UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

SCHEDULE 14A INFORMATION

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Owens Realty Mortgage, Inc.

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Dear Stockholders:

On behalf of the Board of Directors, it is my pleasure to invite you to the 2018 annual meeting of stockholders (the "Annual Meeting") of Owens Realty Mortgage, Inc. a Maryland corporation ("ORM" or the "Company"), to be held at          , on               , at            [a.m./p.m.] Pacific Daylight Time, to consider and vote on the following matters:

1.	To elect two (2) Class II directors, each to serve for a term continuing until the annual meeting of stockholders held in 2021 and until their respective successors are duly elected and qualified; and

2.	To ratify the appointment of Crowe Horwath LLP as the Company's independent registered public accounting firm for the year ending December 31, 2018.

Stockholders will also transact such other business as may properly come before the Annual Meeting or any adjournments or postponements thereof.

THE BOARD UNANIMOUSLY RECOMMENDS A VOTE FOR THE ELECTION OF BOTH OF THE BOARD'S NOMINEES ON PROPOSAL 1 AND FOR PROPOSAL 2 USING THE ENCLOSED WHITE PROXY CARD.

THE BOARD URGES YOU NOT TO SIGN, RETURN OR VOTE ANY PROXY CARD SENT TO YOU BY OR ON BEHALF OF THE HOVDE GROUP.

It is important that your shares be represented at the meeting whether or not you are personally able to attend. Accordingly, after reading the attached Notice of Annual Meeting and Proxy Statement, please promptly submit your proxy as described on your WHITE proxy card or WHITE voting instruction form. If you choose to submit your proxy to vote your shares by the WHITE proxy card or WHITE voting instruction form, please sign, date and mail the WHITE proxy card or WHITE voting instruction form in the enclosed postage-paid return envelope. You may also submit a proxy to vote by telephone or Internet. Instructions for submitting a proxy over the Internet or by telephone are provided on the enclosed WHITE proxy card. Your cooperation is greatly appreciated.

 

 

 

We appreciate your continued interest in the Company. We look forward to greeting you in person at the Annual Meeting and meeting as many of our stockholders as possible. If you have any questions or require any assistance with voting your shares, or if you need additional copies of the proxy materials, please contact:

1290 Avenue of the Americas, 9^th Floor

New York, NY 10104
(888) 206-5970 (Toll Free)
Email: ORM@Georgeson.com

Regardless of how few shares of common stock of the Company that you own, your vote is important. Thank you for your continued support, interest and investment in ORM.

Very truly yours,

Daniel J. Worley

Senior Vice President and Secretary

Walnut Creek, California
[●], 2018

The enclosed Notice of Annual Meeting of Stockholders and Proxy Statement are first being made available to stockholders of record beginning         , 2018.

PRELIMINARY PROXY STATEMENT — SUBJECT TO COMPLETION, DATED MAY 24, 2018

OWENS REALTY MORTGAGE, INC.

2221 Olympic Boulevard

Walnut Creek, California 94595

NOTICE OF ANNUAL MEETING OF STOCKHOLDERS

TO BE HELD ON            , 2018

NOTICE IS HEREBY GIVEN that the 2018 annual meeting of stockholders (the "Annual Meeting") of Owens Realty Mortgage, Inc. a Maryland corporation ("ORM" or the "Company"), will be held at                  , on               , at            [a.m./p.m.] Pacific Daylight Time, to consider and vote on the following matters:

1.	To elect two (2) Class II directors, each to serve for a term continuing until the annual meeting of stockholders held in 2021 and until their respective successors are duly elected and qualified; and

2.	To ratify the appointment of Crowe Horwath LLP as the Company's independent registered public accounting firm for the year ending December 31, 2018.

Stockholders will also transact such other business as may properly come before the Annual Meeting or any adjournments or postponements thereof.

IMPORTANT NOTICE REGARDING THE AVAILABILITY OF PROXY MATERIALS FOR THE ANNUAL MEETING OF STOCKHOLDERS TO BE HELD ON                , 2018: The Proxy Statement and our Annual Report on Form 10-K are available free of charge on the internet at www.owensmortgage.com. On this site, you will be able to access the Proxy Statement, our Annual Report on Form 10-K for the fiscal year ended December 31, 2017, and any amendments or supplements to the foregoing material that are required to be furnished to stockholders.

 

 

By Order of the Board of Directors,

Daniel J. Worley

Senior Vice President and Secretary

Walnut Creek, California

[______ __], 2018

Enclosures

TABLE OF CONTENTS

PRELIMINARY PROXY STATEMENT — SUBJECT TO COMPLETION, DATED MAY 24, 2018

OWENS REALTY MORTGAGE, INC.

2221 Olympic Boulevard

Walnut Creek, California 94595

PROXY STATEMENT

FOR ANNUAL MEETING OF STOCKHOLDERS

TO BE HELD ON              , 2018

QUESTIONS AND ANSWERS ABOUT THE ANNUAL MEETING

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

THE BOARD UNANIMOUSLY RECOMMENDS A VOTE FOR THE ELECTION OF BOTH OF THE BOARD'S NOMINEES ON PROPOSAL 1 USING THE ENCLOSED WHITE PROXY CARD.

THE BOARD UNANIMOUSLY RECOMMENDS VOTING FOR PROPOSAL 2.

BACKGROUND OF THE SOLICITATION

 Between 2016 and 2018, the Company's senior management team spoke with representatives of the Hovde Group, on several occasions as part of the Company's regular engagement efforts.

On June 1, 2017, Gary I. Furukawa, the founder, senior partner and chief investment officer of Freestone Capital Management, LLC ("Freestone"), a 7.6% stockholder, sent an open letter to the Board, that in part, called for immediate liquidation of the Company, and expressed concerns with the Company's business strategy and stock price performance.

On June 13, 2017, the Company issued a press release announcing that the Board authorized a new stock repurchase program, which enabled the Company to repurchase up to $10 million of its Common Stock over six months beginning July 13, 2017. In connection with the stock repurchase plan, the Compensation Committee had been engaged in a months-long internal analysis and evaluation of strategic options related to its external management structure, with the assistance of FTI Consulting, Inc. ("FTI"), a leading independent consultant. In the same release, the Company announced an increased quarterly dividend of $0.10 per share of Common Stock for the quarter ended June 30, 2017.

On June 15, 2017, William Owens, who was at the time serving as the Company's Chairman of the Board, sent an open letter to Freestone that acknowledged the stockholder's feedback and responded that the Board has serious concerns regarding the consequences of liquidation, including adverse economic and tax implications. In addition, Mr. Owens reiterated the Company's commitment to closing the gap between the Company's stock price and book value, as evidenced by the Company's stock repurchase program that it had announced on June 13, 2017 and the Company's ongoing strategy of disposing of its real estate assets in a responsible manner, and reallocating proceeds into commercial loan investments.

On August 8, 2017, as part the ongoing effort to analyze and evaluate strategic options related to the Company's external management structure, the Company issued a press release announcing an agreement between the Board and the Manager to adjust the methodology used to calculate the annual fee payable to the Manager. This fee reduction generated approximately $198,000 of cost savings for the Company for the quarter ended September 30, 2017.

In August 2017, in conjunction with the Company's view of the importance of corporate governance, the Company began to consider potential corporate governance enhancements, which among other things, included increasing gender diversity on the Company's Board.

On December 29, 2017, following extensive deliberation by the Board, the Company entered into a settlement agreement with Freestone and certain of its affiliates pursuant to which the Company agreed to purchase Common Stock held by Freestone in a privately negotiated transaction. The Board determined this strategy would permit the Company to repurchase these shares at a price that would be accretive to the Company's book value, continue to pursue its strategic plan already successfully underway and achieving results, avoid a costly and distracting proxy fight and remain intensely focused on maximizing long-term value for all stockholders.

On January 5, 2018, Eric Hovde spoke with Bryan Draper, President, Chief Executive Officer and Director of the Company, and Daniel Worley, Senior Vice President and Corporate Secretary of the Company, and informed the Company of his intention to nominate a slate of directors for the Annual Meeting. (Eric Hovde did not elaborate on his concerns regarding the Company's strategy or business.)

On January 9, 2018, Eric Hovde and James Hua, of Opal Advisors, LLC and a member of the Hovde Group, requested that the Company provide director questionnaires for a potential nomination for election of Eric Hovde's brother, Steven Hovde, and James Hua as Class II directors at the Annual Meeting.

On January 10, 2018, the Company sent each of Steven Hovde and Mr. Hua director questionnaires to complete and return to the Board.

On January 12, 2018, the last date on which stockholder nominations were due with respect to the Company's Annual Meeting, the Hovde Group delivered a formal notice to the Board expressing its intent to nominate and solicit proxies in support of two Class II director candidates, Steven Hovde and Mr. Hua, for election to the Board.  According to the nomination notice, as of January 12, 2018, the Hovde Group owned approximately 3.7% of the Company's outstanding shares of Common Stock.

PROPOSAL 1: ELECTION OF TWO (2) DIRECTORS

On November 12, 2013, the Company acted by resolution of the Board of Directors to elect to be subject to all of the provisions of Sections 3-803, 3-804 and 3-805 of Title 3, Subtitle 8 of the Maryland General Corporation Law ("MGCL"). As a result of the Company's election to be subject to Section 3-803 of the MGCL, the Board is classified into three separate classes of directors.  Directors in each class are elected for a staggered term of three-years each, with a term of office of only one of these three classes of directors expiring each year.  Previously, the Board consisted of a single class of directors, with directors required to stand for election every year.

Each of our Class II directors, Mr. Bryan H. Draper and Mr. James M. Kessler, has a term expiring at the Annual Meeting upon the election and qualification of his respective successor. There is also one Class I director, Mr. Gary C. Wallace, with a term continuing until the annual meeting of stockholders in 2020 and until his successor is elected and qualified, and two Class III directors with terms continuing until the annual meeting of stockholders in 2019 and until their respective successors are elected and qualified. The Class III directors are Mr. Dennis G. Schmal and Mr. William C. Owens.  At each annual meeting of stockholders, the successors to the class of directors whose term expires at that annual meeting of stockholders will be elected to hold office for a term continuing until the annual meeting of stockholders held in the third year following the year of their election and until their successors are elected and qualified, or until their earlier death, resignation or removal.

The Nominating and Corporate Governance Committee of the Board has recommended, and the Board has nominated, Messrs. Draper and Kessler (the "Nominees") to stand for election at the Annual Meeting and to hold office until the annual meeting of stockholders to be held in 2021 and until their respective successors are duly elected and qualified. Each Nominee has agreed to serve as a nominee, to serve as a director if elected and has consented to being named as a nominee in this Proxy Statement. Accordingly, the Board has no reason to believe that either Nominee will be unable or unwilling to serve. If either Nominee should decline or be unable to serve as a director, it is intended that the proxy will be voted for the election of such person as is nominated as a replacement by the Nominating and Corporate Governance Committee and by the Board.  The Board has no reason to believe that any replacement nominee or nominees will be required.

Information about the Director Nominees and the Continuing Directors

As a result of our adoption of the provisions of Section 3-804 of Title 3, Subtitle 8 of the MGCL, any vacancies occurring on our Board, including vacancies occurring as a result of the death, resignation, or removal of a director, or due to an increase in the size of the Board, may be filled only by the affirmative vote of a majority of the remaining directors in office, even if the remaining directors do not constitute a quorum, and any director elected to fill a vacancy will serve for the remainder of the full term of the directorship in which the vacancy occurred and until a successor is duly elected and qualifies.

Messrs. Draper and Kessler, the Nominees for election as directors at the Annual Meeting, have each been evaluated by the Nominating and Corporate Governance Committee pursuant to the guidelines described below under "Governance of Our Company—Director Qualifications" and the determination has been made that each of the Nominees fulfills and exceeds the qualities that we look for in members of our Board.  There is no familial relationship among any of the members of our Board or our executive officers. Messrs. Draper and Owens are affiliated with our Manager and are not independent under the NYSE American rules.  Each of Mr. Schmal, Mr. Wallace and Mr. Kessler is independent as defined in the NYSE American rules. See "Governance of Our Company— Director Independence."

 

 

Nominees for Class II Directors (Terms expire at the 2018 Annual Meeting):

Bryan H. Draper – Mr. Draper, age 60, has served as our President and CEO since January 2016 and as a member of our Board since Owens Mortgage Investment Fund, a California Limited Partnership merged with and into ORM, with ORM as the surviving corporation (the "Merger"), on May 20, 2013.  Mr. Draper served as the Secretary and Treasurer of the Company from its inception in 2012 until January 2016, and as our Chief Financial Officer from January 2013 to January 2016.  He has also been Chief Financial Officer and Corporate Secretary of our Manager since December 1987 and a member of the Board of Directors of the Manager since January 1997. Mr. Draper is also currently the Chief Financial Officer of Investors Yield, Inc. (a California Trust Company) which is owned 100% by the Manager. Mr. Draper is expected to continue as a director and Corporate Secretary and Chief Financial Officer of the Manager until he resigns or is replaced by a vote of the Manager's stockholders and board of directors, respectively.  Mr. Draper is a certified public accountant and is responsible for all accounting, finance, and tax matters for the Manager. Mr. Draper received a Master's degree in business administration from the University of Southern California in 1981.

 Mr. Draper's extensive experience in the commercial mortgage financing and real estate industries, including REO dispositions, credit facilities, and risk oversight, his deep knowledge of our business as our Chief Executive Officer, as our former Chief Financial Officer and as the Chief Financial Officer of our Manager, as well as his CPA certification and expertise in accounting and financial matters make him well qualified to serve a director of the Company and strengthens our Board's collective qualifications, skills, experience and viewpoints.

James M. Kessler – Mr. Kessler, age 65, has been a member of our Board since the consummation of the Merger on May 20, 2013.  He has been the President of Stonehenge Property Group, a private real estate development and advisory services company, since its inception in August 2005.  Mr. Kessler founded Stonehenge Property Group and is responsible for all of its operations including budgets, business plans, property acquisition and development, financing and leasing.  From January 2004 to July 2005, he was the founder and principal of Highland Development Company, a retail acquisition and development company that was part of the Marcus & Millichap group of companies.  From April 2002 to October 2003, Mr. Kessler served as the Chief Operating Officer of ScanlanKemperBard Companies, a private real estate investment firm.  From July 1999 to February 2002, he served as the Chief Development Officer of Federal Realty Investment Trust, a publicly traded REIT.  While at Federal Realty Investment Trust, Mr. Kessler was responsible for establishing and managing regional and satellite offices, development, redevelopment, construction, operations, asset management and leasing.  From December 1989 to July 1999, Mr. Kessler was the Chief Development Officer of Burnham Pacific Properties/The Martin Group, a publicly traded REIT.  From 1985 to December 1989, he served as the Director of Marketing of Transpacific Development, a private real estate development and management company.  Mr. Kessler received his bachelor's degree in business administration and management from Golden Gate University in 1981.

Mr. Kessler's extensive experience in the real estate investment, development, business operations, and management industries and his senior management positions in two publicly traded REITs make him well qualified to serve as a director of the Company and strengthens our Board's collective qualifications, skills, experience and viewpoints.

 

Conclusion and Recommendation; Vote Required

This election of directors is considered a contested election. Accordingly, each Nominee for election to the Board will be elected only if such nominee receives the affirmative vote of a plurality of the total votes cast. This means that the two individuals nominated for election to the Board at the Annual Meeting who receive the largest number of properly cast "FOR" votes (among votes properly cast in person or by proxy) will be elected as directors. In director elections, stockholders may either vote "FOR" or withhold voting authority with respect to director nominees. Shares of Common Stock voting "withhold" are counted for purposes of determining a quorum. However, if you withhold authority to vote with respect to the election of either or both of the two nominees, your shares of Common Stock will not be voted with respect to those nominees indicated. Therefore, "withhold" votes will not affect the outcome of the election of directors. Broker non-votes, if any, and abstentions will not be treated as votes cast for the election of a director and will have no effect on the results of the vote, although they will be considered present for the purpose of determining the presence of a quorum.

THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE "FOR" THE ELECTION OF THE CLASS II NOMINEES NAMED ABOVE.

Class I Director (Term expires at the 2020 Annual Meeting):

Gary C. Wallace – Mr. Wallace, age 63, has been a member of our Board since July 22, 2016. Mr. Wallace has provided consulting services to various banks, private equity firms, venture capital firms and the Public Company Accounting Oversight Board since his retirement from KPMG in 2005. He has also served as a member of the Board and Chairman of the Audit Committee of Plaza Bancorp and Plaza Bank from June 26, 2015 until November 2017. From February 2014 until February 2017, Mr. Wallace served as a member of the Board and Chairman of the Audit Committee of Orient Bancorp and Bank of the Orient.  From 2012 until June 26, 2015, Mr. Wallace served as a Director of Manhattan Bancorp and Bank of Manhattan, N.A. Mr. Wallace joined KPMG in 1975 and retired as a KPMG Audit Partner Specialist in Banking and Investment Services in 2005, having served as head of the Northern California Financial Institutions Practice. As a KPMG Audit Partner, Mr. Wallace served as engagement partner and associate SEC reviewing partner for banks, real estate, venture capital, private equity, hedge fund and investment companies ranging in size from startups to entities with over fifty billion dollars in assets. Mr. Wallace received a Bachelor of Science degree in Business Administration, Summa Cum Laude, from California State University – East Bay in 1975. 

Mr. Wallace's extensive experience in audit, accounting and other financial matters, as well as deep familiarity with the financial services industry, corporate governance issues, regulatory matters, and risk management make him well qualified to serve as a director of the Company and strengthens our Board's collective qualifications, skills, experience and viewpoints.

Class III Directors (Terms expire at the 2019 Annual Meeting):

  William C. Owens – Mr. Owens, age 67, has served as our executive Chairman Emeritus since May 7, 2018 and as member of our Board since ORM's inception in 2012. Mr. Owens also served as our executive Chairman of the Board from ORM's inception in 2012 until May 7, 2018, as our President from our inception until January 2016, and as our Chief Executive Officer from January 2013 until January 2016.  He has been President of our Manager since April 1996 and is a member of the Board of Directors and the Loan Committee of the Manager and its Chief Executive Officer. Mr. Owens is expected to continue as a director and President and Chief Executive Officer of the Manager until he resigns or is replaced by a vote of the Manager's stockholders and board of directors, respectively. From 1979 until April 1996, he served as a Senior Vice President of the Manager. Mr. Owens is also currently the President of Investors Yield, Inc. (a California Trust Company) which is owned 100% by the Manager. Mr. Owens has been active in real estate construction, development, and mortgage financing since 1973. Prior to joining Owens Mortgage Company in 1979, Mr. Owens was involved in mortgage banking, property management and real estate development.  As President of the Manager, Mr. Owens is responsible for the overall activities and operations of the Manager, including corporate investment, operating policy and planning.  In addition, he is responsible for loan production, including the underwriting and review of potential loan investments.  Mr. Owens graduated from Westmont College in 1973 and is a licensed real estate broker.

Mr. Owens' extensive experience in the mortgage financing and real estate industries, his deep knowledge of our business as our executive Chairman Emeritus, as our former Chief Executive Officer and as the Chief Executive Officer of our Manager, and his prior leadership experience make him well qualified to serve as a director of the Company and strengthens our Board's collective qualifications, skills, experience and viewpoints.

 

 

  Dennis G. Schmal – Mr. Schmal, age 71, has been a member of our Board since the consummation of the Merger on May 20, 2013, and was appointed Chairman of the Board on May 7, 2018. In May of 2015, Mr. Schmal began service as a director and as chair of the audit committee of a public technology company, Blue Calypso, Inc., which deregistered and became a private company in March 2017. Mr. Schmal currently serves as a director of Blue Calypso, Inc., however, he no longer serves on the audit committee and the company's operations have substantially ceased. Mr. Schmal also serves as a director of the public investment funds overseen by the following three asset management complexes: the AssetMark GuideMark/GuidePath Funds, where he has served as a director since 2006 and is chairman of the audit committee; the Wells Fargo GAI Hedge Funds where he has served as a director since 2008 and is a member of the audit committee; and the Cambria ETF Series where he has served as a director since 2013 and is chairman of the audit committee.   Mr. Schmal served as a director and a member of the audit (chairman), nominating, and compensation committees of Merriman Holdings, Inc., a securities and investment banking firm from August 2003 until July 2016.  From May 2005 until July 2014, Mr. Schmal served as chairman of the board of directors of Pacific Metrics Corporation, a private company in the educational assessment/software field. Mr. Schmal served as chairman of the board of directors of a technology industry startup, Sitoa Global Inc., from January 2012 until April 2013. From August 2004 to November 2011, he served as a member of the board of directors, audit committee (chairman) and compensation committee of Varian Semiconductor, a semiconductor equipment manufacturer.  From October 2008 to May 2011, he served as a director and chairman of the audit committee of Grail Advisors EFT Trust, an exchange traded fund complex.  From September 2006 to May 2008, Mr. Schmal served as a director and chairman of the audit committee of North Bay Bancorp, a bank holding company.  From February 1972 to April 1999, Mr. Schmal was employed by Arthur Andersen LLP, primarily as a partner overseeing the delivery of accounting and audit services. During his career with Arthur Andersen LLP, Mr. Schmal specialized in working with companies in the financial services sector, including the commercial banking, securities/investment banking and asset management industries.  Mr. Schmal received a Bachelor of Science in Business Administration – Finance and Accounting Option from California State University, Fresno in 1972 and holds a CPA certificate (retired).

PROPOSAL 2: RATIFICATION OF APPOINTMENT OF INDEPENDENT ACCOUNTING FIRM

The audit committee of our Board (the "Audit Committee") has appointed Crowe Horwath LLP as our independent registered public accounting firm for the year ending December 31, 2018 and is submitting the selection of Crowe Horwath LLP to our stockholders for ratification.  Crowe Horwath LLP has audited our financial statements for each of the fiscal years since and including 2013.  Neither our bylaws nor other governing documents or applicable law require stockholder ratification of the Audit Committee's appointment of Crowe Horwath LLP as our independent registered public accounting firm. However, our Board is submitting the appointment of Crowe Horwath LLP to our stockholders for ratification as a matter of good corporate practice.

This vote is non-binding, as the Audit Committee has the sole authority to retain and dismiss the Company's independent registered public accounting firm.  If our stockholders fail to ratify the appointment of Crowe Horwath LLP at the Annual Meeting, the Audit Committee will consider whether or not to appoint a different independent registered public accounting firm. Even if the appointment is ratified, the Audit Committee, in its discretion, may direct the appointment of a different independent registered public accounting firm at any time during the year if it determines that such a change would be in our best interests.

The Company expects that a representative of Crowe Horwath LLP will be present at the Annual Meeting, will have the opportunity to make a statement if so desired and will be available to respond to appropriate inquiries from stockholders.

 

Principal Accountant Fees and Services

The following table summarizes the aggregate fees (including related expenses) earned by our independent registered public accounting firm, Crowe Horwath LLP, for the fiscal years ended December 31, 2017 and 2016:

Audit Fees.  Audit fees consist of fees and expenses billed by Crowe Horwath LLP related to the audit of our consolidated financial statements included in Form 10-K, the audit of our internal control over financial reporting and the reviews of the interim consolidated financial statements included in the Form 10-Q's, including services normally provided by an accountant in connection with statutory and regulatory filings or engagements.

Audit Related Fees.  Audit-related fees are fees and expenses billed for assurance and related services that are reasonably related to the performance of the audit or review of the Company's financial statements and are not reported under "Audit Fees."

Tax Fees.  Tax fees billed to us by Crowe Horwath LLP are for tax compliance and consulting fees, which typically consist of fees billed for professional services for tax return preparation and other tax compliance.

All Other Fees.  All other fees consist of fees for products and services other than the services reported above, including consulting fees paid for a cost segregation study and accounting guidance subscriptions paid.

         

All services rendered by Crowe Horwath LLP were pre-approved by the Audit Committee for 2017 in accordance with its pre-approval policy, and the Audit Committee concluded that the provision of such services by Crowe Horwath LLP was compatible with the maintenance of that firm's independence in the conduct of its audit functions. The Audit Committee charter requires that the committee review and pre-approve each audit or permissible non-audit engagement or accounting project involving the independent public accountant, and the related fees or ranges of fees, prior to commencement of the engagement or project subject to certain exceptions if the services meet pre-approval policies that may be established under the charter. The Audit Committee may delegate its pre-approval authority to one or more of its members and, if such delegation occurs, then such member(s) are required to report any pre-approval decisions to the Audit Committee at its next-scheduled meeting.

REPORT OF THE AUDIT COMMITTEE

The Board of Directors has appointed an Audit Committee presently composed of three directors, Messrs. Wallace, Kessler and Schmal, who each served on the Audit Committee throughout 2017. Each of the committee members is independent as defined in the NYSE American rules, and the Board has determined that Mr. Wallace is an "audit committee financial expert" (as defined in Item 407 of Regulation S-K under the Securities Act of 1933, as amended (the "Securities Act")).

The Audit Committee's responsibility is one of oversight as set forth in its charter, which is available on the Company's web site at www.owensmortgage.com. It is not the duty of the Audit Committee to prepare the Company's financial statements, to plan or conduct audits or to determine that the Company's financial statements are complete and accurate and are in accordance with generally accepted accounting principles. The Company's management is responsible for preparing the Company's financial statements and for maintaining effective internal control over financial reporting. The Company's independent registered public accounting firm is responsible for auditing the financial statements and the effectiveness of the Company's internal control over financial reporting and for expressing an opinion as to whether those audited financial statements present fairly, in all material respects, the Company's financial position, results of operations and cash flows in conformity with generally accepted accounting principles, and for expressing an opinion as to whether the Company maintained, in all material respects, effective internal control over financial reporting.

At a meeting held subsequent to December 31, 2017, the Audit Committee reviewed and discussed with management and Crowe Horwath LLP, the Company's independent registered public accounting firm, the audited financial statements of the Company as of and for the year ended December 31, 2017, and the related report prepared by Crowe Horwath LLP. The Audit Committee met with Crowe Horwath LLP, with and without management present, to discuss the results of their audit. Management represented to the Audit Committee that the Company's consolidated financial statements as of and for the year ended December 31, 2017 were prepared in accordance with accounting principles generally accepted in the United States and that the Company maintained effective internal control over financial reporting as of December 31, 2017.

The Audit Committee has discussed with Crowe Horwath LLP the matters required to be discussed by PCAOB Auditing Standard No. 1301, which included among other things a discussion of Crowe Horwath LLP's judgments about the quality (not just the acceptability) of the Company's accounting principles as applied to financial reporting.

The Audit Committee has received from Crowe Horwath LLP the written statements required by PCAOB Rule No. 3526, "Communications with Audit Committees Concerning Independence," and has discussed Crowe Horwath LLP's independence with Crowe Horwath LLP, and has considered the compatibility of non-audit services with the auditor's independence. The Audit Committee also received regular updates on the amount of fees and scope of audit and other services provided by Crowe Horwath LLP.

Based on the review and discussions referred to above, and subject to the limitations on the Audit Committee's role and responsibilities referred to above and in its charter, the Audit Committee recommended to the Board of Directors that the audited consolidated financial statements as of and for the year ended December 31, 2017, be included in our Annual Report on Form 10-K for the year ended December 31, 2017, for filing with the SEC. The Audit Committee also appointed Crowe Horwath LLP as the Company's independent registered public accounting firm for the year ending December 31, 2018 and is presenting this appointment to the Company's stockholders for ratification.

Gary C. Wallace, Chair

James Matthew Kessler

Dennis George Schmal

 

In connection with the previously announced review of our corporate governance practices, the Board approved revisions to the Guidelines that created, among other things, a director resignation policy setting forth the Board's expectation that any director that fails to receive the required majority vote in an uncontested election will promptly tender his or her resignation to the Board for its consideration, a Board diversity policy, an anti-pledging policy and stock ownership guidelines for the Company's directors and executive officers.

Our Board is currently comprised of five members: Bryan H. Draper, William C. Owens, Dennis G. Schmal, James M. Kessler and Gary C. Wallace.  The Board conducts its business through regular meetings and through actions taken by written consent in lieu of meetings. During 2017, the Board held nine meetings. Each director attended at least 75% of the meetings of the Board and of the committees on which he or she served and that were held in 2017.  Although we do not have a policy requiring director attendance at the Annual Meeting, directors are encouraged to attend the Annual Meeting. All of our directors attended the Company's 2017 annual meeting of stockholders.

 The positions of Chairman of the Board and CEO are held by different persons as Mr. Draper is our CEO and Mr. Schmal currently serves as the independent Chairman of the Board. The Board believes that the arrangement of separating the roles of Chairman of the Board and CEO is in the best interest of the Company and its stockholders at this time because it allows the Company the benefit of the distinct abilities and experience of both individuals and provides the appropriate balance between strategy development and independent oversight of management. Because the Company currently has an independent non-executive Chairman of the Board, no lead independent director has been appointed.

During 2017, the Compensation Committee retained FTI as its independent compensation consultant. The Compensation Committee requested that FTI provide the Committee with a peer group analysis to compare the compensation terms for our Manager and for our independent directors against the compensation terms in place at a peer group of our competitors, such peer group to be developed by FTI.  The Compensation Committee also asked FTI to develop recommendations regarding the compensation of our Manager and of our independent directors, and to develop a peer group analysis and additional information relating to the compensation of certain executive officers of the Company in the event they were retained by the Company directly as employees. Additionally, in 2017, FTI was engaged by the Compensation Committee to perform other financial advisory services unrelated to executive or director compensation.  The Company paid $217,283 and $35,000 in 2017 to FTI for financial advisory services and executive/director compensation advisory services, respectively.  The decision to engage FTI for, and the determination of the scope of, these financial and compensation services was made solely by the Compensation Committee without the recommendation of management. 

Effective May 7, 2018, we adopted share retention requirements for our executives and directors.  The Board believes that meaningful ownership of the Company's Common Stock by its directors and executive officers helps to align the interests of the Company's directors and executive officers with those of its stockholders and is consistent with the Company's commitment to sound corporate governance. Therefore, directors and executive officers are required to own shares of the Company's Common Stock pursuant to the Company's director and executive stock ownership guidelines.

We believe that engaging with our stockholders is fundamental to our commitment to good governance and important to our success. Throughout the year, we seek opportunities to connect with our stockholders to gain and share valuable insights into current and emerging business and governance trends. During 2017, we held over 23 phone or in-person meetings with multiple stockholders to discuss various key corporate matters, including our capital allocation, REO projects, commercial lending environment, loan criteria, interest rates and other risk management practices, share repurchases, and our governance practices. Our engagement activities take place throughout the year and we also conduct quarterly earnings calls where we try to answer many of the questions that we receive during our investor outreach.

Board Role in Risk Oversight 

Code of Business Conduct and Ethics 

Director Qualifications 

The Board believes that it should be comprised of directors with complementary backgrounds, and that directors should, at a minimum, have expertise that will strengthen our Board's collective qualifications, skills, experience and viewpoints. Directors should possess the highest personal and professional ethics and should be willing and able to devote the required amount of time to our business. The Board is committed to seeking to attain diversity and balance among directors with respect to race, gender and ethnicity, as well as with respect to viewpoints, background, skills and experience. To that end, the Nominating and Corporate Governance Committee, when expanding the size of the Board or filling a vacancy on the Board, has formally committed to interviewing at least one candidate who brings gender, race or ethnic diversity to the Board.

Although there is no formal list of required qualifications governing the suitability of individual candidates (both new candidates and current Board members), the Nominating and Corporate Governance Committee, in recommending candidates for election, and the Board, in approving (and, in the case of vacancies, appointing) such candidates, will take into account many factors, including the following:

·	the independence of the candidate from the Manager and whether the candidate meets the criteria for membership of the audit or other committees;

·	personal and professional integrity, ethics and values;

·	experience in corporate management, such as serving as an officer or former officer of a publicly held company, and a general understanding of marketing, finance and other elements relevant to the success of a publicly traded company in today's business environment;

·	experience in the Company's industry and with relevant social policy concerns;

·	experience as a board member of another publicly held company;

·	diversity (of both background and experience);

·	academic expertise in an area of the Company's operations;

·	practical and mature business judgment, including the ability to make independent analytical inquiries; and

·	adequate time availability to fulfill the Board director commitment.

When seeking candidates for director, the Nominating and Corporate Governance Committee may solicit suggestions from management, incumbent directors or others. While there is no formal policy for considering candidates that are recommended by stockholders, candidates recommended in writing and in a timely manner by stockholders entitled to vote in the election of directors will be considered and evaluated by the Nominating and Corporate Governance Committee under the same criteria applied to other candidates. The committee or its chairman will interview a candidate if it is believed the candidate might be suitable to be a director. The Nominating and Corporate Governance Committee may also ask the candidate to meet with management. If the Nominating and Corporate Governance Committee believes a candidate would be a valuable addition to the Board, it will recommend the candidate's election to the full Board. 

Stockholder Communications with Directors 

The Company has adopted a written policy for approval of transactions and arrangements between the Company and the Company's current and recent former directors, director nominees, current and recent former executive officers, greater than five percent stockholders and their immediate family members, and entities where any of the foregoing persons is employed or serves as a general partner, principal or in a similar position (each, a "Related Party").

The policy provides that the Audit Committee reviews certain transactions subject to the policy and determines whether or not to approve or ratify those transactions. In doing so, the Audit Committee takes into account, among other things, whether the transaction is on terms comparable to those that could be obtained in arm's length dealings with an unrelated third party under similar circumstances, the extent of the Related Party's interest in the transaction, and the conflicts of interest provisions and corporate opportunity provisions of the Company's Code of Business Conduct and Ethics.  The Related Party transaction must be approved or ratified by the Audit Committee in accordance with the provisions of the policy and in accordance with relevant provisions of the Company's Charter, bylaws and applicable provisions of the MGCL.

The Audit Committee has considered and adopted standing pre-approvals under the policy for certain limited transactions with Related Parties that meet specific criteria. Information on transactions subject to pre-approval is to be provided to the Audit Committee at its next regularly scheduled meeting. Pre-approved transactions are limited to:

·	compensation to an executive officer or director of the Company if (a) the related compensation is required to be

reported in the Company's proxy statement under the SEC's compensation disclosure requirements or (b) the executive officer is not an immediate family member of another executive officer or director of the Company, the related compensation would be reported in the Company's proxy statement under the SEC's compensation disclosure requirements if the executive officer was a "named executive officer," and the Compensation Committee approved (or recommended that the Board approve and the Board has approved) such compensation;

·

certain transactions in the Company's ordinary course of business where the Related Party's interest arises only from:  (a) the Related Party's position as a director of another entity that is a party to the transaction; (b) from direct or indirect ownership by such Related Party and all other Related Parties, in the aggregate, of less than a 5% equity interest in another person (other than a partnership) that is a party to the transaction; (c) from both such position described in (a) and ownership described in (b); or (d) from the Related Party's position as a limited partner in a partnership  in which all Related Parties in the aggregate have an interest of less than 5% and the Related Party  is not a general partner of and does not have another position in such partnership;

·	certain transactions in the Company's ordinary course of business where the Related Party's interest arises solely from the ownership of the Company's Common Stock and holders of the Company's Common Stock received the same benefit on a pro rata basis; and

 

 

 

·

certain transactions involving a Related Party where the rates or charges involved are determined by competitive bids, or transactions involving the rendering of services as a common or contract carrier, or as a public utility, at rates or charges fixed in conformity with law or a governmental authority.

INFORMATION REGARDING OUR EXECUTIVE OFFICERS

The Board of Directors generally elects officers annually following our annual meeting of stockholders to serve until the meeting of the Board following the next annual meeting. Set forth below is certain information about each executive officer as of May __, 2018. The business address of each executive officer is c/o Owens Realty Mortgage, Inc., 2221 Olympic Blvd., Walnut Creek, CA 94595.

 

 

 

By the Compensation Committee:

Dennis George Schmal, Chair

James Matthew Kessler

Gary C. Wallace

The foregoing Compensation Committee Report shall not be deemed under the Securities Act or the Exchange Act to be (i) "soliciting material" or "filed" or (ii) incorporated by reference by any general statement into any filing made by us with the SEC, except to the extent that we specifically incorporate such report by reference.

PAY RATIO DISCLOSURE

We estimate that the total annual compensation for our median employee was $27,000 for 2017.  The Company does not, however, pay salary, bonus, equity or other compensation to its principal executive officer (or any of its officers), and the pay ratio disclosure required by Item 402(u) of Regulation SK is not calculable without any such compensation.

COMPENSATION OF INDEPENDENT DIRECTORS

We pay directors' fees only to those directors who are independent under the NYSE American rules. From January 1 through June 30, 2017, each independent director was paid a cash retainer at an annual rate of $35,000 and, commencing July 1, 2017, the cash retainer paid to the independent directors was increased to an annual rate of $50,000, in each case, payable quarterly in advance. During 2017, our lead independent director (Mr. Schmal) was paid a supplemental retainer at an annual rate of $2,500, payable quarterly in advance. In addition, during 2017 our independent directors received the following supplemental annual retainers for their service on committees, in each case, payable quarterly in advance:

·	Audit Committee Chair (Mr. Wallace) — $7,500;

·	Compensation Committee Chair (Mr. Schmal) — $7,500; and

·	Nominating and Corporate Governance Committee Chair (Mr. Schmal) — $5,000.

We also reimburse all members of our Board for their travel expenses incurred in connection with their attendance at our Board, committee and stockholder meetings.

 

The following table summarizes the compensation received by our independent directors for the fiscal year ended December 31, 2017.  

The following table sets forth certain information regarding the beneficial ownership of the Common Stock as of May 18, 2018 (unless otherwise indicated), of each current director and director nominee, each of our executive officers, our executive officers and directors as a group and each stockholder known to management to own beneficially more than 5% of the outstanding shares of our Common Stock. Unless otherwise indicated, we believe that the beneficial owner set forth in the table has sole voting and investment power.

*Less than one percent.

 

 

 

RELATED PARTY TRANSACTIONS

Ownership of the Manager

The voting common stock of our Manager, Owens Financial Group, Inc., is owned as follows: 62.5% by William C. Owens, 16.305% by Bryan H. Draper, 16.305% by William E. Dutra and 4.89% by Brian M. Haines.

We have entered into a Management Agreement with our Manager, Owens Financial Group, Inc., which describes the services to be provided by our Manager.  The compensation payable to the Manager for those services and certain other important provisions relating to the Manager are described in our Charter, provided, however that the Board and Manager adjusted the Prior Management Fee to the Interim Management Fee on an interim basis during the period from July 1, 2017 to March 31, 2018. Effective April 1, 2018, the Board and the Manager amended the Management Agreement to adopt the Interim Management Fee and make certain additional changes to reduce the management fee payable as described below in "Interim Fee Reduction and Amendment of Management Agreement to Further Reduce Management Fees and Expenses". The Manager manages our day-to-day operations and business, subject to the supervision and oversight of our Board of Directors.  The Manager is required to act in accordance with policies and restrictions contained in the Company's Charter and such additional investment policies as may be adopted by our Board of Directors.

 

 

The Management Agreement continues in effect for the duration of the existence of the Company, unless earlier terminated by the affirmative vote of the holders of a majority of the outstanding shares of Common Stock, by the Manager in response to an amendment to its compensation that it does not consent to, automatically in certain circumstances relating to the assignment of the Management Agreement, or by either party for cause as defined therein.

The Management Agreement provides that the fees payable to the Manager as described in the Charter may not be changed without the approval of the Board (including a majority of the independent members of the Board), the holders of a majority of the outstanding shares of Common Stock and the Manager; provided that stockholder approval is not required to adjust the Manager's compensation so long as such adjustment will not have a significant adverse impact on the stockholders of the Company. The Charter and the Management Agreement provide for the payment of the following fees by the Company and by borrowers:

Fees paid by the Company. The Manager is entitled to receive the following fees from the Company:

·

Management Fee.  Until July 1, 2017, the Prior Management Fee was paid by the Company to the Manager monthly not to exceed 2.75% annually of the average unpaid balance of our loans at the end of each of the 12 months in the calendar year. Since this fee was paid monthly, it could exceed 2.75% in one or more months, but the total fee in any one year was limited to a maximum of 2.75%, and any amount paid above this had to be repaid by the Manager to the Company. The Manager was entitled to receive a management fee on all loans, including those that were delinquent. Effective July 1, 2017 through March 31, 2018, the Board and the Manager adjusted the Prior Management Fee on an interim basis to the reduced Interim Management Fee which was a monthly management fee equal to 1/12th of 1.50% of the Company's Stockholders' Equity, subject to the additional details of the calculation as described below in "Interim Fee Reduction and Amendment of Management Agreement to Further Reduce Management Fees and Expenses".

Effective April 1, 2018, the Company and the Manager amended the Management Agreement to adopt the Interim Management Fee adjustment along with an additional adjustment such that the monthly management fee payable equals (i) one-twelfth (1/12), multiplied by (ii) (a) 1.50% of the first $300,000,000 of the Company's Stockholders' Equity, plus (b) 1.25% of the Company's Stockholders' Equity that is greater than $300,000,000.  See "Interim Fee Reduction and Amendment of Management Agreement to Further Reduce Management Fees and Expenses" below for additional details of the  new management fee calculation, and for a description of certain additional changes to the fees and expenses payable to our Manager.

Management fees amounted to approximately $3,546,000 and $3,286,000 for the years ended December 31, 2017 and 2016, respectively. Of the $3,546,000 in management fees paid in 2017, our Manager has informed us that approximately $1,704,000 (48%) was allocated by the Manager to pay the five (5) employees of the Manager that would have qualified as our "named executive officers" under SEC Regulation SK 402(a)(3) had they been employed and paid by the Company. Of this compensation paid to such employees of the Manager, 62% was fixed salary and bonus and 38% was in the form of variable/incentive payments consisting of sales commissions on origination of loans.

·

Loan Servicing Fee.  The Manager may act as servicing agent with respect to the Company's mortgage loans. Until April 1, 2018, the Manager was entitled to receive from ORM a monthly servicing fee, which, when added to all other fees paid in connection with the servicing of a particular loan, could not exceed the lesser of the customary, competitive fee in the community where the loan is placed for the provision of such mortgage services on that type of loan, or up to 0.25% per year of the unpaid balance of ORM's mortgage loans at the end of each month. Servicing fees amounted to approximately $362,000 and $299,000 for the years ended December 31, 2017 and 2016, respectively. Effective April 1, 2018, no further servicing fees are payable to the Manager as described in "Interim Fee Reduction and Amendment of Management Agreement to Further Reduce Management Fees and Expenses" below.

 

 

Fees paid by borrowers. The Manager is entitled to receive directly from borrowers the following fees:

·

Acquisition and Origination Fees.  Until April 1, 2018, the Manager or its affiliates was entitled to receive and retain all fees and commissions paid or payable to it by any party other than ORM and any subsidiary in connection with ORM making or investing in mortgage loans. Included in the computation of such fees or commission is any selection fee, mortgage placement fee, nonrecurring management fee and any origination fee, loan fee or points paid by borrowers to the Manager or any fee of a similar nature, however designated. Such fees earned by the Manager amounted to approximately $2,492,000 and $2,514,000 on loans originated or extended of approximately $122,240,000 and $101,594,000 for the years ended December 31, 2017 and 2016, respectively. Effective April 1, 2018, such fees are to be shared with the Company as described in "Interim Fee Reduction and Amendment of Management Agreement to Further Reduce Management Fees and Expenses" below.

·

Late Payment Charges.  The Manager is entitled to receive and retain all additional charges paid by borrowers on delinquent loans and loans past maturity held by ORM, including additional interest and late payment fees. The amounts paid to or collected by the Manager for late payment charges totaled approximately $83,000 and $83,000 for the years ended December 31, 2017 and 2016, respectively. Effective April 1, 2018, such fees and charges are to be shared with the Company as described in "Interim Fee Reduction and Amendment of Management Agreement to Further Reduce Management Fees and Expenses" below.

·

Other Miscellaneous Fees. ORM remits other miscellaneous fees to the Manager, which are collected from loan payments, loan payoffs or advances from loan principal (i.e. funding, demand and partial release fees). Such fees remitted to the Manager totaled approximately $23,000 and $20,000 for the years ended December 31, 2017 and 2016, respectively.

ORM paid Investor's Yield, Inc. (a wholly owned subsidiary of the Manager) approximately $1,000 and $9,000 in trustee's fees related to certain foreclosure proceedings on ORM loans during the years ended December 31, 2017 and 2016, respectively.

Interim Fee Reduction and Amendment of the Management Agreement to Further Reduce Management Fees and Expenses

Interim Management Fee Reduction. During the period from July 1, 2017 through March 31, 2018, the Manager and the Board agreed to reduce the Prior Management Fee to a monthly "Interim Management Fee" calculated as follows:

1.	The "Interim Management Fee" is equal to (i) one-twelfth (1/12) multiplied by (ii) 1.50% of the "Opening Stockholders' Equity Balance" (defined below), with such Opening Stockholders' Equity Balance to be adjusted by the Manager in the following manner:

(A) at the end of a calendar month to reflect any changes that result from any of the events specified in clause (A) in the definition of "Stockholders' Equity" (defined below) during such calendar month from the Opening Stockholders' Equity Balance; and

 

 

(B) at the end of a calendar quarter to reflect any changes that result from the components specified in clauses (B), (C) or (D) in the definition of "Stockholders' Equity" (defined below) for such calendar quarter from the Opening Stockholders' Equity Balance.

Since the Management Fee is paid monthly during the period, and the components of Stockholders' Equity specified in clauses (B), (C) and (D) in the definition of "Stockholders' Equity" will not be known until the end of the quarter in question, the Manager shall use the prior quarter's value as an estimate for each monthly payment and will effect a reconciliation at the end of the quarter, so that the actual aggregate Management Fee paid for each quarter will be based on the values of the components specified in clauses (B), (C) and (D) in the definition of "Stockholders' Equity" at the end of that particular quarter as if the components specified in clauses (B), (C) and (D) were known at each month end.

2.	As used in the calculation of the Interim Management Fee, "Stockholders' Equity" means:

(A) the sum of the net proceeds from any issuances of the Company's equity securities since inception (including the book value of the Company's Common Stock and Additional Paid-in Capital at inception of the Company) less any amount that the Company pays for repurchases of its equity securities (determined as of the most recent month end), plus

(B) the Company's consolidated retained earnings at the end of the most recently completed calendar quarter (without taking into account any non-cash equity compensation expense incurred in current or prior periods), less

(C)  any unrealized gains, losses or other items that do not affect realized net income as of the most recently completed calendar quarter as adjusted to exclude

(D) one-time events pursuant to changes in GAAP and certain other non-cash charges after discussions between the Manager and the Company's Independent Directors and after approval by a majority of the Company's  Independent Directors.

3.

As used in the calculation of the Interim Management Fee, "Opening Stockholders' Equity Balance" means Stockholders' Equity at the end of the most recently completed calendar quarter. "Independent Directors" means the members of the Company's Board of Directors who are not officers, employees or directors of the Manager or any person directly or indirectly controlling or controlled by the Manager, and who are otherwise "independent" in accordance with the applicable rules of the NYSE American.

4.

The Manager shall compute each installment of the Interim Management Fee reasonably promptly at the end of each calendar month during the Interim Adjustment Period.  A copy of the computations, including a comparison of the Interim Management Fee to the Prior Management Fee, made by the Manager to calculate such installment shall thereafter promptly be delivered to the Board of Directors.

5.	The adjustments during the interim period did not include any change to the loan servicing fees or expense reimbursements payable by the Company to the Manager, and the Manager also continue to receive the fees paid by our borrowers to the Manager.

This adjustment resulted in a reduced management fee of approximately $440,000 during the last six months of 2017.

Amendment of the Management Agreement to Further Reduce Management Fees and Expenses. Effective April 1, 2018, the Management Agreement was amended by Amendment No. 1 (the "Amendment") to implement the following changes to the Manager's compensation structure:

 

 

·

Reduced Management Fee: The Amendment revises the management fee by making permanent the recent "Interim Management Fee" adjustment described above along with an additional adjustment such that the "Management Fee," calculated and payable to the Manager monthly in arrears, equals (i) one-twelfth (1/12) multiplied by (ii) (a) 1.50% of the first $300,000,000 of the Company's Stockholders' Equity (as defined in the Amendment), and (b) 1.25% of the Stockholders' Equity that is greater than $300,000,000.

·

Company to Receive 30% of Loan Fees: The Company will receive thirty-percent (30%) of the gross fees and commissions paid to the Manager in connection with the Company making or investing in mortgage loans, including thirty-percent (30%) of the gross fees paid in connection with the extension or modification of any loans, with the exception of certain miscellaneous administration fees collected in association with loan funding, demand, and partial release fees, with the remaining seventy-percent (70%) of such fees to be paid to the Manager.

·	Company to Receive 30% of Late Payment Charges: The Company will receive thirty-percent (30%) of all late payment charges from borrowers on loans owned by the Company, with the remaining seventy-percent (70%) to be paid to the Manager.

·	Elimination of Service Fees: The Company will no longer pay the Manager any servicing fees for the Manager's services as servicing agent with respect to any of its mortgage loans.

·	Elimination of Certain Expense Reimbursements: The Company will no longer reimburse the Manager for salary and related salary expense of the Manager's non-management and non-supervisory personnel.

Repurchase of Freestone Shares

On December 29, 2017, the Company entered into the Settlement Agreement with Freestone Capital Management, LLC and certain of its affiliates (collectively, "Freestone"), a stockholder group that beneficially owned more than 5% of our outstanding Common Stock, pursuant to which the Company agreed to purchase the 810,937 shares of Common Stock held by Freestone in a privately negotiated transaction for $19.25 per share, resulting in an aggregate purchase price of approximately $15.6 million. Pursuant to the terms of the Settlement Agreement, for a period of five years following the date of the Settlement Agreement, Freestone agreed to customary standstill restrictions relating to share purchases, support of proxy contests and other activist campaigns, calling of special meetings, and related matters.  For a period of two years following the date of the Agreement, the Company and Freestone also agreed to abide by customary covenants not to sue and non-disparagement provisions.  In addition, the Company and Freestone each released the other from all claims that the releasing party has, had or may have against the released party that relate to the investment by Freestone in the Company.

Office Lease

ORM does not have any separate offices. The Manager operates from its executive offices at 2221 Olympic Boulevard, Walnut Creek, California 94595, or the Executive Office. The lessor of the Executive Office is Olympic Blvd. Partners, a California General Partnership ("OBP"), of which the Manager is a 50% general partner. The Executive Office is the sole asset of OBP. The lease agreement, or the Office Lease, between OBP and the Manager for the Executive Office has a term extending until December 31, 2019. The Manager pays rent in the amount of $15,975 per month to OBP under the Office Lease. For each of the years ended December 31, 2017 and 2016, Owens Financial Group paid $191,700 to OBP for use of the Executive Office. The Executive Office was subject to a deed of trust in the amount of $616,780 as of December 31, 2017 with monthly payments of interest and principal of $3,988. The loan was repaid in full in March 2018.

SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

PROPOSALS OF STOCKHOLDERS

In order for a stockholder proposal submitted outside of Rule 14a-8, including any proposal of business or nominations for the Board of Directors made by stockholders, to be considered at the 2018 annual meeting of stockholders, our bylaws require, among other things, that such proposal must be made by written notice (setting forth all information required by our current bylaws) and received by our Secretary not earlier than the 150^th day nor later than 5:00 p.m., Pacific Time, on the 120^th day prior to _________________. Accordingly, to submit a director candidate for consideration for nomination at our 2018 annual meeting of stockholders, stockholders must submit the recommendation, in writing and in accordance with our bylaws by ________________, but in no event earlier than ______________.

OTHER MATTERS

Under applicable SEC rules and regulations, members of the Board, the Board's nominees, and certain officers and other employees of the Company are "participants" with respect to the Company's solicitation of proxies in connection with the Annual Meeting. The following sets forth certain information about such persons (the "Participants").

The names and present principal occupation of our director nominees, each a Participant, are set forth in the section entitled "Proposal 1: Election of Two (2) Directors" under the heading "Information about the Director Nominees and the Continuing Directors" of this Proxy Statement. The business address for the Company's current directors and director nominees is c/o Owens Realty Mortgage, Inc., 2221 Olympic Boulevard, Walnut Creek, California 94595.

Executive officers and employees of the Company who are Participants are William E. Dutra, Brian M. Haines, Melina A Platt and Daniel J. Worley. The business address for each is c/o Owens Realty Mortgage, Inc., 2221 Olympic Boulevard, Walnut Creek, California 94595. Their principal occupations are stated in the section entitled "Information Regarding Our Executive Officers" in this Proxy Statement.

The number of the Company's securities beneficially owned by the Participants as of May 18, 2018 is set forth in the section entitled "Securities Ownership of Management and Certain Beneficial Owners" in this Proxy Statement.

The following table sets forth information regarding purchases and sales of the Company's securities by the Participants within the past two years. No part of the purchase price or market value of these securities is represented by funds borrowed or otherwise obtained for the purpose of acquiring or holding such securities.

 

 

Miscellaneous Information Concerning Participants

Other than as set forth in this Annex A or elsewhere in this Proxy Statement and based on the information provided by each Participant, none of the Participants or their associates (i) beneficially owns (within the meaning of Rule 13d-3 under the Securities Exchange Act of 1934), directly or indirectly, or owns of record but not beneficially, any shares of Common Stock or other securities of the Company or any of its subsidiaries or (ii) has any substantial interest, direct or indirect, by security holdings or otherwise, in any matter to be acted upon at the Annual Meeting. In addition, neither the Company nor any of the Participants listed above is now or has been within the past year a party to any contract, arrangement or understanding with any person with respect to any of the Company's securities, including, but not limited to, joint ventures, loan or option arrangements, puts or calls, guarantees against loss or guarantees of profit, division of losses or profits or the giving or withholding of proxies. No Participant has been convicted in a criminal proceeding (excluding traffic violations and similar misdemeanors) during the past ten years.

Other than as set forth in this Annex A or elsewhere in this Proxy Statement and based on the information provided by each Participant, neither the Company nor any of the Participants listed above or any of their associates have or will have (i) any arrangements or understandings with any person with respect to any future employment by the Company or its affiliates or with respect to any future transactions to which the Company or any of its affiliates will or may be a party or (ii) a direct or indirect material interest in any transaction or series of similar transactions since the beginning of our last fiscal year or any currently proposed transactions, or series of similar transactions, to which the Company or any of its subsidiaries was or is to be a party in which the amount involved exceeds $120,000.

PRELIMINARY PROXY CARD – SUBJECT TO COMPLETION

EVERY STOCKHOLDER'S VOTE IS IMPORTANT

EASY VOTING OPTIONS:

 

Please detach at perforation before mailing.

WHITE PROXY CARD

OWENS REALTY MORTGAGE, INC.

ANNUAL MEETING OF STOCKHOLDERS

The undersigned, a stockholder of Owens Realty Mortgage, Inc., a Maryland corporation (the "Company"), acknowledges receipt of the Notice of the Annual Meeting of Stockholders and Proxy Statement and hereby appoints William C. Owens and Bryan H. Draper, and each of them acting individually or in the absence of others, as proxies with full power of substitution and re-substitution in any of them, to vote all shares of Common Stock of the Company held by the undersigned as shown below on this Proxy Card, with all the powers the undersigned would possess if personally present, at the Annual Meeting of Stockholders of Owens Realty Mortgage, Inc. to be held at [●], on [●], 2018 at [●] Pacific Daylight Time, or at any continuation, postponements or adjournments thereof, as hereafter specified, upon such matters as may properly come before the Annual Meeting of Stockholders, with the same force and effect as the undersigned might or could do if personally present thereat. The shares represented by this Proxy Card shall be voted in the manner set forth on the reverse side. The undersigned hereby revokes all proxies previously given by the undersigned with respect to the Annual Meeting of Stockholders, including any proxy previously given by telephone or internet.

THIS PROXY CARD, WHEN PROPERLY SIGNED, DATED AND RETURNED, WILL BE VOTED AS DIRECTED. UNLESS OTHERWISE DIRECTED, THIS PROXY CARD WILL BE VOTED FOR THE ELECTION OF THE DIRECTOR NOMINEES AND FOR PROPOSAL 2. THE BOARD UNANIMOUSLY RECOMMENDS THAT YOU VOTE ON THIS PROXY CARD "FOR" EACH OF THE NOMINEES PROPOSED BY THE BOARD IN PROPOSAL 1 AND "FOR" PROPOSAL 2. The Board of Directors (the "Board") knows of no other items of business that will be presented for consideration at the Annual Meeting of Stockholders other than those described in the accompanying Proxy Statement.  If any of the Board's nominees shall be unable to serve or for good cause will not serve, then your WHITE proxy card will be voted for such nominee(s) as the holders of your proxy, acting in their discretion may determine.

 

	VOTE VIA THE INTERNET:  www.proxy-direct.com VOTE VIA THE TELEPHONE:  1-800-337-3503
	To change the address on your account, please check the box at right and indicate your new address in the address space below.  Please note that changes to the registered name(s) on the account may not be submitted via this method. ☐

 

 

PLEASE MARK, SIGN, DATE AND RETURN THIS PROXY CARD USING THE ENCLOSED ENVELOPE.

ORM_29881_051818

PRELIMINARY PROXY CARD – SUBJECT TO COMPLETION

EVERY STOCKHOLDER'S VOTE IS IMPORTANT

Important Notice Regarding the Availability of Proxy Materials for the

The Proxy Statement and Proxy Card for this Meeting are available at:

IF YOU VOTE ON THE INTERNET OR BY TELEPHONE,

YOU NEED NOT RETURN THIS PROXY CARD

Please detach at perforation before mailing.

WHITE PROXY CARD

TO VOTE MARK BLOCKS BELOW IN BLUE OR BLACK INK AS SHOWN IN THIS EXAMPLE:   ☒

    ■  Proposals – The Board of Directors unanimously recommends a vote FOR the nominees listed below and FOR Proposal 2.

1.	Company Proposal: To elect two (2) Class II directors, each to serve for a term continuing until the annual meeting of stockholders held in 2021 and until their respective successors are duly elected and qualified:

 

			FOR	WITHHOLD				FOR	WITHHOLD
	01.	Bryan H. Draper	£	£		02.	James M. Kessler	£	£

		FOR	AGAINST	ABSTAIN
2.	Company Proposal: To ratify the appointment of Crowe Horwath LLP as the Company's independent registered public	£	£	£
	accounting firm for the year ending December 31, 2018.

 

 

3.	To transact such other business as may properly come before the Annual Meeting or at any postponement or adjournment thereof.

   ■   Authorized Signatures ─ This section must be completed for your vote to be counted.─ Sign and Date Below

Note: Please sign exactly as your name(s) appear(s) on this Proxy Card, and date it.  When shares are held jointly, each holder should sign.  When signing as attorney, executor, administrator, trustee, officer of corporation or other entity or in another representative capacity, please give the full title under the signature.

 

Date (mm/dd/yyyy) ─ Please print date below		Signature 1 ─ Please keep signature within the box		Signature 2 ─ Please keep signature within the box
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