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 September 30, 2019, the fair value of the loans held-for-sale was $489.2 million and their amortized cost was $484.3 million. Included in “Net realized and unrealized gains (losses) on 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, 2019, unrealized gains recognized for such changes in fair value were $1.6 million. For the nine months ended September 30, 2018, unrealized losses similarly recognized were $2.3 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 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. A summary of securitizations and securities obtained from those securitizations for the periods ended September 30, 2019 and 2018 is as follows: · In the thir d quarter of 2019, the Company sponsored The Bancorp Commercial Mortgage 2019-CRE6 Trust, securitizing $778.2 million of loans and recording a $13.7 million 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 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 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 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): September 30, December 31, 2019 2018 SBL non-real estate $ 84,181 $ 76,340 SBL commercial mortgage 209,008 165,406 SBL construction 38,116 21,636 Small business loans * 331,305 263,382 Direct lease financing 412,755 394,770 SBLOC / IBLOC ** 920,463 785,303 Other specialty lending 3,167 31,836 Other consumer loans *** 6,388 16,302 1,674,078 1,491,593 Unamortized loan fees and costs 9,299 10,383 Total loans, net of deferred loan fees and costs $ 1,683,377 $ 1,501,976 September 30, December 31, 2019 2018 SBL loans, including deferred fees and costs of $6,135 and $7,478 for September 30, 2019 and December 31, 2018, respectively $ 337,440 $ 270,860 SBL loans included in held-for-sale 222,007 199,977 Total small business loans $ 559,447 $ 470,837 * The preceding table shows small business loans (SBL) and SBL held-for-sale at the dates indicated (in thousands). While the majority of SBL are comprised of SBA loans, SBL also includes $16,953,000 of non-SBA loans as of September 30, 2019 and none at December 31, 2018. ** 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 Other consumer loans are demand deposit overdrafts reclassified as loan balances totaling $771,000 and $7.2 million at September 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 September 30, 2019 and December 31, 2018 (in thousands): September 30, 2019 Recorded investment Unpaid principal balance Related allowance Average recorded investment Interest income recognized Without an allowance recorded SBL non-real estate $ 352 $ 2,478 $ - $ 262 $ 4 SBL commercial mortgage - - - - - SBL construction - - - 355 - Direct lease financing 288 288 - 381 9 Consumer - home equity 495 495 - 1,329 7 With an allowance recorded SBL non-real estate 3,898 3,898 (3,037) 3,955 22 SBL commercial mortgage 458 458 (71) 458 - SBL construction 711 711 (35) 178 - Direct lease financing 136 136 (136) 305 16 Consumer - home equity 1,220 1,220 (204) 400 - Total SBL non-real estate 4,250 6,376 (3,037) 4,217 26 SBL commercial mortgage 458 458 (71) 458 - SBL construction 711 711 (35) 533 - Direct lease financing 424 424 (136) 686 25 Consumer - home equity 1,715 1,715 (204) 1,729 7 $ 7,558 $ 9,684 $ (3,483) $ 7,623 $ 58 December 31, 2018 Recorded investment Unpaid principal balance Related allowance Average recorded investment Interest income recognized Without an allowance recorded SBL non-real estate $ 175 $ 1,469 $ - $ 334 $ - SBL commercial mortgage - - - - - Direct lease financing 437 548 - 425 28 Consumer - home equity 1,612 1,612 - 1,648 10 With an allowance recorded SBL non-real estate 3,541 3,541 (2,806) 2,816 70 SBL commercial mortgage 458 458 (71) 505 - Direct lease financing 434 434 (145) 617 66 Consumer - home equity 129 129 (17) 26 - Total SBL non-real estate 3,716 5,010 (2,806) 3,150 70 SBL 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 September 30, 2019 or December 31, 2018) (in thousands): September 30, December 31, 2019 2018 Non-accrual loans SBL non-real estate $ 3,803 $ 2,590 SBL commercial mortgage 458 458 SBL construction 711 - Consumer 1,448 1,468 Total non-accrual loans 6,420 4,516 Loans past due 90 days or more and still accruing 2,788 954 Total non-performing loans 9,208 5,470 Other real estate owned - - Total non-performing assets $ 9,208 $ 5,470 Interest which would have been earned on loans classified as non-accrual for the nine months ended September 30, 2019 and 2018, was $356,000 and $188,000 , respectively. The Company’s loans that were modified as of September 30, 2019 and December 31, 2018 and considered troubled debt restructurings are as follows (dollars in thousands): September 30, 2019 December 31, 2018 Number Pre-modification recorded investment Post-modification recorded investment Number Pre-modification recorded investment Post-modification recorded investment SBL non-real estate 6 $ 1,274 $ 1,274 5 $ 1,564 $ 1,564 Direct lease financing 2 423 423 3 870 870 Consumer 2 495 495 2 513 513 Total 10 $ 2,192 $ 2,192 10 $ 2,947 $ 2,947 The balances below provide information as to how the loans were modified as troubled debt restructuring loans as of September 30, 2019 and December 31, 2018 (in thousands): September 30, 2019 December 31, 2018 Adjusted interest rate Extended maturity Combined rate and maturity Adjusted interest rate Extended maturity Combined rate and maturity SBL non-real estate $ - $ 60 $ 1,214 $ - $ 85 $ 1,479 Direct lease financing - 136 287 - 434 436 Consumer - - 495 - - 513 Total $ - $ 196 $ 1,996 $ - $ 519 $ 2,428 The following table summarizes, as of September 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 SBL non-real estate 1 $ 660 Total 1 $ 660 The Company had no commitments to extend additional credit to loans classified as troubled debt restructurings as of September 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 September 30, 2019, there were 10 troubled debt restructured loans with a balance of $2.2 million which had specific reserves of $1.2 million. Approximately $1.0 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): September 30, 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 (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 December 31, 2018 SBL non-real estate SBL commercial mortgage SBL construction Direct lease financing SBLOC Other specialty lending Other consumer loans Unallocated Total Beginning 1/1/2018 $ 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 September 30, 2018 SBL non-real estate SBL commercial mortgage SBL construction Direct lease financing SBLOC Other specialty lending Other consumer loans Unallocated Total Beginning 1/1/2018 $ 3,145 $ 1,120 $ 136 $ 1,495 $ 365 $ 57 $ 581 $ 197 $ 7,096 Charge-offs (1,079) (157) - (532) - - (20) - (1,788) Recoveries 47 13 - 64 - - - - 124 Provision (credit) 1,434 245 50 929 24 19 (44) 3 2,660 Ending balance $ 3,547 $ 1,221 $ 186 $ 1,956 $ 389 $ 76 $ 517 $ 200 $ 8,092 Ending balance: Individually evaluated for impairment $ 1,844 $ 71 $ - $ 195 $ - $ - $ - $ - $ 2,110 Ending balance: Collectively evaluated for impairment $ 1,703 $ 1,150 $ 186 $ 1,761 $ 389 $ 76 $ 517 $ 200 $ 5,982 Loans: Ending balance $ 74,408 $ 166,432 $ 17,978 $ 395,976 $ 778,552 $ 40,799 $ 12,172 $ 10,456 $ 1,496,773 Ending balance: Individually evaluated for impairment $ 2,972 $ 458 $ - $ 1,125 $ - $ - $ 1,618 $ - $ 6,173 Ending balance: Collectively evaluated for impairment $ 71,436 $ 165,974 $ 17,978 $ 394,851 $ 778,552 $ 40,799 $ 10,554 $ 10,456 $ 1,490,600 The Company did no t have loans acquired with deteriorated credit quality at either September 30, 2019 or December 31, 2018. A detail of the Company’s delinquent loans by loan category is as follows (in thousands): September 30, 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 $ 141 $ - $ - $ 3,803 $ 3,944 $ 80,237 $ 84,181 SBL commercial mortgage - - - 458 458 208,550 209,008 SBL construction - - - 711 711 37,405 38,116 Direct lease financing 1,898 930 2,788 - 5,616 407,139 412,755 SBLOC / IBLOC 2,561 - - - 2,561 917,902 920,463 Other specialty lending - - - - - 3,167 3,167 Consumer - other - - - - - 1,037 1,037 Consumer - home equity - - - 1,448 1,448 3,903 5,351 Unamortized loan fees and costs - - - - - 9,299 9,299 $ 4,600 $ 930 $ 2,788 $ 6,420 $ 14,738 $ 1,668,639 $ 1,683,377 December 31, 2018 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 $ 346 $ 125 $ - $ 2,590 $ 3,061 $ 73,279 $ 76,340 SBL commercial mortgage - - - 458 458 164,948 165,406 SBL 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): September 30, 2019 Pass Special mention Substandard Doubtful Loss Unrated subject to review * Unrated not subject to review * Total loans SBL non-real estate * $ 64,507 $ 1,948 $ 4,577 $ - $ - $ 9,148 $ 4,001 $ 84,181 SBL commercial mortgage * 194,949 268 5,011 - - 7,889 891 209,008 SBL construction 37,284 - 711 - - - 121 38,116 Direct lease financing 397,612 - 9,535 - - 2,256 3,352 412,755 SBLOC / IBLOC 865,695 - - - - - 54,768 920,463 Other specialty lending 3,167 - - - - - - 3,167 Consumer 3,351 - 1,448 - - - 1,589 6,388 Unamortized loan fees and costs - - - - - - 9,299 9,299 $ 1,566,565 $ 2,216 $ 21,282 $ - $ - $ 19,293 $ 74,021 $ 1,683,377 December 31, 2018 Pass Special mention Substandard Doubtful Loss Unrated subject to review * Unrated not subject to review * Total loans SBL non-real estate $ 67,809 $ 1,641 $ 4,517 $ - $ - $ 347 $ 2,026 $ 76,340 SBL commercial mortgage 158,667 273 458 - - 5,498 510 165,406 SBL 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. |