Toggle SGML Header (+)


Section 1: 10-Q

orm10q0616.htm

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

FORM 10-Q

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

For the Quarterly Period Ended June 30, 2016

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 August 5, 2016
Common Stock, $.01 par value                                                              10,247,477 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 39
     
Item 3. Quantitative and Qualitative Disclosures about Market Risk 62
     
Item 4. Controls and Procedures 64
 
PART II – OTHER INFORMATION
     
Item 1.   Legal Proceedings   64
     
Item 1A Risk Factors 64
     
Item 6. Exhibits 65
 


 
3

 

Part I. FINANCIAL INFORMATION
Item 1. Financial Statements

OWENS REALTY MORTGAGE, INC.
Consolidated Balance Sheets
 (UNAUDITED)
   
June 30, 2016
 
December 31, 2015
 
ASSETS
             
Cash and cash equivalents
 
$
747,494
 
$
1,255,842
 
Restricted cash
   
8,954,472
   
7,225,371
 
Loans, net of allowance for loan losses of $1,780,921 in 2016 and $1,842,446 in 2015
   
117,799,946
   
104,901,361
 
Interest and other receivables
   
2,186,080
   
1,764,918
 
Other assets, net of accumulated depreciation and amortization of $298,458 in 2016 and $275,277 in 2015
   
893,316
   
741,001
 
Deferred financing costs, net of accumulated amortization of $209,086 in 2016 and $323,325 in 2015
   
276,250
   
126,308
 
Deferred tax assets, net
   
7,368,835
   
 
Investment in limited liability company
   
2,141,342
   
2,141,032
 
Real estate held for sale
   
119,713,119
   
100,191,166
 
Real estate held for investment, net of accumulated depreciation of $2,584,503 in 2016 and $2,915,596 in 2015
   
43,136,122
   
53,647,246
 
   Total assets
 
$
303,216,976
 
$
271,994,245
  
LIABILITIES AND EQUITY
             
LIABILITIES:
             
Dividends payable
 
$
819,798
 
$
2,133,455
 
Due to Manager
   
334,554
   
408,643
 
Accounts payable and accrued liabilities
   
6,170,485
   
3,359,294
 
Deferred gains on sales of real estate
   
209,662
   
209,662
 
Lines of credit payable
   
38,747,415
   
20,915,500
 
Notes and loans payable on real estate
   
49,453,984
   
45,458,844
 
Total liabilities
   
95,735,898
   
72,485,398
 
Commitments and Contingencies (Note 14)
             
EQUITY:
             
Stockholders’ equity:
             
Preferred stock, $.01 par value per share, 5,000,000 shares authorized, no shares issued and outstanding at June 30, 2016 and December 31, 2015
   
   
 
Common stock, $.01 par value per share, 50,000,000 shares authorized, 11,198,119 shares issued, 10,247,477 shares outstanding at June 30, 2016 and December 31, 2015
   
111,981
   
111,981
 
Additional paid-in capital
   
182,437,522
   
182,437,522
 
Treasury stock, at cost – 950,642 shares at June 30, 2016 and December 31, 2015
   
(12,852,058
)
 
(12,852,058
)
Retained earnings
   
33,495,951
   
25,282,553
 
Total stockholders’ equity
   
203,193,396
   
194,979,998
 
Non-controlling interests
   
4,287,682
   
4,528,849
 
   Total equity
   
207,481,078
   
199,508,847
 
   Total liabilities and equity
 
$
303,216,976
 
$
271,994,245
 

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

 
4

 

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

   
For the Three Months Ended
 
For the Six Months Ended
 
   
June 30, 2016
 
June 30, 2015
 
June 30, 2016
 
June 30, 2015
 
Revenues:
                         
Interest income on loans
 
$
2,196,012
 
$
2,500,866
 
$
4,239,020
 
$
5,324,738
 
Rental and other income from real estate properties
   
2,451,416
   
3,443,366
   
4,591,401
   
6,986,264
 
Income from investment in limited liability company
   
44,686
   
42,816
   
87,310
   
85,877
 
Total revenues
   
4,692,114
   
5,987,048
   
8,917,731
   
12,396,879
 
Expenses:
                         
Management fees to Manager
   
825,149
   
440,611
   
1,590,664
   
897,000
 
Servicing fees to Manager
   
75,014
   
40,055
   
144,606
   
81,546
 
General and administrative expense
   
349,927
   
280,078
   
903,345
   
659,048
 
Rental and other expenses on real estate properties
   
2,048,929
   
2,159,533
   
3,839,307
   
4,349,945
 
Depreciation and amortization
   
309,271
   
583,572
   
652,920
   
1,185,958
 
Interest expense
   
1,005,703
   
471,920
   
1,688,755
   
1,058,946
 
Provision for loan losses
   
274,920
   
340,477
   
385,995
   
428,043
 
Impairment losses on real estate properties
   
2,110,150
   
147,000
   
2,110,150
   
1,256,434
 
Total expenses
   
6,999,063
   
4,463,246
   
11,315,742
   
9,916,920
 
Operating (loss) income
   
(2,306,949
)
 
1,523,802
   
(2,398,011
)
 
2,479,959
 
Gain on sales of real estate, net
   
   
14,825,858
   
4,838,815
   
15,031,299
 
Net (loss) income before income tax benefit
   
(2,306,949
)
 
16,349,660
   
2,440,804
   
17,511,258
 
Income tax benefit
   
7,368,835
   
   
7,368,835
   
 
Net income
   
5,061,886
   
16,349,660
   
9,809,639
   
17,511,258
 
Less: Net loss (income) attributable to non-controlling interests
   
56,847
   
(2,588,884
)
 
43,355
   
(2,598,762
)
Net income attributable to common  stockholders
 
$
5,118,733
 
$
13,760,776
 
$
9,852,994
 
$
14,912,496
 
                           
Per common share data:
                         
Basic and diluted earnings per common share
 
$
0.50
 
$
1.28
 
$
0.96
 
$
1.38
 
Basic and diluted weighted average number of common shares outstanding
   
10,247,477
   
10,768,001
   
10,247,477
   
10,768,001
 
Dividends declared per share of common stock
 
$
0.08
 
$
0.18
 
$
0.16
 
$
0.25
 
                           

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








 
5

 

OWENS REALTY MORTGAGE, INC.
Consolidated Statements of Stockholders’ Equity
Six Months Ended June 30, 2016 and 2015
(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, 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
 
   
   
   
              —
   
              —
   
14,912,496
   
14,912,496
   
2,598,762
   
17,511,258
 
Dividends declared
 
   
   
   
              —
   
              —
   
(2,692,000
)
 
(2,692,000
)
 
               —
   
(2,692,000
)
Contribution from non-controlling interest
 
   
   
   
   
   
   
   
279,184
   
279,184
 
Distributions to non-controlling interests
 
   
   
   
              —
   
              —
   
               —
   
                —
   
(2,483,790
)
 
(2,483,790
)
Balances, June 30, 2015
 
11,198,119
 
$
111,981
 
$
182,437,522
   
(430,118
)
$
(5,349,156
)
$
19,592,007
 
$
196,792,354
 
$
4,568,909
 
$
201,361,263
 
                                                       
Balances, December 31, 2015
 
11,198,119
 
$
111,981
 
$
182,437,522
   
(950,642
)
 
(12,852,058
)
$
25,282,553
 
$
194,979,998
 
$
4,528,849
 
$
 199,508,847
 
                                                       
Net income
 
   
   
   
              —
   
              —
   
9,852,994
   
9,852,994
   
(43,355
)
 
9,809,639
 
Dividends declared
 
   
   
   
              —
   
              —
   
(1,639,596
)
 
(1,639,596
)
 
   
(1,639,596
)
Contribution from non-controlling interest
 
   
   
   
              —
   
              —
   
               —
   
                —
   
44,208
   
44,208
 
Distributions to non-controlling interests
 
   
   
   
              —
   
              —
   
               —
   
                —
   
(242,020
)
 
(242,020
)
Balances, June 30, 2016
 
11,198,119
 
$
111,981
 
  $
182,437,522
   
(950,642
)
$
(12,852,058
)
$
33,495,951
 
$
203,193,396
 
$
4,287,682
 
$
207,481,078
 
                                                       

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




 
6

 

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

   
Six Months Ended June 30,
 
   
2016
 
2015
 
CASH FLOWS FROM OPERATING ACTIVITIES:
             
Net income
 
$
9,809,639
 
$
17,511,258
 
Adjustments to reconcile net income to net cash provided by operating activities:
             
Gain on sales of real estate and other assets, net
   
(4,838,815
)
 
(15,031,299
)
Deferred income tax (benefit) expense
   
(7,368,835
)
 
 
Income from investment in limited liability company
   
(87,310
)
 
(85,877
)
Provision for loan losses
   
385,995
   
428,043
 
Impairment losses on real estate properties
   
2,110,150
   
1,256,434
 
Depreciation and amortization of real estate and related assets
   
652,920
   
1,185,958
 
Amortization of deferred financing costs to interest expense
   
244,756
   
170,112
 
Accretion of discount on loan to interest income
   
   
(536,816
)
Changes in operating assets and liabilities:
             
Interest and other receivables
   
(490,730
)
 
(520,413
)
Other assets
   
(163,788
)
 
(7,027
)
Accounts payable and accrued liabilities
   
(1,465,000
)
 
(306,136
)
Due to Manager
   
(74,089
)
 
(66,533
)
Net cash (used in) provided by operating activities
   
(1,285,107
)
 
3,997,704
 
               
CASH FLOWS FROM INVESTING ACTIVITIES:
             
Principal collected on loans
   
27,860,551
   
27,720,941
 
Investments in loans
   
(41,776,363
)
 
(28,737,011
)
Investment in real estate properties
   
(8,361,689
)
 
(8,404,537
)
Net proceeds from disposition of real estate properties and other assets
   
6,478,811
   
34,865,173
 
Purchases of furniture, fixtures and equipment
   
(27,512
)
 
(36,588
)
Transfer to restricted cash, net
   
(1,729,101
)
 
(1,107,390
)
Distribution received from investment in limited liability company
   
87,000
   
85,000
 
Net cash (used in) provided by investing activities
   
(17,468,303
)
 
24,385,588
 
               
CASH FLOWS FROM FINANCING ACTIVITIES:
             
Advances on notes payable
   
4,152,381
   
14,455,710
 
Repayments on notes payable
   
(333,587
)
 
(19,770,694
)
Advances on lines of credit
   
52,265,415
   
18,462,000
 
Repayments on lines of credit
   
(34,433,500
)
 
(29,912,000
)
Payment of deferred financing costs
   
(254,582
)
 
(41,735
)
Distributions to non-controlling interests
   
(242,020
)
 
(2,483,790
)
Contributions from non-controlling interest
   
44,208
   
279,184
 
Purchase of treasury stock
   
   
 
Dividends paid
   
(2,953,253
)
 
(2,045,920
)
Net cash provided by (used in) financing activities
   
18,245,062
   
(21,057,245
)
               
Net (decrease) increase in cash and cash equivalents
   
(508,348
)
 
7,326,047
 
               
Cash and cash equivalents at beginning of period
   
1,255,842
   
1,413,545
 
               
Cash and cash equivalents at end of period
 
$
747,494
 
$
8,739,592
 
               
Supplemental Disclosures of Cash Flow Information
             
Cash paid during the period for interest (excluding amounts capitalized)
 
$
1,291,839
 
$
964,543
 
Cash paid during the period for interest that was capitalized
   
274,562
   
116,661
 
 
 
7

 
 
Supplemental Disclosures of Non-Cash Activity
             
Increase in real estate from loan foreclosures
 
$
700,800
 
$
 
Decrease in loans, net of allowance for loan losses, from loan foreclosures
   
(631,232
)
 
 
Decrease in interest and other receivables from loan foreclosures
   
(69,568
)
 
 
Change in capital expenditures financed through accounts payable
   
(4,276,191
)
 
(2,654,294
)
Amortization of deferred financing costs capitalized to construction project
   
(36,230
)
 
(103,674
)
Dividends declared but not paid
   
(819,798
)
 
(1,938,240
)


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 (“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 operating income represented by such distributions to avoid taxation at the entity level and to be taxed generally only at the stockholder level. The Company currently intends to distribute all of its REIT taxable income, excluding net capital gains. 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 year ended December 31, 2015 filed with the Securities and Exchange Commission (“SEC”). The results of operations for the three and six months ended June 30, 2016 are not necessarily indicative of the operating results to be expected for the full year ending December 31, 2016. 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 and its wholly-owned taxable REIT subsidiaries (“TRSs”) and its majority- and wholly-owned limited liability companies. 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.
 
9

 
OWENS REALTY MORTGAGE, INC.

Notes to Consolidated Financial Statements (Unaudited)



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.

Recently Issued Accounting Pronouncements

In June 2016, the FASB issued Accounting Standards Update 2016-13, “Financial Instruments – Credit Losses (Topic 326) – Measurement of Credit Losses on Financial Instruments”, or ASU 2016-13. The amendments in ASU-2016-13 eliminate the probable and incurred credit loss recognition threshold in current GAAP and, instead, reflect an entity’s current estimate of all expected credit losses. The amendments in ASU 2016-13 broaden the information that an entity must consider in developing its expected credit loss estimate for assets measured either collectively or individually. The use of forecasted information incorporates more timely information in the estimate of expected credit loss. This standard is effective for interim and annual reporting beginning after December 15, 2019, with early adoption permitted for interim and annual reporting beginning after December 15, 2018. The Company is currently evaluating the impact that ASU 2016-13 may have on its consolidated financial statements.

In March 2016, the FASB issued Accounting Standards Update 2016-07, “Investments – Equity Method and Joint Ventures (Topic 323) – Simplifying the Transition to the Equity Method of Accounting”, or ASU 2016-07. To simplify the accounting for equity method investments, the amendments in ASU 2016-07 eliminate the requirement in Topic 323 that an entity retroactively adopt the equity method of accounting if an investment qualifies for use of the equity method as a result of an increase in the level of ownership or degree of influence. The amendments require that the equity method investor add the cost of acquiring the additional interest in the investee to the current basis of the investor’s previously held interest and adopt the equity method of accounting as of the date the investment becomes qualified for equity method accounting. This standard is effective for interim and annual reporting beginning after December 15, 2016, with early adoption permitted. The Company is currently evaluating the impact that ASU 2016-07 may have on its consolidated financial statements.

In February 2016, the FASB issued Accounting Standards Update 2016-02, “Leases (Topic 842)” or ASU 2016-02.  ASU 2016-02 amends existing guidance related to leases, primarily by requiring the recognition of lease assets and lease liabilities by lessees for those leases classified as operating leases under the current accounting guidance. This standard is effective for interim and annual reporting beginning after December 15, 2018, with early adoption permitted.  The Company is currently evaluating the impact that ASU 2016-02 may have on its consolidated financial statements.

In January 2016, the FASB issued Accounting Standards Update 2016-01, “Financial Instruments- Overall (Subtopic 825-10) – Recognition and Measurement of Financial Assets and Financial Liabilities”, or ASU 2016-1.  ASU 2016-01 amends existing guidance related to the disclosure, presentation, recognition and measurement of financial assets and financial liabilities.  This accounting standard primarily amends the accounting for certain equity investments, fair value disclosures and presentation of financial assets and financial liabilities. This standard is effective for interim and annual reporting beginning after December 15, 2017, with certain aspects available for early adoption.  The Company is currently evaluating the impact that ASU 2016-01 may have on its consolidated financial statements.

In May 2014, the FASB issued Accounting Standards Update 2014-09, “Revenue from Contracts with Customers (Topic 606),” or ASU 2014-09. ASU 2014-09 broadly amends the accounting guidance for revenue recognition. ASU 2014-09 is effective for the first interim or annual period beginning after December 15, 2017, and is to be applied prospectively. Early adoption is not permitted. The Company is currently evaluating the impact that ASU 2014-09 may have on its consolidated financial statements.
 
10

 
OWENS REALTY MORTGAGE, INC.

Notes to Consolidated Financial Statements (Unaudited)


 
Recently Adopted 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. In August 2015, the FASB issued ASU 2015-15 which clarified that the SEC would not object to entities continuing to report debt issuance costs on line of credit arrangements as assets. The recognition and measurement guidance for debt issuance costs are not affected by these ASUs. The Company adopted these ASUs retrospectively during the quarter ended March 31, 2016 and elected to continue to report its deferred financing costs on lines of credit as assets, as allowed by the clarifying guidance issued in ASU 2015-15. Adoption of these standards resulted in net debt issuance costs (deferred financing costs) on the Company’s debt (other than lines of credit) being presented as a direct offset to the applicable debt on the balance sheet. Thus, both deferred financing costs and notes and loans payable on real estate on the accompanying consolidated balance sheets were decreased by $482,000 and $658,000 as of June 30, 2016 and December 31, 2015, respectively.

Significant Accounting Policies
 
      The significant accounting policies used in the preparation of these interim consolidated financial statements are disclosed in the Company’s consolidated financial statements for the year ended December 31, 2015 included in its 2015 annual report on Form 10-K.  There have been no significant changes to those significant accounting policies other than the adoption of ASU 2015-03 as discussed above.
 
NOTE 3 – 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 is included in the recorded investment in the impaired loan that is measured as described below. 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).

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.
 
11

 
OWENS REALTY MORTGAGE, INC.

Notes to Consolidated Financial Statements (Unaudited)



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.

Land Loans – These loans generally possess a higher inherent risk of loss than other real estate portfolio segments.  A major risk arises from the necessity to complete the projects within the specified costs and time lines. Trends in the construction industry significantly impact the credit quality of these loans as demand drives construction activity. In addition, trends in real estate values significantly impact the credit quality of these loans, as property values generally determine the economic viability of construction projects.

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.

Management monitors the credit quality of the Company’s loan portfolio on an ongoing basis using certain credit quality indicators including a loan’s delinquency status and internal asset classification. A loan is considered classified when it meets the definition of impaired as described above.
 
12

 
OWENS REALTY MORTGAGE, INC.

Notes to Consolidated Financial Statements (Unaudited)


       
        The following tables show the changes in the allowance for loan losses by portfolio segment for the three and six months ended June 30, 2016 and 2015 and the allocation of the allowance for loan losses and loans as of June 30, 2016 and December 31, 2015 by portfolio segment and by impairment methodology:

   
Commercial
 
Residential
 
Land
   
2016
       
Total
                 
Allowance for loan losses:
           
   
Three Months Ended June 30, 2016
 
Beginning balance
 
$
1,140,527
$
503,922
$
            309,072
$
1,953,521
   
Charge-offs
 
(447,520
)
            —
 
             —
 
(447,520)
 
Provision
 
            71,893
 
100,407
 
102,620
 
274,920
 
Ending Balance
 
$
764,900
$
604,329
$
411,692
$
1,780,921
                 
   
Six Months Ended June 30, 2016
 
Beginning balance
 
$
1,140,530
$
                    455,587
$
 246,329
$
1,842,446
   
   Charge-offs
 
(447,520
)
            —
 
             —
 
(447,520)
 
   Provision
 
             71,890
 
148,742
 
165,363
 
385,995
Ending balance
 
$
764,900 
$
                    604,329
$
 411,692
$
      1,780,921
                 
   
As of June 30, 2016
 
Ending balance: individually evaluated for impairment
$
            —
$
            —
$
             —
$
            —
                 
Ending balance: collectively evaluated for impairment
$
764,900
$
604,329
$
411,692
$
1,780,921
                 
 
Ending balance
 
$
764,900
$
604,329
$
411,692
$
1,780,921
                 
Loans:
               
 
Ending balance
 
$
92,022,283
$
20,915,061
$
6,643,523
$
119,580,867
                 
Ending balance: individually evaluated for impairment
$
1,432,000
$
      6,662,298
$
           —
$
8,094,298
                 
Ending balance: collectively evaluated for impairment
$
90,590,283
$
     14,252,763
$
        6,643,523
$
111,486,569

 
13

 
OWENS REALTY MORTGAGE, INC.

Notes to Consolidated Financial Statements (Unaudited)




   
Commercial
 
Residential
 
Land
   
2015
       
Total
                 
Allowance for loan losses:
           
   
Three Months Ended June 30, 2015
 
Beginning balance
 
$
911,766
$
1,973,021
$
            72,134
$
2,956,921
  
   Charge-offs
 
            —
 
            —
 
             —
 
 
   Provision
 
            28,449
 
101,596
 
210,432
 
340,477
 
Ending Balance
 
$
940,215
$
2,074,617
$
282,566
$
3,297,398
                 
   
Six Months Ended June 30, 2015
 
Beginning balance
 
$
888,260
$
                    1,975,112
$
5,983
$
2,869,355
   
   Charge-offs
 
            —
 
            —
 
             —
 
 
   Provision
 
             51,955
 
            99,505
 
276,583
 
428,043
Ending balance
 
$
940,215 
$
                    2,074,617
$
 282,566
$
      3,297,398
                 
   
As of December 31, 2015
 
Ending balance: individually evaluated for impairment
$
485,823
$
            —
$
             —
$
 485,823
                 
Ending balance: collectively evaluated for impairment
$
654,707
$
455,587
$
246,329
$
1,356,623
                 
 
Ending balance
 
$
1,140,530
$
455,587
$
246,329
$
1,842,446
                 
Loans:
               
 
Ending balance
 
$
76,800,297
$
24,675,867
$
5,267,643
$
106,743,807
                 
Ending balance: individually evaluated for impairment
$
1,078,752
$
      7,615,055
$
           —
$
8,693,807
                 
Ending balance: collectively evaluated for impairment
$
75,721,545
$
17,060,812
$
        5,267,643
$
98,050,000

 
14

 
OWENS REALTY MORTGAGE, INC.

Notes to Consolidated Financial Statements (Unaudited)



The following tables show an aging analysis of the loan portfolio by the time monthly payments are past due as of June 30, 2016 and December 31, 2015:

   
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
 June 30, 2016
           
                         
Commercial
$
1,175,000
$
       —
$
        1,432,000
$
         2,607,000
$
89,415,283
$
        92,022,283
Residential
 
1,950,859
 
 
         6,662,298
 
         8,613,157
 
              12,301,904
 
        20,915,061
Land
 
          —
 
           —
 
         —
 
        —
 
6,643,523
 
6,643,523
 
$
         3,125,859
$
      —
$
       8,094,298
$
11,220,157
$
       108,360,710
$
  119,580,867

   
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, 2015
           
                         
Commercial
$
          —
$
          —
$
       1,078,752
$
       1,078,752
$
       75,721,545
$
76,800,297
Residential
 
 
 
        7,615,055
 
        7,615,055
 
       17,060,812
 
24,675,867
Land
 
          —
 
          —
 
        
 
 
5,267,643
 
5,267,643
 
$
         —
$
          —
$
   8,693,807
$
   8,693,807
$
      98,050,000
$
   106,743,807

All of the loans that are 90 or more days past due as listed above are on non-accrual status as of June 30, 2016 and December 31, 2015.

 
15

 
OWENS REALTY MORTGAGE, INC.

Notes to Consolidated Financial Statements (Unaudited)



The following tables show information related to impaired loans as of and for the three and six months ended June 30, 2016:

   
As of June 30, 2016
 
 
 
Recorded
Investment
 
 
Unpaid
Principal
Balance
 
 
 
Related
Allowance
With no related allowance recorded:
           
 
Commercial
 
$
1,469,729
  $
         1,432,000
  $
 
 
Residential
 
         7,131,693
 
6,662,298
 
 
 
Land
 
       
 
         
 
 
 —
 
 
$
8,601,422
$
8,094,298
$
             
With an allowance recorded:
           
 
Commercial
$
         —
$
          —
$
 
 
Residential
 
       —
 
         —
 
 
Land
 
 
 
 
  —
 
 
 
 
$
$
$
             
Totals:
           
 
Commercial
 
$
 
1,469,729
  $
         1,432,000
  $
 
 
Residential
 
 
7,131,693
 
         6,662,298
 
 
 
Land
 
       
 
         
 
 
 
 
$
8,601,422
$
8,094,298
$

 
16

 
OWENS REALTY MORTGAGE, INC.

Notes to Consolidated Financial Statements (Unaudited)





 
Three Months Ended June 30, 2016
Six Months Ended June 30, 2016
 
 
Average
Recorded
Investment
 
 
Interest
Income
Recognized
 
 
Average
Recorded
Investment
 
 
Interest
Income
Recognized
With no related allowance recorded:
               
 
Commercial
  $
         1,467,371
  $
 
 
$
         2,167,256
 
$
 
 
Residential
 
7,278,422
 
 
5,183
 
6,501,620
 
 
             10,430
 
Land
 
         —
 
 
 
 
 
             —
 
 
$
8,745,793
$
5,183
$
8,668,876
$
10,430
                 
With an allowance recorded:
               
 
Commercial
$
          381,715
$
 
$
          1,730,569
$
 
 
Residential
 
         —
 
 
 
         —
 
 
 
Land
 
 
 
 
 
 
 
 
 
 
$
381,715
$
$
1,730,569
$
                 
Totals:
               
 
Commercial
  $
         1,849,086
  $
 
  $
         3,897,825
  $
 
 
Residential
 
         7,278,422
 
 
5,183
 
         6,501,620
 
 
10,430
 
Land
 
         —
 
 
 
 
 
 
 
$
9,127,508
$
5,183
$
10,399,445
$
10,430

 
17

 
OWENS REALTY MORTGAGE, INC.

Notes to Consolidated Financial Statements (Unaudited)




The following tables show information related to impaired loans as of December 31, 2015 and for the three and six months ended June 30, 2015:

   
As of December 31, 2015
 
 
 
Recorded
Investment
 
 
Unpaid
Principal
Balance
 
 
 
Related
Allowance
With no related allowance recorded:
           
 
Commercial
 
$
       
 
 $
              
 
 $
 
 
Residential
 
         8,063,450
 
          7,615,055
 
 
 
Land
 
       
 
         
 
 
 
 
 
$
8,063,450
$
7,615,055
$
             
With an allowance recorded:
           
 
Commercial
$
         1,144,864
$
          1,078,752
$
 
485,823
 
Residential
 
       
 
         
 
 
 
Land
 
 
 
 
 
 
 
 
 
$
1,144,864
$
1,078,752
$
485,823
             
Totals:
           
 
Commercial
 
$
1,144,864
  
$
         1,078,752
 
  $
485,823
 
Residential
 
 
8,063,450
 
         7,615,055
 
 
 
Land
 
       
 
         
 
 
 
 
$
9,208,314
$
8,693,807
$
485,823

 
18

 
OWENS REALTY MORTGAGE, INC.

Notes to Consolidated Financial Statements (Unaudited)




 
 
Three Months Ended June 30, 2015
Six Months Ended June 30, 2015
 
 
Average
Recorded
Investment
 
 
Interest
Income
Recognized
 
 
Average
Recorded
Investment
 
 
Interest
Income
Recognized
With no related allowance recorded:
               
 
Commercial
  $
              
  $
 
 
$
         3,868,828
 
$
 
601,660
 
Residential
 
          248,783
 
 
5,433
 
          250,281
 
 
             10,926
 
Land
 
         
 
 
 
         620,023
 
 
216,904
 
 
$
248,783
$
5,433
$
4,739,132
$
829,490
                 
With an allowance recorded:
               
 
Commercial
$
          1,105,184
$
 
8,990
$
          1,092,442
$
 
22,473
 
Residential
 
         7,983,345
 
 
59,600
 
         7,983,345
 
 
122,600
 
Land
 
 
 
 
 
 
 
 
 
 
$
9,088,529
$
68,590
$
9,075,787
$
145,073
                 
Totals:
               
 
Commercial
  $
         1,105,184
  $
 
8,990
  $
         4,961,270
  $
 
624,133
 
Residential
 
         8,232,127
 
 
65,033
 
         8,233,626
 
 
133,526
 
Land
 
         
 
 
 
         620,023
 
 
216,904
 
 
$
9,337,311
$
74,023
$
13,814,919
$
974,563

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 $0 and $486,000 of specific reserves on loans totaling approximately $7,132,000 and $9,208,000 (recorded investments before reserves) to borrowers whose loan terms had been modified in troubled debt restructurings as of June 30, 2016 and December 31, 2015, 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 three and six months ended June 30, 2016 and 2015, nor were there loans modified as troubled debt restructurings within the previous twelve months for which there was a payment default during the three and six months ended June 30, 2016 and 2015.
 
19

 
OWENS REALTY MORTGAGE, INC.

Notes to Consolidated Financial Statements (Unaudited)



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 14 for further discussion of the Company’s environmental remediation obligation with respect to the properties owned by 1850.)

The Company received distributions from 1850 of $87,000 during the three and six months ended June 30, 2016 and $85,000 during the three and six months ended June 30, 2015. The net income to the Company from its investment in 1850 De La Cruz was approximately $45,000 and $43,000 during the three months ended June 30, 2016 and 2015, respectively, and $87,000 and $86,000 during the six months ended June 30, 2016 and 2015, respectively.

NOTE 5 - REAL ESTATE HELD FOR SALE

Real estate properties held for sale as of June 30, 2016 and December 31, 2015 consists of properties acquired through foreclosure classified by property type as follows:

   
June 30,
2016
 
December 31,
2015
 
Residential
 
$
58,710,324
 
$
51,942,601
 
Land (including land under development)
   
53,591,236
   
42,071,143
 
Office
   
5,476,645
   
4,716,487
 
Golf course
   
1,934,914
   
 
Industrial
   
   
1,460,935
 
   
$
119,713,119
 
$
100,191,166
 

Transfers

During the three months ended June 30, 2016, the Company transferred three properties with book values totaling approximately $5,869,000 (one land, one office unit and one golf course) from “Held for Investment” to “Held for Sale” as the properties were listed for sale and sales are expected within a one year period. During the six months ended June 30, 2016, the Company transferred four properties with book values totaling approximately $10,052,000 (one land, one office unit, one golf course and one condominium) from “Held for Investment” to “Held for Sale” as the properties were listed for sale and sales are expected within a one year period.

During the three months ended June 30, 2015, the Company transferred one golf course property with a book value of approximately $1,954,000 from “Held for Sale” to “Held for Investment” as the property was no longer listed for sale and a sale was not expected within a one year period. As a result of this transfer, the Company recorded approximately $79,000 of depreciation expense that would have previously been recorded had the property been continuously classified as “Held for Investment”. During the six months ended June 30, 2015, the Company transferred three properties with book values totaling approximately $11,817,000 (one land, one residential and one industrial) from “Held for investment” to “Held for sale” as the properties were listed for sale and sales were expected within a one year period.
 
20

 
OWENS REALTY MORTGAGE, INC.

Notes to Consolidated Financial Statements (Unaudited)


Impairment Losses

During the three and six months ended June 30, 2016, the Company recorded an impairment loss of approximately $2,110,000 on the unimproved residential and commercial land located in Gypsum, Colorado due to a decrease in the listing price of the property.

During the three and six months ended June 30, 2015, the Company recorded impairment losses of approximately $147,000 and $1,256,000, respectively, 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 net fair market value estimated by management.

Sales

During the six months ended June 30, 2016, the Company sold one industrial property and one office building in an office complex for aggregate net sales proceeds of approximately $6,479,000, resulting in total gain on sale of real estate of approximately $4,839,000.

During the three and six months ended June 30, 2015, the Company sold three and four real estate properties for net sales proceeds aggregating approximately $33,756,000 and $34,865,000, resulting in gains on sale of real estate totaling approximately $14,826,000 and $14,879,000, respectively. In addition, the Company recognized gain of approximately $152,000 during the six months ended June 30, 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.

In March 2016, TOTB North and TOTB Miami entered into a Purchase Agreement and Deposit Receipt (the “Purchase Agreement”) with Interwest Capital Corporation (the “Buyer”) to sell all real estate and related properties owned by the TOTB entities (the “TOTB Sale”) for $82,000,000, subject to potential adjustments as described in the Purchase Agreement. The Company agreed to reduce the price to $75,500,000 and executed an amendment to the Purchase Agreement in June 2016. Buyer’s obligation to purchase the TOTB properties is subject to a number of conditions and there is no guarantee when or if the transaction will close. The aggregate book value of the TOTB properties subject to sale was approximately $54,527,000 as of June 30, 2016.

Foreclosure Activity

During the three months ended June 30, 2016, the Company foreclosed on one loan secured by an office property located in Oakdale, California with a principal balance of approximately $1,079,000 and obtained the property via the trustee’s sale. In addition, accrued interest and advances made on the loan (for items such as legal fees and delinquent property taxes) in the total amount of approximately $70,000 were capitalized to the basis of the property. It was determined that the fair value of the property was lower than the Company’s investment in the loan and a specific loan allowance was previously established of approximately $495,000. This amount was then recorded as a charge-off against the allowance for loan losses at the time of foreclosure, after a reduction of the previously established allowance in the amount of approximately $48,000 as a result of an updated appraisal obtained (net charge-off of $448,000). The property, along with a unit in the building purchased by the Company in 2015, was contributed into a new taxable REIT subsidiary, East G, LLC, in June 2016. The property is classified as held for sale as a sale is expected to be completed within a one year period.

There were no foreclosures during the three and six months ended June 30, 2015.
 
21

 
OWENS REALTY MORTGAGE, INC.

Notes to Consolidated Financial Statements (Unaudited)



NOTE 6 - REAL ESTATE HELD FOR INVESTMENT

Real estate held for investment as of June 30, 2016 and December 31, 2015 consists of properties acquired through foreclosure classified by property type as follows:


   
June 30,
2016
 
December 31,
2015
 
Retail
 
$
22,908,762
 
$
23,122,714
 
Land
   
4,234,131
   
8,112,676
 
Residential
   
2,429,661
   
6,673,540
 
Assisted care
   
5,477,136
   
5,402,376
 
Office
   
4,020,441
   
4,315,608
 
Marina
   
4,065,991
   
4,079,087
 
Golf course
   
   
1,941,245
 
   
$
43,136,122
 
$
53,647,246
 

The balances of land and the major classes of depreciable property for real estate held for investment as of June 30, 2016 and December 31, 2015 are as follows:
   
June 30,
2016
   
December 31,
2015
 
Land and land improvements
 
$
17,142,092
   
$
23,443,676
 
Buildings and improvements
   
28,578,533
     
33,119,166
 
     
45,720,625
     
56,562,842
 
Less: Accumulated depreciation
   
(2,584,503
)
   
(2,915,596
)
   
$
43,136,122
   
$
53,647,246
 

It is the Company’s intent to sell its real estate properties held for investment, but expected sales of these properties are not probable to occur within the next year.
 
Depreciation expense was approximately $291,000 and $562,000 for the three months ended June 30, 2016 and 2015, respectively, and $619,000 and $1,142,000 for the six months ended June 30, 2016 and 2015, respectively.
 
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 eight 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 June 30, 2016 and thereafter is as follows:
 
Twelve months ending June 30:
       
2017
 
$
4,380,256
 
2018
   
2,267,019
 
2019
   
1,689,867
 
2020
   
1,022,851
 
2021
   
554,864
 
Thereafter (through 2024)
   
1,187,714
 
   
$
11,102,571
 
 
 
22

 
OWENS REALTY MORTGAGE, INC.

Notes to Consolidated Financial Statements (Unaudited)




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 June 30, 2016 and December 31, 2015, the outstanding balances and total commitments under the Funding Agreements consisted of the following:
 
   
As of June 30, 2016
 
As of December 31, 2015
 
                   
   
Outstanding
Balance
 
Total
Commitment
 
Outstanding
Balance
 
Total
Commitment
 
CB&T Line of Credit
 
$
30,934,915
 
$
40,241,942
 
$
8,289,500
 
$
22,574,753
 
    Opus Bank Line of Credit    
7,812,500
   
7,812,500
   
12,626,000
   
12,626,000
 
Total
 
$
38,747,415
 
$
48,054,442
 
$
20,915,500
 
$
35,200,753
 
 
The Funding Agreements are generally collateralized by assignments of specific loans and 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 agreements were amended and restated in April 2015 to add First Bank as an additional lender and to increase the maximum borrowings available (total commitment) under the facility to the lesser of a $30,000,000 maximum or the amount determined pursuant to a borrowing base calculation described in the Advance Formula Agreement. Pursuant to the First Amendment to Amended and Restated Credit Agreement and Loan Documents dated March 1, 2016 (the “First Amendment”), the maximum commitment of the lenders under the facility has been increased from $30,000,000 to $50,000,000, such maximum commitment can be increased (on request of the Company and with the permission of the lenders) in the future to up to $75,000,000, and borrowings under the CB&T Credit Facility now mature on March 1, 2018.

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 (3.75% at June 30, 2016). Upon a default such interest rate increases by 2.00%. The original 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 were being amortized to interest expense using the straight-line method through the maturity date of the CB&T Credit Facility (fully amortized as of June 30, 2016). The First Amendment required the payment of an origination fee and other costs totaling $255,000 that was capitalized to deferred financing costs and is being amortized to interest expense using the straight-line method through the new maturity date. The Company is also subject to certain ongoing administrative fees and expenses. Interest expense on the CB&T Credit Facility was approximately $304,000 and $66,000 during the three months ended June 30, 2016 and 2015, respectively (including $32,000 and $31,000, respectively, in amortization of deferred financing costs) and $493,000 and $227,000 during the six months ended June 30, 2016 and 2015, respectively (including $66,000 and $55,000, respectively, in deferred financing costs).

Borrowings are secured by certain assets of the Company. These collateral assets will include the grant to the 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. As of June 30, 2016, the carrying amount and classification of loans and real estate properties securing the CB&T Credit Facility were as follows:
 
Loans:
   
June 30,
2016
 
Commercial
 
$
51,914,214
 
Residential
   
5,403,501
 
Total
 
$
57,317,715
 
 
 
23

 
OWENS REALTY MORTGAGE, INC.

Notes to Consolidated Financial Statements (Unaudited)


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 June 30, 2016.

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 was 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 were available from 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 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 June 30, 2016 was 4.88%. Upon a default under the Opus Credit Facility such interest rate increases by an additional 5.00%. Commencing May 1, 2016, the Company began making required monthly principal payments in addition to interest payments.  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 $124,000 and $109,000 during the three months ended June 30, 2016 and 2015, respectively (including $19,000 and $19,000, respectively, in amortization of deferred financing costs) and $233,000 and $38,000 during the six months ended June 30, 2016 and 2015, respectively (including $38,000 and $38,000, respectively, in amortization of deferred financing costs).

Borrowings under the Opus Credit Facility are secured by certain of the Company's assets. These collateral assets include the following types of assets as identified by the parties and described in Borrowing Base Collateral Certificates entered into by the parties: (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 June 30, 2016, the carrying amount and classification of loans and real estate properties securing the Opus Credit Facility were as follows:

Loans:
   
June 30,
2016
 
Commercial
 
$
7,000,000
 
Real Estate:
       
Office
 
$
8,219,355
 

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 June 30, 2016.
 
24

 
OWENS REALTY MORTGAGE, INC.

Notes to Consolidated Financial Statements (Unaudited)




NOTE 8 - NOTES AND LOANS PAYABLE ON REAL ESTATE

The Company had the following notes and loans payable outstanding as of June 30, 2016 and December 31, 2015:
   
June 30,
2016
 
Interest Rate
 
December 31,
2015
 
Interest Rate
 
Payment Terms/Frequency
 
Maturity Date
Tahoe Stateline Venture, LLC Note #1
 
$
2,900,000
 
5.00%
 
$
2,900,000
 
5.00%
 
Interest Only
Semi-annual
 
December 2016
Tahoe Stateline Venture, LLC Note #2
   
500,000
 
5.00%
   
500,000
 
5.00%
 
Interest Only
Quarterly
 
August 2017
TOTB North, LLC Construction Loan Payable
   
20,162,287
 
4.65%
   
16,009,906
 
4.61%
 
Amortizing
Monthly
 
June 2017
TOTB Miami, LLC Loan Payable
   
12,547,508
 
4.65%
   
12,693,231
 
4.61%
 
Amortizing
Monthly
 
November 2017
Tahoe Stateline Venture, LLC Loan Payable
   
13,826,037
 
3.47%
   
14,013,901
 
3.47%
 
Amortizing
Monthly
 
January 2021
Principal amount
 
$
49,935,832
     
$
46,117,038
           
Less unamortized deferred financing costs
   
(481,848
)
     
(658,194
)
         
Notes and loans payable, net
 
$
49,453,984
     
$
45,458,844
           

The following table shows maturities by year on these notes and loans payable as of June 30, 2016:
 
Twelve months ending June 30:
       
2017
 
$
23,752,658
 
2018
   
13,142,005
 
2019
   
413,308
 
2020
   
427,880
 
2021
   
12,199,981
 
Thereafter
   
 
   
$
49,935,832
 

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 $85,000 and $85,000 of interest on the notes during the six months ended June 30, 2016 and 2015, respectively. As of June 30, 2016 and December 31, 2015, there was approximately $18,000 and $18,000, 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.
 
25

 
OWENS REALTY MORTGAGE, INC.

Notes to Consolidated Financial Statements (Unaudited)


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 June 30, 2016 was 4.65% 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) October 1, 2016 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 or at the earlier closing of the proposed TOTB Sale to Buyer.

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 first quarter of 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 and six months ended June 30, 2016, approximately $0 and $36,000, respectively, of deferred financing costs was amortized and capitalized to the Project and $52,000 and $67,000, respectively, was expensed. During the three and six months ended June 30, 2015, approximately $52,000 and $104,000, respectively, of deferred financing costs was amortized and capitalized to the Project. During the three months ended June 30, 2016 and 2015, approximately $224,000 and $28,000, respectively, of interest was incurred of which $0 and $28,000, respectively, was capitalized to the Project. During the six months ended June 30, 2016 and 2015, approximately $421,000 and $42,000, respectively, of interest was incurred of which $134,000 and $42,000, respectively, was capitalized to the Project.

Pursuant to the amended Purchase Agreement with Buyer, TOTB North and TOTB Miami have agreed to sell all real estate and related properties owned by the TOTB entities for $75,500,000, subject to potential adjustments as described in the amended Purchase Agreement. The TOTB Sale is subject to a number of conditions and there is no guarantee when or if the transaction will close.

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 June 30, 2016.
 
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 June 30, 2016 was 4.65% 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 or at the earlier closing of the proposed TOTB Sale.
 
26

 
OWENS REALTY MORTGAGE, INC.

Notes to Consolidated Financial Statements (Unaudited)



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 June 30, 2016 and 2015, approximately $173,000 and $166,000, respectively, of interest expense was incurred (including approximately $26,000 and $31,000, respectively, of deferred financing costs amortized to interest expense). During the six months ended June 30, 2016 and 2015, approximately, $350,000 and $331,000, respectively, of interest expense was incurred (including approximately $55,000 and $59,000, respectively, 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 June 30, 2016.
 
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 an additional $3,830,000 was borrowed in September 2015.

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.

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 June 30, 2016 and 2015, approximately $129,000 and $98,000, respectively, of interest expense was incurred (including approximately $9,000 and $9,000, respectively, of deferred financing costs amortized to interest expense). During the six months ended June 30, 2016 and 2015, approximately $259,000 and $197,000, respectively, of interest expense was incurred (including approximately $18,000 and $18,000, respectively, 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 June 30, 2016.
 
27

 
OWENS REALTY MORTGAGE, INC.

Notes to Consolidated Financial Statements (Unaudited)




NOTE 9 - TRANSACTIONS WITH AFFILIATES

In consideration of the management services rendered to the Company pursuant to the management agreement between the Company and OFG (the “Management Agreement”), 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 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 $825,000 and $441,000 for the three months ended June 30, 2016 and 2015, respectively, and $1,591,000 and $897,000 for the six months ended June 30, 2016 and 2015, respectively, and are included in the accompanying consolidated statements of income. Servicing fees amounted to approximately $75,000 and $40,000 for the three months ended June 30, 2016 and 2015, respectively, and $145,000 and $82,000 for the six months ended June 30, 2016 and 2015, respectively, and are included in the accompanying consolidated statements of income. As of June 30, 2016 and December 31, 2015, the Company owed management and servicing fees to OFG in the amount of approximately $299,000 and $267,000, respectively.
 
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. During the three and six months ended June 30, 2016 and 2015, OFG elected to take the maximum compensation that it is able to take pursuant to the Company’s charter 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 $4,000 and $0 for the three months ended June 30, 2016 and 2015, respectively, and $6,000 and $17,000 for the six months ended June 30, 2016 and 2015, 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 $4,000 and $2,000, respectively, during the three months ended June 30, 2016 and 2015 and $9,000 and $4,000, respectively, during the six months ended June 30, 2016 and 2015, respectively.

OFG originates all loans the Company invests in and receives loan origination and extension fees from borrowers. During the three and six months ended June 30, 2016, OFG earned approximately $535,000 and $1,253,000, respectively, on loans originated or extended of approximately $19,015,000 and $54,165,000, respectively. During the three and six months ended June 30, 2015, OFG earned approximately $467,000 and $712,000, respectively, on loans originated or extended of approximately $19,615,000 and $30,053,000, 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 for such services were $106,000 and $134,000 during the three months ended June 30, 2016 and 2015, respectively, and $219,000 and $264,000 during the six months ended June 30, 2016 and 2015, respectively. As of June 30, 2016 and December 31, 2015, there was $36,000 and $142,000 payable to OFG for such services. The Company also reimbursed certain of OFG’s officers for allowed expenses in the total amount of $0 and $1,000 during the six months ended June 30, 2016 and 2015, respectively.
 
28

 
OWENS REALTY MORTGAGE, INC.

Notes to Consolidated Financial Statements (Unaudited)


The Company paid Investor’s Yield, Inc. (a wholly owned subsidiary of OFG) approximately $3,000 and $7,000 during the six months ended June 30, 2016 and 2015, respectively, in fees primarily related to certain foreclosure proceedings on Company loans.
 
During the six months ended June 30, 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 May 27, 2015, the Board of Directors authorized a Rule 10b5-1 stock repurchase plan (the “2015 Repurchase Plan”) under which the Company was able purchase up to $7.5 million of its Common Stock. Under the 2015 Repurchase Plan, repurchases were funded from available working capital, and repurchased shares were returned to the status of authorized but unissued shares of Common Stock. The 2015 Repurchase Plan permitted repurchases commencing June 27, 2015 through its expiration in May 2016; however no shares had been repurchased under this plan as of June 30, 2015. During the year ended December 31, 2015, the Company repurchased 520,524 shares of its Common Stock under this plan for a total cost of approximately $7,503,000 (including commissions), and no further purchases were made pursuant to this plan.

On December 11, 2015, the Board of Directors authorized a new Rule 10b5-1 stock repurchase plan (the “2016 Repurchase Plan”) under which the Company may purchase up to $7.5 million of its Common Stock. Under the 2016 Repurchase Plan, repurchases will be funded from available working capital, and the repurchased shares will return to the status of authorized but unissued shares of Common Stock. The 2016 Repurchase Plan provides for stock repurchases to commence on April 1, 2016 and is subject to certain price, volume and timing constraints specified in the brokerage agreement. There is no guarantee as to the exact number of shares that will be repurchased by the Company. The 2016 Repurchase Plan is set to expire on March 31, 2017, although the Company may terminate the Repurchase Plan at any time.  No shares had been repurchased under this new plan as of June 30, 2016.

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 June 30, 2016 and December 31, 2015 were approximately $3,871,000 and $3,809,000, respectively, and are reported as part of restricted cash in the accompanying consolidated balance sheets. The $8,500,000 required to be held in non-interest bearing accounts as of June 30, 2016 pursuant to the Company’s two lines of credit agreements satisfy this contingency reserve requirement.
 
Escrow Deposits
 
Restricted cash includes deposits held in third party escrow accounts to fund construction costs and replacement reserves and to pay property taxes and insurance on Company real estate in the amounts of approximately $454,000 and $225,000 as of June 30, 2016 and December 31, 2015, respectively.
 
 
29

 
OWENS REALTY MORTGAGE, INC.

Notes to Consolidated Financial Statements (Unaudited)



 
NOTE 12 - INCOME TAXES
 
The Company operates in such a manner as to qualify as a REIT, under the provisions of the Code; therefore, applicable REIT taxable income is included in the taxable income of its shareholders, to the extent distributed by the Company. To maintain REIT status for federal income tax purposes, the Company is generally required to distribute at least 90% of its REIT taxable income to its shareholders as well as comply, generally, with certain other qualification requirements as defined under the Code. As a REIT, the Company is not subject to federal corporate income tax to the extent that it distributes 100% of its REIT taxable income each year.

Taxable income from non-REIT activities managed through the Company's taxable REIT subsidiaries (“TRSs”) (Lone Star Golf, Inc., Zalanta Resort at the Village, LLC and East G, LLC) is subject to federal, state and local income taxes. The Company did not record a provision for current income taxes related to Lone Star for the six months ended June 30, 2016 and the years ended December 31, 2015 and 2014 as it was in a net loss position. In addition, deferred taxes related to temporary differences in book and taxable income, as well as net operating losses of Lone Star, were not significant and the deferred taxes would likely not be realizable due to Lone Star’s loss history.

In June 2016, the Company converted Zalanta Resort at the Village, LLC (“Zalanta”) into a TRS and contributed two additional real estate assets into Zalanta. These properties included 75 improved, residential lots previously held within Baldwin Ranch Subdivision, LLC and a medical office condominium complex previously held within AMFU, LLC. The conversion of Zalanta into a TRS and contribution of the additional real estate assets resulted in the Company recording a deferred tax asset and income tax benefit in the amount of approximately $7,369,000 primarily due to a $19,862,000 aggregate difference between the book and tax basis of the subject real estate assets as of June 30, 2016.

In addition, in June 2016, the Company established a new entity, East G, LLC (“East G”) and contributed an office property that was obtained via foreclosure of a loan in May 2016 into this new entity along with a unit in the same building that had been purchased in December 2015. The Company then converted East G into a TRS. Deferred taxes related to temporary differences in book and taxable income were not significant and the deferred taxes would likely not be realizable due to expected future operating losses from the property.

The components of the income tax benefit as it relates to the Company’s taxable income (loss) from domestic TRSs during the three and six months ended June 30, 2016 were as follows:

   
For the Three and Six Months Ended June 30, 2016
 
               
   
Federal
 
State and Local
 
Total
 
Deferred benefit
 
$
6,436,164
 
$
932,671
 
$
7,368,835
 
Income tax benefit
 
$
6,436,164
 
$
932,671
 
$
7,368,835
 

A reconciliation of the income tax benefit (provision) based upon the statutory tax rates to the effective rates of our taxable REIT subsidiaries is as follows for the three and six months ended June 30, 2016:

     
For the Three and Six Months Ended
June 30, 2016
 
Tax expense (benefit) at Federal statutory rate
 
$
 
State income tax expense (benefit), net of federal effect
   
 
Real estate basis differences
   
7,923,612
 
Change in valuation allowance
   
(554,777
)
Income tax benefit
 
$
7,368,835
 
 
 
30

 
OWENS REALTY MORTGAGE, INC.

Notes to Consolidated Financial Statements (Unaudited)



Significant components of the Company’s deferred tax assets (liabilities) are as follows as of June 30, 2016:

Deferred tax assets (liabilities):
   
As of
June 30, 2016
 
Real estate basis differences
 
$
7,923,612
 
Total deferred tax assets
   
7,923,612
 
Valuation allowance
 
$
(554,777
)
Net deferred tax assets
   
7,368,835
 

NOTE 13 – FAIR VALUE
 
The Company discloses fair value of 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.
 
 
31

 
OWENS REALTY MORTGAGE, INC.

Notes to Consolidated Financial Statements (Unaudited)


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 property sales 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 June 30, 2016 and December 31, 2015, 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.

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 properties held for sale 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.

 
32

 
OWENS REALTY MORTGAGE, INC.

Notes to Consolidated Financial Statements (Unaudited)



 
The following table presents information about the Company’s assets measured at fair value on a nonrecurring basis as of June 30, 2016 and December 31, 2015:
 
   
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)
June 30, 2016
               
Nonrecurring:
               
Real estate properties:
     
 
 
 
 
 
  Land
$
2,113,850
               $ $
$
$
2,113,850
  Commercial
 
756,125
 
 
 
756,125
 
Total real estate properties
 
$
 
2,869,975
$
$
 
 
$
 
2,869,975
                 
December 31, 2015
               
Nonrecurring:
               
Impaired loans:
               
  Commercial
$
659,041
 
$
 
659,041
 
Total impaired loans
 
$
 
659,041
$
 
$
 
$
 
   659,041
                 
Real estate properties:
               
  Land
$
4,224,000
 
$
$
         4,224,000
 
Total real estate properties
 
$
 
    4,224,000
$
$
 
      —
$
 
4,224,000

The (reversal of) provision for loan losses based on the fair value of loan collateral less estimated selling costs for the impaired loans above totaled approximately $(48,000) and $(9,000) during the three months ended June 30, 2016 and 2015, respectively, and $(38,000) and $(6,000) during the six months ended June 30, 2016 and 2015, respectively. Impairment losses were recorded on real estate properties in the amounts of approximately $2,110,000 and $147,000 during the three months ended June 30, 2016 and 2015, respectively, and $2,110,000 and $1,256,000 during the six months ended June 30, 2016 and 2015, respectively.
 
There were no liabilities measured at fair value on a non-recurring basis at June 30, 2016 and December 31, 2015.
 
 
33

 
OWENS REALTY MORTGAGE, INC.

Notes to Consolidated Financial Statements (Unaudited)



The following table presents quantitative information about Level 3 fair value measurements for assets measured at fair value on a non-recurring basis at June 30, 2015 and December 31, 2014:

At June 30, 2016:

Description
 
Fair Value
 
Valuation Technique
 
Significant Unobservable Inputs
 
Input/Range
 
Weighted Average
                     
Real Estate Properties:
                 
Land
$
2,113,850
 
Appraisal
 
Comparable Sales Adjustment
 
(50)%
 
N/A
Commercial
 
756,125
 
Appraisal
 
Comparable Sales
Adjustment
 
(5.0)% to 5.0%
 
N/A
           
Capitalization Rate
 
7.3%
 
N/A
           
Estimated Cost of
Improvements
 
42.8%
 
N/A

At December 31, 2015:

Description
 
Fair Value
 
Valuation Technique
 
Significant Unobservable Inputs
 
Input/Range
 
Weighted Average
                     
Impaired Loans:
                   
Commercial
$
    659,041
 
Appraisal
 
Estimated Cost of Improvements
 
31.9%
 
N/A
           
Capitalization Rate
 
7.0%
 
N/A
           
Comparable Sales Adjustment
 
(20)% to 30%
 
N/A
Real Estate Properties:
                 
Land
$
  4,224,000
 
Appraisal
 
Comparable Sales Adjustment
 
(33.4)%
 
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 were multiple impaired loans or real estate properties measured at fair value on a nonrecurring basis.
 
 
34

 
OWENS REALTY MORTGAGE, INC.

Notes to Consolidated Financial Statements (Unaudited)



The approximate carrying amounts and estimated fair values of financial instruments at June 30, 2016 and December 31, 2015 are as follows:
 
         
Fair Value Measurements at June 30, 2016
     
 
Carrying Value
 
Level 1
 
Level 2
 
Level 3
 
Total
Financial assets
                   
 
Cash and cash equivalents
$
747,000
$
747,000
$
$
$
747,000
 
Restricted cash
 
8,954,000
 
8,954,000
 
 
 
8,954,000
 
Loans, net
 
117,800,000
 
 
 
117,823,000
 
117,823,000
 
Investment in limited liability company
 
2,141,000
 
 
 
2,352,000
 
2,352,000
 
Accrued interest and advances receivable
 
1,295,000
 
 
 
1,295,000
 
1,295,000
                       
Financial liabilities
                   
 
Due to Manager
$
335,000
$
$
335,000
$
$
335,000
 
Accrued interest payable
 
326,000
 
 
268,000
 
58,000
 
326,000
 
Lines of credit payable
 
38,747,000
 
 
38,747,000
 
 
38,747,000
 
Notes and loans payable
 
49,454,000
 
 
32,392,000
 
16,909,000
 
49,301,000

         
Fair Value Measurements at December 31, 2015
     
 
Carrying Value
 
Level 1
 
Level 2
 
Level 3
 
Total
Financial assets
                   
 
Cash and cash equivalents
$
1,256,000
$
1,256,000
$
$
$
1,256,000
 
Restricted cash
 
7,225,000
 
7,225,000
 
 
 
7,225,000
 
Loans, net
 
104,901,000
 
 
 
104,895,000
 
104,895,000
 
Investment in limited liability company
 
2,141,000
 
 
 
2,352,000