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EX-32.2 - Shepherd's Finance, LLCex32-2.htm
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EX-10.2 - Shepherd's Finance, LLCex10-2.htm
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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

 

[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the Quarterly Period Ended March 31, 2020

 

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 333-224557

 

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.)

 

13241 Bartram Park Blvd., Suite 2401, Jacksonville, Florida 32258

(Address of principal executive offices)

 

(302) 752-2688

(Registrant’s telephone number including area code)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of Each Class   Trading Symbol(s)   Name of Each Exchange on Which Registered
None   None   None

 

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 [X] No [  ]

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes [X] No [  ]

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

  Large accelerated filer [  ] Accelerated filer [  ]
  Non-accelerated filer [X] Smaller reporting company [X]
  Emerging growth company [X]    

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [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 4
   
Item 1. Financial Statements 4
   
Interim Condensed Consolidated Balance Sheets as of March 31, 2020 (Unaudited) and December 31, 2019 4
   
Interim Condensed Consolidated Statements of Operations (Unaudited) for the Three Months Ended March 31, 2020 and 2019 5
   
Interim Condensed Consolidated Statement of Changes in Members’ Capital (Unaudited) for the Three Months Ended March 31, 2020 and 2019 6
   
Interim Condensed Consolidated Statements of Cash Flows (Unaudited) for the Three Months Ended March 31, 2020 and 2019 7
   
Notes to Interim Condensed Consolidated Financial Statements (Unaudited) 8
   
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 19
   
Item 3. Quantitative and Qualitative Disclosure About Market Risk 35
   
Item 4. Controls and Procedures 35
   
PART II. OTHER INFORMATION 36
   
Item 1. Legal Proceedings 36
   
Item 1A. Risk Factors 36
   
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 36
   
Item 3. Defaults upon Senior Securities 37
   
Item 4. Mine Safety Disclosures 37
   
Item 5. Other Information 37
   
Item 6. Exhibits 37

 

 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. These risks and uncertainties include, but are not limited to: uncertainties relating to the effects of COVID-19; the length of the COVID-19 pandemic and severity of such outbreak nationally and across the globe; the pace of recovery following the COVID-19 pandemic; general economic uncertainty in key global markets and a worsening of global economic conditions or low levels of economic growth; the rate and the pace of economic recovery following economic downturns; and those other risks described in other risk factors as outlined in our Registration Statement on Form S-1, as amended, and our Annual Report on Form 10-K. 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. For further information regarding risks and uncertainties associated with our business, and important factors that could cause our actual results to vary materially from those expressed or implied in such forward-looking statements, please refer to the factors set forth in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Risk Factors” sections of the documents we file from time to time with the U.S. Securities and Exchange Commission, including, but not limited to, our Annual Report on Form 10-K for the year ended December 31, 2019.

 

When considering forward-looking statements, you should keep these risk factors, as well as the other cautionary statements in this report and in our Annual Report on Form 10-K for the year ended December 31, 2019 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

 

(in thousands of dollars)   March 31, 2020     December 31, 2019  
    (Unaudited)        
Assets                
Cash and cash equivalents   $ 3,341     $ 1,883  
Accrued interest receivable     1,162       1,031  
Loans receivable, net     54,197       55,369  
Foreclosed assets     5,031       4,916  
Premises and equipment     928       936  
Other assets     210       202  
Total assets   $ 64,869     $ 64,337  
Liabilities and Members’ Capital                
Customer interest escrow   $ 681     $ 643  
Accounts payable and accrued expenses     304       466  
Accrued interest payable     2,414       2,533  
Notes payable secured, net of deferred financing costs     26,054       26,991  
Notes payable unsecured, net of deferred financing costs     28,416       26,520  
Due to preferred equity member     37       37  
Total liabilities   $ 57,906     $ 57,190  
                 
Commitments and Contingencies (Note 9)                
                 
Redeemable Preferred Equity                
Series C preferred equity   $ 3,036     $ 2,959  
                 
Members’ Capital                
Series B preferred equity     1,470       1,470  
Class A common equity     2,457       2,718  
Members’ capital   $ 3,927     $ 4,188  
                 
Total liabilities, redeemable preferred equity and members’ capital   $ 64,869     $ 64,337  

 

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

For the Three Months ended March 31, 2020 and 2019

 

    Three Months Ended  
    March 31,  
(in thousands of dollars)   2020     2019  
             
Net Interest Income                
Interest and fee income on loans   $ 2,574     $ 2,432  
Interest expense:                
Interest related to secured borrowings     817       681  
Interest related to unsecured borrowings     767       625  
Interest expense   $ 1,584     $ 1,306  
                 
Net interest income     990       1,126  
                 
Less: Loan loss provision     35       47  
Net interest income after loan loss provision     955       1,079  
                 
Non-Interest Income                
Gain on foreclosure of assets   $ -     $ -  
Total non-interest income     -       -  
                 
Income     955       1,079  
                 
Non-Interest Expense                
Selling, general and administrative   $ 708     $ 624  
Depreciation and amortization     21       23  
Loss on the sale of foreclosed assets     35       -  
Impairment loss on foreclosed assets     109       80  
Total non-interest expense     873       727  
                 
Net income   $ 82     $ 352  
                 
Earned distribution to preferred equity holders     126       105  
                 
Net income attributable to common equity holders   $ (44 )   $ 247  

 

The accompanying notes are an integral part of these interim condensed consolidated financial statements.

 

 5 

 

 

Shepherd’s Finance, LLC

Interim Condensed Consolidated Statements of Changes in Members’ Capital - Unaudited

For the Three Months Ended March 31, 2020 and 2019

 

(in thousands of dollars)   March 31, 2020     March 31, 2019  
             
Members’ capital, beginning balance   $ 4,188     $ 3,697  
Net income less distributions to Series C preferred equity holders of $89 and $72     (7 )     280  
Contributions from Series B preferred equity holders     -       60  
Earned distributions to Series B preferred equity holders     (37 )     (33 )
Distributions to common equity holders     (217 )     -  
                 
Members’ capital, ending balance   $ 3,927     $ 4,004  

 

The accompanying notes are an integral part of the interim condensed consolidated financial statements.

 

 6 

 

 

Shepherd’s Finance, LLC

Interim Condensed Consolidated Statements of Cash Flows - Unaudited

For the Three Months Ended March 31, 2020 and 2019

 

   

Three Months Ended

March 31,

 
(in thousands of dollars)   2020     2019  
             
Cash flows from operations                
Net income   $ 82     $ 352  
Adjustments to reconcile net income to net cash provided by operating activities                
Amortization of deferred financing costs     40       65  
Provision for loan losses     35       47  
Change in loan origination fees, net     (191 )      59  
Loss on sale of foreclosed assets     35       -  
Impairment of foreclosed assets     109       80  
Depreciation and amortization     21       20  
Net change in operating assets and liabilities:                
Other assets     (21 )     58  
Accrued interest receivable     (131 )     (129 )
Customer interest escrow     1       350  
Accrued interest payable     (119 )     (48 )
Accounts payable and accrued expenses     (162 )     (137 )
                 
Net cash (used in) provided by operating activities     (302 )     717  
                 
Cash flows from investing activities                
Loan additions and principal collections, net     1,328       (3,606 )
Investment in foreclosed assets     (444 )     (176 )
Proceeds from the sale of foreclosed assets     185       -  
                 
Net cash provided by (used in) investing activities     1,069       (3,782 )
                 
Cash flows from financing activities                
Contributions from preferred equity holders     -       60  
Distributions to preferred equity holders     (12 )     (32 )
Distributions to common equity holders     (217 )     -  
Proceeds from secured note payable     4,084       5,262  
Repayments of secured note payable     (4,390 )     (2,459 )
Proceeds from unsecured notes payable     5,261       3,925  
Redemptions/repayments of unsecured notes payable     (3,959 )     (3,087 )
Deferred financing costs paid     (77 )     (93 )
                 
Net cash provided by financing activities     691       3,576  
                 
Net increase in cash and cash equivalents     1,458       511  
                 
Cash and cash equivalents                
Beginning of period     1,883       1,401  
End of period   $ 3,341     $ 1,912  
                 
Supplemental disclosure of cash flow information                
Cash paid for interest   $ 1,703     $ 1,348  
                 
Non-cash investing and financing activities                
Reinvested earnings of Series B preferred equity held in interest escrow   $ 37     $ 34  
Earned but not paid distributions of Series C preferred equity holders   $ 89     $ 72  
Secured transferred to unsecured notes payable   $ 631     $ -  
Reclassification of deferred financing costs from other assets   $ -     $ 189  

 

The accompanying notes are an integral part of these interim condensed consolidated financial statements.

 

 7 

 

 

Shepherd’s Finance, LLC

Notes to Interim Condensed Consolidated Financial Statements (unaudited)

 

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

 

Shepherd’s Finance, LLC and subsidiary (the “Company”) was originally formed as a Pennsylvania limited liability company on May 10, 2007. The Company is the sole member of a consolidating subsidiary, 84 REPA, LLC. The Company operates pursuant to its Second Amended and Restated Operating Agreement, as amended, by and among Daniel M. Wallach and the other members of the Company effective as of March 16, 2017.

 

As of March 31, 2020, the Company extends commercial loans to residential homebuilders (in 21 states) to:

 

  construct single family homes,
  develop undeveloped land into residential building lots, and
  purchase and improve for sale older homes.

 

Basis of Presentation

 

The accompanying (a) interim condensed consolidated balance sheet as of March 31, 2020, 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, the instructions to Form 10-Q and Article 8 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 consolidated results of operations for any interim period are not necessarily indicative of results expected for the fiscal year ending December 31, 2020. These unaudited interim condensed consolidated financial statements should be read in conjunction with the 2019 consolidated financial statements and notes thereto (the “2019 Financial Statements”) included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019 (the “2019 Form 10-K”). The accounting policies followed by the Company are set forth in Note 2 – Summary of Significant Accounting Policies in the 2019 Financial Statements.

 

Accounting Standards to be Adopted

 

Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) 2016-13, “Financial Instruments-Credit Losses: Measurement of Credit Losses on Financial Instruments”. The amendments in ASU 2016-13 introduce a new current expected credit loss (“CECL”) model for certain financial assets, including mortgage loans and reinsurance receivables. The new model will not apply to debt securities classified as available-for-sale. For assets within the scope of the new model, an entity will recognize as an allowance against earnings its estimate of the contractual cash flows not expected to be collected on day one of the asset’s acquisition. The allowance may be reversed through earnings if a security recovers in value. This differs from the current impairment model, which requires recognition of credit losses when they have been incurred and recognizes a security’s subsequent recovery in value in other comprehensive income. ASU 2016-13 also makes targeted changes to the current impairment model for available-for-sale debt securities, which comprise the majority of the Company’s invested assets. Similar to the CECL model, credit loss impairments will be recorded in an allowance against earnings that may be reversed for subsequent recoveries in value. The amendments in ASU 2016-13, along with related amendments in ASU No. 2018-19 - Codification Improvements to Topic 326, Financial Instruments-Credit Losses, are effective for annual and interim periods beginning after December 15, 2019 on a modified retrospective basis. For smaller reporting companies, the effective date for annual and interim periods is January 1, 2023. The Company is reviewing its policies and processes to ensure compliance with the requirements in ASU 2016-13.

 

 8 

 

 

FASB ASU 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement.” This ASU amends the disclosure requirements of Topic 820, Fair Value Measurement, to remove disclosure of transfers between Level 1 and Level 2 of the fair value hierarchy and to include disclosure of the range and weighted average used in Level 3 fair value measurements, among other amendments. The ASU applies to all entities that are required to provide disclosures about recurring or non-recurring fair value measurements. Amendments should be applied retrospectively to all periods presented, except for certain amendments, which should be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. The effective date for the additional disclosures for calender year-end public companies is January 1, 2020.

 

Reclassifications

 

Certain prior year amounts have been reclassified for consistency with current period presentation.

 

2. Fair Value

 

The Company had no financial instruments measured at fair value on a recurring basis as of March 31, 2020 and December 31, 2019.

 

The following tables present the balances of non-financial instruments measured at fair value on a non-recurring basis as of March 31, 2020 and December 31, 2019.

 

                Quoted Prices in Active
Markets for
    Significant
Other
    Significant  
    March 31, 2020     Identical     Observable     Unobservable  
    Carrying     Estimated     Assets     Inputs     Inputs  
    Amount     Fair Value     Level 1     Level 2     Level 3  
                               
Foreclosed assets   $ 5,031     $ 5,031     $            $                $       5,031  
Impaired loans, net     1,531       1,531                   1,531  
Total   $ 6,562     $ 6,562     $     $     $ 6,562  

 

                Quoted Prices              
                in Active     Significant        
                Markets for     Other     Significant  
    December 31, 2019     Identical     Observable     Unobservable  
    Carrying     Estimated     Assets     Inputs     Inputs  
    Amount     Fair Value     Level 1     Level 2     Level 3  
                               
Foreclosed assets   $ 4,916     $ 4,916     $              $                 $        4,916  
Impaired loans, net     1,487       1,487                   1,487  
Total   $ 6,403     $ 6,403     $     $     $ 6,403  

 

 9 

 

 

The table below is a summary of fair value estimates for financial instruments:

 

    March 31, 2020     December 31, 2019  
    Carrying     Estimated     Carrying     Estimated  
    Amount     Fair Value     Amount     Fair Value  
Financial Assets                                
Cash and cash equivalents   $ 3,341     $ 3,341     $ 1,883     $ 1,883  
Loans receivable, net     54,197       54,197       55,369       55,369  
Accrued interest on loans     1,162       1,162       1,031       1,031  
Financial Liabilities                                
Customer interest escrow     681       681       643       643  
Notes payable secured, net     26,054       26,054       26,991       26,991  
Notes payable unsecured, net     28,416       28,416       26,520       26,520  
Accrued interest payable     2,414       2,414       2,533       2,533  

 

3. Financing Receivables

 

Financing receivables are comprised of the following as of March 31, 2020 and December 31, 2019:

 

   March 31, 2020   December 31, 2019 
         
Loans receivable, gross  $56,077   $57,608 
Less: Deferred loan fees   (676)   (856)
Less: Deposits   (1,149)   (1,352)
Plus: Deferred origination costs   215    204 
Less: Allowance for loan losses   (270)   (235)
           
Loans receivable, net  $54,197   $55,369 

 

The allowance for loan losses at March 31, 2020 is $270, of which $224 related to loans without specific reserves. At December 31, 2019, the allowance was $235, of which $230 related to loans without specific reserves. No charge-offs occurred during the quarter ended March 31, 2020. During the year ended December 31, 2019, we incurred $173 in direct charge-offs.

 

Commercial Construction and Development Loans

 

Commercial Loans – Construction Loan Portfolio Summary

 

As of March 31, 2020, the Company’s portfolio consisted of 218 commercial construction and nine development loans with 67 borrowers in 21 states.

 

The following is a summary of the loan portfolio to builders for home construction loans as of March 31, 2020 and December 31, 2019:

 

Year    

Number of

States

   

Number
of

Borrowers

   

Number of

Loans

    Value of Collateral(1)     Commitment Amount    

Gross

Amount

Outstanding

   

Loan to Value

Ratio(2)

    Loan Fee  
2020       21           67       218     $ 86,958     $    61,420     $ 46,161       71 %(3)     5 %
2019       21       70       241     $ 93,211     $ 65,273     $ 48,611       70 %(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.

 

 10 

 

 

Commercial Loans – Real Estate Development Loan Portfolio Summary

 

The following is a summary of our loan portfolio to builders for land development as of March 31, 2020 and December 31, 2019:

 

Year   Number of
States
    Number
of
Borrowers
   

Number

of
Loans

    Gross Value
of
Collateral(1)
    Commitment Amount(3)    

Gross Amount

Outstanding

   

Loan to Value

Ratio(2)

    Interest Spread  
2020     4       5       9     $ 12,151     $ 11,066     $ 9,916       82 %(4)     7 %
2019         4             5            9     $ 13,007     $ 9,866     $         8,997       69 %(4)           7 %

 

(1) The value is determined by the appraised value adjusted for remaining costs to be paid. For both March 31, 2020 and December 31, 2019, a portion of this collateral is $1,470 of preferred equity in our Company. In the event of a foreclosure on the property securing these loans, the portion of our collateral that is preferred equity might be difficult to sell, which may impact our ability to recover the loan balance. In addition, a portion of the collateral value is estimated based on the selling prices anticipated for the homes.
   
(2) The loan to value ratio is calculated by taking the outstanding amount and dividing by the appraised value calculated as described above.
   
(3) The commitment amount does not include letters of credit and cash bonds.
   
(4) Represents the weighted average loan to value ratio of the loans.

 

Credit Quality Information

 

The following tables present credit-related information at the “class” level in accordance with FASB ASC 310-10-50, “Disclosures about the Credit Quality of Finance Receivables and the Allowance for Credit Losses.” See our 2019 Form 10-K, as filed with the SEC, for more information.

 

Gross finance receivables – By risk rating:

 

    March 31, 2020     December 31, 2019  
             
Pass   $ 50,809     $ 53,542  
Special mention     3,687       2,571  
Classified – accruing            
Classified – nonaccrual     1,581       1,495  
                 
Total   $ 56,077     $ 57,608  

 

Finance Receivables – Method of impairment calculation:

 

    March 31, 2020     December 31, 2019  
             
Performing loans evaluated individually   $ 27,732     $ 26,233  
Performing loans evaluated collectively     26,764       29,880  
Non-performing loans without a specific reserve     1,063       1,467  
Non-performing loans with a specific reserve     518       28  
                 
Total evaluated collectively for loan losses   $ 56,077     $ 57,608  

 

 11 

 

 

As March 31, 2020 and December 31, 2019, 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 March 31, 2020 and December 31, 2019.

 

    March 31, 2020     December 31, 2019  
             
Unpaid principal balance (contractual obligation from customer)   $ 1,581     $ 1,495  
Charge-offs and payments applied     -       -  
Gross value before related allowance     1,581       1,495  
Related allowance     (50 )     (8 )
Value after allowance   $ 1,531     $ 1,487  

 

Concentrations

 

Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of loans receivable. Our concentration risks for our top three customers listed by geographic real estate market are summarized in the table below:

 

   March 31, 2020  December 31, 2019
      Percent of      Percent of 
   Borrower  Loan   Borrower  Loan 
   City  Commitments   City  Commitments 
               
Highest concentration risk  Pittsburgh, PA          25%  Pittsburgh, PA        25%
Second highest concentration risk  Orlando, FL   16%  Orlando, FL   15%
Third highest concentration risk  Cape Coral, FL   4%  Cape Coral, FL   3%

 

4. Foreclosed Assets

 

The following table is a roll forward of foreclosed assets:

 

   

Three Months
Ended

March 31, 2020

   

Year

Ended

December 31, 2019

   

Three Months
Ended

March 31, 2019

 
                   
Beginning balance   $ 4,916     $ 5,973     $ 5,973  
Additions from loans     -       3,352       -  
Additions for construction/development     444       763       176  
Sale proceeds     (185 )     (4,543 )     -  
Loss on sale     (35 )     (274 )     -  
Gain on foreclosure     -       203       -  
Impairment loss on foreclosed assets     (109 )     (558 )     (80 )
Ending balance   $ 5,031     $ 4,916     $ 6,069  

 

 12 

 

 

5. Borrowings

 

The following table displays our borrowings and a ranking of priority:

 

    Priority
Rank
  March 31, 2020     December 31, 2019  
Borrowing Source                    
Purchase and sale agreements and other secured borrowings   1   $ 25,445     $ 26,806  
Secured line of credit from affiliates   2     614       189  
Unsecured line of credit (senior)   3     500       500  
Other unsecured debt (senior subordinated)   4     1,407       1,407  
Unsecured Notes through our public offering, gross   5     21,070       20,308  
Other unsecured debt (subordinated)   5     5,302       4,131  
Other unsecured debt (junior subordinated)   6     590       590  
                     
Total       $ 54,928     $ 53,931  

 

The following table shows the maturity of outstanding debt as of March 31, 2020:

 

Year Maturing   Total Amount
Maturing
    Public
Offering
    Other
Unsecured
    Secured Borrowings  
2020   $ 31,813     $ 1,949     $ 4,424     $ 25,439  
2021     13,006       11,570       1,420       16  
2022     5,225       3,463       1,746       16  
2023     1,027       821       189       17  
2024 and thereafter     3,857       3,267       20       571  
Total   $ 54,928     $ 21,070     $ 7,799     $ 26,059  

 

Secured Borrowings

 

Lines of Credit

 

As of March 31, 2020, the Company had borrowed $614 on its lines of credit from affiliates, which have a total limit of $2,500.

 

Summary

 

Borrowings secured by loan assets are summarized below:

 

    March 31, 2020     December 31, 2019  
    Book Value of Loans which Served as Collateral     Due from Shepherd’s Finance to Loan Purchaser or Lender    

Book Value of

Loans which Served as Collateral

    Due from Shepherd’s Finance to Loan Purchaser or Lender  
Loan Purchaser                                
Builder Finance   $ 12,593     $ 8,428     $ 13,711     $ 9,375  
S.K. Funding     10,004       6,771       10,394       6,771  
                                 
Lender                                
Shuman     1,798       1,325       1,785       1,325  
Jeff Eppinger     1,941       1,000       1,821       1,000  
Hardy Enterprises, Inc.     1,852       1,000       1,684       1,000  
Gary Zentner     611       250       472       250  
R. Scott Summers     1,210       847       841       628  
Paul Swanson     6,105       5,193       8,377       5,824  
Total   $ 36,114     $ 24,814     $ 39,085     $ 26,173  

 

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Unsecured Borrowings

 

Unsecured Notes through the Public Offering (“Notes Program”)

 

On March 22, 2019, the Company terminated its second public offering and commenced its third public offering of fixed rate subordinated notes (the “Notes”). The effective interest rate on borrowings through our Notes Program at March 31, 2020 and December 31, 2019 was 10.68% and 10.56%, respectively, not including the amortization of deferred financing costs. We generally offer four durations at any given time, ranging from 12 to 48 months from the date of issuance. There are limited rights of early redemption. Our 36-month Note has a mandatory early redemption option, subject to certain conditions. The following table shows the roll forward of our Notes Program:

 

    Three Months
Ended
March 31, 2020
    Year Ended
December 31, 2019
    Three Months
Ended
March 31, 2019
 
                   
Gross Notes outstanding, beginning of period   $ 20,308     $ 17,348     $ 17,348  
Notes issued     4,722       11,127       3,532  
Note repayments / redemptions     (3,960 )     (8,167 )     (2,049 )
                         
Gross Notes outstanding, end of period   $ 21,070     $ 20,308     $ 18,831  
                         
Less deferred financing costs, net     453       416       454  
                         
Notes outstanding, net   $ 20,617     $ 19,892     $ 18,377  

 

The following is a roll forward of deferred financing costs:

 

   

Three Months

Ended

March 31, 2020

   

 

Year Ended

December 31, 2019

   

Three Months

Ended

March 31, 2019

 
                   
Deferred financing costs, beginning balance   $ 786     $ 1,212     $ 1,212  
Additions     77       365       282  
Disposals     -       (791 )      
Deferred financing costs, ending balance     863       786       1,494  
Less accumulated amortization     (410 )     (370 )     (1,040 )
Deferred financing costs, net   $ 453     $ 416     $ 454  

 

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The following is a roll forward of the accumulated amortization of deferred financing costs:

 

    Three Months     Year     Three Months  
   

Ended

March 31, 2020

    Ended
December 31, 2019
   

Ended

March 31, 2019

 
                   
Accumulated amortization, beginning balance   $   370     $    1,000     $ 1,000  
Additions     40       161       40  
Disposals     -       (791 )     -  
Accumulated amortization, ending balance   $ 410     $ 370     $ 1,040  

 

Other Unsecured Debts

 

Our other unsecured debts are detailed below:

 

              Principal Amount Outstanding as of  
Loan   Maturity
Date
  Interest
Rate(1)
    March 31,
2020
    December 31, 2019  
Unsecured Note with Seven Kings Holdings, Inc.   Demand(2)     9.5 %   $ 500     $ 500  
Unsecured Line of Credit from Builder Finance, Inc.   March 2021     10.0 %     500       -  
Unsecured Line of Credit from Paul Swanson   June 2020(6)     10.0 %     1,807       1,176  
Subordinated Promissory Note   September 2020     9.5 %     563       563  
Subordinated Promissory Note   December 2021     10.5 %     146       146  
Subordinated Promissory Note   April 2020     10.0 %     100       100  
Subordinated Promissory Note   April 2021     10.0 %     174       174  
Subordinated Promissory Note   August 2022     11.0 %     200       200  
Subordinated Promissory Note   March 2023     11.0 %     169       169  
Subordinated Promissory Note   April 2020     6.5 %     500       500  
Subordinated Promissory Note   February 2021     11.0 %     600       600  
Subordinated Promissory Note   Demand     5.0 %     500       500  
Subordinated Promissory Note   Demand     5.0 %     3       3  
Subordinated Promissory Note   December 2023     11 %     20       -  
Subordinated Promissory Note   February 2024     11 %     20       -  
Senior Subordinated Promissory Note   March 2022(3)     10.0 %     400       400  
Senior Subordinated Promissory Note   March 2022(4)     1.0 %     728       728  
Junior Subordinated Promissory Note   March 2022(4)     22.5 %     417       417  
Senior Subordinated Promissory Note   October 2020(5)     1.0 %     279       279  
Junior Subordinated Promissory Note   October 2020(5)     20.0 %     173       173  
                $ 7,799     $ 6,628  

 

(1) Interest rate per annum, based upon actual days outstanding and a 365/366-day year.

 

(2) Due six months after lender gives notice.

 

(3) Lender may require us to repay $20 of principal and all unpaid interest with 10 days’ notice.

 

(4) These notes were issued to the same holder and, when calculated together, yield a blended return of 11% per annum.

 

(5) These notes were issued to the same holder and, when calculated together, yield a blended return of 10% per annum.

 

(6) Amount due in June 2020 is $1,000 with the remainder due November 2020.

 

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6. Redeemable Preferred Equity

 

The following is a roll forward of our Series C cumulative preferred equity (“Series C Preferred Units”):

 

   

Three Months

Ended

March 31, 2020

   

Year

Ended

December 31, 2019

   

Three Months

Ended

March 31, 2019

 
                   
Beginning balance   $ 2,959     $ 2,385     $ 2,385  
Additions from new investment     -       300       -  
Distributions     (12 )     (42 )        
Additions from reinvestment     89       316       72  
                         
Ending balance   $ 3,036     $ 2,959     $ 2,457  

 

The following table shows the earliest redemption options for investors in our Series C Preferred Units as of March 31, 2020:

 

Year Maturing   Total Amount
Redeemable
 
       
2024   $      2,719  
2025     317  
         
Total   $ 3,036  

 

7. Members’ Capital

 

There are currently two classes of equity units outstanding that the Company classifies as Members’ Capital: Class A common units (“Class A Common Units”) and Series B cumulative preferred units (“Series B Preferred Units”). As of March 31, 2020, the Class A Common Units are held by eight members, all of whom have no personal liability. All Class A common members have voting rights in proportion to their capital account. There were 2,629 Class A Common Units outstanding as of March 31, 2020 and December 31, 2019.

 

The Series B Preferred Units were issued to the Hoskins Group through a reduction in a loan issued by the Hoskins Group to the Company. In December 2015, the Hoskins Group agreed to purchase 0.1 Series B Preferred Units for $10 at each closing of a lot to a third party in the Hamlets and Tuscany subdivisions. As of March 31, 2020, the Hoskins Group owned a total of 14.7 Series B Preferred Units, which were issued for a total of $1,470.

 

8. Related Party Transactions

 

As of March 31, 2020, the Company had $1,250, $250, and $386 available to borrow against the line of credit from Daniel M. Wallach (our Chief Executive Officer and chairman of the board of managers) and his wife, the line of credit from the 2007 Daniel M. Wallach Legacy Trust, and the line of credit from William Myrick (our Executive Vice President of Sales), respectively. A more detailed description is included in Note 6 of our 2019 Financial Statements. These borrowings are in notes payable secured, net of deferred financing costs on the interim condensed consolidated balance sheet.

 

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9. Commitments and Contingencies

 

Unfunded commitments to extend credit, which have similar collateral, credit risk, and market risk to our outstanding loans, were $15,259 and $16,662 at March 31, 2020 and December 31, 2019, respectively.

 

10. Selected Quarterly Condensed Consolidated Financial Data (Unaudited)

 

Summarized unaudited quarterly condensed consolidated financial data for the quarters of 2020 and 2019 are as follows:

 

    Quarter 1     Quarter 4     Quarter 3     Quarter 2     Quarter 1  
    2020     2019     2019     2019     2019  
                               
Net interest income after loan loss provision   $ 955     $ 1,117     $ 1,115     $ 818     $ 1,079  
Non-interest income     -       22       86       95       -  
SG&A expense     708       447       703       620       624  
Depreciation and amortization     21       26       21       22       23  
Loss on sale of foreclosed assets     35             274              
Impairment loss on foreclosed assets           109       282             196       80  
Net income   $ 82     $ 384     $ 203     $ 75     $ 352  

 

11. Non-Interest Expense Detail

 

The following table displays our selling, general and administrative (“SG&A”) expenses:

 

   

For the Three Months Ended

March 31,

 
    2020     2019  
Selling, general and administrative expenses                
Legal and accounting   $ 139     $ 127  
Salaries and related expenses     278       362  
Board related expenses     25       16  
Advertising     21       19  
Rent and utilities     13       9  
Loan and foreclosed asset expenses     135       20  
Travel     59       32  
Other     38       39  
Total SG&A   $ 708     $ 624  

 

12. Subsequent Events

 

Management of the Company has evaluated subsequent events through May 11, 2020, the date these interim condensed consolidated financial statements were issued.

 

In March 2020, the Company told all of its borrowers that it would fund all loans where the underlying house was already under construction, and advised the customers to build as quickly as possible to bring the houses on the market as soon as possible. For loans where the borrower had not yet begun construction of the underlying house, the Company told the borrowers that it would not fund construction and that they should therefore not start construction. As described below, the Company is now beginning to fund additional loans in certain limited circumstances.

 

 17 

 

 

The Company continues to monitor market conditions overall and in the specific markets in which it lends. Most non-bank competitors are no longer making new loans and some are not funding existing loans. Some markets have had little to no impact from a housing perspective as a result of COVID-19, while other markets have been impacted. Borrowers in Pennsylvania and Michigan have been most impacted by COVID-19 due to the government shutting down home construction completely in those states (Pennsylvania has announced reopening construction on May 1, 2020). Opportunities for home sales for our borrowers in their markets are impacted to varying degrees. The Company is now funding new loans to borrowers in stronger markets for the purpose of developing presold homes, which loans have reduced (60%) loan-to-value ratios. The Company is also considering funding spec loans in those same markets on a case-by-case basis for loans with reduced loan-to-value ratios (50-60%).

 

Changes in home buyer FICO scores and other requirements by end user lenders is expected to impact the Company’s builders who focus on lower priced homes, and some real estate markets where the primary business is entertainment will be more impacted than most other markets. The Company has some customers in Orlando, Florida, and is working through issues with two of those customers. Some of those customers may have their credit quality downgraded in future quarters, and the Company is working to mitigate any losses it may incur as a result of the virus for those customers and others as they become known.

 

As of April 20, 2020, the Company informed some of those builders located in stronger markets to begin construction. As a result, the committed amount on the remaining loans that the Company has not released for construction to begin was $4,200 with $3,000 unfunded.

 

On May 7, 2020, the Company made the decision to reopen lending under normal, pre-COVID-19 terms for a limited group of certain of its customers. In addition, the decision was made to allow rehab loans to builders at terms that are less conservative than the 50% loan to value established in April 2020 but more conservative than terms prior to the arrival of COVID-19.

 

Management is also contemplating purchasing debt from other similar lending companies at deep discounts, but does not have any serious prospects at this time.

 

On May 5, 2020, we entered into an agreement to borrow approximately $362 pursuant to the Paycheck Protection Program (“PPP”), created under the Coronavirus Aid, Relief, and Economic Security Act, or CARES Act. The PPP is intended to provide loans to qualified businesses to cover payroll and certain other identified costs. The loan has an interest rate of 1.0% and a term of 24 months. No payments are due for the first 6 months, although interest accrues, and monthly payments, which include interest, are due over the next 18 months to pay off the loan. Funds from the loan may only be used for certain purposes, including payroll, benefits, rent, and utilities. All or a portion of the loan may be forgivable, as provided by the terms of the PPP. The loan is evidenced by a promissory note, which contains customary events of default relating to, among other things, payment defaults and breaches of representations. We may prepay the loan at any time prior to maturity with no prepayment penalties.

 

The Company is continuously monitoring the markets, builders, and the COVID-19 situation for the remaining loans which the Company has not yet released for construction. Management anticipates revisiting these lending parameters in May 2020 as the COVID-19 situation continues to develop. Management also notes that while demand for its lending products declined in 2019 due increases in competition, demand during the pandemic is increasing.

 

 18 

 

 

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

(All dollar [$] amounts shown in thousands.)

 

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with our interim condensed consolidated financial statements and the notes thereto contained elsewhere in this report. The following Management’s Discussion and Analysis of Financial Condition and Results of Operations should also be read in conjunction with our audited annual consolidated financial statements and related notes and other consolidated financial data (the “2019 Financial Statements”) included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019 (the “2019 Form 10-K”). See also “Cautionary Note Regarding Forward-Looking Statements” preceding Part I.

 

Overview

 

The Company faces risks related to COVID-19, which has caused significant disruptions to the economy. COVID-19 has spread globally and the outbreak has caused significant disruptions to the economy, including in the United States and in all of the markets in which the Company lends. The Company’s operating results depend significantly on the homebuilding industry.

 

During March 2020, the Company made the decision due to the potential impact of COVID-19 to inform its borrowers that the Company would fund all loans where the underlying asset was currently under construction. For borrowers who currently have loans where the underlying asset was at a non-start position, they were informed to not start construction until told to do so by the Company.

 

During April 2020, as the Company continued to monitor market conditions overall and in the specific markets in which the Company lends, the Company observed that some markets had little to no impact from a housing perspective as a result of COVID-19; however, the Company’s borrowers in Pennsylvania and Michigan were significantly impacted due to the government shutting down home construction completely. The Company made the decision to fund new loans to borrowers in stronger markets for the purpose of developing presold homes, which loans have reduced loan-to-value ratios. In addition, the Company will continue to monitor funding spec loans in some markets on a case-by-case basis for loans with reduced loan -to-value ratios.

 

On May 7, 2020, the Company made the decision to reopen lending under normal, pre-COVID-19 terms for a limited group of certain of its customers. In addition, the decision was made to allow rehab loans to builders at terms that are less conservative than the 50% loan to value established in April 2020 but more conservative than terms prior to the arrival of COVID-19.

 

Net income for the first quarter of 2020 decreased by $270 when compared to the same period of 2019. The decrease in net income was primarily due to the following:

 

Fee income decreased $236 or 33% to $484 compared to the same period of 2019. Originations for the quarter ended March 31, 2020 were $7,771 compared to $18,982 for the same period of 2019; The decrease in originations was primarily due to competition and COVID-19.

Loss on the sale and impairment of foreclosed assets increased $64 due to one certain asset being sold and additional costs incurred to complete construction of additional properties.

 

We had $54,197 and $55,369 in loan assets as of March 31, 2020 and December 31, 2019, respectively. In addition, as of March 31, 2020, we had 218 construction loans in 21 states with 67 borrowers and nine development loans in four states with five borrowers.

 

Cash used in operations decreased $1,019 for three months ended March 31, 2020 as compared to the same period of 2019. Our decrease in operating cash flow was due primarily to a decrease in interest escrow of $349, net income of $270 and change in loan origination fees, net of $250.

 

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Critical Accounting Estimates

 

To assist in evaluating our interim condensed consolidated financial statements, we describe below the critical accounting estimates that we use. We consider an accounting estimate to be critical if: (1) the accounting estimate requires us to make assumptions about matters that were highly uncertain at the time the accounting estimate was made, and (2) changes in the estimate that are reasonably likely to occur from period to period, or use of different estimates that we reasonably could have used, would have a material impact on our consolidated financial condition or results of operations. See our 2019 Form 10-K, as filed with the SEC, for more information on our critical accounting estimates. No material changes to our critical accounting estimates have occurred since December 31, 2019 unless listed below.

 

Loan Losses

 

Fair value of collateral has the potential to impact the calculation of the loan loss provision (the amount we have expensed over time in anticipation of loan losses we have not yet realized). Specifically, relevant to the allowance for loan loss reserve is the fair value of the underlying collateral supporting the outstanding loan balances. 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. Due to a rapidly changing economic market, an erratic housing market, the various methods that could be used to develop fair value estimates, and the various assumptions that could be used, determining the collateral’s fair value requires significant judgment.

 

   March 31, 2020 
   Loan Loss 
   Provision 
Change in Fair Value Assumption  Higher/(Lower) 
Increasing fair value of the real estate collateral by 35%*  $- 
Decreasing fair value of the real estate collateral by 35%**  $(6,528)

 

* Increases in the fair value of the real estate collateral do not impact the loan loss provision, as the value generally is not “written up.”

 

** Assumes the loans were nonperforming and a book amount of the loans outstanding of $54,197.

 

Foreclosed Assets

 

The fair value of real estate will impact our foreclosed asset value, which is recorded at 100% of fair value (after selling costs are deducted).

 

   March 31, 2020 
   Foreclosed 
   Assets 
Change in Fair Value Assumption  Higher/(Lower) 
Increasing fair value of the foreclosed asset by 35%*  $- 
Decreasing fair value of the foreclosed asset by 35%**  $(1,761)

 

* Increases in the fair value of the foreclosed assets do not impact the carrying value, as the value generally is not “written up.” Those gains would be recognized at the sale of the asset.

 

** Assumes a book amount of the foreclosed assets of $5,031.

 

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Interest Spread

 

The following table displays a comparison of our interest income, expense, fees, and spread:

 

   Three Months Ended 
   March 31, 
   2020   2019 
Interest Income        *          *  
Interest income on loans  $2,090    14%  $1,712    13%
Fee income on loans   484    4%   720    6%
Interest and fee income on loans   2,574    18%   2,432    19%
Interest expense unsecured   727    5%   585    5%
Interest expense secured   817    6%   681    5%
Amortization of offering costs   40    -%   40    -%
Interest expense   1,584    11%   1,306    10%
Net interest income (spread)  $990    7%  $1,126    9%
                     
Weighted average outstanding
loan asset balance
  $57,756        $50,886      

 

*annualized amount as percentage of weighted average outstanding gross loan balance

 

There are three main components that can impact our interest spread:

 

Difference between the interest rate received (on our loan assets) and the interest rate paid (on our borrowings). The loans we have originated have interest rates which are based on our cost of funds, with a minimum cost of funds of 7%. For most loans, the margin is fixed at 3%; however, for our development loans the margin is fixed at 7%. This component is also impacted by the lending of money with no interest cost (our equity).

 

Interest income on loans increased 1% for the quarter ended March 31, 2020 compared to the same period of 2019 due primarily to our cost of funds. During the quarter ended March 31, 2020 and 2019, our cost of funds was 10.69% and 10.45%, respectively. In addition, loans receivables, net increased $4,206 to $54,197 as of March 31, 2020 compared to $49,991 as of March 31, 2019. The difference between interest rate received on loans and the interest paid was 3% for both the periods ended March 31, 2020 and 2019 which is our standard margin.

 

We currently anticipate that the difference between our interest income and interest expense will continue to be 3% for the remainder of 2020, however our margin could be compressed as a result of COVID-19. We anticipate our standard margin to be 3% on all future construction loans and 7% on all development loans which yields a blended margin of approximately 3.4%.

 

Fee income. Our construction loan fee is 5% on the amount we commit to lend, which is amortized over the expected life of each loans. In addition, our development loans do not recognize a loan fee. When loans terminate before than their expected life, the remaining fee is recognized at the termination of the loan. During the quarter ended March 31, 2019, our fee income included a modification charge to our largest customer of $125. Excluding the modification charge, fee income on loans for the quarter ended March 31, 2019 was 5%. During the first quarter of 2020, our lower origination of new loans (partly due to competition and partly due to the COVID-19) caused the reduction to 4% for fee income in that quarter. Higher originations or a reduction in the balance of old loans will result in the fee income returning to 5%.

 

Amount of nonperforming assets. Generally, we can have two types of nonperforming assets that negatively affect interest spread: loans not paying interest and foreclosed assets.

 

As of March 31, 2020 and 2019, $1,581 and $2,617 loans were not paying interest, respectively. As of late April 2020, and directly related to COVID-19, one of our customers in default located in Orlando, Florida entered into negotiations to sell half of his loans to another of our customers. We are working with the customer with respect to the remainder of his loans either through a deed in lieu of foreclosure or a foreclosure.

 

Foreclosed assets do not provide a monthly interest return. As of March 31, 2020 and 2019, foreclosed assets were $5,031 and $6,069, respectively, which resulted in a negative impact on our interest spread in both years.

 

 21 

 

 

The amount of nonperforming assets is expected to increase over the next quarter due to some of the nonperforming loans becoming foreclosed assets, and will decrease as we continue to sell our assets where construction is complete.

 

SG&A Expenses

 

The following table displays our SG&A expenses:

 

  

For the Three Months Ended

March 31,

 
   2020   2019 
Selling, general and administrative expenses          
Legal and accounting  $139   $127 
Salaries and related expenses   278    362 
Board related expenses   25    16 
Advertising   21    19 
Rent and utilities   13    9 
Loan and foreclosed asset expenses   135    20 
Travel   59    32 
Other   38    39 
Total SG&A  $708   $624 

 

Our SG&A expense increased $84 for the quarter ended March 31, 2020 compared to the same period of 2019 due significantly to the following:

 

  Loan and foreclosed asset expenses increased $115 due to additional construction costs incurred to complete properties. The Company had 15 foreclosed assets under construction as of March 31, 2020 compared to three for the same period of 2019;
  Legal and accounting fees increased $12 due to additional costs incurred related to the amendment of our third Indenture;
  Board related expenses increased $9 due to the addition of one board member in April 2019;
  Travel increased $27 due to timing of field travel; and
  These items were offset by a decrease in salaries and related expenses which resulted from the reduction of two employees and lower Company quota bonuses.  

 

Impairment Loss on Foreclosed Assets

 

As of March 31, 2020 and 2019, impaired loss on foreclosed assets was $109 and $80, respectively. The increase in foreclosed assets was directly related to properties acquired back due to the death of a borrower in 2018. During the quarter ended March 31, 2019, we finished our largest foreclosed asset in Sarasota, Florida and recorded an impairment of $80 during the quarter on that property.

 

We do not anticipate losses on the sale of foreclosed assets in the future; however, this may be subject to change based on the final selling price of the foreclosed assets.

 

Loan Loss Provision

 

Our loan loss provision decreased $12 for the quarter ended March 31, 2020, compared to the same periods of 2019. The decrease in loan loss provision was primarily due to the reduction in loan loss provision for our collective reserve of $46, which was offset by an increase in loans with a specific reserve of $34. The increase in our specific researve related to additional impairment on two of our assets.

 

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Consolidated Financial Position

 

Loans Receivable

 

Commercial Loans – Construction Loan Portfolio Summary

 

We anticipate that the aggregate balance of our construction loan portfolio will increase as loans near maturity and as we have new loan originations.

 

The following is a summary of our loan portfolio to builders for home construction loans as of March 31, 2020:

 

State 

Number

of
Borrowers

  

Number

of
Loans

   Value of
Collateral (1)
   Commitment
Amount
   Amount
Outstanding
   Loan to
Value Ratio(2)
   Loan Fee 
Arizona   1    1   $1,345   $807   $269    60%   5%
Connecticut   1    2    683    450    179    66%   5%
Colorado   1    1    630    425    425    67%   5%
Florida   16    107    32,293    24,079    18,847    75%   5%
Georgia   3    4    2,085    1,343    942    64%   5%
Illinois   1    1    1,245    747    367    60%   5%
Indiana   2    3    1,687    1,083    554    64%   5%
Michigan   4    6    2,145    1,480    1,298    69%   5%
New Jersey   3    5    1,676    1,255    1,245    74%   5%
New York   2    4    1,740    1,199    979    69%   5%
North Carolina   5    14    3,875    2,691    1,506    69%   5%
Ohio   3    8    3,463    2,206    1,814    64%   5%
Oregon   2    4    1,887    1,252    798    66%   5%
Pennsylvania   3    20    17,129    11,557    10,403    67%   5%
South Carolina   8    20    6,583    4,907    2,734    75%   5%
Tennessee   3    4    1,367    1,069    547    78%   5%
Texas   4    6    3,009    1,987    946    66%   5%
Utah   2    4    2,307    1,701    1,210    74%   5%
Virginia   1    2    820    535    520    65%   5%
Washington   1    1    450    315    293    70%   5%
Wisconsin   1    1    539    332    285    62%   5%
Total   67    218   $86,958   $61,420   $46,161    71%(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.

 

 23 

 

 

The following is a summary of our loan portfolio to builders for home construction loans as of December 31, 2019:

 

State 

Number

of
Borrowers

  

Number

of
Loans

   Value of
Collateral(1)
   Commitment
Amount
  

Gross

Amount
Outstanding

  

Loan to
Value

Ratio(2)

   Loan Fee 
Colorado   1    1   $630   $425   $424    67%   5%
Connecticut   1    1    340    224    55    66%   5%
Florida   17    112    32,259    24,031    16,826    74%   5%
Georgia   3    4    2,085    1,343    917    64%   5%
Idaho   1    1    310    217    173    70%   5%
Indiana   2    3    1,687    1,083    383    64%   5%
Michigan   4    11    3,696    2,566    1,820    69%   5%
New Jersey   3    6    1,925    1,471    1,396    76%   5%
New York   2    3    1,370    940    743    69%   5%
North Carolina   6    20    5,790    4,009    2,471    69%   5%
Ohio   3    9    4,117    2,664    2,153    65%   5%
Oregon   1    2    1,137    796    739    70%   5%
Pennsylvania   3    24    20,791    13,322    11,772    64%   5%
South Carolina   11    25    8,809    6,419    4,786    73%   5%
Tennessee   3    4    1,367    1,069    503    78%   5%
Texas   3    4    1,984    1,270    843    64%   5%
Utah   2    4    1,862    1,389    1,000    75%   5%
Virginia   1    3    1,245    815    734    65%   5%
Washington   1    2    1,040    728    445    70%   5%
Wisconsin   1    1    539    332    285    62%   5%
Wyoming   1    1    228    160    143    70%   5%
Total   70    241   $93,211   $65,273   $48,611    70%(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.

 

Commercial Loans – Real Estate Development Loan Portfolio Summary

 

The following is a summary of our loan portfolio to builders for land development as of March 31, 2020:

 

States 

Number

of Borrowers

  

Number

of

Loans

   Value of Collateral(1)   Commitment Amount(2)   Gross
Amount
Outstanding
  

Loan to

Value Ratio(3)

  

Interest

Spread

 
Pennsylvania   1    3   $9,335   $8,200   $8,384    90%   7%
Florida   2    3    1,301    1,356    783    60%   7 
North Carolina   1    1    400    260    131    33%   7 
South Carolina   1    2    1,115    1,250    618    55%   7 
Total   5    9   $12,151   $11,066   $9,916    82%(4)   7%

 

(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 $1,470 of preferred equity in our Company. In the event of a foreclosure on the property securing these loans, the portion of our collateral that is preferred equity in our Company might be difficult to sell, which could impact our ability to eliminate the loan balance.
   
(2) The commitment amount does not include unfunded letters of credit.
   
(3) The loan to value ratio is calculated by taking the outstanding amount and dividing by the appraised value calculated as described above.
   
(4) Represents the weighted average loan to value ratio of the loans.

 

 24 

 

 

The following is a summary of our loan portfolio to builders for land development as of December 31, 2019:

 

States 

Number

of Borrowers

  

Number

of

Loans

   Value of Collateral(1)   Commitment Amount(2)   Gross
Amount
Outstanding
  

Loan to

Value Ratio(3)

  

Interest

Spread

 
Pennsylvania   1    3   $10,191   $7,000   $7,389    73%   7%
Florida   2    3    1,301    1,356    891    68%   7 
North Carolina   1    1    400    260    99    25%   7 
South Carolina   1    2    1,115    1,250    618    55%   7 
Total   5    9   $13,007   $9,866   $8,997    69%(4)   7%

 

(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 $1,470 of preferred equity in our Company. In the event of a foreclosure on the property securing these loans, the portion of our collateral that is preferred equity in our Company might be difficult to sell, which could impact our ability to eliminate the loan balance.
   
(2) The commitment amount does not include unfunded letters of credit.
   
(3) The loan to value ratio is calculated by taking the outstanding amount and dividing by the appraised value calculated as described above.
   
(4) Represents the weighted average loan to value ratio of the loans.

 

Combined Loan Portfolio Summary

 

Financing receivables are comprised of the following as of March 31, 2020 and December 31, 2019:

 

   March 31, 2020   December 31, 2019 
         
Loans receivable, gross  $56,077   $57,608 
Less: Deferred loan fees   (676)   (856)
Less: Deposits   (1,149)   (1,352)
Plus: Deferred origination costs   215    204 
Less: Allowance for loan losses   (270)   (235)
           
Loans receivable, net  $54,197   $55,369 

 

The following is a roll forward of combined loans:

 

  

Three Months

Ended
March 31,

2020

  

Year

Ended
December 31,

2019

  

Three Months

Ended
March 31,

2019

 
             
Beginning balance  $55,369   $46,490   $46,490 
Additions   9,462    56,842    13,404 
Principal collections   (10,993)   (45,009)   (9,600)
Transferred to foreclosed assets       (3,352)    
Change in builder deposit   203    157    (197)
Change in loan loss provision   (35)   (49)   (47)
Change in loan fees, net   191   290    (59)
Ending balance  $54,197   $55,369   $49,991 

 

 25 

 

 

Finance Receivables – By risk rating:

 

   March 31, 2020   December 31, 2019 
         
Pass  $50,809   $53,542 
Special mention   3,687    2,571 
Classified – accruing        
Classified – nonaccrual   1,581    1,495 
           
Total  $56,077   $57,608 

 

Finance Receivables – Method of impairment calculation:

 

   March 31, 2020   December 31, 2019 
         
Performing loans evaluated individually  $27,732   $26,233 
Performing loans evaluated collectively   26,764    29,880 
Non-performing loans without a specific reserve   1,063    1,467 
Non-performing loans with a specific reserve   518    28 
           
Total evaluated collectively for loan losses  $56,077   $57,608 

 

At March 31, 2020 and December 31, 2019, 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 March 31, 2020 and December 31, 2019.

 

   March 31, 2020   December 31, 2019 
         
Unpaid principal balance (contractual obligation from customer)  $1,581   $1,495 
Charge-offs and payments applied   -    - 
Gross value before related allowance   1,581    1,495 
Related allowance   (50)   (8)
Value after allowance  $1,531   $1,487 

 

Below is an aging schedule of loans receivable as of March 31, 2020, on a recency basis:

 

   No.
Loans
   Unpaid
Balances
   % 
Current loans (current accounts and accounts on which more than 50% of an original contract payment was made in the last 59 days)   222   $54,496    97%
60-89 days   1    82    -%
90-179 days   -    -    -%
180-269 days   4    1,499    3%
                
Subtotal   227   $56,077    100%
                
Interest only accounts (Accounts on which interest, deferment, extension and/or default charges were received in the last 60 days)   -   $-    -%
                
Partial Payment accounts (Accounts on which the total received in the last 60 days was less than 50% of the original contractual monthly payment. “Total received” to include interest on simple interest accounts, as well as late charges on deferment charges on pre-computed accounts.)   -   $-    -%
                
Total   227   $56,077    100%

 

 26 

 

 

Below is an aging schedule of loans receivable as of March 31, 2020, on a contractual basis:

 

   No.
Loans
   Unpaid
Balances
   % 
Contractual Terms - All current Direct Loans and Sales Finance Contracts with installments past due less than 60 days from due date.   222   $54,496    97%
60-89 days   1    82    -%
90-179 days   -    -    -%
180-269 days   4    1,499    3%
                
Subtotal   227   $56,077    100%
                
Interest only accounts (Accounts on which interest, deferment, extension and/or default charges were received in the last 60 days)   -   $-    -%
                
Partial Payment accounts (Accounts on which the total received in the last 60 days was less than 50% of the original contractual monthly payment. “Total received” to include interest on simple interest accounts, as well as late charges on deferment charges on pre-computed accounts.)   -   $-    -%
                
Total   227   $56,077    100%

 

Below is an aging schedule of loans receivable as of December 31, 2019, on a recency basis:

 

   No.
Loans
   Unpaid
Balances
   % 
Current loans (current accounts and accounts on which more than 50% of an original contract payment was made in the last 59 days)   246   $56,113    97%
60-89 days   -    -    -%
90-179 days   4    1,495    3%
180-269 days   -    -    -%
                
Subtotal   250   $57,608    100%
                
Interest only accounts (Accounts on which interest, defermen