XNAS:VRTB Vestin Realty Mortgage II Inc Quarterly Report 10-Q Filing - 6/30/2012

Effective Date 6/30/2012

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vrtb06301210q.htm


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 June 30, 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 August 14, 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
 
   
   
June 30, 2012
   
December 31, 2011
 
   
(Unaudited)
       
Assets
           
Cash and cash equivalents
  $ 3,271,000     $ 9,226,000  
Investment in marketable securities - related party
    501,000       592,000  
Interest and other receivables, net of allowance of $2,505,000 at June 30, 2012 and $5,468,000 at December 31, 2011
    20,000       14,000  
Notes receivable, net of allowance of $24,465,000 at June 30, 2012 and $17,250,000 at December 31, 2011
    --       --  
Real estate held for sale
    9,171,000       10,767,000  
Other real estate owned
    8,963,000       --  
Investment in real estate loans, net of allowance for loan losses of $6,804,000 at June 30, 2012 and $26,247,000 at December 31, 2011
    28,132,000       31,777,000  
Due from related parties
    89,000       110,000  
Investment in MVP Realty Advisors
    32,000       --  
Other assets
    288,000       149,000  
                 
Total assets
  $ 50,467,000     $ 52,635,000  
                 
LIABILITIES AND EQUITY
 
                 
Liabilities
               
Accounts payable and accrued liabilities
  $ 661,000     $ 753,000  
Note payable
    171,000       25,000  
Deferred gain on sale of HFS
    38,000       102,000  
                 
Total liabilities
    870,000       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 June 30, 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 June 30, 2012 and 12,720,783 shares issued and 12,531,405 outstanding at December 31, 2011
    1,000       1,000  
Additional paid-in capital
    270,983,000       271,005,000  
Accumulated deficit
    (221,115,000 )     (219,070,000 )
Accumulated other comprehensive income
    (82,000 )     9,000  
Total stockholders’ equity
    49,597,000       51,755,000  
                 
Total equity
    49,597,000       51,755,000  
                 
Total liabilities and equity
  $ 50,467,000     $ 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
   
For The
Six Months Ended
   
6/30/2012
   
6/30/2011
   
6/30/2012
 
6/30/2011
                     
Revenues
                   
Interest income from investment in real estate loans
  $ 313,000     $ 258,000     $ 581,000   $ 757,000  
Gain related to pay off of real estate loan, including recovery of allowance for loan loss
    1,099,000       35,000       1,236,000     35,000  
Gain related to pay off of notes receivable, including recovery of allowance for notes receivable
    85,000       92,000       148,000     98,000  
Total revenues
    1,497,000       385,000       1,965,000     890,000  
                                 
Operating expenses
                               
Management fees - related party
    274,000       274,000       549,000     549,000  
Provision for loan loss
    --       --       765,000     --  
Interest expense
    --       50,000       --     119,000  
Professional fees
    335,000       394,000       587,000     699,000  
Consulting
    58,000       35,000       112,000     66,000  
Insurance
    73,000       82,000       146,000     157,000  
Other
    50,000       51,000       116,000     140,000  
Total operating expenses
    790,000       886,000       2,275,000     1,730,000  
                                 
Income (loss) from operations
    707,000       (501,000 )     (310,000 )   (840,000 )
                                 
Non-operating income (loss)
                               
Interest income from banking institutions
    --       2,000       1,000     5,000  
Recovery from settlement with loan guarantor
    543,000       --       543,000     --  
Gain on sale of marketable securities
    --       --       15,000     --  
Discounted professional fees
    --       1,600,000       --     1,600,000  
Settlement expense
    (22,000 )     --       (44,000 )   --  
Total non-operating income, net
    521,000       1,602,000       515,000     1,605,000  
                                 
Provision for income taxes
    --       --       --     --  
                                 
Income from continuing operations
    1,228,000       1,101,000       205,000     765,000  
                                 
Discontinued operations, net of income taxes
                               
Net gain on sale of real estate held for sale
    2,000       10,000       12,000     10,000  
Expenses related to real estate held for sale
    (289,000 )     (127,000 )     (842,000 )   (399,000 )
Write-downs on real estate held for sale
    (1,420,000 )     (612,000 )     (1,420,000 )   (612,000 )
Income from Hawaiian cemeteries and mortuaries, net of income taxes
    --       591,000       --     877,000  
Total loss from discontinued operations
    (1,707,000 )     (138,000 )     (2,250,000 )   (124,000 )
                                 
Net income (loss)
    (479,000 )     963,000       (2,045,000 )   641,000  
Allocation to noncontrolling interest – related party
    --       225,000       --     333,000  
Net income (loss) attributable to common stockholders
  $ (479,000 )   $ 738,000     $ (2,045,000 ) $ 308,000  
                                 
Basic and diluted income (loss) per weighted average common share
                               
  Continuing operations
    0.10       0.08       0.01     0.06  
  Discontinued operations
    (0.14 )     (0.02 )     (0.17 )   (0.04 )
   Total basic and diluted income (loss) per weighted
                               
    average common share
  $ (0.04 )   $ 0.06     $ (0.16 ) $ 0.02  
                                 
Dividends declared per common share
  $ --     $ --     $ --   $ --  
                                 
Weighted average common shares outstanding
    12,531,405       13,139,513       12,531,405     13,139,513  


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



VESTIN REALTY MORTGAGE II, INC.
 
CONSOLIDATED STATEMENTS OF OTHER COMPREHENSIVE INCOME (LOSS)
 
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2012 AND 2011
 
(UNAUDITED)
   
For The
Three Months Ended
   
For The
Six Months Ended
 
   
6/30/2012
   
6/30/2011
   
6/30/2012
   
6/30/2011
 
                         
Net income (loss)
  $ (479,000 )   $ 963,000     $ (2,045,000 )   $ 641,000  
                                 
Unrealized holding loss on available-for-sale securities – related party
    (97,000 )     361,000       (91,000 )     128,000  
Unrealized gain on marketable securities on assets held for sale
    --       --       --       1,058,000  
                                 
Comprehensive income (loss)
    (576,000 )     1,324,000       (2,136,000 )     1,827,000  
Net (income) loss attributable to noncontrolling interest
    --       (225,000 )     --       (333,000 )
                                 
Comprehensive income (loss) attributable to Vestin Realty Mortgage II, Inc.
  $ (576,000 )   $ 1,099,000     $ (2,136,000 )   $ 1,494,000  
                                 



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



  VESTIN REALTY MORTGAGE II, INC.
 
  CONSOLIDATED STATEMENT OF EQUITY
 
  FOR THE SIX MONTHS ENDED JUNE 30, 2012
 
  (UNAUDITED)  
   
Treasury Stock
 
Common Stock
                         
   
Shares
 
Amount
 
Shares
 
Amount
 
Additional
Paid-in
Capital
 
Accumulated Deficit
 
Accumulated
Other Comprehensive
Income (Loss)
 
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 Loss
                     
(2,045,000)
     
(2,045,000)
     
                                       
Unrealized Loss on Marketable Securities – Related Party
                         
(91,000)
 
(91,000)
     
                                       
Comprehensive Loss
                             
(2,136,000)
     
                                       
Purchase treasury stock
     
 
 
 
        (22,000 )        
(22,000
)    
                                       
Stockholders' Equity at
June 30, 2012 (Unaudited)
 
189,378
$
(190,000)
 
12,531,405
$
1,000
$
270,983,000
$
(221,115,000)
$
(82,000)
$
49,597,000
     
         


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
Six Months Ended
 
   
06/30/2012
   
06/30/2011
 
Cash flows from operating activities:
           
Net income (loss)
  $ (2,045,000 )   $ 308,000  
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
               
Recovery of allowance for doubtful notes receivable
    (148,000 )     (91,000 )
Gain related to recovery of allowance for loan loss
    (1,236,000 )     (35,000 )
Gain related to recovery from settlement with loan guarantor
    (543,000 )     --  
Provision for loan loss
    765,000       --  
Gain on sale of real estate held for sale
    (12,000 )     --  
Gain on sale of marketable securities
    (15,000 )     --  
Amortized interest income
    --       (26,000 )
Provision for doubtful accounts related to receivable included in other expense
    --       559,000  
Write-downs on real estate held for sale
    1,420,000       612,000  
Change in operating assets and liabilities:
               
Interest and other receivables
    (6,000 )     1,498,000  
Assets held for sale, net of liabilities
    --       156,000  
Due to/from related parties
    21,000       639,000  
Deferred gain on sale of HFS
    (64,000 )     --  
Other assets
    153,000       106,000  
Accounts payable and accrued liabilities
    (93,000 )     (3,519,000 )
Net cash provided by (used in) operating activities
    (1,803,000 )     207,000  
                 
Cash flows from investing activities:
               
Investments in real estate loans
    (19,881,000 )     (1,453,000 )
Proceeds from loan payoffs
    12,697,000       71,000  
Sale of investments in real estate loans to
               
    related parties
    --       100,000  
    third parties
    2,307,000       600,000  
Proceeds from notes receivable
    148,000       91,000  
Proceeds from settlement from loan guarantor
    543,000       --  
Investment in MVP Realty Advisors
    (32,000 )     --  
Proceeds from sale of real estate held for sale
    207,000       --  
Proceeds on nonrefundable extension fees on real estate held for sale
    12,000       --  
Purchase of marketable securities
    (1,011,000 )     --  
Purchase of marketable securities – related party
    --       (6,000 )
Sale of marketable securities
    1,026,000       --  
Net cash used in investing activities
    (3,984,000 )     (597,000 )
                 
Cash flows from financing activities:
               
Principal payments on notes payable
    (146,000 )     (76,000 )
Purchase of treasury stock
    (22,000 )     --  
Distributions to holder of noncontrolling interest – related party
    --       (213,000 )
Net cash used in financing activities
    (168,000 )     (289,000 )
                 
NET CHANGE IN CASH
    (5,955,000 )     (679,000 )
                 
Cash and cash equivalents, beginning of period
    9,226,000       7,884,000  
                 
Cash and cash equivalents, end of period
  $ 3,271,000     $ 7,205,000  

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



VESTIN REALTY MORTGAGE II, INC.
 
   
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
 
   
(UNAUDITED)
 
   
For the
Six Months Ended
 
   
06/30/2012
   
06/30/2011
 
             
Supplemental disclosures of cash flows information:
           
Interest paid
  $ --     $ 119,000  
                 
Non-cash investing and financing activities:
               
Transfer of  fully allowed interest receivable and related allowance to real estate held for sale
  $ 2,334,000     $ --  
Transfer of fully allowed interest receivable to notes receivable
  $ 907,000     $ --  
Investments in real estate loans  and related allowances transferred to note receivable
  $ 6,642,000     $ --  
Real estate held for sale acquired through foreclosure, net of prior allowance
  $ 32,000     $ 160,000  
Note payable relating to prepaid D & O insurance
  $ 219,000     $ 219,000  
Unrealized gain on marketable securities of assets held for sale
  $ --     $ 1,058,000  
Other real estate owned acquired through deed in lieu, net of prior allowance
  $ 8,963,000     $ --  
    Retirement of treasury stock   $ 22,000      $ --   
Unrealized gain (loss) on marketable securities - related party
  $ (91,000 )   $ 128,000  


The accompanying notes are an integral part of these consolidated statements.
 
-6-



VESTIN REALTY MORTGAGE II, INC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 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.




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.  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.



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;

 
·
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, assets held for sale, and liabilities related to assets held for sale.

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.  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.

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 June 30, 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.

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 June 30, 2012 and 2011.

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 June 7, 2012, the our Board of Directors (“Board”) approved the adoption of a prearranged stock repurchase plan intended to qualify for the safe harbor under Rule 10b5-1 under the Securities Exchange Act of 1934, as amended (“10b5-1 Plan”). The 10b5-1 Plan will become effective on the third business day following the earlier of (i) completion of the proposed acquisition by the Company of VRM I in a stock for stock merger pursuant to a definitive merger agreement dated May 30, 2012 (the “Merger Agreement”), (ii) a vote by our shareholders or VRM I to reject the proposed Merger or (iii) termination of the Merger Agreement by VRM I.  The 10b5-1 Plan will terminate twelve months after its effective date, unless terminated sooner in accordance with its terms. Purchases may be made in the open market or through privately negotiated transactions in support of the Company’s stock repurchase plan. Purchases in the open market will be made in compliance with Rule 10b-18 under the Securities Exchange Act of 1934. The Company is authorized to purchase up to $5,200,000 of its common stock pursuant to the 10b5-1 Plan.

Segments

We are currently authorized to operate two reportable segments, investments in real estate loans and investments in real property.  As of June 30, 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 June 30, 2012, approximately 55% of our assets, net of allowance for loan losses, are classified as investments in real estate loans.

Reclassifications

Certain amounts in the June 30, 2011 consolidated financial statements have been reclassified to conform to the June 30, 2012 presentation.

Principles of Consolidation

Our consolidated financial statements include the accounts of VRM II, TRS II, our wholly owned subsidiary, and 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.
 
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 June 30, 2012 and December 31, 2011, we had no funds in excess of the federally-insured limits.  Additionally as of December 31, 2011, the assets held for sale included no cash deposits held in excess of federally insured limits.

As of June 30, 2012, 56% and 23% of our loans were in Nevada 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.

At June 30, 2012, the aggregate amount of loans to our three largest borrowers represented approximately 38% of our total investment in real estate loans.  These real estate loans consisted of commercial and land loans, secured by properties located in Nevada and California, with a first lien position on the California loan and one of the Nevada loans, and a second lien position on the second Nevada loan.  Their interest rates are between 8% and 15%, and the aggregate outstanding balance is approximately $13.2 million.  As of June 30, 2012, our largest loan, totaling approximately $7.2 million, is secured by property located in California, is a non-performing loan with an interest rate of 11%, and 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 August 14, 2012 the loan has matured however the balance due continues to be outstanding.  Our manager is in negotiations 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. One of the loans secured by property located in Nevada has an interest rate of 15%, was considered non-performing, and has been fully reserved.  The second loan secured by property in Nevada has an interest rate of 8% and is considered performing.    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 June 30, 2012 and December 31, 2011, two and four loans, respectively, totaling approximately $3.5 and $11.0 million, respectively, had a common guarantor.  These loans represented approximately 10.0% and 19.0%, respectively, of our portfolio’s total value as of June 30, 2012 and December 31, 2011.  All two and four loans, respectively, were considered performing as of June 30, 2012 and December 31, 2011.

As of June 30, 2012 and December 31 2011, six and nine loans totaling approximately $7.6 million and $6.2 million, respectively, representing approximately 21.9% and 10.7%, respectively, of our portfolio’s total value, had a common guarantor.  At June 30, 2012 and December 31, 2011 all loans were considered performing.

As of June 30, 2012 three loans totaling approximately $5.8 million representing approximately 16.5% of our portfolio’s total value had a common guarantor.  As of June 30, 2012 all three 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 June 30, 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 June 30, 2012 and December 31, 2011, we had two and no investments in real estate loans, respectively, that had interest reserves.

Loan Portfolio

As of June 30, 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 4.5% 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 June 30, 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
 
Commercial
    18     $ 24,254,000       9.75 %     69.42 %     70.90 %
Land
    3       10,682,000       10.74 %     30.58 %     58.13 %
Total
    21     $ 34,936,000       10.06 %     100.00 %     66.45 %




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 June 30, 2012 and December 31, 2011, was 10.06% 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 June 30, 2012, and December 31, 2011:

 Loan Type  
Number of Loans
   
June 30, 2012
Balance*
   
Portfolio
Percentage
   
Number of Loans
   
December 31, 2011 Balance*
   
Portfolio
Percentage
 
First deeds of trust
    19     $ 31,017,000       88.78 %     18     $ 28,684,000       49.43 %
Second deeds of trust
    2       3,919,000       11.22 %     6       29,340,000       50.57 %
Total
    21     $ 34,936,000       100.00 %     24     $ 58,024,000       100.00 %

*
Please see Balance Sheet Reconciliation below.

The following is a schedule of contractual maturities of investments in real estate loans as of June 30, 2012:

Non-performing and past due loans
  $ 12,900,000  
July 2012 – September 2012
    6,176,000  
October 2012 – December 2012
    3,161,000  
January 2013 – March 2013
    1,842,000  
April 2013 – June 2013
    9,615,000  
Thereafter
    1,242,000  
         
Total
  $ 34,936,000  




The following is a schedule by geographic location of investments in real estate loans as of June 30, 2012 and December 31, 2011:

   
June 30, 2012 Balance *
   
Portfolio Percentage
   
December 31, 2011 Balance *
   
Portfolio Percentage
 
                         
Arizona
  $ 1,343,000       3.84 %   $ 16,108,000       27.76 %
California
    7,869,000       22.52 %     8,564,000       14.76 %
Colorado
    --       --       895,000       1.54 %
Michigan
    2,159,000       6.18 %     --       --  
Nevada
    19,605,000       56.12 %     21,114,000       36.39 %
New York
    250,000       0.72 %     --       --  
Ohio
    323,000       0.92 %     323,000       0.56 %
Oregon
    --       --       46,000       0.08 %
Texas
    1,307,000       3.74 %     10,974,000       18.91 %
Utah
    2,080,000       5.96 %     --       --  
Total
  $ 34,936,000       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.

   
June 30, 2012 Balance
   
December 31, 2011 Balance
 
Balance per loan portfolio
  $ 34,936,000     $ 58,024,000  
Less:
               
Allowance for loan losses (a)
    (6,804,000 )     (26,247,000 )
Balance per consolidated balance sheets
  $ 28,132,000     $ 31,777,000  

 
(a)
Please refer to Specific Reserve Allowance below.

Non-Performing Loans

As of June 30, 2012, we had three 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 $7.7 million, net of allowance for loan losses of approximately $5.3 million, which does not include the allowances of approximately $1.6 million relating to performing loans as of June 30, 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 August 15, 2012, these loan balances have not been charged off.




At June 30, 2012, the following loan types were non-performing:

Loan Type
 
Number Of Non-Performing Loans
   
Balance at
June 30, 2012
   
Allowance for Loan Losses
   
Net Balance at
June 30, 2012
 
Commercial
    2     $ 5,700,000     $ (5,250,000 )   $ 450,000  
Land
    1       7,200,000       --       7,200,000  
Total
    3     $ 12,900,000     $ (5,250,000 )   $ 7,650,000  

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
    4     $ 22,114,000     $ (19,570,000 )   $ 2,544,000  
Land
    1       7,450,000       --       7,450,000  
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 77%.




The following is a breakdown of allowance for loan losses related to performing loans and non-performing loans as of June 30, 2012 and December 31, 2011:

   
As of June 30, 2012
 
   
Balance
   
Allowance for loan losses **
   
Balance, net of allowance
 
Non-performing loans – no related allowance
  $ 7,200,000     $ --     $ 7,200,000  
Non-performing loans – related allowance
    5,700,000       (5,250,000 )     450,000  
Subtotal non-performing loans
    12,900,000       (5,250,000 )     7,650,000  
                         
Performing loans – no related allowance
    18,919,000       --     $ 18,919,000  
Performing loans – related allowance
    3,117,000       (1,554,000 )     1,563,000  
Subtotal performing loans
    22,036,000       (1,554,000 )     20,482,000  
                         
 
Total
  $ 34,936,000     $ (6,804,000 )   $ 28,132,000  
                         

   
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.

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