10-Q 1 vrta10q093012.htm VESTIN REALTY MORTGAGE I, INC. SEPTEMBER 30, 2012 10 Q vrta10q093012.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 September 30, 2012

Or

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

For the transition period from _________ to _________

Commission File Number: 333-125347
Company Logo
VESTIN REALTY MORTGAGE I, INC.
(Exact name of registrant as specified in its charter)


MARYLAND
 
20-4028839
(State or Other Jurisdiction of
 
(I.R.S. Employer
Incorporation or Organization)
 
Identification No.)

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

Registrant’s Telephone Number: 702.227.0965

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

Yes  [X]    No   [   ]

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes  [   ]    No   [   ]

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

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes  [   ]    No   [X]

As of November 14, 2012, there were 6,340,859 shares of the Company’s Common Stock outstanding.



TABLE OF CONTENTS

   
Page
     
 
     
     
 
     
 
     
   3
     
 
     
 
     
 
     
     
     
 
     
     
     
     
 
     
 
Exhibit 31.1
 
     
 
Exhibit 31.2
 
     
 
Exhibit 32
 




PART I - FINANCIAL INFORMATION

ITEM 1.
CONSOLIDATED FINANCIAL STATEMENTS

VESTIN REALTY MORTGAGE I, INC.
 
   
CONSOLIDATED BALANCE SHEETS
 
   
ASSETS
 
   
   
September 30, 2012
   
December 31, 2011
 
   
(Unaudited)
       
Assets
           
Cash and cash equivalents
  $ 534,000     $ 6,758,000  
Investment in marketable securities - related party
    827,000       651,000  
Interest and other receivables, net of allowance of $0 at September 30, 2012 and $228,000 at December 31, 2011
    15,000       10,000  
Notes receivable, net of allowance of $1,931,000 at September 30, 2012 and $837,000 at December 31, 2011
    --       --  
Real estate held for sale
    2,825,000       2,409,000  
Investment in real estate loans, net of allowance for loan losses of $628,000 at September 30, 2012 and $5,485,000 at December 31, 2011
    13,858,000       10,767,000  
Asset held for sale
    4,292,000       --  
Other assets
    163,000       100,000  
                 
Total assets
  $ 22,514,000     $ 20,695,000  
                 
LIABILITIES AND STOCKHOLDERS' EQUITY
 
                 
Liabilities
               
Accounts payable and accrued liabilities
  $ 101,000     $ 147,000  
Due to related parties
    104,000       104,000  
Notes payable
    56,000       19,000  
Liabilities related to asset held for sale
    34,000       --  
Deferred gain on sale of Hawaii Funeral Services, LLC
    42,000       63,000  
                 
Total liabilities
    337,000       333,000  
                 
Commitments and contingencies
               
                 
Stockholders' equity
               
Preferred stock, $0.0001 par value; 1,000,000 shares authorized; none issued
    --       --  
Treasury stock, at cost, 0 shares at September 30, 2012 and 534,207 shares at December 31, 2011
    --       (1,045,000 )
Common stock, $0.0001 par value; 25,000,000 shares authorized; 6,340,859 shares issued and  outstanding at September 30, 2012 and 6,875,066 shares issued and 6,340,859 outstanding at December 31, 2011
    1,000       1,000  
Additional paid-in capital
    61,217,000       62,262,000  
Accumulated deficit
    (40,352,000 )     (40,856,000 )
Accumulated other comprehensive income
    199,000       --  
Total stockholders’ equity before non-controlling interest – related party
    21,065,000       20,362,000  
Noncontrolling interest – related party
    1,112,000       --  
Total equity
    22,177,000       20,362,000  
                 
Total liabilities and stockholders' equity
  $ 22,514,000     $ 20,695,000  


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



VESTIN REALTY MORTGAGE I, INC.
 
   
CONSOLIDATED STATEMENTS OF OPERATIONS
 
(UNAUDITED)
 
   
For The
Three Months Ended
   
For The
Nine Months Ended
 
   
9/30/2012
   
9/30/2011
   
9/30/2012
   
9/30/2011
 
Revenues
                       
Interest income from investment in real estate loans
  $ 291,000     $ 97,000     $ 643,000     $ 328,000  
Gain related to pay off of real estate loan, including recovery of allowance for loan loss
    22,000       --       210,000       --  
Gain related to pay off of notes receivable, including recovery of allowance for notes receivable
    30,000       22,000       89,000       33,000  
Other
    --       --       --       12,000  
Total revenues
    343,000       119,000       942,000       373,000  
                                 
Operating expenses
                               
Management fees - related party
    61,000       69,000       199,000       207,000  
Provision for loan loss
    21,000       608,000       40,000       735,000  
Interest expense
    2,000       7,000       3,000       19,000  
Professional fees
    135,000       59,000       523,000       304,000  
Consulting
    20,000       22,000       58,000       69,000  
Insurance
    55,000       55,000       166,000       176,000  
Other
    41,000       31,000       121,000       155,000  
Total operating expenses
    335,000       851,000       1,110,000       1,665,000  
                                 
Income (loss( from operations
    8,000       (732,000 )     (168,000 )     (1,292,000 )
                                 
Non-operating income (loss)
                               
Interest income from banking institutions
    --       1,000       --       6,000  
Recovery from settlement with loan guarantor
    267,000       --       978,000       --  
Settlement income
    55,000       --       55,000       --  
Gain on sale of marketable securities – related party
    3,000       --       3,000       --  
Discounted professional fees
    --       --       --       280,000  
Settlement expense
    --       --       (23,000 )     --  
Income from equity method investee held for sale
    --       328,000       --       661,000  
Total non-operating income, net
    325,000       329,000       1,013,000       947,000  
                                 
Provision for income taxes
    --       --       --       --  
                                 
Income (loss) from continuing operations
    333,000       (403,000 )     845,000       (345,000 )
                                 
Discontinued operations, net of income taxes
                               
Net gain on sale of real estate held for sale
    --       --       4,000       --  
Expenses related to real estate held for sale
    (29,000 )     (98,000 )     (116,000 )     (232,000 )
Write-downs on real estate held for sale
    --       (141,000 )     (316,000 )     (273,000 )
Income from asset held for sale, net of income taxes
    79,000       --       118,000       --  
Total loss from discontinued operations
    50,000       (239,000 )     (310,000 )     (505,000 )
                                 
Net income (loss)
    383,000       (642,000 )     535,000       (850,000 )
Allocation to noncontrolling interest – related party
    (21,000 )     --       (31,000 )     --  
Net income (loss) attributable to common stockholders
  $ 362,000     $ (642,000 )   $ 504,000     $ (850,000 )
                                 
Basic and diluted income (loss) per weighted average common share
                               
  Continuing operations
    0.05       (0.06 )     0.14       (0.05 )
  Discontinued operations
    0.01       (0.04 )     (0.05 )     (0.08 )
  Total basic and diluted income (loss) per weighted
                               
    average common share
  $ 0.06     $ (0.10 )   $ 0.09     $ (0.13 )
                                 
Dividends declared per common share
  $ --     $ --     $ --     $ --  
Weighted average common shares outstanding
    6,340,859       6,340,858       6,340,859       6,380,734  


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



VESTIN REALTY MORTGAGE I, INC.
 
CONSOLIDATED STATEMENTS OF OTHER COMPREHENSIVE INCOME (LOSS)
 
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2012 AND 2011
 
(UNAUDITED)
   
For The
Three Months Ended
   
For The
Nine Months Ended
 
   
9/30/2012
   
9/30/2011
   
9/30/2012
   
9/30/2011
 
                         
Net income (loss)
  $ 383,000     $ (642,000 )   $ 535,000     $ (850,000 )
                                 
Unrealized holding gain (loss) on available-for-sale securities – related party
    219,000       (82,000 )     199,000       (208,000 )
                                 
Comprehensive income (loss)
    602,000       (724,000 )     734,000       (1,058,000  
Net (income) attributable to noncontrolling interest
    (21,000 )     --       (31,000 )     --  
                                 
Comprehensive income (loss) attributable to Vestin Realty Mortgage I, Inc.
  $ 581,000     $ (724,000 )   $ 703,000     $ (1,058,000 )
                                 



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


  VESTIN REALTY MORTGAGE I, INC.
 
  CONSOLIDATED STATEMENT OF EQUITY
 
  FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2012
 
  (UNAUDITED)

   
Treasury Stock
   
Common Stock
                               
   
Shares
   
Amount
   
Shares
   
Amount
   
Additional
Paid-in-
Capital
   
Accumulated Deficit
   
Accumulated
Other Comprehensive
Loss
   
Noncontrolling Interest – Related Party
   
Total
 
Stockholders' Equity at
December 31, 2011
    534,207     $ (1,045,000 )     6,340,859     $ 1,000     $ 62,262,000     $ (40,856,000 )   $ --     $ --     $ 20,362,000  
                                                                         
Net Income
                                            504,000               31,000       535,000  
                                                                         
                                                                         
Unrealized Gain on Marketable Securities - Related Party
                                                    199,000               199,000  
                                                                         
Comprehensive Loss
                                                                    734,000  
                                                                         
Retire treasury stock
    (534,207 )     1,045,000                       (1,045,000  )                             --   
                                                                         
Non-Controlling Interest – Related Party
                                                            1,081,000       1,081,000  
                                                                         
Stockholders' Equity at September 30, 2012 (Unaudited)
    --     $ --       6,340,859     $ 1,000     $ 61,217,000     $ (40,352,000 )   $ 199,000     $ 1,112,000     $ 22,177,000  


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



VESTIN REALTY MORTGAGE I, INC.
 
   
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
   
(UNAUDITED)
 
   
   
For The Nine
Months Ended
 
   
09/30/2012
   
09/30/2011
 
Cash flows from operating activities:
           
Net income (loss)
  $ 535,000     $ (850,000 )
Adjustments to reconcile net loss to net cash used in operating activities:
               
Write-downs on real estate held for sale
    316,000       273,000  
Recovery of allowance for doubtful notes receivable
    (89,000 )     (10,000 )
Gain on sale of marketable securities – related party
    (3,000 )     --  
Gain related to recovery of allowance for loan loss
    (210,000 )     (33,000 )
Settlement income
    (55,000 )     --  
Gain on sale of real estate held for sale
    (4,000 )     --  
Gain related to recovery from settlement with loan guarantor
    (978,000 )     --  
Provision for loan loss
    40,000       735,000  
Amortized interest income
    --       (2,000 )
Income from equity method investee held for sale
    --       (661,000 )
Change in operating assets and liabilities:
               
Interest and other receivables
    (5,000 )     669,000  
Due to/from related parties
    --       (731,000 )
Asset held for sale, net of liabilities
    (118,000 )     --  
Deferred gain on sale of Hawaii Funeral Services, LLC
    (21,000 )     --  
Other assets
    103,000       124,000  
Accounts payable and accrued liabilities
    (44,000 )     (1,281,000 )
Net cash used in operating activities
    (533,000 )     (1,767,000 )
                 
Cash flows from investing activities:
               
Investments in real estate loans
    (14,169,000 )     (3,676,000 )
Purchase of investment in real estate loans from
               
    VRM II
    (1,000,000 )     --   
    Other related parties
    (300,000 )     --   
Purchase of marketable securities – related party
    --       (543,000 )
Proceeds from loan payoffs
    6,689,000       804,000  
Sale of investments in real estate loans to third parties
    2,012,000       --  
Proceeds from sale of marketable security – related party
    26,000       --  
Proceeds from settlement from loan guarantor
    978,000       --  
Proceeds from notes receivable
    89,000       10,000  
Proceeds from settlement  income
    55,000       --  
Proceeds from sale of real estate held for sale
    133,000       --  
Investment in asset held for sale
    (80,000 )     --   
Proceeds related to nonrefundable extension fees on real estate held for sale
    5,000       --  
Distributions from investment in equity method investee held for sale
    --       387,000  
Net cash used in investing activities
    (5,562,000 )     (3,018,000 )
                 
Cash flows from financing activities:
               
Purchase of treasury stock at cost
    --       (104,000 )
Principal payments on notes payable
    (129,000 )     (114,000 )
Net cash used in financing activities
    (129,000 )     (218,000 )
                 
NET CHANGE IN CASH
    (6,224,000 )     (5,003,000 )
                 
Cash and cash equivalents, beginning of period
    6,758,000       8,145,000  
                 
Cash and cash equivalents, end of period
  $ 534,000     $ 3,142,000  

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



VESTIN REALTY MORTGAGE I, INC.
 
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
 
(UNAUDITED)
 
   
For The Nine
Months Ended
 
   
09/30/2012
   
09/30/2011
 
Supplemental disclosures of cash flows information:
           
Interest paid
  $ 3,000     $ 19,000  
                 
Non-cash investing and financing activities:
               
Write-off of interest receivable and related allowance
  $ 228,000     $ --  
Real estate held for sale through deed in lieu, net of prior allowance
  $ 787,000     $ --  
Note payable relating to prepaid D & O insurance
  $ 166,000     $ 167,000  
Adjustment to note receivable and related allowance
  $ 1,087,000     $ --  
Asset held for sale acquired through foreclosure, net of prior allowance
    (3,059,000 )     --  
Unrealized gain (loss) on marketable securities - related party
  $ 199,000     $ (212,000 )


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



VESTIN REALTY MORTGAGE I, INC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2012

(UNAUDITED)

NOTE A — ORGANIZATION

Vestin Realty Mortgage I, Inc. (“VRM I”) formerly Vestin Fund I, LLC (“Fund I”) invests in loans secured by real estate through deeds of trust or mortgages (hereafter referred to collectively as “deeds of trust” and as defined in our management agreement (“Management Agreement”) as “Mortgage Assets”).  In addition we may invest in, acquire, manage or sell real property or acquire entities involved in the ownership or management of real property.  We commenced operations in August 2000.  References in this report to the “Company,”“we,” “us,” or “our” refer to Fund I with respect to the period prior to April 1, 2006 and to VRM I with respect to the period commencing on May 1, 2006.

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

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

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

The VRM II board of directors has recommended that VRM II changes its manager by appointing VRM Management LLC ("Vestin Management") as its new manager.  VRM Management is a newly formed Nevada limited liability company which is 90% owned by our Chairman and Chief Executive Officer, Michael Shustek and 10% owned by Craig Burr.  Mr. Burr is an attorney who has been engaged in the private practice of law in Las Vegas, Nevada for more than 19 years.  The current employees and officers of Vestin Mortgage would join VRM Management and would continue to render services to us through this new entity.

 
-7-



The terms of the proposed management agreement with VRM Management are identical to VRM II’s current Management Agreement with Vestin Mortgage.  In addition, VRM Management will be subject to the continuing oversight of the VRM II board of directors to be the same extent as Vestin Mortgage.

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

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

NOTE B — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

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

Management Estimates

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

Cash and Cash Equivalents

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

Revenue Recognition

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


 
-8-



Investments in Real Estate Loans

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

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

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

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

Allowance for Loan Losses

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

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


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

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

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

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

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

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

Discontinued Operations

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

Real Estate Held for Sale

Real estate held for sale (“REO”) includes real estate acquired through foreclosure and will be carried at the lower of the recorded amount, inclusive of any senior indebtedness, or the property's estimated fair value, less estimated costs to sell, with fair value based on appraisals and knowledge of local market conditions.  While pursuing foreclosure actions, we seek to identify potential purchasers of such property.  We seek to sell properties acquired through foreclosure as quickly as circumstances permit, taking into account current economic conditions.  The carrying values of REO are assessed on a regular basis from updated appraisals, comparable sales values or purchase offers.

Management classifies REO when the following criteria are met:

 
·
Management commits to a plan to sell the properties;

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

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

 
·
The sale of the property is probable;

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

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


 
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Classification of Operating Results from Real Estate Held for Sale

Generally, operating results and cash flows from long-lived assets held for sale are to be classified as discontinued operations as a separately stated component of net income.  Our operations related to REO are separately identified in the accompanying consolidated statements of operations.

Secured Borrowings

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

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

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

Investment in Marketable Securities – Related Party

Investment in marketable securities – related party consists of stock in VRM II.  The securities are stated at fair value as determined by the closing market price as of September 30, 2012 and December 31, 2011.  All securities are classified as available-for-sale.

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

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

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

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

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


 
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Fair Value Disclosures

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

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

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

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

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

Basic and Diluted Earnings Per Common Share

Basic earnings per share (“EPS”) is computed by dividing net income available to common stockholders by the weighted average number of common shares outstanding.  Diluted EPS is similar to basic EPS except that the weighted average number of common shares outstanding is increased to include the number of additional common shares that would have been outstanding if the dilutive potential common shares had been exercised.  We had no outstanding common share equivalents during the three months ended September 30, 2012 and 2011.

Common Stock Dividends

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

Treasury Stock

On February 21, 2008, our Board of Directors authorized the repurchase of up to $5 million worth of our common stock.  Depending upon market conditions, shares may be repurchased from time to time at prevailing market prices through open market or privately negotiated transactions.  We are not obligated to purchase any shares.  Subject to applicable securities laws, including SEC Rule 10b-18, repurchases may be made at such times and in such amounts, as our management deems appropriate.  The repurchases will be funded from our available cash.


 
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Segments

We are currently authorized to operate two reportable segments, investments in real estate loans and investments in real property.  As of September 30, 2012, we had not commenced investing in real property.

Our objective is to invest approximately 97% of our assets in real estate loans and real estate investments, while maintaining approximately 3% as a working capital cash reserve.  Current market conditions have impaired our ability to be fully invested in real estate loans and real estate investments.  As of September 30, 2012, approximately 62% of our assets, net of allowance for loan losses, are classified as investments in real estate loans.

Reclassifications

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

Principles of Consolidation
 
Our consolidated financial statements include the accounts of VRM I, Vestin TRS I, Inc., our wholly owned subsidiary, and VREO XXV, LLC, in which we have a controlling interest.  All significant intercompany balances and transactions have been eliminated in consolidation.
 
Business Combinations
 
 
In December 2007, the Financial Accounting Standards Board (FASB) revised the authoritative guidance for business combinations, establishing principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired (including goodwill), the liabilities assumed, and any noncontrolling interest in the acquiree. Subsequently, on April 1, 2009, the FASB amended and clarified certain aspects of its authoritative guidance on initial recognition and measurement, subsequent measurement and accounting, and disclosure of assets and liabilities arising from contingencies in a business combination. We apply the FASB authoritative guidance to all business combinations for which the acquisition date is on or after January 1, 2009, and to certain future income tax effects related to our prior business combinations, should they arise.
 
Noncontrolling Interests

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

Income Taxes

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


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

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

NOTE C — FINANCIAL INSTRUMENTS AND CONCENTRATIONS OF CREDIT RISK

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

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

We maintain cash deposit accounts and certificates of deposit which, at times, may exceed federally-insured limits.  To date, we have not experienced any losses.  As of September 30, 2012 and December 31, 2011, we had no funds in excess of the federally-insured limits.

As of September 30, 2012, 77% and 12% of our loans were in Nevada and Michigan, respectively, compared to 37%, 27%, 20%, and 10% of our loans were in Nevada, Oregon, Arizona and Texas at December 31, 2011, respectively.  As a result of this geographical concentration of our real estate loans, the downturn in the local real estate markets in these states has had a material adverse effect on us.

At September 30, 2012, the aggregate amount of loans to our three largest borrowers represented approximately 47% of our total investment in real estate loans.  These real estate loans consisted of commercial loans, secured by property located in Michigan and Nevada, all first lien position with interest rates between 7.75% and 9.00%, and an aggregate outstanding balance of approximately $6.7 million.  As of September 30, 2012, all three of our largest loans were considered performing.

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

Common Guarantors

As of September 30, 2012 and December 31, 2011, four and seven loans, respectively, totaling approximately $4.9 million and $4.6 million, respectively, representing approximately 34.4% and 28.6%, respectively, of our portfolio’s total value, had a common guarantor.  These loans are considered performing.


 
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As of September 30, 2012 five loans totaling approximately $5.9 million representing approximately 40.7% of our portfolio’s total value had a common guarantor.  As of September 30, 2012 all loans were considered performing.

For additional information regarding the above loans, see Note D – Investments In Real Estate Loans.

NOTE D — INVESTMENTS IN REAL ESTATE LOANS

As of September 30, 2012 and December 31, 2011, most of our loans provided for interest only payments with a “balloon” payment of principal payable and any accrued interest payable in full at the end of the term.

In addition, we may invest in real estate loans that require borrowers to maintain interest reserves funded from the principal amount of the loan for a period of time.  At September 30, 2012 and December 31, 2011, we had no investments in real estate loans that had interest reserves. We did not have any variable interest rate loans as of September 30, 2012 or December 31, 2011.

Loan Portfolio

As of September 30, 2012, we had five available real estate loan products consisting of commercial, construction, acquisition and development, land and residential.  The effective interest rates on all product categories range from 4.5% to 10% which includes performing loans that are being fully or partially accrued and will be payable at maturity.  Revenue by product will fluctuate based upon relative balances during the period.

Investments in real estate loans as of September 30, 2012, were as follows:

Loan Type
 
Number of Loans
   
Balance *
   
Weighted Average Interest Rate
   
Portfolio Percentage
   
Current Weighted Average Loan-To-Value, Net of Allowance for Loan Losses
 
                               
Commercial
    14     $ 14,392,000       8.11 %     99.35 %     67.15 %
Land
    1       94,000       6.00 %     0.65 %     53.81 %
Total
    15     $ 14,486,000       8.10 %     100.00 %     67.06 %

Investments in real estate loans as of December 31, 2011, were as follows:

Loan Type
 
Number of Loans
   
Balance *
   
Weighted Average Interest Rate
   
Portfolio Percentage
   
Current Weighted Average Loan-To-Value, Net of Allowance for Loan Losses
 
                               
Commercial
    17     $ 15,855,000       10.15 %     97.55 %     70.96 %
Construction
    1       165,000       8.00 %     1.02 %     90.50 %
Residential
    1       138,000       11.69 %     0.85 %     89.73 %
Land
    1       94,000       6.00 %     0.58 %     53.81 %
Total
    20     $ 16,252,000       10.09 %     100.00 %     70.86 %

*
Please see Balance Sheet Reconciliation below.

The “Weighted Average Interest Rate” as shown above is based on the contractual terms of the loans for the entire portfolio including non-performing loans.  The weighted average interest rate on performing loans only, as of September 30, 2012 and December 31, 2011, was 8.10% and 9.77%, respectively.  Please see “Asset Quality and Loan Reserves” below for further information regarding performing and non-performing loans.

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

The following is a schedule of priority of real estate loans as of September 30, 2012 and December 31, 2011:

 
Loan Type
 
Number of Loans
   
September 30, 2012
Balance *
   
Portfolio
Percentage
   
Number of Loans
   
December 31, 2011 Balance *
   
Portfolio
Percentage
 
                                     
First deeds of trust
    12     $ 13,058,000       90.14 %     13     $ 10,840,000       66.70 %
Second deeds of trust
    3       1,428,000       9.86 %     7       5,412,000       33.30 %
Total
    15     $ 14,486,000       100.00 %     20     $ 16,252,000       100.00 %

*
Please see Balance Sheet Reconciliation below.

During July 2012, we, VRM II and other affiliated entities modified a loan with a total of $2.8 million, of which our portion was $1.1 million.  The terms of the modification resulted in a first trust deed loan of approximately $1.4 million, of which our portion is approximately $0.4 million, and a second trust deed loan of approximately $1.4 million, of which our portion is approximately $0.2 million.  As of September 30, 2012, approximately $0.5 million of the first trust deed has been sold to third-party investors.

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

October 2012 –December 2012
  $ 2,225,000  
January 2013 – March 2013
    3,843,000  
April 2013 – June 2013
    4,823,000  
July 2013 – September 2013
    2,845,000  
Thereafter
    750,000  
         
Total
  $ 14,486,000  

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

   
September 30, 2012 Balance *
   
Portfolio Percentage
   
December 31, 2011 Balance *
   
Portfolio Percentage
 
                         
Arizona
  $ --       -- %   $ 3,282,000       20.20 %
California
    445,000       3.07 %     647,000       3.98 %
Colorado
    --       --       300,000       1.85 %
Michigan
    1,741,000       12.02 %     --       --  
Nevada
    11,157,000       77.02 %     5,928,000       36.48 %
Oregon
    --       --       4,434,000       27.28 %
Texas
    484,000       3.34 %     1,661,000       10.21 %
Utah
    659,000       4.55 %     --       --  
Total
  $ 14,486,000       100.00 %   $ 16,252,000       100.00 %

*
Please see Balance Sheet Reconciliation below.


 
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Balance Sheet Reconciliation

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

   
September 30, 2012 Balance
   
December 31, 2011 Balance
 
Balance per loan portfolio
  $ 14,486,000     $ 16,252,000  
Less:
               
Allowance for loan losses (a)
    (628,000 )     (5,485,000 )
Balance per consolidated balance sheets
  $ 13,858,000     $ 10,767,000  

 
(a)
Please refer to Specific Reserve Allowance below.

Non-Performing Loans

As of September 30, 2012, we had no loans considered non-performing (i.e., based on current information and events, it is probable that we will be unable to collect all amounts due according to the contractual terms of the loan agreement or when the payment of interest is 90 days past due).

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

Loan Type
 
Number Of Non-Performing Loans
   
Balance at
December 31, 2011
   
Allowance for Loan Losses
   
Net Balance at
December 31, 2011
 
Commercial
    4     $ 7,571,000     $ (3,724,000 )   $ 3,847,000  
Total
    4     $ 7,571,000     $ (3,724,000 )   $ 3,847,000  

Asset Quality and Loan Reserves

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

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

 
·
Prevailing economic conditions;

 
·
Historical experience;

 
·
The nature and volume of the loan portfolio;

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

 
·
Evaluation of industry trends; and

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


 
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Based upon this evaluation, a determination is made as to whether the allowance for loan losses is adequate to cover any potential losses on an individual loan basis; we do not have a general allowance for loan losses.  Additions to the allowance for loan losses are made by charges to the provision for loan loss.  As of September 30, 2012, our ratio of total allowance for loan losses to total loans with an allowance for loan loss was 37%.  The following is a breakdown of allowance for loan losses related to performing and non-performing loans as of September 30, 2012 and December 31, 2011.

   
As of September 30, 2012
 
   
Balance
   
Allowance for loan losses *
   
Balance, net of allowance
 
                   
Non-performing loans – no related allowance
  $ --     $ --     $ --  
Non-performing loans – related allowance
    --       --       --  
Subtotal non-performing loans
    --       --       --  
                         
Performing loans – no related allowance
    12,807,000       --       12,807,000  
Performing loans – related allowance
    1,679,000       (628,000 )     1,051,000  
Subtotal performing loans
    14,486,000       (628,000 )     13,858,000  
                         
Total
  $ 14,486,000     $ (628,000 )   $ 13,858,000  


   
As of December 31, 2011
 
   
Balance
   
Allowance for loan losses*
   
Balance, net of allowance
 
                   
Non-performing loans – no related allowance
  $ --     $ --     $ --  
Non-performing loans – related allowance
    7,571,000       (3,724,000 )     3,847,000  
Subtotal non-performing loans
    7,571,000       (3,724,000 )     3,847,000  
                         
Performing loans – no related allowance
    6,241,000       --       6,241,000  
Performing loans – related allowance
    2,440,000       (1,761,000 )     678,000  
Subtotal performing loans
    8,681,000       (1,761,000 )     6,920,000  
                         
Total
  $ 16,252,000     $ (5,485,000 )   $ 10,767,000  

*
Please refer to Specific Reserve Allowances below.

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

 
Specific Reserve Allowances

As of September 30, 2012, we have provided a specific reserve allowance for three performing loans based on updated appraisals of the underlying collateral and/or our evaluation of the borrower.  The following table is a roll-forward of the allowance for loan losses for the nine months ended September 30, 2012 and 2011 by loan type.

 
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Loan Type
 
Balance at
12/31/2011
   
Specific Reserve Allocation
   
Loan Pay Downs and Settlements
   
 
Write Off
   
Transfers to REO and Notes Receivable
   
Balance at
9/30/2012
 
                                     
Commercial
  $ 5,412,000     $ 40,000     $ (1,312,000 )   $ (1,000,000 )     (2,512,000 )   $ 628,000  
Construction
    73,000       --       (73,000 )     --       --       --  
Total
  $ 5,485,000     $ 40,000     $ (1,385,000 )   $ (1,000,000 )     (2,512,000 )   $ 628,000  

Loan Type
 
Balance at
12/31/2010
   
Specific Reserve Allocation
   
Sales
   
Settlements
   
Transfers to REO & Other Assets
   
Balance at
9/30/2011
 
                                     
Commercial
  $ 5,708,000     $ 753,000     $ --     $ (1,038,000 )   $ --     $ 5,423,000  
Construction
    72,000       --       --       --       --       72,000  
Total
  $ 5,780,000     $ 753,000     $ --     $ (1,038,000 )   $ --     $ 5,495,000  

Troubled Debt Restructuring

As of September 30, 2012 and December 31, 2011 we had two and seven loans, respectively, totaling approximately $1.2 million and $4.4 million, respectively that met the definition of a Troubled Debt Restructuring or TDR.  When the Company modifies the terms of an existing loan that is considered TDR, it is considered performing as long as it is in compliance with the modified terms of the loan agreement.  If the modification calls for deferred interest, it is recorded as interest income as cash is collected.  Impairment on these loans is generally determined by the lesser of the value of the underlying collateral or the present value of expected future cash flows.  During the previous 12 months there have been no loans that became TDR loans.  The following is a breakdown of our TDR loans that were considered performing and non-performing as of September 30, 2012 and December 31, 2011:

As of September 30, 2012
                                   
   
Total
   
Performing
   
Non-Performing
 
Loan Type
 
Number of Loans
   
Fund Balance
   
Number of Loans
   
Fund Balance
   
Number of Loans
   
Fund Balance
 
                                     
Commercial
    2     $ 1,195,000       2     $ 1,195,000       --     $ --  
Total
    2     $ 1,195,000       2     $ 1,195,000       --     $ --  

As of December 31, 2011
                                   
   
Total
   
Performing
   
Non-Performing
 
Loan Type
 
Number of Loans
   
Fund Balance
   
Number of Loans
   
Fund Balance
   
Number of Loans
   
Fund Balance
 
                                     
Commercial
    6     $ 4,212,000       4     $ 2,276,000       2     $ 1,936,000  
Construction
    1       165,000       1       165,000       --       --  
Total
    7     $ 4,377,000       5     $ 2,441,000       2     $ 1,936,000  

 
·
Commercial – As of September 30, 2012 and December 31, 2011 we had 14 and 17, respectively, commercial loans, two and three of which, respectively, were modified pursuant to TDR.  On January 1, 2011 the principal amount of one of the non-performing loans was reduced by approximately $1.0 million.  Interest only payments were due monthly from September 2010 until August 2011, at which point payments of interest and principal started and will continue until September 2013.  As of September 30, 2012 this loan was considered performing.


 
-19-



The reduction in TDR loans was a result of a first position lender foreclosed on a fully allowed for second position loan, reclassifying second position loans as fully allowed for notes receivable due to receiving payoffs on the first position loans releasing the collateral and accepting a deed-in-lieu on another property which is now reported as assets held for sale.

For additional information, see “Non-Performing” of this Note D – Investments in Real Estate Loans and Note J – “Notes Receivable”.

Extensions

As of September 30, 2012, our manager had granted extensions on five outstanding loans, totaling approximately $5.9 million, of which our portion was approximately $2.3 million, pursuant to the terms of the original loan agreements, which permit extensions by mutual consent, or as part of a TDR.  Such extensions are generally provided on loans where the original term was 12 months or less and where a borrower requires additional time to complete a construction project or negotiate take-out financing.  Our manager generally grants extensions when a borrower is in compliance with the material terms of the loan, including, but not limited to the borrower’s obligation to make interest payments on the loan.  In addition, if circumstances warrant, our manager may extend a loan that is in default as part of a work out plan to collect interest and/or principal.  Subsequent to the extension, one of the five loans became non-performing.  This loan had a total principal amount at September 30, 2012, of approximately $1.1 million, of which our portion is approximately $0.5 million.

NOTE E — INVESTMENT IN MARKETABLE SECURITIES – RELATED PARTY

As of September 30, 2012 and December 31, 2011, we owned 537,078 shares of VRM II’s common stock, representing approximately 4.44% of the total outstanding shares.  The closing price of VRM II’s common stock on September 30, 2012, was $1.54 per share, resulting in an unrealized gain for the nine months ended September 30, 2012.

At December 31, 2011, our manager evaluated the near-term prospects of VRM II in relation to the severity and duration of the unrealized loss.  Based on that evaluation and current market conditions, we have determined there was an other-than-temporary impairment on our investment in VRM II as of December 31, 2011.  We reversed our unrealized other comprehensive losses and realized a loss on our investment to its fair value of $1.17 per share as of December 31, 2011, totaling approximately $0.2 million and recognizing an impairment of approximately $0.2 million.

During the three months ended September 30, 2012, the trading price for VRM II’s common stock ranged from $1.10 to $1.68 per share.  We will continue to evaluate our investment in marketable securities on a quarterly basis.

NOTE F — REAL ESTATE HELD FOR SALE

At September 30, 2012 we held five properties with a total carrying value of approximately $2.8 million, which were acquired through foreclosure and recorded as investments in REO.  Our REO are accounted for at the lower of cost or fair value less costs to sell with fair value based on appraisals and knowledge of local market conditions.  We seek to sell properties acquired through foreclosure as quickly as circumstances permit taking into account current economic conditions.

During April 2012, we, VRM II and Fund III sold a property to an unrelated third party for approximately $0.5 million, of which our portion was approximately $0.1 million.  This transaction resulted in a net gain for us of approximately $2,000.  A consultation fee of approximately $17,000 was paid to our manager.


 
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On February 7, 2012, we, VRM II and Fund III entered into a Deed in Lieu Agreement with a borrower resolving the foreclosure of our secured loan which had matured on December 31, 2011, with a principal balance, net of allowance for loan loss of approximately $9.9 million, of which our portion was approximately $0.8 million.  Pursuant to the Deed in Lieu Agreement, our subsidiary 1701 Commerce, LLC (“1701 Commerce”) received a deed to the property which had secured the loan.  The property, which is being operated as the Sheraton – Forth Worth, Texas, is the subject of litigation relating to the validity, priority, nature, and extent of liens claimed by other parties that may secure claims ranging from approximately $41 million to $48 million. We dispute both the validity of certain claimed liens and the amount of the claimed secured debt in part and as of this time intend to pursue our objections and disputes as to such matters.  On March 26, 2012, 1701 Commerce filed for Chapter 11 bankruptcy protection in the United States Bankruptcy Court for the Northern District of Texas, Ft. Worth Division, to reorganize its financial affairs and to avoid a pending foreclosure of the property that had been scheduled by a mortgage lien holder and to preserve and protect 1701 Commerce’s equity and the interests of the other creditors of the property.  Due to the uncertainty and disputes involving this property, we recorded this investment as Other Real Estate Owned on the balance sheet until August 23, 2012 when the Bankruptcy Court issued an order allowing the bankruptcy to proceed despite a motion to dismiss it and required 1701 Commerce to deposit $1 million as additional collateral with the court funded by us, VRM II and VF III, and gave 1701 Commerce until November 24, 2012, which has now been extended indefinitely to obtain confirmation of a reorganization plan.  We hold an interest of approximately 8%, VRM II holds an interest of approximately 90% and Fund III holds an interest of approximately 2% in 1701 Commerce.

On September 24, 2012, 1701 Commerce entered into an asset purchase agreement to sell its assets in consideration of $55 million. Pursuant to the agreement, an earnest money deposit of $250,000 is currently maintained by a title company. Following the Bankruptcy Court’s approval of the sale of the assets to the buyer, the buyer has a 60 day due diligence period to review and approve the assets to be acquired. Upon the satisfaction of all conditions included in the agreement, the balance of the purchase price will be paid in cash to 1701 Commerce. As of the date of this report, management estimates the net realizable value to approximate the net assets held for sale.

In August, 2011, VREO XVIII, LLC, an entity owned by us, VRM II and VF III entered into a purchase and sale agreement to sell one of the REO assets.  The terms of the sale provided for an all cash transaction in the amount of $2 million, with a closing to occur within 60 days.  The date of closing was extended several times, but ultimately, the transaction cancelled, as the purchaser was unable to obtain financing.  In 2012 non-refundable extension fees in the amount of $30,000 were collected, of which our portion was approximately $5,000.

As of September 30, 21012 four of our five REO properties consisted of raw land which did not have operations.  The following is a summary of the results of total operations, including our 8% interest in these operations, related to the one remaining REO for the period from September 1, 2012 (foreclosure) through September 30, 2012:
 
Revenue
  $ 1,099,000  
Expenses
    (1,004,000 )
         
Net Income
  $ 95,000  

We seek to sell properties acquired through foreclosure as quickly as circumstances permit taking into account current economic conditions.

Beginning balance, January 1, 2012
  $ 2,409,000  
Real estate held for sale acquired through foreclosure
    787,000  
Additional investment in REO
    80,000  
Proceeds on nonrefundable extension fee
    (5,000 )
Write down
    (316,000 )
Sale
    (130,000 )
Ending balance, September 30, 2012
  $ 2,825,000  


 
-21-


NOTE G — ASSETS HELD FOR SALE AND DISCONTINUED OPERATIONS

During May 2012, we, VRM II and Fund III foreclosed on a loan with a balance of approximately $6.0 million, of which our portion was approximately $4.4 million. The property includes 23 cottage units in a retirement community located in Eugene, Oregon. The property includes operations, which will be reported as an asset held for sale from the date of this foreclosure.

Effective January 1, 2009, we adopted FASB's accounting standard related to business combination which required acquisition method of accounting to be used for all business combinations and for an acquirer to be identified for each business combination. This accounting standard requires an acquirer to recognize the assets acquired, the liabilities assumed, and any non-controlling interest in the acquiree at the acquisition date, measured at their fair values as of that date, with limited exceptions. It also requires the acquirer in a business combination achieved in stages (sometimes referred to as a step acquisition) to recognize the identifiable assets and liabilities, as well as the non-controlling interest in the acquiree, at the full amounts of their fair values (or other amounts determined in accordance with the standard).

Our acquisition of VREO XXV was accounted for in accordance with this standard and the Company has allocated the purchase price of VREO XXV based upon the estimated fair value of the net assets acquired and liabilities assumed and the fair value of the noncontrolling interest measured at the acquisition date. The estimated fair value of VREO XXV at the time of the acquisition totaled $4.1 million.

We performed an allocation as of the foreclosure date as follows:

Cash
  $ 308,000  
Property and equipment
    3,841,000  
Current assets
    14,000  
Accounts payable and accrued liabilities
    (23,000 )
         
     Net assets
  $ 4,140,000  

In addition, we estimated the fair value of the non-controlling interest at $1.1 million, which is 25% owned by Fund III and 1% by VRM II.

Immediately upon foreclosure, we committed to a plan to sell all interests in VREO XXV, at which point we began classifying the related assets of VREO XXV as assets held for sale, and the related liabilities as liabilities related to assets held for sale. Additionally, we have classified VREO XXV’s results as discontinued operations.

Assets and groups of assets and liabilities which comprise disposal groups are classified as “held for sale” when all of the following criteria are met: a decision has been made to sell, the assets are available for sale immediately, the assets are being actively marketed at a reasonable price in relation to the current fair value, a sale has been or is expected to be concluded within twelve months of the balance sheet date, and significant changes to the plan to sell are not expected. Assets held for sale are not depreciated.

Additionally, the operating results and cash flows related to these assets and liabilities are included in discontinued operations in the consolidated statements of operations and consolidated statements of cash flows for the year ended September 30, 2012.


 
-22-



The following is a summary of net assets held for sale through September 30, 2012:

   
September 30, 2012
 
Assets:
     
Cash
  $ 439,000  
Current assets
    4,000  
Property and equipment
    3,849,000  
       Total assets
  $ 4,292,000  
         
Liabilities:
       
Accounts payable and accrued liabilities
  $ 34,000  
     Total liabilities
    34,000  
         
Net assets held for sale
  $ 4,258,000  

The following is a summary of the results of operations related to the assets held for sale for the three months ended September 30, 2012 and the period from May 1, 2012 (foreclosure) through September 30, 2012:

   
For The Three Months Ended September 30, 2012
   
For The Period from May 1, 2012 (foreclosure) through September 30, 2012
 
             
Revenue
  $ 124,000     $ 266,000  
Expenses
    (85,000 )     (148,000 )
                 
Net Income
  $ 39,000     $ 118,000  

NOTE H — RELATED PARTY TRANSACTIONS

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

Transactions with the Manager

Our manager is entitled to receive from us an annual management fee of up to 0.25% of our aggregate capital contributions received by us and Fund I from the sale of shares or membership units, paid monthly.  The amount of management fees paid to our manager for the three months ended September 30, 2012 and 2011 was $61,000 and $69,000, respectively, and for the nine months ended September 30, 2012 and 2011 was $199,000 and $207,000, respectively.

As of September 30, 2012 and December 31, 2011, our manager owned 100,000 of our common shares, representing approximately 1.6% of our total outstanding common stock.  For the three and nine months ended September 30, 2012 and 2011, we declared $0 in dividends payable to our manager.

As of September 30, 2012 and December 31, 2011 we did not owe or have any receivables from our manager.

As of March 31, 2012, we had paid our manager approximately $69,000 for services to be performed from April through June 2012.  As of September 30, 2012 there is no prepaid balance.   A discount of 7% has been applied to the July 2012 payment.

 
-23-



During May 2012, our manager received total consultation fees of approximately $17,000, related to the sale of an REO property owned by us, VRM II and Fund III.

During the nine months ended September 30, 2012, we bought approximately $0.1 million in real estate loans from Vestin Mortgage.  No gain or loss resulted from these transactions.

Transactions with Other Related Parties

As of September 30, 2012 and December 31, 2011, we owned 537,078 common shares of VRM II, representing approximately 4.4%, of their total outstanding common stock.  For the three and nine months ended September 30, 2012 and 2011 we recognized $0 in dividend income from VRM II.

As of September 30, 2012 and December 31, 2011, VRM II owned 538,178 of our common shares, approximately 8.5%, of our total outstanding common stock.  For the three and nine months ended September 30, 2012 and 2011 we declared $0 in dividends payable to VRM II.

As of September 30, 2012 and December 31, 2011 we owed VRM II approximately $0.2 million and $0.1 million, respectively, primarily related to legal fees

As of September 30, 2012 we had a receivable with Fund III of $4,000.  As of December 31, 2011 we had no receivable or payable with Fund III.

During the nine months ended September 30, 2012, we bought approximately $0.2 million in real estate loans from MVP Mortgae.  No gain or loss resulted from these transactions.

NOTE I — NOTES RECEIVABLE

During January 2012 we, VRM II and Fund III rewrote one of our existing loans.  The interest rate of this loan was changed from 3% paying monthly with 5% accruing to 7% paid monthly.  The amount of the loan allowance of approximately $0.1 million and the interest currently accrued on the existing loan, which was fully allowed for, of approximately $23,000 was moved to notes receivable.  In April 2012, we received a payment on the new loan, which was less than the amount owed.  The difference of $19,000 was recorded as a loan allowance as of June 30 and was reclassified to notes receivable during April 2012.

During April 2012, we, VRM II and Fund III received a payment in full satisfaction of an investment in real estate loan secured by a first deed of trust.  The remaining balance due on the second deed of trust was previously fully allowed for, of approximately $0.2 million was moved to notes receivable and remains fully allowed for.  We receive monthly payments of approximately $11,000.  As of September 30, 2012 the balance is approximately $0.2 million.

During February 2012, we, VRM II and Fund III received a payment in full satisfaction of an investment in real estate loan secured by a first deed of trust and a partial payment of an investment in real estate loan secured by a second deed of trust on the same real estate.  The remaining balance due on the second deed of trust was previously fully allowed for, of approximately $0.7 million was moved to notes receivable and remains fully allowed for.  During March 2012 a payment of approximately $30,000 was received and recognized as Gain related to pay off of notes receivable, including recovery of allowance for notes receivable.  Additionally, we receive monthly payments of approximately $1,000.  As of September 30, 2012 the balance is approximately $0.7 million.

NOTE J — FAIR VALUE

As of September 30, 2012, financial assets and liabilities utilizing Level 1 inputs included investment in marketable securities - related party.  We had no assets or liabilities utilizing Level 2 inputs, and assets and liabilities utilizing Level 3 inputs included investments in real estate loans.


 
-24-



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

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

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

The following table presents the valuation of our financial assets and liabilities as of September 30, 2012 and December 31, 2011, measured at fair value on a recurring basis by input levels:

   
Fair Value Measurements at Reporting Date Using
       
   
Quoted Prices in Active Markets For Identical Assets (Level 1)
   
Significant Other Observable Inputs (Level 2)
   
Significant Unobservable Inputs (Level 3)
   
Balance
at 9/30/12
   
Carrying Value on Balance Sheet at 9/30/12
 
Assets
                             
Investment in marketable securities - related party
  $ 827,000     $ --     $ --     $ 827,000     $ 827,000  
Investment in real estate loans
  $ --     $ --     $ 13,210,000     $ 13,210,000     $ 13,858,000  

   
Fair Value Measurements at Reporting Date Using
       
   
Quoted Prices in Active Markets For Identical Assets (Level 1)
   
Significant Other Observable Inputs (Level 2)
   
Significant Unobservable Inputs (Level 3)
   
Balance at 12/31/2011
   
Carrying Value on Balance Sheet at 12/31/2011
 
Assets
                             
Investment in marketable securities - related party
  $ 651,000     $ --     $ --     $ 651,000     $ 651,000  
Investment in real estate loans
  $ --     $ --     $ 10,827,000     $ 10,827,000     $ 10,802,000  


 
-25-



The following table presents the changes in our financial assets and liabilities that are measured at fair value on a recurring basis using significant unobservable inputs (Level 3) from January 1, 2012 to September 30, 2012.  There were no liabilities measured at fair value on a recurring basis using significant unobservable inputs as of January 1, 2012 to September 30, 2012.
   
Investment in real estate loans
 
       
Balance on January 1, 2012
  $ 10,827,000  
Change in temporary valuation adjustment included in net income (loss)
       
Increase in allowance for loan losses
    (40,000 )
       Write-off of allowance for uncollectible loan
    1,000,000  
       Transfer of allowance on real estate loans converted to unsecured notes receivable
    989,000  
       Transfer of allowance on real estate loan to real estate held for sale
    150,000  
       Transfer of allowance on real estate loan to asset held for sale
    1,375,000  
       Reduction of allowance on real estate loans following payment
    284,000  
       Reduction of allowance on real estate loan following settlement of loan
    1,101,000  
Purchase and additions of assets
       
New mortgage loans and mortgage loans bought
    15,395,000  
Transfer of real estate loans to real estate held for sale
    (936,000 )
Transfer of real estate loan to asset held for sale
    (4,434,000 )
Transfer of real estate loans converted to unsecured notes receivable
    (989,000 )
Sales, pay downs and reduction of assets
       
Write-off of uncollectible loan
    (1,000,000 )
Reduction of balance of real estate loan following settlement
    (1,101,000 )
Collections of principal and sales of investment in real estate loans
    (8,703,000 )
Temporary change in estimated fair value based on future cash flows
    (708,000 )
         
Balance on September 30, 2012, net of temporary valuation adjustment
  $ 13,210,000  

The following table presents the changes in our financial assets and liabilities that are measured at fair value on a recurring basis using significant unobservable inputs (Level 3) from January 1, 2011 to September 30, 2011:
       
   
Investment in real estate loans
 
       
Balance on January 1, 2011
  $ 6,660,000  
Change in temporary valuation adjustment included in net loss
       
Increase in allowance for loan losses
    (702,000 )
Purchase and additions of assets
       
New mortgage loans and mortgage loans bought
    3,676,000  
       Reduction of allowance for loan losses relative to settlement of  investment in real estate loan
    986,000  
Sales, pay downs and reduction of assets
       
Collections of principal and settlements of investment in real estate loans
    (1,790,000 )
Temporary change in estimated fair value based on future cash flows
    85,000  
         
Balance on September 30, 2011, net of temporary valuation adjustment
  $ 8,915,000  


 
-26-



NOTE K — RECENT ACCOUNTING PRONOUNCEMENTS

Adopted

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

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

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

NOTE L — LEGAL MATTERS INVOLVING THE MANAGER

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

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


 
-27-



The Vestin Group and Fund III were defendants in a civil action filed by Birkeland Family, LLC III and Birkeland Family, LLC V (“Plaintiffs”) in District Court for Clark County, Nevada.  The Plaintiffs alleged as causes of action against Vestin Group and Fund III:  Breach of Contract and Breach of the Implied Covenant of Good Faith and Fair Dealing regarding the sale of the office building commonly described as 8379 W. Sunset Road, Las Vegas, Nevada.  The action sought monetary, punitive and exemplary damages.  On January 18, 2011, summary judgment was granted in favor of Fund III, with the Court finding that Fund III was not part of the lease and, therefore, could not be held liable for damages.  The Manager is still involved in this civil action. Fund III is attempting to recover legal fees associated with this matter.  A judgment has been entered against Vestin Group in the amount of approximately $4.2 million.  Vestin Group has appealed this judgment.

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

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

NOTE M — LEGAL MATTERS INVOLVING THE COMPANY

In April 2006, the lenders of the loans made to RightStar, Inc. (“RightStar”) filed suit against the State of Hawaii listing 26 causes of action, including allegations that the State of Hawaii illegally blocked the lender’s right to foreclose and take title to its collateral by inappropriately attaching conditions to the granting of licenses needed to operate the business, the pre-need trust funds and the perpetual care trust funds and that the State of Hawaii attempted to force the lenders to accept liability for any statutory trust fund deficits while no such lender liability exists under the laws of the State of Hawaii.  The State of Hawaii responded by filing allegations against Vestin Mortgage and VRM II alleging that these Vestin entities improperly influenced the former RightStar trustees to transfer trust funds to VRM II.

On May 9, 2007, we, VRM II, Vestin Mortgage, the State of Hawaii and Comerica Incorporated (“Comerica”) announced that an arrangement had been reached to auction the RightStar assets.  The auction was not successful. On June 12, 2007, the court approved the resolution agreement, which provides that the proceeds of the foreclosure sale would be allocated in part to VRM II, Vestin Mortgage and us and in part to fund the trust’s statutory minimum balances.  We, VRM II, Vestin Mortgage, the State of Hawaii and Comerica have pledged to cooperate to recover additional amounts owed to the trusts and the creditors from others.  Should the recovery meet or exceed $9 million, all parties have agreed that no further litigation between the state of Hawaii and Vestin will be reinstituted related to the trusts’ statutory minimum balances.  The Vestin entities and the State of Hawaii signed a new agreement that would permit the foreclosure to proceed.  On January 25, 2010, the Circuit Court of the First Circuit for the State of Hawaii confirmed the right of VRM I and its affiliates VRM II and Vestin Mortgage, to acquire through foreclosure the RightStar assets.  On June 29, 2010 the First Circuit for the State of Hawaii issued its final order allowing the foreclosure.  On July 13, 2010 we and VRM II completed our foreclosure of these properties and we classified them as Investment in Equity Method Investee Held for Sale.


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

We, Vestin Mortgage and Michael V. Shustek (“Defendants”) were defendants in a civil action filed by approximately 25 separate plaintiffs (“Plaintiffs”) in District Court for Clark County, Nevada.  The Plaintiffs alleged, among other things, that Defendants: breached certain alleged contractual obligations owed to Plaintiffs; breached fiduciary duties supposedly owed to Plaintiffs; and misrepresented or omitted material facts regarding the conversion of Fund I into VRM I.  The action sought monetary and punitive damages.  On September 8, 2010, the parties agreed to settle the case.  The Settlement Agreement provides for the settlement and complete release of all claims against the Defendants.  The settlement was made without admission of liability by the Defendants.

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

In July, 2012, we along with our Manager, VRM II, Vestin Group, Vestin Originations and Michael Shustek entered into a Settlement Agreement and Mutual Release ("Settlement Agreeement") with the State of Hawaii and The Huntington National Bank as successor trustee to the Rightstar Trusts.  Under the Settelemtn Agreement, we and VRM II  were entitled to receive a portion of certain net proceeds from certain claims from third parties through litigation, settlement or otherwise. The parties agreed to mutually release each other from any claims and in lieu of such amounts due under the Settlement Agreement, within ten (10) business days after the later of (a) The Huntington National Bank's receipt of the first tranche of certain trust recovery proceeds or (b) entry of a final and non-appealable decision or order approving settlement with each of certain other persons, the sum of $145,000.00 shall be disbursed from the first tranche of the trust recovery proceeds to us and VRM II.  All other amounts payable under the Settlement Agreement were assigned to the Rightstar Trusts and The Huntington National Bank as successor trustee, all rights, obligations and claims we or VRM II has or ever can, shall or may have or claim to have arising out of or related to the Rightstar Trusts, or which were asserted or which could have been asserted in such cases.  We and VRM II also released any and all interest in the amounts set aside from the sale of the property at 485 Waiale Street, Wailuku, Hawaii. Finally VRM II agreed to purchase all 447,226 shares in VRM II currently owned by the Rightstar trusts for $1.40 per share, which purchase is to be consummated within seven (7) days following Court approval of the settlement.  The settlement was approved by the Court on August 3, 2012.  As of September 30, 2012 the $145,000 has been paid and the shares have been purchased.


 
-29-



On February 7, 2012, we, VRM II and Fund III entered into a Deed in Lieu Agreement with a borrower resolving the foreclosure of our secured loan which had matured on December 31, 2011, with a principal balance, net of allowance for loan loss of approximately $9.9 million, of which our portion was approximately $0.8 million.  Pursuant to the Deed in Lieu Agreement, our subsidiary 1701 Commerce, LLC (“1701 Commerce”) received a deed to the property which had secured the loan.  The property, which is being operated as the Sheraton – Forth Worth, Texas, is the subject of litigation relating to the validity, priority, nature, and extent of liens claimed by other parties that may secure claims ranging from approximately $41 million to $48 million. We dispute both the validity of certain claimed liens and the amount of the claimed secured debt in part and as of this time intend to pursue our objections and disputes as to such matters.  On March 26, 2012, 1701 Commerce filed for Chapter 11 bankruptcy protection in the United States Bankruptcy Court for the Northern District of Texas, Ft. Worth Division, to reorganize its financial affairs and to avoid a pending foreclosure of the property that had been scheduled by a mortgage lien holder and to preserve and protect 1701 Commerce’s equity and the interests of the other creditors of the property.  Due to the uncertainty and disputes involving this property, we recorded this investment as Other Real Estate Owned on the balance sheet until August 23, 2012 when the Bankruptcy Court issued an order allowing the bankruptcy to proceed despite a motion to dismiss it and required 1701 Commerce to deposit $1 million as additional collateral with the court funded by us, VRM II and VF III, and gave 1701 Commerce until November 24, 2012, which has now been extended indefinitely to obtain confirmation of a reorganization plan.  We hold an interest of approximately 8%, VRM II holds an interest of approximately 90% and Fund III holds an interest of approximately 2% in 1701 Commerce.

On September 24, 2012, 1701 Commerce entered into an asset purchase agreement to sell its assets in consideration of $55 million. Pursuant to the agreement, an earnest money deposit of $250,000 is currently maintained by a title company. Following the Bankruptcy Court’s approval of the sale of the assets to the buyer, the buyer has a 60 day due diligence period to review and approve the assets to be acquired. Upon the satisfaction of all conditions included in the agreement, the balance of the purchase price will be paid in cash to 1701 Commerce. As of the date of this report, management estimates the net realizable value to approximate the net assets held for sale.
 
NOTE N — INCOME TAXES

 
We operated as a REIT through December 31, 2011. We announced on March 28, 2012 that we have terminated our election to be treated as a REIT under the Internal Revenue Code of 1986, as amended (the “Code”), effective for the tax year ending December 31, 2012.

The components of the provision for income tax benefit are as follows for the nine months ended:

   
9/30/2012
   
9/30/2011
 
Current Taxes
           
    Federal
    --       --  
    State
    --       --  
    Total Current Taxes
    --       --  
Change in Deferred Taxes
    171,000       --  
Change in Valuation Allowance
    (171,000 )     --  
                 
Provision for income tax expense (benefit)
    --       --  


 
-30-


The following is a summary of the significant components of the Company’s deferred tax assets and liabilities at September 30, 2012:

Deferred Tax Assets:
     
   Provision for Loan Losses
    304,000  
   Write down on real estate held for sale
    915,000  
   Recovery of allowance for doubtful notes receivable
    590,000  
   Net operating loss carryforward
    12,279,000  
   Total Deferred Tax Assets
    14,088,000  
   Valuation allowance
    (14,088,000 )
   Deferred Tax Assets, net of valuation allowance
    --  
   Non-current portion
    --   
   Current portion
    --  

The effective tax rate used for calculation of the deferred taxes as of September 30, 2012 was 34%.  The Company has established a valuation allowance against deferred tax assets of $14,088,000 due to the uncertainty regarding realization, comprised primarily of a reserve against the deferred tax assets attributable to the net operating loss carryforward timing differences.

As of December 31, 2011 we were organized and conducted our operations to qualify as a REIT under Sections 856 to 860 of the Internal Revenue Code of 1986, as amended (the “Code”) and to comply with the provisions of the Internal Revenue Code with respect thereto.  A REIT is generally not subject to federal income tax on that portion of its REIT taxable income (“Taxable Income”) which is distributed to its stockholders, provided that at least 90% of Taxable Income is distributed and provided that certain other requirements are met.  Our Taxable Income may substantially exceed or be less than our net income as determined based on GAAP, because, differences in GAAP and taxable net income consist primarily of allowances for loan losses or doubtful account, write-downs on real estate held for sale, amortization of deferred financing cost, capital gains and losses, and deferred income.

NOTE O — SUBSEQUENT EVENTS

Management evaluated subsequent events through the date of this filing and determined that no such events have occurred that would require adjustment to or disclosure in the financial statements.



 
-31-



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

The following is a financial review and analysis of our financial condition and results of operations for the three and nine months ended September 30, 2012 and 2011.  This discussion should be read in conjunction with our consolidated financial statements and accompanying notes and other detailed information regarding us appearing elsewhere in this report on Form 10-Q and our report on Form 10-K, Part II, Item 7 Management’s Discussion and Analysis of Financial Conditions and Results of Operations for the year ended December 31, 2011.

FORWARD-LOOKING STATEMENTS

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

RESULTS OF OPERATIONS

OVERVIEW

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

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


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

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

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

During the nine months ended September 30, 2012, we funded ten loans totaling approximately $12.8 million.  During the nine months ended September 30, 2011, we funded four loans totaling approximately $3.1 million.  As of September 30, 2012, our loan-to-value ratio was 67%, net of allowances for loan losses, on a weighted average basis generally using updated appraisals.  Additional increases in loan defaults accompanied by additional declines in real estate values, as evidenced by updated appraisals generally prepared on an “as-is-basis,” will have a material adverse effect on our financial condition and operating results.

As of September 30 2012, we have provided a specific reserve allowance for three performing loans based on updated appraisals of the underlying collateral and our evaluation of the borrower for these loans, obtained by our manager.  For further information regarding allowance for loan losses, refer to Note D – Investments in Real Estate Loans of the Notes to the Consolidated Financial Statements included in Part I, Item I Consolidated Financial Statements of this Quarterly Report on Form 10-Q.

Our capital, subject to a 3% reserve, will constitute the bulk of the funds we have available for investment in real estate loans.

As of September 30, 2012, our loans were in the following states: California, Michigan, Nevada, Texas and Utah.

At our annual meeting held on December 15, 2011, a majority of the shareholders voted to amend our Bylaws to expand our investment policy to include investments in and acquisition, management and sale of real property or the acquisition of entities involved in the ownership or management of real property. A majority of the shareholders also voted to amend our charter to change the terms of our existence from its expiration date of December 31, 2019 to perpetual existence. As a result we will begin to acquire, manage, renovate, reposition, sell or otherwise invest in real property or acquire entities involved in the ownership or management of real property.


 
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We and VRM II announced on May 30, 2012 that they, along with VRM Merger Sub, Inc. (a wholly owned subsidiary of VRM II), entered into a definitive merger agreement pursuant to which VRM Merger Sub will merge with and into VRM I in a stock-for-stock merger, with us surviving the transaction as a wholly owned subsidiary of VRM II.  Under the terms of the transaction, which has been approved by the boards of directors of both companies, stockholders of VRM I (other than VRM II) will receive a fixed ratio of 0.82 share of VRM II common stock for each share of VRM I common stock they own.  Upon closing, which is expected in the fourth quarter of 2012, our stockholders will own approximately 30% of VRM II common stock.  Pursuant to the terms of the agreement, one member of our Board of Directors will replace an existing Director on the VRM I Board of Directors.  The primary purpose of the proposed merger is the potential cost savings and operating synergies that will be achieved through a combination.  A registration statement relating to the stock to be issued by VRM II in the proposed transaction has been filed with the SEC and is pending a decaration of effective by the SEC.  The transaction is subject to customary approvals and closing conditions and requires the approval of our stockholders (with respect to the merger) and the VRM II stockholders (with respect to the issuance of VRM II common stock).

The VRM II board of directors has recommended that VRM II changes its manager by appointing VRM Management LLC as its new manager.  VRM Management is a newly formed Nevada limited liability company which is 90% owned by our Chairman and Chief Executive Officer, Michael Shustek and 10% owned by Craig Burr.  Mr. Burr is an attorney who has been engaged in the private practice of law in Las Vegas, Nevada for more than 19 years.  The current employees and officers of Vestin Mortgage would join VRM Management and would continue to render services to us through this new entity.

The terms of the proposed management agreement with VRM Management are identical to VRM II’s current Management Agreement with Vestin Mortgage.  In addition, VRM Management will be subject to the continuing oversight of the VRM II board of directors to be the same extent as Vestin Mortgage.

SUMMARY OF FINANCIAL RESULTS

Comparison of Operating Results for the three months ended September 30, 2012, to the three months ended September 30, 2011.

Total Revenue:
 
2012
   
2011
   
$ Change
   
% Change
 
Interest income from investment in real estate loans
  $ 291,000     $ 97,000     $ 194,000       200 %
Recovery of allowance for doubtful notes receivable
    30,000       22,000       8,000       36 %
Gain related to pay off of real estate loan, including recovery of allowance for loan loss
    22,000       --       22,000       100 %
            Total
  $ 343,000     $ 119,000     $ 224,000       188 %

Our revenue from interest income is dependent upon the balance of our investment in real estate loans and the interest earned on these loans.  Interest income was adversely affected by the level of modified loans and the reduction in new lending activity during the first three quarters of 2011.  We experienced an increase in new lending activity since the second quarter 2011, which has produced an overall increase in interest income for third quarter 2012.  It is premature at this time to predict whether or not the increase in lending activity in the second half of 2011 and first three quarters of 2012 will be sustained in the future.  Scheduled payments on fully reserved notes receivable and loans resulted in an increase in gain related to payoff of real estate loan and other income.

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

 
-34-




Operating Expenses:
 
2012
   
2011
   
$ Change
   
% Change
 
Management fees – related party
  $ 61,000     $ 69,000     $ (8,000 )     (12 %)
Provision for loan loss
    21,000       608,000       (587,000 )     (97 %)
Interest expense
    2,000       7,000       (5,000 )     (71 %)
Professional fees
    135,000       59,000       76,000       129 %
Insurance
    55,000       55,000       --       --  
Consulting
    20,000       22,000       (2,000 )     (9 %)
Other
    41,000       31,000       10,000       32 %
            Total
  $ 335,000     $ 851,000     $ (516,000 )     (61 )%

Operating expenses were 61% lower during the three months ended September 30, 2012 than during the same three months in 2011.  Provision for loan losses was lower during the three months ended September 30, 2012 than the same three months in 2011 due to values of the collateral securing our loans becoming more stable... Interest expense decreased during the three months ended September 30, 2012 due to the decreased balance of secured borrowings which were paid off in 2011.  Professional fees have increased due to payment of legal bills pertaining to the merger.

Non-operating income (loss):
 
2012
   
2011
   
$ Change
   
% Change
 
Interest income from banking institutions
  $ --     $ 1,000     $ (1,000 )     (100 %)
Gain on sale of marketable securities – related party
    3,000       --       3,000       100 %
Income from settlement
    55,000       --       55,000       100 %
Recovery from settlement with loan guarantor
    267,000       --       267,000       100 %
Income from equity investee held for sale
    --       328,000       (328,000 )     (100 %)
            Total
  $ 325,000     $ 329,000     $ (4,000 )     (1 %)

During the three months ended September 30, 2011 we received income from an equity investment held for sale and did not have similar income in 2012.  During January 2011, we, VRM II and Fund III were awarded unsecured claims up to $3.6 million from a bankruptcy settlement with a guarantor of certain loans. Pursuant to the terms of the settlement, we received payment of approximately $0.3 million during July 2012.  In July, 2012, we along with our Manager, VRM II, Vestin Group, Vestin Originations and Michael Shustek entered into a Settlement Agreement and Mutual Release with the State of Hawaii and The Huntington National Bank as successor trustee to the Rightstar Trusts.  Under the Settlement Agreement, we and VRM II  were entitled to receive a portion of certain net proceeds from certain claims from third parties through litigation, settlement or otherwise.  The agreement resulted in payments to claimants of $145,000, with our portion was approximately $55,000.

See Note G – Assets Held for Sale and Discontinued Operations and Note M – Legal Matters Involving the Company included in Part I, Item I Consolidated Financial Statements of this Quarterly Report on Form 10-Q.

Discontinued operations, net of income taxes:
 
2012
   
2011
   
$ Change
   
% Change
 
Income from asset held for sale, net of income taxes
  $ 79,000     $ --     $ 79,000       (100 %)
Expenses related to real estate held for sale
    (29,000 )     (98,000 )     69,000       70 %
Write-downs on real estate held for sale
    --       (141,000 )     141,000       100 %
            Total
  $ 50,000     $ (239,000 )   $ 289,000       (121 %)


 
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Income from discontinued operations was 121% higher during the three months ended September 30, 2012 than during the same three months in 2011.We received income from assets held for sale during the three months ended September 30, 2012 and did not receive similar income during  the same period in 2011.  No write-down on real estate was necessary for the three months ended September 30, 2012.

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

Comparison of Operating Results for the nine months ended September 30, 2012 to the nine months ended September 30, 2011.

Total Revenue:
 
2012
   
2011
   
$ Change
   
% Change
 
Interest income from investment in real estate loans
  $ 643,000     $ 328,000     $ 315,000       96 %
Recovery of allowance for doubtful notes receivable
    89,000       33,000       56,000       170 %
Gain related to pay off of real estate loan, including recovery of allowance for loan loss
    210,000       --       210,000       100 %
Other income
    --       12,000       (12,000 )     (100 %)
            Total
  $ 942,000     $ 373,000     $ 569,000       153 %

Our revenue from interest income is dependent upon the balance of our investment in real estate loans and the interest earned on these loans.  Interest income has been adversely affected by the level of modified loans and the reduction in new lending activity during the first three quarters of 2011.  We experienced an increase in new lending activity in the second half of 2011 and first three quarters of 2012 which has produced an overall increase in interest income for 2012.  It is premature at this time to predict whether or not the increase in lending activity in the second half of 2011 and first three quarters of 2012 will be sustained in the future.  Scheduled payments on fully reserved notes receivable and loans resulted in an increase in gain related to payoff of real estate loan and other income.  During May 2012, we, VRM II and Fund III sold our portions of a fully reserved loan of $14.0 million, of which our portion was $1.2 million to a third party.  We received a payment of approximately $0.1 million.

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

Operating Expenses:
 
2012
   
2011
   
$ Change
   
% Change
 
Management fees – related party
  $ 199,000     $ 207,000     $ (8,000 )     (4 %)
Provision for loan losses
    40,000       735,000       (695,000 )     (95 %)
Interest expense
    3,000       19,000       (16,000 )     (84 %)
Professional fees
    523,000       304,000       219,000       72 %
Insurance
    166,000       176,000       (10,000 )     (5 %)
Consulting
    58,000       69,000       (11,000 )     (16 %)
Other
    121,000       155,000       (34,000 )     (22 %)
            Total
  $ 1,110,000     $ 1,665,000     $ (555,000 )     (33 %)

Operating expenses were 33% lower during the nine months ended September 30, 2012 than during the same nine months in 2011.  Provision for loan losses was lower during the nine months ended September 30, 2012 than the same nine months in 2011 due to values of the collateral securing our loans remaining constant.  Interest expense decreased during the nine months ended September 30, 2012 due to the decreased balance of secured borrowings which were paid off in 2011.  Professional fees have increased due to payment of legal bills pertaining to the proposed merger between us and VRM II.

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

 
-36-





Non-operating income (loss):
 
2012
   
2011
   
$ Change
   
% Change
 
Interest income from banking institutions
  $ --     $ 6,000     $ (6,000 )     (100 %)
Gain on sale of marketable securities – related party
    3,000       --       3,000       100 %
Income from settlement
    55,000       --       55,000       100 %
Recovery from settlement with loan guarantor
    978,000       --       978,000       100 %
Income from equity investee held for sale
    --       661,000       (661,000 )     (100 %)
Settlement expense
    (23,000 )     --       (23,000 )     (100 %)
Discounted legal fees
    --       280,000       (280,000 )     (100 %)
            Total
  $ 1,013,000     $ 947,000     $ 66,000       7 %

During the nine months ended September 30, 2012 we settled a lawsuit with an acquirer of property previously foreclosed upon and sold which resulted in an expense of approximately $23,000.  In addition, we received income from equity investee held for sale and approximately $0.3 million in discounts related to past legal bills during the nine months ended September 30, 2011 and did not have similar income or discount in 2012.  During January 2011, we, VRM II and Fund III were awarded unsecured claims up to $3.6 million from a bankruptcy settlement with a guarantor of certain loans. Pursuant to the terms of the settlement, we received payment of approximately $0.7 million during April 2012 and $0.3 million in July 2012.  In July, 2012, we along with our Manager, VRM II, Vestin Group, Vestin Originations and Michael Shustek entered into a Settlement Agreement and Mutual Release with the State of Hawaii and The Huntington National Bank as successor trustee to the Rightstar Trusts.  Under the Settlement Agreement, we and VRM II  were entitled to receive a portion of certain net proceeds from certain claims from third parties through litigation, settlement or otherwise.  The agreement resulted in payments to claimants of $145,000, with our portion was approximately $55,000.

See Note G – Assets Held for Sale and Discontinued Operations and Note M – Legal Matters Involving the Company included in Part I, Item I Consolidated Financial Statements of this Quarterly Report on Form 10-Q.

Discontinued operations, net of income taxes:
 
2012
   
2011
   
$ Change
   
% Change
 
Net gain on sale of real estate held for sale
  $ 4,000     $ --     $ 4,000       100 %
Income from assets held for sale, net of income taxes
    118,000       --       118,000       (100 %)
Expenses related to real estate held for sale
    (116,000 )     (232,000 )     116,000       (50 %)
Write-downs on real estate held for sale
    (316,000 )     (273,000 )     (43,000 )     16 %
            Total
  $ (310,000 )   $ (505,000 )   $ 195,000       (39 %)

During nine months ended September 30, 2012 we recorded net gains on sale of real estate held for sale for properties sold in current and prior periods due to payments on settlement agreements.  The overall increase in losses from discontinued operations was primarily affected by an increase in write-downs on real estate held for sale.  The increase in write-downs on real estate held for sale is mainly due to the acceptance of a purchase contract on one property.  In addition, we received income from assets held for sale during the nine months ended September 30, 2012 and did not have similar income in 2011.

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


 
-37-



CAPITAL AND LIQUIDITY

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

During the nine months ended September 30, 2012, net cash flows used in operating activities approximated $0.5 million.  Operating cash flows were used for the payment of normal operating expenses such as management fees, accounting fees and legal bills.  Cash flows related to investing activities consisted of cash provided by loan and notes receivable payoffs of approximately $8.8 million, proceeds from settlement from loan guarantor of approximately $1.0 million and cash used for purchases of investments in real estate loans of approximately $15.5 million.  In addition, the Bankruptcy Court issued an order to deny the dismissal of the bankruptcy and required 1701 Commerce to deposit $1 million as additional collateral with the court, of which our portion is $0.1 million.  Cash flows from financing activities consisted of cash used in payment of notes payable of approximately $0.1 million.

At September 30, 2012, we had approximately $0.5 million in cash, $0.8 million in marketable securities – related party and approximately $22.5 million in total assets.  We intend to meet short-term working capital needs through a combination of proceeds from loan payoffs, loan sales, sales of real estate held for sale and/or borrowings.  We believe we have sufficient working capital to meet our operating needs during the next 12 months.

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

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

On February 21, 2008, our Board of Directors authorized the repurchase of up to $5 million worth of our common stock.  Depending upon market conditions, shares may be repurchased from time to time at prevailing market prices through open market or privately negotiated transactions.  During the year ended December 31, 2011, we used approximately $104,000 to acquire 78,600 shares of our common stock.  We are not obligated to purchase any additional shares.  As of September 30, 2012 and December 31, 2011, we had a total of 534,207 shares as treasury stock carried on our books at cost totaling approximately $1.0 million.

We maintain working capital reserves of approximately 3% in cash and cash equivalents, certificates of deposits and short-term investments or liquid marketable securities.  This reserve is available to pay expenses in excess of revenues, satisfy obligations of underlying properties, expend money to satisfy our unforeseen obligations and for other permitted uses of working capital.  As of November 14, 2012, we have met our 3% reserve requirement.

Investments in Real Estate Loans Secured by Real Estate Portfolio

We offer five real estate loan products consisting of commercial property, construction, acquisition and development, land, and residential.  The effective interest rates on all product categories range from 4.5% to 10%. Revenue by product will fluctuate based upon relative balances during the period.

 
-38-



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

Asset Quality and Loan Reserves

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

OFF-BALANCE SHEET ARRANGEMENTS

As of September 30, 2012, we do not have any interests in off-balance sheet special purpose entities nor do we have any interests in non-exchange traded commodity contracts.

RELATED PARTY TRANSACTIONS

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

CRITICAL ACCOUNTING ESTIMATES

Revenue Recognition

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

The following table presents a sensitivity analysis, averaging the balance of our loan portfolio at the end of the last six quarters, to show the impact on our financial condition at September 30, 2012, from fluctuations in weighted average interest rate charged on loans as a percentage of the loan portfolio:

Changed Assumption
 
Increase (Decrease) in Interest Income
 
Weighted average interest rate assumption increased by 1.0% or 100 basis points
  $ 145,000  
Weighted average interest rate assumption increased by 5.0% or 500 basis points
  $ 724,000  
Weighted average interest rate assumption increased by 10.0% or 1,000 basis points
  $ 1,449,000  
Weighted average interest rate assumption decreased by 1.0% or 100 basis points
  $ (145,000 )
Weighted average interest rate assumption decreased by 5.0% or 500 basis points
  $ (724,000 )
Weighted average interest rate assumption decreased by 10.0% or 1,000 basis points
  $ (1,449,000 )


 
-39-



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

Allowance for Loan Losses

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

The following table presents a sensitivity analysis to show the impact on our financial condition at September 30, 2012, from increases and decreases to our allowance for loan losses as a percentage of the loan portfolio:

Changed Assumption
 
Increase (Decrease) in Allowance for Loan Losses
 
Allowance for loan losses assumption increased by 1.0% of loan portfolio
  $ 145,000  
Allowance for loan losses assumption increased by 5.0% of loan portfolio
  $ 724,000  
Allowance for loan losses assumption increased by 10.0% of loan portfolio
  $ 1,449,000  
Allowance for loan losses assumption decreased by 1.0% of loan portfolio
  $ (145,000 )
Allowance for loan losses assumption decreased by 5.0% of loan portfolio
  $ (724,000 )
Allowance for loan losses assumption decreased by 10.0% of loan portfolio
  $ (1,449,000 )

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

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

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

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

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

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

 
-40-



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

Real Estate Held for Sale

Real estate held for sale includes real estate acquired through foreclosure and will be carried at the lower of the recorded amount, inclusive of any senior indebtedness, or the property’s estimated fair value, less estimated costs to sell, with fair value based on appraisals and knowledge of local market conditions.  The carrying values of real estate held for sale are assessed on a regular basis from updated appraisals, comparable sales values or purchase offers.

RECENT ACCOUNTING PRONOUNCEMENTS

See Note K – Recent Accounting Pronouncements of the Notes to the Consolidated Financial Statements included in Part I, Item I Consolidated Financial Statements of this Quarterly Report on Form 10-Q.

CONTROLS AND PROCEDURES

 
(a) Evaluation of Disclosure Controls and Procedures
 
The Company’s Chief Executive Officer and Chief Financial Officer has evaluated the Company’s disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as of the end of the period covered by this report, and they have concluded that these controls and procedures are effective.
 
(b) Changes in Internal Control over Financial Reporting
 
There have been no changes in internal control over financial reporting during the third quarter of 2012, that have materially affected, or are reasonably likely to materially affect, the company’s internal control over financial reporting.

PART II – OTHER INFORMATION

ITEM 1.
LEGAL PROCEEDINGS

Please refer to Note L – Legal Matters Involving the Manager and Note M – Legal Matters Involving the Company of the Notes to the Consolidated Financial Statements included in Part I, Item I Consolidated Financial Statements of this Quarterly Report on Form 10-Q for information regarding our legal proceedings, which are incorporated herein by reference.

UNREGISTERED SALES OF EQUITY AND USE OF PROCEEDS

None.

The following is a summary of our stock purchases during the three months ended September 30, 2012, as required by Regulation S-K, Item 703.
Period
 
(a) Total Number of Shares Purchased
   
(b) Average Price Paid per Share
   
(c) Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs
   
(d) Maximum Number of (or Approximate Dollar Value) of Shares that May Yet Be Purchase Under the Plans or Programs
 
July 1, 2012 –July 31, 2012
    --     $ --       --     $ 4,013,475  
August 1, 2012 – August 31, 2012
    --       --       --       4,013,475  
September 1, 2012 – September 30, 2012
    --       --       --       4,013,475  
                                 
Total
    --     $ --       --     $ 4,013,475  


 
-41-


ITEM 6.
EXHIBITS

Exhibit No.
 
Description of Exhibits
2.1(1)
 
Agreement and Plan of Merger between Vestin Fund II, LLC and the Registrant
2.2(5)
 
Membership Interest Purchase Agreement between VRM I, VRM II and Northstar Hawaii, LLC
3.1(1)
 
Articles of Incorporation of the Registrant
3.2(1)
 
Bylaws of the Registrant
3.3(1)
 
Form of Articles Supplementary of the Registrant
4.1(1)
 
Reference is made to Exhibits 3.1, 3.2 and 3.3
4.2(2)
 
Specimen Common Stock Certificate
4.3(1)
 
Form of Rights Certificate
10.1(1)
 
Form of Management Agreement between Vestin Mortgage and the Registrant
10.2(1)
 
Form of Rights Agreement between the Registrant and the rights agent
10.3 (4)
 
Agreement between Strategix Solutions, LLC and Vestin Realty Mortgage I, Inc. for accounting services.
10.4 (6)
 
Died in Lieu
14 (3)   Vestin Realty Mortgage I, Inc. Code of Business Codeuct and Ethics
21.1(2)
 
List of subsidiaries of the Registrant
31.1
 
Section 302 Certification of Michael V. Shustek
31.2
 
Section 302 Certification of Eric Bullinger
32
 
Certification Pursuant to 18 U.S.C. Sec. 1350
101
 
The following material from the Company's quarterly report on Form 10-Q for the three and nine months ended September 30, 2012, formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Balance Sheets as of September 30, 2012 (unautdited) and December 31, 2011, (ii) Consolidated Statements of Operations for the three and nine months ended September 30, 2012 and 2011 (unaudited), (iii) Cosolidated Statements of Other Comprehensive Inocme for the three and nine months ended September 30, 2012 and 2011 (unaudited), (iv) Consolidated Statement of Equity for the nine months ended September 30, 2012 (unaudited), (v) Consolidated Statements of Cash Flows for the nine months ended September 30, 2012 and 2011 (unaudited), and (vi) Notes to the Consolidated Financial Statements (unaudited).

(1)
 
Incorporated herein by reference to Post-Effective Amendment No. 3 to our Form S-4 Registration Statement filed on January 4, 2006 (File No. 333-125347)
(2)
 
Incorporated herein by reference to Post-Effective Amendment No. 4 to our Form S-4 Registration Statement filed on January 31, 2006 (File No. 333-125347)
(3)
 
Incorporated herein by reference to the Transition Report on Form 10-K for the ten month transition period ended April 30, 2006 filed on June 28, 2006 (File No. 000-51964)
(4)
 
Incorporated herein by reference to the Quarterly Report on Form 10-Q filed on May 8, 2009 (File No. 000-51964)
(5)
 
Incorporated herein by reference to the Form 8-K/A filed on November 14, 2011 (File No. 000-51964)
(6)
 
Incorporated herein by reference to the Form 10-K filed on March 16, 2012 (File No. 000-51964)

 
-42-





Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 
Vestin Realty Mortgage I, Inc.
     
 
By:
/s/ Michael V. Shustek
   
Michael V. Shustek
   
President and Chief Executive Officer
 
Date:
November 14, 2012
     
 
By:
/s/ Eric Bullinger
   
Eric Bullinger
   
Chief Financial Officer
 
Date:
November 14, 2012




 
-43-


Exhibit 31.1

CERTIFICATIONS

I, Michael V. Shustek, certify that:

1. I have reviewed this Form 10-Q of Vestin Realty Mortgage I, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the consolidated financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a–15(e) and 15d–15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a–15(f) and 15d–15(f)) for the registrant and have:

 
(a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 
(b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external purposes in accordance with generally accepted accounting principles;

 
(c)
Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 
(d)
Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

 
(a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

 
(b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date: November 14, 2012

/s/ Michael V. Shustek
Michael V. Shustek
Chief Executive Officer
Vestin Realty Mortgage I, Inc.


Exhibit 31.2

CERTIFICATIONS

I, Eric Bullinger, certify that:

1. I have reviewed this Form 10-Q of Vestin Realty Mortgage I, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the consolidated financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a–15(e) and 15d–15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a–15(f) and 15d–15(f)) for the registrant and have:

 
(a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 
(b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external purposes in accordance with generally accepted accounting principles;

 
(c)
Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 
(d)
Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

 
(a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

 
(b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date: November 14, 2012

/s/ Eric Bullinger
Eric Bullinger
Chief Financial Officer
Vestin Realty Mortgage I, Inc.


Exhibit 32

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350


Michael V. Shustek, as Chief Executive Officer of Vestin Realty Mortgage I, Inc. (the “Registrant”), and Eric Bullinger, as Chief Financial Officer of the Registrant, hereby certify, pursuant to 18 U.S.C. Sec. 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
 

 
 
(1)
The Registrant’s Report on Form 10-Q for the nine months ended September 30, 2012, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), fully complies with the requirements of Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)); and
 

 
 
(2)
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Registrant.
 


Date: November 14, 2012

/s/ Michael V. Shustek
Michael V. Shustek
Chief Executive Officer
Vestin Realty Mortgage I, Inc.



Date: November 14, 2012

/s/ Eric Bullinger
Eric Bullinger
Chief Financial Officer
Vestin Realty Mortgage I, Inc.