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EX-31 - Shepherd's Finance, LLCex31-1.htm
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
 
 
FORM 10-Q
 
 
 
 
 
S Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 
For the Quarterly Period Ended June 30, 2015
 
or
 
£  Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 
For the Transition Period From         to
 
Commission File Number 333-181360
 
 
 
SHEPHERD’S FINANCE, LLC
(Exact name of registrant as specified on its charter)
 
DELAWARE
 
36-4608739
(State or other jurisdiction of
 
(I.R.S. Employer
Incorporation or organization)
 
Identification No.)
 
12627 San Jose Blvd., Suite 203, Jacksonville, FL 32223
(Address of principal executive offices)
 
302-752-2688
(Registrant’s telephone number including area code)
 
 
 
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes  S    No  £
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes  S    No  £
 
Indicate by check mark whether the registrant is a large accelerated filer, accelerated filer, or non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.
 
 
Large accelerated filer
¨
Accelerated filer
¨
 
Non-accelerated filer
¨
Smaller reporting company
x
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  ¨    No  x
 
 
 
 
 
FORM 10-Q
SHEPHERD’S FINANCE, LLC
TABLE OF CONTENTS
 
 
Page
 
Cautionary Note Regarding Forward-Looking Statements
3
PART I. FINANCIAL INFORMATION
 
Item 1. Financial Statements
4
Interim Condensed Consolidated Balance Sheets as of June 30, 2015 (Unaudited) and December 31, 2014
4
Interim Condensed Consolidated Statements of Operations (Unaudited) for the Three and Six Months Ended June 30, 2015 and 2014
5
Interim Condensed Consolidated Statement of Changes in Members’ Capital (Unaudited) for the Six Months Ended June 30, 2015
6
Interim Condensed Consolidated Statements of Cash Flows (Unaudited) for the Six Months Ended June 30, 2015 and 2014
7
Notes to Interim Condensed Consolidated Financial Statements (Unaudited)
8
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
27
Item 3. Quantitative and Qualitative Disclosure About Market Risk
45
Item 4. Controls and Procedures
45
PART II. OTHER INFORMATION
 
Item 1. Legal Proceedings
46
Item 1A. Risk Factors
46
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
46
Item 3. Defaults upon Senior Securities
46
Item 4. Mine Safety Disclosures
46
Item 5. Other Information
46
Item 6. Exhibits
46
 
 
2

 
 
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
 
Certain statements contained in this Form 10-Q of Shepherd’s Finance, LLC, other than historical facts, may be considered forward-looking statements within the meaning of the federal securities laws. Words such as “may,” “will,” “expect,” “anticipate,” “believe,” “estimate,” “continue,” “predict,” or other similar words identify forward-looking statements. Forward-looking statements appear in a number of places in this report, including without limitation, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and include statements regarding our intent, belief or current expectation about, among other things, trends affecting the markets in which we operate, our business, financial condition and growth strategies. Although we believe that the expectations reflected in these forward-looking statements are based on reasonable assumptions, forward-looking statements are not guarantees of future performance and involve risks and uncertainties. Actual results may differ materially from those predicted in the forward-looking statements as a result of various factors, including but not limited to those set forth in the “Risk Factors” section of our Annual Report on Form 10-K for the year ended December 31, 2014, as filed with the Securities and Exchange Commission. If any of the events described in “Risk Factors” occur, they could have an adverse effect on our business, consolidated financial condition, results of operations and cash flows.
 
When considering forward-looking statements, you should keep these risk factors, as well as the other cautionary statements in this report and in our 2014 Form 10-K in mind. You should not place undue reliance on any forward-looking statement. We are not obligated to update forward-looking statements.
 
 
3

 
PART I – FINANCIAL INFORMATION
 
ITEM 1. FINANCIAL STATEMENTS
 
Shepherd’s Finance, LLC
Interim Condensed Consolidated Balance Sheets
 
 
 
 
As of
 
 
 
 
June 30,
 
 
December 31,
 
 
 
 
2015
 
 
2014
 
(in thousands of dollars)
 
 
(Unaudited)
 
 
 
 
 
 
 
 
 
 
 
 
Assets
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
1,903
 
$
558
 
Accrued interest on loans
 
 
108
 
 
78
 
Deferred financing costs, net
 
 
622
 
 
630
 
Loans receivable, net
 
 
8,895
 
 
8,097
 
Other assets
 
 
26
 
 
13
 
Total assets
 
$
11,554
 
$
9,376
 
Liabilities and Members’ Capital
 
 
 
 
 
 
 
Customer interest escrow
 
$
603
 
$
318
 
Accounts payable and accrued expenses
 
 
351
 
 
199
 
Notes payable secured
 
 
829
 
 
 
Notes payable unsecured
 
 
6,691
 
 
5,802
 
Due to preferred equity member
 
 
25
 
 
 
Total liabilities
 
 
8,499
 
 
6,319
 
 
 
 
 
 
 
 
 
Commitments and Contingencies (Notes 4 and 8)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Series B preferred equity
 
 
1,000
 
 
1,000
 
Class A common equity
 
 
2,055
 
 
2,057
 
Members’ capital
 
 
3,055
 
 
3,057
 
 
 
 
 
 
 
 
 
Total liabilities and members’ capital
 
$
11,554
 
$
9,376
 
 
The accompanying notes are an integral part of these interim condensed consolidated financial statements.
 
 
4

 
Shepherd’s Finance, LLC
Interim Condensed Consolidated Statements of Operations – Unaudited
 
 
 
Three Months Ended
 
Six Months Ended
 
 
 
June 30,
 
June 30,
 
(in thousands of dollars)
 
2015
 
2014
 
2015
 
2014
 
Interest Income
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest and fee income on loans
 
$
410
 
$
244
 
$
786
 
$
440
 
Interest expense
 
 
183
 
 
86
 
 
359
 
 
149
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net interest income
 
 
227
 
 
158
 
 
427
 
 
291
 
Less: Loan loss provision
 
 
15
 
 
2
 
 
23
 
 
3
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net interest income
 
 
212
 
 
156
 
 
404
 
 
288
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Non-Interest Expense
 
 
 
 
 
 
 
 
 
 
 
 
 
Selling, general and administrative
 
 
119
 
 
84
 
 
269
 
 
199
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total non-interest expense
 
 
119
 
 
84
 
 
269
 
 
199
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net Income
 
$
93
 
$
72
 
$
135
 
$
89
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Earned distribution to preferred equity holder
 
 
25
 
 
 
 
50
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income attributable to common equity holder
 
$
68
 
$
72
 
$
85
 
$
89
 
 
The accompanying notes are an integral part of these interim condensed consolidated financial statements.
 
 
5

 
Shepherd’s Finance, LLC
Interim Condensed Consolidated Statement of Changes in Members’ Capital – Unaudited
 
 
 
Six Months
 
 
 
Ended
 
(in thousands of dollars)
 
June 30, 2015
 
Members’ capital, as of December 31, 2014
 
$
3,057
 
Net income
 
 
135
 
Earned distributions to preferred equity holder
 
 
(50)
 
Distributions to common equity holders
 
 
(87)
 
 
 
 
 
 
Members’ capital, as of June 30, 2015
 
$
3,055
 
 
The accompanying notes are an integral part of these interim condensed consolidated financial statements.
 
 
6

 
Shepherd’s Finance, LLC
Interim Condensed Consolidated Statements of Cash Flows – Unaudited
 
 
 
Six Months Ended
 
 
 
June 30,
 
(in thousands of dollars)
 
2015
 
2014
 
 
 
 
 
 
 
 
 
Cash flows from operations
 
 
 
 
 
 
 
Net income
 
$
135
 
$
89
 
Adjustments to reconcile net income to net cash provided by (used in) operating activities
 
 
 
 
 
 
 
Amortization of deferred financing costs
 
 
105
 
 
22
 
Provision for loan losses
 
 
23
 
 
3
 
Net loan origination fees deferred (earned)
 
 
(26)
 
 
8
 
Net change in operating assets and liabilities
 
 
 
 
 
 
 
Other assets
 
 
(13)
 
 
(12)
 
Accrued interest on loans
 
 
(30)
 
 
(18)
 
Customer interest escrow
 
 
285
 
 
(19)
 
Accounts payable and accrued expenses
 
 
152
 
 
59
 
 
 
 
 
 
 
 
 
Net cash provided by (used in) operating activities
 
 
631
 
 
132
 
 
 
 
 
 
 
 
 
Cash flows from investing activities
 
 
 
 
 
 
 
Loan originations and principal collections, net
 
 
(795)
 
 
(2,128)
 
 
 
 
 
 
 
 
 
Net cash provided by (used in) investing activities
 
 
(795)
 
 
(2,128)
 
 
 
 
 
 
 
 
 
Cash flows from financing activities
 
 
 
 
 
 
 
Distributions to members
 
 
(112)
 
 
(27)
 
Proceeds from secured note payable
 
 
1,344
 
 
 
Repayments of secured note payable
 
 
(515)
 
 
 
Proceeds from unsecured notes payable
 
 
1,804
 
 
2,367
 
Redemptions of unsecured notes payable
 
 
(540)
 
 
(49)
 
Repayment of unsecured note payable
 
 
(375)
 
 
 
Deferred financing costs
 
 
(97)
 
 
(27)
 
 
 
 
 
 
 
 
 
Net cash provided by (used in)financing activities
 
 
1,509
 
 
2,264
 
 
 
 
 
 
 
 
 
Net increase (decrease) in cash and cash equivalents
 
 
1,345
 
 
268
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
 
 
 
 
 
 
Beginning of period
 
 
558
 
 
722
 
 
 
 
 
 
 
 
 
End of period
 
$
1,903
 
$
990
 
 
 
 
 
 
 
 
 
Supplemental disclosure of cash flow information
 
 
 
 
 
 
 
Cash paid for interest
 
$
113
 
$
27
 
Non-cash investing and financing activities
 
 
 
 
 
 
 
Earned but not paid distribution to preferred equity holder
 
$
25
 
$
 
 
The accompanying notes are an integral part of these interim condensed consolidated financial statements.
 
 
7

 
Information presented throughout these notes to the interim condensed consolidated financial statements (Unaudited) is in thousands of dollars.
 
1. Description of Business and Basis of Presentation
 
Description of Business
 
Description of Business
 
Shepherd’s Finance, LLC and subsidiaries (the “Company”, “we” or “our”) is a finance company that engages in commercial lending to residential homebuilders, financing construction of single family homes and residential development. The loans are extended to residential homebuilders and, as such, are commercial loans. We primarily fund our lending and operations by continued issuance of Fixed Rate Subordinated Notes (“Notes”) to the general public, which Notes are unsecured subordinated debt. 
 
Basis of Presentation
 
The accompanying (a) condensed consolidated balance sheet as of December 31, 2014, which has been derived from audited consolidated financial statements, and (b) unaudited interim condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X. While certain information and disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”), management believes that the disclosures herein are adequate to make the unaudited interim condensed consolidated information presented not misleading. In the opinion of management, the unaudited interim condensed consolidated financial statements reflect all adjustments necessary for a fair presentation of the consolidated financial position, results of operations and cash flows for the periods presented. Such adjustments are of a normal, recurring nature. The results of operations for any interim period are not necessarily indicative of results expected for the fiscal year ending December 31, 2015. These unaudited interim condensed consolidated financial statements should be read in conjunction with the year end 2014 consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014 (the “2014 Statements”). The accounting policies followed by the Company are set forth in Note 2 - Summary of Significant Accounting Policies of the notes to the 2014 Statements.
 
Liquidity and Capital Resources
 
Our operations are subject to certain risks and uncertainties, particularly related to the concentration of our current operations, the majority of which are to a single customer and geographic region, as well as the evolution of the current economic environment and its impact on the United States real estate and housing markets. Both the concentration of risk and the economic environment could directly or indirectly cause or magnify losses related to certain transactions and access to and cost of adequate financing.
 
 
8

 
We currently have six sources of capital:
 
 
 
June 30,
 
December 31,
 
 
 
2015
 
2014
 
Capital Source
 
 
 
 
 
 
 
Purchase and sale agreements
 
$
829
 
$
 
Secured line of credit from affiliates
 
 
 
 
 
Unsecured Notes through our Notes offering
 
 
6,691
 
 
5,427
 
Other unsecured debt
 
 
 
 
375
 
Preferred equity
 
 
1,000
 
 
1,000
 
Common equity
 
 
2,055
 
 
2,057
 
 
 
 
 
 
 
 
 
Total
 
$
10,575
 
$
8,859
 
 
Certain features of the purchase and sale agreements have added liquidity and flexibility, which have lessened the need for the lines of credit from affiliates.  Eventually, the Company intends to permanently replace the lines of credit to affiliates with a secured line of credit from a bank or through other liquidity.
 
The Company’s anticipated primary sources of liquidity going forward are:
The purchase and sale agreements, which should allow for a significant increase in loan balances;
The continued issuance of Notes to the general public through our public Notes offering, which was declared effective by the SEC on October 4, 2012, and has been registered and declared effective in 38 states as of both June 30, 2015 and December 31, 2014. We began to advertise in March 2013 and received an aggregate of approximately $6,691 and $5,427 in Notes proceeds as of June 30, 2015 and December 31, 2014, respectively (net of redemptions). We anticipate continuing our capital raising efforts in 2015, focusing on the efforts that have proven fruitful;
Interest income and/or principal repayments related to the loans. The Company’s ability to fund its operations remains dependent upon the ability of our largest borrower, whose loan commitments represented 63% and 60% of our total outstanding loan commitments as of June 30, 2015 and December 31, 2014, respectively, to continue paying interest and/or principal. The risk of our largest customer not paying interest is mitigated in the short term by having an interest escrow, which had a balance of $539 and $249 as of June 30, 2015 and December 31, 2014, respectively. While a default by this large customer could impact our cash flow and/or profitability in the long term, we believe that, in the short term, a default might impact profitability, but not liquidity, as we are generally not receiving interest payments from the customer while he is performing (interest is being credited from his interest escrow);
Funds borrowed from affiliated creditors. 
 
We generated net income of $135 and $89 for six months ended June 30, 2015 and 2014, respectively. At June 30, 2015 and December 31, 2014, we had cash on hand of $1,903 and $558, respectively, and our outstanding debt totaled $7,520 and $5,802, respectively, of which $829 and $0 was secured, respectively. As of June 30, 2015 and December 31, 2014, the amount that we have not loaned, but are obligated to potentially lend to our customers based on our agreements with them, was $4,055 and $1,745 respectively. Our availability on our line of credit from our members was $1,500 at both June 30, 2015 and December 31, 2014. Our borrowings under our purchase and sale agreements were $829 and $0 at June 30, 2015 and December 31, 2014, respectively. The purchase and sale agreement adds liquidity and allows us to expand our business.
 
Our current plan is to expand the commercial lending program by using current liquidity and available funding (including funding from our Notes program). We have anticipated the costs of this expansion and the continuing costs of maintaining our public company status, and we anticipate generating, through normal operations, the cash flows and liquidity necessary to meet our operating, investing and financing requirements. As noted above, the three most significant factors driving our current plans are the purchase and sale agreements, continued payments of principal and/or interest by our largest borrower and the public offering of Notes. If actual results differ materially from our current plan or if expected financing is not available, we believe we have the ability and intent to obtain funding and generate net worth through additional debt or equity infusions of cash, if needed. There can be no assurance, however, that we will be able to implement our strategies or obtain additional financing under favorable terms, if at all.
 
 
9

 
2. Summary of Significant Accounting Policies
 
Segment Reporting
 
We report all ongoing operations in one segment, commercial lending.
 
Use of Estimates
 
The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the interim condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. It is reasonably possible that market conditions could deteriorate, which could materially affect our consolidated financial position, results of operations and cash flows. Among other effects, such changes could result in the need to increase the amount of our allowance for loan losses.
 
 
10

 
Revenue Recognition
 
Interest income generally is recognized on an accrual basis. The accrual of interest is generally discontinued on all loans past due 90 days or more. All interest accrued but not collected for loans that are placed on nonaccrual or charged off is reversed against interest income, unless management believes that the accrued interest is recoverable through liquidation of collateral. Interest received on nonaccrual loans is applied against principal. Interest on accruing impaired loans is recognized as long as such loans do not meet the criteria for nonaccrual status.
 
Advertising
 
Advertising costs are expensed as incurred and are included in selling, general and administrative. Advertising expenses were $10 and $0 for the six months ended June 30, 2015 and 2014, respectively.
 
Cash and Cash Equivalents
 
Management considers highly-liquid investments with original maturities of three months or less to be cash equivalents.
 
Fair Value Measurements
 
The Company follows the guidance of the Financial Accounting Standards Board (FASB) Accounting Standards Codification Topic (ASC)  825, Financial Instruments, and ASC 820, Fair Value Measurements. ASC 825 permits entities to measure many financial instruments and certain other items at fair value. The objective is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. ASC 820 clarifies that fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. Under this guidance, fair value measurements are not adjusted for transaction costs. This guidance establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). See Note 3.
 
Loans Receivable
 
Loans are stated at the amount of unpaid principal, net of any allowances for loan losses, and adjusted for (1) the net unrecognized portion of direct costs and nonrefundable loan fees associated with lending, and (2) deposits made by the borrowers used as collateral for a loan and due back to the builder at or prior to loan payoff. The net amount of nonrefundable loan origination fees and direct costs associated with the lending process, including commitment fees, is deferred and accreted to interest income over the lives of the loans using a method that approximates the interest method. The majority of the Company’s loan balances are secured by real estate in a suburb of Pittsburgh, Pennsylvania. Accordingly, the ultimate collectability of a substantial portion of these loans is susceptible to changes in market conditions in that area.
 
Past due loans are loans contractually past due 30 days or more as to principal or interest payments. A loan is classified as nonaccrual, and the accrual of interest on such loan is discontinued, when the contractual payment of principal or interest becomes 90 days past due. In addition, a loan may be placed on nonaccrual at any other time management has serious doubts about further collectability of principal or interest according to the contractual terms, even though the loan is currently performing. A loan may remain on accrual status if it is in the process of collection or well-secured (i.e. the loan has sufficient collateral value). Loans are restored to accrual status when the obligation is brought current or has performed in accordance with the contractual terms for a reasonable period of time and the ultimate collectability of the total contractual principal and interest is no longer in doubt.
 
A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Impaired loans, or portions thereof, are charged off when deemed uncollectible. Once a loan is 90 days past due, management begins a workout plan with the borrower or commences its foreclosure process on the collateral.
 
 
11

 
Allowance for Loan Losses
 
The allowance for loan losses is maintained at a level believed adequate by management to absorb probable losses inherent in the loan portfolio.
 
We establish a collective reserve for all loans which are not more than 60 days past due at the end of a quarter. This collective reserve takes into account both historical information and a qualitative analysis of housing and other economic factors that may impact our future realized losses. For loans to one borrower with committed balances less than 10% of our total committed balances on all loans extended to all customers, we individually analyze for impairment all loans which are more than 60 days past due at the end of a quarter. For loans to one borrower with committed balances equal to or greater than 10% of our total committed balances on all loans extended to all customers, we individually analyze all loans for potential impairment. The analysis of loans, if required, includes a comparison of estimated collateral value to the principal amount of the loan. For impaired loans, if the value determined is less than the principal amount due (less any builder deposit), then the difference is included in the allowance for loan loss. As values change, estimated loan losses may be provided for more or less than the previous period, and some loans may not need a loss provision based on payment history.  For homes which are partially complete, we appraise on an as-is and completed basis, and use the one that more closely aligns with our planned method of disposal for the property.
 
For loans that are individually evaluated for impairment, appraisals have been prepared within the last 13 months. There are also broker’s opinions of value (“BOV”) prepared, if the appraisal is more than six months old. The lower of any BOV prepared in the last six months, or appraisal done in the last 13 months, is used, unless we determine a BOV to be invalid based on the comparable sales used. If we determine a BOV to be invalid, we will use the appraised value. Appraised values are adjusted down for estimated costs associated with asset disposal.
 
Deferred Financing Costs, Net
 
We defer certain costs associated with financing activities related to the issuance of debt securities (deferred financing costs). These costs consist primarily of professional fees incurred related to the transactions. Deferred financing costs are amortized into interest expense over the life of the related debt. We make estimates for the average duration of future investments. If these estimates are determined to be incorrect in the future, the rate at which we are amortizing the deferred offering costs as interest expense would be adjusted and could have a material impact on the consolidated financial statements.
 
 
12

 
The following is a roll forward of deferred financing costs:
 
 
 
Six Months
 
 
 
Six Months
 
 
 
Ended
 
Year Ended
 
Ended
 
 
 
June 30,
 
December 31,
 
June 30,
 
 
 
2015
 
2014
 
2014
 
 
 
 
 
 
 
 
 
 
 
 
Deferred financing costs, beginning balance
 
$
737
 
$
669
 
$
669
 
Additions
 
 
97
 
 
68
 
 
27
 
 
 
 
 
 
 
 
 
 
 
 
Deferred financing costs, ending balance
 
$
834
 
$
737
 
$
696
 
 
 
 
 
 
 
 
 
 
 
 
Less accumulated amortization
 
 
(212)
 
 
(107)
 
 
(42)
 
 
 
 
 
 
 
 
 
 
 
 
Deferred financing costs, net
 
$
622
 
$
630
 
$
654
 
 
The following is a roll forward of the accumulated amortization of deferred financing costs:
 
 
 
Six Months
 
 
 
Six Months
 
 
 
Ended
 
Year Ended
 
Ended
 
 
 
June 30,
 
December 31,
 
June 30,
 
 
 
2015
 
2014
 
2014
 
 
 
 
 
 
 
 
 
 
 
 
Accumulated amortization, beginning balance
 
$
107
 
$
20
 
$
20
 
Additions
 
 
105
 
 
87
 
 
22
 
 
 
 
 
 
 
 
 
 
 
 
Accumulated amortization, ending balance
 
$
212
 
$
107
 
$
42
 
 
Income Taxes
 
The entities included in the consolidated financial statements are organized as pass-through entities under the Internal Revenue Code. As such, taxes are the responsibility of the members. Other significant taxes for which the Company is liable are recorded on an accrual basis.
 
The Company applies ASC 740, Income Taxes. ASC 740 provides guidance for how uncertain tax positions should be recognized, measured, presented and disclosed in the consolidated financial statements and requires the evaluation of tax positions taken or expected to be taken in the course of preparing the Company’s consolidated financial statements to determine whether the tax positions are “more-likely-than-not” to be sustained by the applicable tax authority. Tax positions with respect to income tax at the Limitted Liability Company level not deemed to meet the “more-likely-than-not” threshold would be recorded as a tax benefit or expense in the appropriate period. Management concluded that there are no uncertain tax positions that should be recognized in the consolidated financial statements. With few exceptions, the Company is no longer subject to income tax examinations for years prior to 2011.
 
The Company’s policy is to record interest and penalties related to taxes in interest expense on the consolidated statements of operations. There have been no significant interest or penalties assessed or paid.
 
 
13

 
Risks and Uncertainties
 
The Company is subject to many of the risks common to the commercial lending and real estate industries, such as general economic conditions, decreases in home values, decreases in housing starts, and high unemployment. These risks, which could have a material and negative impact on the Company’s consolidated financial condition, results of operations, and cash flows include, but are not limited to, declines in housing starts, unfavorable changes in interest rates, and competition from other lenders. At June 30, 2015, our loans were primarily concentrated in a suburb of Pittsburgh, Pennsylvania, so the housing starts and prices in that area are more significant to our business than other areas if  and until more loans are created in other markets.
 
Concentrations
 
Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of loans receivable. As of June 30, 2015 and December 31, 2014, 63% and 60%, respectively of our outstanding loan commitments consist of loans to one borrower, and the collateral is in one real estate market.
 
Recent Accounting Pronouncements
 
The FASB has issued Accounting Standards Update No. (ASU) 2015-03, Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs. The amendments in this ASU require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by the amendments in this ASU. For public business entities, the amendments are effective for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. The Company is still evaluating the potential impact on the Company’s consolidated financial statements.

3. Fair Value
 
Utilizing ASC 820, the Company has established a framework for measuring fair value under U.S. GAAP using a hierarchy, which requires the Company to maximize the use of observable inputs and minimize the use of unobservable inputs. Fair value measurements are an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. Three levels of inputs are used to measure fair value, as follows:
 
Level 1 – quoted prices in active markets for identical assets or liabilities;
 
Level 2 – quoted prices in active markets for similar assets and liabilities and inputs that are observable for the asset or liability; or
 
Level 3 – unobservable inputs, such as discounted cash flow models or valuations.
 
A financial instrument's level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. The following describes valuation methodologies used for assets measured at fair value:
 
At June 30, 2015 and December 31, 2014, the Company had no assets measured at fair value on a recurring basis.
 
 
14

 
Fair Value Measurements on a Non-recurring Basis
 
Impaired Loans
A loan is considered to be impaired when it is probable the Company will be unable to collect all principal and interest payments due in accordance with the contractual terms of the loan agreement. The analysis of impaired loans includes a comparison of estimated collateral value to the principal amount of the loan. If the value determined is less than the principal amount due (less any builder deposit), then the difference is included in the allowance for loan loss. As values change, estimated loan losses may be provided for more or less than the previous period.  For homes which are partially complete, we appraise on an as-is and completed basis, and use the one that more closely aligns with our planned method of disposal for the property. For loans that are individually evaluated for impairment, appraisals have been prepared within the last 13 months. There are also broker’s opinions of value (“BOV”) prepared, if the appraisal is more than six months old. The lower of any BOV prepared in the last six months, or appraisal done in the last 13 months, is used, unless we determine a BOV to be invalid based on the comparable sales used. If we determine a BOV to be invalid, we will use the appraised value. Appraised values are adjusted down for estimated costs associated with asset disposal, generally between 0% and 5%, depending on the type of collateral. Fair value estimates for impaired loans are classified as Level 3.
 
Assets measured at fair value on a nonrecurring basis are summarized below:
 
June 30, 2015
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Quoted
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Prices in
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Active
 
Significant
 
 
 
 
 
 
 
 
 
 
 
 
Markets for
 
Other
 
Significant
 
 
 
 
 
 
 
 
 
Identical
 
Observable
 
Unobservable
 
 
 
Carrying
 
Estimated
 
Assets
 
Inputs
 
Inputs
 
 
 
Amount
 
Fair Value
 
Level 1
 
Level 2
 
Level 3
 
Financial Assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Impaired loans
 
$
108
 
$
108
 
$
-
 
$
-
 
$
108
 
 
There were no impaired assets as of December 31, 2014.
 
Fair Value of Financial Instruments
 
ASC 825 requires disclosure of fair value information about financial instruments, whether or not recognized on the face of the balance sheet, for which it is practicable to estimate that value. The following methods and assumptions were used by the Company in estimating the fair value of its financial instruments:
 
Cash and Cash Equivalents
 
The carrying amount approximates fair value because of the short maturity of these instruments.
 
Loans Receivable and Commitments to Extend Credit
 
For variable rate loans that reprice frequently with no significant change in credit risk, estimated fair values are based on carrying values at June 30, 2015 and December 31, 2014. The estimated fair values for other loans are calculated by discounting the future cash flows using current rates at which similar loans would be made to borrowers with similar credit ratings and the same remaining maturities and approximate carrying values of these instruments at June 30, 2015 and December 31, 2014. For unfunded commitments to extend credit, because there would be no adjustment between fair value and carrying amount for the amount if actually loaned, there is no adjustment to the amount before it is loaned. The amount for commitments to extend credit is zero in the tables below because there is no difference between carrying value and fair value, and the amount is not recorded on the consolidated balance sheets as a liability.
 
Customer Interest Escrow
 
The customer interest escrow does not yield interest to the customer, but because: 1) the customer loans are demand loans, 2) there is no way to estimate how long the escrow will be in place, and 3) the interest rate which could be used to discount this amount is negligible, the fair value approximates the carrying value at both June 30, 2015 and December 31, 2014.
 
 
15

 
Borrowings under Credit Facilities
 
The fair value of the Company’s borrowings under credit facilities is estimated based on the expected cash flows discounted using the current rates offered to the Company for debt of the same remaining maturities. As all of the borrowings under credit facilities or the Notes are 1) payable on demand, 2) have a variable interest rate, 3) or have interest rates similar rates to what the Company can borrow funds for today, the fair value of the borrowings is determined to approximate carrying value at June 30, 2015 and December 31, 2014.
 
The table below is a summary of fair value estimates for financial instruments and the level of the fair value hierarchy (as discussed in Note 2) within which the fair value measurements are categorized at the periods indicated:
 
June 30, 2015
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Quoted Prices
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
in Active
 
Significant
 
 
 
 
 
 
 
 
 
 
 
 
Markets for
 
Other
 
Significant
 
 
 
 
 
 
 
 
 
Identical
 
Observable
 
Unobservable
 
 
 
Carrying
 
Estimated
 
Assets
 
Inputs
 
Inputs
 
 
 
Amount
 
Fair Value
 
Level 1
 
Level 2
 
Level 3
 
Financial Assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
1,903
 
$
1,903
 
$
1,903
 
$
 
$
 
Loans receivable, net
 
 
8,895
 
 
8,895
 
 
 
 
 
 
8,895
 
Financial Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Customer interest escrow
 
 
603
 
 
603
 
 
 
 
 
 
603
 
Notes payable secured
 
 
829
 
 
829
 
 
 
 
 
 
829
 
Notes payable unsecured
 
 
6,691
 
 
6,691
 
 
 
 
 
 
6,691
 
 
December 31, 2014
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Quoted Prices
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
in Active
 
Significant
 
 
 
 
 
 
 
 
 
 
 
 
Markets for
 
Other
 
Significant
 
 
 
 
 
 
 
 
 
Identical
 
Observable
 
Unobservable
 
 
 
Carrying
 
Estimated
 
Assets
 
Inputs
 
Inputs
 
 
 
Amount
 
Fair Value
 
Level 1
 
Level 2
 
Level 3
 
Financial Assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
558
 
$
558
 
$
588
 
$
 
$
 
Loans receivable, net
 
 
8,097
 
 
8,097
 
 
 
 
 
 
8,097
 
Financial Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Customer interest escrow
 
 
318
 
 
318
 
 
 
 
 
 
318
 
Notes payable unsecured
 
 
5,802
 
 
5,802
 
 
 
 
 
 
5,802
 
 
 
16

 
4. Financing Receivables
 
Financing receivables are comprised of the following:
 
 
 
June 30,
 
December 31,
 
 
 
2015
 
2014
 
 
 
 
 
 
 
 
 
Commercial loans, gross
 
$
9,510
 
$
8,691
 
Less: Deferred loan fees
 
 
(412)
 
 
(438)
 
Less: Deposits
 
$
(159)
 
$
(134)
 
Less: Allowance for loan losses
 
 
(44)
 
 
(22)
 
 
 
 
 
 
 
 
 
Commercial loans, net
 
$
8,895
 
$
8,097
 
 
Roll forward of commercial loans:
 
 
 
Six Months Ended
 
Year Ended
 
Six Months Ended
 
 
 
June 30,
 
December 31,
 
June 30,
 
 
 
2015
 
2014
 
2014
 
 
 
 
 
 
 
 
 
 
 
 
Beginning balance
 
$
8,097
 
$
4,045
 
$
4,045
 
Additions
 
 
4,015
 
 
7,433
 
 
3,122
 
Payoffs/Sales
 
 
(3,196)
 
 
(3,394)
 
 
(857)
 
Change in builder deposit
 
 
(24)
 
 
(98)
 
 
(133)
 
Change in loan loss provision
 
 
(23)
 
 
(22)
 
 
(3)
 
New loan fees
 
 
(268)
 
 
(343)
 
 
(208)
 
Earned loan fees
 
 
294
 
 
476
 
 
196
 
 
 
 
 
 
 
 
 
 
 
 
Ending balance
 
$
8,895
 
$
8,097
 
$
6,162
 
 
Commercial Construction and Development Loans
 
Pennsylvania Loans
 
On December 30, 2011, pursuant to a credit agreement by and between us, Benjamin Marcus Homes, LLC (“BMH”), Investor’s Mark Acquisitions, LLC (“IMA”) and Mark L. Hoskins (“Hoskins”) (collectively, the “Hoskins Group”) (as amended, the “Credit Agreement”), we originated two new loan assets, one to BMH as borrower (the “BMH Loan”) and one to IMA as borrower (the “New IMA Loan”). Pursuant to the Credit Agreement and simultaneously with the origination of the BMH Loan and the New IMA Loan, we also assumed the position of lender on an existing loan to IMA (the “Existing IMA Loan”) and assumed the position of borrower on another existing loan in which IMA serves as the lender (the “SF Loan”). Throughout this report, we refer to the BMH Loan, the New IMA Loan, and the Existing IMA Loan collectively as the “Pennsylvania Loans.” When we assumed the position of the lender on the Existing IMA Loan, we purchased a loan which was originated by the borrower’s former lender, and assumed that lender’s position in the loan and maintained the recorded collateral position in the loan. The borrower’s former lender and the seller of the BMH property are the same independent third party. The BMH Loan, the New IMA Loan and the Existing IMA Loan are all cross-defaulted and cross-collateralized with each other. Further, IMA and Hoskins serve as guarantors of the BMH Loan, and BMH and Hoskins serve as guarantors of the New IMA Loan and the Existing IMA Loan. As such, we are currently primarily reliant on a single developer and homebuilder for our revenues.
 
 
17

 
In April, July, September and December 2013, in March and December 2014, and in March and June of 2015, we entered into amendments to the Pennsylvania Loans. As a result of these amendments, BMH was allowed to borrow for the construction of homes on lots 204, 205, and 206 of the Hamlets subdivision and lots 2 and 5 of the Tuscany subdivision, both located in a suburb of Pittsburgh, Pennsylvania, and to borrow for the purchase of lot 5 of the Hamlets subdivision. As of June 30, 2015, all of the construction loans for homes done by amendment to the credit agreement have been repaid. The lot loan for lot 5 in the Hamlets subdivision is still outstanding.
 
As a result of these amendments to the Credit Agreement, we converted $1,000 of the SF Loan from debt to preferred equity.  The new preferred equity serves as collateral for the Pennsylvania Loans. There is no liquid market for the preferred equity instrument, so we can give no assurance as to our ability to generate any amount of proceeds from that collateral. We also reduced the balance of the SF Loan by $125, which was added to the Interest Escrow, and repaid the remaining $375 with cash. The interest rate on the Existing IMA Loan was raised to match the New IMA Loan.
 
Also as a result of these amendments to the Credit Agreement, we funded an additional $500 of interest escrow, we issued a letter of credit for $155 (which was reduced to $29 in the first quarter of 2015) to a sewer authority relating to BMH Loan (the “Letter of Credit”), and we issued a cash bond for development not to exceed $425, and agreed to issue another cash bond not to exceed $320.  We also allowed a fully funded mortgage in the amount of $1,146 to be placed in superior position to our mortgage, with the $1,146 proceeds being used to reduce the balance of BMH’s outstanding loan with us. The terms and conditions of the Pennsylvania Loans are set forth in further detail below.

A detail of the financing receivables for the Pennsylvania Loans at June 30, 2015 is as follows:
 
 
 
 
 
 
 
 
 
 
 
Estimated
 
 
 
 
 
 
 
Funded to
 
 
collateral
 
Item
 
Term
 
Interest Rate
 
Borrower
 
 
values
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
COF +2%
 
 
 
 
 
 
 
 
BMH Loan
 
Demand(1)
 
(7% Floor)
 
 
 
 
 
 
 
 
Land for phase 5 (10 acres)
 
 
 
 
 
$
 
 
$
1,079
 
Lots
 
 
 
 
 
 
269
 
 
 
1,785
(6)
Interest Escrow
 
 
 
 
 
 
950
 
 
 
539
 
Loan Fee
 
 
 
 
 
 
750
 
 
 
 
Cash Bond
 
 
 
 
 
 
385
(9)
 
 
385
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total BMH Loan
 
 
 
 
 
 
2,354
 
 
 
3,788
 
IMA Loans
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
COF +2%
 
 
 
 
 
 
 
 
New IMA Loan (loan fee)
 
Demand(1)
 
(7% Floor)
 
 
250
 
 
 
 
 
 
 
 
COF +2%
 
 
 
 
 
 
 
 
New IMA Loan (advances)
 
Demand(1)
 
(7% Floor)
 
 
1,207
 
 
 
 
 
 
 
 
COF +2%
 
 
 
 
 
 
 
 
Existing IMA Loan
 
Demand(2)
 
(7% Floor)
 
 
1,687
 
 
 
2,908
(4)
 
 
 
 
 
 
 
 
 
 
 
 
 
Total IMA Loans
 
 
 
 
 
 
3,144
 
 
 
2,908
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Unearned Loan Fee
 
 
 
 
 
 
(214)
 
 
 
 
SF Preferred Equity
 
 
 
 
 
 
 
 
 
 
1,025
(8)
 
 
 
 
 
 
 
 
 
 
 
 
 
Total
 
 
 
 
 
$
5,284
 
 
$
7,721
 
 
 
18

 
A detail of the financing receivables for the Pennsylvania Loans at December 31, 2014 is as follows:
 
 
 
 
 
 
 
 
 
 
 
Estimated
 
 
 
 
 
 
 
Funded to
 
 
collateral
 
Item
 
Term
 
Interest Rate
 
borrower
 
 
values
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
COF +2%
 
 
 
 
 
 
 
 
BMH Loan
 
Demand(1)
 
(7% Floor)
 
 
 
 
 
 
 
 
Land for phases 4, and 5 (25 acres)
 
 
 
 
 
$
 
 
$
1,515
 
Lots
 
 
 
 
 
 
142
 
 
 
374
(7)
Interest Escrow
 
 
 
 
 
 
450
 
 
 
249
 
Loan Fee
 
 
 
 
 
 
750
 
 
 
 
Excess Paydown
 
 
 
 
 
 
(22)
(5)
 
 
 
 
Lot 2 Windemere
 
 
 
 
 
 
126
 
 
 
126
 
Construction loan lot 5 Tuscany
 
 
 
 
 
 
536
 
 
 
932
 
Construction loan lot 2 Tuscany
 
 
 
 
 
 
498
 
 
 
739
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total BMH Loan
 
 
 
 
 
 
2,480
 
 
 
3,935
 
IMA Loans
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
COF +2%
 
 
 
 
 
 
 
 
New IMA Loan (loan fee)
 
Demand(1)
 
(7% Floor)
 
 
250
 
 
 
 
 
 
 
 
COF +2%
 
 
 
 
 
 
 
 
New IMA Loan (advances)
 
Demand(1)
 
(7% Floor)
 
 
1,491
 
 
 
 
 
 
 
 
COF +2%
 
 
 
 
 
 
 
 
Existing IMA Loan
 
Demand(2)
 
(7% Floor)
 
 
1,687
 
 
 
2,484
(3)
 
 
 
 
 
 
 
 
 
 
 
 
 
Total IMA Loans
 
 
 
 
 
 
3,428
 
 
 
2,484
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Unearned Loan Fee
 
 
 
 
 
 
(322)
 
 
 
 
SF Preferred Equity
 
 
 
 
 
 
 
 
 
 
1,000
(8)
SF Loan Payable
 
 
 
 
 
 
 
 
 
375
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total
 
 
 
 
 
$
5,586
 
 
$
7,794
 
 _______________
(1) These are the stated terms; however, in practice, principal will be repaid upon the sale of each developed lot.
 
(2) These are the stated terms; however, in practice, principal will be repaid upon the sale of each developed lot after the BMH loan and the New IMA loan are satisfied.
 
(3) Estimated collateral value is equal to the appraised value of the remaining lots of $2,976, net of the net estimated costs to finish the development of $217 and the second mortgage amount of $275.
 
(4) Estimated collateral value is equal to the appraised value of the remaining lots of $3,101, net of the net estimated costs to finish the development of $193.
 
(5) Excess Paydown is the amount of initial funding of the Interest Escrow and/or Loan Fee that has/have been repaid to date. These amounts are available to be reborrowed in the future.
 
(6) Estimated collateral value is equal to the lots’ appraised value of $4,200 minus remaining improvements of $1,109, net of the outstanding first mortgage of $1,146 and a third mortgage payoff of $160.
 
(7) Estimated collateral value is equal to the lots’ appraised value of $2,336 minus remaining improvements of $656, net of the outstanding first mortgage of $1,146 and a third mortgage payoff of $160.
 
(8) In the event of a foreclosure on the property securing certain of our loans, a portion of our collateral is preferred equity in our Company, which might be difficult to sell in order to reduce the loan balance.
 
(9) The cash bond is in place to guarantee to the township that work will be completed on this project.  We will fund this work and expect to cancel the bond upon completion of the work.
 
 
19

 
The loans are collectively cross-collateralized and, therefore, treated as one loan for the purpose of calculating the effective interest rate and for available remedies upon an instance of default. As lots are released, a specific release price is repaid by the borrower, with 10% of that amount being used to fund the Interest Escrow. The customer will make cash interest payments only when the Interest Escrow is fully depleted, except for construction funding for homes, where the customer makes interest payments monthly. 
 
The Pennsylvania Loans created in 2011 had a $1,000 loan fee. The expenses incurred related to issuing the loans were approximately $76, which were netted against the loan amount. The remaining $924, which is netted against the gross loan amount, is being recognized over the expected life of the loans using the straight-line method in accordance with ASC 310-20, Nonrefundable Fees and Other Costs. During 2013 and 2014, eight construction loans to the same customer were executed with $162 in loan fees, which fees were recognized over the expected life of each advance.
 
The Company has a credit agreement with its largest borrower which includes a maximum exposure on all three loans, as described in the chart below. This limit does not include construction loans or the cash bonds.
 
Commercial Loans – Real Estate Development Loan Portfolio Summary
 
The following is a summary of our loan portfolio to builders for land development as of June 30, 2015. The Pennsylvania loans below are included as part of the Pennsylvania Loans discussed above.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loan to
 
 
 
 
 
 
Number of
 
Number of
 
 
Value of
 
 
Commitment
 
 
Amount
 
Value
 
 
Loan
 
State
 
Borrowers
 
Loans
 
 
Collateral(1)
 
 
Amount
 
 
Outstanding
 
Ratio(2)
 
 
Fee
 
Pennsylvania
 
1
 
3
 
 
$7,721
 
 
$6,365
(3)
 
$5,498
 
71%
 
 
$1,000
 
Total
 
1
 
3
 
 
$7,721
 
 
$6,365
 
 
$5,498
 
71%
 
 
$1,000
 
_______________
 
(1)
The value is determined by the appraised value adjusted for remaining costs to be paid and third party mortgage balances. Part of this collateral is $1,025 of preferred equity and unpaid earnings distributions in and from our Company. There is no liquid market for the preferred equity instrument, so we can give no assurance as to our ability to generate any amount of proceeds from that collateral.
 
(2)
The loan to value ratio is calculated by taking the outstanding amount and dividing by the appraised value.
 
(3)
The commitment amount includes the letter of credit the issued cash bond, and the cash bond not issued but committed to, in addition to the credit limit of $5,631 maximum commitment amount.
 
The following is a summary of our loan portfolio to builders for land development as of December 31, 2014. The Pennsylvania loans below are included as part of the Pennsylvania Loans discussed above.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loan to
 
 
 
 
 
 
Number of
 
Number of
 
 
Value of
 
 
Commitment
 
 
Amount
 
Value
 
 
Loan
 
State
 
Borrowers
 
Loans
 
 
Collateral(1)
 
 
Amount
 
 
Outstanding
 
Ratio(2)
 
 
Fee
 
Pennsylvania
 
1
 
3
 
 
$5,997
 
 
$4,903
(3)
 
$4,748
 
79%
 
 
$1,000
 
Total
 
1
 
3
 
 
$5,997
 
 
$4,903
 
 
$4,748
 
79%
 
 
$1,000
 
_______________
 
(1)
The value is determined by the appraised value adjusted for remaining costs to be paid and third party mortgage balances. Part of this collateral is $1,000 of preferred equity in our Company. There is no liquid market for the preferred equity instrument, so we can give no assurance as to our ability to generate any amount of proceeds from that collateral.
 
(2)
The loan to value ratio is calculated by taking the outstanding amount and dividing by the appraised value.
 
(3)
The commitment amount includes a portion of the letter of credit which, when added to the current outstanding balance, is greater than the $4,750 maximum commitment amount per the Credit Agreement.
 
 
20

 
Commercial Construction Loan Portfolio Summary
 
The following is a summary of our loan portfolio to builders for home construction loans as of June 30, 2015. Some of the Pennsylvania loans are included as part of the Pennsylvania Loans discussed above.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loan to
 
 
 
 
 
Number of
 
Number
 
Value of
 
Commitment
 
Amount
 
Value
 
 
 
State
 
Borrowers
 
of Loans
 
Collateral (1)
 
Amount
 
Outstanding
 
Ratio(2)
 
Loan Fee
 
Colorado
 
1
 
2
 
$
1,095
 
$
767
 
$
450
 
70%
 
5%
 
Delaware
 
1
 
1
 
 
830
 
 
500
 
 
66
 
60%
 
5%
 
Florida
 
1
 
4
 
 
1,275
 
 
893
 
 
821
 
70%
 
5%
 
Georgia
 
2
 
5
 
 
966
 
 
730
 
 
450
 
76%
 
5%
 
Louisiana
 
1
 
2
 
 
1,132
 
 
622
 
 
623
 
55%
 
5%
 
New Jersey
 
1
 
1
 
 
325
 
 
227
 
 
64
 
70%
 
5%
 
North Carolina
 
1
 
2
 
 
385
 
 
270
 
 
75
 
70%
 
5%
 
Pennsylvania
 
1
 
5
 
 
3,948
 
 
2,186
 
 
564
 
55%
 
5%
 
South Carolina
 
2
 
7
 
 
1,528
 
 
1,005
 
 
899
 
66%
 
5%
 
Total
 
11
 
29
 
$
11,484
 
$
7,200
 
$
4,012
 
63%(3)
 
5%
 
_______________
 
(1)
The value is determined by the appraised value.
 
 
(2)
The loan to value ratio is calculated by taking the commitment amount and dividing by the appraised value.
 
 
 
(3)
Represents the weighted average loan to value ratio of the loans.
 
The following is a summary of our loan portfolio to builders for home construction loans as of December 31, 2014. Some of the Pennsylvania loans are included as part of the Pennsylvania Loans discussed above.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loan to
 
 
 
 
 
Number of
 
Number
 
Value of
 
Commitment
 
Amount
 
Value
 
Loan
 
State
 
Borrowers
 
of Loans
 
Collateral (1)
 
Amount
 
Outstanding
 
Ratio(2)
 
Fee
 
Colorado
 
1
 
1
 
$
515
 
$
361
 
$
68
 
70%
 
5%
 
Florida
 
1
 
2
 
 
685
 
 
480
 
 
404
 
70%
 
5%
 
Georgia
 
2
 
5
 
 
1,027
 
 
810
 
 
349
 
79%
 
5%
 
Louisiana
 
1
 
2
 
 
1,230
 
 
861
 
 
620
 
70%
 
5%
 
New Jersey
 
1
 
1
 
 
390
 
 
273
 
 
259
 
70%
 
5%
 
Pennsylvania
 
2
 
4
 
 
2,826
 
 
1,850
 
 
1,463
 
65%
 
5%
 
South Carolina
 
2
 
4
 
 
1,577
 
 
900
 
 
780
 
57%
 
5%
 
Total
 
10
 
19
 
$
8,250
 
$
5,535
 
$
3,943
 
67%(3)
 
5%
 
_______________
 
(1)
The value is determined by the appraised value.
 
 
(2)
The loan to value ratio is calculated by taking the commitment amount and dividing by the appraised value.
 
 
 
(3)
Represents the weighted average loan to value ratio of the loans.
 
Credit Quality Information
 
The following table presents credit-related information at the “class” level in accordance with ASC 310-10-50, Disclosures about the Credit Quality of Finance Receivables and the Allowance for Credit Losses. A class is generally a disaggregation of a portfolio segment. In determining the classes, the Company considered the finance receivable characteristics and methods it applies in monitoring and assessing credit risk and performance.
 
 
21

 
The following table summarizes finance receivables by the risk ratings that regulatory agencies utilize to classify credit exposure and which are consistent with indicators the Company monitors. Risk ratings are reviewed on a regular basis and are adjusted as necessary for updated information affecting the borrowers’ ability to fulfill their obligations.
 
The definitions of these ratings are as follows:
 
Pass – finance receivables in this category do not meet the criteria for classification in one of the categories below.
 
 
 
 
Special mention – a special mention asset exhibits potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may, at some future date, result in the deterioration of the repayment prospects.
 
 
 
 
Classified – a classified asset ranges from: 1) assets that are inadequately protected by the current sound worth and paying capacity of the borrower, and are characterized by the distinct possibility that some loss will be sustained if the deficiencies are not corrected to 2) assets with weaknesses that make collection or liquidation in full unlikely on the basis of current facts, conditions, and values. Assets in this classification can be accruing or on non-accrual depending on the evaluation of these factors.
 
Finance Receivables – By risk rating:
 
 
 
June 30,
 
December 31,
 
 
 
2015
 
2014
 
 
 
 
 
 
 
 
 
Pass
 
$
8,165
 
$
7,301
 
Special mention
 
 
622
 
 
796
 
Classified – accruing
 
 
 
 
 
Classified – nonaccrual
 
 
108
 
 
 
 
 
 
 
 
 
 
 
Total
 
$
8,895
 
$
8,097
 
  
Finance Receivables – Method of impairment calculation:
 
 
 
As of June 30, 2015
 
As of December 31, 2014
 
 
 
Finance
 
Loan Loss
 
Finance
 
Loan Loss
 
 
 
Receivable
 
Reserve
 
Receivable
 
Reserve
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Performing loans evaluated individually
 
$
5,748
 
$
15
 
$
5,571
 
$
15
 
Performing loans evaluated collectively
 
 
2,417
 
 
7
 
 
2,526
 
 
7
 
Non performing loans without a specific reserve
 
 
622
 
 
1
 
 
 
 
 
Non performing loans with a specific reserve
 
 
108
 
 
21
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total evaluated for loan loss
 
$
8,895
 
$
44
 
$
8,097
 
$
22
 
 
At June 30, 2015 and December 31, 2014, there were no loans acquired with deteriorated credit quality.
 
Impaired loans
 
The following is a summary of our impaired nonaccrual commercial construction loans as of June 30, 2015 and December 31, 2014.  All loans listed have a related allowance for loan losses.
 
 
22

 
 
 
June 30,
 
 
December 31,
 
 
 
2015
 
 
2014
 
 
 
 
 
 
 
 
 
 
Unpaid principal balance (contractual obligation from customer)
 
$
215