LOANS RECEIVABLE

6 Months Ended

Jun. 30, 2020

Loans receivable consist of the following:


	June 30, 2020		December 31, 2019
	(in thousands)

SBA 7(a) loans receivable, subject to credit risk	$	27,207	$	27,290
SBA 7(a) loans receivable, subject to loan-backed notes	24,491		27,598
SBA 7(a) loans receivable, paycheck protection program	15,466		—
SBA 7(a) loans receivable, subject to secured borrowings	9,941		12,644
Loans receivable	77,105		67,532
Deferred capitalized costs	497		1,145
Loan loss reserves	(447)		(598)
Loans receivable, net	$	77,155	$	68,079

SBA 7(a) Loans Receivable, Subject to Credit Risk—Represents the unguaranteed portions of loans originated under the SBA 7(a) Small Business Loan Program which were retained by the Company and the government guaranteed portions of such loans that have not yet been fully funded or sold.

SBA 7(a) Loans Receivable, Subject to Loan-Backed Notes—Represents the unguaranteed portions of loans originated under the SBA 7(a) Small Business Loan Program which were transferred to a trust and are held as collateral in connection with a securitization transaction. The proceeds received from the transfer are reflected as loan-backed notes payable (Note 7). These loans are subject to credit risk.

SBA 7(a) Loans Receivable, Paycheck Protection Program—Enacted in March 2020, the Coronavirus Aid, Relief and Economic Security Act (the "CARES Act") implemented the Paycheck Protection Program, a new SBA 7(a) loan program that provides small businesses with uncollateralized and unguaranteed loans at an interest rate of 1.00%, with repayment deferred for a period of six months following origination. The loans will be fully forgiven, subject to certain limitations, when used by the borrower for payroll costs, interest on mortgages, rent, and utilities. For those loans that are forgiven, the SBA will remit 100% of the remaining outstanding principal plus accrued interest to us. For those loans whose borrowers do not meet the criteria required for forgiveness, repayment obligations commence after the applicable deferment period in equal installments over the remaining term to maturity. A substantial portion of the loans that we originated under the Paycheck Protection Program have a two-year term and deferment period of six months; however, loans approved by the SBA after June 5, 2020, have a five-year term and deferment period of 16 months. The loans are fully guaranteed by the SBA provided that originating lenders follow the requirements set forth in the Paycheck Protection Program. Accordingly, there is no credit risk associated with these loans since the SBA has guaranteed payment of the principal and interest. Neither the government nor lenders charged borrowers any fees in connection with the Paycheck Protection Program loans; however, the SBA paid lenders a fee upon funding loans under the Paycheck Protection Program.

As a SBA 7(a) licensee, we are an authorized lender under the Paycheck Protection Program and have originated $15,466,000 of loans under the program as of June 30, 2020. We expect a significant portion of these loans will be forgiven and repaid, either in part or in full, by the SBA, including both principal and accrued interest.

SBA 7(a) Loans Receivable, Subject to Secured Borrowings—Represents the government guaranteed portions of loans originated under the SBA 7(a) Small Business Loan Program which were sold with the proceeds received from the sale reflected as secured borrowings—government guaranteed loans. There is no credit risk associated with these loans since the SBA has guaranteed payment of the principal.

At June 30, 2020 and December 31, 2019, 99.9% and 99.6%, respectively, of our loans subject to credit risk were current. We classify loans with negative characteristics in substandard categories ranging from special mention to doubtful. At June 30, 2020 and December 31, 2019, $185,000 and $1,362,000, respectively, of loans subject to credit risk were classified in substandard categories.

At each of June 30, 2020 and December 31, 2019, our loans subject to credit risk were 98.7% concentrated in the hospitality industry.

Section 1112 of the CARES Act (“Section 1112”) provides for six months of subsidy loan payments to be made on all loans originated under the SBA 7(a) Small Business Loan Program in ‘regular’ servicing. Borrowers’ scheduled payments of principal and interest will be made by the SBA and these payments do not have to be repaid by the borrower. The overwhelming majority of borrowers under our SBA 7(a) Small Business Loan Program qualify for relief under Section 1112. The relief also applies to any new borrowers for covered loans made through September 27, 2020. As a result of the relief provided by Section 1112, we do not expect delinquencies to be material in the aggregate for loans serviced under our SBA 7(a) Small Business Loan Program through September 2020.