Shepherd's Finance 10-Q 2024 Q3 Quarterly report

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, 2024

or

☐ 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 333-224557

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) 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
	Item 1. Financial Statements
		Interim Consolidated Balance Sheets as of September 30, 2024 (Unaudited) and December 31, 2023	4
		Interim Consolidated Statements of Operations (Unaudited) for the Three and Nine Months Ended September 30, 2024 and 2023	5
		Interim Consolidated Statement of Changes in Members’ Capital (Unaudited) for the Three and Nine Months Ended September 30, 2024 and 2023	6
		Interim Consolidated Statements of Cash Flows (Unaudited) for the Nine Months Ended September 30, 2024 and 2023	7
		Notes to Interim Consolidated Financial Statements (Unaudited)	8
	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		26
	Item 3. Quantitative and Qualitative Disclosure About Market Risk		50
	Item 4. Controls and Procedures		50
PART II. OTHER INFORMATION
	Item 1. Legal Proceedings		51
	Item 1A. Risk Factors		51
	Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		51
	Item 3. Defaults upon Senior Securities		52
	Item 4. Mine Safety Disclosures		52
	Item 5. Other Information		52
	Item 6. Exhibits		52

2

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: 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 for the year ended December 31, 2023. 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, 2023.

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, 2023 in mind. You should not place undue reliance on any forward-looking statement. We are not obligated to update forward-looking statements.

3

Shepherd’s Finance, LLC

Interim Consolidated Balance Sheets

(in thousands of dollars)	September 30, 2024		December 31, 2023
	(Unaudited)
Assets
Cash and cash equivalents	$	4,348	$	3,522
Accrued interest receivable		825		1,171
Loans receivable, net		49,212		58,130
Real estate investments		14,038		435
Foreclosed assets, net		1,841		130
Premises and equipment		811		828
Other assets		1,278		618
Total assets	$	72,353	$	64,834
Liabilities, Redeemable Preferred Equity, and Members’ Capital
Customer interest escrow	$	431	$	292
Accounts payable and accrued expenses		907		609
Accrued interest payable		4,327		3,861
Notes payable secured, net of deferred financing costs		23,871		21,519
Notes payable unsecured, net of deferred financing costs		34,211		31,786
Deferred revenue – real estate investments		297		-
Total liabilities	$	64,044	$	58,067
Commitments and Contingencies (Note 10)		-
Redeemable Preferred Equity
Series C preferred equity		-		4,773
Members’ Capital
Series C preferred equity		6,308		-
Class A common equity		2,001		1,994
Members’ capital	$	8,309	$	1,994
Total liabilities, redeemable preferred equity and members’ capital	$	72,353	$	64,834

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

4

Shepherd’s Finance, LLC

Interim Consolidated Statements of Operations - Unaudited

For the Three and Nine Months Ended September 30, 2024 and 2023

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
(in thousands of dollars)	2024		2023		2024		2023
Interest Income
Interest and fee income on loans	$	2,699	$	2,763	$	8,259	$	8,494
Interest expense:
Interest related to secured borrowings		318		473		1,066		1,651
Interest related to unsecured borrowings		900		826		2,676		2,419
Interest expense		1,218		1,299		3,742		4,070
Net interest and fee income		1,481		1,464		4,517		4,424
Less: Provision for credit losses		332		131		719		294
Net interest and fee income after provision for credit losses		1,149		1,333		3,798		4,130
Non-Interest Income
Revenue from the sale of land parcels		1,601		-		1,601		-
Other income		12		16		40		56
Gain on sale of real estate investments		-		-		-		10
Gain on foreclosed assets		2		-		2		15
Total non-interest income		1,615		16		1,643		81
Income before non-interest expense		2,764		1,349		5,441		4,211
Non-Interest Expense
Cost of land parcels sold		1,601		-		1,601		-
Selling, general and administrative		714		591		2,129		2,034
Depreciation and amortization		20		21		61		61
Loss on foreclosed assets		-		-		479		34
Total non-interest expense		2,335		612		4,270		2,129
Net Income	$	429	$	737	$	1,171	$	2,082
Earned Distribution to Preferred Equity Holders		185		144		513		445
Net Income Attributable to Common Equity Holders	$	244	$	593	$	658	$	1,637

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

5

Shepherd’s Finance, LLC

Interim Consolidated Statements of Changes in Members’ Capital – Unaudited

For the Three Months Ended September 30, 2024 and 2023

(in thousands of dollars)	Series B Preferred Equity		Series C Preferred Equity			Class A Common Equity			Total Members’ Capital
July 1, 2023	$	-	$	-		$	2,117		$	2,117
Net income attributable to Common A equity		-		-			593			593
Net income attributable to Series C equity
Distributions to Series C equity
Issuance of Common A equity units
Cumulative effect of CECL adoption as of January 1, 2023
Contributions from Series C equity
Distributions to Series B preferred equity
Conversion of Series C equity
Distributions to Common A equity		-		-			(490	)		(490	)
September 30, 2023	$	-	$	-		$	2,220		$	2,220
July 1, 2024	$	-	$	6,189		$	1,866		$	8,055
Net income attributable to Common A equity		-		-			244			244
Net income attributable to Series C equity		-		185			-			185
Distributions to Series C equity		-		(66	)		-			(66	)
Distributions to Common A equity		-		-			(116	)		(116	)
Issuance of Common A equity units		-		-			7			7
September 30, 2024	$	-	$	6,308		$	2,001		$	8,309

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

For the Nine Months Ended September 30, 2024 and 2023

(in thousands of dollars)	Series B Preferred Equity			Series C Preferred Equity			Class A Common Equity			Total Members’ Capital
January 1, 2023	$	1,900		$	-		$	180		$	2,080
Cumulative effect of CECL adoption as of January 1, 2023		-			-			(178	)		(178	)
Net income attributable to Common A equity		-			-			1,637			1,637
Contributions from Common A equity		-			-			1,460			1,460
Distributions to Common A equity		-			-			(879	)		(879	)
Distributions to Series B preferred equity		(1,900	)		-			-			(1,900	)
September 30, 2023	$	-		$	-		$	2,220		$	2,220
January 1, 2024	$	-		$	-		$	1,994		$	1,994
Balance	$	-		$	-		$	1,994		$	1,994
Net income attributable to Common A equity		-			-			658			658
Net income attributable to Series C equity		-			513			-			513
Contributions from Series C equity		-			1,200			-			1,200
Conversion of Series C equity		-			4,773			-			4,773
Distributions to Series C equity		-			(178	)		-			(178	)
Distributions to Class A equity		-			-			(668	)		(668	)
Issuance of Common A equity units		-			-			17			17
September 30, 2024	$	-		$	6,308		$	2,001		$	8,309
Balance	$	-		$	6,308		$	2,001		$	8,309

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

6

Shepherd’s Finance, LLC

Interim Consolidated Statements of Cash Flows - Unaudited

For the Nine Months Ended September 30, 2024 and 2023

(in thousands of dollars)	September 30, 2024			September 30, 2023
Cash flows from operations
Net income	$	1,171		$	2,082
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization of deferred financing costs		157			179
Provision for credit losses		719			294
Change in loan origination fees, net		(184	)		166
Depreciation and amortization		61			61
Gain on foreclosed assets		(2	)		(15	)
Loss on foreclosed assets		479			34
Gain on sale of real estate investments		-			(10	)
Proceeds from sale of real estate investments		1,601			2,131
Deferred revenue – real estate investments		297			-
Issuance of common A equity units for employee compensation		17			-
Net change in operating assets and liabilities:
Other assets		(702	)		533
Accrued interest receivable		346			(86	)
Customer interest escrow		139			(389	)
Accrued interest payable		1,023			1,228
Accounts payable and accrued expenses		298			(197	)
Net cash provided by operating activities	$	5,420		$	6,011
Cash flows from investing activities
Loan originations and principal collections, net		(45	)		(2,616	)
Investments in real estate asset trusts		(330	)		-
Additions for construction in foreclosed assets		(541	)		(125	)
Acquisition of 339, net of cash acquired		(2,996	)		-
Additions for construction in real estate investments		(3,544	)		(1,461	)
Proceeds from sale of foreclosed assets		659			1,549
Net cash used in investing activities	$	(6,797	)	$	(2,653	)
Cash flows from financing activities
Contributions from common A equity holders		-			1,460
Contributions from preferred C equity holders		1,200			-
Distributions to preferred B equity holders		-			(1,900	)
Distributions to preferred C equity holders		(178	)		(1,288	)
Distributions to common equity holders		(668	)		(879	)
Proceeds from secured note payable		10,885			9,252
Repayments of secured note payable		(9,915	)		(10,050	)
Proceeds from unsecured notes payable		9,624			799
Redemptions/repayments of unsecured notes payable		(8,655	)		(1,307	)
Deferred financing costs paid		(90	)		(89	)
Net cash provided by (used in) financing activities	$	2,203		$	(4,002	)
Net change in cash and cash equivalents		826			(644	)
Cash and cash equivalents
Beginning of period		3,522			4,196
End of period	$	4,348		$	3,552
Supplemental disclosure of cash flow information
Cash paid for interest	$	4,208		$	3,632
Non-cash investing and financing activities
Earned by preferred B equity and distributed to customer interest escrow	$	-		$	47
Earned but not paid distributions of preferred C equity	$	-		$	366
Foreclosed assets transferred from loans receivable, net	$	2,306		$	-
Secured and unsecured notes payable transfers	$	893		$	387
Accrued interest payable transferred to notes payable	$	743		$	790

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

7

Shepherd’s Finance, LLC

Notes to Consolidated Financial Statements (unaudited)

Information presented throughout these notes to the consolidated financial statements is in thousands of dollars.

1. Description of Business

Shepherd’s Finance, LLC and subsidiary (the “Company”, “we”, or “our”) was originally formed as a Pennsylvania limited liability company on May 10, 2007. We are the sole member of two consolidating subsidiaries, Shepherd’s Stable Investments, LLC and 339 Justabout Land Company. The Company operates pursuant to its Second Amended and Restated Limited Liability Company Agreement 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 and invests in land transactions (in 20 states as of September 30, 2024) to:

● construct single family homes,

● develop undeveloped land into residential building lots, and

● purchase and improve for sale older homes.

2. Acquisition

Acquisition of 339 Justabout Land Co., LLC

Effective February 15, 2024, the Company completed its acquisition of 339 Justabout Land Co. LLC (“339”), in a transaction valued at $9,122. The Company paid cash consideration of $3,000 plus the amount of our intercompany debt.

The property has since been subdivided into two parcels. One parcel is being developed into lots and are available for home construction (“Phase 1 Lots”) and the other parcel will be developed into a second phase of lots (“Phase 2 Lots”), which should be available for construction later this year or early next year (collectively the “339 Lots”).

We charge an option fee to Benjamin Marcus Homes (“BMH”) for the right to buy the Phase 1 Lots owned by 339. The option fee was $890 as of February 15, 2024, and the Company will defer the revenue related to the option fee over the twelve months. As of September 30, 2024, deferred revenue, real estate investment was $297.

During the quarter ended September 30, 2024, BMH purchased five lots from 339 for both revenue and cost of land parcels sold of $1,601 which is included within non-interest income and non-interest expense, respectively, on the interim consolidated statements of operations. No gain or loss was recognized in the sale of the lots.

The total expected selling price of the 339 Lots is approximately $18,500 and the gross purchase price was approximately $3,900 (the “Purchase Price”). BMH immediately repaid an intercompany debt to 339 of $892, which in turn was returned to the Company, leaving the net investment at $3,000. We purchased subject to the debt owed by 339, which included a first position development loan from the Company, and two subordinate financings from lenders outside of the Company.

8

The following table summarizes the allocation of purchase price to assets and liabilities acquired in connection with the Company’s acquisition of 339 based on fair values as of February 15, 2024.

Schedule of Purchase Price to Assets and Liabilities 

Acquisition Consideration
Gross purchase price	$	3,892
Debt of 339 to the Company		6,122
Immediate repayment of previous 339 owner of intercompany debt		(892	)
Purchase consideration	$	9,122

The purchase price has been allocated to the acquired assets and assumed liabilities based on estimated fair values. The table below provides the provisional recording of assets acquired and liabilities assumed as of the acquisition date.

Schedule of Acquired Assets and Assumed Liabilities

	Amounts recognized as of the acquisition date
Purchase Consideration	$	9,122
Fair value of identified assets acquired:
Cash		4
Real estate investments		11,330
Total identifiable assets		11,334
Fair value of liabilities assumed:
Current liabilities		462
Other liabilities		1,750
Total liabilities assumed		2,212
Net identifiable assets acquired	$	9,122

The allocation presented above is based upon management’s estimate of the fair values using valuation techniques including appraisals and purchase contracts, as well as estimating completion costs and future interest costs. In estimating the fair value of the identifiable acquired assets and assumed liabilities, the fair value estimates are based on, but not limited to, expected future revenue and cash flows and estimated discount rates. Except for real estate assets, all assets and liabilities are estimated at their historical carrying values, which approximates fair value.

3. Fair Value

The Company had no financial instruments measured at fair value on a recurring basis as of September 30, 2024 and December 31, 2023.

9

The following tables present the balances of non-financial instruments measured at fair value on a non-recurring basis:

Schedule of Non-financial Instruments Measured at Fair Value on Non-recurring Basis 

	September 30, 2024				Quoted Prices in Active Markets for Identical		Significant Other Observable		Significant Unobservable
	Carrying		Estimated		Assets		Inputs		Inputs
	Amount		Fair Value		Level 1		Level 2		Level 3
Foreclosed assets, net	$	1,841	$	1,841	$	–	$	–	$	1,841
Impaired loans, net		5,029		5,029		–		–		5,029
Other impaired loans, net		5,393		5,393		–		–		5,393
Total	$	6,870	$	6,870	$	–	$	–	$	6,870

	December 31, 2023				Quoted Prices in Active Markets for Identical		Significant Other Observable		Significant Unobservable
	Carrying		Estimated		Assets		Inputs		Inputs
	Amount		Fair Value		Level 1		Level 2		Level 3
Foreclosed assets, net	$	130	$	130	$	–	$	–	$	130
Impaired COVID loans, net		82		82		–		–		82
Other impaired loans, net		5,393		5,393		–		–		5,393
Total	$	5,605	$	5,605	$	–	$	–	$	5,605

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

 Schedule of Fair Value Estimates for Financial Instruments

	September 30, 2024				December 31, 2023
	Carrying		Estimated		Carrying		Estimated
	Amount		Fair Value		Amount		Fair Value
Financial Assets
Cash and cash equivalents	$	4,348	$	4,348	$	3,522	$	3,522
Loan receivable, net		49,212		49,212		58,130		58,130
Accrued interest on loans receivables, net		825		825		1,171		1,171
Financial Liabilities
Customer interest escrow		431		431		292		292
Notes payable secured, net		23,871		23,871		21,519		21,519
Notes payable unsecured, net		34,211		34,211		31,786		31,786
Accrued interest payable		4,327		4,327		3,861		3,861

4. Real Estate Investment Assets

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

 Schedule of Roll Forward of Real Estate Investment Assets

	Nine Months Ended September 30, 2024			Year Ended December 31, 2023			Nine Months Ended September 30, 2023
Beginning balance	$	435		$	660		$	660
Additions from 339 acquisition		11,330			–			–
Gain on sale of real estate investments		-			10			10
Investments in real estate asset trust		330			–			–
Proceeds from the sale of real estate investments		(1,601	)		(2,131	)		(2,131	)
Additions for construction/development		3,544			1,896			1,461
Ending balance	$	14,038		$	435		$	–

10

During the quarter ended September 30, 2024, the Company invested in one of our borrowers, DBL Capital Real Estate Fund 1, LLC (“DBL”) for $330. The investment is to develop six empty lots into houses and the Company is expected to receive a variable return.

5. Loans Receivables, net

Financing receivables are comprised of the following:

 Schedule of Financing Receivables

	September 30, 2024			December 31, 2023
Loans receivables, gross	$	52,157		$	61,293
Less: Deferred loan fees		(1,540	)		(1,772	)
Less: Deposits		(907	)		(1,056	)
Plus: Deferred origination costs		312			360
Less: Allowance for credit losses		(810	)		(695	)
Loans receivable, net	$	49,212		$	58,130

Commercial Construction and Development Loans

As of September 30, 2024, the Company’s portfolio consisted of 192 construction and seven development loans with 63 borrowers in 20 states.

Construction Loan Portfolio Summary

The following is a summary of our loan portfolio to builders for home construction loans as of September 30, 2024 and December 31, 2023:

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)			Loan Fee
2024		20		62		192	$	102,150	$	69,005	$	47,334		68	%(3)		5	%
2023		20		62		225	$	117,169	$	75,300	$	51,788		64	%(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 value of collateral.
(3)	Represents the weighted average loan to value ratio of the loans.

11

Real Estate Development Loan Portfolio Summary

The following is a summary of our loan portfolio to builders for land development as of September 30, 2024 and December 31, 2023:

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		Gross Amount Outstanding		Loan to Value Ratio(2)			Interest Spread(4)
2024		6		7		7	$	14,513	$	6,389	$	4,823		33	%(3)		varies
2023		6		9		11	$	23,873	$	11,256	$	9,505		40	%(3)		varies

(1)	The value is determined by the appraised value.
(2)	The loan to value ratio is calculated by taking the outstanding amount and dividing it by the value of collateral.
(3)	Represents the weighted average loan to value ratio of the loans.
(4)	The interest spread varies for the state of Pennsylvania and is 7% across other states.

The following is a roll forward of our loan receivables, net:

Schedule of Construction and Development Loan Portfolio 

	September 30, 2024			December 31, 2023
Beginning balance	$	58,130		$	56,650
Originations and modifications		37,089			58,216
Principal collections		(37,659	)		(57,895	)
Transferred from loans receivables, net to foreclosed assets		(2,306	)		–
Transferred from loans receivables, net to real estate investments		(6,122	)		–
Change in builder deposit		149			(217	)
Change in allowance for credit losses		115			1,832
Change in loan fees, net		(184	)		(456	)
Ending balance	$	49,212		$	58,130

Credit Quality Information

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.

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, a 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.

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.

12

Our Company construction loans are collateralized by land and real estate while our Company development loans are collateralized by land. Secured nonaccrual loans individually evaluated are also collateralized by land and real estate.

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, 2024:

Schedule of Gross Loan Receivable, Commitment Value and ACL Credit Rank Loan Pool Category 

	Loans Receivable Gross		Commitment Value		ACL
Construction Loans Collectively Evaluated
A Credit Risk	$	36,429	$	54,664	$	(220	)
B Credit Risk		4,441		5,948		(54	)
C Credit Risk		841		1,851		(23	)
Development Loans Collectively Evaluated
A Credit Risk	$	4,140	$	5,627	$	(3	)
B Credit Risk		198		275		–
C Credit Risk		485		487		(18	)
Unsecured Nonaccrual Loans Individually Evaluated	$	–	$	–	$	–
Secured Nonaccrual Loans Individually Evaluated	$	5,623	$	6,542	$	(594	)
ACL Unfunded Commitments	$	-		-		102
Total	$	52,157	$	75,394	$	(810	)

The following table presents the Company’s gross loans receivable, commitment value and ACL for each respective credit rank loan pool category as of December 31, 2023.

	Loans Receivable Gross		Commitment Value		ACL
Construction Loans Collectively Evaluated
A Credit Risk	$	40,252	$	59,075	$	(211	)
B Credit Risk		5,718		10,339		(32	)
C Credit Risk		–		–		–
Development Loans Collectively Evaluated
A Credit Risk	$	8,787	$	9,793	$	(5	)
B Credit Risk		172		511		–
C Credit Risk		452		454		(10	)
Unsecured Nonaccrual Loans Individually Evaluated	$	86	$	81	$	(86	)
Secured Nonaccrual Loans Individually Evaluated	$	5,826	$	6,303	$	(351	)
ACL Unfunded Commitments	$	–	$	–	$	–
Total	$	61,293	$	86,556	$	(695	)

13

The following table presents the amortized cost basis of loans on nonaccrual status and loans past due over 89 days still accruing as of September 30, 2024:

Schedule of Amortized Cost Basis of Loans on Nonaccrual Status and Loans 

	Nonaccrual with No Allowance for Credit Loss		Nonaccrual with Allowance for Credit Loss		Loans Past Due Over 89 Days Still Accruing
Unsecured Nonaccrual Loans Individually Evaluated	$	–	$	–	$	–
Secured Nonaccrual Loans Individually Evaluated	$	2,209	$	3,414	$	–
Total	$	2,209	$	3,414	$	–

The following table presents the amortized cost basis of loans on nonaccrual status and loans past due over 89 days still accruing as of December 31, 2023:

	Nonaccrual with No Allowance for Credit Loss		Nonaccrual with Allowance for Credit Loss		Loans Past Due Over 89 Days Still Accruing
Unsecured Nonaccrual Loans Individually Evaluated	$	–	$	86	$	–
Secured Nonaccrual Loans Individually Evaluated	$	2,495	$	3,331	$	–
Total	$	2,495	$	3,417	$	–

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 for estimated costs associated with asset disposal. A 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 nonaccrual loans. The Company’s policies with respect to placing loans on nonaccrual 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.

14

The following is an aging of our gross loan portfolio as of September 30, 2024:

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
Performing Loans
A Credit Risk	$	40,569	$	40,569	$	–	$	–	$	–	$	–
B Credit Risk		4,639		4,639		–		–		–		–
C Credit Risk		1,326		1,326		–		–		–		–
Performing Loans		1,326		1,326		–		–		–		–
Forbearance Loans
Secured Nonaccrual Loans	$	5,129	$	–	$	1,856	$	–	$	–	$	3,273
Forbearance Loans	$	5,129	$	–	$	1,856	$	–	$	–	$	3,273
Nonaccrual Loans
Unsecured Loans	$	–	$	–	$	–	$	–	$	–	$	–
Secured Loans		494		–		–		–		494		–
Total	$	52,157	$	46,534	$	1,856	$	–	$	494	$	3,273

The following is an aging of our gross loan portfolio as of December 31, 2023:

	Gross Loan		Current		Past Due		Past Due		Past Due		Past Due
	Value		0 - 59		60 - 89		90 - 179		180 - 269		>270
Performing Loans
A Credit Risk	$	49,039	$	49,039	$	–	$	–	$	–	$	–
B Credit Risk		5,890		5,890		–		–		–		–
C Credit Risk		452		452		–		–		–		–
Performing Loans		452		452		–		–		–		–
Nonaccrual Loans
Unsecured Loans	$	86	$	–	$	–	$	–	$	–	$	86
Secured Loans		5,826		–		881		1,497		1,641		–
Total	$	61,293	$	55,381	$	881	$	1,497	$	1,641	$	86

Below is an aging schedule of loans receivable as of September 30, 2024, 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.)		175	$	46,534		89.2	%
60-89 days		8		1,856		3.6	%
90-179 days		–		–		–	%
180-269 days		12		494		0.9	%
>270 days		4		3,273		6.3	%
Subtotal		199	$	52,157		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		199	$	52,157		100.0	%

15

Below is an aging schedule of loans receivable as of December 31, 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.)		219	$	55,381		90.4	%
60-89 days		3		881		1.4	%
90-179 days		3		1,497		2.4	%
180-269 days		4		1,641		2.7	%
>270 days		7		1,893		3.1	%
Subtotal		236	$	61,293		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		236	$	61,293		100.0	%

Below is an aging schedule of loans receivable as of September 30, 2024, on a contractual basis:

Schedule 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.)		175	$	46,534		89.2	%
60-89 days		8		1,856		3.6	%
90-179 days		–		–		–	%
180-269 days		12		494		0.9	%
>270 days		4		3,273		6.3	%
Subtotal		199	$	52,157		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		199	$	52,157		100.0	%

16

Below is an aging schedule of loans receivable as of December 31, 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.)		219	$	55,381		90.4	%
60-89 days		3		881		1.4	%
90-179 days		3		1,497		2.4	%
180-269 days		4		1,641		2.7	%
>270 days		7		1,893		3.1	%
Subtotal		236	$	61,293		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		236	$	61,293		100.0	%

Allowance for Credit Losses on Loans

The following table provides a roll forward of the allowance for credit losses for the quarter ended September 30, 2024:

Schedule of Allowance for Credit Losses 

	Performing Loans																	Nonaccrual loans
	Construction									Development
	A Credit Risk			B Credit Risk			C Credit Risk			A Credit Risk			B Credit Risk		C Credit Risk			Secured			Unsecured			Total
Allowance for credit losses as of June 30, 2024	$	(126	)	$	(58	)	$	(6	)	$	(2	)	$	–	$	(17	)	$	(366	)	$	–		$	(575	)
Charge-offs		–			–			–			–			–		–			89			–			89
Recoveries		–			–			–			–			–		–			–			(3	)		(3	)
Provision for credit losses funded		(20	)		18			(4	)		–			–		(1	)		(317	)		3			(321	)
Provision for credit losses unfunded
Reclassification of ACL on unfunded commitments
Impact of the adoption of ASC 326
Reduction in ACL for loan participations
Allowance for credit losses as of September 30, 2024	$	(146	)	$	(40	)	$	(10	)	$	(2	)	$	–	$	(18	)	$	(594	)	$	–		$	(810	)
Reserve for unfunded commitments as of June 30, 2024	$	(56	)	$	(27	)	$	(8	)	$	–		$	–	$	–		$	–		$	–		$	(91	)
Provision for credit losses unfunded		(19	)		13			(4	)		(1	)		–		–			–			–			(11	)
Reserve for unfunded commitments as of September 30, 2024	$	(75	)	$	(14	)	$	(12	)	$	(1	)	$	–	$	–		$	–		$	–		$	(102	)

17

The following table provides a roll forward of the allowance for credit losses for the nine months ended September 30, 2024:

	Performing Loans																	Nonaccrual loans
	Construction									Development
	A Credit Risk			B Credit Risk			C Credit Risk			A Credit Risk			B Credit Risk		C Credit Risk			Secured			Unsecured			Total
Allowance for credit losses as of December 31, 2023	$	(211	)	$	(32	)	$	–		$	(5	)	$	–	$	(10	)	$	(351	)	$	(86	)	$	(695	)
Reclassification of ACL on unfunded commitments		59			19			–			–			–		–			–			–			78
Charge-offs		–			–			–			–			–		–			453			52			505
Recoveries		–			–			–			–			–		–			–			(3	)		(3	)
Provision for credit losses funded		6			(27	)		(10	)		3			–		(8	)		(696	)		37			(695	)
Allowance for credit losses as of September 30, 2024	$	(146	)	$	(40	)	$	(10	)	$	(2	)	$	–	$	(18	)	$	(594	)	$	–		$	(810	)
Reserve for unfunded commitments as of December 31, 2023	$	–		$	–		$	–		$	–		$	–	$	–		$	–		$	–		$	–
Reclassification of ACL on unfunded commitments		(59	)		(19	)		–			–			–		–			–			–			(78	)
Provision for credit losses unfunded		(16	)		5			(12	)		(1	)		–		–			–			–			(24	)
Reserve for unfunded commitments as of September 30, 2024	$	(75	)	$	(14	)	$	(12	)	$	(1	)	$	–	$	–		$	–		$	–		$	(102	)

The following table provides a roll forward of the allowance for credit losses for the year ended December 31, 2023:

	Performing Loans																		Nonaccrual loans
	Construction									Development
	A Credit Risk			B Credit Risk			C Credit Risk			A Credit Risk			B Credit Risk			C Credit Risk			Secured			Unsecured			Total
December 31, 2022	$	(174	)	$	(66	)	$	(9	)	$	(37	)	$	(2	)	$	(7	)	$	(247	)	$	(1,985	)	$	(2,527	)
Allowance for credit losses	$	(174	)	$	(66	)	$	(9	)	$	(37	)	$	(2	)	$	(7	)	$	(247	)	$	(1,985	)	$	(2,527	)
Impact of the adoption of ASC 326		(33	)		(1	)		(12	)		35			2			(30	)		–			(139	)		(178	)
Charge-offs		–			–			–			–			–			–			132			2,610			2,742
Reduction in ACL for loan participations		5			–			–			–			–			–			–			–			5
Provision for credit losses		(9	)		35			21			(3	)		–			27			(236	)		(572	)		(737	)
Provision for credit losses funded		(9	)		35			21			(3	)		–			27			(236	)		(572	)		(737	)
December 31, 2023	$	(211	)	$	(32	)	$	–		$	(5	)	$	–		$	(10	)	$	(351	)	$	(86	)	$	(695	)
Allowance for credit losses	$	(211	)	$	(32	)	$	–		$	(5	)	$	–		$	(10	)	$	(351	)	$	(86	)	$	(695	)

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 $23,237 and $25,263 as of September 30, 2024 and December 31, 2023, respectively. The ACL is calculated at an estimated loss rate on the total commitment value for loans in our portfolio. The ACL on unfunded commitments is calculated as the difference between the ACL on commitment value less the estimated loss rate and the total gross loan value for loans in our portfolio. As of September 30, 2024, the ACL for unfunded commitments was $102. In addition, as of September 30, 2024, we had no off-balance sheet transactions, nor do we currently have any such arrangements or obligations.

18

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, 2024				December 31, 2023
		Percent of				Percent of
	Borrower	Loan			Borrower	Loan
	City	Commitments			City	Commitments
Highest concentration risk	Pittsburgh, PA		34	%	Pittsburgh, PA		29	%
Second highest concentration risk	Orlando, FL		6	%	Cape Coral, FL		7	%
Third highest concentration risk	Greenville, SC		5	%	Palm Bay, FL		6	%

6. Foreclosed Assets

The following table is our roll forward of foreclosed assets:

Schedule of Roll Forward of Foreclosed Assets

	Nine Months Ended September 30, 2024			Year Ended December 31, 2023			Nine Months Ended September 30, 2023
Beginning balance	$	130		$	1,582		$	1,582
Transferred from loans receivables, net		2,306			-			-
Additions for construction in foreclosed assets		541			125			125
Sale proceeds		(659	)		(1,549	)		(1,549	)
Gain on foreclosed assets		2			8			15
Loss on foreclosed assets		(479	)		(36	)		(34	)
Ending balance	$	1,841		$	130		$	139

7. Borrowings

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

Schedule of Borrowings 

	Priority Rank	September 30, 2024			December 31, 2023
Borrowing Source
Purchase and sale agreements and other secured borrowings	1	$	23,261		$	21,196
Secured line of credit from affiliates	2		613			326
Unsecured line of credit (senior)	3		1,047			1,160
Other unsecured debt (senior subordinated)	4		1,834			1,834
Unsecured Notes through our public offering, gross	5		19,202			20,854
Other unsecured debt (subordinated)	5		11,388			7,266
Other unsecured debt (junior subordinated)	6		907			907
Less deferred financing fees			(170	)		(238	)
Total		$	58,082		$	53,305

19

The following table shows the maturity of outstanding debt as of September 30, 2024:

Schedule of Maturity of Debt

Year Maturing	Total Amount Maturing		Public Offering		Other Unsecured		Secured Borrowings
2024	$	29,568	$	1,411	$	5,587	$22,570
2025		10,293		7,070		3,204	19
2026		4,167		1,582		2,565	20
2027		7,199		5,857		571	771
2028		3,453		3,282		149	22
2029 and thereafter		3,572		-		3,100	472
Total	$	58,252	$	19,202	$	15,176	$23,874

Secured Borrowings

Lines of Credit

As of September 30, 2024 and December 31, 2023, the Company had $613 and $327 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 as of September 30, 2024. The lines will continue to automatically renew unless notice of nonrenewal is given by a lender.

Loan with Hanna Holdings, Inc.

As of September 30, 2024, the Loan with Hanna Holdings, Inc. decreased $500 to $750 compared to $1,250 as of the 339 Acquisition date.

This loan was debt acquired in the 339 acquisition which 339 used the loan to originally purchase the property.

● Principal not to exceed $1,250

● Secured with a second position mortgage

● 7% interest rate

● Due in December 2027, but payable with a payoff associated with each lot sale. Interest accrues and is paid upon each payoff of principal.

Secured Deferred Financing Costs

The Company had secured deferred financing costs of $3 as of September 30, 2024 and December 31, 2023.

Secured Borrowings Secured by Loan Assets

Borrowings secured by loan assets are summarized below:

Schedule of Secured Borrowings 

	September 30, 2024				December 31, 2023
	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	$	8,795	$	6,336	$	7,615	$	5,770
S.K. Funding		10,958		6,500		7,358		6,500
Lender
Shuman		213		125		358		125
Jeff Eppinger		4,110		1,500		3,496		1,500
R. Scott Summers		944		902		2,177		1,003
John C. Solomon		1,027		563		598		563
Judith Swanson		9,517		6,027		10,038		5,164
Total	$	35,564	$	21,953	$	31,640	$	20,625

20

Unsecured Borrowings

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

The effective interest rate on borrowings through our Notes Program as of September 30, 2024 and December 31, 2023 was 9.05% and 9.01%, 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 is a roll forward of our Notes Program:

Schedule of Roll Forward of Notes Outstanding 

	Nine Months Ended September 30, 2024			Year Ended December 31, 2023			Nine Months Ended September 30, 2023
Gross notes outstanding, beginning of period	$	20,854		$	21,576		$	21,576
Notes issued		2,511			1,353			685
Note repayments / redemptions		(4,163	)		(2,075	)		(1,502	)
Gross notes outstanding, end of period	$	19,202		$	20,854		$	20,759
Deferred financing costs, net		(167	)		(235	)		(276	)
Notes outstanding, net	$	19,035		$	20,619		$	20,483

The following is a roll forward of deferred financing costs:

Schedule of Roll Forward of Deferred Financing Costs 

	Nine Months Ended September 30, 2024			Year Ended December 31, 2023			Nine Months Ended September 30, 2023
Deferred financing costs, beginning balance	$	939		$	835		$	835
Additions		90			103			89
Deferred financing costs, ending balance		1,029			939			924
Less accumulated amortization		(862	)		(703	)		(648	)
Deferred financing costs, net	$	167		$	235		$	276

21

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, 2024		Year Ended December 31, 2023		Nine Months Ended September 30, 2023
Accumulated amortization, beginning balance	$	703	$	468	$	468
Additions		159		235		180
Accumulated amortization, ending balance	$	862	$	703	$	648

Other Unsecured Debts

Our other unsecured debts are detailed below:

Schedule of Other Unsecured Loans 

Loan	Maturity Date	Interest Rate(1)			September 30, 2024		December 31, 2023
Unsecured Note with Seven Kings Holdings, Inc. Senior Subordinated	Demand(2)		9.5	%	$	297	$	410
Unsecured Line of Credit from Judith Swanson	October 2024		10.0	%		973		1,836
Unsecured Line of Credit from Judith Swanson	April 2025		10.0	%		500		-
Unsecured Line of Credit from Builder Finance, Inc. Senior Subordinated	January 2025		10.0	%		750		750
Subordinated Promissory Note	April 2024		10.0	%		-		100
Subordinated Promissory Note	February 2025		9.0	%		600		600
Subordinated Promissory Note	March 2026		9.75	%		500		500
Subordinated Promissory Note	December 2027		10.0	%		20		20
Subordinated Promissory Note	February 2024		11.0	%		-		20
Subordinated Promissory Note	January 2025		10.0	%		15		15
Subordinated Promissory Note	February 2027		8.5	%		200		-
Subordinated Promissory Note	March 2027		10.0	%		26		26
Subordinated Promissory Note	November 2026		9.5	%		200		200
Subordinated Promissory Note	October 2024		10.0	%		700		700
Subordinated Promissory Note	December 2024		10.0	%		100		100
Subordinated Promissory Note	April 2025		10.0	%		202		202
Subordinated Promissory Note	July 2025		8.0	%		100		100
Subordinated Promissory Note	September 2027		10	%		108		108
Subordinated Promissory Note	October 2025		8.0	%		100		100
Subordinated Promissory Note	December 2025		8.0	%		180		180
Senior Subordinated Promissory Note	March 2026(3)		8.0	%		374		374
Subordinated Promissory Note	August 2026		8.0	%		291		291
Senior 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
Junior Subordinated Promissory Note	October 2024(4)		20.0	%		447		447
Subordinated Promissory Note	March 2029		10.0	%		1,100		1,200
Subordinated Promissory Note	April 2024		10.0	%		-		750
Subordinated Promissory Note	May 2027		10.0	%		97		98
Subordinated Promissory Note	November 2027		10.0	%		120		120
Subordinated Promissory Note	June 2025		10.0	%		1,000		-
Subordinated Promissory Note	April 2028		10.0	%		149		-
Subordinated Promissory Note	April 2029		11.0	%		2,000		-
Subordinated Promissory Note	June 2025		11.0	%		1,007		-
Subordinated Promissory Note	Varies (5)		Prime+1.5	%		1,100		-
Total Other Unsecured Debt					$	15,176	$	11,167

(1)	Interest rate per annum, based upon actual days outstanding and a 365/366-day year.
(2)	Due six months after lender gives notice.
(3)	Lender may require us to repay $20 of principal and all unpaid interest with 10 days’ notice.
(4)	These notes were issued to the same holder and, when calculated together, yield a blended rate of 10% per annum.
(5)	Lender may elect to terminate, effective semi-annually as of August 16 and/or February 16 of any given year.

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8. Customer Interest Escrow

Below is a roll forward of interest escrow:

 Schedule of Interest Escrow

	Nine Months Ended September 30, 2024			Year Ended December 31, 2023			Nine Months Ended September 30, 2023
Beginning balance	$	292		$	766		$	766
Preferred equity dividends		–			47			47
Additions from Pennsylvania loans		668			654			408
Additions from other loans		604			538			434
Interest, fees, principal or repaid to borrower		(1,133	)		(1,713	)		(1,231	)
Ending balance	$	431		$	292		$	424

9. Series C Preferred Equity

On April 19, 2024, the Company entered into Amendment No. 4 to the Second Amended and Restated Limited Liability Company Agreement (“Fourth Amendment”) with an effective date of March 31, 2024 to effect a 100-for-1 unit split of its Series C cumulative preferred units (“Series C Preferred Units”) that became effective March 31, 2024. As a result of the split, every Series C Preferred Unit, issued and outstanding immediately prior to March 31, 2024 will automatically be reclassified (without any further act) into one hundred Series C Preferred Units.

The Fourth Amendment also increased the maximum number of authorized Series C Preferred Units to 20,000, of which 8,000 are to be issued only pursuant to the Preferred Unit Reinvestment Program. In addition, pursuant to the Fourth Amendment, after six years from the date of investment, instead of being entitled to the right of redemption, the holders of Series C Preferred Units will be entitled to convert all or a portion of the Series C Preferred Units to the common units of the Registrant, on a 1 for 1 basis, after a 12-month waiting period after the notice of conversion is given.

In addition, the Fourth Amendment restricted the right to require the Company to redeem the Series C Preferred Units for cash; therefore, the units were reclassified from mezzanine equity to Members’ Capital. The Company’s redeemable Series C preferred equity was $4,773 as of December 31, 2023. The Company’s redeemable Series C preferred equity was $6,308 as of September 30, 2024.

The Series C Preferred Units have a fixed value which is their purchase price and preferred liquidation and distribution rights. Yearly distributions of 12% of the Series C Preferred Units’ value will be made on a quarterly basis.

23

Roll forward of Series C Preferred Equity:

Schedule of Roll Forward of Series C Preferred Equity

	Nine Months Ended September 30, 2024			Year Ended December 31, 2023			Nine Months Ended September 30, 2023
Beginning balance	$	4,773		$	5,725		$	5,725
Additions from new investment		1,200			-			-
Distributions		(178	)		(1,539	)		(1,287	)
Additions from reinvestments		513			587			444
Ending balance	$	6,308		$	4,773		$	4,882

The following table shows the earliest conversion options for investors in Series C Preferred Equity as of September 30, 2024:

Schedule of Conversion Options for Investors in Series C Preferred Equity 

Year Maturing	Total Amount Convertible
2024	$	2,651
2025		558
2026		309
2027		1,308
2028		206
2029 and thereafter		1,276
Total	$	6,308

10. Related Party Transactions

As of September 30, 2024, the Company had $818, $68, and $1,000 available to borrow against the line of credit from Daniel M. Wallach (our Chief Executive Officer and Chairman of the Board of Managers) and his wife, the line of credit from the 2007 Daniel M. Wallach Legacy Trust, and the line of credit from William Myrick (our Executive Vice President), respectively.

As of September 30, 2024, the Company had other unsecured debt of $1,100 with an interest rate of prime plus 1.5% with Sheldon Investment, LLC, which is related to Gregory Sheldon who is a member of our Board of Managers. Sheldon Investment, LLC may elect to demand repayment of the debt, effective semi-annually as of August 16 and/or February 16 of any given year.

A more detailed description of related party transactions is included in Note 10 to our audited annual consolidated financial statements and related notes and other consolidated financial data (the “2023 Financial Statements”) included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2023. These borrowings are included in notes payable secured, net of deferred financing costs on the interim consolidated balance sheet.

11. Commitments and Contingencies

Unfunded commitments to extend credit, which have similar collateral, credit risk, and market risk to our outstanding loans, were $23,237 and $25,263 as of September 30, 2024 and December 31, 2023, respectively.

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12. Selected Quarterly Consolidated Financial Data (Unaudited)

 Schedule of Unaudited Quarterly Condensed Consolidated Financial Data

	Quarter 3		Quarter 2		Quarter 1		Quarter 4		Quarter 3		Quarter 2		Quarter 1
	2024		2024		2024		2023		2023		2023		2023
Net interest and fee income	$	1,481		1,334	$	1,702	$	1,606	$	1,464	$	1,509	$	1,451
Provision for credit losses		332		165		222		443		131		43		120
Net interest and fee income after provision for credit losses		1,149		1,169		1,480		1,163		1,333		1,466		1,331
Gain on foreclosed assets		2		–		–		–		–		17		–
Gain on the sale of real estate assets		–		–		–		–		–		10		–
Revenue from the sale of land parcels		1,601		–		–		–		–		–		–
Dividend or other income		12		13		15		24		16		19		21
Cost of land parcels sold		1,601		–		–		–		–		–		–
SG&A expense		714		586		829		662		591		617		826
Depreciation and amortization		20		20		21		20		21		20		20
Loss on foreclosed assets		–		278		201		9		–		–		36
Net income	$	429	$	298	$	444	$	496	$	737	$	875	$	470

13. Non-Interest Expense Detail

The following table displays our selling, general and administrative expenses:

 Schedule of Selling General and Administrative Expenses

	For the Nine Months Ended September 30,
	2024		2023
Selling, general and administrative expenses
Legal and accounting	$	224	$	240
Salaries and related expenses		1,359		1,302
Board related expenses		81		81
Advertising		45		16
Rent and utilities		64		43
Loan and foreclosed asset expenses		101		71
Travel		128		118
Other		127		163
Total SG&A	$	2,129	$	2,034

14. Subsequent Events

The management of the Company has evaluated subsequent events through November 14, 2024, the date these interim consolidated financial statements were issued.

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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 consolidated financial statements and the notes thereto contained elsewhere in this report and with our audited annual consolidated financial statements and related notes and other consolidated financial data (the “2023 Financial Statements”) included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2023 (the “2023 Form 10-K”). See also “Cautionary Note Regarding Forward-Looking Statements” preceding Part I.

Overview

During the quarter and nine months ended September 30, 2024, the Company continued to focus on the reduction of non-interest earning assets. As of September 30, 2024, gross loan values classified as nonaccrual were 24 or $5,623 compared to 17 or $5,912 as of December 31, 2023. In addition, as of September 30, 2024, we had six foreclosed assets, net or $1,841 compared to one or $130 as of December 31, 2023.

The estimated loss on interest income resulting from non-interest earning assets for the quarter and nine months ended September 30, 2024 was $280 and $840, respectively, compared to $296 and $715 for the same periods of 2023. Looking ahead, we expect the balance of non-interest earning assets to 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 2024 and the beginning of 2025:

1.	Continue to manage the balance of non-interest-bearing assets, which includes foreclosed real estate and nonaccrual assets.
2.	Control SG&A expenses.
3.	Slightly increase margin, as compared to our current spread.
4.	Maintain liquidity at a level sufficient for loan originations.
5.	Manage the increase in loan loss and impairment expenses.
6.	Maintain sales.

The current housing market is something we haven’t seen before. While many factors imply that we should be in a decline in housing values, the number of homes with a sub 3% fixed interest rate is something new to our United States housing market. Usually as housing becomes unaffordable due to either interest rates or home prices, the sale of new homes drops, and the number of foreclosures increases. Neither of these things is generally happening in the marketplace, even though housing is mostly unaffordable. We believe this is likely due to the number of sub 3% mortgages that exist and are likely to continue to exist. New homes are typically 10% of available homes for sale and are now more than 30%. It seems that the supply of used homes is unlikely to increase unless mortgage interest rates drop substantially. The Company’s foreclosed assets increased during the nine months ended September 30, 2024 to $1,840 from $130 as of December 31, 2023.

We had $49,212 and $58,130 in loan receivables, net as of September 30, 2024 and December 31, 2023, respectively. As of September 30, 2024, we had 192 construction and seven development loans with 64 borrowers in 20 states. In addition, as of September 30, 2024, we transferred from loan receivables, net to foreclosed assets and to real estate investments $2,306 and $6,122, respectively.

During the nine months ended September 30, 2024, the Company completed acquisition of 339 Justabout Land Co. LLC (“339”), in a transaction valued at $9,122. The Company paid cash consideration of $3,000 plus the amount of our intercompany debt. The Company transferred $6,122 from loan receivables, net and acquired $462 in accrued interest payable and $1,750 in secured notes payable. The Company acquired $11,330 in real estate investments from the acquisition of 339. In addition, during the nine months ended September 30, 2024, 339 sold five lots for a total sales price and cost of goods sold both of $1,601. No gain or loss was recognized on the sales.

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Net cash provided by operations decreased $591 to $5,420 for the nine months ended September 30, 2024 compared to the same period of 2023. The decrease in operating cash flow was due primarily to the reclass of proceeds from the sale of real estate investments to operating activities from investing activities for the nine months ended September 30, 2024 and 2023 of $1,601 and $2,131, respectively and other assets, which was offset by an increase in provision for credit losses.

Critical Accounting Estimates

To assist in evaluating our interim 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 2023 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, 2023, unless listed below.

Loan Losses

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

Change in Fair Value Assumption	September 30, 2024 Loan Loss Provision Higher/(Lower)
Increasing fair value of the real estate collateral by 35%*	$	-
Decreasing fair value of the real estate collateral by 35%**	$	5,117

* 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 non-performing and a book amount of the loans outstanding of $49,212.

Foreclosed Assets

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

Change in Fair Value Assumption	September 30, 2024 Foreclosed Assets Higher/(Lower)
Increasing fair value of the foreclosed asset by 35%*	$	-
Decreasing fair value of the foreclosed asset by 35%**	$	644

* 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 assets.

** Assumes a book amount of the foreclosed assets of $1,841.

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Results of Operations

Interest Spread

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

	Three Months Ended										Nine Months Ended
	September 30,										September 30,
	2024					2023					2024					2023
Interest Income				*					*					*					*
Estimated interest income	$	1,852		14	%	$	2,117		14	%	$	5,938		14	%	$	6,834		14	%
Estimated unearned interest income due to COVID-19		-		-	%		(100	)	(1	)%		-		-	%		(340	)	(1	)%
Interest income on loans	$	1,852		14	%	$	2,017		13	%	$	5,938		14	%	$	6,494		13	%
Fee income on loans**	$	796		6	%	$	896		6	%	$	2,239		5	%	$	2,449		5	%
Deferred loan fees		(174	)	(1	)%		(150	)	(1	)%		(513	)	(1	)%		(449	)	(1	)%
Fee income on loans, net	$	622		5	%	$	746		5	%	$	1,726		4	%	$	2,000		4	%
Interest and fee income on loans	$	2,474		18	%	$	2,763		18	%	$	7,664		18	%	$	8,494		18	%
Interest expense unsecured	$	850		6	%	$	768		5	%	$	2,519		6	%	$	2,240		5	%
Interest expense secured		318		3	%		473		3	%		1,066		3	%		1,651		4	%
Amortization offering costs		50		-	%		58		-	%		157		-	%		179		-	%
Interest expense	$	1,218		9	%	$	1.299		8	%	$	3,742		9	%	$	4,070		9	%
Net interest and fee income (spread)	$	1,256		9	%	$	1,464		10	%	$	3,922		9	%	$	4,424		9	%
Weighted average outstanding loan asset balance	$	54,081				$	61,552				$	56,553				$	63,191

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

**Excludes fee income related to the 339 Acquisition

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 rate of 10.25%. For most loans, the margin is fixed at 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).

Interest income on loans for both the quarter and nine months ended September 30, 2024, was 14%, compared to 14% for both same periods of 2023.

During both the quarter and nine months ended September 30, 2024, the Company’s margin was 5% compared to 5% and 4% for the same periods of the prior year, respectively. The increase in margin is due to aged loans and development loans earning a higher interest rate.

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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%. This 2.5% margin may increase because some customers run past the standard repayment time and pay a higher rate of interest after that.

● Fee income. Our construction loan fee is 5% of the amount we commit to lend, which is amortized over the expected life of each loan. When loans terminate before their expected life, the remaining fee is recognized at that time. During 2022, we started charging an annual fee on most of our development loans which varies.

Fee income on loans before deferred loan fee adjustments was 6% for both the quarter and nine months ended September 30, 2024 compared to 5% for both of the same periods of 2023.

● Amount of non-performing assets. Generally, two types of non-performing assets negatively affect our interest spread which are loans not paying interest and foreclosed assets.

As of September 30, 2024 and December 31, 2023, foreclosed assets were $1,841 and $130, respectively, which resulted in a negative impact to our interest spread. During the nine months ended September 30, 2024 the Company reclassed six construction loans to foreclosed assets after which two were sold. As of September 30, 2024 the Company had five foreclosed assets compared to one as of December 31, 2023.

As of September 30, 2024 and December 31, 2023, gross loans receivables nonaccrual loans or loans not earning interest were $5,623 and $5,912, respectively.

Provision for credit losses

Provision for credit losses (expense throughout the period) was $332 and $719 for the quarter and nine months ended September 30, 2024, respectively, compared to $131 and $294 for the same periods of the prior year.

The allowance for credit losses as of September 30, 2024 and December 31, 2023 was $810 and $695, respectively. The increase in the allowance for credit losses is due to certain impaired assets that required completion that cost more than the original budget from the builder. In addition, some appraised values decreased in specific markets. The Company believes it has properly reserved for all foreclosed and impaired loans.

Non-Interest Income

Other Income

During the quarter and nine months ended September 30, 2024 and 2023, we consulted for one of our construction and development loan customers which included accounting guidance. Other income related to our consulting fees was $12 and $40 for the quarter and nine months ended September 30, 2024, respectively, compared to $16 and $56 for the same period of 2023. We anticipate continuing our consulting services to our customers on an as needed basis during 2024.

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,
	2024		2023		2024		2023
Legal and accounting	$	39	$	43	$	224	$	240
Salaries and related expenses		467		405		1,359		1,302
Board related expenses		27		27		81		81
Advertising		15		5		45		16
Rent and utilities		20		13		64		43
Loan and foreclosed asset expenses		49		14		101		71
Travel		48		37		128		118
Other		49		47		127		163
Total SG&A	$	714	$	591	$	2,129	$	2,034

29

Our SG&A expenses increased $123 to $714 during the quarter ended September 30, 2024 compared to the same period of 2023. The change in SG&A for the quarter ended September 30, 2024 was primarily due to higher salaries and related expenses and loan and foreclosed asset expenses.

For the nine months ended September 30, 2024, SG&A expenses increased $95 to $2,129 compared to the same periods of 2023 due primarily to salaries and related expenses and advertising expenses.

Loss on Foreclosed Assets

During the quarter ended September 30, 2024, impairment on foreclosed assets decreased $2 to $2 compared to the same period of 2023. The decrease was primarily due to credits related to payments previously adjusted to the asset. In addition, we sold two of our foreclosed assets during the quarter ended September 30, 2024 which did not result in an impairment or loss on the sale of foreclosed assets.

For the nine months ended September 30, 2024, impairment on foreclosed assets increased $443 to $477 compared to the same period of 2023. The increase was primarily due to the transfer of six loan receivable assets to foreclosed assets which incurred a loss on the transfer of $159 and additional impairment losses on foreclosed assets of $318. No foreclosed assets were transferred from loan receivables and no impairment losses were incurred during the same period of 2023.

Consolidated Financial Position

Acquisition

Acquisition of 339 Justabout Land Co., LLC

Effective February 15, 2024, the Company completed its acquisition of 339 Justabout Land Co. LLC (“339”), in a transaction valued at $9,122. The Company paid cash consideration of $3,000 plus the amount of our intercompany debt.

The property has since been subdivided into two parcels. One parcel is being developed into lots and are available for home construction (“Phase 1 Lots”) and the other parcel will be developed into a second phase of lots (“Phase 2 Lots”), which should be available for construction later this year or early next year (collectively the “339 Lots”).

We charge an option fee to Benjamin Marcus Homes (“BMH”) for the right to buy the Phase 1 Lots owned by 339. The option fee was $890 as of February 15, 2024, and the Company will defer the revenue related to the option fee over the twelve months. As of September 30, 2024, deferred revenue, real estate investment was $297.

During the quarter ended September 30, 2024, BMH purchased five lots from 339 for both revenue and cost of land parcels sold of $1,601. No gain or loss was recognized in the sale of the lots.

The total expected selling price of the 339 Lots is approximately $18,500 and the gross purchase price was approximately $3,900 (the “Purchase Price”). BMH immediately repaid an intercompany debt to 339 of $892, which in turn was returned to the Company, leaving the net investment at $3,000. We purchased subject to the debt owed by 339, which included a first position development loan from the Company, and two subordinate financings from lenders outside of the Company.

30

The following table summarizes the allocation of purchase price to assets and liabilities acquired in connection with the Company’s acquisition of 339 based on fair values as of February 15, 2024.

Acquisition Consideration
Gross purchase price	$	3,892
Debt of 339 to the Company		6,122
Immediate repayment of previous 339 owner of intercompany debt		(892	)
Purchase consideration	$	9,122

The purchase price has been allocated to the acquired assets and assumed liabilities based on estimated fair values. The table below provides the provisional recording of assets acquired and liabilities assumed as of the acquisition date.

(in thousands of dollars)	Amounts recognized as of the acquisition date
Purchase Consideration	$	9,122
Fair value of identified assets acquired:
Cash		4
Real estate investments		11,330
Total identifiable assets		11,334
Fair value of liabilities assumed:
Current liabilities		462
Other liabilities		1,750
Total liabilities assumed		2,212
Net identifiable assets acquired	$	9,122

The allocation presented above is based upon management’s estimate of the fair values using valuation techniques including appraisals and purchase contracts, as well as estimating completion costs and future interest costs. In estimating the fair value of the identifiable acquired assets and assumed liabilities, the fair value estimates are based on, but not limited to, expected future revenue and cash flows and estimated discount rates. Except for real estate assets, all assets and liabilities are estimated at their historical carrying values, which approximates fair value.

Loans Receivables, net

The following is a roll forward of loans receivables, gross to net:

	September 30, 2024			December 31, 2023
Loans receivables, gross	$	52,157		$	61,293
Less: Deferred loan fees		(1,540	)		(1,772	)
Less: Deposits		(907	)		(1,056	)
Plus: Deferred origination costs		312			360
Less: Allowance for credit losses		(810	)		(695	)
Loans receivable, net	$	49,212		$	58,130

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Commercial Loans – Construction Loan Portfolio Summary

We anticipate that the aggregate balance of our construction loan portfolio will increase as built homes take longer to sell.

The following is a summary of our loan portfolio to builders for home construction loans as of September 30, 2024

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		3		1,330		942		646		71	%		5	%
California		1		1		3,210		1,750		1,346		55	%		5	%
Connecticut		1		2		1,040		728		287		70	%		5	%
Florida		9		42		16,227		10,827		7,686		67	%		5	%
Georgia		4		8		4,058		2,657		1,668		65	%		5	%
Idaho		1		4		1,462		1,060		129		73	%		5	%
Illinois		1		1		1,727		992		1,650		57	%		5	%
Indiana		1		1		335		235		233		70	%		5	%
Louisiana		4		5		1,463		1,024		759		70	%		5	%
Mississippi		1		1		369		258		258		70	%		5	%
New Jersey		2		7		2,950		2,363		1,930		80	%		5	%
New York		1		1		650		455		105		70	%		5	%
North Carolina		10		20		11,105		6,777		4,620		61	%		5	%
Ohio		3		5		2,356		1,613		1,377		68	%		5	%
Pennsylvania		2		23		25,031		17,992		13,681		72	%		5	%
South Carolina		11		52		20,069		13,357		6,372		67	%		5	%
Tennessee		4		5		1,594		1,075		881		67	%		5	%
Texas		2		4		2,710		2,126		1,652		78	%		5	%
Utah		1		3		2,918		1,792		1,422		61	%		5	%
Virginia		3		4		1,546		982		632		64	%		5	%
Total		63		192		102,150		69,005		47,334		68	%(3)		5	%

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

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

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The following is a summary of our loan portfolio to builders for home construction loans as of December 31, 2023:

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		5	$	2,148	$	1,504	$	846		70	%		5	%
California		1		1		2,551		1,530		1,511		60	%		5	%
Connecticut		1		2		1,039		681		510		66	%		5	%
Florida		12		71		36,644		19,279		14,093		53	%		5	%
Georgia		4		8		2,963		1,831		1,229		62	%		5	%
Illinois		1		1		1,600		992		763		62	%		5	%
Indiana		1		1		335		235		79		70	%		5	%
Louisiana		2		3		773		541		300		70	%		5	%
Maryland		1		1		480		336		336		70	%		5	%
Missouri		1		2		820		570		439		70	%		5	%
New Jersey		2		5		1,985		1,563		954		79	%		5	%
North Carolina		8		23		10,637		6,681		2,994		63	%		5	%
Ohio		3		10		3,776		2,601		1,686		69	%		5	%
Pennsylvania		2		21		21,301		16,763		13,205		79	%		5	%
South Carolina		11		50		20,029		12,624		6,694		63	%		5	%
Tennessee		3		5		1,554		1,047		696		67	%		5	%
Texas		2		4		1,970		1,773		1,693		90	%		5	%
Utah		1		3		2,918		1,792		910		61	%		5	%
Virginia		3		3		857		530		474		62	%		5	%
Washington		1		6		2,789		2,427		2,376		87	%		5	%
Total		62		225	$	117,169	$	75,300	$	51,788		64	%(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 value of collateral.
(3)	Represents the weighted average loan to value ratio of the loans.

Commercial Loans – Real Estate Development Loan Portfolio Summary

The following is a summary of our loan portfolio to builders for land development as of September 30, 2024:

States	Number of Borrowers		Number of Loans		Value of Collateral(1)		Commitment Amount		Gross Amount Outstanding(4)		Loan to Value Ratio(2)			Interest Spread(5)
Florida		2		2		3,233		1,500		486		15	%		7	%
Georgia		1		1		385		275		198		52	%		7	%
New York		1		1		5,440		300		300		6	%		7	%
North Carolina		1		1		200		127		127		64	%		7	%
Pennsylvania		1		1		3,375		3,700		3,227		96	%		varies
South Carolina		1		1		1,880		487		485		26	%		7	%
Total		7		7		14,513		6,389		4,823		33	%(3)		7	%

(1)	The value is determined by the appraised value adjusted for remaining costs to be paid and third-party mortgage balances. 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 loan to value ratio is calculated by taking the outstanding amount and dividing it by the value of collateral.
(3)	Represents the weighted average loan to value ratio of the loans.
(4)	Gross Amount Outstanding credit balances are due to deposits on account.
(5)	The interest spread varies for the state of Pennsylvania and is 7% across other states.

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The following is a summary of our loan portfolio to builders for land development as of December 31, 2023:

States	Number of Borrowers		Number of Loans		Value of Collateral(1)		Commitment Amount		Gross Amount Outstanding(4)		Loan to Value Ratio(2)			Interest Spread(5)
Delaware		1		1		543		147		147		27	%		7	%
Florida		3		3		207		1,378		133		64	%		7	%
New Jersey		1		1		50		26		26		51	%		7	%
North Carolina		1		2		1,110		240		210		19	%		7	%
Pennsylvania		1		2		19,983		8,500		8,365		42	%		varies
South Carolina		2		2		1,980		965		624		32	%		7	%
Total		9		11	$	23,873	$	11,256	$	9,505		40	%(3)		7	%

(1)	The value is determined by the appraised value adjusted for remaining costs to be paid and third-party mortgage balances. 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 loan to value ratio is calculated by taking the outstanding amount and dividing it by the value of collateral.
(3)	Represents the weighted average loan to value ratio of the loans.
(4)	Gross Amount Outstanding credit balances are due to deposits on account.
(5)	The interest spread varies for the state of Pennsylvania and is 7% across other states.

The following is a roll forward of our loan receivables, net:

	September 30, 2024			December 31, 2023
Beginning balance	$	58,130		$	56,650
Originations and modifications		37,089			58,216
Principal collections		(37,659	)		(57,895	)
Transferred from loans receivables, net to foreclosed assets		(2,306	)		–
Transferred from loans receivables, net to real estate investments		(6,122	)		–
Change in builder deposit		149			(217	)
Change in allowance for credit losses		115			1,832
Change in loan fees, net		(184	)		(456	)
Ending balance	$	49,212		$	58,130

Credit Quality Information

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.

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, a 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.

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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.

Our Company construction loans are collateralized by land and real estate while our Company development loans are collateralized by land. Secured nonaccrual loans individually evaluated are also collateralized by land and real estate.

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, 2024:

	Loans Receivable Gross		Commitment Value		ACL
Construction Loans Collectively Evaluated
A Credit Risk	$	36,429	$	54,664	$	(220	)
B Credit Risk		4,441		5,948		(54	)
C Credit Risk		841		1,851		(23	)
Development Loans Collectively Evaluated
A Credit Risk	$	4,140	$	5,627	$	(3	)
B Credit Risk		198		275		-
C Credit Risk		485		487		(18	)
Unsecured Nonaccrual Loans Individually Evaluated	$	-	$	-	$	-
Secured Nonaccrual Loans Individually Evaluated	$	5,623	$	6,542	$	(594	)
ACL Unfunded Commitments	$	-		-		102
Total	$	52,157	$	75,394	$	(810	)

The following table presents the Company’s gross loans receivable, commitment value and ACL for each respective credit rank loan pool category as of December 31, 2023.

	Loans Receivable Gross		Commitment Value		ACL
Construction Loans Collectively Evaluated
A Credit Risk	$	40,252	$	59,075	$	(211	)
B Credit Risk		5,718		10,339		(32	)
C Credit Risk		–		–		–
Development Loans Collectively Evaluated
A Credit Risk	$	8,787	$	9,793	$	(5	)
B Credit Risk		172		511		–
C Credit Risk		452		454		(10	)
Unsecured Nonaccrual Loans Individually Evaluated	$	86	$	81	$	(86	)
Secured Nonaccrual Loans Individually Evaluated	$	5,826	$	6,303	$	(351	)
ACL Unfunded Commitments	$	–		–		–
Total	$	61,293	$	86,556	$	(695	)

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The following table presents the amortized cost basis of loans on nonaccrual status and loans past due over 89 days still accruing as of September 30, 2024:

	Nonaccrual with No Allowance for Credit Loss		Nonaccrual with Allowance for Credit Loss		Loans Past Due Over 89 Days Still Accruing
Unsecured Nonaccrual Loans Individually Evaluated	$	–	$	–	$	–
Secured Nonaccrual Loans Individually Evaluated	$	2,209	$	3,414	$	–
Total	$	2,209	$	3,414	$	–

The following table presents the amortized cost basis of loans on nonaccrual status and loans past due over 89 days still accruing as of December 31, 2023:

	Nonaccrual with No Allowance for Credit Loss		Nonaccrual with Allowance for Credit Loss		Loans Past Due Over 89 Days Still Accruing
Unsecured Nonaccrual Loans Individually Evaluated	$	–	$	86	$	–
Secured Nonaccrual Loans Individually Evaluated	$	2,495	$	3,331	$	–
Total	$	2,495	$	3,417	$	–

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 for estimated costs associated with asset disposal. A 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.

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In addition, our loan portfolio includes performing, forbearance and nonaccrual loans. The Company’s policies with respect to placing loans on nonaccrual 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, 2024:

	Gross Loan		Current		Past Due		Past Due		Past Due		Past Due
	Value		0 - 59		60 - 89		90 - 179		180 - 269		>270
Performing Loans
A Credit Risk	$	40,569	$	40,569	$	–	$	–	$	–	$	–
B Credit Risk		4,639		4,639		–		–		–		–
C Credit Risk		1,326		1,326		–		–		–		–
Forbearance Loans
Secured Nonaccrual Loans	$	5,129	$	–	$	1,856	$	–	$	–	$	3,273
Nonaccrual Loans
Unsecured Loans	$	–	$	–	$	–	$	–	$	–	$	–
Secured Loans		494		–		–		–		494		–
Total	$	52,157	$	46,534	$	1,856	$	–	$	494	$	3,273

The following is an aging of our gross loan portfolio as of December 31, 2023:

	Gross Loan		Current		Past Due		Past Due		Past Due		Past Due
	Value		0 - 59		60 - 89		90 - 179		180 - 269		>270
Performing Loans
A Credit Risk	$	49,039	$	49,039	$	–	$	–	$	–	$	–
B Credit Risk		5,890		5,890		–		–		–		–
C Credit Risk		452		452		–		–		–		–
Nonaccrual Loans
Unsecured Loans	$	86	$	–	$	–	$	–	$	–	$	86
Secured Loans		5,826		–		881		1,497		1,641		–
Total	$	61,293	$	55,381	$	881	$	1,497	$	1,641	$	86

Below is an aging schedule of loans receivable as of September 30, 2024, 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.)		175	$	46,534		89.2	%
60-89 days		8		1,856		3.6	%
90-179 days		–		–		–	%
180-269 days		12		494		0.9	%
>270 days		4		3,273		6.3	%
Subtotal		199	$	52,157		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		199	$	52,157		100.0	%

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Below is an aging schedule of loans receivable as of December 31, 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.)		219	$	55,381		90.4	%
60-89 days		3		881		1.4	%
90-179 days		3		1,497		2.4	%
180-269 days		4		1,641		2.7	%
>270 days		7		1,893		3.1	%
Subtotal		236	$	61,293		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		236	$	61,293		100.0	%

Below is an aging schedule of loans receivable as of September 30, 2024, 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.)		175	$	46,534		89.2	%
60-89 days		8		1,856		3.6	%
90-179 days		–		–		–	%
180-269 days		12		494		0.9	%
>270 days		4		3,273		6.3	%
Subtotal		199	$	52,157		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		199	$	52,157		100.0	%

38

Below is an aging schedule of loans receivable as of December 31, 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.)		219	$	55,381		90.4	%
60-89 days		3		881		1.4	%
90-179 days		3		1,497		2.4	%
180-269 days		4		1,641		2.7	%
>270 days		7		1,893		3.1	%
Subtotal		236	$	61,293		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		236	$	61,293		100.0	%

Allowance for Credit Losses on Loans

The following table provides a roll forward of the allowance for credit losses for the quarter ended September 30, 2024:

	Performing Loans																	Nonaccrual loans
	Construction									Development
	A Credit Risk			B Credit Risk			C Credit Risk			A Credit Risk			B Credit Risk		C Credit Risk			Secured			Unsecured		Total
Allowance for credit losses as of June 30, 2024	$	(126	)	$	(58	)	$	(6	)	$	(2	)	$	–	$	(17	)	$	(366	)	$	–	$	(575	)
Charge-offs		–			–			–			–			–		–			89			–		89
Provision for credit losses funded		(20	)		18			(4	)		–			–		(1	)		(317	)		–		(324	)
Allowance for credit losses as of September 30, 2024	$	(146	)	$	(40	)	$	(10	)	$	(2	)	$	–	$	(18	)	$	(594	)	$	–	$	(810	)
Reserve for unfunded commitments as of June 30, 2024	$	(56	)	$	(27	)	$	(8	)	$	–		$	–	$	–		$	–		$	–	$	(91	)
Provision for credit losses unfunded		(19	)		13			(4	)		(1	)												(11	)
Reserve for unfunded commitments as of September 30, 2024	$	(75	)	$	(14	)	$	(12	)	$	(1	)	$	–	$	–		$	–		$	–	$	(102	)

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The following table provides a roll forward of the allowance for credit losses for the nine months ended September 30, 2024:

	Performing Loans																	Nonaccrual loans
	Construction									Development
	A Credit Risk			B Credit Risk			C Credit Risk			A Credit Risk			B Credit Risk		C Credit Risk			Secured			Unsecured			Total
Allowance for credit losses as of December 31, 2023	$	(211	)	$	(32	)	$	–		$	(5	)	$	–	$	(10	)	$	(351	)	$	(86	)	$	(695	)
Reclassification of ACL on unfunded commitments		59			19			–			–			–		–			–			–			78
Charge-offs		–			–			–			–			–		–			453			52			505
Provision for credit losses funded		13			(27	)		(10	)		3			–		(8	)		(696	)		34			(691	)
Allowance for credit losses as of September 30, 2024	$	(136	)	$	(40	)	$	(10	)	$	(2	)	$	–	$	(18	)	$	(594	)	$	–		$	(810	)
Reserve for unfunded commitments as of December 31, 2023	$	–		$	–		$	–		$	–		$	–	$	–		$	–		$	–		$	–
Reclassification of ACL on unfunded commitments		(59	)		(19	)		–			–			–		–			–			–			(78	)
Provision for credit losses unfunded		(16	)		5			(12	)		(1	)		–		–			–			–			(24	)
Reserve for unfunded commitments as of September 30, 2024	$	(75	)	$	(14	)	$	(12	)	$	(1	)	$	–	$	–		$	–		$	–		$	(102	)

The following table provides a roll forward of the allowance for credit losses as of December 31, 2023:

	Performing Loans																		Nonaccrual loans
	Construction									Development
	A Credit Risk			B Credit Risk			C Credit Risk			A Credit Risk			B Credit Risk			C Credit Risk			Secured			Unsecured			Total
December 31, 2022	$	(174	)	$	(66	)	$	(9	)	$	(37	)	$	(2	)	$	(7	)	$	(247	)	$	(1,985	)	$	(2,527	)
Impact of the adoption of ASC 326		(33	)		(1	)		(12	)		35			2			(30	)		–			(139	)		(178	)
Charge-offs		–			–			–			–			–			–			132			2,610			2,742
Reduction in ACL for loan participations		5			–			–			–			–			–			–			–			5
Provision for credit losses		(9	)		35			21			(3	)		–			27			(236	)		(572	)		(737	)
December 31, 2023	$	(211	)	$	(32	)	$	–		$	(5	)	$	–		$	(10	)	$	(351	)	$	(86	)	$	(695	)

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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 $23,237 and $25,263 as of September 30, 2024 and December 31, 2023, respectively. The ACL is calculated at an estimated loss rate on the total commitment value for loans in our portfolio. The ACL on unfunded commitments is calculated as the difference between the ACL on commitment value less the estimated loss rated and the total gross loan value for loans in our portfolio. As of September 30,2024, the ACL for unfunded commitments was $102. In addition, as of September 30, 2024, 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, 2024				December 31, 2023
		Percent of				Percent of
	Borrower	Loan			Borrower	Loan
	City	Commitments			City	Commitments
Highest concentration risk	Pittsburgh, PA		34	%	Pittsburgh, PA		29	%
Second highest concentration risk	Orlando, FL		6	%	Cape Coral, FL		7	%
Third highest concentration risk	Greenville, SC		5	%	Palm Bay, FL		6	%

Foreclosed Assets

Below is a roll forward of foreclosed assets:

	Nine Months Ended September 30, 2024			Year Ended December 31, 2023			Nine Months Ended September 30, 2023
Beginning balance	$	130		$	1,582		$	1,582
Transferred from loans receivables, net		2,306			-			-
Additions for construction in foreclosed assets		541			125			125
Sale proceeds		(659	)		(1,549	)		(1,549	)
Gain on foreclosed assets		-			8			15
Loss on foreclosed assets		(477	)		(36	)		(34	)
Ending balance	$	1,841		$	130		$	139

Real Estate Investments

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

	Nine Months Ended September 30, 2024			Year Ended December 31, 2023			Nine Months Ended September 30, 2023
Beginning balance	$	435		$	660		$	660
Additions from 339 acquisition		11,330			–			–
Gain on sale of real estate investments		-			10			10
Investments in real estate asset trusts		330			–			–
Proceeds from the sale of real estate investments		(1,601	)		(2,131	)		(2,131	)
Additions for construction/development		3,544			1,896			1,461
Ending balance	$	14,038		$	435		$	–

41

During the quarter ended September 30, 2024, the Company invested in one of our borrowers, DBL Capital Real Estate Fund 1, LLC (“DBL”) for $330. The investment is to develop six empty lots into houses and the Company is expected to receive a variable return.

Customer Interest Escrow

Below is a roll forward of interest escrow:

	Nine Months Ended September 30, 2024			Year Ended December 31, 2023			Nine Months Ended September 30, 2023
Beginning balance	$	292		$	766		$	766
Preferred equity dividends		–			47			47
Additions from Pennsylvania loans		668			654			408
Additions from other loans		604			538			434
Interest, fees, principal or repaid to borrower		(1,133	)		(1,713	)		(1,231	)
Ending balance	$	431		$	292		$	424

Related Party Transactions

As of September 30, 2024, the Company had $818, $68, and $1,000 available to borrow against the line of credit from Daniel M. Wallach (our Chief Executive Officer and Chairman of the Board of Managers) and his wife, the line of credit from the 2007 Daniel M. Wallach Legacy Trust, and the line of credit from William Myrick (our Executive Vice President), respectively.

As of September 30, 2024, the Company had other unsecured debt of $1,100 with an interest rate of prime plus 1.5% with Sheldon Investment, LLC, which is related to Gregory Sheldon who is a member of our Board of Managers. Sheldon Investment, LLC may elect to demand repayment of the debt, effective semi-annually as of August 16 and/or February 16 of any given year.

A more detailed description of related party transactions is included in Note 10 to our audited annual consolidated financial statements and related notes and other consolidated financial data (the “2023 Financial Statements”) included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2023. These borrowings are included in notes payable secured, net of deferred financing costs on the interim consolidated balance sheet.

Secured Borrowings

Lines of Credit

As of September 30, 2024, and December 31, 2023, the Company had $596 and $327 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 as of September 30, 2024. The lines will continue to automatically renew unless notice of nonrenewal is given by a lender.

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Loan with Hanna Holdings, Inc.

This loan was debt acquired in the 339 acquisition which 339 used the loan to originally purchase the property.

● Principal not to exceed $1,250

● Secured with a second position mortgage

● 7% interest rate

● Due in December 2027, but payable with a payoff associated with each lot sale. Interest accrues and is paid upon each payoff of principal, on the principal amount being paid back.

Secured Deferred Financing Costs

The Company had secured deferred financing costs of $3 as of September 30, 2024 and 2023.

Borrowings secured by loan assets are summarized below:

	September 30, 2024				December 31, 2023
	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	$	8,795	$	6,336	$	7,615	$	5,770
S.K. Funding		10,958		6,500		7,358		6,500
Lender
Shuman		213		125		358		125
Jeff Eppinger		4,110		1,500		3,496		1,500
R. Scott Summers		944		902		2,177		1,003
John C. Solomon		1,027		563		598		563
Judith Swanson		9,517		6,027		10,038		5,164
Total	$	35,564	$	21,953	$	31,640	$	20,625

Unsecured Borrowings

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

The effective interest rate on borrowings through our Notes Program as of September 30, 2024 and December 31, 2023 was 9.05% and 9.01%, 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.

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The following is a roll forward of our Notes Program:

	Nine Months Ended September 30, 2024			Year Ended December 31, 2023			Nine Months Ended September 30, 2023
Gross notes outstanding, beginning of period	$	20,854		$	21,576		$	21,576
Notes issued		2,511			1,353			685
Note repayments / redemptions		(4,163	)		(2,075	)		(1,502	)
Gross notes outstanding, end of period	$	19,202		$	20,854		$	20,759
Deferred financing costs, net		(167	)		(235	)		(276	)
Notes outstanding, net	$	19,035		$	20,619		$	20,483

The following is a roll forward of deferred financing costs:

	Nine Months Ended September 30, 2024			Year Ended December 31, 2023			Nine Months Ended September 30, 2023
Deferred financing costs, beginning balance	$	939		$	835		$	835
Additions		90			103			89
Deferred financing costs, ending balance		1,029			939			924
Less accumulated amortization		(862	)		(703	)		(648	)
Deferred financing costs, net	$	167		$	235		$	276

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

	Nine Months Ended September 30, 2024		Year Ended December 31, 2023		Nine Months Ended September 30, 2023
Accumulated amortization, beginning balance	$	703	$	468	$	468
Additions		159		235		180
Accumulated amortization, ending balance	$	862	$	703	$	648

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Other Unsecured Debts

Our other unsecured debts are detailed below:

Loan	Maturity Date	Interest Rate(1)			September 30, 2024		December 31, 2023
Unsecured Note with Seven Kings Holdings, Inc. Senior Subordinated	Demand(2)		9.5	%	$	297	$	410
Unsecured Line of Credit from Judith Swanson	October 2024		10.0	%		973		1,836
Unsecured Line of Credit from Judith Swanson	April 2025		10.0	%		500		-
Unsecured Line of Credit from Builder Finance, Inc. Senior Subordinated	January 2025		10.0	%		750		750
Subordinated Promissory Note	April 2024		10.0	%		-		100
Subordinated Promissory Note	February 2025		9.0	%		600		600
Subordinated Promissory Note	March 2026		9.75	%		500		500
Subordinated Promissory Note	December 2027		10.0	%		20		20
Subordinated Promissory Note	February 2024		11.0	%		-		20
Subordinated Promissory Note	January 2025		10.0	%		15		15
Subordinated Promissory Note	February 2027		8.5	%		200		-
Subordinated Promissory Note	March 2027		10.0	%		26		26
Subordinated Promissory Note	November 2026		9.5	%		200		200
Subordinated Promissory Note	October 2024		10.0	%		700		700
Subordinated Promissory Note	December 2024		10.0	%		100		100
Subordinated Promissory Note	April 2025		10.0	%		202		202
Subordinated Promissory Note	July 2025		8.0	%		100		100
Subordinated Promissory Note	September 2027		10	%		108		108
Subordinated Promissory Note	October 2025		8.0	%		100		100
Subordinated Promissory Note	December 2025		8.0	%		180		180
Senior Subordinated Promissory Note	March 2026(3)		8.0	%		374		374
Subordinated Promissory Note	August 2026		8.0	%		291		291
Senior 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
Junior Subordinated Promissory Note	October 2024(4)		20.0	%		447		447
Subordinated Promissory Note	March 2029		10.0	%		1,100		1,200
Subordinated Promissory Note	April 2024		10.0	%		-		750
Subordinated Promissory Note	May 2027		10.0	%		97		98
Subordinated Promissory Note	November 2027		10.0	%		120		120
Subordinated Promissory Note	June 2025		10.0	%		1,000		-
Subordinated Promissory Note	April 2028		10.0	%		149		-
Subordinated Promissory Note	April 2029		11.0	%		2,000		-
Subordinated Promissory Note	June 2025		11.0	%		1,007		-
Subordinated Promissory Note	Varies (5)		Prime +1.5	%		1,100		-
					$	15,176	$	11,167

(1)	Interest rate per annum, based upon actual days outstanding and a 365/366-day year.
(2)	Due six months after lender gives notice.
(3)	Lender may require us to repay $20 of principal and all unpaid interest with 10 days’ notice.
(4)	These notes were issued to the same holder and, when calculated together, yield a blended rate of 10% per annum.
(5)	Lender may elect to terminate, effective semi-annually as of August 16 and/or February 16 of any given year.

Preferred Equity and Members’ Capital

On April 19, 2024, the Company entered into Amendment No. 4 to the Second Amended and Restated limited Liability Company Agreement (“Fourth Amendment”) with an effective date of March 31, 2024 to effect a 100-for-1 unit split of its Series C cumulative preferred units (“Series C Preferred Units”) that became effective March 31, 2024. As a result of the split, every Series C Preferred Units, issued and outstanding immediately prior to March 31, 2024, will automatically be reclassified (without any further act) into one hundred Series C Preferred Units.

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The Fourth Amendment also increased the maximum number of authorized Series C Preferred Units to 20,000, of which 8,000 are to be issued only pursuant to the Preferred Unit Reinvestment Program. In addition, pursuant to the Fourth Amendment, after six years from the date of investment, instead of being entitled to the right of redemption, the holders of Series C Preferred Units will be entitled to convert all or a portion of the Series C Preferred Units to the common units of the Registrant, on a 1 for 1 basis, after a 12-month waiting period after the notice of conversion is given.

In addition, the Fourth Amendment restricted the right to require the Company to redeem the Series C Preferred Units for cash; therefore, the units were reclassified from mezzanine equity to Members’ Capital of $6,308 as of September 30, 2024. The Company’s redeemable preferred equity was $4,773 as of December 31, 2023.

We strive to maintain a reasonable (about 15%) balance between (1) preferred equity plus members’ capital and (2) total assets. The ratio of preferred equity plus members’ capital to total assets was 11.5% and 10.4% as of September 30, 2024, and December 31, 2023, respectively. We anticipate this ratio to increase as more earnings are retained in 2024 and 2025 and some additional preferred equity may be added.

Priority of Borrowings

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

	Priority Rank	September 30, 2024			December 31, 2023
Borrowing Source
Purchase and sale agreements and other secured borrowings	1	$	23,261		$	21,196
Secured line of credit from affiliates	2		613			326
Unsecured line of credit (senior)	3		1,047			1,160
Other unsecured debt (senior subordinated)	4		1,834			1,834
Unsecured Notes through our public offering, gross	5		19,202			20,854
Other unsecured debt (subordinated)	5		11,388			7,266
Other unsecured debt (junior subordinated)	6		907			907
Less deferred financing fees			(170	)		(238	)
Total		$	58,082		$	53,305

Liquidity and Capital Resources

Our primary liquidity management objective is to meet expected cash flow needs while continuing to service our business and customers. As of September 30, 2024, and December 31, 2023, we had combined loans outstanding of 199 and 236, respectively. In addition, gross loans outstanding were $52,157 and $61,293 as of September 30, 2024, and December 31, 2023, respectively.

Unfunded commitments to extend credit, which have similar collateral, credit and market risk to our outstanding loans, were $23,237 and $25,263 as of September 30, 2024, and December 31, 2023, 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, 2024. Other than unfunded commitments, we had no off-balance sheet transactions, nor do we currently have any such arrangements or obligations.

We anticipate originations to continue to lower in 2024 due to higher interest rates which slow the sales of our customer’s homes.

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

Source of Liquidity	As of September 30, 2024		As of December 31, 2023
Secured debt, net of deferred financing costs	$	23,871	$	21,519
Unsecured debt, net of deferred financing costs	$	34,211	$	31,786
Equity*	$	8,309	$	6,767
Cash and cash equivalents	$	4,348	$	3,522

* Equity includes Members’ Capital and Preferred Equity.

As of September 30, 2024, and December 31, 2023, cash and cash equivalents were $4,348 and $3,552, respectively.

Secured debt, net of deferred financing costs increased $2,352 to $23,871 as of September 30, 2024, compared to $21,519 for the year ended December 31, 2023. The increase in secured debt was due primarily to borrowings pursuant to our loan purchase and sale agreements.

Unsecured debt, net of deferred financing costs increased $2,425 to $34,211 as of September 30, 2024 compared to $31,786 as of December 31, 2023. The increase in unsecured debt was primarily due to other unsecured borrowings.

Equity increased $1,542 to $8,309 as of September 30, 2024, compared to $6,767 as of December 31, 2023. The increase was due primarily to contributions from Series C Preferred Equity holders of $1,200.

We anticipate an increase in our equity during the three months subsequent to September 30, 2024, mostly through retained earnings. If we are not able to maintain our equity, we will rely more heavily on raising additional funds through the Notes Program.

The total amount of our debt maturing through the year ending December 31, 2024, is $29,568, which consists of secured borrowings of $22,570 and unsecured borrowings of $6,998.

Secured borrowings maturing through the year ending December 31, 2024, significantly consists of loan purchase and sale agreements with two loan purchasers (Builder Finance and S. K. Funding) and six lenders. These secured borrowings are listed as maturing over the next 12 months due primarily to their related demand for loan collateral. The following are secured facilities with actual maturity and renewal dates:

● Swanson – $6,027 automatically renews unless notice given;

● Shuman – $125 due July 2025 and automatically renews unless notice is given;

● S. K. Funding – $4,500 due July 2025 and automatically renews unless notice is given;

● S. K. Funding – $2,000 due July 2025 and automatically renews unless notice is given;

● Builder Finance, Inc – $6,336 with no expiration date;

● New LOC Agreements - $2,965 generally one-month notice and nine months to reduce principal balance to zero;

● Wallach LOC - $432 due upon demand;

● Wallach Trust - $175 due upon demand; and

● Mortgage Payable – $4, with payments due monthly.

Unsecured borrowings due by December 31, 2024, consist of Notes issued pursuant to the Notes Program and other unsecured debt of $1,411 and $5,587, respectively. To the extent that Notes issued pursuant to the Notes Program are not reinvested upon maturity, we will be required to fund the maturities, which we anticipate funding through the issuance of new Notes in our Notes Program. Historically, approximately 73% of our Note holders reinvest upon maturity. The 36-month Note in our Notes program has a mandatory early redemption option, subject to certain conditions. As of September 30, 2024, the 36-month Notes were $2,789. Our other unsecured debt has historically renewed. For more information on other unsecured borrowings, see Note 7 – Borrowings. If other unsecured borrowings are not renewed in the future, we anticipate funding such maturities through investments in our Notes Program.

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Summary

We have the funding available to address the loans we have today, including our unfunded commitments. We anticipate our assets reducing in the remainder of 2024; however, we are prepared for an increase of our assets through the net sources and uses (12-month liquidity) listed above as well as future capital from debt, preferred equity, and regular equity. Our expectation to reduce loan asset balances is subject to changes in the housing market and competition. Although our secured debt is almost entirely listed as currently due because of the underlying collateral being demand notes, much 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 have an impact on 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 to the value 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 will incur 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).

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, including the effects listed above. Housing starts have been increasing for the last several 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%, may need a larger than 7% difference. This may cause our lending rates, which are based on our cost of funds, to be noncompetitive. High interest rates may also increase builder defaults, as interest payments may become a higher portion of operating costs for the builder.

However, we note that one difference between the current housing cycle compared to prior cycles is that the supply of used homes in the market is low due to the number of homes owned with lower interest rates. Due to the new data on used homes in the market, this makes understanding future results an issue for the Company. Meanwhile, as housing cycles start to decline, foreclosures increase and with their initial interest rate at 3% or less if started within the last 24 months, foreclosures may not have as large of an impact.

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Below is a chart showing three-year U.S. treasury rates and 30-year fixed mortgage rates. The U.S. treasury rates, are used by us here to approximate CD rates. Both the short- and long-term interest rates have risen slightly to historically normal levels.

Housing prices are also generally correlated with housing starts; therefore, increases in housing starts usually coinciding with increases in housing values, and the reverse is generally true. Looking at the chart below, housing starts have fallen back from the pandemic high; however, since then the change remains relatively flat.

Below is a graph showing single family housing-starts from 2000 through today which is provided by Federal Reserve Economic Data (“FRED):

 

Off-Balance Sheet Arrangements

As of September 30, 2024, we had no off-balance sheet transactions, nor do we currently have any such arrangements or obligations.

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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.

Internal Control over Financial Reporting

There has been no change in our internal controls over financial reporting during the quarter ended September 30, 2024, that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.

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PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

None.

ITEM 1A. RISK FACTORS

Not applicable.

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, 2024:

(amounts in this table are not in thousands) Owner	Units		Amount
Daniel M. and Joyce S. Wallach		38.66823	$	38,668.23
Gregory L. Sheldon and Madeline M. Sheldon		25.78595		25,785.95
Schultz Family Living Trust		5.93137		5,931.37
Fernando Ascencio and Lorraine Carol Ascencio		11.09762		11,097.62
Mark and Tris Ann Garboski		37.52340		37,523.40
Total		119.00657	$	119,006.57

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.

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(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, 2024, we had issued $19,719 in Notes pursuant to our current public offering. As of September 30, 2024, we incurred expenses of $355 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, 2024, were $19,364 all of which was used to increase loan balances.

(c)

None.

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, 2024, 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, 2024, there were no material changes to the procedures by which members may recommend nominees to our board of managers.
(c)	During the quarter ended September 30, 2024, no director or officer (as defined in Rule 16a-1(f) under the Exchange Act) of the Company adopted or terminated any Rule 10b5-1 trading arrangements or non-Rule 10b5-1 trading arrangements (in each case, as defined in Item 408(a) of Regulation S-K).

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.

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EXHIBIT INDEX

The following exhibits are included in this report on Form 10-Q for the period ended September 30, 2024 (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
3.6	Amendment No. 3 to Second Amended and Restated Limited Liability Company Agreement of the Registrant, incorporated by reference to Exhibit 3.6 to the Registrant’s Annual Report on Form 10-K, filed March 15, 2024, Commission File No. 333-224557.
3.7	Amendment No. 4 to the Second Amended and Restated Limited Liability Company Agreement of Shepherd’s Finance, LLC , incorporated by reference to Exhibit 3.1 to the Registrant’s Current Report on Form 8-K, filed April 22, 2024, 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.

** Furnished.

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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 14, 2024	By:	/s/ Catherine Leslie
		Catherine Leslie
		Chief Financial Officer

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