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, 2018 and 2017, the fair value of these loans was $688.5 million and $503.3 million, and the unpaid principal balance was $685.1 million and $498.6 million, respectively. Included in the net realized and unrealized gains (losses) on loans originated for sale in the consolidated statement of operations were changes in fair value resulting in an unrealized loss of $979,000 in 2018, unrealized gains of $1.8 million in 2017 and unrealized 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 is recorded in Interest Income – Loans, including fees in the consolidated statements of operations. 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. Through December 31, 2018 the Company has sponsored the structuring of four separate commercial mortgage loan securitizations. Each of the securitizations is considered a variable interest entity of which the Company is not the primary beneficiary. 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 is expected that those factors would generally offset the impact of prepayments which are accordingly not assumed. Because of credit enhancements for each security, cash flows were not reduced by expected losses. The Company does not service the loans sold into these securitizations. 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 costs and exit costs. A summary of securitizations and securities obtained from those securitizations is as follows: · In the third quarter of 2018, the Company sponsored The Bancorp Commercial Mortgage 2018-CRE4 Trust, securitizing $341.0 million of loans and recording a $9.0 million gain. The certificates obtained by the Company in the transaction had an acquisition date fair value of $33.7 million based upon an initial discount rate of 4.88% . · In the first quarter of 2018, the Company sponsored The Bancorp Commercial Mortgage 2018-CRE3 Trust, securitizing $304.3 million of loans and recording an $11.7 million gain. The certificates obtained by the Company in the transaction had an acquisition date fair value of $28.4 based upon an initial discount rate of 5.79% . · In the third quarter of 2017, the Company sponsored The Bancorp Commercial Mortgage 2018-CRE2 Trust, securitizing $314.4 million of loans and recording a $12.0 million gain. The certificates obtained by the Company had an acquisition date fair value of $24.6 million based upon an initial discount rate of 9.41% . · In the first quarter of 2017, the Company sponsored The Bancorp Commercial Mortgage 2018-CRE1 Trust, securitizing $263.1 million of loans and recording a $5.1 million gain. The certificates obtained by the Company in the transaction had an acquisition date fair value of $21.7 million based upon an initial discount rate of 4.78% . 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, 2018 2017 SBA non-real estate $ 76,340 $ 70,379 SBA commercial mortgage 165,406 142,086 SBA construction 21,636 16,740 SBA loans * 263,382 229,205 Direct lease financing 397,571 377,660 SBLOC 785,303 730,462 Other specialty lending 31,836 30,720 Other consumer loans 16,302 14,133 1,494,394 1,382,180 Unamortized loan fees and costs 10,383 10,048 Total loans, net of deferred loan fees and costs $ 1,504,777 $ 1,392,228 Included in the table above in other consumer loans are demand deposit overdrafts reclassified as loan balances totaling $7.2 million and $2.3 million at December 31, 2018 and 2017, 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, 2018 2017 SBA loans, including deferred fees and costs $ 270,860 $ 236,724 SBA loans included in held for sale 199,977 165,177 Total SBA loans $ 470,837 $ 401,901 The following table provides information about impaired loans at December 31, 2018 and 2017 (in thousands): Recorded investment Unpaid principal balance Related allowance Average recorded investment Interest income recognized December 31, 2018 Without an allowance recorded SBA non-real estate $ 175 $ 1,469 $ - $ 334 $ - SBA commercial mortgage - - - - - Direct lease financing 437 548 - 425 28 Consumer - other - - - - - Consumer - home equity 1,612 1,612 - 1,648 10 With an allowance recorded SBA non-real estate 3,541 3,541 2,806 2,816 70 SBA commercial mortgage 458 458 71 505 - Direct lease financing 434 434 145 617 66 Consumer - other - - - - - Consumer - home equity 129 129 17 26 - Total SBA non-real estate 3,716 5,010 2,806 3,150 70 SBA commercial mortgage 458 458 71 505 - Direct lease financing 871 982 145 1,042 94 Consumer - other - - - - - Consumer - home equity 1,741 1,741 17 1,674 10 $ 6,786 $ 8,191 $ 3,039 $ 6,371 $ 174 December 31, 2017 Without an allowance recorded SBA non-real estate $ 459 $ 1,286 $ - $ 311 $ 12 SBA commercial mortgage - - - - - Direct lease financing 229 341 - 103 33 Consumer - other - - - 259 - Consumer - home equity 1,695 1,695 - 1,712 9 With an allowance recorded SBA non-real estate 2,399 2,399 1,689 2,507 60 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 72 SBA commercial mortgage 693 693 225 747 - Direct lease financing 229 341 - 508 33 Consumer - other - - - 273 - Consumer - home equity 1,695 1,695 - 1,712 9 $ 5,475 $ 6,414 $ 1,914 $ 6,058 $ 114 The following table summarizes the Company’s non-accrual loans, loans past due 90 days and other real estate owned at December 31, 2018 and 2017, respectively (the Company had no non-accrual leases at December 31, 2018 or December 31, 2017): December 31, 2018 2017 (in thousands) Non-accrual loans SBA non-real estate $ 2,590 $ 1,889 SBA commercial mortgage 458 693 Consumer 1,468 1,414 Total non-accrual loans 4,516 3,996 Loans past due 90 days or more and still accruing 954 227 Total non-performing loans 5,470 4,223 Other real estate owned - 450 Total non-performing assets $ 5,470 $ 4,673 Interest which would have been earned on loans classified as non-accrual at December 31 , 2018 and 2017, was $255,000 and $226,000 , respectively. The Company’s loans that were modified for the years ended December 31, 2018 and 2017 and considered troubled debt restructurings are as follows (in thousands): December 31, 2018 December 31, 2017 Number Pre-modification recorded investment Post-modification recorded investment Number Pre-modification recorded investment Post-modification recorded investment SBA non-real estate 5 $ 1,564 $ 1,564 5 $ 1,476 $ 1,476 Direct lease financing 3 870 870 1 $ 230 $ 230 Consumer 2 513 513 2 535 535 Total 10 $ 2,947 $ 2,947 8 $ 2,241 $ 2,241 The balances below provide information as to how the loans were modified as troubled debt restructured loans at December 31, 2018 and 2017 (in thousands): December 31, 2018 December 31, 2017 Adjusted interest rate Extended maturity Combined rate and maturity Adjusted interest rate Extended maturity Combined rate and maturity SBA non-real estate $ - $ 85 $ 1,479 $ - $ 115 $ 1,361 Direct lease financing - 434 436 - - 230 Consumer - - 513 - - 535 Total $ - $ 519 $ 2,428 $ - $ 115 $ 2,126 The Company had a commitment to extend $27,000 of additional credit to one loan classified as a troubled debt restructuring as of December 31, 2018 and a commitment to extend $228,000 to one loan classified as a troubled debt restructuring as of December 31, 2017. However, the $228,000 commitment was not drawn upon. When loans are classified as troubled debt restructurings, their collateral is valued and a specific reserve is established if the collateral valuation, less disposition costs, is lower than the recorded value of the loan. At December 31, 2018, there were ten troubled debt restructured loans with a balance of $2.9 million which had specific reserves of $1.5 million. Approximately $1.4 million of these reserves related to the non-guaranteed portion of SBA loans for start-up businesses with the balance attributable to direct lease financing. The following table summarizes as of December 31, 2018 loans that were restructured within the last 12 months that have subsequently defaulted (in thousands). December 31, 2018 Number Pre-modification recorded investment SBA non-real estate 1 $ 258 Direct lease financing 2 735 Total 3 $ 993 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, 2018 Beginning balance $ 3,145 $ 1,120 $ 136 $ 1,495 $ 365 $ 57 $ 581 $ 197 $ 7,096 Charge-offs (1,348) (157) - (637) - - (21) - (2,163) Recoveries 57 13 - 64 1 - 135 Provision (credit) 2,782 (35) 114 1,103 28 3 (453) 43 3,585 Ending balance $ 4,636 $ 941 $ 250 $ 2,025 $ 393 $ 60 $ 108 $ 240 $ 8,653 Ending balance: Individually evaluated for impairment $ 2,806 $ 71 $ - $ 145 $ - $ - $ 17 $ - $ 3,039 Ending balance: Collectively evaluated for impairment $ 1,830 $ 870 $ 250 $ 1,880 $ 393 $ 60 $ 91 $ 240 $ 5,614 Loans: Ending balance $ 76,340 $ 165,406 $ 21,636 $ 397,571 $ 785,303 $ 31,836 $ 16,302 $ 10,383 $ 1,504,777 Ending balance: Individually evaluated for impairment $ 3,716 $ 458 $ - $ 871 $ - $ - $ 1,741 $ - $ 6,786 Ending balance: Collectively evaluated for impairment $ 72,624 $ 164,948 $ 21,636 $ 396,700 $ 785,303 $ 31,836 $ 14,561 $ 10,383 $ 1,497,991 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 $ 70,379 $ 142,086 $ 16,740 $ 377,660 $ 730,462 $ 30,720 $ 14,133 $ 10,048 $ 1,392,228 Ending balance: Individually evaluated for impairment $ 2,858 $ 693 $ - $ 229 $ - $ - $ 1,695 $ - $ 5,475 Ending balance: Collectively evaluated for impairment $ 67,521 $ 141,393 $ 16,740 $ 377,431 $ 730,462 $ 30,720 $ 12,438 $ 10,048 $ 1,386,753 The Company did no t have loans acquired with deteriorated credit quality at either December 31, 2018 or December 31, 2017. A detail of the Company’s delinquent loans by loan category is as follows (in thousands): December 31, 2018 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 $ 346 $ 125 $ - $ 2,590 $ 3,061 $ 73,279 $ 76,340 SBA commercial mortgage - - - 458 458 164,948 165,406 SBA construction - 694 - - 694 20,942 21,636 Direct lease financing 2,594 1,572 954 - 5,120 392,451 397,571 SBLOC 487 - - - 487 784,816 785,303 Other specialty lending 108 - - - 108 31,728 31,836 Consumer - other - - - - - 9,147 9,147 Consumer - home equity - - - 1,468 1,468 5,687 7,155 Unamortized loan fees and costs - - - - - 10,383 10,383 $ 3,535 $ 2,391 $ 954 $ 4,516 $ 11,396 $ 1,493,381 $ 1,504,777 December 31, 2017 SBA non-real estate $ 58 $ 268 $ - $ 1,889 $ 2,215 $ 68,164 $ 70,379 SBA commercial mortgage - - - 693 693 141,393 142,086 SBA construction - - - - - 16,740 16,740 Direct lease financing 3,789 2,233 227 - 6,249 371,411 377,660 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 - - - - - 10,048 10,048 $ 3,989 $ 2,574 $ 227 $ 3,996 $ 10,786 $ 1,381,442 $ 1,392,228 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, 2018 Pass Special mention Substandard Doubtful Loss Unrated subject to review * Unrated not subject to review * Total loans SBA non-real estate $ 67,809 $ 1,641 $ 4,517 $ - $ - $ 347 $ 2,026 $ 76,340 SBA commercial mortgage 158,667 273 458 - - 5,498 510 165,406 SBA construction 19,912 - 694 - - 843 187 21,636 Direct lease financing 382,860 2,157 1,456 - - 3,623 7,475 397,571 SBLOC 775,153 - - - - - 10,150 785,303 Other specialty lending 31,749 - - - - - 87 31,836 Consumer 5,849 - 1,742 - - - 8,711 16,302 Unamortized loan fees and costs - - - - - - 10,383 10,383 $ 1,441,999 $ 4,071 $ 8,867 $ - $ - $ 10,311 $ 39,529 $ 1,504,777 December 31, 2017 SBA non-real estate $ 63,547 $ 3,392 $ 3,450 $ - $ - $ - $ (10) $ 70,379 SBA commercial mortgage 141,084 277 693 - - - 32 142,086 SBA construction 16,740 - - - - - - 16,740 Direct lease financing 204,906 - 2,895 - - 8,820 161,039 377,660 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 - - - - - - 10,048 10,048 $ 821,957 $ 3,950 $ 8,985 $ - $ - $ 8,820 $ 548,516 $ 1,392,228 * At December 31, 2018, in excess of 50% 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 2018 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, 2018, approximately 50% of the SBLOC portfolio had been reviewed. SBA Loans – The targeted review or rated threshold for 2018 was 100% , to be rated and/or reviewed within 90 days of funding, less fully guaranteed loans purchased for CRA. The 100 % coverage includes loans rated by designated SBA department personnel, with a review threshold for the independent loan review department of all loans exceeding $1.0 million and any classified loans. At December 31, 2018, approximately 100% of the government guaranteed loan portfolio had been rated and/or reviewed. Direct Lease Financing – The targeted review threshold for 2018 was 35% . At December 31, 2018, approximately 58% of the leasing portfolio had been reviewed. All lease relationships exceeding $1.0 million are reviewed. Commercial Mortgaged Backed Securities (Floating Rate) – The targeted review threshold for 2018 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, 2018, 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, 2018, 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, 2018, approximately 100% of the non-CRA loans had been reviewed. Home Equity Lines of Credit, or HELOC – The targeted review threshold for 2018 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, 2018, approximately 83% of the HELOC portfolio had been reviewed. |