Shepherd’s Finance, LLC Reports 2022 Results
JACKSONVILLE, FL, March 21, 2023 (GLOBE NEWSWIRE) — Shepherd’s Finance, LLC (“Shepherd’s,” the “Company,” “we,” or “our”) announced its operating results for the year ended December 31, 2022.
2022 Overview
During 2022, the Company continued to focus on the reduction of non-interest earning assets. As of December 31, 2022, loans classified as non-accrual were 14 or approximately $7.2 million compared to 23 or approximately $9.5 million as of December 31, 2021. In addition, as of December 31, 2022 and 2021 we had 3 foreclosed assets or approximately $1.6 million and 5 or approximately $2.7 million, respectively.
The Company continues to lose interest income on assets that do not accrue interest. During the year ended December 31, 2022 the estimated loss on interest income related to impaired and foreclosed assets was approximately $1.2 million. Looking ahead, we expect this to decrease as we continue to focus on the reduction through selling our remaining non-interest earning assets in 2023.
While the Company continues to face risks as it relates to the economy and the homebuilding industry, management has decided to focus on the following during 2023:
| 1. | Continue to decrease the balance of non-interest-bearing assets, which includes foreclosed real estate and classified non-accrual assets. | |
| 2. | While we anticipate lower loan originations in 2023 as compared to 2022, we will increase our focus on fix and flips as a percentage of sales. | |
| 3. | Lower SG&A expenses. | |
| 4. | Maintain a consistent margin, similar to our current spread. | |
| 5. | Maintain liquidity at a level sufficient for loan originations. |
During 2023, the housing market in most of the areas in which we do business will likely decline as compared to the same period of time in 2022 due to the impact of current economic conditions. While markets will probably weaken compared to where they were during 2022, we anticipate losses incurred in principal related to COVID-19 will decrease, and the lower interest income due to nonperforming assets will continue to decrease during 2023 as compared to 2022. Short term interest rates are expected to continue to rise. Mortgage rates peaked mid-2022 and have declined since. A continued rise in short term rates is likely to benefit the company as our competitors’ rates will rise faster than ours making us more competitive, but an additional rise in long term interest rates would negatively impact the housing industry as a whole, and therefore us.
2022 Financial Highlights
| ● | Interest and Fee Income – Interest and fee income on loans increased approximately $2.3 million, or 28.7%, to approximately $10.2 million for the year ended December 31, 2022, compared to the same period of 2021.
|
| ● | Net Income – The Company had net income of approximately $1.8 million for the year ended December 31, 2022 compared to approximately $0.8 million for the same period of 2021, an increase in net income of approximately $1.0 million. |
The Chief Executive Officer of Shepherd’s Finance, Daniel M. Wallach, commented: “We returned to profitability in 2021 after the impact of COVID-19 and continued to increase revenue and profit in 2022. We are working to maintain or increase profit in 2023 through our continued efforts in sales and focus on the reduction of non-interest earning assets; however, we are unsure how current interest, inflation and global security concerns may impact the Company. We appreciate the continued support of our investors.”
Results of Operations
| ● | Loan Loss Provision |
Loan loss provision (expense throughout the year) was approximately $0.9 million and $0.6 million for the years ended December 31, 2022 and 2021, respectively. Due to the changes in economic conditions during 2022, we revised the calculation of our loan loss provision which resulted in an increase in reserve across all loan types. As a result, while the percentage of nonperforming loans went down, the reserve increased.
The allowance for loan losses at December 31, 2022 was approximately $2.5 million which primarily consisted of approximately $0.3 million for loans without specific reserves, $0.2 million for loans with specific reserves and $2.0 million for specific reserves due to the impact of COVID-19. During the year ended December 31, 2022, we incurred approximately $0.5 million in direct charge offs.
The allowance for loan losses at December 31, 2021 was approximately $2.0 million which primarily consisted of $0.2 million for loans without specific reserves, $0.3 million for loans with specific reserves, $0.1 million for special mention loans and $1.5 million for specific reserves due to the impact of COVID-19. During the year ended December 31, 2021, we incurred approximately $0.5 million in direct charge offs.
| ● | Non-Interest Income |
Gain on Sale of Foreclosed Assets
During the years ended December 31, 2022 and 2021, we recognized approximately $0.1 million and $0.2 million, respectively, as a gain on the sale of foreclosed assets which related to the sale of two and six foreclosed assets during 2022 and 2021, respectively.
Dividend Income
During January 2021, we invested approximately $500 in Series A Preferred Units in Benjamin Marcus Homes, LLC. During the years ended December 31, 2022 and 2021, approximately $0.1 million and $0 of dividend income was recognized related to the Series A Preferred Units investment, respectively. This investment was redeemed subsequent to December 31, 2022, and the proceeds of $561,800 was converted to debt under our development line of credit with the Hoskins Group
Other Income
During the year ended December 31, 2022, we consulted for two of our construction and development loan customers which included accounting guidance and recognized approximately $0.2 million in other income. No consulting services were performed during the year ended December 31, 2021. We anticipate to continue our consulting services to our customers on an as needed basis during 2023.
Gain on Foreclosure of Assets
During the years ended December 31, 2022 and 2021, we recognized approximately $0 million and $0.1 million, respectively, as a gain on the foreclosure of assets. We transferred one loan receivable asset to foreclosed assets for both years ended December 31, 2022 and 2021. The transfer for the year ended December 31, 2021 resulted in a gain.
Gain on the Extinguishment of Debt
During April 2020, the Company received a grant under the Economic Injury Disaster Loan Emergency Advance (the “EIDL Advance”) of less than $0.1 million which was used for payroll and other certain operating expenses. In February 2021, the full EIDL Advance of less than $0.1 million and accrued interest were forgiven by the U.S. Small Business Administration.
During February 2021, the Company received their second draw of the Paycheck Protection Program (“PPP”) loan created under the Coronavirus Aid, Relief, and Economic Security Act for approximately $0.3 million which was used to cover payroll and certain other identified costs. During August 2021, the full amount of the PPP loan was forgiven.
| ● | Non-Interest Expense |
Selling, General and Administrative (“SG&A”) Expenses
SG&A expenses increased approximately $0.8 million to approximately $2.7 million for the year ended December 31, 2022 compared to approximately $1.9 million for the same period of 2021 due primarily to salaries and related expense. Salaries and related expenses increased approximately $0.8 million to $1.6 million for the year ended December 31, 2022 compared to approximately $0.8 million for the same period of 2021, due primarily to:
| ● | Profit share expense was approximately $0.4 million and $0.1 million for the years ended December 31, 2022 and 2021, respectively; | |
| ● | Employee retention credits and tax refunds were approximately $0 and $0.3 million for the years ended December 31, 2022 and 2021, respectively; and | |
| ● | Deferred loan origination salaries expenses were approximately $0.7 million and $0.8 million for the years ended December 31, 2022 and 2021, respectively. |
Impairment Loss on Foreclosed Assets
During both years ended December 31, 2022 and 2021, we recognized approximately less than $0.1 million as a loss on impairment of foreclosed assets.
Loss on the Sale of Foreclosed Assets
During the years ended December 31, 2022 and 2021, we recognized approximately $0 and $0.1 million as loss on the sale of one and seven foreclosed assets, respectively.
Loss on Foreclosure of Assets
During the years ended December 31, 2022 and 2021, we recognized approximately $0 and $0.1 million as a loss on foreclosure of assets. We transferred one loan receivable asset to foreclosed assets during both years ended December 31, 2022 and 2021.
Balance Sheet Management
Cash, Cash Equivalents and Restricted Cash
We try to avoid borrowing on our lines of credit from affiliates. To accomplish this, we must carry some cash for liquidity. This amount generally grows as our Company grows. As of December 31, 2022 and 2021, our cash and cash equivalents were approximately $3.0 million and $3.7 million, respectively, and our restricted cash was approximately $1.2 million and $0, respectively.
During 2022, we received two deposits for one of our sold real estate assets which was deemed restricted until construction on the home was complete.
Loans Receivable, net
Loans receivable, net totaled approximately $56.7 million and $46.9 million as of December 31, 2022 and 2021, respectively. As of December 31, 2022 and 2021, we had 14 impaired loans in the aggregate amount of approximately $7.2 million and 23 impaired loans in the aggregate amount of approximately $9.5 million that were not paying interest, respectively. Non-performing assets not related to the impact of COVID-19 were approximately $3.8 million of the approximately $7.2 million for 2022 and approximately $2.9 million of the approximately $9.5 million for 2021. As of January 1, 2023, the Company adopted a new accounting standard regarding the new methodology, Current Expected Credit Losses, for recognizing loan losses as allowance for credit losses. The effect was to increase the allowance by approximately $0.2 million and reduce members’ capital.
Foreclosed Assets
As of December 31, 2022, foreclosed assets decreased approximately $1.1 million to approximately $1.6 million compared to approximately $2.7 million for the same period of 2021.
Notes Payable Secured, net of deferred financing costs
Notes payable secured, net increased approximately $3.2 million to approximately $23.2 million as of December 31, 2022 compared to approximately $20.0 million for the same period of 2021.
Notes Payable Unsecured, net of deferred financing costs
Notes payable unsecured, net increased approximately $2.4 million to approximately $30.1 million as of December 31, 2022 compared to approximately $27.7 million for the same period of 2021. A significant portion of our notes payable unsecured, net includes notes from our public offerings, constituting approximately $21.2 million and approximately $20.3 million as of December 31, 2022 and 2021, respectively.
Interest Rates for the Subordinated Notes Program
Shepherd’s offers the following interest rates for its public notes offering, effective as of March 6, 2023:
| Maturity (Duration) | Annual Interest Rate | Annual Effective Yield (i) | Effective Yield to Maturity (ii) | |||||||||
| 12 Months | 7.00 | % | 7.23 | % | 7.23 | % | ||||||
| 24 Months | 8.00 | % | 8.30 | % | 17.29 | % | ||||||
| 36 Months | 6.00 | % | 6.17 | % | 19.67 | % | ||||||
| 48 Months | 10.00 | % | 10.47 | % | 48.94 | % | ||||||
| (i) | The Annual Effective Yield is determined by taking the Annual Interest Rate as a decimal and dividing it by 12 for a monthly rate, then taking that rate plus 1 and multiplying that by itself 11 more times, then subtracting the one back off and converting back to a percentage. For instance, for an Annual Interest Rate of 7.00%, we take .07/12 which is 0.005 plus 1 which is 1.005, and then multiply 1.005 by itself 11 more times which yields 1.0723, then subtracting off the 1, leaving 0.0723, and finally converting to a percentage, which gives us an Annual Effective Yield of 7.23%. |
| (ii) | The Effective Yield to Maturity is determined by taking the Annual Interest Rate as a decimal and dividing it by 12 for a monthly rate, then taking that rate plus 1 and multiplying that by itself by (the total number of months of the investment minus one) times, then subtracting the one back off and converting back to a percentage. For instance, for a 48 month investment with an Annual Interest Rate of 10.00%, we take .10/12 which is 0.0083 plus 1 which is 1.0083, and then multiply 1.0083 by itself 47 more times which yields 1.4894, then subtracting off the 1, leaving 0.4894, and finally converting to a percentage, which gives us an Effective Yield To Maturity of 48.94%. |
About Shepherd’s Finance, LLC
Shepherd’s Finance, LLC is headquartered in Jacksonville, Florida and is focused on commercial lending to participants in the residential construction and development industry. As of December 31, 2022, Shepherd’s Finance, LLC had approximately $56.7 million in loan assets with 230 construction and 20 development loans in 21 states with 66 borrowers. For more information, please visit http://www.shepherdsfinance.com.
Forward Looking Statements
This press release may contain certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Such forward-looking statements can generally be identified by our use of forward-looking terminology such as “may,” “will,” “expect,” “intend,” “anticipate,” “estimate,” “believe,” “continue,” or other similar words. Because such statements include risks, uncertainties, and contingencies, actual results may differ materially from the expectations, intentions, beliefs, plans, or predictions of the future expressed or implied by such forward-looking statements. These risks, uncertainties, and contingencies include, but are not limited to: the recent decline in housing starts and rise in interest rates; uncertainties relating to the effects of the COVID-19 pandemic; general economic uncertainty in key global markets and a worsening of global economic conditions or low levels of economic growth; the rate and the pace of economic recovery following economic downturns; and those other risks described in other risk factors as outlined in our Registration Statement on Form S-1, as amended, and our Annual Report on Form 10-K. The Company undertakes no obligation to update these statements following the date of this press release, except as required by law. In addition, the Company, through its senior management, may make from time to time forward-looking public statements concerning the matters described herein. Such forward-looking statements are necessarily estimates reflecting the best judgment of the Company’s senior management based upon current information and involve a number of risks and uncertainties. Certain factors that could affect the accuracy of such forward-looking statements are identified in the public filings made by the Company with the Securities and Exchange Commission, and forward-looking statements contained in this press release or in other public statements of the Company or its senior management should be considered in light of those factors. This is neither an offer nor a solicitation to purchase securities.
Contact:
Catherine Loftin
Shepherd’s Finance, LLC13241 Bartram Park Blvd, STE 2401 | Jacksonville, FL, 32258
Direct (904) 518-3422 | Office (302) 752-2688
catherineloftin@shepherdsfinance.com | www.shepherdsfinance.com
Shepherd’s Finance, LLC
Consolidated Balance Sheets
As of December 31, 2022, and 2021
| (in thousands of dollars) | 2022 | 2021 | ||||||
| Assets | ||||||||
| Cash and cash equivalents | $ | 2,996 | $ | 3,735 | ||||
| Restricted cash | 1,200 | – | ||||||
| Accrued interest receivable | 670 | 598 | ||||||
| Loans receivable, net | 56,650 | 46,943 | ||||||
| Real estate investments | 660 | 1,651 | ||||||
| Foreclosed assets, net | 1,582 | 2,724 | ||||||
| Premises and equipment | 852 | 875 | ||||||
| Other assets | 862 | 1,089 | ||||||
| Total assets | $ | 65,472 | $ | 57,615 | ||||
| Liabilities and Members’ Capital | ||||||||
| Customer interest escrow | $ | 766 | $ | 479 | ||||
| Accounts payable and accrued expenses | 650 | 296 | ||||||
| Accrued interest payable | 2,921 | 2,464 | ||||||
| Notes payable secured, net of deferred financing costs | 23,173 | 20,016 | ||||||
| Notes payable unsecured, net of deferred financing costs | 30,110 | 27,713 | ||||||
| Due to preferred equity member | 47 | 43 | ||||||
| Total liabilities | $ | 57,667 | $ | 51,011 | ||||
| Commitments and Contingencies (Note 10) | ||||||||
| Redeemable Preferred Equity | ||||||||
| Series C preferred equity | $ | 5,725 | $ | 5,014 | ||||
| Members’ Capital | ||||||||
| Series B preferred equity | 1,900 | 1,720 | ||||||
| Class A common equity | 180 | (130 | ) | |||||
| Members’ capital | $ | 2,080 | $ | 1,590 | ||||
| Total liabilities, redeemable preferred equity and members’ capital | $ | 65,472 | $ | 57,615 | ||||
Shepherd’s Finance, LLC
Consolidated Statements of Operations
For the years ended December 31, 2022 and 2021
| (in thousands of dollars) | 2022 | 2021 | ||||||
| Net Interest Income | ||||||||
| Interest and fee income on loans | $ | 10,220 | $ | 7,944 | ||||
| Interest expense: | ||||||||
| Interest related to secured borrowings | 2,134 | 1,973 | ||||||
| Interest related to unsecured borrowings | 2,972 | 3,147 | ||||||
| Interest expense | $ | 5,106 | $ | 5,120 | ||||
| Net interest income | 5,114 | 2,824 | ||||||
| Less: Loan loss provision | 930 | 588 | ||||||
| Net interest income after loan loss provision | 4,184 | 2,236 | ||||||
| Non-Interest Income | ||||||||
| Gain on sale of foreclosed assets | $ | 101 | $ | 166 | ||||
| Gain on foreclosure of assets | – | 67 | ||||||
| Gain on the extinguishment of debt | – | 371 | ||||||
| Dividend income | 62 | – | ||||||
| Other income | 154 | – | ||||||
| Total non-interest income | $ | 317 | $ | 604 | ||||
| Income | 4,501 | 2,840 | ||||||
| Non-Interest Expense | ||||||||
| Selling, general and administrative | $ | 2,683 | $ | 1,873 | ||||
| Depreciation and amortization | 56 | 53 | ||||||
| Loss on the sale of foreclosed assets | – | 92 | ||||||
| Loss on foreclosure | – | 47 | ||||||
| Impairment loss on foreclosed assets | 2 | 10 | ||||||
| Total non – Interest expense | 2,741 | 2,075 | ||||||
| Net income | $ | 1,760 | $ | 765 | ||||
| Earned distribution to preferred equity holders | 826 | 701 | ||||||
| Net income attributable to common equity holders | $ | 934 | $ | 64 | ||||
