UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

☒ Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the Quarterly Period Ended September 30, ~~2022~~2023

☐ Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the Transition Period From to

Commission File Number 333-263759

SHEPHERD’S FINANCE, LLC

(Exact name of registrant as specified on its charter)

Delaware		36-4608739
(State or other jurisdiction of		(I.R.S. Employer
Incorporation or organization)		Identification No.)

13241 Bartram Park Blvd., Suite 2401, Jacksonville, Florida 32258

(Address of principal executive offices)

(~~302~~(302)) 752-2688

(Registrant’s telephone number including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class		Trading Symbol(s)		Name of Each Exchange on Which Registered
None		None		None

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer	☐	Accelerated filer	☐
Non-accelerated filer	☒	Smaller reporting company	☒
Emerging growth company	☒

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☒

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

FORM 10-Q

SHEPHERD’S FINANCE, LLC

TABLE OF CONTENTS

			Page

	Cautionary Note Regarding Forward-Looking Statements		3

PART I. FINANCIAL INFORMATION			4

	Item 1. Financial Statements		4

		Interim Condensed Consolidated Balance Sheets as of September 30, ~~2022~~2023 (Unaudited) and December 31, ~~2021~~2022	4

		Interim Condensed Consolidated Statements of Operations (Unaudited) for the Three and Nine Months Ended September 30, ~~2022~~2023 and ~~2021~~2022	5

		Interim Condensed Consolidated Statement of Changes in Members’ Capital (Unaudited) for the Three and Nine Months Ended September 30, ~~2022~~2023 and ~~2021 and for the Three Months Ended September 30,~~ 2022 ~~and 2021~~	6

		Interim Condensed Consolidated Statements of Cash Flows (Unaudited) for the Nine Months Ended September 30, ~~2022~~2023 and ~~2021~~2022	7

		Notes to Interim Condensed Consolidated Financial Statements (Unaudited)	8

	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		22
	18

	Item 3. Quantitative and Qualitative Disclosure About Market Risk		3641

~~Item 4. Controls and Procedures~~	36

	Item 4. Controls and Procedures		41

PART II. OTHER INFORMATION			41
	37

	Item 1. Legal Proceedings		41
	37

	Item 1A. Risk Factors		41
	37

	Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		42
	37

	Item 3. Defaults upon Senior Securities		42
	38

	Item 4. Mine Safety Disclosures		3842

	Item 5. Other Information		3842

	Item 6. Exhibits		3843

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

Certain statements contained in this Form 10-Q of Shepherd’s Finance, LLC, other than historical facts, may be considered forward-looking statements within the meaning of the federal securities laws. Words such as “may,” “will,” “expect,” “anticipate,” “believe,” “estimate,” “continue,” “predict,” or other similar words identify forward-looking statements. Forward-looking statements appear in a number of places in this report, including without limitation, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and include statements regarding our intent, belief or current expectation about, among other things, trends affecting the markets in which we operate, our business, financial condition and growth strategies.

Although we believe that the expectations reflected in these forward-looking statements are based on reasonable assumptions, forward-looking statements are not guarantees of future performance and involve risks and uncertainties. These risks and uncertainties include, but are not limited to: uncertainties relating to the effects of COVID-19; the length of the COVID-19 pandemic and severity of such outbreak nationally and across the globe; the pace of recovery following the COVID-19 pandemic; the impact of inflation and rising interest rates on the economy and housing markets; general economic uncertainty in key global markets and a worsening of global economic conditions or low levels of economic growth; the rate and the pace of economic recovery following economic downturns; and those other risks described in other risk factors as outlined in our Registration Statement on Form S-1, as amended, and our Annual Report on Form 10-K. Actual results may differ materially from those predicted in the forward-looking statements as a result of various factors, including but not limited to those set forth in the “Risk Factors” section of our Registration Statement on Form S-1, as amended, and our Annual Report on Form 10-K. For further information regarding risks and uncertainties associated with our business, and important factors that could cause our actual results to vary materially from those expressed or implied in such forward-looking statements, please refer to the factors set forth in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Risk Factors” sections of the documents we file from time to time with the U.S. Securities and Exchange Commission, including, but not limited to, our Annual Report on Form 10-K for the year ended December 31, ~~2021.~~2022.

When considering forward-looking statements, you should keep these risk factors, as well as the other cautionary statements in this report and in our Annual Report on Form 10-K for the year ended December 31, ~~2021~~2022 in mind. You should not place undue reliance on any forward-looking statement. We are not obligated to update forward-looking statements.

~~PART I – FINANCIAL INFORMATION~~

~~ITEM 1. FINANCIAL STATEMENTS~~

Shepherd’s Finance, LLC

Interim Condensed Consolidated Balance Sheets

(in thousands of dollars)	September 30, 2022		December 31, 2021			September 30, 2023		December 31, 2022
	(Unaudited)					(Unaudited)
Assets
Cash and cash equivalents	$	1,119	$	3,735		$	3,552	$	2,996
Restricted cash		600		-			-		1,200
Accrued interest receivable		633		598			756		670
Loans receivable, net		55,864		46,943
Loans receivable, net of allowance for credit losses of $2,863 and $2,527 as of September 30, 2023 and December 31, 2022, respectively							58,628		56,650
Real estate investments		1,565		1,651			-		660
Foreclosed assets, net		1,443		2,724			139		1,582
Premises and equipment		858		875			834		852
Other assets		953		1,089			286		862
Total assets	$	63,035	$	57,615		$	64,195	$	65,472
Liabilities and Members’ Capital
Liabilities, redeemable preferred equity and Members’ Capital
Customer interest escrow	$	833	$	479		$	424	$	766
Accounts payable and accrued expenses		507		296			453		650
Accrued interest payable		2,501		2,464			3,359		2,921
Notes payable secured, net of deferred financing costs		23,712		20,016			22,009		23,173
Notes payable unsecured, net of deferred financing costs		27,759		27,713			30,848		30,110
Due to preferred equity member		47		43			-		47
Total liabilities	$	55,359	$	51,011		$	57,093	$	57,667

Commitments and Contingencies (Note 10)		-		-			-		-

Redeemable Preferred Equity
Series C preferred equity	$	5,593	$	5,014		$	4,882	$	5,725

Members’ Capital
Series B preferred equity		1,870		1,720			-		1,900
Class A common equity		213		(130	)		2,220		180
Members’ capital	$	2,083	$	1,590		$	2,220	$	2,080

Total liabilities, redeemable preferred equity and members’ capital	$	63,035	$	57,615		$	64,195	$	65,472

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

Shepherd’s Finance, LLC

Interim Condensed Consolidated Statements of Operations - Unaudited

For the Three and Nine Months ~~ended~~Ended September 30, ~~2022~~2023 and ~~2021~~2022

(in thousands of dollars) 2022 2021 2022 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 )

Three Months Ended Nine Months Ended
September 30, September 30,
(in thousands of dollars) 2023 2022 2023 2022
Interest Income
Interest and fee income on loans $ 2,763 $ 2,711 $ 8,494 $ 7,493
Interest expense:
Interest related to secured borrowings 473 541 1,651 1,584
Interest related to unsecured borrowings 826 746 2,419 2,201
Interest expense 1,299 1,287 4,070 3,785

Net interest income 1,464 1,424 4,424 3,708

Less: Loan loss provision 131 271 294 479

Net interest income after loan loss provision 1,333 1,184 4,130 3,229

Non-Interest Income
Other income 16 31 56 126
Gain on sale of real estate investments - - 10 -
Gain on impairment of foreclosed assets - - 7 -
Gain on sale of foreclosed assets - - 8 101
Total non-interest income 16 31 81 227

Income 1,349 1,215 4,211 3,456

Non-Interest Expense
Selling, general and administrative 591 603 2,034 2,012
Depreciation and amortization 21 12 61 36
Impairment loss on foreclosed assets - 35 - 35
Loss on sale of foreclosed assets - - 34 -
Total non-interest expense 612 650 2,129 2,083

Net Income $ 737 $ 534 $ 2,082 $ 1,373

Earned distribution to preferred equity holders 144 211 445 610

Net income attributable to common equity holders $ 593 $ 323 $ 1,637 $ 763
The accompanying notes are an integral part of these interim condensed consolidated financial statements.

5
Shepherd’s Finance, LLC
Interim Condensed Consolidated Statements of Changes in Members’ Capital – Unaudited
For the ~~Nine~~Three and ~~Three~~Nine Months Ended September 30, ~~2022~~2023 and ~~2021~~2022

For the ~~Nine~~Three Months Ended September 30, ~~2022~~2023 and ~~2021~~2022

(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
(in thousands of dollars) September 30,
2023 September 30,
2022

Members’ capital, beginning balance, July 1, 2023 and 2022 $ 2,117 $ 1,947

Cumulative effect adjustment due to the adoption of ASU 2016-13 (178 ) -
Net income less distributions to Series C preferred equity holders of $144 and $164 593 370
Contributions from Common A equity holders - -
Contributions from Series B preferred equity holders - 10
Distributions to Series B preferred equity holders - (47 )
Distributions to common equity holders (490 ) (197 )

Members’ capital, as of September 30, 2023 and 2022 $ 2,220 $ 2,083

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

For the ~~Three~~Nine Months Ended September 30, ~~2022~~2023 and ~~2021~~2022

(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
(in thousands of dollars) September 30,
2023 September 30,
2022

Members’ capital, January 1, 2023 and 2022 $ 2,080 $ 1,590
Cumulative effect adjustment due to the adoption of ASU 2016-13 (178 ) -
Net income less distributions to Series C preferred equity holders of $445 and $473 1,637 900
Contributions from Common A equity holders 1,460 -
Contributions from Series B preferred equity holders - 150
Distributions to Series B preferred equity holders (1,900 ) (137 )
Distributions to common equity holders (879 ) (420 )

Members’ capital, as of September 30, 2023 and 2022 $ 2,220 $ 2,083

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

6

Shepherd’s Finance, LLC
Interim Condensed Consolidated Statements of Cash Flows - Unaudited
For the Nine Months Ended September 30, ~~2022~~2023 and ~~2021~~2022
(in thousands of dollars) 2022 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

September 30,
(in thousands of dollars) 2023 2022

Cash flows from operations
Net income $ 2,082 $ 1,373
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization of deferred financing costs 179 175
Provision for loan losses 294 479
Change in loan origination fees, net 166 187
Depreciation and amortization 61 35
Loss on sale of foreclosed assets 34 -
Gain on sale of foreclosed assets (8 ) (101 )
Impairment of foreclosed assets (7 ) 35
Gain on the sale of real estate investments (10 ) -

Net change in operating assets and liabilities:
Other assets 533 118
Accrued interest receivable (86 ) (35 )
Customer interest escrow (389 ) 221
Accrued interest payable 1,228 610
Accounts payable and accrued expenses (197 ) 211

Net cash provided by operating activities 3,880 3,308

Cash flows from investing activities
Loan originations and principal collections, net (2,616 ) (9,126 )
Investment in foreclosed assets (125 ) (210 )
Additions for construction in real estate investments (1,461 ) (1,901 )
Deposits for construction in real estate investments - 970
Proceeds from the sale of real estate investments 2,131 1,017
Proceeds from the sale of foreclosed assets 1,549 1,096

Net cash used in investing activities (522 ) (8,154 )

Cash flows from financing activities
Contributions from Common A equity holders 1,460 -
Contributions from preferred B equity holders - 150
Contributions from preferred C equity holders - 200
Distributions to preferred B equity holders (1,900 ) -
Distributions to preferred C equity holders (1,288 ) (94 )
Distributions to common equity holders (879 ) (420 )
Proceeds from secured notes payable 9,252 11,380
Repayments of secured notes payable (10,050 ) (7,844 )
Proceeds from unsecured notes payable 799 5,263
Redemptions/repayments of unsecured notes payable (1,307 ) (5,618 )
Deferred financing costs paid (89 ) (187 )

Net cash (used in) provided by financing activities (4,002 ) 2,830

Net change in cash, cash equivalents and restricted cash (644 ) (2,016 )

Cash and cash equivalents
Beginning of period 4,196 3,735
End of period $ 3,552 $ 1,719

Supplemental disclosure of cash flow information
Cash paid for interest $ 3,632 $ 3,748

Non-cash investing and financing activities
Earned by Series B preferred equity holders but not distributed to customer interest escrow $ - $ 47
Earned by Series B preferred equity holders and distributed to customer interest escrow $ 47 $ 133
Earned but not paid distributions of Series C preferred equity holders $ 336 $ 473
Secured and unsecured notes payable transfers $ 387 $ 159
Accrued interest payable transferred to notes payable $ 790 $ 573
Foreclosure of assets transferred from loans receivable, net $ - $ 556
Foreclosure of assets transferred to loans receivable, net $ - $ 1,017
The accompanying notes are an integral part of these interim condensed consolidated financial statements.

7
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 2120 states as of September 30, ~~2022)~~2023) 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~~2023 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~~2022 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.~~2023. These unaudited interim condensed consolidated financial statements should be read in conjunction with the ~~2021~~2022 consolidated financial statements and notes thereto (the ~~“2021~~“2022 Financial Statements”) included in the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2021~~2022 (the ~~“2021~~“2022 Form 10-K”). The accounting policies followed by the Company are set forth in Note 2 – Summary of Significant Accounting Policies in the ~~2021~~2022 Financial Statements.

Adoption of New Accounting ~~Standards to be Adopted~~Standard

In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-13, “Financial ~~Instruments-Credit Losses:~~Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial ~~Instruments~~Instruments”~~.” The amendments in~~ (“ASU ~~2016-13 introduce a new~~2016-13”). This update to Accounting Standards Codification Topic (“ASC”) 326, Financial Instruments - Credit Losses (“ASC 326”), significantly changed the way entities recognize impairment on many financial assets by requiring immediate recognition of estimated credit losses expected to occur over the asset’s remaining life. FASB describes this impairment recognition model as the current expected credit loss (“CECL”) model ~~for certain financial assets, including mortgage loans~~ and ~~reinsurance receivables. The new~~believes the CECL 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 recoversresult in ~~value. This differs from the current impairment model, which requires~~more timely 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 tosince the CECL model incorporates expected credit ~~loss impairments will be recorded in an allowance against earnings~~losses versus incurred credit losses. The scope of FASB’s CECL model includes loans, held-to-maturity debt instruments, lease receivables, loan commitments and financial guarantees that ~~may be reversed~~are not accounted for ~~subsequent recoveries in~~at fair 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.

8

~~Reclassifications~~In the remainder of these Notes to Interim Condensed Consolidated Financial Statements, references to CECL or to ASC 326 shall mean the accounting standards and principles set forth in ASC 326 after giving effect to ASU 2016-13. The new guidance was effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2022.

~~Certain reclassifications have been made to~~The Company adopted ASU 2016-13 on January 1, 2023 and recorded a one-time cumulative-effect adjustment of $178 as disclosed in the ~~prior period’s financial statements and disclosures to conform to the current period’s presentation.~~Statement of Changes in Members’ Capital.

2. Fair Value

The Company had no financial instruments measured at fair value on a recurring basis as of September 30, ~~2022~~2023 and December 31, ~~2021.~~2022.

The following tables present the balances of non-financial instruments measured at fair value on a non-recurring basis as of September 30, ~~2022~~2023 and December 31, ~~2021.~~2022.
Schedule of Non-financial Instruments Measured at Fair Value on Non-recurring Basis
September 30, 2022
Quoted Prices
in Active Markets for
Identical

Significant
Other
Observable

Significant
Unobservable
September 30, 2023
Quoted
Prices
in Active
Markets
for
Identical

Significant
Other
Observable

Significant
Unobservable

Carrying Estimated Assets Inputs Inputs Carrying Estimated Assets Inputs Inputs
Amount Fair Value Level 1 Level 2 Level 3 Amount Fair Value Level 1 Level 2 Level 3

Foreclosed assets, net $ 1,443 $ 1,443 $ – $ – $ 1,443 $ 139 $ 139 $    – $       – $ 139
Impaired loans due to COVID-19, net 2,964 2,964 – – 2,964 560 560 – – 560
Other impaired loans, net 1,040 1,040 – – 1,040 5,215 5,215 – – 5,215
Total $ 5,447 $ 5,447 $ – $ – $ 5,447 $ 5,914 $ 5,914 $ – $ – $ 5,914

December 31, 2021
Quoted Prices
in Active Markets for
Identical

Significant
Other
Observable

Significant
Unobservable
December 31, 2022
Quoted
Prices
in Active
Markets
for
Identical

Significant
Other
Observable

Significant
Unobservable

Carrying Estimated Assets Inputs Inputs Carrying Estimated Assets Inputs Inputs
Amount Fair Value Level 1 Level 2 Level 3 Amount Fair Value Level 1 Level 2 Level 3

Foreclosed assets $ 2,724 $ 2,724 $ – $ – $ 2,724
Foreclosed assets, net $ 1,582 $ 1,582 $     – $       – $ 1,582
Impaired loans due to COVID-19, net 5,129 5,129 – – 5,129 1,348 1,348 – – 1,348
Other impaired loans, net 2,572 2,572 – – 2,572 3,596 3,596 – – 3,596
Total $ 10,425 $ 10,425 $ – $ – $ 10,425 $ 6,526 $ 6,526 $ – $ – $ 6,526
9

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

Schedule 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
Notes payable 27,759 27,759 27,713 27,713
Accrued interest payable 2,501 2,501 2,464 2,464
9

September 30, 2023 December 31, 2022
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
Financial Assets
Cash, cash equivalents and restricted cash $ 3,552 $ 3,552 $ 4,196 $ 4,196
Loan receivable, net 58,628 58,628 56,650 56,650
Accrued interest on loans receivables, net 756 756 670 670
Financial Liabilities
Customer interest escrow 424 424 766 766
Notes payable secured, net 22,009 21,961 23,173 23,173
Notes payable unsecured, net 30,848 30,848 30,110 30,110
Accrued interest payable 3,359 3,407 650 650

3. ~~Financing~~Loan Receivables, net

Financing receivables are comprised of the following as of September 30, ~~2022~~2023 and December 31, ~~2021:~~2022:

Schedule of Financing Receivables

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 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.~~
September 30,
2023 December 31,
2022

Loans receivable, gross $ 63,543 $ 60,974
Less: Deferred loan fees (1,441 ) (1,264 )
Less: Deposits (928 ) (839 )
Plus: Deferred origination costs 317 306
Less: Allowance for credit losses (2,863 ) (2,527 )

Loans receivable, net $ 58,628 $ 56,650

Commercial Construction and Development Loans

Construction Loan Portfolio Summary

As of September 30, ~~2022,~~2023, the Company’s portfolio consisted of ~~225 commercial~~209 construction and 1913 development loans with 6160 borrowers in 21 ~~states~~.states.

The following is a summary of the loan portfolio to builders for home construction loans as of September 30, ~~2022~~2023 and December 31, ~~2021:~~2022:

Schedule of Commercial Loans - Construction Loan Portfolio Summary
Year
Number
of
States

Number
of
Borrowers

Number
of
Loans

Value of
Collateral⁽¹⁾
Commitment Amount
Gross
Amount
Outstanding

Loan to Value
Ratio⁽²⁾⁽³⁾
Loan Fee
Number
of
States

Number
of
Borrowers

Number
of
Loans

Value of
Collateral⁽¹⁾
Commitment
Amount
Gross
Amount
Outstanding

Loan to Value
Ratio⁽²⁾⁽³⁾
Loan
Fee
2023 20 59 209 $ 113,144 $ 75,618 $ 54,630 67 % 5 %
2022 21 61 225 $ 103,540 $ 71,664 $ 51,680 69 % 5 % 21 66 230 $ 104,993 $ 72,526 $ 52,796 69 % 5 %
2021 20 66 224 $ 98,935 $ 66,008 $ 43,106 67 % 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.

10

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~~2023 and December 31, ~~2021:~~2022:

Schedule of Commercial Loans - Real Estate Development Loan Portfolio Summary
Year
Number
of
States

Number
of
Borrowers

Number
of
Loans

Gross Value
of
Collateral⁽¹⁾
Commitment Amount⁽²⁾
Gross Amount
Outstanding

Loan to Value
Ratio⁽³⁾⁽⁴⁾
Interest Spread
Number
of
States

Number
of
Borrowers

Number
of
Loans

Gross
Value of
Collateral⁽¹⁾
Commitment
Amount⁽²⁾
Gross
Amount
Outstanding

Loan to
Value
Ratio⁽³⁾⁽⁴⁾
Interest
Spread
2023 5 8 13 $ 19,765 $ 11,042 $ 8,913 45 % varies
2022 8 14 19 $ 19,173 $ 11,610 $ 8,213 43 % varies 8 14 20 $ 19,718 $ 12,110 $ 8,178 41 % varies
2021 6 12 15 $ 12,464 $ 9,095 $ 7,657 61 % varies

⁽¹⁾ The value is determined by the appraised value adjusted for remaining costs to be paid. As of September 30, ~~2022~~2023 and December 31, ~~2021,~~2022, a portion of this collateral is $~~1,870~~0 and $~~1,720~~1,900, 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.

The following is a roll forward of our construction and development loan portfolio or loans receivables, net:
Schedule of Construction and Development Loan Portfolio

Nine Months
Ended
September 30,
2023

Year Ended
December 31,
2022

Beginning balance $ 56,650 $ 46,943
Originations and modifications 45,199 59,408
Principal collections (44,631 ) (49,658 )
Transferred from loans receivable, net - (556 )
Transferred to loans receivable, net - 1,017
Change in builder deposit (88 ) 95
Change in the allowance for credit losses (336 ) (479 )
Change in loan fees, net (166 ) (120 )
Ending balance $ 58,628 $ 56,650
Credit Quality Information

~~The following tables present credit-related information at~~Effective January 1, 2023, we adopted ASC 326, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,” which replaced the ~~“class” level in accordance~~incurred loss methodology for determining out provision for credit losses and allowance for credit losses with ~~FASB Accounting Standard Codification 310-10-50, “~~~~Disclosures about~~current expected credit loss (“CECL”) model. Upon the ~~Credit Quality~~adoption of ~~Finance Receivables and~~ASC 326 the ~~Allowance~~total amount of the allowance for ~~Credit Losses.” See our 2021 Form 10-K, as filed with~~credit losses (“ACL”) on loans estimated using the ~~SEC, for more information.~~CECL methodology increased $178 compared to the total amount of the allowance recorded using the prior incurred loss model.

~~Gross finance receivables – By risk rating:~~Based on the Company’s size, complexity and historical data the aggregate method or loss-rate method was selected to estimate expected credit losses. An expected loss ratio is applied based on internal historical losses and originations. The aggregate method relies upon the performance of an entire segment of the loan portfolio to best represent the behavior of these specific segments over time. In addition, modified open pool approach was used which utilizes our borrowers credit rankings for both construction and development loans. Internal risk-rating grades are assigned by the Company’s management based on an analysis of financial and collateral strength and other credit attributes underlying each loan. Loan grades are A, B and C and Unsecured for both construction and development loans where A and C defines the highest and lowest scores, respectively. Unsecured loans in our portfolio do not hold underlying collateral.
~~Summary of Finance Receivables by Classification~~

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~~Each loan pool is adjusted for qualitative factors not inherently considered in the quantitative analysis. The qualitative adjustments either increase or decrease the quantitative model estimation. We consider factors that are relevant within the qualitative framework which include the following: lending policy, changes in nature and volume of ~~impairment calculation:~~loans, staff experience, changes in volume and trends of non-performing loans, trends in underlying collateral values, quality of our loan review system and other economic conditions, including inflation.
~~Schedule of Finance Receivables Impairment Calculation Method~~

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.~~
11
The following table presents the Company’s gross loans receivable, commitment value and ACL for each respective credit rank loan pool category as of September 30, 2023.
Schedule of Gross Loans Receivable, Commitment Value and ACL Credit Rank Loan Pool Category
Loans
Receivable
Gross Commitment
Value ACL
Construction Loans Collectively Evaluated:
A Credit Risk $ 40,293 $ 57,363 $ 235
B Credit Risk 4,966 8,656 33
C Credit Risk 1,145 1,366 16

Development Loans Collectively Evaluated:
A Credit Risk $ 8,315 $ 10,038 $ 6
B Credit Risk - - -
C Credit Risk 504 506 27

Unsecured Loans $ 2,863 $ 2,768 $ 2,367

Secured loans individually evaluated $ 5,457 $ 5,963 $ 179

Total $ 63,543 $ 86,660 $ 2,863
For loans greater than 12 months in age that are individually evaluated, appraisals are ordered and prepared if the current appraisal is greater than 13 months old and construction is greater than 90% complete. If construction is less than 90% complete the Company uses the latest appraisal on file. At certain times the Company may choose to use a broker’s opinions of value (“BOV”) as a replacement for an appraisal if deemed more efficient by management. Appraised values are adjusted down for estimated costs associated with asset disposal. Broker’s opinion of selling price, use currently valid sales contracts on the subject property, or representative recent actual closings by the builder on similar properties may be used in place of a broker’s opinion of value.
Appraisers are state certified, and are selected by first attempting to utilize the appraiser who completed the original appraisal report. If that appraiser is unavailable or unreasonably expensive, we use another appraiser who appraises routinely in that geographic area. BOVs are created by real estate agents. We try to first select an agent we have worked with, and then, if that fails, we select another agent who works in that geographic area.
In addition, our loan portfolio includes performing, forbearance and non-accrual loans. The Company’s policies with respect to placing loans on non-accrual and individually evaluated if they are past due greater than 90 days unless management deems the loan an exception. A fair market value analysis is performed and an allowance for credit loss is established based on the results of the analysis.
The following is an aging of our gross loan portfolio as of September 30, 2023:
Schedule of Aging of Gross Loan Portfolio
Gross Loan Current
Past
Due
Past Due Past Due Past Due
Value 0 - 59 60 - 89 90 - 179 180 - 269 >270 ACL
Performing Loans
A Credit Risk $ 48,608 $ 48,608 $ – $ – $ – $ – $ 241
B Credit Risk 4,966 4,966 – – – – 33
C Credit Risk 1,649 1,649 – – – – 43
Performing Loans 1,649 1,649 – – – – 43

Forbearance Loans
B Credit Risk – – – – – – –
C Credit Risk – – – – – – –
Forbearance Loans – – – – – – –

Unsecured Loans 2,863 – – – 81 2,782 2,367
Loans individually evaluated 5,457 – 1,453 1,561 852 1,591 179
Total $ 63,543 $ 55,223 $ 1,453 $ 1,561 $ 933 $ 4,373 $ 2,863
12
Below is an aging schedule of loans receivable as of September 30, 2023, on a recency basis:
Summary of Aging Schedule of Loans Receivables 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) 206 $ 55,223 86.8 %
60-89 days 3 1,453 6.1 %
90-179 days 4 1,561 – %
180-269 days 3 933 0.2 %
>270 days 6 4,373 6.9 %

Subtotal 222 $ 63,543 100.0 %

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 $ 63,543 100.0 %
Below is an aging schedule of loans receivable as of September 30, 2023, on a contractual basis:

Summary of Aging Schedule of Loans Receivables 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. 206 $ 55,223 86.8 %
60-89 days 3 1,453 6.1 %
90-179 days 4 1,561 – %
180-269 days 3 933 0.2 %
>270 days 6 4,373 6.9 %

Subtotal 222 $ 63,543 100.0 %

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 $ 63,543 100.0 %
13

~~Impaired~~Allowance for Credit Losses on Loans

The following istable provides a ~~summary~~roll forward of ~~our impaired non-accrual commercial construction loans as of September 30, 2022 and December 31, 2021.~~the allowance for credit losses:
Schedule of ~~Impaired Loans~~Allowance for Credit Losses

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

Allowance for credit losses as of December 31, 2022 $ (2,527 )
Impact of the adoption of ASC 326 (178 )
Charge-offs 136
Loan loss provision (294 )
Allowance for credit losses as of September 30, 2023 $ (2,863 )
Allowance for Credit Losses on Unfunded Loan Commitments
Unfunded commitments to extend credit, which have similar collateral, credit and market risk to our outstanding loans, were $20,988 and $19,730 as of September 30, 2023 and December 31, 2022, respectively. The allowance for credit losses is calculated at an estimated loss rate and the total commitment value for loans in our portfolio. Therefore, for off-balance-sheet credit exposures, the estimate of expected credit losses has been presented as a liability on the balance sheet as of September 30, 2023. Other than unfunded commitments, we had no off-balance sheet transactions, nor do we currently have any such arrangements or obligations.

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:
Summary of Concentration Risks
September 30, 2023 December 31, 2022
Percent of Percent of
Borrower Loan Borrower Loan
City Commitments City Commitments

Highest concentration risk Pittsburgh, PA 32 % Pittsburgh, PA 27 %
Second highest concentration risk Cape Coral, FL 8 % Orlando, FL 9 %
Third highest concentration risk Orlando, FL 6 % Spokane, WA 7 %
The following disclosures are presented under GAAP in effect prior to the adoption of CECL. The Company has included these disclosures to address the applicable prior periods.
Finance Receivables – By risk rating:
Summary of Finance Receivables by Classification
December 31, 2022

Pass $ 49,955
Special mention 3,842
Classified – accruing –
Classified – non-accrual 7,177

Total $ 60,974
Finance Receivables – Method of impairment calculation:
Schedule of Finance Receivables Impairment Calculation Method
December 31, 2022

Performing loans evaluated individually $ 15,984
Performing loans evaluated collectively 37,813
Non-performing loans without a specific reserve 1,096
Non-performing loans with a specific reserve 6,081

Total evaluated collectively for loan losses $ 60,974
14
The following is a summary of our impaired non-accrual construction and development loans as of December 31, 2022.
Schedule of ~~Concentration Risk~~ Impaired Loans
December 31,
2022

Unpaid principal balance (contractual obligation from customer) $ 7,628
Charge-offs and payments applied (451 )
Gross value before related allowance 7,177
Related allowance (2,233 )
Value after allowance $ 4,944
Below is an aging schedule of loans receivable as of December 31, 2022, on a recency basis:
September 30, 2022 December 31, 2021
Percent of Percent of
Borrower Loan Borrower Loan
City Commitments City Commitments

Highest concentration risk Pittsburgh, PA 28 % Pittsburgh, PA 26 %
Second highest concentration risk Cape Coral, FL 10 % Orlando, FL 7 %
Third highest concentration risk Orlando, FL 5 % Spokane, WA 4 %

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) 236 $ 53,797 88.2 %
60-89 days 4 2,570 4.2 %
90-179 days – – – %
180-269 days 3 528 0.9 %
>270 days 7 4,079 6.7 %

Subtotal 250 $ 60,974 100.0 %

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 250 $ 60,974 100.0 %
Below is an aging schedule of loans receivable as of December 31, 2022, on a contractual basis:

No.
Loans

Unpaid
Balances
%
Contractual Terms - All current Direct Loans and Sales Finance Contracts with installments past due less than 60 days from due date. 236 $ 53,797 88.2 %
60-89 days 4 2,570 4.2 %
90-179 days – – – %
180-269 days 3 528 0.9 %
>270 days 7 4,079 6.7 %

Subtotal 250 $ 60,974 100.0 %

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 250 $ 60,974 100.0 %
15
4. Real Estate Investment Assets

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

Schedule of ~~Real~~Roll Forward of Real Estate Investment Assets

Nine Months
Ended
September 30, 2022

Year
Ended
December 31, 2021

Nine Months
Ended
September 30, 2021

Nine Months
Ended
September 30,
2023

Year Ended
December 31,
2022

Nine Months
Ended
September 30,
2022

Beginning balance $ 1,651 $ 1,181 $ 1,181 $ 660 $ 1,651 $ 1,651
Deposits from real estate investments (970 ) (200 ) (200 ) - (1,570 ) (970 )
Gain on sale of real estate investments 10 -
Proceeds from the sale of real estate investments (1,017 ) – – (2,131 ) (1,647 ) (1,017 )
Additions for construction/development 1,901 670 277 1,461 2,226 1,901
Ending balance $ 1,565 $ 1,651 $ 1,258 $ - $ 660 $ 1,565

AsDuring June 2020, we acquired four lots from a borrower in exchange for the transfer of loans secured by those lots. We extinguished the principal balance for the loans on the lots in the amount of $640 and in addition, paid a $500 management fee for the development of homes on the lots. The management fee was paid through reducing the principal balance on a current loan receivable with the borrower. Two of the four homes sold during 2022.
During the nine months ended September 30, ~~2022 we received a $600~~ ~~deposit for one of~~2023, the Company sold our final two real estate ~~investments which is classified~~investment assets and recognized a gain on ~~our balance sheet as restricted cash.~~the sale of $10.
12
5. Foreclosed Assets

The following table is a roll forward of foreclosed assets:

Schedule of Roll Forward of Foreclosed Assets

Nine Months
Ended
September 30, 2022

Year
Ended
December 31, 2021

Nine Months
Ended
September 30, 2021

Nine Months
Ended
September 30,
2023

Year Ended
December 31,
2022

Nine Months
Ended
September 30,
2022

Beginning balance $ 2,724 $ 4,449 $ 4,449 $ 1,582 $ 2,724 $ 2,724
Transfers from loan receivables, net 556 791 274 - 556 556
Transfers to loan receivables, net (1,017 ) - - - (1,017 ) (1,017 )
Additions from construction/development 210 818 612 125 316 210
Sale proceeds (1,096 ) (3,418 ) (2,674 ) (1,549 ) (1,096 ) (1,096 )
Loss on foreclosure - (47 ) -
Loss on sale of foreclosed assets - (92 ) (69 ) (34 ) - -
Gain on foreclosure - 67 -
Gain on sale of foreclosed assets 101 166 165 8 101 101
Impairment loss on foreclosed assets (35 ) (10 ) (10 )
Impairment on foreclosed assets 7 (2 ) (35 )
Ending balance $ 1,443 $ 2,724 $ 2,747 $ 139 $ 1,582 $ 1,443

16
6. Borrowings

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

Priority
Rank
September 30, 2022 December 31, 2021
Priority
Rank
September 30,
2023 December 31,
2022
Borrowing Source
Purchase and sale agreements and other secured borrowings 1 $ 23,669 $ 19,165 1 $ 21,491 $ 23,142
Secured lines of credit from affiliates 2 49 859 2 522 35
Unsecured line of credit (senior) 3 1,250 1,250 3 500 1,250
Other unsecured debt (senior subordinated) 4 1,094 1,053 4 634 634
Unsecured Notes through our public offering, gross 5 20,512 20,636 5 20,759 21,576
Other unsecured debt (subordinated) 5 4,835 4,693 5 8,324 6,109
Other unsecured debt (junior subordinated) 6 447 447 6 907 907

Total $ 51,856 $ 48,103
Total gross secured and unsecured notes payable $ 53,137 $ 53,653

The following table shows the maturity of outstanding debt as of September 30, ~~2022:~~2023:

Schedule of Maturity of Debt
Year Maturing
Total Amount
Maturing

Public
Offering

Other
Unsecured

Secured
Borrowings
Total Amount Maturing Public Offering Other Unsecured Secured Borrowings
2022 $ 24,373 $ 958 $ 503 $ 22,912
2023 8,262 5,926 2,264 72 $ 25,158 $ 1,582 $ 2,134 $ 21,442
2024 8,912 6,198 2,587 127 11,077 7,722 3,337 18
2025 6,618 6,147 398 73 8,674 7,557 1,098 19
2026 and thereafter 3,691 1,282 1,875 534
2026 2,720 835 1,865 20
2027 and thereafter 5,508 3,063 1,931 514
Total $ 51,856 $ 20,511 $ 7,627 $ 23,718 $ 53,137 $ 20,759 $ 10,365 $ 22,013

13
Secured Borrowings

Lines of Credit

As of September 30, ~~2022~~2023 and December 31, ~~2021,~~2022, the Company had $49522 and $~~859~~35 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~~as of ~~2022, and the~~September 30, 2023. 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 $63 and $84 as of September 30, ~~2022~~2023 and December 31, ~~2021,~~2022, respectively.
17

Borrowings secured by loan assets are summarized below:

Schedule of Secured Borrowings
September 30, 2022 December 31, 2021 September 30, 2023 December 31, 2022

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
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 $ 10,145 $ 6,379 $ 8,232 $ 6,065
S.K. Funding 11,211 7,300 8,084 5,500 9,450 6,500 9,049 7,100

Lender
Shuman 532 125 566 125 345 125 724 125
Jeff Eppinger 3,436 1,500 3,328 1,500 1,387 260 2,761 1,500
R. Scott Summers 1,733 777 1,475 847 2,073 1,003 1,334 728
John C. Solomon 1,128 563 1,139 563 1,054 563 1,172 563
Judith Y. Swanson 11,124 7,000 9,803 6,841 10,618 6,086 9,571 6,473

Total $ 36,169 $ 22,859 $ 29,242 $ 18,345 $ 35,072 $ 20,916 $ 32,843 $ 22,554

Unsecured Borrowings

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

The effective interest rate on borrowings through our Notes Program at September 30, ~~2022~~2023 and December 31, ~~2021~~2022 was ~~8.88~~9.01% and ~~9.28~~8.60%, 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:

Schedule of Roll Forward of Notes Outstanding

Nine Months
Ended
September 30, 2022

Year
Ended
December 31, 2021

Nine Months
Ended
September 30, 2021

Nine Months
Ended
September 30,
2023

Year Ended
December 31,
2022

Nine Months
Ended
September 30,
2022

Gross Notes outstanding, beginning of period $ 20,636 $ 21,482 $ 21,482 $ 21,576 $ 20,636 $ 20,636
Notes issued 3,243 7,876 7,239 685 7,245 3,243
Note repayments / redemptions (3,368 ) (8,722 ) (7,820 ) (1,502 ) (6,305 ) (3,368 )

Gross Notes outstanding, end of period $ 20,511 $ 20,636 $ 20,901 $ 20,759 $ 21,576 $ 20,511

Less deferred financing costs, net (379 ) (367 ) (389 ) (276 ) (367 ) (379 )

Notes outstanding, net $ 20,132 $ 20,269 $ 21,192 $ 20,483 $ 21,209 $ 20,132

14
The following is a roll forward of deferred financing costs:

Schedule of Roll Forward of Deferred Financing Costs

Nine Months
Ended
September 30, 2022

Year
Ended
December 31, 2021

Nine Months
Ended
September 30, 2021

Nine Months
Ended
September 30,
2023

Year Ended
December 31,
2022

Nine Months
Ended
September 30,
2022

Deferred financing costs, beginning balance $ 1,061 $ 942 $ 942 $ 835 $ 1,061 $ 1,061
Additions 187 119 95 89 223 187
Disposals - (449 ) -
Deferred financing costs, ending balance 1,248 1,061 1,037 924 835 1,248
Less accumulated amortization (869 ) (694 ) (648 ) (648 ) (468 ) (869 )
Deferred financing costs, net $ 379 $ 367 $ 389 $ 276 $ 367 $ 379
18

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

Schedule of Roll Forward of Accumulated Amortization of Deferred Financing Costs

Nine Months
Ended
September 30, 2022

Year
Ended
December 31, 2021

Nine Months
Ended
September 30, 2021

Nine Months
Ended
September 30,
2023

Year Ended
December 31,
2022

Nine Months
Ended
September 30,
2022

Accumulated amortization, beginning balance $ 694 $ 526 $ 526 $ 468 $ 694 $ 694
Additions 175 168 122 180 223 175
Disposals - (449 ) -
Accumulated amortization, ending balance $ 869 $ 694 $ 648 $ 648 $ 468 $ 869

Other Unsecured Debts

Our other unsecured debts are detailed below:
Schedule of Other Unsecured Loans

Principal Amount Outstanding as of
Loan Maturity Date
Interest
Rate⁽¹⁾
September 30, 2022 December 31, 2021
Maturity
Date

Interest
Rate⁽¹⁾

September 30,
2023

December 31,
2022

Unsecured Note with Seven Kings Holdings, Inc. Demand⁽²⁾ 9.5 % $ 500 $ 500
Unsecured Note with Seven Kings Holdings, Inc. Senior Subordinated Demand⁽²⁾ 9.5 % $ 500 $ 500
Unsecured Line of Credit from Swanson July 2022 10.0 % - 159 October 2023 10.0 % 914 527
Unsecured Line of Credit from Builder Finance, Inc. January 2023 10.0 % 750 750
Unsecured Line of Credit from Builder Finance, Inc. Senior Subordinated January 2024 10.0 % - 750
Subordinated Promissory Note April 2024 10.0 % 100 100 April 2024 10.0 % 100 100
Subordinated Promissory Note August 2022 11.0 % - 200 February 2025 9.0 % 600 600
Subordinated Promissory Note February 2023 10.0 % 600 600 October 2023 10.0 % 400 400
Subordinated Promissory Note June 2023 10.0 % 400 400 March 2024 9.75 % 500 500
Subordinated Promissory Note March 2024 9.75 % 500 - December 2023 11.0 % 20 20
Subordinated Promissory Note December 2022 5.0 % 3 3 February 2024 11.0 % 20 20
Subordinated Promissory Note December 2023 11.0 % 20 20 January 2025 10.0 % 15 15
Subordinated Promissory Note February 2024 11.0 % 20 20 January 2026 8.0 % - 10
Subordinated Promissory Note January 2025 10.0 % 15 15 March 2027 10.0 % 26 -
Subordinated Promissory Note January 2026 8.0 % 10 - November 2023 9.5 % 200 200
Subordinated Promissory Note November 2023 9.5 % 200 200 October 2024 10.0 % 700 700
Subordinated Promissory Note October 2024 10.0 % 700 700 December 2024 10.0 % 100 100
Subordinated Promissory Note December 2024 10.0 % 100 100 April 2025 10.0 % 202 202
Subordinated Promissory Note April 2025 10.0 % 202 202 July 2023 8.0 % - 100
Subordinated Promissory Note July 2023 8.0 % 100 100 July 2025 8.0 % 100 -
Subordinated Promissory Note July 2024 5.0 % - 1,500 September 2023 7.0 % - 94
Subordinated Promissory Note September 2023 7.0 % 94 94 September 2027 10 % 108 -
Subordinated Promissory Note October 2023 7.0 % 100 100 October 2023 7.0 % 100 100
Subordinated Promissory Note December 2025 8.0 % 180 180 December 2025 8.0 % 180 180
Senior Subordinated Promissory Note March 2026⁽³⁾ 10.0 % 375 334 March 2026⁽³⁾ 8.0 % 374 374
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 -
Subordinated Promissory Note August 2026 8.0 % 291 291
Subordinated Promissory Note July 2026⁽⁴⁾ 1.0 % 740 740
Junior Subordinated Promissory Note July 2026⁽⁴⁾ 20.0 % 460 460
Senior Subordinated Promissory Note October 2024⁽⁴⁾ 1.0 % 720 720 October 2024⁽⁴⁾ 1.0 % 720 720
Junior Subordinated Promissory Note October 2024⁽⁴⁾ 20.0 % 447 447 October 2024⁽⁴⁾ 20.0 % 447 447
Other unsecured loans $ 7,627 $ 7,444
Subordinated Promissory Note March 2029 10.0 % 1,700 -
Subordinated Promissory Note April 2024 10.0 % 750 750
Subordinated Promissory Note May 2027 10.0 % 98 -
Total Other Unsecured Debt $ 10,365 $ 8,900

⁽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.

1519

7. Redeemable Preferred Equity

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

Nine Months
Ended
September 30, 2022

Year
Ended
December 31, 2021

Nine Months
Ended
September 30, 2021

Nine Months
Ended
September 30,
2023

Year Ended
December 31,
2022

Nine Months
Ended
September 30,
2022

Beginning balance $ 5,014 $ 3,582 $ 3,582 $ 5,725 $ 5,014 $ 5,014
Additions from new investment 200 1,000 800 - 200 200
Distributions (94 ) (101 ) (71 )
Distributions and redemptions (1,287 ) (131 ) (94 )
Additions from reinvestments 473 533 388 444 642 473

Ending balance $ 5,593 $ 5,014 $ 4,699 $ 4,882 $ 5,725 $ 5,593

The following table shows the earliest redemption options for investors in our Series C Preferred Units as of September 30, ~~2022:~~2023:
Schedule of Redemption Option for Investors

Year Maturing Total Amount Redeemable
Year Redeemable Total
Amount
Redeemable
2024 $ 3,509 $ 2,638
2025 440 495
2026 309 309
2027 1,129 1,234
2028 206 206
Total $ 5,593 $ 4,882
During March 2023, the Company redeemed 11.78109 of the Series C Preferred Units, held by our CEO and his wife, at a redemption price of $1,178, all of which was reinvested in Common Units.

8. Members’ Capital

~~There are currently~~The Company has two classes of equity units ~~outstanding~~ that ~~the Company~~it 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,~~2023, the Class A Common Units are held by ~~eight~~seven members, all of whom have no personal liability. In addition, as of September 30, 2023, the Series B Preferred Units was $0 compared to $1,900 as of December 31, 2022. All Class A common members have voting rights in proportion to their capital account. ~~There were~~
~~2,629~~During March 2023, the Company issued 17,371 Class A Common Units for $1,460, and 20,000 Class A Common Units were outstanding as of September 30, ~~2022 and~~2023. As of December 31, ~~2021.~~2022, there were 2,629 Class A Common Units outstanding.

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.
On March 2023, the Company redeemed 100% of the outstanding Series B Preferred Units constituting 19 units, at a redemption price of $1,900. As of ~~September 30,~~December 31, 2022, the Hoskins Group owned a total of ~~18.7~~19.0 Series B Preferred Units, which were issued for a total of $~~1,870~~1,900.

20
9. Related Party Transactions

As of September 30, ~~2022,~~2023, the Company had $~~1,250~~889, $~~250~~89, and $~~951~~1,000 available to borrow against the line of credit from Daniel M. Wallach (our Chief Executive Officer and ~~chairman~~Chairman of the ~~board~~Board of ~~managers)~~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~~2022 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~~2023, 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.~~
~~As of December 31, 2021, the Company serviced two loans~~ originated by Mr. Myrick and serviced by the Company paid off for ~~which it received a~~ 5~~% loan fee and borrowed~~ $~~141~~105 ~~against the Myrick LOC to originate and fund construction on the two such loans.~~.

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~~20,988 and $~~22,902~~19,730 at September 30, ~~2022~~2023 and December 31, ~~2021,~~2022, respectively.
16

11. Selected Quarterly Condensed Consolidated Financial Data (Unaudited)

Summarized unaudited quarterly condensed consolidated financial data for the quarters of ~~2022~~2023 and ~~2021~~2022 are as follows:

Schedule of Unaudited Quarterly Condensed Consolidated Financial Data

Quarter 3 Quarter 2 Quarter 1 Quarter 4 Quarter 3 Quarter 2 Quarter 1 Quarter
3 Quarter
2 Quarter
1 Quarter
4 Quarter
3 Quarter
2 Quarter
1
2022 2022 2022 2021 2021 2021 2021 2023 2023 2023 2022 2022 2022 2022

Net interest and fee income $ 1,455 $ 1,267 $ 1,112 $ 958 $ 830 $ 625 $ 411 $ 1,464 $ 1,509 $ 1,451 $ 1,407 $ 1,424 $ 1,242 $ 1,041
Loan loss provision 271 134 74 246 83 45 214 131 43 120 451 271 134 74
Net interest income after loan loss provision 1,184 1,133 1,038 712 747 580 197 1,333 1,466 1,331 956 1,153 1,108 967
Gain on sale of foreclosed assets – 101 – 1 64 13 88 - 8 - - - 101 -
Gain on foreclosure of assets – – – 67 – – –
Gain on extinguishment of debt – – – – 361 – 10
Gain on the sale of real estate assets - 10 - - - -
Dividend or other income 16 19 21 90 31 25 70
SG&A expense 603 713 697 415 483 438 537 591 617 826 672 603 713 695
Depreciation and amortization 12 12 12 12 12 13 16 21 20 20 20 12 12 12
Loss on sale of foreclosed assets – – – 23 – 51 18 - - 34 - - - -
Loss on foreclosure of assets – – – 47 – – –
Impairment loss on foreclosed assets 35 – – – – – 10
Net income (loss) $ 534 $ 509 $ 329 $ 283 $ 677 $ 91 $ (286 )
Impairment (gain) loss on foreclosed assets - (9 ) 2 (33 ) 35 - -
Net income $ 737 $ 875 $ 470 $ 387 $ 534 $ 509 $ 330

12. Non-Interest Expense Detail

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

Schedule of Selling General and Administrative Expenses
2023 2022

For the Nine Months Ended
September 30,

For the Nine Months Ended
September 30,

2022 2021 2023 2022
Selling, general and administrative expenses
Legal and accounting $ 182 $ 143 $ 240 $ 182
Salaries and related expenses 1,219 613 1,302 1,219
Board related expenses 77 74 81 77
Advertising 86 54 16 86
Rent and utilities 58 40 43 58
Loan and foreclosed asset expenses 151 299 71 151
Travel 105 105 118 105
Other 134 130 163 134
Total SG&A $ 2,012 $ 1,458 $ 2,034 $ 2,012

13. Subsequent Events

Management of the Company has evaluated subsequent events through November ~~9, 2022,~~8, 2023, the date these interim condensed consolidated financial statements were issued.
1721

ITEM 2. 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 report. 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~~“2022 Financial Statements”) included in the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2021~~2022 (the ~~“2021~~“2022 Form 10-K”). See also “Cautionary Note Regarding Forward-Looking Statements” preceding Part I.

Overview

During the quarter and nine months ended September 30, ~~2022,~~2023, the Company continued to focus on the reduction of non-interest earning assets. As of September 30, ~~2022, loans~~2023, gross loan values classified as non-accrual were 1116 or ~~$5,890~~$8,320 compared to 2314 or ~~$9,526~~$7,177 as of December 31, ~~2021.~~2022. In addition, as of September 30, ~~2022,~~2023, we had ~~three~~one foreclosed ~~assets~~asset or ~~$1,443~~$139 compared to ~~five~~three or ~~$2,724~~$1,582 as of December 31, ~~2021.~~2022.

The ~~Company continues to lose~~estimated loss on interest income onresulting from non-interest earning assets ~~that do not accrue interest. During~~for the quarter and nine months ended September 30, ~~2022, the estimated loss on interest income related~~2023 was $296 and $715 compared to ~~impaired and foreclosed assets was~~ $257 and $864, ~~respectively.~~respectively, compared to the same periods of 2022. 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.~~remain somewhat constant.

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:~~2023 and the beginning of 2024:

1. Continue to ~~decrease~~manage 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~~2024 as compared to ~~2022,~~2023, we will increase orour focus on fix and flips as a percentage of sales.
3. ~~Lower~~Control SG&A expenses.
4. ~~Maintain a consistent~~Slightly increase margin, ~~similar~~as compared to our current spread.
5. Maintain liquidity at a level sufficient for loan originations.
6. Reduce the Company’s loan loss and impairment expenses.

~~We anticipate that~~The continued rise of long-term rates is making it challenging for ~~the last quarter~~our customers to sell built product. Housing starts bottomed in November of 2022 and have risen since, despite the ~~housing market~~increase in ~~most of~~long-term rates. Despite the ~~areas~~increase in ~~which we do business will decline due to~~starts, 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 toCompany anticipates a 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~~starts during 2024 and is planning accordingly. The rise in short term rates ishas likely ~~to benefit~~benefited the ~~company~~Company as our competitors’ rates ~~will rise~~have risen faster than ours making us more competitive, but ~~the continued~~an additional rise in long term interest rates iswould negatively ~~impacting~~impact the housing industry as a whole, and therefore us.

We had ~~$55,864~~$58,628 and ~~$46,943~~$56,650 in loan assets, net as of September 30, ~~2022~~2023 and December 31, ~~2021,~~2022, respectively. ~~In addition, as~~As of September 30, ~~2022,~~2023, we had ~~225~~209 commercial construction and 1913 development loans with 6160 borrowers in 21 states.

Net cash provided by operations increased ~~$2,144~~$572 to ~~$3,308 as of~~$3,880 for the nine months ended September 30, ~~2022~~2023 compared to the same period of ~~2021. Our~~2022. The 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.~~other assets.
22

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~~2022 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~~2022 unless listed below.

18
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 September 30, 2023
Loan Loss Loan Loss
Provision Provision
Change in Fair Value Assumption Higher/(Lower) Higher/(Lower)
Increasing fair value of the real estate collateral by 35%* $ $ -
Decreasing fair value of the real estate collateral by 35%** $ 3,760 $ 3,555

* 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~~non-performing and a book amount of the loans outstanding of ~~$55,864.~~$58,628.

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 September 30, 2023
Foreclosed Foreclosed
Assets Assets
Change in Fair Value Assumption Higher/(Lower) Higher/(Lower)
Increasing fair value of the foreclosed asset by 35%* $ $          -
Decreasing fair value of the foreclosed asset by 35%** $ 505 $ 49

* 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.~~$139.

23
Results of ~~Operation~~Operations

Interest Spread

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

Three Months Ended Nine Months Ended Three Months Ended Nine Months Ended
September 30, September 30, September 30, September 30,
2022 2021 2022 2021 2023 2022 2023 2022
Interest Income * * * * * * * *
Estimated interest income $ 2,198 15 % $ 1,532 12 % $ 5,978 14 % $ 4,533 12 % $ 2,117 14 % $ 2,198 15 % $ 6,834 14 % $ 5,978 14 %
Estimated unearned interest income due to COVID-19 (167 ) (1 )% (228 ) (2 )% (519 ) (1 )% (684 ) (2 )% (100 ) (1 )% (167 ) (1 )% (340 ) (1 )% (519 ) (1 )%
Interest income on loans $ 2,031 14 % $ 1,304 10 % $ 5,459 13 % $ 3,849 10 % $ 2,017 13 % $ 2,031 14 % $ 6,494 13 % $ 5,459 13 %

Fee income on loans 874 6 % 959 8 % 2,662 6 % 2,557 7 % $ 896 6 % $ 874 6 % $ 2,449 5 % $ 2,662 6 %
Deferred loan fees (163 ) (1 )% (200 ) (2 )% (502 ) (1 )% (621 ) (2 )% (150 ) (1 )% (163 ) (1 )% (449 ) (1 )% (502 ) (1 )%
Fee income on loans, net 711 5 % 759 6 % 2,160 5 % 1,936 5 % $ 746 5 % $ 711 5 % $ 2,000 4 % $ 2,160 5 %

Interest and fee income on loans 2,742 19 % 2,063 16 % 7,619 18 % 5,785 15 % $ 2,763 18 % $ 2,742 19 % $ 8,494 18 % $ 7,619 18 %

Interest expense unsecured 694 5 % 745 6 % 2,026 5 % 2,276 6 % $ 768 5 % $ 694 5 % $ 2,240 5 % $ 2,026 5 %
Interest expense secured 541 4 % 446 4 % 1,584 4 % 1,521 4 % 473 3 % 541 4 % 1,651 4 % 1,584 4 %
Amortization offering costs 52 - % 42 - % 175 - % 122 - % 58 - % 52 - % 179 - % 175 - %
Interest expense 1,287 9 % 1,233 10 % 3,785 9 % 3,919 10 % $ 1,299 8 % $ 1,287 9 % $ 4,070 9 % $ 3,785 9 %

Net interest income (spread) 1,455 10 % 830 6 % 3,834 9 % 1,866 5 % $ 1,464 10 % $ 1,455 10 % $ 4,424 9 % $ 3,834 9 %

Weighted average outstanding loan asset balance $ 59,095 $ 50,156 $ 56,773 $ 50,226 $ 61,552 $ 59,095 $ 63,191 $ 56,773

*Annualized amount as percentage of weighted average outstanding gross loan balance
19

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%10.25%. For most loans, the margin is fixed at 3%2.5%; 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~~decreased to ~~15% and~~ 14% for the quarter ~~and nine months~~ ended September 30, ~~2022~~2023 compared to ~~12%~~15% for the same ~~periods~~period of ~~the prior year.~~2022. Interest income ~~increased~~decreased $511, due primarily to ~~a decline in~~write offs related to two borrowers who were impaired during the ~~total~~third quarter 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~~2023 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.~~
24

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,~~This 2.5% may increase because some customers run past the standard repayment time and ~~increase pricing by 2.5% on those loans at all times~~pay a higher rate of interest after that. ~~This pricing change is anticipated~~For the quarter and nine months ended September 30, 2023, margin not including fee income was 5% compared to ~~lower profit~~4% for the same period 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 perprior 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,~~life, the remaining fee is recognized at ~~the termination~~that time. During 2022, we started charging an annual fee on most of ~~the loan. During~~our development loans which varies.
Fee income on loans before deferred loan fee adjustments decreased 1% to 5% for the quarter and nine months ended September 30, 2023 compared to 6% for the same period of 2022 ~~and 2021, fee income, net was 5%.~~due primarily to fully funded loans taking longer to payoff due to the rise in long-term interest rates.

● Amount of ~~nonperforming~~non-performing assets. Generally, two types of ~~nonperforming~~non-performing assets negatively affect our interest ~~spread:~~spread which are 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~~2023 and December 31, ~~2021,~~2022, foreclosed assets were ~~$1,443~~$139 and ~~$2,724,~~$1,822, respectively, which resulted in a negative impact to our interest ~~spread in both years.~~spread.

~~The amount~~As of ~~nonperforming assets is expected to decrease over the next quarter as we continue to liquidate nonperforming assets.~~September 30, 2023 and December 31, 2022, gross loans receivables non-accrual loans or loans not earning interest was $8,320 and $7,178, respectively.

20
Loan Loss Provision

Loan loss provision ~~(expense throughout the year)~~ was ~~$271~~$131 and ~~$83~~$294 for the ~~quarters ended September 30, 2022~~quarter and ~~2021, respectively. For the~~ nine months ended September 30, ~~2022~~2023 compared to $271 and ~~2021, loan loss expense was~~ $479 ~~and $342,~~for the same periods of 2022, respectively.

The allowance for ~~loan~~credit losses at September 30, 2023 was $2,863 which consisted of $2,316 for loans evaluated individually due to COVID-19, $230 for other loans evaluated individually and $317 for loans evaluated collectively.
The allowance for credit losses at December 31, 2022 was ~~$2,156~~$2,527 which primarily consisted of ~~$270~~$294 for loans without specific reserves, ~~$85~~$246 for loans with specific reserves and ~~$1,801~~$1,987 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~~Other Income

During ~~April 2020,~~ the ~~Company received a grant under~~quarters and nine months ended September 30, 2023 and 2022, we consulted for one of our construction and development loan customers which included accounting guidance. Other income related to our consulting fees was $16 and $56 for the ~~Economic Injury Disaster Loan Emergency Advance (the “EIDL Advance”)~~quarter and nine months ended September 30, 2023 compared to $31 and $126 for ~~$10 which was used for payroll and other certain operating expenses.~~the same periods of 2022, respectively. We anticipate to continue our consulting services to our customers on an as needed basis during 2023.
~~During February 2021,~~
Gain on the ~~full EIDL Advance or $10 and accrued interest were forgiven by the U.S. Small Business Administration.~~Sale of Real Estate Investments

During ~~February 2021,~~ the ~~Company received their second draw~~quarter and nine months ended September 30, 2023, we recognized $0 and $10, respectively, of non-interest income related to the ~~Paycheck Protection Program (“PPP”) loan created under~~sale of certain real estate investments. No gains were recognized for the ~~Coronavirus Aid, Relief,~~same periods of 2022.
25
Gain on Impairment of Foreclosed Assets
During the quarter and ~~Economic Security Act~~nine months ended September 30, 2023, we recognized $9 and $7 of non-interest income related to impairments of certain foreclosed assets. No gains were recognized for ~~$316 which was used to cover payroll and certain other identified costs. During August 2021,~~ the ~~full amount~~same periods of ~~the PPP loan was forgiven.~~2022.

Gain on Sale of Foreclosed Assets

During the quarter and nine months ended September 30, ~~2022 and 2021,~~2023, we sold ~~none~~one foreclosed asset and ~~two foreclosed assets and one and 13 foreclosed assets, which resulted in~~recognized a gain on the sale of ~~$0,~~$8 compared to the sale of two foreclosed assets for a gain on the sale of $101 ~~and $64 and $165, respectively.~~during the same periods of 2022.

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
21
Three Months Ended
September 30, Nine Months Ended
September 30,
2023 2022 2023 2022
Legal and accounting $ 43 $ 29 $ 240 $ 182
Salaries and related expenses 405 430 1,302 1,219
Board related expenses 27 27 81 77
Advertising 5 24 16 86
Rent and utilities 13 15 43 58
Loan and foreclosed asset expenses 14 9 71 151
Travel 37 27 118 105
Other 47 42 163 134
Total SG&A $ 591 $ 603 $ 2,034 $ 2,012

Our SG&A expense ~~increased $120 and $554 for~~decreased $12 to $591 during the quarter ended September 30, 2023 compared to the same period of 2022. The decrease was primarily due to lower salaries and related expenses, which was partially offset by an increase in legal and accounting fees. During the nine months ended September 30, ~~2022, respectively,~~2023 SG&A expenses increased $22 to $2,034 compared to the same ~~periods~~period of ~~2021,~~2022. The increase was primarily due ~~primarily~~ to salaries and related ~~expense,~~expenses, which was partially offset by ~~decreases~~a decrease 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:~~advertising.
● 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~~2023 we ~~recognized $0 as~~sold one foreclosed asset which incurred a loss on the sale of ~~foreclosed assets compared to $0 and $69 for the same periods of the prior year, respectively.~~$34. 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~~period of ~~the prior year, respectively.~~2022.

Consolidated Financial Position

Loans ~~Receivable~~Receivables, net

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.built homes take longer to sell.

26
The following is a summary of our loan portfolio to builders for home construction loans as of September 30, 2023
(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 1 2 $ 928 $ 650 $ 460 70 % 5 %
California 1 1 2,551 1,530 1,468 60 % 5 %
Connecticut 1 2 930 605 477 65 % 5 %
Florida 12 80 41,743 25,164 18,342 60 % 5 %
Georgia 5 7 3,162 2,211 1,408 70 % 5 %
Illinois 1 1 1,600 992 763 62 % 5 %
Louisiana 2 3 820 589 569 72 % 5 %
Maryland 1 1 480 336 313 70 % 5 %
Missouri 1 1 250 175 130 70 % 5 %
New Jersey 3 4 1,829 1,600 1,638 88 % 5 %
North Carolina 8 16 5,925 3,693 1,982 62 % 5 %
Ohio 3 7 2,580 1,763 1,400 68 % 5 %
Pennsylvania 1 22 24,770 19,186 14,167 77 % 5 %
South Carolina 11 45 16,651 10,421 5,977 63 % 5 %
Tennessee 2 4 1,114 761 561 68 % 5 %
Texas 2 4 2,220 1,774 1,684 80 % 5 %
Utah 1 1 2,200 1,320 640 60 % 5 %
Virginia 2 2 602 421 400 70 % 5 %
Washington 1 6 2,789 2,427 2,251 87 % 5 %
Total 59 209 $ 113,144 $ 75,618 $ 54,630 67 %⁽³⁾ 5 %
⁽¹⁾ The value is determined by the appraised value.
⁽²⁾ The loan to value ratio is calculated by taking the commitment amount and dividing by the appraised value.
⁽³⁾ Represents the weighted average loan to value ratio of the loans.
The following is a summary of our loan portfolio to builders for home construction loans as of December 31, 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 %
(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 1 2 $ 767 $ 537 $ 362 70 % 5 %
Connecticut 2 5 2,045 1,463 1,365 72 % 5 %
Delaware 1 3 1,035 725 523 70 % 5 %
Florida 19 113 42,605 30,573 21,155 72 % 5 %
Georgia 5 6 3,116 1,798 919 58 % 5 %
Illinois 1 1 1,245 747 586 60 % 5 %
Louisiana 2 4 975 628 457 64 % 5 %
Maryland 1 2 958 671 232 70 % 5 %
Michigan 3 5 1,437 1,003 979 70 % 5 %
New Jersey 1 5 3,127 2,259 2,769 72 % 5 %
New York 1 1 740 500 500 68 % 5 %
North Carolina 6 15 7,067 4,143 2,676 59 % 5 %
Ohio 2 4 1,178 831 775 71 % 5 %
Oregon 1 1 550 385 368 70 % 5 %
Pennsylvania 1 17 20,132 14,016 9,831 70 % 5 %
South Carolina 10 27 7,525 5,133 3,582 68 % 5 %
Tennessee 3 4 1,554 977 799 63 % 5 %
Texas 2 4 3,118 2,039 1,828 65 % 5 %
Utah 1 1 900 720 719 80 % 5 %
Virginia 2 3 924 646 213 70 % 5 %
Washington 1 7 3,995 2,732 2,158 54 % 5 %
Total 66 230 $ 104,993 $ 72,526 $ 52,796 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.

2227
~~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.~~
23
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:~~2023:

States Number of Borrowers Number of Loans
Value of
Collateral⁽¹⁾
Commitment Amount⁽²⁾ Gross Amount Outstanding Loan to Value Ratio⁽³⁾ Interest Spread 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 1 1 543 147 147 27 % 7 %
Florida 4 4 576 1,196 34 6 % varies 3 3 137 1,378 36 26 % 7 %
Georgia 1 1 60 24 24 40 % varies
New Jersey 1 2 100 52 51 51 % varies 1 2 100 52 51 51 % 7 %
Pennsylvania 1 5 16,357 8,500 6,537 40 % varies 1 5 16,945 8,500 7,810 46 % varies
South Carolina 4 4 1,387 1,386 1,367 99 % varies 2 2 2,040 965 869 43 % 7 %
Texas 1 1 - 125 (28 ) 100 % varies
Total 14 19 $ 19,173 $ 11,610 $ 8,213 43 %⁽⁴⁾ varies 8 13 19,765 $ 11,042 $ 8,913 $ 45 %⁽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 $1,870 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:~~2022:

(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

Number
of Borrowers

Number
of
Loans
Value of Collateral⁽¹⁾ Commitment Amount⁽²⁾
Gross
Amount
Outstanding⁽⁵⁾

Loan
to
Value Ratio⁽³⁾

Interest
Spread

Connecticut 1 1 $ 350 $ 180 $ 180 51 % 7 % 1 1 $ 150 $ 180 $ 81 54 % 7 %
Delaware 1 1 543 147 147 27 % 7 % 1 1 543 147 147 27 % 7 %
Florida 5 5 816 1,297 611 75 % 7 % 4 4 175 1,196 (117 ) (67 )% 7 %
Georgia 1 1 60 24 24 40 % 7 %
New Jersey 1 2 100 52 51 51 % 7 %
North Carolina 1 1 625 500 500 80 % 7 %
Pennsylvania 1 4 9,312 6,500 6,103 66 % varies 1 5 16,664 8,500 6,153 37 % varies
South Carolina 3 3 1,373 846 539 39 % 7 % 3 4 1,401 1,386 1,367 98 % 7 %
Texas 1 1 70 125 77 110 % 7 % 1 1 - 125 (28 ) 100 % 7 %
Total 12 15 $ 12,464 $ 9,095 $ 7,657 61 %⁽⁴⁾ 7 % 14 20 $ 19,718 $ 12,110 $ 8,178 41 %⁽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~~$1,900 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.

2428
~~Combined Loan Portfolio Summary~~

~~Financing~~Loans receivables, ~~are~~net is comprised of the following as of September 30, ~~2022~~2023 and December 31, ~~2021:~~2022:

September 30, 2022 December 31, 2021 September 30,
2023 December 31,
2022

Loans receivable, gross $ 59,893 $ 50,763 $ 63,543 $ 60,974
Less: Deferred loan fees (1,326 ) (1,143 ) (1,441 ) (1,264 )
Less: Deposits (848 ) (934 ) (928 ) (839 )
Plus: Deferred origination costs 301 305 317 306
Less: Allowance for loan losses (2,156 ) (2,048 )
Less: Allowance for credit losses (2,863 ) (2,527 )

Loans receivable, net $ 55,864 $ 46,943 $ 58,628 $ 56,650

The following is a roll forward of ~~combined loans:~~our construction and development loan portfolio or loans receivables, net:

Nine Months
Ended
September 30, 2022

Year
Ended
December 31, 2021

Nine Months
Ended
September 30, 2021

Nine Months
Ended
September 30,
2023

Year Ended
December 31,
2022

Beginning balance $ 46,943 $ 46,405 $ 46,405 $ 56,650 $ 46,943
Originations and modifications 45,519 45,395 34,499 45,199 59,408
Principal collections (36,850 ) (44,290 ) (33,914 ) (44,631 ) (49,658 )
Transferred from loans receivable, net (556 ) (791 ) (274 ) - (556 )
Transferred to loans receivable, net 1,017 - - - 1,017
Change in builder deposit 87 403 317 (88 ) 95
Change in the allowance for loan losses (109 ) (80 ) 166
Change in the allowance for credit losses (336 ) (479 )
Change in loan fees, net (187 ) (99 ) 258 (166 ) (120 )
Ending balance $ 55,864 $ 46,943 $ 47,457 $ 58,628 $ 56,650

~~Finance Receivables – By risk rating:~~Credit Quality Information

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
Effective January 1, 2023, we adopted ASC 326, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,” which replaced the incurred loss methodology for determining out provision for credit losses and allowance for credit losses with current expected credit Loss (“CECL”) model. Upon the adoption of ASC 326 the total amount of the allowance for credit losses (“ACL”) on loans estimated using the CECL methodology increased $178 compared to the total amount of the allowance recorded using the prior incurred loss model.

2529

~~Finance Receivables – Method~~Based on the Company’s size, complexity and historical data the aggregate method or loss-rate method was selected to estimate expected credit losses. An expected loss ratio is applied based on internal historical losses and originations. The aggregate method relies upon the performance 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
Asan entire segment of ~~September 30, 2022~~the loan portfolio to best represent the behavior of these specific segments over time. In addition, modified open pool approach was used which utilizes our borrowers credit rankings for both construction and ~~December 31, 2021, there were no~~development loans. Internal risk-rating grades are assigned by the Company’s management based on an analysis of financial and collateral strength and other credit attributes underlying each loan. Loan grades are A, B and C and Unsecured for both construction and development loans ~~acquired with deteriorated credit quality.~~where A and C defines the highest and lowest scores, respectively. Unsecured loans in our portfolio do not hold underlying collateral.

~~Impaired Loans~~Each loan pool is adjusted for qualitative factors not inherently considered in the quantitative analysis. The qualitative adjustments either increase or decrease the quantitative model estimation. We consider factors that are relevant within the qualitative framework which include the following: lending policy, changes in nature and volume of loans, staff experience, changes in volume and trends of non-performing loans, trends in underlying collateral values, quality of our loan review system and other economic conditions, including inflation.
The following table presents the Company’s gross loans receivable, commitment value and ACL for each respective credit rank loan pool category as of September 30, 2023.
Loans
Receivable
Gross Commitment
Value ACL
Construction Loans Collectively Evaluated:
A Credit Risk $ 40,293 $ 57,363 $ 235
B Credit Risk 4,966 8,656 33
C Credit Risk 1,145 1,366 16

Development Loans Collectively Evaluated:
A Credit Risk $ 8,315 $ 10,038 $ 6
B Credit Risk - - -
C Credit Risk 504 506 27

Unsecured Loans $ 2,863 $ 2,768 $ 2,367

Secured loans individually evaluated $ 5,457 $ 5,963 $ 179

Total $ 63,543 $ 86,660 $ 2,863
For loans greater than 12 months in age that are individually evaluated, appraisals are ordered and prepared if the current appraisal is greater than 13 months old and construction is greater than 90% complete. If construction is less than 90% complete the Company uses the latest appraisal on file. At certain times the Company may choose to use a broker’s opinions of value (“BOV”) as a replacement for an appraisal if deemed more efficient by management. Appraised values are adjusted down for estimated costs associated with asset disposal. Broker’s opinion of selling price, use currently valid sales contracts on the subject property, or representative recent actual closings by the builder on similar properties may be used in place of a broker’s opinion of value.
Appraisers are state certified, and are selected by first attempting to utilize the appraiser who completed the original appraisal report. If that appraiser is unavailable or unreasonably expensive, we use another appraiser who appraises routinely in that geographic area. BOVs are created by real estate agents. We try to first select an agent we have worked with, and then, if that fails, we select another agent who works in that geographic area.
30
In addition, our loan portfolio includes performing, forbearance and non-accrual loans. The Company’s policies with respect to placing loans on non-accrual and individually evaluated if they are past due greater than 90 days unless management deems the loan an exception. A fair market value analysis is performed and an allowance for credit loss is established based on the results of the analysis.

The following is ~~a summary~~an aging of our ~~impaired non-accrual (non-performing) commercial construction loans~~gross loan portfolio as of September 30, ~~2022 and December 31, 2021.~~2023:

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
Gross Loan Current
Past
Due
Past Due Past Due Past Due
Value 0 - 59 60 - 89 90 - 179 180 - 269 >270 ACL
Performing Loans
A Credit Risk $ 48,608 $ 48,608 $ – $ – $ – $ – $ 241
B Credit Risk 4,966 4,966 – – – – 33
C Credit Risk 1,649 1,649 – – – – 43

Forbearance Loans
B Credit Risk – – – – – – –
C Credit Risk – – – – – – –

Unsecured Loans 2,863 – – – 81 2,782 2,367
Loans individually evaluated 5,457 – 1,453 1,561 852 1,591 179
Total $ 63,543 $ 55,223 $ 1,453 $ 1,561 $ 933 $ 4,373 $ 2,863

Below is an aging schedule of loans receivable as of September 30, 2023, 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) 206 $ 55,223 86.8 %
60-89 days 3 1,453 6.1 %
90-179 days 4 1,561 – %
180-269 days 3 933 0.2 %
>270 days 6 4,373 6.9 %

Subtotal 222 $ 63,543 100.0 %

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 $ 63,543 100.0 %
31
Below is an aging schedule of loans receivable as of September 30, 2023, 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. 206 $ 55,223 86.8 %
60-89 days 3 1,453 6.1 %
90-179 days 4 1,561 – %
180-269 days 3 933 0.2 %
>270 days 6 4,373 6.9 %

Subtotal 222 $ 63,543 100.0 %

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 $ 63,543 100.0 %
The following table provides a roll forward of the allowance for credit losses:
Allowance for credit losses as of December 31, 2022 $ (2,527 )
Impact of the adoption of ASC 326 (178 )
Charge-offs 136
Loan loss provision (294 )
Allowance for credit losses as of September 30, 2023 $ (2,863 )
Allowance for Credit Losses on Unfunded Loan Commitments
Unfunded commitments to extend credit, which have similar collateral, credit and market risk to our outstanding loans, were $20,988 and $19,730 as of September 30, 2023 and December 31, 2022, respectively. The allowance for credit losses is calculated at an estimated loss rate and the total commitment value for loans in our portfolio. Therefore, for off-balance-sheet credit exposures, the estimate of expected credit losses has been presented as a liability on the balance sheet as of September 30, 2023. Other than unfunded commitments, we had no off-balance sheet transactions, nor do we currently have any such arrangements or obligations.
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, 2023 December 31, 2022
Percent of Percent of
Borrower Loan Borrower Loan
City Commitments City Commitments

Highest concentration risk Pittsburgh, PA 32 % Pittsburgh, PA 27 %
Second highest concentration risk Cape Coral, FL 8 % Orlando, FL 9 %
Third highest concentration risk Orlando, FL 6 % Spokane, WA 7 %
32
The following disclosures are presented under GAAP in effect prior to the adoption of CECL. The Company has included these disclosures to address the applicable prior periods.
Finance Receivables – By risk rating:
December 31, 2022

Pass $ 49,955
Special mention 3,842
Classified – accruing –
Classified – non-accrual 7,177

Total $ 60,974
Finance Receivables – Method of impairment calculation:
December 31, 2022

Performing loans evaluated individually $ 15,984
Performing loans evaluated collectively 37,813
Non-performing loans without a specific reserve 1,096
Non-performing loans with a specific reserve 6,081

Total evaluated collectively for loan losses $ 60,974
The following is a summary of our impaired non-accrual construction and development loans as of December 31, 2022.
December 31, 2022

Unpaid principal balance (contractual obligation from customer) $ 7,628
Charge-offs and payments applied (451 )
Gross value before related allowance 7,177
Related allowance (2,233 )

Value after allowance $ 4,944
Below is an aging schedule of loans receivable as of December 31, 2022, on a recency basis:

No.
Loans

Unpaid
Balances
%
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 % 236 $ 53,797 88.2 %
60-89 days - - - 4 2,570 4.2 %
90-179 days - - - – – – %
180-269 days 3 462 1 % 3 528 0.9 %
>270 days 8 5,428 9 % 7 4,079 6.7 %

Subtotal 244 $ 59,893 100 % 250 $ 60,974 100.0 %

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 % 250 $ 60,974 100.0 %

2633

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 %
27
~~Below is an aging schedule of loans receivable as of December 31, 2021, on a contractual basis:~~

No.
Loans

Unpaid
Balances
%
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 % 236 $ 53,797 88.2 %
60-89 days 1 203 0.4 % 4 2,570 4.2 %
90-179 days 10 2,058 4.1 % – – – %
180-269 days 1 392 0.8 % 3 528 0.9 %
>270 days 11 6,872 13.5 % 7 4,079 6.7 %

Subtotal 239 $ 50,763 100 % 250 $ 60,974 100.0 %

7
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 % 250 $ 60,974 100.0 %

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

Nine Months
Ended
September 30,
2023

Year Ended
December 31,
2022

Nine Months
Ended
September 30,
2022

Beginning balance $ 2,724 $ 4,449 $ 4,449 $ 1,582 $ 2,724 $ 2,724
Transfers from loan receivables, net 556 791 274 - 556 -
Transfers to loan receivables, net (1,017 ) - - - (1,017 ) (1,017 )
Additions from construction/development 210 818 612 125 316 153
Sale proceeds (1,096 ) (3,418 ) (2,674 ) (1,549 ) (1,096 ) (1,096 )
Loss on foreclosure - (47 ) -
Loss on sale of foreclosed assets - (92 ) (69 ) (34 ) - -
Gain on foreclosure - 67 -
Gain on sale of foreclosed assets 101 166 165 8 101 101
Impairment loss on foreclosed assets (35 ) (10 ) (10 )
Impairment on foreclosed assets 7 (2 ) -
Ending balance $ 1,443 $ 2,724 $ 2,747 $ 139 $ 1,582 $ 865

During the ~~quarter~~both quarters and nine months ended September 30, ~~2022~~2023 and ~~2021,~~2022 we sold ~~none~~0 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.assets.

2834

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

Nine Months
Ended
September 30,
2023

Year Ended
December 31,
2022

Nine Months
Ended
September 30,
2022

Beginning balance $ 479 $ 510 $ 510 $ 766 $ 479 $ 479
Preferred equity dividends 133 230 106 47 180 133
Additions from Pennsylvania loans 1,124 513 501 408 1,218 1,124
Additions from other loans 240 720 633 434 301 240
Interest, fees, principal or repaid to borrower (1,143 ) (1,494 ) (1,182 ) (1,231 ) (1,412 ) (1,143 )
Ending balance $ 833 $ 479 $ 568 $ 424 $ 766 $ 833

Related Party Borrowings

As of September 30, ~~2022,~~2023, the Company had ~~$1,250, $250,~~$889, $89, and ~~$951~~$1,000 available to borrow against the line of credit from Daniel M. Wallach (our Chief Executive Officer and ~~chairman~~Chairman of the ~~board~~Board of ~~managers)~~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~~2022 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~~2023, 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 and serviced by the Company paid off 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.~~$105.

Secured Borrowings

Lines of Credit

As of September 30, ~~2022~~2023 and December 31, ~~2021,~~2022, the Company had ~~$49~~$522 and ~~$859~~$35 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~~nine months ended September 30, 2023 and 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$3 and $8$4 as of September 30, ~~2022~~2023 and December 31, ~~2021,~~2022, respectively.

2935
~~Summary~~

~~The borrowings~~Borrowings secured by loan assets are summarized below:

September 30, 2022 December 31, 2021 September 30, 2023 December 31, 2022

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
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 $ 10,145 $ 6,379 $ 8,232 $ 6,065
S.K. Funding 11,211 7,300 8,084 5,500 9,450 6,500 9,049 7,100

Lender
Shuman 532 125 566 125 345 125 724 125
Jeff Eppinger 3,436 1,500 3,328 1,500 1,387 260 2,761 1,500
R. Scott Summers 1,733 777 1,475 847 2,073 1,003 1,334 728
John C. Solomon 1,128 563 1,139 563 1,054 563 1,172 563
Judith Y. Swanson 11,124 7,000 9,803 6,841 10,618 6,086 9,571 6,473

Total $ 36,169 $ 22,859 $ 29,242 $ 18,345 $ 35,072 $ 20,916 $ 32,843 $ 22,554

Unsecured Borrowings

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

The effective interest rate on borrowings through our Notes Program at September 30, ~~2022~~2023 and December 31, ~~2021~~2022 was ~~8.88%~~9.01% and ~~9.28%~~8.60%, 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

Nine Months
Ended
September 30,
2023

Year Ended
December 31,
2022

Nine Months
Ended
September 30,
2022

Gross Notes outstanding, beginning of period $ 20,636 $ 21,482 $ 21,482 $ 21,576 $ 20,636 $ 20,636
Notes issued 3,243 7,876 7,239 685 7,245 3,243
Note repayments / redemptions (3,368 ) (8,722 ) (7,820 ) (1,502 ) (6,305 ) (3,368 )

Gross Notes outstanding, end of period $ 20,511 $ 20,636 $ 20,901 $ 20,759 $ 21,576 $ 20,511

Less deferred financing costs, net (379 ) (367 ) (389 ) (276 ) (367 ) (379 )

Notes outstanding, net $ 20,132 $ 20,269 $ 21,192 $ 20,483 $ 21,209 $ 20,132

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

Nine Months
Ended
September 30,
2023

Year Ended
December 31,
2022

Nine Months
Ended
September 30,
2022

Deferred financing costs, beginning balance $ 1,061 $ 942 $ 942 $ 835 $ 1,061 $ 1,061
Additions 187 119 95 89 223 187
Disposals - (449 ) -
Deferred financing costs, ending balance 1,248 1,061 1,037 924 835 1,248
Less accumulated amortization (869 ) (694 ) (648 ) (648 ) (468 ) (869 )
Deferred financing costs, net $ 379 $ 367 $ 389 $ 276 $ 367 $ 379

3036

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

Nine Months
Ended
September 30,
2023

Year Ended
December 31,
2022

Nine Months
Ended
September 30,
2022

Accumulated amortization, beginning balance $ 694 $ 526 $ 526 $ 468 $ 694 $ 694
Additions 175 168 122 180 223 175
Disposals - (449 ) -
Accumulated amortization, ending balance $ 869 $ 694 $ 648 $ 648 $ 468 $ 869

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
Maturity
Date

Interest
Rate⁽¹⁾

September 30,
2023

December 31,
2022

Unsecured Note with Seven Kings Holdings, Inc. Demand⁽²⁾ 9.5 % $ 500 $ 500
Unsecured Note with Seven Kings Holdings, Inc. Senior Subordinated Demand⁽²⁾ 9.5 % $ 500 $ 500
Unsecured Line of Credit from Swanson July 2022 10.0 % - 159 October 2023 10.0 % 914 527
Unsecured Line of Credit from Builder Finance, Inc. January 2023 10.0 % 750 750
Unsecured Line of Credit from Builder Finance, Inc. Senior Subordinated January 2024 10.0 % - 750
Subordinated Promissory Note April 2024 10.0 % 100 100 April 2024 10.0 % 100 100
Subordinated Promissory Note August 2022 11.0 % - 200 February 2025 9.0 % 600 600
Subordinated Promissory Note February 2023 10.0 % 600 600 October 2023 10.0 % 400 400
Subordinated Promissory Note June 2023 10.0 % 400 400 March 2024 9.75 % 500 500
Subordinated Promissory Note March 2024 9.75 % 500 - December 2023 11.0 % 20 20
Subordinated Promissory Note December 2022 5.0 % 3 3 February 2024 11.0 % 20 20
Subordinated Promissory Note December 2023 11.0 % 20 20 January 2025 10.0 % 15 15
Subordinated Promissory Note February 2024 11.0 % 20 20 January 2026 8.0 % - 10
Subordinated Promissory Note January 2025 10.0 % 15 15 March 2027 10.0 % 26 -
Subordinated Promissory Note January 2026 8.0 % 10 - November 2023 9.5 % 200 200
Subordinated Promissory Note November 2023 9.5 % 200 200 October 2024 10.0 % 700 700
Subordinated Promissory Note October 2024 10.0 % 700 700 December 2024 10.0 % 100 100
Subordinated Promissory Note December 2024 10.0 % 100 100 April 2025 10.0 % 202 202
Subordinated Promissory Note April 2025 10.0 % 202 202 July 2023 8.0 % - 100
Subordinated Promissory Note July 2023 8.0 % 100 100 July 2025 8.0 % 100
Subordinated Promissory Note July 2024 5.0 % - 1,500 September 2023 7.0 % - 94
Subordinated Promissory Note September 2023 7.0 % 94 94 September 2027 10 % 108 -
Subordinated Promissory Note October 2023 7.0 % 100 100 October 2023 7.0 % 100 100
Subordinated Promissory Note December 2025 8.0 % 180 180 December 2025 8.0 % 180 180
Senior Subordinated Promissory Note March 2026⁽³⁾ 10.0 % 375 334 March 2026⁽³⁾ 8.0 % 374 374
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 -
Subordinated Promissory Note August 2026 8.0 % 291 291
Subordinated Promissory Note July 2026⁽⁴⁾ 1.0 % 740 740
Junior Subordinated Promissory Note July 2026⁽⁴⁾ 20.0 % 460 460
Senior Subordinated Promissory Note October 2024⁽⁴⁾ 1.0 % 720 720 October 2024⁽⁴⁾ 1.0 % 720 720
Junior Subordinated Promissory Note October 2024⁽⁴⁾ 20.0 % 447 447 October 2024⁽⁴⁾ 20.0 % 447 447
Subordinated Promissory Note March 2029 10.0 % 1,700 -
Subordinated Promissory Note April 2024 10.0 % 750 750
Subordinated Promissory Note May 2027 10.0 % 98 -
$ 7,627 $ 7,444 $ 10,365 $ 8,900

⁽¹⁾ Interest rate per annum, based upon actual days outstanding and a 365/366-day year.
⁽²⁾ Due ~~nine months~~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.

3137

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%~~9.3% and 11.9% as of September 30, ~~2022~~2023 and December 31, ~~2021.~~2022, respectively. We anticipate this ratio to increase as more earnings are retained in ~~2022~~2023 and 2024 and some additional preferred equity may be added. The % went down as we eliminated the Preferred B equity, repaid a Preferred C investor and received investments from all of the Common equity investors. While the percentage sited above did reduce, the Common equity increased from $180 to $2,117 during the above time period.

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
Priority
Rank
September 30,
2023 December 31,
2022
Borrowing Source
Purchase and sale agreements and other secured borrowings 1 $ 23,669 $ 19,165 1 $ 21,491 $ 23,142
Secured lines of credit from affiliates 2 49 859 2 522 35
Unsecured line of credit (senior) 3 1,250 1,250 3 500 1,250
Other unsecured debt (senior subordinated) 4 1,094 1,053 4 634 634
Unsecured Notes through our public offering, gross 5 20,512 20,636 5 20,759 21,576
Other unsecured debt (subordinated) 5 4,835 4,693 5 8,324 6,109
Other unsecured debt (junior subordinated) 6 447 447 6 907 907

Total $ 51,856 $ 48,103
Total gross secured and unsecured notes payable $ 53,137 $ 53,653

Liquidity and Capital Resources

Our primary liquidity management objective is to meet expected cash flow needs while continuing to service our business and customers. WeAs of September 30, 2023 and December 31, 2022, we had ~~244 and 239~~ combined loans outstanding of 222 and 250, respectively. In addition, gross loans outstanding were $63,543 and $60,974 as of September 30, ~~2022~~2023 and December 31, ~~2021,~~2022, respectively. ~~Gross loans receivable totaled $59,893 and $50,763 as of September 30, 2022 and December 31, 2021, respectively. Our unfunded~~
Unfunded commitments to extend credit, which have similar collateral, credit and market risk to our outstanding loans, were ~~$19,984~~$20,988 and ~~$22,902~~$19,730 as of September 30, ~~2022~~2023 and December 31, ~~2021,~~2022, respectively. For off-balance-sheet credit exposures, the estimate of expected credit losses has been presented as a liability on the balance sheet as of September 30, 2023. Other than unfunded commitments, we had no off-balance sheet transactions, nor do we currently have any such arrangements or obligations.
38

We anticipate ~~lower~~ originations ~~and payoffs during~~to begin to slow in 2024 due to higher interest rates slowing the ~~12 months subsequent to September 30, 2022 which is similar to the first nine months~~rate of ~~2022 and due primarily to the current economic decline in the housing market activity.~~sale of our customers’-built homes.

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

Source of Liquidity
As of
September 30, 2022

As of
December 31, 2021

As of
September 30,
2023

As of
December 31,
2022

Secured debt, net of deferred financing costs $ 23,712 $ 20,016 $ 22,009 $ 23,173
Unsecured debt, net of deferred financing costs 27,759 27,713 $ 30,848 $ 30,110
Equity* 7,676 6,604 $ 7,102 $ 7,805
Cash 1,119 3,735

Cash, cash equivalents and restricted cash $ 3,552 $ 4,196

*Equity includes Members’ Capital and Redeemable Preferred Equity.

32
As of September 30, ~~2022~~2023 and December 31, ~~2021,~~2022, cash, cash equivalents and restricted cash was ~~$1,119~~$3,552 and ~~$3,735,~~$4,196, respectively. ~~In addition, we had $600 in restricted cash as of September 30, 2022.~~
Secured debt, net of deferred financing costs ~~increased $3,696~~decreased $1,164 to ~~$23,712~~$22,009 as of September 30, ~~2022~~2023 compared to ~~$20,016~~$23,173 for the year ended December 31, ~~2021 which~~2022. The decrease in secured debt was due primarily ~~related~~ to repayments on borrowings onpursuant to our loan 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~~$738 to ~~$27,759~~$30,848 as of September 30, ~~2022~~2023 compared to ~~$27,713 for the year ended~~$30,110 as of 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.2022.

Equity ~~increased $1,072~~decreased $703 to ~~$7,676~~$7,102 as of September 30, ~~2022~~2023 compared to ~~$6,604 for the year ended~~$7,805 as of December 31, ~~2021.~~2022. The decrease was due to the $1,900 and $1,178 redemption of Series B preferred equity and Series C cumulative preferred equity, respectively. The decrease in equity was partially offset by an increase in Class A common equity of $1,937 as of September 30, 2023.
As of September 30, 2023, Series C cumulative preferred equity decreased $843 to $4,882 compared to $5,725 as of December 31, 2022 which was due primarily to ~~retained earnings from Common A and earned but not paid distributions~~the redemption of ~~Series C preferred equity holders. In addition, investments~~$1,178 in ~~Series C increased $200.~~March 2023.

We anticipate an increase in our common equity and Series C preferred equity during the 12nine months subsequent to September 30, ~~2022,~~2023, mostly through ~~retaining~~retained earnings. If we are not able to ~~increase~~maintain 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~~2023 is ~~$24,373,~~$25,109, which consists of secured borrowings of ~~$22,912~~$21,393 and unsecured borrowings of ~~$1,461.~~$3,716.

Secured borrowings maturing through the year ending December 31, ~~2022 primarily~~2023 significantly consists of loan purchase and sale agreements with two loan purchasers (Builder Finance and S. K. Funding) and ~~six~~five lenders. These secured borrowings are listed as maturing over the next 12 months due primarily to their related demand loan collateral. The following are secured facilities listed as maturing in ~~2022~~2023 with actual maturity and renewal dates:

● Swanson – ~~$7,000 due October 2023 and~~$6,086 automatically renews unless notice given;
● Shuman – $125 due July ~~2023~~2024 and automatically renews unless notice is given;
● S. K. Funding – $4,500 due ~~January 2023~~July 2024 and automatically renews unless notice is given;
● S. K. Funding – ~~$2,800 of the total~~$2,400 due ~~January 2023~~April 2024 and automatically renews unless notice is given;
● Builder Finance, ~~Inc.~~Inc – ~~$5,594~~$6,326 with no expiration date;
● New LOC Agreements - ~~$2,840 due~~$1,825 generally ~~with~~ one-month notice and nine months to reduce principal balance to zero;
● ~~Myrick~~Wallach LOC - ~~$49~~$263 due upon demand;
● Wallach Trust - $263 due upon demand; and
● Mortgage Payable – $4, with payments due monthly.

3339

Unsecured borrowings due by December 31, ~~2022~~2023 consist of Notes issued pursuant to the Notes Program and other unsecured debt of ~~$958 and $503,~~$3,716and $2,414, 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%~~75% of our Note holders reinvest upon maturity.
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 The 36-month Note ~~sold~~ in our ~~third public notes offering had~~Notes program has a mandatory early redemption option, subject to certain conditions.
As of September 30, 2023, the 36-month Notes were $1,018. Our other unsecured debt has historically ~~renews.~~renewed. For more information on other unsecured borrowings, see Note 7 – Borrowings. If other unsecured borrowings are not renewed in the future, we anticipate funding such maturities through investments in our Notes Program.

Summary

We have the funding available to address the loans we have today, including our unfunded commitments. We anticipate ~~not growing~~ our ~~assets;~~assets reducing in the remainder of 2023; however, we are prepared ~~to grow if the economic environment requires or allows it~~for an increase of 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~~reduce loan asset balances is subject to changes ~~due to changes~~ in ~~demand, competition,~~the housing market and ~~the economy.~~competition. 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.~~months.
34

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~~Housing starts ~~recently dropped by approximately 27%.~~have been increasing for the last 12 months, but customers are reporting longer hold times of built product. 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%5%, 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.~~rates. Both the short- and long-term interest rates have risen slightly ~~but are generally low historically.~~
to historically normal levels.

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.

3540

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~~2023 and December 31, ~~2021,~~2022, other than unfunded loan commitments, we had no off-balance sheet transactions, nor do we currently have any such arrangements or obligations.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and are not required to provide the information under this item.

ITEM 4. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

As of the end of the period covered by this report, management, including our Chief Executive Officer (our principal executive officer) and Chief Financial Officer (our principal financial officer) evaluated the effectiveness of the design and operation of our disclosure controls and procedures. Based upon, and as of the date of, the evaluation, our Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures were effective as of the end of the period covered by this report to ensure that information required to be disclosed in the reports we file and submit under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and reported as and when required. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports we file and submit under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

36
Internal Control over Financial Reporting

There has been no change in our internal controls over financial reporting during the quarter ended September 30, ~~2022~~2023 that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.
PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

None.

ITEM 1A. RISK FACTORS

Not applicable.
41
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

(a) Reinvestments in Partial Series C Cumulative Preferred Units

Investors in the Series C cumulative preferred units (“Series C Preferred Units”) may elect to reinvest their distributions in additional Series C Preferred Units (the “Series C Reinvestment Program”). Pursuant to the Series C Reinvestment Program, we issued the following Series C Preferred Units during the quarter ended September 30, ~~2022:~~2023:

Owner Units Amount Units Amount
Daniel M. and Joyce S. Wallach 0.5804205 58,042.05 0.2825589 28,255.89
Gregory L. Sheldon and Madeline M. Sheldon 0.2030814 20,308.14 0.2288373 22,883.73
BLDR, LLC 0.1877835 18,778.35 0.2115991 21,159.91
Schultz Family Living Trust 0.0467135 4,671.35 0.0526379 5,263.79
Fernando Ascencio and Lorraine Carol Ascencio 0.0874011 8,740.11 0.0984858 9,848.58
Mark and Tris Ann Garboski 0.1758926 17,589.26 0.1982002 19,820.02
Total 1.2812926 128,129.26 1,0723192 107,231.92

The proceeds received from the sales of the partial Series C Preferred Units in these transactions were used for the funding of construction loans. The transactions in Series C Preferred Units described above were effected in private transactions exempt from the registration requirements of the Securities Act under Section 4(a)(2) of the Securities Act. The transactions described above did not involve any public offering, were made without general solicitation or advertising, and the buyer represented to us that he/she/it is an “accredited investor” within the meaning of Rule 501 of Regulation D promulgated under the Securities Act, with access to all relevant information necessary to evaluate the investment in the Series C Preferred Units.

(b)
We registered up to $70,000 in Fixed Rate Subordinated Notes (“Notes”) in our current public offering, which is our fourth public offering of Notes (SEC File No. 333-263759, effective September 16, 2022). As of September 30, ~~2022,~~2023, we had issued ~~$328~~$8,720 in Notes pursuant to our current public offering. As of September 30, ~~2022,~~2023, we incurred expenses of ~~$126~~$253 in connection with the issuance and distribution of the Notes in our current public offering, which were paid to third parties. These expenses were not for underwriters or discounts, but were for advertising, printing, and professional services. Net offering proceeds as of September 30, ~~2022~~2023 were ~~$202~~$8,467 all of which was used to increase loan balances.

Our prior public offering, which was our third public offering of Notes (SEC File No. 333-224557, effective March 22, 2019) terminated on September 16, 2022, which had issued $38,463 in Notes pursuant to our third public offering. From March 22, 2019 through September 16, 2022, we incurred expenses of $665 in connection with the issuance and distribution of the Notes in our third public offering, which were paid to third parties. These expenses were not for underwriters or discounts, but were for advertising, printing and professional services. Net offering proceeds as of September 16, 2022 were $37,798 all of which were used to increase loan balances.
(c) None.
37
ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.
ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

(a) During the quarter ended September 30, ~~2022,~~2023, there was no information required to be disclosed in a report on Form 8-K which was not disclosed in a report on Form 8-K.

(b) During the quarter ended September 30, ~~2022,~~2023, there were no material changes to the procedures by which members may recommend nominees to our board of managers.
42

ITEM 6. EXHIBITS

The exhibits required to be filed with this report are set forth on the Exhibit Index hereto and incorporated by reference herein.

EXHIBIT INDEX

The following exhibits are included in this report on Form 10-Q for the period ended September 30, ~~2022~~2023 (and are numbered in accordance with Item 601 of Regulation S-K).

Exhibit No. Name of Exhibit
3.1 Certificate of Conversion, incorporated by reference to Exhibit 3.1 to the Registrant’s Registration Statement on Form S-1, filed on May 11, 2012, Commission File No. 333-181360

3.2 Certificate of Formation, incorporated by reference to Exhibit 3.2 to the Registrant’s Registration Statement on Form S-1, filed on May 11, 2012, Commission File No. 333-181360

3.3 Second Amended and Restated Limited Liability Company Agreement of the Registrant, incorporated by reference to Exhibit 3.1 to the Registrant’s Form 8-K, filed on November 13, 2017, Commission File No. 333-203707

3.4 Amendment No. 1 to Second Amended and Restated Limited Liability Company Agreement of the Registrant, incorporated by reference to Exhibit 3.4 to the Registrant’s Quarterly Report on Form 10-Q, filed May 9, 2019, Commission File No. 333-203707

3.5 Amendment No. 2 to Second Amended and Restated Limited Liability Company Agreement of the Registrant, incorporated by reference to Exhibit 3.1 to the Registrant’s Current Report on Form 8-K, filed March 31, 2020, Commission File No. 333-224557

4.1 Indenture Agreement (including Form of Note) dated September 16, 2022, incorporated by reference to Exhibit 4.1 to the Registrant’s Post-Effective Amendment No. 1, filed on September 16, 2022, Commission File No. 333-263759
31.1* Certification of Principal Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2* Certification of Principal Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1* Certification of Principal Executive Officer, pursuant to 18 U.S.C. Section 1350, as created by Section 906 of the Sarbanes-Oxley Act of 2002

32.2* Certification of Principal Financial Officer, pursuant to 18 U.S.C. Section 1350, as created by Section 906 of the Sarbanes-Oxley Act of 2002

101.INS* Inline XBRL Instance Document

101.SCH* Inline XBRL Schema Document

101.CAL* Inline XBRL Calculation Linkbase Document

101.DEF* Inline XBRL Definition Linkbase Document

101.LAB* Inline XBRL Labels Linkbase Document

101.PRE* Inline XBRL Presentation Linkbase Document

104* Inline XBRL Cover Page Interactive Data File

* Filed herewith.

3843

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

SHEPHERD’S FINANCE, LLC
(Registrant)

Dated: November ~~9, 2022~~8, 2023 By: /s/ Catherine Loftin
Catherine Loftin
Chief Financial Officer

3944

(in thousands of dollars)	2022		2021		2022		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	)

(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

(in thousands of dollars)	September 30, 2023			September 30, 2022

Members’ capital, beginning balance, July 1, 2023 and 2022	$	2,117		$	1,947

Cumulative effect adjustment due to the adoption of ASU 2016-13		(178	)		-
Net income less distributions to Series C preferred equity holders of $144 and $164		593			370
Contributions from Common A equity holders		-			-
Contributions from Series B preferred equity holders		-			10
Distributions to Series B preferred equity holders		-			(47	)
Distributions to common equity holders		(490	)		(197	)

Members’ capital, as of September 30, 2023 and 2022	$	2,220		$	2,083


	September 30,
(in thousands of dollars)	2023			2022

Cash flows from operations
Net income	$	2,082		$	1,373
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization of deferred financing costs		179			175
Provision for loan losses		294			479
Change in loan origination fees, net		166			187
Depreciation and amortization		61			35
Loss on sale of foreclosed assets		34			-
Gain on sale of foreclosed assets		(8	)		(101	)
Impairment of foreclosed assets		(7	)		35
Gain on the sale of real estate investments		(10	)		-

Net change in operating assets and liabilities:
Other assets		533			118
Accrued interest receivable		(86	)		(35	)
Customer interest escrow		(389	)		221
Accrued interest payable		1,228			610
Accounts payable and accrued expenses		(197	)		211

Net cash provided by operating activities		3,880			3,308

Cash flows from investing activities
Loan originations and principal collections, net		(2,616	)		(9,126	)
Investment in foreclosed assets		(125	)		(210	)
Additions for construction in real estate investments		(1,461	)		(1,901	)
Deposits for construction in real estate investments		-			970
Proceeds from the sale of real estate investments		2,131			1,017
Proceeds from the sale of foreclosed assets		1,549			1,096

Net cash used in investing activities		(522	)		(8,154	)

Cash flows from financing activities
Contributions from Common A equity holders		1,460			-
Contributions from preferred B equity holders		-			150
Contributions from preferred C equity holders		-			200
Distributions to preferred B equity holders		(1,900	)		-
Distributions to preferred C equity holders		(1,288	)		(94	)
Distributions to common equity holders		(879	)		(420	)
Proceeds from secured notes payable		9,252			11,380
Repayments of secured notes payable		(10,050	)		(7,844	)
Proceeds from unsecured notes payable		799			5,263
Redemptions/repayments of unsecured notes payable		(1,307	)		(5,618	)
Deferred financing costs paid		(89	)		(187	)

Net cash (used in) provided by financing activities		(4,002	)		2,830

Net change in cash, cash equivalents and restricted cash		(644	)		(2,016	)

Cash and cash equivalents
Beginning of period		4,196			3,735
End of period	$	3,552		$	1,719

Supplemental disclosure of cash flow information
Cash paid for interest	$	3,632		$	3,748

Non-cash investing and financing activities
Earned by Series B preferred equity holders but not distributed to customer interest escrow	$	-		$	47
Earned by Series B preferred equity holders and distributed to customer interest escrow	$	47		$	133
Earned but not paid distributions of Series C preferred equity holders	$	336		$	473
Secured and unsecured notes payable transfers	$	387		$	159
Accrued interest payable transferred to notes payable	$	790		$	573
Foreclosure of assets transferred from loans receivable, net	$	-		$	556
Foreclosure of assets transferred to loans receivable, net	$	-		$	1,017

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

	September 30, 2022				Quoted Prices in Active Markets for Identical		Significant Other Observable		Significant Unobservable		September 30, 2023				Quoted Prices in Active Markets for Identical		Significant Other Observable		Significant Unobservable
	Carrying		Estimated		Assets		Inputs		Inputs		Carrying		Estimated		Assets		Inputs		Inputs
	Amount		Fair Value		Level 1		Level 2		Level 3		Amount		Fair Value		Level 1		Level 2		Level 3

Foreclosed assets, net	$	1,443	$	1,443	$	–	$	–	$	1,443	$	139	$	139	$	–	$	–	$	139
Impaired loans due to COVID-19, net		2,964		2,964		–		–		2,964		560		560		–		–		560
Other impaired loans, net		1,040		1,040		–		–		1,040		5,215		5,215		–		–		5,215
Total	$	5,447	$	5,447	$	–	$	–	$	5,447	$	5,914	$	5,914	$	–	$	–	$	5,914


	September 30, 2023				December 31, 2022
	Carrying		Estimated		Carrying		Estimated
	Amount		Fair Value		Amount		Fair Value
Financial Assets
Cash, cash equivalents and restricted cash	$	3,552	$	3,552	$	4,196	$	4,196
Loan receivable, net		58,628		58,628		56,650		56,650
Accrued interest on loans receivables, net		756		756		670		670
Financial Liabilities
Customer interest escrow		424		424		766		766
Notes payable secured, net		22,009		21,961		23,173		23,173
Notes payable unsecured, net		30,848		30,848		30,110		30,110
Accrued interest payable		3,359		3,407		650		650


	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

Year	Number of States		Number of Borrowers		Number of Loans		Value of Collateral⁽¹⁾		Commitment Amount		Gross Amount Outstanding		Loan to Value Ratio⁽²⁾⁽³⁾			Loan Fee			Number of States		Number of Borrowers		Number of Loans		Value of Collateral⁽¹⁾		Commitment Amount		Gross Amount Outstanding		Loan to Value Ratio⁽²⁾⁽³⁾			Loan Fee
2023																				20		59		209	$	113,144	$	75,618	$	54,630		67	%		5	%
2022		21		61		225	$	103,540	$	71,664	$	51,680		69	%		5	%		21		66		230	$	104,993	$	72,526	$	52,796		69	%		5	%
2021		20		66		224	$	98,935	$	66,008	$	43,106		67	%		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.

	Nine Months Ended September 30, 2023			Year Ended December 31, 2022

Beginning balance	$	56,650		$	46,943
Originations and modifications		45,199			59,408
Principal collections		(44,631	)		(49,658	)
Transferred from loans receivable, net		-			(556	)
Transferred to loans receivable, net		-			1,017
Change in builder deposit		(88	)		95
Change in the allowance for credit losses		(336	)		(479	)
Change in loan fees, net		(166	)		(120	)
Ending balance	$	58,628		$	56,650


	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


	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

	Loans Receivable Gross		Commitment Value		ACL
Construction Loans Collectively Evaluated:
A Credit Risk	$	40,293	$	57,363	$	235
B Credit Risk		4,966		8,656		33
C Credit Risk		1,145		1,366		16

Development Loans Collectively Evaluated:
A Credit Risk	$	8,315	$	10,038	$	6
B Credit Risk		-		-		-
C Credit Risk		504		506		27

Unsecured Loans	$	2,863	$	2,768	$	2,367

Secured loans individually evaluated	$	5,457	$	5,963	$	179

Total	$	63,543	$	86,660	$	2,863

	Gross Loan		Current		Past Due		Past Due		Past Due		Past Due
	Value		0 - 59		60 - 89		90 - 179		180 - 269		>270		ACL
Performing Loans
A Credit Risk	$	48,608	$	48,608	$	–	$	–	$	–	$	–	$	241
B Credit Risk		4,966		4,966		–		–		–		–		33
C Credit Risk		1,649		1,649		–		–		–		–		43
Performing Loans		1,649		1,649		–		–		–		–		43

Forbearance Loans
B Credit Risk		–		–		–		–		–		–		–
C Credit Risk		–		–		–		–		–		–		–
Forbearance Loans		–		–		–		–		–		–		–

Unsecured Loans		2,863		–		–		–		81		2,782		2,367
Loans individually evaluated		5,457		–		1,453		1,561		852		1,591		179
Total	$	63,543	$	55,223	$	1,453	$	1,561	$	933	$	4,373	$	2,863

	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)		206	$	55,223		86.8	%
60-89 days		3		1,453		6.1	%
90-179 days		4		1,561		–	%
180-269 days		3		933		0.2	%
>270 days		6		4,373		6.9	%

Subtotal		222	$	63,543		100.0	%

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	$	63,543		100.0	%

	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.		206	$	55,223		86.8	%
60-89 days		3		1,453		6.1	%
90-179 days		4		1,561		–	%
180-269 days		3		933		0.2	%
>270 days		6		4,373		6.9	%

Subtotal		222	$	63,543		100.0	%

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	$	63,543		100.0	%


	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


Allowance for credit losses as of December 31, 2022	$	(2,527	)
Impact of the adoption of ASC 326		(178	)
Charge-offs		136
Loan loss provision		(294	)
Allowance for credit losses as of September 30, 2023	$	(2,863	)

	December 31, 2022

Pass	$	49,955
Special mention		3,842
Classified – accruing		–
Classified – non-accrual		7,177

Total	$	60,974

	December 31, 2022

Performing loans evaluated individually	$	15,984
Performing loans evaluated collectively		37,813
Non-performing loans without a specific reserve		1,096
Non-performing loans with a specific reserve		6,081

Total evaluated collectively for loan losses	$	60,974

	December 31, 2022

Unpaid principal balance (contractual obligation from customer)	$	7,628
Charge-offs and payments applied		(451	)
Gross value before related allowance		7,177
Related allowance		(2,233	)
Value after allowance	$	4,944


	Nine Months Ended September 30, 2022			Year Ended December 31, 2021			Nine Months Ended September 30, 2021			Nine Months Ended September 30, 2023			Year Ended December 31, 2022			Nine Months Ended September 30, 2022

Beginning balance	$	1,651		$	1,181		$	1,181		$	660		$	1,651		$	1,651
Deposits from real estate investments		(970	)		(200	)		(200	)		-			(1,570	)		(970	)
Gain on sale of real estate investments											10						-
Proceeds from the sale of real estate investments		(1,017	)		–			–			(2,131	)		(1,647	)		(1,017	)
Additions for construction/development		1,901			670			277			1,461			2,226			1,901
Ending balance	$	1,565		$	1,651		$	1,258		$	-		$	660		$	1,565


	Priority Rank	September 30, 2022		December 31, 2021		Priority Rank	September 30, 2023		December 31, 2022
Borrowing Source
Purchase and sale agreements and other secured borrowings	1	$	23,669	$	19,165	1	$	21,491	$	23,142
Secured lines of credit from affiliates	2		49		859	2		522		35
Unsecured line of credit (senior)	3		1,250		1,250	3		500		1,250
Other unsecured debt (senior subordinated)	4		1,094		1,053	4		634		634
Unsecured Notes through our public offering, gross	5		20,512		20,636	5		20,759		21,576
Other unsecured debt (subordinated)	5		4,835		4,693	5		8,324		6,109
Other unsecured debt (junior subordinated)	6		447		447	6		907		907

Total		$	51,856	$	48,103
Total gross secured and unsecured notes payable							$	53,137	$	53,653

Year Maturing	Total Amount Maturing		Public Offering		Other Unsecured		Secured Borrowings		Total Amount Maturing		Public Offering		Other Unsecured		Secured Borrowings
2022	$	24,373	$	958	$	503	$	22,912
2023		8,262		5,926		2,264		72	$	25,158	$	1,582	$	2,134	$	21,442
2024		8,912		6,198		2,587		127		11,077		7,722		3,337		18
2025		6,618		6,147		398		73		8,674		7,557		1,098		19
2026 and thereafter		3,691		1,282		1,875		534
2026										2,720		835		1,865		20
2027 and thereafter										5,508		3,063		1,931		514
Total	$	51,856	$	20,511	$	7,627	$	23,718	$	53,137	$	20,759	$	10,365	$	22,013


						Principal Amount Outstanding as of
Loan	Maturity Date		Interest Rate⁽¹⁾			September 30, 2022		December 31, 2021		Maturity Date	Interest Rate⁽¹⁾			September 30, 2023		December 31, 2022
Unsecured Note with Seven Kings Holdings, Inc.		Demand⁽²⁾		9.5	%	$	500	$	500
Unsecured Note with Seven Kings Holdings, Inc. Senior Subordinated										Demand⁽²⁾		9.5	%	$	500	$	500
Unsecured Line of Credit from Swanson		July 2022		10.0	%		-		159	October 2023		10.0	%		914		527
Unsecured Line of Credit from Builder Finance, Inc.		January 2023		10.0	%		750		750
Unsecured Line of Credit from Builder Finance, Inc. Senior Subordinated										January 2024		10.0	%		-		750
Subordinated Promissory Note		April 2024		10.0	%		100		100	April 2024		10.0	%		100		100
Subordinated Promissory Note		August 2022		11.0	%		-		200	February 2025		9.0	%		600		600
Subordinated Promissory Note		February 2023		10.0	%		600		600	October 2023		10.0	%		400		400
Subordinated Promissory Note		June 2023		10.0	%		400		400	March 2024		9.75	%		500		500
Subordinated Promissory Note		March 2024		9.75	%		500		-	December 2023		11.0	%		20		20
Subordinated Promissory Note		December 2022		5.0	%		3		3	February 2024		11.0	%		20		20
Subordinated Promissory Note		December 2023		11.0	%		20		20	January 2025		10.0	%		15		15
Subordinated Promissory Note		February 2024		11.0	%		20		20	January 2026		8.0	%		-		10
Subordinated Promissory Note		January 2025		10.0	%		15		15	March 2027		10.0	%		26		-
Subordinated Promissory Note		January 2026		8.0	%		10		-	November 2023		9.5	%		200		200
Subordinated Promissory Note		November 2023		9.5	%		200		200	October 2024		10.0	%		700		700
Subordinated Promissory Note		October 2024		10.0	%		700		700	December 2024		10.0	%		100		100
Subordinated Promissory Note		December 2024		10.0	%		100		100	April 2025		10.0	%		202		202
Subordinated Promissory Note		April 2025		10.0	%		202		202	July 2023		8.0	%		-		100
Subordinated Promissory Note		July 2023		8.0	%		100		100	July 2025		8.0	%		100		-
Subordinated Promissory Note		July 2024		5.0	%		-		1,500	September 2023		7.0	%		-		94
Subordinated Promissory Note		September 2023		7.0	%		94		94	September 2027		10	%		108		-
Subordinated Promissory Note		October 2023		7.0	%		100		100	October 2023		7.0	%		100		100
Subordinated Promissory Note		December 2025		8.0	%		180		180	December 2025		8.0	%		180		180
Senior Subordinated Promissory Note		March 2026⁽³⁾		10.0	%		375		334	March 2026⁽³⁾		8.0	%		374		374
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		-
Subordinated Promissory Note										August 2026		8.0	%		291		291
Subordinated Promissory Note										July 2026⁽⁴⁾		1.0	%		740		740
Junior Subordinated Promissory Note										July 2026⁽⁴⁾		20.0	%		460		460
Senior Subordinated Promissory Note		October 2024⁽⁴⁾		1.0	%		720		720	October 2024⁽⁴⁾		1.0	%		720		720
Junior Subordinated Promissory Note		October 2024⁽⁴⁾		20.0	%		447		447	October 2024⁽⁴⁾		20.0	%		447		447
Other unsecured loans						$	7,627	$	7,444
Subordinated Promissory Note										March 2029		10.0	%		1,700		-
Subordinated Promissory Note										April 2024		10.0	%		750		750
Subordinated Promissory Note										May 2027		10.0	%		98		-
Total Other Unsecured Debt														$	10,365	$	8,900


⁽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.


Year Maturing	Total Amount Redeemable
Year Redeemable			Total Amount Redeemable
2024	$	3,509	$	2,638
2025		440		495
2026		309		309
2027		1,129		1,234
2028		206		206
Total	$	5,593	$	4,882


	Quarter 3		Quarter 2		Quarter 1		Quarter 4		Quarter 3		Quarter 2		Quarter 1			Quarter 3		Quarter 2			Quarter 1		Quarter 4			Quarter 3		Quarter 2		Quarter 1
	2022		2022		2022		2021		2021		2021		2021			2023		2023			2023		2022			2022		2022		2022

Net interest and fee income	$	1,455	$	1,267	$	1,112	$	958	$	830	$	625	$	411		$	1,464	$	1,509		$	1,451	$	1,407		$	1,424	$	1,242	$	1,041
Loan loss provision		271		134		74		246		83		45		214			131		43			120		451			271		134		74
Net interest income after loan loss provision		1,184		1,133		1,038		712		747		580		197			1,333		1,466			1,331		956			1,153		1,108		967
Gain on sale of foreclosed assets		–		101		–		1		64		13		88			-		8			-		-			-		101		-
Gain on foreclosure of assets		–		–		–		67		–		–		–
Gain on extinguishment of debt		–		–		–		–		361		–		10
Gain on the sale of real estate assets																	-		10			-		-					-		-
Dividend or other income																	16		19			21		90			31		25		70
SG&A expense		603		713		697		415		483		438		537			591		617			826		672			603		713		695
Depreciation and amortization		12		12		12		12		12		13		16			21		20			20		20			12		12		12
Loss on sale of foreclosed assets		–		–		–		23		–		51		18			-		-			34		-			-		-		-
Loss on foreclosure of assets		–		–		–		47		–		–		–
Impairment loss on foreclosed assets		35		–		–		–		–		–		10
Net income (loss)	$	534	$	509	$	329	$	283	$	677	$	91	$	(286	)
Impairment (gain) loss on foreclosed assets																	-		(9	)		2		(33	)		35		-		-
Net income																$	737	$	875		$	470	$	387		$	534	$	509	$	330