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, 2021
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
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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. Actual results may differ materially from those predicted in the forward-looking statements as a result of various factors, including but not limited to those set forth in the “Risk Factors” section of our Registration Statement on Form S-1, as amended, and our Annual Report on Form 10-K. 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, 2020.
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, 2020 in mind. You should not place undue reliance on any forward-looking statement. We are not obligated to update forward-looking statements.
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PART I – FINANCIAL INFORMATION
Shepherd’s Finance, LLC
Interim Condensed Consolidated Balance Sheets
(in thousands of dollars) | March 31, 2021 | December 31, 2020 | ||||||
(Unaudited) | ||||||||
Assets | ||||||||
Cash and cash equivalents | $ | 4,924 | $ | 4,749 | ||||
Accrued interest receivable | 546 | 601 | ||||||
Loans receivable, net | 45,093 | 46,405 | ||||||
Real estate investments | 1,185 | 1,181 | ||||||
Foreclosed assets, net | 3,764 | 4,449 | ||||||
Premises and equipment | 894 | 903 | ||||||
Other assets | 918 | 981 | ||||||
Total assets | $ | 57,324 | $ | 59,269 | ||||
Liabilities and Members’ Capital | ||||||||
Customer interest escrow | $ | 530 | $ | 510 | ||||
Accounts payable and accrued expenses | 193 | 289 | ||||||
Accrued interest payable | 3,018 | 3,158 | ||||||
Notes payable secured, net of deferred financing costs | 19,941 | 22,959 | ||||||
Notes payable unsecured, net of deferred financing costs | 28,012 | 26,978 | ||||||
PPP loan and EIDL advance | 361 | 10 | ||||||
Due to preferred equity member | - | 106 | ||||||
Total liabilities | $ | 52,055 | $ | 54,010 | ||||
Commitments and Contingencies (Note 10) | ||||||||
Redeemable Preferred Equity | ||||||||
Series C preferred equity | $ | 3,983 | $ | 3,582 | ||||
Members’ Capital | ||||||||
Series B preferred equity | 1,640 | 1,630 | ||||||
Class A common equity | (354 | ) | 47 | |||||
Members’ capital | $ | 1,286 | $ | 1,677 | ||||
Total liabilities, redeemable preferred equity and members’ capital | $ | 57,324 | $ | 59,269 |
The accompanying notes are an integral part of these interim condensed consolidated financial statements.
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Shepherd’s Finance, LLC
Interim Condensed Consolidated Statements of Operations - Unaudited
For the Three Months ended March 31, 2021 and 2020
Three Months Ended | ||||||||
March 31, | ||||||||
(in thousands of dollars) | 2021 | 2020 | ||||||
Net Interest Income | ||||||||
Interest and fee income on loans | $ | 1,778 | $ | 2,574 | ||||
Interest expense: | ||||||||
Interest related to secured borrowings | 557 | 817 | ||||||
Interest related to unsecured borrowings | 810 | 767 | ||||||
Interest expense | $ | 1,367 | $ | 1,584 | ||||
Net interest income | 411 | 990 | ||||||
Less: Loan loss provision | 214 | 35 | ||||||
Net interest income after loan loss provision | 197 | 955 | ||||||
Non-Interest Income | ||||||||
Gain on sale of foreclosed assets | $ | 88 | $ | - | ||||
Gain on extinguishment of debt | 10 | - | ||||||
Total non-interest income | 98 | - | ||||||
Income before non-interest expense | 295 | 955 | ||||||
Non-Interest Expense | ||||||||
Selling, general and administrative | $ | 537 | $ | 708 | ||||
Depreciation and amortization | 16 | 21 | ||||||
Loss on the sale of foreclosed assets | 18 | 35 | ||||||
Impairment loss on foreclosed assets | 10 | 109 | ||||||
Total non-interest expense | 581 | 873 | ||||||
Net (loss) income | $ | (286 | ) | $ | 82 | |||
Earned distribution to preferred equity holders | 115 | 126 | ||||||
Net loss attributable to common equity holders | $ | (401 | ) | $ | (44 | ) |
The accompanying notes are an integral part of these interim condensed consolidated financial statements.
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Shepherd’s Finance, LLC
Interim Condensed Consolidated Statements of Changes in Members’ Capital - Unaudited
For the Three Months Ended March 31, 2021 and 2020
(in thousands of dollars) | March 31, 2021 | March 31, 2020 | ||||||
Members’ capital, beginning balance | $ | 1,677 | $ | 4,188 | ||||
Net (loss) income less distributions to Series C preferred equity holders of $115 and $89 | (401 | ) | (7 | ) | ||||
Contributions from Series B preferred equity holders | 10 | - | ||||||
Earned distributions to Series B preferred equity holders | - | (37 | ) | |||||
Distributions to common equity holders | - | (217 | ) | |||||
Members’ capital, ending balance | $ | 1,286 | $ | 3,927 |
The accompanying notes are an integral part of the interim condensed consolidated financial statements.
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Shepherd’s Finance, LLC
Interim Condensed Consolidated Statements of Cash Flows - Unaudited
For the Three Months Ended March 31, 2021 and 2020
Three Months Ended March 31, | ||||||||
(in thousands of dollars) | 2021 | 2020 | ||||||
Cash flows from operations | ||||||||
Net (loss) income | $ | (286 | ) | $ | 82 | |||
Adjustments to reconcile net (loss) income to net cash provided by operating activities | ||||||||
Amortization of deferred financing costs | 42 | 40 | ||||||
Provision for loan losses | 214 | 35 | ||||||
Change in loan origination fees, net | 82 | (191 | ) | |||||
Loss on sale of foreclosed assets | 18 | 35 | ||||||
Impairment of foreclosed assets | 10 | 109 | ||||||
Gain on the sale of foreclosed assets | (88 | ) | - | |||||
Gain on extinguishment of debt | (10 | ) | - | |||||
Depreciation and amortization | 16 | 21 | ||||||
Net change in operating assets and liabilities: | ||||||||
Other assets | 56 | (21 | ) | |||||
Accrued interest receivable | 55 | (131 | ) | |||||
Customer interest escrow | (86 | ) | 1 | |||||
Accrued interest payable | (140 | ) | (119 | ) | ||||
Accounts payable and accrued expenses | (96 | ) | (162 | ) | ||||
Net cash used in operating activities | (213 | ) | (301 | ) | ||||
Cash flows from investing activities | ||||||||
Loan additions and principal collections, net | 742 | 1,328 | ||||||
Investment in foreclosed assets | (257 | ) | (444 | ) | ||||
Additions for construction in real estate investments | (4 | ) | - | |||||
Proceeds from the sale of foreclosed assets | 1,276 | 185 | ||||||
Net cash provided by investing activities | 1,757 | 1,069 | ||||||
Cash flows from financing activities | ||||||||
Contributions from preferred B equity holders | 10 | - | ||||||
Contributions from preferred C equity holders | 300 | - | ||||||
Distributions to preferred equity holders | (14 | ) | (12 | ) | ||||
Distributions to common equity holders | - | (217 | ) | |||||
Proceeds from secured note payable | 1,616 | 4,084 | ||||||
Repayments of secured note payable | (4,203 | ) | (4,390 | ) | ||||
Proceeds from unsecured notes payable | 2,641 | 5,261 | ||||||
Redemptions/repayments of unsecured notes payable | (2,045 | ) | (3,959 | ) | ||||
Proceeds from PPP loan | 361 | - | ||||||
Deferred financing costs paid | (35 | ) | (77 | ) | ||||
Net cash (used in) provided by financing activities | (1,369 | ) | 690 | |||||
Net increase in cash and cash equivalents | 175 | 1,458 | ||||||
Cash and cash equivalents | ||||||||
Beginning of period | 4,749 | 1,883 | ||||||
End of period | $ | 4,924 | $ | 3,341 | ||||
Supplemental disclosure of cash flow information | ||||||||
Cash paid for interest | $ | 1,507 | $ | 1,703 | ||||
Non-cash investing and financing activities | ||||||||
Earned by Series B preferred equity holders but not distributed to customer interest escrow | $ | - | $ | 37 | ||||
Earned by Series B preferred equity holders and distributed to customer interest escrow | $ | 106 | $ | 37 | ||||
Foreclosure of assets transferred from loans receivable, net | $ | 274 | $ | - | ||||
Earned but not paid distributions of Series C preferred equity holders | $ | 115 | $ | 89 | ||||
Secured transferred to unsecured notes payable | $ | 431 | $ | 631 | ||||
EIDL advance forgiveness in reduction of debt | $ | 10 | $ | - |
The accompanying notes are an integral part of these interim condensed consolidated financial statements.
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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, Shepherd’s Stable Investments, LLC. The Company operates pursuant to its Second Amended and Restated Limited Liability Company Agreement, as amended, by and among Daniel M. Wallach and the other members of the Company effective as of March 16, 2017, and as subsequently amended.
The Company extends commercial loans to residential homebuilders (in 21 states as of March 31, 2021) to:
● | construct single family homes, | |
● | develop undeveloped land into residential building lots, and | |
● | purchase older homes and then rehabilitate the home for sale. |
Basis of Presentation
The accompanying unaudited interim condensed consolidated financial statements for the period ended March 31, 2021 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. The accompanying condensed consolidated balance sheet as of December 31, 2020 has been derived from audited consolidated financial statements. 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, 2021. These unaudited interim condensed consolidated financial statements should be read in conjunction with the 2020 consolidated financial statements and notes thereto (the “2020 Financial Statements”) included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020 (the “2020 Form 10-K”). The accounting policies followed by the Company are set forth in Note 2 – Summary of Significant Accounting Policies in the 2020 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 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.
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2. Fair Value
The Company had no financial instruments measured at fair value on a recurring basis as of March 31, 2021 and December 31, 2020.
The following tables present the balances of non-financial instruments measured at fair value on a non-recurring basis as of March 31, 2021 and December 31, 2020.
Quoted Prices in Active | Significant | Significant | ||||||||||||||||||
March 31, 2021 | Markets for | Other | Unobservable | |||||||||||||||||
Carrying | Estimated | Identical | Observable | Inputs | ||||||||||||||||
Amount | Fair Value | Assets Level 1 | Inputs Level 2 | Level 3 | ||||||||||||||||
Foreclosed assets | $ | 3,764 | $ | 3,764 | $ | – | $ | – | $ | 3,764 | ||||||||||
Impaired loans due to COVID-19, net | 6,217 | 6,217 | – | – | 6,217 | |||||||||||||||
Other impaired loans, net | 1,882 | 1,882 | – | – | 1,882 | |||||||||||||||
Total | $ | 11,863 | $ | 11,863 | $ | – | $ | – | $ | 11,863 |
Quoted Prices in Active | Significant | Significant | ||||||||||||||||||
December 31, 2020 | Markets for | Other | Unobservable | |||||||||||||||||
Carrying | Estimated | Identical | Observable | Inputs | ||||||||||||||||
Amount | Fair Value | Assets Level 1 | Inputs Level 2 | Level 3 | ||||||||||||||||
Foreclosed assets | $ | 4,449 | $ | 4,449 | $ | – | $ | – | $ | 4,449 | ||||||||||
Impaired loans due to COVID-19, net | 9,054 | 9,054 | – | – | 9,054 | |||||||||||||||
Other impaired loans, net | 1,064 | 1,064 | – | – | 1,064 | |||||||||||||||
Total | $ | 14,567 | $ | 14,567 | $ | – | $ | – | $ | 14,567 |
The table below is a summary of fair value estimates for financial instruments:
March 31, 2021 | December 31, 2020 | |||||||||||||||
Carrying | Estimated | Carrying | Estimated | |||||||||||||
Amount | Fair Value | Amount | Fair Value | |||||||||||||
Financial Assets | ||||||||||||||||
Cash and cash equivalents | $ | 4,924 | $ | 4,924 | $ | 4,749 | $ | 4,749 | ||||||||
Loan receivable, net | 45,093 | 45,093 | 46,405 | 46,405 | ||||||||||||
Accrued interest on loans | 546 | 546 | 601 | 601 | ||||||||||||
Financial Liabilities | ||||||||||||||||
Customer interest escrow | 530 | 530 | 510 | 510 | ||||||||||||
Notes payable secured, net | 19,941 | 19,941 | 22,959 | 22,959 | ||||||||||||
Notes payable unsecured, net | 28,012 | 28,012 | 26,978 | 26,978 | ||||||||||||
PPP loan and EIDL advance | 361 | 361 | 10 | 10 | ||||||||||||
Accrued interest payable | 3,018 | 3,018 | 3,158 | 3,158 |
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3. Financing Receivables
Financing receivables are comprised of the following as of March 31, 2021 and December 31, 2020:
March 31, 2021 | December 31, 2020 | |||||||
Loans receivable, gross | $ | 49,320 | $ | 50,449 | ||||
Less: Deferred loan fees | (1,223 | ) | (1,092 | ) | ||||
Less: Deposits | (1,505 | ) | (1,337 | ) | ||||
Plus: Deferred origination costs | 402 | 353 | ||||||
Less: Allowance for loan losses | (1,901 | ) | (1,968 | ) | ||||
Loans receivable, net | $ | 45,093 | $ | 46,405 |
The allowance for loan losses at March 31, 2021 is $1,901, of which $159 is related to loans without specific reserves. The Company recorded specific reserves for loans impaired due to impacts from COVID-19 of $1,413, special mention loans of $120, and impaired loans not due to impacts from COVID-19 of $209. At December 31, 2020, the allowance was $1,968, of which $151 is related to loans without specific reserves. During the quarter ended March 31, 2021 and year ended December 31, 2020, we incurred $282 and $72 in direct charge offs, respectively.
Commercial Construction and Development Loans
Construction Loan Portfolio Summary
As of March 31, 2021, the Company’s portfolio consisted of 209 commercial construction and 12 development loans with 70 borrowers in 21 states.
The following is a summary of the loan portfolio to builders for home construction loans as of March 31, 2021 and December 31, 2020:
Year | Number of States | Number Borrowers | Number of Loans | Value of Collateral(1) | Commitment Amount | Gross Amount Outstanding | Loan to Value Ratio(2) | Loan Fee | ||||||||||||||||||||||||||
2021 | 21 | 70 | 209 | $ | 84,134 | $ | 60,328 | $ | 40,342 | 72 | %(3) | 5 | % | |||||||||||||||||||||
2020 | 21 | 67 | 213 | $ | 86,268 | $ | 61,714 | $ | 42,219 | 72 | %(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. |
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Real Estate Development Loan Portfolio Summary
The following is a summary of our loan portfolio to builders for land development as of March 31, 2021 and December 31, 2020:
Year | Number of States | Number of Borrowers | Number of | Gross Value Collateral(1) | Commitment Amount(2) | Gross Amount Outstanding | Loan to Value Ratio(3) | Interest Spread | ||||||||||||||||||||||||||
2021 | 7 | 11 | 12 | $ | 13,917 | $ | 11,742 | $ | 8,978 | 65 | %(4) | varies | ||||||||||||||||||||||
2020 | 5 | 8 | 9 | $ | 11,628 | $ | 10,815 | $ | 8,230 | 71 | %(4) | 7 | % |
(1) | The value is determined by the appraised value adjusted for remaining costs to be paid. As of March 31, 2021 and December 31, 2020, a portion of this collateral is $1,640 and $1,630, respectively, 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 Accounting Standard Codification 310-10-50, “Disclosures about the Credit Quality of Finance Receivables and the Allowance for Credit Losses.” See our 2020 Form 10-K, as filed with the SEC, for more information.
Gross finance receivables – By risk rating:
March 31, 2021 | December 31, 2020 | |||||||
Pass | $ | 37,456 | $ | 35,544 | ||||
Special mention | 2,141 | 3,089 | ||||||
Classified – accruing | – | – | ||||||
Classified – nonaccrual | 9,723 | 11,816 | ||||||
Total | $ | 49,320 | $ | 50,449 |
Finance Receivables – Method of impairment calculation:
March 31, 2021 | December 31, 2020 | |||||||
Performing loans evaluated individually | $ | 15,583 | $ | 16,412 | ||||
Performing loans evaluated collectively | 24,014 | 22,221 | ||||||
Non-performing loans without a specific reserve | 616 | 1,518 | ||||||
Non-performing loans with a specific reserve | 9,107 | 10,298 | ||||||
Total evaluated collectively for loan losses | $ | 49,320 | $ | 50,449 |
As March 31, 2021 and December 31, 2020, there were no loans acquired with deteriorated credit quality.
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Impaired Loans
The following is a summary of our impaired non-accrual commercial construction loans as of March 31, 2021 and December 31, 2020.
March 31, 2021 | December 31, 2020 | |||||||
Unpaid principal balance (contractual obligation from customer) | $ | 10,005 | $ | 11,888 | ||||
Charge-offs and payments applied | (282 | ) | (72 | ) | ||||
Gross value before related allowance | 9,723 | 11,816 | ||||||
Related allowance | (1,624 | ) | (1,698 | ) | ||||
Value after allowance | $ | 8,099 | $ | 10,118 |
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, 2021 | December 31, 2020 | |||||||||||
Percent of | Percent of | |||||||||||
Borrower | Loan | Borrower | Loan | |||||||||
City | Commitments | City | Commitments | |||||||||
Highest concentration risk | Pittsburgh, PA | 28 | % | Pittsburgh, PA | 29 | % | ||||||
Second highest concentration risk | Orlando, FL | 11 | % | Orlando, FL | 12 | % | ||||||
Third highest concentration risk | Spokane, WA | 3 | % | Cape Coral, FL | 6 | % |
4. Real Estate Investment Assets
The following table is a roll forward of real estate investment assets:
Three Months March 31, 2021 | Year Ended December 31, 2020 | Three Months March 31, 2020 | ||||||||||
Beginning balance | $ | 1,181 | $ | – | $ | – | ||||||
Transfers from loans | – | 1,140 | – | |||||||||
Additions for construction/development | 4 | 41 | – | |||||||||
Ending balance | $ | 1,185 | $ | 1,181 | $ | – |
5. Foreclosed Assets
The following table is a roll forward of foreclosed assets:
Three Months March 31, 2021 | Year Ended December 31, 2020 | Three Months March 31, 2020 | ||||||||||
Beginning balance | $ | 4,449 | $ | 4,916 | $ | 4,916 | ||||||
Additions from loans | 274 | 2,118 | – | |||||||||
Additions for construction/development | 257 | 1,410 | 444 | |||||||||
Sale proceeds | (1,276 | ) | (3,697 | ) | (185 | ) | ||||||
Loss on foreclosure | – | (54 | ) | – | ||||||||
Loss on sale | (18 | ) | (102 | ) | (35 | ) | ||||||
Gain on foreclosure | – | 52 | – | |||||||||
Gain on sale | 88 | 160 | – | |||||||||
Impairment loss on foreclosed assets | (10 | ) | (290 | ) | (109 | ) | ||||||
Impairment loss on foreclosed assets due to COVID-19 | – | (64 | ) | – | ||||||||
Ending balance | $ | 3,764 | $ | 4,449 | $ | 5,031 |
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6. Borrowings
The following table displays our borrowings and a ranking of priority:
Priority Rank | March 31, 2021 | December 31, 2020 | ||||||||
Borrowing Source | ||||||||||
Purchase and sale agreements and other secured borrowings | 1 | $ | 19,950 | $ | 22,968 | |||||
Secured line of credit from affiliates | 2 | – | – | |||||||
Unsecured line of credit (senior) | 3 | 500 | 500 | |||||||
PPP loan and EIDL advance | 3 | 361 | 10 | |||||||
Other unsecured debt (senior subordinated) | 4 | 1,782 | 1,800 | |||||||
Unsecured Notes through our public offering, gross | 5 | 22,082 | 21,482 | |||||||
Other unsecured debt (subordinated) | 5 | 3,193 | 2,747 | |||||||
Other unsecured debt (junior subordinated) | 6 | 864 | 864 | |||||||
Total | $ | 48,732 | $ | 50,371 |
The following table shows the maturity of outstanding debt as of March 31, 2021:
Year Maturing | Total Amount Maturing | Public Offering | Other Unsecured | Secured Borrowings | ||||||||||||
2021 | $ | 30,756 | $ | 10,012 | $ | 1,646 | $ | 19,098 | ||||||||
2022 | 5,899 | 3,960 | 1,923 | 16 | ||||||||||||
2023 | 3,211 | 2,103 | 1,029 | 79 | ||||||||||||
2024 | 7,044 | 4,815 | 2,087 | 142 | ||||||||||||
2025 and thereafter | 1,822 | 1,192 | 15 | 615 | ||||||||||||
Total | $ | 48,732 | $ | 22,082 | $ | 6,700 | $ | 19,950 |
Secured Borrowings
Lines of Credit
As of March 31, 2021, the Company had no amounts borrowed against its lines of credit from affiliates, which have a total limit of $2,500.
None of our lines of credit have given us notice of nonrenewal during the first quarter of 2021, and the lines will continue to automatically renew unless notice of nonrenewal is given by a lender.
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Secured Deferred Financing Costs
The Company had secured deferred financing costs of $9 and $8 as of March 31, 2021 and December 31, 2020, respectively.
Borrowings secured by loan assets are summarized below:
March 31, 2021 | December 31, 2020 | |||||||||||||||
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 | $ | 8,111 | $ | 5,114 | $ | 7,981 | $ | 5,919 | ||||||||
S.K. Funding | 4,581 | 3,834 | 4,551 | 3,898 | ||||||||||||
Lender | ||||||||||||||||
Shuman | 2,003 | 1,325 | 1,916 | 1,325 | ||||||||||||
Jeff Eppinger | 3,472 | 200 | 2,206 | 1,500 | ||||||||||||
Hardy Enterprises, Inc. | 1,345 | 700 | 1,590 | 1,000 | ||||||||||||
Gary Zentner | 519 | 250 | 424 | 250 | ||||||||||||
R. Scott Summers | 1,435 | 847 | 1,259 | 847 | ||||||||||||
John C. Solomon | 788 | 563 | 743 | 563 | ||||||||||||
Paul Swanson | 9,091 | 6,254 | 9,381 | 6,685 | ||||||||||||
Total | $ | 31,345 | $ | 19,087 | $ | 30,051 | $ | 21,987 |
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, 2021 and December 31, 2020 was 10.27% and 10.38%, 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, 2021 | Year Ended December 31, 2020 | Three Months Ended March 31, 2020 | ||||||||||
Gross Notes outstanding, beginning of period | $ | 21,482 | $ | 20,308 | $ | 20,308 | ||||||
Notes issued | 2,627 | 7,691 | 4,722 | |||||||||
Note repayments / redemptions | (2,027 | ) | (6,517 | ) | (3,960 | ) | ||||||
Gross Notes outstanding, end of period | $ | 22,082 | $ | 21,482 | $ | 21,070 | ||||||
Less deferred financing costs, net | (409 | ) | (416 | ) | (453 | ) | ||||||
Notes outstanding, net | $ | 21,673 | $ | 21,066 | $ | 20,617 |
The following is a roll forward of deferred financing costs:
Three Months Ended March 31, 2021 | Year Ended December 31, 2020 | Three Months Ended March 31, 2020 | ||||||||||
Deferred financing costs, beginning balance | $ | 942 | $ | 786 | $ | 786 | ||||||
Additions | 35 | 156 | 77 | |||||||||
Deferred financing costs, ending balance | 977 | 942 | 863 | |||||||||
Less accumulated amortization | (568 | ) | (526 | ) | (410 | ) | ||||||
Deferred financing costs, net | $ | 409 | $ | 416 | $ | 453 |
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The following is a roll forward of the accumulated amortization of deferred financing costs:
Three Months Ended March 31, 2021 | Year Ended December 31, 2020 | Three Months Ended March 31, 2020 | ||||||||||
Accumulated amortization, beginning balance | $ | 526 | $ | 370 | $ | 370 | ||||||
Additions | 42 | 165 | 40 | |||||||||
Disposals | - | (9 | ) | - | ||||||||
Accumulated amortization, ending balance | $ | 568 | $ | 526 | $ | 410 |
Other Unsecured Debts
Our other unsecured debts are detailed below:
Maturity | Interest | Principal Amount Outstanding as of | ||||||||||||
Loan | Date | Rate(1) | March 31, 2021 | December 31, 2020 | ||||||||||
Unsecured Note with Seven Kings Holdings, Inc. | Demand(2) | 9.5 | % | $ | 500 | $ | 500 | |||||||
Unsecured Line of Credit from Paul Swanson | October 2022 | 10.0 | % | 746 | 315 | |||||||||
Subordinated Promissory Note | December 2023 | 10.5 | % | 146 | 146 | |||||||||
Subordinated Promissory Note | April 2024 | 10.0 | % | 100 | 100 | |||||||||
Subordinated Promissory Note | October 2022 | 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 | February 2023 | 11.0 | % | 600 | 600 | |||||||||
Subordinated Promissory Note | December 2022 | 5.0 | % | 3 | 3 | |||||||||
Subordinated Promissory Note | December 2023 | 11.0 | % | 35 | 20 | |||||||||
Subordinated Promissory Note | February 2024 | 11.0 | % | 20 | 20 | |||||||||
Subordinated Promissory Note | November 2021 | 9.5 | % | 200 | 200 | |||||||||
Subordinated Promissory Note | October 2024 | 10.0 | % | 700 | 700 | |||||||||
Subordinated Promissory Note | December 2024 | 10 | % | 100 | 100 | |||||||||
Senior Subordinated Promissory Note | March 2022(3) | 10.0 | % | 334 | 352 | |||||||||
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 2024(5) | 1.0 | % | 720 | 720 | |||||||||
Junior Subordinated Promissory Note | October 2024(5) | 20.0 | % | 447 | 447 | |||||||||
$ | 6,339 | $ | 5,911 |
(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. |
15 |
Second Draw Paycheck Protection Program Loan
On February 5, 2021, the Company entered into an agreement (the “Loan Agreement”) to borrow approximately $361 from LCA Bank Corporation pursuant to the Paycheck Protection Program (“PPP”), originally created under the Coronavirus Aid, Relief, and Economic Security Act, or CARES Act, and extended to “second draw” PPP loans. The PPP is intended to provide loans to qualified businesses to cover payroll and certain other identified costs. 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 has an interest rate of 1.0% per annum and a term of 60 months. Payments will be deferred in accordance with the CARES Act, as modified by the Paycheck Protection Program Flexibility Act of 2020; however, interest will accrue during the deferral period. If the loan is not forgiven in accordance with the terms of the program, we will be obligated to make monthly payments of principal and interest to repay the loan in full prior to maturity. 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.
7. 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, 2021 | Year Ended December 31, 2020 | Three Months Ended March 31, 2020 | ||||||||||
Beginning balance | $ | 3,582 | $ | 2,959 | $ | 2,959 | ||||||
Additions from new investment | 300 | 300 | - | |||||||||
Distributions | (14 | ) | (49 | ) | (12 | ) | ||||||
Earned distributions to preferred equity holders | 115 | 372 | 89 | |||||||||
Ending balance | $ | 3,983 | $ | 3,582 | $ | 3,036 |
The following table shows the earliest redemption options for investors in our Series C Preferred Units as of March 31, 2021:
Year Maturing | Total Amount Redeemable | |||
2024 | $ | 3,001 | ||
2025 | 368 | |||
2026 | 309 | |||
2027 | 305 | |||
Total | $ | 3,983 |
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 March 31, 2021, 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, 2021 and December 31, 2020.
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, 2021, the Hoskins Group owned a total of 16.4 Series B Preferred Units, which were issued for a total of $1,640.
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9. Related Party Transactions
As of March 31, 2021, the Company had $1,250, $250, and $1,000 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), respectively. A more detailed description is included in Note 7 of our 2020 Financial Statements. These borrowings are in notes payable secured, net of deferred financing costs on the interim condensed consolidated balance sheet.
10. Commitments and Contingencies
Unfunded commitments to extend credit, which have similar collateral, credit risk, and market risk to our outstanding loans, were $19,986 and $19,495 at March 31, 2021 and December 31, 2020, respectively.
11. Selected Quarterly Condensed Consolidated Financial Data (Unaudited)
Summarized unaudited quarterly condensed consolidated financial data for the quarters of 2021 and 2020 are as follows:
Quarter 1 | Quarter 4 | Quarter 3 | Quarter 2 | Quarter 1 | ||||||||||||||||
2021 | 2020 | 2020 | 2020 | 2020 | ||||||||||||||||
Net interest income (loss) after loan loss provision | $ | 197 | $ | 792 | $ | 319 | $ | (1,788 | ) | $ | 955 | |||||||||
Non-interest income | 98 | 379 | 230 | 3 | - | |||||||||||||||
SG&A expense | 537 | 648 | 367 | 462 | 708 | |||||||||||||||
Depreciation and amortization | 16 | 22 | 21 | 21 | 21 | |||||||||||||||
Loss on sale of foreclosed assets | 18 | 16 | 51 | – | 35 | |||||||||||||||
Impairment loss and loss on foreclosure of assets | 10 | 241 | 6 | 91 | 109 | |||||||||||||||
Net income (loss) | $ | (286 | ) | $ | 244 | $ | 104 | $ | (2,359 | ) | $ | 82 |
12. Non-Interest Expense Detail
The following table displays our selling, general and administrative (“SG&A”) expenses:
For the Three Months Ended March 31, | ||||||||
2021 | 2020 | |||||||
Selling, general and administrative expenses | ||||||||
Legal and accounting | $ | 103 | $ | 139 | ||||
Salaries and related expenses | 209 | 278 | ||||||
Board related expenses | 25 | 25 | ||||||
Advertising | 9 | 21 | ||||||
Rent and utilities | 9 | 13 | ||||||
Loan and foreclosed asset expenses | 113 | 135 | ||||||
Travel | 24 | 59 | ||||||
Other | 45 | 38 | ||||||
Total SG&A | $ | 537 | $ | 708 |
13. Subsequent Events
Management of the Company has evaluated subsequent events through May 10, 2021, the date these interim condensed consolidated financial statements were issued.
On April 1, 2021, the Company sold five of its Series C Cumulative Preferred Units to two joint investors, for the total price of $500,000.
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(All dollar [$] 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 “2020 Financial Statements”) included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020 (the “2020 Form 10-K”). See also “Cautionary Note Regarding Forward-Looking Statements” preceding Part I.
Overview
During the three months ended March 31, 2021, the Company continued to face COVID-19 risks as it related to the economy and the homebuilding industry. In reaction to the COVID-19 economic risks, the Company’s management made the decision to focus on the following three areas:
1. | Decrease the amount of non-interest-bearing assets, which includes our foreclosed assets and classified non-accrual loans or impaired loans receivables; |
2. | Increase loan originations which were lower during the year ended December 31, 2020 due primarily to COVID-19; and |
3. | Maintain liquidity to fund new loan originations and for the completion of construction costs for existing loans. |
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 in the second quarter of 2021.
We had $45,093 and $46,405 in loan assets as of March 31, 2021 and December 31, 2020, respectively. In addition, as of March 31, 2021, we had 209 construction loans in 21 states with 70 borrowers and 12 development loans in seven states with 11 borrowers.
Net cash used in operations decreased $88 for the three months ended March 31, 2021 as compared to the same period of 2020. Our increase in operating cash flow was due primarily to the provisions for loan losses. As of March 31, 2021, the provisions for loan losses were $214 which included $114 for impairment charges due to the COVID-19 pandemic.
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 2020 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, 2020 unless listed below.
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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, 2021 | ||||
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%** | $ | 3,089 |
* 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 $45,093.
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, 2021 | ||||
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%** | $ | 1,317 |
* 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 $3,764.
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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, | ||||||||||||||||
2021 | 2020 | |||||||||||||||
Interest Income | * | |||||||||||||||
Estimated interest income | $ | 1,508 | 12 | % | $ | 2,090 | 14 | % | ||||||||
Estimated unearned interest income due to COVID-19 | (267 | ) | (2 | )% | - | - | % | |||||||||
Interest income on loans | 1,241 | 10 | % | 2,090 | 14 | % | ||||||||||
Fee income on loans, gross | 728 | 6 | % | 605 | 5 | % | ||||||||||
Deferred loan fees | (191 | ) | (2 | )% | (121 | ) | (1 | )% | ||||||||
537 | 4 | % | 484 | 4 | % | |||||||||||
Interest and fee income on loans | 1,778 | 14 | % | 2,574 | 18 | % | ||||||||||
Interest expense unsecured | (769 | ) | (6 | )% | 727 | (5 | )% | |||||||||
Interest expense secured | (557 | ) | (5 | )% | 817 | (6 | )% | |||||||||
Amortization of offering costs | (41 | ) | (- )% | 40 | (- ) | % | ||||||||||
Interest expense | 1,367 | (11 | )% | 1,584 | 11 | % | ||||||||||
Net interest income (spread) | $ | 411 | 3 | % | $ | 990 | 7 | % | ||||||||
Weighted average outstanding loan asset balance | $ | 50,273 | $ | 57,756 |
*annualized amount as percentage of weighted average outstanding gross
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 generally 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 10% for the three months ended March 31, 2021 compared to 14% for the same period of 2020. Estimated interest income not earned due primarily to classified-nonaccrual loans was approximately $267 for the quarter ended March 31, 2021.
We anticipate our standard margin to be 3% on all future construction loans and generally 7% on all development loans which yields a blended margin of approximately 3.9%.
● 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. In addition, our development loans do not recognize a loan fee. When loans terminate before their expected maturity, the remaining fee is recognized at the termination of the loan. During the quarter ended March 31, 2021, fee income included a modification charge to our largest customer of $124.
● 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, 2021 and 2020, $9,723 and $1,581 in loans were not paying interest, respectively.
Foreclosed assets do not provide a monthly interest return. As of March 31, 2021 and 2020, foreclosed assets were $3,764 and $5,031, respectively, which resulted in a negative impact to our interest spread in both years.
The amount of nonperforming assets is expected to decrease over the next quarter as we continue to sell our assets following completion of construction.
Loan Loss Provision
Loan loss provision (expense throughout the year) was $214 and $35 for the quarters ended March 31, 2021 and 2020, respectively.
The allowance for loan losses at March 31, 2021 is $1,901, of which $157 is related to loans without specific reserves. The Company recorded specific reserves for loans impaired due to impacts from COVID-19 as of March 31, 2021 of $1,413, special mention loans of $120, and impaired loans not due to impacts from COVID-19 of $211. At December 31, 2020, the allowance was $1,968, of which $151 is related to loans without specific reserves. During the quarter ended March 31, 2021 and year ended December 31, 2020, we incurred $282 and $72 in direct charge offs, respectively.
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Non-Interest Income
Gain on Sale of Foreclosed Assets
During the quarters ended March 31, 2021 and 2020, we recognized $88 and $0, respectively, as a gain on the sale of foreclosed assets. We sold four foreclosed assets related to two original borrowers during the quarter ended March 31, 2021 that resulted in a gain on their sale.
Gain on the Extinguishment of Debt
During April 2020, the Company received a grant under the Economic Injury Disaster Loan Emergency Advance (the “EIDL Advance”) for $10 which was used for payroll and other certain operating expenses.
In February 2021, the full EIDL Advance or $10 and accrued interest were forgiven by the U.S. Small Business Administration.
Non-Interest Expense
Selling, General and Administrative (“SG&A”) Expenses
The following table displays our SG&A expenses:
For the Three Months Ended March 31, | ||||||||
2021 | 2020 | |||||||
Selling, general and administrative expenses | ||||||||
Legal and accounting | $ | 103 | $ | 139 | ||||
Salaries and related expenses | 209 | 278 | ||||||
Board related expenses | 25 | 25 | ||||||
Advertising | 9 | 21 | ||||||
Rent and utilities | 9 | 13 | ||||||
Loan and foreclosed asset expenses | 113 | 135 | ||||||
Travel | 24 | 59 | ||||||
Other | 45 | 38 | ||||||
Total SG&A | $ | 537 | $ | 708 |
Our SG&A expense decreased $171 for the quarter ended March 31, 2021 compared to the same period of 2020, due significantly to the following:
● | Legal and accounting fees decreased $36 due primarily to the addition of internal legal counsel and lower outsourced legal fees; and | |
● | Salaries and related expenses decreased $69 which resulted from the increase in deferred loan origination fees which reduces salary expenses. |
Loss on the Sale of Foreclosed Assets
During the quarters ended March 31, 2021 and 2020, we recognized $18 and $35, respectively, as a loss on the sale of foreclosed assets. We sold four and one foreclosed assets related to one original borrower during the quarters ended March 31, 2021 and 2020, respectively.
21 |
Impairment Loss on Foreclosed Assets
As of March 31, 2021 and 2020, impaired loss on foreclosed assets was $10 and $109, respectively. The decrease in impairment loss on foreclosed assets was directly related to assets acquired due to a death of a borrower during the last quarter of 2019.
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, 2021:
State | Number of | Number of | Value of Collateral(1) | Commitment Amount | Amount Outstanding | Loan to Value Ratio(2) | Loan Fee | |||||||||||||||||||||
Arizona | 3 | 4 | $ | 1,821 | $ | 1,504 | $ | 1,062 | 60 | % | 5 | % | ||||||||||||||||
Connecticut | 1 | 1 | 515 | 382 | 358 | 74 | % | 5 | % | |||||||||||||||||||
Delaware | 2 | 5 | 1,970 | 1,379 | 717 | 70 | % | 5 | % | |||||||||||||||||||
Florida | 19 | 64 | 23,294 | 18,895 | 15,248 | 81 | % | 5 | % | |||||||||||||||||||
Georgia | 1 | 1 | 760 | 388 | 23 | 51 | % | 5 | % | |||||||||||||||||||
Illinois | 2 | 2 | 1,890 | 1,199 | 489 | 60 | % | 5 | % | |||||||||||||||||||
Idaho | 1 | 1 | 355 | 249 | 60 | 70 | % | 5 | % | |||||||||||||||||||
Michigan | 3 | 13 | 3,580 | 2,796 | 1,420 | 78 | % | 5 | % | |||||||||||||||||||
Mississippi | 1 | 1 | 240 | 189 | 187 | 79 | % | 5 | % | |||||||||||||||||||
New Jersey | 1 | 5 | 1,357 | 1,339 | 1,007 | 99 | % | 5 | % | |||||||||||||||||||
New York | 3 | 2 | 1,159 | 833 | 783 | 72 | % | 5 | % | |||||||||||||||||||
North Carolina | 7 | 14 | 4,512 | 3,110 | 2,214 | 69 | % | 5 | % | |||||||||||||||||||
Ohio | 2 | 6 | 1,758 | 1,146 | 684 | 65 | % | 5 | % | |||||||||||||||||||
Oregon | 2 | 7 | 2,759 | 1,932 | 655 | 70 | % | 5 | % | |||||||||||||||||||
Pennsylvania | 3 | 22 | 19,980 | 12,448 | 8,941 | 62 | % | 5 | % | |||||||||||||||||||
South Carolina | 10 | 38 | 9,130 | 6,468 | 2,932 | 71 | % | 5 | % | |||||||||||||||||||
Tennessee | 3 | 5 | 2,169 | 1,463 | 1,093 | 67 | % | 5 | % | |||||||||||||||||||
Texas | 2 | 7 | 2,750 | 1,898 | 1,058 | 69 | % | 5 | % | |||||||||||||||||||
Utah | 2 | 3 | 699 | 489 | 413 | 70 | % | 5 | % | |||||||||||||||||||
Virginia | 1 | 1 | 505 | 354 | 79 | 70 | % | 5 | % | |||||||||||||||||||
Washington | 1 | 7 | 2,931 | 1,867 | 919 | 64 | % | 5 | % | |||||||||||||||||||
Total | 70 | 209 | $ | 84,134 | $ | 60,328 | $ | 40,342 | 72 | %(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. |
22 |
The following is a summary of our loan portfolio to builders for home construction loans as of December 31, 2020:
State | Number of | Number of | Value of Collateral(1) | Commitment Amount | Gross Amount | Loan to Ratio(2) | Loan Fee | |||||||||||||||||||||
Arizona | 3 | 4 | $ | 1,821 | $ | 1,503 | $ | 1,004 | 60 | % | 5 | % | ||||||||||||||||
Connecticut | 1 | 1 | 515 | 382 | 262 | 65 | % | 5 | % | |||||||||||||||||||
Delaware | 1 | 1 | 585 | 409 | 187 | 70 | % | 5 | % | |||||||||||||||||||
Florida | 16 | 80 | 25,779 | 21,193 | 16,201 | 82 | % | 5 | % | |||||||||||||||||||
Georgia | 3 | 3 | 1,300 | 839 | 476 | 65 | % | 5 | % | |||||||||||||||||||
Illinois | 2 | 2 | 1,890 | 1,199 | 474 | 60 | % | 5 | % | |||||||||||||||||||
Michigan | 4 | 9 | 2,451 | 1,942 | 805 | 79 | % | 5 | % | |||||||||||||||||||
Mississippi | 1 | 1 | 240 | 189 | 166 | 79 | % | 5 | % | |||||||||||||||||||
New Jersey | 1 | 5 | 1,357 | 1,339 | 928 | 99 | % | 5 | % | |||||||||||||||||||
New York | 3 | 2 | 1,184 | 814 | 845 | 69 | % | 5 | % | |||||||||||||||||||
North Carolina | 6 | 18 | 4,519 | 3,123 | 2,059 | 69 | % | 5 | % | |||||||||||||||||||
Ohio | 3 | 8 | 2,703 | 2,020 | 1,393 | 75 | % | 5 | % | |||||||||||||||||||
Oregon | 1 | 2 | 1,217 | 852 | 238 | 70 | % | 5 | % | |||||||||||||||||||
Pennsylvania | 3 | 24 | 22,791 | 13,593 | 9,825 | 60 | % | 5 | % | |||||||||||||||||||
South Carolina | 8 | 27 | 7,284 | 4,930 | 3,195 | 68 | % | 5 | % | |||||||||||||||||||
Tennessee | 3 | 5 | 2,169 | 1,463 | 509 | 67 | % | 5 | % | |||||||||||||||||||
Texas | 3 | 8 | 2,806 | 2,106 | 1,191 | 75 | % | 5 | % | |||||||||||||||||||
Utah | 2 | 6 | 2,583 | 1,822 | 1,542 | 71 | % | 5 | % | |||||||||||||||||||
Virginia | 1 | 1 | 505 | 353 | 79 | 70 | % | 5 | % | |||||||||||||||||||
Washington | 1 | 5 | 2,030 | 1,311 | 508 | 65 | % | 5 | % | |||||||||||||||||||
Wisconsin | 1 | 1 | 539 | 332 | 332 | 62 | % | 5 | % | |||||||||||||||||||
Total | 67 | 213 | $ | 86,268 | $ | 61,714 | $ | 42,219 | 72 | %(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, 2021:
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 | 2 | $ | 8,175 | $ | 8,200 | $ | 6,468 | 79 | % | varies | |||||||||||||||||
Delaware | 1 | 1 | 321 | 147 | 147 | 46 | % | 7 | % | |||||||||||||||||||
Florida | 4 | 4 | 1,673 | 1,372 | 823 | 49 | % | 7 | % | |||||||||||||||||||
New York | 1 | 1 | 1,237 | 452 | 452 | 36 | % | 7 | % | |||||||||||||||||||
North Carolina | 1 | 1 | 400 | 260 | 165 | 41 | % | 7 | % | |||||||||||||||||||
Oregon | 1 | 1 | 855 | 600 | 600 | 70 | % | 7 | % | |||||||||||||||||||
South Carolina | 2 | 2 | 1,256 | 711 | 323 | 26 | % | 7 | % | |||||||||||||||||||
Total | 11 | 12 | $ | 13,917 | $ | 11,742 | $ | 8,978 | 65 | %(4) | 11 | % |
(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 $1,640 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. |
23 |
The following is a summary of our loan portfolio to builders for land development as of December 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 | 2 | $ | 7,361 | $ | 8,200 | $ | 6,175 | 84 | % | 7 | % | ||||||||||||||||
Florida | 3 | 3 | 1,373 | 1,193 | 1,029 | 87 | % | 7 | % | |||||||||||||||||||
New York | 1 | 1 | 1,238 | 451 | 452 | 36 | % | 7 | % | |||||||||||||||||||
North Carolina | 1 | 1 | 400 | 260 | 136 | 34 | % | 7 | % | |||||||||||||||||||
South Carolina | 2 | 2 | 1,256 | 711 | 438 | 35 | % | 7 | % | |||||||||||||||||||
Total | 8 | 9 | $ | 11,628 | $ | 10,815 | $ | 8,230 | 71 | %(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 $1,630 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, 2021 and December 31, 2020:
March 31, 2021 | December 31, 2020 | |||||||
Loans receivable, gross | $ | 49,320 | $ | 50,449 | ||||
Less: Deferred loan fees | (1,223 | ) | (1,092 | ) | ||||
Less: Deposits | (1,505 | ) | (1,337 | ) | ||||
Plus: Deferred origination costs | 402 | 353 | ||||||
Less: Allowance for loan losses | (1,901 | ) | (1,968 | ) | ||||
Loans receivable, net | $ | 45,093 | $ | 46,405 |
The following is a roll forward of combined loans:
Three Months Ended | Year Ended | Three Months Ended | ||||||||||
Beginning balance | $ | 46,405 | $ | 55,369 | $ | 55,369 | ||||||
Additions | 7,089 | 46,249 | 9,462 | |||||||||
Principal collections | (7,662 | ) | (50,079 | ) | (10,993 | ) | ||||||
Transferred to foreclosed assets | (274 | ) | (2,118 | ) | – | |||||||
Transferred to real estate investments | – | (1,140 | ) | – | ||||||||
Change in builder deposit | (169 | ) | 16 | 203 | ||||||||
Change in loan loss provision | (214 | ) | (1,805 | ) | (35 | ) | ||||||
Change in loan fees, net | (82 | ) | (87 | ) | 191 | |||||||
Ending balance | $ | 45,093 | $ | 46,405 | $ | 54,197 |
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Finance Receivables – By risk rating:
March 31, 2021 | December 31, 2020 | |||||||
Pass | $ | 37,456 | $ | 35,544 | ||||
Special mention | 2,141 | 3,089 | ||||||
Classified – accruing | – | – | ||||||
Classified – nonaccrual | 9,723 | 11,816 | ||||||
Total | $ | 49,320 | $ | 50,449 |
Finance Receivables – Method of impairment calculation:
March 31, 2021 | December 31, 2020 | |||||||
Performing loans evaluated individually | $ | 15,583 | $ | 16,412 | ||||
Performing loans evaluated collectively | 24,014 | 22,221 | ||||||
Non-performing loans without a specific reserve | 616 | 1,518 | ||||||
Non-performing loans with a specific reserve | 9,107 | 10,298 | ||||||
Total evaluated collectively for loan losses | $ | 49,320 | $ | 50,449 |
At March 31, 2021 and December 31, 2020, there were no loans acquired with deteriorated credit quality.
Impaired Loans
The following is a summary of our impaired non-accrual (non-performing) commercial construction loans as of March 31, 2021 and December 31, 2020.
March 31, 2021 | December 31, 2020 | |||||||
Unpaid principal balance (contractual obligation from customer) | $ | 10,005 | $ | 11,888 | ||||
Charge-offs and payments applied | (282 | ) | (72 | ) | ||||
Gross value before related allowance | 9,723 | 11,816 | ||||||
Related allowance | (1,624 | ) | (1,698 | ) | ||||
Value after allowance | $ | 8,099 | $ | 10,118 |
Below is an aging schedule of loans receivable as of March 31, 2021, 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) | 201 | $ | 39,597 | 80.3 | % | |||||||
60-89 days | - | - | - | % | ||||||||
90-179 days | - | - | - | % | ||||||||
180-269 days | 20 | 9,723 | 19.7 | % | ||||||||
Subtotal | 221 | $ | 49,320 | 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 | 221 | $ | 49,320 | 100 | % |
25 |
Below is an aging schedule of loans receivable as of March 31, 2021, 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. | 201 | $ | 39,597 | 80.3 | % | |||||||
60-89 days | - | - | - | % | ||||||||
90-179 days | - | - | - | % | ||||||||
180-269 days | 20 | 9,723 | 19.7 | % | ||||||||
Subtotal | 221 | $ | 49,320 | 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 | 221 | $ | 49,320 | 100 | % |
Below is an aging schedule of loans receivable as of December 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) | 194 | $ | 38,956 | 77.2 | % | |||||||
60-89 days | - | - | - | % | ||||||||
90-179 days | - | - | - | % | ||||||||
180-269 days | 28 | 11,493 | 22.8 | % | ||||||||
Subtotal | 222 | $ | 50,449 | 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 | 222 | $ | 50,449 | 100 | % |
26 |
Below is an aging schedule of loans receivable as of December 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. | 194 | $ | 38,956 | 77.2 | % | |||||||
60-89 days | - | - | - | % | ||||||||
90-179 days | - | - | - | % | ||||||||
180-269 days | 28 | 11,493 | 22.8 | % | ||||||||
Subtotal | 222 | $ | 50,449 | 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 | 222 | $ | 50,449 | 100 | % |
Foreclosed Assets
Below is a roll forward of foreclosed assets:
Three Months March 31, 2021 | Year Ended December 31, 2020 | Three Months March 31, 2020 | ||||||||||
Beginning balance | $ | 4,449 | $ | 4,916 | $ | 4,916 | ||||||
Additions from loans | 274 | 2,118 | – | |||||||||
Additions for construction/development | 257 | 1,410 | 444 | |||||||||
Sale proceeds | (1,276 | ) | (3,697 | ) | (185 | ) | ||||||
Loss on foreclosure | – | (54 | ) | – | ||||||||
Loss on sale | (18 | ) | (102 | ) | (35 | ) | ||||||
Gain on foreclosure | – | 52 | – | |||||||||
Gain on sale | 88 | 160 | – | |||||||||
Impairment loss on foreclosed assets | (10 | ) | (290 | ) | (109 | ) | ||||||
Impairment loss on foreclosed assets due to COVID-19 | – | (64 | ) | – | ||||||||
Ending balance | $ | 3,764 | $ | 4,449 | $ | 5,031 |
27 |
During the quarter ended March 31, 2021, we reclassed one construction loan from loans receivable to foreclosed assets compared to none during the same period of 2020. In addition, during the quarter ended March 31, 2021, we sold nine foreclosed assets compared to one during the same period of 2020.
Customer Interest Escrow
Below is a roll forward of interest escrow:
Three Months Ended March 31, 2021 | Year Ended December 31, 2020 | Three Months Ended March 31, 2020 | ||||||||||
Beginning balance | $ | 510 | $ | 643 | $ | 643 | ||||||
Preferred equity dividends | 106 | 83 | 37 | |||||||||
Additions from Pennsylvania loans | 58 | 1,173 | 500 | |||||||||
Additions from other loans | 233 | 448 | 51 | |||||||||
Interest, fees, principal or repaid to borrower | (377 | ) | (1,837 | ) | (550 | ) | ||||||
Ending balance | $ | 530 | $ | 510 | $ | 681 |
Related Party Borrowings
As of March 31, 2021, the Company had $1,250, $250, and $1,000 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), respectively. A more detailed description is included in Note 6 to the 2020 Financial Statements. These borrowings are in notes payable secured, net of deferred financing costs on the interim condensed consolidated balance sheet.
Secured Borrowings
Lines of Credit
As of March 31, 2021, the Company had no amounts borrowed against its lines of credit from affiliates, which have a total limit of $2,500.
None of our lines of credit have given us notice of nonrenewal during the first quarter of 2021, and the lines will continue to automatically renew unless notice of nonrenewal is given by a lender.
Secured Deferred Financing Costs
The Company had secured deferred financing costs of $9 and $8 as of March 31, 2021 and December 31, 2020, respectively.
Summary
The borrowings secured by loan assets are summarized below:
March 31, 2021 | December 31, 2020 | |||||||||||||||
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 | $ | 8,111 | $ | 5,114 | $ | 7,981 | $ | 5,919 | ||||||||
S.K. Funding | 4,581 | 3,834 | 4,551 | 3,898 | ||||||||||||
Lender | ||||||||||||||||
Shuman | 2,003 | 1,325 | 1,916 | 1,325 | ||||||||||||
Jeff Eppinger | 3,472 | 200 | 2,206 | 1,500 | ||||||||||||
Hardy Enterprises, Inc. | 1,345 | 700 | 1,590 | 1,000 | ||||||||||||
Gary Zentner | 519 | 250 | 424 | 250 | ||||||||||||
R. Scott Summers | 1,435 | 847 | 1,259 | 847 | ||||||||||||
John C. Solomon | 788 | 563 | 743 | 563 | ||||||||||||
Paul Swanson | 9,091 | 6,254 | 9,381 | 6,685 | ||||||||||||
Total | $ | 31,345 | $ | 19,087 | $ | 30,051 | $ | 21,987 |
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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, 2021 and December 31, 2020 was 10.27% and 10.38%, 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, 2021 | Year Ended | Three Months Ended March 31, 2020 | ||||||||||
Gross Notes outstanding, beginning of period | $ | 21,482 | $ | 20,308 | $ | 20,308 | ||||||
Notes issued | 2,627 | 7,691 | 4,722 | |||||||||
Note repayments / redemptions | (2,027 | ) | (6,517 | ) | (3,960 | ) | ||||||
Gross Notes outstanding, end of period | $ | 22,082 | $ | 21,482 | $ | 21,070 | ||||||
Less deferred financing costs, net | (409 | ) | (416 | ) | (453 | ) | ||||||
Notes outstanding, net | $ | 21,673 | $ | 21,066 | $ | 20,617 |
The following is a roll forward of deferred financing costs:
Three Months Ended March 31, 2021 | Year Ended December 31, 2020 | Three Months Ended March 31, 2020 | ||||||||||
Deferred financing costs, beginning balance | $ | 942 | $ | 786 | $ | 786 | ||||||
Additions | 35 | 156 | 77 | |||||||||
Deferred financing costs, ending balance | 977 | 942 | 863 | |||||||||
Less accumulated amortization | (568 | ) | (526 | ) | (410 | ) | ||||||
Deferred financing costs, net | $ | 409 | $ | 416 | $ | 453 |
The following is a roll forward of the accumulated amortization of deferred financing costs:
Three Months March 31, 2021 | Year Ended | Three Months March 31, 2020 | ||||||||||
Accumulated amortization, beginning balance | $ | 326 | $ | 370 | $ | 370 | ||||||
Additions | 242 | 165 | 40 | |||||||||
Disposals | - | (9 | ) | - | ||||||||
Accumulated amortization, ending balance | $ | 568 | $ | 526 | $ | 410 |
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Other Unsecured Debts
Our other unsecured debts are detailed below:
Maturity | Interest | Principal Amount Outstanding as of | ||||||||||||
Loan | Date | Rate(1) | March 31, 2021 | December 31, 2020 | ||||||||||
Unsecured Note with Seven Kings Holdings, Inc. | Demand(2) | 9.5 | % | $ | 500 | $ | 500 | |||||||
Unsecured Line of Credit from Paul Swanson | October 2022 | 10.0 | % | 746 | 315 | |||||||||
Subordinated Promissory Note | December 2023 | 10.5 | % | 146 | 146 | |||||||||
Subordinated Promissory Note | April 2024 | 10.0 | % | 100 | 100 | |||||||||
Subordinated Promissory Note | October 2022 | 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 | February 2023 | 11.0 | % | 600 | 600 | |||||||||
Subordinated Promissory Note | December 2022 | 5.0 | % | 3 | 3 | |||||||||
Subordinated Promissory Note | December 2023 | 11.0 | % | 35 | 20 | |||||||||
Subordinated Promissory Note | February 2024 | 11.0 | % | 20 | 20 | |||||||||
Subordinated Promissory Note | November 2021 | 9.5 | % | 200 | 200 | |||||||||
Subordinated Promissory Note | October 2024 | 10.0 | % | 700 | 700 | |||||||||
Subordinated Promissory Note | December 2024 | 10 | % | 100 | 100 | |||||||||
Senior Subordinated Promissory Note | March 2022(3) | 10.0 | % | 334 | 352 | |||||||||
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 2024(5) | 1.0 | % | 720 | 720 | |||||||||
Junior Subordinated Promissory Note | October 2024(5) | 20.0 | % | 447 | 447 | |||||||||
$ | 6,339 | $ | 5,911 |
(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. |
30 |
Redeemable Preferred Equity and Members’ Capital
We strive to maintain a reasonable (about 15%) balance between (1) redeemable preferred equity plus members’ capital and (2) total assets. The ratio of redeemable preferred equity plus members’ capital to loan assets was 11% as of March 31, 2021 and December 31, 2020. We anticipate this ratio to decrease until more preferred equity is added.
Priority of Borrowings
The following table displays our borrowings and a ranking of priority. The lower the number, the higher the priority.
Priority Rank | March 31, 2021 | December 31, 2020 | ||||||||||
Borrowing Source | ||||||||||||
Purchase and sale agreements and other secured borrowings | 1 | $ | 19,950 | $ | 22,968 | |||||||
Secured line of credit from affiliates | 2 | — | — | |||||||||
Unsecured line of credit (senior) | 3 | 500 | 500 | |||||||||
PPP loan and EIDL advance | 3 | 361 | 10 | |||||||||
Other unsecured debt (senior subordinated) | 4 | 1,782 | 1,800 | |||||||||
Unsecured Notes through our public offering, gross | 5 | 22,082 | 21,482 | |||||||||
Other unsecured debt (subordinated) | 5 | 3,193 | 2,747 | |||||||||
Other unsecured debt (junior subordinated) | 6 | 864 | 864 | |||||||||
Total | $ | 48,732 | $ | 50,371 |
Liquidity and Capital Resources
Our primary liquidity management objective is to meet expected cash flow needs while continuing to service our business and customers. We had 221 and 222 combined loans outstanding as of March 31, 2021 and December 31, 2020, respectively. Gross loans receivable totaled $49,320 and $50,449 as of March 31, 2021 and December 31, 2020, respectively. Our unfunded commitments to extend credit, which have similar collateral, credit and market risk to our outstanding loans, were $19,986 and $19,495 as March 31, 2021 and December 31, 2020, respectively.
We anticipate an increase in our gross loan receivables over the 12 months subsequent to March 31, 2021 by directly increasing originations to new and existing customers. In addition, business competition has declined and, therefore, we believe the ability to return to historical levels may be achieved through the remainder of the year.
To fund our combined loans, we rely on secured debt, unsecured debt, and equity, which are described in the following table:
Source of Liquidity | As of March 31, 2021 | As of December 31, 2020 | ||||||
Secured debt | $ | 19,941 | $ | 22,959 | ||||
Unsecured debt | 28,012 | 26,978 | ||||||
Equity | 5,269 | 5,259 |
Secured debt, net of deferred financing costs decreased $3,018 during the three months ended March 31, 2021. We anticipate increasing our secured debt by roughly half of the increase in loan asset balances over the 12 months subsequent to March 31, 2021 through our existing loan purchase and sale agreements and additional lines of credit.
31 |
We anticipate that the other half of the loan asset growth will come from a combination of increases in our unsecured debt and equity. Unsecured debt, net of deferred financing costs increased $1,034 during the three months ended March 31, 2021 due primarily to an increased participation in our Notes Program of $607 and other unsecured debts of $428. We anticipate an increase in our unsecured debt through increased sales in the Notes Program to cover most of the increase in loan assets not covered by increases in our secured debt during the 12 months subsequent to March 31, 2021.
In addition, in February 2021, we borrowed approximately $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. 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.
Contractual Obligations
The following table shows the maturity of outstanding debt as of March 31, 2021:
Year Maturing | Total Amount Maturing | Public Offering | Other Unsecured | Secured Borrowings | ||||||||||||
2021 | $ | 30,756 | $ | 10,012 | $ | 1,646 | $ | 19,098 | ||||||||
2022 | 5,899 | 3,960 | 1,923 | 16 | ||||||||||||
2023 | 3,211 | 2,103 | 1,029 | 79 | ||||||||||||
2024 | 7,044 | 4,815 | 2,087 | 142 | ||||||||||||
2025 and thereafter | 1,822 | 1,192 | 15 | 615 | ||||||||||||
Total | $ | 48,732 | $ | 22,082 | $ | 6,700 | $ | 19,950 |
The total amount maturing through year ending December 31, 2021 is $30,756, which consists of secured borrowings of $19,098 and unsecured borrowings of $11,658.
Secured borrowings maturing through the year ending December 31, 2021 significantly consists of loan purchase and sale agreements with two loan purchasers (Builder Finance, Inc. and S. K. Funding, LLC) and six lenders. Our secured borrowings are classified as maturing during 2021 due primarily to the related collateral consisting of demand loans. The following lists our secured facilities with maturity and renewal dates:
● | Swanson – $6,254 due October 2022, will automatically renew unless notice is given; | |
● | Shuman – $1,325 due July 2021, will automatically renew unless notice is given; | |
● | S. K. Funding, LLC – $3,500 of the total due January 2022, will automatically renew unless notice is given; | |
● | S. K. Funding, LLC – $334 no expiration date; | |
● | Builder Finance, Inc. – $5,114 no expiration date; | |
● | New LOC Agreements – $1,997 generally one-month notice and six months to reduce principal balance to zero; and | |
● | Mortgage payable – $4 due monthly. |
Unsecured borrowings due by December 31, 2021 consist of Notes issued pursuant to the Notes Program and other unsecured debt of $10,012 and $1,646, respectively. To the extent that proceeds from Notes issued pursuant to the Notes Program are not reinvested upon maturity, we will be required to fund the maturities, which we anticipate funding through the issuance of new Notes in our Notes Program. Historically, approximately 81% of our Note holders reinvest upon maturity. Our other unsecured debt has historically renewed. For more information on other unsecured borrowings, see Note 6 – Borrowings. If other unsecured borrowings are not renewed in the future, we anticipate funding such maturities through investments in our Notes Program.
Series C cumulative preferred units (“Series C Preferred Units”) are redeemable by the Company at any time, upon a change of control or liquidation, or by the investor any time after 6 years from the initial date of purchase. The following table shows the earliest redemption options for investors in our Series C Preferred Units as of March 31, 2021:
Year Maturing | Total Amount Redeemable | |||
2024 | $ | 3,001 | ||
2025 | 368 | |||
2026 | 309 | |||
2027 | 305 | |||
Total | $ | 3,983 |
32 |
Summary
We have the funding available to fund the loans we have today, including our unfunded commitments. We anticipate growing our assets through the net sources and uses (12-month liquidity) listed above as well as future capital increases from debt, redeemable preferred equity, and regular equity. Our expectation to grow loan asset balances is subject to changes due to changes in demand, competition, and COVID-19. Although our secured debt is almost entirely listed as currently due because of the underlying collateral being demand notes, the vast majority of our secured debt is either contractually set to automatically renew unless notice is given or, in the case of purchase and sale agreements, has no end date as to when the purchasers will not purchase new loans (although they are never required to purchase additional loans).
Inflation, Interest Rates, and Housing Starts
Since we are in the housing industry, we are affected by factors that impact that industry. Housing starts impact our customers’ ability to sell their homes. Faster sales generally mean higher effective interest rates for us, as the recognition of fees we charge is spread over a shorter period. Slower sales generally mean lower effective interest rates for us. Slower sales also are likely to increase the default rate we experience.
Housing inflation has a positive impact on our operations. When we lend initially, we are lending a percentage of a home’s expected value, based on historical sales. If those estimates prove to be low (in an inflationary market), the percentage we loaned of the value actually decreases, reducing potential losses on defaulted loans. The opposite is true in a deflationary housing price market. It is our opinion that values are somewhat above average in many of the housing markets in the U.S. today, and our lending against these values is safer than loans made by financial institutions in 2006 to 2008. Our analysis of the COVID-19 impact on housing in the markets in which we do business is mixed. In many markets, our customers see demand as outpacing new housing starts. In some markets, few houses are selling due to governmental restrictions on realtors. In Orlando, Florida, we anticipate some significant lack of demand for customers who sell more affordable homes, which is likely to lead to reductions in selling prices. We note that nationwide, fewer first-time home buyers will qualify for government backed loans due to FICO score and other criteria changes.
Interest rates have several impacts on our business. First, rates affect housing (starts, home size, etc.). High long-term interest rates may decrease housing starts, having the effects listed above. Higher interest rates will also affect our investors. We believe that there will be a spread between the rate our Notes yield to our investors and the rates the same investors could get on deposits at FDIC insured institutions. We also believe that the spread may need to widen if these rates rise. For instance, if we pay 7% above average CD rates when CDs are paying 0.5%, when CDs are paying 3%, we may have to have a larger than 7% difference. This may cause our lending rates, which are based on our cost of funds, to be uncompetitive. High interest rates may also increase builder defaults, as interest payments may become a higher portion of operating costs for the builder. High interest rates may also increase builder defaults, as interest payments may become a higher portion of operating costs for the builder. Below is a chart showing three-year U.S. treasury rates, which are being used by us here to approximate CD rates. Short term interest rates have risen slightly but are generally low historically.
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Housing prices are also generally correlated with housing starts, so that increases in housing starts usually coincide with increases in housing values, and the reverse is generally true. Below is a graph showing single family housing starts from 2000 through today.
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Source: U.S. Census Bureau
To date, changes in housing starts, CD rates, and inflation have not had a material impact on our business.
Off-Balance Sheet Arrangements
As of March 31, 2021 and December 31, 2020, other than unfunded loan commitments, we had no off-balance sheet transactions, nor do we currently have any such arrangements or obligations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and are not required to provide the information under this item.
ITEM 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
As of the end of the period covered by this report, management including our Chief Executive Officer (our principal executive officer) and Chief Financial Officer (our principal financial officer) evaluated the effectiveness of the design and operation of our disclosure controls and procedures. Based upon, and as of the date of, the evaluation, our CEO (our principal executive officer) and CFO (our principal financial officer) concluded that the disclosure controls and procedures were effective as of the end of the period covered by this report to ensure that information required to be disclosed in the reports we file and submit under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and reported as and when required. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports we file and submit under the Exchange Act is accumulated and communicated to our management, including our CEO (our principal executive officer) and CFO (our principal financial officer), as appropriate to allow timely decisions regarding required disclosure.
Internal Control over Financial Reporting
There has been no change in our internal controls over financial reporting during the quarter ended March 31, 2021 that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.
None.
Not applicable.
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ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
(a) | Reinvestments in Partial Series C Cumulative Preferred Units
Investors in the Series C cumulative preferred units (“Series C Preferred Units”) may elect to reinvest their distributions in additional Series C Preferred Units (the “Series C Reinvestment Program”). Pursuant to the Series C Reinvestment Program, we issued the following Series C Preferred Units as of March 31, 2021: |
Owner | Units | Amount | ||||||
Daniel M. and Joyce S. Wallach | 0.4852416 | $ | 48,524.16 | |||||
Gregory L. Sheldon and Madeline M. Sheldon | 0.1151166 | 11,511.66 | ||||||
BLDR, LLC | 0.1569902 | 15,699.02 | ||||||
Schultz Family Living Trust | 0.0390533 | 3,905.33 | ||||||
Fernando Ascencio and Lorraine Carol Ascencio | 0.0730688 | 7,306.88 | ||||||
Total | 0.8694705 | $ | 86,947.05 |
The proceeds received from the sales of the partial Series C Preferred Units in these transactions were used for the funding of construction loans. The transactions in Series C Preferred Units described above were effected in private transactions exempt from the registration requirements of the Securities Act under Section 4(a)(2) of the Securities Act. The transactions described above did not involve any public offering, were made without general solicitation or advertising, and the buyer represented to us that he/she/it is an “accredited investor” within the meaning of Rule 501 of Regulation D promulgated under the Securities Act, with access to all relevant information necessary to evaluate the investment in the Series C Preferred Units. |
(b) | We registered up to $70,000,000 in Fixed Rate Subordinated Notes (“Notes”) in our current public offering, which is our third public offering of Notes (SEC File No. 333-224557, effective March 22, 2019). As of March 31, 2021, we had issued $24,456 in Notes pursuant to our current public offering. As of March 31, 2021, we incurred expenses of $535 in connection with the issuance and distribution of the Notes in our current public offering, which were paid to third parties. These expenses were not for underwriters or discounts, but were for advertising, printing, and professional services. Net offering proceeds as of March 31, 2021 were $23,921, all of which was used to increase loan balances. | |
(c) | None. |
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
(a) | During the quarter ended March 31, 2021, there was no information required to be disclosed in a report on Form 8-K which was not disclosed in a report on Form 8-K. | |
(b) | During the quarter ended March 31, 2021, there were no material changes to the procedures by which members may recommend nominees to our board of managers. |
The exhibits required to be filed with this report are set forth on the Exhibit Index hereto and incorporated by reference herein.
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EXHIBIT INDEX
The following exhibits are included in this report on Form 10-Q for the period ended March 31, 2021 (and are numbered in accordance with Item 601 of Regulation S-K).
* Filed herewith.
** Pursuant to Regulation 406T of Regulation S-T, these Interactive Data Files are deemed not filed or part of a registration statement or prospectus for purpose of Section 11 or 12 of the Securities Act of 1933, as amended, or Section 18 of the Securities Exchange Act of 1934, as amended, and are otherwise not subject to liability.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
SHEPHERD’S FINANCE, LLC (Registrant) | ||
Dated: May 10, 2021 | By: | /s/ Catherine Loftin |
Catherine Loftin | ||
Chief Financial Officer |
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