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Section 1: 10-Q (ORM 10-Q AT 3/31/15)

orm10q033115.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 March 31, 2015

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 000-54957

OWENS REALTY MORTGAGE, INC.
(Exact Name of Registrant as Specified in Its Charter)

Maryland
 
46-0778087
(State or Other Jurisdiction
 
(I.R.S. Employer Identification No.)
of Incorporation or Organization)
   
     
2221 Olympic Boulevard
   
Walnut Creek, California
 
94595
(Address of Principal Executive Offices)
 
(Zip Code)
     
(925) 935-3840
Registrant’s Telephone Number, Including Area Code

NOT APPLICABLE  
 (Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)

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 (§232.405 of this chapter) during the preceding 12 months (or such shorter period that the registrant was required to submit and post such files). Yes [X] No [  ]


 
1

 



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. (Check One):

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

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


Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Class                                           Outstanding as of May 11, 2015
Common Stock, $.01 par value                             10,768,001 shares

 
2

 


TABLE OF CONTENTS


PART I – FINANCIAL INFORMATION
 
    Page
     
Item 1. Financial Statements 4
     
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 36
     
Item 3. Quantitative and Qualitative Disclosures about Market Risk 55
     
Item 4.   Controls and Procedures 57
     
 
PART II – OTHER INFORMATION
 
Item 1. Legal Proceedings 57
     
Item 1A. Risk Factors 57
     
Item 6.   Exhibits 58
     
 
 


 
3

 

Part I. FINANCIAL INFORMATION
Item 1. Financial Statements

OWENS REALTY MORTGAGE, INC.
Consolidated Balance Sheets
 (UNAUDITED)
   
March 31,
 
December 31,
 
   
2015
 
2014
 
ASSETS
             
Cash and cash equivalents
 
$
13,904,244
 
$
1,413,545
 
Restricted cash
   
8,723,582
   
6,248,746
 
Loans, net of allowance for losses of $2,956,921 in 2015 and $2,869,355 in 2014
   
53,977,658
   
65,164,156
 
Interest and other receivables
   
1,656,728
   
1,482,380
 
Other assets, net of accumulated depreciation and amortization of $1,090,942 in 2015 and $1,065,172 in 2014
   
1,170,055
   
1,138,123
 
Deferred financing costs, net of accumulated amortization of $384,931 in 2015 and $253,675 in 2014
   
1,186,329
   
1,317,585
 
Investment in limited liability company
   
2,185,642
   
2,142,581
 
Real estate held for sale
   
69,600,765
   
59,494,339
 
Real estate held for investment, net of accumulated depreciation of $5,192,002 in 2015 and $6,075,287 in 2014
   
95,054,901
   
103,522,466
 
   Total assets
 
$
247,459,904
 
$
241,923,921
 
LIABILITIES AND EQUITY
             
LIABILITIES:
             
Dividends payable
 
$
753,760
 
$
1,292,160
 
Due to Manager
   
189,103
   
283,644
 
Accounts payable and accrued liabilities
   
4,855,330
   
2,219,674
 
Deferred gains on sales of real estate
   
209,662
   
362,283
 
Line of credit payable
   
13,969,000
   
11,450,000
 
Notes and loans payable on real estate
   
38,052,034
   
37,569,549
 
Total liabilities
   
58,028,889
   
53,177,310
 
Commitments and Contingencies (Note 13)
             
EQUITY:
             
Stockholders’ equity:
             
Preferred stock, $.01 par value per share, 5,000,000 shares authorized, no shares issued and outstanding at March 31, 2015 and December 31, 2014
   
   
 
Common stock, $.01 par value per share, 50,000,000 shares authorized, 11,198,119 shares issued, 10,768,001 shares outstanding at March 31, 2015 and December 31, 2014
   
111,981
   
111,981
 
Additional paid-in capital
   
182,437,522
   
182,437,522
 
Treasury stock, at cost – 430,118 shares at March 31, 2015 and December 31, 2014
   
(5,349,156
)
 
(5,349,156
)
Retained earnings
   
7,769,471
   
7,371,511
 
Total stockholders’ equity
   
184,969,818
   
184,571,858
 
Non-controlling interests
   
4,461,197
   
4,174,753
 
   Total equity
   
189,431,015
   
188,746,611
 
   Total liabilities and equity
 
$
247,459,904
 
$
241,923,921
 

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

 
4

 

OWENS REALTY MORTGAGE, INC.
Consolidated Statements of Income
 (UNAUDITED)

   
Three Months Ended March 31,
 
   
2015
 
2014
 
Revenues:
             
Interest income on loans
 
$
2,823,871
 
$
1,136,784
 
Rental and other income from real estate properties
   
3,542,899
   
2,689,975
 
Income from investment in limited liability company
   
43,061
   
41,696
 
Other income
   
   
18
 
Total revenues
   
6,409,831
   
3,868,473
 
Expenses:
             
Management fees to Manager
   
456,389
   
420,306
 
Servicing fees to Manager
   
41,490
   
38,210
 
General and administrative expense
   
378,971
   
415,743
 
Rental and other expenses on real estate properties
   
2,190,412
   
1,915,115
 
Depreciation and amortization
   
602,386
   
546,097
 
Interest expense
   
587,026
   
127,385
 
Provision for loan losses
   
87,566
   
127,172
 
Impairment losses on real estate properties
   
1,109,434
   
7,540
 
Total expenses
   
5,453,674
   
3,597,568
 
Operating income
   
956,157
   
270,905
 
Gain on sales of real estate, net
   
205,441
   
277,184
 
Gain on foreclosure of loan
   
   
257,020
 
Net income
   
1,161,598
   
805,109
 
Less: Net income attributable to non-controlling interests
   
(9,878
)
 
(44,546
)
Net income attributable to common stockholders
 
$
1,151,720
 
$
760,563
 
               
Per common share data:
             
Basic and diluted earnings per common share
 
$
0.11
 
$
0.07
 
Basic and diluted weighted average number of common shares outstanding
   
10,768,001
   
10,769,498
 
Dividends declared per share of common stock
 
$
0.07
 
$
0.05
 
               

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










 
5

 

OWENS REALTY MORTGAGE, INC.
Consolidated Statements of Stockholders’ Equity
Three Months Ended March 31, 2015 and 2014
 (UNAUDITED)

 
Common Stock
 
Additional
Paid-in
Capital
   
Treasury Stock
         
Total
Stockholders’
Equity
   
Non-
controlling
Interests
     
         
Retained Earnings
         
Total
Equity
 
 
Shares
 
Amount
     
Shares
   
Amount
               
                                                       
Balances, December 31, 2013
 
11,198,119
 
$
111,981
 
$
182,437,522
   
(403,910
)
$
(5,023,668
)
$
2,348,575
 
$
179,874,410
 
$
6,351,896
 
$
 186,226,306
 
                                                       
Net income
 
   
   
   
              —
   
              —
   
               760,563
   
                760,563
   
               44,546
   
805,109
 
Dividends declared
 
   
   
   
              —
   
              —
   
               (537,733
)
 
                (537,733
)
 
               —
   
(537,733
)
Purchase of treasury stock
 
   
   
   
(26,208
)
 
(325,488
)
 
   
(325,488
)
 
   
(325,488
)
Contribution from non-controlling interest
 
   
   
   
   
   
   
   
4,359
   
4,359
 
Distributions to non-controlling interests
 
   
   
   
              —
   
              —
   
               —
   
                —
   
               (2,618
)
 
(2,618
)
Balances, March 31, 2014
 
11,198,119
 
$
111,981
 
$
182,437,522
   
(430,118
)
$
(5,349,156
)
$
2,571,405
 
$
179,771,752
 
$
6,398,183
 
$
186,169,935
 
                                                       
Balances, December 31, 2014
 
11,198,119
 
$
111,981
 
$
182,437,522
   
(430,118
)
 
(5,349,156
)
$
7,371,511
 
$
184,571,858
 
$
4,174,753
 
$
 188,746,611
 
                                                       
Net income
 
   
   
   
              —
   
              —
   
1,151,720
   
1,151,720
   
9,878
   
1,161,598
 
Dividends declared
 
   
   
   
              —
   
              —
   
               (753,760
)
 
                (753,760
)
 
   
(753,760
)
Contribution from non-controlling interest
 
   
   
   
              —
   
              —
   
               —
   
                —
   
279,184
   
279,184
 
Distributions to non-controlling interests
 
   
   
   
              —
   
              —
   
               —
   
                —
   
(2,618
)
 
(2,618
)
Balances, March 31, 2015
 
11,198,119
 
$
111,981
 
  $
182,437,522
   
(430,118
)
$
(5,349,156
)
$
7,769,471
 
$
184,969,818
 
$
4,461,197
 
$
189,431,015
 
                                                       
 
 

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

 
6

 

OWENS REALTY MORTGAGE, INC.
Consolidated Statements of Cash Flows
 (UNAUDITED)

   
Three Months Ended March 31,
 
   
2015
 
2014
 
CASH FLOWS FROM OPERATING ACTIVITIES:
             
Net income
 
$
1,161,598
 
$
805,109
 
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
             
Gain on sales of real estate, net
   
(205,441
)
 
(277,184
)
Gain on foreclosures of loans
   
   
(257,020
)
Income from investment in limited liability company
   
(43,061
)
 
(41,696
)
Provision for loan losses
   
87,566
   
127,172
 
Impairment losses on real estate properties
   
1,109,434
   
7,540
 
Depreciation and amortization
   
602,386
   
546,097
 
Amortization of deferred financing costs
   
79,419
   
 
Accretion of discount on loan
   
(536,816
)
 
(12,200
)
Changes in operating assets and liabilities:
             
Interest and other receivables
   
(174,348
)
 
(268,931
)
Other assets
   
(52,972
)
 
(120,808
)
Accounts payable and accrued liabilities
   
46,979
   
(582,186
)
Due to Manager
   
(94,541
)
 
(136,180
)
Net cash provided by (used in) operating activities
   
1,980,203
   
(210,287
)
CASH FLOWS FROM INVESTING ACTIVITIES:
             
Principal collected on loans
   
21,873,017
   
2,506,314
 
Investment in loans
   
(10,237,269
)
 
(9,049,000
)
Investment in real estate properties
   
(1,743,620
)
 
(3,501,041
)
Net proceeds from disposition of real estate properties
   
1,108,820
   
1,350
 
Purchases of vehicles and equipment
   
(1,507
)
 
(3,988
)
Transfer (to) from restricted cash, net
   
(2,474,836
)
 
108,862
 
Net cash provided by (used in) investing activities
   
8,524,605
   
(9,937,503
)
CASH FLOWS FROM FINANCING ACTIVITIES:
             
Advances on notes payable
   
10,342,938
   
 
Repayments on notes payable
   
(9,860,453
)
 
(44,909
)
Advances on lines of credit
   
10,989,000
   
4,100,000
 
Repayments on lines of credit
   
(8,470,000
)
 
 
Payment of deferred financing costs
   
   
(140,000
)
Distributions to non-controlling interests
   
(2,618
)
 
(2,618
)
Contribution from non-controlling interest
   
279,184
   
4,359
 
Purchase of treasury stock
   
   
(325,488
)
Dividends paid
   
(1,292,160
)
 
(179,333
)
Net cash provided by financing activities
   
1,985,891
   
3,412,011
 
Net increase (decrease) in cash and cash equivalents
   
12,490,699
   
(6,735,779
)
Cash and cash equivalents at beginning of period
   
1,413,545
   
8,158,734
 
Cash and cash equivalents at end of period
 
$
13,904,244
 
$
1,422,955
 
Supplemental Disclosure of Cash Flow Information
             
Cash paid during the period for interest (excluding amounts capitalized)
 
$
487,145
 
$
132,734
 
Cash paid during the period for interest that was capitalized
   
20,050
   
7,194
 
Supplemental Disclosure of Non-Cash Activity
             
Increase in real estate from loan foreclosures
   
   
3,241,220
 
Decrease in loans, net of allowance for loan losses, from loan foreclosures
   
   
(2,959,500
)
 
 
 
7

 
 
Decrease in interest and other receivables from loan foreclosures
   
   
(281,720
)
Amortization of deferred financing costs capitalized to construction project
   
(51,837
)
 
 
Change in capital expenditures financed through accounts payable
   
(2,588,677
)
 
(1,123,758
)
Dividends declared but not paid
   
(753,760
)
 
(537,733
)

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

 
8

 
OWENS REALTY MORTGAGE, INC.

Notes to Consolidated Financial Statements (Unaudited)



NOTE 1 – ORGANIZATION
 
Owens Realty Mortgage, Inc. (the “Company”) was incorporated on August 9, 2012, under the laws of the State of Maryland. The Company is authorized to issue 50,000,000 shares of its $0.01 par value common stock. In addition, the Company is authorized to issue 5,000,000 shares of preferred stock at $0.01 par value per share. The Company was created to effect the merger (the “Merger”) of Owens Mortgage Investment Fund, a California Limited Partnership (“OMIF”) with and into the Company as described in the Registration Statement on Form S-4, as amended, of the Company, declared effective on February 12, 2013 (File No. 333-184392).  The Merger was part of a plan to reorganize the business operations of OMIF so that it could elect to qualify as a real estate investment trust for Federal income tax purposes. The Merger was approved by OMIF limited partners on April 16, 2013 and was completed on May 20, 2013.

The Company has elected to be taxed as a real estate investment trust (“REIT”) under the Internal Revenue Code of 1986, as amended (the “Code”), commencing with the Company’s taxable year ended December 31, 2012. As a REIT, the Company is permitted to deduct distributions made to its stockholders, allowing its income and gain represented by such distributions to avoid taxation at the entity level and to be taxed generally only at the stockholder level. The Company intends to distribute substantially all of its income and gain. As a REIT, however, the Company is subject to separate, corporate-level tax, including potential 100% penalty taxes under various circumstances, as well as certain state and local taxes. In addition, the Company’s taxable REIT subsidiaries are subject to full corporate income tax. Furthermore, the Company’s ability to continue to qualify as a REIT will depend upon its continuing satisfaction of various requirements, such as those related to the diversity of its stock ownership, the nature of its assets, the sources of its income and the distributions to its stockholders, including a requirement that the Company distribute to its stockholders at least 90% of its REIT taxable income on an annual basis (determined without regard to the dividends paid deduction and by excluding net capital gain).

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

In the opinion of the management of the Company, the accompanying unaudited financial statements contain all adjustments, consisting of normal, recurring adjustments, necessary to present fairly the financial information included therein. Certain information and footnote disclosures presented in the annual consolidated financial statements are not included in these interim financial statements.  These consolidated financial statements should be read in conjunction with the audited consolidated financial statements included in the Form 10-K of ORM for the fiscal year ended December 31, 2014 filed with the Securities and Exchange Commission (“SEC”). The results of operations for the three months ended March 31, 2015 are not necessarily indicative of the operating results to be expected for the full year ending December 31, 2015. The Company evaluates subsequent events up to the date it files its Form 10-Q with the SEC. 

Basis of Presentation

Principles of Consolidation

The consolidated financial statements include the accounts of the Company, its wholly-owned taxable REIT subsidiary (TRS) and its majority- and wholly-owned limited liability companies (see notes 5 and 6). The Company is in the business of providing mortgage lending services and manages its business as one operating segment. Due to foreclosure activity, the Company also owns and manages real estate assets.

Certain reclassifications, not affecting previously reported net income or total stockholders’ equity, have been made to the previously issued consolidated financial statements to conform to the current period presentation.

Management Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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 financial statements and the reported amounts of revenues and expenses during the reporting periods. Such estimates are inherently imprecise and actual results could differ significantly from such estimates.
 
9

 
OWENS REALTY MORTGAGE, INC.

Notes to Consolidated Financial Statements (Unaudited)



Recently Issued Accounting Pronouncements

In April 2015, the FASB issued Accounting Standards Update 2015-03, “Interest - Imputation of Interest (Subtopic 835-30) – Simplifying the Presentation of Debt Issuance Costs,” or ASU 2015-03. ASU 2015-03 simplifies the presentation of debt issuance costs by requiring that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct reduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by this ASU. The amendments in this ASU are effective for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. The adoption of this ASU by the Company will change the presentation of debt issuance costs, which will be reported as a direct offset to the applicable debt on the balance sheet.

In April 2014, the FASB issued Accounting Standards Update 2014-08, “Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity”. ASU 2014-08 updated guidance that changes the criteria for determining which disposals can be presented as discontinued operations and modifies related disclosure requirements. Under the new guidance, a discontinued operation is defined as a disposal of a component or group of components that is disposed of or is classified as held for sale and represents a strategic shift that has (or will have) a major effect on an entity's operations and financial results. As a result of this new guidance, future dispositions of real estate owned assets may no longer meet the criteria to be considered as discontinued operations. The guidance was effective as of the first quarter of 2015 and did not have a material effect on the Company’s consolidated financial statements.

Significant Accounting Policies
 
Cash and Cash Equivalents

Cash and cash equivalents include funds on deposit with financial institutions.

Restricted Cash

Restricted cash includes contingency reserves required pursuant to the Company’s charter, non-interest bearing deposits required pursuant to the Company’s lines of credit (see Note 7), the deposit required pursuant to the Company’s construction loan payable (see Note 8) and escrow deposits for property taxes and insurance to be paid on certain Company real estate properties.

Concentration of Credit Risk

Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash and cash equivalents and loans. The Company places its cash and cash equivalents with financial institutions and, at times, cash held may exceed the Federal Deposit Insurance Corporation, or “FDIC”, insured limit. The Company has exposure to credit risk on its loans and other investments. The Company’s manager, Owens Financial Group, Inc. (“OFG” or “Manager”), will seek to manage credit risk by performing analysis of underlying collateral assets.

Loans and Allowance for Loan Losses

Loans are generally stated at the principal amount outstanding. Advances under the terms of a loan to pay property taxes, insurance, legal and other costs are generally capitalized and reported as interest and other receivables. The Company’s portfolio consists primarily of real estate loans generally collateralized by first, second and third deeds of trust.  Interest income on loans is accrued by the simple interest method. Loans are generally placed on nonaccrual status when the borrowers are past due greater than ninety days or when full payment of principal and interest is not expected. When a loan is classified as nonaccrual, interest accruals discontinue and all past due interest remains accrued until the loan becomes current, is paid off or is foreclosed upon. Interest accruals are resumed on such loans only when they are brought fully current with respect to interest and principal and when, in the judgment of management, the loans are estimated to be fully collectible as to both principal and interest. Cash receipts on nonaccrual loans are used to reduce any outstanding accrued interest, and then are recorded as interest income, except when such payments are specifically designated as principal reduction or when management does not believe the Company’s investment in the loan is fully recoverable. The Company does not incur origination costs and does not earn or collect origination fees from borrowers as OFG is entitled to all such fees (see Note 9).
 
10

 
OWENS REALTY MORTGAGE, INC.

Notes to Consolidated Financial Statements (Unaudited)



Loans and the related accrued interest and advances are analyzed by management on a periodic basis for ultimate recovery. The allowance for loan losses is management’s estimate of probable credit losses inherent in the Company’s loan portfolio that have been incurred as of the balance sheet date.  The allowance is established through a provision for loan losses which is charged to expense.  Additions to the allowance are expected to maintain the adequacy of the total allowance after credit losses and loan growth.  Credit exposures determined to be uncollectible are charged against the allowance.  Cash received on previously charged off amounts is recorded as a recovery to the allowance.  The overall allowance consists of two primary components: specific reserves related to impaired loans that are individually evaluated for impairment and general reserves for inherent losses related to loans that are not considered impaired and are collectively evaluated for impairment.

Regardless of a loan type, a loan is considered impaired when, based on current information and events, management believes it is probable that the Company will be unable to collect all amounts due, including principal and interest, according to the contractual terms of the original agreement or when monthly payments are delinquent for more than 90 days on a loan.  All loans determined to be impaired are individually evaluated for impairment.  When a loan is considered impaired, management estimates impairment based on the present value of expected future cash flows discounted at the loan's effective interest rate, except that as a practical expedient, management may measure impairment based on a loan's observable market price, or the fair value of the collateral if the loan is collateral dependent.  A loan is collateral dependent if the repayment of the loan is expected to be provided solely by the underlying collateral. These valuations are generally updated during the fourth quarter but may be updated during interim periods if deemed appropriate by management.

A restructuring of a debt constitutes a troubled debt restructuring (“TDR”) if the Company for economic or legal reasons related to the debtor's financial difficulties grants a concession to the debtor that it would not otherwise consider.  Restructured loans typically present an elevated level of credit risk as the borrowers are not able to perform according to the original contractual terms.  Loans that are reported as TDR’s are considered impaired and measured for impairment as described above.

The determination of the general reserve for loans that are not considered impaired and are collectively evaluated for impairment is based on estimates made by management, to include, but not limited to, consideration of historical losses by portfolio segment, internal asset classifications, and qualitative factors to include economic trends in the Company’s service areas, industry experience and trends, geographic concentrations, estimated collateral values, the Company’s underwriting policies, the character of the loan portfolio, and probable losses inherent in the portfolio taken as a whole.

The Company maintains a separate allowance for each portfolio segment (loan type).  These portfolio segments include commercial real estate, residential real estate and land loans.   The allowance for loan losses attributable to each portfolio segment, which includes both impaired loans that are individually evaluated for impairment and loans that are not considered impaired and are collectively evaluated for impairment, is combined to determine the Company’s overall allowance, which is included on the consolidated balance sheet. The reserve for loans that are not considered impaired consists of reserve factors that are based on management’s assessment of the following for each portfolio segment: (1) inherent credit risk, (2) historical losses, and (3) other qualitative factors.  These reserve factors are inherently subjective and are driven by the repayment risk associated with each portfolio segment described below.
 
11

 
OWENS REALTY MORTGAGE, INC.

Notes to Consolidated Financial Statements (Unaudited)



Commercial and Residential Real Estate Loans –Adverse economic developments or an overbuilt market impact commercial and residential real estate projects and may result in troubled loans.  Trends in vacancy rates of properties impact the credit quality of these loans.  High vacancy rates reduce operating revenues and the ability for properties to produce sufficient cash flow to service debt obligations.

Land Loans – These loans generally possess a higher inherent risk of loss than other real estate portfolio segments.  Trends in real estate values significantly impact the security of these loans, as property values generally determine the economic viability of development projects. As improved property values decline, the value of unimproved land declines disproportionally more quickly.

Other Assets

Other assets primarily include deferred rent, capitalized lease commissions, prepaid expenses, deposits and inventory. Amortization of lease commissions is provided on the straight-line method over the lives of the related leases.

Deferred Financing Costs

Issuance and other costs related to the Company’s lines of credit and certain notes payable are capitalized and amortized to interest expense under either the straight-line or effective interest methods over the terms of the respective debt instruments. Deferred financing costs related to the construction loan in TOTB North, LLC are being amortized to the construction project under the straight-line method over the term of construction/renovation.

Rental Income

The Company leases multifamily rental units under operating leases with terms of generally one year or less. Rental revenue is recognized, net of rental concessions, on a straight-line method over the related lease term. Rental income on commercial property is recognized on a straight-line basis over the term of each operating lease. Recognition of gains on the sale of real estate is dependent upon the transaction meeting certain criteria related to the nature of the property and the terms of the sale including potential seller financing.

Real Estate Held for Sale

Real estate held for sale includes properties acquired in full or partial settlement of loan obligations, principally through foreclosure, that are being marketed for sale. Real estate held for sale is recorded upon acquisition at the property’s estimated fair value less estimated costs to sell. Any excess of the recorded investment in the loan over the net fair value is charged against the allowance for loan losses. Any excess of the net fair value over the recorded investment in the loan is credited first to the allowance for loan losses as a recovery to the extent charge-offs had been recorded previously, and then to earnings as gain on foreclosure of loan.

After acquisition, costs incurred relating to the development and improvement of property are capitalized to the extent they do not cause the recorded value to exceed the net fair value, whereas costs relating to holding and disposition of the property are expensed as incurred. After acquisition, real estate held for sale is analyzed periodically for changes in fair values and any subsequent write down is charged to impairment losses on real estate properties. Any recovery in the fair value subsequent to such a write down is recorded (not to exceed the net fair value at acquisition) as an offset to impairment losses on real estate properties. Recognition of gains on the sale of real estate is dependent upon the transaction meeting certain criteria related to the nature of the property and the terms of the sale including potential seller financing.

Real Estate Held for Investment

Real estate held for investment includes properties acquired in full or partial settlement of loan obligations, principally through foreclosure, that are not being marketed for sale and are either being operated or leased, are being managed through the development process (including obtaining appropriate and necessary entitlements, permits and/or construction) or are idle properties awaiting more favorable market conditions. Certain of these properties are those that the Company cannot sell without placing our REIT status at risk or become subject to prohibited transactions penalty taxes. Real estate held for investment is recorded upon acquisition at the property’s estimated fair value, less estimated costs to sell.
 
12

 
OWENS REALTY MORTGAGE, INC.

Notes to Consolidated Financial Statements (Unaudited)



After acquisition, costs incurred relating to the development and improvement of the property are capitalized, whereas costs relating to operating or holding the property are expensed. Subsequent to acquisition, management periodically compares the carrying value of real estate to expected undiscounted future cash flows for the purpose of assessing the recoverability of the recorded amounts. If the carrying value exceeds future undiscounted cash flows, the assets are reduced to estimated fair value.

Depreciation of real estate properties held for investment is provided on the straight-line method over the estimated remaining useful lives of buildings and improvements (5-39 years). Depreciation of tenant improvements is provided on the straight-line method over the shorter of their estimated useful lives or the lease terms.
 
The Company reclassifies real estate properties from held for investment to held for sale in the period in which all of the following criteria are met: 1) Management commits to a plan to sell the property; 2) The property is available for immediate sale in its present condition; 3) An active program to locate a buyer has been initiated; 4) The sale of the property is probable and the transfer of the property is expected to qualify for recognition as a completed sale, within one year; and 5) Actions required to complete the plan indicate it is unlikely that significant changes to the plan will be made or the plan will be withdrawn. Such real estate properties are recorded at the time of reclassification at their carrying amounts prior to reclassification or fair value, whichever is lower. This establishes the initial basis at which the properties are accounted for as held for sale, as described above.
 
If circumstances arise that previously were considered unlikely, and, as a result, the Company decides not to sell a real estate property classified as held for sale, the property is reclassified to held for investment. The property is then measured individually at the lower of its carrying amount, adjusted for depreciation or amortization expense that would have been recognized had the property been continuously classified as held for investment or its fair value at the date of the subsequent decision not to sell.
 
Environmental Remediation Liability
 
Liabilities related to future environmental remediation costs are recorded when remediation or monitoring or both are probable and the costs can be reasonably estimated. The Company’s environmental remediation liability related to the property located in Santa Clara, California (held within 1850 De La Cruz, LLC – see Notes 4 and 13) was recorded based on a third party consultant’s estimate of the costs required to remediate and monitor the contamination.
 
Earnings per Common Share

The Company calculates basic earnings per share by dividing net income allocable to common stockholders for the period by the weighted-average shares of common stock outstanding for that period. Diluted earnings per share takes into effect any dilutive instruments, except if when doing so such instruments would be anti-dilutive. At the present time, the Company has not issued any restricted stock or restricted stock units.

Income Taxes
 
The Company has elected to be taxed as a REIT. As a result of the Company’s REIT status and its distribution policy, the Company does not generally expect to pay U.S. federal corporate level income taxes. Many of the REIT requirements, however, are highly technical and complex. To qualify as a REIT, the Company must meet a number of organizational and operational requirements, including a requirement that the Company distribute annually at least 90% of the Company’s REIT taxable income to the Company’s stockholders. If the Company has previously qualified as a REIT and fails to qualify as a REIT in any subsequent taxable year and does not qualify for certain statutory relief provisions, the Company will be subject to U.S. federal income taxes at regular corporate rates (including any applicable alternative minimum tax) and may be precluded from qualifying as a REIT for the Company’s four subsequent taxable years. Even if the Company qualifies for taxation as a REIT, the Company may be subject to certain U.S. federal, state, local and foreign taxes on the Company’s income and property and to U.S. federal income and excise taxes on the Company’s undistributed REIT taxable income.
 
13

 
OWENS REALTY MORTGAGE, INC.

Notes to Consolidated Financial Statements (Unaudited)



The Company has elected or may elect to treat certain of its existing or newly created corporate subsidiaries as taxable REIT subsidiaries (each a “TRS”). In general, a TRS may hold assets that the REIT cannot hold directly and, subject to certain exceptions related to hotels and healthcare properties, may engage in any real estate or non-real estate related business.  A TRS is treated as a regular corporation and is subject to federal, state, local and foreign taxes on its income and property. Lone Star Golf, Inc. is treated as a TRS of the Company.

ASC 740 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. ASC 740 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. The Company has analyzed its various federal and state filing positions and believes that its income tax filing positions and deductions are well documented and supported.

Certain entities included in the Company’s consolidated financial statements are subject to certain state and local taxes. These taxes are recorded as general and administrative expenses in the accompanying consolidated financial statements.

 
14

 
OWENS REALTY MORTGAGE, INC.

Notes to Consolidated Financial Statements (Unaudited)



NOTE 3 – LOANS AND ALLOWANCE FOR LOAN LOSSES
 
The following tables show the changes in the allowance for loan losses by portfolio segment for the three months ended March 31, 2015 and 2014 and the allocation of the allowance for loan losses and loans as of March 31, 2015 and December 31, 2014 by portfolio segment and by impairment methodology:

   
Commercial
 
Residential
 
Land
   
2015
       
Total
                 
Allowance for loan losses:
           
   
Three Months Ended March 31, 2015
 
Beginning balance
 
$
888,260
$
1,975,112
$
5,983
$
2,869,355
 
Provision (Reversal)
 
            23,506
 
(2,091)
 
66,151
 
87,566
 
Ending Balance
 
$
911,766
$
1,973,021
$
72,134
$
2,956,921
                 
   
As of March 31, 2015
 
Ending balance: individually evaluated for impairment
$
552,761
$
1,839,345
$
$
2,392,106
                 
Ending balance: collectively evaluated for impairment
$
359,005
$
133,676
$
72,134
$
564,815
                 
Ending balance
$
911,766
$
1,973,021
$
72,134
$
2,956,921
                 
Loans:
               
 
Ending balance
 
$
42,600,361
$
12,791,670
$
1,542,548
$
56,934,579
                 
Ending balance: individually evaluated for impairment
$
1,078,752
$
7,785,790
$
$
8,864,542
                 
Ending balance: collectively evaluated for impairment
$
41,521,609
$
5,005,880
$
1,542,548
$
48,070,037

 

 
15

 
OWENS REALTY MORTGAGE, INC.

Notes to Consolidated Financial Statements (Unaudited)



   
Commercial
 
Residential
 
Land
   
2014
       
Total
                 
Allowance for loan losses:
           
   
Three Months Ended March 31, 2014
 
Beginning balance
 
$
932,651
$
3,798,203
$
8,234
$
4,739,088
 
   (Reversal) Provision
 
282,373
 
(159,259)
 
4,058
 
127,172
 
Ending Balance
 
$
1,215,024
$
3,638,944
$
12,292
$
4,866,260
                 
   
As of December 31, 2014
 
Ending balance: individually evaluated for impairment
$
550,010
$
  1,839,345
$
             —
$
 2,389,355
                 
Ending balance: collectively evaluated for impairment
$
338,250
$
 135,767
$
             5,983
$
480,000
                 
 
Ending balance
 
$
888,260
$
1,975,112
$
              5,983
$
2,869,355
                 
Loans:
               
 
Ending balance
 
$
52,531,537
$
 13,491,906
$
2,010,068
$
68,033,511
                 
Ending balance: individually evaluated for impairment
$
12,666,935
$
      7,788,747
$
           1,860,068
$
22,315,750
                 
Ending balance: collectively evaluated for impairment
$
39,864,602
$
5,703,159
$
        150,000
$
45,717,761

The following tables show an aging analysis of the loan portfolio by the time monthly payments are past due as of March 31, 2015 and December 31, 2014:

   
Loans
30-59 Days
Past Due
 
Loans
60-89 Days
Past Due
 
Loans
90 or More Days
Past Due
           
         
Total Past
Due Loans
 
Current Loans
 
Total Loans
March 31, 2015
           
                         
Commercial
$
          — 
$
       —
$
        1,078,752
$
         1,078,752
$
41,521,609
$
        42,600,361
Residential
 
          — 
 
 
         7,785,790
 
         7,785,790
 
5,005,880
 
        12,791,670
Land
 
          — 
 
 —
 
         —
 
       —
 
1,542,548
 
1,542,548
 
$
          — 
$
      —
$
       8,864,542
$
8,864,542
$
       48,070,037
$
  56,934,579

 
16

 
OWENS REALTY MORTGAGE, INC.

Notes to Consolidated Financial Statements (Unaudited)



   
Loans
30-59 Days
Past Due
 
Loans
60-89 Days
Past Due
 
Loans
90 or More Days
Past Due
           
         
Total Past
Due Loans
 
Current Loans
 
Total Loans
December 31, 2014
           
                         
Commercial
$
          —
$
          —
$
       1,078,752
$
       1,078,752
$
       51,452,785
$
52,531,537
Residential
 
 
 
        7,788,747
 
        7,788,747
 
       5,703,159
 
13,491,906
Land
 
          —
 
          —
 
        1,860,068
 
        1,860,068
 
150,000
 
2,010,068
 
$
         —
$
          —
$
   10,727,567
$
   10,727,567
$
      57,305,944
$
   68,033,511

All of the loans that are 90 or more days past due as listed above are on non-accrual status as of March 31, 2015 and December 31, 2014. In addition, two commercial loans totaling $11,588,000 as of December 31, 2014 that were considered impaired were restored to accrual status during the quarter ended March 31, 2014 because the Company had received consistent payments from the borrower over a six month period and management expected that the borrower would continue to keep the loans current with respect to principal and interest payments.  These two loans were paid off in full during the quarter ended March 31, 2015.

The following tables show information related to impaired loans as of and for the three months ended March 31, 2015:

   
As of March 31, 2015
 
Three Months Ended March 31, 2015
 
 
 
 
Recorded
Investment
 
 
Unpaid
Principal
Balance
 
 
 
Related
Allowance
 
 
Average
Recorded
Investment
 
 
Interest
Income
Recognized
With no related allowance recorded:
                   
 
Commercial
 
$
   
  
$
           
  
$
 
 
$
 
7,737,656
 
$
 
601,660
 
Residential
 
         250,790
 
          250,790
 
 
 
 
251,780
 
 
            5,493
 
Land
 
         
 
           
 
 
 
 
1,240,045
 
 
216,904
                     
With an allowance recorded:
                   
 
Commercial
 
         1,079,699
 
          1,078,752
 
552,761
 
 
1,079,699
 
 
13,484
 
Residential
 
       7,983,345
 
         7,535,000
 
 
1,839,345
 
 
 7,983,345
 
 
 63,000
 
Land
 
 
  
 
 
 
 
 
 
 
 
 
            
                     
Total:
                   
 
Commercial
 
$
 
1,079,699
  
$
1,078,752
  
$
 
552,761
  
$
 
 8,817,355
  
$
 
615,144
 
Residential
 
$
 
8,234,135
  
$
         7,785,790
  
$
 
1,839,345
  
$
 
 8,235,125
 
 $
 
 68,493
 
Land
 
$
         
  
$
           
  
$
 
  
$
 
1,240,045
 
 $
 
216,904

 
17

 
OWENS REALTY MORTGAGE, INC.

Notes to Consolidated Financial Statements (Unaudited)



The following tables show information related to impaired loans as of December 31, 2014 and for the three months ended March 31, 2014:

   
As of December 31, 2014
 
Three Months Ended March 31, 2014
 
 
 
 
Recorded
Investment
 
 
Unpaid
Principal
Balance
 
 
 
Related
Allowance
 
 
Average
Recorded
Investment
 
 
Interest
Income
Recognized
With no related allowance recorded:
                   
 
Commercial
 
$
       11,588,183
  
$
         11,588,183
  
$
 
 
$
 
16,217,747
 
$
 
498,505
 
Residential
 
         253,747
 
          253,747
 
 
 
 
 2,503,678
 
 
            45,000
 
Land
 
       1,860,068
 
         1,860,068
 
 
 
 
4,023,444
 
 
            54,320
                     
With an allowance recorded:
                   
 
Commercial
 
         1,079,699
 
          1,078,752
 
 
550,010
 
 
1,783,636
 
 
14,482
 
Residential
 
       7,983,345
 
         7,535,000
 
 
1,839,345
 
 
 7,983,430
 
 
 39,000
 
Land
 
 
  
 
 
 
 
 
 
 
 
 
            
                     
Total:
                   
 
Commercial
 
$
 
12,667,882
  
$
         12,666,935
 
 $
 
550,010
  
$
 
 18,001,383
  
$
 
512,987
 
Residential
 
$
 
8,267,092
  
$
         7,788,747
 
  $
 
1,839,345
  
$
 
 10,487,108
  
$
 
 84,000
 
Land
 
$
       1,860,068
  
$
         1,860,068
  
$
 
  
$
 
4,023,444
  
$
 
54,320

The recorded investment balances presented in the above tables include amounts advanced in addition to principal on impaired loans (such as property taxes, insurance and legal charges) that are reimbursable by borrowers and are included in interest and other receivables in the accompanying consolidated balance sheets. Interest income recognized on a cash basis for impaired loans approximates the interest income recognized as reflected in the tables above.

Troubled Debt Restructurings

The Company has allocated approximately $2,392,000 and $2,389,000 of specific reserves on loans totaling approximately $9,314,000 and $20,265,000 (recorded investments before reserves) to borrowers whose loan terms had been modified in troubled debt restructurings as of March 31, 2015 and December 31, 2014, respectively.  The Company has not committed to lend additional amounts to any of these borrowers.

No loans were modified as troubled debt restructurings during the quarters ended March 31, 2015 and 2014.

NOTE 4 – INVESTMENT IN LIMITED LIABILITY COMPANY

During 2008, the Company entered into an operating agreement (the “Operating Agreement”) of 1850 De La Cruz LLC, a California limited liability company (“1850”), with Nanook Ventures LLC (“Nanook”), an unrelated party.  The purpose of the joint venture is to acquire, own and operate certain industrial land and buildings located in Santa Clara, California that were owned by the Company. The property was subject to a Purchase and Sale Agreement dated July 24, 2007 (the “Sale Agreement”), as amended, between the Company, as seller, and Nanook, as buyer.  During the course of due diligence under the Sale Agreement, it was discovered that the property was contaminated and that remediation and monitoring may be required.  The parties agreed to enter into the Operating Agreement to restructure the arrangement as a joint venture.  At the time of closing in July 2008, the two properties were separately contributed to two new limited liability companies, Nanook Ventures One LLC and Nanook Ventures Two LLC that are wholly owned by 1850. The Company and Nanook are the Members of 1850 and NV Manager, LLC is the manager. (See Note 13 for further discussion of the Company’s environmental remediation obligation with respect to the properties owned by 1850.)
 
18

 
OWENS REALTY MORTGAGE, INC.

Notes to Consolidated Financial Statements (Unaudited)



The Company received no distributions from 1850 during the three months ended March 31, 2015 and 2014. The net income to the Company from its investment in 1850 De La Cruz was approximately $43,000 and $42,000 during the three months ended March 31, 2015 and 2014, respectively.

NOTE 5 - REAL ESTATE HELD FOR SALE

Real estate properties held for sale as of March 31, 2015 and December 31, 2014 consists of properties acquired through foreclosure classified by property type as follows:

   
March 31,
2015
 
December 31,
2014
 
Land (including land under development)
 
$
37,562,043
 
$
36,263,330
 
Retail
   
15,439,021
   
16,494,440
 
Residential
   
6,852,989
   
 
Office
   
4,716,159
   
4,716,159
 
Industrial
   
3,005,470
   
 
Golf course
   
2,025,083
   
2,020,410
 
   
$
69,600,765
 
$
59,494,339
 

During the three months ended March 31, 2015, the Company transferred three properties (one land, one residential and one industrial) from “Held for investment” to “Held for sale” as the properties are now listed for sale and sales are expected within the next year.

During the three months ended March 31, 2015, the Company recorded an impairment loss of approximately $1,109,000 on the unimproved residential and commercial land located in Gypsum, Colorado due to a decrease in the listing price of the property and a reduction in the fair market value estimated by management.

During the three months ended March 31, 2015, the Company sold one retail property for net sales proceeds of approximately $1,109,000, resulting in a gain on sale of real estate of approximately $53,000. In addition, the Company recognized gain of approximately $152,000 during the three months ended March 31, 2015 that had previously been deferred related to the sale of a real estate property in 2012.  The gain on the sale of this property was being accounted for under the installment method.

There were no sales during the three months ended March 31, 2014; however, a gain of approximately $277,000 was recognized during the three months ended March 31, 2014 that had previously been deferred related to the sale of a real estate property in 2012. The gain on the sale of that property was being recognized under the installment method.

 
19

 
OWENS REALTY MORTGAGE, INC.

Notes to Consolidated Financial Statements (Unaudited)



NOTE 6 - REAL ESTATE HELD FOR INVESTMENT

Real estate held for investment as of March 31, 2015 and December 31, 2014 consists of properties acquired through foreclosure classified by property type as follows:


   
March 31,
2015
 
December 31,
2014
 
Land
 
$
8,839,255
 
$
10,797,656
 
Residential
   
44,460,963
   
48,154,258
 
Retail
   
23,286,401
   
23,211,896
 
Assisted care
   
4,999,210
   
5,005,000
 
Office
   
4,375,862
   
4,416,108
 
Industrial
   
1,446,605
   
4,486,797
 
Storage
   
3,823,911
   
3,847,884
 
Marina
   
3,822,694
   
3,602,867
 
   
$
95,054,901
 
$
103,522,466
 

The balances of land and the major classes of depreciable property for real estate held for investment as of March 31, 2015 and December 31, 2014 are as follows:
   
March 31,
2015
   
December 31,
2014
 
Land and land improvements
 
$
34,347,537
   
$
39,003,422
 
Buildings and improvements
   
65,899,366
     
70,594,331
 
     
100,246,903
     
109,597,753
 
Less: Accumulated depreciation
   
(5,192,002
)
   
(6,075,287
)
   
$
95,054,901
   
$
103,522,466
 

It is the Company’s intent to sell the majority of its real estate properties held for investment, but expected sales are not probable to occur within the next year.
 
Depreciation expense was approximately $580,000 and $519,000 for the three months ended March 31, 2015 and 2014, respectively.

2014 Foreclosure Activity
 
During the quarter ended March 31, 2014, Sandmound Marina, LLC (“Sandmound”) (wholly owned by the Company) foreclosed on a first mortgage loan secured by unimproved land and a marina and campground located in Bethel Island, California with a principal balance of approximately $2,960,000 and obtained the properties via the trustee’s sale. In addition, advances made on the loan or incurred as part of the foreclosure (such as legal fees and delinquent property taxes) in the total amount of approximately $282,000 were capitalized to the basis of the properties. The fair market values of the properties acquired were estimated to be higher than Sandmound’s recorded investment in the subject loan, and, thus, a gain on foreclosure in the amount of approximately $257,000 was recorded. The properties have been classified as held for investment as sales are not expected within one year.
 
20

 
OWENS REALTY MORTGAGE, INC.

Notes to Consolidated Financial Statements (Unaudited)



Certain of the Company’s real estate properties held for sale and investment are leased to tenants under noncancellable leases with remaining terms ranging from one to twelve years. Certain of the leases require the tenant to pay all or some operating expenses of the properties. The future minimum rental income from noncancellable operating leases due within the five years subsequent to March 31, 2015 and thereafter is as follows:
 
Twelve months ending March 31:
       
2016
 
$
6,890,670
 
2017
   
3,753,707
 
2018
   
3,098,675
 
2019
   
2,648,921
 
2020
   
1,686,500
 
Thereafter (through 2026)
   
3,325,297
 
   
$
21,403,770
 

NOTE 7 – LINES OF CREDIT PAYABLE
 
The Company borrows funds under the revolving California Bank & Trust (“CB&T”) line of credit and the revolving Opus Bank (“Opus”) line of credit (collectively, the “Funding Agreements”). As of March 31, 2015 and December 31, 2014, the outstanding balances and total commitments under the Funding Agreements consisted of the following:

   
As of March 31, 2015
 
As of December 31, 2014
 
                   
   
Outstanding
Balance
 
Total
Commitment
 
Outstanding
Balance
 
Total
Commitment
 
                   
CB&T Line of Credit
 
$
13,969,000
 
$
13,969,000
 
$
11,450,000
 
$
17,355,000
 
Opus Bank Line of Credit
   
   
12,626,000
   
   
16,721,000
 
Total
 
$
13,969,000
 
$
26,595,000
 
$
11,450,000
 
$
34,076,000
 
 
The Funding Agreements are generally collateralized by assignments of specific loans or real estate properties owned by the Company.

CB&T Line of Credit

In February 2014, the Company entered into a Credit Agreement and Advance Formula Agreement and related agreements with CB&T as the lender (the “CB&T Credit Facility”). The maximum borrowings available (total commitment) is the lesser of $20,000,000 or the amount determined pursuant to a borrowing base calculation described in the Advance Formula Agreement. On April 21, 2015, the Company signed an amendment and restatement of the CB&T Credit Facility to increase the maximum potential borrowings from $20,000,000 to $30,000,000 and to add First Bank as an additional lender (see Note 14 for a further discussion of this amendment).

Borrowings mature on February 5, 2016.  Such borrowings bear interest payable monthly at the prime rate of interest established by CB&T from time-to-time plus one quarter percent (.25%) per annum (3.5% at March 31, 2015). Upon a default such interest rate increases by 2.00%. The CB&T Credit Facility required the payment of an origination fee of $100,000 and other issuance costs totaling $177,000 that were capitalized to deferred financing costs and are being amortized to interest expense using the straight-line method through the maturity date of the CB&T Credit Facility. The Company is also subject to certain ongoing administrative fees and expenses. Interest expense on the CB&T Credit Facility was approximately $161,000 and $2,000 during the three months ended March 31, 2015 and 2014, respectively (including $23,000 and $0, respectively, in amortization of deferred financing costs).
 
21

 
OWENS REALTY MORTGAGE, INC.

Notes to Consolidated Financial Statements (Unaudited)



Borrowings are secured by certain assets of the Company. These collateral assets will include the grant to CB&T of first-priority deeds of trust on certain real property assets and trust deeds of the Company to be identified by the parties from time-to-time and all personal property of the Company, which collateral includes the assets described in the Security Agreement and in other customary collateral agreements that will be entered into by the parties from time-to-time. As of March 31, 2015, the carrying amount and classification of loans and real estate properties securing the CB&T Credit Facility were as follows:

Loans:
   
March 31,
2015
 
Commercial
 
$
3,983,703
 
Real Estate:
       
Residential
   
6,852,989
 
Storage
   
3,823,911
 
Industrial
   
3,005,470
 
Total
 
$
13,682,370
 

The CB&T Credit Facility agreements contain financial covenants which are customary for a loan of this type. Management is not aware of any breach of these covenants as of March 31, 2015.

On April 1, 2015, the Company used the proceeds from two loans that were paid off on March 31, 2015 to pay down the CB&T line of credit by $12,125,000. This line of credit repayment was required since the loans that paid off were collateral securing the CB&T Credit Facility.

Opus Bank Line of Credit

In April 2014, the Company entered into a Secured Revolving Credit Loan Agreement (the “Opus Credit Agreement”) and related agreements with Opus as the lender (the “Opus Credit Facility”).  The maximum borrowings available (total commitment) under the facility is the lesser of $20,000,000 or the Maximum Allowed Advance amount determined pursuant to a borrowing base calculation described in the Opus Credit Agreement.

Advances under the Opus Credit Facility may be made by Opus until April 1, 2016.  All borrowings under the Opus Credit Facility bear interest payable monthly as follows: (i) commencing October 1, 2014, and on each successive six month anniversary during the term (the “Rate Change Date”), the rate of interest will be reset to the Six Month LIBOR rate of interest (0.40% at March 31, 2015) as reported on such Rate Change Date plus four percent (4.0%) per annum but in no event will the interest rate be lower than 4.5% per annum. The interest rate as of March 31, 2015 was 4.5%. Upon a default under the Opus Credit Facility such interest rate increases by an additional 5.00%. Commencing on May 1, 2016, in addition to the required interest payments, the Company is also required to make mandatory monthly principal payments and all amounts under the Opus Credit Facility are to be repaid not later than April 1, 2017.

The Opus Credit Facility required the payment of an origination fee of $100,000 and other issuance costs totaling $231,000 that were capitalized as deferred financing costs and are being amortized to interest expense using the straight-line method through the maturity date of the Opus Credit Facility. The Company is also subject to certain ongoing administrative fees and expenses. Interest expense on the Opus Credit Facility was approximately $19,000 and $0 during the three months ended March 31, 2015 and 2014, respectively (including $19,000 and $0, respectively, in amortization of deferred financing costs).

Borrowings under the Opus Credit Facility will be secured by certain of the Company's assets. These collateral assets will include the following types of assets to be identified by the parties and described in Borrowing Base Collateral Certificates  to be entered into by the parties from time-to-time: (i) the grant to Opus of first-priority deeds of trust on certain of the Company's real property assets that meet related eligibility requirements set forth in the Opus Credit Agreement (as further defined in the Opus Credit Agreement, the “REO Collateral”); and (ii) the grant to Opus of a collateral interest in mortgage loan promissory notes issued by the Company in the ordinary course of business that meet related eligibility requirements set forth in the Opus Credit Agreement (as further defined in the Opus Credit Agreement, the “Note Collateral”). As of March 31, 2015, the carrying amount and classification of loans and real estate properties securing the Opus Credit Facility were as follows:
 
22

 
OWENS REALTY MORTGAGE, INC.

Notes to Consolidated Financial Statements (Unaudited)



 
Loans:
   
March 31,
2015
 
Commercial
 
$
7,962,810
 
Real Estate:
       
Office
   
9,092,020
 
Industrial
   
1,446,605
 
Total
 
$
10,538,625
 

The Opus Credit Facility contains financial covenants which are customary for loans of this type. Management is not aware of any breach of these covenants as of March 31, 2015.
 
NOTE 8 - NOTES AND LOANS PAYABLE ON REAL ESTATE

The Company had the following notes and loans payable outstanding as of March 31, 2015 and December 31, 2014:
   
March 31,
2015
 
December 31,
2014
 
Interest Rate
 
Payment Terms/Frequency
 
Maturity Date
720 University, LLC Note Payable
 
$
9,771,263
 
$
9,741,463
 
6.00%
 
Interest Only
Monthly
 
May 2015
Tahoe Stateline Venture, LLC Note #1
   
2,900,000
   
2,900,000
 
5.00%
 
Interest Only
Semi-annual
 
December 2016
Tahoe Stateline Venture, LLC Note #3
   
500,000
   
500,000
 
5.00%
 
Interest Only
Quarterly
 
August 2017
TOTB North, LLC Construction Loan Payable
   
1,579,593
   
1,007,919
 
4.50%
 
Amortizing
Monthly
 
June 2017
TOTB Miami, LLC Loan Payable
   
12,900,079
   
12,975,167
 
4.27%
 
Amortizing
Monthly
 
November 2017
Tahoe Stateline Venture, LLC Loan Payable
   
10,401,099
   
10,445,000
 
3.47%
 
Amortizing
Monthly
 
January 2021
   
$
38,052,034
 
$
37,569,549
           

The following table shows maturities by year on these notes and loans payable as of March 31, 2015:
 
Twelve months ending March 31:
       
2016
 
$
10,339,715
 
2017
   
3,492,680
 
2018
   
14,653,696
 
2019
   
298,242
 
2020
   
308,757
 
Thereafter
   
8,958,944
 
   
$
38,052,034
 

 
23

 
OWENS REALTY MORTGAGE, INC.

Notes to Consolidated Financial Statements (Unaudited)



720 University, LLC Note Payable

The Company had a note payable with a bank through its investment in 720 University, LLC (“720 University), which was secured by the retail development located in Greeley, Colorado. In November 2014, 720 University entered into an agreement to sell the property that secures this note payable, and the buyer extended a new loan to 720 University to repay the existing note payable. The refinancing closed in January 2015. The principal amount of the new loan is $9,771,263 and accrues interest at 6.0% per annum until paid off with the closing of the sale of the property to the buyer which is expected to occur on or about May 28, 2015. 720 University incurred interest expense of approximately $142,000 and $125,000 during the three months ended March 31, 2015 and 2014, respectively.
 
Tahoe Stateline Venture, LLC Notes Payable

The Company obtained these obligations as a result of the foreclosure or purchase of nine parcels by TSV in 2013 and 2012. The Company paid approximately $6,000 and $7,000 of interest on the notes during the three months ended March 31, 2015 and 2014, respectively. As of March 31, 2015 and December 31, 2014, there was approximately $55,000 and $19,000, respectively, in accrued but unpaid interest on these notes. The interest incurred has been capitalized to the basis of the land under development.
 
TOTB North, LLC Construction Loan Payable
 
In June 2014, TOTB North, LLC (“TOTB North”) entered into a Construction Loan Agreement (the “Loan Agreement”) and related documents with Bank of the Ozarks (“Ozarks”) as the lender providing TOTB North with a loan (the “North Loan”) of up to $21,304,000 to renovate and improve the vacant and unimproved “North” apartment building held in TOTB North (the “Project”).  The North Loan is secured by a first mortgage lien on the North building and all improvements and certain other assets, and is cross-defaulted and cross-collateralized with the TOTB Miami, LLC Loan Payable described below.

The initial maturity date (the “Maturity Date”) of the North Loan is June 12, 2017, which may be extended at the option of TOTB North for two additional one year periods, subject to certain conditions. The balance of the loan was approximately $1,580,000 and $1,008,000 as of March 31, 2015 and December 31, 2014, respectively.

All outstanding borrowings under the North Loan bear interest equal to the floating daily Three Month LIBOR rate of interest plus four percent (4.0%) per annum (the “Note Rate”), but the Note Rate will not be lower than four and one-half percent (4.5%) per annum. The Note Rate as of March 31, 2015 was 4.5% per annum.  Upon a default under the North Loan documents the Note Rate increases by an additional eight percent (8.00%) per annum. Interest only payments are payable monthly until the “Amortization Commencement Date” which is the earlier to occur of (i) December 12, 2015 or (ii) the first monthly interest payment date occurring after the Project is completed and the North property achieves a DSCR of greater than 1.25:1. Commencing on the Amortization Commencement Date, monthly principal payments are also required with principal amortizing over 300 months and the balance of the North Loan is due on the Maturity Date.

TOTB North made a required deposit with Ozarks of $1.0 million (the “Bridge Equity”) in 2014 using a capital contribution by TOTB (excess funds held and capital contributions of $453,000 from the Company and $108,000 from OFG).  The Bridge Equity was provided to fund project costs pending satisfaction of additional post-closing conditions under the loan documents, and Ozarks reimbursed the Bridge Equity as part of the loan in February 2015. All post-closing conditions were met in February 2015, and TOTB North was given access to the remaining balance of the North Loan once the Company and OFG contributed an additional $1,170,000 and $279,000, respectively, during the quarter ended March 31, 2015 due to increased construction costs for the Project.

During 2014, TOTB North paid customary closing fees, disbursements and expenses, including an origination fee to Ozarks, which totaled $622,000. The majority of these costs were paid out of proceeds from the North Loan and capitalized to deferred financing costs and are being amortized to the Project using the straight-line method through the Maturity Date. During the three months ended March 31, 2015, approximately $52,000 of deferred financing costs was amortized to the Project. During the three months ended March 31, 2015, approximately $14,000 of interest was incurred which was capitalized to the Project.
 
24

 
OWENS REALTY MORTGAGE, INC.

Notes to Consolidated Financial Statements (Unaudited)



The North Loan documents contain financial covenants of TOTB North and the Guarantors which are customary for loans of this type. Management is not aware of any breach of these covenants as of March 31, 2015.
 
TOTB Miami, LLC Loan Payable
 
In November 2014, TOTB Miami, LLC (“TOTB”) entered into another loan agreement (the “TOTB Loan Agreement”) and related documents with Ozarks providing TOTB a loan (the “TOTB Miami Loan”) of $13,000,000 secured by a first mortgage lien on the 154 leased condominium units owned in the Pointe building and the related parcel and all improvements as well as certain other assets. As a condition of providing the TOTB Miami Loan, Ozarks required that the TOTB Miami Loan and the North Loan be cross-collateralized and cross-defaulted, that excess proceeds from any sale of the North property be used to reduce or pay off the TOTB Miami Loan and that excess proceeds from any sale of the TOTB property be used to pay off the North Loan.

The net cash proceeds from the TOTB Miami Loan were distributed to the members of TOTB in 2014. The initial maturity date (the “Maturity Date”) of the TOTB Miami Loan is November 16, 2017, and the Maturity Date may be extended at the option of TOTB for two additional one year periods if a number of conditions are met.

All outstanding borrowings under the TOTB Miami Loan will bear interest equal to the floating daily Three Month LIBOR rate of interest plus four percent (4.0%) per annum (the “Note Rate”), but in no event will the Note Rate be lower than four and one-quarter percent (4.25%) per annum. The Note Rate as of March 31, 2015 was 4.27% per annum.  Upon a default under the TOTB Miami Loan documents, including any cross-default, the Note Rate increases by an additional eight percent (8.00%) per annum. Principal and interest is payable monthly with principal amortizing over 300 months, and the balance of the loan is due on the Maturity Date.

TOTB was obligated to pay customary closing fees, disbursements and expenses, including an origination fee to the Lender, which totaled approximately $323,000. The majority of these costs were paid out of proceeds from the loan and capitalized to deferred financing costs and are being amortized to interest expense using the effective interest method through the Maturity Date. During the three months ended March 31, 2015, approximately $166,000 of interest expense was incurred (including approximately $28,000 of deferred financing costs amortized to interest expense).

The TOTB Miami Loan documents contain financial covenants of TOTB and the Guarantors which are customary for loans of this type. Management is not aware of any breach of these covenants as of March 31, 2015.
 
Tahoe Stateline Venture, LLC Loan Payable
 
In December 2014, Tahoe Stateline Ventures, LLC (“TSV”) entered into a Credit Agreement (the “Credit Agreement”) and related documents with RaboBank, N.A. as the lender (“Lender”) providing TSV with a loan (the “TSV Loan”) of up to $14,500,000. TSV borrowed $10,445,000 at the first closing under the TSV Loan and up to an additional $4,055,000 (the “Undisbursed Portion”) will be made available to TSV in one or more future advances provided that no event of default has occurred under the TSV loan documents and that such additional advances do not result in a pro forma Debt Service Coverage ratio (as defined in the agreements) of less than 1.25:1.00.

The maturity date of the TSV Loan is January 1, 2021 (the “Maturity Date”). All outstanding borrowings under the TSV Loan documents bear interest initially at a rate of 3.47% per annum (the “Long Term Adjustable Rate”), provided that on January 1, 2018 the Long Term Adjustable Rate will be reset to Lender’s then current market rate for three year fixed rate loans from comparable commercial real estate secured transactions, as determined by Lender in its sole discretion. Upon a default under the TSV Loan documents, the interest rate on the outstanding principal balance increases by an additional five percent (5.00%) per annum and the rate on any other outstanding obligations thereunder increases to ten percent (10.00%) per annum. Prepayments under the TSV Loan documents are subject to certain prepayment fees; provided that during the 90 day period immediately prior to January 1, 2018, and the 90 day period immediately prior to the Maturity Date, TSV may prepay the entire unpaid balance of the Loan in full, without any Prepayment Fee or penalty.
 
25

 
OWENS REALTY MORTGAGE, INC.

Notes to Consolidated Financial Statements (Unaudited)



During the term of the TSV Loan, TSV will make equal combined payments of principal and accrued interest on the first day of each month in an amount calculated to fully amortize the original principal amount over a period of 300 months, subject to certain adjustments and the balance of the TSV Loan is due on the Maturity Date.

The Credit Agreement required the payment of a closing fee of $108,750 and certain administrative fees totaling approximately $218,000. The majority of these costs were paid out of proceeds from the loan and capitalized to deferred financing costs and are being amortized to interest expense using the effective interest method through the Maturity Date. During the three months ended March 31, 2015, approximately $99,000 of interest expense was incurred (including approximately $9,000 of deferred financing costs amortized to interest expense).

The TSV Loan documents contain financial covenants which are customary for loans of this type. Management is not aware of any breach of these covenants as of March 31, 2015.

NOTE 9 - TRANSACTIONS WITH AFFILIATES

In consideration of the management services rendered to the Company, OFG is entitled to receive from the Company a management fee payable monthly, subject to a maximum of 2.75% per annum of the average unpaid balance of the Company’s mortgage loans.

All of the Company’s loans are serviced by OFG, in consideration for which OFG receives a monthly fee, which, when added to all other fees paid in connection with the servicing of a particular loan, does not exceed the lesser of the customary, competitive fee paid in the community where the loan is placed for the provision of such mortgage services on that type of loan, or up to 0.25% per annum of the unpaid principal balance of the loans.

OFG, at its sole discretion may, on a monthly basis, adjust the management and servicing fees as long as they do not exceed the allowable limits calculated on an annual basis. Even though the fees for a month may exceed 1/12 of the maximum limits, at the end of the calendar year the sum of the fees collected for each of the 12 months must be equal to or less than the stated limits. Management fees amounted to approximately $456,000 and $420,000 for the three months ended March 31, 2015 and 2014, respectively and are included in the accompanying consolidated statements of operations. Servicing fees amounted to approximately $41,000 and $38,000 for the three months ended March 31, 2015 and 2014, respectively, and are included in the accompanying consolidated statements of operations. As of March 31, 2015 and December 31, 2014, the Company owed management and servicing fees to OFG in the amount of approximately $142,000 and $171,000, respectively.
 
The maximum management and servicing fees were paid to OFG during the three months ended March 31, 2015 and 2014.
 
In determining the management fees to pay to OFG, OFG may consider a number of factors, including current market yields, delinquency experience, un-invested cash and real estate activities. OFG expects that the management fees it receives from the Company will vary in amount and percentage from period to period. However, due to reduced levels of mortgage investments held by the Company, during the three months ended March 31, 2015 and the year ended December 31, 2014, OFG elected to take the maximum compensation that it is able to take pursuant to the Management Agreement and will likely continue to take the maximum compensation for the foreseeable future.

Pursuant to the charter, OFG receives all late payment charges from borrowers on loans owned by the Company. The amounts paid to or collected by OFG for such charges totaled approximately $17,000 and $1,000 for the three months ended March 31, 2015 and 2014, respectively. In addition, the Company remits other miscellaneous fees to OFG, which are collected from loan payments, loan payoffs or advances from loan principal (i.e. funding, demand and partial release fees). The amounts paid to or collected by OFG for such fees totaled approximately $2,000 and $1,000 during the three months ended March 31, 2015 and 2014, respectively.
 
26

 
OWENS REALTY MORTGAGE, INC.

Notes to Consolidated Financial Statements (Unaudited)



OFG originates all loans the Company invests in and receives loan origination and extension fees from borrowers. During the three months ended March 31, 2015 and 2014, OFG earned approximately $244,000 and $209,000, respectively, in loan fees on loans originated of $10,438,000 and $9,049,000, respectively.

OFG is reimbursed by the Company for the actual cost of goods, services and materials used for or by the Company and paid by OFG and the salary and related salary expense of OFG’s non-management and non-supervisory personnel performing services for the Company which could be performed by independent parties (subject to certain limitations in the Management Agreement). The amounts reimbursed to OFG by the Company were $131,000 and $157,000 during the three months ended March 31, 2015 and 2014, respectively, and approximately $47,000 and $113,000 were payable to OFG at March 31, 2015 and December 31, 2014, respectively. The Company also reimbursed certain of OFG’s officers for allowed expenses in the total amount of $1,000 and $1,000 during the three months ended March 31, 2015 and 2014, respectively.

The Company paid Investor’s Yield, Inc. (a wholly owned subsidiary of OFG) approximately $7,000 and $30,000 in fees primarily related to certain foreclosure proceedings on Company loans during the three months ended March 31, 2015 and 2014, respectively.
 
During the three months ended March 31, 2015, the Company purchased OFG’s full interest in a loan secured by an industrial property located in San Ramon, California with a principal balance of $1,499,000 at face value.
 
NOTE 10 – STOCKHOLDERS’ EQUITY
 
On August 9, 2013, the Board of Directors authorized a Rule 10b5-1 stock repurchase plan (the “Repurchase Plan”) which permitted the Company to purchase up to the lesser of $7 million of its common stock or five percent of the shares of common stock outstanding as of that date. During the three months ended March 31, 2014, the Company repurchased 26,208 shares of its common stock for a total cost of approximately $325,000 (including commissions) and an average cost of $12.42 per share. The Repurchase Plan expired on May 19, 2014, and as of that date, the Company had repurchased 430,118 shares of its common stock, for a total cost of approximately $5,349,000 (including commissions) and an average cost of $12.44 per share. No further repurchases have been made by the Company.

NOTE 11 – RESTRICTED CASH
 
Contingency Reserves
 
In accordance with the charter, the Company is required to maintain cash, cash equivalents and marketable securities as contingency reserves in an aggregate amount of 1-1/2% of Capital as defined in the charter. Although the Manager believes the contingency reserves are adequate, it could become necessary for the Company to sell or otherwise liquidate certain of its investments or other assets to cover such contingencies on terms which might not be favorable to the Company, which could lead to unanticipated losses upon sale of such assets.
 
The contingency reserves required per the charter as of March 31, 2015 and December 31, 2014 were approximately $3,892,000 and $3,876,000, respectively, and are reported as restricted cash in the accompanying consolidated balance sheets. The $7,000,000 required to be held in non-interest bearing accounts as of March 31, 2015 pursuant to the Company’s two lines of credit agreements satisfy this contingency reserve requirement (see Note 7).
 
Escrow Deposits
 
Restricted cash includes deposits held in third party escrow accounts to pay property taxes and insurance on Company real estate in the amounts of approximately $195,000 and $249,000 as of March 31, 2015 and December 31, 2014, respectively.
 
27

 
OWENS REALTY MORTGAGE, INC.

Notes to Consolidated Financial Statements (Unaudited)


Construction Loan Equity Deposit

Restricted cash includes an equity deposit held by Ozarks to fund additional Project costs incurred prior to allowing further advances on the construction loan in the amount of approximately $1,529,000 as of March 31, 2015 (see Note 8).

NOTE 12 – FAIR VALUE
 
The Company accounts for its financial and nonfinancial assets and liabilities pursuant to ASC 820 – Fair Value Measurements and Disclosures.  ASC 820 defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements.
 
Fair value is defined in ASC 820 as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC 820 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:
 
Level 1       Quoted prices in active markets for identical assets or liabilities
 
Level 2       Observable inputs other than Level 1 prices, such as quoted prices for similar assets or
liabilities; quoted prices in active markets that are not active; or other inputs that are
observable or can be corroborated by observable market data for substantially the full
term of the assets or liabilities

Level 3       Unobservable inputs that are supported by little or no market activity, such as the
Company’s own data or assumptions.

Level 3 inputs include unobservable inputs that are used when there is little, if any, market activity for the asset or liability measured at fair value. In certain cases, the inputs used to measure fair value fall into different levels of the fair value hierarchy. In such cases, the level in which the fair value measurement in its entirety falls is determined based on the lowest level input that is significant to the fair value measurement. Management’s assessment of the significance of a particular input requires judgment and considers factors specific to the asset or liability being measured.

Management monitors the availability of observable market data to assess the appropriate classification of financial instruments within the fair value hierarchy. Changes in economic conditions or model-based valuation techniques may require the transfer of financial instruments from one fair value level to another.  In such instances, the transfer is reported at the beginning of the reporting period.

Management evaluates the significance of transfers between levels based upon the nature of the financial instrument and size of the transfer relative to total assets, total liabilities or total earnings.

The following is a description of the Company’s valuation methodologies used to measure and disclose the fair values of its financial and nonfinancial assets and liabilities on a nonrecurring basis. There were no assets or liabilities measured at fair value on a recurring basis.
 
Impaired Loans
 
The Company does not record loans at fair value on a recurring basis. However, from time to time, a loan is considered impaired and a specific allowance for loan losses is established.  A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement or when monthly payments are delinquent greater than ninety days. Once a loan is identified as impaired, management measures impairment in accordance with ASC 310-10-35.  The fair value of impaired loans is estimated by either an observable market price (if available) or the fair value of the underlying collateral, if collateral dependent.  The fair value of the loan’s collateral is determined by third party appraisals (by licensed appraisers), broker price opinions, comparable properties or other indications of value. Those impaired loans not requiring an allowance represent loans for which the fair value of the collateral exceed the recorded investments in such loans. At March 31, 2015 and December 31, 2014, the majority of the total impaired loans were evaluated based on the fair value of the collateral by obtaining third party appraisals that valued the collateral primarily by utilizing an income or market approach or some combination of the two.  In accordance with ASC 820, impaired loans where an allowance is established based on the fair value of collateral require classification in the fair value hierarchy.  Because appraisals used by management generally include significant unobservable inputs and market data, the Company records the impaired loan as nonrecurring Level 3. Unobservable market data included in appraisals often includes adjustments to comparable property sales for such items as location, size and quality to estimate fair values using a sales comparison approach.  Unobservable market data also includes cash flow assumptions and capitalization rates used to estimate fair values under an income approach.
 
28

 
OWENS REALTY MORTGAGE, INC.

Notes to Consolidated Financial Statements (Unaudited)



Real Estate Held for Sale and Investment
 
Real estate held for sale and investment includes properties acquired through foreclosure of the related loans. When property is acquired, any excess of the Company’s recorded investment in the loan and accrued interest income over the estimated fair market value of the property, net of estimated selling costs, is charged against the allowance for loan losses. Subsequently, real estate held for sale properties are carried at the lower of carrying value or fair value less costs to sell. The Company periodically compares the carrying value of real estate held for investment to expected future cash flows as determined by internally or third party generated valuations (including third party appraisals that primarily utilize an income or market approach or some combination of the two) for the purpose of assessing the recoverability of the recorded amounts. If the carrying value exceeds future undiscounted cash flows, the assets are reduced to fair value. The fair value of real estate held for sale and investment is estimated using appraisals in a manner similar to that of collateral dependent impaired loans described above which generally results in a Level 2 or Level 3 classification in the fair value hierarchy.

 
29

 
OWENS REALTY MORTGAGE, INC.

Notes to Consolidated Financial Statements (Unaudited)


The following table presents information about the Company’s assets and liabilities measured at fair value on a nonrecurring basis as of March 31, 2015 and December 31, 2014:
 
   
Fair Value Measurements Using
   
Fair Value
 
Quoted Prices In Active Markets for Identical Assets
(Level 1)
 
Significant Other Observable Inputs
(Level 2)
 
Significant Unobservable Inputs
(Level 3)
March 31, 2015
               
Nonrecurring:
               
Impaired loans:
         
 
 
 
  Commercial
$
       526,938
$
$
$
       526,938
  Residential
 
6,144,000
 
 
 
6,144,000
 
 Total
 
$
    6,670,938
$
$
 
$
 
     6,670,938
                 
Real estate properties:
     
 
 
 
 
 
  Land
$
4,704,000
$
$
$
    4,704,000
 
Total
 
$
 
   4,704,000
$
$
 
 
$
 
4,704,000
                 
December 31, 2014
               
Nonrecurring:
               
Impaired loans:
               
  Commercial
$
529,689
$
$
$
            529,689
  Residential
 
6,144,000
 
 
 
6,144,000
 
Total
 
$
 
6,673,689
$
 
$
 
$
 
   6,673,689
                 
Real estate properties:
               
  Commercial
$
1,292,500
$
$
$
1,292,500
  Land
 
2,334,773
 
 
 
         2,334,773
 
Total
 
$
 
    3,627,273
$
$
 
      —
$
 
3,627,273

The provision for loan losses based on the fair value of loan collateral less estimated selling costs for the impaired loans above totaled approximately $3,000 and $73,000 during the three months ended March 31, 2015 and 2014, respectively. Impairment losses of approximately $1,109,000 and $8,000 were recorded on real estate properties during the three months ended March 31, 2015 and 2014, respectively.
 
There were no liabilities measured at fair value on a non-recurring basis at March 31, 2015 and December 31, 2014.
 
 
30

 
OWENS REALTY MORTGAGE, INC.

Notes to Consolidated Financial Statements (Unaudited)


 
The following table presents quantitative information about Level 3 fair value measurements for financial instruments measured at fair value on a non-recurring basis at March 31, 2015 and December 31, 2014:

At March 31, 2015:

Description
 
Fair Value
 
Valuation Technique
 
Significant Unobservable Inputs
 
Input/Range
 
Weighted Average
                     
Impaired Loans:
                   
Commercial
$
    526,938
 
Appraisal
 
Estimated Cost of Improvements
 
13.6%
 
N/A
           
Capitalization Rate
 
6.5%
 
N/A
           
Comparable Sales Adjustment
 
(59)% to (2.3)%
 
N/A
Residential
$
 6,144,000
 
Appraisal
 
Estimated Cost of Improvements
 
1.8%
 
N/A
           
Discount Rate
 
12%
 
N/A
           
Comparable Sales Adjustment
 
(10)% to 20%
 
N/A
Real Estate Properties:
                 
Land
$
4,704,000
 
Appraisal
 
Comparable Sales Adjustment
 
(19)%
 
N/A

At December 31, 2014:
Description
 
Fair Value
 
Valuation Technique
 
Significant Unobservable Inputs
 
Input/Range
 
Weighted Average
                     
Impaired Loans:
                   
Commercial
$
    529,689
 
Appraisal
 
Estimate Cost of Improvements
 
13.6%
 
N/A
           
Capitalization Rate
 
6.5%
 
N/A
           
Comparable Sales Adjustment
 
(59)% to (2.3)%
 
N/A
Residential
$
 6,144,000
 
Appraisal
 
Estimate Cost of Improvements
 
1.8%
 
N/A
           
Discount Rate
 
12%
 
N/A
           
Comparable Sales Adjustment
 
(10)% to 20%
 
N/A
Real Estate Properties:
                 
Commercial
$
  1,292,500
 
Appraisal
 
Comparable Purchase Offers
 
(42)% to 13.4%
 
N/A
Land
$
  2,334,773
 
Appraisal
 
Comparable Sales Adjustment
 
5% to 62.8%
 
N/A
           
Discount Rate
 
8%
 
N/A

Where only one percentage is presented in the above table there was only one unobservable input of that type for one loan or property. Adjustments to comparable sales included items such as market conditions, location, size, condition, access/frontage and intended use. A weighted average of an unobservable input is presented in the table above only to the extent there was multiple impaired loans or real estate properties measured at fair value on a nonrecurring basis.
 
31

 
OWENS REALTY MORTGAGE, INC.

Notes to Consolidated Financial Statements (Unaudited)


The approximate carrying amounts and estimated fair values of financial instruments at March 31, 2015 and December 31, 2014 are as follows:
         
Fair Value Measurements at March 31, 2015
     
Carrying Value
 
Level 1
 
Level 2
 
Level 3
 
Total
Financial assets
                   
 
Cash and cash equivalents
$
13,904,000
$
13,904,000
$
$
$
13,904,000
 
Restricted cash
 
8,724,000
 
8,724,000
 
 
 
8,724,000
 
Loans, net
 
53,978,000
 
 
 
53,942,000
 
53,942,000
 
Investment in limited liability company
 
2,186,000
 
 
 
2,352,000
 
2,352,000
 
Interest and other receivables
 
759,000
 
 
 
759,000
 
759,000
                       
Financial liabilities
                   
 
Due to Manager
$
189,000
$
$
189,000
$
$
189,000
 
Accrued interest payable
 
238,000
 
 
133,000
 
105,000
 
238,000
 
Line of credit payable
 
13,969,000
 
 
13,969,000
 
 
13,969,000
 
Notes payable
 
38,052,000
 
 
24,881,000
 
13,171,000
 
38,052,000

 
         
Fair Value Measurements at December 31, 2014
     
Carrying Value
 
Level 1
 
Level 2
 
Level 3
 
Total
Financial assets
                   
 
Cash and cash equivalents
$
1,414,000
$
1,414,000
$
$
$
1,414,000
 
Restricted cash
 
6,249,000
 
6,249,000
 
 
 
6,249,000
 
Loans, net
 
65,164,000
 
 
 
66,009,000
 
66,009,000
 
Investment in limited liability company
 
2,143,000
 
 
 
2,352,000
 
2,352,000
 
Interest and other receivables
 
838,000
 
 
 
838,000
 
838,000
                       
Financial liabilities
                   
 
Due to Manager
$
284,000
$
$
284,000
$
$
284,000
 
Accrued interest payable
 
175,000
 
 
113,000
 
62,000
 
175,000
 
Lines of credit payable
 
11,450,000
     
11,450,000
 
 
11,450,000
 
Notes payable
 
37,570,000
 
 
24,428,000
 
13,155,000
 
37,583,000

The following methods and assumptions were used by the Company in estimating the fair value of each class of financial instruments:

Cash, cash equivalents and restricted cash: The carrying value of cash and cash equivalents and restricted cash approximates the fair value because of the liquidity and/or relatively short maturity of these instruments and are classified as Level 1.

Loans, net: The fair value of loans that are not impaired are estimated using discounted cash flow methodology, using discount rates, which, in the opinion of management, best reflect current market interest rates that would be offered for loans with similar characteristics and credit quality but are often unobservable resulting in a Level 3 classification. The fair values of loans that are impaired are estimated by the Company primarily through the use of third party appraisals of the underlying collateral. Such appraisals often include unobservable market data including adjustments to comparable property sales for such items as location, size and quality to estimate fair values using a sales comparison approach and include cash flow assumptions and capitalization rates used to estimate fair values under an income approach resulting in a Level 3 classification.
 
32

 
OWENS REALTY MORTGAGE, INC.

Notes to Consolidated Financial Statements (Unaudited)



Investment in limited liability company: The fair value of the Company’s investment in limited liability company is estimated based on an appraisal obtained which used unobservable inputs and is classified as Level 3.

Lines of credit payable: The fair value of the Company’s lines of credit payable is estimated based upon comparable market indicators of current pricing for the same or similar issue or on the current rate offered to the Company for debt of the same remaining maturity which are generally observable resulting in a Level 2 classification.

Notes payable: The fair values of the Company’s notes payable and related accrued interest payable are estimated based upon comparable market indicators of current pricing for the same or similar issues or on the current rates offered to the Company for debt of the same remaining maturities resulting in either a Level 2 or Level 3 classification. Generally, Level 2 inputs are used for variable rate notes payable and Level 3 inputs are used for fixed rate notes payable.

Other: The carrying values of interest and other receivables and due to Manager are estimated to approximate fair values due to the short term nature of these instruments and are classified as Level 2 (except for accrued interest and advances related to loans which are classified as Level 3).

NOTE 13 - COMMITMENTS AND CONTINGENCIES

Environmental Remediation Obligations

The Company has an obligation to pay all required costs to remediate and monitor contamination of the real properties owned by 1850. As part of the Operating Agreement executed by the Company and its joint venture partner in 1850, Nanook, the Company has indemnified Nanook against all obligations related to the expected costs to monitor and remediate the contamination. In 2008, the Company had accrued an amount that a third party consultant had estimated will need to be paid to monitor and remediate the site. The majority of clean-up activities were completed during 2012 as part of the tenant’s construction of a new building on the site. Thus, approximately $460,000 was paid by the Company from the previously established liability, and an additional $100,000 was accrued during the year ended December 31, 2012 as a result of an updated estimate of future costs to be incurred. If additional amounts are required, it will be an obligation of the Company. As of March 31, 2015 and December 31, 2014, approximately $57,000 and $60,000 of this obligation remains accrued on the Company’s books. All costs for this remediation will be paid from cash reserves.

During the course of due diligence performed by a potential buyer of TOTB during 2012, a low level of arsenic was found in the ground water of a monitoring well located on the property owned by TOTB. While the level of arsenic exceeds the minimum level acceptable for drinking water standards, the water under this property is subject to tidal influence and is not used for domestic consumption.  TOTB has retained an environmental consultant to perform additional testing and analysis with the goal of petitioning the appropriate governmental agency to issue a no further action letter for this property due to the low level of contamination and the low quality of the ground water under the property.  At this time, the costs of any potential remediation and/or monitoring are unknown and cannot be estimated. As of March 31, 2015 and December 31, 2014, approximately $95,000 and $79,000 had been accrued and/or paid for testing and analysis.

 
33

 
OWENS REALTY MORTGAGE, INC.

Notes to Consolidated Financial Statements (Unaudited)


Contractual Obligations

The Company has entered into various contracts for design, architectural and engineering for the potential phase II development of the land owned by TSV. The aggregate amount of these contracts as of the date of this filing is approximately $1,585,000 of which approximately $504,000 has been incurred as of March 31, 2015. Management expects that all costs for this project will be paid from cash reserves and/or construction financing to be obtained in the future.

The Company has also entered into contracts for the construction, demolition and concrete remediation, design, architectural and engineering services related to the renovation of the vacant apartment building owned by TOTB North (see Note 8) in the aggregate amount of approximately $20,928,000 of which approximately $4,387,000 has been incurred to March 31, 2015 in addition to other capitalized costs related to the construction project of $1,187,000 (total of $5,574,000). Management expects that all costs for this project will be paid from cash reserves or the recently obtained construction loan. It is possible that additional change orders will be submitted and construction costs may be higher than expected.

The Company has entered into contracts for new bathrooms and modular offices and improvements to the bridge that accesses the marina held within Brannan Island, LLC in the aggregate amount of approximately $785,000 of which approximately $451,000 has been incurred to March 31, 2015. Management expects that all costs from the project will be paid from cash reserves or advances from the lines of credit.  It is possible that additional change orders will be submitted and construction costs may be higher than expected.

As of March 31, 2015, the Company has commitments to advance additional funds to borrowers of construction, rehabilitation and other loans in the total amount of approximately $7,521,000 (including approximately $1,595,000 in interest reserves).
 
Legal Proceedings

The Company is involved in various legal actions arising in the normal course of business.  In the opinion of management, such matters will not have a material effect upon the financial position of the Company.

NOTE 14 – SUBSEQUENT EVENT

On April 21, 2015, the Company signed an amendment and restatement of the CB&T Credit Facility to increase the maximum potential borrowings from $20,000,000 to $30,000,000 and to add First Bank as an additional Lender.

The Amended and Restated Credit Agreement is dated as of April 16, 2015, and is among the Company, as Borrower, CB&T as administrative agent, swingline lender and lender, and First Bank as an additional lender.   The parties also entered into a related Amended and Restated Advance Formula Agreement, two Master Revolving Notes from the Company (one to CB&T in an amount up to $20,000,000 and the other to First Bank in an amount up to $10,000,000), a restated Security Agreement, and an Addendum to Credit Agreement (Agency Provisions). These agreements collectively amend and restate the prior agreements with CB&T dated February 5, 2014.

The maximum borrowing under the revolving CB&T Credit Facility is the lesser of $30,000,000 or the amount determined pursuant to a borrowing base calculation described in the Advance Formula Agreement. At any time that the aggregate principal amount of the total borrowings under the CB&T Credit Facility exceeds the maximum permitted pursuant to the borrowing base calculation, the Company must promptly repay an amount equal to such excess. 

Funds under the CB&T Credit Facility may be borrowed, repaid and redrawn, and all borrowings mature on February 5, 2016.  Such borrowings will bear interest payable monthly, in arrears, on the first business day of each month, at the prime rate of interest established by CB&T from time-to-time (currently 3.25%) plus one quarter percent (.25%) per annum. Upon a default under the CB&T Credit Facility such interest rate increases by 2.00%.
 
34

 
OWENS REALTY MORTGAGE, INC.

Notes to Consolidated Financial Statements (Unaudited)


Borrowings under the CB&T Credit Facility are to be secured by certain assets of the Company. These collateral assets will include the grant to Lenders of first-priority deeds of trust on certain real property assets and trust deeds of the Company to be identified by the parties from time-to-time and all personal property of the Company, which collateral includes the assets described in the Security Agreement and in other customary collateral agreements that will be entered into by the parties from time-to-time.

The borrowing base calculation outlined in the Advance Formula Agreement equals the sum of: (a) the lesser of (i) 75% of the outstanding principal balance of those mortgage loan promissory notes issued by the Company in the ordinary course of business that qualify as “Eligible Loan Notes” according to criteria outlined in the Advance Formula Agreement and (ii) 50% of the then-current Appraised Value of the real property securing such Eligible Loan Notes; plus (b) 50% of the then-current Appraised Value of the real property owned by the Company that qualifies as “Eligible Owned Real Property” according to criteria outlined in the Advance Formula Agreement.

The CB&T Credit Facility contains affirmative, negative, and financial covenants which management believes are customary for loans of this type. The amended CB&T Credit Facility is also subject to the payment of an additional fee of $25,000 per year, prorated from the effective date of the Note to Maturity, and certain administrative fees.

The Credit Agreement contains certain events of default (subject to specified thresholds and, in certain cases, cure periods), which management believes are customary for loans of this type. If an event of default occurs and is continuing under the Credit Agreement, the lenders may, among other things, terminate their obligations to lend under the CB&T Credit Facility and require the Company to repay all amounts owed thereunder.




 
35

 

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

Forward Looking Statements

The following discussion provides information to assist you in understanding our financial condition and results of operations.  This discussion and analysis contains forward-looking statements. These forward-looking statements include information about possible or assumed future results of our business, financial condition, liquidity, results of operations, plans and objectives. When we use the words “may,” “believe,” “expect,” “anticipate,” “estimate,” “plan,” “continue,” “intend,” “should,” “project” or similar expressions, it intends to identify forward-looking statements. These forward-looking statements are subject to risks and uncertainties, as more particularly set forth in our filings with the Securities and Exchange Commission, including those described in the “Forward Looking Statements” and “Risk Factors” sections of our Annual Report on Form 10-K for the year ended December 31, 2014, that could cause actual results to differ materially from those projected in the forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management’s analysis only as of the date hereof. New risks and uncertainties arise over time and it is not possible to predict those events or how they may affect us. Except as required by law, we are not obligated to, and do not intend to, update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

Overview and Background

We are a specialty finance company that focuses on the origination, investment and management of commercial real estate mortgage loans.  We provide customized, short-term capital to small and middle-market investors and developers who require speed and flexibility. We are organized and conduct our operations to qualify as a real estate investment trust, or REIT, for U.S. federal income tax purposes. We are externally managed and advised by Owens Financial Group, Inc. (“OFG” or the “Manager”), a specialized commercial real estate management company that has originated, serviced and managed alternative commercial real estate investments since 1951.

The Company is a Maryland corporation formed to reorganize the business of its predecessor, OMIF, into a publicly traded REIT. OMIF was a California Limited Partnership registered with the Securities and Exchange Commission that was formed in 1983 for the purposes of funding and servicing short-term commercial real estate loans. Beginning in 2009, OMIF experienced liquidity issues as its borrowers were unable to access credit sources to pay off its loans.  OMIF eventually foreclosed on a substantial portion of its loan portfolio, repositioning many of the properties for investment or eventual sale.  OMIF also experienced a significant increase in capital withdrawal requests that it was unable to honor due to insufficient cash, net of reserves, and restrictions under the terms of its bank line of credit. In addition, OMIF was restricted by provisions within the partnership agreement from making additional investments in mortgage loans while qualified redemption requests remained pending and unpaid. In addition to increasing investor liquidity through public listing of its stock, the Company was created to provide the opportunity for resuming mortgage lending activities, with the goal of increasing income to stockholders.

On May 20, 2013, OMIF merged with and into the Company with the Company as the surviving entity, succeeding to and continuing the operations of OMIF. The Company now, by virtue of the Merger, directly or indirectly owns all of the assets and business formerly owned by OMIF. The Company is a deemed successor issuer to OMIF pursuant to Rule 12g-3(a) under the Exchange Act, and on July 1, 2013, the Company’s Common Stock was listed on the NYSE MKT exchange.  For accounting purposes, the merger was treated as a transfer of assets and exchange of shares between entities under common control. The accounting basis used to initially record the assets and liabilities in the Company was the carryover basis of OMIF.

Our primary sources of revenue are interest income earned on our loan portfolio and revenues we generate from our operating real estate assets. We have resumed originating loans and believe the Company is well positioned to capitalize on lending opportunities as the economy continues to recover. However, there can be no assurances that we will be able to identify and make loans to suitable commercial real estate borrowers or have adequate liquidity and capital to fund such loans.

Our operating results are affected primarily by:

·  
the level of foreclosures and related loan and real estate losses experienced;
 
 
36

 
 
·  
the income or losses from foreclosed properties prior to the time of disposal;
·  
the amount of cash available to invest in loans;
·  
the amount of borrowing to finance loan investments and our cost of funds on such borrowing;
·  
the level of real estate lending activity in the markets serviced;
·  
the ability to identify and lend to suitable borrowers;
·  
the interest rates we are able to charge on loans; and
·  
the level of delinquencies on loans.

Between 2008 and 2013, we experienced increased delinquent loans and foreclosures which created substantial losses. As a result, we now own significantly more real estate than in the past, which has reduced cash flow and net income. As of March 31, 2015, approximately 16% of our loans are impaired and/or past maturity. As of March 31, 2015, we own approximately $165 million of real estate held for sale or investment, which is approximately 67% of total assets. During the three month period ended March 31, 2015, we sold one property for net sales proceeds of $1,109,000 and gain of $53,000. We also recognized an additional $152,000 in deferred gain under the installment method due to final repayment received on a carryback loan from the sale of a real estate property in late 2012.  We will continue to attempt to sell certain of our properties but may need to sell them for losses or wait until market values recover. In addition, under the REIT tax rules, we may be subject to a “prohibited transaction” penalty tax on tax gains from the sale of our properties in certain circumstances. In order to fit within a REIT “safe harbor” and avoid prohibited transaction tax, we expect to wait to sell any property that would result in tax gain until we have held such property for at least two years after the conversion (May 2015). In addition, we are also limited in the number and dollar amount of properties we can sell in a given year under the REIT tax rules.

Although management believes that only two of our delinquent loans will result in loss to the Company (and has caused the Company to record specific allowances for loan losses on such loans), real estate values could decrease further. Management continues to perform frequent evaluations of such collateral values using internal and external sources, including the use of updated independent appraisals.  As a result of these evaluations, the allowance for loan losses and our investments in real estate could change in the near term, and such changes could be material.

Our website can be found at www.owensmortgage.com. We make available through the website, access to our annual and quarterly financial statements, current reports on Form 8-K, and amendments to those reports, as well as proxy statements and other periodic reports and filings submitted to the SEC. We also provide access to certain Company presentations, fact sheets, press releases and corporate governance information.

Business Strategy

Our primary business objective is to provide our stockholders with attractive risk-adjusted returns by producing consistent and predictable dividends while maintaining a strong balance sheet. We believe we have positioned the Company for future growth and seek to increase funds from operations, or FFO, and distributions to stockholders through active portfolio management and execution of our business plan which is outlined below:

·     
Capitalize on market lending opportunity by leveraging our existing origination network to expand our commercial real estate loan portfolio.
·     
Enhance and reposition our commercial real estate assets through the investment of capital and strategic management.
·     
Increase liquidity available for lending activities by focusing on opportunities to remove real estate assets from our balance sheet.
·     
Manage leverage to marginally expand sources of liquidity while maintaining a conservative balance sheet.

Current Market Conditions, Risks and Recent Trends

During 2013 and 2014, the global capital and credit markets continued to slowly recover from the economic downturn which began in 2007. Real estate markets also continued to recover, slowly on a national basis and more significantly in major metropolitan areas, and we expect this trend to continue through 2015. Accordingly, as our real estate assets are carried at the lower of carrying value or fair value less costs to sell, it is possible that we have substantial imbedded gains in certain of our real estate properties held for sale and investment that are not reflected in our financial statements or in the value of our stock. However, despite these improvements, the overall market recovery remains uncertain. Should the economy regress, the commercial real estate sector may experience additional losses and operating challenges.

 
37

 
Critical Accounting Policies

Please refer to the section of ORM’s Annual Report on Form 10-K for the year ended December 31, 2014 entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations —Critical Accounting Policies” for a discussion of our critical accounting policies. During the three months ended March 31, 2015, there were no material changes to these policies.

In preparing the consolidated financial statements, management is required to make estimates based on the information available that affect the reported amounts of assets and liabilities as of the balance sheet dates and revenues and expenses for the reporting periods. Such estimates relate principally to the determination of (1) the allowance for loan losses including the accrued interest and advances that are estimated to be unrecoverable based on estimates of amounts to be collected plus estimates of the value of the property as collateral; (2) the valuation of real estate held for sale and investment (at acquisition and subsequently); and (3) the estimate of environmental remediation liabilities. While we believe that these accounting policies and estimates are based on sound measurement criteria, actual future events can and often do result in outcomes that can be materially different from these estimates and forecasts.

Results of Operations

Net income attributable to our common stockholders increased approximately $391,000 during the three months ended March 31, 2015, as compared to the same period in 2014. This increase was primarily a result of the following:

·     
An increase in interest income on loans of $1,687,000 due to the accretion of the remaining $512,000 discount on an impaired loan that was repaid prior to maturity during the quarter, an increase in past due and deferred interest collected on impaired loans and an increase in the average balance of performing loans between the quarter ended March 31, 2014 and the quarter ended March 31, 2015 of approximately 63%.

·     
An increase in net operating income from real estate properties of $578,000 due primarily to net operating income on the recently completed retail complex owned by TSV and increased rental rates and/or occupancy on certain real estate properties during the quarter.

These items that increased net income were partially offset by the following:

·     
An increase in interest expense of $460,000 due to interest incurred on our lines of credit, our loans payable within TOTB and TSV and the amortization of deferred financing costs to interest expense from these debt instruments during the quarter. All of these debt facilities (other than the CB&T Credit Facility) were obtained and began to incur interest expense subsequent to the first quarter of 2014.
 
·     
An increase in impairment losses on real estate properties of $1,102,000 due to an impairment loss of $1,109,000 recorded on the unimproved residential and commercial land located in Gypsum, Colorado during the quarter due to a decrease in the listing price and a reduction in the fair market value estimated by management.
 

 
38

 
 
Summary of Financial Results
   
Three Months Ended March 31,
 
   
2015
 
2014
 
               
Total revenues
 
$
6,409,831
 
$
3,868,473
 
Total expenses
   
5,453,674
   
3,597,568
 
Operating income
   
956,157
   
270,905
 
Gain on sale of real estate, net
   
205,441
   
277,184
 
Gain on foreclosure of loan
   
   
257,020
 
Net income
   
1,161,598
   
805,109
 
Less: Net income attributable to non-controlling interests
   
(9,878
)
 
(44,546
)
Net income attributable to common stockholders
 
$
1,151,720
 
$
760,563
 
Net income per common share (basic and diluted)
 
$
0.11
 
$
0.07
 
Weighted average number of common shares outstanding
   
10,768,001
   
10,769,498
 
Dividends declared per share of common stock
 
$
0.07
 
$
0.05
 
               

Three Months Ended March 31, 2015 Compared to Three Months Ended March 31, 2014

Total Revenues

Interest income on loans increased $1,687,000 (148.4% increase) during the three months ended March 31, 2015, as compared to the same period in 2014. This increase was primarily due to the accretion of the remaining $512,000 discount on an impaired loan as the loan was repaid prior to maturity during the quarter, an increase in past due and deferred interest collected on impaired loans and an increase in the average balance of performing loans between the quarter ended March 31, 2014 and the quarter ended March 31, 2015 of approximately 63%.

Rental and other income from real estate properties increased $853,000 (31.7% increase) during the three months ended March 31, 2015, as compared to the same period in 2014, primarily due to increased rental rates and/or occupancy on certain of our properties during 2014 and 2015 and increased income from the Tahoe Stateline Venture retail property that was completed and partially occupied during the fourth quarter of 2014.

Total Expenses

Management fees amounted to approximately $456,000 and $420,000 for the three months ended March 31, 2015 and 2014, respectively. Servicing fees amounted to approximately $41,000 and $38,000 for the three months ended March 31, 2015 and 2014, respectively.

The maximum management and servicing fees were paid to the Manager during the three months ended March 31, 2015 and 2014.
 
The maximum management fee permitted under the Management Agreement is 2.75% per year of the average unpaid balance of mortgage loans. For the three months ended March 31, 2015 (annualized) and the calendar years 2014, 2013 and 2012, the management fees were 2.75%, 2.75%, 2.74% and 2.67% of the average unpaid balance of mortgage loans, respectively.
 
In determining the management fees, the Manager may consider a number of factors, including current market yields, delinquency experience, un-invested cash and real estate activities. The Manager expects that the management fees it receives from us will vary in amount and percentage from period to period. However, due to reduced levels of mortgage investments held by us during the quarters ended March 31, 2015 and 2014, the Manager chose to take the maximum compensation that it is able to take pursuant to the charter and will likely continue to take the maximum compensation for the foreseeable future.

 
39

 
Rental and other expenses on real estate properties increased $275,000 (14.4% increase) during the three months ended March 31, 2015, as compared to the same period in 2014, primarily due to the completion of the retail complex owned by TSV during the fourth quarter of 2014 and, thus, there was a full quarter of operating expenses for the complex during 2015. Approximately 75% of these expenses were charged to tenants as common area maintenance (“CAM”) reimbursements and reflected in the increase in revenue for the property during the quarter.

Depreciation and amortization expense increased $56,000 (10.3% increase) during the three months ended March 31, 2015, as compared to the same period in 2014, primarily due to depreciation of the retail complex owned by TSV during the quarter, which was completed during the fourth quarter of 2015, net of discontinued depreciation on certain real estate properties that were moved to held for sale during 2014 and 2015.

Interest expense increased $460,000 (360.8% increase) during the three months ended March 31, 2015 as compared to 2014, due to interest incurred on our lines of credit, the loans payable within TOTB and TSV and the amortization of deferred financing costs to interest expense from these debt instruments during the quarter ended March 31, 2015. All of these debt facilities (other than the CB&T Credit Facility) were obtained and began to incur interest expense subsequent to the first quarter of 2014.

The provision for loan losses of $88,000 during the three months ended March 31, 2015 was the result of an analysis performed on the loan portfolio. The general loan loss allowance increased $85,000 during the three months ended March 31, 2015 primarily due to an increase in the balance of performing loans during the quarter. The specific loan loss allowance increased $3,000 during the three months ended March 31, 2015. We recorded a provision for loan losses of $127,000 during the three months ended March 31, 2014.

The impairment losses on real estate properties of $1,109,000 during the three months ended March 31, 2015 was the result of a decrease in the listing price of the unimproved residential and commercial land located in Gypsum, Colorado and a reduction in the fair market value estimated by management.

Gain on Sales of Real Estate

Gain on sales of real estate decreased $72,000 during the three months ended March 31, 2015, as compared to the same period in 2014. During the three months ended March 31, 2015, we sold one commercial property located in San Jose, California for gain of approximately $53,000 and recorded $152,000 of deferred gain under the installment method related to the sale of the condominiums located in Santa Barbara, California in 2012 due to the remaining repayment of the carry back loan during the quarter. During the three months ended March 31, 2014, we recorded approximately $277,000 of deferred gain under the installment method related to the same sale of the condominiums located in Santa Barbara, California in 2012 due to a partial principal repayment received on the carry back loan during the quarter.

Net Income Attributable to Non-Controlling Interests

Net income attributable to non-controlling interests decreased $35,000 (77.8% decrease) during the three months ended March 31, 2015, as compared to the same period in 2014, due primarily to reduced net income from TOTB as a result of interest expense incurred during the quarter from the new loan obtained during the fourth quarter of 2014.

 
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Financial Condition

March 31, 2015 and December 31, 2014

Loan Portfolio

During the quarter ended March 31, 2015, we originated five new loans in the aggregate amount of approximately $9,489,000 and advanced additional amounts to borrowers on existing loans of approximately $748,000 (total of $10,237,000).  We also received full or partial payoffs (including principal amortization) on loans totaling $21,873,000.

Our portfolio of loan investments decreased from 34 to 32, and the average loan balance decreased from $2,001,000 to $1,779,000, between December 31, 2014 and March 31, 2015.

As of March 31, 2015 and December 31, 2014, we had three and six loans that were impaired totaling approximately $8,865,000 (16%) and $22,316,000 (33%), respectively.  This included two and two past maturity loans totaling $8,614,000 (15%) and $8,614,000 (13%), respectively. In addition, one loan of approximately $862,000 (1%) was past maturity but current in monthly payments as of December 31, 2014, (combined total of impaired and past maturity loans of $8,865,000 (16%) and $23,178,000 (34%), respectively). Of the impaired and past maturity loans, no loans were in the process of foreclosure and no loans involved borrowers who were in bankruptcy as of March 31, 2015 and December 31, 2014.

As of March 31, 2015 and December 31, 2014, approximately $56,684,000 (99.6%) and $67,780,000 (99.6%) of our loans are interest-only and require the borrower to make a “balloon payment” on the principal amount upon maturity of the loan. To the extent that a borrower has an obligation to pay mortgage loan principal in a large lump sum payment, its ability to satisfy this obligation may be dependent upon its ability to sell the property, obtain suitable refinancing or otherwise raise a substantial cash amount. As a result, these loans involve a higher risk of default than fully amortizing loans. Borrowers occasionally are not able to pay the full amount due at the maturity date.  We may allow these borrowers to continue making the regularly scheduled monthly interest payments for certain periods of time to assist the borrower in meeting the balloon payment obligation without formally filing a notice of default.  These loans for which the principal is due and payable, but the borrower has failed to make such payment of principal, are referred to as “past maturity loans”. As of March 31, 2015 and December 31, 2014, we had two and three past maturity loans totaling approximately $8,614,000 and $9,476,000, respectively.

As of March 31, 2015 and December 31, 2014, we held the following types of loans:

   
March 31,
2015
   
December 31,
2014
 
By Property Type:
           
Commercial
 
$
42,600,361
   
$
52,531,537
 
Residential
   
12,791,670
     
13,491,906
 
Land
   
1,54