Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion of our financial condition and results of operations should be read in conjunction with the financial statements and the notes to those statements included elsewhere in this annual report. Certain statements in this discussion and elsewhere in this Report constitute forward-looking statements, within the meaning of section 21E of the Exchange Act, that involve risks and uncertainties. Actual results may differ materially from those anticipated in these forward-looking statements.
Company Overview
Sachem Capital Corp., a New York corporation, established in 2010 and completing an initial public offering in 2017 is a self-managed REIT that specializes in originating, underwriting, funding, servicing and managing a portfolio of first mortgage loans. The Company operates its business as one segment. The Company offers short-term (i.e., one to three years), secured, non-bank loans (sometimes referred to as “hard money” loans) to real estate owners and investors to fund their acquisition, renovation, development, rehabilitation or improvement of properties located primarily in the northeastern and southeastern sections of the United States. The properties securing the Company’s loans are generally classified as residential or commercial real estate and, typically, are held for resale or investment. Each loan is secured by a first mortgage lien on real estate and may also be secured with additional collateral, such as other real estate owned by the borrower or its principals, a pledge of the ownership interests in the borrower by the principals thereof, and/or personal guarantees by the principals of the borrower. The Company does not lend to owner occupants of residential real estate. The Company’s primary underwriting criteria is a conservative loan to value ratio. In addition, the Company may make opportunistic real estate purchases apart from its lending activities.
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2024 Year in Review
Total revenue decreased 11.2%; net (loss) income attributable to common shareholders decreased 462.5%; and earnings per common share decreased $1.20 per share.
Critical Accounting Policies and Use of Estimates
The accompanying consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”). The preparation of the consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Management will base the use of estimates on (a) various assumptions that consider prior reporting results, (b) projections regarding future operations and (c) general financial market and local and general economic conditions. Actual amounts could differ from those estimates. See Note 2 – Significant Accounting Policies for further details.
Revenue Recognition
Interest income from commercial loans is recognized, as earned, over the loan period, whereas origination and modification fee revenue on commercial loans are amortized over the term of the respective notes.
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CECL Allowance
We record an allowance for credit losses (“CECL”) in accordance with the CECL standard on our loan portfolio, including unfunded construction commitments, on a collective basis by assets with similar risk characteristics. This methodology replaces the probable incurred loss impairment methodology. In addition, interest and fees receivable and amounts included in due from borrowers, other than reimbursements, which include origination, modification and other fees receivable are also analyzed for credit losses in accordance with the CECL standard, as they represent a financial asset that is subject to credit risk. Further, CECL requires credit losses to be presented as an allowance rather than as a write-down on available-for-sale debt securities if management does not intend to sell and does not believe that it is more likely than not, they will be required to sell. As allowed under the CECL standard that we have adopted, as a practical expedient, the fair value of the collateral at the reporting date is compared to the net carrying amount of the loan when determining the allowance for credit losses for loans in pending/pre-foreclosure status, as defined. Fair value of collateral is reduced by estimated cost to sell if the collateral is expected to be sold. The CECL standard requires an entity to consider historical loss experience, current conditions, and a reasonable and supportable forecast of the economic environment. We utilize a loss-rate method for estimating current expected credit losses. The loss rate method involves applying a loss rate to a pool of loans with similar risk characteristics to estimate the expected credit losses on that pool of loans. In determining the CECL allowance, we consider various factors including (1) historical loss experience in its portfolio, (2) loan specific losses for loans deemed collateral dependent based on excess amortized cost over the fair value of the underlying collateral, and (3) its current and future view of the macroeconomic environment. We also utilize a reasonable and supportable forecast period equal to the contractual term of the loan plus any applicable short-term extensions that are reasonably expected for construction loans. Loans, interest receivable, due from borrowers, unfunded commitments, and (available-for-sale debt) investment securities are all presented net on the Consolidated Balance Sheets with expanded disclosures in the notes to the consolidated financial statements. The change in the balances during the reporting period are recorded in the Consolidated Statements of Operations under the provision for credit losses.
Results of Operations
Years ended December 31, 2024 and 2023
Total revenue
Total revenue for the year ended December 31, 2024, was $57.5 million compared to $64.7 million for the year ended December 31, 2023, a decrease of $7.2 million, or 11.2%. The decrease in revenue was primarily due to a reduction in the number of loan originations and a decline in net loans held for investment over the year. For 2024, interest income was $43.2 million compared to $49.3 million for 2023, representing a decrease of $6.1 million or 12.4%. Fee income from loans decreased to $8.6 million for 2024 compared to $10.7 million for 2023, a decrease of $2.1 million, or 19.7% due to lower origination volume as compared to 2023. Income from limited liability company investments increased to $5.2 million for 2024 compared to $3.5 million for 2023, an increase of $1.7 million, or 48.8%. Other investment income was $0.4 million for 2024 compared to $1.2 million for 2023, a decrease of $0.8 million, or 67.7%.
Operating costs and expenses
Total operating costs and expenses for the year ended December 31, 2024, were $75.3 million compared to $49.7 million for 2023, an increase of $25.6 million, or 51.5%. This net increase was attributable to (i) a $21.3 million increase in provision for credit losses related to loans and (ii) a $1.9 million increase in general and administrative expenses as a result of increased legal and professional fees during the second and third quarters of the year related to matters outside of our ordinary course of business; all of which was offset by a $1.4 million decrease in interest and amortization expense.
Other (loss) income
Total other loss for the year ended December 31, 2024 was $21.8 million compared to other income of $0.9 million the year ended December 31, 2023, a decrease of $22.7 million. This decrease was driven by the $22.0 million loss on the sale of loans, and a decrease in gain on equity securities of $0.7 million.
Net (loss) income attributable to common shareholders and net (loss) income attributable to common shareholders per share
Net loss attributable to common shareholders for the year ended December 31, 2024 was $43.9 million compared to net income attributable to common shareholders of $12.1 million for the year ended December 31, 2023. Accordingly, net loss per weighted average Common Share outstanding for the year ended December 31, 2024 was $0.93 compared to net income per weighted average Common Share outstanding for the year ended December 31, 2023 of $0.27.
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Comprehensive (loss) income
For the year ended December 31, 2024, we reported a reclass of realized losses on certain equity securities of $0.3 million reflecting the recognition of unrealized losses on securities sold, as well as a reversal of losses on debt securities from unrealized to realized following the sale of such securities. For the year ended December 31, 2023, we reported a reclassification of unrealized losses to provision for credit losses of $0.8 million reflecting the recognition of unrealized losses on securities held for over one year, which were not considered temporary losses, as well as an unrealized gain on investment securities of $0.1 million.
Book value per common share
The following table sets forth the calculation of our book value per common share (in thousands, except share and per share data):
At December 31,
Total shareholders’ equity, net of preferred stock 123,982 179,328
Book value per common share $ 2.64 $ 3.83
Book value per common share as of December 31, 2024, was $2.64, a decrease of $1.19 from our book value per common share as of December 31, 2023 of $3.83. Such decrease is primarily due to the net effect of the sum of the following:
Liquidity and Capital Resources
Total assets at December 31, 2024 were $492.0 million compared to $620.9 million at December 31, 2023, a decrease of $128.9 million, or 20.8%. The decrease was due primarily to note sale that closed during December 2024, lower originations during the year as a result of utilizing principal repayments and cash received for the redemption of the unsubordinated unsecured note payable that was due in December 2024, and sale of $36.2 million of investments in securities.
Total liabilities at December 31, 2024 were $310.3 million compared to $390.8 million at December 31, 2023, a decrease of $80.5 million, or 20.6%. This decrease was principally due to repaying in full two tranches of our unsecured unsubordinated five-year notes that matured in June and December of 2024. The total amount repaid was $58.2 million. In addition, we closed our Wells Fargo line of credit, which had an outstanding balance of $27.3 million. Finally, there was a decrease in advances from borrowers of $7.0 million. These decreases were partaially offset by our outstanding balance on the Churchill Credit Facility which increased by $7.2 million.
Total shareholders’ equity at December 31, 2024 was $181.7 million compared to $230.1 million at December 31, 2023, a decrease of $48.4 million, or 21.0%. This decrease was attributable to the $22.0 million loss on the sale of loans that occurred in December 2024, the $26.9 million provisions related to loans mandated by CECL, and the $4.9 million valuation allowance on loans held for sale, all of which contributed to the result of a $39.6 million net loss for the year ended December 31, 2024.
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Sources and Uses of Funds
Our primary sources of cash include principal and interest payments on mortgage loans and various fees associated with such loans, proceeds from the sales of real property, net proceeds from offerings of equity securities and borrowings from our credit facilities. Our primary uses of cash include debt service payments (both principal and interest), new originations of loans held for investment, new investments in real estate, dividend distributions to our shareholders, and operating expenses.
These sources and uses of cash are reflected in our Consolidated Statements of Cash Flows as summarized below:
Year Ended One Year Change
(in thousands)
For a detailed breakdown of our cash flows during the years ended December 31, 2024 and 2023, see the statement of cash flows included in our audited financial statements.
We project anticipated cash requirements for our operating needs as well as cash flows generated from operating activities available to meet these needs. Our short-term cash requirements primarily include funding of loans, dividend payments, interest and principal payments on our indebtedness, including repayment/refinancing of the Notes maturing in September 2025, and payments for usual and customary operating and administrative expenses, such as employee compensation and sales and marketing expenses. Based on this analysis, we believe that our current cash balances, availability on our debt facilities, and our anticipated cash flows from operations will be sufficient to fund the operations for the next 12 months.
Our long-term cash needs will include principal and interest payments on outstanding indebtedness maturing late in 2026 and early 2027, preferred stock dividends and funding of new mortgage loans. Funding for long-term cash needs will come from unused net proceeds from financing activities, operating cash flows, refinancing existing debt, and proceeds from sales of real estate owned.
On March 20, 2025, we terminated our existing Needham Credit Facility and replaced it with a new Needham Credit Facility. Except as described below, the new Needham Credit Facility is identical to the old Needham Credit Facility in all material respects:
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Simultaneously with the execution and delivery of the Credit, Security and Guaranty Agreement, dated as of March 20, 2025, among SN Holdings, Sachem and Needham, which governs the new Needham Credit Facility, Sachem repaid the entire outstanding balance on the old credit facility, $39.6 million, and SN Holdings drew $36.1 million on the new credit facility, reducing our outstanding indebtedness by $3.5 million. As of March 20, 2025, the Company was no longer in violation of any Needham Credit Facility covenants. On April 1, 2025, SN Holdings is required to make a principal payment of $9.9 million, further reducing the outstanding indebtedness to $26.2 million.
A copy of the Credit, Security and Guaranty Agreement, dated as of March 20, 2025, among SN Holdings, Sachem and Needham, is filed as Exhibit 10.8 to this Report.
Subsequent Events
On February 24, 2025, the Board authorized and the Company declared a dividend of $0.484375 per share on the Company’s 7.75% Series A Preferred Stock payable on March 31, 2025 to Series A Preferred Stock shareholders of record on March 15, 2025. The payment represents the full amount of the dividend accruing from December 30, 2024 through and including March 29, 2025.
On March, 5, 2025, the Board authorized and declared a quarterly dividend of $0.05 per Common Share to be paid to shareholders of record as of the close of trading on the NYSE American on March 17, 2025. The dividend is payable on March 31, 2025.
On March 10, 2025, our Compensation Committee authorized (i) a grant of 420,168 restricted Common Shares to John L. Villano, which shares had a fair market value on the date of grant of approximately $500,000; and (ii) a one-time bonus grant of 20,000 restricted Common Shares to each of our non-employee directors, Arthur Goldberg, Brian Prinz, Leslie Bernhard and Jeffery Walraven. Each of our non-employee directors, with the exception of Mr. Walraven, also had the option, at his or her election, to receive the fair market value equivalent of his or her grant in a lump sum cash payment of $23,800. An aggregate of 60,000 restricted Common Shares were granted to our non-employee directors, which shares had an aggregate fair market value on the date of grant of approximately $71,400. Ms. Bernhard elected to receive the lump sum cash payment.
We identified subsequent to the above March 10, 2025 action of the Company’s Compensation Committee regarding authorization of issuance of 420,168 of restricted Common Shares to John L. Villano under the effective 2016 Equity Compensation Plan that it had over authorized on the total issuance by 320,168 shares. The over issuance is a result of a specified limitation in the Plan that no more than 100,000 Common Shares may be made subject to awards to a single individual in a single plan year, subject to adjustments as provided. No identified adjustment provisions were deemed applicable. As a result of this identification, it was also determined that in calendar 2023 and 2024 there were additional similar over issuances of 30,890 and 11,857, respectively. In total, there were 362,915 restricted Common Shares which have been issued in excess of Plan limitations, all of which still remain unvested and restricted. No other plan years have identified any additional over issuances. In an immediate remediation of this matter, on March 24, 2025, John L. Villano voluntarily forfeited the 420,168 Common Shares that were granted on March 10, 2025.
See Needham Credit Facility subsequent event as disclosed above in the “Liquidity” section.
Management has evaluated subsequent events through March 31, 2025, the date on which the consolidated financial statements were available to be issued. Based on the evaluation, no adjustments were required in the accompanying consolidated financial statements.
Off-Balance Sheet Arrangements
We are not a party to any off-balance sheet transactions, arrangements or other relationships with unconsolidated entities or other persons that are likely to affect liquidity or the availability of our requirements for capital resources.
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Contractual Obligations
As of December 31, 2024, our contractual obligations include unfunded amounts of any outstanding construction loans and unfunded commitments for loans and limited liability company investments.
Less than 1 – 3 3 – 5 More than
(in thousands) Total 1 year years years 5 years
Unfunded commitments 4,374 4,374 — — —
Recent Accounting Pronouncements
See ‘‘Note 2 — Significant Accounting Policies’’ to the financial statements for explanation of recent accounting pronouncements impacting us.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
We are a “smaller reporting company” as defined by Regulation S-K and, as such, are not required to provide the information required by this item.
Item 8. Consolidated Financial Statements and Supplementary Data
The consolidated financial statements required by this Item are set forth beginning on page F-1.
Item 9. Change in and Disagreements with Accountants on Accounting and Financial Disclosure
Effective on November 18, 2024, we dismissed Hoberman & Lesser CPA’s, LLP (“Hoberman”) from serving as our independent registered public accounting firm and engaged Baker Tilly US, LLP (“Baker Tilly”) as our new independent registered public accounting firm. The Audit Committee directed the process of review of candidate firms to replace Hoberman and approved the decision to engage Baker Tilly. In connection with Hoberman’s audit of the year ended December 31, 2023 and reviews of the Company’s financial statements through November 14, 2024, there were no disagreements with Hoberman on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements, if not resolved to Hoberman’s satisfaction, would have caused them to make reference thereto in their report on the financial statements for such years.
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Management, with the participation of our Principal Executive Officer and Principal Accounting Officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act) as of December 31, 2024 (the “Evaluation Date”).
Based on this evaluation, our Principal Executive Officer and Principal Accounting Officer concluded that our disclosure controls and procedures were not effective as of the Evaluation Date. This conclusion was based on the identification of a material weakness in our internal control over financial reporting related to stock-based compensation, as described in Management’s Report on Internal Control over Financial Reporting below.
Specifically, the material weakness resulted from deficiencies in the design and operation of controls surrounding the authorization and accounting for equity awards, which could impact the reliability of financial reporting and the accuracy of disclosures included in our periodic SEC filings.
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Management has initiated remediation efforts, including strengthening review procedures and implementing enhanced oversight of equity award approvals, which are ongoing as of the date of this Report.
Management’s Annual Report on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting and for the assessment of the effectiveness of internal control over financial reporting. As defined by the SEC, internal control over financial reporting is defined in Rule 13a-15(f) or 15d-15(f) promulgated under the Exchange Act as a process designed by, or under the supervision of John L. Villano and Jeffery C. Walraven, our Principal Executive Officer and Principal Accounting Officer, respectively, and effected by the Board, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Our internal control over financial reporting is supported by written policies and procedures that: (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles and that our receipts and expenditures are being made only in accordance with authorizations of management and the Board; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.
Our internal control system was designed to provide reasonable assurances to our management and the Board regarding the preparation and fair presentation of published financial statements. All internal control systems, no matter how well designed, have inherent limitations which may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2024. In making this assessment, management used the framework set forth in the report entitled Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission, or COSO (the “COSO Framework”). The COSO Framework summarizes each of the components of a company’s internal control system, including (i) the control environment, (ii) risk assessment, (iii) control activities, (iv) information and communication, and (v) monitoring.
Based on this evaluation, management identified a material weakness in our internal control over financial reporting relating to stock-based compensation. Specifically, the Compensation Committee authorized a grant of restricted stock to an executive that exceeded the individual award limit prescribed by the Company’s 2016 Equity Compensation Plan. Although the executive voluntarily forfeited the over-authorized shares upon discovery, management concluded that this deficiency demonstrated a failure in the design and operation of controls to ensure compliance with plan-based limits on equity compensation. Additionally, controls were not designed or operating effectively to ensure that the amount of stock-based compensation expense recorded was appropriately calculated. As a result, these control deficiencies could have resulted in a material misstatement in our financial statements that would not be prevented or detected on a timely basis.
Accordingly, management has concluded that our internal control over financial reporting was not effective as of December 31, 2024.
Management has initiated steps to remediate the material weakness, including strengthening procedures around the review and authorization of equity awards and implementing enhanced oversight to ensure compliance with the terms of the 2016 Equity Compensation Plan. These efforts are ongoing as of the date of this report.
This Report does not include an attestation report of our independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our independent registered public accounting firm pursuant to rules of the SEC that permit us to provide only management’s report in this Report.
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Changes in Internal Control Over Financial Reporting
There was no change in our internal control over financial reporting (as defined in Rules 13a-15(f) or 15d-15(f) under the Exchange Act) identified in connection with the evaluation required by Rules 13a-15(d) or 15d-15(d) that occurred during the fiscal quarter ended December 31, 2024 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Item 9B. Other Information
Amendment of Bylaws
On March 25, 2025, the Board adopted and approved the Amended and Restated Bylaws of the Company (the “Amended and Restated Bylaws”), effective as of such date. The Amended and Restated Bylaws, among other things:
The foregoing does not purport to be complete and is qualified in its entirety by reference to the Amended and Restated Bylaws attached hereto as Exhibit 3.2 and incorporated herein by reference.
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2025 Annual Meeting of Shareholders
The Company plans to hold its 2025 Annual Meeting of Shareholders (the “2025 Annual Meeting”) on July 9, 2025. In accordance with the requirements set forth in the Amended and Restated Bylaws, a shareholder seeking to submit a proposal or to make a nomination for consideration by shareholders at the 2025 Annual Meeting without the inclusion of such proposal or nomination in our proxy materials must comply with the requirements set forth in our Amended and Restated Bylaws, including by delivering a notice of the shareholder’s proposal or nomination to the Secretary at the Company’s principal executive offices at 568 East Main Street, Branford, CT 06405. Such notice must be received by the Secretary at such address no later than April 10, 2025. In addition, to comply with the universal proxy rules, shareholders who intend to solicit proxies in support of director nominees other than the Company’s nominees must provide notice that sets forth the information required by Rule 14a-19 under the Exchange Act (including a statement that such shareholder intends to solicit the holders of shares representing at least 67% of the voting power of the Company’s shares entitled to vote on the election of directors in support of director nominees other than the Company’s nominees), which notice must be postmarked or transmitted electronically to the Company at its principal executive offices at 568 East Main Street, Branford, CT 06405 no later than May 12, 2025.
Because the expected date of the 2025 Annual Meeting is more than 30 days from the date of the anniversary of the Company’s 2024 Annual Meeting of Shareholders, we are informing shareholders of this change and the updated deadline for shareholders to submit proposals intended for inclusion in our proxy statement and form of proxy for consideration at the 2025 Annual Meeting in accordance with Rule 14a-8 under the Exchange Act. Accordingly, to be timely, shareholders wishing to submit proposals intended to be considered for inclusion in our proxy and form of proxy statement relating to the 2025 Annual Meeting must ensure that proper notice is received by us at our offices no later than April 10, 2025, which we consider a reasonable time before we will begin printing and sending proxy materials.
(b) Insider Trading Arrangements
None.
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
Not applicable.
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PART III
Item 10. Directors, Executive Officers and Corporate Governance.
The information required by Item 10 is hereby incorporated by reference from our definitive Proxy Statement relating to our 2025 Annual Meeting of Shareholders, to be filed with the Securities and Exchange Commission not later than 120 days following the end of our fiscal year.
Item 11. Executive Compensation.
The information required by Item 11 is hereby incorporated by reference from our definitive Proxy Statement relating to our 2025 Annual Meeting of Shareholders, to be filed with the Securities and Exchange Commission not later than 120 days following the end of our fiscal year.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters
The information required by Item 12 is hereby incorporated by reference from our definitive Proxy Statement relating to our 2025 Annual Meeting of Shareholders, to be filed with the Securities and Exchange Commission not later than 120 days following the end of our fiscal year.
Item 13. Certain Relationships and Related Transactions and Director Independence.
The information required by Item 13 is hereby incorporated by reference from our definitive Proxy Statement relating to our 2025 Annual Meeting of Shareholders, to be filed with the Securities and Exchange Commission not later than 120 days following the end of our fiscal year.
Item 14. Principal Accounting Fees and Services
The information required by Item 14 is hereby incorporated by reference from our definitive Proxy Statement relating to our 2025 Annual Meeting of Shareholders, to be filed with the Securities and Exchange Commission not later than 120 days following the end of our fiscal year.
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PART IV
Item 15. Exhibits and Financial Statement Schedules
(a) 1. Financial Statements — See Index to Financial Statements on page F-1.
2. Financial Statement Schedules — See (c) below.
3. Exhibits — See (b) below.
ExhibitNo. Description
2.1 Form of Amended and Restated Exchange Agreement(1)
3.1 Certificate of Incorporation(1)
3.1(a) Certificate of Amendment to Certificate of Incorporation(1)
3.2 Amended and Restated Bylaws, effective as of March 25. 2025*
4.3 Form of 7.75% Notes due 2025 (included as Exhibit A to Exhibit 4.2 above)
4.6 Form of 6.00% Note due 2026 (attached as Exhibit A to Exhibit 4.5 above).
4.8 Form of 6.00% Note due 2027 (attached as Exhibit A to Exhibit 4.7 above)
4.10 Form of 7.125% Note due 2027 (attached as Exhibit A to Exhibit 4.9 above)
4.12 Form of 8.00% Note due 2027 (attached as Exhibit A to Exhibit 4.11 above)
10.2 Sachem Capital Corp. 2016 Equity Compensation Plan(1)
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14.1 Code of Ethics(7)
19.1 Insider Trading Policy of the Company*
21.1 List of Subsidiaries*
23.1 Consent of Baker Tilly US, LLP, dated March 31, 2025*
23.2 Consent of Hoberman & Lesser CPA’s, LLP, dated March 31, 2025*
97.1 Policy Relating to Recovery of Erroneously Awarded Compensation (23)
101.INS XBRL Instance Document *
101.SCH XBRL Taxonomy Extension Schema Document *
101.CAL XBRL Taxonomy Extension Calculation Linkbase Document *
101.DEF XBRL Taxonomy Extension Definition Linkbase Document *
101.LAB XBRL Taxonomy Extension Label Linkbase Document *
101. PRE XBRL Taxonomy Extension Presentation Linkbase Document *
* Filed herewith.
*** Furnished, not filed, in accordance with item 601(32)(ii) of Regulation S-K.
(5) Intentionally omitted.
(12) Intentionally omitted.
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(17) Intentionally omitted.
Item 16. Form 10-K Summary
None.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
SACHEM CAPITAL CORP.
By: /s/ John L. Villano
John L. Villano, CPA
President and Chief Executive Officer
(Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated on March 31, 2025:
Signature Title
/s/ John L. Villano Chairman, Chief Executive Officer and President
John L. Villano, CPA (Principal Executive Officer)
/s/ Jeffery C. Walraven Interim Chief Financial Officer and Director
Jeffery C. Walraven (Principal Accounting and Financial Officer)
/s/ Leslie Bernhard Director
Leslie Bernhard
/s/ Arthur L. Goldberg Director
Arthur L. Goldberg
/s/ Brian A. Prinz Director
Brian A. Prinz
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INDEX TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2024 AND 2023
Report of Independent Registered Public Accounting Firm (PCAOB ID 23) F-2
Report of Predecessor Auditor (PCAOB ID 694) F-5
Consolidated Financial Statements:
Consolidated Balance Sheets F-5
Consolidated Statements of Operations F-6
Consolidated Statements of Comprehensive (Loss) Income F-7
Consolidated Statements of Changes in Shareholders’ Equity F-8
Consolidated Statements of Cash Flows F-9
Notes to Consolidated Financial Statements F-11
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the shareholders and the board of directors of Sachem Capital Corp.:
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheet of Sachem Capital Corp. (the “Company”) as of December 31, 2024, the related statements of operations, comprehensive loss, changes in shareholders’ equity, and cash flows, for the year ended December 31, 2024, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2024, and the results of its operations and its cash flows for the year ended December 31, 2024, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audit included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audit provides a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of a critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
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Allowance for Credit Losses
Critical Audit Matter Description
As described in Note 2, the Company records an allowance for credit losses in accordance with the current expected credit loss standard on the Company’s loan portfolio, including unfunded construction commitments, on a collective basis by assets with similar risk characteristics.
The Company utilizes a vintage loss-rate method for estimating current expected credit losses. The vintage loss-rate method involves applying a loss rate to a pool of loans with similar risk characteristics to estimate the expected credit losses on that pool of loans. In determining the allowance for credit losses, the Company considers various factors including (1) historical loss experience and unrealized forecasted losses in its portfolio, (2) loan specific losses for loans deemed collateral dependent based on excess amortized cost over the fair value of the underlying collateral, and (3) its current and future view of the macroeconomic environment.
Management estimates the allowance for credit losses using relevant information, from internal and external sources, relating to past events, current conditions and reasonable and supportable forecasts. The allowance for credit losses is maintained at a level sufficient to provide for expected credit losses over the life of the loans based on evaluating historical credit loss experience and to make adjustments to historical loss information for differences in the specific risk characteristics in the current loan portfolio.
We identified the allowance for credit losses as a critical audit matter as auditing the allowance for credit losses required significant auditor judgment as amounts determined by management rely on analysis that is highly subjective and includes significant estimation uncertainty.
How the Critical Audit Matter was Addressed in the Audit
The primary procedures we performed to address this critical audit matter included:
Classification, Valuation, and Disclosure of Investments in Limited Liability Companies
Critical Audit Matter Description
As described in Notes 2 and 17, the Company has certain investments in limited liability companies, consisting of limited liability membership equity investments in real estate note-on-note mortgage investment vehicles, direct investments in real estate, and a direct investment in a real estate asset manager. The Company accounts for its investments in limited liability companies based on the level of ownership, control, and influence in accordance with ASC 810, Consolidations, ASC 323, Equity Method and Joint Ventures, and ASC 321, Investments in Equity Securities. These investments require a detailed analysis of the type of investment on an investment-by-investment basis to determine the appropriate classification of the investment as to whether the investment should be reported using the cost basis, the equity method or whether the investment should be consolidated based on the accounting literature.
Management evaluated the operating agreements and concluded that the Company does not have control over the investees as defined in ASC 810, Consolidations. Management further evaluated their investments in limited liability companies, and determined the Company does not have significant influence over the investees as defined in ASC 323, Equity Method and Joint Ventures. As such, management elected to apply the measurement alternative in accordance with ASC 321, Investments in Equity Securities, and carry the investments at cost less impairment.
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We identified management’s assessment of whether the operating agreements for investments in limited liability companies provide the Company with a controlling financial interest or significant influence as a critical audit matter due to the complexity of applying the accounting principles of ASC 810, ASC 323, and ASC 321 to the various operating agreements.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to the assessment of whether the investments in limited liability companies provide the Company with a controlling financial interest or significant influence included the following, among others:
/s/ Baker Tilly US, LLP
We have served as the Company’s auditor since 2024.
Philadelphia, Pennsylvania
March 31, 2025
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders
Sachem Capital Corp.
Opinion on the Financial Statements
We have audited the accompanying balance sheet of Sachem Capital Corp. (the “Company”) as of December 31, 2023 and the related statements of comprehensive income, changes in shareholders’ equity, and cash flows for the year ended December 31, 2023, and the related notes (collectively referred to as the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2023, and the results of its operations and its cash flows for the year ended December 31, 2023, in conformity with accounting principles generally accepted in the United States of America.
Change in Accounting Principle
As discussed in Note 2 to the financial statements, the Company has changed its method of accounting for credit losses effective January 1, 2023, due to the adoption of Accounting Standards Update 2016-13 Financial Instruments – Credit Losses (FASB ASC 326): Measurement of Credit Losses on Financial Instruments. The Company adopted the new credit loss standard using the modified retrospective method such that prior period amounts are not adjusted and continue to be reported in accordance with previously applicable generally accepted accounting principles. The adoption of the new credit loss standard and its subsequent application is also communicated as a critical audit matter below.
Basis of Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
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Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the account or disclosures to which it relates.
Mortgages Receivable and Allowance for Credit Losses
As discussed in Note 2 to the financial statements, the Company estimates its allowance for credit losses (“ACL”) in accordance with Accounting Standards Update 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (the “ASU”). The Company adopted Accounting Standards Codification (“ASC”) Topic 326 as of January 1, 2023 as described in Note 2 to the financial statements. The ASU requires credit losses on loans to be measured using an expected credit loss model (referred to as the current expected credit loss (CECL) model) which estimates credit losses over the expected life of the loan. Estimates of expected credit losses are based on historical experience, adjusted for management’s evaluation of current conditions and reasonable and supportable forecasts. The impact of adoption of this standard on January 1, 2023, was a $2.0 million increase to the allowance for credit losses, a $0.5 million increase to the allowance for unfunded commitments, and an increase of $2.5 million to cumulative net earnings for the cumulative effect adjustment recorded upon adoption.
The Company’s measurement of expected credit losses of loans on a pooled basis, when the loans share similar risk characteristics, is based on historical data that is adjusted, as necessary, for both internal and external qualitative factors where there are differences in the historical loss data of the Company and current or projected future conditions. The Company currently pools its portfolio based on geographic locations. Consideration of the relevant qualitative factors is used to bring the ACL to the level management believes is appropriate based on factors that are otherwise unaccounted for in the quantitative process. The ACL also includes reserves for loans evaluated on an individual basis, such as certain loans identified for potential foreclosure proceedings for either non-performance or other similar criteria. Management applies its judgment in the determination of the qualitative factors and establishes reserves on an individual basis to estimate the ACL.
Auditing the initial adoption of the relative qualitative factors used in the allowance for credit losses and the subsequent application of the qualitative factors was identified by us as a critical audit matter because of the significant auditor judgement applied and significant audit effort needed to evaluate the subjective and complex judgements made by management during adoption and subsequent application of the qualitative factor framework.
The primary procedures we performed, with the assistance of our valuation specialist, to address this critical audit matter included:
We have served as the Company’s auditor from 2015 to 2024.
New York, New York
April 1, 2024
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SACHEM CAPITAL CORP.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
Years Ended
December 31,
Assets
Investment securities (at fair value) 1,517 37,776
Allowance for credit losses (18,470) (7,523)
Interest and fees receivable, net 3,768 8,475
Investments in limited liability companies 53,942 43,036
Investments in rental real estate, net 14,032 10,554
Property and equipment, net 3,222 3,373
Liabilities and Shareholders' Equity
Liabilities:
Accrued dividends payable — 5,144
Accounts payable and accrued liabilities 4,377 2,322
Below market lease intangible 665 665
Commitments and Contingencies – Note 12
Shareholders’ equity:
Accumulated other comprehensive income — 316
Total liabilities and shareholders’ equity $ 491,976 $ 620,892
The accompanying notes are an integral part of these consolidated financial statements.
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SACHEM CAPITAL CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share data)
Years Ended
December 31,
Revenues
Income from limited liability company investments 5,239 3,522
Other investment income 391 1,209
Operating expenses
Interest and amortization of deferred financing costs 27,798 29,190
Compensation and employee benefits 6,824 6,932
General and administrative expenses 6,841 4,955
Change in valuation allowance related to loans held for sale 4,880 —
Impairment loss on real estate owned 492 794
Operating (loss) income before other (loss) income (17,776) 15,039
Other (loss) income
Gain on equity securities 178 860
Loss on sale of loans (21,973) —
Total other (loss) income, net (21,795) 860
Preferred stock dividend (4,304) (3,795)
Net (loss) income attributable to common shareholders $ (43,875) $ 12,104
Basic (loss) earnings per Common Share $ (0.93) $ 0.27
Diluted (loss) earnings per Common Share $ (0.93) $ 0.27
The accompanying notes are an integral part of these consolidated financial statements.
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SACHEM CAPITAL CORP.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
(in thousands, except share and per share data)
Years Ended
December 31,
Other comprehensive (loss) income:
Unrealized holding gains on available for sale (“AFS”) securities — 69
Other comprehensive (loss) income (316) 878
Comprehensive (loss) income, net (39,887) 16,777
Preferred stock dividend (4,304) (3,795)
The accompanying notes are an integral part of these consolidated financial statements.
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SACHEM CAPITAL CORP.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(in thousands, except share data)
FOR THE YEARS ENDED DECEMBER 31, 2024 AND 2023
Accumulated
Additional Other
Stock buyback — — (71,000) — (226) — — — (226)
Net income — — — — — — 15,899 — 15,899
Net loss — — — — — — (39,571) — (39,571)
The accompanying notes are an integral part of these consolidated financial statements.
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SACHEM CAPITAL CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Years Ended
December 31,
CASH FLOWS FROM OPERATING ACTIVITIES
Amortization of deferred financing costs 2,456 2,415
Depreciation expense 372 266
Write-off of other assets - pre-offering costs — 477
Stock-based compensation 863 823
Change in valuation allowance related to loans held for sale 4,880 —
Loss on sale of Loans 21,973 —
Impairment loss on real estate owned 492 794
(Gain) on equity securities (178) (860)
Deferred loan fees revenue (2,697) 287
Changes in operating assets and liabilities:
Interest and fees receivable, net 2,476 (2,285)
Due from borrowers, net (1,431) (334)
Accounts payable and accrued liabilities 1,041 374
Advances from borrowers (6,951) 1,106
Total adjustments and operating changes 52,461 5,952
NET CASH PROVIDED BY OPERATING ACTIVITIES 12,890 21,851
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of investment securities (7,767) (30,415)
Proceeds from the sale of investment securities 43,888 18,120
Purchase of interests in limited liability companies (18,271) (13,896)
Proceeds from limited liability companies returns of capital 7,366 1,661
Proceeds from sale of real estate owned 1,624 450
Acquisitions of and improvements to real estate owned (510) (229)
Proceeds from sale of property and equipment 9 1,299
Purchase of property and equipment (77) (784)
Improvements in investment in rental real estate (3,025) (10,845)
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 79,910 (72,488)
CASH FLOWS FROM FINANCING ACTIVITIES
Repayments on lines of credit (49,751) —
Proceeds from repurchase agreements 19,055 14,028
Repayments of repurchase agreements (11,808) (30,100)
(Repayment of) proceeds from mortgage payable (79) 331
Dividends paid on Common Shares (16,508) (21,933)
Dividends paid on Series A Preferred Stock (4,304) (3,795)
Proceeds from issuance of common shares, net of expenses 2,050 20,450
Repurchase of Common Shares (1,489) (226)
Repayment of notes payable (58,163) —
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES (87,332) 39,522
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 5,468 (11,115)
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD 12,598 23,713
CASH AND CASH EQUIVALENTS - END OF PERIOD $ 18,066 $ 12,598
The accompanying notes are an integral part of these consolidated financial statements.
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SACHEM CAPITAL CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(in thousands)
Years Ended
December 31,
SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION
Cash paid during the period for interest $ 25,300 $ 26,616
Loans held for investment from sale of real estate owned $ 989 $ 2,577
Loans transferred from held to investment to held for sale $ 15,850 $ —
The accompanying notes are an integral part of these consolidated financial statements.
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SACHEM CAPITAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. The Company
Sachem Capital Corp. (the “Company”), a New York corporation, specializes in originating, underwriting, funding, servicing and managing a portfolio of first mortgage loans. The Company operates its business as one segment. The Company offers short-term (i.e., one to three years), secured, non-bank loans (sometimes referred to as “hard money” loans) to real estate owners and investors to fund their acquisition, renovation, development, rehabilitation or improvement of properties located primarily in the northeastern and southeastern sections of the United States. The properties securing the Company’s loans are generally classified as residential or commercial real estate and, typically, are held for resale or investment. Each loan is secured by a first mortgage lien on real estate and may also be secured with additional collateral, such as other real estate owned by the borrower or its principals, a pledge of the ownership interests in the borrower by the principals thereof, and/or personal guarantees by the principals of the borrower. The Company does not lend to owner occupants of residential real estate. The Company’s primary underwriting criteria is a conservative loan to value ratio. In addition, the Company may make opportunistic real estate purchases apart from its lending activities.
Segment Reporting
The Company uses the management approach to determine reportable operating segments. The Company operates through a single operating and reporting segment with an investment objective to generate both current income and capital appreciation through its investments in real estate mortgage loans and real estate. The management approach considers the internal organization and reporting used by the Company’s Chief Executive Officer, whom serves as the chief operating decision maker (“CODM”) for making decisions, allocating resources and assessing performance. The CODM assesses the performance and makes operating decisions of the Company on a consolidated basis primarily based on the Company’s net income. In addition to other factors and metrics, the CODM utilizes net income as a key determinant of the amount of dividends to be distributed to the Company's stockholders.
As the Company’s operations comprise of a single reporting segment, the segment assets are reflected on the accompanying consolidated balance sheet as “total assets” and the significant segment expenses are listed on the accompanying consolidated statement of operations.
2. Significant Accounting Policies
Basis of Presentation and Principles of Consolidation
The accompanying consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”). The consolidated financial statements of the Company include the accounts of all subsidiaries in which the Company has control over significant operating, financial and investing decisions of the entity. As of December 31, 2024, the accounts and activities of these subsidiaries were not material to warrant separate disclosure or segment reporting. As a result, the Company has only one reportable segment for financial reporting purposes. All intercompany accounts and transactions have been eliminated in consolidation.
Use of Estimates in the Preparation of Consolidated Financial Statements
The preparation of the consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Management will base the use of estimates on (a) various assumptions that consider prior reporting results, (b) the Company’s projections regarding future operations and (c) general financial market and local and general economic conditions. Actual amounts could differ from those estimates. Significant estimates include the provisions for current expected credit losses, loans held for sale at fair value, and real estate owned.
Concentration of Credit Risks
Financial instruments that may subject the Company to concentrations of credit risk consist primarily of cash and cash equivalents, loans and related receivables. Concentration of credit risk relating to loans and related receivables are managed by the Company through robust portfolio monitoring and performing due diligence prior to origination or acquisition, when and where available and appropriate.
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SACHEM CAPITAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Cash and Cash Equivalents
The Company considers all demand deposits, cashier’s checks, money market accounts and certificates of deposit with an original maturity of three months or less to be cash equivalents.
Investment Securities (at fair value)
Debt investments are classified as available-for-sale and realized gains and losses are recorded using the specific identification method. Changes in fair value, excluding credit losses and impairments, are recorded in other comprehensive (loss) income. Fair value is calculated based on publicly available market information or other estimates determined by management. If the cost of an investment exceeds its fair value, management evaluates, among other factors, general market conditions, credit quality of debt instrument issuers, and the extent to which the fair value is less than cost. To determine credit losses, management employs a systematic methodology that considers available quantitative and qualitative evidence. In addition, management may consider specific adverse conditions related to the financial health of, and business outlook for, the investee. If the Company plans to sell the security or it is more likely than not that it will be required to sell the security before recovery, then a decline in fair value below cost is recorded as an impairment charge in net income and a new cost basis in the investment is established. If market, industry, and/or investee conditions deteriorate, the Company may incur future losses and/or impairments.
Marketable equity investments with readily determinable fair values are measured at fair value and are classified as trading securities with changes in value recorded in net income.
Investment in Limited Liability Companies (“LLCs”)
The Company accounts for its investments in limited liability companies based on the level of ownership, control, and influence in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 323 (Investments – Equity Method and Joint Ventures) and FASB ASC 810 (Consolidation). Investments in LLCs are classified into the following categories based on the Company’s level of influence and control:
1.Fair Value Method (FASB ASC 321) – Passive Investments (Less than 20% Ownership, No Significant Influence)
2.Equity Method (FASB ASC 323) – Significant Influence (20% – 50% Ownership)
3.Consolidation (FASB ASC 810) – Variable Interest Entities (“VIEs”) or Controlling Interest
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SACHEM CAPITAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
When both conditions are met, the Company consolidates the VIE in its financial statements, including the entity’s assets, liabilities, and operations. Noncontrolling interests in consolidated LLCs, if any, are presented separately within the financial statements. The Company reassesses its conclusions about VIE status and primary beneficiary determination on an ongoing basis, particularly when events occur that may change the underlying structure or governance of the investee.
For investments accounted for under the equity method or the measurement alternative cost method, the Company evaluates whether indicators of impairment exist. If an investment is determined to be other-than-temporarily impaired, the carrying value is written down to its estimated fair value, with the impairment loss recognized in earnings.
Loans held for investment
Loans that are originated and serviced by the Company, that management has the intent and ability to hold for the foreseeable future are reporting at their outstanding balances, net of an allowance for credit losses and unamortized deferred fees. The net amount of nonrefundable loan origination fees and certain direct costs associated with the lending process are deferred and amortized to fee income over the contractual lives of the loans using the interest method which reflects a constant yield. Interest income on loans is accrued based on the unpaid principal balance outstanding and the contractual terms of the loan agreements.
Loans held for sale
Loans are classified as held for sale if there is an intent to sell in the near-term. These loans are recorded at the lower of amortized cost or fair value. If the fair value of a loan is determined to be less than its amortized cost, a non-recurring fair value adjustment will be recorded through a valuation allowance. When a loan is transferred into the held for sale category, any previously recorded allowance for credit losses is reversed in the provision for credit losses related to loans and the loan is recorded at its amortized cost basis. If the amortized cost basis exceeds the loan’s fair value at the date of transfer, a valuation allowance equal to the difference between amortized cost basis and fair value is recorded.
Non-accrual loans
A loan is generally placed on non-accrual status when it is probable that principal and interest will not be collected under the original contractual terms. At that time, interest income is no longer accrued. Non-accrual loans consist of loans for which principal or interest has been delinquent for 90 days or more. Interest income is subsequently recognized only to the extent it is received in cash or until the loan qualifies for return to accrual status. Loans are restored to accrual status when contractually current and the collection of future payments is reasonably assured. In certain instances, the Company may make exceptions to placing a loan on non-accrual status if the loan is in the process of modification.
Loan modifications made to borrowers experiencing financial difficulty.
In situations where economic or legal circumstances may cause a borrower to experience significant financial difficulties, the Company may grant concessions for a period of time to the borrower that it would not otherwise consider. These modified terms may include interest rate reductions, principal forgiveness, term extensions, and other-than-insignificant payment delay intended to minimize the Company’s economic loss and to avoid foreclosure or repossession of collateral. The Company monitors the performance of all loans, including loans modified to borrowers experiencing financial difficulty and considers loans that are 90 days past due to be in payment default.
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SACHEM CAPITAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Transfer of Financial Assets
Transfers of financial assets are accounted for as sales when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Company, (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and (3) the Company does not maintain effective control over the transferred assets. Transfers of agreements that meet the sale criteria under FASB ASC 860 (Transfers and Servicing) are derecognized from the Consolidated Balance Sheets at the time of transfer. If the transfer of loans does not meet the sale criteria or participating interest criteria under FASB ASC 860, the transfer is accounted for as a secured borrowing and the loan is not de-recognized and a participating liability is recorded in the Consolidated Balance Sheets.
Allowance for Credit Losses
The Company adopted the current expected credit loss (“CECL”) standard effective January 1, 2023 in accordance with Accounting Standard Update (“ASU”) No. 2016-13. The initial CECL allowance adjustment of $2.5 million was recorded effective January 1, 2023 as a cumulative-effect of change in accounting principle through a direct charge to cumulative net earnings on the consolidated statements of shareholders’ equity. Subsequent changes to the CECL allowance will be recognized in the consolidated statements of operations in “Provision for credit losses related to loans held for investment”.
The Company records an Allowance for credit losses on the consolidated balance sheets with respect to its loan portfolio, including unfunded construction commitments, on a collective basis by assets with similar risk characteristics. This methodology, known as the “estimated expected lifetime losses,” replaces the “probable incurred loss impairment” methodology. In addition, interest and fees receivable and amounts included in due from borrowers, other than reimbursements, which include origination, modification and other fees receivable are also analyzed for credit losses in accordance with CECL standard, as they represent a financial asset that is subject to credit risk. As allowed under the CECL standard used by the Company, as a practical expedient, the fair value of the collateral at the reporting date is compared to the net carrying amount of the loan when determining the allowance for credit losses for loans in pending/pre-foreclosure status, as defined. Fair value of collateral is reduced by estimated cost to sell if the collateral is expected to be sold. The aggregate gross outstanding principal of loans in pending/pre-foreclosure as of December 31, 2024, and December 31, 2023, was $52.1 million and $63.7 million, respectively. As of December 31, 2024, and December 31, 2023, the Company had directly reserved against these loans in foreclosure in the amounts of $6.1 million and $5.1 million, respectively. Further, the Company had direct reserves against non-performing loans held for investment that experienced declines in fair value of $7.3 million and $0, respectively. As of December 31, 2024, the aggregate outstanding principal amount of non-performing loans held for investment with direct allowances was $57.8 million. Such allowances are presented net in “Loans held for investment, net” and “Loans held for sale, net” on the consolidated balance sheets included in the accompanying consolidated financial statements based on their respective classification.
The CECL standard requires an entity to consider historical loss experience, current conditions, and a reasonable and supportable forecast of the economic environment. The Company utilizes a vintage loss-rate method for estimating current expected credit losses. The vintage loss rate method involves applying a vintage loss rate to a pool of loans with similar risk characteristics to estimate the expected credit losses on that pool of loans. In determining the CECL allowance, the Company considers various factors including (1) historical loss experience and unrealized forecasted losses in its portfolio, (2) loan specific losses for loans deemed collateral dependent based on excess amortized cost over the fair value of the underlying collateral, and (3) its current and future view of the macroeconomic environment.
The Company’s estimate of expected credit losses includes a review of charge-off experience factors, contractual delinquency, historical collection rates, the value of underlying collateral and other information to make the necessary judgments as to allowance for credit losses expected in the portfolio as of the reporting date. While management utilizes the best information available to make its evaluations, changes in macroeconomic conditions, interest rate environments, or both, may significantly impact the assumptions and inputs used in determining the allowance for credit losses. The Company’s charge-off policy is determined by a review of each delinquent loan. The Company has an accounting policy to not place loans on nonaccrual status unless they are more than 90 days delinquent. Accrual of interest income is generally resumed when the delinquent contractual principal and interest is paid in full or when a portion of the delinquent payments are made, and the ongoing required contractual payments have been made for an appropriate period.
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SACHEM CAPITAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In the year ended December 31, 2024, the Company updated its methodology for estimating the CECL factors on its portfolio of financial assets related to loans. This update reflects the Company incorporating its current unrealized losses on individually evaluated loans into its historical loss data, as this change is believed to provide sufficient coverage to forecast estimated expected lifetime losses.
Management estimates the allowance for credit losses using relevant information, from internal and external sources, relating to past events, current conditions and reasonable and supportable forecasts. The Allowance for credit losses is maintained at a level sufficient to provide for expected credit losses over the life of the loans based on evaluating historical credit loss experience and to make adjustments to historical loss information for differences in the specific risk characteristics in the current loan portfolio. The “Allowance for credit losses” related to the principal outstanding is presented within “Loans held for investment, net” and for unfunded commitments is within accounts payable and accrued liabilities in the Company’s consolidated balance sheets. The “Allowance for credit losses” related to the late payment fees are presented in “Interest and fees receivable, net”, and “Due from borrowers, net” in the Company’s consolidated balance sheets. Lastly, the allowance related to unfunded commitments for construction loans is presented in “Accounts payable and accrued liabilities” on the Company’s consolidated balance sheets.
See Note 4 – Loans and Allowance for Credit Losses for further details.
Fair Value Measurements
The framework for measuring fair value provides a fair value hierarchy that prioritizes inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). The three levels of the fair value hierarchy under FASB ASC 820 are described as follows:
Level 1Inputs to the valuation methodology are unadjusted quoted prices for identical assets or liabilities in active markets that the Company can access.
Level 2Inputs to the valuation methodology include:
● quoted prices for similar assets or liabilities in active markets;
If the asset or liability has a specified (i.e., contractual) term, the Level 2 input must be observable for substantially the full term of the asset or liability.
Level 3Inputs to the valuation methodology are unobservable and significant to the fair value measurement.
Property and Equipment
Land and building acquired in 2021 to serve as the Company’s corporate headquarters is stated at cost. Renovation of the building was completed in the first quarter of 2023 and the Company relocated its operations to the building in March 2023. The land is carried at cost. The building is stated at cost less accumulated depreciation. The building is being depreciated using the straight – line method over its estimated useful life of 40 years. The building was placed in service during the three months ended March 31, 2023. Further, furniture and fixtures, computer hardware and software, and vehicles are stated at cost less accumulated depreciation. Depreciation is computed by the straight-line method over the estimated useful lives of the assets. Furniture and fixtures are depreciated using an estimated useful life of three to five years. Computer hardware and software are depreciated using an estimated useful life of two to three years. Vehicles are depreciated using an estimated useful life of five years.
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SACHEM CAPITAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following tables represent the Company’s property and equipment, net: