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. These sales are accounted for as true sales, and servicing rights on these loans are not retained. The Company has elected fair value treatment for these loans to better reflect the economics of the transactions. At September 30, 2018, the fair value of the loans held for sale was $308.5 million and their book value was $306.4 million. Included in the realized and unrealized gains (losses) on loans originated for sale in the Consolidated Statements of Operations were unrealized losses on unsold loans. For the nine months ended September 30, 2018, losses recognized for such changes in fair value were $2.3 million. For the nine months ended September 30, 2017, gains similarly recognized were $1.9 million. There were no changes in fair value related to credit risk. Interest earned on loans held for sale during the period held are 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 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 September 30, 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 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, 2018 2017 SBA non-real estate $ 74,408 $ 70,379 SBA commercial mortgage 166,432 142,086 SBA construction 17,978 16,740 SBA loans * 258,818 229,205 Direct lease financing 395,976 377,660 SBLOC 778,552 730,462 Other specialty lending 40,799 30,720 Other consumer loans 12,172 14,133 1,486,317 1,382,180 Unamortized loan fees and costs 10,456 10,048 Total loans, net of deferred loan fees and costs $ 1,496,773 $ 1,392,228 Included in the table above under other consumer loans are demand deposit overdrafts reclassified as loan balances totaling $2.6 million and $2.3 million at September 30, 2018 and December 31, 2017, respectively. 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): September 30, December 31, 2018 2017 SBA loans, including deferred fees and costs $ 266,433 $ 236,724 SBA loans included in held for sale 193,372 165,177 Total SBA loans $ 459,805 $ 401,901 The following table provides information about impaired loans at September 30, 2018 and December 31, 2017 (in thousands): Recorded investment Unpaid principal balance Related allowance Average recorded investment Interest income recognized September 30, 2018 Without an allowance recorded SBA non-real estate $ 193 $ 1,328 $ - $ 374 $ - SBA commercial mortgage - - - - - Direct lease financing 454 566 - 421 22 Consumer - other - - - - - Consumer - home equity 1,618 1,618 - 1,656 7 With an allowance recorded - SBA non-real estate 2,779 2,779 1,844 2,636 25 SBA commercial mortgage 458 458 71 517 - Direct lease financing 671 671 195 663 56 Consumer - other - - - - - Consumer - home equity - - - - - Total SBA non-real estate 2,972 4,107 1,844 3,010 25 SBA commercial mortgage 458 458 71 517 - Direct lease financing 1,125 1,237 195 1,084 78 Consumer - other - - - - - Consumer - home equity 1,618 1,618 - 1,656 7 $ 6,173 $ 7,420 $ 2,110 $ 6,267 $ 110 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 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, 2018 or December 31, 2017) (in thousands): September 30, December 31, 2018 2017 Non-accrual loans SBA non-real estate $ 2,433 $ 1,889 SBA commercial mortgage 458 693 Consumer 1,343 1,414 Total non-accrual loans 4,234 3,996 Loans past due 90 days or more and still accruing 1,015 227 Total non-performing loans 5,249 4,223 Other real estate owned 405 450 Total non-performing assets $ 5,654 $ 4,673 Interest which would have been earned on loans classified as non-accrual at September 30, 2018 and 2017, was $188,000 and $171,000 , respectively . The Company’s loans that were modified as of September 30, 2018 and December 31, 2017 and considered troubled debt restructurings are as follows (dollars in thousands): September 30, 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 $ 719 $ 719 5 $ 1,476 $ 1,476 Direct lease financing 3 1,125 1,125 1 230 230 Consumer 2 519 519 2 535 535 Total 10 $ 2,363 $ 2,363 8 $ 2,241 $ 2,241 The balances below provide information as to how the loans were modified as troubled debt restructuring loans as of September 30, 2018 and December 31, 2017 (in thousands): September 30, 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 $ - $ 148 $ 571 $ - $ 115 $ 1,361 Direct lease financing - 671 454 - - 230 Consumer - - 519 - - 535 Total $ - $ 819 $ 1,544 $ - $ 115 $ 2,126 The following table summarizes, as of September 30, 2018, troubled debt restructuring loans that had been restructured within the last 12 months that have subsequently defaulted ( in thousands): Number Pre-modification recorded investment SBA non-real estate 2 $ 314 Direct lease financing 1 308 Total 3 $ 622 The Company had no commitments to extend additional credit to loans classified as troubled debt restructurings as of September 30, 2018 . 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 September 30, 2018 Beginning balance $ 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 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 September 30, 2017 Beginning balance $ 1,976 $ 737 $ 76 $ 1,994 $ 315 $ 32 $ 975 $ 227 6,332 Charge-offs (343) - - (780) - - (113) - (1,236) Recoveries 13 - - - - - 24 - 37 Provision (credit) 1,576 521 22 196 45 36 (220) (26) 2,150 Ending balance $ 3,222 $ 1,258 $ 98 $ 1,410 $ 360 $ 68 $ 666 $ 201 $ 7,283 Ending balance: Individually evaluated for impairment $ 1,659 $ 185 $ - $ - $ - $ - $ - $ - $ 1,844 Ending balance: Collectively evaluated for impairment $ 1,563 $ 1,073 $ 98 $ 1,410 $ 360 $ 68 $ 666 $ 201 $ 5,439 Loans: Ending balance $ 72,055 $ 132,997 $ 14,205 $ 369,069 $ 720,279 $ 36,664 $ 20,107 $ 8,684 $ 1,374,060 Ending balance: Individually evaluated for impairment $ 2,645 $ 1,226 $ - $ 284 $ - $ - $ 1,700 $ - $ 5,855 Ending balance: Collectively evaluated for impairment $ 69,410 $ 131,771 $ 14,205 $ 368,785 $ 720,279 $ 36,664 $ 18,407 $ 8,684 $ 1,368,205 The Company did no t have loans acquired with deteriorated credit quality at either September 30, 2018 or December 31, 2017. A detail of the Company’s delinquent loans by loan category is as follows (in thousands): 30-59 Days 60-89 Days 90 Days Total Total September 30, 2018 past due past due or greater Non-accrual past due Current loans SBA non-real estate $ 377 $ 258 $ - $ 2,433 $ 3,068 $ 71,340 $ 74,408 SBA commercial mortgage - - - 458 458 165,974 166,432 SBA construction - - - - - 17,978 17,978 Direct lease financing 2,168 802 1,015 - 3,985 391,991 395,976 SBLOC 78 - - - 78 778,474 778,552 Other specialty lending - - - - - 40,799 40,799 Consumer - other - - - - - 4,642 4,642 Consumer - home equity - 133 - 1,343 1,476 6,054 7,530 Unamortized loan fees and costs - - - - - 10,456 10,456 $ 2,623 $ 1,193 $ 1,015 $ 4,234 $ 9,065 $ 1,487,708 $ 1,496,773 30-59 Days 60-89 Days 90 Days Total Total December 31, 2017 past due past due or greater Non-accrual past due Current loans 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): September 30, 2018 Pass Special mention Substandard Doubtful Loss Unrated subject to review * Unrated not subject to review * Total loans SBA non-real estate $ 66,964 $ 2,592 $ 3,873 $ - $ - $ 21 $ 958 $ 74,408 SBA commercial mortgage 156,712 274 458 - - 8,988 - 166,432 SBA construction 17,284 - 694 - - - - 17,978 Direct lease financing 385,640 - 1,839 - - - 8,497 395,976 SBLOC 766,143 - - - - - 12,409 778,552 Other specialty lending 40,789 - - - - - 10 40,799 Consumer 6,521 - 1,476 - - - 4,175 12,172 Unamortized loan fees and costs - - - - - - 10,456 10,456 $ 1,440,053 $ 2,866 $ 8,340 $ - $ - $ 9,009 $ 36,505 $ 1,496,773 December 31, 2017 Pass Special mention Substandard Doubtful Loss Unrated subject to review * Unrated not subject to review * Total loans 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 * For information on targeted loan review thresholds see “Allowance for Loan Losses ” in the 2017 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. |