ 762 $ 199 $ 910 $ 181 $ 4,251 Loans: Ending balance $ 68,887 $ 114,029 $ 6,977 $ 231,514 $ 575,948 $ 48,315 $ 23,180 $ 9,227 $ 1,078,077 Ending balance: Individually evaluated for impairment $ 904 $ - $ - $ - $ - $ - $ 1,524 $ - $ 2,428 Ending balance: Collectively evaluated for impairment $ 67,983 $ 114,029 $ 6,977 $ 231,514 $ 575,948 $ 48,315 $ 21,656 $ 9,227 $ 1,075,649 The Company did no t have loans acquired with deteriorated credit quality at either December 31, 201 6 or December 31, 201 5 . A detail of the Company’s delinquent loans by loan category is as follows (in thousands): December 31, 2016 30-59 Days past due 60-89 Days past due Greater than 90 days Non accrual Total past due Current Total loans SBA non real estate $ 559 $ - $ - $ 1,530 $ 2,089 $ 72,555 $ 74,644 SBA commercial mortgage - - - - - 126,159 126,159 SBA construction - - - - - 8,826 8,826 Direct lease financing 11,856 1,998 661 - 14,515 332,130 346,645 SBLOC - - - - - 630,400 630,400 Other specialty lending - - - - - 11,073 11,073 Consumer - other - - - - - 5,403 5,403 Consumer - home equity 155 - - 1,442 1,597 10,374 11,971 Unamortized loan fees and costs - - - - - 7,790 7,790 $ 12,570 $ 1,998 $ 661 $ 2,972 $ 18,201 $ 1,204,710 $ 1,222,911 December 31, 2015 SBA non real estate $ - $ - $ - $ 733 $ 733 $ 68,154 $ 68,887 SBA commercial mortgage - - - - - 114,029 114,029 SBA construction - - - - - 6,977 6,977 Direct lease financing 3,957 3,108 403 - 7,468 224,046 231,514 SBLOC - - - - - 575,948 575,948 Other specialty lending - - - - - 48,315 48,315 Consumer - other - 1 - - 1 6,844 6,845 Consumer - home equity - 1,398 - 1,194 2,592 13,743 16,335 Unamortized loan fees and costs - - - - - 9,227 9,227 $ 3,957 $ 4,507 $ 403 $ 1,927 $ 10,794 $ 1,067,283 $ 1,078,077 The Company evaluates its loans under an internal loan risk rating system as a means of identifying problem loans. The following table provides information by credit risk rating indicator for each segment of the loan portfolio excluding loans held for sale at the dates indicated (in thousands): December 31, 2016 Pass Special mention Substandard Doubtful Loss Unrated subject to review * Unrated not subject to review * Total loans SBA non real estate $ 51,437 $ 2,723 $ 3,628 $ - $ - $ - $ 16,856 $ 74,644 SBA commercial mortgage 92,485 - - - - 15,164 18,510 126,159 SBA construction 8,060 - - - - - 766 8,826 Direct lease financing 122,571 - 3,736 - - 30,881 189,457 346,645 SBLOC 277,489 - - - - - 352,911 630,400 Other specialty lending 11,073 - - - - - - 11,073 Consumer 9,837 288 2,312 - - - 4,937 17,374 Unamortized loan fees and costs - - - - - - 7,790 7,790 $ 572,952 $ 3,011 $ 9,676 $ - $ - $ 46,045 $ 591,227 $ 1,222,911 December 31, 2015 SBA non real estate $ 55,682 $ - $ 904 $ - $ - $ 8,610 $ 3,691 $ 68,887 SBA commercial mortgage 92,859 - - - - 3,894 17,276 114,029 SBA construction 6,977 - - - - - - 6,977 Direct lease financing 90,588 - 670 - - 17,200 123,056 231,514 SBLOC 204,201 - - - - 19,372 352,375 575,948 Other specialty lending 46,520 - - - - - 1,795 48,315 Consumer 7,631 70 3,473 - - 457 11,549 23,180 Unamortized loan fees and costs - - - - - - 9,227 9,227 $ 504,458 $ 70 $ 5,047 $ - $ - $ 49,533 $ 518,969 $ 1,078,077 * At December 31, 2016, approximately 48% of the total continuing loan portfolio was reviewed as a result of the coverage of each loan portfolio type. The targeted coverages and scope of the reviews are risk-based and vary according to each portfolio as follows: Security Backed Lines of Credit (SBLOC) – The targeted review threshold is 40% with the largest 25% of SBLOCs by commitment to be reviewed annually. At December 31, 2016 approximately 44% of the SBLOC portfolio had been reviewed. SBA Loans – The targeted review threshold is 100% , less guaranteed portions of any loans purchased and loans funded within 90 days of quarter end which are reviewed in the subsequent quarter. Although loans are not typically purchased, loans for CRA purposes are periodically purchased. Within the quarter following December 31, 2016, the 100% threshold was met for the portfolio, excluding government guaranteed loans. Leasing – The targeted review threshold is 50% . At December 31, 2016, approximately 36% of the leasing portfolio had been reviewed. The loan review department has targeted meeting the threshold by April 30, 2017. Commercial Mortgaged Backed Securities (Floating Rate) – The targeted review threshold is 100% . Floating rate loans will be reviewed initially within 90 days of funding and will be monitored on an ongoing basis as to payment status. Subsequent reviews will be performed based on a sampling each quarter. Each floating rate loan will be reviewed if any available extension options are exercised. Within the quarter following December 31, 2016, the 100% threshold was met for the portfolio outstanding as of December 31, 2016. CMBS (Fixed Rate) - CMBS fixed rate loans will generally not be reviewed as they are sold on the secondary market in a relatively short period of time. 100% of fixed rate Loans that are unable to be readily sold on the secondary market and remain on the bank's books after nine months will be reviewed at least annually. Within the quarter following December 31, 2016, the 100% threshold was met for the portfolio outstanding as of December 31, 2016. Specialty Lending - Specialty Lending, defined as commercial loans unique in nature that do not fit into other established categories, have a review coverage threshold of 100% for non-Community Reinvestment Act (“CRA”) loans. At December 31, 2016, approximately 100% of the non CRA loans had been reviewed. Home Equity Lines of Credit, or HELOC – The targeted review threshold for 2016 was 50% . The largest 25% of HELOCs by commitment will be reviewed annually. At December 31, 2106 approximately 83% of the HELOC portfolio had been reviewed. |