10-K 1 c130-20171231x10k.htm 10-K 10-K_Taxonomy2017

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



FORM 10-K



(Mark One)

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

For the fiscal year ended December 31, 2017



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

For the transition period from _________ to_________



Commission file number:  333-4028LA

 

MINISTRY PARTNERS INVESTMENT COMPANY, LLC

 (Exact name of small business issuer in its charter)

 



 

CALIFORNIA

(State or other jurisdiction of

incorporation or organization)

26-3959348

(I.R.S. Employer Identification No.)

 



 915 West Imperial Highway, Suite 120, Brea, California  92821

(Address of principal executive offices)

 

Issuer’s telephone number:  (714) 671-5720



Securities registered under 12(b) of the Exchange Act:  None



Securities registered under 12(g) of the Exchange Act:  None





Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes  No  .



Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.  Yes  No .



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



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



Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. .  




 

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





 

 

 

 Large accelerated filer 

 Accelerated filer 

 Non-accelerated filer 

Smaller reporting company filer 



If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revise accounting standards provided pursuant to Section 13(a) of the Exchange Act. 



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



As of May 4, 2017 (the last date any sale or exchange was made of our Class A Common Units), the aggregate market value of the registrant’s Class A Common Units held by non‑affiliates was estimated to have no value while the Series A Preferred Units was estimated at $66.67 per share or $4,968,133.   The registrant has sold no Class A Common Units within the past sixty days and there is no public market value for the registrant’s Class A Common Units.  The number of Class A Common Units outstanding, as of December 31, 2017, was 146,522.





DOCUMENTS INCORPORATED BY REFERENCE

 

None


 

MINISTRY PARTNERS INVESTMENT COMPANY, LLC

FORM 10-K



TABLE OF CONTENTS







 

 

 



 

 

Page No.



 

 

 

Part I

 

 

 



Item 1.

Business

2



Item 1A.

Risk Factors

29



Item 1B.

Unresolved Staff Comments

47



Item 2.

Properties

47



Item 3.

Legal Proceedings

48



Item 4.

Mine Safety Disclosures

48



 

 

 

Part II

 

 

 



Item 5.

Market for our Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

49



Item 6.

Selected Financial Data

51



Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

51



Item 7A.

Quantitative and Qualitative Disclosures About Market Risk

82



Item 8.

Financial Statements and Supplementary Data

85 - F-46



Item 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

86



Item 9A.

Controls and Procedures

86



Item 9B.

Other Information

87



 

 

 

Part III

 

 

 



Item 10.

Managers and Executive Officers and Corporate Governance

87



Item 11.

Executive Compensation

94



Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

96



Item 13.

Certain Relationships and Related Transactions, and Director Independence

98



Item 14.

Principal Accounting Fees and Services

103



 

 

 

Part IV

 

 

 



Item 15.

Exhibits and Financial Statements Schedules

104



 

EXHIBIT INDEX

104



Item 16 

Form 10-K Summary

108



 

 

 

SIGNATURES

 

109



 

 

 



 

 







 


 

Explanatory Note for Purposes of the “Safe Harbor Provisions” of Section 21E of the Securities Exchange Act of 1934, as amended



Certain statements in this report, 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” in Part I, Item 1A of this Form 10-K or otherwise accompany the forward-looking statements contained in this Form 10-K. 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 Form 10-K.







PART I

 



 

Item 1.

BUSINESS



Our Company



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 (“we”, “us”, “our” or the “Company”). 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 us 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.  Substantially all of our business operations currently are conducted in California and, while we have more loan investments in California than in any other state, we own loan interests in 30 different states.



We were incorporated under California law on October 22, 1991 under the name Ministry Partners Investment Corporation and established as a credit union service organization, or

 

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("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.  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.”



To finance our mortgage loan investments, we obtain funds from the sale of our debt securities. We also obtain funds from lines of credit provided by various financial institutions and by selling 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.   



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



On November 13, 2009, the Company 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 the Company’s mortgage financing activities. On February 23, 2010, the California Department of Real Estate issued MP Realty a license to operate as a corporate real estate broker. MP Realty has conducted limited operations since its inception.



On April 26, 2010, the Company formed Ministry Partners Securities, LLC, a Delaware limited liability company (“MP Securities”). MP Securities has been formed to provide financing solutions for churches, charitable institutions and faith-based organizations.  On March 2, 2011, MP Securities’ application for membership in the Financial Industry Regulatory Authority (“FINRA”) was approved and MP Securities began acting as a selling agent for the Company’s publicly offered investment notes under a registration statement declared effective by the U.S. Securities and Exchange Commission (“SEC”).  MP Securities has also acted as a selling agent for the Companies subsequently offered public and private placement notes.  In November 2012, MP Securities also began selling investments in mutual funds. 



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

 

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Securities to provide registered investment advisory services. On September 26, 2013, MP Securities entered into a clearing firm agreement with Royal Bank of Canada Dain Rauscher (RBC Dain), thereby enabling MP Securities to open brokerage accounts for its customers. Finally, on March 14, 2013, the Company received a resident license from the California Department of Insurance to act as an Insurance Producer under the name Ministry Partners Insurance Agency, LLC (MPIA).   MPIA has reached agreements with multiple insurance companies to offer life and disability insurance products, as well as fixed and variable annuities.  MP Securities can now offers a broad scope of investment services that will enable it to better serve the Company’s clients and customers.



We are a California limited liability company and our principal executive offices are located at 915 West Imperial Highway, Suite 120, Brea, California 92821.  Our telephone number is (714) 671-5720 and our website address is www.ministrypartners.org.



Our Business



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



As a financial services company that has specialized in assisting Christian ministries, churches and religious 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.  As a result of improved market conditions, we believe that the secondary market for church and ministry loans, including the sale of loan participation interests in mortgage loan investments we underwrite and originate, presents us with significant business opportunities.     



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



Our general practice in past years has been to fund loan acquisitions and originations with borrowings under our credit facilities. We then repay borrowings on our credit facilities with proceeds from the sale of investor notes, mortgage loan prepayments and repayments, and from our operating income. Our ability to access capital to repay borrowings under our credit facilities

 

4

 

 


 

is subject to variability based upon a number of factors, including volatility in the capital markets, our ability to demonstrate consistent earnings, regulatory constraints and limitations, the relative interest rates that we are prepared to pay for our investor debt obligations, the ability of our borrowers to access capital to repay or prepay their obligations to us, and our ability to sell our mortgage loan assets. Any occurrence that disrupts our ability to access capital from these sources may have a material adverse effect on our ability to grow our business, meet our commitments, and make distributions or payments to our equity owners and debt securities investors.

 

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



Our net earnings are generated from:



·

interest income earned on our mortgage loan investments;



·

fee income generated from originating and servicing mortgage loans;



·

fee and concession income generated from the sale of securities, insurance, and investment products distributed by our wholly-owned broker-dealer and investment advisory firm;



·

gains realized on the sale of loans and loan participation interests to financial institutions;



·

fee income from services provided to credit unions; and



·

successful efforts to maximize loan recoveries on delinquent loans in our loan portfolio. 



During 2017, we (i) funded $29.9 million in loans; (ii) earned $75 thousand in other income related to agreements reached with ECCU and America’s Christian Credit Union (“ACCU”) to provide lending and loan servicing capabilities; (iii) utilized the networking agreements with ECCU and ACCU to continue to grow our client base, which resulted in an increase in investor notes payable of $8.5 million and increased fee revenue earned by our wholly-owned, broker-dealer subsidiary, MP Securities by 24%; and (iv) improved the efficiency of managerial and staffing resources and our technological capabilities to create efficiency for our lending and servicing operations and expanded the services we offer to credit unions to generate non-interest related fee income.    

 

5

 

 


 



Our net income of $937 thousand for 2017 primarily resulted from an increase in interest income related to our lending activities, and an increase in other income generated by the loan-related services we provide and the success of our broker-dealer/investment advisory firm in offering non-proprietary products and services to its clients.  To finance our mortgage loan investments, the Company increased its investor note sales by building relationships through MP Securities with our equity owner credit unions to offer investment products and services to their members.  We also used loan participation sales throughout the year to fund loan originations, address liquidity needs and generate other income.  Our broker-dealer revenue increased through the sale of investment and insurance products as well as the fees earned for providing investment advisory services to our clients.  All of these revenue improvements were earned while keeping our 2017 office operations expenses just below the same level as in 2016 and without incurring significant provisions for loan losses from our expanding loan portfolio.



Lending Activities



Loan Origination, Acquisition and Underwriting



Over the last several years, we have improved our operational systems and underwriting resources which has enabled us to expand our ability 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.  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 loans, we funded $29.9 million in loans during the year ended December 31, 2017, $42.7 million in mortgage loans for the year ended December 31, 2016, and $26.7 million for the year ended December 31, 2015.  The Company has the capacity, capability and underwriting experience to originate substantially all of its mortgage loan investments.



Servicing



Our core processing system along with our credit administration personnel give us the capability to service loans for ourselves and other institutions.  As of December 31, 2017, we were servicing 157 loans out of a total of 166 loans, totaling $181.9 million in gross loan principal balance outstanding.



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 seven loans during the year ended December 31, 2017, which resulted in $136 thousand in gains on loan sales as well as an increase of $187 thousand,  which included net servicing assets of $12 thousand.  During 2016, we sold participations in 22 loans, which resulted in $135 thousand in gains on loan sales.  Our technology platform enables us to

 

6

 

 


 

process, record, transmit and account for all financial and operational data for the benefit of other credit unions, finance lenders, churches, financial institutions and investors. With these capabilities, we believe we will be able to continue to expand our portfolio of loans serviced.    



In the past, we have purchased loans from other credit unions, primarily ECCU.  Based upon ECCU’s experience in underwriting and servicing church and ministry related mortgage loans, we have entered into a servicing agreement with ECCU for some of our mortgage loan investments.  As of December 31, 2017, ECCU was servicing seven loans for us, totaling approximately $9.2 million in loan principal outstanding.  As of December 31, 2017, we also own approximately $1.7 million in mortgage loan investments which are being serviced by ACCU, 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 80% without approval from our Board of Managers.  According to our loan policy, the maximum weighted average combined loan to value ratio for all loans in our portfolio secured by real property is 80% at the time of loan funding.  Subsequent to the funding of a loan, the loan to value ratio may increase beyond 80% as the real estate market fluctuates and we receive new valuations of the loan’s collateral. Management monitors the loan to value ratios of loans in our portfolio. Our standard loan investments have ten year maturities with a rate adjustment after five years.



Construction Loans



Construction loans may be made to finance the construction or restoration of facilities for schools, worship facilities or ministry related purposes. These loans normally will have a final maturity that will not exceed five years, with a construction draw period that will not exceed 12 months. In most instances, construction loans are interest-only on the outstanding balance drawn for construction. Under our Church and Ministry Loan Policy, the maximum loan to value ratio for a construction loan is 75%. As of December 31, 2017, we had $3.55 million in construction loans outstanding and $1.04 million in unfunded construction loan commitments.



 

7

 

 


 

Participation Interests Purchased



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.  If and when we decide to purchase a mortgage loan participation from another lender, our lending staff underwrites the participated loan to meet our Board-adopted loan policy requirements.



Due to our ability to originate and service our own loans, our investment in loan participations has been significantly reduced. As of December 31, 2017, approximately $10.9 million, or 5.7% of our total loan portfolio, consisted of loan participations we purchased from other financial institutions, including ECCU and ACCU. For the year ended December 31, 2016, approximately $10.8 million, or 7.3% 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.  As of December 31, 2017 and 2016, we had $157 thousand and $75 thousand, respectively, 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 December 31, 2017, we had $384 thousand in outstanding letter of credit commitments. 



 

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Our Loan Policies



Our managers establish our loan policies and review them periodically and, from time to time, have authorized designated loan officers and our President to make loans within certain limits established by our managers.  Our managers adopted a Church and Ministry Loan Policy to support our expanded levels of acquisition and origination of loans and also appointed a Credit Review Committee to review and carry out our loan policy.  The Credit Review Committee may approve loans up to 25% of our tangible net worth or 5% of our aggregate loan portfolio, whichever is less.  For loans exceeding the threshold, our managers have established a Board Credit Committee that reviews 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.  For any loan participation interest we acquire, with one borrower of a group of financially related borrowers, the aggregate amount of such interest may not exceed 15% of our tangible net worth.  Under the Company’s Church and Ministry Loan Policy, “tangible net worth” is defined as shareholder equity plus available operating lines of credit, calculated at the end of each month.



Our Mortgage Loan Investment Standards



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



·

Demonstration of Ability to Pay. The borrower must support its overall ability to timely pay principal and interest by its operational and cash flow history. For these purposes, "cash flow" includes donations and other revenue which the borrower can demonstrate to be continuing. Generally, debt service payments of the mortgage loan may not exceed a reasonable percentage of the borrower's cash flow over the expected term of the loan.



·

Term of Loan. The remaining term of each mortgage loan must be thirty (30) years or less from the date we acquire or originate the loan.



·

Priority of Secured Interest. The mortgage loan must be evidenced by a written obligation and must be secured by a deed of trust or mortgage on the mortgaged property.



·

Funding Escrow. Mortgage loans must be funded through a formal escrow in a customary manner in order to assure that we receive good title to our security interest in the loan at the time the loan is funded. 



·

Value of Security. Each mortgage loan must be secured by real property for which there is available for review a recent independent appraisal or other independent valuation which supports the value of the property.   If the mortgage loan is $500,000 or less and the loan to value ratio is 50% or less; or the loan amount is less than $250,000, valuation may be established by alternate methods other than an appraisal.



·

Title Insurance. Each mortgage loan must be covered by a standard lender's title insurance policy. 

 

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·

Application of Loan Proceeds. Procedures must be established to assure the loan proceeds will be used for the purposes authorized. Unless we waive the requirement for good cause, loan proceeds must be available only for expenditures on account of the project for which the loan was made.



·

Inspection. We, the original lender, or the lender's representative must have made a personal on‑site inspection of the property securing the loan.



·

Insurance. We require our borrowers to obtain standard insurance protection customary in the industry, including title insurance (to insure against title defects and some forms of documentation), and liability and casualty insurance in customary amounts. We may also require special insurance in connection with particular mortgage loans, including earthquake, flood and environmental hazard insurance.



·

Lines of Credit and Letters of Credit. Our typical mortgage loan investment is a conventional real estate loan. However, from time to time we may make a loan commitment or loan funds pursuant to a line of credit or a letter of credit. These commitments and loans are typically secured by real property or funds pledged by the borrower.  We require that our Credit Review Committee approve the transaction.



·

Credit Union Members.  Loans can be only made to credit union members or our investors, unless otherwise permitted by our Church and Ministry Loan Policy.



·

Location of CollateralEach mortgage loan must be secured by real property located in the United States.  Unsecured loans may be made without a geographical limitation provided that all payments are made in U.S. dollars and the financial statements of the borrower are in English.



·

Loan LimitsThe aggregate total of all construction loans or loans secured by junior liens on real property may not exceed 200% of our tangible net worth.  The maximum aggregate amount of any loan or loans made to one borrower (or to related entities) may not exceed 25% of our tangible net worth.  The maximum aggregate total of all unsecured loans, including unfunded commitments, is 100% of the Company’s tangible net worth.  The maximum aggregate amount of unsecured loans made to any one borrower (or group of financially related borrowers) may not exceed 10% of our tangible net worth at the time the loan is funded or acquired.  For any loan that exceeds 25% of our tangible net worth or 5% of our loan portfolio, whichever is less, the loan must be approved by our Board Credit Committee prior to funding.



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

 

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AGGREGATE CONCENTRATION LIMITS

(dollars in thousands)



 

Policy

 

Year Ended

 

Year Ended



 

Limit

 

December 31, 2017

 

December 31, 2016



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

% of Tangible Net Worth (TNW)

 

Number of Loans

 

Unpaid Balance

 

% of TNW

 

Number of Loans

 

Unpaid Balance

 

% of TNW

Construction Loans

 

200 

%

 

 4

 

$

4,594 

 

48.7 

%

 

 7

 

$

11,755 

 

133.5 

%

Junior Liens

 

200 

%

 

 5

 

 

4,409 

 

46.8 

%

 

10

 

 

5,805 

 

65.9 

%

Unsecured Loans

 

100 

%

 

 5

 

 

1,537 

 

16.3 

%

 

 4

 

 

1,239 

 

14.1 

%

*includes recorded balance and unfunded commitments

 

 

 

 

 

 

 

 

 

 

 

 

 







 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

SINGLE BORROWER CONCENTRATION LIMITS

(dollars in thousands)



 

Policy

 

Year Ended

 

Year Ended



 

Limit

 

December 31, 2017

 

December 31, 2016



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

% of Tangible Net Worth (TNW)

 

Number of Loans Over Limit

 

Unpaid Balance

 

% of TNW

 

Number of Loans Over Limit

 

Unpaid Balance

 

% of TNW

Unsecured Loans to One Borrower

 

10 

%

 

 1

 

$

1,350 

 

14.3 

%

 

 1

 

$

1,110 

 

12.6 

%

Loans to One Borrower

 

25 

%

 

14

 

 

55,028 

 

583.6 

%

 

19

 

 

62,045 

 

704.5 

%

*includes recorded balance and unfunded commitments

 

 

 

 

 

 

 

 

 

 

 

 

 







 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

LARGEST SINGLE BORROWER EXPOSURES

(dollars in thousands)



 

Policy

 

Year Ended

 

Year Ended



 

Limit

 

December 31, 2017

 

December 31, 2016



 

 

 

 

 

 

 

 

 

 

 

 

 



 

% of Tangible Net Worth (TNW)

 

Aggregate Unpaid Balance

 

% of TNW

 

Aggregate Unpaid Balance

 

% of TNW

Largest Real Estate Secured Loan

 

25 

%

 

$

6,638 

 

70.4 

%

 

$

6,008 

 

63.5 

%

Largest Unsecured Loan

 

10 

%

 

 

1,350 

 

14.3 

%

 

 

1,110 

 

11.7 

%

Largest Single Borrower

 

25 

%

 

 

11,786 

 

125.0 

%

 

 

6,008 

 

63.5 

%

*includes recorded balance and unfunded commitments

 

 

 

 

 

 

 

 

 

 



As of December 31, 2017 and December 31, 2016, respectively, we were in compliance with our policy on aggregate concentration limits for construction loans, junior liens and total unsecured loans. Our portfolio included 14 loans and 19 loans at December 31, 2017 and 2016,

 

11

 

 


 

respectively, which exceeded our policy limits for loans made to one borrower.  All of the aforementioned loans exceeding policy limits were originated or purchased in compliance with our policy, which allows our Board of Managers or the Board Credit Committee to approve certain exceptions.



Of the 14 loans that exceeded our policy limits on loans made to a single borrower at December 31, 2017, 11 were approved as exceptions by our Board of Managers or our Board Credit Committee.  The remaining 3 loans migrated out of compliance solely due to a decline in our tangible net worth since the loans were purchased or originated, which is primarily due to increased provisions for loan losses and losses taken on our foreclosed assets in prior years.  At December 31, 2017, we had one unsecured loan that exceeded our policy limit. 



We believe the risk presented by the loans that have migrated out of compliance with our policy on limiting loans to a single borrower which exceed 25% of our tangible net worth will be mitigated by focusing on efforts to successfully manage the impaired loans in our portfolio, generate consistent earnings and originate profitable loans.  Our lending team has placed an increased focus on originating small loans in addition to large loans, and plans to continue to originate a mix of loan sizes.  The average outstanding balance of loans receivable in our portfolio has decreased from $1.1 million at December 31, 2016 to $920 thousand at December 31, 2017.  We have also used loan participation sales to reduce the risk of originating relatively large loans and have sought to include credit unions located in the borrower’s local community to serve as the credit union of record when that credit union holds at least a 10% interest in the loan. 



All loan applicants must complete an application and provide suitable documentation demonstrating an ability to repay the loan and submit this application to our offices in Brea, California.  For new loans, 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 first trust deed 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

 

12

 

 


 

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.



Our cash and loan investments as of December 31, 2017 and 2016 are set forth below:





 

 

 

 

 

 



 

 

 

 

 

 



 

December 31,



 

(dollars in thousands)



 

2017

 

2016

Assets:

 

 

 

 

 

 

Cash

 

$

9,907 

 

$

9,683 

Loans receivable, net of allowance for loan losses of $2,097 and $1,875 as of December 31, 2017 and 2016, respectively

 

 

148,835 

 

 

144,264 

Accrued interest receivable

 

 

742 

 

 

657 



Set forth below are the amounts we invested in each loan category for the years ended December 31, 2017 and 2016, respectively:





 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



 

Year Ended December 31, (dollars in thousands)



 

2017

 

2016

Loans to evangelical churches and related organizations

 

Amount

 

% of Portfolio

 

Amount

 

% of Portfolio

Real estate secured

 

$

147,661 

 

96.7 

%

 

$

134,988 

 

91.2 

%

Construction

 

 

3,553 

 

2.3 

%

 

 

11,755 

 

7.9 

%

Unsecured

 

 

1,500 

 

1.0 

%

 

 

1,239 

 

0.9 

%



 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

152,714 

 

100.0 

%

 

$

147,982 

 

100.0 

%



At December 31, 2017, 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 Item 7. “Management Discussion and Analysis of Financial Condition −  Results of Operations” for information regarding our historical interest costs, interest income and yields realized on our mortgage loan investments for the years ended December 31, 2017 and 2016.

 

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Loan Maturities



The following table sets forth the future maturities of our gross mortgage loan portfolio at December 31, 2017:





 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

Dollar Amount of Mortgage Loans



 

Maturing During Year (in thousands)

Mortgage Loan Portfolio at:

 

2018

 

2019

 

2020

 

2021

 

2022

 

After 2022

 

Total

December 31, 2017

 

$

32,212 

 

 

15,635 

 

 

11,740 

 

 

12,519 

 

 

16,875 

 

 

63,733 

 

$

152,714 



Included in the table above are 126 adjustable rate loans totaling $117.3 million, or 76% of the total balance.  Adjustable rate loans reduce the interest rate risk compared to fixed rate loans with similar cash flow characteristics.



Diversification of our Loan Portfolio



The following table sets forth, as of December 31, 2017 and 2016, 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:





 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 



 

California



 

(dollars in thousands)



 

2017

 

2016



 

 

 

 

 

 

 

 

Unpaid Balance of Loans

 

$

25,658 

 

 

$

29,124 

 

Percent of Total Loans

 

 

16.80 

%

 

 

19.68 

%



 

 

 

 

 

 

 

 

Number of Loans

 

 

40 

 

 

 

40 

 

Percent of Total Loans

 

 

24.10 

%

 

 

24.84 

%



 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 



 

Maryland



 

(dollars in thousands)



 

2017

 

2016



 

 

 

 

 

 

 

 

Unpaid Balance of Loans

 

$

30,695 

 

 

$

23,140 

 

Percent of Total Loans

 

 

20.10 

%

 

 

15.64 

%



 

 

 

 

 

 

 

 

Number of Loans

 

 

13 

 

 

 

11 

 

Percent of Total Loans

 

 

7.83 

%

 

 

6.83 

%

*includes recorded balance and unfunded commitments

 



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

 

14

 

 


 

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 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 2017 and during 2016, we entered into loan participation agreements to sell $9.7 and $14.3 million of loan participations to several credit unions, financial institutions and religious foundations. 



Performance and Monitoring of our Loan Portfolio



Our credit, underwriting and servicing teams are responsible for reviewing and monitoring the performance of the loans in our portfolio.  This involves regular communication with our borrowers, along with the collection of financial statements and other pertinent data.  The review of financial data is done on at least an annual basis, and is often done more frequently as warranted.  Based on the review of this information as well as the performance of the loan as compared to its terms, we will take additional action to ensure that that loan is properly classified.



As of December 31, 2017, seven of our 166 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, ongoing loan covenants, and delinquencies.  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 Board of 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

 

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include delinquent loans, most loans on non-accrual status and all restructured loans, regardless of the loans’ interest accrual status. As of December 31, 2017, one non-accrual loan was deemed to not be classified as impaired as of December 31, 2017 as it was made current the same month it went non-accrual.  However, management elected to leave it non-accrual until multiple payments were made.  While this loan is not impaired it is considered non-performing.



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



We "charge off" or "write off" a loan against our allowance or reserve for loan losses when we believe the uncollectability of the loan balance is confirmed. In most cases, this directly correlates to the completion of foreclosure proceedings on the collateral.  For the year ended December 31, 2017 and December 31, 2016, we recorded $40 thousand and $20 thousand, respectively, in partial charge-offs against one impaired loan when we wrote down the principal balance of that loan as part of an agreement with the borrower.



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.



We report a mortgage loan as delinquent if it is 90 days or more in arrears. At December 31, 2017, 1.0% of our portfolio was delinquent.  At December 31, 2016, 0.90% of our loan portfolio was delinquent.  We have adopted a proactive approach in responding to delinquencies in our loan portfolio. For loans which we act as the lead lender, we make direct contact with the borrower within ten (10) days of an initial late payment. If the situation progresses to 30 days or more, we follow up with an onsite visit to discuss the borrower’s circumstances and how the borrower can bring the loan current.



In the event that an acceptable workout of a delinquent mortgage cannot be reached, we, or ECCU for any loans it services for us, will generally proceed with a foreclosure proceeding on any collateral securing the loan.  At December 31, 2017, we did not have any loan investments in which we or the lead lender in the loan was pursuing foreclosure.  Since inception, we have had eight mortgage loan investment losses that resulted in charge-offs, one of which occurred during the year ended December 31, 2016.  The same loan also had a charge off in 2017.    

 

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Non-performing Loans 



The table below sets forth the amounts and categories of non-performing loans 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 nonaccrual status.  Non-accrual loans represent loans on which interest accruals have been discontinued.  As shown in the table below, our non-performing loans included one non-accrual loan with a recorded balance of $322 thousand that is not considered impaired.  Troubled debt restructuring arrangements (or “TDRs”) are loans which include renegotiated loan terms to assist borrowers who are unable to meet the original terms of their loans.  Such modifications may include a lower interest rate, an extension of the maturity date or reduction in accrued interest.  All TDRs (restructured loans) are initially placed on non-accrual status regardless of whether the loan was performing at the time it was restructured. During the past two years, there have been no material changes in our practices or policies governing how we handle a non-performing loan.

The following is a summary of our non-performing mortgage loans at December 31, 2017, and 2016, respectively (dollars in thousands):







 

 

 

 

 

 

 

 



 

2017

 

 

2016

 



 

 

 

 

 

 

 

 

Restructured loans on non-accrual status

 

 

7,546 

 

 

 

8,192 

 

Other impaired loans on non-accrual status

 

$

495 

 

 

$

686 

 

Loans not impaired on non-accrual status

 

 

322 

 

 

 

--

 

Total non-accrual loans

 

 

8,363 

 

 

 

8,878 

 

Impaired loans on accrual status

 

 

1,214 

 

 

 

--

 

Total non-performing loans on accrual status

 

 

1,214 

 

 

 

--

 

Total non-performing loans

 

$

9,577 

 

 

$

8,878 

 



 

 

 

 

 

 

 

 

Non-performing loans as a percentage of total loans

 

 

6.3 

%

 

 

6.0 

%





   

The Company had eleven and ten nonaccrual loans as of December 31, 2017 and 2016, respectivelyFor the years ended December 31, 2017 and 2016, $558 thousand and  $468 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 $5 thousand was included in income for the year ended December 31, 2016 on non-accrual loans through the accretion of loan discount related to the net present value of cash flows.  No interest was recorded on non-accrual loans through the accretion of loan discount related to the net present value of cash flows for the year ended December 31, 2017.  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 December 31, 2017 and 2016, the Company did not have any loans past due 90 days and still

 

17

 

 


 

accruing.  For the year ended December 31, 2017, the performance of the mortgage loans we hold has substantially improved.



Restructured Loans 



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 December 31, 2017 and 2016 (dollars in thousands):





 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 



 

2017

 

2016



 

 

 

 

 

 

 

 

Number of restructured loans

 

 

 

 

 

 

Balance of restructured loans

 

$

7,546 

 

 

$

8,192 

 

Percentage of loan portfolio

 

 

4.94 

%

 

 

5.54 

%

Allowance for loan losses associated with restructured loans

 

$

1,184 

 

 

$

1,039 

 

Discounts associated with restructured loans

 

$

773 

 

 

$

756 

 



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

 

18

 

 


 

keep their ministries intact and avoid foreclosure.  With a successful loan restructure, we minimize a loan charge-off and protect the interests of our investors and borrowers we serve.



The number of restructured loans as a percentage of our total loan portfolio, while higher than historical levels we incurred prior to the 2008 global economic crisis, are within manageable limits, and the delinquency rates on our mortgage portfolio has 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 the light of current economic and operational conditions.



Investment in Joint Venture



In January 2014, we acquired 3 acres of vacant land in Santa Clarita, California as the result of a deed in lieu of foreclosure agreement we entered into with the borrower.  On December 23, 2015, we executed a grant deed to the Santa Clarita property to Tesoro Hills, LLC, a California limited liability company formed by us and Intertex Property Management, Inc., a California corporation (“Intertex”).  The limited liability company was established as a real estate joint venture to develop, market, sell, lease and manage the property for the benefit of the members. We hold a 30% interest in the Tesoro Hills joint venture. 



Our initial investment in the joint venture was $900 thousand, and due to operating costs of the joint venture, our investment is now valued at $896 thousand.  After performing an evaluation of the venture, we have concluded that it is not impaired.



Foreclosed Asset Transactions  



As of December 31, 2017, we do not own any foreclosed assets.



Allowance for Loan Losses



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



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



 

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Risk ratings are determined by grading a borrower on certain metrics, which include financial performance, strength of management, credit history, and condition of the local economy.  These ratings are updated on an annual basis, or more frequently as necessary.  By segregating the portfolio in this manner, our senior management 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 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 loan changes.  The change in the present value of cash flows attributable to the passage of time is reported as interest income.  If a loan is collateral-dependent, even if that loan has been restructured, we establish an allowance for loan loss based on the value of the collateral securing the loan less estimated costs to sell the collateral.



At December 31, 2017, and December 31, 2016, our allowance for loan losses was $2.1 million, and $1.9 million, respectively, or 1.37% and 1.27%, of our total loan portfolio for the periods.  The increase in our allowance for loan losses is due to several factors.  First, we increased the specific allowance related to other impaired loans by $229 thousand due to management’s estimates of a decrease in collateral values of two of our collateral dependent loans.  We also increased the general allowance by $34 thousand due to the increase in our aggregate loan investments.  These increases were offset by a $41 thousand decrease in the allowance based upon the net present value differences of one of our restructured loans. 



Assessing the adequacy of our allowance for loan losses is inherently subjective as it requires us to make material estimates, including the amount and timing of future cash flows we expect to receive on impaired loans that may be susceptible to significant change.  In the opinion of management, the allowance, when taken as a whole, reflects all known and inherent credit losses in our mortgage loan portfolio as of December 31, 2017.



 

20

 

 


 

The following represents a breakdown of the components of our allowance for loan loss at December 31, 2017, and 2016 (in thousands):





 

 

 

 

 

 



 

 

 

 

 

 



 

2017

 

2016



 

 

 

 

 

 

Specific allowance related to collateral dependent loans

 

$

930 

 

$

701 

Allowance based on net present value differences of restructured loans

 

 

330 

 

 

371 

General allowance

 

 

837 

 

 

803 

Total allowance

 

$

2,097 

 

$

1,875 



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 wholly-owned loans and the retained portion of loans originated by the Company and sold for which the Company possesses a senior lien on the collateral underlying the loan.



Wholly-Owned Junior Collateral Position. This portfolio class consists of the wholly-owned loans and the retained portion of loans originated by the Company and sold for which the Company possesses 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.  These loans present higher credit risk than loans for which the Company possesses a senior lien due to the increased risk of loss should the loan default.



Participations First Collateral Position. This portfolio class consists of the participated loans purchased from another financial entity for which the Company possesses a senior lien on the collateral underlying the loan. Loan participations purchased present higher credit risk than wholly owned loans because the Company does 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 those of the Company.



Participations Junior Collateral Position. This portfolio class consists of the participated loans purchased from another financial entity for which the Company possesses a lien on the underlying collateral that is superseded by another lien on the same collateral.  Loan participations in the junior collateral position loans have higher credit risk than wholly owned loans and participated loans purchased where the Company possesses a senior lien on the

 

21

 

 


 

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, special mention, 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. Special mention assets exhibit potential or actual weaknesses that present a higher potential for loss under adverse circumstances, and deserve management’s close attention. If uncorrected, these weaknesses may result in deterioration of the repayment prospects for the loan at some future date.    Substandard assets include those assets characterized by the distinct possibility that we will sustain some loss if the deficiencies are not corrected. Assets classified as doubtful have all of the weaknesses inherent in those classified substandard with the added characteristic that the weaknesses make collection or liquidation in full highly questionable and improbable, based on currently existing facts, conditions and values. Assets (or portions of assets) classified as loss are those considered uncollectible and of such little value that their continuance as assets is not warranted. Assets that do not expose us to risk sufficient to warrant classification in one of the aforementioned categories, but which possess potential weaknesses that deserve close attention, are designated as watch.



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; (ii) preserves our capital base; and (iii) generates consistent income for distribution to our note holders and 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. 



Employees



Effective as of June 1, 2017, we entered into a staffing agreement with Total HR, which provides us with payroll and staffing services.  As of December 31, 2017, we had 19 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.



 

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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 National Credit Union Administration (“NCUA”) that apply to CUSOs.  As a CUSO, we primarily serve the interests of our credit union equity holders 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, securities brokers and financial advisers.



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 Financial Institutions (“DFI”) which is a part of the California Department of Business Oversight (“DBO”), in particular, must comply with DFI 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 flow directly to our equity owners 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. 

 

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We conduct our commercial lending activities under California Finance Lender License # 603F994.



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



As we expand our loan originations outside of the State of California, we will need to comply with laws and regulations of those states.  The statutes which govern mortgage lending and origination activities vary from state to state.  Because these laws are constantly changing, due in part, to the challenge facing the real estate industry and financial institutions from 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 Department 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

 

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petroleum contamination) could be subject to liability for cleanup 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.  We continue to monitor and evaluate the impact the Dodd-Frank Act could have on our business and we believe that many of the provisions of the Act and regulations adopted thereunder do not have a material impact on our business and operations.  Certain provisions that have not been implemented, however, could affect our business and include, but are not limited to (i) the implementation of more stringent fiduciary standards for broker dealers resulting from a rule proposed and temporarily suspended by the U.S. Department of Labor (“DOL”) and potential establishment of a new self-regulatory organization for investment advisors.



Broker Dealer Registration



U.S. broker dealers are subject to rules and regulations imposed by the SEC, FINRA, other self-regulatory organization and state securities administrators covering all aspects of the securities business.  Our wholly-owned broker-dealer firm, Ministry Partners Securities, LLC, commenced operations in 2012.  As a registered broker-dealer under Section 15 of the Securities Exchange Act of 1934 (the “Exchange Act”), MP Securities is subject to regulation by the U.S. Securities and Exchange Commission and regulation by state securities administrators in the states in which it conducts its activities.  We have registered MP Securities in the states of Arizona, California, Colorado, Florida, Georgia, Idaho, Illinois, Indiana, Kansas, Minnesota, Missouri, Nevada, New York, Ohio, Oregon, Pennsylvania, Rhode Island, South Carolina, Tennessee, Texas, Washington, West Virginia and Wisconsin.



As a small broker dealer that does not hold customer funds or securities, MP Securities is subject to rules and regulations regarding net capital, sales practices, public and private securities offerings, capital adequacy, record keeping and reporting, conflicts of interest involving related parties, conduct of officers, directors and employees, qualification and licensing of supervisory and sales personnel, marketing practices, and supervisory and oversight of personnel to ensure compliance with securities laws.  MP Securities is also subject to the financial responsibility, net capital, customer protection, record-keeping and notification rule amendments adopted by the SEC on July 30, 2013.  Because MP Securities does not carry or hold customer funds or securities and relies upon a clearing firm to conduct these transactions, Rule 17a-5 requires that it

 

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file an exemption report as well as reports prepared by an independent public accountant confirming that it meets the exemption provisions.  As amended, the net capital rule requires that MP Securities take into account in its computation of regulatory net capital any liabilities the Company assumes as its parent entity.



MP Securities is also subject to routine inspections and examinations by the SEC staff under Rule 17(b) of the Exchange Act and the SEC is authorized to review, if requested, the work papers of the broker dealer’s independent public accounting firm that conducts the audit.  As required by amendments to Rule 17a-5 of the Exchange Act, MP Securities files an annual report with the SEC and FINRA that includes its audited financial statements, supporting schedules and its exemption report as a non-carrying broker-dealer.  MP Securities is a member of the Securities Investor Protection Corporation (“SIPC”) and files a copy of its annual report with SIPC.



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.



Due to our close affiliation with MP Securities, we are subject to related party transaction disclosure issues under federal and state securities laws and rules adopted by FINRA.  In particular, related party transactions can raise regulatory concerns in determining whether MP Securities meets its net capital requirements, whether the allocation of costs are fairly treated in any expense sharing arrangements, or management services agreements entered into with the Company, review of compensation paid to sales representatives in selling proprietary securities products offered by the Company and complying with the suitability, know your customer and fair practices and dealings obligations under federal and state law and rules imposed by FINRA on broker dealer firms.    MP Securities is also subject to FINRA’s review and policies governing disclosure practices when offering proprietary securities products, training its staff to identify and manage conflicts of interest and reporting on significant conflict issues, including the firm’s adopted measures to identify and manage conflicts, to the MP Securities Board of Managers and its Chief Executive Officer.



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 will be subject to additional rules and regulations governing sales practices and suitability rules imposed on member firms.  MP Securities also acts as a selling agent for the Company’s privately offered debt securities.  Because MP Securities participates in the offer and sale of the Company’s publicly and privately offered debt securities, it is required to comply with FINRA’s filing requirements for these offerings.  We believe that MP Securities has fully complied with its filing obligations as required under applicable FINRA, SEC and state securities laws. 

 

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Our wholly-owned subsidiary, MP Securities, is also required to maintain minimum net capital pursuant to rules imposed by FINRA.  In general, net capital is the net worth of the entity (assets minus liabilities) less any other imposed deductions or other charges.  If a member firm fails to maintain the required net capital it must cease conducting business and, if it does not do so, it may be subject to suspension or revocation of registration by the SEC and suspension or expulsion by FINRA.  Under its Membership Agreement entered into with FINRA, MP Securities is required to maintain minimum net capital of the greater of $5,000 or one fifteenth of its aggregate indebtedness.  As required by the 2013 amendments adopted by the SEC, MP Securities is required to include any liabilities that have been assumed by the Company unless the Company is able to demonstrate that it has adequate capital to pay such expenses.



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 adverse 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.



Fiduciary Standards



Under the Dodd-Frank Act, the SEC was authorized to consider whether broker dealer firms should be held to a standard of care similar to the fiduciary standard applied to registered investment advisors.  Although the SEC has not adopted the fiduciary rule for broker dealer firms, the DOL issued final regulations in April 2016 which expanded the definition as to who will be deemed to be an “investment advice fiduciary” under the Employment Retirement Income Security Act of 1974 (“ERISA”).  DOL also issued a new prohibited transaction exemption generally known as the best interest contract exemption designed to address conflicts that may arise when a person provides advice to a retail investor that may be vulnerable to conflicts of interest involving the advisory firm.



 

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With the issuance of the DOL fiduciary rule under ERISA, fiduciary status would be extended to investment advisors and investment professionals that have previously not been considered fiduciaries.  If deemed a fiduciary, the representative is held to a strict standard requiring the representative to act solely in the interests of plan participants and beneficiaries.  With the adoption of the fiduciary standard, the representative is subject to personal liability to the ERISA plan for breaches of its actions under the rule.  Implementation of the DOL fiduciary rule, especially in the context of an IRA rollover handled by a MP Securities adviser or sales representative and subsequent investment of such funds in our proprietary debt securities, will require that we incur additional compliance costs, engage in further training initiatives, undertake a thorough review of available transactional exemptions from the rule, prepare agreements to comply with such rule and implement information technology revisions to our policies and procedures to comply with DOL’s fiduciary rule. 



On February 3, 2017, President Trump issued a Memorandum to DOL requesting that it analyze whether the fiduciary rule with an effective date of April 10, 2017 will adversely impact the ability of Americans to gain access to retirement information and financial advice and further requested that DOL prepare an updated economic and legal analysis of the impact of the rule.  On November 27, 2017, the DOL officially delayed the start of the aforementioned fiduciary rule by announcing an 18 month extension for the start of key provisions of the fiduciary rule, moving back the compliance date to July 1, 2019.  On March 15, 2018, the 5th U.S. Circuit Court of Appeals nullified the DOL’s fiduciary rule and upheld a sweeping challenge to DOL’s authority to enforce its fiduciary rule.  Other courts, however, have reached a different conclusion.  Individual states, in addition, may take a different approach and apply the fiduciary standard to transactions subject to that state’s regulatory authority.  The SEC has also announced that it is working on a proposed fiduciary rule that would govern the sale of securities products by brokers and investment advisers.  We are continuing to monitor developments with the DOL fiduciary rule and have adopted an assets under management fee compensation model that will be applied to sales of our debt securities made by MP Securities representatives.  We believe that implementing this change will (i) more closely align the compensation program used by MP Securities for its representatives with the interests of investors in our debt securities; and (ii) reduce the offering costs of our securities offerings, thereby increasing the net proceeds received by the Company from the sale of such securities to further the Company’s strategic objectives.



Privacy Standards



The Gramm-Leach-Bliley Financial Services Modernization Act of 1999 (“GLBA”) modernized the financial services industry by establishing a comprehensive framework to permit affiliations among commercial banks, insurance companies, securities firms and other financial service providers. We are subject to regulations implementing the privacy protection provisions of the GLBA. These regulations require us to disclose our privacy policy, including identifying with whom we share “non-public personal information” to our investors and borrowers at the time of establishing the customer relationship and annually thereafter. The State of California’s Financial Information Privacy Act also regulates consumer’s rights under California law to restrict the sharing of financial data.  In recent years, there has been a heightened legislative and regulatory focus on data security, including requiring customer notification in the event of a data breach. 

 

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Congress has held several hearings in the subject and legislation has been introduces which would impose more rigorous requirements for data security and response to data breaches.  As MP Securities expands its investment adviser business operations, it will also need to monitor regulatory initiatives promulgated under Dodd-Frank that affect investment advisers.









 

Item 1A.

RISK FACTORS



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 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 Form 10-K and the information incorporated by reference in this Form 10-K.



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:



·

quality of the mortgage loan assets we own and the profitability of our operations;

·

limitations imposed under our credit facility arrangements and trust indenture agreements that contain restrictive and negative covenants that may limit our ability to borrow additional sums or sell our publicly and privately offered debt securities;

·

strength of the lenders from whom we borrow; and

·

borrowing limitations imposed under our credit facilities.

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. Unexpected large withdrawals by investors that hold our debt securities that can negatively affect our overall liquidity.



We have expanded our methods of raising capital, including seeking financing from institutional lenders, selling participations in our mortgage loan investments, and expanding the sales of our

 

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debt securities to institutional, corporate, and retail investors. For the year ended December 31, 2017, total assets increased to $161.0 million as compared to $156.6 million at December 31, 2016.  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, 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, a FINRA member broker-dealer in 2012, acts as a selling agent for our notes offerings, insurance products, and investment advisory services.   Our ability to attract new investors in our debt securities and increase the sale of our debt securities will depend, to a substantial degree, on our ability to assemble an effective advisory 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 equip a qualified group of advisors at MP Securities, we may not be able to increase sales of the Company’s debt securities, strengthen our balance sheet and effectively utilize the investment in our core data processing and information systems we have implemented.



We depend on repeat purchases by a significant number of investors in our debt securities to finance our business.



A significant percentage of the investors who purchase our debt securities purchase new notes after we repay their notes. For the years 2008 – 2011, on average, 71% of the investors that purchased one of our publicly offered notes had previously purchased one of our debt securities. However, the average dropped to 40% during 2012 – 2013 as regulatory constraints were imposed on investments in our publicly offered debt securities due to suitability and concentration of investment restrictions that limit the amount of our debt securities that may be purchased by an investor. Since the restrictions were imposed, the Company has concentrated on serving clients that meet these suitability restrictions.  Consequently, the renewal rate has steadily increased averaging 57% for the years 2014 – 2017 with the rate climbing to 64% for the year 2017.  There is no assurance that historical patterns of repeat purchases made by investors will resume or that the recent improvement in our reinvestment rate will continue in the future. If the rate of repeat investments made by previous investors declines, our ability to maintain or grow our asset base could be impaired.



Some of our debt securities investors may be unable to purchase our Class 1A or other public offering notes due to FINRA’s investor suitability standards.



When handling sales of our investor notes, MP Securities and its sales advisors 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.

 

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Deterioration in real estate values which collateralizes our mortgage loan investments could lead to losses and reduced earnings.



In previous years, we have recorded additional provisions for losses related to real estate assets acquired after we initiated loan foreclosure proceedings.  If we take ownership of a property as part of a foreclosure action when a borrower defaults on one of our mortgage loan investments, we could be required to write down the value of a real estate owned asset and record a charge to our earnings if the value of the property declines further after we take title to the property.  Further deterioration could lead to an increase in non-performing assets, increased credit losses, and reduced earnings.    



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



Our success is dependent, in part, upon our ability to effectively manage our balance sheet assets through the use of leverage. A significant amount of our assets are pledged as collateral for borrowings. Our Board of Managers has overall responsibility for our financing strategy. Leverage creates an opportunity for increased net income, but at the same time creates risks. For example, leveraging magnifies changes in our net worth. We will incur leverage only when we expect that it will enhance our investment returns. To the extent that we fail to meet our debt service obligations, we risk the loss of some or all of our assets to satisfy these debt obligations. There can be no assurance that we will be able to meet our debt service obligations and, to the extent that we cannot, we risk the loss of some or all of our assets, or a financial loss if we are required to liquidate assets at a commercially inopportune time. At December 31, 2017, we had $150.5 million of total debt obligations on our balance sheet. Of this amount, we owed $81.4 million under our institutional credit facilities and $69.0 million on our investor debt securities. Approximately 14% of our total debt obligations is payable in the years ending December 31, 2018, 2019 and 2020,  in each year.  



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. The Company was profitable in seven out of ten years during the years 2008 - 2017 totaling $4.0 million in net income.  However, primarily due to increases in our allowance for loan losses and deleveraging of our balance sheet as a result of the post-recession economic landscape, the Company incurred net losses of $1.6 million, $1.0 million, and $1.9 million in calendar years 2010, 2011, and 2014, respectively, totaling $4.5 million.  While the Company has been steadily strengthening and diversifying its sources of revenue to mitigate the risks described above, we can give no assurances that we will be able to achieve and maintain consistent profits due to the uncertainties related to commercial real estate lending.



 

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



For the year ended December 31, 2017 and the year ended December 31, 2016, we recorded a provision for loan losses of $262 thousand and $113 thousand, respectively.  Although we regularly evaluate our financial reserves to protect against future losses based on the probability and severity of the losses, there is no guarantee that our assessment of this risk will be adequate to cover any future potential losses.



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



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



At December 31, 2017 and December 31, 2016, our non-performing assets totaled $9.3 million and $8.9 million, respectively or 5.7% of our total assets, in each year.  Nonperforming assets adversely affect our net income in the following ways:



·

We do not record interest income we receive on collateral-dependent, non-performing loans.



·

We are required to record allowances for probable losses through a current period charge to the provision for loan losses or provision for other real estate owned assets.



·

Non-interest expense increases when we write down the value of properties in our other real estate owned portfolio to reflect changing market values.



·

There are legal and other professional fees associated with the resolution of problem real estate owned assets, as well as carrying costs, such as taxes, insurance and maintenance fees related to our other real estate owned assets.



·

The resolution of non-performing assets requires active involvement of our management team, which can divert them from focusing on the Company’s core strategic objectives.



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

 

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Our credit facilities are collateralized by a portion of our mortgage loans; therefore these pledged assets will be unavailable to meet our unsecured debt obligations.



Our NCUA credit facilities, the MU Credit Facility and the WesCorp Credit Facility Extension,  require that we secure the facilities with mortgage loans, maintaining a minimum collateralization ratio (“MCR”) of at least 120% for the two credit facilities in total. Loans that are pledged as collateral to the credit facilities will be unavailable for other cash flow purposes, including meeting our unsecured debt obligations.  If at any time, we fail to maintain the MCR requirements, we will be required to deliver cash or qualifying mortgage loans in an amount sufficient to meet the MCR requirements.  If the Company has exceeded the MCR, we may request and receive a release of collateral up to the dollar amount sufficient for the Company to maintain the MCR requirements. See Note 9 of the Notes to the Consolidated Financial Statements in Part II, Item 8 of this Report for further details. 



As of December 31, 2017, $98.6 million of the $152.7 million of gross loans were pledged to the credit facilities, leaving $54.1 million not pledged to the NCUA credit facilities.  As of the date of this Report, we are in compliance with our MCR covenants as required by our credit facilities.



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 our investor notes.



 

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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 will require that we payoff our $63.4 million MU Credit Facility and $18.1 million WesCorp Credit Facility Extension on November 1, 2026. If we are unable to roll-over, extend, refinance or replace such credit facilities on attractive terms, we may have to rely upon less efficient forms of financing new investments, which will result in fewer loan acquisitions or originations of profitable mortgages and further deleveraging of our balance sheet and thereby reduce the amount of earnings available for distributions to our equity investors and funds available for operations and to meet our debt service obligations.



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



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



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



We have used borrowing facilities obtained from institutional lenders and relied upon offerings of debt securities in SEC registered offerings to fund the origination or acquisition of mortgage loans made to evangelical churches and ministries. Lending borrowed funds subjects us to interest rate risk which is largely determined by the difference, or “spread”, between the interest rates we pay on the borrowed funds and the interest rates our borrowers pay on our mortgage loan investments. An increase 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.



 

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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.



Our broker dealer and investment advisory business depends on fees generated from the distribution of financial products and advisory fees.



One of our core strategic objectives is to increase non-interest earning revenues generated by our wholly-owned subsidiary, MP Securities.  To that end, MP Securities receives a significant portion of its revenues from fees generated from the distribution of financial products, such as mutual funds and variable annuities.  Changes in the structure or amount of fees paid by sponsors of these products could directly affect the revenues and net earnings of our subsidiary, MP Securities.  In addition, if these products experience losses or increased investor redemptions, MP Securities could generate lower fee revenues from the distribution and sale of mutual funds, annuities, and securities products offered to its clients and customers.



The ability to attract and retain qualified financial advisors and associates is critical to MP Securities’ continued success.



As we continue to expand the non-interest generating sources of revenues of our business, we will need to attract, recruit, and retain qualified investment and financial advisors that complement the services we provide to our credit union equity owners and their members.  Turnover in the financial services industry with broker dealer and advisory firms is high.  If we are unable to recruit, attract, and retain qualified professionals, our strategic goal of expanding the non-interest generating segment of our business could be jeopardized, thereby adversely affecting our net earnings and financial condition.



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 were 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 have significantly improved our liquidity position through (i) the successful refinancing of our MU Credit Facility and WesCorp Credit Facility Extension in late 2011; (ii) relief granted from certain minimum collateralization requirements under these credit facilities in 2015; (iii) the extension of the maturity date of our credit facilities granted in November 2016; (iv) the sale of all of our foreclosed assets; (v) the

 

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payoff of some of our mortgage loan investments; and (vi) an increase in note sales, we will need to monitor and successfully manage our liquidity requirements as necessary when redemption requests for our debt securities are received, or a debt security investment matures and is not re-invested in another debt security we may offer.



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



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



From time to time, we  have engaged 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, including our largest equity owner, ECCU and our newest shareholder, ACCU. While the Company has taken extraordinary measures to mitigate any risks, these procedures may not be sufficient to address conflicts of interest that may arise.  



 

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



None of our equity owners 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 equity owners to do so. In such event, one or more of our equity owners may be unwilling or unable to make voluntary additional capital contributions or loans because their financial capabilities are at the time impaired. Also, if an equity owner’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 Asset Management Assistance Center (AMAC), NCUA or other regulatory agency, it is unclear what rights, if any, that agency will have to exercise that owner’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:



·

interest rates and credit spreads;



·

the availability of credit, including the price, terms and conditions under which it can be obtained;



·

loan values relative to the value of the underlying real estate assets;



·

default rates on special purpose mortgage loans for churches and ministries and the amount of the related losses;



·

the actual and perceived state of the real estate markets for church properties and special use facilities; and



·

unemployment rates.



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. In past years, these events had adverse effects on our business resulting in significant increases in our provision for loan losses and unavailability of financing for the acquisition and warehousing

 

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of our mortgage loan investments. Deterioration in U.S. economic conditions could harm our financial condition, income and ability to make distributions to our equity investors.



Declining real estate values could harm our operations.



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. 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.  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.



 

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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, the Department of Insurance, the California Department of Business Oversight and securities regulators in the states where MP Securities conducts business. To the extent MP Securities engages in securities and insurance-related activities in a particular state, state securities and insurance administrators will have jurisdiction over the activities of our broker-dealer affiliated entity. In addition, the real estate brokerage activities of MP Realty and our mortgage lending business are subject to various state regulatory authorities. The failure to comply with obligations imposed by any federal, state or other applicable regulatory authority binding on us or our subsidiaries or to maintain any of the licenses or permits required to be maintained by us could result in investigations, sanctions and reputation damage.



The enactment of the Dodd-Frank Act, including the adoption of the proposed new fiduciary rule or additional regulations affecting broker dealer and investment adviser firms, could affect our business.



With the enactment of the Dodd-Frank Act and increased regulatory scrutiny of financial institutions, broker dealers, and investment advisory firms, we will need to carefully monitor the impact of regulatory changes on the broker dealer and investment advisory services provided by our wholly-owned subsidiary, MP Securities.  Certain proposed revisions, including the adoption or revision of the proposed DOL fiduciary standard rule and enhanced regulatory oversight of incentive compensation paid to investment advisors, could affect our business.  In particular, the adoption of the DOL fiduciary standard rule could materially affect IRA accounts, IRA rollovers, and the investment of funds rolled over from an IRA into other investments.  Even though the DOL’s fiduciary standards rule has been delayed until 2019, we will continue to monitor the impact of new regulations proposed and/or adopted by the SEC, DOL and FINRA on our broker dealer and investment advisory business.



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. There is intense competition from financial institutions that are looking to make commercial loans at competitive rates to qualified borrowers. In addition, approximately 15% of the principal balance of our total mortgage loans will need to be refinanced during the year ending December 31, 2018. If a significant number of borrowers refinance their loans with another lender, our business and profitability could be adversely affected.



 

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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 equity owners 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 interest rate adjustment or maturity date. A significant portion of our borrowing arrangements with our note investors and credit facility lenders, however, provides for variable rates of interest that are indexed to short-term borrowing rates or fixed rates on short-term maturities. To mitigate our interest rate risks, we have entered into, and may enter into in the future, interest rate hedging transactions that include, but are not limited to, interest rate caps and interest rate swaps. The results of using these types of instruments to mitigate interest rate risks are not guaranteed, and as a result, the volatility of interest rates could result in reduced earnings or losses for us and negatively affect our ability to make distributions of earnings to our equity investors.



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



Some of our assets are participation interests in loans or co-lender arrangements in which we share the rights, obligations and benefits of the loan with other lenders. We may need the consent of these parties to exercise our rights under such loans, including rights with respect to amendment of loan documentation, enforcement proceedings in the event of default and the institution of, and control over, foreclosure proceedings. Similarly, a majority of the participants may be able to take actions to which we object but to which we will be bound if our participation interest represents a minority interest. We may be adversely affected by this lack of full control. As of December, 2017 and 2016, our investments included $10.9 million and $10.8 million, respectively, in loan participations, representing 7% of our portfolio in each year.



 

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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 as described in our Board adopted loan policy. 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, which may change depending on the state of the economy.



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



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



·

decisions regarding our contract with ECCU for our office facilities;



·

managing foreclosure actions and real estate owned properties acquired in foreclosure or other proceedings when ECCU and the Company each hold an economic interest in a mortgage loan;



·

decisions relating to shared marketing programs and use of ECCU’s facilities by MP Securities personnel to offer investment products to ECCU’s members;



·

decisions regarding collection and enforcement actions taken by ECCU when it acts as primary lender of a loan participation interest or as servicer for one of our mortgage loan investments; and



·

decisions regarding agreements entered into with ECCU for loan underwriting, processing, marketing, and customer support and services.



 

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



We have further mitigated these conflicts of interest by forming a Credit Review Committee, of which all members are unrelated to ECCU. This committee makes most of the loan approval decisions under our Church and Ministry Loan Policy as adopted by our Board of Managers. 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 Board Credit Committee or Board of Managers.



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



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



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



We are among a limited number of non-bank financial institutions specialized in providing loans to evangelical churches and church organizations. Moreover, 16.8% of our mortgage loan investments involve California borrowers or are secured by properties located in California, while 20.1% involve borrowers located in Maryland. 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

 

42

 

 


 

we need additional liquidity. The amount we would realize is dependent on several factors, including the quality and yield of similar mortgage loans and the prevailing financial market and economic conditions. Although we have never sold a performing loan we own for less than par, it is possible that we could realize substantially less than the face amount of our mortgage loans, should we be required to sell or hypothecate them. Thus, the amount we could realize for the liquidation of our mortgage loan investments is uncertain and cannot be predicted.



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

 

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



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



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



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



Some loans in our investment portfolio have been restructured or may otherwise be at risk or under credit watch. 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

 

43

 

 


 

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:



·

uninsured casualty loss (such as an earthquake or flood);



·

a decline in the local real estate market;



·

undiscovered defects on the property;



·

waste or neglect of the property;



·

a downturn in demographic and residential trends;



 

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·

a decline in growth in the area in which the property is located. Also, churches and church-related properties are generally not as marketable as more common commercial, retail or residential properties.



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 initially determined upon 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.



 

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



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



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



We compete with church bond financing companies, banks, credit unions, 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, 2017 and

 

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2016, we held $3.6 million and $11.8 million, respectively in construction loans that have been disbursed.  As of December 31, 2017, a total of $4.6 million has been authorized for construction loans, including previously disbursed funds.    





 

Item 1B

UNRESOLVED STAFF COMMENTS



None.







 

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Item 2. 

PROPERTIES



Corporate Offices



As of December 31, 2017, the Company conducts its operations from its main corporate office at 915 West Imperial Highway, Suite 120, Brea, California.  In addition, the Company has one branch office located in Fresno, California. All of our office spaces are under operating leases.  See further discussion in “Note 11, Commitments and Contingencies in the Notes to Consolidated Financial Statements” in Part II, Item 8 of this Report.  



Investment Property



As of December 31, 2017, the Company had one investment in a joint venture that owns a property located in Santa Clarita, California.  Additional information regarding the Company’s investment in the joint venture is included in Note 5 of the Notes to the Consolidated Financial Statements in Part II, Item 8 of this Report.







 

Item 3.

LEGAL PROCEEDINGS



Due to 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.  We consider litigation related to our loan portfolio to be routine to the conduct of our business. 



On November 11, 2017, Mr. Harold D. Woodall, former Senior Vice President and Chief Credit Officer, filed a suit against the Company and its Chief Executive Officer and President, Joseph Turner, Jr., in the Superior Court of Orange County, California.  Mr. Woodall’s employment arrangement with the Company terminated effective as of September 5, 2017.  Mr. Woodall’s suit alleges that the Company wrongfully terminated his employment and violated California’s Fair Employment and Housing Act of 1959, and the California Labor Code’s whistle blowing law.  Mr. Woodall seeks compensatory damages, punitive damages, attorney’s fees and other relief as the court deems just.  The Company believes the allegations in Mr. Woodall’s suit are groundless, without merit and it intends to vigorously contest the allegations set forth in Mr. Woodall’s complaint.  Although the Company believes that it will prevail on the merits, the litigation could have a lengthy process, and the ultimate outcome cannot be predicted.







 

Item 4.

MINE SAFETY DISCLOSURES



Not applicable.

 

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PART II

 



 

Item 5.

MARKET FOR OUR COMMON EQUITY, RELATED MEMBER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

 

Price Range of Common Units



There is no public market for our Class A Units and Series A Preferred Units (the “Series A Units”).  Effective as of December 31, 2008, we converted our form of organization from a California corporation to a California limited liability company.  As a result of the conversion, each share of our common stock immediately outstanding prior to the conversion date was converted into one fully paid and non-assessable unit of our Class A Units and each holder of our Class I and Class II Preferred Stock received one Series A Unit for each share of Class I and Class II Preferred Stock exchanged.  As of December 31, 2017, a total of 146,522 Class A Units were issued, with 11 holders of record, and a total of 117,100 Series A Units were issued, with 12 holders of record.



Sale of Equity Securities by Issuer



During the year ended December 31, 2017, we did not sell Class A Units, Series A Units or equity units.



Purchases of Equity Securities by Issuer



During the year ended December 31, 2017, we did not purchase Class A Units or Series A Units.



Dividends and Distributions



For 2017, we made no distributions to the holders of our Class A Units.    During 2017 and 2016, we made distributions on our Series A Units as follows:



 

 

 

 

 

 



 

 

 

 

 

 

SERIES A UNITS



 

 

 

 

 

 



 

Distributions Declared per Unit

Quarter

 

2017

 

2016



 

 

 

 

 

 

First

 

$

0.506 

 

$

0.364 

Second

 

 

0.496 

 

 

0.369 

Third

 

 

0.512 

 

 

0.454 

Fourth

 

 

1.184 

 

 

1.103 

Total distributions per Unit

 

$

2.698 

 

$

2.290 



 

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On May 14, 2013, the Series A Preferred Unit holders approved the adoption of an Amended and Restated Certificate of Powers, Designations, Preferences and Rights of Series A Preferred Units (the “Amended Series A Certificate”), pursuant to which holders of the Series A Preferred Units approved a reduction in the preferred dividend return payable to the Series A Preferred Unit holders.  Under the Amended Series A Certificate, the Series A Preferred Unit holders are entitled to receive a quarterly cash dividend that is 25 basis points higher than the one year LIBOR rate in effect on the last day of the calendar month for which the preferred return is approved (the “Series A Dividend”).



Payment of the Series A Dividend will have priority over the distribution of profits or income to the Class A Unit holders and any series or class of common units that are hereafter issued.  In the event that we accrue, but do not distribute, the Series A Dividend, no distribution of earnings may be made to the holders of our Class A Units until payment of the Series A Dividend has been made.



In addition to quarterly dividends to our Series A Preferred Unit holders, we have also agreed to set aside funds for payment to the holders of the Series A Units in an amount equal to 10% of our net profits earned for any fiscal year, after subtracting the amount of quarterly Series A Dividends paid during such year.  This priority distribution of our net profits after payment of quarterly Series A Dividend will be made to holders of the Series A Units on a pro rata basis.  The balance of any profits, taking into consideration the preferred distribution to the holders of Series A Units, will be allocated to all holders of our Class A Units in proportion to their percentage interests in our Class A Units.  We accrued $72.0 thousand and $69.7 thousand in net profits to distribute to our Series A Unit holders for the years ended December 31, 2017 and 2016, respectively.  This increased the amount of distributions declared on our Series A Units for the fourth quarters of 2016 and 2017 by $0.62 per unit and $0.59 per unit, respectively.



In the event of a loss, our operating agreement provides that losses will be allocated first to the holders of common units and then to the Series A Unit holders until their respective capital accounts have been reduced to zero.  If the capital accounts of the members cannot offset the entire loss, the balance will be allocated, pro rata, to the holders of common units in proportion to their respective ownership interest in our common equity units.



Equity Compensation Plans



We do not have an equity compensation plans which authorize the issuance of our equity interests to our managers, officers or employees.



 

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Item 6.

SELECTED FINANCIAL DATA



We are a “smaller reporting company” as defined by Regulation S-K and as such, are not providing the information contained in this item pursuant to Regulation S-K.





 

Item 7.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS



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



Overview



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



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



·

maintaining liquidity, growing our balance sheet, and strengthening the quality of our assets;



·

building capital while developing new financing sources;



·

increasing revenues through efforts to expand loan originations and servicing income from loans we originate, and through the sale of loan participation interests;



·

increasing our revenue from broker-dealer related services by offering a full array of wealth management products and services, including the offering of registered investment advisor  and insurance products and services;



 

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·

working with credit unions and other CUSOs to serve the needs of their members and owners, expand our own client base, and increase our fee income from broker-dealer services as well as loan servicing and origination fees;



·

increasing the sale of our investor debt securities, thereby enabling the growth of our balance sheet and the generation of new investment capital;



·

managing and strengthening our loan portfolio through aggressive and proactive efforts to resolve problems in our non-performing assets, increasing cash flows from our borrowers and ultimately realizing the benefit of our investments;



·

broadening the number of clients in our investor debt securities and effectively implementing strategies designed to ensure compliance with FINRA’s suitability and regulatory standards for investments made in our debt securities;



·

developing capital funding sources that are not dependent on the sale of mortgage-backed securities or institutional credit facilities; and



·

managing the size and cost structure of our business to match our operating environment and capital funding efforts.



For the year ended December 31, 2017, we recognized net income of $937 thousand. Our core business thrived as MP Securities, our broker-dealer subsidiary, was able to significantly increase the sale of our proprietary notes by expanding our individual client base, developing relationships with institutional investors, and utilizing the networking agreements we have in place with ECCU and ACCU to offer wealth management products to their members.  Our lending team was able to use these funds to originate additional loans for the year, increasing our net loan balances by 3% as compared to 2016The growth of the key components of our balance sheet was an important contributing factor to the increase in net interest income reported for 2017.



The resolution of non-performing loans will contribute either positively or negatively to the Company’s performance. Therefore, we continue to monitor our loan portfolio very closely and work with borrowers to minimize losses on mortgage loan investments.  We recorded $262 thousand in provisions for credit losses for the year ended December 31, 2017. $229 thousand was added due to taking additional reserves on two collateral-dependent impaired loans.  The Company believes that these additional reserves will enable the Company to implement work out and exit strategies for several of our impaired loans.



Finally, we continue to develop sources of revenue outside our core business.  Our lending and servicing team generated $330 thousand in fee income for the year. We sold additional loans, which generated gains on sale and increased the servicing fee income received from loans in which we have sold participation interests to other credit unions. We also entered into service agreements with ECCU that allows us to use our lending, real estate expertise and relationships with borrowers to generate additional fee income.  MP Securities has continued to expand its

 

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business, as it earned $853 thousand in fee income in 2017, an increase over 2016 of $166 thousand.  The Company’s management team believes that it will be able to use its capabilities in lending, servicing, and investment advisory services to supplement its net interest income with fee income.



Key Factors in Assessing our 2017 Financial Results



For the year ended December 31, 2017, the primary items affecting our operating performance were the following:



·

an increase in interest income due to a $7.1 million increase in average interest-earning loans as we funded  $29.9 million in loans during the year;



·

an increase in average outstanding investor notes of $11.3 million, which provided the cash necessary to fund loans, but also contributed to an increase in interest expense;



·

recording provisions for loan losses of $262 thousand, mainly due to an increase of specific reserves on collateral-dependent loans;



·

an increase in non-interest income of $106 thousand due to increases in fees generated by our subsidiary, MP Securities, partially offset by a reduction in other lending income;



·

a $32 thousand decrease in salary and benefits expenses for 2017 as compared to 2016 due to a reduction in staff from 20 in 2016 to 19 in 2017; and



·

a reduction in office operations expense due to a reduction in premiums associated with the Company’s overall liability insurance program.



We believe that the substantial increase in investor note sales, the performance of our lending team in originating new loans, and the increase in external income generated by the Company’s broker dealer subsidiary were the key drivers behind the Company’s positive earnings achieved in 2017.  The Company’s broker dealer, MP Securities, contributed to our earnings through the sale of other financial products and by providing investment advisory services to members of the credit unions we serve.  In addition, our capacity and capability to service our own loans as well as loans for others allows us to keep our servicing costs down and generate other income.  Our lending team’s experience in handling non-performing assets will continue to be crucial as we look to manage our remaining impaired loans in such a way as to minimize losses.



Financial Condition



We obtain funds for our mortgage loan investments from the sale of our debt securities, which are sold primarily to investors whom 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

 

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to increase the size of our balance sheet, improve our earnings and purchase mortgage loan assets. 



Our total assets as of December 31, 2017 increased to $161.0 million, as compared to $156.6 million at December 31, 2016.  Our total liabilities were $151.6 million at December 31, 2017, as compared to $147.8 million at December 31, 2016. 



The following table sets forth selected measures of our financial performance for the years ended December 31, 2017 and 2016, respectively (dollars in thousands):





 

 

 

 

 

 



 

 

 

 

 

 



 

2017

 

2016



 

 

 

 

 

 

Total income

 

$

10,654 

 

$

9,913 

Provision for loan losses

 

 

262 

 

 

113 

Credit for losses on foreclosed assets

 

 

--

 

 

(6)

Net income

 

 

937 

 

 

922 

Total assets

 

 

161,022 

 

 

156,638 

Borrowings from financial institutions

 

 

81,492 

 

 

86,326 

Notes payable, net of debt issuance costs

 

 

69,003 

 

 

60,479 

Total equity

 

 

9,429 

 

 

9,456 



2017 Developments



Performance of Loan Portfolio.  With the increased liquidity provided to us through note sales and loan sales we funded  $29.9 million in net loans during the yearOur average outstanding loan balance for 2017 was $148.2 million, up from $140.4 million for the year ended December 31, 2016. 



As part of our strategic decision to reposition our loan portfolio, we have continued to focus on originating lower balance loans made to ministries where we can achieve more favorable yields and avoid deteriorating our margins while reducing overall risk exposure to any one borrower.  However, we also have originated larger loans when we are able to find participants to purchase a participation interest in the loan.  This generates servicing fee income while allowing us to minimize our risk exposure on the loan. We believe we have found a good mix in loan size that allows us to take advantage of quality lending opportunities. Our average net loan balance (recorded balance) increased slightly from $919 thousand at December 31, 2016 to $920 thousand at December 31, 2017.    In addition, over the past few years, we have substantially expanded our relationships with credit unions throughout the United States and believe these relationships will enable us to increase the amount of loan participation interests we sell and service for others.



 

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The careful management of our mortgage portfolio, especially in regard to our impaired loans, has helped us stabilize our delinquency ratio, which includes loans 90 days delinquent or greater.  Our delinquency ratio at December 31, 2017 was 1.04%, as compared to 0.9% at December 31, 2016.    Our non-performing loan portfolio remained stable in 2017 as our average recorded investment in impaired loans increased slightly from $8.6 million at December 31, 2016 to $8.8 million at December 31, 2017.    



Enhancing our Capital Funding Sources.  Since the credit crisis of 2008, we have not been able to find a replacement for our institutional credit facilities.  While the refinancing transactions we entered into on November 4, 2011 with the NCUA to amend our Members United and WesCorp credit facilities, including the subsequent amendments thereto, 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.



We believe that we have created the capacity to originate, underwrite and service a larger quantity of mortgage loans and have developed new relationships that will enable us to sell loan participations and effectively leverage our capital assets in a profitable manner.  During 2017, we continued our loan participation sales strategy and received $9.7 million in funds from loan participation sales for the year.  Assuming our liquidity sources of capital remain intact, we intend to continue to utilize existing relationships with other credit unions and CUSOs to sell as much as 90% of qualifying loans we originate and use these funds to originate additional loans. 



The main source of our capital funding has been through MP Securities’ sale of our investor notes through various securities offerings.  The sustained success of our note program is due in part to networking agreements reached with ECCU and ACCU during the last half of 2015. Through these agreements and by offering a number of different products through our public and private placement offerings, we believe we have developed a viable program to offer debt securities for purchase by individuals, churches, and institutional investors to an expanded group of potential investors.  During 2017, MP Securities sold $29.3 million of our publicly and privately offered debt securities, $19.5 million of which represented new investments rather than repurchases of notes using maturing note principal.    



The Company’s primary loan funding will continue be provided by investor note sales, loan participation sales and our NCUA-AMAC loan which matures in 2026. In addition, the Company established a formal relationship with Catalyst Corporate Credit Union in 2017 and we expect to formalize a short-term credit facility with a financial institution to warehouse church mortgages in 2018.



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.  Over the past several years, we have undertaken efforts to expand the scope of revenue generating services we offer in an effort to make us less dependent on a favorable net interest rate margin from our mortgage loan investments to make the Company less susceptible to unfavorable changes in interest rates.  Because we possess the capability to service our own loans, we have significantly increased the portion of our wholly-owned loan portfolio that we service ourselves, thereby reducing the costs

 

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of third party servicers and increasing net interest earned on those loans.   We now service 157 of the 166 loans in our portfolio.    We also use our servicing capabilities to service loan participations for others.    We sold $9.7 million in loans to credit unions and other investors during 2017These sales generated $136 thousand in gains during the year, and combined with other participations that we service, helped to generate $90 thousand in servicing fee income.  As of December 31, 2017, we service $37.4 million in loan participations for investors.



In 2011, our wholly-owned subsidiary, MP Securities, was registered under the Securities Exchange Act of 1934 and approved for membership by FINRA.  In the first quarter of 2012, MP Securities launched its broker-dealer operations and began its efforts to develop a sales force of registered representatives dedicated to the distribution of our debt securities. 



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



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



MP Securities has also entered into networking agreements with our largest equity owner, ECCU, and with equity owner ACCU, a Glendora, California-based credit union, to provide investment services, insurance services, and financial planning assistance to their members.  As part of this arrangement, MP Securities remits a portion of the gross commission received on any transactions consummated with ECCU or ACCU members as a result of the products purchased through MP Securities.  By entering into these networking agreements, MP Securities has been able to expand its client base, offer non-proprietary products and services to the credit unions it serves and their members and generate fee income.



 

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By increasing the scope of the services it can offer and entering into networking arrangements with credit unions, MP Securities has been able to recruit a sales force of registered representatives dedicated to managing our clients’ wealth in a manner consistent with the principles of Biblical stewardship, and act as a selling agent in the distribution of our debt securities.  In 2017, MP Securities’ marketing and sales efforts resulted in an increase in fee and commission revenue for 2017 of $166 thousand as compared to 2016.  If MP Securities continues to successfully implement its strategy, we will be able to (i) strengthen the profitability of our core operations; (ii) grow our balance sheet and ramp up the origination of profitable mortgage loans; (iii) introduce new clients to our proprietary investment products; (iv) increase fee income from assets under management; (v) improve client and investor retention and the renewal rate of our debt securities investors; and (vi) leverage the experience and intellectual capital of our management team through increased loan origination fees and servicing income.



Significant Accounting Estimates and Critical Accounting Policies



Critical Accounting Policies



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



Valuation of Loans



All of our loans are held for investment and are carried at their recorded 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.



 

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Allowance for Loan Losses and Allowance for Losses on Foreclosed Assets



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



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



Management regularly evaluates our allowance for loan losses based upon our periodic review of the collectability of the loans, historical experience, nature and volume of our loan portfolio, adverse situations that may affect the borrower’s ability to repay, value of the collateral and prevailing economic conditions.  Similarly, management regularly evaluates our allowance for losses on foreclosed assets based on the appraisal value of the asset, the listing price of the property when it is offered for sale, offers made by potential purchasers of the property, potential costs involved in selling the property, the sales price of similar properties recently sold in the surrounding area, and any other information that might affect the value of the asset.  Since evaluations of this nature are inherently subjective, we may have to adjust our allowance for loan losses or our allowance for losses on foreclosed assets as conditions change and new information becomes available.



Recent Accounting Pronouncements



In January 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-01, “Financial Instruments – Overall (Subtopic 825-10) – Recognition and Measurement of Financial Assets and Financial Liabilities.” ASU 2016-01, among other things, (i) requires equity investments, with certain exceptions, to be measured at fair value with changes in fair value recognized in net income, (ii) simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment, (iii) eliminates the requirement for public business entities to disclose the methods and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance

 

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sheet, (iv) requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes, (v) requires an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments, (vi) requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset on the balance sheet or the accompanying notes to the financial statements and (vii) clarifies that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity’s other deferred tax assets. ASU 2016-01 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. The guidance requires companies to apply the requirements in the year of adoption, through cumulative adjustment while the guidance related to equity securities without readily determinable fair values, should be applied prospectively. The adoption of this guidance is not expected to have a significant impact on the consolidated financial statements.

   

In February 2016, the FASB issued ASU No. 2016-02 “Leases (Topic 842).” ASU 2016-02 establishes a right of use model that requires a lessee to record a right of use asset and a lease liability for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. For lessors, the guidance modifies the classification criteria and the accounting for sales-type and direct financing leases. A lease will be treated as sale if it transfers all of the risks and rewards, as well as control of the underlying asset, to the lessee. If risks and rewards are conveyed without the transfer of control, the lease is treated as a financing. If the lessor doesn’t convey risks and rewards or control, an operating lease results. The amendments are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years for public business entities. Entities are required to use a modified retrospective approach for leases that exist or are entered into after the beginning of the earliest comparative period in the financial statements, with certain practical expedients available. Early adoption is permitted. Management is assessing the impact of ASU 2016-02 on its accounting and disclosures and expects this pronouncement will not have a material impact on the Company’s consolidated financial position or results of operation.

 

In June 2016, the FASB issued ASU 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” ASU 2016-13 introduces an approach based on expected losses to estimate credit losses on certain types of financial instruments. ASU 2016-13 also modifies the impairment model for available-for-sale debt securities and provides for a simplified accounting model for purchased financial assets with credit deterioration since their origination. ASU 2016-13 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. The guidance requires companies to apply the requirements in the year of adoption through cumulative adjustment with some aspects of the update requiring a prospective transition approach. Management is currently evaluating the potential impact of the pending adoption of ASU 2016-13 on the consolidated financial statements.

 

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In August 2016, the FASB issued ASU 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (a consensus of the Emerging Issues Task Force).” ASU 2016-15 is intended to reduce diversity in practice in how certain transactions are classified in the statement of cash flows. ASU 2016-15 addresses eight classification issues related to the statement of cash flows: (i) debt prepayment or debt extinguishment, (ii) settlement of zero-coupon bonds, (iii) contingent consideration payments made after a business combination, (iv) proceeds from the settlement of insurance claims, (v) proceeds from the settlement of corporate-owned life insurance policies, including bank-owned life insurance policies, (vi) distributions received from equity method invitees, (vii) beneficial interest in securitizations transactions, and (viii) separately identifiable cash flows and application of the predominance principle. ASU 2016-15 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. The guidance requires companies to apply the requirements retrospectively to all prior periods presented. If it is impracticable for a company to apply ASU 2016-15 retrospectively, requirements may be applied prospectively as of the earliest date practicable. Management is currently evaluating the potential impact of the pending adoption of ASU 2016-15 on the consolidated financial statements.

 

In December 2016, FASB issued ASU 2016-20, “Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers,” which is intended to provide clarification of aspects of the guidance issued in ASU 2014-09. ASU 2016-20 addresses (i) loan guarantee fees, (ii) impairment testing of contract costs, (iii) provisions for losses on construction-type and production-type contracts, and (iv) various disclosures. ASU 2016-20 is effective concurrently with ASU 2014-09 which we are required to adopt in the first quarter of fiscal year 2018. The guidance permits companies to either apply the requirements retrospectively to all prior periods presented, or apply the requirements in the year of adoption, through cumulative adjustment. The Company adopted the new revenue guidance effective January 1, 2018, by recognizing the cumulative effect of initially applying the new standard as an adjustment to the opening balance of retained earnings. This cumulative adjustment had an immaterial impact to Company’s consolidated financial position and results of operations.

 

In January 2017, the FASB issued ASU 2017-01, “Business Combinations (Topic 805): Clarifying the Definition of a Business.” ASU 2017-01 is intended to clarify the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. ASU 2017-01 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. Early adoption is permitted for (i) transactions which the acquisition date occurs before the issuance date or effective date of the ASU, only when the transaction has not been reported in financial statements that have been issued or made available for issuance, or (ii) for transactions in which a subsidiary is deconsolidated or a group of assets is derecognized that occur before the issuance date or effective date of the ASU, only when the transaction has not been reported in financial statements that have been issued or made available for issuance. The guidance requires companies to apply the requirements prospectively. ASU 2017-01 is not expected to have a significant impact on the consolidated financial statements.

 

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Consolidated Financial Condition and Results of Operations



Our Balance Sheet as of December 31, 2017 and 2016



 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

Comparison



 

2017

 

2016

 

$ Difference

 

% Difference



 

(Audited) 

 

(Audited) 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

Cash

 

$

9,907 

 

$

9,683 

 

$

224 

 

 

2%

Pledged and Restricted cash

 

 

58 

 

 

653 

 

 

(595)

 

 

(91%)

Loans receivable, net of allowance for loan losses of $2,097 and $1,875 as of December 31, 2017 and 2016, respectively

 

 

148,835 

 

 

144,264 

 

 

4,571 

 

 

3%

Accrued interest receivable

 

 

742 

 

 

657 

 

 

85 

 

 

13%

Investments

 

 

896 

 

 

892 

 

 

 

 

0%

Property and equipment, net

 

 

103 

 

 

115 

 

 

(12)

 

 

(10%)

Servicing assets

 

 

270 

 

 

258 

 

 

12 

 

 

5%

Other assets

 

 

211 

 

 

116 

 

 

95 

 

 

82%

Total assets

 

$

161,022 

 

$

156,638 

 

$

4,384 

 

 

3%

Liabilities and members’ equity

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

NCUA credit facilities

 

$

81,492 

 

$

86,326 

 

$

(4,834)

 

 

(6%)

Notes payable, net of debt issuance costs

 

 

69,003 

 

 

60,479 

 

 

8,524 

 

 

14%

Accrued interest payable

 

 

208 

 

 

173 

 

 

35 

 

 

20%

Other liabilities

 

 

890 

 

 

853 

 

 

37 

 

 

4%

Total liabilities

 

 

151,593 

 

 

147,831 

 

 

3,762 

 

 

3%

Members' equity:

 

 

 

 

 

 

 

 

 

 

 

 

Series A preferred units

 

 

11,715 

 

 

11,715 

 

 

--

 

 

--%

Class A common units    

 

 

1,509 

 

 

1,509 

 

 

--

 

 

--%

Accumulated deficit

 

 

(3,795)

 

 

(4,417)

 

 

622 

 

 

(14%)

Total members' equity

 

 

9,429 

 

 

8,807 

 

 

622 

 

 

7%

Total liabilities and members' equity

 

$

161,022 

 

$

156,638 

 

$

4,384 

 

 

3%



GeneralThe $4.4 million increase in total assets at December 31, 2017, as compared to December 31, 2016 is due primarily to an increase in loans receivable.  Our investor notes payable increased by $8.5 million during the year.  By increasing the sale of investor notes along with participation loan sales and loan maturities, we generated enough cash to fund $29.9 million in loans during the year.  Principal collected and loan sales during the year ended December 31, 2017 was $15.8 million and $9.7 million, respectively. 



Our mortgage loan portfolio consists entirely of loans made to evangelical churches and ministries.  161 of the 166 loan on the Company’s balance sheet are secured by real estate collateral. Five loans, representing 0.98% of our portfolio are unsecured.  Our portfolio carried a weighted average interest rate of 6.31% and 6.28% at December 31, 2017 and December 31, 2016.



Non-performing Assets.  Non-performing assets consist of non-accrual loans, restructured loans, and foreclosed assets, which include real estate properties we own.  Non-accrual loans include

 

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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. 



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



We had eleven non-accrual loans with a recorded balance of $8.4 million and ten non-accrual loans with a recorded balance of $8.9 million as of December 31, 2017 and 2016, respectively.  At December 31, 2017, ten of these loans are considered collateral-dependent while one is considered non-collateral dependent.  



We transferred all of our remaining foreclosed real estate assets during the year ended December 31, 2016 and did not initiate foreclosure proceedings on any additional properties during 2016 and 2017.



The following table summarizes our non-performing assets:





 

 

 

 

 

 



 

 

 

 

 

 

Non-performing Assets

($ in thousands)



 

 

 

 

 

 



 

December 31, 2017

 

December 31, 2016



 

 

 

 

 

 

Non-Performing Loans:1

 

 

 

 

 

 

Collateral Dependent:

 

 

 

 

 

 

Delinquencies over 90-Days

 

$

495 

 

$

233 

Troubled Debt Restructurings2

 

 

6,104 

 

 

6,544 

Other Impaired Loans

 

 

1,214 

 

 

453 

Total Collateral Dependent Loans

 

 

7,813 

 

 

7,230 

Non-Collateral Dependent:

 

 

 

 

 

 

Delinquencies over 90-Days

 

 

--

 

 

--

Other Impaired loans

 

 

--

 

 

--

Troubled Debt Restructurings

 

 

1,442 

 

 

1,648 

Total Non-Collateral Dependent Loans

 

 

1,442 

 

 

1,648 

Loans 90 Days past due and still accruing

 

 

--

 

 

--

Total Non-Performing Loans

 

 

9,255 

 

 

8,878 

Foreclosed Assets

 

 

--

 

 

--

 

62

 

 


 

Total Non-performing Assets

 

$

9,255 

 

$

8,878 



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

2  Includes $1.1 million of restructured loans that were over 90 days delinquent as of December 31, 2017 and 2016.



At December 31, 2017 and 2016, the Company held eight restructured loans, all of which were on non-accrual status.  Three of these loans were over 90 days delinquent at December 31, 2017.  For all restructured loans in our portfolio at December 31, 2017, unpaid accrued interest at the time of the loan restructure was added to the principal balance of the loan.  The amount of interest added was also recorded as a loan discount, which did not increase the net loan balance.  In addition, for each of the restructured loans, the interest rate was temporarily decreased and the payments were restructured to a weekly basis from a monthly basis.  Each borrower involved in a troubled debt restructuring was experiencing financial difficulties at the time the loan restructured.



Effective as of December 31, 2016, all of the Company’s foreclosed properties have been disposed of.  Also as of December 31, 2017 the Company had no foreclosed properties as no assets were foreclosed in 2017. 



As of December 31, 2017 and 2016, the balances of impaired loans were as follows:





 

 

 

 

 

 



 

 

 

 

 

 



 

December 31,

 

December 31,



 

2017

 

2016



 

 

 

 

 

 

Impaired loans with an allowance for loan loss

 

$

3,999 

 

$

4,327 

Impaired loans without an allowance for loan loss

 

 

5,256 

 

 

4,551 

Total impaired loans

 

$

9,255 

 

$

8,878 



 

 

 

 

 

 

Allowance for loan losses related to impaired loans

 

$

1,260 

 

$

1,072 

Total non-accrual loans

 

$

8,363 

 

$

8,878 

Total loans past due 90 days or more and still accruing

 

$

--

 

$

--



Information regarding interest income recognized on impaired loans for the years ended December 31, 2017 and 2016, is as follows:





 

 

 

 

 

 



 

 

 

 

 

 



 

2017

 

2016



 

 

 

 

 

 

Average investment in impaired loans

 

$

9,066 

 

$

8,464 



 

 

 

 

 

 

Interest income recognize on impaired loans

 

 

--

 

 

44 

Interest income recognized on impaired loans attributable to their change in present value

 

 

--

 

 

Total interest income recognized on impaired loans

 

$

--

 

$

49 



No additional funds were committed to be advanced in connection with impaired loans as of December 31, 2017.



 

63

 

 


 

Allowance for Loan LossesWe 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:



·

Changes in lending policies and procedures, including changes in underwriting standards and collection;

·

Changes in national, regional and local economic and business conditions and developments that affect the collectability of the portfolio;

·

Changes in the volume and severity of past due loans, the volume of nonaccrual loans, and the volume and severity of adversely classified loans;

·

Changes in the value of underlying collateral for collateral-dependent loans;

·

The effect of credit concentrations; and

·

The rate of defaults on loans modified as troubled debt restructurings within the previous twelve months.



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 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 for non-collateral dependent loans. 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

 

64

 

 


 

are recorded at the time of the restructuring. The change in the present value of cash flows attributable to the passage of time is recognized as interest income.



During 2017, we made adjustments to the reserves on two of our impaired loans totaling $277 thousand based on changes in the circumstances of the borrower as well as updated collateral valuations of the properties securing our collateral-dependent loans. Specific reserves were also reduced on two loans by $48 thousand due to principal payments made by the borrowers. In addition, one of our collateral-dependent loans refinanced with another financial institution which allowed us to recover $14 thousand in principal variance.  Finally, on another loan, we recorded a partial charge-off of $40 thousand according to the terms of a restructured loan agreement we have with a borrower. 



During 2016, we made adjustments to the reserves on several of our impaired loans based on changes in the circumstances of the borrower as well as updated collateral valuations of the properties securing our collateral-dependent loans. We were able to refinance one of our non-collateral-dependent loans and reclassify it as a performing loan, which allowed us to recover $135 thousand in specific reserves and transfer $150 thousand in specific reserves to general reserves.  During 2016, we recorded $370 thousand in additional specific reserves on loans where the estimated value of the collateral decreased, and recovered $236 thousand in reserves on loans where we received favorable collateral valuations from appraisals.  We also recorded $33 thousand in specific reserves on a loan that was classified as collateral-dependent during 2016.  We recorded a partial charge-off of $20 thousand according to the terms of a restructured loan agreement we have with a borrower.  We recovered $2 thousand in allowances related to a loan participation charged off in 2015 and we recorded $5 thousand in interest income related to changes in the net present value of non-collateral-dependent impaired loans. 



The activity in the allowance for loan losses for the years ended December 31, 2017 and 2016 was as follows:





 

 

 

 

 

 



 

 

 

 

 

 



 

2017

 

2016



 

 

 

 

 

 

Balance, beginning of period

 

$

1,875 

 

$

1,785 

Provision for loan loss

 

 

262 

 

 

113 

Chargeoffs

 

 

(40)

 

 

(20)

Recoveries

 

 

--

 

 

Accretion of allowance related to restructured loans

 

 

--

 

 

(5)

Balance, end of period

 

$

2,097 

 

$

1,875 



 

65

 

 


 

The process of providing adequate allowance for loan losses involves management estimates and, as a result, future losses may differ from current estimates.  We have attempted to maintain the allowance at a level which compensates for losses that may arise from unknown conditions.   At December 31, 2017 and December 31, 2016, the allowance for loan losses was $2.1 million and $1.9 million, respectively, which represented 1.37% and 1.27% of our gross loans receivable at those respective dates.    





 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 



 

Allowance for Loan Losses

 



 

as of and for the

 



 

 

 

 

 

 

 

 



 

Year Ended

 

 

Year Ended

 



 

December 31,

 

 

December 31,

 



 

2017

 

 

2016

 

Balances:

 

($ in thousands)

 

Average total loans outstanding during period

 

$

150,348 

 

 

$

140,379 

 

Total loans outstanding at end of the period

 

$

152,714 

 

 

$

147,982 

 

Allowance for loan losses:

 

 

 

 

 

 

 

 

Balance at the beginning of period

 

$

1,875 

 

 

$

1,785 

 

Provision charged to expense

 

 

262 

 

 

 

113 

 

Charge-offs

 

 

 

 

 

 

 

 

Wholly-Owned First

 

 

40 

 

 

 

20 

 

Wholly-Owned Junior

 

 

--

 

 

 

--

 

Participation First

 

 

--

 

 

 

--

 

Participation Junior

 

 

--

 

 

 

--

 

Total

 

 

40 

 

 

 

20 

 

Recoveries

 

 

 

 

 

 

 

 

Wholly-Owned First

 

 

--

 

 

 

--

 

Wholly-Owned Junior

 

 

--

 

 

 

--

 

Participation First

 

 

--

 

 

 

(2)

 

Participation Junior

 

 

--

 

 

 

--

 

Total

 

 

--

 

 

 

(2)

 



 

 

 

 

 

 

 

 

Net loan charge-offs

 

 

40 

 

 

 

18 

 

Accretion of allowance related to restructured loans

 

 

--

 

 

 

 



 

 

 

 

 

 

 

 

Balance

 

$

2,097 

 

 

$

1,875 

 



 

 

 

 

 

 

 

 

Ratios:

 

 

 

 

 

 

 

 

Net loan charge-offs to average total  loans

 

 

0.03 

%

 

 

0.01 

%

Provision for loan losses to average total loans1

 

 

0.17 

%

 

 

0.08 

%

Allowance for loan losses to total loans at the end of the period

 

 

1.37 

%

 

 

1.27 

%

Allowance for loan losses to non-performing  loans

 

 

22.66 

%

 

 

21.12 

%

Net loan charge-offs to allowance for loan losses at the end of the period

 

 

1.91 

%

 

 

0.96 

%

Net loan charge-offs to provision for loan losses

 

 

15.27 

%

 

 

15.93 

%





NCUA Credit FacilitiesThe $4.8 million decrease in NCUA credit facilities is the result of regular monthly payments we made on our NCUA credit facilities. We did not make any additional principal payments during the year.  The remaining balance on these facilities totals $81.5 million and bears interest at a rate of 2.525% and has a maturity date of November 2026.



 

66

 

 


 

Notes Payable.  Our investor notes payable consist of debt securities sold under publicly offered debt securities offerings as well as notes sold to accredited investors in private offerings.  Sales and on-going service of the Company’s notes are now being handled by our wholly-owned subsidiary, MP Securities, which is a broker-dealer firm subject to regulation by FINRA, the SEC and applicable state regulatory authorities.  MP Securities continues to expand its operations and transition into a more diversified financial services firm.  In addition to the networking agreements reached in 2014 with ECCU and ACCU, MP Securities has also developed relationships with institutional investors that are able to purchase larger investments in our debt securities offerings.  As a result of these relationships, investor notes payable increased by $8.5 million during the year ended December 31, 2017.  Notes payable are presented net of debt issuance costs, which represents legal costs incurred in preparing and filing our note prospectuses and investor related disclosure documents.    



Members’ Equity.  Total members’ equity increased in 2017 due mainly to our net income of $937 thousand, which was offset by $315 thousand of dividends declared on our Series A Preferred Units. We did not repurchase any ownership units during the years ended December 31, 2017 and 2016.





Results of Operations for the Years Ended December 31, 2017 and December 31, 2016





 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



 

Years ended

 

Comparison



 

December 31,

 

 

 

 

 

 



 

 

          

 

 

          

 

 

            

 

 

            



 

2017

 

2016

 

$ Difference

 

% Difference

Interest income:

 

 

 

 

 

 

 

 

 

 

 

 

Interest on loans

 

$

9,424 

 

$

8,803 

 

$

621 

 

 

7%

Interest on interest-bearing accounts

 

 

47 

 

 

33 

 

 

14 

 

 

42%

Total interest income

 

 

9,471 

 

 

8,836 

 

 

635 

 

 

7%

Interest expense:

 

 

 

 

 

 

 

 

 

 

 

 

NCUA credit facilities

 

 

2,123 

 

 

2,241 

 

 

(118)

 

 

(5%)

Notes payable

 

 

2,465 

 

 

1,969 

 

 

496 

 

 

25%

Total interest expense

 

 

4,588 

 

 

4,210 

 

 

378 

 

 

9%

Net interest income

 

 

4,883 

 

 

4,626 

 

 

257 

 

 

6%

Provision for loan losses

 

 

262 

 

 

113 

 

 

149 

 

 

132%

Net interest income after provision for loan losses

 

 

4,621 

 

 

4,513 

 

 

108 

 

 

2%

Non-interest income:

 

 

 

 

 

 

 

 

 

 

 

 

Broker-dealer commissions and fees

 

 

853 

 

 

687 

 

 

166 

 

 

24%

Other lending income

 

 

330 

 

 

390 

 

 

(60)

 

 

(15%)

Total non-interest income

 

 

1,183 

 

 

1,077 

 

 

106 

 

 

10%

Non-interest expenses:

 

 

 

 

 

 

 

 

 

 

 

 

Salaries and benefits

 

 

2,753 

 

 

2,785 

 

 

(32)

 

 

(1%)

Marketing and promotion

 

 

166 

 

 

131 

 

 

35 

 

 

27%

 

67

 

 


 

Office occupancy

 

 

152 

 

 

147 

 

 

 

 

3%

Office operations

 

 

1,287 

 

 

1,358 

 

 

(71)

 

 

(5%)

Foreclosed assets, net

 

 

--

 

 

(281)

 

 

281 

 

 

(100%)

Legal and accounting

 

 

485 

 

 

506 

 

 

(21)

 

 

(4%)

Total non-interest expenses

 

 

4,843 

 

 

4,646 

 

 

197 

 

 

4%

Income before provision for income taxes

 

 

961 

 

 

944 

 

 

17 

 

 

2%

Provision for income taxes and state LLC fees

 

 

24 

 

 

22 

 

 

 

 

9%

Net income

 

$

937 

 

$

922 

 

$

15 

 

 

2%



In 2017, we recognized net income of $937 thousand due to several different factors.  As further described below, the most significant factors influencing our consolidated results of operations for the year ended December 31, 2017, as compared to 2016 were:



Increase in Interest Income.  Interest income on our mortgage loan investments increased by 7% and $635 thousand in 2017 as compared to 2016.  This is due to the 5.4% increase in average interest-earning loans as well as additional interest income recognized from accelerated deferred fee amortization when we sold $9.7 million in loan participation interests throughout the year.



Increase in Net Interest IncomeInterest expense on our borrowings decreased $118 thousand during the year due to principal payments made on our NCUA borrowings. Interest expense on our notes payable increased by $496 thousand for the year ended December 31, 2017.  The average rate paid on our investor notes increased from 3.56% for the year ended December 31, 2016 to 3.69% for the year ended December 31, 2017 as the note index rates increased due to the economic environment and monetary policy. To manage interest rate expense, the Company has reduced the spread on the variable rate series Class 1 Notes in May 2017.  In addition, the Company reduced the spread on the fixed series Class 1A Notes relative to those of the Class 1 Notes under its Class 1A Notes offering.  The Class 1A Notes were registered with the SEC on February 27, 2018, so this change will not impact our financial statements until 2018. In addition, an increase in average notes payable of $11.3 million, or 20%, contributed to the 25% increase in note payable interest expense.  Due to the fixed nature of the NCUA debt, total interest expense only increased 9% or $378 thousand in 2017 over 2016. These changes combined to result in a 6% and $257 thousand increase in net interest income for the year.



Provisions for Loan Losses.  As described above, we increased several of our specific reserves on collateral-dependent loans during the year ended December 31, 2017, which accounted for $229 thousand of the $262 thousand provision for credit losses for the year ended December 31, 2017.  This led to a $149 thousand increase in provisions over the year ended December 31, 2016.  The factors above resulted in a $108 thousand and 2% increase in net interest income after provision for loan losses over the year ended December 31, 2016.



Improvements in Non-Interest Related Income.  We received other income of $1.2 million for the year ended December 31, 2017 which is an increase of $106 thousand from the year ended December 31, 2016.  This increase in other income is due primarily to an increase in broker-dealer commissions and fees. These increases were offset partially by a decrease in other lending

 

68

 

 


 

income of $60 thousand mostly due to lower servicing fee income of $56 thousand.  The reduction in servicing income was due to the payoff of a participated loan at the end of the year that required an amortization of a previously recorded servicing asset.



Broker-dealer commissions and fees increased 24% and $166 thousand for the year ended December 31, 2017 compared to the year ended December 31, 2016.  The increase was realized by expanding our client base and utilizing networking agreements with two of our credit unions shareholders.    

 

Decline in Salaries and Benefits Expense.  Salaries and benefits expenses for the year ended December 31, 2017 decreased by $32 thousand from the year ended December 31, 2016, primarily to a reduction of employees from 20 at the end of 2016 to 19 at the end of 2017.



Decrease in Office Operations Expense.  Office operations expenses decreased by $71 thousand for the year ended December 31, 2017 as compared to 2016.  Although several factors contributed in small ways to the decrease, the largest factor was a $42 thousand decrease in insurance costs due to changing our insurance brokerage relationship and re-bidding our overall liability insurance program.  



Decrease in Net Income from Foreclosed Assets.  Net income from foreclosed assets decreased by $281 thousand for the year ended December 31, 2017.  The Company did not have any foreclosed assets on its balance sheet during 2017. 



Results of Operations for the Years Ended December 31, 2016 and December 31, 2015





 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



 

Years ended

 

Comparison



 

December 31,

 

 

 

 

 

 



 

 

          

 

 

          

 

 

            

 

 

            



 

2016

 

2015

 

$ Difference

 

% Difference

Interest income:

 

 

 

 

 

 

 

 

 

 

 

 

Interest on loans

 

$

8,803 

 

$

8,034 

 

$

769 

 

 

10%

Interest on interest-bearing accounts

 

 

33 

 

 

20 

 

 

13 

 

 

65%

Total interest income

 

 

8,836 

 

 

8,054 

 

 

782 

 

 

10%

Interest expense:

 

 

 

 

 

 

 

 

 

 

 

 

NCUA credit facilities

 

 

2,241 

 

 

2,328 

 

 

(87)

 

 

(4%)

Notes payable

 

 

1,969 

 

 

1,787 

 

 

182 

 

 

10%

Total interest expense

 

 

4,210 

 

 

4,115 

 

 

95 

 

 

2%

Net interest income

 

 

4,626 

 

 

3,939 

 

 

687 

 

 

17%

Provision (credit) for loan losses

 

 

113 

 

 

(524)

 

 

637 

 

 

(122%)

Net interest income after provision for loan losses

 

 

4,513 

 

 

4,463 

 

 

50 

 

 

1%

Non-interest income:

 

 

 

 

 

 

 

 

 

 

 

 

Broker-dealer commissions and fees

 

 

687 

 

 

525 

 

 

162 

 

 

31%

Other lending income

 

 

390 

 

 

307 

 

 

83 

 

 

27%

 

69

 

 


 

Total non-interest income

 

 

1,077 

 

 

832 

 

 

245 

 

 

29%

Non-interest expenses:

 

 

 

 

 

 

 

 

 

 

 

 

Salaries and benefits

 

 

2,785 

 

 

2,871 

 

 

(86)

 

 

(3%)

Marketing and promotion

 

 

131 

 

 

104 

 

 

27 

 

 

26%

Office occupancy

 

 

147 

 

 

143 

 

 

 

 

3%

Office operations

 

 

1,358 

 

 

1,292 

 

 

66 

 

 

5%

Foreclosed assets, net

 

 

(281)

 

 

(20)

 

 

(261)

 

 

1305%

Legal and accounting

 

 

506 

 

 

527 

 

 

(21)

 

 

(4%)

Total non-interest expenses

 

 

4,646 

 

 

4,917 

 

 

(271)

 

 

(6%)

Income (loss) before provision for income taxes

 

 

944 

 

 

378 

 

 

566 

 

 

150%

Provision for income taxes and state LLC fees

 

 

22 

 

 

21 

 

 

 

 

5%

Net income (loss)

 

$

922 

 

$

357 

 

$

565 

 

 

158%



In 2016, we recognized net income of $922 thousand due to several different factors.  As further described below, the most significant factors influencing our consolidated results of operations for the year ended December 31, 2016, as compared to 2015 were:



Increase in Interest Income.  Interest income on our mortgage loan investments increased by 10% in 2016 as compared to 2015.  This is due to the 8% increase in average interest-earning loans as well as additional interest income recognized from accelerated deferred fee amortization when we sold $14.3 million in loan participation interests throughout the year.  Interest income recognized on interest-bearing accounts increased by 65% during the year as we entered into several new banking relationships where we could earn additional interest on the funds maintained in those accounts.



Increase in Net Interest Income.  Interest expense on our borrowings decreased during the year due to principal payments made on our NCUA borrowings. Interest expense on our notes payable increased by $182 thousand for the year ended December 31, 2016.  The average rate paid on our investor notes decreased from 3.70% for the year ended December 31, 2015 to 3.56% for the year ended December 31, 2016 as our Class A Notes mature and are replaced by Class 1 Notes, which bear interest at lower rates. However, this decrease in rates paid on our investor notes was offset by an increase in average notes payable of $6.1 million, or 13.1%, which led to the 10% increase in note payable interest expense.  The $782 thousand increase in interest income combined with the $95 thousand increase in interest expense resulted in a 17% increase in net interest income for the year.



Provisions for Loan Losses.  As described above, we increased several of our specific reserves on collateral-dependent loans, while we were able to reverse reserves on several other loans where the estimated collateral value increased during the year ended December 31, 2016.  The increase in loans receivable also contributed to an increase in general reserves, which generated additional provisions for loan losses.  These factors led to $113 thousand in provisions taken during the year ended December 31, 2016.  Conversely, for the year ended December 31, 2015, we were able to record credits for loan losses of $524 thousand due to a settlement reached on one of our impaired loans as well as the reclassification of one of our collateral-dependent loans

 

70

 

 


 

to non-collateral-dependent.  Despite the fact that we recorded $637 thousand in additional expense related to provisions in 2016, gains made in our net interest income during the year ended December 31, 2016 resulted in a 1% increase in net interest income after provisions for loan losses.



Improvements in Non-Interest Related Income.  We received other income of $1.1 million for the year ended December 31, 2016 which is an increase of $245 thousand from the year ended December 31, 2015.  This increase in other income is due primarily to gains on the sale of loan participation interests of $86 thousand, as well as agreements reached with ECCU to provide servicing and lending-related services that generated $70 thousand in additional income.  These increases were offset by a decrease in late charges of $46 thousand, as we had received a large, one-time late charge of $48 thousand in 2015.



We also earned $162 thousand in additional income in 2016 related to our broker-dealer subsidiary.  Expanding our client base and utilizing networking agreements with credit unions allowed us to recognize $135 thousand in additional commissions on insurance products and annuities, $53 thousand in additional income on the sale of real estate investment trusts and 401k planning services, and $9 thousand in additional advisory fees. 

 

Decline in Salaries and Benefits Expense.  Salaries and benefits expenses for the year ended December 31, 2016 decreased by $86 thousand from the year ended December 31, 2015, primarily to due $222 thousand in salary expense accrued as part of a severance agreement reached with our former President upon his retirement from the Company at the end of 2015.  This decrease was partially offset by an increase in bonuses of $171 thousand paid for the year ended December 31, 2016, as the Board of Managers approved discretionary bonuses for our employees in recognition of the Company’s financial performance for the year.



Increase in Office Operations Expense.  Office operations expenses increased by $70 thousand for the year ended December 31, 2016 as compared to 2015.  Although several factors contributed in small ways to the increase, the largest factor was an $84 thousand increase in fees paid to ACCU and ECCU under the networking agreements that MP Securities entered into with those two credit unions in 2015. 



Increase in Net Income from Foreclosed Assets.  Net income from foreclosed assets increased by $261 thousand for the year ended December 31, 2016.  As described above, we disposed of our remaining foreclosed assets during 2016, which had two primary effects.  First, we were able to sell the properties at a higher value than we had recorded them, realizing gains of $278 thousand on two property sales.  Second, our net expenses for the management of foreclosed real estate assets totaled $123 thousand in 2015.  By disposing of the properties early in 2016, we were able to decrease our net expenses paid in the management of foreclosed assets to $4 thousand



 

71

 

 


 

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:





 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

Average Balances and Rates/Yields



 

For the Years Ended December 31,



 

(Dollars in Thousands)



 

2017

 

2016



 

Average Balance

 

Interest Income/ Expense

 

Average Yield/ Rate

 

Average Balance

 

Interest Income/ Expense

 

Average Yield/ Rate

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-earning accounts with other financial institutions

 

$

14,502 

 

 

$

47 

 

 

 

0.33 

%

 

$

14,024 

 

 

$

33 

 

 

 

0.24 

%

Interest-earning loans [1]

 

 

137,840 

 

 

 

9,424 

 

 

 

6.84 

%

 

 

130,725 

 

 

 

8,803 

 

 

 

6.73 

%

Total interest-earning assets

 

 

152,342 

 

 

 

9,471 

 

 

 

6.22 

%

 

 

144,749 

 

 

 

8,836 

 

 

 

6.10 

%

Non-interest-earning assets

 

 

8,782 

 

 

 

--

 

 

 

--

 

 

 

8,557 

 

 

 

--

 

 

 

--

 

Total Assets

 

 

161,124 

 

 

 

9,471 

 

 

 

5.88 

%

 

 

153,306 

 

 

 

8,836 

 

 

 

5.76 

%

Liabilities:

 

 

--

 

 

 

--

 

 

 

--

 

 

 

 

 

 

 

 

 

 

 

 

 

Public offering notes – Class 1

 

 

35,956 

 

 

 

1,257 

 

 

 

3.50 

%

 

 

24,769 

 

 

 

771 

 

 

 

3.11 

%

Public offering notes – Class A

 

 

14,680 

 

 

 

564 

 

 

 

3.84 

%

 

 

21,242 

 

 

 

799 

 

 

 

3.76 

%

Special offering notes

 

 

1,387 

 

 

 

58 

 

 

 

4.18 

%

 

 

1,934 

 

 

 

81 

 

 

 

4.19 

%

International notes

 

 

11 

 

 

 

--

 

 

 

--

%

 

 

53 

 

 

 

 

 

 

3.77 

%

Subordinated notes

 

 

5,619 

 

 

 

266 

 

 

 

4.73 

%

 

 

4,749 

 

 

 

229 

 

 

 

4.82 

%

Secured notes

 

 

9,075 

 

 

 

320 

 

 

 

3.53 

%

 

 

2,637 

 

 

 

87 

 

 

 

3.30 

%

NCUA credit facilities

 

 

84,093 

 

 

 

2,123 

 

 

 

2.52 

%

 

 

88,495 

 

 

 

2,241 

 

 

 

2.53 

%

Total interest-bearing liabilities

 

$

150,821 

 

 

$

4,588 

 

 

 

3.04 

%

 

$

143,879 

 

 

$

4,210 

 

 

 

2.93 

%

Net interest income

 

 

 

 

 

$

4,883 

 

 

 

--

 

 

 

 

 

 

$

4,626 

 

 

 

 

 

Net interest margin [2]

 

 

 

 

 

 

 

 

 

 

3.21 

%

 

 

 

 

 

 

 

 

 

 

3.20 

%



[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 increased to $152.3 million during the year ended December 31, 2017, from $144.8 million, an increase of $7.6 million or 5.2% as compared to the previous year. The average yield on these assets increased 12 basis point to 6.22% from 6.10%.  The yield on interest-earning loans increased 10 basis points to 6.84% from 6.73% due to an increase in amortization of deferred fees and an increase in the weighted average interest rate of the portfolio, which increased from 6.28% to 6.31% for the year ended December 31, 2017.  The

 

72

 

 


 

yield on our interest-earning accounts with other financial institutions increased 9 basis points to 0.33% for the year ended December 31, 2017 as compared to 0.24% for the year ended December 31, 2016.  The primary reason for the increase in yield on these accounts was attributable to the overall increase in deposit rates at financial institutions.  Non-interest-earning assets increased by $225 thousand. These changes combined to increase the average yield on total assets by 12 basis points to 5.88% for the year ended December 31, 2017 from 5.76% for the year ended December 31, 2016.



Average interest-bearing liabilities, consisting primarily of investor notes and credit facility borrowings, increased to $150.8 million during the year ended December 31, 2017, from $143.9 million during 2016. The average rate paid on these liabilities increased 8 basis points from 2.93% for the year ended December 31, 2016 to 3.04% for the year ended December 31, 2017.   The interest rate on our NCUA borrowings is fixed at 2.525% until the facility matures in 2026.  The weighted average rate paid on our notes increased 13 basis points from 3.56% to 3.69%.  As the total amount of our investor notes grow and the aggregate balance on our NCUA facilities decrease, we anticipate that the average rate paid on these liabilities will increase.  As a result, we have reduced the spread paid over market indices on our publicly offered debt securities in order to adjust to changes in the interest rate environment and manage our cost of funds.



Net interest income for the year ended December 31, 2017 increased $257 thousand, a 5.6% increase, to $4.9 million as compared to $4.6 million for the prior year. Net interest margin increased one basis point from 3.20% for the year ended December 31, 2016 to 3.21% for the year ended December 31, 2017.  











 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

Average Balances and Rates/Yields



 

For the Years Ended December 31,



 

(Dollars in Thousands)



 

2016

 

2015



 

Average Balance

 

Interest Income/ Expense

 

Average Yield/ Rate

 

Average Balance

 

Interest Income/ Expense

 

Average Yield/ Rate

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-earning accounts with other financial institutions

 

$

14,024 

 

 

$

33 

 

 

 

0.24 

%

 

$

16,323 

 

 

$

20 

 

 

 

0.12 

%

Interest-earning loans [1]

 

 

130,725 

 

 

 

8,803 

 

 

 

6.73 

%

 

 

120,951 

 

 

 

8,034 

 

 

 

6.64 

%

Total interest-earning assets

 

 

144,749 

 

 

 

8,836 

 

 

 

6.10 

%

 

 

137,274 

 

 

 

8,054 

 

 

 

5.87 

%

Non-interest-earning assets

 

 

8,557 

 

 

 

--

 

 

 

--

 

 

 

11,918 

 

 

 

--

 

 

 

 

 

Total Assets

 

 

153,306 

 

 

 

8,836 

 

 

 

5.76 

%

 

 

149,194 

 

 

 

8,054 

 

 

 

5.40 

%

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Public offering notes – Class 1

 

 

24,769 

 

 

 

771 

 

 

 

3.11 

%

 

 

6,474 

 

 

 

203 

 

 

 

3.14 

%

Public offering notes – Class A

 

 

21,242 

 

 

 

799 

 

 

 

3.76 

%

 

 

33,291 

 

 

 

1,246 

 

 

 

3.74 

%

Special offering notes

 

 

1,934 

 

 

 

81 

 

 

 

4.19 

%

 

 

3,252 

 

 

 

112 

 

 

 

3.44 

%

International notes

 

 

53 

 

 

 

 

 

 

3.77 

%

 

 

146 

 

 

 

 

 

 

2.74 

%

Subordinated notes

 

 

4,749 

 

 

 

229 

 

 

 

4.82 

%

 

 

3,502 

 

 

 

166 

 

 

 

4.74 

%

Secured notes

 

 

2,637 

 

 

 

87 

 

 

 

3.30 

%

 

 

1,660 

 

 

 

56 

 

 

 

3.37 

%

NCUA credit facilities

 

 

88,495 

 

 

 

2,241 

 

 

 

2.53 

%

 

 

92,191 

 

 

 

2,328 

 

 

 

2.53 

%

Total interest-bearing liabilities

 

$

143,879 

 

 

$

4,210 

 

 

 

2.93 

%

 

$

140,516 

 

 

$

4,115 

 

 

 

2.93 

%

 

73

 

 


 

Net interest income

 

 

 

 

 

$

4,626 

 

 

 

 

 

 

 

 

 

 

$

3,939 

 

 

 

 

 

Net interest margin [2]

 

 

 

 

 

 

 

 

 

 

3.20 

%

 

 

 

 

 

 

 

 

 

 

2.87 

%



[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 increased to $144.7 million during the year ended December 31, 2016, from $137.3 million, an increase of $7.5 million or 5%. The average yield on these assets increased to 6.10% for the year ended December 31, 2016 as compared to 5.87% for the year ended December 31, 2015.  The yield on interest-earning loans increased to 6.73% from 6.64% due to an increase in loan participation interest sales that resulted in the accelerated amortization of deferred fees.  The weighted average interest rate of the portfolio stayed constant at 6.28%. 



The yield on our interest-earning accounts with other financial institutions increased to 0.24% for the year ended December 31, 2016 as compared to 0.12% for the year ended December 31, 2015.  For cash management purposes and in an effort to decrease concentration risk, we diversified our banking relationships and placed cash in money market accounts that give us added flexibility and earn higher interest rates. The increase in interest earned on cash and increase in loan sales caused our yield on interest-earning assets to rise in 2016.  Due to the sale of our foreclosed real estate assets, we decreased our non-interest-earning assets by $3.4 million, which, when combined with the higher yield earned on interest-earning assets, increased the yield on our total assets by 34 basis points from 5.40% for the year ended December 31, 2015 to 5.76% for the year ended December 31, 2016.



Average interest-bearing liabilities, consisting primarily of investor notes and credit facility borrowings, increased to $143.9 million during the year ended December 31, 2016, from $140.5 million during 2015. The average rate paid on these liabilities stayed constant at 2.93% for the years ended December 31, 2016 and 2015. The interest rate on our NCUA borrowings is fixed at 2.525% until the facility matures in 2026.  The weighted average rate paid on our notes decreased from 3.70% to 3.56%, but our notes comprised a larger portion of interest-bearing liabilities during 2016, so the average rate paid on our liabilities remained the same.  As the total amount of our investor notes grow and our NCUA facilities decrease, we anticipate that the average rate paid on these liabilities will increase.  As a result, we have implemented revisions in our publicly offered debt securities with the registration of our Class 1A Notes with the SEC on February 27, 2018 by reducing some of the rates paid on our investor note products to adjust to changes in the interest rate environment and our cost of funds.



Net interest income for the year ended December 31, 2016 was $4.6 million, which was an increase of $687 thousand, or 17%, from the prior year. Net interest margin increased from 2.87% for the year ended December 31, 2015 to 3.20% for the year ended December 31, 2016.



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):

 

74

 

 


 





 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

Rate/Volume Analysis of Net Interest Income



 

 

 



 

Year Ended December 31, 2017 vs. 2016



 

Increase (Decrease) Due to Change in



 

Volume

 

Rate

 

Total



 

(Dollars in Thousands)



 

 

 

 

 

 

 

 

 

Increase (Decrease) in Interest Income:

 

 

 

 

 

 

 

 

 

Interest-earning account with other financial institutions

 

$

--

 

$

14 

 

$

14 

Total loans

 

 

630 

 

 

(9)

 

 

621 



 

 

630 

 

 

 

 

635 

Increase (Decrease) in Interest Expense:

 

 

 

 

 

 

 

 

 

Public offering notes – Class A

 

 

382 

 

 

104 

 

 

486 

Public offering notes – Class 1

 

 

(252)

 

 

17 

 

 

(235)

Special offering notes

 

 

(23)

 

 

--

 

 

(23)

International notes

 

 

(1)

 

 

(1)

 

 

(2)

Subordinated notes

 

 

41 

 

 

(4)

 

 

37 

Secured notes

 

 

226 

 

 

 

 

233 

NCUA credit facilities

 

 

(111)

 

 

(7)

 

 

(118)



 

 

262 

 

 

116 

 

 

378 

Change in net interest income

 

$

368 

 

$

(111)

 

$

257 



 

 

 

 

 

 

 

 

 







 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

Rate/Volume Analysis of Net Interest Income



 

 

 



 

Year Ended December 31, 2016 vs. 2015



 

Increase (Decrease) Due to Change in



 

Volume

 

Rate

 

Total



 

(Dollars in Thousands)



 

 

 

 

 

 

 

 

 

Increase (Decrease) in Interest Income:

 

 

 

 

 

 

 

 

 

Interest-earning account with other financial institutions

 

$

(3)

 

$

16 

 

$

13 

Total loans

 

 

397 

 

 

372 

 

 

769 



 

 

394 

 

 

388 

 

 

782 

Increase (Decrease) in Interest Expense:

 

 

 

 

 

 

 

 

 

Public offering notes – Class A

 

 

570 

 

 

(2)

 

 

568 

Public offering notes – Alpha Class

 

 

(453)

 

 

 

 

(447)

Special offering notes

 

 

(51)

 

 

20 

 

 

(31)

International notes

 

 

(4)

 

 

 

 

(2)

Subordinated notes

 

 

60 

 

 

 

 

63 

Secured notes

 

 

32 

 

 

(1)

 

 

31 

NCUA credit facilities

 

 

(93)

 

 

 

 

(87)



 

 

61 

 

 

34 

 

 

95 

Change in net interest income

 

$

333 

 

$

354 

 

$

687 





 

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Cash and Cash Equivalents

 

We experienced a decrease in our cash (includes pledged and restricted) during the twelve months ended December 31, 2017 of $371 thousand, as compared to a net decrease of $1.4 million for the twelve months ended December 31, 2016.



Net cash provided by operating activities totaled $774 thousand for the twelve months ended December 31, 2017, an increase of $332 thousand from $442 thousand provided by operating activities during the twelve months ended December 31, 2016.  This is due to an increase in net income arising from interest income and other income.

 

Net cash used by investing activities totaled $4.4 million during the twelve months ended December 31, 2017, compared to $8.3 million used during the twelve months ended December 31, 2016, a decrease in cash used of $3.9 million. This difference is attributable to a $12.8 million decrease in loan originations during the year as compared to 2016.  The loan funding activity was offset by a decrease in loan participation sales of $4.6 million and a decrease in foreclosed asset sales of $2.9 million.  We also received $1.6 million less in principal payments we collected from our mortgage loan investments.  In 2018, we expect to continue to grow our balance sheet through the funding of new loans and partially finance the origination of these loans through the sale of loan participation interests.

 

Net cash provided by financing activities totaled $3.3 million for the twelve-month period ended December 31, 2017, a decrease of $3.2 million from $6.5 million provided by financing activities during the twelve months ended December 31, 2016.  Investor note sale during 2017 decreased by $2.1 million in 2017 as compared to 2016, which accounted for the decrease in cash provided by financing activities.



Liquidity and Capital Resources



We rely on cash generated from our operations, cash reserves and proceeds from the sale of loan participations and investor notes to meet our obligations as they arise.  In addition, we earn cash from other revenue-generating activities, chiefly commissions on securities sales and fees earned from managing client investments through our wholly-owned broker-dealer, MP Securities and fees generated from services provided to credit unions and loan servicing capabilities and other services we provide to credit unions and CUSOs.  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.  Our liquidity plan relies primarily on cash generated by operations, cash reserves and proceeds from the sale of debt securities.  We supplement this liquidity plan by selling loan participations when necessary, as well as through the generation of additional sources of non-interest income.  In addition, the Company established a formal relationship with Catalyst Corporate Credit Union in 2017 and expects to formalize a short-term credit facility with a financial institution to warehouse church mortgages in 2018.



 

76

 

 


 

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



We are also susceptible to withdrawal requests made by large note investors, ministries and churches that can adversely affect our liquidity.  We believe that our available cash, cash flow from operations, net interest and other fee income will be sufficient to fund our liquidity requirements for the next 12 months.  Should our liquidity needs exceed our available sources of liquidity, we believe we could sell a mortgage loan investments at par to raise additional cash; however, we also must maintain adequate collateral consisting of loans receivable and cash to secure our NCUA credit facilities



While the Company is in process of establishing a short-term credit facility with an institutional lender, we  cannot guarantee that these sources of cash will be available to us due to the uncommitted nature of the credit facility.  Our liquidity requirements for the near future were significantly reduced by the agreement reached with the NCUA to extend the maturity date of our borrowings under these facilities from 2018 to 2026. 



Our liquidity ratio was 13.2% at December 31, 2017, which is well within our policy and operational comfort.  Our liquidity ratio is calculated as our cash balance divided by our total liabilities less the portion of our line of credit facilities due after one year. 



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



Due to suitability and investment concentration limitations for investments made in our publicly offered debt securities, some of our investors were prevented from renewing or making investments in our publicly offered debt securitiesDue to those restrictions, the renewal rate fell to 34% in 2013.  As the Company began serving more clients that meet these suitability restrictions and offered other investment products to investors whom need to diversify their investments, renewal rates increased to 56% as of December 2016 and 64% for the year ended December 31, 2017.  We believe that the networking agreements entered into with ACCU and ECCU, as well as relationships developed with institutional investors, led to substantial increases in investor note sales in 2016 and 2017.  We further believe that the variety of note products we deliver through public and private offerings provides our clients options for suitable investments and we continue to explore options to provide proprietary investment products that meet the investment objectives of our investors.  While we do not expect that our investor renewal rate

 

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will necessarily return to the historic renewal rates we enjoyed prior to 2012, we expect continued improvement in our investor renewal rates over the next few years.    



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



Credit Facilities Developments



As of December 31, 2017, our credit facilities’ commitments, amounts available and principal amounts outstanding were as follows:



National Credit Union Administration Facilities



Members United Facility



On November 4, 2011, the Company and the National Credit Union Administration Board As Liquidating Agent of Members United Corporate Federal Credit Union (“Lender”) entered into an $87.3 million credit facility refinancing transaction (the “MU Credit Facility”).  The MU Credit Facility replaced the original $100 million CUSO Line entered into by and between the Company and Members United Corporate Federal Credit Union on May 7, 2008.  Accrued interest is due and payable monthly in arrears on the MU Credit Facility on the first day of each month 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.  On March 30, 2015, the Company and the NCUA entered into an agreement to amend to the Loan and Security Agreement (the “LSA Amendments”) for both the MU Credit Facility and the $23.5 million credit facility the Company has with the National Credit Union Administration as Liquidating Agent of Western Federal Credit Union (the “WesCorp Credit Facility”).  The LSA Amendments altered the collateral requirements on both facilities, as well as some of the Company’s reporting requirements to the NCUA.  The balance of the MU Credit Facility was $63.4 million and $67.1 million at December 31, 2017 and 2016, respectively.  Effective as of November 30, 2016, the Company and the Lender agreed to amend the terms of the facility.  Under the amended terms of the facility, the required minimum monthly payment was increased to $450 thousand, and the facility will mature on November 1, 2026, at which point the final principal payment will be due. 



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

 

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filed with the U.S. Securities and Exchange Commission and maintain a minimum collateralization ratio of at least 110% (120% for the MU Credit Facility and Wescorp Credit Facility combined).  If at any time the Company fails to maintain its required minimum collateralization ratio, it will be required to deliver cash or qualifying mortgage loans in an amount sufficient to enable us to meet its obligation to maintain a minimum collateralization ratio.  At December 31, 2017 and 2016, the collateral securing the MU Credit Facility had an aggregate principal balance of $71.7 million and $79.4 million, respectively.  The loan collateral securing the facility was sufficient at December 31, 2017 and 2016.



In addition to the minimum collateralization requirement, the MU Credit Facility also includes covenants which prevent the Company from renewing or extending a loan pledged as collateral under this facility unless certain conditions have been met and requires the borrower to deliver current financial statements to the Company.  Under the terms of the MU Credit Facility, the Company has established a lockbox maintained for the benefit of Lender that will receive all payments made by collateral obligors.  The Company’s 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 and the Company's breach of any of its covenants.  As of December 31, 2017 and 2016, the Company was in compliance with its covenants under the MU Credit Facility.



WesCorp Facility



On November 4, 2011, the Company and the National Credit Union Administration Board As Liquidating Agent of Western Corporate Federal Credit Union (previously herein defined as “Lender”) entered into a $23.5 million credit facility refinancing transaction (the “WesCorp Credit Facility Extension”).  The WesCorp Credit Facility Extension amends, restates and replaces a credit facility entered into by and between the Company and Western Corporate Federal Credit Union on November 30, 2009.  Under the WesCorp Credit Facility Extension, accrued interest is due and payable monthly in arrears on the first day of each month at the lesser of the maximum rate permitted by applicable law under the loan documents or 2.525%.  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 Extension requires monthly principal and interest payments of $106 thousand.  As of December 31, 2017 and 2016, $18.1 million and $19.2 million, respectively, was outstanding on the WesCorp Credit Facility Extension. Effective as of November 30, 2016, the Company and the Lender agreed to amend the terms of the facility.  Under the amended terms of the facility, the required minimum monthly payment was increased to $129 thousand and the facility will mature on November 1, 2026, at which point the final principal payment will be due. 



The WesCorp Credit Facility Extension includes a number of borrower covenants, including affirmative covenants to maintain the collateral free of liens, to timely pay the amounts due on the facility, to provide the Lender with interim or annual financial statements and annual and periodic reports filed with the U.S. Securities and Exchange Commission and maintain a minimum collateralization ratio of at least 110% (120% for the MU Credit Facility and Wescorp

 

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Facility combined).  If at any time the Company fails to maintain its required minimum collateralization ratio, it will be required to deliver cash or qualifying mortgage loans in an amount sufficient to enable it to meet its obligation to maintain a minimum collateralization ratio.  As of December 31, 2017 and 2016, the collateral securing the WesCorp Credit Facility Extension had an aggregate principal balance of $26.9 million and $26.9 million, respectively. The loan collateral securing the facility was sufficient at December 31, 2017 and 2016.    As of December 31, 2017 and 2016, the Company was in compliance with its covenants under the Wescorp Credit Facility Extension.



On November 30, 2016, we and the NCUA agreed to extend the maturity date of both of the NCUA Facilities from October 2018 to November 2026.  As part of the agreement, the regular monthly principal and interest payments due on the two credit facilities were re-amortized.  Under the terms of the new agreement, we now pay $579 thousand in monthly principal and interest payments and will be required make a final balloon payment of approximately $34 million in November 2026.  No other terms of the facilities were altered as part of this agreement.



Investor Notes



SEC Registered Public Offerings



We also rely on the sale of our investor notes to provide the funding for origination and purchase of mortgage loan assets and fund our general operations.  As of December 31, 2017, a total of $69.1 million of our investor debt securities were issued and outstanding.  For further information on our investor notes, see Note 10,  Notes Payable in our accompanying audited consolidated financial statements for the year ended December 31, 2017, which is located in Part II, Item 8 of this ReportHistorically, 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.  Since the Company’s inception, several classes of notes have been registered, retired, and are no longer outstanding.



Class A Offering.  In April 2008, we registered with the SEC an offering of $80.0 million of new Class A Notes that consisted of three series of notes, including a fixed series, flex series and variable series.  We registered an additional $100.0 million in Class A Notes with the SEC in June, 2010, and on June 24, 2011, we filed a registration statement with the SEC seeking to register an additional $75 million of our Class A Notes.  The Class A Notes offering expired on December 31, 2014 and no additional Class A Notes were sold after expiration.  As of December 31, 2017, $12.3 million in Class A Notes were outstanding.



Class 1 Offering.  The Class A Notes offering was replaced in January 2015 with the Class 1 Notes offering.  We registered $85 million of our Class 1 Notes in two series – fixed and variable notes.  The registration was declared effective on January 6, 2015.  Similar to our Class A Notes, our Class 1 Notes are all unsecured debt securities. The interest rates we pay on the fixed series and variable series notes are determined by reference to an index rate plus a rate spread as determined by the Class 1 Notes prospectus.    The Class 1 Notes offering expired on December

 

80

 

 


 

31, 2017 and no Class 1 Notes have been sold after the expiration date. As of December 31, 2017, $39.7 million in Class 1 Notes were outstanding.



Class 1A OfferingThe Class 1 Notes offering was replaced in February 2018 with the Class 1A Notes Offering. The Company registered $90 million of its Class 1A Notes in two series – fixed and variable notes. The registration statement was declared effective on February 27, 2018. Similar to the Company’s Class 1 Notes, our Class 1A Notes are all unsecured debt securities. The interest rate we pay on the fixed series notes is determined by reference to an index published by the Federal Reserve Board which reports the monthly average yield of a range of Treasury Securities, all adjusted to the equivalent of a one-year maturity (the “CMT Index”), that is in effect on the date the Note is issued plus a rate spread as determined in the Class 1A Notes prospectus.  The interest rate that 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. As described in the Class 1A Notes prospectus, the CMT index is determined by the Constant Maturity Treasury rates published by the U.S. Department of Treasury for actively traded Treasury securities and the Variable Index is equal to the 3-month LIBOR rate. The 3-month LIBOR rate is the London interbank Offered Rate (“LIBOR”) interest rate for 3 – month obligations.



Private Offerings



In addition to the public notes, we offer notes under several private placement offerings.  In March 2013, we began offering Series 1 Subordinated Capital Notes and International Notes to accredited investors, as that term is defined in Rule 501 promulgated under the Securities Act of 1933, as amended.  Effective as of January 15, 2015, we commenced the offering of our Secured Investment Notes under Rule 506 of Regulation D, promulgated under the Securities Act of 1933, as amended.  The Secured Investment Notes are secured by either 100% of their outstanding balance in cash or 105% of their outstanding balance in loans receivable.  Investors have to meet certain criteria in order to purchase these notes and are also subject to suitability restrictions.  At December 31, 2017, $9.8 million, $6.8 million, and $473 thousand of our Secured Investment Notes, Subordinated Capital Notes, and International Notes were outstanding, respectively.



Of the $69.1 million in investor notes that are outstanding at December 31, 2017, $10.7 million are available to be withdrawn at any time without penalty while an additional $15.4 million will mature in 2018.  Historically, we have experienced a high rate of renewal or reinvestment by our note holders upon maturity of their notes.  We believe the historical record of repeat purchasers by our debt security investors supports our confidence in the future viability of our investor note program.



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

 

81

 

 


 

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 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, 2017.







 

Item 7A.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT 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

 

82

 

 


 

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 holders, the sale of mortgage assets and to a lesser extent, credit facilities.  Further, we manage our maturity risk between assets and liabilities with the goal of limiting our exposure to interest rate risk, ensuring adequate liquidity.  Interest income and interest expense are affected by general economic conditions and by competition in the marketplace.  Our interest and pricing strategies are driven by our asset/liability management analyses and by local market conditions.

In connection with the above-mentioned strategy, we simulate the change in net interest income and net interest margin given immediate and parallel interest rate shocks over a 12-month horizon.  Shown below are possible changes to net interest income and the net interest margin based upon the model’s program under a 200 basis point increase in the interest rates as of December 31, 2017:





 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

Change (in basis points)

 

Net Interest Income (next twelve months)

 

Change in Net Interest Income

 

% Change in Net Interest Income

 

Net Interest Margin

+200

 

$

5,272 

 

$

57 

 

1.09 

%

 

3.15 

%



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 $57 thousand over the “base case” (i.e., no interest rate change) and our net interest margin would increase from 3.12% to 3.15%.  We did not consider a decrease in interest rates in our analysis as interest rates remain at relatively low levels and have been

 

83

 

 


 

increasing in the last year.  Based upon the review of management and our Board, we consider the results indicated by the report to be acceptable.    







 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

Maturity Analysis



 

as of December 31, 2017



 

Amounts Subject to Maturity Within (dollars in thousands)



 

Year 1

 

Year 2

 

Year 3

 

Year 4

 

Year 5

 

After Year 5

 

Non-Maturity

 

Total

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash with financial institutions

 

$

9,907 

 

$

--

 

$

--

 

$

--

 

$

--

 

$

--

 

$

--

 

$

9,907 

Restricted cash

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

58 

 

 

58 

Loans, gross of deferred fees

 

 

32,212 

 

 

15,635 

 

 

11,740 

 

 

12,519 

 

 

16,875 

 

 

63,733 

 

 

--

 

 

152,714 

Allowance for loan losses, loan discount, and deferred fees

 

 

--

 

 

--

 

 

--

 

 

--

 

 

--

 

 

--

 

 

(3,879)

 

 

(3,879)

Noninterest earning assets

 

 

--

 

 

--

 

 

--

 

 

--

 

 

--

 

 

--

 

 

2,222 

 

 

2,222 

Total assets

 

$

42,119 

 

$

15,635 

 

$

11,740 

 

$

12,519 

 

$

16,875 

 

$

63,733 

 

$

(1,599)

 

$

161,022 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Borrowings from financial institutions

 

$

4,940 

 

$

5,078 

 

$

5,203 

 

$

5,341 

 

$

5,477 

 

$

55,453 

 

$

--

 

$

81,492 

Notes payable

 

 

15,426 

 

 

15,300 

 

 

14,671 

 

 

16,364 

 

 

3,921 

 

 

3,406 

 

 

--

 

 

69,088 

Other liabilities

 

 

--

 

 

--

 

 

--

 

 

--

 

 

--

 

 

--

 

 

1,013 

 

 

1,013 

Members' equity

 

 

--

 

 

--

 

 

--

 

 

--

 

 

--

 

 

--

 

 

9,429 

 

 

9,429 

Total liabilities and members' equity

 

$

20,366 

 

$

20,378 

 

$

19,874 

 

$

21,705 

 

$

9,398 

 

$

58,859 

 

$

10,442 

 

$

161,022 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Maturity gap

 

$

21,753 

 

$

(4,743)

 

$

(8,134)

 

$

(9,186)

 

$

7,477 

 

$

4,874 

 

$

(12,041)

 

$

--

Cumulative maturity gap

 

$

21,753 

 

$

17,010 

 

$

8,876 

 

$

(310)

 

$

7,167 

 

$

12,041 

 

$

--

 

$

--



The preceding table indicates that we have a positive one-year cumulative gap of $21.8 million at December 31, 2017.  This indicates that funds expected to become available in the next year due to maturing assets are greater than interest-bearing liabilities coming due in the next year.  The Company has $10.7 million outstanding of certain notes payable that have contractual maturities of up to 72 months but can be withdrawn in whole or in part at any time prior to maturity without restriction.  For purposes of the maturity analysis above, these notes are included in the year they contractually mature. If these funds all were to be withdrawn in the first year, the positive one-year maturity gap would be reduced to $11.1 million.



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 2018.   

 

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Item 8.

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

Included herewith are the following financial statements:





 

Table of Contents



Page



 

Report of Independent Registered Public Accounting Firm

F-1



 

Financial Statements

 



 

Consolidated Balance Sheets

F-2

Consolidated Statements of Income

F-3

Consolidated Statements of Equity

F-4

Consolidated Statements of Cash Flows

F-5

Notes to Consolidated Financial Statements

F-6 – F-47



 

 

85

 

 


 



Report of Independent Registered Public Accounting Firm





To the Members

Ministry Partners Investment Company, LLC

Brea, California





Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Ministry Partners Investment Company, LLC and its subsidiaries (the Company) as of December 31, 2017 and 2016, the related consolidated statements of income, equity, and cash flows for the years then ended, and the related notes to the consolidated financial statements (collectively, the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2017 and 2016, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.

 

Basis for Opinion

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.

 

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.







/s/ Hutchinson and Bloodgood LLP     



We have served as the Company's auditor since 2005.



Glendale, California

March 29, 2018

 

F-1

 

 


 



Ministry Partners Investment Company, LLC and Subsidiaries

Consolidated Balance Sheets

December 31, 2017 and 2016

(Dollars in Thousands except for Unit Data)







 

 

 

 

 

 



 

 

 

 

 

 



 

2017

 

2016

Assets:

 

 

 

 

 

 

Cash

 

$

9,907 

 

$

9,683 

Pledged cash

 

 

--

 

 

600 

Restricted cash

 

 

58 

 

 

53 

Loans receivable, net of allowance for loan losses of $2,097 and $1,875 as of December 31, 2017 and 2016, respectively

 

 

148,835 

 

 

144,264 

Accrued interest receivable

 

 

742 

 

 

657 

Investments in joint venture

 

 

896 

 

 

892 

Property and equipment, net

 

 

103 

 

 

115 

Servicing assets

 

 

270 

 

 

258 

Other assets

 

 

211 

 

 

116 

Total assets

 

$

161,022 

 

$

156,638 

Liabilities and members’ equity

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

NCUA credit facilities

 

$

81,492 

 

$

86,326 

Notes payable, net of debt issuance costs of $85 and $78 as of December 31, 2017 and 2016, respectively

 

 

69,003 

 

 

60,479 

Accrued interest payable

 

 

208 

 

 

173 

Other liabilities

 

 

890 

 

 

853 

Total liabilities

 

 

151,593 

 

 

147,831 

Members' Equity:

 

 

 

 

 

 

Series A preferred units, 1,000,000 units authorized, 117,100 units issued and outstanding (liquidation preference of $100 per unit)

 

 

11,715 

 

 

11,715 

Class A common units, 1,000,000 units authorized, 146,522 units issued and outstanding

 

 

1,509 

 

 

1,509 

Accumulated deficit

 

 

(3,795)

 

 

(4,417)

Total members' equity

 

 

9,429 

 

 

8,807 

Total liabilities and members' equity

 

$

161,022 

 

$

156,638 









The Notes to Consolidated Financial Statements are an integral part of these consolidated financial statements.

 

F-2

 

 


 

Ministry Partners Investment Company, LLC and Subsidiaries

Consolidated Statements of Income

Years Ended December 31, 2017 and 2016

(Dollars in Thousands except for Unit Data)









 

 

 

 

 

 



 

 

 

 

 

 



 

2017

 

2016

Interest income:

 

 

 

 

 

 

Interest on loans

 

$

9,424 

 

$

8,803 

Interest on interest-bearing accounts

 

 

47 

 

 

33 

Total interest income

 

 

9,471 

 

 

8,836 

Interest expense:

 

 

 

 

 

 

NCUA Credit Facilities

 

 

2,123 

 

 

2,241 

Notes payable

 

 

2,465 

 

 

1,969 

Total interest expense

 

 

4,588 

 

 

4,210 

Net interest income

 

 

4,883 

 

 

4,626 

Provision for loan losses

 

 

262 

 

 

113 

Net interest income after provision for loan losses

 

 

4,621 

 

 

4,513 

Non-interest income:

 

 

 

 

 

 

Broker-dealer commissions and fees

 

 

853 

 

 

687 

Other lending income

 

 

330 

 

 

390 

Total non-interest income

 

 

1,183 

 

 

1,077 

Non-interest expenses:

 

 

 

 

 

 

Salaries and benefits

 

 

2,753 

 

 

2,785 

Marketing and promotion

 

 

166 

 

 

131 

Office occupancy

 

 

152 

 

 

147 

Office operations and other expenses

 

 

1,287 

 

 

1,358 

Foreclosed assets, net

 

 

--

 

 

(281)

Legal and accounting

 

 

485 

 

 

506 

Total non-interest expenses

 

 

4,843 

 

 

4,646 

Income before provision for income taxes

 

 

961 

 

 

944 

Provision for income taxes and state LLC fees

 

 

24 

 

 

22 

Net income

 

$

937 

 

$

922 











The Notes to Consolidated Financial Statements are an integral part of these consolidated financial statements.







 

F-3

 

 


 

Ministry Partners Investment Company, LLC and Subsidiaries

Consolidated Statements of Equity

Years Ended December 31, 2017 and 2016

(Dollars in Thousands except for Unit Data)











 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

Series A Preferred

 

Class A Common

 

 

 

 

 

 



 

Units

 

Units

 

 

 

 

 

 



 

Number of Units

 

Amount

 

Number of Units

 

Amount

 

 

Accumulated Deficit

 

 

Total



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2015

 

 

117,100 

 

$

11,715 

 

 

146,522 

 

$

1,509 

 

$

(5,066)

 

$

8,158 

Net income

 

 

--

 

 

--

 

 

--

 

 

--

 

 

922 

 

 

922 

Dividends on preferred units

 

 

--

 

 

--

 

 

--

 

 

--

 

 

(273)

 

 

(273)



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2016

 

 

117,100 

 

$

11,715 

 

 

146,522 

 

$

1,509 

 

$

(4,417)

 

$

8,807 

Net income

 

 

--

 

 

--

 

 

--

 

 

--

 

 

937 

 

 

937 

Dividends on preferred units

 

 

--

 

 

--

 

 

--

 

 

--

 

 

(315)

 

 

(315)



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2017

 

 

117,100 

 

$

11,715 

 

 

146,522 

 

$

1,509 

 

$

(3,795)

 

$

9,429 































The Notes to Consolidated Financial Statements are an integral part of these consolidated financial statements.



 

F-4

 

 


 

Ministry Partners Investment Company, LLC and Subsidiaries

Consolidated Statements of Cash Flows

Years Ended December 31, 2017 and 2016

(Dollars in Thousands)



 

 

 

 

 

 



 

 

 

 

 

 



 

2017

 

2016

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

 

Net income

 

$

937 

 

$

922 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

Depreciation

 

 

30 

 

 

20 

Amortization of deferred loan fees

 

 

(438)

 

 

(345)

Amortization of debt issuance costs

 

 

114 

 

 

96 

Provision for loan losses

 

 

262 

 

 

113 

Accretion of allowance for loan losses on restructured loans

 

 

--

 

 

(5)

Accretion of loan discount

 

 

(44)

 

 

(43)

Gain on sale of loans

 

 

(136)

 

 

(135)

Gain (loss) on investments

 

 

(4)

 

 

Gain on sale of foreclosed assets

 

 

--

 

 

(278)

Credit for foreclosed asset losses

 

 

--

 

 

(6)

Changes in:

 

 

 

 

 

 

Accrued interest receivable

 

 

(85)

 

 

(112)

Other assets

 

 

75 

 

 

92 

Other liabilities and accrued interest payable

 

 

63 

 

 

117 

Net cash provided by operating activities

 

 

774 

 

 

442 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

 

Loan originations

 

 

(29,917)

 

 

(42,733)

Loan sales

 

 

9,735 

 

 

14,292 

Loan principal collections

 

 

15,784 

 

 

17,368 

Foreclosed asset sales

 

 

--

 

 

2,865 

Purchase of property and equipment

 

 

(18)

 

 

(77)

Net cash used by investing activities

 

 

(4,416)

 

 

(8,285)

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

 

Net change in NCUA borrowings

 

 

(4,834)

 

 

(3,911)

Net changes in notes payable

 

 

8,532 

 

 

10,642 

Debt issuance costs

 

 

(121)

 

 

(52)

Dividends paid on preferred units

 

 

(306)

 

 

(198)

Net cash provided by financing activities

 

 

3,271 

 

 

6,481 

Net decrease in cash

 

 

(371)

 

 

(1,362)

Cash at beginning of period

 

 

10,336 

 

 

11,698 

Cash at end of period

 

$

9,965 

 

$

10,336 

Supplemental Disclosures of Cash Flow Information

 

 

 

 

 

 

Interest paid

 

$

4,553 

 

$

4,178 

Income taxes and state LLC fees paid

 

$

22 

 

$

20 

Transfer of foreclosed assets to investments

 

$

--

 

$

900 

The Notes to Consolidated Financial Statements are an integral part of these consolidated financial statements.

 

F-5

 

 


 



Note 1.Summary of Significant Accounting Policies



Nature of Business



Ministry Partners Investment Company, LLC (the “Company”) was incorporated in California in 1991 as a C corporation and converted to a limited liability company (“LLC”) on December 31, 2008.  The Compny is owned by a group of 11 federal and state chartered credit unions, as well as the Asset Management Assistance Center of the National Credit Union Administration (“NCUA”), none of which owns a majority of the voting equity units of the Company.  The Asset Management Assistance Center owns only Series A Preferred Units, while our credit union equity holders own both our Class A Common Units and Series A Preferred Units.  Offices of the Company are located in Brea, California.  The Company provides funds for real property secured loans as well as unsecured loans for the benefit of evangelical churches and church organizations.  The Company funds its operations primarily through the sale of debt securities, as well as through other borrowings.  When the Company was formed, substantially all of the Company’s loans were purchased from its largest equity investor, the Evangelical Christian Credit Union (“ECCU”), of Brea, California. Currently the Company primarily originates church and ministry loans independently, and also from time to time purchases loans from credit unions other than ECCU. Nearly all of the Company’s business and operations currently are conducted in California and its mortgage loan investments cover approximately 30 states, with the largest number of loans made to California borrowers.



In 2007 the Company created a wholly-owned special purpose subsidiary, Ministry Partners Funding, LLC (“MPF”).  MPF was inactive from November 30, 2009 through November 2014.  The Company plans to maintain MPF for use as a financing vehicle to offer, manage or sell debt securities, participate in debt financing transactions and serve as a collateral agent to hold mortgage loans for the benefit of our secured note investors.  In December 2014, the Company reactivated MPF to hold loans used as collateral for our new Secured Investment Certificates.



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



On April 26, 2010, the Company formed Ministry Partners Securities, LLC, a Delaware limited liability company (“MP Securities”). MP Securities was 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. Effective July 14, 2010, MP Securities was qualified to transact business in the State of California.  On March 2, 2011, MP Securities’ application for membership in the Financial Industry Regulatory Authority (“FINRA”) was approved.  In October 2012 MP Securities began acting as a selling agent for the Company’s Class A Notes offering offered under a registration statement declared effective by the U.S. Securities and Exchange Commission (“SEC”).  In January 2015, MP Securities began acting as a selling agent for the Company’s Class 1 Notes offering.  In November 2012, MP Securities also began selling investments in mutual funds.  In addition

 

F-6

 

 


 

to serving as a selling agent for MPIC’s debt securities, the Company offers other investment products including mutual funds.  



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. On September 26, 2013, MP Securities entered into a clearing firm agreement with Royal Bank of Canada Dain Rauscher (RBC Dain), thereby enabling MP Securities to open brokerage accounts for its customers. On March 14, 2013, the Company received a resident license from the California Department of Insurance to act as an Insurance Producer under the name Ministry Partners Insurance Agency, LLC (MPIA).  MPIA has reached agreements with multiple insurance companies to offer their life and disability insurance products, as well as fixed and variable annuities.  MP Securities can now offer a broad scope of investment services that will enable it to better serve the Company’s clients and customers.



On July 31, 2014, the Company executed a networking agreement with America’s Christian Credit Union (“ACCU”), whereby ACCU will refer its credit union members to the Company for investment and insurance services and financial planning.  The Company reached a similar agreement with ECCU on October 6, 2014. Under the terms of the networking agreements, and subsequent amendments, the Company remits a proportional share of the revenue to both ACCU and ECCU when their members utilize the investment, insurance, or financial planning services of the Company.



The Company has executed multiple selling and/or solicitor agreements with additional third party investment and insurance product providers to meet client or member needs.



Due to its broad offering of products and services, MP Securities is directly regulated by the following federal and state entities:  the Securities and Exchange Commission (SEC), the Financial Industry Regulatory Authority (FINRA), the California Department of Business Oversight, and the California Department of Insurance.  In addition, MP Securities is licensed with the state insurance or securities divisions in every state in which business is conducted. Through December 31, 2017, MP Securities was licensed for insurance in 15 states and for investments in 24 states.



Principles of Consolidation



The consolidated financial statements include the accounts of Ministry Partners Investment Company, LLC and its wholly-owned subsidiaries, MPF, MP Realty and MP Securities.  All significant inter‑company balances and transactions have been eliminated in consolidation.

 

Conversion to LLC



Effective December 31, 2008, the Company converted its form of organization from a corporation organized under California law to a limited liability company organized under the laws of the State of California.  With the filing of Articles of Organization-Conversion with the California Secretary of State, the separate existence of Ministry Partners Investment Corporation ceased and the entity continued by operation of law under the name Ministry Partners Investment Company, LLC.

 

F-7

 

 


 



Since the conversion became effective, the Company is managed by a group of managers that provides oversight of the affairs and carries out their duties similar to the role and function that the Board of Directors performed under the previous bylaws.  Operating like a Board of Directors, the managers have full, exclusive and complete discretion, power and authority to oversee the management of Company affairs.  Instead of Articles of Incorporation and Bylaws, management structure and governance procedures are now governed by the provisions of an Operating Agreement that has been entered into by and between the Company’s managers and members.

 

Cash and Cash Equivalents



For purposes of the statement of cash flows, cash equivalents include time deposits, certificates of deposit, and all highly liquid debt instruments with original maturities of three months or less.  The Company had no cash positions other than demand deposits as of December 31, 2017 and 2016



A portion of the Company’s cash held at credit unions is insured by the National Credit Union Insurance Fund, while a portion of cash held at other financial institutions is insured by the Federal Deposit Insurance Corporation (“FDIC”).  The Company maintains cash that may exceed insured limits.  The Company does not expect to incur losses in its cash accounts.



Reclassifications



Certain reclassifications have been made to the 2016 financial statements to conform to the 2017 presentation.  Neither member’s equity nor net income for the year ended December 31, 2016 were impacted by the reclassifications.



Use of Estimates



The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.  Material estimates that are particularly susceptible to significant change in the near term relate to, but are not limited to, the determination of the allowance for loan losses and the valuation of foreclosed real estate.



Investments in Joint Venture



The Company’s investment in a joint venture is analyzed for impairment by management on a periodic basis by comparing the carrying value to the estimated value of the underlying real property.  Any impairment charges will be recorded as a valuation allowance against the value of the asset.  The Company’s share of income and expenses of the joint venture will increase or decrease the Company’s investment and will be recorded on the income statement as realized gains or losses on investment.    



 

F-8

 

 


 

Loans Receivable



Loans that management has the intent and ability to hold for the foreseeable future are reported at their outstanding unpaid principal balance adjusted for an allowance for loan losses, deferred loan fees and costs, and loan discounts. Interest income on loans is accrued on a daily basis using the interest method. Loan origination fees and costs are deferred and recognized as an adjustment to the related loan yield using the interest method.  Loan discounts represent interest accrued and unpaid which has been added to loan principal balances at the time the loan was restructured.  Loan discounts are accreted to interest income over the term of the restructured loan once the loan is deemed fully collectible and is no longer considered impaired.  Loan discounts also represent the differences between the purchase price on loans we purchased from third parties and the recorded principal balance of the loan.  These discounts are accreted to interest income over the term of the loan using the interest method.  Discounts are not accreted to income on impaired loans.



The accrual of interest is discontinued at the time a loan is 90 days past due. Accrual of interest can be discontinued prior to the loan becoming 90 days past due if management determines the loan is impaired.  Past due status is based on contractual terms of the loan. In all cases, loans are placed on nonaccrual or charged off at an earlier date if collection of principal or interest is considered doubtful.



All interest accrued but not collected for loans that are placed on nonaccrual or charged off are reversed against interest income. The interest on these loans is accounted for on the cash basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.



Allowance for Loan Losses



The Company sets aside an allowance or reserve for loan losses through charges to earnings, which are shown in the Company’s Consolidated Statements of Operations as a provision for loan losses.  Loan losses are charged against the allowance when management believes the uncollectability of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance.



The allowance for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of the collectability of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.



The allowance consists of general and specific components. The general component covers non-classified loans and is based on historical loss experience adjusted for qualitative factors.  In establishing the allowance for loan losses, management considers significant factors that affect the collectability of the Company’s loan portfolio. While historical loss experience provides a reasonable starting point for the analysis, such experience by itself does not form a sufficient basis to determine the appropriate level of the allowance for loan losses. Management also considers qualitative (or environmental) factors that are likely to cause

 

F-9

 

 


 

estimated credit losses associated with our existing portfolio to differ from historical loss experience, including:



-Changes in lending policies and procedures, including changes in underwriting standards and collection;

-Changes in national, regional and local economic and business conditions and developments that affect the collectability of the portfolio;

-Changes in the volume and severity of past due loans, the volume of nonaccrual loans, and the volume and severity of adversely classified loans;

-Changes in the value of underlying collateral for collateral-dependent loans; and

-The effect of credit concentrations.



These factors are adjusted on an on-going basis. The specific component of the Company’s allowance for loan losses relates to loans that are classified as impaired.  For such loans, an allowance is established when the discounted cash flows, collateral value, or observable market price of the impaired loan is lower than the carrying value of that loan.



All loans in the loan portfolio are subject to impairment analysis.  The Company reviews its loan portfolio monthly by examining delinquency reports and information related to the financial condition of its borrowers and collateral value of its loans.  Through this process, the Company identifies potential impaired loans.  A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal and interest when due according to the contractual terms of the loan agreement.  Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting future scheduled principal and interest payments when due.  Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired.  Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower's prior payment record, and the amount of the shortfall in relation to the principal and interest owed.  A loan is generally deemed to be impaired when it is 90 days or more past due, or earlier when facts and circumstances indicate that it is probable that a borrower will be unable to make payments in accordance with the loan contract.



Impairment is measured on a loan-by-loan basis by either the present value of expected future cash flows discounted at the loan's effective interest rate, the obtainable market price, or the fair value of the collateral if the loan is collateral-dependent.  When the Company modifies the terms of a loan for a borrower that is experiencing financial difficulties, a troubled debt restructuring is deemed to have occurred and the loan is classified as impaired.  Loans or portions thereof are charged off when they are determined by management to be uncollectible.  Uncollectability is evaluated periodically on all loans classified as “Loans of Lesser Quality.”  As the Company has an established practice of working to explore every possible means of repayment with its borrowers, it has historically not charged off a loan until the borrower has exhausted all reasonable means of making loan payments from cash flows, at which point the underlying collateral becomes subject to foreclosure.  Among other variables, management will consider factors such as the financial condition of the borrower, and the value of the underlying collateral in assessing uncollectability.



 

F-10

 

 


 

Troubled Debt Restructurings



A troubled debt restructuring is a loan for which the Company, for reasons related to a borrower’s financial difficulties, grants a concession to a borrower that the Company would not otherwise consider.  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.



Loans that are renewed at below-market terms are considered to be troubled debt restructurings if the below-market terms represent a concession due to the borrower’s troubled financial condition. Troubled debt restructurings are classified as impaired loans and are measured at the present value of estimated future cash flows using the loan's effective rate at inception of the loan. The change in the present value of cash flows attributable to the passage of time is reported as interest income.  If the loan is considered to be collateral-dependent, impairment is measured based on the fair value of the collateral.



Loan Portfolio Segments and Classes



Management segregates the loan portfolio into portfolio segments for purposes of evaluating the allowance for loan losses.  A portfolio segment is defined as the level at which the Company develops and documents a systematic method for determining its allowance for loan losses.  The portfolio segments 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.



Company’s loan portfolio consists of one segment – church loans. The loan portfolio is segregated into the following portfolio classes:



Wholly-Owned First Collateral Position. This portfolio class consists of wholly-owned loans and the retained portion of loans originated by the Company and sold for which the Company possesses a senior lien on the collateral underlying the loan.



Wholly-Owned Junior Collateral Position. This portfolio class consists of the wholly-owned loans and the retained portion of loans originated by the Company and sold for which the Company possesses 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.  These loans present higher credit risk than loans for which the Company possesses a senior lien due to the increased risk of loss should the loan default.



Participations First Collateral Position. This portfolio class consists of the participated loans purchased from another financial entity for which the Company possesses a senior lien on the collateral underlying the loan. Loan participations purchased present higher credit risk than wholly owned loans because the Company does 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 those of the Company.



Participations Junior Collateral Position. This portfolio class consists of the participated loans purchased from another financial entity for which the Company possesses a lien on the

 

F-11

 

 


 

underlying collateral that is superseded by another lien on the same collateral.  Loan participations in the junior collateral position loans have higher credit risk than wholly owned loans and participated loans purchased where the Company possesses 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.



Credit Quality Indicators



The Company’s policies provide for the classification of loans that are considered to be of lesser quality as watch, special mention, substandard, doubtful, or loss assets. Special mention assets exhibit potential or actual weaknesses that present a higher potential for loss under certain conditions.  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 the Company will sustain some loss if the deficiencies are not corrected. Assets classified as doubtful have all of the weaknesses inherent in those classified substandard with the added characteristic that the weaknesses make collection or liquidation in full highly questionable and improbable, based on currently existing facts, conditions and values. Assets (or portions of assets) classified as loss are those considered uncollectible and of such little value that their continuance as assets is not warranted. Assets that do not expose the Company 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.  Loans designated as watch are considered pass loans.



The Company has established a standard loan grading system to assist management and review personnel in their analysis and supervision of the loan portfolio.  The loan grading system is as follows:



Pass: The borrower has sufficient cash to fund debt services.  The borrower may be able to obtain similar financing from other lenders with comparable terms.  The risk of default is considered low.



Watch: These loans exhibit potential or developing weaknesses that deserve extra attention from credit management personnel. If the developing weakness is not corrected or mitigated, there may be deterioration in the ability of the borrower to repay the debt in the future.  Loans graded Watch must be reported to executive management and the Board of Managers.  Potential for loss under adverse circumstances is elevated, but not foreseeable.  Watch loans are considered pass loans.



Special mention: These credit facilities exhibit potential or actual weaknesses that present a higher potential for loss under adverse circumstances, and deserve management’s close attention. If uncorrected, these weaknesses may result in deterioration of the repayment prospects for the loan at some future date.



Substandard: Loans and other credit extensions bearing this grade are considered to be inadequately protected by the current sound worth and debt service capacity of the borrower or of any pledged collateral. These obligations, even if apparently protected by collateral value, have well-defined weaknesses related to adverse financial, managerial, economic, ministry, or environmental conditions which have clearly jeopardized repayment of principal

 

F-12

 

 


 

and interest as originally intended. Furthermore, there is the possibility that some future loss will be sustained if such weaknesses are not corrected.



Doubtful: This classification consists of loans that display the properties of substandard loans with the added characteristic that the severity of the weaknesses makes collection or liquidation in full highly questionable or improbable based upon currently existing facts, conditions, and values.  The probability of some loss is very high, but because of certain important and reasonably specific factors, the amount of loss cannot be exactly determined.  Such pending factors could include merger or liquidation, additional capital injection, refinancing plans, or perfection of liens on additional collateral.



Loss: Loans in this classification are considered uncollectible and cannot be justified as a viable asset.  This classification does not mean the loan has absolutely no recovery value, but that it is neither practical nor desirable to defer writing off this loan even though partial recovery may be obtained in the future.



Foreclosed Assets



Assets acquired through foreclosure or other proceedings are initially recorded at fair value at the date of foreclosure less estimated costs of disposal, which establishes a new cost.  After foreclosure, valuations are periodically performed by management, and foreclosed assets held for sale are carried at the lower of cost or fair value, less estimated costs of disposal.  Any write-down to fair value just prior to the transfer to foreclosed assets is charged to the allowance for loan losses.  The Company’s real estate assets acquired through foreclosure or other proceedings are evaluated regularly to ensure that the recorded amount is supported by its current fair value and that valuation allowances to reduce the varying amount to fair value less estimated costs of disposal are recorded as necessary.  Revenue and expense from the operation of the Company’s foreclosed assets and changes in the valuation allowance are included in net expenses from foreclosed assets.  When the foreclosed property is sold, a gain or loss is recognized on the sale for the difference between the sales proceeds and the carrying amount of the property.



Transfers of Financial Assets



Transfers of financial assets are accounted for as sales when control over the assets has been surrendered. Control over transferred assets is deemed to have been surrendered when (1) the assets have been isolated from the Company, (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and (3) the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity.



The Company, from time to time, sells participation interests in mortgage loans it has originated or acquired.  In order to recognize the transfer of a portion of a financial asset as a sale, the transferred portion and any portion that continues to be held by the transferor must represent a participating interest, and the transfer of the participating interest must meet the conditions for surrender of control. To qualify as a participating interest (i) each portion of a financial asset must represent a proportionate ownership interest in an entire financial asset, (ii) from the date of transfer, all cash flows received from the entire financial asset must be divided proportionately among the participating interest holders in an amount equal to their share of ownership, (iii) the transfer must be made on a non-recourse basis (other than

 

F-13

 

 


 

standard representations and warranties made under the loan participation sale agreement) to, or subordination by, any participating interest holder, and (iv) no party has the right to pledge or exchange the entire financial asset. If the participating interest or surrender of control criteria is not met, the transaction is accounted for as a secured borrowing arrangement.



Under some circumstances, when the Company sells participations in wholly owned loans receivable that it services, it retains a servicing asset that is initially measured at fair value.  As quoted market prices are generally not available for these assets, the Company estimates fair value based on the present value of future expected cash flows associated with the loan receivable.  The Company amortizes servicing assets over the life of the associated receivable using the interest method.  Any gain or loss recognized on the sale of loans receivable depends in part on both the previous carrying amount of the financial assets involved in the sale, allocated between the assets sold and the interests that continue to be held by the Company based on their relative fair value at the date of transfer, and the proceeds received.



Property and Equipment



Furniture, fixtures, and equipment are stated at cost, less accumulated depreciation. Depreciation is computed on a straight-line basis over the estimated useful lives of the assets, which range from three to seven years.



Debt Issuance Costs



Debt issuance costs are related to borrowings from financial institutions as well as public offerings of unsecured notes, and are amortized into interest expense over the contractual terms of the debt using the straight-line method.



Employee Benefit Plan



Contributions to the qualified employee retirement plan are recorded as compensation cost in the period incurred.



Income Taxes



The Company has elected to be treated as a partnership for income tax purposes. Therefore, income and expenses of the Company are passed through to its members for tax reporting purposes.  According to its operating agreement, Tesoro Hills, LLC, a joint venture in which the Company has an investment, has also elected to be treated as a partnership for income tax purposes.  The Company and MP Securities are subject to a California LLC fee.



The Company uses a recognition threshold and a measurement attribute for the consolidated financial statement recognition and measurement of a tax position taken in a tax return. Benefits from tax positions are recognized in the financial statements only when it is more likely than not that the tax position will be sustained upon examination by the appropriate taxing authority that would have full knowledge of all relevant information. A tax position that meets the more-likely-than-not recognition threshold is measured at the largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate settlement. Tax positions that previously failed to meet the more-likely-than-not recognition threshold are recognized in the first subsequent financial reporting period in which that threshold is met. Previously recognized tax positions that no longer meet the more-likely-than-not recognition

 

F-14

 

 


 

threshold are derecognized in the first subsequent financial reporting period in which that threshold is no longer met.



Recent Accounting Pronouncements



In January 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-01, “Financial Instruments – Overall (Subtopic 825-10) – Recognition and Measurement of Financial Assets and Financial Liabilities.” ASU 2016-01, among other things, (i) requires equity investments, with certain exceptions, to be measured at fair value with changes in fair value recognized in net income, (ii) simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment, (iii) eliminates the requirement for public business entities to disclose the methods and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet, (iv) requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes, (v) requires an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments, (vi) requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset on the balance sheet or the accompanying notes to the financial statements and (vii) clarifies that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity’s other deferred tax assets. ASU 2016-01 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. The guidance requires companies to apply the requirements in the year of adoption, through cumulative adjustment while the guidance related to equity securities without readily determinable fair values, should be applied prospectively. The adoption of this guidance is not expected to have a significant impact on the consolidated financial statements.

  

In February 2016, the FASB issued ASU No. 2016-02 “Leases (Topic 842).” ASU 2016-02 establishes a right of use model that requires a lessee to record a right of use asset and a lease liability for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. For lessors, the guidance modifies the classification criteria and the accounting for sales-type and direct financing leases. A lease will be treated as sale if it transfers all of the risks and rewards, as well as control of the underlying asset, to the lessee. If risks and rewards are conveyed without the transfer of control, the lease is treated as a financing. If the lessor doesn’t convey risks and rewards or control, an operating lease results. The amendments are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years for public business entities. Entities are required to use a modified retrospective approach for leases that exist or are entered into after the beginning of the earliest comparative period in the financial statements, with certain practical expedients available. Early adoption is permitted. Management is assessing the impact of ASU 2016-02 on its accounting and disclosures and expects this pronouncement will not have a material impact on the Company’s consolidated financial position or results of operation.

 

In June 2016, the FASB issued ASU 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” ASU 2016-13 introduces an approach based on expected losses to estimate credit losses on certain types of financial

 

F-15

 

 


 

instruments. ASU 2016-13 also modifies the impairment model for available-for-sale debt securities and provides for a simplified accounting model for purchased financial assets with credit deterioration since their origination. ASU 2016-13 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. The guidance requires companies to apply the requirements in the year of adoption through cumulative adjustment with some aspects of the update requiring a prospective transition approach. Management is currently evaluating the potential impact of the pending adoption of ASU 2016-13 on the consolidated financial statements.

 

In August 2016, the FASB issued ASU 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (a consensus of the Emerging Issues Task Force).” ASU 2016-15 is intended to reduce diversity in practice in how certain transactions are classified in the statement of cash flows. ASU 2016-15 addresses eight classification issues related to the statement of cash flows: (i) debt prepayment or debt extinguishment, (ii) settlement of zero-coupon bonds, (iii) contingent consideration payments made after a business combination, (iv) proceeds from the settlement of insurance claims, (v) proceeds from the settlement of corporate-owned life insurance policies, including bank-owned life insurance policies, (vi) distributions received from equity method invitees, (vii) beneficial interest in securitizations transactions, and (viii) separately identifiable cash flows and application of the predominance principle. ASU 2016-15 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. The guidance requires companies to apply the requirements retrospectively to all prior periods presented. If it is impracticable for a company to apply ASU 2016-15 retrospectively, requirements may be applied prospectively as of the earliest date practicable. Management is currently evaluating the potential impact of the pending adoption of ASU 2016-15 on the consolidated financial statements.

 

In December 2016, FASB issued ASU 2016-20, “Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers,” which is intended to provide clarification of aspects of the guidance issued in ASU 2014-09. ASU 2016-20 addresses (i) loan guarantee fees, (ii) impairment testing of contract costs, (iii) provisions for losses on construction-type and production-type contracts, and (iv) various disclosures. ASU 2016-20 is effective concurrently with ASU 2014-09 which we are required to adopt in the first quarter of fiscal year 2018. The guidance permits companies to either apply the requirements retrospectively to all prior periods presented, or apply the requirements in the year of adoption, through cumulative adjustment. The Company adopted the new revenue guidance effective January 1, 2018, by recognizing the cumulative effect of initially applying the new standard as an adjustment to the opening balance of retained earnings. This cumulative adjustment had an immaterial impact to Company’s consolidated financial position and results of operations.

 

In January 2017, the FASB issued ASU 2017-01, “Business Combinations (Topic 805): Clarifying the Definition of a Business.” ASU 2017-01 is intended to clarify the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. ASU 2017-01 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. Early adoption is permitted for (i) transactions which the acquisition date occurs before the issuance date or effective date of the ASU, only when the transaction has not been reported in financial statements that have been issued or made

 

F-16

 

 


 

available for issuance, or (ii) for transactions in which a subsidiary is deconsolidated or a group of assets is derecognized that occur before the issuance date or effective date of the ASU, only when the transaction has not been reported in financial statements that have been issued or made available for issuance. The guidance requires companies to apply the requirements prospectively. ASU 2017-01 is not expected to have a significant impact on the consolidated financial statements.

 

Note 2.Pledge of Cash and Restricted Cash



Some of the Company’s cash may be pledged as collateral for its borrowings and is considered restricted cash.  At December 31, 2017,  there was no pledged cash.  At December 31, 2016, $600 thousand was pledged as collateral for secured notes (see Note 10).



Restricted cash consists of funds the Company is required to maintain in a Central Registration Depository (CRD) account with FINRA, as well as funds the Company has deposited with RBC Dain as clearing deposits. The CRD funds may only be used for fees charged by FINRA to maintain the membership status of the Company, as well as fees related to registered and associated persons of the Company.  At December 31, 2017 and 2016, restricted cash held in the CRD account totaled $236 and $2,098, respectively.  At December 31, 2017 and 2016, restricted cash held with RBC Dain totaled $57,743 and $50,705.



Note 3.Related Party Transactions



Transactions with Equity Owners



Transactions with ECCU



Abel Pomar began serving as a member of the Company’s board of managers in February 2016. Mr. Pomar currently serves as the President, Chief Executive Officer of ECCU.



The Company maintains a portion of its cash at ECCU.  Total funds held with ECCU were $1.1 million and $1.2 million at December 31, 2017 and 2016, respectively. Interest earned on these funds totaled approximately five thousand and $15 thousand for the years ended December 31, 2017 and 2016, respectively.



The Company leases offices from ECCU pursuant to an Office Lease dated November 4, 2009 and amended on October 11, 2013, and purchases other services from ECCU. Charges of approximately $138 thousand and $109 thousand for the years ended December 31, 2017 and 2016, respectively, were made primarily for rent, while charges for other services purchased from ECCU were immaterial. All of these charges are included in Office Occupancy or Office Operations expense. The method used to arrive at the periodic charge is based on the fair market value of services provided. Management believes that such method is reasonable.



In the past, the Company has purchased mortgage loans, including loan participation interests, from ECCU, our largest equity owner.  The Company did not purchase any loans from ECCU during the years ended December 31, 2017 and 2016.  During the years ended December 31, 2017 and 2016, the Company recognized $546 thousand and $602 thousand of interest income on loans purchased from ECCU, respectively.  ECCU currently acts as the

 

F-17

 

 


 

servicer for seven of the 166 loans in the Company’s loan portfolio.  Per the loan servicing agreement with ECCU, a servicing fee of 65 basis points is deducted from the interest payments the Company receives on the wholly-owned loans ECCU services for the Company.  In lieu of a servicing fee, loan participations the Company purchases from ECCU have pass-through rates which are up to 75 basis points lower than the loan’s contractual rate.  On loan participation interests purchased from ECCU, the Company negotiates the pass-through interest rates with ECCU on a loan by loan basis. At December 31, 2017, the Company did not invest in wholly-owned loans serviced by ECCU. At December 31, 2016, the Company’s investment in wholly-owned loans serviced by ECCU totaled $899 thousand.  At December 31, 2017 and 2016, the Company’s investment in loan participations serviced by ECCU totaled $9.2 million and $10.3 million, respectively.



On October 6, 2014, MP Securities reached a networking agreement with ECCU whereby ECCU refers clients to MP Securities for investment advisory services.  In exchange, the Company remits to ECCU a solicitor fee allowable by the California Department of Business Oversight.  The Company remitted $24 thousand and $71 thousand in fees during the years ended December 31, 2017 and 2016, respectively.



On April 8, 2016, the Company and ECCU entered into a Master Services Agreement (the “Services Agreement”), pursuant to which the Company will provide marketing, member and client services, operational and reporting services to ECCU commencing on the effective date of the Services Agreement and ending on December 31, 2016; provided, however, that unless either party provides at least thirty (30) days written notice to the other party prior to its expiration, the agreement will automatically renew for successive one year periods.  The agreement was renewed in 2018 for an additional six monthsEither party may terminate the Services Agreement for any reason by providing thirty (30) days prior written notice.  The Company has agreed to assign a designated service representative which must be approved by ECCU in performing its duties under the Agreement.  Pursuant to the terms of the Services Agreement, the Company will make visits, deliver reports, provide marketing, educational and loan related services to ECCU’s members, borrowers, leads, referral sources and contacts in the southeast region of the United States.  Subsequently, the agreement was amended on March 1, 2018 and now includes referral fee income to be paid by either party on the successful closing of a formally referred loan.  For the years ended December 31, 2017 and 2016, the Company recognized $54 thousand and $68 thousand in income as a result of this agreement.



On October 5, 2016, the Company entered into a Successor Servicing Agreement with ECCU pursuant to which the Company has agreed to serve as the successor loan servicing agent for certain mortgage loans designated by ECCU in the event ECCU requests that the Company assume its obligation to act as the servicing agent for those loans.  The term of the Agreement is for a period of three years.  For the years ended December 31, 2017 and 2016, the Company recognized $9 thousand and $2 thousand in income as a result of this agreement.



Transactions with ACCU



On May 4, 2017, ACCU acquired 12,000 Class A Units and 12,000 Series A Preferred Units of the Company’s Class A Common Units and Series A Preferred Units, respectively, which represents 8.19% of the Company’s issued and outstanding Class A Units and 10.25% of the Company’s issued and outstanding Series A Preferred Units from Financial Partners Credit Union, a California state chartered credit union (“FPCU”).  The Company’s Board of

 

F-18

 

 


 

Managers approved ACCU’s purchase of the Membership Units from FPCU and has consented to ACCU’s request to be admitted as a new member of the Company.  ACCU’s purchase of the Class A Units and Series A Preferred Units was consummated pursuant to a privately negotiated transaction.



On April 15, 2016, Mendell Thompson was appointed to the Company’s Board of Managers.  Mr. Thompson currently serves as President and Chief Executive Officer of America’s Christian Credit Union (“ACCU”)



The Company has sold $9.3 million in loan participations to ACCU since 2011, including $6.4 million during the twelve month period ended December  31, 2017.  As of December 31, 2017, the outstanding balance of loan participations sold to ACCU is $2.7 million.



The Company maintains a portion of its cash at ACCU. Total funds held with ACCU were $6.1 million and $4.8 million at December 31, 2017 and 2016, respectively. Interest earned on these funds totaled approximately $26 thousand and $7 thousand for the years ended December 31, 2017 and 2016, respectively.



In addition, the Company’s wholly-owned subsidiary, MP Securities, has a Networking Agreement with ACCU pursuant to which MP Securities will assign one or more registered sales representatives to one or more locations designated by ACCU and offer investment products, investment advisory services, insurance products, annuities and mutual fund investments to ACCU’s members. MP Securities has agreed to offer only those investment products and services that have been approved by ACCU or its Board of Directors and comply with applicable investor suitability standards required by federal and state securities laws and regulations. MP Securities offers these products and services to ACCU members in accordance with NCUA rules and regulations and in compliance with its membership agreement with FINRA. MP Securities has agreed to compensate ACCU for permitting it to use the designated location to offer such products and services to ACCU’s members under an arrangement that will entitle ACCU to be paid a percentage of total revenue received by MP Securities from transactions conducted for or on behalf of ACCU members.  The Networking Agreement may be terminated by either ACCU or MP Securities without cause upon thirty days prior written notice.  MP Securities paid $190 thousand and $120 thousand to ACCU under the terms of this agreement during the year ended December 31, 2017 and 2016, respectively.



On August 14, 2017, The Company and ACCU entered into a Master Services Agreement (the “ACCU Services Agreement”), pursuant to which the Company will provide marketing, member and client services, operational and reporting services to ACCU commencing on the effective date of the ACCU Services Agreement and ending on February 15, 2018, provided, however, that the agreement will automatically renew for successive one year periods. The agreement was automatically renewed in 2018. Either party may terminate the ACCU Services Agreement for any reason by providing thirty (30) days prior written notice. The Company has agreed to assign a designated representative which must be approved by ACCU in performing its duties under the Agreement. Pursuant to the terms of the ACCU Services Agreement, the Company will make visits, deliver reports, provide marketing, educational and loan related services to ACCU members, borrowers, leads, referral sources and contacts in the Western region of the United States. The Company recognized $12 thousand for the twelve month period ended December  31, 2017.



 

F-19

 

 


 

Transactions with Oher Equity Owners



On August 14, 2013, the Company entered into a Loan Participation Agreement with Western Federal Credit Union, which has since changed its name to UNIFY Financial Credit Union (“UFCU”).  UFCU is an owner of both the Company’s Class A Common Units and Series A Preferred Units.  Under this agreement, the Company sold UFCU a $5.0 million loan participation interest in one of its mortgage loan interests.  As part of this agreement, the Company retained the right to service the loan, and it charges UFCU 50 basis points for servicing the loan.



From time to time, managers and management have purchased investor notes issued by the Company.  Investor notes payable to related parties total $250 thousand and $53  thousand at December 31, 2017 and 2016, respectively.



Transactions with Subsidiaries



The Company also entered into a selling agreement with MP Securities pursuant to which MP Securities served as its selling agent in distributing its Class 1 Notes.  Under the terms of the Class 1 Notes Offering, MP Securities received a selling concession for acting as a participating broker ranging from 1.25% to 5.0% on the sale of a fixed series note and an amount equal to .25% per annum on the average note balance for a variable series note.  No comissions were paid on any accrued interest that is added to the principal of a Class 1 Note pursuant to an interest deferral election made by the investor. 



The Company has also entered into a Managing Participating Broker Agreement with MP Securities pursuant to which MP Securities will act as the managing broker for the offering of its Class 1 Notes.  As the managing participating broker, MP Securities will maintain sales records, process and approve investor applications, conduct retail and wholesale marketing activities for sales of the Class 1 Notes and undertake its own due diligence review of the offering.  MP Securities does not serve as a lead underwriter or syndicate manager for the offering.



Under the terms of the Managing Participating Broker Dealer Agreement (the “MPB Agreement”) entered into with MP Securities and possible participating brokers in the future, the Company will pay gross selling commissions ranging from 1.25% to 5.00% for the sale of Fixed Series Class 1 Notes and an amount equal to .50% of the amount of Variable Series Class 1 Notes sold plus an amount equal to .25% per annum on the average note balance of such Variable Series Class 1 Note.  Both the gross commissions and managing participating broker commissions will be reduced by .25% of the total amount of each note sold in the offering to a repeat purchaser who is then, or has been within the immediately preceding thirty (30) days, an owner of one of the Company’s investor notes.  No commissions are paid on the accrued interest deferred and added to the principal balance of a note when an investor elects to defer interest received on a note.  In the event MP Securities provides wholesaling services in connection with the Class 1 Notes offering, the Company may reimburse MP Securities and any other selling group member up to $40 thousand in wholesaling expenses.  As of the date of this Report, no wholesaling expenses have been paid to MP Securities or any other selling group member under the Class 1 Notes offering.



In connection with the Company’s Secured Note offering, it has engaged MP Securities to act as its managing broker for the offering.  Under the terms of a Managing Broker-Dealer

 

F-20

 

 


 

Agreement entered into by and between the Company and MP Securities, it will pay selling commissions ranging from 2% on its Secured Notes with a 18-month maturity to 5% on Secured Notes with a 54-month maturity, with total selling commissions not to exceed 5%.



In addition, the Company has signed an Administrative Services Agreement with MP Securities which stipulates that it will provide certain services to MP Securities.  This agreement was updated in November 2017 and subsequently in February of 2018. These services include the lease of office space, use of equipment, including computers and phones, and payroll and personnel services.  In December 2015, the Company agreed if requested by MP Securities to waive and abate MP Securities’ obligation to pay the Company for these services for a limited period of time not to exceed twelve months and subject to a maximum expense abatement of $250 thousand.  For the year ended December 31, 2016, no abatements had been requested by MP Securities or made by the Company. Pursuant to resolutions adopted by the Board of Managers in November 2016, the Board authorized the officers of the Company to extend the terms of this agreement for an additional twelve month period.  The agreement was not renewed at expiration in November of 2017.  For the year ended December 31, 2017,  no abatements had been requested by MP Securities or made by the Company.  The total expenses charged to the Company by MPIC were $530,494 and $629,895 for the years ended December 31, 2017 and 2016, respectively.



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



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





Note 4.Loans



All of the loans are made to various evangelical churches and related organizations, primarily to purchase, construct or improve facilities. Loan maturities extend through 2031. The loans carry interest rates ranging from 3.00% to 8.50%, with a weighted average note rate of 6.31% and 6.28% as of December 31, 2017 and December 31, 2016.  See Note 9 for detail on loans pledged as collateral for NCUA credit facilities and Note 10 for detail on loans pledged as collateral for notes payable. A summary of loans as of December 31 follows (dollars in thousands):





 

 

 

 

 

 



 

 

 

 

 

 

 

F-21

 

 


 



 

2017

 

2016



 

 

 

 

 

 

Loans to evangelical churches and related organizations:

 

 

 

 

 

 

Real estate secured

 

$

151,214 

 

$

146,743 

Unsecured

 

 

1,500 

 

 

1,239 

Total loans

 

 

152,714 

 

 

147,982 



 

 

 

 

 

 

Deferred loan fees, net

 

 

(911)

 

 

(980)

Loan discount

 

 

(871)

 

 

(863)

Allowance for loan losses

 

 

(2,097)

 

 

(1,875)

Loans, net

 

$

148,835 

 

$

144,264 



The Company’s loan portfolio is comprised of one segment – church loans. The loans fall into four classes, which are defined in Note 1: wholly-owned loans for which the Company possesses the first collateral position, wholly-owned loans that are either unsecured or for which the Company possesses a junior collateral position, participated loans purchased for which the Company possesses the first collateral position, and participated loans purchased for which the Company possesses a junior collateral position.

Loans by portfolio segment (church loans) and the related allowance for loan losses are presented below. Loans and the allowance for loan losses are further segregated by impairment methodology (dollars in thousands).





 

 

 

 

 

 



 

 

 

 

 

 



 

Loans and Allowance for Loan Losses (by segment)



 

As of



 

 

 

 

 

 



 

December 31, 2017

 

December 31, 2016



 

 

 

 

 

 

Loans:

 

 

 

 

 

 

Individually evaluated for impairment

 

$

9,255 

 

$

8,878 

Collectively evaluated for impairment 

 

 

143,459 

 

 

139,104 

Balance

 

$

152,714 

 

$

147,982 



 

 

 

 

 

 

Allowance for loan losses:

 

 

 

 

 

 

Individually evaluated for impairment

 

$

--

 

$

1,072 

Collectively evaluated for impairment 

 

 

2,097 

 

 

803 

Balance

 

$

2,097 

 

$

1,875 

Allowance for Loan Losses



Management believes that the allowance for loan losses as of December 31, 2017 and 2016 is appropriate. Changes in the allowance for loan losses by loan portfolio segment (church loans) as of and for the years ended December 31 are summarized as follows (dollars in thousands):



 

 

 

 

 

 



 

 

 

 

 

 



 

2017

 

2016



 

 

 

 

 

 

Balance, beginning of period

 

$

1,875 

 

$

1,785 

Provision for loan loss

 

 

262 

 

 

113 

Chargeoffs

 

 

(40)

 

 

(20)

Recoveries

 

 

--

 

 

Accretion of allowance related to restructured loans

 

 

--

 

 

(5)

Balance, end of period

 

$

2,097 

 

$

1,875 

 

F-22

 

 


 



During the year ended December 31, 2016, the Company amended its credit policy to include the special mention category. The following table is a summary of the loan portfolio credit quality indicators by loan class at December 31, 2017 and 2016 (dollars in thousands)  :







 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Credit Quality Indicators (by class)

As of  December 31, 2017



 

Wholly-Owned First

 

Wholly-Owned Junior

 

Participation First

 

Participation Junior

 

Total



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Grade:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pass

 

$

115,422 

 

 

5,269 

 

 

9,474 

 

 

--

 

$

130,165 

Watch

 

 

13,082 

 

 

--

 

 

212 

 

 

--

 

 

13,294 

Special mention

 

 

3,152 

 

 

--

 

 

--

 

 

--

 

 

3,152 

Substandard

 

 

5,907 

 

 

196 

 

 

--

 

 

--

 

 

6,103 

Doubtful

 

 

--

 

 

--

 

 

--

 

 

--

 

 

--

Loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

--

Total

 

$

137,563 

 

$

5,465 

 

$

9,686 

 

$

--

 

$

152,714 







 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Credit Quality Indicators (by class)

As of  December 31, 2016



 

Wholly-Owned First

 

Wholly-Owned Junior

 

Participation First

 

Participation Junior

 

Total



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Grade:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pass

 

$

109,744 

 

 

5,600 

 

 

10,590 

 

 

--

 

$

125,934 

Watch

 

 

12,950 

 

 

--

 

 

220 

 

 

--

 

 

13,170 

Special mention

 

 

2,334 

 

 

--

 

 

--

 

 

--

 

 

2,334 

Substandard

 

 

6,339 

 

 

205 

 

 

--

 

 

--

 

 

6,544 

Doubtful

 

 

--

 

 

--

 

 

--

 

 

--

 

 

--

Loss

 

 

--

 

 

--

 

 

--

 

 

--

 

 

--

Total

 

$

131,367 

 

$

5,805 

 

$

10,810 

 

$

--

 

$

147,982 



The following table sets forth certain information with respect to the Company’s loan portfolio delinquencies by loan class and amount at December 31, 2017 and 2016 (dollars in thousands):









 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Age Analysis of Past Due Loans (by class)

As of December 31, 2017



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

30-59 Days Past Due

 

60-89 Days Past Due

 

Greater Than 90 Days

 

Total Past Due

 

Current

 

Total Loans

 

Recorded Investment 90 Days or more and Accruing



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Church loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Wholly-Owned First

 

$

--

 

 

3,521 

 

 

1,587 

 

 

5,108 

 

 

132,455 

 

 

137,563 

 

$

--

 

F-23

 

 


 

Wholly-Owned Junior

 

 

--

 

 

196 

 

 

--

 

 

196 

 

 

5,269 

 

 

5,465 

 

 

--

Participation First

 

 

--

 

 

--

 

 

--

 

 

--

 

 

9,686 

 

 

9,686 

 

 

--

Participation Junior

 

 

--

 

 

--

 

 

--

 

 

--

 

 

--

 

 

--

 

 

--



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

--

 

$

3,717 

 

$

1,587 

 

$

5,304 

 

$

147,410 

 

$

152,714 

 

$

--







 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Age Analysis of Past Due Loans (by class)

As of December 31, 2016



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

30-59 Days Past Due

 

60-89 Days Past Due

 

Greater Than 90 Days

 

Total Past Due

 

Current

 

Total Loans

 

Recorded Investment 90 Days or more and Accruing



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Church loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Wholly-Owned First

 

$

3,598 

 

 

886 

 

 

1,334 

 

 

5,818 

 

 

125,549 

 

 

131,367 

 

$

--

Wholly-Owned Junior

 

 

--

 

 

--

 

 

--

 

 

--

 

 

5,805 

 

 

5,805 

 

 

--

Participation First

 

 

1,358 

 

 

--

 

 

--

 

 

1,358 

 

 

9,452 

 

 

10,810 

 

 

--

Participation Junior

 

 

--

 

 

--

 

 

--

 

 

--

 

 

--

 

 

--

 

 

--



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

4,956 

 

$

886 

 

$

1,334 

 

$

7,176 

 

$

140,806 

 

$

147,982 

 

$

--



Non-Performing Loans



Non-performing loans include non-accrual loans, loans 90 days or more past due and still accruing, and restructured loans.  Non-accrual loans represent loans on which interest accruals have been discontinued.  Restructured loans are loans in which the borrower has been granted a concession on the interest rate or the original repayment terms due to financial distress. 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. 



The following tables are summaries of impaired loans by loan class at December 31, 2017 and 2016.  The recorded investment in impaired loans reflects the balances in the financial statements, net of loan discounts, whereas the unpaid principal balance reflects the contractual balances before application of collected interest payments toward the recorded investment (dollars in thousands):













 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

F-24

 

 


 

Impaired Loans (by class)

As of and for the Year Ended December 31, 2017



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

Recorded Investment

 

Unpaid Principal Balance

 

Related Discount

 

Related Allowance

 

Average Recorded Investment

 

Interest Income Recognized



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

With no related allowance recorded:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Church loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Wholly-Owned First

 

$

5,060 

 

 

6,395 

 

 

443 

 

 

--

 

 

4,703 

 

 

--

Wholly-Owned Junior

 

 

196 

 

 

216 

 

 

11 

 

 

--

 

 

200 

 

 

--

Participation First

 

 

--

 

 

--

 

 

--

 

 

--

 

 

--

 

 

--

Participation Junior

 

 

--

 

 

--

 

 

--

 

 

--

 

 

--

 

 

--



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

With an allowance recorded:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Church loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Wholly-Owned First

 

 

3,999 

 

 

5,271 

 

 

319 

 

 

1,260 

 

 

4,163 

 

 

--

Wholly-Owned Junior

 

 

--

 

 

--

 

 

--

 

 

--

 

 

--

 

 

--

Participation First

 

 

--

 

 

--

 

 

--

 

 

--

 

 

--

 

 

--

Participation Junior

 

 

--

 

 

--

 

 

--

 

 

--

 

 

--

 

 

--



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Church loans

 

$

9,255 

 

$

11,882 

 

 

773 

 

$

1,260 

 

$

9,066 

 

$

--







 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Impaired Loans (by class)

As of and for the Year Ended December 31, 2016



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

Recorded Investment

 

Unpaid Principal Balance

 

Related Discount

 

Related Allowance

 

Average Recorded Investment

 

Interest Income Recognized



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

With no related allowance recorded:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Church loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Wholly-Owned First

 

$

4,347 

 

$

5,419 

 

 

425 

 

$

--

 

$

3,114 

 

$

31 

Wholly-Owned Junior

 

 

204 

 

 

216 

 

 

11 

 

 

--

 

 

204 

 

 

--

Participation First

 

 

--

 

 

--

 

 

 

 

 

--

 

 

--

 

 

--

Participation Junior

 

 

--

 

 

--

 

 

 

 

 

--

 

 

--

 

 

--



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

With an allowance recorded:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Church loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Wholly-Owned First

 

 

4,327 

 

 

5,345 

 

 

319 

 

 

1,072 

 

 

5,506 

 

 

13 

Wholly-Owned Junior

 

 

--

 

 

--

 

 

 

 

 

--

 

 

1,664 

 

 

--

Participation First

 

 

--

 

 

--

 

 

 

 

 

--

 

 

--

 

 

--

Participation Junior

 

 

--

 

 

--

 

 

 

 

 

--

 

 

--

 

 

--



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Church loans

 

$

8,878 

 

$

10,980 

 

 

755 

 

$

1,072 

 

$

10,487 

 

$

44 





 

F-25

 

 


 

A summary of nonaccrual loans by loan class at December 31, 2017 and 2016 is as follows (dollars in thousands):





 

 

 



 

 

 

Loans on Nonaccrual Status (by class)

As of December 31, 2017



 

 

 

Church loans:

 

 

 

Wholly-Owned First

 

$

8,167 

Wholly-Owned Junior

 

 

196 

Participation First

 

 

--

Participation Junior

 

 

--



 

 

 

Total

 

$

8,363 









 

 

 



 

 

 

Loans on Nonaccrual Status (by class)

As of December 31, 2016



 

 

 

Church loans:

 

 

 

Wholly-Owned First

 

$

8,674 

Wholly-Owned Junior

 

 

205 

Participation First

 

 

--

Participation Junior

 

 

--



 

 

 

Total

 

$

8,878 



The Company did not perform a troubled debt restructure in 2017.  Five previously structured loans with a recorded balance of $4.2 million matured during 2017 and are in process of a new restructure.  A summary of troubled debt restructurings by loan class that were modified during the year ended December 31, 2016 is as follows (dollars in thousands):











 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

Troubled Debt Restructurings (by class)

For the Year Ended December 31, 2016



 

 

 

 

 

 

 

 

 

 

 

 



 

Number of Loans

 

Pre-Modification Outstanding Recorded Investment

 

Post-Modification Outstanding Recorded Investment

 

Recorded Investment At Period End



 

 

 

 

 

 

 

 

 

 

 

 

Church loans:

 

 

 

 

 

 

 

 

 

 

 

 

Wholly-Owned First

 

 

 

$

944 

 

$

944 

 

$

925 



 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

 

$

944 

 

$

944 

 

$

925 

 

F-26

 

 


 





The Company restructured one loan during the year ended December 31, 2016. The Company lowered the interest rate on this loan as part of the restructure, but did not add any amounts to the principal balance. This loan had been previously restructured.  Interest was added to this loan as part of a prior restructuring transaction.



The loan that was modified during the year ended December 31, 2016 defaulted during 2016. 



 

 

 

 

 

 



 

 

 

 

 

 

Troubled Debt Restructurings Defaulted (by class)

During the Year Ended December 31, 2016



 

 

 

 

 

 



 

Number of Loans

 

Recorded Investment



 

 

 

 

 

 

Troubled debt restructurings that subsequently defaulted:

 

 

 

 

 

 

Church loans:

 

 

 

 

 

 

Wholly-Owned First

 

 

 

$

925 

Total:

 

 

 

 

 

 

Church loans

 

 

 

$

925 





Loans modified in a troubled debt restructuring are closely monitored for delinquency as an early indicator for future default.  If loans modified in a troubled debt restructuring subsequently default, the Company evaluates such loans for potential further impairment.  As a result of this evaluation, specific reserves may be increased.

No additional funds were committed to be advanced in connection with impaired loans, including restructured loans, as of December 31, 2017 or 2016.

Note 5. Investments in Joint Venture

In December 2015, the Company finalized an agreement with Intertex Property Management, Inc., a California corporation, to enter into a joint venture to form Tesoro Hills, LLC (the “Valencia Hills Project”), a company that will develop and market property formerly classified by the Company as a foreclosed asset.  In January 2016, the Company transferred ownership in the foreclosed asset to the Valencia Hills Project as part of the agreement and reclassified the carrying value of the property from foreclosed assets to investments in joint venture.  The Company’s initial investment in the joint venture was $900 thousand, which was equal to its carrying value in the foreclosed asset at December 31, 2015.



The joint venture incurred $10 thousand in losses for the year ended December 31, 2016, of which $8 thousand was allocated to the Company according to the terms of the operating agreement.  As of December 31, 2016, the carrying value of the investment was $892 thousand.  For the year ended December 31, 2017 the joint venture recorded a $4 thousand gain, of which $4 thousand was allocated to the Company.  The carrying value of the investment as of December 31, 2017 is $896 thousand.  Management has conducted an evaluation of the investment as of December 31, 2017 and has determined that the investment is not impaired. 



 

F-27

 

 


 

Note 6. Foreclosed Assets

All of the Company’s foreclosed assets as of December 31, 2015 were sold or transferred to a joint venture investment during the year ended December 31, 2016.  The Company did not acquire any new foreclosed assets for the year ended December 31, 2017 and 2016.

Foreclosed assets are presented net of an allowance for losses.  An analysis of the allowance for losses on foreclosed assets is as follows (dollars in thousands):





 

 

 

 

 

 



 

 

 

 

 

 



 

Allowance for Losses on Foreclosed Assets for the Years Ended December 31,



 

2017

 

2016

Balance, beginning of period

 

$

--

 

$

1,111 

Provision (credit) for losses

 

 

--

 

 

(6)

Charge-offs

 

 

--

 

 

(1,111)

Recoveries

 

 

--

 

 

Balance, end of period

 

$

--

 

$

--



Expenses and income applicable to foreclosed assets include the following (dollars in thousands):





 

 

 

 

 

 



 

 

 

 

 

 



 

Foreclosed Asset Income and Expenses for the Years Ended December 31,



 

2017

 

2016

Net gain on sale of foreclosed assets

 

$

--

 

$

278 

Credit for losses

 

 

--

 

 

Operating expenses, net of rental income

 

 

--

 

 

(3)

Net income

 

$

--

 

$

281 











Note 7.  Loan Participation Sales

During the year December 31, 2017, the Company sold participations in six church loans totaling $9.7 million.  During the year ended December 31, 2016, the Company sold participations in 22 church loans totaling $14.3 million.  The Company retained servicing responsibilities in these loans, and as a result, the Company recorded servicing assets totaling $203 thousand and $155 thousand during the years ended December 31, 2017 and 2016, respectively. These assets are being amortized using the interest method over the terms of the loans.  The amortization of servicing assets is recorded as an adjustment to servicing fee income and totaled $191 and $83 thousand for the years ended December 31, 2017 and 2016, respectively.    

 

F-28

 

 


 

A summary of servicing assets for the year ended December 31, 2017 and 2016 is as follows (dollars in thousands):







 

 

 

 

 



 

 

 

 

 



2017

 

2016

Balance, beginning of period

$

258 

 

$

186 

Additions:

 

 

 

 

 

Servicing obligations from sale of loan participations

 

203 

 

 

155 

Subtractions:

 

 

 

 

 

Amortization

 

(191)

 

 

(83)

Balance, end of period

$

270 

 

$

258 



For the years ended December 31, 2017 and 2016, the Company recognized gains of $136 thousand and $135 thousand, respectively, on the sales of loan participations. 



Note 8.Premises and Equipment

Premises and equipment consist of the following at December 31 (dollars in thousands):







 

 

 

 

 

 



 

 

 

 

 

 



 

2017

 

2016



 

 

 

 

 

 

Furniture and office equipment

 

$

486 

 

$

468 

Computer system

 

 

222 

 

 

222 

Leasehold improvements

 

 

25 

 

 

25 



 

 

 

 

 

 

Total premises and equipment

 

 

733 

 

 

715 

Less accumulated depreciation and amortization

 

 

(630)

 

 

(600)



 

 

 

 

 

 

Premises and equipment, net

 

$

103 

 

$

115 



Depreciation and amortization expense for the years ended December 31, 2017 and 2016 amounted to $30 thousand and $20 thousand, respectively.



Note 9.NCUA Credit Facilities





Items Applicable to Each NCUA Credit Facility



On November 4, 2011, the Company and the National Credit Union Administration Board As Liquidating Agent of Members United Corporate Federal Credit Union (“Lender”) entered into an $87.3 million credit facility refinancing transaction (the “MU Credit Facility”). 

 

F-29

 

 


 



Also on November 4, 2011, the Company and the National Credit Union Administration Board As Liquidating Agent of Western Corporate Federal Credit Union (previously herein defined as “Lender”) entered into a $23.5 million credit facility refinancing transaction (the “WesCorp Credit Facility Extension”).



Accrued interest is due and payable monthly in arrears on the NCUA credit facilities on the first day of each month 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.  Effective as of November 30, 2016, the Company and the Lender agreed to amend the terms of the facilities.  Under the amended terms of the facility, the required minimum monthly payment was increased and the facilities will mature on November 1, 2026, at which point the final principal payment will be due.



Future principal paydowns from NCUA credit facilities are as follows at December 31:





 

 

 



 

 

 

2018

 

 

4,940 

2019

 

 

5,078 

2020

 

 

5,203 

2021

 

 

5,341 

2022

 

 

5,477 

Thereafter

 

 

55,453 



 

$

81,492 







The NCUA credit facilities include a number of borrower covenants, including affirmative covenants to maintain the collateral free of liens, to timely pay the amounts due on the facility, to provide the Lender with interim or annual financial statements and annual and periodic reports filed with the U.S. Securities and Exchange Commission and maintain a minimum collateralization ratio of at least 110%  (120% for the MU Credit Facility and Wescorp Facility combined).  If at any time the Company fails to maintain its required minimum collateralization ratio, it will be required to deliver cash or qualifying mortgage loans in an amount sufficient to enable us to meet its obligation to maintain a minimum collateralization ratio.  In total, the collateral securing both facilities at December 31, 2017 and December 31, 2016 satisfied the 120% minimum.  In addition, the collateral securing both facilities at December 31, 2017 and December 31, 2016 separately satisfied the 110% minimum.



The NCUA credit facilities also include covenants which prevent the Company from renewing or extending a loan pledged as collateral under these facilities unless certain conditions have been met and requires the borrower to deliver current financial statements to the Company.  Under the terms of the facilities, the Company has established two separate lockboxes for each facility maintained for the benefit of Lender that will receive all payments made by collateral obligors.  The Company’s obligation to repay the outstanding balance on this facility may be accelerated upon the occurrence of an “Event of Default” as defined in the NCUA credit facilities.  Such Events of Default include, among others, failure to make

 

F-30

 

 


 

timely payments due under the NCUA credit facilities and the Company's breach of any of its covenants.  As of December 31, 2017 and 2016,  respectively, the Company was in compliance with its covenants under each of the NCUA credit facilities.



Members United Facility



The balance of the MU Credit Facility was $63.4 million and $67.1 million at December 31, 2017 and 2016, respectively.  Under the amended terms of the facility, the required minimum monthly payment was increased to $450 thousand.  



At December 31, 2017 and December 31, 2016, the collateral securing the MU Credit Facility had an aggregate principal balance of $71.7 million and $79.4 million, respectively.  The collateral securing the MU Credit Facility at December 31, 2017 and 2016 satisfied the 110% minimum.



WesCorp Facility



As of December 31, 2017 and 2016,  $18.1 million and $19.2 million, respectively, was outstanding on the WesCorp Credit Facility Extension. Under the amended terms of the facility, the required minimum monthly payment was increased to $129 thousand.  



As of December 31, 2017 and 2016, the collateral securing the WesCorp Credit Facility Extension had an aggregate principal balance of $26.9 million at each year end.   The collateral securing the WesCorp Credit Facility Extension at December 31, 2017 and 2016 satisfied the 110% minimum collateralization ratio required by the amended agreement. 





Note 10.Notes Payable



SEC Registered Public Offerings



Notes payable comprised unsecured and secured notes totaling $59.3 million and $9.8 million, respectively, at December 31, 2017.  Notes payable comprised of unsecured and secured notes totaling $57.2 million and $3.4 million, respectively, at December 31, 2016.  The notes are payable to investors who have purchased the securities, including individuals, churches, and Christian ministries, many of whom are members of ECCU or ACCU. Notes pay interest at stated spreads over an index rate that is adjusted every month. Interest can be reinvested or paid at the investor's option. The Company may repurchase all or a portion of notes at any time at its sole discretion, and may allow investors to redeem their notes prior to maturity at its sole discretion.



 

F-31

 

 


 

Class A OfferingIn April 2008, the Company registered with the SEC $80.0 million of new Class A Notes in three series, including a Fixed Series, Flex Series and Variable Series.  This was a "best efforts" offering and continued through April 30, 2010.  The Company registered an additional $100.0 million of Class A notes on both June 3, 2010 and May 4, 2011.  The offering included three categories of notes, including a fixed interest note, a variable interest note, and a flex note, which allows borrowers to increase their interest rate once a year with certain limitations.  The Class A Notes contained restrictive covenants pertaining to paying dividends, making redemptions, acquiring, purchasing or making certain payments, requiring the maintenance of minimum tangible net worth, limitations on the issuance of additional notes and incurring of indebtedness.  The Class A Notes required the Company to maintain a minimum tangible adjusted net worth, as defined in the Class A Notes Trust Indenture Agreement, of not less than $4.0 million.  The Company was in compliance with these covenants as of December 31, 2017 and 2016



The Class A Notes were issued under a Trust Indenture between the Company and U.S. Bank National Association (“US Bank”). The Class A Note Offering expired on December 31, 2015 and the Company discontinued the sale of its Class A Notes. At December 31, 2017 and 2016, $12.3 million and $17.3 million of these notes were outstanding, respectively.



Class 1 OfferingIn January 2015, the Company registered with the SEC $85.0 million of new Class 1 Notes in two series, including a Fixed Series and Variable Series.  This is a "best efforts" offering and will continue through December 31, 2017.  The offering includes two categories of notes, including a fixed interest note and a variable interest note.  The interest rates the Company will pay on the Fixed Series Notes are determined by reference to the Swap Index, an index that is based upon a weekly average Swap rate reported by the Federal Reserve Board, and is in effect on the date they are issued. These notes bear interest at the Swap Index plus a rate spread of 1.7% to 2.5% and have maturities ranging from 12 to 60 months.  The interest rates the Company pays on the Variable Series Notes are determined by reference to the Variable Index in effect on the date the interest rate is set and bear interest at a rate of the Swap Index plus a rate spread of 1.50% to 1.80%.  Effective as of January 6, 2015, the Variable Index is defined under the Class 1 Notes as the three month LIBOR rate. 



The Class 1 Notes also contain restrictive covenants pertaining to paying dividends, making redemptions, acquiring, purchasing or making certain payments, requiring the maintenance of minimum tangible net worth, limitations on the issuance of additional notes and incurring of indebtedness.  The Class 1 Notes require the Company to maintain a minimum tangible adjusted net worth, as defined in the Class 1 Notes Trust Indenture Agreement, of not less than $4.0 million.  The Company is not permitted to issue any Class 1 Notes if, after giving effect to such issuance, the Class 1 Notes then outstanding would have an aggregate unpaid balance exceeding $125.0 million.  The Company’s other indebtedness, as defined in the Class 1 Notes Trust Indenture Agreement, and subject to certain exceptions enumerated therein, may not exceed $20.0 million outstanding at any time while any Class 1 Notes are outstanding. The Company was in compliance with these covenants as of December 31, 2017 and 2016



The Class 1 Notes were issued under a Trust Indenture between the Company and U.S. Bank.  The Class 1 Notes are part of up to $300 million of Class 1 Notes the Company may issue pursuant to the US Bank Indenture.  At December 31, 2017 and 2016,  $39.7 million and $32.9 million of Class 1 Notes were outstanding, respectively.



 

F-32

 

 


 

Class 1A OfferingThe Class 1 Notes offering was replaced in February 2018 with the Class 1A Notes Offering. The Company registered $90 million of its Class 1A Notes in two series – fixed and variable notes. The registration was declared effective on February 27, 2018. Similar to the Company’s Class 1 Notes, Class 1A Notes are unsecured. The interest rate paid on the Fixed Series Notes is determined in reference to the CMT Index in effect on the date that they are issued plus a rate spread as determined in the Class 1A prospectus.  The interest rate paid on the Variable Series Notes is determined by reference to the Variable Index in effect on the date the interest rate is set. The CMT index is determined by the Constant Maturity Treasury rates published by the U.S. Department of Treasury for actively traded Treasury securities. The Variable Index is equal to the 3-month LIBOR rate.



Private Offerings



Secured Investment Certificates (“Secured Notes”).  In January 2015, the Company began offering Secured Notes under a new private placement memorandum pursuant to the requirements of Rule 506 of Regulation D.  Under this offering, the Company may sell up to $80.0 million in Secured Notes to qualified investors.  The Notes require as collateral either cash pledged in the amount of 100% of the outstanding balance of the Notes or loans receivable pledged in the amount of 105% of the outstanding balance of the Notes.  At December 31, 2017 and 2016, a total of $9.8 million and $3.4 million in Secured Notes were outstanding.  At December 31, 2017 and 2016,  the collateral securing the Secured Notes had an outstanding balance of $10.9 million and $2.9 million, respectivly.  The December 31, 2017 collateral balance was sufficient to satisfy the minimum collateral requirement of the private placement memorandum. As of December 31, 2017 no cash was pledged in regards to the Secured Notes. The December 31, 2016 collateral balance was not sufficient to satisfy the minimum collateral requirement of the private placement memorandum, therefore as of December 31, 2016 the Company had pledged $600 thousand in cash to meet the minimum collateralization requirements of the Secured Notes. 



Series 1 Subordinated Capital Notes (“Subordinated Notes”)In February 2013, the Company launched the sale of its Subordinated Notes pursuant to a limited private offering to qualified investors that meets the requirements of Rule 506 of Regulation D.  The Subordinated Notes have been offered with maturity terms from 12 to 60 months at an interest rate fixed on the date of issuance, as determined by the then current seven-day average rate reported by the U.S. Federal Reserve Board for interest rate swaps. At December 31, 2017 and 2016, a total of $6.8 million and $5.1 million respectively in notes sold pursuant to this offering were outstanding.



International NotesIn March 2013, the Company launched the sale of a new private offering of its 2013 International Notes.  This offering was made only to qualified investors that meet the requirements of Rule 902 of Regulation S.  Including International Notes sold under previous private offerings, at December 31, 2016, $54 thousand of its International Notes were outstandingNo International Notes were outstanding at December 31, 2017.



Special Offering NotesSpecial Offering Notes are 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

 

F-33

 

 


 

compliance with exemptions from registration or qualifications under federal and applicable state securities laws. At December 31, 2017 and 2016, a total of $473 thousand and $1.8 million respectively in notes sold pursuant to this offering were outstanding.



Under the Subordinated Notes and 2013 International Notes offerings, the Company is subject to certain covenants, including limitations on restricted payments, limitations on the amount of notes that can be sold, restrictions on mergers and acquisitions, and proper maintenance of books and records.  The Company was in compliance with these covenants at December 31, 2017



A summary of notes payable at December 31 is as follows (dollars in thousands):



 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



 

Amount

 

Weighted Average Interest Rate



 

 

2017

 

 

2016

 

2017

 

2016

SEC Registered Public Offerings

 

 

 

 

 

 

 

 

 

 

 

 

Class 1 Offering

 

$

39,704 

 

$

32,876 

 

3.70 

%

 

3.24 

%

Class A Offering

 

 

12,255 

 

 

17,308 

 

4.00 

%

 

3.86 

%



 

 

 

 

 

 

 

 

 

 

 

 

Private Offerings

 

 

 

 

 

 

 

 

 

 

 

 

Special Offering Notes

 

 

473 

 

 

1,827 

 

3.94 

%

 

4.34 

%

Subordinated Notes

 

 

6,835 

 

 

5,147 

 

4.66 

%

 

4.74 

%

Secured Notes

 

 

9,821 

 

 

3,345 

 

3.77 

%

 

3.30 

%

International Notes

 

 

--

 

 

54 

 

--

%

 

3.62 

%

Notes Payable, gross

 

$

69,088 

 

$

60,557 

 

 

 

 

 

 

Debt Issuance Costs

 

 

85 

 

 

78 

 

 

 

 

 

 

Notes Payable, net

 

 

69,003 

 

 

60,479 

 

 

 

 

 

 



The following are maturities of notes payable for each of the next five years ending December 31 (dollars in thousands):







 

 

 



 

 

 

2018

 

$

15,426 

2019

 

 

15,300 

2020

 

 

14,671 

2021

 

 

16,364 

2022

 

 

3,921 

Thereafter

 

 

3,406 



 

$

69,088 











Note 11.Commitments and Contingencies



Credit-Related Financial Instruments



The Company is a party to credit-related financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include unadvanced lines of credit, and standby letters of credit. Such

 

F-34

 

 


 

commitments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the balance sheet.



The Company’s exposure to credit loss is represented by the contractual amount of these commitments. The Company uses the same credit policies in making commitments as it does for on-balance-sheet instruments. At December 31, 2017 and 2016, the following financial instruments were outstanding whose contract amounts represent credit risk:







 

 

 

 

 

 



 

 

 

 

 

 



 

Contract Amount at:



 

 

 

 

 

 



 

December 31, 2017

 

December 31, 2016



 

 

 

 

 

 

Undisbursed loans

 

$

1,199

 

$

2,073

Standby letter of credit

 

$

384

 

$

764



Undisbursed loans are commitments for possible future extensions of credit to existing customers. These loans are sometimes unsecured and may not necessarily be drawn upon to the total extent to which the Company is committed.  Commitments to extend credit are generally at variable rates.



Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loans to customers.



Contingencies



In the normal course of business, the Company may become involved in various legal proceedings. In the opinion of management, any liability resulting from such proceedings would not have a material adverse effect on the financial statements.



On November 11, 2017, Mr. Harold D. Woodall, former Senior Vice President and Chief Credit Officer, filed a suit against the Company and its Chief Executive Officer and President, Joseph Turner, Jr. in the Superior Court of Orange County, California.  Mr. Woodall’s employment arrangement with the Company terminated effective as of September 5, 2017.  Mr. Woodall’s suit alleges that the Company wrongfully terminated his employment and violated California’s Fair Employment and Housing Act of 1959, and the California Labor Code’s whistle blowing law.  Mr. Woodall seeks compensatory damages, punitive damages, attorney’s fees and other relief as the court deems just.  The Company believes the allegations in Mr. Woodall’s suit are groundless without merit and it intends to vigorously contest the allegations set forth in Mr. Woodall’s complaint.  Although the Company believes that it will prevail on the merits, the litigation could have a lengthy process, and the ultimate outcome cannot be predicted. As such, the Company has accrued $30 thousand as a contingent liability for the insurance deductible. The Company’s Professional Employer Organization is providing legal counsel for its defense.



 

F-35

 

 


 

Operating Lease Commitments



The Company has lease commitments covering its offices in Brea and Fresno, California. At December 31, 2017, future minimum rental payments for the years ending December 31 are as follows:





 

 

 



 

 

 

2018

 

 

149 

2019

 

 

27 

2020

 

 

Total

 

$

183 



Total rent expense, including common area and other occupancy costs, was $152 thousand and $147 thousand for the years ended December 31, 2017 and 2016, respectively. The Brea office lease expires in 2018 and contains one additional option to renew for five years.



The Fresno office lease was scheduled to expire in 2018 and subsequent to December 31, 2017, was extended through 2020.











Note 12.Office Operations and Other Expenses



Office operations and other expenses for the years ended December 31 comprise the following:







 

 

 

 

 

 



 

 

 

 

 

 



 

2017

 

2016



 

 

 

 

 

 

Lending expenses

 

$

53 

 

$

60 

Repairs and maintenance

 

 

295 

 

 

285 

Depreciation

 

 

30 

 

 

20 

Insurance

 

 

278 

 

 

321 

Travel expenses

 

 

63 

 

 

73 

Human resources

 

 

48 

 

 

59 

Software servicing

 

 

56 

 

 

44 

Referral fees

 

 

214 

 

 

191 

Correspondent fees

 

 

59 

 

 

60 

Other

 

 

191 

 

 

245 



 

 

 

 

 

 

Total

 

$

1,287 

 

$

1,358 









 

F-36

 

 


 

Note 13.Preferred and Common Units Under LLC Structure



The Series A Preferred Units are entitled to a cumulative Preferred Return, payable quarterly in arrears, equal to the liquidation preference times a dividend rate of 190 basis points through March 2013 and 25 basis points thereafter over the 1-year LIBOR rate in effect on the last day of the calendar month in which the Preferred Return is paid.  In addition, the Series A Preferred Units are entitled to an annual Preferred Distribution, payable in arrears, equal to 10% of the Company’s profits, after subtracting from profits the Preferred Return.  The Company accrued $69 thousand and $72 thousand as an annual Preferred Distribution at December 31, 2017 and 2016, respectively.



The Series A Preferred Units have a liquidation preference of $100 per unit; have no voting rights; and are subject to redemption in whole or in part at the Company’s election on December 31 of any year, for an amount equal to the liquidation preference of each unit, plus any accrued and unpaid Preferred Return and Preferred Distribution on such units. The Preferred Units have priority as to earnings and distributions over the Common Units. The resale of the Company’s Preferred Units and Common Units are subject to the Company’s first right of refusal to purchase units proposed to be transferred.  Upon the Company’s failure to pay a Preferred Return for four consecutive quarters, the holders of the Series A Preferred Units have the right to appoint two managers.



The Class A Common Units have voting rights.



Note 14.Retirement Plans



401(k)



Employees who are at least 21 years of age are eligible to participate in the ADP 401(k) plan upon the hire date. No minimum service is required and the minimum age is 21. Each employee may elect voluntary contributions not to exceed 86% of salary, subject to certain limits based on Federal tax law. The plan has a matching program, which qualifies as a Safe Harbor 401(k) plan. As a Safe Harbor Section 401(k) plan, the Company matches each eligible employee’s contribution, dollar for dollar, up to 3% of the employee’s compensation and 50% of the employee’s contribution that exceeds 3%, up to a maximum of 5% of the employee’s compensation.  Company matching contributions for the plan years ended December 31, 2017 and 2016 were $80 thousand and $73 thousand, respectively.



Profit Sharing

The profit sharing plan is for all employees who, at the end of the calendar year, are at least 21 years old, still employed, and have at least 900 hours of service during the plan year. The amount annually contributed on behalf of each qualified employee is determined by the managers, and is calculated as a percentage of the eligible employee's annual earnings. There were no contributions to the profit sharing plan for the years ended December 31, 2017 and 2016.



 

F-37

 

 


 

Note 15.Fair Value



Fair Value of Financial Instruments



The carrying amounts and estimated fair values of financial instruments at December 31 are as follows (dollars in thousands):







 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

Fair Value Measurements at December 31, 2017 using



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

Carrying Value

 

Quoted Prices in Active Markets for Identical Assets Level 1

 

Significant Other Observable Inputs Level 2

 

Significant Unobservable Inputs Level 3

 

Fair Value

FINANCIAL ASSETS:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash 

 

$

9,907 

 

$

9,907 

 

$

--

 

$

--

 

$

9,907 

Loans, net

 

 

148,835 

 

 

--

 

 

--

 

 

146,732 

 

 

146,732 

Investments in joint venture

 

 

896 

 

 

--

 

 

--

 

 

896 

 

 

896 

Accrued interest receivable

 

 

742 

 

 

--

 

 

--

 

 

742 

 

 

742 

FINANCIAL LIABILITIES:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NCUA credit facilities

 

$

81,492 

 

$

--

 

$

--

 

$

76,945 

 

$

76,945 

Notes payable

 

 

69,003 

 

 

--

 

 

--

 

 

69,264 

 

 

69,264 

Other financial liabilities

 

 

346 

 

 

--

 

 

--

 

 

346 

 

 

346 











 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

Fair Value Measurements at December 31, 2016 using



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

Carrying Value

 

Quoted Prices in Active Markets for Identical Assets Level 1

 

Significant Other Observable Inputs Level 2

 

Significant Unobservable Inputs Level 3

 

Fair Value

FINANCIAL ASSETS:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash 

 

$

9,683 

 

$

9,683 

 

$

--

 

$

--

 

$

9,683 

Loans, net

 

 

144,264 

 

 

--

 

 

--

 

 

144,125 

 

 

144,125 

Investments in joint venture

 

 

892 

 

 

--

 

 

--

 

 

892 

 

 

892 

Accrued interest receivable

 

 

657 

 

 

--

 

 

--

 

 

657 

 

 

657 

FINANCIAL LIABILITIES:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NCUA credit facilities

 

$

86,326 

 

$

--

 

$

--

 

$

83,322 

 

$

83,322 

Notes payable

 

 

60,479 

 

 

--

 

 

--

 

 

60,759 

 

 

60,759 

Other financial liabilities

 

 

302 

 

 

--

 

 

--

 

 

302 

 

 

302 



Management uses judgment in estimating the fair value of the Company’s financial instruments; however, there are inherent weaknesses in any estimation technique. Therefore, for substantially all financial instruments, the fair value estimates presented herein are not necessarily indicative of the underlying value of the Company, or the amounts the Company could have realized in a sales transaction at December 31, 2017 and 2016.  



 

F-38

 

 


 

The following methods and assumptions were used to estimate the fair value of financial instruments:



Cash – The carrying amounts reported in the consolidated balance sheets approximate fair value for cash.



Loans – Fair value is estimated by discounting the future cash flows using the current average rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities.



Investments in Joint Venture – Fair value is based on the value of the underlying real property.



Accrued Interest Receivable – The carrying amounts reported in the consolidated balance sheets approximate fair value as these receivables are short-term in nature.



Notes Payable – The fair value of fixed maturity notes is estimated by discounting the future cash flows using the rates currently offered for notes payable of similar remaining maturities.



NCUA Credit Facilities – The fair values of NCUA credit facilities are estimated using discounted cash flow analyses based on current incremental borrowing rates for similar types of borrowing arrangements.



Other Financial Liabilities - The carrying amounts reported in the consolidated balance sheets approximate fair value as these payables are short-term in nature.



Off-Balance Sheet Instruments – The fair value of loan commitments is based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties' credit standing. The fair value of loan commitments is insignificant at December 31, 2017 and 2016.



Fair Value Measurements Using Fair Value Hierarchy



The following section describes the valuation methodologies used for assets measured at fair value as well as the general classification of such instruments pursuant to the valuation hierarchy.



Fair value hierarchy for valuation gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The fair value hierarchy is as follows:



·

Level 1 inputs are quoted prices (unadjusted) for identical assets or liabilities in active markets.



·

Level 2 inputs include quoted prices for similar assets and liabilities in active markets, quoted prices for identical assets and liabilities in inactive markets, inputs that are observable for the asset or liability (such as interest rates, prepayment speeds, credit risks, etc.), or inputs that are derived principally from or corroborated by observable market data by correlation or by other means.

 

F-39

 

 


 



·

Level 3 inputs are unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the level in the fair value hierarchy within which the fair value measurement in its entirety falls has been determined based on the lowest level input that is significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset or liability.



The following section describes the valuation methodologies used for assets measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy.



Fair Value Measured on a Nonrecurring Basis



Certain assets are measured at fair value on a nonrecurring basis; that is, the assets are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment). The following table presents such assets carried on the balance sheet by caption and by level within the valuation hierarchy (dollars in thousands):











 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



Fair Value Measurements Using:

 

 

 

   

 

Quoted Prices in Active Markets for Identical Assets (Level 1)

 

Significant Other Observable Inputs (Level 2)

 

Significant Unobservable Inputs (Level 3)

 

Total

Assets at December 31, 2017:

 

 

 

 

 

 

 

 

 

 

 

 

Collateral dependent loans (net of allowance and discount)

 

$

--

 

$

--

 

$

6,135 

 

$

6,135 

Investments in joint venture

 

 

--

 

 

--

 

 

896 

 

 

896 



 

$

--

 

$

--

 

$

7,031 

 

$

7,031 

   

 

 

 

 

 

 

 

 

 

 

 

 

   

 

 

 

 

 

 

 

 

 

 

 

 

Assets at December 31, 2016:

 

 

 

 

 

 

 

 

 

 

 

 

Collateral dependent loans (net of allowance and discount)

 

$

--

 

$

1,062 

 

$

4,736 

 

$

5,798 

Investments in joint venture

 

 

--

 

 

--

 

 

892 

 

 

892 



 

$

--

 

$

1,062 

 

$

5,628 

 

$

6,690 



Impaired Loans



Collateral-dependent impaired loans are carried at the fair value of the collateral less estimated costs to sell. The fair value of collateral is determined based on appraisals. In some cases, adjustments were made to the appraised values for various factors including age of the

 

F-40

 

 


 

appraisal, age of comparable properties included in the appraisal, and known changes in the market and in the collateral. When significant adjustments were based on unobservable inputs, the resulting fair value measurement has been categorized as a Level 3 measurement. Otherwise, collateral-dependent impaired loans are categorized under Level 2.  Because of the uncertain market, fair value for collateral-dependent loans based on appraisals more than 30 days old were deemed to involve significant adjustments based on unobservable inputs.



Joint Venture Investment



Joint venture investments are initially recorded at the estimated value of the assets contributed to the joint venture.  After the initial contribution, the recorded value of the joint venture is adjusted by the Company’s prorated share of income and expenses earned and incurred by the joint venture.  The Company also performs a periodic impairment analysis to determine whether the value of the joint venture is lower than the recorded value of the joint venture based on the value of the underlying real property.  An impairment charge will be recorded on the investment if the analysis reveals any impairment to the asset’s value.



Foreclosed Assets  

 

Real estate acquired through foreclosure or other proceedings (foreclosed assets) is initially recorded at fair value at the date of foreclosure less estimated costs of disposal, which establishes a new cost. After foreclosure, valuations are periodically performed and foreclosed assets held for sale are carried at the lower of cost or fair value, less estimated costs of disposal. The fair values of real properties initially are determined based on appraisals. In some cases, adjustments were made to the appraised values for various factors including age of the appraisal, age of comparables included in the appraisal, and known changes in the market or in the collateral. Subsequent valuations of the real properties are based on management estimates or on updated appraisals. Foreclosed assets are categorized under Level 3 when significant adjustments are made by management to appraised values based on unobservable inputs. Otherwise, foreclosed assets are categorized under Level 2 if their values are based solely on appraisals. 

The following is a reconciliation of the assets for which significant unobservable inputs (Level 3) were used in determining fair value (dollars in thousands) for the years ended December 31, 2017 and 2016:





 

 

 



 

 

 



 

Impaired loans



 

(net of allowance and discount)

Balance, December 31, 2016

 

$

4,736 

Re-classifications of assets from Level 3 into Level 2

 

 

1,253 

Allowance and discount, net of discount amortization

 

 

(500)

Loans that became impaired

 

 

1,495 

Loan payments and payoffs

 

 

(849)

Balance, December 31, 2017

 

$

6,135 







 

 

 



 

 

 



 

Investment in joint venture



 

(net of allowance and discount)

Balance, December 31, 2016

 

$

892 

Pro rata share of joint venture gain

 

 

 

F-41

 

 


 

Balance, December 31, 2017

 

$

896 







 

 

 



 

 

 





 

 

 



 

 

 



 

Impaired loans



 

(net of allowance and discount)

Balance, December 31, 2015

 

$

5,940 

Re-classifications of assets from Level 3 into Level 2

 

 

(990)

Allowance and discount, net of discount amortization

 

 

(452)

Transfer of loans into foreclosed assets

 

 

--

Loans that became impaired

 

 

653 

Loan payments and payoffs

 

 

(415)

Balance, December 31, 2016

 

$

4,736 





 

 

 



 

 

 



 

Investment in joint venture



 

(net of allowance and discount)

Balance, December 31, 2015

 

$

--

Transfer of foreclosed assets to investment in joint venture

 

 

900 

Pro rata share of joint venture losses

 

 

(8)

Balance, December 31, 2016

 

$

892 







 

 

 



 

 

 



 

Foreclosed assets



 

(net of allowance and discount)

Balance, December 31, 2015

 

$

900 

Transfer of foreclosed assets to investment in joint venture

 

 

(900)

Balance, December 31, 2016

 

$

--



The following tables present the valuation methodology and unobservable inputs for level 3 assets measured at fair value on a non-recurring basis at December 31:



 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

2017

Assets

 

 

Fair Value (in thousands)

 

Valuation Techniques

 

Unobservable Input

 

Range (Weighted Average)

Impaired Loans

 

$

6,135

 

Discounted appraised value

 

Selling cost / Estimated market decrease

 

25% -58%  (37.72%)

Investment in joint venture

 

$

896

 

Internal evaluations

 

Estimated future market value

 

0%  (0%)























 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

2016

Assets

 

 

Fair Value (in thousands)

 

Valuation Techniques

 

Unobservable Input

 

Range (Weighted Average)

Impaired Loans

 

$

4,736

 

Internal evaluations

 

Estimated market decrease

 

0% - 41%  (24.77%)

Investment in joint venture

 

$

892

 

Internal evaluations

 

Estimated future market value

 

0%  (0%)















 

F-42

 

 


 

Note 16.Income Taxes and State LLC Fees



The Company is subject to a California gross receipts LLC fee of approximately $12,000 per year.  MP Securities is subject to a California gross receipts LLC fee of approximately $6,400 for the year ended December 31, 2017.  MP Realty incurred a tax loss for the years ended December 31, 2017 and 2016, and recorded a provision of $800 per year for the state minimum franchise tax.



For the years ended December 31, 2017 and 2016, MP Realty has federal and state net operating loss carryforwards of approximately $407 thousand and 402 thousand, respectively, which begin to expire in 2030. Management assessed the realizability of the deferred tax asset and determined that a 100% valuation against the deferred tax asset was appropriate at December 31, 2017 and 2016.



Tax years ended December 31, 2014 through December 31, 2017 remain subject to examination by the Internal Revenue Service and the tax years ended December 31, 2013 through December 31, 2017 remain subject to examination by the California Franchise Tax Board.



Note 17.Segment Information



Reportable Segments



The Company's reportable segments are strategic business units that offer different products and services. They are managed separately because each business requires different management, personnel proficiencies, and marketing strategies.



There are two reportable segments: finance company and broker-dealer.  The finance company segment uses funds from the sale of debt securities, operations, and loan participations to originate or purchase mortgage loans. The broker-dealer segment sells debt securities, mutual funds, and insurance products, and provides investment advisory services to generate fee income.



The accounting policies applied to determine the segment information are the same as those described in the summary of significant accounting policies. Intersegment revenues and expenses are accounted for at amounts that assume the transactions were made to unrelated third parties at the current market prices at the time of the transactions.



Management evaluates the performance of each segment based on net income or loss before provision for income taxes and LLC fees.



 

F-43

 

 


 

Financial information with respect to the reportable segments is as follows (dollars in thousands):





 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 



 

Financial Information by Segment for the Year Ended December 31, 2017



 

 

Finance Company

 

 

Broker Dealer

 

 

Total

External income

 

$

9,798 

 

$

856 

 

$

10,654 

Intersegment revenue

 

 

--

 

 

900 

 

 

900 

External non-interest expenses

 

 

3,765 

 

 

1,078 

 

 

4,843 

Intersegment non-interest expenses

 

 

 

 

--

 

 

Segment net profit (loss)

 

 

267 

 

 

669 

 

 

936 

Segment assets

 

 

159,870 

 

 

1,207 

 

 

161,077 







 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 



 

Financial Information by Segment for the Year Ended December 31, 2016



 

 

Finance Company

 

 

Broker Dealer

 

 

Total



 

 

 

 

 

 

 

 

 

External income

 

$

9,226 

 

$

687 

 

$

9,913 

Intersegment revenue

 

 

--

 

 

738 

 

 

738 

External non-interest expenses

 

 

3,483 

 

 

1,185 

 

 

4,668 

Intersegment non-interest expenses

 

 

363 

 

 

--

 

 

363 

Segment net profit (loss)

 

 

1,058 

 

 

240 

 

 

1,298 

Segment assets

 

 

156,221 

 

 

439 

 

 

156,660 





The following schedules are presented to reconcile amounts in the foregoing segment information to the amounts reported in the Company's consolidated financial statements (dollars in thousands).



 

 

 



 

 

 



 

December 31, 2017

Revenue

 

 

 

Total revenue of reportable segments

 

$

11,554 

Intersegment revenue

 

 

(900)

Consolidated revenue

 

$

10,654 



 

 

 

Non-interest expenses

 

 

 

Total non-interest expenses of reportable segments

 

$

4,844 

Intersegment non-interest expenses

 

 

(1)

Consolidated non-interest expenses

 

$

4,843 



 

 

 

Profit

 

 

 

Total profit of reportable segments

 

$

936 

Interesegment profits

 

 

Consolidated net income

 

$

937 



 

 

 

 

F-44

 

 


 

Assets

 

 

 

Total assets of reportable segments

 

$

161,077 

Segment accounts receivable from corporate office

 

 

(55)

Consolidated assets

 

$

161,022 













 

 

 



 

 

 



 

December 31, 2016

Revenue

 

 

 

Total revenue of reportable segments

 

$

10,651 

Intersegment revenue

 

 

(738)

Consolidated revenue

 

$

9,913 



 

 

 

Non-interest expenses

 

 

 

Total non-interest expenses of reportable segments

 

$

5,031 

Intersegment non-interest expenses

 

 

(363)

Consolidated non-interest expenses

 

$

4,668 



 

 

 

Profit

 

 

 

Total profit of reportable segments

 

$

1,298 

Interesegment profits

 

 

(376)

Consolidated net income

 

$

922 



 

 

 

Assets

 

 

 

Total assets of reportable segments

 

$

156,660 

Segment accounts receivable from corporate office

 

 

(22)

Consolidated assets

 

$

156,638 



















Note  18.Condensed Financial Statements of Parent Company



Financial information pertaining only to the parent company, Ministry Partners Investment Company, LLC, is as follows:



 

 

 

 

 

 



 

 

 

 

 

 

Balance Sheets

 

December 31



 

2017

 

2016

Assets:

 

 

 

 

 

 

Cash

 

$

8,783 

 

$

9,883 

Loans receivable, net of allowance for loan losses

 

 

148,835 

 

 

144,264 

Accrued interest receivable

 

 

742 

 

 

657 

Investments

 

 

896 

 

 

892 

Property and equipment, net

 

 

99 

 

 

107 

Investment in subsidiaries

 

 

(24)

 

 

(24)

Due from subsidiaries

 

 

573 

 

 

473 

Other assets

 

 

460 

 

 

363 

Total assets

 

$

160,364 

 

$

156,615 



 

 

 

 

 

 

Liabilities and equity:

 

 

 

 

 

 

NCUA credit facilities

 

$

81,492 

 

$

86,326 

 

F-45

 

 


 

Notes payable, net of debt issuance costs

 

 

69,003 

 

 

60,479 

Accrued interest payable

 

 

208 

 

 

173 

Other liabilities

 

 

882 

 

 

830 

Total liabilities

 

 

151,585 

 

 

147,808 



 

 

 

 

 

 

Equity

 

 

8,779 

 

 

8,807 



 

 

 

 

 

 

Total liabilities and members' equity

 

$

160,364 

 

$

156,615 





 

 

 

 

 

 



 

 

 

 

 

 

Statements of Income

 

Years Ended December 31



 

2017

 

2016

Income:

 

 

 

 

 

 

Interest income

 

$

9,471 

 

$

8,836 

Other income

 

 

327 

 

 

390 

Total income

 

 

9,798 

 

 

9,226 

Interest expense:

 

 

 

 

 

 

NCUA credit facilities

 

 

2,123 

 

 

2,241 

Notes payable

 

 

2,465 

 

 

1,969 

Total interest expense

 

 

4,588 

 

 

4,210 

Provision (credit) for loan losses

 

 

262 

 

 

113 

Other operating expenses

 

 

4,645 

 

 

4,172 

Income before provision for income taxes

 

 

303 

 

 

731 

Provision for income taxes and state LLC fees

 

 

15 

 

 

15 



 

 

288 

 

 

716 

Equity in undistributed net income of subsidiaries

 

 

649 

 

 

206 

Net income

 

 

937 

 

 

922 















 

 

 

 

 

 



 

 

 

 

 

 

Statements of Cash Flows

 

Years Ended December 31



 

2017

 

2016

Cash Flows from Operating Activities

 

 

 

 

 

 

Net income

 

$

937 

 

$

922 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

Equity in undistributed net loss of subsidiaries

 

 

(649)

 

 

(206)

Depreciation

 

 

26 

 

 

14 

Provision for loan losses

 

 

262 

 

 

113 

Provision (credit) for foreclosed asset losses

 

 

--

 

 

(6)

Amortization of deferred loan fees

 

 

(438)

 

 

(345)

Amortization of debt issuance costs

 

 

114 

 

 

96 

Accretion of allowance for loan losses on restructured loans

 

 

--

 

 

(5)

Accretion of loan discount

 

 

(44)

 

 

(43)

Gain on sale of loans

 

 

(136)

 

 

(135)

Gain on sale of foreclosed assets

 

 

--

 

 

(278)

Changes in:

 

 

 

 

 

 

Accrued interest receivable

 

 

(85)

 

 

(112)

Other assets

 

 

80 

 

 

(9)

Other liabilities and accrued interest payable

 

 

(22)

 

 

257 

Net cash provided by operating activities

 

 

45 

 

 

263 



 

 

 

 

 

 

 

F-46

 

 


 

Cash Flows from Investing Activities

 

 

 

 

 

 

Loan originations

 

 

(29,917)

 

 

(42,733)

Loan sales

 

 

9,735 

 

 

14,292 

Loan principal collections, net

 

 

15,784 

 

 

17,368 

Foreclosed asset sales

 

 

--

 

 

2,865 

Purchase of property and equipment

 

 

(18)

 

 

(73)

Net cash used by investing activities

 

 

(4,416)

 

 

(8,281)



 

 

 

 

 

 

Cash Flows from Financing Activities

 

 

 

 

 

 

Net change in NCUA credit facilities

 

 

(4,834)

 

 

(3,911)

Net changes in notes payable

 

 

8,532 

 

 

10,642 

Debt issuance costs

 

 

(121)

 

 

(52)

Dividends paid on preferred units

 

 

(306)

 

 

(198)

Cash provided by financing activities

 

 

3,271 

 

 

6,481 

Net decrease in cash

 

 

(1,100)

 

 

(1,537)

Cash at beginning of period

 

 

9,883 

 

 

11,420 

Cash at end of period

 

$

8,783 

 

$

9,883 



 

 

 

 

 

 

Supplemental Disclosures of Cash Flow Information

 

 

 

 

 

 

Interest paid

 

$

4,553 

 

$

4,178 

Income taxes and state LLC fees paid

 

$

14 

 

$

14 















 

 

F-47

 

 


 







 

Item 9.

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.





 

Item 9A.

CONTROLS AND PROCEDURES



Evaluation of Disclosure Controls and Procedures



Our Principal Executive Officer and Principal Financial Officer have evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the fiscal period ending December 31, 2017 covered by this Annual Report on Form 10-K. Based upon such evaluation, our Principal Executive Officer and Principal Financial Officer have concluded that our disclosure controls and procedures were effective as of and for the year ended December 31, 2017. This conclusion by our Principal Executive Officer and Principal Financial Officer does not relate to reporting periods after December 31, 2017.  



Changes in Internal Control Over Financial Reporting



We made a change in controls over our revenue recognition and salary expense processes during the year ended December 31, 2017.  Management believes that this change is sufficient to ensure that all information regarding our revenue on securities and salary expense is properly recorded.  No other changes in internal controls were made during the year ended December 31, 2017.



Management’s Report on Internal Control Over Financial Reporting



Management is responsible for establishing and maintaining adequate internal control over our financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act). Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America.



Our internal controls over financial reporting include those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America, and that our receipts and expenditures are being made only in accordance with authorizations of management and the Board; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition our assets that could have a material effect on our financial statements.



 

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Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Management assessed the effectiveness of our internal control over financial reporting as of and for the year ended December 31, 2017.  In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission Internal Control‑Integrated Framework. Based on this assessment, management believes that, as of and for the year ended December 31, 2017, our internal control over financial reporting is effective.



This annual report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our registered public accounting firm pursuant to rules of the SEC that permit us to provide only management’s report in this Annual Report on Form 10-K. 





 

Item 9B.

OTHER INFORMATION



None.



PART III





 

Item 10.

MANAGERS AND EXECUTIVE OFFICERS OF THE REGISTRANT

 

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

 



 

 

Name

Age

Managers/Executive Officers

R. Michael Lee

59

Chairman of the Board, Chairman of Ministry Partners Securities, Manager

Van C. Elliott

81

Corporate Secretary, Manager

Joseph W. Turner, Jr.

50

Chief Executive Officer and President

William M. Crammer III

58

Senior Vice President, Chief Lending Officer

Brian S. Barbre

44

Senior Vice President, Chief Financial Officer and Principal Accounting Officer

Edward J. Ramirez

50

Vice President, Credit Administration

Mendell Thompson

63

Board Credit Committee Chairman, Manager

Juli Anne Lawrence

65

ALCO Committee Chairperson, Manager

Jerrod Foresman

49

Manager

Jeffrey T. Lauridsen

68

Audit Committee Chairman, Manager

Abel Pomar

52

Manager



 

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

 

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



VAN C. ELLIOTT has served as a member of our Board since 1991. He has served as a director for ECCU from April 1988 until the present (except for the periods from March 1997 to March 1998 and March 2004 to March 2005). He serves on the Board of Vanguard Global Network, an organization that trains pastors internationally. Mr. Elliott served as associate director of the Conservative Baptist Association of Southern California from 1980 to 1994, where he was responsible for the general administrative oversight of the association’s activities. Since that time, he has been self-employed as a consultant providing financial and fund raising consultation services to church and church-related organizations. He received his Bachelor’s and Master’s degrees in mathematics and speech from Purdue University and spent seven years in the computer industry. Mr. Elliott holds a Master of Divinity from Denver Seminary and has spent fourteen years in local church ministries serving in the area of Christian education and administration. He has completed post-graduate instruction at the College for Financial Planning. Mr. Elliott is a member of the Financial Planning Association and holds the professional designation of Certified Financial Planner.®   Mr. Elliott brings to our Board his extensive experience as a credit union board member and intimate knowledge of church and ministry financial operations. He serves on our Executive Committee and on our Audit Committee.



JOSEPH W. TURNER, JR. has served as Chief Executive Officer and President since December 3, 2015. Mr. Turner is also the Chief Executive Officer and President for Ministry Partners Securities LLC, the wholly-owned subsidiary of Ministry Partners Investment Company. Mr. Turner also held the position as Chief Compliance Officer of Ministry Partners

 

88

 

 


 

Securities LLC until December 14, 2015. During his tenure with the Company, Mr. Turner has led the Company’s efforts in transitioning its wholly-owned broker dealer to a more robust and diverse financial services firm, launching its investment advisory and insurance company activities in addition to overseeing the capital raising efforts related to the Company’s proprietary products. Mr. Turner was also instrumental in formalizing strategic partnerships with Evangelical Christian Credit Union (the Company’s largest equity owner) and America’s Christian Credit Union to provide complimentary financial products and services to their collective members. Prior to joining the Company in 2011, Mr. Turner served in various roles; including Regional Vice President, Chief Operating Officer, Chief Executive Officer and President for Strongtower Financial, Inc., a Fresno, California based broker dealer and advisory firm which specialized in providing investment banking services, mortgage financing for churches and ministries, and investment and insurance products and services. Prior to joining Strongtower in 2007, Mr. Turner served as Managing Director of Principal Financial Group where he led a financial advisory and insurance group. Mr. Turner began his career with Prudential Preferred as an investment advisor in 1990. Mr. Turner received his Bachelor of Science in Business Administration – Finance degree from California State University, Fresno. Mr. Turner has completed industry leadership training both at Drake University and the Wharton School of Business. Mr. Turner holds the FINRA Series 6, 7, 24, 63, 65, and 51 as well as life, health and disability licenses in over 23 states.    Mr. Turner also serves as a director of Christian Care Ministries, Inc., a Melbourne, Florida based public charity (“CCM”), a ministry that encourages and enables Christians to connect with, share their lives, faith, talents, and financial resources with one another through its Medi-Share health care sharing ministry. CCM has current investments in the Company’s publicly and privately offered debt securities as well as other products offered by the Company’s wholly-owned subsidiary, MP Securities. For further information regarding Mr. Turner’s appointment to the CCM Board of Directors, see Part III, Item 10, Code of Ethics” in this Report.



WILLIAM M. CRAMMER, III has served as the Company’s Senior Vice President and Chief Lending Officer since September 21, 2017. Prior to that, Mr. Crammer served as the Company’s Vice President of Administration and Manager of Loan Participations.  Mr. Crammer received a Bachelor of Science degree in accounting from California State University, Fullerton and has over thirty (30) years of management experience in overseeing the financial, administrative and operational functions of both small and large organizations. In his previous role as the Company’s Manager of Loan Participations, Mr. Crammer was instrumental in launching the Company’s loan participation sales program, which significantly increased the Company’s ability to secure additional funding resources when needed.



BRIAN S. BARBRE has served as the Company’s Senior Vice President, Chief Financial Officer and Principal Accounting Officer and as the Chief Financial Officer for Ministry Partners Securities, LLC since September 25, 2017. Mr. Barbre has previously served as Vice President Finance and Treasurer of ECCU, the Company’s largest equity owner.  Over the course of Mr. Barbre’s seventeen years working with ECCU, he has served as Vice President Finance / Treasurer, Director of Finance, Finance Manager and Sr. Financial Analyst.  Mr. Barbre is a Certified Public Accountant and has served as an Adjunct professor at Biola University where he has taught cost accounting and accounting information systems courses.  Mr. Barbre holds a

 

89

 

 


 

Bachelor of Science in Business Administration, Magna Cum Laude, from Biola University and a Master of Business Administration degree from California State University Fullerton.



EDWARD J. RAMIREZ  joined  the Company in September 2017 after seven years of service as the Assistant Vice President, Ministry Development Group, Portfolio and Risk Management/Loan Portfolio Manager at Christian Community Credit Union, a San Dimas, California based credit union.  Prior to that, Mr. Ramirez was a product manager and loan underwriter for ECCU from 2002 to 2010.  Mr. Ramirez earned his Bachelor of Arts in Business Administration from California State University, Fullerton and his Master of Business Administration from Azusa Pacific University.



MENDELL THOMPSON joined the Board when Arthur Black, whom served on the Board from 1997 through April 2016, retired from the Board.  In May of 2017, Mr. Thompson was re-elected for a three term ending May of 2020.  Mr. Thompson serves as President/CEO of America’s Christian Credit Union in Glendora, California, a position he has held since 1986. Prior to his promotion to President/CEO at age 32 in 1986, Mr. Thompson held a variety of other positions at ACCU between 1977 and 1986. Among his many accomplishments, Mr. Thompson was influential in taking ACCU through a charter change in 1993 that opened the door to making church loans. Currently, America's Christian Credit Union serves more than 75,000 members, has over $313 million in assets, and manages assets of over $450 million.  Mr. Thompson was elected to the Glendora City Council in 2015 and is currently serving his first 4-year term, is a trustee on the Point Loma Nazarene University (PLNU) Board and a director on the PLNU Foundation Board. Mr. Thompson has served as a director of the National Association of State Credit Union Supervisors (NASCUS) Executive Council, as a director on the Board of WesCorp FCU, Chairman of WesCorp’s Supervisory Committee, and on the Glendora Church of the Nazarene Board. He has been a director of the CU Deposit Network, the Financial Marketing Association, and the Southern California CU Executives Society Council.  Mr. Thompson graduated cum laude in 1976 with a bachelor’s degree in History/Business from Point Loma Nazarene University, and is also a graduate of the Western CUNA Management School and Stanford University’s Executive Development Program. Mr. Thompson is the Chairman of the Company’s Board Credit Committee.



JULI ANNE LAWRENCE has served as a member of our Board since 2007. She is currently the Chief Strategy Officer of Raoust + Partners, a Hampton, Virginia based strategic planning and marketing firm for credit unions.  Prior to her current engagement, Ms. Lawrence served as Senior Vice President of Research and Development for Western Bancorp in San Jose, California.  Prior to that engagement, she served as President and Chief Executive Officer of the National Institute of Health Federal Credit Union. Prior to that, she was Executive Vice President and Chief Operating Officer of KeyPoint Credit Union and the President of its subsidiary, KeyPoint Financial Services. Before joining KeyPoint Credit Union, Mrs. Lawrence 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. Lawrence 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. Mrs. Lawrence received her Bachelor

 

90

 

 


 

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.  Mrs. Lawrence 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. Mrs. Lawrence provides our Board with the benefit of her extensive experience in financial institution operations and technology and especially, her asset-liability management expertise. Mrs. Lawrence serves on the Company’s Executive Committee,  as our Chair of the Asset-Liability Management Committee, and as a member of the Ministry Partners Securities LLC Board of Managers.



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



JEFFREY T. LAURIDSEN has served as a member of our Board since October 2007. He is an attorney in private practice with the Law Offices of Jeffrey T. Lauridsen in Garden Grove, California. Before establishing his current practice, Mr. Lauridsen served with several other law firms in the Orange County area, as partner and senior associate. Mr. Lauridsen’s 29 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 defects, general liability, premises liability, products, medical malpractice, ERISA, insurance coverage, automobile liability, insurance bad faith, employment and labor law, sexual harassment, sexual molestation and others. Prior to entering into the practice of law, Mr. Lauridsen worked as a claim representative in the insurance industry for 19 years. Mr. Lauridsen received his Associate of Arts degree in Political Science from Fullerton College. He received his Bachelor of Science in Law and Juris Doctorate degrees from California Southern Law School. He has served as Elder at Grace Church in Orange, California for 18 years. Mr. Lauridsen brings to our Board the perspective of an experienced attorney, as well as intimate knowledge of ministry governance. In addition to being a member of the Board’s Executive Committee, Mr. Lauridsen serves on our Board Credit Committee and serves as Chairman of our Audit Committee.



ABEL POMAR began serving as a member of our board in February 2016. Mr. Pomar currently serves as the President, Chief Executive Officer of ECCU. Prior to joining ECCU, Mr. Pomar served as Senior Vice President, Strategic Initiatives within the Global Compliance organization at Bank of America, where he was most recently responsible for leading the delivery of

 

91

 

 


 

regulatory compliance change and transformation initiatives across the enterprise. During his nearly eight years at Bank of America, Mr. Pomar held various leadership positions, including roles in global marketing and corporate affairs, technology delivery and change management, strategic planning and continuous improvement, and finance. He holds a bachelor’s degree in operations management and a MBA with a concentration in finance from California State University, Los Angeles. Mr. Pomar also serves on the Board of Managers for Ministry Partners Securities LLC, the Company’s wholly-owned subsidiary.



Our Board of Managers



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



When initially formed, we were a wholly-owned subsidiary of ECCU.  At that time, the Board consisted of ECCU executives and a number of independent directors.   As of the date of this Report, our Board consists of seven managers, a majority of which are independent managers.



The Board has established the following committees to help oversee various aspects of our business:



·

Our Executive Committee is charged with responsibility for determining the Chief Executive Officer and President’s compensation and undertaking other matters of an executive and strategic oversight nature;



·

Our Audit Committee is chartered to oversee the annual audit of our financial reports, oversee the establishment and maintenance of internal controls and oversee compliance with our Ethics Policy;



·

Our Board Credit Committee is authorized to oversee compliance with our Loan Policy, to review the performance and management of our loan portfolio, and to approve loan originations over a certain dollar amount or loans that have fallen outside of the parameters of the Loan Policy;



·

Our Credit Review Committee is appointed by the Board to review and implement our Loan Policy and to review most of the loan applications we receive;



·

Our Asset Liability Committee is chartered to oversee the maintenance of our asset liability strategy and process, as well as our asset liability, liquidity and other policies relating to the mitigation of risks to our earnings and capital; and



 

92

 

 


 

·

Our Governance Committee is charged with responsibility for the board governance policies, including our Related Parties Transaction Policy, and with the periodic task of nominating persons for election to the Board.



The Board is actively involved in and regularly meets with members of our senior management to discuss capital adequacy, use of leverage, asset liability management, strategic planning and liquidity issues we face.  Our Asset Liability Committee regularly meets with the objective of performing oversight of interest rate risk, future net interest income and expense, capital and liquidity forecasts and review of trends impacting our balance sheet. 



Our Board Chairman



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



Code of Ethics



On November 6, 2009, our Board adopted a Code of Ethics for our principal officers and members of the Board.  On February 26, 2018, the Company’s President and Chief Executive Officer, Joseph Turner, was appointed to the Board of Directors for Christian Care Ministry, Inc., headquartered in Melbourne, Florida (“CCM”).   CCM currently maintains a business relationship with MP Securities and the Company, holds investments in the Company’s debt securities and has purchased other investment products made available through MP Securities.



The Company’s Board of Managers were advised of the potential CCM Board appointment of Mr. Turner during its February 2018 meeting, and after significant discussion, concluded that Mr. Turner’s appointment to the CCM Board of Directors fully complied with the Company’s Code of Ethics and Related Party Policy. In addition, the Company has taken precautions to formally mitigate any potential conflicts of risk between the Company, CCM, and Mr. Turner, including, but not limited to the following:



·

Mr. Turner has declared the CCM Board Appointment as an outside business activity under MP Securities’ policies and procedures, which was subsequently approved by MP Securities Chief Compliance Officer.



·

Mr. Turner has agreed to waive and refrain from receiving any compensation related to his role as a Board Member of CCM.



·

MP Securities has assigned another Investment Advisor to manage the Company’s business relationship with CCM.



 

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·

When undertaking his duties as a CCM Board Member, Mr. Turner will recuse himself from all matters involving the investment by CCM in an investment product or debt security offered by the Company.





·

The Company, CCM and Mr. Turner will comply with applicable disclosure obligations required for the Company’s securities and regulatory filings and monitor the business relationships by and among the Company, MP Securities, Mr. Turner and CCM to ensure that such relationships and any agreements related thereto comply with the Company’s Code of Ethics and Related Parties Transaction Policy.



Audit Committee



As authorized within the operating agreement for Ministry Partners Investment Company LLC, the Board of Managers established the Audit Committee in 2005 with the adoption of its formal charter. The primary purpose of the Audit Committee, as designated in its formal charter, is to oversee the Company’s accounting policies and practice, financial reporting procedures and audits of the Company’s financial statements. For the year ended December 31, 2017, the Audit Committee  is comprised of three members, including Jeffrey T. Lauridsen, Van Elliott and Jerrod Foresman. Mr. Lauridsen, a corporate attorney in Southern California for over 30 years, is Chairman of the Audit Committee and Vice Chairman of the overall Board of Managers. Mr. Van Elliott, a Certified Financial Planner and church leadership consultant, brings extensive experience as a credit union board member and has intimate knowledge of the Company’s financial operations as he has served as the Company’s Interim Chief Executive Officer on several occasions over the last 28 years since the Company’s inception. Mr. Elliott also serves as the Company’s Corporate Secretary. The Company also added Jerrod Foresman to the Audit Committee in 2017. Mr. Foresman has nearly 28 years of experience in the financial services industry as an Executive, Compliance Officer, and Operations Principal. His knowledge of the financial operations of broker-dealers, advisory firms, and insurance agencies has been a significant addition to the Audit Committee in overseeing the operations of both the Company and MP Securities, the Company’s wholly-owned subsidiary.









 

Item 11.

EXECUTIVE COMPENSATION



The following table sets forth certain information regarding compensation we paid for services rendered to us during the years ended December 31, 2017 and 2016 by our senior executive officers. 











 

94

 

 


 

Summary Compensation Table

Annual Compensation



 



 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

Name and Principal Position

 

Year Ended

 

 

Salary

 

 

Bonus

 

 

All Other Compensation

 

Michael Lee

 

2017

 

$

--

 

 

--

 

 

14,200 

(1)

Chairman of the Board of Managers

 

2016

 

$

--

 

$

--

 

$

12,250 

(2)

Joseph Turner

 

2017

 

 

244,096 

 

 

69,575 

 

 

37,866 

(3)

President and Chief Executive Officer

 

2016

 

 

242,006 

 

 

500 

 

 

41,503 

(4)

Susan Reilly

 

2017

 

 

--

 

 

--

 

 

--

(3)

Former Sr Vice President and Chief Financial Officer

 

2016

 

 

117,916 

 

 

--

 

 

93,670 

(5)

Harold Woodall

 

2017

 

 

147,117 

 

 

35,350 

 

 

20,799 

(3)

Sr Vice President and Chief Credit Officer

 

2016

 

 

166,018 

 

 

500 

 

 

31,723 

(4)

Daniel Flude

 

2017

 

 

83,339 

 

 

26,950 

 

 

18,242 

(3)

Vice President, Finance

 

2016

 

 

121,121 

 

 

3,900 

 

 

34,438 

(4)

Van Elliott

 

2017

 

 

--

 

 

--

 

 

9,200 

(1)

Secretary and Manager

 

2016

 

 

--

 

 

--

 

 

9,350 

(2)

Juli Anne Lawrence

 

2017

 

 

--

 

 

--

 

 

11,600 

(1)

Manager

 

2016

 

 

--

 

 

--

 

 

11,250 

(2)

Arthur Black

 

2017

 

 

--

 

 

--

 

 

--

(1)

Manager

 

2016

 

 

--

 

 

--

 

 

1,250 

(2)

Jeffrey Lauridsen

 

2017

 

 

--

 

 

--

 

 

11,600 

(1)

Manager

 

2016

 

 

--

 

 

--

 

 

11,650 

(2)

Jerrod Foresman

 

2017

 

 

--

 

 

--

 

 

8,350 

(1)

Manager

 

2016

 

 

--

 

 

--

 

 

9,350 

(2)

Abel Pomar

 

2017

 

 

--

 

 

--

 

 

5,200 

(1)

Manager

 

2016

 

 

--

 

 

--

 

 

6,500 

(2)

Mendell Thompson

 

2017

 

 

--

 

 

--

 

 

8,600 

(1)

Manager

 

2016

 

 

--

 

 

--

 

 

6,650 

(2)

William M. Crammer, III,

 

2017

 

 

128,481 

 

 

28,291 

 

 

26,724 

(3)

Senior Vice President and Chief Lending Officer

 

2016

 

 

89,635 

 

 

2,400 

 

 

17,955 

(4)

Brian S. Barbre

 

2017

 

 

36,462 

 

 

15,047 

 

 

8,352 

(3)

Sr. Vice President, Chief Financial Officer and Principal Accounting Officer

 

2016

 

 

--

 

 

--

 

 

--

(6)

Edward J. Ramirez

 

2017

 

 

29,923 

 

 

4,297 

 

 

7,721 

(3)

Vice President, Credit Administration

 

2016

 

 

--

 

 

--

 

 

--

(6)



(1) We accrued amounts for each Manager for their service on the Board during 2017 which were paid in January 2018. 

 

(2) We accrued amounts for each Manager for their service on the Board during 2016 which were paid in January 2017.

 

(3) This includes the aggregate amount we contributed to the Company’s 401(k) retirement plan, for medical benefits and life and disability insurance for these officers in 2017.



(4) This includes the aggregate amount we contributed to the Company’s 401(k) retirement plan, for medical benefits and life and disability insurance benefits for these officers for 2016.



(5) We contributed an aggregate amount of $11,687 for Ms. Reilly's 401(k) retirement plan, medical benefits and life and disability insurance for 2016.  We paid Ms. Reilly $77,532 in severance payments in 2016 as a result of the Company’s management restructuring and reorganization plan which was announced in 2016.



(6) Neither Mr. Barbre nor Mr. Ramirez were executive officers in the years ending December 31, 2016.  Mr. Barbre’s 2017 bonus was included in his offer letter prior to joining the Company.



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

 

95

 

 


 



In February 2014, the Board approved the payment of compensation grants to Managers of the Board for rendering services to the Company. Under the grants approved by the Board, each Manager will receive a cash grant for serving on the Board, and will receive additional amounts for attendance at each Board meeting and for serving as a Chairperson of one of our Board Committees.  Each Manager is also entitled to be reimbursed for expenses incurred in performing duties on our behalf.  For the years ended December 31, 2017 and 2016, we accrued $68.7 thousand and $68 thousand in compensation awards for our Managers, respectively.  These awards were paid in January 2017 and 2018







 

Item 12.

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS



The following table sets forth information available to us, as of December 31, 2017, 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.





 

 

 

(1)



Name

 

 

Beneficial

Ownership

Percentage

Owned(1)



R. Michael Lee

915 W. Imperial Hwy., Suite 120

Brea, CA 92821

 

 

 

--

 

--%



Van C. Elliott

915 W. Imperial Hwy., Suite 120

Brea, CA 92821

 

 

 

--

 

--%



Mendell Thompson

915 W. Imperial Hwy., Suite 120

Brea, CA 92821

 

 

 

--

 

--%



Juli Anne  Lawrence

915 W. Imperial Hwy., Suite 120

Brea, CA 92821

 

 

 

--

 

--%



Jeffrey T. Lauridsen

915 W. Imperial Hwy., Suite 120

Brea, CA 92821

 

 

 

--

 

--%



Abel Pomar

915 W. Imperial Hwy., Suite 120

Brea, CA 92821

 

 

 

--

 

--%

 

96

 

 


 



Jerrod L. Foresman

915 W. Imperial Hwy., Suite 120

Brea, CA 92821

 

 

 

--

 

--%



Joseph W. Turner, Jr.

915 W. Imperial Hwy., Suite 120

Brea, CA 92821

 

 

 

--

 

--%



Brian S. Barbre

915 W. Imperial Hwy., Suite 120

Brea, CA 92821

 

 

 

--

 

--%



William Crammer

915 W. Imperial Hwy., Suite 120

Brea, CA 92821

 

 

 

--

 

--%



Edward J. Ramirez

915 W. Imperial Hwy., Suite 120

Brea, CA 92821

 

 

 

--

 

--



 

 

 

 



All officers and members of the Board as a group

 

 

 

--

 

 

--%

 







 

 

Other 5% or greater beneficial owners (seven):

 

 



 

 

Name

Beneficial Ownership

Percentage Owned(1)

Evangelical Christian Credit Union

62,000  42.31% 

America’s Christian Credit Union

12,000  8.19% 

Navy Federal Credit Union (2)

11,905  8.13% 

UNIFY Financial Credit Union (3)

11,905  8.13% 

Wescom Credit Union

11,905  8.13% 

Credit Union of Southern California

11,900  8.12% 

Keypoint Credit Union

8,000  5.46% 



 

97

 

 


 

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



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



(3) UNIFY Financial Credit Union was formerly Western Federal Credit Union.

 





 

Item 13.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE



Transactions with Equity Owners



Transactions with ECCU



Abel Pomar began serving as a member of the Company’s Board of Managers in February 2016. Mr. Pomar currently serves as the President and Chief Executive Officer of ECCU.



The Company maintains a portion of its cash at ECCU.  Total funds held with ECCU were $1.1 million and $1.2 million at December 31, 2017 and 2016, respectively. Interest earned on these funds totaled approximately $5 thousand and $15 thousand for the years ended December 31, 2017 and 2016, respectively.



The Company leases offices from ECCU pursuant to an Office Lease dated November 4, 2009 and amended on October 11, 2013, and purchases other services from ECCU. Charges of approximately $138 thousand and $109 thousand for the years ended December 31, 2017 and 2016, respectively, were made primarily for rent, while charges for other services purchased from ECCU were immaterial. All of these charges are included in Office Occupancy or Office Operations expense. The method used to arrive at the periodic charge is based on the fair market value of services provided. Management believes that such method is reasonable.



In the past, the Company has purchased mortgage loans, including loan participation interests, from ECCU, our largest equity owner.  The Company did not purchase any loans from ECCU during the years ended December 31, 2017 and 2016.  During the years ended December 31, 2017 and 2016, the Company recognized $546 thousand and $602 thousand of interest income on loans purchased from ECCU, respectively.  ECCU currently acts as the servicer for seven of the 166 loans in the Company’s loan portfolio.  Per the loan servicing agreement with ECCU, a servicing fee of 65 basis points is deducted from the interest payments the Company receives on the wholly-owned loans ECCU services for the Company.  In lieu of a servicing fee, when the Company purchases a loan participation interest from ECCU, the loan will have a pass-through rate which is up to 75 basis points lower than the loan’s contractual rate.  For any loan participation interests purchased from ECCU, the Company negotiates the pass-through interest rates with ECCU on a loan by loan basis. At December 31, 2017, the Company did not invest in

 

98

 

 


 

any wholly-owned loans serviced by ECCU.  At December 31, 2016, the Company’s investment in wholly-owned loans serviced by ECCU totaled $899 thousand.  At December 31, 2017 and 2016, the Company’s investment in loan participations serviced by ECCU totaled $9.2 million and $10.3 million, respectively.



On October 6, 2014, MP Securities reached a networking agreement with ECCU whereby ECCU refers clients to MP Securities for investment advisory services.  In exchange, the Company remits to ECCU a referral fee allowable by the California Department of Business Oversight.  The Company remitted $24 thousand and $71 thousand in fees to ECCU during the years ended December 31, 2017 and 2016, respectively.



On April 8, 2016, the Company and ECCU entered into a Master Services Agreement (the “Services Agreement”), pursuant to which the Company will provide marketing, member and client services, operational and reporting services to ECCU commencing on the effective date of the Services Agreement and ending on December 31, 2016; provided, however, that unless either party provides at least thirty (30) days written notice to the other party prior to its expiration, the agreement will automatically renew for successive one year periods.  The agreement was renewed in March 2018 for an additional one year term.  Either party may terminate the Services Agreement for any reason by providing thirty (30) days prior written notice.  The Company has agreed to assign a designated service representative which must be approved by ECCU in performing its duties under the Agreement.  Pursuant to the terms of the Services Agreement, the Company will make visits, deliver reports, provide marketing, educational and loan related services to ECCU’s members, borrowers, leads, referral sources and contacts in the southeast region of the United States.  Subsequently, the agreement was amended on March 1, 2018 and now provides that referral fees will be paid by either party on the successful closing of a formally referred loan.  For the years ended December 31, 2017 and 2016, the Company recognized $54 thousand and $68 thousand in income as a result of this agreement.



On October 5, 2016, the Company entered into a Successor Servicing Agreement with ECCU pursuant to which the Company has agreed to serve as the successor loan servicing agent for certain mortgage loans designated by ECCU in the event ECCU requests that the Company assume its obligation to act as the servicing agent for those loans.  The term of the Agreement is for a period of three years.  For the years ended December 31, 2017 and 2016, the Company recognized $9 thousand and $2 thousand in income as a result of this agreement.



Transactions with ACCU



On May 4, 2017, America’s Christian Credit Union (“ACCU”) acquired 12,000 Class A Units and 12,000 Series A Preferred Units of the Company’s Class A Common Units and Series A Preferred Units, respectively, which represents 8.19% of the Company’s issued and outstanding Class A Units and 10.25% of the Company’s issued and outstanding Series A Preferred Units from Financial Partners Credit Union, a California state chartered credit union (“FPCU”).  The Company’s Board of Managers approved ACCU’s purchase of the Membership Units from FPCU and has consented to ACCU’s request to be admitted as a new member of the Company. 

 

99

 

 


 

ACCU’s purchase of the Class A Units and Series A Preferred Units was consummated pursuant to a privately negotiated transaction.



On April 15, 2016, Mendell Thompson was appointed to the Company’s Board of Managers.  Mr. Thompson currently serves as President and Chief Executive Officer of ACCU. 



The Company has sold $9.3 million in loan participations to ACCU since 2011, including $6.4 million during the twelve month period ended December 31, 2017.  As of December 31, 2017, the outstanding balance of loan participations sold to ACCU is $2.7 million.



The Company maintains a portion of its cash at ACCU. Total funds held with ACCU were $6.1 million and $4.8 million at December 31, 2017 and 2016, respectively. Interest earned on these funds totaled approximately $26 thousand and $7 thousand for the years ended December 31, 2017 and 2016, respectively.



In addition, the Company’s wholly-owned subsidiary, MP Securities, has a Networking Agreement with ACCU pursuant to which MP Securities will assign one or more registered sales representatives to one or more locations designated by ACCU and offer investment products, investment advisory services, insurance products, annuities and mutual fund investments to ACCU’s members. MP Securities has agreed to offer only those investment products and services that have been approved by ACCU or its Board of Directors and comply with applicable investor suitability standards required by federal and state securities laws and regulations. MP Securities offers these products and services to ACCU members in accordance with NCUA rules and regulations and in compliance with its membership agreement with FINRA. MP Securities has agreed to compensate ACCU for permitting it to use the designated location to offer such products and services to ACCU’s members under an arrangement that will entitle ACCU to be paid a percentage of total revenue received by MP Securities from transactions conducted for or on behalf of ACCU members.  The Networking Agreement may be terminated by either ACCU or MP Securities without cause upon thirty days prior written notice.  MP Securities paid $190 thousand and $120 thousand to ACCU under the terms of this agreement during the year ended December 31, 2017 and 2016, respectively.



On August 14, 2017, The Company and ACCU entered into a Master Services Agreement (the “ACCU Services Agreement”), pursuant to which the Company will provide marketing, member and client services, operational and reporting services to ACCU commencing on the effective date of the ACCU Services Agreement and ending on February 15, 2018, provided, however, that the agreement will automatically renew for successive one year periods. The agreement was automatically renewed in February 2018 for another one year term. Either party may terminate the ACCU Services Agreement for any reason by providing thirty (30) days prior written notice. The Company has agreed to assign a designated representative which must be approved by ACCU in performing its duties under the Agreement. Pursuant to the terms of the ACCU Services Agreement, the Company will make visits, deliver reports, provide marketing, educational and loan related services to ACCU members, borrowers, leads, referral sources and contacts in the Western region of the United States. The Company recognized $12 thousand in income from this agreement for the twelve month period ended December 31, 2017.

 

100

 

 


 



Transactions with Other Equity Owners



On August 14, 2013, the Company entered into a Loan Participation Agreement with Western Federal Credit Union, which has since changed its name to UNIFY Financial Credit Union (“UFCU”).  UFCU is an owner of both the Company’s Class A Common Units and Series A Preferred Units.  Under this agreement, the Company sold UFCU a $5.0 million loan participation interest in one of its mortgage loan interests.  As part of this agreement, the Company retained the right to service the loan, and it charges UFCU 50 basis points for servicing the loan.

Transactions with Subsidiaries



The Company is offering its Class 1A Notes on a best efforts basis through MP Securities, our wholly-owned subsidiary. There is no minimum offering. Upon the Company’s acceptance of an executed Purchase Agreement, we will place subscription funds directly into the Company’s operating account for use in our business.



The Company will pay MP Securities a 1.50% initial sales commission on the sale of any of the Company’s Class 1A Notes.  MP Securities will receive an account servicing fee equal to 1% per annum of the principal balance of a Class 1A Note purchased, determined on a monthly basis commencing one year after the purchase of a Note; subject however, to a maximum gross fee of 5.50% over the term of a Class 1A Note.  The Company reserves the right to waive, reduce, or suspend payment of this account servicing fee at any time.  In addition, no account servicing fee will be assessed on any Class 1A Note purchased once the total compensation paid to MP Securities resulting from the purchase of a Class 1A Note reaches 5.5%.  The account servicing fee will not be assessed on any outstanding Class 1 or Class A Notes.



For each sale of a Note, the Company will pay a 0.50% processing fee on the purchase of a Class 1A Note, payable at closing of a purchase of a Note. The Company reserves the right to waive, reduce or suspend payment of the processing fee at any time.



The Company has entered into a selling agreement with its wholly-owned subsidiary, MP Securities, pursuant to which MP Securities will sell its Series 1 Subordinated Capital Notes (the “Subordinated Capital Notes”) and its 2013 International Notes (the “International Notes”).  The Company has transitioned its compensation arrangement with MP Securities to an assets under management fee that will pay MP Securities a fee equal to 1% of the outstanding balances of the Subordinated Capital Notes and International Notes; subject, however, to a maximum gross dealer compensation of 2.5%.  The Company will pay MP Securities no selling commissions on any new sales of the Company’s Subordinated Capital Notes and International Notes.  MP Securities will receive an assets-under-management fee equal to 1% of the outstanding balances of our Subordinated Capital Notes and International Notes, determined on a monthly basis.  The Company reserves the right to waive, reduce, or suspend payment of the assets under management fee at any time. At no time will the compensation paid to MP Securities pursuant to an assets under management fee be assessed on a Subordinated Capital Note or International Note purchased prior to July 1, 2017 when a 2.5% commission was

 

101

 

 


 

previously paid on the purchase transaction.  In addition, no assets under management fee will be assessed on any note purchased prior to July 1, 2017 once the total compensation paid to MP Securities resulting from the purchase of such note reaches 2.5%.  For each sale of a Subordinated Capital Notes and International Note, the Company will pay a 0.50% processing fee on the purchase of a note, payable at closing of a purchase of a note.



In connection with the Company’s Secured Note offering, it has engaged MP Securities to act as its managing broker for the offering.  Effective as of September 1, 2017, the Company has transitioned to an assets under management fee compensation model for all sales made by MP Securities of the Secured Notes.  Under the assets under management fee compensation structure, MP Securities will be paid a fee equal to 1% of the outstanding balances of our Secured Notes; provided, however, that the maximum amount of fees assessed will not exceed 5% of the Secured Note investment.  The Company will also pay MP Securities a .50% processing fee on the purchase of a Secured Note.



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



In addition, the Company has signed an Administrative Services Agreement with MP Securities which stipulates that it will provide certain services to MP Securities.  This agreement was updated in November 2017 and subsequently amended in February of 2018. These services include the lease of office space, use of equipment, including computers and phones, and providing payroll and personnel services.  In December 2015, the Company agreed if requested by MP Securities to waive and abate MP Securities’ obligation to pay the Company for these services for a limited period of time not to exceed twelve months and subject to a maximum expense abatement of $250 thousand.  For the year ended December 31, 2016, no abatements had been requested by MP Securities or made by the Company. Pursuant to resolutions adopted by the Board of Managers in November 2016, the Board authorized the officers of the Company to extend the terms of this agreement for an additional twelve month period.  The agreement was not renewed at expiration in November of 2017.  For the year ended December 31, 2017, no abatements had been requested by MP Securities or made by the Company.  The total expenses charged to MP Securities by the Company were $530,494 and $629,895 for the years ended December 31, 2017 and 2016, respectively.



 

102

 

 


 

Other Transactions



From time to time, managers and management have purchased investor notes issued by the Company.  Investor notes payable to related parties total $250 thousand and $53 thousand at December 31, 2017 and 2016, respectively.



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









 

Item 14.

PRINCIPAL ACCOUNTANT FEES AND SERVICES



Before our principal accountant is engaged by us to render audit or non-audit services, where required by the rules and regulations promulgated by the Securities and Exchange Commission, such engagement is approved by our Audit Committee.

The aggregate fees billed by our accounting firm, Hutchinson and Bloodgood LLP, for the years ended December 31 were as follows:





 

 

 

 

 

 



 

 

 

 

 

 



 

2017

 

2016



 

 

 

 

 

 

Audit and audit-related fees

 

$

128,800 

 

$

133,580 

Tax Fees

 

 

14,300 

 

 

12,500 

All other fees

 

 

11,800 

 

 

5,436 

Total

 

$

154,900 

 

$

151,516 



Our Audit Committee has considered whether the provision of the non-audit services described above is compatible with maintaining our auditors’ independence and determined that such services are appropriate.



 

103

 

 


 



 





 

Item 15.

EXHIBITS





 

Exhibit No.

Description

3.1

Articles of Organization - Conversion of Ministry Partners Investment Company, LLC, dated as of December 31, 2008 (1)

3.2

Operating Agreement of Ministry Partners Investment Company, LLC, dated as of December 31, 2008 (1)

3.3

Plan of Conversion of Ministry Partners Investment Corporation, dated September 18, 2008 (1)

3.4

Series A Preferred Unit Certificate of Ministry Partners Investment Company, LLC, dated as of December 31, 2008 (1)

3.5

First Amendment to the Operating Agreement of Ministry Partners Investment Company, LLC, effective as of February 11, 2010 (2)

3.6

Amended and Restated Certificate of Designation of the Powers, Designations, Preferences and Rights of Series A Preferred Units, effective as of May 23, 2013 (3)

10.1

$10 Million Committed Line of Credit Facility and Security Agreement, dated October 8, 2007 (4)

10.2

$50 Million CUSO Committed Line of Credit Facility and Security Agreement, dated October 8, 2007 (4)

10.3

Loan and Security Agreement dated November 4, 2011, by and between Ministry Partners Investment Company, LLC and The National Credit Union Administration Board as Liquidating Agent of Western Corporate Federal Credit Union (5)

10.4

Loan and Security Agreement dated November 4, 2011, by and between Ministry Partners Investment Company, LLC and The National Credit Union Administration Board as Liquidating Agent of Members United Corporate Federal Credit Union (5)

10.5

CUSO Line of Credit Facility Note and Security Agreement, dated May 14, 2008, executed by Ministry Partners Investment Corporation in favor of Members United Corporate Federal Credit Union (6)

10.6

Office Lease, dated November 4, 2008, by and between Ministry Partners Investment Corporation and Evangelical Christian Credit Union (7)

10.7

Equipment Lease, dated as of January 1, 2009, by and between Ministry Partners Investment Company, LLC and Evangelical Christian Credit Union (7)

10.8

Professional Services Agreement, dated as of January 1, 2009, by and between Ministry Partners Investment Company, LLC and Evangelical Christian Credit Union (7)

 

104

 

 


 

10.9

Form of Individual Manager Indemnification Agreement (8)

10.10

Confidential Severance and Release Agreement by and between Ministry Partners Investment Company LLC and Billy M. Dodson, effective November 8, 2013 (9)

10.11

Interim CEO Employment Agreement by and between Ministry Partners Investment Company LLC and James. H. Overholt, effective November 12, 2013 (10)

10.12

Employment Agreement by and between Ministry Partners Investment Company, LLC and James H. Overholt, effective May 13, 2014 (11)

10.13

Loan and Security Agreement by and between Ministry Partners Investment Company, LLC and Ministry Partners Funding, LLC dated December 15, 2014 (12)

10.14

Managing Broker Dealer Agreement by and between Ministry Partners Investment Company, LLC and Ministry Partners Securities, LLC, dated ______________, 2018  (19)  

10.15

Amendment to Loan and Security Agreement by and between The National Credit Union Administration Board As Liquidating Agent of Members United Corporate Federal Credit Union and Ministry Partners Investment Company, LLC dated March 30, 2015. (13)

10.16

Amendment to Loan and Security Agreement by and between The National Credit Union Administration Board As Liquidating Agent of Western Corporate Federal Credit Union and Ministry Partners Investment Company, LLC dated March 30, 2015. (13)

10.17

Employment Agreement by and between Ministry Partners Securities, LLC and Joseph Turner dated May 27, 2015. (14)

10.18

Severance and Release Agreement dated January 7, 2016. (15)

10.19

Employment Agreement by and between Ministry Partners Securities, LLC and Joseph Turner dated May 5, 2016. (16)

10.20

Separation and Release Agreement dated September 7, 2016. (17)

10.21

Amendment and Modification of Promissory Note by and between The National Credit Union Administration Board As Liquidating Agent of Members United Corporate Federal Credit Union and Ministry Partners Investment Company, LLC dated November 30, 2016. (18)

10.22

Amendment and Modification of Promissory Note by and between The National Credit Union Administration Board As Liquidating Agent of Western Corporate Federal Credit Union and Ministry Partners Investment Company, LLC dated November 30, 2016. (18)

10.23

Networking Agreement by and between Ministry Partners Securities, LLC and America’s Christian Credit Union dated July 30, 2014 and Addendum related thereto dated December 1, 2016. (20)

 

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10.24

Trust Indenture by and between Ministry Partners Investment Company, LLC and U.S. Bank National Association, as Trustee dated December 20, 2017 (21)

10.29

Administrative Services Agreement by and between Ministry Partners Investment Company, LLC  and Ministry Partners Securities, LLC dated January 30, 2018 (19)

10.30

Managing Broker Dealer Agreement by and between Ministry Partners Investment Company, LLC and Ministry Partners Securities, LLC, dated January 6, 2015. (12)

10.31

(Amended) Master Services Agreement by and between Ministry Partners Investment Company, LLC and Evangelical Christian Credit Union, dated March 1, 2018. (*)

10.32

Master Services Agreement by and between Ministry Partners Investment Company, LLC and America’s Christian Credit Union, dated August 17, 2017. (*)

14.1

Code of Ethics for Ministry Partners Investment Company, LLC, effective as of February 11, 2010 (2)

21.1

List of Subsidiaries (*)

23.1

Consent of Hutchinson and Bloodgood LLP (*)

31.1

Certification of Principal Executive Officer pursuant to Rule 13a-14(a) or Rule 15(d)-14(a) (*)

31.2

Certification of Principal Financial and Accounting Officer pursuant to Rule 13a-14(a) or Rule 15(d)-14(a) (*)

32.1

Certification of Principal Executive Officer and Principal Accounting Officer pursuant to 18 U.S.C. §1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (*)

101.ins

XBRL Taxonomy Extension Definition Linkbase Document **

101.sch

XBRL Taxonomy Extension Schema Document **

101.def

XBRL Taxonomy Extension Definition Linkbase Document **

101.cal

XBRL Taxonomy Extension Calculation Linkbase Document **

101.lab

XBRL Taxonomy Extension Label Linkbase Document **

101.pre

XBRL Taxonomy Extension Presentation Linkbase Document **

 _____________________________





 

(1)

Incorporated by reference to the Current Report on Form 8-K filed by the Company on December 22, 2008.

(2)

Incorporated by reference to the Report on Form 10-K filed by the Company on March 31, 2010.

 

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(3)

Incorporated by reference to the Current Report on Form 8-K filed by the Company on May 23, 2013.

(4)

Incorporated by reference to the Report on Form 8-K filed by the Company on October 15, 2007, as amended.

(5) 

Incorporated by reference to the Report on Form 8-K filed by the Company on November 11, 2011.

(6)

Incorporated by reference to the Report on Form 8-K filed by the Company on May 20, 2008.

(7)

Incorporated by reference to the Report on Form 10-K filed by the Company on April 14, 2009.

(8)

Incorporated by reference to Exhibit 10.20 to the Registration Statement on Form S-1 filed by the Company on June 24, 2011.

(9)

Incorporated by reference to Exhibit 10.1 of the Report on Form 10-Q filed by the Company on November 14, 2013.

(10)

Incorporated by reference to the Current Report on Form 8-K filed by the Company on January 7, 2014.

(11)

Incorporated by reference to the Report on Form 10-Q filed by the Company on May 15, 2014.

(12)

Incorporated by reference to the Report on Form 10-K filed by the Company on March 31, 2015

(13)

Incorporated by reference to the Current Report on Form 8-K filed by the Company on April 9, 2015.

(14)

Incorporated by reference to the Current Report on Form 8-K filed by the Company on June 3, 2015.

(15)

Incorporated by reference to the Current Report on Form 8-K filed by the Company on January 12, 2016.

(16)

Incorporated by reference to the Current Report on Form 8-K filed by the Company on May 11, 2016.

(17)

Incorporated by reference to the Current Report on Form 8-K filed by the Company on September 13 2016.

(18)

Incorporated by reference to the Current Report on Form 8-K filed by the Company on December 5, 2016.

(19)

Incorporated by reference to Pre-Effective Amendment No. 1 to Form S-1 filed by the Company on January 30, 2018.

 

107

 

 


 

(20)

Incorporated by reference to Exhibit 10.23 on Form S-1 filed by the Company on December 8, 2017.

(21)

Incorporated by reference to Exhibit A on Form S-1 filed by the Company on December 8, 2017.

*

Filed herewith.

**

Furnished, not filed, herewith.









 

Item 16.

FORM 10-K SUMMARY



Not applicable.







 

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SIGNATURES

 

In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

MINISTRY PARTNERS INVESTMENT

COMPANY, LLC

 

Dated:  March 29, 2018By: /s/ Joseph W. Turner

  Joseph W. Turner,

  Chief Executive Officer

  (Principal Executive Officer)



 

Dated:  March 29, 2018By: /s/ Brian. S. Barbre

  Brian S. Barbre,

  Senior Vice President and Chief Financial Officer

  (Principal Accounting Officer)



 

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Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed by the following persons on behalf of the Company and in the capacities and on the dates indicated.





/s/ Joseph W. Turner

Chief Executive Officer (Principal Executive Officer)

Date:  March 29, 2018



/s/ Brian S. Barbre

Senior Vice President and Chief Financial Officer (Principal Accounting Officer)

Date:  March 29, 2018



/s/ R. Michael Lee

Chairman, Board of Managers

Date:  March 29, 2018



/s/ Van C. Elliott

Secretary, Manager

Date:  March 29, 2018



/s/ Mendell Thompson

Manager

Date:  March 29, 2018



/s/ Juli Anne S. Lawrence

Manager

Date:  March 29, 2018



/s/ Jeffrey T. Lauridsen

Manager

Date:  March 29, 2018



/s/ Jerrod L.Foresman

Manager

Date:  March 29, 2018



/s/ Abel Pomar

Manager

Date:  March 29, 2018





 

 

110