XNAS:VRTB Vestin Realty Mortgage II Inc Quarterly Report 10-Q Filing - 3/31/2012

Effective Date 3/31/2012

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

(Mark one)

[X]  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2012

Or

[    ]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the transition period from _________ to _________

Commission File Number: 333-125121
 
Company Logo
VESTIN REALTY MORTGAGE II, INC.
(Exact name of registrant as specified in its charter)


MARYLAND
 
61-1502451
(State or Other Jurisdiction of
 
(I.R.S. Employer
Incorporation or Organization)
 
Identification No.)

8880 W. SUNSET ROAD, SUITE 200, LAS VEGAS, NEVADA 89148
(Address of Principal Executive Offices)  (Zip Code)

Registrant’s Telephone Number: 702.227.0965

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes  [X]    No   [   ]

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 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  [   ]    No   [   ]

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

Large accelerated filer [   ]
Accelerated filer [   ]
Non-accelerated filer [   ]
(Do not check if a smaller reporting company)
Smaller reporting company [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]

As of May 15, 2012, there were 12,531,405 shares of the Company’s Common Stock outstanding.



TABLE OF CONTENTS

   
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PART I - FINANCIAL INFORMATION

ITEM 1.
CONSOLIDATED FINANCIAL STATEMENTS

VESTIN REALTY MORTGAGE II, INC.
 
   
CONSOLIDATED BALANCE SHEETS
 
   
ASSETS
 
   
   
March 31, 2012
   
December 31, 2011
 
   
(Unaudited)
       
Assets
           
Cash and cash equivalents
  $ 6,143,000     $ 9,226,000  
Investment in marketable securities - related party
    597,000       592,000  
Interest and other receivables, net of allowance of $2,431,000 at March 31, 2012 and $5,468,000 at December 31, 2011
    14,000       14,000  
Notes receivable, net of allowance of $23,101,000 at March 31, 2012 and $17,250,000 at December 31, 2011
    1,040,000       --  
Real estate held for sale
    10,767,000       10,767,000  
Other real estate owned
    8,963,000       --  
Investment in real estate loans, net of allowance for loan losses of $20,929,000 at March 31, 2012 and $26,247,000 at December 31, 2011
    22,950,000       31,777,000  
Due from related parties
    25,000       110,000  
Investment in MVP Realty Advisors
    15,000       --  
Prepaid management fees
    274,000       --  
Other assets
    84,000       149,000  
                 
Total assets
  $ 50,872,000     $ 52,635,000  
                 
LIABILITIES AND EQUITY
 
                 
Liabilities
               
Accounts payable and accrued liabilities
  $ 624,000     $ 753,000  
Note payable
    --       25,000  
Deferred gain on sale of HFS
    53,000       102,000  
                 
Total liabilities
    677,000       880,000  
                 
Commitments and contingencies
               
                 
Stockholders’ equity
               
Preferred stock, $0.0001 par value; 1,000,000 shares authorized; none issued
    --       --  
Treasury stock, at cost, 189,378 shares at March 31, 2012 and 189,378 shares at December 31, 2011
    (190,000 )     (190,000 )
Common stock, $0.0001 par value; 100,000,000 shares authorized; 12,720,783 shares issued and 12,531,405 outstanding at March 31, 2012 and 12,720,783 shares issued and 12,531,405 outstanding at December 31, 2011
    1,000       1,000  
Additional paid-in capital
    271,005,000       271,005,000  
Accumulated deficit
    (220,636,000 )     (219,070,000 )
Accumulated other comprehensive income
    15,000       9,000  
Total stockholders’ equity
    50,195,000       51,755,000  
                 
Total liabilities and equity
  $ 50,872,000     $ 52,635,000  


The accompanying notes are an integral part of these consolidated statements.
 
-1-



VESTIN REALTY MORTGAGE II, INC.
 
CONSOLIDATED STATEMENTS OF OPERATIONS
 
(UNAUDITED)
   
For the Three Months Ended
      03/31/2012
03/31/2011
 
       
Revenues
     
Interest income from investment in real estate loans
  $ 268,000     $ 499,000  
Gain related to pay off of real estate loan, including recovery of allowance for loan loss
    139,000       --  
Gain related to pay off of notes receivable, including recovery of allowance for notes receivable
    61,000       --  
Other income
    --       6,000  
Total revenues
    468,000       505,000  
Operating expenses
               
Management fees - related party
    274,000       274,000  
Provision for loan loss
    765,000       --  
Interest expense
    --       68,000  
Professional fees
    252,000       305,000  
Consulting fees
    53,000       35,000  
Insurance
    73,000       82,000  
Other
    67,000       79,000  
Total operating expenses
    1,484,000       843,000  
Loss from operations
    (1,016,000 )     (338,000 )
 
Non-operating income (loss)
               
Interest income from banking institutions
    1,000       2,000  
Gain on sale of marketable securities
    15,000       --  
Settlement expense
    (22,000 )     --  
Total other non-operating income (loss), net
    (6,000 )     2,000  
 
Loss from continued operations, before taxes
    (1,022,000 )     (336,000 )
                 
Provision for income taxes
    --       --  
                 
Loss from continued operations
    (1,022,000 )     (336,000 )
                 
Discontinued operations, net of income taxes
               
Net gain on sale of real estate held for sale
    10,000       --  
Expenses related to real estate held for sale
    (554,000 )     (226,000 )
Expenses related to real estate held for sale – related party
    --       (46,000 )
Income from asset held for sale, net of income taxes
    --       286,000  
Total income (loss) from discontinued operations
    (544,000 )     14,000  
Net Loss      (1,566,000     (322,000  )
                 
 Allocatin to non-controlling interest - related parties      --       109,000   
                 
Net loss attributable to common stockholders
  $ (1,566,000 )   $ (431,000 )
                 
Basic and diluted income (loss) per weighted average common share
               
Continuing operations
  $ (0.08 )   $ (0.03 )
Discontinued operations
    (0.01 )     0.00  
Total basic and diluted loss per weighted average common share
  $ (0.09 )   $ (0.03 )
Dividends declared per common share
  $ --     $ --  
Weighted average common shares outstanding
    12,531,405       13,139,513  



The accompanying notes are an integral part of these consolidated statements.
 
-2-



VESTIN REALTY MORTGAGE II, INC.
 
CONSOLIDATED STATEMENT OF OTHER COMPREHENSIVE LOSS
 
FOR THE THREE MONTHS ENDED MARCH 31, 2012 AND 2011
 
(UNAUDITED)

   
Vestin Realty Mortgage II, Inc.
03/31/2012
   
Noncontrolling Interest
03/31/2012
   
Total
03/31/2012
   
Vestin Realty Mortgage II, Inc.
03/31/2011
   
Noncontrolling Interest
03/31/2011
   
Total
03/31/2011
 
                                     
Net loss
  $ (1,566,000 )   $ --     $ (1,566,000 )   $ (431,000 )   $ 109,000     $ (322,000 )
                                                 
Unrealized gains on available-for-sale securities
                                               
   Unrealized holding gains – related party
    6,000       --       6,000       181,000       --       181,000  
   Unrealized holding gains
    --       --       --       644,000       --       644,000  
   Net amount reclassified to
   earnings
    --       --       --       --       --       --  
Net change in unrealized gains on available-for-sale securities
    6,000       --       6,000       825,000       --       825,000  
Total Other Comprehensive Income, net of tax
    6,000       --       6,000       825,000       --       825,000  
                                                 
Comprehensive Loss
  $ (1,560,000 )   $ --     $ (1,560,000 )   $ 394,000     $ 109,000     $ 503,000  



The accompanying notes are an integral part of these consolidated statements.
 
-3-



  VESTIN REALTY MORTGAGE II, INC.  
   
  CONSOLIDATED STATEMENT OF EQUITY  
   
  FOR THE THREE MONTHS ENDED MARCH 31, 2012  
     
 
(UNAUDITED)
 
   
Treasury Stock
 
Common Stock
                       
   
Shares
 
Amount
 
Shares
 
Amount
 
Additional
Paid-in
Capital
 
Accumulated Deficit
 
Accumulated
Other Comprehensive
Income
 
Total
   
                                     
Stockholders' Equity at
December 31, 2011
 
189,378
$
(190,000)
 
12,531,405
$
1,000
$
271,005,000
$
(219,070,000)
$
9,000
$
51,755,000
 
                                     
Net Income (Loss)
                     
(1,566,000)
     
(1,566,000)
   
                                     
Unrealized Gain on Marketable Securities – Related Party
                         
6,000
 
6,000
   
                                     
Comprehensive Loss
                             
(1,560,000)
   
                                     
Stockholders' Equity at
March 31, 2012 (Unaudited)
 
189,378
$
(190,000)
 
12,531,405
$
1,000
$
271,005,000
$
(220,636,000)
$
15,000
$
50,195,000
   
     


The accompanying notes are an integral part of these consolidated statements.
 
-4-


VESTIN REALTY MORTGAGE II, INC.
 
   
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
   
(UNAUDITED)
 
   
For the
Three Months Ended
 
   
03/31/2012
   
03/31/2011
 
Cash flows from operating activities:
           
Net loss
  $ (1,566,000 )   $ (322,000 )
Adjustments to reconcile net loss to net cash used in operating activities:
               
Recovery of allowance for doubtful notes receivable
    (61,000 )     (2,000 )
Gain related to recovery of allowance for loan loss
    (139,000 )     --  
Provision for loan loss
    765,000       --  
Gain on sale of marketable securities
    (15,000 )     --  
Amortized interest income
    --       (16,000 )
Change in operating assets and liabilities:
               
Interest and other receivables
    --       142,000  
Assets held for sale, net of liabilities
    --       (286,000 )
Due to/from related parties
    85,000       520,000  
Deferred gain on sale of HFS
    (49,000 )     --  
Other assets
    (209,000 )     70,000  
Accounts payable and accrued liabilities
    (128,000 )     (1,867,000 )
Net cash used in operating activities
    (1,317,000 )     (1,761,000 )
                 
Cash flows from investing activities:
               
Investments in real estate loans
    (4,996,000 )     (1,453,000 )
Proceeds from loan payoffs
    2,301,000       38,000  
Sale of investments in real estate loans to third parties
    1,933,000       --  
Proceeds from notes receivable
    61,000       2,000  
Investment in MVP Realty Advisors
    (15,000 )     --  
Investment in notes receivable
    (1,040,000 )     --  
Purchase of marketable securities
    (1,011,000 )     --  
Sale of marketable securities
    1,026,000       --  
Net cash used in investing activities
    (1,741,000 )     (1,413,000 )
                 
Cash flows from financing activities:
               
Principal payments on notes payable
    (25,000 )     (27,000 )
Distributions to holder of noncontrolling interest – related party
    --       74,000  
Net cash provided by (used in) financing activities
    (25,000 )     47,000  
                 
NET CHANGE IN CASH
    (3,083,000 )     (3,127,000 )
                 
Cash and cash equivalents, beginning of period
    9,226,000       7,884,000  
                 
Cash and cash equivalents, end of period
  $ 6,143,000     $ 4,757,000  
                 
Supplemental disclosures of cash flows information:
               
Interest paid
  $ --     $ 68,000  
                 
Non-cash investing and financing activities:
               
Write-off of interest receivable and related allowance
  $ 2,130,000     $ --  
Transfer of interest receivable to notes receivable
  $ 907,000     $ --  
Investments in real estate loans  and related allowances transferred to note receivable
  $ 2,938,000       --  
Real estate held for sale acquired through foreclosure, net of prior allowance
  $ --     $ 160,000  
Other real estate owned acquired through deed in lieu, net of prior allowance
  $ 8,963,000     $ --  
Unrealized gain on marketable securities - related party
  $ 6,000     $ 181,000  



The accompanying notes are an integral part of these consolidated statements.
 
-5-



VESTIN REALTY MORTGAGE II, INC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2012

(UNAUDITED)

NOTE A — ORGANIZATION

Vestin Realty Mortgage II, Inc. (“VRM II”) formerly Vestin Fund II, LLC (“Fund II”) invests in loans secured by real estate through deeds of trust or mortgages (hereafter referred to collectively as “deeds of trust” and as defined in our management agreement (“Management Agreement”) as “Mortgage Assets”).  In addition we may invest in, acquire, manage or sell real property or acquire entities involved in the ownership or management of real property.  We commenced operations in June 2001.  References in this report to the “Company,”“we,”“us,” or “our” refer to Fund II with respect to the period prior to April 1, 2006 and to VRM II with respect to the period commencing on April 1, 2006.

We operated as a real estate investment trust (“REIT”) through December 31, 2011.  We are not a mutual fund or an investment company within the meaning of the Investment Company Act of 1940, nor are we subject to any regulation thereunder.  As a REIT, we were required to have a December 31 fiscal year end.  We announced on March 28, 2012 that we have terminated our election to be treated as a REIT under the Internal Revenue Code of 1986, as amended (the “Code”), effective for the tax year ending December 31, 2012.  Under the Code, we will not be able to make a new election to be taxed as a REIT during the four years following December 31, 2012.  Pursuant to our charter, upon the determination by the Board of Directors that we should no longer qualify as a REIT, the restrictions on transfer and ownership of shares set forth in Article VII of our charter ceased to be in effect and, accordingly, shares of the Company’s stock will no longer be subject to such restrictions.

Vestin Group, Inc. (“Vestin Group”), a Delaware corporation, owns a significant majority of Vestin Mortgage, LLC, a Nevada limited liability company, which is our manager (the “manager” or “Vestin Mortgage”). On January 7, 2011, Vestin Mortgage converted from a corporation to a limited liability company.  Michael Shustek, the CEO and managing member of our manager and CEO, President and a director of us, wholly owns Vestin Group, which is engaged in asset management, real estate lending and other financial services through its subsidiaries.  Our manager, prior to June 30, 2006, also operated as a licensed Nevada mortgage broker and was generally engaged in the business of brokerage, placement and servicing of commercial loans secured by real property.  On July 1, 2006, a mortgage broker license was issued to an affiliated company, Vestin Originations, Inc. (“Vestin Originations”), which is majority-owned by Vestin Group.  Vestin Originations continued the business of brokerage, placement and servicing of real estate loans.  Since February 14, 2011, the business of brokerage and placement of real estate loans have been performed by affiliated or non-affiliated mortgage brokers, including Vestin Originations and Advant Mortgage, LLC (“Advant”), both licensed Nevada mortgage brokers, which are indirectly majority owned by Mr. Shustek.

Pursuant to a management agreement, our manager is responsible for managing our operations and implementing our business strategies on a day-to-day basis.  Consequently, our operating results are dependent to a significant extent upon our manager’s ability and performance in managing our operations and servicing our loans.

Vestin Mortgage is also the manager of Vestin Realty Mortgage I, Inc. (“VRM I”), as the successor by merger to Vestin Fund I, LLC (“Fund I”) and Vestin Fund III, LLC (“Fund III”).  VRM I has investment objectives similar to ours, and Fund III is in the process of an orderly liquidation of its assets.


 
-6-



During April 2009, we entered into an accounting services agreement with Strategix Solutions, LLC (“Strategix Solutions”), a Nevada limited liability company, for the provision of accounting and financial reporting services.  Strategix Solutions also provides accounting and financial reporting services to VRM I and Fund III.  Our CFO and other members of our accounting staff are employees of Strategix Solutions.  Strategix Solutions is managed by LL Bradford and Company, LLC ("LL Bradford"), a certified public accounting firm that has provided non-audit accounting services to us.  The principal manager of LL Bradford was a former officer of our manager from April 1999 through January 1, 2005.  Strategix Solutions is owned by certain partners of LL Bradford, none of whom are currently or were previously officers of our manager.  As used herein, “management” means our manager, its manager, its executive officers and the individuals at Strategix Solutions who perform accounting and financial reporting services on our behalf.

NOTE B — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The financial statements of the Company have been prepared in accordance with the accounting principles generally accepted in the United States of America (“GAAP”).  In the opinion of management all normal recurring adjustments considered necessary to give a fair presentation of operating results for the periods presented have been included.  Management has included all normal recurring adjustments considered necessary to give a fair presentation of operating results for the periods presented.  Interim results are not necessarily indicative of results for a full year.  The information included in this Form 10-Q should be read in conjunction with information included in the 2011 annual report filed on Form 10-K.

Management Estimates

The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period.  Actual results could differ from those estimates.

Cash and Cash Equivalents

Cash and cash equivalents include interest-bearing and non-interest-bearing bank deposits, money market accounts, short-term certificates of deposit with original maturities of three months or less, and short-term instruments with a liquidation provision of one month or less.

Revenue Recognition

Interest is recognized as revenue on performing loans when earned according to the terms of the loans, using the effective interest method.  We do not accrue interest income on loans once they are determined to be non-performing.  A loan is non-performing when, based on current information and events, it is probable that we will be unable to collect all amounts due according to the contractual terms of the loan agreement or when the payment of interest is 90 days past due.  Cash receipts will be allocated to interest income, except when such payments are specifically designated by the terms of the loan as principal reduction.  Interest is fully allowed for on impaired loans and is recognized on a cash basis method.

Investments in Real Estate Loans

We may, from time to time, acquire or sell investments in real estate loans from or to our manager or other related parties pursuant to the terms of our Management Agreement without a premium.  The primary purpose is to either free up capital to provide liquidity for various reasons, such as loan diversification, or place excess capital in investments to maximize the use of our capital.  Selling or buying loans allows us to diversify our loan portfolio within these parameters.  Due to the short-term nature of the loans we make and the similarity of interest rates in loans we normally would invest in, the fair value of a loan typically approximates its carrying value.  Accordingly, discounts or premiums typically do not apply upon sales of loans and therefore, generally no gain or loss is recorded on these transactions, regardless of whether to a related or unrelated party.

 
-7-




Investments in real estate loans are secured by deeds of trust or mortgages.  Generally, our real estate loans require interest only payments with a balloon payment of the principal at maturity.  We have both the intent and ability to hold real estate loans until maturity and therefore, real estate loans are classified and accounted for as held for investment and are carried at amortized cost.  Loans sold to or purchased from affiliates are accounted for at the principal balance and no gain or loss is recognized by us or any affiliate.  Loan-to-value ratios are initially based on appraisals obtained at the time of loan origination and are updated, when new appraisals are received or when management’s assessment of the value has changed, to reflect subsequent changes in value estimates.  Such appraisals are generally dated within 12 months of the date of loan origination and may be commissioned by the borrower.

The Company considers a loan to be impaired when, based upon current information and events, it believes it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement.  The Company’s impaired loans include troubled debt restructuring, and performing and non-performing loans in which full payment of principal or interest is not expected.  The Company calculates an allowance required for impaired loans based on the present value of expected future cash flows discounted at the loan’s effective interest rate, or at the loan’s observable market price or the fair value of its collateral.

Loans that have been modified from their original terms are evaluated to determine if the loan meets the definition of a Troubled Debt Restructuring (“TDR”) as defined by ASC 310-40.  When the Company modifies the terms of an existing loan that is considered a TDR, it is considered performing as long as it is in compliance with the modified terms of the loan agreement.  If the modification calls for deferred interest, it is recorded as interest income as cash is collected.

Allowance for Loan Losses

We maintain an allowance for loan losses on our investments in real estate loans for estimated credit impairment.  Our manager’s estimate of losses is based on a number of factors including the types and dollar amounts of loans in the portfolio, adverse situations that may affect the borrower’s ability to repay, prevailing economic conditions and the underlying collateral securing the loan.  Additions to the allowance are provided through a charge to earnings and are based on an assessment of certain factors, which may indicate estimated losses on the loans.  Actual losses on loans are recorded first as a reduction to the allowance for loan losses.  Generally, subsequent recoveries of amounts previously charged off are recognized as income.

Estimating allowances for loan losses requires significant judgment about the underlying collateral, including liquidation value, condition of the collateral, competency and cooperation of the related borrower and specific legal issues that affect loan collections or taking possession of the property.  As a commercial real estate lender willing to invest in loans to borrowers who may not meet the credit standards of other financial institutional lenders, the default rate on our loans could be higher than those generally experienced in the real estate lending industry.  We and our manager generally approve loans more quickly than other real estate lenders and, due to our expedited underwriting process; there is a risk that the credit inquiry we perform will not reveal all material facts pertaining to a borrower and the security.

Additional facts and circumstances may be discovered as we continue our efforts in the collection and foreclosure processes.  This additional information often causes management to reassess its estimates.  In recent years, we have revised estimates of our allowance for loan losses.  Circumstances that have and may continue to cause significant changes in our estimated allowance include, but are not limited to:

 
·
Declines in real estate market conditions, which can cause a decrease in expected market value;

 
·
Discovery of undisclosed liens for community improvement bonds, easements and delinquent property taxes;


 
-8-



 
·
Lack of progress on real estate developments after we advance funds.  We customarily utilize disbursement agents to monitor the progress of real estate developments and approve loan advances.  After further inspection of the related property, progress on construction occasionally does not substantiate an increase in value to support the related loan advances;

 
·
Unanticipated legal or business issues that may arise subsequent to loan origination or upon the sale of foreclosed property; and

 
·
Appraisals, which are only opinions of value at the time of the appraisal, may not accurately reflect the value of the property.

Discontinued Operations

We have reclassified for all periods presented in the accompanying consolidated statements of operations, the amounts related to discontinued operations and real estate held for sale, in accordance with the applicable accounting criteria.  In addition, the assets and liabilities related to the discontinued operations are reported separately in the accompanying consolidated balance sheets as real estate held for sale and other real estate owned.
 
Real Estate Held for Sale

Real estate held for sale (“REO”) includes real estate acquired through foreclosure and will be carried at the lower of the recorded amount, inclusive of any senior indebtedness, or the property's estimated fair value, less estimated costs to sell, with fair value based on appraisals and knowledge of local market conditions.  While pursuing foreclosure actions, we seek to identify potential purchasers of such property.  It is not our intent to invest in or to own real estate as a long-term investment.  We generally seek to sell properties acquired through foreclosure as quickly as circumstances permit, taking into account current economic conditions.  The carrying values of REO are assessed on a regular basis from updated appraisals, comparable sales values or purchase offers.

Management classifies real estate as REO when the following criteria are met:

 
·
Management commits to a plan to sell the properties;

 
·
The property is available for immediate sale in its present condition subject only to terms that are usual and customary;

 
·
An active program to locate a buyer and other actions required to complete a sale have been initiated;

 
·
The sale of the property is probable;

 
·
The property is being actively marketed for sale at a reasonable price; and

 
·
Withdrawal or significant modification of the sale is not likely.

Real Estate Held For Sale – Seller-Financed

We occasionally finance sales of foreclosed properties (“seller-financed REO”) to third parties.  In order to record a sale of real estate when we provide financing, the buyer of the real estate is required to make minimum initial and continuing investments.  Minimum initial investments range from 10% to 25% based on the type of real estate sold.  In addition, there are limits on commitments and contingent obligations incurred by a seller in order to record a sale.


 
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Because we occasionally foreclose on loans with raw land or developments in progress, available financing for such properties is often limited and we frequently provide financing up to 100% of the selling price on these properties.  In addition, we may make additional loans to the buyer to continue development of a property.  Although sale agreements are consummated at closing, they lack adequate initial investment by the buyer to qualify as a sale transaction.  These sale agreements are not recorded as a sale until the minimum requirements are met.

These sale agreements are recorded under the deposit method or cost recovery method. Under the deposit method, no profit is recognized and any cash received from the buyer is reported as a deposit liability on the balance sheet.  Under the cost recovery method, no profit is recognized until payments by the buyer exceed the carrying basis of the property sold.  Principal payments received will reduce the related receivable, and interest collections will be recorded as unrecognized gross profit on the balance sheet.  The carrying values of these properties would be included in real estate held for sale – seller financed on the consolidated balance sheets, when applicable.

In cases where the investment by the buyer is significant (generally 20% or more) and the buyer has an adequate continuing investment, the purchase money debt is not subject to future subordination, and a full transfer of risks and rewards has occurred, we will use the full accrual method.  Under the full accrual method, a sale is recorded and the balance remaining to be paid is recorded as a normal note.  Interest is recorded as income when received.

Secured Borrowings

Secured borrowings provide an additional source of capital for our lending activity.  Secured borrowings allow us to increase the diversification of our loan portfolio and to invest in loans that we might not otherwise invest in.  We do not receive any fees for entering into secured borrowing arrangements; however, we may receive revenue for any differential of the interest spread, if applicable.  Loans in which unaffiliated investors have participated through inter-creditor agreements (“Inter-creditor Agreements”) are accounted for as secured borrowings.

The Inter-creditor Agreements provide us additional funding sources for real estate loans whereby an unaffiliated investor (the “Investor”) may participate on a non-paripassu basis in certain real estate loans with us and/or VRM I (collectively, the “Lead Lenders”).  In the event of borrower non-performance, the Inter-creditor Agreements generally provide that the Lead Lenders must repay the Investor’s loan amount either by (i) continuing to remit to the Investor the interest due on the participated loan amount; (ii) substituting an alternative loan acceptable to the Investor; or (iii) repurchasing the participation from the Investor for the outstanding balance plus accrued interest.

Additionally, an Investor may participate in certain loans with the Lead Lenders through Participation Agreements.  In the event of borrower non-performance, the Participation Agreement may allow the Investor to be repaid up to the amount of the Investor’s investment prior to the Lead Lender being repaid.  Real estate loan financing under the Participation Agreements are also accounted for as a secured borrowing.  We do not receive any revenues for entering into secured borrowing arrangements.

Investment in Marketable Securities – Related Party

Investment in marketable securities – related party consists of stock in VRM I.  The securities are stated at fair value as determined by the closing market prices as of March 31, 2012 and December 31, 2011.  All securities are classified as available-for-sale.

We are required to evaluate our available-for-sale investment for other-than-temporary impairment charges.  We will determine when an investment is considered impaired (i.e., decline in fair value below its amortized cost), and evaluate whether the impairment is other than temporary (i.e., investment value will not be recovered over its remaining life).  If the impairment is considered other than temporary, we will recognize an impairment loss equal to the difference between the investment’s cost and its fair value.


 
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According to the SEC Staff Accounting Bulletin, Topic 5: Miscellaneous Accounting, M - Other Than Temporary Impairment of Certain Investments in Debt and Equity Securities, there are numerous factors to be considered in such an evaluation and their relative significance will vary from case to case.  The following are a few examples of the factors that individually or in combination, indicate that a decline is other than temporary and that a write-down of the carrying value is required:

 
·
The length of the time and the extent to which the market value has been less than cost;

 
·
The financial condition and near-term prospects of the issuer, including any specific events which may influence the operations of the issuer such as changes in technology that may impair the earnings potential of the investment or the discontinuance of a segment of the business that may affect the future earnings potential; or

 
·
The intent and ability of the holder to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in market value.

Fair Value Disclosures

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (i.e. “the exit price”) in an orderly transaction between market participants at the measurement date.  In determining fair value, the Company uses various valuation approaches, including quoted market prices and discounted cash flows.  The established hierarchy for inputs used, in measuring fair value, maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available.  Observable inputs are inputs that market participants would use in pricing the asset or liability developed based on market data obtained from independent sources.  Unobservable inputs are inputs that reflect a company’s judgment concerning the assumptions that market participants would use in pricing the asset or liability developed based on the best information available under the circumstances.  The fair value hierarchy is broken down into three levels based on the reliability of inputs as follows:

 
·
Level 1 – Valuations based on quoted prices in active markets for identical instruments that the Company is able to access.  Since valuations are based on quoted prices that are readily and regularly available in an active market, valuation of these products does not entail a significant degree of judgment.

 
·
Level 2 – Valuations based on quoted prices in active markets for instruments that are similar, or quoted prices in markets that are not active for identical or similar instruments, and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets.

 
·
Level 3 – Valuations based on inputs that are unobservable and significant to the overall fair value measurement, which utilize the Company’s estimates and assumptions.

If the volume and level of activity for an asset or liability have significantly decreased, we will still evaluate our fair value estimate as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date under current market conditions.  In addition, since we are a publicly traded company, we are required to make our fair value disclosures for interim reporting periods.

Basic and Diluted Earnings Per Common Share

Basic earnings per share (“EPS”) is computed by dividing net income available to common stockholders by the weighted average number of common shares outstanding.  Diluted EPS is similar to basic EPS except that the weighted average number of common shares outstanding is increased to include the number of additional common shares that would have been outstanding if the dilutive potential common shares had been exercised.  We had no outstanding common share equivalents during the three months ended March 31, 2012 and 2011.


 
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Common Stock Dividends

During June 2008, our Board of Directors decided to suspend the payment of dividends.  Our Board of Directors will closely monitor our operating results in order to determine when dividends should be reinstated; however, we do not expect them to be reinstating dividends in the foreseeable future.

Treasury Stock

On March 21, 2007, our Board of Directors authorized the repurchase of up to $10 million worth of our common stock.  Depending upon market conditions, shares may be repurchased from time to time at prevailing market prices through open market or privately negotiated transactions.  We are not obligated to purchase any shares.  Subject to applicable securities laws, including SEC rule 10b-18, repurchases may be made at such times and in such amounts, as our management deems appropriate.  The share repurchase program may be discontinued or terminated at any time and we have not established a date for completion of the share repurchase program.  The repurchases will be funded from our available cash.

Segments

We are currently authorized to operate two reportable segments, investments in real estate loans and investments in real property.  As of March 31, 2012, we had not commenced investing in real property.

Our objective is to invest approximately 97% of our assets in real estate loans and real estate investments, while maintaining approximately 3% as a working capital cash reserve.  Current market conditions have impaired our ability to be fully invested in real estate loans and real estate investments.  As of March 31, 2012, approximately 24% of our assets, net of allowance for loan losses, are classified as investments in real estate loans.

Reclassifications

Certain amounts in the March 31, 2011 consolidated financial statements have been reclassified to conform to the March 31, 2012 presentation.

Principles of Consolidation

Our consolidated financial statements include the accounts of VRM II, TRS II, our wholly owned subsidiary, HFS, in which we had a controlling interest through December 1, 2011. Our consolidated financial statements also included the accounts of the funeral merchandise and service trusts, cemetery merchandise and service trusts, and cemetery perpetual care trusts (“Trusts”) in which we had a variable interest and HFS was the primary beneficiary through December 1, 2011. Intercompany balances and transactions have been eliminated in consolidation.
 
Noncontrolling Interests

The FASB issued authoritative guidance for noncontrolling interests in December 2007, which establishes accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. The guidance clarifies that a noncontrolling interest in a subsidiary, which is sometimes referred to as an unconsolidated investment, is an ownership interest in the consolidated entity that should be reported as a component of equity in the consolidated financial statements. Among other requirements, the guidance requires consolidated net income to be reported at amounts attributable to both the parent and the noncontrolling interest. It also requires disclosure, on the face of the consolidated income statement, of the amounts of consolidated net income attributable to the parent and to the noncontrolling interest.
 

 
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Income Taxes

The Company accounts for its income taxes under the assets and liabilities method, which requires recognition of deferred tax assets and liabilities for future tax consequences of events that have been included in the financial statements.  Under this method, deferred tax assets and liabilities are determined based on the differences between the financial statements and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse.  The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date.

The Company records net deferred tax assets to the extent the Company believes these assets will more likely than not be realized.  In making such determination, the Company considers all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax planning strategies and recent financial operations.  A valuation allowance is established against deferred tax assets that do not meet the criteria for recognition.  In the event the Company were to determine that it would be able to realize deferred income tax assets in the future in excess of their net recorded amount, they would make an adjustment to the valuation allowance which would reduce the provision for income taxes.

The Company follows the accounting guidance which provides that a tax benefit from an uncertain tax position may be recognized when it is more likely than not that the position will be sustained upon examination, including resolutions of any related appeals or litigation processes, based on the technical merits. Income tax positions must meet a more-likely-than-not recognition threshold at the effective date to be recognized initially and in subsequent periods.  Also included is guidance on measurement, derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.

NOTE C — FINANCIAL INSTRUMENTS AND CONCENTRATIONS OF CREDIT RISK

Financial instruments consist of cash, interest and other receivables, notes receivable, accounts payable and accrued liabilities, due to/from related parties and notes payable.  The carrying values of these instruments approximate their fair values due to their short-term nature.  Marketable securities – related party and investment in real estate loans are further described in Note K – Fair Value.

Financial instruments with concentration of credit and market risk include cash, interest and other receivables, marketable securities - related party, notes receivable, accounts payable and accrued liabilities, due to/from related parties, notes payable, and loans secured by deeds of trust.

We maintain cash deposit accounts and certificates of deposit that, at times, may exceed federally-insured limits.  To date, we have not experienced any losses.  As of March 31, 2012 and December 31, 2011, we had approximately $0.3 million and $0, respectively, in excess of the federally-insured limits.  Additionally, as of March 31, 2012 and December 31, 2011, the assets held for sale included no cash deposits held in excess of federally insured limits.

As of March 31, 2012, 35%, 35%, and 20% of our loans were in Nevada, Arizona, and California respectively, compared to 36%, 28%, 19%, and 15% in Nevada, Arizona, Texas, and California, at December 31, 2011, respectively.  As a result of this geographical concentration of our real estate loans, the downturn in the local real estate markets in these states has had a material adverse effect on us.


 
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At March 31, 2012, the aggregate amount of loans to our three largest borrowers represented approximately 52% of our total investment in real estate loans.  These real estate loans consisted of commercial and land loans, secured by properties located in Arizona, Nevada and California, with a first lien position on the California loan and second lien positions on the Arizona and Nevada loans.  Their interest rates are between 11% and 15%, and the aggregate outstanding balance is approximately $23.3 million.  As of March 31, 2012, our largest loan, totaling $12.6 million, is secured by property located in Arizona and has an interest rate of 15%, was considered non-performing and has been fully reserved.  The loan secured by property located in Nevada has an interest rate of 15% was considered non-performing, and has been fully reserved.  The loan secured by property located in California, a non-performing loan with an interest rate of 11%, is a result of troubled debt restructuring.  Through March 25, 2011, interest was being paid monthly at 6% and deferred at 5%.  Effective March 25, 2011, the total interest was being fully deferred until March 2012. As of May 25, 2012 the loan has matured however the balance due continues to be outstanding.  Our manager is in negations to attempt to remediate the non-performing status of this loan.   See “Troubled Debt Restructuring” and “Non-Performing Loans” in Note D – Investments in Real Estate Loans.  At December 31, 2011, the aggregate amount of loans to our three largest borrowers represented approximately 53% of our total investment in real estate loans.  These real estate loans consisted of commercial and land loans, secured by property located in Arizona, Texas and California, with a first lien position on the California loan and second lien positions on the Arizona and Texas loans.  Their interest rates ranged between 8% and 15%, and the aggregate outstanding balance was approximately $30.7 million.

The success of a borrower’s ability to repay its real estate loan obligation in a large lump-sum payment may be dependent upon the borrower’s ability to refinance the obligation or otherwise raise a substantial amount of cash.  With the weakened economy, credit continues to be difficult to obtain and as such, many of our borrowers who develop and sell commercial real estate projects have been unable to complete their projects, obtain takeout financing or have been otherwise adversely impacted.  In addition, an increase in interest rates over the loan rate applicable at origination of the loan may have an adverse effect on our borrower’s ability to refinance.

Common Guarantors

As of March 31, 2012 and December 31, 2011, two loans totaling approximately $15.9 million representing approximately 36.1% and 27.3% of our portfolio’s total value, respectively, along with two unsecured notes receivable totaling approximately $5.0 million, had a common guarantor.  As of March 31, 2012 and December 31, 2011, both loans were fully reserved and were considered non-performing.

As of March 31, 2012 and December 31, 2011, four loans totaling approximately $6.3 and $11.0 million, respectively, had a common guarantor.  These loans represented approximately 14.4% and 19.0%, respectively, of our portfolio’s total value as of March 31, 2012 and December 31, 2011.  One loan at March 31, 2012 and December 31, 2011 is secured by a second deed of trust and had a balance of approximately $0.7 million and $0.9 million, respectively.  All four loans were considered performing as of March 31, 2012 and December 31, 2011.

As of March 31, 2012 and December 31 2011, six and nine loans totaling approximately $6.5 million and $6.2 million, respectively, representing approximately 14.8% and 10.7%, respectively, of our portfolio’s total value, had a common guarantor.  At March 31, 2012 and December 31, 2011 all loans were considered performing.

For additional information regarding non-performing loans discussed above, see “Non-Performing Loans” in Note D – Investments In Real Estate Loans.

NOTE D — INVESTMENTS IN REAL ESTATE LOANS

As of March 31, 2012 and December 31, 2011, most of our loans provided for interest only payments with a “balloon” payment of principal payable and any accrued interest payable in full at the end of the term.

In addition, we may invest in real estate loans that require borrowers to maintain interest reserves funded from the principal amount of the loan for a period of time.  At March 31, 2012 and December 31, 2011, we had two and no investments in real estate loans, respectively, that had interest reserves.


 
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Loan Portfolio

As of March 31, 2012, we had five available real estate loan products consisting of commercial, construction, acquisition and development, land and residential.  The effective interest rates on all product categories range from 0% to 15% which includes performing loans that are being fully or partially accrued and will be payable at maturity.  Revenue by product will fluctuate based upon relative balances during the period.

Investments in real estate loans as of March 31, 2012, were as follows:
 
Loan Type
 
Number of Loans
   
Balance *
   
Weighted Average Interest Rate
   
Portfolio Percentage
   
Current Weighted Average Loan-To-Value, Net of Allowance for Loan Losses
 
                               
Residential
    1     $ 410,000       8.00 %     0.93 %     60.43 %
Commercial
    18       32,536,000       11.86 %     74.15 %     62.73 %
Land
    3       10,933,000       10.75 %     24.92 %     64.15 %
Total
    22     $ 43,879,000       11.55 %     100.00 %     63.31 %
 
Investments in real estate loans as of December 31, 2011, were as follows:
 
Loan Type
 
Number of Loans
   
Balance *
   
Weighted Average Interest Rate
   
Portfolio Percentage
   
Current Weighted Average Loan-To-Value, Net of Allowance for Loan Losses
 
                               
Residential
    1     $ 385,000       8.00 %     0.66 %     61.41 %
Commercial
    19       40,050,000       10.97 %     69.02 %     71.43 %
Construction
    1       6,656,000       8.00 %     11.47 %     89.49 %
Land
    3       10,933,000       10.75 %     18.85 %     64.15 %
Total
    24     $ 58,024,000       10.57 %     100.00 %     71.10 %

*
Please see Balance Sheet Reconciliation below.

The “Weighted Average Interest Rate” as shown above is based on the contractual terms of the loans for the entire portfolio including non-performing loans.  The weighted average interest rate on performing loans only, as of March 31, 2012 and December 31, 2011, was 10.09% and 6.79%, respectively.  Please see “Non-Performing Loans” and “Asset Quality and Loan Reserves” below for further information regarding performing and non-performing loans.

Loan-to-value ratios are generally based on the most recent appraisals and may not reflect subsequent changes in value and include allowances for loan losses.  Recognition of allowance for loan losses will result in a maximum loan-to-value ratio of 100% per loan.

The following is a schedule of priority of real estate loans as of March 31, 2012, and December 31, 2011:

 
Loan Type
 
Number of Loans
   
March 31, 2012
Balance*
   
Portfolio
Percentage
   
Number of Loans
   
December 31, 2011 Balance*
   
Portfolio
Percentage
 
 
                                   
 First deeds of trust     18     $ 26,613,000       60.65 %     18     $ 28,684,000       49.43 %
 Second deeds of trust     4       17,266,000       39.35 %     6       29,340,000       50.57 %
    Total     22     $ 43,879,000       100.00 %     24     $ 58,024,000       100.00 %

*
Please see Balance Sheet Reconciliation below.


 
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The following is a schedule of contractual maturities of investments in real estate loans as of March 31, 2012:

Non-performing and past due loans
  $ 26,346,000  
April 2012 – June 2012
    6,290,000  
July 2012 – September 2012
    3,678,000  
October 2012 – December 2012
    915,000  
January 2013 – March 2013
    3,822,000  
Thereafter
    2,828,000  
         
Total
  $ 43,879,000  

The following is a schedule by geographic location of investments in real estate loans as of March 31, 2012 and December 31, 2011:

   
March 31, 2012 Balance *
   
Portfolio Percentage
   
December 31, 2011 Balance *
   
Portfolio Percentage
 
                         
Arizona
  $ 15,443,000       35.19 %   $ 16,108,000       27.76 %
California
    8,559,000       19.51 %     8,564,000       14.76 %
Colorado
    895,000       2.04 %     895,000       1.54 %
Nevada
    15,188,000       34.61 %     21,114,000       36.39 %
Ohio
    323,000       0.74 %     323,000       0.56 %
Oregon
    46,000       0.10 %     46,000       0.08 %
Texas
    306,000       0.70 %     10,974,000       18.91 %
Utah
    3,119,000       7.11 %     --       --  
Total
  $ 43,879,000       100.00 %   $ 58,024,000       100.00 %

*
Please see Balance Sheet Reconciliation below.

Balance Sheet Reconciliation

The following table reconciles the balance of the loan portfolio to the amount shown on the accompanying Consolidated Balance Sheets.

   
March 31, 2012 Balance
   
December 31, 2011 Balance
 
Balance per loan portfolio
  $ 43,879,000     $ 58,024,000  
Less:
               
Allowance for loan losses (a)
    (20,929,000 )     (26,247,000 )
Balance per consolidated balance sheets
  $ 22,950,000     $ 31,777,000  

 
(a)
Please refer to Specific Reserve Allowance below.

Non-Performing Loans

As of March 31, 2012, we had five loans considered non-performing (i.e., based on current information and events, it is probable that we will be unable to collect all amounts due according to the contractual terms of the loan agreement or when the payment of interest is 90 days past due).  These loans are currently carried on our books at a value of approximately $8.5 million, net of allowance for loan losses of approximately $17.9 million, which does not include the allowances of approximately $3.1 million relating to performing loans as of March 31, 2012.  Except as otherwise provided below, these loans have been placed on non-accrual of interest status and may be the subject of pending foreclosure proceedings.  Our manager has commenced foreclosure proceedings on a majority of these loans, and has proceeded with legal action to enforce the personal guarantees as our manager deems appropriate.  As of May 15, 2012, these loan balances have not been charged off.

 
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At March 31, 2012, the following loan types were non-performing:

Loan Type
 
Number Of Non-Performing Loans
   
Balance at
March 31, 2012
   
Allowance for Loan Losses
   
Net Balance at
March 31, 2012
 
 
Commercial
    4     $ 18,896,000     $ (17,865,000 )   $ 1,031,000  
Land
    1       7,450,000       --       7,450,000  
Total
    5     $ 26,346,000     $ (17,865,000 )   $ 8,481,000  

At December 31, 2011, the following loan types were non-performing:

Loan Type
 
Number Of Non-Performing Loans
   
Balance at
December 31, 2011
   
Allowance for Loan Losses
   
Net Balance at
December 31, 2011
 
                         
Commercial
    5     $ 29,564,000     $ (19,570,000 )   $ 9,994,000  
Total
    5     $ 29,564,000     $ (19,570,000 )   $ 9,994,000  

Asset Quality and Loan Reserves

Losses may occur from investing in real estate loans.  The amount of losses will vary as the loan portfolio is affected by changing economic conditions and the financial condition of borrowers.

The conclusion that a real estate loan is uncollectible or that collectability is doubtful is a matter of judgment.  On a quarterly basis, our manager evaluates our real estate loan portfolio for impairment.  The fact that a loan is temporarily past due does not necessarily mean that the loan is non-performing.  Rather, all relevant circumstances are considered by our manager to determine impairment and the need for specific reserves.  Such evaluation, which includes a review of all loans on which full collectability may not be reasonably assured, considers among other matters:

 
·
Prevailing economic conditions;

 
·
Historical experience;

 
·
The nature and volume of the loan portfolio;

 
·
The borrowers’ financial condition and adverse situations that may affect the borrowers’ ability to pay;

 
·
Evaluation of industry trends; and

 
·
Estimated net realizable value of any underlying collateral in relation to the loan amount.

Based upon this evaluation, a determination is made as to whether the allowance for loan losses is adequate to cover any potential losses on an individual loan basis; we do not have a general allowance for loan losses.  Additions to the allowance for loan losses are made by charges to the provision for loan loss.  Our ratio of total allowance for loan losses to total loans with an allowance for loan loss is 84%.  The following is a breakdown of allowance for loan losses related to performing loans and non-performing loans as of March 31, 2012 and December 31, 2011:

 
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As of March 31, 2012
 
   
Balance
   
Allowance for loan losses **
   
Balance, net of allowance
 
Non-performing loans – no related allowance
  $ 7,450,000     $ --     $ 7,450,000  
Non-performing loans – related allowance
    18,896,000       (17,865,000 )     1,031,000  
Subtotal non-performing loans
    26,346,000       (17,865,000 )     8,481,000  
                         
Performing loans – no related allowance
    11,594,000       --       11,594,000  
Performing loans – related allowance
    5,939,000       (3,064,000 )     2,875,000  
Subtotal performing loans
    17,533,000       (3,064,000 )     14,469,000  
                         
Total
  $ 43,879,000     $ (20,929,000 )   $ 22,950,000  
 
   
As of December 31, 2011
 
   
Balance
   
Allowance for loan losses **
   
Balance, net of allowance
 
Non-performing loans – no related allowance
  $ --     $ --     $ --  
Non-performing loans – related allowance
    29,564,000       (19,570,000 )     9,994,000  
Subtotal non-performing loans
    29,564,000       (19,570,000 )     9,994,000  
                         
Performing loans – no related allowance
    17,064,000       --       17,064,000  
Performing loans – related allowance
    11,396,000       (6,677,000 )     4,719,000  
Subtotal performing loans
    28,460,000       (6,677,000 )     21,783,000  
                         
Total
  $ 58,024,000     $ (26,247,000 )   $ 31,777,000  

**
Please refer to Specific Reserve Allowances below.

Our manager evaluated our loans and, based on current estimates with respect to the value of the underlying collateral, believes that such collateral is sufficient to protect us against further losses of principal.  However, such estimates could change or the value of the underlying real estate could decline.  Our manager will continue to evaluate our loans in order to determine if any other allowance for loan losses should be recorded.

Specific Reserve Allowances
 
As of March 31, 2012, we have provided a specific reserve allowance for four non-performing loans and four performing loans based on updated appraisals of the underlying collateral and/or our evaluation of the borrower.  The following table is a roll-forward of the allowance for loan losses for the three months ended March 31, 2012 and 2011 by loan type.  We will continue to evaluate our position in these loans.

 
 
Loan Type
 
Balance at
12/31/2011
   
Specific Reserve Allocation
   
Loan Pay Downs
   
Settlements
   
Transfers to Notes Receivable
   
Balance at
3/31/2012
 
Commercial
  $ 22,392,000     $ 765,000     $ (139,000 )   $ --     $ (2,973,000 )   $ 20,045,000  
Construction
    2,971,000       --       --       --       (2,971,000 )     --  
Land
    884,000       --       --       --       --       884,000  
Total
  $ 26,247,000     $ 765,000     $ (139,000 )   $ --     $ (5,944,000 )   $ 20,929,000  


 
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Loan Type
 
Balance at
12/31/2010
   
Specific Reserve Allocation *
   
Sales
   
Settlements
   
Transfers to Notes Receivable
   
Balance at
3/31/2011
 
Commercial
  $ 27,487,000       --     $ --     $ (1,414,000 )   $ (3,940,000 )   $ 22,133,000  
Construction
    5,646,000       --       --       --       (2,736,000 )     2,910,000  
Land
    424,000       --       --       --       --       424,000  
Total
  $ 33,557,000     $ --     $ --     $ (1,414,000 )   $ (6,676,000 )   $ 25,467,000  

Troubled Debt Restructuring

As of March 31, 2012 and December 31, 2011, we had five and seven loans, totaling approximately $21.6 million and $30.8 million, respectively, which met the definition of a Troubled Debt Restructuring or TDR.  When the Company modifies the terms of an existing loan that is considered TDR, it is considered performing as long as it is in compliance with the modified terms of the loan agreement.  If the modification calls for deferred interest, it is recorded as interest income as cash is collected.  Impairment on these loans is generally determined by the lesser of the value of the underlying collateral or the present value of expected future cash flows.  During the previous 12 months there have been four loans that became TDR loans and all remain performing.  The following is a breakdown of our TDR loans that were considered performing and non-performing as of March 31, 2012 and December 31, 2011:

As of March 31, 2012
                                   
   
Total
   
Performing
   
Non-Performing
 
Loan Type
 
Number of Loans
   
Fund Balance
   
Number of Loans
   
Fund Balance
   
Number of Loans
   
Fund Balance
 
                                     
Commercial
    4     $ 14,190,000       3     $ 10,940,000       1     $ 3,250,000  
Land
    1       7,450,000       --       --       1       7,450,000  
Total
    5     $ 21,640,000       3     $ 10,940,000       2     $ 10,700,000  

As of December 31, 2011
                                   
   
Total
   
Performing
   
Non-Performing
 
Loan Type
 
Number of Loans
   
Fund Balance
   
Number of Loans
   
Fund Balance
   
Number of Loans
   
Fund Balance
 
                                     
Commercial
    5     $ 16,740,000       3     $ 2,821,000       2     $ 13,919,000  
Construction
    1       6,655,000       1       6,655,000       --       --  
Land
    1       7,450,000       1       7,450,000       --       --  
Total
    7     $ 30,845,000       5     $ 16,926,000       2     $ 13,919,000  

 
·
Commercial – As of March 31, 2012 and December 31, 2011, we had 18 and 19 commercial loans, respectively, four and five of which, respectively, were modified pursuant to TDR.  During January 2012, our one TDR construction loan was modified into a new loan which reduced the principal balance from approximately $7.3 million, of which our portion was approximately $6.7 to the carrying value of approximately $4.0 million in total, of which our portion is approximately $3.7 million.  Subsequent to the loan modification we sold approximately $1.6 million of our loan to third parties.  The interest rate was changed from 3% paid and 5% accruing monthly to 7% paid monthly.  The accrued interest balance of approximately $1.0 million, of which our portion is approximately $1.0 million, was reclassified as a notes receivable.  For additional information, see “Non-Performing” of this Note D – Investments in Real Estate Loans and Note J – “Notes Receivable”.

 
·
Construction – As of December 31, 2011, we had one construction loan modified pursuant to TDR.  During January 2012, we restructured the loan into a new loan which is a commercial loan.

 
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·
Land – As of March 31, 2012 and December 31, 2011, we had one land loan modified pursuant to TDR.  Through March 25, 2011, interest payment was being paid monthly at 6% and deferred at 5% on this loan.  Effective March 25, 2011, the total interest was being fully deferred until March 2012. As of March 25, 2012 the loan has matured, however the balance due continues to be outstanding.  Our manager is in negations to attempt to remediate the non-performing status of this loan.  See “Non-Performing Loans” in Note D – Investments in Real Estate Loans.

Extensions

As of March 31, 2012, our manager had granted extensions on eight outstanding loans totaling approximately $22.6 million of which our portion was approximately $19.7 million, pursuant to the terms of the original loan agreements, which permit extensions by mutual consent, or as part of a TDR.  Such extensions are generally provided on loans where the original term was 12 months or less and where a borrower requires additional time to complete a construction project or negotiate take-out financing.  Our manager generally grants extensions when a borrower is in compliance with the material terms of the loan, including, but not limited to the borrower’s obligation to make interest payments on the loan.  In addition, if circumstances warrant, our manager may extend a loan that is in default as part of a work out plan to collect interest and/or principal.  Subsequent to their extension, two of the eight loans had become non-performing.  The loans, which became non-performing after their extension, had a total principal amount at March 31, 2012, of $7.3 million, of which our portion is $6.3 million.

NOTE E — INVESTMENT IN MARKETABLE SECURITIES

As of March 31, 2012 and December 31, 2011, we owned 538,178 shares of VRM I’s common stock, representing approximately 8.50% of the total outstanding shares. The closing price of VRM I’s common stock on March 31, 2012, was $1.11 per share.

During the three months ended March 31, 2012, the trading price for VRM I’s common stock ranged from $1.03 to $1.28 per share.  We will continue to evaluate our investment in marketable securities on a quarterly basis.

During January 2012, we purchased 60,000 shares of Annaly Capital Management Inc. This company is a publicly traded REIT and the shares were deemed to be part of our 3% working capital reserve.  During February 2012, we sold all of our shares for a gain of approximately $15,000.

NOTE F — REAL ESTATE HELD FOR SALE

At March 31, 2012, we held five properties with a total carrying value of approximately $10.8 million, which were acquired through foreclosure and recorded as investments in REO.  Our REO are accounted for at the lower of cost or fair value less costs to sell with fair value based on appraisals and knowledge of local market conditions.  We seek to sell properties acquired through foreclosure as quickly as circumstances permit taking into account current economic conditions.


 
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NOTE G — OTHER REAL ESTATE OWNED

On February 7, 2012, we, VRM I and Fund III entered into a Deed in Lieu Agreement with a borrower resolving the foreclosure of our second deed of trust loan which had matured on December 31, 2011, with a balance of approximately $11.8 million, of which our portion was approximately $10.7 million.  Our subsidiary 1701 Commerce, LLC, pursuant to the Deed in Lieu Agreement received a deed to the property which had secured the loan.  The property, which is being operated as the Sheraton – Forth Worth, Texas, is subject to a first trust deed of ranging from approximately $39 million to $43 million.  The first deed of trust has matured and the first deed holder has demanded payment in full.  On March 26, 2012, 1701 Commerce filed for Chapter 11 bankruptcy protection in the United States Bankruptcy Court for the northern district of Texas, Ft. Worth in order to stop the first trust deed holder’s foreclosure of the property and to protect 1701 Commerce’s equity in the property, as well as to protect the other creditors of the property.  Due to the uncertainty and dispute involving this property, we have recorded this investment as Other Real Estate Owned on the balance sheet. We will continue to pursue and protect our equity in this property. If the Bankruptcy Court accepts our plan, we expect to include the operations through consolidation into our financial statements from that date. If the Bankruptcy Court does not accept our plan, we will determine what the accounting treatment will be at the time the decision is made. We hold an interest of approximately 90%, VRM I holds an interest of approximately 8% and Fund III holds an interest of approximately 2% in 1701 Commerce.

NOTE H — RELATED PARTY TRANSACTIONS

From time to time, we may acquire or sell investments in real estate loans from/to our manager or other related parties.  Pursuant to the terms of our Management Agreement, such acquisitions and sales are made without any mark up or mark down.  No gain or loss is recorded on these transactions, as it is not our intent to make a profit on the purchase or sale of such investments.  The purpose is generally to diversify our portfolio by syndicating loans, thereby providing us with additional capital to make additional loans.

Transactions with the Manager

Our manager is entitled to receive from us an annual management fee of up to 0.25% of our aggregate capital contributions received by us and Fund II from the sale of shares or membership units, paid monthly.  The amount of management fees paid to our manager for the three months ended March 31, 2012 and 2011, were $0.3 million, during each period.

As of March 31, 2012 and December 31, 2011, our manager owned 92,699 of our common shares, representing approximately 0.73%, of our total outstanding common stock for both periods.

As of March 31, 2012 and December 31, 2011, we had receivables from our manager of approximately $19,000.

As of March 31, 2012 we had prepaid management fees of approximately $0.3 million for services to be performed from April through June 2012.  A discount of 7% will be applied to the July 2012 payment.

Transactions with Other Related Parties

As of March 31, 2012 and December 31, 2011, we owned 538,178 common shares of VRM I, representing approximately 8.5%, of their total outstanding common stock for both periods.

As of March 31, 2012 and December 31, 2011, VRM I owned 537,078 of our common shares, representing approximately 4.2%, of our total outstanding common stock for both periods.

As of March 31, 2012, we had a payable to VRM I of approximately $5,000.  As of December 31, 2011, we had receivables from VRM I of approximately $0.1 million, primarily related to legal fees.

As of March 31, 2012 and December 31, 2011, Fund III owned 114,117 of our common shares, representing approximately 0.9% of our total outstanding common stock.

 
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As of March 31, 2012, we had receivables from Fund III of approximately $10,000.  As of December 31, 2011, we had a payable to Fund III of approximately $13,000.

NOTE I — INVESTMENT IN MVP REALTY ADVISORS

Together with our Chairman and Chief Executive Officer, Michael Shustek, we have formed a Nevada limited liability company, MVP Realty Advisor, LLC (“MVPRA”).  MVPRA intends to act as the advisor to MVP Monthly Income Realty Trust, Inc., a recently formed Maryland corporation which was organized to invest in real estate and loans secured by real estate (“MVP Realty Trust “).  On April 16, 2012, MVP Realty Trust made its initial filing of a registration statement with the Securities and Exchange Commission in connection with a proposed public offering of its common stock.  MVP Realty Trust will seek to qualify as a real estate investment trust (“REIT”).  Under the terms of a proposed Advisory Agreement between MVPRA and MVP Realty Trust, MVPRA will be entitled to certain fees for advisory and other management services rendered to MVP Realty Trust.

During March 2012 and April 2012, we contributed $15,000 and $1,000, respectively, for interest in MVPRA.  Mr. Shustek, through a wholly owned company named MVP Capital Partners, LLC (“MVPCP”), contributed $1,500 for a 60% interest in MVPRA.  The Company and MVPCP anticipate providing additional funds to MVPRA, either in the form of capital contributions or loans.  The amount and nature of such funding arrangements cannot be determined at this time.

Under the terms of the Operating Agreement which will govern MVPRA, any loans we may make to MVPRA must be paid in full and we shall have received distributions of profits equal to our capital contributions prior to MVPCP receiving any distributions from MVPRA.

VRTB’s participation in MVPRA was approved by the independent members of the VRTB Board of Directors.

NOTE J — NOTES RECEIVABLE

During January 2012 we, VRM I and Fund III rewrote one of our existing loans.  The interest rate of this loan was changed from 3% paying monthly with 5% accruing to 7% paid monthly.  The amount of the loan allowance of approximately $3.0 million and the interest currently accrued on the existing loan, which was fully allowed for, of approximately $1.0 million was moved to notes receivable.  In April 2012, we received a payment on the new loan which was less than the amount owed.  The difference of approximately $0.8 million was recorded as a loan allowance as of March 31, 2012 and was reclassified to note receivable during April, 2012.

During February 2012 we, VRM I and Fund III received a payment in full for the first on one of our existing loans and a partial payment on the second.  The remaining balance, which was fully allowed for, of approximately $1.3 million has been moved to notes receivable and remains fully allowed for.  In March 2012 a payment of approximately $50,000 was received.

On February 29, 2012, we made a loan to TNP Strategic Retail Operating Partnership, LP, a Delaware limited-partnership, in the amount of $1,040,000 evidenced by a promissory note (“Note”) and secured by the separate and unconditional guaranty (“Guaranty”) of TNP Strategic Retail Trust, Inc., a Maryland corporation (“TNP Trust”).  The unpaid principal balance on the Note is to bear interest at a rate of 9.00% per annum until May 31, 2012, at which time the loan matures.  The Guaranty is secured by an absolute assignment to VRTB of all of TNP Trust’s right, title and interest in and to 25% of all net proceeds received by TNP Trust in connection with TNP Trust’s public offering of stock after payment of sales commission, fees and expenses payable in connection therewith.

NOTE K — FAIR VALUE

As of March 31, 2012, financial assets and liabilities utilizing Level 1 inputs included investment in marketable securities - related party.  We had no assets or liabilities utilizing Level 2 inputs, and assets and liabilities utilizing Level 3 inputs included investments in real estate loans.


 
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To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment.  Accordingly, our degree of judgment exercised in determining fair value is greatest for instruments categorized in Level 3.  In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy.  In such cases, an asset or liability will be classified in its entirety based on the lowest level of input that is significant to the measurement of fair value.

Fair value is a market-based measure considered from the perspective of a market participant who holds the asset or owes the liability rather than an entity-specific measure.  Therefore, even when market assumptions are not readily available, our own assumptions are set to reflect those that market participants would use in pricing the asset or liability at the measurement date.  We use prices and inputs that are current as of the measurement date, including during periods of market dislocation, such as the recent illiquidity in the auction rate securities market.  In periods of market dislocation, the observability of prices and inputs may be reduced for many instruments.  This condition may cause our financial instruments to be reclassified from Level 1 to Level 2 or Level 3 and/or vice versa.

Our valuation techniques will be consistent with at least one of the three possible approaches: the market approach, income approach and/or cost approach.  Our Level 1 inputs are based on the market approach and consist primarily of quoted prices for identical items on active securities exchanges.  Our Level 2 inputs are primarily based on the market approach of quoted prices in active markets or current transactions in inactive markets for the same or similar collateral that do not require significant adjustment based on unobservable inputs.  Our Level 3 inputs are primarily based on the income and cost approaches, specifically, discounted cash flow analyses, which utilize significant inputs based on our estimates and assumptions.

The following table presents the valuation of our financial assets and liabilities as of March 31, 2012 and December 31, 2011, measured at fair value on a recurring basis by input levels:

   
Fair Value Measurements at Reporting Date Using
       
   
Quoted Prices in Active Markets For Identical Assets (Level 1)
   
Significant Other Observable Inputs (Level 2)
   
Significant Unobservable Inputs (Level 3)
   
Balance at 03/31/2012
   
Carrying Value on Balance Sheet at 03/31/2012
 
Assets
                             
Investment in marketable securities - related party
  $ 597,000     $ --     $ --     $ 597,000     $ 597,000  
    Investment in notes receivable   $ --      $ --      $ 1,040,000      $ 1,040,000      $ 1,040,000   
Investment in real estate loans
  $ --     $ --     $ 22,010,000     $ 22,010,000     $ 22,950,000  
                                         

   
Fair Value Measurements at Reporting Date Using
       
   
Quoted Prices in Active Markets For Identical Assets (Level 1)
   
Significant Other Observable Inputs (Level 2)
   
Significant Unobservable Inputs (Level 3)
   
Balance at 12/31/2011
   
Carrying Value on Balance Sheet at 12/31/2011
 
Assets
                             
Investment in marketable securities - related party
  $ 592,000     $ --     $ --     $ 592,000     $ 592,000  
Investment in real estate loans
  $ --     $ --     $ 30,646,000     $ 30,646,000     $ 31,777,000  
                                         


 
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The following table presents the changes in our financial assets and liabilities that are measured at fair value on a recurring basis using significant unobservable inputs (Level 3) from January 1, 2012 to March 31, 2012:

       
   
Investment in
real estate loans
 
       
Balance on January 1, 2012
  $ 30,646,000  
Change in temporary valuation adjustment included in net income (loss)
       
Increase in allowance for loan losses
    (765,000 )
Purchase and additions of assets
       
Transfer of allowance on real estate loans to real estate held for sale
    1,706,000  
Reduction of allowance on real estate loans due to loan payment
    139,000  
New mortgage loans and mortgage loans acquired
    4,996,000  
Transfer of allowance on real estate loans converted to unsecured notes receivable
    4,187,000  
Sales, pay downs and reduction of assets
       
Transfer of real estate loans to real estate held for sale
    (10,669,000 )
Collections and settlements of principal and sales of investment in real estate loans
    (4,284,000 )
Conversion of real estate loans to unsecured notes receivable
    (4,187,000 )
Temporary change in estimated fair value based on future cash flows
    241,000  
Balance on March 31, 2012, net of temporary valuation adjustment
  $ 22,010,000  

The following table presents the changes in our financial assets and liabilities that are measured at fair value on a recurring basis using significant unobservable inputs (Level 3) from January 1, 2011 to March 31, 2011:
 
   
Assets
 
   
Investment in
real estate loans
   
Assets under secured borrowings
 
             
Balance on January 1, 2011
  $ 26,624,000     $ 1,320,000  
Purchase and additions of assets
               
Transfer of allowance on real estate loans to real estate held for sale
    2,736,000       --  
New mortgage loans and mortgage loans acquired
    1,453,000       --  
Transfer of allowance on real estate loans converted to unsecured notes receivable
    3,940,000       --  
Sales, pay downs and reduction of assets
               
Collections and settlements of principal and sales of investment in real estate loans
    (37,000 )     --  
Conversion of real estate loans to unsecured notes receivable
    (3,940,000 )     --  
Transfer of real estate loans to real estate held for sale
    (2,896,000 )     --  
Temporary change in estimated fair value based on future cash flows
    (81,000 )     --  
Transfer to Level 1
    --       --  
Transfer to Level 2
    --       --  
                 
Balance on March 31, 2011, net of temporary valuation adjustment
  $ 2,779,000     $ (1,320,000 )


 
-24-




   
Liabilities
 
   
Secured borrowings
 
       
Balance on January 1, 2011
  $ 1,088,000  
Payment on secured borrowings
    --  
         
Balance on March 31, 2011, net of temporary valuation adjustment
  $ 1,088,000  

NOTE L — RECENT ACCOUNTING PRONOUNCEMENTS

Adopted

On January 1, 2012, VRM II adopted changes issued by the Financial Accounting Standards Board (FASB) to conform existing guidance regarding fair value measurement and disclosure between GAAP and International Financial Reporting Standards. These changes both clarify the FASB’s intent about the application of existing fair value measurement and disclosure requirements and amend certain principles or requirements for measuring fair value or for disclosing information about fair value measurements. The clarifying changes relate to the application of the highest and best use and valuation premise concepts, measuring the fair value of an instrument classified in a reporting entity’s shareholders’ equity, and disclosure of quantitative information about unobservable inputs used for Level 3 fair value measurements. The amendments relate to measuring the fair value of financial instruments that are managed within a portfolio; application of premiums and discounts in a fair value measurement; and additional disclosures concerning the valuation processes used and sensitivity of the fair value measurement to changes in unobservable inputs for those items categorized as Level 3, a reporting entity’s use of a nonfinancial asset in a way that differs from the asset’s highest and best use, and the categorization by level in the fair value hierarchy for items required to be measured at fair value for disclosure purposes only. Other than the additional disclosure requirements, the adoption of these changes had no impact on the Consolidated Financial Statements.

On January 1, 2012, VRM II adopted changes issued by the FASB to the presentation of comprehensive income. These changes give an entity the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements; the option to present components of other comprehensive income as part of the statement of changes in stockholders’ equity was eliminated. The items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income were not changed. Additionally, no changes were made to the calculation and presentation of earnings per share. Management elected to present the two-statement option. Other than the change in presentation, the adoption of these changes had no impact on the Consolidated Financial Statements.

Issued

In December 2011, the Financial Accounting Standards Board (“FASB”) released Accounting Standards Update No. 2011-10 (“ASU 2011-10”), Property, Plant and Equipment (Topic 360): Derecognition of in Substance Real Estate—a Scope Clarification (a consensus of the FASB Emerging Issues Task Force). ASU 2011-10 clarifies when a parent (reporting entity) ceases to have a controlling financial interest in a subsidiary that is in substance real estate as a result of default on the subsidiary’s nonrecourse debt, the reporting entity should apply the guidance for Real Estate Sale (Subtopic 360-20). The provisions of ASU 2011-10 are effective for public companies for fiscal years and interim periods within those years, beginning on or after June 15, 2012. When adopted, ASU 2011-10 is not expected to materially impact our consolidated financial statements.


 
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NOTE M — LEGAL MATTERS INVOLVING THE MANAGER

The United States Securities and Exchange Commission (the “Commission”), conducted an investigation of certain matters related to us, our manager, Vestin Capital, VRM I, and Fund III.  We fully cooperated during the course of the investigation.  On September 27, 2006, the investigation was resolved through the entry of an Administrative Order by the Commission (the “Order”).  Our manager, Vestin Mortgage and its Chief Executive Officer, Michael Shustek, as well as Vestin Capital (collectively, the “Respondents”), consented to the entry of the Order without admitting or denying the findings therein.

In the Order, the Commission found that the Respondents violated Sections 17(a)(2) and 17(a)(3) of the Securities Act of 1933 through the use of certain slide presentations in connection with the sale of units in Fund III and in our predecessor, Vestin Fund II, LLC.  The Respondents consented to the entry of a cease and desist order, the payment by Mr. Shustek of a fine of $100,000 and Mr. Shustek’s suspension from association with any broker or dealer for a period of six months, which expired in March 2007.  In addition, the Respondents agreed to implement certain undertakings with respect to future sales of securities.  We are not a party to the Order.

The Manager and Fund III were defendants in a civil action filed by Birkeland Family, LLC III and Birkeland Family, LLC V (“Plaintiffs”) in District Court for Clark County, Nevada.  The Plaintiffs alleged as causes of action against the Manager and Fund III:  Breach of contract and breach of the implied covenant of good faith and fair dealing regarding the sale of the office building commonly described as 8379 W. Sunset Road, Las Vegas, Nevada.  The action sought monetary, punitive and exemplary damages.  On January 18, 2011, summary judgment was granted in favor of Fund III, with the Court finding that Fund III was not part of the lease and, therefore, could not be held liable for damages.  The Manager is still involved in this civil action.

For additional information, see Note N – Legal Matters Involving the Company

In addition to the matters described above, our manager is involved in a number of other legal proceedings concerning matters arising in connection with the conduct of its business activities.  Our manager believes it has meritorious defenses to each of these actions and intends to defend them vigorously.  Other than the matters described above, our manager believes that it is not a party to any pending legal or arbitration proceedings that would have a material adverse effect on our manager’s financial condition or results of operations or cash flows, although it is possible that the outcome of any such proceedings could have a material impact on our manager’s net income in any particular period.

NOTE N — LEGAL MATTERS INVOLVING THE COMPANY

We, VRM I and Vestin Mortgage (“Defendants”) were defendants in a breach of contract class action filed in San Diego Superior Court by certain plaintiffs who alleged, among other things, that they were wrongfully denied roll-up rights in connection with the merger of Fund I into VRM I and Fund II into VRM II.  The court certified a class of all former Fund I unit holders and Fund II unit holders who voted against the mergers of Fund I into VRM I and Fund II into VRM II.  The trial began in December 2009 and concluded in January 2010.  On February 11, 2010, the Defendants were notified of a Tentative Statement of Decision, in their favor issued by the Superior Court for the State of California in San Diego following a trial.  In the Tentative Statement, the Court found that there was no roll-up and therefore no breach of contract.  The Court entered final judgment for the Defendants on March 18, 2010.  Defendants and Plaintiffs agreed to a post-judgment settlement by which Plaintiffs agreed not to appeal the judgment in consideration of a waiver by the Defendants of any claim to recover actual court costs from the Plaintiffs.  The Court granted final approval of this settlement of post-judgment rights on July 9, 2010.

We, Vestin Mortgage and Michael V. Shustek (“Defendants”) were defendants in a civil action filed by 88 sets of plaintiffs representing approximately 138 individuals (“Plaintiffs”), in District Court for Clark County, Nevada (the “Nevada Lawsuit”).  The Plaintiffs alleged, among other things, that Defendants: breached certain alleged contractual obligations owed to Plaintiffs; breached fiduciary duties supposedly owed to Plaintiffs; and misrepresented or omitted material facts regarding the conversion of Fund II into VRM II.  The action sought monetary and punitive damages.  The court dismissed the claim for punitive damages.  On September 8, 2010, the parties agreed to settle the case.  The Settlement Agreement provides for the settlement and complete release of all claims against the Defendants.  The settlement was made without admission of liability by Defendants.

 
-26-



In addition to the matters described above, we are involved in a number of other legal proceedings concerning matters arising in the ordinary course of our business activities.  We believe we have meritorious defenses to each of these actions and intend to defend them vigorously.  Other than the matters described above, we believe that we are not a party to any pending legal or arbitration proceedings that would have a material adverse effect on our financial condition or results of operations or cash flows, although it is possible that the outcome of any such proceedings could have a material impact on our operations in any particular period.

NOTE O— SUBSEQUENT EVENTS

During April 2012, we contributed $1,000 for interest in MVPRA.  Mr. Shustek, through a wholly owned company named MVP Capital Partners, LLC (“MVPCP”), contributed $1,500 for a 60% interest in MVPRA.

During January 2011, we, VRM I and Fund III were awarded unsecured claims up to $3.6 million from a bankruptcy settlement with a guarantor of certain loans. Pursuant to the terms of the settlement, we, VRM I and Fund III received payments of approximately $543,000, $711,000 and $114,000, respectively, during April 2012.

During May 2012, we, VRM I and Fund III foreclosed on a loan with a balance of approximately $6.0 million, of which our portion was approximately $46,000. The property includes 23 cottage units in a retirement community located in Eugene, Oregon. The property includes operations, which will be reported as an investment under the equity method from the date of this foreclosure. The property will be held for sale.

During May 2012, we, VRM I and Fund III sold our portions of a fully reserved loan of $14.0 million, of which our portion was $12.6 million to a third party.  We, VRM I and Fund III received approximately $1.2 million for this loan of which or portion was approximately $1.0 million.


 
-27-


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

The following is a financial review and analysis of our financial condition and results of operations for the three months ended March 31, 2012 and 2011.  This discussion should be read in conjunction with our consolidated financial statements and accompanying notes and other detailed information regarding us appearing elsewhere in this report on Form 10-Q and our report on Form 10-K, Part II, Item 7 Management’s Discussion and Analysis of Financial Conditions and Results of Operations for the year ended December 31, 2011.

FORWARD-LOOKING STATEMENTS

Certain statements in this report, including, without limitation, matters discussed under this Item 2 Management’s Discussion and Analysis of Financial Condition and Results of Operations, should be read in conjunction with the consolidated financial statements, related notes, and other detailed information included elsewhere in this report on Form 10-Q.  We are including this cautionary statement to make applicable and take advantage of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995.  Statements that are not historical fact are forward-looking statements.  Certain of these forward-looking statements can be identified by the use of words such as “believes,” “anticipates,” “expects,” “intends,” “plans,” “projects,” “estimates,” “assumes,” “may,” “should,” “will,” or other similar expressions.  Such forward-looking statements involve known and unknown risks, uncertainties and other important factors, which could cause actual results, performance or achievements to differ materially from future results, performance or achievements.  These forward-looking statements are based on our current beliefs, intentions and expectations.  These statements are not guarantees or indicative of future performance.  Important assumptions and other important factors that could cause actual results to differ materially from those forward-looking statements include, but are not limited to, those factors, risks and uncertainties of this Quarterly Report on Form 10-Q and in our other securities filings with the Securities and Exchange Commission (“SEC”).  Our future financial condition and results of operations, as well as any forward-looking statements, are subject to change and involve inherent risks and uncertainties.  Our estimates of the value of collateral securing our loans may change, or the value of the underlying property could decline subsequent to the date of our evaluation.  As a result, such estimates are not guarantees of the future value of the collateral.  The forward-looking statements contained in this report are made only as of the date hereof.  We undertake no obligation to update or revise information contained herein to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.

RESULTS OF OPERATIONS

OVERVIEW

Our primary business objective is to generate income while preserving principal by investing in real estate loans.  We believe there is a significant market opportunity to make real estate loans to owners and developers of real property whose financing needs are not met by other real estate lenders.  The loan underwriting standards utilized by our manager and the mortgage brokers we utilize are less strict than those used by many institutional real estate lenders.  In addition, one of our competitive advantages is our ability to approve loan applications more quickly than many institutional lenders.  As a result, in certain cases, we may make real estate loans that are riskier than real estate loans made by many institutional lenders such as commercial banks.  However, in return, we seek a higher interest rate and our manager takes steps to mitigate the lending risks such as imposing a lower loan-to-value ratio.  While we may assume more risk than many institutional real estate lenders, in return, we seek to generate higher yields from our real estate loans.

Our operating results are affected primarily by: (i) the amount of capital we have to invest in real estate loans, (ii) the level of real estate lending activity in the markets we service, (iii) our ability to identify and work with suitable borrowers, (iv) the interest rates we are able to charge on our loans and (v) the level of non-performing assets, foreclosures and related loan losses which we may experience.

Our operating results have been adversely affected by increases in allowances for loan losses and increases in non-performing assets.  This negative trend accelerated sharply during the year ended December 31, 2008 and continues to affect our operations.  See Note F – Real Estate Held for Sale and “Non-performing Loans” in Note D – Investments In Real Estate Loans of the Notes to the Consolidated Financial Statements included in Part I, Item I Consolidated Financial Statements of this Quarterly Report on Form 10-Q.

 
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We believe that the current level of our non-performing assets is a direct result of the deterioration of the economy and credit markets several years ago.  As the economy weakened and credit became more difficult to obtain, many of our borrowers who develop and sell commercial real estate projects were unable to complete their projects, obtain takeout financing or were otherwise adversely impacted.  While the general economy has improved, the commercial real estate markets in many of the areas where we make loans continue to suffer from depressed conditions.  Our exposure to the negative developments in the credit markets and general economy has likely been increased by our business strategy, which entails more lenient underwriting standards and expedited loan approval procedures.  Moreover, declining real estate values in the principal markets in which we operate has in many cases eroded the current value of the security underlying our loans.

Continued weakness in the commercial real estate markets and the weakness in lending may continue to have an adverse impact upon our markets.  This may result in further defaults on our loans, and we might be required to record additional reserves based on decreases in market values, or we may be required to restructure additional loans.  This increase in loan defaults has materially affected our operating results and led to the suspension of dividends to our stockholders.  For additional information regarding our non-performing loans see “Non-Performing Loans” in Note D –  Investments In Real Estate Loans of the Notes to the Consolidated Financial Statements included in Part I, Item I Consolidated Financial Statements of this Quarterly Report on Form 10-Q.

During the three months ended March 31, 2012 and 2011, we funded three and one loans, repectively, totaling approximately $5.0 million and approximately $1.5 million, respectively.  As of March 31, 2012, our loan-to-value ratio was 63.3%, net of allowances for loan losses, on a weighted average basis generally using updated appraisals.  Additional increases in loan defaults accompanied by additional declines in real estate values, as evidenced by updated appraisals generally prepared on an “as-is-basis,” will have a material adverse effect on our financial condition and operating results.

As of March 31, 2012, we have provided a specific reserve allowance for four non-performing loans and four performing loans based on updated appraisals of the underlying collateral and our evaluation of the borrower for these loans, obtained by our manager.  For further information regarding allowance for loan losses, refer to “Specific Reserve Allowance” in Note D –  Investments In Real Estate Loans of the Notes to the Consolidated Financial Statements included in Part I, Item I Consolidated Financial Statements of this Quarterly Report on Form 10-Q.

As of March 31, 2012, our loans were in the following states: Arizona, California, Colorado, Nevada, Ohio, Oregon, Texas and Utah.

At our annual meeting held on December 15, 2011, a majority of the shareholders voted to amend our Bylaws to expand our investment policy to include investments in and acquisition, management and sale of real property or the acquisition of entities involved in the ownership or management of real property. A majority of the shareholders also voted to amend our charter to change the terms of our existence from its expiration date of December 31, 2020 to perpetual existence. As a result, we will begin to acquire, manage, renovate, reposition, sell or otherwise invest in real property or acquire entities involved in the ownership or management of real property.

We are currently exploring the possibility of a stock for stock merger with VRM I.  A special committee of our board of directors, consisting solely of independent directors, has been appointed to evaluate and negotiate the potential merger.  The special committee has engaged independent financial and legal advisors to assist in this process.  Any such proposed merger would be subject to the approval of our shareholders as well as the shareholders of VRM I.


 
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SUMMARY OF FINANCIAL RESULTS

Comparison of Operating Results for the three months ended March 31, 2012, to the three months ended March 31, 2011.

Total Revenue:
 
2012
   
2011
   
$ Change
   
% Change
 
Interest income from investment in real estate loans
  $ 268,000     $ 499,000     $ (231,000 )     (46 %)
Gain related to pay off of real estate loan, including recovery of allowance for loan loss
    139,000       --       139,000       100 %
Gain related to pay off of notes receivable, including recovery of allowance for notes receivable
    61,000       --       61,000       100 %
Other Income
    --       6,000       (6,000 )     (100 %)
            Total
  $ 468,000     $ 505,000     $ (37,000 )     (7 %)

Our revenue from interest income is dependent upon the balance of our investment in real estate loans and the interest earned on these loans.  Interest income has been adversely affected by the level of modified loans and the reduction in new lending activity during the first three quarters of 2011.  First quarter 2011 revenue is higher than 2012 due to loans which were modified, paid off or collateral released starting in the second quarter 2011.  We have experienced an increase in new lending activity in the second half of 2011 and we anticipate that the activity in our loan portfolio will produce an overall increase in interest income for 2012.  It is premature at this time to predict whether or not the increase in lending activity in the second half of 2011 and first quarter 2012 will be sustained in the future.  Scheduled payments on fully reserved notes receivable and loans resulted in an increase in gain related to payoff of real estate loan and other income.

For additional information see Note D – Investments in Real Estate Loans and Note J - Notes Receivable of the Notes to the Consolidated Financial Statements included in Part I, Item 1 Consolidated Financial Statements of this Quarterly Report on Form 10-Q.

Total Operating Expenses:
 
2012
   
2011
   
$ Change
   
% Change
 
Management fees – related party
  $ 274,000     $ 274,000     $ --       --  
Provision for loan loss
    765,000       --       765,000       100 %
Interest expense
    --       68,000       (68,000 )     (100 %)
Professional fees
    252,000       305,000       (53,000 )     (17 %)
Consulting fees
    53,000       35,000       18,000       51 %
Insurance
    73,000       82,000       (9,000 )     (11 %)
Other
    67,000       79,000       (12,000 )     (14 %)
            Total
  $ 1,484,000     $ 843,000     $ 641,000       76 %

Operating expenses were 76% higher during the three months ended March 31, 2012 largely as a result of a provision for loan losses that did not occur during the three months ended March 31, 2011.  Interest expense decreased during the three months ended March 31, 2012 due to the decreased balance of secured borrowings which were paid off in 2011.  Professional fees have decreased due to a significant decrease in pending litigation.

See “Specific Loan Allowance” in Note D – Investments in Real Estate Loans and Note N – Legal Matters Involving The Company of the Notes to the Consolidated Financial Statements included in Part I, Item 1 Consolidated Financial Statements of this Quarterly Report on Form 10-Q.

 
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Non-operating income (loss):
 
2012
   
2011
   
$ Change
   
% Change
 
Interest income from banking institutions
  $ 1,000     $ 2,000     $ (1,000 )     (50 %)
Gain on sale of marketable securities
    15,000       --       15,000       100 %
Settlement expense
    (22,000 )     --       (22,000 )     (100 %)
            Total
  $ (6,000 )   $ 2,000     $ (8,000 )     (400 %)

During the three months ended March 31, 2012 we settled a lawsuit with an acquirer of property previously foreclosed upon and sold which resulted in an expense of approximately $22,000.  There were no such comparable expenses in the three months ended March 31, 2011.  The purchase and subsequent sale of marketable securities occurred during the three months ended March 31, 2012 resulting in a gain of approximately $15,000.  No such transaction occurred in the three months ended March 31, 2011.

See Note N – Legal Matters Involving The Company of the Notes to the Consolidated Financial Statements included in Part I, Item I Consolidated Financial Statements of this Quarterly Report on Form 10-Q.

Discontinued operations, net of income taxes:
 
2012
   
2011
   
$ Change
   
% Change
 
Net gain on sale of real estate held for sale
  $ 10,000     $ --     $ 10,000       100 %
Expenses related to real estate held for sale
    (554,000 )     (226,000 )     (328,000 )     145 %
Expenses related to real estate held for sale – related party
    --       (46,000 )     46,000       100 %
Income from Assets Held for Sale, net of income taxes
    --       286,000       (286,000 )     (100 %)
            Total
  $ (544,000 )   $ 14,000     $ (558,000 )     (3986 %)

During the three months ended March 31, 2012 we recorded net gains on sale of real estate held for sale for properties sold in prior periods due to payments on settlement agreements.  Expenses related to real estate held for sale increased due to property acquired during the three months ended March 31, 2012. In addition, we received income from assets held for sale during the three months ended March 31, 2011 and did not have similar income in 2012.

See Note F — Real Estate Held For Sale and Note G – Other Real Estate Owned of the Notes to the Financial Statements included in Part I, Item I Consolidated Financial Statements of this Quarterly Report on Form 10-Q.

CAPITAL AND LIQUIDITY

Liquidity is a measure of a company’s ability to meet potential cash requirements, including ongoing commitments to fund lending activities and general operating purposes.  Subject to a 3% reserve, we generally seek to use all of our available funds to invest in real estate assets.  Distributable cash flow generated from such loans is paid out to our stockholders, in the form of a dividend.  We do not anticipate the need for hiring any employees, acquiring fixed assets such as office equipment or furniture, or incurring material office expenses during the next twelve months.  We may pay our manager an annual management fee of up to 0.25% of the aggregate capital received by Fund II and us from the sale of shares or membership units.

During the three months ended March 31, 2012, net cash flows used in operating activities were approximately $1.3 million.  Operating cash flows were adversely impacted by the payment of accounts payable for asset held for sale of approximately $0.3 million which mainly consisted of payment of legal bills and operating expenses.  In addition, operating cash flows were adversely impacted by prepaid management fees of approximately $0.3 million in 2012 compared to 2011.  Cash flows related to investing activities consisted of cash used by loan investments in new real estate loans of approximately $5.0 million, an investment in MVP Realty Advisors of $15,000 and an increase in notes receivable of approximately $1.0 million.  In addition, cash flows related to investing activities consisted of cash provided by loan payoffs and sale of investments in real estate loans to related and third parties of approximately $4.3 million and proceeds from notes receivable of approximately $11,000.  Cash flows from financing activities consisted of cash used for payments on notes payable of approximately $25,000.

At March 31, 2012, we had approximately $6.1 million in cash, $0.6 million in marketable securities – related party and approximately $97.5 million in total assets.  We intend to meet short-term working capital needs through a combination of proceeds from loan payoffs, loan sales, sales of real estate held for sale and/or borrowings.  We believe we have sufficient working capital to meet our operating needs during the next 12 months.

 
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During April 2012, we contributed $1,000 for interest in MVP Realty Advisors and expect to contribute additional funds however we cannot currently estimate the additional funds that will be contributed in the future.

We have no current plans to sell any new shares.  Although a small percentage of our shareholders have elected to reinvest their dividends, we suspended payment of dividends in June 2008 and at this time are not able to predict when dividend payments will resume.  Accordingly, we do not expect to issue any new shares through our dividend reinvestment program in the foreseeable future.

When economic conditions permit, we may seek to expand our capital resources through borrowings from institutional lenders or through securitization of our loan portfolio or similar arrangements.  No assurance can be given that, if we should seek to borrow additional funds or to securitize our assets, we would be able to do so on commercially attractive terms.  Our ability to expand our capital resources in this manner is subject to many factors, some of which are beyond our control, including the state of the economy, the state of the capital markets and the perceived quality of our loan portfolio.

On March 21, 2007, our Board of Directors authorized the repurchase of up to $10 million worth of our common stock.  Depending upon market conditions, shares may be repurchased from time to time at prevailing market prices through open market or privately negotiated transactions. We are not obligated to purchase any shares.  Subject to applicable securities laws, repurchases may be made at such times and in such amounts, as our manager deems appropriate.  As of March 31, 2012 and December 31, 2011, we had a total of 189,378 shares of treasury stock carried on our books at cost totaling approximately $0.2 million.
 
We maintain working capital reserves of approximately 3% in cash and cash equivalents, certificates of deposits and short-term investments or liquid marketable securities.  This reserve is available to pay expenses in excess of revenues, satisfy obligations of underlying properties, expend money to satisfy our unforeseen obligations and for other permitted uses of working capital.  As of May 15, 2012, we have met our 3% reserve requirement.

Investments in Real Estate Loans Secured by Real Estate Portfolio

We offer five real estate loan products consisting of commercial property, construction, acquisition and development, land, and residential loans.  The effective interest rates on all product categories range from 0% to 15%.  Revenue by product will fluctuate based upon relative balances during the period.  We had investments in 22 real estate loans, as of March 31, 2012, with a balance of approximately $43.9 million as compared to investments in 24 real estate loans as of December 31, 2011, with a balance of approximately $58.0 million.

For additional information on our investments in real estate loans, refer to Note D – Investments In Real Estate Loans of the Notes to the Consolidated Financial Statements included in Part I, Item I Consolidated Financial Statements of this Quarterly Report on Form 10-Q.

Asset Quality and Loan Reserves

As a commercial real estate lender willing to invest in riskier loans, rates of delinquencies, foreclosures or losses on our loans could be higher than those generally experienced in the commercial mortgage lending industry during this period of economic slowdown and recession.  Problems in the sub-prime residential mortgage market have adversely affected the general economy and the availability of funds for commercial real estate developers.  We believe this lack of available funds has led to an increase in defaults on our loans.  Furthermore, problems experienced in U.S. credit markets from 2007 through 2009 reduced the availability of credit for many prospective borrowers.  While credit markets have generally improved, the commercial real estate markets in our principal areas of operation have not recovered, thereby resulting in continuing constraints on the availability of credit in these markets.  These problems have made it more difficult for our borrowers to obtain the anticipated re-financing necessary in many cases to pay back our loans.  Thus, we have had to work with some of our borrowers to either modify, restructure and/or extend their loans in order to keep or restore the loans to performing status.  Our manager will continue to evaluate our loan portfolio in order to minimize risk associated with current market conditions.

OFF-BALANCE SHEET ARRANGEMENTS

As of March 31, 2012, we do not have any interests in off-balance sheet special purpose entities nor do we have any interests in non-exchange traded commodity contracts.

 
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RELATED PARTY TRANSACTIONS

From time to time, we may acquire or sell investments in real estate loans from/to our manager or other related parties pursuant to the terms of our Management Agreement without a premium.  No gain or loss is recorded on these transactions, as it is not our intent to make a profit on the purchase or sale of such investments.  The purpose is generally to diversify our portfolio by syndicating loans, thereby providing us with additional capital to make additional loans.  For further information regarding related party transactions, refer to Note H – Related Party Transactions of the Notes to the Consolidated Financial Statements included in Part I, Item I Consolidated Financial Statements of this Quarterly Report on Form 10-Q.

CRITICAL ACCOUNTING ESTIMATES

Revenue Recognition

Interest income on loans is accrued by the effective interest method.  We do not accrue interest income from loans once they are determined to be non-performing.  A loan is considered non-performing when, based on current information and events, it is probable that we will be unable to collect all amounts due according to the contractual terms of the loan agreement or when the payment of interest is 90 days past due.

The following table presents a sensitivity analysis, averaging the balance of our loan portfolio at the end of the last six quarters, to show the impact on our financial condition at March 31, 2012, from fluctuations in weighted average interest rate charged on loans as a percentage of the loan portfolio:

Changed Assumption
 
Increase (Decrease) in Interest Income
 
Weighted average interest rate assumption increased by 1.0% or 100 basis points
  $ 540,000  
Weighted average interest rate assumption increased by 5.0% or 500 basis points
  $ 2,702,000  
Weighted average interest rate assumption increased by 10.0% or 1,000 basis points
  $ 5,405,000  
Weighted average interest rate assumption decreased by 1.0% or 100 basis points
  $ (540,000 )
Weighted average interest rate assumption decreased by 5.0% or 500 basis points
  $ (2,702,000 )
Weighted average interest rate assumption decreased by 10.0% or 1,000 basis points
  $ (5,405,000 )

The purpose of this analysis is to provide an indication of the impact that the weighted average interest rate fluctuations would have on our financial results.  It is not intended to imply our expectation of future revenues or to estimate earnings.  We believe that the assumptions used above are appropriate to illustrate the possible material impact on the consolidated financial statements.

Allowance for Loan Losses

We maintain an allowance for loan losses on our investments in real estate loans for estimated credit impairment in our investment in real estate loans portfolio.  Our manager’s estimate of losses is based on a number of factors including the types and dollar amounts of loans in the portfolio, adverse situations that may affect the borrower’s ability to repay, prevailing economic conditions and the underlying collateral securing the loan.  Additions to the allowance are provided through a charge to earnings and are based on an assessment of certain factors, which may indicate estimated losses on the loans.  Actual losses on loans are recorded as a charge-off or a reduction to the allowance for loan losses.  Subsequent recoveries of amounts previously charged off are added back to the allowance or included as income.

 
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The following table presents a sensitivity analysis to show the impact on our financial condition at March 31, 2012, from increases and decreases to our allowance for loan losses as a percentage of the loan portfolio:

Changed Assumption
 
Increase (Decrease) in Allowance for Loan Losses
 
Allowance for loan losses assumption increased by 1.0% of loan portfolio
  $ 439,000  
Allowance for loan losses assumption increased by 5.0% of loan portfolio
  $ 2,194,000  
Allowance for loan losses assumption increased by 10.0% of loan portfolio
  $ 4,388,000  
Allowance for loan losses assumption decreased by 1.0% of loan portfolio
  $ (439,000 )
Allowance for loan losses assumption decreased by 5.0% of loan portfolio
  $ (2,194,000 )
Allowance for loan losses assumption decreased by 10.0% of loan portfolio
  $ (4,388,000 )

Estimating allowances for loan losses requires significant judgment about the underlying collateral, including liquidation value, condition of the collateral, competency and cooperation of the related borrower and specific legal issues that affect loan collections or taking possession of the property.  As a commercial real estate lender willing to invest in loans to borrowers who may not meet the credit standards of other financial institutional lenders, the default rate on our loans could be higher than those generally experienced in the mortgage lending industry.  We, our manager and Vestin Originations and Advant generally approve loans more quickly than other real estate lenders and, due to our expedited underwriting process, there is a risk that the credit inquiry we perform will not reveal all material facts pertaining to a borrower and the security.

We may discover additional facts and circumstances as we continue our efforts in the c