Loans | Note E — Loans The Company originates loans for sale or securitization into 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, 2019 and 2018, the fair value of these loans was $1.18 billion and $688.5 million, and the unpaid principal balance was $1.17 billion and $685.1 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 gain of $963,000 in 2019, unrealized loss of $979,000 in 2018 and unrealized gains of $1.8 million in 2017. These amounts are net of credit related reductions in fair value of $486,000 and $829,000 , respectively, in 2019 and 2018, related to a single loan. In 2017, there was no decrease in fair value based upon instrument-specific credit risk. 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 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 upon structuring 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 is as follows: · In the third quarter of 2019, the Company sponsored The Bancorp Commercial Mortgage 2019-CRE6 Trust, securitizing $778.2 million of loans and recording a $14.2 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 $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 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, excluding loans held-for-sale, are as follows (in thousands): December 31, December 31, 2019 2018 SBL non-real estate $ 84,579 $ 76,340 SBL commercial mortgage 218,110 165,406 SBL construction 45,310 21,636 Small business loans * 347,999 263,382 Direct lease financing 434,460 394,770 SBLOC / IBLOC ** 1,024,420 785,303 Other specialty lending 3,055 31,836 Other consumer loans *** 4,554 16,302 1,814,488 1,491,593 Unamortized loan fees and costs 9,757 10,383 Total loans, net of unamortized loan fees and costs $ 1,824,245 $ 1,501,976 December 31, December 31, 2019 2018 SBL loans, including unamortized fees and costs of $4,215 and $7,478 for December 31, 2019 and December 31, 2018, respectively $ 352,214 $ 270,860 SBL loans included in held-for-sale 220,358 199,977 Total small business loans $ 572,572 $ 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 is comprised of SBA loans, SBL also includes $16,952,000 and $0 of non-SBA loans a s of December 31, 2019 and 2018, respectively . ** 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 $882,000 and $7.2 million at December 31, 2019 and 2018, respectively. O verdraft charge-offs and recoveries are reflected in the allowance for loan and leases losses. The following table provides information about impaired loans at December 31, 2019 and 2018 (in thousands): 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 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 table summarizes the Company’s non-accrual loans, loans past due 90 days and other real estate owned at December 31, 2019 and 2018, respectively (the Company had no non-accrual leases at December 31, 2019 or December 31, 2018): December 31, 2019 2018 (in thousands) Non-accrual loans SBL non-real estate $ 3,693 $ 2,590 SBL commercial mortgage 1,047 458 SBL construction 711 - Consumer 345 1,468 Total non-accrual loans 5,796 4,516 Loans past due 90 days or more and still accruing 3,264 954 Total non-performing loans 9,060 5,470 Other real estate owned - - Total non-performing assets $ 9,060 $ 5,470 Interest which would have been earned on loans classified as non-accrual at December 31, 2019 and 2018, was $388,000 and $255,000 , respectively. The Company’s loans that were modified as of December 31, 2019 and 2018 and considered troubled debt restructurings are as follows (in thousands): December 31, 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 8 $ 1,309 $ 1,309 5 $ 1,564 $ 1,564 Direct lease financing 1 286 286 3 870 870 Consumer 2 489 489 2 513 513 Total 11 $ 2,084 $ 2,084 10 $ 2,947 $ 2,947 The balances below provide information as to how the loans were modified as troubled debt restructured loans at December 31, 2019 and 2018 (in thousands): December 31, 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 $ - $ 51 $ 1,258 $ - $ 85 $ 1,479 Direct lease financing - 286 - - 434 436 Consumer - - 489 - - 513 Total $ - $ 337 $ 1,747 $ - $ 519 $ 2,428 The Company had no commitments to extend additional credit to loans classified as a troubled debt restructuring as of December 31, 2019 and a commitment to extend $27,000 to one loan classified as a troubled debt restructuring as of December 31, 2018. 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, 2019, there were eleven troubled debt restructured loans with a balance of $2. 1 million which had specific reserves of $1.0 million . These reserves related primarily to the non-guaranteed portion of SBA loans for start-up businesses . The following table summarizes as of December 31, 2019 loans that were restructured within the last 12 months that have subsequently defaulted (in thousands). December 31, 2019 Number Pre-modification recorded investment SBL non-real estate 1 $ 660 Total 1 $ 660 A detail of the changes in the allowance for loan and lease losses by loan category is as follows (in thousands): 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 balance 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 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 balance 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 The Company did no t have loans acquired with deteriorated credit quality at either December 31, 2019 or December 31, 2018. A detail of the Company’s delinquent loans by loan category is as follows (in thousands): 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 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): December 31, 2019 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 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 * At December 31, 2019, 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 2019 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, 2019, approximately 55% of the SBLOC portfolio had been reviewed. Insurance Backed Lines of Credit (IBLOC) – The targeted review threshold for 2019 was 40% with the largest 25% of IBLOCs by commitment to be reviewed annually. A random sample of the remaining loans will also be reviewed and a minimum of 20 loans will be reviewed each quarter. At December 31, 2019, approximately 57% of the IBLOC portfolio had been reviewed. SBA Loans – The targeted review or rated threshold for 2019 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, 2019, approximately 100% of the government guaranteed loan portfolio had been rated and/or reviewed. Direct Lease Financing – The targeted review threshold for 2019 was 35% . At December 31, 2019, approximately 54% 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 2019 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, 2019, 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, 2019, 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, 2019, approximately 100% of the non-CRA loans had been reviewed. Home Equity Lines of Credit, or HELOC – The targeted review threshold for 2019 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, 2019, approximately 85% of the HELOC portfolio had been reviewed. |