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 SeptemberJune 30, 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 Jose13241 Bartram Park Blvd., Suite 203,2401, Jacksonville, FL 32223Florida 32258
(Address of principal executive offices)
302-752-2688(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,website, 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.
| 3 |
PART I – FINANCIAL INFORMATION
Shepherd’s Finance, LLC
Interim Condensed Consolidated Balance Sheets
| As of | As of | |||||||||||||||
| (in thousands of dollars) | September 30, 2017 | December 31, 2016 | June 30, 2018 | December 31, 2017 | ||||||||||||
| (Unaudited) | (Unaudited) | |||||||||||||||
| Assets | ||||||||||||||||
| Cash and cash equivalents | $ | 2,471 | $ | 1,566 | $ | 247 | $ | 3,478 | ||||||||
| Accrued interest receivable | 435 | 280 | 653 | 720 | ||||||||||||
| Loans receivable, net | 29,626 | 20,091 | 41,819 | 30,043 | ||||||||||||
| Foreclosed assets | 1,079 | 2,798 | 5,636 | 1,036 | ||||||||||||
| Property, plant and equipment | 767 | 69 | ||||||||||||||
| Property, plant and equipment, net | 1,045 | 1,020 | ||||||||||||||
| Other assets | 125 | 82 | 176 | 58 | ||||||||||||
| Total assets | $ | 34,503 | $ | 24,886 | $ | 49,576 | $ | 36,355 | ||||||||
| Liabilities, Redeemable Preferred Equity and Members’ Capital | ||||||||||||||||
| Liabilities | ||||||||||||||||
| Customer interest escrow | $ | 851 | $ | 812 | $ | 544 | $ | 935 | ||||||||
| Accounts payable and accrued expenses | 462 | 377 | 482 | 705 | ||||||||||||
| Accrued interest payable | 1,117 | 986 | 1,654 | 1,353 | ||||||||||||
| Notes payable secured | 12,168 | 7,322 | ||||||||||||||
| Notes payable secured, net of deferred financing costs | 21,058 | 11,644 | ||||||||||||||
| Notes payable unsecured, net of deferred financing costs | 14,993 | 11,962 | 20,769 | 16,904 | ||||||||||||
| Due to preferred equity member | 29 | 28 | 31 | 31 | ||||||||||||
| Total liabilities | 29,620 | 21,487 | 44,538 | 31,572 | ||||||||||||
| Commitments and Contingencies (Notes 3 and 10) | ||||||||||||||||
| Commitments and Contingencies (Notes 3 and 9) | ||||||||||||||||
| Redeemable Preferred Equity | ||||||||||||||||
| Series C preferred equity | 1,065 | – | 1,165 | 1,097 | ||||||||||||
| Members’ Capital | ||||||||||||||||
| Series B preferred equity | 1,220 | 1,150 | 1,280 | 1,240 | ||||||||||||
| Class A common equity | 2,598 | 2,249 | 2,593 | 2,446 | ||||||||||||
| Members’ capital | 3,818 | 3,399 | 3,873 | 3,686 | ||||||||||||
| Total liabilities, redeemable preferred equity and members’ capital | $ | 34,503 | $ | 24,886 | $ | 49,576 | $ | 36,355 | ||||||||
The accompanying notes are an integral part of these interim condensed consolidated financial statements.
| 4 |
Shepherd’s Finance, LLC
Interim Condensed Consolidated Statements of Operations - Unaudited
For the Three and NineSix Months ended SeptemberJune 30, 20172018 and 20162017
| Three Months Ended | Nine Months Ended | Three Months Ended | Six Months Ended | |||||||||||||||||||||||||||||
| September 30, | September 30, | June 30, | June 30, | |||||||||||||||||||||||||||||
| (in thousands of dollars) | 2017 | 2016 | 2017 | 2016 | 2018 | 2017 | 2018 | 2017 | ||||||||||||||||||||||||
| Interest Income | ||||||||||||||||||||||||||||||||
| Interest and fee income on loans | $ | 1,673 | $ | 909 | $ | 4,203 | $ | 2,656 | $ | 2,045 | $ | 1,356 | $ | 3,872 | $ | 2,530 | ||||||||||||||||
| Interest expense: | ||||||||||||||||||||||||||||||||
| Interest related to secured borrowings | 324 | 148 | 718 | 409 | 517 | 215 | 928 | 394 | ||||||||||||||||||||||||
| Interest related to unsecured borrowings | 424 | 315 | 1,192 | 852 | 513 | 401 | 963 | 768 | ||||||||||||||||||||||||
| Interest expense | 748 | 463 | 1,910 | 1,261 | 1,030 | 616 | 1,891 | 1,162 | ||||||||||||||||||||||||
| Net interest income | 925 | 446 | 2,293 | 1,395 | 1,015 | 740 | 1,981 | 1,368 | ||||||||||||||||||||||||
| Less: Loan loss provision | 8 | 4 | 34 | 10 | 19 | 15 | 59 | 26 | ||||||||||||||||||||||||
| Net interest income after loan loss provision | 917 | 442 | 2,259 | 1,385 | 996 | 725 | 1,922 | 1,342 | ||||||||||||||||||||||||
| Non-Interest Income | ||||||||||||||||||||||||||||||||
| Gain from foreclosure of assets | – | – | – | 44 | ||||||||||||||||||||||||||||
| Gain from sale of foreclosed assets | – | – | 77 | – | – | – | – | 77 | ||||||||||||||||||||||||
| Total non-interest income | – | – | 77 | 44 | – | – | – | 77 | ||||||||||||||||||||||||
| Income | 917 | 442 | 2,336 | 1,429 | 996 | 725 | 1,922 | 1,419 | ||||||||||||||||||||||||
| Non-Interest Expense | ||||||||||||||||||||||||||||||||
| Selling, general and administrative | 537 | 297 | 1,447 | 952 | 691 | 450 | 1,308 | 898 | ||||||||||||||||||||||||
| Depreciation and amortization | 21 | 6 | 38 | 12 | ||||||||||||||||||||||||||||
| Impairment loss on foreclosed assets | 47 | – | 202 | – | 80 | 106 | 85 | 155 | ||||||||||||||||||||||||
| Total non-interest expense | 584 | 297 | 1,649 | 952 | 792 | 562 | 1,431 | 1,065 | ||||||||||||||||||||||||
| Net Income | $ | 333 | $ | 145 | $ | 687 | $ | 477 | $ | 204 | 163 | $ | 491 | $ | 354 | |||||||||||||||||
| Earned distribution to preferred equity holders | 61 | 27 | 149 | 79 | 67 | 57 | 130 | 88 | ||||||||||||||||||||||||
| Net income attributable to common equity holders | $ | 272 | $ | 118 | $ | 538 | $ | 398 | $ | 137 | 106 | $ | 361 | $ | 266 | |||||||||||||||||
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 Inin Members’ Capital - Unaudited
For the NineSix Months Ended SeptemberJune 30, 20172018
| (in thousands of dollars) | Nine Months Ended September 30, 2017 | Six Months Ended June 30, 2018 | ||||||
| Members’ capital, beginning balance | $ | 3,399 | $ | 3,686 | ||||
| Net income | 687 | 491 | ||||||
| Contributions from members (preferred) | 70 | 40 | ||||||
| Earned distributions to preferred equity holders | (149 | ) | (130 | ) | ||||
| Distributions to common equity holders | (189 | ) | (214 | ) | ||||
| Members’ capital, ending balance | $ | 3,818 | $ | 3,873 | ||||
The accompanying notes are an integral part of thesethe interim condensed consolidated financial statements.
| 6 |
Shepherd’s Finance, LLC
Interim Condensed Consolidated Statements of Cash Flows - Unaudited
For the NineSix Months Ended SeptemberJune 30, 20172018 and 20162017
Nine Months Ended September 30, | Six Months Ended June 30, | |||||||||||||||
| (in thousands of dollars) | 2017 | 2016 | 2018 | 2017 | ||||||||||||
| Cash flows from operations | ||||||||||||||||
| Net income | $ | 687 | $ | 477 | $ | 491 | $ | 354 | ||||||||
| Adjustments to reconcile net income to net cash provided by (used in) operating activities | ||||||||||||||||
| Amortization of deferred financing costs | 165 | 204 | 95 | 121 | ||||||||||||
| Provision for loan losses | 34 | 10 | 59 | 26 | ||||||||||||
| Net loan origination fees deferred (earned) | 120 | (133 | ) | 351 | 254 | |||||||||||
| Change in deferred origination expense | (26 | ) | (30 | ) | (87 | ) | (71 | ) | ||||||||
| Impairment of foreclosed assets | 202 | – | 85 | 155 | ||||||||||||
| Gain from foreclosure of assets | – | (44 | ) | |||||||||||||
| Depreciation and amortization | 38 | 12 | ||||||||||||||
| Gain from sale of foreclosed assets | (77 | ) | – | - | (77 | ) | ||||||||||
| Net change in operating assets and liabilities | ||||||||||||||||
| Other assets | (43 | ) | (75 | ) | (118 | ) | 10 | |||||||||
| Accrued interest receivable | (155 | ) | (192 | ) | (176 | ) | (74 | ) | ||||||||
| Customer interest escrow | 39 | (109 | ) | (391 | ) | 17 | ||||||||||
| Accounts payable and accrued expenses | 217 | 626 | 78 | 39 | ||||||||||||
| Net cash provided by operating activities | 1,163 | 734 | ||||||||||||||
| Net cash provided by (used in) operating activities | 425 | 742 | ||||||||||||||
| Cash flows from investing activities | ||||||||||||||||
| Loan originations and principal collections, net | (9,663 | ) | (5,091 | ) | (15,996 | ) | (9,090 | ) | ||||||||
| Investment in foreclosed assets | (296 | ) | (459 | ) | (545 | ) | (265 | ) | ||||||||
| Proceeds from sale of foreclosed assets | 1,890 | – | - | 1,890 | ||||||||||||
| Property plant and equipment additions | (698 | ) | – | (63 | ) | (583 | ) | |||||||||
| Net cash provided by (used in) investing activities | (8,767 | ) | (5,550 | ) | (16,564 | ) | (8,048 | ) | ||||||||
| Cash flows from financing activities | ||||||||||||||||
| Contributions from redeemable preferred equity | 1,004 | – | - | 1,004 | ||||||||||||
| Contributions from members (preferred) | 70 | 90 | 40 | 10 | ||||||||||||
| Distributions to preferred equity holders | (88 | ) | (78 | ) | (62 | ) | (58 | ) | ||||||||
| Distributions to common equity holders | (189 | ) | (355 | ) | (214 | ) | (117 | ) | ||||||||
| Proceeds from secured note payable | 11,760 | 6,544 | 13,538 | 5,775 | ||||||||||||
| Repayments of secured note payable | (6,914 | ) | (4,405 | ) | (4,118 | ) | (4,277 | ) | ||||||||
| Proceeds from unsecured notes payable | 9,412 | 3,629 | 8,784 | 9,218 | ||||||||||||
| Redemptions/repayments of unsecured notes payable | (6,481 | ) | (1,336 | ) | (4,953 | ) | (5,687 | ) | ||||||||
| Deferred financing costs paid | (65 | ) | (53 | ) | (67 | ) | (40 | ) | ||||||||
| Net cash provided by financing activities | 8,509 | 4,036 | ||||||||||||||
| Net cash provided by (used in) financing activities | 12,948 | 5,828 | ||||||||||||||
| Net increase (decrease) in cash and cash equivalents | 905 | (780 | ) | (3,231 | ) | (1,478 | ) | |||||||||
| Cash and cash equivalents | ||||||||||||||||
| Beginning of period | 1,566 | 1,341 | 3,478 | 1,566 | ||||||||||||
| End of period | $ | 2,471 | $ | 561 | $ | 247 | $ | 88 | ||||||||
| Supplemental disclosure of cash flow information | ||||||||||||||||
| Cash paid for interest | $ | 1,616 | $ | 671 | $ | 1,533 | $ | 1,062 | ||||||||
| Non-cash investing and financing activities | ||||||||||||||||
| Earned but not paid distribution of preferred equity holders | $ | 29 | $ | 27 | $ | 68 | $ | 29 | ||||||||
| Foreclosure of assets | $ | – | $ | 1,813 | $ | 3,897 | $ | – | ||||||||
| Accrued interest reduction due to foreclosure | $ | – | $ | 130 | $ | 243 | $ | – | ||||||||
| Net loan origination fees (earned) due to foreclosure | $ | – | $ | (55 | ) | |||||||||||
The accompanying notes are an integral part of these interim condensed consolidated financial statements.
| 7 |
Shepherd’s Finance, LLC
Notes to Interim Condensed Consolidated Financial Statements (unaudited)
Information presented throughout these notes to the interim condensed consolidated financial statements (unaudited) is in thousands of dollars.
1. Description of Business and Basis of Presentation
Description of Business
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 theThe Company is a sole member of a consolidating subsidiary, 84 REPA, LLC. The Company operatedoperates pursuant to an operating agreementits Second Amended and Restated Operating Agreement by and among Daniel M. Wallach and the other members of the Company from its inception througheffective as of March 29, 2012, at which time it adopted an amended and restated operating agreement.16, 2017.
As of SeptemberJune 30, 2017,2018, the Company extends commercial loans to residential homebuilders (in 1617 states) to:
| ● | construct single family homes, | |
| ● | develop undeveloped land into residential building lots, and | |
| ● | purchase and improve for sale older homes. |
Basis of Presentation
The accompanying (a) interim condensed consolidated balance sheet as of December 31, 2016,2017, 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 in the 2017 Statements.
Accounting Standards Adopted in the Period
Accounting Standards Update (“Note 2”ASU”) 2016-01, “Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities (An Amendment of FASB ASC 825).” The Financial Accounting Standards Board (“FASB”) issued ASU 2016-01 in January 2016, and it 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.
| 8 |
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 Accounting Standards Codification (“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 ASU 2014-09, codified at ASC Topic 606. The Company adopted ASC Topic 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 Topic 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 Topic 606. All of the Company’s revenue that is subject to ASC Topic 606 would be included in non-interest income; however, not all non-interest income is subject to ASC Topic 606. The Company had no contract liabilities or unsatisfied performance obligations with customers as of June 30, 2018.
Reclassifications
Certain prior year amounts have been reclassified for consistency with current period presentation.
2. Fair Value
There has beenThe Company had no change in ourfinancial instruments measured at fair value policy duringon a recurring basis as of June 30, 2018 and December 31, 2017.
The following tables present the balances of non-financial instruments measured at fair value on a non-recurring basis as of SeptemberJune 30, 20172018 and December 31, 2016.2017.
SeptemberJune 30, 20172018
| 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 | ||||||||||
| Carrying | Estimated | Quoted Prices in Active Markets for Identical Assets | Significant Other Observable Inputs | Significant Unobservable Inputs | ||||||||||||||||
| Amount | Fair Value | Level 1 | Level 2 | Level 3 | ||||||||||||||||
| Foreclosed assets | $ | 5,636 | $ | 5,636 | $ | – | $ | – | $ | 5,636 | ||||||||||
| 9 |
December 31, 20162017
| Quoted Prices | ||||||||||||||||||||
| in Active | ||||||||||||||||||||
| Markets for | Significant 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 | ||||||||||
| 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 | $ | 1,036 | $ | 1,036 | $ | – | $ | – | $ | 1,036 | ||||||||||
The Company had no impaired loans as of June 30, 2018 and December 31, 2017.
The table below is a summary of fair value estimates for financial instruments and the level of the fair value hierarchy within which the fair value measurements are categorized at the periods indicated:
SeptemberJune 30, 20172018
| Quoted Prices | Quoted Prices | |||||||||||||||||||||||||||||||||||||||
| in Active | in Active | Significant | ||||||||||||||||||||||||||||||||||||||
| Markets for | Significant Other | Significant | Markets for | 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 | $ | 2,471 | $ | 2,471 | $ | 2,471 | $ | – | $ | – | $ | 247 | $ | 247 | $ | 247 | $ | – | $ | – | ||||||||||||||||||||
| Loans receivable, net | 29,626 | 29,626 | – | – | 29,626 | 41,819 | 41,819 | – | – | 41,819 | ||||||||||||||||||||||||||||||
| Accrued interest receivable | 435 | 435 | – | – | 435 | 653 | 653 | – | – | 653 | ||||||||||||||||||||||||||||||
| Financial Liabilities | ||||||||||||||||||||||||||||||||||||||||
| Financial Liabilities: | ||||||||||||||||||||||||||||||||||||||||
| Customer interest escrow | 851 | 851 | – | – | 851 | 544 | 544 | – | – | 544 | ||||||||||||||||||||||||||||||
| Notes payable secured | 12,168 | 12,168 | – | – | 12,168 | 21,058 | 21,058 | – | – | 21,058 | ||||||||||||||||||||||||||||||
| Notes payable unsecured, net | 14,993 | 14,993 | – | – | 14,993 | 20,769 | 20,769 | – | – | 20,769 | ||||||||||||||||||||||||||||||
| Accrued interest payable | 1,117 | 1,117 | – | – | 1,117 | 1,654 | 1,654 | – | – | 1,654 | ||||||||||||||||||||||||||||||
December 31, 20162017
| Quoted Prices | Quoted Prices | |||||||||||||||||||||||||||||||||||||||
| in Active | in Active | Significant | ||||||||||||||||||||||||||||||||||||||
| Markets for | Significant Other | Significant | Markets for | 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 receivable | 280 | 280 | – | – | 280 | 720 | 720 | – | – | 720 | ||||||||||||||||||||||||||||||
| Financial Liabilities | ||||||||||||||||||||||||||||||||||||||||
| 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 SeptemberJune 30, 20172018 and December 31, 2016:2017:
September 30, 2017 | December 31, 2016 | June 30, 2018 | December 31, 2017 | |||||||||||||
| Loans receivable, gross | $ | 31,858 | $ | 21,569 | $ | 44,803 | $ | 32,375 | ||||||||
| Less: Deferred loan fees | (738 | ) | (618 | ) | (1,197 | ) | (847 | ) | ||||||||
| Less: Deposits | (1,487 | ) | (861 | ) | (1,827 | ) | (1,497 | ) | ||||||||
| Plus: Deferred origination expense | 81 | 55 | 196 | 109 | ||||||||||||
| Less: Allowance for loan losses | (88 | ) | (54 | ) | (156 | ) | (97 | ) | ||||||||
| Loans receivable, net | $ | 29,626 | $ | 20,091 | $ | 41,819 | $ | 30,043 | ||||||||
Commercial Construction and Development Loans
Commercial Loans – Construction Loan Portfolio Summary
As of SeptemberJune 30, 2017, we have 482018, the Company has 68 borrowers, all of whom, including our onefour development loan customercustomers (the “Hoskins Group”)Group,” consisting of Benjamin Marcus Homes, LLC, Investor’s Mark Acquisitions, LLC, and Mark Hoskins, being the largest of the four), borrow money for the purpose of building new homes.
The following is a summary of ourthe loan portfolio to builders for home construction loans as of SeptemberJune 30, 20172018 and December 31, 2016.2017:
| 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 | |||||||||||||||||||||||||
| 2017 | 16 | 48 | 148 | $ | 71,305 | $ | 43,748 | $ | 28,404 | 61 | %(3) | 5 | % | ||||||||||||||||||||
| 2016 | 15 | 30 | 69 | 46,187 | 27,141 | 17,487 | 59 | %(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 | 68 | 245 | $ | 93,976 | $ | 60,551 | $ | 38,888 | 64 | %(3) | 5 | % | |||||||||||||||||||
| 2017 | 16 | 52 | 168 | 75,931 | 47,087 | 29,564 | 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 land development as of SeptemberJune 30, 20172018 and December 31, 2016. These loans are referred to as the Pennsylvania Loans.2017:
| Year | State | Number of Borrowers | Number of Loans | Value of Collateral(1) | Commitment Amount | Gross Amount Outstanding | Loan to Value Ratio(2) | Loan Fee | ||||||||||||||||||||||||||
| 2017 | Pennsylvania | 1 | 3 | $ | 5,339 | $ | 4,600 | (3) | $ | 3,454 | 65 | % | $ | 1,000 | ||||||||||||||||||||
| 2016 | Pennsylvania | 1 | 3 | 6,586 | 5,931 | (3) | 4,082 | 62 | % | 1,000 | ||||||||||||||||||||||||
| 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 | 4 | 7 | $ | 8,249 | $ | 6,367 | $ | 5,915 | 72 | % | $ | 1,000 | |||||||||||||||||||
| 2017 | 1 | 1 | 3 | 4,997 | 4,600 | 2,811 | 56 | % | 1,000 | |||||||||||||||||||||||
| (1) | The value is determined by the appraised value adjusted for remaining costs to be |
| (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 |
| (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 |
| 11 |
Credit Quality Information
The following table presentstables present credit-related information at the “class” level in accordance with Financial Accounting Standards Board Accounting Standards CodificationFASB ASC 310-10-50, “Disclosures about the Credit Quality of Finance Receivables and the Allowance for Credit Losses.” See our Form 10-K for the year ended December 31, 2016,2017, as filed with the SEC, for more information.
Gross finance Receivablesreceivables – By risk rating:
September 30, 2017 | December 31, 2016 | June 30,2018 | December 31,2017 | |||||||||||||
| Pass | $ | 26,931 | $ | 18,275 | $ | 39,327 | $ | 25,656 | ||||||||
| Special mention | 4,927 | 3,294 | 5,476 | 6,719 | ||||||||||||
| Classified – accruing | – | – | ||||||||||||||
| Classified – nonaccrual | – | – | ||||||||||||||
| Total | $ | 31,858 | $ | 21,569 | $ | 44,803 | $ | 32,375 | ||||||||
Gross finance Receivablesreceivables – Method of impairment calculation:
September 30, 2017 | December 31, 2016 | June 30, 2018 | December 31,2017 | |||||||||||||
| Performing loans evaluated individually | $ | 9,367 | $ | 12,424 | $ | 18,409 | $ | 14,992 | ||||||||
| Performing loans evaluated collectively | 22,491 | 9,145 | 26,394 | 17,383 | ||||||||||||
| Non-performing loans without a specific reserve | – | – | ||||||||||||||
| Non-performing loans with a specific reserve | – | – | ||||||||||||||
| Total | $ | 31,858 | $ | 21,569 | $ | 44,803 | $ | 32,375 | ||||||||
At SeptemberAs of June 30, 20172018 and December 31, 2016,2017, there were no loans acquired with deteriorated credit 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:
| September 30, 2017 | December 31, 2016 | June 30, 2018 | December 31, 2017 | |||||||||||||||||||||
| Percent of | Percent of | Percent of | Percent of | |||||||||||||||||||||
| Borrower | Loan | Borrower | Loan | Borrower | Loan | Borrower | Loan | |||||||||||||||||
| City | Commitments | City | Commitments | City | Commitments | City | Commitments | |||||||||||||||||
| Highest concentration risk | Pittsburgh, PA | 25 | % | Pittsburgh, PA | 37 | % | Pittsburgh, PA | 23 | % | Pittsburgh, PA | 22 | % | ||||||||||||
| Second highest concentration risk | Sarasota, FL | 7 | % | Sarasota, FL | 11 | % | Cape Coral, FL | 4 | % | Sarasota, FL | 7 | % | ||||||||||||
| Third highest concentration risk | Orlando, FL | 5 | % | Savannah, GA | 6 | % | Orlando, FL | 4 | % | Savannah, GA | 5 | % | ||||||||||||
| 12 |
4. Foreclosed Assets
RollThe following table is a roll forward of foreclosed assets:
Nine Months Ended | Year Ended | Nine Months Ended | Six Months Ended | Year Ended | Six Months Ended | |||||||||||||||||||
| Beginning balance | $ | 2,798 | $ | 965 | $ | 965 | $ | 1,036 | $ | 2,798 | $ | 2,798 | ||||||||||||
| Additions from loans | – | 1,813 | 1,813 | 4,140 | - | - | ||||||||||||||||||
| Additions for construction/development | 296 | 566 | 459 | 545 | 317 | 265 | ||||||||||||||||||
| Sale proceeds | (1,890 | ) | (463 | ) | – | - | (1,890 | ) | (1,890 | ) | ||||||||||||||
| Gain on sale | 77 | 28 | – | - | 77 | 77 | ||||||||||||||||||
| Impairment loss on foreclosed assets | (202 | ) | (111 | ) | – | (85 | ) | (266 | ) | (155 | ) | |||||||||||||
| Ending balance | $ | 1,079 | $ | 2,798 | $ | 3,237 | $ | 5,636 | $ | 1,036 | $ | 1,095 | ||||||||||||
During April 2018, we entered into a Deed in Lieu of Foreclosure Agreement with a certain borrower who defaulted on a loan by failing to make an interest payment that was due. The Company reclassified $4,140, consisting of $3,897 of principal from Loan receivable, net and $243 of interest from Accrued interest receivable, to Foreclosed assets on the balance sheet as of June 30, 2018.
5. Property, Plant, Equipment and Long Lived Assets
In the first quarter of 2017, we purchased, for $625, a partially completed building. It is our intent to complete the building for operating purposes. As such, we invested $142 in related improvements to the building for the nine months ended September 30, 2017. No depreciation has been recorded as the building has not been placed in service.
We are developing operations software and invested $41 in this project for the nine months ended September 30, 2017. We purchased loan document software in 2016 for $71. Total depreciation of that software has been $25, of which $19 has been recognized in 2017.
6. Borrowings
The following table displays our borrowings and a ranking of priority:
| Priority Rank | September 30, 2017 | December 31, 2016 | ||||||||||
| Borrowing Source | ||||||||||||
| Purchase and sale agreements and other secured borrowings | 1 | $ | 12,168 | $ | 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, gross | 5 | 14,139 | 11,221 | |||||||||
| Other unsecured debt (subordinated) | 5 | 713 | 700 | |||||||||
| Other unsecured debt (junior subordinated) | 6 | 173 | 173 | |||||||||
| Total | $ | 27,472 | $ | 19,695 | ||||||||
| Priority Rank | June 30, 2018 | December 31, 2017 | ||||||||||
| Borrowing Source | ||||||||||||
| Purchase and sale agreements | 1 | $ | 19,186 | $ | 11,644 | |||||||
| Secured line of credit from affiliates | 2 | 1,877 | - | |||||||||
| Unsecured line of credit (senior) | 3 | 500 | - | |||||||||
| Other unsecured borrowings (senior subordinated) | 4 | 1,008 | 279 | |||||||||
| Unsecured Notes through our public offering, gross | 5 | 15,274 | 14,121 | |||||||||
| Other unsecured borrowings (subordinated) | 5 | 3,649 | 2,617 | |||||||||
| Other unsecured borrowings (junior subordinated) | 6 | 590 | 173 | |||||||||
| Total | $ | 42,084 | $ | 28,834 | ||||||||
The following table shows the maturity of outstanding debtborrowings as of SeptemberJune 30, 2017.2018:
| Year Maturing | Total Amount Maturing | Public Offering | Other Unsecured | Purchase and Sale Agreements and other secured borrowings | Total Amount Maturing | Public | Other Unsecured | Purchase and Sale Agreements and Other Secured Borrowings | ||||||||||||||||||||||||
| 2017 | $ | 12,247 | $ | 79 | $ | – | $ | 12,168 | ||||||||||||||||||||||||
| 2018 | 5,133 | 4,633 | 500 | – | $ | 25,728 | $ | 2,306 | $ | 3,007 | $ | 20,415 | ||||||||||||||||||||
| 2019 | 3,754 | 3,641 | 113 | – | 7,556 | 6,499 | 1,043 | 14 | ||||||||||||||||||||||||
| 2020 | 2,494 | 1,942 | 552 | – | 2,270 | 2,155 | 100 | 15 | ||||||||||||||||||||||||
| 2021 | 3,844 | 3,844 | – | – | 3,788 | 3,773 | - | 15 | ||||||||||||||||||||||||
| 2022 and thereafter | 2,742 | 541 | 1,597 | 604 | ||||||||||||||||||||||||||||
| Total | $ | 27,472 | $ | 14,139 | $ | 1,165 | $ | 12,168 | $ | 42,084 | $ | 15,274 | $ | 5,747 | $ | 21,063 | ||||||||||||||||
| 13 |
Secured Borrowings
Purchase and Sale Agreements
In July 2017,March 2018, we entered into the SixthSeventh Amendment (the “Sixth“Seventh Amendment”) to our Loan Purchase and Sale Agreement (the “Agreement”“S.K. Funding LPSA”) with S.K. Funding, LLC (the “S.K.(“S.K. Funding”). The Agreement was originally entered into between the Company and Seven Kings Holdings, Inc. (“7Kings”). However, on or about May 7, 2015, 7Kings assigned its right and interest in the Agreement to S.K. Funding.
The purpose of the SixthSeventh Amendment was to allow S.K. Funding to purchase portionsa portion of the Pennsylvania Loans for a purchase price of $3,000 under parameters different from those specified in the Agreement. The Pennsylvania Loans purchased pursuant to the Sixth Amendment consist of a portion of the loans to the Hoskins Group. We will continue to service the loans.$649.
The timing of the Company’s principal and interest payments to S.K. Funding under the SixthSeventh 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. The Pennsylvania Loans had a principal amount in excess of $4,000time, as of the effective date of the Sixth Amendment. While the total principal amount of the Pennsylvania Loans exceeds $1,000, S.K. Funding must fund (by paying the Company) the amount by which the total principal amount of the Pennsylvania Loans exceeds $1,000, with such total amount funded not exceeding $3,000. The interest rate accruing to S.K. Funding under the Sixth Amendment is 10.5% calculated on a 365/366 day basis. When the total principal amount of the Pennsylvania Loans is less than $4,000, 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 of the Pennsylvania Loans is less than $4,000 until S.K. Funding’s principal has been repaid in full. S.K. Funding will continue to be obligated, as described in this paragraph, to fund (by paying the Company) the Pennsylvania Loans for any increases in the outstanding balance of the Pennsylvania Loans up to no more than a total outstanding amount of $4,000.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 then 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 SixthSeventh Amendment has a term of 24 months from the effective date and will automatically renew for an additional six month termssix-month term unless either party gives written notice of its intent not to renew the Sixth Amendment at least six months prior to the end of a term. Further, no Protective Advances (as such term is defined in the Agreement) will be required with respect to the Pennsylvania Loans. S.K. Funding will have a priority position as compared to the Company in the case of a default by any of the borrowers.
LineLines of Credit
Also inAmendments to the Lines of Credit with Mr. Wallach and His Affiliates
During June 2018, we entered into a First Amendment to the line of credit with our Chief Executive Officer and his wife (the “Wallach LOC”) which modified the interest rate to generally equal the prime rate plus 3%. The interest rate for the Wallach LOC was 6.8% and 4.4% as of June 30, 2018 and 2017, respectively. We borrowed $877 and $0 against the Wallach LOC as of June 30, 2018 and 2017, respectively. Interest was $6 and $10 for the quarter and six months ended June 30, 2018, respectively. As of June 30, 2018, there was $373 remaining availability on the Wallach LOC.
During June 2018, we entered into a First Amendment to the line of credit with the 2007 Daniel M. Wallach Legacy Trust, which our Chief Executive Officer’s trust (the “Wallach Trust LOC”) which modified the interest rate to generally equal the prime rate plus 3%. The interest rate for this borrowing was 6.8% and 4.4% as of June 30, 2018 and 2017, respectively. As of June 30, 2018, we borrowed $0 against the Wallach Trust LOC. As of June 30, 2018, there the was $250 remaining availability on the Wallach Trust LOC.
Line of Credit (Shuman)
During July 2017, we entered into a line of credit agreement (the “Shuman LOC Agreement”) with a group of lenders (“Shuman”(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 2019 unless extended by Shuman for one or more additional 12-month periods. |
The line is secured with assignments of certain notes and mortgages and carries a total cost of funds to us of 10%. The maximum amount we can draw on the line is $1,325, whichShuman LOC was fully borrowed as of SeptemberJune 30, 2018. Interest expense was $33 and $67 for the quarter and six months ended June 30, 2018, respectively.
Modification to the Line of Credit with Paul Swanson
During April 2018, we entered into a Master Loan Modification Agreement (the “Swanson Modification Agreement”) with Paul Swanson which modified the Line of Credit Agreement between us and Mr. Swanson dated October 23, 2017. It is due in July 2018.Pursuant to the Swanson Modification Agreement, Mr. Swanson provides us with a revolving line of credit (the “Swanson LOC”) with the following terms:
| ● | Principal not to exceed $7,000; | |
| ● | Secured with assignments of certain notes and mortgages; | |
| ● | Cost of funds to us of 10%; and | |
| ● | Due in January 2019 unless extended by Mr. Swanson for one or more additional 15-month periods. |
The Swanson LOC was fully borrowed as of June 30, 2018. Interest expense was $165 and $265 for the quarter and six months ended June 30, 2018, respectively.
New Line of Credit with William Myrick
During June 2018, we entered into a line of credit agreement (the “Myrick LOC Agreement”) with our Executive Vice President of Sales, William Myrick. Pursuant to the Myrick LOC Agreement, Mr. Myrick provides us with a line of credit (the “Myrick LOC”) with the following terms:
| ● | Principal not to exceed $1,000; | |
| ● | Secured by a lien against all of our assets; | |
| ● | Cost of funds to us generally equal to the prime rate plus 3%; and | |
| ● | Due upon demand. |
The Myrick LOC was fully borrowed as of June 30, 2018. Interest expense was $3 for both the quarter and six months ended June 30, 2018.
Mortgage Payable
During the first six months of 2018, we entered into a commercial mortgage on our office building with the following terms:
| ● | Principal not to exceed $660; | |
| ● | Interest rate at 5.07% per annum based on a year of 360 days; and | |
| ● | Due in January 2033. |
The principal amount of the Company’s commercial mortgage was $654 as of June 30, 2018. Interest expense was $7 and $18 for the quarter and six months ended June 30, 2018.
Summary
The secured borrowingspurchase and sale agreements and lines of credit are detailedsummarized below:
| September 30, 2017 | December 31, 2016 | |||||||||||||||
| 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 | ||||||||||||||||
| 1st Financial Bank, USA/Builder Finance, Inc. | $ | 9,482 | $ | 4,830 | $ | 5,779 | $ | 2,517 | ||||||||
| S.K. Funding, LLC | 11,169 | 6,013 | 7,770 | 4,805 | ||||||||||||
| Shuman | 2,147 | 1,325 | – | – | ||||||||||||
| Total | $ | 22,798 | $ | 12,168 | $ | 13,549 | $ | 7,322 | ||||||||
| June 30, 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. | $ | 8,538 | $ | 4,843 | $ | 7,483 | $ | 4,089 | ||||||||
| S.K. Funding | 10,108 | 6,625 | 9,128 | 4,134 | ||||||||||||
| Lender | ||||||||||||||||
| Shuman | 2,160 | 1,325 | 1,747 | 1,325 | ||||||||||||
| Paul Swanson | 8,214 | 5,738 | 2,518 | 2,096 | ||||||||||||
| Total | $ | 29,020 | $ | 18,531 | $ | 20,876 | $ | 11,644 | ||||||||
| 15 |
Unsecured Borrowings
Other Unsecured LoansDebts
In August 2015, we entered into anOur other unsecured note with 7Kings, under which wedebts are the borrower. Thedetailed below:
| Maturity | Interest | Principal Amount Outstanding as of | ||||||||||||
| Loan | Date | Rate(1) | June 30, 2018 | December 31, 2017 | ||||||||||
| Unsecured Note with Seven Kings Holdings, Inc. | August 2018 | 7.5 | % | 500 | 500 | |||||||||
| Unsecured Line of Credit from Builder Finance, Inc. | January 2019 | 10.0 | % | 500 | - | |||||||||
| Unsecured Line of Credit from Paul Swanson | December2018(2) | 10.0 | % | 1,262 | 1,904 | |||||||||
| Subordinated Promissory Note | Demand(3) | 7.5 | % | 1,125 | - | |||||||||
| Subordinated Promissory Note | December 2019 | 10.5 | % | 263 | 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(5) | 1.0 | % | 728 | - | |||||||||
| Junior Subordinated Promissory Note | March 2022(5) | 22.5 | % | 417 | - | |||||||||
| Senior Subordinated Promissory Note | October 2022(6) | 1.0 | % | 279 | 279 | |||||||||
| Junior Subordinated Promissory Note | October 2022(6) | 20.0 | % | 173 | 173 | |||||||||
| $ | 5,747 | $ | 3,069 | |||||||||||
(1)Interest rate per annum, based upon actual days outstanding and a 365/366 day year.
(2)Due in December 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 September 30, 2017 and December 31, 2016. The note was due on February 19, 2016 and was renewed several times. The maturity date is now February 19, 2018 and may be prepaid at any time without fee, premium, or penalty. This note is separate from the purchase and sale agreement with 7Kings mentioned above.
In January 2017, we entered into an unsecured line of credit with Builder’s Finance, Inc., under which we are the borrower. The(4)This note has a maximum amount outstanding of $500, of which $0 was outstanding as of September 30, 2017. Interest on the loan accrues annually at a rate of 10%. The maturity date is January 28, 2018 and may be prepaid upon lender’s request at any time without penalty.least 10 days prior to an interest payment and up to $20 of principal.
(5)These notes were issued to the same holder and, when calculated together, yield a blended return of 11% per annum.
(6) These notes were issued to the same holder and, when calculated together, yield a blended return of 10% per annum.
| 16 |
Unsecured Notes through the Public Offering (Notes Program)(“Notes Program”)
The effective interest rate on the notesNotes (“Notes”) offered pursuant to our public offering (“Notes”)the Notes Program at SeptemberJune 30, 20172018 and December 31, 20162017 was 9.15%9.39% and 8.26%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 ourthe Notes program:Program:
Nine Months 2017 | Year Ended 2016 | Nine Months 2016 | ||||||||||
| Gross Notes outstanding, beginning of period | $ | 11,221 | $ | 8,496 | $ | 8,496 | ||||||
| Notes issued | 8,299 | 4,972 | 3,529 | |||||||||
| Note repayments / redemptions | (5,381 | ) | (2,247 | ) | (1,336 | ) | ||||||
| Gross Notes outstanding, end of period | $ | 14,139 | $ | 11,221 | $ | 10,689 | ||||||
| Less deferred financing costs, net | 311 | 411 | 448 | |||||||||
| Notes outstanding, net | $ | 13,828 | $ | 10,810 | $ | 10,241 | ||||||
| Six Months Ended June 30, 2018 | Year Ended December 31, 2017 | Six Months Ended June 30, 2017 | ||||||||||
| Gross Notes outstanding, beginning of period | $ | 14,121 | $ | 11,221 | $ | 11,221 | ||||||
| Notes issued | 3,350 | 8,375 | 8,105 | |||||||||
| Note repayments / redemptions | (2,197 | ) | (5,475 | ) | (5,087 | ) | ||||||
| Gross Notes outstanding, end of period | $ | 15,274 | $ | 14,121 | $ | 14,239 | ||||||
| Less deferred financing costs, net | 252 | 286 | 330 | |||||||||
| Notes outstanding, net | $ | 15,022 | $ | 13,835 | $ | 13,909 | ||||||
The following is a roll forward of deferred financing costs:
| Nine Months | Year | Nine Months | Six Months | Year | Six Months | |||||||||||||||||||
| Ended | Ended | Ended | Ended | Ended | Ended | |||||||||||||||||||
September 30, 2017 | December 31, 2016 | September 30, 2016 | June 30, 2018 | December 31, 2017 | June 30, 2017 | |||||||||||||||||||
| Deferred financing costs, beginning balance | $ | 1,014 | $ | 935 | $ | 935 | $ | 1,102 | $ | 1,014 | $ | 1,014 | ||||||||||||
| Additions | 65 | 79 | 53 | 61 | 88 | 40 | ||||||||||||||||||
| Deferred financing costs, ending balance | $ | 1,079 | $ | 1,014 | $ | 988 | $ | 1,163 | $ | 1,102 | $ | 1,054 | ||||||||||||
| Less accumulated amortization | (768 | ) | (603 | ) | (540 | ) | (911 | ) | (816 | ) | (724 | ) | ||||||||||||
| Deferred financing costs, net | $ | 311 | $ | 411 | $ | 448 | $ | 252 | $ | 286 | $ | 330 | ||||||||||||
The following is a roll forward of the accumulated amortization of deferred financing costs:
| Nine Months | Year | Nine Months | Six Months | Year | Six Months | |||||||||||||||||||
| Ended | Ended | Ended | Ended | Ended | Ended | |||||||||||||||||||
September 30, 2017 | December 31, 2016 | September 30, 2016 | June 30, 2018 | December 31, 2017 | June 30, 2017 | |||||||||||||||||||
| Accumulated amortization, beginning balance | $ | 603 | $ | 336 | $ | 336 | $ | 816 | $ | 603 | $ | 603 | ||||||||||||
| Additions | 165 | 267 | 204 | 95 | 213 | 121 | ||||||||||||||||||
| Accumulated amortization, ending balance | $ | 768 | $ | 603 | $ | 540 | $ | 911 | $ | 816 | $ | 724 | ||||||||||||
7.6. Redeemable Preferred Equity
The following is a roll forward of Series C cumulative preferred unitsequity (“Series C Preferred Units”) were issued to Margaret Rauscher IRA LLC (Margaret Rauscher is the wife of one of our independent managers, Eric A. Rauscher) in March 2017 and to an IRA owned by William Myrick, another one of our independent managers, in April 2017. 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 Series C Preferred Units have a fixed value which is their purchase price and preferred liquidation and distribution rights. Yearly distributions of 12% of the Series C Preferred Units’ value (provided profits are available) will be made quarterly. This rate can increase if any interest rate on our public Notes offering rises above 12%. Dividends can be reinvested monthly into additional Series C Preferred Units.:
Roll forward of redeemable preferred equity:
Six Months Ended June 30,2018 | Year Ended December 31,2017 | Six Months Ended June 30,2017 | ||||||||||
| Beginning balance | $ | 1,097 | $ | – | $ | – | ||||||
| Additions from new investment | – | 1,004 | 1,004 | |||||||||
| Additions from reinvestment | 68 | 93 | 29 | |||||||||
| Ending balance | $ | 1,165 | $ | 1,097 | $ | 1,033 | ||||||
Nine Months Ended 2017 | Year Ended 2016 | Nine Months Ended 2016 | ||||||||||
| Beginning balance | $ | – | $ | – | $ | – | ||||||
| Additions from new investment | 1,004 | – | – | |||||||||
| Additions from reinvestment | 61 | – | – | |||||||||
| Ending balance | $ | 1,065 | $ | – | $ | – | ||||||
| 17 |
The following table shows the earliest redemption options for investors in our Series C Preferred Units as of SeptemberJune 30, 2017.2018:
| Year Maturing | Total Amount Redeemable | |||
| 2023 | $ | 1,065 | ||
| Total | $ | 1,065 | ||
| Year of Available Redemption | Total Amount Redeemable | |||
| 2023 | $ | 1,165 | ||
| Total | $ | 1,165 | ||
8.7. Members’ Capital
There are currently two classes of equity units outstanding:outstanding that the Company classifies as Members’ Capital: Class A common units (“Class A Common Units”) and Series B cumulative preferred units (“Series B Preferred Units”).
The As of June 30, 2018, 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 SeptemberJune 30, 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,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 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.
The Series B PreferredSales purchased 14.3% of our outstanding Class A Common Units were issued to the Hoskins Group through a reduction in a loan issued by the Hoskins Group to the Company. In December 2015, the Hoskins Group agreed to purchase 0.1 Series B Preferred Units for $10 at each closing of a lot to a third party in the Hamlets and Tuscany subdivision. As of September 30, 2017, the Hoskins Group owns a total of 12.2 Series B Preferred Units, which were issued for a total of $1,220.from our CEO.
9.8. Related Party Transactions
An IRA owned byAs of June 30, 2018, each of the wife of Eric A. Rauscher, one of ourCompany’s two independent managers and an IRA owned by William Myrick, also one of our independent managers, each own Series C Preferred Units, as more fully described in Note 7.
Each of our three independent managers and our Executive Vice President of Operations own 1% of our Class A common units.Common Units. As of June 30, 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.
Our independent manager Kenneth Summers and his son are minor participants inAs of June 30, 2018, the ShumanCompany borrowed $877 against the Wallach LOC, which is a 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 interim condensed consolidated balance sheet.
As of June 30, 2018, the Company borrowed $1,000 against the Myrick LOC, which is a line of credit with our Executive Vice President of Sales. A more fully describeddetailed description is included in Note 6.5 above. This borrowing is included in notes payable secured, net of deferred financing costs on the interim condensed consolidated balance sheet.
In February 2018, the Company 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, the Company issued a Senior Subordinated Promissory Note in the principal amount of $400 to family members of our CEO. This borrowing is included in the notes payable unsecured, net of deferred financing costs on the interim condensed consolidated balance sheet.
10.9. Commitments and Contingencies
Unfunded commitments to extend credit, which have similar collateral, credit risk, and market risk to our outstanding loans, were $16,489$21,676 and $11,503$19,312 at SeptemberJune 30, 20172018 and December 31, 2016,2017, respectively.
| 18 |
11.10. Selected Quarterly Condensed Consolidated Financial Data (Unaudited)
Summarized unaudited quarterly condensed consolidated financial data for the two quarters of 2018 and four quarters of 2017 and 2016 are as follows (in thousands):follows:
Quarter 4 | Quarter 3 | Quarter 2 | Quarter 1 | Quarter 4 | Quarter 3 | Quarter 2 | Quarter 1 | |||||||||||||||||||||||||
| 2017 | 2017 | 2017 | 2017 | 2016 | 2016 | 2016 | 2016 | |||||||||||||||||||||||||
| Net Interest Income after Loan Loss Provision | $ | – | $ | 917 | $ | 725 | $ | 617 | $ | 491 | $ | 442 | $ | 464 | $ | 479 | ||||||||||||||||
| Non-Interest Income | – | – | – | 77 | 28 | – | 44 | – | ||||||||||||||||||||||||
| SG&A expense | – | 537 | 456 | 454 | 367 | 297 | 305 | 350 | ||||||||||||||||||||||||
| Impairment loss on foreclosed assets | – | 47 | 106 | 49 | 111 | – | – | – | ||||||||||||||||||||||||
| Net Income | $ | – | $ | 333 | $ | 163 | $ | 191 | $ | 41 | $ | 145 | $ | 203 | $ | 129 | ||||||||||||||||
Quarter 2 | Quarter 1 | Quarter 4 | Quarter 3 | Quarter 2 | Quarter 1 | |||||||||||||||||||
| 2018 | 2018 | 2017 | 2017 | 2017 | 2017 | |||||||||||||||||||
| Net Interest Income after Loan Loss Provision | $ | 996 | $ | 926 | $ | 802 | $ | 917 | $ | 725 | $ | 617 | ||||||||||||
| Non-Interest Income | – | – | – | – | – | 77 | ||||||||||||||||||
| SG&A expense | 691 | 617 | 643 | 537 | 456 | 454 | ||||||||||||||||||
| Depreciation and Amortization | 21 | 17 | – | – | – | 6 | ||||||||||||||||||
| Impairment loss on foreclosed assets | 80 | 5 | 64 | 47 | 106 | 49 | ||||||||||||||||||
| Net Income | $ | 204 | $ | 287 | $ | 95 | $ | 333 | $ | 163 | $ | 191 | ||||||||||||
12.11. Non-Interest expense detail
The following table displays our selling, general and administrative (“SG&A”) expenses:
| For the Nine Months Ended September 30, | For the Six Months Ended June 30, | |||||||||||||||
| 2017 | 2016 | 2018 | 2017 | |||||||||||||
| Selling, general and administrative expenses | ||||||||||||||||
| Legal and accounting | $ | 164 | $ | 139 | $ | 223 | $ | 125 | ||||||||
| Salaries and related expenses | 976 | 593 | 833 | 583 | ||||||||||||
| Board related expenses | 82 | 84 | 37 | 55 | ||||||||||||
| Advertising | 42 | 31 | 35 | 25 | ||||||||||||
| Rent and utilities | 22 | 15 | 20 | 14 | ||||||||||||
| Loan and foreclosed asset expenses | 30 | 17 | 38 | 26 | ||||||||||||
| Travel | 45 | 26 | 51 | 32 | ||||||||||||
| Other | 86 | 47 | 71 | 38 | ||||||||||||
| Total SG&A | $ | 1,447 | $ | 952 | $ | 1,308 | $ | 898 | ||||||||
13.12. Subsequent Events
On October 23, 2017, we entered into a Line of Credit Agreement (the “LOC Agreement”) with Paul Swanson (the “Lender”). Pursuant to the LOC Agreement, the Lender will provide us with a revolving line of credit (the “Line of Credit”) not to exceed $4,000. The LOC Agreement is effective as of October 23, 2017 and will terminate 15 months after that date unless extended by the Lender for one or more additional 15 month periods. We may terminate the LOC Agreement by providing the Lender with notice at least 60 days in advanceManagement of the original termination or any renewal termination date.Company has evaluated subsequent events through August 8, 2018, the date these consolidated financial statements were issued.
The LineOn July 31, 2018, we redeemed all of Credit requires monthly paymentsour outstanding Series C Cumulative Preferred Units (the “Preferred Units”), which were held by two investors. On August 1, 2018, we sold 12 of interest only duringour Preferred Units to Daniel M. Wallach, our Chief Executive Officer and Chairman of our board of managers, and his wife, Joyce S. Wallach, for the termtotal price of the Line of Credit, with the principal balance due upon termination. The unpaid principal amounts advanced on the Line of Credit bear interest for each day until due at a fixed rate per annum (computed on the basis of a year of 360 days for actual days elapsed) for each day at 9%. We may, at our option, choose to prepay the principal, interest, or other amounts due from us under the Line of Credit in whole or in part at any time.$1,200.
We are pledging, and will continue to pledge in the future, certain of our commercial loans as collateral for the Line of Credit (the “Collateral Loans”) pursuant to the Collateral Assignment of Notes and Documents dated as of October 23, 2017. The amount outstanding under the Line of Credit may not exceed 67% of the aggregate amount outstanding on the Collateral Loans then pledged to secure the Line of Credit. Our obligation to repay the Line of Credit is evidenced by two Promissory Notes from us dated October 23, 2017 (the “Promissory Notes”), one evidencing a promise to repay the secured portion of the Line of Credit and one evidencing a promise to repay the unsecured portion of the Line of Credit.
R. Scott Summers, P.L.L.C., a West Virginia professional limited liability company (the “Custodian”) will serve as the custodian to hold the Collateral Loans for the benefit of the Lender pursuant to the Custodial Agreement dated as of October 23, 2017 between us, the Lender, and the Custodian. The Custodian is owned by R. Scott Summers, an investor in our public Notes offering and the son of Kenneth R. Summers, one of our independent managers. The Custodian is responsible for certifying to the Lender that it has received the relevant Collateral Loan assignment documentation from us. We are responsible for paying the Custodian’s monthly fee, which is equal to 1% interest on the amount of the Collateral Loans outstanding in the Custodian’s custody.
| ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
(All dollar [$] 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 had $29,626$41,819 and $20,091$30,043 in loan assets as of SeptemberJune 30, 20172018 and December 31, 2016,2017, respectively. As of SeptemberJune 30, 2017,2018, we have 148245 construction loans in 1617 states with 4868 borrowers and haveseven development loans in three states with 4 borrowers. As of June 30, 2018, and December 31, 2017, we had four and three development loans, respectively, in Pittsburgh, Pennsylvania. We have entered into two purchase and sale agreement relationships with third-parties to finance portions of our loans. The first loan portions that are accounted for as financing arrangements under the program took place during the first quarter of 2015. These agreements have allowed us to increase our loan balances and commitments significantly. In January 2017, we entered into a line of credit agreement with a bank for $500, which we used at times during the first nine months of 2017. In March 2017, we added a third class of equity, Series C cumulative preferred units (“Series C Preferred Units”Pennsylvania (the “Pennsylvania Loans”). These Series C Preferred Units have a redemption feature after six years, and therefore appear as mezzanine equity on our financial statements. In July 2017, we entered into a secured line of credit agreement for $1,325.
We currently have eightvarious sources of capital:capital, detailed below:
September 30, 2017 | December 31, 2016 | June 30, 2018 | December 31, 2017 | |||||||||||||
| Capital Source | ||||||||||||||||
| Purchase and sale agreements and other secured borrowings | $ | 12,168 | $ | 7,322 | $ | 19,186 | $ | 11,644 | ||||||||
| Secured line of credit from affiliates | – | – | 1,877 | – | ||||||||||||
| Unsecured senior line of credit from a bank | – | – | 500 | – | ||||||||||||
| Unsecured Notes through our public offering | 14,139 | 11,221 | ||||||||||||||
| Unsecured Notes through our Notes Program | 15,274 | 14,121 | ||||||||||||||
| Other unsecured debt | 1,165 | 1,152 | 5,247 | 3,069 | ||||||||||||
| Preferred equity, Series B units | 1,220 | 1,150 | 1,280 | 1,240 | ||||||||||||
| Preferred equity, Series C units | 1,065 | – | 1,165 | 1,097 | ||||||||||||
| Common equity | 2,598 | 2,249 | 2,593 | 2,446 | ||||||||||||
| Total | $ | 32,355 | $ | 23,094 | $ | 47,122 | $ | 33,617 | ||||||||
Our net income has been higherincreased for the first ninesecond quarter and six months of 2017ended June 30, 2018 as compared to the same period in 2016 mostly2017 due primarily to increased loan originations. Inoriginations which was partially offset by payroll cost increases due to an increase the third quarternumber of 2017,employees, and an increase in our borrowers paid off several loans on which we had not recognized interest income in the second quarterloan loss reserve.
Cash provided by operations was $425 as of 2017. When those loans paid off, we received the interest income; therefore, income was recognized in the third quarter of 2017. Earnings in the third quarter of 2017 and 2016 were $333 and $145, respectively, and earnings for the nine months ended SeptemberJune 30, 2017 were $6872018 as compared to $477$742 for the same period of 2016. Cash provided by operations was $1,163 as of September 30, 2017 as2017. Our decrease in operating cash flow in 2018 compared to $734 for the same period of 2016. Cash flow from operations has been higher than2017 was due to a decrease in customer interest escrow of $408 offset by an increase in net profit because amortized financing costs, interest expensed but not paid at lenders request (to allow for compounding) and impairment charges all reduce net income but not operating cash flow.loan origination fee deferred of $97.
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 as of and for the year ended December 31, 2016,2017, 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, 20162017 unless listed below.
Loan Losses
Fair value of collateral has the potential to impact the calculation of the loan loss provision (the amount we have expensed over time in anticipation of loan losses we have not yet realized). Specifically, relevant to the allowance for loan loss reserve is the fair value of the underlying collateral supporting the outstanding loan balances. Fair value measurements are an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. Due to a rapidly changing economic market, an erratic housing market, the various methods that could be used to develop fair value estimates, and the various assumptions that could be used, determining the collateral’s fair value requires significant judgment.
| September 30, 2017 | ||||
| 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%** | $ | 493 | ||
| 20 |
| June 30, 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%** | $ | (2,092 | ) | |
* Increases in the fair value of the real estate collateral do not impact the loan loss provision, as the value generally is not “written up.”
** Assumes the loans were nonperforming and a book amount of the loans outstanding of $29,626.$42,153.
Foreclosed Assets
The fair value of real estate will impact our foreclosed asset value, which is recorded at 100% of fair value (after selling costs are deducted).
| September 30, 2017 | June 30, 2018 | |||||||
| Foreclosed | Foreclosed | |||||||
| Assets | Assets | |||||||
| Change in Fair Value Assumption | Higher/(Lower) | Higher/(Lower) | ||||||
| Increasing fair value of the foreclosed asset by 35%* | $ | – | $ | – | ||||
| Decreasing fair value of the foreclosed asset by 35% | $ | (378 | ) | $ | (1,973 | ) | ||
* Increases in the fair value of the foreclosed assets do not impact the carrying value, as the value generally is not “written up.” Those gains would be recognized at the sale of the asset.
** Assumes a book amount of the foreclosed assets of $5,636.
Consolidated Results of Operations
Key financial and operating data for the three and ninesix months ended SeptemberJune 30, 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 | Six Months Ended | |||||||||||||||
| June 30, | June 30, | |||||||||||||||
| 2018 | 2017 | 2018 | 2017 | |||||||||||||
| Interest Income | ||||||||||||||||
| Interest and fee income on loans | $ | 2,045 | $ | 1,356 | $ | 3,872 | $ | 2,530 | ||||||||
| Interest expense: | ||||||||||||||||
| Interest related to secured borrowings | 517 | 215 | 928 | 394 | ||||||||||||
| Interest related to unsecured borrowings | 513 | 401 | 963 | 768 | ||||||||||||
| Interest expense | 1,030 | 616 | 1,891 | 1,162 | ||||||||||||
| Net interest income | 1,015 | 740 | 1,981 | 1,368 | ||||||||||||
| Less: Loan loss provision | 19 | 15 | 59 | 26 | ||||||||||||
| Net interest income after loan loss provision | 996 | 725 | 1,922 | 1,342 | ||||||||||||
| Non-Interest Income | ||||||||||||||||
| Gain from foreclosure of assets | – | – | – | – | ||||||||||||
| Gain from sale of foreclosed assets | – | – | – | 77 | ||||||||||||
| Total non-interest income | – | – | – | 77 | ||||||||||||
| Income | 996 | 725 | 1,922 | 1,419 | ||||||||||||
| Non-Interest Expense | ||||||||||||||||
| Selling, general and administrative | 691 | 450 | 1,308 | 898 | ||||||||||||
| Depreciation and amortization | 21 | 6 | 38 | 12 | ||||||||||||
| Impairment loss on foreclosed assets | 80 | 106 | 85 | 155 | ||||||||||||
| Total non-interest expense | 792 | 562 | 1,431 | 1,065 | ||||||||||||
| Net Income | $ | 204 | $ | 163 | $ | 491 | $ | 354 | ||||||||
| Earned distribution to preferred equity holders | 67 | 57 | 130 | 88 | ||||||||||||
| Net income attributable to common equity holders | $ | 137 | $ | 106 | $ | 361 | $ | 266 | ||||||||
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| (in thousands of dollars) | 2017 | 2016 | 2017 | 2016 | ||||||||||||
| Interest Income | ||||||||||||||||
| Interest and fee income on loans | $ | 1,673 | $ | 909 | $ | 4,203 | $ | 2,656 | ||||||||
| Interest expense: | ||||||||||||||||
| Interest related to secured borrowings | 324 | 148 | 718 | 409 | ||||||||||||
| Interest related to unsecured borrowings | 424 | 315 | 1,192 | 852 | ||||||||||||
| Interest expense | 748 | 463 | 1,910 | 1,261 | ||||||||||||
| Net interest income | 925 | 446 | 2,293 | 1,395 | ||||||||||||
| Less: Loan loss provision | 8 | 4 | 34 | 10 | ||||||||||||
| Net interest income after loan loss provision | 917 | 442 | 2,259 | 1,385 | ||||||||||||
| Non-Interest Income | ||||||||||||||||
| Gain from foreclosure of assets | – | – | – | 44 | ||||||||||||
| Gain from sale of foreclosed assets | – | – | 77 | – | ||||||||||||
| Total non-interest income | – | – | 77 | 44 | ||||||||||||
| Income | 917 | 442 | 2,336 | 1,429 | ||||||||||||
| Non-Interest Expense | ||||||||||||||||
| Selling, general and administrative | 537 | 297 | 1,447 | 952 | ||||||||||||
| Impairment loss on foreclosed assets | 47 | – | 202 | – | ||||||||||||
| Total non-interest expense | 584 | 297 | 1,649 | 952 | ||||||||||||
| Net Income | $ | 333 | $ | 145 | $ | 687 | $ | 477 | ||||||||
| Earned distribution to preferred equity holders | 61 | 27 | 149 | 79 | ||||||||||||
| Net income attributable to common equity holders | $ | 272 | $ | 118 | $ | 538 | $ | 398 | ||||||||
Interest Spread
The following table displays a comparison of our interest income, expense, fees, and spread:
| Three Months Ended | Nine Months Ended | |||||||||||||||||||||||||||||||
| September 30, | September 30, | |||||||||||||||||||||||||||||||
| 2017 | 2016 | 2017 | 2016 | |||||||||||||||||||||||||||||
| Interest Income | * | * | * | * | ||||||||||||||||||||||||||||
| Interest income on loans | $ | 1,198 | 15 | % | $ | 623 | 13 | % | $ | 2,829 | 14 | % | $ | 1,737 | 13 | % | ||||||||||||||||
| Fee income on loans | 475 | 6 | % | 286 | 6 | % | 1,374 | 6 | % | 919 | 6 | % | ||||||||||||||||||||
| Interest and fee income on loans | 1,673 | 21 | % | 909 | 19 | % | 4,203 | 20 | % | 2,656 | 19 | % | ||||||||||||||||||||
| Interest expense related parties | – | – | – | – | – | – | – | – | ||||||||||||||||||||||||
| Interest expense unsecured | 380 | 5 | % | 246 | 5 | % | 1,027 | 5 | % | 648 | 5 | % | ||||||||||||||||||||
| Interest expense secured | 324 | 4 | % | 147 | 3 | % | 718 | 3 | % | 409 | 3 | % | ||||||||||||||||||||
| Amortization offering costs | 44 | – | % | 70 | 2 | % | 165 | 1 | % | 204 | 1 | % | ||||||||||||||||||||
| Interest expense | 748 | 9 | % | 463 | 10 | % | 1,910 | 9 | % | 1,261 | 9 | % | ||||||||||||||||||||
| Net interest income (spread) | 925 | 12 | % | 446 | 9 | % | 2,293 | 11 | % | 1,395 | 10 | % | ||||||||||||||||||||
| Weighted average outstanding loan asset balance | $ | 31,742 | $ | 18,893 | $ | 27,161 | $ | 17,966 | ||||||||||||||||||||||||
| Three Months Ended | Six Months Ended | |||||||||||||||||||||||||||||||
| June 30, | June 30, | |||||||||||||||||||||||||||||||
| 2018 | 2017 | 2018 | 2017 | |||||||||||||||||||||||||||||
| Interest Income | * | * | * | * | ||||||||||||||||||||||||||||
| Interest income on loans | $ | 1,416 | 13 | % | $ | 851 | 12 | % | $ | 2,708 | 13 | % | $ | 1,631 | 12 | % | ||||||||||||||||
| Fee income on loans | 629 | 6 | % | 505 | 7 | % | 1,164 | 6 | % | 899 | 7 | % | ||||||||||||||||||||
| Interest and fee income on loans | 2,045 | 19 | % | 1,356 | 19 | % | 3,872 | 19 | % | 2,530 | 19 | % | ||||||||||||||||||||
| Interest expense unsecured | 467 | 4 | % | 344 | 5 | % | 868 | 4 | % | 647 | 5 | % | ||||||||||||||||||||
| Interest expense secured | 513 | 4 | % | 215 | 3 | % | 928 | 4 | % | 394 | 3 | % | ||||||||||||||||||||
| Amortization offering costs | 50 | 1 | % | 57 | 1 | % | 95 | 1 | % | 121 | 1 | % | ||||||||||||||||||||
| Interest expense | 1,030 | 10 | % | 616 | 9 | % | 1,891 | 9 | % | 1,162 | 9 | % | ||||||||||||||||||||
| Net interest income (spread) | 1,015 | 9 | % | 740 | 10 | % | 1,981 | 10 | % | 1,368 | 10 | % | ||||||||||||||||||||
| Weighted average outstanding loan asset balance | $ | 42,439 | $ | 28,211 | $ | 40,135 | $ | 25,983 | ||||||||||||||||||||||||
*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 an increase of 1% to approximately the same 2%3% margin. This component is also impacted by the lending of money with no interest cost (our equity). For the ninesix months ended SeptemberJune 30, 2017 as compared to the period in 2016, the increase in this calculation is due to an increase in default interest we charged and collected on certain of our loans. The impacted loans were either terminated as of September 30, 2017, or no longer in default. $104 of the associated interest income of these defaulted loans which was not recognized in the second quarter of 2017 was recognized in the third quarter of 2017. We anticipate2018, the difference between interest income and interest expense was 4% compared to 3% for the same period of 2017. The increase relates to an increase in default interest rate for the classified accruing loan during the first quarter of 2018.
For the quarter ended June 30, 2018 and quarter and six months ended June 30, 2017 the difference between interest income and interest expense was 3%.We currently anticipate that the difference between our interest income and interest expense will continue to be between 3% and 4% duringfor the remainder of 2017. This number is greater than the 2% margin mentioned above because some of the funds we lend are from our equity, so there is no interest cost associated with those funds, and some loans pay higher interest rates due to their age, even though they are not in default.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 was 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 terminate quicker than their expected life, the remaining unrecognized fee is recognized upon the termination of the loan. For the nine month period ended September 30, 2017,When loans exceed their expected life, no additional fee income is recognized. In 2018 our fee income decreased as a percentage of our loan balance by 1% because of the completion of the recognition of our development loan fees in 2016; this decrease was offset bydue to an increase of 1% from constructionin loans which generally have higher rates than development loans.that exceeded their expected life. We currently anticipate that fee income will continue at the same 6% rate for the remainder of 2017.2018.
| 22 |
●Amount of nonperforming assets. Generally, we can have three types of nonperforming assets that negatively affect interest spread: loans not paying interest, foreclosed assets, and cash. We had no nonperformingAll of our loans were paying interest in the first threequarter ended June 30, 2018 and quarter and six months of both 2017 and 2016,and two nonperforming loansended June 30, 2017.One loan was not paying interest in the second quarter of 2017, which terminated in the third quarter. six months ended June 30, 2018.
Foreclosed assets do not haveprovide a monthly interest return. The difference between our average foreclosed assetIn April 2018, we recorded $3,897 from Loan receivables, net to Foreclosed assets on the balance sheet as of June 30, 2018, which resulted in 2017 as compared to 2016 did not have a majornegative impact on our performance in the first two quarters of 2017, but did have a positive impact in the third quarter of 2017. interest spread.
The amount of nonperforming assets is expected to rise over the next twelve months, both due to work expected on the two lots we currently owndevelopment costs related to foreclosed assets, anticipated foreclosure of assets, and due to idle cash increases which arerelated to anticipated due to large borrowing inflows.
Non-Interest Income
WeFor the three and six months ended June 30, 2018, we did not recognize non-interest income compared to the same period of 2017. In the first six months of 2017, we sold a foreclosed asset in 2017 and recognized a gain of $77. In 2016, we foreclosed on a loan, which resulted in a gain of $44 being booked in the second quarter of 2016.We do not anticipate Non-interest income for 2018.
SG&A Expenses
The following table displays our SG&A expenses:
| Three Months | Nine Months | Three Months | Six Months | |||||||||||||||||||||||||||||
| Ended September 30, | Ended September 30, | Ended June 30, | Ended June 30, | |||||||||||||||||||||||||||||
| 2017 | 2016 | 2017 | 2016 | 2018 | 2017 | 2018 | 2017 | |||||||||||||||||||||||||
| Selling, general and administrative expenses | ||||||||||||||||||||||||||||||||
| Legal and accounting | $ | 39 | $ | 27 | $ | 164 | $ | 139 | $ | 80 | $ | 29 | $ | 223 | $ | 125 | ||||||||||||||||
| Salaries and related expenses | 393 | 207 | 976 | 593 | 477 | 329 | 833 | 583 | ||||||||||||||||||||||||
| Board related expenses | 27 | 29 | 82 | 84 | 15 | 26 | 37 | 55 | ||||||||||||||||||||||||
| Advertising | 17 | 6 | 42 | 31 | 18 | 8 | 35 | 25 | ||||||||||||||||||||||||
| Rent and utilities | 8 | 5 | 22 | 15 | 10 | 9 | 20 | 14 | ||||||||||||||||||||||||
| Loan and foreclosed asset expenses | 4 | – | 30 | 17 | ||||||||||||||||||||||||||||
| Loan foreclosed asset expenses | 30 | 19 | 38 | 26 | ||||||||||||||||||||||||||||
| Travel | 13 | 7 | 45 | 26 | 28 | 17 | 51 | 32 | ||||||||||||||||||||||||
| Other | 36 | 15 | 86 | 47 | 33 | 13 | 71 | 38 | ||||||||||||||||||||||||
| Total SG&A | $ | 537 | $ | 297 | $ | 1,447 | $ | 952 | $ | 691 | $ | 450 | $ | 1,308 | $ | 898 | ||||||||||||||||
We had roughly twice as many employees during the threeLegal and nine month periods ended September 30, 2017 as 2016, whichaccounting 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. Salaries and related expenses increased due to our hiring of 11 new officeemployees, which was partially offset by a reduction in the fourth quarter of 2017. We added a loan document software package in the second half of 2016, and the amortization of that system is in Other SG&A. Loan expenses, mostly post-closing title searches designed to ensure our mortgage is in first position, have increased with the increased volume of loans.CEO’s salary.
Impairment Loss on Foreclosed Assets
During 2017, we haveWe owned five different foreclosed assets. Twoassets as of June 30, 2018, compared four as of December 31, 2017. Three of the foreclosed assets are lots that we plan to build housesunder construction and the remaining two have completed homes on to maximize our return, one was a lot which we sold and for which we recorded a gain, and two were partially built homes which we needed to complete. The two which were partially built have resulted in the impairment recorded in 2017.lots. We do not anticipate more losses on those homesthe sale of foreclosed assets in the future, but dependingfuture; however, this may be subject to change based on the final selling price of those homes, morethe foreclosed assets.
Loan Loss Provision
Our loan loss may needprovision increased $19 and $59 for the quarter and six month ended June 30, 2018 compared to be recorded.$15 and $26 for the same periods of 2017 due to an increase in loan balances and qualitative reserve percentage as a result of the change in housing values.
| 23 |
Consolidated Financial Position
The following is a roll forward of deferred financing costs:
| Nine Months | Year | Nine Months | ||||||||||
| Ended | Ended | Ended | ||||||||||
September 30, 2017 | December 31, 2016 | September 30, 2016 | ||||||||||
| Deferred financing costs, beginning balance | $ | 1,014 | $ | 935 | $ | 935 | ||||||
| Additions | 65 | 79 | 53 | |||||||||
| Deferred financing costs, ending balance | $ | 1,079 | $ | 1,014 | $ | 988 | ||||||
| Less accumulated amortization | (768 | ) | (603 | ) | (540 | ) | ||||||
| Deferred financing costs, net | $ | 311 | $ | 411 | $ | 448 | ||||||
The following is a roll forward of the accumulated amortization of deferred financing costs:
| Nine Months | Year | Nine Months | ||||||||||
| Ended | Ended | Ended | ||||||||||
September 30, 2017 | December 31, 2016 | September 30, 2016 | ||||||||||
| Accumulated amortization, beginning balance | $ | 603 | $ | 336 | $ | 336 | ||||||
| Additions | 165 | 267 | 204 | |||||||||
| Accumulated amortization, ending balance | $ | 768 | $ | 603 | $ | 540 | ||||||
We anticipate some additions in the fourth quarter of 2017 in actual payments, and continued recognition, both at similar levels to earlier periods this year.
Loans Receivable
Commercial Loans – Construction Loan Portfolio Summary
We anticipate that the aggregate balance of our construction loan portfolio will increase as loans near maturity and due toas we have new loan originations.
The following is a summary of our loan portfolio to builders for home construction loans as of June 30, 2018.
| State | Number of Borrowers | Number of Loans | Value of Collateral(1) | Commitment Amount | Gross Amount Outstanding | Loan to Value Ratio(2) | Loan Fee | |||||||||||||||||||||
| Arizona | 1 | 4 | $ | 1,071 | $ | 750 | $ | 218 | 70 | % | 5 | % | ||||||||||||||||
| Colorado | 3 | 7 | 3,878 | 2,621 | 1,729 | 68 | % | 5 | % | |||||||||||||||||||
| Florida | 17 | 73 | 22,652 | 15,143 | 9,392 | 67 | % | 5 | % | |||||||||||||||||||
| Georgia | 8 | 12 | 8,246 | 5,594 | 3,929 | 68 | % | 5 | % | |||||||||||||||||||
| Indiana | 2 | 3 | 932 | 652 | 273 | 70 | % | 5 | % | |||||||||||||||||||
| Michigan | 5 | 30 | 7,754 | 4,697 | 2,723 | 61 | % | 5 | % | |||||||||||||||||||
| New Jersey | 4 | 14 | 5,188 | 3,494 | 2,233 | 67 | % | 5 | % | |||||||||||||||||||
| New York | 1 | 7 | 2,567 | 1,496 | 1,375 | 58 | % | 5 | % | |||||||||||||||||||
| North Carolina | 5 | 9 | 2,656 | 1,859 | 925 | 70 | % | 5 | % | |||||||||||||||||||
| North Dakota | 1 | 1 | 375 | 263 | 205 | 70 | % | 5 | % | |||||||||||||||||||
| Ohio | 1 | 3 | 2,331 | 1,497 | 1,145 | 64 | % | 5 | % | |||||||||||||||||||
| Oregon | 1 | 1 | 607 | 348 | 280 | 57 | % | 5 | % | |||||||||||||||||||
| Pennsylvania | 3 | 29 | 21,708 | 12,424 | 8,860 | 57 | % | 5 | % | |||||||||||||||||||
| South Carolina | 11 | 40 | 10,357 | 7,188 | 4,349 | 69 | % | 5 | % | |||||||||||||||||||
| Tennessee | 1 | 2 | 640 | 426 | 262 | 67 | % | 5 | % | |||||||||||||||||||
| Utah | 1 | 2 | 920 | 634 | 264 | 69 | % | 5 | % | |||||||||||||||||||
| Virginia | 3 | 8 | 2,094 | 1,465 | 726 | 70 | % | 5 | % | |||||||||||||||||||
| Total | 68 | 245 | $ | 93,976 | $ | 60,551 | $ | 38,888 | 64 | %(3) | 5 | % | ||||||||||||||||
| (1) | The value is determined by the appraised value. |
| (2) | The loan to value ratio is calculated by taking the commitment amount and dividing by the appraised value. |
| (3) | Represents the weighted average loan to value ratio of the loans. |
The following is a summary of our loan portfolio to builders for home construction loans as of September 30,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 | Number of Borrowers | Number of Loans | Value of Collateral(1) | Commitment Amount | Gross Amount Outstanding | Loan to Value Ratio(2) | Loan Fee | ||||||||||||||||||||||||||||||||||||||||||
| Colorado | 3 | 5 | $ | 2,563 | $ | 1,707 | $ | 1,058 | 67 | % | 5 | % | 3 | 6 | $ | 3,224 | $ | 2,196 | $ | 925 | 68 | % | 5 | % | ||||||||||||||||||||||||||||||||
| Connecticut | 1 | 1 | 715 | 500 | 500 | 70 | % | 5 | % | |||||||||||||||||||||||||||||||||||||||||||||||
| Delaware | 1 | 1 | 244 | 171 | 133 | 70 | % | 5 | % | 1 | 1 | 244 | 171 | 147 | 70 | % | 5 | % | ||||||||||||||||||||||||||||||||||||||
| Florida | 12 | 46 | 22,740 | 14,435 | 9,320 | 63 | % | 5 | % | 15 | 54 | 25,368 | 16,555 | 10,673 | 65 | % | 5 | % | ||||||||||||||||||||||||||||||||||||||
| Georgia | 7 | 17 | 10,020 | 6,124 | 3,192 | 61 | % | 5 | % | 7 | 13 | 8,932 | 5,415 | 3,535 | 61 | % | 5 | % | ||||||||||||||||||||||||||||||||||||||
| Indiana | 2 | 2 | 995 | 597 | 401 | 60 | % | 5 | % | 2 | 2 | 895 | 566 | 356 | 63 | % | 5 | % | ||||||||||||||||||||||||||||||||||||||
| Michigan | 4 | 23 | 6,238 | 3,860 | 2,163 | 62 | % | 5 | % | 4 | 25 | 7,570 | 4,717 | 2,611 | 62 | % | 5 | % | ||||||||||||||||||||||||||||||||||||||
| New Jersey | 3 | 8 | 2,288 | 1,567 | 1,064 | 68 | % | 5 | % | 2 | 11 | 3,635 | 2,471 | 1,227 | 68 | % | 5 | % | ||||||||||||||||||||||||||||||||||||||
| New York | 1 | 4 | 1,460 | 703 | 703 | 48 | % | 5 | % | 1 | 5 | 1,756 | 929 | 863 | 53 | % | 5 | % | ||||||||||||||||||||||||||||||||||||||
| North Carolina | 3 | 6 | 1,650 | 1,155 | 364 | 70 | % | 5 | % | 3 | 6 | 1,650 | 1,155 | 567 | 70 | % | 5 | % | ||||||||||||||||||||||||||||||||||||||
| Ohio | 2 | 2 | 2,116 | 1,341 | 1010 | 63 | % | 5 | % | 1 | 1 | 711 | 498 | 316 | 70 | % | 5 | % | ||||||||||||||||||||||||||||||||||||||
| Oregon | 1 | 1 | 607 | 425 | 76 | 70 | % | 5 | % | |||||||||||||||||||||||||||||||||||||||||||||||
| Pennsylvania | 2 | 17 | 14,637 | 7,747 | 5,967 | 53 | % | 5 | % | 2 | 20 | 15,023 | 7,649 | 5,834 | 51 | % | 5 | % | ||||||||||||||||||||||||||||||||||||||
| South Carolina | 5 | 9 | 3,016 | 1,993 | 1,191 | 66 | % | 5 | % | 7 | 18 | 4,501 | 3,058 | 1,445 | 68 | % | 5 | % | ||||||||||||||||||||||||||||||||||||||
| Tennessee | 1 | 3 | 1,080 | 767 | 752 | 71 | % | 5 | % | 1 | 2 | 690 | 494 | 494 | 72 | % | 5 | % | ||||||||||||||||||||||||||||||||||||||
| Utah | 1 | 3 | 1,208 | 846 | 535 | 70 | % | 5 | % | 1 | 2 | 790 | 553 | 344 | 70 | % | 5 | % | ||||||||||||||||||||||||||||||||||||||
| Virginia | 1 | 1 | 335 | 235 | 51 | 70 | % | 5 | % | 1 | 1 | 335 | 235 | 150 | 70 | % | 5 | % | ||||||||||||||||||||||||||||||||||||||
| Total | 48 | (4) | 148 | $ | 71,305 | $ | 43,748 | $ | 28,404 | 61 | %(3) | 5 | % | 52 | (4) | 168 | $ | 75,931 | $ | 47,087 | $ | 29,564 | 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) | One builder |
The following is a summary of our loan portfolio to builders for home construction loans as of December 31, 2016.
| 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 | % | ||||||||||||||||
Commercial Loans – Real Estate Development Loan Portfolio Summary
The following is a summary of our loan portfolio to builders for land development as of SeptemberJune 30, 20172018 and December 31, 2016. These2017. A significant portion of our development loans consist of the Pennsylvania Loans. Our additional development loans are referred to as the Pennsylvania Loans.in South Carolina and Florida.
| Year | 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 States | Number of Borrowers | Number of Loans | Value of Collateral(1) | Commitment Amount | Gross Amount Outstanding | Loan to Value Ratio(2) | Loan Fee | ||||||||||||||||||||||||||||||||||||||||||||||
| 2018 | 3 | 4 | 7 | $ | 8,249 | $ | 6,367 | (3) | $ | 5,915 | 72 | % | $ | 1,000 | ||||||||||||||||||||||||||||||||||||||||||||||||
| 2017 | Pennsylvania | 1 | 3 | $ | 5,339 | $ | 4,600 | (3) | $ | 3,454 | 65 | % | $ | 1,000 | 1 | 1 | 3 | 4,997 | 4,600 | (3) | 2,811 | 56 | % | 1,000 | ||||||||||||||||||||||||||||||||||||||
| 2016 | Pennsylvania | 1 | 3 | 6,586 | 5,931 | (3) | 4,082 | 62 | % | 1,000 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| (1) | The value is determined by the appraised value adjusted for remaining costs to be |
| (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 |
| 25 |
Combined Loan Portfolio Summary
Financing receivables are comprised of the following as of SeptemberJune 30, 20172018 and December 31, 2016:2017:
September 30, 2017 | December 31, 2016 | June 30, 2018 | December 31, 2017 | |||||||||||||
| Loans receivable, gross | $ | 31,858 | $ | 21,569 | $ | 44,803 | $ | 32,375 | ||||||||
| Less: Deferred loan fees | (738 | ) | (618 | ) | (1,197 | ) | (847 | ) | ||||||||
| Less: Deposits | (1,487 | ) | (861 | ) | (1,827 | ) | (1,497 | ) | ||||||||
| Plus: Deferred origination expense | 81 | 55 | 196 | 109 | ||||||||||||
| Less: Allowance for loan losses | (88 | ) | (54 | ) | (156 | ) | (97 | ) | ||||||||
| Loans receivable, net | $ | 29,626 | $ | 20,091 | $ | 41,819 | $ | 30,043 | ||||||||
RollThe following is a roll forward of commercialcombined loans:
Nine Months Ended 2017 | Year Ended 2016 | Nine Months Ended 2016 | ||||||||||
| Beginning balance | $ | 20,091 | $ | 14,060 | $ | 14,060 | ||||||
| Additions | 24,099 | 23,184 | 15,264 | |||||||||
| Payoffs/sales | (13,810 | ) | (15,168 | ) | (9,739 | ) | ||||||
| Moved to foreclosed assets | – | (1,639 | ) | (1,639 | ) | |||||||
| Change in deferred origination expense | 26 | 55 | 30 | |||||||||
| Change in builder deposit | (626 | ) | (340 | ) | (184 | ) | ||||||
| Change in loan loss provision | (34 | ) | (16 | ) | (10 | ) | ||||||
| New loan fees | (1,494 | ) | (1,270 | ) | (792 | ) | ||||||
| Earned loan fees | 1,374 | 1,225 | 925 | |||||||||
| Ending balance | $ | 29,626 | $ | 20,091 | $ | 17,915 | ||||||
Six Months Ended | Year Ended | Six Months Ended | ||||||||||
| Beginning balance | $ | 30,043 | $ | 20,091 | $ | 20,091 | ||||||
| Additions | 19,870 | 33,451 | 16,081 | |||||||||
| Payoffs/sales | (11,337 | ) | (22,645 | ) | (6,229 | ) | ||||||
| Moved to foreclosed assets | 3,897 | - | – | |||||||||
| Change in deferred origination expense | 87 | 55 | 71 | |||||||||
| Change in builder deposit | (331 | ) | (636 | ) | (762 | ) | ||||||
| Change in loan loss provision | (59 | ) | (44 | ) | (26 | ) | ||||||
| New loan fees | (1,528 | ) | (2,127 | ) | (1,153 | ) | ||||||
| Earned loan fees | 1,177 | 1,898 | 899 | |||||||||
| Ending balance | $ | 41,819 | $ | 30,043 | $ | 28,972 | ||||||
Finance Receivables – By risk rating:
September 30, 2017 | December 31, 2016 | June 30, 2018 | December 31, 2017 | |||||||||||||
| Pass | $ | 26,931 | $ | 18,275 | $ | 39,327 | $ | 25,656 | ||||||||
| Special mention | 4,927 | 3,294 | 5,476 | 6,719 | ||||||||||||
| Classified – accruing | – | – | - | - | ||||||||||||
| Classified – nonaccrual | – | – | - | - | ||||||||||||
| Total | $ | 31,858 | $ | 21,569 | $ | 44,803 | $ | 32,375 | ||||||||
Finance Receivables – Method of impairment calculation:
| June 30, 2018 | December 31, 2017 | |||||||
| Performing loans evaluated individually | $ | 18,409 | $ | 14,992 | ||||
| Performing loans evaluated collectively | 26,394 | 17,383 | ||||||
| Non-performing loans without a specific reserve | - | - | ||||||
| Non-performing loans with a specific reserve | - | - | ||||||
| Total | $ | 44,803 | $ | 32,375 | ||||
| 26 |
At June 30, 2018 and December 31, 2017, there were no loans acquired with deteriorated credit quality.
Below is an aging schedule of gross loans receivable as of SeptemberJune 30, 2017,2018, on a recency basis:
| No. Accts. | Unpaid Balances | % | 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) | 151 | $ | 31,858 | 100 | % | 252 | $ | 44,803 | 100 | % | ||||||||||||||
| 60-89 days | – | – | 0 | % | – | – | 0 | % | ||||||||||||||||
| 90-179 days | – | – | 0 | % | – | – | 0 | % | ||||||||||||||||
| 180-269 days | – | – | 0 | % | – | – | 0 | % | ||||||||||||||||
| Subtotal | 151 | $ | 31,858 | 100 | % | 252 | $ | 44,803 | 100 | % | ||||||||||||||
| Interest only accounts (Accounts on which interest, deferment, extension and/or default charges were received in the last 60 days) | – | $ | – | 0 | % | – | $ | – | 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 | % | – | $ | – | 0 | % | ||||||||||||||
| Total | 151 | $ | 31,858 | 100 | % | 252 | $ | 44,803 | 100 | % | ||||||||||||||
Below is an aging schedule of gross loans receivable as of SeptemberJune 30, 2017,2018, on a contractual basis:
| No. Accts. | Unpaid Balances | % | 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. | 151 | $ | 31,858 | 100 | % | 252 | $ | 44,803 | 100 | % | ||||||||||||||
| 60-89 days | – | – | 0 | % | – | – | 0 | % | ||||||||||||||||
| 90-179 days | – | – | 0 | % | – | – | 0 | % | ||||||||||||||||
| 180-269 days | – | – | 0 | % | – | – | 0 | % | ||||||||||||||||
| Subtotal | 151 | $ | 31,858 | 100 | % | 252 | $ | 44,803 | 100 | % | ||||||||||||||
| Interest only accounts (Accounts on which interest, deferment, extension and/or default charges were received in the last 60 days) | – | $ | – | 0 | % | – | $ | – | 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 | % | – | $ | – | 0 | % | ||||||||||||||
| Total | 151 | $ | 31,858 | 100 | % | 252 | $ | 44,803 | 100 | % | ||||||||||||||
Below is an aging schedule of gross loans receivable as of December 31, 2016,2017, on a recency basis:
| No. Accts. | Unpaid Balances | % | 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 | % | 153 | $ | 26,421 | 82 | % | ||||||||||||||
| 60-89 days | 1 | 2,952 | 14 | % | 18 | 5,954 | 18 | % | ||||||||||||||||
| 90-179 days | – | – | 0 | % | – | – | 0 | % | ||||||||||||||||
| 180-269 days | – | – | 0 | % | – | – | 0 | % | ||||||||||||||||
| Subtotal | 72 | $ | 21,569 | 100 | % | 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 | % | – | $ | – | 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 | % | – | $ | – | 0 | % | ||||||||||||||
| Total | 72 | $ | 21,569 | 100 | % | 171 | $ | 32,375 | 100 | % | ||||||||||||||
Below is an aging schedule of gross loans receivable as of December 31, 2016,2017, on a contractual basis:
| No. Accts. | Unpaid Balances | % | 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 | % | 153 | $ | 26,421 | 82 | % | ||||||||||||||
| 60-89 days | 1 | 2,952 | 14 | % | 18 | 5,954 | 18 | % | ||||||||||||||||
| 90-179 days | – | – | 0 | % | – | – | 0 | % | ||||||||||||||||
| 180-269 days | – | – | 0 | % | – | – | 0 | % | ||||||||||||||||
| Subtotal | 72 | $ | 21,569 | 100 | % | 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 | % | – | $ | – | 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 | % | – | $ | – | 0 | % | ||||||||||||||
| Total | 72 | $ | 21,569 | 100 | % | 171 | $ | 32,375 | 100 | % | ||||||||||||||
Foreclosed Assets
Below is a roll forward of foreclosed assets:
Nine Months Ended 2017 | Year Ended 2016 | Nine Months Ended 2016 | Six Months Ended | Year Ended | Six Months Ended | |||||||||||||||||||
| Beginning balance | $ | 2,798 | $ | 965 | $ | 965 | $ | 1,036 | $ | 2,798 | $ | 2,798 | ||||||||||||
| Additions from loans | – | 1,813 | 1,813 | 4,140 | - | - | ||||||||||||||||||
| Additions for construction/development | 296 | 566 | 459 | 545 | 317 | 265 | ||||||||||||||||||
| Sale proceeds | (1,890 | ) | (463 | ) | – | - | (1,890 | ) | (1,890 | ) | ||||||||||||||
| Gain on sale | 77 | 28 | – | - | 77 | 77 | ||||||||||||||||||
| Impairment loss on foreclosed assets | (202 | ) | (111 | ) | – | (85 | ) | (266 | ) | (155 | ) | |||||||||||||
| Ending balance | $ | 1,079 | $ | 2,798 | $ | 3,237 | $ | 5,636 | $ | 1,036 | $ | 1,095 | ||||||||||||
Property, PlantDuring April 2018, we entered into a Deed in Lieu of Foreclosure Agreement (the “Deed Agreement”) with a certain borrower who defaulted on a loan by failing to make an interest payment that was due. As a result, the Company reclassified $4,140, consisting of $3,897 of principal from Loan receivable, net and Equipment and Long Lived Assets
In$243 of interest from Accrued interest receivable, to Foreclosed assets on the first quarterbalance sheet as of 2017, we purchased, for $625, a partially completed building. It is our intent to complete the building for operating purposes. As such, we invested $142 in related improvements to the building for the nine months ended SeptemberJune 30, 2017. No depreciation has been recorded, as the building has not been placed in service. We anticipate another $275 in costs associated with this project in the fourth quarter of 2017.
We are developing operations software and invested $41 in this project for the nine months ended September 30, 2017. We purchased loan document software in 2016 for $71. Total depreciation of that software has been $25, of which $19 has been recognized in 2017.2018.
Customer Interest Escrow
Below is a roll forward of interest escrow:
Nine Months Ended 2017 | Year Ended 2016 | Nine Months Ended 2016 | ||||||||||
| Beginning balance | $ | 812 | $ | 498 | $ | 498 | ||||||
| + Preferred equity dividends | 86 | 104 | 77 | |||||||||
| + Additions from Pennsylvania Loans | 345 | 926 | 551 | |||||||||
| + Additions from other loans | 962 | 430 | 302 | |||||||||
| - Interest and fees | (1,229 | ) | (1,109 | ) | (789 | ) | ||||||
| - Repaid to borrower or used to reduce principal | (125 | ) | (37 | ) | – | |||||||
| Ending balance | $ | 851 | $ | 812 | $ | 639 | ||||||
Six Months Ended 2018 | Year Ended 2017 | Six Months Ended 2017 | ||||||||||
| Beginning balance | $ | 935 | $ | 812 | $ | 812 | ||||||
| Preferred equity dividends | 62 | 115 | 57 | |||||||||
| Additions from Pennsylvania Loans | 101 | 480 | 51 | |||||||||
| Additions from other loans | 160 | 1,163 | 901 | |||||||||
| Interest, fees, principal or repaid to borrower | (714 | ) | (1,635 | ) | (992 | ) | ||||||
| Ending balance | $ | 544 | $ | 935 | $ | 829 | ||||||
Notes Payable UnsecuredRelated Party Borrowings
During June 2018, we entered into a First Amendment to the thirdline of credit with our Chief Executive Officer and his wife (the “Wallach LOC”) which modified the interest rate to generally equal the prime rate plus 3%. The interest rate for this borrowing was 6.8% and 4.4% as of June 30, 2018 and 2017, respectively. We borrowed $877 and $0 against the Wallach LOC as of June 30, 2018 and 2017, respectively. Interest expense was $6 and $10 for the quarter and six months ended June 30, 2018, respectively, and $0 for the quarter and six months ended June 30, 2017.
During June 2018, we entered into a First Amendment to the line of credit with the 2007 Daniel M. Wallach Legacy Trust, which our Chief Executive Officer’s trust (the “Wallach Trust LOC”) which modified the interest rate to generally equal the prime rate plus 3%. The interest rate for this borrowing was 6.8% and 4.4% as of June 30, 2018 and 2017, respectively. We borrowed $0 against the Wallach Trust LOC as of June 30, 2018 and 2017.
During June 2018, we renewedentered into a line of credit agreement (the “Myrick LOC Agreement”) with our $500 noteExecutive Vice President of Sales, William Myrick. Pursuant to the Myrick LOC Agreement, Mr. Myrick provides us with 7Kings, which is now due in Februarya line of credit (the “Myrick LOC”) with the following terms:
| ● | Principal not to exceed $1,000; | |
| ● | Secured by a lien against all of our assets; | |
| ● | Cost of funds to us generally equal to the prime rate plus 3%; and | |
| ● | Due upon demand. |
| 29 |
The Myrick LOC was fully borrowed as of June 30, 2018. The interest rate for the Myrick LOC was 6.8% as of June 30, 2018. Interest expense on the Myrick LOC was $3 for both the quarter and six months ended June 30, 2018.
Secured Borrowings –
Purchase and Sale Agreements
In July, 2017,March 2018, we entered into the SixthSeventh Amendment (the “Sixth“Seventh Amendment”) to our Loan Purchase and Sale Agreement (the “Agreement”“S.K. Funding LPSA”) with S.K. Funding, LLC (the “S.K.(“S.K. Funding”). The Agreement was originally entered into between the Company and Seven Kings Holdings, Inc. (“7Kings”). However, on or about May 7, 2015, 7Kings assigned its right and interest in the Agreement to S.K. Funding.
The purpose of the SixthSeventh Amendment was to allow S.K. Funding to purchase portionsa portion of the Pennsylvania Loans for a purchase price of $3,000$649 under parameters different from those specified in the Agreement. The Pennsylvania Loans purchased pursuant to the Sixth Amendment consist of a portion of the Hoskins Group’s loans. We will continue to service the Loans.S.K. Funding LPSA.
The timing of the Company’s principal and interest payments to S.K. Funding under the SixthSeventh 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. The Pennsylvania Loans had a principal amount in excess of $4,000time, as of the effective date of the Sixth Amendment. While the total principal amount of the Pennsylvania Loans exceeds $1,000, S.K. Funding must fund (by paying the Company) the amount by which the total principal amount of the Pennsylvania Loans exceeds $1,000, with such total amount funded not exceeding $3,000. The interest rate accruing to S.K. Funding under the Sixth Amendment is 10.5% calculated on a 365/366 day basis. When the total principal amount of the Pennsylvania Loans is less than $4,000, 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 of the Pennsylvania Loans is less than $4,000 until S.K. Funding’s principal has been repaid in full. S.K. Funding will continue to be obligated, as described in this paragraph, to fund (by paying the Company) the Pennsylvania Loans for any increases in the outstanding balance of the Pennsylvania Loans up to no more than a total outstanding amount of $4,000.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 SixthSeventh Amendment has a term of 24 months from the effective date and will automatically renew for an additional six month termssix-month term unless either party gives written notice of its intent not to renew the Sixth Amendment at least six months prior to the end of a term. Further, no Protective Advances (as such term is defined in the Agreement) will be required with respect to the Pennsylvania Loans. S.K. Funding will have a priority position as compared to the Company in the case of a default by any of the borrowers.
Secured Borrowings – LineLines of Credit
Also inDuring July 2017, we entered into a line of credit agreement (the “Shuman LOC Agreement”) with a group of lenders (“Shuman”(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 2019 unless extended by Shuman for one or more additional 12-month periods. |
The line is secured with assignments of certain notes and mortgages, and carries a total cost of funds to us of 10%. The maximum amount we can draw on the line is $1,325, whichShuman LOC was fully borrowed as of SeptemberJune 30, 2017. It is due in July 2018. Interest expense was $33 and $67 for the quarter and six months ended June 30, 2018, respectively.
During the remainder of 2017 and all ofApril 2018, we intendentered into a Master Loan Modification Agreement (the “Swanson Modification Agreement”) with Paul Swanson which modified the Line of Credit Agreement between us and Mr. Swanson dated October 23, 2017. Pursuant to increase our secured borrowings to fund additional growth in loan balances.the Swanson Modification Agreement, Mr. Swanson provides us with a revolving line of credit (the “Swanson LOC”) with the following terms:
| ● | Principal not to exceed $7,000; | |
| ● | Secured with assignments of certain notes and mortgages; | |
| ● | Cost of funds to us of 10%; and | |
| ● | Due in January 2018 unless extended by Mr. Swanson for one or more additional 15-month periods. |
The Swanson LOC was fully borrowed as of June 30, 2018. Interest expense was $165 and $265 for the quarter and six months ended June 30, 2018, respectively.
Mortgage Payable
During January 2018, we entered into a commercial mortgage on our office building with the following terms:
| ● | Principal not to exceed $660; | |
| ● | Interest rate at 5.07% per annum based on a year of 360 days; and | |
| ● | Due in January 2033. |
Summary
The purchase and sale agreements and lines of credit are summarized below:
| June 30, 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. | $ | 8,538 | $ | 4,843 | $ | 7,483 | $ | 4,089 | ||||||||
| S.K. Funding | 10,108 | 6,625 | 9,128 | 4,134 | ||||||||||||
| Lender | ||||||||||||||||
| Shuman | 2,160 | 1,325 | 1,747 | 1,325 | ||||||||||||
| Paul Swanson | 8,214 | 5,738 | 2,518 | 2,096 | ||||||||||||
| Total | $ | 29,020 | $ | 18,531 | $ | 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 | 2015 | 55 | % | Varies | 9–9.5 | % | ||||||||
| Lender | ||||||||||||||
| Shuman | 2017 | 67 | % | Yes | 10 | % | ||||||||
| Paul Swanson | 2017 | 67 | % | Yes | 10 | % | ||||||||
| 31 |
Unsecured Borrowings
Other Unsecured Debts
Our other unsecured debts are detailed below:
| Maturity | Interest | Principal Amount Outstanding as of | ||||||||||||
| Loan | Date | Rate(1) | June 30, 2018 | December 31, 2017 | ||||||||||
| Unsecured Note with Seven Kings Holdings, Inc. | August 2018 | 7.5 | % | 500 | 500 | |||||||||
| Unsecured Line of Credit from Builder Finance, Inc. | January 2019 | 10.0 | % | 500 | - | |||||||||
| Unsecured Line of Credit from Paul Swanson | December2018(2) | 10.0 | % | 1,262 | 1,904 | |||||||||
| Subordinated Promissory Note | Demand(3) | 7.5 | % | 1,125 | - | |||||||||
| Subordinated Promissory Note | December 2019 | 10.5 | % | 263 | 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(5) | 1.0 | % | 728 | - | |||||||||
| Junior Subordinated Promissory Note | March 2022(5) | 22.5 | % | 417 | - | |||||||||
| Senior Subordinated Promissory Note | October 2022(6) | 1.0 | % | 279 | 279 | |||||||||
| Junior Subordinated Promissory Note | October 2022(6) | 20.0 | % | 173 | 173 | |||||||||
| $ | 5,747 | $ | 3,069 | |||||||||||
(1)Interest rate per annum, based upon actual days outstanding and a 365/366 day year.
(2)Due in December 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.
(5)These notes were issued to the same holder and, when calculated together, yield a blended return of 11% per annum.
(6)These notes were issued to the same holder and, when calculated together, yield a blended return of 10% per annum.
| 32 |
Secured Borrowings – SummaryUnsecured Notes through the Public Offering (“Notes Program”)
The secured borrowingseffective interest rate on the Notes offered pursuant to the Notes Program at June 30, 2018 and December 31, 2017 was 9.39% and 9.21%, respectively, not including the amortization of deferred financing costs. There are detailed below:limited rights of early redemption. The following table shows the roll forward of our Notes Program:
| September 30, 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 or Lender | Collateral | Purchaser or Lender | |||||||||||||
| Loan purchaser | ||||||||||||||||
| 1st Financial Bank, USA/Builder Finance, Inc. | $ | 9,482 | $ | 4,830 | $ | 5,779 | $ | 2,517 | ||||||||
| S.K. Funding, LLC | 11,169 | 6,013 | 7,770 | 4,805 | ||||||||||||
| Shuman | 2,147 | 1,325 | – | – | ||||||||||||
| Total | $ | 22,798 | $ | 12,168 | $ | 13,549 | $ | 7,322 | ||||||||
| Six Months Ended June 30, 2018 | Year Ended December 31, 2017 | Six Months Ended June 30, 2017 | ||||||||||
| Gross Notes outstanding, beginning of period | $ | 14,121 | $ | 11,221 | $ | 11,221 | ||||||
| Notes issued | 3,350 | 8,375 | 8,105 | |||||||||
| Note repayments / redemptions | (2,197 | ) | (5,475 | ) | (5,087 | ) | ||||||
| Gross Notes outstanding, end of period | $ | 15,274 | $ | 14,121 | $ | 14,239 | ||||||
| Less deferred financing costs, net | 252 | 286 | 330 | |||||||||
| Notes outstanding, net | $ | 15,022 | $ | 13,835 | $ | 13,909 | ||||||
| Typical Current Advance Rate | Does Buyer Portion | |||||||||||||
| Year Initiated | On New Loans | Have Priority? | Rate | |||||||||||
| Loan purchaser | ||||||||||||||
| 1st Financial Bank, USA/Builder Finance, Inc. | 2014 | 70 | % | Yes | The rate our customer pays us | |||||||||
| S.K. Funding, LLC | 2015 | 55 | % | Varies | 9-9.5% | |||||||||
| Shuman | 2017 | 67 | % | Yes | 10 | % | ||||||||
The following is a roll forward of deferred financing costs:
| Six Months | Year | Six Months | ||||||||||
| Ended | Ended | Ended | ||||||||||
| June 30, 2018 | December 31, 2017 | June 30, 2017 | ||||||||||
| Deferred financing costs, beginning balance | $ | 1,102 | $ | 1,014 | $ | 1,014 | ||||||
| Additions | 61 | 88 | 40 | |||||||||
| Deferred financing costs, ending balance | $ | 1,163 | $ | 1,102 | $ | 1,054 | ||||||
| Less accumulated amortization | (95 | ) | (816 | ) | (724 | ) | ||||||
| Deferred financing costs, net | $ | 911 | $ | 286 | $ | 330 | ||||||
The following is a roll forward of the accumulated amortization of deferred financing costs:
| Six Months | Year | Six Months | ||||||||||
| Ended | Ended | Ended | ||||||||||
| June 30, 2018 | December 31, 2017 | June 30, 2017 | ||||||||||
| Accumulated amortization, beginning balance | $ | 816 | $ | 603 | $ | 603 | ||||||
| Additions | 95 | 213 | 121 | |||||||||
| Accumulated amortization, ending balance | $ | 911 | $ | 816 | $ | 724 | ||||||
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)(2) total assets. The ratio of redeemable preferred equity plus members’ capital to assets was 14%10% as of both SeptemberJune 30, 20172018 and 13% as of December 31, 2016.2017. 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. In March and April of 2017, we received an aggregate of $1,004 of new investment in our redeemable preferred equity from oneSales purchased 14.3% of our independent managers and the wife of another ofClass A common units from our independent managers.CEO.
| 33 |
Priority of Borrowings
The following table displays our borrowings and a ranking of priority. The lower the number, the higher the priority.
| Priority Rank | September 30, 2017 | December 31, 2016 | ||||||||||
| Borrowing Source | ||||||||||||
| Purchase and sale agreements and other secured borrowings | 1 | $ | 12,168 | $ | 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, gross | 5 | 14,139 | 11,221 | |||||||||
| Other unsecured debt (subordinated) | 5 | 713 | 700 | |||||||||
| Other unsecured debt (junior subordinated) | 6 | 173 | 173 | |||||||||
| Total | $ | 27,472 | $ | 19,695 | ||||||||
| Priority Rank | June 30, 2018 | December 31, 2017 | |||||||||
| Borrowing Source | |||||||||||
| Purchase and sale agreements | 1 | $ | 19,186 | $ | 11,644 | ||||||
| Secured line of credit from affiliates | 2 | 1,877 | - | ||||||||
| Unsecured line of credit (senior) | 3 | 500 | - | ||||||||
| Other unsecured borrowings (senior subordinated) | 4 | 1,008 | 279 | ||||||||
| Unsecured Notes through our Notes Program, gross | 5 | 15,274 | 14,121 | ||||||||
| Other unsecured borrowings (subordinated) | 5 | 3,649 | 2,617 | ||||||||
| Other unsecured borrowings (junior subordinated) | 6 | 590 | 173 | ||||||||
| Total | $ | 42,084 | $ | 28,834 | |||||||
Liquidity and Capital Resources
The Company’s anticipatedOur primary sourcesliquidity management objective is to meet expected cash flow needs while continuing to service our business and customers. As of liquidity going forward,June 30, 2018, and the amounts received from such sourcesDecember 31, 2017, we had 252 and 171, respectively, in combined loans outstanding, which totaled $44,803 and $32,375, respectively, in gross loan receivables outstanding. Unfunded commitments to extend credit, which have similar collateral, credit and market risk to our outstanding loans, were $21,676 and $19,312 as of June 30, 2018 and December 31, 2017, respectively. We anticipate a significant increase in our gross loans receivables over the nine12 months subsequent to June 30, 2018 by directly increasing originations through new and existing customers.
To fund our combined loans, we rely on secured debt, unsecured debt and equity, which are described in the following table:
| Source of Liquidity | As of June 30, 2018 | As of December 31, 2017 | ||||||
| Secured debt | $ | 21,058 | $ | 11,644 | ||||
| Unsecured debt | 20,769 | 16,904 | ||||||
| Equity | 5,038 | 4,783 | ||||||
Secured debt, net of deferred financing costs increased $9,414 during the six months ended SeptemberJune 30, 20172018, which consisted of an increase in loan purchase and 2016, are:sale agreements, balances on lines of credits with affiliates and mortgage payable of $6,887, $1,877 and $650, respectively. We anticipate increasing our secured debt by roughly half of the increase in loan asset balances over the 12 months subsequent to June 30, 2018 through our existing loan purchase and sale agreements.
| Source of Liquidity | Nine Months Ended September 30, 2017 | Nine Months Ended September 30, 2016 | Comment and Future Outlook | |||||||
| Purchase and sale agreements and secured borrowings | $ | 11,760 | $ | 6,544 | We increased our purchase and sale agreements by $3,000 in relation to our development loans and added a line of credit for $1,325 in the third quarter of 2017. We are working to obtain additional secured funding. | |||||
| Unsecured borrowings (including Notes issued through our public offering) | 9,412 | 3,629 | We initiated a $500 line of credit in January 2017, which we used during 2017 but which had a $0 balance as of September 30, 2017. We also have increased the balance of our unsecured Notes. We plan to continue to increase our unsecured borrowings as needed. | |||||||
| Principal payments | 13,810 | 9,739 | Our loan volume increased in the third quarter of 2017 resulting in an increase in principal payments. Repayments were particularly high in the third quarter of 2017 as our volume has increased. Our concentrations in large borrowers adds risk to this source of liquidity. We anticipate continued growth in payoffs as our volume increases. | |||||||
| Interest income | 4,203 | 2,656 | We anticipate interest income increasing as our loan balances grow. Our concentrations in large borrowers adds risk to this source of liquidity. | |||||||
| Funds from the sale of foreclosed assets | 1,890 | – | We anticipate selling more foreclosed assets in the future. | |||||||
| Unsecured bank line of credit | – | – | We have $500 available as of September 30, 2017. | |||||||
The Company’s anticipated primary usesother half of liquidity going forward,the loan asset growth will come from a combination of increases in our unsecured debt and equity. Unsecured debt, net of deferred financing costs increased $3,865 during the amounts expended on such usessix months ended June 30, 2018, which consisted of an increase in our Notes Program of $1,187 and an increase in the balances of unsecured lines of credit of $2,678. We anticipate an increase in our unsecured debt through increased sales in the Notes Program to cover most of the increase in loan assets not covered by increases in our secured debt during the 12 months subsequent to June 30, 2018.
Equity increased $255 during the six months ended June 30, 2018, which consisted of an increase in Series C cumulative preferred units (“Series C Units”), Series B cumulative preferred units, and Class A common equity of $68, $40 and $147, respectively. We anticipate an increase in our equity during the 12 months subsequent to June 30, 2017 through the issuance of additional Series C Units. During the year ended December 31, 2017, we increased the amount of Series C Units outstanding by $1,097. If we do are not able to increase our equity through the issuance of additional Series C Units, we will look to our Notes Program for the increase. If we anticipate not being able to fund our projected increases in loan balances through the means listed above, we may reduce new loan originations to reduce need for additional funds.
Cash provided by operations was $425 as of June 30, 2018 as compared to $742 for the nine months ended September 30,same period of 2017. Our decrease in operating cash flow in 2018 compared to the same period of 2017 and 2016, are:was due to a decrease in customer interest escrow of $408 offset by an increase in net loan origination fee deferred of $97.
| Use of Liquidity | Nine Months Ended 2017 | Nine Months Ended 2016 | Comment and Future Outlook | |||||||
| Purchase and sale agreements and secured borrowings | $ | 6,914 | $ | 4,405 | These will continue to grow as loan payoffs continue to rise. | |||||
| Unsecured borrowings | 6,481 | 1,336 | Consists mostly of borrowings from our Notes program. The increase in 2017 is due to both the increase in the balance of notes, and the maturing of this portfolio of debt. | |||||||
| Loan funding | 23,473 | 14,830 | We have unfunded loan commitments of $16,489 as of September 30, 2017. | |||||||
| Interest expense | 1,910 | 1,261 | We anticipate interest expense increasing as we grow. | |||||||
| Distributions | 189 | 335 | Distributions are based on income | |||||||
Contractual Obligations
The following table shows the maturity of our outstanding debt as of June 30, 2018:
| Year Maturing | Total Amount Maturing | Public Offering | Other Unsecured | Secured Borrowings | ||||||||||||
| 2018 | $ | 25,728 | $ | 2,306 | $ | 3,007 | $ | 20,415 | ||||||||
| 2019 | 7,556 | 6,499 | 1,043 | 14 | ||||||||||||
| 2020 | 2,270 | 2,155 | 100 | 15 | ||||||||||||
| 2021 | 3,788 | 3,773 | - | 15 | ||||||||||||
| 2022 and thereafter | 2,742 | 541 | 1,597 | 604 | ||||||||||||
| Total | $ | 42,084 | $ | 15,274 | $ | 5,747 | $ | 21,063 | ||||||||
The total amount maturing through year ended December 31, 2019 is $33,284, which consists of secured borrowings of $20,429 and unsecured borrowings of $12,855.
Secured borrowings maturing through year ended December 30, 2019 significantly consists of loan purchase and sale agreements with two loan purchasers (Builder Finance, Inc. and S. K. Funding) and two lenders (Stephen Shuman and Paul Swanson).
The purchasers under the loan purchase and sale agreements have an unconditional obligation to fund loans once agreed to purchase; however, Builder Finance, Inc. has put options that could require us to (a) buy back loans after 12 months and (b) buy back 10% of the portfolio commitment value in any 12 months.
Our lenders have lines of credit with the Company described as follows:
Stephen Shuman’s line of credit (“Shuman LOC”) is due July 2019 and unless terminated will automatically renew 60 days prior for an additional 12 months. If the Shuman LOC does not renew, $1,325 will be due in July 2019, which we would expect to fund through loan payoffs.
Paul Swanson’s line of credit (“Swanson LOC”) is due on December 31, 2018 and unless terminated will automatically renew 120 days prior for an additional 15 months. If the Swanson LOC does not renew, $4,000 will be due on December 31, 2018 and $3,000 will be due 120 days after, and which we would expect to fund through loan payoffs used as collateral for the line.
Unsecured borrowings due on December 31, 2018 consist of Notes issued pursuant to the Notes Program and other unsecured debt of $8,805 and $4,050, respectively. To the extent that Notes issued pursuant to the Notes Program are not renewed upon maturity, we will be required to fund the maturities, which we anticipate funding through the issuance of new Notes in our Notes Program. Our other unsecured debt has historically renewed. For more information on other unsecured borrowings, see Note 5 – Borrowings. If other unsecured borrowings are not renewed in the future, we anticipate funding such maturities through investments in our Notes Program.
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 from proceeds of our Notes | |
| ● | match our interest rate to our borrower to our cost of funds. |
The following table contains our sources of liquidity for the six months ended June 30, 2018 and 2017:
| Source of Liquidity | Six Months Ended | Six Months Ended | Comment and Future Outlook | |||||||
| Secured debt | $ | 13,538 | $ | 5,775 | We increased our related party debt and added a mortgage on our office building. We intend to continue to increase funds through bank participation during 2018 as needed. | |||||
| Unsecured debt | 8,784 | 9,218 | Our unsecured debt outside of our Notes Program increased during 2018. We plan to increase our unsecured borrowings as needed. | |||||||
| Principal payments | 11,337 | 6,229 | Our loan volume increased in 2018 resulting in an increase in principal payments. We anticipate continued growth in payoffs as our volume increases. | |||||||
| Interest income | 2,708 | 1,631 | We anticipate interest income increasing as our loan balances grow. Our concentration in large borrowers adds risk to this source of liquidity. | |||||||
| Funds from the sale of foreclosed assets | – | 1,890 | We anticipate selling more foreclosed assets in the future. | |||||||
| 35 |
The following table contains our uses of liquidity for the six months ended June 30, 2018 and 2017:
| Use of Liquidity | Six Months Ended | Six Months Ended June 30, 2017 | Comment and Future Outlook | |||||||
| Unfunded and new loans | $ | 21,676 | $ | 17,797 | We have loan commitments which are unfunded and will be funded as the collateral of these loans are built. As we create new loans, a portion will be funded at origination and the remaining balance will fund over time. | |||||
| Payments on secured debt | 4,118 | 4,277 | These will continue to grow as loan payoffs continue to rise. | |||||||
| Payments on unsecured debt | 4,953 | 5,687 | Consists mostly of borrowings from our Notes program. We anticipate these payments to increase in 2018. | |||||||
| Interest expense | 1,891 | 1,162 | We anticipate interest expense increasing as we incur additional debt. | |||||||
| Distributions to owners | 276 | 175 | Distributions are based on income. | |||||||
Inflation, Interest Rates, and Housing Starts
Since we are in the housing industry, we are affected by factors that impact that industry. Housing starts impact our customers’ ability to sell their homes. Faster sales generally mean higher effective interest rates for us, as the recognition of fees we charge is spread over a shorter period. Slower sales generally mean lower effective interest rates for us. Slower sales also are likely to increase the default rate we experience.
Housing inflation generally 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 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 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.
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.
| 37 |
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 SeptemberJune 30, 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.
| 38 |
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 and six months ended SeptemberJune 30, 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) |
Reinvestments in Partial Series C Cumulative Preferred Units Investors in the Series C cumulative preferred units (“Series C Preferred Units”) may elect to reinvest their distributions in additional Series C Preferred Units (the “Series C Reinvestment Program”). Pursuant to the Series C Reinvestment Program, on
The transactions in Series C Preferred Units described above were effected in private transactions exempt from the registration requirements of the Securities Act under Section 4(a)(2) of the Securities Act. The transactions described above did not involve any public offering, were made without general solicitation or advertising, and the buyer represented to us that it is an “accredited investor’’ within the meaning of Rule 501 of Regulation D promulgated under the Securities Act, with access to all relevant information necessary to evaluate the investment in the Series C Preferred Units. | |
| (b) | We registered up to $70,000,000 in Fixed Rate Subordinated Notes in our public offering (SEC File No. 333-203707, effective September 29, 2015). As of | |
| (c) | None. |
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
| (a) | During the quarter ended | |
| (b) | During the quarter ended |
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 SeptemberJune 30, 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 | ||