Loans Receivable

9 Months Ended

Sep. 30, 2020

Loans Receivable

Beneficient Loans Receivable

Loans receivable held by the Company as of September 30, 2020 and December 31, 2019, were originated primarily through the initial capitalization transactions of Beneficient in 2017 and 2018. These loans are collateralized by the cash flows from the portfolio of alternative assets held in the custody of certain trusts of the ExAlt Plan™. The outstanding principal balance was $460.6 million and $425.9 million as of September 30, 2020 and December 31, 2019, respectively, which included $200.6 million and $154.7 million of inception-to-date interest income paid-in-kind, respectively.

Components of the carrying value of loans receivable were as follows for the periods presented below (in thousands):


	September 30, 2020		December 31, 2019
Loans receivable, net of discount	$	229,961	$	232,344
Allowance for loan losses	(2,914)		—
Loans receivable, net	$	227,047	$	232,344

As described in Note 4, on December 31, 2019, a change-of-control event occurred that resulted in the application of push-down accounting, and all of Beneficient’s assets and liabilities were recorded at fair value. Certain of the purchased loans were determined to be PCI loans under ASC 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality, as defined in Note 2, with the remaining loans accounted for under ASC 310-20, Nonrefundable Fees and Other Costs. For loans accounted for under ASC 310-20, the discount arising due to the difference between each loan’s carrying value and the estimated fair value at the time of acquisition will be accreted into interest income over its remaining contractual life. Should management obtain new information about facts and circumstances that existed at the acquisition date, additional adjustments to the fair values assigned to acquired loans could occur during the measurement period of one year from the acquisition date.

The following table reflects the fair value of non-PCI and PCI loans as of December 31, 2019, the date of the change-of control (in thousands):


Fair value of non-PCI loans	$	86,436

Fair value of PCI loans	$	145,908

The fair values above do not include the downward measurement period adjustments totaling $26.1 million discussed in Note 4.

The following table reflects the outstanding principal balance and carrying amounts of the non-PCI loans (in thousands):


	September 30, 2020				December 31, 2019
	Carrying Value		Unpaid Balance		Carrying Value		Unpaid Balance
Loans receivable	$	93,625	$	140,997	$	86,436	$	129,304

The following table reflects the outstanding principal balance and carrying amounts of the PCI loans (in thousands):


	September 30, 2020				December 31, 2019
	Carrying Value		Unpaid Balance		Carrying Value		Unpaid Balance
Loans receivable	$	133,422	$	319,607	$	145,908	$	296,627

As of December 31, 2019, total contractually required payments receivable, including interest, on PCI loans over the remaining contract period was $772.2 million. This assumes all loans accrue interest through maturity, with maturities on loans that existed at December 31, 2019 ranging from 2029 to 2030. Cash flows expected to be collected at the acquisition date totaled $235.6 million. The difference between total cash flows expected to be collected and the fair value of the loans represents accretable yield.

The following table presents a rollforward of the accretable yield for the three and nine months ended September 30, 2020 (in thousands):


	Three Months Ended September 30, 2020		Nine Months Ended September 30, 2020
Balance, beginning of period	$	66,383	$	89,647
Accretion	(7,899)		(22,863)
Decrease in accretable yield(a)	—		(8,300)
Balance, end of period	$	58,484	$	58,484

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(a)Includes changes in the accretable yield due to both transfers from the nonaccretable difference and the impact of changes in the expected timing of cash flows.

The changes in the allowance for loan losses for the three and nine months ended September 30, 2020 are as follows (in thousands):


	Three Months Ended September 30, 2020		Nine Months Ended September 30, 2020
Beginning balance	$	7,900	$	—
(Recapture) provision	(4,986)		2,914
Charge-offs and other, net	—		—
Ending balance	$	2,914	$	2,914

As of September 30, 2020, the allowance for loan losses was $2.9 million, $2.3 million of which was related to PCI loans. There were no net charge-offs related to PCI loans during the three and nine months ended September 30, 2020.

During the three months ended September 30, 2020, a loan loss provision recapture of $5.0 million was recorded, all of which was related to PCI loans. The quarter-to-date loan loss provision recapture was due to an increase in expected cash flows from the underlying collateral for certain PCI loans. During the nine months ended September 30, 2020, a loan loss provision expense of $2.9 million was recorded, $2.3 million of which was related to PCI loans. The year-to-date loan loss provision expense was primarily due to a decrease in expected cash flows.

As a result of the push-down accounting described in Note 4, the loans were recorded at fair value and there was no carryover allowance for loan losses recorded as of December 31, 2019.

Promissory Note-LiquidTrusts

On May 31, 2019, GWG Life entered into a Promissory Note (the “Promissory Note”), made by Jeffrey S. Hinkle and Dr. John A. Stahl, not in their individual capacity but solely as trustees of The LT-1 LiquidTrust, The LT-2 LiquidTrust, The LT-5 LiquidTrust, The LT-7 LiquidTrust, The LT-8 LiquidTrust and The LT-9 LiquidTrust (collectively, the “LiquidTrust Borrowers”). Pursuant to the terms of the Promissory Note, GWG Life funded a term loan to the LiquidTrust Borrowers in an aggregate principal amount of $65.0 million (the “Loan”). The Loan was made pursuant to GWG Holdings’ strategy to further diversify into alternative assets (beyond life insurance) and ancillary businesses and was intended to better position Beneficient’s balance sheet, working capital and liquidity profile to satisfy anticipated Texas Department of Banking regulatory requirements. The Loan bears interest at 7.0% per annum, with interest payable at maturity, and matures on June 30, 2023.

The loan is reported in financing receivables from affiliates in the consolidated balance sheets and included accrued interest receivable of $2.2 million as of December 31, 2019. There was no allowance for loan losses related to the Promissory Note as of December 31, 2019.

On September 30, 2020, GWG Holdings, GWG Life, BCH, Ben LP, BCC, and the LiquidTrust Borrowers entered into an agreement (the “Promissory Note Repayment”) by which the parties agreed to repay the Promissory Note and any related accrued interest for a $75.0 million Preferred Series C Unit Account (the “Preferred C”) of BCH that Ben LP issued to the LiquidTrust Borrowers for no consideration; however, the transaction ultimately increased the value of the collateral of Beneficient's loan portfolio. The $75.0 million of Preferred C received by GWG Life was transferred to GWG Holdings upon execution of the Promissory Note Conversion, which increased GWG Holdings’ ownership percentage in Beneficient. As part of the agreement, if Beneficient has not received a trust charter as of the one-year anniversary of the Promissory Note Conversion, or if no trust charter filing is still pending or in the process of being refiled, GWG Holdings would receive an additional $5.0 million of Preferred C. The outstanding balance of the Promissory Note on September 30, 2020, immediately prior to the transaction, with accrued and unpaid interest thereon, was $70.6 million.

As a result of the change in ownership while GWG Holdings retained a controlling interest, a rebalancing of the noncontrolling interests was performed in accordance with ASC 810-10. Ultimately, the transaction resulted in a $26.3 million decrease to noncontrolling interests based on the rebalancing of equity performed as a result of GWG Holdings’ receipt of additional Preferred C, a $70.6 million decrease to financing receivables from affiliates, and a resulting $44.3 million decrease to additional paid-in-capital in GWG Holdings’ condensed consolidated financial statements. The Preferred C that was received by GWG Holdings is eliminated in consolidation.