Form 424B3 Shepherd's Finance, LLC

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May 19, 2022 1:52 PM EDT

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Filed pursuant to Rule 424(b)(3)

File No. 333-224557

SHEPHERD’S FINANCE, LLC

SUPPLEMENT NO. 1 DATED MAY 19, 2022

TO THE PROSPECTUS DATED April 22, 2022

This document supplements, and should be read in conjunction with, the prospectus of Shepherd’s Finance, LLC (the “Company,” “we,” or “our”) dated April 22, 2022. Unless otherwise defined in this supplement, capitalized terms used in this supplement shall have the same meanings as set forth in the prospectus.

The purpose of this supplement is to disclose:

	●	an update regarding the status of our offering;
	●	an update to the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section of our prospectus to include information for the three months ended March 31, 2022; and
	●	our unaudited condensed consolidated financial statements as of and for the three months ended March 31, 2022.

Status of Our Offering

We commenced this offering of Fixed Rate Subordinated Notes (“Notes”), which is our second follow-on offering of Notes (our “Current Offering”), on March 22, 2019. As of May 17, 2022, we have issued approximately $32.99 million of Notes in our Current Offering. As of May 17, 2022, approximately $37.01 million of Notes remain available for sale to the public under our Current Offering.

On February 25, 2022, our board of managers approved an extension of the Current Offering until 180 days after the third anniversary of the effective date of our Current Offering, as permitted under applicable SEC rules. We may continue to sell Notes in our Current Offering until the earlier of 180 days after the third anniversary of the effective date of our Current Offering, September 18, 2022, or the effective date of the registration statement for our third follow-on offering. We also reserve the right to terminate the Current Offering at any time.

We commenced our initial public offering of Notes on October 4, 2012. On September 29, 2015, we terminated our initial public offering, having issued approximately $8.25 million in Notes. We commenced our first follow-on offering of Notes (our “First Follow-on Offering”) on September 29, 2015. On March 22, 2019, we terminated our First Follow-on Offering, having issued approximately $29.99 million in Notes.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

(All dollar [$] amounts shown in thousands.)

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with our interim condensed consolidated financial statements and the notes thereto contained elsewhere in this supplement. The following Management’s Discussion and Analysis of Financial Condition and Results of Operations should also be read in conjunction with our audited annual consolidated financial statements and related notes and other consolidated financial data (the “2021 Financial Statements”) included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021 (the “2021 Form 10-K”).

Overview

During the quarter ended March 31, 2022, the Company continued to focus on the reduction of non-interest earning assets. As of March 31, 2022, loans classified as non-accrual were 19 or $7,960 compared to 20 or $9,723 for the same period in the prior year. In addition, as of March 31, 2022, we had four foreclosed assets or $1,822 compared to nine or $3,764 for the same period of the prior year.

The Company continues to lose interest income on assets that do not accrue interest. During the quarter ended March 31, 2022, the estimated loss on interest income related to impaired and foreclosed assets was $342. Looking ahead, we expect this to decrease as we continue to sell our remaining foreclosed assets and impaired loans in 2022.

While the Company continues to face COVID-19 risks as it relates to the economy and the homebuilding industry, management has decided to focus on the following during 2022:

	1.	Decrease the amount of non-interest-bearing assets, which includes cash, our foreclosed assets, real estate assets and classified non-accrual loans or impaired loans receivables.
	2.	Increase loan originations.
	3.	Maintain liquidity to fund new loan originations and completion of construction costs for existing loans.
	4.	Lower our cost of funds (to maintain a competitive market level).
	5.	Raise margin beyond the elimination of nonperforming assets.

We anticipate that for 2022, the housing market in most of the areas in which we do business will be strong despite the impact of current economic conditions. While markets may weaken compared to where they were as of March 31, 2022, we expect demand to be strong compared to supply for the next several quarters. In addition, we anticipate losses incurred in principal related to COVID-19 will not continue, and the lower interest income due to nonperforming assets will decrease significantly in 2022. Short term interest rates as well as mortgage interest rates are expected to continue to rise. A 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 a rise in long term interest rates may negatively impact the housing industry as a whole, and therefore us.

We had $52,079 and $46,943 in loan assets, net as of March 31, 2022 and December 31, 2021, respectively. In addition, as of March 31, 2022, we had 232 commercial construction and 17 development loans with 64 borrowers in 21 states.

Net cash provided by operations increased $1,737 for the three months ended March 31, 2022 as compared to the same period of 2021. Our increase in operating cash flow was due primarily to net income and customer interest escrow. As of March 31, 2022, customer interest escrow included $500 for a Pennsylvania development loan.

Critical Accounting Estimates

To assist in evaluating our interim condensed consolidated financial statements, we describe below the critical accounting estimates that we use. We consider an accounting estimate to be critical if: (1) the accounting estimate requires us to make assumptions about matters that were highly uncertain at the time the accounting estimate was made, and (2) changes in the estimate that are reasonably likely to occur from period to period, or use of different estimates that we reasonably could have used, would have a material impact on our consolidated financial condition or results of operations. See our 2021 Form 10-K, as filed with the SEC, for more information on our critical accounting estimates. No material changes to our critical accounting estimates have occurred since December 31, 2021 unless listed below.

Loan Losses

Fair value of collateral has the potential to impact the calculation of the loan loss provision (the amount we have expensed over time in anticipation of loan losses we have not yet realized). Specifically, relevant to the allowance for loan loss reserve is the fair value of the underlying collateral supporting the outstanding loan balances. Fair value measurements are an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. Due to a rapidly changing economic market, an erratic housing market, the various methods that could be used to develop fair value estimates, and the various assumptions that could be used, determining the collateral’s fair value requires significant judgment.

	March 31, 2022
	Loan Loss
	Provision
Change in Fair Value Assumption	Higher/(Lower)
Increasing fair value of the real estate collateral by 35%*	$	-
Decreasing fair value of the real estate collateral by 35%**	$	3,188

* Increases in the fair value of the real estate collateral do not impact the loan loss provision, as the value generally is not “written up.”

** Assumes the loans were nonperforming and a book amount of the loans outstanding of $52,079.

Foreclosed Assets

The fair value of real estate will impact our foreclosed asset value, which is recorded at 100% of fair value (after selling costs are deducted).

	March 31, 2022
	Foreclosed
	Assets
Change in Fair Value Assumption	Higher/(Lower)
Increasing fair value of the foreclosed asset by 35%*	$	-
Decreasing fair value of the foreclosed asset by 35%**	$	638

* Increases in the fair value of the foreclosed assets do not impact the carrying value, as the value generally is not “written up.” Those gains would be recognized at the sale of the asset.

** Assumes a book amount of the foreclosed assets of $1,822.

Results of Operation

Interest Spread

The following table displays a comparison of our interest income, expense, fees, and spread:

	Three Months Ended
	March 31,
	2022					2021
Interest Income				*
Estimated interest income	$	1,810		13	%	$	1,508		12	%
Estimated unearned interest income due to COVID-19		(186	)	(1	)%		(267	)	(2	)%
Interest income on loans		1,624		12	%		1,241		10	%

Fee income on loans		918		6	%		728		6	%
Deferred loan fees		(181	)	(1	)%		(191	)	(2	)%
Fee income on loans, net		737		5	%		537		4	%

Interest and fee income on loans		2,361		17	%		1,778		14	%

Interest expense unsecured		(669	)	(5	)%		(769	)	(6	)%
Interest expense secured		(518	)	(4	)%		(557	)	(5	)%
Amortization of offering costs		(63	)	-	%		(41	)	-	%
Interest expense		(1,250	)	(9	)%		(1,367	)	(11	)%
Net interest income (spread)	$	1,111		8	%	$	411		3	%

Weighted average outstanding loan asset balance	$	55,140				$	50,273

*Annualized amount as percentage of weighted average outstanding gross

There are three main components that can impact our interest spread:

● Difference between the interest rate received (on our loan assets) and the interest rate paid (on our borrowings). The loans we have originated have interest rates which are based on our cost of funds, with a minimum cost of funds of 7%. For most loans, the margin is fixed at 3%; however, for our development loans the margin is generally fixed at 7%. This component is also impacted by the lending of money with no interest cost (our equity).

Interest income on loans increased to 12% for the quarter ended March 31, 2022 compared to 10% for the same period of 2021. Interest expense decreased to 9% compared to 11% for the same period of 2021. The decrease in the interest expense is due to the lowered effective interest rate of 9.11% for the quarter ended March 31, 2022 compared to 10.27% for the same period of 2021. In addition, we reduced the balance of higher rate secured debt for the quarter ended March 31, 2022 compared to the same period of 2021.

We anticipate our standard margin to be 3% on all future construction loans and generally 7% on all development loans which yields a blended margin of approximately 3.7%.

● Fee income. Our construction loan fee is 5% on the amount we commit to lend, which is amortized over the expected life of each loan. In addition, our development loans typically do not recognize a loan fee. When loans terminate before their expected maturity, the remaining fee is recognized at the termination of the loan. During the quarter ended March 31, 2022, fee income, net increased to 5% compared to 4% for the same period of 2021 which was due primarily to the decrease in deferred loan fees.

● Amount of nonperforming assets. Generally, two types of nonperforming assets negatively affect our interest spread: loans not paying interest and foreclosed assets.

As of March 31, 2022 and 2021, $7,960 and $9,723, respectively, in loans were not paying interest.

Foreclosed assets do not provide a monthly interest return. As of March 31, 2022 and 2021, foreclosed assets were $1,822 and $3,764, respectively, which resulted in a negative impact to our interest spread in both years.

The amount of nonperforming assets is expected to decrease over the next quarter as we continue to liquidate nonperforming assets.

Loan Loss Provision

Loan loss provision (expense throughout the year) was $74 and $214, respectively, for the quarters ended March 31, 2022 and 2021.

The allowance for loan losses at March 31, 2022 was $1,955 which primarily consisted of $204 for loans without specific reserves, $148 for loans with specific reserves and $1,603 for loans with specific reserves due to the impact of COVID-19. As of December 31, 2021 the allowance for loan losses was $2,048 which primarily consisted of $163 for loans without specific reserves, $342 for loans with specific reserves, $60 for special mention loans and $1,483 for loans with specific reserves due to the impact of COVID-19.

During the quarter ended March 31, 2022 and year ended December 31, 2021, we incurred $167 and $509 in direct charge offs, respectively.

Non-Interest Income

Gain on Sale of Foreclosed Assets

During the quarters ended March 31, 2022 and 2021, we recognized $0 and $88, respectively, as a gain on the sale of foreclosed assets. No foreclosed assets were sold during the quarter ended March 31, 2022. During the quarter ended March 31, 2021, we sold four foreclosed assets related to two original borrowers that resulted in a gain on their sale.

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”) for $10 which was used for payroll and other certain operating expenses.

In February 2021, the full EIDL Advance or $10 and accrued interest were forgiven by the U.S. Small Business Administration.

Non-Interest Expense

Selling, General and Administrative (“SG&A”) Expenses

The following table displays our SG&A expenses:

	For the Three Months Ended March 31,
	2022		2021
Selling, general and administrative expenses
Legal and accounting	$	119	$	103
Salaries and related expenses		400		209
Board related expenses		25		25
Advertising		20		9
Rent and utilities		15		9
Loan and foreclosed asset expenses		34		113
Travel		39		24
Other		43		45
Total SG&A	$	695	$	537

Our SG&A expense increased $158 for the quarter ended March 31, 2022 compared to the same period of 2021, due primarily to salaries and related expense, partially offset by decreases in foreclosed asset expenses. Salaries and related expenses increased $191 to $400 for the quarter ended March 31, 2022 compared to $209 for the same period of 2022 due to the following:

	●	Profit share increased $68 due to the increase in net income; and
	●	Deferred loan fees decreased $93 due to the increase new loan originations and modifications.

Loss on the Sale of Foreclosed Assets

During the quarters ended March 31, 2022 and 2021, we recognized $0 and $18, respectively, as a loss on the sale of foreclosed assets. No foreclosed assets were sold during the quarter ended March 31, 2022. During the quarter ended March 31, 2021, five foreclosed assets were sold which resulted in a loss on their sale.

Impairment Loss on Foreclosed Assets

As of March 31, 2022 and 2021, impairment loss on foreclosed assets was $0 and $10, respectively.

Consolidated Financial Position

Loans Receivable

Commercial Loans – Construction Loan Portfolio Summary

We anticipate that the aggregate balance of our construction loan portfolio will increase as loans near maturity and as we have new loan originations.

The following is a summary of our loan portfolio to builders for home construction loans as of March 31, 2022:

State	Number of Borrowers		Number of Loans		Value of Collateral⁽¹⁾		Commitment Amount		Amount Outstanding		Loan to Value Ratio⁽²⁾			Loan Fee
Arizona		2		2	$	670	$	469	$	215		70	%		5	%
Connecticut		2		5		2,062		1,532		780		74	%		5	%
Delaware		1		5		5,485		2,055		1,594		37	%		5	%
Florida		18		91		30,365		22,614		15,097		74	%		5	%
Georgia		3		4		1,950		1,175		650		60	%		5	%
Illinois		2		2		1,890		1,199		637		63	%		5	%
Indiana		1		1		624		437		426		70	%		5	%
Louisiana		2		4		935		628		335		67	%		5	%
Michigan		2		7		1,941		1,591		1,425		82	%		5	%
New Jersey		1		8		3,084		2,601		2,484		84	%		5	%
New York		1		2		1,265		878		669		69	%		5	%
North Carolina		5		13		6,935		4,036		1,990		58	%		5	%
Ohio		2		9		3,086		2,132		1,348		69	%		5	%
Oregon		1		1		550		385		238		70	%		5	%
Pennsylvania		1		25		26,197		16,320		11,492		62	%		5	%
South Carolina		10		35		8,860		6,197		3,614		70	%		5	%
Tennessee		2		2		990		558		281		56	%		5	%
Texas		2		5		2,873		1,750		887		61	%		5	%
Utah		1		2		622		435		205		70	%		5	%
Virginia		4		4		1,437		960		597		67	%		5	%
Washington		1		5		2,730		1,747		1,280		64	%		5	%
Total		64		232	$	104,551	$	69,699	$	46,244		67	%⁽³⁾		5	%

	⁽¹⁾	The value is determined by the appraised value.

	⁽²⁾	The loan to value ratio is calculated by taking the commitment amount and dividing by the appraised value.

	⁽³⁾	Represents the weighted average loan to value ratio of the loans.

The following is a summary of our loan portfolio to builders for home construction loans as of December 31, 2021:

(All dollar [$] amounts shown in table in thousands.)

State	Number of Borrowers		Number of Loans		Value of Collateral⁽¹⁾		Commitment Amount		Gross Amount Outstanding		Loan to Value Ratio⁽²⁾and ⁽³⁾			Loan Fee
Arizona		2		3	$	995	$	697	$	390		70	%		5	%
Connecticut		2		4		1,535		1,084		719		71	%		5	%
Delaware		1		6		5,960		2,387		1,817		40	%		5	%
Florida		18		88		28,922		21,787		13,649		75	%		5	%
Georgia		2		2		1,130		631		366		56	%		5	%
Illinois		2		2		1,890		1,199		627		63	%		5	%
Indiana		1		1		624		436		347		70	%		5	%
Louisiana		2		3		590		387		125		66	%		5	%
Michigan		2		12		3,431		2,586		2,299		75	%		5	%
New Jersey		1		7		2,382		1,910		1,664		80	%		5	%
New York		1		1		525		378		305		72	%		5	%
North Carolina		8		14		7,141		4,349		2,105		61	%		5	%
Ohio		2		9		2,929		2,132		1,105		73	%		5	%
Oregon		2		2		923		646		440		70	%		5	%
Pennsylvania		2		20		21,867		13,487		10,078		62	%		5	%
South Carolina		10		32		8,353		5,793		3,579		69	%		5	%
Tennessee		2		2		940		582		319		62	%		5	%
Texas		2		5		2,873		1,750		549		61	%		5	%
Virginia		3		3		1,140		765		519		67	%		5	%
Washington		1		8		4,785		3,022		2,104		63	%		5	%
Total		66		224	$	98,935	$	66,008	$	43,106		67	%⁽³⁾		5	%

	⁽¹⁾	The value is determined by the appraised value.

	⁽²⁾	The loan to value ratio is calculated by taking the commitment amount and dividing by the appraised value.

	⁽³⁾	Represents the weighted average loan to value ratio of the loans.

Commercial Loans – Real Estate Development Loan Portfolio Summary

The following is a summary of our loan portfolio to builders for land development as of March 31, 2022:

States	Number of Borrowers		Number of Loans		Value of Collateral⁽¹⁾		Commitment Amount⁽²⁾		Gross Amount Outstanding		Loan to Value Ratio⁽³⁾			Interest Spread
Pennsylvania		1		5	$	11,994	$	8,500	$	7,275		61	%		varies
Delaware		1		1		543		147		147		27	%		7	%
Florida		5		5		1,033		1,297		732		71	%		7	%
Texas		1		1		70		125		77		110	%		7	%
Connecticut		1		1		250		180		214		85	%		7	%
South Carolina		4		4		2,373		1,386		1,391		59	%		7	%
Total		13		17	$	16,263	$	11,635	$	9,836		60	%⁽⁴⁾		7	%

	⁽¹⁾	The value is determined by the appraised value adjusted for remaining costs to be paid and third-party mortgage balances. Part of this collateral is $1,830 of preferred equity in our Company. In the event of a foreclosure on the property securing these loans, the portion of our collateral that is preferred equity in our Company might be difficult to sell, which could impact our ability to eliminate the loan balance.

	⁽²⁾	The commitment amount does not include unfunded letters of credit.

	⁽³⁾	The loan to value ratio is calculated by taking the outstanding amount and dividing by the appraised value calculated as described above.

	⁽⁴⁾	Represents the weighted average loan to value ratio of the loans.

The following is a summary of our loan portfolio to builders for land development as of December 31, 2021:

(All dollar [$] amounts shown in table in thousands.)

States	Number of Borrowers		Number of Loans		Value of Collateral⁽¹⁾		Commitment Amount⁽²⁾		Gross Amount Outstanding		Loan to Value Ratio⁽³⁾			Interest Spread
Pennsylvania		1		4	$	9,312	$	6,500	$	6,103		66	%		varies
Florida		5		5		816		1,297		611		75	%		7	%
Texas		1		1		70		125		77		110	%		7	%
Connecticut		1		1		350		180		180		51	%		7	%
Delaware		1		1		543		147		147		27	%		7	%
South Carolina		3		3		1,373		846		539		39	%		7	%
Total		12		15	$	12,464	$	9,095	$	7,657		61	%⁽⁴⁾		7	%

⁽¹⁾	The value is determined by the appraised value adjusted for remaining costs to be paid and third-party mortgage balances. Part of this collateral is $1,720 of preferred equity in our Company. In the event of a foreclosure on the property securing these loans, the portion of our collateral that is preferred equity in our Company might be difficult to sell, which could impact our ability to eliminate the loan balance.

⁽²⁾	The commitment amount does not include unfunded letters of credit.

⁽³⁾	The loan to value ratio is calculated by taking the outstanding amount and dividing by the appraised value calculated as described above.

⁽⁴⁾	Represents the weighted average loan to value ratio of the loans.

Combined Loan Portfolio Summary

Financing receivables are comprised of the following as of March 31, 2022 and December 31, 2021:

	March 31, 2022			December 31, 2021

Loans receivable, gross	$	56,080		$	50,763
Less: Deferred loan fees		(1,446	)		(1,143	)
Less: Deposits		(873	)		(934	)
Plus: Deferred origination costs		273			305
Less: Allowance for loan losses		(1,955	)		(2,048	)

Loans receivable, net	$	52,079		$	46,943

The following is a roll forward of combined loans:

	Three Months Ended March 31, 2022			Year Ended December 31, 2021			Three Months Ended March 31, 2021

Beginning balance	$	46,943		$	46,405		$	46,405
Originations and modifications		14,770			45,395			7,089
Principal collections		(10,469	)		(44,290	)		(7,662	)
Transferred from (to) foreclosed assets		1,017			(791	)		(274	)
Change in builder deposit		61			403			(169	)
Change in the allowance for loan losses		92			(80	)		(214	)
Change in loan fees, net		(335	)		(99	)		(82	)
Ending balance	$	52,079		$	46,943		$	45,093

Finance Receivables – By risk rating:

	March 31, 2022		December 31, 2021

Pass	$	47,117	$	38,893
Special mention		1,003		2,344
Classified – accruing		–		–
Classified – nonaccrual		7,960		9,526

Total	$	56,080	$	50,763

Finance Receivables – Method of impairment calculation:

	March 31, 2022		December 31, 2021

Performing loans evaluated individually	$	18,767	$	16,495
Performing loans evaluated collectively		29,354		24,742
Non-performing loans without a specific reserve		1,363		596
Non-performing loans with a specific reserve		6,596		8,930

Total evaluated collectively for loan losses	$	56,080	$	50,763

At March 31, 2022 and December 31, 2021, there were no loans acquired with deteriorated credit quality.

Impaired Loans

The following is a summary of our impaired non-accrual (non-performing) commercial construction loans as of March 31, 2022 and December 31, 2021.

	March 31, 2022			December 31, 2021

Unpaid principal balance (contractual obligation from customer)	$	8,127		$	10,035
Charge-offs and payments applied		(167	)		(509	)
Gross value before related allowance		7,960			9,526
Related allowance		(1,751	)		(1,825	)
Value after allowance	$	6,209		$	7,701

Below is an aging schedule of loans receivable as of March 31, 2022, on a recency basis:

	No. Loans		Unpaid Balances		%
Current loans (current accounts and accounts on which more than 50% of an original contract payment was made in the last 59 days)		230	$	48,120		85.8	%
60-89 days		1		186		0.3	%
90-179 days		4		775		1.4	%
180-269 days		6		1,274		2.3	%
>270 days		8		5,725		10.2	%

Subtotal		249	$	56,080		100	%

Interest only accounts (Accounts on which interest, deferment, extension and/or default charges were received in the last 60 days)		-	$	-		-	%

Partial Payment accounts (Accounts on which the total received in the last 60 days was less than 50% of the original contractual monthly payment. “Total received” to include interest on simple interest accounts, as well as late charges on deferment charges on pre-computed accounts.)		-	$	-		-	%

Total		249	$	56,080		100	%

Below is an aging schedule of loans receivable as of December 31, 2021, on a recency basis:

	No. Loans		Unpaid Balances		%
Current loans (current accounts and accounts on which more than 50% of an original contract payment was made in the last 59 days)		216	$	41,238		81.2	%
60-89 days		1		203		0.4	%
90-179 days		10		2,058		4.1	%
180-269 days		1		392		0.8	%
>270 days		11		6,872		13.5	%

Subtotal		239	$	50,763		100	%

Interest only accounts (Accounts on which interest, deferment, extension and/or default charges were received in the last 60 days)		-	$	-		-	%

Partial Payment accounts (Accounts on which the total received in the last 60 days was less than 50% of the original contractual monthly payment. “Total received” to include interest on simple interest accounts, as well as late charges on deferment charges on pre-computed accounts.)		-	$	-		-	%

Total		239	$	50,763		100	%

Below is an aging schedule of loans receivable as of March 31, 2022, on a contractual basis:

	No. Loans		Unpaid Balances		%
Contractual Terms - All current Direct Loans and Sales Finance Contracts with installments past due less than 60 days from due date.		230	$	48,120		85.8	%
60-89 days		1		186		0.3	%
90-179 days		4		775		1.4	%
180-269 days		6		1,274		2.3	%
>270 days		8		5,725		10.2	%

Subtotal		249	$	56,080		100	%

Interest only accounts (Accounts on which interest, deferment, extension and/or default charges were received in the last 60 days)		-	$	-		-	%

Partial Payment accounts (Accounts on which the total received in the last 60 days was less than 50% of the original contractual monthly payment. “Total received” to include interest on simple interest accounts, as well as late charges on deferment charges on pre-computed accounts.)		-	$	-		-	%

Total		249	$	56,080		100	%

Below is an aging schedule of loans receivable as of December 31, 2021, on a contractual basis:

	No. Loans		Unpaid Balances		%
Contractual Terms - All current Direct Loans and Sales Finance Contracts with installments past due less than 60 days from due date.		216	$	41,238		81.2	%
60-89 days		1		203		0.4	%
90-179 days		10		2,058		4.1	%
180-269 days		1		392		0.8	%
>270 days		11		6,872		13.5	%

Subtotal		239	$	50,763		100	%

Interest only accounts (Accounts on which interest, deferment, extension and/or default charges were received in the last 60 days)		-	$	-		-	%

Partial Payment accounts (Accounts on which the total received in the last 60 days was less than 50% of the original contractual monthly payment. “Total received” to include interest on simple interest accounts, as well as late charges on deferment charges on pre-computed accounts.)		-	$	-		-	%

Total		239	$	50,763		100	%

Foreclosed Assets

Below is a roll forward of foreclosed assets:

	Three Months Ended March 31, 2022			Year Ended December 31, 2021			Three Months Ended March 31, 2021

Beginning balance	$	2,724		$	4,449		$	4,449
Transfers (to) from loan receivables, net		(1,017	)		791			274
Additions for construction/development		115			818			257
Sale proceeds		–			(3,418	)		(1,276	)
Loss on foreclosure		–			(47	)		–
Loss on sale of foreclosed assets		–			(92	)		(18	)
Gain on foreclosure		–			67			–
Gain on sale of foreclosed assets		–			166			88
Impairment loss on foreclosed assets		–			(10	)		(10	)
Ending balance	$	1,822		$	2,724		$	3,764

During the quarter ended March 31, 2022, we transferred one construction loan from loan receivable to foreclosed assets. In addition, during the quarter ended March 31, 2022, no foreclosed assets were sold compared to nine during the same period of 2021.

Customer Interest Escrow

Below is a roll forward of interest escrow:

	Three Months Ended March 31, 2022			Year Ended December 31, 2021			Three Months Ended March 31, 2020

Beginning balance	$	479		$	510		$	510
Preferred equity dividends		43			230			106
Additions from Pennsylvania loans		902			513			58
Additions from other loans		120			720			233
Interest, fees, principal or repaid to borrower		(359	)		(1,494	)		(377	)
Ending balance	$	1,185		$	479		$	530

Related Party Borrowings

As of March 31, 2022, the Company had $1,174, $250, and $530 available to borrow against the line of credit from Daniel M. Wallach (our Chief Executive Officer and chairman of the board of managers) and his wife, the line of credit from the 2007 Daniel M. Wallach Legacy Trust, and the line of credit from William Myrick (our Executive Vice President), respectively. A more detailed description is included in Note 7 to the 2021 Financial Statements. These borrowings are included in notes payable secured, net of deferred financing costs on the interim condensed consolidated balance sheet.

During the quarter ended March 31, 2022, Mr. Myrick originated one loan for approximately $24 and the Company services the loan and in return received a 5% loan fee. In addition, $365 was borrowed against the Myrick LOC to fund construction on the three loans originated by Mr. Myrick. As of December 31, 2021, the Company serviced two loans originated by Mr. Myrick for which it received a 5% loan fee and borrowed $141 against the Myrick LOC to originate and fund construction on the two such loans.

Secured Borrowings

Lines of Credit

As of March 31, 2022 and December 31, 2021, the Company had $545 and $859 borrowed against its lines of credit from affiliates, respectively, which have a total limit of $2,500.

None of our lines of credit have given us notice of nonrenewal during the first quarter of 2022, and the lines will continue to automatically renew unless notice of nonrenewal is given by a lender.

Secured Deferred Financing Costs

The Company had secured deferred financing costs of $7 and $8 as of March 31, 2022 and December 31, 2021, respectively.

Summary

The borrowings secured by loan assets are summarized below:

	March 31, 2022				December 31, 2021
	Book Value of Loans which Served as Collateral		Due from Shepherd’s Finance to Loan Purchaser or Lender		Book Value of Loans which Served as Collateral		Due from Shepherd’s Finance to Loan Purchaser or Lender
Loan Purchaser
Builder Finance	$	7,457	$	5,248	$	4,847	$	2,969
S.K. Funding		9,821		6,500		8,084		5,500

Lender
Shuman		712		125		566		125
Jeff Eppinger		3,461		1,500		3,328		1,500
R. Scott Summers		1,900		847		1,475		847
John C. Solomon		1,122		563		1,139		563
Judith Y. Swanson		11,495		7,000		9,803		6,841

Total	$	35,968	$	21,783	$	29,242	$	18,345

Unsecured Borrowings

Unsecured Notes through the Public Offering (“Notes Program”)

The effective interest rate on borrowings through our Notes Program at March 31, 2022 and December 31, 2021 was 9.11% and 9.28%, respectively, not including the amortization of deferred financing costs. We generally offer four durations at any given time, ranging from 12 to 48 months from the date of issuance. There are limited rights of early redemption. Our 36-month Note has a mandatory early redemption option, subject to certain conditions. The following table shows the roll forward of our Notes Program:

	Three Months Ended March 31, 2022			Year Ended December 31, 2021			Three Months Ended March 31, 2021

Gross Notes outstanding, beginning of period	$	20,636		$	21,482		$	21,482
Notes issued		380			7,876			2,627
Note repayments / redemptions		(978	)		(8,722	)		(2,027	)

Gross Notes outstanding, end of period	$	20,038		$	20,636		$	22,082

Less deferred financing costs, net		(380	)		(367	)		(409	)

Notes outstanding, net	$	19,658		$	20,269		$	21,673

The following is a roll forward of deferred financing costs:

	Three Months Ended March 31, 2022			Year Ended December 31, 2021			Three Months Ended March 31, 2021

Deferred financing costs, beginning balance	$	1,061		$	942		$	942
Additions		76			119			35
Deferred financing costs, ending balance		1,137			1,061			977
Less accumulated amortization		(757	)		(694	)		(568	)
Deferred financing costs, net	$	380		$	367		$	409

The following is a roll forward of the accumulated amortization of deferred financing costs:

	Three Months Ended March 31, 2022		Year Ended December 31, 2021		Three Months Ended March 31, 2021

Accumulated amortization, beginning balance	$	694	$	526	$	526
Additions		63		168		42
Accumulated amortization, ending balance	$	757	$	694	$	568

Other Unsecured Debts

Our other unsecured debts are detailed below:

					Principal Amount Outstanding as of
Loan	Maturity Date	Interest Rate⁽¹⁾			March 31, 2022		December 31,2021
Unsecured Note with Seven Kings Holdings, Inc.	Demand⁽²⁾		9.5	%	$	500	$	500
Unsecured Line of Credit from Swanson	July 2022		6.0	%		-		159
Unsecured Line of Credit from Builder Finance, Inc.	January 2023		10.0	%		-		750
Subordinated Promissory Note	December 2021		10.5	%				-
Subordinated Promissory Note	April 2024		10.0	%		100		100
Subordinated Promissory Note	August 2022		11.0	%		200		200
Subordinated Promissory Note	February 2023		10.0	%		600		600
Subordinated Promissory Note	June 2023		10.0	%		400		400
Subordinated Promissory Note	March 2024		9.75	%		500		-
Subordinated Promissory Note	December 2022		5.0	%		3		3
Subordinated Promissory Note	December 2023		11.0	%		20		20
Subordinated Promissory Note	February 2024		11.0	%		20		20
Subordinated Promissory Note	January 2025		10.0	%		15		15
Subordinated Promissory Note	January 2026		8.0	%		10		-
Subordinated Promissory Note	November 2023		9.5	%		200		200
Subordinated Promissory Note	October 2024		10.0	%		700		700
Subordinated Promissory Note	December 2024		10.0	%		100		100
Subordinated Promissory Note	April 2025		10.0	%		202		202
Subordinated Promissory Note	July 2023		8.0	%		100		100
Subordinated Promissory Note	July 2024		5.0	%		1,500		1,500
Subordinated Promissory Note	September 2023		7.0	%		94		94
Subordinated Promissory Note	October 2023		7.0	%		100		100
Subordinated Promissory Note	December 2025		8.0	%		180		180
Senior Subordinated Promissory Note	March 2022⁽³⁾		10.0	%		-		334
Senior Subordinated Promissory Note	March 2026⁽³⁾		8.0	%		375		-
Senior Subordinated Promissory Note	October 2024⁽⁴⁾		1.0	%		720		720
Junior Subordinated Promissory Note	October 2024⁽⁴⁾		20.0	%		447		447
					$	7,086	$	7,444

⁽¹⁾	Interest rate per annum, based upon actual days outstanding and a 365/366-day year.

⁽²⁾	Due six months after lender gives notice.

⁽³⁾	Lender may require us to repay $20 of principal and all unpaid interest with 10 days’ notice.

⁽⁴⁾	These notes were issued to the same holder and, when calculated together, yield a blended return of 10% per annum.

Redeemable Preferred Equity and Members’ Capital

We strive to maintain a reasonable (about 15%) balance between (1) redeemable preferred equity plus members’ capital and (2) total assets. The ratio of redeemable preferred equity plus members’ capital to loan assets was 13% and 14% as of March 31, 2022 and December 31, 2021, respectively. We anticipate this ratio to increase as more earnings are retained in 2022 and some additional preferred equity may be added.

Priority of Borrowings

The following table displays our borrowings and a ranking of priority. The lower the number, the higher the priority.

	Priority Rank	March 31, 2022		December 31, 2021
Borrowing Source
Purchase and sale agreements and other secured borrowings	1	$	22,599	$	19,165
Secured line of credit from affiliates	2		545		859
Unsecured line of credit (senior)	3		500		1,250
Other unsecured debt (senior subordinated)	4		1,094		1,053
Unsecured Notes through our public offering, gross	5		20,038		20,636
Other unsecured debt (subordinated)	5		5,045		4,693
Other unsecured debt (junior subordinated)	6		447		447

Total		$	50,268	$	48,103

Liquidity and Capital Resources

Our primary liquidity management objective is to meet expected cash flow needs while continuing to service our business and customers. We had 249 and 239 combined loans outstanding as of March 31, 2022 and December 31, 2021, respectively. Gross loans receivable totaled $56,080 and $50,763 as of March 31, 2022 and December 31, 2021, respectively. Our unfunded commitments to extend credit, which have similar collateral, credit and market risk to our outstanding loans, were $23,455 and $22,902 as March 31, 2022 and December 31, 2021, respectively.

We anticipate an increase in our gross loan receivables over the 12 months subsequent to March 31, 2022 by directly increasing originations to new and existing customers.

To fund our combined loans, we rely on secured debt, unsecured debt, equity and cash which are described in the following table:

Source of Liquidity	As of March 31, 2022		As of December 31, 2021
Secured debt, net of deferred financing costs	$	23,137	$	20,016
Unsecured debt, net of deferred financing costs		26,744		27,713
Equity*		6,875		6,604
Cash		2,961		3,735

*Equity includes Members’ Capital and Redeemable Preferred Equity.

As of March 31, 2022 and December 31, 2021, cash was $2,961 and $3,735, respectively.

Secured debt, net of deferred financing costs increased $3,121 to $23,137 as of March 31, 2022 compared to $20,016 for the year ended December 31, 2021 which was primarily due to borrowings on our purchase and sale agreements. We anticipate secured debt to increase as our loan receivable balances increase.

Unsecured debt, net of deferred financing costs decreased $969 to $26,744 as of March 31, 2022 compared to $27,713 for the year ended December 31, 2021. The decrease in unsecured debt primarily related to unsecured notes sold outside of our Notes Program.

Equity increased $271 to $6,875 as of March 31, 2022 compared to $6,604 for the year ended December 31, 2021. The increase was due primarily to earned but not paid distributions of Series C preferred equity holders.

We anticipate an increase in our equity during the 12 months subsequent to December 31, 2021, through retaining earnings. If we are not able to increase our equity through retained earnings, we will rely more heavily on raising additional funds through the Notes Program.

The total amount of our debt maturing through year ending December 31, 2022 is $28,561, which consists of secured borrowings of $22,340 and unsecured borrowings of $6,221.

Secured borrowings maturing through the year ending December 31, 2022 primarily consists of loan purchase and sale agreements with two loan purchasers (Builder Finance and S. K. Funding) and six lenders. These secured borrowings are listed as maturing over the next 12 months due to their related demand loan collateral. The following are secured facilities listed as maturing in 2022 with actual maturity and renewal dates:

	●	Swanson – $7,000 due July 2022 and automatically renews unless notice given;
	●	Shuman – $125 due July 2022 and automatically renews unless notice is given;
	●	S. K. Funding – $4,500 due July 2022 and automatically renews unless notice is given;
	●	S. K. Funding – $2,000 of the total due January 2023 and automatically renews unless notice is given;
	●	Builder Finance, Inc – $5,248 with no expiration date;
	●	New LOC Agreements - $2,909 due generally with one-month notice and six months to reduce principal balance to zero;
	●	Myrick LOC - $470 due upon demand; and
	●	Mortgage Payable – $15 due monthly.

Unsecured borrowings due by December 31, 2022 consist of Notes issued pursuant to the Notes Program and other unsecured debt of $5,518 and $703, respectively. To the extent that Notes issued pursuant to the Notes Program are not reinvested upon maturity, we will be required to fund the maturities, which we anticipate funding through the issuance of new Notes in our Notes Program. Historically, approximately 73% of our Note holders reinvest upon maturity. The 36 month Note in our Notes program has a mandatory early redemption option, subject to certain conditions. As of March 31, 2022, outstanding 36-month Notes totaled $367. Our other unsecured debt has historically renewed. For more information on other unsecured borrowings, see Note 7 – Borrowings. If other unsecured borrowings are not renewed in the future, we anticipate funding such maturities through investments in our Notes Program.

Summary

We have the funding available to address the loans we have today, including our unfunded commitments. We anticipate growing our assets through the net sources and uses (12-month liquidity) listed above as well as future capital increases from debt, redeemable preferred equity, and regular equity. Our expectation to grow loan asset balances is subject to changes due to changes in demand, competition, and COVID-19. Although our secured debt is almost entirely listed as currently due because of the underlying collateral being demand notes, the vast majority of our secured debt is either contractually set to automatically renew unless notice is given or, in the case of purchase and sale agreements, has no end date as to when the purchasers will not purchase new loans (although they are never required to purchase additional loans).

Inflation, Interest Rates, and Housing Starts

Since we are in the housing industry, we are affected by factors that impact that industry. Housing starts impact our customers’ ability to sell their homes. Faster sales generally mean higher effective interest rates for us, as the recognition of fees we charge is spread over a shorter period. Slower sales generally mean lower effective interest rates for us. Slower sales also are likely to increase the default rate we experience.

Housing inflation has a positive impact on our operations. When we lend initially, we are lending a percentage of a home’s expected value, based on historical sales. If those estimates prove to be low (in an inflationary market), the percentage we loaned of the value actually decreases, reducing potential losses on defaulted loans. The opposite is true in a deflationary housing price market. It is our opinion that values are well above average in many of the housing markets in the U.S. today, and our lending against these values is having more risk than prior years.

Interest rates have several impacts on our business. First, rates affect housing (starts, home size, etc.). High long-term interest rates may decrease housing starts, having the effects listed above. Higher interest rates will also affect our investors. We believe that there will be a spread between the rate our Notes yield to our investors and the rates the same investors could get on deposits at FDIC insured institutions. We also believe that the spread may need to widen if these rates rise. For instance, if we pay 7% above average CD rates when CDs are paying 0.5%, when CDs are paying 3%, we may have to have a larger than 7% difference. This may cause our lending rates, which are based on our cost of funds, to be uncompetitive. High interest rates may also increase builder defaults, as interest payments may become a higher portion of operating costs for the builder. Below is a chart showing three-year U.S. treasury rates and 30-year fixed mortgage rates. The U.S. treasury rates, are used by us here to approximate CD rates. Both the short and long term interest rates have risen slightly but are generally low historically.

Housing prices are also generally correlated with housing starts, so that increases in housing starts usually coincide with increases in housing values, and the reverse is generally true. Below is a graph showing single family housing starts from 2000 through today.

Source: U.S. Census Bureau

To date, changes in housing starts, CD rates, and inflation have not had a material impact on our business.

Off-Balance Sheet Arrangements

As of March 31, 2022 and December 31, 2021, other than unfunded loan commitments, we had no off-balance sheet transactions, nor do we currently have any such arrangements or obligations.

Financial Statements

The financial statements listed below are contained in this supplement:

Interim Condensed Consolidated Balance Sheets as of March 31, 2022 (Unaudited) and December 31, 2021		F-1

Interim Condensed Consolidated Statements of Operations (Unaudited) for the Three Months Ended March 31, 2022 and 2021		F-2

Interim Condensed Consolidated Statement of Changes in Members’ Capital (Unaudited) for the Three Months Ended March 31, 2022 and 2021		F-3

Interim Condensed Consolidated Statements of Cash Flows (Unaudited) for the Three Months Ended March 31, 2022 and 2021		F-4

Notes to Interim Condensed Consolidated Financial Statements (Unaudited)		F-5

Shepherd’s Finance, LLC

Interim Condensed Consolidated Balance Sheets

(in thousands of dollars)	March 31, 2022			December 31, 2021
		(Unaudited)
Assets
Cash and cash equivalents	$	2,961		$	3,735
Accrued interest receivable		697			598
Loans receivable, net		52,079			46,943
Real estate investments		1,707			1,651
Foreclosed assets, net		1,822			2,724
Premises and equipment		869			875
Other assets		856			1,089
Total assets	$	60,991		$	57,615
Liabilities and Members’ Capital
Customer interest escrow	$	1,185		$	479
Accounts payable and accrued expenses		349			296
Accrued interest payable		2,657			2,464
Notes payable secured, net of deferred financing costs		23,137			20,016
Notes payable unsecured, net of deferred financing costs		26,744			27,713
Due to preferred equity member		44			43
Total liabilities	$	54,116		$	51,011

Commitments and Contingencies (Note 10)

Redeemable Preferred Equity
Series C preferred equity	$	5,134		$	5,014

Members’ Capital
Series B preferred equity		1,830			1,720
Class A common equity		(89	)		(130	)
Members’ capital	$	1,741		$	1,590

Total liabilities, redeemable preferred equity and members’ capital	$	60,991		$	57,615

The accompanying notes are an integral part of these interim condensed consolidated financial statements.

F-1

Shepherd’s Finance, LLC

Interim Condensed Consolidated Statements of Operations - Unaudited

For the Three Months ended March 31, 2022 and 2021

	Three Months Ended
	March 31,
(in thousands of dollars)	2022		2021

Net Interest Income
Interest and fee income on loans	$	2,361	$	1,778
Interest expense:
Interest related to secured borrowings		518		557
Interest related to unsecured borrowings		732		810
Interest expense	$	1,250	$	1,367

Net interest income		1,111		411

Less: Loan loss provision		74		214
Net interest income after loan loss provision		1,037		197

Non-Interest Income
Gain on sale of foreclosed assets	$	-	$	88
Gain on extinguishment of debt		-		10
Total non-interest income		-		98

Income before non-interest expense		1,037		295

Non-Interest Expense
Selling, general and administrative	$	695	$	537
Depreciation and amortization		12		16
Loss on the sale of foreclosed assets		-		18
Impairment loss on foreclosed assets		-		10
Total non-interest expense		707		581

Net income (loss)	$	330	$	(286	)

Earned distribution to preferred equity holders		195		115

Net income (loss) attributable to common equity holders	$	135	$	(401	)

The accompanying notes are an integral part of these interim condensed consolidated financial statements.

F-2

Shepherd’s Finance, LLC

Interim Condensed Consolidated Statements of Changes in Members’ Capital - Unaudited

For the Three Months Ended March 31, 2022 and 2021

(in thousands of dollars)	March 31, 2022			March 31, 2021

Members’ capital, beginning balance	$	1,590		$	1,677
Net income (loss) less distributions to Series C preferred equity holders of $151 and $115		179			(401	)
Contributions from Series B preferred equity holders		110			10
Earned distributions to Series B preferred equity holders		(44	)		-
Distributions to common equity holders		(94	)		-

Members’ capital, ending balance	$	1,741		$	1,286

The accompanying notes are an integral part of the interim condensed consolidated financial statements.

F-3

Shepherd’s Finance, LLC

Interim Condensed Consolidated Statements of Cash Flows - Unaudited

For the Three Months Ended March 31, 2022 and 2021

	Three Months Ended March 31,
(in thousands of dollars)	2022			2021

Cash flows from operations
Net income (loss)	$	330		$	(286	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Amortization of deferred financing costs		63			42
Provision for loan losses		74			214
Change in loan origination fees, net		335			82
Loss on sale of foreclosed assets		-			18
Impairment of foreclosed assets		-			10
Gain on the sale of foreclosed assets		-			(88	)
Gain on extinguishment of debt		-			(10	)
Depreciation and amortization		12			16
Net change in operating assets and liabilities:
Other assets		227			56
Accrued interest receivable		(99	)		55
Customer interest escrow		663			(86	)
Accrued interest payable		372			366
Accounts payable and accrued expenses		53			(96	)

Net cash provided by operating activities		2,030			293

Cash flows from investing activities
Loan originations and principal collections, net		(4,528	)		742
Investment in foreclosed assets		(115	)		(257	)
Additions for construction in real estate investments		(241	)		(4	)
Deposits for construction in real estate investments		185			-
Proceeds from the sale of foreclosed assets		-			1,276

Net cash (used in) provided by investing activities		(4,699	)		1,757

Cash flows from financing activities
Contributions from preferred B equity holders		110			10
Contributions from preferred C equity holders		-			300
Distributions to preferred equity holders		(31	)		(14	)
Distributions to common equity holders		(94	)		-
Proceeds from secured note payable		4,470			1,616
Repayments of secured note payable		(1,508	)		(4,203	)
Proceeds from unsecured notes payable		752			2,135
Redemptions/repayments of unsecured notes payable		(1,728	)		(2,045	)
Proceeds from PPP loan		-			361
Deferred financing costs paid		(76	)		(35	)

Net cash provided by (used in) financing activities		1,895			(1,875	)

Net (decrease) increase in cash and cash equivalents		(774	)		175

Cash and cash equivalents
Beginning of period		3,735			4,749
End of period	$	2,961		$	4,924

Supplemental disclosure of cash flow information
Cash paid for interest	$	1,057		$	1,507

Non-cash investing and financing activities
Earned by Series B preferred equity holders but not distributed to customer interest escrow	$	44		$	-
Earned by Series B preferred equity holders and distributed to customer interest escrow	$	43		$	106
Foreclosure of assets transferred from loans receivable, net	$	-		$	274
Foreclosure of assets transferred to loans receivable, net	$	1,017		$	-
Earned but not paid distributions of Series C preferred equity holders	$	121		$	115
Secured and unsecured notes payable transfers	$	159		$	431
Accrued interest payable transferred to unsecured notes payable	$	179		$	506
EIDL advance forgiveness in reduction of debt	$	-		$	10

The accompanying notes are an integral part of these interim condensed consolidated financial statements.

F-4

Shepherd’s Finance, LLC

Notes to Interim Condensed Consolidated Financial Statements (unaudited)

Information presented throughout these notes to the interim condensed consolidated financial statements (unaudited) is in thousands of dollars.

1. Description of Business and Basis of Presentation

Description of Business

Shepherd’s Finance, LLC and subsidiary (the “Company”) was originally formed as a Pennsylvania limited liability company on May 10, 2007. The Company is the sole member of a consolidating subsidiary, Shepherd’s Stable Investments, LLC. The Company operates pursuant to its Second Amended and Restated Limited Liability Company Agreement, as amended, by and among Daniel M. Wallach and the other members of the Company effective as of March 16, 2017, and as subsequently amended.

The Company extends commercial loans to residential homebuilders (in 21 states as of March 31, 2022) to:

	●	construct single family homes,
	●	develop undeveloped land into residential building lots, and
	●	purchase older homes and then rehabilitate the home for sale.

Basis of Presentation

The accompanying unaudited interim condensed consolidated financial statements for the period ended March 31, 2022 have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information, the instructions to Form 10-Q and Article 8 of Regulation S-X. The accompanying condensed consolidated balance sheet as of December 31, 2021 has been derived from audited consolidated financial statements. While certain information and disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”), management believes that the disclosures herein are adequate to make the unaudited interim condensed consolidated information presented not misleading. In the opinion of management, the unaudited interim condensed consolidated financial statements reflect all adjustments necessary for a fair presentation of the consolidated financial position, results of operations, and cash flows for the periods presented. Such adjustments are of a normal, recurring nature. The consolidated results of operations for any interim period are not necessarily indicative of results expected for the fiscal year ending December 31, 2022. These unaudited interim condensed consolidated financial statements should be read in conjunction with the 2021 consolidated financial statements and notes thereto (the “2021 Financial Statements”) included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021 (the “2021 Form 10-K”). The accounting policies followed by the Company are set forth in Note 2 – Summary of Significant Accounting Policies in the 2021 Financial Statements.

Accounting Standards to be Adopted

Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) 2016-13, “Financial Instruments-Credit Losses: Measurement of Credit Losses on Financial Instruments.” The amendments in ASU 2016-13 introduce a new current expected credit loss (“CECL”) model for certain financial assets, including mortgage loans and reinsurance receivables. The new model will not apply to debt securities classified as available-for-sale. For assets within the scope of the new model, an entity will recognize as an allowance against earnings its estimate of the contractual cash flows not expected to be collected on day one of the asset’s acquisition. The allowance may be reversed through earnings if a security recovers in value. This differs from the current impairment model, which requires recognition of credit losses when they have been incurred and recognizes a security’s subsequent recovery in value in other comprehensive income. ASU 2016-13 also makes targeted changes to the current impairment model for available-for-sale debt securities, which comprise the majority of the Company’s invested assets. Similar to the CECL model, credit loss impairments will be recorded in an allowance against earnings that may be reversed for subsequent recoveries in value. The amendments in ASU 2016-13, along with related amendments in ASU 2018-19, “Codification Improvements to Topic 326, Financial Instruments-Credit Losses,” are effective for annual and interim periods beginning after December 15, 2019 on a modified retrospective basis. For smaller reporting companies, the effective date for annual and interim periods is January 1, 2023. The Company is reviewing its policies and processes to ensure compliance with the requirements in ASU 2016-13.

F-5

Reclassifications

Certain reclassifications have been made to the prior period’s financial statements and disclosures to conform to the current period’s presentation.

2. Fair Value

The Company had no financial instruments measured at fair value on a recurring basis as of March 31, 2022 and December 31, 2021.

The following tables present the balances of non-financial instruments measured at fair value on a non-recurring basis as of March 31, 2022 and December 31, 2021.

					Quoted Prices in Active		Significant		Significant
	March 31, 2022				Markets for Identical		Other Observable		Unobservable
	Carrying		Estimated		Assets		Inputs		Inputs
	Amount		Fair Value		Level 1		Level 2		Level 3

Foreclosed assets	$	1,822	$	1,822	$	–	$	–	$	1,822
Impaired loans due to COVID-19, net		3,720		3,720		–		–		3,720
Other impaired loans, net		2,489		2,489		–		–		2,489
Total	$	8,031	$	8,031	$	–	$	–	$	8,031

					Quoted Prices in Active Markets for		Significant Other		Significant
	December 31, 2021				Identical		Observable		Unobservable
	Carrying		Estimated		Assets		Inputs		Inputs
	Amount		Fair Value		Level 1		Level 2		Level 3

Foreclosed assets	$	2,724	$	2,724	$	–	$	–	$	2,724
Impaired loans due to COVID-19, net		5,129		5,129		–		–		5,129
Other impaired loans, net		2,572		2,572		–		–		2,572
Total	$	10,425	$	10,425	$	–	$	–	$	10,425

The table below is a summary of fair value estimates for financial instruments:

	March 31, 2022				December 31, 2021
	Carrying		Estimated		Carrying		Estimated
	Amount		Fair Value		Amount		Fair Value
Financial Assets
Cash and cash equivalents	$	2,961	$	2,961	$	3,735	$	3,735
Loan receivable, net		52,079		52,079		46,943		46,943
Accrued interest on loans		697		697		598		598
Financial Liabilities
Customer interest escrow		1,185		1,185		479		479
Notes payable secured, net		23,137		23,137		20,016		20,016
Notes payable unsecured, net		26,744		26,744		27,713		27,713
Accrued interest payable		2,657		2,657		2,464		2,464

F-6

3. Financing Receivables

Financing receivables are comprised of the following as of March 31, 2022 and December 31, 2021:

	March 31, 2022			December 31, 2021

Loans receivable, gross	$	56,080		$	50,763
Less: Deferred loan fees		(1,446	)		(1,143	)
Less: Deposits		(873	)		(934	)
Plus: Deferred origination costs		273			305
Less: Allowance for loan losses		(1,955	)		(2,048	)

Loans receivable, net	$	52,079		$	46,943

During the quarter ended March 31, 2022 and year ended December 31, 2021, we incurred $167 and $509 in direct charge offs, respectively.

Commercial Construction and Development Loans

Construction Loan Portfolio Summary

As of March 31, 2022, the Company’s portfolio consisted of 232 commercial construction and 17 development loans with 64 borrowers in 21 states.

The following is a summary of the loan portfolio to builders for home construction loans as of March 31, 2022 and December 31, 2021:

Year

Number

States

Number

Borrowers

Number

Loans

Value of

Collateral⁽¹⁾

Commitment Amount

Gross

Amount

Outstanding

Loan to Value

Ratio⁽²⁾⁽³⁾

Loan Fee

2022

232

104,551

69,699

46,244

2021

224

98,935

66,008

43,106

⁽¹⁾	The value is determined by the appraised value.

⁽²⁾	The loan to value ratio is calculated by taking the commitment amount and dividing by the appraised value.

⁽³⁾	Represents the weighted average loan to value ratio of the loans.

F-7

Real Estate Development Loan Portfolio Summary

The following is a summary of our loan portfolio to builders for land development as of March 31, 2022 and December 31, 2021:

Year

Number

States

Number

Borrowers

Number

Loans

Gross Value

Collateral⁽¹⁾

Commitment Amount⁽²⁾

Gross Amount

Outstanding

Loan to Value

Ratio⁽³⁾⁽⁴⁾

Interest Spread

2022

16,263

11,635

9,836

Varies

2021

12,464

9,095

7,657

varies

⁽¹⁾	The value is determined by the appraised value adjusted for remaining costs to be paid. As of March 31, 2022 and December 31, 2021, a portion of this collateral is $1,830 and $1,720, respectively, of preferred equity in our Company. In the event of a foreclosure on the property securing these loans, the portion of our collateral that is preferred equity might be difficult to sell, which may impact our ability to recover the loan balance. In addition, a portion of the collateral value is estimated based on the selling prices anticipated for the homes.

⁽²⁾	The commitment amount does not include letters of credit and cash bonds.

⁽³⁾	The loan to value ratio is calculated by taking the outstanding amount and dividing by the appraised value calculated as described above.

⁽⁴⁾	Represents the weighted average loan to value ratio of the loans.

Credit Quality Information

The following tables present credit-related information at the “class” level in accordance with FASB Accounting Standard Codification 310-10-50, “Disclosures about the Credit Quality of Finance Receivables and the Allowance for Credit Losses.” See our 2021 Form 10-K, as filed with the SEC, for more information.

Gross finance receivables – By risk rating:

	March 31, 2022		December 31, 2021

Pass	$	47,117	$	38,893
Special mention		1,003		2,344
Classified – accruing		–		–
Classified – nonaccrual		7,960		9,526

Total	$	56,080	$	50,763

Finance Receivables – Method of impairment calculation:

	March 31, 2022		December 31, 2021

Performing loans evaluated individually	$	18,767	$	16,495
Performing loans evaluated collectively		29,354		24,742
Non-performing loans without a specific reserve		1,363		596
Non-performing loans with a specific reserve		6,596		8,930

Total evaluated collectively for loan losses	$	56,080	$	50,763

As March 31, 2022 and December 31, 2021, there were no loans acquired with deteriorated credit quality.

F-8

Impaired Loans

The following is a summary of our impaired non-accrual commercial construction loans as of March 31, 2022 and December 31, 2021.

	March 31, 2022			December 31, 2021

Unpaid principal balance (contractual obligation from customer)	$	8,127		$	10,035
Charge-offs and payments applied		(167	)		(509	)
Gross value before related allowance		7,960			9,526
Related allowance		(1,751	)		(1,825	)
Value after allowance	$	6,209		$	7,701

Concentrations

Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of loans receivable. Our concentration risks for our top three customers listed by geographic real estate market are summarized in the table below:

March 31, 2022

December 31, 2021

Percent of

Borrower

Loan

Borrower

Loan

City

Commitments

City

Commitments

Highest concentration risk

Pittsburgh, PA

Second highest concentration risk

Cape Coral, FL

Orlando, FL

Third highest concentration risk

Orlando, FL

Spokane, WA

4. Real Estate Investment Assets

The following table is a roll forward of real estate investment assets:

	Three Months Ended March 31, 2022			Year Ended December 31, 2021			Three Months Ended March 31, 2021

Beginning balance	$	1,651		$	1,181		$	1,181
Deposits from real estate investments		(185	)		(200	)		–
Additions for construction/development		241			670			4
Ending balance	$	1,707		$	1,651		$	1,185

F-9

5. Foreclosed Assets

The following table is a roll forward of foreclosed assets:

	Three Months Ended March 31, 2022			Year Ended December 31, 2021			Three Months Ended March 31, 2021

Beginning balance	$	2,724		$	4,449		$	4,449
Transfers (to) from loan receivables, net		(1,017	)		791			274
Additions for construction/development		115			818			257
Sale proceeds		–			(3,418	)		(1,276	)
Loss on foreclosure		–			(47	)		–
Loss on sale of foreclosed assets		–			(92	)		(18	)
Gain on foreclosure		–			67			–
Gain on sale of foreclosed assets		–			166			88
Impairment loss on foreclosed assets		–			(10	)		(10	)
Ending balance	$	1,822		$	2,724		$	3,764

6. Borrowings

The following table displays our borrowings and a ranking of priority:

	Priority Rank	March 31, 2022		December 31, 2021
Borrowing Source
Purchase and sale agreements and other secured borrowings	1	$	22,599	$	19,165
Secured lines of credit from affiliates	2		545		859
Unsecured line of credit (senior)	3		500		1,250
Other unsecured debt (senior subordinated)	4		1,094		1,053
Unsecured Notes through our public offering, gross	5		20,038		20,636
Other unsecured debt (subordinated)	6		5,045		4,693
Other unsecured debt (junior subordinated)	7		447		447

Total		$	50,268	$	48,103

The following table shows the maturity of outstanding debt as of March 31, 2022:

Year Maturing	Total Amount Maturing		Public Offering		Other Unsecured		Secured Borrowings
2022	$	28,561	$	$5,518	$	703	$	22,340
2023		5,186		3,601		1,514		71
2024		9,682		5,468		4,087		127
2025		5,568		5,088		398		82
2026 and thereafter		1,271		363		384		524
Total	$	50,268	$	$20,038	$	7,086	$	23,144

Secured Borrowings

Lines of Credit

As of March 31, 2022 and December 31, 2021, the Company had $545 and $859 borrowed against its lines of credit from affiliates, respectively, which have a total limit of $2,500.

None of our lines of credit have given us notice of nonrenewal during the first quarter of 2022, and the lines will continue to automatically renew unless notice of nonrenewal is given by a lender.

F-10

Secured Deferred Financing Costs

The Company had secured deferred financing costs of $7 and $8 as of March 31, 2022 and December 31, 2021, respectively.

Borrowings secured by loan assets are summarized below:

	March 31, 2022				December 31, 2021
	Book Value of Loans which Served as Collateral		Due from Shepherd’s Finance to Loan Purchaser or Lender		Book Value of Loans which Served as Collateral		Due from Shepherd’s Finance to Loan Purchaser or Lender
Loan Purchaser
Builder Finance	$	7,457	$	5,248	$	4,847	$	2,969
S.K. Funding		9,821		6,500		8,084		5,500

Lender
Shuman		712		125		566		125
Jeff Eppinger		3,461		1,500		3,328		1,500
R. Scott Summers		1,900		847		1,475		847
John C. Solomon		1,122		563		1,139		563
Judith Y. Swanson		11,495		7,000		9,803		6,841

Total	$	35,968	$	21,783	$	29,242	$	18,345

Unsecured Borrowings

Unsecured Notes through the Public Offering (“Notes Program”)

	Three Months Ended March 31, 2022			Year Ended December 31, 2021			Three Months Ended March 31, 2021

Gross Notes outstanding, beginning of period	$	20,636		$	21,482		$	21,482
Notes issued		380			7,876			2,627
Note repayments / redemptions		(978	)		(8,722	)		(2,027	)

Gross Notes outstanding, end of period	$	20,038		$	20,636		$	22,082

Less deferred financing costs, net		(380	)		(367	)		(409	)

Notes outstanding, net	$	19,658		$	20,269		$	21,673

F-11

The following is a roll forward of deferred financing costs:

	Three Months Ended March 31, 2022			Year Ended December 31, 2021			Three Months Ended March 31, 2021

Deferred financing costs, beginning balance	$	1,061		$	942		$	942
Additions		76			119			35
Deferred financing costs, ending balance		1,137			1,061			977
Less accumulated amortization		(757	)		(694	)		(568	)
Deferred financing costs, net	$	380		$	367		$	409

The following is a roll forward of the accumulated amortization of deferred financing costs:

	Three Months Ended March 31, 2022		Year Ended December 31, 2021		Three Months Ended March 31, 2021

Accumulated amortization, beginning balance	$	694	$	526	$	526
Additions		63		168		42
Accumulated amortization, ending balance	$	757	$	694	$	568

Other Unsecured Debts

Our other unsecured debts are detailed below:

					Principal Amount Outstanding as of
Loan	Maturity Date	Interest Rate⁽¹⁾			March 31, 2022		December 31, 2021
Unsecured Note with Seven Kings Holdings, Inc.	Demand⁽²⁾		9.5	%	$	500	$	500
Unsecured Line of Credit from Swanson	July 2022		6.0	%		-		159
Unsecured Line of Credit from Builder Finance, Inc.	January 2023		10.0	%		-		750
Subordinated Promissory Note	December 2021		10.5	%				-
Subordinated Promissory Note	April 2024		10.0	%		100		100
Subordinated Promissory Note	August 2022		11.0	%		200		200
Subordinated Promissory Note	February 2023		10.0	%		600		600
Subordinated Promissory Note	June 2023		10.0	%		400		400
Subordinated Promissory Note	March 2024		9.75	%		500		-
Subordinated Promissory Note	December 2022		5.0	%		3		3
Subordinated Promissory Note	December 2023		11.0	%		20		20
Subordinated Promissory Note	February 2024		11.0	%		20		20
Subordinated Promissory Note	January 2025		10.0	%		15		15
Subordinated Promissory Note	January 2026		8.0	%		10		-
Subordinated Promissory Note	November 2023		9.5	%		200		200
Subordinated Promissory Note	October 2024		10.0	%		700		700
Subordinated Promissory Note	December 2024		10.0	%		100		100
Subordinated Promissory Note	April 2025		10.0	%		202		202
Subordinated Promissory Note	July 2023		8.0	%		100		100
Subordinated Promissory Note	July 2024		5.0	%		1,500		1,500
Subordinated Promissory Note	September 2023		7.0	%		94		94
Subordinated Promissory Note	October 2023		7.0	%		100		100
Subordinated Promissory Note	December 2025		8.0	%		180		180
Senior Subordinated Promissory Note	March 2022⁽³⁾		10.0	%		-		334
Senior Subordinated Promissory Note	March 2026⁽³⁾		8.0	%		375		-
Senior Subordinated Promissory Note	October 2024⁽⁴⁾		1.0	%		720		720
Junior Subordinated Promissory Note	October 2024⁽⁴⁾		20.0	%		447		447
					$	7,086	$	7,444

⁽¹⁾	Interest rate per annum, based upon actual days outstanding and a 365/366-day year.

⁽²⁾	Due six months after lender gives notice.

⁽³⁾	Lender may require us to repay $20 of principal and all unpaid interest with 10 days’ notice.

⁽⁴⁾	These notes were issued to the same holder and, when calculated together, yield a blended return of 10% per annum.

F-12

7. Redeemable Preferred Equity

The following is a roll forward of our Series C cumulative preferred equity (“Series C Preferred Units”):

	Three Months Ended March 31, 2022			Year Ended December 31, 2021			Three Months Ended March 31, 2021

Beginning balance	$	5,014		$	3,582		$	3,582
Additions from new investment		-			1,000			300
Distributions		(31	)		(101	)		(14	)
Additions from reinvestments		151			533			115

Ending balance	$	5,134		$	5,014		$	3,983

The following table shows the earliest redemption options for investors in our Series C Preferred Units as of March 31, 2022:

Year Maturing	Total Amount Redeemable
2024	$	3,329
2025		414
2026		309
2027		1,082

Total	$	$5,134

8. Members’ Capital

There are currently two classes of equity units outstanding that the Company classifies as Members’ Capital: Class A common units (“Class A Common Units”) and Series B cumulative preferred units (“Series B Preferred Units”). As of March 31, 2022, the Class A Common Units are held by eight members, all of whom have no personal liability. All Class A common members have voting rights in proportion to their capital account. There were 2,629 Class A Common Units outstanding as of March 31, 2022 and December 31, 2021.

The Series B Preferred Units were issued to the Hoskins Group through a reduction in a loan issued by the Hoskins Group to the Company. In December 2015, the Hoskins Group agreed to purchase 0.1 Series B Preferred Units for $10 at each closing of a lot to a third party in the Hamlets and Tuscany subdivisions. As of March 31, 2022, the Hoskins Group owned a total of 18.3 Series B Preferred Units, which were issued for a total of $1,830.

F-13

9. Related Party Transactions

10. Commitments and Contingencies

Unfunded commitments to extend credit, which have similar collateral, credit risk, and market risk to our outstanding loans, were $23,455 and $22,902 at March 31, 2022 and December 31, 2021, respectively.

11. Selected Quarterly Condensed Consolidated Financial Data (Unaudited)

Summarized unaudited quarterly condensed consolidated financial data for the quarters of 2022 and 2021 are as follows:

	Quarter 1		Quarter 4		Quarter 3		Quarter 2		Quarter 1
	2022		2021		2021		2021		2021

Net interest income	$	1,111	$	958	$	830	$	625	$	411
Loan loss provision		74		246		83		45		214
Net interest income after loan loss provision		1,037		712		747		580		197
Gain on sale of foreclosed assets		–		1		64		13		88
Gain on foreclosure of assets		–		67		–		–		–
Gain on extinguishment of debt		–		–		361		–		10
SG&A expense		695		415		483		438		537
Depreciation and amortization		12		12		12		13		16
Loss on sale of foreclosed assets		–		23		–		51		18
Loss on foreclosure of assets		–		47		–		–		–
Impairment loss on foreclosed assets		–		–		–		–		10
Net income (loss)	$	330	$	283	$	677	$	91	$	(286	)

12. Non-Interest Expense Detail

The following table displays our selling, general and administrative (“SG&A”) expenses:

	For the Three Months Ended March 31,
	2022		2021
Selling, general and administrative expenses
Legal and accounting	$	119	$	103
Salaries and related expenses		400		209
Board related expenses		25		25
Advertising		20		9
Rent and utilities		15		9
Loan and foreclosed asset expenses		34		113
Travel		39		24
Other		43		45
Total SG&A	$	695	$	537

13. Subsequent Events

Management of the Company has evaluated subsequent events through May 12, 2022, the date these interim condensed consolidated financial statements were issued.

F-14

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