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 not 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.