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EX-32 - Owens Realty Mortgage, Inc.orm10qex32.htm
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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, 2015

OR

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

For the transition period from ________ to __________

Commission file number 000-54957

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

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

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [  ]

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or such shorter period that the registrant was required to submit and post such files). Yes [X] No [  ]


 
1

 



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

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

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


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

Class                                           Outstanding as of November 6, 2015
Common Stock, $.01 par value                                  10,326,205 shares

 
2

 


TABLE OF CONTENTS


PART I – FINANCIAL INFORMATION
 
    Page
     
Item 1. Financial Statements 4
     
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 35
     
Item 3. Quantitative and Qualitative Disclosures about Market Risk 56
     
Item 4. Controls and Procedures 58
 
PART II – OTHER INFORMATION
 
Item 1. Legal Proceedings   58
     
Item 1A Risk Factors 58
     
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 59
     
Item 6. Exhibits 59
     
 

 
3

 

Part I. FINANCIAL INFORMATION

OWENS REALTY MORTGAGE, INC.
Consolidated Balance Sheets
 (UNAUDITED)
   
September 30,
 
December 31,
 
   
2015
 
2014
 
ASSETS
             
Cash and cash equivalents
 
$
6,707,686
 
$
1,413,545
 
Restricted cash
   
7,495,337
   
6,248,746
 
Loans, net of allowance for loan losses of $3,341,714 in 2015 and $2,869,355 in 2014
   
73,492,372
   
65,164,156
 
Interest and other receivables
   
1,688,948
   
1,482,380
 
Other assets, net of accumulated depreciation and amortization of $259,597 in 2015 and $1,065,172 in 2014
   
681,715
   
1,138,123
 
Deferred financing costs, net of accumulated amortization of $676,047 in 2015 and $253,675 in 2014
   
936,948
   
1,317,585
 
Investment in limited liability company
   
2,188,064
   
2,142,581
 
Real estate held for sale
   
104,681,106
   
59,494,339
 
Real estate held for investment, net of accumulated depreciation of $2,591,431 in 2015 and $6,075,287 in 2014
   
53,905,407
   
103,522,466
 
   Total assets
 
$
251,777,583
 
$
241,923,921
 
LIABILITIES AND EQUITY
             
LIABILITIES:
             
Dividends payable
 
$
835,533
 
$
1,292,160
 
Due to Manager
   
234,588
   
283,644
 
Accounts payable and accrued liabilities
   
4,654,230
   
2,219,674
 
Deferred gains on sales of real estate
   
209,662
   
362,283
 
Lines of credit payable
   
8,954,000
   
11,450,000
 
Notes and loans payable on real estate
   
41,197,782
   
37,569,549
 
Total liabilities
   
56,085,795
   
53,177,310
 
Commitments and Contingencies (Note 13)
             
EQUITY:
             
Stockholders’ equity:
             
Preferred stock, $.01 par value per share, 5,000,000 shares authorized, no shares issued and outstanding at September 30, 2015 and December 31, 2014
   
   
 
Common stock, $.01 par value per share, 50,000,000 shares authorized, 11,198,119 shares issued, 10,407,738 and 10,768,001 shares outstanding at September 30, 2015 and December 31, 2014
   
111,981
   
111,981
 
Additional paid-in capital
   
182,437,522
   
182,437,522
 
Treasury stock, at cost – 790,381 and 430,118 shares at September 30, 2015 and December 31, 2014
   
(10,602,004
)
 
(5,349,156
)
Retained earnings
   
19,143,709
   
7,371,511
 
Total stockholders’ equity
   
191,091,208
   
184,571,858
 
Non-controlling interests
   
4,600,580
   
4,174,753
 
   Total equity
   
195,691,788
   
188,746,611
 
   Total liabilities and equity
 
$
251,777,583
 
$
241,923,921
 

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

 
4

 

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

   
For the Three Months Ended
 
For the Nine Months Ended
 
   
September 30, 2015
 
September 30, 2014
 
September 30, 2015
 
September 30, 2014
 
Revenues:
                         
Interest income on loans
 
$
1,372,739
 
$
1,399,122
 
$
6,697,476
 
$
3,564,842
 
Rental and other income from real estate properties
   
2,996,873
   
3,262,549
   
9,983,138
   
8,936,923
 
Income from investment in limited liability company
   
44,605
   
43,686
   
130,483
   
126,357
 
Other income
   
   
   
   
19
 
Total revenues
   
4,414,217
   
4,705,357
   
16,811,097
   
12,628,141
 
Expenses:
                         
Management fees to Manager
   
513,292
   
435,652
   
1,410,293
   
1,275,901
 
Servicing fees to Manager
   
46,663
   
39,605
   
128,208
   
115,991
 
General and administrative expense
   
292,531
   
285,669
   
951,579
   
1,090,876
 
Rental and other expenses on real estate properties
   
2,070,680
   
2,060,670
   
6,420,490
   
5,952,479
 
Depreciation and amortization
   
526,178
   
549,189
   
1,712,136
   
1,642,922
 
Interest expense
   
354,163
   
338,225
   
1,413,109
   
718,707
 
Bad debt expense
   
150,402
   
660
   
150,537
   
1,296
 
Provision for loan losses
   
44,316
   
117,680
   
472,359
   
141,032
 
Impairment losses on real estate properties
   
   
123,500
   
1,256,434
   
179,040
 
Total expenses
   
3,998,225
   
3,950,850
   
13,915,145
   
11,118,244
 
Operating income
   
415,992
   
754,507
   
2,895,952
   
1,509,897
 
Gain on sales of real estate, net
   
   
113,113
   
15,031,299
   
2,740,105
 
Gain on foreclosure of loan
   
   
   
   
257,020
 
Net income
   
415,992
   
867,620
   
17,927,251
   
4,507,022
 
Less: Net income attributable to non-controlling interests
   
(31,671
)
 
(83,797
)
 
(2,630,434
)
 
(151,752
)
Net income attributable to common  stockholders
 
$
384,321
 
$
783,823
 
$
15,296,817
 
$
4,355,270
 
                           
Per common share data:
                         
Basic and diluted earnings per common share
 
$
0.04
 
$
0.07
 
$
1.43
 
$
0.40
 
Basic and diluted weighted average number of common shares outstanding
   
10,538,735
   
10,768,001
   
10,690,736
   
10,768,495
 
Dividends declared per share of common stock
 
$
0.08
 
$
0.05
 
$
0.33
 
$
0.15
 
                           

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








 
5

 

OWENS REALTY MORTGAGE, INC.
Consolidated Statements of Stockholders’ Equity
Nine Months Ended September 30, 2015 and 2014
(UNAUDITED)

 
                Additional                       Total     Non-        
   
Common Stock
    Paid-in    
Treasury Stock
          Stockholders’     controlling    
Total
 
   
Shares
   
Amount
   
Capital
   
Shares
   
Amount
   
Retained Earnings
   
Equity
   
Interests
   
Equity
 
                                                       
Balances, December 31, 2013
 
11,198,119
 
$
111,981
 
$
182,437,522
   
(403,910
)
$
(5,023,668
)
$
2,348,575
 
$
179,874,410
 
$
6,351,896
 
$
 186,226,306
 
                                                       
Net income
 
   
   
   
              —
   
              —
   
4,355,270
   
4,355,270
   
               151,752
   
4,507,022
 
Dividends declared
 
   
   
   
              —
   
              —
   
(1,614,533
)
 
(1,614,533
)
 
               —
   
(1,614,533
)
Purchase of treasury stock
 
   
   
   
(26,208
)
 
(325,488
)
 
   
(325,488
)
 
   
(325,488
)
Contribution from non-controlling interest
 
   
   
   
   
   
   
   
112,533
   
112,533
 
Distributions to non-controlling interests
 
   
   
   
              —
   
              —
   
               —
   
                —
   
               (6,108
)
 
                (6,108
)
Balances, September 30, 2014
 
11,198,119
 
$
111,981
 
$
182,437,522
   
(430,118
)
$
(5,349,156
)
$
5,089,312
 
$
182,289,659
 
$
6,610,073
 
$
188,899,732
 
                                                       
Balances, December 31, 2014
 
11,198,119
 
$
111,981
 
$
182,437,522
   
(430,118
)
 
(5,349,156
)
$
7,371,511
 
$
184,571,858
 
$
4,174,753
 
$
 188,746,611
 
                                                       
Net income
 
   
   
   
              —
   
              —
   
15,296,817
   
15,296,817
   
2,630,434
   
17,927,251
 
Dividends declared
 
   
   
   
              —
   
              —
   
(3,524,619
)
 
(3,524,619
)
 
   
(3,524,619
)
Purchase of treasury stock
 
   
   
   
(360,263
)
 
(5,252,848
)
 
   
(5,252,848
)
 
   
(5,252,848
)
Contribution from non-controlling interest
 
   
   
   
              —
   
              —
   
               —
   
                —
   
279,184
   
279,184
 
Distributions to non-controlling interests
 
   
   
   
              —
   
              —
   
               —
   
                —
   
(2,483,791
)
 
(2,483,791
)
Balances, September 30, 2015
 
11,198,119
 
$
111,981
 
  $
182,437,522
   
(790,381
)
$
(10,602,004
)
$
19,143,709
 
$
191,091,208
 
$
4,600,580
 
$
195,691,788
 
                                                       

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




 
6

 

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

   
Nine Months Ended September 30,
 
   
2015
 
2014
 
CASH FLOWS FROM OPERATING ACTIVITIES:
             
Net income
 
$
17,927,251
 
$
4,507,022
 
Adjustments to reconcile net income to net cash provided by operating activities:
             
Gain on sales of real estate and other assets, net
   
(15,031,299
)
 
(2,740,105
)
Gain on foreclosure of loan
   
   
(257,020
)
Income from investment in limited liability company
   
(130,483
)
 
(126,357
)
Provision for loan losses
   
472,359
   
141,032
 
Impairment losses on real estate properties
   
1,256,434
   
179,040
 
Depreciation and amortization of real estate and related assets
   
1,712,136
   
1,642,922
 
Amortization of deferred financing costs to interest expense
   
266,862
   
78,261
 
Accretion of discount on loan to interest income
   
(536,816
)
 
(85,403
)
Changes in operating assets and liabilities:
             
Interest and other receivables
   
(206,568
)
 
(561,304
)
Other assets
   
(46,149
)
 
(74,934
)
Accounts payable and accrued liabilities
   
91,447
   
(198,465
)
Due to Manager
   
(49,056
)
 
(98,161
)
Net cash provided by operating activities
   
5,726,118
   
2,406,528
 
               
CASH FLOWS FROM INVESTING ACTIVITIES:
             
Principal collected on loans
   
31,698,649
   
20,857,860
 
Investments in loans
   
(39,962,408
)
 
(27,168,876
)
Investment in real estate properties
   
(15,475,195
)
 
(18,024,721
)
Net proceeds from disposition of real estate properties and other assets
   
34,865,173
   
174,890
 
Purchases of furniture, fixtures and equipment
   
(48,402
)
 
(7,212
)
Transfer to restricted cash, net
   
(1,246,591
)
 
(1,485,050
)
Distribution received from investment in limited liability company
   
85,000
   
84,000
 
Net cash provided by (used in) investing activities
   
9,916,226
   
(25,569,109
)
               
CASH FLOWS FROM FINANCING ACTIVITIES:
             
Advances on notes payable
   
23,538,846
   
372,472
 
Repayments on notes payable
   
(19,910,613
)
 
(330,905
)
Advances on lines of credit
   
30,161,000
   
41,144,507
 
Repayments on lines of credit
   
(32,657,000
)
 
(20,291,807
)
Payment of deferred financing costs
   
(41,735
)
 
(354,549
)
Distributions to non-controlling interests
   
(2,483,791
)
 
(6,108
)
Contributions from non-controlling interest
   
279,184
   
112,533
 
Purchase of treasury stock
   
(5,252,848
)
 
(325,488
)
Dividends paid
   
(3,981,246
)
 
(1,256,133
)
Net cash (used in) provided by financing activities
   
(10,348,203
)
 
19,064,522
 
               
Net increase (decrease) in cash and cash equivalents
   
5,294,141
   
(4,098,059
)
               
Cash and cash equivalents at beginning of period
   
1,413,545
   
8,158,734
 
               
Cash and cash equivalents at end of period
 
$
6,707,686
 
$
4,060,675
 
               
Supplemental Disclosures of Cash Flow Information
             
Cash paid during the period for interest (excluding amounts capitalized)
 
$
1,207,669
 
$
705,238
 
Cash paid during the period for interest that was capitalized
   
187,784
   
 
 
 
7

 
 
Supplemental Disclosures of Non-Cash Activity
             
Increase in real estate from loan foreclosures
 
$
 
$
3,241,220
 
Decrease in loans, net of allowance for loan losses, from loan foreclosures
   
   
(2,959,500
)
Decrease in interest and other receivables from loan foreclosures
   
   
(281,720
)
Transfers from real estate held for investment to real estate held for sale
   
64,627,930
   
11,651,439
 
Transfers from real estate held for sale to real estate held for investment
   
1,953,677
   
1,958,400
 
Capital expenditures financed through accounts payable
   
(2,343,109
)
 
(838,419
)
Deferred financing costs paid from construction loan
   
   
620,391
 
Amortization of deferred financing costs capitalized to construction project
   
(155,510
)
 
(69,116
)


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

 
8

 
OWENS REALTY MORTGAGE, INC.

Notes to Consolidated Financial Statements (Unaudited)



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

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

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

In the opinion of the management of the Company, the accompanying unaudited financial statements contain all adjustments, consisting of normal, recurring adjustments, necessary to present fairly the financial information included therein. Certain information and footnote disclosures presented in the annual consolidated financial statements are not included in these interim financial statements.  These consolidated financial statements should be read in conjunction with the audited consolidated financial statements included in the Form 10-K of ORM for the year ended December 31, 2014 filed with the Securities and Exchange Commission (“SEC”). The results of operations for the three and nine months ended September 30, 2015 are not necessarily indicative of the operating results to be expected for the full year ending December 31, 2015. The Company evaluates subsequent events up to the date it files its Form 10-Q with the SEC. 

Basis of Presentation

Principles of Consolidation

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

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

Management Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Such estimates are inherently imprecise and actual results could differ significantly from such estimates.
 
 
9

 
OWENS REALTY MORTGAGE, INC.

Notes to Consolidated Financial Statements (Unaudited)



Recently Issued Accounting Standards

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

In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers (Topic 606),” or ASU 2014-09. ASU 2014-09 broadly amends the accounting guidance for revenue recognition. ASU 2014-09 is effective for the first interim or annual period beginning after December 15, 2016 (deferred by one year to December 15, 2017 with ASU 2015-14 issued in August 2015) , and is to be applied prospectively. Early adoption is not permitted. The Company is currently evaluating the impact that ASU 2014-09 will have on its financial statements.

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

Significant Accounting Policies
 
      The significant accounting policies used in the preparation of these interim consolidated financial statements are disclosed in the Company’s consolidated financial statements for the year ended December 31, 2014 included in its 2014 annual report on Form 10-K.  There have been no significant changes to those significant accounting policies.
 
 
10

 
OWENS REALTY MORTGAGE, INC.

Notes to Consolidated Financial Statements (Unaudited)



 
NOTE 3 – LOANS AND ALLOWANCE FOR LOAN LOSSES
 
The following tables show the changes in the allowance for loan losses by portfolio segment for the three and nine months ended September 30, 2015 and 2014 and the allocation of the allowance for loan losses and loans as of September 30, 2015 and December 31, 2014 by portfolio segment and by impairment methodology:

   
Commercial
 
Residential
 
Land
   
2015
       
Total
                 
Allowance for loan losses:
           
   
Three Months Ended September 30, 2015
 
Beginning balance
 
$
940,215
$
2,074,617
$
            282,566
$
3,297,398
   Charge-offs
 
            —
 
            —
 
             —
 
 
   Provision
 
(40,858
            85,174
 
 
            44,316
 
Ending Balance
 
$
899,357
$
2,159,791
$
282,566
$
3,341,714
                 
   
Nine Months Ended September 30, 2015
 
Beginning balance
 
 
$
88,260
$
                    1,975,112
$
5,983
$
2,869,355
   Charge-offs
 
            —
 
            —
 
             —
 
 
   Provision
 
             11,097
 
184,679
 
276,583
 
472,359
Ending balance
 
$
899,357 
$
                    2,159,791
$
 282,566
$
      3,341,714
                 
   
As of September 30, 2015
Ending balance: individually evaluated for impairment
 
 
$
480,005
$
  1,839,345
$
             —
$
 2,319,350
                 
Ending balance: collectively evaluated for impairment
$
419,352
$
320,446
$
282,566
$
1,022,364
                 
 
Ending balance
 
$
899,357
$
2,159,791
$
282,566
$
3,341,714
                 
Loans:
               
 
Ending balance
 
$
51,011,804
$
19,779,734
$
6,042,548
$
76,834,086
                 
Ending balance: individually evaluated for impairment
$
2,510,752
$
      7,779,694
$
           —
$
10,290,446
                 
Ending balance: collectively evaluated for impairment
$
48,501,052
$
12,000,040
$
        6,042,548
$
66,543,640

 
11

 
OWENS REALTY MORTGAGE, INC.

Notes to Consolidated Financial Statements (Unaudited)



   
Commercial
 
Residential
 
Land
   
2014
       
Total
                 
Allowance for loan losses:
           
   
Three Months Ended September 30, 2014
 
Beginning balance
 
$
1,507,196
$
3,249,975
$
            5,269
$
4,762,440
 
  Charge-offs
 
            —
 
            —
 
             —
 
            —
 
  Provision
 
            46,937
 
70,742
 
             1
 
117,680
 
Ending Balance
 
$
1,554,133
$
3,320,717
$
             5,270
$
4,880,120
                 
   
Nine Months Ended September 30, 2014
 
Beginning balance
 
$
932,651
$
           3,798,203
$
8,234
$
4,739,088
 
  Charge-offs
 
            —
 
            —
 
             —
 
 
  Provision (reversal)
 
621,482
 
(477,486
             (2,964
141,032
 
Ending balance
 
$
1,554,133
$
   3,320,717
$
             5,270
$
          4,880,120
                 
   
As of December 31, 2014
Ending balance: individually evaluated for impairment
 
$
550,010
$
  1,839,345
$
             —
$
2,389,355
                 
Ending balance: collectively evaluated for impairment
 
$
338,250
$
135,767
$
             5,983
$
480,000
                 
Ending balance
$
888,260
$
1,975,112
$
             5,983
$
2,869,355
                 
Loans:
               
 
Ending balance
 
$
52,531,537
$
 13,491,906
$
2,010,068
$
68,033,511
                 
Ending balance: individually evaluated for impairment
 
$
12,666,935
$
      7,788,747
$
           1,860,068
$
22,315,750
                 
Ending balance: collectively evaluated for impairment
 
$
 39,864,602
$
     5,703,159
$
        150,000
$
45,717,761
                 

 
12

 
OWENS REALTY MORTGAGE, INC.

Notes to Consolidated Financial Statements (Unaudited)


The following tables show an aging analysis of the loan portfolio by the time monthly payments are past due as of September 30, 2015 and December 31, 2014:

   
Loans
30-59 Days
Past Due
 
Loans
60-89 Days
Past Due
 
Loans
90 or More Days
Past Due
           
         
Total Past
Due Loans
 
Current Loans
 
Total Loans
September 30, 2015
           
                         
Commercial
$
$
       1,432,000
$
        1,078,752
$
         2,510,752
$
48,501,052
$
        51,011,804
Residential
 
 
 
         7,779,694
 
         7,779,694
 
              12,000,040
 
        19,779,734
Land
 
 
           —
 
         —
 
        —
 
6,042,548
 
6,042,548
 
$
$
      1,432,000
$
       8,858,446
$
10,290,446
$
       66,543,640
$
  76,834,086

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

All of the loans that are 90 or more days past due as listed above are on non-accrual status as of September 30, 2015 and December 31, 2014. In addition, two commercial loans totaling $11,588,000 as of December 31, 2014 were considered impaired but were restored to accrual status during 2014 because the Company had received consistent payments from the borrower over a six month period and management expected that the borrower would continue to keep the loans current with respect to principal and interest payments.  These two loans were paid off in full during the first quarter of 2015.
 
 
13

 
OWENS REALTY MORTGAGE, INC.

Notes to Consolidated Financial Statements (Unaudited)




The following tables show information related to impaired loans as of and for the three and nine months ended September 30, 2015:

   
As of September 30, 2015
 
 
 
Recorded
Investment
 
 
Unpaid
Principal
Balance
 
 
 
Related
Allowance
With no related allowance recorded:
           
 
Commercial
 
$
 
1,463,453
  $
1,432,000
  $
 
 
Residential
 
         244,694
 
244,694
 
 
 
Land
 
       
 
         
 
 
 —
 
$
1,708,147
$
1,676,694
$
             
With an allowance recorded:
           
 
Commercial
$
         1,144,864
$
          1,078,752
$
 
480,005
 
Residential
 
       7,983,345
 
         7,535,000
 
 
1,839,345
 
Land
 
 
 
 
  —
 
 
 
$
9,128,209
$
8,613,752
$
2,319,350
             
Totals:
           
 
Commercial
 
$
 
2,608,317
  $
         2,510,752
  $
 
480,005
 
Residential
 
 
8,228,039
 
         7,779,694
 
 
1,839,345
 
Land
 
       
 
         
 
 
 
$
10,836,356
$
10,290,446
$
2,319,350

 
14

 
OWENS REALTY MORTGAGE, INC.

Notes to Consolidated Financial Statements (Unaudited)



 
Three Months Ended September 30, 2015
Nine Months Ended September 30, 2015
 
 
Average
Recorded
Investment
 
 
Interest
Income
Recognized
 
 
Average
Recorded
Investment
 
 
Interest
Income
Recognized
With no related allowance recorded:
               
 
Commercial
  $
         487,818
  $
 
              9,547
 
$
         2,741,825
 
$
 
611,206
 
Residential
 
245,725
 
 
              5,654
 
          248,762
 
 
             16,581
 
Land
 
         —
 
 
              —
 
         413,348
 
 
216,904
 
$
733,543
$
15,201
$
3,403,935
$
844,691
                 
With an allowance recorded:
               
 
Commercial
$
          1,148,627
$
 
17,979
$
          1,111,170
$
 
40,452
 
Residential
 
         7,983,345
 
 
35,000
 
         7,983,345
 
 
157,600
 
Land
 
 
 
 
 
 
 
 
 
$
9,131,972
$
52,979
$
9,094,515
$
198,052
                 
Totals:
               
 
Commercial
  $
         1,636,445
  $
 
27,526
  $
         3,852,995
  $
 
651,658
 
Residential
 
         8,229,070
 
 
40,654
 
         8,232,107
 
 
174,181
 
Land
 
         —
 
 
 
         413,348
 
 
216,904
 
$
9,865,515
$
68,180
$
12,498,450
$
1,042,743

 
15

 
OWENS REALTY MORTGAGE, INC.

Notes to Consolidated Financial Statements (Unaudited)



The following tables show information related to impaired loans as of December 31, 2014 and for the three and nine months ended September 30, 2014:

   
As of December 31, 2014
 
 
 
Recorded
Investment
 
 
Unpaid
Principal
Balance
 
 
 
Related
Allowance
With no related allowance recorded:
           
 
Commercial
 
$
       11,588,183
 
 $
         11,588,183
  
$
 
 
Residential
 
         253,747
 
          253,747
 
 
 
Land
 
       1,860,068
 
         1,860,068
 
 
 
 
$
13,701,998
$
13,701,998
$
             
With an allowance recorded:
           
 
Commercial
$
         1,079,699
$
          1,078,752
$
 
550,010
 
Residential
 
       7,983,345
 
         7,535,000
 
 
1,839,345
 
Land
 
 
 
 
 
 
 
 
$
9,063,044
$
8,613,752
$
2,389,355
             
Totals:
           
 
Commercial
 
$
 
12,667,882
  
$
         12,666,935
  
$
 
550,010
 
Residential
 
 
8,237,092
 
         7,788,747
 
 
1,839,345
 
Land
 
       1,860,068
 
         1,860,068
 
 
 
$
22,765,042
$
22,315,750
$
2,389,355

 
16

 
OWENS REALTY MORTGAGE, INC.

Notes to Consolidated Financial Statements (Unaudited)



 
Three Months Ended September 30, 2014
Nine Months Ended September 30, 2014
 
 
Average
Recorded
Investment
 
 
Interest
Income
Recognized
 
 
Average
Recorded
Investment
 
 
Interest
Income
Recognized
With no related allowance recorded:
               
 
Commercial
  $
         16,410,099
  $
 
                617,507
 
$
         16,306,543
 
$
 
1,405,623
 
Residential
 
          2,233,235
 
 
              —
 
          2,374,941
 
 
             67,733
 
Land
 
         1,860,216
 
 
                38,276
 
         2,633,298
 
 
132,916
 
$
20,503,550
$
655,783
$
21,314,782
$
1,606,272
                 
With an allowance recorded:
               
 
Commercial
$
          1,910,269
$
 
13,484
$
          1,867,315
$
 
39,956
 
Residential
 
         7,983,345
 
 
22,000
 
         7,983,373
 
 
96,000
 
Land
 
 
 
 
 
 
 
 
 
$
9,893,614
$
35,484
$
9,850,688
$
135,956
                 
Totals:
               
 
Commercial
  $
         18,320,368
  $
 
630,991
  $
         18,173,858
  $
 
1,445,579
 
Residential
 
         10,216,580
 
 
22,000
 
         10,358,314
 
 
163,733
 
Land
 
         1,860,216
 
 
38,276
 
         2,633,298
 
 
132,916
 
$
30,397,164
$
691,267
$
31,165,470
$
1,742,228

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

Troubled Debt Restructurings

The Company has allocated approximately $2,319,000 and $2,389,000 of specific reserves on loans totaling approximately $9,373,000 and $20,265,000 (recorded investments before reserves) to borrowers whose loan terms had been modified in troubled debt restructurings as of September 30, 2015 and December 31, 2014, respectively.  The Company has not committed to lend additional amounts to any of these borrowers.

No loans were modified as troubled debt restructurings during the three and nine months ended September 30, 2015 and 2014.
 
17

 
OWENS REALTY MORTGAGE, INC.

Notes to Consolidated Financial Statements (Unaudited)


NOTE 4 – INVESTMENT IN LIMITED LIABILITY COMPANY

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

The Company received distributions from 1850 of $0 and $85,000 during the three and nine months ended September 30, 2015, respectively, and $0 and $84,000 during the three and nine months ended September 30, 2014, respectively. The net income to the Company from its investment in 1850 De La Cruz was approximately $45,000 and $44,000 during the three months ended September 30, 2015 and 2014, respectively, and $130,000 and $126,000 during the nine months ended September 30, 2015 and 2014, respectively.

NOTE 5 - REAL ESTATE HELD FOR SALE

Real estate properties held for sale as of September 30, 2015 and December 31, 2014 consists of properties acquired through foreclosure classified by property type as follows:

   
September 30,
2015
 
December 31,
2014
 
Land (including land under development)
 
$
40,300,887
 
$
36,263,330
 
Retail
   
   
16,494,440
 
Residential
   
54,222,726
   
 
Office
   
4,716,159
   
4,716,159
 
Industrial
   
1,422,308
   
 
Storage
   
3,782,526
   
 
Marina
   
236,500
   
 
Golf course
   
   
2,020,410
 
   
$
104,681,106
 
$
59,494,339
 

During the three months ended September 30, 2015, the Company transferred four properties (one residential, one industrial, one marina and one storage) from “Held for Investment” to “Held for Sale” as the properties are now listed for sale and sales are expected within the next year. During the nine months ended September 30, 2015, the Company transferred one golf course property from “Held for Sale” to “Held for Investment” as the property was no longer listed for sale and a sale was not expected within the next year. As a result of this transfer, the Company recorded approximately $79,000 of depreciation expense that would have previously been recorded had the property been continuously classified as “Held for Investment”.

During the quarter ended September 30, 2014, the Company transferred one retail property and one residential property from “Held for investment” to “Held for sale” because the properties were listed for sale and sales were expected within the next year. During the nine months ended September 30, 2014, the Company transferred one parcel of land from “Held for sale” to “Held for investment” because the property was no longer listed for sale and a sale was not likely within the next year.
 
 
18

 
OWENS REALTY MORTGAGE, INC.

Notes to Consolidated Financial Statements (Unaudited)


During the nine months ended September 30, 2015, the Company recorded impairment losses of approximately $1,256,000 on the unimproved residential and commercial land located in Gypsum, Colorado due to a decrease in the listing price of the property and a reduction in the net fair market value estimated by management.

During the three and nine months ended September 30, 2014, the Company recorded impairment losses of $124,000 and $179,000, respectively, on the marina property located in Oakley, California due to a decrease in the listing price of the property and a reduction in the fair market value recently estimated by management.

There were no sales during the three months ended September 30, 2015. During the nine months ended September 30, 2015, the Company sold four real estate properties for net sales proceeds aggregating approximately $34,865,000, resulting in gains on sale of real estate totaling approximately $14,879,000. In addition, the Company recognized gain of approximately $152,000 during the nine months ended September 30, 2015 that had previously been deferred related to the sale of a real estate property in 2012.  The gain on the sale of this property was being accounted for under the installment method.

There were no sales during the three and nine months ended September 30, 2014; however, gains totaling approximately $2,626,000 were recognized during the nine months ended September 30, 2014 that had previously been deferred related to the sales of real estate properties in 2012 and 2013. The gains on the sales of the properties were being recognized under the installment method.

NOTE 6 - REAL ESTATE HELD FOR INVESTMENT

Real estate held for investment as of September 30, 2015 and December 31, 2014 consists of properties acquired through foreclosure classified by property type as follows:


   
September 30,
2015
 
December 31,
2014
 
Land
 
$
8,839,255
 
$
10,797,656
 
Residential
   
6,721,923
   
48,154,258
 
Retail
   
23,278,649
   
23,211,896
 
Assisted care
   
5,073,316
   
5,005,000
 
Office
   
4,300,543
   
4,416,108
 
Industrial
   
   
4,486,797
 
Storage
   
   
3,847,884
 
Marina
   
3,740,468
   
3,602,867
 
Golf course
   
1,951,253
   
 
   
$
53,905,407
 
$
103,522,466
 

The balances of land and the major classes of depreciable property for real estate held for investment as of September 30, 2015 and December 31, 2014 are as follows:
   
September 30,
2015
   
December 31,
2014
 
Land and land improvements
 
$
24,047,216
   
$
39,003,422
 
Buildings and improvements
   
32,449,622
     
70,594,331
 
     
56,496,838
     
109,597,753
 
Less: Accumulated depreciation
   
(2,591,431
)
   
(6,075,287
)
   
$
53,905,407
   
$
103,522,466
 

It is the Company’s intent to sell its real estate properties held for investment, but expected sales of these properties are not probable to occur within the next year.
 
19

 
OWENS REALTY MORTGAGE, INC.

Notes to Consolidated Financial Statements (Unaudited)


Depreciation expense was approximately $505,000 and $523,000 for the three months ended September 30, 2015 and 2014, respectively, and $1,647,000 and $1,563,000 for the nine months ended September 30, 2015 and 2014, respectively.
 
During the quarter ended September 30, 2014, the Company sold one of the improved, residential lots located in West Sacramento, California for $175,000, resulting in a gain to the Company of approximately $105,000. The remaining lot was then transferred to “Held for sale” as it is now listed for sale and a sale is expected within the next year.

2015 Foreclosure Activity
 
The Company foreclosed on no loans during the three and nine months ended September 30, 2015.

2014 Foreclosure Activity
 
During the nine months ended September 30, 2014, Sandmound Marina, LLC (“Sandmound”) (wholly owned by the Company) foreclosed on a first mortgage loan secured by unimproved land and a marina and campground located in Bethel Island, California with a principal balance of approximately $2,960,000 and obtained the properties via the trustee’s sale. In addition, advances made on the loan or incurred as part of the foreclosure (such as legal fees and delinquent property taxes) in the total amount of approximately $282,000 were capitalized to the basis of the properties. The fair market values of the properties acquired were estimated to be higher than Sandmound’s recorded investment in the subject loan, and, thus, a gain on foreclosure in the amount of approximately $257,000 was recorded. The properties have been classified as held for investment as sales are not expected within one year.

Certain of the Company’s real estate properties held for sale and investment are leased to tenants under noncancellable leases with remaining terms ranging from one to nine years. Certain of the leases require the tenant to pay all or some operating expenses of the properties. The future minimum rental income from noncancellable operating leases due within the five years subsequent to September 30, 2015 and thereafter is as follows:
 
Twelve months ending September 30:
       
2016
 
$
5,501,140
 
2017
   
2,081,943
 
2018
   
1,711,319
 
2019
   
1,382,710
 
2020
   
480,682
 
Thereafter (through 2024)
   
1,345,092
 
   
$
12,502,886
 

NOTE 7 – LINES OF CREDIT PAYABLE
 
The Company borrows funds under the revolving California Bank & Trust (“CB&T”) line of credit and the revolving Opus Bank (“Opus”) line of credit (collectively, the “Funding Agreements”). As of September 30, 2015 and December 31, 2014, the outstanding balances and total commitments under the Funding Agreements consisted of the following:
   
As of September 30, 2015
 
As of December 31, 2014
 
                   
   
Outstanding
 
Total
 
Outstanding
 
Total
 
   
Balance
 
Commitment
 
Balance
 
Commitment
 
CB&T Line of Credit
 
$
8,954,000
 
$
17,992,910
 
$
11,450,000
 
$
17,355,000
 
Opus Bank Line of Credit
   
   
12,626,000
   
   
16,721,000
 
Total
 
$
8,954,000
 
$
30,618,910
 
$
11,450,000
 
$
34,076,000
 
 
 
20

 
OWENS REALTY MORTGAGE, INC.

Notes to Consolidated Financial Statements (Unaudited)


The Funding Agreements are generally collateralized by assignments of specific loans and real estate properties owned by the Company.

CB&T Line of Credit

In February 2014, the Company entered into a Credit Agreement and Advance Formula Agreement and related agreements with CB&T as the lender (the “CB&T Credit Facility”), which agreements were amended and restated in April 2015 to increase the maximum potential borrowings and to add First Bank as an additional lender. The maximum borrowings available (total commitment) under the amended facility is the lesser of $30,000,000 or the amount determined pursuant to a borrowing base calculation described in the Advance Formula Agreement.

Borrowings mature on February 5, 2016.  Such borrowings bear interest payable monthly at the prime rate of interest established by CB&T from time-to-time plus one quarter percent (.25%) per annum (3.5% at September 30, 2015). Upon a default such interest rate increases by 2.00%. The CB&T Credit Facility required the payment of an origination fee of $100,000 and other issuance costs totaling $177,000 that were capitalized to deferred financing costs and are being amortized to interest expense using the straight-line method through the maturity date of the CB&T Credit Facility. The Company is also subject to certain ongoing administrative fees and expenses. Interest expense on the CB&T Credit Facility was approximately $70,000 and $171,000 during the three months ended September 30, 2015 and 2014, respectively (including $36,000 and $23,000, respectively, in amortization of deferred financing costs) and $297,000 and $287,000 during the nine months ended September 30, 2015 and 2014, respectively (including $90,000 and $46,000, respectively, in amortization of deferred financing costs).

Borrowings are secured by certain assets of the Company. These collateral assets will include the grant to the lenders of first-priority deeds of trust on certain real property assets and trust deeds of the Company to be identified by the parties from time-to-time and all personal property of the Company, which collateral includes the assets described in the Security Agreement and in other customary collateral agreements that will be entered into by the parties from time-to-time. As of September 30, 2015, the carrying amount and classification of loans and real estate properties securing the CB&T Credit Facility were as follows:

Loans:
   
September 30,
2015
 
Commercial
 
$
15,996,624
 
Real Estate:
       
Residential
   
6,852,989
 
Storage
   
3,782,526
 
Total
 
$
10,635,515
 

The CB&T Credit Facility agreements contain financial covenants which are customary for a loan of this type. Management is not aware of any breach of these covenants as of September 30, 2015.

Opus Bank Line of Credit

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

Advances under the Opus Credit Facility may be made by Opus until April 1, 2016.  All borrowings under the Opus Credit Facility bear interest payable monthly as follows: (i) commencing October 1, 2014, and on each successive six month anniversary during the term (the “Rate Change Date”), the rate of interest will be reset to the Six Month LIBOR rate of interest as reported on such Rate Change Date plus four percent (4.0%) per annum but in no event will the interest rate be lower than 4.5% per annum. The interest rate as of September 30, 2015 was 4.5%. Upon a default under the Opus Credit Facility such interest rate increases by an additional 5.00%. Commencing on May 1, 2016, in addition to the required interest payments, the Company is also required to make mandatory monthly principal payments and all amounts under the Opus Credit Facility are to be repaid not later than April 1, 2017.
 
 
21

 
OWENS REALTY MORTGAGE, INC.

Notes to Consolidated Financial Statements (Unaudited)



The Opus Credit Facility required the payment of an origination fee of $100,000 and other issuance costs totaling $231,000 that were capitalized as deferred financing costs and are being amortized to interest expense using the straight-line method through the maturity date of the Opus Credit Facility. The Company is also subject to certain ongoing administrative fees and expenses. Interest expense on the Opus Credit Facility was approximately $19,000 and $40,000 during the three months ended September 30, 2015 and 2014, respectively (including $19,000 and $19,000, respectively, in amortization of deferred financing costs) and $58,000 and $53,000 during the nine months ended September 30, 2015 and 2014, respectively (including $58,000 and $32,000, respectively, in amortization of deferred financing costs).

Borrowings under the Opus Credit Facility will be secured by certain of the Company's assets. These collateral assets will include the following types of assets to be identified by the parties and described in Borrowing Base Collateral Certificates  to be entered into by the parties from time-to-time: (i) the grant to Opus of first-priority deeds of trust on certain of the Company's real property assets that meet related eligibility requirements set forth in the Opus Credit Agreement (as further defined in the Opus Credit Agreement, the “REO Collateral”); and (ii) the grant to Opus of a collateral interest in mortgage loan promissory notes issued by the Company in the ordinary course of business that meet related eligibility requirements set forth in the Opus Credit Agreement (as further defined in the Opus Credit Agreement, the “Note Collateral”). As of September 30, 2015, the carrying amount and classification of loans and real estate properties securing the Opus Credit Facility were as follows:

Loans:
   
September 30,
2015
 
Commercial
 
$
8,425,924
 
Real Estate:
       
Office
   
9,016,702
 
Industrial
   
1,422,308
 
Total
 
$
10,439,010
 

The Opus Credit Facility contains financial covenants which are customary for loans of this type. Management is not aware of any breach of these covenants as of September 30, 2015.
 
 
22

 
OWENS REALTY MORTGAGE, INC.

Notes to Consolidated Financial Statements (Unaudited)




NOTE 8 - NOTES AND LOANS PAYABLE ON REAL ESTATE

The Company had the following notes and loans payable outstanding as of September 30, 2015 and December 31, 2014:
 
   
September 30,
2015
 
December 31,
2014
 
Interest Rate
 
Payment Terms/Frequency
 
Maturity Date
720 University, LLC Note Payable
 
$
 
$
9,741,463
 
6.00%
 
Interest Only
Monthly
 
Paid off
Tahoe Stateline Venture, LLC Note #1
   
2,900,000
   
2,900,000
 
5.00%
 
Interest Only
Semi-annual
 
December 2016
Tahoe Stateline Venture, LLC Note #2
   
500,000
   
500,000
 
5.00%
 
Interest Only
Quarterly
 
August 2017
TOTB North, LLC Construction Loan Payable
   
10,945,502
   
1,007,919
 
4.50%
 
Amortizing
Monthly
 
June 2017
TOTB Miami, LLC Loan Payable
   
12,754,415
   
12,975,167
 
4.33%
 
Amortizing
Monthly
 
November 2017
Tahoe Stateline Venture, LLC Loan Payable
   
14,097,865
   
10,445,000
 
3.47%
 
Amortizing
Monthly
 
January 2021
   
$
41,197,782
 
$
37,569,549
           

The following table shows maturities by year on these notes and loans payable as of September 30, 2015:
 
Twelve months ending September 30:
       
2016
 
$
652,322
 
2017
   
15,032,576
 
2018
   
12,573,703
 
2019
   
416,904
 
2020
   
431,603
 
Thereafter
   
12,090,674
 
   
$
41,197,782
 

720 University, LLC Note Payable

The Company had a note payable with a bank through its investment in 720 University, LLC (“720 University), which was secured by the retail development located in Greeley, Colorado. In November 2014, 720 University entered into an agreement to sell the property that secured this note payable, and the buyer extended a new loan to 720 University to repay the existing note payable. The refinancing closed in January 2015. The principal amount of the new loan was $9,771,263 and accrued interest at 6.0% per annum until paid off with the closing of the sale of the property to the buyer which occurred on June 15, 2015. 720 University incurred interest expense of approximately $0 and $127,000 during the three months ended September 30, 2015 and 2014, respectively, and $265,000 and $378,000 during the nine months ended September 30, 2015 and 2014, respectively.
 
Tahoe Stateline Venture, LLC Notes Payable

The Company obtained these obligations as a result of the foreclosure or purchase of nine parcels by Tahoe Stateline Venture, LLC (“TSV”) in 2013 and 2012. The Company paid approximately $91,000 and $107,000 of interest on the notes during the nine months ended September 30, 2015 and 2014, respectively. As of September 30, 2015 and December 31, 2014, there was approximately $55,000 and $19,000, respectively, in accrued but unpaid interest on these notes. The interest incurred has been capitalized to the basis of the land under development.
 
 
23

 
OWENS REALTY MORTGAGE, INC.

Notes to Consolidated Financial Statements (Unaudited)



 
TOTB North, LLC Construction Loan Payable
 
In June 2014, TOTB North, LLC (“TOTB North”) entered into a Construction Loan Agreement (the “Loan Agreement”) and related documents with Bank of the Ozarks (“Ozarks”) as the lender providing TOTB North with a loan (the “North Loan”) of up to $21,304,000 to renovate and improve the vacant and unimproved “North” apartment building held in TOTB North (the “Project”).  The North Loan is secured by a first mortgage lien on the North building and all improvements and certain other assets, and is cross-defaulted and cross-collateralized with the TOTB Miami, LLC Loan Payable described below.

The initial maturity date (the “Maturity Date”) of the North Loan is June 12, 2017, which may be extended at the option of TOTB North for two additional one year periods, subject to certain conditions. The balance of the loan was approximately $10,946,000 and $1,008,000 as of September 30, 2015 and December 31, 2014, respectively.

All outstanding borrowings under the North Loan bear interest equal to the floating daily Three Month LIBOR rate of interest plus four percent (4.0%) per annum (the “Note Rate”), but the Note Rate will not be lower than four and one-half percent (4.5%) per annum. The Note Rate as of September 30, 2015 was 4.5% per annum.  Upon a default under the North Loan documents the Note Rate increases by an additional eight percent (8.00%) per annum. Interest only payments are payable monthly until the “Amortization Commencement Date” which is the earlier to occur of (i) December 12, 2015 or (ii) the first monthly interest payment date occurring after the Project is completed and the North property achieves a DSCR of greater than 1.25:1. Commencing on the Amortization Commencement Date, monthly principal payments are also required with principal amortizing over 300 months and the balance of the North Loan is due on the Maturity Date.

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

During 2014, TOTB North paid customary closing fees, disbursements and expenses, including an origination fee to Ozarks, which totaled $622,000. The majority of these costs were paid out of proceeds from the North Loan and capitalized to deferred financing costs and are being amortized to the Project using the straight-line method through the Maturity Date. During the three and nine months ended September 30, 2015, approximately $52,000 and $156,000, respectively, of deferred financing costs were amortized to the Project. During the three and nine months ended September 30, 2014, approximately $52,000 and $69,000, respectively, of deferred financing costs were amortized to the Project. During the three and nine months ended September 30, 2015, approximately $91,000 and $133,000, respectively, of interest was incurred which was capitalized to the Project. During the three and nine months ended September 30, 2014, approximately $9,000 and $10,000, respectively, of interest was incurred which was capitalized to the Project.

The North Loan documents contain financial covenants of TOTB North and the Guarantors which are customary for loans of this type. Management is not aware of any breach of these covenants as of September 30, 2015.
 
TOTB Miami, LLC Loan Payable
 
In November 2014, TOTB Miami, LLC (“TOTB”) entered into another loan agreement (the “TOTB Loan Agreement”) and related documents with Ozarks providing TOTB a loan (the “TOTB Miami Loan”) of $13,000,000 secured by a first mortgage lien on the 154 leased condominium units owned in the Pointe building and the related parcel and all improvements as well as certain other assets. As a condition of providing the TOTB Miami Loan, Ozarks required that the TOTB Miami Loan and the North Loan be cross-collateralized and cross-defaulted, that excess proceeds from any sale of the North property be used to reduce or pay off the TOTB Miami Loan and that excess proceeds from any sale of the TOTB property be used to pay off the North Loan.
 
24

 
OWENS REALTY MORTGAGE, INC.

Notes to Consolidated Financial Statements (Unaudited)



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

All outstanding borrowings under the TOTB Miami Loan will bear interest equal to the floating daily Three Month LIBOR rate of interest plus four percent (4.0%) per annum (the “Note Rate”), but in no event will the Note Rate be lower than four and one-quarter percent (4.25%) per annum. The Note Rate as of September 30, 2015 was 4.33% per annum.  Upon a default under the TOTB Miami Loan documents, including any cross-default, the Note Rate increases by an additional eight percent (8.00%) per annum. Principal and interest is payable monthly with principal amortizing over 300 months, and the balance of the loan is due on the Maturity Date.

TOTB was obligated to pay customary closing fees, disbursements and expenses, including an origination fee to the Lender, which totaled approximately $323,000. The majority of these costs were paid out of proceeds from the loan and capitalized to deferred financing costs and are being amortized to interest expense using the effective interest method through the Maturity Date. During the three and nine months ended September 30, 2015, approximately $166,000 and $497,000, respectively, of interest expense was incurred (including approximately $33,000 and $92,000, respectively, of deferred financing costs amortized to interest expense).

The TOTB Miami Loan documents contain financial covenants of TOTB and the Guarantors which are customary for loans of this type. Management is not aware of any breach of these covenants as of September 30, 2015.
 
Tahoe Stateline Venture, LLC Loan Payable
 
In December 2014, Tahoe Stateline Ventures, LLC (“TSV”) entered into a Credit Agreement (the “Credit Agreement”) and related documents with RaboBank, N.A. as the lender (“Lender”) providing TSV with a loan (the “TSV Loan”) of up to $14,500,000. TSV borrowed $10,445,000 at the first closing under the TSV Loan and an additional $3,830,000 was borrowed in September 2015.

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

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

The Credit Agreement required the payment of a closing fee of $108,750 and certain administrative fees totaling approximately $218,000. The majority of these costs were paid out of proceeds from the loan and capitalized to deferred financing costs and are being amortized to interest expense using the effective interest method through the Maturity Date. During the three and nine months ended September 30, 2015, approximately $99,000 and $296,000, respectively, of interest expense was incurred (including approximately $9,000 and $27,000, respectively, of deferred financing costs amortized to interest expense).
 
 
25

 
OWENS REALTY MORTGAGE, INC.

Notes to Consolidated Financial Statements (Unaudited)



The TSV Loan documents contain financial covenants which are customary for loans of this type. Management is not aware of any breach of these covenants as of September 30, 2015.

NOTE 9 - TRANSACTIONS WITH AFFILIATES

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

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

OFG, at its sole discretion may, on a monthly basis, adjust the management and servicing fees as long as they do not exceed the allowable limits calculated on an annual basis. Even though the fees for a month may exceed 1/12 of the maximum limits, at the end of the calendar year the sum of the fees collected for each of the 12 months must be equal to or less than the stated limits. Management fees amounted to approximately $513,000 and $436,000 for the three months ended September 30, 2015 and 2014, respectively, and $1,410,000 and $1,276,000 for the nine months ended September 30, 2015 and 2014, respectively, and are included in the accompanying consolidated statements of income. Servicing fees amounted to approximately $47,000 and $40,000 for the three months ended September 30, 2015 and 2014, respectively, and $128,000 and $116,000 for the nine months ended September 30, 2015 and 2014, respectively, and are included in the accompanying consolidated statements of income. As of September 30, 2015 and December 31, 2014, the Company owed management and servicing fees to OFG in the amount of approximately $192,000 and $171,000, respectively.
 
The maximum management and servicing fees were paid to OFG during the three and nine months ended September 30, 2015 and 2014.
 
In determining the management fees to pay to OFG, OFG may consider a number of factors, including current market yields, delinquency experience, un-invested cash and real estate activities. During the three and nine months ended September 30, 2015 and 2014, OFG elected to take the maximum compensation that it is able to take pursuant to the Management Agreement and will likely continue to take the maximum compensation for the foreseeable future.

Pursuant to the charter, OFG receives all late payment charges from borrowers on loans owned by the Company. The amounts paid to or collected by OFG for such charges totaled approximately $0 and $2,000 for the three months ended September 30, 2015 and 2014, respectively, and $17,000 and $4,000 for the nine months ended September 30, 2015 and 2014, respectively. In addition, the Company remits other miscellaneous fees to OFG, which are collected from loan payments, loan payoffs or advances from loan principal (i.e. funding, demand and partial release fees). The amounts paid to or collected by OFG for such fees totaled approximately $2,000 and $1,000, respectively, during the three months ended September 30, 2015 and 2014 and $6,000 and $2,000, respectively, during the nine months ended September 30, 2015 and 2014, respectively.

OFG originates all loans the Company invests in and receives loan origination and extension fees from borrowers. During the three and nine months ended September 30, 2015, OFG earned approximately $289,000 and $1,001,000, respectively, on loans originated or extended of approximately $11,982,000 and $42,034,000, respectively. During the three and nine months ended September 30, 2014, OFG earned approximately $186,000 and $726,000, respectively, on loans originated or extended of approximately $8,025,000 and $30,226,000, respectively.

OFG is reimbursed by the Company for the actual cost of goods, services and materials used for or by the Company and paid by OFG and the salary and related salary expense of OFG’s non-management and non-supervisory personnel performing services for the Company which could be performed by independent parties (subject to certain limitations in the Management Agreement and the Company’s charter). The total OFG reimbursements expensed by the Company for such services were $130,000 and $167,000 during the three months ended September 30, 2015 and 2014, respectively, and $394,000 and $507,000 during the nine months ended September 30, 2015 and 2014, respectively. As of September 30, 2015 and December 31, 2014, there was $43,000 and $113,000 payable to OFG for such services. The Company also reimbursed certain of OFG’s officers for allowed expenses in the total amount of $1,000 and $1,000 during the nine months ended September 30, 2015 and 2014, respectively.
 
 
26

 
OWENS REALTY MORTGAGE, INC.

Notes to Consolidated Financial Statements (Unaudited)



The Company paid Investor’s Yield, Inc. (a wholly owned subsidiary of OFG) approximately $7,000 and $30,000 during the nine months ended September 30, 2015 and 2014, respectively, in fees primarily related to certain foreclosure proceedings on Company loans.
 
During the nine months ended September 30, 2015, the Company purchased OFG’s full interest in a loan secured by an industrial property located in San Ramon, California with a principal balance of $1,499,000 at face value.
 
NOTE 10 – STOCKHOLDERS’ EQUITY
 
Dividends

On March 18, 2015, the board of directors declared a $0.07 dividend on our shares of common stock to holders of record as of March 31, 2015. The dividend was paid on April 14, 2015 and totaled $753,760.

On June 19, 2015, the board of directors declared a $0.18 dividend on our shares of common stock to holders of record as of June 30, 2015. The dividend was paid on July 14, 2015 and totaled $1,938,240.

On September 18, 2015, the board of directors declared a $0.08 dividend on our shares of common stock to holders of record as of September 30, 2015. The dividend was paid on October 14, 2015 and totaled $835,533.

As of September 30, 2015, the Company has net capital gains from the sales of real estate properties totaling approximately $12,710,000. It is the intention of management to retain all net capital gains within the Company and not distribute them as is permitted for a REIT.  However, the retained net capital gains will be taxable to shareholders and will require the Company to make a tax payment to the U.S Treasury Department on behalf of shareholders at the highest corporate tax rate (currently 35%), which are to be reflected as tax payments on shareholders’ tax returns. Such payments will be recorded as dividends in the Company’s financial statements.

Stock Repurchase Programs

On August 9, 2013, the Board of Directors authorized a Rule 10b5-1 stock repurchase plan (the “2013 Repurchase Plan”) which permitted the Company to purchase up to the lesser of $7 million of its common stock or five percent of the shares of common stock outstanding as of that date. A Rule 10b5-1 plan permits the Company to repurchase shares at times when it might otherwise be prevented from doing so. During the nine months ended September 30, 2014, the Company repurchased 26,208 shares of its common stock for a total cost of approximately $325,000 (including commissions) and an average cost of $12.42 per share. The 2013 Repurchase Plan expired on May 19, 2014, and as of that date, the Company had repurchased 430,118 shares of its common stock, for a total cost of approximately $5,349,000 (including commissions) and an average cost of $12.44 per share.

On May 27, 2015, the Board of Directors authorized a new Rule 10b5-1 stock repurchase plan (the “2015 Repurchase Plan”) under which the Company may purchase up to $7.5 million of its common stock. Under the 2015 Repurchase Plan, repurchases will be funded from available working capital, and the repurchased shares will return to the status of authorized but unissued shares of common stock. Repurchases under the 2015 Repurchase Plan are subject to certain price, volume and timing constraints specified in the brokerage agreement. There is no guarantee as to the exact number of shares that will be repurchased by the Company. The 2015 Repurchase Plan permits repurchases commencing on June 27, 2015 and expires by its terms on May 12, 2016, although the Company may terminate the 2015 Repurchase Plan at any time. During the quarter ended September 30, 2015, the Company repurchased 360,263 shares of its common stock under this new plan for a total cost of approximately $5,253,000 (including commissions) and an average cost of $14.58 per share and repurchased another 66,528 shares in October 2015 (subsequent to quarter end) for a total cost of approximately $938,000 (including commissions) and an average cost of $14.10 per share.
 
 
27

 
OWENS REALTY MORTGAGE, INC.

Notes to Consolidated Financial Statements (Unaudited)



NOTE 11 – RESTRICTED CASH
 
Contingency Reserves
 
In accordance with the charter, the Company is required to maintain cash, cash equivalents and marketable securities as contingency reserves in an aggregate amount of 1-1/2% of Capital as defined in the charter. Although the Manager believes the contingency reserves are adequate, it could become necessary for the Company to sell or otherwise liquidate certain of its investments or other assets to cover such contingencies on terms which might not be favorable to the Company, which could lead to unanticipated losses upon sale of such assets.
 
The contingency reserves required per the charter as of September 30, 2015 and December 31, 2014 were approximately $4,009,000 and $3,876,000, respectively, and are reported as part of restricted cash in the accompanying consolidated balance sheets. $7,000,000 is required to be held in non-interest bearing accounts pursuant to the Company’s two lines of credit agreements, which also satisfies the contingency reserve requirement in the charter.
 
Escrow Deposits
 
Restricted cash includes deposits held in third party escrow accounts to fund construction costs and replacement reserves and to pay property taxes and insurance on Company real estate in the amounts of approximately $495,000 and $249,000 as of September 30, 2015 and December 31, 2014, respectively.

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

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

Level 3 inputs include unobservable inputs that are used when there is little, if any, market activity for the asset or liability measured at fair value. In certain cases, the inputs used to measure fair value fall into different levels of the fair value hierarchy. In such cases, the level in which the fair value measurement in its entirety falls is determined based on the lowest level input that is significant to the fair value measurement. Management’s assessment of the significance of a particular input requires judgment and considers factors specific to the asset or liability being measured.
 
28

 
OWENS REALTY MORTGAGE, INC.

Notes to Consolidated Financial Statements (Unaudited)



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

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

The following is a description of the Company’s valuation methodologies used to measure and disclose the fair values of its financial and nonfinancial assets and liabilities on a nonrecurring basis. There were no assets or liabilities measured at fair value on a recurring basis.
 
Impaired Loans
 
The Company does not record loans at fair value on a recurring basis. However, from time to time, a loan is considered impaired and a specific allowance for loan losses is established.  A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement or when monthly payments are delinquent greater than ninety days. Once a loan is identified as impaired, management measures impairment in accordance with ASC 310-10-35.  The fair value of impaired loans is estimated by either an observable market price (if available) or the fair value of the underlying collateral, if collateral dependent.  The fair value of the loan’s collateral is determined by third party appraisals (by licensed appraisers), broker price opinions, comparable properties or other indications of value. Those impaired loans not requiring an allowance represent loans for which the fair value of the collateral exceed the recorded investments in such loans. At September 30, 2015 and December 31, 2014, the majority of the total impaired loans were evaluated based on the fair value of the collateral by obtaining third party appraisals that valued the collateral primarily by utilizing an income or market approach or some combination of the two.  In accordance with ASC 820, impaired loans where an allowance is established based on the fair value of collateral require classification in the fair value hierarchy.  Because appraisals used by management generally include significant unobservable inputs and market data, the Company records the impaired loan as nonrecurring Level 3. Unobservable market data included in appraisals often includes adjustments to comparable property sales for such items as location, size and quality to estimate fair values using a sales comparison approach.  Unobservable market data also includes cash flow assumptions and capitalization rates used to estimate fair values under an income approach.

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

 
29

 
OWENS REALTY MORTGAGE, INC.

Notes to Consolidated Financial Statements (Unaudited)


The following table presents information about the Company’s assets and liabilities measured at fair value on a nonrecurring basis as of September 30, 2015 and December 31, 2014:
 
   
Fair Value Measurements Using
   
Fair Value
 
Quoted Prices In Active Markets for Identical Assets
(Level 1)
 
Significant Other Observable Inputs
(Level 2)
 
Significant Unobservable Inputs
(Level 3)
September 30, 2015
               
Nonrecurring:
               
Impaired loans:
         
 
 
 
  Commercial
$
       664,859
$
$
$
       664,859
  Residential
 
6,144,000
 
 
 
6,144,000
 
 Total
 
$
    6,808,859
$
$
 
$
 
     6,808,859
                 
Real estate properties:
     
 
 
 
 
 
  Land
$
4,557,000
$
$
$
    4,557,000
 
Total
 
$
 
4,557,000
$
$
 
 
$
 
4,557,000
                 
December 31, 2014
               
Nonrecurring:
               
Impaired loans:
               
  Commercial
$
529,689
$
$
$
            529,689
  Residential
 
6,144,000
 
 
 
6,144,000
 
Total
 
$
 
6,673,689
$
 
$
 
$
 
   6,673,689
                 
Real estate properties:
               
  Commercial
$
1,292,500
$
$
$
1,292,500
  Land
 
2,334,773
 
 
 
         2,334,773
 
Total
 
$
 
    3,627,273
$
$
 
      —
$
 
3,627,273

The (reversal of) provision for loan losses based on the fair value of loan collateral less estimated selling costs for the impaired loans above totaled approximately $(64,000) and $8,000 during the three months ended September 30, 2015 and 2014, respectively, and $(70,000) and $81,000 during the nine months ended September 30, 2015 and 2014, respectively. Impairment losses were recorded on real estate properties in the amounts of approximately $0 and $124,000 during the three months ended September 30, 2015 and 2014, respectively, and $1,256,000 and $179,000 during the nine months ended September 30, 2015 and 2014, respectively.
 
There were no liabilities measured at fair value on a non-recurring basis at September 30, 2015 and December 31, 2014.

 
30

 
OWENS REALTY MORTGAGE, INC.

Notes to Consolidated Financial Statements (Unaudited)




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

At September 30, 2015:

Description
 
Fair Value
 
Valuation Technique
 
Significant Unobservable Inputs
 
Input/Range
 
Weighted Average
                     
Impaired Loans:
                   
Commercial
$
664,859
 
Appraisal
 
Estimated Cost of Improvements
 
31.9%
 
N/A
           
Capitalization Rate
 
7%
 
N/A
           
Comparable Sales Adjustment
 
(20)% to 30%
 
N/A
Residential
$
 6,144,000
 
Appraisal
 
Estimated Cost of Improvements
 
1.8%
 
N/A
           
Discount Rate
 
12%
 
N/A
           
Comparable Sales Adjustment
 
(10)% to 20%
 
N/A
Real Estate Properties:
                 
Land
$
4,557,000
 
Appraisal
 
Comparable Sales Adjustment
 
(19)%
 
N/A

At December 31, 2014:

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

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

 
31

 
OWENS REALTY MORTGAGE, INC.

Notes to Consolidated Financial Statements (Unaudited)




The approximate carrying amounts and estimated fair values of financial instruments at September 30, 2015 and December 31, 2014 are as follows:
 
         
Fair Value Measurements at September 30, 2015
     
Carrying Value
 
Level 1
 
Level 2
 
Level 3
 
Total
Financial assets
                   
 
Cash and cash equivalents
$
6,708,000
$
6,708,000
$
$
$
6,708,000
 
Restricted cash
 
7,495,000
 
7,495,000
 
 
 
7,495,000
 
Loans, net
 
73,492,000
 
 
 
73,469,000
 
73,469,000
 
Investment in limited liability company
 
2,188,000
 
 
 
2,352,000
 
2,352,000
 
Accrued interest and advances receivable
 
1,026,000
 
 
 
1,026,000
 
1,026,000