UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



FORM 10-K



(Mark One)

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

For the fiscal year ended December 31, 2016



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

For the transition period from _________ to_________



Commission file number:  333-4028LA

 

MINISTRY PARTNERS INVESTMENT COMPANY, LLC

 (Exact name of small business issuer in its charter)

 



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

(Address of principal executive offices)

 

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



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



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





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



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



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



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



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



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





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



As of December 31, 2008 (the last date any sale or exchange was made of our Class A common units), the aggregate market value of the registrant’s Class A common units held by non‑affiliates was $1,809,572.   The registrant has sold no Class A common units within the past sixty days and there is no public market value for the registrant’s Class A common units.  The number of Class A common units outstanding, as of March 29, 2017, was 146,522.



DOCUMENTS INCORPORATED BY REFERENCE

 

None

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MINISTRY PARTNERS INVESTMENT COMPANY, LLC

FORM 10-K



TABLE OF CONTENTS











 

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



Certain statements in this report, other than purely historical information, including estimates, projections, statements relating to our business plans, objectives and expected operating results, and the assumptions upon which those statements are based, are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward‑looking statements are included with respect to, among other things, our current business plan, business strategy and portfolio management. These forward-looking statements generally are identified by the words “believe,” “project,” “expect,” “anticipate,” “estimate,” “intend,” “strategy,” “plan,” “may,” “should,” “will,” “would,” “will be,” “will continue,” “will likely result,” and similar expressions. Forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties which may cause actual results or outcomes to differ materially from those contained in the forward-looking statements. Important factors that we believe might cause such differences are discussed in the section entitled, “Risk Factors” in Part I, Item 1A of this Form 10-K or otherwise accompany the forward-looking statements contained in this Form 10-K. We undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise. In assessing all forward-looking statements, readers are urged to read carefully all cautionary statements contained in this Form 10-K.



MINISTRY PARTNERS ®, MINISTRY PARTNERS INVESTMENT COMPANY, LLC JOY IN INVESTING ®, the MINISTRY PARTNERS logo and design of a flower with two shaded leaves ® and MINISTRY PARTNERS SECURITIES ® are all trademarks or service marks owned by Ministry Partners Investment Company, LLC and registered with the U.S. Patent and Trademark Office.





PART I

 

Item 1.   BUSINESS

 

Our Company



We are a privately owned California limited liability company with 12 equity owners, 11 of whom are federal or state chartered credit unions and one of whom is the Asset Management Assistance Center of the National Credit Union Administration (“we”, “us”, “our” or the “Company”). We exist to help make evangelical ministries more effective by providing ministries with Biblically-based, value-driven financial services and by providing funding services to the credit unions who serve those ministries. We do this by investing in mortgage loans made to churches and ministries. These loans are typically originated by us and secured by church and church-related real property owned by and/or maintained for the benefit of evangelical churches or church-related organizations such as Christian schools and ministries.  When the Company was formed, substantially all of the mortgage loans in our loan portfolio were purchased from our largest equity investor, the Evangelical Christian Credit Union of Brea,

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California (“ECCU”), and ECCU acted as our underwriter and primary servicer for a significant portion of those loans.



In 2010, we developed the capability to originate and service loans ourselves.  Since that time, we have increased the proportion of our portfolio that is originated and serviced by us.  As of December 31, 2016, we owned a total of 157 mortgage loans and four unsecured loans, with a recorded balance, net of allowance for losses, of $144.2 million.  As of the date of this Report, we service 150 of these loans.  The average loan balance for our loan investments is $919 thousand and our loans have a weighted average life to maturity period of 6.4 years at December 31, 2016.  Substantially all of our business operations currently are conducted in California and, while we have more loan investments in California than in any other state, we own loan interests in 33 different states.



We were incorporated under California law on October 22, 1991 under the name Ministry Partners Investment Corporation and established as a credit union service organization, or ("CUSO"), by ECCU for the purpose of providing mortgage loans to evangelical churches and ministry organizations. Effective as of December 31, 2008, we converted our form of organization from a California corporation to a California limited liability company. This conversion was a statutory conversion authorized under Section 1150 of the California Beverly Killea Limited Liability Company 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.” Since the conversion became effective, we have been managed by a group of managers that carry out their duties similar to the role and function that the board of directors performed under our previous bylaws.  Operating like a board of directors, the managers have full, exclusive and complete discretion, power and authority to oversee the management of our affairs.  



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



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

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and conditions of a Loan and Security Agreement entered into by and between the Company and MPF dated December 31, 2014.



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



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



On July 11, 2013, MP Securities executed a new membership agreement with FINRA which authorized it to act on a fully disclosed basis with a clearing firm to expand its brokerage activities. In addition, on July 11, 2013, the State of California granted its approval for MP Securities to provide registered investment advisory services. Finally, on September 26, 2013, MP Securities entered into a clearing firm agreement with Royal Bank of Canada Dain Rauscher (RBC Dain), thereby enabling MP Securities to open brokerage accounts for its customers. On March 14, 2013, the Company received a resident license from the California Department of Insurance to act as an Insurance Producer under the name Ministry Partners Insurance Agency, LLC (MPIA).   MPIA has reached agreements with multiple insurance companies to offer their life and disability insurance products, as well as fixed and variable annuities.  MP Securities can now offer a broad scope of investment services that will enable it to better serve the Company’s clients and customers.



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



Our Business



We are a non-bank financial services company that conducts business on a national scope.  We were organized as a CUSO for the specific purpose of assisting evangelical Christian churches and organizations by providing financing for the acquisition, development and/or renovation of churches or church-related properties, and provide Christian investors the opportunity to

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participate in funding those projects.  As a CUSO, we perform these services for the benefit of our credit union equity members.



The religious loan market segment has grown dramatically over the years since our inception and both the size of the loans and the number of qualified borrowers in this sector has steadily increased. Prior to the 2008 global financial crisis that adversely affected real estate values in certain regions of the United States, the size of the church and ministry mortgage financing market in the United States was estimated to range between $20 billion and $40 billion annually.  While post-crisis estimates of the size of this market have been difficult to obtain, we believe that the demand for ministry loans originated and serviced by niche lenders to churches and ministries will continue to exceed available lending and financing sources for this sector. We base our belief on our past experience with making loans to this market segment and on information we have obtained through contact with sources in the industry.  We believe that the availability of lenders serving this market has been somewhat unpredictable as larger financial institutions expand, contract or vacate this niche market during periods of expansion or contraction.  As a financial services company that has specialized in assisting these organizations since we commenced operations in 1991, we believe that the lack of predictable financing sources for evangelical Christian churches and organizations presents us with a significant opportunity.  In addition, we believe that lenders that are active in the market for church loans appear to have tightened their credit standards.  As a result of improved market conditions, we have seen that the secondary market for church and ministry loans, including the sale of loan participation interests in mortgage loan investments we underwrite and originate, presents us with significant business opportunities.  We have begun to take advantage of those opportunities by selling participations in loans to credit unions, other CUSOs, foundations, and banks.    



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



Our general practice in past years has been to fund loan acquisitions and originations with borrowings under our credit facilities. We then repay borrowings on our credit facilities with proceeds from the sale of investor notes, mortgage loan prepayments and repayments, and from our operating income. Our ability to access capital to repay borrowings under our credit facilities is subject to variability based upon a number of factors, including volatility in the capital markets, our ability to demonstrate consistent earnings, regulatory constraints and limitations, the relative interest rates that we are prepared to pay for our investor debt obligations, the ability of our borrowers to access capital to repay or prepay their obligations to us, and our ability to sell our mortgage loan assets. Any occurrence that disrupts our ability to access capital from these sources may have a material adverse effect on our ability to grow our business, meet our

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commitments, and make distributions or payments to our equity owners and debt securities investors.



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



Our net earnings are generated from:

















During 2016, we (i) funded $42.7 million in loans, which represents the largest amount of origination activity in our history; (ii) earned $70 thousand in other income related to agreements reached with ECCU to provide lending and loan servicing capabilities; (iii) transferred one of our foreclosed assets to a joint venture where the asset can be developed for sale and sold our remaining foreclosed assets for a gain of $278 thousand; (iv) utilized the networking agreements reached in 2014 with ECCU and America’s Christian Credit Union (“ACCU”) to continue to grow our client base, which resulted in an increase in investor notes payable of $10.6 million and increased fee revenue earned by our wholly-owned, broker-dealer subsidiary, MP Securities by 31%; (v) reached an agreement with the NCUA to re-amortize our borrowings, resulting in an increase in monthly principal payments on our borrowings, but also moving the maturity date of the facility from 2018 to 2026, which gives us eight additional years of funding under the facility at a rate of 2.53%;  and (vi) continued to improve the efficiency of managerial and staffing resources and our technological capabilities to create efficiency for our lending and servicing

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operations as well as expanding the services we offer to credit unions to generate non-interest related fee income.    



Our net income of $922 thousand for 2016 primarily results from an increase in interest income related to our lending activity, and an increase in other income generated by the loan-related services we provide and the success of our broker-dealer/investment advisory firm in selling non-proprietary products and services.  Our lending activity was made possible by an increase in investor note sales facilitated by building relationships through MP Securities with credit unions and other Christian-oriented credit unions.  We also used loan participation sales throughout the year to fund loan originations, address liquidity needs and generate other income.  Our broker-dealer revenue increased through the sale of mutual funds and insurance products as well as the fees earned for providing investment advisory services to our clients.  Finally, we were able to eliminate the remaining foreclosed real estate assets from our balance sheet, which had the dual effect of decreasing the management and maintenance costs of the properties as well as earnings generated when we were able to sell such properties at a gain.  All of these gains were earned while keeping our operating expenses at approximately the same level as in 2015 and without incurring significant provisions for loan losses from our expanding loan portfolio.



Lending Activities



Loan Origination, Acquisition and Underwriting



Over the last several years, we have expanded our in-house staff, improved our operational systems and underwriting resources which has enabled us to expand our ability to originate, underwrite and service our mortgage loan investments.  From time to time, we also purchase mortgage loans and loan participation interests from other financial institutions.  When we acquire a mortgage loan or loan participation interest, we apply our internally developed underwriting criteria and loan acquisition policies and review the underwriting procedures carried out by the financial institution that is selling the loan or participation interest.  When we originate a loan, we rely entirely on our own underwriting capabilities and standards.  Typically, we receive an origination fee and loan processing fee at the inception of each loan. 



As a result of our increased focus on originating our own loans, we have originated $128.0 million in loans over the last four years.  As a result of our efforts to expand underwriting, servicing and loan administration services starting in 2010, the Company now has the capacity, capability and underwriting experience to originate and service all of our mortgage loan investments.   



Servicing



Our core processing system along with our loan administration personnel give us the capability to service loans for ourselves and other institutions.  As of December 31, 2016, we were servicing 150 loans out of a total of 161 loans in our portfolio, totaling approximately $135.0 million in loan principal outstanding, net of participations sold.  These loans totaled approximately $177.1 million in gross loan principal balance outstanding at December 31, 2016. 

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By originating our own loans and servicing our own portfolio, we have reduced total servicing costs while earning additional lending and servicing fees. 



Our servicing capability also represents the operational foundation of our loan participation strategy, which will enable us to produce recurring servicing revenue from loan participations sold. We sold participations in 22 loans during the year ended December 31, 2016 for an aggregate amount totaling $14.3 million, which resulted in $135 thousand in gains on loan sales.  For the year ended December 31, 2015, we sold participation interests in 8 loans totaling $6.0 million thereby generating $49 thousand in income.  As of December 31, 2016, we serviced $39.9 million in loan participations sold to other financial institutions.  Our technology platform enables us to process, record, transmit and account for all financial and operational data for the benefit of other credit unions, finance lenders, churches, financial institutions and investors. With these additional capabilities, we believe we will be able to continue to expand our loan servicing capabilities. 



In the past, we have purchased loans from other credit unions, primarily ECCU.  Based upon ECCU’s experience in underwriting and servicing church and ministry related mortgage loans, we have entered into a servicing agreement with ECCU for some of our mortgage loan investments.  As of December 31, 2016, ECCU was servicing nine loans for us, totaling approximately $11.2 million in loan principal outstanding.  As of December 31, 2016, we also own approximately $1.8 million in mortgage loan investments which are being serviced by ACCU, a Glendora, California based credit union.



Types of Loans



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

Permanent Loans



We acquire or originate mortgage loans that may have an adjustable interest rate or fixed rate.  The term for a mortgage loan may not exceed 30 years and the maximum loan to value ratio may not exceed 90% without approval from our Board of Managers. Subsequent to the funding of a loan, the loan to value ratio may increase beyond 90% as the real estate market fluctuates and we receive new valuations of the loan’s collateral. According to our loan policy, the maximum weighted average combined loan to value ratio for all loans in our portfolio secured by real property is 80%. Management monitors the loan to value ratios of loans in our portfolio. Our standard loan investments have ten year maturities with a rate adjustment after five years.



Construction Loans



Construction loans may be made to finance the construction or restoration of facilities for schools, worship facilities or ministry related purposes.  These loans normally will have a final maturity that will not exceed ten years, with a construction draw period that will run from nine to 18 months.  In most instances, construction loans are interest-only on the outstanding balance

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drawn for construction.  The interest-only period lasts until the loan converts to a commercial real estate loan.  Under our Church and Ministry Loan Policy, the maximum loan to value ratio for a construction loan is 75% of the completed value of the collateral.  Due to an increase in opportunities to fund church construction loans, we have increased our construction lending activity over the last two years.  As of December 31, 2016, we had $11.8 million of construction loans outstanding and $2.1 million in unfunded construction loan commitments.  We anticipate a significant portion of our outstanding construction loans to be completed in early 2017, when they will convert to commercial real estate loans.  As of December 31, 2015, we had $1.9 million of construction loans outstanding and $5.1 million in unfunded construction loan commitments.



Participation Interests



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



Due to our enhanced ability to originate and service our own loans, our investment in loan participations has been significantly reduced.  We have not purchased a loan or a loan participation interest since 2013.  As of December 31, 2016, approximately $10.8 million, or 7% of our total loan portfolio, consisted of loan participations we purchased from other financial institutions, including ECCU.  For the year ended December 31, 2015, approximately $12.4 million, or 9% of our total loan portfolio, consisted of loan participations we purchased from other financial institutions.



Line of Credit



We may make line of credit arrangements available to borrowers to meet their temporary working capital needs.  The term of such arrangements typically will not exceed one year and will provide for minimum interest payments during the term of the loan.  As of December 31, 2016, we had $75 thousand in unfunded line of credit commitments as compared to $155 thousand in unfunded line of credit commitments at December 31, 2015.



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Letters of Credit



Under our Church and Ministry Loan Policy, we are authorized to issue letters of credit granting the person named in the letter the right to demand payment from us for up to a specified amount provided the conditions set out in the letter are met.  We require that a letter of credit be fully secured by funds on deposit or restricted funds on a line of credit with a draw period on the line of credit that meets or exceeds the draw period on the letter of credit.  As of December 31, 2016, we had $686 thousand in outstanding letter of credit commitments compared to $1.1 million as of December 31, 2015.



Our Loan Policies



Our managers establish our loan policies and review them periodically and, from time to time, have authorized designated loan officers and our President to make loans within certain limits established by our managers.  Our managers adopted a Church and Ministry Loan Policy to support our expanded levels of acquisition and origination of loans and also appointed a Credit Review Committee to review and carry out our loan policy.  The Credit Review Committee may approve loans up to 25% of our tangible net worth or 5% of our aggregate loan portfolio, whichever is less.  For loans exceeding the threshold, our managers have established a Loan Committee that reviews our loans and loan requests which exceed certain prescribed limits under our loan policies.   Upon approval, we issue a written loan commitment to the applicant that specifies the material terms of the loan.  Any loan exceeding 50% of our tangible net worth, or 7% of our total loan portfolio, whichever is less, must be recommended by the Credit Review Committee and approved by the Board of Managers prior to funding.  For any loan participation interest we acquire, the aggregate amount of such interest may not exceed 15% of our total net worth.



Our Mortgage Loan Investment Standards



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









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















As of December 31, 2016 and 2015, respectively, we were in compliance with our policy on aggregate concentration limits for construction loans, junior liens and total unsecured loans. Our portfolio included 19 loans and 22 loans at December 31, 2016 and 2015, respectively, that exceeded our policy limits for loans made to one borrower.  All of the aforementioned loans

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exceeding policy limits were originated or purchased in compliance with our policy, which allows our managers or the Company’s Credit Review Committee to approve certain exceptions.



Of the 19 loans that were out of compliance at December 31, 2016, 10 were approved as exceptions by our Board of Managers or our Credit Review Committee.  The remaining nine loans migrated out of compliance solely due to a decline in our tangible net worth since the loans were purchased or originated, which is primarily due to increased provisions for loan losses and losses taken on our foreclosed assets in prior years.  At December 31, 2016 we had one unsecured loan that exceeded our policy limit.  This loan was participated to another financial institution.  We were still waiting to collect the funds from the participating financial institution at the end of the year.  Once these funds were collected in January 2017, the net balance of the loan brought it in compliance with our policy. 



We believe the risk presented by the loans that have migrated out of compliance with our policy on limiting loans to a single borrower which exceed 25% of our tangible net worth will be mitigated by focusing on efforts to successfully manage the impaired loans in our portfolio.  Over the past several years, our lending team has placed an increased focus on originating small loans in addition to large loans, and plans to continue to originate a mix of loan sizes.  The average outstanding balance of loans receivable in our portfolio has decreased from $1.1 million at December 31, 2013 to $919 thousand at December 31, 2016.  We have also used loan participation sales to reduce the risk of originating relatively large loans and have sought to include credit unions located in the borrower’s local community to serve as the credit union of record when that credit union holds at least a 10% interest in the loan. 



All loan applicants must complete an application and provide suitable documentation demonstrating an ability to repay the loan and submit this application to our offices in Brea, California.  For new loans greater than $500,000, we or our designated representative will conduct a site visit to inspect the collateral and conduct our due diligence review of the applicant.  Each loan must meet our Church Ministry and Loan Policy guidelines.



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



Our Loan Investment Portfolio



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

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institutions. Generally, the percentage of our ownership interest in our mortgage loans has ranged from 1% to 100%. Joint ownership allows us to participate in larger loans and in a greater number of loans than we would otherwise be able to afford, and therefore allows us to achieve greater diversification for our mortgage loan investment portfolio.



Our cash and loan investments as of December 31, 2016 and 2015 are set forth below:





Set forth below are the amounts we invested in each loan category for the years ended December 31, 2016 and 2015, respectively:





At December 31, 2016, we had no loans that are considered individually material (10% of net assets or greater) to our financial operations.



Our Net Interest Income and Interest Margin



Our earnings depend largely upon the difference between the income we receive from interest‑earning assets, which are principally mortgage loan investments and interest-earning accounts with other financial institutions, and the interest paid on our investor notes and lines of credit. This difference is net interest income. Net interest margin is net interest income expressed as a percentage of average total interest-earning assets.



Please see the discussion under Item 7. “Management Discussion and Analysis of Financial Condition −  Results of Operations” for information regarding our historical interest costs, interest income and yields realized on our mortgage loan investments for the years ended December 31, 2016 and 2015.



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Loan Maturities



The following table sets forth the future maturities of our gross mortgage loan portfolio at December 31, 2016:





Included in the table above are 124 adjustable rate loans.  These loans, totaling approximately $109.1 million, are due in 2021 or later, with the exception of one participation interest that matures in 2018.  All adjustable rate loans have one rate adjustment after five years.



Diversification of our Loan Portfolio



The following table sets forth, as of December 31, 2016 and 2015, each state in which: (i) the unpaid balance of our mortgage loans was 10% or more of the total unpaid balance of our loan portfolio; and (ii) the number of our loans was 10% or more of our total loans:





Our Loan Renewal Policies 



We offer to renew, re-underwrite or otherwise continue (i.e. renew) a maturing loan on a case-by-case basis, based on the terms of the maturing loan, the credit status of the borrower and our

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liquidity needs at the time. Prior to maturity, each loan is analyzed and re-underwritten to determine if it is a possible rollover candidate. Management then reviews our liquidity needs and conditions in determining whether to recommend to our Credit Review Committee to renew the loan.



Sale of Loan Participation Interests



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



During 2016, we entered into loan participation agreements to sell $14.3 million of loan participations to several credit unions.    During 2015, we entered into loan participation agreements to sell $6.0 million of loan participations. 



Performance and Monitoring of our Loan Portfolio



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



As of December 31, 2016, nine of our 161 mortgage loan investments are serviced by ECCU and subject to ECCU’s collection policies.  Under the terms of our servicing agreement with ECCU, we monitor each mortgage loan or participation interest we acquire to ensure full payments are received as scheduled.  We also receive monthly reports from ECCU regarding our mortgage loan investments, including delinquent loan status reports.  For the loans that we service, we monitor payment receipts and delinquency.  We produce status reports on these loans similar to those which we receive from ECCU.  These status reports are included in monthly and quarterly reports management prepares for our Board of Managers.



Impaired Loans



An impaired loan is defined as a loan on which, based on current information and events, it is probable that we will be unable to collect the scheduled payments of principal and interest when due according to the contractual terms of the loan agreement. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Impaired loans include delinquent loans, loans on non-accrual status and all restructured loans, regardless of the

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loans’ interest accrual status. We use the terms “impaired loan” and “non-performing loan” interchangeably in the discussion below.



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



We "charge off" or "write off" a loan against our allowance or reserve for loan losses when we believe the uncollectability of the loan balance is confirmed. In most cases, this directly correlates to the completion of foreclosure proceedings on the collateral.  In 2015, we recorded $103 thousand in charge-offs against one impaired loan.  In 2016, we recorded $20 thousand in a partial charge-off against one impaired loan when we wrote down the principal balance of that loan as part of an agreement with the borrower.



Delinquent Loans



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



We report a mortgage loan as delinquent if it is 90 days or more in arrears. At December 31, 2016, 0.90% of our portfolio was delinquent.  At December 31, 2015, 0.78% of our loan portfolio was delinquent.  We have adopted a proactive approach in responding to delinquencies in our loan portfolio. For loans which we act as the lead lender, we make direct contact with the borrower within ten (10) days of an initial late payment. If the situation progresses to 30 days or more, we follow up with an onsite visit to discuss the borrower’s circumstances and how the borrower can bring the loan current.



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



Non-performing Loans 



The table below sets forth the amounts and categories of non-performing assets in our portfolio.  Loans are placed on non-accrual status when the collection of principal and/or interest becomes

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doubtful or other factors involving the loan or the borrower’s financial condition warrant placing the loan on non‑accrual status.  Non-accrual loans represent loans on which interest accruals have been discontinued.  Troubled debt restructuring arrangements (or “TDRs”) are loans which include renegotiated loan terms to assist borrowers who are unable to meet the original terms of their loans.  Such modifications may include a lower interest rate, an extension of the maturity date or reduction in accrued interest.  All TDRs (restructured loans) are initially placed on non-accrual status regardless of whether the loan was performing at the time it was restructured. During the past two years, there have been no material changes in our practices or policies governing how we handle a non-performing loan.

The following is a summary of our non-performing mortgage loans at December 31, 2016, and 2015, respectively (dollars in thousands):





   

The Company had ten and eight nonaccrual loans as of December 31, 2016 and 2015, respectively.  For the years ended December 31, 2016 and 2015, $468 thousand and $304 thousand, respectively, of gross interest income would have been recorded had the non-accrual loans been current in accordance with their original terms.  Interest in the amount of $5 thousand and $22 thousand, respectively, was included in income for the years ended December 31, 2016 and 2015 on non-accrual loans through the accretion of loan discount related to the net present value of cash flows.  We monitor our non‑performing loans on an ongoing basis as part of our loan review and work‑out process.  The potential risk of loss on these loans is evaluated by comparing the loan balance to the fair value of any underlying collateral for collateral-dependent loans, or the present value of projected future cash flows.  As of December 31, 2016 and 2015, the Company did not have any loans past due 90 days and still accruing.



Restructured Loans 



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



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In order to properly evaluate a potential restructure, when we receive a request for a modification or restructure, we evaluate the strength of the borrower’s financial condition, leadership of the pastoral team and board, developments that have impacted the church and its leadership team, local economic conditions, the value of the underlying collateral, the borrower’s commitment to sound budgeting and financial controls, whether there is a denominational guaranty of any portion of the indebtedness, debt service coverage for the borrower, availability of other collateral and any other relevant factors unique to the borrower.  While we have no written policy that establishes criteria for when a request for restructuring a loan will be approved, our Credit Review Committee reviews each request, solicits written reports and recommendations from management and summaries of the requests and actions taken by the Credit Review Committee are presented to the Company’s managers for their review at quarterly meetings throughout the year. 



The following table shows the number and balance of restructured loans in our mortgage loan portfolio, as well as the percentage of our total portfolio those loans represented and the amount of allowance for loan losses associated with restructured loans at December 31, (dollars in thousands):





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



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

Allowance for Loan Losses



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

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



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



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



If we restructure a loan, we establish an allowance for loan loss for that individual loan based on the difference between the net present value of the future receipt of cash payments from the restructured loan as compared to the net present value of cash flows which we would have received from the original loan, discounted at the original interest rate of the loan.  As time passes and the restructured loan performs according to its modified terms, the net present value of future cash flows of the restructured loan changes.  The change in the present value of cash flows attributable to the passage of time is reported as interest income.  If a loan is collateral-dependent, even if that loan has been restructured, we establish an allowance for loan loss based on the value of the collateral securing the loan less estimated costs to sell the collateral.



At December 31, 2016 and 2015, our allowance for loan losses was $1.9 and $1.8 million, respectively, or 1.27% and 1.31%, respectively, of our total loan portfolio.  The change in our allowance is due to several factors.  The first is that we were able to recover allowances based on the net present value difference of one of our restructured loans when we refinanced the loan at a market rate.  We no longer consider that loan impaired.  We also decreased specific reserves on several collateral-dependent loans when appraisals indicated that the value of the underlying collateral had risen above our net interest in the loan.  These decreases in our allowance were

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offset by additional specific reserves taken based on management’s estimates of decreases in the collateral values of several collateral-dependent loans as well as an increase in general reserves due to the growth of our loan portfolio.



Assessing the adequacy of our allowance for loan losses is inherently subjective as it requires us to make material estimates, including the amount and timing of future cash flows we expect to receive on impaired loans that may be susceptible to significant change.  In the opinion of management, the allowance, when taken as a whole, reflects all known and inherent credit losses in our mortgage loan portfolio as of December 31, 2016.



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



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



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



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



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



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

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Participations Junior Collateral Position.  This portfolio class consists of the participated loans for which we possess a lien on the underlying collateral that is superseded by another lien on the same collateral.  Loan participations in the junior collateral position loans have greater credit risk than wholly owned loans and participated loans where we hold a senior lien on the collateral.  The increased risk is the result of the factors presented above relating to both junior lien positions and participations.



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



Competition



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



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



Employees



Effective as of January 1, 2013, we entered into a staffing agreement with Automated Data Processing, Inc., which provides us with payroll and staffing services.  As of December 31, 2016, we had 20 full or part-time employees.  None of our employees are covered by a collective

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bargaining agreement, and we believe that we have an excellent relationship with our employees and staff.



Regulation



General



We are organized as a credit union service organization and, as a result, are subject to the regulations promulgated by the National Credit Union Administration (“NCUA”) that apply to CUSOs.  As a CUSO, we primarily serve the interests of our credit union equity holders and members of such credit unions.  We are also subject to various laws and regulations which govern: (i) credit granting activities; (ii) establishment of maximum interest rates; (iii) disclosures to borrowers and investors in our equity securities; (iv) secured transactions; (v) foreclosure, judicial sale and creditor remedies that are available to a secured lender; and (vi) the licensure requirements of mortgage lenders, finance lenders, brokers and financiers.



As a CUSO, we are limited in the scope of activities we may provide.  In addition, our federal credit union equity investors are permitted to invest in or lend to a CUSO only if the CUSO primarily serves credit unions, its membership or the membership of credit unions contracting with the CUSO.  While the NCUA lacks direct supervisory authority over our operations, our federal credit union equity owners are subject to regulations which govern the rules and conditions of an investment or loan they make or sell to a CUSO.  In addition, state chartered credit unions must follow their respective state’s guidelines which govern investments by a state chartered credit union.  Our equity owners that are regulated by the California Department of Financial Institutions (“DFI”) which is a part of the California Department of Business Oversight (“DBO”), in particular, must comply with DFI regulations that govern their investment in or loans they make to a CUSO.



Tax Status



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



Regulation of Mortgage Lenders



We conduct loan originating activities for churches and related ministry projects.  Many states regulate the investment in or origination of mortgage loans.  Under the California Finance Lender’s Law, no lender may engage in the business of providing services as a “finance lender” or “broker” without obtaining a license from the California Department of Business Oversight

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(“DBO”), unless otherwise exempt under the law.  We conduct our commercial lending activities under California Finance Lender License # 603F994.



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



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



Loan Brokerage Services



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



Environmental Issues Associated with Real Estate Lending

 

The Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA”), a federal statute, generally imposes strict liability on all prior and current “owners and operators” of sites containing hazardous waste. However, Congress acted to protect secured creditors by providing that the term “owner and operator” excludes a person whose ownership is limited to protecting its security interest in the site. Since the enactment of the CERCLA, this “secured creditor exemption” has been the subject of judicial interpretations which have left open the possibility that lenders could be liable for clean-up costs on contaminated property that they hold as collateral for a loan. To the extent that legal uncertainty exists in this area, all creditors that have made loans secured by properties with potential hazardous waste contamination (such as petroleum contamination) could be subject to liability for cleanup costs, which costs often

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substantially exceed the value of the collateral property.  In addition, state and local environmental laws, ordinances and regulations can also impact the properties underlying our mortgage loan investments.  An owner or control party of a site may also be subject to common law claims by third parties based on damages and costs resulting from environmental contamination emanating from a site.



Regulation of Financial Services



The financial services industry in the U.S. is subject to extensive regulation under federal and state laws.  The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (“Dodd-Frank Act”) was enacted on July 21, 2010.  The Dodd-Frank Act resulted in sweeping changes in the regulation of financial institutions and created a new Consumer Financial Protection Bureau and Financial Stability Oversight Council with authority to identify institutions and practices that might pose a systemic risk.  We continue to monitor and evaluate the impact the Dodd-Frank Act could have on our business and we believe that many of the provisions of the Act and regulations adopted thereunder will not have a material impact on our business and operations.  Certain provisions that have not been implemented, however, could affect our business and include, but are not limited to (i) the implementation of more stringent fiduciary standards for broker dealers resulting from a rule proposed and temporarily suspended by the U.S. Department of Labor (“DOL”) and potential establishment of a new self-regulatory organization for investment advisors.



Broker Dealer Registration



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



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

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MP Securities take into account in its computation of regulatory net capital liabilities the Company assumes as its parent entity.



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



Much of the regulation of broker-dealers in the U.S. has been delegated to self-regulatory organizations, principally FINRA and the securities exchanges.  FINRA adopts and amends rules (which are subject to approval by the SEC) for regulating the industry and conducts periodic examinations of member firms.  The SEC, FINRA and state securities administrators may conduct administrative proceedings that can result in censure, fine, suspension or expulsion of a broker-dealer, its officers or employees.



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



As a broker-dealer firm, MP Securities is subject to regulation regarding sales methods, use of advertising materials, arrangements with clearing firms or exchanges, record keeping, regulatory reporting, conduct of managers, officers and employees and supervision.  To the extent MP Securities solicits orders from customers, it will be subject to additional rules and regulations governing sales practices and suitability rules imposed on member firms.  MP Securities also acts as a selling agent for the Company’s privately offered debt securities.  Because MP Securities participates in the offer and sale of the Company’s publicly and privately offered debt securities, it is required to comply with FINRA’s filing requirements for these offerings.  We believe that MP Securities has fully complied with its filing obligations as required under applicable FINRA, SEC and state securities laws. 



Our wholly-owned subsidiary, MP Securities, is also required to maintain minimum net capital pursuant to rules imposed by FINRA.  In general, net capital is the net worth of the entity (assets

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



Regulation of Investment Advisers



On July 11, 2013, the State of California granted its approval for MP Securities to provide investment advisory services.  As a California registered investment advisory firm, MP Securities is required to develop and maintain compliance procedures, record keeping procedures, comply with custody rules, marketing and disclosure obligations.  MP Securities is also subject to the Investment Advisers Act of 1940, as amended, and related regulations.  The SEC is authorized to institute proceedings and impose fines and sanctions for violation of the Investment Advisers Act.  In addition to ensuring MP Securities’ compliance with federal and state laws governing its activities as a California registered investment advisory firm, the California DBO requires that representatives hired by MP Securities meet certain qualification requirements, including complying with certain testing requirements and examinations.



Our failure to comply with the requirements of the Investment Advisers Act, related SEC rules or regulations and provisions of the California Corporations Code and Code of Regulations could have a material adverse effect on us.  We believe we are in full compliance in all material aspects with SEC requirements and California laws and regulations.  As MP Securities hires new registered investment advisers, it will be required to monitor its compliance with SEC and DBO regulations.



Fiduciary Standards



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



With the issuance of the DOL fiduciary rule under ERISA, fiduciary status would be extended to investment advisors and investment professionals that have previously not been considered fiduciaries.  If deemed a fiduciary, the representative is held to a  strict standard requiring the representative to act solely in the interests of plan participants and beneficiaries.  With the adoption of the fiduciary standard, the representative is subject to personal liability to the ERISA

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plan for breaches of its actions under the rule.  Implementation of the DOL fiduciary rule, especially in the context of an IRA rollover handled by a MP Securities adviser or sales representative and subsequent investment of such funds in our proprietary debt securities, will require that we incur additional compliance costs, engage in further training initiatives,  undertake a  thorough review of available transactional exemptions from the rule, prepare agreements to comply with such rule and implement information technology revisions to our policies and procedures to comply with DOL’s fiduciary rule. 



On February 3, 2017, President Trump issued a Memorandum to DOL requesting that it analyze whether the fiduciary rule with an effective date of April 10, 2017 will adversely impact the ability of Americans to gain access to retirement information and financial advice and further requested that DOL prepare an updated economic and legal analysis of the impact of the rule.  By action taken on March 3, 2017, DOL requested comments as to whether to extend the applicability of the rule for sixty (60) days to June 9, 2017.  We are continuing to monitor developments with the DOL fiduciary rule and are undertaking efforts to move away from compensating MP Securities and its representatives when engaged in the sale of our debt securities on a sales commission basis to a level asset under management fee structure.  We believe that implementing this change will (i) more closely align the compensation program used by MP Securities for its representatives with the interests of investors in our debt securities; and (ii) reduce the offering costs of our securities offerings, thereby increasing the net proceeds received by the Company from the sale of such securities to further the Company’s strategic objectives.



Privacy Standards



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





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Item 1A

 RISK FACTORS



Our business, financial condition, and results of operations could be harmed by any of the following risks or other risks which have not been identified or which we believe are immaterial or unlikely.  The risks and uncertainties described below are not the only risks that may have a material, adverse effect on us.  Additional risks and uncertainties also could adversely affect our business, financial condition and results of operations.  The risks discussed below include forward-looking statements, and our actual results may differ substantially from those discussed in these forward-looking statements. Investors should carefully consider the risks described below in conjunction with the other information in this Form 10-K and the information incorporated by reference in this Form 10-K.



Risks Related to the Company



We may be unable to obtain sufficient capital to meet the financing requirements of our business.



Our ability to finance our operations and repay maturing obligations to our investors and credit facility lenders depends, to a substantial degree, on our ability to borrow money and raise capital from the sale of our debt securities. Our ability to borrow money and sell our debt securities is affected by a variety of factors including:



From 2008 until the fourth quarter of 2015, the size of the Company’s balance sheet steadily decreased as a result of deleveraging our assets, a reduction in the total amount of debt securities held on our balance sheet, and pay-downs and/or pay-offs of institutional credit facilities we have relied upon, in part, to fund our business. An event of default, lack of liquidity or a general deterioration in the economy that affects the availability of credit may increase our cost of funding, make it difficult for us to renew or restructure our credit facilities and obtain new lines of credit. Unexpected large withdrawals by investors that hold our debt securities that can negatively affect our overall liquidity.



We are actively expanding our methods of raising capital, including seeking financing from institutional lenders, selling participations in our mortgage loan investments, and expanding the sales of our debt securities to institutional, corporate, and retail investors. For the year ended December 31, 2016, total assets increased to 156.6 million as compared to $149.0 million at December 31, 2015.  If our strategy to raise additional capital through the sale of investor notes

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and debt securities is not viable, we will need to find alternative sources of borrowing to finance our operations. To the extent we are unable to raise the capital we need to implement our strategic objectives, we may have to sell assets, further deleverage our balance sheet, and reduce operational expenses, thereby reducing cash available to distribute to our equity and debt securities investors.



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



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



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



A significant percentage of the investors who purchase our debt securities purchase new notes after we repay their notes. Historically, a substantial proportion of our investors have purchased a new debt security from us when their notes mature. For the years 2008 – 2011, 76%, 79%, 57% and 73% of the investors that purchased a Class A Note had previously purchased one of our debt securities. When regulatory constraints were imposed on investments made in our Class 1 Notes in 2014, this rate fell to as low as 34% due to suitability and concentration of investment restrictions that limit the amount of our debt securities that may be purchased by an investor. For the years ended December 31, 2015 and 2016, our renewal rate climbed to 55% and 56%, respectively.  There is no assurance that historical patterns of repeat purchases made by investors will resume or that the recent improvement in our reinvestment rate will continue in the future. If the rate of repeat investments made by previous investors declines, our ability to maintain or grow our asset base could be impaired.



Some of our debt securities investors may be unable to purchase our Class 1 Notes due to FINRA’s investor suitability standards.



When handling sales of our investor notes, MP Securities and its sales advisors must comply with FINRA’s “know your customer” and “suitability” guidelines which are designed to ensure that investors make investments that are appropriate given the age, investment experience, net worth, need for liquidity and mix of investments owned by the investor. Some of our investors who have invested in our debt securities in the past may not be able to invest in our debt securities due to these regulatory constraints. If MP Securities is unable to offer such investors a suitable investment alternative, we could see a reduction in total amount of debt securities we

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hold and rely upon, in part, to fund our mortgage loan investments, thereby making it difficult to grow our balance sheet.



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



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



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



Our success is dependent, in part, upon our ability to effectively manage our balance sheet assets through the use of leverage. A significant amount of our assets are pledged as collateral for borrowings. Our Board of Managers has overall responsibility for our financing strategy. Leverage creates an opportunity for increased net income, but at the same time creates risks. For example, leveraging magnifies changes in our net worth. We will incur leverage only when we expect that it will enhance our investment returns. To the extent that we fail to meet our debt service obligations, we risk the loss of some or all of our assets to satisfy these debt obligations. There can be no assurance that we will be able to meet our debt service obligations and, to the extent that we cannot, we risk the loss of some or all of our assets, or a financial loss if we are required to liquidate assets at a commercially inopportune time. At December 31, 2016, we had $146.9 million of total debt obligations on our balance sheet. Of this amount, we owed $86.3 million under our institutional credit facilities and $60.6 million on our investor debt securities. Approximately 19%, 12% and 12% of our total debt obligations is payable in the years ending December 31, 2017, 2018 and 2019, respectively.



We have had fluctuating earnings.



As a mortgage financing lender, our profitability may be adversely affected by increasing provisions for losses relating to our loan portfolio. While we remained profitable during calendar years 2008 and 2009, we incurred net losses of $1.6 million and $1.0 million in calendar years 2010 and 2011, respectively, primarily due to increases in our allowance for loan losses and deleveraging of our balance sheet. With the successful refinancing of our primary credit facilities in November 2011 and improvement in the performance of our mortgage loan portfolio during 2012, we realized a profit of $417 thousand for 2012. We realized a profit of $592 thousand in 2013 as our mortgage loan portfolio performance remained stable and we were able to sell three of our foreclosed assets for a gain during the year. Decreases in the value of collateral securing our collateral dependent loans and decreases in the value of some of our foreclosed real estate owned assets primarily accounted for the $1.9 million loss reported for the year ended December 31, 2014.  Credits for loan losses and improvement in real estate values of some of our foreclosed assets resulted in net income of $357 thousand during the year ended December 31, 2015.  Due

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to the growth of investor note sales, loan originations, and broker-dealer fee income generated from non-proprietary products, we had net earnings of $922 thousand for the year ended December 31, 2016.  While we believe that Company has strategically focused its core mission on serving our credit union owners, and members they serve, and is implementing its dual strategy of generating positive net interest margins and expanding the fee income we generate from non-interest bearing mortgage loan investments, we can give no assurances that we will be able to achieve and maintain consistent profits over the next few years.



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



For the year ended December 31, 2016, we recorded provisions for loan losses of $113 thousand. We recorded a credit for loan losses of $524 thousand for the year ended December 31, 2015. Although we regularly evaluate our financial reserves to protect against future losses based on the probability and severity of the losses, there is no guarantee that our assessment of this risk will be adequate to cover any future potential losses.



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



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



At December 31, 2016 and December 31, 2015, our non-performing assets (which consist of impaired loans and other real estate owned) totaled $8.9 million and $15.4 million, respectively, or 5.7% and 10.3%  of our total assets at each date, respectively. At December 31, 2014, and December 31, 2013, our non-performing assets were $15.9 million and $22.2 million, respectively, or 10.3% and 14.0% of total assets, respectively. Nonperforming assets adversely affect our net income in the following ways:









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



Our credit facilities require us to maintain excess collateral and to meet the minimum collateralization ratio requirements on these loans, our free assets may be materially reduced and our ability to meet our debt obligations materially impaired.



Our $87.3 million credit facility refinancing transaction entered into with the National Credit Union Administration Board as Liquidating Agent of Members United Corporate Federal Credit Union (the “MU Credit Facility”)  and $23.5 million credit facility refinancing transaction entered into with the NCUA (the “WesCorp Credit Facility Extension”), each dated November 4, 2011, require that we secure the facility with mortgage loans having an aggregate unpaid balance exceeding the unpaid balance of the credit facility. If at any time, we fail to maintain the required minimum collateralization ratio, we will be required to deliver cash or qualifying mortgage loans in an amount sufficient to enable us to maintain the minimum collateralization ratio that must be met under our credit facilities.  We reached an agreement with the NCUA in March 2015 to provide for a more flexible minimum collateralization ratio.  Under our MU Credit Facility and WesCorp Credit Facility Extension individually, we are now required to maintain a minimum collateralization ratio of at least 110%. We are required to maintain a collective minimum collateralization ratio of at least 120% for the two credit facilities in total.  The NCUA retains all excess collateral until these credit facilities are repaid in full and any excess collateral will not be available to pay our other obligations including our secured notes, Class A Notes, Class 1 Notes and other debt securities until we repay or retire the MU Credit Facility and WesCorp Credit Facility Extension.  However, we do have the ability to pledge cash on a one-to-one basis if there is a temporary deficit in the loan collateral pledged under these facilities.



As of December 31, 2016, we had pledged approximately $79.4 million and $26.9 million of our mortgage loans to secure the MU Credit Facility and the WesCorp Credit Facility Extension, respectively.  As of the date of this Report, we are in compliance with this covenant.



Default under one credit facility will result in a default under our other credit facilities.



Our credit facilities and debt securities generally provide for cross-default provisions whereby a default under one agreement will trigger an event of default under other agreements, giving our lenders the right to declare all amounts outstanding under their particular credit agreement to be immediately due and payable, and enforce their rights by foreclosing on or otherwise liquidating

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collateral pledged under these agreements. For example, a default under one of our credit facilities would also constitute our default under our other credit facilities. Thus, to maintain these credit facilities, there cannot be a default under either one.



In the event of our default under our secured credit facilities, we could lose assets in excess of our assets pledged as collateral. 



In the event of a default under our MU Credit Facility or our WesCorp Credit Facility Extension, the lender has the right to foreclose on its collateral pursuant to the respective credit facility agreement and applicable commercial law. These laws do not require, and the permissible foreclosure procedures do not assure, that the collateral securing these loans will be sold or otherwise liquidated for an amount equal to its fair market value. Thus, in the event of foreclosure, there is no assurance the lender will realize proceeds from the collateral sufficient to repay the debt we owe. Moreover, because these credit facilities are recourse against the borrower, the respective lender generally has the right to pursue the borrower for any deficiency between the amount the borrower owes on the defaulted loan and the value the lender realizes from its liquidation of the collateral for the loan. Thus, our assets remaining after a foreclosure by a lender under our credit facilities may not be sufficient to repay our other debt, including our investor notes.



We may not be able to finance our investments on a long-term basis with an institutional lender on attractive terms, which may require us to seek more costly financing for our investments or to liquidate assets.



In recent years, we have relied upon short-term credit facilities to finance a substantial portion of our mortgage loan investments. When we acquire mortgage loans that have a maturity term that exceeds the term of our institutional credit facilities, we bear the risk of being unable to refinance, extend or replace our primary credit facilities or otherwise finance them on a long-term basis at attractive terms or in a timely manner, or at all. If it is not possible or economical for us to finance such investments on attractive terms, we may be unable to pay-down our credit facilities or be required to liquidate the assets at a loss in order to do so. Our reliance on financing provided by institutional credit facility lenders will require that we payoff our MU Credit Facility and WesCorp Credit Facility Extension on November 1, 2026. If we are unable to roll-over, extend, refinance or replace such credit facilities on attractive terms, we may have to rely upon less efficient forms of financing new investments, which may result in fewer loan acquisitions or originations of profitable mortgages and further deleveraging of our balance sheet and thereby reduce the funds available for distribution to our equity investors, for operations and meet our debt service obligations.



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



Our financing arrangements contain restrictions, covenants and events of default. Failure to meet or satisfy any of these covenants could result in an event of default under these agreements. Any event of default may materially adversely affect us. In addition, these restrictions may interfere

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



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



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



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



We are dependent on the knowledge, skills, institutional contacts and experience of our senior management team. We also rely on our management team to manage our mortgage loan investments, evaluate and attract new borrowers, make prudent decisions as they relate to work-outs, modifications and restructurings and develop relationships with institutional investors, lenders, financial institutions, broker-dealer firms, ministries and individual investors. We can give no assurances that we will be able to recruit and retain qualified senior managers that will enable us to achieve our core strategic objectives and continue to profitably grow our business.



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



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



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



As we continue to expand the non-interest generating sources of revenues of our business, we will need to attract, recruit, and retain qualified investment and financial advisors that complement the services we provide to our credit union equity owners and their members. 

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Turnover in the financial services industry with broker dealer and advisory firms is high.  If we are unable to recruit, attract, and retain qualified professionals, our strategic goal of expanding the non-interest generating segment of our business could be jeopardized, thereby adversely affecting our net earnings and financial condition.



As a small financial services company that operates in a niche market, we are subject to liquidity risk that could materially affect our operations and financial condition.



In past years, the financial services industry, credit markets and financing sources for ministry loans have been materially and adversely affected by reduced availability of liquidity. Reduced liquidity can particularly affect smaller lenders that have relied on short-term institutional credit facilities to enhance their liquidity needs. While we significantly improved our liquidity position through the successful refinancing of our MU Credit Facility and WesCorp Credit Facility Extension in late 2011 and due to relief granted by NCUA from certain minimum collateralization requirements in 2015, we will need to monitor and successfully manage our liquidity requirements as necessary when redemption requests for our debt securities are received, or a debt security investment matures and is not re-invested in another debt security we may offer.  We also depend on the sale of loan participation interests in our mortgage loan investments and sale of investor notes to manage our liquidity demands.



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



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



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From time to time, we  have engaged in transactions with related parties and our policies and procedures regarding these transactions may be insufficient to address any conflicts of interest that may arise.  



Under our code of business conduct, we have established procedures regarding the review, approval and ratification of transactions which may give rise to a conflict of interest between us and any employee, officer, trustee, their immediate family members, other businesses under their control and other related persons. In the ordinary course of our business operations, we have ongoing relationships and have engaged in transactions with several related entities, including our largest equity owner, ECCU. These procedures may not be sufficient to address conflicts of interest that may arise.



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



None of our equity owners are obligated to make additional contributions or loan us additional funds. However, they may do so on a voluntary basis and we may from time to time, in the future, request our equity owners to do so. In such event, one or more of our equity owners may be unwilling or unable to make voluntary additional capital contributions or loans because their financial capabilities are at the time impaired. Also, if an equity owner’s financial status is in the future deteriorated to the extent that they or their operations are ceased or otherwise come under the control of the Asset Management Assistance Center (“AMAC”), NCUA or other regulatory agency, it is unclear what rights, if any, that agency will have to exercise that owner’s membership rights in our company or, if it can exercise any such rights, the manner in which it will do so.



Risks Related to the Financial Services Industry and Financial Markets



Deterioration of market conditions could negatively impact our business, results of operations and financial condition, including liquidity.



The market in which we operate is affected by a number of factors that are largely beyond our control but can nonetheless have a potentially significant, negative impact on our business. These factors include, among other things:











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Our mortgage loan investments can be adversely affected by significant declines in the value of real estate and real estate related assets, impairment of the ability of many borrowers to repay their obligations, and illiquidity in the markets for real estate and real estate-related assets. In past years, these events had adverse effects on our business resulting in significant increases in our provision for loan losses and unavailability of financing for the acquisition and warehousing of our mortgage loan investments. Deterioration in U.S. economic conditions could harm our financial condition, income and ability to make distributions to our equity investors.

 

Declining real estate values could harm our operations.



Declining real estate values generally reduce the level of new mortgage loan originations, since borrowers often use increases in the value of their existing properties to support the purchase of, or investment in, or renovation of their worship facilities. Borrowers may also be less able to pay principal and interest on our loans, and the loans underlying our securities, if the real estate economy weakens. Further, declining real estate values significantly increase the likelihood that we will incur losses on our foreclosed assets and on our loans in the event of default because the value of our collateral may be insufficient to cover our investment in such assets. Any sustained period of increased payment delinquencies, foreclosures or losses could adversely affect both our net interest income from loans as well as our ability to originate, sell and securitize loans, which would significantly harm our revenues, results of operations, financial condition, liquidity, business prospects and our ability to make distributions to our equity investors.



Interest rate fluctuations and shifts in the yield curve may cause losses.



Our primary interest rate exposures relate to our mortgage loan investments and floating rate debt obligations. Changes in interest rates, including changes in expected interest rates or “yield curves,” affect our business in a number of ways. Changes in the general level of interest rates can affect our net interest income, which is the difference between the interest income we earn on our interest-earning assets and the interest expense we incur in connection with our interest-bearing liabilities. Changes in the level of interest rates also can affect, among other things, our ability to originate and acquire mortgages and the market value of our mortgage investments.



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



Our ability to execute our business strategy, particularly the growth of our mortgage loan investments portfolio, depends to a significant degree on our ability to obtain additional capital. Our financing strategy is dependent on our ability to obtain debt financing at rates that provide a positive net spread. We have used borrowing facilities obtained from institutional lenders and relied upon offerings of debt securities in SEC registered offerings to fund the origination or acquisition of mortgage loans made to evangelical churches and ministries.  If spreads for such

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liabilities widen or if availability of credit facilities ceases to exist, then our ability to execute future financings will be severely restricted.



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



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



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



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



Risks Related to Our Mortgage Loan Investments

We are subject to risks related to prepayment of mortgage loans held in our portfolio, which may negatively impact our business.



Generally, our borrowers may prepay the principal amount of their mortgage loans at any time. Due to the Federal Reserve Board’s accommodative monetary policies, there is intense competition from financial institutions that are looking to make commercial loans at competitive rates to qualified borrowers. In addition, approximately 14% of the principal balance of our total mortgage loans will need to be refinanced during the year ending December 31, 2017. If a significant number of borrowers refinance their loans with another lender, our business and profitability could be adversely affected.



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



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



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



Our investment and business strategy depends on our ability to successfully finance our investments in mortgage loans that provide a positive spread as compared to our cost of borrowing. A substantial portion of our loan investments provide for a fixed interest rate with a typical five year interest rate adjustment or maturity date. A significant portion of our borrowing arrangements with our note investors and credit facility lenders, however, provides for variable rates of interest that are indexed to short-term borrowing rates or fixed rates on short-term maturities. To mitigate our interest rate risks, we have entered into, and may enter into in the future, interest rate hedging transactions that include, but are not limited to, interest rate caps and interest rate swaps. The results of using these types of instruments to mitigate interest rate risks are not guaranteed, and as a result, the volatility of interest rates could result in reduced earnings or losses for us and negatively affect our ability to make distributions of earnings to our equity investors.



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



Some of our assets are participation interests in loans or co-lender arrangements in which we share the rights, obligations and benefits of the loan with other lenders. We may need the consent of these parties to exercise our rights under such loans, including rights with respect to amendment of loan documentation, enforcement proceedings in the event of default and the institution of, and control over, foreclosure proceedings. Similarly, a majority of the participants may be able to take actions to which we object but to which we will be bound if our participation interest represents a minority interest. We may be adversely affected by this lack of full control. As of December 31, 2016 and December 31, 2015, our investments included $10.8 and $12.4 million, respectively, in loan participations, representing 7% and 9% of our portfolio, respectively.



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



Generally, to pay their loans, churches depend largely on revenues from church member contributions. Donations typically fluctuate over time for a number of reasons, including, but not limited to, fluctuations in church leadership and membership, local economic conditions, including unemployment rates, credit conditions and local real estate markets.



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



The quality of the mortgage loans in which we invest depends largely on the adequacy and implementation of sound underwriting standards as described in our Board adopted loan policy. Even where the lender has sound underwriting standards, these standards must be properly observed and implemented in order to obtain the target loan risk levels, which may change depending on the state of the economy.



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



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















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



We have further mitigated these conflicts of interest by forming a Credit Review Committee, of which all members are unrelated to ECCU. This committee makes most of the loan approval decisions under our Church and Ministry Loan Policy as adopted by our Board of Managers. Our Church and Ministry Loan Policy sets forth minimum credit quality standards for the loans we make or purchase, and can only be overridden, depending on the circumstances, by our Credit Review Committee or our Board Credit Committee.



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



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



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



We are among a limited number of non-bank financial institutions specialized in providing loans to evangelical churches and church organizations. Moreover, approximately 19.7% of our mortgage loan investments involve California borrowers or are secured by properties located in California. Although there are a number of national and regional institutions making and/or investing in mortgage loans to churches and church related organizations, these loans are secured by special purpose facilities. As a result, if the properties securing such mortgages must be sold, there may be a limited number of buyers available for such properties. Nevertheless, we believe that there is a great deal of diversity in the types of not-for-profit organizations and entities that could be potential acquirers of properties of this nature, including, but not limited to, other churches, schools, clinics, community development agencies, universities and educational institutions, day care, social services, assisted living facilities and relief organizations.



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



Because the market for our mortgage loans is specialized, the prices at which our portfolio could be liquidated are uncertain. As a result, our mortgage loan investments are relatively illiquid investments and we may have difficulty in disposing of these assets quickly or at all in the event we need additional liquidity. The amount we would realize is dependent on several factors, including the quality and yield of similar mortgage loans and the prevailing financial market and

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economic conditions. Although we have never sold a performing loan we own for less than par, it is possible that we could realize substantially less than the face amount of our mortgage loans, should we be required to sell or hypothecate them. Thus, the amount we could realize for the liquidation of our mortgage loan investments is uncertain and cannot be predicted.



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

 

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



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



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



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



Some loans in our investment portfolio have been restructured or may otherwise be at risk or under credit watch. We make various assumptions and judgments about the collectability of our loan portfolio, including the creditworthiness of our borrowers and the value of the real estate and other assets serving as collateral for the repayment of many of our loans. If we determine that it is probable that we will not be able to collect all amounts due to us under the terms of a particular loan agreement, we could be required to recognize an impairment charge or a loss on the loan unless the value of the collateral securing the loan exceeds the carrying value of the

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loan. If our assumptions regarding, among other things, the present value of expected future cash flows or the value of the collateral securing our loans are incorrect or general economic and financial conditions cause one or more borrowers to become unable to make payments under their loans, we could be required to recognize impairment charges, which could result in a material reduction in earnings in the period in which the loans are determined to be impaired and may adversely affect, perhaps materially, our financial condition, liquidity and ability to make debt service payments and distributions to our equity owners.



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



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



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



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















The occurrence of any of these factors could severely impair the market value of the security for our mortgage loan investments. In the event of a default under a mortgage loan held directly by us, we will bear the risk of loss of principal to the extent of any deficiency between the value of

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the collateral and the principal and accrued interest of the mortgage loan. Foreclosure of a church mortgage can be an expensive and lengthy process, which could have a significant effect on our anticipated return on the foreclosed mortgage loan. Such delays can cause the value of the mortgaged property to further deteriorate. The properties also incur operating expenses pending their sale, including property insurance, management fees, security, repairs and maintenance. Any additional expenses incurred could adversely affect our ability to recover the full value of our collateral.



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



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



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



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



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



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



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



We compete with church bond financing companies, banks, savings and loan associations, denominational loan funds, certain real estate investment trusts, insurance companies and other financial institutions to serve this market sector. Many of these entities have greater marketing resources, more extensive networks of offices and locations, and lower costs in proportion to their size due to economies of scale.



We are exposed to environmental liabilities with respect to properties to which we take title. 



In the course of our business, we may take title to real estate through foreclosure on one of our mortgage loan investments or otherwise. If we do take title to a property, we could be subject to environmental liabilities with respect to these properties. In such a circumstance, we may be held liable to a governmental entity or to third parties for property damage, personal injury, and investigation and clean-up costs incurred by these parties in connection with environmental contamination, or may be required to investigate or clean up hazardous or toxic substances, or chemical releases, at a property. The costs associated with investigation or remediation activities could be substantial. If we ever become subject to significant environmental liabilities, our business, financial condition, liquidity and results of operations could be materially and adversely affected.



Risks of cost overruns and non-completion of the construction or renovation of the mortgage properties securing construction loans we invest in may materially adversely affect our investment. 



The renovations, refurbishment or expansion by a borrower of a mortgage property involves risks of cost overruns and non-completion. Costs of construction or improvements to bring a mortgage property up to standards established for the market position intended for that property may exceed original estimates, possibly making a project uneconomical. Such delays and cost overruns are often the result of events outside both our and the borrower’s control such as material shortages, labor shortages and strikes and unexpected delays caused by weather and other acts of nature. Also, environmental risks and construction defects may cause cost overruns, and completion delays. If such construction or renovation is not completed in a timely manner, or if it costs more than expected, the borrower may experience a prolonged impairment of the borrower’s revenues making it unable to make payments on our loan. At December 31, 2016 and 2015, we held $11.8 million and $1.9 thousand, respectively, in construction loans. 



Item 1B.  UNRESOLVED STAFF COMMENTS



None.





Item 2.  PROPERTIES

 

Our business offices are located at 915 West Imperial Highway, Suite 120, Brea, California 92821.  Our telephone number is (714) 671-5720.

 

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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.  In November 2013, we renewed the lease for a five year period.  The ECCU Office Lease agreement includes one additional option to renew for an additional five year term.  The base rent escalates each year on the anniversary of the agreement.  For 2016, our base rent began at $9,671 per month and escalated to  $9,920 per month. 



On March 6, 2012, MP Securities entered into an office lease for approximately 1,358 square feet of office space to open a branch office in Fresno, California.  The lease has a term of 36 months.  In February 2015, we negotiated a renewal of the lease for an additional three year term.  The lease extends through February 2018.  The base rent escalates each year on the anniversary of the agreement. For 2016, the base rent for this branch office began at $2,064 per month and escalated to $2,176 per month.



As of December 31, 2016,  we had no foreclosed real estate assets as we had disposed of all but one of our foreclosed assets through sale agreements reached with third parties.  One of our foreclosed properties, however, was transferred to a joint venture in which we hold an $892 thousand investment as described below.



Tesoro Hills Joint Venture. 



In January 2014, we acquired 3 acres of vacant land in Santa Clarita, California as the result of a deed in lieu of foreclosure agreement we entered into with the borrower.  On December 23, 2015, we executed a grant deed to the Santa Clarita property to Tesoro Hills, LLC, a California limited liability company formed by us and Intertex Property Management, Inc., a California corporation (“Intertex”).  The limited liability company was established as a real estate joint venture to develop, market, sell, lease and manage the property for the benefit of the members. We hold a 30% interest in the Tesoro Hills joint venture.  Under the terms of the Tesoro Hills Operating Agreement, Intertex agreed to make an initial $25,000 capital contribution, pay the costs of organizing the entity, pay certain development costs, provided, however, that it will not be required to contribute more than $300,000 to the development of the property.  If additional capital contributions are required to develop the property for use as a school, church, not-for-profit facility or other special use, each member may elect to make a loan to the joint venture.  The members have further agreed that no capital event to sell, dispose of, transfer, gift, encumber, or convey the property will occur for a period of two years after the joint venture was formed.  Since the Santa Clarita property is vacant land which needs to be permitted, properly zoned, graded and substantially improved before the property may be sold, leased or conveyed to another party, we believe that conveying the property to the Tesoro Hills joint venture will maximize our chances of recovering our investment in the loan.  The title to the Santa Clarita property was transferred to the Tesoro Hills, LLC joint venture in January 2016.



The value of the property at the time we transferred it to the joint venture was $900 thousand.  Operating losses of the joint venture allocated to us has decreased the value of our investment to $892 thousand at December 31, 2016.



 

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Item 3.  LEGAL PROCEEDINGS



Due to our investments made in mortgage loans, we may from time to time have an interest in, or be involved in, litigation arising out of our loan portfolio.  We consider litigation related to our loan portfolio to be routine to the conduct of our business.  In our opinion, we are not currently involved in any litigation matters that could have a material adverse effect on our financial position, results of operations or cash flows.



Item 4.  MINE SAFETY DISCLOSURES



Not applicable.

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PART II

 

 

Price Range of Common Units



There is no public market for our Class A Units and Series A Preferred Units (the “Series A Units”).  Effective as of December 31, 2008, we converted our form of organization from a California corporation to a California limited liability company.  As a result of the conversion, each share of our common stock immediately outstanding prior to the conversion date was converted into one fully paid and non-assessable unit of our Class A Units and each holder of our Class I and Class II Preferred Stock received one Series A Unit for each share of Class I and Class II Preferred Stock exchanged.  As of December 31, 2016, a total of 146,522 Class A Units were issued, with 11 holders of record, and a total of 117,100 Series A Units were issued, with 12 holders of record.



Sale of Equity Securities by Issuer



During the year ended December 31, 2016, we did not sell Class A Units, Series A Units or equity units.



Purchases of Equity Securities by Issuer



During the year ended December 31, 2016, we did not purchase Class A Units or Series A Units.



Dividends and Distributions



Prior to our conversion from a corporation to a limited liability company, we paid regular dividends on our Class I and Class II Preferred Stock.  For 2016, we made no distributions to the holders of our Class A Units.



During 2016 and 2015, we made distributions on our Series A Units as follows:

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



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



In addition to quarterly dividends to our Series A Preferred Unit holders, we have also agreed to set aside funds for payment to the holders of the Series A Units in an amount equal to 10% of our net profits earned for any fiscal year, after subtracting the amount of quarterly Series A Dividends paid during such year.  This priority distribution of our net profits after payment of quarterly Series A Dividend will be made to holders of the Series A Units on a pro rata basis.  The balance of any profits, taking into consideration the preferred distribution to the holders of Series A Units, will be allocated to all holders of our Class A Units in proportion to their percentage interests in our Class A Units.  For the year ended December 31, 2013, we set aside $43.9 thousand in net profits to distribute to our Series A Unit holders.  This increased the distributions declared per Series A Unit for the fourth quarter by $0.37 per unit.  Because we incurred a net loss for the year ended December 31, 2014, no priority distributions were accrued for our Series A Unit holders.  We accrued $23.1 thousand and $72.0 in net profits to distribute to our Series A Unit holders for the years ended December 31, 2015 and 2016, respectively.  This increased the amount of distributions declared on our Series A Units for the fourth quarters of 2015 and 2016 by $0.21 per unit and $0.62 per unit, respectively.



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



Equity Compensation Plans



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











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Item 6.SELECTED FINANCIAL DATA



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





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



Overview



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



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











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For the year ended December 31, 2016, we recognized net income of $922 thousand. Our core business thrived as MP Securities, our broker-dealer subsidiary, was able to significantly increase the sale of our proprietary notes by expanding our individual client base, developing relationships with institutional investors, and utilizing the networking agreements we have in place with ECCU and ACCU to offer wealth management products to their members.  Our lending team was able to use these funds to originate a record amount of loans for the year, increasing our net loan balances by 9% as compared to 2015.  The growth of the key components of our balance sheet was an important contributing factor to the increase in net interest income reported for 2016.



Net income for the year was also bolstered by earnings generated from our non-performing assets.  We continue to closely monitor our loan portfolio very closely and work with borrowers to minimize losses on mortgage loan investments.  We recorded $113 thousand in provisions for credit losses for the year ended December 31, 2016, but this was related to additional general reserves taken as our loan portfolio grew.  We took additional specific reserves against some collateral-dependent loans, but these were offset by recoveries of reserves on other loans as the borrower’s financial situation stabilized or the value of the collateral underlying a collateral-dependent loan increased.  In addition, we sold or transferred all of our remaining foreclosed real estate assets during 2016, recognizing a gain of $278 thousand in gains on sale, and recording $281 thousand in net income from foreclosed real estate assets for the year.  While this is not a source of consistent revenue on which we plan to rely upon in the future, we believe that our asset management strategies can contribute positively to the financial performance of the Company.



Finally, we continue to develop sources of revenue outside our core business.  Our lending and servicing team generated $390 thousand in fee income for the year. We sold additional loans, which generated gains on sale and increased the servicing fee income received from loans in which we have sold participation interests to other credit unions. We also entered into service

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agreements with ECCU that allows us to use our lending, real estate expertise and relationships with borrowers to generate additional fee income.  MP Securities has continued to expand its business, as it earned $687 thousand in fee income in 2016.  The Company’s management team believes that it will be able to use its capabilities in lending, servicing, and investment advisory services to supplement its net interest income with fee income.



Key Factors in Assessing our 2016 Financial Results



For the year ended December 31, 2016, the primary items affecting our operating performance were the following:



















We believe that the substantial increase in investor note sales and performance of our lending team in originating new loans and successfully managing the disposition of our real estate assets were the key drivers behind the Company’s positive earnings achieved in 2016.  In addition, MP Securities contributed to our earnings through the sale of other financial products and by providing investment advisory services which supplemented those core earnings.  In addition, our capacity and capability to service our own loans as well as loans for others allows us to keep

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our servicing costs down and generate other income.  We have also divested ourselves of a significant portion of our non-performing assets, which will provide cost savings in the future. Our lending team’s experience in handling these assets will continue to be crucial as we look to manage our remaining impaired loans in such a way as to minimize losses and potentially recover previously recorded reserves.



Financial Condition



We obtain funds for our mortgage loan investments from the sale of our debt securities, which are sold primarily to investors whom are in or associated with the Christian community, including individuals, ministries and organizations associated with evangelical churches and their governing associations. We also have relied upon credit facilities with institutional lenders to increase the size of our balance sheet, improve our earnings and purchase mortgage loan assets. 



Our total assets as of December 31, 2016 increased to $156.6 million, as compared to $149.0 million at December 31, 2015.  Our total liabilities were $147.8 million at December 31, 2016, as compared to $140.9 million at December 31, 2015. 



The following table sets forth selected measures of our financial performance for the years ended December 31, 2016 and 2015, respectively (dollars in thousands):





2016 Developments



Performance of Loan Portfolio.  With the increased liquidity provided to us through note sales, loan sales, and the sale of foreclosed assets, we originated $42.7 million in net loans during the year and rolled over $3.7 million of mortgage loans that matured in 2016.  Our average outstanding loan balance for 2016 was $140.4 million, up from $131.9 million for the year ended December 31, 2015. 



As part of our strategic decision to reposition our loan portfolio, we have continued to focus on originating lower balance loans made to ministries where we can achieve more favorable yields

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and avoid deteriorating our margins while reducing overall risk exposure to any one borrower.  However, we also have originated larger loans when we are able to find participants to purchase a participation interest in the loan.  This generates servicing fee income while allowing us to minimize our risk exposure on the loan. We believe we have found a good mix in loan size that allows us to take advantage of quality lending opportunities. Our average net loan balance decreased from $928 thousand at December 31, 2015 to $919 thousand at December 31, 2016.  In addition, over the past few years, we have substantially expanded our relationships with credit unions throughout the United States and believe these relationships will enable us to increase the amount of loan participation interests we sell and service for others.



The careful management of our mortgage portfolio, especially in regard to our impaired loans, has helped us stabilize our delinquency ratio under 1%.  Our delinquency ratio at December 31, 2016 was 0.9%, as compared to 0.78% at December 31, 2015.  As further evidence of improving conditions of our loan portfolio, our investment in non-performing loans has decreased from $11.9 million at December 31, 2015 to $8.9 million at December 31, 2016. We have several borrowers whose financial conditions required restructuring of their loans; and we performed one of these restructures in 2016.  We had two loans default during 2016 that were not considered impaired loans in prior years and were not restructured.  We attempt to manage these loans in such a way to avoid foreclosure and minimize losses. This careful management resulted in one previously impaired loan being restored to performing status during the year. 



Foreclosed Asset Transactions.    ECCU reached a selling agreement in December 2015 to sell one of our remaining properties in Palm Beach County, Florida in which we held an ownership interest.  The price agreed upon allowed us to reduce our valuation allowance on that property by $271 thousand.  The sale transaction closed in March 2016 and we recognized $55 thousand as a gain on sale.  ECCU also reached an agreement to sell another of the properties in which we owned an interest in a real estate owned asset in Fort Worth, Texas.  This sale closed in March, 2016 and we recognized a gain of $223 thousand on the sale of this property. 



In January 2016, we completed a transaction to transfer interest of a parcel of vacant land in Santa Clarita, California to a joint venture. This property was a foreclosed asset.  See “Item 2, Properties”.  Our initial investment in the joint venture was $900 thousand, which was equal to the net investment we carried in the property at December 31, 2015.  Due to operating costs of the joint venture, our investment is now valued at $892 thousand.  After performing an evaluation of the venture, we have concluded that it is not impaired. 



In June 2016, we disposed of the final real estate foreclosed asset on our balance sheet when ECCU reached an agreement to sell a property in which we owned an interest.  This property had been written off entirely, and we did not earn any gain on sale as a result of this transaction. 



As of December 31, 2016 and as of the date of this Report, we do not own any foreclosed assets.



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

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our return to sustained profitability, these refinancing transactions are not sources of new funding and do not provide the resources we need to grow our business.



We believe that we have created the capacity to originate, underwrite and service a larger quantity of mortgage loans and have developed new relationships that will enable us to sell loan participations and effectively leverage our capital assets in a profitable manner.  During 2016, we continued our loan participation sales strategy and closed $14.3 million in loan participation sales for the year.  Due to high cash balances at certain points during the year, we only pursued participation sales opportunities during periods where cash was needed to originate new loans or to ensure liquidity standards were maintained.  Assuming our liquidity sources of capital remain intact, we intend to continue to utilize existing relationships with other credit unions and CUSOs to sell as much as 90% of qualifying loans we originate and use these funds to originate additional loans. 



Since the middle of 2015, the main source of our capital funding has been through MP Securities’ sale of our investor notes through various securities offerings.  In January 2015, we registered $80 million of our Class 1 Notes pursuant to a Registration Statement filed with the SEC.  With this new Registration Statement, the Class 1 Notes replaced our Class A Notes.  On January 15, 2015, we also began to sell our Secured Investment Notes pursuant to a private placement memorandum under the provisions of Rule 506 promulgated under the Securities Act of 1933, as amended.  The sustained success of our note program is also due in part to networking agreements reached with ECCU and ACCU during the last half of 2015. Through these agreements and by offering a number of different products through our public and private placement offerings, we believe we have developed a viable program to offer debt securities for purchase by individuals, churches, institutional investors, and IRA investments to an expanded group of potential investors.  During 2016, MP Securities sold $28.9 million of our publicly and privately offered debt securities, $22.1 million of which represented new investments rather than repurchases of notes using maturing note principal. 



We will continue to rely heavily on investor note sales and supplement funds received from those sales with sales of participation interests in our mortgage loan investments.  Due to our positive earnings and improved financial health over the last two years, we are pursuing the possibility of utilizing short-term credit facilities for immediate cash needs to originate loans or maintain liquidity.



Diversify Our Revenue Sources.  Since inception, our primary source of revenue has come from the net interest margin we earn on our mortgage loan investments.  After the financial crisis of 2008 and a resulting lack of liquidity in credit markets, we deleveraged our balance sheet, which reduced the net interest income we receive on our investments.  In response to these developments, over the past several years we have undertaken efforts to expand the scope of revenue generating services we offer in an effort to make us less dependent on a favorable net interest rate margin from our mortgage loan investments to make the Company less susceptible to unfavorable changes in interest rates.  Because we possess the capability to service our own loans, we have significantly increased the portion of our wholly-owned loan portfolio that we service ourselves, thereby reducing the costs of third party servicers and increasing net interest earned on those loans.   We now service 150 of the 161 loans in our portfolio.  We also use our

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servicing capabilities to service loan participations for others.  We sold $14.3 million in loans to credit unions and other investors during 2016.  These sales generated $135 thousand in gains during the year, and combined with other participations that we service, helped to generate $146 thousand in servicing fee income.  As of December 31, 2016, we service $39.9 million in loan participations for investors.



In 2011, our wholly-owned subsidiary, MP Securities, was registered under the Securities Exchange Act of 1934 and was approved for membership by FINRA.  In the first quarter of 2012, MP Securities launched its broker-dealer operations and began its efforts to develop a sales force of registered representatives dedicated to the distribution of our debt securities.  Effective as of September 24, 2012, MP Securities received approval to sell our Class A Notes offered under a Registration Statement that was declared effective by the SEC on October 11, 2012.  In March of 2013, MP Securities began selling our Series 1 Subordinated Capital Notes and 2013 International Notes in private offerings, thus opening up additional securities products to enable us to reduce the dependence on institutional credit facilities.  In January 2015, MPS received approval to sell our Class 1 Notes offered under a Registration Statement that was declared effective by the SEC on January 6, 2015.



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



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



MP Securities has also entered into networking agreements with our largest equity owner, ECCU, and with ACCU, a Glendora, California-based credit union, to provide investment services, insurance services, and financial planning assistance to their members.  As part of this arrangement, MP Securities remits a portion of the gross commission received on any

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transactions consummated to ECCU or ACCU as a result of the products purchased through MP Securities.  By entering into these networking agreements, MP Securities has been able to expand its client base, offer non-proprietary products and services to the credit unions it serves and their members and generate fee income.



By increasing the scope of the services it can offer and entering into networking arrangements with credit unions, MP Securities has been able to recruit a sales force of registered representatives dedicated to managing our clients’ wealth in a manner consistent with the principles of Biblical stewardship, and act as a selling agent in the distribution of our debt securities.  In 2016, MP Securities’ marketing and sales efforts resulted in an increase in fee and commission revenue for 2016 of $161 thousand as compared to 2015.  If MP Securities continues to successfully implement its strategy, we will be able to (i) strengthen the profitability of our core operations; (ii) grow our balance sheet and ramp up the origination of profitable mortgage loans; (iii) introduce new clients to our proprietary investment products and address the challenges we faced with the overconcentration and suitability standards imposed on the sale of our publicly offered debt securities by regulatory authorities; (iv) increase fee income from assets under management; (v) improve client and investor retention and the renewal rate of our debt securities investors; and (vi) leverage the experience and intellectual capital of our management team through increased loan origination fees and servicing income.



Significant Accounting Estimates and Critical Accounting Policies



Critical Accounting Policies



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



Valuation of Loans



All of our loans are held for investment and are carried at their recorded balance, less an allowance for loan losses and loan discount, and adjusted for deferred loan fees and costs.  We defer loan origination fees and costs and recognize those amounts as an adjustment to the related loan yield on the asset using the interest method.  Loan discounts reflect an offset against accrued interest that has been added to a loan balance under a restructuring arrangement.  They also represent the difference between the purchase price of a loan and the loan balance when a loan is purchased at a discount.  Loan discounts are accreted to interest income as a yield

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adjustment using the interest method.  Loan discounts on impaired loans are not accreted into income until repayment of the loan is reasonably assured.



Allowance for Loan Losses and Allowance for Losses on Foreclosed Assets



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



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



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



Recent Accounting Pronouncements



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

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

 

In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842).” ASU 2016-02 requires a lessee to recognize assets and liabilities for leases with lease terms of more than 12 months. Consistent with current GAAP, the recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee primarily will depend on its classification as a finance or operating lease. However, unlike current GAAP which requires only capital leases to be recognized on the balance sheet, the new ASU 2016-02 will require both types of leases to be recognized on the balance sheet. ASU 2016-02 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted. The guidance requires companies to apply the requirements in the year of adoption using a modified retrospective approach. We are currently evaluating the potential impact of the pending adoption of ASU 2016-02 on our consolidated financial statements.

 

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

 

In August 2016, the FASB issued ASU 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (a consensus of the Emerging Issues Task Force).” ASU 2016-15 is intended to reduce diversity in practice in how certain transactions are classified in the statement of cash flows. ASU 2016-15 addresses eight

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classification issues related to the statement of cash flows: (i) debt prepayment or debt extinguishment, (ii) settlement of zero-coupon bonds, (iii) contingent consideration payments made after a business combination, (iv) proceeds from the settlement of insurance claims, (v) proceeds from the settlement of corporate-owned life insurance policies, including bank-owned life insurance policies, (vi) distributions received from equity method invitees, (vii) beneficial interest in securitizations transactions, and (viii) separately identifiable cash flows and application of the predominance principle. ASU 2016-15 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. Early adoption is permitted. The guidance requires companies to apply the requirements retrospectively to all prior periods presented. If it is impracticable for a company to apply ASU 2016-15 retrospectively, requirements may be applied prospectively as of the earliest date practicable. We are currently evaluating the potential impact of the pending adoption of ASU 2016-15 on our consolidated financial statements.

 

In December 2016, FASB issued ASU 2016-20, “Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers,” which is intended to provide clarification of aspects of the guidance issued in ASU 2014-09. ASU 2016-20 addresses (i) loan guarantee fees, (ii) impairment testing of contract costs, (iii) provisions for losses on construction-type and production-type contracts, and (iv) various disclosures. ASU 2016-20 is effective concurrently with ASU 2014-09 which we are required to adopt in the first quarter of fiscal year 2018. Early adoption is permitted. The guidance permits companies to either apply the requirements retrospectively to all prior periods presented, or apply the requirements in the year of adoption, through cumulative adjustment. We are currently evaluating the potential impact of the pending adoption of ASU 2016-20 on our consolidated financial statements, and we have not yet identified which transition method will be applied upon adoption.

 

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





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Consolidated Financial Condition and Results of Operations



Our Balance Sheet for the Years Ended December 31, 2016 and 2015



General.  The $7.6 million increase in total assets at December 31, 2016, as compared to December 31, 2015 is due primarily to an increase in loans receivable.  Our investor notes payable increased by $10.7 million during the year.  By increasing the sale of investor notes, we generated enough cash to originate $42.7 million in loans during the year.  The $42.7 million in new loan originations is the largest amount of new loans generated by the Company in a single year since its inception.



These originations were offset by $17.4 million in principal paydowns in our loan investments during the year ended December 31, 2016.  Included in these paydowns was $12.7 million of loans that paid off and could not be renewed under similar terms.  During 2016, we sold participations in 22 loans to other credit unions and CUSOs for a net of $14.3 million. 



Our mortgage loan portfolio consists entirely of loans made to evangelical churches and ministries.  All but four of these loans are secured by real estate collateral, while four loans that represent 0.8% of our portfolio are unsecured.  Our portfolio carried a weighted average interest rate of 6.28% at December 31, 2016 and December 31, 2015.



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Non-performing Assets.  Non-performing assets consist of non-accrual loans, restructured loans, and foreclosed assets, which include real estate properties we own.  Non-accrual loans include any loan that becomes 90 days or more past due, loans where terms have been modified in a favorable manner to the borrower due to financial difficulty (“troubled debt restructurings”), and any other loan where management assesses full collectability of principal and interest to be in question.  Once a loan is put on non-accrual status, the balance of any accrued interest is immediately reversed.  Loans past due 90 days or more will not return to accrual status until they become current.  Troubled debt restructurings will not return to accrual status until they perform according their modified payment terms without exception for at least six months. 



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



We had ten non-accrual loans with a recorded balance of $8.9 million and eight non-accrual loans with a recorded balance of $8.8 million as of December 31, 2016 and 2015, respectively.  At December 31, 2016, nine of these loans are considered collateral-dependent while one is considered non-collateral dependent.  We had one loan that was considered impaired at December 31, 2015 that we refinanced during 2016.  Due to improved financial conditions of the borrower, we were able to reclassify the loan as a performing loan.  



We sold or transferred all of our remaining foreclosed real estate assets during the year ended December 31, 2016 and did not initiate foreclosure proceedings on any additional properties during 2016.  As of December 31, 2016, we have no foreclosed real estate assets.



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The following table summarizes our non-performing assets:







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

2  Includes $1.1 million of restructured loans that were over 90 days delinquent as of December 31, 2016 and 2015.



At December 31, 2016, the Company held eight restructured loans, all of which were on non-accrual status.  Two of these loans were over 90 days delinquent.  At December 31, 2015, the Company held had nine restructured loans, eight of which were on non-accrual status.  One of these loans was over 90 days delinquent.    For all restructured loans in our portfolio at December 31, 2016, unpaid accrued interest at the time of the loan restructure was added to the principal balance of the loan.  The amount of interest added was also recorded as a loan discount, which did not increase the net loan balance.  In addition, for each of the restructured loans, the interest rate was temporarily decreased and the payments were restructured to a weekly basis from a monthly basis.  Each borrower involved in a troubled debt restructuring was experiencing financial difficulties at the time the loan restructured. 



As of December 31, 2015, we held four foreclosed real properties with a net value of $3.5 million, which includes $1.1 million in valuation allowances against the properties.  Effective as of December 31, 2016, all of the Company’s foreclosed properties have been disposed of.



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As of December 31, 2016 and 2015, the balances of impaired loans were as follows:







Information regarding interest income recognized on impaired loans for the years ended December 31, 2016 and 2015, is as follows:







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



Allowance for Loan Losses.  We maintain an allowance for loan losses that we consider adequate to cover both the inherent risk of loss associated with the loan portfolio as well as the risk associated with specific loans that we have identified as having a significant chance of resulting in loss.  Allowances taken to address the inherent risk of loss in the loan portfolio are considered general reserves.  We include various factors in our analysis. These are weighted based on the level of risk represented and for the potential impact on our portfolio.  These factors include:





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In addition, we include additional general reserves for our loans that are collateralized by a junior lien or that are unsecured.  In order to more accurately determine the potential impact these factors have on our portfolio, we segregate our loans into pools based on risk rating when we perform our analysis.  Risk factors are weighted differently depending upon the quality of the loans in the pool.  In general, risk factors are given a higher weighting for lower quality loans, which results in greater general reserves related to these loans.  We evaluate these factors on a quarterly basis to ensure that we have adequately addressed the risk inherent in our loan portfolio.



We also examine our entire loan portfolio regularly to identify individual loans which we believe have a greater risk of loss than is addressed by general reserves.   These are identified by examining delinquency reports, both current and historic, monitoring collateral value, and performing a periodic review of borrower financial statements.  For loans that are collateral dependent, management first determines the value at risk on the investment, defined as the unpaid principal balance, net of discounts, less the collateral value net of estimated costs associated with selling a foreclosed property.  This entire value at risk is reserved.  For impaired loans that are not collateral dependent, management will record an impairment based on the present value of expected future cash flows.  Loans that carry a specific reserve are formally reviewed quarterly, although reserves will be adjusted more frequently if additional information regarding the loan’s status or its underlying collateral is received.



Finally, our allowance for loan losses includes reserves related to troubled debt restructurings.  These reserves are calculated as the difference in the net present value of payment streams between a troubled debt restructuring at its modified terms as compared to its original terms, discounted at the original interest rate on the loan.  These reserves are recorded at the time of the restructuring. The change in the present value of cash flows attributable to the passage of time is reported as interest income.



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



In September 2015, ECCU reached a settlement with a title company in connection with a foreclosure action on a loan in which we held a 64.8% loan participation interest.  As a result of the settlement agreement, we were able to reverse $190 thousand in specific reserves previously recorded on this loan. We also charged off $143 thousand in allowances related to the loan. 

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After charging it off, we also recovered $20 thousand in foreclosure related costs that were reimbursed.  Due to the performance of the borrower of one of our other impaired loans, we reclassified the loan from collateral-dependent to non-collateral-dependent.  As a result of this reclassification, we changed our reserve method on this loan from using the difference between the discounted collateral value and our investment in the loan to using the difference between the net present value of expected future cash flows on the loan and our investment.  With this change in the method we used to establish a reserve on this loan investment, we were able to record $400 thousand in credits for loan losses previously taken. In addition, we recorded specific reserves on several other loans which we restructured during the year.



The activity in the allowance for loan losses for the years ended December 31, 2016 and 2015 was as follows:





The process of providing adequate allowance for loan losses involves management estimates and, as a result, future losses may differ from current estimates.  We have attempted to maintain the allowance at a level which compensates for losses that may arise from unknown conditions.  At December 31, 2016 and December 31, 2015, the allowance for loan losses was $1.9 million and $1.8 million, respectively, which represented 1.27% and 1.31% of our gross loans receivable at those respective dates. 

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NCUA Credit Facilities.  The decrease in NCUA credit facilities is the result of $3.9 million in regular monthly payments we made on our NCUA credit facilities. We did not make any additional principal payments during the year.  The remaining balance on these facilities totals $86.3 million and bears interest at a rate of 2.525% pursuant to agreements entered into with the NCUA in November 2011.  In November 2016, we reached an agreement with the NCUA to extend the maturity date of the facilities to November 2026.  For further discussion concerning our borrowings and credit facilities see Item 7, “Credit Facility Borrowings.”



Notes Payable.  Our investor notes payable consist of debt securities sold under publicly offered debt securities offerings as well as notes sold to accredited investors in private offerings.  Sales of the Company’s  notes are now being handled by our wholly-owned subsidiary, MP Securities, which is a broker-dealer firm subject to regulation by FINRA, the SEC and applicable state regulatory authorities.  MP Securities continues to expand its operations and transition into

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a more diversified financial services firm.  In addition to the networking agreements reached in 2015 with ECCU and ACCU, MP Securities has also developed relationships with institutional investors that are able to purchase larger investments in our debt securities offerings.  As a result of these relationships, investor notes payable increased by $10.7 million during the year ended December 31, 2016.  Notes payable are presented net of debt issuance costs, which represents legal costs incurred in preparing and filing our note prospectuses and investor related disclosure documents. 



Members’ Equity.  Total members’ equity increased in 2016 due mainly to our net income of $922 thousand, which was offset by $202 thousand of regular dividend payments and $71 thousand of net profit distributions declared on our Series A Preferred Units. We did not repurchase any ownership units during the years ended December 31, 2016 and 2015.





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





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



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

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several new banking relationships where we could earn additional interest on the funds maintained in those accounts.



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



Provisions for Loan Losses.  As described above, we increased several of our specific reserves on collateral-dependent loans, while we were able to reverse reserves on several other loans where the estimated collateral value increased during the year ended December 31, 2016.  The increase in loans receivable also contributed to an increase in general reserves, which generated additional provisions for loan losses.  These factors led to $113 thousand in provisions taken during the year ended December 31, 2016.  Conversely, for the year ended December 31, 2015, we were able to record credits for loan losses of $524 thousand due to a settlement reached on one of our impaired loans as well as the reclassification of one of our collateral-dependent loans to non-collateral-dependent.  Despite the fact that we recorded $637 thousand in additional expense related to provisions in 2016, gains made in our net interest income during the year ended December 31, 2016 resulted in a 1% increase in net interest income after provisions for loan losses.



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



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

 

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

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December 31, 2016, as the Board of Managers approved discretionary bonuses for our employees in recognition of the Company’s financial performance for the year.



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



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



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Results of Operations for the Years Ended December 31, 2015 and December 31, 2014





In 2015, we recognized net income of $357 thousand due in large part to credits taken in our provisions for loan losses.  As further described below, the most significant factors influencing our consolidated results of operations for the year ended December 31, 2015, as compared to 2014 were:



Reduction in Interest Income on Our Mortgage Loan Investments.    Interest income on our mortgage loan investments decreased by 11% in 2015 as compared to 2014.  This is consistent with the 12% decrease in average interest-earning loans from $136.7 million for the year ended December 31, 2014 to $121.0 million for the year ended December 31, 2015.  Although our average balances in interest-bearing accounts with other institutions increased by 72%, the

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interest income recognized on those accounts decreased by 52% as the rates earned on those accounts decreased.  We moved much of our cash from ECCU to other institutions to avoid concentration risk, but it decreased the yield we earned on our interest-bearing accounts.



Reduction in Net Interest Income.    Interest expense on our borrowings decreased during the year due to principal payments made on our NCUA borrowings and lower rates paid on our debt securities.  While the average balance of our investor notes increased from December 31, 2014 as compared to December 31, 2015, we replaced the Class A Notes as they matured with our new Class 1 Notes, which bear interest at an average of 3.14% compared to 3.82% for Class A Notes in 2014.  Our average borrowings from financial institutions decreased by $5.4 million as compared to 2014 due to regular principal payments made throughout 2015, as well as $2.5 million of additional principal payments made during 2014.   Despite the 6% reduction in interest expense from 2014, the 11% decrease in interest income resulted in a 17% decrease in net interest income for the year.



Credits in Provisions for Loan Losses.  We reported credits for loan loss provisions of $524 thousand for the year ended December 31, 2015 as compared to provisions of $252 thousand for the year ended December 31, 2014. In 2014, we increased our general reserves by $40 thousand and recorded $465 thousand in specific reserves on an impaired loan.  However, we also reduced some of the specific reserves on other impaired loans as our investment in those loans decreased relative to the collateral value of the properties which served as collateral for the loan.  For 2015, we reversed $190 thousand in provisions previously taken on an impaired loan when ECCU reached a settlement with the title insurance company on a title claim made in connection with a foreclosure action on a mortgage loan in which we held a 64.8% loan participation interest.  We also reversed $400 thousand in loan loss provisions previously taken when we changed the classification of an impaired loan to non-collateral-dependent.  We recorded several small allowances in 2015 on other impaired loans when they were restructured.  Despite the significant credit for loan losses, our reduced net interest income caused our net interest income after provisions to decrease by $10 thousand for the year ended December 31, 2015, as compared to the year ended December 31, 2014.



Improvements in Non-Interest Related Income.  We received other income of $832 thousand in the year ended December 31, 2015 which is an increase of $497 thousand from the year ended December 31, 2014.  We recognized an additional $109 thousand in other lending income in 2015.  While we recognized $21 thousand less in gains on loan sales, we collected an additional $48 thousand in late charges related to one loan, an additional $59 thousand in servicing fees as we increased the number of loan participations we sold, and recording $25 thousand in additional lending fees related mainly to originating loans and extending the maturity date of some of our existing loans when we negotiate a renewal.  We also earned $388 thousand in additional income in 2015 related to our broker-dealer subsidiary.  Adding new sales personnel and utilizing our networking agreements with credit unions allowed us to recognize $252 thousand in additional commissions on insurance products and annuities, $55 thousand in additional advisory fees, and $81 thousand in commissions on transactions involving mutual funds and other investment products. 

 



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Decline in Non-Interest Expense.  Our non-interest expenses for the year ended December 31, 2015 decreased by $1.8 million from the year ended December 31, 2014. This is entirely related to $2.4 million in additional provisions for losses on foreclosed assets taken on one of our properties during 2014.  We reached several favorable real estate purchase agreements on several of our real estate owned assets in 2015, and as such, we were able to avoid having to report significant expenses on our foreclosed assets in 2015.  Outside of those provisions, non-interest expenses increased by $608 thousand.  Salaries and benefits expenses increased by $474 thousand as we hired five new employees during the year and we accrued $222 thousand in salary and benefits expenses in severance payments to be paid to our former Chief Executive Officer as a result of his retirement.



Reduction in Office, Marketing and Other Expenses.  Marketing expenses stayed fairly consistent as we did not undertake any new marketing projects.  A vast majority of our marketing is done via personal contact by our lending and broker-dealer staff.  Office occupancy expenses were also consistent as we have not added any new offices.  Legal and accounting expenses decreased by $57 thousand as we competed the registration of our Class 1 Notes, and incurred less foreclosure and loan workout related expenses as most of the work on those projects was completed in 2014.  We also incurred less in consulting expenses at MP Securities, as we relied less on outside consultants for compliance matters. 



Net Interest Income and Net Interest Margin



Our earnings depend largely upon the difference between the income we receive from interest-earning assets, which are principally mortgage loan investments and interest-earning accounts with other financial institutions, and the interest paid on notes payable and lines of credit. This difference is net interest income. Net interest margin is net interest income expressed as a percentage of average total interest-earning assets.



The following tables provide information, for the periods indicated, on the average amounts outstanding for the major categories of interest-earning assets and interest-bearing liabilities, the amount of interest earned or paid, the yields and rates on major categories of interest-earning assets and interest-bearing liabilities, and the net interest margin:

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[1] Loans are net of deferred fees and before the allowance for loan losses

[2] Net interest margin is equal to net interest income as a percentage of average total assets.



Average interest-earning assets increased to $144.7 million during the year ended December 31, 2016, from $137.3 million, an increase of $7.5 million or 5%. The average yield on these assets increased to 6.10% for the year ended December 31, 2016 as compared to 5.87% for the year ended December 31, 2015.  The yield on interest-earning loans increased to 6.73% from 6.64% due to an increase in loan participation interest sales that resulted in the accelerated amortization of deferred fees.  The weighted average interest rate of the portfolio stayed constant at 6.28%.  The yield on our interest-earning accounts with other financial institutions increased to 0.24% for the year ended December 31, 2016 as compared to 0.12% for the year ended December 31, 2015.  For cash management purposes and in an effort to decrease concentration risk, we have diversified our banking relationships and have placed cash in money market accounts that give us flexibility and earn higher interest rates. This increase in interest earned on cash and the increase in loan sales caused our yield on interest-earning assets to rise in 2016.  Due to the sale of our foreclosed real estate assets, we have decreased our non-interest-earning assets by $3.4 million, which, when combined with the higher yield earned on interest-earning assets, increased the yield on our total assets by 34 basis points from 5.40% for the year ended December 31, 2015 to 5.76% for the year ended December 31, 2016.



Average interest-bearing liabilities, consisting primarily of investor notes and credit facility borrowings, increased to $143.9 million during the year ended December 31, 2016, from $140.5 

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million during 2015. The average rate paid on these liabilities stayed constant at 2.93% for the years ended December 31, 2016 and 2015. The interest rate on our NCUA borrowings is fixed at 2.525% until the facility matures in 2026.  The weighted average rate paid on our notes decreased from 3.70% to 3.56%, but our notes comprised a larger portion of interest-bearing liabilities during 2016, so the average rate paid on our liabilities remained the same.  As the total amount of our investor notes grow and our NCUA facilities decrease, we anticipate that the average rate paid on these liabilities will increase.  As a result, we are exploring options to reduce the rates paid on our investor note products to adjust to changes in the interest rate environment and our cost of funds.



Net interest income for the year ended December 31, 2016 was $4.6 million, which was an increase of $687 thousand, or 17%, from the prior year. Net interest margin increased from 2.64% for the year ended December 31, 2015 to 3.02% for the year ended December 31, 2016.











[1] Loans are net of deferred fees and before the allowance for loan losses

[2] Net interest margin is equal to net interest income as a percentage of average total assets.



Average interest-earning assets decreased to $137.3 million during the year ended December 31, 2015, from $146.2 million, a decrease of $8.9 million or 6%. The average yield on these assets decreased to 5.87% for the year ended December 31, 2015 as compared to 6.22% for the year ended December 31, 2014.  The yield on interest-earning loans increased to 6.64% from 6.62% due to an increase in the weighted average interest rate of our loan portfolio from 6.28% to

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6.33%.  The yield on our interest-earning accounts with other financial institutions decreased to 0.12% for the year ended December 31, 2015 as compared to 0.44% for the year ended December 31, 2014.  For cash management purposes and in an effort to decrease concentration risk, we transferred much of our cash to accounts that produce a lower yield.  In addition, our cash balances comprised a much larger portion of our interest-earning assets in 2015 as we decided to increase our efforts to fund loans in our pipeline in the second half of 2015 after experiencing liquidity issues for much of 2014 and the first six months of 2015.  This shift in cash balances, the comparatively larger proportion of cash, and the decrease in loan yield caused our yield on interest-earning assets to decline.  Due to these factors, the yield on all of our assets decreased by 42 basis points from 5.82% for the year ended December 31, 2014 to 5.40% for the year ended December 31, 2015.



Average interest-bearing liabilities, consisting primarily of investor notes and credit facility borrowings payable, decreased to $140.5 million during the year ended December 31, 2015, from $145.7 million during 2014. The average rate paid on these liabilities decreased to 2.93% for the year ended December 31, 2015, from 2.99% for 2014. The decrease in the rate paid on interest-bearing liabilities was the result of lower interest rates paid on our investor debt securities.  While LIBOR rates steadily increased in 2015, we eliminated a class of notes in our Class 1 Notes offering that paid higher than average rates.  The average rates paid on our investor notes decreased from 3.82% during the year ended December 31, 2014 to 3.70% for the year ended December 31, 2015. The interest rate on our NCUA borrowings is fixed at 2.525% until the facility matures in 2026.



Net interest income for the year ended December 31, 2015 was $3.9 million, which was a decrease of $786 thousand, or 17%, from the prior year. Net interest margin decreased from 3.03% for the year ended December 31, 2014 to 2.64% for the year ended December 31, 2015.



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

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Cash and Cash Equivalents

 

We experienced a decrease in our cash during the twelve months ended December 31, 2016 in the amount of $1.4 million, as compared to a net increase of $9.8 million for the twelve months ended December 31, 2015. The decrease is primarily due to a historic high of loan originations funded by the Company in 2016.



Net cash provided by operating activities totaled $442 thousand for the twelve months ended December 31, 2016, an increase of $724 thousand from $282 thousand used by operating activities during the twelve months ended December 31, 2015.  This is due to an increase in net income arising from interest income.  We experienced non-cash contributions to our net income, but even after accounting for these, our operating activities provided cash for 2016 to fund our operations and mortgage investments.

 

Net cash used by investing activities totaled $8.3 million during the twelve months ended December 31, 2016, compared to $1.4 million used during the twelve months ended December 31, 2015, an increase in cash used of $6.9 million. This difference is attributable to a $16.1 million increase in loan originations during the year as compared to 2015.  The loan funding activity was offset by an increase in loan participation sales of $8.2 million and an increase in foreclosed asset sales of $2.3 million.  We experienced $1.2 million less in loan payoffs in 2016 as compared to 2015, which decreased the amount of principal we collected from borrowers.  In 2017, we expect to continue to grow our balance sheet through the funding of new loans and partially finance the origination of these loans through the sale of loan participation interests.

 

Net cash provided by financing activities totaled $6.5 million for the twelve-month period ended December 31, 2016, an increase of $10.4 million from $3.9 million used in financing activities during the twelve months ended December 31, 2015.  We substantially expanded our investor note sale program during 2016 and increased our net notes sales by $10.6 million in 2016 as compared to 2015, which accounted for the increase in cash provided by financing activities.



Liquidity and Capital Resources



We rely on cash generated from our operations, cash reserves and proceeds from the sale of loan participations and investor notes to meet our obligations as they arise.  In addition, we earn cash from other revenue-generating activities, chiefly commissions on securities sales and fees earned from managing client investments through our wholly-owned broker-dealer, MP Securities and fees generated from services provided to credit unions and loan servicing capabilities and other services we provide to credit unions and CUSOs.  We require cash to originate and acquire new mortgage loans, repay indebtedness, make interest payments to our note investors and pay expenses related to our general business operations.  We intend to continue our current liquidity plan which relies primarily on cash generated by operations, cash reserves and proceeds from the sale of debt securities.  However, we intend to supplement this liquidity plan by selling loan participations when necessary, as well as through the generation of additional sources of non-interest income. We are also exploring the possibility of obtaining short-term funding for loan originations and liquidity needs through institutional credit facilities.



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



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



We may not be able to obtain desired financing from an institutional lender on terms and conditions acceptable to us.  We feel that our positive earnings and healthy financial position over the last two years has positioned the Company to obtain financing, we cannot guarantee that these sources of cash will be available to us.  Our liquidity concerns for the near future were significantly reduced by the agreement reached with the NCUA to extend the maturity date of our borrowings under these facilities from 2018 to 2026.  While the agreement requires an additional $80 thousand in monthly payments, we believe that we can generate enough cash through operations and investor note sales to make those payments without eroding our liquidity.  This agreement obviates the need to obtain $80 million in financing sources to replace the NCUA credit facilities when they were scheduled to mature in October 2018.



Our liquidity ratio was 15.52% at December 31, 2016, which is well within our policy and operational comfort.  Our liquidity ratio is calculated as our cash balance divided by our total liabilities less the portion of our line of credit facilities due after one year. 



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



Due to suitability and investment concentration limitations for investments made in our publicly offered debt securities, some of our investors were prevented from renewing or making investments in our publicly offered debt securities.  Due to those restrictions, the renewal rate fell to 34% in 2013.  The renewal rate increased to 53% for 2014, 55% for 2015, and to 56% for 2016 as we are now serving clients that meet these suitability restrictions and are offering other investment products to investors whom may need to diversify their investments.  We believe that the networking agreements entered into with ACCU and ECCU, as well as relationships developed with institutional investors, led to substantial increases in investor note sales in 2016. 

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We believe that the variety of note products we provide through public and private offerings give our clients options for suitable investments and we are continuing to explore options to provide proprietary investment products that meet the investment objectives of our investors.  While we do not expect that our investor renewal rate will necessarily return to the historic renewal rates we enjoyed prior to 2012, we expect continued improvement in our investor renewal rates over the next few years.    



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



We are also continuing to explore the possibility of obtaining a line of credit facility that would provide short-term financing for funding new loans which we would then offer for sale in the loan participation market.  We are seeking to partner with other credit unions that may have an interest in originating or investing in new business loans that are made to churches and ministries that meet our underwriting guidelines. 



Credit Facilities Developments



As of December 31, 2016, our credit facilities’ commitments, amounts available and principal amounts outstanding were as follows:



National Credit Union Administration Facilities



On November 4, 2011, we and the National Credit Union Administration Board As Liquidating Agent of Members United Corporate Federal Credit Union entered into an $87.3 million credit facility refinancing transaction which amended and restated a $100 million credit line we entered into with Members United on May 7, 2008.  On the same date, we and the National Credit Union Administration Board As Liquidating Agent of Western Corporate Federal Credit Union entered into a $23.5 million credit facility which amended and restated a credit facility agreement we had previously reached with WesCorp (collectively, the Members United Facility and WesCorp Facility Extension are hereinafter referred to as the “NCUA Facilities”).    Accrued interest is due and payable monthly in arrears at the lesser of the maximum interest rate permitted by applicable law under the loan documents or 2.525%.  The term loan may be repaid or retired without penalty, but any amounts repaid or prepaid under the facility may not be re-borrowed. 



The NCUA Facilities also include covenants which prevent us from renewing or extending a loan pledged as collateral under these facilities unless certain conditions have been met and requiring the borrower to deliver current financial statements to us.  Under the terms of the NCUA Facilities, we have established a lockbox maintained for the benefit of the NCUA that will receive all payments made by collateral obligors.  Our obligation to repay the outstanding

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balance on these facilities may be accelerated upon the occurrence of an “Event of Default” as defined in the agreement.  Such events of default include, among others, failure to make timely payments due under the NCUA Facilities, or our breach of any of our covenants.



The NCUA Facilities require collateral to be maintained in the form of loans receivable pledged to secure the facilities.  The facility which was an amendment of our Members United Facility required the total balance of the loans securing the facility to be 128% of the facility’s balance.  The WesCorp Facility Extensionrequired a collateralization ratio of 150%.  On March 30, 2015, we reached an agreement with the NCUA to amend the minimum collateralization covenants of both facilities, in addition to permitting the Company to deliver cash to meet minimum collateralization covenants.  For a list of the amendments made to the NCUA Facilities as compared to the original agreement, see “Amendments to our Credit Facility Agreements” below.



Amendments to our Credit Facility Agreements



On March 30, 2015, we and the NCUA agreed to an Amendment to the Loan and Security Agreement (the “LSA Amendments”) for both the Members United Credit Facility and the WesCorp Credit Facility.  Under the terms of the LSA Amendments, significant changes were made, which are disclosed in the following table:







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



Investor Notes



We also rely on the sale of our investor notes to provide the funding for origination and purchase of mortgage loan assets and fund our general operations.  As of December 31, 2016, a total of $60.6 million of our investor debt securities were issued and outstanding.  For further information on our investor notes, see Note 11,  Notes Payable in our accompanying audited consolidated financial statements for the year ended December 31, 2016.  Historically, we have offered investor notes under offerings registered with the SEC and in private placements exempt under the provisions of the Securities Act of 1933, as amended.  Our Alpha Class Notes were initially registered with the SEC in July 2001 and an additional $75.0 million of new Alpha Notes were registered with the SEC in May 2007.  We discontinued the sale of our Alpha Class Notes in April, 2008.  As of December 31, 2016, none of these notes remained outstanding.



In addition to our Alpha Class Notes, in April 2008, we registered with the SEC an offering of $80.0 million of new Class A Notes that consisted of three series of notes, including a fixed series, flex series and variable series.  We registered an additional $100.0 million in Class A Notes with the SEC in June, 2010, and on June 24, 2011, we filed a registration statement with the SEC seeking to register an additional $75 million of our Class A Notes.  The Class A Notes

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offering expired on December 31, 2014 and no additional Class A Notes were sold in 2015.  As of December 31, 2016, $17.3 million in Class A Notes were outstanding.



The Class A Notes offering was replaced in January 2015 with the Class 1 Notes offering.  We registered $85 million of our Class 1 Notes in two series – fixed and variable notes.  The registration was declared effective on January 6, 2015.  Similar to our Class A Notes, our Class 1 Notes are all unsecured debt securities. The interest rates we pay on the fixed series notes are determined by reference to the “swap index”, an index that is based upon a weekly average swap rate reported by the Federal Reserve Board, and is in effect on the date they are issued.  These notes bear interest at the swap index plus a rate spread of 1.70% to 2.50% and are issued in maturities ranging from 12 to 84 months.  The interest rates we pay on the variable series notes are determined by reference to the variable index in effect on the date the interest rate is set and bear interest at a rate of the swap index plus a rate spread of 1.50% to 1.80%.  Effective as of January 6, 2015, the variable index is defined under the Class 1 Notes as the three month LIBOR rate.  As of December 31, 2016, $32.9 million in Class 1 Notes were outstanding.



In addition to Class 1 Notes, we offer notes under several private placement offerings.  In March 2013, we began offering Series 1 Subordinated Capital Notes and International Notes to accredited investors, as that term is defined in Rule 501 promulgated under the Securities Act of 1933, as amended.  Effective as of January 15, 2015, we commenced the offering of our Secured Investment Notes under Rule 506 of Regulation D, promulgated under the Securities Act of 1933, as amended.  The Secured Investment Notes are secured by either 100% of their outstanding balance in cash or 105% of their outstanding balance in loans receivable.  Investors have to meet certain criteria in order to purchase these notes and are also subject to suitability restrictions.  At December 31, 2016, $3.3 million, $5.1 million, and $54 thousand of our Secured Investment Notes, Subordinated Capital Notes, and International Notes were outstanding, respectively.



Of the $60.6 million in investor notes that are outstanding at December 31, 2016, $9.1 million are available to be withdrawn at any time without penalty while an additional $13.2 million will mature in 2017.  Historically, we have experienced a high rate of renewal or reinvestment by our note holders upon maturity of their notes.  We believe the historical record of repeat purchasers by our debt security investors supports our confidence in the future viability of our investor note program.



Debt Covenants



Our investor notes require that we comply with certain financial covenants including, without limitation, minimum net worth, interest coverage, restrictions on the distribution of earnings to our equity investors and incurring other indebtedness that is not permitted under the provisions of our loan and trust indenture.  If an event of default occurs under our investor notes, the trustee may declare the principal and accrued interest on all notes to be due and payable and may exercise other available remedies to collect payment on such notes.  We are in compliance with our debt covenants under the investor notes.



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The MU Credit Facility and WesCorp Credit Facility Extension agreements contain a number of standard borrowing covenants, including affirmative covenants to maintain good and indefeasible title to the pledged collateral free and clear of all liens, to maintain a lockbox for the benefit of the lender to collect payments from borrowers on the collateral notes and comply with customary covenants for a transaction of this nature.  In addition, unless otherwise waived by the NCUA, we may not renew or extend an underlying mortgage loan unless a recent appraisal is completed for such mortgaged property, the loan continues to be amortized over the same period as the prior note and requires the borrower to submit quarterly financial statements in the event the borrower has negative annual net income or a debt service coverage ratio of less than 1.0 to 1.0.  We are in compliance with these covenants as of December 31, 2016.











Market Risk Management

Market Risk Management

Market risk arises from changes in interest rates, exchange rates, commodity prices and equity prices.  Our market risk exposure primarily consists of interest rate risk, which is mitigated by policies and procedures which monitor and limit our earnings and balance sheet exposure to changes in interest rates.  In the past, we have also utilized various financial hedging instruments such as interest rate swaps and interest rate caps which allow us to diminish some of our interest rate risk associated with some of our variable rate assets and liabilities. Further, we do not have any exposure to currency exchange rates.  Our earnings depend primarily upon the difference between the income we receive from our interest earning assets and our cost of funds, principally interest expense incurred on interest-bearing liabilities.  Interest rates charged on our loans are affected principally by the demand for loans, the supply of money available for lending purposes, and competitive factors.  In turn, these factors are influenced by general economic conditions and other constraints beyond our control such as governmental economic and tax policies, general supply of money in the economy, governmental budgetary actions, and the actions of the Federal Reserve Board.

Interest Rate Risk Management

In an effort to manage our exposure to interest rate risk, our Board has formed an Asset/Liability Management Committee (the “ALM Committee”) that meets on a regular basis.  The core investment objectives of the ALM Committee are to coordinate, control and perform oversight of our portfolio consistent with our business plan and board approved policies.  The ALM Committee establishes and monitors our mix of assets and funding sources, taking into account relative costs and spreads, interest rate sensitivity and cash flow requirements in an effort to produce results consistent with our liquidity, capital adequacy, level of risk and profitability goals.

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The principal objective of interest rate risk management (often referred to as “asset/liability management”) is to manage the financial components of our statement of condition in a manner that will optimize the risk/reward equation for earnings and capital in relation to changing interest rates.  We have adopted formal policies and standard industry practices to monitor and manage interest rate risk exposure.  As part of this effort, we construct interest rate risk scenarios utilizing an asset/liability program from a third party provider of financial data monitoring and reporting systems, enabling us to better manage economic risk and interest rate risk.

Our fundamental asset and liability objective is to maximize our economic value while maintaining adequate liquidity and exposure to interest rate risk deemed by our Board to be acceptable. We believe an acceptable degree of exposure to interest rate risk results from the management of assets and liabilities through the maturities, repricing and mix of our mortgage loan investments, borrowing facilities and investor notes to attempt to neutralize the potential impact of changes in market interest rates.  Our profitability is dependent to a large extent upon our net interest income, which is the difference between our interest income on interest-earning assets such as loans and interest-bearing assets, and our interest expense on interest-bearing liabilities, such as our investor notes and financial institution borrowings.  Unlike other financial institutions which have access to other sources of liquidity such as the Federal Reserve Discount Window or the Federal Home Loan Bank, we are dependent upon the issuance of investor notes, capital investments by our equity holders, the sale of mortgage assets and to a lesser extent, credit facilities.  Further, we manage our maturity risk between assets and liabilities with the goal of limiting our exposure to interest rate risk, ensuring adequate liquidity.  Interest income and interest expense are affected by general economic conditions and by competition in the marketplace.  Our interest and pricing strategies are driven by our asset/liability management analyses and by local market conditions.

In connection with the above-mentioned strategy, we simulate the change in net interest income and net interest margin given immediate and parallel interest rate shocks over a 12-month horizon.  Shown below are possible changes to net interest income and the net interest margin based upon the model’s program under a 200 basis point increase in the interest rates as of December 31, 2016:





These results indicate the effect of immediate rate changes and do not consider the yield from reinvesting in short-term versus long-term instruments.  The above profile illustrates that, if there were an immediate and sustained increase of 200 basis points in interest rates, our net interest income would increase by $102 thousand over the “base case” (i.e., no interest rate change) and our net interest margin would increase from 3.14% to 3.20%.  Our net interest margin will increase if rates rise.  We did not consider a decrease in interest rates in our analysis as interest rates remain at relatively low levels and have been increasing in the last year.  Based upon the review of management and our Board, we consider the results indicated by the report to be acceptable.    





The preceding table indicates that we have a positive one-year cumulative gap of $18.5 million at December 31, 2016.  This indicates that funds expected to become available in the next year due to maturing assets are greater than interest-bearing liabilities coming due in the next year.  Certain notes payable have contractual maturities of 72 months but can be withdrawn in whole or in part at any time prior to maturity without restriction.  While historically our investors have not withdrawn all of these funds prior to their maturity, for purposes of the maturity analysis above, these notes are included in the Year 1 maturity column.



When an increase in interest rates will help the entity and a decrease in interest rates will hurt the entity, the entity is considered to be asset sensitive.  Currently, our balance sheet is asset sensitive as the amount of assets maturing is greater than the amount of liabilities maturing over the next year.  In the view of management, this sensitivity will not have a material adverse impact on the Company’s financial position and results of operations for 2017.

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Item 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

Included herewith are the following financial statements: