UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



FORM 10-Q



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

For the quarterly period ended September 30, 2018



OR



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

For the period from _____ to _____



333-4028la

(Commission file No.)

 

MINISTRY PARTNERS INVESTMENT COMPANY, LLC

(Exact name of registrant as specified in its charter)

 



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

(Address of principal executive offices)

 

(714) 671-5720

(Registrant's telephone number, including area code)



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



Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).  Yes ☑   No ☐    



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



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 revised financial 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 ☑.



At September 30, 2018, registrant had issued and outstanding 146,522 units of its Class A common units.  The information contained in this Form 10-Q should be read in conjunction with the registrant’s Annual Report on Form 10-K for the year ended December 31, 2017.

 

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MINISTRY PARTNERS INVESTMENT COMPANY, LLC



FORM 10-Q



TABLE OF CONTENTS







 

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PART I - FINANCIAL INFORMATION

 

Item 1.  Financial Statements

 

Ministry Partners Investment Company, LLC and Subsidiaries

Consolidated Balance Sheets

September 30, 2018 and December 31, 2017

 (Dollars in thousands Except Unit Data)





 

The accompanying notes are an integral part of these consolidated financial statements.

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 Ministry Partners Investment Company, LLC and Subsidiaries

Consolidated Statements of Income (unaudited)

For the three and nine month periods ended September 30, 2018 and 2017

(Dollars in thousands)







The accompanying notes are an integral part of these consolidated financial statements.

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Ministry Partners Investment Company, LLC and Subsidiaries

Consolidated Statements of Cash Flows (Unaudited)

For the nine months ended September 30, 2018 and 2017

(Dollars in thousands)





The accompanying notes are an integral part of these consolidated financial statements.

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MINISTRY PARTNERS INVESTMENT COMPANY, LLC



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

The accounting and financial reporting policies of MINISTRY PARTNERS INVESTMENT COMPANY, LLC (the “Company”, “we”, or “our”) and its wholly-owned subsidiaries, Ministry Partners Funding, LLC, MP Realty Services, Inc., and Ministry Partners Securities, LLC, conform to accounting principles generally accepted in the United States and general financial industry practices.  The accompanying interim consolidated financial statements have not been audited.  A more detailed description of the Company’s accounting policies is included in its 2017 annual report filed on Form 10-K.  In the opinion of management, all adjustments (which include only normal recurring adjustments) necessary to present fairly the financial position, results of operations and cash flows at September 30, 2018 and for the nine months ended September 30, 2018 and 2017 have been made.



Certain information and note disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. The results of operations for the periods ended September 30, 2018 and 2017 are not necessarily indicative of the results for the full year.

 

1.  Summary of Significant Accounting Policies

 

Nature of Business

 

Ministry Partners Investment Company, LLC (the “Company”) was formed in California in 1991.  Primary operations are related to activities involved in financing loans secured by real property and providing investment services for the benefit of evangelical churches and church organizations.  The Company funds its operations primarily through the sale of debt securities. 



The Company’s wholly owned subsidiaries are Ministry Partners Funding, LLC (“MPF”), MP Realty Services, Inc., a California corporation (“MP Realty”), and Ministry Partners Securities, LLC, a Delaware limited liability company (“MP Securities”). MPF was formed in 2007 and was inactive from November 30, 2009 through November 2014.  In December 2014, the Company reactivated MPF to hold loans used as collateral for our Secured Investment Certificates.  MP Realty was formed in November 2009, and obtained a license to operate as a corporate real estate broker through the California Department of Real Estate on February 23, 2010. MP Realty has conducted limited operations to date.  MP Securities was formed on April 26, 2010 to provide investment and financing solutions for individuals, churches, charitable institutions, and faith-based organizations.  In addition, MP Securities acts as the selling agent for the Company’s public and private placement notes. 



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 as of 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.



Since the conversion became effective, the Company is managed by a group of managers that provides oversight of the Company’s 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 September 30, 2018 and December 31, 2017. 



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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 2017 financial statements to conform to the 2018 presentation.  Neither member’s equity nor net income for the nine months ended September 30, 2017 was impacted by the reclassifications.



Use of Estimates



The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  These estimates govern areas such as the allowance for credit losses and the fair value of financial instruments.  Actual results could differ from these estimates.



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. 



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 Income 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.



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





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.”  The company 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.



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.



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







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

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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 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 effective rate of interest method.



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



New accounting guidance

 

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, “Revenue from Contracts with Customers”, which supersedes existing accounting standards for revenue recognition and creates a single framework.  ASU 2014-09 and all subsequent amendments to the ASU (collectively "ASC 606") requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers and revises when it is appropriate to recognize a gain or loss from the transfer of nonfinancial assets such as other real estate owned.  This standard also specifies the accounting for certain costs to obtain or fulfill a contract with a customer.  The Company’s implementation efforts included a detailed review of revenue contracts within the scope of guidance and an evaluation of the impact on the Company’s revenue recognition policies.  No transition-related practical expedients were applied.



The majority of Company's revenues come from interest income, which is outside the scope of ASC 606.  The Company's revenues that are within the scope of ASC 606 are presented as Non-Interest Income and are recognized as revenue when the Company satisfies its obligation to the customer.  Revenues within the scope of ASC 606 include wealth advisory fees, investment brokerage fees, and other service and miscellaneous income. 

 

The Company adopted ASC 606 using the modified retrospective method applied to all contracts not completed as of January 1, 2018.  Results for reporting periods beginning after January 1, 2018 are presented under ASC 606 while prior period amounts continue to be reported in accordance with legacy generally accepted accounting principles ("GAAP").  The adoption of ASC 606 did not result in a material change to the accounting for any of the in-scope revenue streams; as such, no cumulative effect adjustment was recorded.



Accounting Standards Pending Adoption



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. The Company has several lease agreements, which are currently considered operating leases, and therefore, not recognized on the Company’s consolidated financial position. The Company expects the new guidance will require these lease agreements to be recognized on the consolidated financial position as a right-of-use asset and a corresponding lease liability.  However, the Company does not expect the new guidance to have a material impact on the Company’s consolidated statements of income. The Company is nearing completion of its effort to compile the lease data necessary to apply the amended guidance.

 

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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.  The Company preliminary evaluation indicates the provisions of ASU No. 2016-13 are expected to impact the Company’s consolidated financial statements, in particular the level of the reserve for credit losses.  The Company is continuing to evaluate the extent of the potential impact.

  

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 September 30, 2018 and December 31, 2017, the Company held no pledged cash.



The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the statement of financial position that sum to the total of the same such amounts shown in the statement of cash flows (dollars in thousands):







Amounts included in restricted cash represent those required to be set aside with the 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 or for fees related to registered and associated persons of the Company.

 

3.  Related Party Transactions

 

Transactions with Equity Owners



Transactions with Evangelical Christian Credit Union (“ECCU”)



ECCU is the Company’s founder and largest equity owner and as such the Company has several related party dealings.  The following describes the nature and dollar amounts of the material related party transactions with ECCU.



ECCU related parties who serve on the Company’s Board of Managers:





Related party balances related to the assets of the Company (in thousands):





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Related Party transactions of the Company (in thousands except unit data):



Loan participation interests purchased:



Occasionally, the Company purchases loan participation interests from ECCU.  The Company negotiates pass-through interest rates on loan participation interests purchased from ECCU on a loan by loan basis.  Management believes these terms are equivalent to those that prevail in arm's length transactions.



Lease and Services Agreement:



The Company leases its corporate offices and purchases other facility related services from ECCU pursuant to a written lease and services agreement.  Management believes these terms are equivalent to those that prevail in arm's length transactions.



MP Securities Networking Agreement with ECCU:



MP Securities, the Company’s wholly-owned subsidiary, entered into a Networking Agreement with ECCU pursuant to which MP Securities has agreed to offer investment products and services to ECCU’s members that:

(1) have been approved by ECCU or its Board of Directors,

(2) comply with applicable investor suitability standards required by federal and state securities laws and regulations,

(3) are offered in accordance with NCUA rules and regulations, and

(4) are in compliance with its membership agreement with FINRA.



The agreement entitles ECCU to be paid a percentage of total revenue received by MP Securities from transactions conducted for or on behalf of ECCU members.  The Networking Agreement may be terminated by either ECCU or MP Securities without cause upon thirty days prior written notice.



Master Services Agreement (the “Services Agreement”) with ECCU:



The Company and ECCU have entered into the Services Agreement, pursuant to which the Company provides relationship management services to ECCU’s members and business development services to new leads in the southeast region of the United States.  Either party may terminate the Services Agreement for any reason by providing thirty (30) days written notice.  On March 1, 2018, the agreement was amended to include referral fees to be paid by either party on the successful closing of a referred loan.  The current agreement expired on September 1, 2018 and the companies are in process of negotiating an extension to the agreement.



Successor Servicing Agreement with ECCU:



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.



Transactions with America’s Christian Credit Union (“ACCU”)



ACCU is one of the equity owners of the Company and has several related party agreements with the Company.  The following describes the nature and dollar amounts of the material related party transactions with ACCU.



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Ownership transfer:



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 Managers approved ACCU’s purchase of the Class A and Series A Preferred Units from FPCU and 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 June 29, 2018, ACCU, acquired 2,000 of the Company’s Series A Preferred Units, which represents 1.71% of the Company’s issued and outstanding Series A Preferred Units from The National Credit Union Administration Board as Liquidating Agent of Telesis Community Credit Union, a federally chartered credit union (“NCUAB”).  The Company’s Board of Managers has approved ACCU’s purchase of the Membership Units from NCUAB and has consented to ACCU’s acquisition of additional membership interests of the Company.



ACCU related parties who serve on the Company’s Board of Managers:







Related party balances related to the assets of the Company (in thousands):





Related Party transactions of the Company (in thousands except unit data):





Loan participation interests purchased:



Occasionally, the Company sells or purchases participation interests from ACCU.  The Company negotiates pass-through interest rates on loan participation interests purchased or sold from and to ACCU on a loan by loan basis.  Management believes these terms are equivalent to those that prevail in arm's length transactions.



MP Securities networking agreement with ACCU:



MP Securities has entered into a Networking Agreement with ACCU pursuant to which MP Securities has agreed to offer investment products and services to ACCU’s members that:

(1) have been approved by ACCU or its Board of Directors,

(2) comply with applicable investor suitability standards required by federal and state securities laws and regulations,

(3) are offered in accordance with NCUA rules and regulations, and

(4) are in compliance with its membership agreement with FINRA.



The agreement entitles 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.



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Transactions with Other Equity Owners



The Company has a Loan Participation Agreement with UNIFY Financial Credit Union (“UFCU”), 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 on August 14, 2013.  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 has several agreements with its subsidiary, MP Securities.  The income and expense related to these agreements are eliminated in the consolidated financials.  MP Securities serves as the managing broker for the Company’s public and private placement notes.  The Company receives compensation related to these services ranging from 0.25% to 5.50% over the life of a note depending on the length of the note and the offering under which the note was sold.  In addition, the Company’s subsidiary, MPF serves as the collateral agent for the Company’s Secured Notes.  The terms of these agreements are described in the Company’s Prospectus for its Class 1A Notes and the private placement offerings that have been conducted by the Company.  Additional details regarding the Company’s Notes are described in section “10. Notes Payable” of this report.



The Company also has entered into an Administrative Services Agreement with MP Securities in which it provides services including the lease of office space, use of equipment, including computers and phones, and payroll and personnel services.  The agreement stipulates MP Securities will provide ministerial, compliance, marketing, operational, and investor relations-related services regarding the Company’s investor note program.  As stated above all intercompany transactions related to this agreement are eliminated in the consolidated financial statements.



From time to time, the Company’s Board and members of its executive management team have purchased investor notes from the Company or have purchased investment products through MP Securities.  Investor notes payable to related parties totaled $269 thousand and $250 thousand at September 30, 2018 and December 31, 2017, respectively.



Related Party Transaction Policy



To assist in evaluating any related transactions the Company may enter into with a related party, the 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 a 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.

 

4.  Loans Receivable and Allowance for Loan Losses

 

The Company’s loan portfolio is comprised of one segment – church loans.  The loans fall into four classes, which include 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.  See “Note 1 – Loan Portfolio Segments and Classes” to Part I “Financial Information” of this Report.



All of our loans are made to various evangelical churches and related organizations, primarily to purchase, construct, or improve facilities. Loan maturities extend through 2027.    The loan portfolio had a weighted average rate of 6.40% and 6.31% as of September 30, 2018 and December 31, 2017, respectively. A summary of the Company’s mortgage loans owned as of September 30, 2018 and December 31, 2017 is as follows (dollars in thousands):







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Allowance for Loan Losses



Management believes that the allowance for loan losses, as shown in the following table, as of September 30, 2018 and December 31, 2017 is appropriate.  The following table shows the changes in the allowance for loan losses for the nine months ended September 30, 2018 and the year ended December 31, 2017 (dollars in thousands):







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).



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The Company has established a standard loan grading system to assist management and loan review personnel in their analysis and supervision of the loan portfolio.  The following table is a summary of the loan portfolio credit quality indicators by loan class at September 30, 2018 and December 31, 2017, which is the date on which the information was updated for each credit quality indicator (dollars in thousands):

















The following table sets forth certain information with respect to the Company’s loan portfolio delinquencies by loan class and amount at September 30, 2018 and December 31, 2017 (dollars in thousands):









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Impaired Loans



Impaired 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.  Impaired 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 as of nine months ended September 30, 2018 and 2017, and the year ended December 31, 2017, respectively.  The unpaid principal balance reflects the contractual principal outstanding on the loan. The recorded balance reflects the unpaid principal balance less any interest payments that have been recorded against principal. The recorded investment reflects the recorded balance less discounts taken.  The related allowance reflects specific reserves taken on the impaired loans (dollars in thousands):









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A summary of nonaccrual loans by loan class at September 30, 2018 and December 31, 2017 is as follows (dollars in thousands):



 





The Company restructured no loans during each of the nine months ended September 30, 2018 and 2017.



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The Company had five restructured loans that were past maturity as of December 31, 2017.  For three of these loans, the Company has entered into forbearance agreements with the borrowers and is evaluating what actions it should undertake to restructure these mortgage loans and protect its investment.  For two of these loans, the Company is evaluating what actions it should further undertake to protect its investment in these loans.



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, management evaluates such loans for potential further impairment.  As a result of this evaluation, specific reserves may be increased or adjustments may be made in the allocation of reserves.



As of September 30, 2018, no additional funds were committed to be advanced in connection with loans modified as troubled debt restructurings. 

 

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 $1 thousand in losses during the nine months ended September 30, 2018 and incurred $6 thousand in gains for the nine months ended September 30, 2017.  As of September 30, 2018, the value of the Company’s investment in the property is $895 thousand.  The value as of December 31, 2017 was $896 thousand.  Management has conducted an evaluation of the investment as of September 30, 2018 and has determined that the investment is not impaired.

 

6.  Revenue Recognition



Pursuant to the adoption of ASU 2014-09, Revenue from Contracts with Customers (Topic 606), the following disclosures discuss the Company's revenue recognition accounting policies.  The Company recognizes two primary types of revenue: interest income and non-interest income.



Interest Income



The Company’s principal source of revenue is interest income from loans, which is not within the scope of Topic 606.  In addition, certain non-interest income streams, such as fees associated with loan servicing, are also not in the scope of Topic 606.



Non-interest Income



Non-interest income includes revenue from various types of transactions and services provided to customers.  The following tables reflect the Company’s non-interest income disaggregated by financial statement line item. Items outside of scope of ASC 606 are noted as such.  The commentary following the tables describes the nature, amount, and timing of the related revenue streams (dollars in thousands):







The following is a description of principal activities from which the Company generates non-interest income revenue. Revenues are recognized as the Company satisfies its obligations with our clients, service partners, and borrowers in an amount that reflects the consideration that we expect to receive in exchange for those services.

 

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Wealth advisory fees

 

Wealth advisory fees are generally recognized over time as services are rendered and are based on either a percentage of the market value of the assets under management, or fixed based on the services provided to the client.  The Company’s execution of these services represents its related performance obligations.  Fees are calculated quarterly and are usually collected at the beginning of the period from the client’s account and recognized ratably over the related billing period as the performance obligation is fulfilled.  Any commissions paid related to these fees are also recognized ratably over the related billing period as the performance obligation is fulfilled.

 

Investment brokerage fees



Investment brokerage fees arise from selling and distribution services and trade execution services.  The Company’s execution of these services fulfills its related performance obligations.



The Company also offers selling and distribution services, and earns commissions through the sale of annuity and mutual fund products.  The Company acts as an agent in these transactions and recognizes revenue at a point in time when the customer executes a contract with a product carrier.  The Company may also receive trailing commissions and 12b-1 fees related to mutual fund and annuity products, and recognizes this revenue in the period that they are realized since the revenue cannot be accurately predicted at the time the policy becomes effective.



Trade execution commissions are earned and recognized on the trade date, which is when the performance obligation is fulfilled.  Payment for the trade execution is due on the settlement date. 



Other non-interest income



Other non-interest income includes fees earned based on service contracts we have entered into with credit unions.  Revenue is recognized monthly based on the terms of the contracts, which require monthly payments for the services we perform.

 

7.  Loan Sales



The Company sold one of its impaired loans during the nine months ended September 30, 2018.  The loan was sold servicing released; therefore, no servicing asset was recorded.  The Company recorded a gain on sale for this transaction as the sale price for the loan was greater than the Company’s net investment in the loan, which represented the unpaid principal balance on the loan less discounts and interest payments recorded against principal.



The following table shows the amount of loan participation sales and the resulting changes in servicing assets recorded during the three and nine month periods ended September 30, 2018 and 2017, and the year ended December 31, 2017.  Servicing assets are amortized using the interest method as an adjustment to servicing fee income. 



A summary of loan participation sales and servicing assets are as follows (dollars in thousands):







 

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8. Premises and Equipment



Premises and equipment consist of the following at September 30, 2018 and December 31, 2017 (dollars in thousands):









 

9.  NCUA Credit Facilities

 

The Company has two credit facilities with the NCUA, the “WesCorp Credit Facility Extension” and the “MU Credit Facility”.  The NCUA credit facilities may be collateralized by qualifying mortgage loans or cash. As of September 30, 2018, all collateral pledged is qualifying mortgage loans.  The facilities are non-revolving, do not have an option to renew or extend additional credit, and do not contain a prepayment penalty. These credit facilities include a number of borrower covenants which as of September 30, 2018 and December 31, 2017, respectively, the Company was in compliance.  The following table summarizes the terms of each facility as of September 30, 2018 (dollars in millions):







Future principal contractual payments of the Company’s borrowings from financial institutions during the twelve month periods ending September 30, are as follows (dollars in thousands):





 

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10.  Notes Payable



The Company has the following notes payable at September 30, 2018 and December 31, 2017 (dollars in thousands):



Future maturities for the Company’s investor notes during the twelve month periods ending September 30, are as follows (dollars in thousands):







Debt issuance costs related to the Company’s notes payable were $103 thousand and $85 thousand at September 30, 2018 and December 31, 2017, respectively



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.  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.



SEC Registered Public Offerings 



Class A Offering.  In April 2008, the Company registered with the SEC its Class A Notes.  The Class A Note Offering expired on December 31, 2015 and the Company discontinued the sale of its Class A Notes. The offering included three categories of notes, including a fixed interest note, a variable interest note, and a flex note that 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 Company was in compliance with these covenants as of September 30, 2018 and December 31, 2017.  The Class A Notes were issued under a Trust Indenture between the Company and U.S. Bank National Association (“US Bank”).



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Class 1 Offering.  In January 2015, the Company registered with the SEC its Class 1 Notes.  The Class 1 Note Offering expired on December 31, 2017 and the Company discontinued the sale of its Class 1 Notes at that time.  The offering included two categories of notes, including a fixed interest note and a variable interest note.  The Class 1 Notes 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 Company was in compliance with these covenants as of September 30, 2018 and December 31, 2017.  The Class 1 Notes were issued under a Trust Indenture between the Company and U.S. Bank.



Class 1A Offering.  In February 2018, the Company launched its Class 1A Notes Offering.  Pursuant to a Registration Statement declared effective on February 27, 2018, the Company registered $90 million of its Class 1A Notes in two series – fixed and variable notes.  The Class 1A Notes are unsecured.  The interest rate paid on the Fixed Series Notes is determined in reference to a Constant Maturity Treasury Index published by the U.S. Department of Treasury (“CMT Index”) in effect on the date that the note is issued plus a rate spread as described in the Company’s Class 1A Prospectus.  The interest rate paid on a Variable Series Note 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.  The Class 1A Notes are issued under a Trust Indenture entered into between the Company and U.S. Bank. 



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 September 30, 2018 and December 31, 2017, the collateral securing the Secured Notes had an outstanding balance of $9.70 million and $10.9 million, respectively.  The September 30, 2018 and December 31, 2017 collateral balance was sufficient to satisfy the minimum collateral requirement of the Secured Notes offering. As of September 30, 2018 and December 31, 2017, no cash was pledged in regards to the Secured Notes. The Company’s 2015 Secured Note offering terminated on December 31, 2017.  Effective as of April 30, 2018, the Company launched a new $80 million secured note offering.  The 2018 Secured Note offering will be issued pursuant to a Loan and Security Agreement and it will include the same terms and conditions previously set forth in its 2015 Secured Note offering.



Series 1 Subordinated Capital Notes (“Subordinated Notes”).  In June 2018, the Company amended the offer and sale of its Subordinated Notes initially launched in February 2013, 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.



Under the Subordinated Notes offering, 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 September 30, 2018 and December 31, 2017. 



Special Offering Notes.  Special 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 individuals), the holders of these Notes are accredited investors within the meaning of Regulation D under the 1933 Securities Act. We may continue to sell our debt securities to eligible investors on an individual, negotiated basis as we deem appropriate and in compliance with exemptions from registration or qualifications under federal and applicable state securities laws.

 

11.  Commitments and Contingencies



Unfunded Commitments



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 un-advanced lines of credit and standby letters of credit.  Such commitments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the balance sheet.



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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 September 30, 2018 and December 31, 2017, the following financial instruments were outstanding whose contract amounts represent credit risk (dollars in thousands):







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. As of September 30, 2018, the Company is a defendant in a wrongful termination of employment lawsuit.  The Company is contesting the claim and at September 30, 2018, the Company’s liabilities include an accrual of $30 thousand for litigation-related expenses incurred in connection with this claim.  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.



Operating Lease Commitments



The Company has lease commitments covering its offices in Brea and Fresno, California. At September 30, 2018, future minimum rental payments for the twelve months ending September 30, are as follows:



Total rent expense, including common area costs, was $107 thousand for the nine months ended September 30, 2018 and 2017. The Brea office lease expires in 2018 and contains one additional option to renew for five years.



The Fresno office lease is scheduled to expire in 2020.  There are no options to renew in the lease agreement.

 

12.  Preferred and Common Units Under LLC Structure



Holders of the Series A Preferred Units 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 Company has also agreed to set aside an annual amount equal to 10% of its net profits earned for any year, after subtracting from profits the quarterly Series A Preferred Unit dividends paid, for distribution to its Series A Preferred Unit holders. 



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 declared but unpaid quarterly dividends and preferred distributions on such units.  The Series A Preferred Units have priority as to earnings and distributions over the Common Units. The resale of the Company’s Series A 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 quarterly dividends for four consecutive quarters, the holders of the Series A Preferred Units have the right to appoint two managers to its Board of Managers.



The Class A Common Units have voting rights, but have no liquidation preference or rights to dividends, unless declared.

 

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13.  Retirement Plans



401(k)



All of the Company’s employees are eligible to participate in the Automated Data Processing, Inc. (“ADP”) 401(k) plan effective as of the date their employment commences.  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 U.S. 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% of their compensation, up to a maximum contribution of 5% of the employee’s compensation.  Company matching contributions for the nine months ended September 30, 2018 and 2017 were $65 thousand and $60 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 Company’s Board of Managers and is calculated as a percentage of the eligible employee's annual earnings.  Plan forfeitures are used to reduce the Company’s annual contribution.  The Company made no profit sharing contributions for the plan during the year ended December 31, 2017.  No profit sharing contribution has been made or approved for the nine months ended September 30, 2018.

 

14.  Fair Value Measurements



Fair Value Measurements Using Fair Value Hierarchy



Measurements of fair value are classified within a hierarchy based upon inputs that give 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:









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Fair Value of Financial Instruments



The carrying amounts and estimated fair values of the Company’s financial instruments at September 30, 2018 and December 31, 2017, are as follows (dollars in thousands):











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 amounts the Company could have realized in a sales transaction at September 30, 2018 and December 31, 2017.



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



Cash – The carrying amounts reported in the 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 – Fair value is estimated by analyzing the operations and marketability of the underlying investment to determine if the investment is other-than-temporarily impaired.



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.  The discount rate is estimated by Company management by using market rates which reflect the interest rate risk inherent in the notes.

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NCUA Borrowings – The fair value of borrowings from financial institutions are estimated using discounted cash flow analyses based on current incremental borrowing rates for similar types of borrowing arrangements. The discount rate is estimated by Company management using market rates which reflect the interest rate risk inherent in the notes.



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 term of the agreements and the counterparties' credit standing. The fair value of loan commitments is insignificant at September 30, 2018 and December 31, 2017.



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):





Activity in Level 3 assets is as follows for the nine months ended September 30, 2018 and for the year ended December 31, 2017 (dollars in thousands):











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Impaired Loans



Collateral-dependent impaired loans are carried at the fair value of the collateral less estimated costs to sell, incorporating assumptions that experienced parties might use in estimating the value of such collateral. 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 appraisal, age of comparables 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.

 

The valuation methodologies used to measure the fair value adjustments for Level 3 assets recorded at fair value on a nonrecurring basis at September 30, 2018 and December 31, 2017 are summarized below (dollars in thousands):











 

15.  Income Taxes and State LLC Fees



MPIC is subject to a California gross receipts LLC fee of approximately $12,000 per year.  MP Securities was 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.



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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.

 

16.  Segment Information



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.



Reflecting the manner is which we manage our businesses, including resource allocation and performance assessment, we have two reportable segments that represent the primary businesses reported in our consolidated financial statements: finance company (the parent company) and broker-dealer (MP Securities).  The finance company segment uses funds from the sale of debt securities, operations, and loan participations to originate or purchase mortgage loans and services loans.  The broker-dealer segment sells debt securities and other investment products, as well as providing 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.



Financial information with respect to the reportable segments for the three months ended September 30, 2018 is as follows (dollars in thousands):





Financial information with respect to the reportable segments for the three month period ended September 30, 2017 is as follows (dollars in thousands):





Financial information with respect to the reportable segments for the nine months ended September 30, 2018 is as follows (dollars in thousands):



Financial information with respect to the reportable segments for the nine month period ended September 30, 2017 is as follows (dollars in thousands):