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 as 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. Overdraft 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 not 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.