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 June 30, ~~2017~~2018

[ ]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 333-203707

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.)

~~12627 San Jose~~13241 Bartram Park Blvd., Suite ~~203,~~2401, Jacksonville, ~~FL 32223~~Florida 32258

(Address of principal executive offices)

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

(Registrant’s telephone number including area code)

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 and posted on its corporate ~~Web site,~~website, if any, every Interactive Data File required to be submitted and posted 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 and post 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	[ ]	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. [ ]

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

~~Item 1. Financial Statements~~	4

Item 1. Financial Statements	4

Interim Condensed Consolidated Balance Sheets as of June 30, ~~2017~~2018 (Unaudited) and December 31, ~~2016~~2017	4

Interim Condensed Consolidated Statements of Operations (Unaudited) for the Three Months and Six Months Ended June 30, ~~2017~~2018 and ~~2016~~2017	5

Interim Condensed Consolidated Statement of Changes in Members’ Capital (Unaudited) for the Six Months Ended June 30, ~~2017~~2018	6

Interim Condensed Consolidated Statements of Cash Flows (Unaudited) for the Six Months Ended June 30, ~~2017~~2018 and ~~2016~~2017	7

Notes to Interim Condensed Consolidated Financial Statements (Unaudited)	8

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	2219

Item 3. Quantitative and Qualitative Disclosure About Market Risk	4038

Item 4. Controls and Procedures	4038

PART II. OTHER INFORMATION	39

Item 1. Legal Proceedings	4139

Item 1A. Risk Factors	4139

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	4139

Item 3. Defaults upon Senior Securities	4140

Item 4. Mine Safety Disclosures	4140

Item 5. Other Information	4140

Item 6. Exhibits	4140

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. 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 Annual Report on Form 10-K for the year ended December 31, ~~2016,~~2017, as filed with the Securities and Exchange Commission. If any of the events described in “Risk Factors” occur, they could have an adverse effect on our business, consolidated financial condition, results of operations, and cash flows.

When considering forward-looking statements, you should keep these risk factors, as well as the other cautionary statements in this report and in our ~~2016~~2017 Form 10-K in mind. You should not place undue reliance on any forward-looking statement. We are not obligated to update forward-looking statements.

PART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

Shepherd’s Finance, LLC

Interim Condensed Consolidated Balance Sheets

	As of				As of
(in thousands of dollars)	June 30, 2017		December 31, 2016		June 30, 2018		December 31, 2017
	(Unaudited)				(Unaudited)
Assets
Cash and cash equivalents	$	88	$	1,566	$	247	$	3,478
Accrued interest receivable		354		280		653		720
Loans receivable, net		28,972		20,091		41,819		30,043
Foreclosed assets		1,095		2,798		5,636		1,036
Property, plant and equipment		652		69
Property, plant and equipment, net						1,045		1,020
Other assets		84		82		176		58

Total assets	$	31,245	$	24,886	$	49,576	$	36,355

Liabilities, Redeemable Preferred Equity and Members’ Capital

Liabilities

Customer interest escrow	$	829	$	812	$	544	$	935
Accounts payable and accrued expenses		434		377		482		705
Accrued interest payable		968		986		1,654		1,353
Notes payable secured		8,820		7,322
Notes payable secured, net of deferred financing costs						21,058		11,644
Notes payable unsecured, net of deferred financing costs		15,574		11,962		20,769		16,904
Due to preferred equity member		29		28		31		31

Total liabilities		26,654		21,487		44,538		31,572

Commitments and Contingencies (Notes 3 and 10)
Commitments and Contingencies (Notes 3 and 9)

Redeemable Preferred Equity

Series C preferred equity		1,033		–		1,165		1,097

Members’ Capital

Series B preferred equity		1,160		1,150		1,280		1,240
Class A common equity		2,398		2,249		2,593		2,446
Members’ capital		3,558		3,399		3,873		3,686

Total liabilities, redeemable preferred equity and members’ capital	$	31,245	$	24,886	$	49,576	$	36,355

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

Shepherd’s Finance, LLC

Interim Condensed Consolidated Statements of Operations - Unaudited

For the Three and Six Months ended June 30, ~~2017~~2018 and ~~2016~~2017

	Three Months Ended					Six Months Ended				Three Months Ended				Six Months Ended
	June 30,					June 30,				June 30,				June 30,
(in thousands of dollars)	2017		2016			2017		2016		2018		2017		2018		2017
Interest Income
Interest and fee income on loans	$	1,356	$	898		$	2,530	$	1,747	$	2,045	$	1,356	$	3,872	$	2,530
Interest expense:
Interest related to secured borrowings		215		144			394		261		517		215		928		394
Interest related to unsecured borrowings		401		292			768		537		513		401		963		768
Interest expense		616		436			1,162		798		1,030		616		1,891		1,162

Net interest income		740		462			1,368		949		1,015		740		1,981		1,368
Less: Loan loss provision		15		(2	)		26		6		19		15		59		26

Net interest income after loan loss provision		725		464			1,342		943		996		725		1,922		1,342

Non-Interest Income
Gain from foreclosure of assets		–		44			–		44
Gain from sale of foreclosed assets		–		–			77		–		–		–		–		77

Total non-interest income		–		44			77		44		–		–		–		77

Income		725		508			1,419		987		996		725		1,922		1,419

Non-Interest Expense
Selling, general and administrative		456		305			910		655		691		450		1,308		898
Depreciation and amortization											21		6		38		12
Impairment loss on foreclosed assets		106		–			155		–		80		106		85		155

Total non-interest expense		562		305			1,065		655		792		562		1,431		1,065

Net Income	$	163	$	203		$	354	$	332	$	204		163	$	491	$	354

Earned distribution to preferred equity holders		57		26			88		52		67		57		130		88

Net income attributable to common equity holders	$	106	$	177		$	266	$	280	$	137		106	$	361	$	266

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

Shepherd’s Finance, LLC

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

For the Six Months Ended June 30, 2018

(in thousands of dollars)	Six Months Ended June 30, 2018

Members’ capital, beginning balance	$	3,686
Net income		491
Contributions from members (preferred)		40
Earned distributions to preferred equity holders		(130	)
Distributions to common equity holders		(214	)
Members’ capital, ending balance	$	3,873

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

Shepherd’s Finance, LLC

Interim Condensed Consolidated Statements of Cash Flows - Unaudited

For the Six Months Ended June 30, 2018 and 2017

				Six Months Ended June 30,
(in thousands of dollars)	Six Months Ended June 30, 2017			2018			2017

Members’ capital, beginning balance	$	3,399
Cash flows from operations
Net income		354		$	491		$	354
Adjustments to reconcile net income to net cash provided by (used in) operating activities
Amortization of deferred financing costs					95			121
Provision for loan losses					59			26
Net loan origination fees deferred (earned)					351			254
Change in deferred origination expense					(87	)		(71	)
Impairment of foreclosed assets					85			155
Depreciation and amortization					38			12
Gain from sale of foreclosed assets					-			(77	)
Net change in operating assets and liabilities
Other assets					(118	)		10
Accrued interest receivable					(176	)		(74	)
Customer interest escrow					(391	)		17
Accounts payable and accrued expenses					78			39

Net cash provided by (used in) operating activities					425			742

Cash flows from investing activities
Loan originations and principal collections, net					(15,996	)		(9,090	)
Investment in foreclosed assets					(545	)		(265	)
Proceeds from sale of foreclosed assets					-			1,890
Property plant and equipment additions					(63	)		(583	)

Net cash provided by (used in) investing activities					(16,564	)		(8,048	)

Cash flows from financing activities
Contributions from redeemable preferred equity					-			1,004
Contributions from members (preferred)		10			40			10
Earned distributions to preferred equity holders		(88	)
Distributions to preferred equity holders					(62	)		(58	)
Distributions to common equity holders		(117	)		(214	)		(117	)
Members’ capital, ending balance	$	3,558
Proceeds from secured note payable					13,538			5,775
Repayments of secured note payable					(4,118	)		(4,277	)
Proceeds from unsecured notes payable					8,784			9,218
Redemptions/repayments of unsecured notes payable					(4,953	)		(5,687	)
Deferred financing costs paid					(67	)		(40	)

Net cash provided by (used in) financing activities					12,948			5,828

Net increase (decrease) in cash and cash equivalents					(3,231	)		(1,478	)

Cash and cash equivalents
Beginning of period					3,478			1,566
End of period				$	247		$	88

Supplemental disclosure of cash flow information
Cash paid for interest				$	1,533		$	1,062

Non-cash investing and financing activities
Earned but not paid distribution of preferred equity holders				$	68		$	29
Foreclosure of assets				$	3,897		$	–
Accrued interest reduction due to foreclosure				$	243		$	–

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

~~Shepherd’s Finance, LLC~~

~~Interim Condensed Consolidated Statements of Cash Flows - Unaudited~~

~~For the Six Months Ended June 30, 2017 and 2016~~

Six Months Ended
June 30,

(in thousands of dollars) 2017 2016

Cash flows from operations
Net income $ 354 $ 332
Adjustments to reconcile net income to net cash provided by (used in) operating activities
Amortization of deferred financing costs 121 134
Provision for loan losses 26 6
Net loan origination fees deferred (earned) 254 (93 )
Change in deferred origination expense (71 ) (30 )
Impairment of foreclosed assets 155 –
Gain from foreclosure of assets – (44 )
Gain from sale of foreclosed assets (77 ) –
Net change in operating assets and liabilities
Other assets (2 ) (110 )
Accrued interest receivable (74 ) (278 )
Customer interest escrow 17 (80 )
Accounts payable and accrued expenses 39 461

Net cash provided by (used in) operating activities 742 298

Cash flows from investing activities
Loan originations and principal collections, net (9,090 ) (4,057 )
Investment in foreclosed assets (265 ) (375 )
Proceeds from sale of foreclosed assets 1,890 –
Property plant and equipment additions (583 ) –

Net cash provided by (used in) investing activities (8,048 ) (4,432 )

Cash flows from financing activities
Contributions from redeemable preferred equity 1,004 –
Contributions from members (preferred) 10 50
Distributions to preferred equity holders (58 ) (51 )
Distributions to common equity holders (117 ) (235 )
Proceeds from secured note payable 5,775 5,023
Repayments of secured note payable (4,277 ) (3,230 )
Proceeds from unsecured notes payable 9,218 2,355
Redemptions/repayments of unsecured notes payable (5,687 ) (59 )
Deferred financing costs paid (40 ) (28 )

Net cash provided by (used in) financing activities 5,828 3,825

Net increase (decrease) in cash and cash equivalents (1,478 ) (309 )

Cash and cash equivalents
Beginning of period 1,566 1,341
End of period $ 88 $ 1,032

Supplemental disclosure of cash flow information
Cash paid for interest $ 1,062 $ 378

Non-cash investing and financing activities
Earned but not paid distribution of preferred equity holders $ 29 $ 26
Foreclosure of assets $ – $ 1,813
Accrued interest reduction due to foreclosure $ – $ 130
Net loan origination fees (earned) due to foreclosure $ – $ (55 )

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

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

~~Description of Business~~

Shepherd’s Finance, LLC and subsidiary (the “Company”~~, “we”, or “our”~~) was originally formed as a Pennsylvania limited liability company on May 10, 2007. ~~We are the~~The Company is a sole member of a consolidating subsidiary, 84 REPA, LLC. The Company ~~operated~~operates pursuant to ~~an operating agreement~~its Second Amended and Restated Operating Agreement by and among Daniel M. Wallach and the other members of the Company ~~from its inception through~~effective as of March ~~29, 2012, at which time it adopted an amended and restated operating agreement.~~16, 2017.

~~The~~As of June 30, 2018, the Company ~~lends money~~extends commercial loans to residential homebuilders to construct single family homes, to develop undeveloped land into residential building lots, and to purchase and improve for sale older homes. The loans are extended to residential homebuilders and, as such, are commercial loans. We lend in 16 states as of June 30, 2017.(in 17 states) to:

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

Basis of Presentation

The accompanying (a) interim condensed consolidated balance sheet as of December 31, ~~2016 ,~~2017, which has been derived from audited consolidated financial statements, and (b) unaudited interim condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X. 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, ~~2017.~~2018. These unaudited interim condensed consolidated financial statements should be read in conjunction with the ~~2016~~2017 consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K as of and for the year ended December 31, ~~2016~~2017 (the ~~“2016~~“2017 Statements”). The accounting policies followed by the Company are set forth in Note 2 -–Summary of Significant Accounting Policies in the 2017 Statements.

Accounting Standards Adopted in the Period

Accounting Standards Update (“~~Note 2”~~ASU”) 2016-01, “Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities (An Amendment of FASB ASC 825).” The Financial Accounting Standards Board (“FASB”) issued ASU 2016-01 in January 2016, and it was intended to enhance the reporting model for financial instruments to provide users of financial statements with improved decision-making information. The amendments of ASU 2016-01 include: (i) requiring equity investments, except those accounted for under the equity method of accounting or those that result in the consolidation of an investee, to be measured at fair value, with changes in fair value recognized in net income; (ii) requiring a qualitative assessment to identify impairment of equity investments without readily determinable fair values; and (iii) clarifying that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity’s other deferred tax assets.

ASU 2016-01 became effective for the Company on January 1, 2018. The adoption of ASU 2016-01 did not have a material impact on the Company’s consolidated financial statements.

ASU 2014-09, “Revenue from Contracts with Customers (Topic 606).” Issued in May 2014, ASU 2014-09 added FASB Accounting Standards Codification (“ASC”) Topic 606, “Revenue from Contracts with Customers,” and superseded revenue recognition requirements in FASB ASC Topic 605, “Revenue Recognition,” and certain cost guidance in FASB ASC Topic 605-35, “Revenue Recognition – Construction-Type and Production-Type Contracts.” ASU 2014-09 requires an entity to recognize revenue when (or as) an entity transfers control of goods or services to a customer at the amount to which the entity expects to be entitled. Depending on whether certain criteria are met, revenue should be recognized either over time, in a manner that depicts the entity’s performance, or at a point in time, when control of the ~~notes~~goods or services is transferred to the ~~2016 Statements.~~customer. ASU 2014-09 became effective for the Company on January 1, 2018. The adoption of ASU 2014-09 did not have a material impact on the Company’s consolidated financial statements.

Revenue

On January 1, 2018, the Company implemented ASU 2014-09, codified at ASC Topic 606. The Company adopted ASC Topic 606 using the modified retrospective transition method. As of December 31, 2017, the Company had no uncompleted customer contracts and, as a result, no cumulative transition adjustment was made during the first quarter of 2018. Results for reporting periods beginning January 1, 2018 are presented under ASC Topic 606, while prior period amounts continue to be reported under legacy U.S. GAAP.

The majority of the Company’s revenue is generated through interest earned on financial instruments, including loans, which falls outside the scope of ASC Topic 606. All of the Company’s revenue that is subject to ASC Topic 606 would be included in non-interest income; however, not all non-interest income is subject to ASC Topic 606. The Company had no contract liabilities or unsatisfied performance obligations with customers as of June 30, 2018.

Reclassifications

Certain prior year amounts have been reclassified for consistency with current period presentation.

2. Fair Value

Utilizing Financial Accounting Standards Board Accounting Standards Codification (“FASB ASC”) 820, the Company has established a framework for measuring fair value under U.S. GAAP using a hierarchy, which requires the Company to maximize the use of observable inputs and minimize the use of unobservable inputs. 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. Three levels of inputs are used to measure fair value, as follows:

	~~Level 1 –~~	~~quoted prices in active markets for identical assets or liabilities;~~

	~~Level 2 –~~	~~Significant other observable inputs for the assets or liabilities~~

	~~Level 3 –~~	~~Significant unobservable inputs.~~

~~A financial instrument’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement.~~

~~Fair Value Measurements of Non-Financial Instruments on a Recurring Basis~~

~~At June 30, 2017 and December 31, 2016, the~~The Company had no ~~non-financial~~financial instruments measured at fair value on a recurring ~~basis.~~

~~Fair Value Measurements~~basis as of ~~Non-Financial Instruments on a Non-Recurring Basis~~

~~Foreclosed Assets~~

Foreclosed assets consist of properties obtained through foreclosure or in satisfaction of loans and is recorded at the fair value of the property, less estimated costs to sell. Estimates of fair value are generally based on third-party appraisals of the property and are classified within Level 3 of the fair value hierarchy. The appraisals are sometimes discounted based on management’s knowledge of the property and/or changes in market conditions from the date of the most recent appraisal. Such discounts are typically significant unobservable inputs for determining fair value.

~~Impaired Loans~~

At June 30, ~~2017, the Company had impaired loans,~~2018 and on December 31, ~~2016, it had none.~~2017.

A loan is considered to be impaired when it is probable the Company will be unable to collect all principal and interest payments due in accordance with the contractual terms of the loan agreement. The analysis of impaired loans includes a comparison of estimated collateral value to the principal amount of the loan. If the value determined is less than the principal amount due (less any builder deposit), then the difference is included in the allowance for loan loss. As values change, estimated loan losses may be provided for more or less than the previous period. For homes which are partially complete, we appraise on an as-is and completed basis, and use the one that more closely aligns with our planned method of disposal for the property. For loans that are individually evaluated for impairment, appraisals have been prepared within the last 13 months. There are also broker’s opinions of value (“BOV”) prepared, if the appraisal is more than six months old. The lower of any BOV prepared in the last six months, or appraisal done in the last 13 months, is used, unless we determine a BOV to be invalid based on the comparable sales used. If we determine a BOV to be invalid, we will use the appraised value. Appraised values are adjusted down for estimated costs associated with asset disposal, generally between 0% and 5%, depending on the type of collateral. Fair value estimates for impaired loans are classified as Level 3.

The following tables present the balances of non-financial instruments measured at fair value on a non-recurring basis as of June 30, ~~2017~~2018 and December 31, ~~2016.~~2017.

June 30, ~~2017~~2018

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

Foreclosed assets $ 1,095 $ 1,095 $ – $ – $ 1,095
Impaired loans $ 1,980 $ 1,980 $ – $ – $ 1,980

Carrying

Estimated

Quoted Prices

in Active

Markets for

Identical

Assets

Significant

Other

Observable

Inputs

Significant

Unobservable

Inputs

Amount

Fair Value

Level 1

Level 2

Level 3

Foreclosed assets

5,636

–

5,636

December 31, ~~2016~~2017

Quoted Prices

in Active

Significant

Markets for

Other

Significant

Identical

Observable

Unobservable

Carrying

Estimated

Assets

Inputs

Amount

Fair Value

Level 1

Level 2

Level 3

Foreclosed assets

1,036

–

1,036

~~Fair Value of Financial Instruments~~

~~ASC 825 requires disclosure~~The Company had no impaired loans as of fair value information about financial instruments, whether or not recognized on the face of the balance sheet, for which it is practicable to estimate that value. The following methods and assumptions were used by the Company in estimating the fair value of its financial instruments:

~~Cash and Cash Equivalents~~

~~The carrying amount approximates fair value because of the short maturity of these instruments.~~

~~Loans Receivable and Commitments to Extend Credit~~

~~For variable rate loans that reprice frequently with no significant change in credit risk, estimated fair values are based on carrying values at both~~ June 30, ~~2017~~2018 and December 31, 2016. Because the loans are demand loans and therefore have no known time horizon, there is no significant impact from fluctuating interest rates. For unfunded commitments to extend credit, because there would be no adjustment between fair value and carrying amount for the amount if actually loaned, there is no adjustment to the amount before it is loaned. The amount for commitments to extend credit is not listed in the tables below because there is no difference between carrying value and fair value, and the amount is not recorded on the consolidated balance sheets as a liability.

2017.

~~Interest Receivable~~

~~The fair value approximates the carrying value at both June 30, 2017 and December 31, 2016.~~

~~Customer Interest Escrow~~

~~The fair value of the customer interest escrow approximates the carrying value at both June 30, 2017 and December 31, 2016.~~

~~Borrowings under Credit Facilities~~

The fair value of the Company’s borrowings under credit facilities is estimated based on the expected cash flows discounted using the current rates offered to the Company for debt of the same remaining maturities. As all of the borrowings under credit facilities or the Fixed Rate Subordinated Notes issued pursuant to our public offering (the “Notes”) are either payable on demand or at similar rates to what the Company can borrow funds for today, the fair value of the borrowings is determined to approximate carrying value at both June 30, 2017 and December 31, 2016. The interest on our Notes offering is paid to our Note holders either monthly or at the end of their investment, compounded on a monthly basis. For the same reasons as the determination for the principal balances on the Notes, the fair value approximates the carrying value for the interest as well. The interest payable makes up the bulk of our accounts payable and accrued expenses.

The table below is a summary of fair value estimates for financial instruments and the level of the fair value hierarchy ~~(as discussed in Note 2)~~ within which the fair value measurements are categorized at the periods indicated:

June 30, ~~2017~~2018

					Quoted Prices										Quoted Prices
					in Active		Significant								in Active		Significant
					Markets for		Other		Significant						Markets for		Other		Significant
					Identical		Observable		Unobservable						Identical		Observable		Unobservable
	Carrying		Estimated		Assets		Inputs		Inputs		Carrying		Estimated		Assets		Inputs		Inputs
	Amount		Fair Value		Level 1		Level 2		Level 3		Amount		Fair Value		Level 1		Level 2		Level 3
Financial Assets
Financial Assets:
Cash and cash equivalents	$	88	$	88	$	88	$	–	$	–	$	247	$	247	$	247	$	–	$	–
Loans receivable, net		28,972		28,972		–		–		28,972		41,819		41,819		–		–		41,819
Accrued interest receivable		354		354		–		–		354		653		653		–		–		653
Financial Liabilities
Financial Liabilities:
Customer interest escrow		829		829		–		–		829		544		544		–		–		544
Notes payable secured		8,820		8,820		–		–		8,820		21,058		21,058		–		–		21,058
Notes payable unsecured, net		15,574		15,574		–		–		15,574		20,769		20,769		–		–		20,769
Accrued interest payable		996		996		–		–		996		1,654		1,654		–		–		1,654

December 31, ~~2016~~2017

					Quoted Prices										Quoted Prices
					in Active		Significant								in Active		Significant
					Markets for		Other		Significant						Markets for		Other		Significant
					Identical		Observable		Unobservable						Identical		Observable		Unobservable
	Carrying		Estimated		Assets		Inputs		Inputs		Carrying		Estimated		Assets		Inputs		Inputs
	Amount		Fair Value		Level 1		Level 2		Level 3		Amount		Fair Value		Level 1		Level 2		Level 3
Financial Assets
Financial Assets:
Cash and cash equivalents	$	1,566	$	1,566	$	1,566	$	–	$	–	$	3,478	$	3,478	$	3,478	$	–	$	–
Loans receivable, net		20,091		20,091		–		–		20,091		30,043		30,043		–		–		30,043
Accrued interest receivable		280		280		–		–		280		720		720		–		–		720
Financial Liabilities
Financial Liabilities:
Customer interest escrow		812		812		–		–		812		935		935		–		–		935
Notes payable secured		7,322		7,322		–		–		7,322		11,644		11,644		–		–		11,644
Notes payable unsecured, net		11,962		11,962		–		–		11,962		16,904		16,904		–		–		16,904
Accrued interest payable		993		993		–		–		993		1,353		1,353		–		–		1,353

3. Financing Receivables

Financing receivables are comprised of the following as of June 30, ~~2017~~2018 and December 31, ~~2016:~~2017:

June 30, 2017
December 31, 2016

Loans receivable, gross $ 31,421 $ 21,569
Less: Deferred loan fees (872 ) (618 )
Less: Deposits (1,623 ) (861 )
Plus: Deferred origination expense 126 55
Less: Allowance for loan losses (80 ) (54 )

Loans receivable, net $ 28,972 $ 20,091

~~Roll forward of loans receivable, net:~~

Six Months
Ended
June 30, 2017

Year
Ended
December 31, 2016

Six Months
Ended
June 30, 2016

Beginning balance $ 20,091 $ 14,060 $ 14,060
Additions 16,081 23,184 10,692
Payoffs/sales (6,229 ) (15,168 ) (6,594 )
Moved to foreclosed assets – (1,639 ) (1,639 )
Change in deferred origination expense 71 55 30
Change in builder deposit (762 ) (340 ) (41 )
Change in loan loss provision (26 ) (16 ) (6 )
New loan fees (1,153 ) (1,270 ) (540 )
Earned loan fees 899 1,225 633

Ending balance $ 28,972 $ 20,091 $ 16,595

	June 30, 2018			December 31, 2017

Loans receivable, gross	$	44,803		$	32,375
Less: Deferred loan fees		(1,197	)		(847	)
Less: Deposits		(1,827	)		(1,497	)
Plus: Deferred origination expense		196			109
Less: Allowance for loan losses		(156	)		(97	)

Loans receivable, net	$	41,819		$	30,043

Commercial Construction and Development Loans

~~Pennsylvania Loans~~

We have three development loans (the “Pennsylvania Loans”) covering two developments. The loans are to the same borrowing group (the “Hoskins Group”). They are cross-defaulted and cross-collateralized with each other. Our total commitment amount under the Pennsylvania Loans is approximately $5,231 as of June 30, 2017, as described in more detail below. As such, we are currently reliant on a single developer and homebuilder for a significant portion of our revenues. As part of our agreement with the Hoskins Group, they invest in our preferred equity in an amount equal to $10 per closing of a lot payoff in the two developments.

The loans are secured by several first priority mortgages in residential building lots located in the subdivisions commonly known as the Hamlets of Springdale and the Tuscany Subdivision, both in Peters Township, Pennsylvania, a suburb of Pittsburgh, as well as the Interest Escrow.

~~Commercial Loans – Real Estate Development Loan Portfolio Summary~~

~~The following is a summary of our loan portfolio to builders for land development as of June 30, 2017. The Pennsylvania loans below are the Pennsylvania Loans discussed above.~~

State Number of Borrowers Number of Loans Value of Collateral⁽¹⁾ Commitment Amount
Gross Amount
Outstanding

Loan to Value
Ratio⁽²⁾
Loan Fee
Pennsylvania 1 3 $ 6,298 $ 5,231 ⁽³⁾ $ 4,050 64 % $ 1,000
Total 1 3 $ 6,298 $ 5,231 $ 4,050 64 % $ 1,000

⁽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 $1,160 of preferred equity in our Company. In the event of a foreclosure on the property securing certain of our loans, a portion of our collateral is preferred equity in our Company, which might be difficult to sell, which could impact our ability to eliminate the loan balance.

⁽²⁾	~~The loan to value ratio is calculated by taking the outstanding amount and dividing by the appraised value.~~

⁽³⁾	The commitment amount does not include letters of credit and cash bonds, as the sum of the total balance outstanding including the cash bonds plus the letters of credit and remaining to fund for construction is less than the $5,231 commitment amount.

~~The following is a summary of our loan portfolio to builders for land development as of December 31, 2016. The Pennsylvania loans below are the Pennsylvania Loans discussed above.~~

State Number of Borrowers Number of Loans Value of Collateral⁽¹⁾ Commitment Amount
Gross Amount
Outstanding

Loan to Value
Ratio⁽²⁾
Loan Fee
Pennsylvania 1 3 $ 6,586 $ 5,931 ⁽³⁾ $ 4,082 62 % $ 1,000
Total 1 3 $ 6,586 $ 5,931 $ 4,082 62 % $ 1,000

⁽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 $1,150 of preferred equity in our Company. In the event of a foreclosure on the property securing certain of our loans, a portion of our collateral is preferred equity in our Company, which might be difficult to sell, which could impact our ability to eliminate the loan balance.

⁽²⁾	~~The loan to value ratio is calculated by taking the outstanding amount and dividing by the appraised value.~~

⁽³⁾	The commitment amount does not include letters of credit and cash bonds, as the sum of the total balance outstanding including the cash bonds plus the letters of credit and remaining to fund for construction is less than the $5,931 commitment amount.

Commercial Loans – Construction Loan Portfolio Summary

As of June 30, ~~2017, we have 49 other~~2018, the Company has 68 borrowers, all of whom, ~~along with~~including four development loan customers (the “Hoskins Group,” consisting of Benjamin Marcus Homes, LLC, Investor’s Mark Acquisitions, LLC, and Mark Hoskins, being the ~~Hoskins Group,~~largest of the four), borrow money for the purpose of building new homes.

The following is a summary of ~~our~~the loan portfolio to builders for home construction loans as of June 30, ~~2017.~~2018 and December 31, 2017:

State Number of Borrowers Number of Loans Value of Collateral⁽¹⁾ Commitment Amount
Gross
Amount
Outstanding

Loan to Value
Ratio⁽²⁾
Loan Fee
Colorado 3 6 $ 3,113 $ 2,092 $ 1,082 67 % 5 %
Connecticut 1 1 715 500 500 70 % 5 %
Delaware 1 1 244 171 115 70 % 5 %
Florida 11 42 21,930 13,904 8,110 63 % 5 %
Georgia 9 22 13,958 8,405 4,991 60 % 5 %
Indiana 2 2 995 597 178 60 % 5 %
Michigan 3 13 3,254 2,065 1,139 63 % 5 %
New Jersey 3 8 2,361 1,652 1,098 70 % 5 %
New York 1 7 2,160 1,064 984 49 % 5 %
North Carolina 2 7 1,740 1,218 543 70 % 5 %
Ohio 2 2 2,116 1,340 777 63 % 5 %
Pennsylvania 2 15 12,595 6,407 5,244 51 % 5 %
South Carolina 8 14 4,071 2,699 1,350 66 % 5 %
Tennessee 1 3 1,080 767 711 71 % 5 %
Utah 1 3 1,208 846 353 70 % 5 %
Virginia 1 1 408 260 196 64 % 5 %
Total 50 ⁽⁴⁾ 147 $ 71,948 $ 43,987 $ 27,371 61 %⁽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.~~

⁽⁴⁾	~~One builder borrows in multiple states.~~

~~The following is a summary of our loan portfolio to builders for home construction loans as of December 31, 2016.~~

State Number of Borrowers Number of Loans Value of Collateral⁽¹⁾ Commitment Amount
Gross
Amount
Outstanding

Loan to Value
Ratio⁽²⁾
Loan Fee
Colorado 1 3 $ 1,615 $ 1,131 $ 605 70 % 5 %
Connecticut 1 1 715 500 479 70 % 5 %
Delaware 1 2 244 171 40 70 % 5 %
Florida 7 15 14,014 8,548 4,672 61 % 5 %
Georgia 4 9 6,864 4,249 2,749 62 % 5 %
Idaho 1 1 319 215 205 67 % 5 %
Michigan 1 1 210 126 118 60 % 5 %
New Jersey 1 3 977 719 528 74 % 5 %
New York 1 4 1,745 737 685 42 % 5 %
North Carolina 2 2 1,015 633 216 62 % 5 %
Ohio 1 1 1,405 843 444 60 % 5 %
Pennsylvania 2 15 12,725 6,411 5,281 50 % 5 %
South Carolina 5 7 2,544 1,591 783 63 % 5 %
Tennessee 1 3 1,080 767 430 71 % 5 %
Utah 1 2 715 500 252 70 % 5 %
Total 30 69 $ 46,187 $ 27,141 $ 17,487 59 %⁽³⁾ 5 %

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

2018

245

93,976

60,551

38,888

%⁽³⁾

2017

168

75,931

47,087

29,564

%⁽³⁾

⁽¹⁾	The value is determined by the appraised value.

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

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

Commercial Loans – Real Estate Development Loan Portfolio Summary

The following is a summary of our loan portfolio to builders for land development as of June 30, 2018 and December 31, 2017:

Year

Number of States

Number of Borrowers

Number

of Loans⁽⁴⁾

Gross Value of Collateral⁽¹⁾

Commitment Amount⁽³⁾

Gross Amount

Outstanding

Loan to Value

Ratio⁽²⁾

Loan Fee

2018

8,249

6,367

5,915

1,000

2017

4,997

4,600

2,811

1,000

⁽¹⁾	The value is determined by the appraised value adjusted for remaining costs to be paid. A portion of this collateral is $1,280 and $1,240 as of June 30, 2018 and December 31, 2017, 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 loan to value ratio is calculated by taking the outstanding amount and dividing by the appraised value calculated as described above.

⁽³⁾	The commitment amount does not include letters of credit and cash bonds.

⁽⁴⁾	As of December 31, 2017, our development loans consisted of borrowings which originated in December 2011 and to which we refer throughout this report as the “Pennsylvania Loans”. During the first six months of 2018, the Company originated one additional development loan to the Pennsylvania Loans.

Credit Quality Information

The following ~~table presents~~tables present credit-related information at the “class” level in accordance with FASB ASC 310-10-50, “Disclosures about the Credit Quality of Finance Receivables and the Allowance for Credit Losses.” See our Form 10-K for the year ended December 31, ~~2016,~~2017, as filed with the SEC, for more information.

Gross finance ~~Receivables~~receivables – By risk rating:

	June 30, 2017		December 31, 2016		June 30,2018		December 31,2017

Pass	$	25,791	$	18,275	$	39,327	$	25,656
Special mention		3,643		3,294		5,476		6,719
Classified – accruing		–		–
Classified – nonaccrual		1,987		–
Total	$	31,421	$	21,569	$	44,803	$	32,375

Gross finance ~~Receivables~~receivables – Method of impairment calculation:

	June 30, 2017		December 31, 2016		June 30, 2018		December 31,2017

Performing loans evaluated individually	$	8,978	$	12,424	$	18,409	$	14,992
Performing loans evaluated collectively		20,456		9,145		26,394		17,383
Non-performing loans without a specific reserve		–		–
Non-performing loans with a specific reserve		1,987		–
Total	$	31,421	$	21,569	$	44,803	$	32,375

AtAs of June 30, ~~2017~~2018 and December 31, ~~2016,~~2017, there were no loans acquired with deteriorated credit quality.

~~Impaired Loans~~

~~The following is a summary of our impaired nonaccrual commercial construction loans as of June 30, 2017 and December 31, 2016. All loans listed have a related allowance for loan losses.~~

Concentrations

Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of loans receivable. Our concentration risks for individual borrowers are summarized in the table below:

June 30, 2017

December 31, 2016

June 30, 2018

December 31, 2017

Percent of

Borrower

Loan

Borrower

Loan

Borrower

Loan

Borrower

Loan

City

Commitments

City

Commitments

City

Commitments

City

Commitments

Highest concentration risk

Pittsburgh, PA

Second highest concentration risk

Sarasota, FL

Cape Coral, FL

Sarasota, FL

Third highest concentration risk

Orlando, FL

Savannah, GA

Orlando, FL

Savannah, GA

4. Foreclosed Assets

~~Roll~~The following table is a roll forward of ~~Foreclosed Assets:~~foreclosed assets:

Six Months
Ended
June 30, 2017

Year
Ended
December 31, 2016

Six Months
Ended
June 30, 2016

Beginning balance $ 2,798 $ 965 $ 965
Additions from loans – 1,813 1,813
Additions for construction/development 265 566 375
Sale proceeds (1,890 ) (463 ) –
Gain on sale 77 28 –
Impairment loss on foreclosed assets (155 ) (111 ) –
Ending balance $ 1,095 $ 2,798 $ 3,153

~~5. Property, Plant and Equipment~~

	Six Months Ended June 30, 2018			Year Ended December 31, 2017			Six Months Ended June 30, 2017

Beginning balance	$	1,036		$	2,798		$	2,798
Additions from loans		4,140			-			-
Additions for construction/development		545			317			265
Sale proceeds		-			(1,890	)		(1,890	)
Gain on sale		-			77			77
Impairment loss on foreclosed assets		(85	)		(266	)		(155	)
Ending balance	$	5,636		$	1,036		$	1,095

InDuring April 2018, we entered into a Deed in Lieu of Foreclosure Agreement with a certain borrower who defaulted on a loan by failing to make an interest payment that was due. The Company reclassified $4,140, consisting of $3,897 of principal from Loan receivable, net and $243 of interest from Accrued interest receivable, to Foreclosed assets on the ~~first quarter~~balance sheet as of 2017, we purchased, for $625, a partially completed building. It is our intent to complete the building for operating purposes. As such, we invested $27 in related improvements to the building in the second quarter. No depreciation has been recorded as the building has not been placed in service. We anticipate another $400 in costs associated with this project.June 30, 2018.

6.5. Borrowings

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

	Priority Rank		June 30, 2017		December 31, 2016		Priority Rank		June 30, 2018		December 31, 2017
Borrowing Source
Purchase and sale agreements		1	$	8,820	$	7,322		1	$	19,186	$	11,644
Secured line of credit from affiliates		2		–		–		2		1,877		-
Unsecured line of credit (senior)		3		500		–		3		500		-
Other unsecured debt (senior subordinated)		4		279		279
Other unsecured borrowings (senior subordinated)								4		1,008		279
Unsecured Notes through our public offering, gross		5		14,239		11,221		5		15,274		14,121
Other unsecured debt (subordinated)		5		713		700
Other unsecured debt (junior subordinated)		6		173		173
Other unsecured borrowings (subordinated)								5		3,649		2,617
Other unsecured borrowings (junior subordinated)								6		590		173
Total			$	24,724	$	19,695			$	42,084	$	28,834

The following table shows the maturity of outstanding ~~debt~~borrowings as of June 30, ~~2017.~~2018:

Year Maturing	Total Amount Maturing		Public Offering		Other Unsecured		Purchase and Sale Agreements		Total Amount Maturing		Public Offering		Other Unsecured		Purchase and Sale Agreements and Other Secured Borrowings

2017	$	9,693	$	373	$	500	$	8,820
2018		5,133		4,633		500		–	$	25,728	$	2,306	$	3,007	$	20,415
2019		3,569		3,456		113		–		7,556		6,499		1,043		14
2020		1,943		1,943		–		–		2,270		2,155		100		15
2021		4,386		3,834		552		–		3,788		3,773		-		15
2022 and thereafter										2,742		541		1,597		604
Total	$	24,724	$	14,239	$	1,665	$	8,820	$	42,084	$	15,274	$	5,747	$	21,063

Secured Borrowings

Purchase and Sale Agreements

~~We have two current purchase~~In March 2018, we entered into the Seventh Amendment (the “Seventh Amendment”) to our Loan Purchase and ~~sale agreement relationships where we are the seller of portions of loans we create. The two purchasers are Builder Finance, Inc. and~~Sale Agreement (the “S.K. Funding LPSA”) with S.K. Funding, LLC (“S.K. Funding”). Generally, the purchasers buy between 50% and 70% of each loan sold. Builder Finance, Inc., a subsidiary of 1st Financial Bank, USA, began purchasing portions of loans effective as of August 1, 2016. Prior to August 1, 2016, 1st Financial Bank, USA had purchased these loans under a separate loan purchase and sale agreement. S.K. Funding, an affiliate of Seven Kings Holdings, Inc. (“7Kings”), was assigned the loan purchase and sale agreement by 7Kings on or about May 7, 2015.

The buyers receive interest rates ranging from our cost of funds to the note rate charged to the borrower (interest rates we paid were between 9% and 12% for both 2017 and 2016). The buyers generally receive nonepurpose of the ~~loan fees we charge. We have the right~~Seventh Amendment was to ~~call some of the loans sold, with some restrictions. Once sold, the buyer must fund their~~allow S.K. Funding to purchase a portion of the ~~loans purchased.~~Pennsylvania Loans for a purchase price of $649.

The timing of the Company’s principal and interest payments to S.K. Funding under the Seventh Amendment, and S.K. Funding’s obligation to fund the Pennsylvania Loans, vary depending on the total principal amount of the Pennsylvania Loans outstanding at any time, as follows:

	●	If the total principal amount exceeds $1,000, S.K. Funding must fund the amount between $1,000 and less than or equal to $3,500.
	●	If the total principal amount is less than $4,500 then the Company will also repay S.K. Funding’s principal as principal payments are received on the Pennsylvania Loans from the underlying borrowers in the amount by which the total principal amount is less than $4,500 until S.K. Funding’s principal has been repaid in full.
	●	The interest rate accruing to S.K. Funding under the Seventh Amendment is 10.5% calculated on a 365/366-day basis.

The Seventh Amendment has a term of 24 months and will automatically renew for an additional six-month term unless either party gives written notice of its intent not to renew at least six months prior to the end of a term. S.K. Funding will have a priority position as compared to the Company in the case of a default by any of the borrowers.

Lines of Credit

Amendments to the Lines of Credit with Mr. Wallach and His Affiliates

During June 2018, we entered into a First Amendment to the line of credit with our Chief Executive Officer and his wife (the “Wallach LOC”) which modified the interest rate to generally equal the prime rate plus 3%. The interest rate for the Wallach LOC was 6.8% and 4.4% as of June 30, 2018 and 2017, respectively. We ~~service~~borrowed $877 and $0 against the ~~loans. Also,~~Wallach LOC as of June 30, 2018 and 2017, respectively. Interest was $6 and $10 for the quarter and six months ended June 30, 2018, respectively. As of June 30, 2018, there ~~are limited put options in some cases, whereby~~was $373 remaining availability on the ~~purchaser can cause~~Wallach LOC.

During June 2018, we entered into a First Amendment to the line of credit with the 2007 Daniel M. Wallach Legacy Trust, which our Chief Executive Officer’s trust (the “Wallach Trust LOC”) which modified the interest rate to generally equal the prime rate plus 3%. The interest rate for this borrowing was 6.8% and 4.4% as of June 30, 2018 and 2017, respectively. As of June 30, 2018, we borrowed $0 against the Wallach Trust LOC. As of June 30, 2018, there the was $250 remaining availability on the Wallach Trust LOC.

Line of Credit (Shuman)

During July 2017, we entered into a line of credit agreement (the “Shuman LOC Agreement”) with a group of lenders (collectively, “Shuman”). Pursuant to the Shuman LOC Agreement, Shuman provides us with a revolving line of credit (the “Shuman LOC”) with the following terms:

	●	Principal not to exceed $1,325;
	●	Secured with assignments of certain notes and mortgages;
	●	Cost of funds to us of 10%; and
	●	Due in July 2019 unless extended by Shuman for one or more additional 12-month periods.

The Shuman LOC was fully borrowed as of June 30, 2018. Interest expense was $33 and $67 for the quarter and six months ended June 30, 2018, respectively.

Modification to ~~repurchase~~the Line of Credit with Paul Swanson

During April 2018, we entered into a ~~loan.~~ Master Loan Modification Agreement (the “Swanson Modification Agreement”) with Paul Swanson which modified the Line of Credit Agreement between us and Mr. Swanson dated October 23, 2017. Pursuant to the Swanson Modification Agreement, Mr. Swanson provides us with a revolving line of credit (the “Swanson LOC”) with the following terms:

	●	Principal not to exceed $7,000;
	●	Secured with assignments of certain notes and mortgages;
	●	Cost of funds to us of 10%; and
	●	Due in January 2019 unless extended by Mr. Swanson for one or more additional 15-month periods.

The ~~purchase~~Swanson LOC was fully borrowed as of June 30, 2018. Interest expense was $165 and ~~sale agreements are recorded~~$265 for the quarter and six months ended June 30, 2018, respectively.

New Line of Credit with William Myrick

During June 2018, we entered into a line of credit agreement (the “Myrick LOC Agreement”) with our Executive Vice President of Sales, William Myrick. Pursuant to the Myrick LOC Agreement, Mr. Myrick provides us with a line of credit (the “Myrick LOC”) with the following terms:

	●	Principal not to exceed $1,000;
	●	Secured by a lien against all of our assets;
	●	Cost of funds to us generally equal to the prime rate plus 3%; and
	●	Due upon demand.

The Myrick LOC was fully borrowed as ~~secured borrowings.~~of June 30, 2018. Interest expense was $3 for both the quarter and six months ended June 30, 2018.

Mortgage Payable

During the first six months of 2018, we entered into a commercial mortgage on our office building with the following terms:

	●	Principal not to exceed $660;
	●	Interest rate at 5.07% per annum based on a year of 360 days; and
	●	Due in January 2033.

The principal amount of the Company’s commercial mortgage was $654 as of June 30, 2018. Interest expense was $7 and $18 for the quarter and six months ended June 30, 2018.

Summary

The purchase and sale agreements and lines of credit are summarized below:

	June 30, 2018				December 31, 2017
			Due From				Due From
	Book Value of		Shepherd’s		Book Value of		Shepherd’s
	Loans which		Finance to Loan		Loans which		Finance to Loan
	Served as Collateral		Purchaser or Lender		Served as Collateral		Purchaser or Lender
Loan Purchaser
Builder Finance, Inc.	$	8,538	$	4,843	$	7,483	$	4,089
S.K. Funding		10,108		6,625		9,128		4,134

Lender
Shuman		2,160		1,325		1,747		1,325
Paul Swanson		8,214		5,738		2,518		2,096

Total	$	29,020	$	18,531	$	20,876	$	11,644

Unsecured Borrowings

Other Unsecured Debts

Our other unsecured debts are detailed below:

June 30, 2017 December 31, 2016
Book Value of Due From Book Value of Due From
Loans which Shepherd’s Loans which Shepherd’s
Served as Finance to Loan Served as Finance to Loan
Collateral Purchaser Collateral Purchaser
Loan purchaser
1st Financial Bank, USA/Builder Finance, Inc. $ 9,507 $ 5,207 $ 5,779 $ 2,517
S.K. Funding, LLC 8,523 3,613 7,770 4,805

Total $ 18,030 $ 8,820 $ 13,549 $ 7,322

	Maturity	Interest			Principal Amount Outstanding as of
Loan	Date	Rate⁽¹⁾			June 30, 2018		December 31, 2017
Unsecured Note with Seven Kings Holdings, Inc.	August 2018		7.5	%		500		500

Unsecured Line of Credit from Builder Finance, Inc.	January 2019		10.0	%		500		-

Unsecured Line of Credit from Paul Swanson	December2018⁽²⁾		10.0	%		1,262		1,904

Subordinated Promissory Note	Demand⁽³⁾		7.5	%		1,125		-

Subordinated Promissory Note	December 2019		10.5	%		263		113

Subordinated Promissory Note	April 2020		10.0	%		100		100

Senior Subordinated Promissory Note	March 2022⁽⁴⁾		10.0	%		400		-

Senior Subordinated Promissory Note	March 2022⁽⁵⁾		1.0	%		728		-

Junior Subordinated Promissory Note	March 2022⁽⁵⁾		22.5	%		417		-

Senior Subordinated Promissory Note	October 2022⁽⁶⁾		1.0	%		279		279

Junior Subordinated Promissory Note	October 2022⁽⁶⁾		20.0	%		173		173

					$	5,747	$	3,069

At December 31, 2016, the $7,770 of loans which served as collateral for S.K. Funding did not include the book value of the foreclosed assets which also secured their position, which amount was $1,813. At June 30, 2017, the $8,523 of loans which served as collateral for S.K. Funding included no foreclosed assets.⁽¹⁾Interest rate per annum, based upon actual days outstanding and a 365/366 day year.

~~Affiliate Loans~~⁽²⁾Due in December 2018 unless extended by Mr. Swanson for one or more additional 15-month periods.

In December 2011, the Company entered into two secured revolving lines of credit with affiliates, both of whom are members. These loans have an interest rate of the affiliates’ cost of funds, which was 4.41% and 4.19% as of June 30, 2017 and December 31, 2016, respectively. They are demand notes. The maximum that can be borrowed under these notes is $1,500, at the discretion of the lenders. The security for the lines of credit includes all of the otherwise unencumbered assets of the Company. The Company did not borrow on these lines in either 2016 or during the⁽³⁾Principal due six months ~~ended June 30, 2017.~~after lender gives notice. This note may be prepaid without fee, premium, or penalty.

~~Other Unsecured Loans~~⁽⁴⁾This note may be prepaid upon lender’s request at least 10 days prior to an interest payment and up to $20 of principal.

~~In August 2015, we entered into an unsecured note with 7Kings, under which we are~~⁽⁵⁾These notes were issued to the ~~borrower. The note has~~same holder and, when calculated together, yield a ~~maximum amount outstanding~~blended return of $500, of which $500 was outstanding as of both June 30, 2017 and December 31, 2016. Interest on the 7Kings loan accrues annually at a rate of 7.5%. The note was due on February 19, 2016 and was renewed several times. The maturity date is now August 18, 2017 and may be prepaid at any time without penalty. Interest is due at the end of each month and was $19 for both of the six month periods ended June 30, 2017 and 2016. The note is included in Other unsecured debt (subordinated) in the table at the start of this note.11% per annum.

~~In January 2017, we entered into an unsecured line~~⁽⁶⁾ These notes were issued to the same holder and, when calculated together, yield a blended return of credit with Builder’s Finance, Inc., under which we are the borrower. The note has a maximum amount outstanding of $500, of which $500 was outstanding as of June 30, 2017. Interest on the loan accrues annually at a rate of 10%. The maturity date is January 28, 2018 and may be prepaid at any time without penalty. Interest is due at the end of each month and was $18 for the six month period ended June 30, 2017. The note is included in Unsecured line of credit (senior) in the table at the start of this note. per annum.

We have four other unsecured notes, which are listed in the first two tables of this Note 6. The interest rates and priorities vary. We recorded $30 and $6 in interest related to these four notes for the six months ended June 30, 2017 and 2016, respectively.

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

The effective interest rate on the Notes (“Notes”) offered pursuant to ~~our public offering~~the Notes Program at June 30, ~~2017~~2018 and December 31, ~~2016~~2017 was ~~8.58%~~9.39% and ~~8.26%~~9.21%, respectively, not including the amortization of deferred financing costs. There are limited rights of early redemption. ~~We generally offer four durations at any given time, ranging anywhere from 12 to 48 months.~~ The following table shows the roll forward of ~~our~~the Notes ~~program:~~Program:

	Six Months Ended June 30, 2017			Year Ended December 31, 2016			Six Months Ended June 30, 2016			Six Months Ended June 30, 2018			Year Ended December 31, 2017			Six Months Ended June 30, 2017

Gross notes outstanding, beginning of period	$	11,221		$	8,496		$	8,496
Gross Notes outstanding, beginning of period										$	14,121		$	11,221		$	11,221
Notes issued		8,105			4,972			2,255			3,350			8,375			8,105
Note repayments / redemptions		(5,087	)		(2,247	)		(59	)		(2,197	)		(5,475	)		(5,087	)

Gross notes outstanding, end of period	$	14,239		$	11,221		$	10,692
Gross Notes outstanding, end of period										$	15,274		$	14,121		$	14,239

Less deferred financing costs, net		330			411			493			252			286			330

Notes outstanding, net	$	13,909		$	10,810		$	10,199		$	15,022		$	13,835		$	13,909

The following is a roll forward of deferred financing costs:

	Six Months			Year			Six Months			Six Months			Year			Six Months
	Ended			Ended			Ended			Ended			Ended			Ended
	June 30, 2017			December 31, 2016			June 30, 2016			June 30, 2018			December 31, 2017			June 30, 2017

Deferred financing costs, beginning balance	$	1,014		$	935		$	935		$	1,102		$	1,014		$	1,014
Additions		40			79			28			61			88			40
Deferred financing costs, ending balance	$	1,054		$	1,014		$	963		$	1,163		$	1,102		$	1,054
Less accumulated amortization		(724	)		(603	)		(470	)		(911	)		(816	)		(724	)
Deferred financing costs, net	$	330		$	411		$	493		$	252		$	286		$	330

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

	Six Months		Year		Six Months		Six Months		Year		Six Months
	Ended		Ended		Ended		Ended		Ended		Ended
	June 30, 2017		December 31, 2016		June 30, 2016		June 30, 2018		December 31, 2017		June 30, 2017

Accumulated amortization, beginning balance	$	603	$	336	$	336	$	816	$	603	$	603
Additions		121		267		134		95		213		121
Accumulated amortization, ending balance	$	724	$	603	$	470	$	911	$	816	$	724

7.6. Redeemable Preferred Equity

The following is a roll forward of Series C cumulative preferred ~~units~~equity (“Series C Preferred Units”) were issued to Margaret Rauscher IRA LLC (Margaret Rauscher is the wife of one of our independent managers, Eric A. Rauscher) in March 2017, and to an IRA owned by William Myrick, another one of our independent managers, in April 2017. They 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 Series C Preferred Units have a fixed value which is their purchase price, and preferred liquidation and distribution rights. Yearly distributions of 12% of the Series C Preferred Units’ value (provided profits are available) will be made quarterly. This rate can increase if any interest rate on our Note Program rises above 12%. Dividends can be reinvested monthly into additional Series C Preferred Units.

~~Roll forward of redeemable preferred equity:~~:

	Six Months Ended June 30, 2017		Year Ended December 31, 2016		Six Months Ended June 30, 2016		Six Months Ended June 30,2018		Year Ended December 31,2017		Six Months Ended June 30,2017

Beginning balance	$	–	$	–	$	–	$	1,097	$	–	$	–
Additions from new investment		1,004	$	–	$	–		–		1,004		1,004
Additions from reinvestment		29		–		–		68		93		29

Ending balance	$	1,033	$	–	$	–	$	1,165	$	1,097	$	1,033

The following table shows the earliest redemption options for investors in our Series C Preferred Units as of June 30, ~~2017.~~2018:

Year Maturing	Total Amount Redeemable
Year of Available Redemption			Total Amount Redeemable

2023	$	1,033	$	1,165

Total	$	1,033	$	1,165

8.7. Members’ Capital

There are currently two classes of equity units ~~outstanding:~~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”).

~~The~~ As of June 30, 2018, the Class A ~~common units~~Common Units are held by ~~eight~~nine 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~~Common Units outstanding at both June 30, ~~2017~~2018 and December 31, ~~2016. On December 31, 2015, an affiliate~~2017.

In January 2018, our Chief Financial Officer and Executive Vice President of ~~7Kings, S.K. Funding,~~Operations purchased 4%2% and 1% of our ~~common equity~~outstanding Class A Common Units, respectively, from ~~the Wallach family.~~our CEO. In March ~~2017, S.K. Funding sold its 4% interest in our common equity in equal 1% portions to each of our three independent managers and~~2018, our Executive Vice President of ~~Operations.~~Sales purchased 14.3% of our outstanding Class A Common Units from our CEO.

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. The Series B Preferred Units are redeemable only at the option of the Company or upon a change or control or liquidation. Ten Series B Preferred Units were initially issued for a total of $1,000. The Series B Preferred Units have a fixed value which is their purchase price, and preferred liquidation and distribution rights. Yearly distributions of 10% of the Series B Preferred Units’ value (provided profits are available) will be made quarterly. The Hoskins Group’s Series B Preferred Units are also used as collateral for that group’s loans to the Company. There is no liquid market for the Series B Preferred Units, so we can give no assurance as to our ability to generate any amount of proceeds from that collateral. 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 subdivision. As of June 30, 2017, the Hoskins Group owns a total of 11.6 Series B Preferred Units, which were issued for a total of $1,160.

There are two additional authorized unit classes, of which no units are outstanding: Class A preferred units and Class B profit units. Once Class B profit units are issued, the existing Class A common units will become Class A preferred units. Class A preferred units will receive preferred treatment in terms of distributions and liquidation proceeds.

~~The members’ capital balances by class are as follows:~~

Class or Series
June 30, 2017
December 31, 2016
Series B Preferred Units $ 1,160 $ 1,150
Class A Common Units 2,398 2,249

Members’ Capital $ 3,558 $ 3,399

9.8. Related Party Transactions

~~The Company has a loan agreement with~~As of June 30, 2018, each of the Company’s two ~~of our affiliates, as more fully described in Note 6 – Affiliate Loans.~~

~~The Company has loan agreements with the Hoskins Group, as more fully described in Note 3.~~

~~The Hoskins Group has a preferred equity interest in the Company, as more fully described in Note 8.~~

~~An IRA owned by the wife of Eric A. Rauscher, one of our~~ independent managers ~~and an IRA owned by William Myrick, also one of our independent managers, each own Series C Preferred Units, as more fully described in Note 7.~~

~~Each of our three independent managers and our Executive Vice President of Operations~~ own 1% of our Class A ~~common units.~~Common Units. As of June 30, 2018, our CFO, Executive Vice President of Operations, and Executive Vice President of Sales each own 2%, 2%, and 15.3% of our Class A Common Units, respectively.

~~The Company has accepted new investments under the Notes program from employees, managers, members and relatives~~As of ~~managers and members, with $1,701 and $2,810 outstanding at June 30,2017 and~~ June 30, ~~2016, respectively. The larger~~2018, the Company borrowed $877 against the Wallach LOC, which is a line of ~~these investments are~~credit with our CEO and his wife. A more detailed ~~below:~~description is included in Note 5 above. This borrowing is included in notes payable secured, net of deferred financing costs on the interim condensed consolidated balance sheet.

Relationship to Amount invested as of
Weighted
average
interest
Rate as of

Interest earned
during the
six months ended

Shepherd’s June 30 December 31 June 30, June 30,
Investor Finance 2017 2016 2017 2017 2016
David Wallach Parent of Independent Manager 211 111 9.42 % 6 5

R. Scott Summers Son of Independent Manager 275 75 8.00 % 8 12

Wallach Family Irrevocable Educational Trust Trustee is Member 200 200 9.00 % 9 8

Eric A. Rauscher Independent Manager 475 600 10.00 % 21 22

Joseph Rauscher Parent of Independent Manager 195 186 9.33 % 9 8

As of June 30, 2018, the Company borrowed $1,000 against the Myrick LOC, which is a line of credit with our Executive Vice President of Sales. A more detailed description is included in Note 5 above. This borrowing is included in notes payable secured, net of deferred financing costs on the interim condensed consolidated balance sheet.

In February 2018, the Company issued a Subordinated Promissory Note in the principal amount of $1,125 to a trust affiliated with Seven Kings Holdings, Inc. One of our independent managers, Kenneth R. Summers, is the trustee of that trust. This borrowing is included in notes payable unsecured, net of deferred financing costs on the interim condensed consolidated balance sheet.

In March 2018, the Company issued a Senior Subordinated Promissory Note in the principal amount of $400 to family members of our CEO. This borrowing is included in the notes payable unsecured, net of deferred financing costs on the interim condensed consolidated balance sheet.

~~10.~~9. Commitments and Contingencies

In the normal course of business there may be outstanding commitments to extend credit that are not included in the consolidated financial statements. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon and some of the funding may come from the earlier repayment of the same loan (in the case of revolving lines), the total commitment amounts do not necessarily represent future cash requirements. The financial instruments involve, to varying degrees, elements of credit and interest rate risk in excess of amounts recognized in the consolidated financial statements. The Company evaluates each customer’s creditworthiness on a case-by-case basis. The Company has several Letters of Credit relating to development loans which are part of the unfunded commitment amount. Unfunded commitments to extend credit, which have similar collateral, credit risk, and market risk to our outstanding loans, were ~~$17,797~~$21,676 and ~~$11,503~~$19,312 at June 30, ~~2017~~2018 and December 31, ~~2016,~~2017, respectively.

The Company plans to fund its new loan growth, unfunded commitment, and principal amounts due on its debt using various sources of funding. In July 2017, we sold a participating interest in the Pennsylvania Loans for $3,000 (see note 13), and became the borrower on a secured line of credit for $1,325. The combined $4,325 added to our liquidity. We sell 70% participating interests in most of the loans we create. The portions of loans sold already that has not been funded is $3,356. There are loans that we have designated for sale which, at 70% funding, will eventually provide $4,442 in liquidity, and there are loans we have not designated for sale, which, if sold at 70% funding, would eventually provide $3,387 in liquidity. In addition, the Company receives payoffs on loans, a portion of which is returned to the loan purchaser, if any. Also, the Company receives funds from new public offering sales, and many of the Notes which mature are renewed, reducing the funding needed.

~~11.~~10. Selected Quarterly Condensed Consolidated Financial Data (Unaudited)

Summarized unaudited quarterly condensed consolidated financial data for the two quarters of 2018 and four quarters of 2017 ~~and 2016~~ are as ~~follows (in thousands):~~follows:

	Quarter 4		Quarter 3		Quarter 2		Quarter 1		Quarter 4		Quarter 3		Quarter 2		Quarter 1		Quarter 2		Quarter 1		Quarter 4		Quarter 3		Quarter 2		Quarter 1
	2017		2017		2017		2017		2016		2016		2016		2016		2018		2018		2017		2017		2017		2017

Net Interest Income after Loan Loss Provision	$	–	$	–	$	725	$	617	$	491	$	442	$	464	$	479	$	996	$	926	$	802	$	917	$	725	$	617
Non-Interest Income		–		–		–		77		28		–		44		–		–		–		–		–		–		77
SG&A expense		–		–		456		454		367		297		305		350		691		617		643		537		456		454
Depreciation and Amortization																		21		17		–		–		–		6
Impairment loss on foreclosed assets		–		–		106		49		111		–		–		–		80		5		64		47		106		49
Net Income	$	–	$	–	$	163	$	191	$	41	$	145	$	203	$	129	$	204	$	287	$	95	$	333	$	163	$	191

~~12.~~11. Non-Interest expense detail

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

	For the Six Months Ended June 30,
	2018		2017
Selling, general and administrative expenses
Legal and accounting	$	223	$	125
Salaries and related expenses		833		583
Board related expenses		37		55
Advertising		35		25
Rent and utilities		20		14
Loan and foreclosed asset expenses		38		26
Travel		51		32
Other		71		38
Total SG&A	$	1,308	$	898

For the Six Months Ended
June 30,
2017 2016
Selling, general and administrative expenses
Legal and accounting $ 125 $ 112
Salaries and related expenses 583 385
Board related expenses 55 55
Advertising 25 25
Rent and utilities 14 10
Loan and foreclosed asset expenses 26 17
Travel 32 19
Other 50 32
Total SG&A $ 910 $ 655

~~13.~~12. Subsequent Events

On July 24, 2017, we entered into the Sixth Amendment (the “Sixth Amendment”) to our Loan Purchase and Sale Agreement (the “Agreement”) with S.K. Funding, LLC (the “S.K. Funding”). The Agreement was originally entered into betweenManagement of the Company ~~and Seven Kings Holdings, Inc. (“7Kings”). However, on or about May 7, 2015, 7Kings assigned its right and interest in~~has evaluated subsequent events through August 8, 2018, the ~~Agreement to S.K. Funding.~~date these consolidated financial statements were issued.

~~The purpose~~On July 31, 2018, we redeemed all of our outstanding Series C Cumulative Preferred Units (the “Preferred Units”), which were held by two investors. On August 1, 2018, we sold 12 of our Preferred Units to Daniel M. Wallach, our Chief Executive Officer and Chairman of our board of managers, and his wife, Joyce S. Wallach, for the ~~Sixth Amendment was to allow S.K. Funding to purchase portions of the Pennsylvania Loans for a purchase~~total price of $3,000 under parameters different from those specified in the Agreement. The Pennsylvania Loans purchased pursuant to the Sixth Amendment consist of a portion of the Hoskins Group loans. We will continue to service the Loans.$1,200.

The timing of the Company’s principal and interest payments to S.K. Funding under the Sixth Amendment, and S.K. Funding’s obligation to fund the Pennsylvania Loans, vary depending on the total principal amount of the Pennsylvania Loans outstanding at any time. The Pennsylvania Loans had a principal amount in excess of $4,000 as of the effective date of the Sixth Amendment. While the total principal amount of the Pennsylvania Loans exceeds $1,000, S.K. Funding must fund (by paying the Company) the amount by which the total principal amount of the Pennsylvania Loans exceeds $1,000, with such total amount funded not exceeding $3,000. The interest rate accruing to S.K. Funding under the Sixth Amendment is 10.5% calculated on a 365/366 day basis. When the total principal amount of the Pennsylvania Loans is less than $4,000, the Company will also repay S.K. Funding’s principal as principal payments are received on the Pennsylvania Loans from the underlying borrowers in the amount by which the total principal amount of the Pennsylvania Loans is less than $4,000 until S.K. Funding’s principal has been repaid in full. S.K. Funding will continue to be obligated, as described in this paragraph, to fund (by paying the Company) the Pennsylvania Loans for any increases in the outstanding balance of the Pennsylvania Loans up to no more than a total outstanding amount of $4,000.

The Sixth Amendment has a term of 24 months from the effective date and will automatically renew for additional six month terms unless either party gives written notice of its intent not to renew the Sixth Amendment at least six months prior to the end of a term. Further, no Protective Advances (as such term is defined in the Agreement) will be required with respect to the Pennsylvania Loans. S.K. Funding will have a priority position as compared to the Company in the case of a default by any of the borrowers.

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 included in the Company’s Annual Report on Form 10-K as of and for the year ended December 31, ~~2016.~~2017. See also “Cautionary Note Regarding Forward-Looking Statements” preceding Part I.

Overview

We ~~were organized in the Commonwealth of Pennsylvania in 2007 under the name 84 RE Partners, LLC~~had $41,819 and changed our name to Shepherd’s Finance, LLC on December 2, 2011. We converted to a Delaware limited liability company on March 29, 2012. Our business is focused on commercial lending to participants in the residential construction and development industry. We believe this market is underserved because of the lack of traditional lenders currently participating in the market. We are located in Jacksonville, Florida. Our operations are governed pursuant to our operating agreement.

From 2007 through the majority of 2011, we were the lessor in three commercial real estate leases with a then affiliate, 84 Lumber Company. Beginning in late 2011, we began commercial lending to residential homebuilders. Our current loan portfolio is described more fully in this section under the sub heading “Commercial Construction and Development Loans.” Since 2011, we have originated approximately 275 construction loans totaling $77,000. We currently have 10 paid employees, including our Executive Vice President of Operations. We currently use three employees to originate most of our new loans. Our office staff processes, underwrites, documents, and funds our loans. Our office staff also manages our investor relations and relationships with other debt holders. Our board of managers is comprised of Daniel M. Wallach and three independent managers — William Myrick, Eric A. Rauscher, and Kenneth R. Summers. Our officers are responsible for our day-to-day operations, while the board of managers is responsible for overseeing our business.

The commercial loans we extend are secured by mortgages on the underlying real estate. We extend and service commercial loans to small-to-medium sized homebuilders for the purchase of lots and/or the construction of homes thereon. In some circumstances, the lot is purchased with an older home on the lot which is then either removed or rehabilitated. If the home is rehabilitated, the loan is referred to as a “rehab” loan. We also extend and service loans for the purchase of undeveloped land and the development of that land into residential building lots. In addition, we may, depending on our cash position and the opportunities available to us, do none, any or all of the following: purchase defaulted unsecured debt from suppliers to homebuilders at a discount (and then secure that debt with real estate or other collateral), purchase defaulted secured debt from financial institutions at a discount, and purchase real estate in which we will operate our business. In February 2017, we purchased a building in which we intend to operate once renovation has been completed. We anticipate that renovation will be completed in the third quarter of 2017.

Our Chief Executive Officer, Mr. Wallach, has been in the housing industry since 1985. He was the CFO of a multi-billion dollar supplier of building materials to home builders for 11 years. He also was responsible for that company’s lending business for 20 years. During those years, he was responsible for the creation and implementation of many secured lending programs to builders. Some of these were performed fully by that company, and some were performed in partnership with banks. In general, the creation of all loans, and the resolution of defaulted loans, was his responsibility, whether the loans were company loans or loans in partnership with banks. Through these programs, he was responsible for the creation of approximately $2,000,000 in loans which generated interest spread of $50,000, after deducting for loan losses. Through the years, he managed the development of systems for reducing and managing the risks and losses on defaulted loans. Mr. Wallach also was responsible for that company’s unsecured debt to builders, which reached over $300,000 at its peak. He also gained experience in securing defaulted unsecured debt.

~~We had $28,972 and $20,091~~$30,043 in loan assets as of June 30, ~~2017~~2018 and December 31, ~~2016,~~2017, respectively. As of June 30, ~~2017,~~2018, we have ~~147~~245 construction loans in 1617 states with 5068 borrowers and ~~have~~seven development loans in three states with 4 borrowers. As of June 30, 2018, and December 31, 2017, we had four and three development loans, respectively, in Pittsburgh, Pennsylvania. We have entered into two purchase and sale agreement relationships with third-parties to sell portions of our loans. The first loan portions sold under the program took place during the first quarter of 2015. These agreements have allowed us to increase our loan balances and commitments significantly. In January 2017, we entered into a line of credit agreement with a bank for $500, which we used at times during the first six months of 2017. In March 2017, we added a third class of equity, Series C cumulative preferred units (“Series C Preferred Units”Pennsylvania (the “Pennsylvania Loans”). ~~These Series C Preferred Units have a redemption feature after six years, and therefore appear as mezzanine equity on our financial statements.~~

We ~~currently~~ have ~~eight~~various sources of ~~capital:~~capital, detailed below:

	June 30, 2017		December 31, 2016		June 30, 2018		December 31, 2017
Capital Source
Purchase and sale agreements⁽¹⁾	$	8,820	$	7,322
Purchase and sale agreements and other secured borrowings					$	19,186	$	11,644
Secured line of credit from affiliates		–		–		1,877		–
Unsecured senior line of credit from a bank		500		–		500		–
Unsecured Notes through our public offering		14,239		11,221
Unsecured Notes through our Notes Program						15,274		14,121
Other unsecured debt		1,165		1,152		5,247		3,069
Preferred equity, Series B units		1,160		1,150		1,280		1,240
Preferred equity, Series C units		1,033		–		1,165		1,097
Common equity		2,398		2,249		2,593		2,446

Total	$	29,315	$	23,094	$	47,122	$	33,617

⁽¹⁾

We have two current purchase and sale agreement relationships where we are the seller of portions of loans we create. The two purchasers are Builder Finance, Inc. and S.K. Funding, LLC. Generally, the purchasers buy between 50% and 70% of each loan sold. Builder Finance, Inc., a subsidiary of 1st Financial Bank, USA, began purchasing portions of loans effective as of August 1, 2016. Prior to August 1, 2016, 1st Financial Bank, USA had purchased these loans under a separate loan purchase and sale agreement. S.K. Funding, LLC, an affiliate of Seven Kings Holdings, Inc., was assigned the loan purchase and sale agreement by Seven Kings Holdings, Inc. on or about May 7, 2015.

Our net income increased for the second quarter and six months ended June 30, 2018 as compared to the same period in 2017 due primarily to increased loan originations which was partially offset by payroll cost increases due to an increase the number of employees, and an increase in our loan loss reserve.

Cash provided by operations was $425 as of June 30, 2018 as compared to $742 for the same period of 2017. Our decrease in operating cash flow in 2018 compared to the same period of 2017 was due to a decrease in customer interest escrow of $408 offset by an increase in net loan origination fee deferred of $97.

Critical Accounting Estimates

To assist in evaluating our 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 Form 10-K as of and for the year ended December 31, 2017, 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, 2017 unless listed below.

Loan Losses

Loan losses, as applicable, are accounted for both on the consolidated balance sheets and the consolidated statements of operations. On the consolidated statements of operations, management estimates the amount of losses to capture during the current year. This current period amount incurred is referred to as the loan loss provision. The calculation of our allowance for loan losses, which appears on our consolidated balance sheets, requires us to compile relevant data for use in a systematic approach to assess and estimate the amount of probable losses inherent in our commercial lending operations and to reflect that estimated risk in our allowance calculations. We use the policy summarized as follows:

We establish a collective reserve for all loans which are not more than 60 days past due at the end of a quarter. This collective reserve takes into account both historical information and a qualitative analysis of housing and other economic factors that may impact our future realized losses. For loans to one borrower with committed balances less than 10% of our total committed balances on all loans extended to all customers, we individually analyze for impairment all loans which are more than 60 days past due at the end of a quarter. For loans to one borrower with committed balances equal to or greater than 10% of our total committed balances on all loans extended to all customers, we individually analyze all loans for potential impairment. The analysis of loans, if required, includes a comparison of estimated collateral value to the principal amount of the loan. For impaired loans, if the value determined is less than the principal amount due (less any builder deposit), then the difference is included in the allowance for loan loss. As values change, estimated loan losses may be provided for more or less than the previous period, and some loans may not need a loss provision based on payment history. For homes which are partially complete, we appraise on an as-is and completed basis, and use the one that more closely aligns with our planned method of disposal for the property.

For loans greater than 12 months in age that are individually evaluated for impairment, appraisals have been prepared within the last 13 months. For all loans individually evaluated for impairment, there is also a broker’s opinions of value (“BOV”) prepared, if the appraisal is more than six months old. The lower of any BOV prepared in the last six months, or the most recent appraisal, is used, unless we determine a BOV to be invalid based on the comparable sales used. If we determine a BOV to be invalid, we will use the appraised value. Appraised values are adjusted down for estimated costs associated with asset disposal. Broker’s opinion of selling price, currently valid sales contracts on the subject property, or representative recent actual closings by the builder on similar properties may be used in place of a BOV.

Appraisers are state certified, and are selected by first attempting to utilize the appraiser who completed the original appraisal report. If that appraiser is unavailable or unreasonably expensive, we use another appraiser who appraises routinely in that geographic area. BOVs are created by real estate agents. We try to first select an agent we have worked with, and then, if that fails, we select another agent who works in that geographic area.

Fair value of collateral has the potential to impact the calculation of the loan loss ~~provision.~~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.

June 30, 2017
Loan Loss
Provision
Change in Fair Value Assumption Higher/(Lower)
Increasing fair value of the real estate collateral by 30%* $ –
Decreasing fair value of the real estate collateral by 30%** $ 481

	June 30, 2018
	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%**	$	(2,092	)

* 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.”

** IfAssumes the loans were nonperforming ~~assuming~~and a book amount of the loans outstanding of ~~$28,972, and the fair value of the real estate collateral on all outstanding loans was reduced by 30%, an addition to the loan loss provision of $481 would be required.~~$42,153.

Foreclosed Assets

Foreclosed assets, as applicable, are accounted for both on the consolidated balance sheets and the interim condensed consolidated statements of operations. On the interim condensed consolidated statements of operations, management estimates the amount of impairment to capture when a loan is converted to a foreclosed asset, the impairment when the value of an asset drops below its carrying amount, and any gain or loss upon final disposition of the asset. The calculation of the impairment, which appears on our interim condensed consolidated balance sheets as a reduction in the asset, requires us to compile relevant data for use in a systematic approach to assess and estimate the value of the asset and therefore any required impairment thereof. We use the policy summarized as follows:

For properties which exist in the condition in which we intend to sell them, we obtain an appraisal of the asset’s current value. We reduce the appraised value by 10% to account for selling costs. This amount is used to initially record the asset. Typically, prior to the initial booking of the foreclosed asset, the loan has already been reserved to this level. If during ownership, the value of the foreclosed asset drops, an additional impairment is recorded. For assets that need to be improved prior to sale, the above calculation is performed at the time of the booking of the foreclosed asset (an appraisal “as-is”), but subsequent to that, we look at the to be completed value minus 10% and subtract off the estimated cost of remaining work to be done. If this results in additional impairment, it is booked in non-interest expense. For assets which are going to be improved, while the asset is a loan (before it becomes a foreclosed asset) the calculation of the specific loan loss reserve is done based on the to be completed value as compared to the book value plus estimated completion costs. This can result in an impairment at the initial booking of the foreclosed asset.

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

June 30, 2017
Foreclosed
Assets
Change in Fair Value Assumption Higher/(Lower)
Increasing fair value of the foreclosed asset by 30%* $ –
Decreasing fair value of the foreclosed asset by 30% $ (329 )

	June 30, 2018
	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%	$	(1,973	)

* 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.

~~Amortization of Deferred Financing Costs~~

We amortize our deferred financing costs based on the effective interest method. As such, we make estimates for the duration of the future investment proceeds we anticipate receiving from our Notes offering. If this estimate is determined to be incorrect in the future, the rate at which we are amortizing the deferred financing costs as interest expense would be adjusted.

~~Currently, we anticipate~~** Assumes a consistent average duration of 34 months for the Notes in our current offering. An increasing average duration over the remaining anticipated length of the Notes offering would decrease the amount of amortization reflected in interest in the next 12 months, and a decreasing average duration of investments over the remaining anticipated length would increase the amount reflected in the next 12 months.

Change in Anticipated Average Duration
Resulting
adjustment needed
to Interest Expense
during the next 12
months
Higher/(Lower)

Decreasing the average duration to 5 months for all remaining months of origination $ 4
Increasing the average duration to 5 months for all remaining months of origination $ (22 )

~~Other Loss Contingencies~~

~~Other loss contingencies are recorded as liabilities when it is probable that a liability has been incurred and the~~book amount of the loss is reasonably estimable. Disclosure is required when there is a reasonable possibility that the ultimate loss will exceed the recorded provision. Contingent liabilities are often resolved over long time periods. Estimating probable losses requires analysisforeclosed assets of ~~multiple forecasts that often depend on judgments about potential actions by third-parties such as courts, arbitrators, juries, or regulators.~~$5,636.

~~Accounting and Auditing Standards Applicable to “Emerging Growth Companies”~~

We are an “emerging growth company” under the recently enacted JOBS Act. For as long as we are an “emerging growth company,” we are not required to: (1) comply with any new or revised financial accounting standards that have different effective dates for public and private companies until those standards would otherwise apply to private companies, (2) provide an auditor’s attestation report on management’s assessment of the effectiveness of internal control over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act, (3) comply with any new requirements adopted by the Public Company Accounting Oversight Board, or the PCAOB, requiring mandatory audit firm rotation or a supplement to the auditor’s report in which the auditor would be required to provide additional information about the audit and the financial statements of the issuer, or (4) comply with any new audit rules adopted by the PCAOB after April 5, 2012, unless the SEC determines otherwise. We intend to take advantage of such extended transition period. Since we will not be required to comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for other public companies, our consolidated financial statements may not be comparable to the financial statements of companies that comply with public company effective dates. If we were to subsequently elect to instead comply with these public company effective dates, such election would be irrevocable pursuant to Section 107 of the JOBS Act.

~~Other Significant Accounting Policies~~

Other significant accounting policies, not involving the same level of measurement uncertainties as those discussed above, are nevertheless important to an understanding of the consolidated financial statements. Policies related to credit quality information, fair value measurements, offsetting assets and liabilities, related party transactions and revenue recognition require difficult judgments on complex matters that are often subject to multiple and recent changes in the authoritative guidance. Certain of these matters are among topics currently under reexamination or have recently been addressed by accounting standard setters and regulators. Specific conclusions have not been reached by these standard setters, and outcomes cannot be predicted with confidence. Also, see Notes 1 and 2 to our 2016 consolidated financial statements, as they discuss accounting policies that we have selected from acceptable alternatives.

Consolidated Results of Operations

Key financial and operating data for the three and six months ended June 30, ~~2017~~2018 and ~~2016~~2017 are set forth below. For a more complete understanding of our industry, the drivers of our business, and our current period results, this discussion should be read in conjunction with our consolidated financial statements, including the related notes and the other information contained in this document.

	Three Months Ended					Six Months Ended				Three Months Ended				Six Months Ended
	June 30,					June 30,				June 30,				June 30,
	2017		2016			2017		2016		2018		2017		2018		2017
Interest Income
Interest and fee income on loans	$	1,356	$	898		$	2,530	$	1,747	$	2,045	$	1,356	$	3,872	$	2,530
Interest expense:
Interest related to secured borrowings		215		144			394		261		517		215		928		394
Interest related to unsecured borrowings		401		292			768		537		513		401		963		768
Interest expense		616		436			1,162		798		1,030		616		1,891		1,162

Net interest income		740		462			1,368		949		1,015		740		1,981		1,368
Less: Loan loss provision		15		(2	)		26		6		19		15		59		26

Net interest income after loan loss provision		725		464			1,342		943		996		725		1,922		1,342

Non-Interest Income
Gain from foreclosure of assets		–		44			–		44		–		–		–		–
Gain from sale of foreclosed assets		–		–			77		–		–		–		–		77

Total non-interest income		–		44			77		44		–		–		–		77

Income		725		508			1,419		987		996		725		1,922		1,419

Non-Interest Expense
Selling, general and administrative		456		305			910		655		691		450		1,308		898
Depreciation and amortization											21		6		38		12
Impairment loss on foreclosed assets		106		–			155		–		80		106		85		155

Total non-interest expense		562		305			1,065		655		792		562		1,431		1,065

Net Income	$	163	$	203		$	354	$	332	$	204	$	163	$	491	$	354

Earned distribution to preferred equity holders		57		26			88		52		67		57		130		88

Net income attributable to common equity holders	$	106	$	177		$	266	$	280	$	137	$	106	$	361	$	266

Interest Spread

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

Three Months Ended Six Months Ended
June 30, June 30,
2017 2016 2017 2016
Interest Income * * * *
Interest income on loans $ 851 12 % $ 609 13 % $ 1,631 12 % $ 1,114 13 %
Fee income on loans 505 7 % 289 6 % 899 7 % 633 7 %
Interest and fee income on loans 1,356 19 % 898 19 % 2,530 19 % 1,747 20 %
Interest expense related parties – – – – – – – –
Interest expense unsecured 344 5 % 224 5 % 647 5 % 402 5 %
Interest expense secured 215 3 % 145 3 % 394 3 % 262 3 %
Amortization offering costs 57 1 % 67 1 % 121 1 % 134 1 %
Interest expense 616 9 % 436 9 % 1,162 9 % 798 9 %
Net interest income (spread) 740 10 % 462 10 % 1,368 10 % 949 11 %

Weighted average outstanding loan asset balance $ 28,211 $ 18,620 $ 25,983 $ 17,875

	Three Months Ended								Six Months Ended
	June 30,								June 30,
	2018				2017				2018				2017
Interest Income				*				*				*				*
Interest income on loans	$	1,416	13	%	$	851	12	%	$	2,708	13	%	$	1,631	12	%
Fee income on loans		629	6	%		505	7	%		1,164	6	%		899	7	%
Interest and fee income on loans		2,045	19	%		1,356	19	%		3,872	19	%		2,530	19	%
Interest expense unsecured		467	4	%		344	5	%		868	4	%		647	5	%
Interest expense secured		513	4	%		215	3	%		928	4	%		394	3	%
Amortization offering costs		50	1	%		57	1	%		95	1	%		121	1	%
Interest expense		1,030	10	%		616	9	%		1,891	9	%		1,162	9	%
Net interest income (spread)		1,015	9	%		740	10	%		1,981	10	%		1,368	10	%

Weighted average outstanding loan asset balance	$	42,439			$	28,211			$	40,135			$	25,983

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

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

●Difference between the interest rate received (on our loan assets) and the interest rate paid (on our borrowings). The loans we have originated have interest rates which are based on our cost of funds, with a minimum cost of funds of 5%. For most loans, the margin is fixed at 2%; however, for our development loans the margin is fixed at 7%. Future loans are anticipated to be originated at an increase of 1% to approximately ~~the same 2%~~3% margin. This component is also impacted by the lending of money with no interest cost (our equity). ~~We anticipate~~For the six months ended June 30, 2018, the difference between interest income and interest expense was 4% compared to 3% for the same period of 2017. The increase relates to an increase in default interest rate for the classified accruing loan during the first quarter of 2018.

For the quarter ended June 30, 2018 and quarter and six months ended June 30, 2017 the difference between interest income and interest expense was 3%.We currently anticipate that the difference between our interest income and interest expense will continue to be ~~between~~ 3% ~~and 4% during~~for the remainder of ~~2017.~~2018.

●Fee income. Fee income is displayed in the table above. The two loans originated in December 2011 had a net origination fee of $924. This fee was recognized over the life of the loans, and has been fully recognized as of August 2016. Our construction loans have a 5% fee on the amount we commit to lend, which is amortized over the expected life of each of those loans; however, we do not recognize a loan fee on our development loans. When loans ~~pay back~~terminate quicker than their expected life, the remaining unrecognized fee is recognized upon the termination of the loan. ~~Our~~When loans exceed their expected life, no additional fee income is recognized. In 2018 our fee income decreased ~~as a percentage of our loan balance because the recognition of our loan fee on our development~~1% due to an increase in loans ~~was completed in 2016. Our~~that exceeded their expected life. We currently anticipate that fee income increased as a percentage of our loan balance because construction loans increased as a percentage of our total balance, and the fee income on construction loans is generally higher than development loans. These two items resulted in relatively flat fee income when comparing periods from 2017 towill continue at the same ~~period in 2016~~6% rate for the remainder of 2018.

●Amount of nonperforming assets. Generally, we can have three types of nonperforming assets that negatively affect interest spread: loans not paying interest, foreclosed assets, and cash. ~~Loans~~All of our loans were paying interest in the quarter ended June 30, 2018 and quarter and six months ended June 30, 2017.One loan was not paying interest can impact our interest spread. We had no such loans in the first three months of both 2017 and 2016, and two nonperforming loans in the second three month period of 2017. This caused a slight reduction in interest income on loans. Foreclosed assets do not have a monthly interest return. The difference between our average foreclosed asset balance in 2017 as compared to 2016 did not have a major impact on our performance.

~~Loan Loss Provision~~

~~We recorded $19 and $6~~ in the six months ended June 30, ~~2017 and 2016, respectively,~~2018.

Foreclosed assets do not provide a monthly interest return. In April 2018, we recorded $3,897 from Loan receivables, net to Foreclosed assets on the balance sheet as of June 30, 2018, which resulted in ~~loss reserve provision~~a negative impact on our interest spread.

The amount of nonperforming assets is expected to rise over the next twelve months, due to expected development costs related to ~~our collective reserve (loans not individually impaired). Those numbers were $8~~foreclosed assets, anticipated foreclosure of assets, and ~~($2) for the three months ended June 30, 2017 and 2016, respectively. These~~idle cash increases ~~were due to increases in loan balances. In the second quarter of 2017, we booked a specific reserve of $7~~ related to ~~two of our nonperforming loans. No such reserve was made in the first six months of 2016. We anticipate that the collective reserve will increase as our balances rise throughout the remainder of 2017.~~anticipated large borrowing inflows.

Non-Interest Income

WeFor the three and six months ended June 30, 2018, we did not recognize non-interest income compared to the same period of 2017. In the first six months of 2017, we sold a foreclosed asset ~~in 2017~~ and recognized a gain of $77. ~~In 2016, we foreclosed on a loan, which resulted in a gain of $44 being booked in the second quarter of 2016.~~We do not anticipate Non-interest income for 2018.

SG&A Expenses

The following table displays our SG&A expenses:

	Three Months				Six Months				Three Months				Six Months
	Ended June 30,				Ended June 30,				Ended June 30,				Ended June 30,
	2017		2016		2017		2016		2018		2017		2018		2017
Selling, general and administrative expenses
Legal and accounting	$	29	$	26	$	125	$	112	$	80	$	29	$	223	$	125
Salaries and related expenses		329		205		583		385		477		329		833		583
Board related expenses		26		26		55		55		15		26		37		55
Advertising		8		7		25		25		18		8		35		25
Rent and utilities		9		5		14		10		10		9		20		14
Loan foreclosed asset expenses		19		13		26		17		30		19		38		26
Travel		17		10		32		19		28		17		51		32
Other		19		13		50		32		33		13		71		38
Total SG&A	$	456	$	305	$	910	$	655	$	691	$	450	$	1,308	$	898

Legal and accounting expenses increased due to additional work performed related to the growth of the Company. Salaries and related expenses increased due to our hiring of 11 new employees, which was partially offset by a reduction in our CEO’s salary.

Impairment Loss on Foreclosed Assets

We ~~had roughly twice~~owned five foreclosed assets as ~~many employees during~~of June 30, 2018, compared four as of December 31, 2017. Three of the ~~three~~foreclosed assets are lots under construction and the remaining two have completed homes on the lots. We do not anticipate losses on the sale of foreclosed assets in the future; however, this may be subject to change based on the final selling price of the foreclosed assets.

Loan Loss Provision

Our loan loss provision increased $19 and $59 for the quarter and six month ~~periods~~ ended June 30, ~~2017 as we did during~~2018 compared to $15 and $26 for the same periods of 2017 due to an increase in ~~2016, which increased our payroll~~loan balances and ~~travel costs. We anticipate adding more staff~~qualitative reserve percentage as a result of the change in 2017. We will also have expenses related to operating from our new office in the second half of 2017. We added a loan document software package in the second half of 2016, and the amortization of that system is in Other SG&A. Loan expenses, mostly post closing title searches designed to ensure our mortgage is in first position, have increased with the increased volume of loans.housing values.

Consolidated Financial Position

~~Cash and Cash Equivalents~~

We try to avoid borrowing on our line of credit from affiliates. To accomplish this, we must carry some cash for liquidity. At June 30, 2017 and December 31, 2016, we had $88 and $1,566, respectively, in cash. When we create new loans, they typically do not have significant outstanding loan balances for several months. In January 2017, we executed a line of credit with a bank with a maximum outstanding of $500, which lessens somewhat the amount of cash we carry on our books. We anticipate selling more participating interests in our loans in the third quarter of 2017, increasing our cash position. These sales will be to existing loan purchasers with us. We also anticipate closing on a secured line of credit in the third quarter of 2017, providing additional liquidity and funding. Cash balances were allowed to decline at the end of June, 2017 as we had commitments for additional secured financing of $4,325 which closed in July of 2017.

~~Deferred Financing Costs, Net~~

Our deferred financing costs are related to our public offering of unsecured Notes. The deferred financing costs are reflected as a reduction in the unsecured Notes offering liability. The first offering which was effective from October 2012 through September 2015 cost more to create than our second offering, which has been effective since September 2015. As the amortization is much more than the amount we are spending on the offerings during these same periods, the net deferred financing costs have been decreasing. This decrease is expected to continue for the remainder of 2017.

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

Six Months Six Months
Ended Year Ended Ended
June 30, 2017 December 31, 2016 June 30, 2016

Deferred financing costs, beginning balance $ 1,014 $ 935 $ 935
Additions 40 79 28
Deferred financing costs, ending balance $ 1,054 $ 1,014 $ 963
Less accumulated amortization (724 ) (603 ) (470 )
Deferred financing costs, net $ 330 $ 411 $ 493

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

Six Months Six Months
Ended Year Ended Ended

June 30,2017
December 31, 2016
June 30,2016

Accumulated amortization, beginning balance $ 603 $ 336 $ 336
Additions 121 267 134
Accumulated amortization, ending balance $ 724 $ 603 $ 470

Loans Receivable

In December 2011, we originated two new loans and assumed a lender’s position on a third loan, which, net of unearned loan fees, had total balances of $4,050 and $4,082 as of June 30, 2017 and December 31, 2016, respectively. The development loans are referred to herein as the “Pennsylvania Loans.” The purpose of the loans was to develop two subdivisions in a suburb of Pittsburgh, Pennsylvania. The Hamlets subdivision is a five phase subdivision of 81 lots, of which 63 have been developed and sold, 18 are developed and not sold, as of June 30, 2017. The Tuscany subdivision is a single phase 18 lot subdivision, with four lots remaining as of June 30, 2017. We are considering financing several more phases of these subdivisions. If we finance these additional phases, the balances will increase, and if we do not, the balances will decrease due to repayments.

~~As of June 30, 2017, we have 49 other borrowers, all of whom, along with the Hoskins Group, borrow money for the purpose of building new homes.~~

~~Commercial Loans – Real Estate Development Loan Portfolio Summary~~

~~The following is a summary of our loan portfolio to builders for land development as of June 30, 2017. The Pennsylvania loans below are the Pennsylvania Loans discussed above.~~

⁽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 $1,160 of preferred equity in our Company. In the event of a foreclosure on the property securing certain of our loans, a portion of our collateral is preferred equity in our Company, which might be difficult to sell, which could impact our ability to eliminate the loan balance.

⁽²⁾	~~The loan to value ratio is calculated by taking the outstanding amount and dividing by the appraised value.~~

⁽³⁾	The commitment amount does not include letters of credit and cash bonds, as the sum of the total balance outstanding including the cash bonds plus the letters of credit and remaining to fund for construction is less than the $5,231 commitment amount.

~~The following is a summary of our loan portfolio to builders for land development as of December 31, 2016. The Pennsylvania loans below are the Pennsylvania Loans discussed above.~~

⁽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 $1,150 of preferred equity in our Company. In the event of a foreclosure on the property securing certain of our loans, a portion of our collateral is preferred equity in our Company, which might be difficult to sell, which could impact our ability to eliminate the loan balance.

⁽²⁾	~~The loan to value ratio is calculated by taking the outstanding amount and dividing by the appraised value.~~

⁽³⁾	The commitment amount does not include letters of credit and cash bonds, as the sum of the total balance outstanding including the cash bonds plus the letters of credit and remaining to fund for construction is less than the $5,931 commitment amount.

Commercial Loans – Construction Loan Portfolio Summary

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

The following is a summary of our loan portfolio to builders for home construction loans as of June 30, 2018.

State	Number of Borrowers		Number of Loans		Value of Collateral⁽¹⁾		Commitment Amount		Gross Amount Outstanding		Loan to Value Ratio⁽²⁾			Loan Fee
Arizona		1		4	$	1,071	$	750	$	218		70	%		5	%
Colorado		3		7		3,878		2,621		1,729		68	%		5	%
Florida		17		73		22,652		15,143		9,392		67	%		5	%
Georgia		8		12		8,246		5,594		3,929		68	%		5	%
Indiana		2		3		932		652		273		70	%		5	%
Michigan		5		30		7,754		4,697		2,723		61	%		5	%
New Jersey		4		14		5,188		3,494		2,233		67	%		5	%
New York		1		7		2,567		1,496		1,375		58	%		5	%
North Carolina		5		9		2,656		1,859		925		70	%		5	%
North Dakota		1		1		375		263		205		70	%		5	%
Ohio		1		3		2,331		1,497		1,145		64	%		5	%
Oregon		1		1		607		348		280		57	%		5	%
Pennsylvania		3		29		21,708		12,424		8,860		57	%		5	%
South Carolina		11		40		10,357		7,188		4,349		69	%		5	%
Tennessee		1		2		640		426		262		67	%		5	%
Utah		1		2		920		634		264		69	%		5	%
Virginia		3		8		2,094		1,465		726		70	%		5	%
Total		68		245	$	93,976	$	60,551	$	38,888		64	%⁽³⁾		5	%

⁽¹⁾	The value is determined by the appraised value.

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

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

The following is a summary of our loan portfolio to builders for home construction loans as of December 31, 2017.

State	Number of Borrowers			Number of Loans		Value of Collateral⁽¹⁾		Commitment Amount		Gross Amount Outstanding		Loan to Value Ratio⁽²⁾			Loan Fee			Number of Borrowers			Number of Loans		Value of Collateral⁽¹⁾		Commitment Amount		Gross Amount Outstanding		Loan to Value Ratio⁽²⁾			Loan Fee
Colorado		3			6	$	3,113	$	2,092	$	1,082		67	%		5	%		3			6	$	3,224	$	2,196	$	925		68	%		5	%
Connecticut		1			1		715		500		500		70	%		5	%
Delaware		1			1		244		171		115		70	%		5	%		1			1		244		171		147		70	%		5	%
Florida		11			42		21,930		13,904		8,110		63	%		5	%		15			54		25,368		16,555		10,673		65	%		5	%
Georgia		9			22		13,958		8,405		4,991		60	%		5	%		7			13		8,932		5,415		3,535		61	%		5	%
Indiana		2			2		995		597		178		60	%		5	%		2			2		895		566		356		63	%		5	%
Michigan		3			13		3,254		2,065		1,139		63	%		5	%		4			25		7,570		4,717		2,611		62	%		5	%
New Jersey		3			8		2,361		1,652		1,098		70	%		5	%		2			11		3,635		2,471		1,227		68	%		5	%
New York		1			7		2,160		1,064		984		49	%		5	%		1			5		1,756		929		863		53	%		5	%
North Carolina		2			7		1,740		1,218		543		70	%		5	%		3			6		1,650		1,155		567		70	%		5	%
Ohio		2			2		2,116		1,340		777		63	%		5	%		1			1		711		498		316		70	%		5	%
Oregon																			1			1		607		425		76		70	%		5	%
Pennsylvania		2			15		12,595		6,407		5,244		51	%		5	%		2			20		15,023		7,649		5,834		51	%		5	%
South Carolina		8			14		4,071		2,699		1,350		66	%		5	%		7			18		4,501		3,058		1,445		68	%		5	%
Tennessee		1			3		1,080		767		711		71	%		5	%		1			2		690		494		494		72	%		5	%
Utah		1			3		1,208		846		353		70	%		5	%		1			2		790		553		344		70	%		5	%
Virginia		1			1		408		260		196		64	%		5	%		1			1		335		235		150		70	%		5	%
Total		50	⁽⁴⁾		147	$	71,948	$	43,987	$	27,371		61	%⁽³⁾		5	%		52	⁽⁴⁾		168	$	75,931	$	47,087	$	29,564		62	%⁽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.

⁽⁴⁾	One builder ~~borrows~~ in multiple states.

Commercial Loans – Real Estate Development Loan Portfolio Summary

The following is a summary of our loan portfolio to builders for ~~home construction loans~~land development as of June 30, 2018 and December 31, ~~2016.~~2017. A significant portion of our development loans consist of the Pennsylvania Loans. Our additional development loans are in South Carolina and Florida.

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
2018		3		4		7	$	8,249	$	6,367	⁽³⁾	$	5,915		72	%	$	1,000
2017		1		1		3		4,997		4,600	⁽³⁾		2,811		56	%		1,000

⁽¹⁾	The value is determined by the appraised ~~value.~~value adjusted for remaining costs to be paid. Part of this collateral is $1,280 as of June 30, 2018 and $1,240 as of December 31, 2017 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 eliminate the loan balance. Part of the collateral value is estimated based on the selling prices anticipated for the homes. Appraised values will replace these estimates in the third quarter of 2018.

⁽²⁾	The loan to value ratio is calculated by taking the ~~commitment~~outstanding amount and dividing by the appraised ~~value.~~value calculated as described above.

⁽³⁾	~~Represents the weighted average loan to value ratio~~The commitment amount does not include letters of ~~the loans.~~credit and cash bonds.

Combined Loan Portfolio Summary

Financing receivables are comprised of the following as of June 30, ~~2017~~2018 and December 31, ~~2016:~~2017:

	June 30, 2017			December 31, 2016			June 30, 2018			December 31, 2017

Loans receivable, gross	$	31,421		$	21,569		$	44,803		$	32,375
Less: Deferred loan fees		(872	)		(618	)		(1,197	)		(847	)
Less: Deposits		(1,623	)		(861	)		(1,827	)		(1,497	)
Plus: Deferred origination expense		126			55			196			109
Less: Allowance for loan losses		(80	)		(54	)		(156	)		(97	)
Loans receivable, net	$	28,972		$	20,091		$	41,819		$	30,043

~~Roll~~

The following is a roll forward of ~~commercial~~combined loans:

	Six Months Ended June 30,2017			Year Ended December 31, 2016			Six Months Ended June 30,2016			Six Months Ended June 30, 2018			Year Ended December 31, 2017			Six Months Ended June 30, 2017

Beginning balance	$	20,091		$	14,060		$	14,060		$	30,043		$	20,091		$	20,091
Additions		16,081			23,184			10,692			19,870			33,451			16,081
Payoffs/sales		(6,229	)		(15,168	)		(6,594	)		(11,337	)		(22,645	)		(6,229	)
Moved to foreclosed assets		–			(1,639	)		(1,639	)		3,897			-			–
Change in deferred origination expense		71			55			30			87			55			71
Change in builder deposit		(762	)		(340	)		(41	)		(331	)		(636	)		(762	)
Change in loan loss provision		(26	)		(16	)		(6	)		(59	)		(44	)		(26	)
New loan fees		(1,153	)		(1,270	)		(540	)		(1,528	)		(2,127	)		(1,153	)
Earned loan fees		899			1,225			633			1,177			1,898			899
Ending balance	$	28,972		$	20,091		$	16,595		$	41,819		$	30,043		$	28,972

Finance Receivables – By risk rating:

	June 30,2017		December 31, 2016		June 30, 2018		December 31, 2017

Pass	$	25,791	$	18,275	$	39,327	$	25,656
Special mention		3,643		3,294		5,476		6,719
Classified – accruing		–		–		-		-
Classified – nonaccrual		1,987		–		-		-
Total	$	31,421	$	21,569	$	44,803	$	32,375

Finance Receivables – Method of impairment calculation:

	June 30, 2017		December 31, 2016		June 30, 2018		December 31, 2017

Performing loans evaluated individually	$	8,978	$	12,424	$	18,409	$	14,992
Performing loans evaluated collectively		20,456		9,145		26,394		17,383
Non-performing loans without a specific reserve		–		–		-		-
Non-performing loans with a specific reserve		1,987		–		-		-
Total	$	31,421	$	21,569	$	44,803	$	32,375

At June 30, ~~2017~~2018 and December 31, ~~2016,~~2017, there were no loans acquired with deteriorated credit quality.

~~Impaired Loans~~

~~The following is a summary of our impaired nonaccrual commercial construction loans as of June 30, 2017 and December 31, 2016. All loans listed have a related allowance for loan losses.~~

June 30, 2017 December 31, 2016

Unpaid principal balance (contractual obligation from customer) $ 1,987 $ –
Charge-offs and payments applied – –
Gross value before related allowance 1,987 –
Related allowance 7 –
Value after allowance $ 1,980 $ –

Estimated collateral value 2,200 –
Total charge-offs, payments applied, and allowance (coverage) 7 –
Coverage % (coverage divided by unpaid principal balance) 0.4 % –

~~Below is an aging schedule of gross loans receivable as of June 30, 2017, on a recency basis:~~

No.
Accts. 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) 148 $ 29,434 94 %
60-89 days – – 0 %
90-179 days 2 1,987 6 %
180-269 days – – 0 %

Subtotal 150 $ 31,421 100 %

Interest only accounts (Accounts on which interest, deferment, extension and/or default charges were received in the last 60 days) – $ – 0 %

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.) – $ – 0 %

Total 150 $ 31,421 100 %

Below is an aging schedule of gross loans receivable as of June 30, ~~2017,~~2018, on a recency basis:

	No. Accts.		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)		252	$	44,803		100	%
60-89 days		–		–		0	%
90-179 days		–		–		0	%
180-269 days		–		–		0	%

Subtotal		252	$	44,803		100	%

Interest only accounts (Accounts on which interest, deferment, extension and/or default charges were received in the last 60 days)		–	$	–		0	%

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.)		–	$	–		0	%

Total		252	$	44,803		100	%

Below is an aging schedule of gross loans receivable as of June 30, 2018, on a contractual basis:

	No. Accts.		Unpaid Balances		%			No. Accts.		Unpaid Balances		%
Contractual Terms - All current Direct Loans and Sales Finance Contracts with installments past due less than 60 days from due date.		148	$	29,434		94	%		252	$	44,803		100	%
60-89 days		–		–		0	%		–		–		0	%
90-179 days		2		1,987		6	%		–		–		0	%
180-269 days		–		–		0	%		–		–		0	%

Subtotal		150	$	31,421		100	%		252	$	44,803		100	%

Interest only accounts (Accounts on which interest, deferment, extension and/or default charges were received in the last 60 days)		–	$	–		0	%		–	$	–		0	%

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.)		–	$	–		0	%		–	$	–		0	%

Total		150	$	31,421		100	%		252	$	44,803		100	%

Below is an aging schedule of gross loans receivable as of December 31, ~~2016,~~2017, on a recency basis:

	No. Accts.		Unpaid Balances		%			No. Accts.		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)		71	$	18,617		86	%		153	$	26,421		82	%
60-89 days		1		2,952		14	%		18		5,954		18	%
90-179 days		–		–		0	%		–		–		0	%
180-269 days		–		–		0	%		–		–		0	%

Subtotal		72	$	21,569		100	%		171	$	32,375		100	%

Interest only accounts (Accounts on which interest, deferment, extension and/or default charges were received in the last 60 days)		–	$	–		0	%		–	$	–		0	%

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.)		–	$	–		0	%		–	$	–		0	%

Total		72	$	21,569		100	%		171	$	32,375		100	%

Below is an aging schedule of gross loans receivable as of December 31, ~~2016,~~2017, on a contractual basis:

	No. Accts.		Unpaid Balances		%			No. Accts.		Unpaid Balances		%
Contractual Terms - All current Direct Loans and Sales Finance Contracts with installments past due less than 60 days from due date.		71	$	18,617		86	%		153	$	26,421		82	%
60-89 days		1		2,952		14	%		18		5,954		18	%
90-179 days		–		–		0	%		–		–		0	%
180-269 days		–		–		0	%		–		–		0	%

Subtotal		72	$	21,569		100	%		171	$	32,375		100	%

Interest only accounts (Accounts on which interest, deferment, extension and/or default charges were received in the last 60 days)		–	$	–		0	%		–	$	–		0	%

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.)		–	$	–		0	%		–	$	–		0	%

Total		72	$	21,569		100	%		171	$	32,375		100	%

Foreclosed Assets

Below is a roll forward of foreclosed assets:

	Six Months Ended June 30,2017			Year Ended December 31, 2016			Six Months Ended June 30,2016		Six Months Ended June 30, 2018			Year Ended December 31, 2017			Six Months Ended June 30, 2017

Beginning balance	$	2,798		$	965		$	965	$	1,036		$	2,798		$	2,798
Additions from loans		–			1,813			1,813		4,140			-			-
Additions for construction/development		265			566			375		545			317			265
Sale proceeds		(1,890	)		(463	)		–		-			(1,890	)		(1,890	)
Gain on sale		77			28			–		-			77			77
Impairment loss on foreclosed assets		(155	)		(111	)		–		(85	)		(266	)		(155	)
Ending balance	$	1,095		$	2,798		$	3,153	$	5,636		$	1,036		$	1,095

~~Property, Plant~~During April 2018, we entered into a Deed in Lieu of Foreclosure Agreement (the “Deed Agreement”) with a certain borrower who defaulted on a loan by failing to make an interest payment that was due. As a result, the Company reclassified $4,140, consisting of $3,897 of principal from Loan receivable, net and ~~Equipment~~

In$243 of interest from Accrued interest receivable, to Foreclosed assets on the ~~first quarter~~balance sheet as of 2017, we purchased a partially completed building, for $625, in which we plan to operate, and invested $27 in improvements to the building in the second quarter. No depreciation has been recorded as the building has not been placed in service. We anticipate another $400 in the third quarter of 2017 in costs associated with this project.June 30, 2018.

Customer Interest Escrow

The Pennsylvania Loans called for a funded interest escrow account (the “Interest Escrow”) which was funded with proceeds from the Pennsylvania Loans. The initial funding on the Interest Escrow was $450. The balance as of June 30, 2017 and December 31, 2016 was $311 and $541, respectively. To the extent the balance is available in the Interest Escrow, interest due on certain loans is deducted from the Interest Escrow on the date due. The Interest Escrow is increased by 20% of lot payoffs on the same loans, and by distributions on the Hoskins Group’s Series B preferred equity. All of these transactions are noncash to the extent that the total escrow amount does not need additional funding.

We have 44 and 16 other loans active as of June 30, 2017 and December 31, 2016, respectively, that also have interest escrows. The cumulative balance of all interest escrows other than the Pennsylvania Loans was $518 and $271 as of June 30, 2017 and December 31, 2016, respectively. We anticipate that the interest escrows for existing loans will reduce in the future as those loans use the escrow to cover interest costs. We anticipate that some new loans will increase the escrow. Overall, the escrow balance will reduce over time unless we increase our lending to the Hoskins Group for their development loans.

Below is a roll forward of interest escrow:

Six Months Ended
June 30,2017
Year Ended
December 31, 2016
Six Months Ended
June 30, 2016

Beginning balance $ 812 $ 498 $ 498
+ Preferred equity dividends 57 104 51
+ Additions from Pennsylvania Loans 51 926 130
+ Additions from other loans 901 430 199
- Interest and fees (867 ) (1,109 ) (460 )
- Repaid to borrower or used to reduce principal (125 ) (37 ) –
Ending balance $ 829 $ 812 $ 418

	Six Months Ended June 30, 2018			Year Ended December 31, 2017			Six Months Ended June 30, 2017

Beginning balance	$	935		$	812		$	812
Preferred equity dividends		62			115			57
Additions from Pennsylvania Loans		101			480			51
Additions from other loans		160			1,163			901
Interest, fees, principal or repaid to borrower		(714	)		(1,635	)		(992	)
Ending balance	$	544		$	935		$	829

~~Notes Payable Unsecured~~Related Party Borrowings

~~Our Notes payable unsecured increased in~~During June 2018, we entered into a First Amendment to the line of credit with our Chief Executive Officer and his wife (the “Wallach LOC”) which modified the interest rate to generally equal the prime rate plus 3%. The interest rate for this borrowing was 6.8% and 4.4% as of June 30, 2018 and 2017, respectively. We borrowed $877 and $0 against the Wallach LOC as of June 30, 2018 and 2017, respectively. Interest expense was $6 and $10 for the quarter and six months ended June 30, ~~2017 with new Notes of $8,105 offset by redemptions of $5,087. We used our unsecured bank line during 2017, and the balance as of June 30, 2017 and December 31, 2016 was $500~~2018, respectively, and $0 ~~respectively. Our other unsecured notes payable had little change during~~for the quarter and six months ended June 30, 2017.

During June 2018, we entered into a First Amendment to the line of credit with the 2007 Daniel M. Wallach Legacy Trust, which our Chief Executive Officer’s trust (the “Wallach Trust LOC”) which modified the interest rate to generally equal the prime rate plus 3%. The interest rate for this borrowing was 6.8% and 4.4% as of June 30, 2018 and 2017, respectively. We borrowed $0 against the Wallach Trust LOC as of June 30, 2018 and 2017.

	●	Principal not to exceed $1,000;
	●	Secured by a lien against all of our assets;
	●	Cost of funds to us generally equal to the prime rate plus 3%; and
	●	Due upon demand.

The Myrick LOC was fully borrowed as of June 30, 2018. The interest rate for the Myrick LOC was 6.8% as of June 30, 2018. Interest expense on the Myrick LOC was $3 for both the quarter and six months ended June 30, 2018.

Secured Borrowings

Purchase and Sale Agreements

~~We service~~In March 2018, we entered into the ~~loans we sell in~~Seventh Amendment (the “Seventh Amendment”) to our ~~purchase~~Loan Purchase and ~~sale agreements. There is typically an unlimited right for us to call any loan sold, however in some cases of such call, a minimum of 4%~~Sale Agreement (the “S.K. Funding LPSA”) with S.K. Funding, LLC (“S.K. Funding”).

The purpose of the ~~commitment~~Seventh Amendment was to allow S.K. Funding to purchase a portion of the Pennsylvania Loans for a purchase price of $649 under parameters different from those specified in the S.K. Funding LPSA.

The timing of the Company’s principal and interest payments to S.K. Funding under the Seventh Amendment, and S.K. Funding’s obligation to fund the Pennsylvania Loans, vary depending on the total principal amount of the ~~buyer must have been received by buyer, or we must make up the difference. Also, Builder Finance~~Pennsylvania Loans outstanding at any time, as follows:

	●	If the total principal amount exceeds $1,000, S.K. Funding must fund the amount between $1,000 and less than or equal to $3,500.
	●	If the total principal amount is less than $4,500 the Company will also repay S.K. Funding’s principal as principal payments are received on the Pennsylvania Loans from the underlying borrowers in the amount by which the total principal amount is less than $4,500 until S.K. Funding’s principal has been repaid in full.
	●	The interest rate accruing to S.K. Funding under the Seventh Amendment is 10.5% calculated on a 365/366-day basis.

The Seventh Amendment has a ~~put option, which is limited~~term of 24 months and will automatically renew for an additional six-month term unless either party gives written notice of its intent not to ~~10%~~renew at least six months prior to the end of a term. S.K. Funding will have a priority position as compared to the Company in the case of a default by any of the ~~funding provided by Builder Finance under all loans purchased in~~borrowers.

Lines of Credit

During July 2017, we entered into a line of credit agreement (the “Shuman LOC Agreement”) with a group of lenders (collectively, “Shuman”). Pursuant to the ~~trailing 12 months.~~Shuman LOC Agreement, Shuman provides us with a revolving line of credit (the “Shuman LOC”) with the following terms:

	●	Principal not to exceed $1,325;
	●	Secured with assignments of certain notes and mortgages;
	●	Cost of funds to us of 10%; and
	●	Due in July 2019 unless extended by Shuman for one or more additional 12-month periods.

The Shuman LOC was fully borrowed as of June 30, 2018. Interest expense was $33 and $67 for the quarter and six months ended June 30, 2018, respectively.

During April 2018, we entered into a Master Loan Modification Agreement (the “Swanson Modification Agreement”) with Paul Swanson which modified the Line of Credit Agreement between us and Mr. Swanson dated October 23, 2017. Pursuant to the Swanson Modification Agreement, Mr. Swanson provides us with a revolving line of credit (the “Swanson LOC”) with the following terms:

	●	Principal not to exceed $7,000;
	●	Secured with assignments of certain notes and mortgages;
	●	Cost of funds to us of 10%; and
	●	Due in January 2018 unless extended by Mr. Swanson for one or more additional 15-month periods.

The Swanson LOC was fully borrowed as of June 30, 2018. Interest expense was $165 and $265 for the quarter and six months ended June 30, 2018, respectively.

Mortgage Payable

During January 2018, we entered into a commercial mortgage on our office building with the following terms:

	●	Principal not to exceed $660;
	●	Interest rate at 5.07% per annum based on a year of 360 days; and
	●	Due in January 2033.

Summary

The purchase and sale agreements and lines of credit are ~~recorded as secured borrowings.~~summarized below:

	June 30, 2018				December 31, 2017
			Due From				Due From
	Book Value of		Shepherd’s		Book Value of		Shepherd’s
	Loans which		Finance to Loan		Loans which		Finance to Loan
	Served as Collateral		Purchaser or Lender		Served as Collateral		Purchaser or Lender
Loan Purchaser
Builder Finance, Inc.	$	8,538	$	4,843	$	7,483	$	4,089
S.K. Funding		10,108		6,625		9,128		4,134

Lender
Shuman		2,160		1,325		1,747		1,325
Paul Swanson		8,214		5,738		2,518		2,096

Total	$	29,020	$	18,531	$	20,876	$	11,644

			Typical Current Advance Rate			Does Buyer Portion
	Year Initiated		On New Loans			Have Priority?	Rate
Loan Purchaser
Builder Finance, Inc.		2014		70	%	Yes		The rate our customer pays us
S.K. Funding		2015		55	%	Varies		9–9.5	%

Lender
Shuman		2017		67	%	Yes		10	%
Paul Swanson		2017		67	%	Yes		10	%

Unsecured Borrowings

~~The purchase and sale agreements~~Other Unsecured Debts

Our other unsecured debts are detailed below:

	Maturity	Interest			Principal Amount Outstanding as of
Loan	Date	Rate⁽¹⁾			June 30, 2018		December 31, 2017
Unsecured Note with Seven Kings Holdings, Inc.	August 2018		7.5	%		500		500

Unsecured Line of Credit from Builder Finance, Inc.	January 2019		10.0	%		500		-

Unsecured Line of Credit from Paul Swanson	December2018⁽²⁾		10.0	%		1,262		1,904

Subordinated Promissory Note	Demand⁽³⁾		7.5	%		1,125		-

Subordinated Promissory Note	December 2019		10.5	%		263		113

Subordinated Promissory Note	April 2020		10.0	%		100		100

Senior Subordinated Promissory Note	March 2022⁽⁴⁾		10.0	%		400		-

Senior Subordinated Promissory Note	March 2022⁽⁵⁾		1.0	%		728		-

Junior Subordinated Promissory Note	March 2022⁽⁵⁾		22.5	%		417		-

Senior Subordinated Promissory Note	October 2022⁽⁶⁾		1.0	%		279		279

Junior Subordinated Promissory Note	October 2022⁽⁶⁾		20.0	%		173		173

					$	5,747	$	3,069

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

⁽²⁾Due in December 2018 unless extended by Mr. Swanson for one or more additional 15-month periods.

⁽³⁾Principal due six months after lender gives notice. This note may be prepaid without fee, premium, or penalty.

⁽⁴⁾This note may be prepaid upon lender’s request at least 10 days prior to an interest payment and up to $20 of principal.

⁽⁵⁾These notes were issued to the same holder and, when calculated together, yield a blended return of 11% per annum.

⁽⁶⁾These notes were issued to the same holder and, when calculated together, yield a blended return of 10% per annum.

Typical Current Advance Rate Does Buyer Portion
Year Initiated On New Loans Have Priority? Rate
Loan purchaser
1st Financial Bank, USA/Builder Finance, Inc. 2014 70 % Yes The rate our
customer pays us
S.K. Funding, LLC 2015 50 % Varies 9-9.5%

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

The effective interest rate on the Notes offered pursuant to the Notes Program at June 30, 2018 and December 31, 2017 was 9.39% and 9.21%, respectively, not including the amortization of deferred financing costs. There are limited rights of early redemption. The following table shows the roll forward of our Notes Program:

	Six Months Ended June 30, 2018			Year Ended December 31, 2017			Six Months Ended June 30, 2017

Gross Notes outstanding, beginning of period	$	14,121		$	11,221		$	11,221
Notes issued		3,350			8,375			8,105
Note repayments / redemptions		(2,197	)		(5,475	)		(5,087	)

Gross Notes outstanding, end of period	$	15,274		$	14,121		$	14,239

Less deferred financing costs, net		252			286			330

Notes outstanding, net	$	15,022		$	13,835		$	13,909

The following is a roll forward of deferred financing costs:

	Six Months			Year			Six Months
	Ended			Ended			Ended
	June 30, 2018			December 31, 2017			June 30, 2017

Deferred financing costs, beginning balance	$	1,102		$	1,014		$	1,014
Additions		61			88			40
Deferred financing costs, ending balance	$	1,163		$	1,102		$	1,054
Less accumulated amortization		(95	)		(816	)		(724	)
Deferred financing costs, net	$	911		$	286		$	330

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

	Six Months		Year		Six Months
	Ended		Ended		Ended
	June 30, 2018		December 31, 2017		June 30, 2017

Accumulated amortization, beginning balance	$	816	$	603	$	603
Additions		95		213		121
Accumulated amortization, ending balance	$	911	$	816	$	724

Redeemable Preferred Equity and Members’ Capital

We strive to maintain a reasonable (about 15%) balance between 1)(1) redeemable preferred equity plus members’ capital and ~~2) debt.~~(2) total assets. The ratio of redeemable preferred equity plus members’ capital to assets was ~~15% and 14%~~10% as of June 30, ~~2017~~2018 and 13% as of December 31, ~~2016, respectively.~~2017. We anticipate this ratio dropping until more preferred equity is added. We are currently exploring potential increases in preferred ~~equity~~equity.

In ~~March 2017, S.K. Funding sold its 4% interest in~~January 2018, our ~~common equity in equal~~Chief Financial Officer and Executive Vice President of Operations purchased 2% and 1% ~~portions to each~~ of our ~~three independent managers and~~Class A common units; respectively, from our CEO. In March 2018, our Executive Vice President of ~~Operations. In March and April of 2017, we received an aggregate of $1,004 of new investment in our redeemable preferred equity from one~~Sales purchased 14.3% of our ~~independent managers and the wife of another of~~Class A common units from our ~~independent managers.~~CEO.

Priority of Borrowings

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

	Priority Rank		June 30, 2017		December 31, 2016		Priority Rank	June 30, 2018		December 31, 2017
Borrowing Source
Purchase and sale agreements		1	$	8,820	$	7,322	1	$	19,186	$	11,644
Secured line of credit from affiliates		2		–		–	2		1,877		-
Unsecured line of credit (senior)		3		500		–	3		500		-
Other unsecured debt (senior subordinated)		4		279		279
Unsecured Notes through our public offering, gross		5		14,239		11,221
Other unsecured debt (subordinated)		5		713		700
Other unsecured debt (junior subordinated)		6		173		173
Other unsecured borrowings (senior subordinated)							4		1,008		279
Unsecured Notes through our Notes Program, gross							5		15,274		14,121
Other unsecured borrowings (subordinated)							5		3,649		2,617
Other unsecured borrowings (junior subordinated)							6		590		173
Total			$	24,724	$	19,695		$	42,084	$	28,834

Liquidity and Capital Resources

Our ~~operations are subject~~primary liquidity management objective is to ~~certain risks~~meet expected cash flow needs while continuing to service our business and ~~uncertainties, particularly related~~customers. As of June 30, 2018, and December 31, 2017, we had 252 and 171, respectively, in combined loans outstanding, which totaled $44,803 and $32,375, respectively, in gross loan receivables outstanding. Unfunded commitments to extend credit, which have similar collateral, credit and market risk to our outstanding loans, were $21,676 and $19,312 as of June 30, 2018 and December 31, 2017, respectively. We anticipate a significant increase in our gross loans receivables over the ~~concentration of~~12 months subsequent to June 30, 2018 by directly increasing originations through new and existing customers.

To fund our ~~current operations, 23% of~~combined loans, we rely on secured debt, unsecured debt and equity, which are ~~to a single customer~~described in ~~a single geographic region, as well as~~ the evolution of the current economic environment and its impact on the United States real estate and housing markets. Both the concentration of risk and the economic environment could directly or indirectly cause or magnify losses related to certain transactions and access to and cost of adequate financing.following table:

Source of Liquidity	As of June 30, 2018		As of December 31, 2017
Secured debt	$	21,058	$	11,644
Unsecured debt		20,769		16,904
Equity		5,038		4,783

~~The Company’s anticipated primary sources~~Secured debt, net of ~~liquidity going forward are:~~

	●	The purchase and sale agreements and secured lines, which allow us to increase our loan balances. Our loan origination volume is dependent upon our buyers continuing to purchase loans from us. We added a secured line of credit in July 2017 for $1,325, which functions much like the purchase and sale agreements. We also added a $3,000 purchase to an existing purchase and sale agreement in July of 2017;

	●	The continued issuance of Notes to the general public through our second public Notes offering, which was declared effective by the SEC on September 29, 2015, and has been registered and declared effective in 44 states as of June 30, 2017. We began to advertise for our Notes offerings in March 2013 and received an aggregate of approximately $14,239 and $11,221 in Notes proceeds as of June 30, 2017 and December 31, 2016, respectively (net of redemptions). We anticipate continuing our capital raising efforts in 2017, focusing on the efforts that have proven fruitful;

	●	Interest income and/or principal repayments related to the loans. The Company’s ability to fund its operations remains dependent upon the ability of our largest borrower, whose loan commitments represented 23% and 37% our total outstanding loan commitments as of June 30, 2017 and December 31, 2016, respectively, to continue paying interest and/or principal. The risk of our largest customer not paying interest is mitigated in the short term by having an Interest Escrow, which had a balance of $311 and $541 as of June 30, 2017 and December 31, 2016, respectively. While a default by this large customer could impact our cash flow and/or profitability in the long term, we believe that, in the short term, a default might impact profitability, but not liquidity, as we are generally not receiving interest payments from the customer on the development loan portion of the customer’s balance while the customer is performing (this interest is being credited from the interest escrow). This customer is in good standing with us and is current on their construction loan interest payments. As of June 30, 2017, our next two largest customers made up 7% and 5% respectively of our loan commitments, with loans in Sarasota, Florida and Orlando, Florida, respectively. As of December 31, 2016, our next two largest customers made up 11% and 6% respectively of our loan commitments, with loans in Sarasota, Florida and Savannah, Georgia, respectively;

	●	~~Funds from the sale of foreclosed assets, net of any debt which we might have on those assets;~~

	●	~~Funds borrowed from our bank line; and~~

	●	~~Funds borrowed from affiliated creditors.~~

~~We generated net income of $354 and $332 for~~deferred financing costs increased $9,414 during the six months ended June 30, ~~2017 and 2016, respectively and cash flow from operations~~2018, which consisted of $742 and $298 for the same periods. At June 30, 2017 and December 31, 2016, we had cash on hand of $88 and $1,566, respectively, availability on our bank line of $0 and $0, respectively, and our outstanding debt totaled $24,724 and $19,695, respectively, of which $8,820 and $7,322 was secured, respectively. The secured amount is from ouran increase in loan purchase and sale agreements, balances on lines of credits with affiliates and mortgage payable of $6,887, $1,877 and $650, respectively. We anticipate increasing our secured debt by roughly half of the increase in loan asset balances over the 12 months subsequent to June 30, 2018 through our existing loan purchase and sale agreements.

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 $3,865 during the six months ended June 30, 2018, which ~~add liquidity~~consisted of an increase in our Notes Program of $1,187 and ~~allow us~~an increase in the balances of unsecured lines of credit of $2,678. We anticipate an increase in our unsecured debt through increased sales in the Notes Program to ~~expand~~cover most of the increase in loan assets not covered by increases in our ~~business. As~~secured debt during the 12 months subsequent to June 30, 2018.

Equity increased $255 during the six months ended June 30, 2018, which consisted of an increase in Series C cumulative preferred units (“Series C Units”), Series B cumulative preferred units, and Class A common equity of $68, $40 and $147, respectively. We anticipate an increase in our equity during the 12 months subsequent to June 30, 2017 through the issuance of additional Series C Units. During the year ended December 31, 2017, we increased the amount of Series C Units outstanding by $1,097. If we do are not able to increase our equity through the issuance of additional Series C Units, we will look to our Notes Program for the increase. If we anticipate not being able to fund our projected increases in loan balances through the means listed above, we may reduce new loan originations to reduce need for additional funds.

Cash provided by operations was $425 as of June 30, 2018 as compared to $742 for the same period of 2017. Our decrease in operating cash flow in 2018 compared to the same period of 2017 ~~and~~was due to a decrease in customer interest escrow of $408 offset by an increase in net loan origination fee deferred of $97.

Contractual Obligations

The following table shows the maturity of our outstanding debt as of June 30, 2018:

Year Maturing	Total Amount Maturing		Public Offering		Other Unsecured		Secured Borrowings

2018	$	25,728	$	2,306	$	3,007	$	20,415
2019		7,556		6,499		1,043		14
2020		2,270		2,155		100		15
2021		3,788		3,773		-		15
2022 and thereafter		2,742		541		1,597		604
Total	$	42,084	$	15,274	$	5,747	$	21,063

The total amount maturing through year ended December 31, ~~2016, the amount that we have not loaned, but are obligated to potentially lend to our customers based on our~~2019 is $33,284, which consists of secured borrowings of $20,429 and unsecured borrowings of $12,855.

Secured borrowings maturing through year ended December 30, 2019 significantly consists of loan purchase and sale agreements with ~~them, was $17,797~~two loan purchasers (Builder Finance, Inc. and ~~$11,503, respectively.~~ S. K. Funding) and two lenders (Stephen Shuman and Paul Swanson).

The purchasers under the loan purchase and sale agreements have an unconditional obligation to fund loans once agreed to purchase; however, Builder Finance, Inc. has put options that could require us to (a) buy back loans after 12 months and (b) buy back 10% of the portfolio commitment value in any 12 months.

Our ~~availability on our~~lenders have lines of credit with the Company described as follows:

Stephen Shuman’s line of credit ~~from our members was $1,500 at both June 30, 2017~~(“Shuman LOC”) is due July 2019 and ~~December 31, 2016. Our members are~~unless terminated will automatically renew 60 days prior for an additional 12 months. If the Shuman LOC does not ~~obligated~~renew, $1,325 will be due in July 2019, which we would expect to fund ~~requests under our line of credit. The Company plans to fund its new~~through loan growth, unfunded commitment, and principal amounts due on its debt using various sources of funding. In July 2017, we sold a participating interest in the Hoskins Group loans for $3,000, and became the borrower on a securedpayoffs.

Paul Swanson’s line of credit (“Swanson LOC”) is due on December 31, 2018 and unless terminated will automatically renew 120 days prior for ~~$1,325 (these items~~an additional 15 months. If the Swanson LOC does not renew, $4,000 will be due on December 31, 2018 and $3,000 will be due 120 days after, and which we would expect to fund through loan payoffs used as collateral for the line.

Unsecured borrowings due on December 31, 2018 consist of Notes issued pursuant to the Notes Program and other unsecured debt of $8,805 and $4,050, respectively. To the extent that Notes issued pursuant to the Notes Program are ~~mentioned~~not renewed upon maturity, we will be required to fund the maturities, which we anticipate funding through the issuance of new Notes in our Notes Program. Our other unsecured debt has historically renewed. For more information on other unsecured borrowings, see Note 5 – Borrowings. If other unsecured borrowings are not renewed in the ~~first bullet point above). The combined $4,325 added to~~future, we anticipate funding such maturities through investments in our liquidity. We sell 70% participating interests in most of the loans we create. The portions of loans sold already that has not been funded is $3,356. There are loans that we have designated for sale which, at 70% funding, will eventually provide $4,442 in liquidity, and there are loans we have not designated for sale, which, if sold at 70% funding, would eventually provide $3,387 in liquidity. In addition, the Company receives payoffs on loans, a portion of which is returned to the loan purchaser, if any. Also, the Company receives funds from new public offering sales, and many of the notes which mature are renewed, reducing the funding neededNotes Program.

To help manage our liquidity, we:

	��●	do not offer demand deposits (for instance, a checking account). We manage the duration of our Notes through the interest rates we offer at any time;

	●	fund loan requests with varying sources of capital, not just from proceeds of our Notes ~~offering;~~Program; and

	●	match our interest rate to our borrower to our cost of funds.

~~We currently (or may in~~The following table contains our sources of liquidity for the ~~future) use liquidity to:~~six months ended June 30, 2018 and 2017:

	●	~~make payments on other borrowings, including loans from affiliates and banks;~~

	●	~~pay Notes on their scheduled due date and Notes that we are required to redeem early;~~

	●	~~make interest payments on the Notes; and~~

	●	~~to the extent we have remaining net proceeds and adequate cash on hand, fund any one or more of the following activities:~~

Source of Liquidity	Six Months Ended June 30, 2018		Six Months Ended June 30, 2017		Comment and Future Outlook
Secured debt	$	13,538	$	5,775	We increased our related party debt and added a mortgage on our office building. We intend to continue to increase funds through bank participation during 2018 as needed.
Unsecured debt		8,784		9,218	Our unsecured debt outside of our Notes Program increased during 2018. We plan to increase our unsecured borrowings as needed.
Principal payments		11,337		6,229	Our loan volume increased in 2018 resulting in an increase in principal payments. We anticipate continued growth in payoffs as our volume increases.
Interest income		2,708		1,631	We anticipate interest income increasing as our loan balances grow. Our concentration in large borrowers adds risk to this source of liquidity.
Funds from the sale of foreclosed assets		–		1,890	We anticipate selling more foreclosed assets in the future.

	●	~~to extend commercial construction loans to homebuilders to build single or multi-family homes or develop lots;~~

	●	~~to make distributions to equity owners, including the preferred equity owners;~~

	●	~~for working capital and other corporate purposes;~~

	●	~~to purchase defaulted secured debt from financial institutions at a discount;~~

	●	~~to purchase defaulted unsecured debt from suppliers to homebuilders at a discount and then secure it with real estate or other collateral;~~

	●	~~to purchase and improve real estate in which we will operate our business (one such purchase occurred in February 2017); and~~

	●	~~to redeem Notes which we have decided to redeem prior to maturity.~~

The following table contains our uses of liquidity for the six months ended June 30, 2018 and 2017:

Use of Liquidity	Six Months Ended June 30, 2018		Six Months Ended June 30, 2017		Comment and Future Outlook
Unfunded and new loans	$	21,676	$	17,797	We have loan commitments which are unfunded and will be funded as the collateral of these loans are built. As we create new loans, a portion will be funded at origination and the remaining balance will fund over time.
Payments on secured debt		4,118		4,277	These will continue to grow as loan payoffs continue to rise.
Payments on unsecured debt		4,953		5,687	Consists mostly of borrowings from our Notes program. We anticipate these payments to increase in 2018.
Interest expense		1,891		1,162	We anticipate interest expense increasing as we incur additional debt.
Distributions to owners		276		175	Distributions are based on income.

Inflation, Interest Rates, and Housing Starts

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

Housing inflation generally has a positive impact on our operations. When we lend initially, we are lending a percentage of a home’s expected value, based on historical sales. If those estimates prove to be low (in an inflationary market), the percentage we loaned of the value actually decreases, reducing potential losses on defaulted loans. The opposite is true in a deflationary housing price market. It is our opinion that values are average in many of the housing markets in the U.S. today, and our lending against these values is safer than loans made by financial institutions in 2006 to 2008.

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. Higher short term rates may increase the rates builders are charged by banks faster than our rates to the builder will grow, which might be a benefit for us. Below is a chart showing three year U.S. treasury rates, which are being used by us here to approximate CD rates. Short term interest rates have risen slightly but are generally low historically.

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

Source: U.S. Census Bureau

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

Off-Balance Sheet Arrangements

As of June 30, ~~2017~~2018, and December 31, ~~2016,~~2017, 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~~CEO (our principal executive ~~officer~~officer) and CFO (our principal financial officer) evaluated the effectiveness of the design and operation of our disclosure controls and procedures. Based upon, and as of the date of, the evaluation, our ~~chief executive officer~~CEO (our principal executive ~~officer~~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 ~~chief executive officer~~CEO (our principal executive ~~officer~~officer) and CFO (our principal financial officer), as appropriate to allow timely decisions regarding required disclosure.

Internal Control over Financial Reporting

~~There have~~During 2018, we hired a Vice President of Administrative Operations and Product Development to further implement segregation of duties. In addition, we placed into service an internally developed proprietary software system to assist in the management of our Notes Program, which replaced an electronic spreadsheet system. The development of the proprietary software system was designed in part to enhance the overall system of internal controls over financial reporting through further automation of various business processes. Except for the above-mentioned items there has been no ~~changes~~change in our internal ~~control~~controls over financial reporting ~~that occurred~~ during the quarter and six months ended June 30, ~~2017~~2018 that ~~have~~has materially affected or ~~are~~is reasonably likely to materially affect our internal ~~control~~controls over financial reporting.

PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

None.

ITEM 1A. RISK FACTORS

Not applicable.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

	(a)	*~~Issuance of~~Reinvestments in Partial Series C Cumulative ~~Redeemable~~ Preferred Units* ~~We had an unregistered sale of equity securities~~Investors in the ~~three months ended June 30, 2017 in the form of the sale of~~ Series C cumulative ~~redeemable~~ preferred units ~~as disclosed~~(“Series C Preferred Units”) may elect to reinvest their distributions in ~~our Current Report~~additional Series C Preferred Units (the “Series C Reinvestment Program”). Pursuant to the Series C Reinvestment Program, on ~~Form 8-K filed on~~January 31, 2018, we issued approximately 0.0474022 of a Series C Preferred Unit to Margaret Rauscher IRA LLC in exchange for distribution proceeds of approximately $4,740.22, and approximately 0.0601630 of a Series C Preferred Unit to an IRA owned by William Myrick in exchange for distribution proceeds of approximately $6,016.30. On February 28, 2018, we issued approximately 0.0478762 of a Series C Preferred Unit to Margaret Rauscher IRA LLC in exchange for distribution proceeds of approximately $4,787.62, and approximately 0.0607647 of a Series C Preferred Unit to an IRA owned by William Myrick in exchange for distribution proceeds of approximately $6,076.47. On March 31, 2018, we issued approximately 0.0483550 of a Series C Preferred Unit to Margaret Rauscher IRA LLC in exchange for distribution proceeds of approximately $4,835.50, and approximately 0.0613723 of a Series C Preferred Unit to an IRA owned by William Myrick in exchange for distribution proceeds of approximately $6,137.23. On April ~~14, 2017.~~30, 2018, we issued approximately 0.0488386 of a Series C Preferred Unit to Margaret Rauscher IRA LLC in exchange for distribution proceeds of approximately $4,883.86, and approximately 0.06198.60 of a Series C Preferred Unit to an IRA owned by William Myrick in exchange for distribution proceeds of approximately $6,198.60. On May 31, 2018, we issued approximately 0.0493269 of a Series C Preferred Unit to Margaret Rauscher IRA LLC in exchange for distribution proceeds of approximately $4,932.69, and approximately 0.0626059 of a Series C Preferred Unit to an IRA owned by William Myrick in exchange for distribution proceeds of approximately $6,260.59. On June 30, 2018, we issued approximately 0.0498202 of a Series C Preferred Unit to Margaret Rauscher IRA LLC in exchange for distribution proceeds of approximately $4,982.02, and approximately 0.0632320 of a Series C Preferred Unit to an IRA owned by William Myrick in exchange for distribution proceeds of approximately $6,323.20. The proceeds received from the sales of the partial Series C Preferred Units in those 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 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 in our public offering (SEC File No. 333-203707, effective September 29, 2015). As of June 30, ~~2017,~~2018, we had issued ~~$14,344,000~~$18,435,000 in Notes pursuant to that public offering. From September 29, 2015 through June 30, ~~2017,~~2018, we incurred expenses of ~~$145,000~~$246,000 in connection with the issuance and distribution of the Notes, 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 June 30, ~~2017~~2018 were ~~$14,199,000,~~$18,189,000, 100% 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 June 30, ~~2017,~~2018, 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 June 30, ~~2017,~~2018, 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.

EXHIBIT INDEX

The following exhibits are included in this report on Form 10-Q for the period ended June 30, ~~2017~~2018 (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 Company’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 Company’s Registration Statement on Form S-1, filed on May 11, 2012, Commission File No. 333-181360

3.3		Second Amended and Restated Operating Agreement, ~~incorporated by reference to Exhibit 3.3 to the Company’s Registration Statement on Form S-1, filed on May 11, 2012, Commission File No. 333-181360~~

~~3.4~~		Amendment No. 1 to the Amended and Restated Limited Liability Company Agreement of Shepherd’s Finance, LLC, dated December 31, 2014, incorporated by reference to Exhibit 10.2 to the Company’s Form 8-K, filed on January 6, 2015, Commission File No. 333-181360

~~3.5~~		Amendment No. 2 to the Amended and Restated Limited Liability Company Agreement of Shepherd’s Finance, LLC, dated March 30, 2015, incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K, filed on March 30, 2015, Commission File No. 333-181360

~~3.6~~		Amendment No. 3 to the Amended and Restated Limited Liability Company Agreement of Shepherd’s Finance, LLC, dated as of December 28, 2015, incorporated by reference to Exhibit 10.3 to the Company’s Form 8-K, filed on December 31, 2015, Commission File No. 333-203707

~~3.7~~		~~Amendment No. 4 to the Amended and Restated Limited Liability Company Agreement of Shepherd’s Finance, LLC, dated as of March 16, 2017,~~ incorporated by reference to Exhibit 3.1 to the Company’s Form 8-K, filed on ~~March 21,~~November 13, 2017, Commission File No. 333-203707

4.1		Indenture Agreement (including Form of Note) dated September 29, 2015, incorporated by reference to Exhibit 4.1 to the Company’s Post-Effective Amendment No. 1, filed on September 29, 2015, Commission File No. 333-203707

10.1		Master Loan Modification Agreement to the Line of Credit Agreement between Shepherd’s Finance, LLC and Paul Swanson, dated as of April 11, 2018, incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K, filed on April 18, 2018, Commission File No. 333-203707

10.1*10.2		~~First Amendment~~Unsecured Promissory Note from Shepherd’s Finance, LLC to Paul Swanson, dated as of October 23, 2017 and April 12, 2018, incorporated by reference to Exhibit 10.2 to the ~~Loan Purchase~~Company’s Form 8-K, filed on April 18, 2018, Commission File No. 333-203707

10.3		Secured Promissory Note from Shepherd’s Finance, LLC to Paul Swanson, dated as of October 23, 2017 and ~~Sale~~ April 13, 2018, incorporated by reference to Exhibit 10.3 to the Company’s Form 8-K, filed on April 18, 2018, Commission File No. 333-203707

10.4		Agreement between Shepherd’s Finance, LLC and ~~Builder~~1333 Vista Drive, LLC, dated April 27, 2018, incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K, filed on May 3, 2018, Commission File No. 333-203707

10.5		Deed in Lieu of Foreclosure Agreement between Shepherd’s Finance, ~~Inc.,~~LLC and 1333 Vista Drive, LLC, dated asApril 27, 2018, incorporated by reference to Exhibit 10.2 to the Company’s Form 8-K, filed on May 3, 2018, Commission File No. 333-203707

10.6		Warranty Deed in Lieu of ~~March 31, 2017~~Foreclosure Agreement between Shepherd’s Finance, LLC and 1333 Vista Drive, LLC, dated April 27, 2018, incorporated by reference to Exhibit 10.3 to the Company’s Form 8-K, filed on May 3, 2018, Commission File No. 333-203707

10.7*		First Amendment to Promissory Note between Shepherd’s Finance, LLC and Daniel M. Wallach and Joyce S. Wallach, dated June 14, 2018

10.8*		First Amendment to Promissory Note between Shepherd’s Finance, LLC and 2007 Daniel M. Wallach Legacy Trust, dated June 14, 2018

31.1*		Certification of Principal Executive Officer, ~~and~~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, ~~and~~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.

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: August ~~3, 2017~~9, 2018	By:	/s/ ~~Daniel M. Wallach~~Catherine Loftin
		~~Daniel M. Wallach~~Catherine Loftin
		Chief ~~Executive~~Financial Officer ~~and Manager~~

	June 30, 2017		December 31, 2016

Unpaid principal balance (contractual obligation from customer)	$	1,987	$	–
Charge-offs and payments applied		–		–
Gross value before related allowance		1,987		–
Related allowance		7		–
Value after allowance	$	1,980	$	–

Class or Series	June 30, 2017		December 31, 2016
Series B Preferred Units	$	1,160	$	1,150
Class A Common Units		2,398		2,249

Members’ Capital	$	3,558	$	3,399

	Relationship to	Amount invested as of				Weighted average interest Rate as of			Interest earned during the six months ended
	Shepherd’s	June 30		December 31		June 30,			June 30,
Investor	Finance	2017		2016		2017			2017		2016
David Wallach	Parent of Independent Manager		211		111		9.42	%		6		5

R. Scott Summers	Son of Independent Manager		275		75		8.00	%		8		12

Wallach Family Irrevocable Educational Trust	Trustee is Member		200		200		9.00	%		9		8

Eric A. Rauscher	Independent Manager		475		600		10.00	%		21		22

Joseph Rauscher	Parent of Independent Manager		195		186		9.33	%		9		8

	Six Months Ended June 30,2017			Year Ended December 31, 2016			Six Months Ended June 30, 2016

Beginning balance	$	812		$	498		$	498
+ Preferred equity dividends		57			104			51
+ Additions from Pennsylvania Loans		51			926			130
+ Additions from other loans		901			430			199
- Interest and fees		(867	)		(1,109	)		(460	)
- Repaid to borrower or used to reduce principal		(125	)		(37	)		–
Ending balance	$	829		$	812		$	418