Business Combinations

6 Months Ended

Jun. 30, 2024

Business Combinations

Business Combinations

Note 5. Business Combinations

Madison One Acquisition

On June 5, 2024 the Company acquired Madison One, a lending originator and servicer in the government guaranteed loan industry focusing on USDA and SBA guaranteed loan products. Refer to Note 1 for more information about the Madison One Acquisition. The purchase price was allocated to the assets acquired and liabilities assumed based on their respective fair values. The methodologies used, and key assumptions made, to estimate the fair value of the assets acquired and liabilities assumed are primarily based on future cash flows and discount rates.

The table below summarizes the fair value of assets acquired and liabilities assumed from the Madison One Acquisition.

(in thousands)	June 5, 2024
Assets
Cash and cash equivalents	$	83
Restricted cash		721
Servicing rights		16,304
Other assets:
Intangible assets		10,400
Other		303
Total assets acquired	$	27,811
Liabilities
Accounts payable and other accrued liabilities		978
Total liabilities assumed	$	978
Net assets acquired	$	26,833
Non-controlling interests		(600)
Net assets acquired, net of non-controlling interests	$	26,233

The table below illustrates the aggregate consideration transferred, net assets acquired, and the related goodwill.

(in thousands)		June 5, 2024
Fair value of net assets acquired	$	26,233
Cash paid		32,868
Contingent consideration		3,926
Total consideration transferred	$	36,794
Goodwill	$	10,561

Broadmark Merger

On May 31, 2023, the Company completed a merger with Broadmark, a specialty real estate finance company that specialized in originating and servicing residential and commercial construction loans. Refer to Note 1 for more information about the Broadmark Merger. The purchase price was allocated to the assets acquired and liabilities assumed based on their respective fair values. The methodologies used, and key assumptions made, to estimate the fair value of the assets acquired and liabilities assumed are primarily based on future cash flows and discount rates.

The table below summarizes the fair value of assets acquired and liabilities assumed from the Broadmark Merger.

(in thousands)	Preliminary Purchase Price Allocation			Measurement Period Adjustments		Updated Purchase Price Allocation
Assets
Cash and cash equivalents	$	38,710	$	—	$	38,710
Loans, net		772,954		(8,587)		764,367
Real estate owned, held for sale		158,911		(23,671)		135,240
Other assets		17,107		(7,151)		9,956
Total assets acquired	$	987,682	$	(39,409)	$	948,273
Liabilities
Corporate debt, net		98,028		—		98,028
Accounts payable and other accrued liabilities		22,531		819		23,350
Total liabilities assumed	$	120,559	$	819	$	121,378
Net assets acquired	$	867,123	$	(40,228)	$	826,895

In a business combination, the initial allocation of the purchase price is considered preliminary and therefore, is subject to change until the end of the measurement period. The final determination occurred within one year of the merger date. Because the measurement period for the Broadmark Merger remained open until May 31, 2024, certain fair value estimates changed once all information necessary to make a final fair value assessment was received. The amounts presented in the table above pertained to the preliminary purchase price allocation reported at the time of the Broadmark Merger based on information that was available to management at the time the consolidated financial statements were prepared. The preliminary purchase price allocation changed as the Company completed its analysis of the fair value of the assets acquired and liabilities assumed, which impacts the consolidated financial statements. Subsequent to the determination of the preliminary purchase price allocation, the Company recorded a measurement period adjustment based on the updated valuations obtained by decreasing net assets acquired and the total bargain purchase gain related to this transaction by $40.2 million.

The table below illustrates the aggregate consideration transferred, net assets acquired, and the related bargain purchase gain.

(in thousands)		Preliminary Purchase Price Allocation		Measurement Period Adjustments		Updated Purchase Price Allocation
Fair value of net assets acquired	$	867,123	$	(40,228)	$	826,895
Consideration transferred based on the value of common stock issued		637,229		—		637,229
Bargain purchase gain	$	229,894	$	(40,228)	$	189,666

In the table above, the bargain purchase gain represents the fair value of the assets acquired and liabilities assumed in the Broadmark Merger which exceeds the fair value of the 62.2 million shares of common stock issued at $10.24 per share at the Effective Time. Gain on bargain purchase is recognized in the consolidated statements of operations.

The following pro-forma income and earnings (unaudited) of the combined company are presented as if the Broadmark Merger had occurred on January 1, 2024 and January 1, 2023.

		Three Months Ended June 30,				Six Months Ended June 30,
(in thousands)		2024	2023			2024	2023
Selected Financial Data
Interest income	$	234,119	$	246,245	$	466,473	$	486,050
Interest expense		(183,167)		(172,876)		(366,972)		(333,860)
Recovery of (provision for) loan losses		18,871		(22,360)		45,415		(17,327)
Non-interest income		(82,393)		276,813		(185,021)		309,307
Non-interest expense		(66,239)		(65,526)		(144,101)		(132,242)
Income (loss) before provision for income taxes	$	(78,809)	$	262,296	$	(184,206)	$	311,928
Income tax benefit (expense)		48,579		(5,141)		78,790		(5,532)
Net income (loss)	$	(30,230)	$	257,155	$	(105,416)	$	306,396

Non-recurring pro-forma transaction costs directly attributable to the Broadmark Merger were $1.2 million for both the three months ended June 30, 2024 and 2023 and $1.6 million for both the six months ended June 30, 2024 and 2023, and have been deducted from the non-interest expense amount above. These costs included legal, accounting, valuation, and other professional or consulting fees directly attributable to the Broadmark Merger.