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, ~~2018~~2019

[ ]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~~333-224557

SHEPHERD’S FINANCE, LLC

(Exact name of registrant as specified on its charter)

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

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

(Address of principal executive offices)

(302)752-2688

(Registrant’s telephone number including area code)

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

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

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

Indicate by check mark whether the registrant has submitted electronically ~~and posted on its corporate 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	[ ]X]	Smaller reporting company	[X]
Emerging growth company	[X]

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

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

FORM 10-Q

SHEPHERD’S FINANCE, LLC

TABLE OF CONTENTS

	Page

Cautionary Note Regarding Forward-Looking Statements	3

PART I. FINANCIAL INFORMATION	4

Item 1. Financial Statements	4

Interim Condensed Consolidated Balance Sheets as of June 30, ~~2018~~2019 (Unaudited) and December 31, ~~2017~~2018	4

Interim Condensed Consolidated Statements of Operations (Unaudited) for the Three ~~Months~~ and Six Months Ended June 30, ~~2018~~2019 and ~~2017~~2018	5

Interim Condensed Consolidated ~~Statement~~Statements of Changes in Members’ Capital (Unaudited) for the Six Months Ended June 30, 2019 and 2018 and for the Three Months Ended June 30, 2019 and 2018	6

Interim Condensed Consolidated Statements of Cash Flows (Unaudited) for the Six Months Ended June 30, ~~2018~~2019 and ~~2017~~2018	7

Notes to Interim Condensed Consolidated Financial Statements (Unaudited)	8

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	19

Item 3. Quantitative and Qualitative Disclosure About Market Risk	3837

Item 4. Controls and Procedures	38

~~PART II. OTHER INFORMATION~~	3937

~~Item 1. Legal Proceedings~~PART II. OTHER INFORMATION	3937

Item ~~1A. Risk Factors~~1. Legal Proceedings	3937

Item 1A. Risk Factors	37

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

Item 3. Defaults upon Senior Securities	39

Item ~~3. Defaults upon Senior Securities~~4. Mine Safety Disclosures	4039

Item ~~4. Mine Safety Disclosures~~5. Other Information	4039

~~Item 5. Other Information~~	40

Item 6. Exhibits	4039

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, ~~2017,~~2018, 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 ~~2017~~Annual Report on Form 10-K for the year ended December 31, 2018 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
(in thousands of dollars)	June 30, 2018		December 31, 2017		June 30, 2019		December 31, 2018
	(Unaudited)				(Unaudited)
Assets
Cash and cash equivalents	$	247	$	3,478	$	2,153	$	1,401
Accrued interest receivable		653		720		809		568
Loans receivable, net		41,819		30,043		50,377		46,490
Foreclosed assets		5,636		1,036		7,964		5,973
Property, plant and equipment, net		1,045		1,020
Premises and equipment						1,006		1,051
Other assets		176		58		399		327

Total assets	$	49,576	$	36,355	$	62,708	$	55,810

Liabilities, Redeemable Preferred Equity and Members’ Capital

Liabilities

Liabilities and Members’ Capital
Customer interest escrow	$	544	$	935	$	1,109	$	939
Accounts payable and accrued expenses		482		705		412		724
Accrued interest payable		1,654		1,353		2,269		2,140
Notes payable secured, net of deferred financing costs		21,058		11,644		28,690		23,258
Notes payable unsecured, net of deferred financing costs		20,769		16,904		23,635		22,635
Due to preferred equity member		31		31		34		32

Total liabilities		44,538		31,572	$	56,149	$	49,728

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

Redeemable Preferred Equity

Series C preferred equity		1,165		1,097	$	2,715	$	2,385

Members’ Capital

Series B preferred equity		1,280		1,240		1,420		1,320
Class A common equity		2,593		2,446		2,424		2,377
Members’ capital		3,873		3,686	$	3,844	$	3,697

Total liabilities, redeemable preferred equity and members’ capital	$	49,576	$	36,355	$	62,708	$	55,810

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, ~~2018~~2019 and ~~2017~~2018

	Three Months Ended				Six Months Ended				Three Months Ended					Six Months Ended
	June 30,				June 30,				June 30,					June 30,
(in thousands of dollars)	2018		2017		2018		2017		2019			2018		2019		2018
Interest Income
Interest and fee income on loans	$	2,045	$	1,356	$	3,872	$	2,530	$	2,454		$	1,925	$	4,886	$	3,632
Interest expense:
Interest related to secured borrowings		517		215		928		394		769			517		1,450		928
Interest related to unsecured borrowings		513		401		963		768		716			513		1,341		963
Interest expense		1,030		616		1,891		1,162		1,485			1,030		2,791		1,891

Net interest income		1,015		740		1,981		1,368		969			895		2,095		1,741
Less: Loan loss provision		19		15		59		26		151			19		198		59

Net interest income after loan loss provision		996		725		1,922		1,342		818			876		1,897		1,682

Non-Interest Income
Gain from sale of foreclosed assets		–		–		–		77
Gain on foreclosure of assets										95			–		95		–

Total non-interest income		–		–		–		77		95			–		95		–

Income		996		725		1,922		1,419		913			876		1,992		1,682

Non-Interest Expense
Selling, general and administrative		691		450		1,308		898		620			571		1,244		1,068
Depreciation and amortization		21		6		38		12		22			21		45		38
Loss on foreclosure of assets										169			–		169		–
Impairment loss on foreclosed assets		80		106		85		155		27			80		107		85

Total non-interest expense		792		562		1,431		1,065		838			672		1,565		1,191

Net Income	$	204		163	$	491	$	354	$	75		$	204	$	427	$	491

Earned distribution to preferred equity holders		67		57		130		88		110			67		215		130

Net income attributable to common equity holders	$	137		106	$	361	$	266	$	(35	)	$	137	$	212	$	361

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

Shepherd’s Finance, LLC

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

For the Six and Three Months Ended June 30, 2019 and 2018

For the Six Months Ended June 30, 2019 and 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

(in thousands of dollars)	2019			2018

Members’ capital, beginning balance, December 31	$	3,697		$	3,686
Net income less distributions to preferred C of $148 and $68		279			423
Contributions from preferred B equity holders		100			40
Earned distributions to preferred B equity holders		(66	)		(62	)
Distributions to common equity holders		(166	)		(214	)
Members’ capital, ending balance June 30	$	3,844		$	3,873

For the Three Months Ended June 30, 2019 and 2018

(in thousands of dollars)	2019			2018

Members’ capital, beginning balance, March 31	$	4,004		$	3,888
Net income less distributions to preferred C of $75 and $33		-			171
Contributions from preferred B equity holders		40			40
Earned distributions to preferred B equity holders		(34	)		(34	)
Distributions to common equity holders		(166	)		(192	)
Members’ capital, ending balance June 30	$	3,844		$	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~~2019 and ~~2017~~2018

	Six Months Ended June 30,						Six Months Ended June 30,
(in thousands of dollars)	2018			2017			2019			2018

Cash flows from operations
Net income	$	491		$	354		$	427		$	491
Adjustments to reconcile net income to net cash provided by (used in) operating activities
Adjustments to reconcile net income to net cash provided by operating activities
Amortization of deferred financing costs		95			121			133			95
Provision for loan losses		59			26			198			59
Net loan origination fees deferred (earned)		351			254
Net loan origination fees deferred								155			351
Change in deferred origination expense		(87	)		(71	)		65			(87	)
Impairment of foreclosed assets		85			155			107			85
Loss on foreclosed assets								169			-
Gain on foreclosed assets								(95	)		-
Depreciation and amortization		38			12			45			38
Gain from sale of foreclosed assets		-			(77	)
Net change in operating assets and liabilities
Net change in operating assets and liabilities:
Other assets		(118	)		10			(72	)		(118	)
Accrued interest receivable		(176	)		(74	)		(241	)		(176	)
Customer interest escrow		(391	)		17			170			(391	)
Accounts payable and accrued expenses		78			39			(181	)		78

Net cash provided by (used in) operating activities		425			742
Net cash provided by operating activities								880			425

Cash flows from investing activities
Loan originations and principal collections, net		(15,996	)		(9,090	)		(6,021	)		(15,996	)
Investment in foreclosed assets		(545	)		(265	)		(456	)		(545	)
Proceeds from sale of foreclosed assets		-			1,890
Property plant and equipment additions		(63	)		(583	)
Premises and equipment additions								-			(63	)

Net cash provided by (used in) investing activities		(16,564	)		(8,048	)
Net cash used in investing activities								(6,477	)		(16,604	)

Cash flows from financing activities
Contributions from redeemable preferred equity		-			1,004
Contributions from members (preferred)		40			10
Contributions from preferred equity holders								300			40
Distributions to preferred equity holders		(62	)		(58	)		(85	)		(62	)
Distributions to common equity holders		(214	)		(117	)		(166	)		(214	)
Proceeds from secured note payable		13,538			5,775			11,016			13,538
Repayments of secured note payable		(4,118	)		(4,277	)		(6,648	)		(4,118	)
Proceeds from unsecured notes payable		8,784			9,218			6,186			8,784
Redemptions/repayments of unsecured notes payable		(4,953	)		(5,687	)		(3,923	)		(4,953	)
Deferred financing costs paid		(67	)		(40	)		(331	)		(67	)

Net cash provided by (used in) financing activities		12,948			5,828
Net cash provided by financing activities								6,349			12,948

Net increase (decrease) in cash and cash equivalents		(3,231	)		(1,478	)		752			(3,231	)

Cash and cash equivalents
Beginning of period		3,478			1,566			1,401			3,478
End of period	$	247		$	88		$	2,153		$	247

Supplemental disclosure of cash flow information
Cash paid for interest	$	1,533		$	1,062		$	2,662		$	1,533

Non-cash investing and financing activities
Earned but not paid distribution of preferred equity holders	$	68		$	29
Foreclosure of assets	$	3,897		$	–
Earned by preferred B equity holders but not distributed to customer interest escrow							$	34		$	31
Earned by preferred B equity holders and distributed to customer interest escrow							$	33		$	31
Foreclosure of assets transferred from loans receivable							$	1,716		$	3,897
Accrued interest reduction due to foreclosure	$	243		$	–		$	-		$	243
Earned but not paid distributions of preferred C equity holders							$	148		$	68
Unsecured transferred to secured notes payable							$	1,014		$	-

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

Shepherd’s Finance, LLC and subsidiary (the “Company”) was originally formed as a Pennsylvania limited liability company on May 10, 2007. The Company is athe sole member of a consolidating subsidiary, 84 REPA, LLC. The Company operates pursuant to its Second Amended and Restated Operating Agreement, as amended, by and among Daniel M. Wallach and the other members of the Company effective as of March 16, 2017.

~~As of June 30, 2018, the~~The Company extends commercial loans to residential homebuilders (in ~~17 states)~~20 states as of June 30, 2019) 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, 2017,~~June 30, 2019, 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 108 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, ~~2018.~~2019. These unaudited interim condensed consolidated financial statements should be read in conjunction with the ~~2017~~2018 consolidated financial statements and notes thereto (the “2018 Financial Statements”) included in the Company’s Annual Report on Form 10-K ~~as of and~~ for the year ended December 31, ~~2017~~2018 (the ~~“2017 Statements”~~“2018 Form 10-K”). The accounting policies followed by the Company are set forth in Note 2 –Summary of Significant Accounting Policiesin the ~~2017~~2018 Financial Statements.

Accounting Standards Adopted in the Period

Accounting Standards Update (“ASU”) 2016-13 – “Financial Instruments-Credit Losses: Measurement of Credit Losses on Financial Instruments”. The amendments in ASU 2016-13 introduce a new current expected credit loss (“CECL”) model for certain financial assets, including mortgage loans and reinsurance receivables. The new model will not apply to debt securities classified as available-for-sale. For assets within the scope of the new model, an entity will recognize as an allowance against earnings its estimate of the contractual cash flows not expected to be collected on day one of the asset’s acquisition. The allowance may be reversed through earnings if a security recovers in value. This differs from the current impairment model, which requires recognition of credit losses when they have been incurred and recognizes a security’s subsequent recovery in value in other comprehensive income. ASU 2016-13 also makes targeted changes to the current impairment model for available-for-sale debt securities, which comprise the majority of the Company’s invested assets. Similar to the CECL model, credit loss impairments will be recorded in an allowance against earnings that may be reversed for subsequent recoveries in value. The amendments in ASU 2016-13, along with related amendments in ASU No. 2018-19 - Codification Improvements to Topic 326, Financial Instruments-Credit Losses, are effective for annual and interim periods beginning after December 15, 2019 on a modified retrospective basis. The Company is reviewing its policies and processes to ensure compliance with the requirements in ASU 2016-13.

Accounting Standards Update (“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 goods or services is transferred to the 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.~~2019.

Reclassifications

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

2. Fair Value

The Company had no financial instruments measured at fair value on a recurring basis as of June 30, ~~2018~~2019 and December 31, ~~2017.~~2018.

The following tables present the balances of non-financial instruments measured at fair value on a non-recurring basis as of June 30, ~~2018~~2019 and December 31, ~~2017.~~2018.

~~June 30, 2018~~

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 $ – $ – $ 5,636

					Quoted Prices
					in Active Markets for		Significant Other		Significant
	June 30, 2019				Identical		Observable		Unobservable
	Carrying		Estimated		Assets		Inputs		Inputs
	Amount		Fair Value		Level 1		Level 2		Level 3

Foreclosed assets	$	7,964	$	7,964	$	–	$	–	$	7,964
Impaired assets		1,663		1,663		–		–		1,663
Total	$	9,627	$	9,627	$	–	$	–	$	9,627

~~December 31, 2017~~

					Quoted Prices
					in Active Markets for		Significant Other		Significant
	December 31, 2018				Identical		Observable		Unobservable
	Carrying		Estimated		Assets		Inputs		Inputs
	Amount		Fair Value		Level 1		Level 2		Level 3

Foreclosed assets	$	5,973	$	5,973	$	–	$	–	$	5,973
Impaired assets		2,503		2,503		–		–		2,503
Total	$	8,476	$	8,476	$	–	$	–	$	8,476

~~The Company had no impaired loans as of June 30, 2018 and December 31, 2017.~~

The table below is a summary of fair value estimates for financial instruments and the level of the fair value hierarchy within which the fair value measurements are categorized at the periods indicated:

~~June 30, 2018~~

QuotedPrices

in Active

Markets for

Significant

Other

Significant

June 30, 2019

Identical

Observable

Unobservable

Carrying

Estimated

Assets

Inputs

Amount

Fair Value

Level 1

Level 2

Level 3

Financial Assets

Cash and cash equivalents

2,153

–

Loans receivable, net

50,377

–

50,377

Accrued interest on loans

809

–

809

Financial Liabilities

Customer interest escrow

1,109

–

1,109

Notes payable secured, net

28,690

–

28,690

Notes payable unsecured, net

23,635

–

23,635

Accrued interest payable

2,269

–

2,269

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
Financial Assets:
Cash and cash equivalents $ 247 $ 247 $ 247 $ – $ –
Loans receivable, net 41,819 41,819 – – 41,819
Accrued interest receivable 653 653 – – 653
Financial Liabilities:
Customer interest escrow 544 544 – – 544
Notes payable secured 21,058 21,058 – – 21,058
Notes payable unsecured, net 20,769 20,769 – – 20,769
Accrued interest payable 1,654 1,654 – – 1,654

~~December 31, 2017~~

					Quoted Prices										QuotedPrices
					in Active		Significant								in Active Markets for		Significant Other		Significant
					Markets for		Other		Significant		December 31, 2018				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	$	3,478	$	3,478	$	3,478	$	–	$	–	$	1,401	$	1,401	$	1,401	$	–	$	–
Loans receivable, net		30,043		30,043		–		–		30,043		46,490		46,490		–		–		46,490
Accrued interest receivable		720		720		–		–		720
Financial Liabilities:
Accrued interest on loans												568		568		–		–		568
Financial Liabilities
Customer interest escrow		935		935		–		–		935		939		939		–		–		939
Notes payable secured		11,644		11,644		–		–		11,644
Notes payable secured, net												23,258		23,258		–		–		23,258
Notes payable unsecured, net		16,904		16,904		–		–		16,904		22,635		22,635		–		–		22,635
Accrued interest payable		1,353		1,353		–		–		1,353		2,140		2,140		–		–		2,140

3. Financing Receivables

Financing receivables are comprised of the following as of June 30, ~~2018~~2019 and December 31, ~~2017:~~2018:

	June 30, 2018			December 31, 2017			June 30, 2019			December 31, 2018

Loans receivable, gross	$	44,803		$	32,375		$	52,960		$	49,127
Less: Deferred loan fees		(1,197	)		(847	)		(1,095	)		(1,249	)
Less: Deposits		(1,827	)		(1,497	)		(1,517	)		(1,510	)
Plus: Deferred origination expense		196			109
Plus: Deferred origination costs								243			308
Less: Allowance for loan losses		(156	)		(97	)		(214	)		(186	)

Loans receivable, net	$	41,819		$	30,043		$	50,377		$	46,490

Commercial Construction and Development Loans

Commercial Loans – Construction Loan Portfolio Summary

As of June 30, ~~2018,~~2019, the ~~Company has 68~~Company’s portfolio consisted of 246 commercial construction and nine development loans with 67 borrowers all of whom, including four development loan customers (the “Hoskins Group,” consisting of Benjamin Marcus Homes, LLC, Investor’s Mark Acquisitions, LLC, and Mark Hoskins, being the largest of the four), borrow money for the purpose of building new homes.in 20 states.

The following is a summary of the loan portfolio to builders for home construction loans as of June 30, ~~2018~~2019 and December 31, ~~2017:~~2018:

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			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
2019																				20		67		246	$	100,556	$	68,427	$	45,514		68	%⁽³⁾		5	%
2018		17		68		245	$	93,976	$	60,551	$	38,888		64	%⁽³⁾		5	%		18		75		259		102,808		68,364		43,107		67	%⁽³⁾		5	%
2017		16		52		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.

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~~2019 and December 31, ~~2017:~~2018:

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		Number of States		Number of Borrowers		Number of Loans		Gross Value of Collateral⁽¹⁾		Commitment Amount⁽²⁾		Gross Amount Outstanding		Loan to Value Ratio⁽³⁾			Loan Fee
2019																			4		5		9	$	12,635	$	8,444	$	7,446		59	%	$	1,000
2018		3		4		7	$	8,249	$	6,367	$	5,915		72	%	$	1,000		3		4		9		10,134		7,456		6,020		59	%		1,000
2017		1		1		3		4,997		4,600		2,811		56	%		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~~$1,420 and ~~$1,240~~$1,320 as of June 30, ~~2018~~2019 and December 31, ~~2017,~~2018, respectively, of preferred equity in our Company. In the event of a foreclosure on the property securing these loans, the portion of our collateral that is preferred equity might be difficult to sell, which may impact our ability to recover the loan balance. In addition, a portion of the collateral value is estimated based on the selling prices anticipated for the homes.

⁽²⁾	The commitment amount does not include letters of credit and cash bonds.

⁽³⁾	The loan to value ratio is calculated by taking the outstanding amount and dividing by the appraised value calculated as described above.

⁽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 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 2018 Form 10-K, ~~for the year ended December 31, 2017,~~ as filed with the SEC, for more information.

Gross finance receivables – By risk rating:

	June 30,2018		December 31,2017		June 30, 2019		December 31, 2018

Pass	$	39,327	$	25,656	$	49,916	$	43,402
Special mention		5,476		6,719		1,381		3,222
Classified – accruing						–		–
Classified – nonaccrual						1,663		2,503

Total	$	44,803	$	32,375	$	52,960	$	49,127

Gross finance receivables – Method of impairment calculation:

	June 30, 2018		December 31,2017		June 30, 2019		December 31, 2018

Performing loans evaluated individually	$	18,409	$	14,992	$	22,147	$	19,037
Performing loans evaluated collectively		26,394		17,383		27,769		27,587
Total	$	44,803	$	32,375
Non-performing loans without a specific reserve						1,381		2,204
Non-performing loans with a specific reserve						1,663		299

Total evaluated collectively for loan losses					$	52,960	$	49,127

As of June 30, ~~2018~~2019 and December 31, ~~2017,~~2018, 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, 2019 and December 31, 2018.

	June 30, 2019			December 31, 2018

Unpaid principal balance (contractual obligation from customer)	$	1,663		$	2,503
Charge-offs and payments applied		-			-
Gross value before related allowance		1,663			2,503
Related allowance		(7	)		(20	)
Value after allowance	$	1,656		$	2,483

Concentrations

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

June 30, 2018 December 31, 2017
Percent of Percent of
Borrower Loan Borrower Loan
City Commitments City Commitments

Highest concentration risk Pittsburgh, PA 23 % Pittsburgh, PA 22 %
Second highest concentration risk Cape Coral, FL 4 % Sarasota, FL 7 %
Third highest concentration risk Orlando, FL 4 % Savannah, GA 5 %

June 30, 2019

December 31, 2018

Percent of

Borrower

Loan

Borrower

Loan

City

Commitments

City

Commitments

Highest concentration risk

Pittsburgh, PA

Second highest concentration risk

Orlando, FL

Third highest concentration risk

Cape Coral, FL

4. Foreclosed Assets

The following table is a roll forward of foreclosed assets:

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

During 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 balance sheet as of June 30, 2018.

	Six Months Ended June 30, 2019			Year Ended December 31, 2018			Six Months Ended June 30, 2018

Beginning balance	$	5,973		$	1,036		$	1,036
Additions from loans		1,716			4,737			4,140
Additions for construction/development		456			1,608			545
Sale proceeds		-			(809	)		-
Gain on sale		-			-			-
Loss on sale		-			(103	)		-
Gain on foreclosure		95			19			-
Loss on foreclosure		(169	)		(47	)		-
Impairment loss on foreclosed assets		(107	)		(468	)		(85	)
Ending balance	$	7,964		$	5,973		$	5,636

5. Borrowings

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

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

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

Year Maturing
Total
Amount
Maturing

Public
Offering
Other Unsecured
Purchase
and Sale
Agreements
and Other 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

	Priority Rank	June 30, 2019		December 31, 2018
Borrowing Source
Purchase and sale agreements and other secured borrowings	1	$	28,086	$	22,521
Secured lines of credit from affiliates	2		633		816
Unsecured line of credit (senior)	3		500		500
Other unsecured debt (senior subordinated)	4		1,008		1,008
Unsecured notes through our public offering, gross	5		19,241		17,348
Other unsecured debt (subordinated)	5		2,756		3,401
Other unsecured debt (junior subordinated)	6		590		590

Total		$	52,814	$	46,184

The following table shows the maturity of outstanding debt as of June 30, 2019:

Year Maturing	Total Amount Maturing		Public Offering		Other Unsecured		Secured Borrowings
2019	$	33,894	$	3,921	$	1,887	$	28,086
2020		5,642		4,575		1,052		15
2021		8,075		8,059		-		16
2022		3,842		2,080		1,746		16
2023 and thereafter		1,361		606		169		586
Total	$	52,814	$	19,241	$	4,854	$	28,719

Secured Borrowings

~~Purchase and Sale Agreements~~

~~In March 2018, we entered into the Seventh Amendment (the “Seventh Amendment”) to our Loan Purchase and Sale Agreement (the “S.K. Funding LPSA”) with S.K. Funding, LLC (“S.K. Funding”).~~

~~The purpose of the Seventh Amendment was to allow S.K. Funding to purchase a portion of the 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.

New Lines of Credit

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

~~During~~quarter ended June ~~2018,~~30, 2019, we entered into ~~a First Amendment to the~~three line of credit ~~with our Chief Executive Officer and his wife~~agreements (the ~~“Wallach LOC”) which modified the interest rate to generally equal the prime rate plus 3%. The interest rate for the Wallach~~“New LOC 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 was $6 and $10 for the quarter and six months ended June 30, 2018, respectively. As of June 30, 2018, there was $373 remaining availability on the 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”~~Agreements”). Pursuant to the ~~Shuman~~New LOC ~~Agreement, Shuman provides~~Agreements, the lenders provide us with a revolving ~~line~~lines of credit ~~(the “Shuman LOC”)~~ with the following terms:

	●	Principal not to exceed ~~$1,325;~~$2,250;
	●	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~~Terms allow the lenders to give one ~~or more additional 12-month periods.~~month notice after which the principal balance of a New LOC Agreement will reduce to a zero over the next six months.

~~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 the Line of Credit with Paul Swanson~~

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 2019 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.~~

~~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 of June 30, 2018. Interest expense was $3~~$30 for both the quarter and six months ended June 30, ~~2018.~~2019.

~~Mortgage Payable~~

Lines of Credit from Affiliates

~~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~~As of June 30, ~~2018. Interest expense was $7 and $18 for~~2019, the ~~quarter and six months ended June 30, 2018.~~Company had borrowed $633 on its lines of credit from affiliates, which have a total limit of $2,500.

~~Summary~~Deferred Financing Cost

The ~~purchase and sale agreements and lines~~following is a roll forward of ~~credit~~secured deferred financing costs:

	Six MonthsEnded June 30, 2019			Year Ended December 31, 2018			Six Months Ended June 30, 2018

Deferred financing costs, beginning balance	$	104		$	–		$	–
Additions		–			104			–
Deferred financing costs, ending balance	$	104		$	104		$	–
Less accumulated amortization		(75	)		(25	)		–
Deferred financing costs, net	$	29		$	79		$	–

Summary

Borrowings secured by loan assets are summarized below:

	June 30, 2018				December 31, 2017
			Due From				Due From		June 30, 2019				December 31, 2018
	Book Value of		Shepherd’s		Book Value of		Shepherd’s				Due from				Due from
	Loans which		Finance to Loan		Loans which		Finance to Loan		Book Value of Loans which		Shepherd’s Finance to Loan		Book Value of Loans which		Shepherd’s Finance to Loan
	Served as Collateral		Purchaser or Lender		Served as Collateral		Purchaser or Lender		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	$	10,615	$	6,697	$	8,742	$	5,294
S.K. Funding		10,108		6,625		9,128		4,134
S.K. Funding, LLC										12,640		6,922		11,788		6,408

Lender
Shuman		2,160		1,325		1,747		1,325
Stephen K. Shuman										1,774		1,325		2,051		1,325
Jeff Eppinger										1,893		1,000		-		-
Hardy Enterprises, Inc.										1,797		1,000		-		-
Gary Zentner										791		250		-		-
Paul Swanson		8,214		5,738		2,518		2,096		10,264		7,000		8,079		5,986

Total	$	29,020	$	18,531	$	20,876	$	11,644	$	39,774	$	24,194	$	30,660	$	19,013

Unsecured Borrowings

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

On March 22, 2019, the Company terminated its second public offering and commenced its third public offering of fixed rate subordinated notes (the “Notes”). The effective interest rate on borrowings through our Notes Program at June 30, 2019 and December 31, 2018 was 10.15% and 10.07%, 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 from 12 to 48 months from the date of issuance. The following table shows the roll forward of our Notes Program:

	Six Months Ended June 30, 2019			Year Ended December 31, 2018			Six Months Ended June 30, 2018

Gross Notes outstanding, beginning of period	$	17,348		$	14,121		$	14,121
Notes issued		5,818			9,645			3,350
Note repayments / redemptions		(3,925	)		(6,418	)		(2,197	)

Gross Notes outstanding, end of period	$	19,241		$	17,348		$	15,274

Less deferred financing costs, net		460			212			252

Notes outstanding, net	$	18,781		$	17,136		$	15,022

The following is a roll forward of deferred financing costs:

	Six Months Ended June 30, 2019			Year Ended December 31, 2018			Six Months Ended June 30, 2018

Deferred financing costs, beginning balance	$	1,212		$	1,102		$	1,102
Additions		331			117			61
Disposals		-			(7	)		-
Deferred financing costs, ending balance		1,543			1,212			1,163
Less accumulated amortization		(1,083	)		(1,000	)		(911	)
Deferred financing costs, net	$	460		$	212		$	252

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

	Six Months Ended June 30, 2019		Year Ended December 31, 2018		Six Months Ended June 30, 2018

Accumulated amortization, beginning balance	$	1,000	$	816	$	816
Additions		83		184		95
Accumulated amortization, ending balance	$	1,083	$	1,000	$	911

Other Unsecured Debts, net

Our other unsecured debts are detailed below:

	Maturity	Interest			Principal Amount Outstanding as of								Principal Amount Outstanding as of
Loan	Date	Rate⁽¹⁾			June 30, 2018		December 31, 2017		Maturity Date	Interest Rate⁽¹⁾			June 30, 2019		December 31, 2018
Unsecured Note with Seven Kings Holdings, Inc.	August 2018		7.5	%		500		500	Demand⁽²⁾		9.5	%	$	500	$	500

Unsecured Line of Credit from Builder Finance, Inc.	January 2019		10.0	%		500		-	January 2020		10.0	%		500		500

Unsecured Line of Credit from Paul Swanson	December2018⁽²⁾		10.0	%		1,262		1,904	July 2019		10.0	%		-		1,014

Subordinated Promissory Note	Demand⁽³⁾		7.5	%		1,125		-	September 2019		9.5	%		1,125		1,125

Subordinated Promissory Note	December 2019		10.5	%		263		113	December 2019		10.5	%		113		113

Subordinated Promissory Note	April 2020		10.0	%		100		100	April 2020		10.0	%		100		100

Subordinated Promissory Notes									October 2019		10.0	%		150		150
Subordinated Promissory Note									August 2022		11.0	%		200		-
Subordinated Promissory Note									September 2020⁽⁶⁾		11.0	%		169		-
Senior Subordinated Promissory Note	March 2022⁽⁴⁾		10.0	%		400		-	March 2022⁽³⁾		10.0	%		400		400

Senior Subordinated Promissory Note	March 2022⁽⁵⁾		1.0	%		728		-	March 2022⁽⁴⁾		1.0	%		728		728

Junior Subordinated Promissory Note									March 2022⁽⁴⁾		22.5	%		417		417
Senior Subordinated Promissory Note									October 2020⁽⁵⁾		1.0	%		279		279
Junior Subordinated Promissory Note	March 2022⁽⁵⁾		22.5	%		417		-	October 2020⁽⁵⁾		20.0	%		173		173
													$	4,854	$	5,499
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~~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~~

⁽³⁾Lender may ~~be prepaid without fee, premium, or penalty.~~require us to repay $20 of principal and all unpaid interest with 10 days’ notice.

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

~~Unsecured Notes through the Public Offering (“Notes Program”)~~⁽⁶⁾Due one month after lender gives notice, which notice may not be given prior to August 1, 2020.

The effective interest rate on the Notes (“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 the Notes Program:

~~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 (911 ) (816 ) (724 )
Deferred financing costs, net $ 252 $ 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

6. Redeemable Preferred Equity

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

	Six Months Ended June 30,2018		Year Ended December 31,2017		Six Months Ended June 30,2017		Six Months Ended June 30, 2019		Year Ended December 31, 2018			Six Months Ended June 30, 2018

Beginning balance	$	1,097	$	–	$	–	$	2,385	$	1,097		$	1,097
Additions from new investment		–		1,004		1,004		200		2,300			–
Redemptions								(18)		(1,177	)		–
Additions from reinvestment		68		93		29		148		165			68

Ending balance	$	1,165	$	1,097	$	1,033	$	2,715	$	2,385		$	1,165

The following table shows the earliest redemption options for investors in our Series C Preferred Units as of June 30, ~~2018:~~2019:

Year of Available Redemption	Total Amount Redeemable		Total Amount Redeemable

2023	$	1,165

2024			$	2,515
2025				200
Total	$	1,165	$	2,715

7. Members’ Capital

There are currently two classes of equity units outstanding that the Company classifies as Members’ Capital: Class A common units (“Class A Common Units”) and Series B cumulative preferred units (“Series B Preferred Units”). As of June 30, ~~2018,~~2019, the Class A Common Units are held by ~~nine~~six members, all of whom have no personal liability. All Class A common members have voting rights in proportion to their capital account. There were 2,629 Class A Common Units outstanding at both June 30, ~~2018~~2019 and December 31, ~~2017.~~2018.

The Series B Preferred Units were issued to the Hoskins Group through a reduction in a loan issued by the Hoskins Group to the Company. In ~~January 2018, our Chief Financial Officer~~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 Hamlet’s and ~~Executive Vice President~~Tuscany subdivisions. As of ~~Operations purchased 2% and 1%~~June 30, 2019, the Hoskins Group owns a total of ~~our outstanding Class A Common~~14.2 Series B Preferred Units, ~~respectively, from our CEO. In March 2018, our Executive Vice President~~which were issued for a total of ~~Sales purchased 14.3% of our outstanding Class A Common Units from our CEO.~~$1,420.

8. Related Party Transactions

As of June 30, ~~2018, each~~2019, the Company had $1,115, $250, and $501 available to borrow against the line of credit from Daniel M. Wallach (our Chief Executive Officer and chairman of the ~~Company’s two independent managers own 1%~~board of ~~our Class A Common Units. As~~managers) and his wife, the line of ~~June 30, 2018, our CFO,~~credit from the 2007 Daniel M. Wallach Legacy Trust, and the line of credit from William Myrick (our Executive Vice President of ~~Operations, and Executive Vice President of Sales each own 2%~~Sales), ~~2%, and 15.3% of our Class A Common Units,~~ respectively.

~~As of June 30, 2018, the Company borrowed $877 against the Wallach LOC, which is a line of credit with our CEO and his wife.~~ A more detailed description is included in Note ~~5 above. This borrowing is included~~6 of our 2018 Financial Statements. These borrowings are in notes payable secured, ~~net of deferred financing costs on the interim condensed consolidated balance sheet.~~

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.

9. Commitments and Contingencies

Unfunded commitments to extend credit, which have similar collateral, credit risk, and market risk to our outstanding loans, were ~~$21,676~~$22,911 and ~~$19,312~~$25,258 at June 30, ~~2018~~2019 and December 31, ~~2017,~~2018, respectively.

10. Selected Quarterly Condensed Consolidated Financial Data (Unaudited)

Summarized unaudited quarterly condensed consolidated financial data for the ~~two~~ quarters of ~~2018~~2019 and ~~four quarters of 2017~~2018 are as follows:

	Quarter 2		Quarter 1		Quarter 4		Quarter 3		Quarter 2		Quarter 1		Quarter 2		Quarter 1		Quarter 4			Quarter 3		Quarter 2		Quarter 1
	2018		2018		2017		2017		2017		2017		2019		2019		2018			2018		2018		2018

Net Interest Income after Loan Loss Provision	$	996	$	926	$	802	$	917	$	725	$	617	$	818	$	1,079	$	914		$	783	$	876	$	806
Non-Interest Income		–		–		–		–		–		77		95		–		(1	)		20		–		–
SG&A expense		691		617		643		537		456		454
SG&A Expense														620		624		403			559		571		497
Depreciation and Amortization		21		17		–		–		–		6		22		23		21			23		21		17
Impairment loss on foreclosed assets		80		5		64		47		106		49
Loss on Sale of Foreclosed Assets														–		–		100			3		–		–
Loss on Foreclosure of Assets														169		–		–			–		–		–
Impairment Loss on Foreclosed Assets														27		80		379			51		80		5
Net Income	$	204	$	287	$	95	$	333	$	163	$	191	$	75	$	352	$	10		$	167	$	204	$	287

11. Non-Interest ~~expense detail~~Expense Detail

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

	For the Six Months Ended June 30,				For the Six Months Ended June 30,
	2018		2017		2019		2018
Selling, general and administrative expenses
Legal and accounting	$	223	$	125	$	174	$	223
Salaries and related expenses		833		583		784		593
Board related expenses		37		55		41		37
Advertising		35		25		50		35
Rent and utilities		20		14		25		20
Loan and foreclosed asset expenses		38		26		47		38
Travel		51		32		46		51
Other		71		38		77		71
Total SG&A	$	1,308	$	898	$	1,244	$	1,068

12. Subsequent Events

Management of the Company has evaluated subsequent events through August ~~8, 2018,~~14, 2019, the date these interim condensed consolidated financial statements were issued.

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,~~2019, we sold 12one foreclosed asset for $4,800 with a principal balance of ~~our Preferred Units to Daniel M. Wallach, our Chief Executive Officer and Chairman~~$4,817 which resulted in a loss of ~~our board of managers, and his wife, Joyce S. Wallach, for the total price of $1,200.~~approximately $274.

ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with our interim condensed consolidated financial statements and the notes thereto contained elsewhere in this report. The following Management’s Discussion and Analysis of Financial Condition and Results of Operations should also be read in conjunction with our audited annual consolidated financial statements and related notes and other consolidated financial data (the 2018 Financial Statements) included in the Company’s Annual Report on Form 10-K ~~as of and~~ for the year ended December 31, ~~2017.~~2018 (the 2018 Form 10-K). See also “Cautionary Note Regarding Forward-Looking Statements” preceding Part I.

Overview

Net income for the quarter and six months ended June 30, 2019 decreased by $129 and $64, respectively, when compared to the same period of 2018. The decrease in net income was mainly due to an increase in loss and impairment of foreclosure of $116 and $191, respectively, for the quarter and six months ended June 30, 2019, which was offset by a gain on foreclosure of $95 for both the quarter and six months ended June 30, 2019. We reclassified 18 construction loan assets from loan assets, net to foreclosed assets during the quarter ended June 30, 2019 which resulted in a gain of $95 on five loans and a loss of $169 on 13 loans. The 18 loans had total outstanding balances of $1,432 and were to one customer who died.

~~Overview~~In addition, loan loss provision increased $132 and $139 for both the quarter and six months ended June 30, 2019 compared to the same period of 2018. The increase in loan loss provision was primarily due to the sale of an impaired asset which resulted in a loss of $124.

We had ~~$41,819~~$50,377 and ~~$30,043~~$46,490 in loan assets as of June 30, ~~2018~~2019 and December 31, ~~2017,~~2018, respectively. AsIn addition, as of June 30, ~~2018,~~2019, we ~~have 245~~had 246 construction loans in 1720 states with 6867 borrowers and ~~seven~~nine development loans in three states with 4four borrowers. ~~As of June 30, 2018, and December 31, 2017, we had four and three development loans, respectively, in Pittsburgh, Pennsylvania (the “Pennsylvania Loans”).~~

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

June 30, 2018

December 31, 2017

Capital Source
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 –
Unsecured Notes through our Notes Program 15,274 14,121
Other unsecured debt 5,247 3,069
Preferred equity, Series B units 1,280 1,240
Preferred equity, Series C units 1,165 1,097
Common equity 2,593 2,446

Total $ 47,122 $ 33,617

~~Our net income~~Cash provided by operations increased $454 for ~~the second quarter and~~ six months ended June 30, ~~2018~~2019 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~~of 2018. Our 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 primarily to ~~a decrease in customer~~ interest ~~escrow of $408 offset by an increase in net loan origination fee deferred of $97.~~escrows.

Critical Accounting Estimates

To assist in evaluating our interim condensed consolidated financial statements, we describe below the critical accounting estimates that we use. We consider an accounting estimate to be critical if: (1) the accounting estimate requires us to make assumptions about matters that were highly uncertain at the time the accounting estimate was made, and (2) changes in the estimate that are reasonably likely to occur from period to period, or use of different estimates that we reasonably could have used, would have a material impact on our consolidated financial condition or results of operations. See our 2018 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~~2018 unless listed below.

Loan Losses

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

	June 30, 2019
	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%**	$	(1,683	)

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.”

** Assumes the loans were nonperforming and a book amount of the loans outstanding of ~~$42,153.~~$50,229.

Foreclosed Assets

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

	June 30, 2018			June 30, 2019
	Foreclosed			Foreclosed
	Assets			Assets
Change in Fair Value Assumption	Higher/(Lower)			Higher/(Lower)
Increasing fair value of the foreclosed asset by 35%*	$	–		$	-
Decreasing fair value of the foreclosed asset by 35%	$	(1,973	)
Decreasing fair value of the foreclosed asset by 35%**				$	(2,787	)

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

** Assumes a book amount of the foreclosed assets of ~~$5,636.~~

$7,964.

Consolidated Results of Operations

Key financial and operating data for the three and six months ended June 30, ~~2018~~2019 and ~~2017~~2018 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 interim condensed 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,
	2018		2017		2018		2017		2019			2018		2019		2018
Interest Income
Interest and fee income on loans	$	2,045	$	1,356	$	3,872	$	2,530	$	2,454		$	1,925	$	4,886	$	3,632
Interest expense:
Interest related to secured borrowings		517		215		928		394		769			517		1,450		928
Interest related to unsecured borrowings		513		401		963		768		716			513		1,341		963
Interest expense		1,030		616		1,891		1,162		1,485			1,030		2,791		1,891

Net interest income		1,015		740		1,981		1,368		969			895		2,095		1,741
Less: Loan loss provision		19		15		59		26		151			19		198		59

Net interest income after loan loss provision		996		725		1,922		1,342		818			876		1,897		1,682

Non-Interest Income
Gain from foreclosure of assets		–		–		–		–
Gain from sale of foreclosed assets		–		–		–		77
Gain on foreclosure of assets										95			–		95		–

Total non-interest income		–		–		–		77		95			–		95		–

Income		996		725		1,922		1,419		913			876		1,992		1,682

Non-Interest Expense
Selling, general and administrative		691		450		1,308		898		620			571		1,244		1,068
Depreciation and amortization		21		6		38		12		22			21		45		38
Loss on foreclosure of assets										169			–		169		–
Impairment loss on foreclosed assets		80		106		85		155		27			80		107		85

Total non-interest expense		792		562		1,431		1,065		838			672		1,565		1,191

Net Income	$	204	$	163	$	491	$	354	$	75		$	204	$	427	$	491

Earned distribution to preferred equity holders		67		57		130		88		110			67		215		130

Net income attributable to common equity holders	$	137	$	106	$	361	$	266	$	(35	)	$	137	$	212	$	361

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,
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

	Three Months Ended								Six Months Ended
	June 30,								June 30,
	2019				2018				2019				2018
Interest Income				*				*				*				*
Interest income on loans	$	1,849	14	%	$	1,416	13	%	$	3,561	14	%	$	2,708	13	%
Fee income on loans		605	5	%		629	6	%		1,325	5	%		924	5	%
Interest and fee income on loans		2,454	19	%		2,045	19	%		4,886	19	%		3,632	18	%
Interest expense unsecured		673	5	%		467	4	%		1,258	5	%		868	4	%
Interest expense secured		769	5	%		513	4	%		1,450	5	%		928	4	%
Amortization offering costs		43	1	%		50	1	%		83	1	%		95	1	%
Interest expense		1,485	11	%		1,030	10	%		2,791	11	%		1,891	9	%
Net interest income (spread)		969	8	%		1,015	9	%		2,095	8	%		1,981	9	%

Weighted average outstanding loan asset balance	$	53,620			$	42,439			$	52,253			$	40,135

*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%7%. For most loans, the margin is fixed at 2%3%; however, for our development loans the margin is fixed at 7%. ~~Future loans~~Loans originated after June 30, 2018 are ~~anticipated to be originated~~ at an increase of 1% to approximately 3% margin, older loans are at a 2% margin. This component is also impacted by the lending of money with no interest cost (our equity). 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~~2019, the interest income on loans increased by 1% compared to the prior year’s same periods due to our increase in interest rates from 2% to 3% starting with new loans created in the third quarter of 2018.

The difference between the interest ~~income~~rate received on our loans and the interest ~~expense~~we paid was 3%. for both of the three months ended June 30, 2019 and 2018. The difference between the interest rate received on our loans and the interest we paid was 3% and 4% for the six months ended June 30, 2019 and 2018, respectively. The 3% is lower due to the dollar amount of loans that are not paying interest. The 4% from last year was higher than typical because of the dollar amount of loans we had paying default rate interest. Some of those loans have since paid off, and some have become foreclosed assets. While our stated margin is 3%, our actual is different because 1) some loans pay higher than the stated margin, 2) some loans are not paying interest, and 3) the dollar amount of loans may be different than the dollar amount of debt. Another factor that impacts this margin is the percentage of loans which are development loans paying the 7% margin.

We currently anticipate that the difference between our interest income and interest expense will continue to be 3% for the remainder of ~~2018.~~2019. Due to the increase in our pricing which started with loans created in the third quarter of 2018, we anticipate our standard margin to be 3% on all future construction loans and 7% on all development loans which yields a blended margin of approximately 3.4%. These factors should yield us a spread in the low 3%’s until the foreclosed asset balance is reduced significantly, and then in the low 4%’s thereafter, assuming no other significant changes to our business. Our largest foreclosed asset, a property in Sarasota, Florida, is completed and on the market.

●Fee income. Our construction loans have a 5% fee on the amount that 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 terminate quicker than their expected life, the remaining unrecognized fee is recognized upon the termination of the loan. When loans exceed their expected life, no additional fee income is recognized. In 2018 our fee income decreased 1% due to an increase in loans that exceeded their expected life. We currently anticipate that fee income will continue at the same 6% rate for the remainder of 2018.

We currently anticipate that fee income will be 5% for the remainder of 2019.

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

As of ~~our~~June 30, 2019, $1,663 of loans were not paying interest. As of June 30, 2018, all 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 in the six months ended June 30, 2018.~~interest.

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~~As of June 30, 2019, and 2018, we had $7,964 and $5,636, respectively, in foreclosed assets, which resulted in a negative impact on our interest ~~spread.~~spread because the increase in 2018 to $6,323 occurred at the end of the second quarter of 2018.

The amount of nonperforming assets is expected to ~~rise~~decrease over the next ~~twelve months,~~quarter due to ~~expected development costs related to~~our largest foreclosed ~~assets, anticipated foreclosure of assets, and idle cash increases related to anticipated large borrowing inflows.~~asset being sold during August 2019.

~~Non-Interest Income~~

For 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 and recognized a gain of $77. 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,
	2018		2017		2018		2017		2019		2018		2019		2018
Selling, general and administrative expenses
Legal and accounting	$	80	$	29	$	223	$	125	$	47	$	80	$	174	$	223
Salaries and related expenses		477		329		833		583		422		357		784		593
Board related expenses		15		26		37		55		25		15		41		37
Advertising		18		8		35		25		31		18		50		35
Rent and utilities		10		9		20		14		16		10		25		20
Loan foreclosed asset expenses		30		19		38		26
Loan and foreclosed asset expenses										27		30		47		38
Travel		28		17		51		32		14		28		46		51
Other		33		13		71		38		38		33		77		71
Total SG&A	$	691	$	450	$	1,308	$	898	$	620	$	571	$	1,244	$	1,068

~~Legal~~Our SG&A expense increased $49 and ~~accounting expenses increased~~$176 for the quarter and six months ended June 30, 2019, respectively, due primarily to ~~additional work performed related to the growth of the Company. Salaries~~salaries and related expenses ~~increased due~~from hiring additional employees to ~~our hiring of 11 new employees, which was partially offset by a reduction in our CEO’s salary.~~support Company growth.

Impairment Loss on Foreclosed Assets

We owned ~~five~~25 and four foreclosed assets as of June 30, 2019 and 2018, ~~compared~~respectively. Excluding the 18 recently taken from our deceased borrower, we had four properties completed and on the market as of ~~December 31, 2017. Three~~June 30, 2019. In addition, two are vacant lots not under construction; however, on the market and one is a partially built home under construction. Of the 18 which we received through foreclosure recently, there were originally 20, two of those which were resolved by us selling one loan to a third party before foreclosure, and a different third party buying one of the ~~foreclosed assets~~homes at the foreclosure sale. Of the remaining 18, eight are ~~lots under~~partially built in various stages of construction which we are planning on completing, and the ~~remaining two have completed homes~~other 10 are lots. We will decide whether to develop on the ~~lots. We~~lots once we have made progress on the eight under construction. As of June 30, 2019, 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~~$132 and ~~$59~~$139 for the quarter and six ~~month~~months ended June 30, ~~2018~~2019, respectively, compared to ~~$15 and $26 for~~ the same periods of ~~2017~~2018. The increase was primarily due to the sale of an ~~increase in~~impaired loan ~~balances and qualitative reserve percentage as~~asset during the second quarter of 2019 with a ~~result~~loss of ~~the change in housing values.~~$124.

Consolidated Financial Position

Loans Receivable

Commercial Loans – Construction Loan Portfolio Summary

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

The following is a summary of our loan portfolio to builders for home construction loans as of June 30, ~~2018.~~2019:

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		Amount Outstanding		Loan to Value Ratio⁽²⁾			Loan Fee
Arizona		1		4	$	1,071	$	750	$	218		70	%		5	%
Connecticut																	1	1		340		204		165		60	%		5	%
Colorado		3		7		3,878		2,621		1,729		68	%		5	%	2	2		1,260		838		835		67	%		5	%
Florida		17		73		22,652		15,143		9,392		67	%		5	%	15	104		30,973		22,706		13,401		73	%		5	%
Georgia		8		12		8,246		5,594		3,929		68	%		5	%	3	7		4,483		3,064		2,458		68	%		5	%
Idaho																	1	2		605		424		260		70	%		5	%
Indiana		2		3		932		652		273		70	%		5	%	1	1		347		243		128		70	%		5	%
Michigan		5		30		7,754		4,697		2,723		61	%		5	%	3	11		3,386		2,349		1,559		69	%		5	%
New Jersey		4		14		5,188		3,494		2,233		67	%		5	%	4	13		4,638		3,571		2,416		77	%		5	%
New York		1		7		2,567		1,496		1,375		58	%		5	%	2	4		1,595		1,117		1,093		70	%		5	%
North Carolina		5		9		2,656		1,859		925		70	%		5	%	5	12		3,699		2,536		1,197		69	%		5	%
North Dakota		1		1		375		263		205		70	%		5	%
Ohio		1		3		2,331		1,497		1,145		64	%		5	%	3	6		4,787		3,057		2,305		64	%		5	%
Oregon		1		1		607		348		280		57	%		5	%	1	3		1,704		1,193		598		70	%		5	%
Pennsylvania		3		29		21,708		12,424		8,860		57	%		5	%	3	30		24,549		14,615		11,159		60	%		5	%
South Carolina		11		40		10,357		7,188		4,349		69	%		5	%	12	28		9,662		6,741		4,363		70	%		5	%
Tennessee		1		2		640		426		262		67	%		5	%	2	3		1,120		784		427		70	%		5	%
Texas																	3	5		1,905		1,214		699		64	%		5	%
Utah		1		2		920		634		264		69	%		5	%	2	6		2,587		1,786		1,183		69	%		5	%
Virginia		3		8		2,094		1,465		726		70	%		5	%	2	5		1,819		1,217		1,060		67	%		5	%
Washington																	1	1		590		413		101		70	%		5	%
Wyoming																	1	2		507		355		107		70	%		5	%
Total		68		245	$	93,976	$	60,551	$	38,888		64	%⁽³⁾		5	%	67	246	$	100,556	$	68,427	$	45,514		68	%⁽³⁾		5	%

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

	⁽²⁾	The loan to value ratio is calculated by taking the commitment amount and dividing by the 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.~~2018:

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		Amount Outstanding		Loan to Value Ratio⁽²⁾			Loan Fee
Arizona																		1	1	$	1,140	$	684	$	214		60	%		5	%
Colorado		3			6	$	3,224	$	2,196	$	925		68	%		5	%	2	4		2,549		1,739		1,433		68	%		5	%
Delaware		1			1		244		171		147		70	%		5	%
Florida		15			54		25,368		16,555		10,673		65	%		5	%	18	104		32,381		22,855		12,430		71	%		5	%
Georgia		7			13		8,932		5,415		3,535		61	%		5	%	5	6		5,868		3,744		2,861		64	%		5	%
Idaho																		1	2		605		424		77		70	%		5	%
Indiana		2			2		895		566		356		63	%		5	%	2	5		1,567		1,097		790		70	%		5	%
Michigan		4			25		7,570		4,717		2,611		62	%		5	%	4	26		5,899		3,981		2,495		67	%		5	%
New Jersey		2			11		3,635		2,471		1,227		68	%		5	%	5	15		4,999		3,742		2,820		75	%		5	%
New York		1			5		1,756		929		863		53	%		5	%	2	4		1,555		1,089		738		70	%		5	%
North Carolina		3			6		1,650		1,155		567		70	%		5	%	5	12		3,748		2,580		1,712		69	%		5	%
North Dakota																		1	1		375		263		227		70	%		5	%
Ohio		1			1		711		498		316		70	%		5	%	2	3		3,220		1,960		1,543		61	%		5	%
Oregon		1			1		607		425		76		70	%		5	%
Pennsylvania		2			20		15,023		7,649		5,834		51	%		5	%	3	34		24,808		14,441		10,087		58	%		5	%
South Carolina		7			18		4,501		3,058		1,445		68	%		5	%	15	29		9,702		6,738		4,015		69	%		5	%
Tennessee		1			2		690		494		494		72	%		5	%	1	2		750		525		347		70	%		5	%
Texas																		1	1		179		125		26		70	%		5	%
Utah		1			2		790		553		344		70	%		5	%	4	4		1,788		1,206		486		67	%		5	%
Virginia		1			1		335		235		150		70	%		5	%	3	6		1,675		1,172		806		70	%		5	%
Total		52	⁽⁴⁾		168	$	75,931	$	47,087	$	29,564		62	%⁽³⁾		5	%	75	259	$	102,808	$	68,365	$	43,107		67	%⁽³⁾		5	%

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

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

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

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

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~~2019 and December 31, ~~2017.~~2018. A significant portion of our development loans consist of ~~the~~three development loans to a borrower in Pittsburgh, Pennsylvania ~~Loans.~~(the “Pennsylvania Loans”). Our additional development loans are with borrowers in North Carolina, 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		Number of States	Number of Borrowers	Number of Loans		Gross Value of Collateral⁽¹⁾		Commitment Amount⁽³⁾		Gross Amount Outstanding		Loan to Value Ratio⁽²⁾			Loan Fee
2019																			4	5		9	$	12,635	$	8,444	$	7,446		59	%	$	1,000
2018		3		4		7	$	8,249	$	6,367	⁽³⁾	$	5,915		72	%	$	1,000	3	4		9		10,134		7,456		6,020		59	%		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 adjusted for remaining costs to be paid. ~~Part~~A portion of this collateral is ~~$1,280~~$1,420 and $1,320 as of June 30, ~~2018~~2019 and ~~$1,240 as of~~ December 31, ~~2017~~2018, 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 ~~eliminate~~recover the loan balance. ~~Part~~In addition, a portion 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 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.

Combined Loan Portfolio Summary

Financing receivables are comprised of the following as of June 30, ~~2018~~2019 and December 31, ~~2017:~~2018:

	June 30, 2018			December 31, 2017			June 30, 2019			December 31, 2018

Loans receivable, gross	$	44,803		$	32,375		$	52,960		$	49,127
Less: Deferred loan fees		(1,197	)		(847	)		(1,095	)		(1,249	)
Less: Deposits		(1,827	)		(1,497	)		(1,517	)		(1,510	)
Plus: Deferred origination expense		196			109
Plus: Deferred origination costs								243			308
Less: Allowance for loan losses		(156	)		(97	)		(214	)		(186	)

Loans receivable, net	$	41,819		$	30,043		$	50,377		$	46,490

The following is a roll forward of combined loans:

	Six Months Ended June 30, 2018			Year Ended December 31, 2017			Six Months Ended June 30, 2017			Six Months Ended June 31,2019			Year Ended December 31,2018			Six Months Ended June 30, 2018

Beginning balance	$	30,043		$	20,091		$	20,091		$	46,490		$	30,043		$	30,043
Additions		19,870			33,451			16,081			29,183			54,145			19,870
Payoffs/sales		(11,337	)		(22,645	)		(6,229	)		(23,154	)		(32,899	)		(11,337	)
Moved to foreclosed assets		3,897			-			–
Transferred to foreclosed assets											(1,716	)		(4,494	)		3,897
Change in deferred origination expense		87			55			71			(65	)		199			87
Change in builder deposit		(331	)		(636	)		(762	)		(8	)		(12	)		(331	)
Change in loan loss provision		(59	)		(44	)		(26	)		(198	)		(89	)		(59	)
New loan fees		(1,528	)		(2,127	)		(1,153	)		(1,656	)		(2,949	)		(1,528	)
Earned loan fees		1,177			1,898			899			1,501			2,546			1,177
Ending balance	$	41,819		$	30,043		$	28,972		$	50,377		$	46,490		$	41,819

Finance Receivables – By risk rating:

	June 30, 2018		December 31, 2017		June 30, 2019		December 31, 2018

Pass	$	39,327	$	25,656	$	49,916	$	43,402
Special mention		5,476		6,719		1,381		3,222
Classified – accruing		-		-		–		–
Classified – nonaccrual		-		-		1,663		2,503

Total	$	44,803	$	32,375	$	52,960	$	49,127

Finance Receivables – Method of impairment calculation:

	June 30, 2018		December 31, 2017		June 30, 2019		December 31, 2018

Performing loans evaluated individually	$	18,409	$	14,992	$	22,147	$	19,037
Performing loans evaluated collectively		26,394		17,383		27,769		27,587
Non-performing loans without a specific reserve		-		-		1,381		2,204
Non-performing loans with a specific reserve		-		-		1,663		299
Total	$	44,803	$	32,375

Total evaluated collectively for loan losses					$	52,960	$	49,127

At June 30, 2019 and December 31, 2018, there were no loans acquired with deteriorated credit quality.

AtImpaired Loans

The following is a summary of our impaired nonaccrual commercial construction loans as of June 30, ~~2018~~2019 and December 31, ~~2017, there were no loans acquired with deteriorated credit quality.~~2018:

	June 30, 2019			December 31, 2018

Unpaid principal balance (contractual obligation from customer)	$	1,663		$	2,503
Charge-offs and payments applied		-			-
Gross value before related allowance		1,663			2,503
Related allowance		(7	)		(20	)
Value after allowance	$	1,656		$	2,483

Below is an aging schedule of ~~gross~~ loans receivable as of June 30, ~~2018,~~2019, on a recency basis:

	No. Accts.		Unpaid Balances		%			No. Loans		Unpaid Balances		%
Current loans (current accounts and accounts on which more than 50% of an original contract payment was made in the last 59 days)		252	$	44,803		100	%		247	$	51,297		96	%
60-89 days		–		–		0	%		7		1,378		3	%
90-179 days		–		–		0	%		–		–		–	%
180-269 days		–		–		0	%		1		285		1	%

Subtotal		252	$	44,803		100	%		255	$	52,960		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	%		255	$	52,960		100	%

Below is an aging schedule of ~~gross~~ loans receivable as of June 30, ~~2018,~~2019, on a contractual basis:

	No. Accts.		Unpaid Balances		%			No. Loans		Unpaid Balances		%
Contractual Terms - All current Direct Loans and Sales Finance Contracts with installments past due less than 60 days from due date.		252	$	44,803		100	%		247	$	51,297		96	%
60-89 days		–		–		0	%		7		1,378		3	%
90-179 days		–		–		0	%		–		–		–
180-269 days		–		–		0	%		1		285		1	%

Subtotal		252	$	44,803		100	%		255	$	52,960		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	%		255	$	52,960		100	%

Below is an aging schedule of ~~gross~~ loans receivable as of December 31, ~~2017,~~2018, on a recency basis:

	No. Accts.		Unpaid Balances		%			No. Loans		Unpaid Balances		%
Current loans (current accounts and accounts on which more than 50% of an original contract payment was made in the last 59 days)		153	$	26,421		82	%		265	$	48,144		98	%
60-89 days		18		5,954		18	%		–		–		–	%
90-179 days		–		–		0	%		1		299		1	%
180-269 days		–		–		0	%		2		684		1	%

Subtotal		171	$	32,375		100	%		268	$	49,127		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		171	$	32,375		100	%		268	$	49,127		100	%

Below is an aging schedule of ~~gross~~ loans receivable as of December 31, ~~2017,~~2018, on a contractual basis:

	No. Accts.		Unpaid Balances		%			No. Loans		Unpaid Balances		%
Contractual Terms - All current Direct Loans and Sales Finance Contracts with installments past due less than 60 days from due date.		153	$	26,421		82	%		265	$	48,144		98	%
60-89 days		18		5,954		18	%		–		–		–	%
90-179 days		–		–		0	%		1		299		1	%
180-269 days		–		–		0	%		2		684		1	%

Subtotal		171	$	32,375		100	%		268	$	49,127		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		171	$	32,375		100	%		268	$	49,127		100	%

Foreclosed Assets

Below is a roll forward of foreclosed assets:

	Six Months Ended June 30, 2018			Year Ended December 31, 2017			Six Months Ended June 30, 2017			Six Months Ended June 30, 2019			Year Ended December 31, 2018			Six Months Ended June 30, 2018

Beginning balance	$	1,036		$	2,798		$	2,798		$	5,973		$	1,036		$	1,036
Additions from loans		4,140			-			-			1,716			4,737			4,140
Additions for construction/development		545			317			265			456			1,608			545
Sale proceeds		-			(1,890	)		(1,890	)		-			(809	)		-
Gain on sale		-			77			77
Loss on sale											-			(103	)		-
Gain on foreclosure											95			19			-
Loss on foreclosure											(169	)		(47	)		-
Impairment loss on foreclosed assets		(85	)		(266	)		(155	)		(107	)		(468	)		(85	)
Ending balance	$	5,636		$	1,036		$	1,095		$	7,964		$	5,973		$	5,636

During ~~April 2018, we entered into~~the quarter the Company reclassified18 construction loans from loans receivable, net to foreclosed assets and five properties recognized a ~~Deed in Lieu~~gain on foreclosure of ~~Foreclosure Agreement (the “Deed Agreement”) with~~$95 which was offset by a loss on 13 properties of $169. The foreclosure was due to the death of a certain ~~borrower who defaulted on a loan by failing to make an interest payment that was due. As a result,~~borrower.

During 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 balance sheet as of~~six months ended June 30, 2019, we finished our largest foreclosed asset, a property in Sarasota, Florida, and listed it for sale, and substantially completed the two projects in Georgia which are also listed for sale. The Company recognized $27 and $107 of impairment for the quarter and six months ended June 30, 2019 compared to $80 and $85 the same periods of 2018.

Customer Interest Escrow

Below is a roll forward of interest escrow:

	Six Months Ended June 30, 2018			Year Ended December 31, 2017			Six Months Ended June 30, 2017			Six Months Ended June 30, 2019			Year Ended December 31, 2018			Six Months Ended June 30, 2018

Beginning balance	$	935		$	812		$	812		$	939		$	935		$	935
Preferred equity dividends		62			115			57			66			125			62
Additions from Pennsylvania Loans		101			480			51			853			362			101
Additions from other loans		160			1,163			901			295			1,214			160
Interest, fees, principal or repaid to borrower		(714	)		(1,635	)		(992	)		(1,044	)		(1,697	)		(714	)
Ending balance	$	544		$	935		$	829		$	1,109		$	939		$	544

Related Party Borrowings

~~During~~As of June ~~2018, we entered into a First Amendment~~30, 2019, the Company had $1,108, $250, and $384 available to borrow against the line of credit ~~with our~~from Daniel M. Wallach (our Chief Executive Officer and chairman of the board of managers) 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, 2018, respectively, and $0 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~~from the 2007 Daniel M. Wallach Legacy Trust, ~~which our Chief Executive Officer’s trust (the “Wallach Trust LOC”) which modified~~and 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.

~~During June 2018, we entered into a~~ line of credit ~~agreement (the “Myrick LOC Agreement”) with our~~from William Myrick (our Executive Vice President of ~~Sales, William Myrick.~~Sales), respectively. A more detailed description is included in Note 6 to the 2018 Financial Statements. These borrowings are in notes payable secured, net of deferred financing costs on the interim condensed consolidated balance sheet.

Secured Borrowings

New Lines of Credit

During the quarter ended June 30, 2019, we entered into three line of credit agreements (the “New LOC Agreements”). Pursuant to the ~~Myrick~~New LOC ~~Agreement, Mr. Myrick provides~~Agreements, the lenders provide us with ~~a line~~revolving lines 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 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~~

The purpose of the 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.

	●	~~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.~~

~~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 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;~~$2,250;
	●	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~~Terms allow the lenders to give one ~~or more additional 12-month periods.~~month notice after which the principal balance of a New LOC Agreement will reduce to zero over the next six months.

~~The Shuman LOC was fully borrowed as of June 30, 2018.~~ Interest expense was ~~$33 and $67~~$30 for both the quarter and six months ended June 30, ~~2018, respectively.~~2019.

~~During April 2018, we entered into a Master Loan Modification Agreement (the “Swanson Modification Agreement”) with Paul Swanson which modified the Line~~Lines of Credit ~~Agreement between us and Mr. Swanson dated October 23, 2017. Pursuant to~~from Affiliates

As of June 30, 2019, the ~~Swanson Modification Agreement, Mr. Swanson provides us with a revolving line~~Company had borrowed $633 on its lines of credit ~~(the “Swanson LOC”) with the following terms:~~from affiliates, which have a total limit of $2,500.

	●	~~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.~~

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

Deferred Financing Costs

The following is a roll forward of deferred financing costs:

	Six Months Ended			Year Ended			Six Months Ended
	June 30, 2019			December 31, 2018			June 30, 2018

Deferred financing costs, beginning balance	$	104		$	–		$	–
Additions		–			104			–
Deferred financing costs, ending balance	$	104		$	104		$	–
Less accumulated amortization		(75	)		(25	)		–
Deferred financing costs, net	$	29		$	79		$	–

Summary

The borrowings secured by loan assets are summarized below:

	June 30, 2019				December 31, 2018
			Due from				Due from
	Book Value of Loans which		Shepherd’s Finance to Loan		Book Value of Loans which		Shepherd’s Finance to Loan
	Served as Collateral		Purchaser or Lender		Served as Collateral		Purchaser or Lender
Loan Purchaser
Builder Finance, Inc.	$	10,615	$	6,697	$	8,742	$	5,294
S.K. Funding, LLC		12,640		6,922		11,788		6,408

Lender
Stephen K. Shuman		1,774		1,325		2,051		1,325
Jeff Eppinger		1,893		1,000		-		-
Hardy Enterprises, Inc.		1,797		1,000		-		-
Gary Zentner		791		250		-		-
Paul Swanson		10,264		7,000	��	8,079		5,986

Total	$	39,774	$	24,194	$	30,660	$	19,013

	Year Initiated	Typical Current Advance Rate On New Loans			Does Buyer Portion Have Priority?
Loan Purchaser
Builder Finance, Inc.	2014		75	%	Yes
S.K. Funding, LLC	2015		55	%	Varies

Lender
Stephen K. Shuman	2017		67	%	Yes
Jeff Eppinger	2019		67	%	Yes
Hardy Enterprises, Inc.	2019		67	%	Yes
Gary Zentner	2019		67	%	Yes
Paul Swanson	2017		67	%	Yes

~~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.~~

Unsecured Borrowings

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

~~During January~~On March 22, 2019, the Company terminated its second public offering and commenced its third public third public offering of fixed rate subordinated notes (the “Notes”). The effective interest rate on borrowings through our Notes Program at June 30, 2019 and December 31, 2018 ~~we entered into a commercial mortgage on~~was 10.15% and 10.07%, 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 from 12 to 48 months from the date of issuance. The following table shows the roll forward of our ~~office building with the following terms:~~Notes Program:

	●	~~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~~

	Six Months Ended June 30, 2019			Year Ended December 31, 2018			Six Months Ended June 30, 2018

Gross Notes outstanding, beginning of period	$	17,348		$	14,121		$	14,121
Notes issued		5,818			9,645			3,350
Note repayments / redemptions		(3,925	)		(6,418	)		(2,197	)

Gross Notes outstanding, end of period	$	19,241		$	17,348		$	15,274

Less deferred financing costs, net		460			212			252

Notes outstanding, net	$	18,781		$	17,136		$	15,022

The ~~purchase and sale agreements and lines~~following is a roll forward of ~~credit are summarized below:~~deferred financing costs:

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 %

	Six Months Ended			Year Ended			Six Months Ended
	June 30, 2019			December 31, 2018			June 30, 2018

Deferred financing costs, beginning balance	$	1,212		$	1,102		$	1,102
Additions		331			117			61
Disposals		-			(7	)		-
Deferred financing costs, ending balance	$	1,543		$	1,212		$	1,163
Less accumulated amortization		(1,083	)		(1,000	)		(911	)
Deferred financing costs, net	$	460		$	212		$	252

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

	Six Months Ended		Year Ended		Six Months Ended
	June 30, 2019		December 31, 2018		June 30, 2018

Accumulated amortization, beginning balance	$	1,000	$	816	$	816
Additions		83		184		95
Accumulated amortization, ending balance	$	1,083	$	1,000	$	911

Other Unsecured Debts, net

Our other unsecured debts are detailed below:

	Maturity	Interest			Principal Amount Outstanding as of									Principal Amount Outstanding as of
Loan	Date	Rate⁽¹⁾			June 30, 2018		December 31, 2017		Maturity Date		Interest Rate⁽¹⁾			June 30, 2019		December 31, 2018
Unsecured Note with Seven Kings Holdings, Inc.	August 2018		7.5	%		500		500		Demand⁽²⁾		9.5	%	$	500	$	500

Unsecured Line of Credit from Builder Finance, Inc.	January 2019		10.0	%		500		-		January 2020		10.0	%		500		500

Unsecured Line of Credit from Paul Swanson	December2018⁽²⁾		10.0	%		1,262		1,904		July 2019		10.0	%		-		1,014

Subordinated Promissory Note	Demand⁽³⁾		7.5	%		1,125		-		September 2019		9.5	%		1,125		1,125

Subordinated Promissory Note	December 2019		10.5	%		263		113		December 2019		10.5	%		113		113

Subordinated Promissory Note	April 2020		10.0	%		100		100		April 2020		10.0	%		100		100

Subordinated Promissory Notes										October 2019		10.0	%		150		150
Subordinated Promissory Note										August 2022		11.0	%		200		-
Subordinated Promissory Note										September 2020⁽⁶⁾		11.0	%		169		-
Senior Subordinated Promissory Note	March 2022⁽⁴⁾		10.0	%		400		-		March 2022⁽³⁾		10.0	%		400		400

Senior Subordinated Promissory Note	March 2022⁽⁵⁾		1.0	%		728		-		March 2022⁽⁴⁾		1.0	%		728		728

Junior Subordinated Promissory Note										March 2022⁽⁴⁾		22.5	%		417		417
Senior Subordinated Promissory Note										October 2020⁽⁵⁾		1.0	%		279		279
Junior Subordinated Promissory Note	March 2022⁽⁵⁾		22.5	%		417		-		October 2020⁽⁵⁾		20.0	%		173		173
														$	4,854	$	5,499
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~~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~~

⁽³⁾Lender may ~~be prepaid without fee, premium, or penalty.~~require us to repay $20 of principal and all unpaid interest with 10 days’ notice.

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

⁽⁶⁾Due one month after lender gives notice, which notice may not be given prior to August 1, 2020.

~~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) redeemable preferred equity plus members’ capital and (2) total assets. The ratio of redeemable preferred equity plus members’ capital to assets was ~~10%~~11% as of June 30, ~~2018~~2019 and ~~13%~~12% as of December 31, ~~2017.~~2018. We anticipate this ratio ~~dropping~~further decreasing until more preferred equity is added. We are currently exploring potential increases in preferred equity.

In January 2018, our Chief Financial Officer and Executive Vice President of Operations purchased 2% and 1% of our Class A common units; respectively, from our CEO. In March 2018, our Executive Vice President of Sales purchased 14.3% of our Class A common units from our 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, 2018 December 31, 2017
Borrowing Source
Purchase and sale agreements 1 $ 19,186 $ 11,644
Secured line of credit from affiliates 2 1,877 -
Unsecured line of credit (senior) 3 500 -
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 $ 42,084 $ 28,834

	Priority Rank	June 30, 2019		December 31, 2018
Borrowing Source
Purchase and sale agreements and other secured borrowings	1	$	28,086	$	22,521
Secured lines of credit from affiliates	2		633		816
Unsecured line of credit (senior)	3		500		500
Other unsecured debt (senior subordinated)	4		1,008		1,008
Unsecured Notes through our public offering, gross	5		19,241		17,348
Other unsecured debt (subordinated)	5		2,756		3,401
Other unsecured debt (junior subordinated)	6		590		590

Total		$	52,814	$	46,184

Liquidity and Capital Resources

Our primary liquidity management objective is to meet expected cash flow needs while continuing to service our business and customers. As of June 30, ~~2018,~~2019 and December 31, ~~2017,~~2018, we had ~~252~~255 and ~~171,~~268, respectively, in combined loans outstanding, which totaled ~~$44,803~~$52,960 and ~~$32,375,~~$49,127, 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~~$22,911 and ~~$19,312~~$25,258 as of June 30, ~~2018~~2019 and December 31, ~~2017,~~2018, respectively. ~~We anticipate a significant increase in our gross loans receivables over the 12 months subsequent to June 30, 2018 by directly increasing originations through new and existing customers.~~

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

Source of Liquidity
As of
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

Source of Liquidity	As of June 30, 2019		As of December 31, 2018
Secured debt	$	28,690	$	23,258
Unsecured debt		23,635		22,635
Equity		6,559		6,082

Secured debt, net of deferred financing costs increased ~~$9,414 during the six months ended~~$5,432 as of June 30, ~~2018,~~2019, which consisted of an increase in ~~loan purchase~~borrowings secured by loans and ~~sale agreements, balances on lines of credits with affiliates and mortgage payable of $6,887, $1,877 and $650, respectively.~~foreclosed assets. 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~~2019 through our existing loan purchase and sale ~~agreements.~~agreements and additional lines of credit.

~~The~~We anticipate that the other half of the loan asset growth will come from a combination of increases in our unsecured debt and equity. Unsecured debt, net of deferred financing costs increased ~~$3,865 during the six months ended~~$1,000 as of June 30, ~~2018, which consisted~~2019, and unsecured debt, net of deferred financing costs changed due to an increase in our Notes Program of ~~$1,187 and an increase~~$1,645, which was offset by a decrease in other unsecured debt of $645. The change in other unsecured debt was due to the ~~balances~~elimination of the unsecured ~~lines~~portion of the line of credit from Paul Swanson of ~~$2,678.~~$1,014, which was offset by two new promissory notes which both total $369. We anticipate an increase in our unsecured debt through increased sales in the Notes Program to cover most of the increase in loan assets not covered by increases in our secured debt during the 12 months subsequent to June 30, ~~2018.~~2019.

Equity increased ~~$255~~$477 during the six months ended June 30, ~~2018,~~2019, which consisted of an increase in Series C cumulative preferred units (“Series C Preferred Units”), Series B cumulative preferred units, and Class A common equity of ~~$68, $40~~$330, $100, and ~~$147,~~$47, respectively. We anticipate an increase in our equity during the 12 months subsequent to June 30, ~~2017~~2019, through the issuance of additional Series C Preferred Units. During the year ended December 31, ~~2017,~~2018, we increased the amount of Series C Preferred Units outstanding by ~~$1,097.~~$1,288. If we do are not able to increase our equity through the issuance of additional Series C Preferred Units, we will ~~look to our~~rely more heavily on raising additional funds through the Notes ~~Program for the increase.~~Program. If we anticipate ~~not being able~~an inability to fund our projected increases in loan balances ~~through the means listed~~as discussed 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 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:~~2019:

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

Year Maturing	Total Amount Maturing		Public Offering		Other Unsecured		Secured Borrowings
2019	$	33,894	$	3,921	$	1,887	$	28,086
2020		5,642		4,575		1,052		15
2021		8,075		8,059		-		16
2022		3,842		2,080		1,746		16
2023 and thereafter		1,361		606		169		586
Total	$	52,814	$	19,241	$	4,854	$	28,719

The total amount maturing through year ~~ended~~ending December 31, 2019 is ~~$33,284,~~$33,894, which consists of secured borrowings of ~~$20,429~~$28,086 and unsecured borrowings of ~~$12,855.~~$5,808.

Secured borrowings maturing through year ~~ended~~ending December ~~30,~~31, 2019 ~~significantly consists~~is comprised mostly of loan purchase and sale agreements with two loan purchasers (Builder Finance, Inc. and S. K. ~~Funding)~~Funding, LLC) and two lenders (Stephen K. Shuman and Paul Swanson). Our secured borrowings are largely reported as due by 2019 because the related collateral is demand loans. The following lists our secured facilities with maturity and renewal dates:

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 lenders have lines of credit with the Company described as follows:~~

Stephen Shuman’s line of credit (“Shuman LOC”) is due July 2019 and unless terminated will automatically renew 60 days prior for an additional 12 months. If the Shuman LOC does not renew, $1,325 will be due in July 2019, which we would expect to fund through loan payoffs.

Paul Swanson’s line of credit (“Swanson LOC”) is due on December 31, 2018 and unless terminated will automatically renew 120 days prior for 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.

	●	Swanson – $7,000 due April 2020, will automatically renew unless notice is given;
	●	Shuman – $1,325 due July 2020, will automatically renew unless notice is given;
	●	S. K. Funding, LLC – $3,500 of the total due July 2020, will automatically renew unless notice is given;
	●	S. K. Funding, LLC – $3,422 with no expiration date;
	●	Builder Finance, Inc. – $6,697 with no expiration date;
	●	Hardy Enterprises, Inc. - $1,000, due will automatically renew monthly unless notice is given;
	●	Jeff Eppinger - $1,000, due will automatically renew monthly unless notice is given;
	●	Gary Zentner - $250, due will automatically renew monthly unless notice is given;
	●	London Financial Company, LLC – $3,250 due September 2019, renewal available;
	●	Wallach LOC – $135 with no expiration date;
	●	Myrick LOC – $499 with no expiration date; and
	●	Mortgage payable – $641 due in January 2033.

Unsecured borrowings due on December 31, ~~2018~~2019 consist of Notes issued pursuant to the Notes Program and other unsecured debt of ~~$8,805~~$3,921 and ~~$4,050,~~$1,925, respectively. To the extent that Notes issued pursuant to the Notes Program are not ~~renewed~~reinvested upon maturity, we will be required to fund the maturities, which we anticipate funding through the issuance of new Notes in our Notes Program. Historically, approximately 82% of our Note holders reinvest upon maturity. 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 future, we anticipate funding such maturities through investments in our Notes 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 Program; and~~

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

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

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.

3534

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

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.

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

Inflation, Interest Rates, and Housing Starts

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

Housing inflation 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. The U.S. may be entering into a housing slow down. Some markets seem to be slowing, although most of those markets are not markets in which we lend.

Interest rates have several impacts on our business. First, rates affect housing (starts, home size, etc.). High ~~long term~~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~~receive 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~~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~~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.

3635

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.

3736

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, ~~2018,~~2019 and December 31, ~~2017,~~2018, 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 ~~CEO~~Chief Executive Officer (our principal executive officer) and ~~CFO~~Acting Chief Financial Officer (our principal financial officer) evaluated the effectiveness of the design and operation of our disclosure controls and procedures. Based upon, and as of the date of, the evaluation, our CEO (our principal executive officer) and Acting CFO (our principal financial officer) concluded that the disclosure controls and procedures were effective as of the end of the period covered by this report to ensure that information required to be disclosed in the reports we file and submit under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and reported as and when required. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports we file and submit under the Exchange Act is accumulated and communicated to our management, including our CEO (our principal executive officer) and Acting CFO (our principal financial officer), as appropriate to allow timely decisions regarding required disclosure.

Internal Control over Financial Reporting

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 thereThere has been no change in our internal controls over financial reporting during the quarter ~~and six months~~ ended June 30, ~~2018~~2019 that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.

PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

None.

ITEM 1A. RISK FACTORS

Not applicable.

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

(a)

Reinvestments in Partial Series C Cumulative Preferred Units

Investors in the Series C cumulative preferred units (“Series C Preferred Units”) may elect to reinvest their distributions in additional Series C Preferred Units (the “Series C Reinvestment Program”). Pursuant to the Series C Reinvestment Program, ~~on January 31, 2018,~~ we issued ~~approximately 0.0474022 of a~~the following 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 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. OnUnits 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. 2019:

Owner	Units		Amount
Daniel M. and Joyce S. Wallach		0.7758996	$	77,589.96
Gregory L. Sheldon		0.1280362		12,803.62
BLDR, LLC		0.2510268		25,102.68
Schultz Family Living Trust		0.0412151		4,121.51
Jeffrey L. Eppinger		0.0610040		6,100.40
Fernando and Lorraine Carol Ascencio		0.0160000		1,600.00

		The proceeds received from the sales of the partial Series C Preferred Units in ~~those~~these transactions were used for the funding of construction loans. The transactions in Series C Preferred Units described above were effected in private transactions exempt from the registration requirements of the Securities Act under Section 4(a)(2) of the Securities Act. The transactions described above did not involve any public offering, were made without general solicitation or advertising, and the buyer represented to us that he/she/it is an “accredited ~~investor’’~~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.

		*Issuance of Series C Cumulative Preferred Units* On June 7, 2019, we sold two Series C Preferred Units to two joint investors, for the total price of $200,000. This sale of Series C Preferred Units was effected in a private transaction exempt from the registration requirements of the Securities Act under Section 4(a)(2) of the Securities Act. This transaction in Series C Preferred Units did not involve any public offering, was made without general solicitation or advertising, and the buyers represented to the us that they were each an “accredited investor” as defined under the Securities Act, with access to all relevant information necessary to evaluate the investment in the Series C Preferred Units.

		*Issuance of Partial Series B Cumulative Preferred Units* We previously entered into an agreement with the Hoskins Group (consisting of Benjamin Marcus Homes, LLC, Investor’s Mark Acquisitions, LLC, and Mark L. Hoskins) pursuant to which we sell the Hoskins Group 0.1 Series B cumulative preferred units (“Series B Preferred Units”) upon the closing of certain lots. We issued 0.5 Series B Preferred Units to the Hoskins Group on January 30, 2019 for $50,000, 0.1 Series B Preferred Units to the Hoskins Group on January 31, 2019 for $10,000, 0.1 Series B Preferred Units to the Hoskins Group on May 22, 2019 for $10,000, 0.2 Series B Preferred Units to the Hoskins Group on May 30, 2019 for $20,000, and 0.1 Series B Preferred Units to the Hoskins Group on May 31, 2019 for $10,000. The proceeds received from the sales of the Series B Preferred Units in those transactions were used for the funding of construction loans. The transactions in Series B 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 buyers represented to us that they are 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 B Preferred Units.

	(b)	We registered up to $70,000,000 in Fixed Rate Subordinated Notes (“Notes”) in our current public offering, which is our third public offering of Notes (SEC File No. ~~333-203707,~~333-224557, effective ~~September 29, 2015)~~March 22, 2019). As of June 30, ~~2018,~~2019, we had issued ~~$18,435,000~~$2,808,522 in Notes pursuant to ~~that~~our current public offering. From ~~September 29, 2015~~March 22, 2019 through June 30, ~~2018,~~2019, we incurred expenses of ~~$246,000~~$93,554 in connection with the issuance and distribution of the Notes in our current public offering, which were paid to third parties. These expenses were not for underwriters or discounts, but were for advertising, printing, and professional services. Net offering proceeds as of June 30, ~~2018~~2019 were ~~$18,189,000, 100%~~$2,714,968, all of which was used to increase loan balances.

	(c)	None.

3938

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, ~~2018,~~2019, 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, ~~2018,~~2019, 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, ~~2018~~2019 (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 of the Company, incorporated by reference to Exhibit 3.1 to the Company’s Form 8-K, filed on November 13, 2017, Commission File No. 333-203707

3.4		Amendment No. 1 to the Company’s Second Amended and Restated Operating Agreement, dated as of March 21, 2019, incorporated by reference to Exhibit 3.4 to the Company’s Form 10-Q for the Quarterly Period Ended March 31, 2019, filed on May 9, 2019, Commission File No. 333-203707

4.1		Indenture Agreement (including Form of Note) dated ~~September 29, 2015,~~March 22, 2019, incorporated by reference to Exhibit 4.1 to the Company’s Post-Effective Amendment No. 1, filed on ~~September 29, 2015,~~March 22, 2019, Commission File No. ~~333-203707~~333-224557

~~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

~~10.2~~		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 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 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 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, LLC and 1333 Vista Drive, LLC, dated April 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 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, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2*		Certification of Principal Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

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

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

~~101.INS~~
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 ~~9, 2018~~14, 2019	By:	/s/ Catherine Loftin
		Catherine Loftin
		Acting Chief Financial Officer

(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

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

	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

	June 30, 2018		December 31, 2017
Capital Source
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		–
Unsecured Notes through our Notes Program		15,274		14,121
Other unsecured debt		5,247		3,069
Preferred equity, Series B units		1,280		1,240
Preferred equity, Series C units		1,165		1,097
Common equity		2,593		2,446

Total	$	47,122	$	33,617

			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	%

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

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.

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.