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, 20172018
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 333-203707
SHEPHERD’S FINANCE, LLC
(Exact name of registrant as specified on its charter)
Delaware | 36-4608739 | |
(State or other jurisdiction of | (I.R.S. Employer | |
Incorporation or organization) | Identification No.) |
12627 San Jose Blvd., Suite 203, Jacksonville, FL 32223
(Address of principal executive offices)
302-752-2688
(Registrant’s telephone number including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [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 | [ ] | 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. [ ]
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
2 |
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements contained in this Form 10-Q of Shepherd’s Finance, LLC, other than historical facts, may be considered forward-looking statements within the meaning of the federal securities laws. Words such as “may,” “will,” “expect,” “anticipate,” “believe,” “estimate,” “continue,” “predict,” or other similar words identify forward-looking statements. Forward-looking statements appear in a number of places in this report, including without limitation, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and include statements regarding our intent, belief or current expectation about, among other things, trends affecting the markets in which we operate, our business, financial condition and growth strategies. Although we believe that the expectations reflected in these forward-looking statements are based on reasonable assumptions, forward-looking statements are not guarantees of future performance and involve risks and uncertainties. Actual results may differ materially from those predicted in the forward-looking statements as a result of various factors, including but not limited to those set forth in the “Risk Factors” section of our Annual Report on Form 10-K for the year ended December 31, 2016,2017, as filed with the Securities and Exchange Commission. If any of the events described in “Risk Factors” occur, they could have an adverse effect on our business, consolidated financial condition, results of operations, and cash flows.
When considering forward-looking statements, you should keep these risk factors, as well as the other cautionary statements in this report and in our 20162017 Form 10-K in mind. You should not place undue reliance on any forward-looking statement. We are not obligated to update forward-looking statements.
PART I – FINANCIAL INFORMATION
Shepherd’s Finance, LLC
Interim Condensed Consolidated Balance Sheets
As of | As of | |||||||||||||||
(in thousands of dollars) | March 31, 2017 | December 31, 2016 | March 31, 2018 | December 31, 2017 | ||||||||||||
(Unaudited) | (Unaudited) | |||||||||||||||
Assets | ||||||||||||||||
Cash and cash equivalents | $ | 586 | $ | 1,566 | $ | 380 | $ | 3,478 | ||||||||
Accrued interest on loans | 320 | 280 | ||||||||||||||
Accrued interest receivable | 966 | 720 | ||||||||||||||
Loans receivable, net | 24,167 | 20,091 | 39,692 | 30,043 | ||||||||||||
Foreclosed assets | 1,081 | 2,798 | 1,079 | 1,036 | ||||||||||||
Property, plant and equipment | 625 | – | ||||||||||||||
Property, plant and equipment, net | 1,033 | 1,020 | ||||||||||||||
Other assets | 67 | 151 | 92 | 58 | ||||||||||||
Total assets | $ | 26,846 | $ | 24,886 | $ | 43,242 | $ | 36,355 | ||||||||
Liabilities, Redeemable Preferred Equity and Members’ Capital | ||||||||||||||||
Liabilities | ||||||||||||||||
Customer interest escrow | $ | 1,021 | $ | 812 | $ | 786 | $ | 935 | ||||||||
Accounts payable and accrued expenses | 1,482 | 1,363 | 478 | 705 | ||||||||||||
Notes payable secured | 6,728 | 7,322 | ||||||||||||||
Accrued interest payable | 1,373 | 1,353 | ||||||||||||||
Notes payable secured, net of deferred financing costs | 17,554 | 11,644 | ||||||||||||||
Notes payable unsecured, net of deferred financing costs | 13,587 | 11,962 | 18,002 | 16,904 | ||||||||||||
Due to preferred equity member | 31 | 28 | 31 | 31 | ||||||||||||
Total liabilities | 22,849 | 21,487 | 38,224 | 31,572 | ||||||||||||
Commitments and Contingencies (Notes 3 and 10) | ||||||||||||||||
Commitments and Contingencies (Notes 3 and 9) | ||||||||||||||||
Redeemable Preferred Equity | ||||||||||||||||
Series C preferred equity | 440 | – | $ | 1,130 | $ | 1,097 | ||||||||||
Members’ Capital | ||||||||||||||||
Series B preferred equity | 1,160 | 1,150 | 1,240 | 1,240 | ||||||||||||
Class A common equity | 2,397 | 2,249 | 2,648 | 2,446 | ||||||||||||
Members’ capital | 3,557 | 3,399 | 3,888 | 3,686 | ||||||||||||
Total liabilities, redeemable preferred equity and members’ capital | $ | 26,846 | $ | 24,886 | $ | 43,242 | $ | 36,355 |
The accompanying notes are an integral part of these interim condensed consolidated financial statements.
Shepherd’s Finance, LLC
Interim Condensed Consolidated Statements of Operations - Unaudited
For the Three Months ended March 31, 20172018 and 20162017
(in thousands of dollars) | 2017 | 2016 | ||||||
Net Interest Income | ||||||||
Interest and fee income on loans | $ | 1,174 | $ | 849 | ||||
Interest expense: | ||||||||
Interest related to secured borrowings | 179 | 117 | ||||||
Interest related to unsecured borrowings | 367 | 245 | ||||||
Interest expense | 546 | 362 | ||||||
Net interest income | 628 | 487 | ||||||
Less: Loan loss provision | 11 | 8 | ||||||
Net interest income after loan loss provision | 617 | 479 | ||||||
Non-Interest Income | ||||||||
Gain from sale of foreclosed assets | 77 | – | ||||||
Income | 694 | 479 | ||||||
Non-Interest Expense | ||||||||
Selling, general and administrative | 454 | 350 | ||||||
Impairment loss on foreclosed assets | 49 | – | ||||||
Total non-interest expense | 503 | 350 | ||||||
Net income | $ | 191 | $ | 129 | ||||
Earned distribution to preferred equity holders | 31 | 26 | ||||||
Net income attributable to common equity holders | $ | 160 | $ | 103 |
Three Months Ended | ||||||||
March 31, | ||||||||
(in thousands of dollars) | 2018 | 2017 | ||||||
Interest Income | ||||||||
Interest and fee income on loans | $ | 1,827 | $ | 1,174 | ||||
Interest expense: | ||||||||
Interest related to secured borrowings | 411 | 179 | ||||||
Interest related to unsecured borrowings | 450 | 367 | ||||||
Interest expense | 861 | 546 | ||||||
Net interest income | 966 | 628 | ||||||
Less: Loan loss provision | 40 | 11 | ||||||
Net interest income after loan loss provision | 926 | 617 | ||||||
Non-Interest Income | ||||||||
Gain from foreclosure of assets | - | 77 | ||||||
Total non-interest income | - | 77 | ||||||
Income | 926 | 694 | ||||||
Non-Interest Expense | ||||||||
Selling, general and administrative | 617 | 448 | ||||||
Depreciation and amortization | 17 | 6 | ||||||
Impairment loss on foreclosed assets | 5 | 49 | ||||||
Total non-interest expense | 639 | 503 | ||||||
Net Income | $ | 287 | $ | 191 | ||||
Earned distribution to preferred equity holders | 63 | 31 | ||||||
Net income attributable to common equity holders | $ | 224 | $ | 160 |
The accompanying notes are an integral part of these interim condensed consolidated financial statements.
5 |
Shepherd’s Finance, LLC
Interim Condensed Consolidated Statements of Changes In Members’ Capital - Unaudited
For the Three Months Ended March 31, 20172018
(in thousands of dollars) | 2017 | Three Months Ended March 31, 2018 | ||||||
Members’ capital, beginning balance | $ | 3,399 | $ | 3,686 | ||||
Net income | 191 | 287 | ||||||
Contributions from members (preferred) | 10 | |||||||
Earned distributions to preferred equity holder | (31 | ) | ||||||
Earned distributions to preferred equity holders | (63 | ) | ||||||
Distributions to common equity holders | (12 | ) | (22 | ) | ||||
Members’ capital, ending balance | $ | 3,557 | $ | 3,888 |
The accompanying notes are an integral part of these interim condensed consolidated financial statements.
Shepherd’s Finance, LLC
Interim Condensed Consolidated Statements of Cash Flows - Unaudited
For the Three Months Ended March 31, 20172018 and 20162017
Three Months Ended March 31, | ||||||||||||||||
(in thousands of dollars) | 2017 | 2016 | 2018 | 2017 | ||||||||||||
Cash flows from operations | ||||||||||||||||
Net income | $ | 191 | $ | 129 | $ | 287 | $ | 191 | ||||||||
Adjustments to reconcile net income to net cash provided by (used in) operating activities | ||||||||||||||||
Amortization of deferred financing costs | 64 | 67 | 48 | 64 | ||||||||||||
Provision for loan losses | 11 | 8 | 40 | 11 | ||||||||||||
Net loan origination fees deferred (earned) | 198 | (49 | ) | |||||||||||||
Net loan origination fees deferred | 85 | 198 | ||||||||||||||
Change in deferred origination expense | (64 | ) | (10 | ) | (23 | ) | (64 | ) | ||||||||
Impairment of foreclosed assets | 49 | – | 5 | 49 | ||||||||||||
Gain from sale of foreclosed assets | (77 | ) | – | |||||||||||||
Net change in operating assets and liabilities | ||||||||||||||||
Depreciation and amortization | 17 | 6 | ||||||||||||||
Gain from foreclosure of assets | - | (77 | ) | |||||||||||||
Net change in operating assets and liabilities: | ||||||||||||||||
Other assets | 15 | – | (39 | ) | 9 | |||||||||||
Accrued interest on loans | (40 | ) | (103 | ) | ||||||||||||
Accrued interest receivable | (246 | ) | (40 | ) | ||||||||||||
Customer interest escrow | 209 | (35 | ) | (149 | ) | 209 | ||||||||||
Accounts payable and accrued expenses | 119 | 269 | (207 | ) | 119 | |||||||||||
Net cash provided by (used in) operating activities | 675 | 276 | ||||||||||||||
Net cash (used in) provided by operating activities | (182 | ) | 675 | |||||||||||||
Cash flows from investing activities | ||||||||||||||||
Loan originations and principal collections, net | (4,221 | ) | (3,404 | ) | (9,751 | ) | (4,221 | ) | ||||||||
Investment in foreclosed assets | (145 | ) | (213 | ) | (48 | ) | (145 | ) | ||||||||
Proceeds from sale of foreclosed assets | 1,890 | – | - | 1,890 | ||||||||||||
Property plant and equipment additions | (556 | ) | – | (25 | ) | (556 | ) | |||||||||
Net cash provided by (used in) investing activities | (3,032 | ) | (3,617 | ) | ||||||||||||
Net cash used in investing activities | (9,824 | ) | (3,032 | ) | ||||||||||||
Cash flows from financing activities | ||||||||||||||||
Contributions from redeemable preferred equity | 440 | – | - | 440 | ||||||||||||
Contributions from members (preferred) | 10 | 40 | ||||||||||||||
Distributions to members | (40 | ) | (190 | ) | ||||||||||||
Contributions from preferred equity holders | - | 10 | ||||||||||||||
Distributions to preferred equity holders | (30 | ) | (28 | ) | ||||||||||||
Distributions to common equity holders | (22 | ) | (12 | ) | ||||||||||||
Proceeds from secured note payable | 2,001 | 3,892 | 7,581 | 2,001 | ||||||||||||
Repayments of secured note payable | (2,595 | ) | (1,578 | ) | (1,665 | ) | (2,595 | ) | ||||||||
Proceeds from unsecured notes payable | 4,144 | 633 | 4,479 | 4,144 | ||||||||||||
Redemptions/repayments of unsecured notes payable | (2,573 | ) | (10 | ) | (3,400 | ) | (2,573 | ) | ||||||||
Deferred financing costs paid | (10 | ) | (19 | ) | (35 | ) | (10 | ) | ||||||||
Net cash provided by (used in) financing activities | 1,377 | 2,768 | ||||||||||||||
Net cash provided by financing activities | 6,908 | 1,377 | ||||||||||||||
Net increase (decrease) in cash and cash equivalents | (980 | ) | (573 | ) | ||||||||||||
Net decrease in cash and cash equivalents | (3,098) | (980 | ) | |||||||||||||
Cash and cash equivalents | ||||||||||||||||
Beginning of period | 1,566 | 1,341 | 3,478 | 1,566 | ||||||||||||
End of period | $ | 586 | $ | 768 | $ | 380 | $ | 586 | ||||||||
Supplemental disclosure of cash flow information | ||||||||||||||||
Cash paid for interest | $ | 488 | $ | 152 | $ | 813 | $ | 488 | ||||||||
Non-cash investing and financing activities | ||||||||||||||||
Earned but not paid distribution of preferred equity holders | $ | 31 | $ | 1 | $ | 33 | $ | 31 |
The accompanying notes are an integral part of these interim condensed consolidated financial statements.
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
Description of Business
Shepherd’s Finance, LLC and subsidiary (the “Company”, “we”, or “our”) was originally formed as a Pennsylvania limited liability company on May 10, 2007. We are the sole member of a consolidating subsidiary, 84 REPA, LLC. The Company operated pursuant to an operating agreement by and among Daniel M. Wallach and the members of the Company from its inception through March 29, 2012, at which time it adopted an amended and restated operating agreement.
TheAs of March 31, 2018, the Company lends moneyextends commercial loans to residential homebuilders to construct single family homes, to develop undeveloped land into residential building lots, and to purchase and improve for sale older homes. The loans are extended to residential homebuilders and, as such, are commercial loans. We lend in 16 states as of March 31, 2017.(in 17 states) to:
● | construct single family homes, | |
● | develop undeveloped land into residential building lots, and | |
● | purchase and improve for sale older homes. |
Basis of Presentation
The accompanying (a) condensed consolidated balance sheet as of DecemberMarch 31, 2016,2018, which has been derived from audited consolidated financial statements, and (b) unaudited interim condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X. While certain information and disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”), management believes that the disclosures herein are adequate to make the unaudited interim condensed consolidated information presented not misleading. In the opinion of management, the unaudited interim condensed consolidated financial statements reflect all adjustments necessary for a fair presentation of the consolidated financial position, results of operations, and cash flows for the periods presented. Such adjustments are of a normal, recurring nature. The consolidated results of operations for any interim period are not necessarily indicative of results expected for the fiscal year ending December 31, 2017.2018. These unaudited interim condensed consolidated financial statements should be read in conjunction with the 20162017 consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K as of and for the year ended December 31, 20162017 (the “2016“2017 Statements”). The accounting policies followed by the Company are set forth in Note 2 -Summary of Significant Accounting Policies (“Note 2”)in the 2017 Statements.
Accounting Standards Adopted in the Period
ASU 2016-01, “Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities (An Amendment of FASB ASC 825).” Issued in January 2016, ASU 2016-01 was intended to enhance the reporting model for financial instruments to provide users of financial statements with improved decision-making information. The amendments of ASU 2016-01 include: (i) requiring equity investments, except those accounted for under the equity method of accounting or those that result in the consolidation of an investee, to be measured at fair value, with changes in fair value recognized in net income; (ii) requiring a qualitative assessment to identify impairment of equity investments without readily determinable fair values; and (iii) clarifying that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity’s other deferred tax assets.
ASU 2016-01 became effective for the Company on January 1, 2018. The adoption of ASU 2016-01 did not have a material impact on the Company’s consolidated financial statements.
ASU 2014-09, “Revenue from Contracts with Customers (Topic 606).” Issued in May 2014, ASU 2014-09 added FASB ASC Topic 606, Revenue from Contracts with Customers, and superseded revenue recognition requirements in FASB ASC Topic 605, Revenue Recognition and certain cost guidance in FASB ASC Topic 605-35, Revenue Recognition – Construction-Type and Production-Type Contracts. ASU 2014-09 requires an entity to recognize revenue when (or as) an entity transfers control of goods or services to a customer at the amount to which the entity expects to be entitled. Depending on whether certain criteria are met, revenue should be recognized either over time, in a manner that depicts the entity’s performance, or at a point in time, when control of the notesgoods or services is transferred to the 2016 Statements.customer.ASU 2014-09 became effective for the Company on January 1, 2018. The adoption of ASU 2014-09 did not have a material impact on the Company’s consolidated financial statements.
Revenue
On January 1, 2018, the Company implemented Accounting Standards Update 2014-09, Revenue from Contracts with Customers, codified at ASC Topic 606. The Company adopted ASC 606 using the modified retrospective transition method. As of December 31, 2017, the Company had no uncompleted customer contracts and, as a result, no cumulative transition adjustment was made during the first quarter of 2018. Results for reporting periods beginning January 1, 2018 are presented under ASC 606, while prior period amounts continue to be reported under legacy U.S. GAAP.
The majority of the Company’s revenue is generated through interest earned on financial instruments, including loans, which falls outside the scope of ASC 606. All of the Company’s revenue that is subject to ASC 606 would be included in non-interest income; however, not all non-interest income is subject to ASC 606. The Company had no contract liabilities or unsatisfied performance obligations with customers as of March 31, 2018.
Reclassifications
Certain prior year amounts have been reclassified for consistency with current period presentation.
2. Fair Value
Utilizing Financial Accounting Standards Board Accounting Standards Codification (“FASB ASC”) 820, the CompanyThere has established a framework for measuringbeen no change in our fair value under U.S. GAAP using a hierarchy, which requires the Company to maximize the use of observable inputs and minimize the use of unobservable inputs. Fair value measurements are an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. Three levels of inputs are used to measure fair value, as follows:
A financial instrument’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement.
Fair Value Measurements of Non-financial Instruments on a Recurring Basis
The Company has no non-financial instruments measured at fair value on a recurring basis.
Fair Value Measurements of Non-Financial Instruments on a Non-recurring Basis
Foreclosed Assets
Foreclosedassets consist of properties obtained through foreclosure or in satisfaction of loans and is recorded at the fair value of the property, less estimated costs to sell. Estimates of fair value are generally based on third-party appraisals of the property and are classified within Level 3 of the fair value hierarchy. The appraisals are sometimes discounted based on management’s knowledge of the property and/or changes in market conditions from the date of the most recent appraisal. Such discounts are typically significant unobservable inputs for determining fari value.policy during 2018.
The following tables presentspresent the balances of non-financial instruments measured at fair value on a non-recurring basis as of March 31, 20172018 and December 31, 2016.2017.
March 31, 20172018
Quoted Prices | ||||||||||||||||||||
in Active | Significant | |||||||||||||||||||
Markets for | Other | Significant | ||||||||||||||||||
Identical | Observable | Unobservable | ||||||||||||||||||
Carrying | Estimated | Assets | Inputs | Inputs | ||||||||||||||||
Amount | Fair Value | Level 1 | Level 2 | Level 3 | ||||||||||||||||
Foreclosed assets | $ | 1,081 | $ | 1,081 | $ | – | $ | – | $ | 1,081 |
Quoted | ||||||||||||||||||||
Prices | ||||||||||||||||||||
in Active | ||||||||||||||||||||
Markets | Significant | |||||||||||||||||||
for | Other | Significant | ||||||||||||||||||
Identical | Observable | Unobservable | ||||||||||||||||||
Carrying | Estimated | Assets | Inputs | Inputs | ||||||||||||||||
Amount | Fair Value | Level 1 | Level 2 | Level 3 | ||||||||||||||||
Foreclosed assets | $ | 1,079 | $ | 1,079 | $ | – | $ | – | $ | 1,079 |
December 31, 2016
Quoted Prices | ||||||||||||||||||||
in Active | Significant | |||||||||||||||||||
Markets for | Other | Significant | ||||||||||||||||||
Identical | Observable | Unobservable | ||||||||||||||||||
Carrying | Estimated | Assets | Inputs | Inputs | ||||||||||||||||
Amount | Fair Value | Level 1 | Level 2 | Level 3 | ||||||||||||||||
Foreclosed assets | $ | 2,798 | $ | 2,798 | $ | – | $ | – | $ | 2,798 |
Fair Value of Financial Instruments2017
ASC 825 requires disclosure of fair value information about financial instruments, whether or not recognized on the face of the balance sheet, for which it is practicable to estimate that value. The following methods and assumptions were used by the Company in estimating the fair value of its financial instruments:
Quoted | ||||||||||||||||||||
Prices | ||||||||||||||||||||
in Active | ||||||||||||||||||||
Markets | Significant | |||||||||||||||||||
for | Other | Significant | ||||||||||||||||||
Identical | Observable | Unobservable | ||||||||||||||||||
Carrying | Estimated | Assets | Inputs | Inputs | ||||||||||||||||
Amount | Fair Value | Level 1 | Level 2 | Level 3 | ||||||||||||||||
Foreclosed assets | $ | 1,036 | $ | 1,036 | $ | – | $ | – | $ | 1,036 |
Cash and Cash Equivalents
The carrying amount approximates fair value because of the short maturity of these instruments.
Loans Receivable and Commitments to Extend Credit
For variable rate loans that reprice frequently with no significant change in credit risk, estimated fair values of collateral are based on carrying values at both March 31, 2017 and December 31, 2016. Because the loans are demand loans and therefore have no known time horizon, there is no significant impact from fluctuating interest rates. For unfunded commitments to extend credit, because there would be no adjustment between fair value and carrying amount for the amount if actually loaned, there is no adjustment to the amount before it is loaned. The amount for commitments to extend credit is not listed in the tables below because there is no difference between carrying value and fair value, and the amount is not recorded on the consolidated balance sheets as a liability.
Interest Receivable
Although interest receivable from our customers does not yield additional interest to us, because interest is due roughly 10 days after it is billed, the impact is negligible and the fair value approximates the carrying value at both March 31, 2017 and December 31, 2016.
Customer Interest Escrow
The customer interest escrow does not yield interest to the customer, but because: 1) the customer loans are demand loans, 2) there is no way to estimate how long the escrow will be in place, and 3) the interest rate which could be used to discount this amount is negligible, the fair value approximates the carrying value at both March 31, 2017 and December 31, 2016.
Borrowings under Credit Facilities
The fair value of the Company’s borrowings under credit facilities is estimated based on the expected cash flows discounted using the current rates offered to the Company for debt of the same remaining maturities. As all of the borrowings under credit facilities or the Notes are either payable on demand or at similar rates to what the Company can borrow funds for today, the fair value of the borrowings is determined to approximate carrying value at both March 31, 2017 and December 31, 2016. The interest on our Notes offering is paid to our Note holders either monthly or at the end of their investment, compounded on a monthly basis. For the same reasons as the determination for the principal balances on the Notes, the fair value approximates the carrying value for the interest as well. The interest payable makes up the bulk of our accounts payable and accrued expenses.
The table below is a summary of fair value estimates for financial instruments and the level of the fair value hierarchy (as discussed in Note 2) within which the fair value measurements are categorized at the periods indicated:
March 31, 2018
Quoted Prices | ||||||||||||||||||||
in Active | Significant | |||||||||||||||||||
Markets for | Other | Significant | ||||||||||||||||||
Identical | Observable | Unobservable | ||||||||||||||||||
Carrying | Estimated | Assets | Inputs | Inputs | ||||||||||||||||
Amount | Fair Value | Level 1 | Level 2 | Level 3 | ||||||||||||||||
Financial Assets: | ||||||||||||||||||||
Cash and cash equivalents | $ | 380 | $ | 380 | $ | 380 | $ | – | $ | – | ||||||||||
Loans receivable, net | 39,692 | 39,692 | – | – | 39,692 | |||||||||||||||
Accrued interest receivable | 966 | 966 | – | – | 966 | |||||||||||||||
Financial Liabilities: | ||||||||||||||||||||
Customer interest escrow | 786 | 786 | – | – | 786 | |||||||||||||||
Notes payable related party | 1,000 | 1,000 | – | – | 1,000 | |||||||||||||||
Notes payable secured | 16,554 | 16,554 | – | – | 16,554 | |||||||||||||||
Notes payable unsecured, net | 18,002 | 18,002 | – | – | 18,002 | |||||||||||||||
Accrued interest payable | 1,373 | 1,373 | – | – | 1,373 |
MarchDecember 31, 2017
Quoted Prices | ||||||||||||||||||||
in Active | Significant | |||||||||||||||||||
Markets for | Other | Significant | ||||||||||||||||||
Identical | Observable | Unobservable | ||||||||||||||||||
Carrying | Estimated | Assets | Inputs | Inputs | ||||||||||||||||
Amount | Fair Value | Level 1 | Level 2 | Level 3 | ||||||||||||||||
Financial Assets | ||||||||||||||||||||
Cash and cash equivalents | $ | 586 | $ | 586 | $ | 586 | $ | – | $ | – | ||||||||||
Loans receivable, net | 24,167 | 24,167 | – | – | 24,167 | |||||||||||||||
Accrued interest on loans | 320 | 320 | – | – | 320 | |||||||||||||||
Financial Liabilities | ||||||||||||||||||||
Customer interest escrow | 1,021 | 1,021 | – | – | 1,021 | |||||||||||||||
Notes payable secured | 6,728 | 6,728 | – | – | 6,728 | |||||||||||||||
Notes payable unsecured, net | 13,587 | 13,587 | – | – | 13,587 | |||||||||||||||
Accrued interest payable | 998 | 998 | – | – | 998 |
December 31, 2016
Quoted Prices | Quoted Prices | |||||||||||||||||||||||||||||||||||||||
in Active | Significant | in Active | ||||||||||||||||||||||||||||||||||||||
Markets for | Other | Significant | Markets for | Significant Other | Significant | |||||||||||||||||||||||||||||||||||
Identical | Observable | Unobservable | Identical | Observable | Unobservable | |||||||||||||||||||||||||||||||||||
Carrying | Estimated | Assets | Inputs | Inputs | Carrying | Estimated | Assets | Inputs | Inputs | |||||||||||||||||||||||||||||||
Amount | Fair Value | Level 1 | Level 2 | Level 3 | Amount | Fair Value | Level 1 | Level 2 | Level 3 | |||||||||||||||||||||||||||||||
Financial Assets | ||||||||||||||||||||||||||||||||||||||||
Financial Assets: | ||||||||||||||||||||||||||||||||||||||||
Cash and cash equivalents | $ | 1,566 | $ | 1,566 | $ | 1,566 | $ | – | $ | – | $ | 3,478 | $ | 3,478 | $ | 3,478 | $ | – | $ | – | ||||||||||||||||||||
Loans receivable, net | 20,091 | 20,091 | – | – | 20,091 | 30,043 | 30,043 | – | – | 30,043 | ||||||||||||||||||||||||||||||
Accrued interest on loans | 280 | 280 | – | – | 280 | |||||||||||||||||||||||||||||||||||
Financial Liabilities | ||||||||||||||||||||||||||||||||||||||||
Accrued interest receivable | 720 | 720 | – | – | 720 | |||||||||||||||||||||||||||||||||||
Financial Liabilities: | ||||||||||||||||||||||||||||||||||||||||
Customer interest escrow | 812 | 812 | – | – | 812 | 935 | 935 | – | – | 935 | ||||||||||||||||||||||||||||||
Notes payable secured | 7,322 | 7,322 | – | – | 7,322 | 11,644 | 11,644 | – | – | 11,644 | ||||||||||||||||||||||||||||||
Notes payable unsecured, net | 11,962 | 11,962 | – | – | 11,962 | 16,904 | 16,904 | – | – | 16,904 | ||||||||||||||||||||||||||||||
Accrued interest payable | 993 | 993 | – | – | 993 | 1,353 | 1,353 | – | – | 1,353 |
3. Financing Receivables
Financing receivables are comprised of the following as of March 31, 20172018 and December 31, 2016:2017:
March 31, 2017 | December 31, 2016 | |||||||
Commercial loans, gross | $ | 26,121 | $ | 21,569 | ||||
Less: Deferred loan fees | (816 | ) | (618 | ) | ||||
Less: Deposits | (1,192 | ) | (861 | ) | ||||
Plus: Deferred origination expense | 119 | 55 | ||||||
Less: Allowance for loan losses | (65 | ) | (54 | ) | ||||
Commercial loans, net | $ | 24,167 | $ | 20,091 |
Roll forward of commercial loans:
Three Months Ended | Year Ended | Three Months Ended | ||||||||||
Beginning balance | $ | 20,091 | $ | 14,060 | $ | 14,060 | ||||||
Additions | 7,461 | 23,184 | 7,081 | |||||||||
Payoffs/sales | (2,909 | ) | (15,168 | ) | (3,620 | ) | ||||||
Moved to foreclosed assets | – | (1,639 | ) | – | ||||||||
Change in deferred origination expense | 64 | 55 | 10 | |||||||||
Change in builder deposit | (331 | ) | (340 | ) | (57 | ) | ||||||
Change in loan loss provision | (11 | ) | (16 | ) | (8 | ) | ||||||
New loan fees | (593 | ) | (1,270 | ) | (332 | ) | ||||||
Earned loan fees | 395 | 1,225 | 381 | |||||||||
Ending balance | $ | 24,167 | $ | 20,091 | $ | 17,515 |
March 31, 2018 | December 31, 2017 | |||||||
Loans receivable, gross | $ | 42,201 | $ | 32,375 | ||||
Less: Deferred loan fees | (932 | ) | (847 | ) | ||||
Less: Deposits | (1,573 | ) | (1,497 | ) | ||||
Plus: Deferred origination expense | 133 | 109 | ||||||
Less: Allowance for loan losses | (137 | ) | (97 | ) | ||||
Loans receivable, net | $ | 39,692 | $ | 30,043 |
Commercial Construction and Development Loans
Pennsylvania Loans
We have three development loans (the “Pennsylvania Loans”) covering two developments. The loans are to the same borrowing group (the “Hoskins Group”). They are cross-defaulted and cross-collateralized with each other. Our total commitment amount under the Pennsylvania Loans is approximately $5,231 as of March 31, 2017, as described in more detail below. As such, we are currently reliant on a single developer and homebuilder for a significant portion of our revenues. As part of our agreement with the Hoskins Group, they invest in our preferred equity in an amount equal to $10 per closing of a lot payoff in the two developments. We collected a fee of $1,000 upon closing of the loans in 2011, which was recognized through July 2016, the original expected life of the loan. Additionally, we created an interest escrow account (the “Interest Escrow”) which has been funded at various times by borrowings, and by a portion of each lot payoff. Interest on the Pennsylvania Loans accrues annually at 7% (2% prior to August 1, 2016) plus the greater of (i) 5.0% or (ii) the weighted average price paid by us on or in connection with all of our borrowed funds (such weighted average price includes interest rates, loan fees, legal fees and any and all other costs paid by us on our borrowed funds, and, in the case of funds borrowed by us from our affiliates, the weighted average price paid by such affiliate on or in connection with such borrowed funds) (“COF”). Pursuant to the credit agreement, interest payments on the loans are funded from the Interest Escrow, with any shortfall funded by the Hoskins Group. Loans may be prepaid in whole or in part at any time without penalty.
The loans are secured by several first priority mortgages in residential building lots located in the subdivisions commonly known as the Hamlets of Springdale and the Tuscany Subdivision, both in Peters Township, Pennsylvania, a suburb of Pittsburgh, as well as the Interest Escrow.
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, 2017. The Pennsylvania loans below are the Pennsylvania Loans discussed above.
State | Number of Borrowers | Number of Loans | Value of Collateral(1) | Commitment Amount | Gross Amount Outstanding | Loan to Value Ratio(2) | Loan Fee | |||||||||||||||||||||
Pennsylvania | 1 | 3 | $ | 6,333 | $ | 5,231 | (3) | $ | 3,901 | 62 | % | $ | 1,000 | |||||||||||||||
Total | 1 | 3 | $ | 6,333 | $ | 5,231 | $ | 3,901 | 62 | % | $ | 1,000 |
The following is a summary of our loan portfolio to builders for land development as of December 31, 2016. The Pennsylvania loans below are the Pennsylvania Loans discussed above.
State | Number of Borrowers | Number of Loans | Value of Collateral(1) | Commitment Amount | Gross Amount Outstanding | Loan to Value Ratio(2) | Loan Fee | |||||||||||||||||||||
Pennsylvania | 1 | 3 | $ | 6,586 | $ | 5,931 | (3) | $ | 4,082 | 62 | % | $ | 1,000 | |||||||||||||||
Total | 1 | 3 | $ | 6,586 | $ | 5,931 | $ | 4,082 | 62 | % | $ | 1,000 |
Commercial Loans – Construction Loan Portfolio Summary
As of March 31, 2017,2018, we have 43 other64 borrowers, all of whom, along withincluding our three development loan customers (the “Hoskins Group,” consisting of Benjamin Marcus Homes, LLC, Investor’s Mark Acquisitions, LLC, and Mark Hoskins, being the Hoskins Group,largest of the three), borrow money for the purpose of building new homes.
The following is a summary of our loan portfolio to builders for home construction loans as of March 31, 2017.2018 and December 31, 2017:
State | Number of Borrowers | Number of Loans | Value of Collateral(1) | Commitment Amount | Gross Amount Outstanding | Loan to Value Ratio(2) | Loan Fee | |||||||||||||||||||||
Colorado | 2 | 5 | $ | 2,314 | $ | 1,566 | $ | 694 | 68 | % | 5 | % | ||||||||||||||||
Connecticut | 1 | 1 | 715 | 500 | 500 | 70 | % | 5 | % | |||||||||||||||||||
Delaware | 1 | 1 | 244 | 171 | 40 | 70 | % | 5 | % | |||||||||||||||||||
Florida | 11 | 23 | 17,194 | 10,633 | 6,158 | 62 | % | 5 | % | |||||||||||||||||||
Georgia | 7 | 17 | 11,455 | 6,728 | 3,744 | 59 | % | 5 | % | |||||||||||||||||||
Indiana | 2 | 2 | 995 | 597 | 103 | 60 | % | 5 | % | |||||||||||||||||||
Michigan | 3 | 7 | 1,609 | 1,047 | 614 | 65 | % | 5 | % | |||||||||||||||||||
New Jersey | 3 | 8 | 2,023 | 1,451 | 996 | 72 | % | 5 | % | |||||||||||||||||||
New York | 1 | 6 | 1,855 | 853 | 805 | 46 | % | 5 | % | |||||||||||||||||||
North Carolina | 1 | 2 | 490 | 343 | 131 | 70 | % | 5 | % | |||||||||||||||||||
Ohio | 1 | 1 | 1,405 | 843 | 505 | 60 | % | 5 | % | |||||||||||||||||||
Pennsylvania | 2 | 16 | 13,170 | 6,887 | 5,758 | 52 | % | 5 | % | |||||||||||||||||||
South Carolina | 8 | 15 | 4,106 | 2,709 | 999 | 66 | % | 5 | % | |||||||||||||||||||
Tennessee | 1 | 3 | 1,080 | 767 | 606 | 71 | % | 5 | % | |||||||||||||||||||
Utah | 1 | 3 | 1,133 | 793 | 472 | 70 | % | 5 | % | |||||||||||||||||||
Virginia | 1 | 1 | 408 | 260 | 95 | 64 | % | 5 | % | |||||||||||||||||||
Total | 45 | (4) | 111 | $ | 60,196 | $ | 36,148 | $ | 22,221 | 60 | %(3) | 5 | % |
Year | Number of States | Number of Borrowers | Number of Loans | Value of Collateral(1) | Commitment Amount | Gross Amount Outstanding | Loan to Value Ratio(2) | Loan Fee | ||||||||||||||||||||||||
2018 | 17 | 64 | 199 | $ | 84,753 | $ | 54,773 | $ | 36,959 | 65 | %(3) | 5 | % | |||||||||||||||||||
2017 | 16 | 52 | 168 | 75,931 | 47,087 | 29,563 | 62 | %(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 home construction loansland development as of March 31, 2018 and December 31, 2016.2017:
State | Number of Borrowers | Number of Loans | Value of Collateral(1) | Commitment Amount | Gross Amount Outstanding | Loan to Value Ratio(2) | Loan Fee | |||||||||||||||||||||
Colorado | 1 | 3 | $ | 1,615 | $ | 1,131 | $ | 605 | 70 | % | 5 | % | ||||||||||||||||
Connecticut | 1 | 1 | 715 | 500 | 479 | 70 | % | 5 | % | |||||||||||||||||||
Delaware | 1 | 2 | 244 | 171 | 40 | 70 | % | 5 | % | |||||||||||||||||||
Florida | 7 | 15 | 14,014 | 8,548 | 4,672 | 61 | % | 5 | % | |||||||||||||||||||
Georgia | 4 | 9 | 6,864 | 4,249 | 2,749 | 62 | % | 5 | % | |||||||||||||||||||
Idaho | 1 | 1 | 319 | 215 | 205 | 67 | % | 5 | % | |||||||||||||||||||
Michigan | 1 | 1 | 210 | 126 | 118 | 60 | % | 5 | % | |||||||||||||||||||
New Jersey | 1 | 3 | 977 | 719 | 528 | 74 | % | 5 | % | |||||||||||||||||||
New York | 1 | 4 | 1,745 | 737 | 685 | 42 | % | 5 | % | |||||||||||||||||||
North Carolina | 2 | 2 | 1,015 | 633 | 216 | 62 | % | 5 | % | |||||||||||||||||||
Ohio | 1 | 1 | 1,405 | 843 | 444 | 60 | % | 5 | % | |||||||||||||||||||
Pennsylvania | 2 | 15 | 12,725 | 6,411 | 5,281 | 50 | % | 5 | % | |||||||||||||||||||
South Carolina | 5 | 7 | 2,544 | 1,591 | 783 | 63 | % | 5 | % | |||||||||||||||||||
Tennessee | 1 | 3 | 1,080 | 767 | 430 | 71 | % | 5 | % | |||||||||||||||||||
Utah | 1 | 2 | 715 | 500 | 252 | 70 | % | 5 | % | |||||||||||||||||||
Total | 30 | 69 | $ | 46,187 | $ | 27,141 | $ | 17,487 | 59 | %(3) | 5 | % |
Year | Number of States | Number of Borrowers | Number of Loans(4) | Gross Value of Collateral(1) | Commitment Amount(3) | Gross Amount Outstanding | Loan to Value Ratio(2) | Loan Fee | ||||||||||||||||||||||||
2018 | 3 | 3 | 6 | $ | 8,019 | $ | 6,362 | $ | 5,242 | 65 | % | $ | 1,000 | |||||||||||||||||||
2017 | 1 | 1 | 3 | 4,997 | 4,600 | 2,811 | 56 | % | 1,000 |
(1) | The value is determined by the appraised |
(2) | The loan to value ratio is calculated by taking the |
(3) | |
(4) | As of December 31, 2017, our development loans consisted of borrowings which originated in December 2011 and to which we refer throughout this report as the |
Credit Quality Information
The following table presents credit-related information at the “class” level in accordance with FASB ASCFinancial Accounting Standards Board Accounting Standards Codification 310-10-50,Disclosures about the Credit Quality of Finance Receivables and the Allowance for Credit Losses. A class is generally a disaggregation of a portfolio segment. In determiningSee our Form 10-K for the classes,year ended December 31, 2017, as filed with the Company considered theSEC, for more information.
Gross finance receivable characteristics and methods it applies in monitoring and assessing credit risk and performance.
The following table summarizes finance receivables by the risk ratings that regulatory agencies utilize to classify credit exposure and which are consistent with indicators the Company monitors. Risk ratings are reviewed on a regular basis and are adjusted as necessary for updated information affecting the borrowers’ ability to fulfill their obligations.
The definitions of these ratings are as follows:
Finance Receivables – By risk rating:
March 31, 2017 | December 31, 2016 | March 31, 2018 | December 31, 2017 | |||||||||||||
Pass | $ | 22,448 | $ | 18,275 | $ | 31,194 | $ | 25,656 | ||||||||
Special mention | 3,673 | 3,294 | 7,231 | 6,719 | ||||||||||||
Classified – accruing | – | – | 3,776 | – | ||||||||||||
Classified – nonaccrual | – | – | – | – | ||||||||||||
Total | $ | 26,121 | $ | 21,569 | $ | 42,201 | $ | 32,375 |
Finance ReceivablesGross finance receivables – Method of impairment calculation:
March 31, 2017 | December 31, 2016 | March 31, 2018 | December 31, 2017 | |||||||||||||
Performing loans evaluated individually | $ | 9,555 | $ | 12,424 | $ | 11,217 | $ | 14,992 | ||||||||
Performing loans evaluated collectively | 16,566 | 9,145 | 27,208 | 17,383 | ||||||||||||
Non-performing loans without a specific reserve | – | – | 3,776 | – | ||||||||||||
Non-performing loans with a specific reserve | – | – | – | – | ||||||||||||
Total | $ | 26,121 | $ | 21,569 | $ | 42,201 | $ | 32,375 |
At March 31, 20172018 and December 31, 2016,2017, there were no loans acquired with deteriorated credit quality, loans past due 90 or more days, impaired loans, or loans on nonaccrual status.quality.
Concentrations
Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of loans receivable. Our concentration risks for individual borrowers are summarized in the table below:
March 31, 2017 | December 31, 2016 | |||||||||||
Percent of | Percent of | |||||||||||
Borrower | Loan | Borrower | Loan | |||||||||
City | Commitments | City | Commitments | |||||||||
Highest concentration risk | Pittsburgh, PA | 28 | % | Pittsburgh, PA | 37 | % | ||||||
Second highest concentration risk | Sarasota, FL | 9 | % | Sarasota, FL | 11 | % | ||||||
Third highest concentration risk | Savannah, GA | 5 | % | Savannah, GA | 6 | % |
At March 31, 2017, our loans were significantly concentrated in a suburb of Pittsburgh, Pennsylvania, so the housing starts and prices in that area are more significant to our business than other areas until and if more loans are created in other markets.
March 31, 2018 | December 31, 2017 | |||||||||||
Percent of | Percent of | |||||||||||
Borrower | Loan | Borrower | Loan | |||||||||
City | Commitments | City | Commitments | |||||||||
Highest concentration risk | Pittsburgh, PA | 21 | % | Pittsburgh, PA | 22 | % | ||||||
Second highest concentration risk | Sarasota, FL | 6 | % | Sarasota, FL | 7 | % | ||||||
Third highest concentration risk | Orlando, FL | 5 | % | Savannah, GA | 5 | % |
4. Foreclosed Assets
Roll forward of Foreclosed Assets:foreclosed assets:
Three Months Ended | Year Ended | Three Months Ended | ||||||||||
Beginning balance | $ | 2,798 | $ | 965 | $ | 965 | ||||||
Additions from loans | – | 1,813 | – | |||||||||
Additions for construction/development | 145 | 566 | 213 | |||||||||
Sale proceeds | (1,890 | ) | (463 | ) | – | |||||||
Gain on sale | 77 | 28 | – | |||||||||
Impairment loss on foreclosed assets | (49 | ) | (111 | ) | – | |||||||
Ending balance | $ | 1,081 | $ | 2,798 | $ | 1,178 |
Three Months Ended March 31, 2018 | Year Ended December 31, 2017 | Three Months Ended March 31, 2017 | ||||||||||
Beginning balance | $ | 1,036 | $ | 2,798 | $ | 2,798 | ||||||
Additions for construction/development | 48 | 317 | 296 | |||||||||
Sale proceeds | - | (1,890 | ) | (1,890 | ) | |||||||
Gain on sale | - | 77 | 77 | |||||||||
Impairment loss on foreclosed assets | (5 | ) | (266 | ) | (202 | ) | ||||||
Ending balance | $ | 1,079 | $ | 1,036 | $ | 1,079 |
5. Property, Plant and Equipment
We purchased a partially completed building in which we plan to operate for $625 in the first quarter of 2017. No depreciation has been recorded as the asset has not been placed in service.
6. Borrowings
The following table displays our borrowings and a ranking of priority:
Priority Rank | March 31, 2017 | December 31, 2016 | Priority Rank | March 31, 2018 | December 31, 2017 | |||||||||||||||||||
Borrowing Source | ||||||||||||||||||||||||
Purchase and sale agreements | 1 | $ | 6,728 | $ | 7,322 | |||||||||||||||||||
Purchase and sale agreements and other secured borrowings | 1 | $ | 16,559 | $ | 11,644 | |||||||||||||||||||
Secured line of credit from affiliates | 2 | – | – | 2 | 1,000 | – | ||||||||||||||||||
Unsecured line of credit (senior) | 3 | – | – | 3 | 500 | – | ||||||||||||||||||
Other unsecured debt (senior subordinated) | 4 | 279 | 279 | 4 | 1,007 | 279 | ||||||||||||||||||
Unsecured Notes through our public offering | 5 | 12,792 | 11,221 | |||||||||||||||||||||
Unsecured Notes through our public offering, gross | 5 | 13,785 | 14,121 | |||||||||||||||||||||
Other unsecured debt (subordinated) | 5 | 700 | 700 | 5 | 2,387 | 2,617 | ||||||||||||||||||
Other unsecured debt (junior subordinated) | 6 | 173 | 173 | 6 | 590 | 173 | ||||||||||||||||||
Total | $ | 20,672 | $ | 19,695 | $ | 35,828 | $ | 28,834 |
The following table shows the maturity of outstanding debt as of March 31, 2017.2018.
Year Maturing | Total Amount Maturing | Public Offering | Other Unsecured | Purchase and Sale Agreements | Total Amount Maturing | Public Offering | Other Unsecured | Purchase and Sale Agreements and other secured borrowings | ||||||||||||||||||||||||
2017 | $ | 8,575 | $ | 1,247 | $ | 600 | $ | 6,728 | ||||||||||||||||||||||||
2018 | 3,091 | 3,091 | – | – | $ | 22,413 | $ | 3,547 | $ | 1,954 | $ | 16,912 | ||||||||||||||||||||
2019 | 3,563 | 3,563 | – | – | 4,876 | 4,029 | 833 | 14 | ||||||||||||||||||||||||
2020 | 2,578 | 2,578 | – | – | 2,269 | 2,154 | 100 | 15 | ||||||||||||||||||||||||
2021 | 2,865 | 2,313 | 552 | – | 3,904 | 3,889 | - | 15 | ||||||||||||||||||||||||
2022 and thereafter | 2,366 | 166 | 1,597 | 603 | ||||||||||||||||||||||||||||
Total | $ | 20,672 | $ | 12,792 | $ | 1,152 | $ | 6,728 | $ | 35,828 | $ | 13,785 | $ | 4,484 | $ | 17,559 |
Secured Borrowings
Purchase and Sale Agreements
We have two current purchaseIn March 2018, we entered into the Seventh Amendment (the “Seventh Amendment”) to our Loan Purchase and sale agreement relationships where we are the seller of portions of loans we create. The two purchasers are Builder Finance, Inc. andSale Agreement (the “S.K. Funding LPSA”) with S.K. Funding, LLC. Generally, the purchasers buy between 50% and 70% of each loan sold. Builder Finance, Inc., a subsidiary of 1st Financial Bank, USA, began purchasing portions of loans effective as of August 1, 2016. Prior to August 1, 2016, 1st Financial Bank, USA had purchased these loans under a separate loan purchase and sale agreement.LLC (“S.K. Funding”).
The buyers receive interest rates ranging from our cost of funds to the note rate charged to the borrower (interest rates we paid were between 9% and 12% for both 2017 and 2016). The buyers generally receive nonepurpose of the loan fees we charge. We have the rightSeventh Amendment was to call some of the loans sold, with some restrictions. Once sold, the buyer must fund theirallow S.K. Funding to purchase a portion of the loans purchased. We servicePennsylvania Loans for a purchase price of $649 under parameters different from those specified in the loans. Also, there are limited put options in some cases, wherebyS.K. Funding LPSA.
The timing of the purchaser can cause usCompany’s principal and interest payments to repurchase a loan. The purchaseS.K. Funding under the Seventh Amendment, and sale agreements are recordedS.K. Funding’s obligation to fund the Pennsylvania Loans, vary depending on the total principal amount of the Pennsylvania Loans outstanding at any time, as secured borrowings.follows:
● | If the total principal amount exceeds $1,000, S.K. Funding must fund the amount between $1,000 and less than or equal to $3,500. | |
● | If the total principal amount is less than $4,500 the Company will also repay S.K. Funding’s principal as principal payments are received on the Pennsylvania Loans from the underlying borrowers in the amount by which the total principal amount is less than $4,500 until S.K. Funding’s principal has been repaid in full. | |
● | The interest rate accruing to S.K. Funding under the Seventh Amendment is 10.5% calculated on a 365/366-day basis. |
The purchaseSeventh Amendment has a term of 24 months and sale agreements are detailed below:will automatically renew for an additional six-month term unless either party gives written notice of its intent not to renew at least six months prior to the end of a term. S.K. Funding will have a priority position as compared to the Company in the case of a default by any of the borrowers.
March 31, 2017 | December 31, 2016 | |||||||||||||||
Book Value of | Due From | Book Value of | Due From | |||||||||||||
Loans which | Shepherd’s | Loans which | Shepherd’s | |||||||||||||
Served as | Finance to Loan | Served as | Finance to Loan | |||||||||||||
Collateral | Purchaser | Collateral | Purchaser | |||||||||||||
Loan purchaser | ||||||||||||||||
1st Financial Bank, USA/Builder Finance, Inc. | $ | 5,706 | $ | 3,025 | $ | 5,779 | $ | 2,517 | ||||||||
S.K. Funding, LLC | 8,182 | 3,703 | 7,770 | 4,805 | ||||||||||||
Total | $ | 13,888 | $ | 6,728 | $ | 13,549 | $ | 7,322 |
Lines of Credit
At December 31, 2016,During March 2018, we borrowed $1,000 against our line of credit with our Chief Executive Officer and his wife. Interest was $4 and $0 in the $7,770first quarter of loans which served as collateral2018 and 2017, respectively. The interest rate for S.K. Funding does not include the book value of the foreclosed assets which also secured their position, which amountthis borrowing was $1,813. There were no foreclosed assets securing S.K. Funding, LLC’s position4.4% as of March 31, 2017.2018.
During July 2017, we entered into a line of credit agreement (the “Shuman LOC Agreement”) with a group of lenders (collectively, “Shuman”). Pursuant to the Shuman LOC Agreement, Shuman provides us with a revolving line of credit (the “Shuman LOC”) with the following terms:
● | Principal not to exceed $1,325; | |
● | Secured with assignments of certain notes and mortgages; | |
● | Cost of funds to us of 10%; and | |
● | Due in July 2018 unless extended by Shuman for one or more additional 12-month periods. |
The Shuman LOC was fully borrowed as of March 31, 2018
During October 2017, we entered into a line of credit agreement (the “Swanson LOC Agreement”) with Paul Swanson. Pursuant to the Swanson LOC Agreement, Mr. Swanson provides us with a revolving line of credit (the “Swanson LOC”) with the following terms:
● | Principal not to exceed $4,000; | |
● | Secured with assignments of certain notes and mortgages; | |
● | Cost of funds to us of 10%; and | |
● | Duein January 2019 unless extended by Mr. Swanson for one or more additional 15-month periods. |
As of March 31, 2018, we have borrowed $3,851 under the Swanson LOC.
Mortgage Payable
During the first quarter of 2018, we entered into a commercial mortgage on our office building with the following terms:
● | Principal not to exceed $660; | |
● | Secured with assignments of certain notes and mortgages; | |
● | Interest rate at 5.07% per annum based on a year of 360 days; and | |
● | Due in January 2033. |
Affiliate LoansSummary
In December 2011, the Company entered into two secured revolving linesThe Purchase and Sale Agreements and Lines of credit with affiliates, both of whomCredit are members. These loans have an interest rate of the affiliates’ cost of funds, which was 4.19% as of both March 31, 2017 and December 31, 2016, respectively. They are demand notes. The maximum that can be borrowed under these notes is $1,500, at the discretion of the lenders. The security for the lines of credit includes all of the assets of the Company. The Company has not borrowed on these lines in either 2017 or 2016.summarized below:
March 31, 2018 | December 31, 2017 | |||||||||||||||
Due From | Due From | |||||||||||||||
Book Value of | Shepherd’s | Book Value of | Shepherd’s | |||||||||||||
Loans which | Finance to Loan | Loans which | Finance to Loan | |||||||||||||
Served as Collateral | Purchaser or Lender | Served as Collateral | Purchaser or Lender | |||||||||||||
Loan Purchaser | ||||||||||||||||
Builder Finance, Inc. | $ | 7,506 | $ | 4,262 | $ | 7,483 | $ | 4,089 | ||||||||
S.K. Funding | 13,046 | 6,463 | 9,128 | 4,134 | ||||||||||||
Lender | ||||||||||||||||
Shuman | 2,134 | 1,325 | 1,747 | 1,325 | ||||||||||||
Paul Swanson | 5,147 | 3,851 | 2,518 | 2,096 | ||||||||||||
Total | $ | 27,833 | $ | 15,901 | $ | 20,876 | $ | 11,644 |
Unsecured Borrowings
Other Unsecured LoansDebts
In August 2015, we entered into anOur other unsecured note with Seven Kings Holdings, Inc. (“7Kings”), under which wedebts are the borrower. Thedetailed below:
Principal Amount Outstanding as of | ||||||||||||||
Maturity | Interest | March 31, | December 31, | |||||||||||
Loan | Date | Rate(1) | 2018 | 2017 | ||||||||||
Unsecured Note with Seven Kings Holdings, Inc. | August 2018 | 7.5 | % | 500 | 500 | |||||||||
Unsecured Line of Credit from Builders Finance, Inc. | January 2019 | 10.0 | % | 500 | - | |||||||||
Unsecured Line of Credit from Paul Swanson | June 2018(2) | 10.0 | % | 149 | 1,904 | |||||||||
Subordinated Promissory Note | Demand(3) | 7.5 | % | 1,125 | - | |||||||||
Subordinated Promissory Note | December 2019 | 10.5 | % | 113 | 113 | |||||||||
Subordinated Promissory Note | April 2020 | 10.0 | % | 100 | 100 | |||||||||
Senior Subordinated Promissory Note | March 2022(4) | 10.0 | % | 400 | - | |||||||||
Senior Subordinated Promissory Note | March 2022 | 1.0 | % | 728 | - | |||||||||
Junior Subordinated Promissory Note | March 2022 | 22.5 | % | 417 | - | |||||||||
Senior Subordinated Promissory Note | October 2022 | 1.0 | % | 279 | 279 | |||||||||
Junior Subordinated Promissory Note | October 2022 | 20.0 | % | 173 | 173 | |||||||||
$ | 4,484 | $ | 3,069 |
(1)Interest rate per annum, based upon actual days outstanding and a 365/366 day year.
(2)Due in June 2018 unless extended by Mr. Swanson for one or more additional 15-month periods.
(3)Principal due six months after lender gives notice. This note has a maximum amount outstanding of $500, of which $500 was outstanding as of both March 31, 2017 and December 31, 2016. Interest on the 7Kings loan accrues annually at a rate of 7.5%. The note was due on February 19, 2016 and was renewed several times. The maturity date is now August 18, 2017 and may be prepaid at any time without fee, premium or penalty. Interest is due at the end of each month and was $9 for both of the three month periods ended March 31, 2017 and 2016.
We have four other unsecured notes, which are listed in the first two tables(4)This note may be prepaid upon lender's request at least 10 days prior to an interest payment and up to $20 of this Note 6. The interest rates and priorities vary. We recorded $15 and $2 in interest related to these four notes for the three months ended March 31, 2017 and 2016, respectively.principal.
Unsecured Notes through the Public Offering (Notes Program)(“Notes Program”)
The effective interest rate on the unsecured subordinated notes (the “Notes”)Notes offered pursuant to our public offeringthe Notes Program at March 31, 20172018 and December 31, 20162017 was 8.58%9.16% and 8.26%9.21%, respectively, not including the amortization of deferred financing costs. There are limited rights of early redemption. We generally offer four durations at any given time, ranging anywhere from 12 to 48 months. The following table shows the roll forward of our Notes program:Program:
Three Months Ended March 31, 2017 | Year Ended December 31, 2016 | Three Months Ended March 31, 2016 | Three Months Ended March 31, 2018 | Year Ended December 31, 2017 | Three Months Ended March 31, 2017 | |||||||||||||||||||
Gross notes outstanding, beginning of period | $ | 11,221 | $ | 8,496 | $ | 8,496 | ||||||||||||||||||
Gross Notes outstanding, beginning of period | $ | 14,121 | $ | 11,221 | $ | 11,221 | ||||||||||||||||||
Notes issued | 4,144 | 4,972 | 633 | 1,309 | 8,375 | 4,144 | ||||||||||||||||||
Note repayments / redemptions | (2,573 | ) | (2,247 | ) | (10 | ) | (1,645 | ) | (5,475 | ) | (2,573 | ) | ||||||||||||
Gross notes outstanding, end of period | $ | 12,792 | $ | 11,221 | $ | 9,119 | ||||||||||||||||||
Gross Notes outstanding, end of period | $ | 13,785 | $ | 14,121 | $ | 12,792 | ||||||||||||||||||
Less deferred financing costs, net | 357 | 411 | 551 | 267 | 286 | 357 | ||||||||||||||||||
Notes outstanding, net | $ | 12,435 | $ | 10,810 | $ | 8,568 | $ | 13,518 | $ | 13,835 | $ | 12,435 |
The following is a roll forward of deferred financing costs:
Three Months | Three Months | Three Months | Year | Three Months | ||||||||||||||||||||
Ended | Year Ended | Ended | Ended | Ended | Ended | |||||||||||||||||||
March 31, 2017 | December 31, 2016 | March 31, 2016 | March 31, 2018 | December 31, 2017 | March 31, 2017 | |||||||||||||||||||
Deferred financing costs, beginning balance | $ | 1,014 | $ | 935 | $ | 935 | $ | 1,102 | $ | 1,014 | $ | 1,014 | ||||||||||||
Additions | 10 | 79 | 19 | 29 | 88 | 10 | ||||||||||||||||||
Deferred financing costs, ending balance | $ | 1,024 | $ | 1,014 | $ | 954 | $ | 1,131 | $ | 1,102 | $ | 1,024 | ||||||||||||
Less accumulated amortization | (667 | ) | (603 | ) | (403 | ) | (864 | ) | (816 | ) | (667 | ) | ||||||||||||
Deferred financing costs, net | $ | 357 | $ | 411 | $ | 551 | $ | 267 | $ | 286 | $ | 357 |
The following is a roll forward of the accumulated amortization of deferred financing costs:
Three Months | Three Months | |||||||||||
Ended | Year Ended | Ended | ||||||||||
March 31, 2017 | December 31, 2016 | March 31, 2016 | ||||||||||
Accumulated amortization, beginning balance | $ | 603 | $ | 336 | $ | 336 | ||||||
Additions | 64 | 267 | 67 | |||||||||
Accumulated amortization, ending balance | $ | 667 | $ | 603 | $ | 403 |
Three Months | Year | Three Months | ||||||||||
Ended | Ended | Ended | ||||||||||
March 31, 2018 | December 31, 2017 | March 31, 2017 | ||||||||||
Accumulated amortization, beginning balance | $ | 816 | $ | 603 | $ | 603 | ||||||
Additions | 48 | 213 | 64 | |||||||||
Accumulated amortization, ending balance | $ | 864 | $ | 816 | $ | 667 |
7.6. Redeemable Preferred Equity
The following is a roll forward our of Series C cumulative preferred units were issued to Margaret Rauscher IRA LLC (Margaret Rauscher is the wife of our manager Eric Rauscher). They 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 equity (“Series C units have a fixed value which is their purchase price, and preferred liquidation and distribution rights. Yearly distributions of 12% of the Series C units’ value (provided profits are available) will be made quarterly. This rate can increase if our interest rates on our Note Program rise above 12%. Dividends can be reinvested monthly into additional Series C units.Preferred Units”):
Roll forward of redeemable preferred equity:
Three Months Ended | Year Ended | Three Months Ended | ||||||||||
Beginning balance | $ | – | $ | – | $ | – | ||||||
Additions from new investment | 440 | – | – | |||||||||
Ending balance | $ | 440 | $ | – | $ | – |
Three Months Ended March 31, 2018 | Year Ended December 31, 2017 | Three Months Ended March 31, 2017 | ||||||||||
Beginning balance | $ | 1,097 | $ | – | $ | – | ||||||
Additions from new investment | – | 1,004 | 440 | |||||||||
Additions from reinvestment | 33 | 93 | – | |||||||||
Ending balance | $ | 1,130 | $ | 1,097 | $ | 440 |
The following table shows the earliest redemption options for investors in our Series C unitsPreferred Units as of March 31, 2017.2018:
Year Maturing | Total Amount Redeemable | Total Amount Redeemable | |||||||
2023 | $ | 440 | $ | 1,130 | |||||
Total | $ | 440 | $ | 1,130 |
8.7. Members’ Capital
There are currently threetwo classes of units:units outstanding: Class A common units (“Class A Common Units”) and Series B cumulative preferred units and (“Series C cumulative preferred units.
B Preferred Units”). The Class A common unitsCommon Units are held by eightnine 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 unitsCommon Units outstanding at both March 31, 20172018 and December 31, 2016. On December 31, 2015, an affiliate2017.
In January 2018, our Chief Financial Officer and Executive Vice President of 7Kings, S.K. Funding, LLC,Operations purchased 4%2% and 1% of our common equityoutstanding Class A Common Units, respectively, from the Wallach family.our CEO. In March 2017, S.K. Funding, LLC sold its 4% interest in our common equity in equal 1% portions to each of our three independent managers and2018, our Executive Vice President of Operations.Sales purchased 14.3% of our outstanding Class A Common Units from our CEO.
The Series B cumulative preferred units were issued to the Hoskins Group through a reduction in a loan issued by the Hoskins Group to the Company. The Series B preferred units are redeemable only at the option of the Company or upon a change or control or liquidation. Ten Series B preferred units were initially issued for a total of $1,000. The Series B preferred units have a fixed value which is their purchase price, and preferred liquidation and distribution rights. Yearly distributions of 10% of the Series B preferred units’ value (provided profits are available) will be made quarterly. The Hoskins Group’s Series B preferred units are also used as collateral for that group’s loans to the Company. There is no liquid market for the Series B preferred units, so we can give no assurance as to our ability to generate any amount of proceeds from that collateral. In December 2015, the Hoskins Group agreed to purchase 0.1 units of Series B preferred units for $10 at each closing of a lot to a third party in the Hamlets and Tuscany subdivision. As of March 31, 2017, the Hoskins Group owns a total of 11.6 Series B preferred units, which were issued for a total of $1,160.
There are two additional authorized unit classes, of which no units are outstanding: Class A preferred units and Class B profit units. Once Class B profit units are issued, the existing Class A common units will become Class A preferred units. Class A preferred units will receive preferred treatment in terms of distributions and liquidation proceeds.
The members’ capital balances by class are as follows:
Class | March 31, 2017 | December 31, 2016 | ||||||
B Preferred Units | $ | 1,160 | $ | 1,150 | ||||
A Common Units | 2,397 | 2,249 | ||||||
Members’ Capital | $ | 3,557 | $ | 3,399 |
9.8. Related Party Transactions
The Company has a loan agreement with twoAs of March 31, 2018, each of our affiliates, as more fully described in Note 6 –Affiliate Loans.
The Company has loan agreements with the Hoskins Group, as more fully described in Note 3.
The Hoskins Group has a preferred equity interest in the Company, as more fully described in Note 8.
Each of our threetwo independent managers on our board of managers and our Executive Vice President of Operations own 1% of our Class A common units.Common Units. As of March 31, 2018, our CFO, Executive Vice President of Operations, and Executive Vice President of Sales each own 2%, 2%, and 15.3% of our Class A Common Units, respectively.
The Company has accepted new investments underIn March 2018, we borrowed $1,000 against our line of credit with our CEO and his wife. A more detailed description is included in Note 5 above. This borrowing is included in notes payable secured, net of deferred financing costs on the Notes program from employees, managers, members and relatives of managers and members, with $2,355 and $2,197 outstanding at March 31, 2017 and December 31, 2016, respectively. The larger of these investments are detailed below:interim condensed consolidated balance sheet.
Weighted average interest | Interest earned during the three months ended | |||||||||||||||||||||
Relationship to | Amount invested as of | rate as of | March 31, | |||||||||||||||||||
Investor | Shepherd’s Finance | March 31, 2017 | March 31, 2016 | March 31, 2017 | 2017 | 2016 | ||||||||||||||||
William Myrick | Independent Manager | $ | 260 | $ | 288 | 8.94 | % | $ | 7 | $ | 6 | |||||||||||
R. Scott Summers | Son of Independent Manager | 275 | 375 | 8.00 | % | 3 | 6 | |||||||||||||||
Wallach Family Irrevocable Educational Trust | Trustee is Member | 200 | 200 | 9.00 | % | 5 | 4 | |||||||||||||||
Eric Rauscher | Independent Manager | 475 | 600 | 10.00 | % | 9 | 11 | |||||||||||||||
Joseph Rauscher | Parents of Independent Manager | 195 | 186 | 9.33 | % | 4 | 4 | |||||||||||||||
Seven Kings Holdings, Inc.(1) | Affiliate of Member | 500 | 500 | 9.00 | % | 11 | 9 |
10.In February 2018, we issued a Subordinated Promissory Note in the principal amount of $1,125 to a trust affiliated with Seven Kings Holdings, Inc. One of our independent managers, Kenneth R. Summers, is the trustee of that trust. This borrowing is included in notes payable unsecured, net of deferred financing costs on the interim condensed consolidated balance sheet.
In March 2018, we issued a Senior Subordinated Promissory Note in the principal amount of $400 to family members of one of our CEO.This borrowing is included in the notes payable unsecured, net of deferred financing costs on the interim condensed consolidated balance sheet.
In March 2018, we issued a Senior Subordinated Promissory Note in the principal amount of $400 to family members of one of our CEO.
9. Commitments and Contingencies
In the normal course of business there may be outstanding commitments to extend credit that are not included in the consolidated financial statements. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon and some of the funding may come from the earlier repayment of the same loan (in the case of revolving lines), the total commitment amounts do not necessarily represent future cash requirements. The financial instruments involve, to varying degrees, elements of credit and interest rate risk in excess of amounts recognized in the consolidated financial statements. The Company evaluates each customer’s creditworthiness on a case-by-case basis. The Company has several Letters of Credit relating to development loans which are part of the unfunded commitment amount. Unfunded commitments to extend credit, which have similar collateral, credit risk, and market risk to our outstanding loans, were $15,257$18,935 and $11,503$19,312 at March 31, 20172018 and December 31, 2016,2017, respectively.
11.10. Selected Quarterly Condensed Consolidated Financial Data (Unaudited)
Summarized unaudited quarterly condensed consolidated financial data for the four quarters of 2017each of 2018 and 20162017 are as follows (in thousands):follows:
Quarter 4 | Quarter 3 | Quarter 2 | Quarter 1 | Quarter 4 | Quarter 3 | Quarter 2 | Quarter 1 | Quarter 1 | Quarter 4 | Quarter 3 | Quarter 2 | Quarter 1 | ||||||||||||||||||||||||||||||||||||||||
2017 | 2017 | 2017 | 2017 | 2016 | 2016 | 2016 | 2016 | 2018 | 2017 | 2017 | 2017 | 2017 | ||||||||||||||||||||||||||||||||||||||||
Net Interest Income after Loan Loss Provision | $ | – | $ | – | $ | – | $ | 617 | $ | 491 | $ | 442 | $ | 464 | $ | 479 | $ | 926 | $ | 802 | $ | 917 | $ | 725 | $ | 617 | ||||||||||||||||||||||||||
Non-Interest Income | – | – | – | 77 | 28 | – | 44 | – | – | – | – | – | 77 | |||||||||||||||||||||||||||||||||||||||
SG&A expense | – | – | – | 454 | 367 | 297 | 305 | 350 | 617 | 643 | 537 | 456 | 448 | |||||||||||||||||||||||||||||||||||||||
Depreciation and Amortization | 17 | – | – | – | 6 | |||||||||||||||||||||||||||||||||||||||||||||||
Impairment loss on foreclosed assets | – | – | – | 49 | 111 | – | – | – | 5 | 64 | 47 | 106 | 49 | |||||||||||||||||||||||||||||||||||||||
Net Income | $ | – | $ | – | $ | – | $ | 191 | $ | 41 | $ | 145 | $ | 203 | $ | 129 | $ | 287 | $ | 95 | $ | 333 | $ | 163 | $ | 191 |
12.11. Non-Interest expense detail
The following table displays our selling, general and administrative (“SG&A&A”) expenses:
For the Three Months Ended March 31, | For the Three Months Ended March 31, | |||||||||||||||
2017 | 2016 | 2018 | 2017 | |||||||||||||
Selling, general and administrative expenses | ||||||||||||||||
Legal and accounting | $ | 96 | $ | 86 | $ | 143 | $ | 96 | ||||||||
Salaries and related expenses | 254 | 180 | 356 | 254 | ||||||||||||
Board related expenses | 29 | 29 | 22 | 29 | ||||||||||||
Advertising | 17 | 18 | 17 | 17 | ||||||||||||
Rent and utilities | 5 | 5 | 10 | 5 | ||||||||||||
Printing | 6 | 4 | ||||||||||||||
Loan and foreclosed asset expenses | 7 | 4 | 8 | 7 | ||||||||||||
Travel | 15 | 9 | 23 | 15 | ||||||||||||
Software | 8 | – | ||||||||||||||
Other | 17 | 15 | 38 | 25 | ||||||||||||
Total SG&A | $ | 454 | $ | 350 | $ | 617 | $ | 448 |
13.12. Subsequent Events
Management of the Company has evaluated subsequent events through April 27, 2017,May 10, 2018, the date these consolidated financial statements were issued.
As described more fully in Note 5, in October 2017, we entered into the Swanson LOC Agreement, pursuant to which Mr. Swanson provided us with the Swanson LOC. We and Mr. Swanson entered into a Master Loan Modification Agreement which modified the Swanson LOC Agreement (the “Modification Agreement”) and is effective and enforceable by us as of April 13, 2018. The Modification Agreement increased the maximum borrowing amount under the Swanson LOC from $4,000 to $7,000. If Mr. Swanson elects not to renew the Modification Agreement, Mr. Swanson must give us written notice at least 120 days before the expiration date of the then current term. If Mr. Swanson provides such written notice, we must repay $4,000 of the Swanson LOC by the expiration date and must repay the remaining balance on the Swanson LOC by 120 days after the expiration date. Our obligation to repay the Swanson LOC is evidenced by two Modified Promissory Notes from us, one dated April 12, 2018 and evidencing a promise to repay the secured portion of the Swanson LOC and the other dated April 13, 2018 and evidencing a promise to repay the unsecured portion of the Swanson LOC. The Modification Agreement did not affect the other terms of the Swanson LOC Agreement.
In April 2018, we fully repaid our line of credit to our CEO and his wife, which had a $1,000 outstanding principal balance as of March 31, 2018.
In February 2016, we entered into a construction loan agreement (the “Vista Loan Agreement”) with Lex Partners II, LLC (“Lex Partners II”), pursuant to which we extended a construction loan (the “Vista Loan”) to Lex Partners II to be used for the refinance of a parcel of land located at 1333 Vista Drive, Sarasota, Florida 34239 and the construction of a home thereon (the “Vista Property”). On June 30, 2016, Lex Partners II deeded the Vista Property to 1333 Vista Drive, LLC (the “Property Owner”), an unaffiliated third party, but Lex Partners II remained the borrower on the Vista Loan. As of April 24, 2018, the principal balance on the Vista Loan was approximately $3,776 and the unpaid interest on the Vista Loan was approximately $243.
In February 2018, Lex Partners II defaulted under the Vista Loan by failing to make an interest payment that was due. Subsequently, on April 27, 2018, we and the Property Owner entered into an Agreement (the “Master Agreement”), which requires, among other things, that the Property Owner deed the Vista Property to us in lieu of foreclosure. When such deed in lieu of foreclosure is effective, the Master Agreement requires we pay the sum of $50 to the Property Owner. On April 14, 2017,27, 2018, we and the Property Owner executed a Deed in Lieu of Foreclosure Agreement (the “Deed Agreement”). As required by the Deed Agreement, on April 27, 2018, the Property Owner also executed a Warranty Deed in Lieu of Foreclosure in favor of the Company, sold 5.637 Series C Cumulative Preferred Units (the “Preferred Units”) forpursuant to which the total priceProperty Owner deeded the Vista Property to us, and on May 3, 2018, we made the required payment of $564$50 to William Myrick, onethe Property Owner.
Pursuant to the Master Agreement, we may complete construction of the Company’s independent managers, through his individual retirement account (such transaction,single family residence being built on the “Preferred Units Sale Transaction”). The Preferred Units Sale Transaction was effectedVista Property, but we are not required to do so. When we sell the Vista Property, the Master Agreement requires that we pay the first $250 of profit (as defined in a private transaction exempt from the registration requirements of the Securities Act of 1933 (the “Securities Act”) under Section 4(a)(2) of the Securities Act. The Preferred Units Sale Transaction did not involve any public offering, was made without general solicitation or advertising, and the buyer representedMaster Agreement) to the Company that it is an “accredited investor” as defined under the Securities Act, with accessProperty Owner, subject to all relevant information necessary to evaluate the investmentcertain limitations contained in the Preferred Units.Master Agreement.
ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
(All dollar [$] 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 included in the Company’s Annual Report on Form 10-K as of and for the year ended December 31, 2016.2017. See also “Cautionary Note Regarding Forward-Looking Statements” preceding Part I.
Overview
We were organized in the Commonwealth of Pennsylvania in 2007 under the name 84 RE Partners, LLChad $39,692 and changed our name to Shepherd’s Finance, LLC on December 2, 2011. We converted to a Delaware limited liability company on March 29, 2012. Our business is focused on commercial lending to participants in the residential construction and development industry. We believe this market is underserved because of the lack of traditional lenders currently participating in the market. We are located in Jacksonville, Florida. Our operations are governed pursuant to our operating agreement.
From 2007 through the majority of 2011, we were the lessor in three commercial real estate leases with a then affiliate, 84 Lumber Company. Beginning in late 2011, we began commercial lending to residential homebuilders. Our current loan portfolio is described more fully in this section under the sub heading “Commercial Construction and Development Loans.” Since 2011, we have originated approximately 225 construction loans totaling $66,000. We currently have 10 paid employees, including our Executive Vice President of Operations. We currently use three employees to originate most of our new loans. Our office staff processes, underwrites, documents, and funds our loans. Our office staff also manages our investor relations and relationships with other debt holders. Our board of managers is comprised of Daniel M. Wallach and three independent managers — William Myrick, Eric A. Rauscher, and Kenneth R. Summers. Our officers are responsible for our day-to-day operations, while the board of managers is responsible for overseeing our business.
The commercial loans we extend are secured by mortgages on the underlying real estate. We extend and service commercial loans to small-to-medium sized homebuilders for the purchase of lots and/or the construction of homes thereon. In some circumstances, the lot is purchased with an older home on the lot which is then either removed or rehabilitated. If the home is rehabilitated, the loan is referred to as a “rehab” loan. We also extend and service loans for the purchase of undeveloped land and the development of that land into residential building lots. In addition, we may, depending on our cash position and the opportunities available to us, do none, any or all of the following: purchase defaulted unsecured debt from suppliers to homebuilders at a discount (and then secure that debt with real estate or other collateral), purchase defaulted secured debt from financial institutions at a discount, and purchase real estate in which we will operate our business. In February 2017, we purchased a building in which we intend to operate once renovation has been completed. We anticipate that renovation will be completed in the summer of 2017.
Our Chief Executive Officer, Mr. Wallach, has been in the housing industry since 1985. He was the CFO of a multi-billion dollar supplier of building materials to home builders for 11 years. He also was responsible for that company’s lending business for 20 years. During those years, he was responsible for the creation and implementation of many secured lending programs to builders. Some of these were performed fully by that company, and some were performed in partnership with banks. In general, the creation of all loans, and the resolution of defaulted loans, was his responsibility, whether the loans were company loans or loans in partnership with banks. Through these programs, he was responsible for the creation of approximately $2,000,000 in loans which generated interest spread of $50,000, after deducting for loan losses. Through the years, he managed the development of systems for reducing and managing the risks and losses on defaulted loans. Mr. Wallach also was responsible for that company’s unsecured debt to builders, which reached over $300,000 at its peak. He also gained experience in securing defaulted unsecured debt.
We had $24,167 and $20,091$30,043 in loan assets as of March 31, 20172018 and December 31, 2016,2017, respectively. As of March 31, 2017,2018, we have 111199 construction loans in 1617 states with 4564 borrowers and havesix development loans in three states. As of March 31, 2018 and December 31, 2017, we had four and three development loans, respectively, in Pittsburgh, Pennsylvania. WePennsylvania (the “Pennsylvania Loans”). In addition, we have entered into two purchase and sale agreement relationships with third-parties to sell portionsvarious sources of our loans. The first loan portions sold under the program took place duringcapital, detailed below:
March 31, 2018 | December 31, 2017 | |||||||
Capital Source | ||||||||
Purchase and sale agreements and other secured borrowings | $ | 16,559 | $ | 11,644 | ||||
Secured line of credit from affiliates | 1,000 | – | ||||||
Unsecured senior line of credit from a bank | 500 | – | ||||||
Unsecured Notes through our Notes Program | 13,785 | 14,121 | ||||||
Other unsecured debt | 3,984 | 3,069 | ||||||
Preferred equity, Series B units | 1,240 | 1,240 | ||||||
Preferred equity, Series C units | 1,130 | 1,097 | ||||||
Common equity | 2,648 | 2,446 | ||||||
Total | $ | 40,846 | $ | 33,617 |
Our net income increased for the first quarter of 2015. These agreements have allowed us2018 as compared to the same period in 2017 due primarily to increased loan originations, which was partially offset by payroll cost increases due to an increase the number of employees, and an increase in our loan balances and commitments significantly. In January 2017, we entered into a lineloss reserve.
Cash used in operations was $182 as of credit agreement with a bankMarch 31, 2018 as compared to cash provided by operations of $675 for $500, which we used at times during the first three monthssame period of 2017. Our decrease in operating cash flow in 2018 is mainly due to an increase in accrued interest receivable of $246 offset by a decrease in interest and other payables of $207. In March 2017, we added a third classour increase in operating cash flow, as compared to net income, was due to an increase in accrued expenses of equity, Series C cumulative preferred units. These Series C preferred units have a redemption feature after six years,$119, an increase in interest escrow of $209, and therefore show as mezzanine equity on our financial statements.
We currently have eight sourcesan increase in interest and other payables of capital:$119.
March 31, 2017 | December 31, 2016 | |||||||
Capital Source | ||||||||
Purchase and sale agreements(1) | $ | 6,728 | $ | 7,322 | ||||
Secured line of credit from affiliates | – | – | ||||||
Unsecured senior line of credit from a bank | – | – | ||||||
Unsecured Notes through our public offering | 12,792 | 11,221 | ||||||
Other unsecured debt | 1,152 | 1,152 | ||||||
Preferred equity, Series B units | 1,160 | 1,150 | ||||||
Preferred equity, Series C units(2) | 440 | – | ||||||
Common equity | 2,397 | 2,249 | ||||||
Total | $ | 24,669 | $ | 23,094 |
Critical Accounting Estimates
To assist in evaluating our 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 Form 10-K for the year ended December 31, 2017, 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, 2017 unless listed below.
Loan Losses
Loan losses, as applicable, are accounted for both on the consolidated balance sheets and the consolidated statements of operations. On the consolidated statements of operations, management estimates the amount of losses to capture during the current year. This current period amount incurred is referred to as the loan loss provision. The calculation of our allowance for loan losses, which appears on our consolidated balance sheets, requires us to compile relevant data for use in a systematic approach to assess and estimate the amount of probable losses inherent in our commercial lending operations and to reflect that estimated risk in our allowance calculations. We use the policy summarized as follows:
We establish a collective reserve for all loans which are not more than 60 days past due at the end of a quarter. This collective reserve takes into account both historical information and a qualitative analysis of housing and other economic factors that may impact our future realized losses. For loans to one borrower with committed balances less than 10% of our total committed balances on all loans extended to all customers, we individually analyze for impairment all loans which are more than 60 days past due at the end of a quarter. For loans to one borrower with committed balances equal to or greater than 10% of our total committed balances on all loans extended to all customers, we individually analyze all loans for potential impairment. The analysis of loans, if required, includes a comparison of estimated collateral value to the principal amount of the loan. For impaired loans, if the value determined is less than the principal amount due (less any builder deposit), then the difference is included in the allowance for loan loss. As values change, estimated loan losses may be provided for more or less than the previous period, and some loans may not need a loss provision based on payment history. For homes which are partially complete, we appraise on an as-is and completed basis, and use the one that more closely aligns with our planned method of disposal for the property.
For loans greater than 12 months in age that are individually evaluated for impairment, appraisals have been prepared within the last 13 months. For all loans individually evaluated for impairment, there is also a broker’s opinions of value (“BOV”) prepared, if the appraisal is more than six months old. The lower of any BOV prepared in the last six months, or the most recent appraisal, is used, unless we determine a BOV to be invalid based on the comparable sales used. If we determine a BOV to be invalid, we will use the appraised value. Appraised values are adjusted down for estimated costs associated with asset disposal. Broker’s opinion of selling price, currently valid sales contracts on the subject property, or representative recent actual closings by the builder on similar properties may be used in place of a broker’s opinion of value.
Appraisers are state certified, and are selected by first attempting to utilize the appraiser who completed the original appraisal report. If that appraiser is unavailable or unreasonably expensive, we use another appraiser who appraises routinely in that geographic area. BOVs are created by real estate agents. We try to first select an agent we have worked with, and then, if that fails, we select another agent who works in that geographic area.
Fair value of collateral has the potential to impact the calculation of the loan loss provision.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, 2017 | ||||
Loan Loss | ||||
Provision | ||||
Change in Fair Value Assumption | Higher/(Lower) | |||
Increasing fair value of the real estate collateral by 30%* | $ | – | ||
Decreasing fair value of the real estate collateral by 30%** | $ | 46 |
March 31, 2018 | ||||
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%** | $ | (1,908 | ) |
* 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.”
**If Assumes the loans were nonperforming assumingand a book amount of the loans outstanding of $24,167, and the fair value of the real estate collateral on all outstanding loans was reduced by 30%, an addition to the loan loss provision of $46 would be required.$39,692.
Foreclosed Assets
Foreclosed assets, as applicable, are accounted for both on the consolidated balance sheets and the interim condensed consolidated statements of operations. On the interim condensed consolidated statements of operations, management estimates the amount of impairment to capture when a loan is converted to a foreclosed asset, the impairment when the value of an asset drops below its carrying amount, and any gain or loss upon final disposition of the asset. The calculation of the impairment, which appears on our interim condensed consolidated balance sheets as a reduction in the asset, requires us to compile relevant data for use in a systematic approach to assess and estimate the value of the asset and therefore any required impairment thereof. We use the policy summarized as follows:
For properties which exist in the condition in which we intend to sell them, we obtain an appraisal of the asset’s current value. We reduce the appraised value by 10% to account for selling costs. This amount is used to initially record the asset. Typically, prior to the initial booking of the foreclosed asset, the loan has already been reserved to this level. If during ownership, the value of the foreclosed asset drops, an additional impairment is recorded. For assets that need to be improved prior to sale, the above calculation is performed at the time of the booking of the foreclosed asset (an appraisal “as-is”), but subsequent to that, we look at the to be completed value minus 10% and subtract off the estimated cost of remaining work to be done. If this results in additional impairment, it is booked in non-interest expense. For assets which are going to be improved, while the asset is a loan (before it becomes a foreclosed asset) the calculation of the specific loan loss reserve is done based on the to be completed value as compared to the book value plus estimated completion costs. This can result in an impairment at the initial booking of the foreclosed asset.
The fair value of real estate will impact our foreclosed asset value, which is bookedrecorded at 100% of fair value (after selling costs are deducted). 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.
March 31, 2017 | ||||
Foreclosed | ||||
Assets | ||||
Change in Fair Value Assumption | Higher/(Lower) | |||
Increasing fair value of the foreclosed asset by 30%* | $ | – | ||
Decreasing fair value of the foreclosed asset by 30% | $ | (324 | ) |
March 31, 2018 | ||||
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% | $ | (378 | ) |
* 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.
Amortization of Deferred Financing Costs
We amortize our deferred financing costs based on the effective interest method. As such, we make estimates for the duration of the future investment proceeds we anticipate receiving from our Notes offering. If this estimate is determined to be incorrect in the future, the rate at which we are amortizing the deferred financing costs as interest expense would be adjusted.
Currently, we anticipate a consistent average duration of 34 months for the Notes in our current offering. An increasing average duration over the remaining anticipated length of the Notes offering would decrease the amount of amortization reflected in interest in the next 12 months, and a decreasing average duration of investments over the remaining anticipated length would increase the amount reflected in the next 12 months.
Change in Anticipated Average Duration | Resulting adjustment needed to Interest Expense during the next 12 months Higher/(Lower) | |||
Decreasing the average duration to 5 months for all remaining months of origination | $ | 15 | ||
Increasing the average duration to 5 months for all remaining months of origination | $ | (11 | ) |
Other Loss Contingencies
Other loss contingencies are recorded as liabilities when it is probable that a liability has been incurred and the amount of the loss is reasonably estimable. Disclosure is required when there is a reasonable possibility that the ultimate loss will exceed the recorded provision. Contingent liabilities are often resolved over long time periods. Estimating probable losses requires analysis of multiple forecasts that often depend on judgments about potential actions by third-parties such as courts, arbitrators, juries, or regulators.
Accounting and Auditing Standards Applicable to “Emerging Growth Companies”
We are an “emerging growth company” under the recently enacted JOBS Act. For as long as we are an “emerging growth company,” we are not required to: (1) comply with any new or revised financial accounting standards that have different effective dates for public and private companies until those standards would otherwise apply to private companies, (2) provide an auditor’s attestation report on management’s assessment of the effectiveness of internal control over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act, (3) comply with any new requirements adopted by the Public Company Accounting Oversight Board, or the PCAOB, requiring mandatory audit firm rotation or a supplement to the auditor’s report in which the auditor would be required to provide additional information about the audit and the financial statements of the issuer, or (4) comply with any new audit rules adopted by the PCAOB after April 5, 2012, unless the SEC determines otherwise. We intend to take advantage of such extended transition period. Since we will not be required to comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for other public companies, our consolidated financial statements may not be comparable to the financial statements of companies that comply with public company effective dates. If we were to subsequently elect to instead comply with these public company effective dates, such election would be irrevocable pursuant to Section 107 of the JOBS Act.
Other Significant Accounting Policies
Other significant accounting policies, not involving the same level of measurement uncertainties as those discussed above, are nevertheless important to an understanding of the consolidated financial statements. Policies related to credit quality information, fair value measurements, offsetting assets and liabilities, related party transactions and revenue recognition require difficult judgments on complex matters that are often subject to multiple and recent changes in the authoritative guidance. Certain of these matters are among topics currently under reexamination or have recently been addressed by accounting standard setters and regulators. Specific conclusions have not been reached by these standard setters, and outcomes cannot be predicted with confidence. Also, see Notes 1 and 2 to our 2016 consolidated financial statements, as they discuss accounting policies that we have selected from acceptable alternatives.
Consolidated Results of Operations
Key financial and operating data for the three months ended March 31, 20172018 and 20162017 are set forth below. For a more complete understanding of our industry, the drivers of our business, and our current period results, this discussion should be read in conjunction with our consolidated financial statements, including the related notes and the other information contained in this document.
Three Months Ended | ||||||||
March 31, | ||||||||
2018 | 2017 | |||||||
Interest Income | ||||||||
Interest and fee income on loans | $ | 1,827 | $ | 1,174 | ||||
Interest expense: | ||||||||
Interest related to secured borrowings | 411 | 179 | ||||||
Interest related to unsecured borrowings | 450 | 367 | ||||||
Interest expense | 861 | 546 | ||||||
Net interest income | 966 | 628 | ||||||
Less: Loan loss provision | 40 | 11 | ||||||
Net interest income after loan loss provision | 926 | 617 | ||||||
Non-Interest Income | ||||||||
Gain from foreclosure of assets | - | 77 | ||||||
Total non-interest income | - | 77 | ||||||
Income | 926 | 694 | ||||||
Non-Interest Expense | ||||||||
Selling, general and administrative | 617 | 448 | ||||||
Depreciation and amortization | 17 | 6 | ||||||
Impairment loss on foreclosed assets | 5 | 49 | ||||||
Total non-interest expense | 639 | 503 | ||||||
Net Income | $ | 287 | $ | 191 | ||||
Earned distribution to preferred equity holders | 63 | 31 | ||||||
Net income attributable to common equity holders | $ | 224 | $ | 160 |
20 |
Three Months Ended March 31, | ||||||||
2017 | 2016 | |||||||
Net Interest Income | ||||||||
Interest and fee income on loans | $ | 1,174 | $ | 849 | ||||
Interest expense: | ||||||||
Interest related to secured borrowings | 179 | 117 | ||||||
Interest related to unsecured borrowings | 367 | 245 | ||||||
Interest expense | 546 | 362 | ||||||
Net interest income | 628 | 487 | ||||||
Less: Loan loss provision | 11 | 8 | ||||||
Net interest income after loan loss provision | 617 | 479 | ||||||
Non-Interest Income | ||||||||
Gain from sale of foreclosed assets | 77 | – | ||||||
Income | 694 | 479 | ||||||
Non-Interest Expense | ||||||||
Selling, general and administrative | 454 | 350 | ||||||
Impairment loss on foreclosed assets | 49 | – | ||||||
Total non-interest expense | 503 | 350 | ||||||
Net income | $ | 191 | $ | 129 | ||||
Earned distribution to preferred equity holders | 31 | 26 | ||||||
Net income attributable to common equity holders | $ | 160 | $ | 103 |
Interest Spread
The following table displays a comparison of our interest income, expense, fees, and spread:
Three Months Ended | ||||||||||||||||||||||||||||||||
For the Three Months Ended March 31, | March 31, | |||||||||||||||||||||||||||||||
2017 | 2016 | 2018 | 2017 | |||||||||||||||||||||||||||||
Interest Income | * | * | * | * | ||||||||||||||||||||||||||||
Interest income on loans | $ | 780 | 13 | % | $ | 505 | 12 | % | $ | 1,291 | 13 | % | $ | 780 | 13 | % | ||||||||||||||||
Fee income on loans | 394 | 7 | % | 344 | 8 | % | 536 | 6 | % | 394 | 7 | % | ||||||||||||||||||||
Interest and fee income on loans | 1,174 | 20 | % | 849 | 20 | % | 1,827 | 19 | % | 1,174 | 20 | % | ||||||||||||||||||||
Interest expense – secured | 179 | 3 | % | 117 | 3 | % | ||||||||||||||||||||||||||
Interest expense – unsecured | 303 | 5 | % | 178 | 4 | % | ||||||||||||||||||||||||||
Interest expense unsecured | 402 | 4 | % | 303 | 5 | % | ||||||||||||||||||||||||||
Interest expense secured | 411 | 4 | % | 179 | 3 | % | ||||||||||||||||||||||||||
Amortization of offering costs | 64 | 1 | % | 67 | 2 | % | 48 | 1 | % | 64 | 1 | % | ||||||||||||||||||||
Interest expense | 546 | 9 | % | 362 | 9 | % | 861 | 9 | % | 546 | 9 | % | ||||||||||||||||||||
Net interest income (spread) | 628 | 11 | % | 487 | 11 | % | $ | 966 | 10 | % | $ | 628 | 11 | % | ||||||||||||||||||
Weighted average outstanding loan asset balance | $ | 23,756 | $ | 17,131 | $ | 37,831 | $ | 23,756 |
*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 5%. For most loans, the margin is fixed at 2%; however, for our development loans the margin is fixed at 7%. Future loans are anticipated to be originated at approximately the same 2% margin. This component is also impacted by the lending of money with no interest cost (our equity). Our interest income on loans was higher in the first three months ofFor both 2018 and 2017, as compared to 2016 by 1%. This increase was due to an increase in the rate we are charging on our development loans. Our interest expense for unsecured borrowings increased in 2017 as compared to 2016 due to an increase in what we are paying our Note holders, but this was offset by a decrease in the percentage cost of our offering costs, which decreased due to an increase in borrowings without an increase in cost. We anticipate the difference between interest income and interest expense was 4%. We currently anticipate that the difference between our interest income and interest expense will continue to be between 3% and 4% during 2017.for the remainder of 2018.
●Fee income.Fee income is displayed in the table above. The two loans originated in December 2011 had a net origination fee of $924. This fee was recognized over the life of the loans, and has been fully recognized as of August 2016. Our construction loans have a 5% fee on the amount we commit to lend, which is amortized over the expected life of each of those loans; however, we do not recognize a loan fee on our development loans. When loans pay backterminate quicker than their expected life, the remaining unrecognized fee is recognized upon the termination of the loan. OurWhen loans exceed their expected life, no additional fee income is recognized. In 2018 our fee income decreased as a percentage of our loan balance because the recognition of our loan fee on our development loans was completed in 2016. We anticipate that our fee percentage in 2017 compared to 2016 will be lower in the first seven months due to the development loan fee income, and higher in the last five months1% due to an increase in construction loans as a percentagethat exceeded their expected life. We currently anticipate that fee income will continue at the same 6% rate for the remainder of our total balance.2018.
●Amount of nonperforming assets.Generally, we can have three types of nonperforming assets. Loansassets that negatively affect interest spread: loans not paying interest, can impact our interest spread.foreclosed assets, and cash. We had no suchnonperforming loans in the first three monthsquarter of both 20172018 and 2016.2017. Foreclosed assets do not haveprovide a monthly interest return. While we had fewerThe difference between our average foreclosed assets as of March 31, 2017asset balance in 2018 as compared to March 31, 2016,2017 did not have a major impact on our average balance of foreclosed assets during the three month period ended March 31, 2017 was higher than the same period of 2016.
Loan Loss Provision
We recorded $11 and $8performance in the threefirst quarter of 2018. The amount of nonperforming assets is expected to rise over the next twelve months, ended March 31, 2017due to work expected on the two lots we currently own, anticipated foreclosure of assets, and 2016, respectively, in loss reserve provisiondue to idle cash increases related to our collective reserve (loans not individually impaired). These increases were due to increases in loan balances. We did not reserve any amount in those same periods in our specific reserve (for loans individually impaired). We anticipate that the collective reserve will increase as our balances rise throughout 2017.anticipated large borrowing inflows.
Non-Interest Income
WeFor the three months ended March 31, 2018, we did not recognize non-interest income compared to the same period in 2017. In the first quarter of 2017, we sold a foreclosed asset in 2017 and recognized a gain of $77.
21 |
SG&A Expenses
The following table displays our SG&A expenses:
For the Three Months Ended March 31, | For the Three Months Ended | |||||||||||||||
2017 | 2016 | 2018 | 2017 | |||||||||||||
Selling, general and administrative expenses | ||||||||||||||||
Legal and Accounting | $ | 96 | $ | 86 | ||||||||||||
Selling, general and administrative expenses: | ||||||||||||||||
Legal and accounting | $ | 143 | $ | 96 | ||||||||||||
Salaries and related expenses | 254 | 180 | 356 | 254 | ||||||||||||
Board related expenses | 29 | 29 | 22 | 29 | ||||||||||||
Advertising | 17 | 18 | 17 | 17 | ||||||||||||
Rent and Utilities | 5 | 5 | ||||||||||||||
Printing | 6 | 4 | ||||||||||||||
Rent and utilities | 10 | 5 | ||||||||||||||
Loan and foreclosed asset expenses | 7 | 4 | 8 | 7 | ||||||||||||
Travel | 15 | 9 | 23 | 15 | ||||||||||||
Software | 8 | – | ||||||||||||||
Other | 17 | 15 | 38 | 25 | ||||||||||||
Total SG&A | $ | 454 | $ | 350 | $ | 617 | $ | 448 |
We had twice as many employees during the three month period ended March 31, 2017 as we did during the same period in 2016, whichLegal and accounting expenses increased our payroll and travel costs. We anticipate adding more staff in 2017. We will also have expensesdue to additional work performed related to operating fromthe growth of the Company. Payroll increased due to our hiring of nine new officeemployees, which was partially offset by a reduction in the second half of 2017. We added a loan document software package in the second half of 2016. We may also expend funds to improve our back office computer systems in 2017.
Consolidated Financial PositionCEO’s salary.
Cash and Cash EquivalentsImpairment Loss on Foreclosed Assets
We try to avoid borrowing on our lineowned four foreclosed assets as of credit from affiliates. To accomplish this, we must carry some cash for liquidity. At March 31, 2017 and2018, compared to five foreclosed assets that we owned as of December 31, 2016, we had $5862017. Two of the foreclosed assets are lots under construction and $1,566, respectively, in cash. When we create new loans, they typicallythe remaining two have completed homes on the lots. We do not have significant outstanding loan balances for several months. In January 2017, we executed a lineanticipate losses on the sale of credit with a bank with a maximum outstandingforeclosed assets in the future; however this may be subject to change based on the final selling price of $500, which should lessen somewhat the amount of cash we carry on our books.foreclosed assets.
Deferred Financing Costs, NetLoan Loss Provision
Our deferred financing costs are relatedloan loss provision increased $29 to our public offering of unsecured Notes. The deferred financing costs are reflected as a reduction in the unsecured Notes offering liability. The first offering which was effective from October 2012 through September 2015 cost more to create than our second offering, which has been effective since September 2015. As the amortization from$40 during the first offering is being wrapped up and the second offering’s amortization is increasing, the effectquarter of this is a small decrease in total amortization during the three months ended March 31, 2017 as2018 compared to the same period in 2017 due to an increase in loan balances and qualitative reserve percentage as a result of 2016. As the amortization is much more than the amount we are spending on the offerings during these same periods, the net deferred financing costs have been decreasing.change in housing values.
Consolidated Financial Position
The following is a roll forward of deferred financing costs:
Three Months | Year | Three Months | ||||||||||||||||||||||
Ended | Ended | Ended | ||||||||||||||||||||||
Three Months | Year Ended | Three Months Ended | March 31, 2018 | December 31, 2017 | March 31, 2017 | |||||||||||||||||||
March 31, 2017 | December 31, 2016 | March 31, 2016 | ||||||||||||||||||||||
Deferred financing costs, beginning balance | $ | 1,014 | $ | 935 | $ | 935 | $ | 1,102 | $ | 1,014 | $ | 1,014 | ||||||||||||
Additions | 10 | 79 | 19 | 29 | 88 | 10 | ||||||||||||||||||
Deferred financing costs, ending balance | $ | 1,024 | $ | 1,014 | $ | 954 | $ | 1,131 | $ | 1,102 | $ | 1,024 | ||||||||||||
Less accumulated amortization | (667 | ) | (603 | ) | (403 | ) | (864 | ) | (816 | ) | (667 | ) | ||||||||||||
Deferred financing costs, net | $ | 357 | $ | 411 | $ | 551 | $ | 267 | $ | 286 | $ | 357 |
The following is a roll forward of the accumulated amortization of deferred financing costs:
Three Months Ended | Year Ended | Three Months Ended | ||||||||||
March 31, 2017 | December 31,2016 | March 31, 2016 | ||||||||||
Accumulated amortization, beginning balance | $ | 603 | $ | 336 | $ | 336 | ||||||
Additions | 64 | 267 | 67 | |||||||||
Accumulated amortization, ending balance | $ | 667 | $ | 603 | $ | 403 |
Loans Receivable
In December 2011, we originated two new loans and assumed a lender’s position on a third loan, which, net of unearned loan fees, had total balances of $3,901 and $4,082 as of March 31, 2017 and December 31, 2016, respectively. These loans were all to borrowers that are affiliated with each other, and are cross-collateralized. Collectively, the development loans are referred to herein as the “Pennsylvania Loans.” No individual impairment has been deemed necessary for these loans. The purpose of the loans was to develop two subdivisions in a suburb of Pittsburgh, Pennsylvania. The Hamlets subdivision is a five phase subdivision of 81 lots, of which 63 have been developed and sold, 18 are developed and not sold, as of March 31, 2017. The Tuscany subdivision is a single phase 18 lot subdivision, with four lots remaining as of March 31, 2017.
Three Months | Year | Three Months | ||||||||||
Ended | Ended | Ended | ||||||||||
March 31, 2018 | December 31, 2017 | March 31, 2017 | ||||||||||
Accumulated amortization, beginning balance | $ | 816 | $ | 603 | $ | 603 | ||||||
Additions | 48 | 213 | 64 | |||||||||
Accumulated amortization, ending balance | $ | 864 | $ | 816 | $ | 667 |
22 |
The borrower also owns Series B preferred equity units in the Company which serves as collateral for the Pennsylvania Loans. There is no liquid market for the Series B preferred units, so we can give no assurance as to our ability to generate any amount of proceeds from that collateral. Beginning in December 2015, the Hoskins Group invests in our Series B preferred units in an amount equal to $10 per closing of a lot payoff in the Hamlets or Tuscany subdivisions.
As of March 31, 2017, we have 43 other borrowers, all of whom, along with the Hoskins Group, borrow money for the purpose of building new homes.
Commercial Loans – Real Estate Development Loan Portfolio SummaryReceivable
The following is a summary of our loan portfolio to builders for land development as of March 31, 2017. The Pennsylvania loans below are the Pennsylvania Loans discussed above.
State | Number of Borrowers | Number of Loans | Value of Collateral(1) | Commitment Amount | Gross Amount Outstanding | Loan to Value Ratio(2) | Loan Fee | |||||||||||||||||||||
Pennsylvania | 1 | 3 | $ | 6,333 | $ | 5,231 | (3) | $ | 3,901 | 62 | % | $ | 1,000 | |||||||||||||||
Total | 1 | 3 | $ | 6,333 | $ | 5,231 | $ | 3,901 | 62 | % | $ | 1,000 |
The following is a summary of our loan portfolio to builders for land development as of December 31, 2016. The Pennsylvania loans below are the Pennsylvania Loans discussed above.
State | Number of Borrowers | Number of Loans | Value of Collateral(1) | Commitment Amount | Gross Amount Outstanding | Loan to Value Ratio(2) | Loan Fee | |||||||||||||||||||||
Pennsylvania | 1 | 3 | $ | 6,586 | $ | 5,931 | (3) | $ | 4,082 | 62 | % | $ | 1,000 | |||||||||||||||
Total | 1 | 3 | $ | 6,586 | $ | 5,931 | $ | 4,082 | 62 | % | $ | 1,000 |
Commercial Loans – Construction Loan Portfolio Summary
We anticipate that the aggregate balance of our construction loan portfolio will increase as loans near maturity, and due to new loan originations.
The following is a summary of our loan portfolio to builders for home construction loans as of March 31, 2017.2018.
State | Number of Borrowers | Number of Loans | Value of Collateral(1) | Commitment Amount | Gross Amount Outstanding | Loan to Value Ratio(2) | Loan Fee | Number of Borrowers | Number of Loans | Value of Collateral(1) | Commitment Amount | Gross Amount Outstanding | Loan to Value Ratio(2) | Loan Fee | |||||||||||||||||||||||||||||||||||||||||||
Colorado | 2 | 5 | $ | 2,314 | $ | 1,566 | $ | 694 | 68 | % | 5 | % | 3 | 6 | $ | 3,225 | $ | 2,196 | $ | 1,244 | 68 | % | 5 | % | |||||||||||||||||||||||||||||||||
Connecticut | 1 | 1 | 715 | 500 | 500 | 70 | % | 5 | % | ||||||||||||||||||||||||||||||||||||||||||||||||
Delaware | 1 | 1 | 244 | 171 | 40 | 70 | % | 5 | % | 1 | 1 | 244 | 171 | 167 | 70 | % | 5 | % | |||||||||||||||||||||||||||||||||||||||
Florida | 11 | 23 | 17,194 | 10,633, | 6,158 | 62 | % | 5 | % | 17 | 56 | 24,455 | 16,252 | 11,588 | 66 | % | 5 | % | |||||||||||||||||||||||||||||||||||||||
Georgia | 7 | 17 | 11,455 | 6,728 | 3,744 | 59 | % | 5 | % | 7 | 13 | 9,253 | 6,038 | 4,695 | 65 | % | 5 | % | |||||||||||||||||||||||||||||||||||||||
Indiana | 2 | 2 | 995 | 597 | 103 | 60 | % | 5 | % | 2 | 2 | 640 | 448 | 241 | 70 | % | 5 | % | |||||||||||||||||||||||||||||||||||||||
Michigan | 3 | 7 | 1,609 | 1,047 | 614 | 65 | % | 5 | % | 5 | 24 | 6,354 | 4,080 | 2,634 | 64 | % | 5 | % | |||||||||||||||||||||||||||||||||||||||
New Jersey | 3 | 8 | 2,023 | 1,451 | 996 | 72 | % | 5 | % | 3 | 13 | 4,298 | 2,934 | 1,730 | 68 | % | 5 | % | |||||||||||||||||||||||||||||||||||||||
New York | 1 | 6 | 1,855 | 853 | 805 | 46 | % | 5 | % | 1 | 7 | 2,491 | 1,444 | 1,393 | 58 | % | 5 | % | |||||||||||||||||||||||||||||||||||||||
North Carolina | 1 | 2 | 490 | 343 | 131 | 70 | % | 5 | % | 3 | 6 | 1,650 | 1,155 | 809 | 70 | % | 5 | % | |||||||||||||||||||||||||||||||||||||||
North Dakota | 1 | 1 | 375 | 263 | 108 | 70 | % | 5 | % | ||||||||||||||||||||||||||||||||||||||||||||||||
Ohio | 1 | 1 | 1,405 | 843 | 505 | 60 | % | 5 | % | 1 | 3 | 2,331 | 1,498 | 658 | 64 | % | 5 | % | |||||||||||||||||||||||||||||||||||||||
Oregon | 1 | 1 | 607 | 425 | 169 | 70 | % | 5 | % | ||||||||||||||||||||||||||||||||||||||||||||||||
Pennsylvania | 2 | 16 | 13,170 | 6,887 | 5,758 | 52 | % | 5 | % | 3 | 22 | 16,688 | 9,434 | 7,230 | 57 | % | 5 | % | |||||||||||||||||||||||||||||||||||||||
South Carolina | 8 | 15 | 4,106 | 2,709 | 999 | 66 | % | 5 | % | 10 | 29 | 7,595 | 5,224 | 2,990 | 69 | % | 5 | % | |||||||||||||||||||||||||||||||||||||||
Tennessee | 1 | 3 | 1,080 | 767 | 606 | 71 | % | 5 | % | 1 | 3 | 1,120 | 795 | 449 | 71 | % | 5 | % | |||||||||||||||||||||||||||||||||||||||
Utah | 1 | 3 | 1,133 | 793 | 472 | 70 | % | 5 | % | 1 | 1 | 400 | 280 | 207 | 70 | % | 5 | % | |||||||||||||||||||||||||||||||||||||||
Virginia | 1 | 1 | 408 | 260 | 95 | 64 | % | 5 | % | 4 | 11 | 3,027 | 2,136 | 647 | 71 | % | 5 | % | |||||||||||||||||||||||||||||||||||||||
Total | 45 | (4) | 111 | $ | 60,196 | $ | 36,148 | $ | 22,221 | 60 | %(3) | 5 | % | 64 | (4) | 199 | $ | 84,753 | $ | 54,773 | $ | 36,959 | 65 | % | (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. |
(4) | One builder borrows in multiple states. |
The following is a summary of our loan portfolio to builders for home construction loans as of December 31, 2016.2017:
State | Number of Borrowers | Number of Loans | Value of Collateral(1) | Commitment Amount | Gross Amount Outstanding | Loan to Value Ratio(2) | Loan Fee | |||||||||||||||||||||
Colorado | 1 | 3 | $ | 1,615 | $ | 1,131 | $ | 605 | 70 | % | 5 | % | ||||||||||||||||
Connecticut | 1 | 1 | 715 | 500 | 479 | 70 | % | 5 | % | |||||||||||||||||||
Delaware | 1 | 2 | 244 | 171 | 40 | 70 | % | 5 | % | |||||||||||||||||||
Florida | 7 | 15 | 14,014 | 8,548 | 4,672 | 61 | % | 5 | % | |||||||||||||||||||
Georgia | 4 | 9 | 6,864 | 4,249 | 2,749 | 62 | % | 5 | % | |||||||||||||||||||
Idaho | 1 | 1 | 319 | 215 | 205 | 67 | % | 5 | % | |||||||||||||||||||
Michigan | 1 | 1 | 210 | 126 | 118 | 60 | % | 5 | % | |||||||||||||||||||
New Jersey | 1 | 3 | 977 | 719 | 528 | 74 | % | 5 | % | |||||||||||||||||||
New York | 1 | 4 | 1,745 | 737 | 685 | 42 | % | 5 | % | |||||||||||||||||||
North Carolina | 2 | 2 | 1,015 | 633 | 216 | 62 | % | 5 | % | |||||||||||||||||||
Ohio | 1 | 1 | 1,405 | 843 | 444 | 60 | % | 5 | % | |||||||||||||||||||
Pennsylvania | 2 | 15 | 12,725 | 6,411 | 5,281 | 50 | % | 5 | % | |||||||||||||||||||
South Carolina | 5 | 7 | 2,544 | 1,591 | 783 | 63 | % | 5 | % | |||||||||||||||||||
Tennessee | 1 | 3 | 1,080 | 767 | 430 | 71 | % | 5 | % | |||||||||||||||||||
Utah | 1 | 2 | 715 | 500 | 252 | 70 | % | 5 | % | |||||||||||||||||||
Total | 30 | 69 | $ | 46,187 | $ | 27,141 | $ | 17,487 | 59 | %(3) | 5 | % |
State | Number of | Number of Loans | Value of Collateral(1) | Commitment Amount | Amount Outstanding | Loan to Value Ratio(2) | Loan Fee | ||||||||||||||||||||||
Colorado | 3 | 6 | $ | 3,224 | $ | 2,196 | $ | 925 | 68 | % | 5 | % | |||||||||||||||||
Delaware | 1 | 1 | 244 | 171 | 147 | 70 | % | 5 | % | ||||||||||||||||||||
Florida | 15 | 54 | 25,368 | 16,555 | 10,673 | 65 | % | 5 | % | ||||||||||||||||||||
Georgia | 7 | 13 | 8,932 | 5,415 | 3,535 | 61 | % | 5 | % | ||||||||||||||||||||
Indiana | 2 | 2 | 895 | 566 | 356 | 63 | % | 5 | % | ||||||||||||||||||||
Michigan | 4 | 25 | 7,570 | 4,717 | 2,611 | 62 | % | 5 | % | ||||||||||||||||||||
New Jersey | 2 | 11 | 3,635 | 2,471 | 1,227 | 68 | % | 5 | % | ||||||||||||||||||||
New York | 1 | 5 | 1,756 | 929 | 863 | 53 | % | 5 | % | ||||||||||||||||||||
North Carolina | 3 | 6 | 1,650 | 1,155 | 567 | 70 | % | 5 | % | ||||||||||||||||||||
Ohio | 1 | 1 | 711 | 498 | 316 | 70 | % | 5 | % | ||||||||||||||||||||
Oregon | 1 | 1 | 607 | 425 | 76 | 70 | % | 5 | % | ||||||||||||||||||||
Pennsylvania | 2 | 20 | 15,023 | 7,649 | 5,834 | 51 | % | 5 | % | ||||||||||||||||||||
South Carolina | 7 | 18 | 4,501 | 3,058 | 1,445 | 68 | % | 5 | % | ||||||||||||||||||||
Tennessee | 1 | 2 | 690 | 494 | 494 | 72 | % | 5 | % | ||||||||||||||||||||
Utah | 1 | 2 | 790 | 553 | 344 | 70 | % | 5 | % | ||||||||||||||||||||
Virginia | 1 | 1 | 335 | 235 | 150 | 70 | % | 5 | % | ||||||||||||||||||||
Total | 52 | (4) | 168 | $ | 75,931 | $ | 47,087 | $ | 29,563 | 62 | % | (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. |
(4) | We have one builder in two states. |
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, 2018 and December 31, 2017. A significant portion of our development loans consist of the Pennsylvania Loans. Our additional development loans are in South Carolina and Florida.
Year | Number of | Number of | Number of | Value of Collateral(1) | Commitment Amount | Gross | Loan to | Loan Fee | ||||||||||||||||||||||||
2018 | 3 | 3 | 6 | $ | 8,019 | $ | 6,362 | (3) | $ | 5,242 | 65 | % | $ | 1,000 | ||||||||||||||||||
2017 | 1 | 1 | 3 | 4,997 | 4,600 | (3) | 2,811 | 56 | % | 1,000 |
(1) | The value is determined by the appraised value adjusted for remaining costs to be paid. Part of this collateral is $1,240 as of March 31, 2018 and December 31, 2017 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 eliminate the loan balance. Part of the collateral value is estimated based on the selling prices anticipated for the homes. Appraised values will replace these estimates in the second quarter of 2018. |
(2) | The loan to value ratio is calculated by taking the outstanding amount and dividing by the appraised value calculated as described above. |
(3) | The commitment amount does not include letters of credit and cash bonds. |
Combined Loan Portfolio Summary
Financing receivables are comprised of the following as of March 31, 20172018 and December 31, 2016:2017:
March 31, 2017 | December 31, 2016 | |||||||
Commercial loans, gross | $ | 26,121 | $ | 21,569 | ||||
Less: Deferred loan fees | (816 | ) | (618 | ) | ||||
Less: Deposits | (1,192 | ) | (861 | ) | ||||
Plus: Deferred origination expense | 119 | 55 | ||||||
Less: Allowance for loan losses | (65 | ) | (54 | ) | ||||
Commercial loans, net | $ | 24,167 | $ | 20,091 |
March 31, 2018 | December 31, 2017 | |||||||
Loans receivable, gross | $ | 42,201 | $ | 32,375 | ||||
Deferred loan fees | (932 | ) | (847 | ) | ||||
Deposits | (1,573 | ) | (1,497 | ) | ||||
Deferred origination expense | 133 | 109 | ||||||
Allowance for loan losses | (137 | ) | (97 | ) | ||||
Loans receivable, net | $ | 39,692 | $ | 30,043 |
BelowThe following is a roll forward of commercial loans:
Three Months Ended | Year Ended December 31, 2016 | Three Months Ended | Three Months Ended 2018 | Year Ended 2017 | Three Months Ended 2017 | |||||||||||||||||||
Beginning balance | $ | 20,091 | $ | 14,060 | $ | 14,060 | $ | 30,043 | $ | 20,091 | $ | 20,091 | ||||||||||||
Additions | 7,461 | 23,184 | 7,081 | 14,476 | 33,451 | 7,461 | ||||||||||||||||||
Payoffs/Sales | (2,909 | ) | (15,168 | ) | (3,620 | ) | ||||||||||||||||||
Payoffs/sales | (4,649 | ) | (22,645 | ) | (2,909 | ) | ||||||||||||||||||
Moved to foreclosed assets | – | (1,639 | ) | – | – | – | – | |||||||||||||||||
Change in deferred origination expense | 64 | 55 | 10 | 23 | 55 | 64 | ||||||||||||||||||
Change in builder deposit | (331 | ) | (340 | ) | (57 | ) | (76 | ) | (636 | ) | (331 | ) | ||||||||||||
Change in loan loss provision | (11 | ) | (16 | ) | (8 | ) | (40 | ) | (44 | ) | (11 | ) | ||||||||||||
New loan fees | (593 | ) | (1,270 | ) | (332 | ) | (619 | ) | (2,127 | ) | (593 | ) | ||||||||||||
Earned loan fees | 395 | 1,225 | 381 | 534 | 1,898 | 395 | ||||||||||||||||||
Ending balance | $ | 24,167 | $ | 20,091 | $ | 17,515 | $ | 39,692 | $ | 30,043 | $ | 24,167 |
Finance Receivables – By risk rating:
March 31, 2017 | December 31, 2016 | March 31, 2018 | December 31, 2017 | |||||||||||||
Pass | $ | 22,448 | $ | 18,275 | $ | 31,194 | $ | 25,656 | ||||||||
Special mention | 3,673 | 3,294 | 7,231 | 6,719 | ||||||||||||
Classified – accruing | – | – | 3,776 | – | ||||||||||||
Classified – nonaccrual | – | – | – | – | ||||||||||||
Total | $ | 26,121 | $ | 21,569 | $ | 42,201 | $ | 21,569 |
Below is an aging schedule of gross loans receivable as of March 31, 2018, on a recency basis:
No. Accts. | 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) | 204 | $ | 38,425 | 91 | % | |||||||
60-89 days | 1 | 3,776 | 9 | % | ||||||||
90-179 days | – | – | 0 | % | ||||||||
180-269 days | – | – | 0 | % | ||||||||
Subtotal | 205 | $ | 42,201 | 100 | % | |||||||
Interest only accounts (Accounts on which interest, deferment, extension and/or default charges were received in the last 60 days) | – | $ | – | 0 | % | |||||||
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.) | – | $ | – | 0 | % | |||||||
Total | 205 | $ | 42,201 | 100 | % |
Below is an aging schedule of gross loans receivable as of March 31, 2018, on a contractual basis:
No. Accts. | Unpaid Balances | % | ||||||||||
Contractual Terms - All current Direct Loans and Sales Finance Contracts with installments past due less than 60 days from due date. | 204 | $ | 38,425 | 91 | % | |||||||
60-89 days | 1 | 3,776 | 9 | % | ||||||||
90-179 days | – | – | 0 | % | ||||||||
180-269 days | – | – | 0 | % | ||||||||
Subtotal | 205 | $ | 42,201 | 100 | % | |||||||
Interest only accounts (Accounts on which interest, deferment, extension and/or default charges were received in the last 60 days) | – | $ | – | 0 | % | |||||||
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.) | – | $ | – | 0 | % | |||||||
Total | 205 | $ | 42,201 | 100 | % |
Below is an aging schedule of gross loans receivable as of December 31, 2017, on a recency basis:
No. Accts. | 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) | 153 | $ | 26,421 | 82 | % | |||||||
60-89 days | 18 | 5,954 | 18 | % | ||||||||
90-179 days | – | – | 0 | % | ||||||||
180-269 days | – | – | 0 | % | ||||||||
Subtotal | 171 | $ | 32,375 | 100 | % | |||||||
Interest only accounts (Accounts on which interest, deferment, extension and/or default charges were received in the last 60 days) | – | $ | – | 0 | % | |||||||
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.) | – | $ | – | 0 | % | |||||||
Total | 171 | $ | 32,375 | 100 | % |
Below is an aging schedule of gross loans receivable as of December 31, 2017, on a contractual basis:
No. Accts. | Unpaid Balances | % | ||||||||||
Contractual Terms - All current Direct Loans and Sales Finance Contracts with installments past due less than 60 days from due date. | 153 | $ | 26,421 | 82 | % | |||||||
60-89 days | 18 | 5,954 | 18 | % | ||||||||
90-179 days | – | – | 0 | % | ||||||||
180-269 days | – | – | 0 | % | ||||||||
Subtotal | 171 | $ | 32,375 | 100 | % | |||||||
Interest only accounts (Accounts on which interest, deferment, extension and/or default charges were received in the last 60 days) | – | $ | – | 0 | % | |||||||
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.) | – | $ | – | 0 | % | |||||||
Total | 171 | $ | 32,375 | 100 | % |
Foreclosed Assets
Below is a roll forward of foreclosed assets:
Three Months Ended 2018 | Year Ended 2017 | Three Months Ended 2017 | ||||||||||
Beginning balance | $ | 1,036 | $ | 2,798 | $ | 2,798 | ||||||
Additions for construction/development | 48 | 317 | 296 | |||||||||
Sale proceeds | – | (1,890 | ) | (1,890 | ) | |||||||
Gain on sale | – | 77 | 77 | |||||||||
Impairment loss on foreclosed assets | (5 | ) | (266 | ) | (202 | ) | ||||||
Ending balance | $ | 1,079 | $ | 1,036 | $ | 1,079 |
Customer Interest Escrow
Below is a roll forward of interest escrow:
Three Months Ended 2018 | Year Ended 2017 | Three Months Ended 2017 | ||||||||||
Beginning balance | $ | 935 | $ | 812 | $ | 812 | ||||||
Preferred equity dividends | 30 | 115 | 28 | |||||||||
Additions from Pennsylvania Loans | - | 480 | 51 | |||||||||
Additions from other loans | 102 | 1,163 | 629 | |||||||||
Interest, fees, principal or repaid to borrower | (281 | ) | (1,635 | ) | (499 | ) | ||||||
Ending balance | $ | 786 | $ | 935 | $ | 1,021 |
Related Party Borrowings
During March 2018, we borrowed $1,000 under our line of credit with our CEO and his wife. We incurred $4 and $0 of interest expense during the period ended March 31, 2018 and 2017, respectively. The interest rate for this borrowing was 4.4% as of March 31, 2018.
Secured Borrowings
Purchase and Sale Agreements
In March 2018, we entered into the Seventh Amendment (the “Seventh Amendment”) to our Loan Purchase and Sale Agreement (the “S.K. Funding LPSA”) with S.K. Funding, LLC (“S.K. Funding”).
The purpose of the Seventh Amendment was to allow S.K. Funding to purchase a portion of the Pennsylvania Loans for a purchase price of $649 under parameters different from those specified in the S.K. Funding LPSA.
The timing of the Company’s principal and interest payments to S.K. Funding under the Seventh Amendment, and S.K. Funding’s obligation to fund the Pennsylvania Loans, vary depending on the total principal amount of the Pennsylvania Loans outstanding at any time, as follows:
● | If the total principal amount exceeds $1,000, S.K. Funding must fund the amount between $1,000 and less than or equal to $3,500. | |
● | If the total principal amount is less than $4,500 the Company will also repay S.K. Funding’s principal as principal payments are received on the Pennsylvania Loans from the underlying borrowers in the amount by which the total principal amount is less than $4,500 until S.K. Funding’s principal has been repaid in full. | |
● | The interest rate accruing to S.K. Funding under the Seventh Amendment is 10.5% calculated on a 365/366-day basis. |
The Seventh Amendment has a term of 24 months and will automatically renew for an additional six-month term unless either party gives written notice of its intent not to renew at least six months prior to the end of a term. S.K. Funding will have a priority position as compared to the Company in the case of a default by any of the borrowers.
Lines of Credit
During July 2017, we entered into a line of credit agreement (the “Shuman LOC Agreement”) with a group of lenders (collectively, “Shuman”). Pursuant to the Shuman LOC Agreement, Shuman provides us with a revolving line of credit (the “Shuman LOC”) with the following terms:
● | Principal not to exceed $1,325; | |
● | Secured with assignments of certain notes and mortgages; | |
● | Cost of funds to us of 10%; and | |
● | Due in July 2018 unless extended by Shuman for one or more additional 12-month periods. |
The Shuman LOC was fully borrowed as of March 31, 2018
During October 2017, we entered into a line of credit agreement (the “Swanson LOC Agreement”) with Paul Swanson. Pursuant to the Swanson LOC Agreement, Mr. Swanson provides us with a revolving line of credit (the “Swanson LOC”) with the following terms:
● | Principal not to exceed $4,000; | |
● | Secured with assignments of certain notes and mortgages; | |
● | Cost of funds to us of 10%; and | |
● | Duein January 2019 unless extended by Mr. Swanson for one or more additional 15-month periods. |
As of March 31, 2018, we have borrowed $3,851 under the Swanson LOC.
Summary
The secured borrowings are detailed below:
March 31, 2018 | December 31, 2017 | |||||||||||||||
Due From | Due From | |||||||||||||||
Book Value of | Shepherd’s | Book Value of | Shepherd’s | |||||||||||||
Loans which | Finance to Loan | Loans which | Finance to Loan | |||||||||||||
Served as | Purchaser or | Served as | Purchaser or | |||||||||||||
Collateral | Lender | Collateral | Lender | |||||||||||||
Loan Purchaser | ||||||||||||||||
Builder Finance, Inc. | $ | 7,506 | $ | 4,262 | $ | 7,483 | $ | 4,089 | ||||||||
S.K. Funding, LLC | 13,046 | 6,463 | 9,128 | 4,134 | ||||||||||||
Lender | ||||||||||||||||
Shuman | 2,134 | 1,325 | 1,747 | 1,325 | ||||||||||||
Paul Swanson | 5,147 | 3,851 | 2,518 | 2,096 | ||||||||||||
Total | $ | 27,833 | $ | 15,901 | $ | 20,876 | $ | 11,644 |
Typical Current Advance Rate | Does Buyer Portion | |||||||||||||||
Year Initiated | On New Loans | Have Priority? | Rate | |||||||||||||
Loan Purchaser | ||||||||||||||||
Builder Finance, Inc. | 2014 | 70 | % | Yes | The rate our customer pays us | |||||||||||
S.K. Funding, LLC | 2015 | 55 | % | Varies | 9–9.5% | |||||||||||
Lender | ||||||||||||||||
Shuman | 2017 | 67 | % | Yes | 10 | % | ||||||||||
Paul Swanson | 2017 | 67 | % | Yes | 10 | % |
Unsecured Borrowings
Other Unsecured Debts
Our other unsecured debts are detailed below:
Principal Amount Outstanding as of | ||||||||||||||
Maturity | Interest | March 31, | December 31, | |||||||||||
Loan | Date | Rate(1) | 2018 | 2017 | ||||||||||
Unsecured Note with Seven Kings Holdings, Inc. | August 2018 | 7.5 | % | 500 | 500 | |||||||||
Unsecured Line of Credit from Builders Finance, Inc. | January 2019 | 10.0 | % | 500 | - | |||||||||
Unsecured Line of Credit from Paul Swanson | June 2018(2) | 10.0 | % | 149 | 1,904 | |||||||||
Subordinated Promissory Note | Demand(3) | 7.5 | % | 1,125 | - | |||||||||
Subordinated Promissory Note | December 2019 | 10.5 | % | 113 | 113 | |||||||||
Subordinated Promissory Note | April 2020 | 10.0 | % | 100 | 100 | |||||||||
Senior Subordinated Promissory Note | March 2022(4) | 10.0 | % | 400 | - | |||||||||
Senior Subordinated Promissory Note | March 2022 | 1.0 | % | 728 | - | |||||||||
Junior Subordinated Promissory Note | March 2022 | 22.5 | % | 417 | - | |||||||||
Senior Subordinated Promissory Note | October 2022 | 1.0 | % | 279 | 279 | |||||||||
Junior Subordinated Promissory Note | October 2022 | 20.0 | % | 173 | 173 | |||||||||
$ | 4,484 | $ | 3,069 |
(1)Interest rate per annum, based upon actual days outstanding and a 365/366 day year.
(2)Due in June 2018 unless extended by Mr. Swanson for one or more additional 15-month periods.
(3)Principal due six months after lender gives notice. This note may be prepaid without fee, premium or penalty.
(4)This note may be prepaid upon lender's request at least 10 days prior to an interest payment and up to $20 of principal.
Unsecured Notes through the Public Offering (“Notes Program”)
The effective interest rate on the Notes offered pursuant to our Notes Program at March 31, 2018 and December 31, 2017 was 9.16% and 9.21%, respectively, not including the amortization of deferred financing costs. There are limited rights of early redemption. The following table shows the roll forward of our Notes program:
Three Months 2018 | Year Ended 2017 | Three Months 2017 | ||||||||||
Gross Notes outstanding, beginning of period | $ | 14,121 | $ | 11,221 | $ | 11,221 | ||||||
Notes issued | 1,309 | 8,375 | 4,144 | |||||||||
Note repayments / redemptions | (1,645 | ) | (5,475 | ) | (2,573 | ) | ||||||
Gross Notes outstanding, end of period | $ | 13,785 | $ | 14,121 | $ | 12,792 | ||||||
Less deferred financing costs, net | 267 | 286 | 357 | |||||||||
Notes outstanding, net | $ | 13,518 | $ | 13,835 | $ | 12,435 |
29 |
Finance Receivables – MethodThe following is a roll forward of impairment calculation:deferred financing costs:
March 31, 2017 | December 31, 2016 | |||||||
Performing loans evaluated individually | $ | 9,555 | $ | 12,424 | ||||
Performing loans evaluated collectively | 16,566 | 9,145 | ||||||
Non-performing loans without a specific reserve | – | – | ||||||
Non-performing loans with a specific reserve | – | – | ||||||
Total | $ | 26,121 | $ | 21,569 |
Three Months | Year | Three Months | ||||||||||
Ended | Ended | Ended | ||||||||||
March 31, 2018 | December 31, 2017 | March 31, 2017 | ||||||||||
Deferred financing costs, beginning balance | $ | 1,102 | $ | 1,014 | $ | 1,014 | ||||||
Additions | 29 | 88 | 10 | |||||||||
Deferred financing costs, ending balance | $ | 1,131 | $ | 1,102 | $ | 1,024 | ||||||
Less accumulated amortization | (864 | ) | (816 | ) | (667 | ) | ||||||
Deferred financing costs, net | $ | 267 | $ | 286 | $ | 357 |
BelowThe following is an aging schedulea roll forward of loans receivable asthe accumulated amortization of March 31, 2017, on a recency basis:deferred financing costs:
No. Accts. | 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) | 114 | $ | 26,121 | 100 | % | |||||||
60-89 days | – | – | 0 | % | ||||||||
90-179 days | – | – | 0 | % | ||||||||
180-269 days | – | – | 0 | % | ||||||||
Subtotal | 114 | $ | 26,121 | 100 | % | |||||||
Interest only accounts (Accounts on which interest, deferment, extension and/or default charges were received in the last 60 days) | – | $ | – | 0 | % | |||||||
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.) | – | $ | – | 0 | % | |||||||
Total | 114 | $ | 26,121 | 100 | % |
Below is an aging schedule of loans receivable as of March 31, 2017, on a contractual basis:
No. Accts. | Unpaid Balances | % | ||||||||||
Contractual Terms - All current Direct Loans and Sales Finance Contracts with installments past due less than 60 days from due date. | 114 | $ | 26,121 | 100 | % | |||||||
60-89 days | – | – | 0 | % | ||||||||
90-179 days | – | – | 0 | % | ||||||||
180-269 days | – | – | 0 | % | ||||||||
Subtotal | 114 | $ | 26,121 | 100 | % | |||||||
Interest only accounts (Accounts on which interest, deferment, extension and/or default charges were received in the last 60 days) | – | $ | – | 0 | % | |||||||
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.) | – | $ | – | 0 | % | |||||||
Total | 114 | $ | 26,121 | 100 | % |
Below is an aging schedule of loans receivable as of December 31, 2016, on a recency basis:
No. Accts. | 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) | 71 | $ | 18,617 | 86 | % | |||||||
60-89 days | 1 | 2,952 | 14 | % | ||||||||
90-179 days | – | – | 0 | % | ||||||||
180-269 days | – | – | 0 | % | ||||||||
Subtotal | 72 | $ | 21,569 | 100 | % | |||||||
Interest only accounts (Accounts on which interest, deferment, extension and/or default charges were received in the last 60 days) | – | $ | – | 0 | % | |||||||
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.) | – | $ | – | 0 | % | |||||||
Total | 72 | $ | 21,569 | 100 | % |
Below is an aging schedule of loans receivable as of December 31, 2016, on a contractual basis:
No. Accts. | Unpaid Balances | % | ||||||||||
Contractual Terms - All current Direct Loans and Sales Finance Contracts with installments past due less than 60 days from due date. | 71 | $ | 18,617 | 86 | % | |||||||
60-89 days | 1 | 2,952 | 14 | % | ||||||||
90-179 days | – | – | 0 | % | ||||||||
180-269 days | – | – | 0 | % | ||||||||
Subtotal | 72 | $ | 21,569 | 100 | % | |||||||
Interest only accounts (Accounts on which interest, deferment, extension and/or default charges were received in the last 60 days) | – | $ | – | 0 | % | |||||||
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.) | – | $ | – | 0 | % | |||||||
Total | 72 | $ | 21,569 | 100 | % |
Three Months | Year | Three Months | ||||||||||
Ended | Ended | Ended | ||||||||||
March 31, 2018 | December 31, 2017 | March 31, 2017 | ||||||||||
Accumulated amortization, beginning balance | $ | 816 | $ | 603 | $ | 603 | ||||||
Additions | 48 | 213 | 64 | |||||||||
Accumulated amortization, ending balance | $ | 864 | $ | 816 | $ | 667 |
Foreclosed Assets
Below is a Roll forward of Foreclosed Assets:
Three Months Ended | Year Ended | Three Months Ended | ||||||||||
Beginning balance | $ | 2,798 | $ | 965 | $ | 965 | ||||||
Additions from loans | – | 1,813 | – | |||||||||
Additions for construction/development | 145 | 566 | 213 | |||||||||
Sale Proceeds | (1,890 | ) | (463 | ) | – | |||||||
Gain on sale | 77 | 28 | – | |||||||||
Impairment loss on foreclosed assets | (49 | ) | (111 | ) | – | |||||||
Ending balance | $ | 1,081 | $ | 2,798 | $ | 1,178 |
We foreclosed on five properties during 2015, of which four were acquired at the foreclosure sale and one was acquired via a deed in lieu of foreclosure. Three of the properties were lots in Georgia. We had an agreement with a builder to build a house on one of the lots which was completed in 2016 and sold and closed in November 2016. We recorded a gain of $28 as a result of that sale. We are starting construction on homes on the other two lots in the second quarter of 2017. Two of the properties were partially completed homes in Louisiana — one has been finished and work is proceeding to complete the second of these homes. The impairments in 2017 and 2016 have been on those two homes, as has the additions from construction in 2017. We acquired one property via a deed in lieu of foreclosure during 2016. This property is a beach lot in Sarasota, Florida, which we sold in March 2017 for slightly more than book value.
Property, Plant and Equipment
We purchased a partially completed building in which we plan to operate for $625 in the first quarter of 2017. No depreciation has been recorded as the asset has not been placed in service.
Customer Interest Escrow
The Pennsylvania Loans called for a funded interest escrow account (the “Interest Escrow”) which was funded with proceeds from the Pennsylvania Loans. The initial funding on the Interest Escrow was $450. The balance as of March 31, 2017 and December 31, 2016 was $449 and $541, respectively. To the extent the balance is available in the Interest Escrow, interest due on certain loans is deducted from the Interest Escrow on the date due. The Interest Escrow is increased by 20% of lot payoffs on the same loans, and by distributions on the Hoskins Group’s Series B preferred equity. All of these transactions are noncash to the extent that the total escrow amount does not need additional funding.
We have 27 and 16 other loans active as of March 31, 2017 and December 31, 2016, respectively, that also have interest escrows. The cumulative balance of all interest escrows other than the Pennsylvania Loans was $572 and $271 as of March 31, 2017 and December 31, 2016, respectively.
Roll forward of interest escrow:
Three Months Ended March 31, 2017 | Year Ended December 31, 2016 | Three Months Ended March 31, 2016 | ||||||||||
Beginning balance | $ | 812 | $ | 498 | $ | 498 | ||||||
+ Preferred equity dividends | 28 | 104 | 25 | |||||||||
+ Additions from Pennsylvania Loans | 51 | 926 | 114 | |||||||||
+ Additions from other loans | 629 | 430 | 66 | |||||||||
- Interest and fees | (471 | ) | (1,109 | ) | (240 | ) | ||||||
- Repaid to borrower or used to reduce principal | (28 | ) | (37 | ) | – | |||||||
Ending balance | $ | 1,021 | $ | 812 | $ | 463 |
Notes Payable Unsecured
Our Notes payable unsecured increased in the three months ended March 31, 2017 with new Notes of $4,144 offset by redemptions of $2,573. We used our unsecured bank line during the first quarter of 2017, however the balance as of both March 31, 2017 and December 31, 2016 was $0. Our other unsecured notes payable had no change during the three months ended March 31, 2017.
Notes Payable to Related Parties
We have two lines of credit from affiliates, which had a combined, outstanding balance of $0 as of both March 31, 2017 and December 31, 2016. We had $1,500 available to us on the affiliate lines as of both March 31, 2017 and December 31, 2016, although the affiliates have no obligation to lend money under the note.
Purchase and Sale Agreements
Previously, we had entered into a Loan Purchase and Sale Agreement with 1st Financial Bank USA (“1st Financial”) dated as of December 24, 2014, as amended (the “1st Financial LPSA”). 1st Financial bought senior positions in the loans they purchased, generally 50% of each loan. 1st Financial generally receives the interest rate we charge the borrower (with a floor of 10%) on their portion of the loan balance, and we receive the rest of the interest and all of the loan fee. We service the loans. There is an unlimited right for us to call any loan sold, however in any case of such call, a minimum of 4% of the commitment amount of 1st Financial must have been received by 1st Financial in interest, or we must make up the difference. Also, 1st Financial has a put option, which is limited to 10% of the funding made by 1st Financial under all loans purchased in the trailing 12 months.
On February 6, 2017, we entered into a Loan Purchase and Sale Agreement (the “Builder Finance LPSA”) with Builder Finance, Inc. (“Builder Finance”), pursuant to which Builder Finance shall have the right, from time to time, to purchase from us senior priority interests in certain loans made to fund the vertical construction of one to four family residential dwellings. Builder Finance is a subsidiary of 1st Financial. The Builder Finance LPSA was made effective as of August 1, 2016 and governs all eligible loans purchased from us on or after August 1, 2016, even those that would have been owned by 1st Financial pursuant to the 1st Financial LPSA. Each eligible loan will be evidenced by notes secured by, among other things, mortgages or deeds of trust encumbering the respective construction properties. Builder Finance is buying senior positions in the loans they purchase, originally 60% and 70% on new loans as of February 6, 2017, of each loan. Builder Finance generally receives the interest rate we charge the borrower (with a floor of 10%) on their portion of the loan balance, and we receive the rest of the interest and all of the loan fee. We service the loans. There is an unlimited right for us to call any loan sold, however in any case of such call, a minimum of 4% of the commitment amount of Builder Finance must have been received by Builder Finance in interest, or we must make up the difference. Also, Builder Finance has a put option, which is limited to 10% of the funding provided by Builder Finance under all loans purchased in the trailing 12 months.
In April 2015, the Company entered into a purchase and sale agreement with 7Kings as purchaser and the Company as seller, whereby 7Kings buys loans offered to it by us, providing that their portions of the loans always total less than $1,500. On or about May 7, 2015, 7Kings assigned its right and interest in the purchase and sale agreement to S.K. Funding, an affiliate of 7Kings. S.K. Funding may adjust the $1,500 with notice, but such change will not cause a buyback by us. S.K. Funding is buying pari-passu positions in the loans they purchase, generally 50% of each loan. S.K. Funding generally receives a 9% interest rate on its portion of the loan balance, and we receive the rest of the interest and all of the loan fees. We service the loans. There is an unlimited right for us to call any loan sold. This transaction is accounted for as a secured line of credit. In the fourth quarter of 2015, we entered into a modification of our agreement with S.K. Funding whereby S.K. Funding agreed to buy priority interests of $1,000 each in two large loans we originated. In the first quarter of 2016, after one of such interests was repaid, we entered into an additional modification whereby S.K. Funding agreed to buy priority interests totaling $2,000 in a total of three large loans we originated. The interest rate for the loans covered by these modifications is 9.5% to S.K. Funding. On June 30, 2016, one of those two loans was terminated with a deed in lieu of foreclosure. The property is owned by us, and we owe S.K. Funding $1,000 on that property (secured by mortgage) to be repaid upon the sale of the property, which occurred in March 2017. This amount is still covered by our purchase and sale agreement and is included in the totals in the chart below for December 31, 2016. Two more amendments were signed in the fourth quarter of 2016 allowing for more priority purchases of loans under the same terms as the first two amendments. On December 31, 2015, S.K. Funding purchased 4% of our common equity from the Wallach family. However, it sold this 4% interest on March 31, 2017.
The purchase and sale agreements are recorded as secured borrowings.
The purchase and sale agreements are detailed below:
March 31, 2017 | December 31, 2016 | |||||||||||||||
Book Value of | Due From | Book Value of | Due From | |||||||||||||
Loans which | Shepherd’s | Loans which | Shepherd’s | |||||||||||||
Served as | Finance to Loan | Served as | Finance to Loan | |||||||||||||
Collateral | Purchaser | Collateral | Purchaser | |||||||||||||
Loan purchaser | ||||||||||||||||
1st Financial Bank, USA/Builder Finance, Inc. | $ | 5,706 | $ | 3,025 | $ | 5,779 | $ | 2,517 | ||||||||
S.K. Funding, LLC | 8,182 | 3,703 | 7,770 | 4,805 | ||||||||||||
Total | $ | 13,888 | $ | 6,728 | $ | 13,549 | $ | 7,322 |
Redeemable Preferred Equity and Members’ Capital
We strive to maintain a reasonable (about 15%) balance between 1)(1) redeemable preferred equity plus members’ capital and 2) debt.(2) total assets. The ratio of redeemable preferred equity plus members’ capital to assets was 15% and 14%13% as of March 31, 20172018 and 16% as of December 31, 2016 respectively.2017. We anticipate this ratio dropping until more preferred equity is added. We are currently exploring potential increases in preferred equity.
In March 2017, S.K. Funding sold its 4% interest inJanuary 2018, our common equity in equalChief Financial Officer and Executive Vice President of Operations purchased 2% and 1% portions to each of our three independent managers andClass A common units; respectively, from our CEO. In March 2018, our Executive Vice President of Operations.Sales purchased 14.3% of our Class A common units from our CEO.
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, 2017 | December 31, 2016 | ||||||||
Borrowing Source | ||||||||||
Purchase and sale agreements | 1 | $ | 6,728 | $ | 7,322 | |||||
Secured line of credit from affiliates | 2 | – | – | |||||||
Unsecured line of credit (senior) | 3 | – | – | |||||||
Other unsecured debt (senior subordinated) | 4 | 279 | 279 | |||||||
Unsecured Notes through our public offering | 5 | 12,792 | 11,221 | |||||||
Other unsecured debt (subordinated) | 5 | 700 | 700 | |||||||
Other unsecured debt (junior subordinated) | 6 | 173 | 173 | |||||||
Total | $ | 20,672 | $ | 19,695 |
Priority Rank | March 31, 2018 | December 31, 2017 | ||||||||||
Borrowing Source | ||||||||||||
Purchase and sale agreements and other secured borrowings | 1 | $ | 16,559 | $ | 11,644 | |||||||
Secured line of credit from affiliates | 2 | 1,000 | – | |||||||||
Unsecured line of credit (senior) | 3 | 500 | – | |||||||||
Other unsecured debt (senior subordinated) | 4 | 1,007 | 279 | |||||||||
Unsecured Notes through our Notes Program, gross | 5 | 13,785 | 14,121 | |||||||||
Other unsecured debt (subordinated) | 5 | 2,387 | 2,617 | |||||||||
Other unsecured debt (junior subordinated) | 6 | 590 | 173 | |||||||||
Total | $ | 35,828 | $ | 28,834 |
Liquidity and Capital Resources
Our operations are subject to certain risks and uncertainties, particularly related to the concentration of our current operations, a significant portion of which are to a single customer and geographic region, as well as the evolution of the current economic environment and its impact on the United States real estate and housing markets. Both the concentration of risk and the economic environment could directly or indirectly cause or magnify losses related to certain transactions and access to and cost of adequate financing.
The Company’s anticipated primary sources of liquidity going forward, and the amounts received from such sources as of March 31, 2018 and 2017, are:
The Company’s anticipated primary uses of liquidity going forward, and the amounts expended on such uses as of | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
We generated net income of $191 and $129 for the three months ended March 31, 2018 and 2017, and 2016, respectively and cash flow from operations of $675 and $276 for the same periods. At March 31, 2017 and December 31, 2016, we had cash on hand of $586 and $1,566, respectively, availability on our bank line of $500 and $0, respectively, and our outstanding debt totaled $20,672 and $19,695, respectively, of which $6,728 and $7,322 was secured, respectively. The secured amount is from our purchase and sale agreements, which add liquidity and allow us to expand our business. As of March 31, 2017 and December 31, 2016, the amount that we have not loaned, but are obligated to potentially lend to our customers based on our agreements with them, was $15,257 and $11,503, respectively. Our availability on our line of credit from our members was $1,500 at both March 31, 2017 and December 31, 2016. Our members are not obligated to fund requests under our line of credit.are:
Our current plan is to expand the commercial lending program by using current liquidity and available funding (including funding from our Notes program).
Use of Liquidity | Three Months Ended | Three Months Ended March 31, 2017 | Comment and Future Outlook | |||||||
Unfunded and new loans | $ | 18,935 | $ | 15,257 | We have loan commitments which are unfunded which will need to be funded as the collateral of these loans are built. As we create new loans, some portion of those will be funded at the initial creation of the loan and then the rest will be funded over time. | |||||
Payments on secured debt | 1,665 | 2,595 | These will continue to grow as loan payoffs continue to rise. | |||||||
Payments on unsecured debt | 3,400 | 2,573 | Consists mostly of borrowings from our Notes program. We anticipate these payments to increase in 2018. | |||||||
Interest expense | 861 | 546 | We anticipate interest expense increasing as we grow. | |||||||
Distributions to owners | 52 | 40 | Distributions are based on income |
To help manage our liquidity, we:
● | do not offer demand deposits (for instance, a checking account). We manage the duration of our Notes through the interest rates we offer at any time; | |
● | fund loan requests with varying sources of capital, not just our Notes offering; and | |
● | match our interest rate to our borrower to our cost of funds. |
We currently (or may in the future) use liquidity to:
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 mean higher effective interest rates for us, as the recognition of fees we charge is spread over a shorter period. Slower sales mean lower effective interest rates for us. Slower sales 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 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.
Interest rates have several impacts on our business. First, rates affect housing (starts, home size, etc.). High long termlong-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. Higher short-term rates may increase the rates builders are charged by banks faster than our rates to the builder will grow, which might be a benefit for us. Below is a chart showing three yearthree-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.
Market Yield on U.S. Treasury Securities at 3-Year Constant Maturity
Year | Yield | Year | Yield | Year | Yield | Year | Yield | Year | Yield | Year | Yield | |||||||||||||||||||||||||||||||||||
1962 | 3.47 | % | 1972 | 5.72 | % | 1982 | 12.93 | % | 1992 | 5.30 | % | 2002 | 3.10 | % | 2012 | 0.38 | % | |||||||||||||||||||||||||||||
1963 | 3.67 | % | 1973 | 6.96 | % | 1983 | 10.45 | % | 1993 | 4.44 | % | 2003 | 2.10 | % | 2013 | 0.54 | % | |||||||||||||||||||||||||||||
1964 | 4.03 | % | 1974 | 7.84 | % | 1984 | 11.92 | % | 1994 | 6.27 | % | 2004 | 2.78 | % | 2014 | 0.90 | % | |||||||||||||||||||||||||||||
1965 | 4.22 | % | 1975 | 7.50 | % | 1985 | 9.64 | % | 1995 | 6.25 | % | 2005 | 3.93 | % | 2015 | 1.02 | % | |||||||||||||||||||||||||||||
1966 | 5.23 | % | 1976 | 6.77 | % | 1986 | 7.06 | % | 1996 | 5.99 | % | 2006 | 4.77 | % | 2016 | 1.00 | % | |||||||||||||||||||||||||||||
1967 | 5.03 | % | 1977 | 6.68 | % | 1987 | 7.68 | % | 1997 | 6.10 | % | 2007 | 4.35 | % | ||||||||||||||||||||||||||||||||
1968 | 5.68 | % | 1978 | 8.29 | % | 1988 | 8.26 | % | 1998 | 5.14 | % | 2008 | 2.24 | % | ||||||||||||||||||||||||||||||||
1969 | 7.02 | % | 1979 | 9.70 | % | 1989 | 8.55 | % | 1999 | 5.49 | % | 2009 | 1.43 | % | ||||||||||||||||||||||||||||||||
1970 | 7.29 | % | 1980 | 11.51 | % | 1990 | 8.26 | % | 2000 | 6.22 | % | 2010 | 1.11 | % | ||||||||||||||||||||||||||||||||
1971 | 5.66 | % | 1981 | 14.46 | % | 1991 | 6.82 | % | 2001 | 4.09 | % | 2011 | 0.75 | % |
(Source: Federal Reserve)
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.
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, 20172018, and December 31, 2016,2017, 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 officerCEO (our principal executive officerofficer) and CFO (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 chief executive officerCEO (our principal executive officerofficer) 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 chief executive officerCEO (our principal executive officerofficer) and CFO (our principal financial officer), as appropriate to allow timely decisions regarding required disclosure.
Internal Control over Financial Reporting
There haveDuring 2018, we hired a Vice President of Administrative Operations and Product Development to further implement segregation of duties. In addition, we placed into service an internally developed proprietary software system to assist in the management of our Notes Program, which replaced an electronic spreadsheet system. The development of the proprietary software system was designed in part to enhance the overall system of internal controls over financial reporting through further automation of various business processes. Except for the above-mentioned items there has been no changeschange in our internal controlcontrols over financial reporting that occurred during the quarter ended March 31, 20172018 that havehas materially affected or areis reasonably likely to materially affect our internal controlcontrols over financial reporting.
None.
Not applicable.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
(a) |
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
The
| |
(b) | We registered up to $70,000,000 in Fixed Rate Subordinated Notes in our public offering (SEC File No. 333-203707, effective September 29, 2015). As of March 31, | |
(c) | None. |
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
(a) | During the quarter ended March 31, | |
(b) | During the quarter ended March 31, |
The exhibits required to be filed with this report are set forth on the Exhibit Index hereto and incorporated by reference herein.
EXHIBIT INDEX
The following exhibits are included in this report on Form 10-Q for the period ended March 31, 20172018 (and are numbered in accordance with Item 601 of Regulation S-K).
101.INS** | XBRL Instance Document | |
101.SCH** | XBRL Schema Document | |
101.CAL** | XBRL Calculation Linkbase Document | |
101.DEF** | XBRL Definition Linkbase Document | |
101.LAB** | XBRL Labels Linkbase Document | |
101.PRE** | XBRL Presentation Linkbase Document |
* 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.
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: | By: | /s/ |
Chief |
37 |