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Loans

9 Months Ended

Sep. 30, 2020

Note 6. Loans

The Company has several lending lines of business including small business comprised primarily of SBA loans, direct lease financing, SBLOC and IBLOC and other specialty and consumer lending. The Company also originated loans for sale into commercial mortgage-backed securitizations or to secondary government guaranteed loan markets. At origination, the Company elected fair value treatment for these loans as they were originally held-for-sale, to better reflect the economics of the transactions. Currently, the Company intends to hold these loans on its balance sheet, and thus no longer accounts for these loans as held-for-sale. The Company continues to present these loans at fair value. At September 30, 2020, the fair value of these loans was $1.85 billion and their amortized cost was $1.85 billion. Included in “Net realized and unrealized gains (losses) on commercial loans originated for sale” in the consolidated statements of operations are changes in the estimate in fair value of unsold loans. For the nine months ended September 30, 2020, unrealized losses recognized for such changes in fair value were $3.1 million of which $490,000 was attributable to credit weaknesses. For the nine months ended September 30, 2019, unrealized gains recognized for such changes in fair value were $1.6 million. Interest earned on loans at fair value during the period held is recorded in Interest Income-Loans, including fees, in the consolidated statements of operations. The Bank also pledged the majority of its loans held for investment at amortized cost and commercial loans at fair value to the Federal Home Loan Bank and to the Federal Reserve Bank for lines of credit. The Federal Home Loan Bank line is periodically utilized to manage liquidity, but the Federal Reserve line has not generally been used. However, in light of the impact of the Coronavirus, the Federal Reserve has encouraged banks to utilize their lines to maximize the amount of funding available for credit markets. Accordingly, the Bank has periodically borrowed against its Federal Reserve line on an overnight basis. The amount of loans pledged varies and the collateral may be unpledged at any time to the extent the collateral exceeds advances. The lines are maintained consistent with the Bank’s liquidity policy which maximizes potential liquidity.

The Company has periodically sponsored the structuring of commercial mortgage loan securitizations. The Company has sponsored six of these securitizations since 2017 which are described in the 2019 Form 10-K. The loans sold to the commercial mortgage-backed securitizations are transitional commercial mortgage loans which are made to improve and rehabilitate existing properties which are already cash flowing. Servicing rights are not retained. Each of the securitizations is considered a variable interest entity of which the Company is not the primary beneficiary and therefore are not consolidated in its financial statements. Further, true sale accounting has been applicable to each of the securitizations, as supported by a review performed by an independent third-party consultant. In each of the securitizations, the Company has obtained a tranche of certificates which are accounted for as available-for-sale debt securities. The securities are recorded at fair value at acquisition, which is determined by an independent third party based on the discounted cash flow method using unobservable (level 3) inputs. The loans securitized are structured with some prepayment protection and with extension options which are common for rehabilitation loans. It was expected such prepayment protection and extension options would generally offset the impact of prepayments which would therefore not be significant. Accordingly, prepayments on CRE securities were not originally assumed in the first four securitizations. However, as a result of higher than expected prepayments on CRE2 annual prepayments of 15% on CRE5 were assumed, beginning after the first-year anniversary of the CRE5 securitization. For CRE6, there was no premium or discount associated with the tranche purchased and prepayments were accordingly not estimated.

Because of credit enhancements for each security, cash flows were not reduced by expected losses. For each of the securitizations, the Company has recorded a gain which is comprised of (i) the excess of consideration received by the Company in the transaction over the carrying value of the loans at securitization, less related transactions costs incurred; and (ii) the recognition of previously deferred origination and exit fees.

There were no securitizations during the nine months ended September 30, 2020. A summary of securitizations and securities obtained from securitizations for the nine month period ended September 30, 2019 is as follows:

In the third quarter of 2019, the Company sponsored the The Bancorp Commercial Mortgage 2019-CRE6 Trust, securitizing $778.2 million of loans and recording a $14.2 gain. The certificates obtained by the Company in the transaction had an acquisition date fair value of $51.6 million based upon an initial discount rate of 4.12%.

In the first quarter of 2019, the Company sponsored The Bancorp Commercial Mortgage 2019-CRE5 Trust, securitizing $518.3 million of loans and recording an $11.2 million gain. The certificates obtained by the Company in the transaction had an acquisition date fair value of $41.6 million based upon an initial discount rate of 4.75%.

In the third quarter of 2020, the Company decided to not pursue securitizations and no future securitizations are currently planned. The loans being currently retained total approximately $1.6 billion and are mostly comprised of multi-family loans, specifically apartment buildings. The $1.6 billion comprises the majority of the commercial loans, at fair value on the balance sheet, with the balance of that category comprised of the government guaranteed portion of SBA loans.

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 commercial loans at fair value, are as follows (in thousands):



	September 30,	December 31,
	2020	2019

SBL non-real estate	$ 293,488	$ 84,579
SBL commercial mortgage	270,264	218,110
SBL construction	27,169	45,310
Small business loans *	590,921	347,999
Direct lease financing	430,675	434,460
SBLOC / IBLOC **	1,428,253	1,024,420
Advisor financing ***	26,600	-
Other specialty lending	2,194	3,055
Other consumer loans ****	3,809	4,554
	2,482,452	1,814,488
Unamortized loan fees and costs	6,308	9,757
Total loans, net of unamortized loan fees and costs	$ 2,488,760	$ 1,824,245

	September 30,	December 31,
	2020	2019

SBL loans, net of (deferred fees) and costs of $(607) and $4,215
for September 30, 2020 and December 31, 2019, respectively	$ 590,314	$ 352,214
SBL loans included in commercial loans at fair value	250,958	220,358
Total small business loans	$ 841,272	$ 572,572

* The preceding table shows small business loans, or SBL, and SBL held at fair value at the dates indicated (in thousands). Included in SBL non-real estate loans are $207.9 million of Paycheck Protection Program loans with estimated lives of less than one year. While the majority of SBL are comprised of SBA loans, SBL also includes $17.8 million of non-SBA loans as of September 30, 2020 and $17.0 million at December 31, 2019.

** Securities Backed Lines of Credit, or SBLOC, are collateralized by marketable securities, while Insurance Backed Lines of Credit, or IBLOC, are collateralized by the cash surrender value of insurance policies. At September 30, 2020 and December 31, 2019, respectively, IBLOC loans amounted to $359.4 million and $144.6 million.

*** In 2020, the Company began originating loans to investment advisors for purposes of debt refinance, acquisition of another firm or internal succession. Maximum loan amounts are subject to loan-to-value ratios of 70%, based on third party business appraisals, but may be increased depending upon the debt service coverage ratio. Personal guarantees and blanket business liens are obtained as appropriate.

**** Included in the table above under other consumer loans are demand deposit overdrafts reclassified as loan balances totaling $151,000 and $882,000 at September 30, 2020 and December 31, 2019, respectively.

The following table provides information about loans individually evaluated for credit loss at September 30, 2020 and December 31, 2019 (in thousands):



	September 30, 2020
	Recorded ‎investment	Unpaid ‎principal ‎balance	Related ‎allowance	Average ‎recorded ‎investment	Interest ‎income ‎recognized
Without an allowance recorded
SBL non-real estate	$ 445	$ 3,525	$ -	$ 365	$ 2
SBL commercial mortgage	2,036	2,036	-	1,056	-
SBL construction	-	-	-	-	-
Direct lease financing	260	260	-	4,116	-
Consumer - home equity	567	567	-	554	8
With an allowance recorded
SBL non-real estate	2,775	2,775	(1,818)	3,310	12
SBL commercial mortgage	5,481	5,481	(1,010)	2,098	-
SBL construction	711	711	(26)	711	-
Direct lease financing	544	544	(43)	782	-
Consumer - home equity	-	-	-	30	-
Total
SBL non-real estate	3,220	6,300	(1,818)	3,675	14
SBL commercial mortgage	7,517	7,517	(1,010)	3,154	-
SBL construction	711	711	(26)	711	-
Direct lease financing	804	804	(43)	4,898	-
Consumer - home equity	567	567	-	584	8
	$ 12,819	$ 15,899	$ (2,897)	$ 13,022	$ 22



	December 31, 2019
	Recorded ‎investment	Unpaid ‎principal ‎balance	Related ‎allowance	Average ‎recorded ‎investment	Interest ‎income ‎recognized
Without an allowance recorded
SBL non-real estate	$ 335	$ 2,717	$ -	$ 277	$ 5
SBL commercial mortgage	76	76	-	15	-
SBL construction	-	-	-	284	-
Direct lease financing	286	286	-	362	11
Consumer - home equity	489	489	-	1,161	9
With an allowance recorded
SBL non-real estate	3,804	4,371	(2,961)	3,925	30
SBL commercial mortgage	971	971	(136)	561	-
SBL construction	711	711	(36)	284	-
Direct lease financing	-	-	-	244	-
Consumer - home equity	121	121	(9)	344	-
Total
SBL non-real estate	4,139	7,088	(2,961)	4,202	35
SBL commercial mortgage	1,047	1,047	(136)	576	-
SBL construction	711	711	(36)	568	-
Direct lease financing	286	286	-	606	11
Consumer - home equity	610	610	(9)	1,505	9
	$ 6,793	$ 9,742	$ (3,142)	$ 7,457	$ 55

The loan review department recommends non-accrual status for loans to the surveillance committee, where interest income appears to be uncollectible or a protracted delay in collection becomes evident. The surveillance committee further vets and approves the non-accrual status.

The following table summarizes non-accrual loans with and without an allowance for credit losses as of the periods indicated (in thousands):


	September 30, 2020			December 31, 2019
	Non-accrual loans with a related ACL *	Non-accrual loans without a related ACL *	Total non-accrual loans	Total non-accrual loans
SBL non-real estate	$ 2,541	$ 394	$ 2,935	$ 3,693
SBL commercial mortgage	5,481	2,036	7,517	1,047
SBL construction	711	-	711	711
Direct leasing	544	260	804	-
Consumer	-	308	308	345
	$ 9,277	$ 2,998	$ 12,275	$ 5,796

* Allowance for credit losses

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 (in thousands):



	September 30,	December 31,
	2020	2019

Non-accrual loans
SBL non-real estate	$ 2,935	$ 3,693
SBL commercial mortgage	7,517	1,047
SBL construction	711	711
Direct leasing	804	-
Consumer	308	345
Total non-accrual loans	12,275	5,796

Loans past due 90 days or more and still accruing	24	3,264
Total non-performing loans	12,299	9,060
Other real estate owned	-	-
Total non-performing assets	$ 12,299	$ 9,060

Interest which would have been earned on loans classified as non-accrual for the nine months ended September 30, 2020 and 2019, was $459,000 and $356,000, respectively. No income on non-accrual loans was recognized during the nine months ended September 30, 2020. In the nine months ended September 30, 2020 a total of $361,000 was reversed from interest income, which represented interest accrued on loans placed into non-accrual status during the period.

The Company’s loans that were modified as of September 30, 2020 and December 31, 2019 and considered troubled debt restructurings are as follows (dollars in thousands):



	September 30, 2020			December 31, 2019
	Number	Pre-modification recorded investment	Post-modification recorded investment	Number	Pre-modification recorded investment	Post-modification recorded investment
SBL non-real estate	8	$ 927	$ 927	8	$ 1,309	$ 1,309
Direct lease financing	1	260	260	1	286	286
Consumer	2	474	474	2	489	489
Total	11	$ 1,661	$ 1,661	11	$ 2,084	$ 2,084

The balances below provide information as to how the loans were modified as troubled debt restructuring loans as of September 30, 2020 and December 31, 2019 (in thousands):



	September 30, 2020			December 31, 2019
	Adjusted interest rate	Extended maturity	Combined rate and maturity	Adjusted interest rate	Extended maturity	Combined rate and maturity
SBL non-real estate	$ -	$ 23	$ 904	$ -	$ 51	$ 1,258
Direct lease financing	-	260	-	-	286	-
Consumer	-	-	474	-	-	489
Total	$ -	$ 283	$ 1,378	$ -	$ 337	$ 1,747

The Company had one troubled debt restructured loan at March 31, 2020 that had been restructured within the last 12 months that has subsequently defaulted. In February 2020, a single borrower came under financial stress and agreed to an orderly liquidation of vehicles collateralizing their $15.3 million loan balance at March 31, 2020, which was reflected in the direct lease financing balance and in troubled debt restructurings at that date. The borrower subsequently filed for bankruptcy and the bankruptcy court gave the Company permission to sell the vehicles which were transferred to other assets as of June 30, 2020. As a result of the sales, substantially all of the balance has been repaid, and the $15.3 million balance noted above was reduced to $1.7 million as of September 30, 2020. As of October 29, 2020, the balance had been reduced to $690,000. Estimates of the disposition value of the remaining vehicles currently exceed the balance due.

The Company had no commitments to extend additional credit to loans classified as troubled debt restructurings as of September 30, 2020 or December 31, 2019.

When loans are classified as troubled debt restructurings, the Company estimates the value of underlying collateral and repayment sources. A specific reserve in the allowance for credit losses is established if the collateral valuation, less disposition costs, is lower than the recorded loan value. The amount of the specific reserve serves to increase the provision for credit losses in the quarter the loan is classified as a troubled debt restructuring. As of September 30, 2020, there were 11 troubled debt restructured loans with a balance of $1.7 million which had specific reserves of $479,000. Substantially all of these reserves related to the non-guaranteed portion of SBA loans for start-up businesses.

Effective January 1, 2020, CECL accounting replaced the prior incurred loss model that recognized losses when it became probable that a credit loss would be incurred, with a new requirement to recognize lifetime expected credit losses immediately when a financial asset is originated or purchased. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of loans to present the net amount expected to be collected on the loans. Loans, or portions thereof, are charged off against the allowance when they are deemed uncollectible. Loans are deemed uncollectible based on individual facts and circumstances including the quality of repayment sources, the length of collection efforts and the probability and timing of recoveries. During the first quarter of 2020, upon adoption of the guidance, the allowance for credit losses was increased by $2.6 million. Additionally, $569,000 was established as an allowance for off-balance sheet credit losses (for unfunded loan commitments) and recorded in other liabilities. These amounts did not impact our Consolidated Statement of Operations, as the guidance required these cumulative differences between the two accounting conventions to flow through retained earnings, net of their income tax benefit. The following table shows the effect of the adoption of CECL as of January 1, 2020 and the September 30, 2020 allowance for credit loss (in thousands).


	December 31, 2019		January 1, 2020		September 30, 2020
	Incurred loss method		CECL (day 1 adoption)		CECL
	Amount	% of Segment	Amount	% of Segment	Amount	% of Segment
Allowance for credit losses on loans and leases
SBL non real estate	$ 4,914	8.33%	$ 4,766	8.08%	$ 4,801	1.64%
SBL commercial mortgage	1,458	0.71%	2,009	0.98%	3,552	1.31%
SBL construction	432	0.95%	571	1.26%	423	1.56%
Direct lease financing	2,426	0.56%	4,788	1.10%	5,847	1.35%
SBLOC	440	0.05%	440	0.05%	534	0.00%
IBLOC	113	0.08%	72	0.05%	180	0.00%
Advisor financing	-	0.00%	-	0.00%	199	0.75%
Other specialty lending (1)	97	0.39%	170	0.40%	148	6.75%
Consumer - other	40	0.88%	58	1.27%	43	1.13%
Unallocated	318		-		-	0.00%
	$ 10,238	0.56%	$ 12,874	0.71%	$ 15,727	0.63%

Liabilities:
Allowance for credit losses on off-balance sheet credit exposures	-		569		570
Total allowance for credit losses	$ 10,238		$ 13,443		$ 16,297

(1)Included in other speciality lending are $34.7 million of SBA loans purchased for CRA purposes as of September 30,2020. These loans are classified as SBL in our loan tables.

Management estimates the allowance using relevant available internal and external historical loan performance information, current economic conditions and reasonable and supportable forecasts. Historical credit loss experience provides the initial basis for the estimation of expected credit losses over the estimated life of the loans. The methodology used in the estimation of the allowance, which is performed at least quarterly, is designed to be responsive to changes in portfolio credit quality and the impact of current and future economic conditions on loan performance. The review of the appropriateness of the allowance is performed by the Chief Credit Officer and presented to the audit committee for their review. The allowance for credit losses includes reserves on loan pools with similar risk characteristics based on a lifetime loss-rate model, or vintage analysis, as described in the following paragraph. Loans that do not share risk characteristics are evaluated on an individual basis. If foreclosure is believed to be probable or repayment is expected from the sale of the collateral, a reserve for deficiency is established within the allowance. Expected credit losses for such collateral dependent loans are based on the difference between loan principal and the estimated fair value of the collateral, adjusted for disposition costs as appropriate.

For purposes of determining the pool-basis reserve, the loans not assigned an individual reserve are segregated by product type, to recognize differing risk characteristics within portfolio segments. A historical loss rate is calculated for each product type, except SBLOC and IBLOC, based upon historical net charge-offs for that product. The loss rate is determined by classifying charge-off losses according to the year the related loans were originated, which is referred to as vintage analysis. The loss rate is then projected over the estimated remaining loan lives unique to each loan pool, to determine estimated lifetime losses. For SBLOC and IBLOC, since losses have not been incurred, probability of loss/loss given default considerations are utilized. Additionally, for all loan pools the Company adds to the allowance a component for each pool based upon qualitative factors such as the Company’s current loan performance statistics as determined by pool. These qualitative factors adjust for asset specific differences between historical loss experience and the current portfolio for each pool. The qualitative factors are intended to address factors that may not be reflected in historical loss rates and otherwise unaccounted for in the quantitative process. A similar process is employed to calculate a reserve assigned to off-balance sheet commitments, which are comprised of unfunded loan commitments and letters of credit. That reserve is recorded in other liabilities. In the twelve to eighteen months for which the Company believes it is able to develop reasonable and supportable forecasts, its model includes qualitative factors which may increase or decrease the allowance compared to historical loss rates. For average loan lives which extend beyond that period, expected losses provided for in the allowance are primarily based on applying historical loss rates over the estimated lives of the loans. Even though portions of the allowance may be allocated to loans that have been individually measured for credit deterioration, the entire allowance is available for any credit that, in management’s judgment, should be charged off.

The Company ranks its qualitative factors in five levels: minimal risk, low, moderate, moderate-high and high. When the Company adopted CECL as of January 1, 2020, the management assumption was that some degree of economic slowdown should be considered over the next eighteen months. That belief reflected the length of the current economic expansion and the relatively high level of unsustainable deficit spending. Accordingly, certain of the Company’s qualitative factors were set at moderate as of January 1, 2020. Based on the uncertainty as to how the Coronavirus would impact the Company’s loan pools, the Company increased other qualitative factors to moderate in 2020. The economic qualitative factor is based on the estimated impact of economic conditions on the loan pools, as distinguished from the economic factors themselves. The Company’s charge-offs in its lines of business have been non-existent for SBLOC and IBLOC. The charge-off history for SBL and leasing do not correlate with economic conditions. Given the continuing economic weakness, the economic qualitative component for the non-guaranteed portion of SBA 7a loans, was increased to moderate high. While specific or groups of economic factors did not correlate with actual historical losses, multiple economic factors are considered. For the non-guaranteed portion of SBA loans and leasing, the Company’s loss forecasting analysis included a review of industry statistics. However, the Company’s own charge-off history was the primary quantitative element in the forecasts.

Below are the portfolio segments used to pool loans with similar risk characteristics and align with our methodology for measuring expected credit losses. These pools have similar risk and collateral characteristics, and certain of these pools are broken down further in determining and applying the vintage loss estimates previously discussed. For instance, within the direct lease financing pool, government and public institution leases are considered separately. Additionally, the Company evaluates its loans under an internal loan risk rating system as a means of identifying problem loans. The special mention classification indicates weaknesses that may, if not cured, threaten the borrower’s future repayment ability. A substandard classification reflects an existing weakness indicating the possible inadequacy of net worth and other repayment sources. These classifications are used both by regulators and peers, as they have been correlated with an increased probability of credit losses. A summary of our primary portfolio pools and loans accordingly classified, by year of origination, is as follows:

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As of September 30, 2020	2020	2019	2018	2017	2016	Prior	Revolving loans at amortized cost	Total
SBL non real estate
Non-rated	$ 208,252	$ -	$ -	$ -	$ -	$ -	$ -	$ 208,252
Pass	7,018	9,541	12,557	6,745	7,654	10,916	-	54,431
Special mention	-	-	1,132	-	520	716	-	2,368
Substandard	-	43	20	693	1,324	1,662	-	3,742
Total SBL non-real estate	215,270	9,584	13,709	7,438	9,498	13,294	-	268,793

SBL commercial mortgage
Non-rated	9,681	2,938	-	-	-	-	-	12,619
Pass	17,611	64,628	48,134	39,773	32,808	36,011	-	238,965
Special mention	-	-	-	-	-	259	-	259
Substandard	-	-	-	-	76	7,441	-	7,517
Total SBL commercial mortgage	27,292	67,566	48,134	39,773	32,884	43,711	-	259,360

SBL construction
Non-rated	206	-	-	-	-	-	-	206
Pass	2,855	14,078	9,595	-	-	-	-	26,528
Special mention	-	-	-	-	-	-	-	-
Substandard	-	-	-	-	711	-	-	711
Total SBL construction	3,061	14,078	9,595	-	711	-	-	27,445

Direct lease financing
Non-rated	11,315	3,065	2,437	1,256	587	18	-	18,678
Pass	204,670	98,781	59,875	28,921	11,990	2,086	-	406,323
Special mention	-	-	-	-	8	-	-	8
Substandard	3,676	46	503	846	556	39	-	5,666
Total direct lease financing	219,661	101,892	62,815	31,023	13,141	2,143	-	430,675

SBLOC
Non-rated	-	-	-	-	-	-	7,897	7,897
Pass	-	-	-	-	-	-	1,064,990	1,064,990
Special mention	-	-	-	-	-	-	-	-
Substandard	-	-	-	-	-	-	-	-
Total SBLOC	-	-	-	-	-	-	1,072,887	1,072,887

IBLOC
Non-rated	-	-	-	-	-	-	97,017	97,017
Pass	-	-	-	-	-	-	262,340	262,340
Special mention	-	-	-	-	-	-	-	-
Substandard	-	-	-	-	-	-	-	-
Total IBLOC	-	-	-	-	-	-	359,357	359,357

Other specialty
Non-rated	2,537	-	-	-	-	-	-	2,537
Pass	116	3,484	6,368	7,042	7,083	12,817	-	36,910
Special mention	-	-	-	-	-	-	-	-
Substandard	-	-	-	-	-	-	-	-
Total other specialty	2,653	3,484	6,368	7,042	7,083	12,817	-	39,447

Advisor financing
Non-rated	11,717	-	-	-	-	-	-	11,717
Pass	15,269	-	-	-	-	-	-	15,269
Special mention	-	-	-	-	-	-	-	-
Substandard	-	-	-	-	-	-	-	-
Total advisor financing	26,986	-	-	-	-	-	-	26,986

Consumer
Non-rated	414	-	-	15	-	1,617	-	2,046
Pass	-	-	-	-	-	1,456	-	1,456
Special mention	-	-	-	-	-	-	-	-
Substandard	-	-	-	-	-	308	-	308
Total consumer	414	-	-	15	-	3,381	-	3,810
Total	$ 495,337	$ 196,604	$ 140,621	$ 85,291	$ 63,317	$ 75,346	$ 1,432,244	$ 2,488,760

SBL. Substantially all small business loans consist of SBA loans. The Bank participates in loan programs established by the SBA, including the 7(a) Loan Guarantee Program and the 504 Fixed Asset Financing Program and a temporary program, the Paycheck Protection Program, or PPP, in 2020. The 7(a) Loan Guarantee Program is designed to help small business borrowers start or expand their businesses by providing partial guarantees of loans made by banks and non-bank lending institutions for specific business purposes, including long or short term working capital; funds for the purchase of equipment, machinery, supplies and materials; funds for the purchase, construction or renovation of real estate; and funds to acquire, operate or expand an existing business or refinance existing debt, all under conditions established by the SBA. The 504 Fixed Asset Financing Program includes the financing of real estate and commercial mortgages. In 2020, the Company also participated in PPP, which provides short-term loans to small businesses. PPP loans are fully guaranteed by the U.S. government. This program was a specific response to the Coronavirus, and these loans are expected to be reimbursed by the U.S. government within one year of their origination. The Company segments the SBL portfolio into four pools: non real estate, commercial mortgage and construction to capture the risk characteristics of each pool, and the PPP loans discussed above. In the table above, the PPP loans are included in non-rated SBL non real estate. The qualitative factors for SBL loans focus on pool loan performance, underlying collateral for collateral dependent loans and changes in economic conditions. Additionally, the construction segment adds a qualitative factor for general construction risk, such as construction delays. The U.S. government guaranteed portion of 7a loans and PPP loans, which are fully guaranteed, are not included in the risk pools because they have inherently different risk characteristics because of the U.S. government guarantee.

Direct lease financing. The Company provides lease financing for commercial and government vehicle fleets and, to a lesser extent, provides lease financing for other equipment. Leases are either open-end or closed-end. An open-end lease is one in which, at the end of the lease term, the lessee must pay us the difference between the amount at which Company sells the leased asset and the stated termination value. Termination value is a contractual value agreed to by the parties at the inception of a lease as to the value of the leased asset at the end of the lease term. A closed-end lease is one for which no such payment is due on lease termination. In a closed-end lease, the risk that the amount received on a sale of the leased asset will be less than the residual value is assumed by us, as lessor. The qualitative factors for direct lease financing focus on underlying collateral for collateral dependent loans, portfolio loan performance, loan concentrations and changes in economic conditions.

SBLOC. SBLOC loans are made to individuals, trusts and entities and are secured by a pledge of marketable securities maintained in one or more accounts with respect to which the Company obtains a securities account control agreement. The securities pledged may be either debt or equity securities or a combination thereof, but all such securities must be listed for trading on a national securities exchange or automated inter-dealer quotation system. SBLOCs are typically payable on demand. Maximum SBLOC line amounts are calculated by applying a standard ‘advance rate’ calculation against the eligible security type depending on asset class: typically up to 50% for equity securities and mutual fund securities and 80% for investment grade (Standard & Poor’s rating of BBB- or higher, or Moody’s rating of Baa3 or higher) municipal or corporate debt securities. Substantially all SBLOCs have full recourse to the borrower. The underlying securities collateral for SBLOC loans is monitored on a daily basis to confirm the composition of the client portfolio and its daily market value. The primary qualitative factor in the SBLOC analysis is the ratio of loans outstanding to market value. This factor has been maintained at low levels, which has remained appropriate as losses have not materialized despite the historic declines in the equity markets during 2020, during which there have been no losses. Significant losses have not been incurred since inception of this line of business. Additionally, the advance rates noted above were established to provide the Company with protection from declines in market conditions from the origination date of the lines of credit.

IBLOC. IBLOC loans are collateralized by the cash surrender value of insurance policies. Should a loan default, the primary risks for IBLOCs are if the insurance company issuing the policy were to become insolvent, or if that company would fail to recognize the Bank’s assignment of policy proceeds. To mitigate these risks, insurance company ratings are periodically evaluated for compliance with Bank standards. Additionally, the Bank utilizes assignments of cash surrender value which legal counsel has concluded are enforceable. The qualitative factors for IBLOC primarily focus on the concentration risk with insurance companies.

Advisor financing. In 2020, the Bank began originating loans to investment advisors for purposes of debt refinance, acquisition of another firm or internal succession. Maximum loan amounts are subject to loan-to-value ratios of 70%, based on third party business appraisals, but may be increased depending upon the debt service coverage ratio. Personal guarantees and blanket business liens are obtained as appropriate. The qualitative factors for advisor financing focus on changes in lending policies and procedures, portfolio performance and economic conditions.

Other specialty lending and consumer loans. Other specialty lending loans and consumer loans are categories of loans which the Company generally no longer offers. The loans primarily are consumer loans and home equity loans. The qualitative factors for all other specialty lending and consumer loans focus on changes in the underlying collateral for collateral dependent loans, portfolio loan performance, loan concentrations and changes in economic conditions.

Expected credit losses are estimated over the estimated remaining lives of loans. The estimate excludes possible extensions, renewals and modifications unless either of the following applies: management has a reasonable expectation that a loan will be restructured, or the extension or renewal options are included in the borrower contract and are not unconditionally cancellable by us.

The Company does not measure an allowance for credit losses on accrued interest receivable balances, because these balances are written off in a timely manner as a reduction to interest income when loans are placed on non-accrual status.

As a result of the CARES Act, the SBA began, in April 2020, to make six months of principal and interest payments on SBA 7a loans, which are generally 75% guaranteed by the U.S. government. As of September 30, 2020, the Company had $334.7 million of related guaranteed balances, and additionally had $207.9 million of PPP loans which were also guaranteed. The six months of support will expire in the fourth quarter of 2020, at which time the Company may decide to grant up to six month of deferrals for principal and interest payments. Accounting and banking regulators have determined that deferrals of up to six months of principal and interest payments on loans do not represent material changes in loan terms, as a result of Covid and not because of other or pre-existing financial difficulties. Accordingly, such loans will not, during the deferral period, be classified as delinquent, non-accrual or restructured.

Allowance for credit losses on off-balance sheet credit exposures. The Company estimates expected credit losses over the contractual period in which the Company is exposed to credit risk via a contractual obligation to extend credit, unless that obligation is unconditionally cancellable by the Company. The allowance for credit losses on off-balance sheet credit exposures is adjusted through the provision for credit losses. The estimate considers the likelihood that funding will occur over the estimated life of the commitment. The amount of the allowance in the liability account as of September 30, 2020 was $570,000.

A detail of the changes in the allowance for credit losses by loan category and summary of loans evaluated individually and collectively for credit deterioration is as follows (in thousands):



	September 30, 2020
	SBL non-real estate	SBL commercial mortgage	SBL construction	Direct lease financing	SBLOC / IBLOC	Advisor financing	Other specialty lending	Other consumer loans	Unallocated	Total
Beginning 12/31/2019	$ 4,985	$ 1,472	$ 432	$ 2,426	$ 553	$ -	$ 12	$ 40	$ 318	$ 10,238
1/1 CECL adjustment	(220)	537	139	2,362	(41)	-	158	20	(318)	2,637
Charge-offs	(1,350)	-	-	(2,178)	-	-	-	-	-	(3,528)
Recoveries	82	-	-	502	-	-	-	-	-	584
Provision (credit)	1,304	1,543	(148)	2,735	202	199	(22)	(17)	-	5,796
Ending balance	$ 4,801	$ 3,552	$ 423	$ 5,847	$ 714	$ 199	$ 148	$ 43	$ -	$ 15,727

Ending balance: Individually evaluated for expected credit loss	$ 1,818	$ 1,010	$ 26	$ 43	$ -	$ -	$ -	$ -	$ -	$ 2,897

Ending balance: Collectively evaluated for expected credit loss	$ 2,983	$ 2,542	$ 397	$ 5,804	$ 714	$ 199	$ 148	$ 43	$ -	$ 12,830

Loans:
Ending balance	$ 293,488	$ 270,264	$ 27,169	$ 430,675	$ 1,428,253	$ 26,600	$ 2,194	$ 3,809	$ 6,308	$ 2,488,760

Ending balance: Individually evaluated for expected credit loss	$ 3,220	$ 7,517	$ 711	$ 804	$ -	$ -	$ -	$ 567	$ -	$ 12,819

Ending balance: Collectively evaluated for expected credit loss	$ 290,268	$ 262,747	$ 26,458	$ 429,871	$ 1,428,253	$ 26,600	$ 2,194	$ 3,242	$ 6,308	$ 2,475,941



	December 31, 2019
	SBL non-real estate	SBL commercial mortgage	SBL construction	Direct lease financing	SBLOC / IBLOC	Other specialty lending	Other consumer loans	Unallocated	Total
Beginning 1/1/2019	$ 4,636	$ 941	$ 250	$ 2,025	$ 393	$ 60	$ 108	$ 240	$ 8,653
Charge-offs	(1,362)	-	-	(528)	-	-	(1,103)	-	(2,993)
Recoveries	125	-	-	51	-	-	2	-	178
Provision (credit)	1,586	531	182	878	160	(48)	1,033	78	4,400

Ending balance	$ 4,985	$ 1,472	$ 432	$ 2,426	$ 553	$ 12	$ 40	$ 318	$ 10,238

Ending balance: Individually evaluated for impairment	$ 2,961	$ 136	$ 36	$ -	$ -	$ -	$ 9	$ -	$ 3,142

Ending balance: Collectively evaluated for impairment	$ 2,024	$ 1,336	$ 396	$ 2,426	$ 553	$ 12	$ 31	$ 318	$ 7,096

Loans:
Ending balance	$ 84,579	$ 218,110	$ 45,310	$ 434,460	$ 1,024,420	$ 3,055	$ 4,554	$ 9,757	$1,824,245

Ending balance: Individually evaluated for impairment	$ 4,139	$ 1,047	$ 711	$ 286	$ -	$ -	$ 610	$ -	$ 6,793

Ending balance: Collectively evaluated for impairment	$ 80,440	$ 217,063	$ 44,599	$ 434,174	$ 1,024,420	$ 3,055	$ 3,944	$ 9,757	$1,817,452



	September 30, 2019
	SBL non-real estate	SBL commercial mortgage	SBL construction	Direct lease financing	SBLOC	Other specialty lending	Other consumer loans	Unallocated	Total
Beginning 1/1/2019	$ 4,636	$ 941	$ 250	$ 2,025	$ 393	$ 60	$ 108	$ 240	$ 8,653
Charge-offs	(995)	-	-	(391)	-	-	(3)	-	(1,389)
Recoveries	94	-	-	51	-	-	1	-	146
Provision (credit)	1,595	315	141	676	118	(48)	125	28	2,950
Ending balance	$ 5,330	$ 1,256	$ 391	$ 2,361	$ 511	$ 12	$ 231	$ 268	$ 10,360

Ending balance: Individually evaluated for impairment	$ 3,037	$ 71	$ 35	$ 136	$ -	$ -	$ 204	$ -	$ 3,483

Ending balance: Collectively evaluated for impairment	$ 2,293	$ 1,185	$ 356	$ 2,225	$ 511	$ 12	$ 27	$ 268	$ 6,877

Loans:
Ending balance	$ 84,181	$ 209,008	$ 38,116	$ 412,755	$ 920,463	$ 3,167	$ 6,388	$ 9,299	$ 1,683,377

Ending balance: Individually evaluated for impairment	$ 4,250	$ 458	$ 711	$ 424	$ -	$ -	$ 1,715	$ -	$ 7,558

Ending balance: Collectively evaluated for impairment	$ 79,931	$ 208,550	$ 37,405	$ 412,331	$ 920,463	$ 3,167	$ 4,673	$ 9,299	$ 1,675,819

The Company did not have loans acquired with deteriorated credit quality at either September 30, 2020 or December 31, 2019.

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



	September 30, 2020
	30-59 Days	60-89 Days	90+ Days		Total		Total
	past due	past due	still accruing	Non-accrual	past due	Current	loans
SBL non-real estate	$ 2,631	$ 440	-	$ 2,935	$ 6,006	$ 287,482	$ 293,488
SBL commercial mortgage	2,087	850	-	7,517	10,454	259,810	270,264
SBL construction	-	-	-	711	711	26,458	27,169
Direct lease financing	946	503	24	804	2,277	428,398	430,675
SBLOC / IBLOC	3,174	362	-	-	3,536	1,424,717	1,428,253
Advisor financing	-	-	-	-	-	26,600	26,600
Other specialty lending	-	-	-	-	-	2,194	2,194
Consumer - other	-	-	-	-	-	650	650
Consumer - home equity	-	-	-	308	308	2,851	3,159
Unamortized loan fees and costs	-	-	-	-	-	6,308	6,308
	$ 8,838	$ 2,155	$ 24	$ 12,275	$ 23,292	$ 2,465,468	$ 2,488,760

‎



	December 31, 2019
	30-59 Days	60-89 Days	90+ Days		Total		Total
	past due	past due	still accruing	Non-accrual	past due	Current	loans
SBL non-real estate	$ 36	$ 125	$ -	$ 3,693	$ 3,854	$ 80,725	$ 84,579
SBL commercial mortgage	-	1,983	-	1,047	3,030	215,080	218,110
SBL construction	-	-	-	711	711	44,599	45,310
Direct lease financing	2,008	2,692	3,264	-	7,964	426,496	434,460
SBLOC / IBLOC	290	75	-	-	365	1,024,055	1,024,420
Other specialty lending	-	-	-	-	-	3,055	3,055
Consumer - other	-	-	-	-	-	1,137	1,137
Consumer - home equity	-	-	-	345	345	3,072	3,417
Unamortized loan fees and costs	-	-	-	-	-	9,757	9,757
	$ 2,334	$ 4,875	$ 3,264	$ 5,796	$ 16,269	$ 1,807,976	$ 1,824,245

The following table provides information by credit risk rating indicator, as discussed previously in this note, for each segment of the loan portfolio, excluding loans at fair value, at December 31, 2019 (in thousands):



	Pass	Special mention	Substandard	Doubtful	Loss	Unrated subject to review *	Unrated not subject to review *	Total loans
SBL non-real estate	$ 76,108	$ 3,045	$ 4,430	$ -	$ -	$ -	$ 996	$ 84,579
SBL commercial mortgage	208,809	2,249	5,577	-	-	-	1,475	218,110
SBL construction	44,599	-	711	-	-	-	-	45,310
Direct lease financing	420,289	-	8,792	-	-	-	5,379	434,460
SBLOC / IBLOC	942,858	-	-	-	-	-	81,562	1,024,420
Other specialty lending	3,055	-	-	-	-	-	-	3,055
Consumer	2,545	-	345	-	-	-	1,664	4,554
Unamortized loan fees and costs	-	-	-	-	-	-	9,757	9,757
	$ 1,698,263	$ 5,294	$ 19,855	$ -	$ -	$ -	$ 100,833	$ 1,824,245

* For information on targeted loan review thresholds see “Allowance for Loan Losses” in the 2019 Form 10-K in the loans footnote and in this Form 10-Q in the Management’s Discussion and Analysis of Financial Condition and Results of Operations.