Registration File No. 333-199237



SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

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POST-EFFECTIVE AMENDMENT NO. 2

TO

FORM S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

_____________________



Ministry Partners Investment Company, LLC

(Name of small business issuer in its charter)

_____________________





915 West Imperial Highway, Suite 120

Brea, California 92821

(714) 671-5720

 (Address and telephone number of principal executive offices and principal place of business)



JOSEPH W. TURNER, JR.

Chief Executive Officer, President

915 West Imperial Highway, Suite 120

Brea, California 92821

(714) 671-5720

(Name, address and telephone number of agent for service)



With copies to:



RANDY K STERNS, ESQ.

BUSH ROSS, P.A.

1801 N. Highland Avenue

Tampa,  Florida 33602

(813)  224-9255

_____________________



Approximate date of proposed sale to the public:  As soon as practicable after the Registration Statement becomes effective.



If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. ☑



If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following space and list the Securities Act registration statement number of the earlier effective registration statement for the same offering: ☐



If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ☐



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If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ☐ 



If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. ☐ 



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



Large accelerated filer ☐            Accelerated filer ☐             Non-accelerated filer ☐             Smaller reporting company ☑

                                                                   (Do not check if a smaller reporting company)



 

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(1) The notes will be sold at their face amount.

(2) A total of $85,000,000 of the Class 1 Notes is being registered, consisting of a combination of the Fixed Series and/or Variable Series.

(3) The fee is based on the total of $85,000,000 being registered hereby.



The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the Commission acting pursuant to said section 8(a) may determine.



Explanatory Note



The purpose of this amendment is to update the financial information and related disclosures to include and reflect the Company’s financial statements for its year ended December 31, 2015 and thereby satisfy its undertaking to do so in Section 17 of Part II of the Registration Statement.

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$85,000,000

 MINISTRY PARTNERS INVESTMENT COMPANY, LLC

Class 1 Notes Promissory Notes

We are offering our Class 1 Notes in two Series: the Fixed Series and the Variable Series in several Categories, each of which has a minimum required investment. The Class 1 Notes, which we sometimes refer to as the “Notes”, are our unsecured and unsubordinated obligations and, except as described herein, rank equal in right to payment with our existing and future unsecured creditors. Each Note Series bears interest at a rate equal to the sum of the Spread for the respective Series Category plus the applicable Index rate. The Fixed Series Notes are offered with maturities of 12, 18, 24, 30, 36, 42, 48, 54 and 60 months and the Variable Series Notes are offered with a maturity of 72 months. Unless otherwise indicated, the words “we”, “us”, “our” or the “Company” refer to Ministry Partners Investment Company, LLC, together with three wholly owned subsidiaries.

We are offering the Notes on a best efforts basis through our Selling Group comprised of our subsidiary, Ministry Partners Securities, LLC (“Managing Participating Broker” or “MP Securities”) and possibly other selected FINRA member broker-dealers (the “Participating Brokers”).

INVESTING IN THE NOTES INVOLVES RISKS, INCLUDING POSSIBLE LOSS OF PRINCIPAL. SEE “RISK FACTORS” BEGINNING ON PAGE 17. THERE WILL BE NO PUBLIC MARKET FOR THE NOTES.

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATIONS TO THE CONTRARY IS A CRIMINAL OFFENSE.

THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL SECURITIES IN ANY STATE TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER IN SUCH STATE.





The Notes are part of up to $300 million of Class 1 Notes we are authorized to issue under the Class 1 Note Trust Indenture, which we refer to as the “Indenture.” U.S. Bank National Association, whom we refer to as “Trustee,” serves as the Trustee under the Indenture.

The Notes and other securities we offer are not deposits of, obligations of, or guaranteed by any of these credit unions. They are not insured or guaranteed by the National Credit Union Share Insurance Fund (“NCUSIF”), the Federal Deposit Insurance Corporation (“FDIC”), or any other government agency or private insurer.

The current Rate Schedule and any other supplements to this Prospectus are placed inside this front cover.

The date of this Prospectus is May 3, 2016

Ministry Partners Securities, LLC

 

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Table of Contents

 



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YOU SHOULD RELY ONLY ON INFORMATION CONTAINED IN THIS PROSPECTUS. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION DIFFERENT FROM THAT CONTAINED IN THIS PROSPECTUS. WE ARE OFFERING TO SELL AND SEEKING OFFERS TO BUY NOTES ONLY IN JURISDICTIONS WHERE OFFERS AND SALES ARE PERMITTED. THE INFORMATION CONTAINED IN THIS PROSPECTUS IS ACCURATE ONLY AS OF THE DATE OF THIS PROSPECTUS, REGARDLESS OF THE TIME THE PROSPECTUS MAY BE DELIVERED OR OF ANY SALE OF THE NOTES.

 



 

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INTRODUCTION



We have prepared this Prospectus so that you will have the information necessary to make your investment decision. Please read this Prospectus carefully. It describes the Notes, the risks involved in investing in the Notes, our company and our business, and our financial condition. We refer to the registered owner of a Note as a “Noteholder” or “Holder”.



FREQUENTLY ASKED QUESTIONS ABOUT THE NOTES







 

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SUITABILITY STANDARDS



An investment in our Notes is only suitable for persons who have adequate financial means and desire an investment in unsecured debt obligations for a term of the Note selected, from 12-months up to 60-months for the Fixed Series Notes. All of the Variable Series Notes have a term of 72-months. In addition, an investment has limited liquidity, which means that it may be difficult for you to sell your Note. Persons who may require liquidity prior to the maturity of their Note or seek a guaranteed stream of income should not invest in our Notes.



In consideration of these factors, we have established minimum suitability standards for purchasers of Notes. These minimum suitability standards require that a purchaser of Notes satisfy the following:



If you are a natural person (an individual):





If you are a non-natural person (such as a church, school, parachurch ministry, corporation, or trust):





In the case of sales to fiduciary accounts, the suitability standards must be met by either the fiduciary account, by the person who directly or indirectly supplied the funds for the purchase of the Notes, or by the beneficiary of the account.



We and the Managing Participating Broker are responsible for determining if the Note purchasers meet these minimum suitability standards for investing in our Notes. In making this determination, we and the Managing Participating Broker will rely on the Participating Brokers and information provided by prospective Note purchasers. In addition to the minimum suitability standards described above, we and each Participating Broker, authorized representative or any other person selling Notes on our behalf, are required to make every reasonable effort to determine that the purchase of Notes is a suitable and appropriate investment for each Note purchaser.



In making this determination, your Participating Broker, authorized representative or other person selling Notes on our behalf will, based on a review of the information provided by you, including your age, investment objectives, income, net worth, financial situation and other investments held by you, consider whether you:



–the fundamental risks of an investment in the Note you purchase;

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–the risk that you may lose your entire investment in your Note;

–the lack of liquidity of the Note you purchase;

–any restrictions on transferability of the Notes; and

–the tax, including ERISA, consequences of an investment in our Notes.

Such persons must maintain records for at least six years of the information used to determine that an investment in the Notes is suitable and appropriate for each investor.



Restriction Imposed by the USA PATRIOT Act and Related Acts



In accordance with the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (the “USA PATRIOT Act”), the Notes offered by this Prospectus may not be offered, sold, transferred or delivered, directly or indirectly, to any “Unacceptable Investor,” which means anyone who is:



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PROSPECTUS SUMMARY



The following summary highlights selected information we have included in this Prospectus. It does not contain all of the information that may be important to you. More detailed information about the Notes, the Indenture, our business, and our operating data is contained elsewhere in this Prospectus. See also the section, “Frequently Asked Questions About The Notes.” This section does not contain all of the information that is important to your decision whether to invest in the Notes. We encourage you to read this Prospectus, including the section entitled “Risk Factors” and our Financial Statements starting at page F-1 of this Prospectus in their entirety before making an investment decision.



About Our Company



We are a California limited liability company. Our principal executive offices are located at 915 West Imperial Highway, Suite 120, Brea, California, 92821 and our telephone number is 800-753-6742. Our website is located at www.ministrypartners.org. The information on our website is not part of this Prospectus.  



We are in the business of making and investing in loans made to evangelical Christian churches, ministries and related organizations. Our loan investments are generally secured by a first lien on church properties and/or ministry related properties. We use the proceeds from the sale of the Notes and our other borrowings to fund our Mortgage Loan investments. We may, from time to time, use proceeds from the sale of the Notes to repay outstanding Notes and/or other borrowings. We refer to the Notes and other Notes we sell to investors as our debt securities.



















 





 

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SELECTED FINANCIAL DATA



The following is a summary of selected financial data for the years ended December 31, 2015 and 2014 (dollars in thousands):







For a discussion on the factors that affected the Company’s results of operations and financial condition for the year ended December 31, 2015 as compared to the year ended December 31, 2014, please refer to the section titled “Management’s Discussion and Analysis of Financial Condition.”



WARNING CONCERNING FORWARD-LOOKING STATEMENTS



Certain statements in this Prospectus, other than purely historical information, including estimates, projections, statements relating to our business plans, objectives and expected operating results, and the assumptions upon which those statements are based, are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward‑looking statements are included with respect to, among other things, our current business plan, business strategy and portfolio management. These forward-looking statements generally are identified by the words “believe,” “project,” “expect,” “anticipate,” “estimate,” “intend,” “strategy,” “plan,” “may,” “should,” “will,” “would,” “will be,” “will continue,” “will likely result,” and similar expressions. Forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties which may cause actual results or outcomes to differ materially from those contained in the forward-looking statements. Important factors that we believe might cause such differences are discussed in the section entitled, “Risk Factors” or otherwise accompany the forward-looking statements contained in this Prospectus. We undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise. In assessing all forward-looking statements, readers are urged to read carefully all cautionary statements contained in this Prospectus.  



These forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties that are subject to change based upon various factors (many of which are beyond our control).  Such risks, uncertainties and other factors that could cause our financial performance to differ materially from the expectations expressed in such forward-looking statements include, but are not limited to, the risks set forth in our Annual Report on Form 10-K for the year ended December 31, 2015, as well as the following:



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RISK FACTORS



Carefully consider the risks described below before making your investment decision. Refer to the other information in this Prospectus, including our financial statements and the related Notes.



Our business, financial condition, and results of operations could be harmed by any of the following risks or other risks which have not been identified or which we believe are immaterial or unlikely. The U.S. economy is still recovering from an economic recession and we expect this to have a significant impact on our business and operations, including, without limitation, the credit quality of our loan portfolio, our liquidity and our earnings. The risks and uncertainties described below are not the only risks that may have a material, adverse effect on us. Additional risks and uncertainties also could adversely affect our business, financial condition and results of operations. The risks discussed below include forward-looking statements, and our actual results may differ substantially from those discussed in these forward-looking statements. Investors should carefully consider the risks described below in conjunction with the other information in this Prospectus and the information incorporated by reference in this Prospectus.  



Risks Related to the Notes



Payment of the Notes is not secured or guaranteed by any person.



Repayment of the Notes is our exclusive obligation, and the Notes are our sole responsibility and are not the obligation or responsibility of any other person. See “Description of the Notes” below. In general, as a Noteholder, you will have no greater right to payment than that of our other general creditors. At December 31, 2015 we had $140.1  million of total debt obligations of which $49.9  million consisted of various types of Investor Debt, approximately 37%, 21% and 17%   of which are due and payable in 2016,  2017 and 2018, respectively.



Our secured debt requires us to maintain excess collateral, which potentially decreases our assets available to pay the Notes and our other unsecured debt.



Our current credit facilities and Secured Notes each require that we secure their payment with Mortgage Loans having an unpaid balance exceeding the unpaid balance of the loan. This excess collateral may not be available to pay the Notes or our other unsecured creditors. This is because there is no assurance that the then current realizable value of the Mortgage Loans constituting this collateral will not be less than the then unpaid balance. Also, in the event of a default under these secured loans, the respective lender has the right to foreclose on its collateral pursuant to the respective credit facility agreement and applicable commercial law. Because these laws generally do not require the collateral securing these loans to be sold or otherwise liquidated for an amount equal to its then fair market value, creditors holding these loans could seize some or all of the excess collateral we pledged to secure these loans. Thus, our assets remaining after foreclosure on these credit facilities may not be sufficient to repay debt owed to our other creditors, including the Holders.



The Trustee may resign in the event we are in default on the Notes.



The Trustee may resign as Trustee under the Indenture at any time upon notice, thereby requiring the appointment of a successor trustee in accordance with the Indenture. In such event, delays may result in the appointment of a successor trustee, which may, in turn, delay the Noteholders’ ability to pursue one or more remedies in the event we are declared in default under the Indenture.



Your rights as a Holder are governed and restricted by the Indenture.



The Notes are subject to the Indenture, which restricts and regulates your rights as a Noteholder. For example, in the event of our default, the Indenture allows you to seek remedies against us only through action by the Trustee.  The Indenture requires a Vote of the Holders to take certain acts on behalf of the Holders and that Vote will bind all Holders.  For example, the Indenture provides that in the event of our default, the Holders of 25% of the unpaid principal amount of the Outstanding Notes may declare the entire unpaid balance of the Notes immediately due and

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payable. The Indenture requires a Majority in Interest Vote of the Holders to pursue collection of the Notes and other remedies. The Indenture also provides that a Majority Vote of the Holders is required to adopt certain amendments and supplements to the Indenture and the Notes, and to waive certain defaults, events of default,  and/or to remove and replace the Trustee. The Indenture contains cross-default provisions whereby our default on one Series of the Notes will constitute a default with respect to each other Series of Notes. Thus, Holders suffering an actual default may be more inclined to take action against us than Holders who suffer only a technical default on their Notes because of these cross-default provisions. Accordingly, where there is an actual default on one or more Series of Notes constituting less than a majority of the unpaid principal balance of the Outstanding Notes, such Holders may not be able to obtain the approval of the Holders required to appoint a Trustee and pursue a remedy under the Indenture. In such event, you may have no practical recourse against us. See the description of the Indenture under “The Indenture” below.

 

BY EXECUTING YOUR PURCHASE APPLICATION, YOU AGREE TO BE BOUND BY THE TERMS AND CONDITIONS OF THE INDENTURE. YOU SHOULD CAREFULLY REVIEW THE INDENTURE WHICH IS ATTACHED AS EXHIBIT A TO THIS PROSPECTUS. YOU MAY NOT INSTITUTE OR CONTINUE ANY PROCEEDING, JUDICIAL OR OTHERWISE, WITH RESPECT TO YOUR NOTE, THE INDENTURE, OR THE APPOINTMENT OF A RECEIVER OR OTHER TRUSTEE OR FOR ANY OTHER REMEDY IN CONNECTION THEREWITH DURING THE PERIOD OF OPERATION OF THE INDENTURE, UNLESS CERTAIN CONDITIONS, AS SET FORTH IN THE INDENTURE, ARE SATISFIED.



Because the selling commissions we pay to the Selling Group are different for each series of Notes, members of the Selling Group face potential conflicts of interest with our Note investors.



The Selling Group will receive commissions ranging from a maximum of 5.50% for the sale of certain longer term Fixed Series Notes to as little as 0.75% for the sale of Variable Series Notes. Thus, the amount of the PB Commissions a Participating Broker will receive, including MP Securities, will differ depending on the Series and category of the Note sold and the amount of the PB Commissions will, in general, increase with the length of the term of the Note sold. The Participating Brokers and the Managing Participating Broker, to the extent it places a Note, therefore face potential conflicts of interest between the interests of their customers and their own economic interests, in that they will have a greater financial incentive to sell Notes which result in the highest commissions (generally longer term Notes) while the Note yielding the highest commission (i.e. a longer term Note) may or may not meet the greatest needs of the customer.



No assurance of hardship prepayment if requested.



In general, the Notes are redeemable prior to maturity upon request, but only in our sole discretion. Thus, Holders may not be able to redeem their Notes prior to maturity, particularly during times when there are a significant number of early redemption requests.



The Notes are non-negotiable and may not be transferred without the Company’s prior written consent.



The Notes are non-negotiable and are payable only to the person shown as the registered Holder on the records of the Company. The Holder, or any subsequent registered Holder, may transfer his or her Note, or any interest in that Note, only upon the prior written consent of the Company, which consent will not be unreasonably withheld.



There will be no market for your Note and you must depend solely on our ability to repay your Note for liquidity of your investment.



You should be prepared to hold your Note to maturity, subject to any redemption right you may have under your particular Note. You have the right to tender your Note for prepayment at any time, for which we may charge an administrative fee of not more than 3-months of interest payable on the principal amount of the Note. However, our prepayment of your Note is voluntary and you should not rely on our willingness or ability to do so.



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The Notes are not rated and there will be no sinking fund for repayment of the Notes.



We have not obtained a rating for your Notes from an independent rating agency and we do not intend to request such a rating. Also, there will not be a sinking fund established for the repayment of the Notes and we must rely on our available cash resources to timely repay your Note. There is no assurance that we will have adequate cash resources available at the time the Notes are due.



The Holders may need to appoint a successor or substitute trustee before they can pursue their remedies under the Indenture.



Under the Indenture, you and the other Holders may pursue your remedies in the event of our default or otherwise exercise your rights under the Indenture only through the Trustee. U.S. Bank is the Trustee. In the event the Trustee resigns or should the Holders desire to appoint a different Trustee, they may do so only with a Majority Vote. Also, finding a suitable Trustee and obtaining the Majority Vote of the Holders could be time consuming and completion of this appointment process could significantly delay the Holders’ ability to exercise your rights under the Indenture. See “The Indenture” below.



Under certain circumstances, a Majority Vote of the Holders may amend or supplement your Note or the Indenture without your consent.



Also, by a Majority Vote, the Holders may approve the waiver of any default, event of default or breach of a covenant or other condition under the Note. Moreover, the Trustee has the power under the Indenture to compromise or settle any claims against us by the Holders and, if such compromise or settlement is approved by a Majority Vote of the Holders, the settlement or compromise would be binding on all Holders. IN ANY OF THESE EVENTS, YOU MAY BE WITHOUT PRACTICAL RECOURSE AGAINST US.



We may not be able to maintain our promised minimum tangible adjusted net worth of $4.0 million as required by the Indenture.



In the event we sustain net losses, we may not be able to satisfy this Minimum Adjusted Net Worth requirement unless our Members contribute additional equity capital. Our Members are under no obligation to contribute additional equity capital and they would make any such additional investment solely on a voluntary basis.



We have the right to repay your Note.



Thus, we have the right to terminate your investment in a Note at a time its yield increases because of drops in prevailing interest rates.



We have not independently determined the offering price for the Notes.



We are issuing the Notes at their face amount, i.e., at par. We have not determined the price of the Notes based on any single or group of objective factors. No independent appraisal or evaluation company, or other expert or advisor, has been consulted in regard to the pricing of our Notes. Therefore, there is no assurance that the yield you will receive from your Note is not lower than that which could be obtained from similar investments from other issuers.



We may apply the proceeds from this offering to repay existing indebtedness which will not increase our Mortgage Loan investment portfolio.



We may from time to time apply all or a substantial amount of the proceeds from the sale of the Notes to the repayment of interest and/or principal on our credit facilities and/or our previously issued debt securities. We will generally choose to use our available cash funds, which may include proceeds from the sale of the Notes, for these purposes, rather than liquidate our short-term investments or Mortgage Loan investments for these purposes.



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Risks Related to the Company



We may be unable to obtain sufficient capital to meet the financing requirements of our business.



Our ability to finance our operations and repay maturing obligations to our investors and credit facility lenders depends, to a substantial degree, on our ability to borrow money and raise capital from the sale of our debt securities. Our ability to borrow money and sell our debt securities is affected by a variety of factors including:



During the last five years, the size of the Company’s balance sheet has been reduced as a result of deleveraging our assets, a reduction in the total amount of our investor debt securities, and pay-downs and/or pay-offs of institutional credit facilities we have relied upon, in part, to fund our business. An event of default, lack of liquidity or a general deterioration in the economy that affects the availability of credit may increase our cost of funding, make it difficult for us to renew or restructure our credit facilities and obtain new lines of credit. We are also susceptible to withdrawals by investors in our debt securities that can cause unexpected liquidity problems.



We are actively expanding our methods of raising capital, including seeking financing from institutional lenders, selling participations in our loans receivable, and expanding the sales of our debt securities to institutional, individual, IRA and retail investors. If our strategy to raise additional capital through the sale of investor notes and debt securities is not viable, we will need to find alternative sources of borrowing to finance our operations. To the extent we are unable to raise the capital we need to implement our strategic objectives, we may have to sell assets, further deleverage our balance sheet, and reduce operational expenses, thereby reducing cash available to distribute to our equity and debt securities investors.



Our ability to raise capital and attract new investors in our debt securities depends on our ability to attract an effective sales force in our wholly-owned licensed broker-dealer firm.



Our wholly-owned subsidiary, MP Securities, commenced limited operations as a FINRA member broker-dealer in 2012. Since that time, MP Securities has expanded the scope of services it provides to include acting as a selling agent for our notes offerings, providing insurance products and investment advisory services.  Our ability to attract new investors in our debt securities and increase the sale of our debt securities will depend, to a substantial degree, on our ability to assemble an effective sales team and to strategically recruit, retain and compensate the required personnel to assist us in this effort. If we are unable to recruit, retain and successfully motivate a qualified sales force at MP Securities, we may not be able to increase sales of the Company’s debt securities, strengthen our balance sheet and effectively utilize the investment in our core data processing and information systems we have implemented.



We depend on repeat purchases by a significant number of Holders to finance our business.



A significant percentage of the investors who purchase our debt securities purchase new notes after we repay their notes. Historically, a substantial proportion of our investors have purchased a new debt security from us when their notes mature. For the years 2008 – 2011, 76%, 79%, 57% and 73% of the investors that purchased a Class A Note had previously purchased one of our debt securities. For 2012, only 45% of the investors in our Class A Notes were repeat purchasers of our debt securities, primarily due to having to stop selling these notes for approximately six months while we sought approval from FINRA for MP Securities to sell our Class A Notes. In 2013, this rate fell to 34% due to suitability and concentration of investment restrictions that limit the amount of our debt securities that may be

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purchased by an investor.   For the years ended December 31, 2014 and 2015, our renewal rate climbed to 53% and 55%, respectively.  There is no assurance that historical patterns of rates of investments made by previous investors will resume in the future. If the rate of investments made by previous investors remains low, our ability to maintain or grow our asset base could be impaired.



Some of our debt securities investors may be unable to purchase the Notes due to FINRA’s investor suitability standards.



When handling sales of the Notes, MP Securities and its sales representatives must comply with FINRA’s “know your customer” and “suitability” guidelines which are designed to ensure that investors make investments that are appropriate given the age, investment experience, net worth, need for liquidity and mix of investments owned by the investor. Some of our investors who have invested in our debt securities in the past may not be able to invest in the Notes due to these regulatory constraints. If MP Securities is unable to offer such investors a suitable investment alternative, we could see a reduction in total amount of Investor Debt on our balance sheet, thereby making it difficult to grow our balance sheet.

Deterioration in real estate values and general economic conditions could lead to losses and reduced earnings.

For the year ended December 31, 2014, we reported a  net loss of $1.9 million.  During 2014, several of our non-performing assets decreased in value, resulting in $2.4 million taken in provisions for losses on foreclosed assets and $252 thousand in provisions for loan losses.  During 2015, we recognized $11 thousand in credits for losses recognized in prior years on foreclosed assets when we sold some of our real estate assets, which contributed to our net income of $357 thousand for the year.  We cannot assume that credits will be recovered in future years on our real estate owned assets due to the fact that, as of the date of this Prospectus, we have only one remaining real estate owned asset.  If we take ownership of a property as part of a foreclosure action when a borrower defaults on one of our mortgage loan investments, we could be required to write down the value of a real estate owned asset and record a charge to our earnings if the value of the property declines further after we take title to the property.  Further deterioration could lead to an increase in non-performing assets, increased credit losses, and reduced earnings.

Our growth is dependent on leverage, which may create other risks.

Our success is dependent, in part, upon our ability to grow our balance sheet assets through the use of leverage. Our organizational and governing documents do not limit the amount of indebtedness which we may incur. A significant amount of our assets are pledged as collateral for borrowings. Our Managers have overall responsibility for our financing strategy. Leverage creates an opportunity for increased net income, but at the same time creates risks. For example, leveraging magnifies changes in our net worth. We will incur leverage only when we expect that it will enhance our investment returns. To the extent that we fail to meet our debt service obligations, we risk the loss of some or all of our assets to satisfy these debt obligations. There can be no assurance that we will be able to meet our debt service obligations and, to the extent that we cannot, we risk the loss of some or all of our assets, or a financial loss if we are required to liquidate assets at a commercially inopportune time. At December 31, 2015, we had $140.1 million of total debt obligations. Of this amount, we owed $90.2 million under our institutional credit facilities and $49.9 million on our investor debt securities. Approximately 16%, 10% and 65% of our total debt obligations are payable in the years ending December 31, 2016,  2017 and 2018, respectively.

We have had fluctuating earnings.



As a mortgage financing lender, our profitability may be adversely affected by increasing provisions for losses relating to our loan portfolio. While the United States continues to recover from an economic crisis that has been characterized by high unemployment figures, residential and commercial foreclosures and restricted access to credit, many churches have been adversely impacted in their ability to meet their financial obligations. While we remained profitable during calendar years 2008 and 2009, we incurred net losses of $1.6 million and $1.0 million in calendar years 2010 and 2011, respectively, primarily due to increases in our allowance for loan losses and deleveraging of our balance sheet. With the successful refinancing of our primary credit facilities in November 2011 and improvement in the performance of our Mortgage Loan portfolio during 2012, we realized a profit of $417 thousand for 2012. We realized a profit of

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$592 thousand in 2013 as our Mortgage Loan portfolio performance remained stable and we were able to sell three of our foreclosed assets for a gain during the year. Decreases in the value of collateral securing our collateral dependent loans and decreases in the value of some of our foreclosed real estate owned assets primarily accounted for the $1.9 million loss reported for the year ended December 31, 2014.  For the year ended December 31, 2015, we reported net earnings of $357 thousand.  Since we have had fluctuating earnings over the last several years, we can give no assurances that we will be able to achieve and maintain consistent profits over the next few years.

Our reserves for loan losses may prove inadequate, which could have a material adverse effect on us.

For the year ended December 31, 2014, we recorded provisions for loan losses of $252 thousand. We recorded a credit for loan losses of $524 thousand for the year ended December 31, 2015. Although we regularly evaluate our financial reserves to protect against future losses based on the probability and severity of the losses, there is no guarantee that our assessment of this risk will be adequate to cover any future potential losses. 



Unanticipated adverse changes in the economy or events adversely affecting specific assets, borrowers, mismanaged construction, loss of a senior pastor, rising interest rates, failure to sell properties or assets, or geographical regions in which our borrowers or their properties are located may negatively impact our assessment of this risk and result in reserves that will be inadequate over time to protect against potential future losses. Maintaining the adequacy of our allowance for loan losses may require that we make significant and unanticipated increases in our provisions for loan losses, which would materially affect our results of operations and capital adequacy. Given the total amount of our allowance for loan losses, an adverse collection experience in a small number of loans could require an increase in our allowance.



If our non-performing assets increase, our earnings will be adversely affected.



At December 31, 2015 and December 31, 2014, our non-performing assets (which consist of impaired loans and other real estate owned properties) totaled $15.4 million and $15.9 million, respectively, or 10.3% of our total assets at each date. At December 31, 2013, and December 31, 2012, our non-performing assets were $22.2 million and $21.5 million, respectively, or 14.0% and 12.9% of total assets, respectively. Nonperforming assets adversely affect our net income in the following ways:













If additional borrowers become delinquent and do not pay their loans and we are unable to successfully manage our non-performing assets, our losses and troubled assets could increase significantly, which could have a material adverse effect on our results of operations and financial condition.



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The U.S. financial markets that have in the past provided liquidity, securitization financing, short-term credit facilities and access to capital to fund investments in church mortgage loans have been adversely impacted by payment defaults of churches and ministries, increases in loan work-outs and restructurings for churches and ministry related borrowers, and has reduced the availability of short-term financing facilities to finance our business.



In recent years, the availability of credit to finance the acquisition or origination of church mortgage loans has substantially reduced the financing sources for the ministry related mortgage loans we originate or invest in. This has reduced and made it more difficult for us to secure short-term credit facilities from institutional lenders, reduced the amount of capital we have available to make new investments in mortgage loans and has reduced, and may continue to reduce, revenue and cash flow we receive from our investments. Our continued use of secured institutional bank financing facilities will depend upon our ability to refinance or obtain renewals of our primary credit facilities when they mature in 2018 and obtain new secured bank financing on acceptable terms.



Our credit facilities require us to maintain excess collateral and to meet these minimum collateralization ratio requirements on these loans, our free assets may be materially reduced and our ability to meet our debt obligations materially impaired.



Our $87.3 million credit facility refinancing transaction entered into with the National Credit Union Administration Board as Liquidating Agent of Members United Corporate Federal Credit Union (the “MU Credit Facility”) and $23.5 million credit facility refinancing transaction entered into with the NCUA (the “WesCorp Credit Facility Extension”), each dated November 4, 2011, require that we secure the facility with mortgage loans having an aggregate unpaid balance exceeding the unpaid balance of the credit facility. If at any time, we fail to maintain the required minimum collateralization ratio, we will be required to deliver cash or qualifying mortgage loans in an amount sufficient to enable us to maintain the minimum collateralization ratio that must be met under our credit facilities.



We reached an agreement with the NCUA in March 2015 to provide for a more flexible minimum collateralization ratio.  Under our MU Credit Facility and WesCorp Credit Facility Extension, measured independently, we are now required to maintain a minimum collateralization ratio of at least 110%. We are required to maintain a collective minimum collateralization ratio of at least 120% for the two credit facilities in total.  As a result, the NCUA will retain all excess collateral until these credit facilities are repaid in full and we will not have this excess collateral available to pay our other obligations including our secured notes, Class A Notes, Class 1 Notes and other debt securities until we repay or retire the MU Credit Facility and WesCorp Credit Facility Extension.  However, we do have the ability to pledge cash on a one-to-one basis if there is a temporary deficit in the loan collateral pledged under these facilities.  On April 3, 2015, the NCUA confirmed amendments to both credit facility agreements which, among other things, grant us greater access to any excess collateral. See “Our Capitalization– NCUA credit facilities– Amendments to Our Credit Facility Agreements.”



As of December 31, 2015, we had pledged approximately $81.9 million and $25.7 million of our mortgage loans to secure the MU Credit Facility and the WesCorp Credit Facility Extension, respectively.  This represented a collateral deficiency of $686 thousand according to the terms of our credit facility agreements.  We pledged cash in the amount of $686 thousand in order to satisfy this deficit at December 31, 2015.  As of the date of this Prospectus, we are in compliance with this covenant.



Default under one credit facility will result in a default under our other credit facilities.



Our credit facilities and debt securities generally provide for cross-default provisions whereby a default under one agreement will trigger an event of default under other agreements, giving our lenders the right to declare all amounts outstanding under their particular credit agreement to be immediately due and payable, and enforce their rights by foreclosing on or otherwise liquidating collateral pledged under these agreements. For example, a default under one of our credit facilities would also constitute our default under our other credit facilities. Thus, to maintain these credit facilities, there cannot be a default under either one.

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In the event of our default under our secured credit facilities, we could lose assets in excess of our assets pledged as collateral. 



In the event of a default under our MU Credit Facility or our WesCorp Credit Facility Extension, the lender has the right to foreclose on its collateral pursuant to the respective credit facility agreement and applicable commercial law. These laws do not require, and the permissible foreclosure procedures do not assure, that the collateral securing these loans will be sold or otherwise liquidated for an amount equal to its fair market value. Thus, in the event of foreclosure, there is no assurance the lender will realize proceeds from the collateral sufficient to repay the debt we owe. Moreover, because these credit facilities are recourse against the borrower, the respective lender generally has the right to pursue the borrower for any deficiency between the amount the borrower owes on the defaulted loan and the value the lender realizes from its liquidation of the collateral for the loan. Thus, our assets remaining after a foreclosure by a lender under our credit facilities may not be sufficient to repay our other debt, including the Notes.



We may not be able to finance our investments on a long-term basis with an institutional lender on attractive terms, which may require us to seek more costly financing for our investments or to liquidate assets.



In recent years, we have relied upon short-term credit facilities to finance a substantial portion of our Mortgage Loan investments. When we acquire Mortgage Loans that have a maturity term that exceeds the term of our institutional credit facilities, we bear the risk of being unable to refinance, extend or replace our primary credit facilities or otherwise finance them on a long-term basis at attractive terms or in a timely manner, or at all. If it is not possible or economical for us to finance such investments on attractive terms, we may be unable to pay-down our credit facilities or be required to liquidate the assets at a loss in order to do so. Our reliance on financing provided by institutional credit facility lenders may subject us to an obligation to make significant balloon payments upon maturity of our $70.2 million MU Credit Facility and $20.0 million WesCorp Credit Facility Extension on October 31, 2018. If we are unable to roll-over, extend, refinance or replace such credit facilities on attractive terms, we may have to rely upon less efficient forms of financing new investments, which will result in fewer loan acquisitions or originations of profitable mortgages and further deleveraging of our balance sheet and thereby reduce the amount of earnings available for distributions to our equity investors and funds available for operations and to meet our debt service obligations.



Our financing arrangements contain covenants that restrict our operations and any default under these arrangements would inhibit our ability to grow our business, increase revenue and make distributions to our equity investors.



Our financing arrangements contain restrictions, covenants and events of default. Failure to meet or satisfy any of these covenants could result in an event of default under these agreements. Any event of default may materially adversely affect us. In addition, these restrictions may interfere with our ability to obtain financing or engage in other business activities. Furthermore, our default under any of our financing arrangements could have a material adverse effect on our business, financial condition, liquidity and results of operations and our ability to make distributions to our equity investors.



We rely on the use of borrowed funds and sale of debt securities to finance a substantial part of our business.



We have used borrowing facilities obtained from institutional lenders and relied upon offerings of debt securities in SEC registered offerings to fund the origination or acquisition of Mortgage Loans made to evangelical churches and ministries. Lending borrowed funds subjects us to interest rate risk which is largely determined by the difference, or “spread”, between the interest rates we pay on the borrowed funds and the interest rates our borrowers pay on our Mortgage  Loan investments. Any changes in our borrowing costs could decrease the spread we receive on our Mortgage Loan investments, which could adversely affect our ability to pay interest and redeem the outstanding debt securities on our balance sheet as they mature.



Loss of our management team or the ability to attract and retain key employees could harm our business.



We are dependent on the knowledge, skills, institutional contacts and experience of our senior management team. We also rely on our management team to manage our Mortgage Loan investments, evaluate and attract new borrowers,

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make prudent decisions as they relate to work-outs, modifications and restructurings and develop relationships with institutional investors, lenders, financial institutions, broker-dealer firms, ministries and individual investors. We can give no assurances that we will be able to recruit and retain qualified senior managers that will enable us to achieve our core strategic objectives and continue to profitably grow our business.



As a small financial services company that operates in a niche market, we are subject to liquidity risk that could materially affect our operations and financial condition.



In recent years, the financial services industry, credit markets and financing sources for ministry loans have been materially and adversely affected by reduced availability of liquidity. Reduced liquidity can particularly affect smaller lenders that have relied on short-term institutional credit facilities to enhance their liquidity needs. While we significantly improved our liquidity position through the successful refinancing of our MU Credit Facility and WesCorp Credit Facility Extension in late 2011, and as a result of relief being granted from certain minimum collateralization requirements in 2015, the sale of mortgage loan interests and foreclosed assets, the payoff of some of our mortgage loan investments, and an increase in note sales, we will need to monitor and successfully manage our liquidity requirements as necessary when redemption requests for our debt securities are received, or a debt security investment matures and is not re-invested in another debt security we may offer.



Our systems may experience an interruption or breach in security which could subject us to increased operating costs as well as litigation and other liabilities.



We rely heavily on communications and information systems to conduct our business. Any failure, interruption or breach in security of these systems could result in failures or disruptions in our customer and investor relationship management, general ledger, deposit, loan and other systems. The secure transmission of confidential information over the Internet and other electronic transmission and communication systems is essential to maintaining customer confidence in certain of our services. Security breaches, computer viruses, acts of vandalism and developments in computer capabilities could result in a breach or breakdown of the technology we use to protect customer information and transaction data. While we have policies and procedures designed to prevent or limit the effect of the possible failure, interruption or security breach of our information systems, there can be no assurance that any such failure, interruption or security breach will not occur or, if they do occur, that they will be adequately addressed. The occurrence of any failure, interruption or security breach of our information systems could damage our reputation, result in a loss of a borrower, investor or customer’s business or expose us to civil litigation and possible financial liability. Our financial, accounting, data processing or other operating systems and facilities may fail to operate properly or become disabled as a result of events that are beyond our control, such as unforeseen catastrophic events, cyber attacks, human error, change in operational practices of our system vendors, or unforeseen problems encountered while implementing major new computer systems or upgrades to existing systems, potentially resulting in data loss and adversely affecting our ability to process these transactions.



We engage in transactions with related parties and our policies and procedures regarding these transactions may be insufficient to address any conflicts of interest that may arise.  



Under our code of business conduct, we have established procedures regarding the review, approval and ratification of transactions which may give rise to a conflict of interest between us and any employee, officer, trustee, their immediate family members, other businesses under their control and other related persons. In the ordinary course of our business operations, we have ongoing relationships and have engaged in transactions with several related entities. These procedures may not be sufficient to address any conflicts of interest that may arise.



Any negative changes in the financial capabilities of one or more of our Members could adversely affect our ability to raise additional capital. 



None of our Members are obligated to make additional contributions or loan us additional funds. However, they may do so on a voluntary basis and we may from time to time, in the future, request our Members to do so. In such event, one or more of our Members may be unwilling or unable to make voluntary additional capital contributions or loans because their financial capabilities are at the time impaired. Also, if a Member’s financial status is in the future

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deteriorated to the extent that they or their operations are ceased or otherwise come under the control of the AMAC, NCUA or other regulatory agency, it is unclear what rights, if any, that agency will have to exercise that Member’s membership rights in our company or, if it can exercise any such rights, the manner in which it will do so.



Risks Related to the Financial Services Industry and Financial Markets



Deterioration of market conditions could negatively impact our business, results of operations and financial condition, including liquidity.



The market in which we operate is affected by a number of factors that are largely beyond our control but can nonetheless have a potentially significant, negative impact on our business. These factors include, among other things:















While there has been some improvement in U.S. real estate markets, our Mortgage Loan investments can be adversely affected by significant declines in the value of real estate and real estate related assets, impairment of the ability of many borrowers to repay their obligations and illiquidity in the markets for real estate and real estate-related assets. During the last several years, these events had significant adverse effects on our business resulting in significant increases in our provision for loan losses and unavailability of financing for the acquisition and warehousing of our Mortgage Loan investments. Deterioration in U.S. economic conditions could harm our financial condition, income and ability to make distributions to our equity investors.

 

Declining real estate values could harm our operations.



We believe the risks associated with our business are more severe during periods similar to those which we have recently experienced in which an economic slowdown or recession is accompanied by declining real estate values. Declining real estate values generally reduce the level of new Mortgage Loan originations, since borrowers often use increases in the value of their existing properties to support the purchase of, or investment in, or renovation of their worship facilities. Borrowers may also be less able to pay principal and interest on our loans, and the loans underlying our securities, if the real estate economy weakens. Further, declining real estate values significantly increase the likelihood that we will incur losses on our foreclosed assets and on our loans in the event of default because the value of our collateral may be insufficient to cover our investment in such assets. Any sustained period of increased payment delinquencies, foreclosures or losses could adversely affect both our net interest income from loans as well as our ability to originate, sell and securitize loans, which would significantly harm our revenues, results of operations, financial condition, liquidity, business prospects and our ability to make distributions to our equity investors.



Interest rate fluctuations and shifts in the yield curve may cause losses.



Our primary interest rate exposures relate to our Mortgage Loan investments and floating rate debt obligations. Changes in interest rates, including changes in expected interest rates or “yield curves,” affect our business in a number of ways. Changes in the general level of interest rates can affect our net interest income, which is the difference between the interest income we earn on our interest-earning assets and the interest expense we incur in

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connection with our interest-bearing liabilities. Changes in the level of interest rates also can affect, among other things, our ability to originate and acquire mortgages and the market value of our mortgage investments.



In the event of a significant rising interest rate environment, default by our mortgage loan obligors could increase our losses and negatively affect our liquidity and operating results. Interest rates are highly sensitive to many factors, including governmental monetary and tax policies, domestic and international economic and political conditions, and other factors beyond our control.



Our ability to execute our business strategy, particularly the growth of our Mortgage Loan investments portfolio, depends to a significant degree on our ability to obtain additional capital. Our financing strategy is dependent on our ability to obtain debt financing at rates that provide a positive net spread. If spreads for such liabilities widen or if availability of credit facilities ceases to exist, then our ability to execute future financings will be severely restricted.



Our subsidiary, MP Securities, is required to maintain licenses in the various jurisdictions in which it will conduct its activities.



As a registered broker-dealer and FINRA member,  MP Securities is required to maintain registrations under the securities laws in those states in which it conducts business. Failure to maintain such state registrations would prevent MP Securities from originating securities in such states and supplementing our revenue with underwriting fees or commissions it receives in connection with securities it would otherwise sell in those states.    



Our reputation, operating business and core strategic objectives could be adversely affected by regulatory compliance failures.



We rely on publicly offered debt securities to fund a substantial portion of our operations and, as a result, are subject to U.S. securities laws, rules, and regulations promulgated by the SEC and applicable state securities statutes. Our subsidiary, MP Securities, is subject to oversight from the SEC, FINRA, and the California Department of Business Oversight. To the extent MP Securities engages in securities activities in a particular state, state securities administrators will have jurisdiction over the activities of our broker-dealer affiliated entity. In addition, the real estate brokerage activities of MP Realty and our mortgage lending business are subject to various state regulatory authorities. The failure to comply with obligations imposed by any federal, state or other applicable regulatory authority binding on us or our subsidiaries or to maintain any of the licenses or permits required to be maintained by us could result in investigations, sanctions and reputation damage.



Risks Related to Our Mortgage Loan Investments

We are subject to risks related to prepayment of Mortgage Loans held in our portfolio, which may negatively impact our business.



Generally, our borrowers may prepay the principal amount of their Mortgage Loans at any time. Due to the Federal Reserve Board’s accommodative monetary policies, there is intense competition from financial institutions that are looking to make commercial loans at competitive rates to qualified borrowers. In addition, approximately 7% of the principal balance of our total Mortgage Loans will need to be refinanced during the year ending December 31, 2016. If a significant number of borrowers refinance their loans with another lender, our business and profitability could be adversely affected.



Increases in interest rates during the term of a loan may adversely impact a borrower’s ability to repay a loan at maturity or to prepay a loan.



If interest rates increase during the term of our loan, a borrower may not be able to obtain the necessary funds to repay our loan at maturity through refinancing. Increasing interest rates may hinder a borrower’s ability to refinance our loan because the underlying property cannot satisfy the debt service coverage requirements necessary to obtain new financing or because the value of the property has decreased. If a borrower is unable to repay our loan at maturity, we

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could suffer a loss and we would not be able to reinvest proceeds in assets with higher interest rates. As a result, our financial performance and ability to make distributions to our Members could be materially adversely affected.



Although we seek to favorably match the interest rate return on our Mortgage Loan investments with our debt financing commitments, we are subject to significant interest rate risk.



Our investment and business strategy depends on our ability to successfully finance our investments in mortgage loans that provide a positive spread as compared to our cost of borrowing. A substantial portion of our loan investments provide for a fixed interest rate with a typical five year maturity. A significant portion of our borrowing arrangements with our note investors and credit facility lenders, however, provides for variable rates of interest that are indexed to short-term borrowing rates or fixed rates on short-term maturities. To mitigate our interest rate risks, we have entered into, and may enter into in the future, interest rate hedging transactions that include, but are not limited to, interest rate caps and interest rate swaps. The results of using these types of instruments to mitigate interest rate risks are not guaranteed, and as a result, the volatility of interest rates could result in reduced earnings or losses for us and negatively affect our ability to make distributions of earnings to our equity investors.



We are subject to the risks associated with loan participations, such as less than full control rights.



Some of our assets are participation interests in loans or co-lender arrangements in which we share the rights, obligations and benefits of the loan with other lenders. We may need the consent of these parties to exercise our rights under such loans, including rights with respect to amendment of loan documentation, enforcement proceedings in the event of default and the institution of, and control over, foreclosure proceedings. Similarly, a majority of the participants may be able to take actions to which we object but to which we will be bound if our participation interest represents a minority interest. We may be adversely affected by this lack of full control. As of December 31, 2015 and 2014, our investments included $12.4 and $23.3 million, respectively, in loan participations, representing 9% and 17% of our portfolio, respectively.



Church revenues fluctuate and may substantially decrease during times of economic hardship.



Generally, to pay their loans, churches depend largely on revenues from church member contributions. Donations typically fluctuate over time for a number of reasons, including, but not limited to, fluctuations in church leadership and membership, local economic conditions, including unemployment rates, credit conditions and local real estate markets.



The quality of our mortgage loans depends on consistent application of sound underwriting standards.



The quality of the mortgage loans in which we invest depends largely on the adequacy and implementation of sound underwriting standards used to make the loans. Even where the lender has sound underwriting standards, these standards must be properly observed and implemented in order to obtain the target loan risk levels.



Because two of our Managers hold executive or board positions with our largest equity owner, they may, from time to time in their capacity as a manager of the Company, have a conflict of interest with the interests of that member.



Two of our Board of Managers hold executive or Board positions with our largest equity owner. Conflicts of interest may arise for these Managers between our interests and those of their affiliated credit union. Moreover, conflicts of interest are inherent in any transactions involving mortgage loans between us and their affiliated credit union. Because of their relationships, these Managers will face conflicts of interest in connection with various decisions they will make on our behalf, including, but not limited to:







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We have also implemented a Related Parties Transaction Policy to which all of our Managers and officers must adhere. It provides, among other things, that certain related party transactions be approved by a majority of those Managers who are unrelated to the parties in the transaction.



We have further mitigated these conflicts of interest by forming a Credit Review Committee, of which three out of the four members consist of our officers who are unrelated to ECCU. This committee makes most of the loan approval decisions under our Church and Ministry Loan Policy. Our Church and Ministry Loan Policy sets forth minimum credit quality standards for the loans we make or purchase, and can only be overridden, depending on the circumstances, by our Investment Committee or by our Managers.



Because we invest only in specialized purpose mortgage loans, our loan portfolio is generally more risky than if it were diversified.



We are among a limited number of non-bank financial institutions specialized in providing loans to evangelical churches and church organizations. Even though the number of institutions making and/or investing in mortgage loans to churches and church related organizations has increased in recent years, these loans are secured by specialized properties and the secondary market for these loans remains regional and limited. Our mortgage loan agreements require the borrower to adequately insure the property securing the loan against liability and casualty loss. However, certain types of losses, generally those of a catastrophic nature such as earthquakes, floods or storms, and losses due to civil disobedience, are either uninsurable or are not economically insurable. If a property was destroyed by an uninsured loss, we could suffer loss of all or a substantial part of our mortgage loan investment.



Our loan portfolio is concentrated geographically and focused on loans to churches and religious organizations.



We are among a limited number of non-bank financial institutions specialized in providing loans to evangelical churches and church organizations. Moreover, approximately 24% of our mortgage loan investments involve California borrowers or are secured by properties located in California. Although there are a number of national and regional institutions making and/or investing in mortgage loans to churches and church related organizations, these loans are secured by special purpose facilities. As a result, if the properties securing such mortgages must be sold, there may be a limited number of buyers available for such properties. Nevertheless, we believe that there is a great deal of diversity in the types of not-for-profit organizations and entities that could be potential acquirers of properties of this nature, including, but not limited to, other churches, schools, clinics, community development agencies, universities and educational institutions, day care, social services, assisted living facilities and relief organizations.



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We may need, from time to time, to sell or hypothecate our mortgage loan investments.



Because the market for our mortgage loans is specialized, the prices at which our portfolio could be liquidated are uncertain. As a result, our mortgage loan investments are relatively illiquid investments and we may have difficulty in disposing of these assets quickly or at all in the event we need additional liquidity. The amount we would realize is dependent on several factors, including the quality and yield of similar mortgage loans and the prevailing financial market and economic conditions. Although we have never sold a performing loan we own for less than par, it is possible that we could realize substantially less than the face amount of our mortgage loans, should we be required to sell or hypothecate them. Thus, the amount we could realize for the liquidation of our mortgage loan investments is uncertain and cannot be predicted.



We may not have all of the material information relating to a potential borrower at the time that we make a credit decision with respect to that potential borrower or at the time we advance funds to the borrower. As a result, we may suffer losses on loans or make advances that we would not have made if we had all of the material information.

 

There is generally no publicly available information about the churches and ministries to which we lend. Therefore, we must rely on our borrowers and the due diligence efforts of our staff to obtain the information that we consider when making our credit decisions. To some extent, our staff depends and relies upon the pastoral staff to provide full and accurate disclosure of material information concerning their operations and financial condition. We may not have access to all of the material information about a particular borrower’s operations, financial condition and prospects, or a borrower’s accounting records may become poorly maintained or organized. The financial condition and prospects of a church may also change rapidly in the current economic environment. In such instances, we may not make a fully informed credit decision which may lead, ultimately, to a failure or inability to recover our loan in its entirety.



We may be unable to recognize or act upon an operational or financial problem with a church in a timely fashion so as to prevent a loss of our loan to that church.

 

Our borrowers may experience operational or financial problems that, if not timely addressed by us, could result in a substantial impairment or loss of the value of our loan to the church. We may fail to identify problems because our borrowers did not report them in a timely manner or, even if the borrower did report the problem, we may fail to address it quickly enough or at all. Although we attempt to minimize our credit risk through prudent loan approval practices in all categories of our lending, we cannot assure you that such monitoring and approval procedures will reduce these lending risks or that our credit administration personnel, policies and procedures will adequately adapt to changes in economic or any other conditions affecting our borrowers and the quality of our loan portfolio. As a result, we could suffer loan losses which could have a material adverse effect on our revenues, net income and results of operations.



Some of the loans in our investment portfolio are in the process of being restructured, have been restructured or may otherwise be at risk, which could result in impairment charges and loan losses.



Some loans in our investment portfolio have been restructured or may otherwise be at risk or under credit watch. Over the last three years, the number of churches that have requested or been granted loan modifications has been significantly higher than in our prior historical experience. Under current economic conditions, the credit performance of these modified loans may not conform to either historical experience or our expectations. We make various assumptions and judgments about the collectability of our loan portfolio, including the creditworthiness of our borrowers and the value of the real estate and other assets serving as collateral for the repayment of many of our loans. If we determine that it is probable that we will not be able to collect all amounts due to us under the terms of a particular loan agreement, we could be required to recognize an impairment charge or a loss on the loan unless the value of the collateral securing the loan exceeds the carrying value of the loan. If our assumptions regarding, among other things, the present value of expected future cash flows or the value of the collateral securing our loans are incorrect or general economic and financial conditions cause one or more borrowers to become unable to make payments under their loans, we could be required to recognize impairment charges, which could result in a material reduction in earnings in the period in which the loans are determined to be impaired and may adversely affect, perhaps

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materially, our financial condition, liquidity and ability to make debt service payments and distributions to our equity owners.



Some of our Mortgage Loan investments currently are, and in the future may be, non-performing loans which are subject to increased risks relative to performing loans.



Some of the loans in our Mortgage Loan portfolio currently are, or in the future may be, a non-performing loan. Such loans may become non-performing if the church falls upon financial distress, the community or congregation the church serves suffers financial hardship or there is significant change in leadership of the church, in each instance, resulting in the borrower being unable to meet its debt service obligations to us. Such non-performing loans may require a substantial amount of work-out negotiations and restructuring efforts by our management team. These restructuring efforts may involve modifications to the interest rate, extension or deferral of payments to be made under the loan or other concessions. Even if a restructuring is successfully accomplished, a risk still exists that the borrower may not be able or willing to maintain the restructured payments or refinance the restructured mortgage at maturity.



In the event a borrower defaults on one of our Mortgage Loan investments, we will generally need to recover our investment through the sale of the property securing the loan.



In that event, the value of the real property security may prove insufficient, in which case we would not recover the amount of our investment. Even though an appraisal of the property may be obtained at the time the loan is originated, the property’s value could decline as a result of a number of subsequent events, including:















The occurrence of any of these factors could severely impair the market value of the security for our mortgage loan investments. In the event of a default under a Mortgage  Loan held directly by us, we will bear the risk of loss of principal to the extent of any deficiency between the value of the collateral and the principal and accrued interest of the mortgage loan. Foreclosure of a church mortgage can be an expensive and lengthy process, which could have a significant effect on our anticipated return on the foreclosed mortgage loan. Such delays can cause the value of the mortgaged property to further deteriorate. The properties also incur operating expenses pending their sale, including property insurance, management fees, security, repairs and maintenance. Any additional expenses incurred could adversely affect our ability to recover the full value of our collateral.



There is a possibility that we could incur foreclosures and losses in connection with our Mortgage Loan investments during recessionary or depressed economic periods.



Recessionary or depressed periods typically occur on a cyclic basis by an unpredictable time and with uncertain lengths. Also, such events can be triggered by terrorist acts, war, large scale economic dislocations, or widespread and large corporate bankruptcies. The effects of these events cannot presently be predicted. We could incur losses as a result of borrower defaults and foreclosures on our mortgage loan investments. Also, during times of recession or depression, the demand for our mortgage loans, even in times of declining interest rates, is likely to decline. Also, in connection with any sale or hypothecation of a mortgage loan, we would likely have to agree to be responsible in whole or in part for a limited period of time for any delinquencies or default. If we should experience significant

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delinquency rates, our revenues would materially decrease and, subject to our other available cash resources at the time, our ability to timely pay our debt securities obligations or our other indebtedness may be substantially impaired.



When we acquire properties through the foreclosure of one of our Mortgage Loan investments, we may recognize losses if the fair value of the real property internally determined upon such acquisition is less than the previous carrying amount of the foreclosed loan.



When we acquire a property through foreclosure, we value the property and its related assets and liabilities. We determine fair value based primarily upon discounted cash flow or capitalization rate assumptions, the use of which requires assumptions including discount rates, capitalization rates, and other third party data. We may recognize a loss if the fair value of the property internally determined upon acquisition is less than the previous carrying amount of the foreclosed loan. Until 2011, we had never foreclosed on a real estate mortgage we owned.



Real estate taxes resulting from a foreclosure could adversely affect the value of our collateral.



If we foreclose on a mortgage loan and take legal title to the real property, we could become responsible for real estate taxes levied and assessed against the foreclosed upon real property. While churches are normally exempt from real estate assessments on their worship and ministry related properties, once we acquire the real property after a foreclosure, any real estate taxes assessed would be our financial responsibility and could prevent us from recovering the full value of our investment.



Competition may limit our business opportunities and our ability to operate profitably.  



We compete with church bond financing companies, banks, savings and loan associations, denominational loan funds, certain real estate investment trusts, insurance companies and other financial institutions to serve this market sector. Many of these entities have greater marketing resources, more extensive networks of offices and locations, and lower costs in proportion to their size due to economies of scale.



We are exposed to environmental liabilities with respect to properties to which we take title. 



In the course of our business, we may take title to real estate through foreclosure on one of our mortgage loan investments or otherwise. If we do take title to a property, we could be subject to environmental liabilities with respect to these properties. In such a circumstance, we may be held liable to a governmental entity or to third parties for property damage, personal injury, and investigation and clean-up costs incurred by these parties in connection with environmental contamination, or may be required to investigate or clean up hazardous or toxic substances, or chemical releases, at a property. The costs associated with investigation or remediation activities could be substantial. If we ever become subject to significant environmental liabilities, our business, financial condition, liquidity and results of operations could be materially and adversely affected.



Risks of cost overruns and non-completion of the construction or renovation of the mortgage properties securing construction loans we invest in may materially adversely affect our investment. 



The renovations, refurbishment or expansion by a borrower of a mortgage property involves risks of cost overruns and non-completion. Costs of construction or improvements to bring a mortgage property up to standards established for the market position intended for that property may exceed original estimates, possibly making a project uneconomical. Such delays and cost overruns are often the result of events outside both our and the borrower’s control such as material shortages, labor shortages and strikes and unexpected delays caused by weather and other acts of nature. Also, environmental risks and construction defects may cause cost overruns, and completion delays. If such construction or renovation is not completed in a timely manner, or if it costs more than expected, the borrower may experience a prolonged impairment of the borrower’s revenues making it unable to make payments on our loan. At December 31, 2015 and 2014, we held $1.9 million and $261 thousand, respectively in construction loans.    



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ESTIMATED USE OF PROCEEDS



The following table sets forth information about how we intend to use the proceeds raised in the Offering. It assumes that we sell the maximum offering of $85,000,000 of the Notes we are offering. Many of the amounts set forth below represent our management’s best estimate since they cannot be precisely calculated at this time. Assuming all $85 million of Notes are sold in the Offering, we expect that approximately 94.13% of the money we receive from the Offering will be available for reinvestment. The remaining approximately 0.37% will be used to pay underwriting compensation and issuance and distribution expenses.  





We expect to invest the net proceeds available for investment in Mortgage Loan investments by purchasing or otherwise acquiring additional Mortgage Loans or participation interests therein. However, if we deem it necessary, we may from time to time use a portion of the Offering proceeds to pay interest and principal due on our existing indebtedness, including our credit facilities and our debt securities. In order to preserve our interests in existing Mortgage Loans, we may also, if required, use some proceeds to pay our operational expenses. We have not identified any specific investments we will make with the Offering proceeds and our management has broad discretion over their use and investment. Pending use of the net proceeds, we intend to invest them in a short-term, interest bearing commercial account with a financial institution, which may be one of our Members.



DESCRIPTION OF THE NOTES



Following is a summary of the material terms of the Notes and the Indenture. It does not purport to be complete. This summary is subject to, and is qualified by reference in its entirety to, all of the provisions of the Notes and the Indenture. A copy of the Indenture is set forth in Exhibit A to this Prospectus. Copies of the Fixed Series Note and the

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Variable Series Note are set forth in Exhibit B and Exhibit C, respectively, to this Prospectus. We urge you to read the forms of the Notes and the Indenture because they, and not this description, define your rights as a Noteholder.



General



The Notes are our general unsecured and unsubordinated obligations (except as described below). The Notes rank equal in right of payment with our existing and future unsecured and unsubordinated indebtedness. Accrued interest and principal are payable on the Notes at maturity.



The Notes are issued subject to the Indenture, which is intended to constitute an indenture agreement as that term is defined under the Trust Indenture Agreement Act of 1939, which we refer to as the 1939 Act. The Notes have been registered under the 1939 Act, and the Indenture contains certain required protective provisions benefiting the Holders, as required by the 1939 Act. In addition, the Indenture contains certain financial covenants and restrictions on the payment of distributions to our Members and on our ability to incur other debt.



The interest rates we pay on the Fixed Series Notes are determined by reference to the Swap Index in effect on the date they are issued.  The interest rate we pay on the Variable Series Notes is determined by reference to the Variable Index in effect on the date the interest rate is set. Descriptions of the Swap Index and the Variable Index are set forth under “The Indexes” below.



We reserve the right to prospectively adjust the applicable Spread as required to ensure our financial stability and our access to capital at competitive rates. Any change in the applicable Spread will apply only to Notes we sell at least 10 days after we give notice of the change to prospective investors. We will provide notice of any change in a Spread by supplement to this Prospectus.



There were no Notes Outstanding before the commencement of this Offering. Including the Notes sold in this Offering, the Company is authorized a total of $300 million of the Notes under the Indenture.



The Fixed Series Notes



Category and Required Minimum Purchase. The Fixed Series Notes are offered in six Categories, each requiring a stated minimum purchase.



Interest Rate. The Fixed Series Notes pay an interest rate equal to the sum of the Fixed Spread for the respective Fixed Series Note Category shown in the table below plus the Swap Index then in effect.



Maturities. All Fixed Series Notes are offered with maturities of 12, 18, 24, 30, 36, 42, 48, 54 and 60 months.



The Categories, the corresponding required minimum purchase amounts, and the respective Fixed Spreads are set forth below.







 

The Form of the Fixed Series Notes is included as Exhibit B to this Prospectus.



The Variable Series Notes



Category and Minimum Required Purchase. The Variable Notes are offered in five Categories, each requiring a stated minimum purchase.



Interest Rate. The Variable Series Notes pay a variable rate of interest equal to the sum of the Variable Index plus the Fixed Spread for the respective Category of Variable Series Note. The interest rate on the Variable Series Notes will be adjusted monthly on a specified day each month, commencing the month following the date the Variable Series Note is issued.



Maturities. Variable Series Notes have a maturity of 72 months.



Prepayment. We will prepay your Variable Series Note in whole or in part upon delivery to us of your written request, provided your Note had an unpaid principal balance of at least $10,000 during the immediately preceding 90 days.



The Categories, the corresponding required minimum purchase amounts, and respective Variable Series Spreads are set forth in the following table.





The Form of the Variable Series Notes is included as Exhibit C to this Prospectus.



The Indexes



General. The interest rates we pay on the Fixed Series Notes are determined by reference to the Swap Index in effect on the date they are issued. The interest rate we pay on the Variable Series Notes is determined by reference to the Variable Index in effect on the date the interest rate is set.



The Swap Index. The Swap Index in effect when we issue a Fixed Series Note is the weekly average interest rate for Swaps last reported by the Federal Reserve Board. The Fed computes this weekly average of the Swap rate based on the rates reported for seven consecutive calendar days. Currently, the Fed uses Wednesday through Thursday to calculate this average and reports the average on Friday of each week. The Swap rates refer to the International Swaps and Derivatives Association Mid-Market for Swap Rates. These rates are for a fixed rate payer and are based on rates collected at 11:00 a.m. Eastern Time by Garban International PLC and published on Reuters Page ISDAFIX(R1).



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The Swap Index is not reported for partial year obligations. The Swap Index applied to Notes with partial year terms will be the Swap Index corresponding to the term equal to or not exceeding the term of the Fixed Note, or if there is none, the obligation having the longest term not exceeding the term of the Fixed Note. For example, for an 18-month Fixed Note, the 1-year Swap Index will be used. The currently reported Swap Index is available on the Federal Reserve Board’s website, www.federalreserve.gov/releases/H15/data.htm, on its Federal Interest Rates Release H-15. We also make them available to Holders and potential investors upon request.



The Variable Index. The Variable Index in effect when we issue a Variable Series Note is the LIBOR rate for 3‑month financial obligations in effect on the date the Variable Note is issued. The Wall Street Journal regularly reports the LIBOR rate. The Wall Street Journal can be accessed on the internet at www.wallstreetjournal.com. In the event reporting of a current 3‑month LIBOR rate is suspended or ended, we have the right to substitute the successor index, if any, or if there is none, the regularly reported interest rate we determine, in our sole discretion, to most likely track the 3-month LIBOR rate.



Common Provisions of the Notes



Priority of Right to Payment. The Notes are generally equal in rank of payment with our other current and future unsecured debt, except debt which is expressly subordinated to the Notes. Currently, we have an insignificant amount of such subordinated debt outstanding, but we intend to issue more in the future. While not expressly junior to our approximately $90.2 million of credit facility debt or our approximately $2.2 million of Secured Notes, the Notes are essentially junior in right to payment to these secured obligations with respect to payment from our assets securing them.



Payment of Interest. Unless you select the Interest Deferral Election option or other payment option, interest is payable on all Notes in arrears, monthly. The interest rates offered on the day of purchase will be confirmed by us upon request. You may change the way interest is paid on your Note by written notice to us. Interest is payable in arrears, on or before the 5th business day of the month next following the month in which payment is due. Interest will be prorated for the first partial payment period. Interest will be computed on the basis of a 365-day year. Interest will be deemed paid when mailed via the United States Postal Service addressed to the address the investor provides, subject to the check or instrument mailed being drawn on good and sufficient funds. You may change from one method of payment to another by giving us written notice by the 21st day of the month in which you want the change to be effective.



To be entitled to receive the interest effective on any day, an investor’s purchase of the Note must be confirmed and accepted by us on that day. An investor may elect to receive interest payable monthly, quarterly, semi-annually or annually or to reinvest interest, as described below.



Interest Deferral Election. Under this election, any Noteholder may choose to have the payment of accrued interest on their Note deferred and added to their Note’s principal balance. From the date this election is made, all interest payments on the Note will be deferred and the interest added to the Note’s principal balance will accrue interest under the terms of the Note. Interest so deferred will not be kept in a separate account, but will be treated by us in the same manner as the unpaid principal amount of the Notes. We will not pay any commissions or other fees with respect to interest deferred under the Interest Deferral Election.



Investors who are subject to taxation who make the Interest Deferral Election option should be aware that they will continue to have tax liability for all accrued interest in the year it is accrued and added to the Note’s principal balance. See “Certain U.S. Federal Income Tax Considerations.”



Our Right to Prepay the Notes. We may elect at any time to prepay all or a portion of the Notes upon at least thirty (30) days and not more than sixty (60) days’ written notice. The redemption price will be the unpaid principal balance of the Note, plus accrued and unpaid interest thereon, through the redemption date. If less than all of the Notes can be redeemed, we will redeem the Notes on a pro rata basis. We will mail a notice of our election to prepay the Note by first class mail to each Holder to be redeemed at the most recent address the Holder has provided us in writing. If any Note is to be redeemed in part only, the notice of redemption that relates to such Note shall state the portion of the

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principal amount thereof to be redeemed. A new Note in principal amount equal to the unredeemed portion thereof shall be issued in the name of the Holder thereof upon cancellation of the original Note. On and after the redemption date, interest ceases to accrue on Notes or portions of them called for redemption. Our obligation to make partial or total redemptions on a pro rata basis will not limit our right to repurchase any Note on a voluntary basis, including any prepayment of a Note upon an investor’s request as described below.



Presentment of Notes for Early Payment. A Noteholder may request that we voluntarily prepay his or her Note at any time by delivering a written request for early payment of the Note to us at our business offices. We may grant or deny the request in our sole discretion. Our current policy is to grant a reasonable request by reason of a demonstrated bona fide hardship, subject to availability of funds, but there is no assurance we will continue this policy. We must determine whether to purchase a Note so presented within ten (10) business days of our receipt of the request to do so and will, in such event, promptly pay to the requesting Holder the purchase price. In the event we agree to prepay the Note as requested, we may deduct an administrative charge equal to up to 3 months’ interest on the amount of the principal prepaid. If the Noteholder holds the Note in an individual retirement account (an “IRA”), the investor may incur additional withdrawal penalties, fees, and/or taxes.



Payment History of Our Investor Debt Securities Programs 



We have sold our Investor Debt in numerous offerings in our more than twenty years of operations. Since its inception, the Company has offered 12 prior debt investment programs, 10 of which were public offerings. Each of these programs has been liquidated. That is, each investor received timely payment of all interest and principal payments on the debt security we sold them within the time period set forth in their offering materials.





DESCRIPTION OF THE INDENTURE



General



We may issue up to an aggregate of $300 million of the Notes under the Indenture. However, we may not issue any Note if, after giving effect to such issuance, the Notes then outstanding would have an aggregate unpaid balance exceeding $125 million.



As a condition to your purchase of a Note, you agree to adopt and become a party to the Indenture. The Indenture is a contract between the Holders, ourselves, and the Trustee. As required by U.S. federal law, the Notes are governed by the Indenture, which we intend to constitute an indenture under the 1939 Act. We have therefore registered the Indenture and the Notes under the 1939 Act.



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The Trustee



The Indenture appoints U.S. Bank as Trustee. The Trustee has two main roles under the Indenture:









In general, the Holders may direct the Trustee to act or abstain from acting by a Majority Vote. Again, as used in this Prospectus, “Majority Vote” means the vote or consent of a Majority in Interest of the Holders as defined in the Indenture.



Successor Trustee, Trustee Eligibility



The Trustee may not be an affiliate of the Company and must at all times meet the requirements of a trustee under the 1939 Act. Among other things, the 1939 Act requires a trustee to have a combined capital and surplus of not less than $150,000.



Compensation of the Trustee



The Trustee is entitled to base compensation, plus additional compensation for services it may perform at the direction of the Holders under the Indenture. Also, the Trustee has the right to be reimbursed for its costs and expenses. Pursuant to the Indenture, the Trustee agrees to look only to us for payment of its compensation and expenses.



The Trustee’s Rights, Duties and Responsibilities



The Trustee represents the interests of all the Holders pursuant to the Indenture. As described in the following sections, the Trustee may not take specified actions without the direction, authorization or approval of a representative (the “Holder Representative”) who is to be appointed by a Majority Vote of the Holders. If no Holder Representative is appointed, the Trustee must act as directed by a Majority Vote of the Holders. Thus, the Indenture requires Holders who suffer an actual default on their Notes to obtain the consent of a Majority Vote of the Holders, regardless of Series or maturity or default status, or whether they have suffered an actual default, to require the Trustee to take action against us. THIS REQUIREMENT, IN EFFECT, MAY LEAVE MANY HOLDERS WITHOUT PRACTICAL RECOURSE.



NO HOLDER SHALL HAVE THE RIGHT TO INSTITUTE OR CONTINUE ANY PROCEEDING, JUDICIAL OR OTHERWISE, WITH RESPECT TO THE INDENTURE, THE NOTES, OR FOR THE APPOINTMENT OF A RECEIVER OR TRUSTEE OR FOR ANY OTHER REMEDY HEREUNDER, DURING THE PERIOD OF THE OPERATION OF THE INDENTURE, UNLESS CERTAIN CONDITIONS, AS SET FORTH IN THE INDENTURE, ARE SATISFIED.



BY EXECUTING THE APPLICABLE PURCHASE APPLICATION, EACH HOLDER IS AGREEING TO BE BOUND BY THE TERMS OF THE INDENTURE SHOULD IT COME INTO FORCE BY THE APPOINTMENT OF A TRUSTEE PURSUANT TO ITS TERMS. EACH PROSPECTIVE INVESTOR SHOULD CAREFULLY REVIEW THE INDENTURE (ATTACHED AS EXHIBIT A). THE FOREGOING IS ONLY A SUMMARY OF THE PROVISIONS OF THE INDENTURE.



In general, the Indenture requires the Trustee to exercise its rights and powers vested in the Indenture using the same degree of care and skill as a prudent person would exercise or use acting in like capacity in the conduct of an enterprise of like character with like aims to accomplish the purposes of the trust as determined by the Indenture. However, no provision of the Indenture may be construed as to relieve the Trustee from liability for its own grossly negligent action or grossly negligent failure to act or its own willful misconduct.

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The Trustee will not be liable for exercising its rights and powers under the Indenture in certain circumstances including, but not limited to:





 



 



 



 



The Trustee may refuse to take any action if it is required to advance, expend or risk its own funds or otherwise incur financial liability in connection with any such action or in the exercise of any of its powers under the Indenture. The Trustee shall have no duty to take any action whatsoever if it believes in good faith that taking such action may expose it to personal liability. The Trustee assumes no responsibility for the legal enforcement of the Notes or the Indenture.



Under the Indenture, the Trustee does not authenticate the Notes. The Trustee does not collect interest or principal of the Notes on behalf of the Holders, except in the event of a default where the Trustee is directed to do so by a Majority Vote of the Holders.



Our Continuing Covenants Under the Indenture



Limits on Our Payment of Distributions to Members



While any Note is outstanding, we may not make, and will not permit any subsidiary to make, a restricted payment unless no default or event of default has occurred and is continuing, or would occur as a consequence of making the restricted payment, and certain other conditions are met. For this purpose, a restricted payment means: (i) a declaration or payment of any distribution to our Members (other than distributions payable in our membership interests to us or to our wholly-owned subsidiary); (ii) any payment for the acquisition, redemption or retirement of our membership interests or that of any wholly-owned subsidiary; or (iii) any voluntarily purchase, redemption or repayment, prior to its scheduled maturity of any of our indebtedness that is subordinated in right of payment to the Notes. 



In addition, any such restricted payment, together with the aggregate of all other restricted payments we might make, may not exceed the sum of:











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However, under the Indenture the following are not defined as restricted payments:









For the purposes of the Indenture, our “net income” means the aggregate of our net income for the applicable period, on a consolidated basis, determined in accordance with accounting principles generally accepted in the United States of America.



Limits on Our Ability to Incur Debt 



While any Note remains outstanding, we may not, and may not permit any subsidiary to, directly or indirectly, create, incur, issue, assume, guaranty or otherwise become, directly or indirectly, liable with respect to (collectively, “incur”) any indebtedness, unless our fixed charge coverage ratio for our most recently ended four full fiscal quarters immediately preceding the date on which such additional indebtedness is incurred would have been at least 1.20 to 1.0. We calculate the fixed coverage ratio as if the additional indebtedness had been incurred at the beginning of the period. Notwithstanding this restriction, we may incur indebtedness that: (i) is evidenced by the Notes; (ii) was existing at December 31, 2015 as it may be extended or modified; (iii) is incurred in the ordinary course of business for the funding of Mortgage Loans which includes warehouse lines of credit and/or repurchase facilities; (iv) is in respect of performance, completion, guaranty, surety and similar bonds, banker’s acceptances or letters of credit provided by us in the ordinary course of business; and/or (v) when incurred does not result in other indebtedness, other than amounts we owe on the Notes and Class A Notes, to exceed $20.0 million immediately after we incur the indebtedness.



Under the Indenture:









 



 



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The Effect of Our Merger, Consolidation or Sale of Assets 



While any Note is outstanding, we may not consolidate or merge with or into any other person or entity (whether or not we are the surviving entity) or sell, assign, transfer, lease, convey or otherwise dispose of all or substantially all of our properties or assets (excepting sales of our loans we hold for sale in our normal course of business), in one or a series of transactions for the same purpose, unless (i) we are the surviving entity of such transaction; or (ii) if we are not the surviving entity, the surviving entity assumes our obligations under the Notes by agreement or operation of law.

 

Requirements That We Maintain a Minimum Tangible Adjusted Net Worth



In the event that our tangible adjusted net worth is less than the minimum tangible adjusted net worth, within 55 days after the end of any fiscal quarter we must notify the Holders. We must within sixty (60) days thereafter restore our tangible adjusted net worth to an amount greater than the minimum tangible adjusted net worth. For the purposes of this covenant, tangible adjusted net worth includes the amount of our credit facilities to the extent it is subordinated in right to payment on a current basis to the Notes.



Under the Indenture, our “tangible adjusted net worth” means our adjusted net worth less our intangible assets, if any. Our “adjusted net worth” means the sum of (i) our Members’ consolidated equity and of the equity interests of any consolidated subsidiary, plus (ii) the amount of any credit line, whether or not then funded, to the extent such loan amount is expressly subordinated in right to payment on a current basis to the Notes.



Requirements That We Keep Certain Books and Records



We must keep proper books of record and account, in which full and correct entries shall be made of all dealings or transactions of or in relation to the Notes and our business and affairs in accordance with accounting principles generally accepted in the United States of America. We must furnish to the Trustee any and all information related to the Notes as the Trustee may reasonably request and which is in our possession.



Other than the foregoing, there are no covenants or other provisions (except those contained under the California limited liability company law which apply to corporations generally) restricting our ability to enter into transactions with our Affiliates including, but not limited to, transactions involving the sale, lease, transfer or other disposal of any of our assets to, or purchase any assets from, or any contract, agreement, understanding, loan, advance of guarantee with, or for the benefit of, any such Affiliate.



Under California law, our independent Managers’ fiduciary obligations require that they act in good faith under the duties of due care and loyalty in a manner which they believe to be in our best interests and those of our Members, which is not, in most circumstances, the same as the obligation they owe to the Holders.



Remedies in the Event of Our Default



Each of the following constitutes an event of default under the Notes:





 



 



 



The Indenture provides that a default by reason of any of the foregoing Events of Default is a default with respect to all of the Notes.



In order to cure payment in default, we must mail to the Noteholder, direct deposit or credit, if that option is selected, the amount of the nonpayment plus a late payment penalty equal to simple interest on the amount unpaid at the rate of 10% per annum, measured from the date the payment should have been mailed, deposited or credited pursuant to the terms of the Notes until the date it actually is mailed, deposited or credited.



If any event of default occurs and is continuing, the Holders holding at least 25% of the principal amount of the Notes may instruct the Trustee to declare the outstanding Notes to be immediately due and payable and to take any action allowed by law to collect such amounts. Notwithstanding the foregoing, in the case of an event of default arising from our bankruptcy or insolvency, all outstanding Notes will become due and payable without further action or notice. If an event of default has occurred and is continuing, we must, upon written request of the Trustee, cure such default and pay for the benefit of the Noteholder the whole amount then due, any penalties which may be due and, in addition thereto, such further amount as shall be sufficient to cover the costs and expenses of collection, including the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel and all other amounts due to the Trustee. If we fail to cure such defaults and pay such amounts forthwith upon such demand, the Trustee, in its own name and as Trustee of an express trust, shall be entitled to sue for and recover judgment against us and any other obligor on the Notes for the amount so due and unpaid pursuant to the terms of the Notes.



Compromise or Settlement of Claims



The Trustee may not settle or compromise any rights or claims of the Holders, including any right to payment of principal or interest, unless the settlement or compromise is approved by a Majority Vote of the Holders. Any settlement or compromise so approved would be binding upon all the Holders.



The Trustee may withhold from the Holders notice of any default or event of default if it believes that withholding notice is in their interest, except a default or event of default relating to the payment of principal, interest or penalties.



Amendment, Supplement and/or Waiver of the Indenture



The Indenture and/or the Notes may be amended or supplemented by a Majority Vote of the Holders. Also, by a Majority Vote, the Holders may consent to waive any default, event of default, compliance or noncompliance with any provision of the Notes. However, any such amendment, supplement or waiver affecting the term, interest rate and other terms of the Notes must be ratable and proportionate in effect on all Holders based on the aggregate amount of principal and interest and penalty payments due them.



OUR COMPANY



Our Identity and History



We are a privately owned California limited liability company with 12 equity owners, 11 of whom are federal or state chartered credit unions and one of whom is the Asset Management Assistance Center of the National Credit Union Administration. Our principal executive offices are located at 915 West Imperial Highway, Suite 120, Brea, California 92821. Our telephone number is (800) 753-6772 and our website address is www.ministrypartners.org.    We are a non-bank financial services company that conducts business on a national scope.  We were organized as a CUSO for the specific purpose of assisting evangelical Christian churches and organizations by providing financing for the acquisition, development and/or renovation of churches or church-related properties, and provide Christian investors

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the opportunity to participate in funding those projects.  As a CUSO, we perform these services for the benefit of our credit union equity members.



We exist to help make evangelical ministries more effective by providing ministries with Biblically-based, value-driven financial services and by providing funding services to the credit unions who serve those ministries. We do this by investing in mortgage loans made to churches and ministries. These loans are typically originated by credit unions and secured by church and church-related real property owned by and/or maintained for the benefit of evangelical churches or church-related organizations such as Christian schools and ministries.



When the Company was formed, substantially all of the mortgage loans in our loan portfolio were purchased from our largest equity investor, the Evangelical Christian Credit Union of Brea, California (“ECCU”), and ECCU acted as our underwriter and primary servicer for a significant portion of those loans.



In 2010, we developed the capability to originate and service loans ourselves.  Since that time, we have increased the proportion of our portfolio that is originated and serviced by us.  As of December 31, 2015, we owned a total of 145 mortgage loans and two unsecured loans, with a recorded balance of $136.4 million.  As of December 31, 2015, we service 135 of these loans.  The average loan balance for our loan investments is $928 thousand and our loans have a weighted average life to maturity period of 6.3 years at December 31, 2015.  Substantially all of our business operations currently are conducted in California and, while we have more loan investments in California than in any other state, we own mortgage loan interests in 33 different states.



We were incorporated under California law on October 22, 1991 under the name Ministry Partners Investment Corporation and established as a credit union service organization, or ("CUSO"), by ECCU for the purpose of providing mortgage loans to evangelical churches and ministry organizations. Effective as of December 31, 2008, we converted our form of organization from a California corporation to a California limited liability company. This conversion was a statutory conversion authorized under the California Beverly Killea Limited Liability Company Act (now known as the California Revised Uniform Limited Liability Company Act). Upon the conversion, we became, by operation of law, a California limited liability company. As a result of the conversion, our name changed to "Ministry Partners Investment Company, LLC.” Since the conversion became effective, we have been managed by a group of managers that carry out their duties similar to the role and function that the board of directors performed under our previous bylaws.  Operating like a board of directors, the managers have full, exclusive and complete discretion, power and authority to oversee the management of our affairs.  



To finance our mortgage loan investments, we obtain funds from the sale of our debt securities. We also obtain funds from lines of credit provided by various financial institutions and, from time to time, sell participation interests in our mortgage loan investments to generate additional funds. We market our debt securities primarily to investors who are in or associated with the Christian community, including individuals, ministries and other organizations and associations.  As a CUSO, we invest in and originate loans made to evangelical churches and ministry organizations, sell loan participation interests and offer complimentary securities products to our credit union members.    



Our Subsidiaries



MPF



In 2007, we created a wholly-owned special purpose subsidiary, Ministry Partners Funding, LLC (“MPF”), for the purpose of warehousing church and ministry mortgages purchased from ECCU or originated by us for subsequent securitization.  Because of the collapse of the mortgage‑backed securities market and severe credit crisis that adversely impacted global financial markets in the latter part of 2008, we did not securitize any of the mortgage loans that MPF purchased.  We closed down the active operations of MPF effective December 31, 2009 but we have maintained MPF’s existence as a Delaware limited liability company to offer, manage, hold assets, sell debt securities and participate in debt financing transactions.  On January 15, 2015, we modified the operating agreement of MPF to authorize MPF to serve as the custodian of the pledged assets held for investors in our Secured Investment Notes offering pursuant to the terms and conditions of a Loan and Security Agreement entered into by and between the Company and MPF dated December 31, 2014.  

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MP Realty



On November 13, 2009, we formed a wholly-owned subsidiary, MP Realty Services, Inc., a California corporation (“MP Realty”). MP Realty provides loan brokerage and other real estate services to churches and ministries in connection with our mortgage financing activities. On February 23, 2010, the California Department of Real Estate issued MP Realty a license to operate as a corporate real estate broker.  MP Realty has conducted limited operations since its inception.



MP Securities



On April 26, 2010, we formed Ministry Partners Securities, LLC, a Delaware limited liability company (“MP Securities”). On July 14, 2010, MP Securities became a registered broker-dealer firm under Section 15 of the Securities Exchange Act of 1934. Effective as of March 2, 2011, MP Securities’ application for membership in the Financial Industry Regulatory Authority (“FINRA”) was approved. MP Securities has been formed to provide financing solutions for churches, charitable institutions and faith-based organizations and act as a selling agent for securities offered by such entities. In May 2012, MP Securities began selling Secured Investment Certificates issued by the Company pursuant to an offering to qualified investors that meet the requirements of Rule 506 of Regulation D, promulgated by the U.S. Securities and Exchange Commission (“SEC”). On September 24, 2012, MP Securities received a no objections letter from FINRA, thereby authorizing MP Securities to act as a selling agent for the Company’s Class A Notes offering under a registration statement declared effective by the SEC on October 11, 2012. In November 2012, MP Securities also began selling investments in mutual funds. In addition to serving as a selling agent for the Company’s Class A Notes and other debt securities, MP Securities will distribute debt securities issued by religious organizations and business members of credit unions the Company serves and will act as a selling agent in placing mortgage backed business loans made by credit unions to institutional investors.



In March 2013, MP Securities began selling the Company’s Series 1 Subordinated Capital Notes and 2013 International Notes.  On July 11, 2013, MP Securities executed a new membership agreement with FINRA which authorized it to act on a fully disclosed basis with a clearing firm to expand its brokerage activities. In addition, on July 11, 2013, the State of California granted its approval for MP Securities to provide registered investment advisory services. Finally, on September 26, 2013, MP Securities entered into a clearing firm agreement with Royal Bank of Canada Capital Markets, LLC (RBC Capital), thereby enabling it to open brokerage accounts for its customers. MP Securities can now offer a broad scope of investment products that enable it to better serve the Company’s clients and customers.



Our Business



We are a non-bank financial services company that conducts business on a national scope.  We were organized as a credit union service organization for the specific purpose of assisting evangelical Christian churches and organizations by providing financing for the acquisition, development and/or renovation of churches or church-related properties, and provide Christian investors the opportunity to participate in funding those projects.  As a CUSO, we perform these services  for the benefit of our credit union equity members and the credit unions we serve.



The religious loan market segment has grown dramatically over the years since our inception and both the size of the loans and the number of qualified borrowers in this sector has steadily increased. Prior to the 2008 global financial crisis that adversely affected real estate values in certain regions of the United States, the size of the church and ministry mortgage financing market in the United States was estimated to range between $20 billion and $40 billion annually.  While post-crisis estimates of the size of this market have been difficult to obtain, we believe that the demand for ministry loans originated and serviced by niche lenders to churches and ministries will continue to exceed available lending and financing sources for this sector. We base our belief on our past experience with making loans to this market segment and on information we have obtained through contact with sources in the industry. We believe that the availability of lenders serving this market has been somewhat unpredictable as larger financial institutions expand, contract or vacate this niche market during periods of expansion or contraction. As a financial services company that has specialized in assisting these organizations since we commenced operations in 1991, we believe that

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the lack of predictable financing sources for evangelical Christian churches and organizations presents us with a significant opportunity.  In addition, we believe that lenders that are active in the market for church loans appear to have tightened their credit standards.  As a result of improved market conditions, we believe that the secondary market for church and ministry loans, including the sale of loan participation interests in mortgage loan investments we underwrite and originate, presents us with significant new business opportunities. 



Because the financial base and resources of church and ministry organizations have grown larger and these organizations increasingly employ more sophisticated accounting and budgetary practices, financial institutions that do not normally originate religious loans are now willing to participate in or purchase loans in this market segment. As a result, a limited but robust secondary market for these loans has developed among financial institutions, especially credit unions, and we have expanded our operations in this market. We have accessed this market by creating alliances with several third party commercial mortgage broker networks as well as creating a direct participation network consisting of loan funds, credit unions and other financial institutions.



Our general practice in past years has been to fund loan acquisitions with borrowings under our credit facilities. We then repay borrowings on our credit facilities with proceeds from the sale of investor notes, mortgage loan prepayments and repayments, and from our operating income. Our ability to access capital to repay borrowings under our credit facilities is subject to variability based upon a number of factors, including volatility in the capital markets, our ability to demonstrate consistent earnings, regulatory constraints and limitations, the relative interest rates that we are prepared to pay for our investor debt obligations, the ability of our borrowers to access capital to repay or prepay their obligations to us, and our ability to sell our mortgage loan assets. Any occurrence that disrupts our ability to access capital from these sources may have a material adverse effect on our ability to grow our business, meet our commitments, and make distributions or payments to our equity owners and debt securities investors.



As we have undergone a transition from relying on financing from credit institutions to fund our mortgage loans, we have diversified our financing sources. In recent years we have primarily relied on sales of our debt securities to new investors, the purchase of our debt securities by repeat investors and sales of participation interests in our mortgage loans to fund a substantial portion of our loan investments.  Our ability to originate and fund new loans is dependent on the sale of our investor notes to institutional and high net-worth investors collateralized by specific mortgage loans, expanded efforts to generate capital and leverage our mortgage loan investments through the sale of loan participation interests to other financial institutions, expanding the sale of our debt securities through the efforts of our wholly-owned broker-dealer firm, MP Securities, and increasing the amount of other income generated by both MP Securities and by our loan servicing department.



Our net earnings are generated primarily from:















During 2015, we (i) originated fewer loans during the first nine months of the year than we anticipated while maintaining the level of our note balances, causing our net interest margin to decrease to 2.64%; (ii) funded $14.3 million in church loans in the fourth quarter, re-establishing our loans receivable at a level that will improve our net interest margin in 2016; (iii) recovered  $524 thousand in loan loss provisions related to a settlement with a title

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insurance company reached on an impaired loan in which we held a 64.8% participation interest and the reclassification of another impaired loan; (iv) utilized the network selling agreements reached with ECCU and America’s Christian Credit Union in 2014 to grow our client base and substantially increase revenues generated by our wholly-owned, broker-dealer subsidiary, MP Securities; (v) increased other income by 148% through the sale of loan participations, the servicing of loans for other credit unions and CUSOs, commissions and fee income generated by MP Securities; (vi) sold three of our foreclosed assets, wrote off another one, and entered into preliminary agreements to dispose of our remaining three real estate properties in 2016; (vii) appointed a new President and Chief Executive Officer, Joseph Turner, formerly the President of MP Securities after our previous President and Chief Executive Officer, James Overholt, retired; and (viii) continued to implement a strategy designed to diversify our revenue sources through the hiring of experienced staff that will allow us to pursue expansion of services and investment products that our wholly-owned affiliate, MP Securities, will be able to offer. 



Our net income of $357 thousand for 2015 primarily results from recoveries of previously taken provisions for loan losses and gains related to the disposal of some of our foreclosed assets.  We recovered $190 thousand in loan loss provisions related to a settlement reached by ECCU on an impaired loan in which we owned a 64.8% participation interest.  We recovered $400 thousand in provisions on an impaired loan that was reclassified from collateral-dependent to non-collateral-dependent.  We also recognized $132 thousand in gains on the sale of foreclosed assets and recovered a net of $11 thousand in provisions for losses on foreclosed assets based on expected selling prices of these assets. 



These gains offset a reduction in interest income for the year.  Due to liquidity issues in 2014, we delayed many of our planned loan originations until the last quarter of 2015.  While our loans receivable balance at December 31, 2015 is higher than at December 31, 2014, the average loan balance throughout 2015 was significantly lower than in 2014.  In addition, we maintained much higher cash balances throughout the year, which bear low interest rates.  Our yield on interest-earning loans increased slightly and our blended rates paid on our borrowings decreased, so we anticipate that the decline in our net interest income in 2015 and net interest margin is temporary.  We expect net interest margin to increase in 2016 as our loan originations increase.  We were able to mitigate some of the decrease in our net interest income by increasing our other income through commissions and fees received by our broker-dealer subsidiary and by continuing to grow our servicing portfolio and selling more loan participations. Our business plan for 2016 and beyond involves emphasizing the continuing growth of these lines of business. Finally, we sold several of our foreclosed assets in 2015 while recovering some reserves previously taken.  As of the date of this Prospectus, we hold one real estate asset and we have written the value of this investment down to zero.



Our Capitalization



NCUA credit facilities 



At December 31, 2015, our total borrowings from institutional lenders was $90.2 million compared to $93.9 million at December 31, 2014,  a decrease of $3.7 million.



At December 31, 2015, our borrowings from institutional lenders consisted of the following credit facilities:



MU Credit Facility. On October 12, 2007, we entered into the MU Credit Facility with Members United, a federally chartered credit union located in Warrenville, Illinois. This facility consisted of two secured notes, for a secured $10 million revolving line of credit and for a secured $50 million revolving line of credit which was later amended to $100 million. Both notes were secured by certain Mortgage Loans under a recourse obligation.  



On September 24, 2010, the NCUA placed Members United into conservatorship. Under this conservatorship, our MU Credit Facility was placed into, and administered by, an Asset Management Estate established by the NCUA. On November 4, 2011, we and the National Credit Union Administration Board (the “NCUA Board”) as liquidating agent of Members United entered into an $87.3 million credit facility refinancing transaction which amended and restated the original $100 million credit line we entered into with Members United on May 7, 2008. Under the terms of the amended loan documents, the principal balance and any interest due on the MU Credit Facility will mature on

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October 31, 2018. Accrued interest is due and payable monthly in arrears on the MU Credit Facility at the lesser of the maximum interest rate permitted by applicable law under the loan documents or 2.525%.



The NCUA Facilities also include covenants which prevent us from renewing or extending a loan pledged as collateral under these facilities unless certain conditions have been met and requiring the borrower to deliver current financial statements to us.  Under the terms of the NCUA Facilities, we have established a lockbox maintained for the benefit of the NCUA that will receive all payments made by collateral obligors.  Our obligation to repay the outstanding balance on these facilities may be accelerated upon the occurrence of an “Event of Default” as defined in the agreement.  Such events of default include, among others, failure to make timely payments due under the NCUA Facilities, or our breach of any of our covenants.



The NCUA Facilities require collateral to be maintained in the form of loans receivable pledged to secure the facilities.  The facility which was an amendment of our Members United Facility required the total balance of the loans securing the facility to be 128% of the facility’s balance.  On March 30, 2015, we reached an agreement with the NCUA to amend the minimum collateralization covenants of both facilities, in addition to permitting the Company to deliver cash to meet minimum collateralization covenants.



The MU Credit Facility includes a number of borrower covenants, including affirmative covenants to maintain the collateral free of liens, to timely pay the amounts due on the facility, to provide the lender with interim or annual financial statements and annual and periodic reports filed with the SEC.  Our obligation to repay the outstanding balance on this facility may be accelerated upon the occurrence of an “Event of Default” as defined in the MU Credit Facility. Such events of default include, among others, failure to make timely payments due under the MU Credit Facility, or our breach of any of our covenants.



As of December 31, 2015, the outstanding principal balance due on the MU Credit Facility was $70.2 million. As of December 31, 2015, the collateral securing the MU Credit Facility had an aggregate principal balance of $81.9 million.



WesCorp Credit Facility. We entered into the WesCorp Credit Facility on November 30, 2009 with WesCorp, a federally chartered credit union located in San Dimas, California. This facility consisted of a secured note which allowed us to borrow up to $28.0 million. The WesCorp Credit Facility had a fixed interest rate of 3.95% and was initially secured by approximately $59.2 million of Mortgage Loans we previously pledged to secure our former BMO Credit Facility. Thus, the loan was initially secured by excess collateral of approximately $30.8 million. We used $24.6 million of the proceeds from the WesCorp Credit Facility to pay-off our former BMO Credit Facility.



On March 20, 2009, the NCUA assumed control of WesCorp under a conservatorship proceeding initiated by the NCUA under regulations adopted under the Federal Credit Union Act. Effective as of October 1, 2010, WesCorp was placed into liquidation by the NCUA. Pursuant to a letter dated October 25, 2010, we were advised that our WesCorp Credit Facility had been transferred to the Asset Management Assistance Center (“AMAC”), a facility established by the NCUA.    



On November 4, 2011, we and the NCUA Board as liquidating agent of Western Corporate Federal Credit Union entered into a $23.5 million credit facility which amended and restated the WesCorp Credit Facility. Under the terms of the amended loan documents evidencing such credit facility, the principal balance and any interest due on the facility will be payable in full on October 31, 2018. Accrued interest on the WesCorp Credit Facility is due monthly in arrears commencing at the lesser of the maximum rate permitted by applicable law under the loan documents or 2.525%.  The term loan may be repaid or retired without penalty, but any amounts repaid or prepaid under the WesCorp Credit Facility may not be re-borrowed. 



The WesCorp Credit Facility includes a number of other borrower covenants, including affirmative covenants to maintain the collateral free of liens, to timely pay the amounts due on the facility, to provide the NCUA with interim or annual financial statements and annual and periodic reports filed with the SEC.



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The WesCorp Credit Facility Extension requires monthly principal and interest payments of $106 thousand.  As of December 31, 2015 and 2014, $20.0 and $20.8 million, respectively, was outstanding on the WesCorp Credit Facility Extension.



The WesCorp Credit Facility Extension includes a number of borrower covenants, including affirmative covenants to maintain the collateral free of liens, to timely pay the amounts due on the facility, to provide the Lender with interim or annual financial statements and annual and periodic reports filed with the U.S. Securities and Exchange Commission and maintain a minimum collateralization ratio of at least 110% (120% for the MU Credit Facility and Wescorp Facility combined).  If at any time the Company fails to maintain its required minimum collateralization ratio, it will be required to deliver cash or qualifying mortgage loans in an amount sufficient to enable it to meet its obligation to maintain a minimum collateralization ratio.  As of December 31, 2014, the collateral securing the WesCorp Credit Facility Extension had an aggregate principal balance of $29.9 million. This represented a deficit of $1.3 million from the required collateral at December 31, 2014.  As a matter of expediency, the NCUA accepted a cash pledge in addition to the balance of loans pledged as collateral in satisfaction of the minimum collateralization ratio at December 31, 2015.  The Company was not required to make an additional principal payment to satisfy the deficit.  See “Amendments to our Credit Facility Agreements” below for the amount of collateral securing the Wescorp Credit Facility Extension at December 31, 2015.  As of December 31, 2015 and 2014, the Company was in compliance with its covenants under the Wescorp Credit Facility Extension.



Amendments to Our Credit Facility Agreements



On April 3, 2015, the Company received written confirmation from the NCUA that an amendment to the Loan and Security Agreements for both the MU Credit Facility and the WesCorp Credit Facility had been agreed to. The Amendment to the Loan and Security Agreement for each credit facility made the following changes:





The amendments to our credit facility agreements:





We anticipate that these changes will allow us to more quickly fund new loans and loan participations, as it will allow us to pledge cash collateral rather than incurring the delays required to obtain subsequent Mortgage Loans to pledge as collateral.  The amount of Mortgage Loans pledged as collateral on our MU Credit Facility and WesCorp Credit Facility was $107.6 million at December 31, 2015, as compared to $121.7 million at December 31, 2014.



The Class A Notes and Other Investor Debt Securities 



Our Investor Debt consist of various series of notes sold under several registered public offerings as well as in private offerings. At December 31, 2015,  we had a total of $49.9 million of our investor debt securities outstanding. This amount included  $25.3 million of Class A Notes.  Our total Investor Debt outstanding at December 31, 2015 increased by  $1 thousand,  as compared to the $49.9 million total of Investor Debt outstanding at December 31, 2014. Our Members’ Equity consists of regular and preferred membership interests held by several federal and state chartered credit unions. See “Description Of Our Membership Interests And Charter Documents” and “Security Ownership Of Certain Beneficial Owners And Management.”



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At December 31, 2015 and December 31, 2014 and 2013, the balances of our outstanding Investor Debt were as follows: (dollars in thousands):









At December 31, 2015, our investor notes had future maturities during the following twelve month periods ending December 31 (dollars in thousands):







The Alpha Class Notes. The Alpha Class Notes were issued in five Series having maturities up to 120 months. The last of the outstanding Alpha Class Notes were repaid in 2014. 



Special Offering Notes.  Unsecured general obligation notes having various terms we have issued over the past several years to ministries, ministry-related organizations, and individuals. Except for a small number of investors (in total not exceeding 35 persons), the holders of these Notes are accredited investors within the meaning of Regulation D under the 1933 Securities Act. We may continue to sell our debt securities to eligible investors on an individual, negotiated basis as we deem appropriate and in compliance with exemptions from registration or qualifications under federal and applicable state securities laws.



Special Subordinated Notes. The Series 1 Subordinated Capital Notes have been offered with maturity terms from 12 to 60 months at an interest rate fixed on the date of issuance, as determined by the then current seven-day average rate reported by the U.S. Federal Reserve Board for interest rate swaps. At December 31, 2015 and 2014, a total of $3.4 million and $4.7 million in notes sold pursuant to this offering were outstanding, respectively. We may continue to sell our debt securities to eligible investors on an individual, negotiated basis as we deem appropriate and in compliance with exemptions from registration or qualifications under federal and applicable state securities laws. We offer these notes from time to time to accredited investors. Their payment is subordinated to all of our other current and future debt.



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Secured Notes. In January 2015, the Company began offering Secured Investment Certificates under a new private placement memorandum pursuant to the requirements of Rule 506 of Regulation D.  Under this offering, the Company may sell up to $80.0 million in Secured Investment Certificates to qualified investors.  The certificates require as collateral either cash pledged in the amount of 100% of the outstanding balance of the certificates or loans receivable pledged in the amount of 105% of the outstanding balance of the certificates.  At December 31, 2015, a total of $2.2 million in Secured Investment Certificates were outstanding.  The collateral securing the Secured Investment Certificates had an outstanding balance that totaled $3.6 million, which satisfies the minimum collateral requirement of the private placement memorandum. We may continue to sell our debt securities to eligible investors on an individual, negotiated basis as we deem appropriate and in compliance with exemptions from registration or qualifications under federal and applicable state securities laws. The payment of these obligations is secured by a pool of our mortgage loans or cash.  



International Notes. In March 2013, the Company launched the sale of a new private offering of its 2013 International Notes.  This offering was made only to qualified investors that meet the requirements of Rule 902 of Regulation S. Including International Notes sold under previous private offerings, at December 31, 2015 and 2014, a total of $52 thousand and $346 thousand of its International Notes were outstanding, respectively. 



Members’ Equity



Our Members contribute equity capital to our Company through contributions for their membership interests. Total Members’ equity was $8.1 million at December 31, 2015. See “Description Of Our Membership Interests And Charter Documents” and “Security Ownership Of Certain Beneficial Owners And Management.”

 

Competition



Although the demand for church financing is both broad and fragmented, no one firm has a dominant competitive position in the market. We compete with church bond financing companies, banks, savings and loan associations, denominational loan funds, credit unions, REITs, insurance companies and other financial institutions to service this market. Many of these entities have greater marketing resources, extensive networks of offices and locations, larger staffs and lower cost of operations due to their size. We believe, however, we have developed an efficient, effective and economical operation that (i) specializes in identifying and creating a diversified portfolio of church mortgage loans that we or ECCU originate and (ii) preserves our capital base and generates consistent income for distribution to our debt securities investors (including the Holders) and our equity investors.



We rely upon the extensive experience of our officers, management and Managers in working with ministry related financing transactions, loan origination, and investment in churches, schools, ministries and non-profit organizations. 



Regulation



General



We are organized as a credit union service organization and, as a result, are subject to the regulations promulgated by the National Credit Union Administration (“NCUA”) that apply to CUSOs. As a CUSO, we primarily serve the interests of our credit union equity investors and members of such credit unions. We are also subject to various laws and regulations which govern: (i) credit granting activities; (ii) establishment of maximum interest rates; (iii) disclosures to borrowers and investors in our equity securities; (iv) secured transactions; (v) foreclosure, judicial sale and creditor remedies that are available to a secured lender; and (vi) the licensure requirements of mortgage lenders, finance lenders, brokers and financiers.



As a CUSO, we are limited in the scope of activities we may provide. In addition, our federal credit union equity investors are permitted to invest in or lend to a CUSO only if the CUSO primarily serves credit unions, its membership or the membership of credit unions contracting with the CUSO. While the NCUA lacks direct supervisory authority over our operations, our federal credit union equity owners are subject to regulations which govern the rules and conditions of an investment or loan they make or sell to a CUSO. In addition, state chartered credit unions must follow

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their respective state’s guidelines which govern investments by a state chartered credit union. Our equity owners that are regulated by the California Department of Business Oversight (“DBO”), in particular, must comply with DBO regulations that govern their investment in or loans they make to a CUSO.



Tax Status



Effective with our conversion from a corporate form of organization to a limited liability company organized under the laws of the State of California on December 31, 2008, we have chosen to be treated as a partnership rather than a corporation for U.S. tax law purposes. As a result, profits and losses will flow directly to our equity investors under the provisions of our governing documents. If we fail to qualify as a partnership in any taxable year, we will be subject to federal income tax on our net taxable income at regular corporate tax rates. As a limited liability company organized under California law, we are also subject to an annual franchise fee plus a gross receipts tax on our gross revenues from our California based activities if our gross revenues are in excess of $250 thousand per year.



Regulation of Mortgage Lenders



We conduct loan originating activities for churches and related ministry projects. Many states regulate the investment in or origination of mortgage loans. Under the California Finance Lender’s Law, no lender may engage in the business of providing services as a “finance lender” or “broker” without obtaining a license from the DBO, unless otherwise exempt under the law. We conduct our commercial lending activities under California Finance Lender License # 603F994.



As a finance lender, we are licensed with the DBO and file reports from time to time with the DBO. Accordingly, the DBO has enforcement authority over our operations as a finance lender, which includes, among other things, the ability to assess civil monetary penalties, issue cease and desist orders and initiate injunctive actions. We also are subject to licensing requirements in other jurisdictions in connection with our mortgage lending activities. Various laws and judicial and administrative decisions may impose requirements and restrictions that govern secured transactions, require specific disclosure to our borrowers and customers, establish collection, foreclosure, and repossession standards and regulate the use and reporting of certain borrower and customer financial information.



As we expand our loan originations outside of the State of California, we will need to comply with laws and regulations of those states. The statutes which govern mortgage lending and origination activities vary from state to state. Because these laws are constantly changing, due in part, to the challenge facing the real estate industry and financial institutions from residential lending activities, it is difficult to comprehensively identify, accurately interpret and effectively train our staff with respect to all of these laws and regulations. We intend to comply with all applicable laws and regulations wherever we do business and will undertake a best efforts program to do so, including the engagement of professional consultants, legal counsel, and other experts as deemed necessary by our management.



Loan Brokerage Services



In 2009, we created a new subsidiary, MP Realty, which provides loan brokerage and other real estate services to churches and ministries in connection with our mortgage financing activities. The California Bureau of Real Estate issued MP Realty Services, Inc. a license to operate as a corporate real estate broker on February 23, 2010. As we expand our loan brokerage activities to other states, we may be required to register with these states as a commercial mortgage broker if we are directly or indirectly marketing, negotiating or offering to make or negotiate a mortgage loan. We intend to monitor these regulatory requirements as necessary in the event MP Realty provides services to a borrower, lender, broker or agent outside the State of California.



Environmental Issues Associated with Real Estate Lending

 

The Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA”), a federal statute, generally imposes strict liability on all prior and current “owners and operators” of sites containing hazardous waste. However, Congress acted to protect secured creditors by providing that the term “owner and operator” excludes a person whose ownership is limited to protecting its security interest in the site. Since the enactment of the CERCLA,

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this “secured creditor exemption” has been the subject of judicial interpretations which have left open the possibility that lenders could be liable for clean-up costs on contaminated property that they hold as collateral for a loan. To the extent that legal uncertainty exists in this area, all creditors that have made loans secured by properties with potential hazardous waste contamination (such as petroleum contamination) could be subject to liability for clean-up costs, which costs often substantially exceed the value of the collateral property. In addition, state and local environmental laws, ordinances and regulations can also impact the properties underlying our mortgage loan investments. An owner or control party of a site may also be subject to common law claims by third parties based on damages and costs resulting from environmental contamination emanating from a site.



Regulation of Financial Services



The financial services industry in the U.S. is subject to extensive regulation under federal and state laws. The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (“Dodd-Frank Act”) was enacted on July 21, 2010. The Dodd-Frank Act resulted in sweeping changes in the regulation of financial institutions and created a new Consumer Financial Protection Bureau and Financial Stability Oversight Council with authority to identify institutions and practices that might pose a systemic risk. Because of the nature of our business, we do not expect this legislation to have a significant direct impact on our business. We continue to monitor, however, regulations adopted by the U.S. Securities and Exchange Commission (“SEC”) which affect broker dealer firms and investment adviser firms.



Our wholly-owned broker-dealer firm, Ministry Partners Securities, LLC, commenced limited operations in the first quarter of 2012.  In March 2013, MP Securities received a license from the California Department of Insurance to act as a Resident Insurance Producer d/b/a Ministry Partners Insurance Agency. On July 11, 2013, MP Securities executed a new membership agreement with FINRA which authorized it to act on a fully disclosed basis with a clearing firm to expand its brokerage activities. In addition, on July 11, 2013, the State of California granted its approval for MP Securities to provide registered investment advisory services. As a registered broker-dealer under Section 15 of the Securities Exchange Act of 1934, MP Securities is subject to regulation by the U.S. Securities and Exchange Commission and regulation by state securities administrators in the states in which it will conduct its activities. MP Securities is also subject to regulations imposed by the California Department of Business Oversight.  We have registered MP Securities in the states of California, Colorado, Florida, Georgia, Idaho, Illinois, Minnesota, Nevada, New York, North Carolina, Ohio, Oregon, Pennsylvania, Rhode Island, South Carolina, Texas, Washington, West Virginia and Wisconsin.



Much of the regulation of broker-dealers in the U.S. has been delegated to self-regulatory organizations, principally FINRA and the securities exchanges. FINRA adopts and amends rules (which are subject to approval by the SEC) for regulating the industry and conducts periodic examinations of member firms. The SEC, FINRA and state securities administrators may conduct administrative proceedings that can result in censure, fine, suspension or expulsion of a broker-dealer, its officers or employees.



As a broker-dealer firm, MP Securities is subject to regulation regarding sales methods, use of advertising materials, arrangements with clearing firms or exchanges, record keeping, regulatory reporting, conduct of managers, officers and employees and supervision. To the extent MP Securities solicits orders from customers, it is subject to additional rules and regulations governing sales practices and suitability rules imposed on member firms. MP Securities also acts as a selling agent for the Company’s privately offered debt securities.  To the extent MP Securities participates in the offer and sale of the Company’s publicly and privately offered debt securities, it is required to comply with FINRA’s filing requirements for these offerings.  We believe that MP Securities has fully complied with its filing obligations as required under applicable FINRA, SEC and state securities laws.



Our wholly-owned subsidiary, MP Securities, is also required to maintain minimum net capital pursuant to rules imposed by FINRA. In general, net capital is the net worth of the entity (assets minus liabilities) less any other imposed deductions or other charges. If a member firm fails to maintain the required net capital it must cease conducting business and, if it does not do so, it may be subject to suspension or revocation of registration by the SEC and suspension or expulsion by FINRA. Under its Membership Agreement entered into with FINRA, MP Securities is required to maintain minimum net capital of the greater of $5,000 or one-fifteenth of it aggregate indebtedness as defined under FINRA Rule 15c3-1(k)(2)(ii).

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Regulation of Investment Advisers



On July 11, 2013, the State of California granted its approval for MP Securities to provide investment advisory services.  As a California registered investment advisory firm, MP Securities is required to develop and maintain compliance procedures, record keeping procedures, comply with custody rules, marketing and disclosure obligations. MP Securities is also subject to the Investment Advisers Act of 1940, as amended, and related regulations. The SEC is authorized to institute proceedings and impose fines and sanctions for violation of the Investment Advisers Act. In addition to ensuring MP Securities’ compliance with federal and state laws governing its activities as a California registered investment advisory firm, the California DBO requires that representatives hired by MP Securities meet certain qualification requirements, including complying with certain testing requirements and examinations.



Our failure to comply with the requirements of the Investment Advisers Act, related SEC rules or regulations and provisions of the California Corporations Code and Code of Regulations could have a material effect on us. We believe we are in full compliance in all material aspects with SEC requirements and California laws and regulations. As MP Securities hires new registered investment advisers, it will be required to monitor its compliance with SEC and DBO regulations.



Privacy Standards

 

The Gramm-Leach-Bliley Financial Services Modernization Act of 1999 (“GLBA”) modernized the financial services industry by establishing a comprehensive framework to permit affiliations among commercial banks, insurance companies, securities firms and other financial service providers. We are subject to regulations implementing the privacy protection provisions of the GLBA. These regulations require us to disclose our privacy policy, including identifying with whom we share “non-public personal information” to our investors and borrowers at the time of establishing the customer relationship and annually thereafter. The State of California’s Financial Information Privacy Act also regulates consumer’s rights under California law to restrict the sharing of financial data. In recent years, there has been a heightened legislative and regulatory focus on data security, including requiring customer notification in the event of a data breach. Congress has held several hearings in the subject and legislation has been introduced which would impose more rigorous requirements for data security and response to data breaches. As MP Securities expands its investment advisory business operations, it will also need to monitor regulatory initiatives promulgated under Dodd-Frank that affect investment advisers.



Patents, Trademarks and Licensing



We do not rely on any significant patent, trademark, license or franchise to operate our business. We own the rights to the trademarks “MINISTRY PARTNERS ®, MINISTRY PARTNERS INVESTMENT COMPANY, LLC JOY IN INVESTING ®, the MINISTRY PARTNERS logo and design of a flower with two shaded leaves ® and MINISTRY PARTNERS SECURITIES ®” and have obtained U.S. trademark registrations for these marks with the U.S. Patent and Trademark Office.



Certain Legal Aspects of Our Mortgage Loan Investments



Description of Legal Aspects 



The Mortgage Loans are in the form of promissory notes secured by deeds of trust or mortgages on real property or other assets. In general, these notes require the borrower to pay principal and interest on specified dates. The deed of trust or mortgage securing the Mortgage Loan generally provides that in the event the borrower fails to timely pay principal or interest on the note or fails to satisfy any other obligations under the note, such as the failure to maintain the property in good repair, we may declare the entire balance of principal and interest under the note then due and payable.

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Debtor Protection Statutes 



In the event the principal and interest is not paid within a specified period, we must first attempt to collect on the Mortgage Loan by foreclosing on the real property or other asset securing the loan. In general, California law will not allow us to disregard the security and to proceed directly against the maker on the Mortgage Loan note. We must foreclose on the property under the deed of trust. Our ability to recover the value of the Mortgage Loan under such circumstances is affected by certain legal procedures and rights. Mortgage loans secured by real property are subject to the laws of the state in which the property is located and as applicable, federal law, including federal bankruptcy laws. Currently, 36 of the 147 Mortgage Loans held in our portfolio, representing approximately 19.51% of the outstanding balance of the loans held, are secured by property located in the State of California.



California, as most states, imposes statutory prohibitions which limit the remedies of a secured lender. A secured lender is limited in its right to receive a deficiency judgment against the borrower following foreclosure on the secured real property. In addition, California law prevents any deficiency judgment against a borrower by a mortgage lender where the loan either represents a portion of the purchase price of the property payable to the lender by that borrower (a “purchase money loan”) or the loan is secured by the borrower’s residence. Where a deficiency judgment is permissible, it can only be obtained after a judicial foreclosure on the property and then only for the excess of the outstanding debt over the fair market value of the property at the time of the foreclosure sale (as determined under statutory provisions). The net result of these statutes is to offer substantial protections to borrowers and to effectively require a mortgage lender to look only to the value of the property securing the Mortgage Loan through a private sale foreclosure.



In addition to the California state laws restricting actions against borrowers, numerous other statutory provisions, including the federal bankruptcy laws, afford additional relief to debtors which may interface with or affect the ability of a secured lender to realize the value of its Mortgage Loan in the event of a default.



Under the Internal Revenue Code of 1986, as amended, certain liens in favor of the Internal Revenue Service for tax payments are provided priority over existing Mortgage Loans. Also, mortgage lenders are subject to other statutory and administrative requirements under various laws and regulations regarding the origination and servicing of Mortgage Loans, including laws and regulations governing federal and state consumer protection, truth-in-lending laws, the Federal Real Estate Settlement Procedures Act, the Equal Credit Opportunity Act, the Fair Credit Billing Act, the Fair Credit Reporting Act, and related statutes and regulations.



As a result of these debtor protection laws, we could sustain a loss as a result of any of the foregoing federal or state laws and regulations restricting and/or regulating the origination and servicing of Mortgage Loans. Also, these laws and regulations are subject to continual change and evolution and it is always possible that inadvertent violations or liabilities may be incurred by reason of one or more of these provisions.



OUR MORTGAGE LOAN BUSINESS



Lending Activities



Loan Origination, Acquisition and Underwriting



Over the last several years, we have expanded our in-house staff, improved our operational systems and underwriting resources which has enabled us to expand our ability to originate, underwrite and service our mortgage loan investments.. When we acquire a mortgage loan or loan participation interest, we apply our internally developed underwriting criteria and loan acquisition policies and review the underwriting procedures carried out by the financial institution that is selling the loan or participation interest.  When we originate a loan, we rely entirely on our own underwriting capabilities and standards. Typically, we receive an origination fee and loan processing fee at the inception of each loan. 



As a result of our increased focus on originating our own loans, we have originated $86.3 million in loans from 2013 through 2015, as compared to $19.1 million from 2010 through 2012.  As a result of our efforts to expand

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underwriting, servicing and loan administration services starting in 2010, the Company now has the capacity, capability and underwriting experience to originate substantially all of our mortgage loan investments.



Servicing



ECCU has been making mortgage loans for ministry related projects for over 40 years.  Based upon ECCU’s experience in underwriting and servicing church and ministry related mortgage loans, we have entered into a servicing agreement with ECCU for some of our mortgage loan investments.  As of December 31, 2015, ECCU was servicing 10 loans for us, totaling approximately $12.8 million in loan principal outstanding.  As of December 31, 2014, ECCU was servicing 18 loans for us totaling $26.6 million in loan principal outstanding.  As of December 31, 2015, we also own approximately $1.8 million in mortgage loan investments which are being serviced by America’s Christian Credit Union, a Glendora, California based credit union.



Our core processing system along with our loan administration personnel give us the capability to service loans for ourselves and other institutions.  As of December 31, 2015, we were servicing 135 loans out of a total of 147 loans, totaling approximately $105.9 million in loan principal outstanding, net of participations sold.  These loans totaled approximately $151.5 million in gross loan principal balance outstanding at December 31, 2015. 



Our servicing capability also represents the operational foundation of our loan participation strategy, which will enable us to produce recurring servicing revenue from loan participations sold. We sold participations in 8 loans during the year ended December 31, 2015, which resulted in $49 thousand in gains on loan sales as well as an increase of $59 thousand in servicing fee income from the prior year.  Our technology platform enables us to process, record, transmit and account for all financial and operational data for the benefit of other credit unions, finance lenders, churches, financial institutions and investors. With these capabilities, we believe we will be able to continue to expand our portfolio of loans serviced.



Types of Loans



We invest primarily in mortgage loans secured by liens on churches, church-related and/or ministry related properties. Generally, our loans are secured by first mortgage liens, but we may invest in loans secured by second liens or which are guaranteed junior secured obligations, or in unsecured loans, if such loans meet our loan criteria. 

Permanent Loans



We acquire or originate mortgage loans that may have an adjustable interest rate or fixed rate. The term for a mortgage loan may not exceed 30 years and the maximum loan to value ratio may not exceed 80% without approval from our Board of Managers. Historically, our standard loan investments have been limited to five year maturities. Recently, however, we have begun making offers of ten year maturities on newly originated loans and renewals of existing loans.



Construction Loans



Construction loans may be made to finance the construction or restoration of facilities for schools, worship facilities or ministry related purposes. These loans normally will have a final maturity that will not exceed five years, with a construction draw period that will not exceed 12 months. In most instances, construction loans are interest-only on the outstanding balance drawn for construction. Under our Church and Ministry Loan Policy, the maximum loan to value ratio for a construction loan is 75%. As of December 31, 2015, we had $1.9 million in construction loans outstanding and $5.1 million in unfunded construction loan commitments.



Participation Interests



From time to time, we also invest in participation interests in secured mortgage loans, whereby we own a participation interest in a mortgage with a credit union or other lender. By investing in a participation interest, we can participate in a larger loan investment and diversify our mortgage loans investment portfolio while minimizing our exposure to the aggregate amount of the loan. When we invest in a “participation interest”, we purchase an undivided interest in a loan

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that has been originated by a credit union or other financial institution and we share principal and interest payments received from the borrower in an agreed upon manner. When we purchase a participation interest, the purchase transaction is governed by a participation agreement entered into by the originator and the participant containing guidelines as to ownership, control and servicing rights.  In most instances, the originator retains all rights with respect to enforcement, collection and administration of the loan.  When we enter into a loan participation agreement to purchase a loan participation interest from a financial institution, we may have more limited access to the borrower and the lead lender is generally entitled to exercise discretionary power in administering performing loans and undertaking collection efforts in connection with any of its non-performing loans. 



Due to our ability to originate and service our own loans, our investment in loan participations has been significantly reduced. As of December 31, 2015, approximately $12.4 million, or 9% of our total loan portfolio, consisted of loan participations we purchased from other financial institutions, including ECCU. For the year ended December 31, 2014, approximately $23.3 million, or 17% of our total loan portfolio, consisted of loan participations we purchased from other financial institutions.



Line of Credit



We may make line of credit arrangements available to borrowers to meet their temporary working capital needs. The term of such arrangements typically will not exceed one year and will provide for minimum interest payments during the term of the loan. For loans made to members of credit unions that are secured by real property, accounts receivable, and/or inventory, the maximum loan to value ratio is 90% based upon the current value of the collateral. As of December 31, 2015, we had $155 thousand in unfunded line of credit commitments as compared to $575 thousand in unfunded line of credit commitments at December 31, 2014.



Letters of Credit



Under our Church and Ministry Loan Policy, we are authorized to issue letters of credit granting the person named in the letter the right to demand payment from us for up to a specified amount provided the conditions set out in the letter are met. We require that a letter of credit be fully secured by funds on deposit or restricted funds on a line of credit with a draw period on the line of credit that meets or exceeds the draw period on the letter of credit. As of December 31, 2015, we had $1.1 million in outstanding letter of credit commitments as compared to $1.4 million at December 31, 2014.



Our Loan Policies



When we launched the Company, we relied upon ECCU to originate and underwrite a sufficient supply of mortgage loans made to churches, schools, ministries and other non-profit corporations to purchase land, develop facilities, construct or renovate worship facilities or refinance existing indebtedness.  Because ECCU has been making mortgage loans for ministry related projects for over 40 years and has extensive experience in underwriting church and ministry related mortgage loans, for most of our history we purchased substantially all of our loans from ECCU.  However, in recent years we have expanded our operations to include our own independent loan origination and underwriting activities.  Our loan underwriting process involves a review and analysis of the church or ministry’s financial operation, the strength of the organization’s leadership team, prior history, financial capability, value of collateral and general creditworthiness. 



Our managers establish our loan policies and review them periodically and, from time to time, have authorized designated loan officers and our President to make loans within certain limits established by our managers.  Our managers adopted a Church and Ministry Loan Policy to support our expanded levels of acquisition and origination of loans and also appointed a Credit Review Committee to review and carry out our loan policy.  The Credit Review Committee may approve loans up to 25% of our tangible net worth or 5% of our aggregate loan portfolio, whichever is less.  For loans exceeding the threshold, our managers have established a Loan Committee that reviews our loans and loan requests which exceed certain prescribed limits under our loan policies.   Upon approval, we issue a written loan commitment to the applicant that specifies the material terms of the loan.  Any loan exceeding 50% of our tangible net worth, or 7% of our total loan portfolio, whichever is less, must be recommended by the Credit Review Committee and

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approved by the Board of Managers prior to funding.  For any loan participation interest we acquire, the aggregate amount of such interest may not exceed 15% of our total net worth.



Our Mortgage Loan Investment Standards



Our policy is to require each of our mortgage loan investments to meet the following criteria:

























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Subject to the foregoing discussion, the following tables demonstrate and confirm our compliance with these loan limit policies:

























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As of December 31, 2015 and 2014, respectively, we were in compliance with our policy on aggregate concentration limits for construction loans, junior liens and unsecured loans, as well as our policy limit for unsecured loans to one borrower. Our portfolio included 22 loans at December 31, 2015 and 2014 that exceeded our policy limits for loans made to one borrower.  All of the aforementioned loans exceeding policy limits were originated or purchased in compliance with our policy, which allows our managers or the Company’s Loan Committee to approve certain exceptions.



Of the 22 loans that were out of compliance at December 31, 2015,  twelve were approved as exceptions by our Board of Managers or our Loan Committee.  The remaining 10 loans migrated out of compliance solely due to a decline in our tangible net worth since the loans were purchased or originated, which was mainly the result of increased provisions for loan losses and losses taken on our foreclosed assets.  We believe the risk presented by these 13 loans that have migrated out of compliance with our policy on limiting loans to a single borrower which exceed 25% of our tangible net worth will be mitigated by focusing on efforts to successfully manage the impaired loans in our portfolio.  Our lending team is also focusing on originating smaller loans and plans to continue to do so in the future.  The average outstanding balance of loans receivable in our portfolio has decreased from $1.1 million at December 31, 2013 to $967 thousand at December 31, 2014 and further declined to $928 thousand at December 31, 2015.  We have also used loan participation sales to reduce the risk of originating relatively large loans and have sought to include credit unions located in the borrower’s local community to serve as the credit union of record which holds at least a 10% interest in the loan. 



All loan applicants must complete an application and provide suitable documentation demonstrating an ability to repay the loan and submit this application to our offices in Brea, California.  For new loans greater than $500,000, we or our designated representative will conduct a site visit to inspect the collateral and conduct our due diligence review of the applicant.  Each loan must meet our Church Ministry and Loan Policy guidelines.



Based in part on the foregoing criteria, we have adopted a risk rating system for rating the risk of our mortgage loan investments. Our managers and management team monitor portfolio composition regularly and may, from time to time, establish guidelines for management regulating the fraction of the portfolio that may be invested in each risk category.  We monitor the risk ratings of our mortgage loan portfolio on a regular basis.



Our Loan Investment Portfolio



We invest primarily in mortgage loans secured by liens on churches, church-related and/or ministry-related properties. Generally, our mortgage loans are secured by first liens, but under limited circumstances, we may invest in loans secured by junior liens. The payment of our mortgage loan investments is not insured and, in general, is not guaranteed by any person or by any government agency or instrumentality. We must, therefore, look to foreclosure on the property securing the loan as the primary source of recovery in the event the loan is not repaid as required. Some of our mortgage loan investments are partial participation ownership in a mortgage loan, whereby we own an undivided interest in the loan investments with other institutions. Generally, the percentage of our ownership interest in our mortgage loans has ranged from 1% to 100%. Joint ownership allows us to participate in larger loans and in a greater

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number of loans than we would otherwise be able to afford, and therefore allows us to achieve greater diversification for our mortgage loan investment portfolio.



Our cash and loan investments for the years ended December 31, 2015,  2014 and 2013 are set forth below:











Set forth below are the amounts invested in each loan category at December 31, 2015,  2014 and 2013, respectively (dollars in thousands):  









At December 31, 2015,  we had no loans that are considered individually material (10% of net assets or greater) to our financial operations.



Our Net Interest Income and Interest Margin



Our earnings depend largely upon the difference between the income we receive from interest‑earning assets, which are principally mortgage loan investments and interest-earning accounts with other financial institutions, and the interest paid on our investor notes and lines of credit. This difference is net interest income. Net interest margin is net interest income expressed as a percentage of average total interest-earning assets.



Please see the discussion under “Management Discussion and Analysis of Financial Condition − Results of Operations” for information regarding our historical interest costs, interest income and yields realized on our mortgage loan investments for the years ended December 31, 2015,  2014 and 2013.



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Loan Maturities



The following table sets forth the future maturities of our Mortgage Loan portfolio at December 31, 2015:







Included in the table above are 105 adjustable rate loans.  These loans, totaling approximately $90.8 million, are due in 2021 or later.    All adjustable rate loans have one rate adjustment after five years.



Diversification of Our Mortgage Loan Portfolio



The following table sets forth, as of December 31, 2015,  2014 and 2013, each state in which: (i) the unpaid balance of our mortgage loans was 10% or more of the total unpaid balance of our loan portfolio; and (ii) the number of our loans was 10% or more of our total loans:















Our Loan Renewal Policies



We offer to renew, re-underwrite or otherwise continue (i.e. renew) a maturing loan on a case-by-case basis, based on the terms of the maturing loan, the credit status of the borrower and our liquidity needs at the time. Prior to maturity, each loan is analyzed and re-underwritten to determine if it is a possible rollover candidate. Management then reviews our liquidity needs and conditions in determining whether to recommend to our Credit Review Committee to renew the loan.



Sale of Loan Participation Interests



From time to time, we enter into loan participation purchase and sale agreements and we believe there is a robust demand for church and ministry loans in the credit union industry. When we sell a participation interest, a certificate is delivered and agreed upon which identifies the name of the borrower, the principal amount due under the loan, purchase price, interest rate, maturity date and participation percentage acquired under the loan. When we sell a loan participation interest, we generally enter into a loan participation interest purchase agreement which includes standard representations and warranties that are typical for a transaction of this nature. In addition, we are obligated to alert purchasers of such interests of certain material events which might affect the financial condition of the borrower and collectability of the loan.



During 2015, we entered into loan participation agreements to sell $6.0 million of loan participations to several credit unions, financial institutions and religious foundations.  During 2014, we entered into loan participation agreements to sell $13.1 million of loan participations to several credit unions.



Performance and Monitoring of Our Loan Portfolio



As of December 31, 2015,  10 of our 147 mortgage loan investments are serviced by ECCU and subject to ECCU’s collection policies.  Under the terms of our servicing agreement with ECCU, we monitor each mortgage loan or participation interest we acquire to ensure full payments are received as scheduled.  We also receive monthly reports from ECCU regarding our mortgage loan investments, including delinquent loan status reports.  For the loans that we service, we monitor payment receipts and delinquency.  We produce status reports on these loans similar to those which we receive from ECCU.  These status reports are included in monthly and quarterly reports management prepares for our Managers.



Impaired Loans



An impaired loan is defined as a loan on which, based on current information and events, it is probable that we will be unable to collect the scheduled payments of principal and interest when due according to the contractual terms of the loan agreement. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Impaired loans include delinquent loans, loans on non-accrual status and all restructured loans, regardless

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of the loan’s interest accrual status. We use the terms “impaired loan” and “non-performing loan” interchangeably in the discussion below.



A  “delinquent loan” is a loan which is 90 days or more past due. We treat a delinquent loan as an impaired loan. A “restructured loan” means a delinquent loan or an otherwise troubled loan for which we have given the troubled borrower concessions, generally with respect to payment accruals, interest rate reductions, and/or maturity date extensions, which we would not have given the borrower upon making the loan. A restructured loan may or may not be on non-accrual status. We treat a restructured loan as an impaired loan. While our Credit Review Committee closely monitors our loan portfolio performance, there have been no material changes in our practices, policies and procedures with regard to how we treat our non-performing loans that have been adopted over the past two years.



We “charge off” or “write off” a loan against our allowance or reserve for loan losses when we believe the uncollectability of the loan balance is confirmed. In most cases, this directly correlates to the completion of foreclosure proceedings on the collateral.  Prior to June 2011, we had never had a loan charge-off.  We recorded our first loan charge-off in June 2011.  In 2013, we recorded a $978 thousand charge-off against an impaired loan.  In each of these instances, we incurred charge-offs immediately prior to the completion of foreclosure proceedings or sale of the impaired loans. We recorded two partial charge-offs in 2013 totaling $98 thousand on loans where we wrote down the principal balance of those loans.    We also recorded four partial charge-offs in 2014 totaling $584 thousand.  For 2015, we had two mortgage loan charge-offs totaling $143 thousand.



Delinquent Loans



When the U.S. encounters adverse economic conditions, credit contractions occur and real estate values decline, churches are often materially impacted by high unemployment rates, foreclosures on homes owned by their members, collapsing real estate values and diminished net worth of their congregations and members.  Contributions to churches and ministries are especially sensitive to these economic trends facing the U.S.



We report a mortgage loan as delinquent if it is 90 days or more in arrears. At December 31, 2015, 0.78% of our portfolio was delinquent.  At December 31, 2014, 1.35% of our loan portfolio was delinquent.  We have adopted a proactive approach in responding to delinquencies in our loan portfolio. For loans which we act as the lead lender, we make direct contact with the borrower within ten (10) days of an initial late payment. If the situation progresses to 30 days or more, we follow up with an onsite visit to discuss the borrower’s circumstances and how the borrower can bring the loan current.



In the event that an acceptable workout of a delinquent mortgage cannot be reached, we, or ECCU for any loans it services for us, will generally proceed with a foreclosure proceeding on any collateral securing the loan.  At December 31, 2015, we did not have any loan investments in which we or the lead lender in the loan was pursuing foreclosure.  Since inception, we have had eight mortgage loan investment losses that resulted in charge-offs, one of which occurred during the year ended December 31, 2015.  For the year ended December 31, 2015, the performance of the mortgage loans we hold has substantially improved.    



Non-performing Loans



The table below sets forth the amounts and categories of non-performing assets in our portfolio.  Loans are placed on non-accrual status when the collection of principal and/or interest becomes doubtful or other factors involving the loan or the borrower’s financial condition warrant placing the loan on non‑accrual status. Non-accrual loans represent loans on which interest accruals have been discontinued. Troubled debt restructuring arrangements (or “TDRs”) are loans which include renegotiated loan terms to assist borrowers who are unable to meet the original terms of their loans.  Such modifications may include a lower interest rate, an extension of the maturity date or reduction in accrued interest. All TDRs (restructured loans) are initially placed on non-accrual status regardless of whether the loan was performing at the time it was restructured. During the past two years, there have been no material changes in our practices or policies governing how we handle a non-performing loan.

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The following is a summary of our non-performing mortgage loans at December 31, 2015,  2014, and 2013, respectively (dollars in thousands):









We had 8 nonaccrual loans as of December 31, 2015 and 2014, down from 12 nonaccrual loans at December 31, 2013.  For the years ended December 31, 2015 and 2014, $304 thousand and $597 thousand, respectively, of gross interest income would have been recorded had the non-accrual loans been current in accordance with their original terms.  Interest in the amount of $22 thousand and $16 thousand, respectively, was included in income for the years ended December 31, 2015 and 2014 on non-accrual loans through the accretion of loan discount related to the net present value of cash flows.  We monitor non‑performing loans on an ongoing basis as part of our loan review and work‑out process.  The potential risk of loss on these loans is evaluated by comparing the loan balance to the fair value of any underlying collateral for collateral-dependent loans, or the present value of projected future cash flows.  As of December 31, 2015 and 2014,  we did not have any loans past due 90 days and still accruing.



Restructured Loans 



A “restructured loan” or “troubled loan restructuring” means a delinquent loan or an otherwise troubled loan for which we have agreed on a work-out and have given the borrower concessions, generally with respect to payment accruals, interest rate reductions, and/or maturity date extensions, which we would not have given the borrower upon making the loan. We classify a loan as a restructured loan when we make concessions we would not otherwise consider if offering a loan to a borrower.  A restructured loan may or may not be on non-accrual status. We treat a restructured loan as an impaired loan. While our Board’s Credit Review Committee closely monitors our loan portfolio performance, there have been no material changes in our practices, policies and procedures with regard to how we treat our non-performing loans that have been adopted over the past two years. If we decide to accept a loan restructure, we generally will not forgive or reduce the principal amount owed on the loan; in addition, the typical maturity term for a restructured loan does not exceed five years.



From time to time, we have restructured a mortgage loan in light of the borrower's circumstances and capabilities. We review each of these cases on an individual basis, and approve any restructure based on the guidance stipulated in our Collections policy. If we decide to accept a loan restructure, we generally will not forgive or reduce the principal amount owed on the loan; in addition, the typical maturity term for a restructured loan does not exceed five years.  We classify a loan as a restructured loan when we make concessions we would not otherwise consider if offering a loan to a borrower. A restructuring of a loan usually involves an interest rate modification, extension of the maturity date, or reduction of accrued interest owed on the loan on a contingent or absolute basis. 



In order to properly evaluate a potential restructure, when we receive a request for a modification or restructure, we evaluate the strength of the borrower’s financial condition, leadership of the pastoral team and board, developments

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that have impacted the church and its leadership team, local economic conditions, the value of the underlying collateral, the borrower’s commitment to sound budgeting and financial controls, whether there is a denominational guaranty of any portion of the indebtedness, debt service coverage for the borrower, availability of other collateral and any other relevant factors unique to the borrower.  While we have no written policy that establishes criteria for when a request for restructuring a loan will be approved, our Credit Review Committee reviews each request, solicits written reports and recommendations from management and summaries of the requests and actions taken by the Credit Review Committee are presented to the Company’s Managers for their review at quarterly meetings throughout the year.



The following table shows the number and balance of restructured loans in our Mortgage Loan portfolio, as well as the percentage of our total portfolio those loans represented and the amount of allowance for loan losses associated with restructured loans at December 31, 2015, 2014 and 2013 (dollars in thousands):







In the current economic market, loan restructures often produce a better outcome for our loan portfolio than a foreclosure action. Given our specialized knowledge and experience working with churches and ministries, entering into a loan modification often enables the borrower to keep their ministries intact and avoid foreclosure. With a successful loan restructure, we avoid a loan charge-off and protect the interests of our investors and borrowers we serve.



The number of restructured loans as a percentage of our total loan portfolio, while higher than historical levels we incurred prior to the 2008 global economic crisis, are within manageable limits, and the delinquency rates on our mortgage portfolio appear to have stabilized.    We believe we have established adequate levels of reserves for any foreseeable losses, and we continue to evaluate the adequacy of such reserves in light of current economic and operational conditions.



Foreclosed Assets



As of December 31, 2015, we held properties acquired through foreclosure with a net value of $3.5 million, which includes a total valuation allowance of $1.1 million on the properties.  Each property is valued based on its current listing price or most recent appraised value less anticipated selling costs, marketing costs and commissions. 



A summary of the properties we have acquired through foreclosure is listed below:



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In December 2015, Intertex entered into a Contribution Agreement with us pursuant to which we agreed to contribute the property to the Tesoro Hills, LLC joint venture project.  On that same date, Intertex executed an Operating Agreement with us.  Under the terms of the Operating Agreement, Intertex has agreed to make an initial $25,000 capital contribution, pay the costs of organizing the entity, pay certain development costs, provided, however, that it will not be required to contribute more than $300,000 to the development of the property.  If additional capital contributions are required to develop the property for use as a school, church, not-for-profit facility or other special use, each member may elect to make a loan to the joint venture.  The members have further agreed that no capital event to sell, dispose of, transfer, gift, encumber, or convey the property will occur for a period of two years after the joint venture was formed.  Since the Santa Clarita property is vacant land which needs to be permitted, properly zoned, graded and substantially improved before the property may be sold, leased or conveyed to another party, we believe that conveying the property to the Tesoro Hills joint venture will maximize our chances of recovering our investment in the loan.  The title to the Santa Clarita property was transferred to the Tesoro Hills, LLC joint venture in January 2016.





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Listed in the chart below is a summary of foreclosure properties we held as of December 31, 2015, the city and state in which the property is located; our net investment in the loan at the time of foreclosure; the reserve or write-down amount of the property; and the current value after estimated selling costs (dollars in thousands):





*  During the first quarter of 2016, three of the real estate owned assets listed above have been disposed of in sale transactions or in connection with the formation of a real estate joint venture investment.



As of December 31, 2015, our foreclosed real estate properties are valued at $3.5 million and are presented net of any valuation allowances. The Company held $3.5 million, $3.9 million, and $3.3 million of foreclosed assets at December 31, 2015,  2014 and 2013, respectively.



Loan “Charge Offs”



We charge-off or write-off a loan against our allowance or reserve for loan losses when we believe the uncollectability of the loan balance is confirmed. In most cases, this directly correlates to the completion of foreclosure proceedings on the collateral. Prior to June 2011, we had never had a charge-off on one of our mortgage loan investments. We recorded the first loan charge-off in June 2011. We recorded two additional charge-offs in 2012.  In 2013, we recorded $978 thousand as a charge-off against an impaired loan. We recorded two partial charge-offs in 2013 totaling $98 thousand on loans where we wrote down the principal balance of those loans. In 2014, we recorded $544 thousand in charge-offs against three impaired loans.  In 2015, we recorded $103 thousand in charge-offs against one impaired loan. We also recorded a partial charge-off against one impaired loan of $40 thousand in both 2014 and 2015 when we wrote down the principal balance of that loan as part of an agreement with the borrower.  We incurred charge-offs immediately prior to the completion of foreclosure proceedings or sale of the impaired loans or as a result of principal amounts we deemed uncollectible.    

Allowance for Loan Losses

We establish provisions for loan losses, which are charged to earnings, at a level reflecting estimated credit losses on our loan portfolio. In evaluating the level of the allowance for loan losses, we consider the type of loan, amount of loans in our portfolio, adverse situations that may affect our borrowers’ ability to pay and estimated value of underlying collateral and credit quality trends (including trends in non-performing loans expected to result from existing conditions).



The allowance for loan loss is monitored by our senior management on an ongoing basis. We examine the performance characteristics of our portfolio loans, including charge-offs, delinquency ratios, loan restructurings and modifications and other significant factors that, in management’s judgment, may affect our ability to collect loans in the portfolio as of the evaluation date.  Our senior executive team monitors these factors on a regular basis and reviews are conducted quarterly with our managers.  We determine general reserves by segregating our loan portfolio into pools based on the risk rating of the loan and the position of the underlying collateral. 

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Risk ratings are determined by grading a borrower on certain metrics, which include financial performance, strength of management, credit history, and condition of the local economy. These ratings are updated on an annual basis, or more frequently as necessary. By segregating the portfolio in this manner, our senior executive team is better able to assess the potential effects of various risk factors depending on the quality of the loans in a particular pool. The potential impact of factors such as the risk of charge-offs, impairment, delinquency, restructuring, decreases in borrower financial condition, and continued low commercial real estate values throughout the country fluctuates depending on the quality of the loan. As a result, management has increased the weight of these factors for loans with a higher risk rating. 



Our senior executive team also evaluates our allowance for loan losses based upon a review of individual loans in our loan portfolio. This evaluation is inherently subjective as it requires material estimates including the amounts and timing of future cash flows we expect to receive on an impaired loan that may be susceptible to significant change. Once a loan becomes delinquent or non-performing, the borrower reports a material adverse financial condition, or we determine that the value of the collateral underlying an impaired loan has substantially declined, we assess all information available to us to determine the estimated loss for a particular loan. We monitor these individual impaired loans on a regular basis.



If we restructure a loan, we establish an allowance for loan loss for that individual loan based on the difference between the net present value of the future receipt of cash payments from the restructured loan as compared to the net present value of cash flows which we would have received from the original loan, discounted at the original interest rate of the loan. As time passes and the restructured loan performs according to its modified terms, the net present value of future cash flows of the restructured loans changes. The change in the present value of cash flows attributable to the passage of time is reported as interest income. If a loan is collateral-dependent, even if that loan has been restructured, we establish an allowance for loan loss based on the value of the collateral securing the loan less estimated costs to sell the collateral.



At December 31, 2015,  2014 and 2013, our allowance for loan losses was $1.8 million, $2.5 million and $2.9 million, respectively, or 1.31%, 1.81% and 1.90%, respectively, of our total loan portfolio for the period.  Assessing the adequacy of our allowance for loan losses is inherently subjective as it requires us to make material estimates, including the amount and timing of future cash flows we expect to receive on impaired loans that may be susceptible to significant change.  In the opinion of management, the allowance, when taken as a whole, reflects all known and inherent credit losses in our Mortgage Loan portfolio as of December 31, 2015.



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The following represents a breakdown of the components of our allowance for loan loss at December 31, 2015,  2014 and 2013 (in thousands):











In addition, we segregate the loan portfolio into classes for purposes of evaluating the allowance for loan losses. A portfolio class is defined as the level at which we develop and document a systematic method for determining its allowance for loan losses. The portfolio classes are segregated based on loan types and the underlying risk factors present in each loan type. Such risk factors are periodically reviewed by management and revised as deemed appropriate.



Our loan portfolio consists of one segment, church loans, and is segregated into the following classes:



Wholly-owned First Collateral Position. This portfolio class consists of the wholly-owned loans for which we possess a senior lien on the collateral underlying the loan.



Wholly-owned Junior Collateral Position.  This portfolio class consists of the wholly-owned loans for which we possess a lien on the underlying collateral that is superseded by another lien on the same collateral. This class also contains any loans that are not secured by any collateral. These loans present greater credit risk than loans for which we possess a senior lien due to the increased risk of loss should the loan enter foreclosure.

 

Participations First Collateral Position.  This portfolio class consists of the individual percentage interests in Mortgage Loans (“loan participation interests”) for which we possess a senior lien on the collateral underlying the loan. Loan participations have more credit risk than wholly-owned loans because we do not maintain full control over the disposition and direction of actions regarding the management and collection of the loans. The lead lender directs most servicing and collection activities and major actions must be coordinated and negotiated with the other participants, whose best interests regarding the loan may not align with ours.



Participations Junior Collateral Position.  This portfolio class consists of the loan participation interests for which we possess a lien on the underlying collateral that is superseded by another lien on the same collateral. Loan participations in junior collateral position loans have greater credit risk than wholly-owned loans and loan participation interests where we hold a senior lien on the collateral. The increased risk is the result of the factors presented above relating to both junior lien positions and participations.



Classification of Loans.  Our policies provide for the classification of loans that are considered to be of lesser quality as watch, substandard, doubtful, or loss assets. An asset is considered substandard if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Substandard assets include those assets characterized by the distinct possibility that we will sustain some loss if the deficiencies are not corrected. Assets classified as doubtful have all of the weaknesses inherent in those classified substandard with the added characteristic that the weaknesses make collection or liquidation in full highly questionable and improbable, based on currently existing facts, conditions and values. Assets (or portions of assets) classified as loss are those considered uncollectible and of such little value that their continuance as assets is not warranted. Assets that do not expose us to

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risk sufficient to warrant classification in one of the aforementioned categories, but which possess potential weaknesses that deserve close attention, are designated as watch.



Our Competition



Although the demand for church financing is both broad and fragmented, no one firm has a dominant competitive position in the market. We compete with church bond financing companies, banks, credit unions, denominational loan funds, REITs, insurance companies and other financial institutions to service this market. Many of these entities have greater marketing resources, extensive networks of offices and locations, larger staffs and lower cost of operations due to their size. We believe, however, we have developed an efficient, effective and economical operation that (i) specializes in identifying and creating a diversified portfolio of church mortgage loans that we or other credit unions originate and (ii) preserves our capital base and generates consistent income for payments on our debt obligations and distribution to our equity investors.



We rely upon the extensive experience of our officers, management and Managers in working with ministry related financing transactions, loan origination, and investment in churches, schools, ministries and non-profit organizations. 



Our Employees



As of January 1, 2013, we entered into a staffing agreement with Automated Data Processing, Inc., which will provide payroll and staffing services.  As of December 31, 2015, we had 24 full- or part-time employees.  None of our employees are covered by a collective bargaining agreement, and we believe that we have an excellent relationship with our employees and staff.



Our Properties



We currently rent our offices (approximately 4,970 square feet of rentable space) from ECCU under the terms of an Office Lease dated November 4, 2008.  In November 2013, we renewed the lease for a five year period.  The ECCU Office Lease agreement includes one additional option to renew for an additional five year term.  For 2013, our base rent was $10,437 per month.  In November 2013, under the terms of the renewal, our base rent decreased to $9,172 per month.  On March 6, 2012, MP Securities entered into an office lease for approximately 1,358 square feet of office space to open a branch office in Fresno, California.  The lease has a term of 36 months.  In February 2015, we negotiated a renewal of the lease for an additional three year term.  The lease extends through February 2018.  For 2016, the base rent for this branch office will be $2,064 per month.



As of December 31, 2015, we held seven properties acquired through foreclosure or deed in lieu of foreclosure agreements. Each property is valued based on its current listing price or most recent appraised value less anticipated selling costs, marketing costs and commissions. We estimate that the fair value of our real estate owned assets held for sale, which represents carrying value, is approximately $3.5 million at December 31, 2015,  net of valuation allowances of $1.1 million.  As of the date of this Prospectus, we hold only one real estate asset and we have written off the value of this investment due to our inability to sell the property.

 

 

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MANAGERS AND EXECUTIVE OFFICERS



Set forth below are the members of our Board of Managers and executive officers: 

 



The following is a summary of the business experience of our executive officers and Managers. With our conversion from a corporation to a limited liability company on December 31, 2008, we are governed by a Board of Managers that supervises our affairs (hereinafter referred to as the “Board”).



R. MICHAEL LEE has served as a member of our Board since January 2009. He was appointed Chairman of the Board in May 2015.  Mr. Lee currently serves as Chief Executive Officer and President for Kane County Teacher’s Credit Union. Previously, Mr. Lee served as Vice President Member Relations for Alloya Corporate Federal Credit Union, President of Midwest Region for Members United Federal Credit Union, Chief Membership Officer for Mid-States Corporate Federal Credit Union, Senior Vice President US Central Federal Credit Union, SVP Corporate Network eCom, SVP Corporate One Federal Credit Union and Vice President of Sales for a national insurance agency.  In the insurance industry, Mr. Lee spent 15 years in different positions that lead him to managing a national sales force that served the needs of business owners. Mr. Lee currently serves on the boards of Illinois Credit Union Foundation and Illinois Credit Union Executive Society. He attended Southern Illinois University; CUNA’s Financial Management School and completed numerous industries training sessions throughout his career. Mr. Lee adds special expertise to our Board with his years of experience as an executive of a number of large financial institutions and with his deep knowledge of the financial industry. Mr. Lee currently serves as Chairman of the Board, member of our Executive Committee, Governance Committee, Asset-Liability Management Committee and serves as the Chairman of the Board for Ministry Partners Securities, LLC.



JOSEPH W. TURNER, JR. has served as Chief Executive Officer and President since December 3, 2015. Mr. Turner is also the Chief Executive Officer and President for Ministry Partners Securities LLC, the wholly-owned subsidiary of Ministry Partners Investment Company. Mr. Turner also held the position as Chief Compliance Officer of Ministry Partners Securities LLC until December 14, 2015. During his tenure with the Company, Mr. Turner has led the Company’s efforts in transitioning its wholly-owned broker dealer to a more robust and diverse financial services firm, launching its investment advisory and insurance company activities in addition to overseeing the capital raising efforts related to the Company’s proprietary products. Mr. Turner was also instrumental in formalizing strategic partnerships with Evangelical Christian Credit Union (the Company’s largest equity owner) and America’s Christian Credit Union to provide complimentary financial products and services to their collective members. Prior to joining the Company in 2011, Mr. Turner served as Regional Vice President, Chief Operating Officer, Chief Executive Officer and President for Strongtower Financial, Inc., a Fresno, California based broker dealer and advisory firm which specialized in providing investment banking services, mortgage financing for churches and ministries, and investment and insurance products and services. Prior to joining Strongtower in 2007, Mr. Turner served as Managing Director of Principal Financial Group where he led a financial advisory and insurance group. Mr. Turner began his career with Prudential

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Preferred as an investment advisor in 1990. Mr. Turner received his Bachelor of Science in Business Administration – Finance degree from California State University, Fresno. Mr. Turner has completed industry leadership training both at Drake University and the Wharton School of Business. Mr. Turner holds the FINRA Series 6, 7, 24, 63, 65, and 51 as well as life, health and disability licenses in over 23 states.



VAN C. ELLIOTT has served as a member of our Board since 1991. He has served as a director for ECCU from April 1991 until the present (except for the periods from March 1997 to March 1998 and March 2004 to March 2005). He serves on the Board of Vanguard Global Network, an organization that trains pastors internationally. Mr. Elliott served as associate director of the Conservative Baptist Association of Southern California from 1980 to 1994, where he was responsible for the general administrative oversight of the association’s activities. Since that time, he has been self-employed as a consultant providing financial and fund raising consultation services to church and church-related organizations. He received his Bachelor’s and Master’s degrees in mathematics and speech from Purdue University and spent seven years in the computer industry. Mr. Elliott holds a Master of Divinity from Denver Seminary and has spent fourteen years in local church ministries serving in the area of Christian education and administration. He has completed post-graduate instruction at the College for Financial Planning. Mr. Elliott is a member of the Financial Planning Association and holds the professional designation of Certified Financial Planner.®   Mr. Elliott brings to our Board his extensive experience as a credit union board member and intimate knowledge of church and ministry financial operations. He serves on our Executive Committee and on our Audit Committee.



SUSAN B. REILLY has served as our Senior Vice President and Chief Financial Officer since August 18, 2011 and was previously appointed as our Vice President of Finance and Principal Accounting Officer in December, 2007. Prior to joining us, Ms. Reilly served as Controller for Pacific Rim Capital, a private equity investment firm. Before joining that firm in 2007, she was Senior Vice President and Treasurer for East West Bank. Prior to joining East West Bank in 2004, Ms. Reilly served as Treasurer for Catalina Restaurant Group. Before joining that company in 2003, she worked for Parson Consulting Group. Ms. Reilly holds a Bachelor of Science Degree from the University of California Riverside. She completed post-graduate work at California State University at Fullerton and attended the University of Southern California - Marshall School of Business - East West Bank Leadership Program. In addition to holding a California life and disability insurance license, Ms. Reilly holds her series 7, 24, 27, and 99 securities licenses.



ROBERT SCHEPMAN has served as our Vice President for Lender Relations since August of 2010. Mr. Schepman has originated church mortgages for twenty years, beginning with Christian Mutual Life in 1987 and served as a Ministry Development Officer for ECCU for 17 years until his retirement in 2009. From 1981 to 1987, Mr. Schepman originated commercial loans and commercial real estate syndications as a partner in Commercial Capital Resources. Prior to that time, Mr. Schepman owned and operated a commercial metal fabrications business for nine years and enjoyed earlier successes as a securities salesperson and in various other product sales capacities. Mr. Schepman earned his Bachelor of Business Administration degree from Woodbury University, Los Angeles, in 1960. He has held the California Real Estate Broker license since 1990.



TYRUS R. SALTER, Jr. has served as Vice President for Ministry Partners Investment Company since October 1, 2015. Mr. Salter’s primary areas of responsibilities include business development activities, management of ministry relationships and strategic planning initiatives as part of the overall leadership team. Prior to joining Ministry Partners, Mr. Salter held several key roles at the North American Mission Board (NAMB) from 2001 until 2015, including serving as the National Director  for Church Finance Ministry where he was responsible for management of a $155 million loan fund, a $39 million real estate acquisition fund, and served on a management team that directed a $207 million professionally managed equities portfolio. Mr. Salter was also responsible for a team of professional financial consultants that from 2003 through 2014 completed over 500 church loans with aggregate amount financed in excess of $245 million.  Prior to his tenure with the North American Mission Board, Mr. Salter spent six years as the Church Services Team Leader for the State Convention of Baptists in Ohio. Prior to that, Mr. Salter served in the U.S. based airlines industry for nearly 15 years. Mr. Salter earned his Bachelor of Science in Business Administration from McNeese State University, Lake Charles, Louisiana in 1983.



HAROLD D. WOODALL has served as our Vice President for Lending since May, 2007 and was appointed Senior Vice President and Chief Credit Officer on August 18, 2011. His responsibilities include the general management of development, underwriting and processing of loan origination and mortgage investment. Mr. Woodall previously

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served as Vice President for Lending Services at the California Baptist Foundation from 1996 to 2006, where he was responsible for general management of a $130 million loan fund, including origination of over $500 million in church and ministry loans during that period. His previous experience also includes commercial lending, medical equipment manufacturing, real estate sales, oil and gas production and agribusiness consulting. Mr. Woodall is a graduate of Oklahoma State University in Stillwater Oklahoma with a B.S. in Agricultural Economics.



MENDELL L. THOMPSON joined the Board when Arthur Black, who served on the Board from 1997 through April 2016, retired from the Board.  Mr. Thompson will complete the remainder of Mr Black’s term of office.  Mr. Thompson serves as President/CEO of America’s Christian Credit Union in Glendora, California, a position he has held since 1986. Prior to his promotion to President/CEO at age 32 in 1986, Mr. Thompson held a variety of other positions at the Credit Union between 1977 and 1986. Among his many accomplishments, Mr. Thompson was influential in taking the Credit Union through a charter change in 1993 that opened the door to making church loans. Currently, America's Christian Credit Union serves more than 75,000 members, has over $313 million in assets, and manages assets of over $450 million.  Mr. Thompson was elected to the Glendora City Council in 2015 and is currently serving his first 4-year term, is a trustee on the Point Loma Nazarene University (PLNU) Board and a director on the PLNU Foundation Board. Mr. Thompson has served as a director of the National Association of State Credit Union Supervisors (NASCUS) Executive Council, as a director on the Board of WesCorp FCU, Chairman of WesCorp’s Supervisory Committee, and on the Glendora Church of the Nazarene Board. He has been a director of the CU Deposit Network, the Financial Marketing Association, and the Southern California CU Executives Society Council.  Mr. Thompson graduated cum laude in 1976 with a bachelor’s degree in History/Business from Point Loma Nazarene University, and is also a graduate of the Western CUNA Management School and Stanford University’s Executive Development Program.



JULI ANNE S. CALLIS has served as a member of our Board since 2007. She is currently the Senior Vice President of Research and Development for Western Bancorp in San Jose, California.  Prior to her current engagement, she was President and Chief Executive Officer of the National Institute of Health Federal Credit Union. Prior to that, she was Executive Vice President and Chief Operating Officer of KeyPoint Credit Union and the President of its subsidiary, KeyPoint Financial Services. Before joining KeyPoint Credit Union, Ms. Callis served as Vice President for Business Development, Marketing and Legislative Affairs from 1988-1995 at Langley Federal Credit Union. Prior to joining the credit union industry, Ms. Callis served as the Director of Sales for the US Navy Mid-Atlantic Region, which included the direct responsibility for public relations and sales for all Navy Exchange and Commissary Operations in the Mid-Atlantic States, Europe, Iceland and Bermuda. Ms. Callis received her Bachelor of Science degree in Community Health and Education from East Carolina University and received a Master’s degree in Organizational Development from the University of San Francisco, where she is pursuing a Ph.D.  Ms. Callis currently serves on the Board of Directors for the George Washington Institute of Health and Women in BIO. She also previously served as Chair for the Executive Committee of the Open Solutions, Inc. Client Association and serves currently as a Trustee of the International Mission Board of the Southern Baptist Convention. Ms. Callis provides our Board with the benefit of her extensive experience in financial institution operations and technology and especially, her asset-liability management expertise. Ms. Callis serves as our Chair of the Asset-Liability Management Committee.



JERROD FORESMAN has served as a member of our Board since May, 2012. He is the President, Chief Compliance Officer and Financial Operations Principal of Bankers & Investors Company Inc., a registered broker/dealer and investment advisor headquartered in Kansas City, Kansas. B&I is a non-bank affiliate of Valley View Bancshares and its seven local community banks and 45 branches. Mr. Foresman has been serving as a financial advisor since 1990 and has managed and owned financial advisory/marketing firms specializing in working with credit unions and community banks since 1993. Mr. Foresman attended Missouri State University and is currently studying for additional financial designations from the American College in Bryn Mawr, PA. He is a contributing member of the Wealth Management RIA Board of Advisors, Advisor Confidence Index (ACI) from Rydex. Mr. Foresman holds the FINRA Series 7, 24, 27, 63, 65 and 66 as well as life, health, property & casualty insurance licenses.



JEFFREY T. LAURIDSEN has served as a member of our Board since October 2007. He is an attorney in private practice with the Law Offices of Jeffrey T. Lauridsen in Garden Grove, California. Before establishing his current practice, Mr. Lauridsen served with several other law firms in the Orange County area, as partner and senior associate. Mr. Lauridsen’s 17 years of law practice have focused on corporate law and encompassed both trial and appellate work

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in diverse areas of law, including business litigation, construction defects, general liability, premises liability, products, medical malpractice, ERISA, insurance coverage, automobile liability, insurance bad faith, employment and labor law, sexual harassment, sexual molestation and others. Prior to entering into the practice of law, Mr. Lauridsen worked as a claim representative in the insurance industry for 19 years. Mr. Lauridsen received his Associate of Arts degree in Political Science from Fullerton College. He received his Bachelor of Science in Law and Juris Doctorate degrees from California Southern Law School. He has served as Elder at Grace Church in Orange, California for 18 years. Mr. Lauridsen brings to our Board the perspective of an experienced attorney, as well as intimate knowledge of ministry governance. Mr. Lauridsen serves on our Loan Committee and serves as Chairman of our Audit Committee.



ABEL POMAR began serving as a member of our board in February 2016. Mr. Pomar currently serves as the President, Chief Executive Officer of Evangelical Christian Credit Union (“ECCU”). Prior to joining ECCU, Mr. Pomar served as Senior Vice President, Strategic Initiatives within the Global Compliance organization at Bank of America, where he was most recently responsible for leading the delivery of regulatory compliance change and transformation initiatives across the enterprise. During his nearly eight years at Bank of America, Mr. Pomar held various leadership positions, including roles in global marketing and corporate affairs, technology delivery and change management, strategic planning and continuous improvement, and finance. He holds a bachelor’s degree in operations management and a MBA with a concentration in finance from California State University, Los Angeles.



Our Board of Managers



Under our Operating Agreement, our Board and officers are charged with governing and conducting our business and affairs. The Operating Agreement charges our Board with essentially the same duties, obligations and responsibilities as a board of directors of a corporation. The Board establishes our policies and reviews them periodically and has authorized designated officers and our President the authority to carry out those policies.



When initially formed, we were a wholly-owned subsidiary of ECCU. At that time, the board consisted of ECCU executives and a number of independent directors. As of the date of this Prospectus, our Board consists of seven Managers, a majority of which are independent managers. The Board is actively involved in and regularly meets with members of our senior management to discuss capital adequacy, use of leverage, and liquidity issues we face.  Our Asset Liability Committee regularly meets with the objective of performing oversight of interest rate risk, future net interest income and expense, capital and liquidity forecasts and review of trends impacting our balance sheet.



Board Committees



Our Board may from time to time establish and empower board committees to perform various functions on its behalf. Each committee consists of at least three persons. Currently, the Board has established the following committees:













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Our Board Chairman



On May 14, 2015, the Company held a regular board meeting of its Board of Managers, during which it appointed R. Michael Lee, to serve as Chairman of the Board of Managers.  Prior to Mr. Lee’s appointment, Mark Holbrook served as our Board Chairman since the Company’s inception.  Mr. Holbrook also served as our Chief Executive Officer from inception of the Company until February 17, 2011.



Code of Ethics



On November 6, 2009, our Board adopted a Code of Ethics for our principal officers and members of the Board.



Indemnification of Our Managers and Officers 



We may indemnify any of our Managers, officers, Members, employees or agents, provided the agent seeking indemnification acted in good faith and in a manner that the person reasonably believed to be in our best interests and provided that the acts do not constitute gross negligence, intentional misconduct or a knowing violation of law. To the extent we are successful on the merits in defense of our agent’s actions, the agent will be indemnified for all reasonable expenses incurred. In all other instances, a majority of the Members must approve indemnification.



We can advance our agent’s defense costs if approved by Managers who are not seeking indemnification or, if there are none, by a majority of our Members.



Our Managers who are not otherwise involved in the action can approve the advancement of our agent’s defense costs if they receive an undertaking from the person to repay such amount in the event that it is ultimately determined that the person is not entitled to indemnification.



It is the position of some federal and state agencies, including the Pennsylvania Department of Banking and Securities that indemnification with violations of Securities Law is against public policy and void.



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EXECUTIVE COMPENSATION



At their meeting in February 2014, management and the Board of Managers agreed to compensate Managers for their role on the Board and for time spent acting on behalf of the Company, retroactive to 2013. This compensation consists of base compensation of $4,000, additional compensation for acting as a chair or secretary, and compensation for each Board meeting in which they participate. For the year ended December 31, 2014, we accrued $53 thousand in compensation awards for our Managers.  These awards were paid in March 2015.  The Managers elected not to receive compensation awards for the year ended December 31, 2015.  Accordingly, no compensation awards were accrued at December 31, 2015 for our Managers. Each Manager is also entitled to be reimbursed for expenses incurred in performing duties on our behalf.    

 

The following table sets forth certain information regarding compensation we paid for services rendered to us during the years ended December 31, 2015,  2014 and 2013 by our senior executive officers and Managers.  Mr. Overholt, our former Chief Executive Officer and President, retired from his positions as President and Chief Executive Officer of the Company and its subsidiaries on December 3, 2015.  We entered into a severance agreement with Mr. Overholt, the compensation of which is included below.  Upon Mr. Overholt’s departure, Joseph Turner was appointed by the Board to serve as our President and Chief Executive Officer.

 

Summary Compensation Table

Annual Compensation







(1) Until April 2015, Mr. Holbrook was a full-time employee of ECCU. During his tenure on the Board, Mr. Holbrook expended, on the average, approximately 2% of his time as an officer or member of our Board.  We accrued $8,750 for his service as Chairman of the Board and as a Board member during 2014.We accrued $8,100 for his service as Chairman of the Board and as a Board member during 2013 and paid this during 2014.

 

(2) We accrued amounts for each Manager for their service on the Board during 2014.  The amounts accrued for 2013 were paid during 2014.  The Board members elected not to receive any compensation for their service during the year ended December 31, 2015. Mr. Shepard was not compensated for his services on the Board during his term of service on the Board.

 

(3) We contributed an aggregate amount of $18,111 for Ms. Reilly's 401(k) retirement plan, medical benefits and life and disability insurance for 2015.  We contributed an aggregate amount of $31,902 for Mr. Woodall's 401(k) retirement plan, medical benefits and life and disability insurance for 2015.  We contributed an aggregate amount of $40,958 for Mr. Turner’s 401(k) retirement plan, medical benefits and life and disability insurance for 2015.  Per his employment agreement, we also compensated Mr. Turner $9,626 in excess of moving related expenses.



(4) We contributed an aggregate amount of $7,242 for Mr. Overholt's 401(k) retirement plan, medical benefits and life and disability insurance for 2014.  We contributed an aggregate amount of $20,772 for Ms. Reilly's 401(k) retirement plan, medical benefits and life and disability insurance for 2014.  We contributed an aggregate amount of $30,856 for Mr. Woodall's 401(k) retirement plan, medical benefits and life and disability insurance for 2014.  Mr Turner was not considered to be a Company executive officer during 2014.



(5) We have paid or accrued a total of $233,898 for Mr. Overholt’s severance pay, 401(k) retirement plan, medical benefits and life and disability insurance for 2015.  This includes $221,888 accrued for severance pay and medical benefits as stipulated in the severance agreement entered into in December 2015.



(6)  In 2014, we paid $13,867 in medical benefits expenses as part of a severance agreement reached with Mr. Dodson after he resigned in 2013.



(7)  We have paid or accrued a total of $28,462 for Mr. Overholt per a contractual agreement during his service as interim Chief Executive Officer.



(8) In addition to the amounts accrued for Mr. Elliott’s service on the Board, we also paid him an additional $27,875 in 2013 for his service as our Manager-in-Charge during the period between Mr. Dodson’s resignation and Mr. Overholt’s appointment as interim Chief Executive Officer.



(9) In 2014, we paid $13,867 in medical benefits expenses as part of the severance agreement reached with Mr. Dodson in 2013.



No options, warrants or other rights to purchase our equity securities have been issued to our officers.



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DESCRIPTION OF OUR MEMBERSHIP INTERESTS

AND CHARTER DOCUMENTS



Our Authorized Membership Interests



Authorized Capital



Our operating agreement creates two classes of membership interests, common membership interests and deferred membership interests. Our Managers are authorized to issue two classes of common membership interests, the Class A Units and the Class B Units. The Class B Units are identical to the Class A Units, except the Class B Units are non-voting, except to the extent required by the California Revised Limited Liability Act (the “LLC Act”). The Class A Units have the same rights, preferences and privileges as our previous common stock.



The operating agreement establishes one class of preferred membership interests, the Series A Units. The Series A Units have the identical, rights, preferences and privileges as our previous Class I Preferred Stock and our Class II Preferred Stock, except the Series A Units are entitled to receive distributions at the same rate as our previous Class I Preferred Stock, which is a higher rate than was payable on the Class II Preferred Stock.



Our Class A Units



We currently have 146,522 Class A Units outstanding. Our Class A Units are entitled to one vote per Unit on all matters to be voted upon by the Class A Units. Approval of proposals submitted to Members at a duly held meeting, other than the election of Managers, requires a vote of a majority of the Class A Units eligible to vote in person or by proxy. Our Class A Members have the right to cumulate their votes in the election of Managers.



Among the matters on which the Class A Units may vote are the following: (1) the election or removal of Managers; (2) an increase or decrease in the number of Managers; and (3) amendments to our operating agreement. A majority of the Class A Units voting on a matter at a meeting at which a quorum is present will constitute the approval of the Class A Units unless a greater number of votes is specifically required by statute or by our operating agreement.



Our operating agreement may be amended by the vote of a majority of the Class A Units, except that the amendment of the provisions regarding the removal and liability of Managers, the meetings of Members and any provision requiring a greater than majority vote must be approved by each class of membership interests as is required to approve any amendments which would change any rights of that class by reducing the amount payable thereon upon our liquidation, or by diminishing or eliminating any voting rights of that class. For the purposes of the foregoing, the authorization by our Board and/or Members of a new class or Series of preferred membership interests would not constitute such an amendment.



The rights of our Members will be subject to, and may be adversely affected by, the rights of owners of any preferred membership interests we may issue in the future. In addition, the issuance of preferred membership interests could have the effect of making it more difficult for a third party to acquire, or of discouraging a third party from attempting to acquire, control of us.



Members are entitled to receive distributions when and if declared by the Board out of funds legally available therefor, and in the event of our liquidation, dissolution or winding-up, to share ratably in all assets remaining after payment of liabilities. Our Members have no preemptive, conversion, subscription or cumulative voting rights.



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Our Series A Units



We currently have 119,000 Series A Units outstanding. Following is a summary of the rights, preferences and privileges of our Series A Units.



Rank



The Series A Units rank prior to our Class A Units as to distributions of assets. The Board may increase the amount of the Series A Units or designate one or more Series of preferred membership interests which ranks junior to the Series A Units without the approval of the Series A Units. However, the Board may not designate a Series of preferred membership interests ranking senior to the Series A Units without the approval of the owners of at least two-thirds (2/3rds) of the Series A Units.



Distributions



Owners of the Series A Units are entitled to receive distributions payable quarterly at the rate of 25 basis points over the one year LIBOR rate in effect on the last banking day of the calendar month in which the distribution is declared. Distributions are payable when declared payable by our Board. Our Board intends to declare and pay distributions quarterly. Owners of the Series A Units are also entitled to receive distributions payable annually of 10% of our net income less other distributions.  However, our payment of distributions is subject to certain LLC Act restrictions. Distributions are cumulative. That is, any distribution which is declared but not paid will cumulate and be payable as soon as practicable.



Liquidation Preference



$100.00 per Unit, plus an amount equal to any declared and unpaid distributions.



Redemption



We may call the Series A Units for redemption at the liquidation preference of $100.00 per unit, in whole or in part, upon 90 days’ prior written notice on December 31, 2008 or on each December 31 thereafter.



Rights Upon Liquidation



Upon a change in control, liquidation, dissolution or winding up of our affairs, the Series A Units will be entitled to receive the liquidation preference per unit of $100.00 plus the amount of any declared but unpaid distributions before any distributions with respect to our Class A Units or other junior membership interests.



Rights in the Event We Fail to Pay Distributions



In the event we fail to pay four (4) consecutive quarterly distributions, the Series A Units will have the right to elect two (2) Members to our Board, who will serve until distributions on the Series A Units are brought current.



Voting Rights



Except as stated above, the Series A Units have the right to vote only on matters on which preferred membership interests are entitled to vote under the LLC Act, including the right to vote as a class on certain amendments to our charter documents, and certain mergers and reorganizations.



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Our Charter Documents 



As an LLC, we are governed by our charter documents which are comprised of our articles of organization and our operating agreement, which replace our former corporate articles of incorporation and bylaws. A copy of our articles of organization, the plan, and the operating agreement were filed as exhibits to our current report on Form 8-K filed with the Securities and Exchange Commission (SEC) on December 22, 2008.



As an LLC, our business and affairs are under the direction of our Managers and officers. Our Managers and officers are the same persons who served as our directors and officers prior to the conversion. Each serves in a comparable, if not exact, capacity after the conversion as they did prior to the conversion. Thus, there is no change in the persons responsible for our management and operations or their duties with respect to such capacities.



Our operating agreement provides for not less than six nor more than eleven Managers and sets the number at ten. Our Managers are elected by our Class A Unit owners at an annual meeting, subject to certain limited voting rights of our Series A Unit owners.



Our Members have no liability for our LLC level liabilities or debts. Their liability is limited to their investment in their membership interest. No further capital contributions are required, with limited exceptions for wrongful distributions.



Our operating agreement authorizes the offices of President, Secretary and Treasurer and other officers as they deem appropriate, including a Chief Executive Officer, Chief Financial Officer and one or more Vice Presidents. Our officers serve at the pleasure of our Managers.



Our Managers can amend the operating agreement to create one or more classes of preferred units and establish the rights, privileges and preferences of such units. Other changes, including an increase in the authorized number of membership units must be approved by a majority of our Class A Units. Our articles of organization may not be amended without the approval of a majority of our member interests.



Our Board determines when and if distributions are paid to our Members, subject to certain restrictions under the LLC Act.



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SECURITY OWNERSHIP OF CERTAIN

BENEFICIAL OWNERS AND MANAGEMENT



The following table sets forth information available to us, as of April 15, 2016, with respect to our Class A Units owned by each of our executive officers and our Managers, and by our Managers and executive officers as a group, and by each person who is known to us to be the beneficial owner of more than 5.0% of our Class A Units.







Notes to Table

(1)   Based on 146,522 Class A Units outstanding.



(2)   Navy Federal Credit Union is a non-voting equity member, but holds 11,905 Class A Common Units which were acquired pursuant to a merger completed with USA Federal Credit Union.  As the holder of an economic interest in the Company, Navy Federal Credit Union holds a beneficial interest in the Company.





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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS



Safe Harbor Cautionary Statement



This Prospectus contains forward-looking statements regarding Ministry Partners Investment Company, LLC and our wholly-owned subsidiaries, Ministry Partners Funding, LLC, MP Realty, and MP Securities, LLC, including, without limitation, statements regarding our expectations with respect to revenue, credit losses, levels of non-performing assets, expenses, earnings and other measures of financial performance.  Statements that are not statements of historical facts may be deemed to be forward-looking statements as that term is defined in the Private Securities Litigation Reform Act of 1995.  The words “anticipate,” “believe,” “estimate,” “expect,” “plan,” “intend,” “should,” “seek,” “will,” and similar expressions are intended to identify these forward-looking statements, but are not the exclusive means of identifying them.  These forward-looking statements reflect the current views of our management.



These forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties that are subject to change based upon various factors (many of which are beyond our control).  Such risks, uncertainties and other factors that could cause our financial performance to differ materially from the expectations expressed in such forward-looking statements include, but are not limited to, the risks set forth in our Annual Report on Form 10-K for the year ended December 31, 2015, as well as the following:



As used in this quarterly report, the terms “we”, “us”, “our” or the “Company” means Ministry Partners Investment Company, LLC and our wholly-owned subsidiaries, Ministry Partners Funding, LLC, MP Realty, and MP Securities, LLC.





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Overview



We are a Brea, California-based business that was incorporated in 1991 as a credit union service organization whose mission is to make evangelical ministries more effective by providing ministries with Biblically-based, value-driven financial services and by providing funding services to the credit unions who serve these ministries.  We do this by originating and investing in mortgage loans made to churches, most of which are secured by church and church-related real property owned by and/or maintained for the benefit of evangelical churches or church organizations, including Christian schools, ministries and related organizations.  We have also recently expanded the scope of financial services we offer to the Christian evangelical community to include investment advisory services, annuities and other investment products provided through our wholly-owned broker dealer subsidiary, MP Securities.



We are continuing to position the Company for future growth in the areas where we have historically been successful through our investments in church and ministry mortgage loans, while diversifying the sources of revenue generated by our business.  In order to take advantage of our market opportunities and maximize the value of our equity holders’ investment, we will continue to focus on:



























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The following discussion regarding our financial statements should be read in conjunction with the financial statements and notes thereto included in this Annual Report beginning at page F-1.



For the year ended December 31, 2015, we recognized net income of $357 thousand.  Due to liquidity issues throughout 2014, we limited the amount of loan originations we funded during the first nine months of 2015.  We reached an agreement with the NCUA in March 2015 to enable us to temporarily pledge cash in place of loans as collateral on our credit facilities.  This agreement allowed us to avoid making large principal paydowns on our credit facilities when the loan collateral we pledged fell short of the minimum collateralization ratio required by our original agreement with the NCUA.  As our liquidity stabilized, we were able to fund some of the loans in our pipeline during the fourth quarter of 2015. 



Because our note balances remained stable throughout the year while our loans receivable balance was low, our net interest income decreased significantly as compared to 2014.  This decrease was offset by changes in the status of two of our impaired loans which allowed us to record credits for loan losses of $524 thousand for the year.  These transactions increased our net interest income to the point where it covered our operating expenses, despite incurring salary and benefits expense arising from amounts due to our former Chief Executive Officer, James Overholt, pursuant to a severance agreement reached with him upon his retirement in December 2015. In addition, we realized a gain of $20 thousand from the recovery of certain expenses incurred in connection with the sale of our foreclosed assets in 2015.  Careful and diligent management of our real estate assets and impaired loans has substantially contributed to the gains we reported for the year, but we understand that these gains are not part of our core earnings and will not be sustainable as regular sources of income.



During the year ended December 31, 2015, we strengthened the profitability of our core earnings on our mortgage loan investments, expanded our pipeline of loans to be funded, improved our liquidity and relationships with our funding sources, successfully launched a new initiative designed to sell loan participation interests on a servicing retained basis, stabilized and increased the sale of our debt securities and positioned our wholly-owned subsidiary, MP Securities, to become an added source of revenue for the Company.  While our 2015 results have been primarily impacted by prudent management of our real estate owned assets and impaired loans, we have seen significant improvement in the performance of our loan portfolio due, in part, to transitioning our loan underwriting strategy to originating and servicing substantially all of the loans we invest in. In addition, we are continuing to make significant investments in our broker-dealer infrastructure through strategic recruitment of key personnel while expanding our offering of products and services. 



Key Factors in Assessing our 2015 Financial Results



For the year ended December 31, 2015, the primary items affecting our operating performance were the following:











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If we are able to continue to implement the strategic plans and objectives outlined above, we expect to increase the core earnings on our total assets and improve the performance of our wholly-owned broker-dealer and investment advisory firm, MP Securities.  We do not expect to incur losses on our foreclosed assets in 2016 due to the fact that, as of the date of this Prospectus, we have disposed of all but one of our real estate owned assets.  We also expect to see further improvements in the quality of our mortgage loan investments as we replace our foreclosed properties and impaired loans with high quality mortgage loans receivable that we originate and service and as we continue to implement our transition to a more fully diversified financial services firm.  



Financial Condition



We obtain funds for our mortgage loan investments from the sale of our debt securities, which are sold primarily to investors who are in or associated with the Christian community, including individuals, ministries and organizations associated with evangelical churches and their governing associations. We also have relied upon credit facilities with institutional lenders to increase the size of our balance sheet, improve our earnings and purchase mortgage loan assets. 



Our total assets as of December 31, 2015 decreased to $149.1 million, as compared to $153.9 million at December 31, 2014.  Our total liabilities were $141.0 million at December 31, 2014, as compared to $145.9 million at December 31, 2014. 



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The following table sets forth selected measures of our financial performance for the years ended December 31, 2015 and 2014, respectively (dollars in thousands):





2015 Developments



Performance of Loan Portfolio.  Despite liquidity issues throughout 2014 that forced us to slow down our origination process for the first part of 2015, we originated $26.7 million in net loans during the year and rolled over $6.4 million of mortgage loans that matured in 2015.  While our average loan balance in 2015 showed a significant decrease when compared to 2014, our total outstanding loans were $136.4 million at December 31, 2015, up from $135.4 million at December 31, 2014. 



As part of our strategic decision to reposition our loan portfolio, we are focusing on originating lower balance loans made to ministries where we can achieve more favorable yields and avoid deteriorating our margins while reducing overall risk exposure to any one borrower.  However, we also have originated larger loans when we are able to find participants to purchase a percentage of the loan.  This generates servicing fee income while allowing us to minimize our risk exposure on the loan. Our average net loan balance decreased from $970 thousand at December 31, 2014 to $928 thousand at December 31, 2015.  Over the past few years, we have substantially expanded our relationships with credit unions throughout the United States and believe these relationships will enable us to increase the amount of loan participation interests we hold.



The careful management of our mortgage portfolio, especially in regard to our impaired loans, has resulted in a decrease in our delinquency ratio from 3.0% at December 31, 2013 to 1.4% at December 31, 2014 and then further to 0.8% at December 31, 2015.  As further evidence of improving conditions in our loan portfolio, our investment in non-performing loans has decreased from $18.9 million at December 31, 2013 to $12.0 million at December 31, 2014 and then to $11.9 million at December 31, 2015. We had three loans that were restructured in prior years default in 2015; however, we have been able to work with each borrower to restructure these loans and we do not anticipate initiating foreclosure proceedings.  We had one loan that had not been previously restructured default during the year.  In addition, ECCU reached a settlement agreement with a title insurance company regarding a title claim made in connection with a foreclosure action filed on a mortgage loan in which we held a 64.8% loan participation interest.  As a result of this settlement, we were able to remove it from our portfolio, recovering $190 thousand in previously taken loan loss provisions in the transaction. 



Foreclosed Asset Transactions.  At the beginning of 2015, we had seven foreclosed assets, six of which were managed by ECCU and in which we owned a partial investment.  Four of those properties were related to one loan made to a borrower in Rockford, Illinois.  We sold three of those properties during the year, realizing $132 thousand in gains on two of the properties.  Due to difficulties in marketing the third parcel, we recorded $182 thousand in provisions for losses on foreclosed assets prior to selling it for no gain.  Management determined that the fourth

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property acquired in the Rockford foreclosure action was unmarketable and we recorded $78 thousand in additional provisions for losses prior to writing it off completely effective as of December 31, 2015.



ECCU reached a selling agreement in December 2015 to sell one of our remaining properties in Palm Beach County, Florida in which we held an ownership interest.  The price agreed upon allowed us to reduce our valuation allowance on that property by $271 thousand.  The sale transaction closed in March 2016.  ECCU also reached an agreement to sell another of the properties in which we owned an interest in a real estate owned asset in Fort Worth, Texas.  This sale closed on March 4, 2016.  We recognized a gain of $223 thousand on the sale of this property.  Finally, we completed a transaction in January 2016 to dispose of a parcel of vacant land in Santa Clarita, California, which was a foreclosed asset by transferring ownership of the property to a real estate joint venture.  Our investment in the joint venture is $900 thousand, which is equal to the net investment we carried in the property at December 31, 2015.  As of the date of this Prospectus, we hold one real estate owned asset but it has been written down to a balance of $0.



Enhancing our Capital Funding Sources.  Since 2008, we have primarily relied upon institutional credit facilities to generate the capital sources needed to fund our mortgage loan investments.  Our credit facility financing arrangements enabled us to rapidly increase our mortgage loan investments and benefit from favorable net interest rate margins on our mortgage loan investments.  With the advent of the global credit crisis that commenced in 2008, our major institutional credit facility lenders sought to reduce their exposure on these facilities, thereby requiring us to undertake efforts to deleverage our balance sheet.  While the refinancing transactions we entered into on November 4, 2011 with the NCUA to amend our Members United and WesCorp credit facilities have significantly contributed to our return to sustained profitability, these refinancing transactions are not sources of new funding and do not provide the resources we need to grow our business.



Over the past six years, the Company’s institutional credit facility has been reduced by $35.5 million and our investor debt securities have been reduced from $69.5 million at December 31, 2009 to $49.9 million at December 31, 2015.  While the Company does not expect to fully replace these sources of capital, we believe that we have created the capacity to originate, underwrite and service a larger quantity of mortgage loans and have developed new relationships that will enable us to sell loan participations and effectively leverage our capital assets in a profitable manner.  During 2015, we continued our loan participation sales strategy and closed $6.1 million in new loan participation sales for the year.  Due to high cash balances at the beginning of the year, we did not pursue as many participation sales opportunities throughout the year.  Assuming our liquidity sources of capital remain intact, we intend to increase our relationships with other credit unions and CUSOs to sell as much as 90% of each loan we originate and use these funds to originate additional loans.  We anticipate continuing this practice in the future to fund new loans.



A majority of the products sold by MP Securities consist of our debt securities.  During 2015, MP Securities sold $20.7 million of our publicly and privately offered debt securities.  In January 2015, we registered $80 million of our Class 1 Notes pursuant to a Registration Statement filed with the SEC.  With this new Registration Statement, the Class 1 Notes replaced our Class A Notes.  On January 15, 2015, we also began to sell our Secured Investment Notes pursuant to a private placement memorandum under the provisions of Rule 506 promulgated under the Securities Act of 1933, as amended.  With the Company’s publicly and privately offered debt securities, along with sales networking agreements reached with ECCU and ACCU, we believe we have developed a viable program to offer debt securities for purchase by individuals, churches, institutional investors and as IRA type of investments to an expanded group of potential investors.  As a result of cultivating relationships with credit unions and other organizations, we believe that we will be able to increase the amount of our proprietary securities and non-proprietary securities products we sell to investors in 2016.



Diversify Our Revenue Sources.  Since inception, our primary source of revenue has come from the net interest margin we earn on our mortgage loan investments.  After the financial crisis of 2008 and a resulting lack of liquidity in credit markets, we deleveraged our balance sheet, which reduced the net interest income we receive on our investments.  In response to these developments, over the past several years we have undertaken efforts to expand the scope of revenue generating services we offer in an effort to make us less dependent on a favorable net interest rate margin from our mortgage loan investments to make the Company less susceptible to unfavorable changes in interest rates.  Because we possess the capability to service our own loans, we have significantly increased the portion of our wholly-owned loan portfolio that we service ourselves, thereby reducing the costs of third party servicers and

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increasing net interest earned on those loans.   We now service 137 of the 147 loans in our portfolio.  Our loan participation activity increased our revenue from loan servicing by $59 thousand in 2015 as compared to 2014. We expect this revenue to grow further in 2016 as a result of loan participation sales we have entered into over the past two years.  We also continue to develop relationships with credit unions and CUSOs to enhance our capacity to sell additional loan participations into the secondary market for these participation interests.



In 2011, our wholly-owned subsidiary, MP Securities, was registered under the Securities Exchange Act of 1934 and was approved for membership by FINRA.  In the first quarter of 2012, MP Securities launched its broker-dealer operations and began its efforts to develop a sales force of registered representatives dedicated to the distribution of our debt securities.  Effective as of September 24, 2012, MP Securities received approval to sell our Class A Notes offered under a Registration Statement that was declared effective by the SEC on October 11, 2012.  In March of 2013, MP Securities began selling our Series 1 Subordinated Capital Notes and 2013 International Notes in private offerings, thus opening up additional securities products to enable us to reduce the dependence on institutional credit facilities.  In January 2015, MPS received approval to sell our Class 1 Notes offered under a Registration Statement that was declared effective by the SEC on January 6, 2015.



On July 11, 2013, MP Securities executed a new Membership Agreement with FINRA which authorized it to act on a fully disclosed basis with a clearing firm and expand the brokerage activities and types of investment products which can be sold.  In addition, on July 11, 2013, the State of California granted its approval for MP Securities to provide registered investment advisory services.  Finally, on September 26, 2013, MP Securities entered into a clearing firm agreement with Royal Bank of Canada Dain Rauscher (RBC Dain) thereby enabling it to open brokerage accounts for its customers.  This enables MP Securities to offer a broad scope of investment products to better serve the Company’s clients and customers.  In March of 2013, the State of California approved the formation of a dba, Ministry Partners Insurance Agency.  This enables the Company to sell a variety of insurance products. 



During the past three years, the Company has expended substantial resources and capital to broaden the sources of capital it relies on to fund its operations and enhance its ability to generate non-interest earning revenue sources.  Undertaking this task has required us to meet and satisfy various regulatory approvals and licensing requirements.  With the expansion of our Membership Agreement as approved by FINRA, approval as a California registered investment advisory firm, formation and approval of a California insurance agency and entering into a clearing firm arrangement with RBC Dain, we have obtained the necessary approvals that will enable us to recruit qualified and profitable investment advisers and increase the number of clients, ministries and households we serve.  An intended byproduct of this approach will be to increase funding through sales of our debt securities, reduce our dependency on large credit facilities provided by institutional lenders, enhance our liquidity and funding capabilities, and gain greater control over our asset / liability management process.



MP Securities has also entered into networking agreements with our largest equity owner, ECCU and America’s Christian Credit Union, a Glendora, California based credit union, whereby those credit unions may refer their members to MPS Securities for investment services, insurance services, and financial planning assistance.  As part of this arrangement, MP Securities remits a portion of the gross commission received on any transactions consummated as a result of the relationships.  These arrangements have been beneficial to MP Securities in expanding its client base, further enabling us to offer Company debt securities to new investors and, we believe, should continue to lead to new sales opportunities.



By increasing the scope of the services it can offer and entering into networking arrangements with credit unions, MP Securities has been able to recruit a sales force of registered representatives dedicated to managing our clients’ wealth in a manner consistent with the principles of Biblical stewardship, and act as a selling agent in the distribution of our debt securities.  In 2015, MP Securities’ marketing and sales efforts resulted in an increase in fee and commission revenue of $388 thousand.  If MP Securities continues to successfully implement its strategy, we will be able to (i) strengthen the profitability of our core operations; (ii) grow our balance sheet and ramp up the origination of profitable mortgage loans; (iii) introduce new clients to our proprietary investment products and address the challenges we have faced with the overconcentration and suitability standards imposed on the sale of our publicly offered debt securities by regulatory authorities; (iv) increase fee income from assets under management; (v) improve client and investor

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retention and the renewal rate of our debt securities investors; and (vi) leverage the experience and intellectual capital of our management team through increased loan origination fees and servicing income.



Significant Accounting Estimates and Critical Accounting Policies



Critical Accounting Policies



Our discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and the related disclosures. On an on‑going basis, we evaluate these estimates, including those related to the allowance for loan losses, and estimates are based on historical experience, information received from third parties and on various other assumptions that are believed to be reasonable under the circumstances, which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under conditions different from our assumptions. We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements.



Valuation of Loans



All of our loans are held for investment and are carried at their outstanding principal balance, less an allowance for loan losses and loan discount, and adjusted for deferred loan fees and costs.  We defer loan origination fees and costs and recognize those amounts as an adjustment to the related loan yield on the asset using the interest method.  Loan discounts reflect an offset against accrued interest that has been added to a loan balance under a restructuring arrangement.  They also represent the difference between the purchase price of a loan and the loan balance when a loan is purchased at a discount.  Loan discounts are accreted to interest income as a yield adjustment using the interest method.  Loan discounts on impaired loans are not accreted into income until repayment of the loan is reasonably assured.



Allowance for Loan Losses



Determining an appropriate allowance for loan losses involves a significant degree of estimation and judgment. The process of estimating the allowance for loan losses may result in either a specific amount representing the impairment estimate or a range of possible amounts. We accrue a loss when it is probable that an asset has been impaired and the amount of the loss can be reasonably estimated.  A loss is recorded when the outstanding balance of an impaired loan is greater than either 1) the value of the underlying collateral less estimated selling costs for collateral-dependent loans, or 2) the present value of expected cash flows for non-collateral-dependent impaired loans.



When management concludes that a loan is uncollectible, a loan loss is charged against our allowance for loan losses.  If there are subsequent recoveries, we credit such amounts to the allowance.  We recognize the amount that is the best estimate within the estimated range of loan losses. The determination of an amount within the calculated range of losses is in recognition of the fact that historical charge-off experience, without adjustment, may not be representative of current impairment of the current portfolio of loans because of changed circumstances. Such changes may relate to changes in the age of loans in the portfolio, changes in the creditor’s underwriting standards, changes in economic conditions affecting borrowers in a geographic region, or changes in the business climate in a particular industry.



Management regularly evaluates our allowance for loan losses based upon our periodic review of the collectability of the loans, historical experience, nature and volume of our loan portfolio, adverse situations that may affect the borrower’s ability to repay, value of the collateral and prevailing economic conditions.  Since an evaluation of this nature is inherently subjective, we may have to adjust our allowance for loan losses as conditions change and new information becomes available.

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Recent Accounting Pronouncements



In January 2016, Financial Accounting Standards Board ("FASB") issued Accounting Standards Update (ASU) 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities. ASU 2016-01 requires equity investments to be measured at fair value with changes in fair value recognized in net income; simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment; eliminates the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet; requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes; requires an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments; requires separate presentation of financial assets and financial liabilities by measurement category and form of financial assets on the balance sheet or the accompanying notes to the financial statements and clarifies that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity’s other deferred tax assets. ASU 2016-01 is effective for financial statements issued for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. The Company is currently evaluating the impact that ASU 2016-01 will have on its statement of financial position or financial statement disclosures.



ASU 2014-09 Revenue from Contracts with Customers (Topic 606) provides a robust framework for addressing revenue recognition issues and, upon its effective date, replaces almost all existing revenue recognition guidance, including industry-specific guidance, in current U.S. GAAP. The revenue recognition policies of almost all entities will be affected by the new guidance in the ASU. For public business entities, the guidance is effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. The Company is currently evaluating the impact that ASU 2016-01 will have on its statement of financial position or financial statement disclosures.



ASU 2014-15, Presentation of Financial Statements—Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern provides guidance about management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and to provide related footnote disclosures. ASU 2014-15 is effective for annual periods ending after December 15, 2016, and for interim periods within annual periods beginning after December 15, 2016. The Company is currently evaluating the impact that ASU 2016-01 will have on its statement of financial position or financial statement disclosures.



ASU 2014-16, Derivatives and Hedging (Topic 815): Determining Whether the Host Contract in a Hybrid Financial Instrument Issued in the Form of a Share Is More Akin to Debt or to Equity (a consensus of the FASB Emerging Issues Task Force) clarifies how current U.S. GAAP should be interpreted in subjectively evaluating the economic characteristics and risks of a host contract in a hybrid financial instrument that is issued in the form of a share. Public business entities are required to implement the new requirements in fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. The Company is currently evaluating the impact that ASU 2016-01 will have on its statement of financial position or financial statement disclosures.



ASU 2015-01, Income Statement—Extraordinary and Unusual Items (Subtopic 225-20): Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items eliminates the concept of extraordinary items, but retains the presentation and disclosure guidance for items that are unusual in nature or infrequently occurring and expands the guidance to include items that are both unusual in nature and infrequently occurring. The ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. The Company is currently evaluating the impact that ASU 2016-01 will have on its statement of financial position or financial statement disclosures.



ASU 2015-02, Consolidation (Topic 810): Amendments to the Consolidation Analysis made certain targeted revisions to various areas of the consolidation guidance, including the determination of the primary beneficiary of an entity, among others. The ASU is effective for public business entities for fiscal years, and for interim periods within those

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fiscal years, beginning after December 15, 2015. The Company is currently evaluating the impact that ASU 2016-01 will have on its statement of financial position or financial statement disclosures.



ASU 2015-03, Interest—Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Cost requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. Public companies must apply the new requirements in fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. The Company is currently evaluating the impact that ASU 2016-01 will have on its statement of financial position or financial statement disclosures.



ASU 2015-05, Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement helps customers determine whether a cloud computing arrangement includes a software license. For public business entities, the ASU should be applied in annual periods, including interim periods within those annual periods, beginning after December 15, 2015. The Company is currently evaluating the impact that ASU 2016-01 will have on its statement of financial position or financial statement disclosures.



ASU 2015-16, Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments simplifies the accounting for adjustments made to provisional amounts recognized in a business combination. For public business entities, the ASU is effective for fiscal years beginning after December 15, 2015, including interim periods within those fiscal years. The Company is currently evaluating the impact that ASU 2016-01 will have on its statement of financial position or financial statement disclosures.



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Consolidated Financial Condition and Results of Operations



Our Balance Sheet for the Years Ended December 31, 2015 and 2014



General.  The $4.8 million decrease in total assets at December 31, 2015 as compared to December 31, 2014 is due primarily to regular principal payments made on our NCUA credit facilities and the payment of a loan participant’s portion of a mortgage loan payoff that was accrued at December 31, 2014.  Due to liquidity concerns during 2014 and the first six months of 2015, we were forced to temporarily delay the funding of our lending pipeline and could not use the full capacity of our lending team to originate new loans.  Due to the lead time necessary to complete the underwriting and closing of a mortgage loan, it took several months in 2015 to restart the pipeline and begin originating and selling loans.  Because we were able to close several loans in the fourth quarter of 2015, our aggregate total loan balances at December 31, 2015 increased by $1.34 million as compared to 2014.  While the Company was unable to generate substantial increases in the sale of its debt securities in 2015, we believe that this resulted, in part, from the Company’s net loss of $1.89 million which was reported for the year ending December 31, 2014 and its effect on potential investors.  We expect that note sales will increase in 2016 and allow us to increase our loan originations and sale of loan participations.



During the year ended December 31, 2015, gross loans receivable increased by $975 thousand, or 1%, to $136.4 million from $135.4 million at December 31, 2014.  We originated a total of $26.7 million in net loans receivable,

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which was mitigated by loan principal collections of $4.3 million. In addition, 12 mortgage loans totaling $15.8 million were paid off or were refinanced with another lender.  These payoffs represented both early payoffs of existing loans and non-renewals of maturing loans.  In many cases, non-renewals occur because a loan has fallen outside our lending policies and cannot be refinanced by us.  During 2015, we sold participations in eight loans to other credit unions for a net of $6.1 million. 



Our mortgage loan portfolio consists entirely of loans made to evangelical churches and ministries.  All but two of these loans are secured by real estate collateral, while two loans that represent less than 0.1% of our portfolio are unsecured.  Our portfolio carried a weighted average interest rate of 6.33% at December 31, 2015, as compared to 6.28% at December 31, 2014.



Non-performing Assets.  Non-performing assets consist of non-accrual loans, restructured loans, and foreclosed assets, which include real estate properties we now own.  Non-accrual loans include any loan that becomes 90 days or more past due, loans where terms have been modified in a favorable manner to the borrower due to financial difficulty (“troubled debt restructurings”), and any other loan where management assesses full collectability of principal and interest to be in question.  Once a loan is put on non-accrual status, the balance of any accrued interest is immediately reversed.  Loans past due 90 days or more will not return to accrual status until they become current.  Troubled debt restructurings will not return to accrual status until they perform according their modified payment terms without exception for at least six months.  The Company’s non-performing assets include one troubled debt restructuring loan that has performed for six months but has not yet returned to its original terms.



Some of our non-accrual loans are considered collateral-dependent.  A loan is construed to be collateral-dependent when repayment of principal and interest is expected to come solely from the sale of the property from income received on the underlying collateral.  For impaired collateral-dependent loans, any payment of interest we receive from a borrower is recorded against principal.  As a result, interest income is not recognized until the loan is no longer considered impaired. For non-accrual loans that are not considered to be collateral-dependent, we do not accrue interest income, but we recognize income on a cash basis. 



We had eight non-accrual loans with a recorded balance of $8.8 million as of December 31, 2015 and 2014.  At December 31, 2013, we had 12 non-accrual loans with a balance of $17.6 million.  Seven of these loans are considered collateral-dependent while one was reclassified to non-collateral-dependent during the year ended December 31, 2015 due to the performance of the borrower under a loan modification agreement.  During 2015, ECCU reached a settlement with a title company on a title claim made in connection with a foreclosure action on one of our non-accrual loans and we charged the loan off.  The Company had one additional loan that defaulted during the year which was restructured and put on non-accrual status. 



During the third quarter of 2015, ECCU completed real estate purchase agreements on three properties in which we held a participation interest and had recorded as foreclosed assets.  For 2015, we recorded gains on sale of $132 thousand on two of these properties.  We recorded $182 thousand in provisions for loan losses on the third parcel prior to its sale.  We charged off $1.1 million in allowances for loan losses on foreclosed assets related to these sales.  In the fourth quarter of 2015, management determined that a fourth property in which we held an interest was unmarketable.  As a result, we recorded $78 thousand in provisions for losses on this property before writing it off completely.  We charged off $194 thousand in allowances for losses on this property.



The Company did not foreclose on any additional properties during 2015.  As of the date of this Prospectus, the Company has disposed of all but one of its remaining foreclosed real estate assets.



The following table summarizes our non-performing assets:



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_{1 These loans are presented in an amount equal to the unpaid principal less interest payments received which have been recorded against principal.}

_{2 Includes $1.1 million of restructured loans that were over 90 days delinquent as of December 31, 2015 and 2014}



At December 31, 2015, the Company had nine restructured loans, eight of which were on non-accrual status.  One of these loans was over 90 days delinquent.   For all nine of the restructured loans in our portfolio at December 31, 2015, unpaid accrued interest at the time of the loan restructure was added to the principal balance of the loan.  The amount of interest added was also recorded as a loan discount, which did not increase the net loan balance.  In addition, for each of the nine restructured loans, the interest rate was temporarily decreased and the payments were restructured to a weekly basis from a monthly basis.  Each borrower involved in a troubled debt restructuring was experiencing financial difficulties at the time the loan restructured. As of December 31, 2015, we held four foreclosed real properties with a net value of $3.5 million, which includes $1.1 million in valuation allowances against the properties.  Effective as of December 31, 2015, one of the foreclosed properties has been written off.



At December 31, 2014, we had seven restructured loans that were on non-accrual status.  One of these loans was over 90 days delinquent.  We had one non-restructured loan that was over 90 days past due.  As of December 31, 2014, we held seven foreclosed real properties in the amount of $3.9 million, net of $2.4 million in valuation allowances against the properties.



Allowance for Loan Losses.  We maintain an allowance for loan losses that we consider adequate to cover both the inherent risk of loss associated with the loan portfolio as well as the risk associated with specific loans that we have identified as having a significant chance of resulting in loss. 



Allowances taken to address the inherent risk of loss in the loan portfolio are considered general reserves.  We include various factors in our analysis. These are weighted based on the level of risk represented and for the potential impact on our portfolio.  These factors include:



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In addition, we include additional general reserves for our loans that are collateralized by a junior lien or that are unsecured.  In order to more accurately determine the potential impact these factors have on our portfolio, we segregate our loans into pools based on risk rating when we perform our analysis.  Risk factors are weighted differently depending upon the quality of the loans in the pool.  In general, risk factors are given a higher weighting for lower quality loans, which results in greater general reserves related to these loans.  We evaluate these factors on a quarterly basis to ensure that we have adequately addressed the risk inherent in our loan portfolio.



We also examine our entire loan portfolio regularly to identify individual loans which we believe have a greater risk of loss than is addressed by the general reserves.   These are identified by examining delinquency reports, both current and historic, monitoring collateral value, and performing a periodic review of borrower financial statements.  For loans that are collateral dependent, management first determines the value at risk on the investment, defined as the unpaid principal balance, net of discounts, less the collateral value net of estimated costs associated with selling a foreclosed property.  This entire value at risk is reserved.  For impaired loans that are not collateral dependent, management will record an impairment based on the present value of expected future cash flows.  Loans that carry a specific reserve are formally reviewed quarterly, although reserves will be adjusted more frequently if additional information regarding the loan’s status or its underlying collateral is received.



Finally, our allowance for loan losses includes reserves related to troubled debt restructurings.  These reserves are calculated as the difference in the net present value of payment streams between a troubled debt restructuring at its modified terms as compared to its original terms, discounted at the original interest rate on the loan.  These reserves are recorded at the time of the restructuring. The change in the present value of cash flows attributable to the passage of time is reported as interest income.



In June 2014, we made adjustments to the reserves on several of our impaired loans based on updated collateral valuations as compared to our recorded investment in the loans.  We charged off a $465 thousand reserve taken on one of our impaired loans and recorded $119 thousand in additional reserves due to foreclosure actions or principal write-downs on some of our non-performing loans.  We also reclassified $54 thousand in reserves related to a troubled debt restructuring to loan discounts when management determined that the loan was no longer impaired based on its historical performance and analysis of its future performance.  This discount will be amortized into interest income over the remaining life of the loan.  We also recorded $40 thousand in additional general reserves throughout 2014.



In September 2015, ECCU reached a settlement with a title company on a loan in which we held a 64.8% loan participation interest in connection with a foreclosure action on a mortgage loan.  As a result of the settlement agreement, we were able to reverse $190 thousand in specific reserves previously recorded on this loan. We also charged off $143 thousand in allowances related to the loan.  After charging it off, we also recovered $20 thousand in foreclosure related costs that were reimbursed to us.  Due to the performance of the borrower of one of our other impaired loans, we reclassified the loan from collateral-dependent to non-collateral-dependent.  As a result of this reclassification, we changed our reserve method on this loan from using the difference between the discounted collateral value and our investment in the loan to using the difference between the net present value of expected future cash flows on the loan and our investment.  With this change in the method we use to establish a reserve on this loan investment, we were able to record $400 thousand in credits for loan losses previously taken. In addition, we recorded specific reserves on several other loans which we restructured during the year.



The process of providing adequate allowance for loan losses involves management estimates and, as a result, future losses may differ from current estimates.  We have attempted to maintain the allowance at a level which compensates

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for losses that may arise from unknown conditions.  At December 31, 2015 and December 31, 2014, the allowance for loan losses was $1.8 million and $2.5 million, respectively.  This represented 1.3% and 1.8% of our gross loans receivable at those respective dates.    





NCUA Credit Facilities.  The decrease in NCUA credit facilities is the result of $3.6 million in regular monthly payments we made on our NCUA credit facilities. We did not make any additional principal payments during the year.  The remaining balance on these facilities totals $90.2 million and bears interest at a rate of 2.525% pursuant to agreements entered into with the NCUA in November 2011.  The maturity date for both facilities is October 31, 2018. 



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Notes Payable.  Our notes payable consist of debt securities sold under publicly offered debt securities offerings as well as notes sold to accredited investors in private offerings.  Sales of the Company’s  notes are now being handled by our wholly-owned subsidiary, MP Securities, which is a broker-dealer firm subject to regulation by FINRA, the SEC and applicable state regulatory authorities.  The principal balance owed on these notes increased by $1 thousand during 2015.  MP Securities continues to expand its operations and transition into a more diversified financial services firm.  We continue to market our debt securities to new clients as a result of additional sales representatives hired in the last two years and networking agreements reached with ECCU and ACCU.



Members’ Equity.  Total members’ equity increased in 2015 due mainly to our net income of $357 thousand, which was offset by $126 thousand of regular dividend payments and $23 thousand of net profit distributions declared on our Series A Preferred Units. We did not repurchase any ownership units during the years ended December 31, 2015 and 2014.



Results of Operations for the Years Ended December 31, 2015 and December 31, 2014





In 2015, we recognized net income of $357 thousand due in large part to credits taken in our provisions for loan losses.  As further described below, the most significant factors influencing our consolidated results of operations for the year ended December 31, 2015, as compared to 2014 were:



Reduction in Interest Income on Our Mortgage Loan Investments.



Interest income on our mortgage loan investments decreased by 11% in 2015 as compared to 2014.  This is consistent with the 12% decrease in average interest-earning loans from $136.7 million for the year ended December 31, 2014 to $121.0 million for the year ended December 31, 2015.  Although our average balances in interest-bearing accounts with other institutions increased by 72%, the interest income recognized on those accounts decreased by 52% as the rates earned on those accounts decreased.  We moved much of our cash from ECCU to other institutions to avoid concentration risk, but it decreased the yield we earned on our interest-bearing accounts.



Reduction in Net Interest Income.



Interest expense on our borrowings decreased during the year due to principal payments made on our NCUA credit facilities and lower rates paid on our debt securities.  While the average balance of our investor notes increased from December 31, 2014 as compared to December 31, 2015, we replaced the Class A Notes as they matured with our new Class 1 Notes, which bear interest at an average of 3.14% compared to 3.82% for Class A Notes in 2014.  Our average NCUA credit facilities decreased by $5.4 million as compared to 2014 due to regular principal payments made throughout 2015, as well as $2.5 million of additional principal payments made during 2014.   Despite the 6% reduction in interest expense from 2014, the 11% decrease in interest income resulted in a 17% decrease in net interest income for the year.



Credits in Provisions for Loan Losses.



We reported credits for loan loss provisions of $524 thousand for the year ended December 31, 2015 as compared to provisions of $252 thousand for the year ended December 31, 2014. In 2014, we increased our general reserves by $40 thousand and recorded $465 thousand in specific reserves on an impaired loan.  However, we also reduced some of the specific reserves on other impaired loans as our investment in those loans decreased relative to the collateral value of the properties which served as collateral for the loan.  For 2015, we reversed $190 thousand in provisions previously taken on an impaired loan when ECCU reached a settlement with the title insurance company on a title claim made in connection with a foreclosure action on a mortgage loan in which we held a 64.8% loan participation interest.  We also reversed $400 thousand in loan loss provisions previously taken when we changed the classification of an impaired loan to non-collateral-dependent.  We recorded several small allowances in 2015 on other impaired loans when they were restructured.  Despite the significant credit for loan losses, our reduced net interest income caused our net interest income after provisions to decrease by $10 thousand for the year ended December 31, 2015, as compared to the year ended December 31, 2014.



Improvements in Non-Interest Related Income.



We received other income of $832 thousand in the year ended December 31, 2015 which is an increase of $497 thousand from the year ended December 31, 2014.  We recognized an additional $109 thousand in other lending income in 2015.  While we recognized $21 thousand less in gains on loan sales, we collected an additional $48 thousand in late charges related to one loan, an additional $59 thousand in servicing fees as we increased the number

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of loan participations we sold, and recording $25 thousand in additional lending fees related mainly to originating loans and extending the maturity date of some of our existing loans when we negotiate a renewal.  We also earned $388 thousand in additional income in 2015 related to our broker-dealer subsidiary.  Adding new sales personnel and utilizing our networking agreements with credit unions allowed us to recognize $252 thousand in additional commissions on insurance products and annuities, $55 thousand in additional advisory fees, and $81 thousand in commissions on transactions involving mutual funds and other investment products. 

 

Decline in Non-Interest Expense.



Our non-interest expenses for the year ended December 31, 2015 decreased by $1.8 million from the year ended December 31, 2014. This is primarily due to the fact that we took $2.4 million in additional provisions for losses on foreclosed assets on one of our properties during 2014.  In 2015, we  entered into real estate purchase agreements for several of our real estate owned assets, and as a result, were able to avoid having to report significant expenses on our foreclosed assets in 2015.  Outside of those provisions, non-interest expenses increased by $608 thousand.  Salaries and benefits expenses increased by $474 thousand as we hired five new employees during the year and we accrued $222 thousand in salary and benefits expenses in severance payments to be paid to our former Chief Executive Officer as a result of his retirement.



Reduction in Office, Marketing and Other Expenses.



Marketing expenses stayed fairly consistent as we did not undertake any new marketing projects.  A vast majority of our marketing is done via personal contact by our lending and broker-dealer staff.  Office occupancy expenses were also consistent as we have not added any new offices.  Legal and accounting expenses decreased by $57 thousand as we competed the registration of our Class 1 Notes, and incurred less foreclosure and loan workout related expenses as most of the work on those projects was completed in 2014.  We also incurred less in consulting expenses at MP Securities, as we relied less on outside consultants for compliance matters.

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Results of Operations for the Years Ended December 31, 2014 and December 31, 2013





In 2014, we experienced a net loss of $1.9 million due in large part to an increase in provisions on foreclosed assets.  As further described below, the most significant factors influencing our consolidated results of operations for the year ended December 31, 2014, as compared to 2013 were:







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Interest income on our mortgage loan investments decreased by 4% in 2014, as compared to 2013.  This is consistent with the 3% decrease in average interest-earning loans from $140.4 million for the year ended December 31, 2013 to $136.7 million for the year ended December 31, 2014.  Although our average balances in interest-bearing accounts with other institutions only decreased by 6%, the interest income recognized on those accounts decreased by 49% as the rates earned on those accounts decreased.



Interest expense on our borrowings decreased during the year due to principal payments made on our NCUA credit facilities.  While the balances of our investor notes increased from December 31, 2013 to December 31, 2014, the average balance decreased from the prior year and the average interest rates paid on our investor notes decreased as compared to 2013 as well, leading to a $135 thousand reduction in interest expense on our notes payable.  Our average NCUA credit facilities decreased by $4.2 million from 2013 due to regular principal payments as well as $2.5 million of additional principal payments made during 2014.   Despite the 5% reduction in interest expense from 2013, the 4% decrease in interest income resulted in a 3% decrease in net interest income for the year.



We had provisions for loan losses of $9 thousand for the year ended December 31, 2013 as compared to provisions of $252 thousand for the year ended December 31, 2014. In 2014, we increased our general reserves by $40 thousand and recorded $465 thousand in specific reserves on an impaired loan.  However, we also reduced some of the specific reserves on other impaired loans as our investment in those loans decreased relative to the collateral value of the properties which served as collateral for the loan.  For 2013, we did not incur a material decrease in value of the real estate properties that secured our collateral-dependent impaired loans.  As a result, we recorded only $9 thousand in additional reserves for loan losses on these loans.  Due to provisions and reduced net interest income, our net interest income after provisions decreased by $389 thousand for 2014, as compared to the year ended December 31, 2013.



We received other income of $335 thousand in the year ended December 31, 2014 which is an increase of $167 thousand from the year ended December 31, 2013.  We recognized an additional $17 thousand in gains on loan sales related to the sale of participation interests in thirteen loans during the year ended December 31, 2014.  We recognized $45 thousand in additional servicing fee income as we increased the amount of loan participations we service for others during 2014.  We also earned $113 thousand in additional income in 2014 from advisory fees and commissions on the sale of investment products by our broker-dealer subsidiary.   

 

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Our non-interest expenses for the year ended December 31, 2014 increased by $2.3 million from the year ended December 31, 2013. This is entirely related to $2.4 million in additional provisions for losses on foreclosed assets taken on one of our loan participation interests that was foreclosed on and became one of our real estate owned properties.  Outside of those provisions, non-interest expenses decreased by $149 thousand.  Salaries and benefits expenses decreased by $166 thousand. Despite hiring an additional salesperson in 2014 to expand our broker-dealer business, our salary and benefits costs decreased from last year as we incurred a one-time expense of $196 thousand in 2013 for salary related payments to our former Chief Executive Officer.  Bonuses approved by management decreased by $31 thousand from 2013.



Marketing and promotions expenses decreased by $18 thousand in 2014 as we relied more on our salespeople and did not participate in as many large marketing events as we did in 2013.  Legal and accounting expenses decreased by $115 thousand as we did not incur as many legal expenses related to our impaired loans.  We also incurred significant consulting expenses in 2013 related to the hiring of a new Chief Executive Officer which were not incurred in 2014. 



We recorded $2.4 million in provisions for losses on foreclosed assets in 2014 as a result of valuation allowances recorded against six of our properties.  We recorded $13 thousand in provisions for losses on foreclosed assets in the prior year.  However, our net income from managing the properties increased by $156 thousand from 2013 as we earned additional rental income while incurring fewer management costs.  During the year ended December 31, 2013, we recognized $345 thousand in gains from the sale of foreclosed assets compared to $5 thousand in gains on sale in 2014.



Net Interest Income and Net Interest Margin



Our earnings depend largely upon the difference between the income we receive from interest-earning assets, which are principally mortgage loan investments and interest-earning accounts with other financial institutions, and the interest paid on notes payable and lines of credit. This difference is net interest income. Net interest margin is net interest income expressed as a percentage of average total interest-earning assets.



The following tables provide information, for the periods indicated, on the average amounts outstanding for the major categories of interest-earning assets and interest-bearing liabilities, the amount of interest earned or paid, the yields and rates on major categories of interest-earning assets and interest-bearing liabilities, and the net interest margin:

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[1] Loans are net of deferred fees and before the allowance for loan losses

[2] Net interest margin is equal to net interest income as a percentage of average total assets.



Average interest-earning assets decreased to $137.3 million during the year ended December 31, 2015, from $146.2 million, a decrease of $8.9 million or 6%. The average yield on these assets decreased to 5.87% for the year ended December 31, 2015 as compared to 6.22% for the year ended December 31, 2014.  The yield on interest-earning loans increased to 6.64% from 6.62% due to an increase in the weighted average interest rate of our loan portfolio from 6.28% to 6.33%.  The yield on our interest-earning accounts with other financial institutions decreased to 0.12% for the year ended December 31, 2015 as compared to 0.44% for the year ended December 31, 2014.  For cash management purposes and in an effort to decrease concentration risk, we transferred much of our cash to accounts that produce a lower yield.  In addition, our cash balances comprised a much larger portion of our interest-earning assets in 2015 as we decided to increase our efforts to fund loans in our pipeline in the second half of 2015 after experiencing liquidity issues for much of 2014 and the first six months of 2015.  This shift in cash balances, the comparatively larger proportion of cash, and the decrease in loan yield caused our yield on interest-earning assets to decline.  Due to these factors, the yield on all of our assets decreased by 42 basis points from 5.82% for the year ended December 31, 2014 to 5.40% for the year ended December 31, 2015.



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Average interest-bearing liabilities, consisting primarily of investor notes and credit facility borrowings payable, decreased to $140.5 million during the year ended December 31, 2015, from $145.7 million during 2014. The average rate paid on these liabilities decreased to 2.93% for the year ended December 31, 2015, from 2.99% for 2014. The decrease in the rate paid on interest-bearing liabilities was the result of lower interest rates paid on our investor debt securities.  While LIBOR rates steadily increased in 2015, we eliminated a class of notes in our Class 1 Notes offering that paid higher than average rates.  The average rates paid on our notes decreased from 3.82% during the year ended December 31, 2014 to 3.70% for the year ended December 31, 2015. The interest rate on our NCUA credit facilities is fixed at 2.525% until the facility matures in 2018.



Net interest income for the year ended December 31, 2015 was $3.9 million, which was a decrease of $786 thousand, or 17%, from the prior year. Net interest margin decreased from 3.03% for the year ended December 31, 2014 to 2.64% for the year ended December 31, 2015. 





[1] Loans are net of deferred fees and before the allowance for loan losses

[2] Net interest margin is equal to net interest income as a percentage of average total assets.



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Average interest-earning assets decreased to $146.2 million during the year ended December 31, 2014, from $150.4 million, a decrease of $4.2 million or 3% at December 31, 2013. The average yield on these assets decreased to 6.22% for the year ended December 31, 2014 from 6.30% for the year ended December 31, 2013.  The yield on interest-earning loans decreased to 6.62% from 6.69% due to a $66 thousand decrease in accretion of allowances related to restructured loans and a decrease in the weighted average interest rate of our loan portfolio from 6.33% to 6.28%.  The yield on our interest-earning accounts with other financial institutions decreased to 0.44% for the year ended December 31, 2014 as compared to 0.83% for the year ended December 31, 2013.  For cash management purposes, we transferred much of our cash to accounts that produce a lower yield.  This shift in cash balances and the decrease in loan yield caused our yield on interest-earning assets to decline.  However, due to the decrease in average non-interest-earning assets, the yield on all of our assets only decreased by 6 basis points from 5.88% for the year ended December 31, 2013 to 5.82% for the year ended December 31, 2014.



Average interest-bearing liabilities, consisting primarily of investor and credit facility notes payable, decreased to $145.7 million during the year ended December 31, 2014, from $150.5 million during 2013. The average rate paid on these liabilities decreased to 2.99% for the year ended December 31, 2014, from 3.06% for 2013. The decrease in the rate paid on interest-bearing liabilities was the result of lower interest rates paid on our investor debt securities.  The decrease in LIBOR rates for most of 2014 as compared to 2013 had a significant effect on the rates paid on our publicly offered debt securities.  The average rates paid on these notes decreased from 4.07% during the year ended December 31, 2013 to 3.82% for the year ended December 31, 2014. The interest rate on our NCUA credit facilities is fixed at 2.525% until the facility matures in 2018.



Net interest income for the year ended December 31, 2014 was $4.7 million, which was a decrease of $146 thousand, or 3%, from the prior year. Net interest margin remained at 3.03% for the year ended December 31, 2014 as compared to the year ended December 31, 2013.



The following table sets forth, for the periods indicated, the dollar amount of changes in interest earned and paid for interest-earning assets and interest-bearing liabilities, the amount of change attributable to changes in average daily balances (volume), changes in interest rates (rate), and changes attributable to both the volume and rate (rate/volume):

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Credit Quality and Allowance for Loan Losses



We maintain an allowance for loan losses, through charges to earnings, at a level reflecting estimated credit losses on our loan portfolio.  In evaluating the level of the allowance for loan losses, we consider the type of loan, amount of loans in our portfolio, adverse situations that may affect our borrowers’ ability to pay and estimated value of underlying collateral and credit quality trends (including trends in non-performing loans expected to result from existing conditions).



The allowance for loan losses decreased from $2.5 million at December 31, 2014 to $1.8 million at December 31, 2015.  As previously enumerated, several factors led to the decrease in the balance of our allowance for loan losses for the year ended December 31, 2015.  We reversed $190 thousand in specific reserves previously recorded on one of our impaired loans.  We also charged off $103 thousand related to that loan when ECCU, the lead lender on the loan, reached a settlement agreement with the title company related to a title claim made under the policy.  We held a 64.8% loan participation interest in this mortgage loan.  We also charged off an additional $40 thousand related to an agreement entered into on one of our impaired loans.  We reversed $400 thousand in reserves we had taken on a loan when we determined that its impairment status had changed.  In this instance, we entered into a modification agreement with the borrower and the borrower has continued to meet its obligations under this agreement.  We accreted $22 thousand to income on troubled debt restructurings as the present value of the loans changed with the passage of time.  Finally, we recorded $86 thousand in additional provisions, mainly related to increasing the principal balance of impaired loans that we restructured during the year; these provisions were related to cash advanced on these loans to assist the ministries and not to any interest or late fees capitalized on the loans.  A discount is recorded to offset those amounts.   



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The activity in the allowance for loan losses for the years ended December 31, 2015 and 2014 was as follows:





Impaired Loans



As of December 31, 2015 and 2014, the balances of impaired loans were as follows:







Information regarding interest income recognized on impaired loans for the years ended December 31, 2015 and 2014, is as follows:





No additional funds were committed to be advanced in connection with impaired loans as of December 31, 2015.





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Cash and Cash Equivalents

 

We experienced a decrease in our cash during the twelve months ended December 31, 2015 in the amount of $5.6 million, as compared to a net increase of $9.8 million for the twelve months ended December 31, 2014. The decrease is primarily due to regular payments made on our credit facilities and a large payment made to a participant in one of our loans when the loan was paid off. 



Net cash used by operating activities totaled $1.7 million for the twelve months ended December 31, 2015, a decrease of $3.5 million from $1.8 million provided by operating activities during the twelve months ended December 31, 2014.  This is due to the payment made to a participant in one of our loans when we received a loan payoff on the last day of 2014 and remitted the participant’s portion of the payoff in January of 2015.  In addition, much of our positive net income in 2015 was related to non-cash items such as credits for loan losses and credits for losses on foreclosed assets.

 

Net cash used by investing activities totaled $58 thousand during the twelve months ended December 31, 2015, compared to $12.0 million provided during the twelve months ended December 31, 2014, a decrease of $12.1 million. This difference is attributable to a decrease in loan sales as we had significant cash reserves and did not need to sell loans to fund new ones.  We also had fewer loan payoffs in 2015 as compared to 2014, which decreased the amount of principal we collected from borrowers.  We expected to originate more loans than we did in 2015; however, it took longer to move new loans through our loan pipeline after slowing down our loan funding efforts for most of 2014 and for the first six months of 2015.  Our loan originations increased substantially in the fourth quarter of 2015 and we expect that trend to continue in 2016.  These fundings will rely on loan participation sales, which we also expect to increase in 2016.

 

Net cash used in financing activities totaled $3.9 million for the twelve-month period ended December 31, 2015, a decrease of $199 thousand used from $4.1 million used in financing activities during the twelve months ended December 31, 2014.  We did not increase our investor notes payable in 2015, while we received cash from additional sales of notes payable in 2014 of $2.2 million. During 2015, we made $2.4 million less in principal payments on our borrowings as we were not required to make any additional principal paydowns on our credit facilities.



Liquidity and Capital Resources



We rely on cash generated from our operations, cash reserves and proceeds from the sale of investor notes to meet our obligations as they arise.  From time to time, we also generate funds from the sale of mortgage loans and loan participations and raise additional capital through the sale of debt and equity securities.  In addition, we have begun to generate non-interest income, chiefly commissions on securities sales and fees earned from managing client investments through our wholly-owned broker-dealer, MP Securities.  We require cash to originate and acquire new mortgage loans, repay indebtedness, make interest payments to our note investors and pay expenses related to our general business operations.  We intend to continue our current liquidity plan which relies primarily on cash generated by operations, cash reserves and proceeds from the sale of debt securities.  However, we intend to supplement this liquidity plan by expanding loan participation sales as well as through the generation of additional sources of non-interest income.



Our management regularly prepares liquidity forecasts which we rely upon to ensure that we have adequate liquidity to conduct our business.  While we believe that these expected cash inflows and outflows are reasonable, we can give no assurances that our forecasts or assumptions will prove to be accurate, particularly in this recovering credit and financial environment.  While our liquidity sources that include cash, reserves and net cash from operations are generally available on an immediate basis, our ability to sell mortgage loan assets and raise additional debt or equity capital is less certain and less immediate. 



We are also susceptible to withdrawal requests made by large note investors, ministries and churches that can adversely affect our liquidity.  We believe that our available cash, cash flow from operations, net interest and other fee income will be sufficient to fund our liquidity requirements for the next 12 months.  Should our liquidity needs exceed our available sources of liquidity, we believe we could sell a significant portion of our mortgage loan investments at

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par to raise additional cash;  subject however, to our obligation to maintain adequate collateral consisting of loans receivable and cash to secure our NCUA Credit Facilities and Secured Notes.  We may not be able to obtain desired financing from an institutional lender on terms and conditions acceptable to us.  If we are unable to obtain additional capital funding to replace and/or supplement our NCUA Credit Facilities in 2018, our ability to grow our business and meet our strategic objectives will be constrained. 



During the first six months of 2014, our ability to fund and originate loans was significantly impacted due to liquidity concerns.  We temporarily postponed the origination of loans in order to restore our cash balances to adequate levels.  This disrupted the timing of underwriting and funding for the loans in our origination pipeline and delayed the funding of new loans for several quarters.  We were able to increase our liquidity ratio to 31% at December 31, 2014 as compared to 7.49% at March 31, 2014 and resume our lending initiatives.  While these lending initiatives took longer to resume than we anticipated, we funded $14.3 million in loans in the fourth quarter of 2015.  Our liquidity ratio was 21.38% at December 31, 2015, which is well within our policy and operational comfort.  Our liquidity ratio is calculated as our cash balance divided by our total liabilities less the portion of our line of credit facilities due after one year.  Our target liquidity ratio was 16% at December 31, 2015.



Historically, we have experienced high rates of repeat investments or renewals by our debt security investors when their debt securities mature. In 2011, 73% of note holders purchased new investments. However, in 2012, this renewal rate fell to 45% as we temporarily suspended the sale of our Class A Notes while we awaited an order of effectiveness for our registration statement from the SEC and a “no objections” letter from FINRA that would allow the notes to be sold by our wholly-owned subsidiary, MP Securities.  We received the “no objections” letter on September 24, 2012 and the order of effectiveness from the SEC on October 11, 2012. 



Due to suitability and investment concentration limitations for investments made in our publicly offered debt securities, some of our investors have been prevented from renewing or making investments in our publicly offered debt securities.  Due to those restrictions, the investor renewal rate fell to 34% in 2013.  We have hired additional sales personnel at MP Securities in the last two years to improve our sales capabilities. We have also added our publicly offered Class 1 Notes and privately offered secured investment notes as additional investment options that we make available to our investors.    For 2014 and 2015, the renewal rate improved to 53% and 55%.  While we do not expect that our investor renewal rate will immediately return to the historic renewal rates we enjoyed prior to 2012, we expect continued improvement in our investor renewal rates over the next few years. 



Should sources of capital from the sale of our debt securities prove insufficient to fund our operations and obligations, we also own a portfolio of performing mortgage loans and believe that we can maintain an adequate liquidity position through the sale of participation interests and mortgage loan assets to make payments on our credit facilities, pay interest to our note investors and pay operating expenses.  We base this belief on the size and quality of our mortgage loan portfolio and on our management’s experience in finding purchasers for those loans on a timely basis.  However, any sales transactions are dependent on and subject to market and economic conditions and our ability to consummate an acceptable purchase commitment. 



We are also continuing to explore the possibility of obtaining an additional line of credit facility that would provide short-term financing for funding new loans which we would then offer for sale in the participation market.  We are seeking to partner with other credit unions that may have an interest in originating or investing in new business loans that are made to churches and ministries that meet our underwriting guidelines.  By developing new financing resources such as loan participations and institutional financing arrangements, we believe that we can attract new capital while generating profitable returns.    We are also discussing extending the maturity date of our credit facilities with NCUA to avoid any liquidity issues that might be creating by attempting to make a large balloon payment in October, 2018.  By developing new financing resources such as loan participations and institutional financing arrangements, we believe that we can attract new capital while generating profitable returns.



Credit Facilities Developments



On April 3, 2015, we received written notice from the NCUA Board As Liquidating Agent for Members United and WesCorp, confirming amendments to both the MU Credit Facility and the WesCorp Credit Facility. As a result of

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these amendments, among other things, the required individual and combined collateralization ratios of both credit facilities have been lowered and we now have the right to substitute cash for mortgage loan collateral.  With these amendments, we are now able to (i) substitute cash for mortgage loans as pledged collateral, thereby enabling us to more quickly fund new loans and loan participations rather than waiting until a substitute loan can be pledged as collateral; and (ii) reduce the minimum loan collateralization ratio that we will be required to maintain under each of these credit facilities.



As of December 31, 2015, our credit facilities’ commitments, amounts available and principal amounts outstanding were as follows:



Members United Facilities



On October 12, 2007, we entered into two note and security agreements with Members United, a federally chartered credit union located in Warrenville, Illinois for a secured $10 million revolving line of credit and for a secured $50 million revolving line of credit, which was later amended on May 8, 2008 to allow us to borrow up to $100 million through the revolving line of credit. Both credit facilities were secured by certain mortgage loans as a recourse obligation.  On August 27, 2008, we borrowed the entire $10 million available on the $10 million line of credit.  As a result of this financing, the $10 million facility was converted to a term loan with a maturity date of August 26, 2011 and we paid off this facility in 2011.  We also have used our $100 million Members United credit facility to assist us in financing our business.



On September 24, 2010, the NCUA Board of Directors placed Members United into conservatorship.  When the NCUA initiates a conservatorship action, the board of directors and management of the credit union is replaced.  To implement the Members United conservatorship, certain legacy assets and contributed capital accounts, including our Members United credit facilities, were placed into an Asset Management Estate established by the NCUA to administer the Members United conservatorship.



On November 4, 2011, we and the NCUA Board As Liquidating Agent of Members United Corporate Federal Credit Union entered into an $87.3 million credit facility refinancing transaction which amended and restated the original $100 million credit line we entered into with Members United on May 7, 2008. Unless the principal amount of the indebtedness due is accelerated under the terms of the MU Credit Facility loan documents, the principal balance and any interest due on the MU Credit Facility will mature on October 31, 2018. Accrued interest is due and payable monthly in arrears on the MU Credit Facility at the lesser of the maximum interest rate permitted by applicable law under the loan documents or 2.525%. The term loan may be repaid or retired without penalty, but any amounts repaid or prepaid under the MU Credit Facility may not be re-borrowed.

 

The MU Credit Facility includes a number of borrower covenants, including affirmative covenants to maintain the collateral free of liens, to timely pay the amounts due on the facility, to provide the lender with interim or annual financial statements and annual and periodic reports filed with the SEC and maintain a minimum collateralization ratio of at least 110% (120% for the MU Credit Facility and WesCorp Facility combined). If at any time we fail to maintain our required minimum collateralization ratio, we will be required to deliver cash or qualifying mortgage loans in an amount sufficient to enable us to meet our obligation to maintain a minimum collateralization ratio. As of December 31, 2015, the collateral securing the MU Credit Facility had an aggregate principal balance of $92.0 million. This represented a deficit of $1.6 million from the required collateral at December 31, 2014. As a matter of expediency, the NCUA accepted a cash pledge in addition to the balance of loans pledged as collateral in satisfaction of the minimum collateralization ratio and we  were not required to make an additional principal payment to satisfy the deficit. As of December 31, 2015, the outstanding principal balance due on the MU Credit Facility was $70.2 million.



The MU Credit Facility also includes covenants which prevent us from renewing or extending a loan pledged as collateral under this facility unless certain conditions have been met and requiring the borrower to deliver current financial statements to us.  Under the terms of the MU Credit Facility, we have established a lockbox maintained for the benefit of the NCUA that will receive all payments made by collateral obligors.  Our obligation to repay the outstanding balance on this facility may be accelerated upon the occurrence of an “Event of Default” as defined in the MU Credit Facility.  Such events of default include, among others, failure to make timely payments due under the MU

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Credit Facility, or breach of any of our covenants.  As of December 31, 2015 and 2014, the Company was in compliance with its covenants under the MU Credit Facility.



WesCorp Facility



On November 30, 2009, we entered into a $28 million credit facility with WesCorp, a federally chartered credit union located in San Dimas, California.  We used $24.6 million of the proceeds from the WesCorp credit facility to pay-off our existing warehouse line of credit.  The WesCorp credit facility had a fixed interest rate of 3.95% and was initially secured by approximately $59.2 million of mortgage loans we previously pledged to secure our warehouse line of credit. Thus, the loan was initially secured by excess collateral of approximately $30.8 million.



On March 20, 2009, the NCUA assumed control of WesCorp under a conservatorship proceeding initiated by the NCUA under regulations adopted under the Federal Credit Union Act.  Effective as of October 1, 2010, WesCorp was placed into liquidation by the NCUA.  Pursuant to a letter dated October 25, 2010, we were advised that our WesCorp credit facility had been transferred to the AMAC, a facility established by the NCUA.   

 

On November 4, 2011, we and the National Credit Union Administration Board As Liquidating Agent of Western Corporate Federal Credit Union entered into a $23.5 million credit facility which amended and restated the WesCorp credit facility.  Unless the principal amount due on the WesCorp Credit Facility, as extended, is accelerated under the terms of the loan documents evidencing such credit facility, the principal balance and any interest due on the facility will be payable in full on October 31, 2018.  Accrued interest on the WesCorp Credit Facility is due monthly in arrears on the first day of each month at the lesser of the maximum rate permitted by applicable law under the loan documents or 2.525%.  As a result of this refinancing transaction, our interest rate was reduced from 3.95% to 2.525%.  The term loan may be repaid or retired without penalty, but any amounts repaid or prepaid under the WesCorp Credit Facility may not be re-borrowed. 



Amendments to our Credit Facility Agreements



On March 30, 2015, we and the NCUA agreed toan Amendment to the Loan and Security Agreement (the “LSA Amendments”) for both the Members United Credit Facility and the WesCorp Credit Facility.  Under the terms of the LSA Amendments, significant changes were made, which are disclosed in a table in Note 8, NCUA Credit Facilities.  For further information, please see this note in our accompanying audited consolidated financial statements for the year ended December 31, 2015. 



For further information on our credit facilities, see Note 7, NCUA credit facilities, in our accompanying audited consolidated financial statements for the year ended December 31, 2015. 



Investor Notes



We also rely on our investor notes to provide the funding for origination and purchase of mortgage loan assets and fund our general operations.  As of December 31, 2015, a total of $49.9 million of our investor debt securities were issued and outstanding.  For further information on our investor notes, see Note 9, Notes Payable in our accompanying audited consolidated financial statements for the year ended December 31, 2015.  Historically, we have offered investor notes under offerings registered with the SEC and in private placements exempt under the provisions of the Securities Act of 1933, as amended.  Our Alpha Class Notes were initially registered with the SEC in July 2001 and an additional $75.0 million of new Alpha Notes were registered with the SEC in May 2007.  We discontinued the sale of our Alpha Class Notes in April 2008.  As of December 31, 2015, none of these notes remained outstanding.



In addition to our Alpha Class Notes, in April 2008, we registered with the SEC an offering of $80.0 million of new Class A Notes that consists of three series of notes, including a fixed series, flex series and variable series.  We registered an additional $100.0 million in Class A Notes with the SEC in June, 2010, and on June 24, 2011, we filed a registration statement with the SEC seeking to register an additional $75 million of our Class A Notes. 



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Effective as of May 15, 2012, we temporarily discontinued the sale of the Class A Notes and deregistered the securities remaining unsold under our registration statement on Form S-1, initially filed with the SEC on December 23, 2009 and declared effective on June 3, 2010.  We subsequently filed a registration statement seeking to register $75 million of our Class A Notes with the SEC.  This registration statement was declared effective as of October 11, 2012 and we resumed the sale of our Class A Notes.  All of our Class A Notes are unsecured.  The interest rates we pay on the fixed series notes and the flex series notes are determined by reference to the “swap index”, an index that is based upon a weekly average swap rate reported by the Federal Reserve Board, and is in effect on the date they are issued, or in the case of the flex series notes, on the date the interest rate is reset. These notes bear interest at the swap index plus a rate spread of 1.70% to 2.50% and are issued in maturities ranging from 12 to 84 months.  The interest rates we pay on the variable series notes are determined by reference to the variable index in effect on the date the interest rate is set and bear interest at a rate of the swap index plus a rate spread of 1.50% to 1.80%.  Effective as of January 5, 2009, the variable index is defined under the Class A Notes as the three month LIBOR rate.



The Class A Notes are issued under a Trust Indenture we entered into with U.S. Bank National Association.  Pursuant to the US Bank Indenture, we may issue up to a maximum of $200 million of our Class A Notes.  The Trust Indenture covering the Class A Notes contains covenants pertaining to a minimum fixed charge coverage ratio, maintenance of tangible net worth, limitation on issuance of additional notes and incurrence of indebtedness.  We were in compliance with these covenants at December 31, 2015.  At December 31, 2015, $15.9 million of these Class A Notes were outstanding.



The Class A Note offering expired on December 31, 2014 and no additional Class A Notes will be sold after that date.  This offering has been replaced in January 2015 with the Class 1 Notes offering.  We registered $85 million of our Class 1 Notes in two series – fixed and variable notes.  The registration was declared effective on January 6, 2015.  Similar to our Class A Notes, our Class 1 Notes are all unsecured debt securities. The interest rates we pay on the fixed series notes are determined by reference to the “swap index”, an index that is based upon a weekly average swap rate reported by the Federal Reserve Board, and is in effect on the date they are issued. These notes bear interest at the swap index plus a rate spread of 1.70% to 2.50% and are issued in maturities ranging from 12 to 84 months.  The interest rates we pay on the variable series notes are determined by reference to the variable index in effect on the date the interest rate is set and bear interest at a rate of the swap index plus a rate spread of 1.50% to 1.80%.  Effective as of January 6, 2015, the variable index is defined under the Class 1 Notes as the three month LIBOR rate.



In addition to Class 1 Notes, we offer notes under several private placement offerings.  In March 2013, we began offering Series 1 Subordinated Capital Notes and International Notes to accredited investors, as that term is defined in Rule 501 promulgated under the Securities Act of 1933, as amended.  Effective as of January 15, 2015, we commenced the offering of our Secured Investment Notes under Rule 506 of Regulation D, promulgated under the Securities Act of 1933, as amended.  The Secured Investment Notes are secured by either 100% of their outstanding balance in cash or 105% of their outstanding balance in loans receivable.  Investors have to meet certain criteria in order to purchase these notes and are also subject to suitability restrictions.  At December 31, 2015, $2.3 million, $3.4 million and $52 thousand of our Secured Investment Notes, Subordinated Capital Notes and our International Notes were outstanding, respectively.



Of the $49.9 million in investor notes that are outstanding at December 31, 2015, $7.5 million are available to be withdrawn at any time without penalty while an additional $11.0 million will mature in 2016.  Historically, we have experienced a high rate of renewal or reinvestment by our note holders upon maturity of their notes.  We believe the historical record of repeat purchasers by our debt security investors supports our confidence in the future viability of our investor note program.



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Debt Covenants



Our investor notes require that we comply with certain financial covenants including, without limitation, minimum net worth, interest coverage, restrictions on the distribution of earnings to our equity investors and incurring other indebtedness that is not permitted under the provisions of our loan and trust indenture.  If an event of default occurs under our investor notes, the trustee may declare the principal and accrued interest on all notes to be due and payable and may exercise other available remedies to collect payment on such notes.  We are in compliance with our debt covenants under the investor notes.



The MU Credit Facility and WesCorp Credit Facility agreements contain a number of standard borrowing covenants, including affirmative covenants to maintain good and indefeasible title to the pledged collateral free and clear of all liens, to maintain a lockbox for the benefit of the lender to collect payments from borrowers on the collateral notes and comply with customary covenants for a transaction of this nature.  In addition, unless otherwise waived by the NCUA, we may not renew or extend an underlying mortgage loan unless a recent appraisal is completed for such mortgaged property, the loan continues to be amortized over the same period as the prior note and requires the borrower to submit quarterly financial statements in the event the borrower has negative annual net income or a debt service coverage ratio of less than 1.0 to 1.0.  We are in compliance with these covenants as of December 31, 2015.



QUANTITATIVE AND QUALITATIVE MARKET RISK



Market Risk Management

Market Risk Management

Market risk arises from changes in interest rates, exchange rates, commodity prices and equity prices.  Our market risk exposure primarily consists of interest rate risk, which is mitigated by policies and procedures which monitor and limit our earnings and balance sheet exposure to changes in interest rates.  In the past, we have also utilized various financial hedging instruments such as interest rate swaps and interest rate caps which allow us to diminish some of our interest rate risk associated with some of our variable rate assets and liabilities. Further, we do not have any exposure to currency exchange rates.  Our earnings depend primarily upon the difference between the income we receive from our interest earning assets and our cost of funds, principally interest expense incurred on interest-bearing liabilities.  Interest rates charged on our loans are affected principally by the demand for loans, the supply of money available for lending purposes, and competitive factors.  In turn, these factors are influenced by general economic conditions and other constraints beyond our control such as governmental economic and tax policies, general supply of money in the economy, governmental budgetary actions, and the actions of the Federal Reserve Board.

Interest Rate Risk Management

In an effort to manage our exposure to interest rate risk, our Board has formed an Asset/Liability Management Committee (the “ALM Committee”) that meets on a regular basis.  The core investment objectives of the ALM Committee are to coordinate, control and perform oversight of our portfolio consistent with our business plan and board approved policies.  The ALM Committee establishes and monitors our mix of assets and funding sources, taking into account relative costs and spreads, interest rate sensitivity and cash flow requirements in an effort to produce results consistent with our liquidity, capital adequacy, level of risk and profitability goals.

The principal objective of interest rate risk management (often referred to as “asset/liability management”) is to manage the financial components of our statement of condition in a manner that will optimize the risk/reward equation for earnings and capital in relation to changing interest rates.  We have adopted formal policies and standard industry practices to monitor and manage interest rate risk exposure.  As part of this effort, we construct interest rate risk scenarios utilizing an asset/liability program from a third party provider of financial data monitoring and reporting systems, enabling us to better manage economic risk and interest rate risk.

Our fundamental asset and liability objective is to maximize our economic value while maintaining adequate liquidity and exposure to interest rate risk deemed by our Board to be acceptable. We believe an acceptable degree of exposure

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to interest rate risk results from the management of assets and liabilities through the maturities, repricing and mix of our mortgage loan investments, borrowing facilities and investor notes to attempt to neutralize the potential impact of changes in market interest rates.  Our profitability is dependent to a large extent upon our net interest income, which is the difference between our interest income on interest-earning assets such as loans and interest-bearing assets, and our interest expense on interest-bearing liabilities, such as our investor notes and financial institution borrowings.  Unlike other financial institutions which have access to other sources of liquidity such as the Federal Reserve Discount Window or the Federal Home Loan Bank, we are dependent upon the issuance of investor notes, capital investments by our equity holders, the sale of mortgage assets and to a lesser extent, credit facilities.  Further, we manage our maturity risk between assets and liabilities with the goal of limiting our exposure to interest rate risk, ensuring adequate liquidity.  Interest income and interest expense are affected by general economic conditions and by competition in the marketplace.  Our interest and pricing strategies are driven by our asset/liability management analyses and by local market conditions.

In connection with the above-mentioned strategy, we simulate the change in net interest income and net interest margin given immediate and parallel interest rate shocks over a 12-month horizon.  Shown below are possible changes to net interest income and the net interest margin based upon the model’s program under a 200 basis point increase in the interest rates as of December 31, 2015:





These results indicate the effect of immediate rate changes and do not consider the yield from reinvesting in short-term versus long-term instruments.  The above profile illustrates that, if there were an immediate and sustained increase of 200 basis points in interest rates, our net interest income would increase by $170 thousand over the “base case” (i.e., no interest rate change) and our net interest margin would increase from 3.56% to 3.67%.  Our net interest margin will increase if rates rise.  We did not consider a decrease in interest rates in our analysis as interest rates remain at low levels and no further decrease can be reasonably anticipated.  Based upon the review of management and our Board, we consider the results indicated by the report to be acceptable. 



The following table sets forth our maturity gap for interest-earning assets and interest-bearing liabilities as of the period indicated.  For purposes of the following table, an asset or liability is considered to mature based on its contractual terms.  Actual payment patterns may differ from contractual payment patterns.

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The preceding table indicates that we have a positive one-year cumulative gap of $13.8 million at December 31, 2015.  This indicates that funds expected to become available in the next year due to maturing assets are greater than interest-bearing liabilities coming due in the next year.  Certain notes payable have contractual maturities of 72 months but can be withdrawn in whole or in part at any time prior to maturity without restriction.  While historically our investors have not withdrawn all of these funds prior to their maturity, for purposes of the maturity analysis above, these notes are included in the Year 1 maturity column.



When an increase in interest rates will help the entity and a decrease in interest rates will hurt the entity, the entity is considered to be asset sensitive.  Currently, our balance sheet is asset sensitive as the amount of assets maturing is greater than the amount of liabilities maturing over the next year.  In the view of management, this sensitivity will not have a material adverse impact on the Company’s financial position and results of operations for 2016.

 



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CERTAIN RELATIONSHIPS AND RELATED

TRANSACTIONS, AND DIRECTOR INDEPENDENCE

ECCU-Related Agreements

From time to time, we purchase participation interests in mortgage loans from ECCU, our largest equity owner.  ECCU continues to service most of our mortgage loans that it sells to us under a servicing agreement.  Per this agreement, a servicing fee of 50 to 65 basis points is deducted from the interest payments we receive on the wholly-owned loans that ECCU services for us.  In lieu of a servicing fee, the loan participations we purchase from ECCU generally have pass-through rates which are up to 100 basis points lower than the loan contractual rate. We negotiate the pass-through interest rates with ECCU on a loan by loan basis.  At December 31, 2015, our investment in wholly-owned loans serviced by ECCU totaled $930 thousand, while our investment in loan participations serviced by ECCU totaled $20.5 million.  From time to time, we pay fees for additional services ECCU provides for servicing our loans.  These fees amounted to less than $1 thousand during the years ended December 31, 2015 and 2014, respectively.   



We did not purchase any loans from ECCU during the year ended December 31, 2015 and 2014.  We recognized interest income on loans purchased from ECCU of $1.4 million and $2.0 million during the years ended December 31, 2015 and 2014, respectively.  Currently, ECCU services 10 of the 147 mortgage loans we own pursuant to the terms of a servicing agreement. 



In addition, ECCU has repurchased mortgage loans from us as part of our liquidity management practices. Although ECCU has accommodated us in responding to such repurchase requests, ECCU is under no contractual obligation to do so.  Furthermore, federal credit union regulations require that a borrower must be a member of a participating credit union in order for a loan participation to be an eligible investment for a federal chartered credit union. ECCU has from time to time repurchased from us fractional participations in our loan investments which ECCU already services, usually around 1% of the loan balance, to facilitate compliance with National Credit Union Administration rules when we sell participations in those loans to federal credit unions.  Each sale or purchase of a mortgage loan investment or participation interest with ECCU was consummated under our Related Party Transaction Policy that has been adopted by our Board.  We sold $541 thousand in loans to ECCU during the year ended December 31, 2014.    We did not sell any loans to ECCU during the year ended December 31, 2015.



Until the fourth quarter of 2014, we maintained most of our cash balances with ECCU, our largest equity holder.  Total funds held with ECCU at December 31, 2015 and 2014 were $163 thousand and $733 thousand, respectively.  We earned interest on these cash balances for the years ended December 31, 2015 and 2014 in the amount of $14.5 thousand and $41.3 thousand, respectively.  In 2014, we transferred a large portion of our cash to ACCU.



Pursuant to an administrative services agreement, we purchase certain professional services from ECCU and we rent our administrative offices from ECCU pursuant to an office lease entered into on November 4, 2008.  We paid ECCU $117 thousand and $111.1 thousand for the years ended December 31, 2015 and 2014, respectively, for these services and facilities.  We negotiated these charges and terms of the office lease with ECCU based upon the fair market value of such services and rental rates for comparable office space in Brea, California.



On October 6, 2014, our wholly-owned broker-dealer subsidiary, MP Securities, reached an agreement with ECCU whereby ECCU will refer clients to MP Securities for investment advisory services.  In exchange, we will remit to ECCU a solicitation fee allowable by the California Department of Business Oversight.  We remitted $34 thousand in fees during the year ended December 31, 2015.  No fees were remitted or accrued during the year ended December 31, 2014.



On April 8, 2016, the Company and ECCU, entered into a Master Services Agreement (the “Services Agreement”), pursuant to which the Company will provide marketing, member and client services, operational and reporting services to ECCU commencing on the effective date of the Services Agreement and ending on December 31, 2016; provided, however, that unless either party provides at least thirty (30) days written notice to the other party prior to its expiration, the agreement will automatically renew for successive one year periods.  Either party may terminate the

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Services Agreement for any reason by providing thirty (30) days prior written notice.  During the term of the Services Agreement, ECCU has agreed to pay the Company $7,500 per month.  The Company has agreed to assign a designated service representative which must be approved by ECCU in performing its duties under the Agreement.



Pursuant to the terms of the Services Agreement, the Company will make visits to, deliver reports, provide marketing, educational and underwriting related services to ECCU’s members, borrowers, leads, referral sources and contacts in the southeast region of the United States.



Other Related Party Transactions



From time to time, our Board and members of our executive management team have purchased investor notes from us.  One of our Board members, Mr. Van Elliott, holds $51.4 thousand of our Class A Notes. 



On August 15, 2013, we sold a $5.0 million in loan participation interest to Western Federal Credit Union, one of our equity owners.  We charge 50 basis points to service the loan for Western Federal Credit Union.



We have entered into a selling agreement with our wholly-owned subsidiary, MP Securities, pursuant to which MP Securities will sell our Subordinated Capital Notes and our International Notes.  The sales commissions and cost reimbursements paid to any broker-dealer firms that are engaged to assist in the distribution of such certificates will not exceed 3% of the amount of certificates sold.  For the year ended December 31, 2015, MP Securities earned $25 thousand on sales of Series 1 Subordinated Capital Notes and MP Securities did not sell any International Notes during the year ended December 31, 2015. 



We also entered into a selling agreement with MP Securities pursuant to which MP Securities served as our selling agent in distributing our Class A Notes.  Under the terms of the Class A Notes Offering, MP Securities received a selling concession for acting as a participating broker ranging from 1.25% to 5 % on the sale of a fixed series note, 5% on the sale of a flex series note and an amount equal to .25% per annum on the average note balance for a variable series note.  Effective as of January 31, 2014, MP Securities became the managing broker of the Class A Note offering and receives an additional 0.5% on all new note sales as well as 0.25% on note sales made to a repeat purchaser.  No concessions were paid on any accrued interest that is added to the principal of a Class A Note pursuant to an interest deferral election made by the investor.  For the year ended December 31, 2014, MP Securities earned $546 thousand in sales concessions and $81 thousand in managing broker concessions on the sale of our Class A Notes. 



Effective as of January 2015, we discontinued the sale of our Class A Notes.  Pursuant to a Registration Statement filed with the SEC and declared effective on January 6, 2015, we are offering our Class 1 Notes as a replacement debt security for our Class A Notes.  We have also entered into a Managing Participating Broker Agreement with MP Securities pursuant to which MP Securities will act as the managing broker for the offering of our Class 1 Notes.  As the managing participating broker, MP Securities will maintain sales records, process and approve investor applications, conduct retail and wholesale marketing activities for sales of the Class 1 Notes and undertake its own due diligence review of the offering.  MP Securities does not serve as a lead underwriter, distribution manager or syndicate manager for the offering.



Under the terms of the Managing Participating Broker Dealer Agreement (the “MPB Agreement”) entered into with us and MP Securities and possible participating brokers in the future, we will pay gross selling commissions ranging from 1.25% to 1.75% for the sale of Fixed Series Class 1 Notes and an amount equal to .50% of the amount of Variable Series Class 1 Notes sold plus an amount equal to .25% per annum on the average note balance of such Variable Series Class 1 Note.  Both the gross commissions and managing participating broker commissions will be reduced by .25% of the total amount of each note sold in the offering to a repeat purchaser who is then, or has been within the immediately preceding thirty (30) days, an owner of one of our investor notes.  No commissions are paid on the accrued interest deferred and added to the principal balance of a note when an investor elects to defer interest received on a note. 



In the event MP Securities provides wholesale services in connection with the Class 1 Notes offering, we may reimburse MP Securities and any other selling group member up to $40,000 in wholesaling expenses.  As of the date of

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this Prospectus, no wholesaling expenses have been paid to MP Securities or any other selling group member under the Class 1 Notes offering.  For the year ended December 31, 2015, MP Securities earned $437 thousand in sales concessions and $55 thousand in managing broker concessions on the sale of our Class 1 Notes.



In connection with the Company’s Secured Investment Note offering, the Company has engaged MP Securities to act as the Company’s managing broker for the offering.  Under the terms of a Managing Broker-Dealer Agreement entered into by and between the Company and MPS Securities, the Company will pay selling commissions ranging from 2% on our Secured Investment Notes with a 18-month maturity to 5% on Secured Investment Notes with a 54-month maturity, with total selling commissions not to exceed 5%.



In addition, we have signed an Administrative Services Agreement with MP Securities which stipulates that we will provide certain services to MP Securities.  These services include the lease of office space, use of equipment, including computers and phones, and payroll and personnel services.  The total expenses charged to MP Securities for these services were $913 thousand and $680 thousand for the years ended December 31, 2015 and 2014, respectively.  At a Board of Managers meeting held on November 5, 2015, the Board approved a Resolution authorizing a capital contribution of up to $100,000 to be made by the Company in its wholly-owned subsidiary, MP Securities.  The Resolution further authorized the officers of the Company to amend the terms of the Administrative Services Agreement entered into by and between the Company and MP Securities thereby authorizing the Company to abate MP Securities’ obligation to pay the Company for providing those described services for a limited period not to exceed twelve months and for an amount not to exceed $100,000.  MP Securities may discontinue the expense abatement at any time during the one year period by providing written notice to the Company.



Pursuant to a Loan and Security Agreement, dated December 15, 2014, entered into by and among the Company, MPF and the holders of our Secured Investment Notes (the “Loan Agreement”), MPF will serve as the collateral agent for the Secured Investment Notes.  The Company will pledge and deliver mortgage loans and cash to MPF to serve as collateral for the Secured Investment Notes.  As custodian and collateral agent for the Secured Investment Notes, MPF will monitor the Company’s compliance with the terms of the Loan Agreement, take possession of, hold, operate, manage or sell the collateral conveyed to MPF for the benefit of the Secured Investment Note holders.  MPF is further authorized to pursue any remedy at law or in equity after an event of default occurs under the Loan Agreement.



To assist in evaluating any related transactions we may enter into with a related party, our Board has adopted a Related Party Transaction Policy.  Under this policy, a majority of the members of our Board and majority of our independent Board members must approve a material transaction that we enter into with a related party.  As a result, we anticipate that all future transactions that we undertake with an affiliate or related party will be on terms believed by our management to be no less favorable than are available from unaffiliated third parties and will be approved by a majority of our independent Board members.



CERTAIN U.S. FEDERAL INCOME TAX CONSIDERATIONS



The following summary describes the material U.S. federal income tax consequences to a U.S. holder (as defined below) with respect to the purchase, ownership and disposition of the Notes. This summary is generally limited to U.S. holders who will hold the Notes as “capital assets” within the meaning of Section 1221 of the Internal Revenue Code of 1986 as amended, which we refer to as the “Code”, and who acquire the Notes in this Offering at their “issue price.” This summary does not address special situations including those that may apply to particular holders such as exempt organizations, U.S. holders subject to the U.S. federal alternative minimum tax, non-U.S. citizens and foreign corporations or other foreign entities, dealers in securities, traders in securities that elect to mark-to-market, commodities or foreign currencies, financial institutions, insurance companies, regulated investment companies, U.S. holders whose “functional currency” is not the U.S. dollar, partnerships or other pass-through entities, and persons who hold the Notes in connection with a “straddle,” “hedging,” “conversion” or other risk reduction transaction.



This summary is based upon the Code, its legislative history, existing and proposed Treasury Regulations promulgated thereunder by the Internal Revenue Service, to whom we refer to as the “IRS”, court decisions, and rulings now in effect, all of which are subject to change. Prospective investors should particularly note that any such change could have retroactive application so as to result in federal income tax consequences different from those discussed below.

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INVESTORS CONSIDERING A PURCHASE OF THE NOTES SHOULD CONSULT THEIR OWN TAX ADVISERS WITH RESPECT TO THE APPLICATION OF U.S. FEDERAL INCOME TAX LAWS TO THEIR PARTICULAR SITUATIONS, AS WELL AS ANY TAX CONSEQUENCES ARISING UNDER THE FEDERAL ESTATE OR GIFT TAX RULES OR UNDER THE LAWS OF ANY STATE, LOCAL OR FOREIGN TAXING JURISDICTION.



A “U.S. holder” is a beneficial owner of the Notes, who is (1) a citizen or resident of the United States, (2) a domestic corporation, (3) an estate the income of which is subject to U.S. federal income tax without regard to its source, or (4) a trust if a court within the United States is able to exercise primary supervision over the administration of the trust and one or more U.S. persons have the authority to control all substantial decisions of the trust.



Taxation of Interest



It is expected that the Notes will be issued without original issue discount for federal income tax purposes. U.S. holders will be required to recognize as ordinary income any interest paid or accrued on the Notes, in accordance with their regular method of tax accounting. If, however, the principal amount of the Notes exceeded their issue price by more than a de minimis amount, a U.S. holder will be required to include such excess income as original issue discount, as it accrues, in accordance with a constant yield method based on a compounding of interest before the receipt of cash payments attributable to this income.



Disposition, Redemption or Repurchase for Cash



U.S. holders generally will recognize capital gain or loss upon the sale, redemption (including any repurchase or prepayment by us for cash) or other taxable disposition of the Notes in an amount equal to the difference between:





A U.S. holder’s adjusted tax basis in a Note generally will equal the cost of the Note to such U.S. holder. Gain or loss from the taxable disposition of the Notes generally will be long-term capital gain or loss if the Note was held for more than one year at the time of the disposition. The deductibility of capital losses is subject to limitations.

 

We or our designated paying agent will, where required, report to U.S. holders of Notes or our membership interests and the IRS the amount of any interest paid on the Notes (or other reportable payments) in each calendar year and the amount of tax, if any, withheld with respect to such payments. Under the backup withholding provisions of the Code and the applicable Treasury Regulations, a U.S. holder of Notes may be subject to backup withholding at the rate provided in Code section 3406(a)(1), which is currently 28 percent, with respect to dividends or other distributions, or interest paid on or the proceeds of a sale, exchange or redemption of, the Notes, unless such U.S. holder is a corporation or comes within certain other exempt categories and when required demonstrates this fact; or provides correct taxpayer identification number, certifies as to no loss of exemption from backup withholding and otherwise complies with applicable requirements of the backup withholding rules. The amount of any backup withholding from a payment to a U.S. holder will be allowed as a credit against the U.S. holder’s federal income tax liability and may entitle such U.S. holder to a refund, provided that the required information is furnished to the IRS. THE PRECEDING DISCUSSION OF CERTAIN U.S. FEDERAL INCOME TAX CONSEQUENCES IS FOR GENERAL INFORMATION ONLY AND IS NOT TAX ADVICE. ACCORDINGLY, YOU SHOULD CONSULT YOUR OWN TAX ADVISER AS TO PARTICULAR TAX CONSEQUENCES TO YOU OF PURCHASING, HOLDING AND DISPOSING OF THE NOTES, INCLUDING THE APPLICABILITY AND EFFECT OF ANY STATE, LOCAL OR FOREIGN TAX LAWS, AND OF ANY PROPOSED CHANGES IN APPLICABLE LAWS.



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LEGAL PROCEEDINGS



Given the nature of our investments made in mortgage loans, we may from time to time have an interest in, or be involved in, litigation arising out of our loan portfolio, such as foreclosures and other litigation to enforce security interests and guarantor obligations. We consider litigation related to our loan portfolio to be routine to the conduct of our business. In our opinion, we are not involved in any litigation matters that could have a material adverse effect on our financial position, results of operations or cash flows.



PLAN OF DISTRIBUTION



General



We are offering the Notes on a “best efforts” basis pursuant to the Managing Participating Broker Agreement (the “MPB Agreement”) by and between ourselves and MP Securities as the managing participating broker (“MPB”),  and possible additional Participating Brokers in the future.  In general, the term “best efforts” means that the Selling Group does not guarantee that any of the Notes will be sold, but that its members will use their best efforts to sell the Notes as described in this Prospectus.



As MPB,  MP Securities has responsibilities for maintaining Note sales records, receiving, processing and assuring we receive completed investor Purchase Applications, and approving supplemental sales materials for the Offering. However, MP Securities will not act as  a lead underwriter, distribution manager, or syndicate manager of the Selling Group.



It is expected that MP Securities will conduct essentially all of the retail and wholesale marketing and sales of the Notes.  There is no assurance that additional Participating Brokers will participate in the Offering. Because the MPB, MP Securities, is our affiliate, it is not in a position to make an independent review of our Company or this Offering. Accordingly, you will not be able to rely on a  review of the terms and conditions of this Offering by a non-affiliated managing broker-dealer or underwriter or by any future non-affiliated Participating Brokers. MP Securities has certain conflicts of interest between our interests and the interests of its customers in connection with the sale of the Notes.



Because FINRA views the Notes as interests in a direct participation program, an offer or sale of the Notes under the registration statement of which this Prospectus forms a part will be made in compliance with FINRA Rule 2310.



Unless sooner completed or we decide to terminate it sooner, the Offering will terminate on December 31, 2017. We may, without prior notice, in our sole discretion, suspend or discontinue the sale of one or more Note categories or Note category Series at any time or from time to time and we may terminate the Offering at any time.



Underwriting Compensation We Will Pay



Maximum Commissions



We will pay the following commissions as a percentage of the Notes sold. In each case, the gross selling commissions, MPB Commissions, and PB Commissions are identified:







Both the Gross Commission and the MPB Commissions will be reduced by 0.25% of the total amount of each Note sold in the Offering to a Repeat Purchaser who is then, or has been within the immediately preceding thirty (30) days, an owner of one of our investor notes.



Under the MPB Agreement we may, in our sole discretion, change the Selling Commissions we pay on any Note Category or Note Category Series at any time or from time to time without prior notice. However, after giving effect to the change, the Selling Commissions we pay on the Notes may not exceed 5.5% of the Maximum Offering Proceeds.



We will not pay commissions or other compensation to any Selling Group member in connection with the accrued interest deferred and added to a Note’s principal balance pursuant to the Interest Deferral Election. We will not pay referral or similar fees to any accountants, attorneys, or other persons in connection with the distribution of the Notes.



In addition to the MPB fee, we may pay or reimburse other Participating Brokers for their due diligence expenses in reviewing the Offering on either an accountable or non-accountable basis so long as the total of such payments (including the MPB Fee) does not exceed $50,000.



MP Securities and/or other Selling Group members may provide wholesaling services in connection with the Offering. We may reimburse Selling Group members up to $40,000 for wholesaling expenses. Otherwise, MP Securities and other Participating Brokers will be compensated for such services solely from commissions.



We will not pay or reimburse Selling Group members for their training or education expenses in connection with marketing the Notes.  



We and/or the MPB will pay up to an additional estimated maximum expenses of $1,446,407 which are considered underwriting compensation under the FINRA Rules. These include the following estimated expenses:





Thus, we estimate that when these expenses are added to the maximum Selling Commissions of $4,675,000 and maximum due diligence fees of $50,000 and maximum wholesaling expenses of $40,000, we may pay a total of up to approximately $6,211,407 as determined under the FINRA Rules (or 7.31% of the Maximum Offering Proceeds) over the anticipated life of the Offering.



Other Organization and Offering Costs We May Incur for the Offering



In addition to the estimated issuance and distribution expenses of $315,000 we expect to pay, we may pay up to an estimated $389,206 which may be considered additional issuer expenses under the FINRA Rules. We intend to pay these expenses from funds other than the net proceeds of the Offering. Thus, we may pay total issuer expenses under the FINRA Rules of up to a maximum of $704,206 (0.84% of the maximum offering proceeds).



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Commitment Regarding Organization and Offering Expenses



We undertake that the total organization and offering expenses will not exceed 15% of the maximum offering proceeds. 



We also undertake that the underwriting compensation will not exceed 10% of the maximum offering proceeds.



As described above, we currently estimate that we and the MPB will incur up to $6,915,613 in total organization and offering expenses (8.14% of the maximum offering proceeds) and we and the MPB currently estimate that we may pay up to a total of $6,211,407 of underwriting compensation (7.31% of the maximum offering proceeds).



The costs estimated represent allocations of the respective costs over the four months preceding the commencement of the Offering and the anticipated 42-month offering life, which includes a 4-month pre-filing period and a 38-month estimated Offering period. These costs will be incurred at differing rates over that 42‑month period.



Indemnification



Under the MPB Agreement, we have agreed to indemnify MP Securities and each of the Participating Brokers against certain liabilities arising under federal and state securities laws. In doing so, we understand that the U.S. Securities and Exchange Commission and certain states take the position that indemnification against liabilities arising under the federal securities and state laws is against public policy and is unenforceable.



Conflict of Interest



Because we own all of the equity securities of MP Securities, MP Securities will face a conflict of interest in its placement of the Notes between our interests and the interests of its customers. The Selling Group does not include an independent broker to ameliorate this conflict of interest by reviewing the circumstances underlying sales of Notes, or to conduct ongoing due diligence review of our Company and the Offering. Thus, if you purchase a Note through MP Securities, you will not have the benefit of an independent review of the terms and conditions of this Offering by your Participating Broker.



We will pay the Managing Participating Broker and the Participating Brokers commissions ranging from a maximum of 5.50% for the sale of certain categories of Fixed Series Notes to as little as 0.75% for the sale of Variable Series Notes which remain outstanding for less than one year.   Also, the amount of the Participating Broker Commissions will likewise differ depending on the Series of Notes the broker places. The Managing Participating Broker and Participating Brokers therefore face potential conflicts of interest between the interests of their customers and their own economic interests, in that they will have a greater financial incentive to sell those Series of Notes which result in the highest commission (generally Notes with the longest terms) while the Note paying the highest commission may or may not meet the greatest needs of the customer.



Sales to IRAs



We may sell Notes under agreements with individual retirement accounts specifically permitting investment in the Notes. The minimum purchase for an IRA is $1,000 for a Fixed Series Note of 12 months or longer. Interest will be accumulated in the IRA purchaser’s account and posted on the last day of each calendar month and statements will be mailed to the custodian monthly. Under the terms of sale to an IRA, Notes may be redeemed upon 30 days’ advance written notice, although we may waive all or part of the 30-day notice requirement. This right to redeem will, however, be contingent upon sufficient funds being available at the time of the request. If sufficient funds are not available, we will inform the custodian requesting funds, and will schedule payment as soon as is practicable. Such inability to repay upon request will not be an event of default, providing payment can be made within a period not to exceed 30 days from date of request.

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HOW TO PURCHASE A NOTE



Persons who meet the applicable minimum suitability standards described in the “Suitability Standards” of this Prospectus and suitability standards determined by such person’s Participating Broker or financial advisor, may purchase our Notes. After you have read the entire Prospectus and the current supplement(s), if any, accompanying this Prospectus, if you want to purchase a Note, you must proceed as follows:



1.If you are an individual purchasing a Note for your own account, your retirement account, or for a minor, complete and execute a copy of the Retail Purchase Application (Exhibit D-1 in the Prospectus). If the purchaser is a corporation, partnership or other legal entity, complete and execute a copy of the Commercial Purchase Application (Exhibit D-2 in the Prospectus).



2.You should pay for your Notes by delivering a check in the amount of the Notes you are purchasing (“Total Notes Purchased”), payable to Ministry Partners Investment Company, LLC, provided such payment is accompanied by a completed and executed applicable Purchase Application. Certain Participating Brokers who have “net capital” as defined in the applicable securities regulations, of $250,000 or more, may instruct their customers to make their checks payable directly to them. In such case, the Participating Broker will issue its check payable to us for the purchase of your Note(s).



3.By executing your completed Purchase Application and paying the full purchase price of the Note or Notes you desire to purchase, you will attest that you meet the minimum suitability standards as provided in the “Suitability Standards” section of this Prospectus and as stated in your Purchase Application.



An approved trustee must process through us and forward us subscriptions made through IRAs, 401(k) plans or other tax-deferred plans.



Your Purchase Application will be effective only upon our acceptance. We reserve the right to reject any Purchase Application in whole or in part. We may not accept a Purchase Application for Notes until at least five (5) business days after the date you receive the final Prospectus. Subject to compliance with the prompt delivery requirement of Rule 15c2-4 of the 1934 Act, our MPB and/or the Participating Broker through whom you are purchasing your Notes will promptly submit your check on the business day following receipt of your Purchase Application and check.



We accept or reject Purchase Applications and checks within six  (6) business days after we receive them. In certain circumstances where the suitability review procedures are more lengthy than customary, or your Purchase Application and check are not in good order, our bank will hold your check in accordance with applicable legal requirements pending our acceptance of your subscription.



If your Purchase Application is rejected, your funds, without interest or reduction, will be returned to you within ten (10) business days after the date of such rejection. If your Purchase Application is accepted, we will send you confirmation of your purchase of your Note as of the date of acceptance.



LEGAL MATTERS



Bush Ross, P.A., of Tampa,  Florida is acting as our counsel in connection with filing this Post-Effective Amendment No. 2 to the Company’s Registration Statement under the 1933 Act and as such, has passed on certain legal matters in connection with the Notes. Randy K. Sterns, a shareholder in the firm, holds a $25,000 Class A Note and is the beneficial owner of an Individual Retirement Account that holds $122.6 thousand of the Company’s Subordinated Capital Notes.



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EXPERTS



The consolidated balance sheets as of December 31, 2015 and December 31, 2014 and the related consolidated statements of operations, equity, and cash flows for the fiscal years then ended have been included in this Prospectus and reliance is made on the report of Hutchinson and Bloodgood LLP, a limited liability partnership, independent registered public accounting firm, given on the authority of that firm as experts in accounting and auditing.

 

WHERE YOU CAN FIND MORE INFORMATION



We have filed a registration statement on Form S-1 under the Securities Act of 1933, which we refer to as the 1933 Act, relating to the Notes being offered by this Prospectus, and reference is made to such registration statement. This Prospectus constitutes our prospectus filed as part of the registration statement, but it does not contain all information in the registration statement, as certain portions have been omitted in accordance with the rules and regulations of the Securities and Exchange Commission.



We are subject to the informational requirements of the Securities and Exchange Act of 1934, which we refer to as the 1934 Act. The 1934 Act requires us to file reports, proxy statements and other information with the Securities and Exchange Commission. Such reports, proxy statements and other information may be inspected at public reference facilities of the SEC at Judiciary Plaza, 450 Fifth Street N.W., Washington, D.C. 20549. Copies of such material can be obtained from the Public Reference Section of the SEC at Judiciary Plaza, 450 Fifth Street N.W., Washington, D.C. 20549 at prescribed rates. Because we file documents electronically with the SEC, you may also obtain this information by visiting the SEC’s internet website at http://www.sec.gov.



We are also subject to the information and periodic reporting requirements of the 1934 Act, and, in accordance therewith, we file periodic reports, proxy statements and other information with the SEC.