Note 6 – Loans and allowance for loan losses

The accounting for a loan depends on management’s strategy for the loan, and on whether the loan was credit-impaired at the date of acquisition. The Company accounts for loans based on the following loan program categories:

Originated or purchased loans held-for-investment, other than PCI loans – originated transitional loans, originated conventional SBC and SBA loans that have been securitized, or acquired loans with no signs of credit deterioration at time of purchase.

Loans at fair value – certain originated conventional SBC loans for which the Company has elected the fair value option

Loans, held-for-sale, at fair value – originated or acquired that we intend to sell in the near term

PCI loans held-for-investment – acquired loans with signs of credit deterioration at time of purchase

Loan portfolio

The following table summarizes the classification, unpaid principal balance (“UPB”), and carrying value of loans held by the Company including loans of consolidated VIEs:


	September 30, 2019				December 31, 2018
Loans (In Thousands)	Carrying Value		UPB		Carrying Value		UPB
Loans
Acquired SBA 7(a) loans	$	108,360	$	139,347	$	264,308	$	283,423
Acquired loans		238,176		240,875		206,983		215,213
Acquired Transitional loans		83,355		84,247		—		—
Originated Transitional loans		373,784		377,494		272,981		275,237
Originated SBC loans, at fair value		20,434		20,071		22,664		22,325
Originated SBC loans		448,277		445,440		345,100		342,751
Originated SBA 7(a) loans		111,335		116,723		85,569		89,733
Originated Residential Agency loans		2,869		2,868		1,899		1,900
Total Loans, before allowance for loan losses	$	1,386,590	$	1,427,065	$	1,199,504	$	1,230,582
Allowance for loan losses	$	(6,231)		—	$	(6,112)		—
Total Loans, net	$	1,380,359	$	1,427,065	$	1,193,392	$	1,230,582
Loans in consolidated VIEs
Loans
Originated SBC loans	$	671,898	$	663,179	$	432,308	$	422,897
Acquired loans		732,974		738,950		343,156		354,794
Acquired SBA 7(a) loans		—		—		55,966		74,554
Originated Transitional loans		525,395		528,251		391,752		393,116
Total Loans, in consolidated VIEs, before allowance for loan losses	$	1,930,267	$	1,930,380	$	1,223,182	$	1,245,361
Allowance for loan losses on loans in consolidated VIEs	$	(1,734)		—	$	(2,208)		—
Total Loans, net, in consolidated VIEs	$	1,928,533	$	1,930,380	$	1,220,974	$	1,245,361
Total Loans, net, and Loans, net in consolidated VIEs	$	3,308,892	$	3,357,445	$	2,414,366	$	2,475,943
Loans, held for sale, at fair value
Originated Residential Agency loans	$	147,592	$	142,630	$	67,775	$	65,586
Originated Freddie Mac loans		30,412		29,828		23,322		22,973
Originated SBA 7(a) loans		23,863		22,108		21,153		19,669
Acquired loans		1,243		1,218		3,008		2,935
Total Loans, held for sale, at fair value	$	203,110	$	195,784	$	115,258	$	111,163
Loans, held for sale, at fair value in consolidated VIEs
Loans, held for sale, at fair value
Acquired loans	$	3,075	$	3,000	$	—	$	—
Total Loans, held for sale, at fair value in consolidated VIEs	$	3,075	$	3,000	$	—	$	—
Total Loans, held for sale, at fair value, and Loans, held for sale, at fair value in consolidated VIEs	$	206,185	$	198,784	$	115,258	$	111,163
Total Loan portfolio	$	3,515,077	$	3,556,229	$	2,529,624	$	2,587,106

Credit quality indicators

The Company monitors credit quality of our loan portfolio based on primary credit quality indicators. Delinquency rates are a primary credit quality indicator for our types of loans. Loans that are more than 30 days past due provide an early warning of borrowers who may be experiencing financial difficulties and/or who may be unable or unwilling to repay the loan. As the loan continues to age, it becomes clearer that the borrower is likely either unable or unwilling to pay.

The following tables display delinquency information on loans, net as of the unaudited interim consolidated balance sheet dates:


	September 30, 2019
Loans (In Thousands)	Current and less than 30 days past due		30-89 Days Past Due		90+ Days Past Due		Total Loans Carrying Value		Non-Accrual Loans		90+ Days Past Due but Accruing
Loans(1)(2)
Acquired SBA 7(a) loans	$	99,868	$	1,212	$	5,588	$	106,668	$	10,269	$	1,314
Acquired loans		927,144		25,441		15,410		967,995		20,435		1,846
Acquired Transitional loans		78,325		2,716		2,314		83,355		4,886		—
Originated Transitional loans		889,110		4,424		5,645		899,179		18,094		—
Originated SBC loans, at fair value		20,434		—		—		20,434		—		—
Originated SBC loans		1,101,103		7,981		10,788		1,119,872		10,788		—
Originated SBA 7(a) loans		109,585		75		1,124		110,784		4,511		—
Originated Residential Agency loans		533		—		2,336		2,869		2,336		—
Total Loans, before general allowance for loans losses	$	3,226,102	$	41,849	$	43,205	$	3,311,156	$	71,319	$	3,160
General allowance for loan losses							$	(2,264)
Total Loans, net							$	3,308,892
Percentage of outstanding		97.4%		1.3%		1.3%		100%		2.2%		0.1%
(1) Loan balances include specific allowance for loan losses.
(2) Includes Loans, net in consolidated VIEs


	December 31, 2018
Loans (In Thousands)	Current and less than 30 days past due		30-89 Days Past Due		90+ Days Past Due		Total Loans Carrying Value		Non-Accrual Loans		90+ Days Past Due but Accruing
Loans(1)(2)
Acquired SBA 7(a) loans	$	299,080	$	14,943	$	4,465	$	318,488	$	17,916	$	1,043
Acquired loans		524,930		7,213		13,552		545,695		11,447		3,811
Originated Transitional loans		659,103		5,630		—		664,733		—		—
Originated SBC loans, at fair value		22,664		—		—		22,664		—		—
Originated SBC loans		748,146		12,367		16,895		777,408		16,895		—
Originated SBA 7(a) loans		83,076		2,178		162		85,416		1,666		—
Originated Residential Agency loans		337		—		1,562		1,899		1,562		—
Total Loans, before allowance for loans losses	$	2,337,336	$	42,331	$	36,636	$	2,416,303	$	49,486	$	4,854
General allowance for loan losses							$	(1,937)
Total Loans, net							$	2,414,366
Percentage of outstanding		96.7%		1.8%		1.5%		100%		2.0%		0.2%
(1) Loan balances include specific allowance for loan losses.
(2) Includes Loans, net in consolidated VIEs

In addition to delinquency rates, the current estimated LTV ratio is another indicator that can provide insight into a borrower’s continued willingness to pay, as the delinquency rate of high LTV loans tends to be greater than that for loans where the borrower has equity in the collateral. The geographic distribution of the loan collateral also provides insight as to the credit quality of the portfolio, as factors such as the regional economy, property price changes and specific events such as natural disasters, will affect credit quality. The Company monitors the loan-to-value ratio and associated risks on a monthly basis.

The following tables presents quantitative information on the credit quality of loans, net as of the unaudited interim consolidated balance sheet dates:


	Loan-to-Value (a)
(In Thousands)	0.0 – 20.0%		20.1 – 40.0%		40.1 – 60.0%		60.1 – 80.0%		80.1 – 100.0%		Greater than 100.0%		Total
September 30, 2019
Loans(1) (2)
Acquired SBA 7(a) loans	$	3,469	$	17,402	$	23,759	$	24,030	$	20,156	$	17,852	$	106,668
Acquired loans		225,178		335,958		253,597		103,903		23,294		26,065		967,995
Acquired Transitional loans		5,889		10,038		31,180		27,112		9,136		—		83,355
Originated Transitional loans		852		47,601		135,362		660,448		54,863		53		899,179
Originated SBC loans, at fair value		—		8,558		—		10,349		1,527		—		20,434
Originated SBC loans		—		51,508		456,028		595,649		10,654		6,033		1,119,872
Originated SBA 7(a) loans		232		4,964		14,531		40,048		16,017		34,992		110,784
Originated Residential Agency loans		—		51		38		833		1,605		342		2,869
Total Loans, before general allowance for loans losses	$	235,620	$	476,080	$	914,495	$	1,462,372	$	137,252	$	85,337	$	3,311,156
General allowance for loan losses													$	(2,264)
Total Loans, net													$	3,308,892
Percentage of outstanding		7.1	%	14.4	%	27.6	%	44.2	%	4.1	%	2.6	%
December 31, 2018
Loans(1) (2)
Acquired SBA 7(a) loans	$	6,337	$	38,150	$	100,578	$	93,411	$	33,750	$	46,262	$	318,488
Acquired loans		118,198		165,567		136,206		70,017		40,003		15,704		545,695
Originated Transitional loans		—		29,245		178,861		348,967		101,513		6,147		664,733
Originated SBC loans, at fair value		—		8,600		—		6,328		7,736		—		22,664
Originated SBC loans		—		48,259		271,311		457,838		—		—		777,408
Originated SBA 7(a) loans		393		3,200		10,642		24,387		16,473		30,321		85,416
Originated Residential Agency loans		—		—		111		952		734		102		1,899
Total Loans, before allowance for loans losses	$	124,928	$	293,021	$	697,709	$	1,001,900	$	200,209	$	98,536	$	2,416,303
General allowance for loan losses													$	(1,937)
Total Loans, net													$	2,414,366
Percentage of outstanding		5.2	%	12.1	%	28.9	%	41.5	%	8.3	%	4.0	%
(a) Loan-to-value is calculated as carrying amount as a percentage of current collateral value
(1) Loan balances include specific allowance for loan loss reserves.
(2) Includes Loans, net in consolidated VIEs

As of September 30, 2019 and December 31, 2018, the Company’s total carrying amount of loans in the foreclosure process was $0.7 million and $1.4 million, respectively.

The following table displays the geographic concentration of the Company’s loans, net, secured by real estate recorded on our unaudited interim consolidated balance sheets.


Geographic Concentration (Unpaid Principal Balance)	September 30, 2019		December 31, 2018
California	18.1	%	14.1	%
Texas	15.3		11.3
New York	7.9		6.3
Florida	7.7		10.8
Illinois	6.0		3.8
Arizona	4.2		5.0
Georgia	4.2		5.3
North Carolina	3.1		3.7
Washington	2.5		2.8
Ohio	2.5		2.8
Other	28.5		34.1
Total	100.0	%	100.0	%

The following table displays the collateral type concentration of the Company’s loans, net, on our unaudited interim consolidated balance sheets.


Collateral Concentration (Unpaid Principal Balance)	September 30, 2019		December 31, 2018
Multi-family	30.7	%	23.3	%
Retail	19.4		18.5
Office	14.3		15.1
Mixed Use	12.3		9.6
SBA(1)	7.6		18.1
Industrial	7.4		8.2
Lodging/Residential	2.8		2.4
Other	5.5		4.8
Total	100.0	%	100.0	%
(1) Further detail provided on SBA collateral concentration is included in table below.

The following table displays the collateral type concentration of the Company’s SBA loans within loans, net, on our unaudited interim consolidated balance sheets.


Collateral Concentration (Unpaid Principal Balance)	September 30, 2019		December 31, 2018
Offices of Physicians	13.4	%	17.7	%
Child Day Care Services	9.6		9.9
Hotels, Motels & Tourist Courts	9.0		3.8
Eating Places	7.1		5.4
Lodging	5.3		10.1
Veterinarians	4.8		6.8
Gasoline Service Stations	4.3		2.3
Funeral Service & Crematories	3.1		2.3
Grocery Stores	2.6		3.8
Auto	1.8		2.7
Other	39.0		35.2
Total	100.0	%	100.0	%

Allowance for loan losses

The allowance for loan losses represents the Company’s estimate of probable credit losses inherent in the Company’s held-for-investment loan portfolio. This is assessed by considering credit quality indicators, including probable and historical losses, collateral values, loan-to-value (“LTV”) ratios, and economic conditions. The allowance for loan losses includes an asset-specific component, a general formula-based component, and a component related to PCI loans.

The following tables detail the allowance for loan losses by loan product and impairment methodology as of the unaudited interim consolidated balance sheet dates:


	September 30, 2019
(In Thousands)	Originated SBC loans		Originated Transitional loans		Acquired loans		Acquired SBA 7(a) loans		Originated SBA 7(a) loans		Acquired Transitional loans		Total Allowance for loan losses
General	$	23	$	290	$	780	$	347	$	762	$	62	$	2,264
Specific		304		-		418		865		552		-		2,139
PCI		-		-		2,734		828		-		-		3,562
Ending balance	$	327	$	290	$	3,932	$	2,040	$	1,314	$	62	$	7,965


	December 31, 2018
(In Thousands)	Originated SBC loans		Originated Transitional loans		Acquired loans		Acquired SBA 7(a) loans		Originated SBA 7(a) loans		Acquired Transitional loans		Total Allowance for loan losses
General	$	11	$	353	$	608	$	532	$	433	$	-	$	1,937
Specific		-		-		1,012		823		153		-		1,988
PCI		-		-		3,432		963		-		-		4,395
Ending balance	$	11	$	353	$	5,052	$	2,318	$	586	$	-	$	8,320

The following tables detail the activity of the allowance for loan losses for loans, held-for-investment:


	Three Months Ended September 30, 2019
(In Thousands)	Originated SBC loans		Originated Transitional loans		Acquired loans		Acquired SBA 7(a) loans		Originated SBA 7(a) loans		Acquired Transitional loans		Total Allowance for loan losses
Beginning balance	$	421	$	367	$	5,072	$	2,194	$	694	$	66	$	8,814
Provision for (Recoveries of) loan losses		33		(79)		180		(183)		746		(4)		693
Charge-offs and sales		(127)		2		(783)		(93)		(126)		-		(1,127)
Recoveries		-		-		(537)		122		-		-		(415)
Ending balance	$	327	$	290	$	3,932	$	2,040	$	1,314	$	62	$	7,965


	Three Months Ended September 30, 2018
(In Thousands)	Originated SBC loans		Originated Transitional loans		Acquired loans		Acquired SBA 7(a) loans		Originated SBA 7(a) loans		Acquired Transitional loans		Total Allowance for loan losses
Beginning balance	$	95	$	226	$	6,167	$	2,634	$	544	$		$	9,666
Provision for (Recoveries of) loan losses		(94)		101		890		(70)		(27)		-		800
Charge-offs and sales						(766)		(51)				-		(817)
Recoveries		-				(829)		67				-		(762)
Ending balance	$	1	$	327	$	5,462	$	2,580	$	517	$	-	$	8,887


	Nine Months Ended September 30, 2019
(In Thousands)	Originated SBC loans		Originated Transitional loans		Acquired loans		Acquired SBA 7(a) loans		Originated SBA 7(a) loans		Acquired Transitional loans		Total Allowance for loan losses
Beginning balance	$	11	$	353	$	5,052	$	2,318	$	586	$	-		8,320
Provision for (Recoveries of) loan losses		443		(65)		675		590		854		62		2,559
Charge-offs and sales		(127)		2		(784)		(1,055)		(126)		-		(2,090)
Recoveries		-		-		(1,011)		187		-		-		(824)
Ending balance	$	327	$	290	$	3,932	$	2,040	$	1,314	$	62	$	7,965


	Nine Months Ended September 30, 2018
(In Thousands)	Originated SBC loans		Originated Transitional loans		Acquired loans		Acquired SBA 7(a) loans		Originated SBA 7(a) loans		Acquired Transitional loans		Total Allowance for loan losses
Beginning balance	$	637	$	-	$	7,264	$	3,527	$	318	$	-	$	11,746
Provision for loan losses		(467)		327		1,120		(608)		199		-		571
Charge-offs and sales		(169)		-		(1,050)		(573)		-		-		(1,792)
Recoveries		-		-		(1,872)		234		-		-		(1,638)
Ending balance	$	1	$	327	$	5,462	$	2,580	$	517	$	-	$	8,887

Impaired loans - non-PCI loans

The Company considers a loan to be impaired when the Company does not expect to collect all the contractual and principal payments as scheduled in the loan agreements. Impaired loans include loans that have been modified in a TDR or loans that are placed on non-accrual status. All impaired loans are evaluated for an asset-specific allowance as described in Note 3.


(In Thousands)	September 30, 2019		December 31, 2018
Impaired loans
With an allowance	$	14,089	$	9,734
Without an allowance		50,292		33,082
Total recorded carrying value of impaired loans	$	64,381	$	42,816
Allowance for loan losses related to impaired loans	$	(2,139)	$	(1,989)
Unpaid principal balance of impaired loans	$	71,022	$	49,128
Impaired loans on non-accrual status	$	64,381	$	42,816

Average carrying value of impaired loans	$	64,037	$	36,675


	September 30, 2019		September 30, 2018
Interest income on impaired loans for the three months ended	$	125	$	87
Interest income on impaired loans for the nine months ended	$	1,211	$	109

Troubled debt restructurings

If the borrower is determined to be in financial difficulty, then the Company will determine whether a financial concession has been granted to the borrower by analyzing the value of the loan as compared to the recorded investment, modifications of the interest rate as compared to market rates, modification of the stated maturity date, modification of the timing of principal and interest payments and the partial forgiveness of the loan. Modified loans that are classified as TDRs are individually evaluated and measured for impairment.

The following table summarizes the recorded investment of TDRs on the unaudited interim consolidated balance sheet dates by loan type.


	September 30, 2019						December 31, 2018
(In Thousands)	SBC		SBA		Total		SBC		SBA		Total
Recorded carrying value modified loans classified as TDRs	$	5,580	$	10,166	$	15,746	$	1,825	$	17,344	$	19,169
Allowance for loan losses on loans classified as TDRs	$	256	$	571	$	827	$	321	$	278	$	599

Carrying value of modified loans classified as TDRs
Carrying value of modified loans classified as TDRs on accrual status	$	880	$	2,388	$	3,268	$	1,696	$	7,375	$	9,071
Carrying value of modified loans classified as TDRs on non-accrual status		4,700		7,778		12,478		129		9,969		10,098
Total carrying value of modified loans classified as TDRs	$	5,580	$	10,166	$	15,746	$	1,825	$	17,344	$	19,169

The following table summarizes the TDR activity that occurred during the three and nine months ended September 30, 2019 and 2018 and the financial effects of these modifications.


	Three Months Ended September 30, 2019						Three Months Ended September 30, 2018
(In Thousands, except number of loans)	SBC		SBA		Total		SBC		SBA		Total
Number of loans permanently modified		1		15		16		-		7		7
Pre-modification recorded balance (a)	$	596	$	1,843	$	2,439	$	-	$	636	$	636
Post-modification recorded balance (a)	$	596	$	1,658	$	2,254	$	-	$	650	$	650

Number of loans that remain in default as of September 30, 2019 (b)		1		3		4		-		2		2
Balance of loans that remain in default as of September 30, 2019 (b)	$	596	$	61	$	657	$	-	$	65	$	65

Concession granted (a):
Term extension	$	-	$	1,466	$	1,466	$	-	$	595	$	595
Interest rate reduction		-		-		-		-		-		-
Principal reduction		-		-		-		-		8		8
Foreclosure		596		61		657		-		65		65
Total	$	596	$	1,527	$	2,123	$	-	$	668	$	668
(a) Represents carrying value.
(b) Represents the September 30, 2019 carrying values of the TDRs that occurred during the three months ended September 30, 2019 and 2018 that remained in default as of September 30, 2019. Generally, all loans modified in a TDR are placed or remain on non-accrual status at the time of the restructuring. However, certain accruing loans modified in a TDR that are current at the time of restructuring may remain on accrual status if payment in full under the restructured terms is expected. For purposes of this schedule, a loan is considered in default if it is 30 or more days past due.


	Nine Months Ended September 30, 2019						Nine Months Ended September 30, 2018
(In Thousands, except number of loans)	SBC		SBA		Total		SBC		SBA		Total
Number of loans permanently modified		2		27		29		-		28		28
Pre-modification recorded balance (a)	$	699	$	3,544	$	4,243	$	-	$	2,629	$	2,629
Post-modification recorded balance (a)	$	699	$	3,324	$	4,023	$	-	$	2,745	$	2,745

Number of loans that remain in default as of September 30, 2019 (b)		2		7		9		-		6		6
Balance of loans that remain in default as of September 30, 2019 (b)	$	704	$	323	$	1,027	$	-	$	106	$	106

Concession granted (a):
Term extension	$	-	$	2,843	$	2,843	$	-	$	2,366	$	2,366
Interest rate reduction		-		-		-		-		-		-
Principal reduction		-		-		-		-		8		8
Foreclosure		704		116		820		-		104		104
Total	$	704	$	2,959	$	3,663	$	-	$	2,478	$	2,478
(a) Represents carrying value.
(b) Represents the September 30, 2019 carrying values of the TDRs that occurred during the year ended September 30, 2019 and 2018 that remained in default as of September 30, 2019. Generally, all loans modified in a TDR are placed or remain on non-accrual status at the time of the restructuring. However, certain accruing loans modified in a TDR that are current at the time of restructuring may remain on accrual status if payment in full under the restructured terms is expected. For purposes of this schedule, a loan is considered in default if it is 30 or more days past due.

The Company does not believe the financial impact of the presented TDRs to be material. The other elements of the Company’s modification programs do not have a significant impact on financial results given their relative size, or do not have a direct financial impact as in the case of covenant changes.

Loans, held-for-investment are accounted for under ASC 310-10 or ASC 310-30 depending on whether there is evidence of credit deterioration at the time of acquisition. The outstanding carrying amount of our held-for-investment loan portfolio broken down by ASC 310-10 (non-PCI loans) and ASC 310-30 (PCI loans) is as follows:


	September 30, 2019				December 31, 2018
	Non-PCI		PCI		Non-PCI		PCI
(In Thousands)	Loans		Loans		Loans		Loans
Unpaid principal balance	$	3,262,721	$	74,653	$	2,361,155	$	92,463
Non-accretable discount		—		(5,637)		—		(6,040)
Accretable discount		(24,793)		(10,521)		(31,533)		(16,023)
Loans, held-for-investment		3,237,928		58,495		2,329,622		70,400
Allowance for loan losses		(4,403)		(3,562)		(3,925)		(4,395)
Loans, held-for-investment	$	3,233,525	$	54,933	$	2,325,697	$	66,005

PCI loans

The following table details the activity of the accretable yield on PCI loans, held-for-investment. The amount of accretable yield is affected by changes in credit outlooks, including metrics such as default and loss severities, prepayment speeds, which can change the amount and period of time over which interest payments are expected to be received, and the interest rates on variable loans.


	Three Months Ended September 30,				Nine Months Ended September 30,
(In Thousands)	2019		2018		2019		2018
Beginning accretable discount - PCI loans	$	12,176	$	19,485	$	16,023	$	23,749
Purchases/Originations		94		—		94		514
Sales		(574)		(815)		(1,848)		(2,309)
Accretion		(714)		(965)		(2,701)		(3,940)
Other		139		161		316		505
Transfers		(600)		482		(1,363)		(171)
Ending accretable discount - PCI loans	$	10,521	$	18,348	$	10,521	$	18,348