Note 6. Loans

The Company has several lending lines of business including SBA loans, direct lease financing, SBLOC and other specialty and consumer lending. The Company also originates loans for sale into commercial mortgage backed securitizations or to secondary government guaranteed loan markets. These sales are accounted for as true sales and servicing rights on these loans are not retained. The Company has elected fair value treatment for these loans to better reflect the economics of the transactions. At September 30, 2017, the fair value of the loans held for sale was $383.0 million and their book value was $378.2 million. Included in the gain on sale of loans in the Statements of Operations were gains recognized from changes in fair value of $1.9 million for the nine months ended September 30, 2017. There were no changes in fair value related to credit risk. Interest earned on loans held for sale during the period held are recorded in Interest Income-Loans, including fees, on the Statements of Operations.

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 loan amounts to estimated collateral value in making its credit determinations.

Major classifications of loans, excluding loans held for sale, are as follows (in thousands):



	September 30,	December 31,
	2017	2016

SBA non real estate	$ 72,055	$ 74,644
SBA commercial mortgage	132,997	126,159
SBA construction	14,205	8,826
SBA loans *	219,257	209,629
Direct lease financing	369,069	346,645
SBLOC	720,279	630,400
Other specialty lending	36,664	11,073
Other consumer loans	20,107	17,374
	1,365,376	1,215,121
Unamortized loan fees and costs	8,684	7,790
Total loans, net of deferred loan fees and costs	$ 1,374,060	$ 1,222,911

Included in the table above are demand deposit overdrafts reclassified as loan balances totaling $7.1 million and $2.4 million at September 30, 2017 and December 31, 2016, respectively. Overdraft charge-offs and recoveries are reflected in the allowance for loan and lease losses.

* The following table shows SBA loans and SBA loans held for sale at the dates indicated (in thousands):


	September 30,	December 31,
	2017	2016

SBA loans, including deferred fees and costs	$ 225,909	$ 215,786
SBA loans included in held for sale	160,855	154,016
Total SBA loans	$ 386,764	$ 369,802

The following table provides information about impaired loans at September 30, 2017 and December 31, 2016 (in thousands):



	Recorded investment	Unpaid principal balance	Related allowance	Average recorded investment	Interest income recognized
September 30, 2017
Without an allowance recorded
SBA non real estate	$ 357	$ 357	$ -	$ 274	$ -
SBA commercial mortgage	-	-	-	-	-
Direct lease financing	284	396	-	71	-
Consumer - other	-	-	-	-	-
Consumer - home equity	1,700	1,700	-	1,716	-
With an allowance recorded					-
SBA non real estate	2,288	2,288	1,659	2,534	-
SBA commercial mortgage	1,226	1,226	185	761	-
Direct lease financing	-	-	-	506	-
Consumer - other	-	-	-	18	-
Consumer - home equity	-	-	-	-	-
Total
SBA non real estate	2,645	2,645	1,659	2,808	-
SBA commercial mortgage	1,226	1,226	185	761	-
Direct lease financing	284	396	-	577	-
Consumer - other	-	-	-	18	-
Consumer - home equity	1,700	1,700	-	1,716	-
	5,855	5,967	1,844	5,880	-



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 tables summarize the Company’s non-accrual loans, loans past due 90 days and still accruing and other real estate owned for the periods indicated (the Company had no non-accrual leases at September 30, 2017 or December 31, 2016) (in thousands):



	September 30,	December 31,
	2017	2016

Non-accrual loans
SBA non real estate	$ 2,310	$ 1,530
SBA commercial mortgage	1,226	-
Consumer	1,417	1,442
Total non-accrual loans	4,953	2,972

Loans past due 90 days or more	354	661
Total non-performing loans	5,307	3,633
Other real estate owned	-	104
Total non-performing assets	$ 5,307	$ 3,737

The Company’s loans that were modified as of September 30, 2017 and December 31, 2016 and considered troubled debt restructurings are as follows (dollars in thousands):



	September 30, 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	4	$ 1,013	$ 1,013	2	$ 844	$ 844
Direct lease financing	1	285	285	1	734	734
Consumer	2	541	541	1	288	288
Total	7	$ 1,839	$ 1,839	4	$ 1,866	$ 1,866

The balances below provide information as to how the loans were modified as troubled debt restructurings loans as of September 30, 2017 and December 31, 2016 (in thousands):



	September 30, 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	$ -	$ 144	$ 869	$ -	$ 144	$ 700
Direct lease financing	-	-	285	-	-	734
Consumer	-	-	541	-	-	288
Total	$ -	$ 144	$ 1,695	$ -	$ 144	$ 1,722

The following table summarizes, as of September 30, 2017, loans that had been restructured within the last 12 months that have subsequently defaulted.



	Number	Pre-modification recorded investment
SBA non real estate	2	$ 679
Total	2	$ 679

As of September 30, 2017 and December 31, 2016, the Company had no commitments to lend additional funds to loan customers whose loan terms have been modified in troubled debt restructurings.

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
September 30, 2017
Beginning balance	$ 1,976	$ 737	$ 76	$ 1,994	$ 315	$ 32	$ 975	$ 227	$ 6,332
Charge-offs	(343)	-	-	(780)	-	-	(113)	-	(1,236)
Recoveries	13	-	-	-	-	-	24	-	37
Provision (credit)	1,576	521	22	196	45	36	(220)	(26)	2,150
Ending balance	$ 3,222	$ 1,258	$ 98	$ 1,410	$ 360	$ 68	$ 666	$ 201	$ 7,283

Ending balance: Individually evaluated for impairment	$ 1,659	$ 185	$ -	$ -	$ -	$ -	$ -	$ -	$ 1,844

Ending balance: Collectively evaluated for impairment	$ 1,563	$ 1,073	$ 98	$ 1,410	$ 360	$ 68	$ 666	$ 201	$ 5,439

Loans:
Ending balance	$ 72,055	$ 132,997	$ 14,205	$ 369,069	$ 720,279	$ 36,664	$ 20,107	$ 8,684	$ 1,374,060

Ending balance: Individually evaluated for impairment	$ 2,645	$ 1,226	$ -	$ 284	$ -	$ -	$ 1,700	$ -	$ 5,855

Ending balance: Collectively evaluated for impairment	$ 69,410	$ 131,771	$ 14,205	$ 368,785	$ 720,279	$ 36,664	$ 18,407	$ 8,684	$ 1,368,205



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



September 30, 2016
Beginning balance	$ 844	$ 408	$ 48	$ 1,022	$ 762	$ 199	$ 936	$ 181	4,400
Charge-offs	(76)	-	-	(63)	-	-	(39)	-	(178)
Recoveries	1	-	-	18	-	-	7	-	26
Provision (credit)	1,179	343	7	568	(451)	(143)	176	131	1,810
Ending balance	$ 1,948	$ 751	$ 55	$ 1,545	$ 311	$ 56	$ 1,080	$ 312	$ 6,058

Ending balance: Individually evaluated for impairment	$ 939	$ -	$ -	$ -	$ -	$ -	$ 474	$ -	$ 1,413

Ending balance: Collectively evaluated for impairment	$ 1,009	$ 751	$ 55	$ 1,545	$ 311	$ 56	$ 606	$ 312	$ 4,645

Loans:
Ending balance	$ 74,262	$ 117,053	$ 6,317	$ 332,632	$ 621,456	$ 20,076	$ 19,375	$ 7,066	$ 1,198,237

Ending balance: Individually evaluated for impairment	$ 2,774	$ -	$ -	$ -	$ -	$ -	$ 2,707	$ -	$ 5,481

Ending balance: Collectively evaluated for impairment	$ 71,488	$ 117,053	$ 6,317	$ 332,632	$ 621,456	$ 20,076	$ 16,668	$ 7,066	$ 1,192,756

The Company did not have loans acquired with deteriorated credit quality at either September 30, 2017 or December 31, 2016.

A detail of the Company’s delinquent loans by loan category is as follows (in thousands):



	30-59 Days	60-89 Days	90 Days		Total		Total
September 30, 2017	past due	past due	or greater	Non-accrual	past due	Current	loans
SBA non real estate	$ 272	$ 165	$ -	$ 2,310	$ 2,747	$ 69,308	$ 72,055
SBA commercial mortgage	-	-	-	1,226	1,226	131,771	132,997
SBA construction	-	-	-	-	-	14,205	14,205
Direct lease financing	5,065	1,060	354	-	6,479	362,590	369,069
SBLOC	-	-	-	-	-	720,279	720,279
Other specialty lending	-	-	-	-	-	36,664	36,664
Consumer - other	-	-	-	-	-	9,585	9,585
Consumer - home equity	144	-	-	1,417	1,561	8,961	10,522
Unamortized loan fees and costs	-	-	-	-	-	8,684	8,684
	$ 5,481	$ 1,225	$ 354	$ 4,953	$ 12,013	$ 1,362,047	$ 1,374,060



	30-59 Days	60-89 Days	90 Days		Total		Total
December 31, 2016	past due	past due	or greater	Non-accrual	past due	Current	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

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):



September 30, 2017	Pass	Special mention	Substandard	Doubtful	Loss	Unrated subject to review *	Unrated not subject to review *	Total loans
SBA non real estate	$ 44,996	$ 3,981	$ 4,107	$ -	$ -	$ -	$ 18,971	$ 72,055
SBA commercial mortgage	110,059	279	1,226	-	-	2,163	19,270	132,997
SBA construction	14,205	-	-	-	-	-	-	14,205
Direct lease financing	193,792	-	2,770	-	-	8,733	163,774	369,069
SBLOC	357,906	-	-	-	-	-	362,373	720,279
Other specialty lending	36,664	-	-	-	-	-	-	36,664
Consumer	8,791	283	1,885	-	-	-	9,148	20,107
Unamortized loan fees and costs	-	-	-	-	-	-	8,684	8,684
	$ 766,413	$ 4,543	$ 9,988	$ -	$ -	$ 10,896	$ 582,220	$ 1,374,060

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

* For information on targeted loan review thresholds see “Allowance for Loan Losses”