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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

 

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

 

For the Quarterly Period Ended June 30, 2022

 

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 ☒ 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 ☒ 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 Smaller reporting company
  Emerging growth company    

 

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.

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No

 

 

 

 

 

 

FORM 10-Q

SHEPHERD’S FINANCE, LLC

TABLE OF CONTENTS

 

  Page
   
Cautionary Note Regarding Forward-Looking Statements 3
   
PART I. FINANCIAL INFORMATION 4
   
Item 1. Financial Statements 4
   
Interim Condensed Consolidated Balance Sheets as of June 30, 2022 (Unaudited) and December 31, 2021 4
   
Interim Condensed Consolidated Statements of Operations (Unaudited) for the Three and Six Months Ended June 30, 2022 and 2021 5
   
Interim Condensed Consolidated Statement of Changes in Members’ Capital (Unaudited) for the Six Months Ended June 30, 2022 and 2021 and for the Three Months Ended June 30, 2022 and 2021 6
   
Interim Condensed Consolidated Statements of Cash Flows (Unaudited) for the Six Months Ended June 30, 2022 and 2021 7
   
Notes to Interim Condensed Consolidated Financial Statements (Unaudited) 8
   
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 18
   
Item 3. Quantitative and Qualitative Disclosure About Market Risk 36
   
Item 4. Controls and Procedures 36
   
PART II. OTHER INFORMATION 37
   
Item 1. Legal Proceedings 37
   
Item 1A. Risk Factors 37
   
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 37
   
Item 3. Defaults upon Senior Securities 37
   
Item 4. Mine Safety Disclosures 38
   
Item 5. Other Information 38
   
Item 6. Exhibits 38

 

2

 

 

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

Certain statements contained in this Form 10-Q of Shepherd’s Finance, LLC, other than historical facts, may be considered forward-looking statements within the meaning of the federal securities laws. Words such as “may,” “will,” “expect,” “anticipate,” “believe,” “estimate,” “continue,” “predict,” or other similar words identify forward-looking statements. Forward-looking statements appear in a number of places in this report, including without limitation, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and include statements regarding our intent, belief or current expectation about, among other things, trends affecting the markets in which we operate, our business, financial condition and growth strategies.

 

Although we believe that the expectations reflected in these forward-looking statements are based on reasonable assumptions, forward-looking statements are not guarantees of future performance and involve risks and uncertainties. These risks and uncertainties include, but are not limited to: uncertainties relating to the effects of COVID-19; the length of the COVID-19 pandemic and severity of such outbreak nationally and across the globe; the pace of recovery following the COVID-19 pandemic; general economic uncertainty in key global markets and a worsening of global economic conditions or low levels of economic growth; the rate and the pace of economic recovery following economic downturns; and those other risks described in other risk factors as outlined in our Registration Statement on Form S-1, as amended, and our Annual Report on Form 10-K. 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, 2021.

 

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, 2021 in mind. You should not place undue reliance on any forward-looking statement. We are not obligated to update forward-looking statements.

 

3

 

 

PART I – FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

 

Shepherd’s Finance, LLC

Interim Condensed Consolidated Balance Sheets

 

(in thousands of dollars)  June 30, 2022   December 31, 2021 
    (Unaudited)      
Assets          
Cash and cash equivalents  $1,126   $3,735 
Accrued interest receivable   571    598 
Loans receivable, net   54,085    46,943 
Real estate investments   1,608    1,651 
Foreclosed assets, net   865    2,724 
Premises and equipment   863    875 
Other assets   1,259    1,089 
Total assets  $60,377   $57,615 
Liabilities and Members’ Capital          
Customer interest escrow  $1,059   $479 
Accounts payable and accrued expenses   392    296 
Accrued interest payable   2,781    2,464 
Notes payable secured, net of deferred financing costs   22,388    20,016 
Notes payable unsecured, net of deferred financing costs   26,302    27,713 
Due to preferred equity member   46    43 
Total liabilities  $52,968   $51,011 
           
Commitments and Contingencies (Note 10)   -      
           
Redeemable Preferred Equity          
Series C preferred equity  $5,462   $5,014 
           
Members’ Capital          
Series B preferred equity   1,860    1,720 
Class A common equity   87    (130)
Members’ capital  $1,947   $1,590 
           
Total liabilities, redeemable preferred equity and members’ capital  $60,377   $57,615 

 

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

 

4

 

 

Shepherd’s Finance, LLC

Interim Condensed Consolidated Statements of Operations - Unaudited

For the Three and Six Months ended June 30, 2022 and 2021

 

                 
   Three Months Ended   Six Months Ended 
   June 30,   June 30, 
(in thousands of dollars)  2022   2021   2022   2021 
Interest Income                    
Interest and fee income on loans  $2,516   $1,944   $4,877   $3,722 
Interest expense:                    
Interest related to secured borrowings   526    518    1,043    1,075 
Interest related to unsecured borrowings   723    801    1,455    1,611 
Interest expense   1,249    1,319    2,498    2,686 
                     
Net interest income   1,267    625    2,379    1,036 
                     
Less: Loan loss provision   134    45    208    259 
                     
Net interest income after loan loss provision   1,133    580    2,171    777 
                     
Non-Interest Income                    
Gain on extinguishment of debt   -    -    -    10 
Gain on sale of foreclosed assets   101    13    101    101 
                     
Total non-interest income   101    13    101    111 
                     
Income   1,234    593    2,272    888 
                     
Non-Interest Expense                    
Selling, general and administrative   713    438    1,410    975 
Depreciation and amortization   12    13    24    29 
Loss on sale of foreclosed assets   -    51    -    69 
Impairment loss on foreclosed assets   -    -    -    10 
Total non-interest expense   725    502    1,434    1,083 
                     
Net Income (Loss)  $509   $91   $838   $(195)
                     
Earned distribution to preferred equity holders   204    135    399    250 
                     
Net income (loss) attributable to common equity holders  $305   $(44)  $439   $(445)

 

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

 

5

 

 

Shepherd’s Finance, LLC

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

For the Six and Three Months Ended June 30, 2022 and 2021

 

For the Six Months Ended June 30, 2022 and 2021

 

(in thousands of dollars)  2022   2021 
         
Members’ capital, beginning balance, December 31  $1,590   $1,677 
Net income (loss) less distributions to Series C preferred equity holders of $308 and $250   530    (445)
Contributions from Series B preferred equity holders   140    60 
Earned distributions to Series B preferred equity holders   (90)   - 
Distributions to common equity holders   (223)   - 
           
Members’ capital, ending balance, June 30  $1,947   $1,292 

 

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

 

For the Three Months Ended June 30, 2022 and 2021

 

(in thousands of dollars)  2022   2021 
         
Members’ capital, beginning balance, March 31  $1,741   $1,286 
Net loss less distributions to Series C preferred equity holders of $158 and $135   351    (44)
Contributions from Series B preferred equity holders   30    50 
Earned distributions to Series B preferred equity holders   (46)   - 
Distributions to common equity holders   (129)   - 
Members’ capital, ending balance, June 30  $1,947   $1,292 

 

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

 

6

 

 

Shepherd’s Finance, LLC

Interim Condensed Consolidated Statements of Cash Flows - Unaudited

For the Six Months Ended June 30, 2022 and 2021

 

(in thousands of dollars)  2022   2021 
  

Six Months Ended

June 30,

 
(in thousands of dollars)  2022   2021 
         
Cash flows from operations          
Net income (loss)  $838   $(195)
Adjustments to reconcile net income (loss) to net cash provided by operating activities          
Amortization of deferred financing costs   122    80 
Provision for loan losses   208    259 
Change in loan origination fees, net   448    488 
Gain on sale of foreclosed assets   (101)   (101)
Loss on sale of foreclosed assets   -    69 
Impairment and loss on foreclosed assets   -    10 
Depreciation and amortization   24    29 
Gain on extinguishment of debt   -    (10)
Net change in operating assets and liabilities:          
Other assets   (181)   (80)
Accrued interest receivable   27    230 
Customer interest escrow   493    (89)
Accrued interest payable   668    544 
Accounts payable and accrued expenses   96    152 
           
Net cash provided by operating activities   2,642    1,386 
           
Cash flows from investing activities          
Loan originations and principal collections, net   (6,781)   (149)
Investment in foreclosed assets   (153)   (439)
Additions for construction in real estate investments   (1,159)   (59)
Deposits for construction in real estate investments   185    - 
Proceeds from the sale of real estate investments   1,017    - 
Proceeds from the sale of foreclosed assets   1,096    2,119 
           
Net cash (used in) provided by investing activities   (5,795)   1,472 
           
Cash flows from financing activities          
Contributions from preferred B equity holders   140    60 
Contributions from preferred C equity holders   200    800 
Distributions to preferred equity holders   (61)   (41)
Distributions to common equity holders   (223)   - 
Proceeds from secured notes payable   6,493    5,018 
Repayments of secured notes payable   (4,280)   (7,183)
Proceeds from unsecured notes payable   2,253    5,398 
Redemptions/repayments of unsecured notes payable   (3,840)   (5,830)
Proceeds from PPP Loan and EIDL Advance   -    361 
Deferred financing costs paid   (138)   (72)
           
Net cash provided by (used in) financing activities   544    (1,489)
           
Net (decrease) increase in cash and cash equivalents   (2,609)   1,369 
Cash and cash equivalents          
Beginning of period   3,735    4,749 
End of period  $1,126   $6,118 
           
Supplemental disclosure of cash flow information          
Cash paid for interest  $2,181   $3,117 
           
Non-cash investing and financing activities          
Earned by Series B preferred equity holders but not distributed to customer interest escrow  $46   $- 
Earned by Series B preferred equity holders and distributed to customer interest escrow  $87   $106 
Earned but not paid distributions of Series C preferred equity holders  $248   $250 
Secured transferred to unsecured notes payable  $159   $315 
Foreclosure of assets transferred from loans receivable, net  $-   $274 
Foreclosure of assets transferred to loans receivable, net  $1,017   $- 
Accrued interest payable transferred to unsecured notes payable  $351   $975 
EIDL advance forgiveness in reduction of debt  $-   $10 

 

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

 

7

 

 

Shepherd’s Finance, LLC

Notes to Interim Condensed Consolidated Financial Statements (unaudited)

 

Information presented throughout these notes to the interim condensed consolidated financial statements (unaudited) is in thousands of dollars.

 

1. Description of Business and Basis of Presentation

 

Description of Business

 

Shepherd’s Finance, LLC and subsidiary (the “Company”) was originally formed as a Pennsylvania limited liability company on May 10, 2007. The Company is the sole member of a consolidating subsidiary, 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 June 30, 2022) 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 June 30, 2022 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, 2021 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, 2022. These unaudited interim condensed consolidated financial statements should be read in conjunction with the 2021 consolidated financial statements and notes thereto (the “2021 Financial Statements”) included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021 (the “2021 Form 10-K”). The accounting policies followed by the Company are set forth in Note 2 – Summary of Significant Accounting Policies in the 2021 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.

 

8

 

 

Reclassifications

 

Certain reclassifications have been made to the prior period’s financial statements and disclosures to conform to the current period’s presentation.

 

2. Fair Value

 

The Company had no financial instruments measured at fair value on a recurring basis as of June 30, 2022 and December 31, 2021.

 

The following tables present the balances of non-financial instruments measured at fair value on a non-recurring basis as of June 30, 2022 and December 31, 2021.

 

   June 30, 2022  

Quoted Prices in Active Markets for

Identical

  

Significant Other

Observable

  

Significant

Unobservable

 
   Carrying   Estimated   Assets   Inputs   Inputs 
   Amount   Fair Value   Level 1   Level 2   Level 3 
                     
Foreclosed assets  $865   $865   $   $   $865 
Impaired loans due to COVID-19, net   3,135    3,135            3,135 
Other impaired loans, net   1,731    1,731            1,731 
Total  $5,731   $5,731   $   $   $5,731 

 

   December 31, 2021  

Quoted Prices in Active Markets for

Identical

  

Significant Other

Observable

  

Significant

Unobservable

 
   Carrying   Estimated   Assets   Inputs   Inputs 
   Amount   Fair Value   Level 1   Level 2   Level 3 
                     
Foreclosed assets  $2,724   $2,724   $   $   $2,724 
Impaired loans due to COVID-19, net   5,129    5,129            5,129 
Other impaired loans, net   2,572    2,572            2,572 
Total  $10,425   $10,425   $   $   $10,425 

 

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

 

   June 30, 2022   December 31, 2021 
   Carrying   Estimated   Carrying   Estimated 
   Amount   Fair Value   Amount   Fair Value 
Financial Assets                    
Cash and cash equivalents  $1,126   $1,126   $3,735   $3,735 
Loan receivable, net   54,085    54,085    46,943    46,943 
Accrued interest on loans   571    571    598    598 
Financial Liabilities                    
Customer interest escrow   1,059    1,059    479    479 
Notes payable secured, net   22,388    22,388    20,016    20,016 
Notes payable unsecured, net   26,302    26,302    27,713    27,713 
Accrued interest payable   2,781    2,781    2,464    2,464 

 

9

 

 

3. Financing Receivables

 

Financing receivables are comprised of the following as of June 30, 2022 and December 31, 2021:

 

   June 30, 2022   December 31, 2021 
         
Loans receivable, gross  $58,348   $50,763 
Less: Deferred loan fees   (1,609)   (1,143)
Less: Deposits   (909)   (934)
Plus: Deferred origination costs   323    305 
Less: Allowance for loan losses   (2,068)   (2,048)
           
Loans receivable, net  $54,085   $46,943 

 

The allowance for loan losses at June 30, 2022 was $2,068 which primarily consisted of $232 for loans without specific reserves, $216 for loans with specific reserves and $1,620 for loans with specific reserves due to the impact of COVID-19.

 

As of December 31, 2021 the allowance for loan losses was $2,048 which primarily consisted of $163 for loans without specific reserves, $342 for loans with specific reserves, $60 for special mention loans and $1,483 for loans with specific reserves due to the impact of COVID-19.

 

During the six months ended June 30, 2022 and year ended December 31, 2021, we incurred $188 and $509 in direct charge offs, respectively.

 

Commercial Construction and Development Loans

 

Construction Loan Portfolio Summary

 

As of June 30, 2022, the Company’s portfolio consisted of 226 commercial construction and 20 development loans with 60 borrowers in 21 states.

 

The following is a summary of the loan portfolio to builders for home construction loans as of June 30, 2022 and December 31, 2021:

 

Year  

Number

of

States

  

Number

of

Borrowers

  

Number

of

Loans

  

Value of

Collateral(1)

   Commitment Amount  

Gross

Amount

Outstanding

  

Loan to Value

Ratio(2)(3)

   Loan Fee 
 2022    21    60    226   $           112,949   $75,278   $49,410                    67%   5%
 2021    20    66    224   $98,935   $66,008   $43,106    67%   5%

 

(1) The value is determined by the appraised value.
   
(2) The loan to value ratio is calculated by taking the commitment amount and dividing by the appraised value.
   
(3) Represents the weighted average loan to value ratio of the loans.

 

10

 

 

Real Estate Development Loan Portfolio Summary

 

The following is a summary of our loan portfolio to builders for land development as of June 30, 2022 and December 31, 2021:

 

Year  

Number

of

States

  

Number

of

Borrowers

  

Number

of

Loans

  

Gross Value

of

Collateral(1)

   Commitment Amount(2)  

Gross Amount

Outstanding

  

Loan to Value

Ratio(3)(4)

   Interest Spread
 2022    9    14    20   $              19,703   $11,641   $8,938                    45%  Varies
 2021    6    12    15   $12,464   $9,095   $7,657    61%  varies

 

(1) The value is determined by the appraised value adjusted for remaining costs to be paid. As of June 30, 2022 and December 31, 2021, a portion of this collateral is $1,860 and $1,720, 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 2021 Form 10-K, as filed with the SEC, for more information.

 

Gross finance receivables – By risk rating:

 

   June 30, 2022   December 31, 2021 
         
Pass  $50,904   $38,893 
Special mention   743    2,344 
Classified – accruing        
Classified – nonaccrual   6,701    9,526 
           
Total  $58,348   $50,763 

 

Finance Receivables – Method of impairment calculation:

 

   June 30, 2022   December 31, 2021 
         
Performing loans evaluated individually  $18,605   $16,495 
Performing loans evaluated collectively   33,042    24,742 
Non-performing loans without a specific reserve   796    596 
Non-performing loans with a specific reserve   5,905    8,930 
           
Total evaluated collectively for loan losses  $58,348   $50,763 

 

As June 30, 2022 and December 31, 2021, there were no loans acquired with deteriorated credit quality.

 

11

 

 

Impaired Loans

 

The following is a summary of our impaired non-accrual commercial construction loans as of June 30, 2022 and December 31, 2021.

 

   June 30, 2022   December 31, 2021 
         
Unpaid principal balance (contractual obligation from customer)  $6,889   $10,035 
Charge-offs and payments applied   (188)   (509)
Gross value before related allowance   6,701    9,526 
Related allowance   (1,835)   (1,825)
Value after allowance  $4,866   $7,701 

 

Concentrations

 

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

  

   June 30, 2022   December 31, 2021 
      Percent of      Percent of 
   Borrower  Loan   Borrower  Loan 
   City  Commitments   City  Commitments 
               
Highest concentration risk  Pittsburgh, PA   30%  Pittsburgh, PA   26%
Second highest concentration risk  Cape Coral, FL   8%  Orlando, FL   7%
Third highest concentration risk  Orlando, FL   5%  Spokane, WA   4%

 

4. Real Estate Investment Assets

 

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

 

  

Six Months

Ended

June 30, 2022

  

Year

Ended

December 31, 2021

  

Six Months

Ended

June 30, 2021

 
             
Beginning balance  $1,651   $1,181   $1,181 
Deposits from real estate investments   (185)   (200)    
Proceeds from the sale of real estate investments   (1,017)        
Additions for construction/development   1,159    670    59 
Ending balance  $1,608   $1,651   $1,240 

 

12

 

 

5. Foreclosed Assets

 

The following table is a roll forward of foreclosed assets:

 

  

 

Six Months

Ended

June 30, 2022

  

Year

Ended

December 31, 2021

    

Six Months

Ended

June 30, 2021

 
             
Beginning balance  $2,724   $4,449   $4,449 
Transfers (to) from loan receivables, net   (1,017)   791    274 
Additions for construction/development   153    818    439 
Sale proceeds   (1,096)   (3,418)   (2,119)
Loss on foreclosure   -    (47)   - 
Loss on sale of foreclosed assets   -    (92)   (69)
Gain on foreclosure   -    67    - 
Gain on sale of foreclosed assets   101    166    101 
Impairment loss on foreclosed assets   -    (10)   (10)
Ending balance  $865   $2,724   $3,065 

 

6. Borrowings

 

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

 

  

Priority

Rank

  June 30, 2022   December 31, 2021 
Borrowing Source             
Purchase and sale agreements and other secured borrowings  1  $22,051   $19,165 
Secured lines of credit from affiliates  2   344    859 
Unsecured line of credit (senior)  3   1,250    1,250 
Other unsecured debt (senior subordinated)  4   1,094    1,053 
Unsecured Notes through our public offering, gross  5   20,349    20,636 
Other unsecured debt (subordinated)  5   3,545    4,693 
Other unsecured debt (junior subordinated)  6   447    447 
              
Total     $49,080   $48,103 

 

The following table shows the maturity of outstanding debt as of June 30, 2022:

 

Year Maturing 

Total Amount

Maturing

  

Public

Offering

  

Other

Unsecured

  

Secured

Borrowings

 
2022  $25,564   $3,269   $703   $21,592 
2023   7,433    5,098    2,264    71 
2024   8,822    6,108    2,587    127 
2025   5,588    5,117    398    73 
2026 and thereafter   1,673    757    384    532 
Total  $49,080   $20,349   $6,336   $22,395 

 

Secured Borrowings

 

Lines of Credit

 

As of June 30, 2022 and December 31, 2021, the Company had $344 and $859 borrowed against its lines of credit from affiliates, respectively, which have a total limit of $2,500.

 

None of our lines of credit have given us notice of nonrenewal during the second quarter or first six months of 2022, and the lines will continue to automatically renew unless notice of nonrenewal is given by a lender.

 

13

 

 

Secured Deferred Financing Costs

 

The Company had secured deferred financing costs of $7 and $8 as of June 30, 2022 and December 31, 2021, respectively.

 

Borrowings secured by loan assets are summarized below:

 

   June 30, 2022   December 31, 2021 
  

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  $6,771   $4,905   $4,847   $2,969 
S.K. Funding   10,873    6,300    8,084    5,500 
                     
Lender                    
Shuman   527    125    566    125 
Jeff Eppinger   3,586    1,500    3,328    1,500 
R. Scott Summers   1,606    847    1,475    847 
John C. Solomon   993    563    1,139    563 
Judith Y. Swanson   11,009    7,000    9,803    6,841 
                     
Total  $35,365   $21,240   $29,242   $18,345 

 

Unsecured Borrowings

 

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

 

The effective interest rate on borrowings through our Notes Program at June 30, 2022 and December 31, 2021 was 8.90% and 9.28%, respectively, not including the amortization of deferred financing costs. We generally offer four durations at any given time, ranging from 12 to 48 months from the date of issuance. There are limited rights of early redemption. Our 36-month Note has a mandatory early redemption option, subject to certain conditions. The following table shows the roll forward of our Notes Program:

 

  

Six Months

Ended

June 30, 2022

  

Year

Ended

December 31, 2021

  

Six Months

Ended

June 30, 2021

 
             
Gross Notes outstanding, beginning of period  $20,636   $21,482   $21,482 
Notes issued   1,303    7,876    6,330 
Note repayments / redemptions   (1,590)   (8,722)   (6,213)
                
Gross Notes outstanding, end of period  $20,349   $20,636   $21,599 
                
Less deferred financing costs, net   (383)   (367)   (407)
                
Notes outstanding, net  $19,966   $20,269   $21,192 

 

14

 

 

The following is a roll forward of deferred financing costs:

 

  

Six Months

Ended

June 30, 2022

  

Year

Ended

December 31, 2021

  

Six Months

Ended

June 30, 2021

 
             
Deferred financing costs, beginning balance  $1,061   $942   $942 
Additions   138    119    71 
Deferred financing costs, ending balance   1,199    1,061    1,013 
Less accumulated amortization   (816)   (694)   (606)
Deferred financing costs, net  $383   $367   $407 

 

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

 

  

Six Months

Ended

June 30, 2022

  

Year

Ended

December 31, 2021

  

Six Months

Ended

June 30, 2021

 
             
Accumulated amortization, beginning balance  $694   $526   $526 
Additions   122    168    80 
Accumulated amortization, ending balance  $816   $694   $606 

 

Other Unsecured Debts

 

Our other unsecured debts are detailed below:

 

                 
          Principal Amount Outstanding as of 
Loan  Maturity Date 

Interest

Rate(1)

   June 30, 2022   December 31, 2021 
Unsecured Note with Seven Kings Holdings, Inc.  Demand(2)   9.5%  $500   $500 
Unsecured Line of Credit from Swanson  July 2022   10.0%   -    159 
Unsecured Line of Credit from Builder Finance, Inc.  January 2023   10.0%   750    750 
Subordinated Promissory Note  April 2024   10.0%   100    100 
Subordinated Promissory Note  August 2022   11.0%   200    200 
Subordinated Promissory Note  February 2023   10.0%   600    600 
Subordinated Promissory Note  June 2023   10.0%   400    400 
Subordinated Promissory Note  March 2024   9.75%   500    - 
Subordinated Promissory Note  December 2022   5.0%   3    3 
Subordinated Promissory Note  December 2023   11.0%   20    20 
Subordinated Promissory Note  February 2024   11.0%   20    20 
Subordinated Promissory Note  January 2025   10.0%   15    15 
Subordinated Promissory Note  January 2026   8.0%   10    - 
Subordinated Promissory Note  November 2023   9.5%   200    200 
Subordinated Promissory Note  October 2024   10.0%   700    700 
Subordinated Promissory Note  December 2024   10.0%   100    100 
Subordinated Promissory Note  April 2025   10.0%   202    202 
Subordinated Promissory Note  July 2023   8.0%   100    100 
Subordinated Promissory Note  July 2024   5.0%   -    1,500 
Subordinated Promissory Note  September 2023   7.0%   94    94 
Subordinated Promissory Note  October 2023   7.0%   100    100 
Subordinated Promissory Note  December 2025   8.0%   180    180 
Senior Subordinated Promissory Note  March 2026(3)   10.0%   -    334 
Senior Subordinated Promissory Note  March 2026(3)   8.0%   375    - 
Senior Subordinated Promissory Note  October 2024(4)   1.0%   720    720 
Junior Subordinated Promissory Note  October 2024(4)   20.0%   447    447 
Other unsecured loans          $6,336   $7,444 

 

(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 10% per annum.

 

15

 

 

7. Redeemable Preferred Equity

 

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

 

  

Six Months

Ended

June 30, 2022

  

Year

Ended

December 31, 2021

  

Six Months

Ended

June 30, 2021

 
             
Beginning balance  $5,014   $3,582   $3,582 
Additions from new investment   200    1,000    800 
Distributions   (61)   (101)   (41)
Additions from reinvestments   309    533    250 
                
Ending balance  $5,462   $5,014   $4,591 

 

The following table shows the earliest redemption options for investors in our Series C Preferred Units as of June 30, 2022:

 

Year Maturing  Total Amount Redeemable 
2024  $3,418 
2025   427 
2026   309 
2027   1,105 
2028   203 
Total  $5,462 

 

8. Members’ Capital

 

There are currently two classes of equity units outstanding that the Company classifies as Members’ Capital: Class A common units (“Class A Common Units”) and Series B cumulative preferred units (“Series B Preferred Units”). As of June 30, 2022, the Class A Common Units are held by eight members, all of whom have no personal liability. All Class A common members have voting rights in proportion to their capital account. There were 2,629 Class A Common Units outstanding as of June 30, 2022 and December 31, 2021.

 

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 land securing certain development loans. As of June 30, 2022, the Hoskins Group owned a total of 18.6 Series B Preferred Units, which were issued for a total of $1,860.

 

9. Related Party Transactions

 

As of June 30, 2022, the Company had $1,250, $250, and $656 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 to the 2021 Financial Statements. These borrowings are included in notes payable secured, net of deferred financing costs on the interim condensed consolidated balance sheet.

 

During the six months ended June 30, 2022, Mr. Myrick originated one loan for approximately $24 and the Company services the loan and in return received a 5% loan fee. In addition, $653 was borrowed against the Myrick LOC to fund construction on the three loans originated by Mr. Myrick. During the quarter ended June 30, 2022, an additional $138 was added to the Myrick LOC.

 

As of December 31, 2021, the Company serviced two loans originated by Mr. Myrick for which it received a 5% loan fee and borrowed $141 against the Myrick LOC to originate and fund construction on the two such loans.

 

10. Commitments and Contingencies

 

Unfunded commitments to extend credit, which have similar collateral, credit risk, and market risk to our outstanding loans, were $25,869 and $22,902 at June 30, 2022 and December 31, 2021, respectively.

 

16

 

 

11. Selected Quarterly Condensed Consolidated Financial Data (Unaudited)

 

Summarized unaudited quarterly condensed consolidated financial data for the quarters of 2022 and 2021 are as follows:

   

   Quarter 2   Quarter 1   Quarter 4   Quarter 3   Quarter 2   Quarter 1 
   2022   2022   2021   2021   2021   2021 
                         
Net interest income  $1,267   $1,112   $958   $830   $625   $411 
Loan loss provision   134    74    246    83    45    214 
Net interest income after loan loss provision   1,133    1,038    712    747    580    197 
Gain on sale of foreclosed assets   101        1    64    13    88 
Gain on foreclosure of assets           67             
Gain on extinguishment of debt               361        10 
SG&A expense   713    697    415    483    438    537 
Depreciation and amortization   12    12    12    12    13    16 
Loss on sale of foreclosed assets           23        51    18 
Loss on foreclosure of assets           47             
Impairment loss on foreclosed assets                       10 
Net income (loss)  $509   $329   $283   $677   $91   $(286)

 

12. Non-Interest Expense Detail

 

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

 

           
  

For the Six Months Ended

June 30,

 
   2022   2021 
Selling, general and administrative expenses          
Legal and accounting  $153   $126 
Salaries and related expenses   789    328 
Board related expenses   50    50 
Advertising   62    61 
Rent and utilities   43    22 
Loan and foreclosed asset expenses   142    237 
Travel   78    60 
Other   93    91 
Total SG&A  $1,410   $975 

 

13. Subsequent Events

 

Management of the Company has evaluated subsequent events through August 15, 2022, the date these interim condensed consolidated financial statements were issued.

 

17

 

 

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 “2021 Financial Statements”) included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021 (the “2021 Form 10-K”). See also “Cautionary Note Regarding Forward-Looking Statements” preceding Part I.

 

Overview

 

During the quarter and six months ended June 30, 2022, the Company continued to focus on the reduction of non-interest earning assets. As of June 30, 2022, loans classified as non-accrual were 14 or $6,701 compared to 23 or $9,526 as of December 31, 2021. In addition, as of June 30, 2022, we had two foreclosed assets or $865 compared to five or $2,724 as of December 31, 2021.

 

The Company continues to lose interest income on assets that do not accrue interest. During the quarter and six months ended June 30, 2022, the estimated loss on interest income related to impaired and foreclosed assets was $265 and $607, respectively. Looking ahead, we expect this to decrease as we continue to sell our remaining foreclosed assets and impaired loans in 2022.

 

While the Company continues to face risks as it relates to the economy and the homebuilding industry, management has decided to focus on the following during 2022:

 

  1. Decrease the amount of non-interest-bearing assets, which includes cash, our foreclosed assets, real estate assets and classified non-accrual loans or impaired loans receivables.
  2. Increase loan originations.
  3. Maintain liquidity to fund new loan originations and completion of construction costs for existing loans.
  4. Lower our cost of funds (to maintain a competitive market level).
  5. Raise margin beyond the elimination of nonperforming assets.

 

We anticipate that for the last two quarters of 2022, the housing market in most of the areas in which we do business will decline due to the impact of current economic conditions. While markets will probably weaken compared to where they were as of June 30, 2022, we anticipate losses incurred in principal related to COVID-19 will not continue, and the lower interest income due to nonperforming assets will continue to decrease in the remainder of 2022 as compared to the same periods in 2021. Short term interest rates as well as mortgage interest rates are expected to continue to rise. A continued rise in short term rates is likely to benefit the company as our competitors’ rates will rise faster than ours making us more competitive, but a continued rise in long term interest rates may negatively impact the housing industry as a whole, and therefore us.

 

We had $54,085 and $46,943 in loan assets, net as of June 30, 2022 and December 31, 2021, respectively. In addition, as of June 30, 2022, we had 226 commercial construction and 20 development loans with 60 borrowers in 21 states.

 

Net cash provided by operations increased $1,256 for the six months ended June 30, 2022 as compared to the same period of 2021. Our increase in operating cash flow was due primarily to net income and customer interest escrow. As of June 30, 2022, customer interest escrow included $500 for a Pennsylvania development loan.

 

18

 

 

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 2021 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, 2021 unless listed below.

 

Loan Losses

 

Fair value of collateral has the potential to impact the calculation of the loan loss provision (the amount we have expensed over time in anticipation of loan losses we have not yet realized). Specifically, relevant to the allowance for loan loss reserve is the fair value of the underlying collateral supporting the outstanding loan balances. Fair value measurements are an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. Due to a rapidly changing economic market, an erratic housing market, the various methods that could be used to develop fair value estimates, and the various assumptions that could be used, determining the collateral’s fair value requires significant judgment.

 

   June 30, 2022 
   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%**  $3,105 

 

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

 

** Assumes the loans were nonperforming and a book amount of the loans outstanding of $54,085.

 

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).

 

   June 30, 2022 
   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%**  $303 

 

* 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 $865.

 

19

 

 

Results of Operation

 

Interest Spread

 

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

 

   Three Months Ended   Six Months Ended 
   June 30,   June 30, 
   2022   2021   2022   2021 
Interest Income        *         *         *         * 
Estimated interest income  $1,969    13%  $1,531    12%  $3,780    13%  $3,039    12%
Estimated unearned interest income due to COVID-19   (166)   (1)%   (227)   (2)%   (353)   (1)%   (494)   (2)%
Interest income on loans  $1,803    12%  $1,304    10%  $3,427    12%  $2,545    10%
                                         
Fee income on loans   871    6%   870    7%   1,788    6%   1,598    6%
Deferred loan fees   (158)   (1)%   (230)   (2)%   (338)   (1)%   (421)   (1)%
Fee income on loans, net   713    5%   640    5%   1,450    5%   1,177    5%
                                         
Interest and fee income on loans   2,516    17%   1,944    15%   4,877    17%   3,722    15%
                                         
Interest expense unsecured   664    4%   762    6%   1,333    4%   1,531    6%
Interest expense secured   526    3%   518    4%   1,043    3%   1,075    5%
Amortization offering costs   59    1%   39    -%   122    1%   80    -%
Interest expense   1,249    8%   1,319    10%   2,498    8%   2,686    11%
Net interest income (spread)   1,267    9%   625    5%   2,379    9%   1,036    4%
                                         
Weighted average outstanding loan asset balance  $57,025        $50,222        $56,082        $50,247      

 

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

 

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

 

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

 

Interest income on loans increased to 13% for both the quarter and six months ended June 30, 2022 compared to 12% for the same periods of the prior year. Interest expense decreased to 8% for both the quarter and six months ended June 30, 2022 compared to 10% and 11% for the same periods of the prior year. The decrease in the interest expense is due to the lowered effective interest rate of 8.90% for the period ended June 30, 2022 compared to 9.90% for the same period of the prior year. We reduced the balance of higher rate secured debt during the period ended June 30, 2022 compared to the same period of 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 3.6%. In July 2022 we changed our pricing model to decrease by 0.5% our pricing on all new construction loans during their first year, and increase pricing by 2.5% on those loans at all times after that. This pricing change is anticipated to lower profit in the remaining two quarters of 2022 by approximately $18 and in the first two quarters of 2023 by $54, however we anticipate that by the fourth quarter of 2023 the pricing change will increase our profitability. If all currently owned construction loans were currently using this pricing, our profitability would increase by $425 per year.

 

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 typically 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 and six months ended June 30, 2022 and 2021, fee income, net was 5%.

 

Amount of nonperforming assets. Generally, two types of nonperforming assets negatively affect our interest spread: loans not paying interest and foreclosed assets.

 

20

 

 

As of June 30, 2022 and 2021, construction and development loans which did not accrue interest was $6,701 and $7,614, respectively.

 

Foreclosed assets do not provide a monthly interest return. As of June 30, 2022 and 2021, foreclosed assets were $865 and $2,724, 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 liquidate nonperforming assets.

 

Loan Loss Provision

 

Loan loss provision (expense throughout the year) was $134 and $45 for the quarters ended June 30, 2022 and 2021, respectively. For the six months ended June 30, 2022 and 2021, loan loss expense was $208 and $259, respectively.

 

The allowance for loan losses at June 30, 2022 was $2,068 which primarily consisted of $232 for loans without specific reserves, $216 for loans with specific reserves and $1,620 for loans with specific reserves due to the impact of COVID-19.

 

As of December 31, 2021 the allowance for loan losses was $2,048 which primarily consisted of $163 for loans without specific reserves, $342 for loans with specific reserves, $60 for special mention loans and $1,483 for loans with specific reserves due to the impact of COVID-19.

 

During the six months ended June 30, 2022 and year ended December 31, 2021, we incurred $188 and $509 in direct charge offs, respectively.

 

Non-Interest Income

 

Gain on Sale of Foreclosed Assets

 

During the quarter ended June 30, 2022 and 2021, we recognized $101 and $13, respectively, as a gain on the sale of foreclosed assets. We sold two and one foreclosed assets which resulted in a gain on the sale for the quarters ended June 30, 2022 and 2021, respectively.

 

Gain on the sale of foreclosed assets was $101 for both six months ended June 30, 2022 and 2021. We sold two and five foreclosed assets which resulted in a gain on the sale for the six months ended June 30, 2022 and 2021, respectively.

 

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.

 

21

 

 

Non-Interest Expense

 

Selling, General and Administrative (“SG&A”) Expenses

 

The following table displays our SG&A expenses:

 

  

Three Months

Ended June 30,

  

Six Months

Ended June 30,

 
   2022   2021   2022   2021 
Legal and accounting  $33   $23   $153   $126 
Salaries and related expenses   389    119    789    328 
Board related expenses   25    25    50    50 
Advertising   42    52    62    61 
Rent and utilities   28    13    43    22 
Loan and foreclosed asset expenses   109    124    142    237 
Travel   38    36    78    60 
Other   49    46    93    91 
Total SG&A  $713   $438   $1,410   $975 

 

Our SG&A expense increased $275 and $435 for the quarter and six months ended June 30, 2022, respectively, compared to the same periods of 2021, due primarily to salaries and related expense, partially offset by decreases in loan and foreclosed asset expenses. Salaries and related expenses increased $270 and $461 for the quarter and six months ended June 30, 2022, respectively, due primarily to:

 

  Profit share expense was $127 and $195 for the quarter and six months ended June 30, 2022, respectively. No profit share expense was recognized during the same periods of the prior year; and
  Employee retention credit was $96 for both the quarter and six months ended June 30, 2021. No employee retention credits were recognized in 2022.

 

Loss on the Sale of Foreclosed Assets

 

During the quarters ended June 30, 2022 and 2021, we recognized $0 and $51, respectively, as a loss on the sale of foreclosed assets. During the six months ended June 30, 2022 and 2021, we recognized $0 and $69, respectively, as a loss on the sale of foreclosed assets.

 

Impairment Loss on Foreclosed Assets

 

During the quarter and six months ended June 30, 2022 no impairment loss on foreclosed assets were recognized. During the quarter and six months ended June 30, 2021, impairment loss on foreclosed assets was $0 and $10, respectively.

 

Consolidated Financial Position

 

Loans Receivable

 

Commercial Loans – Construction Loan Portfolio Summary

 

We anticipate that the aggregate balance of our construction loan portfolio will increase during the third quarter of 2022 because: 1) Payoffs are slowing as builders sales are slowing some, 2) housing starts are down which should reduce competition between builders for labor and should allow for faster construction which will initially increase the balances, and 3) we had strong originations in the first two quarters of 2022 and those loans will be growing in balance during the third quarter.

 

22

 

 

The following is a summary of our loan portfolio to builders for home construction loans as of June 30, 2022:

 

State 

Number

of

Borrowers

  

Number

of

Loans

  

Value of

Collateral(1)

  

Commitment

Amount

  

Amount

Outstanding

  

Loan to

Value Ratio(2)

   Loan Fee 
Arizona   1    2   $                  767   $537   $93                  70%   5%
Connecticut   2    4    1,659    1,210    987    73%   5%
Delaware   1    6    7,865    3,255    2,372    41%   5%
Florida   18    98    35,176    26,057    16,881    74%   5%
Georgia   5    7    3,590    2,020    1,068    56%   5%
Illinois   2    2    1,890    1,199    897    63%   5%
Indiana   1    1    624    437    426    70%   5%
Louisiana   2    4    935    623    390    67%   5%
Michigan   2    5    1,443    1,138    1.072    79%   5%
New Jersey   1    5    2,687    2,259    2,233    84%   5%
New York   1    2    1,265    878    793    69%   5%
North Carolina   6    14    6,544    3,940    1,897    60%   5%
Ohio   2    9    3,086    2,132    1,640    69%   5%
Oregon   1    1    550    385    304    70%   5%
Pennsylvania   1    25    28,361    17,923    11,931    63%   5%
South Carolina   8    22    5,905    4,274    2,527    72%   5%
Tennessee   2    2    965    583    282    60%   5%
Texas   1    4    2,548    1,659    1,126    65%   5%
Utah   1    3    1,522    1,156    856    76%   5%
Virginia   1    1    297    195    97    66%   5%
Washington   1    9    5,270    3,418    1,538    65%   5%
Total   60    226   $112,949   $75,278   $49,410    67%(3)   5%

 

  (1) The value is determined by the appraised value.
     
  (2) The loan to value ratio is calculated by taking the commitment amount and dividing by the appraised value.
     
  (3) Represents the weighted average loan to value ratio of the loans.

 

The following is a summary of our loan portfolio to builders for home construction loans as of December 31, 2021:

 

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

 

State 

Number

of

Borrowers

  

Number

of

Loans

  

Value of

Collateral(1)

  

Commitment

Amount

  

Gross

Amount

Outstanding

  

Loan to

Value

Ratio(2)

   Loan Fee 
Arizona   2    3   $                  995   $697   $390                  70%   5%
Connecticut   2    4    1,535    1,084    719    71%   5%
Delaware   1    6    5,960    2,387    1,817    40%   5%
Florida   18    88    28,922    21,787    13,649    75%   5%
Georgia   2    2    1,130    631    366    56%   5%
Illinois   2    2    1,890    1,199    627    63%   5%
Indiana   1    1    624    436    347    70%   5%
Louisiana   2    3    590    387    125    66%   5%
Michigan   2    12    3,431    2,586    2,299    75%   5%
New Jersey   1    7    2,382    1,910    1,664    80%   5%
New York   1    1    525    378    305    72%   5%
North Carolina   8    14    7,141    4,349    2,105    61%   5%
Ohio   2    9    2,929    2,132    1,105    73%   5%
Oregon   2    2    923    646    440    70%   5%
Pennsylvania   2    20    21,867    13,487    10,078    62%   5%
South Carolina   10    32    8,353    5,793    3,579    69%   5%
Tennessee   2    2    940    582    319    62%   5%
Texas   2    5    2,873    1,750    549    61%   5%
Virginia   3    3    1,140    765    519    67%   5%
Washington   1    8    4,785    3,022    2,104    63%   5%
Total   66    224   $98,935   $66,008   $43,106    67%(3)   5%

 

  (1) The value is determined by the appraised value.
     
  (2) The loan to value ratio is calculated by taking the commitment amount and dividing by the appraised value.
     
  (3) Represents the weighted average loan to value ratio of the loans.

 

23

 

 

Commercial Loans – Real Estate Development Loan Portfolio Summary

 

The following is a summary of our loan portfolio to builders for land development as of June 30, 2022:

 

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    5   $              16,572   $8,500   $6,674                  40%   varies 
Connecticut   1    1    250    180    213    85%   7%
Delaware   1    1    543    147    147    27%   7%
Florida   4    4    778    1,195    438    56%   7%
New Jersey   1    2    100    52    51    51%   7%
Georgia   1    1    -    24    24    100%   7%
Texas   1    1    -    125    (28)   100%   7%
Michigan   1    1    53    32    32    60%   7%
South Carolina   3    4    1,407    1,386    1,387    99%   7%
Total   14    20   $19,703   $11,641   $8,938    45%(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 $1,860 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.

 

The following is a summary of our loan portfolio to builders for land development as of December 31, 2021:

 

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

 

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    4   $                9,312   $6,500   $6,103                  66%   varies 
Florida   5    5    816    1,297    611    75%   7%
Texas   1    1    70    125    77    110%   7%
Connecticut   1    1    350    180    180    51%   7%
Delaware   1    1    543    147    147    27%   7%
South Carolina   3    3    1,373    846    539    39%   7%
Total   12    15   $12,464   $9,095   $7,657    61%(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 $1,720 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.

 

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(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 June 30, 2022 and December 31, 2021:

 

   June 30, 2022   December 31, 2021 
         
Loans receivable, gross  $58,348   $50,763 
Less: Deferred loan fees   (1,609)   (1,143)
Less: Deposits   (909)   (934)
Plus: Deferred origination costs   323    305 
Less: Allowance for loan losses   (2,068)   (2,048)
           
Loans receivable, net  $54,085   $46,943 

 

The following is a roll forward of combined loans:

 

  

Six Months

Ended

June 30, 2022

  

Year

Ended

December 31, 2021

  

Six Months

Ended

June 30, 2021

 
             
Beginning balance  $46,943   $46,405   $46,405 
Originations and modifications   29,474    45,395    21,776 
Principal collections   (23,803)   (44,290)   (23,171)
Transferred from (to) foreclosed assets   1,017    (791)   (274)
Change in builder deposit   26    403    60 
Change in the allowance for loan losses   (20)   (80)   249 
Change in loan fees, net   448    (99)   488 
Ending balance  $54,085   $46,943   $45,533 

 

Finance Receivables – By risk rating:

 

   June 30, 2022   December 31, 2021 
         
Pass  $50,904   $38,893 
Special mention   743    2,344 
Classified – accruing        
Classified – nonaccrual   6,701    9,526 
           
Total  $58,348   $50,763 

 

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Finance Receivables – Method of impairment calculation:

 

   June 30, 2022   December 31, 2021 
         
Performing loans evaluated individually  $18,605   $16,495 
Performing loans evaluated collectively   33,042    24,742 
Non-performing loans without a specific reserve   796    596 
Non-performing loans with a specific reserve   5,905    8,930 
           
Total evaluated collectively for loan losses  $58,348   $50,763 

 

At June 30, 2022 and December 31, 2021, 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 June 30, 2022 and December 31, 2021.

 

   June 30, 2022   December 31, 2021 
         
Unpaid principal balance (contractual obligation from customer)  $6,889   $10,035 
Charge-offs and payments applied   (188)   (509)
Gross value before related allowance   6,701    9,526 
Related allowance   (1,835)   (1,825)
Value after allowance  $4,866   $7,701 

 

Below is an aging schedule of loans receivable as of June 30, 2022, 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)   232   $51,647    88%
60-89 days   -    -    -%
90-179 days   4    788    2%
180-269 days   4    742    2%
>270 days   6    5,171    8%
                
Subtotal   246   $58,348    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   246   $58,348    100%

 

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Below is an aging schedule of loans receivable as of December 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)   216   $41,238    81.2%
60-89 days   1    203    0.4%
90-179 days   10    2,058    4.1%
180-269 days   1    392    0.8%
>270 days   11    6,872    13.5%
                
Subtotal   239   $50,763    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   239   $50,763    100%

 

Below is an aging schedule of loans receivable as of June 30, 2022, 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.   232   $51,647    88%
60-89 days   -    -    -%
90-179 days   4    788    2%
180-269 days   4    742    2%
>270 days   6    5,171    8%
                
Subtotal   246   $58,348    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   246   $58,348    100%

 

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Below is an aging schedule of loans receivable as of December 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.   216   $41,238    81.2%
60-89 days   1    203    0.4%
90-179 days   10    2,058    4.1%
180-269 days   1    392    0.8%
>270 days   11    6,872    13.5%
                
Subtotal   239   $50,763    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   239   $50,763    100%

 

Foreclosed Assets

 

Below is a roll forward of foreclosed assets:

 

  

Six Months

Ended

June 30, 2022

  

Year

Ended

December 31, 2021

  

Six Months

Ended

June 30, 2021

 
             
Beginning balance  $2,724   $4,449   $4,449 
Transfers (to) from loan receivables, net   (1,017)   791    274 
Additions for construction/development   153    818    439 
Sale proceeds   (1,096)   (3,418)   (2,119)
Loss on foreclosure   -    (47)   - 
Loss on sale of foreclosed assets   -    (92)   (69)
Gain on foreclosure   -    67    - 
Gain on sale of foreclosed assets   101    166    101 
Impairment loss on foreclosed assets   -    (10)   (10)
Ending balance  $865   $2,724   $3,065 

 

During the quarter and six months ended June 30, 2022 and 2021, we sold two and three foreclosed assets and two and 12 foreclosed assets, respectively. In addition, we transferred one asset from foreclosed assets to loans receivable, net during the six months ended June 30, 2022. We transferred one loan receivable to foreclosed assets during the six months ended June 30, 2021.

 

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Customer Interest Escrow

 

Below is a roll forward of interest escrow:

  

Six Months

Ended

June 30, 2022

  

Year

Ended

December 31, 2021

  

Six Months

Ended

June 30, 2020

 
             
Beginning balance  $479   $510   $510 
Preferred equity dividends   87    230    106 
Additions from Pennsylvania loans   1,085    513    297 
Additions from other loans   204    720    488 
Interest, fees, principal or repaid to borrower   (796)   (1,494)   (874)