424B3 1 form424b3.htm

Filed pursuant to Rule 424(b)(3)

File No. 333-263759

SHEPHERD’S FINANCE, LLC

SUPPLEMENT NO. 1 DATED november 15, 2022

TO THE PROSPECTUS DATED september 16, 2022

This document supplements, and should be read in conjunction with, the prospectus of Shepherd’s Finance, LLC (the “Company,” “we,” or “our”) dated September 16, 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 and nine months ended September 30, 2022; and

●

our unaudited condensed consolidated financial statements as of and for the three and nine months ended September 30, 2022.

Status of Our Offering

We commenced this offering of Fixed Rate Subordinated Notes (“Notes”), which is our third follow-on offering of Notes (our “Current Offering”), on September 16, 2022. As of November 14, 2022, we have issued approximately $3.19 million of Notes in our Current Offering. As of November 14, 2022, approximately $66.81 million of Notes remain available for sale to the public under our Current Offering.

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. We commenced our second follow-on offering of Notes (our “Second Follow-on Offering”) on March 22, 2019. On September 16, 2022, we terminated our Second Follow-on Offering, having issued approximately $34.5 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 and nine months ended September 30, 2022, the Company continued to focus on the reduction of non-interest earning assets. As of September 30, 2022, loans classified as non-accrual were 11 or $5,890 compared to 23 or $9,526 as of December 31, 2021. In addition, as of September 30, 2022, we had three foreclosed assets or $1,443 compared to five or $2,724 as of December 31, 2021.

The Company continues to lose interest income on assets that do not accrue interest. During the quarter and nine months ended September 30, 2022, the estimated loss on interest income related to impaired and foreclosed assets was $257 and $864, respectively. Looking ahead, we expect to decrease the balance of non-interest earning assets as we continue to sell our remaining foreclosed assets and impaired loans in 2022.

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

	1.	Continue to decrease the balance of non-interest-bearing assets, which includes foreclosed, real estate and classified non-accrual assets.
	2.	While we anticipate lower loan originations in 2023 as compared to 2022, we will increase or focus on fix and flips as a percentage of sales.
	3.	Lower SG&A expenses.
	4.	Maintain a consistent margin, similar to our current spread.
	5.	Maintain liquidity at a level sufficient for loan originations.

We anticipate that for the last quarter of 2022, the housing market in most of the areas in which we do business will decline due to the impact of current economic conditions. While markets will probably weaken compared to where they were as of September 30, 2022, we anticipate losses incurred in principal related to COVID-19 will not continue, and the lower interest income due to nonperforming assets will continue to decrease in the remainder of 2022 as compared to the same periods in 2021. Short term interest rates as well as mortgage interest rates are expected to continue to rise. A continued rise in short term rates is likely to benefit the company as our competitors’ rates will rise faster than ours making us more competitive, but the continued rise in long term interest rates is negatively impacting the housing industry as a whole, and therefore us.

We had $55,864 and $46,943 in loan assets, net as of September 30, 2022 and December 31, 2021, respectively. In addition, as of September 30, 2022, we had 225 commercial construction and 19 development loans with 61 borrowers in 21 states.

Net cash provided by operations increased $2,144 to $3,308 as of September 30, 2022 compared to the same period of 2021. Our increase in operating cash flow was due primarily to net income, accrued interest payable and customer interest escrows. As of September 30, 2022, customer interest escrows 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.

	September 30, 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%**	$	3,760

* 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 $55,864.

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).

	September 30, 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%**	$	505

* 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 $1,443.

Results of Operation

Interest Spread

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

	Three Months Ended										Nine Months Ended
	September 30,										September 30,
	2022					2021					2022					2021
Interest Income				*					*					*					*
Estimated interest income	$	2,198		15	%	$	1,532		12	%	$	5,978		14	%	$	4,533		12	%
Estimated unearned interest income due to COVID-19		(167	)	(1	)%		(228	)	(2	)%		(519	)	(1	)%		(684	)	(2	)%
Interest income on loans	$	2,031		14	%	$	1,304		10	%	$	5,459		13	%	$	3,849		10	%

Fee income on loans		874		6	%		959		8	%		2,662		6	%		2,557		7	%
Deferred loan fees		(163	)	(1	)%		(200	)	(2	)%		(502	)	(1	)%		(621	)	(2	)%
Fee income on loans, net		711		5	%		759		6	%		2,160		5	%		1,936		5	%

Interest and fee income on loans		2,742		19	%		2,063		16	%		7,619		18	%		5,785		15	%

Interest expense unsecured		694		5	%		745		6	%		2,026		5	%		2,276		6	%
Interest expense secured		541		4	%		446		4	%		1,584		4	%		1,521		4	%
Amortization offering costs		52		-	%		42		-	%		175		-	%		122		-	%
Interest expense		1,287		9	%		1,233		10	%		3,785		9	%		3,919		10	%
Net interest income (spread)		1,455		10	%		830		6	%		3,834		9	%		1,866		5	%

Weighted average outstanding loan asset balance	$	59,095				$	50,156				$	56,773				$	50,226

*Annualized amount as percentage of 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 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).

Estimated interest income on loans increased to 15% and 14% for the quarter and nine months ended September 30, 2022 compared to 12% for the same periods of the prior year. Interest income increased due to a decline in the total of loans not paying interest. Construction loans not paying interest as of September 30, 2022 and 2021 were $5,890 and $9,529, respectively.

Interest expense decreased to 9% for both the quarter and nine months ended September 30, 2022 compared to 10% for both of the same periods of the prior year. The decrease in the interest expense is due to the lowered effective interest rate of 8.88% for the period ended September 30, 2022 compared to 9.53% for the same period of the prior year. We reduced rates of both secured and unsecured debt during the period ended September 30, 2022 compared to the same period of 2021.

We anticipate our standard margin to be 2.5% on all future construction loans and generally 7% on all development loans which yields a blended margin of approximately 3.5%. In July 2022 we changed our pricing model to decrease by 0.5% our pricing on all new construction loans during their first year, and increase pricing by 2.5% on those loans at all times after that. This pricing change is anticipated to lower profit in the remaining quarter of 2022 by approximately $18 and in the first two quarters of 2023 by $54, however we anticipate that by the fourth quarter of 2023 the pricing change will increase our profitability. If all currently owned construction loans were currently using this pricing, our profitability would increase by $310 per year.

● 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 and nine months ended September 30, 2022 and 2021, fee income, net was 5%.

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

As of September 30, 2022 and 2021, construction and development loans which did not accrue interest was $5,890 and $9,529, respectively.

Foreclosed assets do not provide a monthly interest return. As of September 30, 2022 and December 31, 2021, foreclosed assets were $1,443 and $2,724, 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 $271 and $83 for the quarters ended September 30, 2022 and 2021, respectively. For the nine months ended September 30, 2022 and 2021, loan loss expense was $479 and $342, respectively.

The allowance for loan losses at September 30, 2022 was $2,156 which primarily consisted of $270 for loans without specific reserves, $85 for loans with specific reserves and $1,801 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 nine months ended September 30, 2022 and year ended December 31, 2021, we incurred $371 and $509 in direct charge offs, respectively.

Non-Interest Income

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.

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

During February 2021, the Company received their second draw of the Paycheck Protection Program (“PPP”) loan created under the Coronavirus Aid, Relief, and Economic Security Act for $316 which was used to cover payroll and certain other identified costs. During August 2021, the full amount of the PPP loan was forgiven.

Gain on Sale of Foreclosed Assets

During the quarter and nine months ended September 30, 2022 and 2021, we sold none and two foreclosed assets and one and 13 foreclosed assets, which resulted in a gain on the sale of $0, $101 and $64 and $165, respectively.

Non-Interest Expense

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

The following table displays our SG&A expenses:

	Three Months Ended September 30,					Nine Months Ended September 30,
	2022		2021			2022		2021
Legal and accounting	$	29	$	17		$	182	$	143
Salaries and related expenses		430		285			1,219		613
Board related expenses		27		24			77		74
Advertising		24		(7	)		86		54
Rent and utilities		15		18			58		40
Loan and foreclosed asset expenses		9		62			151		299
Travel		27		45			105		105
Other		42		39			134		130
Total SG&A	$	603	$	483		$	2,012	$	1,458

Our SG&A expense increased $120 and $554 for the quarter and nine months ended September 30, 2022, respectively, compared to the same periods of 2021, due primarily to salaries and related expense, partially offset by decreases in loan and foreclosed asset expenses. Salaries and related expenses increased $145 and $606 for the quarter and nine months ended September 30, 2022, respectively, due primarily to:

	●	Profit share expense was $99 and $295 for the quarter and nine months ended September 30, 2022, respectively, compared to $35 for both the quarter and nine months ended for the same period of the prior year;
	●	Employee retention credit was $103 and $199 for both the quarter and nine months ended September 30, 2021. No employee retention credits were recognized in 2022; and
	●	Deferred loan origination salaries expenses were $142 and $497 for the quarter and nine months ended September 30, 2022 compared to $115 and $626 for the same periods of the prior year, respectively.

Loss on the Sale of Foreclosed Assets

During both the quarters and nine months ended September 30, 2022 we recognized $0 as a loss on the sale of foreclosed assets compared to $0 and $69 for the same periods of the prior year, respectively. No foreclosed assets were sold for a loss during the quarter and nine months ended September 30, 2022 and we sold six foreclosed assets during the nine months ended September 30, 2021 which resulted in the loss on sale.

Impairment Loss on Foreclosed Assets

During both the quarter and nine months ended September 30, 2022, we recognized $35 in impairment loss on foreclosed assets compared to $0 and $10 for the same periods of the prior year, 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 during the fourth quarter of 2022 because: 1) Payoffs are slowing as builder sales are slowing some, 2) housing starts are down which should reduce competition between builders for labor and should allow for faster construction which will initially increase the balances, and 3) we had strong originations in the first three quarters of 2022 and those loans will be growing in balance during the fourth quarter.

The following is a summary of our loan portfolio to builders for home construction loans as of September 30, 2022:

State	Number of Borrowers		Number of Loans		Value of Collateral⁽¹⁾		Commitment Amount		Amount Outstanding		Loan to Value Ratio⁽²⁾			Loan Fee
Arizona		1		2	$	767	$	537	$	297		70	%		5	%
Connecticut		2		5		2,045		1,463		1,066		72	%		5	%
Delaware		1		4		1,385		970		767		70	%		5	%
Florida		17		102		38,921		28,602		20,723		73	%		5	%
Georgia		3		5		2,425		1,337		832		55	%		5	%
Illinois		2		1		1,245		747		481		60	%		5	%
Louisiana		2		4		935		629		406		73	%		5	%
Maryland		1		2		958		671		110		70	%		5	%
Michigan		3		5		1,335		1,003		782		75	%		5	%
New Jersey		1		5		2,687		2,259		2,582		84	%		5	%
New York		1		1		740		500		488		68	%		5	%
North Carolina		6		14		6,648		3,966		2,390		60	%		5	%
Ohio		2		7		2,408		1,667		1,356		69	%		5	%
Oregon		1		1		550		385		368		70	%		5	%
Pennsylvania		1		19		22,327		14,452		10,641		65	%		5	%
South Carolina		10		30		7,542		5,247		3,100		70	%		5	%
Tennessee		2		2		965		583		467		60	%		5	%
Texas		2		4		3,118		2,039		1,653		65	%		5	%
Utah		1		3		1,522		1,155		1,044		76	%		5	%
Virginia		1		1		297		195		97		66	%		5	%
Washington		1		8		4,720		3,257		2,030		69	%		5	%
Total		61		225	$	103,540	$	71,664	$	51,680		69	%⁽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⁾			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 September 30, 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
Connecticut		1		1	$	150	$	180	$	81			54	%	varies
Delaware		1		1		543		147		147			27	%	varies
Florida		4		4		576		1,196		34			6	%	varies
Georgia		1		1		60		24		24			40	%	varies
New Jersey		1		2		100		52		51			51	%	varies
Pennsylvania		1		5		16,357		8,500		6,537			40	%	varies
South Carolina		4		4		1,387		1,386		1,367			99	%	varies
Texas		1		1		-		125		(28	)		100	%	varies
Total		14		19	$	19,173	$	11,610	$	8,213			43	%⁽⁴⁾	varies

	⁽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 $1,870 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
Connecticut		1		1	$	350	$	180	$	180		51	%		7	%
Delaware		1		1		543		147		147		27	%		7	%
Florida		5		5		816		1,297		611		75	%		7	%
Pennsylvania		1		4		9,312		6,500		6,103		66	%		varies
South Carolina		3		3		1,373		846		539		39	%		7	%
Texas		1		1		70		125		77		110	%		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 September 30, 2022 and December 31, 2021:

	September 30, 2022			December 31, 2021

Loans receivable, gross	$	59,893		$	50,763
Less: Deferred loan fees		(1,326	)		(1,143	)
Less: Deposits		(848	)		(934	)
Plus: Deferred origination costs		301			305
Less: Allowance for loan losses		(2,156	)		(2,048	)

Loans receivable, net	$	55,864		$	46,943

The following is a roll forward of combined loans:

	Nine Months Ended September 30, 2022			Year Ended December 31, 2021			Nine Months Ended September 30, 2021

Beginning balance	$	46,943		$	46,405		$	46,405
Originations and modifications		45,519			45,395			34,499
Principal collections		(36,850	)		(44,290	)		(33,914	)
Transferred from loans receivable, net		(556	)		(791	)		(274	)
Transferred to loans receivable, net		1,017			-			-
Change in builder deposit		87			403			317
Change in the allowance for loan losses		(109	)		(80	)		166
Change in loan fees, net		(187	)		(99	)		258
Ending balance	$	55,864		$	46,943		$	47,457

Finance Receivables – By risk rating:

	September 30, 2022		December 31, 2021

Pass	$	52,006	$	38,893
Special mention		1,997		2,344
Classified – accruing		–		–
Classified – nonaccrual		5,890		9,526

Total	$	59,893	$	50,763

Finance Receivables – Method of impairment calculation:

	September 30, 2022		December 31, 2021

Performing loans evaluated individually	$	17,178	$	16,495
Performing loans evaluated collectively		36,825		24,742
Non-performing loans without a specific reserve		591		596
Non-performing loans with a specific reserve		5,299		8,930

Total evaluated collectively for loan losses	$	59,893	$	50,763

As of September 30, 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 September 30, 2022 and December 31, 2021.

	September 30, 2022			December 31, 2021

Unpaid principal balance (contractual obligation from customer)	$	6,261		$	10,035
Charge-offs and payments applied		(371	)		(509	)
Gross value before related allowance		5,890			9,526
Related allowance		(1,886	)		(1,825	)
Value after allowance	$	4,004		$	7,701

Below is an aging schedule of loans receivable as of September 30, 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)		233	$	54,003		90	%
60-89 days		-		-		-
90-179 days		-		-		-
180-269 days		3		462		1	%
>270 days		8		5,428		9	%

Subtotal		244	$	59,893		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		244	$	59,893		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 September 30, 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.		233	$	54,003		90	%
60-89 days		-		-		-
90-179 days		-		-		-
180-269 days		3		462		1	%
>270 days		8		5,428		9	%

Subtotal		244	$	59,893		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		244	$	59,893		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:

	Nine Months Ended September 30, 2022			Year Ended December 31, 2021			Nine Months Ended September 30, 2021

Beginning balance	$	2,724		$	4,449		$	4,449
Transfers from loan receivables, net		556			791			274
Transfers to loan receivables, net		(1,017	)		-			-
Additions from construction/development		210			818			612
Sale proceeds		(1,096	)		(3,418	)		(2,674	)
Loss on foreclosure		-			(47	)		-
Loss on sale of foreclosed assets		-			(92	)		(69	)
Gain on foreclosure		-			67			-
Gain on sale of foreclosed assets		101			166			165
Impairment loss on foreclosed assets		(35	)		(10	)		(10	)
Ending balance	$	1,443		$	2,724		$	2,747

During the quarter and nine months ended September 30, 2022 and 2021, we sold none and two foreclosed assets and one and 13 foreclosed assets, respectively.

In addition, during the quarter and nine months ended September 30, 2022 and 2021, we transferred one construction loan from loans receivables to foreclosed assets for both the quarter and nine months ended September 30, 2022 compared to one and none for the same periods of the prior year, respectively.

Customer Interest Escrow

Below is a roll forward of interest escrow:

	Nine Months Ended September 30, 2022			Year Ended December 31, 2021			Nine Months Ended September 30, 2020

Beginning balance	$	479		$	510		$	510
Preferred equity dividends		133			230			106
Additions from Pennsylvania loans		1,124			513			501
Additions from other loans		240			720			633
Interest, fees, principal or repaid to borrower		(1,143	)		(1,494	)		(1,182	)
Ending balance	$	833		$	479		$	568

Related Party Borrowings

As of September 30, 2022, the Company had $1,250, $250, and $951 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 nine months ended September 30, 2022, Mr. Myrick originated one loan for approximately $170 and the Company services the loan and in return received a 5% loan fee. In addition, during the quarter and nine months ended September 30, 2022 $193 and $799 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 September 30, 2022 and December 31, 2021, the Company had $49 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 second 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 $6 and $8 as of September 30, 2022 and December 31, 2021, respectively.

Summary

The borrowings secured by loan assets are summarized below:

	September 30, 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	$	7,005	$	5,594	$	4,847	$	2,969
S.K. Funding		11,211		7,300		8,084		5,500

Lender
Shuman		532		125		566		125
Jeff Eppinger		3,436		1,500		3,328		1,500
R. Scott Summers		1,733		777		1,475		847
John C. Solomon		1,128		563		1,139		563
Judith Y. Swanson		11,124		7,000		9,803		6,841

Total	$	36,169	$	22,859	$	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 September 30, 2022 and December 31, 2021 was 8.88% 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. Our fourth public notes offering, which was declared effective on September 16, 2022, includes a mandatory early redemption option on all Notes, provided that the proceeds are reinvested. In our historical offerings, there were limited rights of early redemption. Our 36-month Note sold in our third public notes offering had a mandatory early redemption option, subject to certain conditions.

The following table shows the roll forward of our Notes Program:

	Nine Months Ended September 30, 2022			Year Ended December 31, 2021			Nine Months Ended September 30, 2021

Gross Notes outstanding, beginning of period	$	20,636		$	21,482		$	21,482
Notes issued		3,243			7,876			7,239
Note repayments / redemptions		(3,368	)		(8,722	)		(7,820	)

Gross Notes outstanding, end of period	$	20,511		$	20,636		$	20,901

Less deferred financing costs, net		(379	)		(367	)		(389	)

Notes outstanding, net	$	20,132		$	20,269		$	21,192

The following is a roll forward of deferred financing costs:

	Nine Months Ended September 30, 2022			Year Ended December 31, 2021			Nine Months Ended September 30, 2021

Deferred financing costs, beginning balance	$	1,061		$	942		$	942
Additions		187			119			95
Deferred financing costs, ending balance		1,248			1,061			1,037
Less accumulated amortization		(869	)		(694	)		(648	)
Deferred financing costs, net	$	379		$	367		$	389

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

	Nine Months Ended September 30, 2022		Year Ended December 31, 2021		Nine Months Ended September 30, 2021

Accumulated amortization, beginning balance	$	694	$	526	$	526
Additions		175		168		122
Accumulated amortization, ending balance	$	869	$	694	$	648

Other Unsecured Debts

Our other unsecured debts are detailed below:

						Principal Amount Outstanding as of
Loan	Maturity Date		Interest Rate⁽¹⁾			September 30, 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		10.0	%		-		159
Unsecured Line of Credit from Builder Finance, Inc.		January 2023		10.0	%		750		750
Subordinated Promissory Note		April 2024		10.0	%		100		100
Subordinated Promissory Note		August 2022		11.0	%		-		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
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 2026⁽³⁾		10.0	%		375		334
Senior Subordinated Promissory Note		August 2026		8.0	%		291		-
Senior Subordinated Promissory Note		July 2026⁽⁴⁾		1.0	%		740		-
Senior Subordinated Promissory Note		July 2026⁽⁴⁾		20.0	%		460		-
Senior Subordinated Promissory Note		October 2024⁽⁴⁾		1.0	%		720		720
Junior Subordinated Promissory Note		October 2024⁽⁴⁾		20.0	%		447		447
						$	7,627	$	7,444

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

⁽²⁾	Due nine 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 total assets was 14% as of September 30, 2022 and December 31, 2021. 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	September 30, 2022		December 31, 2021
Borrowing Source
Purchase and sale agreements and other secured borrowings	1	$	23,669	$	19,165
Secured lines of credit from affiliates	2		49		859
Unsecured line of credit (senior)	3		1,250		1,250
Other unsecured debt (senior subordinated)	4		1,094		1,053
Unsecured Notes through our public offering, gross	5		20,512		20,636
Other unsecured debt (subordinated)	5		4,835		4,693
Other unsecured debt (junior subordinated)	6		447		447

Total		$	51,856	$	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 244 and 239 combined loans outstanding as of September 30, 2022 and December 31, 2021, respectively. Gross loans receivable totaled $59,893 and $50,763 as of September 30, 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 $19,984 and $22,902 as September 30, 2022 and December 31, 2021, respectively.

We anticipate lower originations and payoffs during the 12 months subsequent to September 30, 2022 which is similar to the first nine months of 2022 and due primarily to the current economic decline in the housing market activity.

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 September 30, 2022		As of December 31, 2021
Secured debt, net of deferred financing costs	$	23,712	$	20,016
Unsecured debt, net of deferred financing costs		27,759		27,713
Equity*		7,676		6,604
Cash		1,119		3,735

*Equity includes Members’ Capital and Redeemable Preferred Equity.

As of September 30, 2022 and December 31, 2021, cash was $1,119 and $3,735, respectively. In addition, we had $600 in restricted cash as of September 30, 2022.

Secured debt, net of deferred financing costs increased $3,696 to $23,712 as of September 30, 2022 compared to $20,016 for the year ended December 31, 2021 which was primarily related to borrowings on our purchase and sale agreements. We anticipate secured debt to increase if our loan receivable balances increase.

Unsecured debt, net of deferred financing costs increased $46 to $27,759 as of September 30, 2022 compared to $27,713 for the year ended December 31, 2021. The increase in unsecured debt primarily related to the increase in other unsecured debt sold outside of our Notes Program. In addition, we believe we can increase unsecured debt by raising interest rates if needed.

Equity increased $1,072 to $7,676 as of September 30, 2022 compared to $6,604 for the year ended December 31, 2021. The increase was due primarily to retained earnings from Common A and earned but not paid distributions of Series C preferred equity holders. In addition, investments in Series C increased $200.

We anticipate an increase in our equity during the 12 months subsequent to September 30, 2022, 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 $24,373, which consists of secured borrowings of $22,912 and unsecured borrowings of $1,461.

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 October 2023 and automatically renews unless notice given;
	●	Shuman – $125 due July 2023 and automatically renews unless notice is given;
	●	S. K. Funding – $4,500 due January 2023 and automatically renews unless notice is given;
	●	S. K. Funding – $2,800 of the total due January 2023 and automatically renews unless notice is given;
	●	Builder Finance, Inc. – $5,594 with no expiration date;
	●	New LOC Agreements - $2,840 due generally with one-month notice and nine months to reduce principal balance to zero;
	●	Myrick LOC - $49 due upon demand; and
	●	Mortgage Payable – $4 due monthly.

Unsecured borrowings due by December 31, 2022 consist of Notes issued pursuant to the Notes Program and other unsecured debt of $958 and $503, 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.

Our other unsecured debt historically renews. 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 not growing our assets; however, are prepared to grow if the economic environment requires or allows it 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 the economy. 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. In some of our markets, prices of sold homes are dropping. This is both because some homes are selling for less and because the average home selling is smaller (more affordable). However, we anticipate significant declines in home values in many markets over the next 12 months as mortgage interest rates continue to rise.

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. We can see this impact now as housing starts recently dropped by approximately 27%. 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. While the prime rate and fed funds rate have increased significantly in 2022, the CD rates, while increasing, have not increased as much. 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, however in the current environment, this is less accurate than in most years. 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 September 30, 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 September 30, 2022 (Unaudited) and December 31, 2021		F-2

Interim Condensed Consolidated Statements of Operations (Unaudited) for the Three and Nine Months Ended September 30, 2022 and 2021		F-3

Interim Condensed Consolidated Statement of Changes in Members’ Capital (Unaudited) for the Nine Months Ended September 30, 2022 and 2021 and for the Three Months Ended September 30, 2022 and 2021		F-4

Interim Condensed Consolidated Statements of Cash Flows (Unaudited) for the Nine Months Ended September 30, 2022 and 2021		F-5

Notes to Interim Condensed Consolidated Financial Statements (Unaudited)		F-7

F-1

Shepherd’s Finance, LLC

Interim Condensed Consolidated Balance Sheets

(in thousands of dollars)	September 30, 2022		December 31, 2021
	(Unaudited)
Assets
Cash and cash equivalents	$	1,119	$	3,735
Restricted cash		600		-
Accrued interest receivable		633		598
Loans receivable, net		55,864		46,943
Real estate investments		1,565		1,651
Foreclosed assets, net		1,443		2,724
Premises and equipment		858		875
Other assets		953		1,089
Total assets	$	63,035	$	57,615
Liabilities and Members’ Capital
Customer interest escrow	$	833	$	479
Accounts payable and accrued expenses		507		296
Accrued interest payable		2,501		2,464
Notes payable secured, net of deferred financing costs		23,712		20,016
Notes payable unsecured, net of deferred financing costs		27,759		27,713
Due to preferred equity member		47		43
Total liabilities	$	55,359	$	51,011

Commitments and Contingencies (Note 10)

Redeemable Preferred Equity
Series C preferred equity	$	5,593	$	5,014

Members’ Capital
Series B preferred equity		1,870		1,720
Class A common equity		213		(130	)
Members’ capital	$	2,083	$	1,590

Total liabilities, redeemable preferred equity and members’ capital	$	63,035	$	57,615

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 Operations - Unaudited

For the Three and Nine Months ended September 30, 2022 and 2021

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
(in thousands of dollars)	2022		2021		2022		2021
Interest Income
Interest and fee income on loans	$	2,742	$	2,063	$	7,619	$	5,785
Interest expense:
Interest related to secured borrowings		541		446		1,584		1,521
Interest related to unsecured borrowings		746		787		2,201		2,398
Interest expense		1,287		1,233		3,785		3,919

Net interest income		1,455		830		3,834		1,866

Less: Loan loss provision		271		83		479		342

Net interest income after loan loss provision		1,184		747		3,355		1,524

Non-Interest Income
Gain on extinguishment of debt		-		361		-		371
Gain on sale of foreclosed assets		-		64		101		165
Total non-interest income		-		425		101		536

Income		1,184		1,172		3,456		2,060

Non-Interest Expense
Selling, general and administrative		603		483		2,012		1,458
Depreciation and amortization		12		12		36		41
Loss on sale of foreclosed assets		-		-		-		69
Impairment loss on foreclosed assets		35		-		35		10
Total non-interest expense		650		495		2,083		1,578

Net Income	$	534	$	677	$	1,373	$	482

Earned distribution to preferred equity holders		211		262		610		512

Net income (loss) attributable to common equity holders	$	323	$	415	$	763	$	(30	)

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

F-3

Shepherd’s Finance, LLC

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

For the Nine and Three Months Ended September 30, 2022 and 2021

For the Nine Months Ended September 30, 2022 and 2021

(in thousands of dollars)	2022			2021

Members’ capital, beginning balance, December 31	$	1,590		$	1,677
Net income less distributions to Series C preferred equity holders of $473 and $388		900			94
Contributions from Series B preferred equity holders		150			80
Earned distributions to Series B preferred equity holders		(137	)		(124	)
Distributions to common equity holders		(420	)		-

Members’ capital, ending balance, September 30	$	2,083		$	1,727

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

For the Three Months Ended September 30, 2022 and 2021

(in thousands of dollars)	2022			2021

Members’ capital, beginning balance, June 30	$	1,947		$	1,292
Net income less distributions to Series C preferred equity holders of $164 and $138		370			539
Contributions from Series B preferred equity holders		10			20
Earned distributions to Series B preferred equity holders		(47	)		(124	)
Distributions to common equity holders		(197	)		-
Members’ capital, ending balance, September 30	$	2,083		$	1,727

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

F-4

Shepherd’s Finance, LLC

Interim Condensed Consolidated Statements of Cash Flows - Unaudited

For the Nine Months Ended September 30, 2022 and 2021

	Nine Months Ended September 30,
(in thousands of dollars)	2022			2021

Cash flows from operations
Net income	$	1,373		$	482
Adjustments to reconcile net income to net cash provided by operating activities
Amortization of deferred financing costs		175			122
Provision for loan losses		479			342
Change in loan origination fees, net		187			258
Gain on sale of foreclosed assets		(101	)		(165	)
Loss on sale of foreclosed assets		-			69
Impairment and loss on foreclosed assets		35			10
Depreciation and amortization		35			41
Gain on extinguishment of debt		-			(371	)
Net change in operating assets and liabilities:
Other assets		118			(30	)
Accrued interest receivable		(35	)		118
Customer interest escrow		221			(48	)
Accrued interest payable		610			302
Accounts payable and accrued expenses		211			34

Net cash provided by operating activities		3,308			1,164

Cash flows from investing activities
Loan originations and principal collections, net		(9,126	)		(1,926	)
Investment in foreclosed assets		(210	)		(612	)
Additions for construction in real estate investments		(1,901	)		(277	)
Deposits for construction in real estate investments		970			200
Proceeds from the sale of real estate investments		1,017			-
Proceeds from the sale of foreclosed assets		1,096			2,674

Net cash (used in) provided by investing activities		(8,154	)		59

Cash flows from financing activities
Contributions from preferred B equity holders		150			80
Contributions from preferred C equity holders		200			800
Distributions to preferred equity holders		(94	)		(71	)
Distributions to common equity holders		(420	)		-
Proceeds from secured notes payable		11,380			6,088
Repayments of secured notes payable		(7,844	)		(10,696	)
Proceeds from unsecured notes payable		5,263			7,765
Redemptions/repayments of unsecured notes payable		(5,618	)		(8,752	)
Proceeds from PPP Loan and EIDL Advance		-			361
Deferred financing costs paid		(187	)		(95	)

Net cash provided by (used in) financing activities		2,830			(4,520	)

Net decrease in cash, cash equivalents and restricted cash		(2,016	)		(3,297	)
Cash, cash equivalents and restricted cash
Beginning of period		3,735			4,749
End of period	$	1,719		$	1,452

Supplemental disclosure of cash flow information
Cash paid for interest	$	3,748		$	4,827

Non-cash investing and financing activities
Earned by Series B preferred equity holders but not distributed to customer interest escrow	$	47		$	106
Earned by Series B preferred equity holders and distributed to customer interest escrow	$	133		$	124
Earned but not paid distributions of Series C preferred equity holders	$	473		$	388
Unsecured transferred to secured notes payable	$	159		$	315
Foreclosure of assets transferred from loans receivable, net	$	556		$	274
Foreclosure of assets transferred to loans receivable, net	$	1,017		$	-
Accrued interest payable transferred to unsecured notes payable	$	573		$	1,210
EIDL advance forgiveness in reduction of debt	$	-		$	10

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

F-5

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 September 30, 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 September 30, 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-6

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 September 30, 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 September 30, 2022 and December 31, 2021.

	September 30, 2022				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	$	1,443	$	1,443	$	–	$	–	$	1,443
Impaired loans due to COVID-19, net		2,964		2,964		–		–		2,964
Other impaired loans, net		1,040		1,040		–		–		1,040
Total	$	5,447	$	5,447	$	–	$	–	$	5,447

	December 31, 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	$	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:

	September 30, 2022				December 31, 2021
	Carrying		Estimated		Carrying		Estimated
	Amount		Fair Value		Amount		Fair Value
Financial Assets
Cash, cash equivalents and restricted cash	$	1,719	$	1,719	$	3,735	$	3,735
Loan receivable, net		55,864		55,864		46,943		46,943
Accrued interest on loans		633		633		598		598
Financial Liabilities
Customer interest escrow		833		833		479		479
Notes payable secured, net		23,712		23,712		20,016		20,016
Notes payable unsecured, net		27,759		27,759		27,713		27,713
Accrued interest payable		2,501		2,501		2,464		2,464

F-7

3. Financing Receivables

Financing receivables are comprised of the following as of September 30, 2022 and December 31, 2021:

	September 30, 2022			December 31, 2021

Loans receivable, gross	$	59,893		$	50,763
Less: Deferred loan fees		(1,326	)		(1,143	)
Less: Deposits		(848	)		(934	)
Plus: Deferred origination costs		301			305
Less: Allowance for loan losses		(2,156	)		(2,048	)

Loans receivable, net	$	55,864		$	46,943

During the nine months ended September 30, 2022 and year ended December 31, 2021, we incurred $371 and $509 in direct charge offs, respectively.

Commercial Construction and Development Loans

Construction Loan Portfolio Summary

As of September 30, 2022, the Company’s portfolio consisted of 225 commercial construction and 19 development loans with 61 borrowers in 21 states.

The following is a summary of the loan portfolio to builders for home construction loans as of September 30, 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

225

103,540

71,664

51,680

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-8

Real Estate Development Loan Portfolio Summary

The following is a summary of our loan portfolio to builders for land development as of September 30, 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

19,173

11,610

8,213

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 September 30, 2022 and December 31, 2021, a portion of this collateral is $1,870 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:

	September 30, 2022		December 31, 2021

Pass	$	52,006	$	38,893
Special mention		1,997		2,344
Classified – accruing		–		–
Classified – nonaccrual		5,890		9,526

Total	$	59,893	$	50,763

Finance Receivables – Method of impairment calculation:

	September 30, 2022		December 31, 2021

Performing loans evaluated individually	$	17,178	$	16,495
Performing loans evaluated collectively		36,825		24,742
Non-performing loans without a specific reserve		591		596
Non-performing loans with a specific reserve		5,299		8,930

Total evaluated collectively for loan losses	$	59,893	$	50,763

As September 30, 2022 and December 31, 2021, there were no loans acquired with deteriorated credit quality.

F-9

Impaired Loans

The following is a summary of our impaired non-accrual commercial construction loans as of September 30, 2022 and December 31, 2021.

	September 30, 2022			December 31, 2021

Unpaid principal balance (contractual obligation from customer)	$	6,261		$	10,035
Charge-offs and payments applied		(371	)		(509	)
Gross value before related allowance		5,890			9,526
Related allowance		(1,886	)		(1,825	)
Value after allowance	$	4,004		$	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:

September 30, 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:

	Nine Months Ended September 30, 2022			Year Ended December 31, 2021			Nine Months Ended September 30, 2021

Beginning balance	$	1,651		$	1,181		$	1,181
Deposits from real estate investments		(970	)		(200	)		(200	)
Proceeds from the sale of real estate investments		(1,017	)		–			–
Additions for construction/development		1,901			670			277
Ending balance	$	1,565		$	1,651		$	1,258

As of September 30, 2022 we received a $600 deposit for one of our real estate investments which is classified on our balance sheet as restricted cash.

F-10

5. Foreclosed Assets

The following table is a roll forward of foreclosed assets:

	Nine Months Ended September 30, 2022			Year Ended December 31, 2021			Nine Months Ended September 30, 2021

Beginning balance	$	2,724		$	4,449		$	4,449
Transfers from loan receivables, net		556			791			274
Transfers to loan receivables, net		(1,017	)		-			-
Additions from construction/development		210			818			612
Sale proceeds		(1,096	)		(3,418	)		(2,674	)
Loss on foreclosure		-			(47	)		-
Loss on sale of foreclosed assets		-			(92	)		(69	)
Gain on foreclosure		-			67			-
Gain on sale of foreclosed assets		101			166			165
Impairment loss on foreclosed assets		(35	)		(10	)		(10	)
Ending balance	$	1,443		$	2,724		$	2,747

6. Borrowings

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

	Priority Rank	September 30, 2022		December 31, 2021
Borrowing Source
Purchase and sale agreements and other secured borrowings	1	$	23,669	$	19,165
Secured lines of credit from affiliates	2		49		859
Unsecured line of credit (senior)	3		1,250		1,250
Other unsecured debt (senior subordinated)	4		1,094		1,053
Unsecured Notes through our public offering, gross	5		20,512		20,636
Other unsecured debt (subordinated)	5		4,835		4,693
Other unsecured debt (junior subordinated)	6		447		447

Total		$	51,856	$	48,103

The following table shows the maturity of outstanding debt as of September 30, 2022:

Year Maturing	Total Amount Maturing		Public Offering		Other Unsecured		Secured Borrowings
2022	$	24,373	$	958	$	503	$	22,912
2023		8,262		5,926		2,264		72
2024		8,912		6,198		2,587		127
2025		6,618		6,147		398		73
2026 and thereafter		3,691		1,282		1,875		534
Total	$	51,856	$	20,511	$	7,627	$	23,718

F-11

Secured Borrowings

Lines of Credit

As of September 30, 2022 and December 31, 2021, the Company had $49 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 third quarter or first nine months 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 $6 and $8 as of September 30, 2022 and December 31, 2021, respectively.

Borrowings secured by loan assets are summarized below:

	September 30, 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	$	7,005	$	5,594	$	4,847	$	2,969
S.K. Funding		11,211		7,300		8,084		5,500

Lender
Shuman		532		125		566		125
Jeff Eppinger		3,436		1,500		3,328		1,500
R. Scott Summers		1,733		777		1,475		847
John C. Solomon		1,128		563		1,139		563
Judith Y. Swanson		11,124		7,000		9,803		6,841

Total	$	36,169	$	22,859	$	29,242	$	18,345

Unsecured Borrowings

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

The following table shows the roll forward of our Notes Program:

	Nine Months Ended September 30, 2022			Year Ended December 31, 2021			Nine Months Ended September 30, 2021

Gross Notes outstanding, beginning of period	$	20,636		$	21,482		$	21,482
Notes issued		3,243			7,876			7,239
Note repayments / redemptions		(3,368	)		(8,722	)		(7,820	)

Gross Notes outstanding, end of period	$	20,511		$	20,636		$	20,901

Less deferred financing costs, net		(379	)		(367	)		(389	)

Notes outstanding, net	$	20,132		$	20,269		$	21,192

F-12

The following is a roll forward of deferred financing costs:

	Nine Months Ended September 30, 2022			Year Ended December 31, 2021			Nine Months Ended September 30, 2021

Deferred financing costs, beginning balance	$	1,061		$	942		$	942
Additions		187			119			95
Deferred financing costs, ending balance		1,248			1,061			1,037
Less accumulated amortization		(869	)		(694	)		(648	)
Deferred financing costs, net	$	379		$	367		$	389

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

	Nine Months Ended September 30, 2022		Year Ended December 31, 2021		Nine Months Ended September 30, 2021

Accumulated amortization, beginning balance	$	694	$	526	$	526
Additions		175		168		122
Accumulated amortization, ending balance	$	869	$	694	$	648

Other Unsecured Debts

Our other unsecured debts are detailed below:

						Principal Amount Outstanding as of
Loan	Maturity Date		Interest Rate⁽¹⁾			September 30, 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		10.0	%		-		159
Unsecured Line of Credit from Builder Finance, Inc.		January 2023		10.0	%		750		750
Subordinated Promissory Note		April 2024		10.0	%		100		100
Subordinated Promissory Note		August 2022		11.0	%		-		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
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 2026⁽³⁾		10.0	%		375		334
Senior Subordinated Promissory Note		August 2026		8.0	%		291		-
Senior Subordinated Promissory Note		July 2026⁽⁴⁾		1.0	%		740		-
Senior Subordinated Promissory Note		July 2026⁽⁴⁾		20.0	%		460		-
Senior Subordinated Promissory Note		October 2024⁽⁴⁾		1.0	%		720		720
Junior Subordinated Promissory Note		October 2024⁽⁴⁾		20.0	%		447		447
						$	7,627	$	7,444

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

⁽²⁾	Due Nine 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-13

7. Redeemable Preferred Equity

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

	Nine Months Ended September 30, 2022			Year Ended December 31, 2021			Nine Months Ended September 30, 2021

Beginning balance	$	5,014		$	3,582		$	3,582
Additions from new investment		200			1,000			800
Distributions		(94	)		(101	)		(71	)
Additions from reinvestments		473			533			388

Ending balance	$	5,593		$	5,014		$	4,699

The following table shows the earliest redemption options for investors in our Series C Preferred Units as of September 30, 2022:

Year Maturing	Total Amount Redeemable
2024	$	3,509
2025		440
2026		309
2027		1,129
2028		206
Total	$	5,593

F-14

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 September 30, 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 September 30, 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 land securing certain development loans. As of September 30, 2022, the Hoskins Group owned a total of 18.7 Series B Preferred Units, which were issued for a total of $1,870.

9. Related Party Transactions

During the nine months ended September 30, 2022, Mr. Myrick originated one loan for approximately $170 and the Company services the loan and in return received a 5% loan fee. In addition, during the quarter and nine months ended September 30, 2022, $193 and $799, respectively, was borrowed against the Myrick LOC to fund construction on the three loans originated by Mr. Myrick.

10. Commitments and Contingencies

Unfunded commitments to extend credit, which have similar collateral, credit risk, and market risk to our outstanding loans, were $19,984 and $22,902 at September 30, 2022 and December 31, 2021, respectively.

F-15

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

Net interest and fee income	$	1,455	$	1,267	$	1,112	$	958	$	830	$	625	$	411
Loan loss provision		271		134		74		246		83		45		214
Net interest income after loan loss provision		1,184		1,133		1,038		712		747		580		197
Gain on sale of foreclosed assets		–		101		–		1		64		13		88
Gain on foreclosure of assets		–		–		–		67		–		–		–
Gain on extinguishment of debt		–		–		–		–		361		–		10
SG&A expense		603		713		697		415		483		438		537
Depreciation and amortization		12		12		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		35		–		–		–		–		–		10
Net income (loss)	$	534	$	509	$	329	$	283	$	677	$	91	$	(286	)

12. Non-Interest Expense Detail

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

	For the Nine Months Ended September 30,
	2022		2021
Selling, general and administrative expenses
Legal and accounting	$	182	$	143
Salaries and related expenses		1,219		613
Board related expenses		77		74
Advertising		86		54
Rent and utilities		58		40
Loan and foreclosed asset expenses		151		299
Travel		105		105
Other		134		130
Total SG&A	$	2,012	$	1,458

13. Subsequent Events

Management of the Company has evaluated subsequent events through November 9, 2022, the date these interim condensed consolidated financial statements were issued.

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