Loans and Allowance for Loan Losses

3 Months Ended

Mar. 31, 2022

Loans and Allowance for Loan Losses [Abstract]

Loans and Allowance for Loan Losses

Note 3 – Loans and Allowance for Loan Losses

Loans are summarized as follows according to major risk category as of March 31, 2022 and December 31, 2021:

	March 31,			December 31,
	2022			2021
($ in thousands)
SBA	$	127,778		$	142,392
Commercial, non-real estate		3,285			3,428
Residential real estate		30,772			27,108
Strategic Program loans		101,819			85,850
Commercial real estate		4,187			2,436
Consumer		4,711			4,574
Total loans	$	272,552		$	265,788
Loans held-for-sale		(73,805	)		(60,748	)
Total loans held for investment	$	198,747		$	205,040
Deferred loan costs (fees), net		789			2,917
Allowance for loan losses		(9,987	)		(9,855	)
Net loans	$	189,549		$	198,102

Strategic Program Loans – In 2016, the Company began originating loans with various third-party loan origination platforms that use technology and other innovative systems to streamline the origination of unsecured consumer and secured or unsecured business loans to a wide array of borrowers within certain approved credit profiles. Loans issued by the Company through these programs generally follow and are limited to specific predetermined underwriting criteria. The Company earns monthly minimum program fees from these third parties. Based on the volume of loans originated by the Company related to each Strategic Program, an additional fee equal to a percentage of the loans generated under the Strategic Program may be collected. The program fee is included within non-interest income on the Consolidated Statements of Income.

The Company generally retains the loans and/or receivables for a number of business days after origination before selling the loans and/or receivables to the Strategic Program platform or another investor. Interest income is recognized by the Company while holding the loans. These loans are classified as held-for-sale on the balance sheet.

The Company may also hold a portion of the loans or receivable and sell the remainder directly to the Strategic Programs or other investors. The Company generally services the loans originated through the Strategic Programs in consideration of servicing fees equal to a percentage of the loans generated under the Strategic Programs. In turn, the Strategic Program service providers, subject to the Company’s approval and oversight, serve as sub-servicer and perform typical primary servicing duties including loan collections, modifications, charging-off, reporting and monitoring.

Each Strategic Program establishes a “reserve” deposit account with the Company. The agreements generally require that the deposit reserve account balance does not fall below the dollar amount of the total loans outstanding currently held by the Company for the specific Strategic Program. If necessary, the Company has the right to withdraw amounts from the reserve account to fulfill loan purchaser obligations created under the program agreements. Total cash held in reserve by Strategic Programs at the Company at March 31, 2022 and December 31, 2021, was $50.8 million and $39.6 million, respectively.

Strategic Program loans retained and held-for-sale as of March 31, 2022 and December 31, 2021, are summarized as follows:

	March 31,		December 31,
	2022		2021
($ in thousands)
Retained Strategic Program loans	$	28,014	$	25,102
Strategic Program loans held-for-sale		73,805		60,748
Total Strategic Program loans	$	101,819	$	85,850

Changes in the ALL are summarized as follows:

Three Months Ended March 31, 2022
($ in thousands)	SBA			Commercial, Non-Real Estate			Residential Real Estate		Strategic Program Loans			Commercial Real Estate		Consumer		Total
Beginning balance	$	2,739		$	132		$	352	$	6,549		$	21	$	62	$	9,855
Charge-offs		(31	)		—			—		(2,878	)		—		—		(2,909	)
Recoveries		—			1			—		93			—		—		94
Provision (recapture)		356			(26	)		59		2,558			—		—		2,947
Balance at end of period	$	3,064		$	107		$	411	$	6,322		$	21	$	62	$	9,987
Ending balance individually evaluated for impairment		—			—			—		—			—		—		—
Ending balance collectively evaluated for impairment	$	3,064		$	107		$	411	$	6,322		$	21	$	62	$	9,987
Loans receivable	$	127,778		$	3,285		$	30,772	$	28,014		$	4,187	$	4,711	$	198,747
Ending balance individually evaluated for impairment		951			—			200		—			—		—		1,151
Ending balance collectively evaluated for impairment	$	126,827		$	3,285		$	30,572	$	28,014		$	4,187	$	4,711	$	197,596

Three Months Ended March 31, 2021
($ in thousands)	SBA			Commercial, Non-Real Estate			Residential Real Estate		Strategic Program Loans			Commercial Real Estate		Consumer			Total
Beginning balance	$	920		$	232		$	855	$	4,111		$	19	$	62		$	6,199
Charge-offs		(7	)		(41	)		—		(741	)		—		(2	)		(791	)
Recoveries		11			—			—		132			—		—			143
Provision		—			—			—		633			—		—			633
Balance at end of period	$	924		$	191		$	855	$	4,135		$	19	$	60		$	6,184
Ending balance individually evaluated for impairment		—			—			—		—			—		—			—
Ending balance collectively evaluated for impairment	$	924		$	191		$	855	$	4,135		$	19	$	60		$	6,184
Loans receivable	$	167,824		$	3,867		$	21,712	$	6,580		$	2,589	$	4,807		$	207,379
Ending balance individually evaluated for impairment		890			—			756		—			—		—			1,646
Ending balance collectively evaluated for impairment	$	166,934		$	3,867		$	20,956	$	6,580		$	2,589	$	4,807		$	205,733

The following tables summarize impaired loans as of March 31, 2022 and December 31, 2021:

March 31, 2022
	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
($ in thousands)
With no related allowance recorded
SBA	$	951	$	951	$	—	$	962	$	48
Commercial, non-real estate		—		—		—		—		—
Residential real estate		200		200		—		100		—
Strategic Program loans		—		—		—		—		—
Commercial real estate		—		—		—		—		—
Consumer		—		—		—		—		—
Total	$	1,151	$	1,151	$	—	$	1,062	$	48

December 31, 2021
	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
($ in thousands)
With no related allowance recorded
SBA	$	972	$	972	$	—	$	945	$	47
Commercial, non-real estate		—		—		—		—		—
Residential real estate		—		—		—		189		—
Strategic Program loans		—		—		—		—		—
Commercial real estate		—		—		—		—		—
Consumer		—		—		—		—		—
Total	$	972	$	972	$	—	$	1,134	$	47

For the three months ending March 31, 2022 and December 31, 2021, there were no impaired loans with an allowance recorded.

Nonaccrual and past due loans are summarized below as of March 31, 2022 and December 31, 2021:

March 31, 2022
($ in thousands)	Current		30-59 Days Past  Due		60-89 Days Past Due		90+ Days Past Due & Still Accruing		Total Past Due		Non- Accrual		Total
SBA	$	126,894	$	227	$	—	$	—	$	227	$	657	$	127,778
Commercial, non-real estate		3,285		—		—		—		—		—		3,285
Residential real estate		30,572		—		—		200		200		—		30,772
Strategic Program loans		100,105		981		573		159		1,713		1		101,819
Commercial real estate		4,187		—		—		—		—		—		4,187
Consumer		4,707		4		—		—		4		—		4,711
Total	$	269,750	$	1,212	$	573	$	359	$	2,144	$	658	$	272,552

December 31, 2021
($ in thousands)	Current		30-59 Days Past Due		60-89 Days Past Due		90+ Days Past Due & Still Accruing		Total Past Due		Non- Accrual		Total
SBA	$	141,488	$	247	$	—	$	—	$	247	$	657	$	142,392
Commercial, non-real estate		3,428		—		—		—		—		—		3,428
Residential real estate		27,108		—		—		—		—		—		27,108
Strategic Program loans		84,065		1,041		690		54		1,785		—		85,850
Commercial real estate		2,436		—		—		—		—		—		2,436
Consumer		4,554		20		—		—		20		—		4,574
Total	$	263,079	$	1,308	$	690	$	54	$	2,052	$	657	$	265,788

The amount of interest income for the three months ended March 31, 2022 and 2021, that was not recorded on nonaccrual loans was de minimis.

In addition to past due and nonaccrual status criteria, the Company also evaluates loans using a loan grading system. Internal loan grades are based on current financial information, historical payment experience, and credit documentation, among other factors. Performance-based grades are summarized below:

Pass (Loan Grades 1-4) – A Pass asset is higher quality and does not fit any of the other categories described below. The likelihood of loss is considered remote.

Special Mention (Loan Grade 5)  –  A Special Mention asset has potential weaknesses that may be temporary or, if left uncorrected, may result in a loss. While concerns exist, the Company is currently protected and loss is considered unlikely and not imminent.

Classified Substandard (Loan Grade 6)  –  A Substandard asset is inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any. Assets so classified have well defined weaknesses and are characterized by the distinct possibility that the Company may sustain some loss if deficiencies are not corrected.

Classified Doubtful (Loan Grade 7)  –  A Doubtful asset has all the weaknesses inherent in a Substandard asset with the added characteristics that the weaknesses make collection or liquidation in full highly questionable.

Classified Loss (Loan Grade 8) – A loss loan has an existing weakness or weaknesses that render the loan uncollectible and of such little value that continuing to carry as an asset on the Bank’s book is not warranted. This classification does not mean that the loan has absolutely no recovery or salvage value, but rather it is not practical nor desirable to defer writing off this basically worthless asset, even though partial recovery may be affected in the future.

The Company does not currently grade retained Strategic Program loans due to their small balances and homogenous nature. Credit quality for Strategic Program loans is highly correlated with delinquency levels. The Strategic Program loans are evaluated collectively for impairment.

Outstanding loan balances categorized by these credit quality indicators are summarized as follows at March 31, 2022 and December 31, 2021:

March 31, 2022
($ in thousands)	Pass Grade 1-4		Special Mention Grade 5		Classified/ Doubtful/Loss Grade 6-8		Total
SBA	$	125,366	$	1,461	$	951	$	127,778
Commercial, non-real estate		3,285		—		—		3,285
Residential real estate		30,572		—		200		30,772
Commercial real estate		4,187		—		—		4,187
Consumer		4,711		—		—		4,711
Not Risk Graded
Strategic Program loans								101,819
Total at March 31, 2022	$	168,121	$	1,461	$	1,151	$	272,552

December 31, 2021
($ in thousands)	Pass Grade 1-4		Special Mention Grade 5		Classified/ Doubtful/Loss Grade 6-8		Total
SBA	$	139,985	$	1,435	$	972	$	142,392
Commercial, non-real estate		3,382		46		—		3,428
Residential real estate		27,108		—		—		27,108
Commercial real estate		2,436		—		—		2,436
Consumer		4,574		—		—		4,574
Not Risk Graded
Strategic Program loans								85,850
Total at December 31, 2021	$	177,485	$	1,481	$	972	$	265,788

Loans modified and recorded as TDR’s during the three months ended March 31, 2022 and March 31, 2021, consist of the following:

($ in thousands)	Number of Contracts		Pre- Modification Outstanding Recorded Investment		Post- Modification Outstanding Recorded Investment
March 31, 2022
SBA		1	$	96	$	96
Total at March 31, 2022		1	$	96	$	96
Non-Accrual
SBA		1	$	25	$	25
March 31, 2021
SBA		3	$	114	$	114
Residential real estate		1		756		756
Total at March 31, 2021		4	$	870	$	870
Non-Accrual
SBA		1	$	53	$	53

At March 31, 2022 and 2021, there were no commitments to lend additional funds to debtors whose loan terms have been modified in a TDR. Loans modified and recorded as TDR’s during the three months ended March 31, 2022 and 2021 included modifications to rate and term. There was one principal charge-off recorded related to TDRs during the three months ended March 31, 2022 for $0.01 million.  There were no principal charge-offs recorded related to TDRs during the three months ended March 31, 2021.

During the three months ended March 31, 2022 and 2021, there were no loan modifications to TDRs. Separately, one restructured loan incurred a default within 12 months of the restructure date and continues to be in default during the three months ended March 31, 2022. One restructured loan incurred a default within 12 months of the restructure date during the three months ended March 31, 2021. This same loan was paid in full with interest on May 28, 2021.