Filed pursuant to Rule 424(b)(3)

Registration File No. 333-221954

$90,000,000

 MINISTRY PARTNERS INVESTMENT COMPANY, LLC

Class 1A Notes Promissory Notes

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

We are offering the Notes on a best efforts basis through our wholly-owned subsidiary, Ministry Partners Securities, LLC (“MP Securities”).

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

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

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





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

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

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

The date of this Prospectus is May 13, 2020

Ministry Partners Securities, LLC

 

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Table of Contents

 



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

 



 

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INTRODUCTION



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



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SUITABILITY STANDARDS



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



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



If you are a natural person (an individual):





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





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



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



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



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

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

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–the lack of liquidity of the Note you purchase;

–any restrictions on transferability of the Notes; and

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

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



Restriction Imposed by the USA PATRIOT Act and Related Acts



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



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PROSPECTUS SUMMARY



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



About Our Company



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



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



















 



 

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WARNING CONCERNING FORWARD-LOOKING STATEMENTS



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



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RISK FACTORS



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



Our business, financial condition, and results of operations could be harmed by any of the following risks or other risks which have not been identified or which we believe are immaterial or unlikely. The risks and uncertainties described below are not the only risks that may have a material, adverse effect on us. Additional risks and uncertainties also could adversely affect our business, financial condition and results of operations. The risks discussed below include forward-looking statements, and our actual results may differ substantially from those discussed in these forward-looking statements. Investors should carefully consider the risks described below in conjunction with the other information in this Prospectus and the information incorporated by reference in this Prospectus.



Risks Related to the Notes



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



Repayment of the Notes is our exclusive obligation, and the Notes are our sole responsibility and are not the obligation or responsibility of any other person. See “Description of the Notes” below. In general, as a Noteholder, you will have no greater right to payment than that of our other general creditors. At December 31, 2019, we had $144.5 million of total debt obligations of which $73.0 million consisted of various types of Investor Debt.  



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



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



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



The Notes are subject to the Indenture, which restricts and regulates your rights as a Noteholder. For example, in the event of our default, the Indenture allows you to seek remedies against us only through action by the Trustee. The Indenture requires a Vote of the Holders to take certain acts on behalf of the Holders and that Vote will bind all Holders. For example, the Indenture provides that in the event of our default, the Holders of 25% of the unpaid principal amount of the Outstanding Notes may declare the entire unpaid balance of the Notes immediately due and payable. The Indenture requires a Majority in Interest Vote of the Holders to pursue collection of the Notes and other remedies. The Indenture also provides that a Majority Vote of the Holders is required to adopt certain amendments and supplements to the Indenture and the Notes, and to waive certain defaults, events of default, and/or to remove and replace the Trustee. The Indenture contains cross-default provisions whereby our default on one Series of the Notes will constitute a default with respect to each other Series of Notes. Thus, Holders suffering an actual default may be more inclined to take action against us than Holders who suffer only a technical default on their Notes because of these cross-default provisions. Accordingly, where there is an actual default on one or more Series of Notes constituting less than a majority of the unpaid principal balance of the Outstanding Notes, such Holders may not be able to obtain the approval of the Holders required to appoint a Trustee and pursue a remedy under the Indenture. In such event, you may have no practical recourse against us. See the description of the Indenture under “The Indenture” below.

 

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



No assurance of hardship prepayment if requested.



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



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



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



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



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



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



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



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



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



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



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



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We have the right to repay your Note.



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



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



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



There is no minimum amount of Notes that must be sold before proceeds of the Offering are used by the Company.



There is no minimum amount of Notes that must be sold before the proceeds received from the sale of a Note may be used by the Company for use in our business. Once an investor completes a Purchase Agreement and the subscription is accepted, funds will be immediately made available for use by the Company for the purposes described in the Prospectus.



We may apply proceeds from this offering to repay existing indebtedness which will not increase our mortgage loan investment portfolio. 



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



Risks Related to the Company



The impact of the COVID-19 pandemic could adversely affect our financial condition and results of operations



A widespread health emergency such as the COVID-19 pandemic could cause economic disruptions that could adversely affect the ability of our borrowers to make loan payments.  On March 12, 2020, the President of the United States declared the COVID-19 outbreak in the U.S. a national emergency.  As the pandemic spread, state and local governments have ordered non-essential businesses to close, public gatherings to be discontinued and residents to shelter at home.  Churches, faith-based ministries, private schools, daycare centers and Christian colleges have been forced to discontinue public gatherings, worship services, classes and conference events.  Churches that typically receive weekly offerings of tithes and cash contributions now rely on online giving options and contributions sent by mail.  Church revenues are also dependent on general economic conditions, including unemployment rates and economic disruption to businesses, schools and financial markets.  The U.S. Department of Labor estimates that more than 26 million unemployment insurance claims have been filed since the U.S. national emergency was declared.  Federal banking institutions have encouraged lenders to prudently work with borrowers, and the recently enacted CARES Act provides lenders with the option to avoid classifying loans that have been modified in conjunction with the onset of the COVID-19 pandemic as troubled debt restructurings.  Finally, the spread of the coronavirus has caused us to modify and adjust our office operations, eliminate non-essential travel and require our employees to work remotely when possible or when health conditions so warrant.  While we expect the impact of COVID-19 could have an adverse impact on our business, financial condition and results of operations for 2020, we are unable to predict the extent or nature of these impacts at this time.



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:

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We have expanded our methods of raising capital, including seeking financing from institutional lenders, faith-based organizations and ministries, selling participations in our mortgage loan investments, and broadening our broker-dealer operations and services to assist us in increasing sales of our debt securities to institutional, individual, IRA and retail investors. If our strategy to raise additional capital through the sale of investor notes and debt securities proves to be unsuccessful, we will need to find alternative sources of capital 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 or liquidate assets, further deleverage our balance sheet, and reduce operational expenses, thereby reducing cash available to distribute to our equity and debt securities investors. 



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



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



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



A significant percentage of the investors who purchase our debt securities purchase new notes after we repay their notes. Historically, a substantial proportion of our investors have purchased a new debt security from us when their notes mature.  There is no assurance that historical patterns of rates of investments made by previous investors will continue in the future. If the rate of investments made by previous investors is substantially reduced, our ability to maintain or grow our asset base could be impaired.    The following table shows the investor renewal rate for the prior three years:





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



When handling sales of the Notes, MP Securities and its sales representatives must comply with FINRA’s “know your customer” and “suitability” guidelines which are designed to ensure that investors make investments that are appropriate given the age, investment experience, net worth, need for liquidity and mix of investments owned by the investor. If MP Securities is unable to offer a potential investor a note that will enable such investor to meet the applicable suitability standards, we will need to find other qualified investors to implement our strategic objectives.

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Deterioration in real estate values on 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, we could be required to write down the value of the property if the value of the property declines 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.



We use leverage to invest in mortgage assets, which creates net interest income for the Company. Our success is dependent, in part, upon our ability to manage our leverage effectively. We pledge a significant amount of our assets as collateral for our credit lines. 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 generate a quick sell on a non-cash asset, the asset often sells at a discount. There can be no assurance that we will be able to meet our debt service obligations; and, if we must quickly sell assets to meet our debt service obligations, we risk incurring a loss on of some or all of those assets.



We have had fluctuating earnings.



As a mortgage-financing lender, the performance of our loan portfolio and provisions taken for loan losses has a significant impact on our profitability. Due to the economic and real estate crisis the U.S. faced at the end of the previous decade, the Company incurred a net loss for the years 2010 and 2011.  Since 2014, the Company has reported five consecutive years of profitability.  



The Company’s earnings (losses) for the years 2010 – 2019 are listed below:





Despite the recent improvements, 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.



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

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. As of December 31, 2019, our allowance for loan loss totaled $1,393 thousand representing 1.06% of our total loans.



Unanticipated adverse events may result in reserves that will be inadequate over time to protect against potential future losses. Examples of these adverse events are:



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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. See the section captioned “Management’s Discussion and Analysis of Financial Condition and Results of Operations” located elsewhere in this Prospectus for further discussion related to our process for determining the appropriate level for the allowance for loan losses.



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



Nonperforming assets adversely affect our net income in the following ways:













If additional borrowers become delinquent and do not pay their loans and we are unable to successfully manage our non-performing assets, our losses and troubled assets could increase significantly, which could have a material adverse effect on our results of operations and financial condition.  At December 31, 2019, we had $9.14 million of non-performing assets which represented 5.8% of our total assets.  For the year ended December 31, 2018, we had $13.6 million of non-performing assets which represented 8.8% of our total assets.



A portion of our mortgage loans collateralizes our term-debt credit facilities; therefore, these pledged assets will be unavailable to meet our unsecured debt obligations.



Our term-debt credit facilities require that we secure the facilities with mortgage loans, maintaining a minimum collateralization ratio (“MCR”) of at least 120% for the two facilities in total. Loans pledged as collateral to the term-debt 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.



The following table shows the recorded balance of loans pledged and not pledged as collateral as of December 31, 2019 (dollars in thousands):





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The loans pledged to satisfy these debt facilities, therefore, will not be available to meet our unsecured debt obligations.



Default under one term-debt credit facility will result in a default under our other borrowings.  



Our term-debt 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 term-debt credit facilities would also constitute our default under our other term-debt credit facility. Thus, to maintain these facilities, there cannot be a default under either one.



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



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



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.



When we acquire mortgage loans that have a maturity term that exceeds the term of our institutional term-debt credit facilities, we bear the risk of being unable to refinance, extend or replace our primary term-debt 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 term-debt 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 term-debt on November 1, 2026. If we are unable to roll-over, extend, refinance or replace such 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

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business activities. Furthermore, our default under any of our financing arrangements could have a material adverse effect on our business, financial condition, liquidity and results of operations and our ability to make distributions to our equity investors.



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



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



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



We are dependent on the knowledge, skills, institutional contacts and experience of our senior management team. We also rely on our management team to manage our mortgage loan investments, evaluate and attract new borrowers, make prudent decisions as they relate to work-outs, modifications and restructurings and develop relationships with institutional and faith-based ministry 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 the Company’s core strategic objectives is to increase non-interest earning revenues generated by our wholly-owned subsidiary, MP Securities.  To that end, MP Securities generates a significant portion of its revenues from fees earned from the distribution of financial products, such as mutual funds, insurance 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 less 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 our services provided 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.



During economic downturns, the financial services industry, credit markets and financing sources for ministry loans have been materially and adversely affected by reduced availability of liquidity. Reduced liquidity can particularly affect smaller lenders that have relied on short-term institutional credit facilities to enhance their liquidity needs. We have significantly improved our liquidity position through:



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However, 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. Our critical business systems may fail due to events out of our control, such as:





These events could potentially result in data loss and adversely affect our ability to conduct our business.    The occurrence of any failure, interruption, or security breach of our information systems could damage our reputation or expose us to civil litigation and possible financial liability.



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



Under our code of business conduct, we have established procedures regarding the review, approval and ratification of transactions which may give rise to a conflict of interest between us and any employee, officer, trustee, their immediate family members, other businesses under their control and other related persons. In the ordinary course of our business operations, we have ongoing relationships and have engaged in transactions with several related entities. These transactions include our largest equity owner, Evangelical Christian Credit Union (“ECCU”), and our newest equity owner, America’s Christian Credit Union (“ACCU”). While the Company believes that it has taken reasonable measures to mitigate any risks, these procedures may not be sufficient to address conflicts of interest that may arise.



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



None of our Members are obligated to make additional contributions or loan us additional funds. However, they may do so on a voluntary basis and we may from time to time, in the future, request our Members to do so. In such event, one or more of our Members may be unwilling or unable to make voluntary additional capital contributions or loans because their financial capabilities are at the time impaired. Also, if an equity owner’s financial status at some time in the future is deteriorated to the extent that they or their operations are ceased or otherwise come under the control of

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the Asset Management Assistance Center (“AMAC”), National Credit Union Administration (“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:





Significant declines in the value of real estate related assets, impairment of our borrowers’ ability to repay their obligations, and illiquidity in the markets for real estate related assets can adversely affect our mortgage loan investments. In past years, these events have 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 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.    Specifically, a widespread health emergency such as the COVID-19 pandemic could cause economic disruptions that could adversely affect the ability of our borrowers to make their loan payments. Such an event could also cause note investors to withdraw funds at maturity or request redemptions if they lose confidence in the U.S. and world economy. In addition, COVID-19 could have an adverse impact on our personnel and operations. Accordingly, the Company cannot reliably predict the ultimate impact on financial markets and the Company’s business operations and financial results. The Company has worked to mitigate the impact on its financial results by maintaining high levels of cash relative to historic needs, enabling employees to work remote, and limiting travel. As of December 31, 2019, the Company’s liquidity ratio was 32.21% and it held  $25.9 million in unrestricted cash and cash equivalents on its balance sheet.  



Declining real estate values could harm our operations.



We believe the risks associated with our business are more severe during periods in which an economic slowdown or recession is accompanied by declining real estate values. Declining real estate values generally reduce the level of new mortgage loan originations, since borrowers often use increases in the value of their existing properties to support the purchase of, or investment in, or renovation of their worship facilities. Borrowers may also be less able to pay principal and interest on our loans, and the loans underlying our investor debt 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.

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Changes in the general level of interest rates can affect our net interest income, which is the difference between the interest income we earn on our interest-earning assets and the interest expense we incur in connection with our interest-bearing liabilities. Changes in the level of interest rates also can affect, among other things, our ability to originate and acquire mortgages and the market value of our mortgage investments.



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



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



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



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



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



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



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 dealer and investment advisory firms, we will need to carefully monitor the impact of such 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 initially proposed DOL rule has been shelved, the DOL has indicated that it will issue a revised fiduciary rule.  Given the uncertainty of an election year, 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.



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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. In recent years, there has been intense competition from financial institutions that are looking to make commercial loans at competitive rates to qualified borrowers.  If a significant number of borrowers refinance their loans with another lender, our business and profitability could be adversely affected.



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



If interest rates increase during the term of our loan, a borrower may not be able to obtain the necessary funds to repay our loan at maturity through refinancing. Increasing interest rates may hinder a borrower’s ability to refinance our loan because the underlying property cannot satisfy the debt service coverage requirements necessary to obtain new financing or because the value of the property has decreased. If a borrower is unable to repay our loan at maturity, we could suffer a loss and we would not be able to reinvest proceeds in assets with higher interest rates. As a result, our financial performance and ability to make distributions to our Members could be materially adversely affected.



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



Our investment and business strategy depends on our ability to 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. Our term-debt credit facilities are also at a fixed interest rate, providing a stable cost of funds from that source at 2.525%. A significant portion of our borrowing arrangements with our note investors, 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, from time to time we have 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. We cannot guarantee the results of using these types of instruments to mitigate interest rate risks, 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. In addition to purchasing participation interests, we have sold participation interests in loans we have originated and service.  We may need the consent of these parties to exercise our rights under such loans, including rights with respect to amendment of loan documentation, enforcement proceedings in the event of default and the institution of, and control over, foreclosure proceedings. Similarly, a majority of the participants may be able to take actions to which we object but to which we will be bound if our participation interest represents a minority interest. We may be adversely affected by this lack of full control. As of December 31, 2019 and 2018, our investments included $3.3 million and $5.6 million, respectively, in loan participations, representing 3% and 4% of our portfolio, respectively.



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



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:



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When a mortgage loan is made to a church, the senior pastor usually plays a critical role in determining whether the loan will be repaid.



The senior pastor of a church ministry usually performs a critical role in the leadership, management, effectiveness of the church’s governance and conflict of interest practices, and continued viability of the church. Whenever a leadership crisis is faced by a church that loses its senior pastor due to death, disability, resignation, or retirement can negatively impact the church’s ability to meet its debt service obligations on a mortgage loan we make.



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



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



Because one of our Managers holds a  board position with our largest equity owner, our Manager may, from time to time, have a conflict of interest with the interests of that member.



One of our Board of Managers holds a Board position with ECCU, our largest equity owner. Conflicts of interest may arise for this Manager between our interests and those of the ECCU affiliated credit union. Moreover, conflicts of interest are inherent in any transactions involving mortgage loans between us and one of our affiliated credit unions. Because of these relationships, Managers may face conflicts of interest in connection with various decisions they will make on our behalf, including, but not limited to:





We have implemented a Related Parties Transaction Policy to which all of our Managers and officers must adhere. It provides, among other things, approval of certain related party transactions 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 only our Board Credit Committee or Board of Managers can override these standards, depending on the circumstances described in our Church and Ministry Loan Policy.



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Because we invest in specialized purpose mortgage loans, our loan portfolio is generally riskier 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 there are a number of institutions, denominational loan funds and entities making and/or investing in mortgage loans to churches and church related organizations, 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, health emergencies such as the COVID-19 pandemic 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.



Specialized properties secure our loans and the secondary market for these loans remains regional and limited. As a result, if we must sell the properties securing such mortgages, there may be a limited number of buyers available for such properties. The following table shows the two states with our highest concentration in loans.





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



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



We may not have all 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 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

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



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



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



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



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

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



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



Recessionary or depressed periods typically occur on a cyclic basis by an unpredictable time and with uncertain lengths. Also, such events can be triggered by terrorist acts, war, large scale economic dislocations, epidemics, health crisis such as the COVID-19 pandemic, or widespread and large corporate bankruptcies. The effects of these events cannot presently be predicted. We could incur losses as a result of borrower defaults and foreclosures on our mortgage loan investments. Also, during times of recession or depression, the demand for our mortgage loans, even in times of declining interest rates, is likely to decline. Also, in connection with any sale or hypothecation of a mortgage loan, we would likely have to agree to be responsible in whole or in part for a limited period of time for any delinquencies or default. If we should experience significant delinquency rates, our revenues would materially decrease and, subject to our other available cash resources at the time, our ability to timely pay our debt securities obligations or our other indebtedness may be substantially impaired.    



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



When we acquire a property through foreclosure, we value the property and its related assets and liabilities. We determine fair value based primarily upon discounted cash flow or capitalization rate assumptions, the use of which requires assumptions including discount rates, capitalization rates, and other third-party data. We may recognize a loss if the fair value of the property internally determined upon acquisition is less than the previous carrying amount of the foreclosed loan.



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.



We could be 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

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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 we 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, 2019 and 2018, we held $5.3 million and $4.3 million, respectively,  in construction loans that have been disbursed.  As of December 31, 2019, a total of $7.1 million has been authorized for construction loans, including previously disbursed funds.



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ESTIMATED USE OF PROCEEDS



The following table sets forth information about how we intend to use the proceeds raised in the Offering. It assumes that we sell the maximum offering of $90,000,000 of the Notes we are offering. Many of the amounts set forth below represent our management’s best estimate since they cannot be precisely calculated at this time. Assuming all $90 million of Notes are sold in the Offering, we expect that approximately 94.15% of the money we receive from the Offering will be available for reinvestment. The remaining approximately 5.85% will be used to pay underwriting compensation and issuance and distribution expenses.





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



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DESCRIPTION OF THE NOTES



Following is a summary of the material terms of the Notes and the Indenture. It does not purport to be complete. This summary is subject to, and is qualified by reference in its entirety to, all of the provisions of the Notes and the Indenture. A copy of the Indenture is set forth in Exhibit A to this Prospectus. Copies of the Fixed Series Note and the Variable Series Note are set forth in Exhibit B and Exhibit C, respectively, to this Prospectus. We urge you to read the forms of the Notes and the Indenture because they, and not this description, define your rights as a Noteholder.



General



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



The Notes are issued subject to the Indenture, which is intended to constitute an indenture agreement as that term is defined under the Trust Indenture Act of 1939, which we refer to as the 1939 Act. The Notes have been registered under the 1939 Act, and the Indenture contains certain required protective provisions benefiting the Holders, as required by the 1939 Act. In addition, the Indenture contains certain financial covenants and restrictions on the payment of distributions to our Members and on our ability to incur other debt.    Including the Notes sold in this Offering, the Company is authorized to issue a total of $300 million of the Notes under the Indenture.



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



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



The Fixed Series Notes



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



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



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



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









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



The Variable Series Notes



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



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



Maturities. Variable Series Notes have a maturity of 60 months.



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



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





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



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The Indexes



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



The CMT Index.    The CMT Index refers to the Constant Maturity Treasury rates published by the U.S. Department of the Treasury for actively traded Treasury securities in over the counter trading transactions.  The CMT Index is not reported for partial year obligations for Treasury securities with a maturity term that is greater than one year.  The CMT Index applied to Fixed Notes with a partial year term will be the CMT Index corresponding to the term equal to or not exceeding the term of the Fixed Note, or if there is none, the obligation having the longest term not exceeding the term of the Fixed Note.  For example, for an 18-month Fixed Note, the 1-year CMT Index will be used.  The current CMT Index rates can be reviewed at www.treasury.gov.      



At December 31, 2019, the CMT Index rates published by the U.S. Department of Treasury provided:





The Variable Index. The Variable Index in effect when we issue a Variable Series Note is the LIBOR rate for 3‑month financial obligations in effect on the date the Variable Note is issued. The Wall Street Journal regularly reports the LIBOR rate. The Wall Street Journal can be accessed on the internet at www.wallstreetjournal.com. In the event reporting of a current 3‑month LIBOR rate is suspended or ended, we have the right to substitute the successor index, if any, or if there is none, the regularly reported interest rate we determine, in our sole discretion, to most likely track the 3-month LIBOR rate. For the year ended December 31, 2019, the LIBOR rate ranged from a low of 1.89% to a high of 2.80%.



Common Provisions of the Notes



Priority of Right to Payment. The Notes are generally equal in rank of payment with our other current and future unsecured debt, except debt which is expressly subordinated to the Notes. Currently, we have an insignificant amount of such subordinated debt outstanding, but we intend to issue more in the future. While not expressly junior to our term-debt credit facilities or our $6.5 million in outstanding Secured Notes, the Notes are essentially junior in right to payment to these secured obligations with respect to payment from our assets securing them.



Payment of Interest. Unless you select the Interest Deferral Election option or other payment option, interest is payable on all Notes in arrears, monthly. The interest rates offered on the day of purchase will be confirmed by us upon request. You may change the way interest is paid on your Note by written notice to us. Interest is payable in arrears, on or before the 5th business day of the month next following the month in which payment is due. Interest will be prorated for the first partial payment period. Interest will be computed on the basis of a 365 or 366--day year. Interest will be deemed paid when mailed via the United States Postal Service addressed to the address the investor provides, subject to the check or instrument mailed being drawn on good and sufficient funds. You may change from one method of payment to another by giving us written notice by the 21st day of the month in which you want the change to be effective.



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



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



Investors who are subject to taxation who make the Interest Deferral Election option should be aware that they will continue to have tax liability for all accrued interest in the year it is accrued and added to the Note’s principal balance. See “Certain U.S. Federal Income Tax Considerations” beginning on page 102 of the Prospectus.



Our Right to Prepay the Notes. We may elect at any time to prepay all or a portion of the Notes upon at least thirty (30) days and not more than sixty (60) days’ written notice. The redemption price will be the unpaid principal balance of the Note, plus accrued and unpaid interest thereon, through the redemption date. If less than all of the Notes can be redeemed, we will redeem the Notes on a pro rata basis. We will mail a notice of our election to prepay the Note by first class mail to each Holder to be redeemed at the most recent address the Holder has provided us in writing. If any Note is to be redeemed in part only, the notice of redemption that relates to such Note shall state the portion of the principal amount thereof to be redeemed. A new Note in principal amount equal to the unredeemed portion thereof shall be issued in the name of the Holder thereof upon cancellation of the original Note. On and after the redemption date, interest ceases to accrue on Notes or portions of them called for redemption. Our obligation to make partial or total redemptions on a pro rata basis will not limit our right to repurchase any Note on a voluntary basis, including any prepayment of a Note upon an investor’s request as described below.



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



Payment History of Our Investor Debt Securities Programs 



We have sold our investor debt securities in numerous offerings in our more than twenty-five years of operations. Since inception, the Company has offered 13 prior debt investment programs, 12 of which were public offerings. Each of these programs has been liquidated. That is, each investor received timely payment of all interest and principal payments on the debt security we sold them within the time period set forth in their offering materials.





DESCRIPTION OF THE INDENTURE



General



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



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



The Trustee



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









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



Successor Trustee, Trustee Eligibility



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



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Compensation of the Trustee



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



The Trustee’s Rights, Duties and Responsibilities



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



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



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



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



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





 



 



 



 



The Trustee may refuse to take any action if it is required to advance, expend or risk its own funds or otherwise incur financial liability in connection with any such action or in the exercise of any of its powers under the Indenture. The

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Trustee shall have no duty to take any action whatsoever if it believes in good faith that taking such action may expose it to personal liability. The Trustee assumes no responsibility for the legal enforcement of the Notes or the Indenture.



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



Our Continuing Covenants Under the Indenture



Limits on Our Payment of Distributions to Members



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



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













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









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



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Limits on Our Ability to Incur Debt 



While any Note remains outstanding, we may not, and may not permit any subsidiary to, directly or indirectly, create, incur, issue, assume, guaranty or otherwise become, directly or indirectly, liable with respect to (collectively, “incur”) any indebtedness, unless our fixed charge coverage ratio for our most recently ended four full fiscal quarters immediately preceding the date on which such additional indebtedness is incurred would have been at least 1.20 to 1.0. We calculate the fixed coverage ratio as if the additional indebtedness had been incurred at the beginning of the period. Notwithstanding this restriction, we may incur indebtedness that: (i) is evidenced by the Notes; (ii) existing on the last day of the calendar quarter last ending before the Effective Date, as such Indebtedness may be later extended or modified; (iii) is incurred in the ordinary course of business for the funding of mortgage loans which includes warehouse lines of credit and/or repurchase facilities; (iv) is in respect of performance, completion, guaranty, surety and similar bonds, banker’s acceptances or letters of credit provided by us in the ordinary course of business; and/or (v) when incurred does not result in other indebtedness, other than amounts we owe on the Notes, Class 1 Notes and Class A Notes, to exceed $20.0 million immediately after we incur the indebtedness.



Under the Indenture:









 



 



The Effect of Our Merger, Consolidation or Sale of Assets 



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

 

Requirements That We Maintain a Minimum Tangible Adjusted Net Worth



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



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



Requirements That We Keep Certain Books and Records



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



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



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



Remedies in the Event of Our Default



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





 



 



 



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



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



If any event of default occurs and is continuing, the Holders holding at least 25% of the principal amount of the Notes may instruct the Trustee to declare the outstanding Notes to be immediately due and payable and to take any action allowed by law to collect such amounts. Notwithstanding the foregoing, in the case of an event of default arising from our bankruptcy or insolvency, all outstanding Notes will become due and payable without further action or notice. If an event of default has occurred and is continuing, we must, upon written request of the Trustee, cure such default and pay for the benefit of the Noteholder the whole amount then due, any penalties which may be due and, in addition

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thereto, such further amount as shall be sufficient to cover the costs and expenses of collection, including the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel and all other amounts due to the Trustee. If we fail to cure such defaults and pay such amounts forthwith upon such demand, the Trustee, in its own name and as Trustee of an express trust, shall be entitled to sue for and recover judgment against us and any other obligor on the Notes for the amount so due and unpaid pursuant to the terms of the Notes.



Compromise or Settlement of Claims



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



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



Amendment, Supplement and/or Waiver of the Indenture



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



OUR COMPANY



Our Identity and History



We are a privately owned California limited liability company with 11 equity owners, all of whom are federal or state chartered credit unions. Our principal executive offices are located at 915 West Imperial Highway, Suite 120, Brea, California 92821. Our telephone number is (800) 753-6772 and our website address is www.ministrypartners.org.  We are a non-bank financial services company that conducts business on a national scope.  We were organized as a credit union service organization for the specific purpose of assisting evangelical Christian churches and organizations by providing financing for the acquisition, development and/or renovation of churches or church-related properties, and provide  investors the opportunity to participate in funding those projects.  As a credit union service organization, we perform these services for the benefit of our credit union equity members.    



We also provide investment advisory and financial planning solutions for businesses, individuals, faith-based ministries and organizations, churches and educational institutions.  Our wholly-owned broker dealer also serves as an investment advisory firm that offers life and disability insurance products, IRA investments, fixed and variable annuities, mutual funds and financial plans.



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. A substantial portion of our business consists of investing in mortgage loans made to churches and ministries. These loans are typically 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.  We also generate revenues from the sale of investment products, insurance and servicing fee income by offering non-proprietary investment and financial planning services to our clients.    Substantially all of our business operations currently are conducted in California and, while we have more loan investments in California than in any other state, we own mortgage loan interests in 32 different states.



We were incorporated under California law on October 22, 1991 under the name Ministry Partners Investment Corporation and established as a credit union service organization, or ("CUSO"), by ECCU for the purpose of providing mortgage loans to evangelical churches and ministry organizations. Effective as of December 31, 2008, we

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converted our form of organization from a California corporation to a California limited liability company. This conversion was a statutory conversion authorized under Section 1151 of the California General Corporation Law. Upon the conversion, we became, by operation of law, a California limited liability company. As a result of the conversion, our name changed to "Ministry Partners Investment Company, LLC.” Since the conversion became effective, we have been managed by a group of managers that carry out their duties similar to the role and function that the board of directors performed under our previous bylaws.  Operating like a board of directors, the managers have full, exclusive and complete discretion, power and authority to oversee the management of our affairs.  



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



Our Subsidiaries



We have four wholly owned subsidiaries: Ministry Partners Funding, LLC, MP Realty Services, Inc., Ministry Partners Securities, LLC and Ministry Partners for Christ, Inc.



Ministry Partners Funding, LLC



Ministry Partners Funding, LLC (“MPF”) is a special purpose subsidiary created in 2007. MPF’s original purpose was facilitating church mortgage securitizations by warehousing church and ministry mortgages. With the deleveraging of the Company’s loan investments commencing in 2009, MPF was dormant during the period December 31, 2009 through January 15, 2015. On January 15, 2015, MPF began serving as the custodian of assets pledged to investors in our secured investment notes. A Loan and Security Agreement governs the custodian relationship between the Company and MPF.



MP Realty Services, Inc.



We formed MP Realty Services, Inc., a California corporation, on November 13, 2009 (“MP Realty”). MP Realty Services has been operating as a corporate real estate broker since February 23, 2010 when it received a license from the California Department of Real Estate. MP Realty Services provides loan brokerage and other real estate services to churches and ministries. MP Realty Services has conducted limited operations since its inception.



Ministry Partners Securities, LLC.



Ministry Partners Securities, LLC (“MP Securities”) is a Delaware limited liability company formed on April 26, 2010. Through MP Securities, the Company provides investment advisory and financial planning solutions for individuals, business organizations, churches, charitable institutions, and faith-based organizations. MP Securities also serves as the selling agent for the Company’s public and private placement notes. MP Securities has been a member of the Financial Industry Regulatory Authority (“FINRA”) since March 2, 2011. The subsidiary also provides insurance products under the name Ministry Partners Insurance Agency, LLC through its resident license to act as an insurance producer. MP Securities received its resident license from the California Department of Insurance on March 14, 2013.



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



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Ministry Partners for Christ, Inc.



The Company formed Ministry Partners for Christ, Inc. (“MPC”) on December 28, 2018 for religious and charitable purposes within the meaning of Section 501(c)(3) of the U.S. Internal Revenue Code of 1986. MPC is a not-for-profit corporation formed and organized under Delaware law that will make charitable grants to Christian education, and provide accounting, consulting, and financial expertise to aid evangelical Christian ministries. Although the Company has made an initial cash contribution to launch the foundation, MPC expects to start its grant making activities in the fourth quarter of 2020. On August 23, 2019, the Internal Revenue Service granted MPC tax-exempt status as a private foundation under Section 501(c)(3) of the Internal Revenue Code.



Our Business



We are a non-bank financial services company that conducts business on a national scope.  The religious loan market segment has grown since our inception and we believe that the demand for ministry loans originated and serviced by niche lenders to churches and ministries will continue to exceed available lending and financing sources for this sector. We believe that the availability of lenders serving this market has been somewhat unpredictable as larger financial institutions expand, contract or vacate this niche market during periods of expansion or contraction. As a non-bank financial services company that has specialized in assisting these organizations since we commenced operations in 1991, we believe that the lack of predictable financing sources for evangelical Christian churches and organizations enables us to serve ministries that otherwise may not be able to obtain cost-effective mortgage loans.  We also 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, can be a source of new business. 



Our general practice in past years has been to fund loan acquisitions with borrowings under our credit facilities. We then repay borrowings on our credit facilities with proceeds from the sale of investor notes, mortgage loan prepayments and repayments, and from our operating income. 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, including faith-based ministries and institutions, and the purchase of our debt securities by repeat investors to fund a substantial portion of our loan investments.  Our ability to originate and fund new loans is dependent on the sale of our investor notes to institutional and high net-worth investors collateralized by specific mortgage loans, expanded efforts to generate capital and leverage our mortgage loan investments through the sale of loan participation interests to other financial institutions, expanding the sale of our debt securities through the efforts of our wholly-owned broker-dealer firm, MP Securities, and increasing the amount of other income generated by our financial advisory and financial services subsidiary, MP Securities and by our loan servicing department.



During the past five years, the Company has substantially diversified the source of its revenues by expanding its investment advisory business, selling investment products, and offering financial planning solutions for individuals, small business, churches, charitable institutions and faith-based organizations.  By developing a more diverse and stable flow of earnings, we believe that we will be in a stronger financial position when a future economic downturn such as a pandemic similar to the one caused by COVID-19  occurs.



Our net earnings are generated primarily from:











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Our Capitalization



Borrowings from Financial Institutions 



At December 31, 2019, our total borrowings from institutional lenders was $71.4 million compared to $76.5 million at December 31, 2018, a decrease of $5.1 million.  At December 31, 2019, our borrowings from institutional lenders consisted of the following term-debt credit facilities:  



MU Term-Debt 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 MU Term-Debt Credit Facility.  The MU Term-Debt Credit Facility replaced the original $100 million credit facility entered into by and between the Company and Members United Corporate Federal Credit Union on May 7, 2008.  This credit facility was termed out on November 30, 2016.  Accrued interest is due and payable monthly in arrears on the MU Term-Debt 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 Term-Debt 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 Term-Debt Credit Facility and the $23.5 million WesCorp Term-Debt 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.  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 Term-Debt Credit Facility includes a number of borrower covenants, including affirmative covenants to maintain the collateral free of liens, to timely pay the amounts due on the facility, to provide the Lender with interim or annual financial statements and annual and periodic reports filed with the U.S. Securities and Exchange Commission and maintain a minimum collateralization ratio of at least 110% (120% for the MU Term-Debt Credit Facility and WesCorp Term-Debt 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.  We were in compliance with our minimum collateralization under this facility at December 31, 2019 and December 31, 2018.



In addition to the minimum collateralization requirement, the MU Term-Debt 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 Term-Debt 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 Term-Debt Credit Facility.  Such events of default include, among others, failure to make timely payments due under the MU Term-Debt Credit Facility and the Company's breach of any of its covenants.  As of December 31, 2019 and December 31, 2018, the Company was in compliance with its covenants under the MU Term-Debt Credit Facility. 



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WesCorp Term-Debt Credit Facility. On November 4, 2011, the Company and the National Credit Union Administration Board As Liquidating Agent of Western Corporate Federal Credit Union (“Lender”) entered into a $23.5 million credit facility refinancing transaction (the “WesCorp Term-Debt Credit Facility Extension”).  The WesCorp Term-Debt 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 Term-Debt 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 Term-Debt Credit Facility Extension may not be re-borrowed.  Under the amended terms of the facility, the facility will mature on November 1, 2026, at which point the final principal payment will be due. 



The WesCorp Term-Debt 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 Term-Debt Credit Facility and WesCorp Facility combined).  If at any time the Company fails to maintain its required minimum collateralization ratio, it will be required to deliver cash or qualifying mortgage loans in an amount sufficient to enable it to meet its obligation to maintain a minimum collateralization ratio. 



As of December 31, 2019 and 2018, the Company was in compliance with its covenants under the WesCorp Term-Debt Credit Facility Extension. In 2019, the Lender sold the facility to AmeriNat, a loan servicing firm.

The table below is a summary of the Company’s term-debt credit facilities at December 31, 2019 (dollars in thousands):





We cannot borrow additional funds on these facilities; therefore, we will need to replace any principal paid on the facilities through another source. The following table shows the maturity schedule on our term-debt for the next five years and thereafter as of December 31, 2019 (dollars in thousands):







SEC Registered Offerings and Other Investor Debt Securities 



Our investor debt consists of various series of notes sold under several registered public offerings as well as in private offerings.  At December 31, 2019, we had a total of $73.1 million of our investor debt securities outstanding. This amount included $487 thousand of Class A Notes,  $22.1 million of our Class 1 Notes and $32.7 million of our Class 1A Notes.  At December 31, 2019, our total investor debt securities outstanding increased to $73.1 million as compared to  $68.4 million of debt securities outstanding at December 31, 2018.  Our Members’ Equity consists of regular and preferred membership interests held by several federal and state-chartered credit unions. See the section entitled “Description Of Our Membership Interests And Charter Documents” and “Security Ownership Of Certain Beneficial Owners And Management” of this Prospectus. 



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At December 31, 2019 and 2018, the balances of our outstanding investor debt securities were as follows (dollars in thousands):









At December 31, 2019, our investor notes had future maturities during the following twelve-month periods ending December 31 (dollars in thousands):







Private Offerings.



Subordinated Notes. The Series 1 Subordinated Capital Notes have been offered with maturity terms from 12 to 60 months at an interest rate fixed on the date of issuance, as determined by the then current seven-day average rate reported by the U.S. Federal Reserve Board for interest rate swaps. At December 31, 2019 and 2018, a total of $11.3 million and $7.5 million in notes sold pursuant to this offering were outstanding, respectively. We may continue to sell our debt securities to eligible investors on an individual, negotiated basis as we deem appropriate and in compliance with exemptions from registration or qualifications under federal and applicable state securities laws. We offer these notes from time to time to accredited investors. Payments made to these investors are subordinated to all of our other current and future debt.



Secured Notes. In January 2015, the Company began offering its secured notes (“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 certificates require as collateral either cash pledged in the amount of 100% of the outstanding balance of the certificates or loans receivable pledged in the amount of 105% of the outstanding balance of the certificates.  At December 31, 2019 and 2018, a total of $6.4 million and $9.1 million in Secured Notes were outstanding, respectively.  The collateral securing the Secured Notes 

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satisfied the minimum collateral requirement of the Loan and Security Agreement which governs the issuance of such notes.  We may continue to sell our debt securities to eligible investors on an individual, negotiated basis as we deem appropriate and in compliance with exemptions from registration or qualifications under federal and applicable state securities laws. The payment of these obligations is secured by a pool of our mortgage loans or cash.

 

Members’ Equity



Our Members contribute equity capital to our Company through contributions for their membership interests. Total Members’ equity was $11.1 million at December 31, 2019, as compared to $9.5 million at December 31, 2018. See the section entitled “Description Of Our Membership Interests And Charter Documents” and “Security Ownership Of Certain Beneficial Owners And Management” of this Prospectus.



Competition



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



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



Regulation



General



We are organized as a credit union service organization and, as a result, are subject to the regulations promulgated by the National Credit Union Administration (“NCUA”) that apply to CUSOs. As a CUSO, we primarily serve the interests of our credit union equity investors and members of such credit unions.



We are also subject to various laws and regulations that govern:



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

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their respective state’s guidelines which govern investments by a state chartered credit union. The California Department of Business Oversight (“DBO”), in particular, regulates several of our equity owners.  These credit union owners must comply with DFI regulations that govern the investment in a loan they make to a CUSO.



Tax Status



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



Regulation of Mortgage Lenders



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



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



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



Loan Brokerage Services



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



Environmental Issues Associated with Real Estate Lending

 

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

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



Regulation of Financial Services



The financial services industry in the U.S. is subject to extensive regulation under federal and state laws. The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (“Dodd-Frank Act”) was enacted on July 21, 2010. The Dodd-Frank Act resulted in sweeping changes in the regulation of financial institutions and created a new Consumer Financial Protection Bureau and Financial Stability Oversight Council with authority to identify institutions and practices that might pose a systemic risk. We believe that the Dodd-Frank Act and regulations adopted thereunder have not had 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 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 United States Securities and Exchange Commission (“SEC”), FINRA, other self-regulatory organization, and state securities administrators covering all aspects of the securities business. Our wholly owned broker-dealer firm, MP Securities, 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 SEC and regulation by state securities administrators in the states in which it conducts its activities. We have registered MP Securities in the following states:





MP Securities is subject to rules and regulations regarding:



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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 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:





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:

 

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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 acts as a selling agent for the Company’s public and private debt securities. Due to this role, MP Securities 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.



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. A member firm that fails to maintain the required net capital must cease conducting business. 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 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 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



The Dodd-Frank Act authorized the SEC 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.



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

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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 a MP Securities adviser or sales representative rolling over an individual retirement account (“IRA”) into our proprietary debt securities, will require that we:



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. As a result of the Court’s decision, the DOL has announced that a new rule will be included on its regulatory agenda.  On June 5, 2019, the SEC also issued its Final Interpretations to Enhance Protections and Preserve Choice for Retail Investors in Their Relationships With Financial Professionals.  Under the SEC interpretation, the investment adviser has a duty to provide advice that is in the best interests of the client and requires a reasonable inquiry into the client’s objectives.  The SEC interpretation permits the advisor to apply his or her judgment; provided, however, that there is fair disclosure and informed consent.  We continue to monitor developments with the DOL fiduciary rule and SEC’s Interpretations of the standard of conduct for investment advisors and have adopted an assets under management fee compensation model that is applied to sales of our debt securities made by MP Security’s representatives. With this change, we believe that we will be able to:







Privacy Standards

 

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



Patents, Trademarks and Licensing



We do not rely on any significant patent, trademark, license or franchise to operate our business. We own the rights to the trademarks “MINISTRY PARTNERS ®, MINISTRY PARTNERS INVESTMENT COMPANY, LLC JOY IN

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INVESTING ®, the MINISTRY PARTNERS logo and design of a flower with two shaded leaves ® and MINISTRY PARTNERS SECURITIES ®” and have obtained U.S. trademark registrations for these marks with the U.S. Patent and Trademark Office.



Certain Legal Aspects of Our Mortgage Loan Investments



Description of Legal Aspects 



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



Debtor Protection Statutes 



In the event the principal and interest is not paid within a specified period, we must first attempt to collect on the mortgage loan by foreclosing on the real property or other asset securing the loan. In general, California law will not allow us to disregard the security and to proceed directly against the maker on the mortgage loan note. We must foreclose on the property under the deed of trust. Our ability to recover the value of the mortgage loan under such circumstances is affected by certain legal procedures and rights. Mortgage loans secured by real property are subject to the laws of the state in which the property is located and as applicable, federal law, including federal bankruptcy laws. As of December 31, 2019,  32 of the 151 mortgage loans held in our portfolio, representing approximately 21.2% of the outstanding balance of the loans held, are secured by property located in the state of California.



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



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



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



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





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OUR MORTGAGE LOAN BUSINESS



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. 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, loan processing fee and documentation fee at the inception of each loan. 



We originated $8.0 million in loans during the year ended December 31, 2019, as compared to $15.5 million for the year ended December 31, 2018 and $29.9 million for the year ended December 31, 2017. As a result of efforts to expand our underwriting, servicing and loan administration capabilities, the Company has the capacity and underwriting experience to originate all of our mortgage loan investments.



Servicing



Our servicing capability also represents the operational foundation of our loan participation strategy, which enables us to produce recurring servicing revenue from loan participations sold.   Our technology platform enables us to process, record, transmit and account for all financial and operational data for the benefit of other credit unions, finance lenders, churches, financial institutions and investors.  As of December 31, 2019, we were servicing 145  loans out of a total of 151 loans in our portfolio, totaling approximately $127.7 million in loan principal outstanding, net of participations sold.  These loans totaled approximately $154.7 million in gross loan principal balance outstanding at December 31, 2019.  As of December 31, 2019, ECCU was servicing three loans for us, totaling approximately $1.5 million in loan principal outstanding.  As of December 31, 2019, we also own approximately $1.6 million in mortgage loan investments which are being serviced by ACCU, a Glendora, California based credit union and $205 thousand being serviced by Northwest Christian Credit Union (“NWCU”), a Boise, Idaho based credit union.



We did not sell participations in any of our loans receivable during the year ended December 31, 2019.  During 2018, we sold participations in five loans, which resulted in $13 thousand in gains on loan sales.  With our processing system and loan servicing capabilities, we believe we will be able to continue to expand our portfolio of loans serviced for others.



Types of Loans



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

Permanent Loans



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



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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, 2019, we had $5.27 million in construction loans outstanding and $1.8 million in unfunded construction loan commitments.    



Participation Interests



From time to time, we also invest in participation interests in secured mortgage loans, whereby we own a participation interest in a mortgage with a credit union or other lender. By investing in a participation interest, we can participate in a larger loan investment and diversify our mortgage loans investment portfolio while minimizing our exposure to the aggregate amount of the loan. When we invest in a “participation interest”, we purchase an undivided interest in a loan that has been originated by a credit union or other financial institution and we share principal and interest payments received from the borrower in an agreed upon manner. When we purchase a participation interest, the purchase transaction is governed by a participation agreement entered into by the originator and the participant containing guidelines as to ownership, control and servicing rights.  In most instances, the originator retains all rights with respect to enforcement, collection and administration of the loan.  When we enter into a loan participation agreement to purchase a loan participation interest from a financial institution, we may have more limited access to the borrower and the lead lender is generally entitled to exercise discretionary power in administering performing loans and undertaking collection efforts in connection with any of its non-performing loans. 



Due to our ability to originate and service our own loans, our investment in loan participations has been significantly reduced. As of December 31, 2019, approximately $3.3 million, or 3% of our total loan portfolio, consisted of loan participations we purchased from other financial institutions, including ECCU, ACCU, and NWCU. For the year ended December 31, 2018, approximately $5.8 million, or 4% of our total loan portfolio, consisted of loan participations we purchased from other financial institutions.



Line of Credit



We may make line of credit arrangements available to borrowers to meet their temporary working capital needs. The term of such arrangements typically will not exceed one year and will provide for minimum interest payments during the term of the loan. For loans made to members of credit unions that are secured by real property, accounts receivable, and/or inventory, the maximum loan to value ratio is 80% based upon the current value of the collateral. As of December 31, 2019 and 2018, we had $186 thousand and $248 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, 2019, we did not have any outstanding letter of credit commitments.



Our Loan Policies



Our loan underwriting process involves a review and analysis of the church or ministry’s financial operation, the strength of the organization’s leadership team, prior history, financial capability, value of collateral and general creditworthiness.  Our Board of Managers establishes our loan policies and reviews them periodically and, from time to time, have authorized designated loan officers 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

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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 the Board Credit Committee that reviews our loans and loan requests which exceed certain prescribed limits under our loan policies. Upon approval, we issue a written loan commitment to the applicant that specifies the material terms of the loan. 



Any loan exceeding 25% of our tangible net worth, or 7% of our total loan portfolio, whichever is less, must be recommended by the Credit Review Committee and approved by the Board Credit Committee prior to funding.  For any loan participation interest we acquire, the aggregate amount of such interest may not exceed 15% of our total net worth.



Our Mortgage Loan Investment Standards



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





















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Subject to the foregoing discussion, the following tables demonstrate and confirm our compliance with these loan limit policies for the years ended December 31, 2019 and 2018:  







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As of December 31, 2019 and December 31, 2018, respectively, we were in compliance with our policy on aggregate concentration limits for construction loans, junior liens and total unsecured loans. Our portfolio included 10 loans and 13 loans at December 31, 2019 and 2018, 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.



All of the 10 loans that exceeded our policy limits on loans made to a single borrower at December 31, 2019 were approved as exceptions by our Board of Managers or our Board Credit Committee.  At December 31, 2019, we had no unsecured loans 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, as well as the Company’s ability to 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 $877 thousand at December 31, 2018 to $868 thousand at December 31, 2019.  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 greater than $500,000, we or our designated representative will conduct a site visit to inspect the collateral and conduct our due diligence review of the applicant.  Each loan must meet our Church Ministry and Loan Policy guidelines.



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



Our Loan Investment Portfolio



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

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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 for the years ended December 31, 2019 and 2018 are set forth below:











Set forth below are the amounts invested in each loan category at December 31, 2019 and 2018, respectively (dollars in thousands):





At December 31, 2019, 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 the section entitled “Management Discussion and Analysis of Financial Condition − Results of Operations” of this Prospectus for information regarding our historical interest costs, interest income and yields realized on our mortgage loan investments for the years ended December 31, 2019 and 2018.



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Loan Maturities



The following table sets forth the future maturities of our mortgage loan portfolio at December 31, 2019:









Included in the table above are 107 adjustable rate loans totaling $97.8 million, or 74.6% 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 Mortgage Loan Portfolio



The following table sets forth, as of the years ended December 31, 2019 and 2018 each state in which: (i) the unpaid balance of our mortgage loans was 10% or more of the total unpaid balance of our loan portfolio; and (ii) the number of our loans was 10% or more of our total loans:











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Our Loan Renewal Policies



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



Sale of Loan Participation Interests



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



During the year ended December 31, 2019, we did not sell any loan participations.  During the year ended 2018, we entered into loan participation agreements to sell $4.3 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, 2019 and 2018,  three of our 151 mortgage loan investments and five of our 168 mortgage loan investments are serviced by ECCU,  and subject to ECCU’s collection policies.  Under the terms of our servicing agreement with ECCU, we monitor each mortgage loan or participation interest we acquire to ensure full payments are received as scheduled.  We also receive monthly reports from ECCU regarding our mortgage loan investments, including delinquent loan status reports.  For the loans that we service, we monitor payment receipts and delinquency.  We produce regular status reports on these loans.   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 include delinquent loans, loans on non-accrual status and all restructured loans, regardless of the loan’s interest accrual status. We use the terms “impaired loan” and “non-performing loan” interchangeably in the discussion below.



A “delinquent loan” is a loan which is 90 days or more past due. We treat a delinquent loan as an impaired loan. A “restructured loan” means a delinquent loan or an otherwise troubled loan for which we have given the troubled borrower concessions, generally with respect to payment accruals, interest rate reductions, and/or maturity date extensions, which we would not have given the borrower upon making the loan. A restructured loan may or may not be on non-accrual status. We treat a restructured loan as an impaired loan. While our Credit Review Committee closely

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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 a loan against our allowance or reserve for loan losses when we believe the uncollectability of the loan balance is confirmed. For the years ended December 31, 2019 and 2018, we recorded $923 thousand and $283 thousand, respectively, in partial charge-offs against impaired loans.  For the year ended December 31, 2019, we recovered $380 thousand of previous charged off amounts.



Delinquent Loans



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



We report a mortgage loan as delinquent if it is 90 days or more in arrears. At December 31, 2019,  4.5% of our portfolio was delinquent.  At December 31, 2018,  4.8% 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, 2019, we completed foreclosure proceedings against a single Ohio borrower for two different properties located in adjacent counties. Since inception, we have had $4.4 million in mortgage loan investment losses that resulted in charge-offs,  $923 thousand of which occurred during the year ended December 31, 2019.    We recovered $380 thousand in previously charged off amounts during the year ended December 31, 2019. For the year ended December 31, 2018, we had charge-offs  of $283 thousand. 



Non-performing Loans



The table below sets forth the amounts and categories of non-performing assets in our portfolio.  Loans are placed on non-accrual status when the collection of principal and/or interest becomes doubtful or other factors involving the loan or the borrower’s financial condition warrant placing the loan on non‑accrual status. Non-accrual loans represent loans on which interest accruals have been discontinued. Troubled debt restructuring arrangements (or “TDRs”) are loans which include renegotiated loan terms to assist borrowers who are unable to meet the original terms of their loans.  Such modifications may include a lower interest rate, an extension of the maturity date or reduction in accrued interest. All TDRs (restructured loans) are initially placed on non-accrual status regardless of whether the loan was performing at the time it was restructured.





We had six and 11 non-accrual loans as of December 31, 2019 and 2018, respectively.    At December 31, 2019 and 2018, respectively, we had three and eight restructured loans that were on non-accrual status. One of these loans was over 90 days delinquent at December 31, 2019. In addition, at December 31, 2019 we had three collateral-dependent non-accrual loans that we have not restructured.



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, 2019 and 2018,  we did not have any loans past due 90 days and still accruing.



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Restructured Loans 



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



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



In order to properly evaluate a potential restructure, when we receive a request for a modification or restructure, we evaluate the strength of the borrower’s financial condition, leadership of the pastoral team and board, developments 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, 2019, and 2018 (dollars in thousands):









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



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Prior to the onset of the COVID-19 pandemic, the number of restructured loans as a percentage of our total loan portfolio were within manageable limits and the delinquency rates on our mortgage portfolio had stabilized.  We continue to evaluate the adequacy of our reserves in light of current economic and operational conditions.  See the section entitled “Management’s Discussion and Analysis” and “Financial Condition and Results of Operation” of this Prospectus for further discussion related to our loan portfolio.



Foreclosed Assets



As of December 31, 2019 we held two properties acquired through foreclosure. 



Loan “Charge Offs”



We charge-off an uncollectible portion of a  loan against our allowance or reserve for loan losses when we believe we may not be able to collect the balance of a loan.  For the year ended December 31, 2019, we recorded $923 thousand in charge-offs and recovered $380 thousand in previously charged off loan balances.  For the year ended December 31, 2018,  we recorded $283 thousand in charge-offs.    

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.



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



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



If we restructure a loan, we establish an allowance for loan loss for that individual loan based on the difference between the net present value of the future receipt of cash payments from the restructured loan as compared to the net present value of cash flows which we would have received from the original loan, discounted at the original interest rate of the loan. As time passes and the restructured loan performs according to its modified terms, the net present value of future cash flows of the restructured loans changes. The change in the present value of cash flows attributable

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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, 2019 and 2018, our allowance for loan losses was $1.4 million, and $2.5 million, respectively, or 1.1%, and 1.7%, respectively, of our total loan portfolio for the period.  Assessing the adequacy of our allowance for loan losses is inherently subjective as it requires us to make material estimates, including the amount and timing of future cash flows we expect to receive on impaired loans that may be susceptible to significant change.  The decrease in our allowance for loan losses is due to two key factors.  The first is the charge off of two loans, one of which was charged off as part of a foreclosure proceeding.  The second factor is that several impaired loans carrying an allowance were removed from our portfolio through a payoff or short sale, and the funds collected were greater than our carrying amount, allowing us to reduce the specific reserves recorded on those loans.    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, 2019.



The following represents a breakdown of the components of our allowance for loan loss at December 31, 2019 and 2018 (in thousands):











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



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



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



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

 

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



Participations Junior Collateral Position.  This portfolio class consists of the loan participation interests for which we possess a lien on the underlying collateral that is superseded by another lien on the same collateral. Loan participations in junior collateral position loans have greater credit risk than wholly-owned loans and loan participation interests

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where we hold a senior lien on the collateral. The increased risk is the result of the factors presented above relating to both junior lien positions and participations.



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



Our Competition



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



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



Our Employees



Effective June 1, 2017, we entered into a staffing agreement with Total HR, which provides us with payroll and staffing services. CoAdvantage, a portfolio company of Morgan Stanley Capital Partners, has subsequently acquired Total HR. The Company terminated its agreement with CoAdvantage effective December 14, 2019. On December 15, 2019 the Company entered into a professional employer organization agreement with ADP Total source DE IV, Inc. As of December 31, 2019, we had 19 full or part-time employees and four independent contractor relationships supporting business functions that were outsourced. We do not have a collective bargaining agreement with any of our employees and believe we have an excellent relationship with our employees.



Our Properties



As of December 31, 2019, the Company conducts most of its operations from its main corporate office at 915 West Imperial Highway, Suite 120, Brea, California. In addition, the Company has one primary branch office located in Fresno, California. The Brea corporate office and Fresno branch locations have operating leases. Ministry Partners Securities LLC also maintains networking agreement office locations in Glendora, California and Elgin, Illinois.    As of December 31, 2019, the Company had one investment in a joint venture that owns a property located in Santa Clarita, California. As of December 31, 2019, we hold two properties acquired through foreclosure with a net value of $301 thousand.





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BOARD OF MANAGERS AND EXECUTIVE OFFICERS 



Set forth below are the members of our Board of Managers and our Executive Officers: 

 



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



Mr. 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 KCT 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 the Illinois Credit Union Foundation, Elgin Community College Foundation, Gail Borden Library Foundation, CULIANCE and Illinois Chapter of the 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 MP Securities.



VAN C. ELLIOTT



Mr. 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). 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 organizational, 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.



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JOSEPH W. TURNER, JR.



Mr. Turner has served as Chief Executive Officer and President since December 3, 2015. Mr. Turner is also the Chief Executive Officer and President for Ministry Partners Securities LLC, the wholly-owned subsidiary of Ministry Partners Investment Company. Mr. Turner also held the position as Chief Compliance Officer of Ministry Partners Securities LLC until December 14, 2015. During his tenure with the Company, Mr. Turner has led the Company’s efforts in transitioning its wholly-owned broker dealer to a more robust and diverse financial services firm, launching its investment advisory and insurance company activities in addition to overseeing the capital raising efforts related to the Company’s proprietary products. Mr. Turner was also instrumental in formalizing strategic partnerships with Evangelical Christian Credit Union (the Company’s largest equity owner) and America’s Christian Credit Union (2nd largest Shareholder) 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 Chairman of the Board for 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.



MICHAEL R. BOBLIT



Mr. Boblit has previously served as an independent consultant for the Company since September 14, 2018, working with the Company’s Executive and lending services team. Mr. Boblit served as a commercial loan officer, asset manager, and director for business development at Evangelical Christian Credit Union, a Brea, California credit union (“ECCU”), from August 2000 to July 2018. Prior to joining ECCU, Mr. Boblit had a successful career in managing sales operations for both public and private business consulting firms, high technology companies, enterprise software services, document management solutions and optical storage products. Given Mr. Boblit’s extensive experience in developing sales teams, marketing strategies, and his eighteen years of service with ECCU in its commercial lending operations while working with Christian organizations and churches, Mr. Boblit will be tasked with the responsibility of enhancing the Company’s loan origination and commercial lending operation. Mr. Boblit holds a Bachelor of Science in Business Administration, from University of San Diego. On January 3, 2020, Mr. Boblit was appointed as the Company’s Vice President, Corporate Lending Services. 



BRIAN S. BARBRE



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



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MENDELL THOMPSON



Mr. 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 third term ending May of 2020. Mr. Thompson recently retired as President/CEO of America’s Christian Credit Union in Glendora, California, a position he 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 135,000 members, has over $460 million in assets, and manages assets of over $505 million. Mr. Thompson was elected to the Glendora City Council in 2015 and served one term as Mayor from April 2018-2019. He now serves as Councilman having just been re-elected to another 4-year term. He 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



Ms. 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 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 MP Securities Board of Managers.



JERROD FORESMAN



Mr. Foresman has served as a Board Member of Ministry Partners Investment Company since May 2012 and MP Securities since November 2018. He is Co-Owner and President of Virtue Financial Advisors, LLC and the Office of Supervisory Jurisdiction (OSJ) Principal for Infinex Investments, Inc., managing bank and credit union investment programs for over 70 branch locations in the mid-west. Formerly President, Chief Compliance Officer and FINOP of Bankers & Investors Company Inc., a Registered Broker/Dealer, Investment Advisor and Insurance Agency in Kansas City, Mr. Foresman ran the compliance and operations for 11 years. Bankers & Investors Co. provided investment services for seven banks and four credit unions in Missouri and Kansas. Mr. Foresman had 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 also serves as a board member

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for Angel Flight Air Support, OASIS Refuge and 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



Mr. 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.



Our Board of Managers



The Operating Agreement charges our Board and officers 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 periodically reviews them and has authorized designated officers and our President the authority to carry out those policies. As of the date of this Prospectus, our Board consists of six managers, a majority of which are independent managers.



Board Committees



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















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Our Board Chairman

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



Code of Ethics



On November 6, 2009, our Board adopted a Code of Ethics for our principal officers and members of the Board.    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. Mr. Turner currently serves as Chairman of the CCM Board of Directors.



The Company’s Board of Managers were advised of the potential CCM Board appointment of Mr. Turner during its February 2018 meeting, and after 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:













Indemnification of Our Managers and Officers 



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



We can advance our agent’s defense costs if approved by Managers who are not seeking indemnification or, if there are none, by a majority of our Members.    Our Managers who are not otherwise involved in the action can approve the advancement of our agent’s defense costs if they receive an undertaking from the person to repay such amount in the event that it is ultimately determined that the person is not entitled to indemnification.



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

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EXECUTIVE COMPENSATION



The following table sets forth certain information regarding compensation we paid for services rendered to us during the years ended December 31, 2019 and 2018 by our senior executive officers and Board of Managers.

 

Summary Compensation Table

Annual Compensation





(1) During each year, we accrued amounts for each Manager’s service on the Board. 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. In addition, reimburse each Manager for expenses incurred in performing duties on our behalf. Compensation awards for our Managers for the years ended December 31, 2019 and 2018, were $63 thousand and $68 thousand, respectively.

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

(3) Mr. Pomar resigned his position as Manager effective as of November 2, 2018.

(4) On January 3, 2020, Mr. Boblit was appointed as Vice-President, Corporate Lending Services. Prior to accepting that appointment, he served as an independent consultant to the Company.

(5) Messrs. Crammer and Ramirez serve as officers of the Company, but not executive officers.

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

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DESCRIPTION OF OUR MEMBERSHIP INTERESTS

AND CHARTER DOCUMENTS



Our Authorized Membership Interests



Authorized Capital



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



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



Our Class A Units



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



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



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



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



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



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Our Series A Units



We currently have 117,100 Series A Units outstanding. Following is a summary of the rights, preferences and privileges of our Series A Units.



Rank



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



Distributions



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



Liquidation Preference



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



Redemption



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



Rights Upon Liquidation



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



Rights in the Event We Fail to Pay Distributions



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



Voting Rights



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



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Our Charter Documents 



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



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



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



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



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



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



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



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SECURITY OWNERSHIP OF CERTAIN

BENEFICIAL OWNERS AND MANAGEMENT



The following table sets forth information available to us, as of December 31, 2019, with respect to our Class A Units owned by each of our executive officers and our Managers, and by our Managers and executive officers as a group, and by each person who is known to us to be the beneficial owner of more than 5.0% of our Class A Units.











Notes to Table

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



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



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



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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS



Safe Harbor Cautionary Statement



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



These forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties that are subject to change based upon various factors (many of which are beyond our control).  Such risks, uncertainties and other factors that could cause our financial performance to differ materially from the expectations expressed in such forward-looking statements include, but are not limited to, the risks set forth in our Annual Report on Form 10-K for the year ended December 31, 2019, as well as the following:



The following represents a material update to the risk factors described in our Annual Report on Form 10-K filed with the U.S. Securities and Exchange Commission:



The impact of the COVID-19 pandemic could adversely affect our financial condition and results of operations.



A widespread health emergency such as the COVID-19 pandemic could cause economic disruptions that adversely affect the ability of our borrowers to make loan payments.  On March 12, 2020, the President of the United States declared the COVID-19 outbreak in the U.S. a national emergency.  As the pandemic spread, state and local

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governments have ordered non-essential businesses to close, public gatherings to be discontinued and residents to shelter at home.  Churches, faith-based ministries, private schools, daycare centers and Christian colleges have been forced to discontinue public gatherings, worship services, classes and conference events.  Churches that typically receive weekly offerings of tithes and cash contributions now rely on online giving options and contributions sent by mail.  Church revenues are also dependent on general economic conditions, including unemployment rates and economic disruption to businesses, schools and financial markets.  The U.S. Department of Labor estimates that more than 26 million unemployment insurance claims have been filed since the U.S. national emergency was declared.  Federal banking institutions have encouraged lenders to prudently work with borrowers and the recently enacted CARES Act provides lenders with the option to avoid classifying loans that have been modified in conjunction with the onset of the COVID-19 pandemic as troubled debt restructurings. Finally, the spread of the coronavirus has caused us to modify and adjust our office operations, eliminate non-essential travel and require our employees to work remotely when possible or when health conditions so warrant.  While we expect the impact of COVID-19 could have an adverse impact on our business, financial condition and results of operations for 2020, we are unable to predict the extent or nature of these impacts at this time.



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



Overview



We generate our revenue primarily through our church lending portfolio and secondarily through fees generated from our investment and insurance products and services. While we generate the majority of our revenue through interest income, our strategy is to increase the diversification of our revenue sources. A diversified revenue stream may reduce the risk to the Company if economic factors, such as changes in interest rates, decrease our interest income. We also focus on improving our operating efficiency and capital position by increasing the revenue generated for each dollar of expense incurred to run the business. Increased capital helps mitigate risk in economic down cycles. In addition, we are focusing on reducing risk to our lending revenue by improving the quality of our loan portfolio, assessing the financial strength of our borrowers, and working with our impaired loans to restructure, refinance, and/or liquidate these investments when necessary.



In order to continue to achieve our objectives and maximize the value of our equity holders’ investment, we will continue to focus on:



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Financial Performance Summary for the Two-Year Period: 2019 and 2018



Summary of financial performance

For the year ended December 31, 2019, we recognized net income of $2.0 million and grew owners’ equity by $1.5 million. 2019 was the Company’s most profitable year since inception due to a significant increase in revenue generated by broker-dealer commissions and fees and recoveries from previous nonperforming loans that were refinanced or paid off. Total assets remained relatively flat with a slight increase of $2.5 million.



For the year ended December 31, 2019, the primary items affecting our operating performance were the following:



Progress on Strategic Objectives



In 2019, we made continued progress towards our strategic objectives of diversifying our revenue streams, improving the quality of our loan portfolio, maintaining our balance sheet size, and improving operating efficiency. The following discussion focuses on these strategic objectives.



Diversified revenue streams



Like most finance companies and banks, our primary source of revenue has come from the net interest margin we earn on our mortgage loan investments. We continue to develop sources of revenue outside our net interest income to make us less dependent on a favorable net interest rate margin from our mortgage loan investments. We believe this will make the Company less susceptible to unfavorable changes in interest rates. The Company’s management team

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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.



Our primary sources of recurring non-interest income are:









Loan portfolio quality



We continue to monitor our loan portfolio closely and work with borrowers to minimize losses on our mortgage loan investments. The Company can often find a solution for borrowers who are in distress who are willing and able to find a compatible solution. In 2019, we had several positive results due to our efforts to be more aggressive in resolving our non-performing loans. Two of our previously non-performing loans paid off resulting in a collection of previously written off interest and the reversal of previously recorded provisions.  Additionally, another loan that was an impaired collateral dependent loan paid off. Three additional loans that were impaired collateral dependent loans became performing TDRs and taken off collateral dependent status. Additionally, we transferred one loan into foreclosed assets after foreclosure proceedings were completed. Through these efforts, we saw our classified loans decrease by $4.8 million to $8.8 million at the end of December 31, 2019.



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 yields that are more favorable and avoid deteriorating our margins while reducing overall risk exposure to any one borrower with a smaller aggregate loan balance. 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) was $868 thousand at December 31, 2019. In addition, over the past few years, we have substantially expanded our relationships with credit unions throughout the United States. We believe these relationships will enable us to increase the amount of loan participation interests we sell and service for others.  



Financial Condition



This discussion focuses on the overall performance of our balance sheet. As we are a financial institution, the balance sheet is the primary driver of our net income.

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The following discussion and analysis compares the results of operations for the twelve months ended December 31, 2019 and 2018 and should be read in conjunction with the accompanying consolidated financial statements and notes thereto.



Comparison of Financial Condition at December 31, 2019 and December 31, 2018







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General



Total assets increased 2% due to an increase in our notes payable and total members equity. Loans receivable decreased 10% due to loan payoffs and a decrease in the number and principal amount of new mortgage loans that we originated. The decrease in loans receivable created an inverse increase in cash. As a result, the Company enters 2020 with strong levels of liquidity with cash increasing by $16.2 million to $26.0 million, as compared to a balance of  $9.9 million at December 31, 2018.



Our loan funding comes from our members’ equity, our notes payable, and our credit facility borrowings. Since 2008, the Company has relied primarily on the sale of investor notes to fund its mortgage loan investments and maintain the total size of its balance sheet assets. In 2019, our term-debt decreased by $5.1 million and net notes payable increased by $4.7 million.



Loan Portfolio



Our loan portfolio provides the majority of our revenue, however, it also presents the most risk to future earnings through both interest rate risk and credit risk. Additional information regarding risk to our loans is included in the section entitled “Risk Factors” of this Prospectus.  



Our portfolio consists entirely of loans made to evangelical churches and ministries with approximately 99% of these loans secured by real estate. The loans in our portfolio carried a weighted average interest rate of 6.59% at December 31, 2019 and 6.44% at December 31, 2018. The following discussion on our loan portfolio revolves around the credit risk to our loans and on how we account for and address that risk. 



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 that supports our levels of acquisition and origination of loans. In addition, our managers 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 that 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 (or a group of financially related borrowers), the aggregate amount of such interest may not exceed 15% of our tangible net worth. The Company’s Church and Ministry Loan Policy defines “tangible net worth” as shareholder equity plus available operating lines of credit, calculated at the end of each month.



Loan Concentrations



A concentration of loans by category or geography can pose a risk if economic conditions or natural disasters affect that concentration of loans specifically. 



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The table below shows the amounts we have invested in each loan category:





We consider loans individually material if a loan is 10% of the Company’s net assets or greater. At December 31, 2019, we had no individually material loans.



The following table sets forth, as of December 31, 2019 and 2018, 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:





Non-performing Assets



Non-performing assets include:



Non-accrual loans are loans on which we have stopped accruing interest. Restructured loans are loans in which we have granted the borrower a concession on the interest rate or the original repayment terms due to financial distress. Foreclosed assets are real properties for which we have taken title and possession upon the completion of foreclosure proceedings.

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We closely monitor these non-performing assets on an ongoing basis. Management evaluates the potential risk of loss on these loans and foreclosed assets by comparing the book balance to the fair value of any underlying collateral or the present value of projected future cash flows, as applicable.



From time to time, we determine that certain non-accrual loans are collateral-dependent. When a loan is deemed to be collateral-dependent, the repayment of principal will involve the sale or operation of collateral securing the loan. For these loans, we record any interest payment we receive in one of two methods. If the Company deems that the recorded investment of the loan is fully collectable, we will recognize income on the interest payment received on the cash basis. If we deem that the recorded investment is not fully collectable, we will record any interest payment we receive against principal. For non-collateral-dependent loans that are on non-accrual status, we recognize income on a cash basis.



We had 6 non-accrual loans as of December 31, 2019 and 11 as of December 31, 2018. Two of our non-performing loans were paid off in 2019. Management transferred one non-accrual loan to foreclosed assets after judicial foreclosure proceedings were completed.  Three of the non-accrual loans became performing TDRs and were moved to accrual status. One of the non-accrual loans as of December 31, 2018 was charged-off as part of  a restructuring modification agreed upon with the borrower. We added one additional loan to non-accrual status for the year ended December 31, 2019. As detailed in the table below, these activities decreased the balance of our non-performing loans to $9.1 million at December 31, 2019 as compared to $13.6 million at December 31, 2018.



At December 31, 2019 and December 31, 2018, we had three and nine restructured loans, respectively, that were on non-accrual status. One of these loans was over 90 days delinquent at December 31, 2019. In addition, we have six performing restructured loans on accrual status as of December 31, 2019.



The following table presents our non-performing assets:





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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, payment reduction, or reduction of accrued interest owed on the loan on a contingent or absolute basis.



Under ASC 340-10, if the Company grants a loan extension or modification to a borrower experiencing financial difficulties for other than an insignificant period of time that includes a below-market interest rate, principal forgiveness, payment forbearance or other concession intended to minimize the economic loss to the Company, the loan extension or loan modification is classified as a troubled debt restructuring (“TDR”). In cases where borrowers are granted new terms that provide for a reduction of either interest or principal then due and payable, management measures any impairment on the restructured loan in the same manner as for impaired loans as noted above.



Management considers loans that it renews at below-market terms to be troubled debt restructurings if the below-market terms represent a concession due to the borrower’s troubled financial condition. The Company classifies troubled debt restructurings as impaired loans. For the loans that are not considered to be collateral-dependent, management measures troubled debt restructurings at the present value of estimated future cash flows using the loan's effective rate at start of the loan. The Company reports the change in the present value of cash flows related to the passage of time as interest income. If the loan is considered to be collateral-dependent, impairment is measured based on the fair value of the collateral.



The Company had one restructured loan at March 31, 2020 and December 31, 2019 that was greater than 90 days delinquent.



COVID-19 Impact on the Company’s Lending Business



Our borrowers are primarily churches, Christian schools, educational institutions, and faith-based ministries. Given the stay at home orders that have been issued in most states, many of our borrowers have been unable to conduct services with members in attendance. As a result, churches and ministries have changed their worship services to include an online experience and are depending upon online giving and contributions made by mail to support their ministries. We are employing strong countermeasures in response to the hardship COVID-19 is causing some of our borrowers, which include working with borrowers that could be hurt economically by the pandemic and increasing the Company’s liquidity and cash assets on our balance sheet. These measures include the following:







The federal government has also provided relief to lenders who grant borrowers payment deferments due to the pandemic. Under section 4013 of the CARES Act, financial institutions may choose not to categorize a loan modification as a TDR if it is:





For all other loan modifications, federal agencies that regulate financial institutions have confirmed with FASB that short-term modifications made on a good faith basis in response to COVID-19 to borrowers who were current prior to receiving relief, would not be classified as a TDR. This treatment includes short-term modifications including payment deferrals, fee waivers, and extension of repayment terms.



Allowance for Loan Losses



We maintain an allowance for loan losses that we consider adequate to cover both the inherent risk of loss associated with the loan portfolio as well as the risk associated with specific loans.



General reserves are allowances taken to address the inherent risk of loss in the loan portfolio. We include several factors in our analysis. We weigh these factors for the level of risk represented and for the potential loss on our portfolio. These factors include:





In addition, we include additional general reserves for our loans if the collateral for the loan is a junior lien or if a loan is unsecured. We segregate our loans into pools based on risk rating when we perform our analysis in order to increase the accuracy when determining the potential impact these factors have on our portfolio. We weigh the risk factors based upon the quality of the loans in the pool. In general, we give risk factors a higher weight 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 risks inherent in our loan portfolio.



We also examine our entire loan portfolio regularly to identify individual loans that we believe have a greater risk of loss than is addressed by the general reserves. These are identified by examining delinquency reports, both current and historic, monitoring collateral value, and performing a periodic review of borrower financial statements. For loans that are collateral-dependent, management first determines the amount of the loan investment at risk, defined as the unpaid principal balance, net of discounts, less the collateral value net of estimated costs associated with selling a foreclosed property. The total amount of the loan investment 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. At a minimum, we review loans that carry a specific reserve quarterly. However, we will adjust our reserves more frequently if we receive additional information regarding the loan’s status or its underlying collateral.



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Finally, for non-collateral-dependent trouble debt restructurings we use a net present value method for the allowance calculation. Reserves for these loans are determined by calculating the net present value of payment streams we expect to receive from a restructured loan compared to what we would have received from the loan according to its original terms. We then discount these expected cash flows at the original interest rate on the loan. Management records these reserves at the time of the restructuring. We report the change in the present value of cash flows attributable to the passage of time as interest income.



The process of providing an adequate allowance for loan losses involves discretion on the part of management. We strive to maintain the allowance at a level that compensates for losses that may arise from unknown conditions. As a result, losses may differ from current estimates made by management. 



The chart below details our allowance for loan loss:











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Cash, Cash Equivalents, and Restricted Cash



Cash, cash equivalents, and restricted cash decreased by $16.1 million during the year ended December 31, 2019. The increase in cash was primarily due to $25.3 million in proceeds received from contractual loan payments and loan prepayments offset by cash used for loan purchased and loan originations totaling $10.2 million.



Investments in Joint Venture



The investment in the joint venture is described in “Note 5: Investments in Joint Venture” in this Prospectus beginning on page F-1. The purpose of the joint venture is to develop and sell property we acquired as part of a Deed in Lieu of Foreclosure agreement reached with one of our borrowers in 2014.



Term-Debt



As shown on the Comparison of Financial Condition above, our term-debt decreased by $5.0 million in 2019. This decrease is the result of regular monthly payments made on the term-debt credit facilities. For additional information, refer to “Note 10.  Credit Facilities”, in the notes to consolidated financial statements included in this Prospectus beginning at page F-1.



Notes Payable



Our investor notes payable consist of debt securities sold under publicly registered security offerings as well as notes sold in private placement offerings. Over the last several years, we have expanded our investor note sale program by building relationships with other faith-based organizations whereby we can offer our various investor note products to these organization and the ministries they serve. Concurrently, MP Securities and its staff of financial advisors have increased our customer base through marketing efforts made to individual investors. These efforts helped increase our investor notes payable by $4.7 million during the year ended December 31, 2019. The balance sheet presents our investor notes payable net of debt issuance costs, which have decreased from $92 thousand at December 31, 2018 to $55 thousand at December 31, 2019.



Other liabilities



Our other liabilities include accounts payable to third parties and salaries, bonuses, and commissions payable to our employees. At December 31, 2019, our other liabilities increased by $1.4 million as compared to the year ended December 31, 2018 due to both an increase in funds the Company held on behalf of borrowers for future lending transactions and the addition of a lease liability. Due to the implementation of ASU No. 2016-02, we added a lease liability of $680 thousand at January 1, 2019, which has amortized to $545 thousand at December 31, 2019.



Members’ Equity



During the year ended December 31, 2019, total members’ equity increased by $1.5 million due to net income of $2.0 million earned by the Company as offset by dividend expense of $461 thousand. We did not repurchase or sell any membership equity units during the year ended December 31, 2019.



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Liquidity and Capital Resources



Maintenance of adequate liquidity requires that sufficient resources are always available to meet our cash flow needs. We need cash to obtain new mortgage loans, repay term-debt, make interest payments to our note investors, and pay general operating expenses. Our primary sources of liquidity are:





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



We are also susceptible to withdrawal requests made by our note holders that have made large investments in our notes that can adversely affect our liquidity. We believe that our available cash, cash flow from operations, net interest income, and other fee income will be sufficient to meet our cash needs. Should our liquidity needs exceed our available sources of liquidity, we believe we could sell a portion of our 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 term debt.



Our Board of Managers approves our liquidity policy. The policy sets a minimum liquidity ratio and contains contingency protocol if our liquidity falls below the minimum. Our liquidity ratio was 32% at December 31, 2019, which is above the minimum set by our policy. This was an increase from 13% at December 31, 2018 primarily due to the increase in cash that resulted from originating and funding fewer mortgage loans in 2019.  



We review our liquidity position on a regular basis based upon our current position and expected trends of loan closings and sales of investor notes. Management believes that we maintain adequate sources of liquidity to meet our liquidity needs. Some of the material liquidity events that would adversely affect our business are:





Debt Securities



The sale of our debt securities is a significant component in financing our mortgage loan investments. We continue to sell debt securities filed under a Registration Statement with the SEC to register $90 million of our Class 1A Notes under this Prospectus. The SEC declared the Registration Statement effective on February 27, 2018 and it expires on December 31, 2020. We have also entered into a Loan and Standby Agent Agreement pursuant to a Rule 506 offering to sell $40 million of Series 1 Subordinated Capital Notes and we are offering $80 million in our Secured Notes under a private placement offering. Through sales of the Class 1A Notes and privately placed investor notes, we expect to fund new loans, which we can hold to either receive interest income or sell to participants to generate servicing income and gains on loan sales. We also use the cash we receive from investor note sales to fund general operating activities.



Historically, we have been successful in generating reinvestments by our debt security holders when the notes they hold mature. Our note renewal rate has been stable over the last several years. MP Securities has also hired additional

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financial advisors that have enabled us to increase our client base, which has in turn positioned us to increase notes sales. 



The table below shows the renewal rates of our maturing notes over the last three years:





Term-Debt Credit Facilities



We have funded a significant portion of our balance sheet through our term-debt credit facilities. Because these facilities have a long-term fixed rate expiring in 2026 they provide a stable cost of funds.





However, we cannot borrow additional funds on these facilities; therefore, we will need to replace any principal paid on the facilities through another source. If we cannot find an alternative source of funding, we will have to shrink our balance sheet, which may reduce our net interest income. The following table shows the maturity schedule on our term-debt for the next five years as of December 31, 2019.





Debt Covenants



We have debt covenants on both our notes payable and our term-debt credit facilities. Failure to maintain our covenants could require all interest and principal to become due. As of December 31, 2019, we are in compliance with our covenants on our notes payable and term-debt credit facilities. 







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Results of Operations:



For the year ended December 31, 2019



Net Interest Income and Net Interest Margin



Historically, our earnings have primarily depended upon our net interest income.



Net interest income is the difference between the interest income we receive from our loans and cash on deposit (“interest-earning assets”) and the interest paid on our debt securities and term debt.



Net interest margin is net interest income expressed as a percentage of average total interest-earning assets.



The following table provides information, for average outstanding balances for each major category of interest earnings assets and interest-bearing liabilities, the interest income or interest expense, and the average yield or rate for the periods indicated:





[1] Loans are net of deferred fees and before the allowance for loan losses. This analysis considers non-accrual loans a non-interest earning asset.

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Net interest income increased 16% during the year ended December 31, 2019 while net interest margin increased 37 basis points to 3.29% for the year ended December 31, 2019. These improvements were mainly due to an increase in income on interest-earning assets.



The increase on total interest-earning assets was due to mainly to an increase in yield on interest-earning loans. The majority of this increase was due to the payoff of two previously non-performing loans. On payoff, the Company was able to recapture $511 thousand of interest income previously allocated to principal when the loans were on non-accrual accounting. The weighted average rate on the loan portfolio increased from 6.43% to 6.59% during the year ended December 31, 2019. The rate variance increase on interest-earning accounts with other financial was due to an increase in average yield on these accounts of 96 basis points. The increase was due to two factors. First, overall market interest rates have increased over the last twelve months. Second, we have allocated a higher percentage of our funds to higher interest-earning accounts.



Offsetting the increase in interest income somewhat, total interest expense increased by $227 thousand for the year ended December 31, 2019. This was mostly due to an increase in average balance on investor notes payable offset slightly by a decrease in average balance on term-debt. The average balance of our investor notes payable increased by $6.6 million due to the expanded efforts to market our investor notes to faith-based organizations, institutions, and ministries. The decrease in average balance on term-debt was due to contractual monthly principal payments made on the term-debt.



Provision and non-interest income and expense





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Provision



Net interest income after provision for loan losses increased by $1.9 million for the year ended December 31, 2019. This increase was primarily due to a credit in provision expense related to loan loss recoveries on loan payoffs. 



Non-interest income



The increase in non-interest income shown above was the result of a robust increase in broker-dealer commissions and fees offset by a decrease in other lending income. Revenue from broker-dealer commissions and fees increased by $892 thousand during the year ended December 31, 2019 compared to the year ended December 31, 2018. This increase was the result of an increase in institutional business during the year ended December 31, 2019 compared to the year ended December 31, 2018. Offsetting the increase in broker-dealer commissions and fees, other lending income decreased by $767 thousand during the year ended December 31, 2019. This was mostly due to recording a gain on loan sale the year ended December 31, 2018 while we did not record any gains on loan sales during 2019.  



Non-interest expenses



The increase in non-interest expenses of $523 thousand was due primarily to an increase in variable expenses directly related to the increase in non-interest income described above. Additionally, office operations expenses increased as we outsourced some credit management functions to outside contractors.



Results of Operations:



December 31, 2018 compared to December 31, 2017



Net Interest Income and Net Interest Margin



Historically, our earnings have primarily depended upon our net interest income.







The following table provides information, for average outstanding balances for each major category of interest earnings assets and interest-bearing liabilities, the interest income or interest expense and the average yield or rate for the periods indicated:

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[1] Loans are net of deferred fees and before the allowance for loan losses. This analysis considers non-accrual loans a non-interest earning asset.





Net interest income decreased 10%, or $512 thousand, to $4.4 million for the year ended December 31, 2018. Net interest margin decreased 35 basis points to 2.92% for the year ended December 31, 2018, compared to 3.27% for the year ended December 31, 2017. These decreases were due to the following factors.



Interest income on interest-earning assets decreased by $264 thousand for the year ended December 31, 2018 compared to the year ended December 31, 2017. A rate variance accounted for $396 thousand of this decrease due to a decrease in average yield on interest-earning loans of 33 basis points. The decrease in yield is primarily due to additional net deferred fees recorded for the year ended December 31, 2017 compared to the year ended December 31,

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2018. However, the actual weighted average rate on the loan portfolio increased from 6.31% to 6.43% from December 31, 2017 to December 31, 2018. A positive volume variance of $132 thousand, which was due to an increase in average interest-earning loans of $2.0 million, partially offset the rate variance. Slightly higher rates on interest-earning accounts with other financial institutions partially offset the decrease in interest income.



Average interest-bearing liabilities, consisting of notes payable and borrowings from financial institutions, decreased $2.7 million to $148.1 million during the year ended December 31, 2018, as compared to $150.8 million during the same period in 2017. The decrease is attributable to a $4.9 million decrease in average NCUA borrowings offset by an increase in average notes payable of $2.2 million. The average rate paid on these liabilities, including debt issuance cost amortization, increased 23 basis points from 3.04% for the year ended December 31, 2017 to 3.27% for the year ended December 31, 2018 as the underlying base index rates on notes payable have increased over the previous twelve months.



Provision and non-interest income and expense



Twelve months ended December 31, 2018 as compared to the twelve months ended December 31, 2017:



Provision



Net interest income after provision for loan losses decreased by $916 thousand for year ended December 31, 2018 over the year ended December 31, 2017 due to an increase in provision for loan losses of $404 thousand and a decrease in net interest income as discussed above. Provision for loan losses increased due to specific reserves taken for impaired loans that we expect to restructure or dispose of through foreclosure or sale.



Non-interest income



Non-interest income increased by 22% for year ended December 31, 2018 over the year ended December 31, 2017 due to several factors. Other lending income increased by $592 thousand related to the gain recognized on the sale of a note. This gain was offset by a $331 thousand decrease in broker-dealer commissions and fees due to fewer large institutional investment transactions consummated during the year ended December 31, 2018, as compared to the year ended December 31, 2017. The results for the year ended December 31, 2018 are typical for periods without large, fee-generating institutional investment transactions.



Non-interest expenses



Non-interest expenses for the year ended December 31, 2018 decreased by 4%, or $191 thousand, over the year ended December 31, 2017. This decrease is partially due to lower office operations and other expenses of $63 thousand due to lower referral fees paid to strategic partners in conjunction with a decrease in security transactions referred to our broker-dealer. In addition, salaries and benefits decreased by $59 thousand primarily due to a reduction in accrued bonuses. Legal and accounting expense decreased by $44 thousand due to a decrease in legal fees recorded as expenses related to our note sales.

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CERTAIN RELATIONSHIPS AND RELATED

TRANSACTIONS AND DIRECTOR INDEPENDENCE

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 pertaining to the assets of the Company (in thousands):





Related party transactions of the Company (dollars in thousands):



Loan participation interests purchased:



In the past, the Company purchased loan participation interests from ECCU. Management negotiated the pass-through interest rates on these loans on a loan-by-loan basis. Management believes these negotiated terms were equivalent to those that would prevail in an arm's length transaction. The Company did not purchase any loans from ECCU during the years ended December 31, 2019 and 2018.



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.



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MP Securities Networking Agreement with ECCU:



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

(1) ECCU or its Board of Directors has approved;

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

(3) are offered in accordance with National Credit Union Administration (“NCUA”) rules and regulations; and

(4) comply with its membership agreement with Financial Industry Regulation Authority (“FINRA”).



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



The Company and ECCU had entered into the Services Agreement, pursuant to which the Company was to provide relationship management services to ECCU’s members and business development services to new leads in the southeast region of the United States. On March 1, 2018, the Company and ECCU amended the agreement to include referral fees to be paid by either party on the successful closing of a referred loan. The terms of the agreement allowed either party to terminate the Services Agreement for any reason by providing thirty days written notice. On April 4, 2019, the Company received written notice from ECCU requesting termination of the agreement. The agreement terminated on May 4, 2019.



Successor Servicing Agreement with ECCU:



On October 5, 2016, the Company entered into a Successor Servicing Agreement with ECCU. This agreement obligates the Company to serve as the successor loan servicing agent for certain mortgage loans designated by ECCU. The Company will service these loans in the event ECCU requests that the Company assume its obligation to act as the servicing agent for those loans. The Agreement terminated in October 2019 and has converted to a month-to-month agreement.



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.

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.



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

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





Related party transactions of the Company (dollars in thousands):

Loan participation interests purchased:



Occasionally, the Company sells or purchases loan 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.



From time to time, the Company may purchase a loan participation interest from a related party. The Company and its related party will negotiate in good faith the terms and conditions of such a purchase and in accordance with the Company’s related party procedures and governance practices. Each party must approve such a purchase after full disclosure of the related party transaction and must include terms and conditions that would normally be included in arm’s length transactions conducted by independent parties.



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 and insurance products and services to ACCU’s members that:



(1) ACCU or its Board of Directors has approved;

(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) comply with its membership agreement with FINRA.



The agreement entitles MP Securities to pay ACCU a percentage of total revenue received by MP Securities from transactions conducted for or on behalf of ACCU members. Either ACCU or MP Securities may terminate the Networking Agreement 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 a fee for servicing the loan. Management believes the terms of the agreement are equivalent to those that prevail in arm's length transactions.



Transactions with Subsidiaries



The Company has entered into several agreements with its subsidiary, MP Securities. The Company eliminates the income and expense related to these agreements in the consolidated financial statements. MP Securities serves as the managing broker for the Company’s public and private placement note offerings. MP Securities receives compensation related to these broker dealer services ranging from 0.25% to 5.50% over the life of a note. The amount of the compensation depends on the length of the note and the terms of the offering under which MP Securities sold the note.



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



The Company’s subsidiary, MPF, serves as the collateral agent for the Company’s Secured Notes. The Company’s Prospectus for its Class 1A Notes and the private placement memorandum for the Company’s Secured Notes Offering describe the terms of these agreements.



Related Party Transaction Policy



The Board has adopted a Related Party Transaction Policy to assist in evaluating related transactions the Company may enter into with a related party. 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 entered into on terms believed by management to be no less favorable than are available from unaffiliated third parties. In addition, a majority of the Company’s independent Board members must approve these transactions.



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 owned by related parties totaled $368 thousand and $394 thousand at December 31, 2019 and December 31, 2018.



Related Party Transactions Exceeding $120,000



The following table lists our transactions with related persons that exceed $120,000, and in which any related person had, or will have, a direct material interest (dollars in thousands).  



CERTAIN U.S. FEDERAL INCOME TAX CONSIDERATIONS



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



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



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



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



Taxation of Interest



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



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Disposition, Redemption or Repurchase for Cash



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





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

 

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



LEGAL PROCEEDINGS



Given the nature of our investments made in mortgage loans, we may from time to time have an interest in, or be involved in, litigation arising out of our loan portfolio. We consider litigation related to our loan portfolio to be routine to the conduct of our business. As of December 31, 2019 and subject to the matter described below, we are not involved in any litigation matters that could have a material adverse effect on our financial position, results of operations, or cash flows.



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.  On January 1, 2019, Mr. Woodall passed away in Turlock, California.



Plaintiff’s wrongful termination counsel filed a motion to withdraw from representing the Plaintiff in this matter and the matter is now being handled by counsel appointed for Mr. Woodall’s estate. The Company believes the allegations in Mr. Woodall’s suit are groundless without merit and it has vigorously contested the allegations set forth in Mr. Woodall’s complaint. The Company has filed a Motion for Summary Judgment and the court has set a trial date of September 21, 2020. Because Mr. Woodall is deceased, the estate will be limited in the amount of recoverable damages that can be pursued.  

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PLAN OF DISTRIBUTION



General



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



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



It is expected that MP Securities will conduct all retail and wholesale marketing and sales of the Notes. Because MP Securities is our affiliate, it is not in a position to make an independent review of our Company or this Offering. Accordingly, you will not be able to rely on a review of the terms and conditions of this Offering by a non-affiliated managing broker-dealer or underwriter. MP Securities has certain conflicts of interest between our interests and the interests of its customers in connection with the sale of the Notes.



FINRA Rule 5110 prohibits unfair underwriting arrangements to be paid in connection with a public offering of securities.  Under Rule 5110, a FINRA registered broker dealer firm that participates in a public offering is required to file information about the underwriting terms and arrangements with FINRA’s Corporate Financing Department.  Under the terms of the Managing Broker Dealer Agreement entered into by and between MP Securities and the Company, MP Securities will act as the primary selling agent for the Offering.  As a consequence, MP Securities will be required to obtain a no objections letter from FINRA in order to participate in the Offering.  Because FINRA views the Notes as interests in a direct participation program, an offer or sale of the Notes under the registration statement of which this Prospectus forms a part will be made in compliance with FINRA Rule 2310.



Unless sooner completed or we decide to terminate it sooner, the Offering will terminate on December 31, 2020. We may, without prior notice, in our sole discretion, suspend or discontinue the sale of one or more Note categories or Note category Series at any time or from time to time and we may terminate the Offering at any time.



Underwriting Compensation We Will Pay



Selling Commissions



We will pay a fixed 1.50% commission on the principal amount of a Class 1A Note purchased to our wholly-owned subsidiary, MP Securities.  The 1.50% sales commission will be a fixed amount and will apply to our Fixed Series Notes with a term ranging from 12 to 60 months and our Variable Series Notes with a term of 60 months.  By establishing a fixed 1.50% sales commission on the purchase of a Note, there will be no incentive for our selling agent, MP Securities, to favor investments made in our longer term investor notes.



Account Servicing Fee



Under the terms of the MB Agreement, MP Securities will receive an Account Servicing Fee equal to 1% per annum of the principal amount of our Class 1A Notes, determined on a monthly basis commencing one year after the purchase of a Class 1A Note; subject, however, to a maximum gross dealer compensation of 5.5% assessed on any Class 1A Note sold.  With the adoption of the Account Servicing Fee and reduction of the sales commissions previously paid to MP Securities on the sale of our publicly offered notes, there will be no incentive to favor investments made in our longer term investor notes.  The Account Servicing Fee will not be assessed against or accrued on deferred interest earned but not paid on a Note.



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The Company reserves the right, under the terms of the MB Agreement, to waive, reduce or suspend payment of the Account Servicing Fee that will be assessed on any Class 1A Note during the term of the Offering.  Under the terms of the MB Agreement, the Account Servicing Fee paid to MP Securities will never exceed 5.5% of aggregate purchase amount paid for a Note, including any accrued interest deferred and added to the Note’s principal balance.  Except for the Master Services Agreement entered into with ACCU and ECCU, no referral or similar fees will be paid to any accountants, attorneys, or other persons in connection with the distribution of the Notes. No Account Servicing Fee will be paid to MP Securities on the Company’s outstanding Class 1 or Class A Notes.  See, “CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE – Transactions with Subsidiaries” on page 101 of this Prospectus.



We will not pay or reimburse MP Securities for its training or education expenses in connection with marketing the Notes.



We and/or MP Securities will pay up to an additional estimated maximum expenses of $778,496 which are considered underwriting compensation under the FINRA Rules. These include the following estimated expenses:





The $299,799 of non-transaction based compensation will be paid to registered representatives of MP Securities as salary draws.  The Company’s Chief Executive Officer and President and Chief Financial Officer also serve as President and Chief Financial Officer of MP Securities, respectively and a portion of their salaries has been included in the $478,697 of dual employee non-transaction based compensation.  These allocated costs for salaries paid to dual employees of the Company and MP Securities is deemed to be underwriting compensation under the FINRA Rules. 



Thus, we estimate that when these expenses are added to the maximum compensation of $4,950,000 (inclusive of selling commissions and Account Servicing Fees assessed) and maximum due diligence fees of $9,000, we may pay a total of up to approximately $5,737,496 as determined under the FINRA Rules (or 6.37% of the Maximum Offering Proceeds) over the anticipated life of the Offering.



Processing Fee



For each sale of a Class 1A Note, we will pay 0.50% on the aggregate amount of a Note purchased commencing on the date of this Prospectus.



Other Organization and Offering Costs We May Incur for the Offering



In addition to the estimated issuance and distribution expenses of $317,000 we expect to pay, we may pay up to an estimated $266,411 which may be considered additional issuer expenses under the FINRA Rules. We intend to pay these expenses from funds other than the net proceeds of the Offering. The Company and MP Securities employ personnel that assist in administering the Note program, including processing applications and Notes investments on MP Securities’ information systems, updating sales blotters, maintaining books and records, and assisting in ministerial and clerical duties related to the Notes.  The payment of these non-transaction-based salaries and expenses of dual employees will comply with applicable FINRA Rules governing participation of a member broker dealer firm in the offering of debt securities by an affiliated entity and will be deemed to be issuer expenses that will be paid by the Company.  The estimated $317,000 of issuance and distribution expenses and $266,411 of additional expenses incurred for overhead and salaries of dual employees will not be treated as underwriting compensation under FINRA Rules, but rather as additional organization and offering costs incurred by the Company in connection with the Offering.    Thus, we may pay total issuer expenses under the FINRA Rules of up to a maximum of $614,005  (0.68% of the maximum offering proceeds).



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Commitment Regarding Organization and Offering Expenses



We undertake that the total organization and offering expenses will not exceed 15% of the maximum offering proceeds.    We also undertake that the underwriting compensation will not exceed 10% of the maximum offering proceeds.



As described above, we currently estimate that we and MP Securities will incur up to $6,320,907 in total organization and offering expenses (7.02% of the maximum offering proceeds) and we and MP Securities currently estimate that we may pay up to a total of $5,737,496 of underwriting compensation (6.37% of the maximum offering proceeds).



Indemnification



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



Conflict of Interest



Because we own all of the equity securities of MP Securities, MP Securities will face a conflict of interest in its placement of the Notes between our interests and the interests of its customers. No independent broker will be involved in the sale of Notes and no independent broker will participate in the Offering to ameliorate this conflict of interest by reviewing the circumstances underlying sales of Notes, or to conduct ongoing due diligence review of our Company and the Offering. Thus, if you purchase a Note through MP Securities, you will not have the benefit of an independent review of the terms and conditions of this Offering by an independent participating broker.



Sales to IRAs



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



HOW TO PURCHASE A NOTE



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



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



2.You should pay for your Notes by delivering a check in the amount of the Notes you are purchasing (“Total Notes Purchased”), payable to Ministry Partners Investment Company, LLC, provided such payment is accompanied by a completed and executed applicable Purchase Application.



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



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



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



We accept or reject Purchase Applications and checks within six (6) business days after we receive them. In certain circumstances where the suitability review procedures are more lengthy than customary, or your Purchase Application and check are not in good order, our bank will hold your check in accordance with applicable legal requirements pending our acceptance of your subscription.    If your Purchase Application is rejected, your funds, without interest or reduction, will be returned to you within ten (10) business days after the date of such rejection. If your Purchase Application is accepted, we will send you confirmation of your purchase of your Note as of the date of acceptance.



LEGAL MATTERS



Bush Ross, P.A., of Tampa, Florida is acting as our counsel in connection with filing of the Company’s Registration Statement under the 1933 Act and as such, has passed on certain legal matters in connection with the Notes.  Randy K. Sterns, a shareholder in the firm, holds a $28 thousand Class A Note and is the beneficial owner of an Individual Retirement Account that holds $163 thousand of the Company’s Subordinated Capital Notes.



EXPERTS



The consolidated balance sheets as of December 31, 2019 and December 31, 2018 and the related consolidated statements of income, equity, and cash flows for the fiscal years then ended have been included in this Prospectus and reliance is made on the report of Hutchinson and Bloodgood LLP, a limited liability partnership, independent registered public accounting firm, given on the authority of that firm as experts in accounting and auditing.

 

WHERE YOU CAN FIND MORE INFORMATION



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



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



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