Registration File No. 333-199237

 

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

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PRE-EFFECTIVE AMENDMENT NO. 3

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)

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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)

 

JAMES H. OVERHOLT

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:

 

BRUCE J. RUSHALL, ESQ.

RUSHALL & McGEEVER

6100 Innovation Way

Carlsbad, California 92009

(760) 438-6855

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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. ☐

 

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. ☐ 

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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

 

This Registration Statement is to register the sale of the Company’s next Class of its unsecured promissory notes as the authorized amount of Class A Notes under their indenture is nearing exhaustion. The Class 1 Notes issued under this Registration Statement will replace the Company’s current offering of Class A Notes, the Registration Statement for which will be withdrawn when the subject Registration Statement is declared effective.

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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 January 5, 2015

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:

 

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

–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 nine months ended September 30, 2014 and the year ended December 31, 2013 (dollars in thousands):

 

 

 

For a discussion on the factors that affected the Company’s results of operations and financial condition for the nine months ended September 30, 2014 as compared to the year ended December 31, 2013, 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, 2013, 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 September 30, 2014 we had $143.8 million of total debt obligations of which $49.0 million consisted of various types of Investor Debt, approximately 9%, 11% and 9% of which are due and payable in 2014, 2015 and 2016, 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 our proposed 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

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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 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 which remain outstanding for less than one year. 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.

 

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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.

 

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.

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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.

 

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 four 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 business of MP Securities to increase 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 the first quarter of 2012. During the fourth quarter of 2012, MP Securities began selling our Class A Notes under a Registration Statement declared effective by the SEC on October 11, 2012. 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

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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 implemented in 2010.

 

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 requirements that limit the number of investors who can purchase our securities. For the first nine months of 2014, the rate was 47%. 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 first nine months of 2014, we reported a  net loss of $530 thousand.  While we reported a profit in 2013, our net earnings were due, in part, to the sale of three of our foreclosed assets during the year, which resulted in $345 thousand in gains on sale. During 2014,  several of our non-performing assets decreased in value, resulting in $899 thousand in provisions for losses on foreclosed assets and $236 thousand in provisions for loan losses. While the performance of our loan portfolio and foreclosed assets was a substantial contributing factor in our profitability in 2013,  the deterioration of the market for some of our assets has resulted in losses during the first nine months of 2014. 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 September 30, 2014, we had $143.8 million of total debt obligations. Of this amount, we owed $94.8 million under our institutional credit facilities and $49.0 million on our investor debt securities.

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Approximately 9%, 11% and 9% of our total debt obligations is payable in the years ending December 31, 2014, 2015 and 2016, 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 $592 thousand in 2013 as our Mortgage Loan portfolio performance remained stable in 2013 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 assets has resulted in losses of $530 thousand during the nine months ended 2014. 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.

The continued effects of the economic recession that began in 2007 and subsequent deterioration in real estate values has adversely impacted the performance of our loan portfolio. Borrowers may be unable to repay their loans according to their terms and the collateral securing the payment of these loans may be insufficient to assure repayment. For the nine months ended September 30, 2014 and the year ended December 31, 2013, we recorded provisions for loan losses of $236 thousand, and $9 thousand, respectively. We recorded a credit for loan losses of $9 thousand for the year ended December 31, 2012. 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 September 30, 2014 and December 31, 2013, our non-performing assets (which consist of impaired loans and other real estate owned) totaled $19.6 million and $22.2 million, respectively, or 12.8% and  14.0% of total assets, respectively. At December 31, 2012, and December 31, 2011, our non-performing assets were $21.5 million and $24.3 million, respectively, or 12.9% and 13.5% of total assets, respectively. Nonperforming assets adversely affect our net income in the following ways:

 

 

 

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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.

 

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.

 

Global recessionary economic conditions and adverse developments in 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 $73.8 million credit facility refinancing transaction (the “MU Credit Facility”) entered into with the National Credit Union Administration Board as Liquidating Agent of Members United Corporate Federal Credit Union and $21.0 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. Under our MU Credit Facility and WesCorp Credit Facility Extension, we are required to maintain a minimum collateralization ratio of at least 128% and 150%, respectively. As of September 30, 2014, we had pledged approximately $94.7 million and $31.8 million of our Mortgage Loans to secure the MU Credit Facility and the WesCorp Credit Facility Extension, respectively. 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 and other debt securities until we repay or retire the MU Credit Facility and WesCorp Credit Facility Extension. Under the terms of our agreement with the NCUA, we may request release of excess collateral if the collateralization ratio on either the MU Credit Facility or the Wescorp Credit Facility Extension rises above 150%. However, the release of collateral may not at any point cause the collateralization ratio on either facility to drop below the minimum collateralization ratios described above.

 

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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.

 

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 $73.8 million MU Credit Facility and $21.0 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.

 

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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, 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, the sale of two of our impaired Mortgage Loan interests in 2012, the sale of foreclosed assets in 2013,  and an increase in note sales through September 2014, we will need to monitor and successfully manage our liquidity needs as needed 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.

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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 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 years 2010 and 2011, 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.

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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 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

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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 6% of the principal balance of our total Mortgage Loans will need to be refinanced during the remainder of the year ending December 31, 2014. 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 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 September 30, 2014 and December 31, 2013, our investments included $23.7 and $28.7 million, respectively, in loan participations, representing 17% and 19% of our portfolio, respectively.

 

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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 three of our Managers hold executive or board positions with one of our Members, 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.  

 

The Chairman of our Board of Managers is a full time employee of ECCU, another manager is a director of ECCU, and another manager is an executive officer of Western Federal Credit Union. 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:

 

 

 

 

 

 

 

 

 

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.

 

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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 30% of our mortgage loan investments involve California borrowers or are secured by properties located in California, a market that has been negatively impacted by the collapse of the residential real estate market and decrease in real estate prices. 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.

 

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.

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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 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:

 

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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 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

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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, 2013, we held $774 thousand, respectively in construction loans.  We did not hold any construction loans at September 30, 2014.

 

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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

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Note and the 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

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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).

 

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 $94.8 million of credit facility debt or our approximately $308 thousand 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

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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 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

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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.

 

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:

 

 

 

 

 

 

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 September 30, 2014 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.

 

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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

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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 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.

 

In recent years, we have developed the capability to originate and service loans ourselves and an increasing proportion of our portfolio is now originated and serviced by us. As of September 30, 2014, we owned a total of 139 mortgage loans, with an outstanding principal balance of $137.6 million. At September 30, 2014, the average loan balance for our mortgage loan investments is $990 thousand and our loans have a weighted average life to maturity period of 5.8 years. Substantially all of our business operations currently are conducted in California and our mortgage loan investments are primarily concentrated in California.

 

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 then in effect California limited liability company law. 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 the Notes and our other 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.   

 

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. The funds for these acquisitions came primarily from a $150 million line of credit

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provided by Fairway Finance Company, LLC as lender and BMO Capital Market Corp., as agent (the “BMO Facility”). 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. MPF’s loan purchasing activity continued through early 2009, after which its operations ceased and its assets, including loans, were transferred to us. All liabilities of MPF have been paid off. We closed down the active operations of MPF effective December 31, 2009 but we plan to maintain MPF’s existence as a Delaware limited liability company for possible future use as a financing vehicle to effect debt financing transactions.  

 

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 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 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 to provide Christian investors the opportunity to participate in funding those projects. 

 

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

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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 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 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 the economic climate in the U.S. improves and real estate values in markets that have been adversely impacted by global economic conditions continue to improve, we believe that the secondary market for church and ministry loans presents a business opportunity that we intend to pursue.

 

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, more 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 are an active participant in that market. 

 

Our general practice in recent years has been to fund loan acquisitions with the sale of investor notes and loan participations.  We also have borrowings from the NCUA which require monthly principal and interest payments. We then repay borrowings and investor notes with sales of additional investor notes, mortgage loan prepayments and repayments, loan participation sales, and from our operating income. Our ability to access capital to repay borrowings under our credit facilities and maturing investor notes is subject to variability based upon a number of factors, including volatility in the capital markets, the relative interest rates that we are prepared to pay for our Investor Debt, 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.

 

Our strategy to fund our mortgage loan investments includes the sale of debt securities to institutional and high net-worth investors collateralized by specific mortgage loans, expanded efforts to generate capital through the sale of loan participation interests to other financial institutions, and an increase in the sale of our debt securities through the efforts of our wholly-owned broker-dealer firm, MP Securities.

 

Our revenue is generated primarily from:

 

 

 

 

 

 

During the first nine months of 2014, our net interest margin was 2.98%. During 2013, we had successfully (i) increased our net interest margin from 2.82% to 3.03% through both the origination of high quality loans and the recognition of deferred loan fee income resulting from the sale of loan participations; (ii) sold three

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foreclosed assets for a total of $345 thousand in gains on sale; (iii) obtained regulatory approval from the SEC and FINRA for our wholly-owned broker-dealer firm, MP Securities, to begin acting as a registered investment advisor enabling us to increase the fees we earn; (iv) reduced our recorded investment in impaired loans through our improved collections; and (v) continued the process of implementing a strategy designed to diversify our revenue sources through the hiring of skilled staff that will allow us to pursue expansion of the services and investment products that MP Securities will be able to offer.  Our net income of $592 thousand for the year ended December 31, 2013 is the result of our improved loan origination, successful management of non-performing assets, and an increase in fees earned through servicing loans for others and the sale of investment products through MP Securities.  We accomplished this despite the resignation of our Chief Executive Officer, Billy Dodson, in October 2013. We believe we can continue these trends under the leadership of James Overholt, who was appointed interim Chief Executive Officer in November 2013, and subsequently hired as permanent Chief Executive Officer in May 2014. We will continue to undertake efforts to grow our balance sheet in order to take further advantage of our improved net interest margin and pursue new non-interest related sources of revenue.

 

For the nine months ended September 30, 2014, our net loss was $530 thousand, due in large part to the decrease in value of several of our foreclosed assets and the collateral securing our impaired loans.  Our net income for the year 2013 was $592 thousand, the second highest in our history. Our income for 2013 primarily resulted from successful efforts to sell certain real estate owned assets held on our balance sheet, record cash recoveries on a delinquent loan for which we had previously taken reserves for loan losses, improving our net interest margin on our  Mortgage Loan investments, and increasing non-interest income by transitioning most of our Mortgage Loan investments to servicing retained assets and through the sale of loan participation interests in some of our Mortgage Loan investments. For 2014, we have expanded our efforts to leverage our loan portfolio by selling $6.3 million in loan participation interests in our Mortgage Loan portfolio, we have hired two new investment advisers and improved the profitability of our broker-dealer and registered investment advisory firm, MP Securities, and we have improved the profitability of our core business assets by increasing our net interest margin to 2.98%.  Furthermore, we intend to ramp up our mortgage lending initiatives and continue our efforts to actively manage and monitor our real estate assets and delinquent loans in our loan portfolio.

 

Our Capitalization

 

Borrowings from Financial Institutions 

 

At September 30, 2014, our total borrowings from institutional lenders was $94.8 million. At December 31, 2013, we had $99.9 million of total borrowings from institutional lenders compared to $103.8 million at December 31, 2012, a decrease of $3.9 million.

 

At September 30, 2014, 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 August 27, 2008, we borrowed the entire $10 million available on the $10 million. This $10 million note was converted to a term loan with a maturity date of August 26, 2011.  

 

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 October 31, 2018. Accrued interest is due and payable monthly in arrears on

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the MU Credit Facility commencing on December 1, 2011 and on the first day of each succeeding month thereafter 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. We repaid the $10 million note in 2011. The weighted average interest rate we paid on the MU Credit Facility was 3.98%.

 

Under the MU Credit Facility, we agreed to maintain a minimum collateralization ratio of 128%. 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.

 

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. 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 Credit Facility, or our breach of any of our covenants.

 

As of September 30, 2014, the outstanding principal balance due on the MU Credit Facility was $73.8 million. As of September 30, 2014, the collateral securing the MU Credit Facility had an aggregate principal balance of $94.7 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 Extension is due monthly in arrears commencing on December 1, 2011 and on the first day of each succeeding month thereafter 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 Extension 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, as extended, requires us to maintain a minimum collateralization ratio of at least 150%. 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.

 

At September 30, 2014, the balance outstanding on the WesCorp Credit Facility Extension was $21.0 million. As of September 30, 2014, the collateral securing the WesCorp Credit Facility Extension had an aggregate principal balance of $31.8 million, which satisfies the minimum collateralization ratio for this facility.

 

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 September 30, 2014,  we had a total of $49.0 million of our investor debt securities outstanding. This amount included  $40.6 million of Class A Notes.  Our total Investor Debt outstanding at September 30, 2014 represented an increase of $1.3 million, or approximately 3%  from the $47.7 million total of our Investor Debt outstanding at December 31, 2013. 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.”

 

At September 30, 2014 and December 31, 2013 and 2012, the balances of our outstanding Investor Debt were as follows: (dollars in thousands):

 

 

 

 

At September 30, 2014, our investor notes had future maturities during the twelve month period ending September 30 as follows (dollars in thousands):

 

 

 

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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 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. Subordinated notes having various terms we have sold and may sell from time to time to ministries, ministry-related organizations, and individuals who 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. We offer these notes from time to time to accredited investors. Their payment is subordinated to all of our other current and future debt.

 

Secured Notes. Secured certificated debt obligations we have sold and may sell from time to time to ministries, ministry-related organizations, and individuals who 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. The payment of these obligations is secured by a pool of our mortgage loans.

 

International Notes. Unsecured general obligation notes having various terms we have sold and may sell from time to time in offshore transactions to individuals who are not residents of, or present in, the United States at the time they purchase their note.

 

Members’ Equity

 

Our Members contribute equity capital to our Company through contributions for their membership interests. Total Members’ equity was $9.3 million at September 30, 2014. 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, 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. 

 

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Regulation

 

General

 

We are organized as a credit union service organization and, as a result, are subject to the regulations promulgated by the 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 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

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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, 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. Because many of the implementing regulations have yet to be written by various regulatory agencies, we cannot give any assurances that the Dodd-Frank Act will have no material effect on our business.

 

Our wholly-owned broker-dealer firm, Ministry Partners Securities, LLC, commenced limited operations in the first quarter of 2012. On September 24, 2012, MP Securities received a no objection letter from FINRA, thereby authorizing the Company to act as a selling agent for the Company’s Class A Notes offering that is offered under a registration statement declared effective by the U.S. Securities and Exchange Commission (“SEC”) on October 11, 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

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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 several, but not all of the States.

 

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. Because MP Securities acts as a selling agent for the Company’s Class A Notes offering that is sold under a registration statement filed with the SEC, FINRA must approve MP Securities’ participation in this public offering. 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.

 

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-eighth of it aggregate indebtedness as defined under FINRA Rule 15c3-1(k)(2)(ii).

 

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

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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 Investment Corporation®”, “Ministry Partners and design®”,  “Ministry Partners Investment Company, LLC Joy in Investing”, “Ministry Partners Securities, LLC”, and “Ministry Partners Investment Company and Design” 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.

 

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, the majority of our Mortgage Loans 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.

 

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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

 

Our in-house staff, operational systems, and underwriting resources have enabled us to originate, underwrite and service our mortgage loan investments. From time to time, we also purchase mortgage loans and loan participation interests from other financial institutions, including ECCU. 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 originated $9.7 million in loans during the nine months ended September 30, 2014. We originated $32.7 million in loans during the year ended December 31, 2013, as compared to $9.7 million and $4.7 million in loans during the years ended December 31, 2012 and 2011, respectively. As a result of the efforts of our lending professionals, the Company now has the capacity, capability and underwriting experience to originate substantially all of our mortgage loan investments. In 2013, we also purchased $1.1 million in loans from ECCU. In 2012, we purchased $3.3 million in mortgage loans from ECCU as well as $9.1 million in mortgage loans and mortgage loan participations from other financial institutions.

   

Servicing

 

Beginning in 2010, when we implemented a new core processing system, we have serviced an increasing number of our own loans. As of September 30, 2014, we were servicing 115 loans totaling approximately $107.1 million in loan principal amount, compared to 107 loans we serviced at December 31, 2013 having an approximate principal amount of $112.5 million and the 60 loans we serviced as of December 31, 2012 totaling $77.2 million in principal. Even accounting for the cost of adding new staff and systems to increase our loan servicing capacity, we expect to achieve significant decreases in costs by servicing our loan portfolio over the next several years. 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 nine loans during the nine months ended September 30, 2014, which resulted in $31 thousand in gains on loan sales. We also recognized  $75 thousand in servicing fee income during the nine months ended September 30, 2014. We sold participations in four loans during the year ended December 31, 2013, which resulted in $54 thousand in gains on loan sales and $63 thousand in servicing fee income. Our technology

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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 additional capabilities, we believe we will be able to continue to expand our loan servicing capabilities.    

 

We have also entered into a servicing agreement with ECCU for certain of our mortgage loan investments. As of December 31, 2013, ECCU serviced 26 loans for us having an approximate total principal amount of $33.0 million. This was a decrease from the 59 loans ECCU serviced for us as of December 31, 2012, having an approximate total principal amount of $76.1 million. As of September 30, 2014, ECCU was servicing 21 loans having an approximate total principal amount of $27.5 million. We also own approximately $2.9 million in mortgage loan investments which are being serviced by America’s Christian Credit Union, a Glendora, California based credit union.

 

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 90% 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 90%. As of September 30, 2014, we did not have any construction loans outstanding.

 

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 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. 

 

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Due to our enhanced ability to originate and service our own loans, our investment in loan participations has been significantly reduced. As of September 30, 2014, approximately $23.7 million, or 17% of our total loan portfolio, consisted of loan participations we purchased from other financial institutions, including ECCU. For the year ended December 31, 2013, approximately $28.7 million, or 19% 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 September 30, 2014, we had $155 thousand in unfunded line of credit commitments.

 

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 September 30, 2014, we had $1.9 million in outstanding letter of credit commitments.

 

Our Loan Policies

 

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 an Investment 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.

 

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:

 

 

 

 

 

 

 

 

 

Of the 19 loans that were out of compliance at September 30, 2014,  seven were approved as exceptions by our Board of Managers or our Loan Investment Committee, one loan was purchased before the current policy was adopted, and one loan was purchased by MPF under a different policy that existed for MPF at the time and was subsequently transferred to us as part of the liquidation of one of our credit facilities.  The remaining 10 loans

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migrated out of compliance solely due to a decline in our tangible net worth in the years since the loans were purchased or originated, which was mainly the result of increased provisions for loan losses.  Although the risk presented by these 10 loans will be mitigated by increasing our tangible net worth through generating consistent net profits for our equity owners, our lending team began to focus on originating smaller loans in 2013, has done so through the first nine months of 2014, and plans to continue to do so in the future.  We have also used loan participation sales to reduce the risk of originating relatively large loans.    

 

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 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.

 

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Our cash and loan investments for the nine months ended September 30, 2014 and the years ended December 31, 2013 and 2012 are set forth below:

 

 

 

 

Set forth below are the amounts invested in each loan category at September 30, 2014, December 31, 2013 and 2012, respectively (dollars in thousands):  

 

 

 

 

At September 30, 2014, 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 nine months ended September 30, 2014 and the years ended December 31, 2013 and 2012.

 

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Loan Maturities

 

The following table sets forth the future maturities of our Mortgage Loan portfolio at September 30, 2014:

 

Included in the table above are 82 adjustable rate loans.  These loans, totaling approximately $72.5 million, are due in 2021 or later.

 

Diversification of Our Mortgage Loan Portfolio

 

The following table sets forth, as of September 30, 2014, December 31, 2013 and 2012, 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:

 

 

 

 

 

 

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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 the first nine months of 2014 and during 2013, we entered into loan participation agreements to sell $6.3 million and $9.9 million, respectively, of loan participations to several credit unions.  We did not sell any loan participations during the year ended December 31, 2012.

 

Performance and Monitoring of Our Loan Portfolio

 

Non-performing loans are closely monitored on an ongoing basis as part of management’s 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 or the present value of projected future cash flows.

 

As of September 30, 2014, 21 of our 139 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 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

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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 and recorded two additional charge-offs in 2012.  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.

 

Delinquent Loans

 

When the U.S. encounters adverse economic conditions, credit contractions and declining real estate values, 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. We have adopted a proactive approach in responding to delinquencies in our loan portfolio. 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 circumstances we deem appropriate, we negotiate a work-out of the delinquent mortgage with the borrower. When an acceptable work-out 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. As of December 31, 2013, ECCU has initiated a foreclosure action on one mortgage loan in which we hold a participation interest, representing $817 thousand in outstanding indebtedness. Since inception, we have had eight mortgage loan investment losses that resulted in charge-offs, three of which occurred during the year ended December 31, 2013.  As of September 30, 2014, we had seven real estate owned properties with a net value of $5.5 million, which includes a valuation allowance of $899 thousand on the properties.

 

Due to adverse economic conditions in the U.S., many churches have been 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. In 2009 and 2010, we experienced fluctuating but generally increasing rates in delinquencies on our mortgage loan investments. During 2011 and 2012, delinquency rates decreased, settling on 2.11% at December 31, 2012. Delinquencies increased slightly in 2013 to 3.02% at December 31, 2013, primarily due to $3.7 million in loans that went delinquent in December.  The delinquency rate decreased to 1.40% at September 30, 2014.    

 

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

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years, there have been no material changes in our practices or policies governing how we handle a non-performing loan.

 

The following is a summary of our non-performing mortgage loans at September 30, 2014, December 31, 2013, and 2012, respectively (dollars in thousands):

 

 

 

We had eleven nonaccrual loans as of September 30, 2014, twelve non-accrual loans as of December 31, 2013, and eleven non-accrual loans at December 31, 2012. For the nine months ended September 30, 2014, $455 thousand of our gross interest income would have been recorded had the non-accrual loans been current in accordance with their terms. For the years ended December 31, 2013 and 2012, $621 thousand and $915 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 $21 thousand, $82 thousand and $67 thousand, respectively, was included in income for the nine months ended September 30, 2014 and the years ended December 31, 2013 and 2012 on non-accrual loans through the accretion of loan discount related to the net present value of cash flows. We monitor our 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 September 30, 2014, December 31, 2013 and 2012, the Company did not have any loans past due 90 days and still accruing.

As of September 30, 2014, we held a 64.8% loan participation interest in a $4.17 million bridge loan we acquired from ECCU. ECCU provided bridge financing to an Illinois church which enabled the church to refinance its existing mortgage and pay certain construction site costs that had been completed prior to the funding of the mortgage refinancing transaction (the “Rockford Refinance Transaction”). After the refinancing transaction had been consummated, a contractor filed a claim for a mechanics lien and filed a multi-count complaint for damages and foreclosure against ECCU.  ECCU has filed a Counter-claim for Mortgage Foreclosure and other relief relating to a parcel of real estate on which the church is located.

Because the contractor had entered into a Construction Agreement with the church which pre-dated the recordation of the ECCU mortgage dated March 4, 2008, the contractor has alleged that its mechanics lien is in a first priority position with respect to the church parcel and has priority over ECCU’s mortgage interest.  ECCU has vigorously contested the contractor’s foreclosure claim and has asserted that the bridge financing transaction was consummated for the purpose of refinancing prior existing mortgages on the parcel, payoff certain pre-construction costs that had been completed prior to funding the loan and provide bridge financing to the church

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until a permanent loan was agreed upon.  By providing the church with a mortgage refinancing loan, ECCU asserts that it is entitled to priority over the mechanics lien under Illinois court decisions which apply the doctrine of equitable subrogation, thereby enabling the lender that advances money to pay someone else’s debt for which there exists a lien, to step into the shoes of the prior secured lender with the expectation of receiving an equal lien in priority in the secured asset.

 

In its initial Memorandum Decision and Order dated December 27, 2013, the Circuit Court of the 17th Judicial Circuit of Illinois ruled that the contractor’s Motion for Summary Judgment as to the priority of its mechanics lien was granted and deemed to have priority over ECCU’s mortgage. On May 2, 2014, ECCU filed a Motion to Reconsider the Court’s Order Regarding Priority of Liens and on June 26, 2014, the Court heard arguments from counsel and reviewed briefs and memoranda submitted by the parties.  In its ruling, the Court granted ECCU’s Motion to Reconsider, vacated its prior Order and Opinion and further denied Motions for Summary Judgment filed by both ECCU and the contractor. The Court further noted that genuine issues of fact remain unresolved and set a hearing date to establish a discovery schedule. Because the Company holds a 64.8% loan participation interest in the church parcel that is the subject of the Illinois foreclosure proceedings, the Company has carefully monitored the value of the church facility which serves as collateral for the ECCU mortgage loan. The Company also holds a 64.8% partial REO interest in four other properties which were the subject of separate foreclosure actions filed by ECCU against the church. The Company has taken $292.6 thousand in provisions for loan losses against the primary church parcel that is the subject of the Illinois foreclosure proceedings and has taken an additional $629.3 thousand in provisions for losses against four partially owned REO properties it holds that were successfully foreclosed upon by ECCU.

 

While the Company has been advised by ECCU that it believes there is a substantial basis for its priority claim and reasonable possibility for obtaining a successful outcome in the Illinois foreclosure proceedings, ECCU has also advised the Company that it believes that the title insurance company and closing agent for the Rockford Refinancing Transaction should have a duty to indemnify ECCU for any loss that ECCU may suffer due to a ruling, if granted by the Court, that ECCU’s mortgage has lower priority than the mechanics lien recorded against the church facility.

 

Based upon our review of the litigation pleadings in the Illinois foreclosure action, title policy and related loan closing documents for the $4.17 million loan transaction, the Company believes, but can grant no assurances, that it will be able to recoup a substantial portion of the valuation allowances it has previously recorded against four partially owned REO assets that it obtained in foreclosure proceedings against the church and partial interest in the mortgage loan that is the subject of foreclosure proceedings relating to the church’s primary worship facility.

 

Since our inception in 1991, we have recognized $350 thousand in gains on sale of foreclosed assets.    As of September 30, 2014, our interest in real estate owned properties acquired in foreclosure proceedings is carried at a value of $5.5 million.

 

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 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. 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. 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

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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 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 September 30, 2014, December 31, 2013 and December 31, 2012 (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 delinquency and default rates we are currently experiencing, 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.

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Foreclosed Assets

 

As of September 30, 2014, foreclosed assets consist of six properties. One property was acquired during 2011 in satisfaction of a secured loan. The property had a carrying value of $1.4 million at December 21, 2012 and no valuation allowance has been required for this property. Four additional properties were acquired in August 2013 in partial satisfaction of a secured loan participation. These properties have a net carrying value of $1.1 million, which includes a $629 thousand valuation allowance. We acquired an additional property pursuant to a deed in lieu of foreclosure agreement during the nine months ended September 30, 2014. This property has a carrying value of $900 thousand, which includes a valuation allowance of $270 thousand. In July 2014, we acquired an interest in one property in satisfaction of a participation interest we held. This property has a carrying value of $2.1 million. 

 

On May 30, 2013, the Company originated two loans totaling $1.0 million to a third party for the sale of one property acquired in September 2012 as a result of a deed in lieu of foreclosure agreement the Company entered into with a borrower. The property was carried at a value of $959 thousand at the time of the sale. The Company recognized a $50 thousand net gain on the sale of real estate, and recorded a $41 thousand discount on the loans originated to fund the purchase of the property. The discount will be amortized into interest income over the life of the loans.

 

The Company acquired one property in March 2013 as a result of another deed in lieu of foreclosure agreement the Company entered into with a borrower. On September 4, 2013, the Company sold this property to a third party for $1.7 million in cash. The property had a carrying value at the time of sale of $1.5 million. We recognized $207 thousand as a net gain on the sale of foreclosed property.

 

An additional two properties were acquired in February 2012 in partial satisfaction of a secured loan, one of which was sold during 2013, and the other of which was sold in May 2014.  We recognized total net gains of $93 thousand on the sale of these properties.

 

Since 2011, when the Company completed its first foreclosure, it has recorded $1.0 million in provisions for losses on foreclosed assets and charged off $136 thousand in valuation allowances on foreclosed assets. The Company held $5.5 million, $3.3 million and $2.9 million of foreclosed assets at September 30, 2014, December 31, 2013 and December 31, 2012, 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. During the first nine months of 2014, we recorded $584 thousand as partial charge-offs against impaired loans. 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). Until 2011, we had never recorded a charge-off on our mortgage

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loan investments. As a result, we have a limited historical loss experience to assist us in assessing estimated future losses.

 

Our allowance for loan losses is monitored by our senior executive team by examining 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.  In implementing this monitoring, in March 2012 management refined its analysis of general reserves by segregating our loan portfolio into pools based on the risk rating of the loan and the position of the underlying collateral.

 

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 September 30, 2014, December 31, 2013 and December 31, 2012, our allowance for loan losses was $2.5  million, $2.9 million and $4.0 million, respectively, or 1.81%, 1.90% and 2.54%, 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 September 30, 2014.

 

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The following represents a breakdown of the components of our allowance for loan loss at September 30, 2014, December 31, 2013 and December 31, 2012 (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

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assets is not warranted. Assets that do not expose us to 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 September 30, 2014, we had 20 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 principal office space of approximately 4,970 square feet at 915 West Imperial Highway, Suite 120, Brea, California,  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 lease agreement includes one additional option to renew for five years.  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 and includes an option to extend the lease for an additional two year term.  For 2014, the base rent for this branch office will be $2,173 per month.

 

As of September 30, 2014, we have 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 $5.5 million at September 30, 2014, which includes total valuation allowances of $899 thousand.

 

 

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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”).

 

MARK G. HOLBROOK has served as Chairman of our Board since inception. Until February 17, 2011, Mr. Holbrook served as our Chief Executive Officer. Mr. Holbrook also serves as President and Chief Executive Officer of ECCU. He began his career with ECCU in 1975 and has served as its President since 1984. ECCU currently has assets under management of over $2.3 billion and more than 10,000 members in 50 states and 100 foreign countries. Mr. Holbrook has served as Chairman of the Board of Christian Management Association. He received his Bachelor of Arts degree from Biola University in 1973 and has completed post-graduate studies at Chapman College. Mr. Holbrook brings to our Board extensive experience in the credit union industry, a deep understanding of our business and our investments, and relationships with the credit unions which comprise our equity members.

 

JAMES H. OVERHOLT has served as our Chief Executive Officer and President since May 2014. He was previously appointed as our interim Chief Executive Officer in November 2013.  Mr. Overholt has over 30 years of experience serving as a senior executive officer in the insurance, investment banking, brokerage and financial services industry. Mr. Overholt began his career at Harris Bank, a Chicago based bank that merged with and into the Bank of Montreal. During his 18 year term with Harris Bank, Mr. Overholt supervised and managed the bank’s underwriting, its investment banking division, primary securities dealer and discount brokerage operations. After Harris Bank’s merger with the Bank of Montreal, Mr. Overholt continued to serve in Chief Executive positions at major firms such as Wachovia Securities and Great Western Financial.  At Great Western, he was appointed to head their nationally ranked Securities Company, and later named to the additional posts of Chief Executive of their Insurance Company and Chief Executive of their Capital Management Company.  From 2006 through 2010, Mr. Overholt also served as Chief Operating Officer, then later President and Chief Executive Officer, at Strongtower Financial, a Fresno, California based broker dealer and investment advisory subsidiary of the California Baptist Foundation that specialized in providing direct lending and other financing solutions for churches and ministries.

 

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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). 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.

 

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 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.

 

ARTHUR G. BLACK has served as a member of our Board since 1997 and is retired. He served as Chairman of the Board of Directors for Haven Ministries from 2002 to 2012. Mr. Black served as Director of Ministry Support for Ambassador Advertising Agency from 1998 to 2007. He served as founding Executive Vice President of Truth For Life from 1994 to 1997 and served as director of U.S. broadcasting for Insight For Living from 1993 to 1994. He was Executive Vice President & COO for Solid Rock Radio from 1991 to 1993. He was the managing Director of the Biola Hour from 1981 to 1991. Mr. Black began his career in Christian ministry management with Biola University, joining that staff in 1974. Prior to that, he served in various corporate sales and marketing management positions and was for six years owner/President of two consumer product/service companies. He was a General Partner for Rancho Sierra Acres, Christian Investors, P/L Properties and Ocean

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View Investors covering a cumulative period of 30 years beginning in 1980. Mr. Black has completed the equivalent to two years of business courses towards a degree in business at UCLA. Mr. Black’s long history of working for and with evangelical ministries provides us with keen insights into the needs and operations of the ministries who are our borrowers and investors. Mr. Black serves as Chairman of our Investment Committee.

 

JULI ANNE S. CALLIS has served as a member of our Board since 2007. She is currently President and Chief Executive Officer of the National Institute of Health Federal Credit Union. Prior to her current engagement, 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. She 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 and is also a member of our Executive 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, KS. B&I is a non-bank affiliate of Valley View Bancshares and its seven local community banks and 48 branches. Mr. Foresman has been serving Missouri and Kansas as a financial advisor since 1989 and has managed and owned financial advisory/marketing firms specializing in working with credit unions and community banks over the last seventeen years. Mr. Foresman attended Missouri State University and is currently studying for additional financial designations from the American College in Bryn Mawr, PA. He has been a member of the National Association of Insurance and Financial Advisors, since 1997, Society of Financial Services Professionals since 2000, and is a member of the Kansas City, Kansas Chamber of Commerce. 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 Anh Quoc Duy Nguyen 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 in diverse areas of law, including business litigation, construction defect, 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 Investment Committee and Audit Committee.

  

R. MICHAEL LEE has served as a member of our Board since January 2009. 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

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One Federal Credit Union and Vice President of Sales for a national insurance agency.  In the insurance industry he spent 15 years in different position that lead him to managing a national sales force that served the needs of business owners. Mr. Lee currently serves on the boards of IL Credit Union Foundation and IL 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, Vice 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.

 

RANDOLPH (RANDY) P. SHEPARD has served as a member of our Board since January 2009. Mr. Shepard is currently the Senior Vice President/Investments and Subsidiary Companies of Western Federal Credit Union. Prior to assuming this position in 2003, Mr. Shepard was the Vice President and Chief Financial Officer of Western Federal Credit Union. He attended the University of Redlands and has a certificate of Executive Management from Claremont Graduate School. Mr. Shepard brings to our Board his long experience as both a Chief Financial Officer and a Chief Investment Officer of a large financial institution, providing deep knowledge of accounting, finance and credit subjects. Mr. Shepard serves as the Chairman of our Audit Committee and qualifies as a financial expert as defined in Item 401(e) of Regulation S-K.

 

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.

 

The Board has elected Mr. Holbrook as our chairman every year since our inception in 1991. 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. 

 

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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 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. No compensation was paid in 2013; however, we have accrued this compensation in Other Liabilities to be paid out in 2014. 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, 2013 and 2012 by our senior executive officers. Mr. Dodson was appointed President by the Board effective May 8, 2006.  Mr. Dodson was appointed Chief Executive Officer by the Board effective May 12, 2011. On October 2, 2013, Mr. Dodson resigned his positions as President and Chief Executive Officer of the Company and its subsidiaries. Van Elliott was appointed by the Board to serve as Manager-in-Charge until a new Chief Executive Officer was appointed. On November 7, 2013, James Overholt was appointed as interim Chief Executive Officer.  In May 2014, Mr. Overholt was appointed as full-time President and Chief Executive Officer.

 

Summary Compensation Table

Annual Compensation

 

 

 

 

 

 

(1) Mr. Holbrook is a full-time employee of ECCU. During his tenure on the Board, Mr. Holbrook has 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.  Mr. Shepard was not compensated for his services on the Board during the last three years.

 

(3) We contributed an aggregate amount of $42,599 for Mr. Dodson's 401(k) retirement plan, long-term retirement, medical benefits and life and disability insurance for 2012.   We also contributed an aggregate amount of $22,641 for Ms. Reilly's 401(k) retirement plan, medical benefits and life and disability insurance for 2012.  We contributed an aggregate amount of $28,037 for Mr. Woodall's 401(k) retirement plan, medical benefits and life and disability insurance for 2012.

 

(4) We contributed an aggregate amount of $22,742 for Ms. Reilly's 401(k) retirement plan, medical benefits and life and disability insurance for 2013.  We contributed an aggregate amount of $28,849 for Mr. Woodall's 401(k) retirement plan, medical benefits and life and disability insurance for 2013.

 

(5) 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.

 

(6) We contributed an aggregate amount of $35,815 for Mr. Dodson’s 401(k) retirement plan, medical benefits and life and disability insurance for 2014.  We also accrued $196,355 as part of a severance agreement reached with Mr. Dodson after he resigned.  In 2014, we paid $13,867 in medical benefits expenses as part of the severance agreement.

 

(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.

 

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 September 30, 2014, 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.

 

 

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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, 2013, as well as the following:

 

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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.

 

OVERVIEW

 

We were incorporated in 1991 as a credit union service organization and we invest in and originate mortgage loans made to evangelical churches, ministries, schools and colleges.  Our loan investments are generally secured by a first mortgage lien on properties owned and occupied by evangelical churches, schools, colleges and ministries.  We converted to a limited liability company form of organization on December 31, 2008.

 

The following discussion and analysis compares the results of operations for the three month periods ended September 30, 2014 and September 30, 2013 and should be read in conjunction with the accompanying financial statements and Notes thereto.

 

Results of Operations

 

Three Months Ended September 30, 2014 vs. Three Months Ended September 30, 2013 

 

 

 

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During the three months ended September 30, 2014, we reported net income of $44 thousand, which was a decrease of $239 thousand over the third quarter  of 2013.  The decrease in net income from the third quarter of 2013 is primarily attributable to a decrease in the average yield on our interest earning assets as well as an increase in provisions for loan losses and net foreclosed asset expenses.  These factors were offset by a decline in non-interest expenses for the quarter as compared to the previous year’s quarter ended September 30, 2013.  During the 3rd quarter of 2013, the Company accrued discretionary bonus accruals for its management and staff based upon the Company’s achievement of profitability motives for the year.  For the quarter ended September 30, 2014, the Company accrued no bonus expenses.  The Company recorded a profit for the 3rd quarter of 2014 primarily due to this reduction in non-interest expense and core profitability of its mortgage loan investments.

 

As compared to the third quarter of 2013, interest income decreased by $287 thousand as a result of a decrease in the mortgage loan assets held in our loan portfolio as well as a decrease in the yield earned on our interest-earning assets (see “Management’s Discussion and Analysis of Financial Conditions and Results of Operations - Net Interest Income and Net Interest Margin” below for additional discussion).  Our average interest-earning loans decreased by $4.2 million from the three months ended September 30, 2013 as compared to the three months ended September 30, 2014.  This decrease occurred due to several loan participation sales made during the quarter, as well as replacement loan fundings that were delayed until the fourth quarter of 2014.  We also earned additional interest during the third quarter of 2013 related to accelerated amortization of deferred fees from loan sales, interest payments on non-collateral dependent loans, and the amortization of discounts on troubled debt restructurings.  Several of these loans have since been reclassified as collateral dependent and, as such, do not earn interest.  Interest income earned on interest-bearing accounts with other institutions decreased solely due to a decline in the yield on those assets.  

 

Total interest expense decreased by $41 thousand as compared to the third quarter of 2013 primarily due to the decrease in the average balance of borrowings from financial institutions from $101.3 million for the three months ended September 30, 2013 to $97.8 million for the three months ended September 30, 2014. These borrowings decreased due to regular monthly principal payments on our primary credit facility as well as a $2.5 million dollar paydown in September 2014 to remain compliant with the collateralization requirements on our borrowings required by the facility. The interest paid on our investor notes has also decreased, but this is due to the decrease in the average rates paid on these notes (see “Management’s Discussion and Analysis of Financial Conditions and Results of Operations Net Interest Income and Net Interest Margin”).  The average balance of investor notes has increased since the three months ended September 30, 2013, as we have facilitated the transition of the marketing and sale of our investor notes to our wholly-owned subsidiary, MP Securities. MP Securities sold $3.6 million of our debt securities to new investors during the quarter, and as a result, our note balances have increased by $1.4 million since December 31, 2013.

 

For the three month period ended September 30, 2014, net interest income decreased by $246 thousand, or 19%, from the three month period ended September 30, 2013.  Net interest income after provision for loan losses decreased by $446 thousand for the quarter ended September 30, 2014 over the three months ended September 30, 2013.  For the quarter ended September 30, 2014, we recorded a provision for loan losses of $15 thousand, compared to recording a credit for loan losses of $185 thousand for the three months ended September 30, 2013.  Our provision was related to a troubled debt restructuring we performed during the third quarter, while the credit in the prior year was related to a principal payment made on one of our impaired loans, as well as a reduction in general reserves. 

 

We had other income of $92 thousand in the third quarter of 2014 primarily due to $38 thousand in advisory fees and commissions earned by MP Securities, $27 thousand in servicing fee income, and $25 thousand in gains on loan sales.  MP Securities’ income has increased by $34 thousand over the third quarter of 2013 as we have increased the services provided by our broker-dealer subsidiary.  Hiring a new investment advisor at MP Securities has also allowed us to expand its client base.  In addition, servicing fee revenue has increased by $10 thousand from the third quarter of the prior year due to selling $6.4 million in loan participations over the last twelve months.  While we earned $25 thousand in additional gains on loan sales during the third quarter of the

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prior year, the increase in MPS activity and loan servicing during the three months ended September 30, 2014 led to an increase in other income of $16 thousand from the three months ended September 30, 2013. 

 

Non-interest operating expenses for the three months ended September 30, 2014 decreased by $194 thousand over the same period ended September 30, 2013, a decrease of 15%.  This decrease is due to a decrease in salaries and benefits expenses of $303 thousand as we recorded a large bonus accrual in the third quarter of 2013 that we did not accrue for the three month period ended September 30, 2014.  We also recorded $66 thousand less in professional fees, mainly due to significant consulting expenses incurred during the third quarter of 2013 related to the resignation of our former Chief Executive Officer.  These decreases were offset by $184 thousand in additional net foreclosed asset expenses.  While we realized $206 thousand in gains on the sale of foreclosed assets during the third quarter of the prior year, we did not sell any foreclosed assets during the third quarter of 2014.  In addition, we incurred expenses related to the management of our foreclosed assets during the three months ended September 30, 2014, as compared to the three month period ended September 30, 2013.

 

Nine months ended September 30, 2014 vs. Nine months ended September 30, 2013

 

 

During the nine months ended September 30, 2014, we reported a net loss of $530 thousand, which was a decrease of $1.1 million over the first three quarters of 2013. Our loss in 2014 is primarily attributable to provisions for loan losses and provisions for losses on foreclosed assets taken during the second quarter of 2014. 

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For our real estate owned assets, we regularly evaluate these properties to ensure that the recorded value is supported by its current market value.  If the property has declined in value, a charge to foreclosed asset expense is made.  When the foreclosed property is sold, a gain or loss is recognized for the difference between the sales proceeds and the carrying amount of the property. We have also experienced a decrease in net interest income as our interest-earning assets have decreased from prior year, and the yield earned on those assets has also declined. 

 

The decrease in our total interest income as compared to the prior year is due to a decrease in the balance of our loan portfolio, a decrease in the yield on our assets, and a decrease in the average balance of cash held in interest-earning accounts with other financial institutions.  Our average interest-earning loans decreased by $4.7 million from the nine months ended September 30, 2013 as compared to the nine months ended September 30, 2014.  This decrease has occurred due to several loan participation sales during the year, as well as replacement loan fundings that were delayed until the fourth quarter of 2014. In addition, the yield on loans has declined as several of our non-collateral dependent restructured loans, which earn interest on a cash basis and through discount amortization, have been reclassified as collateral dependent and are no longer earning interest.  The average balance in interest-earning accounts decreased by $2.1 million from the prior year, resulting in a decrease of $35 thousand in the interest earned on these accounts.

 

Total interest expense decreased by $192 thousand as compared to the first three quarters of 2013 primarily due to the decrease in the average balance of notes payable from $49.1 million for the nine months ended September 30, 2013 to $47.5 million for the nine months ended September 30, 2014.  Our institutional borrowings have also decreased as we have made regular monthly principal payments and a $2.5 million additional principal paydown during the nine month period ended September 30, 2014.  The $1.6 million decline in the average balance of our investor notes outstanding at September 30, 2014, as compared to September 30, 2013, was primarily due to investor suitability restrictions which prevented a significant number of our Class A Note investors from making additional investments in these notes.  Certain suitability and concentration limits imposed by FINRA rules and our Class A Notes Prospectus restrict the ability of some of our current investors to renew or make investments in our Class A Notes. We have focused our efforts on marketing these debt securities to new investors.  Our wholly-owned subsidiary, MP Securities, has assumed responsibility for the sale and marketing of our investor notes, which has substantially increased sales of our debt securities to new investors and, as a result, we experienced an increase in note sales during the second and third quarters of 2014, resulting in an increase in the notes payable balance of $1.4 million as compared to December 31, 2013.

 

For the nine month period ended September 30, 2014, net interest income decreased by $209 thousand, or 6%, from the nine month period ended September 30, 2013.  Net interest income after provision for loan losses decreased by $622 thousand for the nine months ended September 30, 2014 over the nine months ended September 30, 2013.  In the first half of 2014, we recorded a provision for loan losses of $236 thousand, compared to recording $177 thousand in credits for loan losses for the nine months ended September 30, 2013.  Our provision was primarily the result of recording specific reserves on one loan participation interest that became collateral dependent during the second quarter of 2014.  A new appraisal on the property securing this loan revealed that the collateral value on the loan was below our recorded investment.  Our review of the other impaired loans in our portfolio did not reveal the need to record additional provisions for loan losses.  Conversely, we recorded credits for loan losses during the nine months ended September 30, 2013 as we reduced general reserves and received a large principal paydown on one of our collateral dependent loans.

 

We received other income of $202 thousand in the first three quarters of 2014 primarily due to $85 thousand in advisory fees and commissions earned by MP Securities and $75 thousand in servicing fee income.  MP Securities’ income has increased by $62 thousand as compared to the first nine months of 2013 as we have increased the services provided by our broker-dealer subsidiary.  Hiring a new investment advisor at MP Securities has also allowed us to expand the client base it serves.  Servicing fee revenue has increased by $34 thousand from the prior year due to selling $6.4 million in loan participations over the last twelve months.  These factors, along with gains on loan sales of $31 thousand and lending fee income of $11 thousand led to a total increase in other income of $72 thousand from the prior year. 

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Non-interest operating expenses for the nine months ended September 30, 2014 increased by $524 thousand over the same period ended September 30, 2013, an increase of 15%.  This increase is due entirely to an increase in net foreclosed asset expenses of $984 thousand.  While we earned $59 thousand in additional rental income from our properties, and had $108 thousand less in repair and maintenance expenses due to the recovery of some prior expenses through insurance, we recorded $899 thousand in provisions for losses on our foreclosed assets. Due to a lack of buyer interest in four of our properties, the listing prices on these assets were reduced, causing us to record reserves to account for the lowered prices.  We may experience additional declines in our foreclosed assets depending on the market’s response to the new listing prices.  Offsetting the increase in foreclosed assets expense was a $301 thousand decrease in salaries and benefits expense that was primarily due to a decrease in bonus accruals in 2014 as the Company has experienced year to date net losses.  Legal and accounting fees decreased by $109 thousand as we experienced increased fees in 2013 related to the sale of one of our foreclosed assets, as well as consulting fees related to engaging an Interim Manager in Charge after the departure of our former Chief Executive Officer. 

 

Net Interest Income and Net Interest Margin

Historically, our earnings have primarily depended upon the difference between the income we receive from interest-earning assets, which consist principally of mortgage loan investments and interest-earning accounts with other financial institutions, and the interest paid on our debt securities and credit facility borrowings. This difference is net interest income. Net interest margin is net interest income expressed as a percentage of average total assets.

 

The following table provides 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:

 

 

 

 

[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 $145.4 million during the three months ended September 30, 2014, from $149.6 million during the same period in 2013, a decrease of $4.2 million or 3%. The average yield on these assets was 5.97% for the three months ended September 30, 2014 as compared to 6.57% for the three months ended September 30, 2013. The average yield decrease is due mainly to additional deferred fee amortization related to a large loan participation sale made during the third quarter of 2013, which temporarily increased the loan yield for the quarter; the loans we sold during the third quarter of 2014 did not have nearly as much in related deferred fee amortization.  In addition, we experienced a decrease in the cash collected on non-collateral dependent impaired loans and on the amortization of discounts associated with troubled debt restructurings.  The increase in yield is also related to the decrease in the interest rates earned on interest-earning accounts held with other institutions.  We have transferred some of our cash to accounts with other institutions in order to reduce our concentration of funds held at ECCU.

 

Average non-interest earning assets increased from $9.9 million for the three months ended September 30, 2013 to $11.7 million at September 30, 2014.  This increase is due primarily to the reclassification of several loans to collateral-dependent status, in which interest payments are recorded as a reduction in principal rather than interest income.  Yield on average assets decreased from 6.23% for the three months ended September 30, 2013 to 5.53% for the three months ended September 30, 2014.

 

Average interest-bearing liabilities, consisting of notes payable and borrowings from financial institutions, decreased to $147.0 million during the three months ended September 30, 2014, from $149.0 million during the same period in 2013. The average rate paid on these liabilities decreased to 2.99% for the three months ended September 30, 2014, from 3.06% for the same period in 2013. This decrease is due primarily to a decrease in the rates paid on our Class A Notes, as the underlying rates for these notes have decreased by 25 basis points over the prior year.

 

Net interest income for the three months ended September 30, 2014, was $1.1 million, which was a decrease of $246 thousand, or 19%, for the same period in 2013.  Net interest margin decreased 56 basis points to 2.74% for the quarter ended September 30, 2014, compared to 3.30% for the quarter ended September 30, 2013.

 

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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 $144.9 million during the nine months ended September 30, 2014, from $151.7 million during the same period in 2013, a decrease of $6.8 million or 4%. The average yield on these assets decreased to 6.25% for the nine months ended September 30, 2014 from 6.33% for the nine months ended September 30, 2013. The average yield decrease is due mainly to additional deferred fee amortization related to a large loan participation sale made during the third quarter of 2013, which temporarily increased the loan yield for the quarter; the loans we sold during the third quarter of 2014 did not have nearly as much in related deferred fee amortization.  In addition, we experienced a decrease in the cash collected on non-collateral dependent impaired loans and on the amortization of discounts associated with troubled debt restructurings. 

 

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The yield on interest-earning loans for the nine months ended September 30, 2014 decreased to 6.60% from 6.73% for the nine months ended September 30, 2013.  Yield on average assets decreased from 5.93% for the nine months ended September 30, 2013 to 5.78% for the nine months ended September 30, 2014.

 

Average interest-bearing liabilities, consisting of notes payable and borrowings from financial institutions, decreased to $146.2 million during the nine months ended September 30, 2014, from $151.4 million during the same period in 2013. The average rate paid on these liabilities decreased to 3.00% for the nine months ended September 30, 2014, from 3.07% for the same period in 2013. This decrease is due primarily to a decrease in the rates paid on our Class A Notes, as the underlying rates for these notes have decreased by 25 basis points over the prior year.

 

Net interest income for the nine months ended September 30, 2014, was $3.5 million, which was a decrease of $210 thousand, or 6%, for the same period in 2013.  Net interest margin decreased 8 basis points to 2.98% for the nine months ended September 30, 2014, compared to 3.06% for the nine months ended September 30, 2013.

 

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

 

 

 

 

 

 

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Financial Condition

 

Comparison of Financial Condition at September 30, 2014 and December 31, 2013

 

 

General.  Total assets decreased by $4.6 million, or 3%, between December 31, 2013 and September 30, 2014.  This decrease was primarily due to a decrease in loans receivable. 

 

During the nine month period ended September 30, 2014, gross loans receivable decreased by $13.1 million, or 9%.  This decrease is due to the sale of $6.3 million in loan participations, the transfer of $3.3 million in loans to foreclosed assets, and the sale of $541 thousand in whole loans. We also experienced $12.9 million in principal paydowns and loan payoffs, however, these paydowns were offset by $9.7 million in new loan originations.

   

Our portfolio consists entirely of loans made to evangelical churches and ministries.  Approximately 99.9% of these loans are secured by real estate, while two loans that represent less than 0.1% of our loans are unsecured.  The loans in our portfolio carried a weighted average interest rate of 6.29% at September 30, 2014 and 6.33% at December 31, 2013.

 

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Non-performing Assets.  Non-performing assets consist of non-accrual loans, troubled debt restructurings, and six foreclosed assets, which are real estate properties.  Non-accrual loans include any loan that becomes 90 days or more past due 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 to their modified payment terms without exception for at least six months. 

 

Some non-accrual loans are considered collateral dependent.  These are defined as loans where the repayment of principal will involve the sale or operation of collateral securing the loan.  For collateral dependent loans, any payment of interest we receive 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 collateral dependent, we do not accrue interest income, but we recognize income on a cash basis.  We had eleven nonaccrual loans as of September 30, 2014 and December 31, 2013.  We hold a participation interest in one loan totaling $751 thousand for which ECCU acts as a lead lender and servicer which is involved in litigation relating to a mechanic’s lien claim made by a contractor.  We are continuing to monitor the litigation initiated by ECCU regarding this participation interest and have been advised by our lead lender that it believes it has reasonable grounds to support its claims to priority rights in the collateral and for recoveries, if necessary, against the title company and closing agent for this loan.  We have recorded an allowance of $292.6 thousand against this loan participation interest. 

 

Since June 2011, the Company has acquired 11 properties through foreclosure proceedings or by reaching Deed in Lieu of Foreclosure agreements with our borrowers. We have sold several of these properties and currently own or hold a partial interest in seven foreclosed assets.  One of these properties was acquired in January of 2014 pursuant to a Deed in Lieu of Foreclosure agreement.  This property has a net carrying value of $900 thousand, which includes a valuation allowance of $270 thousand.    We also acquired on property in July 2014 in satisfaction of a loan participation interest.  This property has a carrying value of $2.1 million.  No valuation allowance has been recorded on this property.  We have experienced $3.0 million in total charge-offs since June 2011.

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The following table presents our non-performing assets:

 

 

 

 

At September 30, 2014, we had ten restructured loans that were on non-accrual status.  One of these loans was over 90 days delinquent.  In addition, we had one non-restructured loan that was over 90 days past due.  As of September 30, 2014, we had seven foreclosed properties valued at $3.4 million, net of an $899 thousand total valuation allowance against the properties.

 

At December 31, 2013, we had eleven 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, 2013, we held six foreclosed real properties in the amount of $3.3 million, net of a $13 thousand valuation allowance against one of 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.

 

The process of providing adequate allowance for loan losses involves discretion on the part of management, and as such, losses may differ from current estimates.  We have attempted to maintain the allowance at a level which compensates for losses that may arise from unknown conditions.  At September 30, 2014 and December 31, 2013, the allowance for loan losses was $2.9 million.  This represented 1.8% of our gross loans receivable at September 30, 2014 and 1.9% of our gross loans receivable at December 31, 2013.   

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Borrowings from Financial Institutions.  At September 30, 2014, we had $94.8 million in borrowings from financial institutions.  This is a decrease of $5.1 million from December 31, 2013.  This decrease is the result of regular monthly payments made on both the MU Credit Facility and the Wescorp Credit Facility Extension as well as a $2.5 million principal payment made to remain compliant with the collateralization requirements on the facilities. 

 

Notes Payable.  Our investor notes payable consist of debt securities sold under a registered national offering as well as notes sold in private placements.  These investor notes had a balance of $49.0 million at September 30, 2014, which was an increase of $1.4 million from December 31, 2013.  While we sell our Class A Notes through our wholly-owned affiliate, MP Securities, these note sales are subject to certain suitability requirements imposed by FINRA rules  that restrict the ability of some of our current investors to renew or make investments in the notes.  Marketing efforts from sales personnel at MP Securities have expanded our customer base and resulted in new Class A Note sales.  We have also increased sales efforts for our special note offerings and Series 1 Subordinated Capital Notes.  We anticipate the growth of our note sales to continue as we hire additional sales personnel.

 

Members’ Equity.  Total members’ equity was $9.3 million at September 30, 2014, which represents a decrease of $598 thousand from $9.9 million at December 31, 2013.  This decrease comprises $527 thousand in net losses for the nine months ended September 30, 2014 and $71 thousand of dividends related to our Series A Preferred Units, which require quarterly dividend payments.  We are also required to make a payment of 10% of our annual net income after dividends to our Series A Preferred Unit holders as we have experienced a net loss for the nine months ended September 30, 2014, there was no accrual for these payments have been made for the three month period ended September 30, 2014. We did not repurchase or sell any ownership units during the nine months ended September 30, 2014.

 

Potential Recoveries of Reserves Established for Loan Losses

 

During the nine months ended September 30, 2014, the Company established a valuation reserve of $899 thousand on four of its real estate owned properties and set aside an additional $207 thousand in provisions for loan losses on its mortgage loan investments.   Since 2009, the Company’s net earnings have been significantly impacted by provisions for loan losses, recoveries of reserves, and adjustments made to reserves for losses on foreclosed assets.  The Company believes, but can grant no assurances, that it will be able to successfully resolve a foreclosure litigation matter involving one of its real estate owned parcels that is subject to a mechanics lien claim made by a construction contractor against the lead lender in a foreclosure action involving one of our mortgage loan investments.

 

The Company holds a 64.8% loan participation interest in a $4.17 million church mortgage loan that is the subject of a mortgage foreclosure action filed by ECCU, which acts as the lead lender, originator and servicer of the loan.  ECCU provided bridge financing to a church which enabled the church to refinance its existing mortgage and pay certain construction site costs that had been completed prior to the funding of the mortgage refinancing transaction (the “Refinance Transaction”).  After the refinancing transaction had been consummated, a contractor filed a a mechanics lien and a multi-count complaint for damages and foreclosure against ECCU.  ECCU has filed a Counter-claim for Mortgage Foreclosure and other relief relating to a parcel of real estate on which the church is located.

   

Because the contractor had entered into a Construction Agreement with the church which pre-dated the recordation of the ECCU mortgage dated March 4, 2008, the contractor has alleged that its mechanics lien is in a first priority position with respect to the church parcel and has priority over ECCU’s mortgage interest.  ECCU has vigorously contested the contractor’s foreclosure claim and has asserted that the bridge financing transaction was consummated for the purpose of refinancing prior existing mortgages on the parcel, payoff certain pre-construction costs that had been completed prior to funding the loan and provide bridge financing to the church until a permanent loan was agreed upon.  By providing the church with a mortgage refinancing loan, ECCU

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asserts that it is entitled to priority over the mechanics lien under applicable court decisions which apply the doctrine of equitable subrogation, thereby enabling the lender that advances money to pay someone else’s debt for which there exists a lien, to step into the shoes of the prior secured lender with the expectation of receiving an equal lien in priority in the secured asset.

   

In its initial Memorandum Decision and Order dated December 27, 2013, the Court ruled that the contractor’s Motion for Summary Judgment as to the priority of its mechanics lien was granted and deemed to have priority over ECCU’s mortgage.  On May 2, 2014, ECCU filed a Motion to Reconsider the Court’s Order Regarding Priority of Liens and on June 26, 2014, the Court heard arguments from counsel and reviewed briefs and memoranda submitted by the parties.  In its ruling, the Court granted ECCU’s Motion to Reconsider, vacated its prior Order and Opinion and further denied Motions for Summary Judgment filed by both ECCU and the contractor. The Court further noted that genuine issues of fact remain unresolved and set a hearing date to establish a discovery schedule.  Because the Company holds a 64.8% loan participation interest in the church parcel that is the subject of the foreclosure proceedings, the Company has carefully monitored the value of the church facility which serves as collateral for the ECCU mortgage loan.  The Company also holds a 64.8% partial REO interest in four other properties which were the subject of separate foreclosure actions filed by ECCU against the church.  The Company has taken $292.6 thousand in provisions for loan losses against the primary church parcel that is the subject of the foreclosure proceedings and has taken an additional $629.3 thousand in provisions for losses against four partially owned REO properties it holds that were successfully foreclosed upon by ECCU.

 

ECCU has advised us that its attorneys believe that there is a substantial basis for its priority claim and reasonable possibility for obtaining a successful outcome in the foreclosure proceedings.  We have also been advised by ECCU that it believes that the title insurance company and closing agent for the Refinance Transaction has a duty to indemnify ECCU for any loss that ECCU may suffer due to an unfavorable ruling, if granted by the Court.

   

Based upon our review of the litigation pleadings in the foreclosure action, title policy and related loan closing documents for the $4.17 million loan transaction, the Company believes, but can grant no assurances, that it will be able to recoup a substantial portion of the valuation allowances it has previously recorded against four partially owned REO assets that it obtained in foreclosure proceedings against the church and partial interest in the mortgage loan that is the subject of foreclosure proceedings relating to the church’s primary worship facility.  If the Company is successful in resolving this claim, the Company will be able to recoup a substantial portion of the losses previously taken on these mortgage loan investments.

 

Liquidity and Capital Resources

 

September 30, 2014 vs. September 30, 2013

 

Maintenance of adequate liquidity requires that sufficient resources be available at all times to meet cash flow requirements of the Company. Desired liquidity may be achieved from both assets and liabilities. Cash, investments in interest-bearing time deposits in other financial institutions, maturing loans, payments of principal and interest on loans and potential loan sales are sources of asset liquidity. Sales of investor notes and access to credit lines also serve as sources of additional liquidity. The Company reviews its liquidity position on a regular basis based upon its current position and expected trends of loans and investor notes. Management believes that the Company maintains adequate sources of liquidity to meet its liquidity needs.  Nevertheless, if we are unable to continue our offering of Class A Notes for any reason, we incur sudden withdrawals by multiple investors in our investor notes, a substantial portion of our notes that mature during the next twelve months are not renewed, and we are unable to obtain capital from sales of our mortgage loan assets or other sources, we expect that our business would be materially and adversely affected.

 

The sale of our debt securities is a significant component in financing our mortgage loan investments.  We have increased our marketing efforts related to the sale of privately placed special offering notes and we believe that

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the sale of these notes will enable the Company to meet its liquidity needs for the near future.  The Company filed a new Registration Statement with the SEC to register $75 million of its Class A Notes that was deemed effective as of October 11, 2012, which would be replaced by this offering of $85 million of Class 1 Notes. We have also entered into a Loan and Standby Agent Agreement pursuant to a Rule 506 offering to sell $40.0 million of Series 1 Subordinated Capital Notes.  The Company is currently in the process of finalizing an offering of $80 million in Secured Notes.  This offering would be made under a Private Offering Memorandum in accordance with rule 506 of Regulation D.  The Company expects this offering to be finalized in December 2014.  By offering the Class 1 Notes and privately placed investor notes, the Company expects to increase its investment in mortgage loans and thereby generate increased interest income.  We also plan on selling participations in a portion of those mortgage loan investments.  The cash gained from these sales will be used to originate additional loan investments or to fund operating activities.  The Company does not have any amounts available to borrow under its MU Credit Facility or Wescorp Credit Facility.

 

Historically, we have been successful in generating reinvestments by our debt security holders when the notes that they hold mature.  During the nine months ended September 30, 2014, our investors renewed their debt securities investments at a 47% rate, which represented an increase from the 38% renewal rate over the nine months ended September 30, 2013.  The renewal rate dropped during the initial three month period after the SEC and FINRA approved our Class A Note offering in October 2012 as we began to implement the suitability requirements and overconcentration limits imposed on investors by FINRA rules and the terms of the Company’s Class A Notes Prospectus.  We have addressed the challenges imposed by FINRA’s suitability rule by offering other securities products to our investors, locating new investors for our Class A Notes and expanding the products and services that MP Securities will offer to our investors.   As a result, we have increased our renewal rate to an adequate level, and we have been able to broaden our investor base, identify eligible new investors and substantially increase the amount of funds raised from new investors in our debt securities..  Our notes payable balance increased by $1.4 million as compared to December 31, 2013.  Coupled with $5.7 million in loan participation sales, this has stabilized our liquidity.

 

The net increase in cash during the nine months ended September 30, 2014 was $5.9 million, as compared to a net increase of $624 thousand for the nine months ended September 30, 2013, an increase of $5.3 million. Net cash provided by operating activities totaled $118 thousand for the nine months ended September 30, 2014, as compared to net cash provided by operating activities of $455 thousand for the same period in 2013. This decrease in net cash provided by operating activities is attributable primarily to the paydown of other liabilities during 2014. 

 

Net cash provided by investing activities totaled $9.7 million during the nine months ended September 30, 2014, as compared to $8.3 million provided during the nine months ended September 30, 2013, an increase in cash of $1.4 million. This increase is related to a decrease in loan originations.  While we received $15.3 million less in cash from loan sales and paydowns, we used $18.1 million less in cash to originate or purchase loans during the nine months ended September 30, 2014.

 

Net cash used by financing activities totaled $3.9 million for the nine month period ended September 30, 2014, a decrease in cash used of $4.2 million from $8.1 million used in financing activities during the nine months ended September 30, 2013. This difference is primarily attributable to an increase in sales of our notes payable.  Cash used in paying down our borrowings from financial institutions increased as we made a $2.5 million principal paydown on our primary credit facility in September 2014. During the first nine months of 2013, we made $510 thousand in additional principal payments.

 

At September 30, 2014, our cash, which includes cash reserves and cash available for investment in mortgage loans, was $13.4 million, an increase of $5.9 million from $7.5 million, at December 31, 2013.

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Analysis of the Years Ended December 31, 2013 and December 31, 2012

 

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

 

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 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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On September 4, 2013 we sold one of our foreclosed assets for $1.7 million.  We recorded a gain on sale of $206 thousand related to this transaction.  We also recorded gains of an additional $139 thousand on the sale of two other properties during the year.  Further, we sold $9.9 million in loan participations throughout 2013, which resulted in gains on loan sales of $54 thousand and improved our liquidity position.  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. 

 

For the year ended December 31, 2013, we generated net income of $592 thousand.  The primary items affecting our operating performance were the following:

 

 

 

 

 

 

 

We expect to see continued improvements in our operating results for 2014 as we implement the core strategic objectives set forth above.  We expect to see further improvements in the performance and stability of our church and ministry borrowers.

 

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. 

 

During 2009, we deleveraged our balance sheet by making several principal reductions on our BMO Facility and paid off the facility on November 30, 2009.  In additional to regular principal payments, we have made several smaller principal reductions to our credit facilities since 2011.  Our total assets as of December 31, 2013 decreased to $158.4 million, as compared to $166.6 million at December 31, 2012.  Our total liabilities were $148.5 million at December 31, 2013, as compared to $157.1 million at December 31, 2012. 

 

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The following table sets selected measures of our financial performance for the years ended December 31, 2013 and 2012, respectively (dollars in thousands):

 

 

 

2013 Developments

 

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 Members United and BMO 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 and restate 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.

 

During 2013, we continued to take steps to develop capital funding sources that are not dependent on the sale of mortgage-backed securities or institutional credit facilities.  In 2012, our wholly-owned subsidiary, MP Securities, was registered under the Securities Exchange Act of 1934 and was approval for membership in FINRA.  In the first quarter of 2012, MP Securities launched its broker-dealer operations and began 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 the Company’s Series 1 Subordinated Capital Notes and 2013 International Notes, thus opening up additional product lines to enable the company to reduce dependence on our NCUA facilities.  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 RBC Capital 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. 

 

It is also able to expand its customer base by attracting seasoned Registered Representatives and Investment Adviser Representative.  Additionally, in March of 2013, the state of California approved the formation of Ministry Partners Insurance Agency, LLC. This enables the company to sell a variety of insurance products. The completion of these initiatives in 2013 creates a foundation that will enable MP Securities to expand its client base, as well as ours. The byproduct of this approach will be to increase funding through sales of our debt

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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.

 

Strengthen the Quality of our Loan Portfolio  

 

Despite competition for church and ministry loans from financial institutions that aggressively sought to make inroads into this niche market by enabling churches to refinance their mortgage loans at historically low interest rates, we originated $32.7 million in net loans in 2013.  We added one additional underwriter as well as an additional support staff person to assist in the origination process. As part of our strategic decision to reposition our loan portfolio, our originations consisted mainly of lower balance loans to smaller ministries where we could achieve more favorable yields and avoid deteriorating our margins while reducing our overall risk exposure to any one borrower.  Our average loan balance decreased from $1.3 million at December 31, 2012 to $1.1 million at December 31, 2013.  In addition, due to our focus on originating high quality loans, the weighted average risk rating in our portfolio decreased from 0.73% at December 31, 2012 to 0.56% at December 31, 2013. 

 

The real estate market for church and ministry properties showed significant improvement in 2012, as compared to the preceding year.  The performance of our mortgage loan portfolio for 2012 was consistent with this trend as we had no new delinquent loans at December 31, 2012.  However, while we saw continued improvement from some of these loans in 2013, we also experienced several new delinquencies.  Our delinquency rate increased from 2.2% at December 31, 2012 to 3.0% at December 31, 2013.  From time to time, borrowers who have previously been granted a mortgage modification may later default on their loan.  During 2013, four mortgage loans we had previously restructured defaulted. However, we have been able to work with the borrower in each situation and we have not initiated any new foreclosure proceedings.  We did reach a Deed in Lieu of Foreclosure agreement with a borrower in January 2014.

 

We continued to devote substantial attention and staff resources in 2013 on efforts to manage, restructure, liquidate or undertake foreclosure actions where necessary to protect our mortgage loan investments.  We were able to reach a Deed in Lieu of Foreclosure agreement with a borrower in May 2013.  We sold this property in September 2013 for a gain on sale of $206 thousand. We recorded a provision for loan losses of $9 thousand during the year ended December 31, 2013, as compared to a credit for loan losses of $9 thousand for the year ended December 31, 2012.   

 

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 the 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 two 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 in order 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 increasing net interest earned on those loans.  We now service 107 of the 138 loans in our portfolio.  Our loan participation activity resulted in increased revenue from loan servicing of $17 thousand, which we expect to grow further in 2014 as a result of loan participation sales during the second half of 2013.  We also continue to develop relationships with several credit unions and CUSOs to enhance our capacity to sell additional loan participations into the market for these participation interests.

 

As described above, in 2013, we continued our expansion of our broker dealer operations with the restructuring of existing staff and the addition of a seasoned Registered Representative who is also an RIA and CFP in our Fresno office.  By increasing the scope of the services it can offer, MP Securities is now able to recruit a sales

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forces 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.  This will enable us to earn additional fee-based income outside of our net interest.

 

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

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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.

 

Recent Accounting Pronouncements

 

Accounting Standards Update (ASU) No. 2013-02, Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income, requires entities to disclose additional information about items reclassified out of accumulated other comprehensive income (AOCI).  The ASU requires disclosures of changes of AOCI balances by component in the financial statements or the footnotes, and it requires significant items reclassified out of AOCI to be disclosed on the face of the income statement or as a separate footnote.  The ASU is effective for fiscal years and interim periods beginning after December 15, 2012.  The adoption of ASU 2013-02 did not have an impact on Company’s financial statements.

 

ASU No. 2013-11, “Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists”.  ASU No. 2013-11 eliminates the diversity in reporting an unrecognized tax benefit when a net operating loss carryforward or similar tax loss exists.  ASU No. 2013-11 requires, in most circumstances, that an unrecognized tax benefit, or a portion of an unrecognized tax benefit, should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward or similar tax loss.  The ASU will be effective prospectively for the Company for annual and interim periods beginning on January 1, 2014 and is not expected to have a material impact on the Company’s financial condition, results of operations, or cash flows.

 

Consolidated Results of Operations

 

Our Balance Sheet at December 31, 2013 and 2012

 

 

General.  The $8.2 million decrease in total assets from December 31, 2013 as compared to December 31, 2012 is due primarily to the scheduled principal paydowns on loans in our portfolio.  A large portion of these payments could not be used to fund additional loans due to a decline in Investor Debt, payments we made on our NCUA borrowings, and operating costs.

 

During the year ended December 31, 2013, gross loans receivable decreased by $6.7 million, or 4%, to $150.7 million from $157.4 million at December 31, 2012.  While we purchased or originated a total of $34.8 million in net loans receivable, we also experienced regular principal paydowns on our loan portfolio throughout the year and 13 mortgage loans totaling $18.4 million were refinanced with another lender or paid off.  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.  In addition, we sold one of our loans to ECCU at par, which represented $4.3 million in loans receivable, sold loan participations to other credit unions for $9.9 million, and transferred $4.3 million in gross loans to foreclosed assets.  While we anticipate selling additional loan participations during 2014, none of the loans currently in our portfolio are being held for sale; we generally sell loans very shortly after they are originated.

 

Our mortgage loan portfolio consists entirely of loans made to evangelical churches and ministries.  All but three of these loans are secured by real estate, while three loans that represents less than 0.1% of our portfolio are unsecured.  Our portfolio carried a weighted average interest rate of 6.33% at December 31, 2013, as compared to 6.36% at December 31, 2012.

 

Non-performing Assets.  Non-performing assets consist of non-accrual loans, restructured loans, and four 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.  Non-performing assets also include one troubled debt restructuring that has performed for six months but has not yet returned to its original terms.

 

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Some of our non-accrual loans are considered collateral-dependent.  A loan is construed to be collateral-dependent when the repayment of principal and interest is expected to come solely from the sale or operation of 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 12 non-accrual loans with a recorded balance of $17.6 million as of December 31, 2013, which represents one more non-accrual loans but with a recorded balance of $18.3 million at December 31, 2012.  In addition to completing foreclosure proceedings on some of the properties securing one loan participation interest in 2013, we entered into a Deed in Lieu of Foreclosure Agreement with one of our borrowers.  These two transactions resulted in the transfer of $3.2 million of net mortgage loan interests to real estate owned assets during the year ended December 31, 2013.

 

On January 31, 2013, we acquired a worship facility pursuant to a Deed in Lieu of Foreclosure Agreement.  The loan had a carrying value, net of discounts and specific reserves, of $1.2 million.  All reserves were charged off immediately prior to acquiring the property in the deed in lieu foreclosure transaction.  The property is now included in our financial statements with a value of $1.2 million.

 

The following table presents our non-performing assets:

 

 

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1  These loans are presented at the balance of unpaid principal less interest payments recorded against principal.

2  Includes $2.6 million and $814 thousand of restructured loans that were over 90 days delinquent as of December 31, 2013 and 2012, respectively.

 

At December 31, 2013, we had nine restructured loans that were on non-accrual status.  One of these loans was over 90 days delinquent.  We had two non-restructured loans that were over 90 days past due.  As of December 31, 2013, we held five foreclosed real properties in the net amount of $3.3 million, which includes a $13 thousand valuation allowance against one of the properties.

 

At December 31, 2012, we had eleven 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, 2012, we held four foreclosed real properties in the net amount of $2.9 million, which includes a $136 thousand valuation allowance against two of 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 qualitative factors in our analysis which are weighted based on the level of risk represented and for the potential impact on our portfolio. These factors include:

 

 

While we have not added any new qualitative factors in the analysis of our loan portfolio since 2009, in March 2012 we refined our analysis by segregating our loans into pools based on the position of the underlying collateral and the risk rating of the loan.  We modify the weight of the factors above depending on the risk associated with the pool.  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 management team is better able to assess the potential impact 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.  This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.  We evaluate the factors used in our general reserve analysis on a quarterly basis to ensure that we have adequately addressed the inherent risks present in our portfolio.

 

We also examine our entire loan portfolio monthly 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 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.

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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 September 2013, we received $206 thousand in principal payments on one of our collateral dependent impaired loans, which allowed us to reduce the specific reserves related to that loan.  We also improved the overall quality of our portfolio through loan originations, and our gross loan portfolio decreased, which resulted in a decrease in our general reserves.  We charged off $978 thousand in allowances related immediately prior to completing a Deed in Lieu of Foreclosure Agreement on the property securing two of our impaired loans.

 

The process of providing adequate allowance for loan losses involves discretion on the part of management, and as such, losses may differ from current estimates.  We have attempted to maintain the allowance at a level which compensates for losses that may arise from unknown conditions.  At December 31, 2013 and December 31, 2012, the allowance for loan losses was $2.9 million and $4.0 million, respectively.  This represented 1.9% and 2.5% of our gross loans receivable at those respective dates.   

 

 

 

1  We reversed $265 thousand of reserves against provision for loan losses during the year ended December 31, 2012 as a result of the sale of two impaired loans, which resulted in a net credit to provision expense.

 

Borrowings from Financial Institutions.  he decrease in borrowings from financial institutions is the result of regular monthly payments we made on our NCUA credit facilities as well as $510 thousand in additional principal payments made in order to remain in compliance with the minimum collateralization ratio requirements of our NUCA credit facilities.  The remaining balance on these facilities totals $103.8 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. 

 

Notes Payable.  Our notes payable consist of debt securities sold under registered national offerings as well as notes sold to accredited investors.  Sales of our notes are now being conducted by our wholly-owned subsidiary, MP Securities, which is a broker-dealer subject to regulation by FINRA. The principal balance owed on these notes decreased by $4.9 million during 2013 primarily due to a net reduction in the amount of our outstanding Class A Notes and a decrease in sales of our Special Offering Notes due to suitability restrictions placed by FINRA on our note sales. 

 

Members’ Equity.  Total members’ equity increased in 2013 due mainly to our net income of $592 thousand for 2013, offset by $197 thousand of dividend payments and net income distributions related to our Series A Preferred Units. We did not repurchase any ownership units during the years ended December 31, 2012 and 2013.

 

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Results of Operations for the Years Ended December 31, 2013 and December 31, 2012

 

 

 

 

In 2013, we recognized net income of $592 thousand due in large part to an increase in non-interest income and a decrease in non-interest expenses.  As further described below, the most significant factors influencing our consolidated results of operations for the year ended December 31, 2013, as compared to 2012 were:

 

 

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Interest income on our mortgage loan investments decreased by 5% from 2012.  While the average balance of our interest-earning loans decreased by 8% from $151.8 million for the year ended December 31, 2012, as compared to $140.4 million for the year ended December 31, 2013, we recognized additional interest income from deferred fees earned when we sold loan participations, improved collections on our non-collateral dependent loans, and a reduction in loan serviced by ECCU for which we receive lower interest rates.  Due to increased loan originations and our loan participation sales, the amortization of net deferred loan fees increased by $169 thousand.  Interest income recognized on interest-bearing accounts with other financial institutions decreased as our average cash balance declined from $13.2 million in 2012 to $10.0 million in 2013.

 

Interest expense on our borrowings decreased during the year due to principal payments made on our NCUA borrowings and a decrease in note balances.  The average balance of our borrowings from financial institutions decreased by $5.3 million from 2012 due to regular principal payments as well as $510 thousand of additional principal paydowns made during 2013.  The weighted average interest rates of our investor notes decreased slightly, but interest expense on our notes payable decreased mainly because the average balance of our notes declined by $8.4 million from 2012 to 2013.  Despite the 10% reduction in interest expense from 2012, the 6% decrease in interest income resulted in a 1% decrease in net interest income for the year.

 

We had a credit for loan losses of $9 thousand for the year ended December 31, 2012 as compared to a provision of $9 thousand for the year ended December 31, 2013. In 2013, we reduced our general reserves and reversed specific reserves on one impaired loan where the balance was paid down by $206 thousand.  However, we also recorded additional specific reserves for some of our impaired loans throughout the year, which resulted in the $9 thousand provision.  For 2012, we did not incur a material decrease in the value of the real estate properties that secured our collateral-dependent impaired loans.  As a result, we recorded no additional reserved for loan losses on these loans.  While we increased reserves on several of our troubled debt restructurings based on new estimates of future cash flows, these provisions were offset by a $265 thousand credit that was taken when we sold two impaired loans in May 2012 at a price greater than our carrying value of the loan.  Due to provisions and reduced net interest income, our net interest income after provisions decreased by $62 thousand.

 

We received other income of $168 thousand in the year ended December 31, 2013 which is an increase of $112 thousand from the year ended December 31, 2012.  We recognized $54 thousand in gains on loan sales related to the sale of participations in four loans during 2013.  We also earned $24 in fee income from the sale of investment products by our broker-dealer subsidiary.  We recognized $17 thousand in additional servicing fee income as we the amount of loan participations we service for others increased due to the participations sales during the year. 

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Our non-interest expenses for the year ended December 31, 2013 decreased by 3% from the year ended December 31, 2012. Salaries and benefits expenses increased by $535 thousand as we hired two additional employees in 2013 to help manage and grow our loan portfolio.  In addition, our Chief Executive Officer left in October 2013, and we reached an agreement to make $196 thousand in severance payments. We appointed an Interim Chief Executive Officer in November 2013.  With the Board of Managers approval, management also approved $183 thousand in bonuses for the year ended December 31, 2013, while $116 thousand were approved for 2012. Finally, management decided to compensate the members of our Board of Managers for their service.  $52 thousand was accrued for Board of Managers compensation during 2013.  We did not pay any compensation to the Board of Managers in previous years.  Office operation expenses decreased by $203 thousand primarily due to reduction in human resources costs related to our new staffing agreement with ADP and fewer expenses related to managing our delinquent loans.

 

Net expenses related to foreclosed assets decreased by $400 thousand during 2013.  We acquired five new real estate assets during 2013, and while this caused rental income from foreclosed assets to increase by $31 thousand, the costs of managing foreclosed assets increased by $100 thousand.  However, we sold three properties during 2013 for a gain on sale of $345 thousand.  We did not recognize any gains on sale during 2012.  We also recorded $123 thousand less in provisions for losses on foreclosed assets, as we did not experience a significant decline in value for any of our properties.

 

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Results of Operations for the Years Ended December 31, 2012 and December 31, 2011

 

 

 

 

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In 2012, we recognized net income of $417 thousand due in large part to reductions in our cost of borrowings from financial institutions and a $1.5 million decline in our provision for loan losses as compared to 2011.  As further described below, the most significant factors influencing our consolidated results of operations for the year ended December 31, 2012, as compared to 2011 were:

 

 

 

 

 

 

 

 

Interest income on our mortgage loan investments decreased by 10% from 2011.  This corresponds to the 10% decrease in the average balance of our interest-earning loans of $168.5 million for the year ended December 31, 2011, as compared to $151.8 million for the year ended December 31, 2012.  While the outstanding balance due on our non-accrual loans declined by $4.6 million for 2012 as compared to 2011, we recorded $379 thousand of interest payments we received against the principal balance of these collateral-dependent impaired loans instead of reporting the payments as interest income in 2012.  In 2011, we recorded $275 thousand in interest payments against the principal balances of our collateral-dependent impaired loans. Interest income recognized on interest-bearing accounts with other financial institutions increased as our average cash balance rose from $7.5 million in 2011 to $13.2 million in 2012.

 

Interest expense on our borrowings decreased substantially during the year due to the refinancing transaction we completed with the NCUA in November, 2011.  The weighted average interest rate paid on the NCUA credit facilities decreased from 4.0% for the year ended December 31, 2011 to 2.5% for the year ended December 31, 2012.  While the weighted average interest rates of our investor notes stayed fairly constant, the average balance of our notes decreased from $60.9 million for 2011 to $57.0 million in 2012, causing the interest expense on investor notes to decrease by $177 thousand.  Even though interest income decreased by 10%, net interest income increased by $995 thousand in 2012 as compared to 2011, primarily due to lower borrowing costs in 2012.

 

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We had a credit for loan losses of $9 thousand for the year ended December 31, 2012 as compared to a provision of $1.5 million for the year ended December 31. In 2011, we recorded $1.6 in additional reserves on four collateral-dependent impaired loans after management concluded that there had been a material decrease in the value of the real estate that secured these loans.  For 2012, we did not incur a material decrease in the value of the real estate properties that secured our collateral-dependent impaired loans.  As a result, we recorded no additional reserved for loan losses on these loans.  While we increased reserves on several of our troubled debt restructurings based on new estimates of future cash flows, these provisions were offset by a $265 thousand credit that was taken when we sold two impaired loans in May 2012 at a price greater than our carrying value of the loan.  As a result of reduced interest expense and $1.4 million reduction in our provision for loan losses, net interest income after provision for loan losses increased by 97% for the year ended December 31, 2012 over the year ended December 31, 2011.

 

We received other income of $56 thousand in the year ended December 31, 2012 which is a decrease of $106 thousand from the year ended December 31, 2011.  We recognized $21 thousand in additional servicing fee income as we serviced the loan participations we sold in 2011 for an entire year.  However, we sold no loan participations during 2012 as we did in 2011, and our gains on loan sales decreased by $132 thousand.

 

Our non-interest expenses for the year ended December 31, 2012 increased by 26% from the year ended December 31, 2011. Salaries and benefits expenses increased by $474 thousand as we experienced a full year from the four additional employees we hired in 2011 to help manage and grow our loan portfolio.  In 2012, we hired two new employees to work for our wholly-owned broker-dealer as well as another staff member to assist in loan servicing. With the Board of Managers approval, management also approved $116 thousand in bonuses for the year ended December 31, 2012, while no bonuses were approved for 2011. Marketing expenses increased by $39 thousand as we engaged in new marketing efforts through our broker-dealer to sell our debt securities and through our lending department to originate new loans.  Office operation expenses increased by $204 thousand primarily due to $33 thousand in additional human resources costs related to our new staff members, $31 thousand in additional insurance costs due to rising premiums, and $52 thousand in additional expenses related to managing our delinquent loans.

 

Net expenses related to foreclosed assets increased by $180 thousand during 2012.  We acquired three new real estate assets during 2012, and while this caused rental income from foreclosed assets to increase by $30 thousand, the costs of managing foreclosed assets increased by $74 thousand.  We also recorded a $136 thousand valuation allowance on one of the properties.  Finally, legal and consulting related costs increased by $10 thousand in 2012. While we incurred $150 thousand less in consulting services related to the refinancing of our bank borrowings in 2011, we had $122 thousand in additional legal expenses and filing fees in 2012 resulting from efforts to launch MP Securities and obtain approval for it to sell our Class A Notes. We also experienced $22 thousand in additional audit fees due to the increased regulatory and reporting obligations of our operations primarily related to the broker-dealer.  While we incurred significant additional legal fees and expenses in 2012 resulting from the launch of MP Securities and obtaining approval for it to sell our Class A Notes, we believe most of these costs are non-recurring in nature.

 

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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Average interest-earning assets decreased to $150.4 million during the year ended December 31, 2013, from $165.0 million, a decrease of $14.6 million or 9%. The average yield on these assets increased to 6.30% for the year ended December 31, 2013 from 6.09% for the year ended December 31, 2012.  This increase is related mainly to the increase in interest earned on loans.  As described above, we experienced an acceleration in the amortization of deferred fees related to participation sales and we increased collections on our non-collateral-dependent impaired loans.  In addition, our cash balances, which receive lower interest rates, comprised 7% of our interest-earning during 2013, which increased the overall average yield.    In 2012, the average balance of our interest-earning accounts with other financial institutions was $13.2 million, which comprised 8% of our total interest-earning assets.  This shift in the balance of assets caused the decrease in the average yield of both our interest-earning assets and total assets.

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Average interest-bearing liabilities, consisting primarily of investor and credit facility notes payable, decreased to $150.5 million during the year ended December 31, 2013, from $164.2 million during 2012. The average rate paid on these liabilities decreased to 3.06% for the year ended December 31, 2013, from 3.13% for 2012. The decrease in the rate paid on interest-bearing liabilities was the result of lower interest rates paid on our notes payable.  Many of the remaining Alpha Class notes matured during the year; the only ones remaining are variable rate notes which bear lower interest rates than the fixed notes that were outstanding during 2012.  The rate on our NCUA borrowings is fixed at 2.53% until the facility matures in 2018.

 

Net interest income for the year ended December 31, 2013 was $4.9 million, which was a decrease of $45 thousand, or 1% from the prior year. The net interest margin increased 21 basis points to 3.03% for the year ended December 31, 2013, as compared to 2.82% for 2012.

 

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Average interest-earning assets decreased to $165.0 million during the year ended December 31, 2012, from $176.1 million, a decrease of $11.1 million or 6%. The average yield on these assets decreased to 6.09% for the year ended December 31, 2012 from 6.29% for the year ended December 31, 2011.  This decrease is related entirely to the composition of our interest-earning assets.  In 2011, interest-earning accounts with other financial institutions, which earned average yields of 1.17%, only comprised 4% of our interest-earning assets.  In 2012, as we sought to increase our liquidity, the average balance of our interest-earning accounts with other financial institutions increased to $13.2 million, which comprised 8% of our total interest-earning assets.  This shift in the balance of assets caused the decrease in the average yield of both our interest-earning assets and total assets.

 

Average interest-bearing liabilities, consisting primarily of investor and credit facility notes payable, decreased to $164.2 million during the year ended December 31, 2012, from $175.7 million during 2011. The average rate paid on these notes decreased to 3.13% for the year ended December 31, 2012, from 4.07% for 2011. The decrease in the rate paid on interest-bearing liabilities was the result of refinancing our Members United and WesCorp credit facilities in November 2011 which reduced our average borrowing rate of 3.97% to an average rate of 2.53%.  The average rate paid on our investor notes remained stable in total, as the average rates on our Class A Notes, which comprise a significant portion of our total notes, only decreased by one basis point.

 

Net interest income for the year ended December 31, 2012 was $4.9 million, which was an increase of $995 thousand, or 25% from the prior year. The net interest margin increased 72 basis points to 2.82% for the year ended December 31, 2012, as compared to 2.10% for 2011.  This increase was mainly related to the decrease in interest rates paid on borrowings on our credit facilities.

 

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).

 

While our provisions for loan losses increased by $18 thousand, our allowance for loan losses decreased from $4.0 million to $2.9 million during the year ended 2013.  Several factors led to the decrease in the balance of our allowance for loan losses for the year ended December 31, 2013.  In May 2013, we reached a Deed in Lieu of Foreclosure agreement with one of our borrowers.  Immediately prior to this transaction, we charged off $978 thousand in reserves related to the loans held by this borrower.  We charged off an additional $98 thousand in reserves on our impaired loans throughout the year.  We recorded $9 thousand in provisions for loan losses, which includes a decrease in general reserves due to the smaller balance in our loan portfolio and the improvement in the weighted average risk rating of our portfolio.  However, we recorded a net increase in specific reserves on some of our impaired loans.  Finally, our allowance decreased by $82 thousand related to the accretion of reserves based on net present value differences on non-collateral-dependent restructured loans.

 

The activity in the allowance for loan losses for the years ended December 31, 2013 and 2012 was as follows:

 

 

 

 

Impaired Loans

 

As of December 31, 2013 and 2012, the principal balances of impaired loans were as follows:

 

 

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Information about impaired loans for the years ended December 31, 2013 and 2012, is as follows:

 

 

No additional funds were committed to be advanced in connection with impaired loans as of December 31, 2013.

 

Cash and Cash Equivalents

 

We experienced a decrease in our cash during the twelve months ended December 31, 2013 in the amount of $2.6 million, as compared to a net decrease of $1.1 million for the twelve months ended December 31, 2012. This decrease is related the decrease in notes payable relative to the decrease in loans receivable. 

 

Net cash provided by operating activities totaled $596 thousand for the twelve months ended December 31, 2013, a decrease of $300 thousand from $896 thousand provided by operating activities during the twelve months ended December 31, 2012.  This is due to the fact that while our net income increased from 2012, much of that increase was related to non-cash income such as the amortization of deferred loan fees and gains on sales of loan participations.  Our other assets also increased by $95 thousand from the prior year.

 

Net cash provided by investing activities totaled $5.9 million during the twelve months ended December 31, 2013, compared to $11.4 million provided during the twelve months ended December 31, 2012, a decrease of $5.5 million. This difference is attributable to an increase in loan originations and purchases from a total of $22.2 million in 2012 to $33.0 million in 2013 as our lending team worked to replace loans that were paid off or sold.

 

Net cash used in financing activities totaled $9.1 million for the twelve-month period in 2013, an increase of $4.3 million from $10.1 million used in financing activities during the twelve months ended December 31, 2012.  We experienced $1.6 million fewer in notes payable paydowns in 2013, and we paid down $2.5 million fewer in borrowings from financial institutions as we did not need to make as many additional principal payments on our NCUA borrowings in 2013 in order to remain in compliance with the collateralization ratios on those borrowings.

 

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 raise funds through the generation of non-interest income, chiefly commissions on securities sales and fees earned from the management of client investments by 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

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the sale of debt securities.  However, we intend to supplement this liquidity plan by expanding our 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 cannot assure you that our forecasts or assumptions will prove to be accurate, particularly in this volatile 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 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 assets to raise additional cash.  We may not be able to obtain desired financing on terms and conditions acceptable to us.  If we are unable to obtain additional capital funding, our ability to grow our business and meet our strategic objectives will be constrained.

 

Historically, we have experienced high rates of repeat investments or renewals by our debt security investors when their debt securities mature.  During 2009 and 2008, for example, 79% and 76%, respectively, of our note investors renewed their investment.  In 2010, the rate dropped to 57% of our note holders who purchased new debt securities.  For the year 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.  While we are now able to distribute Class A Notes through MP Securities, these note sales are subject to certain suitability requirements that restrict the ability of some of our current investors to renew or make investments in our Class A Notes.  Due to those restrictions, the renewal rate fell further to 34% in 2013.  We expect the renewal rate to increase in 2014 as we add new clients who qualify under the suitability restrictions.  We are continuing to hire additional sales personnel at MP Securities and to develop other investment products, including private offerings of debt securities, and, through MP Securities, the sale of off-balance sheet investment products that generate commission income. 

 

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 generate additional liquidity 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.  In addition, sales transactions could only be consummated if our loan balance after the transaction would continue to meet the minimum collateralization requirements of our credit facilities held with the NCUA.  In order to enhance our ability to meet these requirements, we are currently discussing with a small number of financial institutions the possibility of obtaining an additional credit facility that would provide short-term financing for the funding of new loans which we would then offer for sale in the participation market.  We are seeking to increase the sale of secured and unsecured debt securities and 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.

 

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Credit Facilities Developments

 

As of December 31, 2013, our credit facilities’ commitments, amounts available and principal amounts outstanding were as follows:

 

Members United Facilities

 

As of December 31, 2013, the outstanding principal balance due on the MU Credit Facility was $78.4 million. 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 128%. As of December 31, 2013, the collateral securing the MU Credit Facility had an aggregate principal balance of $101.5 million, which satisfies the minimum collateralization ratio for this facility. 

 

For a more detailed description of the MU Credit Facilities, please see “Our Company–  Our Capitalization – Borrowings From Financial Institutions.”

 

WesCorp Facility

 

As of December 31, 2013, $21.5 million 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 NCUA with interim or annual financial statements and annual and periodic reports filed with the SEC and maintain a minimum collateralization ratio of at least 150%. As of December 31, 2013, the collateral securing the WesCorp Credit Facility Extension had an aggregate principal balance of $33.2 million, which satisfies the minimum collateralization ratio for this facility. 

 

For a more detailed description of the WesCorp Facility, please see “Our Company– Our Capitalization – Borrowings From Financial Institutions.”

 

For further information on our credit facilities, see Note 7, Borrowings from Financial Institutions, in our accompanying audited consolidated financial statements for the year ended December 31, 2013. 

 

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, 2013, a total of $47.7 million of our Investor Debt 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, 2013.  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, 2013, $159 thousand 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.  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 flex 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 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, 2013.  At December 31, 2013, $37.0 million of these Class A Notes were outstanding.

 

In addition to Class A Notes, we offer notes under several private placement offerings.  In March 2013, we began offering Series 1 Subordinated Capital Notes and a new private placement of our International Notes.  Investors have to meet certain criteria in order to purchase either of these notes and are also subject to suitability restrictions.  At December 31, 2013, $4.0 million and $409 thousand of our Subordinated Capital Notes and our International Notes were outstanding, respectively.

 

Of the $47.7 million in investor notes that are outstanding at December 31, 2013, $7.8 million are available to be withdrawn at any time without penalty while an additional $15.1 million will mature in 2014.  Historically, we have experienced a high rate of renewal or reinvestment by our note holders upon maturity of their notes.  In 2011 and 2010, 73% and 57%, respectively, of our note investors renewed their investments by purchasing new notes.  For the year ended December 31, 2012, largely due to the temporary suspension of our Class A Notes sales for six months, only 45% of our note investors renewed their investments.  Due to suitability restrictions, the renewal percentage decreased further to 34% in 2013.  While no assurances can be given that we will be able to restore investments made by repeat investors to pre-2012 rates, 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.

 

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 Extension 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

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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, 2013.

 

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 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 owners, 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.

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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, 2013:

 

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 $135 thousand over the “base case” (i.e., no interest rate change) and our net interest margin would increase from 3.22% to 3.30%.  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 $13.9 million at December 31, 2013.  This indicates that the funds expected to become available in the next year due to maturing assets are greater than the 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.  In our experience, investors tend not to withdraw these notes prior to maturity.  Nonetheless, 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 2014.

 

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CERTAIN RELATIONSHIPS AND RELATED

TRANSACTIONS, AND DIRECTOR INDEPENDENCE

 

Transactions with ECCU

 

ECCU continues to service mortgage loans that it has sold 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, 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 September 30, 2014, our investment in wholly-owned loans serviced by ECCU totaled $6.8 million, while our investment in loan participations serviced by ECCU totaled $20.7 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 nine months ended September 30, 2014, and the years ended December 31, 2013 and 2012, respectively.   

 

From time to time, we purchase participation interests in mortgage loans from ECCU, our largest equity owner.     We did not purchase any loans from ECCU during the nine months ended September 30, 2014.  During the year ended December 31, 2013, we purchased $1.1 million of loans from ECCU.  We purchased $5.1 million in loans from ECCU during the year ended December 31, 2012.  We recognized interest income on loans purchased from ECCU of $1.4 million,  $2.4 million and $4.5 million during the nine months ended September 30, 2014, and the years ended December 31, 2013 and 2012, respectively.  Currently, ECCU services 21 of the 139 mortgage loans we own pursuant to the terms of a servicing agreement. 

 

From time to time, 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.  In addition, 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 were selling 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 and $4.3 million in loans to ECCU during the nine months ended September 30, 2014 and the year ended December 31, 2013, respectively.

 

We maintain most of our cash balances with ECCU, our largest equity holder.  Total funds held with ECCU at September 30, 2014, December 31, 2013 and 2012 were $4.2 million, $7.0 million, and $9.5 million, respectively.  We earned interest on these cash balances for the nine months ended September 30, 2014, and the years ended December 31, 2013 and 2012 in the amounts of $31.5 thousand, $83.2 thousand, and $136.6 thousand, respectively.

 

We rent our administrative offices from ECCU pursuant to an office lease entered into on November 4, 2008.  From time to time, we also purchase other services from ECCU.  We paid ECCU $82.9 thousand, $125.7 thousand and $118.2 thousand for the nine months ended September 30, 2014, and the years ended December 31, 2013 and 2012, 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.

 

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. Art Black, is the beneficial owner of a living trust that holds $224 

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thousand of our Class A Notes.  Another of our Board members, Mr. Van Elliott, holds $88  thousand of our Class A Notes. 

 

On August 15, 2013, we sold $5.0 in loan participations to WFCU.  We charge 50 basis points to service the loan for WFCU.

 

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.  MP Securities has earned $45 thousand on sales of Subordinated Capital Notes and $305 on sales of International Notes. We have also entered into a selling agreement with MP Securities, pursuant to which MP Securities will act as selling agent in distributing our Class A Notes.  Under the terms of the Class A Notes Offering, MP Securities will receive 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.  As of January 31, 2014, MP Securities is also engaged as the Managing Participating Broker of the Class A Note offering and will receive an additional 0.5% on all new note sales as well as 0.25% on reinvested note sales. No concessions are 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 nine months ended September 30, 2014 and the year ended December 31, 2013, MP Securities earned $506 thousand and $124 thousand, respectively, in sales concessions on the sale of our Class A Notes. MP Securities will act as participating broker and Managing Participating Broker for the Class 1 Notes offered in this Prospectus. MP Securities will receive the same concessions for selling these notes as they did for selling Class A Notes. 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 $465 thousand, $491 thousand, and $368 thousand for the nine months ended September 30, 2014, and the years ended December 31, 2013 and 2012, respectively.

 

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

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such change could have retroactive application so as to result in federal income tax consequences different from those discussed below.

 

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

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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.

 

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 through the Selling Group pursuant to the Managing Participating Broker Agreement (the “MPB Agreement”) by and between ourselves and MP Securities as 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 PBs 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:

 

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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 PBs 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:

 

Non-transaction based compensation of $1,250,343 allocated to FINRA members;

Dual-employee non-transaction-based compensation of $192,564 allocated to dual employees of the Company and the MPB; and

Underwriter legal expenses of $3,500;

 

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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).

 

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 commission the Managing Participating Broker will reallow to a Participating Broker 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

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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.

 

 

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 PB through whom you are purchasing your Notes will promptly submit your check on the business day following receipt of your Purchase Application and check.

 

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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

 

Rushall & McGeever, of Carlsbad, California is acting as our counsel in connection with the registration of the Notes under the 1933 Act and as such, has passed on certain legal matters in connection with the Notes.

 

EXPERTS

 

The consolidated balance sheets as of December 31, 2013 and December 31, 2012 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.

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