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Loans and Allowance for Loan Losses

6 Months Ended

Jun. 30, 2020

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-deteriorated at the date of acquisition. The Company accounts for loans based on the following loan program categories:

●

Originated or purchased loans held-for-investment– originated transitional loans, originated conventional SBC and SBA loans, or acquired loans with no signs of credit deterioration at time of purchase.

●

Loans at fair value – certain originated conventional SBC loans and PPP 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

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:


	June 30, 2020				December 31, 2019
Loans (In Thousands)	Carrying Value		UPB		Carrying Value		UPB
Loans
Originated Transitional loans	$	410,249	$	413,526	$	593,657	$	600,226
Originated SBA 7(a) loans		293,713		295,956		297,934		299,580
Acquired SBA 7(a) loans		224,565		235,105		255,240		269,396
Originated SBC loans		207,983		205,879		133,118		132,227
Acquired loans		204,793		207,036		430,307		433,079
Originated PPP loans, at fair value		105,248		105,248		—		—
Originated SBC loans, at fair value		19,050		19,551		20,212		19,565
Originated Residential Agency loans		4,295		4,295		3,396		3,395
Total Loans, before allowance for loan losses	$	1,469,896	$	1,486,596	$	1,733,864	$	1,757,468
Allowance for loan losses	$	(37,089)		—	$	(5,880)		—
Total Loans, net	$	1,432,807	$	1,486,596	$	1,727,984	$	1,757,468
Loans in consolidated VIEs
Loans
Originated SBC loans	$	969,659	$	960,765	$	1,037,844	$	1,026,921
Originated Transitional loans		858,613		864,000		490,913		493,217
Acquired loans		794,473		798,841		666,226		671,698
Originated SBA 7(a) loans		73,018		77,203		79,457		83,559
Acquired SBA 7(a) loans		46,385		57,924		53,320		66,997
Total Loans, in consolidated VIEs, before allowance for loan losses	$	2,742,148	$	2,758,733	$	2,327,760	$	2,342,392
Allowance for loan losses on loans in consolidated VIEs	$	(19,974)		—	$	(1,561)		—
Total Loans, net, in consolidated VIEs	$	2,722,174	$	2,758,733	$	2,326,199	$	2,342,392
Total Loans, net, and Loans, net in consolidated VIEs	$	4,154,981	$	4,245,329	$	4,054,183	$	4,099,860
Loans, held for sale, at fair value
Originated Residential Agency loans	$	269,421	$	255,745	$	136,506	$	132,016
Originated Freddie Mac loans		15,355		15,071		21,775		21,513
Originated SBA 7(a) loans		12,382		11,552		28,551		26,669
Acquired loans		511		518		1,245		1,208
Total Loans, held for sale, at fair value	$	297,669	$	282,886	$	188,077	$	181,406
Loans, held for sale, at fair value in consolidated VIEs
Loans, held for sale, at fair value
Acquired loans	$	3,635	$	3,617	$	4,434	$	4,400
Total Loans, held for sale, at fair value in consolidated VIEs	$	3,635	$	3,617	$	4,434	$	4,400
Total Loans, held for sale, at fair value, and Loans, held for sale, at fair value in consolidated VIEs	$	301,304	$	286,503	$	192,511	$	185,806
Total Loan portfolio	$	4,456,285	$	4,531,832	$	4,246,694	$	4,285,666

Loan vintage and 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 table summarizes the classification, UPB, and carrying value of loans by year of origination:


			Carrying Value by Year of Origination
(In Thousands)	UPB		2020		2019		2018		2017		2016		Pre 2016		Total
June 30, 2020
Loans^{(1) (2)}
Originated Transitional loans	$	1,277,526	$	196,317	$	648,447	$	337,312	$	58,618	$	26,990	$	1,091	$	1,268,775
Originated SBC loans		1,166,644		72,024		538,488		273,034		113,472		46,030		131,366		1,174,414
Acquired loans		1,005,877		2,501		29,867		22,921		28,023		15,554		898,964		997,830
Originated SBA 7(a) loans		373,159		14,712		100,526		143,662		76,160		22,672		4,468		362,200
Acquired SBA 7(a) loans		293,029		151		23,477		14,900		289		31		227,290		266,138
Originated PPP loans, at fair value		105,248		105,248		—		—		—		—		—		105,248
Originated SBC loans, at fair value		19,551		—		—		—		1,690		11,460		5,900		19,050
Originated Residential Agency loans		4,295		1,288		1,788		708		219		90		202		4,295
Total Loans, before general allowance for loans losses	$	4,245,329	$	392,241	$	1,342,593	$	792,537	$	278,471	$	122,827	$	1,269,281	$	4,197,950
General allowance for loan losses															$	(42,969)
Total Loans, net															$	4,154,981

(1) Loan balances include specific allowance for loan losses of $14.1 million.

(2) Includes Loans, net in consolidated VIEs

The following table displays delinquency information on loans, net by year of origination:


			Carrying Value by Year of Origination
(In Thousands)	UPB		2020		2019		2018		2017		2016		Pre 2016		Total
June 30, 2020
Loans^{(1) (2)}
Current and less than 30 days past due	$	3,846,470	$	391,330	$	1,291,375	$	737,627	$	231,941	$	92,100	$	1,066,352	$	3,810,725
30-89 Days Past Due		303,591		529		49,852		40,313		30,283		9,790		174,306		305,073
90+ Days		95,268		382		1,366		14,597		16,247		20,937		28,623		82,152
Total Loans, before general allowance for loans losses	$	4,245,329	$	392,241	$	1,342,593	$	792,537	$	278,471	$	122,827	$	1,269,281	$	4,197,950
General allowance for loan losses															$	(42,969)
Total Loans, net															$	4,154,981

(1) Loan balances include specific allowance for loan losses of $14.1 million.

(2) Includes Loans, net in consolidated VIEs

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


	June 30, 2020
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⁾
Originated Transitional loans	$	1,186,742	$	57,369	$	24,664	$	1,268,775	$	24,664	$	—
Originated SBC loans		1,093,804		66,800		13,810		1,174,414		13,810		—
Acquired loans		793,243		179,745		24,842		997,830		31,087		57
Originated SBA 7(a) loans		360,355		—		1,845		362,200		6,372		837
Acquired SBA 7(a) loans		261,189		630		4,319		266,138		9,770		1,300
Originated PPP loans, at fair value		105,248		—		—		105,248		—		—
Originated SBC loans, at fair value		9,011		—		10,039		19,050		—		10,040
Originated Residential Agency loans		1,133		529		2,633		4,295		2,383		425
Total Loans, before general allowance for loans losses	$	3,810,725	$	305,073	$	82,152	$	4,197,950	$	88,086	$	12,659
General allowance for loan losses							$	(42,969)
Total Loans, net							$	4,154,981
Percentage of outstanding		90.7%		7.3%		2.0%		100%		2.1%		0.3%
(1) Loan balances include specific allowance for loan losses of $14.1 million.
(2) Includes Loans, net in consolidated VIEs


	December 31, 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⁾
Originated Transitional loans	$	1,074,955	$	5,728	$	5,645	$	1,086,328	$	24,587	$	—
Originated SBC loans		1,137,140		15,670		16,089		1,168,899		16,089		—
Acquired loans		1,032,259		45,894		16,130		1,094,283		23,500		3,382
Acquired SBA 7(a) loans		297,172		4,646		5,042		306,860		9,177		1,326
Originated SBC loans, at fair value		20,212		—		—		20,212		—		—
Originated SBA 7(a) loans		370,101		5,238		1,290		376,629		8,882		—
Originated Residential Agency loans		582		635		2,179		3,396		2,105		74
Total Loans, before allowance for loans losses	$	3,932,421	$	77,811	$	46,375	$	4,056,607	$	84,340	$	4,782
General allowance for loan losses							$	(2,424)
Total Loans, net							$	4,054,183
Percentage of outstanding		97.0%		1.9%		1.1%		100%		2.1%		0.1%
(1) Loan balances include specific allowance for loan losses of $4.0 million.
(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 collateral concentration of the loan portfolio also provides insight as to the credit quality of the portfolio, as certain economic factors or events may have a more pronounced impact on certain sectors or property types.

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
June 30, 2020
Loans^{(1) (2)}
Originated Transitional loans	$	5,407	$	35,443	$	223,154	$	897,430	$	104,974	$	2,367	$	1,268,775
Originated SBC loans		—		66,041		463,824		613,058		22,754		8,737		1,174,414
Acquired loans		222,563		378,245		236,043		113,572		28,988		18,419		997,830
Originated SBA 7(a) loans		1,365		15,494		48,894		133,045		63,760		99,642		362,200
Acquired SBA 7(a) loans		8,741		38,950		96,622		65,475		30,392		25,958		266,138
Originated PPP loans, at fair value		—		—		—		—		—		105,248		105,248
Originated SBC loans, at fair value		—		7,591		—		11,459		—		—		19,050
Originated Residential Agency loans		—		51		90		810		3,069		275		4,295
Total Loans, before general allowance for loans losses	$	238,076	$	541,815	$	1,068,627	$	1,834,849	$	253,937	$	260,646	$	4,197,950
General allowance for loan losses													$	(42,969)
Total Loans, net													$	4,154,981
Percentage of outstanding		5.7	%	12.9	%	25.5	%	43.7	%	6.0	%	6.2	%
December 31, 2019
Loans^{(1) (2)}
Originated Transitional loans	$	1,736	$	28,108	$	277,388	$	750,298	$	28,059	$	739	$	1,086,328
Originated SBC loans		—		60,601		431,312		660,733		8,045		8,208		1,168,899
Acquired loans		218,679		371,471		293,216		161,431		35,731		13,755		1,094,283
Acquired SBA 7(a) loans		7,712		39,566		103,590		83,954		39,726		32,312		306,860
Originated SBC loans, at fair value		—		8,192		—		6,422		5,598		—		20,212
Originated SBA 7(a) loans		865		13,843		41,166		130,177		78,544		112,034		376,629
Originated Residential Agency loans		—		51		—		830		2,393		122		3,396
Total Loans, before allowance for loans losses	$	228,992	$	521,832	$	1,146,672	$	1,793,845	$	198,096	$	167,170	$	4,056,607
General allowance for loan losses													$	(2,424)
Total Loans, net													$	4,054,183
Percentage of outstanding		5.6	%	12.9	%	28.3	%	44.2	%	4.9	%	4.1	%
(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 June 30, 2020 and December 31, 2019, the Company’s total carrying amount of loans in the foreclosure process was $1.1 million and $0.8 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 (% of Unpaid Principal Balance)	June 30, 2020		December 31, 2019
California	17.8	%	16.9	%
Texas	15.2		15.2
New York	8.4		8.3
Florida	8.1		8.3
Illinois	5.4		5.2
Georgia	4.7		4.8
Arizona	3.4		3.4
North Carolina	3.2		3.2
Washington	2.9		2.8
Colorado	2.7		2.8
Other	28.2		29.1
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 (% of Unpaid Principal Balance)	June 30, 2020		December 31, 2019
Multi-family	26.0	%	26.6	%
Retail	16.8		17.5
SBA⁽¹⁾	18.2		17.6
Office	12.3		12.9
Mixed Use	12.0		10.4
Industrial	6.5		6.4
Lodging/Residential	3.1		3.3
Other	5.1		5.3
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 (% of Unpaid Principal Balance)	June 30, 2020		December 31, 2019
Lodging	16.3	%	17.3	%
Offices of Physicians	12.4		14.1
Child Day Care Services	6.9		8.1
Eating Places	5.4		6.1
Veterinarians	3.4		4.1
Gasoline Service Stations	3.3		3.7
Funeral Service & Crematories	1.9		2.0
Grocery Stores	1.8		2.0
Auto	0.9		1.3
Other	47.7		41.3
Total	100.0	%	100.0	%

Allowance for loan losses

The following tables detail the activity of the allowance for loan losses for loans:


	Three Months Ended June 30, 2020
(In Thousands)	Originated SBC loans		Originated Transitional loans		Acquired loans		Acquired SBA 7(a) loans		Originated SBA 7(a) loans		Originated Residential Agency Loans		Total Allowance for loan losses
Beginning balance	$	10,362	$	24,264	$	10,646	$	5,622	$	7,074	$	—	$	57,968
Provision for (Recoveries of) loan losses		(1,388)		(4,433)		1,960		190		2,580		500		(591)
Charge-offs and sales		—		—		(42)		(97)		(204)		—		(343)
Recoveries		—		—		—		29		—		—		29
Ending balance	$	8,974	$	19,831	$	12,564	$	5,744	$	9,450	$	500	$	57,063


	Three Months Ended June 30, 2019
(In Thousands)	Originated SBC loans		Originated Transitional loans		Acquired loans		Acquired SBA 7(a) loans		Originated SBA 7(a) loans		Originated Residential Agency Loans		Total Allowance for loan losses
Beginning balance	$	—	$	222	$	5,041	$	2,274	$	740	$	—	$	8,277
Provision for (Recoveries of) loan losses		421		145		161		601		(46)		66		1,348
Charge-offs and sales		—		—		—		(630)		—		—		(630)
Recoveries		—		—		(130)		(51)		—		—		(181)
Ending balance	$	421	$	367	$	5,072	$	2,194	$	694	$	66	$	8,814


	Six Months Ended June 30, 2020
(In Thousands)	Originated SBC loans		Originated Transitional loans		Acquired loans		Acquired SBA 7(a) loans		Originated SBA 7(a) loans		Originated Residential Agency Loans		Total Allowance for loan losses
Beginning balance	$	304	$	188	$	3,054	$	2,114	$	1,781	$	—	$	7,441
Cumulative-effect adjustment upon adoption of ASU 2016-13		2,400		1,906		1,878		3,562		1,379		—		11,125
Provision for (recoveries of) loan losses		6,270		17,737		7,682		202		6,823		500		39,214
Charge-offs and sales		—		—		(50)		(229)		(533)		—		(812)
Recoveries		—		—		—		95		-		—		95
Ending balance	$	8,974	$	19,831	$	12,564	$	5,744	$	9,450	$	500	$	57,063


	Six Months Ended June 30, 2019
(In Thousands)	Originated SBC loans		Originated Transitional loans		Acquired loans		Acquired SBA 7(a) loans		Originated SBA 7(a) loans		Originated Residential Agency Loans		Total Allowance for loan losses
Beginning balance	$	11	$	353	$	5,052	$	2,318	$	586	$	—	$	8,320
Provision for (recoveries of) loan losses		410		14		495		773		108		66		1,866
Charge-offs and sales		—		—		—		(962)		—		—		(962)
Recoveries		—		—		(475)		65		—		—		(410)
Ending balance	$	421	$	367	$	5,072	$	2,194	$	694	$	66	$	8,814

Non-accrual loans

The following table details information about the Company’s non-accrual loans:


(In Thousands)	June 30, 2020		December 31, 2019
Non-accrual loans
With an allowance	$	26,429	$	18,063
Without an allowance		61,657		60,036
Total recorded carrying value of non-accrual loans	$	88,086	$	78,099
Allowance for loan losses related to non-accrual loans	$	(13,192)	$	(2,093)
Unpaid principal balance of non-accrual loans	$	108,615	$	83,991

	June 30, 2020		June 30, 2019
Interest income on non-accrual loans for the three months ended	$	290	$	328
Interest income on non-accrual loans for the six months ended	$	1,061	$	934

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.

In March 2020, a joint statement was issued by federal and state regulatory agencies, after consultation with the FASB, to clarify that short-term loan modifications are not TDRs if made on a good-faith basis in response to COVID-19 to borrowers who were current prior to any relief. Under this guidance, six months is provided as an example of short-term, and current is defined as less than 30 days past due at the time the modification program is implemented. The guidance also provides that these modified loans generally will not be classified as non-accrual during the term of the modification. For borrowers who are 30 days or more past due when enrolling in a loan modification program related to the COVID-19 pandemic, we evaluate the loan modifications under our existing TDR framework, and where such a loan modification would result in a concession to a borrower experiencing financial difficulty, the loan will be accounted for as a TDR and will generally not accrue interest.

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


	June 30, 2020						December 31, 2019
(In Thousands)	SBC		SBA		Total		SBC		SBA		Total
Recorded carrying value modified loans classified as TDRs	$	10,344	$	13,085	$	23,429	$	6,258	$	14,204	$	20,462
Allowance for loan losses on loans classified as TDRs	$	215	$	(3,602)	$	(3,387)	$	274	$	454	$	728

Carrying value of modified loans classified as TDRs
Carrying value of modified loans classified as TDRs on accrual status	$	278	$	6,674	$	6,952	$	333	$	7,437	$	7,770
Carrying value of modified loans classified as TDRs on non-accrual status		10,066		6,411		16,477		5,925		6,767		12,692
Total carrying value of modified loans classified as TDRs	$	10,344	$	13,085	$	23,429	$	6,258	$	14,204	$	20,462

The following table summarizes the TDR activity that occurred during the three and six months ended June 30, 2020 and 2019 and the financial effects of these modifications.


	Three Months Ended June 30, 2020						Three Months Ended June 30, 2019
(In Thousands, except number of loans)	SBC		SBA		Total		SBC		SBA		Total
Number of loans permanently modified		2		3		5		—		5		5
Pre-modification recorded balance ^(a)	$	8,305	$	211	$	8,516	$	—	$	193	$	193
Post-modification recorded balance ^(a)	$	8,305		250	$	8,555	$	—	$	180	$	180

Number of loans that remain in default as of June 30, 2020 ^(b)		2		—		2		—		—		—
Balance of loans that remain in default as of June 30, 2020 ^(b)	$	8,305	$	—	$	8,305	$	—	$	—	$	—

Concession granted ^(a):
Term extension	$	—	$	250	$	250	$	—	$	184	$	184
Interest rate reduction		—		—		—		—		—		—
Principal reduction		—		—		—		—		—		—
Foreclosure		8,305		—		8,305		—		—		—
Total	$	8,305	$	250	$	8,555	$	—	$	184	$	184
(a) Represents carrying value.
(b) Represents the June 30, 2020 carrying values of the TDRs that occurred during the three months ended June 30, 2020 and 2019 that remained in default as of June 30, 2020. 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.


	Six Months Ended June 30, 2020						Six Months Ended June 30, 2019
(In Thousands, except number of loans)	SBC		SBA		Total		SBC		SBA		Total
Number of loans permanently modified		3		10		13		1		14		15
Pre-modification recorded balance ^(a)	$	8,456	$	2,978	$	11,434	$	103	$	1,872	$	1,975
Post-modification recorded balance ^(a)	$	8,456	$	3,018	$	11,474	$	103	$	1,829	$	1,932

Number of loans that remain in default as of June 30, 2020 ^(b)		2		1		3		1		5		6
Balance of loans that remain in default as of June 30, 2020 ^(b)	$	8,305	$	141	$	8,446	$	105	$	299	$	404

Concession granted ^(a):
Term extension	$	—	$	1,850	$	1,850	$	—	$	1,411	$	1,411
Interest rate reduction		—		—		—		—		—		—
Principal reduction		—		—		—		—		—		—
Foreclosure		8,305		141		8,446		105		217		322
Total	$	8,305	$	1,991	$	10,296	$	105	$	1,628	$	1,733
(a) Represents carrying value.
(b) Represents the June 30, 2020 carrying values of the TDRs that occurred during the six months ended June 30, 2020 and 2019 that remained in default as of June 30, 2020. 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.

PCD loans

In the three and six months ended June 30, 2020 and 2019, the Company did not acquire any PCD loans.