Loans | Note E — Loans The Company originates loans for sale into securitizations for 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, 2017 and 2016, the fair value of these loans was $ 503.3 million and $ 663.1 million, and the unpaid principal balance was $498.6 million and $660.3 million, respectively. Included in gain on sale of loans in the consolidated statement of operations were changes in fair value resulting in gains of $1.8 million in 2017 and losses of $3.1 million in 2016. There were no amounts of changes in fair value related to instrument-specific credit risk with the exception of the government guaranteed portion of non accrual SBA loans. The fair value of such loans is reduced to the amount of the government guarantee. Interest earned on loans held for sale during the period held are recorded in Interest Income – Loans, including fees in the consolidated 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, 2017 2016 SBA non-real estate $ 71,263 $ 74,644 SBA commercial mortgage 142,086 126,159 SBA construction 16,740 8,826 SBA loans * 230,089 209,629 Direct lease financing 378,029 346,645 SBLOC 730,462 630,400 Other specialty lending 30,720 11,073 Other consumer loans 14,133 17,374 1,383,433 1,215,121 Unamortized loan fees and costs 8,795 7,790 Total loans, net of deferred loan fees and costs $ 1,392,228 $ 1,222,911 Included in the table above are demand deposit overdrafts reclassified as loan balances totaling $2.3 million and $2.4 million at December 31, 2017 and 2016, 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, 2017 2016 SBA loans, including deferred fees and costs $ 236,724 $ 215,786 SBA loans included in held for sale 165,177 154,016 Total SBA loans $ 401,901 $ 369,802 The following table provides information about impaired loans at December 31, 2017 and 2016 (in thousands): Recorded investment Unpaid principal balance Related allowance Average recorded investment Interest income recognized December 31, 2017 Without an allowance recorded SBA non-real estate $ 459 $ 1,286 $ - $ 311 $ - SBA commercial mortgage - - - - - Direct lease financing 229 341 - 103 - Consumer - other - - - 259 - Consumer - home equity 1,695 1,695 - 1,712 - With an allowance recorded SBA non-real estate 2,399 2,399 1,689 2,507 - SBA commercial mortgage 693 693 225 747 - Direct lease financing - - - 405 - Consumer - other - - - 14 - Consumer - home equity - - - - - Total SBA non-real estate 2,858 3,685 1,689 2,818 - SBA commercial mortgage 693 693 225 747 - Direct lease financing 229 341 - 508 - Consumer - other - - - 273 - Consumer - home equity 1,695 1,695 - 1,712 - $ 5,475 $ 6,414 $ 1,914 $ 6,058 $ - 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 $ - The following table summarizes the Company’s non-accrual loans, loans past due 90 days and other real estate owned at December 31, 2017 and 2016, respectively (the Company had no non-accrual leases at December 31, 2017 or December 31, 2016): December 31, 2017 2016 (in thousands) Non-accrual loans SBA non-real estate $ 1,889 $ 1,530 SBA commercial mortgage 693 - Consumer 1,414 1,442 Total non-accrual loans 3,996 2,972 Loans past due 90 days or more 227 661 Total non-performing loans 4,223 3,633 Other real estate owned 450 104 Total non-performing assets $ 4,673 $ 3,737 The Company’s loans that were modified for the years ended December 31, 2017 and 2016 and considered troubled debt restructurings are as follows (in thousands): December 31, 2017 December 31, 2016 Number Pre-modification recorded investment Post-modification recorded investment Number Pre-modification recorded investment Post-modification recorded investment SBA non-real estate 5 $ 1,476 $ 1,476 2 $ 844 $ 844 Direct lease financing 1 230 230 1 $ 734 $ 734 Consumer 2 535 535 1 288 288 Total 8 $ 2,241 $ 2,241 4 $ 1,866 $ 1,866 The balances below provide information as to how the loans were modified as troubled debt restructured loans at December 31, 2017 and 2016 (in thousands): December 31, 2017 December 31, 2016 Adjusted interest rate Extended maturity Combined rate and maturity Adjusted interest rate Extended maturity Combined rate and maturity SBA non-real estate $ - $ 115 $ 1,361 $ - $ 144 $ 700 Direct lease financing - - 230 $ - $ - $ 734 Consumer - - 535 - - 288 Total $ - $ 115 $ 2,126 $ - $ 144 $ 1,722 As of December 31, 2017, there was a commitment to extend $228,000 on one loan classified as a troubled debt restructuring. As of December 31, 2016, we had 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, 2017 loans that were restructured within the last 12 months that have subsequently defaulted (in thousands). December 31, 2017 Number Pre-modification recorded investment SBA non-real estate 1 $ 38 Consumer 1 255 Total 2 $ 293 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, 2017 Beginning balance $ 1,976 $ 737 $ 76 $ 1,994 $ 315 $ 32 $ 975 $ 227 $ 6,332 Charge-offs (1,171) - - (927) - - (109) - (2,207) Recoveries 19 - - 8 24 - 51 Provision (credit) 2,321 383 60 420 50 25 (309) (30) 2,920 Ending balance $ 3,145 $ 1,120 $ 136 $ 1,495 $ 365 $ 57 $ 581 $ 197 $ 7,096 Ending balance: Individually evaluated for impairment $ 1,689 $ 225 $ - $ - $ - $ - $ - $ - $ 1,914 Ending balance: Collectively evaluated for impairment $ 1,456 $ 895 $ 136 $ 1,495 $ 365 $ 57 $ 581 $ 197 $ 5,182 Loans: Ending balance $ 71,263 $ 142,086 $ 16,740 $ 378,029 $ 730,462 $ 30,720 $ 14,133 $ 8,795 $ 1,392,228 Ending balance: Individually evaluated for impairment $ 2,858 $ 693 $ - $ 229 $ - $ - $ 1,695 $ - $ 5,475 Ending balance: Collectively evaluated for impairment $ 68,405 $ 141,393 $ 16,740 $ 377,800 $ 730,462 $ 30,720 $ 12,438 $ 8,795 $ 1,386,753 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 The Company did no t have loans acquired with deteriorated credit quality at either December 31, 2017 or December 31, 2016. A detail of the Company’s delinquent loans by loan category is as follows (in thousands): December 31, 2017 30-59 Days past due 60-89 Days past due 90 Days or greater Non-accrual Total past due Current Total loans SBA non-real estate $ 58 $ 268 $ - $ 1,889 $ 2,215 $ 69,048 $ 71,263 SBA commercial mortgage - - - 693 693 141,393 142,086 SBA construction - - - - - 16,740 16,740 Direct lease financing 3,789 2,233 227 - 6,249 371,780 378,029 SBLOC - - - - - 730,462 730,462 Other specialty lending - - - - - 30,720 30,720 Consumer - other - - - - - 4,482 4,482 Consumer - home equity 142 73 - 1,414 1,629 8,022 9,651 Unamortized loan fees and costs - - - - - 8,795 8,795 $ 3,989 $ 2,574 $ 227 $ 3,996 $ 10,786 $ 1,381,442 $ 1,392,228 December 31, 2016 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 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, 2017 Pass Special mention Substandard Doubtful Loss Unrated subject to review * Unrated not subject to review * Total loans SBA non-real estate $ 63,547 $ 3,392 $ 3,450 $ - $ - $ - $ 874 $ 71,263 SBA commercial mortgage 141,084 277 693 - - - 32 142,086 SBA construction 16,740 - - - - - - 16,740 Direct lease financing 204,906 - 2,895 - - 8,820 161,408 378,029 SBLOC 357,050 - - - - - 373,412 730,462 Other specialty lending 30,720 - - - - - - 30,720 Consumer 7,910 281 1,947 - - - 3,995 14,133 Unamortized loan fees and costs - - - - - - 8,795 8,795 $ 821,957 $ 3,950 $ 8,985 $ - $ - $ 8,820 $ 548,516 $ 1,392,228 December 31, 2016 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 * At December 31, 2017, in excess of 60% of the total continuing loan portfolio was reviewed. The targeted coverages and scope of the reviews are risk-based and vary according to each portfolio. These thresholds are maintained as follows: Security Backed Lines of Credit (SBLOC) – The targeted review threshold for 2017 was 40% with the largest 25% of SBLOCs by commitment to be reviewed annually. A random sampling of a minimum of 20 of the remaining loans will be reviewed each quarter. At December 31, 2017, approximately 49% of the SBLOC portfolio had been reviewed. SBA Loans – The targeted review threshold for 2017 was 100% , to be reviewed within 90 days of funding, less guaranteed portions of any purchased loans. The 100% coverage includes loan review work performed by designated SBA department personnel. At December 31, 2017, approximately 100% of the government guaranteed loan portfolio had been reviewed. The review threshold for the independent loan review department is $1,000,000 . Leasing – The targeted review threshold for 2017 was 35% . At December 31, 2017, approximately 55% of the leasing portfolio had been reviewed. The review threshold is $1,000,000 . Commercial Mortgaged Backed Securities (Floating Rate) – The targeted review threshold for 2017 was 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. At December 31, 2017, approximately 100% of the CMBS floating rate loans on the books more than 90 days had been reviewed. Commercial Mortgaged Backed Securities (Fixed Rate) - 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. At December 31, 2017, approximately 100% of the CMBS fixed rate portfolio had been reviewed. 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, 2017, approximately 100% of the non-CRA loans had been reviewed. Home Equity Lines of Credit, or HELOC – The targeted review threshold for 2017 was 50% . The largest 25% of HELOCs by commitment will be reviewed annually. A random sampling of a minimum of ten of the remaining loans will be reviewed each quarter. At December 31, 2017, approximately 86% of the HELOC portfolio had been reviewed. |