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EX-32.2 - Shepherd's Finance, LLCex32-2.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 June 30, 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 June 30, 2020 (Unaudited) and December 31, 2019 4
   
Interim Condensed Consolidated Statements of Operations (Unaudited) for the Three and Six Months Ended June 30, 2020 and 2019 5
   
Interim Condensed Consolidated Statement of Changes in Members’ Capital (Unaudited) for the Six Months Ended June 30, 2020 and 2019 and for the Three Months Ended June 30, 2020 and 2019 6
   
Interim Condensed Consolidated Statements of Cash Flows (Unaudited) for the Six Months Ended June 30, 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 38
   
Item 4. Controls and Procedures 38
   
PART II. OTHER INFORMATION 39
   
Item 1. Legal Proceedings 39
   
Item 1A. Risk Factors 39
   
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 39
   
Item 3. Defaults upon Senior Securities 40
   
Item 4. Mine Safety Disclosures 40
   
Item 5. Other Information 40
   
Item 6. Exhibits 40

 

 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 and subsequent Quarterly Reports on Form 10-Q. 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)  June 30, 2020   December 31, 2019 
   (Unaudited)     
Assets          
Cash and cash equivalents  $2,540   $1,883 
Accrued interest receivable   637    1,031 
Loans receivable, net   49,797    55,369 
Real estate investments   1,140    - 
Foreclosed assets   5,022    4,916 
Premises and equipment   919    936 
Other assets   259    202 
Total assets  $60,314   $64,337 
           
Liabilities and Members’ Capital          
Customer interest escrow  $550   $643 
Accounts payable and accrued expenses   153    466 
Accrued interest payable   2,700    2,533 
Notes payable secured, net of deferred financing costs   24,293    26,991 
Notes payable unsecured, net of deferred financing costs   27,606    26,520 
PPP Loan and EIDL Advance   371    - 
Due to preferred equity member   -    37 
Total liabilities  $55,673   $57,190 
           
Commitments and Contingencies (Note 10)          
           
Redeemable Preferred Equity          
Series C preferred equity  $3,115   $2,959 
           
Members’ Capital          
Series B preferred equity   1,520    1,470 
Class A common equity   6    2,718 
Members’ capital  $1,526   $4,188 
           
Total liabilities, redeemable preferred equity and members’ capital  $60,314   $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 and Six Months ended June 30, 2020 and 2019

 

   Three Months Ended   Six Months Ended 
   June 30,   June 30, 
(in thousands of dollars)  2020   2019   2020   2019 
Interest Income                    
Interest and fee income on loans  $1,356   $2,454   $3,931   $4,886 
Interest expense:                    
Interest related to secured borrowings   810    769    1,627    1,450 
Interest related to unsecured borrowings   774    716    1,542    1,341 
Interest expense   1,584    1,485    3,169    2,791 
                     
Net interest (loss) income   (228)   969    762    2,095 
Less: Loan loss provision   1,560    151    1,595    198 
                     
Net interest (loss) income after loan loss provision   (1,788)   818    (833)   1,897 
                     
Non-Interest Income                    
Gain on foreclosed assets   -    95    -    95 
Gain on sale of foreclosed assets   3    -    3    - 
                     
Total non-interest income   3    95    3    95 
                     
(Loss) Income   (1,785)   913    (830)   1,992 
                     
Non-Interest Expense                    
Selling, general and administrative   462    620    1,169    1,244 
Depreciation and amortization   21    22    43    45 
Loss on foreclosure of assets   -    169    35    169 
Impairment loss on foreclosed assets   91    27    200    107 
Total non-interest expense   574    838    1,447    1,565 
                     
Net (Loss) Income  $(2,359)  $75   $(2,277)  $427 
                     
Earned distribution to preferred equity holders   92    110    218    215 
                     
Net (loss) income attributable to common equity holders  $(2,451)  $(35)  $(2,495)  $212 

 

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 Six and Three Months Ended June 30, 2020 and 2019

 

For the Six Months Ended June 30, 2020 and 2019

 

(in thousands of dollars)  2020   2019 
         
Members’ capital, beginning balance, December 31  $4,188   $3,697 
Net (loss) income less distributions to Series C preferred equity holders of $181 and $148   (2,458)   279 
Contributions from Series B preferred equity holders   50    100 
Earned distributions to Series B preferred equity holders   (37)   (66)
Distributions to common equity holders   (217)   (166)
Members’ capital, ending balance, June 30  $1,526   $3,844 

 

For the Three Months Ended June 30, 2020 and 2019

 

(in thousands of dollars)  2020   2019 
         
Members’ capital, beginning balance, March 31  $3,927   $3,888 
Net (loss) income less distributions to Series C preferred equity holders of $92 and $75   (2,451)   171 
Contributions from Series B preferred equity holders   50    40 
Earned distributions to Series B preferred equity holders   -    (34)
Distributions to common equity holders   -    (192)
Members’ capital, ending balance, June 30  $1,526   $3,873 

 

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 Six Months Ended June 30, 2020 and 2019

 

  

Six Months Ended

June 30,

 
(in thousands of dollars)  2020   2019 
         
Cash flows from operations          
Net (loss) income  $(2,277)  $427 
Adjustments to reconcile net (loss) income to net cash provided by operating activities          
Amortization of deferred financing costs   79    133 
Provision for loan losses   1,595    198 
Change in loan origination fees, net   (203)   220 
Gain on sale of foreclosed assets   (3)   - 
Loss on sale of foreclosed assets   35    - 
Impairment and loss on foreclosed assets   200    276 
Gain on foreclosed assets   -    (95)
Depreciation and amortization   43    45 
Net change in operating assets and liabilities:          
Other assets   (83)   (72)
Accrued interest receivable   394    (241)
Customer interest escrow   (167)   170 
Accrued interest payable   167    129 
Accounts payable and accrued expenses   (313)   (310)
           
Net cash (used in) provided by operating activities   (533)   880 
           
Cash flows from investing activities          
Loan additions and principal collections, net   3,040    (6,021)
Investment in foreclosed assets   (686)   (456)
Proceeds from the sale of foreclosed assets   348    - 
           
Net cash provided by (used in) investing activities   2,702    (6,477)
           
Cash flows from financing activities          
Contributions from preferred equity holders   50    300 
Distributions to preferred equity holders   (25)   (85)
Distributions to common equity holders   (217)   (166)
Proceeds from secured notes payable   7,302    11,016 
Repayments of secured notes payable   (8,879)   (6,648)
Proceeds from unsecured notes payable   6,604    6,186 
Redemptions/repayments of unsecured notes payable   (6,594)   (3,923)
Proceeds from PPP Loan and EIDL Advance   371    - 
Deferred financing costs paid   (124)   (331)
           
Net cash (used in) provided by financing activities   (1,512)   6,349 
           
Net increase in cash and cash equivalents   657    752 
           
Cash and cash equivalents          
Beginning of period   1,883    1,401 
End of period  $2,540   $2,153 
           
Supplemental disclosure of cash flow information          
Cash paid for interest  $3,002   $2,662 
           
Non-cash investing and financing activities          
Earned by Series B preferred equity holders but not distributed to customer interest escrow  $-   $34 
Earned by Series B preferred equity holders and distributed to customer interest escrow  $74   $33 
Earned but not paid distributions of Series C preferred equity holders  $181   $72 
Secured transferred to unsecured notes payable  $1,116   $1,014 
Transfer of loan receivables to real estate investments  $1,140   $- 
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 June 30, 2020, the Company extends commercial loans to residential homebuilders (in 20 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 June 30, 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” 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. ASU 2018-13 became effective for the Company on January 1, 2020. The adoption of ASU 2018-13 did not have a material impact on the Company’s consolidated financial statements.

 

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 June 30, 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 June 30, 2020 and December 31, 2019.

 

   June 30, 2020  

Quoted Prices in Active

Markets for Identical

   Significant
Other Observable
   Significant Unobservable 
   Carrying   Estimated   Assets   Inputs   Inputs 
   Amount   Fair Value   Level 1   Level 2   Level 3 
                     
Foreclosed assets  $5,022   $5,022   $   $   $5,022 
Impaired loans due to COVID-19, net   10,337    10,337            10,337 
Other impaired loans, net   1,457    1,457             –             –    1,457 
Total  $16,816   $16,816   $   $   $16,816 

 

   December 31, 2019  

Quoted Prices

in Active

Markets for Identical

  

Significant

Other Observable

   Significant 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:

 

   June 30, 2020   December 31, 2019 
   Carrying   Estimated   Carrying   Estimated 
   Amount   Fair Value   Amount   Fair Value 
Financial Assets                    
Cash and cash equivalents  $2,540   $2,540   $1,883   $1,883 
Loans receivable, net   49,797    49,797    55,369    55,369 
Accrued interest on loans   637    637    1,031    1,031 
Financial Liabilities                    
Customer interest escrow   550    550    643    643 
Notes payable secured, net   24,293    24,293    26,991    26,991 
Notes payable unsecured, net   27,606    27,606    26,520    26,520 
PPP Loan and EIDL Advance   371    371    -    - 
Accrued interest payable   2,700    2,700    2,533    2,533 

 

3. Financing Receivables

 

Financing receivables are comprised of the following as of June 30, 2020 and December 31, 2019:

 

   June 30, 2020   December 31, 2019 
         
Loans receivable, gross  $52,905   $57,608 
Less: Deferred loan fees   (725)   (856)
Less: Deposits   (965)   (1,352)
Plus: Deferred origination costs   276    204 
Less: Allowance for loan losses   (1,694)   (235)
           
Loans receivable, net  $49,797   $55,369 

 

The allowance for loan losses at June 30, 2020 was $1,694, of which $154 is related to loans without specific reserves. The Company recorded specific reserves for loans impaired due to impacts from COVID-19 of $1,152, special mention loans of $340, and impaired loans not due to impacts from COVID-19 of $47. As of December 31, 2019, the allowance was $235, of which $230 related to loans without specific reserves. During the quarter and six months ended June 30, 2020, we incurred $136 in direct charge-offs compared to $173 for the year ended December 31, 2019.

 

Commercial Construction and Development Loans

 

Commercial Loans – Construction Loan Portfolio Summary

 

As of June 30, 2020, the Company’s portfolio consisted of 223 commercial construction and eight development loans with 64 borrowers in 20 states.

 

The following is a summary of the loan portfolio to builders for home construction loans as of June 30, 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    20    64    223   $        86,627   $59,513   $43,929    69%(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 June 30, 2020 and December 31, 2019:

 

Year   Number of
States
   Number
of
Borrowers
  

Number

of
Loans

  

Gross

Value
of
Collateral(1)

   Commitment Amount(2)  

Gross Amount

Outstanding

  

Loan to Value

Ratio(3)

   Interest Spread 
2020    4    5    8   $11,023   $10,608   $8,976    81%(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 June 30, 2020 and December 31, 2019, a portion of this collateral is $1,520 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 commitment amount does not include letters of credit and cash bonds.
   
(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.

 

Credit Quality Information

 

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

 

Gross finance receivables – By risk rating:

 

   June 30, 2020   December 31, 2019 
         
Pass  $37,478   $53,542 
Special mention   2,434    2,571 
Classified – accruing        
Classified – nonaccrual   12,993    1,495 
           
Total  $52,905   $57,608 

 

Finance Receivables – Method of impairment calculation:

 

    June 30, 2020     December 31, 2019  
             
Performing loans evaluated individually   $ 18,108     $ 26,233  
Performing loans evaluated collectively     21,804       29,880  
Non-performing loans without a specific reserve     -       1,467  
Non-performing loans with a specific reserve to COVID-19     11,489       -  
Other non-performing loans with a specific reserve     1,504       28  
                 
Total evaluated collectively for loan losses   $ 52,905     $ 57,608  

 

As of June 30, 2020, and December 31, 2019, there were no loans acquired with deteriorated credit quality.

 

 11 

 

 

Impaired Loans

 

The following is a summary of our impaired nonaccrual commercial construction loans as of June 30, 2020 and December 31, 2019.

 

   June 30, 2020   December 31, 2019 
         
Unpaid principal balance (contractual obligation from customer)  $13,014   $1,495 
Charge-offs and payments applied   (21)   - 
Gross value before related allowance   12,993    1,495 
Related allowance   (1,199)   (8)
Value after allowance  $11,794   $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:

 

   June 30, 2020  December 31, 2019
      Percent of      Percent of 
   Borrower  Loan   Borrower  Loan 
   City  Commitments   City  Commitments 
               
Highest concentration risk  Pittsburgh, PA         29%  Pittsburgh, PA         25%
Second highest concentration risk  Orlando, FL   14%  Orlando, FL   15%
Third highest concentration risk  Cape Coral, FL   6%  Cape Coral, FL   3%

 

4. Real Estate Investment Assets

 

During June 2020, the Company acquired two lots from a borrower in exchange for extinguishing two loans secured by those lots in the principal amount of $640. In a subsequent transaction with an unrelated party the Company transferred the two lots in exchange for five lots. In addition, the Company paid a $500 management fee for the development of homes on the five lots acquired from the unrelated party. The management fee was paid through reducing the principal balance on a current loan receivable with the borrower who initially sold us the two lots.

 

The following table is a roll forward of real estate investment assets:

 

  

Six Months
Ended

June 30, 2020

  

Year

Ended

December 31, 2019

  

Six Months
Ended

June 30, 2019

 
             
Beginning balance  $   $         –   $        – 
Transfers from loans   1,140         
Ending balance  $1,140   $   $ 

 

 12 

 

 

5. Foreclosed Assets

 

The following table is a roll forward of foreclosed assets:

 

  

Six Months
Ended

June 30, 2020

  

Year

Ended

December 31, 2019

  

Six Months
Ended

June 30, 2019

 
             
Beginning balance  $4,916   $5,973   $5,973 
Additions from loans   -    3,352    1,716 
Additions for construction/development   686    763    456 
Sale proceeds   (348)   (4,543)    
Loss on sale   (35)   (274)    
Gain on foreclosure   -    203    95 
Gain on sale of foreclosed assets   3    -    - 
Impairment loss on foreclosed assets due to COVID-19   (91)   -    - 
Other impairment loss on foreclosed assets   (109)   (558)   (276)
Ending balance  $5,022   $4,916   $7,964 

 

6. Borrowings

 

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

 

   Priority
Rank
  June 30, 2020   December 31, 2019 
Borrowing Source             
Purchase and sale agreements and other secured borrowings  1  $23,651   $26,806 
Secured line of credit from affiliates  2   651    189 
Unsecured line of credit (senior)  3   500    500 
PPP Loan and EIDL Advance  3   371    - 
Other unsecured debt (senior subordinated)  4   1,407    1,407 
Unsecured Notes through our public offering, gross  5   20,777    20,308 
Other unsecured debt (subordinated)  5   4,788    4,131 
Other unsecured debt (junior subordinated)  6   590    590 
              
Total     $52,735   $53,931 

 

The following table shows the maturity of outstanding debt as of June 30, 2020:

 

Year Maturing  Total Amount
Maturing
   Public
Offering
   Other
Unsecured
   Secured Borrowings 
2020  $28,532   $1,381   $3,830   $23,321 
2021   13,540    11,856    1,668    16 
2022   5,526    3,661    1,849    16 
2023   1,116    821    189    106 
2024 and thereafter   4,021    3,058    120    843 
Total  $52,735   $20,777   $7,656   $24,302 

 

(1)Other Unsecured includes our PPP Loan of $361 and EIDL Advance of $10 (each described below) of which $21, $247, and $103, collectively, matures during 2020, 2021 and 2022, respectively. All or a portion of the PPP Loan may be forgiven.

 

 13 

 

 

Secured Borrowings

 

Lines of Credit from Affiliates

 

As of June 30, 2020, the Company had borrowed $651 on its lines of credit from affiliates, which have a total limit of $2,500.

 

Community Bank Loan (the “Community Bank Loan”)

 

On June 30, 2020, the Company entered into a business loan agreement with Community Bank. The Community Bank Loan is secured by 13 of our foreclosed assets and includes the following terms:

 

Principal not to exceed $362;
Principal payments begin July 30, 2023;
Interest rate of 3.8% per annum based on a year of 360 days; and
Due date of June 30, 2025.

 

Secured Deferred Financing Costs

 

The Company had secured deferred financing costs of $9 and $5 as of June 30, 2020 and December 31, 2019, respectively. Amortization expense for secured deferred financing costs was immaterial for the quarter and six months ended June 30, 2020 and for the year ended December 31, 2019.

 

Summary

 

Borrowings secured by commercial and development loan assets are summarized below:

 

   June 30, 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, Inc.  $10,804   $7,918   $13,711   $9,375 
S.K. Funding, LLC   8,730    5,815    10,394    6,771 
                     
Lender                    
Shuman   2,201    1,325    1,785    1,325 
Jeff Eppinger   1,821    1,000    1,821    1,000 
Hardy Enterprises, Inc.   1,141    800    1,684    1,000 
Gary Zentner   642    250    472    250 
R. Scott Summers   1,443    847    841    628 
Paul Swanson   6,319    4,708    8,377    5,824 
Total  $33,101   $22,663   $39,085   $26,173 

 

 14 

 

 

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 June 30, 2020 and December 31, 2019 was 10.48% 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:

 

  

Six Months
Ended
June 30, 2020

  

Year Ended
December 31, 2019

  

Six Months
Ended
June 30, 2019

 
             
Gross Notes outstanding, beginning of period  $20,308   $17,348   $17,348 
Notes issued   5,668    11,127    5,818 
Note repayments / redemptions   (5,199)   (8,167)   (3,925)
                
Gross Notes outstanding, end of period  $20,777   $20,308   $19,241 
                
Less deferred financing costs, net   456    416    460 
                
Notes outstanding, net  $20,321   $19,892   $18,781 

 

The following is a roll forward of deferred financing costs:

 

  

Six Months
Ended
June 30, 2020

  

Year Ended
December 31, 2019

  

Six Months
Ended
June 30, 2019

 
             
Deferred financing costs, beginning balance  $786   $1,212   $1,212 
Additions   119    365    331 
Disposals       (791)    
Deferred financing costs, ending balance   905    786    1,543 
Less accumulated amortization   (449)   (370)   (1,083)
Deferred financing costs, net  $456   $416   $460 

 

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

 

  

Six Months
Ended
June 30, 2020

  

Year Ended
December 31, 2019

  

Six Months
Ended
June 30, 2019

 
             
Accumulated amortization, beginning balance  $370   $1,000   $1,000 
Additions   79    161    83 
Disposals       (791)    
Accumulated amortization, ending balance  $449   $370   $1,083 

 

 15 

 

 

Other Unsecured Debts

 

Our other unsecured debts are detailed below:

 

         

Principal Amount Outstanding as of

 
Loan 

Maturity
Date

 

Interest
Rate(1)

  

June 30,
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.  January 2021   10.0%   500    - 
Unsecured Line of Credit from Paul Swanson  October 2020(6)   10.0%   2,293    1,176 
Subordinated Promissory Note  September 2020   9.5%   563    563 
Subordinated Promissory Note  December 2021   10.5%   146    146 
Subordinated Promissory Note  April 2024   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 
Subordinated Promissory Note  February 2021   11.0%   600    600 
Subordinated Promissory Note  Demand   5.0%   -    500 
Subordinated Promissory Note  December 2020   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 
           $7,285   $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 October 2020 is $1,000 with the remainder due in November 2020.

 

Paycheck Protection Program Loan

 

On May 5, 2020 the Company entered into a loan agreement (the “PPP Loan”) with LCA Bank Corporation to borrow $361 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 six 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.

 

Economic Injury Disaster Loan Advance (the “EIDL Advance”)

 

The Economic Injury Disaster Loan Emergency Advance is a $10 grant for companies that successfully submit an EIDL (“Economic Injury Disaster Loan”) application. During April 2020, the Company received the grant (the “EIDL Advance”) which may be used for payroll and other certain operating expenses. The EIDL Advance will reduce the forgiveness of the PPP Loan depending on certain parameters required by the CARES Act.

 

 16 

 

 

7. Redeemable Preferred Equity

 

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

 

  

Six Months
Ended
June 30, 2020

  

Year Ended
December 31, 2019

  

Six Months
Ended
June 30, 2019

 
             
Beginning balance  $2,959   $2,385   $2,385 
Additions from new investment   -    300    200 
Distributions   (25)   (42)   (18)
Additions from reinvestment  $181    316    148 
                
Ending balance  $3,115   $2,959   $2,715 

 

The following table shows the earliest redemption options for investors in our Series C Preferred Units as of June 30, 2020:

 

Year Maturing  

Total Amount
Redeemable

 
      
2024   $2,888 
2025    227 
       
Total   $3,115 

 

8. 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 June 30, 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 June 30, 2020 and December 31, 2019.

 

Series B Preferred Units were initially issued to the Hoskins Group (consisting of Benjamin Marcus Homes, LLC, Investor’s Mark Acquisitions, LLC, and Mark L. Hoskins) 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 June 30, 2020, the Hoskins Group owned a total of 15.2 Series B Preferred Units, which were issued for a total of $1,520.

 

9. Related Party Transactions

 

As of June 30, 2020, the Company had $1,249, $250, and $350 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.

 

 17 

 

 

10. Commitments and Contingencies

 

Unfunded commitments to extend credit, which have similar collateral, credit risk, and market risk to our outstanding loans, were $15,585 and $16,662 at June 30, 2020 and December 31, 2019, respectively.

 

11. 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 2   Quarter 1   Quarter 4   Quarter 3   Quarter 2   Quarter 1 
   2020(1)   2020   2019   2019   2019   2019 
                         
Net (loss) interest Income after Loan Loss Provision  $(1,788)  $955   $1,117   $1,115   $818   $1,079 
Non-Interest Income   3    -    22    86    95    - 
SG&A Expense   462    708    447    703    620    624 
Depreciation and Amortization   21    21    26    21    22    23 
Loss on Sale of Foreclosed Assets       35        274         
Impairment Loss on Foreclosed Assets   91    109    282        196    80 
Net (loss) income  $(2,359)  $82   $384   $203   $75   $352 

 

  (1) During the quarter ended June 30, 2020, net interest income after loan loss provision was reduced due to COVID-19 by $1,492 and $469 for loan loss provision and charges to interest income, respectively.  In addition, the Company wrote off $469 of interest income directly related to COVID-19.  During the quarter ended June 30, 2020, impairment loss on foreclosed assets of $91 was due to the impact of COVID-19.

 

12. Non-Interest Expense Detail

 

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

 

  

For the Six Months Ended

June 30,

 
   2020   2019 
Selling, general and administrative expenses          
Legal and accounting  $181   $174 
Salaries and related expenses   484    784 
Board related expenses   50    41 
Advertising   36    50 
Rent and utilities   23    25 
Loan and foreclosed asset expenses   234    47 
Travel   82    46 
Other   79    77 
Total SG&A  $1,169   $1,244 

 

13. Subsequent Events

 

Management of the Company has evaluated subsequent events through August 6, 2020, the date these interim condensed consolidated financial statements were issued.

 

In July 2020, the Company purchased two loans at cost from Daniel M. Wallach (the Company’s Chief Executive Officer and Chairman of the board of managers) for approximately $198. Those loans had previously been purchased from the Company by Mr. Wallach.

 

Also, in July 2020, the Company reserved certain loan losses for loans issued to one of its largest borrowers. However, that borrower has agreed to repay most of the amounts written off, contingent upon the borrower receiving revenues from a construction management agreement it has with an unrelated party. Any revenue received from this arrangement will be income to the Company.

 

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 during the third quarter of 2020 as the COVID-19 situation continues to develop. However, due to the continued cases of the COVID-19 pandemic, there are still economic uncertainties that could negatively impact net income (loss). Other financial impacts could occur though such potential impact is unknown at this time.

 

 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 has been impacted and continues to face risks related to COVID-19, which has caused disruptions to the economy 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. Borrowers with loans in which the underlying asset was at a non-start position 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, and customers in Florida were significantly impacted by the changes in lending rules for end users and the high levels of unemployment caused by COVID-19. 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 continued to monitor funding spec loans in some markets on a case-by-case basis for loans with reduced loan-to-value ratios. The Company also stopped recognizing interest on loans issued to customers impacted by COVID-19 which continued through June and is expected to continue until those loans are paid off. Through June 2020, the amount of estimated unearned interest income due to COVID-19 that was not recognized for the second quarter was $402.

 

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 those established in April 2020 but more conservative than terms prior to the arrival of COVID-19. Currently, the Company is offering normal terms to approximately 40% of its customers, and restricted terms to approximately 60% of its customers. The Company averaged $2,251 in new loan originations in the first five months of 2020, but under these terms the Company originated $7,247 of loans in June 2020 and $6,374 of loans in July 2020. The fees from these originations is typically recognized over 12 months and has had little impact on our financial statements through June 2020; however, the new loan fees from these two months before deferred loan origination costs was $322 which we will recognize over 12 months. The Company attributes this increase in volume to many of its larger nonbank competitors going out of business or leaving the lending business.

 

 19 

 

 

Net income for the quarter and six months ended June 30, 2020 decreased $2,434 and $2,704, respectively, when compared to the same periods of 2019. The decrease in net income was primarily due to the economic effects stemming from the COVID-19 pandemic, which included the following:

 

 

Interest income decreased $805 to $1,044 and $426 to $3,135 for the quarter and six months ended June 30, 2020, respectively, compared to the same periods of 2019. The decrease was due primarily to direct write offs of interest income of $469 for both the quarter and six months ended June 30, 2020. In addition, the Company estimated $402 in reduced interest income for both the quarter and six months ended June 30, 2020 due to non-performing loans not accruing interest due to COVID-19.

     
 

Fee income decreased $293 to $312 and $529 to $796 for the quarter and six months ended June 30, 2020, respectively, compared to the same periods of 2019. Originations for the quarter and six months ended June 30, 2020 were $10,233 and $18,504, respectively, compared to $13,879 and $32,861 for the same periods of 2019. The decrease in originations was primarily due to the impact of the COVID-19 pandemic.

     
 

Loan loss provision increased $1,409 to $1,560 and $1,397 to $1,595 for the quarter and six months ended June 30, 2020, respectively, compared to the same periods of 2019. The increase was due primarily to impairment on loans related to COVID-19. 

     
 

Impairment loss on foreclosed assets due to COVID-19 increased $91 for both the quarter and six months ended June 30, 2020.

 

The Company anticipates a moderate profit in the third quarter of 2020 and an increase in profit in the fourth quarter of 2020 compared to the third quarter of 2020. To achieve these increases in profits, the Company is focused on the following three things:

 

  1. First, the Company is focused on reducing the number of assets currently not paying interest. Due primarily to the impact of COVID-19, the Company transferred the loan receivables balance of $9,728 for one of our largest borrowers into a non-performing asset. The Company’s reduction of non-performing assets is expected to be achieved by a combination of the selling of foreclosed assets and the payoff of nonperforming loans;
     
  2. Second, the Company is focused on continuing the higher level of new loan originations that the Company has seen in June and July 2020; and
     
  3. Third, the Company seeks to have the cash to fund new originations through new financing and the potential reduction of nonperforming assets.

 

We anticipate that the housing market in most of the areas in which we do business will be strong despite the impact of COVID-19, and that doing business with our best customers in those markets will provide good performing loans for our balance sheet. We also anticipate that the losses we incurred in principal related to COVID-19 will not continue, and that the lack of interest due to nonperforming assets from COVID-19 will decrease significantly over the course of the rest of 2020.

 

During the quarter ended June 30, 2020, the Company purchased $10,000 of life insurance covering Daniel M. Wallach for the benefit of the Company as a beneficiary, which renews annually.

 

We had $49,797 and $55,369 in loan assets as of June 30, 2020 and December 31, 2019, respectively. In addition, as of June 30, 2020, we had 223 construction loans in 20 states with 64 borrowers and eight development loans in four states with five borrowers.

 

Cash used in operations decreased $1,413 for six months ended June 30, 2020 as compared to the same period of 2019. Our decrease in operating cash flow was due primarily to impairment loss related to impacts of the COVID-19 pandemic.

 

 20 

 

 

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.

 

Change in Fair Value Assumption 

June 30, 2020

Loan Loss

Provision Higher/(Lower)

 
Increasing fair value of the real estate collateral by 35%*  $ 
Decreasing fair value of the real estate collateral by 35%**  $6,153 

 

* 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 $49,797.

 

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).

 

Change in Fair Value Assumption 

June 30, 2020

Foreclosed

Assets Higher/(Lower)

 
Increasing fair value of the foreclosed assets by 35%*  $- 
Decreasing fair value of the foreclosed assets by 35%**  $(1,757)

 

* 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 $5,022.

 

 21 

 

 

Interest Spread

 

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

 

   Three Months Ended   Six Months Ended 
   June 30,   June 30, 
   2020   2019   2020   2019 
Interest Income        *        *        *        *
Estimated Interest income on loans due to COVID-19  $1,915    14%  $1,849    14%  $4,006    14%  $3,561    14%
Estimated unearned interest income due to COVID-19   (402)   (3)%   -    -    (402)   (1)%   -    - 
Write-offs due to COVID-19   (469)   (3)%   -    -    (469)   (2)%   -    - 
Interest income on loans  $1,044    8%  $1,849    14%  $3,135    11%  $3,561    14%
                                         
Fee income on loans   312    2%   605    5%   796    3%   1,325    5%
Interest and fee income on loans   1,356    10%   2,454    19%   3,931    14%   4,886    19%
Interest expense unsecured   735    5%   673    5%   1,463    5%   1,258    5%
Interest expense secured   810    6%   769    5%   1,627    6%   1,450    5%
Amortization offering costs   39    -%   43    1%   79    -%   83    1%
Interest expense   1,584    11%   1,485    11%   3,169    11%   2,791    11%
Net (loss) interest income (spread)   (228)   (1)%   969    8%   762    3%   2,095    8%
                                         
Weighted average outstanding loan asset balance  $53,716        $53,620        $55,736        $52,253      

 

* Annualized amount as percentage of the 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 decreased to 8% and 11% for the quarter and six months ended June 30, 2020, respectively, compared to 14% for both the quarter and six months ended June 30, 2019. The Company expensed $469 in interest income for both the quarter and six months ended June 30, 2020 due to impairment of loans associated with four of our borrowers directly related to COVID-19. In addition, interest not earned during the quarter ended June 30, 2020 related to those borrowers was approximately $402.

 

The difference between estimated interest income on loans due to COVID-19 and the interest paid was 3% for both the quarter and six months ended June 30, 2020 compared to the same periods of 2019, which is our standard margin.

 

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 loan. We do not recognize a loan fee on our development loans. When loans terminate before than their expected life, the remaining fee is recognized at the termination of the loan.

 

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During the quarter and six months ended June 30, 2020, fee income on loans decreased 3% and 2%, respectively, compared to the same periods of 2019. During the quarter ended June 30, 2020, our lower origination of new loans was primarily due to the impact of the COVID-19 pandemic. During the six months ended June 30, 2020, our lower originations of new loans was partly due to competition and partly due to the impact of the COVID-19 pandemic. We anticipate that higher originations and a reduction in the balance of old loans would 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 June 30, 2020 and 2019, we had 46 impaired loans in the aggregate amount of $12,993 and eight impaired loans in the aggregate amount of $1,663 that were not paying interest, respectively. Non-performing assets not related to the impact of COVID-19 were $1,504; however, due to the impact of COVID-19, the Company transferred the loan receivables balance of $9,728 for one of our largest borrowers into a non-performing asset.

 

Foreclosed assets do not provide a monthly interest return. As of June 30, 2020 and 2019, foreclosed assets were $5,022 and $7,964, respectively, which resulted in a negative impact on our interest spread in both years.

 

The amount of nonperforming assets is expected to decrease in the third quarter of 2020 as we continue to sell our assets when construction is complete.

 

SG&A Expenses

 

The following table displays our SG&A expenses:

 

  

Three Months

Ended June 30,

  

Six Months

Ended June 30,

 
   2020   2019   2020   2019 
Selling, general and administrative expenses                    
Legal and accounting  $42   $47   $181   $174 
Salaries and related expenses   206    422    484    784 
Board related expenses   25    25    50    41 
Advertising   15    31    36    50 
Rent and utilities   10    16    23    25 
Loan and foreclosed asset expenses   99    27    234    47 
Travel   23    14    82    46 
Other   42    38    79    77 
Total SG&A  $462   $620   $1,169   $1,244 

 

Our SG&A expense decreased $158 and $75 for the quarter and six months ended June 30, 2020, respectively, compared to the same periods of 2019 due significantly to the following:

 

 

Salaries and related expenses decreased for the quarter and six months ended June 30, 2020 by $216 and $300, respectively, compared to the same periods of 2019. The decrease was due to the increase in deferred originations costs of $87 to $181 and $50 to $314 for the quarter and six months ended June 30, 2020, compared to the same periods of 2019 directly related to the reduction of the number of loan originations. In addition, profit sharing expense decreased to $0 for both the quarter and six months ended June 30, 2020. During the quarter and six months ended June 30, 2019 profit sharing expense was $70 and $144, respectively.

     
  Loan and foreclosed asset expenses increased for the quarter and six months ended June 30, 2020 by $72 and $187, respectively, compared to the same periods of 2019 due to additional real estate owned asset expenses for taxes and insurance.

 

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Impairment Loss on Foreclosed Assets

 

For the quarter and six months ended June 30, 2020, impairment loss on foreclosed assets increased $64 to $91 and $93 to $200, respectively, compared to the same periods of 2019 primarily due to charges as a result of the impact of the COVID-19 pandemic.

 

We do not anticipate significant 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 increased $1,409 to 1,560 and $1,397 to $1,595 for the quarter and six months ended June 30, 2020, respectively, compared to the same periods of 2019. The increase in loan loss provision was primarily due to specific reserves for loan assets impaired due to the impact of the COVID-19 pandemic of $1,152 and special mention assets of $340.

 

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 June 30, 2020:

 

State 

Number 

of

Borrowers

  

Number of

Loans

  

Value of

Collateral(1)

  

Commitment

Amount

  

Gross Amount

Outstanding

  

Loan to

Value Ratio(2)

   Loan Fee 
Arizona   1    1   $1,345   $807   $341    60%   5%
Connecticut   1    1    343    226    68    66%   5%
Colorado   1    1    630    425    426    67%   5%
Florida   16    108    30,974    22,735    18,229    73%   5%
Georgia   3    3    1,760    1,151    774    65%   5%
Illinois   1    1    1,245    747    368    60%   5%
Indiana   1    1    347    243    233    70%   5%
Michigan   3    5    1,774    1,196    906    67%   5%
New Jersey   3    5    1,676    1,255    1,138    75%   5%
New York   2    4    1,835    1,262    1,169    69%   5%
North Carolina   5    18    4,534    3,094    1,860    68%   5%
Ohio   2    7    2,700    1,754    1,376    65%   5%
Oregon   2    3    1,290    834    607    65%   5%
Pennsylvania   3    25    22,000    13,411    10,450    61%   5%
South Carolina   8    17    5,669    4,267    2,356    75%   5%
Tennessee   3    4    1,367    1,069    615    78%   5%
Texas   5    8    2,584    1,809    612    70%   5%
Utah   2    7    3,006    2,190    1,522    73%   5%
Washington   1    3    1,009    706    594    70%   5%
Wisconsin   1    1    539    332    285    62%   5%
Total   64    223   $86,627   $59,513   $43,929    69%(3)   5%

 

  (1) The value is determined by the appraised value.

 

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  (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, 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