Loans | Note 6. Loans The Company has several lending lines of business including SBA loans, direct lease financing, SBLOC and IBLOC and other specialty and consumer lending. T he Company also originates 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 held-for-sale to better reflect the economics of the transactions. At June 30, 2019, the fair value of the loans held-for-sale was $934.5 m illion and their amortized cost was $929.8 million. Included in “Net realized and unrealized gains (losses) on loans originated for sale” in the consolidated statements of operations are changes in the estimated in fair value of unsold loans. For the six months ended June 30, 2019, unrealized gains recognized for such changes in fair value were $1.3 million. For the six months ended June 30, 2018, unrealized losses similarly recognized were $2.4 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 securitization. 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 June 30, 2019 and 2018 is as follows: · In the first quarter of 2019, the Company sponsored The Bancorp Commercial Mortgage 2019-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 million 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): June 30, December 31, 2019 2018 SBA non-real estate $ 75,475 $ 76,340 SBA commercial mortgage 189,427 165,406 SBA construction 29,298 21,636 SBA loans * 294,200 263,382 Direct lease financing 407,907 394,770 SBLOC / IBLOC ** 837,672 785,303 Other specialty lending 3,432 31,836 Other consumer loans *** 7,898 16,302 1,551,109 1,491,593 Unamortized loan fees and costs 10,342 10,383 Total loans, net of deferred loan fees and costs $ 1,561,451 $ 1,501,976 June 30, December 31, 2019 2018 SBA loans, including deferred fees and costs of $7,302 and $7,478 for June 30, 2019 and December 31, 2018, respectively $ 301,502 $ 270,860 SBA loans included in held-for-sale 215,064 199,977 Total SBA loans $ 516,566 $ 470,837 * The preceding table shows SBA loans and SBA loans held-for-sale at the dates indicated (in thousands). ** Securities Backed Lines of Credit (SBLOC) are collateralized by marketable securities, while Insurance Backed Lines of Credit (IBLOC) are collateralized by the cash surrender value of insurance policies. *** Included in the table above under O ther consumer loans are demand deposit overdrafts reclassified as loan balances totaling $505,000 and $7.2 million at June 30, 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 provides information about impaired loans at June 30, 2019 and December 31, 2018 (in thousands): June 30, 2019 Recorded investment Unpaid principal balance Related allowance Average recorded investment Interest income recognized Without an allowance recorded SBA non-real estate $ 250 $ 2,328 $ - $ 233 $ 2 SBA commercial mortgage - - - - - SBA construction 710 710 - 474 - Direct lease financing 384 495 - 412 9 Consumer - home equity 1,600 1,600 - 1,606 6 With an allowance recorded SBA non-real estate 4,040 4,040 (3,164) 3,974 14 SBA commercial mortgage 458 458 (71) 458 - SBA construction - - - - - Direct lease financing 252 252 (145) 361 14 Consumer - home equity 126 126 (15) 127 - Total SBA non-real estate 4,290 6,368 (3,164) 4,207 16 SBA commercial mortgage 458 458 (71) 458 - SBA construction 710 710 - 474 - Direct lease financing 636 747 (145) 773 23 Consumer - home equity 1,726 1,726 (15) 1,733 6 $ 7,820 $ 10,009 $ (3,395) $ 7,645 $ 45 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 June 30, 2019 or December 31, 2018) (in thousands): June 30, December 31, 2019 2018 Non-accrual loans SBA non-real estate $ 3,830 $ 2,590 SBA commercial mortgage 458 458 SBA construction 710 - Consumer 1,458 1,468 Total non-accrual loans 6,456 4,516 Loans past due 90 days or more and still accruing 2,373 954 Total non-performing loans 8,829 5,470 Other real estate owned - - Total non-performing assets $ 8,829 $ 5,470 Interest which would have been earned on loans classified as non-accrual for the six months ended June 30, 2019 and 2018, was $227,000 and $130,000 , respectively. The Company’s loans that were modified as of June 30, 2019 and December 31, 2018 and considered troubled debt restructurings are as follows (dollars in thousands): June 30, 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 6 $ 1,537 $ 1,537 5 $ 1,564 $ 1,564 Direct lease financing 3 636 636 3 870 870 Consumer 2 501 501 2 513 513 Total 11 $ 2,674 $ 2,674 10 $ 2,947 $ 2,947 The balances below provide information as to how the loans were modified as troubled debt restructuring loans as of June 30, 2019 and December 31, 2018 (in thousands): June 30, 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 $ - $ 68 $ 1,469 $ - $ 85 $ 1,479 Direct lease financing - 252 384 - 434 436 Consumer - - 501 - - 513 Total $ - $ 320 $ 2,354 $ - $ 519 $ 2,428 The following table summarizes, as of June 30, 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 (dollars in thousands): Number Pre-modification recorded investment SBA non-real estate 1 $ 910 Total 1 $ 910 The Company had no commitments to extend additional credit to loans classified as troubled debt restructurings as of June 30, 2019 . When loans are classified as troubled debt restructurings, their collateral is valued and a specific reserve is established if the collateral valuation, less deposition costs, is lower than the recorded value of the loan. As of June 30, 2019, there were eleven troubled debt restructured loans with a balance of $2.7 million which had specific reserves of $1.4 million. Approximately $1.3 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): June 30, 2019 SBA non-real estate SBA commercial mortgage SBA construction Direct lease financing SBLOC / IBLOC Other specialty lending Other consumer loans Unallocated Total Beginning balance $ 4,636 $ 941 $ 250 $ 2,025 $ 393 $ 60 $ 108 $ 240 $ 8,653 Charge-offs (893) - - (185) - - (2) - (1,080) Recoveries 100 - - 16 - - - - 116 Provision (credit) 1,306 274 39 735 51 (47) (32) (26) 2,300 Ending balance $ 5,149 $ 1,215 $ 289 $ 2,591 $ 444 $ 13 $ 74 $ 214 $ 9,989 Ending balance: Individually evaluated for impairment $ 3,164 $ 71 $ - $ 145 $ - $ - $ 15 $ - $ 3,395 Ending balance: Collectively evaluated for impairment $ 1,985 $ 1,144 $ 289 $ 2,446 $ 444 $ 13 $ 59 $ 214 $ 6,594 Loans: Ending balance $ 75,475 $ 189,427 $ 29,298 $ 407,907 $ 837,672 $ 3,432 $ 7,898 $ 10,342 $ 1,561,451 Ending balance: Individually evaluated for impairment $ 4,290 $ 458 $ 710 $ 636 $ - $ - $ 1,726 $ - $ 7,820 Ending balance: Collectively evaluated for impairment $ 71,185 $ 188,969 $ 28,588 $ 407,271 $ 837,672 $ 3,432 $ 6,172 $ 10,342 $ 1,553,631 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 June 30, 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) - (244) - - (15) - (804) Recoveries 47 11 - 64 - - - - 122 Provision (credit) 1,091 88 53 286 33 56 (22) 15 1,600 Ending balance $ 3,895 $ 1,062 $ 189 $ 1,601 $ 398 $ 113 $ 544 $ 212 $ 8,014 Ending balance: Individually evaluated for impairment $ 2,423 $ 74 $ - $ 160 $ - $ - $ - $ - $ 2,657 Ending balance: Collectively evaluated for impairment $ 1,472 $ 988 $ 189 $ 1,441 $ 398 $ 113 $ 544 $ 212 $ 5,357 Loans: Ending balance $ 75,141 $ 156,268 $ 17,781 $ 389,387 $ 795,823 $ 48,253 $ 13,174 $ 10,985 $ 1,506,812 Ending balance: Individually evaluated for impairment $ 3,604 $ 458 $ - $ 1,450 $ - $ - $ 1,624 $ - $ 7,136 Ending balance: Collectively evaluated for impairment $ 71,537 $ 155,810 $ 17,781 $ 387,937 $ 795,823 $ 48,253 $ 11,550 $ 10,985 $ 1,499,676 The Company did no t have loans acquired with deteriorated credit quality at either June 30, 2019 or December 31, 2018. A detail of the Company’s delinquent loans by loan category is as follows (in thousands): June 30, 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 $ 45 $ - $ - $ 3,830 $ 3,875 $ 71,600 $ 75,475 SBA commercial mortgage - - - 458 458 188,969 189,427 SBA construction - - - 710 710 28,588 29,298 Direct lease financing 1,081 1,309 2,373 - 4,763 403,144 407,907 SBLOC / IBLOC 564 - - - 564 837,108 837,672 Other specialty lending - - - - - 3,432 3,432 Consumer - other - - - - - 2,354 2,354 Consumer - home equity - - - 1,458 1,458 4,086 5,544 Unamortized loan fees and costs - - - - - 10,342 10,342 $ 1,690 $ 1,309 $ 2,373 $ 6,456 $ 11,828 $ 1,549,623 $ 1,561,451 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): June 30, 2019 Pass Special mention Substandard Doubtful Loss Unrated subject to review * Unrated not subject to review * Total loans SBA non-real estate $ 66,761 $ 1,375 $ 4,610 $ - $ - $ 794 $ 1,935 $ 75,475 SBA commercial mortgage 181,833 270 5,027 - - 1,122 1,175 189,427 SBA construction 28,588 - 710 - - - - 29,298 Direct lease financing 396,639 - 5,978 - - - 5,290 407,907 SBLOC / IBLOC 808,020 - - - - 9,802 19,850 837,672 Other specialty lending 3,432 - - - - - - 3,432 Consumer 4,792 - 1,727 - - - 1,379 7,898 Unamortized loan fees and costs - - - - - - 10,342 10,342 $ 1,490,065 $ 1,645 $ 18,052 $ - $ - $ 11,718 $ 39,971 $ 1,561,451 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. |