Loans | 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. The Company has elected fair value treatment for these loans held-for-sale to better reflect the economics of the transactions. At March 31, 2019, the fair value of the loans held-for-sale was $570.4 million and their amortized cost was $566.8 million. Included in realized and unrealized gains (losses) on loans originated for sale in the consolidated statements of operations are changes in the estimated fair value of unsold loans. For the three months ended March 31, 2019, unrealized gains recognized for such changes in fair value were $329,000 . For the three months ended March 31, 2018, unrealized losses similarly recognized were $1.5 million. There were no changes in fair value related to credit risk. 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 Bank also pledged the majority of its loans to the Federal Reserve Bank for that line of credit which it has never used. The amount of loans pledged varies and since the Bank does not utilize this line the collateral may be unpledged at any time. The line is 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 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. 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 that those factors would generally offset the impact of prepayments, which would therefore not be significant. Accordingly, prepayments on CRE1 through CRE4 were not assumed. However, as a result of higher than expected prepayments on CRE2, prepayments of 15% on CRE5 were assumed. The 15% prepayment rate is assumed to begin after the first year anniversary of the CRE5 security. 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. A summary of securitizations and securities obtained from those securitizations for the periods ended March 31, 2019 and 2018 is as follows: · In the first quarter of 2019, the Compa ny sponsored The Bancorp Commer c i al Mortgage 201 9 -CRE5 Trust, securitizing $518.3 million of loans and recording a $10.8 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 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% . 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): March 31, December 31, 2019 2018 SBA non-real estate $ 76,112 $ 76,340 SBA commercial mortgage 179,397 165,406 SBA construction 23,979 21,636 SBA loans * 279,488 263,382 Direct lease financing 384,930 394,770 SBLOC 791,986 785,303 Other specialty lending 34,425 31,836 Other consumer loans 9,301 16,302 1,500,130 1,491,593 Unamortized loan fees and costs 10,265 10,383 Total loans, net of deferred loan fees and costs $ 1,510,395 $ 1,501,976 Included in the table above under other consumer loans are demand deposit overdrafts reclassified as loan balances totaling $674,000 and $7.2 million at March 31, 2019 and December 31, 2018, respectively. Estimated 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): March 31, December 31, 2019 2018 SBA loans, including deferred fees and costs of $7,326 and $7,478 for March 31, 2019 and December 31, 2018, respectively $ 286,814 $ 270,860 SBA loans included in held-for-sale 206,901 199,977 Total SBA loans $ 493,715 $ 470,837 The following table provides information about impaired loans at March 31, 2019 and December 31, 2018 (in thousands): March 31, 2019 Recorded investment Unpaid principal balance Related allowance Average recorded investment Interest income recognized Without an allowance recorded SBA non-real estate $ 273 $ 1,810 $ - $ 224 $ 1 SBA commercial mortgage - - - - - SBA construction 710 710 - 355 - Direct lease financing 414 526 - 426 5 Consumer - home equity 1,606 1,606 - 1,609 2 With an allowance recorded SBA non-real estate 4,341 4,341 3,324 3,941 20 SBA commercial mortgage 458 458 71 458 - SBA construction - - - - - Direct lease financing 398 398 151 416 8 Consumer - home equity 126 126 15 128 - Total SBA non-real estate 4,614 6,151 3,324 4,165 21 SBA commercial mortgage 458 458 71 458 - SBA construction 710 710 - 355 - Direct lease financing 812 924 151 842 13 Consumer - home equity 1,732 1,732 15 1,737 2 $ 8,326 $ 9,975 $ 3,561 $ 7,557 $ 36 December 31, 2018 Recorded investment Unpaid principal balance Related allowance Average recorded investment Interest income recognized Without an allowance recorded SBA non-real estate $ 175 $ 1,469 $ - $ 334 $ - SBA commercial mortgage - - - - - Direct lease financing 437 548 - 425 28 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 - 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 - home equity 1,741 1,741 17 1,674 10 $ 6,786 $ 8,191 $ 3,039 $ 6,371 $ 174 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 March 31, 2019 or December 31, 2018) (in thousands): March 31 December 31, 2019 2018 Non-accrual loans SBA non-real estate $ 3,233 $ 2,590 SBA commercial mortgage 458 458 SBA construction 710 - Consumer 1,462 1,468 Total non-accrual loans 5,863 4,516 Loans past due 90 days or more and still accruing 2,483 954 Total non-performing loans 8,346 5,470 Other real estate owned - - Total non-performing assets $ 8,346 $ 5,470 Interest which would have been earned on loans classified as non-accrual at March 31, 2019 and 2018, was $127,000 and $55,000 , respectively. The Company’s loans that were modified as of March 31, 2019 and December 31, 2018 and considered troubled debt restructurings are as follows (dollars in thousands): March 31, 2019 December 31, 2018 Number Pre-modification recorded investment Post-modification recorded investment Number Pre-modification recorded investment Post-modification recorded investment SBA non-real estate 7 $ 1,819 $ 1,819 5 $ 1,564 $ 1,564 Direct lease financing 3 812 812 3 870 870 Consumer 2 507 507 2 513 513 Total 12 $ 3,138 $ 3,138 10 $ 2,947 $ 2,947 The balances below provide information as to how the loans were modified as troubled debt restructuring loans as of March 31, 2019 and December 31, 2018 (in thousands): March 31, 2019 December 31, 2018 Adjusted interest rate Extended maturity Combined rate and maturity Adjusted interest rate Extended maturity Combined rate and maturity SBA non-real estate $ - $ 77 $ 1,742 $ - $ 85 $ 1,479 Direct lease financing - 398 414 - 434 436 Consumer - - 507 - - 513 Total $ - $ 475 $ 2,663 $ - $ 519 $ 2,428 The following table summarizes, as of March 31, 2019, troubled debt restructuring loans that had been restructured within the last 12 months that have subsequently defaulted and which are included in the table above ( in thousands): Number Pre-modification recorded investment SBA non-real estate 1 $ 258 Total 1 $ 258 The Company had no commitments to extend additional credit to loans classified as troubled debt restructurings as of March 31, 201 9 . 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. As of March 31, 2019, there were twelve troubled debt restructured loans with a balance of $3.1 million which had specific reserve of $1.6 million . Approximately $1.5 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. A detail of the changes in the allowance for loan and lease losses by loan category and summary of loans evaluated individually and collectively for impairment is as follows (in thousands): March 31, 2019 SBA non-real estate SBA commercial mortgage SBA construction Direct lease financing SBLOC Other specialty lending Other consumer loans Unallocated Total Beginning balance $ 4,636 $ 941 $ 250 $ 2,025 $ 393 $ 60 $ 108 $ 240 $ 8,653 Charge-offs (322) - - (106) - - - - (428) Recoveries 17 - - 12 - - - - 29 Provision (credit) 846 538 (15) 362 3 22 (29) (27) 1,700 Ending balance $ 5,177 $ 1,479 $ 235 $ 2,293 $ 396 $ 82 $ 79 $ 213 $ 9,954 Ending balance: Individually evaluated for impairment $ 3,324 $ 71 $ - $ 151 $ - $ - $ 15 $ - $ 3,561 Ending balance: Collectively evaluated for impairment $ 1,853 $ 1,408 $ 235 $ 2,142 $ 396 $ 82 $ 64 $ 213 $ 6,393 Loans: Ending balance $ 76,112 $ 179,397 $ 23,979 $ 384,930 $ 791,986 $ 34,425 $ 9,301 $ 10,265 $ 1,510,395 Ending balance: Individually evaluated for impairment $ 4,614 $ 458 $ 711 $ 812 $ - $ - $ 1,732 $ - $ 8,327 Ending balance: Collectively evaluated for impairment $ 71,498 $ 178,939 $ 23,268 $ 384,118 $ 791,986 $ 34,425 $ 7,569 $ 10,265 $ 1,502,068 December 31, 2018 SBA non-real estate SBA commercial mortgage SBA construction Direct lease financing SBLOC Other specialty lending Other consumer loans Unallocated Total 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 $ 394,770 $ 785,303 $ 31,836 $ 16,302 $ 10,383 $ 1,501,976 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 $ 393,899 $ 785,303 $ 31,836 $ 14,561 $ 10,383 $ 1,495,190 March 31, 2018 SBA non-real estate SBA commercial mortgage SBA construction Direct lease financing SBLOC Other specialty lending Other consumer loans Unallocated Total Beginning balance $ 3,145 $ 1,120 $ 136 $ 1,495 $ 365 $ 57 $ 581 $ 197 7,096 Charge-offs (388) (157) - (56) - - (14) - (615) Recoveries 40 6 - 58 - - - - 104 Provision (credit) 391 130 97 (23) 15 92 15 (17) 700 Ending balance $ 3,188 $ 1,099 $ 233 $ 1,474 $ 380 $ 149 $ 582 $ 180 $ 7,285 Ending balance: Individually evaluated for impairment $ 1,464 $ 74 $ - $ - $ - $ 74 $ - $ - $ 1,612 Ending balance: Collectively evaluated for impairment $ 1,724 $ 1,025 $ 233 $ 1,474 $ 380 $ 75 $ 582 $ 180 $ 5,673 Loans: Ending balance $ 75,225 $ 149,227 $ 20,143 $ 385,467 $ 759,369 $ 45,729 $ 17,416 $ 10,488 $ 1,463,064 Ending balance: Individually evaluated for impairment $ 2,606 $ 458 $ - $ 1,532 $ - $ - $ 1,690 $ - $ 6,286 Ending balance: Collectively evaluated for impairment $ 72,619 $ 148,769 $ 20,143 $ 383,935 $ 759,369 $ 45,729 $ 15,726 $ 10,488 $ 1,456,778 The Company did no t have loans acquired with deteriorated credit quality at either March 31, 2019 or December 31, 2018. A detail of the Company’s delinquent loans by loan category is as follows (in thousands): March 31, 2019 30-59 Days 60-89 Days 90 Days Total Total past due past due or greater Non-accrual past due Current loans SBA non-real estate $ 242 $ - $ - $ 3,233 $ 3,475 $ 72,637 $ 76,112 SBA commercial mortgage 4,653 - - 458 5,111 174,286 179,397 SBA construction - - - 710 710 23,269 23,979 Direct lease financing 2,084 656 2,483 - 5,223 379,707 384,930 SBLOC 1,521 - - - 1,521 790,465 791,986 Other specialty lending - - - - - 34,425 34,425 Consumer - other - - - - - 2,578 2,578 Consumer - home equity - - - 1,462 1,462 5,261 6,723 Unamortized loan fees and costs - - - - - 10,265 10,265 $ 8,500 $ 656 $ 2,483 $ 5,863 $ 17,502 $ 1,492,893 $ 1,510,395 December 31, 2018 30-59 Days 60-89 Days 90 Days Total Total past due past due or greater Non-accrual past due Current 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 - 5,120 389,650 394,770 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 $ 1,490,580 $ 1,501,976 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): March 31, 2019 Pass Special mention Substandard Doubtful Loss Unrated subject to review * Unrated not subject to review * Total loans SBA non-real estate $ 68,088 $ 1,595 $ 5,010 $ - $ - $ - $ 1,419 $ 76,112 SBA commercial mortgage 173,162 271 5,111 - - 685 168 179,397 SBA construction 22,900 - 710 - - 369 - 23,979 Direct lease financing 371,706 - 5,673 - - 3,586 3,965 384,930 SBLOC 773,589 - - - - 12,600 5,797 791,986 Other specialty lending 34,425 - - - - - - 34,425 Consumer 5,676 - 1,462 - - - 2,163 9,301 Unamortized loan fees and costs - - - - - - 10,265 10,265 $ 1,449,546 $ 1,866 $ 17,966 $ - $ - $ 17,240 $ 23,777 $ 1,510,395 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 4,674 394,770 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 $ 36,728 $ 1,501,976 * For information on targeted loan review thresholds see “Allowance for Loan Losses ” in the 2018 Form 10-K Report in the loans footnote and in this Form 10-Q in the Management’s Discussion and Analysis of Financial Condition and Results of Operations. |