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, 2015 and 2014 the fair value of these loans was $489.9 million and $217.1 million and the unpaid principal balance was $484.0 million and $212.8 million, respectively. Included in gain on sale of loans in the Statement of Operations were gains recognized from changes in fair value of $1.7 million and $1.9 million during the years ended December 31, 2015 and 2014, respectively. 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.

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,
	2015	2014

SBA non real estate	$ 68,887	$ 62,425
SBA commercial mortgage	114,029	82,317
SBA construction	6,977	20,392
SBA loans *	189,893	165,134
Direct lease financing	231,514	194,464
SBLOC	575,948	421,862
Other specialty lending	48,315	48,625
Other consumer loans	23,180	36,168
	1,068,850	866,253
Unamortized loan fees and costs	9,227	8,340
Total loans, net of deferred loan costs	$ 1,078,077	$ 874,593

Included in the table above are demand deposit overdrafts reclassified as loan balances totaling $2.8 million and $1.8 million at December 31, 2015 and 2014, 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 included in held for sale for the periods indicated (in thousands):


	December 31,	December 31,
	2015	2014

SBA loans, including deferred fees and costs	$ 197,966	$ 172,660
SBA loans included in held for sale	109,174	$ 38,704
Total SBA loans	$ 307,140	$ 211,364

The following table provides information about impaired loans at December 31, 2015 and 2014 (in thousands):


	Recorded investment	Unpaid principal balance	Related allowance	Average recorded investment	Interest income recognized
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	-

December 31, 2014
Without an allowance recorded
SBA non real estate	$ -	$ -	$ -	$ -	$ -
Consumer - other	346	346	-	139	-
Consumer - home equity	827	927	-	1,043	-
With an allowance recorded
SBA non real estate	197	197	40	967	-
Consumer - other	-	-	-	369	-
Consumer - home equity	1,080	1,080	271	885	-
Total
SBA non real estate	197	197	40	967	-
Consumer - other	346	346	-	508	-
Consumer - home equity	1,907	2,007	271	1,928	-

The following table summarizes the Company’s non-accrual loans, loans past due 90 days and other real estate owned at December 31, 2015 and 2014, respectively (the Company had no non-accrual leases at December 31, 2015 or December 31, 2014):


	December 31,
	2015	2014

	(in thousands)

Non-accrual loans
SBA non real estate	$ 733	$ -
Consumer	1,194	1,907
Total non-accrual loans	1,927	1,907

Loans past due 90 days or more	403	149
Total non-performing loans	2,330	2,056
Other real estate owned	-	-
Total non-performing assets	$ 2,330	$ 2,056

The Company’s loans that were modified during the years ended December 31,2015 and 2014 considered troubled debt restructurings are as follows (in thousands):


	December 31, 2015			December 31, 2014
	Number	Pre-modification recorded investment	Post-modification recorded investment	Number	Pre-modification recorded investment	Post-modification recorded investment
SBA non-real estate	1	$ 171	$ 171	1	$ 197	$ 197
Consumer	2	434	434	1	346	346
Total	3	$ 605	$ 605	2	$ 543	$ 543

The balances below provide information as to how the loans were modified as troubled debt restructured loans at December 31, 2015 and 2014 (in thousands):


	December 31, 2015			December 31, 2014
	Adjusted interest rate	Extended maturity	Combined rate and maturity	Adjusted interest rate	Extended maturity	Combined rate and maturity
SBA non-real estate	$ -	$ 171	$ -	$ -	$ 197	$ -
Consumer	-	330	104	-	346	-
Total	$ -	$ 501	$ 104	$ -	$ 543	$ -

As of December 31, 2015 and December 31, 2014, the Company 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, 2015 loans that were restructured within the last 12 months that have subsequently defaulted (in thousands).


	December 31, 2015
	Number	Pre-modification recorded investment
Consumer	1	$ 104
Total	1	$ 104

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, 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


December 31, 2014
Beginning balance	$ 419	$ 496	$ -	$ 311	$ 293	$ 1	$ 2,361	$ -	$ 3,881
Charge-offs	(307)	-	-	(323)	(3)	-	(871)	-	(1,504)
Recoveries	12	-	-	25	-	-	22	-	59
Provision (credit)	261	(35)	114	823	272	65	(331)	33	1,202
Ending balance	$ 385	$ 461	$ 114	$ 836	$ 562	$ 66	$ 1,181	$ 33	$ 3,638

Ending balance: Individually evaluated for impairment	$ 40	$ -	$ -	$ -	$ -	$ -	$ 271	$ -	$ 311

Ending balance: Collectively evaluated for impairment	$ 345	$ 461	$ 114	$ 836	$ 562	$ 66	$ 910	$ 33	$ 3,327


Loans:
Ending balance	$ 62,425	$ 82,317	$ 20,392	$ 194,464	$ 421,862	$ 48,625	$ 36,168	$ 8,340	$ 874,593

Ending balance: Individually evaluated for impairment	$ 197	$ -	$ -	$ -	$ -	$ -	$ 2,253	$ -	$ 2,450

Ending balance: Collectively evaluated for impairment	$ 62,228	$ 82,317	$ 20,392	$ 194,464	$ 421,862	$ 48,625	$ 33,915	$ 8,340	$ 872,143

The Company did not have loans acquired with deteriorated credit quality at either December 31, 2015 or December 31, 2014.

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


December 31, 2015	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	$ -	$ -	$ -	$ 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

December 31, 2014
SBA non real estate	$ -	$ -	$ -	$ -	$ -	$ 62,425	$ 62,425
SBA commercial mortgage	-	-	-	-	-	82,317	82,317
SBA construction	-	-	-	-	-	20,392	20,392
Direct lease financing	5,083	1,832	149	-	7,064	187,400	194,464
SBLOC	-	-	-	-	-	421,862	421,862
Other specialty lending	-	-	-	-	-	48,625	48,625
Consumer - other	9	-	-	-	9	8,654	8,663
Consumer - home equity	-	457	-	1,907	2,364	25,141	27,505
Unamortized loan fees and costs	-	-	-	-	-	8,340	8,340
	$ 5,092	$ 2,289	$ 149	$ 1,907	$ 9,437	$ 865,156	$ 874,593

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, 2015	Pass	Special mention	Substandard	Doubtful	Loss	Unrated subject to review *	Unrated not subject to review *	Total loans
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

December 31, 2014
SBA non real estate	$ 49,214	$ -	$ 197	$ -	$ -	$ 669	$ 12,345	$ 62,425
SBA commercial mortgage	59,086	-	-	-	-	965	22,266	82,317
SBA construction	18,911	-	-	-	-	-	1,481	20,392
Direct lease financing	58,994	-	99	-	-	-	135,371	194,464
SBLOC	142,286	-	-	-	-	57,360	222,216	421,862
Other specialty lending	46,990	-	-	-	-	-	1,635	48,625
Consumer	14,196	346	1,907	-	-	73	19,646	36,168
Unamortized loan fees and costs	-	-	-	-	-	-	8,340	8,340
	$ 389,677	$ 346	$ 2,203	$ -	$ -	$ 59,067	$ 423,300	$ 874,593

* Loan review is performed by staff independent of the loan departments and who report directly to the chief credit officer. Loans are also subject to review by their relationship manager and senior loan personnel. At December 31, 2015, approximately 47% of the total continuing loan portfolio was reviewed as a result of the coverage of each loan portfolio type. The loan review policy guidelines were revised in December 2015 to establish minimum coverages for each loan portfolio. The targeted coverages and scope of the reviews are risk-based and vary according to each portfolio. The Company plans to achieve these thresholds by December 31, 2016 and to maintain them as follows.

Security Backed Lines of Credit (SBLOC) – The targeted review threshold for 2016 is 40% with the largest 25% of SBLOCs by commitment to be reviewed annually. At December 31, 2015 approximately 35% of the SBLOC portfolio had been reviewed.

SBA Loans – The targeted review threshold for 2016 is 100%, less guaranteed portions of any loans purchased and loans funded within 90 days of quarter end. Although loans are not typically purchased, loans for CRA purposes are periodically purchased. At December 31, 2015, approximately 89% of the Government Guaranteed Loan portfolio had been reviewed. The portion not reviewed includes $29 million in purchased loans which are subject to government guarantees and $3 million in newly funded loans.

Leasing – The targeted review threshold for 2016 is 50%. At December 31, 2015, approximately 40% of the Leasing portfolio had been reviewed.

Commercial Mortgaged Backed Securities (Floating Rate) – The targeted review threshold for 2016 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. At December 31, 2015, approximately 57% of the CMBS floating rate portfolio had been reviewed. The portion not reviewed includes $122 million in newly funded loans.

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. At December 31, 2015, none of the CMBS (Fixed Rate) portfolio loans met the scope for review.

Specialty Lending - Specialty Lending, defined as commercial loans unique in nature that do not fit into other established categories, will have a review coverage threshold of 100% for non-Community Reinvestment Act (“CRA”) loans. At December 31, 2015, approximately 100% of the non CRA loans had been reviewed.

Home Equity Lines of Credit, or HELOC – The targeted review threshold for 2016 is 50%. The largest 25% of HELOCs by commitment will be reviewed annually. At December 31, 2105 approximately 52% of the HELOC portfolio had been reviewed.