424B3 1 form424b3.htm

Filed pursuant to Rule 424(b)(3)

File No. 333-224557

SHEPHERD’S FINANCE, LLC

SUPPLEMENT NO. 3 DATED August 11, 2021

TO THE PROSPECTUS DATED April 28, 2021

This document supplements, and should be read in conjunction with, the prospectus of Shepherd’s Finance, LLC (the “Company,” “we,” or “our”) dated April 28, 2021 and Supplement No. 2 dated July 8, 2021, which amended and superseded all prior supplements to the prospectus. 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 and six months ended June 30, 2021; and
	●	our unaudited condensed consolidated financial statements as of and for the three and six months ended June 30, 2021.

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 August 10, 2021, we have issued approximately $24.6 million of Notes in our Current Offering. As of August 10, 2021, approximately $45.4 million of Notes remain available for sale to the public under our Current Offering. On November 5, 2020, our board of managers approved an extension of the Current Offering to March 22, 2022. Therefore, the Current Offering will not last beyond March 22, 2022, unless further extended as permitted under applicable law. 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 “2020 Financial Statements”) included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020 (the “2020 Form 10-K”).

Overview

During the six months ended June 30, 2021, the Company continued to focus on specific issues that arose in 2020, which were primarily due to the pandemic and more specifically the reduction of non-interest earning assets. As of June 30, 2021, loans classified as non-accrual were 14 or $7,614 compared to 46 or $12,993 for the same period in the prior year.

While the Company continues to face COVID-19 risks as it related to the economy and the homebuilding industry, management made the decision during the six months ended June 30, 2021 to focus on the following three areas:

	1.	Decrease the amount of non-interest-bearing assets, which includes cash, our foreclosed assets and classified non-accrual loans or impaired loans receivables;
	2.	Increase loan originations which were lower during the year ended December 31, 2020 due primarily to COVID-19; and
	3.	Maintain liquidity to fund new loan originations and for the completion of construction costs for existing loans.

We anticipate that the housing market in most of the areas in which we do business will be strong despite the impact of COVID-19. We also anticipate that the losses we incurred in principal related to COVID-19 will not continue, and that the lack of interest due to non-performing assets from COVID-19 will decrease significantly in the third quarter of 2021.

We had $45,533 and $46,405 in loan assets as of June 30, 2021 and December 31, 2020, respectively. In addition, as of June 30, 2021, we had 237 construction loans in 23 states with 68 borrowers and 11 development loans in six states with 10 borrowers.

Net cash provided by operations increased $944 for the six months ended June 30, 2021 as compared to the same period of 2020. Our increase in operating cash flow was due primarily to the change in loan origination fees, net.

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 2020 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, 2020 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.

Change in Fair Value Assumption	June 30, 2021 Loan Loss Provision Higher/(Lower)
Increasing fair value of the real estate collateral by 35%*	$	–
Decreasing fair value of the real estate collateral by 35%**	$	(2,592	)

* 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 $45,533.

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).

Change in Fair Value Assumption

June 30, 2021

Foreclosed

Assets Higher/(Lower)

Increasing fair value of the foreclosed assets by 35%*

Decreasing fair value of the foreclosed assets by 35%**

(1,073

)

* 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 $3,065.

Interest Spread

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

	Three Months Ended										Six Months Ended
	June 30,										June 30,
	2021					2020					2021					2020
Interest Income					*					*					*					*
Estimated interest income	$	1,531		12	%	$	1,915		14	%	$	3,039		12	%	$	4,006		14	%
Estimated unearned interest income due to COVID-19		(227	)	(2	)%		(402	)	(3	)%		(494	)	(2	)%		(402	)	(1	)%
Write-offs due to COVID-19		-		-	%		(469	)	(3	)%		-		-	%		(469	)	(2	)%
Interest income on loans	$	1,304		10	%	$	1,044		8	%	$	2,545		10	%	$	3,135		11	%

Fee income on loans		870		7	%		432		3	%		1,598		6	%		1,037		4	%
Deferred loan fees		(230	)	(2	)%		(120	)	(1	)%		(421	)	(1	)%		(241	)	(1	)%
Fee income on loans, net		640		5	%		312		2	%		1,177		5	%		796		3	%

Interest and fee income on loans		1,944		15	%		1,356		10	%		3,722		15	%		3,931		14	%

Interest expense unsecured		801		6	%		735		5	%		1,611		6	%		1,463		5	%
Interest expense secured		518		4	%		810		6	%		1,075		5	%		1,627		6	%
Amortization offering costs		39		-	%		39		-	%		80		-	%		79		-	%
Interest expense		1,358		10	%		1,584		11	%		2,766		11	%		3,169		11	%
Net interest income (spread)		586		5	%		(228	)	(1	)%		956		4	%		762		3	%

Weighted average outstanding loan asset balance	$	50,222				$	53,716				$	50,247				$	55,736

* Annualized amount as percentage of the weighted average outstanding gross loan balance.

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

● Difference between the interest rate received (on our loan assets) and the interest rate paid (on our borrowings). The loans 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 was 10% for both the quarter and six months ended June 30, 2021 compared to 8% and 11% for the same periods of 2020. During the quarter ended June 30, 2021 interest income on loans increased 2% compared to the same period of 2020 due primarily to COVID-19 related write offs which was partially offset by fewer loans paying higher interest due to aging. During the six months ended June 30, 2021 interest income on loans decreased 1% compared to the same period of 2020 due primarily to lower outstanding loan balances which pay interest.

Interest expense decreased to 10% for the quarter ended June 30, 2021 compared to the same period of 2020 which was due primarily to management’s decision to paydown certain notes payables with higher interest rates. The amount of notes payable with higher interest rates is expected to decrease over the next quarter as we continue to pay down outstanding debt.

We anticipate our standard margin to be generally 3% and 7% on all future construction loans and all development loans, respectively, which yields a blended margin of approximately 3.9%.

● 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 do not recognize a loan fee. When loans terminate before their expected maturity, the remaining fee is recognized at the termination of the loan. Faster turning loans typically yield a higher fee income percentage. The increase to 7% for the quarter ended June 30, 2021 compared to 3% for the same period in the prior year is primarily due to having fewer old loans (which are fully amortized) and more faster turning loans.

For both the quarter and six months ended June 30, 2021, fee income increased to 5% compared to 2% and 3% for the quarter and six months ended June 30, 2020, respectively. The increase in fee income was primarily due to higher loan originations.

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

As of June 30, 2021 and 2020, we had 14 and 46 impaired loans in the aggregate gross amount of $7,614 and $12,993 not paying interest, respectively.

Foreclosed assets do not provide a monthly interest return. As of June 30, 2021 and 2020, foreclosed assets were $3,065 and $5,022, 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 sell our assets following completion of construction.

Cash also does not yield a return. We are working to reduce the amount of debt we have to reduce our cash, while maintaining a responsible level of liquidity to cover our unfunded commitments on loans and cash needs for operations and interest.

Non-Interest Income

Gain on Sale of Foreclosed Assets

During the quarters ended June 30, 2021 and 2020, we recognized $13 and $3, respectively, as a gain on the sale of foreclosed assets.

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 for $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:

	Three Months Ended June 30,				Six Months Ended June 30,
	2021		2020		2021		2020
Legal and accounting	$	23	$	42	$	126	$	181
Salaries and related expenses		119		206		328		484
Board related expenses		25		25		50		50
Advertising		52		15		61		36
Rent and utilities		13		10		22		23
Loan and foreclosed asset expenses		124		99		237		234
Travel		36		23		60		82
Other		46		42		91		79
Total SG&A	$	438	$	462	$	975	$	1,169

Our SG&A expense decreased $24 and $194 for the quarter and six months ended June 30, 2021, respectively, compared to the same periods of 2020 due significantly to the following:

●

Salaries and related expenses decreased for the quarter and six months ended June 30, 2021 by $87 and $156, respectively, compared to the same periods of 2020. The decrease was primarily due to the employee retention credit recognized during the second quarter of 2021 related to the first quarter of 2021 of $96; and

●

Loan and foreclosed asset expenses increased for the quarter and six months ended June 30, 2021 by $25 and $3, respectively, compared to the same periods of 2020 due to additional real estate owned asset expenses for taxes and insurance.

Loss on the Sale of Foreclosed Assets

During the quarters ended June 30, 2021 and 2020, we recognized $51 and $0, respectively, as a loss on the sale of foreclosed assets. The loss on sale of foreclosed assets as of June 30, 2021 related to the sale of two properties from two separate original borrowers.

Impairment Loss on Foreclosed Assets

During the quarters ended June 30, 2021 and 2020, impairment loss on foreclosed assets was $0 and $91, 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 June 30, 2021:

State	Number of Borrowers		Number of Loans		Value of Collateral⁽¹⁾		Commitment Amount		Amount Outstanding		Loan to Value Ratio⁽²⁾			Loan Fee
Arizona		2		3	$	476		697		301		146	%		5	%
Connecticut		2		6		2,288		1,546		753		68	%		5	%
Delaware		1		6		5,960		2,122		1,375		36	%		5	%
Florida		18		72		24,893		18,913		12,741		76	%		5	%
Georgia		1		1		760		388		23		51	%		5	%
Idaho		2		2		980		624		297		64	%		5	%
Illinois		2		2		1,890		1,199		627		63	%		5	%
Indiana		1		2		1,149		804		218		70	%		5	%
Michigan		2		12		3,091		2,453		1,625		79	%		5	%
Mississippi		1		1		240		189		189		79	%		5	%
Nevada		1		1		676		335		18		50	%		5	%
New Jersey		1		8		2,807		2,519		1,893		90	%		5	%
New York		2		2		1,159		833		811		72	%		5	%
North Carolina		9		13		5,684		3,817		1,780		67	%		5	%
Ohio		2		10		3,234		2,197		1,135		68	%		5	%
Oregon		2		14		5,007		3,478		2,169		69	%		5	%
Pennsylvania		3		23		21,900		13,543		9,406		62	%		5	%
South Carolina		9		37		8,911		6,222		3,269		70	%		5	%
Tennessee		2		2		786		529		441		67	%		5	%
Texas		2		6		2,755		2,042		1,224		74	%		5	%
Utah		1		3		699		489		442		70	%		5	%
Virginia		1		1		505		353		126		70	%		5	%
Washington		1		10		5,220		3,435		1,003		66	%		5	%
Total		68		237	$	101,070	$	68,727	$	41,866		68	%⁽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, 2020:

State	Number of Borrowers		Number of Loans		Value of Collateral⁽¹⁾		Commitment Amount		Gross Amount Outstanding		Loan to Value Ratio⁽²⁾			Loan Fee
Arizona		3		4	$	1,821	$	1,503	$	1,004		60	%		5	%
Connecticut		1		1		515		382		262		65	%		5	%
Delaware		1		1		585		409		187		70	%		5	%
Florida		16		80		25,779		21,193		16,201		82	%		5	%
Georgia		3		3		1,300		839		476		65	%		5	%
Illinois		2		2		1,890		1,199		474		60	%		5	%
Michigan		4		9		2,451		1,942		805		79	%		5	%
Mississippi		1		1		240		189		166		79	%		5	%
New Jersey		1		5		1,357		1,339		928		99	%		5	%
New York		3		2		1,184		814		845		69	%		5	%
North Carolina		6		18		4,519		3,123		2,059		69	%		5	%
Ohio		3		8		2,703		2,020		1,393		75	%		5	%
Oregon		1		2		1,217		852		238		70	%		5	%
Pennsylvania		3		24		22,791		13,593		9,825		60	%		5	%
South Carolina		8		27		7,284		4,930		3,195		68	%		5	%
Tennessee		3		5		2,169		1,463		509		67	%		5	%
Texas		3		8		2,806		2,106		1,191		75	%		5	%
Utah		2		6		2,583		1,822		1,542		71	%		5	%
Virginia		1		1		505		353		79		70	%		5	%
Washington		1		5		2,030		1,311		508		65	%		5	%
Wisconsin		1		1		539		332		332		62	%		5	%
Total		67		213	$	86,268	$	61,714	$	42,219		72	%⁽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 June 30, 2021:

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		2	$	7,591	$	8,200	$	6,180		81	%		varies
Delaware		1		1		321		147		147		46	%		7	%
Florida		4		4		1,990		1,788		984		49	%		7	%
North Carolina		1		1		400		260		242		60	%		7	%
South Carolina		2		2		1,256		711		330		26	%		7	%
Texas		1		1		209		250		6		3	%		7	%
Total		10		11	$	11,767	$	11,356	$	7,889		67	%⁽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 $1,690 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, 2020:

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		2	$	7,361	$	8,200	$	6,175		84	%		7	%
Florida		3		3		1,373		1,193		1,029		87	%		7	%
New York		1		1		1,238		451		452		36	%		7	%
North Carolina		1		1		400		260		136		34	%		7	%
South Carolina		2		2		1,256		711		438		35	%		7	%
Total		8		9	$	11,628	$	10,815	$	8,230		71	%⁽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 $1,630 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 June 30, 2021 and December 31, 2020:

	June 30, 2021			December 31, 2020

Loans receivable, gross	$	49,755		$	50,449
Less: Deferred loan fees		(1,669	)		(1,092	)
Less: Deposits		(1,276	)		(1,337	)
Plus: Deferred origination costs		442			353
Less: Allowance for loan losses		(1,719	)		(1,968	)

Loans receivable, net	$	45,533		$	46,405

The allowance for loan losses as of June 30, 2021 was $1,719, of which $167 is related to loans without specific reserves. The Company recorded specific reserves for loans impaired due to impacts from COVID-19 of $1,413, special mention loans of $60, and impaired loans not due to impacts from COVID-19 of $79. As of December 31, 2020, the allowance was $1,968, of which $151 is related to loans without specific reserves.

During the quarter and six months ended June 30, 2021, we incurred $227 and $509 in direct charge-offs, respectively, compared to $72 for the year ended December 31, 2020.

The following is a roll forward of combined loans:

	Six Months Ended June 30, 2021			Year Ended December 31, 2020			Six Months Ended June 30, 2020

Beginning balance	$	46,405		$	55,369		$	55,369
Additions		21,776			46,249			18,730
Principal collections		(23,171	)		(50,079	)		(22,293	)
Transferred to foreclosed assets		(274	)		(2,118	)		-
Transferred to real estate investments		-			(1,140	)		(1,140	)
Change in builder deposit		60			16			387
Change in loan loss provision		249			(1,805	)		(1,459	)
Change in loan fees, net		488			(87	)		203
Ending balance	$	45,533		$	46,405		$	49,797

Finance Receivables – By risk rating:

	June 30, 2021		December 31, 2020

Pass	$	39,234	$	35,544
Special mention		2,907		3,089
Classified – accruing		–		–
Classified – nonaccrual		7,614		11,816

Total	$	49,755	$	50,449

Finance Receivables – Method of impairment calculation:

	June 30, 2021		December 31, 2020

Performing loans evaluated individually	$	15,907	$	16,412
Performing loans evaluated collectively		26,233		22,221
Non-performing loans without a specific reserve		875		1,518
Non-performing loans with a specific reserve to COVID-19		6,490		9,555
Other non-performing loans with a specific reserve		250		743

Total evaluated collectively for loan losses	$	49,755	$	50,449

As of June 30, 2021, and December 31, 2020, there were no loans acquired with deteriorated credit quality.

Impaired Loans

The following is a summary of our impaired nonaccrual commercial construction loans as of June 30, 2021 and December 31, 2020.

	June 30, 2021			December 31, 2020

Unpaid principal balance (contractual obligation from customer)	$	8,123		$	11,888
Charge-offs and payments applied		(509	)		(72	)
Gross value before related allowance		7,614			11,816
Related allowance		(1,492	)		(1,698	)
Value after allowance	$	6,122		$	10,118

Below is an aging schedule of loans receivable as of June 30, 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)		234	$	42,140		84.7	%
60-89 days				-		-	%
90-179 days				-		-	%
180-269 days		14		7,615		15.3	%

Subtotal		248	$	49,755		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		248	$	49,755		100	%

Below is an aging schedule of loans receivable as of June 30, 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.		234	$	42,140		84.7	%
60-89 days				-		-	%
90-179 days				-		-	%
180-269 days		14		7,615		15.3	%

Subtotal		248	$	49,755		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		248	$	49,755		100	%

Below is an aging schedule of loans receivable as of December 31, 2020, 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)		194	$	38,956		77.2	%
60-89 days		-		-		-	%
90-179 days		-		-		-	%
180-269 days		28		11,493		22.8	%

Subtotal		222	$	50,449		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		222	$	50,449		100	%

Below is an aging schedule of loans receivable as of December 31, 2020, 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.		194	$	38,956		77.2	%
60-89 days		-		-		-	%
90-179 days		-		-		-	%
180-269 days		28		11,493		22.8	%

Subtotal		222	$	50,449		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		222	$	50,449		100	%

Below is a roll forward of foreclosed assets:

	Six Months Ended June 30, 2021			Year Ended December 31, 2020			Six Months Ended June 30, 2020

Beginning balance	$	4,449		$	4,916		$	4,916
Additions from loans		274			2,118			-
Additions for construction/development		439			1,410			686
Sale proceeds		(2,119	)		(3,697	)		(348	)
Loss on foreclosure		-			(54	)		(35	)
Loss on sale		(69	)		(102	)		-
Gain on foreclosure		-			52			3
Gain on sale		101			160			(91	)
Impairment loss on foreclosed assets		(10	)		(290	)		(109	)
Impairment loss on foreclosed assets due to COVID-19		-			(64	)		-
Ending balance	$	3,065		$	4,449		$	5,022

During the six months ended June 30, 2021, we reclassed one construction loan from loans receivable to foreclosed assets compared to none during the same period of 2020.

In addition, during the quarter and six months ended June 30, 2021, we sold three and nine foreclosed assets, respectively, compared to one and two during the same periods of 2020.

Customer Interest Escrow

Below is a roll forward of interest escrow:

	Six Months Ended June 30, 2021			Year Ended December 31, 2020			Six Months Ended June 30, 2020

Beginning balance	$	510		$	643		$	643
Preferred equity dividends		106			83			74
Additions from Pennsylvania loans		297			1,173			713
Additions from other loans		488			448			82
Interest, fees, principal or repaid to borrower		(874	)		(1,837	)		(962	)
Ending balance	$	527		$	510		$	550

Related Party Borrowings

As of June 30, 2021, the Company had $1,250, $250, and $1,000 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 of Sales), respectively. A more detailed description is included in Note 7 to the 2020 Financial Statements. These borrowings are in notes payable secured, net of deferred financing costs on the interim condensed consolidated balance sheet.

Secured Borrowings

Lines of Credit

As of June 30, 2021, the Company had borrowed $0 on its lines of credit from affiliates, which have a total limit of $2,500.

None of our lines of credit (including with related parties and non-related parties) have given us notice of nonrenewal, and the lines will continue to automatically renew unless notice is given by a lender.

Summary

The borrowings secured by loan assets are summarized below:

	June 30, 2021				December 31, 2020
	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, Inc.	$	6,431	$	4,604	$	7,981	$	5,919
S.K. Funding, LLC		6,620		5,499		4,551		3,898

Lender
Shuman		1,818		1,325		1,916		1,325
Jeff Eppinger		990		200		2,206		1,500
Hardy Enterprises, Inc.		-		-		1,590		1,000
Gary Zentner		1,372		250		424		250
R. Scott Summers		1,542		847		1,259		847
John C. Solomon		940		563		743		563
Paul Swanson		11,288		7,000		9,381		6,685

Total	$	31,001	$	20,288	$	30,051	$	21,987

Unsecured Borrowings

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

On March 22, 2019, the Company terminated its second public offering and commenced its third public offering of fixed rate subordinated notes (the “Notes”). The effective interest rate on borrowings through our Notes Program at June 30, 2021 and December 31, 2020 was 9.90% and 10.38%, 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 mandatory early redemption options, subject to certain conditions, and all of our Notes have a mandatory early redemption option, subject to certain conditions. See Note 13 – Subsequent Events for a more detailed description of recent changes to our indenture to provide for the mandatory early redemption option for all Notes. The following table shows the roll forward of our Notes Program:

	Six Months Ended June 30, 2021			Year Ended December 31, 2020			Six Months Ended June 30, 2020

Gross Notes outstanding, beginning of period	$	21,482		$	20,308		$	20,308
Notes issued		6,330			7,691			5,668
Note repayments / redemptions		(6,213	)		(6,517	)		(5,199	)

Gross Notes outstanding, end of period	$	21,599		$	21,482		$	20,777

Less deferred financing costs, net		(407	)		(416	)		(456	)

Notes outstanding, net	$	21,192		$	21,066		$	20,321

The following is a roll forward of deferred financing costs:

	Six Months Ended June 30, 2021			Year Ended December 31, 2020			Six Months Ended June 30, 2020

Deferred financing costs, beginning balance	$	942		$	786		$	786
Additions		71			156			119
Disposals		–			–			–
Deferred financing costs, ending balance		1,013			942			905
Less accumulated amortization		(606	)		(526	)		(449	)
Deferred financing costs, net	$	407		$	416		$	456

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

	Six Months Ended June 30, 2021		Year Ended December 31, 2020			Six Months Ended June 30, 2020

Accumulated amortization, beginning balance	$	526	$	370		$	370
Additions		80		165			79
Disposals		–		(9	)		–
Accumulated amortization, ending balance	$	606	$	526		$	449

Other Unsecured Debts

Our other unsecured debts are detailed below:

					Principal Amount Outstanding as of
Loan	Maturity Date	Interest Rate⁽¹⁾			June 30, 2021		December 31, 2020
Unsecured Note with Seven Kings Holdings, Inc.	Demand⁽²⁾		9.5	%	$	500	$	500
Unsecured Line of Credit from Paul Swanson	October 2022		10.0	%		-		315
Subordinated Promissory Note	December 2021		10.5	%		146		146
Subordinated Promissory Note	April 2024		10.0	%		100		100
Subordinated Promissory Note	October 2022		10.0	%		-		174
Subordinated Promissory Note	August 2022		11.0	%		200		200
Subordinated Promissory Note	March 2023		11.0	%		169		169
Subordinated Promissory Note	February 2023		10.0	%		600		600
Subordinated Promissory Note	June 2023		10.0	%		400		-
Subordinated Promissory Note	December 2022		5.0	%		3		3
Subordinated Promissory Note	December 2023		11.0	%		35		20
Subordinated Promissory Note	February 2024		11.0	%		20		20
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		-
Senior Subordinated Promissory Note	March 2022⁽³⁾		10.0	%		334		352
Senior Subordinated Promissory Note	March 2022⁽⁴⁾		1.0	%		728		728
Junior Subordinated Promissory Note	March 2022⁽⁴⁾		22.5	%		417		417
Senior Subordinated Promissory Note	October 2024⁽⁵⁾		1.0	%		720		720
Junior Subordinated Promissory Note	October 2024⁽⁵⁾		20.0	%		447		447
					$	6,021	$	5,911

⁽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 11% per annum.

⁽⁵⁾	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) loan assets, net. The ratio of redeemable preferred equity plus members’ capital to loan assets, net was 12.9% for both the periods ending June 30, 2021 and December 31, 2020, respectively. The ratio decreased significantly due to losses related to COVID-19. We anticipate this ratio to increase as we retain earnings for the remainder of 2021.

Priority of Borrowings

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

	Priority Rank		June 30, 2021		December 31, 2020
Borrowing Source
Purchase and sale agreements and other secured borrowings		1	$	21,117	$	22,968
Secured line of credit from affiliates		2		–		–
Unsecured line of credit (senior)		3		500		500
PPP loan and EIDL advance		3		361		10
Other unsecured debt (senior subordinated)		4		1,782		1,800
Unsecured Notes through our public offering, gross		5		21,599		21,482
Other unsecured debt (subordinated)		5		2,876		2,747
Other unsecured debt (junior subordinated)		6		864		864

Total			$	49,099	$	50,371

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 248 and 222 combined loans outstanding as of June 30, 2021 and December 31, 2020, respectively. Gross loans receivable totaled $49,755 and $50,449 as of June 30, 2021 and December 31, 2020, respectively. Our unfunded commitments to extend credit, which have similar collateral, credit and market risk to our outstanding loans, were $26,860 and $19,495 as June 30, 2021 and December 31, 2020, respectively.

We anticipate an increase in our gross loan receivables over the 12 months subsequent to June 30, 2021 by directly increasing originations to new and existing customers. In addition, business competition has declined and, therefore, we believe the ability to return to historical levels may be achieved through the remainder of the year.

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 June 30, 2021		As of December 31, 2020
Secured debt	$	21,109	$	22,959
Unsecured debt		27,214		26,978
Equity		5,883		5,259
Cash		6,118		4,749

As of June 30, 2021 and December 31, 2020, cash was $6,118 and $4,749, respectively. During the six months ended June 30, 2021, the Company made the decision to pay down secured debt with high interest rates. The New Line of Credit Agreements decreased $2,300 to $1,860 as of June 30, 2021, compared to $4,159 as of December 31, 2020. Secured debt, net of deferred financing costs decreased $1,850 during the six months ended June 30, 2021 compared to December 31, 2020 primarily due to the New Secured Line of Credit Agreement payments which were offset by an increase in Purchase and Sale Agreements of $286 to $10,103 as of June 30, 2021 compared to $9,817 as of December 31, 2020.

Unsecured debt, net of deferred financing costs increased $236 during the six months ended June 30, 2021 compared to December 31, 2020 to $27,214 as of June 30, 2021 due primarily to an increased participation in our Notes Program of $127 and other unsecured debts of $110. We anticipate an increase in our unsecured debt through increased sales in the Notes Program during the 12 months subsequent to June 30, 2021.

In addition, in February 2021, we borrowed approximately $361 pursuant to the Paycheck Protection Program (“PPP”), created under the Coronavirus Aid, Relief, and Economic Security Act, or CARES Act. The PPP is intended to provide loans to qualified businesses to cover payroll and certain other identified costs. Funds from the loan may only be used for certain purposes, including payroll, benefits, rent, and utilities. All or a portion of the loan may be forgivable, as provided by the terms of the PPP. See Note 13 – Subsequent Events for additional information regarding forgiveness of the loan in August 2021.

Contractual Obligations

The following table shows the maturity of outstanding debt as of June 30, 2021:

Year Maturing	Total Amount Maturing		Public Offering		Other Unsecured⁽¹⁾		Secured Borrowings
2021	$	26,243	$	5,220	$	727	$	20,296
2022		7,351		5,412		1,923		16
2023		4,525		3,024		1,429		72
2024		7,098		4,884		2,087		127
2025 and thereafter		3,882		3,059		217		606
Total	$	49,099	$	21,599	$	6,383	$	21,117

⁽¹⁾

Other Unsecured includes our PPP Loan of $361 (described below) of which $80, $241, and $40, collectively, matures during 2021, 2022 and 2023, respectively. All or a portion of the PPP Loan may be forgiven.

The total amount maturing through the year ending December 31, 2021 is $26,243, which consists of secured borrowings of $20,296 and unsecured borrowings of $5,947.

Secured borrowings maturing through year ending December 31, 2021 significantly consist of loan purchase and sale agreements with two loan purchasers (Builder Finance, Inc. and S. K. Funding, LLC) and six lenders. Our secured borrowings are classified as maturing during 2021 primarily because the related collateral is demand loans. The following lists our secured facilities with maturity and renewal dates:

	●	Swanson – $7,000 due October 2022, will automatically renew unless notice is given;
	●	Shuman – $1,325 due July 2022, will automatically renew unless notice is given;
	●	S. K. Funding, LLC – $3,500 of the total due January 2022, will automatically renew unless notice is given;
	●	S. K. Funding, LLC – $2,000 with no expiration date;
	●	Builder Finance, Inc. – $4,604 with no expiration date;
	●	New LOC agreements – $1,860 generally one-month notice and six months to reduce principal balance to zero;
	●	Mortgage payable – $8 due monthly.

Unsecured borrowings due by December 31, 2021 consist of Notes issued pursuant to the Notes Program and other unsecured debt of $5,220 and $727, 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 77% of our Note holders reinvest upon maturity. Our other unsecured debt has historically renewed. For more information on other unsecured borrowings, see Note 6 – Borrowings. If other unsecured borrowings are not renewed in the future, we anticipate funding such maturities through investments in our Notes Program.

Series C cumulative preferred units (“Series C Preferred Units”) are redeemable by the Company at any time, upon a change of control or liquidation, or by the investor any time after 6 years from the initial date of purchase. The following table shows the earliest redemption options for investors in our Series C Preferred Units as of June 30, 2021:

Year Maturing	Total Amount Redeemable

2024	$	3,079
2025		379
2026		309
2027		824

Total	$	4,591

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 generally has a positive impact on our operations. When we lend initially, we are lending a percentage of a home’s expected value, based on historical sales. If those estimates prove to be low (in an inflationary market), the percentage we loaned of the value actually decreases, reducing potential losses on defaulted loans. The opposite is true in a deflationary housing price market. It is our opinion that values are average in many of the housing markets in the U.S. today, and our lending against these values is safer than loans made by financial institutions in 2006 to 2008. Our analysis of the COVID-19 impact on housing in the markets in which we do business is mixed. In many markets, our customers see demand as outpacing new housing starts. In Orlando, Florida (which is our second highest geographic concentration risk by borrower), there has been a significant lack of demand for housing sold by customers who sell more affordable homes, which has resulted in losses that we recognized in the second quarter of 2020. We note that nationwide, fewer first-time home buyers will qualify for government backed loans due to FICO score and other criteria changes.

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. This may cause our lending rates, which are based on our cost of funds, to be uncompetitive. High interest rates may also increase builder defaults, as interest payments may become a higher portion of operating costs for the builder. Higher short-term rates may increase the rates builders are charged by banks faster than our rates to the builder will grow, which might be a benefit for us. Below is a chart showing three-year U.S. treasury rates, which are being used by us here to approximate CD rates. The rates we are paying our investors are going down due to COVID-19, including the rate on our three-month Note which has additional redemption options but lower returns, because other alternative investments are paying lower rates. This in turn will lower the rates to our borrowers over time. We also anticipate some lower cost secured funding in the third quarter of 2020 which will also lower both our cost of funds and the rate we charge our customers.

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 June 30, 2021 and December 31, 2020, 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 June 30, 2021 (Unaudited) and December 31, 2020	F-1

Interim Condensed Consolidated Statements of Operations (Unaudited) for the Three and Six Months Ended June 30, 2021 and 2020	F-2

Interim Condensed Consolidated Statement of Changes in Members’ Capital (Unaudited) for the Six Months Ended June 30, 2021 and 2020 and for the Three Months Ended June 30, 2021 and 2020	F-3

Interim Condensed Consolidated Statements of Cash Flows (Unaudited) for the Six Months Ended June 30, 2021 and 2020	F-4

Notes to Consolidated Financial Statements	F-5

Shepherd’s Finance, LLC

Interim Condensed Consolidated Balance Sheets


(in thousands of dollars)	June 30, 2021			December 31, 2020
		(Unaudited)
Assets
Cash and cash equivalents	$	6,118		$	4,749
Accrued interest receivable		371			601
Loans receivable, net		45,533			46,405
Real estate investments		1,240			1,181
Foreclosed assets, net		3,065			4,449
Premises and equipment		887			903
Other assets		1,048			981
Total assets	$	58,262		$	59,269

Liabilities and Members’ Capital
Customer interest escrow	$	527		$	510
Accounts payable and accrued expenses		441			289
Accrued interest payable		2,727			3,158
Notes payable secured, net of deferred financing costs		21,109			22,959
Notes payable unsecured, net of deferred financing costs		27,214			26,978
PPP loan and EIDL advance		361			10
Due to preferred equity member		-			106
Total liabilities	$	52,379		$	54,010

Commitments and Contingencies (Note 10)

Redeemable Preferred Equity
Series C preferred equity	$	4,591		$	3,582

Members’ Capital
Series B preferred equity		1,690			1,630
Class A common equity		(398	)		47
Members’ capital	$	1,292		$	1,677

Total liabilities, redeemable preferred equity and members’ capital	$	58,262		$	59,269

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 and Six Months ended June 30, 2021 and 2020

	Three Months Ended						Six Months Ended
	June 30,						June 30,
(in thousands of dollars)	2021			2020			2021			2020
Interest Income
Interest and fee income on loans	$	1,944		$	1,356		$	3,722		$	3,931
Interest expense:
Interest related to secured borrowings		518			810			1,075			1,627
Interest related to unsecured borrowings		801			774			1,611			1,542
Interest expense		1,319			1,584			2,686			3,169

Net interest income (loss)		625			(228	)		1,036			762

Less: Loan loss provision		45			1,560			259			1,595

Net interest income (loss) after loan loss provision		580			(1,788	)		777			(833	)

Non-Interest Income
Gain on extinguishment of debt		-			-			10			-
Gain on sale of foreclosed assets		13			3			101			3

Total non-interest income		13			3			111			3

Income (Loss)		593			(1,785	)		888			(830	)

Non-Interest Expense
Selling, general and administrative		438			462			975			1,169
Depreciation and amortization		13			21			29			43
Loss on foreclosure of assets		-			-			-			35
Loss on sale of foreclosed assets		51			-			69			-
Impairment loss on foreclosed assets		-			91			10			200
Total non-interest expense		502			574			1,083			1,447

Net Income (Loss)	$	91		$	(2,359	)	$	(195	)	$	(2,277	)

Earned distribution to preferred equity holders		135			92			250			218

Net loss attributable to common equity holders	$	(44	)	$	(2,451	)	$	(445	)	$	(2,495	)

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 Six and Three Months Ended June 30, 2021 and 2020

For the Six Months Ended June 30, 2021 and 2020

(in thousands of dollars)	2021			2020

Members’ capital, beginning balance, December 31	$	1,677		$	4,188
Net loss less distributions to Series C preferred equity holders of $250 and $181		(445	)		(2,458	)
Contributions from Series B preferred equity holders		60			50
Earned distributions to Series B preferred equity holders		-			(37	)
Distributions to common equity holders		-			(217	)
Members’ capital, ending balance, June 30	$	1,292		$	1,526

For the Three Months Ended June 30, 2021 and 2020

(in thousands of dollars)	2021			2020

Members’ capital, beginning balance, March 31	$	1,286		$	3,927
Net loss less distributions to Series C preferred equity holders of $135 and $92		(44	)		(2,451	)
Contributions from Series B preferred equity holders		50			50
Earned distributions to Series B preferred equity holders		-			-
Distributions to common equity holders		-			-
Members’ capital, ending balance, June 30	$	1,292		$	1,526

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 Six Months Ended June 30, 2021 and 2020

	Six Months Ended June 30,
(in thousands of dollars)	2021			2020

Cash flows from operations
Net loss	$	(195	)	$	(2,277	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities
Amortization of deferred financing costs		80			79
Provision for loan losses		259			1,595
Change in loan origination fees, net		488			(203	)
Gain on sale of foreclosed assets		(101	)		(3	)
Loss on sale of foreclosed assets		69			35
Impairment and loss on foreclosed assets		10			200
Depreciation and amortization		29			43
Gain on extinguishment of debt		(10	)		-
Net change in operating assets and liabilities:
Other assets		(80	)		(83	)
Accrued interest receivable		230			394
Customer interest escrow		(89	)		(167	)
Accrued interest payable		(431	)		167
Accounts payable and accrued expenses		152			(313	)

Net cash provided by (used in) operating activities		411			(533	)

Cash flows from investing activities
Loan additions and principal collections, net		(149	)		3,040
Investment in foreclosed assets		(439	)		(686	)
Additions for construction in real estate investments		(59	)		-
Proceeds from the sale of foreclosed assets		2,119			348

Net cash provided by investing activities		1,472			2,702

Cash flows from financing activities
Contributions from preferred B equity holders		60			50
Contributions from preferred C equity holders		800			-
Distributions to preferred equity holders		(41	)		(24	)
Distributions to common equity holders		-			(217	)
Proceeds from secured notes payable		5,018			7,302
Repayments of secured notes payable		(7,183	)		(8,879	)
Proceeds from unsecured notes payable		6,373			6,604
Redemptions/repayments of unsecured notes payable		(5,830	)		(6,594	)
Proceeds from PPP Loan and EIDL Advance		361			371
Deferred financing costs paid		(72	)		(124	)

Net cash used in financing activities		(514	)		(1,511	)

Net increase in cash and cash equivalents		1,369			657

Cash and cash equivalents
Beginning of period		4,749			1,883
End of period	$	6,118		$	2,540

Supplemental disclosure of cash flow information
Cash paid for interest	$	3,117		$	3,002

Non-cash investing and financing activities
Earned by Series B preferred equity holders and distributed to customer interest escrow	$	106		$	74
Earned but not paid distributions of Series C preferred equity holders	$	250		$	181
Secured transferred to unsecured notes payable	$	315		$	1,116
Transfer of loan receivables to real estate investments	$	-		$	1,140
Foreclosure of assets transferred from loans receivable, net	$	274		$	-
EIDL advance forgiveness in reduction of debt	$	10		$	0

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 23 states as of June 30, 2021) to:

	●	construct single family homes,
	●	develop undeveloped land into residential building lots, and
	●	purchase and improve for sale older homes.

Basis of Presentation

The accompanying unaudited interim condensed consolidated financial statements for the period ended June 30, 2021 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, 2020 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, 2021. These unaudited interim condensed consolidated financial statements should be read in conjunction with the 2020 consolidated financial statements and notes thereto (the “2020 Financial Statements”) included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020 (the “2020 Form 10-K”). The accounting policies followed by the Company are set forth in Note 2 – Summary of Significant Accounting Policies in the 2020 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. 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 No. 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

Accounting Standards Adopted

FASB ASU 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement” amends the disclosure requirements of Topic 820, Fair Value Measurement, to remove disclosure of transfers between Level 1 and Level 2 of the fair value hierarchy and to include disclosure of the range and weighted average used in Level 3 fair value measurements, among other amendments. The ASU applies to all entities that are required to provide disclosures about recurring or non-recurring fair value measurements. Amendments should be applied retrospectively to all periods presented, except for certain amendments, which should be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. The effective date for the additional disclosures for calendar year-end public companies is January 1, 2020. ASU 2018-13 became effective for the Company on January 1, 2020. The adoption of ASU 2018-13 did not have a material impact on the Company’s consolidated financial statements.

2. Fair Value

The Company had no financial instruments measured at fair value on a recurring basis as of June 30, 2021 and December 31, 2020.

The following tables present the balances of non-financial instruments measured at fair value on a non-recurring basis as of June 30, 2021 and December 31, 2020.

	June 30, 2021				Quoted Prices in Active Markets for Identical		Significant Other Observable		Significant Unobservable
	Carrying		Estimated		Assets		Inputs		Inputs
	Amount		Fair Value		Level 1		Level 2		Level 3

Foreclosed assets, net	$	3,065	$	3,065	$	–	$	–	$	3,065
Impaired loans due to COVID-19, net		5,076		5,076		–		–		5,076
Other impaired loans, net		1,046		1,046		–		–		1,046
Total	$	9,187	$	9,187	$	–	$	–	$	9,187

	December 31, 2020				Quoted Prices in Active Markets for Identical		Significant Other Observable		Significant Unobservable
	Carrying Amount		Estimated Fair Value		Assets Level 1		Inputs Level 2		Inputs Level 3

Foreclosed assets	$	4,449	$	4,449	$	–	$	–	$	4,449
Impaired loans due to COVID-19, net		9,054		9,054		–		–		9,054
Other impaired loans, net		1,064		1,064		–		–		1,064
Total	$	14,567	$	14,567	$	–	$	–	$	14,567

F-6

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

	June 30, 2021				December 31, 2020
	Carrying		Estimated		Carrying		Estimated
	Amount		Fair Value		Amount		Fair Value
Financial Assets
Cash and cash equivalents	$	6,118	$	6,118	$	4,749	$	4,749
Loans receivable, net		45,533		45,533		46,405		46,405
Accrued interest on loans		371		371		601		601
Financial Liabilities
Customer interest escrow		527		527		510		510
Notes payable secured, net		21,109		21,109		22,959		22,959
Notes payable unsecured, net		27,214		27,214		26,978		26,978
PPP loan and EIDL advance		361		361		10		10
Accrued interest payable		2,727		2,727		3,158		3,158

3. Financing Receivables

Financing receivables are comprised of the following as of June 30, 2021 and December 31, 2020:

	June 30, 2021			December 31, 2020

Loans receivable, gross	$	49,755		$	50,449
Less: Deferred loan fees		(1,669	)		(1,092	)
Less: Deposits		(1,276	)		(1,337	)
Plus: Deferred origination costs		442			353
Less: Allowance for loan losses		(1,719	)		(1,968	)

Loans receivable, net	$	45,533		$	46,405

During the quarter and six months ended June 30, 2021, we incurred $227 and $509 in direct charge-offs, respectively, compared to $72 for the year ended December 31, 2020.

Commercial Construction and Development Loans

Construction Loan Portfolio Summary

As of June 30, 2021, the Company’s portfolio consisted of 237 commercial construction and 11 development loans with 68 borrowers in 23 states.

The following is a summary of the loan portfolio to builders for home construction loans as of June 30, 2021 and December 31, 2020:

Year

Number of

States

Number
of

Borrowers

Number of

Loans

Value of Collateral⁽¹⁾

Commitment Amount

Gross

Amount

Outstanding

Loan to Value

Ratio⁽²⁾

Loan Fee

2021

237

101,070

68,727

41,866

%⁽³⁾

2020

213

86,268

61,714

42,219

%⁽³⁾

⁽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 June 30, 2021 and December 31, 2020:

Year

Number of
States

Number

Borrowers

Number

of
Loans

Gross Value
of
Collateral⁽¹⁾

Commitment Amount⁽²⁾

Gross Amount

Outstanding

Loan to Value

Ratio⁽³⁾

Interest Spread

2021

11,767

11,356

7,889

%⁽⁴⁾

varies

2020

11,628

10,815

8,230

%⁽⁴⁾

⁽¹⁾	The value is determined by the appraised value adjusted for remaining costs to be paid. For June 30, 2021 and December 31, 2020, a portion of this collateral is $1,690 and $1,630, 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 ASC 310-10-50, “Receivables - Disclosures.” See our 2020 Form 10-K, as filed with the SEC, for more information.

Gross finance receivables – By risk rating:

	June 30, 2021		December 31, 2020

Pass	$	39,234	$	35,544
Special mention		2,907		3,089
Classified – accruing		–		–
Classified – nonaccrual		7,614		11,816

Total	$	49,755	$	50,449

Finance Receivables – Method of impairment calculation:

	June 30, 2021		December 31, 2020

Performing loans evaluated individually	$	15,907	$	16,412
Performing loans evaluated collectively		26,233		22,221
Non-performing loans without a specific reserve		875		1,518
Non-performing loans with a specific reserve to COVID-19		6,490		9,555
Other non-performing loans with a specific reserve		250		743

Total evaluated collectively for loan losses	$	49,755	$	50,449

F-8

As of June 30, 2021, and December 31, 2020, there were no loans acquired with deteriorated credit quality.

Impaired Loans

The following is a summary of our impaired nonaccrual commercial construction loans as of June 30, 2021 and December 31, 2020.

	June 30, 2021			December 31, 2020

Unpaid principal balance (contractual obligation from customer)	$	8,123		$	11,888
Charge-offs and payments applied		(509	)		(72	)
Gross value before related allowance		7,614			11,816
Related allowance		(1,492	)		(1,698	)
Value after allowance	$	6,122		$	10,118

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:

June 30, 2021

December 31, 2020

Percent of

Borrower

Loan

Borrower

Loan

City

Commitments

City

Commitments

Highest concentration risk

Pittsburgh, PA

26.4

Pittsburgh, PA

Second highest concentration risk

Orlando, FL

7.4

Orlando, FL

Third highest concentration risk

Spokane, WA

2.4

Cape Coral, FL

4. Real Estate Investment Assets

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

	Six Months Ended June 30, 2021		Year Ended December 31, 2020		Six Months Ended June 30, 2020

Beginning balance	$	1,181	$	–	$	–
Transfers from loans		–		1,140		1,140
Additions for construction/development		59		41		–
Ending balance	$	1,240	$	1,181	$	1,140

F-9

5. Foreclosed Assets

The following table is a roll forward of foreclosed assets:

	Six Months Ended June 30, 2021			Year Ended December 31, 2020			Six Months Ended June 30, 2020

Beginning balance	$	4,449		$	4,916		$	4,916
Additions from loans		274			2,118			-
Additions for construction/development		439			1,410			686
Sale proceeds		(2,119	)		(3,697	)		(348	)
Loss on foreclosure		-			(54	)		(35	)
Loss on sale		(69	)		(102	)		-
Gain on foreclosure		-			52			3
Gain on sale		101			160			(91	)
Impairment loss on foreclosed assets		(10	)		(290	)		(109	)
Impairment loss on foreclosed assets due to COVID-19		-			(64	)		-
Ending balance	$	3,065		$	4,449		$	5,022

6. Borrowings

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

	Priority Rank		June 30, 2021		December 31, 2020
Borrowing Source
Purchase and sale agreements and other secured borrowings		1	$	21,117	$	22,968
Secured line of credit from affiliates		2		–		–
Unsecured line of credit (senior)		3		500		500
PPP loan and EIDL advance		3		361		10
Other unsecured debt (senior subordinated)		4		1,782		1,800
Unsecured Notes through our public offering, gross		5		21,599		21,482
Other unsecured debt (subordinated)		5		2,876		2,747
Other unsecured debt (junior subordinated)		6		864		864

Total			$	49,099	$	50,371

The following table shows the maturity of outstanding debt as of June 30, 2021:

Year Maturing	Total Amount Maturing		Public Offering		Other Unsecured⁽¹⁾		Secured Borrowings
2021	$	26,243	$	5,220	$	727	$	20,296
2022		7,351		5,412		1,923		16
2023		4,525		3,024		1,429		72
2024		7,098		4,884		2,087		127
2025 and thereafter		3,882		3,059		217		606
Total	$	49,099	$	21,599	$	6,383	$	21,117

⁽¹⁾	Other Unsecured includes our PPP Loan of $361 (described below) of which $80, $241, and $40, collectively, matures during 2021, 2022 and 2023, respectively. All or a portion of the PPP Loan may be forgiven.

F-10

Secured Borrowings

Lines of Credit

As of June 30, 2021, the Company had borrowed $0 on its lines of credit from affiliates, which have a total limit of $2,500.

None of our lines of credit have given us notice of nonrenewal during the second quarter of 2021, 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 $8 for both periods ended June 30, 2021 and December 31, 2020.

Summary

Borrowings secured by commercial and development loan assets are summarized below:

	June 30, 2021				December 31, 2020
	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, Inc.	$	6,431	$	4,604	$	7,981	$	5,919
S.K. Funding, LLC		6,620		5,499		4,551		3,898

Lender
Shuman		1,818		1,325		1,916		1,325
Jeff Eppinger		990		200		2,206		1,500
Hardy Enterprises, Inc.		-		-		1,590		1,000
Gary Zentner		1,372		250		424		250
R. Scott Summers		1,542		847		1,259		847
John C. Solomon		940		563		743		563
Paul Swanson		11,288		7,000		9,381		6,685

Total	$	31,001	$	20,288	$	30,051	$	21,987

F-11

Unsecured Borrowings

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

	Six Months Ended June 30, 2021			Year Ended December 31, 2020			Six Months Ended June 30, 2020

Gross Notes outstanding, beginning of period	$	21,482		$	20,308		$	20,308
Notes issued		6,330			7,691			5,668
Note repayments / redemptions		(6,213	)		(6,517	)		(5,199	)

Gross Notes outstanding, end of period	$	21,599		$	21,482		$	20,777

Less deferred financing costs, net		(407	)		(416	)		(456	)

Notes outstanding, net	$	21,192		$	21,066		$	20,321

The following is a roll forward of deferred financing costs:

	Six Months Ended June 30, 2021			Year Ended December 31, 2020			Six Months Ended June 30, 2020

Deferred financing costs, beginning balance	$	942		$	786		$	786
Additions		71			156			119
Disposals		–			–			–
Deferred financing costs, ending balance		1,013			942			905
Less accumulated amortization		(606	)		(526	)		(449	)
Deferred financing costs, net	$	407		$	416		$	456

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

	Six Months Ended June 30, 2021		Year Ended December 31, 2020			Six Months Ended June 30, 2020

Accumulated amortization, beginning balance	$	526	$	370		$	370
Additions		80		165			79
Disposals		–		(9	)		–
Accumulated amortization, ending balance	$	606	$	526		$	449

F-12

Other Unsecured Debts

Our other unsecured debts are detailed below:

					Principal Amount Outstanding as of
Loan	Maturity Date	Interest Rate⁽¹⁾			June 30, 2021		December 31, 2020
Unsecured Note with Seven Kings Holdings, Inc.	Demand⁽²⁾		9.5	%	$	500	$	500
Unsecured Line of Credit from Paul Swanson	October 2022		10.0	%		-		315
Subordinated Promissory Note	December 2021		10.5	%		146		146
Subordinated Promissory Note	April 2024		10.0	%		100		100
Subordinated Promissory Note	October 2022		10.0	%		-		174
Subordinated Promissory Note	August 2022		11.0	%		200		200
Subordinated Promissory Note	March 2023		11.0	%		169		169
Subordinated Promissory Note	February 2023		10.0	%		600		600
Subordinated Promissory Note	June 2023		10.0	%		400		-
Subordinated Promissory Note	December 2022		5.0	%		3		3
Subordinated Promissory Note	December 2023		11.0	%		35		20
Subordinated Promissory Note	February 2024		11.0	%		20		20
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		-
Senior Subordinated Promissory Note	March 2022⁽³⁾		10.0	%		334		352
Senior Subordinated Promissory Note	March 2022⁽⁴⁾		1.0	%		728		728
Junior Subordinated Promissory Note	March 2022⁽⁴⁾		22.5	%		417		417
Senior Subordinated Promissory Note	October 2024⁽⁵⁾		1.0	%		720		720
Junior Subordinated Promissory Note	October 2024⁽⁵⁾		20.0	%		447		447
					$	6,021	$	5,911

⁽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 11% per annum.

⁽⁵⁾	These notes were issued to the same holder and, when calculated together, yield a blended return of 10% per annum.

7. Redeemable Preferred Equity

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

	Six Months Ended June 30, 2021			Year Ended December 31, 2020			Six Months Ended June 30, 2020

Beginning balance	$	3,582		$	2,959		$	2,959
Additions from new investment		800			300			-
Distributions		(41	)		(49	)		(24	)
Additions from reinvestment		250			372			180

Ending balance	$	4,591		$	3,582		$	3,115

F-13

The following table shows the earliest redemption options for investors in our Series C Preferred Units as of June 30, 2021:

Year Maturing	Total Amount Redeemable

2024	$	3,079
2025		379
2026		309
2027		824

Total	$	4,591

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 June 30, 2021, 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 June 30, 2021 and December 31, 2020.

Series B Preferred Units were initially issued to the Hoskins Group (consisting of Benjamin Marcus Homes, LLC, Investor’s Mark Acquisitions, LLC, and Mark L. Hoskins) 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 June 30, 2021, the Hoskins Group owned a total of 16.9 Series B Preferred Units, which were issued for a total of $1,690.

9. Related Party Transactions

As of June 30, 2021, the Company had $1,250, $250, and $1,000 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 of Sales), respectively. A more detailed description is included in Note 7 of our 2020 Financial Statements. These borrowings are in notes payable secured, net of deferred financing costs on the interim condensed consolidated balance sheet.

10. Commitments and Contingencies

Unfunded commitments for construction loans to extend credit, which have similar collateral, credit risk, and market risk to our outstanding loans, were $26,860 and $19,495 at June 30, 2021 and December 31, 2020, respectively.

11. Selected Quarterly Condensed Consolidated Financial Data (Unaudited)

Summarized unaudited quarterly condensed consolidated financial data for the quarters of 2021 and 2020 are as follows:

	Quarter 2		Quarter 1			Quarter 4		Quarter 3		Quarter 2			Quarter 1
	2021		2021			2020		2020		2020			2020

Net (loss) interest Income after Loan Loss Provision	$	580	$	197		$	792	$	319	$	(1,788	)	$	955
Non-Interest Income		13		98			379		230		3			-
SG&A Expense		438		537			648		367		462			708
Depreciation and Amortization		13		16			22		21		21			21
Loss on Foreclosure of Assets		–		–			–		–		–			35
Loss on Sale of Foreclosed Assets		51		18			16		51		–			–
Impairment Loss on Foreclosed Assets		–		10			241		6		91			109
Net income (loss)	$	91	$	(286	)	$	244	$	104	$	(2,359	)	$	82

F-14

12. Non-Interest Expense Detail

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

	For the Six Months Ended June 30,
	2021		2020
Selling, general and administrative expenses
Legal and accounting	$	126	$	181
Salaries and related expenses		328		484
Board related expenses		50		50
Advertising		61		36
Rent and utilities		22		23
Loan and foreclosed asset expenses		237		234
Travel		60		82
Other		91		79
Total SG&A	$	975	$	1,169

13. Subsequent Events

Management of the Company has evaluated subsequent events through August 5, 2021, the date these interim condensed consolidated financial statements were issued.

On July 27, 2021, the Company entered into Amendment No. 2 (the “Amendment”) to the Indenture (the “Indenture”) with U.S. Bank National Association, as trustee. Pursuant to the Amendment, the Company added additional redemption options in the Indenture for holders of a Note. Unless the subordination provisions in the Indenture restrict the Company’s ability to make the redemption, Note holders may require the Company to redeem all or a portion of their Note, regardless of amount, for a redemption price equal to the principal amount plus an amount equal to the unpaid interest thereon for such Note at the stated rate to the redemption date, upon one business day’s advance notice to the Company, but only if the holder immediately upon redemption invests the entirety of the proceeds from such redemption in another Note or another security then-offered by the Company, if any. In such event, the Note holder will not be subject to a holding period requirement or an interest penalty. These redemption options are in addition to the other redemption options described in the Indenture.

In August 2021, the full principal amount of our second PPP loan or approximately $361 and the accrued interest were forgiven by the U.S. Small Business Administration.

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