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Indemnification liability | 3 Months Ended
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Mar. 31, 2023
Indemnification Liability |
Indemnification liability | Note 7. Indemnification liability As discussed at Note 9 to the condensed consolidated financial statements, and pursuant to PCCU Agreements, PCCU funds loans through a third-party vendor. SHF earns the associated interest and pays PCCU a loan hosting payment at an annual rate of 0.25% of the outstanding loan principal. The below schedule details outstanding amounts funded by PCCU and categorized as either collateralized loans or unsecured loans and lines of credit. Schedule of Outstanding Amounts
|  | March 31, 2023 |  |  | December 31, 2022 |
Secured term loans |  | $ | 16,300,000 |  |  | $ | 15,300,000 |
Unsecured loans and lines of credit |  |  | 3,791,428 |  |  |  | 3,598,042 |
Total loans funded by Parent |  | $ | 20,091,428 |  |  | $ | 18,898,042 |
Secured loans contained an interest rate ranging from 5.90% to 12.00%. Unsecured loans and lines of credit contain variable rates ranging from Prime + 1.50 % to Prime + 6.00 %. Unsecured lines of credit had incremental availability of $875,000 and $996,958 at March 31, 2023 and December 31, 2022. SHF has agreed to indemnify PCCU for losses on certain PCCU loans. The indemnity liability reflects SHF management’s estimate of probable credit losses inherent under the agreement at the balance sheet date. Management uses a disciplined process and methodology to establish the liability, and the estimates are sensitive to risk ratings assigned to individual loans covered by the agreement as well as economic assumptions driving the estimation model. Individual loan risk ratings are evaluated at least a quarterly based on each situation by SHF management. Given the Company’s limited lending history, the estimate is based on risk adjusted national charge off rates as published by the US Federal Reserve. The indemnity liability activity are as follows: Schedule of Indemnity Liability
|  | Three Months ended March 31, 2023 |  |  | Three Months ended March 31, 2022 |
Beginning balance |  | $ | 499,465 |  |  | $ | - |
Cumulative effect from adoption of CECL |  |  | 566,341 |  |  |  | - |
Charge-offs |  |  | - |  |  |  | - |
Recoveries |  |  | - |  |  |  | - |
Provision |  |  | 82,026 |  |  |  | 58,386 |
Ending balance |  | $ | 1,147,832 |  |  | $ | 58,386 |
All loans were current and considered performing at March 31, 2023 except one loan which was identified pursuant to potential default on January 5, 2023. The Company’s management was informed that an indemnified loan, having an outstanding balance of $3.1MM, was past due pursuant to its December 2022 payment. The guarantor on the loan stated to management that the borrower is out of money due to business losses. The guarantor noted that the borrower is attempting to sell the building prior to the end of Q2 of 2023. The Company is discussing workout options with the borrower. In addition, further to the aforementioned attempt to sell, the loan has sufficient collateral. The above-mentioned loan is now greater than 120 days delinquent and considered impaired. The Company’s CECL methodology has reserved management’s best estimate of credit losses in relation to this loan and the overall loan portfolio on a collective basis. Credit quality of indemnified loans: As part of the on-going monitoring of the credit quality of the Company’s indemnified loan portfolio, management tracks credit quality indicators based on the loan payment status on monthly basis. All the indemnified loans outstanding on March 31,2023 are evaluated based on their payment status, which is considered as the most meaningful indicator of credit quality. SHF has agreed to indemnify PCCU from all claims related to SHF’s cannabis-related business. Other than potential credit losses, no other circumstances were identified meeting the requirements of a loss contingency. The provision for credit losses on the statement of operations consists of the following activity for the three months ended March 31, 2023 and year ended December 31, 2022: Schedule of Provision for Loan Losses
|  | Commercial real estate loans |  |  | Indemnity liability |  |  | Total |  |  | Commercial real estate loans |  |  | Indemnity liability |  |  | Total |
|  | March 31, 2023 |  |  | March 31, 2022 |
|  | Commercial real estate loans |  |  | Indemnity liability |  |  | Total |  |  | Commercial real estate loans |  |  | Indemnity liability |  |  | Total |
Provision (benefit) |  | $ | (15,390 | ) |  | $ | 82,056 |  |  | $ | 66,666 |  |  | $ | 9,805 |  |  | $ | 58,386 |  |  | $ | 68,191 |

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