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EX-32.2 - Shepherd's Finance, LLCex32-2.htm
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EX-31.1 - Shepherd's Finance, LLCex31-1.htm

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

 

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

 

For the Quarterly Period Ended March 31, 2021

 

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 [X] 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 [X] 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 [X] Smaller reporting company [X]
  Emerging growth company [X]    

 

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. [X]

 

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

 

 

 

 

 

 

FORM 10-Q

SHEPHERD’S FINANCE, LLC

TABLE OF CONTENTS

 

  Page
   
Cautionary Note Regarding Forward-Looking Statements 3
   
PART I. FINANCIAL INFORMATION 4
   
Item 1. Financial Statements 4
   
Interim Condensed Consolidated Balance Sheets as of March 31, 2021 (Unaudited) and December 31, 2020 4
   
Interim Condensed Consolidated Statements of Operations (Unaudited) for the Three Months Ended March 31, 2021 and 2020 5
   
Interim Condensed Consolidated Statement of Changes in Members’ Capital (Unaudited) for the Three Months Ended March 31, 2021 and 2020 6
   
Interim Condensed Consolidated Statements of Cash Flows (Unaudited) for the Three Months Ended March 31, 2021 and 2020 7
   
Notes to Interim Condensed Consolidated Financial Statements (Unaudited) 8
   
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 18
   
Item 3. Quantitative and Qualitative Disclosure About Market Risk 35
   
Item 4. Controls and Procedures 35
   
PART II. OTHER INFORMATION 35
   
Item 1. Legal Proceedings 35
   
Item 1A. Risk Factors 35
   
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 36
   
Item 3. Defaults upon Senior Securities 36
   
Item 4. Mine Safety Disclosures 36
   
Item 5. Other Information 36
   
Item 6. Exhibits 36

 

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: uncertainties relating to the effects of COVID-19; the length of the COVID-19 pandemic and severity of such outbreak nationally and across the globe; the pace of recovery following the COVID-19 pandemic; general economic uncertainty in key global markets and a worsening of global economic conditions or low levels of economic growth; the rate and the pace of economic recovery following economic downturns; and those other risks described in other risk factors as outlined in our Registration Statement on Form S-1, as amended, and our Annual Report on Form 10-K. Actual results may differ materially from those predicted in the forward-looking statements as a result of various factors, including but not limited to those set forth in the “Risk Factors” section of our Registration Statement on Form S-1, as amended, and our Annual Report on Form 10-K. For further information regarding risks and uncertainties associated with our business, and important factors that could cause our actual results to vary materially from those expressed or implied in such forward-looking statements, please refer to the factors set forth in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Risk Factors” sections of the documents we file from time to time with the U.S. Securities and Exchange Commission, including, but not limited to, our Annual Report on Form 10-K for the year ended December 31, 2020.

 

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, 2020 in mind. You should not place undue reliance on any forward-looking statement. We are not obligated to update forward-looking statements.

 

3
 

 

PART I – FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

 

Shepherd’s Finance, LLC

Interim Condensed Consolidated Balance Sheets

 

(in thousands of dollars)  March 31, 2021   December 31, 2020 
   (Unaudited)     
Assets          
Cash and cash equivalents  $4,924   $4,749 
Accrued interest receivable   546    601 
Loans receivable, net   45,093    46,405 
Real estate investments   1,185    1,181 
Foreclosed assets, net   3,764    4,449 
Premises and equipment   894    903 
Other assets   918    981 
Total assets  $57,324   $59,269 
Liabilities and Members’ Capital          
Customer interest escrow  $530   $510 
Accounts payable and accrued expenses   193    289 
Accrued interest payable   3,018    3,158 
Notes payable secured, net of deferred financing costs   19,941    22,959 
Notes payable unsecured, net of deferred financing costs   28,012    26,978 
PPP loan and EIDL advance   361    10 
Due to preferred equity member   -    106 
Total liabilities  $52,055   $54,010 
           
Commitments and Contingencies (Note 10)          
           
Redeemable Preferred Equity          
Series C preferred equity  $3,983   $3,582 
           
Members’ Capital          
Series B preferred equity   1,640    1,630 
Class A common equity   (354)   47 
Members’ capital  $1,286   $1,677 
           
Total liabilities, redeemable preferred equity and members’ capital  $57,324   $59,269 

 

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

 

4
 

 

Shepherd’s Finance, LLC

Interim Condensed Consolidated Statements of Operations - Unaudited

For the Three Months ended March 31, 2021 and 2020

 

   Three Months Ended 
   March 31, 
(in thousands of dollars)  2021   2020 
         
Net Interest Income          
Interest and fee income on loans  $1,778   $2,574 
Interest expense:          
Interest related to secured borrowings   557    817 
Interest related to unsecured borrowings   810    767 
Interest expense  $1,367   $1,584 
           
Net interest income   411    990 
           
Less: Loan loss provision   214    35 
Net interest income after loan loss provision   197    955 
           
Non-Interest Income          
Gain on sale of foreclosed assets  $88   $- 
Gain on extinguishment of debt   10    - 
Total non-interest income   98    - 
           
Income before non-interest expense   295    955 
           
Non-Interest Expense          
Selling, general and administrative  $537   $708 
Depreciation and amortization   16    21 
Loss on the sale of foreclosed assets   18    35 
Impairment loss on foreclosed assets   10    109 
Total non-interest expense   581    873 
           
Net (loss) income  $(286)  $82 
           
Earned distribution to preferred equity holders   115    126 
           
Net loss attributable to common equity holders  $(401)  $(44)

 

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

 

5
 

 

Shepherd’s Finance, LLC

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

For the Three Months Ended March 31, 2021 and 2020

 

(in thousands of dollars)  March 31, 2021   March 31, 2020 
         
Members’ capital, beginning balance  $1,677   $4,188 
Net (loss) income less distributions to Series C preferred equity holders of $115 and $89   (401)   (7)
Contributions from Series B preferred equity holders   10    - 
Earned distributions to Series B preferred equity holders   -    (37)
Distributions to common equity holders   -    (217)
           
Members’ capital, ending balance  $1,286   $3,927 

 

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

 

6
 

 

Shepherd’s Finance, LLC

Interim Condensed Consolidated Statements of Cash Flows - Unaudited

For the Three Months Ended March 31, 2021 and 2020

 

  

Three Months Ended

March 31,

 
(in thousands of dollars)  2021   2020 
         
Cash flows from operations          
Net (loss) income  $(286)  $82 
Adjustments to reconcile net (loss) income to net cash provided by operating activities          
Amortization of deferred financing costs   42    40 
Provision for loan losses   214    35 
Change in loan origination fees, net   82    (191)
Loss on sale of foreclosed assets   18    35 
Impairment of foreclosed assets   10    109 
Gain on the sale of foreclosed assets   (88)   - 
Gain on extinguishment of debt   (10)   - 
Depreciation and amortization   16    21 
Net change in operating assets and liabilities:          
Other assets   56    (21)
Accrued interest receivable   55    (131)
Customer interest escrow   (86)   1 
Accrued interest payable   (140)   (119)
Accounts payable and accrued expenses   (96)   (162)
           
Net cash used in operating activities   (213)   (301)
           
Cash flows from investing activities          
Loan additions and principal collections, net   742    1,328 
Investment in foreclosed assets   (257)   (444)
Additions for construction in real estate investments   (4)   - 
Proceeds from the sale of foreclosed assets   1,276    185 
           
Net cash provided by investing activities   1,757    1,069 
           
Cash flows from financing activities          
Contributions from preferred B equity holders   10    - 
Contributions from preferred C equity holders   300    - 
Distributions to preferred equity holders   (14)   (12)
Distributions to common equity holders   -    (217)
Proceeds from secured note payable   1,616    4,084 
Repayments of secured note payable   (4,203)   (4,390)
Proceeds from unsecured notes payable   2,641    5,261 
Redemptions/repayments of unsecured notes payable   (2,045)   (3,959)
Proceeds from PPP loan   361    - 
Deferred financing costs paid   (35)   (77)
           
Net cash (used in) provided by financing activities   (1,369)   690 
           
Net increase in cash and cash equivalents   175    1,458 
           
Cash and cash equivalents          
Beginning of period   4,749    1,883 
End of period  $4,924   $3,341 
           
Supplemental disclosure of cash flow information          
Cash paid for interest  $1,507   $1,703 
           
Non-cash investing and financing activities          
Earned by Series B preferred equity holders but not distributed to customer interest escrow  $-   $37 
Earned by Series B preferred equity holders and distributed to customer interest escrow  $106   $37 
Foreclosure of assets transferred from loans receivable, net  $274   $- 
Earned but not paid distributions of Series C preferred equity holders  $115   $89 
Secured transferred to unsecured notes payable  $431   $631 
EIDL advance forgiveness in reduction of debt  $10   $- 

 

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

 

7
 

 

Shepherd’s Finance, LLC

Notes to Interim Condensed Consolidated Financial Statements (unaudited)

 

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

 

1. Description of Business and Basis of Presentation

 

Description of Business

 

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

 

The Company extends commercial loans to residential homebuilders (in 21 states as of March 31, 2021) to:

 

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

 

Basis of Presentation

 

The accompanying unaudited interim condensed consolidated financial statements for the period ended March 31, 2021 have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information, the instructions to Form 10-Q and Article 8 of Regulation S-X. The accompanying condensed consolidated balance sheet as of December 31, 2020 has been derived from audited consolidated financial statements. While certain information and disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”), management believes that the disclosures herein are adequate to make the unaudited interim condensed consolidated information presented not misleading. In the opinion of management, the unaudited interim condensed consolidated financial statements reflect all adjustments necessary for a fair presentation of the consolidated financial position, results of operations, and cash flows for the periods presented. Such adjustments are of a normal, recurring nature. The consolidated results of operations for any interim period are not necessarily indicative of results expected for the fiscal year ending December 31, 2021. These unaudited interim condensed consolidated financial statements should be read in conjunction with the 2020 consolidated financial statements and notes thereto (the “2020 Financial Statements”) included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020 (the “2020 Form 10-K”). The accounting policies followed by the Company are set forth in Note 2 – Summary of Significant Accounting Policies in the 2020 Financial Statements.

 

Accounting Standards to be Adopted

 

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

 

8
 

 

2. Fair Value

 

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

 

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

 

           Quoted Prices in Active
   Significant
   Significant 
   March 31, 2021   Markets for   Other   Unobservable 
   Carrying   Estimated   Identical   Observable   Inputs 
   Amount   Fair Value   Assets Level 1   Inputs Level 2   Level 3 
                     
Foreclosed assets  $3,764   $3,764   $   $   $3,764 
Impaired loans due to COVID-19, net   6,217    6,217            6,217 
Other impaired loans, net   1,882    1,882            1,882 
Total  $11,863   $11,863   $   $   $11,863 

 

           Quoted Prices in Active   Significant   Significant 
   December 31, 2020   Markets for   Other   Unobservable 
   Carrying   Estimated   Identical   Observable   Inputs 
   Amount   Fair Value   Assets Level 1   Inputs Level 2   Level 3 
                     
Foreclosed assets  $4,449   $4,449   $   $   $4,449 
Impaired loans due to COVID-19, net   9,054    9,054            9,054 
Other impaired loans, net   1,064    1,064            1,064 
Total  $14,567   $14,567   $   $   $14,567 

 

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

 

   March 31, 2021   December 31, 2020 
   Carrying   Estimated   Carrying   Estimated 
   Amount   Fair Value   Amount   Fair Value 
Financial Assets                    
Cash and cash equivalents  $4,924   $4,924   $4,749   $4,749 
Loan receivable, net   45,093    45,093    46,405    46,405 
Accrued interest on loans   546    546    601    601 
Financial Liabilities                    
Customer interest escrow   530    530    510    510 
Notes payable secured, net   19,941    19,941    22,959    22,959 
Notes payable unsecured, net   28,012    28,012    26,978    26,978 
PPP loan and EIDL advance   361    361    10    10 
Accrued interest payable   3,018    3,018    3,158    3,158 

 

9
 

 

3. Financing Receivables

 

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

 

   March 31, 2021   December 31, 2020 
         
Loans receivable, gross  $49,320   $50,449 
Less: Deferred loan fees   (1,223)   (1,092)
Less: Deposits   (1,505)   (1,337)
Plus: Deferred origination costs   402    353 
Less: Allowance for loan losses   (1,901)   (1,968)
           
Loans receivable, net  $45,093   $46,405 

 

The allowance for loan losses at March 31, 2021 is $1,901, of which $159 is related to loans without specific reserves. The Company recorded specific reserves for loans impaired due to impacts from COVID-19 of $1,413, special mention loans of $120, and impaired loans not due to impacts from COVID-19 of $209. At December 31, 2020, the allowance was $1,968, of which $151 is related to loans without specific reserves. During the quarter ended March 31, 2021 and year ended December 31, 2020, we incurred $282 and $72 in direct charge offs, respectively.

 

Commercial Construction and Development Loans

 

Construction Loan Portfolio Summary

 

As of March 31, 2021, the Company’s portfolio consisted of 209 commercial construction and 12 development loans with 70 borrowers in 21 states.

 

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

 

Year  

Number of

States

  

Number
of

Borrowers

  

Number of

Loans

   Value of Collateral(1)   Commitment Amount  

Gross

Amount

Outstanding

  

Loan to Value

Ratio(2)

  

Loan

Fee

 
 2021    21    70    209   $84,134   $60,328   $40,342    72%(3)   5%
 2020    21    67    213   $86,268   $61,714   $42,219    72%(3)   5%

 

(1) The value is determined by the appraised value.
   
(2) The loan to value ratio is calculated by taking the commitment amount and dividing by the appraised value.
   
(3) Represents the weighted average loan to value ratio of the loans.

 

10
 

 

Real Estate Development Loan Portfolio Summary

 

The following is a summary of our loan portfolio to builders for land development as of March 31, 2021 and December 31, 2020:

 

Year   Number of
States
   Number
of
Borrowers
  

Number

of
Loans

  

Gross Value
of

Collateral(1)

   Commitment Amount(2)  

Gross Amount

Outstanding

  

Loan to Value

Ratio(3)

   Interest Spread 
 2021    7    11    12   $13,917   $11,742   $8,978    65%(4)   varies
 2020    5    8    9   $11,628   $10,815   $8,230    71%(4)   7%

 

(1) The value is determined by the appraised value adjusted for remaining costs to be paid. As of March 31, 2021 and December 31, 2020, a portion of this collateral is $1,640 and $1,630, respectively, of preferred equity in our Company. In the event of a foreclosure on the property securing these loans, the portion of our collateral that is preferred equity might be difficult to sell, which may impact our ability to recover the loan balance. In addition, a portion of the collateral value is estimated based on the selling prices anticipated for the homes.
   
(2) The commitment amount does not include letters of credit and cash bonds.
   
(3) The loan to value ratio is calculated by taking the outstanding amount and dividing by the appraised value calculated as described above.
   
(4) Represents the weighted average loan to value ratio of the loans.

 

Credit Quality Information

 

The following tables present credit-related information at the “class” level in accordance with FASB Accounting Standard Codification 310-10-50, “Disclosures about the Credit Quality of Finance Receivables and the Allowance for Credit Losses.” See our 2020 Form 10-K, as filed with the SEC, for more information.

 

Gross finance receivables – By risk rating:

 

   March 31, 2021   December 31, 2020 
         
Pass  $37,456   $35,544 
Special mention   2,141    3,089 
Classified – accruing        
Classified – nonaccrual   9,723    11,816 
           
Total  $49,320   $50,449 

 

Finance Receivables – Method of impairment calculation:

 

   March 31, 2021   December 31, 2020 
         
Performing loans evaluated individually  $15,583   $16,412 
Performing loans evaluated collectively   24,014    22,221 
Non-performing loans without a specific reserve   616    1,518 
Non-performing loans with a specific reserve   9,107    10,298 
           
Total evaluated collectively for loan losses  $49,320   $50,449 

 

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

 

11
 

 

Impaired Loans

 

The following is a summary of our impaired non-accrual commercial construction loans as of March 31, 2021 and December 31, 2020.

 

   March 31, 2021   December 31, 2020 
         
Unpaid principal balance (contractual obligation from customer)  $10,005   $11,888 
Charge-offs and payments applied   (282)   (72)
Gross value before related allowance   9,723    11,816 
Related allowance   (1,624)   (1,698)
Value after allowance  $8,099   $10,118 

 

Concentrations

 

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

 

   March 31, 2021  December 31, 2020
      Percent of      Percent of 
   Borrower  Loan   Borrower  Loan 
   City  Commitments   City  Commitments 
               
Highest concentration risk  Pittsburgh, PA   28%  Pittsburgh, PA   29%
Second highest concentration risk  Orlando, FL   11%  Orlando, FL   12%
Third highest concentration risk  Spokane, WA   3%  Cape Coral, FL   6%

 

4. Real Estate Investment Assets

 

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

 

  

Three Months
Ended

March 31, 2021

  

Year Ended

December 31, 2020

  

Three Months
Ended

March 31, 2020

 
             
Beginning balance  $1,181   $   $ 
Transfers from loans       1,140     
Additions for construction/development   4    41     
Ending balance  $1,185   $1,181   $ 

 

5. Foreclosed Assets

 

The following table is a roll forward of foreclosed assets:

 

  

Three Months
Ended

March 31, 2021

  

Year Ended

December 31, 2020

  

Three Months
Ended

March 31, 2020

 
             
Beginning balance  $4,449   $4,916   $4,916 
Additions from loans   274    2,118     
Additions for construction/development   257    1,410    444 
Sale proceeds   (1,276)   (3,697)   (185)
Loss on foreclosure       (54)    
Loss on sale   (18)   (102)   (35)
Gain on foreclosure       52     
Gain on sale   88    160     
Impairment loss on foreclosed assets   (10)   (290)   (109)
Impairment loss on foreclosed assets due to COVID-19       (64)    
Ending balance  $3,764   $4,449   $5,031 

 

12
 

 

6. Borrowings

 

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

 

   Priority
Rank
  March 31, 2021   December 31, 2020 
Borrowing Source             
Purchase and sale agreements and other secured borrowings  1  $19,950   $22,968 
Secured line of credit from affiliates  2        
Unsecured line of credit (senior)  3   500    500 
PPP loan and EIDL advance  3   361    10 
Other unsecured debt (senior subordinated)  4   1,782    1,800 
Unsecured Notes through our public offering, gross  5   22,082    21,482 
Other unsecured debt (subordinated)  5   3,193    2,747 
Other unsecured debt (junior subordinated)  6   864    864 
              
Total     $48,732   $50,371 

 

The following table shows the maturity of outstanding debt as of March 31, 2021:

 

Year Maturing   Total Amount
Maturing
    Public
Offering
    Other
Unsecured
    Secured Borrowings  
2021   $ 30,756     $ 10,012     $ 1,646     $ 19,098  
2022     5,899       3,960       1,923       16  
2023     3,211       2,103       1,029       79  
2024     7,044       4,815       2,087       142  
2025 and thereafter     1,822       1,192       15       615  
Total   $ 48,732     $ 22,082     $ 6,700     $ 19,950  

 

Secured Borrowings

 

Lines of Credit

 

As of March 31, 2021, the Company had no amounts borrowed against its lines of credit from affiliates, which have a total limit of $2,500.

 

None of our lines of credit have given us notice of nonrenewal during the first quarter of 2021, and the lines will continue to automatically renew unless notice of nonrenewal is given by a lender.

 

13
 

 

Secured Deferred Financing Costs

 

The Company had secured deferred financing costs of $9 and $8 as of March 31, 2021 and December 31, 2020, respectively.

 

Borrowings secured by loan assets are summarized below:

 

   March 31, 2021   December 31, 2020 
   Book Value of
Loans which Served as Collateral
   Due from Shepherd’s Finance to Loan Purchaser or Lender  

Book Value of

Loans which Served as Collateral

   Due from Shepherd’s Finance to Loan Purchaser or Lender 
Loan Purchaser                    
Builder Finance  $8,111   $5,114   $7,981   $5,919 
S.K. Funding   4,581    3,834    4,551    3,898 
                     
Lender                    
Shuman   2,003    1,325    1,916    1,325 
Jeff Eppinger   3,472    200    2,206    1,500 
Hardy Enterprises, Inc.   1,345    700    1,590    1,000 
Gary Zentner   519    250    424    250 
R. Scott Summers   1,435    847    1,259    847 
John C. Solomon   788    563    743    563 
Paul Swanson   9,091    6,254    9,381    6,685 
                     
Total  $31,345   $19,087   $30,051   $21,987 

 

Unsecured Borrowings

 

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

 

On March 22, 2019, the Company terminated its second public offering and commenced its third public offering of fixed rate subordinated notes (the “Notes”). The effective interest rate on borrowings through our Notes Program at March 31, 2021 and December 31, 2020 was 10.27% and 10.38%, respectively, not including the amortization of deferred financing costs. We generally offer four durations at any given time, ranging from 12 to 48 months from the date of issuance. There are limited rights of early redemption. Our 36-month Note has a mandatory early redemption option, subject to certain conditions. The following table shows the roll forward of our Notes Program:

 

   Three Months
Ended
March 31, 2021
   Year Ended
December 31, 2020
   Three Months
Ended
March 31, 2020
 
             
Gross Notes outstanding, beginning of period  $21,482   $20,308   $20,308 
Notes issued   2,627    7,691    4,722 
Note repayments / redemptions   (2,027)   (6,517)   (3,960)
                
Gross Notes outstanding, end of period  $22,082   $21,482   $21,070 
                
Less deferred financing costs, net   (409)   (416)   (453)
                
Notes outstanding, net  $21,673   $21,066   $20,617 

 

The following is a roll forward of deferred financing costs:

 

  

Three Months

Ended

March 31, 2021

  

Year Ended

December 31, 2020

  

Three Months

Ended

March 31, 2020

 
             
Deferred financing costs, beginning balance  $942   $786   $786 
Additions   35    156    77 
Deferred financing costs, ending balance   977    942    863 
Less accumulated amortization   (568)   (526)   (410)
Deferred financing costs, net  $409   $416   $453 

 

14
 

 

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

 

  

Three Months Ended

March 31, 2021

   Year Ended
December 31, 2020
  

Three Months Ended

March 31, 2020

 
             
Accumulated amortization, beginning balance  $526   $370   $370 
Additions   42    165    40 
Disposals   -    (9)   - 
Accumulated amortization, ending balance  $568   $526   $410 

 

Other Unsecured Debts

 

Our other unsecured debts are detailed below:

 

   Maturity  Interest  

Principal Amount Outstanding as of

 
Loan 

Date

 

Rate(1)

  

March 31, 2021

   December 31, 2020 
Unsecured Note with Seven Kings Holdings, Inc.  Demand(2)   9.5%  $500   $500 
Unsecured Line of Credit from Paul Swanson  October 2022   10.0%   746    315 
Subordinated Promissory Note  December 2023   10.5%   146    146 
Subordinated Promissory Note  April 2024   10.0%   100    100 
Subordinated Promissory Note  October 2022   10.0%   174    174 
Subordinated Promissory Note  August 2022   11.0%   200    200 
Subordinated Promissory Note  March 2023   11.0%   169    169 
Subordinated Promissory Note  February 2023   11.0%   600    600 
Subordinated Promissory Note  December 2022   5.0%   3    3 
Subordinated Promissory Note  December 2023   11.0%   35    20 
Subordinated Promissory Note  February 2024   11.0%   20    20 
Subordinated Promissory Note  November 2021   9.5%   200    200 
Subordinated Promissory Note  October 2024   10.0%   700    700 
Subordinated Promissory Note  December 2024   10%   100    100 
Senior Subordinated Promissory Note  March 2022(3)   10.0%   334    352 
Senior Subordinated Promissory Note  March 2022(4)   1.0%   728    728 
Junior Subordinated Promissory Note  March 2022(4)   22.5%   417    417 
Senior Subordinated Promissory Note  October 2024(5)   1.0%   720    720 
Junior Subordinated Promissory Note  October 2024(5)   20.0%   447    447 
           $6,339   $5,911 

 

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

 

(2) Due six months after lender gives notice.

 

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

 

(4) These notes were issued to the same holder and, when calculated together, yield a blended return of 11% per annum.

 

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

 

15
 

 

Second Draw Paycheck Protection Program Loan

 

On February 5, 2021, the Company entered into an agreement (the “Loan Agreement”) to borrow approximately $361 from LCA Bank Corporation pursuant to the Paycheck Protection Program (“PPP”), originally created under the Coronavirus Aid, Relief, and Economic Security Act, or CARES Act, and extended to “second draw” PPP loans. The PPP is intended to provide loans to qualified businesses to cover payroll and certain other identified costs. Funds from the loan may only be used for certain purposes, including payroll, benefits, rent, and utilities. All or a portion of the loan may be forgivable, as provided by the terms of the PPP. The loan has an interest rate of 1.0% per annum and a term of 60 months. Payments will be deferred in accordance with the CARES Act, as modified by the Paycheck Protection Program Flexibility Act of 2020; however, interest will accrue during the deferral period. If the loan is not forgiven in accordance with the terms of the program, we will be obligated to make monthly payments of principal and interest to repay the loan in full prior to maturity. The loan is evidenced by a promissory note, which contains customary events of default relating to, among other things, payment defaults and breaches of representations. We may prepay the loan at any time prior to maturity with no prepayment penalties.

 

7. Redeemable Preferred Equity

 

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

 

  

Three Months

Ended

March 31, 2021

  

Year

Ended

December 31, 2020

  

Three Months

Ended

March 31, 2020

 
             
Beginning balance  $3,582   $2,959   $2,959 
Additions from new investment   300    300    - 
Distributions   (14)   (49)   (12)
Earned distributions to preferred equity holders   115    372    89 
                
Ending balance  $3,983   $3,582   $3,036 

 

The following table shows the earliest redemption options for investors in our Series C Preferred Units as of March 31, 2021:

 

Year Maturing  Total Amount
Redeemable
 
     
2024  $3,001 
2025   368 
2026   309 
2027   305 
      
Total  $3,983 

 

8. Members’ Capital

 

There are currently two classes of equity units outstanding that the Company classifies as Members’ Capital: Class A common units (“Class A Common Units”) and Series B cumulative preferred units (“Series B Preferred Units”). As of March 31, 2021, the Class A Common Units are held by eight members, all of whom have no personal liability. All Class A common members have voting rights in proportion to their capital account. There were 2,629 Class A Common Units outstanding as of March 31, 2021 and December 31, 2020.

 

The Series B Preferred Units were issued to the Hoskins Group through a reduction in a loan issued by the Hoskins Group to the Company. In December 2015, the Hoskins Group agreed to purchase 0.1 Series B Preferred Units for $10 at each closing of a lot to a third party in the Hamlets and Tuscany subdivisions. As of March 31, 2021, the Hoskins Group owned a total of 16.4 Series B Preferred Units, which were issued for a total of $1,640.

 

16
 

 

9. Related Party Transactions

 

As of March 31, 2021, the Company had $1,250, $250, and $1,000 available to borrow against the line of credit from Daniel M. Wallach (our Chief Executive Officer and chairman of the board of managers) and his wife, the line of credit from the 2007 Daniel M. Wallach Legacy Trust, and the line of credit from William Myrick (our Executive Vice President), respectively. A more detailed description is included in Note 7 of our 2020 Financial Statements. These borrowings are in notes payable secured, net of deferred financing costs on the interim condensed consolidated balance sheet.

 

10. Commitments and Contingencies

 

Unfunded commitments to extend credit, which have similar collateral, credit risk, and market risk to our outstanding loans, were $19,986 and $19,495 at March 31, 2021 and December 31, 2020, respectively.

 

11. Selected Quarterly Condensed Consolidated Financial Data (Unaudited)

 

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

 

   Quarter 1   Quarter 4   Quarter 3   Quarter 2   Quarter 1 
   2021   2020   2020   2020   2020 
                     
Net interest income (loss) after loan loss provision  $197   $792   $319   $(1,788)  $955 
Non-interest income   98    379    230    3    - 
SG&A expense   537    648    367    462    708 
Depreciation and amortization   16    22    21    21    21 
Loss on sale of foreclosed assets   18    16    51        35 
Impairment loss and loss on foreclosure of assets   10    241    6    91    109 
Net income (loss)  $(286)  $244   $104   $(2,359)  $82 

 

12. Non-Interest Expense Detail

 

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

 

  

For the Three Months Ended

March 31,

 
   2021   2020 
Selling, general and administrative expenses          
Legal and accounting  $103   $139 
Salaries and related expenses   209    278 
Board related expenses   25    25 
Advertising   9    21 
Rent and utilities   9    13 
Loan and foreclosed asset expenses   113    135 
Travel   24    59 
Other   45    38 
Total SG&A  $537   $708 

 

13. Subsequent Events

 

Management of the Company has evaluated subsequent events through May 10, 2021, the date these interim condensed consolidated financial statements were issued.

 

On April 1, 2021, the Company sold five of its Series C Cumulative Preferred Units to two joint investors, for the total price of $500,000.

 

17
 

 

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

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

 

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with our interim condensed consolidated financial statements and the notes thereto contained elsewhere in this report. The following Management’s Discussion and Analysis of Financial Condition and Results of Operations should also be read in conjunction with our audited annual consolidated financial statements and related notes and other consolidated financial data (the “2020 Financial Statements”) included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020 (the “2020 Form 10-K”). See also “Cautionary Note Regarding Forward-Looking Statements” preceding Part I.

 

Overview

 

During the three months ended March 31, 2021, the Company continued to face COVID-19 risks as it related to the economy and the homebuilding industry. In reaction to the COVID-19 economic risks, the Company’s management made the decision to focus on the following three areas:

 

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

 

We anticipate that the housing market in most of the areas in which we do business will be strong despite the impact of COVID-19, and that doing business with our best customers in those markets will provide good performing loans for our balance sheet. We also anticipate that the losses we incurred in principal related to COVID-19 will not continue, and that the lack of interest due to nonperforming assets from COVID-19 will decrease significantly in the second quarter of 2021.

 

We had $45,093 and $46,405 in loan assets as of March 31, 2021 and December 31, 2020, respectively. In addition, as of March 31, 2021, we had 209 construction loans in 21 states with 70 borrowers and 12 development loans in seven states with 11 borrowers.

 

Net cash used in operations decreased $88 for the three months ended March 31, 2021 as compared to the same period of 2020. Our increase in operating cash flow was due primarily to the provisions for loan losses. As of March 31, 2021, the provisions for loan losses were $214 which included $114 for impairment charges due to the COVID-19 pandemic.

 

Critical Accounting Estimates

 

To assist in evaluating our interim condensed consolidated financial statements, we describe below the critical accounting estimates that we use. We consider an accounting estimate to be critical if: (1) the accounting estimate requires us to make assumptions about matters that were highly uncertain at the time the accounting estimate was made, and (2) changes in the estimate that are reasonably likely to occur from period to period, or use of different estimates that we reasonably could have used, would have a material impact on our consolidated financial condition or results of operations. See our 2020 Form 10-K, as filed with the SEC, for more information on our critical accounting estimates. No material changes to our critical accounting estimates have occurred since December 31, 2020 unless listed below.

 

18
 

 

Loan Losses

 

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

 

   March 31, 2021 
   Loan Loss 
   Provision 
Change in Fair Value Assumption  Higher/(Lower) 
Increasing fair value of the real estate collateral by 35%*  $- 
Decreasing fair value of the real estate collateral by 35%**  $3,089 

 

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

 

** Assumes the loans were nonperforming and a book amount of the loans outstanding of $45,093.

 

Foreclosed Assets

 

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

 

   March 31, 2021 
   Foreclosed 
   Assets 
Change in Fair Value Assumption  Higher/(Lower) 
Increasing fair value of the foreclosed asset by 35%*  $- 
Decreasing fair value of the foreclosed asset by 35%**  $1,317 

 

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

 

** Assumes a book amount of the foreclosed assets of $3,764.

 

19
 

 

Interest Spread

 

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

 

   Three Months Ended 
   March 31, 
   2021   2020 
Interest Income        *           
Estimated interest income  $1,508    12%  $2,090    14%
Estimated unearned interest income due to COVID-19   (267)   (2)%   -    -%
Interest income on loans   1,241    10%   2,090    14%
                     
Fee income on loans, gross   728    6%   605    5%
Deferred loan fees   (191)   (2)%   (121)   (1)%
    537    4%   484    4%
                     
Interest and fee income on loans   1,778    14%   2,574    18%
                     
Interest expense unsecured   (769)   (6)%   727    (5)%
Interest expense secured   (557)   (5)%   817    (6)%
Amortization of offering costs   (41)   (- )%    40    (- )%
Interest expense   1,367    (11)%   1,584    11%
Net interest income (spread)  $411    3%  $990    7%
                     
Weighted average outstanding loan asset balance  $50,273        $57,756      

 

*annualized amount as percentage of weighted average outstanding gross

 

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

 

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

 

Interest income on loans decreased to 10% for the three months ended March 31, 2021 compared to 14% for the same period of 2020. Estimated interest income not earned due primarily to classified-nonaccrual loans  was approximately $267 for the quarter ended March 31, 2021.

 

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

 

Fee income. Our construction loan fee is 5% on the amount we commit to lend, which is amortized over the expected life of each loan. In addition, our development loans do not recognize a loan fee. When loans terminate before their expected maturity, the remaining fee is recognized at the termination of the loan. During the quarter ended March 31, 2021, fee income included a modification charge to our largest customer of $124.

 

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

 

As of March 31, 2021 and 2020, $9,723 and $1,581 in loans were not paying interest, respectively.

 

Foreclosed assets do not provide a monthly interest return. As of March 31, 2021 and 2020, foreclosed assets were $3,764 and $5,031, respectively, which resulted in a negative impact to our interest spread in both years.

 

The amount of nonperforming assets is expected to decrease over the next quarter as we continue to sell our assets following completion of construction.

 

Loan Loss Provision

 

Loan loss provision (expense throughout the year) was $214 and $35 for the quarters ended March 31, 2021 and 2020, respectively.

 

The allowance for loan losses at March 31, 2021 is $1,901, of which $157 is related to loans without specific reserves. The Company recorded specific reserves for loans impaired due to impacts from COVID-19 as of March 31, 2021 of $1,413, special mention loans of $120, and impaired loans not due to impacts from COVID-19 of $211. At December 31, 2020, the allowance was $1,968, of which $151 is related to loans without specific reserves. During the quarter ended March 31, 2021 and year ended December 31, 2020, we incurred $282 and $72 in direct charge offs, respectively.

 

20
 

 

Non-Interest Income

 

Gain on Sale of Foreclosed Assets

 

During the quarters ended March 31, 2021 and 2020, we recognized $88 and $0, respectively, as a gain on the sale of foreclosed assets. We sold four foreclosed assets related to two original borrowers during the quarter ended March 31, 2021 that resulted in a gain on their sale.

 

Gain on the Extinguishment of Debt

 

During April 2020, the Company received a grant under the Economic Injury Disaster Loan Emergency Advance (the “EIDL Advance”) for $10 which was used for payroll and other certain operating expenses.

 

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

 

Non-Interest Expense

 

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

 

The following table displays our SG&A expenses:

 

  

For the Three Months Ended

March 31,

 
   2021   2020 
Selling, general and administrative expenses          
Legal and accounting  $103   $139 
Salaries and related expenses   209    278 
Board related expenses   25    25 
Advertising   9    21 
Rent and utilities   9    13 
Loan and foreclosed asset expenses   113    135 
Travel   24    59 
Other   45    38 
Total SG&A  $537   $708 

 

Our SG&A expense decreased $171 for the quarter ended March 31, 2021 compared to the same period of 2020, due significantly to the following:

 

  Legal and accounting fees decreased $36 due primarily to the addition of internal legal counsel and lower outsourced legal fees; and
  Salaries and related expenses decreased $69 which resulted from the increase in deferred loan origination fees which reduces salary expenses.

 

Loss on the Sale of Foreclosed Assets

 

During the quarters ended March 31, 2021 and 2020, we recognized $18 and $35, respectively, as a loss on the sale of foreclosed assets. We sold four and one foreclosed assets related to one original borrower during the quarters ended March 31, 2021 and 2020, respectively.

 

21
 

 

Impairment Loss on Foreclosed Assets

 

As of March 31, 2021 and 2020, impaired loss on foreclosed assets was $10 and $109, respectively. The decrease in impairment loss on foreclosed assets was directly related to assets acquired due to a death of a borrower during the last quarter of 2019.

 

Consolidated Financial Position

 

Loans Receivable

 

Commercial Loans – Construction Loan Portfolio Summary

 

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

 

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

 

State 

Number

of
Borrowers

  

Number

of
Loans

   Value of
Collateral(1)
   Commitment
Amount
   Amount
Outstanding
   Loan to
Value Ratio(2)
   Loan Fee 
Arizona   3    4   $1,821   $1,504   $1,062    60%   5%
Connecticut   1    1    515    382    358    74%   5%
Delaware   2    5    1,970    1,379    717    70%   5%
Florida   19    64    23,294    18,895    15,248    81%   5%
Georgia   1    1    760    388    23    51%   5%
Illinois   2    2    1,890    1,199    489    60%   5%
Idaho   1    1    355    249    60    70%   5%
Michigan   3    13    3,580    2,796    1,420    78%   5%
Mississippi   1    1    240    189    187    79%   5%
New Jersey   1    5    1,357    1,339    1,007    99%   5%
New York   3    2    1,159    833    783    72%   5%
North Carolina   7    14    4,512    3,110    2,214    69%   5%
Ohio   2    6    1,758    1,146    684    65%   5%
Oregon   2    7    2,759    1,932    655    70%   5%
Pennsylvania   3    22    19,980    12,448    8,941    62%   5%
South Carolina   10    38    9,130    6,468    2,932    71%   5%
Tennessee   3    5    2,169    1,463    1,093    67%   5%
Texas   2    7    2,750    1,898    1,058    69%   5%
Utah   2    3    699    489    413    70%   5%
Virginia   1    1    505    354    79    70%   5%
Washington   1    7    2,931    1,867    919    64%   5%
Total   70    209   $84,134   $60,328   $40,342    72%(3)   5%

 

  (1) The value is determined by the appraised value.
     
  (2) The loan to value ratio is calculated by taking the commitment amount and dividing by the appraised value.
     
  (3) Represents the weighted average loan to value ratio of the loans.

 

22
 

 

The following is a summary of our loan portfolio to builders for home construction loans as of December 31, 2020:

 

State 

Number

of
Borrowers

  

Number

of
Loans

   Value of
Collateral(1)
   Commitment
Amount
  

Gross

Amount
Outstanding

  

Loan to
Value

Ratio(2)

  

Loan

Fee

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

 

  (1) The value is determined by the appraised value.
      
  (2) The loan to value ratio is calculated by taking the commitment amount and dividing by the appraised value.
     
  (3) Represents the weighted average loan to value ratio of the loans.

 

Commercial Loans – Real Estate Development Loan Portfolio Summary

 

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

 

States  Number of Borrowers   Number of Loans  

Value of

Collateral(1)

   Commitment Amount(2)   Gross Amount Outstanding   Loan to Value Ratio(3)   Interest Spread 
Pennsylvania   1    2   $8,175   $8,200   $6,468    79%   varies
Delaware   1    1    321    147    147    46%   7%
Florida   4    4    1,673    1,372    823    49%   7%
New York   1    1    1,237    452    452    36%   7%
North Carolina   1    1    400    260    165    41%   7%
Oregon   1    1    855    600    600    70%   7%
South Carolina   2    2    1,256    711    323    26%   7%
Total   11    12   $13,917   $11,742   $8,978    65 %(4)   11%

 

  (1) The value is determined by the appraised value adjusted for remaining costs to be paid and third-party mortgage balances. Part of this collateral is $1,640 of preferred equity in our Company. In the event of a foreclosure on the property securing these loans, the portion of our collateral that is preferred equity in our Company might be difficult to sell, which could impact our ability to eliminate the loan balance.
     
  (2) The commitment amount does not include unfunded letters of credit.
     
  (3) The loan to value ratio is calculated by taking the outstanding amount and dividing by the appraised value calculated as described above.
     
  (4) Represents the weighted average loan to value ratio of the loans.

 

23
 

 

The following is a summary of our loan portfolio to builders for land development as of December 31, 2020:

 

States 

Number

of Borrowers

  

Number

of

Loans

  

Value of

Collateral(1)

   Commitment Amount(2)   Gross
Amount
Outstanding
  

Loan to

Value Ratio(3)

  

Interest

Spread

 
Pennsylvania   1    2   $7,361   $8,200   $6,175    84%   7%
Florida   3    3    1,373    1,193    1,029    87%   7%
New York   1    1    1,238    451    452    36%   7%
North Carolina   1    1    400    260    136    34%   7%
South Carolina   2    2    1,256    711    438    35%   7%
Total   8    9   $11,628   $10,815   $8,230    71%(4)   7%

 

  (1) The value is determined by the appraised value adjusted for remaining costs to be paid and third-party mortgage balances. Part of this collateral is $1,630 of preferred equity in our Company. In the event of a foreclosure on the property securing these loans, the portion of our collateral that is preferred equity in our Company might be difficult to sell, which could impact our ability to eliminate the loan balance.
     
  (2) The commitment amount does not include unfunded letters of credit.
     
  (3) The loan to value ratio is calculated by taking the outstanding amount and dividing by the appraised value calculated as described above.
     
  (4) Represents the weighted average loan to value ratio of the loans.

 

Combined Loan Portfolio Summary

 

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

 

   March 31, 2021   December 31, 2020 
         
Loans receivable, gross  $49,320   $50,449 
Less: Deferred loan fees   (1,223)   (1,092)
Less: Deposits   (1,505)   (1,337)
Plus: Deferred origination costs   402    353 
Less: Allowance for loan losses   (1,901)   (1,968)
           
Loans receivable, net  $45,093   $46,405 

 

The following is a roll forward of combined loans:

 

  

Three Months

Ended
March 31, 2021

  

Year Ended
December 31, 2020

  

Three Months

Ended
March 31, 2020

 
             
Beginning balance  $46,405   $55,369   $55,369 
Additions   7,089    46,249    9,462 
Principal collections   (7,662)   (50,079)   (10,993)
Transferred to foreclosed assets   (274)   (2,118)    
Transferred to real estate investments       (1,140)    
Change in builder deposit   (169)   16    203 
Change in loan loss provision   (214)   (1,805)   (35)
Change in loan fees, net   (82)   (87)   191 
Ending balance  $45,093   $46,405   $54,197 

 

24
 

 

Finance Receivables – By risk rating:

 

   March 31, 2021   December 31, 2020 
         
Pass  $37,456   $35,544 
Special mention   2,141    3,089 
Classified – accruing        
Classified – nonaccrual   9,723    11,816 
           
Total  $49,320   $50,449 

 

Finance Receivables – Method of impairment calculation:

 

   March 31, 2021   December 31, 2020 
         
Performing loans evaluated individually  $15,583   $16,412 
Performing loans evaluated collectively   24,014    22,221 
Non-performing loans without a specific reserve   616    1,518 
Non-performing loans with a specific reserve   9,107    10,298 
           
Total evaluated collectively for loan losses  $49,320   $50,449 

 

At March 31, 2021 and December 31, 2020, there were no loans acquired with deteriorated credit quality.

 

Impaired Loans

 

The following is a summary of our impaired non-accrual (non-performing) commercial construction loans as of March 31, 2021 and December 31, 2020.

 

   March 31, 2021   December 31, 2020 
         
Unpaid principal balance (contractual obligation from customer)  $10,005   $11,888 
Charge-offs and payments applied   (282)   (72)
Gross value before related allowance   9,723    11,816 
Related allowance   (1,624)   (1,698)
Value after allowance  $8,099   $10,118 

 

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

 

   No.
Loans
   Unpaid
Balances
   % 
Current loans (current accounts and accounts on which more than 50% of an original contract payment was made in the last 59 days)   201   $39,597    80.3%
60-89 days   -    -    -%
90-179 days   -    -    -%
180-269 days   20    9,723    19.7%
                
Subtotal   221   $49,320    100%
                
Interest only accounts (Accounts on which interest, deferment, extension and/or default charges were received in the last 60 days)   -   $-    -%
                
Partial Payment accounts (Accounts on which the total received in the last 60 days was less than 50% of the original contractual monthly payment. “Total received” to include interest on simple interest accounts, as well as late charges on deferment charges on pre-computed accounts.)   -   $-    -%
                
Total   221   $49,320    100%

 

25
 

 

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

 

   No.
Loans
   Unpaid
Balances
   % 
Contractual Terms - All current Direct Loans and Sales Finance Contracts with installments past due less than 60 days from due date.   201   $39,597    80.3%
60-89 days   -    -    -%
90-179 days   -    -    -%
180-269 days   20    9,723    19.7%
                
Subtotal   221   $49,320    100%
                
Interest only accounts (Accounts on which interest, deferment, extension and/or default charges were received in the last 60 days)   -   $-    -%
                
Partial Payment accounts (Accounts on which the total received in the last 60 days was less than 50% of the original contractual monthly payment. “Total received” to include interest on simple interest accounts, as well as late charges on deferment charges on pre-computed accounts.)   -   $-    -%
                
Total   221   $49,320    100%

 

Below is an aging schedule of loans receivable as of December 31, 2020, on a recency basis:

 

   No.
Loans
   Unpaid
Balances
   % 
Current loans (current accounts and accounts on which more than 50% of an original contract payment was made in the last 59 days)   194   $38,956    77.2%
60-89 days   -    -    -%
90-179 days   -    -    -%
180-269 days   28    11,493    22.8%
                
Subtotal   222   $50,449    100%
                
Interest only accounts (Accounts on which interest, deferment, extension and/or default charges were received in the last 60 days)   -   $-    -%
                
Partial Payment accounts (Accounts on which the total received in the last 60 days was less than 50% of the original contractual monthly payment. “Total received” to include interest on simple interest accounts, as well as late charges on deferment charges on pre-computed accounts.)   -   $-    -%
                
Total   222   $50,449    100%

 

26
 

 

Below is an aging schedule of loans receivable as of December 31, 2020, on a contractual basis:

 

   No.
Loans
   Unpaid
Balances
   % 
Contractual Terms - All current Direct Loans and Sales Finance Contracts with installments past due less than 60 days from due date.   194   $38,956    77.2%
60-89 days   -    -    -%
90-179 days   -    -    -%
180-269 days   28    11,493    22.8%
                
Subtotal   222   $50,449    100%
                
Interest only accounts (Accounts on which interest, deferment, extension and/or default charges were received in the last 60 days)   -   $-    -%
                
Partial Payment accounts (Accounts on which the total received in the last 60 days was less than 50% of the original contractual monthly payment. “Total received” to include interest on simple interest accounts, as well as late charges on deferment charges on pre-computed accounts.)   -   $-    -%
                
Total   222   $50,449    100%

 

Foreclosed Assets

 

Below is a roll forward of foreclosed assets:

 

  

Three Months
Ended

March 31, 2021

  

Year Ended

December 31, 2020

  

Three Months
Ended

March 31, 2020

 
             
Beginning balance  $4,449   $4,916   $4,916 
Additions from loans   274    2,118     
Additions for construction/development   257    1,410    444 
Sale proceeds   (1,276)   (3,697)   (185)
Loss on foreclosure       (54)    
Loss on sale   (18)   (102)   (35)
Gain on foreclosure       52     
Gain on sale   88    160     
Impairment loss on foreclosed assets   (10)   (290)   (109)
Impairment loss on foreclosed assets due to COVID-19       (64)    
Ending balance  $3,764   $4,449   $5,031 

 

27
 

 

During the quarter ended March 31, 2021, we reclassed one construction loan from loans receivable to foreclosed assets compared to none during the same period of 2020. In addition, during the quarter ended March 31, 2021, we sold nine foreclosed assets compared to one during the same period of 2020.

 

Customer Interest Escrow

 

Below is a roll forward of interest escrow:

 

  

Three Months

Ended

March 31, 2021

  

Year Ended

December 31, 2020

  

Three Months

Ended

March 31, 2020

 
             
Beginning balance  $510   $643   $643 
Preferred equity dividends   106    83    37 
Additions from Pennsylvania loans   58    1,173    500 
Additions from other loans   233    448    51 
Interest, fees, principal or repaid to borrower   (377)   (1,837)   (550)
Ending balance  $530   $510   $681 

 

Related Party Borrowings

 

As of March 31, 2021, the Company had $1,250, $250, and $1,000 available to borrow against the line of credit from Daniel M. Wallach (our Chief Executive Officer and chairman of the board of managers) and his wife, the line of credit from the 2007 Daniel M. Wallach Legacy Trust, and the line of credit from William Myrick (our Executive Vice President), respectively. A more detailed description is included in Note 6 to the 2020 Financial Statements. These borrowings are in notes payable secured, net of deferred financing costs on the interim condensed consolidated balance sheet.

 

Secured Borrowings

 

Lines of Credit

 

As of March 31, 2021, the Company had no amounts borrowed against its lines of credit from affiliates, which have a total limit of $2,500.

 

None of our lines of credit have given us notice of nonrenewal during the first quarter of 2021, and the lines will continue to automatically renew unless notice of nonrenewal is given by a lender.

 

Secured Deferred Financing Costs

 

The Company had secured deferred financing costs of $9 and $8 as of March 31, 2021 and December 31, 2020, respectively.

 

Summary

 

The borrowings secured by loan assets are summarized below:

 

   March 31, 2021   December 31, 2020 
   Book Value of Loans which Served as Collateral   Due from Shepherd’s Finance to Loan Purchaser or Lender  

Book Value of

Loans which Served as Collateral

   Due from Shepherd’s Finance to Loan Purchaser or Lender 
Loan Purchaser                    
Builder Finance  $8,111   $5,114   $7,981   $5,919 
S.K. Funding   4,581    3,834    4,551    3,898 
                     
Lender                    
Shuman   2,003    1,325    1,916    1,325 
Jeff Eppinger   3,472    200    2,206    1,500 
Hardy Enterprises, Inc.   1,345    700    1,590    1,000 
Gary Zentner   519    250    424    250 
R. Scott Summers   1,435    847    1,259    847 
John C. Solomon   788    563    743    563 
Paul Swanson   9,091    6,254    9,381    6,685 
                     
Total  $31,345   $19,087   $30,051   $21,987 

 

28
 

 

Unsecured Borrowings

 

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

 

On March 22, 2019, the Company terminated its second public offering and commenced its third public offering of fixed rate subordinated notes (the “Notes”). The effective interest rate on borrowings through our Notes Program at March 31, 2021 and December 31, 2020 was 10.27% and 10.38%, respectively, not including the amortization of deferred financing costs. We generally offer four durations at any given time, ranging from 12 to 48 months from the date of issuance. There are limited rights of early redemption. Our 36-month Note has a mandatory early redemption option, subject to certain conditions. The following table shows the roll forward of our Notes Program:

 

   Three Months
Ended
March 31, 2021
  

Year Ended
December 31, 2020

   Three Months
Ended
March 31, 2020
 
             
Gross Notes outstanding, beginning of period  $21,482   $20,308   $20,308 
Notes issued   2,627    7,691    4,722 
Note repayments / redemptions   (2,027)   (6,517)   (3,960)
                
Gross Notes outstanding, end of period  $22,082   $21,482   $21,070 
                
Less deferred financing costs, net   (409)   (416)   (453)
                
Notes outstanding, net  $21,673   $21,066   $20,617 

 

The following is a roll forward of deferred financing costs:

 

  

Three Months

Ended

March 31, 2021

  

Year Ended

December 31, 2020

  

Three Months

Ended

March 31, 2020

 
             
Deferred financing costs, beginning balance  $942   $786   $786 
Additions   35    156    77 
Deferred financing costs, ending balance   977    942    863 
Less accumulated amortization   (568)   (526)   (410)
Deferred financing costs, net  $409   $416   $453 

 

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

 

  

Three Months
Ended

March 31, 2021

  

Year Ended
December 31, 2020

  

Three Months
Ended

March 31, 2020

 
             
Accumulated amortization, beginning balance  $326   $370   $370 
Additions   242    165    40 
Disposals   -    (9)   - 
Accumulated amortization, ending balance  $568   $526   $410 

 

29
 

 

Other Unsecured Debts

 

Our other unsecured debts are detailed below:

 

   Maturity  Interest   Principal Amount Outstanding as of 
Loan 

Date

 

Rate(1)

  

March 31, 2021

   December 31, 2020 
Unsecured Note with Seven Kings Holdings, Inc.  Demand(2)   9.5%  $500   $500 
Unsecured Line of Credit from Paul Swanson  October 2022   10.0%   746    315 
Subordinated Promissory Note  December 2023   10.5%   146    146 
Subordinated Promissory Note  April 2024   10.0%   100    100 
Subordinated Promissory Note  October 2022   10.0%   174    174 
Subordinated Promissory Note  August 2022   11.0%   200    200 
Subordinated Promissory Note  March 2023   11.0%   169    169 
Subordinated Promissory Note  February 2023   11.0%   600    600 
Subordinated Promissory Note  December 2022   5.0%   3    3 
Subordinated Promissory Note  December 2023   11.0%   35    20 
Subordinated Promissory Note  February 2024   11.0%   20    20 
Subordinated Promissory Note  November 2021   9.5%   200    200 
Subordinated Promissory Note  October 2024   10.0%   700    700 
Subordinated Promissory Note  December 2024   10%   100    100 
Senior Subordinated Promissory Note  March 2022(3)   10.0%   334    352 
Senior Subordinated Promissory Note  March 2022(4)   1.0%   728    728 
Junior Subordinated Promissory Note  March 2022(4)   22.5%   417    417 
Senior Subordinated Promissory Note  October 2024(5)   1.0%   720    720 
Junior Subordinated Promissory Note  October 2024(5)   20.0%   447    447 
           $6,339   $5,911 

 

(1) Interest rate per annum, based upon actual days outstanding and a 365/366-day year.
   
(2) Due six months after lender gives notice.
   
(3) Lender may require us to repay $20 of principal and all unpaid interest with 10 days’ notice.
   
(4) These notes were issued to the same holder and, when calculated together, yield a blended return of 11% per annum.
   
(5) These notes were issued to the same holder and, when calculated together, yield a blended return of 10% per annum.

 

30
 

  

Redeemable Preferred Equity and Members’ Capital

 

We strive to maintain a reasonable (about 15%) balance between (1) redeemable preferred equity plus members’ capital and (2) total assets. The ratio of redeemable preferred equity plus members’ capital to loan assets was 11% as of March 31, 2021 and December 31, 2020. We anticipate this ratio to decrease until more preferred equity is added.

 

Priority of Borrowings

 

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

 

   Priority
Rank
   March 31, 2021   December 31, 2020 
Borrowing Source               
Purchase and sale agreements and other secured borrowings   1   $19,950   $22,968 
Secured line of credit from affiliates   2         
Unsecured line of credit (senior)   3    500    500 
PPP loan and EIDL advance   3    361    10 
Other unsecured debt (senior subordinated)   4    1,782    1,800 
Unsecured Notes through our public offering, gross   5    22,082    21,482 
Other unsecured debt (subordinated)   5    3,193    2,747 
Other unsecured debt (junior subordinated)   6    864    864 
                
Total       $48,732   $50,371 

 

Liquidity and Capital Resources

 

Our primary liquidity management objective is to meet expected cash flow needs while continuing to service our business and customers. We had 221 and 222 combined loans outstanding as of March 31, 2021 and December 31, 2020, respectively. Gross loans receivable totaled $49,320 and $50,449 as of March 31, 2021 and December 31, 2020, respectively. Our unfunded commitments to extend credit, which have similar collateral, credit and market risk to our outstanding loans, were $19,986 and $19,495 as March 31, 2021 and December 31, 2020, respectively.

 

We anticipate an increase in our gross loan receivables over the 12 months subsequent to March 31, 2021 by directly increasing originations to new and existing customers. In addition, business competition has declined and, therefore, we believe the ability to return to historical levels may be achieved through the remainder of the year.

 

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

 

Source of Liquidity  

As of

March 31, 2021

   

As of

December 31, 2020

 
Secured debt   $ 19,941     $ 22,959  
Unsecured debt     28,012       26,978  
Equity     5,269       5,259  

 

Secured debt, net of deferred financing costs decreased $3,018 during the three months ended March 31, 2021. We anticipate increasing our secured debt by roughly half of the increase in loan asset balances over the 12 months subsequent to March 31, 2021 through our existing loan purchase and sale agreements and additional lines of credit.

 

31
 

 

We anticipate that the other half of the loan asset growth will come from a combination of increases in our unsecured debt and equity. Unsecured debt, net of deferred financing costs increased $1,034 during the three months ended March 31, 2021 due primarily to an increased participation in our Notes Program of $607 and other unsecured debts of $428. We anticipate an increase in our unsecured debt through increased sales in the Notes Program to cover most of the increase in loan assets not covered by increases in our secured debt during the 12 months subsequent to March 31, 2021.

 

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

 

Contractual Obligations

 

The following table shows the maturity of outstanding debt as of March 31, 2021:

 

Year Maturing  Total Amount Maturing   Public Offering   Other Unsecured   Secured Borrowings 
2021  $30,756   $10,012   $1,646   $19,098 
2022   5,899    3,960    1,923    16 
2023   3,211    2,103    1,029    79 
2024   7,044    4,815    2,087    142 
2025 and thereafter   1,822    1,192    15    615 
Total  $48,732   $22,082   $6,700   $19,950 

 

The total amount maturing through year ending December 31, 2021 is $30,756, which consists of secured borrowings of $19,098 and unsecured borrowings of $11,658.

 

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

 

  Swanson – $6,254 due October 2022, will automatically renew unless notice is given;
  Shuman – $1,325 due July 2021, will automatically renew unless notice is given;
  S. K. Funding, LLC – $3,500 of the total due January 2022, will automatically renew unless notice is given;
  S. K. Funding, LLC – $334 no expiration date;
  Builder Finance, Inc. – $5,114 no expiration date;
  New LOC Agreements – $1,997 generally one-month notice and six months to reduce principal balance to zero; and
  Mortgage payable – $4 due monthly.

 

Unsecured borrowings due by December 31, 2021 consist of Notes issued pursuant to the Notes Program and other unsecured debt of $10,012 and $1,646, respectively. To the extent that proceeds from 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 81% of our Note holders reinvest upon maturity. Our other unsecured debt has historically renewed. For more information on other unsecured borrowings, see Note 6 – Borrowings. If other unsecured borrowings are not renewed in the future, we anticipate funding such maturities through investments in our Notes Program.

 

Series C cumulative preferred units (“Series C Preferred Units”) are redeemable by the Company at any time, upon a change of control or liquidation, or by the investor any time after 6 years from the initial date of purchase. The following table shows the earliest redemption options for investors in our Series C Preferred Units as of March 31, 2021:

 

Year Maturing  Total Amount
Redeemable
 
     
2024  $3,001 
2025   368 
2026   309 
2027   305 
      
Total  $3,983 

 

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Summary

 

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

 

Inflation, Interest Rates, and Housing Starts

 

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

 

Housing inflation has a positive impact on our operations. When we lend initially, we are lending a percentage of a home’s expected value, based on historical sales. If those estimates prove to be low (in an inflationary market), the percentage we loaned of the value actually decreases, reducing potential losses on defaulted loans. The opposite is true in a deflationary housing price market. It is our opinion that values are somewhat above average in many of the housing markets in the U.S. today, and our lending against these values is safer than loans made by financial institutions in 2006 to 2008. Our analysis of the COVID-19 impact on housing in the markets in which we do business is mixed. In many markets, our customers see demand as outpacing new housing starts. In some markets, few houses are selling due to governmental restrictions on realtors. In Orlando, Florida, we anticipate some significant lack of demand for customers who sell more affordable homes, which is likely to lead to reductions in selling prices. We note that nationwide, fewer first-time home buyers will qualify for government backed loans due to FICO score and other criteria changes.

 

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

 

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

 

 

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Source: U.S. Census Bureau

 

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

 

Off-Balance Sheet Arrangements

 

As of March 31, 2021 and December 31, 2020, other than unfunded loan commitments, we had no off-balance sheet transactions, nor do we currently have any such arrangements or obligations.

 

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 CEO (our principal executive officer) and CFO (our principal 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 CEO (our principal executive officer) and CFO (our principal 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 March 31, 2021 that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.

 

PART II - OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

 

None.

 

ITEM 1A. RISK FACTORS

 

Not applicable.

 

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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 as of March 31, 2021:

 

Owner   Units     Amount  
Daniel M. and Joyce S. Wallach     0.4852416     $ 48,524.16  
Gregory L. Sheldon and Madeline M. Sheldon     0.1151166       11,511.66  
BLDR, LLC     0.1569902       15,699.02  
Schultz Family Living Trust     0.0390533       3,905.33  
Fernando Ascencio and Lorraine Carol Ascencio     0.0730688       7,306.88  
Total     0.8694705     $ 86,947.05  

 

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

 

  (b) We registered up to $70,000,000 in Fixed Rate Subordinated Notes (“Notes”) in our current public offering, which is our third public offering of Notes (SEC File No. 333-224557, effective March 22, 2019). As of March 31, 2021, we had issued $24,456 in Notes pursuant to our current public offering. As of March 31, 2021, we incurred expenses of $535 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 March 31, 2021 were $23,921, 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 March 31, 2021, 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 March 31, 2021, there were no material changes to the procedures by which members may recommend nominees to our board of managers.

 

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 March 31, 2021 (and are numbered in accordance with Item 601 of Regulation S-K).

 

Exhibit

No.

 

 

Name of Exhibit
3.1   Certificate of Conversion, incorporated by reference to Exhibit 3.1 to the Registrant’s Registration Statement on Form S-1, filed on May 11, 2012, Commission File No. 333-181360
     
3.2   Certificate of Formation, incorporated by reference to Exhibit 3.2 to the Registrant’s Registration Statement on Form S-1, filed on May 11, 2012, Commission File No. 333-181360
     
3.3   Second Amended and Restated Limited Liability Company Agreement of the Registrant, incorporated by reference to Exhibit 3.1 to the Registrant’s Form 8-K, filed on November 13, 2017, Commission File No. 333-203707
     
3.4   Amendment No. 1 to Second Amended and Restated Limited Liability Company Agreement of the Registrant, incorporated by reference to Exhibit 3.4 to the Registrant’s Quarterly Report on Form 10-Q, filed May 9, 2019, Commission File No. 333-203707
     
3.5   Amendment No. 2 to Second Amended and Restated Limited Liability Company Agreement of the Registrant, incorporated by reference to Exhibit 3.1 to the Registrant’s Current Report on Form 8-K, filed March 31, 2020, Commission File No. 333-224557
     
4.1   Indenture Agreement (including Form of Note) dated March 22, 2019, incorporated by reference to Exhibit 4.1 to the Registrant’s Post-Effective Amendment No. 1, filed on March 22, 2019, Commission File No. 333-224557
     
4.2   Amendment No. 1 to Indenture Agreement (including Form of Note) dated February 4, 2020, incorporated by reference to Exhibit 4.1 to the Registrant’s Post-Effective Amendment No. 4, filed on February 4, 2020, Commission File No. 333-224557
     
10.1   Loan Agreement dated February 5, 2021 by and between the Registrant and LCA Bank Corporation, incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K, filed on February 11, 2021, Commission File No. 333-224557
     
10.2   Promissory Note dated February 5, 2021 from the Registrant in favor of LCA Bank Corporation, incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K, filed on February 11, 2021, Commission File No. 333-224557
     
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**   XBRL Instance Document
     
101.SCH**   XBRL Schema Document
     
101.CAL**   XBRL Calculation Linkbase Document
     
101.DEF**   XBRL Definition Linkbase Document
     
101.LAB**   XBRL Labels Linkbase Document
     
101.PRE**   XBRL Presentation Linkbase Document

 

* Filed herewith.

 

** Pursuant to Regulation 406T of Regulation S-T, these Interactive Data Files are deemed not filed or part of a registration statement or prospectus for purpose of Section 11 or 12 of the Securities Act of 1933, as amended, or Section 18 of the Securities Exchange Act of 1934, as amended, and are otherwise not subject to liability.

 

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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: May 10, 2021 By: /s/ Catherine Loftin
    Catherine Loftin
    Chief Financial Officer

 

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