Attached files
file | filename |
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EX-23.5 - CONSENT - MINISTRY PARTNERS INVESTMENT COMPANY, LLC | ministry_s1a-ex2305.htm |
EX-5.1 - OPINION OF RUSHALL & MCGEEVER - MINISTRY PARTNERS INVESTMENT COMPANY, LLC | ministry_s1a-ex0501.htm |
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
_____________________
FORM
S-1/A
PRE-EFFECTIVE
AMENDMENT NO. 1 TO
REGISTRATION
STATEMENT
UNDER
THE
SECURITIES ACT OF 1933
_____________________
Ministry
Partners Investment Company, LLC
(Name of
small business issuer in its charter)
_____________________
California
|
6199
|
26-3959348
|
(State
of or other jurisdiction of
incorporation
or organization)
|
(Primary
Standard Industrial
Classification
Code Number)
|
(I.R.S.
Employer
Identification
No.)
|
915
West Imperial Highway, Suite 120
Brea,
California 92821
(714)
671-5720
(Address
and telephone number of principal executive offices and principal place of
business)
_____________________
BILLY
M. DODSON
President
915
West Imperial Highway, Suite 120
Brea,
California 92821
(714)
671-5720
|
With
copies to: BRUCE J. RUSHALL, ESQ.
RUSHALL
& McGEEVER
6100
Innovation Way
Carlsbad,
California 92009
(760)
438-6855
|
(Name,
address and telephone number of agent for service)
_____________________
Approximate date of proposed sale to
the public: As soon as practicable after the Registration
Statement becomes effective.
If any of
the securities being registered on this form are to be offered on a delayed or
continuous basis pursuant to Rule 415 under the Securities Act of 1993, check
the following box. þ
If this
Form is filed to register additional securities for an offering pursuant to Rule
462(b) under the Securities Act, please check the following space and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering: ¨
If this
Form is a post-effective amendment filed pursuant to Rule 462(c) under the
Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the same
offering. ¨
If this
Form is a post-effective amendment filed pursuant to Rule 462(d) under the
Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the same
offering. ¨
If
delivery of the prospectus is expected to be made pursuant to Rule 434, please
check the following box. ¨
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a small reporting company. See
definitions of “large accelerated filer,” “accelerated filer,” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check
one):
Large
accelerated filer ¨ Accelerated
filer ¨ Non-accelerated
filer ¨
Smaller reporting company þ
(Do
not check if a smaller reporting company)
CALCULATION
OF REGISTRATION FEE
|
||||
TITLE
OF EACH CLASS OF SECURITIES
TO
BE REGISTERED
|
AMOUNT
TO
BE REGISTERED
|
PROPOSED
MAXIMUM
OFFERING
PRICE PER SHARE (1)
|
PROPOSED
MAXIMUM
AGGREGATE
OFFERING PRICE (2)
|
AMOUNT
OF
REGISTRATION
FEE (3)
|
Class
A Notes, Fixed Series
|
$100,000,000
|
par
|
$100,000,000
|
|
Class
A Notes, Flex Series
|
$100,000,000
|
par
|
$100,000,000
|
|
Class
A Notes, Variable Series
|
$100,000,000
|
par
|
$100,000,000
|
|
Total
|
$100,000,000
|
par
|
$100,000,000
|
$7,130
|
_________________________
(1)
|
The
notes will be sold at their face
amount.
|
(2)
|
A
total of $100,000,000 of the Class A Notes is being registered, consisting
of a combination of the Fixed Series, Flex Series and/or Variable
Series.
|
(3)
|
The
fee is based on the total of $100,000,000 being registered
hereby.
|
The
registrant hereby amends this registration statement on such date or dates as
may be necessary to delay its effective date until the registrant shall file a
further amendment which specifically states that this registration statement
shall thereafter become effective in accordance with section 8(a) of the
Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission acting pursuant to said section 8(a)
may determine.
The information in this prospectus is not complete and may be changed.
We may not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to sell these securities and it is not soliciting an offer to buy these
securities in any jurisdiction where the offer or sale is not
permitted.
PROSPECTUS
Subject to Completion: Dated March 9,
2010
$100,000,000
MINISTRY
PARTNERS INVESTMENT COMPANY, LLC
Class A
Notes Promissory Notes
We are
offering our Class A Notes in three Series: the Fixed Series, the Flex Series
and the Variable Series in several Categories, each of which has a minimum
required investment. Each 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. The Flex Series Notes have a maturity of 84 months. All
Variable Series Notes have a maturity of 72 months. Unless otherwise indicated,
the words “we,” “us,” or “our” refer to Ministry Partners Investment Company,
LLC, together with its wholly owned subsidiary, Ministry Partners Funding, LLC,
which we refer to as “MPF”.
The Class
A Notes, which we sometimes refer to as the Notes, are our unsecured and
unsubordinated obligations and, except as described below, will rank equal in
right of payment with our existing and future unsecured and unsubordinated
indebtedness.
INVESTING
IN THE CLASS A NOTES INVOLVES RISKS. SEE “RISK FACTORS” BEGINNING ON PAGE 12 . 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.
Offering
Price
|
Commissions(1)
|
Proceeds
to the Company(2)
|
|
Minimum
Purchase
|
$1,000
|
$0
|
$1,000
|
Total
|
$100,000,000
|
$0
|
$100,000,000
|
(1)
|
We
are offering the Notes directly through our officers and selected
employees. Some of our employees, but not our executive officers, may
receive compensation based on the Notes they sell for us in certain
states.
|
(2)
|
Before
deduction of filing, printing, legal, accounting and miscellaneous
expenses payable by us, which we estimate will not exceed
$150,000.
|
We are owned by certain state and federal chartered credit unions. 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. These products involve investment risk, including possible loss of principal. |
The
current Rate Schedule and any other supplements to this Prospectus are placed
inside this front cover.
The date
of this Prospectus is March 9, 2010
Table
of Contents
Page
|
||
INTRODUCTION
|
1
|
|
FREQUENTLY
ASKED QUESTIONS ABOUT THE NOTES
|
1
|
|
PROSPECTUS
SUMMARY
|
8
|
|
About Our Company
|
8
|
|
The Offering
|
8
|
|
The Indexes
|
10
|
|
Note Terms in General
|
10
|
|
Our Secured Credit
Facilities
|
11
|
|
Use of Proceeds
|
11
|
|
Terms of the Offering
|
11
|
|
RISK
FACTORS
|
12
|
|
Risks Related to the Notes
|
12
|
|
Risks Related to the Financial
Services Industry and Financial Markets
|
14
|
|
Risks Related to Our
Business
|
16
|
|
USE
OF PROCEEDS
|
21
|
|
WARNING
CONCERNING FORWARD-LOOKING STATEMENTS
|
21
|
|
DESCRIPTION
OF THE NOTES
|
22
|
|
General
|
22
|
|
The Fixed Series Notes
|
22
|
|
The Flex Series Notes
|
23
|
|
The Variable Series Notes
|
24
|
|
The Indexes
|
24
|
|
Common Provisions of the
Notes
|
25
|
|
DESCRIPTION
OF THE INDENTURE
|
26
|
|
General
|
26
|
|
The Trustee
|
26
|
|
Successor Trustee, Trustee
Eligibility
|
26
|
|
Compensation of the Trustee
|
26
|
|
The Trustee’s Rights, Duties and
Responsibilities
|
26
|
|
Our Continuing Covenants Under
the Indenture
|
27
|
|
Requirements That We Keep Certain
Books and Records
|
29
|
|
Remedies in the Event of Our
Default
|
30
|
|
Compromise or Settlement of
Claims
|
30
|
|
Amendment, Supplement and/or
Waiver of the Indenture
|
31
|
|
OUR
COMPANY AND OUR BUSINESS
|
31
|
|
Our Company
|
31
|
|
Our Conversion to a Limited
Liability Company
|
31
|
|
Our Operating Goals
|
32
|
|
Overview of Our Business
|
32
|
|
Additional Debt
|
33
|
|
Employees and Facilities
|
34
|
|
CAPITALIZATION
AND OPERATIONAL FUNDING
|
34
|
|
Investor Financing
|
34
|
|
Our Subsidiary, MPF
|
34
|
|
Recent Developments in Credit
Markets
|
35
|
|
Our Credit Facilities
|
35
|
|
Western Federal Credit Union Loan
Purchase and Sale Agreement
|
37
|
i
OUR
MORTGAGE LOAN INVESTMENTS
|
37 | |
Description
|
37
|
|
Our Loan Investment
Portfolio
|
38 | |
Loan Maturities
|
39 | |
Diversification of Our Mortgage
Loan Portfolio
|
39 | |
Our Rollover Policy
|
40 | |
Nonperforming and Delinquent
Loans
|
40 | |
Delinquency Management and
Collection
|
41 | |
Our Loan Policies
|
42
|
|
Origination of Our Mortgage Loan
Investments
|
42
|
|
Our Mortgage Loan Investment
Standards
|
42
|
|
Our Risk Rating Analysis
|
44
|
|
Servicing
|
44
|
|
Our Mortgage Loan Portfolio
Management
|
44
|
|
Restrictions on Our Transactions
Involving Interested Parties
|
45
|
|
Nature of Our Investments
|
45
|
|
Our Non-Mortgage Loan
Investments
|
46
|
|
Competition
|
47
|
|
Regulation
|
47
|
|
MANAGEMENT
|
48
|
|
Code of Ethics
|
51
|
|
Audit Committee
|
51
|
|
Audit Committee Financial
Expert
|
51
|
|
Our Board of Managers
|
51
|
|
Board Committees
|
52
|
|
Manager Compensation
|
52
|
|
Indemnification of our Managers
and Officers
|
52
|
|
MANAGEMENT
COMPENSATION
|
53
|
|
DESCRIPTION
OF OUR MEMBERSHIP INTERESTS AND CHARTER DOCUMENTS
|
54
|
|
Our Authorized Membership
Interests
|
54
|
|
Our Class A Units
|
54
|
|
Our Series A Units
|
54
|
|
Our Charter Documents
|
55
|
|
OUR
OTHER INVESTOR DEBT NOTES
|
56
|
|
Class A Notes
|
56
|
|
The Alpha Class Notes
|
56
|
|
Special Offering Notes
|
56
|
|
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
|
57
|
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
59
|
|
Cautionary Notice Regarding
Forward Looking Statements
|
59
|
|
Overview
|
60
|
|
New Opportunities
|
61
|
|
Conversion to Limited Liability
Company
|
61
|
|
Consolidated Results of
Operations
|
61
|
|
Nine Months Ended September 30,
2009 vs. Nine Months Ended September 30, 2008
|
61
|
|
Year Ended December 31, 2008 vs.
Year Ended December 31, 2007
|
62
|
|
Year Ended December 31, 2007 vs.
Year Ended December 31, 2006
|
63
|
|
Net Interest Income and Net
Interest Margin
|
64
|
|
Cash and Cash Equivalents
|
68
|
|
Liquidity and Capital
Resources
|
68
|
|
Nine Months Ended September 30,
2009 vs. Nine Months Ended September 30, 2008
|
68
|
|
Year Ended December 31, 2008 vs.
Year Ended December 31, 2007
|
69
|
|
Credit Facilities
Developments
|
70
|
|
Investor Notes
|
73
|
|
Debt Covenants
|
74
|
|
Special Purpose Entity
|
75
|
|
Significant Accounting Estimates
and Critical Accounting Policies
|
75
|
|
New Accounting
Pronouncements
|
76
|
ii
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
|
77
|
|
CERTAIN
U.S. FEDERAL INCOME TAX CONSIDERATIONS
|
78
|
|
Taxation of Interest
|
79
|
|
Disposition, Redemption or
Repurchase for Cash
|
79
|
|
LEGAL
PROCEEDINGS
|
80
|
|
PLAN
OF DISTRIBUTION
|
80
|
|
Sales to IRAs
|
80
|
|
HOW
TO PURCHASE A NOTE
|
81
|
|
EXPERTS
AND COUNSEL
|
81
|
|
WHERE
YOU CAN FIND MORE INFORMATION
|
81
|
|
INDEX
TO FINANCIAL STATEMENTS
|
F-1
|
|
EXHIBIT
A - Form of Trust Indenture
|
A-1
|
|
EXHIBIT
B - Form of Fixed Series Class A Note
|
B-1
|
|
EXHIBIT
C - Form of Flex Series Class A Note
|
C-1
|
|
EXHIBIT
D - Form of Variable Series Class A Note
|
D-1
|
EXHIBIT E - |
Purchase
Application – Fixed Series Customer Form
|
PA
FIXED-CUSTOMER-1
|
Purchase
Application – Fixed Series Corporation Form
|
PA
FIXED-CORPORATION-1
|
|
Purchase
Application – Flex Series Customer Form
|
PA
FLEX-CUSTOMER-1
|
|
Purchase
Application – Flex Series Corporation Form
|
PA
FLEX-CORPORATION-1
|
|
Purchase
Application – Variable Series Customer Form
|
PA
VARIABLE-CUSTOMER-1
|
|
Purchase
Application – Variable Series Corporation Form
|
PA
VARIABLE-CORPORATION-1
|
____________________________________________
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 PROSPECTUS MAY BE DELIVERED OR OF ANY SALE OF THE
NOTES.
iii
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.
FREQUENTLY
ASKED QUESTIONS ABOUT THE NOTES
Q:
|
Where
can I find any definitions of the terms you use in this
prospectus?
|
A:
|
Unless
otherwise defined in this prospectus, or unless the context in which the
term is used requires a different meaning, certain terms used in this
prospectus, whether capitalized or used in the lower case, have the
meanings set forth in the Definitions section of the
Indenture, which is included as Exhibit A to this
prospectus.
|
Q:
|
Who
are you?
|
A:
|
We
are Ministry Partners Investment Company, LLC, a California limited
liability company. We were established in 1991 as a credit union
service organization to provide funding for secured loans to churches and
ministry organizations. Our loans are secured by churches and church
and ministry related properties.
|
Q:
|
Who
are your owners?
|
A:
|
We
are owned by our Members, who are a small number of state or federal
chartered credit unions. None of our Members owns a majority of our
membership interests.
|
Q:
|
How
would my interest rate on an investment in a Fixed Series Note be
determined?
|
A:
|
Suppose
you purchase a Fixed Series, Category Fixed 25 Note with a 24-month
maturity when the Swap Index for 24-month obligations was 2.30% and our
Fixed Spread for Category Fixed 25 is 2.05%. Then the interest rate
payable on your Category Fixed 25, Fixed Series Note would be the stated
Index plus the applicable Spread, or
4.35%.
|
Q:
|
How
would my interest rate on an investment in a Flex Series Note be
determined?
|
A:
|
Suppose
you purchase a Flex Series, Category Flex 25 Note (all Flex Series Notes
have an 84-month maturity) when the Swap Index for 48-month obligations
was 2.75% and our Flex Spread for Category Flex 25 is 2.30%. Then the
interest rate payable on your Category Flex 25, Flex Series Note would be
the stated Index plus the Applicable Spread, or 5.05%. You may elect
to reset the interest rate on a Flex Series Note, within stated limits,
once during each 12-month period following the first anniversary of its
issuance date.
|
1
Q:
|
How
would my investment in a Flex Series Note
work?
|
A:
|
Suppose
you purchase a Flex Series, Category Flex 25 Note (all Flex Notes have an
84-month maturity) at a time the Swap Index for 84-month obligations was
3.75% and our Flex Spread for Category Flex 25 is 2.30%. Then the interest
rate payable on your Category Flex 25, Flex Series Note would be the
stated Index plus the Applicable Spread, or 6.05%. Under the
Flex Note, you may elect to reset the interest rate, within stated limits,
on your Flex Note once during each 12-month period following the first
anniversary of its issuance date.
|
Q:
|
What
are the specified limits on interest rate adjustments on a Flex
Note?
|
A:
|
The
adjusted interest rate may not increase by more than 1.0% by any single
adjustment or by more than a total of 3.0% by all adjustments over the
term of the Flex Note.
|
Q:
|
What
is the Swap Index?
|
A:
|
The
Swap Index is the then current 7-day average Swap interest rate reported
by the Federal Reserve Board for Swaps having the term corresponding to
the term of the Fixed or Flex Note you
purchase.
|
Q:
|
How
would my investment in a Variable Series Note
work?
|
A:
|
If
you purchase a Variable Series Note for $78,000, you will receive a
Variable 50 Note which will bear interest at a variable rate equal to
0.40% + the Variable Index then in effect. The interest rate on your
Variable 50 Note will be adjusted monthly based on the Variable Index in
effect on each adjustment date. Your Variable 50 Note will have a maturity
of 72 months. However, we will repay all or part of your Variable 50 Note
at your request at any time after your Note has been outstanding with an
unpaid principal balance of $10,000 or
more.
|
Q:
|
What
is the Variable Index?
|
A:
|
The
Variable Index is the then current interest rate reported by the Federal
Reserve Board for 3-month LIBOR
rate.
|
Q:
|
What
is the “fixed Spread”?
|
A:
|
The
“fixed Spread” is the difference or “spread” between the applicable Index
and the interest rate we agree to pay you on the Note you purchase. The
applicable fixed Spread is different for each Series and Category of
Note.
|
2
Q:
|
Can
you change the fixed Spread on my Note after I buy
it?
|
A:
|
No,
not without your written consent.
|
Q:
|
How
often do you pay interest?
|
A:
|
We
pay interest monthly on the Notes. Unless you choose to have the interest
deferred and added to principal, you may change your Note payments from
one method to another by giving us written notice by the 21st
of the month for which you want the change to be
effective.
|
Q:
|
Can
I require you to cash in my Note before it is
due?
|
A:
|
You
can require us to prepay your Variable Series Note, subject to certain
restrictions. You cannot require us to pay a Fixed Note before it is due.
You can, after you have owned a Flex Note at least 12 months, require us
to pay up to 10% of the balance of your Flex Note during any
succeeding 12-month period. Also, in the event of an emergency, you can
otherwise request early payment of all or a portion of a Fixed Note
or Flex Note as explained in the following question and answer.
|
Q:
|
What
if I have an emergency and I need to cash in my
Note?
|
A:
|
If
you have a Fixed Note or Flex Note, you can request that we voluntarily
prepay your Note in whole or in part. We
may in our sole discretion do so, but we are not contractually obligated
to grant your request for prepayment. Our
current policy is to grant any reasonable request subject to availability
of funds. However, there is no assurance we will continue this policy in
the future. In the event we agree to prepay all or portion of your Note,
we may deduct from the amount we prepay an administrative charge of an
amount equal to 3 months’
interest.
|
Q:
|
Do
you have the right to prepay my
Note?
|
A:
|
Yes,
we can prepay or redeem any Note by giving you at least 30 days written
notice of the redemption date. On the date of redemption, we must pay you
accurate principal plus all accrued interest thereon through the
redemption date. We do not have to pay you a premium if we redeem your
note early.
|
Q:
|
What
is your obligation to pay my Note?
|
A:
|
Your
Note is equal in right to payment with our other unsecured creditors. Your
Note is unsecured and is not guaranteed by any of our Managers, members or
any other person.
|
Q:
|
Does any Series or Category of the Notes have
priority as to payment over any other Series or
Category?
|
A:
|
The
Class A Notes and our other unsecured debt obligations are equal in right
to payment of principal and interest. We sometimes refer to this
equal priority as a Note being in “pari passu” with the other Class A
Notes. We do plan to issue up to $200 million of our secured notes (which
we refer to as the “Secured Notes”) over the following two years. These
Secured Notes would be secured by our Mortgage Loans and, to the extent of
such collateral, would be superior in right to payment over the Class A
Notes and our other unsecured
debt.
|
3
Q:
|
Who
is responsible for making payments of principal and interest on the
Notes?
|
A:
|
We
act as paying agent for the Notes. We must certify to the Trustee on a
monthly basis that we are current on all payments then due on each
outstanding note.
|
Q:
|
How
will you use the cash from my investment in the
Notes?
|
A:
|
We
plan to use the proceeds from your investment
to invest in secured loans to churches and ministry organizations. These
secured loans, which we refer to as “Mortgage Loans,” may be loans secured
by deeds of trusts, Mortgage Loans or mortgage bonds. These Mortgage Loans
finance acquisition, development and/or maintenance of churches or
ministry related properties. We provide the needed funding to see
church projects to completion, whether it’s a new worship center, ministry
headquarters or additional
classrooms.
|
Q:
|
How
has the current recession affected your
business?
|
A:
|
Because
we do not invest in subprime loans, the collapse of the subprime loan
market did not directly affect our business. However, the recession that
followed continues to affect our business in a number of ways. The
collapse of the securitized assets market has prevented us from raising
additional capital as we had planned through sale of mortgaged-backed
securities. Our inability to sell bonds or other mortgage backed
securities secured by the mortgages we purchased through our warehouse
credit lines has forced us to modify and repay those loans from other
sources, primarily by selling loans to financial institutions. Also, we
are experiencing increased delinquency rates on our Mortgage Loans as the
continuing recession impacts the borrower churches and ministries, whose
financial resources are particularly impacted by unemployment rates among
their congregation and Members. We believe we are reacting positively to
these challenges and we believe we have adopted strategies which will
allow us to continue to successfully meet these challenges. However, there
is no assurance that we will continue to be able to do so or that we will
not face new or different challenges if the recession continues to
broaden.
|
Q:
|
Why
is there an Indenture?
|
A:
|
We
require you execute the Indenture in order
to:
|
|
·
|
establish
the common terms and conditions for the Notes and a means by which the
holders can act in an organized
manner;
|
|
·
|
provide
for the appointment of an independent Trustee and allow us to deal with a
single representative of the holders with respect to matters addressed in
the Indenture, including in the event of our default;
and
|
|
·
|
authorize
the Trustee to monitor our compliance with the Indenture, to give timely
notices to the holders, and to act for the holders in the event of a
default and in regard to other
matters.
|
4
As
required by U.S. federal law, the Notes are governed by the Indenture. The
Indenture constitutes an “Indenture” under the Trust and Indenture Act of
1939. An Indenture is a contract between us, you as holders and the
Trustee, who is appointed to serve under and pursuant to the
Indenture.
|
Q:
|
Do
I have to abide by the terms of the
Indenture?
|
A:
|
Yes.
Your note is issued pursuant to the terms of the Indenture and your note
is subject to its terms and
conditions.
|
Q:
|
What
is the Trust and Indenture Act of
1939?
|
A:
|
The
Trust and Indenture Act of 1939, or as we refer to it, the 1939 Act,
provides that unless exempt, Notes sold to the public in a registered
offering must be governed by a trust Indenture, as defined, and the Notes
must be registered by the issuer under the 1939 Act. The 1939 Act further
provides that the Trust Indenture must contain certain protective
provisions benefiting the debt holders. We have registered the Notes under
the 1939 Act.
|
Q:
|
Can
you modify or amend the Indenture without the consent of the
holders?
|
A:
|
Yes,
but only in limited circumstances. We may amend or modify the Indenture
with the Trustee without the consent of the holders to, among other
things, add covenants or new events of default for the protection of the
holders; evidence the assumption by a successor trustee under the
Indenture; cure any ambiguity or correct any inconsistency in the
Indenture or amend the Indenture in any other manner that we may deem
necessary or desirable and that will not adversely affect the interests of
the holders of any Series of the outstanding Notes; and establish the form
and terms of the Notes issued under the
Indenture.
|
Except
in these limited circumstances, we and the Trustee must have the consent
of the holders of not less than a majority in interest of the Notes of
each Series and Category then outstanding and affected by the
amendment.
|
Q:
|
What
promises do you make to the holders under the
Indenture?
|
A:
|
Under
the Indenture, we promise or “covenant” to do, among other things, the
following:
|
|
·
|
Make
timely interest and principal payments on the
Notes;
|
|
·
|
Maintain
a specified minimum net worth;
|
|
·
|
Not
issue certain kinds of additional debt beyond specified
limits;
|
|
·
|
Not
to pay certain dividends and other distributions to our
Members;
|
|
·
|
Not
issue unsecured debt that is senior to the Class A Notes;
and
|
·
|
Timely
make principal and interest payments on the Notes and on our other
de
|
5
Q:
|
Who
is the Trustee under the Indenture?
|
A:
|
The
Trustee is US Bank, a federally chartered trust company with fiduciary
powers in 50 states. US Bank offers comprehensive financial services,
including asset management.
|
Q:
|
What
does the Trustee do?
|
A:
|
The
Trustee has two main roles under the
Indenture:
|
|
·
|
The
Trustee performs certain administrative duties for us and you, such as
sending you notices; and
|
|
·
|
The
Trustee may, at your direction, enforce your rights, including the rights
you may have against us if we
default.
|
Q:
|
Who
pays the Trustee?
|
A:
|
Under
the Indenture, we agree to pay, and the Trustee agrees to look only to us
for payment, all of the fees, expenses and expense reimbursements payable
to the Trustee under the Indenture.
|
Q:
|
What
recourse do the holders have in the event of a
default?
|
A:
|
In
the event of a default, a majority in interest of the holders may
accelerate the Notes, i.e., declare their unpaid principal of the Notes
plus any accrued but unpaid interest thereon immediately due and payable.
They can then instruct the Trustee to take action to collect the amount
declared payable.
|
Q:
|
What
is an event of default?
|
A:
|
An
event of default is an event defined in the Indenture, which if not timely
cured, allows you to take action against us for immediate and full payment
of your note. Events of default
include:
|
|
·
|
Our
failure to timely pay interest or principal on your
note;
|
|
·
|
Our
filing of bankruptcy;
|
|
·
|
Our
breach of any of our covenants in the
Indenture.
|
6
Q:
|
Does
the Trustee have the right to waive any default on behalf of the
holders?
|
A:
|
Yes,
but only with the consent or approval of a majority in interest of each
Series and Category of note affected by the
default.
|
Q:
|
How
can the holders direct the Trustee to
act?
|
A:
|
The
holders of a majority of the outstanding principal amount of the Notes (a
majority in interest) can direct the Trustee to act on behalf of the
holders.
|
Q:
|
What
liability does the Trustee have to the
holders?
|
A:
|
The
Trustee is charged to conduct itself in a manner consistent with a
reasonably prudent person in taking actions directed by the holders.
However, the Trustee disclaims any responsibility with respect to the form
of a note or the enforceability of the Notes or the
Indenture.
|
Q:
|
What
reports are you required to provide the
Trustee?
|
A:
|
The
Indenture requires us to provide the Trustee the following
reports.
|
|
·
|
We
must provide the Trustee a list of the names and addresses of the current
owners of record of the Notes
quarterly.
|
|
·
|
We
must annually provide the Trustee with a certified statement that we have
fulfilled all of our obligations under the Indenture with respect to each
Series and Category of Notes for the preceding
year.
|
|
·
|
We
are required to provide the Trustee with a copy of each report we send to
the holders.
|
|
·
|
We
are required to provide the Trustee with a copy of each current quarterly
and annual report we file with the SEC under the 1934
Act.
|
[Remainder of page intentionally left blank.]
7
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
“Frequently Asked Questions About The Notes” section immediately preceding this
summary. 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 the financial
statements and Notes to the financial statements starting at page FS-1 of this
prospectus in their entirety before making an investment decision.
About
Our Company
We are a
California limited liability company. Our principal executive offices are
located at 915 West Imperial Highway, Suite 120, Brea, California, 92821 and our
telephone number is 800-753-6742. Our website is located at www.ministrypartners.org.
The information on our website is not part of this prospectus.
We are in
the business of making and investing in loans made to evangelical Christian
churches, ministries and related organizations. Our loan investments are
generally secured by a first lien on church properties and/or ministry related
properties. We use the proceeds from the sale of the Notes and our other
borrowings to fund our Mortgage Loan investments. We may, from time to time, use
proceeds from the sale of the Notes to repay outstanding Notes and/or other
borrowings. We refer to the Notes and other Notes we sell to investors as our
debt securities.
The
Offering
|
This
offering is for a total of $100,000,000 of our Class A Notes which may be
purchased in one or more of the following
Series:
|
·
|
Fixed
Series, which pay interest at a fixed rate depending on the Category and
maturity of Fixed Series Note
purchased.
|
·
|
Flex
Series, which will pay interest at a fixed rate depending on the Category
and maturity of Flex Series Note purchased. As a Flex Note holder, you
have a one-time option to reset the interest rate to the current rate
offered during each 12-month period following the first anniversary of the
date you purchased the Flex Note.
|
·
|
Variable
Series, which pay at a variable rate of interest adjusted monthly
depending on the Category
purchased.
|
At February 28, 2010, we had cumulatively sold approximately $76.4 million of the $200 million of Class A Notes authorized under the Indenture and we had approximately $49.3 million Notes outstanding. The difference between this amount and the cumulative total sold to date represents Notes which have been paid. With this offering, we propose to sell up to an additional $100 million of the approximately $120 million remaining Notes available for sale under the Indenture. | |
The
Fixed Series Notes
|
The
Fixed Series Notes are offered in the following six Categories with each
requiring the specified minimum purchase. The Fixed Series Notes are
offered with a term (or maturity) of 12, 18, 24, 30, 36, 42, 48, 54, or 60
months.
|
The
Fixed Notes pay a fixed rate of interest equal to the sum of the Swap
Index plus the amount of the Fixed Spread for its respective Category as
set forth below.
|
8
Fixed
Spread
|
||||||||
Fixed
Series
Note
Category
|
Required
Minimum
Purchase
|
12
Month
|
18
Month
|
24
Month
|
30
Month
|
36
Month
|
||
Category
Fixed 1
|
$1,000
|
1.70%
|
1.85%
|
1.95%
|
2.00%
|
2.05%
|
||
Category
Fixed 5
|
$5,000
|
1.75%
|
1.90%
|
2.00%
|
2.05%
|
2.10%
|
||
Category
Fixed 10
|
$10,000
|
1.80%
|
1.95%
|
2.05%
|
2.10%
|
2.15%
|
||
Category
Fixed 25
|
$25,000
|
1.85%
|
2.00%
|
2.10%
|
2.15%
|
2.20%
|
||
Category
Fixed 50
|
$50,000
|
1.90%
|
2.05%
|
2.15%
|
2.20%
|
2.25%
|
||
Category
Fixed 100
|
$100,000
|
1.95%
|
2.10%
|
2.20%
|
2.25%
|
2.30%
|
Fixed
Spread
|
|||||||
Fixed
Series
Note
Category
|
Required
Minimum
Purchase
|
42
Month
|
48
Month
|
54
Month
|
60
Month
|
||
Category
Fixed 1
|
$1,000
|
2.10%
|
2.15%
|
2.20%
|
2.25%
|
||
Category
Fixed 5
|
$5,000
|
2.15%
|
2.20%
|
2.25%
|
2.30%
|
||
Category
Fixed 10
|
$10,000
|
2.20%
|
2.25%
|
2.30%
|
2.35%
|
||
Category
Fixed 25
|
$25,000
|
2.25%
|
2.30%
|
2.35%
|
2.40%
|
||
Category
Fixed 50
|
$50,000
|
2.30%
|
2.35%
|
2.40%
|
2.45%
|
||
Category
Fixed 100
|
$100,000
|
2.35%
|
2.40%
|
2.45%
|
2.50%
|
The
Flex Series Notes
|
The
Flex Series Notes are offered in four Categories, each requiring a
specified minimum purchase. All Flex Series Notes have a maturity of 84
months. However, upon your request at any time after the first anniversary
date of your Note, we will prepay up to 10% of your Note once during any 12-month period. This right is not
cumulative.
|
The
Flex Notes pay a fixed rate of interest equal to the sum of the Swap Index
plus the amount of the Flex Spread for the respective Category as set
forth below.
|
Flex
Series
Note
Category
|
Required
Minimum Purchase
|
Flex
Spread
|
||||||
Category
Flex 25
|
$
|
25,000
|
2.30%
|
|||||
Category
Flex 50
|
$
|
50,000
|
2.35%
|
|||||
Category
Flex 100
|
$
|
100,000
|
2.40%
|
|||||
Category
Flex 250
|
$
|
250,000
|
2.45%
|
Flex
Series Notes offer the investor an option to reset the interest rate on
the Note upon request once during each 12-month period following the first
anniversary of the date of purchase to the currently offered rate on Flex
Series Notes, with certain limitations. However, the interest rate may not
increase by more than 1.0% by any single adjustment or by more than a
total of 3.0% over the term of the Flex
Note.
|
The
Variable Series Notes
|
The
Variable Series Notes are offered in five Categories, each requiring a
specified minimum purchase. All Variable Series Notes have a maturity of
72 months. However, we will, upon your request, prepay your Note without
penalty, in whole or in part, provided your Note has had an unpaid
principal balance of at least $10,000 during the preceding 90
days.
|
The
Variable Series Notes pay interest which is adjusted monthly to the sum of
the Variable Index in effect on the adjustment date, plus the amount of
the Variable Spread for the respective Category as set forth
below.
|
9
Variable
Series
Note
Category
|
Required
Minimum Purchase
|
Variable
Spread
|
||||||
Category
Variable 10
|
$
|
10,000
|
1.50%
|
|||||
Category
Variable 25
|
$
|
25,000
|
1.55%
|
|||||
Category
Variable 50
|
$
|
50,000
|
1.60%
|
|||||
Category
Variable 100
|
$
|
100,000
|
1.70%
|
|||||
Category
Variable 250
|
$
|
250,000
|
1.80%
|
The
Indexes
|
The
interest rates we pay in the Fixed Series Notes and the Flex Series Notes
are determined in reference to the Swap Index in effect on the date they
are issued, or in the case of the Flex Series Notes, on the date the
interest rate is reset. 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. As described under “Description of the
Notes – The Indexes,” the Swap Index is determined by the weekly average
Swap rate reported by the Federal Reserve Board, who we refer to as the
“Fed”. The Variable Index is equal to the 3-month libor rate. The 3-month
libor rate is the London Interbank Offered Rate (“LIBOR”) interest rate
for three-month obligations.
|
Note
Terms in General
|
Certain
common terms of the Class A Notes are summarized below:
|
Manner
of Interest Payments
|
You
may choose to have interest paid on your Note monthly, quarterly,
semi-annually or annually. Unless you select the reinvestment option or
other payment option, interest is payable on all Notes in arrears,
monthly. The interest rate paid for a partial month is adjusted according
to the number of days the Note was outstanding. You may change the way
interest is paid on your Note by written notice to us.
|
Your
Interest
Reinvestment
Option
|
At
any time, you can direct us to retain all interest payable on your Note
and pay you interest on such interest at the same rate payable on the
principal of the Note. This allows you to earn interest on your
interest (i.e., you earn compound interest).
|
Rank
of the Notes
|
Our
payment of the Class A Notes is not secured or guaranteed. The Notes are
generally equal in priority of right to payment with our other existing
and future unsecured debt obligations.
|
You
May Request
Prepayment
|
You
may request at any time that we prepay all or any portion of any Series of
Note you hold prior to its maturity. We may grant the request in our sole
discretion. If granted, we will pay the unpaid balance of the Note, less
an administrative charge not exceeding 3 months’ interest payable on the
Note.
|
Our
Right to Prepay Notes
|
We
reserve the right to prepay a Note at our election at any time upon not
less than 30 days nor more than 60 days’ prior written
notice.
|
Indenture
|
We
issue the Notes under the Trust Indenture between us and U.S. Bank
National Association (“US Bank”), whom we refer to as the Trustee. We
refer to this agreement as the “Indenture.” The Notes are part of up to
$200 million of Class A Notes we may issue pursuant to the
Indenture.
|
10
Protective
Promises
|
Under
the Indenture, we agree that we will:
|
·
maintain a tangible adjusted net worth of at least $4.0
million;
· not
incur additional Indebtedness, as defined, unless our resulting fixed
charge coverage ratio remains at least 1.20 to 1.0;
· limit
our other Indebtedness, as defined, to not more than $20.0
million;
· not
enter into certain transactions with our Affiliates;
· not
consummate certain consolidations, mergers or sales of our assets, unless
we are the entity surviving the transaction or the entity surviving the
transaction assumes our obligations under the Notes; and
· not
make distributions to our Members except under specified
conditions.
|
|
Events
of Default
|
If
an event of default occurs, the Trustee, acting on the direction of a
majority in interest of the holders, will accelerate payment of the Notes
in full. An event of default includes the following:
|
· our
failure to make a required payment on a Note within 30 days after it is
due;
|
|
· our
failure to observe or perform any of the covenants or agreements under the
Notes or the Indenture, unless cured in a timely manner;
or
|
|
· our
uncured default under the terms of any of our other indebtedness, which
default is caused by our failure to pay principal or interest or results
in the acceleration of payment of such indebtedness in the aggregate
amount of $250,000 or more.
|
|
Our
Other Debt
Securities
|
Since
our inception, we have issued various debt securities to investors. At
September 30, 2009, we had outstanding $43.3 million of unsecured Class A
Notes and $15.7 million of unsecured Alpha Class Notes, both of which
classes of Notes were issued in public offerings. We also have outstanding
approximately $8.7 million of other debt securities issued in private
placements. None of these debt securities are secured
and they are pari passu with the Class A Notes in right of payment. We
intend to issue up to $200 million of Secured Notes to investors in 2010
and 2011 which will have a superior right to our other debt obligations,
including the Class A Notes, to payment from the collateral we pledge to
secure their payment.
|
Our
Secured
Credit
Facilities
|
We
have three credit facilities. Two are with Members United Corporate
Federal Credit Union, whom we refer to as “Members United.” One is a $10
million line of credit, which we refer to as the “$10 Million LOC,” and
the other is for $100 million, which we refer to as the “$100 Million CUSO
Line.” Our third is a $28 million loan from Western Corporate Federal
Credit Union. We refer to this lender as “WesCorp” and to this loan as the
“WesCorp Loan”. Each of these credit facilities are secured by designated
Mortgage Loans.
|
Use
of Proceeds
|
After
payment of the costs of this offering, we intend to use the proceeds to
purchase additional mortgage investments. We may also use these proceeds
to pay interest and principal due on our currently outstanding Notes as
payment becomes due.
|
Terms
of the Offering
|
We
will directly receive the proceeds from this offering, and we will use the
offering proceeds as described under “Use of Proceeds.” This offering is
self-underwritten, which means that we are offering and selling the Notes
directly. In the future, we may, in our discretion, engage one or more
broker-dealers to act as our sales agents to solicit the sale of the Notes
in one or more states. We may pay these agents commissions and cost
reimbursements which will not exceed 2.0% of the amount of the Notes they
place.
|
11
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.
If
any of the following risks occur, our business, operations or financial
condition could be materially harmed. As a result, our ability to repay your
Note could be impaired and you could lose all of your investment.
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 an owner of a Note, or noteholder, you will
have no greater right to payment than that of our other general creditors. At
December 31, 2008, we had $260.9 million of total outstanding debt obligations,
of which approximately 46%, 40% and 10% of the principal amount of this debt is
due and payable in the years 2009, 2010 and 2011, respectively.
OUR SECURED DEBT REQUIRES US TO MAINTAIN EXCESS COLLATERAL, WHICH
POTENTIALLY DECREASES OUR ASSETS AVAILABLE TO PAY THE NOTES AND OUR OTHER
UNSECURED DEBT. Our current Credit Facilities and our proposed Secured Notes
each require that we secure their payment with Mortgage Loans having an unpaid
balance exceeding the unpaid balance of the loan. This excess
collateral may not be available to pay the Notes or our other
unsecured creditors. This is because there is no assurance that the then
current realizable value of the Mortgage Loans constituting this collateral will
not be less than the then unpaid balance. Also, in the event of a default under
these secured loans, the respective lender has the
right to foreclose on its collateral pursuant to the respective credit facility
agreement and applicable commercial law. Because these laws generally do
not require that the collateral securing these loans will be sold or otherwise
liquidated for an amount equal to its then fair market value, these creditors
could seize some or all of the excess collateral we pledged to secure their
obligation. Thus, our assets remaining after foreclosure on these credit
facilities may not be sufficient to repay debt owed to our other creditors,
including the holders.
IN THE
EVENT OF OUR DEFAULT UNDER OUR SECURED CREDIT FACILITIES, WE COULD LOSE ASSETS
IN EXCESS OF OUR ASSETS PLEDGED AS COLLATERAL. In the event of a default under
our Members United credit lines and our WesCorp Loan, the respective lender has
the right to foreclose on its collateral pursuant to the respective credit
facility agreement and applicable commercial law. These laws do not
require, and the permissible foreclosure procedures do not assure, that the
collateral securing these loans will be sold or otherwise liquidated for an
amount equal to its fair market value. Thus, in the event of foreclosure, there
is no assurance the lender will realize proceeds from the collateral sufficient
to repay the debt we owe. Moreover, because these credit facilities are
recourse against the borrower, the respective lender generally has the right to
pursue the borrower for any deficiency between the amount the borrower owes on
the defaulted loan and the value the lender realizes from its liquidation of the
collateral for the loan. Thus, our assets remaining after a foreclosure by
a lender under our credit facilities may not be sufficient to repay our other
debt, including the Class A Notes.
RECENT
ECONOMIC DEVELOPMENTS MAY ADVERSELY AFFECT OUR ABILITY TO REPAY THE NOTES.
The United States is in the midst of a severe economic downturn that has
and may continue to affect liquidity in the credit markets and liquidity
and prices in the real estate markets. Rising unemployment results in
declines in real estate values and affects the ability of many of our
mortgage obligors to maintain contributions upon which they depend to make
Mortgage Loan payments. If the economic downturn worsens or continues for
an extended period of time, delinquency and losses on Mortgage Loans could
increase which could result in losses on the Notes.
THE
GEOGRAPHIC CONCENTRATION OF THE COLLATERAL MAY INCREASE YOUR RISK OF LOSS.
Economic conditions in various states will likely affect the rate of
delinquency and possible losses on individual mortgages or loans
comprising the collateral. Changes or fluctuations in these local economic
conditions may affect the ability of a mortgage obligor to make timely
payments on its mortgage obligation. These conditions include
unemployment; real property values; liquidity of local loan and real
property markets; inflation rates; consumer spending and perceptions of
existing and future economic conditions; and effects of national
catastrophes, such as hurricanes, floods and earthquakes.
TO
THE EXTENT WE SELL OUR SECURED NOTES, THEY WILL BE SENIOR TO THE NOTES
WITH RESPECT TO THE MORTGAGE LOANS WE PLEDGE TO SECURE THEM. We propose to
offer for sale up to $200 million of our Secured Notes over the next two
years, subject to our registration of these notes under federal and
applicable state securities laws. Our Secured Notes will be secured by our
Mortgage Loans having an unpaid principal balance equal to 102% of the
face amount of the Secured Notes sold. As our secured creditors, the
holders of our Secured Notes will have prior right to payment over our
Class A Notes and other debt securities from the Mortgage Loans we pledge
to secure their payment. Accordingly, the amount of our assets available
for payment of the Class A Notes and our other unsecured indebtedness will
be reduced to the extent we pledge Mortgage Loans to secure payment of the
Secured Notes. Also, to the extent the amount of collateral for the
Secured Notes exceeds the face amount of the Secured Notes, the amount of
our assets available for payment of the Class A Notes and our other
unsecured indebtedness will be disproportionately
reduced.
|
12
THE TRUSTEE MAY RESIGN IN THE EVENT WE ARE IN
DEFAULT OF THE NOTES. U.S. Bank National Association, Trustee under the
Indenture for the Class A Notes, will also serve as trustee under the indenture
for the Secured Notes. In the event we default under either the Notes or the
Secured Notes, we will, by definition under the respective indenture, be in
default of both the Notes and the Secured Notes. Our default would result in a
conflict of interest for the Trustee because of its service as trustee under
both indentures. In such event, U.S. Bank National Association may resign as
Trustee under the Indenture, 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’ abilities to pursue one or more remedies as a result of our
default.
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 a default or breach by us, under the
Indenture you could seek remedies against us only through the Trustee appointed
under the Indenture. The Indenture requires holders owning only a majority of
the unpaid principal amount of the Notes then outstanding, to take certain acts
on behalf of all of the holders. We refer to this vote as a majority vote of the
holders. Actions approved or authorized by a majority vote which will bind all
holders include the election and removal of the Trustee, adopting certain
amendments and supplements to the Indenture and the Notes, and waiving certain
defaults, events of default or breaches by us under the Indenture. Moreover, the
Indenture contains cross-default provisions whereby our default on one Series of
our Note obligations will constitute a default with respect to each other Series
of Notes outstanding. 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 all of our outstanding
Notes, such holders may not be able to obtain the required majority vote to
appoint a Trustee and proceed under the Indenture. In such event, you may have
no practical recourse against us. See the description of the Indenture under
“The Indenture” below.
BY
EXECUTING YOUR PURCHASE APPLICATION, YOU AGREE TO BE BOUND BY THE TERMS AND
CONDITIONS OF THE INDENTURE. YOU SHOULD CAREFULLY REVIEW THE INDENTURE 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 EARLY REDEMPTION 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 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.
YOU WILL
NOT BE ABLE TO RELY ON THE REVIEW OF AN INDEPENDENT UNDERWRITER. IN GENERAL, WE
ARE NOT MAKING THIS OFFERING THROUGH AN INDEPENDENT UNDERWRITER. When an
offering is made through an underwriter, that firm generally takes the
responsibility of reviewing and approving the offering in accordance with its
professional standards and due diligence procedures. Because we are selling the
Notes directly through our officers and employees, you will not be able to rely
on an independent underwriter’s review of the offering.
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. US 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.
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UNDER
CERTAIN CIRCUMSTANCES, A MAJORITY VOTE OF THE HOLDERS MAY AMEND OR SUPPLEMENT
YOUR NOTE OR THE INDENTURE WITHOUT YOUR CONSENT. Also, by a majority vote, the
holders may approve the waiver of any default, event of default or breach of a
covenant or other condition under the Note. Moreover, the Trustee has the power
under the Indenture to compromise or settle any claims against us by the holders
and, if such compromise or settlement is approved by a majority vote of the
holders, the settlement or compromise would be binding on all holders. IN ANY OF
THESE EVENTS, YOU MAY BE WITHOUT PRACTICAL RECOURSE AGAINST US.
WE MAY
NOT BE ABLE TO MAINTAIN OUR PROMISED MINIMUM TANGIBLE ADJUSTED NET WORTH OF $4.0
MILLION UNDER CERTAIN CIRCUMSTANCES. In the Indenture, we promise to maintain
minimum tangible adjusted net worth, as defined in the Indenture, of at least
$4.0 million.
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.
THERE
WILL BE NO PUBLIC MARKET FOR YOUR NOTES 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 for 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’ 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.
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. Also, in general, the price in terms of
our Notes has not been reviewed by an independent underwriter. Therefore, there
is no assurance that the yield you will receive from your Note is not lower than
that which could be obtained from similar investments from other
issuers.
WE MAY
APPLY THE PROCEEDS FROM THIS OFFERING TO REPAY EXISTING INDEBTEDNESS WHICH WILL
NOT INCREASE OUR MORTGAGE LOAN INVESTMENT PORTFOLIO. We may from time to time
apply all or a substantial amount of the proceeds from the sale of the Notes to
the repayment of interest and/or principal on our credit facilities and/or our
previously issued debt securities. We will generally choose to use our available
cash funds, which may include proceeds from the sale of the Notes, for these
purposes, rather than liquidate our short-term investments or Mortgage Loan
investments for these purposes.
Risks
Related to the Financial Services Industry and Financial Markets
CONTINUANCE
OF CURRENT ECONOMIC CONDITIONS COULD FURTHER HARM OUR FINANCIAL CONDITION,
INCOME AND ABILITY TO MAKE DISTRIBUTIONS TO OUR EQUITY HOLDERS. Beginning in
mid-2007 and continuing through the date of this prospectus, the financial
system in the United States, including credit markets and markets for real
estate and real estate-related assets, has been subject to unprecedented
turmoil. This turmoil has resulted in severe limitations on the availability of
credit, significant declines in the value of real estate and real estate related
assets, impairment of the ability of many borrowers to repay their obligations
and illiquidity in the markets for real estate and real estate-related assets.
These events have had significant adverse effects on our business including
significant increases in our provision for loan losses and the unavailability of
financing for our acquisition and warehousing of Mortgage Loan investments.
Continuation of current economic conditions could further harm our financial
condition, income and ability to make distributions to our equity
investors.
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DETERIORATION
OF MARKET CONDITIONS WILL LIKELY CONTINUE TO 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:
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interest
rates and credit spreads;
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the
availability of credit, including the price, terms and conditions under
which it can be obtained;
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loan
values relative to the value of the underlying real estate
assets;
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default
rates on special purpose Mortgage Loans for churches and ministries and
the amount of the related losses;
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the
actual and perceived state of the real estate markets for church
properties and special use facilities;
and
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unemployment
rates.
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Changes
in these factors are difficult to predict, and a change in one factor can affect
other factors. For example, continuing from 2007, increased default rates in the
subprime mortgage market have played a role in causing credit spreads to widen,
reducing availability of credit on favorable terms, reducing liquidity and price
transparency of real estate-related assets, resulting in difficulty in obtaining
accurate mark-to-market valuations, and causing a negative perception of the
state of the real estate markets generally. These conditions worsened during
2008 as a result of the ongoing global credit and liquidity crisis. Although some easing of these conditions has taken place over the
last half of 2009, they continue to have a significantly negative impact on our
ability to obtain capital at attractive borrowing rates. We do not
currently know the full extent to which this market disruption will affect us or
the markets in which we operate, and we are unable to predict its length or
ultimate severity. If the challenging conditions continue, we may experience
further tightening of liquidity, additional impairment charges as well as
additional challenges in raising capital and obtaining investment or other
financing on attractive terms or at all. In addition, if current market
conditions continue or deteriorate and we are unable to restructure our
short-term borrowing facilities, we could experience a rapid, significant
deterioration of our liquidity, business, results of operations and financial
condition.
A
PROLONGED ECONOMIC SLOWDOWN, A LENGTHY OR SEVERE RECESSION, OR DECLINING REAL
ESTATE VALUES COULD HARM OUR OPERATIONS. We believe the risks associated with
our business are more severe during periods similar to those we are currently
experiencing in which an economic slowdown or recession is accompanied by
declining real estate values. Declining real estate values generally reduce the
level of new Mortgage Loan originations, since borrowers often use increases in
the value of their existing properties to support the purchase of, or investment
in, or renovation of their worship facilities. Borrowers may also be less able
to pay principal and interest on our loans, and the loans underlying our
securities, if the real estate economy weakens. Further, declining real estate
values significantly increase the likelihood that we will incur losses on our
loans in the event of default because the value of our collateral may be
insufficient to cover our investment in such loans. 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, floating rate
debt obligations and interest rate hedges. Changes in interest rates, including
changes in expected interest rates or “yield curves,” affect our business in a
number of ways. Changes in the general level of interest rates can affect our
net interest income, which is the difference between the interest income we earn
on our interest-earning assets and the interest expense we incur in connection
with our interest-bearing liabilities and hedges. 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.
15
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.
Risks
Related to Our Business
OUR
GROWTH IS DEPENDENT ON LEVERAGE, WHICH MAY CREATE OTHER RISKS. Our success is
dependent, in part, upon our ability to grow our balance sheet assets through
leverage. Our organizational and governing documents do not limit the amount of
indebtedness which we may incur. Our Managers have overall responsibility for
our financing strategy. Member approval is not required for changes to 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. There can be no assurance that we will be able to meet
our debt service obligations and, to the extent that we cannot, we risk the loss
of some or all of our assets, or a financial loss if we are required to
liquidate assets at a commercially inopportune time. At September 30, 2009,
we had $202.6 million of total outstanding debt obligations, of which
approximately 63%, 13% and 14% of the principal amount of this debt is due and
payable in the years 2009, 2010 and 2011, respectively.
OUR
ABILITY TO OBTAIN ADDITIONAL LIQUIDITY AND CAPITAL RESOURCES HAS BEEN, AND MAY
CONTINUE TO BE, ADVERSELY AFFECTED BY THE GLOBAL RECESSIONARY ECONOMIC
CONDITIONS AND ADVERSE DEVELOPMENTS IN THE CAPITAL MARKETS. Our business
requires a substantial amount of liquidity to fund investments, to pay expenses,
to increase our total Mortgage Loan investments, make interest payments to our
note investors, and to acquire and hold assets. Developments in the capital
markets have substantially reduced the debt and equity capital available to us
and have adversely affected our ability to raise additional funds for
investment. We have been unable to consummate such securities transactions under
prevailing credit market and economic conditions.
SIGNIFICANT
OVER COLLATERALIZATION OF WESCORP LOAN MAY AFFECT OUR ABILITY TO
ISSUE ADDITIONAL DEBT SECURITIES AND/OR PAY OUR UNSECURED OBLIGATIONS.
We have currently pledged approximately $ 59.2 million of our mortgage loans to secure our $28
million WesCorp Loan, an initial collateralization-to-debt ratio of
approximately 211% . While the principal amount of
this collateral will decrease as we receive amortized payments on these Mortgage
Loans, the principal balance owed on this collateral will remain significantly
higher than the balance we owe on the loan it secures. Also, the lender is not
required to release a proportionate amount of the excess collateral upon our
partial prepayment of the loan. The lender will retain all of the excess
collateral until the loan is repaid in full. We will not have this excess
collateral available to pay our other obligations, including the Notes, until we
repay the WesCorp Loan.
The
failure to secure financing on acceptable terms or in sufficient amounts may
reduce our income by limiting our ability to originate loans and acquire
Mortgage Loan investments and reduce our interest income and increase our
financing expense. A reduction in our net income could impair our liquidity and
our ability to make distributions to our investors. We cannot assure you that
any, or sufficient, funding or capital will be available to us in the future on
terms that are acceptable to us.
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WE MAY
NOT BE ABLE TO FINANCE OUR INVESTMENTS ON A LONG-TERM BASIS ON ATTRACTIVE TERMS,
INCLUDING BY MEANS OF SECURITIZATION, WHICH MAY REQUIRE US TO SEEK MORE COSTLY
FINANCING FOR OUR INVESTMENTS OR TO LIQUIDATE ASSETS. When we finance our
purchase and warehousing of Mortgage Loans, we plan to do so with short-term
loans under our credit facilities with a view to resell them pursuant to
securitized debt transactions. Under this strategy, we bear the risk of being
unable to complete such transactions or otherwise finance them on a long-term
basis at attractive prices or in a timely matter, or at all. If it is not
possible or is economically unfeasible for us to complete such transactions or
otherwise finance such assets on a long-term basis, we may be unable to pay down
our short-term credit facilities, or be required to liquidate the assets at a
loss in order to do so. For example, as a result of the continued deterioration
in the credit markets beginning in 2007, financing investments with
securitizations or other long-term non-recourse financing not subject to margin
requirements has not been available or economical for the past year, and we do
not expect it to be possible or economical to complete a securitization
financing transaction for the foreseeable future. These conditions make it
highly likely that we will have to use less efficient forms of financing for any
new investments, which will result in fewer loan acquisitions or originations of
profitable mortgages and thereby reduce the amount of our earnings available for
distribution to our equity investors and funds available for operations and
investments.
ALTHOUGH
WE SEEK TO FAVORABLY MATCH THE INTEREST RATE RETURN ON OUR MORTGAGE LOAN
INVESTMENTS WITH OUR DEBT FINANCING COMMITMENTS, WE ARE SUBJECT TO SIGNIFICANT
INTEREST RATE RISK. Our investment and business strategy depends on our ability
to successfully finance our investments in Mortgage Loans that provide a
positive spread as compared to our cost of borrowing. A substantial portion of
our loan investments provide for a fixed interest rate with a typical five year
maturity. Most of our borrowing arrangements with our note investors and credit
facility lenders, however, provide for variable rates of interest that are
indexed to short-term borrowing rates. To mitigate our interest rate risks, we
have entered into, and may enter into in the future, interest rate hedging
transactions that include, but are not limited to, interest rate caps and
interest rate swaps. The results of using these types of instruments
to mitigate interest rate risks are not guaranteed, and as a result, the
volatility of interest rates could result in reduced earnings or losses for us
and negatively affect our ability to make distributions of earnings to our
equity investors.
OUR
FINANCING ARRANGEMENTS CONTAIN COVENANTS THAT RESTRICT OUR OPERATIONS, AND COULD
INHIBIT OUR ABILITY TO GROW OUR BUSINESS. Our financing arrangements contain
various restrictions and covenants. Our failure to satisfy any of these
covenants could result in an event of default under these agreements. These
restrictions may interfere with our ability to obtain financing or to engage in
other business activities. 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 payments to our
creditors.
DEFAULT
UNDER ONE CREDIT FACILITY WILL RESULT IN A DEFAULT UNDER OUR OTHER CREDIT
FACILITIES. Our various 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,
our default under one of our credit facilities would also constitute our default
under our other credit facilities, and generally under our debt securities,
including the Notes. Thus, to maintain these credit facilities, there cannot be
a default under either one.
WE ENGAGE
IN TRANSACTIONS WITH RELATED PARTIES AND OUR POLICIES AND PROCEDURES REGARDING
THESE TRANSACTIONS MAY BE INSUFFICIENT TO ADDRESS ANY CONFLICTS OF INTEREST THAT
MAY ARISE. Under our code of business conduct, we have established procedures
regarding the review, approval and ratification of transactions which may give
rise to a conflict of interest between us and any employee, officer, Trustee,
their immediate family Members, other businesses under their control and other
related persons. In the ordinary course of our business operations, we have
ongoing relationships and have engaged in transactions with several related
entities. These procedures may not be sufficient to address any conflicts of
interest that may arise.
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OUR
RESERVES FOR LOAN LOSSES MAY PROVE INADEQUATE, WHICH COULD HAVE A MATERIAL
ADVERSE EFFECT ON US. We maintain and regularly evaluate financial reserves to
protect against potential future losses. Our reserves reflect management’s
judgment of the probability and severity of losses. We cannot be certain that
our judgment will prove to be correct and that reserves will be adequate over
time to protect against potential future losses because of unanticipated adverse
changes in the economy or events adversely affecting specific assets, borrowers,
industries in which our borrowers operate or markets in which our borrowers or
their properties are located. If our reserves for credit losses prove inadequate
we could suffer losses which would have a material adverse affect on our
financial performance, the market prices of our securities and our ability to
pay dividends.
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 will 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.
WE ARE
SUBJECT TO THE RISKS ASSOCIATED WITH LOAN PARTICIPATIONS, SUCH AS LESS THAN FULL
CONTROL RIGHTS. Some of our assets are participation interests in loans or
co-lender arrangements in which we share the rights, obligations and benefits of
the loan with other lenders. We may need the consent of these parties to
exercise our rights under such loans, including rights with respect to amendment
of loan documentation, enforcement proceedings in the event of default and the
institution of, and control over, foreclosure proceedings. Similarly, a majority
of the participants may be able to take actions to which we object but to which
we will be bound if our participation interest represents a minority interest.
We may be adversely affected by this lack of full control.
CHURCH
REVENUES FLUCTUATE AND MAY SUBSTANTIALLY DECREASE DURING TIMES OF ECONOMIC
HARDSHIP. Generally, to pay their loans, churches depend largely on revenues
from church member contributions. Donations typically fluctuate over time for a
number of reasons, including, but not limited to, fluctuations in church
membership, local economic conditions including unemployment rates and local
real estate and market and credit conditions.
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.
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BECAUSE
WE SHARE SOME COMMON MANAGERS AND OFFICERS WITH ECCU, OUR MANAGEMENT HAS
CONFLICTS OF INTEREST WITH THE INTERESTS OF ECCU. Our Chairman and Chief
Executive Officer is a full time employee of ECCU. Two of our other Managers are
also employees of ECCU and another Manager is a director of ECCU. Conflicts of
interest are inherent in Mortgage Loan transactions between ourselves and ECCU
and its affiliates. Because of these multiple relationships, these persons will
face conflicts of interest in connection with various decisions they will make
on our behalf, including, but not limited to:
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decisions
as to which Mortgage Loans ECCU will make available to
us;
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decisions
as to the price and terms of Mortgage Loans ECCU offers to
us;
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determinations
as to the creditworthiness of borrowers of Mortgage Loans ECCU offers to
us;
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decisions
to acquire Mortgage Loan investments from or through
ECCU;
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decisions
regarding our contract with ECCU for our office facilities and
administrative services; and
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decisions
regarding our contracts with ECCU for loan underwriting, processing and
servicing services.
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We have
also implemented a Related Parties Transaction Policy, to which all of our
Managers and officers must adhere. It provides, among other things, that certain
related party transactions be approved by a majority of those Managers who are
unrelated to the parties in the transaction.
We have
further mitigated these conflicts of interest by forming a Credit Review
Committee, three out the four Members of which consist of our officers who are
unrelated to ECCU. This committee makes most of the loan approval decisions
under our Church and Ministry Loan Policy. Our Church and Ministry Loan Policy
sets forth minimum credit quality standards for the loans we make or purchase,
and can only be overridden, depending on the circumstances, by our Investment
Committee or by our Board of Managers.
ANY
HEDGING TRANSACTIONS THAT WE ENTER INTO MAY LIMIT OUR GAINS OR RESULT IN LOSSES.
We use derivatives to hedge a portion of our interest rate exposure, and this
approach has certain risks, including the risk that losses on a hedge position
will reduce the cash available for distribution to our equity investors and that
such losses may exceed the amount invested in such instruments. We have adopted
a general policy with respect to the use of derivatives, which generally allows
us to use derivatives where appropriate, but does not set forth specific
policies and procedures or require that we hedge any specific amount of risk.
From time to time, we use derivative instruments in our risk management strategy
to limit the effects of changes in interest rates on our Mortgage Loan
investments. A hedge may not be effective in eliminating all of the risks
inherent in any particular position. Our profitability may be adversely affected
during any period as a result of the use of derivatives.
BECAUSE
WE INVEST ONLY IN SPECIALIZED PURPOSE MORTGAGE LOANS, OUR LOAN PORTFOLIO IS
GENERALLY MORE RISKY THAN IF IT WERE DIVERSIFIED. We are among a limited number
of institutions specialized in providing loans to evangelical churches and
church organizations. Even though the number of institutions making and/or
investing in Mortgage Loans to churches and church related organizations has
increased in recent years, these loans are secured by specialized properties and
the secondary market for these loans remains regional and limited. Our Mortgage
Loan agreements require the borrower to adequately insure the property securing
the loan against liability and casualty loss. However, certain types of losses,
generally those of a catastrophic nature such as earthquakes, floods or storms,
and losses due to civil disobedience, are either uninsurable or are not
economically insurable. If a property was destroyed by an uninsured loss, we
could suffer loss of all or a substantial part of our Mortgage Loan
investment. Moreover, a majority of our loans are to California
borrowers or are secured by properties located in California, a market that has
been negatively impacted by the collapse of the residential real estate market
and decrease in real estate prices.
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OUR LOAN
PORTFOLIO IS CONCENTRATED GEOGRAPHICALLY AND FOCUSED ON LOANS TO CHURCHES AND
RELIGIOUS ORGANIZATIONS. We are among a limited number of institutions
specialized in providing loans to evangelical churches and church organizations.
Moreover, the majority of our loans are secured by mortgage
properties located in states of California, Colorado, Illinois and Texas, states
which to varying degrees have been negatively impacted by the depressed real
estate market and resulting decrease in real estate prices. Even though
the number of institutions making and/or investing in Mortgage Loans to churches
and church related organizations has increased in recent years, these loans are
secured by special purpose facilities. As a result, if the properties securing
such mortgages must be sold, there may be a limited number of buyers available
for such properties. Nevertheless, we believe that there is a great deal of
diversity in the types of not-for-profit organizations and entities that could
be potential acquirers of properties of this nature, including, but not limited
to, other churches, schools, clinics, community development agencies,
universities and educational institutions, day care, social services, assisted
living facilities and relief organizations.
WE MAY
NEED, FROM TIME TO TIME, TO SELL OR HYPOTHECATE OUR MORTGAGE LOAN INVESTMENTS.
Because the market for our Mortgage Loans is specialized, the prices at which
our portfolio could be liquidated are uncertain. 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. 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 DEPEND
ON REINVESTMENTS BY OUR INVESTORS TO MAINTAIN AND INCREASE OUR ASSET BASE. In
the past, we have sold a significant amount of our new debt securities to our
existing investors when their debt securities matured. Historically, we have
enjoyed a significant rate of reinvestment by our investors upon maturity of
their debt obligations. For example, during the years 2008 and 2007, 76% and
72%, respectively, of our investors extended their investments or reinvested in
new debt securities upon maturity of their Notes. There is no assurance that
these past rates of reinvestment will continue in the future. If our investors
do not reinvest in substantial amounts, our ability to maintain or grow our
asset base could be impaired.
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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uninsured
casualty loss (such as an earthquake or
flood);
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a
decline in the local real estate
market;
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undiscovered
defects on the property;
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|
·
|
waste
or neglect of the property;
|
|
·
|
a
downturn in demographic and residential
trends;
|
|
·
|
a
decline in growth in the area in which the property is located. Also,
churches and church-related properties are generally not as marketable as
more common commercial, retail or residential
properties.
|
The
occurrence of any of these factors could severely impair the market value of the
security for our Mortgage Loan investment.
20
THERE IS
A POSSIBILITY THAT WE COULD INCUR FORECLOSURES AND LOSSES IN CONNECTION WITH OUR
MORTGAGE LOAN INVESTMENTS DURING RECESSIONARY OR DEPRESSED ECONOMIC PERIODS.
Recessionary or depressed periods typically occur on a cyclic basis by an
unpredictable time and with uncertain lengths. Also, such events can be
triggered by terrorist acts, war, large scale economic dislocations, or
widespread and large corporate bankruptcies. The effects of these events cannot
presently be predicted. We could incur losses as a result of borrower defaults
and foreclosures on our Mortgage Loan investments. Also, during times of
recession or depression, the demand for our Mortgage Loans, even in times of
declining interest rates, is likely to decline. Also, in connection with any
sale or hypothecation of a Mortgage Loan, we would likely have to agree to be
responsible in whole or in part for a limited period of time for any
delinquencies or default. If we should experience significant delinquency rates,
our revenues would materially decrease and, subject to our other available cash
resources at the time, our ability to timely pay our debt securities obligations
or our other indebtedness may be substantially impaired.
COMPETITION
MAY LIMIT OUR BUSINESS OPPORTUNITIES AND ABILITY TO OPERATE PROFITABLY . We compete with church bond
financing companies, banks, savings and loan associations, denominational loan
funds, certain real estate investment trusts, insurance companies and other
financial institutions to serve this market sector. Many of these entities have
greater marketing resources, more extensive networks of offices and locations,
and lower costs in proportion to their size due to economies of
scale.
USE
OF PROCEEDS
In the
event all of the Notes are sold, we estimate that we will receive proceeds from
this offering of approximately $99,850,000, after payment of our offering
expenses. We estimate our offering expenses will not exceed $150,000. This is a
“best efforts” offering and is expected to continue through ___________, 2012.
We expect to use the net proceeds of the offering for the following
purposes:
·
|
The
purchase of Mortgage Loan investments;
and
|
·
|
To
pay interest and principal due on our existing indebtedness, including our
credit facilities and our debt
securities.
|
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.
WARNING
CONCERNING FORWARD-LOOKING STATEMENTS
THIS
PROSPECTUS CONTAINS STATEMENTS WHICH CONSTITUTE FORWARD-LOOKING STATEMENTS
WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 AND
OTHER FEDERAL SECURITIES LAWS. ALSO, WHENEVER WE USE WORDS SUCH AS “BELIEVE”,
“EXPECT”, “ANTICIPATE”, “INTEND”, “PLAN”, “ESTIMATE” OR SIMILAR EXPRESSIONS, WE
ARE MAKING FORWARD-LOOKING STATEMENTS. THESE FORWARD-LOOKING
STATEMENTS ARE BASED UPON OUR PRESENT INTENT, BELIEFS OR EXPECTATIONS, BUT
FORWARD-LOOKING STATEMENTS ARE NOT GUARANTEED TO OCCUR AND MAY NOT
OCCUR. ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE CONTAINED IN
OR IMPLIED BY OUR FORWARD-LOOKING STATEMENTS AS A RESULT OF VARIOUS
FACTORS.
YOU
SHOULD NOT PLACE UNDUE RELIANCE UPON FORWARD-LOOKING STATEMENTS.
EXCEPT AS
REQUIRED BY LAW, WE UNDERTAKE NO OBLIGATION TO UPDATE OR REVISE ANY
FORWARD-LOOKING STATEMENTS AS A RESULT OF NEW INFORMATION, FUTURE EVENTS OR
OTHERWISE.
21
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, the Flex Series Note, and the
Variable Series Note are set forth in Exhibit B, Exhibit C and Exhibit D,
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
Holder.
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.
The Notes
are issued subject to the Indenture, which is intended to constitute an
Indenture agreement as that term is defined under the Trust Indenture Agreement
Act of 1939, which we refer to as the 1939 Act. The Notes have been registered
under the 1939 Act, and the Indenture contains certain required protective
provisions benefiting the holders, as required by the 1939 Act. In addition, the
Indenture contains certain financial covenants and restrictions on the payment
of distributions to our Members and on our ability to incur other
debt.
The
interest rates we pay on the Fixed Series Notes and the Flex Series Notes are
determined by reference to the Swap Index in effect on the date they are issued,
or in the case of the Flex Series Notes, on the date the interest rate is reset.
The interest rate we pay on the Variable Series Notes is determined by reference
to the Variable Index in effect on the date the interest rate is set.
Descriptions of the Swap Index and the Variable Index are set forth under “The
Indexes” below.
We
reserve the right to prospectively adjust the applicable Spread as required to
ensure our financial stability and our access to capital at competitive rates.
Any change in the applicable Spread will apply only to Notes we sell at least 10
days after we give notice of the change to prospective investors. We will
provide notice of any change in a Spread by supplement to this
prospectus.
The
Fixed Series Notes
Category and
Required Minimum Purchase. The Fixed Series Notes are offered in six
Categories, each requiring a stated minimum purchase.
Interest Rate.
The Fixed Series Notes pay an interest rate equal to the sum of the Fixed
Spread for the respective Fixed Series Note Category shown in the table below
plus the Swap Index then in effect.
Maturities.
All Fixed Series Notes are offered with maturities of 12, 18, 24, 30, 36, 42,
48, 54 and 60 months.
22
The
Categories, the corresponding required minimum purchase amounts, and the
respective Fixed Spreads are set forth below.
Fixed
Spread
|
|||||||
Fixed
Series
Note
Category
|
Required
Minimum
Purchase
|
12
Month
|
18
Month
|
24
Month
|
30
Month
|
36
Month
|
|
Category
Fixed 1
|
$1,000
|
1.70%
|
1.80%
|
1.90%
|
2.00%
|
2.05%
|
|
Category
Fixed 5
|
$5,000
|
1.75%
|
1.85%
|
1.95%
|
2.05%
|
2.10%
|
|
Category
Fixed 10
|
$10,000
|
1.80%
|
1.90%
|
2.00%
|
2.10%
|
2.15%
|
|
Category
Fixed 25
|
$25,000
|
1.85%
|
1.95%
|
2.05%
|
2.15%
|
2.20%
|
|
Category
Fixed 50
|
$50,000
|
1.90%
|
2.00%
|
2.10%
|
2.20%
|
2.25%
|
|
Category
Fixed 100
|
$100,000
|
1.95%
|
2.05%
|
2.15%
|
2.25%
|
2.30%
|
Fixed
Spread
|
||||||
Fixed
Series
Note
Category
|
Required
Minimum
Purchase
|
42
Month
|
48
Month
|
54
Month
|
60
Month
|
|
Category
Fixed 1
|
$1,000
|
2.10%
|
2.15%
|
2.20%
|
2.25%
|
|
Category
Fixed 5
|
$5,000
|
2.15%
|
2.20%
|
2.25%
|
2.30%
|
|
Category
Fixed 10
|
$10,000
|
2.20%
|
2.25%
|
2.30%
|
2.35%
|
|
Category
Fixed 25
|
$25,000
|
2.25%
|
2.30%
|
2.35%
|
2.40%
|
|
Category
Fixed 50
|
$50,000
|
2.30%
|
2.35%
|
2.40%
|
2.45%
|
|
Category
Fixed 100
|
$100,000
|
2.35%
|
2.40%
|
2.45%
|
2.50%
|
The Form
of the Fixed Series Notes is included in Exhibit B to this
Prospectus.
The
Flex Series Notes
Category and
Required Minimum Purchase. The Flex Series Notes are offered in four
Categories, each requiring a stated minimum purchase.
Interest
Rate. The Flex
Series Notes pay a fixed rate of interest equal to the sum of the Spread for the
respective Flex Series Note Category plus the current Swap Index then in effect.
Flex Series Notes offer the investor an option to reset the interest rate on the
Note, upon request, once during each 12-month period following the first
anniversary of the date of purchase to the currently offered rate on Flex Series
Notes. However, the interest rate may not increase by more than 1.0% by any
single adjustment or by more than a total of 3.0% by all adjustments over the
term of the Flex Note.
Maturities. All
Flex Series Notes have a maturity of 84 months.
Prepayment.
Upon your request, we will prepay up to 10% of the outstanding balance of your
Note, without penalty, during any 12-month period following the first
anniversary of your purchase of your Flex Series Note.
The
Categories, the corresponding minimum purchase amounts, and respective Flex
Spreads are set forth in the following table.
Flex
Series
Note
Category
|
Required
Minimum Purchase
|
Flex
Spread
|
||||||
Category
Flex 25
|
$
|
25,000
|
2.30%
|
|
||||
Category
Flex 50
|
$
|
50,000
|
2.35%
|
|
||||
Category
Flex 100
|
$
|
100,000
|
2.40%
|
|
||||
Category
Flex 250
|
$
|
250,000
|
2.45%
|
|
The Form
of the Flex Series Notes is included as Exhibit C to this
Prospectus.
23
The
Variable Series Notes
Category and
Minimum Required Purchase. The Variable Notes are offered in five
Categories, each requiring a stated minimum purchase.
Interest
Rate. The Variable Series Notes pay a variable rate of interest equal to
the sum of the Variable Index plus the Fixed Spread for the respective Category
of Variable Series Note. The interest rate on the Variable Series Notes will be
adjusted monthly on a specified day each month, commencing the month following
the date the Variable Series Note is issued.
Maturities.
Variable Series Notes have a maturity of seventy-two (72) months.
Prepayment.
We will prepay your Variable Series Note in whole or in part upon your delivery
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.
Variable
Series
Note
Category
|
Required
Minimum Purchase
|
Variable
Spread
|
||||||
Category
Variable 10
|
$
|
10,000
|
1.50%
|
|||||
Category
Variable 25
|
$
|
25,000
|
1.55%
|
|||||
Category
Variable 50
|
$
|
50,000
|
1.60%
|
|||||
Category
Variable 100
|
$
|
100,000
|
1.70%
|
|||||
Category
Variable 250
|
$
|
250,000
|
1.80%
|
The Form
of the Variable Series Notes is included as Exhibit D to this
Prospectus.
The
Indexes
General.
The interest rates we pay on the Fixed Series Notes and the Flex Series Notes
are determined by reference to the Swap Index in effect on the date they are
issued, or in the case of the Flex Series Notes, on the date the interest rate
is reset. The interest rate we pay on the Variable Series Notes is determined by
reference to the Variable Index in effect on the date the interest rate is
set.
The Swap Index.
The Swap Index in effect when we issue a Fixed Series Note or Flex Series
Note is the weekly average interest rate for Swaps last reported by the Federal
Reserve Board. The Fed computes this weekly average of the Swap rate based on
the rates reported for seven consecutive calendar days. Currently, the Fed uses
Wednesday through Thursday to calculate this average and reports the average on
Friday of each week. The Swap rates refer to the International Swaps and
Derivatives Association Mid-Market for Swap Rates. These rates are for a fixed
rate Payer and are based on rates collected at 11:00 a.m. Eastern Time by Garban
International PLC and published on Reuters Page ISDAFIX(R1).
The Swap
Index is not reported for partial year obligations. The Swap Index applied to
Notes with partial year terms will be the Swap Index corresponding to the term
equal to or not exceeding the term of the Fixed Note, or if there is none, the
obligation having the longest term not exceeding the term of the Fixed Note. For
example, for an 18-month Fixed Note, the 1-year Swap Index will be used. The
currently reported Swap Index is available on the Federal Reserve Board’s
website, www.federalreserve.gov/releases/H15/data.htm,
on its Federal Interest Rates Release H-15. We also make them available to
holders and potential investors upon request.
24
The Variable
Index. The Variable Index in effect when we issue a Variable Series
Note is the LIBOR rate for 3-month financial obligations in effect on the date
the Variable Note is issued. The Wall Street Journal regularly reports the LIBOR
rate. The Wall Street Journal can be accessed on the internet at www.wallstreetjournal.com.
In the event reporting of a current 3-month LIBOR rate is suspended or ended, we
have the right to substitute the successor index, if any, or if there is none,
the regularly reported interest rate we determine, in our sole discretion, to
most likely track the 3-month LIBOR rate.
Common
Provisions of the Notes
Payment of
Interest. Unless you select the reinvestment option or other payment
option, interest is payable on all Notes in arrears, monthly. The interest rates
offered on the day of purchase will be confirmed by us upon request. You may
change the way interest is paid on your Note by written notice to us. Interest
is payable in arrears, on or before the 5th business day of the month next
following the month in which payment is due. Interest will be prorated for the
first partial payment period. Interest will be computed on the basis of a
365-day year. Interest will be deemed paid when mailed via the United States
Postal Service addressed to the address the investor provides, subject to the
check or instrument mailed being drawn on good and sufficient funds. You may
change from one method of payment to another by giving us written notice by the
21st day
of the month in which you want the change to be effective.
To be
entitled to receive the interest effective on any day, an investor’s purchase of
the Note must be confirmed and accepted by us on that day. An investor may elect
to receive interest payable monthly, quarterly, semi-annually or annually or to
reinvest interest, as described below.
Interest
Reinvestment Option. Any Note investor may choose to have interest on
their Note reinvested under this reinvestment option. We will retain all accrued
interest on the Note and will from the date of accrual accrue interest under the
terms of the Note as though it were principal. Interest so reinvested will not
be kept in a separate escrow or other account, but will be treated by us in the
same manner as the unpaid principal amount of the Notes to which it
relates.
Reinvestment.
Our current policy is to contact each noteholder approximately thirty
days prior to the maturity date of his or her note to determine the investor’s
preference for payment, or whether the investor would like to reinvest in
another note then being offered by the Company. The noteholder may direct
payment by check or, pursuant to instructions, wire deposit. Holders desiring to
reinvest all or a portion of the proceeds in another note will be provided a
current prospectus. Unless otherwise instructed by the noteholder, we will pay
the note by business check.
Investors
who are subject to taxation who elect the reinvestment option should be aware
that they will continue to have tax liability for all accrued and reinvested
interest in the year it is credited and reinvested. See “Certain U.S. Federal
Income Tax Considerations.”
Our Right to
Prepay the Notes. We may elect at any time to prepay all or a portion of
the Notes upon at least thirty (30) days and not more than sixty (60) days’
written notice. The redemption price will be the unpaid principal balance of the
Note, plus accrued and unpaid interest thereon, through the redemption date. If
less than all of the Notes can be redeemed, we will redeem the Notes on a pro
rata basis. We will mail a notice of redemption by first class mail to each
holder of the Notes to be redeemed at the most recent address the noteholder 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 noteholder 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 of any Holder on a voluntary basis,
including any prepayment of a Note upon an investor’s request as described
below.
25
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 the request
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 noteholder 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.
DESCRIPTION
OF THE INDENTURE
General
We may
issue up to an aggregate of $200 million of the Class A Notes under the
Indenture. However, we may not issue any Note if, after giving effect to such
issuance, the Class A Notes then outstanding would have an aggregate unpaid
balance exceeding $100 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 of the Class A
Notes, 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 US Bank as Trustee. The Trustee has two main roles under the
Indenture:
·
|
The
Trustee is empowered, at the direction of the holders, to enforce your
rights under the Indenture, including your rights against us in the event
we default; and
|
·
|
The
Trustee may perform certain administrative duties for us such as sending
you notices and information regarding your
Notes.
|
Successor
Trustee, Trustee Eligibility
The
Trustee may not be an affiliate of the Company and must at all times meet the
requirements of a Trustee under the 1939 Act. Among other things, the 1939 Act
requires a Trustee to have a combined capital and surplus of not less than
$150,000.
Compensation
of the Trustee
The
Trustee is entitled to base compensation, plus additional compensation for
services it may perform at the direction of the holders under the Indenture.
Also, the Trustee has the right to be reimbursed for its costs and expenses.
Pursuant to the Indenture, the Trustee agrees to look only to us for payment of
its compensation and expenses.
The
Trustee’s Rights, Duties and Responsibilities
The
Trustee represents the interests of all the holders pursuant to the Indenture.
As described in the following sections, the Trustee may not take specified
actions without the direction, authorization or approval of a majority vote of
the holders. The Indenture requires holders who suffer an actual default on
their Notes to obtain the consent of a majority vote of all holders, regardless
of Series or maturity or default status, to appoint a Trustee and take action
against us. THIS REQUIREMENT, IN EFFECT, MAY LEAVE MANY HOLDERS WITHOUT
PRACTICAL RECOURSE.
26
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 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.
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 good man would exercise
or use under the circumstances in the conduct of his or her own affairs.
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:
·
|
Any
action or inaction taken in good faith in accordance with the direction of
a majority in interest of the
holders;
|
·
|
Any
action or inaction taken in reliance upon its legal counsel, accountants
or other experts;
|
·
|
Any
action or inaction taken in good faith in reliance upon an opinion of the
Trustee’s legal counsel;
|
·
|
Any
error of judgment made in good faith unless it is proven that the Trustee
was negligent in ascertaining the pertinent facts;
and
|
·
|
Any
execution of the Trustee’s powers under the Indenture through agents or
attorneys where the Trustee appointed such agent or attorney exercising
the level of care required above.
|
The
Trustee may refuse to take any action if he is required to advance, expend or
risk its own funds or otherwise incur financial liability in connection with any
such action or in the exercise of any of its powers under the Indenture. The
Trustee shall have no duty to take any action whatsoever if it believes in good
faith that taking such action may expose it to personal liability. The Trustee
assumes no responsibility for the legal enforcement of the Notes or the
Indenture.
Under the
Indenture, the Trustee does not authenticate the Notes. The Trustee does not
collect interest or principal of the Notes on behalf of the holders, except in
the event of a default where the Trustee is directed to do so by a majority vote
of the holders.
Our
Continuing Covenants Under the Indenture
Limits on Our
Payment of Distributions. While any Note is
outstanding, we may not make, and will not permit any subsidiary to make, a
restricted payment unless no default or event of default has occurred and is
continuing, or would occur as a consequence of making the restricted payment,
and certain other conditions are met. For this purpose, a restricted payment
means: (i) a declaration or payment of any distribution to our Members (other
than distributions payable in our membership interests to us or to our
wholly-owned subsidiary); (ii) any payment for the acquisition, redemption or
retirement of our membership interests or that of any wholly-owned subsidiary;
or (iii) any voluntarily purchase, redemption or repayment, prior to its
scheduled maturity of any of our indebtedness that is subordinated in right of
payment to the Notes.
27
In
addition, any such restricted payment, together with the aggregate of all other
restricted payments we might make, may not exceed the sum of:
(i)
|
50%
of our net income for the period (taken as one accounting period)
commencing on January 1, 2000 and ending on our most recently ended
full fiscal quarter for which financial statements are available at the
time of the restricted payment (or, if such net income for such period is
a deficit, 100% of such deficit);
plus
|
(ii)
|
100%
of the aggregate net cash proceeds we receive from the issue or sale of
our equity membership interests (other than equity membership interests
sold to a subsidiary), debt securities or securities convertible into our
equity membership interests upon such conversion, or any funds advanced or
loaned to us under any subordinated credit facility;
plus
|
(iii)
|
100%
of the cash, if any, contributed for our capital, as additional paid in
capital by any of our Members.
|
However,
under the Indenture the following are not defined as restricted
payments:
(a)
|
the
payment of any distribution within sixty (60) days after the date of
declaration thereof, if at said date of declaration such payment would
have complied with the foregoing provisions;
or
|
(b)
|
any
payment for (x) the redemption, repurchase, retirement or other
acquisition of any of our equity membership interests, (y) the purchase,
redemption or other acquisition or retirement of our Indebtedness which is
subordinated in right of payment to the Class A Notes, prior to any
mandatory sinking fund payment or maturity; or (z) the making of any
investment in us or any subsidiary in each case of (x), (y) and (z) in
exchange for, or out of, the proceeds of the substantially concurrent sale
(other than to us) of our equity membership
interests.
|
For the
purposes of the Indenture, our “net income” means the aggregate of our net
income for the applicable period, on a consolidated basis, determined in
accordance with accounting principles generally accepted in the United States of
America.
Limits on Our
Ability to Incur Debt. While any Note remains outstanding, we may not,
and may not permit any subsidiary to, directly or indirectly, create, incur,
issue, assume, guaranty or otherwise become, directly or indirectly, liable with
respect to (collectively, “incur”) any indebtedness, unless our fixed charge
coverage ratio for our most recently ended four full fiscal quarters immediately
preceding the date on which such additional indebtedness is incurred would have
been at least 1.20 to 1.0. We calculate the fixed coverage ratio as if the
additional indebtedness had been incurred at the beginning of the period.
Notwithstanding this restriction, we may incur indebtedness that: (i) is
evidenced by the Notes; (ii) was existing at March 31, 2008 as it may be
extended or modified; (iii) is incurred in the ordinary course of business for
the funding of Mortgage Loans which includes warehouse lines of credit and/or
repurchase facilities; (iv) is in respect of performance, completion, guarantee,
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 Class A Notes, to exceed
$20.0 million immediately after we incur the indebtedness.
28
Under the
Indenture:
·
|
Our
“fixed charge coverage ratio” means the ratio of our cash flow to our
fixed charges for the applicable
period;
|
·
|
Our
“cash flow” means, with respect to the period, our consolidated net income
for the applicable period, plus any extraordinary loss, plus any net loss
from the disposition of any assets, plus any provision for taxes, plus any
fixed charges, plus depreciation and amortization for the period, plus our
interest expense paid or accrued for the period with respect to any
indebtedness which is expressly subordinated to the Notes, plus the unused
amount of our credit facilities and any other financing which is expressly
subordinated to the Notes;
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·
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Our
“fixed charges” means our consolidated interest expense for the period,
whether paid or accrued, to the extent such expense was deducted in
computing our consolidated net income, plus, without duplication, all
interest capitalized for the period. Fixed charges do not include any
interest expense with respect to any loan, to the extent it is expressly
subordinated in right of payment to the Notes;
and
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·
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Our
“indebtedness” means any indebtedness, whether or not contingent, we incur
from our borrowings, the balance of the purchase price we owe on any
property, our capital lease obligations, and any of our hedging
obligations, except, in each case, any accrued expense or trade
payable.
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The Effect of Our
Merger, Consolidation or Sale of Assets. While any Note is outstanding,
we may not consolidate or merge with or into any other person or entity (whether
or not we are the surviving entity) or sell, assign, transfer, lease, convey or
otherwise dispose of all or substantially all of our properties or assets
(excepting sales of our loans we hold for sale in our normal course of
business), in one or a Series of transactions for the same purpose, unless (i)
we are the surviving entity of such transaction; or (ii) if we are not the
surviving entity, the surviving entity assumes our obligations under the Notes
by agreement or operation of law.
Requirements That
We Maintain a Minimum Tangible Adjusted Net Worth. In the event that our
tangible adjusted net worth is less than the minimum tangible adjusted net
worth, within 55 days after the end of any fiscal quarter we must notify the
holders of the Class A Notes. 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 for payment on a current basis to the Notes.
Under the
Indenture, our “tangible adjusted net worth” means our adjusted net worth less
our intangible assets, if any. Our “adjusted net worth” means the sum of (i) our
Members’ consolidated equity and of the equity interests of any consolidated
subsidiary, plus (ii) the amount of any credit line, whether or not then funded,
to the extent such loan amount is expressly subordinated in right to payment on
a current basis to the Class A 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.
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Other
than the foregoing, there are no covenants or other provisions (except those
contained under the California General Corporation 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 in a manner which they believe to be in our best
interests and those of our Members, which may not, in all circumstances, be the
same as those of our holders.
Remedies
in the Event of Our Default
Each of
the following constitutes an event of default under the Notes:
·
|
our
default for thirty (30) days in the payment when due of interest or
penalty on any Note;
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·
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our
default for thirty (30) days in the payment when due of principal of any
Note;
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·
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if
not cured in a timely manner, our failure to observe or perform any of the
covenants or agreements in the Notes or set forth under the Indenture;
or
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·
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if
not cured in a timely manner, our default under the instruments governing
any of our other indebtedness, which default (a) is caused by a failure to
pay when due principal or interest on our other indebtedness within the
grace period provided in our other indebtedness and which continues beyond
any applicable grace period (a “payment default”) or (b) results in the
acceleration of payment of such indebtedness in the aggregate amount of
$250,000 or more.
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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, by a majority vote, may
instruct the Trustee to declare all the Notes to be due and payable immediately
and take any action allowed by law to collect such amounts. Notwithstanding the
foregoing, in the case of an event of default arising from our bankruptcy or
insolvency, all outstanding Notes will become due and payable without further
action or notice. If an event of default has occurred and is continuing, we
must, upon written request of the Trustee, cure such default and pay for the
benefit of the noteholder the whole amount then due, any penalties which may be
due and, in addition thereto, such further amount as shall be sufficient to
cover the costs and expenses of collection, including the reasonable
compensation, expenses, disbursements and advances of the Trustee, its agents
and counsel and all other amounts due to the Trustee. If we fail to cure such
defaults and pay such amounts forthwith upon such demand, the Trustee, in its
own name and as Trustee of an express trust, shall be entitled to sue for and
recover judgment against us and any other obligor on the Notes for the amount so
due and unpaid pursuant to the terms of the Notes.
Compromise
or Settlement of Claims
The
Trustee may not settle or compromise any rights or claims of the holders,
including any right to payment of principal or interest, unless the settlement
or compromise is approved by a majority vote of the holders. Any settlement or
compromise so approved would be binding upon all the holders.
The
Trustee may withhold from the holders notice of any default or event of default
if it believes that withholding notice is in their interest, except a default or
event of default relating to the payment of principal or interest or
penalties.
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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, the holders may, by a majority vote, 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 outstanding holders based on the aggregate amount of principal and
interest and penalty payments due them.
OUR
COMPANY AND OUR BUSINESS
Our
Company
We are a
privately owned California limited liability company. We are owned by our
Members, each of whom is a federal or state chartered credit union. None of our
Members has any long term contractual obligations to us, our business or our
creditors. WE ARE SEPARATE FROM ANY CREDIT UNION AND NO CREDIT UNION HAS
GUARANTEED OR OTHERWISE AGREED TO BE RESPONSIBLE IN ANY MANNER FOR THE PAYMENT
OF THE PRINCIPAL OR INTEREST ON THE NOTES. THE NOTES ARE NOT INSURED BY NCUSIF,
THE FDIC, OR ANY GOVERNMENTAL OR PRIVATE ENTITY. See “RISK
FACTORS.”
We were
incorporated under California law on October 22, 1991 as Ministry Partners
Investment Corporation. We were organized as ECCU’s credit union service
organization, or “CUSO,” for the purpose of providing Mortgage Loans to
evangelical churches and church and ministry organizations. Effective December
31, 2008, we converted our form of organization from a California corporation to
a California limited liability company (an “LLC”). This conversion (the
“conversion”) was a statutory conversion authorized under Section 1150 of the
California Beverly Killea Limited Liability Company Act (the “LLC Act”). Upon
the conversion, we became, by operation of law, a California limited liability
company. As a result of the conversion, our name changed to “Ministry Partners
Investment Company, LLC.”
Our
mission is to make loan financing available to the evangelical Christian
community for the acquisition and improvement of church and ministry-related
properties. We do this by investing in Mortgage Loans made to churches and
ministries. These loans are typically originated by credit unions and secured by
church and church-related real property owned by and/or maintained for the
benefit of evangelical churches or church-related organizations such as
Christian schools and ministries.
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. 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.
Our
business offices are located at 915 West Imperial Highway, Suite 120, Brea,
California 92821. Our telephone number is 800-753-6742, www.ministrypartners.org,
e-mail: info@ministrypartners.org.
Our
Conversion to a Limited Liability Company
We
converted our legal form to a California limited liability company effective
December 31, 2008 pursuant to our plan of conversion (the “plan”). Our board of
directors and our shareholders approved our conversion in order to expand our
flexibility in structuring financial transactions, to better implement our
long-term economic interests and the interests of our shareholders, and to
optimize our federal and state income tax planning and strategies.
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Upon our
conversion, each share of our then outstanding 146,522 shares of common stock
was converted into one fully paid and non-assessable unit of our Class A Units,
and each share of our outstanding 100,000 shares of the Class I Preferred Stock
and our outstanding 19,000 shares of Class II Preferred Stock was converted
into one fully paid and non-assessable Series A Unit. Under California law, a
corporation that converts to a limited liability company remains the same entity
that existed before the conversion, except it will be subject to the LLC Act and
will be taxed as an LLC under the applicable provisions of the California
Revenue and Taxation Code. Prior to the conversion, we were taxed as a C
corporation under both federal and state income tax laws. Following the
conversion, we have elected to be taxed as a partnership under both federal and
state income tax laws. Thus, the conversion did not result in a transfer of our
assets, rights, obligations, duties or other property, and the status of our
assets and liabilities are unaltered by the conversion. All of the rights of our
creditors were preserved unimpaired, and all liens upon our property were
preserved unimpaired, and all of our debts, liabilities, obligations and duties
as a corporation thenceforth remained and may be enforced against us to the same
extent they could before the conversion. Thus, the conversion did not affect our
duties or obligations with respect to the secured Notes or the
Indenture.
As an
LLC, our business and affairs are under the direction of our officers and board
of Managers, who we refer to as our “board.” Our Managers and officers are the
same persons who served as our directors and officers prior to the
conversion.
Our
Operating Goals
Our goals
are to provide funds for loans to evangelical churches and church organizations
on a cost effective basis. In addition, we endeavor to operate in such a way as
to provide competitive yields to purchasers of our Notes, distributions to our
preferred membership interests, and a general increase in the value of our
company to our Members.
Overview
of Our Business
We are
one of the few organizations within the western United States formed to assist
evangelical Christian churches and organizations by providing financing for the
acquisition, development and/or renovation of churches or church-related
properties. To date, we have not charged off any of our Mortgage Loan
investment(s), and we have not defaulted on or been delinquent in the payment of
any interest or principal on our debt securities or on any of our borrowing
facilities. We expanded the scope of our operations in 2007 to include
warehousing loans with the intent of reselling them in mortgaged-backed
securities offerings. However, we have not been able to make any such offerings
due to the credit crisis and collapse of mortgage-backed securities markets that
became acute in 2008.
We were
formed in 1991 by ECCU for the purpose of providing financial resources that
could assist in meeting the demand for mortgage financing by churches,
ministries and church-related organizations. Since then, this market segment has
continued to grow, and both the size of the loans and number of qualified
borrowers in this sector has steadily increased. The size of the church and
ministry mortgage financing market in the United States has been estimated to
range between $20 billion and $40 billion annually. While there is no assurance
that this market will continue to grow in quantity and quality, we believe that
the demand for these loans will continue to exceed the available lending and
financing sources for this sector. We base our belief on our past experience
with making loans to this market segment. Also, because the financial base and
resources of church and ministry organizations has grown larger and these
organizations increasingly employ more sophisticated accounting and budgetary
practices, more financial institutions are now willing to originate, participate
in or purchase loans in this market segment. As a result, a limited secondary
market for these loans has developed. We have been an active
participant in that market.
Our
general practice in recent years has been to fund loan acquisitions with
borrowings under our bank facilities. We then repay borrowings on our bank
facilities with proceeds from the sale of investor Notes, prepayments and
repayments, and from our operating income. Our ability to access capital to
repay borrowings under our bank facilities is subject to variability based upon
a number of factors, including volatility in the capital markets, the relative
interest rates that we are prepared to pay for our debt facilities, the ability
of our borrowers to access capital to repay or prepay their obligations to us
and our ability to sell our Mortgage Loan assets. Any occurrence that disrupts
our ability to access capital from these sources may have a material adverse
effect on our ability to grow our business, meet our commitments and make
distributions.
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Successful
liquidity management depends in large part on our ability to accurately predict
or otherwise manage our future leverage costs. Currently, uncertainty as to our
future leverage costs arises under two of our credit facilities. Since April 3,
2009, Members United has had the right to require us to convert our $100 Million
CUSO Line to a 5-year term loan. Conversion to a term loan would require greater
loan payments based on a yet to be determined interest rate and a 30-year
amortization schedule. Higher interest rates or higher principal payments on
this loan could have a material adverse effect on our liquidity and
earnings.
Prior to
2007, our primary business focused on the acquisition of special purpose
Mortgage Loans that were granted to evangelical Christian churches and
organizations in connection with the acquisition, development and/or renovation
of churches or church related properties. Funds to acquire these Mortgage Loans
were provided through the issuance of Notes to investors and equity
investments.
In 2007,
we formed our wholly-owned subsidiary, MPF, to pursue a strategy of acquiring
Mortgage Loans for resale in mortgage-backed securities offerings, which we
refer to as securitized debt transactions. Using this strategy would allow us to
minimize the credit risk on our Mortgage Loans up to the amount of the
securitized debt securities sold to investors and provide additional financing
capabilities to serve our credit union members. Upon its formation, MPF obtained
the BMO Credit Facility to acquire and warehouse Mortgage Loans. By 2008, MPF
had used borrowings under this credit facility to acquire approximately $123
million of Mortgage Loans. However, due to subsequent and continuing
deterioration in the securitized debt transactions market, we have been unable
to implement this strategy.
With the
availability of financing and mortgage-backed loan facilities being curtailed as
U.S. and global financial markets adjust to a lack of liquidity in credit
markets, we primarily rely upon generating profits from our investment Mortgage
Loan portfolio. Growth in our investment portfolio and expansion of origination
and loan participation investments in credit union member business loans
originated by credit unions will necessarily depend upon raising additional
capital and/or funding new borrowing facilities.
To raise
additional capital, we continue our efforts to expand our capital base through
our additional investor debt securities. In addition, we are also evaluating
strategies for reducing our balance sheet leverage that could include the sale
of mortgage assets to banks, credit unions, financial institutions and other
investors.
Our
business model depends on the availability of credit for the funding of our
acquisition of Mortgage Loans and origination of new loans and for the future
securitization of pools of Mortgage Loans that have been acquired or originated
and funded by short-term borrowings from warehouse lenders and other
institutions providing lines of credit. The continued disruption
and uncertainty in the credit markets has limited our access to new credit
facilities with which to finance additional loan originations. As a result, we
are currently financing our loan origination activities solely out of the
proceeds of sales of our debt securities and cash generated by our loan
portfolio. Until the crisis in the U.S financial system eases and credit becomes
more available to finance companies such as ours, we expect to conduct limited
loan origination activities.
Additional
Debt
In
general, there is no limitation as to the amount of debt securities we may issue
with the same or proximate maturity dates. However, we are subject to continuing
covenants under certain of our debt securities, including the Notes, restricting
the amount of debt we can incur. Our default under one or more of these
covenants would allow these creditors to, among other things, declare the entire
unpaid balance of their debt immediately due and payable. These covenants are
intended to assure that, at any such time, our tangible assets will be
substantially in excess of our debt obligations.
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Employees
and Facilities
Effective
January 1, 2008, we entered into a staffing agreement with Administaff
Companies II, L.P. for personnel and personnel administration services. Under this Agreement, we currently have 10 full-time staff
members.
We
currently rent our offices (approximately 4,970 square feet of rentable space)
from ECCU under the terms of an office lease dated November 4,
2008. The lease has an initial term of five years and we have an
option to renew for two additional periods of five years each. Our
base rent under this lease is currently $9,443 per month.
CAPITALIZATION
AND OPERATIONAL FUNDING
Investor
Financing
Under our
business plan, we intend to grow our asset base with funds from this offering,
our sales of other debt or equity securities, and from our credit facilities.
Our rate of asset growth depends on several factors, including the rate at which
our debt investors reinvest or otherwise continue their debt investments as they
mature. To the extent our debt investors do not continue their investments, we
will experience a slower rate of asset growth. We use our available funds, which
may from time to time include proceeds from the sale of our investor debt
securities, to repay debt investments. However, our business plan does not
require us to depend on the future sales of Notes to retire our existing debts,
as we believe we will be able to service and repay our debt securities at any
time through our available cash investments and through liquidation and/or
hypothecation of our Mortgage Loan investments based on our current and
anticipated debt to equity ratios.
We have
historically relied primarily on the sale of our debt securities to investors to
fund our Mortgage Loan investments. We offer our debt securities on a continuous
basis subject to compliance with applicable federal and state securities laws.
Although we intend to continue to direct the sales of our debt securities to
individuals, institutions, ministries and organizations associated with
evangelical churches and church associations, denominations and organizations,
we may in the future engage investment banks to underwrite debt securities and
distribute those securities to their clients. Those clients may not meet the
same description as our current debt investors.
Our
Subsidiary, MPF
In 2007,
we formed MPF to pursue our strategy of obtaining funding by purchasing and
warehousing church and ministry mortgage loans and reselling them in securitized
debt transactions.
Upon
formation, MPF obtained the $150 Million BMO Credit Facility and by 2008 had
used borrowings under this credit facility to acquire approximately $122.7
million of Mortgage Loans. However, due to subsequent and continuing
deterioration of the market for securitized debt transactions, we have been
unable to implement this strategy because MPF has been unable to complete any
securitized debt transactions and pay down the BMO Credit Facility as planned.
We thus repaid the BMO Credit Facility on November 30, 2009 with approximately
$24.63 million borrowed at a lower interest rate under the WesCorp Loan. We
pledged approximately $60.5 million of MPF’s Mortgage Loans released as security
for the BMO Credit Facility upon its repayment as collateral for the WesCorp
Loan. We plan to maintain MPF for possible future use as a vehicle to effecting
securitized debt transactions. MPF’s ability in the future to successfully
complete securitized debt transactions will depend in large part on prevailing
financial market conditions, which, in recent months, have been in general
depressed by various economic developments, including the subprime mortgage
crisis. See “Risk Factors – Risks Related to Our Business.”
The
majority of our outstanding debt securities are due and payable six months to
twelve months from the date of their issuance. See “Risk Factors”. We are able
to accurately budget our cash needs at least 90 days in advance. We believe we
will continue to adequately provide liquidity through our existing cash and
credit facilities and/or, if necessary, the sale or hypothecation of Mortgage
Loan investments.
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Recent
Developments in Credit Markets
Recent
and current conditions in the credit markets have adversely impacted our plan to
complete our proposed securitized debt transactions through MPF. Commencing in
late 2007, the credit markets that we depend on for warehouse lending for
origination, acquisition and securitization for our church Mortgage Loans began
to deteriorate, and that deterioration has continued and even worsened in 2008
and 2009.
Despite
actions by the Federal Reserve Bank to lower interest rates and increase
liquidity, uncertainty among lenders and investors has continued to reduce
liquidity, drive up the cost of lending and drive down the value of assets in
these markets. Under these conditions, banks and other financial institutions
have reported large losses, have demanded that borrowers reduce credit exposure
to these illiquid assets resulting in “margin calls” or reductions in borrowing
availability, and the collective effect of these events have caused massive
sales of underlying assets that collateralize the loans. The need to deleverage
the balance sheets of financial institutions and find buyers for illiquid assets
has also resulted in further downward pressure on market values of the
underlying assets of financial institutions that hold substantial investments in
residential and commercial real property.
Our
Credit Facilities
Members United
Credit Facilities. On October 12, 2007, we entered into two note and
security agreements with Members United. Members United is a federally chartered
credit union located in Warrenville, Illinois, which provides financial services
to our Member credit unions. One note and security agreement is for a secured
$10 million revolving line of credit, which we refer to as the “$10 Million
LOC,” and the other is for a secured $50 million revolving line of credit. The
$50 million facility was amended on May 14, 2008 to allow us to borrow up
to $100 million through the revolving line of credit. We refer to this as the
“$100 Million CUSO Line.” Both credit facilities are secured by eligible
Mortgage Loans. We used the $10 Million LOC for short-term liquidity purposes
and the $100 Million CUSO Line for Mortgage Loan
investments. The draw periods for both of these facilities have
expired.
Each
credit facility is a secured, recourse obligation. We must maintain collateral
in the form of eligible Mortgage Loans, as defined in the line of loan
documents, based on a maximum margin of 90%. This means we must maintain
eligible collateral equal to 1.11 times the loan balance. At December 31,
2008, approximately $100.1 million of loans were pledged as collateral for the
$100 Million CUSO Line and approximately 11.4 million of loans were pledged as
collateral for the $10 Million LOC. On May 21, 2009, we pledged 21 Mortgage
Loans in the total principal amount of $21,902,034 as substitute collateral for
the Mortgage Loan participation interests we previously sold to Western as
described below, which interests previously secured the $100 Million CUSO
Line.
The loan
documents for these credit facilities contain affirmative covenants that are
typical for these types of loans, including requirements that we keep our
collateral free of liens and encumbrances, timely pay the amounts due under the
facility and provide current financial statements and reports to the lender.
Other covenants prevent us from selling all of our assets, from consolidating
with or merging into another entity, from impairing or incurring a lien on the
collateral securing these loans or from incurring certain additional
indebtedness.
On
August 27, 2008, we borrowed the entire $10 million available on our $10
Million LOC at a rate of 3.47%. This credit facility expired on
September 1, 2008. As a result, it was converted to a term loan with a
maturity date of August 26, 2011. This loan bears interest payable monthly
at a floating rate based on the one month LIBOR plus 100 basis points. The
interest rate on this loan is reset monthly. As of December 31, 2008, there
was a $10.0 million outstanding balance on this loan.
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The $100
Million CUSO Line will expire on September 1, 2012. This loan requires
interest-only payments during the draw period at the fixed offered rate set by
Members United, or at a variable rate indexed to the Federal Funds rate at our
option. At December 31, 2008, the unpaid balance on this credit facility
was $89.9 million, and the weighted average interest rate on the facility draws
that have been made under the facility was 4.33%. Since the expiration of the
draw period on April 3, 2009, Members United has had the right to require us to
convert the outstanding balance of this loan to a fixed loan having a 5-year
term and require payments of principal and interest on a 30-year amortization at
a rate of interest to be set by Members United. The lender has not yet required
the loan to be termed and is continuing to require interest only payments. We
are actively negotiating with the lender for acceptable interest rate provisions
in connection with the planned terming of the loan. Until an agreement is
documented, we face uncertainty as to future payment requirements under this
loan. Please see “Management’s
Discussion and Analysis of Financial Condition and Results of Operations”
for a further discussion of this borrowing facility.
WesCorp Loan.
On November 30, 2009, we funded a $28 million WesCorp Loan. WesCorp is a
credit union whose members are credit unions and CUSOs. We used approximately
$24.63 million of the WesCorp Loan to pay off and retire the BMO Credit
Facility, which we have repaid in full. We used the remainder of this loan for
working capital. We intend to repay the WesCorp Loan by its maturity date using
the proceeds from the sale of our additional debt securities, a replacement
credit facility, and/or the sale of the collateral pledged to secure this credit
facility.
This
credit facility loan bears interest at the fixed rate of 3.95%. The loan is
payable in monthly installments equal to accrued interest plus a principal
payment of $116,667 until the maturity date, March 30, 2012, when the
entire balance of principal and interest is due and payable. We have the right
to prepay the loan in whole or in part at any time with a prepayment penalty
equal to the prepayment rate assessed against the amount of the prepayment for
the time remaining from the prepayment date to the maturity date.
This loan
is secured by the approximately $60.5 million of mortgage loans we previously
pledged to secure our previous BMO Credit Facility. Thus, the loan is initially
secured by excess collateral of approximately $32.5 million. This amount of
excess collateral will decrease as we receive amortized payments of principal
and interest from the mortgagors of these pledged Mortgage Loans, which we are
entitled to receive and use so long as we are not in default under the WesCorp
Loan. We are obliged upon the lender’s request to replace a pledged mortgage
loan if it becomes materially impaired. We are otherwise under no obligation to
replace a pledged mortgage loan, unless it is sold or is prepaid. We may replace
a pledged mortgage loan either by pledging a mortgage loan having an equal
unpaid principal balance or with cash of an equivalent amount. Upon any
prepayment, collateral having an equal unpaid principal balance will be
released, and all of the remaining collateral will be released upon full
repayment of the loan. Thus, until the WesCorp Loan is retired in full, we do
not have a right to require the release of the excess collateral.
Under the
loan documents, we make covenants customarily required by lenders for commercial
loans of this kind, including covenants regarding our authority and compliance
with applicable law, and we agree to deliver future financial statements,
provide insurance for coverage for the collateral, provide for adequate
servicing of the collateral, and to give the lender at least 30 days’ prior
written notice before we enter into any additional or replacement line of credit
with an institutional or commercial lender that would replace, in whole or in
part, our Members United credit facilities. We also make certain negative
covenants, including our not entering into certain transactions without the
lender’s prior consent, including mergers and material changes in our Members
United credit facilities. In addition, we covenant to maintain a
debt-to-tangible net worth ratio of not greater than 15 to 1 as determined in
general under GAAP, with certain exceptions including the exclusion from total
liabilities of any unsecured debt securities with a maturity date after
March 30, 2012.
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In the
event of default, the lender may call the entire balance of the loan due and
payable, upon which event the lender will have available all remedies provided
under applicable law, including the right to foreclose on the collateral. In
addition to our failure to pay any amount due and payable under the loan within
the prescribed grace period, events of default include our suffering of any
judgment or attachment in excess of $250,000; a material change in our financial
condition, business or operations; or our failure to make any payment of debt
due and owing to another creditor in the aggregate of more than $500,000. The
loan is full recourse and upon default the lender may seek recovery of the loan
balance and its related costs against the collateral and/or us.
Our Former BMO
Credit Facility. On October 30,
2007, MPF entered into the BMO Credit Facility with Fairway Finance Company, LLC
and BMO Capital Markets Corp. for the purposes of purchasing and warehousing
qualifying mortgages for resell through securitized debt transactions. Under the
applicable loan documentation, MPF was scheduled to commence its first
securitized debt transaction by October 30, 2008. Due to subsequent and
continuing adverse developments in the mortgage backed securities markets, MPF
has been unable to complete any securitized debt transactions. The parties
subsequently amended the terms of this loan to MPF’s orderly repayment of the
loan. On November 30, 2009, we repaid the approximately $24.63 million balance
on the BMO Credit Facility with proceeds borrowed under the WesCorp Loan and
retired this loan.
Western
Federal Credit Union Loan Purchase and Sale Agreement
Effective
on May 1, 2009, we entered into a Master Loan Participation Purchase and
Sale Agreement with Western Federal Credit Union (“Western”). Under this
agreement, Western may purchase participation interests in certain of our
Mortgage Loans on a non-recourse basis. Under the agreement, we must monitor the
loans in which Western participates and alert Western of certain material events
which might affect the financial condition of the borrower, the borrower’s
ability to service the loan, and the collectibility of the loan. This agreement
includes other representations and warranties typically found in loan
participation sales agreements. We have appointed ECCU to act as lead lender
with respect to loans in which Western participates. Western is one of our
Members and is deemed a related party. Our Managers have ratified the Western
agreement under our related party transaction policy. In doing so, our Managers
concluded that the terms and conditions of the Western Sale Agreement are
typical for some of the loan participation agreements entered into in
arm’s-length transactions between unrelated parties.
On
May 19, 2009, Western purchased loan participation interests in the
principal amount of $19.3 million under this agreement. These Mortgage Loan
interests had been pledged as collateral for the $100 Million CUSO Line. On
June 21, 2009, we used the proceeds from the sale of these loan
participation interests to our purchase of 21 Mortgage Loans in the total
principal amount of $21.9 million from MPF. We then pledged those 21 Mortgage
Loans to Members United to replace the participation interests we sold to
Western.
OUR
MORTGAGE LOAN INVESTMENTS
Description
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, except in specified circumstances, 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 a partial participation ownership in the Mortgage Loan, whereby
we own an undivided interest in the loan investments with other institutions.
Generally, our percentage ownership interest in our Mortgage Loans has ranged
from 4.0% 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.
Construction
Loans. Construction loans may be made to finance the construction or
restoration of facilities for schools, worship facilities or ministry related
purposes. These loans normally will have a final maturity that will not exceed
five years, with a construction draw period that will not exceed 12 months.
In most instances, construction loans are interest-only on the outstanding
balance drawn for construction. Under our Church and Ministry Loan Policy, the
maximum loan to value ratio for a construction loan is 90%.
Permanent Loans.
We acquire or originate Mortgage Loans that may have an adjustable
interest rate, a hybrid rate that includes an adjustable rate with an option to
convert to a fixed rate or fixed rate. The term for a Mortgage Loan may not
exceed 30 years and the maximum loan to value ratio may not exceed 90%. For
loans made to credit union members that are secured by real property, accounts
receivable, and/or inventory, the maximum loan to value ratio is 90% based upon
the current value of the collateral.
Lines 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 provide for minimum interest payments during the
term of the loan. The maximum loan to value ratio is 90% of the property
securing the loan.
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.
37
Our
Loan Investment Portfolio
Set forth
below are the amounts of our cash and Mortgage Loan related investments at
September 30, 2009 and at December 31, 2008 and
2007.
Cash
and Mortgage Loan Investments
|
||||||||||||
Nine
Months Ended September 30, 2009
(Unaudited)
|
Year
Ended
December
31,
(Dollars
in Thousands)
|
|||||||||||
2008
|
2007
|
|||||||||||
Assets
|
||||||||||||
Cash
|
$ | 7,504 | $ | 14,889 | $ | 2,243 | ||||||
Loans
held for sale
|
31,947 | -- | -- | |||||||||
Loans,
net of allowance for loan losses of $721 as of September 30, 2009 and $489
and $126 in 2008 and 2007, respectively
|
175,143 | 257,176 | 116,310 | |||||||||
Accrued
interest receivable
|
1,019 | 1,374 | 518 |
We
increased our Mortgage Loan investments from approximately $116 million at
December 31, 2007 to approximately $257 million at December 31, 2008
in anticipation of using up to $100 million of these loans in securitized debt
transactions through MPF. We financed our acquisition of these additional
Mortgage Loan investments primarily from borrowings under our BMO Credit
Facility. Because of the subsequent collapse of the collateralized securities
markets, we deferred our planned securitized debt transactions indefinitely and
sold Mortgage Loans in order to repay approximately $85 million owed
on our BMO Credit Facility. As a result, the amount of our Mortgage Loan
portfolio decreased to approximately $175 million at September 30,
2009.
Set forth
below are the amounts we invested in each category of loans at
September 30, 2009, December 31, 2008 and December 31,
2007.
September
30, 2009
|
December
31, 2008
|
December
31, 2007
|
|||||||||||||||||
Loan
Category
|
Amount
|
Percent
of
Portfolio
|
Amount
|
Percent
of
Portfolio
|
Amount
|
Percent
of
Portfolio
|
|||||||||||||
Commercial
Mortgage Loans
|
$ | 203,413 | 97.7% | $ | 254,869 | 98.8% | $ | 109,390 | 93.8% | ||||||||||
Construction
Loans
|
2,825 | 1.3% | 1,042 | 0.4% | 5,174 | 4.4% | |||||||||||||
Unsecured
Commercial Loans
|
2,002 | 1.0% | 2,000 | 0.8% | 2,000 | 1.8% | |||||||||||||
Total
|
$ | 208,240 | 100.0% | $ | 257,911 | 100.0% | 116,564 | 100.0% |
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 Notes payable and lines of credit. This difference is net interest
income. Net interest margin is net interest income expressed as a percentage of
average total interest-earning assets.
Please
see the discussion under the section “Management Discussion and Analysis of
Financial Condition − Results of Operations” for information
regarding our historical interest costs, interest income and yields realized on
our Mortgage Loan investments for the nine months ended September 30, 2009
and the years ended December 31, 2008 and 2007.
38
Loan
Maturities
The
following table sets forth the future maturities of our Mortgage Loan portfolio
at September 30, 2009.
Dollar
Amount of Mortgage Loans
Maturing
During Year:
|
||||||||||||||||||||||||
2010
|
2011
|
2012
|
2013
|
2014
|
After
2014
|
|||||||||||||||||||
Mortgage
Loan Portfolio at:
|
||||||||||||||||||||||||
September
30, 2009
|
$ | 31,148 | $ | 42,329 | $ | 38,927 | $ | 86,649 | $ | 4,067 | $ | 5,120 |
There is
one adjustable rate loan for $2,485 thousand due in 2012.
Diversification
of Our Mortgage Loan Portfolio
The
following table sets forth, as of September 30, 2009 and December 31, 2008 and
2007, each state in which: (i) the unpaid balance of our Mortgage Loans was
10% or more of the total unpaid balance of our Mortgage Loan portfolio; and
(ii) the number of our Mortgage Loans was 10% or more of our total Mortgage
Loans.
California
|
|||||||||||
9/30/2009
|
12/31/2008
|
12/31/2007
|
|||||||||
Unpaid
Balance of Mortgage Loans
|
$ | 58,497,114 | $ | 78,814,463 | $ | 34,717,287 | |||||
%
|
28.09% | 30.56% | 29.78% | ||||||||
Number
of Loans
|
44 | 57 | 30 | ||||||||
%
|
28.39% | 30.98% | 33.33% | ||||||||
Colorado
|
|||||||||||
9/30/2009
|
12/31/2008
|
12/31/2007
|
|||||||||
Unpaid
Balance of Mortgage Loans
|
$ | 11,577,519 | $ | 16,032,530 | $ | 15,936,503 | |||||
%
|
5.56% | 6.22% | 13.67% | ||||||||
Number
of Loans
|
11 | 13 | 12 | ||||||||
%
|
7.10% | 7.07% | 13.33% | ||||||||
Illinois
|
|||||||||||
9/30/2009
|
12/31/2008
|
12/31/2007
|
|||||||||
Unpaid
Balance of Mortgage Loans
|
$ | 15,194,503 | $ | 23,280,861 | $ | 13,245,346 | |||||
%
|
7.30% | 9.03% | 11.36% | ||||||||
Number
of Loans
|
7 | 10 | 7 | ||||||||
%
|
4.52% | 5.43% | 7.78% |
39
Texas
|
|||||||||||
9/30/2009
|
12/31/2008
|
12/31/2007
|
|||||||||
Unpaid
Balance of Mortgage Loans
|
$ | 22,340,873 | $ | 24,042,317 | $ | 8,294,547 | |||||
%
|
10.73% | 9.32% | 7.12% | ||||||||
Number
of Loans
|
13 | 13 | 5 | ||||||||
%
|
8.39% | 7.07% | 5.56% |
Our
Rollover Policy
We offer
to renew, re-underwrite or otherwise continue (i.e. roll over) 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 Board’s Loan Committee to roll over
the loan.
Nonperforming
and Delinquent Loans
Over the
past nine months, we have experienced fluctuating but generally increasing rates
in delinquencies on our Mortgage Loan investments. During this period,
delinquency rates have ranged from approximately 1.06% to more than 3.31% of the
amount of our mortgage portfolio. We report a Mortgage Loan as delinquent if it
is 90 days or more in arrears. At September 30, 2009, 3.10% of our
portfolio qualified as delinquent.
Nonperforming
Mortgage Loans include:
(i) Nonaccrual
loans. Nonaccrual loans are loans on which interest accruals have been
discontinued. The accrual of interest is discontinued at the time a loan is 90
days past due unless the loan is well-secured and is in the process of
collection.
(ii) Loans
90 days or more past due and still accruing. Nonperforming loans are closely
monitored 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 or the
present value of projected future cash flows.
(iii) Restructured
loans. Restructured loans are loans in which the borrower has been granted a
concession on the interest rate or the original repayment terms due to financial
distress.
[Remainder
of page intentionally left blank.]
40
Set forth
below is a summary of our nonperforming Mortgage Loans at September 30, 2009 and
December 31, 2008.
September
30
2009
|
December
31
2008
|
|||||||
Nonaccrual
loans
|
$ | 15,760 | (1) | $ | 2,700 | |||
Loans
90 days or more past due and still accruing
|
-- | -- | ||||||
Restructured
loans
|
7,639 | 2,287 | ||||||
Total
nonperforming loans
|
$ | 23,399 | $ | 4,987 | ||||
Foregone
interest on nonaccrual loans(2)
|
$ | 255 | $ | 92 | ||||
Nonperforming
loans as percentage of total loans
|
13.3% | 1.9% |
_________________________________________________________
(1)
|
Includes
$9.3 million of restructured loans on nonaccrual
status.
|
(2)
|
Additional
interest income that would have been recorded during the period if the
nonaccrual loans had been current in accordance with their original
terms.
|
Delinquency Management and Collection
We
contract for servicing arrangements with the originators of the loans we
purchase. The continuing recession has to varying degrees stressed the financial
resources of our borrowers. Churches and ministries depend substantially on
contributions from their congregations and benefactors. Congregational
contributions are especially sensitive to unemployment
rates.
We have
adopted a proactive approach in responding to delinquencies. Our servicing agent
or our staff makes 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 some instances, we determine to
restructure the loan in light of the borrower’s circumstances and capabilities.
We classify a loan as a restructured loan when the modified terms result in a
loan we would not normally offer to a new borrower. Restructured loans include
modification to interest rates and/or principal payment terms. However, we do
not forgive the payment of principal in restructuring of a loan. At
September 30, 2009, restructured loans comprised 8.2% of the amount of our
loan portfolio.
If the
matter is not timely resolved and/or the borrower cannot or will not bring the
loan current, our policy is to file notices necessary to foreclose on the
property. To date, we have not resorted to a foreclosure sale on any Mortgage
Loan, although foreclosure proceedings are ongoing for the two loans totaling
$5.4 million. The delinquency and default rates we are currently experiencing,
while higher than historical levels, are within our manageable limits, and our
delinquency rates appear to have stabilized. We believe we have established
adequate levels of reserves for any foreseeable losses, and we continue to
evaluate the adequacy of such reserves in the light of current economic and
operational conditions.
41
Our
Loan Policies
Historically,
we have relied for our investments upon ECCU’s ability to originate Mortgage
Loans made to churches, schools, ministries and other non-profit corporations to
purchase land, develop facilities, construct or renovate worship facilities or
refinance existing indebtedness. Because ECCU has been making Mortgage Loans for
ministry related projects for over 40 years, we have relied upon ECCU’s
successful record in underwriting profitable and performing Mortgage Loans and
contracted with ECCU to service such loans.
We have
expanded our operations to include loan origination activities, offering loans
with fixed and variable interest rates. We receive an origination fee and loan
processing fee at the inception of each loan. These fees may be added to the
principal amount of the loan or paid at closing of the loan. 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 and general creditworthiness.
Origination
of Our Mortgage Loan Investments
We have
historically relied on ECCU for both the origination and underwriting of our
Mortgage Loan investments. We are expanding our in-house staff and loan
origination capabilities and expect to reduce reliance on ECCU. Borrowers pay
loan origination fees and processing fees to us on loans we
originate.
Our Mortgage Loan Investment
Standards
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.
42
Our policy is to require each of our Mortgage Loan investments to meet the following criteria:
Demonstration of
Ability to Pay.
The borrower must support its overall ability to timely pay principal and
interest by its operational and cash flow history. For these purposes, “cash
flow” includes donations and other revenue which the borrower can demonstrate to
be continuing. Generally, debt service payments of the Mortgage Loan may not
exceed a reasonable percentage of the borrower’s cash flow over the expected
term of the loan.
Term of
Loan. The
remaining term of each Mortgage Loan must be thirty (30) years or less from the
date we acquire or originate the loan.
Priority of
Secured Interest.
The loan must be secured by a first or second deed of trust on real property,
except we may invest in a loan secured by a more junior deed of trust under
circumstances we deem acceptable. We may on occasion, in circumstances we deem
appropriate, make an unsecured loan.
Funding
Escrow. The
Mortgage Loans shall be funded through a formal escrow in a customary manner in
order to assure that we receive good title to our security interest in the loan
at the time the loan is funded.
Value of
Security. Each
Mortgage Loan must be secured by real property for which there is available for
review a recent independent appraisal or other independent valuation which
supports the value of the property.
Title
Insurance. Each
Mortgage Loan must be covered by a current standard lender’s title insurance
policy.
Application of
Loan Proceeds.
Our loans are generally for the acquisition of real property. We also make
construction loans which are convertible into permanent loans. Procedures must
be established to assure the loan proceeds will be used for the purposes
authorized. Unless we waive the requirement for good cause, the loan proceeds
must be available only for expenditures on account of the purpose for which the
loan was made.
Inspection. We, the original lender, or
the lender’s representative must have made a personal on-site inspection of the
property securing the loan.
Borrower’s
Credit. The
borrower under the loan must pass credit standards and demonstrate sufficient
income or cash flow to service the Mortgage Loan.
Insurance. We require our borrowers to
obtain standard insurance protection customary in the industry, including title
insurance (to insure against title defects and some forms of documentation),
errors and omissions insurance (to insure against good faith errors on the part
of our employees or agents), and liability and casualty insurance in customary
amounts. We may also require special insurance in connection with particular
Mortgage Loans, including earthquake, flood and environmental hazard
insurance.
Lines of Credit
and Letters of Credit. Our typical Mortgage
Loan investment is a conventional real estate loan. However, from time to time
we may make a loan commitment or loan funds pursuant to a line of credit or a
letter of credit. These commitments and loans are typically secured by real
property or funds pledged by the borrower. For amounts of $500,000 or less, we
do not require an escrow or title insurance. We require that our loan investment
committee approve the transaction.
Credit Union
Members. Loans can be only made to credit union members or our investors,
unless otherwise permitted by our Church and Ministry Loan Policy.
Location of
Mortgage Loan Properties. Each Mortgage Loan must be secured by real
property located in the United States. Unsecured loans may be made
without a geographical limitation provided that all payments are made in U.S.
dollars and the financial statements of the borrower are in
English.
43
Loan
Limits. The
aggregate total of all construction loans or loans secured by junior liens on
real property may not exceed 200% of our tangible net worth. The maximum
aggregate amount of any loan or loans to one borrower (or to related entities)
may not exceed 25% of our tangible net worth. The maximum aggregate amount of
unsecured loans to any one borrower may not exceed 50% of our tangible net
worth. For any loan that exceeds 50% of our tangible net worth or 7% of our loan
portfolio, whichever is less, the loan must be approved by our Managers prior to
funding.
Our
Risk Rating Analysis
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 update the risk ratings of our Mortgage Loan
portfolio at least annually.
Servicing
We
currently rely upon ECCU to be our primary servicer for any loans that we
originate or purchase. As of September 30, 2009, ECCU was servicing 155 loans
for us or for MPF, which totals approximately $208.2 million in loan principal
outstanding. ECCU also serves as servicer of the Mortgage Loans pledged as
collateral to secure the Notes under a separate Servicing
Agreement.
Our
Mortgage Loan Portfolio Management
Liquidity
Management. We
have adopted a liquidity management plan in an attempt to reasonably assure the
continued availability of liquid funds to repay our debt securities as they
mature. Under this plan, we have estimated continued sources of cash, including
cash reserves, reinvestment by our Investors based on reasonable reinvestment
rate assumptions, and anticipated principal payments on our Mortgage Loan
investments.
Since our
inception, we have followed a policy of maintaining operational reserves in an
amount which, together with our expected cash from operations and funds,
including funds available from credit facilities, we judge to be sufficient to
permit the timely payment of interest and principal on our debt securities. We
intend to continue this policy but may, in our discretion, suspend or modify it
at any time or from time to time in the future. Should these reserve resources
be insufficient from time to time, it would be necessary for us to seek interim
financing through additional credit facilities or to sell a sufficient amount of
our Mortgage Loan assets in order to meet our cash flow demands.
Sale or
Hypothecation of Mortgage Loan Investments. In the event we are
unable to continue to finance our investment activities through the sale of our
debt securities, we may have to suspend further Mortgage Loan investment
activities and we could terminate these activities permanently. Under these
circumstances, we would liquidate our Mortgage Loan portfolio as necessary to
repay any then outstanding debt securities as they became due. We believe that
we could realize sufficient funds from our assets to repay any then outstanding
debt on a timely basis because of our ability to determine our liquidity needs
with reasonable certainty at least 90 days in advance, the nature and liquidity
of our cash, our accounts receivable, our Mortgage Loan investments, the
historic prices paid for secured loans comparable to our Mortgage Loan
investments, and the availability of purchasers for our Mortgage Loans. While to
date we have not tried to sell or hypothecate a significant amount of our
Mortgage Loans, we have identified several potential purchasers or lenders who
are credit unions, which on a regular basis purchase and/or sell participations
of secured loans comparable to our Mortgage Loan investments.
44
Restrictions
on Our Transactions Involving Interested Parties
The
following are our policies regarding our engaging in transactions in which our
Managers, officers and executive personnel have an interest:
·
|
Our
board, officers and persons serving on our investment committee may not
participate or seek to influence our decision to invest in a loan or
transaction wherein that individual or a Member of his or her immediate
family has any direct or indirect fiduciary or pecuniary interest. We may
transact business with a board Member, committee Member, officer, or
Member holding 5% or more of our voting membership interests, so long as
the transaction is fair and equitable to us and is consistent with our
policies generally applicable to similar transactions by us with unrelated
parties. Any such transaction must be approved by a majority of our
independent Managers and by a majority of all of our Managers not
otherwise interested in the transaction, following full and complete
disclosure of the person’s or his affiliate’s interest in the
transaction.
|
·
|
No
fee, commission, gift, rebate, or reciprocal arrangement of any kind or
other inducement may be solicited or accepted by any officers, Managers,
committee Members or employees in connection with our investments.
Reciprocal arrangements include any discounts on merchandise or services,
equity participation or any other form of consideration or compensation
whatsoever except as permitted by our board as described
above.
|
·
|
We
may not purchase or participate in a Mortgage Loan where a portion of the
amount of income to be received from the loan is tied to or contingent
upon the revenues or income of the borrower or upon the appreciation in
the value of the borrower’s
business.
|
Nature
of Our 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 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 then attempt to collect on the Mortgage Loan by foreclosing on the
security. In general, California law will not allow us to disregard the security
and to proceed directly against the maker on the Mortgage Loan note. We must
foreclose on the property under the deed of trust. Our ability to recover the
value of the Mortgage Loan under such circumstances is affected by certain legal
procedures and rights. Mortgage loans secured by real property are subject to
the laws of the state in which the property is located and as applicable,
federal law, including federal bankruptcy laws. Currently, the majority of our
Mortgage Loans are secured by property located in the State of
California.
45
California,
as does most states, imposes statutory prohibitions which limit the remedies of
a secured lender. A secured lender is limited in its right to receive a
deficiency judgment against the borrower following foreclosure on the secured
real property. In addition, California law prevents any deficiency judgment
against a borrower by a mortgage lender where the loan either represents a
portion of the purchase price of the property payable to the lender by that
borrower (a “purchase money loan”) or the loan is secured by the borrower’s
residence. Where a deficiency judgment is permissible, it can only be obtained
after a judicial foreclosure on the property and then only for the excess of the
outstanding debt over the fair market value of the property at the time of the
foreclosure sale (as determined under statutory provisions). The net result of
these statutes is to offer substantial protections to borrowers and to
effectively require a mortgage lender to look only to the value of the property
securing the Mortgage Loan through a private sale foreclosure.
In
addition to the California state laws restricting actions against borrowers,
numerous other statutory provisions, including the federal bankruptcy laws,
afford additional relief to debtors which may interface with or affect the
ability of a secured lender to realize the value of its Mortgage Loan in the
event of a default.
Under the
Internal Revenue Code of 1986, as amended, certain liens in favor of the
Internal Revenue Service for tax payments are provided priority over existing
Mortgage Loans. Also, mortgage lenders are subject to other statutory and
administrative requirements under various laws and regulations regarding the
origination and servicing of Mortgage Loans, including laws and regulations
governing federal and state consumer protection, truth-in-lending laws, the
Federal Real Estate Settlement Procedures Act, the Equal Credit Opportunity Act,
the Fair Credit Billing Act, the Fair Credit Reporting Act, and related statutes
and regulations.
As a
result of these debtor protection laws, we could sustain a loss as a result of
any of the foregoing federal or state laws and regulations restricting and/or
regulating the origination and servicing of Mortgage Loans. Also, these laws and
regulations are subject to continual change and evolution and it is always
possible that inadvertent violations or liabilities may be incurred by reason of
one or more of these provisions.
Our
Non-Mortgage Loan Investments
In
addition to traditional Mortgage Loans, we also from time to time invest in
other credit extension arrangements, such as providing letters of credit or
other financial instruments as security for loans. We may also make
unsecured loans to ministries or churches with established credit. The total
amount of unsecured, non-guaranteed loans will not constitute a material portion
of our total loan portfolio.
46
Competition
Although
the demand for church financing is both broad and fragmented, no one firm has a
dominant competitive position in the market sector. We compete with church bond
financing companies, banks, savings and loan associations, denominational loan
funds, certain real estate investment trusts, insurance companies and other
financial institutions to service this market sector. Many of these entities
have greater marketing resources, extensive networks of offices and locations,
larger staffs, and lower costs of operation in proportion to their size. We
believe, however, we have developed an efficient, effective and economical
operation that (i) specializes in identifying and creating a diversified
portfolio of church Mortgage Loans that we or ECCU originate and
(ii) preserves our capital base and generates consistent income for
distribution to our note holders and equity investors.
We rely
upon the extensive experience of our Managers and officers in working with
ministry related financing transactions, loan origination, investment in
churches, schools, ministries and non-profit organizations. We also have access
to the extensive knowledge and experience of ECCU’s management team for guidance
in providing loans to meet the unique needs of churches, ministries, schools and
ministries. Our agreements with ECCU provide a steady source of
Mortgage Loans that are originated or serviced by ECCU and also provide us with
a network of relationships with ministry oriented investors, entities and
organizations that are active in financing ministry related
projects.
Regulation
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 that
apply to CUSOs. As a CUSO, we primarily serve the interests of our Member credit
unions. We are also subject to various laws and regulations which govern:
(1) credit granting activities; (2) establishment of maximum interest
rates; (3) disclosures to borrowers and investors in our equity securities;
(4) secured transactions; (5) foreclosure, judicial sale and creditor
remedies that are available to a secured lender; and (6) the licensure
requirements of mortgage lenders, finance lenders, brokers and
financiers.
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 California Department of Corporations, unless otherwise exempt under
the law. We conduct our commercial lending activities under California Finance
Lender License # 603F994.
As we
expand our loan originations in states outside of the state of California, we
will have to comply with laws and regulations of those states. The statutes
which govern mortgage lending and origination vary from state to state. Because
these laws are constantly changing, due in part, to the challenge facing the
housing industry and financial institutions from subprime lending activities, it
is difficult to comprehensively identify, accurately interpret and effectively
train our personnel 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.
Effective
with the filing of articles of organization-conversion with the California
Secretary of State, we have converted from a corporate form of organization to a
limited liability company organized under the laws of the State of California.
Commencing on December 31, 2008, we are 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 operating
agreement and organizational 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 income is in excess of $250 thousand per year.
47
MANAGEMENT
Our
Managers and executive officers are as follows:
Name
|
Age
|
Positions
|
Mark
G. Holbrook
|
59
|
Chairman
of the Board of Managers, Chief Executive Officer
|
Billy
M. Dodson
|
49
|
President,
Assistant Secretary
|
Van
C. Elliott
|
71
|
Secretary,
Manager
|
Susan
B. Reilly
|
53
|
Vice
President of Finance and Principal Accounting Officer
|
Robert
Schepman
|
70
|
Vice
President Lender Relations
|
Harold
D. Woodall
|
63
|
Vice
President for Lending
|
Mark
A. Johnson
|
51
|
Manager
|
Arthur
G. Black
|
70
|
Manager
|
Shirley
M. Bracken
|
57
|
Manager
|
Juli
Anne S. Callis
|
56
|
Manager
|
Jeffrey
T. Lauridsen
|
59
|
Manager
|
R.
Michael Lee
|
50
|
Manager
|
Randolph
P. Shepard
|
52
|
Manager
|
Scott
T. Vandeventer
|
52
|
Manager
|
Summaries
of the business experience of our Managers and executive officers are set forth
in the prospectus.
MARK G.
HOLBROOK has served as our chairman and chief executive officer since our
conversion. Prior to that, he had served as our chairman of the board and CEO
since our inception. Mr. Holbrook also serves as president and chief executive
officer of ECCU. He began his career with ECCU in 1975 and has served as its
president since 1984. ECCU currently has assets under management of over $2.5
billion and more than 10,000 members in 50 states and 100 foreign countries. Mr.
Holbrook has served as board Chairman of Christian Management Association. He
received his Bachelor of Arts degree from Biola University in 1973 and has
completed post-graduate studies at Chapman College.
BILLY
(BILL) M. DODSON became our president on May 8, 2006, and was elected
Assistant Secretary in October 2007. Before joining us, he served as Vice
President of Sales for California Plan of Church Finance, Inc., a registered
broker-dealer starting in August, 2000. While at that company, he managed all
aspects of a brokerage operation, which annually distributed to investors
between $125 and $175 million of church mortgage bonds. Prior to joining
California Plan of Church Finance, Inc., Mr. Dodson served as Pastor for the
West Valley Church in Sherwood, Oregon. Mr. Dodson received his Bachelor of
Journalism degree from the University of Texas and a Master of Divinity degree
from Southwestern Baptist Theological Seminary. In the past, Mr. Dodson has
held numerous securities and insurance licenses. He is a graduate of the
Securities Industry Institute at the Wharton School, University of
Pennsylvania.
48
VAN C.
ELLIOTT has served as a Manager since our conversion. Prior to that, he served
as one of our directors since 1991. He has served as director for ECCU,
from April, 1991 until the present (except from March, 1997 to March, 1998 and
March, 2004 to March, 2005). Mr. Elliott served as associate director of
the Conservative Baptist Association of Southern California from 1980 to 1994,
where he was responsible for the general administrative oversight of the
association’s activities. Since that time, he has been self-employed as a
consultant providing financial and fund raising consultation services to church
and church-related organizations. He received his Bachelor’s and Master’s
degrees in mathematics and speech from Purdue University and spent seven years
in the computer industry. Mr. Elliott holds a Master of Divinity from
Denver Seminary and has spent fourteen years in local church ministries serving
in the area of Christian education and administration. He has
completed post-graduate instruction at the College for Financial
planning. Mr. Elliott is a member of the Financial planning
Association and holds the professional designation of Certified Financial
planner.®
SUSAN B.
REILLY has served as our Vice President of Finance and Principal Accounting
Officer since December, 2007. Prior to joining us, Ms. Reilly served as
Controller for Pacific Rim Capital, a private equity investment firm. Before
joining that firm in 2007, she was Senior Vice President and Treasurer for East
West Bank. Prior to joining East West Bank in 2004, Ms. Reilly served as
Treasurer for Catalina Restaurant Group. Before joining that company in 2003,
she worked for Parson Consulting Group. Ms. Reilly holds a Bachelor of Science
Degree from the University of California Riverside. She completed post-graduate
work at California State Fullerton and attended the University of Southern
California - Marshall School of Business - East West Bank Leadership
Program.
ROBERT
SCHEPMAN has served as our Vice President for Lender Relations since August of
2009. Mr. Schepman has originated church mortgages for twenty years,
beginning with Christian Mutual Life in 1987, and serving as a Ministry
Development Officer for ECCU for 17 years until his retirement in 2008. From
1981 to 1987 Mr. Schepman originated commercial loans and commercial real estate
syndications as a partner in Commercial Capital Resources. Prior to that time,
Mr. Schepman owned and operated a commercial metal fabrications business for
nine years, and enjoyed earlier successes as a securities salesperson and in
various other product sales capacities. Mr. Schepman earned his Bachelor of
Business Administration degree from Woodbury University, Los Angeles, in
1960. He has held the California Real Estate Broker license since
1990.
HAROLD D.
WOODALL has served as our Vice President for Lending since May of 2007. His
responsibilities include the general management of MPIC’s development,
underwriting, and processing of loan origination and investment. Mr. Woodall
previously served as Vice President for Lending Services at the California
Baptist Foundation from 1996 to 2006, where he was responsible for general
management of a $130 million loan fund, including origination of over $500
million in church and ministry loans during that period. His previous
experience also includes commercial lending, medical equipment manufacturing,
real estate sales, oil and gas production and agribusiness consulting. Mr.
Woodall is a graduate of Oklahoma State University in Stillwater Oklahoma with a
B.S. in Agricultural Economics.
MARK A.
JOHNSON has served as a Manager since our conversion. Prior to that, he served
as one of our directors since our inception. Mr. Johnson also serves as
Executive Vice President of ECCU, a position he has held since June, 1993. Prior
to joining ECCU, Mr. Johnson served as vice president of a multi-company
commercial warehousing/distribution organization and for six years served as
president and chief executive officer of a subsidiary of that company. Prior to
that, Mr. Johnson served as vice president/branch Manager of a Southern
California independent bank. Mr. Johnson has a Bachelor of Science degree in
Business Administration from Biola University.
ARTHUR G.
BLACK has served as a Manager since our conversion. Mr. Black was initially
elected to our board to replace the seat previously held by Mr. Paul A. Kienel.
Prior to that, he served as one of our directors since 1997. He also currently
serves as Chairman of the Board of Directors for Haven Ministries. Mr. Black
previously served as Director of Ministry Support for Ambassador Advertising
Agency from 1998 to 2007. Prior to joining that firm, he had served as a
ministry development officer at ECCU. Mr. Black served as executive vice
president of Truth For Life from 1994 to 1996. Truth For Life is a
nationally-syndicated radio Bible teaching ministry. He held similar positions
with the Biola Hour from 1981 to 1991 and Solid Rock Radio from 1991 to 1993,
and he served as director of U.S. broadcasting for Insight For Living from 1993
to 1994. Mr. Black has been in Christian ministry management since 1974. Prior
to that, he served in various corporate sales and marketing management positions
and was for six years owner/President of two consumer product/service companies.
He is a General Partner for Rancho Sierra Acres, Christian Investors, P/L
Properties and Ocean View Investors. Mr. Black has completed the equivalent to
two years of business courses towards a degree in business at UCLA.
49
SHIRLEY
M. BRACKEN has served as a Manager since our conversion. Prior to that, she
served as one of our directors since June, 2003. Ms. Bracken has since 1997
owned and operated Shirley Bracken Consulting Services, a consulting firm
providing services in the areas of communications, funding, development and
marketing for non-profit organizations, including schools. Until she resigned to
start her consulting business, Ms. Bracken worked for Carl Karcher Enterprises,
Inc. of Anaheim, California, which she first joined in 1983. At the time she
left, Ms. Bracken served as that company’s Vice-President, Communications/Human
Resources. Ms. Bracken holds a BA in Sociology from California State University,
Fullerton, and a Masters in Organizational Leadership from Biola
University.
JULI ANNE
S. CALLIS has served as a Manager since our conversion. Prior to that, she
served as one of our directors since 2007. She is currently Chief Executive
Officer of the National Institute of Health Federal Credit Union. Prior to her
current engagement, she was Executive Vice President and Chief Operating Officer
of KeyPoint Credit Union and the President of its subsidiary, KeyPoint Financial
Services. Before joining KeyPoint Credit Union, Ms. Callis served as Vice
President for Business Development, Marketing and Legislative Affairs from
1988-1995 at Langley Federal Credit Union. Prior to joining the credit union
industry, Ms. Callis served as the Director of Sales for the US Navy Mid
Atlantic Region, which included the direct responsibility for public relations
and sales for all Navy Exchange and Commissary Operations in the Mid Atlantic
States, Europe, Iceland and Bermuda. Ms. Callis received her Bachelor of Science
degree in Community Health and Education from East Carolina University and
received a Master’s degree in Organizational Development from the University of
San Francisco, where she is pursuing a Ph.D. She also serves as Chair for the
Executive committee of the Open Solutions, Inc. Client Association, and as a
Trustee of the International Mission board of the Southern Baptist
Convention.
JEFFREY
T. LAURIDSEN has served as a Manager since our conversion. Prior to that, he
served as one of our directors since October, 2007. He is an attorney
in private practice in Tustin, California. Before establishing his current
practice, Mr. Lauridsen served with several other law firms in the Orange County
area, as partner and senior associate. Mr. Lauridsen’s 17 years of law practice
have focused on corporate law, and encompassed both trial and appellate work in
diverse areas of law, including Business Litigation, Construction Defect,
General Liability, Premises Liability, Products, Medical Malpractice, ERISA,
Insurance Coverage, Automobile Liability, Insurance Bad Faith, Employment and
Labor Law, Sexual Harassment, Sexual Molestation and others. Prior to entering
into the practice of law, Mr. Lauridsen worked as a claim representative in the
insurance industry for 19 years. Mr. Lauridsen received his Associate of Arts
degree in Political Science from Fullerton College. He received his Bachelor of
Science in Law and Juris Doctorate degrees from California Southern Law School.
He has served as Elder at Grace Church in Orange, California for 18
years.
R.
MICHAEL LEE has served as a Manager since our conversion. Prior to that, he
served as one of our directors since January, 2008. Mr. Lee currently serves as
President, Midwest Region and Chief membership Officer for Members United
Corporate Federal Credit Union. Mr. Lee joined Mid-States Corporate Federal
Credit Union in 2005, prior to the merger that created Members United. He has
served as Senior Vice President of Sales for Corporate Network eCom, Senior Vice
President of Marketing and Member Services at U.S. Central Credit Union, and
Senior Vice President, Marketing and Member Services at Corporate One Credit
Union, Inc. Prior to this, he spent 15 years in the insurance
industry, serving the needs of business owners. Mr. Lee attended Southern
Illinois University, CUNA’s Financial Management School, and has completed
numerous industry training sessions throughout his career.
50
RANDOLPH
(RANDY) P. SHEPARD has served as a Manager since our conversion. Prior to that,
he served as one of our directors since January, 2008. Mr. Shepard is currently
the Senior Vice President/Investments and Subsidiary Companies of Western
Federal Credit Union. Prior to assuming this position in 2003, Mr. Shepard was
the Vice President and Chief Financial Officer of Western Federal Credit Union.
He attended the University of Redlands and has a certificate of Executive
Management from Claremont Graduate School.
SCOTT T.
VANDEVENTER has served as a Manager since our conversion. Prior to that, he
served as one of our directors since 1992. Mr. Vandeventer has been employed by
ECCU since 1988 and currently serves as its Executive Vice President and Chief
Operating Officer. Prior to joining ECCU, Mr. Vandeventer provided consulting
services to ECCU and others through AM Business Communications, Inc., a
marketing communication company he founded in 1980. Mr. Vandeventer received his
Bachelors Degree from Biola University and has completed graduate work in
finance and marketing at California State University Fullerton School of
Business Administration.
Code
of Ethics
We have
adopted a code of ethics which applies to our principal executive officer,
principal accounting officer or controller, or persons performing similar
functions.
Audit
Committee
Our
Managers, acting as our directors prior to our conversion to a limited liability
company, established a standing audit committee in May, 2005, which is comprised
of Randolph P. Shepard, Scott T. Vandeventer and Shirley M. Bracken. With the
exception of Mr. Vandeventer, each person serving on our audit committee is
an independent person as defined in our related party transaction policy. Mr.
Shepard serves as chairman of the committee.
Our
Managers have adopted a formal charter for our audit committee. Our audit
committee oversees our corporate accountancy, financial reporting practices and
audits of our financial statements.
Audit
Committee Financial Expert
Our
Managers have determined that Mr. Shepard is an “audit committee financial
expert” as defined in Item 401(e) of Regulation S-B.
Our
Board of Managers
Under the
operating agreement, our board and officers are charged with governing and
conducting our business and affairs. The operating agreement charges our board
with essentially the same duties, obligations and responsibilities as a board of
directors of a corporation. Thus, our business and affairs are governed by our
Managers. Our Managers establish our loan policies and review them periodically
and have authorized designated loan officers and our President the authority to
make loans within certain limits established by our Managers from time to time.
Our Managers have also appointed an investment committee to review and carry out
our loan policy. The investment 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, approval by the full board is required. Upon
approval, we issue a written loan commitment to the applicant that specifies the
material terms of the loan.
Each
Manager serves until the next annual meeting of Members or until the successor
is duly elected and qualified in accordance with our operating agreement. Our
executive officers serve at the pleasure of our Managers. We currently have ten
(10) Managers. Our Managers are elected annually by our Members for a term of
one year or until their successors are elected and qualified. Our officers serve
at the pleasure of our board. The management and direction of our business
activities are under the control of our board.
51
Board
Committees
Our board
has established committees of our Managers, including the Board Governance,
Audit, Investment, Asset/Liability Management and Credit Review committees. Our
investments, including loan purchases and dispositions, are reviewed by our
investment committee appointed by the board. Each committee may consist of at
least three persons. Currently, Messrs. Holbrook, Elliott, Lauridsen, and Black
serve on our investment committee. Mr. Dodson serves ex-officio.
Manager
Compensation
None of
our Managers currently receives compensation for services rendered as a Manager.
Each, however, is entitled to be reimbursed for expenses incurred in performing
duties on our behalf.
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.
[Remainder
of page intentionally left blank.]
52
MANAGEMENT
COMPENSATION
The
following table sets forth certain information regarding compensation we paid
for services rendered to us during the years ended December 31, 2009, 2008 and 2007 by our Principal Executive Officer and
President. Mr. Dodson was appointed President by the Board
effective May 8, 2006.
Summary
Compensation Table
Annual
Compensation
Name
and Principal Position
|
Year
Ended
|
Salary
|
Bonus(1)
|
Non-Equity
Incentive
plan
Compensation
|
All
Other
Compensation
|
||||
Mark
G. Holbrook,
|
2009
|
-0-
|
-0-
|
-0-
|
-0-
|
||||
Chairman,
CEO (2)
|
2008
|
-0-
|
-0-
|
-0-
|
-0-
|
||||
2007
|
-0-
|
-0-
|
-0-
|
-0-
|
|||||
Billy
M. Dodson,
|
2009
|
$190,516
|
$70,700
|
(3)
|
-0-
|
$24,066
|
(4) | ||
President
|
2008
|
183,500
|
73,217
|
(3)
|
$43,229
|
(5)
|
21,943
|
(6) | |
2007
|
173,460
|
68,300
|
(3)
|
39,655
|
(5)
|
63,086
|
(7) | ||
Susan
B. Reilly,
|
2009
|
140,192
|
42,176
|
-0-
|
17,100
|
(4) | |||
Vice
President Finance
|
2008
|
135,000
|
30,375
|
-0-
|
14,704
|
(6) | |||
2007
|
10,904
|
2,100
|
-0-
|
-0-
|
|||||
Harold
Woodall,
|
2009
|
133,867
|
29,281
|
-0-
|
17,807
|
(4) | |||
Vice
President Lending
|
2008
|
120,000
|
18,159
|
-0-
|
15,046
|
(6) | |||
2007
|
84,923
|
500
|
-0-
|
12,672
|
(8) |
(1)
Bonuses are reflected in this table in the year earned. However, each person’s
4th
quarter bonus is awarded at the end of the 4th
quarter but paid in the 1st
quarter of the next following year.
(2) Mr.
Holbrook is a full-time employee of ECCU. Since December 1, 1994, Mr. Holbrook
has expended, on the average, approximately 2% of his time as an officer and
manager of the Company. Mr. Holbrook currently devotes less than 1% of his time
serving the Company as an officer.
(3) An
aggregate bonus amount of $70,700, $73,217 and $68,300 was paid to Mr. Dodson
for the fiscal years 2009, 2008 and 2007, respectively.
(4) We
contributed an aggregate amount of $24,066 for Mr. Dodson’s 401(k) retirement
plan, medical benefits and life and disability insurance for 2009. We also
contributed an aggregate amount of $17,100 for Ms. Reilly’s 401(k) retirement
plan, medical benefits and life and disability insurance for 2009. We also
contributed an aggregate amount of $17,807 for Mr. Woodall’s 401(k) retirement
plan, medical benefits and life and disability insurance for
2009.
(5) In
2008, Mr. Dodson received a long-term incentive award that he earned as a
participant in the ECCU Long-Term Incentive plan. Mr. Dodson’s award was
earned for the year ending December 31, 2006, but did not vest until his service
as an ECCU leased employee was terminated effective as of December 31, 2007.
With the restructuring of our employee leasing arrangements with ECCU, Mr.
Dodson became fully vested in his long-term incentive award and entitled to
receive this payment. As provided under our leasing and administrative services
agreement with ECCU, we were responsible for making this payment. The incentive
award was fully paid by the end of 2008.
(6) We
contributed an aggregate amount of $21,943 for Mr. Dodson’s 401(k) retirement
plan, medical benefits and life and disability insurance for 2008. We also
contributed an aggregate amount of $14,704 for Ms. Reilly’s 401(k) retirement
plan, medical benefits and life and disability insurance for 2008. Finally, we
contributed an aggregate amount of $15,046 for Mr. Woodall’s 401(k) retirement
plan, medical benefits and life and disability insurance for
2008.
(7) For
fiscal year 2007, we contributed $23,433 for Mr. Dodson’s 401(k) retirement
plan, medical benefits, and life and disability insurance. In addition, Mr.
Dodson received sales compensation of $26,384, a retirement benefit of $9,114
and other benefit allowances of $4,155.
(8) We
paid $3,397 in retirement plan contributions and $9,275 in employee benefits for
Mr. Woodall in 2007.
53
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 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 vote
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 holders 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 liquidation, dissolution
or winding up of the company to share ratably in all assets remaining after
payment of liabilities. Our Members have no preemptive, conversion, subscription
or cumulative voting rights.
Our
Series A Units
We
currently have 119,000 Series A Units outstanding. Following is a summary
of the rights, preferences and privileges of our Series A Units.
54
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 holders of at least two-thirds (2/3rds) of
the Series A Units.
Distributions. Holders of the Series A
Units are entitled to receive distributions payable quarterly at the rate of 190
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. However, our payment of distributions is subject to
certain LLC Act restrictions. Distributions are cumulative. That is, any
distribution which is declared but not paid will cumulate and be payable as soon
as practicable.
Liquidation
Preference. $100.00 per Unit, plus an amount equal to any declared and
unpaid distributions.
Redemption. We may call the Series A
Units for redemption at the liquidation preference of $100.00 per unit, in whole
or in part, upon 90 days’ prior written notice on December 31, 2008 or on
each December 31 thereafter.
Rights Upon
Liquidation. Upon
a change in control, liquidation, dissolution or winding up of our affairs, the
Series A Units will be entitled to receive the liquidation preference per unit
of $100.00 plus the amount of any declared but unpaid distributions before any
distributions with respect to our Class A Units or other junior membership
interests.
Rights in the
Event We Fail to Pay Distributions. In the event we fail to pay
four (4) consecutive quarterly distributions, the Series A Units will have the
right to elect two (2) Members to our board, who will serve until distributions
on the Series A Units are brought current.
Voting
Rights. Except as
stated above, the Series A Units have the right to vote only on matters on which
preferred membership interests are entitled to vote under the LLC Act, including
the right to vote as a class on certain amendments to our charter documents, and
certain mergers and reorganizations.
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 holders
at an annual meeting, subject to certain limited voting rights of our Series A
Unit holders.
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.
55
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.
OUR
OTHER INVESTOR DEBT NOTES
At
September 30, 2009, we had $70.8 million of other investor debt securities
outstanding. These debt obligations included the following.
Class
A Notes
At
September 30, 2009, we had $43.3 million of our Class A Notes outstanding. The
Class A Notes were issued in three Series having maturities from 6 to 84 months.
The Class A Notes are our general unsecured and unsubordinated obligations. The
Notes were issued subject to the Class A Notes Trust Indenture. This Indenture
contains certain financial covenants and restrictions on the payment of
distributions and other debt. The Class A Notes rank equal in right of payment
with our existing and future unsecured and unsubordinated
indebtedness.
The
Alpha Class Notes
At
September 30, 2009, we had $15.7 million of our Alpha Class Notes outstanding.
The Alpha Class Notes were issued in five Series having maturities ranging from
6 to 120 months. The Alpha Class Notes are our general unsecured and
unsubordinated obligations (except as described below). The Notes are issued
subject to the Alpha Class Note Loan and Trust Agreement. This Loan Agreement
contains certain financial covenants and restrictions on the payment of
distributions and other debt. The Alpha Class Notes rank equal in right of
payment with our existing and future unsecured and unsubordinated
indebtedness.
Special
Offering Notes
At
September 30, 2009, we had $8.7 million of debt securities having various terms
we have issued over the past several years to ministries, ministry-related
organizations, and individuals. Except for a small number of investors (in total
not exceeding 35 persons), the holders of these Notes are accredited investors
within the meaning of Regulation D under the 1933 Securities Act. We may
continue to sell our debt securities to eligible investors on an individual,
negotiated basis as we deem appropriate and in compliance with exemptions from
registration or qualifications under federal and applicable state securities
laws.
56
SECURITY
OWNERSHIP OF CERTAIN
BENEFICIAL
OWNERS AND MANAGEMENT
The
following table sets forth, as of September 30, 2009, the amount of our Class A
Units owned by each of our executive officers and 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 as of the date of
this prospectus.
Name
|
Class
A Units
Beneficially
Owned
|
Percentage
of
Total
Class
A Units
Owned(1)
|
|||||
Billy
M. Dodson
915
W. Imperial Hwy., Suite 120
Brea,
CA 92821
|
--
|
--%
|
|||||
Mark
G. Holbrook
915
W. Imperial Hwy., Suite 120
Brea,
CA 92821
|
--
|
--%
|
|||||
Mark
A. Johnson
915
W. Imperial Hwy., Suite 120
Brea,
CA 92821
|
--
|
--%
|
|||||
Van
C. Elliott
915
W. Imperial Hwy., Suite 120
Brea,
CA 92821
|
--
|
--%
|
|||||
Susan
B. Reilly
915
W. Imperial Hwy., Suite 120
Brea,
CA 92821
|
--
|
--%
|
|||||
Robert
Schepman
915
W. Imperial Hwy., Suite 120
Brea,
CA 92821
|
--
|
--%
|
|||||
Harold
D. Woodall
915
W. Imperial Hwy., Suite 120
Brea,
CA 92821
|
--
|
--%
|
|||||
Arthur
G. Black
915
W. Imperial Hwy., Suite 120
Brea,
CA 92821
|
--
|
--%
|
|||||
Shirley
M. Bracken
915
W. Imperial Hwy., Suite 120
Brea,
CA 92821
|
--
|
--%
|
|||||
Juli
Anne S. Callis
915
W. Imperial Hwy., Suite 120
Brea,
CA 92821
|
--
|
--%
|
|||||
Jeffrey
T. Lauridsen
915
W. Imperial Hwy., Suite 120
Brea,
CA 92821
|
--
|
--%
|
|||||
R.
Michael Lee
915
W. Imperial Hwy., Suite 120
Brea,
CA 92821
|
--
|
--%
|
57
Randolph
P. Shepard
915
W. Imperial Hwy., Suite 120
Brea,
CA 92821
|
--
|
--%
|
|||||
Scott
T. Vandeventer
915
W. Imperial Hwy., Suite 120
Brea,
CA 92821
|
--
|
--%
|
|||||
All
Managers and officers as a group
|
--
|
--%
|
|||||
Other
5% or greater beneficial owners (seven):
|
|
|
|||||
Evangelical Christian Credit Union | 62,000 | 42.31% | |||||
Financial
Partners Credit Union
|
12,000
|
8.19%
|
|||||
USA
Federal Credit Union
|
11,905
|
8.13%
|
|||||
Western
Federal Credit Union
|
11,905
|
8.13%
|
|||||
Wescom
Credit Union
|
11,905
|
8.13%
|
|||||
Credit
Union of Southern California
|
11,900
|
8.12%
|
|||||
Keypoint
Credit Union
|
8,000
|
5.46%
|
Notes to
Table
(1) Based
on 146,522 Class A Units outstanding.
[Remainder
of page intentionally left blank.]
58
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF
FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Cautionary
Notice Regarding Forward Looking Statements
We desire
to take advantage of the “safe harbor” provisions of the Private Securities
Litigation Reform Act of 1995. This filing contains a number of forward-looking
statements which reflect management’s current views and expectations with
respect to our business, strategies, products, future results and events, and
financial performance. All statements made in this filing other than statements
of historical fact, including statements addressing operating performance,
events, or developments which management expects or anticipates will or may
occur in the future, including statements related to volume growth, revenues,
profitability, new services, adequacy of funds from operations, statements
expressing general optimism about future operating results, and non-historical
information, are forward looking statements. In particular, the words “believe,”
“expect,” “intend,” “anticipate,” “estimate,” “may,” variations of such words,
and similar expressions identify forward-looking statements, but are not the
exclusive means of identifying such statements, and their absence does not mean
that the statement is not forward-looking.
These
forward-looking statements reflect the current views of our management and 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). The following risk factors, among others, could cause
our financial performance to differ materially from the expectations expressed
in such forward-looking statements:
·
|
we
are a highly leveraged company and our indebtedness could adversely affect
our financial condition and
business;
|
·
|
we
depend on the sale of our debt securities to finance our business and have
relied on the renewals or reinvestments made by our holders of debt
securities when their debt securities mature to fund our
business;
|
·
|
we
need to raise additional capital to fund and implement our business
plan;
|
·
|
we
rely upon our largest equity holder to originate profitable church and
ministry related Mortgage Loans and service such
loans;
|
·
|
because
we rely on credit facilities collateralized by church Mortgage Loans that
we acquire, disruptions in the credit markets, financial markets and
economic conditions that adversely impact the value of church Mortgage
Loans can negatively affect our financial condition and
performance;
|
·
|
we
are required to comply with certain covenants and restrictions in our
lines of credit and our financing facility that, if not met, could trigger
repayment obligations of the outstanding principal balance on short
notice;
|
·
|
we
have recently experienced an increase in our non-performing loans as a
percentage of total loans due to the economic downturn in the U.S. that
accelerated in the fall of 2008 and continued in
2009;
|
·
|
we
have entered into several loan modification agreements and arrangements in
2009 to restructure certain Mortgage Loans that we hold of borrowers that
have been negatively impacted by adverse economic conditions in the U.S.;
and
|
·
|
we
are subject to credit risk due to default or non-performance of the
churches or ministries that have entered into Mortgage Loans and
counterparties that we enter into an interest rate swap agreement with to
manage our cash flow requirements.
|
59
As used
in this quarterly report, the terms “we”, “us”, “our” or the “Company” means
Ministry Partners Investment Company, LLC and our wholly-owned subsidiary,
Ministry Partners Funding, LLC.
Readers
should not place undue reliance on these forward-looking statements, which are
based on management’s current expectations and projections about future events,
are not guarantees of future performance, are subject to risks, uncertainties
and assumptions (including those described below), and apply only as of the date
of this filing. Our actual results, performance or achievements could differ
materially from the results expressed in, or implied by, these forward-looking
statements. Factors which could cause or contribute to such differences include,
but are not limited to, the risks discussed in our Annual Report on Form 10-K
and in the press releases and other communications to our Members issued by us
from time to time which attempt to advise interested parties of the risks and
factors which may affect our business. We undertake no obligation to publicly
update or revise any forward-looking statements, whether as a result of new
information, future events, or otherwise.
Overview
Our
primary mission is to make loan financing available to the evangelical Christian
community, primarily for the acquisition and improvement of church-related
properties. We do this by originating and investing in Mortgage Loans made to
churches, most of which are secured by church and church-related real property
owned by and/or maintained for the benefit of evangelical churches or church
organizations, including Christian schools, ministries and related
organizations.
Our goals
are to provide funds for loans to evangelical churches and church organizations
on a cost effective basis, and to provide funds for business loans originated by
our Members and other credit unions. In addition, we intend to operate in such a
way as to provide competitive yields to purchasers of our Notes, earnings for
our common and Series A Unit holders, and a general increase in the value of our
Class A Common Units and Series A Units for the benefit of our
investors.
We obtain
funds for our Mortgage Loan investments from the sale of our debt securities,
which are sold primarily to investors who are in or associated with the
Christian community, including individuals, ministries and organizations
associated with evangelical churches and their governing associations. With
financing from the BMO Credit Facility and Members United financing facilities
in 2007, our total assets grew from $67.7 million at December 31, 2006 to
$275.1 million at December 31, 2008. Total liabilities also grew from $54.6
at December 31, 2006, to $262.3 million at December 31, 2008. Of these
total liabilities owed as of December 31, 2008, (i) $85.3 million was
owed by MPF under the BMO Credit Facility; (ii) $10 million on the $10
Million LOC to Members United; (iii) $89.9 million on the $100 Million CUSO
Line to Members United; and (iv) $75.8 million to our note investors. On
November 30, 2009, we obtained a credit facility with Western Corporate Federal
Credit Union (“WesCorp”) in the amount of $28.0 million (the “WesCorp Loan”). We
drew down approximately $24.28 under this credit facility to repay and retire
the BMO Credit Facility.
With the
rapid increase in our total assets and liabilities on our balance sheet,
interest income received on our investments increased from $3.1 million in
fiscal year 2006 to $13.8 million for fiscal year 2008. Because we benefited
from low short-term interest rates on our short-term borrowing facilities in
2008 and certain tax benefits realized in connection with our conversion to a
limited liability company form of organization, our net income increased to $744
thousand for fiscal year 2008, as compared to a net loss of $299 thousand in
fiscal year 2007. Our continued profitability will depend upon
(i) successfully matching and managing our investment returns from the
mortgages that we originate, acquire and hold with our short-term borrowing
costs; (ii) finding alternative sources of capital to enable us to pay down
our credit facilities and reduce our reliance on debt financing for future
growth; (iii) adding additional services that will generate non-interest
income in order to diversify our sources of income; and (iv) successfully
restructuring our line of credit arrangements with Members United.
60
New
Opportunities
The
continued dislocation in the global and U.S. credit markets has limited our
access to new credit facilities with which to finance additional loan
originations. As a result, we are currently financing our loan origination
activities solely out of the proceeds of sales of our debt securities and cash
generated by our loan portfolio. Until the crisis in the U.S financial system
stabilizes and credit becomes more available to finance companies such as ours,
we expect to conduct limited loan origination activities.
While our
loan origination and securitization activities have been curtailed under current
credit market conditions, we are exploring a number of business opportunities
that do not depend on raising new capital or increasing our debt leverage
ratios. Among these opportunities are consulting services to borrowers and
lenders in our specialized niche, including rendering advice on debt
restructuring, troubled loan workouts, and providing other financial services to
borrowers. We believe our extensive experience and expertise in the church
finance services industry positions us to earn significant fee income from these
activities.
In
addition, by the end of 2010 , we expect to complete
the upgrading and expansion of our data processing systems in the areas of loan
servicing and loan origination. We expect these upgrades will deliver long-term
cost reduction to our operations by eliminating our need to rely on third party
services for these functions. Also, by streamlining our credit and mortgage
portfolio administration capabilities, we will be able to market services to
third party lenders.
We also
intend to expand our efforts to raise capital through the issuance of debt
securities and other investment vehicles in 2009 and 2010 in order to increase
our liquidity and capital funds. In addition, we may consider strategies for
reducing our leverage that may include the sale of Mortgage Loan assets on the
open market to banks, credit unions, and other investors.
Our loan
portfolio continues to perform at an acceptable level. As of September 30, 2009,
the 90-day delinquency rate in our loan portfolio, on a consolidated basis, was
3.10%. We modified nine loans to assist the borrowers in meeting their
obligations, and two loans were in foreclosure.
Conversion
to Limited Liability Company
As of
December 31, 2008, we converted to a California limited liability company
pursuant to a plan of conversion approved by our shareholders on
December 11, 2008. We developed the plan and executed this statutory
conversion primarily to eliminate our ongoing income tax liabilities and provide
for a more flexible capital raising structure. Pursuant to a valuation performed
by an independent consultant in connection with the conversion, we have
concluded that we will be entitled to recover approximately $140 thousand of
federal income taxes paid in previous years as a result of the adoption of the
Plan of Conversion.
Consolidated
Results of Operations
Nine
Months Ended September 30, 2009 vs. Nine Months Ended September 30,
2008
During
the nine months ended September 30, 2009, we had a net income of $937 thousand
as compared to net income of $207 thousand for the nine months ended September
30, 2008. This increase is attributable primarily to an increase in net interest
margin due to the larger loan portfolio for most of 2009 as compared to
2008. Net interest income after provision for loan losses increased
to $3.5 million, an increase of $1.0 million, or 42%, from $2.5 million for the
nine months ended September 30, 2008. This increase is also
attributable to carrying a larger loan portfolio throughout most of 2009 as
compared to 2008. Our cost of funds (i.e., interest expense)
increased to $7.6 million, an increase of $767 thousand or 11%, for the nine
months ended September 30, 2009, as compared to $6.8 million for the nine months
ended September 30, 2008. This is due primarily to an increase in our
line of credit borrowings drawn to fund loan purchases and
originations.
61
Our
operating expenses for the nine months ended September 30, 2009 increased to
$2.6 million from $2.1 million for the same period ended September 30, 2008, an
increase of 20%. The increase was caused primarily by an increase in
salaries and benefits related to the hiring of new employees and an increase in
legal and accounting expenses related to our new note offerings.
Year Ended December 31, 2008 vs. Year
Ended December 31, 2007
Despite a
challenging credit market, primarily driven by a collapse in the liquidity of
mortgage-backed securities, we had a record year of earnings and net income for
our company. As further described below, the most significant factors
influencing our consolidated results for the year ended December 31, 2008,
as compared to 2007 were:
|
·
|
the
growth in our total assets and Mortgage Loan investments from $121 million
at December 31, 2007 to $275 million at December 31,
2008;
|
|
·
|
for
most of 2008, we were able to benefit from lower borrowing costs for our
credit facilities;
|
|
·
|
our
conversion from a corporation form of organization to a limited liability
company, thereby providing significant income tax
savings;
|
|
·
|
an
increased provision for loan
losses;
|
|
·
|
increased
operating costs incurred as a result of expanding our office facilities
and added complexity of our operations;
and
|
|
·
|
the
increase in net interest income resulting from the growth in our Mortgage
Loan assets.
|
Interest income on loans increased from $4.6 million to $13.5 million for the year ended December 31, 2008 due to increases in Mortgage Loans that we acquired. Total interest income increased from $4.9 million to $13.8 million during the year ended December 31, 2008, as compared to the year ended December 31, 2007.
Interest
expense on our lines of credit increased from $377 thousand in 2007 to $6.1
million due to increases on our borrowings under the BMO Credit Facility and
Members United loan facilities. Our interest expense payable to our note
investors increased from $3.2 million to $3.6 million for the year ended
December 31, 2008, primarily due to an increase in the amount of Notes
outstanding.
Total
interest expense increased from $3.6 million to $9.8 million as a result of
these increased borrowing obligations. Net interest income increased to $4.1
million for 2008, as compared to $1.3 million in 2007. Non-interest
income increased from $8 thousand in 2007 to $39 thousand in 2008, primarily due
to an increase in late fees and loan referral fees received.
Personnel
expenses for salaries increased $211 thousand, or 23.8%, to $1.1 million for
2008 compared to $886 thousand during 2007. This increase is the result of
adding support personnel in the finance and accounting, loan, and note
departments during 2008. Our office expenses, insurance and related operations
expenses increased by $809 thousand, or 163.4%, to $1.3 million, as compared to
$495 thousand for the year ended December 31, 2007. The increase in office
expenses is related to an increase in the size of our company.
62
Professional
costs for legal, accounting and consulting services increased by $237 thousand,
or 75.7%, to $550 thousand, as compared to $313 thousand. These increased
expenses were due to a full year of amortization of costs related to opening the
BMO Credit Facility and Members United financing transactions, as well as to
additional legal and accounting services required as our company has grown in
size and complexity. During 2008, we completed a new securities offering of our
Class A Notes, entered into a new trust Indenture relationship with US Bank as
Trustee, consummated a conversion of our company to a limited liability company
and completed a restructuring of our capital structure and have adapted to
increasing reporting and accounting complexities as our operations have
expanded. The increase in salary expense, office operations expense, and
expenses related to legal and accounting services caused non-interest expenses
to increase from $1.8 million during 2007 to $3.0 million during 2008, an
increase of 68.9%.
For the
year ended December 31, 2008, we earned net income of $744 thousand, as
compared to net loss of $299 thousand for the year ended December 31, 2007,
an increase of $1.0 million. This increase was primarily due to the additional
loans receivable acquired during the year at higher interest rates than the
rates paid on the additional debt incurred.
Year
Ended December 31, 2007 vs. Year Ended December 31, 2006
Interest
income on loans increased from $3.0 million to $4.6 million for the year ended
December 31, 2007, primarily due to increases in Mortgage Loans that we
acquired. Total interest income increased from $3.1 million to $4.9 million at
December 31, 2007, as compared to the year ended December 31,
2006.
Interest
expense on our lines of credit increased from $-0- in 2006 to $377 thousand due
to our borrowings under the BMO Credit Facility and Members United loan
facilities. Our interest expense payable to our debt security holders
increased from $2.4 million to $3.2 million for the year ended December 31,
2007, primarily due to an increase in the amount of Notes outstanding from $54.3
million at December 31, 2006 to $62.1 million at December 31,
2007.
Total
interest expenses increased from $2.4 million to $3.6 million as a result of
these increased borrowing obligations. Net interest income increased to $1.3
million for 2007, as compared to $747 thousand in 2006.
Non-interest
income decreased from $233 thousand to $8 thousand in 2007, primarily due to
lower consulting fees and loan commitment fees on letters of
credit.
Personnel
expenses for salaries increased $475 thousand, or 115.2%, to $886 thousand
compared to $411 thousand. We have added a new Vice President of
Lending and Vice President Finance and Accounting in an effort to expand our
services and operations.
Our
office expenses, insurance and related operations expenses increased by $314
thousand, or 174.3%, to $495 thousand, as compared to $181 thousand for the year
ended December 31, 2006. Professional costs for legal, accounting and
consulting services increased by $154 thousand, or 97.1%, to $313 thousand, as
compared to $159 thousand. These increased expenses were due to costs incurred
in undertaking the BMO Credit Facility and Members United financing
transactions, restructuring of our Trustee arrangements for our note investors,
engaging in capital raising initiatives, and our efforts to respond to new
accounting guidelines for consolidating entities and corporate
governance.
Non-interest
expenses increased from $832 thousand to $1.8 million, an increase of $965
thousand or 115.9%. This increase is primarily attributable to increases in
salaries and benefits of $475 thousand, office operations and other expenses of
$314 thousand and legal and accounting expenses of $154 thousand.
For the
year ended December 31, 2007, we incurred a net loss of $299 thousand, as
compared to net earnings of $98 thousand for the year ended December 31,
2006, a decrease of $397 thousand or 404.1%. This decrease was
primarily due to an increase in non-interest expense of $965 thousand and a
decrease in non-interest income of $225 thousand, which were offset by an
increase in net interest income of $584 thousand and a decrease in the income
tax provision of $208 thousand.
63
Net
Interest Income and Net Interest Margin
Our
earnings depend largely upon the difference between the income we receive from
interest-earning assets, which are principally Mortgage Loan investments and
interest-earning accounts with other financial institutions, and the interest
paid on Notes payable and lines of credit. This difference is net interest
income. Net interest margin is net interest income expressed as a percentage of
average total interest-earning assets.
The
following tables provide information, for the periods indicated, on the average
amounts outstanding for the major categories of interest-earning assets and
interest-bearing liabilities, the amount of interest earned or paid, the yields
and rates on major categories of interest-earning assets and interest-bearing
liabilities, and the net interest margin:
[Remainder
of page intentionally left blank.]
64
Average
Balances and Rates/Yields
For
the Nine months Ended September 30,
(Dollars
in Thousands)
2009
|
2008
|
|||||||||||||||||||||||
Average
Balance
|
Interest
Income/Expense
|
Average
Yield/ Rate
|
Average
Balance
|
Interest
Income/ Expense
|
Average
Yield/ Rate
|
|||||||||||||||||||
Assets:
|
||||||||||||||||||||||||
Interest-earning
accounts with other financial institutions
|
$ | 14,169 | $ | 260 | 2.45% | $ | 10,523 | $ | 261 | 3.30% | ||||||||||||||
Total
loans [1]
|
234,790 | 11,225 | 6.37% | 183,721 | 9,188 | 6.67% | ||||||||||||||||||
Total
interest-earning assets
|
248,959 | 11,485 | 6.15% | 194,244 | 9,449 | 6.49% | ||||||||||||||||||
Liabilities:
|
||||||||||||||||||||||||
Public
offering Notes – Alpha Class
|
17,353 | 746 | 5.74% | 38,116 | 1,518 | 5.31% | ||||||||||||||||||
Public
offering Notes – Class A
|
41,022 | 1,319 | 4.29% | 9,362 | 346 | 4.92% | ||||||||||||||||||
Special
offering Notes
|
9,577 | 354 | 4.92% | 19,759 | 771 | 5.20% | ||||||||||||||||||
International
Notes
|
479 | 19 | 5.21% | 497 | 20 | 5.44% | ||||||||||||||||||
Subordinated
Notes
|
2,373 | 106 | 5.97% | -- | -- | -- | ||||||||||||||||||
Bank
borrowings
|
162,457 | 5,046 | 4.14% | 115,882 | 4,168 | 4.80% | ||||||||||||||||||
Total
interest-bearing liabilities
|
$ | 233,261 | 7,590 | 4.34% | $ | 183,616 | 6,823 | 4.95% | ||||||||||||||||
Net
interest income
|
$ | 3,895 | $ | 2,626 | ||||||||||||||||||||
Net
interest margin [2]
|
2.09% | 1.80% |
[1] Loans
are net of deferred fees.
[2] Net
interest margin is equal to net interest income as a percentage of average
interest-earning assets.
Average interest-earning assets increased to $249.0 million during the nine months ended September 30, 2009, from $194.2 million during the same period in 2008, an increase of $54.8 million or 28%. The average yield on these assets decreased to 6.15% for the nine months ended September 30, 2009 from 6.49% for the nine months ended September 30, 2008. This average yield decrease was related to the decrease in interest rates on interest-earning accounts with other financial institutions as well as the sale of relatively high yield loans during the nine months ended September 30, 2009. Average interest-bearing liabilities, consisting of Notes payable, increased to $233.3 million during the nine months ended September 30, 2009, from $183.6 million during the same period in 2008. The average rate paid on these Notes decreased to 4.34% for the nine months ended September 30, 2009, from 4.95% for the same period in 2008. The decrease on the average interest rate paid on these liabilities was primarily related to the decrease on interest rates paid on certain of our credit facilities which are adjusted each month based on an index which has been decreasing. The decrease in the average interest rate paid on our liabilities has also been related to decreasing interest rates we pay on our Class A Notes.
Net
interest income for the nine months ended September 30, 2009, was $3.9 million,
which was an increase of $1.3 million, or 50% for the same period in
2008. Net interest margin increased 29 basis points to a margin of
2.09% for the nine month period ended September 30, 2009, as compared to a
margin of 1.80% for the nine months ended September 30, 2008. The increase in
the net interest margin was related to the substantial decrease in the cost of
funds related to our line of credit borrowings, as well as lower interest rates
paid on our investor Notes.
65
The
following table sets forth, for the periods indicated, the dollar amount of
changes in interest earned and paid for our interest-earning assets and
interest-bearing liabilities, the amount of change attributable to changes in
average daily balances (volume), and changes in interest rates
(rate).
Distribution,
Rate and Yield Analysis of Net Interest Income
For
the Years Ended December 31,
|
||||||||||||||||||||||||
2008
|
2007
|
|||||||||||||||||||||||
Average
Balance
|
Interest
Income/
Expense
|
Average
Yield/ Rate
|
Average
Balance
|
Interest
Income/ Expense
|
Average
Yield/ Rate
|
|||||||||||||||||||
Assets:
|
||||||||||||||||||||||||
Interest-earning
accounts with
other financial institution
|
$ | 11,549 | $ | 383 | 3.32% | $ | 6,058 | $ | 294 | 4.85% | ||||||||||||||
Total
loans [1]
|
202,420 | 13,451 | 6.65% | 69,508 | 4,639 | 6.67% | ||||||||||||||||||
Total
interest-earning assets
|
$ | 213,969 | $ | 13,834 | 6.47% | 75,566 | 4,933 | 6.53% | ||||||||||||||||
Liabilities:
|
||||||||||||||||||||||||
Public
offering Notes – Alpha Class
|
$ | 34,860 | $ | 1,875 | 5.38% | $ | 26,498 | $ | 1,447 | 5.46% | ||||||||||||||
Public
offering Notes – Class
A
|
15,444 | 761 | 4.93% | - - | - - | - - | ||||||||||||||||||
Special
offering Notes
|
18,476 | 968 |
5.24%
|
31,689 | 1,748 | 5.52% | ||||||||||||||||||
International
Notes
|
514 | 28 | 5.45% | 505 | 29 | 5.65% | ||||||||||||||||||
Lines
of credit and other borrowings
|
133,428 | 6,123 | 4.59% | 4,456 | 377 | 8.46% | ||||||||||||||||||
Total
interest-bearing liabilities
|
$ | 202,722 | $ | 9,755 | 4.81% | 63,148 | 3,601 | 5.70% | ||||||||||||||||
Net
interest income
|
$ | 4,079 | $ | 1,332 | ||||||||||||||||||||
Net
interest margin [2]
|
1.91% | 1.76% |
[1]
Loans are gross of deferred loan fees and the allowance for loan
losses.
|
|||||||||||
[2]
Net interest margin is equal to net interest income as a percentage of
average interest-earning
assets.
|
Average interest-earning assets increased to $214.0 million during the year ended December 31, 2008, from $75.6 million, an increase of $138.4 million or 183.1%. The average yield on these assets increased to 6.47% for the year ended December 31, 2008 from 6.53% for the year ended December 31, 2007. This average yield increase was related to higher interest rates on loans we or MPF acquired during 2008, particularly on loans we originated. Average interest-bearing liabilities, consisting primarily of Notes payable, increased to $202.7 million during the year ended December 31, 2008, from $63.1 million during 2007. The average rate paid on these Notes decreased to 4.81% for the year ended December 31, 2008, from 5.70% for 2007. The decrease in the rate paid on interest-bearing liabilities was primarily the result of our lines of credit composing a higher percentage of our interest-bearing liabilities. Our lines of credit incur interest expense at lower rates than our investor Notes.
Net interest income for the year ended December 31, 2008 was $4.1 million, which was an increase of $2.8 million, or 215.4% over the prior year. The net interest margin increased 15 basis points to 1.91% for the year ended December 31, 2008, as compared to 1.76% for 2007. This increase was a result of higher yield on loans combined with lower rates on lines of credit and other borrowings, which now comprise a large portion of interest-bearing liabilities.
66
The
following table sets forth, for the periods indicated, the dollar amount of
changes in interest earned and paid for interest-earning assets and
interest-bearing liabilities, the amount of change attributable to changes in
average daily balances (volume), changes in interest rates (rate), and changes
attributable to both the volume and rate (rate/volume):
Rate/Volume
Analysis of Net Interest Income
|
||||||||||||
Nine
months Ended September 30, 2009 vs. 2008
|
||||||||||||
Increase
(Decrease) Due to Change in
|
||||||||||||
Volume
|
Rate
|
Total
|
||||||||||
(Dollars
in Thousands)
|
||||||||||||
Increase
(Decrease) in Interest Income:
|
||||||||||||
Interest-earning
account with other financial institutions
|
$ | 76 | $ | (77 | ) | $ | (1 | ) | ||||
Total
loans
|
2,457 | (420 | ) | 2,037 | ||||||||
2,533 | (497 | ) | 2,036 | |||||||||
Increase
(Decrease) in Interest Expense:
|
||||||||||||
Public
offering Notes – Alpha Class
|
(885 | ) | 114 | (771 | ) | |||||||
Public
offering Notes – Class A
|
1,023 | (50 | ) | 973 | ||||||||
Special
offering Notes
|
(378 | ) | (40 | ) | (418 | ) | ||||||
International
Notes
|
(1 | ) | (1 | ) | (2 | ) | ||||||
Subordinated
Notes
|
106 | -- | 106 | |||||||||
Other
|
1,505 | (626 | ) | 879 | ||||||||
1,370 | (603 | ) | 767 | |||||||||
Change
in net interest income
|
$ | 1,163 | $ | 106 | $ | 1,269 |
Rate/Volume
Analysis of Net Interest Income
|
||||||||||||
Year
Ended December 31, 2008 vs. 2007
|
||||||||||||
Increase
(Decrease) Due to Change in
|
||||||||||||
Increase
in Interest Income:
|
Volume
|
Rate
|
Total
|
|||||||||
Interest-earning
account with other financial institutions
|
$ | 203 | $ | (114 | ) | $ | 89 | |||||
Total
loans
|
8,833 | (21 | ) | 8,812 | ||||||||
$ | 9,036 | $ | (135 | ) | $ | 8,901 | ||||||
Increase
(Decrease) in Interest Expense:
|
||||||||||||
Public
offering Notes – Class A-1
|
- - | - - | - - | |||||||||
Public
offering Notes – Alpha Class
|
450 | (22 | ) | 428 | ||||||||
Public
offering Notes – Class A
|
761 | - - | 761 | |||||||||
Special
offering Notes
|
(696 | ) | (84 | ) | (780 | ) | ||||||
International
Notes
|
1 | (2 | ) | (1 | ) | |||||||
Lines
of Credit and other borrowings
|
5,997 | (251 | ) | 5,746 | ||||||||
$ | 6,513 | $ | (359 | ) | $ | 6,154 | ||||||
Change
in net interest income
|
$ | 2,523 | $ | 224 | $ | 2,747 |
67
Rate/Volume
Analysis of Net Interest Income
|
||||||||||||
Year
Ended December 31, 2007 vs. 2006
|
||||||||||||
Increase
(Decrease) Due to Change in
|
||||||||||||
Increase in
Interest Income:
|
Volume
|
Rate
|
Total
|
|||||||||
Interest-earning
account with other financial institutions
|
$ | 227 | $ | (24 | ) | $ | (203 | ) | ||||
Total
loans
|
1,599 | (2 | ) | 1,597 | ||||||||
$ | 1,826 | $ | (26 | ) | $ | 1,800 | ||||||
Increase
(Decrease) in Interest Expense:
|
||||||||||||
Public
offering Notes – Class A-1
|
(2 | ) | (2 | ) | (4 | ) | ||||||
Public
offering Notes – Alpha Class
|
344 | 142 | 486 | |||||||||
Public
offering Notes – Class A
|
-- | -- | -- | |||||||||
Special
offering Notes
|
109 | 237 | 346 | |||||||||
International
Notes
|
8 | 3 | 11 | |||||||||
Lines
of credit
|
377 | -- | 377 | |||||||||
$ | 836 | $ | 380 | $ | 1,216 | |||||||
Change
in net interest income
|
$ | 990 | $ | (406 | ) | $ | 584 |
Cash
and Cash Equivalents
We
experienced an increase in our cash during the twelve months ended
December 31, 2008 in the amount of $12.6 million, as compared to a net
decrease of $5.4 million for the twelve months ended December 31, 2007.
This increase was due to an increase in net cash provided by operating
activities and financing activities.
Net cash
provided by operating activities totaled $1.0 million for the twelve months
ended December 31, 2008, an increase of $1.8 million from $751 thousand
used in operating activities during the twelve months ended December 31,
2007.
Net cash
used in investing activities totaled $141.4 million during the twelve months
ended December 31, 2008, compared to $56.5 million used during the twelve
months ended December 31, 2007, an increase in cash used of $84.9 million.
This difference is attributable to more cash used for the purchase of loans
during the twelve months ended December 31, 2008, as compared to the same
period in 2007.
Net cash
provided by financing activities totaled $153.0 million for the twelve-month
period in 2008, an increase of $101.1 million from $51.9 million provided by
financing activities during the twelve months ended December 31, 2007. This
difference is primarily attributable to an increase in our borrowings under our
line of credit facilities.
Liquidity
and Capital Resources
Nine
Months Ended September 30, 2009 vs. Nine Months Ended September 30,
2008
The net
decrease in cash during the nine months ended September 30, 2009 was $7.4
million, as compared to a net increase of $14.3 million for the nine months
ended September 30, 2008, a decrease of $21.7 million. Net cash provided by
operating activities totaled $1.6 million for the nine months ended September
30, 2009, as compared to net cash provided by operating activities of $675
thousand for the same period in 2008. This increase is attributable
primarily to an increase in net income and a decrease in accrued interest
receivable over the same period in 2008.
Net cash
provided by investing activities totaled $49.9 million during the nine months
ended September 30, 2009, as compared to $140.8 million used during the nine
months ended September 30, 2008, an increase in cash of $190.7 million. This
increase is primarily attributable to a decrease in the amount of loan
originations and purchases, as well as an increase in loan sales.
68
Net cash
used in financing activities totaled $58.9 million for this nine month period
ended September 30, 2009, a decrease in cash of $213.3 million from $154.4
million provided by financing activities during the nine months ended September
30, 2008. This difference is attributable to paydowns on our lines of credit and
redemption of our investor Notes.
Historically,
we have relied on the sale of our debt securities to finance our Mortgage Loan
investments. We also have been successful in generating reinvestments
by our debt security holders when the Notes that they hold mature. During the
year ended December 31, 2008, 76% of our investors reinvested in new debt
securities that have been offered by us. During the nine months ended September
30, 2009, our investors reinvested at a 79% rate.
At
September 30, 2009, our cash, which includes cash reserves and cash available
for investment in the Mortgage Loans, was $7.5 million, a decrease of $7.4
million from $14.9 million at December 31, 2008.
Year
Ended December 31, 2008 vs. Year Ended December 31, 2007
At
December 31, 2008 and 2007, we held Mortgage Loans representing $257.2 and
$116.3 million, respectively. Mortgage loans constituted 93.5% and
96.0% of our total assets at December 31, 2008 and 2007,
respectively. During the year ended December 31, 2008, we
acquired or originated $176.0 million of loans, including $60.3 million by MPF.
We acquired $156.7 million in loans from ECCU in 2008, as compared to $73.3
million in 2007.
As of
December 31, 2008, approximately 90% of all loans that we or MPF owned were
originated by ECCU and purchased in whole or as a participation interest. The
remainder were originated directly through our loan origination services. As of
December 31, 2008, we had one loan with a balance of $2.7 million that was
more than 90 days past due and was on non-accrual status. In
addition, we had two loans with balances totaling $2.3 million at
December 31, 2008 that were restructured during the fourth
quarter. We had no impaired loans, non-accrual loans, or loans past
due more than 90 days at December 31, 2007. We have had no
writeoffs of our loans.
As of
December 31, 2008, our total borrowings under our BMO Credit Facility was $85.3
million. We used the BMO Credit Facility to purchase loans from us or ECCU until
such time as they can be included in a securitization transaction. We previously
had a line of credit facility with ECCU, which was terminated in October, 2007.
We had no borrowings under the ECCU line of credit as of December 31,
2007. Including our BMO Credit Facility and the $100 Million CUSO
Line, our line of credit borrowings increased to $175.1 million at December 31,
2008, as compared to $46.3 million at December 31, 2007. We also had $10.0
million outstanding on the $10.0 Million LOC. As of December 31, 2008, the
balance on our $100 Million CUSO Line was $89.9 million.
Obligations
to our note investors increased from $62.1 million at December 31, 2007 to $75.8
million at December 31, 2008. Our total liabilities at December 31, 2008 and
2007 were $262.3 and $109.2 million, respectively. Our total equity was $12.8
and $11.9 million at December 31, 2008 and 2007, respectively.
The U.S.
economy is currently in a recession and we are facing substantial obstacles in
our efforts to borrow funds, and we are being forced to de-leverage our balance
sheet until credit conditions stabilize. We expect to experience
higher costs and less advantageous financing terms for financing our Mortgage
Loan portfolio in 2009, as compared to short-term borrowing costs and financing
terms that were available in 2008. Financing our portfolio of Mortgage Loan
assets also has become more challenging to us as a result of our inability to
complete a securitization transaction in 2009 and the expressed desire of both
of our facility lenders to reduce their exposure to our Mortgage Loan
assets.
69
We rely
on cash generated from our operations, cash reserves, proceeds from the sale of
investor Notes, and borrowings under our lines of credit to meet our obligations
as they arise. From time to time, we also generate funds from the sale of
Mortgage Loans and loan participations and raise additional capital through the
sale of debt and equity securities. We require cash to originate and acquire new
Mortgage Loans, repay indebtedness, make interest payments to our note investors
and pay expenses related to our general business operations. We intend to
continue our current liquidity plan which relies primarily on cash generated by
operations, cash reserves, proceeds from the sale of debt securities, and
borrowings under our lines of credit to the extent available. Our continuing
ability to rely on credit facilities to originate and acquire Mortgage Loan
investments is dependent upon our efforts to restructure our Members United
credit facilities in the first six months of 2010.
Our
management prepared liquidity forecasts which indicate that we have adequate
liquidity to conduct our business. While we believe that these expected cash
inflows and outflows are reasonable, we cannot assure you that our forecasts or
assumptions will prove to be accurate, particularly in this volatile credit and
financial environment. While our liquidity sources that include cash, reserves,
borrowings on existing facilities 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. As a
result, we can give no assurances that we will be able to access these
additional liquidity sources quickly enough to meet our needs.
Historically,
we have experienced significant rates of reinvestment or renewal by our debt
security investors upon maturity of their investments. However, should these
sources prove insufficient to fund our operations and obligations, we also have
an existing portfolio of performing Mortgage Loans and believe that we can
generate additional liquidity through the sale of participation interests and
Mortgage Loan assets to make payments on our credit facilities, pay interest to
our note investors and pay operating expenses.
We base
this belief on the size and quality of our Mortgage Loan investments and
management’s belief that we will be able to find purchasers of those loans on a
timely basis. These sales transactions are dependent on and subject, however, to
market and economic conditions and our ability to consummate an acceptable
purchase commitment. As we continue to work with our lenders in our borrowing
facilities on acceptable modifications and adjustments to our loan facilities,
we may use the proceeds from these sales transactions to make principal
repayments on our borrowing facilities.
Credit
Facilities Developments
During
2008 and until November 30, 2009, we and MPF, had three credit facilities, the
BMO Credit Facility and two loans from Members United, the $100 Million CUSO
Line and the $10 Million LOC. See Note 4. Line of Credit and Other
Borrowings in our unaudited consolidated financial statements for the 9
months ended September 30, 2009 and Note 5, Lines of Credit, in our
audited consolidated financial statements for the year ended December 31,
2008.
As of
September 30, 2009, capacity commitments and principal amounts outstanding under
our 3 credit facilities were as follows:
Credit
Facility
|
Committed
Capacity
|
Principal
Outstanding
|
Members
United $10 Million LOC
|
$10
million
|
$10
million
|
Members
United $100 Million CUSO Line
|
$100
million
|
$89.9
million
|
BMO
Credit Facility
|
$150
million
|
$31.9
million
|
70
On
November 30, 2009, we established and drew down the WesCorp Loan to repay the
BMO Credit Facility in full.
Members United
Facilities. On October 12, 2007, we entered into two note and security
agreements with Members United. Members United is a federally chartered credit
union located in Warrenville, Illinois, which provides financial services to its
member credit unions. One note and security agreement is for a secured $10
million revolving line of credit, which is referred to as the “$10 Million LOC,”
and the other is for a secured $50 million revolving line of credit. The latter
was amended on May 8, 2008 to allow us to borrow up to $100 million through the
revolving line of credit. We refer to this as the “$100 Million CUSO Line.” Both
credit facilities are secured by certain Mortgage Loans. We use the $10 Million
LOC for short-term liquidity purposes and the $100 Million CUSO Line for
Mortgage Loan investments. We may use proceeds from either loan to
service other debt securities.
Both
credit facilities are recourse obligations secured by designated Mortgage Loans.
We must maintain collateral in the form of eligible Mortgage Loans, as defined
in Member United line of credit agreements, of at least 111% of the outstanding
balance on the lines, after the initial pledge of $5 million of Mortgage
Loans. As of September 30, 2009 and December 31, 2008, approximately
$111.8 million and $111.4 million of loans, respectively, were pledged as
collateral for the $100 Million CUSO Line and the $10 Million Members United
term loan. We have the right to substitute or replace one or more of the
Mortgage Loans serving as collateral for these credit facilities.
Both
credit facilities contain a number of standard borrower covenants, including
affirmative covenants to maintain the collateral free of liens and encumbrances,
to timely pay the credit facilities and our other debt, and to provide Members
United with current financial statements and reports. We were in compliance with
these covenants as of September 30, 2009.
On August
27, 2008, we borrowed the entire $10 million available on the $10 Million LOC at
a rate of 3.47%. As a result of this financing, the $10 Million LOC
was converted to a term loan with a maturity date of August 26, 2011. The
loan bears interest payable monthly at a floating rate based on the one month
London Inter-Bank Offered Rate (“LIBOR”) plus 100 basis points. The interest
rate on the Members United $10 Million LOC will be reset monthly. Since the
credit facility expired on September 1, 2008, no new borrowings may be made
under this loan facility. As of September 30, 2009 and December 31,
2008, there was a $10.0 million outstanding balance on the Members United $10
Million LOC.
Under the
$100 Million CUSO Line, we may request advances under a “demand loan” or “term
loan”. A demand loan is a loan with a maximum term of one year and a variable
rate based upon the prime rate quoted by the Wall Street Journal, as adjusted by
a spread as determined by Members United. A term loan is a fixed or
variable loan that has a set maturity date not to exceed twelve
years.
Future
maturities of the tranches of the $10 Million LOC and $100 Million CUSO Line
during the twelve months ending September 30, 2010, and 2011, are as
follows:
2010
|
$ | 77,975 | ||
2011
|
21,900 | |||
$ | 99,875 |
71
During
the period when draws may be made, each advance on the $100 Million CUSO Line
will accrue interest at either the offered rate by Members United for a fixed
term draw or the rate quoted by Bloomberg for the Federal Funds open rate plus
125 basis points for a variable rate draw. Once the $100 Million CUSO Line is
fully drawn, the total outstanding balance will be termed out over a five year
period with a 30 year amortization payment schedule. We are obligated to make
interest payments on the outstanding principal balance of all demand loans and
term loan advances at the applicable demand loan rate or term loan rate on the
third Friday of each month.
As of
September 30, 2009 and December 31, 2008, the balance on the $100
Million CUSO Line was $89.9 million and the weighted average interest rate on
our borrowings under this facility was 4.35% and 4.33%, respectively. Pursuant
to the terms of our promissory note with Members United, once the loan is fully
drawn, the total outstanding balance will be termed out over a five year period
with a 30 year amortization payment schedule. In addition, the term loan
interest rate will be specified by Members United and will be repriced to a
market fixed or variable rate to be determined at the time the loan is
restructured.
In
September, 2008, Members United decided that it would not advance any additional
funds on the $100 Million CUSO Line and we entered into negotiations with
Members United to convert the line of credit facility to a term loan arrangement
with a mutually acceptable interest rate. On July 6, 2009, the interest rates on
two tranches of these term loans in the amounts of $42.8 million and $24 million
were adjusted. In addition, the interest rate on the $2.8 million
tranche was adjusted on August 18, 2009.
We are
continuing to negotiate with Members United regarding the interest rate to be
charged on this facility once the outstanding amounts that become due are termed
out over a five year period with a 30 year amortization schedule. The interest
rate on the $24 million tranche that was scheduled for adjustment on July 6,
2009 has been extended on a month-to-month basis at a variable rate equal to the
Federal Funds open rate plus 1.25%. The $42 million tranche that was
scheduled to be adjusted in July, 2009 has been adjusted to a rate of 6.5%.
While we anticipate that we will be able to successfully restructure our debt
obligations with Members United on the $78.0 million and $11.9 million tranches
on the $100 Million CUSO Line that mature in 2010 and 2011, respectively,
failure to reach acceptable terms on this facility could have a material adverse
effect on our results of operations.
WesCorp Loan.
On November 30, 2009, we funded a $28 million WesCorp Loan. WesCorp is a
credit union whose members are credit unions and CUSOs. We used approximately
$24.63 million of the WesCorp Loan to pay off and retire the BMO Credit
Facility, which we have repaid in full. We will use the approximately $3.41
million remainder of this loan for working capital. We intend to repay the
WesCorp Loan by its maturity date using the proceeds from the sale of our
additional debt securities, a replacement credit facility, and/or the sale of
the collateral pledged to secure this credit facility.
This
credit facility loan bears interest at the fixed rate of 3.95%. The loan is
payable in monthly installments equal to accrued interest plus a principal
payment of $116,667 until the maturity date, March 30, 2012, when the
entire balance of principal and interest is due and payable. We have the right
to prepay the loan in whole or in part at any time with a prepayment penalty
equal to the prepayment rate assessed against the amount of the prepayment for
the time remaining from the prepayment date to the maturity date.
This loan
is secured by the approximately $60.5 million of mortgage loans we previously
pledged to secure the BMO Credit Facility. Thus, the loan is secured by excess
collateral of approximately $32.5 million. We are obliged upon the lender’s
request to replace a pledged mortgage loan if it becomes materially impaired. We
are otherwise under no obligation to replace a pledged mortgage loan, unless it
is sold or is prepaid. We may replace a pledged mortgage loan either by pledging
a mortgage loan having an equal unpaid principal balance or with cash of an
equivalent amount. Upon any prepayment, collateral having an equal unpaid
principal balance will be released, and all of the remaining collateral will be
released upon full repayment of the loan. Thus, until the WesCorp Loan is
retired in full, we do not have a right to require the release of the excess
collateral.
72
Under the
loan documents, we make covenants customarily required by lenders for commercial
loans of this kind, including covenants regarding our authority and compliance
with applicable law, and we agree to deliver future financial statements,
provide insurance for coverage for the collateral, provide for adequate
servicing of the collateral, and to give the lender at least 30 days’ prior
written notice before we enter into any additional or replacement line of credit
with an institutional or commercial lender that would replace, in whole or in
part, our Members United credit facilities. We also make certain negative
covenants, including our not entering into certain transactions without the
lender’s prior consent, including mergers and material changes in our Members
United credit facilities. In addition, we covenant to maintain a
debt-to-tangible net worth ratio of not greater than 15 to 1 as determined in
general under GAAP, with certain exceptions including the exclusion from total
liabilities of any unsecured debt securities with a maturity date after
March 30, 2012.
In the
event of default, the lender may call the entire balance of the loan due and
payable, upon which event the lender will have available all remedies provided
under applicable law, including the right to foreclose on the collateral. In
addition to our failure to pay any amount due and payable under the loan within
the prescribed grace period, events of default include our suffering of any
judgment or attachment in excess of $250,000; a material change in our financial
condition, business or operations; or our failure to make any payment of debt
due and owing to another creditor in the aggregate of more than $500,000. The
loan is full recourse and upon default the lender may seek recovery of the loan
balance and its related costs against the collateral and/or us.
Our Former BMO
Credit Facility. On October 30, 2007, MPF entered into the BMO Credit
Facility with BMO Capital Markets Corp., as agent (“BMO Capital”) and Fairway
Finance Company, LLC (“Fairway”), its subsidiary, as
lender. MPF was formed as a special purpose wholly-owned, bankruptcy
remote, limited liability company under Delaware law for the purpose of serving
as an acquisition vehicle that would purchase qualifying Mortgage Loans that we
or ECCU originate. The credit facility’s loan documents provide for, among other
things, a $150,000,000 line of credit for the purpose of purchasing and
warehousing loans for later securitization.
When we
formed MPF and entered into the BMO Credit Facility, we anticipated that any
mortgage investments made by MPF would be warehoused for resale in securitized
debt transactions, i.e., used as the collateral for offerings of mortgage-backed
securities. However, due to the collapse of the market for securitized debt
transactions, we have been unable to complete any of these transactions, and
thus MPF was required to maintain its warehoused Mortgage Loans and was unable
to pay down the BMO Credit Facility as anticipated.
At
September 30, 2009 and December 31, 2008, the balance on the BMO Capital line of
credit was $31.9 million and $85.3 million, respectively. Interest is calculated
at the rate at which the lender issues commercial paper plus 1.75%. We repaid
this loan in full on November 30, 2009 with proceeds from our WesCorp
Loan.
Investor
Notes
We also
rely on our investor Notes to make investments in Mortgage Loan assets and fund
our general operations. As of December 31, 2008, a total of $75.8
million was owed under these Notes. For further information on our investor
Notes, see Notes 8 and 9, “Notes Payable” and “Public Offerings” in our
accompanying audited consolidated financial statements for the year ended
December 31, 2008. We have offered our investor Notes under registered offerings
with the U.S. Securities and Exchange Commission (“SEC”) and in private
placements that are exempt under the provisions of the Securities Act of 1933,
as amended. Our Alpha Class Notes were initially registered with the
SEC in July, 2001 and an additional $75.0 million of new Alpha Notes were
registered with the SEC in May, 2007. As of December 31, 2008, $24.2 million of
these Notes were outstanding.
In
addition to our Alpha Class Notes, in April, 2008, we registered with the SEC
$80.0 million of new Class A Notes that consists of three Series of Notes,
including a Fixed Series, Flex Series and Variable Series. All Class
A Notes are unsecured. The interest rates we pay on the Fixed Series
Notes and the Flex Series Notes are determined by reference to the Swap Index,
an index that is based upon a weekly average SWAP rate reported by the Federal
Reserve Board, and is in effect on the date they are issued, or in the case of
the Flex Series Notes, on the date the interest rate is reset. These Notes bear
interest at the Swap Index plus a rate spread of 1.7% to 2.5% and have
maturities ranging from 12 to 84 months. The interest rates we pay on
the Variable Series Notes are determined by reference to the Variable Index in
effect on the date the interest rate is set and bear interest at a rate of the
Swap Index plus a rate spread of 1.50% to 1.80%. Effective as of
January 5, 2009, the Variable Index is defined under the Class A Notes as the
three month LIBOR rate.
73
The Notes
were issued under a Trust Indenture we entered into with U.S. Bank National
Association. The Notes are part of up to $200 million of Class A Notes we may
issue pursuant to the US Bank Indenture. The Trust Indenture covering the Class
A Notes contains covenants pertaining to certain minimum fixed charge ratios,
maintenance of tangible net worth, limitation on issuance of additional Notes
and incurrence of indebtedness. At December 31, 2008, $36.5 million of
these Class A Notes were outstanding.
Of the
$75.8 million in investor Notes that are outstanding at December 31, 2008, $49.8
million and $10.4 million will mature in 2009 and 2010, respectively.
Historically, we have a high rate of renewal or reinvestment by our note holders
upon maturity of their Notes. In 2008 and 2007, 76% and 72% of our note
investors renewed their investments in new Notes. While we cannot assure our
investors that we will be able to continue this trend, we have a solid
historical record of experience that supports our investor note
program.
Debt
Covenants
Our
investor Notes require that we comply with certain financial covenants
including, without limitation, minimum net worth, interest coverage,
restrictions on the distribution of earnings to our equity investors and
incurring other indebtedness that is not permitted under the provisions of our
loan and trust Indenture. If an event of default occurs under our investor
Notes, the Trustee may declare the principal and accrued interest on all Notes
to be due and payable and may exercise other available remedies to collect
payment on such Notes. We believe that we are in compliance with our debt
covenants under the investor Notes.
We are
also required to comply with financial and non-financial covenants under our
Members United credit facilities. The Members United credit
facilities contain certain affirmative covenants that are routine for a credit
facility of this nature, including requiring that we keep the collateral free of
liens and encumbrances, timely pay the amounts due under the facility and
provide Members United with current financial statements and
reports. Other negative covenants prevent us from selling all of our
assets, from consolidating with or merging into another entity, from impairing
or incurring a lien on the collateral securing the credit facility or creating
new indebtedness incurred outside ordinary borrowings in the sale of debt and
note securities, loans entered into for purchasing or originating Mortgage
Loans, or borrowings entered into by MPF to acquire eligible Mortgage Loans. We
believe that we are in compliance with these covenants.
Our
covenants under the WesCorp Loan require that we and MPF comply with certain
negative and affirmative covenants. In addition to the covenants customarily
required by lenders of this type of commercial loan, we make the following
covenants:
·
|
to
maintain a debt-to-tangible net worth ratio, as defined, not to exceed 15
to 1; and
|
·
|
to
not increase or materially alter our Members United credit
facilities.
|
If we
were to default under the WesCorp Loan loan documents, the lender could
accelerate payment of all obligations payable, terminate their commitment under
the facility, increase the interest rate charged on the indebtedness and
undertake sale and collection remedies of the mortgage assets in the facility. A
default under the WesCorp Loan would also trigger cross-default provisions in
our other credit facilities and debt securities.
74
Special
Purpose Entity
In
October, 2007, we formed MPF to enter into the BMO Credit Facility. MPF is our
wholly-owned subsidiary and was formed as a special purpose limited liability
company in order to legally isolate us from loans that we transfer to MPF in the
event that a bankruptcy petition is filed by us or if we are subjected to
bankruptcy proceedings. MPF’s activities are restricted in its organizational
and governing documents to invest in and hold qualifying church Mortgage
Loans.
Under
accounting principles generally accepted in the United States of America, we
have determined that MPF is a variable interest entity and that we are the
primary beneficiary of MPF. Therefore, we have consolidated the assets and
liabilities of this entity for financial statement purposes.
Significant
Accounting Estimates and Critical Accounting Policies
Critical
Accounting Policies. Our discussion and analysis of our financial
condition and results of operations are based upon our financial statements,
which have been prepared in accordance with accounting principles generally
accepted in the United States of America. The preparation of these financial
statements requires us to make estimates and judgments that affect the reported
amounts of assets, liabilities, revenues and expenses, and the related
disclosures. On an on-going basis, we evaluate these estimates, including those
related the allowance for loan losses, and estimates are based on historical
experience, information received from third parties and on various other
assumptions that are believed to be reasonable under the circumstances, which
form the basis for making judgments about the carrying values of assets and
liabilities that are not readily apparent from other sources. Actual results may
differ from these estimates under conditions different from our assumptions. We
believe the following critical accounting policies affect our more significant
judgments and estimates used in the preparation of our consolidated financial
statements.
Accounting for
Derivative Financial Investments and Hedging Activities. We use
derivatives to hedge, fix and cap interest rate risk and we account for these
derivative activities at fair value on the balance sheet. Derivative instruments
designated in a hedge relationship to mitigate exposure to changes in the fair
value of an asset, liability, or firm commitment attributable to a particular
risk, are considered fair value hedges. Derivative instruments designated in a
hedge relationship to mitigate exposure to variability in expected future cash
flows, or other types of forecasted transactions, are considered cash flow
hedges. We document all relationships between hedging instruments and hedged
items, as well as our risk-management objective and strategy for undertaking
each hedge transaction.
We use
interest rate swap agreements to hedge our exposure to interest rate risks on
our balance sheet. Interest rate swaps are contracts in which a
Series of interest rate flows are exchanged over a prescribed period. Derivative
instruments that convert a portion of our variable debt to a fixed rate are
commonly referred to as a cash flow hedge and when we convert a portion of our
fixed rate loans to a variable rate, we refer to that as a fair value
hedge.
When a
cash flow hedge is considered to be effective, we record the fair value of the
derivative instrument on our balance sheet as either an asset or liability, with
a corresponding amount recorded as a component of other comprehensive
income. Amounts are reclassified from other comprehensive income to
the income statements in the period or periods that the hedged transaction
affects earnings.
Under a
cash flow hedge, derivative gains and losses that do not offset changes in the
value of hedged asset or liability is recognized immediately in non-interest
income. For hedges that offset changes in the net value of the hedged
liabilities, we defer the net settlement amount and amortize this amount into
net interest income over the life of the hedged debt.
Valuation of
Loans. We carry loans that we intend to hold for the foreseeable future
at their outstanding principal balance, less an allowance for loan losses and
adjusted for deferred loan fees and costs. We defer loan origination fees and
costs and recognize those amounts as an adjustment to the related loan yield on
the asset using the straight line method, which results in an amortization that
is materially the same as the interest method. We carry loans that we intend to
sell at the lower of cost or fair value.
75
Allowance for
Loan Losses. We recognize a loss amount that is the best estimate within
the estimated range of loan losses. Accordingly, the determination of an amount
within the calculated range of losses is in recognition of the fact that
historical charge-off experience, without adjustment, may not be representative
of current impairment of the current portfolio of loans because of changed
circumstances. Such changes may relate to changes in the level of problem loans,
changes in the collateral values, changes in general economic conditions, or
changes in the borrowers’ financial conditions.
Determining
an appropriate allowance for loan losses involves a significant degree of
estimation and judgment. The process of estimating the allowance for loan losses
may result in either a specific amount representing the impairment estimate or a
range of possible amounts. For loans that are impaired, a loss is recorded when
the outstanding balance of an impaired loan is greater than either 1) the value
of the underlying collateral less estimated selling costs for collateral
dependent loans, or 2) the present value of expected cash flows for other
impaired loans.
When
management confirms that a loan is uncollectible, a loan loss is charged against
our allowance for loan losses. If there are subsequent recoveries, we credit
such amounts to the allowance. Management regularly evaluates our allowance for
loan losses based upon our periodic review of the collectibility of the loans,
historical experience, nature and volume of our loan portfolio, adverse
situations that may affect the borrower’s ability to repay, value of the
collateral and prevailing economic conditions. Since an evaluation of this
nature is inherently subjective, we may have to adjust our allowance for loan
losses as conditions change and new information becomes available.
New
Accounting Pronouncements
In August
2009, the Financial Accounting Standards Board (FASB) issued Accounting
Standards Update (ASU) No. 2009-05, “Fair Value Measurements and
Disclosures (Topic 820) – Measuring Liabilities at Fair Value”. This
ASU provides amendments for fair value measurements of liabilities. It
provides clarification that in circumstances in which a quoted price in an
active market for the identical liability is not available, a reporting entity
is required to measure fair value using one or more techniques. ASU 2009-05
also clarifies that when estimating a fair value of a liability, a reporting
entity is not required to include a separate input or adjustment to other inputs
relating to the existence of a restriction that prevents the transfer of the
liability. ASU 2009-05 is effective beginning on October 1, 2009. We
are assessing the impact of ASU 2009-05 on our financial condition, results of
operations, and disclosures.
In June
2009, the FASB issued ASU No. 2009-01 (formerly Statement No. 168), “Topic 105 - Generally Accepted
Accounting Principles - FASB Accounting Standards Codification and the
Hierarchy of Generally Accepted Accounting Principles.” The Codification is the
single source of authoritative nongovernmental U.S. generally accepted
accounting principles (GAAP). The Codification does not change current
GAAP, but is intended to simplify user access to all authoritative GAAP by
providing all the authoritative literature related to a particular topic in one
place. All existing accounting standard documents are superseded and all
other accounting literature not included in the Codification is considered
nonauthoritative. The Codification is effective for interim or annual
reporting periods ending after September 15, 2009. We have made the
appropriate changes to GAAP references in our financial statements.
In June
2009, the FASB issued Statement No. 167, “Amendments to FASB Interpretation
No. 46(R)” (SFAS 167). SFAS 167 amends the consolidation
guidance applicable to variable interest entities. The amendments to
the consolidation guidance affect all entities currently within the scope of FIN
46(R), as well as qualifying special-purpose entities (QSPEs) that are currently
excluded from the scope of FIN 46(R). SFAS 167 is effective as of the
beginning of the first annual reporting period that begins after
November 15, 2009. We do not believe that the adoption of SFAS 167
will have an impact on our consolidated financial statements.
76
In June
2009, the FASB issued Statement No. 166, “Accounting for Transfers of
Financial Assets, an amendment of FASB Statement No. 140” (SFAS No.
166). SFAS 166 amends the derecognition accounting and disclosure guidance
relating to SFAS 140. SFAS 166 eliminates the exemption from
consolidation for QSPEs. It also requires a transferor to evaluate all existing
QSPEs to determine whether they must be consolidated in accordance with SFAS
166. SFAS 166 is effective as of the beginning of the first annual
reporting period that begins after November 15, 2009. We are
assessing the impact of SFAS 166 on our financial condition, results of
operations, and disclosures.
In May
2009, the FASB issued Accounting Standards Codification (ASC) 855 (formerly
Statement No. 165), “Subsequent Events”. ASC
855 establishes general standards of accounting for and disclosure of events
that occur after the balance sheet date but before financial statements are
issued or available to be issued. ASC 855 is effective for interim or
annual periods ending after June 15, 2009. We have adopted the
provisions of ASC 855 in our financial statements, as more particularly
described in Note 11, Subsequent Events.
In April
2009, the FASB issued ASC 825 (formerly FASB Staff Position (FSP) 107-1 and APB
28-1), “Interim Disclosures
about Fair Value of Financial Instruments.” ASC 825 requires a
public entity to provide disclosures about fair value of financial instruments
in interim financial information. ASC 825 is effective for interim
and annual financial periods ending after June 15, 2009. As a
result of adopting the provisions of ASC 825 on June 30, 2009, we are now
disclosing information about the fair value of our financial instruments on a
quarterly basis.
In April
2009, the FASB issued ASC 320 (formerly Staff Position FAS 115-2, FAS 124-2 and
EITF 99-20-2), “Recognition
and Presentation of Other-Than-Temporary-Impairment.” ASC 320
(i) changes existing guidance for determining whether an impairment of debt
securities is other than temporary and (ii) replaces the existing
requirement that the entity’s management assert it has both the intent and
ability to hold an impaired security until recovery with a requirement that
management assert: (a) it does not have the intent to sell the security;
and (b) it is more likely than not it will not have to sell the security
before recovery of its cost basis. Under ASC 320, declines in the
fair value of held-to-maturity and available-for-sale securities below their
cost that are deemed to be other than temporary are reflected in earnings as
realized losses to the extent the impairment is related to credit
losses. The amount of impairment related to other factors is recognized in
other comprehensive income. ASC 320 is effective for interim and annual
periods ending after June 15, 2009. We adopted the provisions of ASC
320 on April 1, 2009. The adoption of ASC 320 effective as of
April 1, 2009 did not have a material impact on our consolidated financial
statements.
In April
2009, the FASB issued ASC 820 (formerly FSP FAS 157-4), “Determining Fair Value When the
Volume and Level of Activity for the Asset or Liability Have Significantly
Decreased and Identifying Transactions That Are Not Orderly.” ASC
820 affirms the objective of fair value when a market is not active, clarifies
and includes additional factors for determining whether there has been a
significant decrease in market activity, eliminates the presumption that all
transactions are distressed unless proven otherwise, and requires an entity to
disclose a change in valuation technique. ASC 820 is effective for interim
and annual periods ending after June 15, 2009. We adopted the
provisions of ASC 820 on April 1, 2009. The provisions of ASC 820 did
not have a material impact on our financial condition and results of
operations.
CERTAIN
RELATIONSHIPS AND RELATED
TRANSACTIONS,
AND DIRECTOR INDEPENDENCE
From time
to time, we purchase participation interests in Mortgage Loans from ECCU, our
largest Equity Interest holder. During the years ended December 31, 2008 and
2007, we directly or through MPF purchased $156.7 million and $73.3 million,
respectively, of loans from ECCU. We recognized interest income on loans
purchased from ECCU of $11.8 million and $4.1 million during the years ended
December 31, 2008 and 2007, respectively.
77
From time
to time, ECCU has repurchased Mortgage Loans from us as part of our liquidity
management practices. Although ECCU has accommodated us in responding to such
repurchase requests, ECCU is under no contractual obligation to do so. During
the years ended December 31, 2008 and 2007, loans in the amount of $843.3
thousand and $24.6 million, respectively, were sold back to ECCU. No gain or
loss was recognized on these sales.
We
maintain most of our cash balances with ECCU. Total funds held with ECCU at
December 31, 2008 and 2007 were $12.0 million and $1.5 million, respectively. We
earned interest on these cash balances for the years ended December 31, 2008 and
2007 in the amount of $310.9 thousand and $88.7 thousand.
Pursuant
to an administrative services agreement, we purchase certain professional
services from ECCU and we rent our administrative offices from ECCU pursuant to
an Office Lease entered into on November 4, 2008. We paid ECCU $164.2
thousand and $177.0 thousand for the years ended December 31, 2008 and
2007, respectively, for these services and facilities. We negotiated these
charges and terms of the Office Lease with ECCU based upon the fair market value
of such services and rental rates for comparable office space in Brea,
California.
For the
year ended December 31, 2007, we leased all of our employees from ECCU. We paid
ECCU $885.7 thousand for these personnel expenses in 2007. Effective as of
January 1, 2008, we terminated our employee leasing arrangement with ECCU and
now lease our staff and employees from Administaff Companies II,
L.P.
On December 14, 2007, the Board appointed R. Michael Lee to serve
as a director. Mr. Lee serves as President, Midwest Region, of Members
United Corporate Federal Credit Union (Members United), which is one of our
lenders. See Note 5 of the audited consolidated financial statements for
December 31, 2008. In addition, Mark G. Holbrook, our Chairman and Chief
Executive Officer, is a full time employee of ECCU and two of our Managers,
Mark A. Johnson and Scott T. Vandeventer, are employees of
ECCU.
On
October 30, 2007, we completed the BMO Credit Facility as our first warehouse
mortgage financing facility. Our wholly-owned subsidiary, MPF, was
formed to acquire Mortgage Loans from us or ECCU. As part of the BMO Credit
Facility, MPF entered into a Mortgage Loan purchase agreement with
ECCU. For the years ended December 31, 2008 and 2007, MPF acquired
$60.3 million and $40.8 million in Mortgage Loans from ECCU, respectively. ECCU
continues to service all Mortgage Loans that it sells to us or MPF under a
servicing agreement. For the year ended December 31, 2008, we paid
ECCU a total of $732.5 thousand in servicing fees.
As a relocation incentive, on July 11, 2007, our Board approved
the purchase of a residence owned by our President and his wife for $450,000,
plus reasonable closing costs incurred in completing the purchase
transaction. On August 7, 2007, we completed the purchase of the
residential property. In January, 2008, we sold the residence and realized a
loss of approximately $105,755, including closing costs, for this
transaction.
Our
Managers have adopted a related party transaction policy. Under this policy, a
majority of our Managers and majority of our independent Managers must approve a
material transaction that we enter into with a related party. As a result, we
anticipate that all future transactions that we undertake with an affiliate or
related party will be on terms believed by our management to be no less
favorable than are available from unaffiliated third parties and will be
approved by a majority of our independent Managers.
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.
78
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 THE PURCHASE OF THE NOTES SHOULD CONSULT THEIR OWN TAX ADVISORS 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 U.S., (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 U.S. is able to exercise primary supervision over
the administration of the trust and one or more U.S. persons have the authority
to control all substantial decisions of the trust.
Taxation
of Interest
It is
expected that the Notes will be issued without original issue discount for
federal income tax purposes. U.S. holders will be required to recognize as
ordinary income any interest paid or accrued on the Notes, in accordance with
their regular method of tax accounting. If, however, the principal
amount of the Notes exceeded their issue price by more than a de minimis amount,
a U.S. holder will be required to include such excess income as original issue
discount, as it accrues, in accordance with a constant yield method based on a
compounding of interest before the receipt of cash payments attributable to this
income.
Disposition,
Redemption or Repurchase for Cash
U.S.
holders generally will recognize capital gain or loss upon the sale, redemption
(including any repurchase or prepayment by us for cash) or other taxable
disposition of the Notes in an amount equal to the difference
between:
·
|
the
U.S. holder’s adjusted tax basis in the Notes (as the case may be);
and
|
·
|
the
amount of cash and fair market value of any property received from such
disposition (other than amounts attributable to accrued interest on the
Notes, which will be treated as interest for federal income tax
purposes).
|
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.
79
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
No legal
proceedings to which we are a party or which otherwise involve us currently
exist.
PLAN
OF DISTRIBUTION
We are
offering the Notes pursuant to written solicitations (accompanied or preceded by
a copy of the Prospectus) directed to our current and past investors, members of
various evangelical denominational, non-denominational, church and ministry
organizations, and possibly to members of specific churches and/or church
organizations.
We are
offering the Notes directly by certain of our officers and Managers. Currently,
our designated officers and employees will provide services in placing the
Notes. None of our officers will receive commission for their services in
connection with the sale of the Notes other than their regular employment
compensation. We plan to pay certain employees participating in the sale of the
Notes compensation based on the amount of the Notes they place.
We may in
the future engage one or more registered broker-dealer firms to serve as our
agents in the sale of the Notes. We may pay these participating sales agents
commissions and other compensation not exceeding two percent (2.0%) of the
principal amount of the Notes they place.
We plan
to sell the Notes in this offering through the second anniversary of the
effective date of the registration statement for the Notes, i.e., __________,
2012, unless we sooner terminate the offering. Our ability to continue the
offering until that time depends on, among other things, our continuing
compliance with applicable federal and state securities laws.
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.
80
HOW
TO PURCHASE A NOTE
Persons
desiring to purchase a Note must complete, date and sign the applicable Purchase
Application, a copy of which is included as Exhibit E to this
prospectus, and return it to us together with payment in full for the aggregate
principal amount of the Notes purchased. The Purchase Application is subject to
acceptance by us within twenty-four hours of our receipt thereof. We may accept
or reject a Purchase Application in our sole discretion. Any questions
concerning the procedure for purchasing the Notes should be directed to Mr.
Billy Dodson, 915 W. Imperial Highway, Suite 120, Brea, California, 92821. Our
telephone number is 800-753-6742.
EXPERTS
AND COUNSEL
The
consolidated balance sheets as of December 31, 2008 and December 31, 2007 and
the related consolidated statements of operations, equity, and cash flows for
the fiscal years then ended have been included in this prospectus and reliance
is made on the report of Hutchinson and Bloodgood LLP, a limited liability
partnership, independent accountants, given on the authority of that firm as
experts in accounting and auditing.
Rushall
& McGeever, of Carlsbad, California, our special counsel, has passed on
certain legal matters in connection with the Notes.
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, and 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.
_________________
81
INDEX
TO FINANCIAL STATEMENTS
Consolidated
Financial Statements for the Nine Months Ended September 30, 2009
and
2008
|
|
CONSOLIDATED
BALANCE SHEETS (UNAUDITED) AT SEPTEMBER 30, 2009 AND DECEMBER 31,
2008
|
F-2
|
CONSOLIDATED
STATEMENTS OF INCOME (UNAUDITED)
|
F-3
|
CONSOLIDATED
STATEMENTS OF CASH FLOWS (UNAUDITED) FOR THE NINE MONTHS ENDED SEPTEMBER
30, 2009 AND 2008
|
F-4
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
F-5
- F-19
|
Consolidated
Financial Statements for the Years Ended December 31, 2008 and
2007
|
|
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
|
F-20
|
CONSOLIDATED
BALANCE SHEETS
|
F-21
|
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
F-22
|
CONSOLIDATED
STATEMENTS OF EQUITY
|
F-23
|
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
F-24
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
F-25
- F-47
|
F-1
MINISTRY
PARTNERS INVESTMENT COMPANY, LLC
CONSOLIDATED
BALANCE SHEETS (UNAUDITED)
SEPTEMBER
30, 2009 AND DECEMBER 31, 2008
(Dollars
in Thousands Except Unit Data)
2009
(Unaudited)
|
2008
|
|||||||
Assets:
|
||||||||
Cash
|
$ | 7,504 | $ | 14,889 | ||||
Loans
held for sale
|
$ | 31,947 | -- | |||||
Loans
receivable, net of allowance for loan losses of $721 and $489 as of
September 30, 2009 and December 31, 2008, respectively
|
175,143 | 257,176 | ||||||
Accrued
interest receivable
|
1,019 | 1,374 | ||||||
Property
and equipment
|
259 | 262 | ||||||
Debt
issuance costs
|
676 | 979 | ||||||
Other
assets
|
569 | 415 | ||||||
Total
assets
|
$ | 217,117 | $ | 275,095 | ||||
Liabilities
and members’ equity
|
||||||||
Liabilities:
|
||||||||
Bank
borrowings
|
$ | 131,822 | $ | 185,146 | ||||
Notes
payable
|
70,770 | 75,774 | ||||||
Accrued
interest payable
|
253 | 292 | ||||||
Other
liabilities
|
413 | 1,132 | ||||||
Total
liabilities
|
203,258 | 262,344 | ||||||
Members'
Equity:
|
||||||||
Series
A preferred units, 1,000,000 units authorized, 117,600 units issued and
outstanding at September 30, 2009 and December 31, 2008 (liquidation
preference of $100 per unit)
|
11,760 | 11,760 | ||||||
Class
A common units, 1,000,000 units authorized, 146,522 units issued and
outstanding
at September 30, 2009 and December 31, 2008
|
1,509 | 1,509 | ||||||
Retained
earnings
|
628 | -- | ||||||
Accumulated
other comprehensive loss
|
(38 | ) | (518 | ) | ||||
Total
members' equity
|
13,859 | 12,751 | ||||||
Total
liabilities and members' equity
|
$ | 217,117 | $ | 275,095 |
The
accompanying notes are an integral part of these consolidated financial
statements
F-2
MINISTRY
PARTNERS INVESTMENT COMPANY, LLC
CONSOLIDATED
STATEMENTS OF INCOME (UNAUDITED)
(Dollars
in Thousands)
Three
months ended
September
30,
|
Nine
months ended
September
30,
|
|||||||||||||||
2009
|
2008
|
2009
|
2008
|
|||||||||||||
Interest
income:
|
||||||||||||||||
Interest
on loans
|
$ | 3,461 | $ | 4,057 | $ | 11,225 | $ | 9,188 | ||||||||
Interest
on interest-bearing accounts
|
50 | 109 | 260 | 261 | ||||||||||||
Total
interest income
|
3,511 | 4,166 | 11,485 | 9,449 | ||||||||||||
Interest
expense:
|
||||||||||||||||
Bank
borrowings
|
1,497 | 1,946 | 5,046 | 4,168 | ||||||||||||
Notes
payable
|
806 | 956 | 2,544 | 2,655 | ||||||||||||
Total
interest expense
|
2,303 | 2,902 | 7,590 | 6,823 | ||||||||||||
Net
interest income
|
1,208 | 1,264 | 3,895 | 2,626 | ||||||||||||
Provision
for loan losses
|
136 | 49 | 394 | 160 | ||||||||||||
Net
interest income after provision for loan losses
|
1,072 | 1,215 | 3,501 | 2,466 | ||||||||||||
Non-interest
income
|
4 | 4 | 9 | 34 | ||||||||||||
Non-interest
expenses:
|
||||||||||||||||
Salaries
and benefits
|
312 | 321 | 994 | 873 | ||||||||||||
Marketing
and promotion
|
3 | 4 | 19 | 11 | ||||||||||||
Office
operations
|
284 | 333 | 956 | 872 | ||||||||||||
Legal
and accounting
|
217 | 127 | 604 | 390 | ||||||||||||
Total
non-interest expenses
|
816 | 785 | 2,573 | 2,146 | ||||||||||||
Income
before provision for income taxes
|
260 | 434 | 937 | 354 | ||||||||||||
Provision
for income taxes
|
-- | 147 | -- | 147 | ||||||||||||
Net
income
|
$ | 260 | $ | 287 | $ | 937 | $ | 207 |
The
accompanying notes are an integral part of these consolidated financial
statements
F-3
MINISTRY
PARTNERS INVESTMENT COMPANY, LLC
CONSOLIDATED
STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008
(Dollars
in Thousands)
2009
|
2008
|
|||||||
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
||||||||
Net
income
|
$ | 937 | $ | 207 | ||||
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
||||||||
Depreciation
|
36 | 5 | ||||||
Amortization
of deferred loan fees
|
(203 | ) | (59 | ) | ||||
Amortization
of debt issuance costs
|
543 | 301 | ||||||
Provision
for loan losses
|
394 | 160 | ||||||
Changes
in:
|
||||||||
Deferred
income taxes
|
-- | 104 | ||||||
Accrued
interest receivable
|
355 | (762 | ) | |||||
Other
assets
|
(192 | ) | 356 | |||||
Other
liabilities
|
(231 | ) | 363 | |||||
Net
cash provided by operating activities
|
1,639 | 675 | ||||||
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
||||||||
Loan
purchases
|
(6,056 | ) | (156,999 | ) | ||||
Loan
originations
|
(191 | ) | (15,287 | ) | ||||
Loan
sales
|
28,455 | -- | ||||||
Loan
principal collections, net
|
27,686 | 31,609 | ||||||
Purchase
of property and equipment
|
(33 | ) | (108 | ) | ||||
Net
cash provided (used) by investing activities
|
49,861 | (140,785 | ) | |||||
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
||||||||
Net
change in bank borrowings
|
(53,324 | ) | 140,533 | |||||
Net
changes in notes payable
|
(5,004 | ) | 13,206 | |||||
Debt
issuance costs
|
(239 | ) | (40 | ) | ||||
Purchase
of preferred stock
|
-- | 1,158 | ||||||
Dividends
paid on preferred stock
|
-- | (50 | ) | |||||
Dividends
paid on preferred units
|
(318 | ) | (362 | ) | ||||
Net
cash provided (used) by financing activities
|
(58,885 | ) | 154,445 | |||||
Net
increase (decrease) in cash
|
$ | (7,385 | ) | $ | 14,335 | |||
Cash
at beginning of period
|
14,889 | 2,243 | ||||||
Cash
at end of period
|
$ | 7,504 | $ | 16,578 | ||||
Supplemental
disclosures of cash flow information
|
||||||||
Interest paid
|
$ | 7,630 | $ | 6,403 | ||||
Non-cash
activities:
|
||||||||
Reclassification of loans held for investment to loans held for sale | $ | 31,947 | $ | -- |
The
accompanying notes are an integral part of these consolidated financial
statements
F-4
MINISTRY
PARTNERS INVESTMENT COMPANY, LLC
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
The
accounting and financial reporting policies of MINISTRY PARTNERS INVESTMENT
COMPANY, LLC (the “Company”, “we”, or “our”) and our wholly-owned
subsidiary, Ministry Partners Funding, LLC, conform to accounting principles
generally accepted in the United States and general financial industry
practices. The accompanying interim consolidated financial statements
have not been audited. A more detailed description of our accounting
policies is included in our 2008 annual report filed on Form 10-K. In
the opinion of management, all adjustments (which include only normal recurring
adjustments) necessary to present fairly the financial position, results of
operations and cash flows at September 30, 2009 and for the three and nine month
periods ended September 30, 2009 and 2008 have been made.
Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted. The results of operations for the periods ended September
30, 2009 and 2008 are not necessarily indicative of the results for the full
year.
1. Summary of Significant Accounting
Policies
Nature
of Business
Ministry
Partners Investment Company, LLC was incorporated in the state of California in
1991 and converted to a limited liability company form of organization under
California law on December 31, 2008. We are owned by a group of 13
federal and state chartered credit unions, none of which owns a majority of our
voting common equity interests. Two of the credit unions own only
preferred units while the others own both common and preferred
units. Our offices are located in Brea, California. We
provide funds for real property secured loans for the benefit of evangelical
churches and church organizations. We fund our operations primarily
through the sale of debt and equity securities and through other
borrowings. Most of our loans are purchased from our largest equity
investor, the Evangelical Christian Credit Union (“ECCU”), of Brea, California.
We also originate church and ministry loans
independently. Substantially all of our business operations currently
are conducted in California and our mortgage loan investments are primarily
concentrated in California.
In 2007,
we created a wholly-owned special purpose subsidiary, Ministry Partners Funding,
LLC (“MPF”), which was
formed to warehouse church and ministry mortgages purchased from ECCU or
originated by us for later securitization or sale. As of the date of
this Report, MPF has not yet securitized any of its loans. MPF was
formed to serve as a financing vehicle that will purchase qualifying church
mortgage loans pending the consummation of a securitization or other financing
transaction that will enable such loans to be accumulated and sold to investors
through the purchase of an interest in a securities instrument or sold to other
investors.
Principles
of Consolidation
The
consolidated financial statements include the accounts of the Company and our
wholly-owned subsidiary, MPF. All significant inter-company balances and
transactions have been eliminated in consolidation.
Use
of Estimates
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities as of the date
of the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
The allowance for loan losses represents a significant estimate by
management.
Cash
We
maintain deposit accounts with other institutions with balances that may exceed
federally insured limits. We have not experienced any losses in such
accounts.
We are
required to maintain certain cash balances on hand in conjunction with our
borrowing arrangement under a credit facility with BMO Capital Markets Corp., as
more particularly described in Note 4.
F-5
Interest
Rate Swap and Interest Rate Cap Agreements
For
asset/liability management purposes, we use interest rate swap agreements or
interest rate caps to hedge various exposures or to modify interest rate
characteristics of various balance sheet accounts. Interest rate
swaps are contracts in which a series of interest rate flows are exchanged over
a prescribed period. The notional amount on which the interest
payments are based is not exchanged. These swap agreements are
derivative instruments that convert a portion of our variable-rate
debt to a fixed rate (cash flow hedge), and convert a portion of our fixed-rate
loans to a variable rate (fair value hedge).
An
interest rate cap is an option contract that protects the holder from increases
in short-term interest rates by making a payment to the holder at the end of
each period when an underlying interest rate (the "index" or "reference"
interest rate) exceeds a specified strike rate (the "cap rate"). Similar to an
interest rate swap, the notional amount on which the payment is made is never
exchanged. An interest cap is purchased for a premium and typically will have a
term ranging from 1 - 7 years. When an interest rate cap is purchased, payments
to the holder are made on a monthly, quarterly or semiannual basis, with the
period generally based upon the maturity of the index interest
rate. For each period, the payment is determined by comparing the
current level of the index interest rate with the cap rate. If the
index rate exceeds the cap rate, the payment is based upon the difference
between the two rates, the length of the period, and the notional
amount. Otherwise, no payment is made for that period. We
utilize interest rate caps to mitigate our upside risk to rising interest
rates.
The
effective portion of the gain or loss on a derivative designated and qualifying
as a cash flow hedging instrument is initially reported as a component of other
comprehensive income and subsequently reclassified into earnings in the same
period or periods during which the hedged transaction affects
earnings. The ineffective portion of the gain or loss on the
derivative instrument, if any, is recognized currently in earnings.
For cash
flow hedges, the net settlement (upon close-out or termination) that offsets
changes in the value of the hedged debt is deferred and amortized into net
interest income over the life of the hedged debt. The portion, if
any, of the net settlement amount that did not offset changes in the value of
the hedged asset or liability is recognized immediately in non-interest
income.
Interest
rate derivative financial instruments receive hedge accounting treatment only if
they are designated as a hedge and are expected to be, and are, effective in
substantially reducing interest rate risk arising from the assets and
liabilities identified as exposing us to risk. Those derivative
financial instruments that do not meet specified hedging criteria would be
recorded at fair value with changes in fair value recorded in
income. If periodic assessment indicates derivatives no longer
provide an effective hedge, the derivative contracts would be closed out and
settled, or classified as a trading activity.
Cash
flows resulting from the derivative financial instruments that are accounted for
as hedges of assets and liabilities are classified in the cash flow statement in
the same category as the cash flows of the items being hedged.
Debt
Issuance Costs
Debt
issuance costs are related to our bank borrowings as well as to our public
offering of unsecured notes and are amortized into interest expense over the
contractual terms of the debt securities.
Conversion
to LLC
Effective
as of December 31, 2008, we have converted our form of organization from a
corporation organized under California law to a limited liability company
organized under the laws of the State of California. With the filing
of Articles of Organization-Conversion with the California Secretary of State,
the separate existence of Ministry Partners Investment Corporation ceased and
the entity continued by operation of law under the name Ministry Partners
Investment Company, LLC.
By
operation of law, the converted entity continued with all of the rights,
privileges and powers of the corporate entity and we are managed by a group of
managers that previously served as our Board of Directors. Our
executive officers and key management team remained intact. The
converted entity by operation of law possessed all of the properties and assets
of the converted corporation and remains responsible for all of the notes,
debts, contract claims and obligations of the converted
corporation.
With the
conversion to the limited liability company form of organization, we have
combined in a single entity the best features of other organizational
structures, thereby permitting our owners to obtain the benefit of a corporate
limited liability shield, the pass-through tax and distribution benefits of a
partnership, the avoidance of a corporate level tax and the flexibility of
making allocations of profit, loss and distributions offered
by partnership treatment under the Internal Revenue
Code.
F-6
Since the
conversion became effective, we are managed by a group of managers that provides
oversight of our affairs and carries 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. Instead of Articles of Incorporation and Bylaws, our
management structure and governance procedures are now governed by the
provisions of an Operating Agreement that has been entered into by and between
our managers and members.
Income
Taxes
Through
December 30, 2008, we were organized as a California corporation and taxed under
the Internal Revenue Code as a C corporation. As a result, we
recorded all current and deferred income taxes arising from our operations
through that date. Deferred income tax assets and liabilities were determined
based on the tax effects of temporary differences between the book and tax bases
of our various assets and liabilities.
Effective
December 31, 2008, we converted our form of organization from a C corporation to
a California limited liability company (the “LLC”). As an LLC,
we are treated as a partnership for income tax purposes. As a result,
we are no longer a tax-paying entity for federal or state income tax purposes,
and no federal or state income tax will be recorded in our financial statements
after the date of conversion. Income and expenses of the entity will
be passed through to the members of the LLC for tax reporting purposes. We will
become subject to a California gross receipts fee of approximately $12,000 per
year for years ending on and after December 31, 2009.
Although
we are no longer a U.S. income tax-paying entity beginning in 2009,
we are nonetheless subject to Accounting Standards Codification 740, Income
Taxes (“ASC 740”), for
all “open” tax periods for which the statute of limitations has not yet
run. ASC 740 prescribes a recognition threshold and a measurement
attribute for the financial statement recognition and measurement of a tax
position taken in a tax return. Benefits from tax positions are recognized in
the financial statements only when it is more likely than not that the tax
position will be sustained upon examination by the appropriate taxing authority
that would have full knowledge of all relevant information. A tax position that
meets the more-likely-than-not recognition threshold is measured at the largest
amount of benefit that is greater than 50 percent likely of being realized upon
ultimate settlement. Tax positions that previously failed to meet the
more-likely-than-not recognition threshold are recognized in the first
subsequent financial reporting period in which that threshold is met. Previously
recognized tax positions that no longer meet the more-likely-than-not
recognition threshold are derecognized in the first subsequent financial
reporting period in which that threshold is no longer met.
Loans
Held for Sale
Loans
originated for sale in the foreseeable future in the secondary market are
carried at the lower of aggregate cost or market value. Net
unrealized losses, if any, are recognized through a valuation allowance by
charges to income. Gains and losses on sales of loans are recognized
at the trade date. All sales are made without recourse.
Loans
Receivable
Loans
that management has the intent and ability to hold for the foreseeable future
are reported at their outstanding unpaid principal balance less an allowance for
loan losses, and adjusted for deferred loan fees and costs. Interest income on
loans is accrued on a daily basis using the interest method. Loan origination
fees and costs are deferred and recognized as an adjustment to the related loan
yield using the straight-line method, which results in an amortization that is
materially the same as the interest method.
The
accrual of interest is discontinued at the time the loan is 90 days past due
unless the credit is well-secured and in the process of collection. Past due
status is based on contractual terms of the loan. In all cases, loans are placed
on nonaccrual or charged off at an earlier date if collection of principal or
interest is considered doubtful.
All
interest accrued but not collected for loans that are placed on nonaccrual or
charged off are reversed against interest income. The interest on these loans is
accounted for on the cash basis or cost-recovery method, until qualifying for
return to accrual. Loans are returned to accrual status when all the principal
and interest amounts contractually due are brought current and future payments
are reasonably assured.
Allowance
for Loan Losses
We set
aside an allowance or reserve for loan losses through charges to earnings, which
are shown in our Consolidated Statements of Operations as the provision for loan
losses. Loan losses are charged against the allowance when management
believes the uncollectibility of a loan balance is confirmed. Subsequent
recoveries, if any, are credited to the allowance.
F-7
The
allowance for loan losses is evaluated on a regular basis by management and is
based upon our periodic review of the collectibility of the loans in light of
historical experience, the nature and volume of the loan portfolio, adverse
situations that may affect the borrower’s ability to repay, estimated value of
any underlying collateral and prevailing economic conditions. This evaluation is
inherently subjective as it requires estimates that are susceptible to
significant revision as more information becomes available.
The
allowance consists of general and unallocated components. The general component
covers non-classified loans and is based on historical loss experience adjusted
for qualitative factors. An unallocated component is maintained to cover
uncertainties that could affect management's estimate of probable losses. The
unallocated component of the allowance reflects the margin of imprecision
inherent in the underlying assumptions used in the methodologies for estimating
general losses in the portfolio. A specific component of the
allowance also is considered in the event a loan becomes impaired.
A loan is
considered impaired when, 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. Factors considered by management in determining impairment
include payment status, collateral value, and the probability of collecting
future scheduled principal and interest payments when due. Loans that
experience insignificant payment delays and payment shortfalls generally are not
classified as impaired. Management determines the significance of payment
delays and payment shortfalls on a case-by-case basis, taking into consideration
all of the circumstances surrounding the loan and the borrower, including the
length of the delay, the reasons for the delay, the borrower's prior payment
record, and the amount of the shortfall in relation to the principal and
interest owed. Impairment is measured on a loan-by-loan basis by either
the present value of expected future cash flows discounted at the loan's
effective interest rate, the obtainable market price, or the fair value of the
collateral if the loan is collateral dependent.
New
Accounting Pronouncements
In August
2009, the Financial Accounting Standards Board (FASB) issued Accounting
Standards Update (ASU) No. 2009-05, “Fair Value Measurements and
Disclosures (Topic 820) – Measuring Liabilities at Fair
Value”. This ASU provides amendments for fair value
measurements of liabilities. It provides clarification that in
circumstances in which a quoted price in an active market for the identical
liability is not available, a reporting entity is required to measure fair value
using one or more techniques. ASU 2009-05 also clarifies that when
estimating a fair value of a liability, a reporting entity is not required to
include a separate input or adjustment to other inputs relating to the existence
of a restriction that prevents the transfer of the liability. ASU
2009-05 is effective beginning on October 1, 2009. We are
assessing the impact of ASU 2009-05 on our financial condition, results of
operations, and disclosures.
In June
2009, the FASB issued ASU No. 2009-01 (formerly Statement No. 168), “Topic 105 - Generally Accepted
Accounting Principles - FASB Accounting Standards Codification and the
Hierarchy of Generally Accepted Accounting Principles.” The Codification is the
single source of authoritative nongovernmental U.S. generally accepted
accounting principles (GAAP). The Codification does not change
current GAAP, but is intended to simplify user access to all authoritative GAAP
by providing all the authoritative literature related to a particular topic in
one place. All existing accounting standard documents are superseded
and all other accounting literature not included in the Codification is
considered nonauthoritative. The Codification is effective for
interim or annual reporting periods ending after September 15,
2009. We have made the appropriate changes to GAAP references in our
financial statements.
In June
2009, the FASB issued Statement No. 167, “Amendments to FASB Interpretation
No. 46(R)” (SFAS 167). SFAS 167 amends the consolidation
guidance applicable to variable interest entities. The amendments to
the consolidation guidance affect all entities currently within the scope of FIN
46(R), as well as qualifying special-purpose entities (QSPEs) that are currently
excluded from the scope of FIN 46(R). SFAS 167 is effective as of the
beginning of the first annual reporting period that begins after November 15,
2009. We do not believe that the adoption of SFAS 167 will have an
impact on our consolidated financial statements.
In June
2009, the FASB issued Statement No. 166, “Accounting for Transfers of
Financial Assets, an amendment of FASB Statement No. 140” (SFAS No.
166). SFAS 166 amends the derecognition accounting and disclosure
guidance relating to SFAS 140. SFAS 166 eliminates the exemption from
consolidation for QSPEs. It also requires a transferor to evaluate all existing
QSPEs to determine whether they must be consolidated in accordance with SFAS
166. SFAS 166 is effective as of the beginning of the first annual
reporting period that begins after November 15, 2009. We are
assessing the impact of SFAS 166 on our financial condition, results of
operations, and disclosures.
F-8
In May
2009, the FASB issued Accounting Standards Codification (ASC) 855 (formerly
Statement No. 165), “Subsequent
Events”. ASC 855 establishes general standards of accounting
for and disclosure of events that occur after the balance sheet date but before
financial statements are issued or available to be issued. ASC 855 is
effective for interim or annual periods ending after June 15,
2009. We have adopted the provisions of ASC 855 in our financial
statements, as more particularly described in Note 11, Subsequent
Events.
In April
2009, the FASB issued ASC 825 (formerly FASB Staff Position (FSP) 107-1 and APB
28-1), “Interim Disclosures
about Fair Value of Financial Instruments.” ASC 825 requires a
public entity to provide disclosures about fair value of financial instruments
in interim financial information. ASC 825 is effective for interim
and annual financial periods ending after June 15, 2009. As a result
of adopting the provisions of ASC 825 on June 30, 2009, we are now disclosing
information about the fair value of our financial instruments on a quarterly
basis.
In April
2009, the FASB issued ASC 320 (formerly Staff Position FAS 115-2, FAS 124-2 and
EITF 99-20-2), “Recognition
and Presentation of Other-Than-Temporary-Impairment.” ASC 320
(i) changes existing guidance for determining whether an impairment of debt
securities is other than temporary and (ii) replaces the existing requirement
that the entity’s management assert it has both the intent and ability to hold
an impaired security until recovery with a requirement that management assert:
(a) it does not have the intent to sell the security; and (b) it is more likely
than not it will not have to sell the security before recovery of its cost
basis. Under ASC 320, declines in the fair value of held-to-maturity
and available-for-sale securities below their cost that are deemed to be other
than temporary are reflected in earnings as realized losses to the extent the
impairment is related to credit losses. The amount of impairment
related to other factors is recognized in other comprehensive
income. ASC 320 is effective for interim and annual periods ending
after June 15, 2009. We adopted the provisions of ASC 320 on April 1,
2009. The adoption of ASC 320 effective as of April 1, 2009 did not
have a material impact on our consolidated financial statements.
In April
2009, the FASB issued ASC 820 (formerly FSP FAS 157-4), “Determining Fair Value When the
Volume and Level of Activity for the Asset or Liability Have Significantly
Decreased and Identifying Transactions That Are Not
Orderly.” ASC 820 affirms the objective of fair value when a
market is not active, clarifies and includes additional factors for determining
whether there has been a significant decrease in market activity, eliminates the
presumption that all transactions are distressed unless proven otherwise, and
requires an entity to disclose a change in valuation technique. ASC
820 is effective for interim and annual periods ending after June 15,
2009. We adopted the provisions of ASC 820 on April 1,
2009. The provisions of ASC 820 did not have a material impact on our
financial condition and results of operations.
2. Related Party
Transactions
We
maintain most of our cash funds at ECCU, our largest equity investor. Total
funds held with ECCU were $6.8 million and $12.0 million at September 30, 2009
and December 31, 2008, respectively. Interest earned on funds held with ECCU
totaled $229.3 thousand and $230.2 thousand for the nine months ended September
30, 2009 and 2008, respectively.
We lease
physical facilities and purchase other services from ECCU pursuant to a written
lease and services agreement. Charges of $149.6 thousand and $116.6 thousand for
the nine months ended September 30, 2009 and 2008, respectively, were incurred
for these services and are included in office operations expense. The method
used to arrive at the periodic charge is based on the fair market value of
services provided. We believe that this method is
reasonable.
In
accordance with a mortgage loan purchase agreement entered into by and between
us and ECCU and a mortgage loan purchase agreement entered into by and between
MPF and ECCU, we or our wholly-owned subsidiary, MPF, purchased $6.3 million and
$157.2 million of loans from ECCU during the nine months ended September 30,
2009 and 2008, respectively. This includes $59.0 thousand purchased
by MPF during the nine months ended September 30, 2009. We recognized
$10.3 million and $7.9 million of interest income on loans purchased from ECCU
during the nine months ended September 30, 2009 and 2008,
respectively. ECCU retains the servicing rights on loans it sells to
MPF and currently acts as the servicer for any loans we purchase from
ECCU. We paid loan servicing fees to ECCU of $510.5 thousand and
$518.6 thousand in the nine months ended September 30, 2009 and September 30,
2008, respectively.
From time
to time, we or our wholly-owned subsidiary, MPF, have sold our mortgage loan
investments to ECCU in isolated sales for short term liquidity
purposes. In addition, federal credit union regulations require that
a borrower must be a member of a participating credit union in order for a loan
participation to be an eligible investment for a federal chartered credit
union. ECCU has from time to time repurchased from MPIC fractional
participations in our loan investments which ECCU already services, usually
around 1% of the loan balance, to facilitate compliance with NCUA rules when we
were selling participations in those loans to federal credit
unions. During the nine month period ended September 30, 2009, $74.0
thousand in loan participation interests were sold to ECCU. During
this period, an additional $2.2 million of whole loans were sold back to ECCU.
Each sale or purchase of a mortgage loan investment or participation interest
was consummated under our Related Party Transaction Policy that has been adopted
by our managers. No gain or loss was incurred on these
sales. No loans were sold back to ECCU during the nine months ended
September 30, 2008.
F-9
On
December 14, 2007, the Board of Directors appointed R. Michael Lee to serve as a
Company director. Mr. Lee serves as President, Midwest Region, of
Members United Corporate Federal Credit Union (“Members United”), which is one
of our lenders. Please review Note 4 for more detailed information
regarding our borrowings from Members United. In addition, Mark G.
Holbrook, our Chairman and Chief Executive Officer, is a full time employee of
ECCU and two of our managers, Mark A. Johnson and Scott T. Vandeventer, are
employees of ECCU. One of our managers also serves as Vice Chairman
of the ECCU Board of Directors.
3. Loans Receivable and Allowance for
Loan Losses
We
originate church mortgage loans, participate in church mortgage loans made by
ECCU, and also purchase entire church mortgage loans from ECCU. Loans
yielded a weighted average of 6.46% as of September 30, 2009, compared to a
weighted average yield of 6.60% as of September 30, 2008. ECCU currently acts as
our servicer for these loans, charging a service fee to us.
An
allowance for loan losses of $721 thousand as of September 30, 2009 and $489
thousand as of December 31, 2008 has been established for loans receivable. We
have not experienced a loan charge-off and, as of September 30, 2009, we believe
that the allowance for loan losses is appropriate.
As of
September 30, 2009, we had $31.9 million of loans classified as loans held for
sale. Based on recent sales of similar loans, we believe we can sell
these loans at par value. Therefore, the loans are carried at
cost. Proceeds from the sale will be used to pay off the unpaid
principal balance on MPF’s borrowing facilities with BMO Capital Markets
Corp.
Non-performing
loans include non-accrual loans, loans 90 days or more past due and still
accruing, and restructured loans. Non-accrual loans represent loans
on which interest accruals have been discontinued. Restructured loans
are loans in which the borrower has been granted a concession on the interest
rate or the original repayment terms due to financial distress. Non-performing
loans are closely monitored on an ongoing basis as part of 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 or the present value of projected future cash flows. The
following is a summary of our nonperforming loans:
September
30
2009
|
December
31
2008
|
September
30
2008
|
||||||||||
Non-accrual
loans
|
$ | 15,760 | 1 | $ | 2,700 | $ | -- | |||||
Loans
90 days or more past due and still accruing
|
-- | -- | -- | |||||||||
Restructured
loans
|
7,639 | 2,287 | -- | |||||||||
Total
nonperforming loans
|
$ | 23,399 | $ | 4,987 | $ | -- | ||||||
Foregone
interest on nonaccrual loans2
|
$ | 255 | $ | 92 | $ | -- | ||||||
Nonperforming
loans as a percentage of total loans
|
13.3 | % | 1.9 | % | -- |
___________________________
1
Includes $9.3 million of restructured loans on non-accrual
status.
2
Additional interest income that would have been recorded during the
period if the nonaccrual loans had been current in accordance with their
original terms.
We had
three nonaccrual loans as of September 30, 2009, up from one nonaccrual loan at
December 31, 2008. As of September 30, 2009, we have had no history of
foreclosures on any secured borrowings, but we have two loans totaling $5.4
million that are in foreclosure proceedings.
4. Line of Credit and Other
Borrowings
Members
United Facilities
On
October 12, 2007, we entered into two note and security agreements with Members
United. Members United is a federally chartered credit union located in
Warrenville, Illinois, which provides financial services to member credit
unions. One note and security agreement is for a secured $10 million revolving
line of credit, which is referred to as the “$10 Million LOC,” and the other is
for a secured $50 million revolving line of credit. The latter was
amended on May 8, 2008 to allow us to borrow up to $100 million through the
revolving line of credit. We refer to this as the “$100 Million CUSO Line.” Both
credit facilities are secured by certain mortgage loans. We use the $10 Million
LOC for short-term liquidity purposes and the $100 Million CUSO Line for
mortgage loan investments. We may use proceeds from either loan to
service other debt securities.
F-10
On August
27, 2008, we borrowed the entire $10 million available on the $10 Million LOC at
a rate of 3.47%. As a result of this financing, the $10 Million LOC
was converted to a term loan with a maturity date of August 26,
2011. The loan bears interest payable monthly at a floating rate
based on the one month London Inter-Bank Offered Rate (“LIBOR”) plus 100 basis
points. The interest rate on the Members United $10 Million LOC will
be reset monthly. Since the credit facility expired on
September 1, 2008, no new borrowings may be made under this loan
facility. As of September 30, 2009 and December 31, 2008, there
was a $10.0 million outstanding balance on the Members United $10 Million
LOC.
Under the
$100 Million CUSO Line, we may request advances under a “demand loan” or “term
loan”. A demand loan is a loan with a maximum term of one year and a
variable rate based upon the prime rate quoted by the Wall Street Journal, as
adjusted by a spread as determined by Members United. A term loan is
a fixed or variable loan that has a set maturity date not to exceed twelve
years.
Future
maturities of the tranches of the $10 Million LOC and $100 Million CUSO Line
during the twelve months ending September 30, 2010, and 2011, are as
follows:
2010
|
$ | 77,975 | ||
2011
|
21,900 | |||
$ | 99,875 |
During
the period when draws may be made, each advance on the $100 Million CUSO Line
will accrue interest at either the offered rate by Members United for a fixed
term draw or the rate quoted by Bloomberg for the Federal Funds open rate plus
125 basis points for a variable rate draw. Once the $100 Million CUSO
Line is fully drawn, the total outstanding balance will be termed out over a
five year period with a 30 year amortization payment schedule. We are
obligated to make interest payments on the outstanding principal balance of all
demand loans and term loan advances at the applicable demand loan rate or term
loan rate on the third Friday of each month.
As of
September 30, 2009 and December 31, 2008, the balance on the $100 Million CUSO
Line was $89.9 million and the weighted average interest rate on our borrowings
under this facility was 4.35% and 4.33%, respectively. Pursuant to
the terms of our promissory note with Members United, once the loan is fully
drawn, the total outstanding balance will be termed out over a five year period
with a 30 year amortization payment schedule. In addition, the term
loan interest rate will be specified by Members United and will be repriced to a
market fixed or variable rate to be determined at the time the loan is
restructured.
In
September, 2008, Members United decided that it would not advance any additional
funds on the $100 Million CUSO Line and we entered into negotiations with
Members United to convert the line of credit facility to a term loan arrangement
with a mutually acceptable interest rate. On July 6, 2009, the
interest rates on two tranches of these term loans in the amounts of $42.8
million and $24 million were adjusted. In addition, the interest rate
on the $2.8 million tranche was adjusted on August 18, 2009.
We are
continuing to negotiate with Members United regarding the interest rate to be
charged on this facility once the outstanding amounts that become due are termed
out over a five year period with a 30 year amortization schedule. The
interest rate on the $24 million tranche that was scheduled for adjustment on
July 6, 2009 has been extended on a month-to-month basis at a variable rate
equal to the Federal Funds open rate plus 1.25%. The $42 million
tranche that was scheduled to be adjusted in July, 2009 has been adjusted to a
rate of 6.5%. While we anticipate that we will be able to
successfully restructure our debt obligations with Members United on the $78.0
million and $11.9 million tranches on the $100 Million CUSO Line that mature in
2010 and 2011, respectively, failure to reach acceptable terms on this facility
could have a material adverse effect on our results of operations.
Both
credit facilities are recourse obligations secured by designated mortgage loans.
We must maintain collateral in the form of eligible mortgage loans, as defined
in Member United line of credit agreements, of at least 111% of the outstanding
balance on the lines, after the initial pledge of $5 million of mortgage
loans. As of September 30, 2009 and December 31, 2008, approximately
$111.8 million and $111.4 million of loans, respectively, were pledged as
collateral for the $100 Million CUSO Line and the $10 Million Members United
term loan. We have the right to substitute or replace one or more of the
mortgage loans serving as collateral for these credit facilities.
F-11
Both
credit facilities contain a number of standard borrower covenants, including
affirmative covenants to maintain the collateral free of liens and encumbrances,
to timely pay the credit facilities and our other debt, and to provide Members
United with current financial statements and reports. We were in
compliance with these covenants as of September 30, 2009.
BMO
Facility
On
October 30, 2007, MPF entered into a Loan, Security, and Servicing agreement
with BMO Capital Markets Corp., as agent (“BMO Capital”) and Fairway
Finance Company, LLC (“Fairway”), its subsidiary, as
lender. MPF was formed as a special purpose wholly-owned, bankruptcy
remote, limited liability company under Delaware law for the purpose of serving
as an acquisition vehicle that would purchase qualifying mortgage loans that we
or ECCU originate. The agreement provides for, among other things, a
$150,000,000 line of credit for the purpose of purchasing and warehousing loans
for later securitization (the “BMO Facility”). As
of September 30, 2009 and December 31, 2008, the balance on the BMO Capital line
of credit was $31.9 million and $85.3 million, respectively. Interest
is calculated at the rate at which the lender issues commercial paper plus
1.75%. The interest rate on the amount outstanding as of September
30, 2009 and December 31, 2008 was 2.14% and 2.09%,
respectively. Although the BMO Facility has a termination date of
October 30, 2010, the termination date may be accelerated if certain termination
events occur under the loan documents.
The line
is secured by a first priority interest in eligible receivables of MPF, as
defined in the loan agreement. Under the terms of this facility, MPF
must maintain the greater of (i) a minimum borrowing equity of $20 million, or
(ii) a 75% maximum loan to asset ratio relative to the balance of eligible
mortgage loans, as adjusted for certain concentration limits. At September 30,
2009 and December 31, 2008, we were in compliance with this requirement. At
September 30, 2009 and December 31, 2008, all of MPF’s $66.8 million and $114
million of loans receivable, respectively, were pledged as collateral for the
BMO Facility. The restricted cash maintained by MPF related to this line was
$3.0 million and $10.4 million at September 30, 2009 and December 31, 2008,
respectively.
The BMO
Facility contains standard borrower representations, covenants and events of
default, including failing to make required payments on the credit facility,
failing to timely cure a borrowing base deficit, incurrence of a default under
MPF’s mortgage loan purchase agreements, the occurrence of an event causing
termination of the servicing agreement, the occurrence of a material adverse
event that affects MPF's ability to collect on its mortgage loan investments,
and other default provisions typical of warehouse financing agreements. The
agreements also contain customary borrower affirmative and negative covenants
that require MPF to operate its activities as a special purpose bankruptcy
remote entity, and to conduct its affairs and operations with us and any other
affiliated entities on an arms-length basis.
We were
advised in October, 2008 that the Bank of Montreal, which provided Fairway with
a liquidity guarantee, chose not to renew its agreement to serve as the
liquidity bank for the BMO Facility. Because of the Bank of
Montreal’s decision to terminate its liquidity arrangement, a “facility
termination date” occurred under the BMO Facility loan documents. As
a result, MPF could make no new borrowings under the facility. In
addition, all funds held in the facility collection account that were received
from borrowers were required to be used to pay all outstanding costs and
expenses due under the facility, then to accrued and unpaid interest on the
outstanding balance of the facility and any remaining amounts applied to reduce
the loan balance to zero. Since all interest and principal repayments
generated by MPF have been reserved and applied to the BMO Facility, any excess
earnings generated from our investment in MPF have been trapped and have been
unavailable to us for liquidity and cash flow purposes.
Effective
as of June 5, 2009, our wholly-owned subsidiary, MPF, entered into an Omnibus
Amendment to Loan, Security and Servicing Agreement and Fee Agreement (the
“Omnibus Amendment”)
with Fairway, ECCU, BMO Capital, U.S. Bank National Assocation and Lyon
Financial Services (d/b/a U.S. Bank Portfolio Services), pursuant to which the
parties agreed to certain modifications and amendments to the BMO
Facility. Under the Omnibus Amendment, the parties agreed
to:
|
·
|
eliminate
any requirement that MPF is obligated to enter into a term securitization
financing transaction, whole loan sale or other refinancing event in an
amount equal to or greater than $50 million for the purpose of completing
a takeout financing arrangement for certain mortgage loans held in the BMO
Facility;
|
|
·
|
reduce
the amount of working capital that MPF is required to maintain under the
BMO Facility from $10 million to $3
million;
|
|
·
|
grant
to MPF an extension of time to comply with certain eligible mortgage loan
vintage requirements that provide that no mortgage loan may remain pledged
as collateral for more than 18 months (the “Vintage Loan
Requirement”);
|
|
·
|
eliminate
a requirement that MPF enter into a hedge transaction on each borrowing
date and on each date that any hedge transaction expires and require
instead that MPF enter into a hedge transaction complying with the terms
of the Omnibus Amendment;
|
|
·
|
on
each monthly “settlement date,” MPF will deposit into a reserve account an
amount equal to the premium that will be needed to purchase a LIBOR Cap
that will enable MPF to purchase hedge protection against unexpected
changes in interest rates for the period that any mortgage loan pledged as
collateral is scheduled to be repaid (the “LIBOR Cap
Premium”);
|
F-12
·
|
prior
to each settlement date, MPF will request that a hedge counterparty
furnish us with confirmation of the LIBOR Cap Premium for all outstanding
LIBOR Caps after estimating the expected payoff dates for the mortgage
loans pledged as collateral and determining the hedge rate to purchase an
interest rate cap;
|
·
|
on
each settlement date, MPF will deposit funds into the reserve account in
an amount equal to the aggregate LIBOR Cap Premiums as of such date over
the amount then on deposit in the reserve account;
and
|
·
|
set
the “spread” on the interest rate to be charged under the BMO Facility at
1.75% over the commercial paper rate, unless an event of default occurs,
which event would trigger a default rate of prime rate plus
2.0%.
|
As
required by the Omnibus Amendment, MPF paid to BMO Capital an amendment fee of
$228 thousand and MPF agreed to reduce the unpaid principal balance of the BMO
Facility from approximately $78.9 million at March 31, 2009 to $50.7 million as
of June 5, 2009. On May 21, 2009, we purchased 21 mortgage loans from
MPF for an aggregate purchase price of $21.9 million. The net
proceeds received by MPF from the sale of these mortgage loans was applied to
reduce MPF’s outstanding indebtedness under the BMO Facility.
On July
15, 2009, MPF, ECCU and BMO Capital entered into a waiver agreement pursuant to
which BMO Capital agreed to waive certain hedging requirements under the terms
of the BMO Facility. As a result of this waiver, MPF will not be
required to cure a “hedge deficit” or “hedge surplus” in excess of 10% in order
to prevent a default under the BMO Facility.
Under the
terms of the Omnibus Amendment, a “facility termination event” occurred
effective as of October 31, 2008. As a result, MPF can make no new
borrowings on the facility and all funds held or received by the facility
collection account from payments of principal and interest and loan prepayments
have been applied on an accelerated basis to the unpaid balance on the
facility. In addition, the BMO Facility loan documents provide that a
mortgage loan which has been in the facility for more than 18 months may not be
pledged as collateral under the BMO Facility. Because of the Vintage
Loan Requirement, we expect that we will be required to pay off the facility
during the first quarter of 2010.
Effective
as of September 30, 2009, MPF, our wholly-owned subsidiary, entered into Omnibus
Amendment No. 2 to Loan, Security and Servicing Agreement and Fee Agreement
(“Amendment No. 2 to the BMO
Facility”) with Fairway, ECCU, BMO Capital, U.S. Bank National
Association and Lyon Financial Services (d/b/a U.S. Bank Portfolio Services)
pursuant to which the parties agreed to certain modifications and amendments to
the BMO Facility.
By
entering into Amendment No. 2 to the BMO Facility, effective as of September 30,
2009, we agreed to eliminate the Vintage Loan Requirement and replace it with a
requirement that we pay down the BMO Facility on the following schedule (dollars
in thousands):
Date
of Determination
|
Loan
Limit
|
Prior
to October 14, 2009
|
$31,892
|
On
or after October 14, 2009
and
prior to November 14, 2009
|
$30,000
|
On
or after November 14, 2009
and
prior to December 14, 2009
|
$20,000
|
On
or after December 14, 2009
and
prior to January 14, 2010
|
$10,000
|
On
or after January 14, 2010
and
prior to February 14, 2010
|
$5,000
|
On
or after February 14, 2010
and
prior to March 14, 2010
|
$2,500
|
On
or after March 14, 2010
|
$0
|
Under the
Amendment No. 2 to the BMO Facility, the parties further agreed to:
|
·
|
delete
the Vintage Loan Requirement under the BMO
Facility;
|
|
·
|
establish
that our borrowing rate under the BMO Facility will be the one month
commercial paper LIBOR rate plus a “spread” that (i) prior to the
occurrence of an event of default and prior to January 1, 2010, will be
set at 1.75%; (ii) on or after January 1, 2010, will be set at 3.00%; or
(iii) following the occurrence of an event of default, the facility rate
will be set at the prime rate plus
2%;
|
|
·
|
provide
that MPF will be required to pay all costs incurred in the registration,
collection, enforcement or amendment of the BMO Facility loan documents
and that each hedge counterparty will be entitled to its pro rata amounts
due under such applicable hedge agreement or for hedge brokerage costs
before any amendments in the BMO Facility are used to repay all or any
portion of the loan balance due under the facility;
and
|
|
·
|
confirm
that any breach or violation of the BMO Facility loan documents resulting
solely from a “borrowing base deficit” that occurred prior to September
30, 2009 will be waived under the BMO
Facility.
|
F-13
By
entering into the Amendment No. 2 to the BMO Facility, we have provided for a
more feasible and less restrictive pay-off schedule for the facility and have
removed the Vintage Loan Requirement that previously existed under the BMO
Facility loan documents that effectively required us to remove any mortgage
loans from the facility after they had been in the facility for more than 18
months.
We intend
to generate funds to satisfy our indebtedness under the BMO Facility through (i)
the collection of principal and interest and loan prepayments from
loans that are held in the facility; (ii) the sale of debt securities under our
U.S. Securities and Exchange Commission registered offering of Class A Notes;
(iii) the sale of mortgage loans or participation interests; (iv) a refinancing
transaction; or (v) a combination of these capital raising
alternatives. We have made all payments due on the BMO Facility on a
timely basis and, as of the date of this Report, are in compliance with all
covenants that we are required to comply with under the
facility. While we expect that we will be able to pay off the
principal balance of the BMO Facility during the first quarter of 2010 through
one or more of the capital raising initiatives discussed above, no assurances
can be given that we will be successful in our efforts to pay off the BMO
Facility by March 14, 2010. In that event, we will be forced to
seek concessions or a waiver from BMO Capital or liquidate mortgage loan
investments that we own.
5. Notes Payable
We have
the following unsecured notes payable at September 30, 2009 (dollars in
thousands):
Weighted Average Interest
Rate
|
|||||||||
Class
A Offering
|
$ | 43,344 | 3.97% | ||||||
Special
Offering
|
8,691 | 4.67% | |||||||
Special
Subordinated Note
|
2,653 | 7.00% | |||||||
International
Offering
|
419 | 4.48% | |||||||
National
Alpha Offering (Note 6)
|
15,663 | 5.46% | |||||||
Total
|
$ | 70,770 | 4.50% |
Future
maturities during the twelve months ending September 30 are as follows (dollars
in thousands):
2010
|
$ | 42,357 | ||
2011
|
7,511 | |||
2012
|
3,004 | |||
2013
|
5,959 | |||
2014
|
6,652 | |||
Thereafter
|
5,287 | |||
$ | 70,770 |
The
National Alpha Offering notes referenced in the table above have been registered
in public offerings pursuant to registration statements filed with the U.S.
Securities and Exchange Commission (the “Alpha Class
Notes”). All Alpha Class Notes are our unsecured obligations
and pay interest at stated spreads over an index rate that is adjusted every
month. Interest can be reinvested or paid at the investor’s
option.
F-14
The Alpha
Class Notes contain covenants pertaining to limitations on restricted payment,
maintenance of tangible net worth, limitation on issuance of additional notes
and incurrence of indebtedness. The Alpha Class Notes require us to
maintain a minimum tangible adjusted net worth, as defined in the Alpha Class
Loan and Trust Agreement (the “Alpha Class Trust Indenture”),
of not less than $4.0 million. We are not permitted to issue any Alpha
Class Notes if, after giving effect to such issuance, the Alpha Class Notes then
outstanding would have an aggregate unpaid balance exceeding $100.0
million. Our other indebtedness, as defined in the Alpha Class Trust
Indenture, and subject to certain exceptions enumerated therein, may not exceed
$10.0 million outstanding at any time while any Alpha Class Note is
outstanding. We were in compliance with these covenants as of September
30, 2009 and December 31, 2008. Effective April 18, 2008, we
discontinued the sale of our Alpha Class Notes. On October 7, 2008,
U.S. Bank National Association succeeded King Trust Company, N.A., as trustee of
the Alpha Class Notes under the terms of a trust indenture
agreement.
Historically,
most of our unsecured notes have been renewed by investors upon
maturity. Because we have discontinued our sale of Alpha Class Notes
effective as of April 18, 2008, all holders of such notes that mature in the
future may reinvest such sums by purchasing our Class A Notes that have been
registered with the Securities and Exchange Commission (see Note 6
below). For matured notes that are not renewed, we fund the
redemption through proceeds we receive from the repayment of the mortgage loans
that we hold.
6. National Offering
In July
2001, we registered with the U.S. Securities and Exchange Commission (the “SEC”) $25.0 million of Alpha
Class Notes issued pursuant to an Alpha Class Trust Indenture which authorized
the issuance of up to $50.0 million of such notes. In April 2003, we
registered with the SEC an additional $25.0 million of Alpha Class
Notes. In April 2005, we registered with the SEC $50.0 million of new
Alpha Class Notes issued pursuant to the Alpha Class Trust Indenture
which authorized the issuance of up to $200.0 million of such
notes. In May 2007, we registered with the SEC an additional $75.0
million of the new Alpha Class Notes. At September 30, 2009 and December 31,
2008, $15.6 million and $24.2 million of these Alpha Class notes were
outstanding, respectively.
In April
2008, we registered with the SEC $80.0 million of new Class A Notes in three
series, including a Fixed Series, Flex Series and Variable
Series. This is a "best efforts" offering and is expected to continue
through April 30, 2010. The offering includes three categories
of notes, including a fixed interest note, a variable interest note, and a flex
note, which allows borrowers to increase their interest rate once a year with
certain limitations. The interest rates we pay on the Fixed Series
Notes and the Flex Series Notes are determined by reference to the Swap Index,
an index that is based upon a weekly average Swap rate reported by the Federal
Reserve Board, and is in effect on the date they are issued, or in the case of
the Flex Series Notes, on the date the interest rate is reset. These notes bear
interest at the Swap Index plus a rate spread of 1.7% to 2.5% and have
maturities ranging from 12 to 84 months. The interest rates we pay on
the Variable Series Notes are determined by reference to the Variable Index in
effect on the date the interest rate is set and bear interest at a rate of the
Swap Index plus a rate spread of 1.50% to 1.80%. Effective as of
January 5, 2009, the Variable Index is defined under the Class A Notes as the
three month LIBOR rate. The notes were issued under
a Supplemental Agreement with Consent of Holders to Loan and Trust
Agreement (the “US Bank
Indenture”) between us and U.S. Bank National Association (“US Bank”). The
Class A Notes are part of up to $200 million of Class A Notes we may issue
pursuant to the US Bank Indenture. The US Bank Indenture covering the
Class A Notes contains covenants pertaining to a minimum fixed charge coverage
ratio, maintenance of tangible net worth, limitation on issuance of additional
notes and incurrence of indebtedness. We were in compliance with
these covenants at September 30, 2009. At September 30, 2009, $43.3
million of these Class A Notes were outstanding.
7. Preferred and Common Units Under LLC
Structure
On
December 31, 2008, both our Class I Preferred Stock and Class II Preferred Stock
were converted into Series A Preferred Units pursuant to a Plan of Conversion
adopted by our shareholders. The Series A Preferred Units are entitled to a
cumulative preferred return, payable quarterly in arrears, equal to the
liquidation preference times a dividend rate of 190 basis points over the 1-year
LIBOR rate in effect on the last day of the calendar month in which the
preferred return is paid (“Preferred Return”). In
addition, the Series A Preferred Units are entitled to an annual preferred
distribution, payable in arrears, equal to 10% of our profits less the Preferred
Return (“Preferred
Distribution”).
F-15
The
Series A Preferred Units have a liquidation preference of $100 per unit; have no
voting rights; and are subject to redemption in whole or in part at our election
on December 31 of any year, for an amount equal to the liquidation preference of
each unit, plus any accrued and unpaid Preferred Return and Preferred
Distribution on such units. The Series A Preferred Units have priority as to
earnings and distributions over our Class A Common Units. We have a
right of first refusal in the event that one of our Class A Common Unit or
Series A Preferred Unit holders proposes to sell or transfer such
units. If we fail to pay a Preferred Return for four consecutive
quarters, the holders of the Series A Preferred Units have the right to appoint
two managers.
On
December 31, 2008, our common stock was converted into Class A Common Units
under the Plan of Conversion that was adopted by our shareholders. In
accordance with the terms of the Plan of Conversion and Operating Agreement
approved by our shareholders and managers, all voting rights are held by the
holders of our Class A Common Units.
8. Interest Rate Swap and Interest Rate
Cap Agreements
We have
utilized stand-alone derivative financial instruments in the form of interest
rate swap and interest rate cap agreements, which derive their value from
underlying interest rates. These transactions involve both credit and
market risk. The notional amounts are amounts on which calculations,
payments, and the value of the derivative are based. Notional amounts
do not represent direct credit exposures. Direct credit exposure is
limited to the net difference between the calculated amounts to be received and
paid, if any. Such differences, which represent the fair value of the
derivative instruments, are reflected on our consolidated balance sheets as
other assets and other liabilities.
We are
exposed to credit-related losses in the event of nonperformance by the
counterparties to these agreements. We control the credit risk of our
financial contracts through credit approvals, limits and monitoring procedures,
and do not expect any counterparties to fail their obligations. We
deal only with primary dealers.
Derivative
instruments are generally either negotiated over-the-counter (“OTC”) contracts or
standardized contracts executed on a recognized exchange. Negotiated
OTC derivative contracts are generally entered into between two counterparties
that negotiate specific agreement terms, including the underlying instrument,
amount, exercise prices and maturity. Although we have used interest
rate swap agreements from time to time in the past, we currently have
no interest rate swap contracts in place. We do, however, currently
have interest rate cap agreements in place.
Risk
Management Policies – Hedging Instruments
The
primary focus of our asset/liability management program is to monitor the
sensitivity of our net portfolio value and net income under varying interest
rate scenarios to take steps to control our risks. On a quarterly
basis, we simulate the net portfolio value and net income expected to be earned
over a twelve-month period following the date of simulation. The
simulation is based on a projection of market interest rates at varying levels
and estimates the impact of such market rates on the levels of interest-earning
assets and interest-bearing liabilities during the measurement
period. Based upon the outcome of the simulation analysis, we
consider the use of derivatives as a means of reducing the volatility of net
portfolio value and projected net income within certain ranges of projected
changes in interest rates. We evaluate the effectiveness of entering
into any derivative instrument agreement by measuring the cost of such an
agreement in relation to the reduction in net portfolio value and net income
volatility within an assumed range of interest rates.
Interest
Rate Risk Management – Cash Flow Hedging Instruments
We use
long-term variable rate debt as a source of funds for use in our lending and
investment activities and other general business purposes. These debt
obligations expose us to variability in interest payments due to changes in
interest rates. If interest rates increase, interest expense
increases. Conversely, if interest rates decrease, interest expense
decreases. We believe it is prudent to limit the variability of a
portion of our interest payment obligations and, therefore, generally hedge a
portion of our variable-rate interest payments. To meet this
objective, in the past, we have entered into interest rate swap agreements
whereby we receive variable interest rate payments and agree to make fixed
interest rate payments during the contract period.
Another
way to hedge our exposure to variable interest rates is through the purchase of
interest rate caps. An interest rate cap is an option contract that
protects the holder from increases in short-term interest rates by making a
payment to such holder when an underlying interest rate (the "index" or
"reference" interest rate) exceeds a specified strike rate (the "cap rate").
Similar to an interest rate swap, the notional amount on which the payment is
made is never exchanged. Interest rate caps are purchased for a premium and
typically have expirations between 1 and 7 years. With the purchase of an
interest rate cap, payments are made to the holder on a monthly, quarterly or
semiannual basis, with the period generally set equal to the maturity of the
index interest rate. In essence, the financial exposure to the holder
of an interest rate cap is limited to the initial purchase price. The
objective of this type of instrument is to mitigate the exposure to rising
interest rates by “caping” the rate ( the strike price) for a specific period of
time.
F-16
At
September 30, 2009, information pertaining to outstanding interest rate cap
agreements that we have used to hedge variable rate debt is as follows (dollars
in thousands):
Notional
amount
|
$ | 20,000 | ||
Strike
Price
|
1.50% | |||
Weighted
average maturity in years
|
1.75 | |||
Fair
value of interest rate caps
|
$ | 109 | ||
Unrealized
loss relating to interest rate caps
|
$ | 38 |
These
agreements provide for us to receive payments at a variable rate determined by a
specified index (one month London Inter-Bank Offered Rate (“LIBOR”)) when the index
interest rate exceeds 1.50%. This rate was 0.25% at September 30,
2009.
At
September 30, 2009, the unrealized loss relating to interest rate caps was
recorded in other assets. Changes in the fair value of interest rate
caps designed as hedging instruments of the variability of cash flows associated
with long-term debt are reported in other comprehensive income
(loss). These amounts subsequently are reclassified into interest
expense as a yield adjustment in the same period in which the related interest
on the long-term debt affects earnings.
We did
not reclassify any other comprehensive income related to interest caps into
interest expense during the nine months ended September 30, 2009.
At
September 30, 2009, we had no outstanding interest rate swap
contracts. Changes in the fair value of interest rate swaps designed
as hedging instruments of the variability of cash flows associated with
long-term debt are reported in other comprehensive income
(loss). These amounts subsequently are reclassified into interest
expense as a yield adjustment in the same period in which the related interest
on the long-term debt affects earnings.
The net
amount of other comprehensive income reclassified into interest expense related
to interest rate swaps during the nine months ended September 30, 2009 was $566
thousand.
Risk
management results for the nine month period ended September 30, 2009 related to
the balance sheet hedging of our long-term debt indicate that the hedges were
highly effective and that there was no component of the derivative instruments’
gain or loss which was excluded from the assessment of hedge
effectiveness.
9. Loan Commitments
Unfunded
Commitments
Unfunded
commitments are commitments for possible future extensions of credit to existing
customers of ECCU. Unfunded commitments totaled $3.3 million at September 30,
2009 and $3.7 million at December 31, 2008.
10. Fair Value
Measurements
Measurements
of fair value are classified within a hierarcy based upon inputs that give the
highest priority to quoted prices in active markets for identical assets or
liabilities and the lowest priority to unobservable inputs. The fair value
hierarchy is as follows:
|
·
|
Level 1 Inputs -
Unadjusted quoted prices in active markets for identical assets or
liabilities that the reporting entity has the ability to access at the
measurement date.
|
|
·
|
Level 2 Inputs -
Inputs other than quoted prices included in Level 1 that are
observable for the asset or liability, either directly or indirectly.
These might include quoted prices for similar assets or liabilities in
active markets, quoted prices for identical or similar assets or
liabilities in markets that are not active, inputs other than quoted
prices that are observable for the asset or liability (such as interest
rates, volatilities, prepayment speeds, credit risks, etc.) or inputs that
are derived principally from or corroborated by market data by correlation
or other means.
|
|
·
|
Level 3 Inputs -
Unobservable inputs for determining the fair values of assets or
liabilities that reflect an entity’s own assumptions about the assumptions
that market participants would use in pricing the assets or
liabilities.
|
F-17
The table
below presents the balance of assets measured at fair value on a recurring basis
and the level of inputs used to measure fair value:
At September 30, 2009
|
||||||||||||||||
Assets
|
Level 1
|
Level 2
|
Level 3
|
Total
|
||||||||||||
Market
caps
|
-- | $ | 109 | -- | $ | 109 | ||||||||||
Loans
held for sale
|
-- | 31,947 | -- | 31,947 | ||||||||||||
-- | $ | 32,056 | -- | $ | 32,056 |
At December 31, 2008
|
||||||||||||||||
Liabilities
|
Level 1
|
Level 2
|
Level 3
|
Total
|
||||||||||||
Interest
rate swaps
|
-- | $ | 518 | -- | $ | 518 |
We had
the following financial assets for which fair value measures are performed on a
nonrecurring basis:
Impaired Loans. We
had impaired loans totaling $23.4 million and $4.0 million as of September 30,
2009 and December 31, 2008, respectively. We used Level 3 inputs
to estimate the current values of underlying collateral for collateral-dependent
loans, and Level 3 inputs to estimate the present value of expected cash flows
for other impaired loans. Based on these fair value measurements, we concluded
that a $165 thousand valuation allowance was required for impaired loans as of
September 30, 2009, but that no valuation allowance was required for impaired
loans as of December 31, 2008.
As of
September 30, 2009, we had no non-financial assets, financial liabilities, or
non-financial liabilities that are measured at fair value.
We are
required to disclose for the interim reporting periods the fair value of all
financial instruments, including assets, liabilities and off-balance sheet items
for which it is practicable to estimate fair value. The fair value estimates are
made based upon relevant market information, if available, and upon the
characteristics of the financial instruments themselves. Because no market
exists for a significant portion of our mortgage loan investments, fair value
estimates are based upon judgments regarding future expected loss experience,
current economic conditions, risk characteristics of various financial
instruments and other factors. The estimated fair value of our mortgage loan
investments and other financial instruments as of September 30, 2009 is shown
below.
Loans
Fair
value is estimated by discounting the future cash flows using the current
average rates at which similar loans would be made to borrowers with similar
credit ratings and for the same remaining maturities.
Notes
Payable
The fair
value of fixed maturity notes is estimated by discounting the future cash flows
using the rates currently offered for notes payable of similar remaining
maturities.
Lines
of Credit
The fair
values of our lines of credit are estimated using discounted cash flows analyses
based on our current incremental borrowing rates for similar types of borrowing
arrangements.
Derivative
Financial Instruments
The fair
values for interest rate swap agreements and market caps are based upon the
amounts required to settle the contracts.
Off-Balance
Sheet Instruments
The fair
value for our loan commitments is based on fees currently charged to enter into
similar agreements, taking into account the remaining terms of the agreements
and the counterparties' credit standing.
F-18
The fair
value of our financial instruments at September 30, 2009 and December 31, 2008,
are as follows:
September
30, 2009
|
December
31, 2008
|
|||||||||||||||
Carrying
Amount
|
Fair
Value
|
Carrying
Amount
|
Fair
Value
|
|||||||||||||
Financial
assets:
|
||||||||||||||||
Cash
|
$ | 7,504 | $ | 7,504 | $ | 14,889 | $ | 14,889 | ||||||||
Loans held for
sale
|
31,947 | 31,947 | -- | -- | ||||||||||||
Loans held for
investment
|
175,143 | 170,273 | 257,176 | 252,192 | ||||||||||||
Accrued interest
receivable
|
1,019 | 1,019 | 1,374 | 1,374 | ||||||||||||
Financial
liabilities:
|
||||||||||||||||
Notes payable
|
70,770 | 69,331 | 75,774 | 76,748 | ||||||||||||
Bank borrowings
|
131,822 | 130,731 | 185,146 | 186,303 | ||||||||||||
Accrued interest
payable
|
253 | 253 | 292 | 292 | ||||||||||||
Dividends payable
|
94 | 94 | 103 | 103 | ||||||||||||
On-balance
sheet derivative financial instruments:
|
||||||||||||||||
Interest rate swap
agreements
|
-- | -- | 518 | 518 | ||||||||||||
Market
caps
|
109 | 109 | -- | -- |
11. Subsequent Events
We have
evaluated subsequent events through November 13, 2009, the date of issuance of
our financial statements. During the period from September 30, 2009
through November 13, 2009, we did not have any material recognizable subsequent
events that would require further disclosure or adjustment to our September 30,
2009 financial statements.
F-19
Report
of Independent Registered Public Accounting Firm
To The
Members
Ministry
Partners Investment Company, LLC
Brea,
California
We have
audited the accompanying consolidated balance sheets of Ministry Partners
Investment Company, LLC and subsidiary as of December 31, 2008 and 2007 and the
related consolidated statements of operations, equity and cash flows for the
years then ended. These consolidated financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these consolidated financial statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. The Company is not
required to have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audits included consideration of internal
control over financial reporting as a basis for designing audit procedures that
are appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Ministry Partners Investment
Company, LLC and subsidiary as of December 31, 2008 and 2007 and the results of
its operations and its cash flows for the years then ended in conformity with
accounting principles generally accepted in the United States of
America.
/s/
Hutchinson and Bloodgood LLP
March 23,
2009
F-20
Ministry
Partners Investment Company, LLC and Subsidiary
Consolidated
Balance Sheets
December
31, 2008 and 2007
(Dollars
in Thousands)
Assets
|
2008
|
2007
|
||||||
Cash
|
$ | 14,889 | $ | 2,243 | ||||
Loans,
net of allowance for loan losses of $489 and $126 in 2008 and 2007,
respectively
|
257,176 | 116,310 | ||||||
Accrued
interest receivable
|
1,374 | 518 | ||||||
Property
and equipment, net
|
262 | 24 | ||||||
Debt
issuance costs
|
979 | 1,340 | ||||||
Other
assets
|
415 | 649 | ||||||
Total
assets
|
$ | 275,095 | $ | 121,084 | ||||
Liabilities
and Equity
|
||||||||
Liabilities
|
||||||||
Lines
of credit and other borrowings
|
$ | 185,146 | $ | 46,300 | ||||
Notes
payable
|
75,774 | 62,057 | ||||||
Accrued
interest payable
|
292 | 180 | ||||||
Other
liabilities
|
1,132 | 638 | ||||||
Total
liabilities
|
262,344 | 109,175 | ||||||
Commitments and
contingencies (Note 7)
|
||||||||
Stockholders'
equity
|
||||||||
Class
I preferred stock, 200,000 shares authorized, -0- and 88,922 shares issued
and outstanding at December 31, 2008 and 2007, respectively; no par value
(liquidation preference value of $100 per share)
|
-- | 8,892 | ||||||
Class
II preferred stock, 75,000 shares authorized, -0- and 19,000 shares issued
and outstanding at December 31, 2008 and 2007, respectively; no par value
(liquidation preference value of $100 per share)
|
-- | 1,900 | ||||||
Common
stock, 10,000,000 shares authorized, -0- and 146,522 shares issued and
outstanding at December 31, 2008 and 2007, respectively; no par
value
|
-- | 1,809 | ||||||
Accumulated
deficit
|
-- | (579 | ) | |||||
Accumulated
other comprehensive loss
|
-- | (113 | ) | |||||
Members'
equity
|
||||||||
Series
A preferred units, 1,000,000 units authorized, 117,600
units issued and outstanding at December 31, 2008 (liquidation
preference of $100 per unit)
|
11,760 | -- | ||||||
Class
A common units, 1,000,000 units authorized, 146,522 units issued and
outstanding at December 31, 2008
|
1,509 | -- | ||||||
Accumulated
other comprehensive loss
|
(518 | ) | -- | |||||
Total
equity
|
12,751 | 11,909 | ||||||
Total
liabilities and equity
|
$ | 275,095 | $ | 121,084 |
The Notes to Consolidated Financial
Statements are an integral part of these statements.
F-21
Ministry
Partners Investment Company, LLC and Subsidiary
Consolidated
Statements of Operations
Years
Ended December 31, 2008 and 2007
(Dollars
in Thousands)
2008
|
2007
|
|||||||
Interest
income
|
||||||||
Loans
|
$ | 13,451 | $ | 4,639 | ||||
Interest
on interest-bearing accounts
|
383 | 294 | ||||||
Total
interest income
|
13,834 | 4,933 | ||||||
Interest
expense
|
||||||||
Lines
of credit and other borrowings
|
6,123 | 377 | ||||||
Notes
payable
|
3,632 | 3,224 | ||||||
Total
Interest expense
|
9,755 | 3,601 | ||||||
Net
interest income
|
4,079 | 1,332 | ||||||
Provision
for loan losses
|
363 | -- | ||||||
Net
interest income after provision for loan losses
|
3,716 | 1,332 | ||||||
Non-interest
income
|
39 | 8 | ||||||
Non-interest
expenses
|
||||||||
Salaries
and benefits
|
1,097 | 886 | ||||||
Marketing
and promotion
|
21 | 76 | ||||||
Office
occupancy
|
62 | 24 | ||||||
Office
operations and other expenses
|
1,304 | 495 | ||||||
Legal
and accounting
|
550 | 313 | ||||||
Ministry
support
|
-- | 2 | ||||||
Total
non-interest expenses
|
3,034 | 1,796 | ||||||
Income
(loss) before benefit from income taxes
|
721 | (456 | ) | |||||
Benefit
from income taxes
|
(23 | ) | (157 | ) | ||||
Net
income (loss)
|
$ | 744 | $ | (299 | ) |
The Notes
to Consolidated Financial Statements are an integral part of these
statements.
F-22
Ministry
Partners Investment Company, LLC and Subsidiary
Consolidated
Statements of Equity
Years
Ended December 31, 2008 and 2007
(Dollars
in Thousands)
Series A Preferred Units
|
Class A Common
Units
|
Preferred Stock
|
Common Stock
|
|||||||||||||||||||||||||||||||||||||||||
Number
of
Units
|
Amount
|
Number
of
Units
|
Amount
|
Number
of
Shares
|
Amount
|
Number
of
Shares
|
Amount
|
Retained
Earnings
(Accumulated
Deficit)
|
Accumulated
Other
Comprehensive
Loss
|
Total
|
||||||||||||||||||||||||||||||||||
Balance,
December 31, 2006
|
-- | $ | -- | -- | $ | -- | 109,022 | $ | 10,902 | 146,522 | $ | 1,809 | $ | 350 | $ | -- | $ | 13,061 | ||||||||||||||||||||||||||
Purchase
of Class I preferred stock
|
-- | -- | -- | -- | (1,100 | ) | (110 | ) | -- | -- | -- | -- | (110 | ) | ||||||||||||||||||||||||||||||
Comprehensive
loss:
|
||||||||||||||||||||||||||||||||||||||||||||
Net
loss
|
-- | -- | -- | -- | -- | -- | -- | -- | (299 | ) | -- | (299 | ) | |||||||||||||||||||||||||||||||
Change
in value of interest rate swap
|
-- | -- | -- | -- | -- | -- | -- | -- | (113 | ) | (113 | ) | ||||||||||||||||||||||||||||||||
Total
comprehensive loss
|
(412 | ) | ||||||||||||||||||||||||||||||||||||||||||
Dividends
on preferred stock
|
-- | -- | -- | -- | -- | -- | -- | -- | (630 | ) | -- | (630 | ) | |||||||||||||||||||||||||||||||
Balance,
December 31, 2007
|
107,922 | 10,792 | 146,522 | 1,809 | (579 | ) | (113 | ) | 11,909 | |||||||||||||||||||||||||||||||||||
Purchase
of Class I preferred stock
|
-- | -- | -- | -- | (1,900 | ) | (190 | ) | -- | -- | -- | -- | (190 | ) | ||||||||||||||||||||||||||||||
Sale
of Class I preferred stock
|
11,578 | 1,158 | -- | -- | -- | -- | 1,158 | |||||||||||||||||||||||||||||||||||||
Comprehensive
income:
|
||||||||||||||||||||||||||||||||||||||||||||
Net
income
|
-- | -- | -- | -- | -- | -- | -- | -- | 744 | -- | 744 | |||||||||||||||||||||||||||||||||
Change
in value of interest
rate swap
|
-- | -- | -- | -- | (405 | ) | (405 | ) | ||||||||||||||||||||||||||||||||||||
Total
comprehensive income
|
339 | |||||||||||||||||||||||||||||||||||||||||||
Dividends
on preferred stock
|
-- | -- | -- | -- | -- | -- | -- | -- | (465 | ) | -- | (465 | ) | |||||||||||||||||||||||||||||||
Conversion
of preferred stock into Series A preferred units
|
117,600 | 11,760 | -- | -- | (117,600 | ) | (11,760 | ) | -- | -- | -- | -- | -- | |||||||||||||||||||||||||||||||
Conversion
of common stock into Class A Units
|
-- | -- | 146,522 | 1,509 | -- | -- | (146,522 | ) | (1,809 | ) | 300 | -- | -- | |||||||||||||||||||||||||||||||
Balance,
December 31, 2008
|
117,600 | $ | 11,760 | 146,522 | $ | 1,509 | -- | $ | -- | -- | $ | -- | $ | -- | $ | (518 | ) | $ | 12,751 |
The Notes
to Consolidated Financial Statements are an integral part of these
statements.
F-23
Ministry
Partners Investment Company, LLC and Subsidiary
Consolidated
Statements of Cash Flows
Years
Ended December 31, 2008 and 2007
(Dollars
in Thousands)
2008
|
2007
|
|||||||
Cash
Flows from Operating Activities
|
||||||||
Net
income (loss)
|
$ | 744 | $ | (299 | ) | |||
Adjustments
to reconcile net income (loss) to
net cash provided by (used in) operating activities
|
||||||||
Depreciation
|
14 | 2 | ||||||
Provision
for loan losses
|
363 | -- | ||||||
Amortization
of deferred loan fees
|
(94 | ) | (100 | ) | ||||
Amortization
of debt issuance costs
|
401 | 73 | ||||||
Net
change in:
|
||||||||
Deferred
income tax benefit
|
116 | (86 | ) | |||||
Accrued
interest receivable
|
(856 | ) | (242 | ) | ||||
Other
assets
|
118 | (546 | ) | |||||
Other
liabilities
|
241 | 447 | ||||||
Net
cash provided by (used in) operating activities
|
1,047 | (751 | ) | |||||
Cash
Flows from Investing Activities
|
||||||||
Loan
purchases
|
(156,731 | ) | (73,295 | ) | ||||
Loan
originations
|
(19,309 | ) | (12,471 | ) | ||||
Loan
sales
|
843 | 24,606 | ||||||
Loan
principal collections, net
|
34,064 | 4,663 | ||||||
Purchase
of property and equipment
|
(252 | ) | (16 | ) | ||||
Net
cash used in investing activities
|
(141,385 | ) | (56,513 | ) | ||||
Cash
Flows from Financing Activities
|
||||||||
Net
change in lines of credit and other borrowings
|
138,846 | 46,300 | ||||||
Net
change in notes payable
|
13,717 | 7,726 | ||||||
Debt
issuance costs
|
(41 | ) | (1,413 | ) | ||||
Net
proceeds from issuance of preferred stock
|
1,158 | -- | ||||||
Purchase
of preferred stock
|
(190 | ) | (110 | ) | ||||
Dividends
paid on preferred stock
|
(506 | ) | (629 | ) | ||||
Net
cash provided by financing activities
|
152,984 | 51,874 | ||||||
Net
increase (decrease) in cash
|
12,646 | (5,390 | ) | |||||
Cash
at beginning of year
|
2,243 | 7,633 | ||||||
Cash
at end of year
|
$ | 14,889 | $ | 2,243 | ||||
Supplemental
Disclosures of Cash Flow Information
|
||||||||
Interest
paid
|
$ | 9,642 | $ | 3,840 | ||||
Income
taxes paid
|
140 | 56 | ||||||
Change
in value of interest rate swap
|
405 | 113 |
The Notes
to Consolidated Financial Statements are an integral part of these
statements.
F-24
Note
1.
|
Summary
of Significant Accounting Policies
|
|
Nature
of Business
|
|
Ministry
Partners Investment Company, LLC (the “Company”) was
incorporated in California in 1991 as a C corporation and converted to a
limited liability company on December 31, 2008. The Company is
owned by a group of 13 federal and state chartered credit unions, none of
which owns a majority of the voting common stock of the
Company. Two of
the credit unions own only preferred units while the others own both
common and preferred units. Offices of the Company are
located in Brea, California. The Company provides funds for
real property secured loans for the benefit of evangelical churches and
church organizations. The Company funds its operations
primarily through the sale of debt and equity securities and through other
borrowings. Most of the Company’s loans are purchased from its
largest equity investor, the Evangelical Christian Credit Union (“ECCU”),
of Brea, California. The Company also originates church and ministry loans
independently. Nearly all of the Company’s business and operations
currently are conducted in California and its mortgage loan investments
are concentrated in California.
In
2007 the Company created a wholly owned special purpose subsidiary,
Ministry Partners Funding, LLC (“MPF”), which warehouses church and
ministry mortgages purchased from ECCU or originated by the Company for
later securitization. MPF has not yet securitized any of its
loans. MPF was formed to serve as a financing vehicle that will
purchase qualifying church mortgage loans pending the consummation of a
securitization transaction that will enable such loans to be accumulated
and sold to investors through the purchase of an interest in a securities
instrument.
|
|
Principles
of Consolidation
|
|
The
consolidated financial statements include the accounts of Ministry
Partners Investment Company, LLC and its wholly-owned subsidiary,
MPF. All significant inter-company balances and transactions
have been eliminated in
consolidation.
|
|
Use
of Estimates
|
|
The
preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosures of contingent assets and
liabilities as of the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates. The allowance for loan losses
represents a significant estimate by
management.
|
|
Cash
|
|
The
Company maintains deposit accounts with other institutions with balances
that may exceed federally insured limits. The Company has not
experienced any losses in such
accounts.
|
|
The
Company is required to maintain certain balances on hand in conjunction
with its borrowing arrangement with BMO Capital as disclosed in Note
5.
|
F-25
Note
1.
|
Summary
of Significant Accounting Policies
(Continued)
|
|
Loans
Receivable
|
|
Loans
that management has the intent and ability to hold for the foreseeable
future are reported at their outstanding unpaid principal balance less an
allowance for loan losses, and adjusted for deferred loan fees and costs.
Interest income on loans is accrued on a daily basis using the interest
method. Loan origination fees and costs are deferred and recognized as an
adjustment to the related loan yield using the straight-line method, which
results in an amortization that is materially the same as the interest
method.
|
|
The
accrual of interest is discontinued at the time the loan is 90 days past
due unless the credit is well-secured and in the process of collection.
Past due status is based on contractual terms of the loan. In all cases,
loans are placed on nonaccrual or charged off at an earlier date if
collection of principal or interest is considered
doubtful.
|
|
All
interest accrued but not collected for loans that are placed on nonaccrual
or charged off are reversed against interest income. The interest on these
loans is accounted for on the cash basis or cost-recovery method, until
qualifying for return to accrual. Loans are returned to accrual status
when all the principal and interest amounts contractually due are brought
current and future payments are reasonably
assured.
|
|
Allowance
for Loan Losses
|
|
The
Company sets aside an allowance or reserve for loan losses through charges
to earnings, which are shown in the Company’s Consolidated Statements of
Operations as the provision for loan losses. Loan losses are
charged against the allowance when management believes the
uncollectibility of a loan balance is confirmed. Subsequent recoveries, if
any, are credited to the allowance.
|
|
The
allowance for loan losses is evaluated on a regular basis by management
and is based upon management’s periodic review of the collectibility of
the loans in light of historical experience, the nature and volume of the
loan portfolio, adverse situations that may affect the borrower’s ability
to repay, estimated value of any underlying collateral and prevailing
economic conditions. This evaluation is inherently subjective as it
requires estimates that are susceptible to significant revision as more
information becomes available.
|
|
The
allowance consists of general and unallocated components. The general
component covers non-classified loans and is based on historical loss
experience adjusted for qualitative factors. An unallocated component is
maintained to cover uncertainties that could affect management's estimate
of probable losses. The unallocated component of the allowance reflects
the margin of imprecision inherent in the underlying assumptions used in
the methodologies for estimating general losses in the
portfolio. A specific component of the allowance also is
considered in the event a loan becomes
impaired.
|
F-26
Note
1.
|
Summary
of Significant Accounting Policies
(Continued)
|
Allowance for
Loan Losses (Continued)
|
A
loan is considered impaired when, based on current information and events,
it is probable that the Company will be unable to collect the scheduled
payments of principal and interest when due according to the contractual
terms of the loan agreement. Factors considered by management in
determining impairment include payment status, collateral value, and the
probability of collecting future scheduled principal and interest payments
when due. Loans that experience insignificant payment delays and
payment shortfalls generally are not classified as impaired.
Management determines the significance of payment delays and payment
shortfalls on a case-by-case basis, taking into consideration all of the
circumstances surrounding the loan and the borrower, including the length
of the delay, the reasons for the delay, the borrower's prior payment
record, and the amount of the shortfall in relation to the principal and
interest owed. Impairment is measured on a loan-by-loan basis by
either the present value of expected future cash flows discounted at the
loan's effective interest rate, the obtainable market price, or the fair
value of the collateral if the loan is collateral
dependent.
|
|
Interest
Rate Swap Agreements
|
|
For
asset/liability management purposes, the Company uses interest rate swap
agreements to hedge various exposures or to modify interest rate
characteristics of various balance sheet accounts. Interest
rate swaps are contracts in which a series of interest rate flows are
exchanged over a prescribed period. The notional amount on
which the interest payments are based is not exchanged. These
swap agreements are derivative instruments that convert a portion of the
Company’s variable-rate debt to a fixed rate (cash flow
hedge).
|
|
The
effective portion of the gain or loss on a derivative designated and
qualifying as a cash flow hedging instrument is initially reported as a
component of other comprehensive income and subsequently reclassified into
earnings in the same period or periods during which the hedged transaction
affects earnings. The ineffective portion of the gain or loss
on the derivative instrument, if any, is recognized currently in
earnings.
|
|
For
cash flow hedges, the net settlement (upon close-out or termination) that
offsets changes in the value of the hedged debt is deferred and amortized
into net interest income over the life of the hedged debt. The
portion, if any, of the net settlement amount that did not offset changes
in the value of the hedged asset or liability is recognized immediately in
non-interest income.
|
|
Interest
rate derivative financial instruments receive hedge accounting treatment
only if they are designated as a hedge and are expected to be, and are,
effective in substantially reducing interest rate risk arising from the
assets and liabilities identified as exposing us to risk. Those
derivative financial instruments that do not meet specified hedging
criteria would be recorded at fair value with changes in fair value
recorded in income. If periodic assessment indicates
derivatives no longer provide an effective hedge, the derivative contracts
would be closed out and settled, or classified as a trading
activity.
|
|
Cash
flows resulting from the derivative financial instruments that are
accounted for as hedges of assets and liabilities are classified in the
cash flow statement in the same category as the cash flows of the items
being hedged.
|
F-27
Note
1.
|
Summary
of Significant Accounting Policies
(Continued)
|
Transfers of Financial
Assets
|
Transfers
of financial assets are accounted for as sales when control over the
assets has been surrendered. Control over transferred assets is
deemed to be surrendered when (1) the assets have been isolated from the
Company, (2) the transferee obtains the right (free of conditions that
constrain it from taking advantage of that right) to pledge or exchange
the transferred assets, and (3) the Company does not maintain effective
control over the transferred assets through an agreement to repurchase
them before their maturity.
|
|
Property
and Equipment
|
|
Furniture,
fixtures, and equipment are stated at cost, less accumulated depreciation.
Depreciation is computed on a straight-line basis over the estimated
useful lives of the assets, which range from three to five
years.
|
|
Debt
Issuance Costs
|
Debt
issuance costs are related to the lines of credit as well as to a public
offering of unsecured notes, and are amortized into interest expense over the
contractual terms of the debt.
|
Income
Taxes
|
|
Through
December 30, 2008, the Company was a C corporation, and thus recorded all
current and deferred income taxes arising from its operations through that
date. Deferred income tax assets and liabilities were determined based on
the tax effects of temporary differences between the book and tax bases of
the various assets and liabilities of the
Company.
|
|
Effective
December 31, 2008, the Company converted from a C corporation to a
California limited liability company (LLC). As a result, the stockholders
of the Company became members of the LLC on the conversion date. The LLC
will be treated as a partnership for income tax purposes; therefore, the
Company will no longer be a tax-paying entity for federal or state income
tax purposes, and thus no federal or state income tax will be recorded in
the financial statements after the date of conversion. Income and expenses
of the Company will be passed through to the members of the LLC for tax
reporting purposes. The Company will become subject to a California gross
receipts fee of approximately $12,000 per year for years ending on and
after December 31, 2009.
|
F-28
Note
1.
|
Summary
of Significant Accounting Policies
(Continued)
|
Income Taxes
(Continued)
|
Although the Company will no longer be an income
tax-paying entity beginning in 2009, it is nonetheless subject to FASB
Interpretation No. 48, Accounting for Uncertainty in
Income Taxes, an interpretation of FASB Statement 109, for all “open” tax periods for which the statute
of limitations has not yet run. FASB Interpretation No. 48,
which the Company adopted as of January 1, 2007, prescribes a recognition threshold and a
measurement attribute for the financial statement recognition and
measurement of a tax position taken in a tax return. Benefits from tax
positions are recognized in the financial statements only when it is more
likely than not that the tax position will be sustained upon examination
by the appropriate taxing authority that would have full knowledge of all
relevant information. A tax position that meets the more-likely-than-not
recognition threshold is measured at the largest amount of benefit that is
greater than 50 percent likely of being realized upon ultimate settlement.
Tax positions that previously failed to meet the more-likely-than-not
recognition threshold are recognized in the first subsequent financial
reporting period in which that threshold is met. Previously recognized tax
positions that no longer meet the more-likely-than-not recognition
threshold are derecognized in the first subsequent financial reporting
period in which that threshold is no longer
met.
|
Employee
Benefit Plan
|
Contributions
to the qualified employee retirement plan are recorded as compensation
cost in the period incurred.
|
|
Recent
Accounting Pronouncements
|
|
In
March 2008, FASB issued SFAS No. 161, Disclosures about Derivative
Instruments and Hedging Activities, which is effective for
financial statements issued for fiscal years and interim periods beginning
after November 15, 2008. SFAS No. 161 requires enhanced
disclosures about an entity’s derivatives and hedging
activities. Management does not expect the adoption of SFAS No.
161 to have a material impact on the Company’s consolidated financial
statements.
|
Note
2.
|
Related
Party Transactions
|
|
The
Company maintains most of its cash at ECCU. Total funds held with ECCU
were $12.0 million and $1.5 million at December 31, 2008 and 2007,
respectively. Interest earned on these funds totaled approximately $310.9
thousand and $88.7 thousand for the years ended December 31, 2008 and
2007, respectively.
|
|
The
Company leases physical facilities from ECCU pursuant to an Office Lease
dated November 4, 2008, and purchases other services from ECCU. Charges of
approximately $164.2 thousand and $177.0 thousand for the years ended
December 31, 2008 and 2007, respectively, were made for these services and
are included in Office Operations expense. The method used to arrive at
the periodic charge is based on the fair market value of services
provided. Management believes that such method is
reasonable.
|
|
During
the year ended December 31, 2007, the Company leased its employees from
ECCU. The Company paid $861.7 thousand for the employee costs during the
year ended December 31, 2007. Effective January 1, 2008, the Company
entered into a staffing agreement with Administaff Companies II, L.P.,
covering all employees pursuant to a client services agreement and
terminated the leasing arrangement with
ECCU.
|
F-29
Note
2.
|
Related
Party Transactions (Continued)
|
|
In
accordance with a mortgage loan purchase arrangement between the Company
and ECCU, the Company purchased $156.7 million and $73.3 million of loans
from ECCU during the years ended December 31, 2008 and 2007,
respectively. This includes $60.3 and $40.8 million purchased
by MPF during the years ended December 31, 2008 and 2007,
respectively. The Company recognized $11.8 million and $4.1
million of interest income on loans purchased from ECCU during the years
ended December 31, 2008 and 2007, respectively. ECCU retains
the servicing rights on loans it sells to the Company. The
Company paid loan servicing fees to ECCU of $732.5 thousand and $61.4
thousand in the years ended December 31, 2008 and 2007,
respectively. For liquidity management purposes, from time to
time the Company has asked ECCU to repurchase some of the mortgage loan
investments in order to provide short-term liquidity. Although ECCU has
from time to time accommodated the Company in responding to such requests,
ECCU is under no obligation to continue this practice. During the years
ended December 31, 2008 and 2007, loans in the amount of $843.3 thousand
and $24.6 million, respectively, were sold back to ECCU. No gain or loss
was incurred on these sales.
|
|
On
December 14, 2007, the Board of Directors appointed R. Michael Lee to
serve as a Company director. Mr. Lee serves as President,
Midwest Region, of Members United Corporate Federal Credit Union (Members
United). See Note 5 for information regarding the Company’s
borrowings from Members United.
|
On July
11, 2007, the Company’s Board of Directors approved by written consent an
agreement pursuant to which the Company purchased a residence owned by the
Company’s President and his wife for $450 thousand plus reasonable closing costs
incurred in completing the purchase transaction. The Board of
Directors approved this purchase transaction as part of a relocation incentive
arrangement. On August 7, 2007, the Company completed the purchase of
this property, and in January of 2008, the Company sold this property. The
Company realized a loss of approximately $106 thousand from this
transaction.
Note
3. Loans
|
A
summary of loans as of December 31
follows:
|
2008
|
2007
|
||||||||
Loans
to evangelical churches and related organizations:
|
|||||||||
Real
estate secured
|
$ | 254,869 | $ | 111,390 | |||||
Construction
|
1,042 | 5,174 | |||||||
Unsecured
|
2,000 | -- | |||||||
Total
Loans
|
$ | 257,911 | $ | 116,564 | |||||
Deferred
loan fees, net
|
(210 | ) | (128 | ) | |||||
Loan
discount
|
(36 | ) | -- | ||||||
Allowance
for loan losses
|
(489 | ) | (126 | ) | |||||
Loans,
net
|
$ | 257,176 | $ | 116,310 |
F-30
Note
3.
|
Loans
(Continued)
|
|
The
loans fall into three categories: loans purchased in whole from
ECCU, loan participations purchased from ECCU, and loans originated
directly by the Company. All of the loans are made to various
evangelical churches and related organizations, primarily to purchase,
construct or improve facilities. Loan maturities extend through 2018. The
loans earn interest at rates between 4.50% and 8.75%, with a weighted
average yield of 6.60% as of December 31,
2008.
|
The
allowance for loan losses was $489 thousand and $126 thousand as of December 31,
2008 and 2007, respectively. The Company has had no experience of loan loss.
Management believes that the allowance for loan losses as of December 31, 2008
and 2007 is appropriate.
The
Company holds one mortgage loan that is more than 90 days delinquent as of
December 31, 2008 with a balance of $2.7 million. In accordance with the
Company’s loan policy, this loan was placed on a non-accrual status, and $92
thousand of interest income was reversed. Management believes that this loan is
adequately secured.
The
following is a summary of information on impaired and non-accrual loans at
December 31:
2008
|
2007
|
||||||||
Impaired
loans without a valuation allowance
|
$ | 4,025 | $ | -- | |||||
Impaired
loans with a valuation allowance
|
-- | -- | |||||||
Total
impaired loans
|
$ | 4,025 | $ | -- | |||||
Valuation
allowance for impaired loans
|
$ | -- | $ | -- | |||||
Total
non-accrual loans
|
$ | 2,700 | $ | -- | |||||
Total
loans past due 90 days or more and still accruing
|
$ | -- | $ | -- | |||||
Average
investment in impaired loans during the year
|
$ | 1,216 | $ | -- | |||||
Interest
income recognized on impaired loans
|
$ | -- | $ | -- | |||||
No
additional funds were committed to be advanced in connection with impaired
loans.
F-31
Note
4.
|
Premises
and Equipment
|
Premises and equipment consisted of the
following at December 31:
2008
|
2007
|
||||||||
Furniture
and office equipment
|
$ | 237 | $ | 24 | |||||
Computer
system
|
17 | 17 | |||||||
Leasehold
improvements
|
25 | -- | |||||||
279 | 41 | ||||||||
Less
accumulated depreciation and amortization
|
(17 | ) | (17 | ) | |||||
$ | 262 | $ | 24 |
|
Depreciation
and amortization expense for the years ended December 31, 2008 and 2007
amounted to $14 thousand and $2 thousand,
respectively.
|
Note
5.
|
Lines
of Credit
|
|
Members
United Facilities
|
|
On
October 12, 2007, the Company entered into two note and security
agreements with Members United. Members United is a federally chartered
credit union located in Warrenville, Illinois, which provides financial
services to member credit unions. One note and security agreement is for a
secured $10 million revolving line of credit, which is referred to as the
“$10 Million LOC,” and the other is for a secured $50 million revolving
line of credit. The latter was amended on May 8, 2008 to allow
the Company to borrow up to $100 million through the revolving line of
credit. The Company refers to this as the “$100 Million CUSO Line.” Both
credit facilities are secured by certain mortgage loans. The Company
intends to use the $10 Million LOC for short-term liquidity purposes and
the $100 Million CUSO Line for mortgage loan investments. The
Company may use proceeds from either loan to service other debt
securities.
|
|
On
August 27, 2008, the Company borrowed the entire $10 million available on
the $10 Million LOC at a rate of 3.47%. As a result of this
financing, the $10 Million LOC was converted to a term loan with a
maturity date of August 26, 2011. The loan bears interest
payable monthly at a floating rate based on the one month LIBOR plus 100
basis points. The interest rate on the Members United term loan
will be reset monthly. Since the credit facility expired on
September 1, 2008, no new borrowings may be made under this loan
facility. As of December 31, 2008, there was a $10.0 million
outstanding balance on the Members United term loan. The $10
Million LOC was not drawn upon in
2007.
|
Under the
$100 Million CUSO Line, the Company may request advances under a “demand loan”
or “term loan”. A demand loan is a loan with a maximum term of one
year and a variable rate based upon the prime rate quoted by the Wall Street
Journal, as adjusted by a spread as determined by Members United. A
term loan is a fixed or variable loan that has a set maturity date not to exceed
twelve years.
F-32
Note
5.
|
Lines
of Credit (Continued)
|
|
Members United
Facilities (Continued)
|
During
the period when draws may be made, each advance on the $100 Million CUSO Line
will accrue interest at either the offered rate by Members United for a fixed
term draw or the rate quoted by Bloomberg for the Federal Funds open
rate plus 125 basis points for a variable rate draw. Once the $100
Million CUSO Line is fully drawn, the total outstanding balance will be termed
out over a five year period with a 30 year amortization payment
schedule. The Company is obligated to make interest payments on the
outstanding principal balance of all demand loans and term loan advances at the
applicable demand loan rate or term loan rate on the third Friday of each
month.
As of
December 31, 2008 and 2007, the balance on the $100 Million CUSO Line was $89.9
million and $4.7 million, respectively, and the weighted average interest rate
on the Company’s borrowings under this facility was 4.33% and 4.87%,
respectively. Pursuant to the terms of the Company’s promissory note
with Members United, once the loan is fully drawn, the total outstanding balance
will be termed out over a five year period with a 30 year amortization payment
schedule. In addition, the term loan interest rate will be specified
by Members United and will be repriced to a market fixed or variable rate to be
determined at the time the loan is restructured.
In
September, 2008, Members United decided that it would not advance any additional
funds on the $100 Million CUSO Line and the Company entered into negotiations
with Members United to convert the line of credit facility to a term loan
arrangement with a mutually acceptable interest rate. On
April 3, 2009, the interest rates on two tranches of these term loans in
the amounts of $42,816,455 and $23,961,623 are scheduled to be
adjusted. In addition, the interest rate on another $2,800,000
tranche will become subject to an interest rate adjustment on August 18,
2009.
The
Company is continuing to negotiate with Members United regarding the interest
rate to be charged on this facility once the outstanding amounts that become due
are termed out over a five year period with a 30 year amortization
schedule. The interest rate on the $23,961,623 tranche that is
scheduled for adjustment on April 3, 2009 has been extended on a month-to-month
basis at a variable rate equal to the Federal Funds open rate plus
1.25%. While the Company is optimistic that it will be able to
restructure its debt facility arrangements with Members United in the next few
months, no assurances or guarantees can be given that the Company will be able
to reach an agreement on a mutually acceptable interest rate, maturity term or
other loan modification terms. Failure to reach an acceptable debt
restructuring agreement could have a material adverse effect on the Company if
the interest rate on the Members United loan facility exceeds the Company’s
expected interest income from its mortgage loan investments.
|
Both
credit facilities are recourse obligations secured by designated mortgage
loans. The Company must maintain collateral in the form of eligible
mortgage loans, as defined in Member United line of credit agreements, of
at least 111% of the outstanding balance on the lines, after the initial
pledge of $5 million of mortgage loans. As of December 31, 2008 and
December 31, 2007, approximately $111.4 million and $5.2 million of
loans, respectively, were pledged as collateral for the $100 Million CUSO
Line and the $10 Million Members United term loan. The Company has the
right to substitute or replace one or more of the mortgage loans serving
as collateral for these credit
facilities.
|
|
Both
credit facilities contain a number of standard borrower covenants,
including affirmative covenants to maintain the collateral free of liens
and encumbrances, to timely pay the credit facilities and the Company’s
other debt, and to provide Members United with current financial
statements and reports.
|
F-33
Note
5.
|
Lines
of Credit (Continued)
|
BMO
Facility
|
On
October 30, 2007, MPF entered into a Loan Sale, Security, and Servicing
agreement with BMO Capital Markets Group, as agent (“BMO Capital”) and
Fairway Finance Company (“Fairway”), its subsidiary, as
lender. The agreement provides for, among other things, a
$150,000,000 line of credit for the purpose of purchasing and warehousing
loans for later securitization. As of December 31, 2008 and
December 31, 2007, the balance on the BMO Capital line of credit was $85.3
million and $41.6 million, respectively. Interest is calculated at the
rate at which the lender issues commercial paper plus
0.90%. The interest rate on the amount outstanding as of
December 31, 2008 and December 31, 2007 was 2.09% and 5.64%, respectively.
The principal balance is due on October 30, 2010, subject to annual
renewal. However, the due date may be accelerated to April 30, 2009 if the
Company is unsuccessful in renegotiating the loan terms – see
below.
|
The line
is secured by a first priority interest in eligible receivables of MPF, as
defined in the loan agreement. Under the terms of this facility, MPF
must maintain the greater of (i) a minimum borrowing equity of $20 million, or
(ii) a 75% maximum loan to asset ratio relative to the balance of eligible
mortgage loans, as adjusted for certain concentration limits. At December 31,
2008 and 2007, the Company was in compliance with this requirement. At December
31, 2008 and December 31, 2007, all of MPF’s $114.0 million and $62.8 million of
loans receivable, respectively, were pledged as collateral for the BMO Capital
line. The restricted cash maintained by MPF related to this line was $10.4
million at December 31, 2008 and $84 thousand at December 31, 2007.
The BMO
Facility contains standard borrower representations, covenants and events of
default, including failing to make required payments on the credit facility,
failing to timely cure a borrowing base deficit, incurrence of a default under
MPF’s mortgage loan purchase agreements, the occurrence of an event causing
termination of the servicing agreement, the occurrence of a material adverse
event that affects MPF's ability to collect on its mortgage loan investments,
and other default provisions typical of warehouse financing agreements. The
agreements also contain customary borrower affirmative and negative covenants
that require MPF to operate its activities as a special purpose bankruptcy
remote entity, and to conduct its affairs and operations with the Company and
any other affiliated entities on an arms-length basis.
Management
has concluded that current conditions in the global financial and credit markets
will prevent the Company from completing a securitization transaction for all or
a portion of the mortgage loans that its wholly-owned subsidiary, MPF, holds in
2009. Under the BMO Facility loan documents, the Company has agreed
to enter into a term securitization financing transaction, whole loan sale or
other refinancing event in an amount equal to or greater than $50 million for
the purpose of arranging takeout financing for certain mortgage loans held in
the facility. Failure to meet this takeout financing commitment
constitutes an event of default under the BMO Facility loan
documents. Given the current disruption in the global credit markets,
including mortgage-backed securities, the Company will not be able to complete a
takeout financing transaction prior to April 30, 2009.
F-34
Note
5.
|
Lines
of Credit (Continued)
|
BMO Facility
(Continued)
In
addition to the Company’s takeout financing commitment, the Company
was also advised in October, 2008 that the Bank of Montreal, which provided
Fairway Finance Company, LLC with a liquidity guarantee, chose not to renew its
agreement to serve as the liquidity bank for the BMO
Facility. Because of its decision to terminate its liquidity
arrangement, a “facility termination date” occurred under the BMO Facility loan
documents. As a result, MPF could make no new borrowings under the
facility. In addition, all funds held in the facility collection
account that were received from borrowers were required to be used to pay all
outstanding costs and expenses due under the facility, then to accrued and
unpaid interest on the outstanding balance of the facility and any remaining
amounts applied to reduce the loan balance to zero. Since all
interest and principal repayments generated by MPF are reserved and applied to
the BMO Facility, any excess earnings generated from the Company’s investment in
MPF remain trapped and unavailable to the Company for liquidity and cash flow
purposes.
If the
Company is unsuccessful in obtaining a waiver, extension or modification of its
covenant to complete a takeout financing transaction on or before April 30,
2009, an event of default will occur under the BMO Facility loan
documents. In that event, the lender will be entitled to exercise any
and all remedies under the BMO Facility loan documents. These
remedies include, but are not limited to, seizing collateral, selling assets, or
increasing the rate of interest on the loan to the prime rate, plus
2%. Such events could have a material adverse effect on the
Company.
The
Company has met with representatives of BMO Capital Markets Corp. in an effort
to reach a mutually acceptable solution to the takeout financing covenant and
termination of the Liquidity Agreement by the Bank of Montreal. The
Company expects to complete these negotiations and enter into a modification
arrangement on or before April 30, 2009. Although the Company cannot
guarantee a successful outcome in these discussions, the Company anticipates
that it will be able to reach an agreement that will avoid any declaration of an
event of default under the BMO Facility loan documents.
ECCU
Facility
Until
October 12, 2007, the Company maintained a $5,000,000 unsecured line of credit
with ECCU. The line of credit expired on October 12, 2007, and the
Company did not seek to renew it. There were no outstanding borrowings on this
line as of December 31, 2007.
Note
6.
|
Interest
Rate Swap Agreements
|
|
The
Company has stand-alone derivative financial instruments in the form of
interest rate swap agreements, which derive their value from underlying
interest rates. These transactions involve both credit and
market risk. The notional amounts are amounts on which
calculations, payments, and the value of the derivative are
based. Notional amounts do not represent direct credit
exposures. Direct credit exposure is limited to the net
difference between the calculated amounts to be received and paid, if
any. Such differences, which represent the fair value of the
derivative instruments, are reflected on the Company’s balance sheet as
other assets and other liabilities.
|
F-35
Note
6.
|
Interest
Rate Swap
Agreements (Continued)
|
|
The
Company is exposed to credit-related losses in the event of nonperformance
by the counterparties to these agreements. The Company controls
the credit risk of its financial contracts through credit approvals,
limits and monitoring procedures, and does not expect any counterparties
to fail their obligations. The Company deals only with primary
dealers.
|
|
Derivative
instruments are generally either negotiated over-the-counter (OTC)
contracts or standardized contracts executed on a recognized
exchange. Negotiated OTC derivative contracts are generally
entered into between two counterparties that negotiate specific agreement
terms, including the underlying instrument, amount, exercise prices and
maturity.
|
|
Risk
Management Policies – Hedging
Instruments
|
|
The
primary focus of the asset/liability management program is to monitor the
sensitivity of the Company’s net portfolio value and net income under
varying interest rate scenarios to take steps to control the Company’s
risks. The Company evaluates the effectiveness of entering into
any derivative instrument agreement by measuring the cost of such an
agreement in relation to the reduction in net portfolio value and net
income volatility within an assumed range of interest
rates.
|
|
Interest
Rate Risk Management – Cash Flow Hedging
Instruments
|
|
The
Company uses long-term variable rate debt as a source of funds for use in
its lending and investment activities and other general business
purposes. These debt obligations expose the Company to
variability in interest payments due to changes in interest
rates. If interest rates increase, interest expense
increases. Conversely, if interest rates decrease, interest
expense decreases. Management believes it is prudent to limit
the variability of a portion of the Company’s interest payments and,
therefore, generally hedges a portion of the Company’s variable-rate
interest payments. To meet this objective, the Company enters
into interest rate swap agreements whereby it receives variable interest
rate payments and makes fixed interest rate payments during the contract
period.
|
The
information pertaining to outstanding interest rate swap agreements used to
hedge variable rate debt is as follows at December 31:
2008
|
2007
|
||||||||
Notional
amount (in thousands)
|
$ | 85,760 | $ | 41,505 | |||||
Weighted
average pay rate
|
3.17% | 4.46% | |||||||
Weighted
average receive rate
|
0.96% | 4.93% | |||||||
Weighted
average maturity in years
|
.28 | .83 | |||||||
Unrealized
loss relating to interest rate swaps (in thousands)
|
$ | (518 | ) | $ | (113 | ) |
|
These
agreements provide for the Company to receive payments at a variable rate
determined by a specified index (one month LIBOR) in exchange for making
payments at a fixed rate. This rate was 0.44% at December 31,
2008.
|
F-36
Note
6.
|
Interest
Rate Swap
Agreements (Continued)
|
|
Interest Rate Risk Management
– Cash Flow Hedging Instruments
(Continued)
|
|
At
December 31, 2008 and 2007, the unrealized loss relating to interest rate
swaps was recorded in other liabilities. Changes in the fair
value of interest rate swaps designed as hedging instruments of the
variability of cash flows associated with long-term debt are reported in
other comprehensive income. These amounts subsequently are
reclassified into interest expense as a yield adjustment in the same
period in which the related interest on the long-term debt affects
earnings. The net amount of other comprehensive income
reclassified into interest expense during the years ended December 31,
2008 and 2007 was $785.1 thousand and $5.9 thousand,
respectively.
|
|
Risk
management results for the years ended December 31, 2008 and 2007 related
to the balance sheet hedging of long-term debt indicate that the hedges
were nearly 100% effective and that there was no component of the
derivative instruments’ gain or loss which was excluded from the
assessment of hedge effectiveness.
|
|
As
of December 31, 2008, approximately $518 thousand of losses reported in
other comprehensive income related to the interest rate swaps were
expected to be reclassified into interest expense as a yield adjustment of
the hedged borrowings during the year ending December 31,
2009.
|
Note
7.
|
Commitments
and Contingencies
|
|
Unfunded
Commitments
|
|
Unfunded
commitments are commitments for possible future extensions of credit to
existing customers of us or ECCU. Unfunded commitments totaled $3.7
million at December 31, 2008 and $13 million at December 31,
2007.
|
|
Standby
Letters of Credit
|
|
Standby
letters of credit are conditional lending commitments issued by us to
guarantee the performance of a customer to a third party. Standby letters
of credit are primarily issued to support borrowing arrangements. The risk
involved in issuing letters of credit is essentially the same as that
involved in extending loans to customers. The letters of credit, if drawn
upon, will be secured by first lien deeds of trust on real property. There
was no liability related to letters of credit at December 31, 2008 and
2007.
|
|
The
Company entered into a Non-recourse Letter of Credit Participation
Agreement with ECCU on September 8, 2005 which expired on September 7,
2007. The Company was committed to 27.72% of a $65.6 million letter
of credit for a Christian university in Riverside, California. This
commitment was fulfilled as of June 28, 2007 and the Company no longer has
an outstanding commitment.
|
F-37
Note
8.
|
Notes
Payable
|
|
A
summary of notes payable at December 31 is as
follows:
|
Weighted
Average
Interest
Rate at
December 31,
|
|||||||||||||||||
2008
|
2007
|
2008
|
2007
|
||||||||||||||
National
Alpha Offering (Note 9)
|
$ | 24,208 | $ | 33,807 | 5.38% | 5.46% | |||||||||||
Class
A Offering (Note 9)
|
36,480 | -- | 4.57% | -- | |||||||||||||
Special
offering notes
|
14,508 | 27,730 | 4.88% | 5.52% | |||||||||||||
International
notes
|
578 | 520 | 5.40% | 5.65% | |||||||||||||
$ | 75,774 | $ | 62,057 |
The
following are maturities of notes payable for each of the next five
years:
Year
Ending December 31,
|
|||||
2009
|
$ | 49,781 | |||
2010
|
10,497 | ||||
2011
|
5,453 | ||||
2012
|
2,694 | ||||
2013
|
5,344 | ||||
Thereafter
|
2,005 | ||||
$ | 75,774 |
|
Notes
are payable to investors who have purchased the securities, including
individuals, churches, and Christian ministries, many of whom are members
of ECCU. All notes payable are unsecured. Notes pay interest at stated
spreads over an index rate that is adjusted every month. Interest can be
reinvested or paid at the investor's option. The Company may repurchase
all or a portion of notes at any time at its sole discretion, and may
allow investors to redeem their notes prior to maturity at its sole
discretion.
|
|
The
Alpha Class Notes contain covenants pertaining to limitations on
restricted payment, maintenance of tangible net worth, limitation on
issuance of additional notes and incurrence of indebtedness. The
Alpha Class Notes require the Company to maintain a minimum tangible
adjusted net worth, as defined in the Loan and Standby Trust Agreement, of
not less than $4.0 million. The Company is not permitted to issue
any Alpha Class Notes if, after giving effect to such issuance, the Alpha
Class Notes then outstanding would have an aggregate unpaid balance
exceeding $100.0 million. The Company’s other indebtedness, as
defined in the Loan and Standby Trust Agreement, and subject to certain
exceptions enumerated therein, may not exceed $10.0 million outstanding at
any time while any Alpha Class Note is outstanding. The Company is
in compliance with these covenants as of December 31, 2008 and December
31, 2007. Effective April 18, 2008, the Company has
discontinued the sale of Alpha Class
Notes.
|
F-38
Note
8.
|
Notes
Payable (Continued)
|
|
The
Class A Notes also contain restrictive covenants pertaining to paying
dividends, making redemptions, acquiring, purchasing or making certain
payments, requiring the maintenance of minimum tangible net worth,
limitations on the issuance of additional notes and incurring of
indebtedness. The Class A Notes require the Company to maintain a
minimum tangible adjusted net worth, as defined in the Class A Notes Trust
Indenture Agreement, of not less than $4.0 million. The Company is
not permitted to issue any Class A Notes if, after giving effect to such
issuance, the Alpha Class Notes then outstanding would have an aggregate
unpaid balance exceeding $100.0 million. The Company’s other
indebtedness, as defined in the Class A Notes Trust Indenture Agreement,
and subject to certain exceptions enumerated therein, may not exceed $20.0
million outstanding at any time while any Alpha Class Note is
outstanding. The Company was in compliance with these covenants as
of December 31, 2008.
|
|
Historically,
most of the Company’s unsecured notes have been renewed by investors upon
maturity. Because the Company has discontinued its sale of
Alpha Class Notes effective April 18, 2008, all holders of such notes that
mature in the future may reinvest such sums by purchasing Class A Notes
that have been registered with the Securities and Exchange Commission (see
Note 9 below). For matured notes that are not renewed, the
Company funds the redemption in part through proceeds from the repayment
of loans, and issuing new notes
payable.
|
Note
9.
|
Public
Offerings
|
|
In
July 2001, the Company registered with the Securities and Exchange
Commission (the SEC) the sale of $25.0 million of Alpha Class Notes issued
pursuant to a Loan and Standby Trust Agreement authorizing the issuance of
up to $50.0 million of such notes. In April 2003, the Company
registered with the SEC the sale of an additional $25.0 million of Alpha
Class Notes. In April 2005, the Company registered with the SEC
the sale of up to $50.0 million of a new Alpha Class Notes issued pursuant
to a Trust Indenture authorizing the issuance of up to $200.0 million of
such notes. In May 2007, the Company registered with the SEC
the sale of an additional $75.0 million of the new Alpha Class Notes. With
the registration of its Class A Notes, the Company has discontinued the
sale of the Alpha Class Notes effective as of April 18,
2008. At December 31, 2008 and December 31, 2007, $24.2 million
and $33.8 million of these notes were outstanding,
respectively.
|
|
In
April 2008, the Company registered with the SEC $80.0 million of new Class
A Notes in three series, including a Fixed Series, Flex Series and
Variable Series. This is a "best efforts" offering and is
expected to continue through April 30, 2010. The offering
includes three categories of notes, including a fixed interest note, a
variable interest note, and a flex note, which allows borrowers to
increase their interest rate once a year with certain
limitations. The interest rates the Company pays on the Fixed
Series Notes and the Flex Series Notes are determined by reference to the
Swap Index, an index that is based upon a weekly average Swap rate
reported by the Federal Reserve Board, and is in effect on the date they
are issued, or in the case of the Flex Series Notes, on the date the
interest rate is reset. These notes bear interest at the Swap Index plus a
rate spread of 1.7% to 2.5% and have maturities ranging from 12 to 84
months. The interest rates the Company pays on the Variable
Series Notes are determined by reference to the Variable Index in effect
on the date the interest rate is set and bear interest at a rate of the
Swap Index plus a rate spread of 1.50% to 1.80%. Effective as
of January 5, 2009, the Variable Index is defined under the Class A Notes
as the three month LIBOR rate. The Notes were issued under a
Trust Indenture between the Company and U.S. Bank National Association (US
Bank). The Notes are part of up to $200 million of Class A
Notes the Company may issue pursuant to the US Bank
Indenture. The Trust Indenture covering the Class A Notes
contains covenants pertaining to a minimum fixed charge coverage ratio,
maintenance of tangible net worth, limitation on issuance of additional
notes and incurrence of indebtedness. At December 31, 2008,
$36.5 million of these Class A Notes were
outstanding.
|
F-39
Note
10.
|
Preferred Stock
Under C Corporation
Structure
|
|
The
Class I Preferred Stock was entitled to annual cumulative dividends,
payable quarterly, equal to the liquidation preference times a dividend
rate of 190 basis points over the 1-year LIBOR rate in effect on the last
day of the calendar month in which the dividend was declared. The
Class I Preferred Stock had a liquidation preference of $100 per share;
had no voting rights except as required under California law; and was
subject to redemption for an amount equal to the liquidation preference of
each share, plus any accrued and unpaid dividends on such shares, in whole
or in part, at the Company’s election. The resale of the Company’s common
stock and preferred stock was subject to the Company’s first right of
refusal to purchase shares proposed to be transferred. During 2007,
the Company purchased 1,100 shares of Class I Preferred stock from a
shareholder, resulting in 88,922 shares of that class of stock outstanding
at December 31, 2007. During 2008, the Company purchased 1,900
shares of Class I Preferred stock from two different
shareholders. The Company also sold 11,578 shares of Class I
Preferred stock to ECCU, resulting in 98,600 shares of that class of stock
outstanding just prior to December 31,
2008.
|
|
The
Class II Preferred Stock had right preferences and privileges identical to
the Class I Preferred Stock, except it was entitled to dividends equal to
the liquidation preference of $100 per share times a dividend rate of one
percent (1%) per annum, and the holders of the Class I Preferred Stock did
not have the right to appoint directors upon the Company’s failure to pay
dividends.
|
Note
11.
|
Preferred
and Common Units Under LLC
Structure
|
|
On
December 31, 2008, the Company’s Class I Preferred Stock and Class II
Preferred Stock were converted into Series A Preferred Units. The Series A
Preferred Units are entitled to a cumulative Preferred Return, payable
quarterly in arrears, equal to the liquidation preference times a dividend
rate of 190 basis points over the 1-year LIBOR rate in effect on the last
day of the calendar month in which the Preferred Return is paid. In
addition, the Series A Preferred Units are entitled to an annual Preferred
Distribution, payable in arrears, equal to 10% of the Company’s profits
less the Preferred Return.
|
|
The
Series A Preferred Units have a liquidation preference of $100 per unit;
have no voting rights; and are subject to redemption in whole or in part
at the Company’s election on December 31 of any year, for an amount equal
to the liquidation preference of each unit, plus any accrued and unpaid
Preferred Return and Preferred Distribution on such units. The Preferred
Units have priority as to earnings and distributions over the Common
Units. The resale of the Company’s Preferred Units and Common Units are
subject to the Company’s first right of refusal to purchase units proposed
to be transferred. Upon the Company’s failure to pay a Preferred
Return for four consecutive quarters, the holders of the Series A
Preferred Units have the right to appoint two
managers.
|
|
On
December 31, 2008, the Company’s Common Stock was converted into the Class
A Common Units. The Class A Common Units have voting
rights.
|
Note
12.
|
Income
Taxes
|
|
Effective December 31, 2008, the Company converted
from a C corporation to a California limited liability company
(LLC). The conversion gave rise to a loss for the year ended
December 31, 2008 for income tax purposes only. The Company will be able
to recover $140 thousand of federal taxes paid in prior years through the
carryback of the tax loss. The deferred tax asset has been eliminated as
of December 31, 2008 since the Company is no longer an income
tax-paying entity.
|
F-40
The
components of the benefit from income taxes at December 31 are as
follows:
2008
|
2007
|
||||||||
Current:
|
|||||||||
Federal
|
$ | -- | $ | -- | |||||
State
|
1 | 1 | |||||||
Federal
tax carryback
|
(140 | ) | (72 | ) | |||||
139 | (71 | ) | |||||||
Deferred:
|
|||||||||
Federal
|
90 | (81 | ) | ||||||
State
|
26 | (54 | ) | ||||||
Change
in valuation allowance
|
-- | 49 | |||||||
116 | (86 | ) | |||||||
Benefit
from income taxes
|
$ | (23 | ) | $ | (157 | ) |
|
The
tax effects of the temporary differences in income and expense items that
gave rise to deferred taxes at December 31 are as
follows:
|
2008
|
2007
|
||||||||
Deferred
tax assets:
|
|||||||||
Allowance
for loan losses
|
$ | -- | $ | 52 | |||||
Net
operating loss carryforward
|
-- | 130 | |||||||
Contribution
carryforward due to tax limitation
|
-- | 29 | |||||||
Interest
rate swap
|
-- | 46 | |||||||
-- | 257 | ||||||||
Valuation
allowance
|
-- | (141 | ) | ||||||
-- | 117 | ||||||||
Deferred
tax liabilities:
|
|||||||||
Depreciation
|
-- | (1 | ) | ||||||
Net
deferred tax asset
|
$ | -- | $ | 116 |
|
The
reason for the differences between the statutory federal income tax rate
and the effective tax rates are summarized as
follows:
|
2008
|
2007
|
||||||||
Statutory
tax rate
|
34.0% | 34.0% | |||||||
Increase
(decrease) resulting from:
|
|||||||||
State
taxes, net of federal tax benefit
|
-- | 7.1 | |||||||
Loss
on conversion to LLC
|
(53.3 | ) | -- | ||||||
Elimination
of net deferred tax asset
|
16.1 | -- | |||||||
Valuation
allowance
|
-- | (6.8 | ) | ||||||
Other,
net
|
-- | 0.2 | |||||||
Effective
tax rate
|
(3.2% | ) | 34.5% |
F-41
Note
13.
|
Comprehensive
Income
|
Comprehensive
income consists of income and other comprehensive income or loss. Other
comprehensive loss consisted of unrealized losses on interest rate swaps, which
are cash flow hedges, of $405 thousand and $113 thousand for years ended
December 31, 2008 and 2007, respectively. The accumulated other
comprehensive loss from cash flow hedges, which is recognized as a separate
component of equity, was $518 thousand and $113 thousand at December 31, 2008
and 2007, respectively. No tax effect is recognized on other
comprehensive losses since the Company is no longer a taxpaying
entity.
Note
14.
|
Retirement
Plans
|
|
The
Company’s employees participate in ECCU's defined contribution plan that
includes two components: a 401(k) plan and a profit sharing plan. In
addition, until December 31, 2007, certain officers participated in a long
term incentive program through the leased employee arrangement with
ECCU. Effective January 1, 2008, the Company terminated its
employee leasing arrangement with ECCU and the Company’s officers no
longer participate in ECCU’s defined contribution plan and incentive
program. However, some of the benefits related to the long-term
incentive program carried over into 2008. Employee benefits
related to the long-term incentive program totaled $43.2 and $80.7
thousand for the years ended December 31, 2008 and 2007,
respectively.
|
|
401(k)
|
|
Employees
who are at least 21 years of age are eligible to participate in the 401(k)
plan upon the hire date. No minimum service is required and the minimum
age is 21. Each employee may elect voluntary contributions not to exceed
60% of salary, subject to certain limits based on Federal tax law. The
plan has a matching program, the percent of which is annually determined
by the managers. Matching contributions for the plan years ended December
31, 2008 and 2007 were $39.3 and $18.5 thousand,
respectively.
|
|
Profit
Sharing
|
|
The
profit sharing plan is for all employees who, at the end of the calendar
year, are at least 21 years old, still employed, and have at least 900
hours of service during the plan year. The amount annually contributed on
behalf of each qualified employee is determined by the managers, and is
calculated as a percentage of the eligible employee's annual earnings.
Plan forfeitures are used to reduce the Company’s annual contribution.
Contributions for the plan years ended December 31, 2008 and 2007
were $8.8 thousand and $24.0 thousand,
respectively.
|
Note
15.
|
Fair
Value Measurements
|
|
Loans
|
|
Fair
value is estimated by discounting the future cash flows using the current
average rates at which similar loans would be made to borrowers with
similar credit ratings and for the same remaining
maturities.
|
F-42
Note
15.
|
Fair
Value Measurements (Continued)
|
|
Notes
Payable
|
|
The
fair value of fixed maturity notes is estimated by discounting the future
cash flows using the rates currently offered for notes payable of similar
remaining maturities.
|
|
Lines
of Credit
|
|
The
fair values of the Company’s lines of credit are estimated using
discounted cash flows analyses based on its current incremental borrowing
rates for similar types of borrowing
arrangements.
|
|
Derivative
Financial Instruments
|
The fair
values for interest rate swap agreements are based upon the amounts required to
settle the contracts.
Off-Balance
Sheet Instruments
The fair
value for the Company's loan commitments is based on fees currently charged to
enter into similar agreements, taking into account the remaining terms of the
agreements and the counterparties' credit standing.
The fair
value of the Company’s financial instruments at December 31, are as
follows:
2008
|
2007
|
||||||||||||||||
Carrying
Amount
|
Fair
Value
|
Carrying
Amount
|
Fair
Value
|
||||||||||||||
Financial
assets:
|
|||||||||||||||||
Cash
|
$ | 14,889 | $ | 14,889 | $ | 2,243 | $ | 2,243 | |||||||||
Loans
|
257,176 | 252,192 | 116,310 | 117,905 | |||||||||||||
Accrued interest
receivable
|
1,374 | 1,374 | 518 | 518 | |||||||||||||
Financial
liabilities:
|
|||||||||||||||||
Notes payable
|
75,774 | 76,748 | 62,057 | 62,055 | |||||||||||||
Lines of credit and other
borrowings
|
185,146 | 186,303 | 46,300 | 46,300 | |||||||||||||
Accrued interest
payable
|
292 | 292 | 179 | 179 | |||||||||||||
Dividends payable
|
103 | 103 | 144 | 144 | |||||||||||||
On-balance
sheet derivative financial instruments:
|
|||||||||||||||||
Interest rate swap
agreements
|
518 | 518 | 113 | 113 |
|
Effective
January 1, 2008, the Company partially adopted SFAS No. 157, Fair Value
Measurements, which defines fair value, establishes a framework for
measuring fair value and expands disclosures about fair value
measurements. SFAS No. 157 applies only to fair value measurements already
required or permitted by other accounting standards and does not impose
requirements for additional fair value measures. SFAS No. 157 was issued
to increase consistency and comparability in reporting fair values. The
Company’s adoption of SFAS No. 157 did not have a material impact on its
financial condition or results of
operations.
|
F-43
Note
15.
|
Fair
Value Measurements
(Continued)
|
Off-Balance Sheet Instruments
(Continued)
In
February 2008, FASB issued Staff Position No. FAS 157-2, or FSP 157-2,
which delays the effective date of SFAS No. 157 for certain nonfinancial assets
and nonfinancial liabilities, such as foreclosed assets, to fiscal years
beginning after November 15, 2008, and interim periods within those fiscal
years. The delay is intended to allow additional time to consider the effect of
various implementation issues that have arisen, or that may arise, from the
application of SFAS No. 157. The Company has elected to apply the deferral
provisions in FSP 157-2 and therefore has only partially applied the provisions
of SFAS No. 157. The Company will fully adopt SFAS No. 157 with respect to
nonfinancial assets and nonfinancial liabilities effective January 1, 2009.
The Company does not believe that such adoption will have a material impact on
the financial statements, but will result in additional disclosures related to
the fair value of nonfinancial assets.
The
application of SFAS No. 157 in situations where the market for a financial
asset is not active was clarified by the issuance of FSP 157-3, Determining the Fair Value of a
Financial Asset When the Market for That Asset Is Not Active, in
October 2008. FSP 157-3 became effective immediately and did not
significantly impact the methods by which the Company determines the fair values
of its financial assets.
SFAS No.
157 establishes a fair value hierarchy for valuation inputs that gives the
highest priority to quoted prices in active markets for identical assets or
liabilities and the lowest priority to unobservable inputs. The
fair value hierarchy is as follows:
|
§
|
Level 1
Inputs - Unadjusted quoted prices in
active markets for identical assets or liabilities that the reporting
entity has the ability to access at the measurement
date.
|
|
§
|
Level 2 Inputs -
Inputs other than quoted prices included in Level 1 that are
observable for the asset or liability, either directly or indirectly.
These might include quoted prices for similar assets or liabilities in
active markets, quoted prices for identical or similar assets or
liabilities in markets that are not active, inputs other than quoted
prices that are observable for the asset or liability (such as interest
rates, volatilities, prepayment speeds, credit risks, etc.) or inputs that
are derived principally from or corroborated by market data by correlation
or other means.
|
|
§
|
Level 3
Inputs - Unobservable inputs for
determining the fair values of assets or liabilities that reflect an
entity’s own assumptions about the assumptions that market participants
would use in pricing the assets or
liabilities.
|
The
Company had one financial liability, the interest rate swap agreement, that is
measured at fair value on a recurring basis. This agreement, recorded
at $518,000 at December 31, 2008, is measured at fair value based on an estimate
provided by the counterparty using Level 2 inputs. The Company had no financial
assets measured at fair value on a recurring basis. The Company had the
following financial assets for which fair value measurements are performed on a
nonrecurring basis:
Impaired Loans. The Company
had impaired loans totaling $4.0 million as of December 31, 2008. Management
used Level 3 inputs to estimate the current values of underlying collateral for
collateral-dependent loans, and Level 3 inputs to estimate the present value of
expected cash flows for other impaired loans. Based on these fair value
measurements, management concluded that no valuation allowance was required for
impaired loans as of December 31, 2008.
F-44
Note
16.
|
Condensed
Financial Statements of Parent
Company
|
|
Financial
information pertaining only to the parent company, Ministry Partners
Investment Company, LLC, is as
follows:
|
Balance
Sheets
|
December 31, | ||||||||
2008
|
2007
|
||||||||
Assets
|
|||||||||
Cash
|
$ | 11,829 | $ | 1,575 | |||||
Loans,
net of allowance for loan losses
|
143,206 | 54,410 | |||||||
Accrued
interest receivable
|
664 | 294 | |||||||
Property
and equipment, net
|
262 | 24 | |||||||
Investment
in MPF
|
32,027 | 21,596 | |||||||
Debt
issuance costs
|
532 | 667 | |||||||
Other
assets
|
423 | 615 | |||||||
Total
assets
|
$ | 188,943 | $ | 79,181 | |||||
December
31,
|
|||||||||
2008 | 2007 | ||||||||
Liabilities
and equity
|
|||||||||
Lines
of credit and other borrowings
|
$ | 99,875 | $ | 4,716 | |||||
Notes
payable
|
75,774 | 62,057 | |||||||
Accrued
interest payable
|
141 | 15 | |||||||
Other
liabilities
|
402 | 484 | |||||||
Total
liabilities
|
176,192 | 67,272 | |||||||
Equity
|
12,751 | 11,909 | |||||||
Total
liabilities and equity
|
$ | 188,943 | $ | 79,181 |
F-45
Note
16. Condensed Financial
Statements of Parent Company (Continued)
Statements
of Operations
|
Years
Ended December 31,
|
||||||||
2008
|
2007
|
||||||||
Income:
|
|||||||||
Interest
income
|
$ | 7,008 | $ | 4,408 | |||||
Other
income
|
33 | 8 | |||||||
Total
income
|
7,041 | 4,416 | |||||||
Interest
expense:
|
|||||||||
Interest
on lines of credit
|
2,434 | 48 | |||||||
Interest
on notes payable
|
3,632 | 3,224 | |||||||
Total
interest expense
|
6,066 | 3,272 | |||||||
Provision
for loan losses
|
328 | -- | |||||||
Other
operating expenses
|
1,468 | 1,725 | |||||||
Loss
before benefit from income taxes
|
(821 | ) | (581 | ) | |||||
Benefit
from income taxes
|
(23 | ) | (208 | ) | |||||
(798 | ) | (373 | ) | ||||||
Equity
in undistributed net income of MPF
|
1,542 | 74 | |||||||
Net
income (loss)
|
$ | 744 | $ | (299 | ) |
F-46
Note
16. Condensed Financial
Statements of Parent Company (Continued)
Statements
of Cash Flows
|
Years
Ended December 31,
|
||||||||
2008
|
2007
|
||||||||
Cash
Flows from Operating Activities
|
|||||||||
Net
income (loss)
|
$ | 744 | $ | (299 | ) | ||||
Adjustments
to reconcile net income (loss) to net cash provided by (used in) operating
activities:
|
|||||||||
Equity
in undistributed net income of MPF
|
(1,542 | ) | (74 | ) | |||||
Depreciation
|
14 | 2 | |||||||
Provision
for loan losses
|
328 | -- | |||||||
Amortization
of deferred loan (fees) costs
|
(94 | ) | (100 | ) | |||||
Amortization
of debt issuance costs
|
176 | 33 | |||||||
Net
change in:
|
|||||||||
Interest
receivable
|
(370 | ) | (19 | ) | |||||
Other
assets
|
(192 | ) | (597 | ) | |||||
Other
liabilities
|
(319 | ) | 241 | ||||||
Net
cash provided by (used in) operating activities
|
(1,255 | ) | (813 | ) | |||||
Cash
Flows from Investing Activities
|
|||||||||
Loan
purchases
|
(96,427 | ) | (32,495 | ) | |||||
Loan
originations
|
(19,309 | ) | (12,471 | ) | |||||
Loan
sales
|
-- | 24,606 | |||||||
Loan
principal collections, net
|
26,706 | 4,128 | |||||||
Investment
in MPF
|
(8,506 | ) | -- | ||||||
Purchase
of property and equipment
|
(252 | ) | (17 | ) | |||||
Net
cash used in investing activities
|
(97,788 | ) | (16,248 | ) | |||||
Cash
Flows from Financing Activities
|
|||||||||
Net
borrowing on line of credit
|
95,159 | 4,716 | |||||||
Net
change in notes payable
|
13,717 | 7,726 | |||||||
Debt
issuance costs
|
(41 | ) | (700 | ) | |||||
Net
proceeds from issuance of preferred stock
|
1,158 | -- | |||||||
Purchase
of preferred stock
|
(190 | ) | (110 | ) | |||||
Dividends
paid on preferred stock
|
(506 | ) | (629 | ) | |||||
Net
cash provided by financing activities
|
109,297 | 11,003 | |||||||
Net
increase (decrease) in cash
|
10,254 | (6,058 | ) | ||||||
Cash
at beginning of year
|
1,575 | 7,633 | |||||||
Cash
at end of year
|
$ | 11,829 | $ | 1,575 | |||||
Supplemental
Disclosures of Cash Flow Information Transfer of loans to
MPF
|
$ | -- | $ | 21,659 |
F-47
EXHIBIT
A
CLASS
A NOTES
TRUST
INDENTURE
THIS
TRUST INDENTURE, dated as of April 18, 2008, is entered into by Ministry
Partners Investment Corporation, a California corporation, the “Company”, and
U.S. Bank National Association, the “Trustee”, pursuant to the terms
hereof.
WHEREAS,
the Company desires to issue up to an aggregate of $200,000,000 of the Notes to
investors; and
WHEREAS,
the Company desires to enter into this Indenture Agreement with the Trustee
whereby the Company hereby appoints Trustee, and Trustee agrees to act as,
Trustee for the Holders under the Notes;
NOW,
THEREFORE, each of the Company and the Trustee agrees as follows for the benefit
of the other and for the equal and ratable benefit of the Holders of the
Notes:
ARTICLE
I
DEFINITIONS
Section
1.01. Definitions. For the
purposes of this Indenture, except as otherwise expressly provided or unless the
context otherwise requires, the terms used herein, whether or not capitalized,
and not otherwise defined in this section have the meaning assigned to them in
the Prospectus and include the plural as well as the singular. Any term not
otherwise defined herein have the meanings assigned to them in the
Prospectus.
“1933 Act” means the
Securities Act of 1933, as amended.
“1934 Act” means the
Securities and Exchange Act of 1934.
“1939 Act” means the Trust
Indenture Act of 1939, as amended.
“Adjusted Net Worth” means the
sum of (i) the consolidated equity of the common stockholders of the Company and
any consolidated subsidiary, plus (ii) the respective amounts reported on such
entity’s most recent balance sheet with respect to any series of preferred
stock, plus (iii) the amount of any Subordinated Loan, whether or not then
funded. For purposes of computing Adjusted Net Worth, any
Subordinated Loan included in Adjusted Net Worth as provided in the foregoing
that is from an Affiliate shall be treated as a transaction with an unaffiliated
third-party under GAAP.
“Affiliate” of any specified
Person means any other Person directly or indirectly controlling or controlled
by or under direct or indirect common control with such specified Person. For
purposes of this definition, “control,” “controlling” and “controlled,” when
used with respect to any specified Person, means the power to direct the
management and policies of such Person, directly or indirectly, whether through
the ownership of voting securities, by contract or otherwise.
“Alpha Class Notes” means any
Alpha Class Note issued by the Company pursuant to that certain Alpha Class
Notes Loan and Standby Trust Agreement dated May 14, 2001, or the Alpha Class
Loan and Trust Agreement dated April 20, 2005, as supplemented.
“Business Day” means any day
other than a Saturday or Sunday or a day on which banking institutions in the
State of California or by federal regulation are not required to be
open.
“Capital Stock” means any
class or series of equity security, including but not limited to, in the case of
the Company, its common stock and Fixed Series Preferred Stock.
“Cash Flow” means with respect
to any period, Consolidated Net income of the Company and any subsidiary for
such period plus (a) an amount equal to any extraordinary loss plus any net loss
realized in connection with the sale or other disposition of any assets (to the
extent such net losses were deducted in computing Net Income for such period),
plus (b) provision for taxes based on income or profits to the extent such
provisions for taxes was deducted in computing Net Income for such period, plus
(c) Fixed Charges for such period, plus (d) depreciation and amortization
(including amortization of goodwill and other intangibles) for such period to
the extent such depreciation and amortization were deducted in computing Net
Income for such period, in each case, on a consolidated basis and determined in
accordance with GAAP, plus (e) interest expense paid or accrued for such
period with respect to the Subordinated Loan and any other Indebtedness which is
subordinated to the Notes, plus (f) the unused amount of any Subordinated
Loan available to the Company on the date the determination of Cash Flow is
made.
A-1
“Category” means a subseries
of a Class A Note as so designated by the Company.
“Class A Notes” means the up
to $200 million in aggregate Principal Amount of the Class A Notes which the
Company issues to the Holders on or after the Effective Date under this
Indenture. The Class A Notes may be issued in one or more series or subseries as
may be determined from time to time by the Company at its sole discretion,
including, but not limited to, the Fixed Series, Flex Series and Variable Series
as defined in this Indenture.
“Default” means any event that
with the passage of time or the giving of notice or both is or could be an Event
of Default.
“ECCU” means the Evangelical
Christian Credit Union, 955 West Imperial Highway, Brea, California,
92821.
“Effective Date” means April
__, 2008.
“Events of Default” means
those Events of Default defined under “Events of Default” herein, whatever the
reason for such event and whether it shall be voluntary or involuntary or be
effected by operation of law or pursuant to any judgment, decree or order of any
court or any order, rule or regulation of any administrative or governmental
body.
“Fixed Charge Coverage Ratio”
means, with respect to any period, the ratio of the Cash Flow of the Company for
such period to the Fixed Charges of the Company for such period. In the event
the Company incurs, assumes, guarantees, repays, redeems or otherwise retires
any Indebtedness (other than any Subordinated Loan) subsequent to the
commencement of the period for which the Fixed Charge Coverage Ratio is being
calculated but prior to the event for which the calculation of the Fixed Charge
Coverage Ratio is made, then the Fixed Charge Coverage Ratio shall be calculated
giving pro forma effect to such incurrence, assumption, guarantee, repayment,
redemption or retirement of Indebtedness, including, if applicable, the
application of the proceeds therefrom, as if the same had occurred at the
beginning of the applicable period. In making such calculations on a pro forma
basis, interest attributable to Indebtedness bearing a floating interest rate
shall be computed as if the rate in effect on the date of computation had been
the applicable rate for the entire period.
“Fixed Charges” means, with
respect to any period, consolidated interest expense for such period, whether
paid or accrued, to the extent such expense was deducted in computing
Consolidated Net Income (including amortization of original issue discount,
noncash interest payments and the interest component of capital leases, but
excluding amortization of deferred financing fees) plus, without duplication,
all interest capitalized for such period on a consolidated basis and in
accordance with GAAP. Fixed Charges shall not include any interest expense for
such period paid or accrued with respect to any loan to the extent it is
expressly subordinated in right of payment to amounts due and payable with
respect to the Class A Notes.
“Fixed Series Note” means any
Note designated as a Fixed Series Note and issued in the form determined by the
Company and deposited with the Trustee as part of this Indenture. Fixed Series
Notes may be issued in one or more of the following Categories.
“Fixed 1” Notes which
require an initial investment of at least $1,000 but less than
$5,000;
|
“Fixed 5” Notes which
require an initial investment of at least $5,000 but less than
$10,000.
|
“Fixed 10” Notes which
require an initial investment of at least $10,000 but less than
$25,000.
|
“Fixed 25” Notes which
require an initial investment of at least $25,000 but less than
$50,000.
|
“Fixed 50” Notes which
require an initial investment of at least $50,000 but less than
$100,000.
|
“Fixed 100” Notes which
require an initial investment of at least
$100,000.
|
A-2
Each
Category of Fixed Note shall pay interest at the rate designated for its
respective Category designated on the Rate Schedule effective on the date the
Fixed Series Note is issued. The Fixed Series Notes shall have a term
(“maturity”) of not less than twelve (12) months nor more than sixty (60)
months.
“Flex Series Note” means any
Note designated as a Flex Series Note and issued in the form determined by the
Company and deposited with the Trustee as part of this Indenture. Flex Series
Notes may be issued in one or more of the following Categories:
“Flex 25 Notes” which require
an initial investment of at least $25,000, but less than $50,000.
“Flex 50 Notes” which require
an initial investment of at least $50,000, but less than $100,000.
“Flex 100 Notes” which require
an initial investment of at least $100,000, but less than $250,000.
“Flex 250 Notes” which require
an initial investment of at least $250,000.
Each
Category of Flex Note shall pay interest at the rate for the respective Category
designated by the Company on the Rate Schedule effective on the date the Flex
Note is issued. The Holder of the Flex Note may elect to reset the interest rate
on the Flex Note once during each 12-month period next following the date of
issuance to the then current Flex Note interest rate for that Category. All Flex
Notes shall have a Maturity Date of eighty-four (84) months from the Issuance
Date and may withdraw up to ten percent (10%) of the principal at any time or
from time to time without penalty or reduction during any 12-month period
following the first anniversary date of the Issuance Date.
“GAAP” means generally
accepted accounting principles set forth in the opinions and pronouncements of
the Accounting Principles Board of the American Institute of Certified Public
Accountants and statements and pronouncements of the Financial Accounting
Standards Board or in such other statements by such other entity as approved by
a significant segment of the accounting profession, which are in effect from
time to time.
“Holder” means the Person or
Persons in whose name a Class A Note is registered on the books and records of
the Company as a holder of Class A Notes.
“Indebtedness” means any
indebtedness, whether or not contingent, (i) in respect of borrowed money or
evidenced by bonds, notes, debentures or similar instruments or credit (or
reimbursement agreements in respect thereof), (ii) representing the balance
deferred and unpaid of the purchase price of any property, (iii) representing
capital lease obligations; and (iv) representing any hedging obligations,
except, in each case, any such balance that constitutes an accrued expense or
trade payable, if and to the extent any of the foregoing Indebtedness (other
than hedging obligations) would appear as a liability upon a balance sheet
prepared in accordance with GAAP, and also includes, to the extent not otherwise
included, the guarantee of obligations of other persons that would be included
within this definition.
“Indenture” means this
Agreement as originally executed or as it may from time to time be supplemented,
modified or amended by one or more supplemental agreements hereto entered into
pursuant to the applicable provisions hereof.
“Issuance Date” means the date
the Note is first issued on the Company’s books and records.
“Majority in Interest” means,
as of the date of determination, a majority of the unpaid principal amount of
all Outstanding Notes plus all unpaid interest due thereon (as reflected on the
books and records of the Company). In determining whether the Holders
of the required principal amount of the Notes have concurred in any direction,
waiver or consent, Notes owned by the Company or an Affiliate shall be
disregarded, except that for the purposes of determining whether the Trustee
shall be protected in relying on any such direction, waiver or consent, only
Notes which the Trustee knows are so owned shall be so disregarded.
“Maturity Date” means the date
on which the unpaid balance of principal and accrued interest is due and payable
on the respective Class A Note. The Maturity Date of the Fixed Series Notes may
be six (6), twelve (12), twenty-four (24), thirty (30) or sixty (60) months from
the Issuance Date. The Maturity Date of the Flex Series Notes is eighty-four
(84) months from the Issuance Date. The Maturity Date of the Variable Series
Notes shall have a Maturity Date of seventy-two (72) months from the Issuance
Date.
A-3
“Net Income” means, with
respect to the Company for any period, the aggregate of the net income of the
Company for such period, on a consolidated basis, determined in accordance with
GAAP; provided that the Net Income of any entity that is not a subsidiary of the
Company or that is accounted for by the equity method of accounting shall be
included only to the extent of the amount of dividends or distributions paid to
the referent entity or a wholly-owned subsidiary of the Company.
“Net Tangible Assets” means,
with respect to the Company, the total amount of assets of the Company and any
subsidiary (less applicable reserves) on a consolidated basis, as determined in
accordance with GAAP, less intangible assets. For purposes of computing Net
Tangible Assets, all transactions between the Company and any Affiliates,
including ECCU, shall be treated as if the transactions had been entered into
with an unaffiliated third-party except to the extent GAAP would require any
different treatment.
“Holder Representative” means
the person who may be designated by a Majority in Interest of the Holders to act
on behalf of the Holders as provided in Section
10.02.
“Notes” means the Class A
Notes.
“Other Indebtedness” means any
Indebtedness of the Company outstanding, except any balance owing on the Alpha
Class Notes or the Class A Notes, including any extension, refinancing,
refunding, renewal, substitution or replacement of any such Notes, but only to
the extent that any such extension, refinancing, refunding, renewal,
substitution or replacement does not exceed the principal amount of the Note
being extended, refinanced, refunded, renewed, substituted or replaced (plus the
amount of the reasonable fees and expenses in connection therewith) and that no
additional security is granted in connection with any such extension,
refinancing, refunding, renewal, substitution or replacement.
“Outstanding Notes” when used
with respect to Class A Notes means, as of the date of determination, all Class
A Notes theretofore issued and delivered by the Company and not paid, prepaid or
redeemed in full pursuant to their terms.
“Person” means any individual,
corporation, partnership, joint venture, association, joint-stock partnership,
trust, unincorporated organization or government or any agency or political
subdivision thereof.
“Principal Amount” means, for
the purposes of determining the amount of the Class A Notes issued or at any
time outstanding, the unpaid aggregate advances to principal of the Class A
Notes made by the holders thereof, whether upon issuance or subsequent thereto,
except “Principal Amount” shall not include any unpaid interest, penalties or
other charges added to principal of the Notes under the terms of the Class A
Notes or otherwise.
“Prospectus” means, at any
time determined, the final Prospectus then current as filed as part of the
Registration Statement filed by the Company with the SEC under the 1933 Act
covering the offer and the sale of the Notes, as it may be amended or
supplemented.
“Rate Schedule” means the
schedule of interest rates payable on the Class A Notes as the Company may from
time to time designate.
“Responsible Officer” means in
the case of the Trustee, any officer within the Trustee’s Corporate Trust
Department (or successor group) or in the case of the Company or any
non-individual Holder Representative, the Chief Executive Officer, President,
Vice President, Chief Financial Officer or Secretary.
“SEC” means the U.S.
Securities and Exchange Commission.
“Subordinated Loan” means any
loan, credit line or other credit facility, whether or not then funded, to the
extent the Company’s obligation to repay such loan, credit line or other credit
facility is expressly subordinated in right to payment on a current basis to the
Class A Notes.
“Subsidiary” means any
corporation, limited liability company or partnership over which the Company may
exercise majority control.
“Tangible Adjusted Net Worth”
means the Adjusted Net Worth of the Company less the Company’s intangible
assets, if any.
A-4
“Trustee” means U.S. Bank
National Association or a successor Trustee approved pursuant to the applicable
provisions of this Indenture.
“Variable Series Note” means
any Note designated as a Variable Series Note and issued in the form determined
by the Company and deposited with the Trustee as part of this Indenture.
Variable Series Notes may be issued in one or more of the following
Categories:
“Variable 10 Notes” which
require an initial investment of at least $10,000, but less than
$25,000.
“Variable 25 Notes” which
require an initial investment of at least $25,000, but less than
$50,000.
“Variable 50 Notes” which
require an initial investment of at least $50,000, but less than
$100,000.
“Variable 100 Notes” which
require an initial investment of at least $100,000.
Each
Category of Variable Note shall pay interest at the variable rate designated by
the Company for the respective Category designated on the Rate Schedule
effective on the date of issuance of the Note and shall have term or maturity of
seventy-two (72) months from the date of issuance.
ARTICLE
II
CONTINUING
COVENANTS OF THE COMPANY
Section
2.01. Limitation on
Restricted Payment. While any Note is outstanding, the Company
shall not, and will not permit any subsidiary to, directly or indirectly: (i)
declare or pay any dividend or make any distribution on account of the Company’s
capital stock or the capital stock of any subsidiary (other than dividends or
distributions payable (a) in capital stock of the Company or the capital stock
of the subsidiary or (b) to the Company or any subsidiary); (ii) purchase,
redeem or otherwise acquire or retire for value any capital stock of the Company
or any wholly-owned subsidiary; (iii) voluntarily purchase, redeem or otherwise
acquire or retire for value, prior to the scheduled maturity of any mandatory
sinking fund payments thereon or the stated maturity thereof, any Indebtedness
of the Company that is subordinated in right of payment to the Class A Notes
(all such payments and other actions set forth in clauses (i) through (iii)
above being collectively referred to as “Restricted Payments”) unless, at the
time of such Restricted Payment:
(a) no
Event of Default shall have occurred and be continuing or would occur as a
consequence thereof;
(b) such
Restricted Payment, together with the aggregate of all other Restricted Payments
made by the Company or any subsidiary, does not exceed the sum of:
(i) 50%
of the Net Income of the Company for the period (taken as one accounting period)
commencing on January 1, 2000 and ending on the last day of the Company’s
most recently ended full fiscal quarter for which financial statements are
available at the time of such Restricted Payment (or, if such Net Income for
such period is a deficit, 100% of such deficit), plus
(ii) 100%
of the aggregate net cash proceeds received by the Company from the issue or
sale of capital stock of the Company (other than capital stock sold to a
subsidiary of the Company), debt securities or capital stock convertible into
capital stock of the Company upon such conversion, or any funds advanced or
loaned to the Company pursuant to any Subordinated Loan; plus
(iii) 100%
of the cash, if any, contributed to the capital of the Company, as additional
paid in capital by any stockholder of the Company.
(c) The
foregoing notwithstanding, the provisions of subsection(b)(i), (ii) and (iii)
above shall not prohibit the following Restricted Payments:
(i) the
payment of any dividend within sixty (60) days after the date of declaration
thereof, if at said date of declaration such payment would have complied with
the foregoing provisions; or
A-5
(ii) the
payment of interest or principal on, or the purchase, redemption or other
acquisition or retirement for value prior to the stated maturity of any of the
Alpha Class Notes; or
(iii) (a)
the redemption, repurchase, retirement or other acquisition of any capital stock
of the Company, (b) the purchase, redemption or other acquisition or retirement
for value prior to the scheduled maturity of any mandatory sinking fund payments
or stated maturity of Indebtedness of the Company subordinated in right of
payment to the Holders, or (c) the making of any investment in the Company or
any subsidiary of the Company in each case of (a), (b) and (c) in exchange for,
or out of the proceeds of the substantially concurrent sale (other than to the
Company) of, capital stock of the Company.
Section
2.02. Limitation on
Outstanding Class A Notes. The Company shall not issue any
Class A Note if, after giving effect to such issuance, the unpaid Principal
Amount of the Class A Notes outstanding at any time would have an aggregate
unpaid balance exceeding $100,000,000.
Section
2.03. Limitation on
Incurrence of Indebtedness. While any Class A Note is outstanding, the
Company shall not, and will 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, the Fixed Charge Coverage Ratio of the Company, determined on a
consolidated basis, for the Company’s most recently ended four full fiscal
quarters for which financial statements are available immediately preceding the
date on which such additional Indebtedness is incurred would have been at least
one and one-fifth (1.20) to one (1.0), determined on a pro forma basis
(including a pro forma application of the net proceeds therefrom to a repayment
of any Indebtedness), as if the additional Indebtedness had been incurred at the
beginning of such four-quarter period. Provided, however, that notwithstanding
the foregoing, the Company may incur Indebtedness that constitutes one or more
of the following: (i) is evidenced by a Note issued pursuant to this Indenture;
(ii) any Alpha Class Note or any Indebtedness which was existing on the last day
of the calendar quarter last ending before the Effective Date, as such
Indebtedness may be later renewed, extended or modified; (iii) is incurred in
the Company’s ordinary course of business for the funding of its mortgage loan
investments, including, but not limited to warehouse lines of credit and
gestation or repurchase credit facilities; (iv) is in respect of performance,
completion, guarantee, surety and similar bonds, banker’s acceptances or letters
of credit provided by the Company in its ordinary course of business; or (v)
when incurred, does not result in aggregate Other Indebtedness in excess of
twenty million dollars ($20,000,000) outstanding immediately after the
Indebtedness is incurred.
Section
2.04. Merger,
Consolidation or Sale of Assets. While any Class A Note is outstanding,
the Company shall not consolidate or merge with or into any other person or
entity (whether or not the Company is the surviving corporation) or sell,
assign, transfer, lease, convey or otherwise dispose of all or substantially all
of its properties or assets (excepting loans held for sale in the normal course
of the Company’s mortgage banking operations) in one or more related
transactions to, another corporation, person or entity, unless, immediately
after such transaction no Default or Event of Default exists, and either: (i)
the Company is the entity surviving such transaction, or (ii) if the entity
surviving such transaction is not the Company, such entity assumes, by contract
or operation of law, the Company’s obligations under the Class A Notes and under
this Agreement.
Section 2.05. Maintenance of Tangible Adjusted Net Worth. In the event that, while any Class A Note is outstanding, within 55 days after the end of any fiscal quarter (100 days after the end of any fiscal year) as of the end of which the Company’s Tangible Adjusted Net Worth is less than four million dollars ($4,000,000) (the “Minimum Tangible Adjusted Net Worth”), the Company shall notify the Holders of such event and shall within sixty (60) days thereafter restore its Tangible Adjusted Net Worth to an amount greater than the Minimum Tangible Adjusted Net Worth.
Section
2.06. Payment of
Trustee’s Compensation and Expenses. The Company shall pay the Trustee’s
compensation and expenses provided for in Section 3.08, and the
Trustee shall look only to the Company for such payment except as the Holders
may from time to time otherwise agree.
Section
2.07. SEC
Reports. The Company shall file with the Trustee within fifteen (15) days
after it files them with the SEC, copies of the annual reports and of the
information, documents, and other reports (or copies of such portions of any of
the foregoing as the SEC may by rules and regulations prescribe) which the
Company is required to file with the SEC pursuant to section 13 or 15(d) of
the 1934 Act. The Company also shall comply with the other provisions of Section
314(a) of the 1939 Act.
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Section
2.08. The Company to
Furnish Trustee Lists of Holders. The Company will furnish or cause to be
furnished to the Trustee not more than five (5) days after its appointment and
acceptance as Trustee, and at such other times as the Trustee may reasonably
request in writing, within ten (10) business days after receipt by the Company
of any such request, a list in such form as the Trustee may reasonably request
containing all the information in the possession or control of the Company, or
any of its paying agents, as to the names and addresses of the Holders of the
Notes, obtained since the date as of which the next previous list, if any, was
furnished, and the status of the amount of principal and interest paid or
outstanding in respect of each of the Notes.
Section
2.09. Books and
Records. The Company shall 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 Class A Notes and the business and affairs of the Company
in accordance with generally accepted accounting principles. The Company shall
furnish to the Trustee any and all information related to the Notes as the
Trustee may reasonably request and which is in the Company’s
possession.
ARTICLE
III
TRUSTEE
Section
3.01. Appointment of
Trustee; Acceptance. The Company hereby appoints U.S. Bank
National Association as Trustee hereunder. The Trustee shall signify its
acceptance of the duties and obligations imposed upon it by this Indenture, by
executing this Indenture.
Section
3.02. Certain Duties
and Responsibilities of Trustee.
(a) The
Trustee undertakes to perform such duties and only such duties as are
specifically set forth in this Indenture, and no implied covenants or
obligations shall be read into this Indenture against the Trustee.
(b) If
an Event of Default exists, the Trustee shall exercise such of the rights and
powers vested in it by this Indenture, and subject to subsection (c)(iii), use
the same degree of care and skill in their exercise as a prudent person would
exercise or use under the circumstances in the conduct of his or her own
affairs.
(c) No
provision of this Indenture shall be construed to relieve the Trustee from
liability for its own negligent action, its own negligent failure to act, or its
own willful misconduct, in each case, as finally adjudicated by a court of law,
except that
(i)
this subsection shall not be construed to limit the effect of subsection
(a);
(ii) the
Trustee shall not be liable for any error of judgment made in good faith, unless
it shall be proved that the Trustee was negligent in ascertaining the pertinent
facts;
(iii) the
Trustee shall not be liable with respect to any action taken or omitted to be
taken by it in accordance with the direction of the Holder Representative,
relating to the time, method and place of conducting any proceeding for any
remedy available to the Trustee, or exercising any trust or power conferred upon
the Trustee under this Indenture; and
(iv) no
provision of this Indenture shall require the Trustee to expend or risk its own
funds or otherwise incur any financial liability in the performance of any of
its duties hereunder, or in the exercise of any of its rights or powers, if it
shall have reasonable grounds for believing that repayment of such funds or
adequate indemnity against such risk or liability is not assured to it in its
sole discretion.
(d) Whether
or not therein expressly so provided, every provision of this Indenture relating
to the conduct or affecting the liability of or affording protection to the
Trustee shall be subject to the provisions of this Section
3.02.
(e) The
Trustee may conclusively rely, as to the truth of the statements and the
correctness of the opinions expressed therein, upon certificates of the
Company’s officers and/or opinions of the Company’s legal counsel furnished to
the Trustee and conforming to the requirements of this Indenture; but in the
case of any such certificates or opinions which by any provision hereof are
specifically required to be furnished to the Trustee, the Trustee shall be under
a duty to examine the same to determine whether or not they conform on their
face to the requirements of this Indenture.
(f) The
permissive rights of the Trustee to do things enumerated in this Indenture shall
not be construed as a duty.
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(g) The
rights of the Trustee and limitations of liability enumerated herein and in
Section 3.04
shall extend to actions taken or omitted in its role as assignee of the Company
under any other documents or instruments relating to or arising from or as a
result of this Indenture (“Note Documents”).
Section
3.03. Notice of
Defaults. Upon the occurrence of any Event of Default
hereunder and provided that a Responsible Officer of the Trustee is aware of or
has received notice of the existence of such Event of Default, promptly with
respect to the Company and the Holder Representative, and within 30 days with
respect to any other Holder, the Trustee shall transmit by mail to the Company
and the Holder Representative, and to the Holders, notice of such Event of
Default known to the Trustee pursuant to Section 3.03, unless
such Event of Default shall have been cured or waived.
Section
3.04. Certain Rights
of Trustee. Except as otherwise provided in Section
3.01:
(a) the
Trustee may rely and shall be protected in acting or refraining from acting upon
any resolution, certificate, statement, instrument, opinion, report, notice,
request, direction, consent, order, bond, debenture, coupon or other paper or
document believed by it to be genuine and to have been signed or presented by
the proper party or parties;
(b) any
request or direction of the Company mentioned herein shall be sufficiently
evidenced by a certificate or order executed by a Responsible
Officer;
(c) whenever
in the administration of this Indenture the Trustee shall deem it desirable that
a matter be proved or established prior to taking, suffering or omitting any
action hereunder, the Trustee (unless other evidence be herein specifically
prescribed) may, in the absence of bad faith on its part, rely upon a
Certificate of the Company;
(d) the
Trustee shall be under no obligation to exercise any of the rights or powers
vested in it by this Indenture at the request or direction of the Holder
Representative pursuant to this Indenture, unless the Holder Representative
shall have offered to the Trustee in writing security or indemnity satisfactory
to the Trustee against the costs, expenses and liabilities which might be
incurred by it in compliance with such request or direction, provided that
nothing contained in this subparagraph (d) shall be construed to require such
security or indemnity for the performance by the Trustee of its obligations
under this Indenture;
(e) the
Trustee shall not be bound to make any investigation into the facts or matters
stated in any resolution, certificate, statement, instrument, opinion, report,
notice, request, direction, consent, order, bond, debenture, coupon or other
paper or document but the Trustee, in its discretion, may make such further
inquiry or investigation into such facts or matters as it may see fit, and, if
the Trustee shall determine to make such further inquiry or investigation, it
shall be entitled to examine the books and records of the Company, personally or
by agent or attorney after reasonable notice and during normal business
hours;
(f) the
Trustee may execute any of the trusts or powers hereunder or perform any duties
hereunder either directly or by or through agents or attorneys and pay
reasonable compensation thereto and the Trustee shall not be responsible for any
misconduct or negligence on the part of any agent or attorney appointed with due
care by it hereunder. The Trustee may act, or refrain from acting, upon the
advise of counsel of its choice concerning all matters of the trusts hereof and
the Trustee shall not be responsible for any loss or damage resulting from any
action or inaction taken in reliance upon said advice; and
(g) the
Trustee shall not be required to take notice or be deemed to have notice of any
Default or Event of Default except for Events of Default specified in Section 4.01, unless
a Responsible Officer of the Trustee shall be specifically notified by a notice
of such Default or Event of Default by the Company, the Holder Representative,
or by any Holder, and all notices or other instruments required by this
Indenture to be delivered to the Trustee, must, in order to be effective, be
delivered in writing to a Responsible Officer of the Trustee at the Office of
the Trustee, and in the absence of such notice so delivered the Trustee may
conclusively assume there is no Default or Event of Default as
aforesaid.
Section
3.05. Not Responsible
for Recitals. The recitals contained herein and in the Notes,
except the certificate of authentication on the Notes, shall be taken as the
statements of the Company, and the Trustee assumes no responsibility for their
correctness. The Trustee makes no representations as to the value or condition
of the Notes, or as to any security which may be afforded thereby, or as to the
validity or sufficiency of this Indenture or of the Notes.
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Section
3.06. May Hold
Notes. The Trustee in its individual or any other capacity may
become the Owner or pledgee of the Notes and may otherwise deal with the Company
with the same rights it would have if it were not Trustee.
Section
3.07. Money Held in
Trust. Any money held by the Trustee in trust hereunder need
not be segregated from other funds except to the extent required by law. The
Trustee shall be under no liability for interest on any money received by it
hereunder except as otherwise expressly provided in this Indenture.
Section
3.08. Compensation and
Expenses of the Trustee. The Company shall pay compensation to and the
expenses of the Trustee as follows:
(a) To
pay the compensation set forth in Exhibit A
hereto;
(b) To
reimburse the Trustee upon its request for all reasonable expenses,
disbursements and advances incurred or made by the Trustee in accordance with
any provision of this Indenture, including reasonable fees and expenses of
counsel for the Trustee, except as such expense, disbursement or advance may be
attributable to the Trustee’s gross negligence or bad faith;
(c) To
indemnify the Trustee for, and to hold it harmless against any loss, liability
or expense incurred without gross negligence or bad faith on its part, arising
out of or in connection with the acceptance or administration of this trust,
including the costs and expenses of defending itself against any claim or
liability in connection with the exercise or performance of any of its powers or
duties hereunder. The obligations of the Company hereunder shall
survive the resignation or removal of the Trustee or the discharge of this
Indenture.
Section
3.09. Trustee
Required; Eligibility. Any successor Trustee shall at all
times be a trust company, a state banking corporation or a national banking
association with the authority to exercise trust powers in the State and (a)
have a combined capital and surplus of at least $50,000,000 as set forth in its
most recent published annual report of condition; or (b) be a wholly-owned
subsidiary of a bank holding company, or a wholly-owned subsidiary of a company
that is a wholly-owned subsidiary of a bank holding company, having a combined
capital surplus of at least $50,000,000 as set forth in its most recent
published annual report of condition, or having at least $50,000,000 of trust
assets under management and have a combined capital surplus of at least
$2,000,000 as set forth in its most recent published annual report of condition;
or (c) is otherwise acceptable to the Holder Representative in its sole and
absolute discretion.
Section
3.10. Resignation and
Removal; Appointment of Successor.
(a) No
resignation or removal of the Trustee hereunder and no appointment of a
successor Trustee pursuant to this Article III shall
become effective until the written acceptance by the successor Trustee of such
appointment.
(b) The
Trustee may resign at any time by giving 30 days’ notice thereof to the Company
and the Holder Representative. If an instrument of acceptance by a successor
Trustee shall not have been delivered to the Trustee within 30 days after the
giving of such notice of resignation, the resigning Trustee may petition, at the
expense of the Company, any court of competent jurisdiction for the appointment
of a successor Trustee.
(c) The
Company or the Holder Representative may remove the Trustee at any time with 30
days’ notice delivered to the Trustee, the Company, and the Holder
Representative.
(d) If
the Trustee shall resign, be removed or become incapable of acting, or if a
vacancy shall occur in the office of the Trustee for any cause, the Holder
Representative shall promptly appoint a successor Trustee. If, within 60 days
after such resignation, removal or incapability or the occurrence of such
vacancy, no successor Trustee shall have been appointed by the Holder
Representative and accepted appointment in the manner hereinafter provided, any
Holder or retiring Trustee, at the expense of the Company, may petition any
court of competent jurisdiction for the appointment of a successor
Trustee.
(e) The
retiring Trustee shall cause notice of each resignation and each removal of the
Trustee and each appointment of a successor Trustee to be mailed by first-class
mail, postage prepaid, to the Holders. Each notice shall include the name of the
successor Trustee and the address of the successor Trustee.
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Section
3.11. Acceptance of
Appointment by Successor.
(a) Every
successor Trustee appointed hereunder shall execute, acknowledge and deliver to
the Company and to the retiring Trustee an instrument accepting such
appointment, and thereupon the resignation or removal of the retiring Trustee
shall become effective and such successor Trustee, without any further act, deed
or conveyance, shall become vested with all the estates, properties, rights,
powers, trusts and duties of the retiring Trustee; notwithstanding the
foregoing, on request of the Company or the successor Trustee, such retiring
Trustee shall, upon payment of its charges, execute and deliver an instrument
conveying and transferring to such successor Trustee upon the trusts herein
expressed all the estates, properties, rights, powers and trusts of the retiring
Trustee, and shall duly assign, transfer and deliver to such successor Trustee
all property and money held by such retiring Trustee hereunder. Upon request of
any such successor Trustee, the Company shall execute any and all instruments
for more fully and certainly vesting in and confirming to such successor Trustee
all such estates, properties, rights, powers and trusts.
(b) No
successor Trustee shall accept its appointment unless at the time of such
acceptance such successor Trustee shall be qualified and eligible under this
Article III, to
the extent operative.
Section
3.12. Merger,
Conversion, Consolidation or Succession to Business. Any
corporation into which the Trustee may be merged or with which it may be
consolidated, or any corporation resulting from any merger, conversion or
consolidation to which the Trustee shall be a party, or any corporation
succeeding to all or substantially all of the corporate trust business of the
Trustee, shall be the successor of the Trustee hereunder, provided such
corporation shall be otherwise qualified and eligible under this Article III, to the
extent operative, without the execution or filing of any paper or any further
act on the part of any of the parties hereto.
Section
3.13. Requirements for
Holder Consent and Instruction to the Trustee.
(a) Notwithstanding
anything to the contrary contained in this Indenture, except for any provision
of Article IX
regarding the consent or approval of all Holders to any supplement or amendment
to this Indenture, the Notes, or to any of the other documents relating to the
Notes, the following provisions shall govern and control with respect to any
consents, determinations, elections, approvals, waivers, acceptances,
satisfactions or expression of opinion of or the taking of any discretionary act
or the giving of any instructions or the taking of actions by the Holder
Representative or the Holders under this Indenture.
(b) The
Company and the Trustee acknowledge that the Holders by a Majority in Interest
may designate a successor Holder Representative. Except as otherwise provided in
this Indenture, the Holder Representative shall have the authority to bind the
Holders for all purposes under this Indenture and under any Note Documents,
including, without limitation, for purposes of exercising the rights of the
Holder Representative under Section 9.05. The
Trustee shall be entitled to rely upon the acts of any such Holder
Representative as binding upon the Holder Representative and the
Holders.
(c) Until
the Trustee receives notice signed by the Holder Representative that a new
Holder Representative has been appointed by a Majority in Interest of the
Holders, the Holder Representative shall continue to act in such capacity and
the Trustee shall continue to rely on the actions of such Holder Representative
for all purposes under this Indenture.
Section
3.14. Appointment of
Co-Trustee.
(a) It
is the purpose of this Indenture that there shall be no violation of any laws of
any jurisdiction (including particularly the laws of the State) denying or
restricting the right of banking corporations or associations to transact
business as trustee in such jurisdiction. It is recognized that in case of
litigation under this Indenture, and in particular in case of litigation as a
result of any Event of Default, or in case the Trustee deems that by reason of
any present or future law of any jurisdiction it may not exercise any of the
powers, rights or remedies herein granted to the Trustee, in trust, as herein
provided, or take any other action which may be desirable or necessary in
connection therewith, it may be necessary that the Trustee appoint an additional
individual or institution as a separate or co-trustee. The following provisions
of this Section
3.14 are adopted to these ends.
(b) The
Trustee is hereby authorized to appoint an additional individual or institution
as a separate or co-trustee hereunder, upon notice to the Company and with the
consent of the Company and the Holder Representative, but without the necessity
of further authorization or consent, in which event each and every remedy,
power, right, claim, demand, cause of action, immunity, estate, title, interest
and lien expressed or intended by this Indenture to be exercised by or vested in
or conveyed to the Trustee with respect thereto shall be exercisable by and vest
in such separate or co-trustee but only to the extent necessary to exercise such
powers, rights and remedies, and every covenant and obligation necessary to the
exercise thereof by such separate or co-trustee shall run to and be enforceable
by either of them.
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(c) Should
any instrument in writing from the Company be required by the separate trustee
or co-trustee appointed by the Trustee for more fully and certainly vesting in
and confirming to him or it such properties, rights, powers, trusts, duties and
obligations, any and all such instruments in writing shall, on request of the
Trustee, be executed, acknowledged and delivered by the Company. In case any
separate trustee or co-trustee, or a successor to either, shall die, become
incapable of acting, resign or be removed, all the estates, properties, rights,
powers, trusts, duties and obligations of such separate trustee or co-trustee,
so far as permitted by law, shall vest in and be exercised by the Trustee until
the appointment of a successor to such separate trustee or
co-trustee.
Section
3.15. Loan
Servicing. The Company and the Trustee acknowledge that the
Company shall service the Notes directly but may, in its discretion, appoint a
Paying Agent as provided in Section
8.04.
Section
3.16. No Recourse
Against Officers or Employees of Trustee. No recourse with
respect to any claim related to any obligation, duty or agreement contained in
this Indenture or any Note Document shall be had against any officer,
shareholder, director or employee, as such, of the Trustee, it being expressly
understood that the obligations, duties and agreements of the Trustee contained
in this Indenture and any Note Documents are solely corporate in
nature.
Section
3.17. Trustee May
Enforce Claims Without Possession of Notes. All rights of action and
claims under this Indenture, or documents related thereto, may be prosecuted and
enforced by the Trustee without the possession of any of the Notes or the
production thereof in any proceeding relating thereto, and any such proceeding
instituted by the Trustee shall be brought in its own name as trustee of an
express trust. Any recovery of judgment shall, after provision for the payment
of the reasonable compensation, expenses, disbursements and advances of the
Trustee, its agents and counsel and all other amounts due to the Trustee
hereunder, be for the ratable benefit of the Holders of the Notes (based on the
aggregate amount of unpaid principal and interest due each such Holder on such
date) in respect of which such judgment has been recovered.
Section
3.18. Undertaking for
Costs. In any suit for the enforcement of any right or remedy under this
Indenture or in any suit against the Trustee for any action taken or omitted by
it as Trustee, a court in its discretion, may require the filing by any party
litigant in the suit of an undertaking to pay the costs of the suit, and the
court in its discretion, may assess reasonable costs, including reasonable
attorneys’ fees, against any party litigant in the suit, having due regard to
the merits and good faith of the claims or defenses made by the party litigant.
This Section does not apply to a suit by the Trustee, a suit by a Holder
pursuant to Section
8.03, or a suit by Holders of more than 10% in principal amount of the
Notes.
Section
3.19. Preferential
Collection of Claims Against Company. The Trustee is subject to Section
311(a) of the 1939 Act, excluding any creditor relationship listed in Section
311(b) of the 1939 Act. A Trustee who has resigned or been removed is
subject to Section 311(a) of the 1939 Act to the extent indicated.
Section
3.20. Rights to Settle
or Compromise. Trustee may not waive or make any settlement or compromise
concerning the rights of Holders, including in regard to payments of principal
or interest, unless it is approved by a Majority in Interest of the Holders. Any
waiver, settlement or compromise so approved would be binding upon all the
Holders, except if and only if required by law, the Trustee may provide a
procedure for any Holder so desiring to remove itself from the group settlement
and to allow the Holder opting out of the group settlement to proceed to enforce
its rights individually and as it sees fit.
Section
3.21. Certificate and
Opinion as to Conditions Precedent. Upon any request or application by
the Company to the Trustee to take any action under this Indenture, the Company
shall furnish to the Trustee:
(a) an
Officers’ Certificate stating that, in the opinion of the signers, all
conditions precedent, if any, provided for in this Indenture relating to the
proposed action have been complied with; and
(b) an
Opinion of Counsel stating that, in the opinion of such counsel, all such
conditions precedent have been complied with.
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Section
3.22. Statements
Required in Certificate or Opinion. Each certificate or opinion with
respect to compliance with a condition or covenant provided for in this
Indenture shall include:
(a) a
statement that the person making such certificate or opinion has read such
covenant or condition;
(b) a
brief statement as to the nature and scope of the examination or investigation
upon which the statements or opinions contained in such certificate or opinion
are based;
(c) a
statement that, in the opinion of such person, he has made such examination or
investigation as is necessary to enable him to express an informed opinion as to
whether or not such covenant or condition has been complied with;
and
(d) a
statement as to whether or not, in the opinion of such person, such condition or
covenant has been complied with.
ARTICLE
IV
DEFAULT
AND REMEDIES
Section
4.01. Events of
Default. Each of the following constitutes an Event of Default under the
Notes:
(a) default
for thirty (30) days in the payment when due of interest or penalty on any
Note;
(b) default
for thirty (30) days in the payment when due of principal of any
Note;
(c) if
not cured in a timely manner, failure by the Company to observe or perform any
of the covenants or agreements in the Notes or set forth under Article II hereof
required to be performed by it;
(d) if
not cured in a timely manner, default under the instruments governing any Other
Indebtedness or any mortgage, indenture or instrument under which there may be
issued or by which there may be secured or evidenced any Other Indebtedness for
money borrowed by the Company, whether such Other Indebtedness or guarantee now
exists or is hereafter created, which default
(i)
is caused by a failure to pay when due principal or interest on such Other
Indebtedness within the grace period provided in such Other Indebtedness and
which continues beyond any applicable grace period (a “Payment Default”)
or
(ii) results
in the acceleration of such Other Indebtedness prior to its express maturity,
provided in each case the principal amount of any such Other Indebtedness,
together with the principal amount of any other such Other Indebtedness under
which there has been a Payment default or the maturity of which has been so
accelerated, aggregates $250,000 or more;
(e) the
Company fails to comply with any of its other agreements in the Notes or this
Indenture and the Default continues;
(f) the
Company pursuant to or within the meaning of any Bankruptcy Law:
(i)
commences a voluntary case,
(ii) consents
to the entry of an order for relief against it in an involuntary
case,
(iii) consents
to the appointment of a Custodian of it or for all or substantially all of its
property, or
(iv) makes
a general assignment for the benefit of its creditors; or
(g) a
court of competent jurisdiction enters an order or decree under any Bankruptcy
Law that:
(i)
is for relief against the Company in an involuntary case,
(ii) appoints
a Custodian of the Company or for all or substantially all of its property,
or
(iii) orders
the liquidation of the Company,
and the
order or decree remains unstayed and in effect for 60 days.
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Section
4.02. Acceleration. If an
Event of Default occurs and is continuing, the Trustee by notice to the Company,
or the Holders of at least 25% in principal amount of the Notes by notice to the
Company and the Trustee, may declare the principal of and accrued interest on
all the Notes to be due and payable. Upon such declaration the
principal and interest shall be due and payable immediately. The Holders of a
Majority in Interest by notice to the Trustee may rescind an acceleration and
its consequences if the rescission would not conflict with any judgment or
decree and if all existing Events of Default have been cured or waived except
nonpayment of principal or interest that has become due solely because of the
acceleration.
Section
4.03. Other
Remedies. If an Event of Default occurs and is continuing, the Trustee
may pursue any available remedy to collect the payment of principal or interest
on the Notes or to enforce the performance of any provision of the Notes or this
Indenture.
The
Trustee may maintain a proceeding even if it does not possess any of the Notes
or does not produce any of them in the proceeding. A delay or omission by the
Trustee or any Holder in exercising any right to remedy accruing upon an Event
of Default shall not impair the right or remedy or constitute a waiver of or
acquiescence in the Event of Default. All remedies are cumulative to the extent
permitted by law.
Section
4.04. Waiver of Past
Defaults. The Holders of a Majority in Interest by notice to the Trustee
may waive an existing Default and its consequences, except a Default in the
payment of the principal of or interest on any Note. Upon any such waiver, such
default shall cease to exist, and any Event of Default arising therefrom shall
be deemed to have been cured, for every purpose of this Indenture; but no such
waiver shall extend to any subsequent or other Default or impair any right
consequent thereof.
Section
4.05. Limitation on
Suits. A Holder may pursue a remedy with respect to this Indenture or the
Notes only if:
(a) the
Holder gives to the Trustee notice of a continuing Event of
Default;
(b) the
Holders of at least a Majority in Interest in principal amount of the Notes make
a request to the Trustee to pursue the remedy;
(c) such
Holder or Holders offer to the Trustee indemnity satisfactory to the Trustee
against any loss, liability or expense;
(d) the
Trustee does not comply with the request within 60 days after receipt of the
request and the offer of indemnity; and
(e) during
such 60-day period the Holders of a Majority in Interest do not give the Trustee
a direction inconsistent with the request.
A Holder
may not use this Indenture to prejudice the rights of another Holder or to
obtain a preference or priority over another Holder.
Section
4.06. Rights of
Holders to Receive Payment. Notwithstanding any other provision of this
Indenture, the right of any Holder to receive payment of principal and interest
on the Note, on or after the respective due dates expressed in the Note, or to
bring suit for the enforcement of such payment on or after such respective
dates, shall not be impaired or affected without the consent of the
Holder.
Section
4.07. Trustee May File
Proofs of Claim. In case of the pendency of any receivership, insolvency,
liquidation, bankruptcy, reorganization, arrangement, adjustment, composition or
other judicial proceeding relative to the Company or any other obligor upon the
Notes or the property of the Company or of such other obligor or their
creditors, the Trustee (irrespective of whether the principal of the Notes shall
then be due and payable, as therein expressed or by declaration or otherwise,
and irrespective of whether the Trustee shall have made any demand on the
Company for the payment of overdue principal or interest) shall be entitled and
empowered, by intervention in such proceeding or otherwise,
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(a) To
file and prove a claim for the whole amount of principal, interest and penalty
owing and unpaid in respect of the Outstanding Notes and to file such other
papers or documents as may be necessary or advisable in order to have the claims
of the Trustee (including to the extent permitted by law any claim for the
reasonable compensation, expenses, disbursements and advances of the Trustee,
its agents and counsel) and of the Holders allowed in such judicial proceeding,
and
(b) To
collect and receive any monies or other property payable or deliverable on any
such claims and to distribute the same; and any custodian, receiver, assignee,
trustee, liquidator, sequestrator or other similar official in any such judicial
proceeding is hereby authorized by each Holder to make such payments to the
Trustee, and in the event that the Trustee shall consent to the making of such
payments directly to the Holders, to pay to the Trustee any amount due to it for
the reasonable compensation, expenses, disbursements and advances of the
Trustee, its agents and counsel, and any other amounts due the Trustee under
this Indenture.
Nothing
herein contained shall be deemed to authorize the Trustee to authorize or
consent to or accept or adopt on behalf of any Holder any plan or
reorganization, arrangement, adjustment or composition affecting the Notes or
the rights of any Holder thereof, or to authorize the Trustee to vote in respect
of the claim of any Holder.
Section
4.08. Application of
Money Collected. Any money collected by the Trustee pursuant
to this Article, together with any other sums then held by the Trustee
hereunder, shall be applied in the following order, at the date or dates fixed
by the Trustee and, in case of the distribution of such money on account of
principal or interest upon presentation of the Notes, and the notation thereof
of the payment if only partially paid and upon surrender thereof if fully
paid:
(a) First:
To the payment of all unpaid amounts due to the Trustee hereunder;
(b) Second:
To the payment of the whole amount then due and unpaid on the Outstanding Notes,
for principal and interest and any penalties which may be due under the terms of
the Notes, in respect of which or for the benefit of which such money has been
collected; and in case such proceeds shall be insufficient to pay in full the
whole amount so due and unpaid on such Notes, then to the payment of such
principal and interest and without any preference or priority, ratably according
to the aggregate amount so due; and
(c) Third:
To the payment of the remainder, if any, to the Company or to whosoever may be
lawfully entitled to receive the same or as a court of competent jurisdiction
may direct.
Section
4.09. Cure of a
Default. To cure a Payment Default, the Company must mail to the Holder,
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 seven and one-half percent (7 ½%) per annum, measured from
the date the payment should have been mailed, deposited or credited pursuant to
the terms of the Class A Notes until the date it actually is mailed, deposited
or credited.
Section
4.10. Rights and
Remedies Cumulative. Except insofar as same shall contradict the express
terms of this Indenture, no right or remedy herein conferred upon or reserved to
the Trustee or to the Holders is intended to be exclusive of any other right or
remedy, and every right and remedy shall, to the extent permitted by law and the
terms of this Indenture, be cumulative and in addition to every other right and
remedy given hereunder or now or hereafter existing at law or in equity or
otherwise.
Section
4.11. Delay or
Omission not Waiver. No delay or omission of the Trustee or of any Holder
to exercise any right or remedy accruing upon an Event of Default shall impair
any such right or remedy or constitute a waiver of any such Event of Default or
an acquiescence therein. Every right and remedy given by this Indenture or by
law to the Trustee or to the Holders may be exercised from time to time, and as
often as may be deemed expedient, by the Trustee or by the Holders, as the case
may be.
ARTICLE
V
CERTAIN
RIGHTS OF THE HOLDERS
Section
5.01. Control by
Majority in Interest. The Holders of a Majority in Interest may direct
the time, method and place of conducting any proceeding for any remedy available
to the Trustee or exercising any trust or power conferred on it. However, the
Trustee may refuse to follow any direction that the Trustee, in its sole
discretion, determines to conflict with law or this Indenture, to be unduly
prejudicial to the rights of other Holders, or to cause the Trustee to incur
personal liability.
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Section
5.02. Rights of
Holders to Receive Payment. Notwithstanding any other provision of this
Indenture, the right of any Holder to receive payment of principal and interest
on the Notes, on or after the respective due dates expressed in the Notes, or to
bring suit for the enforcement of any such payment on or after such respective
dates, shall not be impaired or affected without the consent of the
Holder.
Section
5.03. Limitation on
Actions. DURING THE PERIOD OF THE OPERATION OF THIS INDENTURE, NO HOLDER
SHALL HAVE ANY RIGHT TO INSTITUTE OR CONTINUE ANY PROCEEDING or judicial action
pursuant to Article
IV or otherwise, under or with respect to this Indenture or the Notes, or
for the appointment of a receiver or trustee or for any other remedy hereunder,
unless all of the following have occurred:
(a) Such
Holder has previously given written notice to the Trustee of a continuing Event
of Default;
(b) The
Holders of not less than a Majority in Interest shall have made written request
to the Trustee to institute proceedings in respect of such Event of Default in
its own name as Trustee hereunder;
(c) Such
Holder has offered to the Trustee indemnity reasonably acceptable to the Trustee
against the costs, expenses and liabilities to be incurred in compliance with
such request and provided security therefor reasonably acceptable to the
Trustee;
(d) The
Trustee for 60 days after its receipt of such notice, request and offer of
indemnity has failed to institute any such proceeding; and
(e) No
written direction inconsistent with such written request has been given to the
Trustee during such 60-day period by the Holders of a Majority in
Interest.
It being
understood and intended that no one or more Holders of the Notes shall have any
right in any manner whatever by virtue of, or pursuant to any provision of this
Indenture to affect, disturb or prejudice the rights created under this
Indenture or the rights of any other Holders of the Notes, or to obtain or to
seek to obtain priority or preference over any other Holders or to enforce any
right under this Indenture, except in the manner herein provided and for the
equal and ratable benefit of all Outstanding Notes, no Holder shall have the
right and each Holder hereby waives the right to sue individually except in
accordance with the provisions of this Indenture.
ARTICLE
VI
NOTEHOLDER
LISTS, REPORTS BY THE
TRUSTEE
AND THE COMPANY
Section
6.01. Reports by
Trustee to Holders. Within sixty (60) days after December 31 of each year
(the “reporting date”), the Trustee shall mail to Holders a brief report dated
as of such reporting date that complies with Section 313(a) of the 1939
Act. The Trustee also shall comply with Section 313(b)(2) of the 1939
Act.
Section
6.02. Reports to
SEC. A copy of each report at the time of its mailing to Holders shall be
filed with the SEC and any stock exchange on which the Notes are listed. The
Company shall notify the Trustee when the Notes are listed on any stock
exchange.
SECTION
VII
SATISFACTION
OF NOTES
Section
7.01. Payment of
Notes, Satisfaction and Discharge of Indenture. Whenever the Company has
paid or caused to be paid all amounts then currently due and payable pursuant to
the terms of the Notes then this Indenture and the rights and interests created
hereby shall cease and become null and void (except as to any surviving rights
of transfer or exchange of Notes herein or therein provided for and except as
otherwise stated in the next paragraph) and the Trustee then acting as such
hereunder shall, at the expense of the Company, execute and deliver such
instruments of satisfaction and discharge as may be necessary. Notwithstanding
anything to the contrary herein contained, the obligations of the Company to pay
or reimburse the Trustee as provided herein shall survive the termination,
satisfaction and discharge of this Indenture.
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ARTICLE
VIII
THE
NOTES
Section
8.01. Form and
Dating. The Notes shall be substantially in the forms included in Exhibit A, which is
part of this Indenture. The Notes may have notations, legends or
endorsements required by law, stock exchange rule or usage. Each Note shall be
dated the date of its authentication.
Section
8.02. Execution and
Authentication. The following provisions shall govern authentication of
the Notes.
(a) A
Note shall not be valid until authenticated by the manual signature of the
Company. The signature shall be conclusive evidence that the Note has been
authenticated under this Indenture.
(b) At
least one Officer shall sign the Notes for the Company by manual or facsimile
signature.
(c) If
an Officer whose signature is on a Note no longer holds that office at the time
the Note is authenticated, the Note shall nevertheless be valid.
Section
8.03. Registrar and
Paying Agent. The Company may, in its sole discretion, upon prior notice
to the Trustee maintain an office or agency where Notes may be presented for
registration of transfer or for exchange (“Registrar”) and/or an office or
agency where Notes may be presented for payment (“Paying Agent”). Until such
time, the Company shall perform all sufficient and necessary functions as
Registrar and Paying Agent for the Notes. The Registrar shall keep a register of
the Notes and of their transfer and exchange. The Company may appoint one or
more co-registrars, one or more additional paying agents and one or more
additional conversion agents. The Company shall notify the Trustee of the name
and address of any Agent not a party to this Indenture.
Section
8.04. Paying Agent to
Hold Money in Trust. The Company may but is not required to appoint a
Paying Agent for the Notes. The Company will require any Paying Agent to agree
in writing that the Paying Agent will hold in trust for the benefit of Holders
or the Trustee, all money held by the Paying Agent for the payment of principal
or interest on the Notes, and will notify the Trustee of any default by the
Company in making any such payment. While any such default continues, the
Trustee may require a Paying Agent to pay all money held by it to the
Trustee.
Section
8.05. Holder
Lists. The Registrar shall furnish to the Trustee within thirty (30) days
after the end of each calendar quarter and at such other times as the Trustee
may request in writing, a list in such form and as of such date as the Trustee
may reasonably require of the names and addresses of Holders. The Trustee shall
preserve in as current a form as is reasonably practicable, the most recent list
available to it of the names and addresses of Holders.
Section
8.06. Transfer and
Exchange. Where Notes are presented to the Registrar or a co-registrar
with a request to register transfer or to exchange them for an equal principal
amount of Notes of other denominations, the Registrar shall register the
transfer or make the exchange if its requirements for such transactions are met.
To permit registrations of transfer and exchanges, the Company shall
authenticate Notes at the Registrar’s request. The Company may charge a
reasonable fee for any registration of transfer or exchange.
Section
8.07. Replacement
Notes. If the Holder of a Note claims that the Note has been lost,
destroyed or wrongfully taken, the Company shall issue and authenticate a
replacement Note if the Company’s requirements are met. If required by the
Company, an indemnity bond must be sufficient in the judgment of both to protect
the Company from any loss which any of them may suffer if a Note is replaced.
The Company may charge for its expenses in replacing a Note.
Section
8.08. Outstanding
Notes. The Notes outstanding at any time are all the authenticated Notes
except for those cancelled by it, those delivered to it for cancellation, and
those described in this Section as not outstanding. If a Note is replaced
pursuant to Section
8.07, it ceases to be outstanding unless the Company receives proof
satisfactory to it that the replaced Note is held by a bona fide purchaser. If
Notes are considered paid under Section 7.01, they
cease to be outstanding and interest on them ceases to accrue.
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Section
8.09. Treasury
Notes. A Note does not cease to be outstanding because the Company or an
Affiliate holds the Note. However, in determining whether the Holders of the
required principal amount of Notes have concurred in any direction, waiver or
consent, Notes owned by the Company or an Affiliate shall be disregarded, except
that for the purposes of determining whether the Trustee shall be protected in
relying on any such direction, waiver or consent, only Notes which the Trustee
knows are so owned shall be so disregarded.
Section
8.10. Cancellation. The
Company at any time may deliver Notes to the Trustee for cancellation. The
Registrar and any Paying Agent shall forward to the Company any Notes
surrendered to them for registration of transfer, exchange, payment or
conversion. The Company shall cancel all Notes surrendered for registration of
transfer, exchange, payment or cancellation and shall dispose of cancelled Notes
as the Company determines. The Company may not issue new Notes to replace Notes
that it has paid or delivered for cancellation.
Section
8.11. Defaulted
Interest. If the Company defaults in a payment of interest on the Notes,
it shall pay the defaulted interest in any lawful manner. It may pay the
defaulted interest, plus any interest payable on the defaulted interest, to the
persons who are Holders on a subsequent special record date. The Company shall
fix the record date and payment date. At least 15 days before the record date,
the Company shall mail to Holders a notice that states the record date, payment
date, and amount of interest to be paid.
ARTICLE
IX
SUPPLEMENTAL
AGREEMENTS;
AMENDMENT
OF ANY NOTE DOCUMENTS
Section
9.01. Supplemental
Trust Agreements without Holders’ Consent. The Company and the
Trustee from time to time may enter into a Supplemental Agreement, without the
consent of any Holders, but with the consent of the Holder Representative, as
are necessary or desirable to:
(a) cure
any ambiguity or formal defect or omission or correct or supplement any
provision herein that may be inconsistent with any other provision
herein;
(b) grant
to or confer upon the Trustee for the benefit of the Holders any additional
rights, remedies, powers, authority or security that may lawfully be granted to
or conferred upon the Holders or the Trustee;
(c) amend
any of the provisions of this Indenture to the extent required to maintain the
exclusion of interest on the Notes from gross income for federal income tax
purposes;
(d) add
to the covenants and agreements of the Company in this Indenture other covenants
and agreements thereafter to be observed by the Company or to surrender any
right or power herein reserved to or conferred upon the Company;
(e) make
any change herein which may be required by any Rating Agency in order to obtain
a rating by such Rating Agency on the Notes;
(f) amend,
alter, modify or supplement this Indenture in a manner necessary or desirable in
connection with either the use or maintenance of a Book-Entry System for the
Notes, or the issuance of certificated Notes following the termination of a
Book-Entry System for the Notes; or
(g) make
any other change, which, pursuant to the notice of the Holder Representative, is
not materially adverse to the interests of the Holders. The Trustee will provide
the Holder Representative with at least ten Business Days’ notice of any
proposed Supplemental Agreement. Immediately after the execution of any
Supplemental Agreement for any of the purposes of this Section 9.01, the
Trustee shall cause a notice of the proposed execution of such Supplemental
Agreement to be mailed, postage prepaid, to the Holders. Such notice shall
briefly set forth the nature of the proposed Supplemental Agreement and shall
state that copies thereof are on file at the designated office of the Trustee
for inspection by Holders. A failure on the part of the Trustee to mail the
notice required by this Section 9.01 shall
not affect the validity of such Supplemental Agreement.
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Section
9.02. Supplemental
Trust Agreements with Holders’ Consent.
(a) Except
as otherwise provided in Section 9.01, subject
to the terms and provisions contained in this Section 9.02 and
Section 9.03,
the Holder Representative shall have the right, anything contained in this
Indenture to the contrary notwithstanding, to consent to and approve the
execution by the Company and the Trustee, of each Supplemental Agreement as
shall be deemed necessary or desirable by the Company or the Holder
Representative for the purpose of modifying, altering, amending, adding to or
rescinding, in any particular, any of the terms or provisions contained in this
Indenture or in any Supplemental Agreement; provided, however, that nothing
herein contained shall permit, or be construed as permitting, without the
consent of the Holders of all of the Notes affected by such Supplemental
Agreement, (i) an extension in the payment with respect to any Note issued
hereunder, or (ii) a reduction in any payment payable under or with respect to
any Note, or the rate of interest on any Note, or (iii) the creation of a lien
upon or pledge of the money or other assets pledged to the payment of the Notes
hereunder, or the release of any such assets from the lien of this Indenture, or
(iv) a preference or priority of any Note over any other Notes, or (v) a
reduction in the aggregate principal amount of the Notes required for consent to
such Supplemental Agreement or to any amendment, change or modification to this
Indenture as provided in this Article IX, or (vi)
an extension or reduction in the payment of any other amount payable on or in
connection with any Note issued hereunder. Nothing herein contained, however,
shall be construed as making necessary the approval of Holders (other than the
Holder Representative) of the execution of any Supplemental Agreement authorized
in Section
9.01.
(b) If
at any time the Company shall request the Trustee to enter into a Supplemental
Agreement for any of the purposes of this Section 9.02, the
Trustee, at the expense of the Company, shall cause notice of the proposed
execution of such Supplemental Agreement to be mailed, postage prepaid, to the
Holders. Such notice shall briefly set forth the nature of the proposed
Supplemental Agreement and shall state that copies thereof are on file at the
designated office of the Trustee for inspection by Holders. The Trustee shall
not, however, be subject to any liability to any Holders by reason of its
failure to mail the notice required by this Section 9.02, and any
such failure shall not affect the validity of such Supplemental Agreement when
consented to and approved as provided in this Section
9.02.
(c) Whenever,
at any time within one year after the date of mailing of such notice, the
Company delivers to the Trustee an instrument or instruments in writing
purporting to be executed by the Holder Representative which instrument or
instruments shall refer to the proposed Supplemental Agreement described in such
notice and shall specifically consent to and approve the execution thereof in
substantially the form of the copy thereof referred to in such notice, thereupon
but not otherwise, the Trustee may, subject to the provisions of the subsection
(a), execute such Supplemental Agreement in substantially such
form.
(d) Subject
to subsection (a), if, at the time of the execution of such Supplemental
Agreement, the Holder Representative shall have consented to and approved the
execution thereof as herein provided, no Holder shall have any right to object
to the execution of such Supplemental Agreement, or to object to any of the
terms and provisions contained therein or the operation thereof, or in any
manner to question the propriety of the execution thereof, or to enjoin or
restrain the Trustee or the Company from executing the same or from taking any
action pursuant to the provisions thereof.
Section
9.03. Supplemental
Agreements Part of Indenture. Any Supplemental Agreement
executed in accordance with the provisions of this Article IX shall
thereafter form a part of this Indenture, and all of the terms and conditions
contained in any such Supplemental Agreement as to any provision authorized to
be contained therein shall be, and be deemed to be part of the terms and
conditions of this Indenture for any and all purposes. This Indenture shall be,
and be deemed to be modified and amended in accordance therewith, and the
respective rights, duties and obligations under this Indenture of the Company,
the Trustee and Holders shall thereafter be determined, exercised and enforced
hereunder, subject in all respects to such modifications and amendments. Express
reference to any Supplemental Agreement may be made in the text of any Notes
authenticated after the execution of such Supplemental Agreement, if deemed
necessary or desirable by the Trustee.
Section
9.04. Discretion of
Trustee to Execute Supplemental Agreement. Except in the case
of a direction from the Holder Representative (unless the Trustee determines, in
its reasonable discretion, that such Supplemental Agreement increases its duties
or adversely affects its rights, privileges or indemnities), the Trustee shall
not be under any responsibility or liability to the Company or to any Holder or
to anyone whomsoever for its refusal in good faith to enter into any
Supplemental Agreement if such Supplemental Agreement is deemed by it to be
contrary to the provisions of this Article IX or if the
Trustee has received an Opinion of the Company’s Counsel that such Supplemental
Agreement is contrary to law or materially adverse to the rights of the
Holders.
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Section
9.05. Consents and
Opinions. Subject to Section 9.01, any
Supplemental Agreement entered into under this Article IX shall not
become effective unless and until the Holder Representative shall have approved
the same in writing, each in its sole discretion. No Supplemental Agreement
shall be effective until the Company, the Holder Representative and the Trustee
shall have received a favorable Opinion of the Company’s Counsel. The Trustee
and the Company shall receive, at the expense of the Company, or, if such
Supplemental Agreement is requested by the Holder Representative, at the expense
of the Holder Representative, an Opinion of the Company’s Counsel to the effect
that any such proposed Supplemental Agreement is authorized and complies with
the provisions of this Indenture.
Section
9.06. Notation of
Modification on Notes; Preparation of New Notes. Notes authenticated and
delivered after the execution of any Supplemental Agreement pursuant to the
provisions of this Article IX may
bear a notation, in form approved by the Trustee and the Company, as to any
matter provided for in such Supplemental Agreement, and if such Supplemental
Agreement shall so provide, new Notes, so modified as to conform, in the opinion
of the Trustee and the Company, to any modification of this Indenture contained
in any such Supplemental Agreement, may be prepared by the Company, at the
expense of the Company, or, if such amendment is requested by the Holder
Representative, at the expense of the Holder Representative, authenticated by
the Trustee and delivered without cost to the Holders of the Notes then
outstanding, upon surrender for cancellation of such Notes in equal aggregate
principal amounts.
Section
9.07. Amendments to a
Note Document Not Requiring Consent of Holders. The Company
and the Trustee may, without the consent of or notice to the Holders, consent to
any amendment, change or modification of this Indenture or any Note Document as
is necessary or desirable to:
(a) cure
any ambiguity or formal defect or omission, correct or supplement any provision
therein;
(b) grant
to or confer upon the Trustee for the benefit of the Holders any additional
rights, remedies, powers, authority or security that may lawfully be granted to
or conferred upon the Holders or the Trustee;
(c) amend
any of the provisions therein to the extent required to maintain the exclusion
from gross income of interest on the Notes for federal income tax
purposes;
(d) add
to the covenants and agreements of the Company therein other covenants and
agreements thereafter to be observed by the Company or to surrender any right or
power therein reserved to or conferred upon the Company;
(e) make
any change that is required by any Rating Agency in order to obtain or maintain
a rating by such Rating Agency on the Notes;
(f) amend,
alter, modify or supplement such document in a manner required in connection
with either the use or maintenance of a Book-Entry System for the Notes, or the
issuance of certificated Notes following the termination of a Book-Entry System
for the Notes; or
(g) make
any other change, which, pursuant to the notice of the Holder Representative, is
not materially adverse to the interests of the Holders of the
Notes.
Section
9.08. Amendments to
Note Documents Requiring Consent of Holders.
(a) Except
for the amendments, changes or modifications corresponding to those provided in
Section 9.07,
neither the Company nor the Trustee shall consent to any other amendment, change
or modification of any Note Document (other than this Indenture) without the
consent of the Holder Representative; provided, however, that nothing herein
shall permit or be construed as permitting, without the consent of the Holders
of all of the Notes, (i) an extension of the time of payment of any amounts
payable under the Notes, or (ii) a reduction in the amount of any payment to be
made with respect to the Notes, or the rate of interest on the Notes, or (iii)
the creation of a lien upon or pledge of the money or other assets pledged to
the payment of the Notes hereunder, or the release of any such assets from the
lien of this Indenture, or (iv) a preference or priority of any Notes over any
other Notes, or (v) a reduction in the aggregate principal amount of the Notes
required for consent to any such amendment, change or modification as provided
herein, or (vi) an extension or reduction in the payment of any other amount
payable on or in connection with the Notes issued hereunder. If at any time the
Company requests consent to any such proposed amendment, change or modification
of any of such documents, other than an amendment, change, or modification
permitted by Section
9.07, the Trustee shall, at the expense of the Company, cause notice of
such proposed amendment, change or modification to be mailed, postage prepaid,
to Holders. Such notice shall briefly set forth the nature of such proposed
amendment, change or modification and shall state that copies of the amendment
to such document embodying the same are on file at the designated office of the
Trustee for inspection by Holders. The Trustee shall not, however, be subject to
any liability to any Holders by reason of its failure to mail the notice
required by this Section 9.08, and any
such failure shall not affect the validity of such supplement or amendment to
such document when consented to and approved as provided in this Section
9.08.
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(b) Whenever,
at any time within one year after the date of mailing such notice, the Company
delivers to the Trustee an instrument or instruments in writing purporting to be
executed by the Holder Representative, which instrument or instruments shall
refer to the proposed amendment or supplement to the document described in such
notice and shall specifically consent to and approve the execution thereof in
substantially the form of the copy thereof referred to in such notice, thereupon
but not otherwise, the Company and/or the Trustee may execute such amendment in
substantially the form on file as provided above, without liability or
responsibility to any Holder, whether or not such Holder has consented
thereto.
Section
9.09. Consents and
Opinions. Subject to Section 9.01, any
amendment, change or modification otherwise permitted under this Article IX shall not
become effective unless the Holder Representative shall have approved the same
in writing, in its sole discretion. The Trustee shall not be under any
responsibility or liability to the Company or to any Holder or to anyone
whomsoever for its refusal in good faith to enter into any supplement or
amendment as provided in this Section 9.09 if such
supplement or amendment is deemed by it to be contrary to the provisions of this
Article IX or
if the Trustee has received an Opinion of the Company’s Counsel that such
supplement or amendment is contrary to law or materially adverse to the rights
of the Holders or the liabilities or indemnities of the Trustee. No such
supplement or amendment shall be effective until the Company and the Trustee
shall have received an Opinion of the Company’s Counsel to the effect that any
such proposed supplement or amendment complies with the provisions of this
Indenture, and any other opinion that may be required by the Trustee or the
Holder Representative.
ARTICLE
X
PROVISIONS
OF GENERAL APPLICATION
Section
10.01. Acts of
Holders.
(a) Any
request, demand, authorization, direction, notice, consent, waiver or other
action provided by this Indenture to be given or taken by Holders may be
embodied in and evidenced by an instrument duly executed and delivered by the
Holder Representative, or if there is then none, by one or more substantially
concurrent instruments of substantially similar tenor signed by such Holders in
person or by an agent or attorney duly appointed in writing; and, except as
herein otherwise expressly provided, such action shall become effective when
such instrument or instruments are delivered to the Trustee, and, where it is
herein expressly required, to the Company. Such instrument or instruments (and
the action embodied therein and evidenced thereby) are herein sometimes referred
to as the “Act” of the Holders signing such instrument or
instruments.
(b) The
ownership of the Notes shall be conclusively proven by the books and records of
the Company.
(c) Any
request, demand, authorization, direction, notice, consent, waiver or other
action by the Holder of any Note shall bind every future Holder of the same Note
and the Holder of every Note issued upon the transfer thereof or in exchange
therefor or in lieu thereof, in respect of anything done or suffered to be done
by the Trustee or the Company in reliance thereon, whether or not notation of
such action is made upon such Note.
Section
10.02. Holder
Representative.
(a) In
the event of a default, Holders shall appoint a Holder Representative to act on
their behalf. The Holder Representative shall provide written notice
to the Trustee designating particular individuals authorized to execute any
consent, waiver, approval, direction or other instrument on behalf of the Holder
Representative and such notice may be amended or rescinded by the Holder
Representative at any time. The Holder Representative may be removed
and a successor appointed by a written notice given by a Majority in Interest of
the Holders to the Trustee, and the Company. The removal and
reappointment shall be effective immediately upon receipt of such notice by the
Trustee. A Majority in Interest of the Holders may appoint any Person
to act as Holder Representative.
(b) If
for any reason, no Holder Representative shall then be appointed, all references
to Holder Representative herein shall be deemed to refer to a Majority in
Interest of the Holder.
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(c) Whenever
pursuant to this Indenture or any other Note Document the Holder Representative
exercises any right given to it to approve or disapprove, or any arrangement or
term is to be satisfactory to the Holder Representative, the decision of the
Holder Representative to approve or disapprove or to decide whether arrangements
or terms are satisfactory or not satisfactory shall (except as is otherwise
specifically herein or therein provided) be in the sole discretion of the Holder
Representative, and shall be final and conclusive.
(d) Whenever
this Indenture or any Note Document requires the consent, determination,
election, approval, waiver, acceptance, satisfaction or expression of opinion
of, or the taking of any discretionary act by the Trustee (all of the foregoing
being referred to as “Consent” in this Section 10.02), the right, power,
privilege and option of the Trustee to withhold or grant its Consent shall be
deemed to be the right, power, privilege and option of the Holder Representative
to withhold or grant such Consent, and the Trustee shall have no responsibility
for any action or inaction with respect thereto, except as may be otherwise set
forth in this Indenture.
Section
10.03. Notices.
Any notice, request, demand, authorization, direction, consent, waiver or Act of
Holders or other direction, demand, notice or document provided or permitted by
this Indenture to be made upon, given or furnished to, given, delivered or filed
under this Indenture shall, unless otherwise expressly permitted in this
Indenture, be in writing and shall be delivered as required to:
(a) The
Trustee, U.S. Bank National Association, at 633 W. Fifth Street, 24th
Floor, Los Angeles, California 90071, Attention: Corporate Trust
Services;
(b) The
Company, Ministry Partners Investment Corporation, at 955 West Imperial Highway,
Brea, California 92821, Attention: the President;
(c) To
each Holder of such Notes, at the address of such Holder as it appears in the
books and records of the Company, not later than the latest date, and not
earlier than the earliest date, prescribed for the first publication of such
notice.
(d) Any
notice or communication to a Holder shall be mailed by first-class mail to his
address shown on the Note register kept by the Company. Failure to mail a notice
or communication to a Holder or any defect in it shall not affect its
sufficiency with respect to other Holders. If the Company mails a notice or
communication to Holders, it shall mail a copy to the Trustee and each Agent at
the same time.
(e) Any
notice or communication by the Company or the Trustee to the other that is duly
given in writing and delivered in person, by facsimile or e-mail, or mailed by
first-class mail to the other’s address stated in this Section 10.03 shall
be sufficiently given. If a notice or communication is mailed in the manner
provided above within the time prescribed, it is duly given, whether or not the
addressee receives it. The Company or the Trustee by notice to the other, may
designate additional or different addresses for subsequent notices or
communications.
Section
10.04. Computations. All
computations herein provided for shall be made in accordance with generally
accepted accounting principles consistently applied. In determining generally
accepted accounting principles, the Company may conform to any other rule or
regulation of any regulatory authority having jurisdiction over the
Company.
Section
10.05. Effect of
Headings and Table of Contents. The Article and Section headings herein
are for convenience only and shall not affect the construction hereof. Any
reference to an Article or Section shall, unless otherwise stated, be to the
corresponding Article or Section number of this Indenture.
Section
10.06. Successors and
Assigns. All covenants and agreements in this Indenture by the Company
shall bind its successors and assigns, whether so expressed or not.
Section
10.07. Severability. In case
any provision in this Indenture shall be invalid, illegal or unenforceable, the
validity, legality and enforceability of the remaining provisions shall not in
any way be affected or impaired thereby.
Section
10.08. Benefits of
Indenture. Nothing in this Indenture or in the Class A Notes, expressed
or implied, shall give to any Person, other than the parties hereto and their
successors hereunder, any benefit or any legal or equitable right, remedy or
claim under this Indenture.
A-21
Section
10.09. Governing
Law. This Indenture and all rights and obligations of the undersigned
hereof shall be governed, construed and interpreted in accordance with the laws
of the State of California without regard to conflict of law
principles.
Section
10.10. Persons Deemed
Owners. The Company, the Trustee and any agent of the Company or the
Trustee may treat the Person in whose name any Note is registered as the owner
of such Note for the purpose of receiving payment of principal of or interest on
said Class A Note and for all other purposes whatsoever, whether or not such
Note is overdue.
Section
10.11. Trust Indenture
Act Controls. If any provision of this Indenture limits, qualifies, or
conflicts with another provision which is required to be included in this
Indenture by the 1939 Act, the required provision shall control.
Section
10.12. Communication
by Holders with Other Holders. Holders may communicate pursuant to
Section 312(c) of the 1939 Act.
Section
10.13. Counterparts. This
Indenture may be executed in several counterparts, all of which together shall
constitute one agreement binding on all parties hereto, notwithstanding that all
the parties have not signed the same counterpart.
IN
WITNESS WHEREOF, the parties hereto have caused this Indenture to be duly
executed as of the day and year first above written.
THE
COMPANY
MINISTRY
PARTNERS INVESTMENT CORPORATION,
a
California corporation
By: _______________________________
THE
TRUSTEE
U.S.
BANK NATIONAL ASSOCIATION
By: _______________________________
Title: _______________________________
|
A-22
EXHIBIT
B
SPECIMEN
MINISTRY
PARTNERS INVESTMENT COMPANY, LLC
CLASS
A
FIXED
SERIES NOTE
HOLDER:
|
INTEREST
RATE: ____%
|
Name:
_________________________________
|
ISSUANCE
DATE:___________, 20_______
|
Name
2:___________________________
|
PAYMENT
DATE: ________ day of ______
|
Address:__________________________
|
MATURITY
DATE:__________, 20_______
|
PRINCIPAL
AMOUNT: $_____________
|
CATEGORY
OF FIXED SERIES NOTE: ____________
|
INTEREST
REINVESTMENT ELECTED:
_________________________________
[See
Section 6 Below]
|
TERM:______________________________
NOTE
NO.:__________________________
|
THIS
FIXED SERIES CLASS A NOTE IS SUBJECT TO THE PROVISIONS OF THE INDENTURE dated
April 18, 2008 (the “Indenture”), which authorizes the issuance of up to
$200,000,000 of Class A Notes.
1. Maker’s Obligation to Pay. For
value received, MINISTRY PARTNERS INVESTMENT COMPANY, LLC, a California limited
liability company (“Maker”), hereby promises to pay to the order of the
registered holder of this Note (“Holder”), at such address of Holder, as stated
above and set forth on the records of Maker, or at such other place as Holder
may designate in writing to Maker, the above-stated Principal Amount, plus any
additional advances by Holder and accepted by Maker which are added to the
above-stated Initial Principal Amount, together with interest accrued thereon at
the Interest Rate stated above. The Interest Rate equals the sum of the Fixed
Spread and the Swap Index in effect on the Issuance Date.
2. Manner and Form of Payment.
This Note shall be payable interest only, in arrears, commencing on the Payment
Date of the month next following the month in which the Issuance Date occurs and
continuing on the same day of each month following thereafter until the Maturity
Date stated above occurs, on which date the unpaid balance of principal and
accrued interest shall be due and payable. All Principal and interest shall be
payable in lawful money of the United States of America. All payments made
hereunder shall be applied first to the payment of accrued interest and the
balance remaining to the payment of Principal.
3. Subject to the Indenture. This
Note is issued subject to the terms and conditions of the
Indenture.
4. Events of Default and
Remedies. This Note shall be subject to each of the Events of Default and
remedies set forth in the Indenture. In order to cure Payment Default, Maker
must mail to the Holder, or direct deposit 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
this Note until the date it actually is mailed, deposited or
credited.
If an
Event of Default occurs and is continuing, then the Holders of not less than a
Majority in Principal Amount of the Notes (a Majority of the Holders) may direct
the Trustee to act for all the Holders as provided in the Indenture and the
Trustee will act at the direction of the Majority of the Holders and take any
action allowed by law to collect payment on the Notes. No Holder shall have the
right to institute or continue any proceeding, judicial or otherwise, with
respect to the Notes except pursuant to the Indenture.
5. Interest Reinvestment. If the
Holder has elected to reinvest interest payable on the Note (the “Interest
Reinvestment Election”), Maker shall defer all interest payable on its Note
until the Payment Date by increasing the Principal Amount by an amount equal to
each interest payment otherwise payable on this Note, as of the Payment Date of
such interest payment. Interest shall be payable on such increased Principal
Amount thereon in the manner otherwise provided herein.
B-1
6. Maker’s Election to Prepay.
The Maker may at any time, upon not less than thirty (30) nor more than sixty
(60) days prior written notice to the Holder, elect to prepay the Principal
Amount in whole or in part, by delivering to the Holder payment equal to such
amount of prepayment plus accrued and unpaid interest thereon through such date
of prepayment. Notice of prepayment shall be mailed by first class mail to
Holder. If less than all of the Series of the Note is prepaid, Maker shall
prepay all Notes of the Series on a pro rata basis. In the event of such
prepayment, a new Note in Principal Amount equal to the unpaid Principal Amount
of the original Note shall be issued in the name of Holder and the original Note
shall be canceled. On and after the prepayment date, interest shall cease to
accrue on the portion of the Principal Amount prepaid. The foregoing obligation
to prepay a Series of Notes on a pro rata basis herein shall not in any manner
limit the Maker’s right to repurchase or prepay any Note on a voluntary basis
agreed to by the holder thereof, including any prepayment of the Note prior to
maturity as described below.
7. Early Presentment. Holder may,
upon written notice to Maker, request prepayment of the Note at any time prior
to maturity. In such event, Maker shall determine in Maker’s sole judgment,
whether to so prepay the Note. In the event Maker determines to prepay the Note,
it shall prepay the unpaid balance of the Principal Amount or portion thereof,
plus the accrued but unpaid interest through the date of prepayment, less an
amount equal to an administrative fee not to exceed an amount equal to three (3)
months’ interest on Principal Amount of the Note prepaid.
8. Waivers. The Maker waives
demand for payment, presentment for payment, protest, notice of protest, notice
of dishonor, notice of nonpayment, notice of acceleration or maturity, and/or
diligence in taking any action to collect sums owing hereunder.
9. Severability. In case any
provision in this Note shall be invalid, illegal or unenforceable, the validity,
legality and enforceability of the remaining provisions shall not in any way be
affected or impaired thereby.
10. California Law; Jurisdiction.
This Note is made in the State of California and the provisions hereof shall be
construed in accordance with the laws of the State of California, except to the
extent preempted by federal law. In the event of a default hereunder, this Note
may be enforced in any court of competent jurisdiction in the State of
California, and as a condition to the issuance of this Note, Maker and Holder
submit to the jurisdiction of such court regardless of their residence or where
this Note or any endorsement hereof may have been executed.
Orange
County, California
MINISTRY
PARTNERS INVESTMENT COMPANY, LLC
|
||
By:
___________________________________________
|
B-2
EXHIBIT
C
SPECIMEN
MINISTRY
PARTNERS INVESTMENT COMPANY, LLC
CLASS
A
FLEX
SERIES NOTE
HOLDER:
|
INTEREST
RATE: ____%
|
Name:
_________________________________
|
ISSUANCE
DATE:___________, 20_______
|
Name
2:___________________________
|
PAYMENT
DATE: ________ day of ______
|
Address:__________________________
|
MATURITY
DATE:__________, 20_______
|
PRINCIPAL
AMOUNT: $_____________
|
CATEGORY
OF FLEX SERIES NOTE: ____________
|
INTEREST
REINVESTMENT ELECTED:
________________________________
[See
Section 6 Below]
|
TERM:_____________________________
NOTE
NO.:__________________________
|
THIS FLEX
SERIES CLASS A NOTE IS SUBJECT TO THE PROVISIONS OF THE INDENTURE dated April
18, 2008 (the “Indenture”), which authorizes the issuance of up to $200,000,000
of Class A Notes.
1. Maker’s Obligation to Pay. For
value received, MINISTRY PARTNERS INVESTMENT COMPANY, LLC, a California limited
liability company (“Maker”), hereby promises to pay to the order of the
registered holder of this Note (“Holder”), at such address of Holder, as stated
above and set forth on the records of Maker, or at such other place as Holder
may designate in writing to Maker, the above-stated Principal Amount, plus any
additional advances by Holder and accepted by Maker which are added to the
above-stated Initial Principal Amount, together with interest accrued thereon at
the Interest Rate stated above. The Interest Rate equals the sum of the Flex
Spread plus the Swap Index in effect on the Issuance Date.
2. Manner and Form of Payment.
This Note shall be payable interest only, in arrears, commencing on the Payment
Date of the month next following the month in which the Issuance Date occurs and
continuing on the same day of each month following thereafter until the Maturity
Date stated above occurs, on which date the unpaid balance of principal and
accrued interest shall be due and payable. All Principal and interest shall be
payable in lawful money of the United States of America. All payments made
hereunder shall be applied first to the payment of accrued interest and the
balance remaining to the payment of Principal.
3. Interest Reset Election.
Commencing with each consecutive twelve month period commencing on the
first anniversary date of the Issuance Date, Holder may, in Holder’s sole
discretion, request Maker to reset the Interest Rate to the rate for a Flex Note
of the Category and term in effect on the date of such request. Such reset
request must be in writing dated and promptly delivered to Maker in person, via
fax or electronic delivery, or by U.S. mail postmarked no later than the date of
the request. Provided, however, Holder may make such a reset request only once
during each such twelve month period and the interest rate may not be increased
by more than one percent (1.0%) by any single adjustment or by more than a total
of three percent (3.0%) by all adjustments over the term of the
Note.
4. Subject to the Indenture. This
Note is issued subject to the terms and conditions of the
Indenture.
5. Events of Default and
Remedies. This Note shall be subject to each of the Events of Default and
remedies set forth in the Indenture. In order to cure Payment Default, Maker
must mail to the Holder, or direct deposit 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
this Note until the date it actually is mailed, deposited or
credited.
C-1
If an
Event of Default occurs and is continuing, then the Holders of not less than a
Majority in Principal Amount of the Notes (a Majority of the Holders) may direct
the Trustee to act for all the Holders as provided in the Indenture and the
Trustee will act at the direction of the Majority of the Holders and take any
action allowed by law to collect payment on the Notes. No Holder shall have the
right to institute or continue any proceeding, judicial or otherwise, with
respect to the Notes except pursuant to the Indenture.
6. Interest Reinvestment. If the
Holder has elected to reinvest interest payable on the Note (the “Interest
Reinvestment Election”), Maker shall defer all interest payable on its Note
until the Payment Date by increasing the Principal Amount by an amount equal to
each interest payment otherwise payable on this Note, as of the Payment Date of
such interest payment. Interest shall be payable on such increased Principal
Amount thereon in the manner otherwise provided herein.
7. Holder’s Right to
Prepayment. Commencing on the first anniversary date of the
Issuance Date, Holder has the right to receive prepayment during any consecutive
twelve-month period of up to a maximum of ten percent (10%) of the then
outstanding balance of this Note, upon written notice to Maker.
8. Prepayment of Note. The Maker
may at any time, upon not less than thirty (30) nor more than sixty (60) days
prior written notice to the Holder, elect to prepay the Principal Amount in
whole or in part, by delivering to the Holder payment equal to such amount of
prepayment plus accrued and unpaid interest thereon through such date of
prepayment. Notice of prepayment shall be mailed by first class mail to Holder.
If less than all of the Series of the Note is prepaid, Maker shall prepay all
Notes of the Series on a pro rata basis. In the event of such prepayment, a new
Note in Principal Amount equal to the unpaid Principal Amount of the original
Note shall be issued in the name of Holder and the original Note shall be
canceled. On and after the prepayment date, interest shall cease to accrue on
the portion of the Principal Amount prepaid. The foregoing obligation to prepay
a Series of Notes on a pro rata basis herein shall not in any manner limit the
Maker’s right to repurchase or prepay any Note on a voluntary basis agreed to by
the holder thereof, including any prepayment of the Note prior to maturity as
described below.
9. Early Presentment. Holder may,
upon written notice to Maker, request prepayment of the Note at any time prior
to maturity. In such event, Maker shall determine in Maker’s sole judgment,
whether to so prepay the Note. In the event Maker determines to prepay the Note,
it shall prepay the unpaid balance of the Principal Amount or portion thereof,
plus the accrued but unpaid interest through the date of prepayment, less an
amount equal to an administrative fee not to exceed an amount equal to three (3)
months’ interest on Principal Amount of the Note prepaid.
10. Waivers. The Maker waives
demand for payment, presentment for payment, protest, notice of protest, notice
of dishonor, notice of nonpayment, notice of acceleration or maturity, and/or
diligence in taking any action to collect sums owing hereunder.
11. Severability. In case any
provision in this Note shall be invalid, illegal or unenforceable, the validity,
legality and enforceability of the remaining provisions shall not in any way be
affected or impaired thereby.
12. California Law; Jurisdiction.
This Note is made in the State of California and the provisions hereof shall be
construed in accordance with the laws of the State of California, except to the
extent preempted by federal law. In the event of a default hereunder, this Note
may be enforced in any court of competent jurisdiction in the State of
California, and as a condition to the issuance of this Note, Maker and Holder
submit to the jurisdiction of such court regardless of their residence or where
this Note or any endorsement hereof may have been executed.
Orange
County, California
MINISTRY
PARTNERS INVESTMENT COMPANY, LLC
|
||
By:
___________________________________________
|
C-2
EXHIBIT
D
SPECIMEN
MINISTRY
PARTNERS INVESTMENT COMPANY, LLC
CLASS
A
VARIABLE
SERIES NOTE
HOLDER:
|
INTEREST
RATE: ____%
|
Name:
_________________________________
|
ISSUANCE
DATE:___________, 20_______
|
Name
2:___________________________
|
PAYMENT
DATE: ________ day of ______
|
Address:__________________________
|
MATURITY
DATE:__________, 20_______
|
PRINCIPAL
AMOUNT: $_____________
|
CATEGORY
OF VARIABLE SERIES NOTE: ____________
|
INTEREST
REINVESTMENT ELECTED:
________________________________
[See
Section 6 Below]
|
TERM:_____________________________
NOTE
NO.:__________________________
|
THIS
VARIABLE SERIES CLASS A NOTE IS SUBJECT TO THE PROVISIONS OF THE INDENTURE dated
April 18, 2008 (the “Indenture”), which authorizes the issuance of up to
$200,000,000 of Class A Notes.
1. Maker’s Obligation to Pay. For
value received, MINISTRY PARTNERS INVESTMENT COMPANY, LLC, a California limited
liability company (“Maker”), hereby promises to pay to the order of the
registered holder of this Note (“Holder”), at such address of Holder, as stated
above and set forth on the records of Maker, or at such other place as Holder
may designate in writing to Maker, the above-stated Principal Amount, plus any
additional advances by Holder and accepted by Maker which are added to the
above-stated Initial Principal Amount, together with interest accrued thereon at
the Interest Rate stated above. The Interest Rate equals the Variable Spread
plus the Variable Index in effect on the Issuance Date.
2. Interest Rate Adjustments. On
the ___ day of each month, commencing with the month next following the month of
the Issuance Date (an “Adjustment Date”) and continuing until the Note is repaid
in full, the Interest Rate paid on this Note shall be adjusted to equal the
Interest Rate which Maker would pay on the Category of this Variable Series Note
had it been issued on the respective Adjustment Date.
3. Manner and Form of Payment.
This Note shall be payable interest only, in arrears, commencing on the Payment
Date of the month next following the month in which the Issuance Date occurs and
continuing on the same day of each month following thereafter until the Maturity
Date stated above occurs, on which date the unpaid balance of principal and
accrued interest shall be due and payable. All Principal and interest shall be
payable in lawful money of the United States of America. All payments made
hereunder shall be applied first to the payment of accrued interest and the
balance remaining to the payment of Principal.
4. Holder’s Call for Payment.
Anything else in this Note to the contrary notwithstanding, the Holder may call
the entire unpaid balance of Principal and Interest on this Note due and payable
upon written notice to Maker at any time after the unpaid principal balance on
the Note has equaled $10,000 or more for at least ninety consecutive (90)
days.
5. Subject to the Indenture. This
Note is issued subject to the terms and conditions of the
Indenture.
D-1
6. Events of Default and
Remedies. This Note shall be subject to each of the Events of Default and
remedies set forth in the Indenture. In order to cure Payment Default, Maker
must mail to the Holder, or direct deposit 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
this Note until the date it actually is mailed, deposited or
credited.
If an
Event of Default occurs and is continuing, then the Holders of not less than a
Majority in Principal Amount of the Notes (a Majority of the Holders) may direct
the Trustee to act for all the Holders as provided in the Indenture and the
Trustee will act at the direction of the Majority of the Holders and take any
action allowed by law to collect payment on the Notes. No Holder shall have the
right to institute or continue any proceeding, judicial or otherwise, with
respect to the Notes except pursuant to the Indenture.
7. Interest Reinvestment. If the
Holder has elected to reinvest interest payable on the Note (the “Interest
Reinvestment Election”), Maker shall defer all interest payable on its Note
until the Payment Date by increasing the Principal Amount by an amount equal to
each interest payment otherwise payable on this Note, as of the Payment Date of
such interest payment. Interest shall be payable on such increased Principal
Amount thereon in the manner otherwise provided herein.
8. Maker’s Election to Prepay.
The Maker may at any time, upon not less than thirty (30) nor more than sixty
(60) days prior written notice to the Holder, elect to prepay the Principal
Amount in whole or in part, by delivering to the Holder payment equal to such
amount of prepayment plus accrued and unpaid interest thereon through such date
of prepayment. Notice of prepayment shall be mailed by first class mail to
Holder. If less than all of the Series of the Note is prepaid, Maker shall
prepay all Notes of the Series on a pro rata basis. In the event of such
prepayment, a new Note in Principal Amount equal to the unpaid Principal Amount
of the original Note shall be issued in the name of Holder and the original Note
shall be canceled. On and after the prepayment date, interest shall cease to
accrue on the portion of the Principal Amount prepaid. The foregoing obligation
to prepay a Series of Notes on a pro rata basis herein shall not in any manner
limit the Maker’s right to repurchase or prepay any Note on a voluntary basis
agreed to by the holder thereof, including any prepayment of the Note prior to
maturity as described below.
9. Early Presentment. Holder may,
upon written notice to Maker, request prepayment of the Note at any time prior
to maturity. In such event, Maker shall determine in Maker’s sole judgment,
whether to so prepay the Note. In the event Maker determines to prepay the Note,
it shall prepay the unpaid balance of the Principal Amount or portion thereof,
plus the accrued but unpaid interest through the date of prepayment, less an
amount equal to an administrative fee not to exceed an amount equal to three (3)
months’ interest on Principal Amount of the Note prepaid.
10. Waivers. The Maker waives
demand for payment, presentment for payment, protest, notice of protest, notice
of dishonor, notice of nonpayment, notice of acceleration or maturity, and/or
diligence in taking any action to collect sums owing hereunder.
11. Severability. In case any
provision in this Note shall be invalid, illegal or unenforceable, the validity,
legality and enforceability of the remaining provisions shall not in any way be
affected or impaired thereby.
12. California Law; Jurisdiction.
This Note is made in the State of California and the provisions hereof shall be
construed in accordance with the laws of the State of California, except to the
extent preempted by federal law. In the event of a default hereunder, this Note
may be enforced in any court of competent jurisdiction in the State of
California, and as a condition to the issuance of this Note, Maker and Holder
submit to the jurisdiction of such court regardless of their residence or where
this Note or any endorsement hereof may have been executed.
Orange
County, California
MINISTRY
PARTNERS INVESTMENT COMPANY, LLC
|
||
By:
___________________________________________
|
D-2
EXHIBIT
E
MINISTRY
PARTNERS INVESTMENT COMPANY, LLC
CUSTOMER
PURCHASE APPLICATION
CLASS
A NOTES
FIXED
SERIES
Send completed Purchase Application
to:
MINISTRY
PARTNERS INVESTMENT COMPANY, LLC
915
West Imperial Highway, Suite 120
Brea,
CA 92821
As
required by the USA PATRIOT ACT, IMPORTANT INFORMATION ABOUT PROCEDURES FOR
OPENING A NEW ACCOUNT. Federal law requires all financial
institutions to obtain, verify and record information that identifies each
person who opens an account. What this means for
you: When you purchase a note, we will ask for your name,
address, date of birth and other information that will allow us to identify
you. We thank you for your understanding and cooperation.
1. PURCHASER
INFORMATION
[ ]
|
Individual [Mr.] [Mrs.] [Ms.] [Dr.]
|
(New
IRA)
|
(IRA
Rollover)
|
First
Name
|
Middle
Initial
|
Last
Name
|
Date
of Birth
|
Social
Security Number
|
ID
Type: (circle one) No.
|
Place
Issued
|
Date
Issued
|
Driver’s
License
Passport
Other:
|
|
Date
Expires
|
[ ] Joint
Tenant [Mr.] [Mrs.] [Ms.] [Dr.]
First
Name
|
Middle
Initial
|
Last
Name
|
Date
of Birth
|
Social
Security Number
|
ID
Type: (circle one) No.
|
Place
Issued
|
Date
Issued
|
Driver’s
License
Passport
Other:
|
|
Date
Expires
|
[ ] Gift/Transfer to Minor
Custodian’s
Name (one only)
|
Minor’s
Social Security Number
|
Trustee
Accounts Only: Names of all Trustees Required by Trust Agreement to
Sell/Purchase Notes
Date
of Trust
|
Name
of Trust
|
Tax
Identification Number
|
PA
FIXED-CUSTOMER-1
2.
|
MAILING ADDRESS
|
Email
address:
__________________________________________
|
Street
Address
|
Apt./Suite
Number
|
City
|
State
|
Zip
Code
|
If
PO Box is mailing address, include a physical location address.
( )
|
( )
|
[ ]
U.S.
|
[ ]
Other
|
Business
Telephone
|
Home
Telephone
|
Citizenship
|
Indicate
Country
|
( )
|
( )
|
|
Fax
Number
|
Cell
Phone Number
|
3.
FIXED SERIES
NOTE(S) PURCHASED Please indicate in the space
provided, the amount to be purchased, the category, term and interest
rate
Amount
Purchased
|
Categories |
Maturity
(Term)
|
Interest Rate | ||||||
$_____________
|
Fixed
1 Note
|
mos.
|
%
|
||||||
$_____________
|
Fixed
5 Note
|
mos.
|
%
|
||||||
$_____________
|
Fixed
10 Note
|
mos.
|
%
|
||||||
$_____________
|
Fixed
25 Note
|
mos.
|
%
|
||||||
$_____________
|
Fixed
50 Note
|
mos.
|
%
|
||||||
$_____________
|
Fixed
100 Note
|
mos.
|
%
|
||||||
$_____________
|
Total Amount Purchased Make check payable to “Ministry Partners Investment Company, LLC.” |
4.
PAYMENT OPTIONS
[ ]
|
Reinvestment
Option. Reinvest monthly all interest payments from the
respective series of Notes in Notes of the same
Series.
|
[ ]
|
Periodic Payment
Option. I elect to receive all payments of interest on
my Note: ___Monthly;
___Quarterly;
|
|
___Semi-annually; ___Annually
|
Check only one option
- If no option is selected, interest will be paid monthly. All
principal and interest payments will be mailed to the Holder at the address
stated above.
5.
SIGNATURES
By
executing this PURCHASE APPLICATION I adopt and agree to be bound by the terms
and conditions of the Indenture. I am of legal age. Sign
below exactly as printed in Section 1 above. For joint registration,
both registered owners must sign. Under penalty of perjury, I certify with my
signature below that the number shown in Section 1 above is my correct taxpayer
identification number. Also, I have not been notified by the Internal
Revenue Service that I am currently subject to backup withholding unless
otherwise indicated.
Signature
|
Print
Name
|
Date
|
Signature
|
Print
Name
|
Date
|
MINISTRY
PARTNERS INVESTMENT COMPANY, LLC IS OWNED BY CREDIT UNIONS. SECURITIES PRODUCTS
OFFERED BY MINISTRY PARTNERS INVESTMENT COMPANY, LLC ARE NOT DEPOSITS OF,
OBLIGATIONS OF, OR GUARANTEED BY ANY CREDIT UNION OR OTHER PERSON. THEY ARE NOT
INSURED OR GUARANTEED BY THE NCUSIF OR ANY OTHER GOVERNMENT AGENCY OR PRIVATE
INSURER. THESE PRODUCTS INVOLVE INVESTMENT RISK, INCLUDING POSSIBLE
LOSS OF PRINCIPAL.
PA
FIXED-CUSTOMER-2
EXHIBIT
E
MINISTRY
PARTNERS INVESTMENT COMPANY, LLC
CORPORATION
PURCHASE APPLICATION
CLASS
A NOTES
FIXED
SERIES
Send completed Purchase Application
to:
MINISTRY
PARTNERS INVESTMENT COMPANY, LLC
915
West Imperial Highway, Suite 120
Brea,
CA 92821
As
required by the USA PATRIOT ACT, IMPORTANT INFORMATION ABOUT PROCEDURES FOR
OPENING A NEW ACCOUNT. Federal law requires all financial
institutions to obtain, verify and record information that identifies each
person who opens an account. What this means for
you: When you purchase a note, we will ask for your name,
address, date of birth and other information that will allow us to identify
you. We thank you for your understanding and cooperation.
1.
PURCHASER INFORMATION
[ ] Corporate, Partnership,
Trust or Other Organization
Exact
Name of Corporation, Partnership or Other Organization
|
Tax
Identification Number
|
Trustee Accounts Only: Names of all Trustees Required by Trust Agreement to Sell/Purchase Notes
Date
of Trust
|
Name
of Trust
|
Tax
Identification Number
|
Documents
required for
verification Circle one and include a copy with
application:
Articles of Incorporation
Signature pages of Trust
Partnership
Agreement Legal
status: __________________________________________
Charter
Other:
2.
MAILING
ADDRESS Email
address: __________________________________________
Street
Address
|
Apt./Suite
Number
|
City
|
State
|
Zip
Code
|
If
PO Box is mailing address, include a physical location
address.
( )
|
( )
|
[ ]
U.S.
|
[ ]
Other
|
Business
Telephone
|
Home
Telephone
|
Citizenship
|
Indicate
Country
|
( )
|
( )
|
|
Fax
Number
|
Cell
Phone Number
|
PA
FIXED-CORPORATION-1
3.
FIXED
SERIES NOTE(S) PURCHASED Please indicate in the
space provided, the amount to be purchased, the category, term and interest rate
Amount
Purchased
|
Categories |
Maturity
(Term)
|
Interest Rate | ||||||
$_____________
|
Fixed
1 Note
|
mos.
|
%
|
||||||
$_____________
|
Fixed
5 Note
|
mos.
|
%
|
||||||
$_____________
|
Fixed
10 Note
|
mos.
|
%
|
||||||
$_____________
|
Fixed
25 Note
|
mos.
|
%
|
||||||
$_____________
|
Fixed
50 Note
|
mos.
|
%
|
||||||
$_____________
|
Fixed
100 Note
|
mos.
|
%
|
||||||
$_____________
|
Total Amount Purchased Make check payable to “Ministry Partners Investment Company, LLC.” |
4.
PAYMENT OPTIONS
[ ]
|
Reinvestment
Option. Reinvest monthly all interest payments from the
respective series of Notes in Notes of the same
Series.
|
[ ]
|
Periodic Payment
Option. I elect to receive all payments of interest on
my Note: ___Monthly;
___Quarterly;
|
|
___Semi-annually; ___Annually
|
Check only one option
- If no option is selected, interest will be paid monthly. All
principal and interest payments will be mailed to the Holder at the address
stated above.
5.
SIGNATURES
By
executing this PURCHASE APPLICATION I adopt and agree to be bound by the terms
and conditions of the Indenture. I am of legal age. Sign
below exactly as printed in Section 1 above. For joint registration,
both registered owners must sign. Under penalty of perjury, I certify with my
signature below that the number shown in Section 1 above is my correct taxpayer
identification number. Also, I have not been notified by the Internal
Revenue Service that I am currently subject to backup withholding unless
otherwise indicated.
Signature
|
Print
Name
|
Date
|
SS#
Signature
|
Print
Name
|
Date
|
SS#
For
corporations, trusts or partnerships: We hereby certify that each of the persons
listed below has been duly elected, is now legally holding the office set forth
opposite his/her name, and has the authority to execute this PURCHASE
APPLICATION.
Signature
- President, Trustee, General Partner or
(Title)
|
Print
Name
|
Date
|
Signature
- Co-owner, Secretary of Corporation, Co-Trustee
(other)
|
Print
Name
|
Date
|
MINISTRY
PARTNERS INVESTMENT COMPANY, LLC (“MPIC”) IS OWNED BY CREDIT UNIONS. SECURITIES
PRODUCTS OFFERED BY MPIC ARE NOT DEPOSITS OF, OBLIGATIONS OF, OR GUARANTEED BY
ANY CREDIT UNION OR OTHER PERSON. THEY ARE NOT INSURED OR GUARANTEED BY THE
NCUSIF OR ANY OTHER GOVERNMENT AGENCY OR PRIVATE INSURER. THESE
PRODUCTS INVOLVE INVESTMENT RISK, INCLUDING POSSIBLE LOSS OF
PRINCIPAL.
PA
FIXED-CORPORATION-2
EXHIBIT
E
MINISTRY
PARTNERS INVESTMENT COMPANY, LLC
CUSTOMER
PURCHASE APPLICATION
CLASS
A NOTES
FLEX
SERIES
Send completed Purchase Application
to:
MINISTRY
PARTNERS INVESTMENT COMPANY
915
West Imperial Highway, Suite 120
Brea,
CA 92821
As
required by the USA PATRIOT ACT, IMPORTANT INFORMATION ABOUT PROCEDURES FOR
OPENING A NEW ACCOUNT. Federal law requires all financial
institutions to obtain, verify and record information that identifies each
person who opens an account. What this means for
you: When you purchase a note, we will ask for your name,
address, date of birth and other information that will allow us to identify
you. We thank you for your understanding and cooperation.
1. PURCHASER
INFORMATION
[ ]
|
Individual [Mr.] [Mrs.] [Ms.] [Dr.]
|
(New
IRA)
|
(IRA
Rollover)
|
First
Name
|
Middle
Initial
|
Last
Name
|
Date
of Birth
|
Social
Security Number
|
ID
Type: (circle one) No.
|
Place
Issued
|
Date
Issued
|
Driver’s
License
Passport
Other:
|
|
Date
Expires
|
[ ] Joint
Tenant [Mr.] [Mrs.] [Ms.] [Dr.]
First
Name
|
Middle
Initial
|
Last
Name
|
Date
of Birth
|
Social
Security Number
|
ID
Type: (circle one) No.
|
Place
Issued
|
Date
Issued
|
Driver’s
License
Passport
Other:
|
|
Date
Expires
|
[ ] Gift/Transfer to Minor
Custodian’s
Name (one only)
|
Minor’s
Social Security Number
|
Trustee
Accounts Only: Names of all Trustees Required by Trust Agreement to
Sell/Purchase Notes
Date
of Trust
|
Name
of Trust
|
Tax
Identification Number
|
PA
FLEX-CUSTOMER-1
2.
|
MAILING
ADDRESS
|
Email
address:
__________________________________________
|
Street
Address
|
Apt./Suite
Number
|
City
|
State
|
Zip
Code
|
If
PO Box is mailing address, include a physical location address.
( )
|
( )
|
[ ]
U.S.
|
[ ]
Other
|
Business
Telephone
|
Home
Telephone
|
Citizenship
|
Indicate
Country
|
( )
|
( )
|
|
Fax
Number
|
Cell
Phone Number
|
3. FLEX SERIES NOTE(S) PURCHASED Please indicate in the space provided, the amount to be purchased, the category, term and interest rate
Amount
Purchased
|
Categories |
Maturity
(Term)
|
Interest Rate | ||||||
$_____________
|
Flex
25 Note
|
84mos.
|
%
|
||||||
$_____________
|
Flex
50 Note
|
84mos.
|
%
|
||||||
$_____________
|
Flex
100 Note
|
84mos.
|
%
|
||||||
$_____________
|
Flex
250 Note
|
84mos.
|
%
|
||||||
$_____________
|
Total Amount Purchased Make check payable to “Ministry Partners Investment Company, LLC.” |
4.
PAYMENT OPTIONS
[ ]
|
Reinvestment
Option. Reinvest monthly all interest payments from the
respective series of Notes in Notes of the same
Series.
|
[ ]
|
Periodic Payment
Option. I elect to receive all payments of interest on
my
Note: ___Monthly; ___Quarterly; ___Semi-annually; ___Annually
|
Check only one option
- If no option is selected, interest will be paid monthly. All
principal and interest payments will be mailed to the Holder at the address
stated above.
5.
SIGNATURES
By
executing this PURCHASE APPLICATION I adopt and agree to be bound by the terms
and conditions of the Indenture. I am of legal age. Sign
below exactly as printed in Section 1 above. For joint registration,
both registered owners must sign. Under penalty of perjury, I certify with my
signature below that the number shown in Section 1 above is my correct taxpayer
identification number. Also, I have not been notified by the Internal
Revenue Service that I am currently subject to backup withholding unless
otherwise indicated.
Signature
|
Print
Name
|
Date
|
Signature
|
Print
Name
|
Date
|
MINISTRY
PARTNERS INVESTMENT COMPANY, LLC (“MPIC”) IS OWNED BY CREDIT UNIONS. SECURITIES
PRODUCTS OFFERED BY MPIC ARE NOT DEPOSITS OF, OBLIGATIONS OF, OR GUARANTEED BY
ANY CREDIT UNION OR OTHER PERSON. THEY ARE NOT INSURED OR GUARANTEED BY THE
NCUSIF OR ANY OTHER GOVERNMENT AGENCY OR PRIVATE INSURER. THESE
PRODUCTS INVOLVE INVESTMENT RISK, INCLUDING POSSIBLE LOSS OF
PRINCIPAL.
PA
FLEX-CUSTOMER-2
EXHIBIT
E
MINISTRY
PARTNERS INVESTMENT COMPANY, LLC
CORPORATION
PURCHASE APPLICATION
CLASS
A NOTES
FLEX
SERIES
Send completed Purchase Application
to:
MINISTRY
PARTNERS INVESTMENT COMPANY, LLC
915
West Imperial Highway, Suite 120
Brea,
CA 92821
As
required by the USA PATRIOT ACT, IMPORTANT INFORMATION ABOUT PROCEDURES FOR
OPENING A NEW ACCOUNT. Federal law requires all financial
institutions to obtain, verify and record information that identifies each
person who opens an account. What this means for
you: When you purchase a note, we will ask for your name,
address, date of birth and other information that will allow us to identify
you. We thank you for your understanding and cooperation.
1.
PURCHASER INFORMATION
[ ] Corporate, Partnership,
Trust or Other Organization
Exact
Name of Corporation, Partnership or Other Organization
|
Tax
Identification Number
|
Trustee Accounts Only: Names of all Trustees Required by Trust Agreement to Sell/Purchase Notes
Date
of Trust
|
Name
of Trust
|
Tax
Identification Number
|
Documents
required for
verification Circle one and include a copy with
application:
Articles of Incorporation
Signature pages of Trust
Partnership
Agreement Legal
status: __________________________________________
Charter
Other:
2.
MAILING
ADDRESS Email
address: __________________________________________
Street
Address
|
Apt./Suite
Number
|
City
|
State
|
Zip
Code
|
If
PO Box is mailing address, include a physical location
address.
( )
|
( )
|
[ ]
U.S.
|
[ ]
Other
|
Business
Telephone
|
Home
Telephone
|
Citizenship
|
Indicate
Country
|
( )
|
( )
|
|
Fax
Number
|
Cell
Phone Number
|
PA
FLEX-CORPORATION-1
3.
FLEX
SERIES NOTE(S) PURCHASED Please indicate in
the space provided, the amount to be purchased, the category, term and interest
rate
Amount
Purchased
|
Categories |
Maturity
(Term)
|
Interest Rate | ||||||
$_____________
|
Flex
25 Note
|
84mos.
|
%
|
||||||
$_____________
|
Flex
50 Note
|
84mos.
|
%
|
||||||
$_____________
|
Flex
100 Note
|
84mos.
|
%
|
||||||
$_____________
|
Flex
250 Note
|
84mos.
|
%
|
||||||
$_____________
|
Total Amount Purchased Make check payable to “Ministry Partners Investment Company, LLC.” |
4.
PAYMENT OPTIONS
[ ]
|
Reinvestment
Option. Reinvest monthly all interest payments from the
respective series of Notes in Notes of the same
Series.
|
[ ]
|
Periodic Payment
Option. I elect to receive all payments of interest on
my
Note: ___Monthly; ___Quarterly; ___Semi-annually; ___Annually
|
Check only one option
- If no option is selected, interest will be paid monthly. All
principal and interest payments will be mailed to the Holder at the address
stated above.
5.
SIGNATURES
By
executing this PURCHASE APPLICATION I adopt and agree to be bound by the terms
and conditions of the Indenture. I am of legal age. Sign
below exactly as printed in Section 1 above. For joint registration,
both registered owners must sign. Under penalty of perjury, I certify with my
signature below that the number shown in Section 1 above is my correct taxpayer
identification number. Also, I have not been notified by the Internal
Revenue Service that I am currently subject to backup withholding unless
otherwise indicated.
Signature
|
Print
Name
|
Date
|
SS#
Signature
|
Print
Name
|
Date
|
SS#
For
corporations, trusts or partnerships: We hereby certify that each of the persons
listed below has been duly elected, is now legally holding the office set forth
opposite his/her name, and has the authority to execute this PURCHASE
APPLICATION.
Signature
- President, Trustee, General Partner or
(Title)
|
Print
Name
|
Date
|
Signature
- Co-owner, Secretary of Corporation, Co-Trustee
(other)
|
Print
Name
|
Date
|
MINISTRY
PARTNERS INVESTMENT COMPANY, LLC (“MPIC”) IS OWNED BY CREDIT UNIONS. SECURITIES
PRODUCTS OFFERED BY MPIC ARE NOT DEPOSITS OF, OBLIGATIONS OF, OR GUARANTEED BY
ANY CREDIT UNION OR OTHER PERSON. THEY ARE NOT INSURED OR GUARANTEED BY THE
NCUSIF OR ANY OTHER GOVERNMENT AGENCY OR PRIVATE INSURER. THESE
PRODUCTS INVOLVE INVESTMENT RISK, INCLUDING POSSIBLE LOSS OF
PRINCIPAL.
PA
FLEX-CORPORATION-2
EXHIBIT
E
MINISTRY
PARTNERS INVESTMENT COMPANY, LLC
CUSTOMER PURCHASE
APPLICATION
CLASS
A NOTES
VARIABLE
SERIES
Send completed Purchase Application
to:
MINISTRY
PARTNERS INVESTMENT COMPANY, LLC
915
West Imperial Highway, Suite 120
Brea,
CA 92821
1. PURCHASER
INFORMATION
As
required by the USA PATRIOT ACT, IMPORTANT INFORMATION ABOUT PROCEDURES FOR
OPENING A NEW ACCOUNT. Federal law requires all financial
institutions to obtain, verify and record information that identifies each
person who opens an account. What this means for
you: When you purchase a note, we will ask for your name,
address, date of birth and other information that will allow us to identify
you. We thank you for your understanding and cooperation.
1. PURCHASER
INFORMATION
[ ]
|
Individual [Mr.] [Mrs.] [Ms.] [Dr.]
|
(New
IRA)
|
(IRA
Rollover)
|
First
Name
|
Middle
Initial
|
Last
Name
|
Date
of Birth
|
Social
Security Number
|
ID
Type: (circle one) No.
|
Place
Issued
|
Date
Issued
|
Driver’s
License
Passport
Other:
|
|
Date
Expires
|
[ ] Joint
Tenant [Mr.] [Mrs.] [Ms.] [Dr.]
First
Name
|
Middle
Initial
|
Last
Name
|
Date
of Birth
|
Social
Security Number
|
ID
Type: (circle one) No.
|
Place
Issued
|
Date
Issued
|
Driver’s
License
Passport
Other:
|
|
Date
Expires
|
[ ] Gift/Transfer to Minor
Custodian’s
Name (one only)
|
Minor’s
Social Security Number
|
Trustee
Accounts Only: Names of all Trustees Required by Trust Agreement to
Sell/Purchase Notes
Date
of Trust
|
Name
of Trust
|
Tax
Identification Number
|
PA
VARIABLE-CUSTOMER-1
2.
|
MAILING
ADDRESS
|
Email
address:
__________________________________________
|
Street
Address
|
Apt./Suite
Number
|
City
|
State
|
Zip
Code
|
If
PO Box is mailing address, include a physical location address.
( )
|
( )
|
[ ]
U.S.
|
[ ]
Other
|
Business
Telephone
|
Home
Telephone
|
Citizenship
|
Indicate
Country
|
( )
|
( )
|
|
Fax
Number
|
Cell
Phone Number
|
3.
VARIABLE SERIES NOTE(S)
PURCHASED Please indicate in the space provided, the amount to
be purchased, the category, term and interest rate
Amount
Purchased
|
Categories |
Maturity
(Term)
|
Interest Rate | ||||||
$_____________
|
Variable
10 Note
|
mos.
|
%
|
||||||
$_____________
|
Variable
25 Note
|
mos.
|
%
|
||||||
$_____________
|
Variable
50 Note
|
mos.
|
%
|
||||||
$_____________
|
Variable
100 Note
|
mos.
|
%
|
||||||
$_____________
|
Variable 250 Note |
mos.
|
%
|
||||||
$_____________
|
Total Amount Purchased Make check payable to “Ministry Partners Investment Company, LLC.” |
4.
PAYMENT OPTIONS
[ ]
|
Reinvestment
Option. Reinvest monthly all interest payments from the
respective series of Notes in Notes of the same
Series.
|
[ ]
|
Periodic Payment
Option. I elect to receive all payments of interest on
my
Note: ___Monthly; ___Quarterly; ___Semi-annually; ___Annually
|
Check only one option
- If no option is selected, interest will be paid monthly. All
principal and interest payments will be mailed to the Holder at the address
stated above.
5.
SIGNATURES
By
executing this PURCHASE APPLICATION I adopt and agree to be bound by the terms
and conditions of the Indenture. I am of legal age. Sign
below exactly as printed in Section 1 above. For joint registration,
both registered owners must sign. Under penalty of perjury, I certify with my
signature below that the number shown in Section 1 above is my correct taxpayer
identification number. Also, I have not been notified by the Internal
Revenue Service that I am currently subject to backup withholding unless
otherwise indicated.
Signature
|
Print
Name
|
Date
|
Signature
|
Print
Name
|
Date
|
MINISTRY
PARTNERS INVESTMENT COMPANY, LLC (“MPIC”) IS OWNED BY CREDIT UNIONS. SECURITIES
PRODUCTS OFFERED BY MPIC ARE NOT DEPOSITS OF, OBLIGATIONS OF, OR GUARANTEED BY
ANY CREDIT UNION OR OTHER PERSON. THEY ARE NOT INSURED OR GUARANTEED BY THE
NCUSIF OR ANY OTHER GOVERNMENT AGENCY OR PRIVATE INSURER. THESE
PRODUCTS INVOLVE INVESTMENT RISK, INCLUDING POSSIBLE LOSS OF
PRINCIPAL.
PA
VARIABLE-CUSTOMER-2
EXHIBIT
E
MINISTRY
PARTNERS INVESTMENT COMPANY, LLC
CORPORATION PURCHASE
APPLICATION
CLASS
A NOTES
VARIABLE
SERIES
Send completed Purchase Application
to:
MINISTRY
PARTNERS INVESTMENT COMPANY, LLC
915
West Imperial Highway, Suite 120
Brea,
CA 92821
As
required by the USA PATRIOT ACT, IMPORTANT INFORMATION ABOUT PROCEDURES FOR
OPENING A NEW ACCOUNT. Federal law requires all financial
institutions to obtain, verify and record information that identifies each
person who opens an account. What this means for
you: When you purchase a note, we will ask for your name,
address, date of birth and other information that will allow us to identify
you. We thank you for your understanding and cooperation.
1.
PURCHASER INFORMATION
[ ] Corporate, Partnership,
Trust or Other Organization
Exact
Name of Corporation, Partnership or Other Organization
|
Tax
Identification Number
|
Trustee Accounts Only: Names of all Trustees Required by Trust Agreement to Sell/Purchase Notes
Date
of Trust
|
Name
of Trust
|
Tax
Identification Number
|
Documents
required for
verification Circle one and include a copy with
application:
Articles of Incorporation
Signature pages of Trust
Partnership
Agreement Legal
status: __________________________________________
Charter
Other:
2.
MAILING
ADDRESS Email
address: __________________________________________
Street
Address
|
Apt./Suite
Number
|
City
|
State
|
Zip
Code
|
If
PO Box is mailing address, include a physical location
address.
( )
|
( )
|
[ ]
U.S.
|
[ ]
Other
|
Business
Telephone
|
Home
Telephone
|
Citizenship
|
Indicate
Country
|
( )
|
( )
|
|
Fax
Number
|
Cell
Phone Number
|
PA
VARIABLE-CORPORATION-1
3.
VARIABLE
SERIES NOTE(S) PURCHASED Please indicate in
the space provided, the amount to be purchased, the category, term and interest
rate
Amount
Purchased
|
Categories |
Maturity
(Term)
|
Interest Rate | ||||||
$_____________
|
Variable
10 Note
|
mos.
|
%
|
||||||
$_____________
|
Variable
25 Note
|
mos.
|
%
|
||||||
$_____________
|
Variable
50 Note
|
mos.
|
%
|
||||||
$_____________
|
Variable
100 Note
|
mos.
|
%
|
||||||
$_____________
|
Variable 250 Note |
mos.
|
%
|
||||||
$_____________
|
Total Amount Purchased Make check payable to “Ministry Partners Investment Company, LLC.” |
4.
PAYMENT OPTIONS
[ ]
|
Reinvestment
Option. Reinvest monthly all interest payments from the
respective series of Notes in Notes of the same
Series.
|
[ ]
|
Periodic Payment
Option. I elect to receive all payments of interest on
my
Note: ___Monthly; ___Quarterly; ___Semi-annually; ___Annually
|
Check only one option
- If no option is selected, interest will be paid monthly. All
principal and interest payments will be mailed to the Holder at the address
stated above.
5.
SIGNATURES
By
executing this PURCHASE APPLICATION I adopt and agree to be bound by the terms
and conditions of the Indenture. I am of legal age. Sign
below exactly as printed in Section 1 above. For joint registration,
both registered owners must sign. Under penalty of perjury, I certify with my
signature below that the number shown in Section 1 above is my correct taxpayer
identification number. Also, I have not been notified by the Internal
Revenue Service that I am currently subject to backup withholding unless
otherwise indicated.
Signature
|
Print
Name
|
Date
|
SS#
Signature
|
Print
Name
|
Date
|
SS#
For
corporations, trusts or partnerships: We hereby certify that each of the persons
listed below has been duly elected, is now legally holding the office set forth
opposite his/her name, and has the authority to execute this PURCHASE
APPLICATION.
Signature
- President, Trustee, General Partner or
(Title)
|
Print
Name
|
Date
|
Signature
- Co-owner, Secretary of Corporation, Co-Trustee
(other)
|
Print
Name
|
Date
|
MINISTRY
PARTNERS INVESTMENT COMPANY, LLC (“MPIC”) IS OWNED BY CREDIT UNIONS. SECURITIES
PRODUCTS OFFERED BY MPIC ARE NOT DEPOSITS OF, OBLIGATIONS OF, OR GUARANTEED BY
ANY CREDIT UNION OR OTHER PERSON. THEY ARE NOT INSURED OR GUARANTEED BY THE
NCUSIF OR ANY OTHER GOVERNMENT AGENCY OR PRIVATE INSURER. THESE
PRODUCTS INVOLVE INVESTMENT RISK, INCLUDING POSSIBLE LOSS OF
PRINCIPAL.
PA
VARIABLE-CORPORATION-2
No
dealer, sales person or other individual has been authorized to give any
information or make any representations other than those contained in this
Prospectus and, if given or made, such information or representation must
not be relied upon as having been authorized by the
Company. This Prospectus does not constitute an offer to sell,
or a solicitation of an offer to buy, the Notes offered hereby in any
jurisdiction where, or to any person to whom, it is unlawful to make an
offer or solicitation. Neither the delivery of this Prospectus nor any
sale made hereunder shall, under any circumstances, create an implication
that there has been any change in the affairs of the Company since the
date hereof or that the information contained herein is correct or
complete as of any time subsequent to the date hereof.
|
MINISTRY
PARTNERS
INVESTMENT
COMPANY,
LLC
$100,000,000
CLASS
A NOTES
PROSPECTUS
March
9, 2010
|
[Outside
Back Cover of Prospectus]
PART
II
INFORMATION
NOT REQUIRED IN THE PROSPECTUS
Item
24. Indemnification of Managers and Officers.
Registrant’s
Operating Agreement authorizes Registrant to indemnify its agents (including its
officers and managers to the fullest extent permitted under the California
Limited Liability Company Act). Registrant’s Operating Agreement generally
allows for indemnification of managers and officers against certain loss from
proceedings including threatened, pending or completed investigative,
administrative civil and criminal proceedings, provided such persons acted in
good faith and in a manner the person reasonably believed to be in the best
interests of Registrant or that the person had reasonable cause to believe to be
lawful.
Item
25. Other Expenses of Issuance and Distribution.
The
following is an itemized statement of expenses incurred in connection with this
Registration Statement. All such expenses will be paid by the
company.
Securities
and Exchange Commission Registration Fee
|
$
|
7,860
|
||
Accounting
and Legal Fees and Expenses
|
|
175,000
|
||
Printing
|
|
40,000
|
||
Blue
Sky Registration Fees
|
|
15,000
|
||
Miscellaneous
Expenses
|
|
12,140
|
||
TOTAL
|
$
|
250,000
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All of
the above items except the registration fee are estimates.
Item
26. Recent Sales of Unregistered Securities.
The
company from time to time sells debt securities on a negotiated basis to
ministries or individuals who have purchased notes from the company before
and/or are accredited persons within the meaning of Rule 501 under Regulation D.
For each of these notes, interest rates, terms and other conditions of the loan
were negotiated with the investor. Substantially all of these notes have a
maturity of less than 12 months. The company has relied upon the exemptions
under Regulation D and/or Section 4(2) of the 1933 Act in selling these
securities.
During
the period from January 1, 2009 to September 30, 2009, the company sold an
aggregate of approximately $5,640,442 of debt securities to a total of 17
different investors, all except 6 of whom were accredited investors within the
meaning of Regulation D. The company relied on the exemptions under 4(2),
Regulation D and/or Regulation S under the 1933 Act in making these
sales.
Through
September 30, 2009, the company made sales in a private placement offering of
146,522 shares of its common stock, 98,600 shares of its Class I Preferred
Stock, and 19,000 shares of its Class II Preferred Stock. All of the securities
were sold in units for cash except for 5,500 shares of the Class I Preferred
Stock, which were issued in exchange for 550 shares of outstanding Series A
Preferred Stock. These sales resulted in $13,569,572 in new equity financing for
the company. During this period, the company also sold 84,522 units, each unit
consisting of one share each of Class I Preferred Stock and common stock. The
initial 63,000 units sold included 63,000 shares of outstanding common stock
resold by Evangelical Christian Credit Union (“ECCU”) for its own benefit. The
company incurred no sales commissions or other underwriting costs. Securities
were sold for cash. The securities were sold to a total of twelve (12) state or
federal chartered credit unions and two (2) individuals. The sales of these
securities were made directly by the company. The company relied on the
exemptions under Section 4(2) and 4(6) of the Securities Act of 1933 in the
sales of these securities.
Part II,
Page 1
Item
27. Exhibits.
3.1
|
Articles
of Organization – Conversion of Ministry Partners Investment Company, LLC,
dated as of December 31, 2008 (1)
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3.2
|
Operating
Agreement of Ministry Partners Investment Company, dated as of December
31, 2008 (1)
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3.3
|
Plan
of Conversion of Ministry Partners Investment Corporation, dated September
18, 2008 (1)
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3.4
|
Series
A Preferred Unit Certificate of Ministry Partners Investment Company, LLC,
dated as of December 31, 2008 (1)
|
3.5
|
Articles
of Incorporation of Registrant (7)
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3.6
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Bylaws
of Registrant (7)
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3.7
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Certificate
of Amendment to Articles of Incorporation dated December 11, 2001
(8)
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3.8
|
Certificate
of Amendment to Bylaws dated August 17, 2006 (10)
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3.9
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Certificate
of Amendment to Bylaws dated August 17, 2006 (10)
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3.10
|
Certificate
of Determination of Class I Preferred Stock filed September 6, 2006
(10)
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3.11
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Amendatory
Certificate of Determination for Class I Preferred Stock filed October 26,
2006 (10)
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3.12
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Amendatory
Certificate of Determination for Class II Preferred Stock filed September
25, 2006 (10)
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3.13
|
Certificate
of Amendment to Articles of Incorporation dated October 30, 2007
(11)
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3.14
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Certificate
of Amendment to Bylaws dated October 30, 2007 (11)
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4.1
|
Supplemental
Agreement with Consent of Holders to Loan and Trust Agreement, dated
September 30, 2008, by and between Ministry Partners Investment
Corporation and U.S. Bank National Association (2)
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4.2
|
Agreement
of Resignation, Appointment and Acceptance, dated as of August 7, 2008,
among Ministry Partners Investment Corporation, King Trust Company, N.A.
and U.S. Bank National Association (2)
|
5.1
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Opinion of Rushall & McGeever
|
10.1
|
$10
Million Committed Line of Credit Facility and Security Agreement, dated
October 8, 2007 (3)
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10.2
|
$50
Million CUSO Committed Line of Credit Facility and Security Agreement,
dated October 8, 2007 (3)
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10.3
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Mortgage
Loan Purchase Agreement, dated October 30, 2007, between Evangelical
Christian Credit Union and Ministry Partners Funding, LLC
(4)
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10.4
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Mortgage
Loan Purchase Agreement, dated October 30, 2007, between Ministry Partners
Investment Corporation and Ministry Partners Funding, LLC
(4)
|
10.5
|
Loan,
Security and Servicing Agreement, dated October 30, 2007, by and among
Ministry Partners Funding, LLC, as Borrower, Fairway Finance Company, LLC,
as Lender, Evangelical Christian Credit Union, as Servicer, BMO Capital
Markets Corp., as Agent, U.S. Bank National Association, as Custodian and
Account Bank, and Lyon Financial Services, Inc., as Back-Up Servicer (4)
(6)
|
10.6
|
Promissory
Note, dated October 30, 2007, in the amount of $150,000,000 executed by
Ministry Partners Funding, LLC to and in favor of Fairway Finance Company,
LLC (4)
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Part II,
Page 2
10.7
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Custodial
Agreement, dated as of October 30, 2007, by and among Ministry Partners
Funding, LLC, as Borrower, Evangelical Christian Credit Union, as
Servicer, BMO Capital Markets Corp., as Agent, Lyon Financial Services,
Inc., as Back-Up Servicer, and U.S. Bank National Association, as
Custodian (4)
|
10.8
|
Collection
Account Control Agreement, dated as of October 30, 2007, by and among
Ministry Partners Funding, LLC, as Borrower, Evangelical Christian Credit
Union, as Servicer, BMO Capital Markets Corp., as Agent, and U.S. Bank
National Association, as Account Bank (4)
|
10.9
|
Reserve
Account Control Agreement, dated as of October 30, 2007, by and among
Ministry Partners Funding, LLC, as Borrower, BMO Capital Markets Corp., as
Agent, and U.S. Bank National Association, as Account Bank
(4)
|
10.10
|
Residential
Purchase Agreement, dated July 1, 2007 by and between Ministry Partners
Investment Corporation and Billy M. Dodson (5)
|
10.11
|
Employee
Lease and Professional Services Agreement, dated January 1, 2007, between
Ministry Partners Investment Corporation and Evangelical Christian Credit
Union (4)
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10.12
|
Lease
Agreement for Office Space, dated as of September 1, 2007, between
Ministry Partners Investment Corporation and Evangelical Christian Credit
Union (4)
|
10.13
|
Equipment
Lease, dated as of January 1, 2007, between Evangelical Christian Credit
Union and Ministry Partners Investment Corporation (4)
|
10.14
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ISDA
Master Agreement, dated as of October 22, 2007, between Ministry Partners
Funding, LLC and Bank of Montreal (4)
|
10.15
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CUSO
Line of Credit Facility Note and Security Agreement, dated May 14, 2008,
executed by Ministry Partners Investment Corporation in favor of Members
United Corporate Federal Credit Union (6)
|
10.16
|
Office
Lease, dated November 4, 2008, by and between Ministry Partners Investment
Corporation and ECCU (6)
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10.17
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Equipment
Lease, dated as of January 1, 2009 by and between Ministry Partners
Investment Company, LLC and ECCU (6)
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10.18
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Professional
Services Agreement, dated as of January 1, 2009 by and between Ministry
Partners Investment Company, LLC and ECCU (6)
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10.19
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ECCU
Subordination Agreement Dated April 20, 2005 (10)
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10.20
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ECCU
Loan Agreement Extension dated April 5, 2007 (10)
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10.21
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Waiver
by and among Ministry Partners Funding, LLC, Evangelical Christian Credit
Union and BMO Capital Markets Corp., effective as of May 5, 2009
(14)
|
10.22
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Mortgage
Loan Participation Purchase and Sale Agreement by and between Ministry
Partners Investment Company, LLC, and Western Federal Credit Union, dated
May 1, 2009 (15)
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10.23
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Omnibus
Amendment to Loan, Security and Servicing Agreement and Fee Agreement by
and among Ministry Partners Funding, LLC, Fairway Finance Company, LLC,
Evangelical Christian Credit Union, BMO Capital Markets Corp., U.S. Bank
National Association and Lyon Financial Services, Inc. (d/b/a U.S. Bank
Portfolio Services), effective as of June 5, 2009 (16)
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10.24
|
Waiver
by and among Ministry Partners Funding, LLC, Evangelical Christian Credit
Union and BMO Capital Markets Corp., effective as of July 15, 2009
(17)
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Part II,
Page 3
10.25
|
Loan
and Security Agreement by and between Ministry Partners Investment
Company, LLC, and Western Corporate Federal Credit Union, a federal
corporate credit union, dated November 30, 2009
(18)
|
10.26
|
Promissory
Note by and between Ministry Partners Investment Company, LLC, and Western
Corporate Federal Credit Union, a federal corporate credit union, dated
November 30, 2009 (18)
|
10.27
|
Payoff
and Bailee Letter entered into by and among Ministry Partners Funding,
LLC, and BMP Capital Markets Corp., as agent, Fairway Finance Company,
LLC, as lender, MPF, as borrower, Evangelical Christian Credit Union, as
servicer, Lyon Financial Services, Inc., d/b/a U.S. Bank Portfolio
Services, as back-up servicer, U.S. Bank National Association, as
custodian, and Western Corporate Federal Credit Union, as the replacement
lender, dated November 30, 2009 (18)
|
21.1
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List
of Subsidiaries (4)
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23.1
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Consent
of Rushall & McGeever (included in Exhibit 5.1
hereto)
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23.5
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Consent
of Hutchinson and Bloodgood
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25.1
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Powers
of Attorney (included on page II-7 of Registration
Statement)
|
25.2
|
Form
T-1 with exhibits (13)
|
(1)
|
Incorporated
by reference to the Current Report on Form 8-K filed by the Company on
December 22, 2008.
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(2)
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Incorporated
by reference to the Definitive Schedule 14C Information Statement filed by
the Company on September 8, 2008.
|
(3)
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Incorporated
by reference to the Report on Form 8-K filed by the Company on October 15,
2007 (Accession No. 0000944130-07-000031), as amended.
|
(4)
|
Incorporated
by reference to the Report on Form 10-KSB filed by the Company on April
11, 2008.
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(5)
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Incorporated
by reference to the Report on Form 10-QSB filed by the Company on November
16, 2007 (Accession No. 0001408651-07-000170), as
amended.
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(6)
|
Confidential
treatment requested for certain portions of this exhibit, which portions
are omitted and filed separately with the Securities and Exchange
Commission.
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(7)
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Incorporated
by reference to Registration Statement on Form SB-2 filed on
November 19, 1997
|
(Accession
No. 0000944130-97-000025), as amended.
|
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(8)
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Incorporated
by reference to Registration Statement on Form SB-2 filed on May 24,
2001
|
(Accession
No. 0000944130-01-500010), as amended.
|
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(9)
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Incorporated
by reference to Registration Statement on Form SB-2 filed on February 2,
2005
|
(Accession
No. 0000944130-05-000002), as amended.
|
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(10)
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Incorporated
by reference to Registration Statement on Form SB-2 filed on April 10,
2007
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(Accession
No. 0000944130-07-000066), as amended.
|
|
(11)
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Incorporated
by reference to the Report on Form 8-K filed on November 26,
2007
(Accession
No. 0001408651-07-000194).
|
(12)
|
Incorporated
by reference to the Report on Form 10-K filed by the Company on April 14,
2009 (Accession No. 000432093-09-000122).
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Part II,
Page 4
(13)
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Incorporated
by reference to Registration Statement on Form S-1 filed on February 2,
2008 (Accession No. 0001019687-08-000705).
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(14)
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Incorporated
by reference to Report on Form 8-K filed by the Company on May 12,
2009.
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(15)
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Incorporated
by reference to Report on Form 8-K filed by the Company on May 15,
2009.
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(16)
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Incorporated
by reference to Report on Form 8-K filed by the Company on June 17,
2009.
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(17)
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Incorporated
by reference to Report on Form 10-Q filed by the Company on August 14,
2009.
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(18)
|
Incorporated
by reference to Report on Form 8-K filed by the Company on December 4,
2009
|
Part II,
Page 5
Item
28. Undertakings
(a) Rule
415 Offering. The undersigned Registrant will:
(1) To
file, during any period in which it offers or sells securities, a post-effective
amendment to this registration statement to:
(i) Include
any prospectus required by section 10(a)(3) of the Securities Act;
(ii) Reflect
in the prospectus any facts or events which, individually, or together,
represent a fundamental change in the information in the registration statement.
Notwithstanding the foregoing any increase or decrease in volume of securities
offered (if the total dollar value of securities offered would not exceed that
which was registered) any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of prospectus filed with the
SEC pursuant to Rule 424(b) (§230.424(b) of this chapter) if, in the aggregate,
the changes in volume and price represent no more than a 20% change in the
maximum aggregate offering price set forth in the “Calculation of Registration
Fee” table in the effective registration statement; and
(iii) Include
any additional or changed material information on the plan of
distribution.
(2) For
determining liability under the Securities Act, treat each such post-effective
amendment as a new registration statement of the securities offered, and the
offering of the securities at that time to be the initial bona fide offering;
and
(3) File
a post-effective amendment to remove from registration any of the securities
that remain unsold at the end of the offering.
(4) That,
for the purpose of determining any liability under the Securities Act,
regardless of the underwriting method used to sell the securities to the
purchaser, if the securities are sold to a purchaser by means of any of the
following communications, the undersigned will be a seller to the purchaser and
will be considered to offer or sell such securities to such
purchaser:
a.
Any preliminary prospectus or prospectus of the undersigned relating to the
offering required to be filed pursuant to Rule 424;
b. Any
free writing prospectus relating to the offering prepared by or on behalf of the
undersigned or used or referred to by the undersigned;
c. The
portion of any other free writing prospectus relating to the offering containing
material information about the undersigned or its securities provided by or on
behalf of the undersigned; and
d. Any
other communication that is an offer in the offering made by the undersigned to
the purchaser.
Item 29.
Financial Statements.
Included in the Prospectus in Part I of
this Registration Statement.
Part II,
Page 6
SIGNATURES
In
accordance with the requirements of the Securities Act of 1933, as amended, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form S-1 /A and
authorized this registration statement to be signed on its behalf by the
undersigned, in the City of Brea, California, on the 9 th day of
March, 2010 .
MINISTRY
PARTNERS INVESTMENT COMPANY, LLC
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|||
|
By:
|
/s/ Mark G. Holbrook | |
Mark
G. Holbrook,
|
|||
Chairman
of the Board of Managers, Chief Executive Officer
|
|||
In
accordance with the requirements of the Securities Act of 1933, this
Registration Statement on Form S-1/A has been signed by the following persons in
the capacities and on the dates indicated:
Signature
|
Title
|
Date
|
/s/ Mark G.
Holbrook
Mark
G. Holbrook
|
Chairman
of the Board of Managers,
Chief
Executive Officer
|
March
9, 2010
|
/s/ Susan B.
Reilly
Susan
B. Reilly
|
Principal
Accounting Officer
|
March
9, 2010
|
/s/ Mark A.
Johnson
Mark
A. Johnson
by
Mark G. Holbrook, his attorney-in-fact
|
Manager
|
March
9, 2010
|
/s/ Van C.
Elliott
Van
C. Elliott
by
Mark G. Holbrook, his attorney-in-fact
|
Secretary,
Manager
|
March
9, 2010
|
/s/ Arthur G.
Black
Arthur
G. Black
by
Mark G. Holbrook, his attorney-in-fact
|
Manager
|
March
9, 2010
|
/s/ Shirley M. Bracken
Shirley
M. Bracken
by
Mark G. Holbrook, his attorney-in-fact
|
Manager
|
March
9, 2010
|
/s/ Juli Anne S.
Callis
Juli
Anne S. Callis
by
Mark G. Holbrook, his attorney-in-fact
|
Manager
|
March
9, 2010
|
/s/ Jeffrey T.
Lauridsen
Jeffrey
T. Lauridsen
by
Mark G. Holbrook, his attorney-in-fact
|
Manager
|
March
9, 2010
|
Part II,
Page 7
/s/ R. Michael Lee
R. Michael Lee
by
Mark G. Holbrook, his attorney-in-fact
|
Manager
|
March
9, 2010
|
/s/ Randolph P.
Shepard
Randolph P. Shepard
by
Mark G. Holbrook, his attorney-in-fact
|
Manager
|
March
9, 2010
|
/s/ Scott T.
Vandeventer
Scott T. Vandeventer
by
Mark G. Holbrook, his attorney-in-fact
|
Manager
|
March
9, 2010
|
Part II,
Page 8