Vestin Realty Mortgage II, Inc - FORM 10-Q

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark one)

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

SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2013

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the transition period from _________ to _________

Commission File Number: 000-51892

VESTIN REALTY MORTGAGE II, INC.

(Exact name of registrant as specified in its charter)

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

8880 W. SUNSET ROAD, SUITE 200, LAS VEGAS, NEVADA 89148

(Address of Principal Executive Offices) (Zip Code)

Registrant’s Telephone Number: 702.227.0965

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

Yes [X] No [ ]

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

Yes [ X ] 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, 2013, there were 11,292,339 shares of the Company’s Common Stock outstanding.

Table of Contents

TABLE OF CONTENTS

		Page

Part I	FINANCIAL INFORMATION

Item 1.	Consolidated Financial Statements (unaudited)	1

	Consolidated Balance Sheets as of September 30, 2013 and December 31, 2012	1

	Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2013 and 2012	2

	Consolidated Statements of Other Comprehensive Income (Loss) for the Three and Nine Months Ended September 30, 2013 and 2012	3

	Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2013 and 2012	4

	Notes to Consolidated Financial Statements	6

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	26

Item 4.	Controls and Procedures	35

Part II	OTHER INFORMATION

Item 1.	Legal Proceedings	35

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	35

Item 6.	Exhibits	36

	SIGNATURES	37

	Exhibit 31.1

	Exhibit 31.2

	Exhibit 32

Table of Contents

PART I - FINANCIAL INFORMATION

ITEM 1.

CONSOLIDATED FINANCIAL STATEMENTS

VESTIN REALTY MORTGAGE II, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
ASSETS

	September 30, 2013			December 31, 2012

Assets
Cash and cash equivalents	$	2,027,000		$	10,098,000
Accounts Receivable		15,000			--
Marketable securities - related party		920,000			592,000
Investments in marketable securities		4,116,000			--
Interest and other receivables, net of allowance of $3,022,000 at September 30, 2013 and $2,428,000 at December 31, 2012		10,000			22,000
Notes receivable, net of allowance of $13,994,000 at September 30, 2013 and $20,700,000 at December 31, 2012		--			--
Real estate held for sale		2,553,000			2,619,000
Real estate loans, net of allowance for loan losses of $2,450,000 at September 30, 2013 and $2,500,000 at December 31, 2012		14,811,000			24,880,000
Investment in equity method investee		1,183,000			--
Land and improvements		2,600,000			--
Building and improvements		7,800,000			--
Accumulated depreciation		(22,000	)		--
Total investments in real estate, net		10,378,000			--
Due from related parties		12,000			333,000
Investment in and note receivable from MVP Realty Advisors, LLC, net of allowance		--			1,534,000
Assets held for sale		3,118,000			--
Other assets		439,000			127,000
Total assets	$	39,582,000		$	40,205,000

LIABILITIES AND STOCKHOLDERS’ EQUITY

Liabilities
Accounts payable and accrued liabilities	$	346,000		$	1,080,000
Note payable		93,000			25,000
Liabilities related to assets held for sale		11,000			--
Deferred gain on sale of HFS		--			6,000
Total liabilities		450,000			1,111,000

Commitments and contingencies

Stockholders’ equity
Preferred stock, $0.0001 par value; 1,000,000 shares authorized; none issued		--			--
Treasury stock, at cost, no shares at September 30, 2013 and December 31, 2012		--			--
Common stock, $0.0001 par value; 100,000,000 shares authorized; 11,292,339 shares issued and outstanding at September 30, 2013 and 12,069,805 shares issued and outstanding at December 31, 2012		1,000			1,000
Additional paid-in capital		268,646,000			270,150,000
Accumulated deficit		(236,368,000	)		(231,066,000	)
Accumulated other comprehensive income		810,000			9,000
Total stockholders’ equity before non-controlling interest		33,089,000			39,094,000
Non-controlling interest		6,043,000			--
Total equity		39,132,000			39,094,000

Total liabilities and stockholders’ equity	$	39,582,000		$	40,205,000

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

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VESTIN REALTY MORTGAGE II, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
	For The Three Months Ended September 30,						For The Nine Months Ended September 30,
	2013			2012			2013			2012

Revenues
Interest income from investment in real estate loans	$	267,000		$	427,000		$	1,037,000		$	1,008,000
Gain related to pay off of real estate loan, including recovery of allowance for loan loss		--			31,000			50,000			1,268,000
Gain related to pay off of notes receivable, including recovery of allowance for notes receivable		66,000			79,000			206,000			226,000
Rental revenue		53,000			--			53,000			--
Total revenues		386,000			537,000			1,346,000			2,502,000

Operating expenses
Management fees - related party		267,000			242,000			816,000			791,000
Provision for loan loss		--			50,000			--			815,000
Impairment on MVP Realty Advisors		1,553,000			--			5,131,000			--
Interest expense		3,000			2,000			4,000			2,000
Acquisition expense		131,000			--			131,000			--
Depreciation		22,000			--			22,000			--
Professional fees		171,000			166,000			661,000			753,000
Consulting		30,000			49,000			148,000			161,000
Insurance		71,000			73,000			215,000			219,000
Other		25,000			26,000			176,000			143,000
Total operating expenses		2,273,000			608,000			7,304,000			2,884,000

Loss from operations		(1,887,000	)		(71,000	)		(5,958,000	)		(382,000	)

Non-operating income (loss)
Interest income from banking institutions		--			--			--			1,000
Recovery from settlement with loan guarantor		24,000			203,000			39,000			746,000
Settlement income		--			90,000			--			90,000
Dividend income		8,000			--			8,000			--
Loss on investment in equity method investee		(58,000	)		--			(58,000	)		--
Gain on sale of marketable securities		292,000			--			292,000			15,000
Reversal of settlement reserve		--			--			374,000			--
Settlement expense		--			--			--			(66,000	)
Total non-operating income, net		266,000			293,000			655,000			786,000

Provision for income taxes		--			--			--			--

Income (loss) from continuing operations		(1,621,000	)		222,000			(5,303,000	)		404,000

Discontinued operations, net of income taxes
Net gain (loss) on sale of real estate held for sale		(2,000	)		--			40,000			12,000
Expenses related to real estate held for sale		(24,000	)		(252,000	)		(278,000	)		(1,094,000	)
Recovery from 1701 Commerce		221,000			--			221,000			--
Income (loss) from asset held for sale, net of income taxes		(21,000	)		95,000			(21,000	)		95,000
Write-downs on real estate held for sale		--			--			--			(1,420,000	)
Total income (loss) from discontinued operations		174,000			(157,000	)		(38,000	)		(2,407,000	)

Income (loss) before provision for income taxes		(1,447,000	)		65,000			(5,341,000	)		(2,003,000	)

Allocation to non-controlling interest		(40,000	)		9,000			(40,000	)		9,000
Net income (loss) attributable to common stockholders	$	(1,407,000	)	$	56,000		$	(5,301,000	)	$	(2,012,000	)
Basic and diluted income (loss) per weighted average common share
Continuing operations		(0.14	)		0.02			(0.45	)		0.03
Discontinued operations		0.02			(0.01	)		0.00			(0.20	)
Total basic and diluted income (loss) per weighted
average common share	$	(0.12	)	$	0.01		$	(0.45	)	$	(0.17	)
Dividends declared per common share	$	--		$	--		$	--		$	--
Weighted average common shares outstanding		11,364,763			12,273,764			11,736,267			12,444,897

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

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VESTIN REALTY MORTGAGE II, INC.

STATEMENTS OF OTHER COMPREHENSIVE INCOME (LOSS)

(UNAUDITED)

	For The Three Months Ended September 30,						For The Nine Months Ended September 30,
	2013			2012			2013			2012

Net income (loss)	$	(1,447,000	)	$	65,000		$	(5,341,000	)	$	(2,003,000	)

Unrealized holding income on available-for-sale securities		472,000			--			472,000			--
Unrealized holding income (loss) on available-for-sale securities – related party		(16,000	)		231,000			338,000			140,000
Comprehensive income (loss)		(991,000	)		296,000			(4,531,000	)		(1,863,000	)
Net (income) attributable to noncontrolling interest		40,000			(9,000	)		40,000			(9,000	)
Comprehensive income (loss) attributable to Vestin Realty Mortgage II, Inc.	$	(951,000	)	$	287,000		$	(4,491,000	)	$	(1,872,000	)

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

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VESTIN REALTY MORTGAGE II, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

	For the Nine Months Ended September 30,
	2013			2012
Cash flows from operating activities:
Net loss	$	(5,341,000	)	$	(2,003,000	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation		22,000			--
Recovery of allowance for doubtful notes receivable		(206,000	)		(226,000	)
Gain related to recovery of allowance for loan loss		(50,000	)		(1,268,000	)
Provision for loan loss		--			815,000
Impairment on investment in MVP Realty Advisors		5,131,000			--
Gain on sale of real estate held for sale		(40,000	)		(12,000	)
Gain on sale of marketable securities		(292,000	)		(15,000	)
Dividend income		(8,000	)		--
Gain on proceeds from settlement		--			(90,000	)
Loss on investment in equity method investee		58,000			--
Write-downs on real estate held for sale		--			1,420,000
Gain related to recovery from settlement with loan guarantor		(39,000	)		(746,000	)
Change in operating assets and liabilities:
Assets held for sale, net of liabilities		21,000			(95,000	)
Due to/from related parties		321,000			(78,000	)
Accounts receivable		(15,000	)
Interest and other receivables		11,000			(9,000	)
Deferred gain on sale of HFS		--			(72,000	)
Other assets		(74,000	)		154,000
Reversal of settlement reserve		(374,000	)		--
Accounts payable and accrued liabilities		(324,000	)		(27,000	)
Net cash used in operating activities		(1,199,000	)		(2,252,000	)
Cash flows from investing activities:
Investments in real estate loans		(8,146,000	)		(22,886,000	)
Purchase of investments in real estate loans from		(1,200,000	)		--
VRM I		--			(300,000	)
Related parties		(1,000,000	)		(70,000	)
Proceeds from loan payoffs		12,431,000			15,159,000
Sale of investments in real estate loans to
VRM I		--			1,000,000
Related parties		1,500,000			--
Third parties		6,534,000			3,193,000
Proceeds from notes receivable		206,000			226,000
Proceeds from dividend income		8,000			--
Proceeds from settlement from loan guarantor		--			746,000
Proceeds from settlement		--			90,000
Investment in real estate		(5,882,000	)		--
Investments in MVP Realty Advisors, LLC		(3,597,000	)		(534,000	)
Investment in asset held for sale		(1,595,000	)		--
Investment in equity method investee		(1,241,000	)		--
Proceeds from sale of real estate held for sale		--			207,000
Proceeds on nonrefundable earnest money deposit on real estate held for sale		61,000			24,000
Investment in asset held for sale		--			(900,000	)
Purchase of marketable securities		(5,040,000	)		(1,011,000	)
Proceeds from sale of marketable securities		1,689,000			1,026,000
Net cash used in investing activities		(5,272,000	)		(4,030,000	)

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

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	For the Nine Months Ended September 30,
Cash flows from financing activities:	2013			2012
Purchase of treasury stock		(1,465,000	)		(665,000	)
Proceeds from distribution from real estate held for sale		5,000			--
Principal payments on notes payable		(140,000	)		(170,000	)
Net cash used in financing activities		(1,600,000	)		(835,000	)
NET CHANGE IN CASH		(8,071,000	)		(7,117,000	)
Cash and cash equivalents, beginning of period		10,098,000			9,226,000
Cash and cash equivalents, end of period	$	2,027,000		$	2,109,000

Supplemental disclosures of cash flows information:
Interest paid	$	4,000		$	2,000
Non-cash investing and financing activities:
Transfer of fully allowed interest receivable and related allowance to real estate held for sale	$	--		$	2,334,000
Adjustment to accrued interest and related allowance		--			(789,000	)
Transfer of fully allowed interest receivable to notes receivable	$	--		$	907,000
Investments in real estate loans and related allowances transferred to note receivable	$	--			6,642,000
Real estate held for sale acquired through foreclosure, net of prior allowance	$	--		$	32,000
Note payable relating to prepaid D & O insurance	$	208,000		$	219,000
Other real estate owned acquired through deed in lieu, net of prior allowance	$	--		$	8,963,000
Non-controlling interest portion of investment in real estate	$	4,518,000		$	--
Unrealized gain on marketable securities	$	472,000		$	--
Unrealized gain (loss) on marketable securities - related party	$	388,000		$	(140,000	)
Retirement of treasury stock	$	--		$	(855,000	)

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

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VESTIN REALTY MORTGAGE II, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2013

(UNAUDITED)

NOTE A — ORGANIZATION

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

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

Michael Shustek 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. 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 indirectly 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 loans.

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

The consolidated financial statements include the accounts of VRM II; Vestin TRS II, Inc., our wholly owned subsidiary; 1701 Commerce, LLC; MVP PF Ft. Lauderdale, LLC; MVP PF Memphis Court, LLC; MVP PF Memphis Poplar, LLC; MVP PF St. Louis, LLC; MVP PF Kansas City, LLC; and MVP PF Baltimore, LLC. All significant intercompany transactions and balances have been eliminated in consolidation.

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During April 2009, we entered into an accounting services agreement with Strategix Solutions, LLC (“Strategix Solutions”), a Nevada limited liability company, for the provision of accounting and financial reporting services. Strategix Solutions also provides accounting and financial reporting services to VRM I and Fund III. Our CFO and other members of our accounting staff are employees of Strategix Solutions. Strategix Solutions is managed by LL Bradford and Company, LLC ("LL Bradford"), a certified public accounting firm that has provided non-audit accounting services to us. The principal manager of LL Bradford was a former officer of our manager from April 1999 through January 1, 2005. Strategix Solutions is owned by certain partners of LL Bradford, none of whom are currently or were previously officers of our manager. On January 14, 2013, Eric Bullinger resigned from his position as Chief Financial Officer of Vestin Realty Mortgage I, Inc. and Vestin Realty Mortgage II, Inc and the equivalent of Chief Financial Officer of Vestin Fund III, LLC (hereafter referred to collectively as the “Vestin Entities”). On January 14, 2013, the Board of Directors appointed Tracee Gress as the Chief Financial Officer of the Vestin Entities (or the equivalent thereof in the case of Vestin Fund III, LLC). 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 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 2012 annual report filed on Form 10-K.

Management Estimates

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

Cash and Cash Equivalents

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

Revenue Recognition

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

Investments in Real Estate Loans

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

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

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

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

Allowance for Loan Losses

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

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

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

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

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

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

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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.

Real Estate Held for Sale

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

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

Management commits to a plan to sell the properties;

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

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

The sale of the property is probable;

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

Withdrawal or significant modification of the sale is not likely.

Real Estate Held For Sale – Seller-Financed

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

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

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

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

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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 I (collectively, the “Lead Lenders”). In the event of borrower non-performance, the Inter-creditor Agreements generally provide that the Lead Lenders must repay the Investor’s loan amount either by (i) continuing to remit to the Investor the interest due on the participated loan amount; (ii) substituting an alternative loan acceptable to the Investor; or (iii) repurchasing the participation from the Investor for the outstanding balance plus accrued interest.

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

Investment in Marketable Securities and Investment in Marketable Securities– Related Party

Investment in marketable securities and marketable securities – related party consists of stock in a publicly traded companies that invest in loans collateralized by real estate and VRM I. The securities are stated at fair value as determined by the closing market prices as of September 30, 2013 and December 31, 2012. All securities are classified as available-for-sale.

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

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 and nine months ended September 30, 2013 and 2012.

Common Stock Dividends

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

Treasury Stock

On June 7, 2012, our Board of Directors (“Board”) approved the adoption of a prearranged stock repurchase plan intended to qualify for the safe harbor under Rule 10b5-1 under the Securities Exchange Act of 1934, as amended (“10b5-1 Plan”). Due to the postponement of the merger between VRM I and us, the 10b5-1 plan has been terminated. We record our treasury stock at cost method. During the nine months ended September 30, 2013, we purchased 777,466 shares of treasury stock for approximately $1.5 million. Under the Maryland General Corporation Law, shares of its own stock acquired by a corporation constitute authorized but unissued shares.

In January 2013 we recorded 10,000 shares in treasury stock for $1.48 a share as part of a settlement which resulted in recovery from settlement with loan guarantor of approximately $15,000.

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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, 2013, the Company operates both segments.

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, 2013, approximately 37% of our assets, net of allowance for loan losses, are classified as investments in real estate loans.

Reclassifications

Amounts listed in other assets in the December 31, 2012 consolidated financial statements have been reclassified to conform to the September 30, 2013 presentation.

Principles of Consolidation

Our consolidated financial statements include the accounts of VRM II; Vestin TRS II, Inc., our wholly owned subsidiary; 1701 Commerce, LLC; MVP PF Ft. Lauderdale, LLC; MVP PF Memphis Court, LLC; MVP PF Memphis Poplar, LLC; MVP PF St. Louis, LLC; MVP PF Kansas City, LLC; and MVP PF Baltimore, LLC 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.

Non-controlling Interests

The FASB issued authoritative guidance for non-controlling interests in December 2007, which establishes accounting and reporting standards for the non-controlling interest in a subsidiary and for the deconsolidation of a subsidiary. The guidance clarifies that a non-controlling 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 non-controlling 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 non-controlling 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 was 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 I – Fair Value.

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

We maintain cash deposit accounts and certificates of deposit that, at times, may exceed federally-insured limits. To date, we have not experienced any losses. As of September 30, 2013, we had approximately $1.7 million of funds in excess of the federally-insured limits.

As of September 30, 2013, 39% and 34% of our loans were in California and Nevada, respectively, compared to 55% and 24% of our loans being in Nevada and California, respectively, at December 31, 2012. 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, 2013, the aggregate amount of loans to our three largest borrowers represented approximately 65% of our total investment in real estate loans. These real estate loans consisted of commercial and land loans, secured by properties located in California, Nevada and Michigan, with a first lien position. Their interest rates are between 9% and 15%, and the aggregate outstanding balance is approximately $11.3 million. As of September 30, 2013, our largest loan, totaling approximately $6.7 million and secured by property located in California, is a performing loan with an interest rate of 11%. The second loan is secured by property in Nevada with an interest rate of 15% and is considered non-performing. The third loan is secured by property in Michigan with an interest rate of 9% and is considered performing. At December 31, 2012, the aggregate amount of loans to our three largest borrowers represented approximately 45% of our total investment in real estate loans. These real estate loans consisted of commercial and land loans, secured by property located in Nevada and California, with a first lien position. Their interest rates ranged between 8% and 11%, and the aggregate outstanding balance was approximately $12.3 million.

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

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Common Guarantors

As of September 30, 2013 and December 31, 2012, six and four loans totaling approximately $4.3 million and $5.8 million, respectively, representing approximately 25.1% and 21.3%, respectively, of our portfolio’s total value, had a common guarantor. At September 30, 2013 and December 31, 2012, all of these loans were considered performing.

Additionally, as of December 31, 2012, four loans totaling approximately $7.9 million representing approximately 28.9% of our portfolio’s total value had a common guarantor. As of December 31, 2012, all of these loans were considered performing.

NOTE D — INVESTMENTS IN REAL ESTATE LOANS

As of September 30, 2013 and December 31, 2012, 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. As of September 30, 2013, three loans had a variable interest rate adjusted quarterly at a rate of prime plus 3.30% (6.55% as of September 30, 2013). The balance on these loans was approximately $0.3 million as of September 30, 2013.

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, 2013 and December 31, 2012, we had no investments in real estate loans that had interest reserves.

Loan Portfolio

As of September 30, 2013, 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 6% to 15% which includes performing loans that are being fully or partially accrued and will be payable at maturity. Revenue by product will fluctuate based upon relative balances during the period.

Investments in real estate loans as of September 30, 2013, 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		12	$	9,509,000		10.01	%		55.09	%		65.76	%
Land		3		7,752,000		10.33	%		44.91	%		37.60	%
Total		15	$	17,261,000		10.15	%		100.00	%		49.89	%

Investments in real estate loans as of December 31, 2012, were as follows:

Loan Type	Number of Loans		Balance *		Weighted Average Interest Rate			Portfolio Percentage			Current Weighted Average Loan-To-Value, Net of Allowance for Loan Losses

Commercial		15	$	19,648,000		9.06	%		71.76	%		62.32	%
Land		2		7,732,000		10.33	%		28.24	%		48.60	%
Total		17	$	27,380,000		9.42	%		100.00	%		58.06	%

*	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, 2013 and December 31, 2012, was 9.35% and 9.42%, respectively. Please see “Non-Performing Loans” and “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, 2013, and December 31, 2012:

Loan Type	Number of Loans		September 30, 2013 Balance*		Portfolio Percentage			Number of Loans		December 31, 2012 Balance*		Portfolio Percentage
First deeds of trust		14	$	17,102,000		99.08	%		16	$	26,682,000		97.00	%
Second deeds of trust		1		159,000		0.92	%		1		698,000		3.00	%
Total		15	$	17,261,000		100.00	%		17	$	27,380,000		100.00	%

*	Please see Balance Sheet Reconciliation below.

The following is a schedule of contractual maturities of investments in real estate loans as of September 30, 2013:

Non-performing and past due loans	$	2,450,000
October 2013 – December, 2013		4,396,000
January 2014 – March 2014		2,105,000
April 2014 – June 2014		211,000
July 2014 – September 2014		7,780,000
October 2014 – December 2014		--
Thereafter		319,000

Total	$	17,261,000

The following is a schedule by geographic location of investments in real estate loans as of September 30, 2013 and December 31, 2012:

	September 30, 2013 Balance *		Portfolio Percentage			December 31, 2012 Balance *		Portfolio Percentage

Arizona	$	1,084,000		6.28	%	$	--		--
California		6,696,000		38.79	%		6,696,000		24.46	%
Michigan		2,160,000		12.51	%		2,160,000		7.89	%
Nevada		5,851,000		33.90	%		15,151,000		55.34	%
Ohio		319,000		1.85	%		321,000		1.17	%
Texas		1,151,000		6.67	%		1,151,000		4.20	%
Utah		--		--			1,901,000		6.94	%
Total	$	17,261,000		100.00	%	$	27,380,000		100.00	%

*	Please see Balance Sheet Reconciliation below.

Balance Sheet Reconciliation

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

	September 30, 2013			December 31, 2012
Balance per loan portfolio	$	17,261,000		$	27,380,000
Less:
Allowance for loan losses (a)		(2,450,000	)		(2,500,000	)
Balance per consolidated balance sheets	$	14,811,000		$	24,880,000

(a)

Please refer to Specific Reserve Allowance below.

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Non-Performing Loans

As of September 30, 2013 and December 31, 2012, we had one loan 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). This loan is currently carried on our books at a value of $0, net of allowance for loan losses of approximately $2.5 million. This loan has been placed on non-accrual of interest status.

At September 30, 2013, the following loan types were non-performing:

Loan Type	Number Of Non-Performing Loans		Balance at September 30, 2013		Allowance for Loan Losses			Net Balance at September 30, 2013
Commercial		1	$	2,450,000	$	(2,450,000	)	$	--
Total		1	$	2,450,000	$	(2,450,000	)	$	--

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

Loan Type	Number Of Non-Performing Loans		Balance at December 31, 2012		Allowance for Loan Losses			Net Balance at December 31, 2012

Commercial		1	$	2,450,000	$	(2,450,000	)	$	--
Total		1	$	2,450,000	$	(2,450,000	)	$	--

Asset Quality and Loan Reserves

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

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

Prevailing economic conditions;

Historical experience;

The nature and volume of the loan portfolio;

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

Evaluation of industry trends; and

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

Based upon this evaluation, a determination is made as to whether the allowance for loan losses is adequate to cover any potential losses on an individual loan basis; we do not have a general allowance for loan losses. Additions to the allowance for loan losses are made by charges to the provision for loan loss. Our ratio of total allowance for loan losses to total loans with an allowance for loan loss is 100%.

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The following is a breakdown of allowance for loan losses related to performing loans and non-performing loans as of September 30, 2013 and December 31, 2012:

	As of September 30, 2013
	Balance		Allowance for loan losses **			Balance, net of allowance
Non-performing loans – no related allowance	$	--	$	--		$	--
Non-performing loans – related allowance		2,450,000		(2,450,000	)		--
Subtotal non-performing loans		2,450,000		(2,450,000	)		--

Performing loans – no related allowance		14,811,000		--		$	14,811,000
Performing loans – related allowance		--		--			--
Subtotal performing loans		14,811,000		--			14,811,000

Total	$	17,261,000	$	(2,450,000	)	$	14,811,000

	As of December 31, 2012
	Balance		Allowance for loan losses **			Balance, net of allowance
Non-performing loans – no related allowance	$	--	$	--		$	--
Non-performing loans – related allowance		2,450,000		(2,450,000	)		--
Subtotal non-performing loans		2,450,000		(2,450,000	)		--

Performing loans – no related allowance		24,655,000		--			24,655,000
Performing loans – related allowance		275,000		(50,000	)		225,000
Subtotal performing loans		24,930,000		(50,000	)		24,880,000

Total	$	27,380,000	$	(2,500,000	)	$	24,880,000

**	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, 2013, we have provided a specific reserve allowance for one non-performing loan 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, 2013 and 2012 by loan type. We will continue to evaluate our position in these loans.

Loan Type	Balance at 12/31/2012		Specific Reserve Allocation		Loan Pay Downs			Write-off		Transfers to REO or Notes Receivable		Balance at 9/30/13
Commercial	$	2,500,000	$	--	$	(50,000	)	$	--	$	--	$	2,450,000
Total	$	2,500,000	$	--	$	(50,000	)	$	--	$	--	$	2,450,000

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Loan Type	Balance at 12/31/2011		Specific Reserve Allocation		Loan Pay Downs			Write-off			Transfers to REO or Notes Receivable			Balance at 9/30/12
Commercial	$	22,392,000		815,000	$	(14,295,000	)	$	(3,250,000	)	$	(2,973,000	)	$	2,689,000
Construction		2,971,000		--		--			--			(2,971,000	)		--
Land		884,000		--		--			--			--			884,000
Total	$	26,247,000	$	815,000	$	(14,295,000	)	$	(3,250,000	)	$	(5,944,000	)	$	3,573,000

Extensions

As of September 30, 2013, our manager had granted extensions on seven outstanding loans totaling approximately $21.6 million of which our portion was approximately $15.4 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. As of September 30, 2013, six loans that have been granted extensions are performing.

NOTE E — INVESTMENT IN MARKETABLE SECURITIES – RELATED PARTY

As of September 30, 2013 and December 31, 2012, we owned 538,178 shares of VRM I’s common stock, representing approximately 9.1% and 8.50%, respectively, of the total outstanding shares. The closing price of VRM I’s common stock on September 30, 2013, was $1.71 per share.

During the three months ended September 30, 2013, the trading price for VRM I’s common stock ranged from $1.48 to $2.03 per share. We will continue to evaluate our investment in marketable securities on a quarterly basis.

NOTE F — INVESTMENT IN MARKETABLE SECURITIES

As of September 30, 2013, we owned 245,272 shares of publicly traded companies that invest in loans collateralized by real estate. The closing prices of the common stock on September 30, 2013 resulted in an unrealized gain of approximately $472,000. Additionally, for the nine months ended September 30, 2013, we sold 145,549 shares for a realized gain of approximately $292,000.

NOTE G — REAL ESTATE HELD FOR SALE

At September 30, 2013, we held five properties with a total carrying value of approximately $2.6 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. During May 2013 we, VRM I and VF III received a distribution in the amount of $600,000 of which our portion was approximately $5,000.

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

Beginning balance, January 1, 2013	$	2,619,000
Nonrefundable earnest money deposit		(61,000	)
Distributions		(5,000	)
Write down		--
Sale		--
Ending balance, September 30, 2013	$	2,553,000

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NOTE H — RELATED PARTY TRANSACTIONS

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

Transactions with the Manager

Our manager is entitled to receive from us an annual management fee of up to 0.25% of our aggregate capital contributions received by us and Fund II from the sale of shares or membership units, paid monthly. The amount of management fees paid to our manager for the nine months ended September 30, 2013 and 2012 were approximately $0.8 million, during each period.

As of September 30, 2013 and December 31, 2012, our manager owned 92,699 of our common shares, representing approximately 0.8% and 0.7%, respectively, of our total outstanding common stock at the respective dates.

As of September 30, 2013 and December 31, 2012, we had receivables from our manager of approximately $20,000.

As of September 30, 2013, we had prepaid management fees of approximately $0.2 million for services to be performed from July to November 2013. A discount of 8% will be applied to advance payments of management fees.

Transactions with Other Related Parties

As of September 30, 2013 and December 31, 2012, we owned 538,178 common shares of VRM I, representing approximately 9.1% and 8.5%, respectively, of their total outstanding common stock at the respective dates.

As of September 30, 2013 and December 31, 2012, VRM I owned 537,078 of our common shares, representing approximately 4.7% and 4.4%, respectively, of our total outstanding common stock for both periods.

As of September 30, 2013 and December 31, 2012, we had receivables from VRM I of approximately $5,000 and $0.2 million, respectively, primarily related to legal fees.

As of September 30, 2013 and December 31, 2012, we had receivables from Fund III of approximately $2,000 and $89,000, respectively.

During April 2013, we sold a $1.5 million in investment in a real estate loan to MVP REIT, Inc., an entity managed by a company majority owned by Mr. Shustek. During July 2013, we repurchased $1.0 million of the same loan from MVP REIT.

During April 2013, we purchased $1.2 million in investments in real estate loans from VRM I.

During August 2013, we sold $75,000 of a performing loan to a trust in which a director is one of the trustees. No gain or loss resulted from this transaction.

See also Notes I and J below.

NOTE I — INVESTMENT IN AND NOTE RECEIVABLE FROM MVP REALTY ADVISORS

Together with MVP Capital Partners LLC, which is owned by our Chairman and Chief Executive Officer, Michael Shustek, we have formed a Nevada limited liability company, MVP Realty Advisors, LLC (“MVPRA”). MVPRA acts as the advisor to MVP REIT, Inc., a Maryland corporation which was organized to invest in real estate and loans secured by real estate (“MVP REIT”). On April 16, 2012, MVP REIT filed a registration statement with the Securities and Exchange Commission, which was declared effective by the Securities and Exchange Commission on September 25, 2012. MVP REIT is organized as a publically registered, non-traded real estate investment trust (“REIT”). Under the terms of an Advisory Agreement between MVPRA and MVP REIT, MVPRA is entitled to certain fees for advisory and other management services rendered to MVP REIT.

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During April 2012, we contributed $1,000 for a 40% interest in MVPRA. Our participation in MVPRA was approved by the independent member of our Board of Directors. Mr. Shustek, through a wholly owned company named MVP Capital Partners, LLC (“MVPCP”) contributed $1,500 for a 60% interest in MVPRA. As of June 30, 2013, we and MVPCP had loaned approximately $3.6 million and approximately $1.2 million, respectively, to MVPRA related to MVP REIT, Inc. On June 30, 2013, MVPCP decided to forgive the full amount of its $1.2 million loan. We have not forgiven the balance due from MVPRA; however, the decision by MVPRA to forgive the full amount creates uncertainty as to when we will be repaid the amounts loaned to MVPRA. Based on this uncertainty, we have determined to fully impair the balance of this investment and note receivable totaling $1.5 million and $5.1 million for the three and nine months ended September 30, 2013. Under the terms of the Operating Agreement which governs MVPRA, any loans we may make to MVPRA must be paid in full and we shall have received distributions of profits equal to our capital contributions prior to MVPCP receiving any distributions from MVPRA. During the third quarter, we funded MVPRA an additional $1.5 million continued to be fully allowed for. On November 1, 2013, our board of directors agreed to continue funding MVP RA for an additional 120 days, at which time additional funding will be evaluated. Additionally, we are currently negotiating with MVP Capital Partners to determine our future participating interest in relation to MVP REIT.

NOTE J — NOTE RECEIVABLE

As of November 30, 2010, we had five loans totaling approximately $19.0 million guaranteed by common guarantors, of which our portion was approximately $12.6 million, before allowances totaling approximately $7.3 million, of which our portion was approximately $6.6 million. Pursuant to agreements entered into on March 16, 2009 and July 2, 2009, which modified these loans, three of these loans continued to be secured by real property and two became unsecured due to the permanent financing being obtained for less than the outstanding balance on the loans. On November 30, 2010, we entered into additional agreements to modify the terms related to these five loans in order to further enhance our investment. Pursuant to these additional agreements, we obtained an additional guarantor, as well as an interest in operating profits and any aggregate sales proceeds of $10.4 million less operating profits previously received related to these properties. The new guarantor is the managing member of the borrowing entities and is also the principal manager of L.L. Bradford and was a former officer of our manager from April 1999 through January 2005. In the event the total proceeds from the operating profits and sales proceeds do not equal $10.4 million, each borrower is obligated to execute a promissory note to pay us the deficiency, which would be guaranteed by the guarantors, including the new guarantor. In addition, we agreed to release our deeds of trust on two of the three loans secured by real estate totaling $9.0 million, of which our portion is $0.3 million. As a result of releasing our deeds of trust we classified these loans as unsecured notes receivable for the same amount and recognized a full allowance on this balance.

During the nine months ended September 30, 2013, we terminated the unsecured note receivable balance on four of the properties in connection with MVP REIT’s acquisition of the properties. The Manager and our Board believes that terminating the unsecured notes receivable was in our best interest since we own a 40% interest in MVP Realty Advisors which manages MVP REIT. MVP Realty Advisors will directly benefit from this transaction through the receipt of acquisition fees of 3% of the purchase prices, asset management fees of 0.85% of total assets, debt service fees of the aggregate debt financed and potential future disposition fees of 3% of sale price. We will benefit from 40% of these fees to the extent they exceed operating expenses. VRM I and VF III received shares of common stock of MVP REIT for their interest in the unsecured notes receivable. VRM I and VF III have no interest in MVP Realty Advisors. The final two buildings will be acquired by MVP REIT in the fourth quarter of 2013 and we have agreed to terminate the unsecured notes receivable upon closing.

NOTE K — FAIR VALUE

As of September 30, 2013, 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.

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.

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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, 2013 and December 31, 2012, 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 9/30/13		Carrying Value on Balance Sheet at 9/30/13
Assets
Investment in marketable securities - related party	$	920,000	$	--	$	--	$	920,000	$	920,000
Investment in marketable securities	$	4,116,000	$	--	$	--	$	4,116,000	$	4,116,000
Investment in real estate loans	$	--	$	--	$	14,921,000	$	14,921,000	$	14,811,000

	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 12/31/12		Carrying Value on Balance Sheet at 12/31/12
Assets
Investment in marketable securities - related party	$	592,000	$	--	$	--	$	592,000	$	592,000
Investment in real estate loans	$	--	$	--	$	24,500,000	$	24,500,000	$	24,880,000

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The following table presents the changes in our financial assets and liabilities that are measured at fair value on a recurring basis using significant unobservable inputs (Level 3) from January 1, 2013 to September 30, 2013:


	Investment in real estate loans

Balance on January 1, 2013	$	24,500,000
Change in temporary valuation adjustment included in net loss
Net decrease in allowance for loan losses		50,000
Purchase and additions of assets
New mortgage loans and mortgage loans acquired		10,346,000
Sales, pay downs and reduction of assets
Collections and settlements of principal and sales of investment in real estate loans		(12,431,000	)
Sale of assets to related parties		(1,500,000	)
Sale of assets to third parties		(6,534,000	)
Temporary change in estimated fair value based on future cash flows		490,000

Balance on September 30, 2013, net of temporary valuation adjustment	$	14,921,000


	Investment in real estate loans

Balance on January 1, 2012	$	30,646,000
Change in temporary valuation adjustment included in net income (loss)
Increase in allowance for loan losses		(815,000	)
Purchase and additions of assets
Transfer of allowance on real estate loans to real estate held for sale		14,000
Transfer of allowance on real estate loans to asset held for sale		1,705,000
Reduction of allowance on real estate loans due to loan payments		4,239,000
Reduction of allowance on real estate loans following settlement of loan		11,565,000
New mortgage loans and mortgage loans acquired		20,285,000
Write-off of allowance on uncollectable loan		3,250,000
Transfer of allowance on real estate loans converted to unsecured notes receivable		2,715,000
Sales, pay downs and reduction of assets
Transfer of real estate loans to real estate held for sale		(45,000	)
Transfer of real estate loan to asset held for sale		(10,669,000	)
Collections and settlements of principal and sales of investment in real estate loans		(19,351,000	)
Reduction of loan balance following settlement of loan		(11,565,000	)
Write-off of uncollectable loan		(3,250,000	)
Conversion of real estate loans to unsecured notes receivable		(2,715,000	)
Temporary change in estimated fair value based on future cash flows		1,231,000

Balance on September 30, 2012, net of temporary valuation adjustment	$	27,240,000

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NOTE L – INVESTMENT IN EQUITY METHOD INVESTEE

During September 2013, we formed a limited liability company, MVP MS Red Mountain 2013, LLC (“Red Mountain”) with MVP REIT to acquire a 299-unit self-storage facility located adjacent to Nevada Highway in Boulder City, NV. We and MVP REIT hold a 49% and 51% interest, respectively in the limited liability company. The limited liability company is jointly managed by MVP Realty Advisors, LLC and Vestin Mortgage, LLC. MVP REIT has the right, at any time, with ten days written notice, to purchase our interest in the limited liability company (the “Purchase Right”). The price for the Purchase Right shall be equal to our capital contribution plus a 7.5% annual cumulative return less any distributions received by us.

This acquisition closed on September 12, 2013. The self-storage facility was originally constructed in 1996 and expanded in both 2000 and 2006. The property consists of 23 buildings located on five acres. As of the closing date, the property is approximately 97% occupied. Red Mountain obtained financing of $2.7 million through a 7-year term loan amortized over 25 years at 4.35% annual percentage rate.

NOTE M — ACQUISITION AND ASSETS HELD FOR SALE

On July 26, 2013, we, MVP REIT and VRM I entered into an agreement to acquire six parking facilities from the same seller. We have formed limited liability companies with MVP REIT and VRM I to acquire the properties based on ownership noted in the table below. The limited liability companies are jointly managed by MVP Realty Advisors, LLC and Vestin Mortgage, LLC. MVP REIT has the right, at any time, with 10 days written notice, to purchase our interest in the limited liability companies (the “Purchase Right”). The price for the Purchase Right shall be equal to our capital contribution plus a 7.5% annual cumulative return less any distributions received by us.

The following is a summary of the purchase per the agreement:

				Ownership
Property Name	Purchase Date	Purchase Price		VRTB			VRTA			MVP
MVP PF Ft Lauderdale 2013, LLC	July 31, 2013	$	3,400,000		68	%		--			32	%
MVP PF Memphis Court 2013, LLC	August 28, 2013		1,000,000		51	%		44	%		5	%
MVP PF Memphis Poplar 2013, LLC	August 28, 2013		2,000,000		51	%		44	%		5	%
MVP PF Kansas City 2013, LLC	August 28, 2013		2,800,000		51	%		44	%		5	%
MVP PF Baltimore 2013, LLC	September 4, 2013		2,300,000		51	%		44	%		5	%
MVP PF St. Louis 2013, LLC	September 4, 2013		2,000,000		51	%		44	%		5	%
		$	13,500,000

All of the parking facilities are currently leased to tenants under triple net leases, therefore no specific party has additional management responsibility or decision making authority beyond their ownership interest.

In accordance with ASC 805-10-25-13, the following is the preliminary purchase price allocation:

Ft Lauderdale	$	3,400,000
Memphis Court		190,000
Memphis Poplar		2,685,000
Kansas City		1,550,000
Baltimore		1,550,000
St. Louis		4,125,000
	$	13,500,000

Upon the closing of the purchases described above, three of the six triple net leases were terminated which included a 180 day termination period. Management is in current negotiations to enter into new triple net leases. Upon completion of the new lease agreements, we will obtain updated appraisals to determine final purchase price allocation.

Management has commenced a plan to sell MVP PF Baltimore 2013, LLC and MVP PF Kansas City 2013, LLC. These properties have been reported as Discontinued Operations in the accompanying statement of operations.

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Pro forma results of the Company

The following table of pro forma consolidated results of operations of the Company for the period from April 3, 2012 (inception) through December 31, 2012 and the nine months ended September 30, 2013 assumes that acquisitions were completed as of April 3, 2012 (inception of the Company).

	For the three months ended September 30, 2013			For the three months ended September 30, 2012		For the nine months ended September 30, 2013			For the nine months ended September 30, 2012
Revenues from continuing operations	$	506,000		$	669,000	$	1,874,000		$	3,116,000
Net income (loss) available to common stockholders	$	(1,233,000	)	$	127,000	$	(4,988,000	)	$	(2,100,000	)
Net income (loss) available to common stockholders per share – basic	$	(0.11	)	$	0.01	$	(0.43	)	$	(0.17	)
Net income (loss) available to common stockholders per share – diluted	$	(0.11	)	$	0.01	$	(0.43	)	$	(0.17	)

NOTE N — SEGMENT INFORMATION

Company management reviews financial and operating performance in the following two separate operating segments: (1) investment in real estate loans and (2) investments in real property. Selling, general and administrative expenses, primarily consisting of compensation of employees, seminar expense, professional fees and overhead costs not directly related to a specific operating segment, are reflected in the table below as corporate activities.

The following are certain financial data for the Company’s operating segments for the periods:

	For the Three Months Ended September 30, 2013		For the Three Months Ended September 30, 2012		For the Nine Months Ended September 30, 2013		For the Nine Months Ended September 30, 2012
Revenues
Investment in real estate loans	$	333,000	$	537,000	$	1,293,000	$	2,502,000
Investment in real property		53,000		--		53,000		--
Total revenues as reported	$	386,000	$	537,000	$	1,346,000	$	2,502,000

Operating income(loss)
Investment in real estate loans	$	333,000		$	487,000		$	1,293,000		$	1,687,000
Investment in real property		(1,653,000	)		--			(5,231,000	)		--
Corporate activities		(567,000	)		(558,000	)		(2,020,000	)		(2,069,000	)
Total operating loss as reported	$	(1,887,000	)	$	(71,000	)	$	(5,958,000	)	$	(382,000	)

Total Assets	September 30, 2013		December 31, 2012
Investment in real estate loans	$	17,374,000	$	27,521,000
Investment in real property		10,378,000		--
Corporate assets		11,830,000		12,684,000
Total assets	$	39,582,000	$	40,205,000

NOTE O — RECENT ACCOUNTING PRONOUNCEMENTS

No new accounting pronouncements have been defined that would materially impact our financial statements.

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NOTE P — 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.

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

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

NOTE Q — LEGAL MATTERS INVOLVING THE COMPANY

On February 7, 2012, we, VRM I and Fund III entered into a Deed in Lieu Agreement with a borrower in lieu of the foreclosure of our subordinated 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 $9.0 million. Pursuant to the Deed in Lieu Agreement, our subsidiary 1701 Commerce, LLC (“1701 Commerce”) received a deed to the property. The property is operated as the Sheraton Hotel and Spa– Fort Worth, Texas. 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 the senior mortgage lien holder and to preserve and protect 1701 Commerce’s equity and the interests of the other creditors of the hotel. Due to the uncertainty and disputes involving this property, we recorded this investment as Other Real Estate Owned on our 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 to be funded by us, VRM II and VF III. The sum of $0.2 million was expended from this account leaving the sum of $0.8 million, which sum was returned to the Company in October 2013.

The hotel was sold on July 17, 2013 for the sum of $49,300,000. The net proceeds of the sale and the cash on hand as of the date of the sale are being held in a debtor in possession account subject to the Hotel’s operating accounts payable and claims made through the bankruptcy court. The balance, if any, will be paid over to the owners of 1701 Commerce according to their interest.

We hold an interest of approximately 90%, VRM I holds an interest of approximately 8% and Fund III holds an interest of approximately 2% in 1701 Commerce.

During September 2010, we established reserves related to a litigation settlement. As of September 30, 2013, management determined that the remaining reserves of $374,000 are no longer necessary and have recognized this amount as reversal of settlement reserve.

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

NOTE R— SUBSEQUENT EVENTS

The following subsequent events have been evaluated through the date of this filing with the SEC.

On November 1, 2013, our board of directors agreed to continue funding MVPRA for an additional 120 days at which time additional funding will be evaluated. Additionally, we are currently negotiating with MVP Capital Partners to determine our future participating interest in relation to MVP REIT.

On October 31, 2013, MVP PF Baltimore 2013, LLC entered into an agreement to sell its sole asset for $1,550,000. The agreement allows for 30 days of due diligence prior to the closing of the transaction. The sale of this asset is not expected to result in a significant gain or loss.

During October 2013, we, VRM I and VF III received approximately $0.8 million, of which our portion was approximately $0.7 million related to 1701 Commerce. These proceeds were a return of a $1.0 million deposit that was made pursuant to a court order that was made during August 2012. These proceeds will be reported as income in the discontinued operations section on the statement of operations.

During November 2013, we, VRM I and Fund III sold a REO property to an unrelated third party for approximately $0.2 million, of which our portion was approximately $60,000. This property is fully allowed for and a net gain will be recorded for the full amount.

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ITEM 2.

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

The following is a financial review and analysis of our financial condition and results of operations for the three and nine months ended September 30, 2013 and 2012. 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, 2012.

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 G – 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 have not recovered from the downturn. 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, 2013, we funded five loans totaling approximately $8.1 million. During the nine months ended September 30, 2012, we funded thirteen loans totaling approximately $22.9 million. During the nine months ended September 30, 2013 we had a significant loan that was not completed due to circumstances out of our control. As of September 30, 2013, our loan-to-value ratio was 49.9%, 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, 2013, we have provided a specific reserve allowance for one non-performing loan for the full amount of the loan. For further information regarding allowance for loan losses, refer to “Specific Reserve Allowance” in Note D – Investments In Real Estate Loans of the Notes to the Consolidated Financial Statements included in Part I, Item I Consolidated Financial Statements of this Quarterly Report on Form 10-Q.

As of September 30, 2013, our loans were in the following states: Arizona, California, Michigan, Nevada, Ohio, and Texas.

We have made loans of approximately $5,131,000 to our 40% owned subsidiary, MVP Realty Advisors, the manager of MVP REIT. We believe MVP Realty Advisors has the opportunity to generate significant fees for the services it will render to MVP REIT. However, MVP REIT is currently seeking to raise funds through its initial public offering and the fees paid to date to MVP Realty Advisors have not been significant. Interest on our loan has been accruing. We may not realize interest income from the loan to MVPRA until it is able to generate sufficient fees to service the interest on our loan. On November 1, 2013, our board of directors agreed to continue funding MVPRA for an additional 120, days at which time additional funding will be evaluated. Additionally, we are currently negotiating with MVP Capital Partners to determine our future participating interest in relation to MVP REIT.

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SUMMARY OF FINANCIAL RESULTS

Comparison of operating results for the three months ended September 30, 2013, to the three months ended September 30, 2012.

Total Revenue:	2013		2012		$ Change			% Change
Interest income from investment in real estate loans	$	267,000	$	427,000	$	(160,000	)		(37	%)
Gain related to pay off of real estate loan, including recovery of allowance for loan loss		--		31,000		(31,000	)		(100	%)
Gain related to pay off of notes receivable, including recovery of allowance for notes receivable		66,000		79,000		(13,000	)		(16	%)
Rental Revenue		53,000		--		53,000			100	%
Total	$	386,000	$	537,000	$	(151,000	)		(28	%)

Our revenue from interest income is dependent upon the balance of our investment in real estate loans and the interest earned on these loans. During third quarter 2013, proceeds from loan payoffs were used towards investments in real estate which resulted in a decrease in interest income from investment in real estate loans. All loans in the portfolio at September 30, 2013, with the exception of one, are performing. Total rental revenue earned is from the five properties we acquired during the third quarter 2013.

For additional information see 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.

Operating Expenses:	2013		2012		$ Change			% Change
Management fees – related party	$	267,000	$	242,000	$	25,000			10	%
Provision for loan loss		--		50,000		(50,000	)		(100	%)
Impairment on MVP Realty Advisors		1,553,000		--		1,553,000			100	%
Interest expense		3,000		2,000		1,000			50	%
Acquisition expense		131,000		--		131,000			100	%
Depreciation		22,000		--		22,000			100	%
Professional fees		171,000		166,000		5,000			3	%
Insurance		71,000		73,000		(2,000	)		(3	%)
Consulting		30,000		49,000		(19,000	)		(39	%)
Other		25,000		26,000		(1,000	)		(4	%)
Total	$	2,273,000		608,000		1,665,000			274	%

Operating expenses were 274% higher during the three months ended September 30, 2013 than during the three months ended September 30, 2012. This increase in expense is primarily due to an impairment of the Investment in MVP Realty Advisors. We recorded an impairment of this investment due to uncertainty as to when we will be repaid the amounts loaned. Additionally, the provision for loan losses necessary in 2012 did not occur during the three months ended September 30, 2013. Acquisition expense and depreciation were recorded in 2013 due to acquiring investments in real estate during the third quarter; such acquisitions did not occur in 2012.

For additional information see Note I – Investment in and Note Receivable from MVP Realty Advisors and Note L – Investment in Equity Method Investee, and Note M – Acquisition and Assets Held for Sale 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.

Non-operating Income (Loss):	2013			2012		$ Change			% Change
Recovery from settlement with loan guarantor	$	24,000		$	203,000	$	(179,000	)		(88	%)
Gain on sale of marketable securities		292,000			--		292,000			100	%
Loss on investment on equity method investee		(58,000	)		--		(58,000	)		(100	%)
Dividend income		8,000			--		8,000			100	%
Settlement expense		--			90,000		(90,000	)		(100	%)
Total	$	266,000		$	293,000	$	(27,000	)		(9	%)

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In July 2013 we recorded 14,935 shares in treasury stock for $1.61 per share as part of a settlement which resulted in recovery from settlement with loan guarantor of approximately $24,000. During January 2011, we, VRM I and Fund III were awarded unsecured claims up to $3.6 million from a bankruptcy settlement with a guarantor of certain loans. Pursuant to the terms of the settlement, we received payment of approximately $203,000 during the three months ended September 30, 2012. The purchase and subsequent sale of marketable securities occurred during the nine months ended September 30, 2013 resulting in a gain of approximately $292,000. During the third quarter 2013, we acquired a non-controlling interest in a mini-storage facility and our portion of the loss related to this property is approximately $58,000. During the three months ended September 30, 2013 we received $8,121 in dividend income from our ownership in a publicly traded company which invests in loan collateralized by real estate. In July, 2012, we, along with our Manager, VRM I, 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 I 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, of which our portion was approximately $90,000.

For additional information see Note F – Investment in Marketable Securities, Note L – Investment in Equity Method Investee, and Note Q – Legal Matters Involving The Company of the Notes to the Consolidated Financial Statements included in Part I, Item I Consolidated Financial Statements of this Quarterly Report on Form 10-Q.

Discontinued Operations, net of income taxes:	2013			2012			$ Change			% Change
Net loss on sale of real estate held for sale	$	(2,000	)	$	--		$	(2,000	)		(100	%)
Expenses related to real estate held for sale		(24,000	)		(252,000	)		228,000			90	%
Recovery from 1701 Commerce		221,000			--			221,000			100	%
Income (loss) from assets held for sale, net of income taxes		(21,000	)		95,000			(116,000	)		(122	%)
Total	$	174,000		$	(157,000	)	$	331,000			(211	%)

Expenses related to real estate held for sale was higher in 2012 as a result of property being acquired during February 2012. This property was sold in July 2013. During the three months ended September 30, 2013 we received a settlement related to 1701 Commerce. In addition, we recorded a loss from assets held for sale acquired during the three months ended September 30, 2013.

For additional information see Note G — Real Estate Held For Sale and Note M – Acquisitions and Assets 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, 2013, to the nine months ended September 30, 2012.

Total Revenue:	2013		2012		$ Change			% Change
Interest income from investment in real estate loans	$	1,037,000	$	1,008,000	$	29,000			3	%
Gain related to pay off of real estate loan, including recovery of allowance for loan loss		50,000		1,268,000		(1,218,000	)		(96	%)
Gain related to pay off of notes receivable, including recovery of allowance for notes receivable		206,000		226,000		(20,000	)		(9	%)
Rental Revenue		53,000		--		53,000			100	%
Total	$	1,346,000	$	2,502,000	$	(1,156,000	)		(46	%)

Our revenue from interest income is dependent upon the balance of our investment in real estate loans and the interest earned on these loans. There was a net increase in interest income due to more invested in loans in 2013 than in 2012; however we will recognize a lower interest income from investment in real estate loans in future periods as more of our working capital is invested in real estate. During May 2012, we, VRM I and Fund III sold our portions of a fully reserved loan of $14.0 million, of which our portion was $12.6 million to a third party. We received a payment of approximately $1.0 million which was recorded as a gain. There was no comparable transaction during the nine months ended September 30, 2013. Total rental revenue earned is from the six properties we acquired during the third quarter 2013.

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For additional information see Note D – Investments in Real Estate Loans and Note M – Acquisition and Assets Held for Sale 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:	2013		2012		$ Change			% Change
Management fees – related party	$	816,000	$	791,000	$	25,000			3	%
Provision for loan loss		--		815,000		(815,000	)		(100	%)
Impairment of investment in MVP Realty Advisors		5,131,000		--		5,131,000			100	%
Interest expense		4,000		2,000		2,000			100	%
Acquisition expense		131,000		--		131,000			100	%
Depreciation		22,000		--		22,000			100	%
Professional fees		661,000		753,000		(92,000	)		(12	%)
Insurance		215,000		219,000		(4,000	)		(2	%)
Consulting		148,000		161,000		(13,000	)		(8	%)
Other		176,000		143,000		33,000			23	%
Total	$	7,304,000		2,884,000		4,420,000			153	%

Operating expenses were 153% higher during the nine months ended September 30, 2013 primarily due to an impairment of the Investment in MVP Realty Advisors. We recorded an impairment of this investment due to uncertainty as to when we will be repaid the amounts loaned. Additionally, the provision for loan losses necessary in 2012 did not occur during the nine months ended September 30, 2013. During 2012, we incurred costs for two consultants. In 2013, we are no longer incurring fees costs related to these individuals. There was a decrease in professional fees resulting from a significant decrease in pending litigation and merger activity. Other expense increased in 2013 due to expenses related to merger proxy. Acquisition and depreciation expense were recorded in 2013 due to acquiring investments in real estate during the third quarter

For additional information see “Specific Loan Allowance” in Note D – Investments in Real Estate Loans, Note I – Investment in and Note Receivable from MVP Realty Advisors, Note M – Acquisition and Assets Held for Sale and Note Q – Legal Matters Involving The Company of the Notes to the Consolidated Financial Statements included in Part I, Item 1 Consolidated Financial Statements of this Quarterly Report on Form 10-Q.

Non-operating Income (Loss):	2013			2012			$ Change			% Change
Interest income from banking institutions	$	--		$	1,000		$	(1,000	)		(100	%)
Recovery from settlement with loan guarantor		39,000			746,000			(707,000	)		(95	%)
Dividend Income		8,000			--			8,000			100	%
Settlement income		--			90,000			(90,000	)		(100	%)
Loss on investment on equity method investee		(58,000	)		--			(58,000	)		100	%
Reversal of settlement reserve		374,000			--			374,000			100	%
Gain on sale of marketable securities		292,000			15,000			277,000			1847	%
Settlement expense		--			(66,000	)		66,000			(100	%)
Total	$	655,000		$	786,000		$	(131,000	)		(17	%)

During September 2010, we established reserves related to our Nevada lawsuit settlement. In 2013, management determined that the remaining reserves of $374,000 were no longer necessary, and we recognized this amount as other income. The purchase and subsequent sale of marketable securities occurred during the nine months ended September 30, 2013 and 2012, resulting in a gain of approximately $292,000 and $15,000, respectively. In January 2013 and July 2013, we recorded 10,000 and 14,935 shares, respectively, in treasury stock for $1.48 and $1.61 per share, respectively, as part of a settlement which resulted in recovery from settlement with loan guarantor of approximately $39,000. In comparison, during January 2011, we, VRM I and Fund III were awarded unsecured claims up to $3.6 million from a bankruptcy settlement with a guarantor of certain loans. Pursuant to the terms of that settlement, we received payment of approximately $746,000 during April 2012. During the third quarter 2013, we received approximately $8,000 in dividend income from our ownership in a publicly traded company that invests in loan collateralized by real estate. In July, 2012, we, along with our Manager, VRM I, 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 I 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 of approximately $90,000. During the third quarter 2013, we acquired a non-controlling interest in a mini-storage facility and our portion of the loss related to this property is approximately $58,000. During the nine months ended September 30, 2012 we settled two lawsuits, resulting in an expense of approximately $66,000. In addition, we received from the plaintiff 14,374 shares of the company’s stock that was held as treasury stock, but since retired.

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Discontinued Operations, net of income taxes:	2013			2012			$ Change			% Change
Net gain on sale of real estate held for sale	$	40,000		$	12,000		$	28,000			233	%
Expenses related to real estate held for sale		(278,000	)		(1,094,000	)		816,000			(75	%)
Recovery from 1701 Commerce		221,000			--			221,000			100	%
Income from assets held for sale, net of income taxes		(21,000	)		95,000			(116,000	)		(122	%)
Write downs on real estate held for sale		--			(1,420,000	)		1,420,000			(100	%)
Total	$	(38,000	)	$	(2,407,000	)	$	2,369,000			98	%

During the three months ended March 31, 2013 we recorded net gain of approximately $42,000 related to the sale of HFS in December 2011. During the six months ended June 30, 2012, we recorded net gains on sale of real estate held for sale for a property sold. Expenses related to real estate held for sale were higher in 2012 as a result of property being acquired during February 2012. This property was sold in July 2013. The decrease in write-downs on real estate held for sale is mainly due to the acceptance of a purchase contract during 2012 on one property, along with the stabilization of the markets where our real estate owned are located and a decrease in upkeep and litigation of the properties. During the third quarter 2013, we received a settlement related to our previous investment in 1701 Commerce.

CAPITAL AND LIQUIDITY

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

During the nine months ended September 30, 2013, net cash flows used in operating activities were approximately $1.2 million. Operating cash flows were used for the payment of normal operating expenses such as management fees, accounting fees, legal bills and expenses related to real estate held for sale. Cash flows related to investing activities consisted of cash used for investments in marketable securities of approximately $3.4 million, investments in new real estate loans of approximately $10.3 million, investment in real estate of approximately $5.9 million, investment in equity method investee of approximately $1.2 million, investment in assets held for sale of approximately $1.6 million and an investment in MVP Realty Advisors of approximately $3.6 million. In addition, cash flows related to investing activities consisted of cash provided by loan payoffs and sale of investments in real estate loans to related and third parties of approximately $20.5 million and proceeds from notes receivable of approximately $0.2 million. Cash flows used in financing activities consisted of cash for payments on notes payable of approximately $140,000 to finance our directors and officers insurance policy and purchase of treasury stock for approximately $1.5 million. Cash flows provided by investing activities totaled approximately $5,000 and were from a distribution from real estate held for sale.

At September 30, 2013, we had approximately $2.0 million in cash, $0.9 million in marketable securities – related party, $4.1 million in marketable securities and approximately $39.6 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 had 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.

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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.

During April 2012, we contributed $1,000 for a 40% interest in MVPRA. Our participation in MVPRA was approved by the independent member of our Board of Directors. Mr. Shustek, through a wholly owned company named MVP Capital Partners, LLC (“MVPCP”) contributed $1,500 for a 60% interest in MVPRA. As of June 30, 2013, we and MVPCP had loaned approximately $3.6 million and approximately $1.2 million, respectively, to MVPRA related to MVP REIT, Inc. On June 30, 2013, MVPCP decided to forgive the full amount of its $1.2 million loan. We have not forgiven the balance due from MVPRA; however, the decision by MVPRA to forgive the full amount creates uncertainty as to when we will be repaid the amounts loaned to MVPRA. Based on this uncertainty, we have determined to fully impair the balance of this investment and note receivable as of September 30, 2013. Under the terms of the Operating Agreement which governs MVPRA, any loans we may make to MVPRA must be paid in full and we shall have received distributions of profits equal to our capital contributions prior to MVPCP receiving any distributions from MVPRA. During the third quarter, we funded MVPRA an additional $1.5 million continued to be fully allowed for. On November 1, 2013, our board of directors agreed to continue funding MVPRA for an additional 120 days at which time additional funding will be evaluated. Additionally, we are currently negotiating with MVP Capital Partners to determine our future participating interest in relation to MVP REIT. MVPRA’s ability to repay the sums due us will likely depend upon the success of the MVP REIT public offering

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, 2013, we have met our 3% reserve requirement.

Investments in Real Estate Loans Secured by Real Estate Portfolio

We offer five real estate loan products consisting of commercial property, construction, acquisition and development, land, and residential loans. The effective interest rates on all product categories range from 6% to 15%. Revenue by product will fluctuate based upon relative balances during the period. We had investments in 15 real estate loans, as of September 30, 2013, with a balance of approximately $17.3 million as compared to investments in 17 real estate loans as of December 31, 2012, with a balance of approximately $27.4 million.

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

Asset Quality and Loan Reserves

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

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OFF-BALANCE SHEET ARRANGEMENTS

As of September 30, 2013, 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, 2013, 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	$	267,000
Weighted average interest rate assumption increased by 5.0% or 500 basis points	$	1,335,000
Weighted average interest rate assumption increased by 10.0% or 1,000 basis points	$	2,671,000
Weighted average interest rate assumption decreased by 1.0% or 100 basis points	$	(267,000	)
Weighted average interest rate assumption decreased by 5.0% or 500 basis points	$	(1,335,000	)
Weighted average interest rate assumption decreased by 10.0% or 1,000 basis points	$	(2,670,000	)

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

Allowance for Loan Losses

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

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The following table presents a sensitivity analysis to show the impact on our financial condition at September 30, 2013, 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	$	173,000
Allowance for loan losses assumption increased by 5.0% of loan portfolio	$	863,000
Allowance for loan losses assumption increased by 10.0% of loan portfolio	$	1,726,000
Allowance for loan losses assumption decreased by 1.0% of loan portfolio	$	(173,000	)
Allowance for loan losses assumption decreased by 5.0% of loan portfolio	$	(863,000	)
Allowance for loan losses assumption decreased by 10.0% of loan portfolio	$	(1,726,000	)

Estimating allowances for loan losses requires significant judgment about the underlying collateral, including liquidation value, condition of the collateral, competency and cooperation of the related borrower and specific legal issues that affect loan collections or taking possession of the property. As a commercial real estate lender willing to invest in loans to borrowers who may not meet the credit standards of other financial institutional lenders, the default rate on our loans could be higher than those generally experienced in the mortgage lending industry. We, our manager and MVP Mortgage 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;

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

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 and other real estate owned includes real estate acquired through foreclosure or deed in lieu 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 O – 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.

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ITEM 4.

CONTROLS AND PROCEDURES

(a) Evaluation of Disclosure Controls and Procedures

The Company’s Chief Executive Officer and Chief Financial Officer have 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 2013 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 P – Legal Matters Involving the Manager and Note Q – 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.

ITEM 2.

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, 2013, as required by Regulation S-K, Item 703.

Period	Total Number of Shares Purchased		Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs		Maximum Number of (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Plans or Programs
July 1 – July 31, 2013		14,935	$	1.61		--	$	737,202
August 1 – August 31, 2013		89,823		1.93		89,823		647,379
September 1 – September 30, 2013		30,000		1.77		30,000		617,379

Total		134,758	$	1.86		119,823	$	617,379

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ITEM 6.

EXHIBITS

EXHIBIT INDEX

Exhibit No.		Description of Exhibits
2.1 (2)			Agreement and Plan of Merger between Vestin Fund II, LLC and the Registrant
2.2(12)			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
3.4 (5)			Amendment to Vestin Realty Mortgage II’s Articles of Incorporation, effective December 31, 2007.
3.6 (6)			Amended Articles of Incorporation 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, LLC and the Registrant
10.2 (1)			Form of Rights Agreement between the Registrant and the rights agent
10.3 (4)			Form of Purchase Agreement
10.4 (4)			Amended and Restated Trust Agreement
10.5 (7)			Intercreditor Agreement, dated June 16, 2008, by and between Vestin Originations, Inc., Vestin Mortgage, LLC, Vestin Realty Mortgage II, Inc., and Owens Mortgage Investment Fund
10.6 (10)			Agreement between Strategix Solutions, LLC and Vestin Realty Mortgage II, Inc. for accounting services.
10.7 (11)			Second Supplemental Indenture, dated as of May 27, 2009 pertaining to Junior Subordinated Indenture
10.8 (11)			First Amendment to Amended and Restated Trust Agreement, dated as of May 27, 2009
10.9 (13)			Deed in Lieu
14 (3)			Vestin Realty Mortgage II, Inc. Code of Business Conduct 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 Tracee Gress
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 months ended March 31, 2013, formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Balance Sheets as of September 30, 2013 and December 31, 2012 (unaudited), (ii) Consolidated Statements of Operations for the three and nine months ended September 30, 2013 and 2012 (unaudited) (iii) Consolidated Statements of Other Comprehensive Income for the three and nine months ended September 30, 2013 and 2012 (unaudited) (iv) Consolidated Statements of Cash Flows for the nine months ended September 30, 2013 and 2012 (unaudited) and (vi) Notes to the Consolidated Financial Statements (unaudited).
(1)	Incorporated herein by reference to Post-Effective Amendment No. 6 to our Form S-4 Registration Statement filed on January 4, 2006 (File No. 333-125121)
(2)	Incorporated herein by reference to Post-Effective Amendment No. 7 to our Form S-4 Registration Statement filed on January 13, 2006 (File No. 333-125121)
(3)	Incorporated herein by reference to the Transition Report on Form 10-K for the nine month transition period ended March 31, 2006 filed on September 7, 2006 (File No. 000-51892)
(5)	Incorporated herein by reference to the Current Report on Form 8-K filed on January 4, 2008 (File No. 000-51892)
(6)	Incorporated herein by reference to the Annual Report on Form 10-K filed on March 14, 2008 (File No. 000-51892)
(7)	Incorporated herein by reference to the Quarterly Report on Form 10-Q filed on August 11, 2008 (File No. 000-51892)
(10)	Incorporated herein by reference to the Quarterly Report on Form 10-Q filed on May 8, 2009 (File No. 000-51892)
(11)	Incorporated herein by reference to the Current Report on Form 8-K filed on June 10, 2009 (File No. 000-51892)
(12)	Incorporated herein by reference to the Current Report on Form 8-K/A filed on November 14, 2011 (File No. 000-51892)
(13)	Incorporated herein by reference to the Current Report on Form 10-K filed on March 16, 2012 (File No. 000-51892)

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SIGNATURES

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 II, Inc.

	By:	/s/ Michael V. Shustek
		Michael V. Shustek
		President and Chief Executive Officer
	Date:	November 14, 2013

	By:	/s/ Tracee Gress
		Tracee Gress
		Chief Financial Officer
	Date:	November 14, 2013

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Exhibit 31.1

CERTIFICATIONS

I, Michael V. Shustek, certify that:

1. I have reviewed this Form 10-Q of Vestin Realty Mortgage II, 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, 2013

/s/ Michael V. Shustek

Michael V. Shustek

Chief Executive Officer

Vestin Realty Mortgage II, Inc.

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Exhibit 31.2

CERTIFICATIONS

I, Tracee Gress, certify that:

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

(a)

(b)

(c)

(d)

(a)

(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, 2013

/s/ Tracee Gress

Tracee Gress

Chief Financial Officer

Vestin Realty Mortgage II, Inc.

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Exhibit 32

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350

Michael V. Shustek, as Chief Executive Officer of Vestin Realty Mortgage II, Inc. (the “Registrant”), and Tracee Gress, 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, 2013, 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, 2013

/s/ Michael V. Shustek

Michael V. Shustek

Chief Executive Officer

Vestin Realty Mortgage II, Inc.

Date: November 14, 2013

/s/ Tracee Gress

Tracee Gress

Chief Financial Officer

Vestin Realty Mortgage II, Inc.

Attached files

Vestin Realty Mortgage II, Inc Reports

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