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 THESECURITIES EXCHANGE ACT OF 1934





For the quarterly period ended March 31, 2011





Or





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





For the transition period from _________ to _________





Commission File Number: 333-125347





VESTIN REALTY MORTGAGE I, INC.(Exact name of registrant as specified in its charter)








MARYLAND

20-4028839(State or Other Jurisdiction of

(I.R.S. EmployerIncorporation or Organization)

Identification No.)





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


(Address of Principal Executive Offices)(Zip Code)





Registrant’s Telephone Number: 702.227.0965





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





Yes  [X]    No   [   ]





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





Yes  [   ]    No   [   ]





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





Large accelerated filer [   ]
Accelerated filer [   ]Non-accelerated filer [   ]

(Do not check if a smaller reporting company)
Smaller reporting company [X]





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





Yes  [   ]    No   [X]





As of May 16, 2011, there were 6,419,459 shares of the Company’s Common Stock outstanding.





Table of Contents


TABLEOF CONTENTS





PagePart I
FINANCIAL INFORMATIONItem 1.
Consolidated Financial Statements
1Consolidated Balance Sheets as of March 31, 2011 (unaudited) and December 31, 2010
1Consolidated Statements of Operations (unaudited) for the Three Months Ended March 31, 2011 and 2010
2Consolidated Statement of Equity and Other Comprehensive Loss (unaudited) for the Three Months Ended March 31, 2011
3Consolidated Statements of Cash Flows (unaudited) for the Three Months Ended March 31, 2011 and 2010
4Notes to Consolidated Financial Statements (unaudited)
5Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
24Item 3.
Quantitative and Qualitative Disclosures About Market Risk
31Item 4.
Controls and Procedures
31Part II
OTHER INFORMATIONItem 1.
Legal Proceedings
32Item 1A.
Risk Factors
32Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
35Item 3.
Defaults Upon Senior Securities
36Item 5.
Other Information
36Item 6.
Exhibits
36SIGNATURES
37Exhibit 31.1Exhibit 31.2Exhibit 32








Table of Contents


PARTI - FINANCIAL INFORMATION





ITEM1.
CONSOLIDATED FINANCIAL STATEMENTS





VESTINREALTY MORTGAGE I, INC.CONSOLIDATED BALANCE SHEETSASSETSMarch 31, 2011


December 31, 2010(Unaudited)AssetsCash

$
6,819,000


$
8,145,000Investment in marketable securities - related party


351,000



326,000Interest and other receivables, net of allowance of $166,000 at March 31, 2011 and $196,000 at December 31, 2010


511,000



673,000Notes receivable, net of allowance of $945,000 at March 31, 2011 and December 31, 2010


--



--Real estate held for sale


2,897,000



2,897,000Investment in equity method investee held for sale


5,442,000



5,379,000Investment in real estate loans, net of allowance for loan losses of $4,921,000 at March 31, 2011 and $5,780,000 at December 31, 2010


6,772,000



6,532,000Other assets


57,000



98,000Total assets

$
22,849,000


$
24,050,000LIABILITIES AND STOCKHOLDERS' EQUITYLiabilitiesAccounts payable and accrued liabilities

$
1,239,000


$
1,500,000Due to related parties


164,000



741,000Note payable


256,000



277,000Unearned revenue


1,000



2,000Total liabilities


1,660,000



2,520,000Commitments and contingenciesStockholders' equityPreferred stock, $0.0001 par value; 1,000,000 shares authorized; none issued


--



--Treasury stock, at cost, 455,607 shares at March 31, 2011 and 455,607 shares at December 31, 2010


(941,000
)


(941,000
)Common stock, $0.0001 par value; 25,000,000 shares authorized; 6,875,066 shares issued and 6,419,459 outstanding at March 31, 2011 and 6,875,066 shares issued and 6,419,459 outstanding at December 31, 2010


1,000



1,000Additional paid-in capital


62,262,000



62,262,000Accumulated deficit


(40,151,000
)


(39,785,000
)Accumulated other comprehensive income (loss)


18,000



(7,000
)Total stockholders' equity


21,189,000



21,530,000Total liabilities and stockholders' equity

$
22,849,000


$
24,050,000





The accompanying notes are an integral part of these consolidated statements
 -1-
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VESTINREALTY MORTGAGE I, INC.CONSOLIDATED STATEMENTS OF OPERATIONS








For The Three

Months Ended3/31/2011


3/31/2010RevenuesInterest income from investment in real estate loans

$
128,000


$
322,000Other income


2,000



54,000Total revenues


130,000



376,000Operating expensesManagement fees - related party


69,000



69,000Provision for loan loss


127,000



--Interest expense


8,000



--Professional fees


175,000



416,000Professional fees - related party


17,000



32,000Other


130,000



123,000Total operating expenses


526,000



640,000Loss from operations


(396,000
)


(264,000
)Non-operating incomeInterest income from banking institutions


2,000



--Income from equity method investee held for sale


109,000



--Total non-operating income


111,000



--Income (loss) from real estate held for saleNet gain (loss) on sale of real estate held for sale


--



21,000Expenses related to real estate held for sale


(56,000
)


(54,000
)Expenses related to real estate held for sale – related party


(25,000
)Total loss from real estate held for sale


(81,000
)


(33,000
)Loss before provision for income taxes


(366,000
)


(297,000
)Provision for income taxes


--



--NET LOSS

$
(366,000
)

$
(297,000
)Basic and diluted loss per weighted average common share

$
(0.06
)

$
(0.05
)Dividends declared per common share

$
--


$
--Weighted average common shares outstanding


6,419,459



6,499,191











The accompanying notes are an integral part of these consolidated statements
 -2-
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VESTINREALTY MORTGAGE I, INC.CONSOLIDATED STATEMENT OF EQUITY AND OTHER COMPREHENSIVE LOSSFOR THE THREE MONTHS ENDED MARCH 31, 2011(UNAUDITED)Treasury Stock


Common StockNumber of Shares


Amount


Number of Shares


Amount


Additional Paid-in-Capital


Accumulated deficit


Accumulated Other Comprehensive Income (Loss)


TotalStockholders' Equity at

December 31, 2010


455,607


$
(941,000
)


6,419,459


$
1,000


$
62,262,000


$
(39,785,000
)

$
(7,000
)

$
21,530,000Comprehensive Loss:Net Loss






















(366,000
)






(366,000
)Unrealized Gain on Marketable Securities - Related Party


























25,000



25,000Comprehensive Loss






























(341,000
)Stockholders' Equity at

March 31, 2011 (Unaudited)


455,607


$
(941,000
)


6,419,459


$
1,000


$
62,262,000


$
(40,151,000
)

$
18,000


$
21,189,000








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





VESTINREALTY MORTGAGE I, INC.CONSOLIDATED STATEMENTS OF CASH FLOWS(UNAUDITED)For The Three

Months Ended3/31/11


3/31/10Cash flows from operating activities:Net loss

$
(366,000
)

$
(297,000
)Adjustments to reconcile net loss to net cash used in operating activities:Provision for doubtful accounts related to receivable included in other expense


--



(2,000
)Gain on sale of real estate held for sale


--



(21,000
)Provision for loan loss


127,000



--Amortized interest income


(1,000
)


--Income from equity method investee held for sale


(109,000
)


--Change in operating assets and liabilities:Interest and other receivables


162,000



(60,000
)Due to/from related parties


(577,000
)


(109,000
)Other assets


41,000



24,000Accounts payable and accrued liabilities


(261,000
)


70,000Net cash used in operating activities


(984,000
)


(395,000
)Cash flows from investing activities:Investments in real estate loans


(490,000
)


--Proceeds from loan payoffs


123,000



32,000Proceeds related to real estate held for sale


--



444,000Distributions from investment in equity method investee held for sale


46,000



--Net cash (used in) provided by investing activities


(321,000
)


476,000Cash flows from financing activities:Principal payments on notes payable


(21,000
)


(22,000
)Net cash used in financing activities


(21,000
)


(22,000
)NET CHANGE IN CASH


(1,326,000
)


59,000Cash, beginning of period


8,145,000



1,543,000Cash, end of period

$
6,819,000


$
1,602,000Supplemental disclosures of cash flows information:Interest paid

$
8,000


$
--Non-cash investing and financing activities:Unrealized gain (loss) on marketable securities - related party

$
25,000


$
(96,000
)














The accompanying notes are an integral part of these consolidated statements
 -4-
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VESTINREALTY MORTGAGE I, INC





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS





MARCH 31, 2011





(UNAUDITED)





NOTE A — ORGANIZATION





Vestin Fund I, LLC (“Fund I”) was organized in December 1999 as a Nevada limited liability company for the purpose of investing in commercial real estate loans (hereafter referred to as “real estate loans”).  Vestin Realty Mortgage I, Inc. (“VRM I”) was organized in January 2006 as a Maryland corporation for the sole purpose of effecting a merger with Fund I.  On May 1, 2006, Fund I merged into VRM I and the members of Fund I received one share of VRM I’s common stock for each membership unit of Fund I.  References in this report to the “Company,” “we,” “us,” or “our” refer to Fund I with respect to the period prior to May 1, 2006 and to VRM I with respect to the period commencing on May 1, 2006.  Because we were a limited liability company (“LLC”) during the prior periods reflected in this report, we make reference to Fund I’s “members” rather than “stockholders” in reporting our financial results.





We invest 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”).  We commenced operations in August 2000.





We operate as a real estate investment trust (“REIT”).  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 are required to have a December 31 fiscal year end.





Vestin Group, Inc. (“Vestin Group”), a Delaware corporation, owns a significant majority of Vestin Mortgage, LLC, a Nevada limited liability company, who is our manager (the “manager” or “Vestin Mortgage”). On January 7, 2011, Vestin Mortgage converted from a corporation to a limited liability company.  Michael Shustek, the CEO and managing member of our manager and CEO, President and a director of us, wholly owns Vestin Group, which is engaged in asset management, real estate lending and other financial services through its subsidiaries.  Our manager, prior to June 30, 2006, also operated as a licensed Nevada mortgage broker and was generally engaged in the business of brokerage, placement and servicing of commercial loans secured by real property.  On July 1, 2006, a mortgage broker license was issued to an affiliated company, Vestin Originations, Inc. (“Vestin Originations”), which Vestin Group owns a significant majority of, that continued the business of brokerage, placement and servicing of real estate loans.  Effective February 14, 2011, the business of brokerage and placement of real estate loans will be performed by affiliated or non-affiliated mortgage brokers, which includes Vestin Originations, the significan majority of which is owned by Michael V. Shustek, and Advant Mortgage, LLC (“Advant”), beneficially wholly owned by Michael V. Shustek, both licensed Nevada mortgage brokers.





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





Vestin Mortgage is also the manager of Vestin Realty Mortgage II, Inc. (“VRM II”), as the successor by merger to Vestin Fund II, LLC (“Fund II”) and Vestin Fund III, LLC (“Fund III”).  These entities were formed to invest in real estate loans.  VRM II 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 us and our wholly owned taxable REIT subsidiary, Vestin TRS I, Inc. (“TRS I”).  All significant inter-company transactions and balances have been eliminated in consolidation.





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


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 Table of Contents





On January 21, 2011, Eric Bullinger was appointed as our new CFO by the Board of Directors, pursuant to the terms of our agreement with Strategix Solutions, who was responsible for designating, subject to the approval of our Board of Directors, a new CFO for the Company.  From May 21, 2010, until January 21, 2011, our current CEO, Michael Shustek, acting as our interim CFO.





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”).  Management has included all normal recurring adjustments considered necessary to give a fair presentation of operating results for the periods presented.  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 2010 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 recognized on impaired loans on the 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.





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





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


-6-
 Table of Contents








Loans that have been modified from their original terms are evaluated to determine if the loan meets the definition of a Troubled Debt Restructuring (“TDR”) as defined by Accounting Standards Codification ("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 as a charge-off or a reduction to the allowance for loan losses.  Generally, subsequent recoveries of amounts previously charged off are added back to the allowance and included as income.





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





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





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





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





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





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





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





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.  It is not our intent to invest in or to own real estate as a long-term investment.  We seek to sell properties acquired through foreclosure as quickly as circumstances permit, taking into account current economic conditions.  The carrying values of REO are assessed on a regular basis from updated appraisals, comparable sales values or purchase offers.





Management classifies REO when the following criteria are met:





·
Management commits to a plan to sell the properties;





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





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





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·
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.





Classification of Operating Results from Real Estate Held for Sale





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





Secured Borrowings





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





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





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





Investment in Marketable Securities – Related Party





Investment in marketable securities – related party consists of stock in VRM II.  The securities are stated at fair value as determined by the closing market price as of March 31, 2011 and December 31, 2010.  All securities are classified as available-for-sale.





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





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





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





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





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





-8-
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Fair Value Disclosures





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





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





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





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





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





Basic and Diluted Earnings Per Common Share





Basic earnings per share (“EPS”) is computed by dividing net income available to common stockholders by the weighted average number of common shares outstanding.  Diluted EPS is similar to basic EPS except that the weighted average number of common shares outstanding is increased to include the number of additional common shares that would have been outstanding if the dilutive potential common shares had been exercised.  We had no outstanding common share equivalents during the three months ended March 31, 2011 and 2010.





Common Stock Dividends





During the year ended December 31, 2008, we declared cash dividends of approximately $0.16 per common share.  For tax purposes, approximately $0.02 per common share is classified as ordinary dividends and the balance of approximately $0.14 per common share is classified as non-dividend distributions.





During June 2008, our Board of Directors decided to suspend the payment of dividends.  We will continue to comply with the REIT requirements and will distribute at least ninety percent (90%) of our accumulated REIT taxable income.  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 February 21, 2008, our Board of Directors authorized the repurchase of up to $5 million worth of our common stock.  Depending upon market conditions, shares may be repurchased from time to time at prevailing market prices through open market or privately negotiated transactions.  We are not obligated to purchase any shares.  Subject to applicable securities laws, including SEC Rule 10b-18, repurchases may be made at such times and in such amounts, as our management deems appropriate.  The share repurchase program may be discontinued or terminated at any time, and we have not established a date for completion of the share repurchase program.  The repurchases will be funded from our available cash.  As of March 31, 2011, we had purchased 417,107 shares of treasury stock through the repurchase program noted above.  These shares are carried on our books at a cost totaling $0.9 million.  In addition, as part of a settlement agreement, we repurchased 38,500 shares of stock during January 2009, and classified them as treasury stock and incurred $107,000 in settlement expenses.  These shares are carried on our books at cost totaling $59,000 and are not part of the repurchase program.  As of March 31, 2011 and December 31, 2010, we had a total of 455,607 shares of treasury stock carried on our books at cost totaling $0.9 million.


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 Table of Contents





Segments





We operate as one business segment.





Principles of Consolidation





The accompanying consolidated financial statements include, on a consolidated basis, our accounts, and the accounts of our wholly owned subsidiary.  All significant intercompany balances and transactions have been eliminated in consolidation.





Income Taxes





We are organized and conduct our operations to qualify as a REIT under Sections 856 to 860 of the Internal Revenue Code of 1986, as amended (the “Code”) and to comply with the provisions of the Internal Revenue Code with respect thereto.  A REIT is generally not subject to federal income tax on that portion of its REIT taxable income (“Taxable Income”) which is distributed to its stockholders, provided that at least 90% of Taxable Income is distributed and provided that certain other requirements are met.  Our Taxable Income may substantially exceed or be less than our net income as determined based on GAAP because differences in GAAP and taxable net income consist primarily of allowances for loan losses or doubtful accounts, write-downs on REO, amortization of deferred financing cost, capital gains and losses, and deferred income.  Certain assets of ours are held in a taxable REIT subsidiary (“TRS”).  The income of a TRS is subject to federal and state income taxes.





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 process, based on the technical merits.  Based on our evaluation, we have concluded that there are no significant uncertain tax positions requiring recognition on our financial statements.  The net income tax provisions for the three months ended March 31, 2011 and 2010 were approximately zero.





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 value of these instruments approximates their fair values due to their short-term nature.  Marketable securities – related party and investment in real estate loans are further described in Note K – 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 March 31, 2011 and December 31, 2010, we had approximately $0.3 million and $6.6 million, respectively, in excess of the federally-insured limits.





As of March 31, 2011, 38%, 35%, 5% and 15% of our loans were in Oregon, Nevada, California and Arizona, respectively, compared to 36%, 33%, 12% and 11%, at December 31, 2010, respectively.  As a result of this geographical concentration of our real estate loans, the downturn in the local real estate markets in these states has had a material adverse effect on us.





At March 31, 2011, the aggregate amount of loans to our three largest borrowers represented approximately 57% of our total investment in real estate loans.  These real estate loans consisted of commercial loans, located in Oregon, Arizona and Nevada, with first lien positions in Oregon and Nevada and a second lien position in Arizona.  The interest rates on these loans ranged from 10% to 15%, and had an aggregate outstanding balance due to us of approximately $6.6 million.  As of March 31, 2011, the loans in Oregon and Arizona were considered non-performing, see “Non-Performing Loans” in Note D – Investments in Real Estate Loans.At December 31, 2010, the aggregate amount of loans to our three largest borrowers represented approximately 58% of our total investment in real estate loans.  These real estate loans consisted of commercial loans, located in Oregon, Arizona and California with one at first lien position and two at second lien position, interest rates between 12% and 15%, and an aggregate outstanding balance of approximately $7.2 million.  As of December 31, 2010, all of our largest loans were considered non-performing, see “Non-Performing Loans in Note D –Investments in Real Estate Loans.





We have a significant concentration of credit risk with our largest borrowers.  During the three months ended March 31, 2011, two of our performing loans totaling approximately $4.8 million, of which our portion was approximately $1.8 million, accounted for approximately 42% of our interest income.  During the year ended December 31, 2010, two of our performing loans totaling approximately $20.9 million, of which our portion was approximately $3.3 million, accounted for approximately 76% of our interest income.  During June 2010 and September 2010, these loans were paid in full.  Any additional defaults in our loan portfolio will have a material adverse effect on us.


-10-
 Table of Contents





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





Common Guarantors





As of March 31, 2011 and December 31, 2010, two loans totaling approximately $2.2 million, representing approximately 18.8% and 17.9%, respectively, of our portfolio’s total value, had a common guarantor.  As of March  31, 2011 and December 31, 2010, both loans were fully reserved and both were non-performing loans.





As of March 31, 2011 and December 31, 2010, two loans totaling approximately $5.0 million and $6.0 million, respectively, representing approximately 42.5% and 48.4%, respectively, of our portfolio’s total value, had a common guarantor.  As of March 31, 2011 and December 31, 2010, we recognized an allowance for loan loss on these loans totaling $2.3 million for each period.  These loans are considered non-performing at March 31, 2011; however, as of May 16, 2011, one of the loans was considered performing following compliance with adjusted terms pursuant to a troubled debt restructuring.  For additional information regarding this troubled debt restructuring, see “Troubled Debt Restructuring” in Note D – Investments in Real Estate Loans.





As of March 31, 2011 and December 31, 2010, two and two loans totaling approximately $1.5 million and $1.1 million, respectively, representing approximately 12.7% and 9.1%, respectively, of our portfolio’s total value, had a common guarantor.  These loans are considered performing.





For additional information regarding the above non-performing loans, see “Non-Performing Loans” in Note D –Investments In Real Estate Loans .





NOTE D — INVESTMENTS IN REAL ESTATE LOANS





As of March 31, 2011 and December 31, 2010, most of our loans provided for interest only payments with a “balloon” payment of principal payable and any accrued interest payable in full at the end of the term.





In addition, we may invest in real estate loans that require borrowers to maintain interest reserves funded from the principal amount of the loan for a period of time.  At March 31, 2011 and December 31, 2010, we had one and no investments in real estate loans, respectively, that had interest reserves.





Loan Portfolio





As of March 31, 2011, 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 0% to 15%.  As a result, of troubled debt restructuring, the total interest on one performing loan is being fully accrued and is payable at maturity.  Revenue by product will fluctuate based upon relative balances during the period.





During the second quarter ended June 30, 2010, the Trustee in a Bankruptcy case, involving one of our non-performing commercial loans in California, sold the assets of the Borrower to an unrelated third party for an aggregate amount of $4.1 million.  The proceeds, net of all court costs, closing costs, trustee’s fees, real estate taxes and security guard services, totaled approximately $3.4 million.  An unaffiliated lender was successful in claiming an interest in the proceeds of the bankruptcy sale, purportedly based on loans of approximately $0.9 million, secured by some of the equipment located at the property.  A motion to determine the allocation of the sale proceeds was filed with the Bankruptcy Court.  In the interim, a settlement was reached with the unaffiliated lender wherein we, VRM II and VF III will receive approximately $2.7 million, of which our portion equals approximately $0.5 million.  On May 10, 2011, the funds were received.  For additional information regarding the consummation of this settlement, refer to Note R – Subsequent Events.





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 Table of Contents





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





Loan Type

Number of Loans


Balance *


Weighted Average Interest Rate


Portfolio Percentage


Current Weighted Average Loan-To-Value, Net of Allowance for Loan LossesCommercial


10



11,433,000



10.56
%


97.78
%


88.74
%Construction


1



166,000



8.00
%


1.42
%


92.00
%Land


1



94,000



6.00
%


0.80
%


46.12
%Total


12


$
11,693,000



11.15
%


100.00
%


88.20
%





Investments in real estate loans as of December 31, 2010, 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 LossesCommercial


10


$
12,053,000



11.39
%


97.89
%


91.00
%Construction


1



165,000



8.00
%


1.35
%


92.00
%Land


1



94,000



6.00
%


0.76
%


46.12
%Total


12


$
12,312,000



11.30
%


100.00
%


90.37
%





*
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 March 31, 2011 and December 31, 2010, was 7.52% and 8.35%, respectively.  Please see “Non-Performing Loans” and “Asset Quality and Loan Reserves” below for further information regarding performing and non-performing loans.





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 March 31, 2011 and December 31, 2010:





Loan Type

Number of Loans


March 31, 2011 Balance *


Portfolio

Percentage


Number of Loans


December 31, 2010 Balance *


Portfolio

PercentageFirst deeds of trust


5


$
6,183,000



52.88
%


5


$
5,816,000



47.24
%Second deeds of trust


7



5,510,000



47.12
%


7



6,496,000



52.76
%Total


12


$
11,693,000



100.00
%


12


$
12,312,000



100.00
%





*
Please see Balance Sheet Reconciliation below.











Non-performing and past due loans (a)

$
7,170,000April 2011 – June 2011 (b)


260,000July 2011 – September 2011


742,000October 2011 – December 2011


1,936,000January 2012 – March 2012


490,000April 2012 – June 2012


--Thereafter


1,095,000Total

$
11,693,000





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 Table of Contents





(a)
Amounts include the balance of non-performing loans and loans that have been extended subsequent to March 31, 2011.





(b)
Some of these loans have been or are in the process of being extended subsequent to May 16, 2011.





The following is a schedule by geographic location of investments in real estate loans as of March 31, 2011 and December 31, 2010:





March 31, 2011 Balance *


Portfolio Percentage


December 31, 2010 Balance *


Portfolio PercentageArizona

$
1,690,000



14.45
%

$
1,323,000



10.74
%California


537,000



4.59
%


1,523,000



12.37
%Nevada


4,096,000



35.03
%


4,096,000



33.27
%Oregon


4,434,000



37.93
%


4,434,000



36.02
%Texas


936,000



8.00
%


936,000



7.60
%Total

$
11,693,000



100.00
%

$
12,312,000



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.





March 31, 2011 Balance


December 31, 2010 BalanceBalance per loan portfolio

$
11,693,000


$
12,312,000Less:Allowance for loan losses (a)


(4,921,000
)


(5,780,000
)Balance per consolidated balance sheets

$
6,772,000


$
6,532,000





(a)
Please refer to Specific Reserve Allowance below.





Non-Performing Loans





As of March 31, 2011, we had four loans considered non-performing (i.e., based on current information and events, it is probable that we will be unable to collect all amounts due according to the contractual terms of the loan agreement or when the payment of interest is 90 days past due).  These loans are currently carried on our books at a value of approximately $3.7 million, net of allowance for loan losses of approximately $3.5 million, which does not include the allowances of approximately $1.4 million relating to performing loans as of March 31, 2011.  Except as otherwise provided below, these loans have been placed on non-accrual of interest status and may be the subject of pending foreclosure proceedings.  At March 31, 2011, the following loan types were non-performing:





Loan Type

Number Of Non-Performing Loans


Balance at

March 31, 2011


Allowance for Loan Losses


Net Balance at

March 31, 2011Commercial


4


$
7,171,000


$
(3,486,000
)

$
3,685,000Total


4


$
7,171,000


$
(3,486,000
)

$
3,685,000





·           Commercial – As of March 31, 2011, four of our 10 commercial loans were considered non-performing.  The outstanding balance on the four non-performing loans was approximately $28.0 million, of which our portion is approximately $7.2 million.  As of March 31, 2011, these loans have been non-performing from 19 months to 34 months.  Our manager has commenced foreclosure proceedings on three of these loans, and has proceeded with legal action to enforce the personal guarantees if necessary.  As of March 31, 2011, based on our manager’s evaluations and updated appraisals, our manager has provided a specific allowance to these commercial loans of approximately $20.6 million, of which our portion is approximately $3.5 million.





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 Table of Contents





At December 31, 2010, the following loans were non-performing:





Loan Type

Number Of Non-Performing Loans


Balance at

December 31, 2011


Allowance for Loan Losses


Net Balance at

December 31, 2011Commercial


4


$
8,157,000


$
(4,472,000
)

$
3,685,000Total


4


$
8,157,000


$
(4,472,000
)

$
3,685,000





·           Commercial – As of December 31, 2010, four of our 10 commercial loans were considered non-performing.  The outstanding balance on the four non-performing loans was approximately $28.0 million, of which our portion is approximately $8.2 million.  As of December 31, 2010, these loans have been non-performing from 16 months to 31 months.  Our manager has commenced foreclosure proceedings on three of these loans, and has proceeded with legal action to enforce the personal guarantees if necessary.  As of December 31, 2010, based on our manager’s evaluations and updated appraisals, our manager has provided a specific allowance to these commercial loans of approximately $23.0 million, of which our portion is approximately $4.5 million.





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 51%.  The following is a breakdown of allowance for loan losses related to performing loans and non-performing loans as of March 31, 2011 and December 31, 2010:





As of March 31, 2011Balance


Allowance for loan losses *


Balance, net of allowanceNon-performing loans – no related allowance

$
--


$
--


$
--Non-performing loans – related allowance


7,171,000



(3,486,000
)


3,685,000Subtotal non-performing loans


7,171,000



(3,486,000
)


3,685,000Performing loans – no related allowance


1,584,000



--



1,584,000Performing loans – related allowance


2,938,000



(1,435,000
)


1,503,000Subtotal performing loans


4,522,000



(1,435,000
)


3,087,000Total

$
11,693,000


$
(4,921,000
)

$
6,772,000





-14-
 Table of Contents





As of December 31, 2010Balance


Allowance for loan losses*


Balance, net of allowanceNon-performing loans – no related allowance

$
--


$
--


$
--Non-performing loans – related allowance


8,157,000



(4,472,000
)


3,685,000Subtotal non-performing loans


8,157,000



(4,472,000
)


3,685,000Performing loans – no related allowance


1,967,000



--



1,967,000Performing loans – related allowance


2,188,000



(1,308,000
)


880,000Subtotal performing loans


4,155,000



(1,308,000
)


2,847,000Total

$
12,312,000


$
(5,780,000
)

$
6,532,000





*
Please refer to Specific Reserve Allowancesbelow.





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 March 31, 2011, we have provided a specific reserve allowance for four non-performing loans and five performing loans based on updated appraisals of the underlying collateral and/or our evaluation of the borrower.  The following table is a roll-forward of the allowance for loan losses for the three months ended March 31, 2011 and 2010 by loan type.





Loan Type

Balance at

12/31/2010


Specific Reserve Allocation


Sales


Settlements


Transfers to REO


Balance at

3/31/11Commercial

$
5,708,000


$
127,000--


$
--


$
(986,000
)

$
--


$
4,849,000Construction


72,000



--



--



--



--



72,000Total

$
5,780,000


$
127,000--


$
--


$
(986,000
)

$
--


$
4,921,000





Loan Type

Balance at

12/31/2009


Specific Reserve Allocation


Sales


Loan Pay Downs


Transfers to REO


Balance at

3/31/10Commercial

$
12,395,000


$
--


$
--


$
--


$
--


$
12,395,000Construction


161,000



--



--



--



--



161,000Total

$
12,556,000


$
--


$
--


$
--


$
--


$
12,556,000








·
Commercial – As of March 31, 2011, eight of our 10 commercial loans had a specific reserve allowance totaling approximately $26.3 million, of which our portion is approximately $4.8 million.  The outstanding balance on these eight loans was approximately $44.5 million, of which our portion was approximately $9.9 million.





·
Construction – As of March 31, 2011, our one construction loan had a specific reserve allowance totaling approximately $3.2 million, of which our portion was approximately $72,000.  The outstanding balance on this loan was approximately $7.2 million, of which our portion was approximately $0.2 million.




Troubled Debt Restructuring





As of March 31, 2011 and December 31, 2010 we had six and four loans, respectively, totaling approximately $4.1 million and $2.8 million, respectively, that met the definition of a Troubled Debt Restructuring or TDR.  When the Company modifies the terms of an existing loan that is considered TDR, it is considered performing as long as it is in compliance with the modified terms of the loan agreement.  If the modification calls for deferred interest, it is recorded as interest income as cash is collected.  Impairment on these loans is generally determined by the lesser of the value of the underlying collateral or the present value of expected future cash flows.  The following is a breakdown of our TDR loans that were considered performing and non-performing as of March 31, 2011 and December 31, 2010:


-15-
 Table of Contents





As of March 31, 2011Total


Performing


Non-PerformingLoan Type

Number of Loans


Fund Balance


Number of Loans


Fund Balance


Number of Loans


Fund BalanceCommercial


5


$
3,965,000



3


$
2,428,000



2


$
1,537,000Construction


1



165,000



1



165,000



--



--Total


6


$
4,130,000



4


$
2,593,000



2


$
1,537,000








As of December 31, 2010Total


Performing


Non-PerformingLoan Type

Number of Loans


Fund Balance


Number of Loans


Fund Balance


Number of Loans


Fund BalanceCommercial


3


$
2,679,000



2


$
1,679,000



1


$
1,000,000Construction


1



165,000



1



165,000



--



--Total


4


$
2,844,000



3


$
1,844,000



1


$
1,000,000





·
Commercial – As of March 31, 2011 and December 31, 2010, we had 10 commercial loans; five and three of them, respectively, were modified pursuant to TDR.  As of March 31, 2011 and December 31, 2010, five and three, respectively, of the loans were secured by second deeds of trust, and three and two, respectively, of the four and three loans, respectively, were considered performing prior to their restructuring.  The three performing loans had their interest rates reduced.  One loan’s interest rate was reduced from 15% payable monthly to 8% accrued and payable at maturity, which was extended from April 30, 2010 to December 31, 2011.  As a result of this reduction in interest rate, we recorded an impairment of $150,000, as an allowance for loan loss, based on the reduction of the present value of future cash flows.  The second loan had its maturity date extended to September 16, 2011 and had its interest rate reduced from 10.5% to 3.0%.  This loan was considered performing prior to its restructuring.  The third loan had its maturity date extended to December 31, 2015 and had its interest rate reduced from 15% to 10%.  As a result of this reduction in interest rate, we recorded an impairment of $127,000, as an allowance for loan loss, based on the reduction of the present value of future cash flows.  As of May 16, 2011, the three performing loans continue to perform as required by the loan modification.  One of the non-performing loans had its maturity date extended from September 30, 2009 to December 17, 2009, and then extended again to March 17, 2010 and June 17, 2010, to postpone our foreclosure of the property to determine our exposure in relation to the first trust deed.  As of May 16, 2011, this loan remains non-performing.  The principal amount of the other non-performing loan was reduced by approximately $1.0 million as of January 1, 2011.  Interest only payments are due monthly until August 2011 at which point payments of interest and  principal will start.  While this loan was considered non-performing as of March 31, 2011, as of May 16, 2011 it is considered performing.





·
Construction – As of March 31, 2011 and December 31, 2010, we had one construction loan modified pursuant to TDR.  As of May 16, 2011, the loan continues to perform as required by the loan modifications.  For further information regarding allowance for loan losses, refer to Note I – Notes Receivableof the Notes to the Consolidated Financial Statements included in Part I, Item I Consolidated Financial Statements of this Quarterly Report on Form 10-Q.





Extensions





As of March 31, 2011, our manager had granted extensions on seven loans, totaling approximately $31.2 million, of which our portion was approximately $4.2 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.  Our manager extended one performing loan and one non-performing loan during the three months ended March 31, 2011 to postpone our foreclosure of the properties.  These loans are considered performing as of May 16, 2011.





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 Table of Contents





NOTE E — INVESTMENT IN MARKETABLE SECURITIES – RELATED PARTY





As of March 31, 2011 and December 31, 2010, we owned 225,134 shares of VRM II’s common stock, representing approximately 1.71% of their total outstanding common stock.  The closing price of VRM II’s common stock on March 31, 2011, was $1.56 per share, resulting in an unrealized gain for the three months ended March 31, 2011.





During the three months ended March 31, 2011, the trading price for VRM II’s common stock ranged from $1.40 to $1.74 per share.  We will continue to evaluate our investment in marketable securities on a quarterly basis.





NOTE F — REAL ESTATE HELD FOR SALE





At March 31, 2011, we held six properties with a total carrying value of approximately $2.9 million, which were acquired through foreclosure and recorded as investments in real estate held for sale (“REO”).  As of March 31, 2011, one of the properties has been fully impaired, and we have stopped accruing taxes on that property.  Expenses incurred during the three months ended March 31, 2011 and 2010, related to our REO totaled approximately $81,000 and $33,000.  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.  It is not our intent to invest in or to own real estate as a long-term investment.  We seek to sell properties acquired through foreclosure as quickly as circumstances permit taking into account current economic conditions.  Set forth below is a roll-forward of REO during the three months ended March 31, 2011:





Description

Balance at

12/31/2010


Acquisitions Through Foreclosure


Write Downs


Additions / (Cash Reductions)


Seller Financed Loan


Net Cash Proceeds on Sales


Net Gain (Loss) on Sale of Real Estate


Balance at

03/31/2011Land

$
2,897,000


$
--


$
--


$
--


$
--


$
--


$
--


$
2,897,000Total

$
2,897,000


$
--


$
--


$
--


$
--


$
--


$
--


$
2,897,000





As of March 31, 2011, we held five REO properties, classified as Land, totaling approximately $2.9 million.  These properties were acquired between December 2006 and December 2010 and consist of commercial land and residential land.  During the three months ended March 31, 2011, our manager continually evaluated the carrying value of these properties and based on its estimates and updated appraisals, no write-downs were deemed necessary.  Our manager is currently working with prospective buyers to sell these properties; however, no assurance can be given that these sales will take place.





·
Commercial Land –As of March 31, 2011, we held two properties, classified as commercial land REO, located in Nevada totaling approximately $1.0 million. During the three months ended March 31, 2011, our manager continually evaluated the carrying value of our commercial land REO and based on its estimates and updated appraisals, no write-downs were deemed necessary.





·
Residential Land – As of March 31, 2011, we held three properties, classified as residential land REO, located in Arizona and California totaling approximately $1.9 million. During the three months ended March 31, 2011, our manager continually evaluated the carrying value of our residential land REO and based on its estimates and updated appraisals, no write-downs were deemed necessary.  As of March 31, 2011, one of the properties has been fully impaired and the accrual of property taxes has been discontinued.  The accrued and unaccrued property taxes due would only be satisfied through a sale to a buyer of the property or forfeiture of the property to the local county which is owed the property taxes.




NOTE G – INVESTMENTS IN EQUITY METHOD INVESTEE HELD FOR SALE





As discussed in Note N – Legal Matters Involving the Company, during July 2010, we, VRM II and Vestin Mortgage acquired through foreclosure the RightStar property, which includes 4 cemeteries and 8 mortuaries in Hawaii.  Subsequent to our foreclosure of this property, we and VRM II acquired our manager’s interest in this property for $500,000, of which our portion was $175,000.  Our manager recorded no gain or loss as a result of this transaction.   At the time of foreclosure, the RightStar assets of approximately $14.1 million, of which our portion was approximately $5.3 million, were moved into Hawaii Funeral Services, LLC (“HFS”) of which we hold an interest of approximately 38% and VRM II holds an interest of approximately 62%.





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We account for investments using the equity method of accounting if the investments give us the ability to exercise significant influence, but not control, over the investees. Significant influence is generally deemed to exist if we have an ownership interest in the voting stock of an incorporated investee of between 20% and 50%, although other factors, such as representation on an investee’s board of managers, specific voting and veto rights held by each investor and the effects of commercial arrangements, are considered in determining whether equity method accounting is appropriate. We record our respective interests in the losses or income of such investees within the equity-method investees held for sale category on our statements of operations for each period. The carrying amount of our equity-method investments held for sale is recorded on our consolidated balance sheets as investments in equity-method investees held for sale.





We evaluate our investments in the equity-method investees for impairment each quarter by comparing the carrying amount of each investment to its fair value. Because no active market exists for the investees’ limited liability company membership interests, we evaluate our investments in the equity-method investees for impairment based on our evaluation of the fair value of the equity-method investees’ net assets relative to their carrying values. If we ever were to determine that the carrying values of our investments in equity-method investees were greater than their fair values, we would write the investments down to their fair values.





The financial statements of HFS also include the accounts of the funeral merchandise and service trusts, cemetery merchandise and service trusts, and cemetery perpetual care trusts (“Trusts”) in which they have a variable interest and are the primary beneficiary. Intercompany balances and transactions have been eliminated in consolidation with HFS.





The Trusts are variable interest entities as defined in Accounting Standards Codification Topic 810-10.  In accordance with this guidance, HFS has determined that they are the primary beneficiary of these trusts, as they absorb a majority of the losses and returns associated with these trusts. They consolidate the Trust investments with a corresponding amount recorded as Trusts’ corpus.








For the three months endedMarch 31, 2011


March 31, 2010Net sales

$
3,321,000


$
--Cost of goods sold

$
492,000


$
--Gross profit

$
2,829,000


$
--Net income

$
286,000


$
--Net income attributable to us

$
109,000


$
--





On May 9, 2007, we, VRM II, Vestin Mortgage, the State of Hawaii and Comerica Incorporated (“Comerica”) announced that an arrangement had been reached to auction the RightStar assets.  The auction was not successful.  On June 12, 2007, the court approved the resolution agreement, which provides that the proceeds of the foreclosure sale would be allocated in part to VRM II, Vestin Mortgage and us and in part to fund the trust’s statutory minimum balances.  We, VRM II, Vestin Mortgage, the State of Hawaii and Comerica have pledged to cooperate to recover additional amounts owed to the trusts and the creditors from others. Should the recovery meet or exceed $9 million, all parties have agreed that no further litigation between the state of Hawaii and Vestin will be reinstituted related to the trust’s statutory minimum balances.  The Vestin entities and the State of Hawaii signed a new agreement that would permit the foreclosure to proceed.  On October 12, 2009, the State Court approved the agreement permitting the foreclosure to proceed.  On January 25, 2010, the Circuit Court for the First Circuit for the State of Hawaii confirmed the right of us, VRM II and Vestin Mortgage, to acquire through foreclosure the RightStar assets.  On July 13, 2010, we and VRM II completed our foreclosure of these properties.





An alleged trust deficiency ranging from $24.4 million to $32.7 million was created prior to our acquiring the RightStar properties through foreclosure. Under state law, such deficiencies are generally required to be funded. However, due to the agreement with the state of Hawaii and certain actuarial information obtained from third parties, no accrual has been recorded as of March 31, 2011.





NOTE H — RELATED PARTY TRANSACTIONS





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





Transactions with the Manager





Our manager is entitled to receive from us an annual management fee of up to 0.25% of our aggregate capital contributions received by us and Fund I from the sale of shares or membership units, paid monthly.  The amount of management fees paid to our manager for the three months ended March 31, 2011 and 2010 was $69,000 for each period.


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As of March 31, 2011 and December 31, 2010, our manager owned 100,000 of our common shares, representing approximately 1.56% of our total outstanding common stock.





As of March 31, 2011 and December 31, 2010, we did not owe or have any receivables from our manager.





Transactions with Other Related Parties





As of March 31, 2011 and December 31, 2010, we owned 225,134 common shares of VRM II, representing approximately 1.71% of their total outstanding common stock.  For the three months ended March 31, 2011 and 2010, we recognized $0 in dividend income from VRM II based on the number of shares we held on the dividend record dates.





As of March 31, 2011 and December 31, 2010, VRM II owned 533,675 of our common shares, representing approximately 8.35% of our total outstanding common stock.  For the three months ended March 31, 2011 and 2010, we declared $0 in dividends payable to VRM II based on the number of shares VRM II held on the dividend record dates.





As of March 31, 2011, we owed VRM II approximately $0.2 million, primarily related to legal fees.  As of December 31, 2010, we owed VRM II $0.7 million, primarily related to legal fees.





As of March 31, 2011, we had receivables from Fund III of $6,000.  As of December 31, 2010, we had receivables from Fund III of $2,000.





During the three months ended March 31, 2011 and 2010, we incurred $41,000, and $32,000, respectively, for legal fees to the law firm of Levine, Garfinkel & Katz in which the acting Secretary of Vestin Group has an equity ownership interest.





During the three months ended March 31, 2011, SCORP, Inc., dba Diligent Consulting and Analysis, an entity wholly owned by Daniel B. Stubbs, the former Vice President of Vestin Group, received a consulting fee of approximately $40,000. Our pro-rata share of these fees totaled approximately $10,000.





NOTE I — NOTES RECEIVABLE





During December 2006, we and VRM II entered into a settlement agreement in the amount of $1.5 million with the guarantors of a loan collateralized by a 126 unit (207 bed) assisted living facility in Phoenix, AZ, which we had foreclosed on.  Our portion was approximately $137,000.  The promissory note is payable in seven annual installments of $100,000 with an accruing interest rate of 7%, with the remaining note balance due in April 2013.  As of March 31, 2011, we had received $20,000 in principal payments.  Payments will be recognized as income when received.  The balance of approximately $117,000 was fully reserved as of March 31, 2011.





During December 2009, we and VRM II entered into a promissory note with the borrowers of a land loan, totaling approximately $6.1 million, of which our portion is approximately $0.5 million, as part of the sale of the land collateralizing the loan.  In addition, we and VRM II received a principal pay off of $2.0 million, of which our portion was approximately $0.2 million, on the land loan.  The remaining balance of approximately $1.2 million, of which our portion is approximately $0.1 million, was refinanced as a loan to the new owners of property.  The promissory note is for a 60-month period, with an interest rate of 6.0%, with the first monthly payment due on December 10, 2014.  Payments will be recognized as income when they are received.  The balance of approximately $0.5 million was fully reserved as of March 31, 2011.





As of November 30, 2010, we had five loans totaling approximately $19.0 million, of which our portion is approximately $1.1 million, before allowances totaling approximately $4.2 million, of which our portion is approximately $0.2 million, and were guaranteed by common guarantors. 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, 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 who 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 will execute a promissory note to pay us the deficiency, which shall 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 $0.5 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.





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NOTE J — NOTES PAYABLE





On December 3, 2010, we and VRM II mortgaged a mixed-use land held for sale property for $1.6 million, of which our portion was approximately $0.3 million.  The note has an interest rate of 9%, payable monthly and a maturity date of December 2, 2011.





NOTE K — FAIR VALUE





As of March 31, 2011, 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.





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 as of March 31, 2011, measured at fair value on a recurring basis by input levels:





Fair Value Measurements at Reporting Date UsingQuoted Prices in Active Markets For Identical Assets (Level 1)


Significant Other Observable Inputs (Level 2)


Significant Unobservable Inputs (Level 3)


Balance at 03/31/11


Carrying Value on Balance Sheet at 03/31/11AssetsInvestment in marketable securities - related party

$
351,000


$
--


$
--


$
351,000


$
351,000Investment in real estate loans

$
--


$
--


$
7,102,000


$
7,102,000


$
6,772,000





Fair Value Measurements at Reporting Date UsingQuoted Prices in Active Markets For Identical Assets (Level 1)


Significant Other Observable Inputs (Level 2)


Significant Unobservable Inputs (Level 3)


Balance at 12/31/2010


Carrying Value on Balance Sheet at 12/31/2010AssetsInvestment in marketable securities - related party

$
326,000


$
--


$
--


$
326,000


$
326,000Investment in real estate loans

$
--


$
--


$
6,660,000


$
6,660,000


$
6,532,000
  The following table presents the changes in our financial assets and liabilities that are measured at fair value on a recurring basis using significant unobservable inputs (Level 3) from January 1, 2011 to March 31, 2011.  There were no liabilities measured at fair value on a recurring basis using significant unobservable inputs as of January 1, 2011 to March 31, 2011.


Investment in real estate loansBalance on January 1, 2011

$
6,660,000Change in temporary valuation adjustment included in net income (loss)Increase in allowance for loan losses


(127,000
)Purchase and additions of assetsNew mortgage loans and mortgage loans bought


490,000Reduction of allowance for loan losses relative to settlement of investment in real estate loan


986,000Sales, pay downs and reduction of assetsCollections of principal and settlements of investment in real estate loans


(1,109,000
)Temporary change in estimated fair value based on future cash flows


202,000Transfer to Level 1


--Transfer to Level 2


--Balance on March 31, 2011, net of temporary valuation adjustment

$
7,102,000


Investment in real estate loansBalance on January 1, 2010

$
19,605,000Sales, pay downs and reduction of assetsCollections of principal and sales of investment in real estate loans


(32,000
)Temporary change in estimated fair value based on future cash flows


18,000Transfer to Level 1


--Transfer to Level 2


--Balance on March 31, 2010, net of temporary valuation adjustment

$
19,591,000


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NOTE L — RECENT ACCOUNTING PRONOUNCEMENTS




NONE





NOTE M — 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 II, 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 Fund II, the predecessor to VRM II.  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.





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





On November 21, 2005, Desert Land filed a complaint in the state District Court of Nevada against Vestin Group, Vestin Mortgage and Del Mar Mortgage, Inc. which complaint is substantially similar to a complaint previously filed by Desert Land in the United States District Court, which complaint was dismissed by the United States Court of Appeals for the Ninth Circuit, which dismissal was upheld when the United States Supreme Court denied Desert Land’s Writ of Certiorari.  The action is based upon allegations that Del Mar Mortgage, Inc. and/or Vestin Mortgage charged unlawful fees on various loans arranged by them in 1999, prior to the formation of Fund II.  On March 6, 2006, Desert Land amended the state court complaint to name us.  Desert Land alleges that one or more of the defendants have transferred assets to other entities without receiving reasonable value therefore; alleges plaintiffs are informed and believe that defendants have made such transfers with the actual intent to hinder, delay or defraud Desert Land; that such transfers made the transferor insolvent and that sometime between February 27 and April 1, 2003, Vestin Group transferred $1.6 million to us for that purpose.





The state court complaint further alleged that Desert Land was entitled to void such transfers and that pursuant to NRS 112.20, Desert Land is entitled to an injunction to enjoin defendants from further disposition of assets.  Additionally, Del Mar Mortgage, Inc. has indemnified Vestin Group and Vestin Mortgage for any losses and expenses in connection with the action, and Mr. Shustek has guaranteed the indemnification.  In December 2008, this lawsuit was settled.  The settlement had no effect on us.





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





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


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





NOTE N — LEGAL MATTERS INVOLVING THE COMPANY





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





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





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





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





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





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NOTE O — DIVIDEND REQUIREMENT





To maintain our status as a REIT, we are required to declare dividends, other than capital gain dividends, to our stockholders each year in an amount at least equal to (1) the sum of (a) 90% of our taxable income, computed without regards to the dividends paid deduction and our net capital gain, and (b) 90% of the net income, after tax, from foreclosure property, minus (2) the sum of certain specified items of non-cash income over 5% of our REIT taxable income.  All dividends will be made at the discretion of our Board of Directors and will depend on our earnings, both tax and GAAP, financial condition, maintenance of REIT status and such other factors as the Board of Directors deems relevant.





Our Board of Directors decided to suspend the payment of dividends during June 2008.  We will continue to comply with the REIT requirements and will distribute at least ninety percent (90%) of our REIT taxable income.  Our Board of Directors will closely monitor our operating results in order to determine when dividends should be reinstated; however, we do not anticipate paying dividends in the foreseeable future.




NOTE P — SUBSEQUENT EVENTS





On May 10, 2011, we received funds pursuant to the consummation of a settlement with an unaffiliated lender wherein we, VRM II and Fund III were allocated approximately $2.7 million, of which our portion equals approximately $2.0 million, for proceeds from the bankruptcy sale of assets involving the borrower of one of our non-performing commercial loans in California.












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ITEM2.
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 months ended March 31, 2011 and 2010.  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, 2010.





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 described in Part II Item 1A Risk Factors 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.





Our recent 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.  As of March 31, 2011, we had four loans considered non-performing (i.e., based on current information and events, it is probable that we will be unable to collect all amounts due according to the contractual terms of the loan agreement or when the payment of interest is 90 days past due).  These loans are currently carried on our books at a value of approximately $3.7 million, net of allowance for loan losses of approximately $3.5 million.  These loans have been placed on non-accrual of interest status and may be the subject of pending foreclosure proceedings.





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Non-performing assets, net of allowance for loan losses, totaled approximately $12.0 million or 53% of our total assets as of March 31, 2011, as compared to approximately $12.0 million or 50% of our total assets as of December 31, 2010.  At March 31, 2011, non-performing assets consisted of approximately $2.9 million of real estate held for sale (“REO”), approximately $3.7 million of non-performing loans, net of allowance for loan losses, and investment in an equity method investee held for sale of approximately $5.4 million.  See Note F – Real Estate Held for Sale,Note D – Investments In Real Estate Loans, and Note G –Investments in Equity Method Investee Held for Sale  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 during the past several years.  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 experienced a recovery in 2010, the commercial real estate markets in the areas where we make loans continued to suffer from depressed conditions.  Our exposure to the negative developments in the credit markets and general economy has likely been increased by our business strategy, which entails more lenient underwriting standards and expedited loan approval procedures.  Moreover, declining real estate values in the principal markets in which we operate has in many cases eroded the current value of the security underlying our loans.





The adverse conditions in the commercial real estate markets coupled with our increase in non-performing assets has lead to the reduction of new loans funded by us and the reduction of investments in real estate loans.  During the three months ended March 31, 2011, we funded one loan totaling approximately $0.5 million.  No loans were funded during the three months ended March 31, 2010.


We expect that the weakness in the commercial real estate markets and the weakness in lending will continue to have an adverse impact upon our markets for the foreseeable future.  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.





As of March 31, 2011, our loan-to-value ratio was 88.20%, net of allowances for loan losses, on a weighted average basis, generally using updated appraisals.  Additional significant 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.  The current loan-to-value ratio has been affected by declining real estate values, which have eroded the market value of our collateral.





As of March 31, 2011, we have provided a specific reserve allowance for four non-performing loans and five performing loans based on updated appraisals of the underlying collateral and our evaluation of the borrower for these loans, obtained by our manager.  For further information regarding allowance for loan losses, refer to Note D – Investments in Real Estate Loans of the Notes to the Consolidated Financial Statements included in Part I, Item I Consolidated Financial Statements of this Quarterly Report on Form 10-Q.





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





As of March 31, 2011, our loans were in the following states: Arizona, California, Nevada, Oregon and Texas.





SUMMARY OF FINANCIAL RESULTS





Comparison of Operating Results for the three months ended March 31, 2011, to the three months ended March 31, 2010.





Total Revenues:  For the three months ended March 31, 2011, total revenues were $130,000 compared to $376,000 during the three months ended March 31, 2010, a decrease of $246,000 or 65%.  Revenues were primarily affected by the following factors:





·
Interest income from investments in real estate loans decreased from $322,000 during the three months ended March 31, 2010, to $128,000 during the three months ended March 31, 2011.  This decrease in interest income is mainly due to the decrease in our portfolio of performing real estate loans, which declined from 10 loans totaling approximately $11.0 million as of March 31, 2010, to eight loans totaling approximately $4.5 million as of March 31, 2011.  Our revenue is dependent upon the balance of our performing loans and the interest earned on these loans.  In addition, the weighted average interest rate on our performing loans has decreased from 12.63% as of March 31, 2010 to 7.52% as of March 31, 2011.  This decline is a result of current market conditions in the lending industry, the level of non-performing assets in our portfolio and the reduction of interest rates on outstanding loans through TDR.  For additional information see 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.


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Total Operating Expenses:  For the three months ended March 31, 2011, total operating expenses were $0.5 million compared to approximately $0.6 million during the three months ended March 31, 2010, a decrease of approximately $0.1 million or 16%.  Expenses were primarily affected by the following factors:





·
Professional fees decreased approximately $0.2 million, from approximately $0.4 million during the three months ended March 31, 2010, to approximately $0.2 million during the same period in 2011.  See Note N – 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.





Total Non-Operating Income:  For the three months ended March 31, 2011, total non-operating income was approximately $111,000, compared to none during the three months ended March 31, 2010.  Total non-operating income was primarily affected by the following factors:





·
During the three months ended March 31, 2011, we earned $2,000 in interest income from banking institutions. There were no such earnings during the same period in 2010.  In addition, we earned $109,000 in income from our investment in equity method investee held for sale.  We did not have this investment during the same period in 2010.





Total Loss from Real Estate Held for Sale:  For the three months ended March 31, 2011, total losses from REO were $81,000 compared to approximately $33,000 during the three months ended March 31, 2010, an increase of approximately $48,000 or 145%.  The increase is mainly due to increased operating expenses on REO during the three months ended March 31, 2011, compared to operating expenses during the three months ended March 31, 2010.  For additional information see Note F–Real Estate Held For Sale 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.





Dividends to Stockholders; Reliance on Non-GAAP Financial Measurements:  To maintain our status as a REIT, we are required to declare dividends, other than capital gain dividends, to our stockholders each year in an amount at least equal to (1) the sum of (a) 90% of our taxable income, computed without regard to the dividends paid deduction and our net capital gain, and (b) 90% of the net income, after tax, from foreclosure property, minus (2) the sum of certain specified items of noncash income over 5% of our REIT taxable income, determined without regard to the dividends paid and our net capital gain.  Because we expect to declare dividends based on these requirements, and not based on our earnings computed in accordance with GAAP, we expect that our dividends may at times be more or less than our reported earnings as computed in accordance with GAAP.  During the three months ended March 31, 2011, we did not declare any cash dividends.





Total taxable income and REIT taxable income are non-GAAP financial measurements, and do not purport to be an alternative to reported net income or cash flows from operations determined in accordance with GAAP as a measure of operating performance.  Our total taxable income represents the aggregate amount of taxable income generated by us and our wholly owned taxable REIT subsidiary, TRS I, Inc.  REIT taxable income is calculated under U.S. federal tax laws in a manner that, in certain respects, differs from the calculation of net income pursuant to GAAP.  REIT taxable income excludes the undistributed taxable income of TRS I, Inc., which is not included in REIT taxable income until distributed to us.  Subject to certain TRS value limitations, there is no requirement that the TRS I, Inc. distribute their earnings to us.  Since we are structured as a REIT and the Internal Revenue Code requires that we distribute substantially all of our net taxable income in the form of dividends to our stockholders, we believe that presenting investors with the information management uses to calculate our taxable income is useful to investors in understanding the amount of the minimum dividends that we must declare to our stockholders so as to comply with the rules set forth in the Internal Revenue Code.  Because not all companies have identical calculations, this presentation of total taxable income and REIT taxable income may not be comparable to those reported by other companies.





The table below reconciles the differences between reported net loss and total estimated taxable loss and estimated REIT taxable loss for the three months ended March 31, 2011:





For the

Three Months EndedMarch 31, 2011Net loss, as reported

$
(366,000
)Add (deduct):Provision for loan losses


127,000Settlement of loan pursuant to troubled debt restructuring which was previously fully reserved


(986,000
)Total estimated taxable loss


(1,225,000
)Add : Estimated taxable loss attributable to TRS I, Inc.


--Estimated REIT taxable loss

$
(1,225,000
)





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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 loans.  Distributable cash flow generated from such loans is paid out to our stockholders, in the form of a dividend.  We do not anticipate the need for hiring any employees, acquiring fixed assets such as office equipment or furniture, or incurring material office expenses during the next twelve months.  We may pay our manager an annual management fee of up to 0.25% of our aggregate capital received by us and Fund II from the sale of shares or membership units.





During the three months ended March 31, 2011, net cash flows used in operating activities approximated $1.0 million.  Operating cash flows were adversely impacted by the decrease in interest income of approximately $0.2 million. Cash flows related to investing activities consisted of cash provided by loan payoffs of approximately $0.1 million and distributions from our investment in equity method investee held for sale of $46,000 and cash used for purchases of investments in real estate loans of approximately $0.5 million.  Cash flows from financing activities consisted of cash used in payment of notes payable of $21,000.





During the second quarter ended June 30, 2010, the Trustee in a Bankruptcy case, involving one of our non-performing commercial loans in California, sold the assets of the Borrower to an unrelated third party for an aggregate amount of $4.1 million.  The proceeds, net of all court costs, closing costs, trustee’s fees, real estate taxes and security guard services, totaled approximately $3.4 million.  An unaffiliated lender was successful in claiming an interest in the proceeds of the bankruptcy sale, purportedly based on loans of approximately $0.9 million, secured by some of the equipment located at the property.  A motion to determine the allocation of the sale proceeds was filed with the Bankruptcy Court.  In the interim, a settlement was reached with the unaffiliated lender wherein we,


VRM II and VF III will receive approximately $2.7 million, of which our portion equals approximately $0.5 million and recorded in interest and other receivables at March 31, 2011.  On May 10, 2011, the funds were received.  For additional information regarding the consummation of this settlement, refer to Note P – Subsequent Events.





At March 31, 2011, we had approximately $6.8 million in cash, and approximately $22.9 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 REO and/or borrowings.  We believe we have sufficient working capital to meet our operating needs during the next 12 months.





Since we comply with the REIT requirements and distribute at least ninety percent (90%) of our annual taxable income, our sources of liquidity include: repayments of outstanding loans, dividend reinvestments by our stockholders, arrangements with third parties to participate in our loans and proceeds from issuance of note payable and secured borrowings.  We rely primarily upon repayment of outstanding loans and proceeds from sales of REO to provide capital for investment in new loans.  The significant level of defaults on outstanding loans has reduced the funds we have available for investment in new loans.  Resulting foreclosure proceedings may not generate full repayment of our loans and may result in significant delays in the return of invested funds.  This has diminished our capital resources and impaired our ability to invest in new loans.  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.  We will continue to comply with the REIT requirements and will distribute at least ninety percent (90%) of our REIT taxable income.





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





We are considering various options to enhance the Company’s capital resources.  We have, and may continue to, raise funds through the issuance of promissory notes secured by certain of our real estate owned properties.  However, we do not currently have any arrangements in place to increase our capital resources.





The Board of Directors of the Company has appointed a special committee to enter into negotiations with VRM II regarding a proposed stock for stock merger; however, the stock for stock ratio has not yet been determined.  The compensation that is being paid to the special committee is $17,500, plus $500 per meeting.  In furtherance of the proposed merger, the Company has engaged Milestone Advisors, LLC as its financial advisor and Miles and Stockbridge as counsel to the special committee.  The primary purpose of the proposed merger is the potential cost savings and operating synergies that could be achieved through a combination with VRM II. Any decision with respect to the proposed merger with VRM II will be subject to the approval of the special committee and stockholders of VRM II, as well as the approval of our special committee and stockholders.  There can be no assurance that the proposed merger will be consummated.


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On February 21, 2008, our board of directors authorized the repurchase of up to $5 million worth of our common stock.  Depending upon market conditions, shares may be repurchased from time to time at prevailing market prices through open market or privately negotiated transactions.  We are not obligated to purchase any shares.  Subject to applicable securities laws, including SEC Rule 10b-18, repurchases may be made at such times and in such amounts, as our management deems appropriate.  The share repurchase program may be discontinued or terminated at any time and we have not established a date for completion of the share repurchase program.  The repurchases will be funded from our available cash.  As of March 31, 2011, we had purchased 417,107 shares as treasury stock through the repurchase program noted above.  These shares are carried on our books at cost totaling $0.9 million.  In addition, as part of a settlement agreement, we repurchased 38,500 shares of stock during January 2009, and classified them as treasury stock and incurred $107,000 in settlement expenses.  These shares are carried on our books at cost totaling $59,000 and are not part of the repurchase program.  As of March 31, 2011 and December 31, 2010, we had a total of 455,607 shares as treasury stock carried on our books at cost totaling $0.9 million.





We maintain working capital reserves of approximately 3% in cash and cash equivalents, certificates of deposits and short-term investments or liquid marketable securities.  This reserve is available to pay expenses in excess of revenues, satisfy obligations of underlying properties, expend money to satisfy our unforeseen obligations and for other permitted uses of working capital.  As of May 16, 2011, we have met our 3% reserve requirement.





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.





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 0% to 15%, as a result of troubled debt restructuring whereby, the total interest on one performing loan is being fully accrued and payable at maturity.  Revenue by product will fluctuate based upon relative balances during the period.  As of March 31, 2011 and December 31, 2010, we had investments in 12 real estate loans with a balance of approximately $11.7 million and $12.3 million, respectively.





As of March 31, 2011, we had four loans considered non-performing (i.e., based on current information and events, it is probable that we will be unable to collect all amounts due according to the contractual terms of the loan agreement or when the payment of interest is 90 days past due).  These loans are currently carried on our books at a value of approximately $3.7 million, net of allowance for loan losses of approximately $3.5 million, which does not include the allowances of approximately $1.4 million relating to the decrease in the property value for performing loans as of March 31, 2011.  These loans have been placed on non-accrual of interest status and may be the subject of pending foreclosure proceedings.  Our manager has evaluated these loans and, based on current estimates, believes that the value of the underlying collateral is sufficient to protect us from loss of principal.  However, such estimates may change, or the value of the underlying collateral may deteriorate, in which case further losses may be incurred.





Our manager periodically reviews and makes a determination as to whether the allowance for loan losses is adequate to cover any potential losses.  Additions to the allowance for loan losses are made by charges to the provision for loan loss.  Recoveries of previously charged off amounts are credited to the allowance for loan losses or included as income when the asset is disposed.  As of March 31, 2011, we have provided a specific reserve related to four non-performing loans and five performing loans, based on updated appraisals and evaluation of the borrower obtained by our manager, totaling approximately $4.9 million.  Our manager evaluated these loans and concluded that the remaining underlying collateral was sufficient to protect us against further losses of principal or interest.  Our manager will continue to evaluate these loans in order to determine if any other allowance for loan losses should be recorded.  As of May 16, 2011, we believe any continuing declines in real estate values will adversely affect the value of the collateral securing our real estate loans as well as the market value of our REO.





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





Asset Quality and Loan Reserves





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





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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 real estate loan amount.





Non-performing assets included loans in non-accrual status, net of allowance for loan losses, real estate held for sale, and investment in an equity method investee held for sale totaling approximately $3.7 million, $2.9 million, and $5.4 million, respectively, as of March 31, 2011, compared to approximately $3.7 million, $2.9 million, and $5.4, respectively, as of December 31, 2010.  It is possible that no earnings will be recognized from these assets until they are disposed of, or that no earnings will be recognized at all, and the time it will take to dispose of these assets cannot be predicted.  Our manager believes that these non-performing assets have increased in significant part as a result of conditions in the real estate and credit markets.  We believe that the continued weakness in real estate markets may result in additional losses on our real estate held for sale.





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





Based upon this evaluation, a determination is made as to whether the allowance for loan losses is adequate to cover any potential losses.  Additions to the allowance for loan losses are made by charges to the provision for loan loss.  Recoveries of previously charged off amounts are credited to the allowance for loan losses.  For additional information regarding the roll-forward of the allowance for loan losses for the three months ended March 31, 2011, refer to Note D – Investments In Real Estate Loans of the Notes to the Consolidated Financial Statements included in Part I, Item I Consolidated Financial Statements of this Quarterly Report on Form 10-Q.





Real Estate Held for Sale





At March 31, 2011, we held five properties with a total carrying value of approximately $2.9 million, which were acquired through foreclosure and recorded as investments in REO.  Our investments in 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.  It is not our intent to invest in or to own real estate as a long-term investment.  We seek to sell properties acquired through foreclosure as quickly as circumstances permit, taking into account current economic conditions.  For additional information on our investments in REO, refer to Note F – Real Estate Held for Sale 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.




OFF-BALANCE SHEET ARRANGEMENTS





As of March 31, 2011, 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.





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CONTRACTUAL OBLIGATIONS





At March 31, 2011, we had one contractual obligation, see Note J – Notes Payable 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.





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 March 31, 2011, from fluctuations in weighted average interest rate charged on loans as a percentage of the loan portfolio:





Changed Assumption

Increase (Decrease) in Interest IncomeWeighted average interest rate assumption increased by 1.0% or 100 basis points

$
215,000Weighted average interest rate assumption increased by 5.0% or 500 basis points

$
1,075,000Weighted average interest rate assumption increased by 10.0% or 1,000 basis points

$
2,151,000Weighted average interest rate assumption decreased by 1.0% or 100 basis points

$
(215,000
)Weighted average interest rate assumption decreased by 5.0% or 500 basis points

$
(1,075,000
)Weighted average interest rate assumption decreased by 10.0% or 1,000 basis points

$
(2,151,000
)





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.





The following table presents a sensitivity analysis to show the impact on our financial condition at March 31, 2011, 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 LossesAllowance for loan losses assumption increased by 1.0% of loan portfolio

$
117,000Allowance for loan losses assumption increased by 5.0% of loan portfolio

$
585,000Allowance for loan losses assumption increased by 10.0% of loan portfolio

$
1,169,000Allowance for loan losses assumption decreased by 1.0% of loan portfolio

$
(117,000
)Allowance for loan losses assumption decreased by 5.0% of loan portfolio

$
(585,000
)Allowance for loan losses assumption decreased by 10.0% of loan portfolio

$
(1,169,000
)





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





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





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





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





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





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





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





Real Estate Held for Sale





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





RECENT ACCOUNTING PRONOUNCEMENTS





None





ITEM3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK





Pursuant to Item 305(e) of Regulation S-K (Sec. 229.305(e)), the Company is not required to provide the information required by this Item because it is a “smaller reporting company,” as defined by Rule 229.10(f)(1).





ITEM4.
CONTROLS AND PROCEDURES





Evaluation of Disclosure Controls and Procedures





We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), as appropriate, to allow timely decisions regarding required financial disclosure.  In connection with the preparation of this Report on Form 10-Q, our manager carried out an evaluation, under the supervision and with the participation of our CEO and CFO, as of March 31, 2011, of the effectiveness of the design and operation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) under the Exchange Act.  Based upon our evaluation, our CEO and CFO concluded that, as of March 31, 2011, our disclosure controls and procedures were not effective to provide reasonable assurance that information we are required to disclose in our reports under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our CFO and CEO, as appropriate to allow timely decisions regarding required disclosure due to the material weakness in our internal control over financial reporting as described below. 
 We did not design and implement adequate controls related to the accounting of foreclosure transactions, specifically in this instance, applying consolidation guidance to determine whether and how to consolidate another entity as it relates to investments held by us and VRM II. This material weakness has resulted in the required restatement of previously issued financial statements for the quarter ended September 30, 2010.


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Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues within our company have been or will be detected.  Even effective internal control over financial reporting can only provide reasonable assurance with respect to financial statement preparation.  Furthermore, because of changes in conditions, the effectiveness of internal control over financial reporting may vary over time.  Our manager, Chief Executive Officer and Chief Financial Officer do not expect that our controls and procedures will prevent all errors.





The certifications of our CEO and CFO required under Section 302 of the Sarbanes-Oxley Act have been filed as Exhibits 31.1 and 31.2 to this report.





Changes in Internal Control Over Financial Reporting





As required by Rule 13a-15(d) under the Exchange Act, our management, including our CEO and our CFO, has evaluated our internal control over financial reporting to determine whether any changes occurred during the first fiscal quarter of 2011 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.  On January 21, 2011, the Board of Directors appointed Eric Bullinger as our Chief Financial Officer.  Mr. Bullinger also serves as the Chief Financial Officer of VRM II. and as the equivalent of the Chief Financial Officer of Fund III. We, VRM II and Fund III are referred to collectively hereafter as the “Vestin Entities”. Mr. Bullinger’s services are furnished to us by Strategix Solutions.





PARTII – OTHER INFORMATION





ITEM1.
LEGAL PROCEEDINGS





Please refer to Note M – Legal Matters Involving the Manager and Note N – 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.





ITEM1A.
RISK FACTORS





In considering our future performance and any forward-looking statements made in this report, the material risks described below should be considered carefully.  These factors should be considered in conjunction with the other information included elsewhere in this report.





RISKS RELATED TO OUR BUSINESS





Current economic conditions have increased the risk of defaults on our loans.  Defaults on our real estate loans have reduced our revenues and may continue to do so in the future.





We are in the business of investing in real estate loans and, as such, we are subject to risk of defaults by borrowers.  Our performance has been and will continue to be directly impacted by any defaults on the loans in our portfolio.  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 rate of default on our loans could be higher than those generally experienced in the real estate lending industry.  The sustained period of increased defaults suffered during the past two and a half years has adversely affected our business, financial condition, liquidity and the results of our operations and may continue to do so in the future.





As of March 31, 2011, our non-performing assets were approximately $12.0 million, representing approximately 57% and 53% of our stockholders’ equity and total assets, respectively.  Non-performing assets included approximately $3.7 million in non-performing loans, net of allowance for non-performing loan losses of approximately $3.5 million, approximately $2.9 million of real estate held for sale and investment in an equity method investee held for sale of approximately $5.4 million.  We believe that the level of non-performing assets is largely attributable to difficulties in the real estate and credit markets.  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.  At this time, we are not able to predict how long such difficult economic conditions will continue.


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As of March 31, 2011 and December 31, 2010, we had approximately $4.9 million and $5.8 million, respectively, in allowances for loan losses, resulting in net weighted average loan-to-value ratios of 88.20% and 90.37%, respectively.  Not including allowance for loan losses, our weighted average loan-to-value ratio, as of March 31, 2011 and December 31, 2010, was 130.34%, and 123.67%, respectively, primarily as a result of declines in real estate values that have eroded the market value of our collateral.  As a result, we may not be able to recover the full amount of our loans if the borrower defaults.  Moreover, any failure of a borrower to pay interest on loans will reduce our revenues, the dividends we pay to stockholders and, most likely, the value of our stock.  Similarly, any failure of a borrower to repay loans when due may reduce the capital we have available to make new loans, thereby adversely affecting our operating results.





The recent recession and constraints in the credit markets are adversely affecting our operating results and financial condition.





As a commercial real estate lender willing to invest in riskier loans, rates of delinquencies, foreclosures and losses on our loans could be higher than those generally experienced in the commercial mortgage lending industry during periods of economic slowdown or recession.  The recent recession adversely affected the general economy and the availability of funds for commercial real estate developers.  We believe this lack of available funds led to an increase in defaults on our loans.  Furthermore, problems experienced in the U.S. credit markets from the summer of 2007 through 2009 have reduced the availability of credit for many prospective borrowers.  These problems persist in the markets we are serving, making it more difficult for our borrowers to obtain the anticipated re-financing necessary in many cases to pay back our loans.  Thus, an extended period of illiquidity in the credit markets has resulted in a material increase in the number of our loans that are not paid back on time.  A continuation of increased delinquencies, defaults or foreclosures will have an adverse affect upon our ability to originate, purchase and securitize loans, which could significantly harm our business, financial condition, liquidity and results of operations.  Although there may be some signs of the general economy improving, our business has not encountered the same improvement.





In addition, the recession slowed economic activity, resulting in a decline in new lending.  During the year ended December 31, 2010, we funded two loans in an aggregate amount of approximately $1.3 million as compared to five loans aggregating $4.7 million in 2009.  One loan for approximately $0.5 million was funded during the three months ended March 31, 2011.  Continuation of depressed conditions in the principal markets we serve may result in our continuing to fund fewer loans, thereby reducing our opportunities to generate interest income.





We have suspended payment of dividends and we cannot predict if and when dividends will be reinstated.





We have not paid any dividends since June 2008 and we do not anticipate paying dividends in the foreseeable future.  Dividends were suspended as a result of our operating losses.  For the years ended December 31, 2010 and 2009, our net losses were approximately $3.5 million and $12.5 million, respectively.  We expect that the current economic conditions will make it difficult for us to attain profitability in the near to mid-term.  We are obligated to distribute not less than 90% or our REIT taxable income.  However, at this time, we cannot predict when or if we will generate taxable income and dividends will be reinstated.  For the three months ended March 31, 2011, our net losses were approximately $0.3 million.





Our loan portfolio is concentrated in real estate markets that have not recovered from the recent recession.  Lack of geographical diversification increases our vulnerability to market downturns in the Western states.





As of March 31, 2011, approximately 92% of our loans were in Nevada, Arizona, California and Oregon.  Commercial real estate markets in each of these states suffered significantly during the recent recession, with declining real estate values and high rates of default on real estate loans.  Commercial real estate markets in Nevada, Arizona, California and Oregon have not recovered from the recession.  We also have a loan in Texas.  Our loan concentration in these Western states has increased our vulnerability to the troubled real estate markets in such states.  Real estate markets vary greatly from location to location and our manager has limited experience outside of the Western and Southwestern United States.  Any effort to expand into new geographical regions could be complicated by our manager’s lack of experience in such regions.





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An increased percentage of our loan portfolio consists of second deeds of trust which generally entail a higher degree of risk than first deeds of trust.





We invest in second deeds of trust and, in rare instances, wraparound, or all-inclusive, real estate loans.  Our board is required to approve our investing more than 10% of our assets in second deeds of trust.  During September 2008, the board authorized us to allow loans secured by second deeds of trust to constitute up to 15% of our loans, due to loan restructuring and business opportunities.  In a second deed of trust, our rights as a lender, including our rights to receive payment on foreclosure, will be subject to the rights of the first deed of trust.  In a wraparound real estate loan, our rights will be similarly subject to the rights of a first deed of trust, but the aggregate indebtedness evidenced by our loan documentation will be the first deed of trust plus the new funds we invest.  We would receive all payments from the borrower and forward to the senior lender its portion of the payments we receive.  Because both of these types of loans are subject to the first deed of trust’s right to payment on foreclosure, we incur a greater risk when we invest in each of these types of loans that we will not be able to collect the full amount of our loan and may provide an allowance for the full amount of the loan.  If we are unable to collect the amounts secured by second deeds of trust, our operating results will suffer and we will have less funds available to distribute to shareholders.  As of March 31, 2011, approximately 47% of our loans were secured by a second deed of trust.  When funded, such loans constituted less than 15% of our loans.  The percentage of our loans in second deeds of trust has increased primarily due to a decline in loans secured by first deeds of trust through sales, foreclosures and modifications.  As of March 31, 2011, three of our seven loans secured by second deeds of trust were considered non-performing.  These non-performing loans totaled approximately $22.0 million, of which our portion is approximately $2.7 million.  In addition, our seven second position loans had an allowance for loan loss of approximately $25.3 million, of which our portion is approximately $4.1 million.





MANAGEMENT AND CONFLICTS OF INTEREST RISKS





Our manager may face conflicts of interest in considering a possible combination of the Company with VRM II.





VRM II is a company that engages in making mortgage loans similar to the loans that we make and is managed by our manager.  There may be cost savings and operating synergies that could be achieved by our combination with VRM II.  Our management has evaluated issues relevant to a possible combination and at this time, no decision has been made with respect to whether a combination will be pursued, or with respect to the possible form of any such combination.  Since our manager owes a duty to the investors in each of these entities, it could face a conflict of interest in considering such a possible combination.  Any decision with respect to a proposed combination with VRM II will most likely be subject to the approval of our independent directors and stockholders as well as the approval of VRM II’s Board of Directors and stockholders.





On January 21, 2011, the Board of Directors of the Company announced that it has appointed a Special Committee consisting of Donovan Jacobs (chairman), Ken Seltzer and Daryl Idler to enter into negotiations with VRM II regarding a proposed stock for stock merger.  In furtherance of the proposed merger, the Company has engaged Milestone Advisors, LLC as its financial advisor and Miles and Stockbridge as counsel to the Special Committee. The primary purpose of the proposed merger is the potential cost savings and operating synergies that could be achieved through a combination with VRM II. Any decision with respect to the proposed merger with VRM II will be subject to the approval of the special committee and stockholders of VRM II as well as the approval of our special committee and stockholders. There can be no assurance that the proposed merger will be consummated.





RISK OF OWNERSHIP OF OUR COMMON STOCK





We are required to restate our financials for the periods ending September 30, 2010 and we have determined that such restatement is the result of material weaknesses in our internal control over financial reporting. If our internal control over financial reporting or disclosure controls and procedures are not effective, there may be errors in our financial statements that could require additional restatements, or our filings may not be timely and investors may lose confidence in our reported financial information, which could lead to a decline in our stock price.





Section 404 of the Sarbanes-Oxley Act of 2002 requires us to evaluate the effectiveness of our internal control over financial reporting as of the end of each year, and to include a management report assessing the effectiveness of our internal control over financial reporting in each Annual Report on Form 10-K.





On March 18, 2011, our Audit Committee determined, upon advice of management, that the financial statements included in the Quarterly Report on Form 10-Q for the period ended September 30, 2010 (the “Previously Issued Financial Statements”) should be restated because they contained an error addressed in Financial Accounting Standards Board Statement of Financial Accounting Standards Codification Topic 250, Accounting Changes and Error Corrections.  Accordingly, we concluded that the Previously Issued Financial Statements should not be relied upon.  We intend to correct the error by including restated financial statements in an amendment to its Quarterly Report on Form 10-Q for the quarter ended September 30, 2010.


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Real estate held for sale (“REO”) includes real estate acquired through foreclosure of a loan.  Pursuant to Accounting Standards Codification 310-10-40-3, REO is 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.  It is not our intent to invest in or to own real estate as a long-term investment; consequently, we generally seek to sell properties acquired through foreclosure as quickly as circumstances permit, taking into account current economic conditions.





The error in the Previously Issued Financial Statements related to the classification of our resulting investment in the existing business and related real estate following the foreclosure of the Rightstar International loan (the “Foreclosure”) in July 2010.  Traditionally, the Company funds loans for the purchase of property to be developed, and the collateral on the loan is that property.  As such, the Company initially recorded the Foreclosure as REO.  However, upon completion of the Foreclosure, the Company acquired both the foreclosed property and a noncontrolling membership interest in Hawaii Funeral Services, LLC, which operates the existing mortuary and cemetery business of Rightstar.  Because the existing business generates revenue, our acquisition of a membership interest in Hawaii Funeral Services, LLC should have been recorded as an investment in anEquity Method Investee – Held for Sale, and this noncontrolling interest should have been recorded in the financial statements as an asset of the Company, separately from REO.  Management is currently determining the impact of this error on the Previously Issued Financial Statements.





Our evaluation of our disclosure controls and procedures in association with our assessment of the effectiveness of internal control over the Previous Financial Statements determined that we did not maintain effective controls because we did not design and implement adequate controls related to the accounting of foreclosure transactions, specifically, in this instance, applying consolidation guidance to determine whether and how to consolidate another entity as it relates to investments held by us and VRM II. We have adopted various remedial measures to improve our disclosure controls and procedures.





Any failure to maintain or implement improved controls, or any difficulties we encounter in their implementation, could result in significant deficiencies or material weaknesses, cause us to fail to timely meet our periodic reporting obligations, or result in material misstatements in our periodic reports, including the financial statements included in such reports. Any such failure could also adversely affect the results of periodic management evaluations regarding disclosure controls and the effectiveness of our internal control over financial reporting required under Section 404 of the Sarbanes-Oxley Act of 2002 and the rules promulgated thereunder.  The existence of a material weakness could result in errors in our financial statements that could result in a restatement of financial statements, cause us to fail to timely meet our reporting obligations and cause investors to lose confidence in our reported financial information and adversely impact our stock price.





In addition, we might be exposed to legal claims by investors or enforcement proceedings by the SEC as a result of our issuing any financial statements which subsequently have to be restated.  The defense of any such proceedings could result in diversion of cash resources and management time from more productive uses, thereby adversely affecting our results of operations and financial condition.





ITEM2.
UNREGISTERED SALES OF EQUITY AND USE OF PROCEEDS





On February 21, 2008, our Board of Directors authorized the repurchase of up to $5 million worth of our common stock.  Depending upon market conditions, shares may be repurchased from time to time at prevailing market prices through open market or privately negotiated transactions.





We are not obligated to purchase any shares.  Subject to applicable securities laws repurchases may be made at such times and in such amounts, as our manager deems appropriate.  The share repurchase program may be discontinued or terminated at any time and we have not established a date for completion of the share repurchase program.  The repurchases will be funded from our available cash.  As of March 31, 2011, we had purchased 417,107 shares of treasury stock through the repurchase program noted above.  These shares are carried on our books at a cost totaling $0.9 million.  In addition, as part of a settlement agreement, we repurchased 38,500 shares of stock during January 2009, and classified them as treasury stock and incurred $107,000 in settlement expenses.  These shares are carried on our books at cost totaling $59,000 and are not part of the repurchase program.  As of March 31, 2011 and December 31, 2010, we had a total of 455,607 shares of treasury stock carried on our books at cost totaling $0.9 million.





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The following is a summary of our stock purchases during the three months ended March 31, 2011, as required by Regulation S-K, Item 703.





Period

(a) Total Number of Shares Purchased


(b) Average Price Paid per Share


(c) Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs


(d) Maximum Number of (or Approximate Dollar Value) of Shares that May Yet Be Purchase Under the Plans or ProgramsJanuary 1 – January 31, 2011


--


$
--



--


$
4,116,471February 1 – February 28, 2011


--



--



--



4,116.471March 1 – March 31, 2011


--



--



--



4,116,471Total


--


$
--



--


$
4,116,471





ITEM3.
DEFAULTS UPON SENIOR SECURITIES





None.





ITEM5.
OTHER INFORMATION





None.





ITEM6.
EXHIBITS





EXHIBIT INDEX





Exhibit No.

Description of Exhibits2.1(1)

Agreement and Plan of Merger between Vestin Fund I, LLC and the Registrant3.1(1)

Articles of Incorporation of the Registrant3.2(1)

Bylaws of the Registrant3.3(1)

Form of Articles Supplementary of the Registrant4.1(1)

Reference is made to Exhibits 3.1, 3.2 and 3.34.2(2)

Specimen Common Stock Certificate4.3(1)

Form of Rights Certificate10.1(1)

Form of Management Agreement between Vestin Mortgage, LLC and the Registrant10.2(1)

Form of Rights Agreement between the Registrant and the rights agent10.3 (4)

Agreement between Strategix Solutions, LLC and Vestin Realty Mortgage II, Inc. for accounting services.21.1(2)

List of subsidiaries of the Registrant31.1

Section 302 Certification of Michael V. Shustek31.2

Section 302 Certification of Eric Bullinger32

Certification Pursuant to 18 U.S.C. Sec. 135099.2R(3)

Vestin Realty Mortgage I, Inc. Code of Business Conduct and Ethics





(1)

Incorporated herein by reference to Post-Effective Amendment No. 3 to our Form S-4 Registration Statement filed on January 4, 2006 (File No. 333-125347)(2)

Incorporated herein by reference to Post-Effective Amendment No. 4 to our Form S-4 Registration Statement filed on January 31, 2006 (File No. 333-125347)(3)

Incorporated herein by reference to the Transition Report on Form 10-K for the ten month transition period ended April 30, 2006 filed on June 28, 2006 (File No. 000-51964)(4)

Incorporated herein by reference to the Quarterly Report on Form 10-Q filed on May 8, 2009 (File No. 000-51964)





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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 I, Inc.By:
/s/ Michael V. ShustekMichael V. ShustekPresident and Chief Executive OfficerDate:
May 16, 2011By:
/s/ Eric BullingerEric BullingerChief Financial OfficerDate:
May 16, 2011











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Exhibit31.1





CERTIFICATIONS





I, Michael V. Shustek, certify that:





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





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





3. Based on my knowledge, the 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 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: May 16, 2011





/s/ Michael V. ShustekMichael V. ShustekChief Executive OfficerVestin Realty Mortgage I, Inc.


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Exhibit31.2





CERTIFICATIONS





I, Eric Bullinger, certify that:





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





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





3. Based on my knowledge, the 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 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: May 16, 2011





/s/ Eric BullingerEric BullingerChief Financial OfficerVestin Realty Mortgage I, Inc.


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Exhibit32





CERTIFICATION PURSUANT TO


18 U.S.C. SECTION 1350








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









(1)
The Registrant’s Report on Form 10-Q for the three ended March 31, 2011, 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: May 16, 2011





/s/ Michael V. ShustekMichael V. ShustekChief Executive OfficerVestin Realty Mortgage I, Inc.











Date: May 16, 2011





/s/ Eric BullingerEric BullingerChief Financial OfficerVestin Realty Mortgage I, Inc.








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