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EX-32.2 - EX-32.2 - MINISTRY PARTNERS INVESTMENT COMPANY, LLCc130-20170930xex32_2.htm
EX-32.1 - EX-32.1 - MINISTRY PARTNERS INVESTMENT COMPANY, LLCc130-20170930xex32_1.htm
EX-31.2 - EX-31.2 - MINISTRY PARTNERS INVESTMENT COMPANY, LLCc130-20170930xex31_2.htm
EX-31.1 - EX-31.1 - MINISTRY PARTNERS INVESTMENT COMPANY, LLCc130-20170930xex31_1.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 



FORM 10-Q

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

For the quarterly period ended September 30, 2017



OR



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

For the period from _____ to _____



333-4028la

(Commission file No.)

 

MINISTRY PARTNERS INVESTMENT COMPANY, LLC

(Exact name of registrant as specified in its charter)

 

 

CALIFORNIA

(State or other jurisdiction of incorporation or organization

26-3959348

(I.R.S. employer identification no.)

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

(Address of principal executive offices)

 

(714) 671-5720

(Registrant's telephone number, including area code)



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



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

Large accelerated filer 

Accelerated filer 

 Non-accelerated filer 

Smaller reporting company filer 

Emerging growth company 

 



If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act .    



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



At September 30, 2017, registrant had issued and outstanding 146,522 units of its Class A common units.  The information contained in this Form 10-Q should be read in conjunction with the registrant’s Annual Report on Form 10-K for the year ended December 31, 2016.

 


 





MINISTRY PARTNERS INVESTMENT COMPANY, LLC



FORM 10-Q



TABLE OF CONTENTS





 

PART I — FINANCIAL INFORMATION

 



 

Item 1. Consolidated Financial Statements

F - 1



 

Consolidated Balance Sheets at September 30, 2017 (unaudited) and December 31, 2016 (audited)

F - 1



 

Consolidated Statements of Income (unaudited) for the three and nine months ended September 30, 2017 and 2016

F - 2



 

Consolidated Statements of Cash Flows (unaudited) for the nine months ended September 30, 2017 and 2016

F - 3



 

Notes to Consolidated Financial Statements

F - 4



 

Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

3



 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

18



 

Item 4.  Controls and Procedures

18



 

PART II —OTHER INFORMATION

 



 

Item 1.  Legal Proceedings

19

Item 1A.  Risk Factors

19

Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds

19

Item 3.  Defaults Upon Senior Securities

19

Item 4.  Mine Safety Disclosures

19

Item 5.  Other Information

19

Item 6.  Exhibits

19



 

SIGNATURES

21



 

Exhibit 31.1 — Certification of Chief Executive Officer pursuant to Rule 13a-14(a) or Rule 15(d)-14(a)

 



 

Exhibit 31.2 — Certification of Principal Financial and Accounting Officer pursuant to Rule 13a-14(a) or Rule 15(d)-14(a) 

 



 

Exhibit 32.1 — Certification pursuant to 18 U.S.C. §1350 as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002

 



 

Exhibit 32.2 — Certification pursuant to 18 U.S.C. §1350 as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002

 





 

2

 


 

PART I -l FINANCIAL INFORMATION

 

Item 1.  Financial Statements

 

MINISTRY PARTNERS INVESTMENT COMPANY, LLC

CONSOLIDATED BALANCE SHEETS

SEPTEMBER 30, 2017 AND DECEMBER 31, 2016

 (Dollars in Thousands Except Unit Data)







 

 

 

 

 

 



 

 

 

 

 

 



 

2017

 

2016



 

(Unaudited)

 

(Audited) 

Assets:

 

 

 

 

 

 

Cash

 

$

8,537 

 

$

9,683 

Pledged cash

 

 

--

 

 

600 

Loans receivable, net of allowance for loan losses of $2,015 and $1,875 as of September 30, 2017 and December 31, 2016, respectively

 

 

149,955 

 

 

144,264 

Accrued interest receivable

 

 

693 

 

 

657 

Investments

 

 

897 

 

 

892 

Property and equipment, net

 

 

109 

 

 

115 

Other assets

 

 

700 

 

 

427 

Total assets

 

$

160,891 

 

$

156,638 

Liabilities and members’ equity

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

NCUA borrowings

 

$

82,712 

 

$

86,326 

Notes payable, net of debt issuance costs of $57 and $78 as of September 30, 2017 and December 31, 2016, respectively

 

 

67,037 

 

 

60,479 

Accrued interest payable

 

 

195 

 

 

173 

Borrower deposits

 

 

895 

 

 

117 

Other liabilities

 

 

617 

 

 

736 

Total liabilities

 

 

151,456 

 

 

147,831 

Members' Equity:

 

 

 

 

 

 

Series A preferred units, 1,000,000 units authorized, 117,100 units issued and outstanding at September 30, 2017 and December 31, 2016 (liquidation preference of $100 per unit); See Note 11

 

 

11,715 

 

 

11,715 

Class A common units, 1,000,000 units authorized, 146,522 units issued and outstanding at September 30, 2017 and December 31, 2016; See Note 11

 

 

1,509 

 

 

1,509 

Accumulated deficit

 

 

(3,789)

 

 

(4,417)

Total members' equity

 

 

9,435 

 

 

8,807 

Total liabilities and members' equity

 

$

160,891 

 

$

156,638 

 

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

 

 

F-1

 


 

 MINISTRY PARTNERS INVESTMENT COMPANY, LLC

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2017 AND 2016

(Dollars in Thousands)



 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



 

2017

 

2016

 

2017

 

2016

Interest income:

 

 

 

 

 

 

 

 

 

 

 

 

Interest on loans

 

$

2,393 

 

$

2,154 

 

 

7,014 

 

$

6,539 

Interest on interest-bearing accounts

 

 

11 

 

 

 

 

37 

 

 

22 

Total interest income

 

 

2,404 

 

 

2,161 

 

 

7,051 

 

 

6,561 

Interest expense:

 

 

 

 

 

 

 

 

 

 

 

 

NCUA borrowings

 

 

531 

 

 

560 

 

 

1,600 

 

 

1,686 

Notes payable

 

 

632 

 

 

490 

 

 

1,805 

 

 

1,432 

Total interest expense

 

 

1,163 

 

 

1,050 

 

 

3,405 

 

 

3,118 

Net interest income

 

 

1,241 

 

 

1,111 

 

 

3,646 

 

 

3,443 

Provision for loan losses

 

 

32 

 

 

--

 

 

180 

 

 

45 

Net interest income after provision for loan losses

 

 

1,209 

 

 

1,111 

 

 

3,466 

 

 

3,398 

Non-interest income:

 

 

 

 

 

 

 

 

 

 

 

 

Broker-dealer commissions and fees

 

 

503 

 

 

143 

 

 

735 

 

 

558 

Other lending income

 

 

96 

 

 

101 

 

 

328 

 

 

297 

Total non-interest income

 

 

599 

 

 

244 

 

 

1,063 

 

 

855 

Non-interest expenses:

 

 

 

 

 

 

 

 

 

 

 

 

Salaries and benefits

 

 

695 

 

 

691 

 

 

2,053 

 

 

2,160 

Marketing and promotion

 

 

81 

 

 

51 

 

 

123 

 

 

108 

Office operations

 

 

391 

 

 

357 

 

 

1,109 

 

 

1,121 

Foreclosed assets, net

 

 

--

 

 

(8)

 

 

--

 

 

(281)

Legal and accounting

 

 

77 

 

 

97 

 

 

352 

 

 

403 

Total non-interest expenses

 

 

1,244 

 

 

1,188 

 

 

3,637 

 

 

3,511 

Income before provision for income taxes

 

 

564 

 

 

167 

 

 

892 

 

 

742 

Provision for income taxes

 

 

 

 

 

 

18 

 

 

17 

Net income

 

$

558 

 

$

161 

 

 

874 

 

$

725 



 

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

 

 

F-2

 


 

MINISTRY PARTNERS INVESTMENT COMPANY, LLC

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2017 and 2016 

(Dollars in Thousands)



 

 

 

 

 

 



 

 

 

 

 

 



 

2017

 

2016

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

 

Net income

 

$

874 

 

$

725 

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

 

 

 

 

 

 

Depreciation

 

 

25 

 

 

15 

Amortization of deferred loan fees

 

 

(373)

 

 

(265)

Amortization of debt issuance costs

 

 

90 

 

 

72 

Provision for loan losses

 

 

180 

 

 

45 

Accretion of allowance for loan losses on restructured loans

 

 

--

 

 

(5)

Accretion of loan discount

 

 

(14)

 

 

(34)

Gain on sale of loans

 

 

(135)

 

 

(122)

Gain on sale of foreclosed assets

 

 

--

 

 

(278)

Changes in:

 

 

 

 

 

 

Accrued interest receivable

 

 

(36)

 

 

(96)

Other assets

 

 

(192)

 

 

(36)

Other liabilities and accrued interest payable

 

 

594 

 

 

31 

Net cash provided by operating activities

 

 

1,013 

 

 

52 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

 

Loan purchases

 

 

--

 

 

--

Loan originations

 

 

(27,515)

 

 

(27,730)

Loan sales

 

 

9,288 

 

 

10,930 

Loan principal collections

 

 

12,878 

 

 

10,626 

Foreclosed asset sales

 

 

--

 

 

2,864 

Purchase of property and equipment

 

 

(17)

 

 

(9)

Net cash used by investing activities

 

 

(5,366)

 

 

(3,319)

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

 

Net change in NCUA borrowings

 

 

(3,614)

 

 

(2,802)

Net change in notes payable

 

 

6,537 

 

 

5,654 

Debt issuance costs

 

 

(70)

 

 

(45)

Dividends paid on preferred units

 

 

(246)

 

 

(145)

Net cash provided by financing activities

 

 

2,607 

 

 

2,662 

Net decrease in cash

 

 

(1,746)

 

 

(605)

Cash at beginning of period

 

 

10,283 

 

 

11,645 

Cash at end of period

 

$

8,537 

 

$

11,040 

Supplemental disclosures of cash flow information

 

 

 

 

 

 

Interest paid

 

$

3,383 

 

$

3,118 

Income taxes paid

 

$

--

 

$

19 

Transfer of foreclosed assets to investments

 

$

--

 

$

900 

Loans made to facilitate the sale of foreclosed assets

 

$

--

 

$

--

 

 

F-3

 


 

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





MINISTRY PARTNERS INVESTMENT COMPANY, LLC



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

The accounting and financial reporting policies of MINISTRY PARTNERS INVESTMENT COMPANY, LLC (the “Company”, “we”, or “our”) and its wholly-owned subsidiaries, Ministry Partners Funding, LLC, MP Realty Services, Inc., and Ministry Partners Securities, LLC, conform to accounting principles generally accepted in the United States and general financial industry practices.  The accompanying interim consolidated financial statements have not been audited.  A more detailed description of the Company’s accounting policies is included in our 2016 annual report filed on Form 10-K.  In the opinion of management, all adjustments (which include only normal recurring adjustments) necessary to present fairly the financial position, results of operations and cash flows at September 30, 2017 and for the nine months ended September 30, 2017 and 2016 have been made.



Certain information and note disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. The results of operations for the periods ended September 30, 2017 and 2016 are not necessarily indicative of the results for the full year.



1.  Summary of Significant Accounting Policies

 

Nature of Business

 

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



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



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



 

 

F-4

 


 

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



In March 2013, MP Securities began selling the Company’s Series 1 Subordinated Capital Notes and 2013 International Notes. On July 11, 2013, MP Securities executed a new membership agreement with FINRA which authorized it to act on a fully disclosed basis with a clearing firm to expand its brokerage activities. In addition, on July 11, 2013, the State of California granted its approval for MP Securities to provide registered investment advisory services. On September 26, 2013, MP Securities entered into a clearing firm agreement with Royal Bank of Canada Dain Rauscher (“RBC Dain”), thereby enabling MP Securities to open brokerage accounts for its customers. On March 14, 2013, the Company received a resident license from the California Department of Insurance to act as an Insurance Producer under the name Ministry Partners Insurance Agency, LLC (“MPIA”).  MPIA has reached agreements with multiple insurance companies to offer their life and disability insurance products, as well as fixed and variable annuities.  MP Securities can now offer a broad scope of investment services that will enable it to better serve the Company’s clients and customers.



Due to its broad offering of products and services, MP Securities is directly regulated by the following federal and state entities:  the Securities and Exchange Commission (SEC), the Financial Industry Regulatory Authority (FINRA), the California Department of Business Oversight, and the California Department of Insurance.  In addition, MP Securities is licensed with the state insurance or securities divisions in every state in which business is conducted.  As of September 30, 2017, MP Securities was licensed to sell insurance products in 16 states and as a broker dealer firm in 23 states.



Principles of Consolidation



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

 

Conversion to LLC



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



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

 

Cash and Cash Equivalents



For purposes of the statement of cash flows, cash equivalents include time deposits, certificates of deposit, and all highly liquid debt instruments with original maturities of three months or less.  The Company had no cash positions other than demand deposits as of September 30, 2017 and December 31, 2016. 

 

 

F-5

 


 



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



Use of Estimates



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



Investments



In December 2015, the Company finalized an agreement with Intertex Property Management, Inc., a California corporation, to enter into a joint venture to form Tesoro Hills, LLC (the “Valencia Hills Project”), a company that will develop and market property formerly classified by the Company as a foreclosed asset.  In January 2016, the Company transferred ownership in the foreclosed asset to the Valencia Hills Project as part of the agreement and reclassified the carrying value of the property on its financial statements from foreclosed assets to investments.  The Company’s initial investment in the joint venture was $900 thousand, which was equal to its carrying value in the foreclosed asset at December 31, 2015.  As of September 30, 2017, the Company’s investment in the joint venture is $897 thousand.  The Company’s investment in the joint venture is analyzed for impairment by management on a periodic basis.  Any impairment charges are recorded as a valuation allowance against the value of the asset.  Management concluded that the investment in the joint venture was not impaired as of September 30, 2017.  The Company’s share of income and expenses of the joint venture increase or decrease the Company’s investment and are recorded on the income statement as realized gains or losses on investment. 



Loans Receivable



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



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



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



Allowance for Loan Losses



 

 

F-6

 


 

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



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



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



-

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

-

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

-

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

-

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

-

The effect of credit concentrations.



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



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



 

 

F-7

 


 

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



Troubled Debt Restructurings



A troubled debt restructuring is a loan for which the Company, for reasons related to a borrower’s financial difficulties, grants a concession to a borrower that the Company would not otherwise consider. A restructuring of a loan usually involves an interest rate modification, extension of the maturity date, or reduction of accrued interest owed on the loan on a contingent or absolute basis. 



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



Loan Portfolio Segments and Classes



Management segregates the loan portfolio into portfolio segments for purposes of evaluating the allowance for loan losses. A portfolio segment is defined as the level at which the Company develops and documents a systematic method for determining its allowance for loan losses. The portfolio segments are segregated based on loan types and the underlying risk factors present in each loan type. Such risk factors are periodically reviewed by management and revised as deemed appropriate. 



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



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



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



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



 

 

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



Credit Quality Indicators



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



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



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



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



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



Substandard: Loans and other credit extensions bearing this grade are considered to be inadequately protected by the current net assets and debt service capacity of the borrower or of any pledged collateral. These obligations, even if apparently protected by collateral value, have well-defined weaknesses related to adverse financial, managerial, economic, ministry or governance related deficiencies, or environmental conditions which have clearly jeopardized repayment of principal and interest as originally intended. Furthermore, there is the possibility that some future loss will be sustained if such weaknesses are not corrected.



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



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



 

 

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Foreclosed Assets



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



Transfers of Financial Assets



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



The Company, from time to time, sells participation interests in mortgage loans it has originated or acquired. In order to recognize the transfer of a portion of a financial asset as a sale, the transferred portion and any portion that continues to be held by the transferor must represent a participating interest, and the transfer of the participating interest must meet the conditions for surrender of control. To qualify as a participating interest: (i) each portion of a financial asset must represent a proportionate ownership interest in an entire financial asset, (ii) from the date of transfer, all cash flows received from the entire financial asset must be divided proportionately among the participating interest holders in an amount equal to their share of ownership; (iii) the transfer must be made on a non-recourse basis (other than standard representations and warranties made under the loan participation sale agreement) to, or subordination by, any participating interest holder; and (iv) no party has the right to pledge or exchange the entire financial asset. If the participating interest or surrender of control criteria is not met, the transaction is accounted for as a secured borrowing arrangement.



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



Property and Equipment



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



Debt Issuance Costs



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



Employee Benefit Plan



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

 

 

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Income Taxes



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



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



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 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 the Company’s 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. The Company is currently evaluating the potential impact of the pending adoption of ASU 2016-02 on our consolidated financial statements.



 

 

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In March 2016, the FASB issued ASU 2016-07, “Investments – Equity Method and Joint Ventures (Topic 323): Simplifying the Transition to the Equity Method of Accounting.”  ASU 2016-07 simplifies the accounting for entities that have an investment that becomes qualified for the equity method of accounting as a result of an increase in the level of ownership interest or degree of influence in the investment.  This ASU eliminates the requirement that when an investment qualifies for use of the equity method as a result of an increase in ownership interest or degree of influence, the investor must adjust the investment, results of operations, and retained earnings retroactively on a step-by-step basis.  The cost of acquiring the additional interest is added to the current basis of the investor’s previously held interest.  The Company is currently evaluating the impact that ASU 2016-07 will have on its consolidated statements of financial position or financial statement disclosures.



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

 

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



In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606), requiring an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The updated standard will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective, and permits the use of either a full retrospective method or a retrospective with cumulative effect transition method. The ASU will be effective for annual reporting periods beginning after December 15, 2017, and interim periods within annual periods beginning after December 15, 2018. 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. 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 a cumulative adjustment. The Company is currently evaluating the potential impact of the pending adoption of ASU 2016-20 on its consolidated financial statements, and has not yet identified which transition method will be applied upon adoption.

 

The Company’s revenue is mainly comprised of interest income on financial instruments, which is explicitly excluded from the scope of ASU 2014-09. However, management is currently evaluating the potential impact that the ASU may have on the financial statements with regard to certain types of non-interest income.



 

 

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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. The Company is currently evaluating the potential impact of the pending adoption of ASU 2016-20 on its consolidated financial statements, and has 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 the Company’s consolidated financial statements.

  

2.  Pledge of Cash



Occasionally, the Company will pledge cash as collateral for its borrowings or its secured notes offered under a $85 million private offering memorandum (the “Secured Notes”). This cash is considered restricted cash.  At December 31, 2016,  $600 thousand was pledged as collateral for the outstanding Secured NotesThe Company had no cash pledged as collateral for its Secured Notes or its NCUA borrowings at September 30, 2017.



3.  Related Party Transactions

 

Transactions with Equity Owners



The Company maintains a portion of its cash funds at ECCU, its largest equity investor, and also at ACCU. Total funds held with ECCU were $616 thousand and $1.2 million at September 30, 2017 and December 31, 2016, respectively; total funds held with ACCU were $3.9 million and $4.7 million at September 30, 2017 and December 31, 2016, respectively. Interest earned on funds held with ECCU totaled $4.7 thousand and $14.0 thousand for the nine months ended September 30, 2017 and 2016, respectively. Interest earned on funds held with ACCU totaled $19.0 thousand and $1.6 thousand for the nine months ended September 30, 2017 and 2016, respectively.

 

The Company leases physical facilities and purchase other services from ECCU pursuant to a written lease and services agreement. Charges of $95 thousand and $80 thousand for the nine months ended September 30, 2017 and 2016, respectively, were incurred for these services and are included in office operations expense. The method used to arrive at the periodic charge is based on the fair market value of services provided.  The Company believes that this method is reasonable.  

 

In the past, the Company has purchased mortgage loans, including loan participation interests from ECCU, its largest equity owner, and also from ACCU.  During the nine month periods ended September 30, 2017 and for the year ending December 31, 2016, the Company did not purchase any loans from either ECCU or ACCU.  With regard to loans purchased from ECCU in prior years, the Company recognized $352 thousand and $452 thousand of interest income during the nine months ended September 30, 2017 and 2016, respectively.  ECCU currently acts as the servicer for  seven of the 167 loans held in the Company’s loan portfolio.  Under the terms of the loan servicing agreement the Company entered into with ECCU, a servicing fee of 65 basis points is deducted from the interest payments it receives on wholly-owned loans ECCU services on its behalf.  In lieu of a servicing fee, loan participations the Company purchased from ECCU generally have pass-through rates which are up to 75 basis points

 

 

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lower than the loan’s contractual rate.  The Company negotiated the pass-through interest rates with ECCU on a loan by loan basis.  At September 30, 2017, the Company’s investment in wholly-owned loans serviced by ECCU totaled $0, while its investment in loan participations serviced by ECCU totaled $9.2 million. The final wholly-owned MPIC loan serviced by ECCU was refinanced out of the portfolio in May of 2017. With regard to loans purchased from ACCU in prior years, the Company recognized $66 thousand and $69 thousand of interest income during the nine months ended September 30, 2017 and for the year ending December 31, 2016, respectively. ACCU currently acts as the servicer for two of  the 167 loans held in the Company’s loan portfolio. The Company negotiated servicing fees that range between 50-75 basis points with ACCU on a loan by loan basis. At September 30, 2017, the Company’s investment in loan participations serviced by ACCU totaled $1.7 million.



On October 6, 2014, MP Securities, the Company’s wholly-owned subsidiary, entered into a Networking Agreement with ECCU pursuant to which MP Securities will assign one or more registered sales representatives to one or more locations designated by ECCU and offer investment products, investment advisory services, insurance products, annuities and mutual fund investments to ECCU’s members. MP Securities has agreed to offer only those investment products and services that have been approved by ECCU or its Board of Directors and comply with applicable investor suitability standards required by federal and state securities laws and regulations. MP Securities offers these products and services to ECCU members in accordance with NCUA rules and regulations and in compliance with its membership agreement with FINRA. MP Securities has agreed to compensate ECCU for permitting it to use the designated location to offer such products and services to ECCU’s members under an arrangement that will entitle ECCU to be paid a percentage of total revenue received by MP Securities from transactions conducted for or on behalf of ECCU members.  The Networking Agreement may be terminated by either ECCU or MP Securities without cause upon thirty days prior written notice.  MP Securities paid $19 thousand and $65 thousand to ECCU under the terms of this agreement during the nine months ended September 30, 2017 and 2016, respectively.



On April 8, 2016, the Company and ECCU entered into a Master Services Agreement (the “Services Agreement”), pursuant to which the Company will provide marketing, member and client services, operational and reporting services to ECCU commencing on the effective date of the Services Agreement and ending on December 31, 2016; provided, however, that unless either party provides at least thirty (30) days written notice to the other party prior to its expiration, the agreement will automatically renew for successive one year periods.  The agreement was automatically renewed for the year ended December 31, 2017. Either party may terminate the Services Agreement for any reason by providing thirty (30) days prior written notice.  The Company has agreed to assign a designated service representative which must be approved by ECCU in performing its duties under the Agreement.  Pursuant to the terms of the Services Agreement, the Company will make visits, deliver reports, provide marketing, educational and loan related services to ECCU’s members, borrowers, leads, referral sources and contacts in the southeast region of the United States.  For the nine months ended September 30, 2017 and 2016, the Company recognized $41 thousand and $45 thousand, respectively, in income as a result of this agreement.



On October 5, 2016, the Company entered into a Successor Servicing Agreement with ECCU pursuant to which the Company has agreed to serve as the successor loan servicing agent for certain mortgage loans designated by ECCU in the event ECCU requests that the Company assume its obligation to act as the servicing agent for those loans.  The term of the Agreement is for a period of three years.  For the nine months ended September 30, 2017, the Company recognized $7 thousand in income as a result of this agreement.



On April 15, 2016, Mendell Thompson was appointed to the Company’s Board of Managers.  Mr. Thompson currently serves as President and Chief Executive Officer of America’s Christian Credit Union (“ACCU”).  The Company has sold $8.7 million in loan participations to ACCU since 2011, including $5.9 million during the nine month period ended September 30, 2017.  As of September 30, 2017, the outstanding balance of loan participations sold to ACCU is $7.5 million. 



In addition, the Company’s wholly-owned subsidiary, MP Securities has a Networking Agreement with ACCU pursuant to which MP Securities will assign one or more registered sales representatives to one or more locations designated by ACCU and offer investment products, investment advisory services, insurance products, annuities and mutual fund investments to ACCU’s members. MP Securities has agreed to offer only those investment products and services that have been approved by ACCU or its Board of Directors and comply with applicable investor

 

 

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suitability standards required by federal and state securities laws and regulations. MP Securities offers these products and services to ACCU members in accordance with NCUA rules and regulations and in compliance with its membership agreement with FINRA. MP Securities has agreed to compensate ACCU for permitting it to use the designated location to offer such products and services to ACCU’s members under an arrangement that will entitle ACCU to be paid a percentage of total revenue received by MP Securities from transactions conducted for or on behalf of ACCU members.  The Networking Agreement may be terminated by either ACCU or MP Securities without cause upon thirty days prior written notice.  MP Securities paid $173 thousand and $65 thousand to ACCU under the terms of this agreement during the nine months ended September 30, 2017 and 2016, respectively.  The terms of this agreement have not changed as a result of Mr. Thompson’s appointment to the Company’s Board of Managers.



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



On August 14, 2017, The Company and ACCU entered into a Master Services Agreement (the “ACCU Services Agreement”), pursuant to which the Company will provide marketing, member and client services, operational and reporting services to ACCU commencing on the effective date of the ACCU Services Agreement and ending on February 15, 2018, provided, however, that the agreement will automatically renew for successive one year periods. Either party may terminate the ACCU Services Agreement for any reason by providing thirty (30) days prior written notice. The Company has agreed to assign a designated representative which must be approved by ACCU in performing its duties under the Agreement. Pursuant to the terms of the ACCU Services Agreement, the Company will make visits, deliver reports, provide marketing, educational and loan related services to ACCU members, borrowers, leads, referral sources and contacts in the Western region of the United States. Due to the timing of the reporting period for the nine month period ended September 30, 2017, the Company has not yet recognized any income as a result of this agreement.



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



Transactions with Subsidiaries



The Company has entered into a selling agreement with its wholly-owned subsidiary, MP Securities, pursuant to which MP Securities will sell its Series 1 Subordinated Capital Notes (the “Subordinated Capital Notes”) and its 2013 International Notes (the “International Notes”)The Company has transitioned its compensation arrangement with MP Securities to an assets under management fee that will pay MP Securities a fee equal to 1% of the outstanding balances of the Subordinated Capital Notes and International Notes; subject, however, to a maximum gross dealer compensation of 2.5%.    The Company will pay MP Securities no selling commissions on any new sales of the Company’s Subordinated Capital Notes and International Notes.  MP Securities will receive an assets-under-management fee equal to 1% of the outstanding balances of our Subordinated Capital Notes and International Notes, determined on a monthly basis; subject however, to a maximum gross dealer compensation of 2.50% assessed on any notes sold prior to July 1, 2017.  The Company reserves the right to waive, reduce, or suspend payment of this assets under management fee at any time.  At no time will the compensation paid to MP Securities as an assets under management fee be assessed on a Subordinated Capital Note or International Note purchased prior to July 1, 2017 when a 2.5% commission was previously paid on the purchase transaction.  In addition, no assets under management fee will be assessed on any note purchased prior to July, 2017 once the total compensation paid to MP Securities resulting from the purchase of such note reaches 2.5%.    For each sale of a Subordinated Capital Notes and

 

 

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International Note, the Company will pay a 0.50% processing fee on the purchase of a note, payable at closing of a purchase of a note.



The Company has also entered into a Managing Participating Broker Agreement with MP Securities pursuant to which MP Securities will act as the managing broker for the offering of its Class 1 Notes under a registered offering made under the Securities Act of 1933, as amended  (the “Class 1 Notes”).  As the managing participating broker, MP Securities will maintain sales records, process and approve investor applications, conduct retail and wholesale marketing activities for sales of the Class 1 Notes and undertake its own due diligence review of the offering.  MP Securities does not serve as a lead underwriter or syndicate manager for the offering.    



Under the terms of the Amended and Restated Managing Participating Broker Dealer Agreement (the “MPB Agreement”) entered into with MP Securities, no selling commission will be paid when the sale of a Class 1 Note occurs.  No commissions are paid on the accrued interest deferred and added to the principal balance of a Class 1 Note when an investor elects to defer interest received on a Class 1 Note. 



On May 5, 2017, the Company and MP Securities entered into the MPB Agreement pursuant to which MP Securities will no longer be paid a selling commission upon the sale of a Class 1 Note.  Under the MPB Agreement, we compensate MP Securities with an assets under management fee equal to 1% of the outstanding balances of our Class 1 Notes; provided, however, that the maximum total compensation paid to MP Securities during the period a Class 1 Note is held does not exceed 5.5%The Company also pays a .50% processing fee on the purchase of a Class 1 Note.  The processing fee is assessed on the initial purchase of the Class 1 Note.  No processing fee will be assessed on any withdrawals or requests for liquidation of a Class 1 Note.  In the event an investor increases the amount invested in one of our variable interest earnings notes under our Class 1 Notes offering (the “Variable Series Note(s)”),  no additional processing fee will be paid to MP Securities.



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



In addition, the Company has signed an Administrative Services Agreement with MP Securities which stipulates that it will provide certain services to MP Securities.  These services include the lease of office space, use of equipment, including computers and phones, and payroll and personnel services.  In December 2015, the Company agreed to waive and abate MP Securities’ obligation to pay the Company for these services for a limited period of time not to exceed twelve months and subject to a maximum expense abatement of $250 thousand.  Pursuant to resolutions adopted by the Board of Managers in November 2016, the Board authorized the officers of the Company to extend the terms of this agreement for an additional twelve month period.  No abatements have been requested by MP Securities nor granted by the Company for the nine month period ended September 30, 2017 or the year ended December 31, 2016



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



From time to time, the Company’s Board and members of its executive management team have purchased investor notes from the Company or have purchased investment products through MP Securities. Investor notes payable to related parties totaled $89 thousand and $53 thousand at September 30, 2017 and December 31, 2016, respectively.



 

 

F-16

 


 

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



4.  Loans Receivable and Allowance for Loan Losses

 

The Company originates church mortgage loans, participates in church mortgage loans and also purchases entire church mortgage loans.  The loans fall into four classes: whole loans for which the Company possesses the first collateral position, whole loans that are either unsecured or for which the Company possesses a junior collateral position, participated loans for which the Company possesses the first collateral position and participated loans for which the Company possesses a junior collateral position.  All of the loans are made to various evangelical churches and ministry related organizations, primarily to purchase, refinance, construct or improve facilities. Loan maturities extend through 2027. Loans yielded a weighted average of 6.32% and 6.28% as of September 30, 2017 and December 31, 2016, respectively. A summary of the Company’s mortgage loans owned as of September 30, 2017 and December 31, 2016 is as follows (dollars in thousands):









 

 

 

 

 

 



 

 

 

 

 

 



 

September 30,

 

December 31



 

2017

 

2016



 

 

 

 

 

 

Loans to evangelical churches and related organizations:

 

 

 

 

 

 

Real estate secured

 

$

152,343 

 

$

146,743 

Unsecured

 

 

1,458 

 

 

1,239 

Total loans

 

 

153,801 

 

 

147,982 



 

 

 

 

 

 

Deferred loan fees, net

 

 

(954)

 

 

(980)

Loan discount

 

 

(877)

 

 

(863)

Allowance for loan losses

 

 

(2,015)

 

 

(1,875)

Loans, net

 

$

149,955 

 

$

144,264 



Allowance for Loan Losses



The Company has established an allowance for loan losses of $2.01 million and $1.87 million as of September 30, 2017 and December 31, 2016 for loans held in its mortgage portfolio. For the nine months ended September 30, 2017 and the year ended December 31, 2016,  the Company recorded $40 thousand and $20 thousand, respectively, in charge-offs on its mortgage loan investments. Management believes that the allowance for loan losses as of September 30, 2017 and December 31, 2016 is appropriate.



 

 

F-17

 


 

Changes in the allowance for loan losses for the nine month period ended September 30, 2017 and the year ended December 31, 2016 are as follows (dollars in thousands):













 

 

 

 

 

 



 

 

 

 

 

 



 

Nine months ended

 

Year ended



 

September 30, 2017

 

December 31, 2016



 

 

 

 

 

 

Balance, beginning of period

 

$

1,875 

 

$

1,785 

Provision for loan loss

 

 

180 

 

 

113 

Chargeoffs

 

 

(40)

 

 

(20)

Recoveries

 

 

--

 

 

Accretion of allowance related to restructured loans

 

 

--

 

 

(5)

Balance, end of period

 

$

2,015 

 

$

1,875 



The Company’s loan portfolio is comprised of one segment – church and ministry loans. The loans fall into four classes: whole loans for which the Company possesses the first collateral position, whole loans that are either unsecured or for which the Company possesses a junior collateral position, participated loans for which the Company possesses the first collateral position, and participated loans for which the Company possesses a junior collateral position.



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









 

 

 

 

 

 



 

 

 

 

 

 



 

Loans and Allowance for Loan Losses (by segment)



 

As of



 

 

 

 

 

 



 

September 30, 2017

 

December 31, 2016



 

 

 

 

 

 

Loans:

 

 

 

 

 

 

Individually evaluated for impairment

 

$

8,361 

 

$

8,878 

Collectively evaluated for impairment 

 

 

145,440 

 

 

139,104 

Balance

 

$

153,801 

 

$

147,982 



 

 

 

 

 

 

Allowance for loan losses:

 

 

 

 

 

 

Individually evaluated for impairment

 

$

1,165 

 

$

1,072 

Collectively evaluated for impairment 

 

 

850 

 

 

803 

Balance

 

$

2,015 

 

$

1,875 



 

 

F-18

 


 



The Company has established a standard loan grading system to assist management and loan review personnel in their analysis and supervision of the loan portfolio.  The following table is a summary of the loan portfolio credit quality indicators by loan class at September 30, 2017 and December 31, 2016, which is the date on which the information was updated for each credit quality indicator (dollars in thousands):













 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Credit Quality Indicators (by class)

As of September 30, 2017



 

Wholly-Owned First

 

Wholly-Owned Junior

 

Participation First

 

Participation Junior

 

Total



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Grade:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pass

 

$

113,358 

 

$

5,669 

 

$

12,765 

 

$

--

 

$

131,792 

Watch

 

 

13,579 

 

 

--

 

 

69 

 

 

--

 

 

13,648 

Special mention

 

 

2,143 

 

 

--

 

 

--

 

 

--

 

 

2,143 

Substandard

 

 

6,020 

 

 

198 

 

 

--

 

 

--

 

 

6,218 

Doubtful

 

 

--

 

 

--

 

 

--

 

 

--

 

 

--

Loss

 

 

--

 

 

--

 

 

--

 

 

--

 

 

--

Total

 

$

135,100 

 

$

5,867 

 

$

12,834 

 

$

--

 

$

153,801 













 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Credit Quality Indicators (by class)

As of  December 31, 2016



 

Wholly-Owned First

 

Wholly-Owned Junior

 

Participation First

 

Participation Junior

 

Total



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Grade:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pass

 

$

109,744 

 

$

5,600 

 

$

10,590 

 

$

--

 

$

125,934 

Watch

 

 

12,950 

 

 

--

 

 

220 

 

 

--

 

 

13,170 

Special mention

 

 

2,334 

 

 

--

 

 

--

 

 

--

 

 

2,334 

Substandard

 

 

6,339 

 

 

205 

 

 

--

 

 

--

 

 

6,544 

Doubtful

 

 

--

 

 

--

 

 

--

 

 

--

 

 

--

Loss

 

 

--

 

 

--

 

 

--

 

 

--

 

 

--

Total

 

$

131,367 

 

$

5,805 

 

$

10,810 

 

$

--

 

$

147,982 





 

 

F-19

 


 



The following table sets forth certain information with respect to the Company’s loan portfolio delinquencies by loan class and amount at September 30, 2017 and at December 31, 2016 (dollars in thousands):









 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Age Analysis of Past Due Loans (by class)

As of September 30, 2017



 

30-59 Days Past Due

 

60-89 Days Past Due

 

Greater Than 90 Days

 

Total Past Due

 

Current

 

Total Loans

 

Recorded Investment 90 Days or more and Accruing

Church loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Wholly-Owned First

 

$

3,755 

 

$

686 

 

$

1,752 

 

$

6,193 

 

$

133,080 

 

$

139,273 

 

$

--

Wholly-Owned Junior

 

 

2,333 

 

 

--

 

 

--

 

 

2,333 

 

 

4,786 

 

 

7,119 

 

 

--

Participation First

 

 

--

 

 

--

 

 

--

 

 

--

 

 

7,409 

 

 

7,409 

 

 

--

Participation Junior

 

 

--

 

 

--

 

 

--

 

 

--

 

 

--

 

 

--

 

 

--

Total

 

$

6,088 

 

$

686 

 

$

1,752 

 

$

8,526 

 

$

145,275 

 

$

153,801 

 

$

--







 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Age Analysis of Past Due Loans (by class)

As of  December 31, 2016



 

30-59 Days Past Due

 

60-89 Days Past Due

 

Greater Than 90 Days

 

Total Past Due

 

Current

 

Total Loans

 

Recorded Investment 90 Days or more and Accruing

Church loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Wholly-Owned First

 

$

3,598 

 

$

886 

 

$

1,334 

 

$

5,818 

 

$

125,549 

 

$

131,367 

 

$

--

Wholly-Owned Junior

 

 

--

 

 

--

 

 

--

 

 

--

 

 

5,805 

 

 

5,805 

 

 

--

Participation First

 

 

1,358 

 

 

--

 

 

--

 

 

1,358 

 

 

9,452 

 

 

10,810 

 

 

--

Participation Junior

 

 

--

 

 

--

 

 

--

 

 

--

 

 

--

 

 

--

 

 

--

Total

 

$

4,956 

 

$

886 

 

$

1,334 

 

$

7,176 

 

$

140,806 

 

$

147,982 

 

$

--

 

 

F-20

 


 

The following tables are summaries of impaired loans by loan class as of and for the nine months ended September 30, 2017 and 2016, and the year ended December 31, 2016, respectively.  The unpaid principal balance reflects the contractual principal outstanding on the loan less interest payments recorded against principal on collateral-dependent loans. The net loan principal balance reflects the unpaid principal balance less specific allowances recorded against impaired loans.  The net recorded investment in impaired loans reflects the loan principal balance less discounts (dollars in thousands):













 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Impaired Loans (by class)

As of September 30, 2017



 

Unpaid Principal Balance

 

Related Allowance

 

Net Loan Principal Balance

 

Discount

 

Net Recorded Investment

With no allowance recorded:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Church loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Wholly-Owned First

 

$

4,096 

 

$

--

 

$

4,096 

 

$

425 

 

$

3,671 

Wholly-Owned Junior

 

 

198 

 

 

--

 

 

198 

 

 

11 

 

 

187 

Participation First

 

 

--

 

 

--

 

 

--

 

 

--

 

 

--

Participation Junior

 

 

--

 

 

--

 

 

--

 

 

--

 

 

--

With an allowance recorded:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Church loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Wholly-Owned First

 

 

4,068 

 

 

1,165 

 

 

2,903 

 

 

319 

 

 

2,584 

Wholly-Owned Junior

 

 

--

 

 

--

 

 

--

 

 

--

 

 

--

Participation First

 

 

--

 

 

--

 

 

--

 

 

--

 

 

--

Participation Junior

 

 

--

 

 

--

 

 

--

 

 

--

 

 

--

Total:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Church loans

 

$

8,362 

 

$

1,165 

 

$

7,197 

 

$

755 

 

$

6,442 



 

 

F-21

 


 







 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



 

For the three months ended September 30, 2017

 

For the nine months ended September 30, 2017



 

Average Recorded Investment

 

Interest Income Recognized

 

Average Recorded Investment

 

Interest Income Recognized

With no allowance recorded:

 

 

 

 

 

 

 

 

 

 

 

 

Church loans:

 

 

 

 

 

 

 

 

 

 

 

 

Wholly-Owned First

 

$

3,725 

 

$

--

 

$

3,764 

 

$

--

Wholly-Owned Junior

 

 

188 

 

 

 

 

189 

 

 

Participation First

 

 

--

 

 

--

 

 

--

 

 

--

Participation Junior

 

 

--

 

 

--

 

 

--

 

 

--

With an allowance recorded:

 

 

 

 

 

 

 

 

 

 

 

 

Church loans:

 

 

 

 

 

 

 

 

 

 

 

 

Wholly-Owned First

 

 

2,618 

 

 

--

 

 

2,700 

 

 

--

Wholly-Owned Junior

 

 

--

 

 

--

 

 

--

 

 

--

Participation First

 

 

--

 

 

--

 

 

--

 

 

--

Participation Junior

 

 

--

 

 

--

 

 

--

 

 

--

Total:

 

 

 

 

 

 

 

 

 

 

 

 

Church loans

 

$

6,531 

 

$

 

$

6,653 

 

$







 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Impaired Loans (by class)

As of December 31, 2016



 

Unpaid Principal Balance

 

Related Allowance

 

Net Loan Principal Balance

 

Discount

 

Net Recorded Investment

With no allowance recorded:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Church loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Wholly-Owned First

 

$

4,346 

 

$

--

 

$

4,346 

 

$

425 

 

$

3,921 

Wholly-Owned Junior

 

 

205 

 

 

--

 

 

205 

 

 

11 

 

 

194 

Participation First

 

 

--

 

 

--

 

 

--

 

 

--

 

 

--

Participation Junior

 

 

--

 

 

--

 

 

--

 

 

--

 

 

--

With an allowance recorded:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Church loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Wholly-Owned First

 

 

4,327 

 

 

1,072 

 

 

3,255 

 

 

319 

 

 

2,936 

Wholly-Owned Junior

 

 

--

 

 

--

 

 

--

 

 

--

 

 

--

Participation First

 

 

--

 

 

--

 

 

--

 

 

--

 

 

--

Participation Junior

 

 

--

 

 

--

 

 

--

 

 

--

 

 

--

Total:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Church loans

 

$

8,878 

 

$

1,072 

 

$

7,806 

 

$

756 

 

$

7,050 















 

 

 

 

 

 



 

 

 

 

 

 

 

 

F-22

 


 



 

For the year ended   December 31, 2016



 

Average Recorded Investment

 

Interest Income Recognized



 

 

 

 

 

 

With no allowance recorded:

 

 

 

 

 

 

Church loans:

 

 

 

 

 

 

Wholly-Owned First

 

$

4,085 

 

$

31 

Wholly-Owned Junior

 

 

198 

 

 

--

Participation First

 

 

--

 

 

--

Participation Junior

 

 

--

 

 

--



 

 

 

 

 

 

With an allowance recorded:

 

 

 

 

 

 

Church loans:

 

 

 

 

 

 

Wholly-Owned First

 

 

4,181 

 

 

13 

Wholly-Owned Junior

 

 

--

 

 

--

Participation First

 

 

--

 

 

--

Participation Junior

 

 

--

 

 

--

Total:

 

 

 

 

 

 

Church loans

 

$

8,464 

 

$

44 







 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Impaired Loans (by class)

As of September 30, 2016



 

Unpaid Principal Balance

 

Related Allowance

 

Net Loan Principal Balance

 

Discount

 

Net Recorded Investment

With no allowance recorded:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Church loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Wholly-Owned First

 

$

1,723 

 

$

--

 

$

1,723 

 

$

160 

 

$

1,562 

Wholly-Owned Junior

 

 

--

 

 

--

 

 

--

 

 

--

 

 

--

Participation First

 

 

--

 

 

--

 

 

--

 

 

--

 

 

--

Participation Junior

 

 

--

 

 

--

 

 

--

 

 

--

 

 

--

With an allowance recorded:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Church loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Wholly-Owned First

 

 

6,414 

 

 

783 

 

 

5,631 

 

 

585 

 

 

5,096 

Wholly-Owned Junior

 

 

3,266 

 

 

407 

 

 

2,859 

 

 

56 

 

 

3,803 

Participation First

 

 

--

 

 

--

 

 

--

 

 

--

 

 

--

Participation Junior

 

 

--

 

 

--

 

 

--

 

 

--

 

 

--

Total:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Church loans

 

$

11,403 

 

$

1,190 

 

$

10,213 

 

$

801 

 

$

9,412 

















 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

F-23

 


 



 

For the three months ended September 30, 2016

 

For the nine months ended September 30, 2016



 

Average Recorded Investment

 

Interest Income Recognized

 

Average Recorded Investment

 

Interest Income Recognized

With no allowance recorded:

 

 

 

 

 

 

 

 

 

 

 

 

Church loans:

 

 

 

 

 

 

 

 

 

 

 

 

Wholly-Owned First

 

$

1,588 

 

$

--

 

$

1,644 

 

$

--

Wholly-Owned Junior

 

 

--

 

 

--

 

 

--

 

 

--

Participation First

 

 

--

 

 

--

 

 

--

 

 

--

Participation Junior

 

 

--

 

 

--

 

 

--

 

 

--



 

 

 

 

 

 

 

 

 

 

 

 

With an allowance recorded:

 

 

 

 

 

 

 

 

 

 

 

 

Church loans:

 

 

 

 

 

 

 

 

 

 

 

 

Wholly-Owned First

 

 

5,875 

 

 

--

 

 

6,006 

 

 

--

Wholly-Owned Junior

 

 

3,217 

 

 

38 

 

 

3,238 

 

 

116 

Participation First

 

 

--

 

 

--

 

 

--

 

 

--

Participation Junior

 

 

--

 

 

--

 

 

--

 

 

--

Total:

 

 

 

 

 

 

 

 

 

 

 

 

Church loans

 

$

10,680 

 

$

38 

 

$

10,888 

 

$

116 



A summary of nonaccrual loans by loan class at September 30, 2017 and December 31, 2016 is as follows (dollars in thousands):





 

 

 



 

 

 

Loans on Nonaccrual Status (by class)

As of September 30, 2017



 

 

 

Church loans:

 

 

 

Wholly-Owned First

 

$

10,657 

Wholly-Owned Junior

 

 

216 

Participation First

 

 

--

Participation Junior

 

 

--

Total

 

$

10,873 







 

 

 



 

 

 

Loans on Nonaccrual Status (by class)

As of  December 31, 2016



 

 

 

Church loans:

 

 

 

Wholly-Owned First

 

$

8,673 

Wholly-Owned Junior

 

 

205 

Participation First

 

 

--

Participation Junior

 

 

--

Total

 

$

8,878 









No loans were restructured during the three month period ended September 30, 2017. The following table presents a summary of loans the Company restructured during the nine months ended September 30, 2017 and 2016. 





 

 

 

 

 

 

 

 

 

 

 

 

 

 

F-24

 


 



 

 

 

 

 

 

 

 

 

 

 

 





 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

Troubled Debt Restructurings (by class)

For the nine months ended September 30, 2017



 

 

 

 

 

 

 

 

 

 

 

 



 

Number of Loans

 

Pre-Modification Outstanding Recorded Investment

 

Post-Modification Outstanding Recorded Investment

 

Recorded Investment At Period End



 

 

 

 

 

 

 

 

 

 

 

 

Church loans:

 

 

 

 

 

 

 

 

 

 

 

 

Wholly-Owned First

 

 

 

$

1,291 

 

$

1,291 

 

$

1,291 

Wholly-Owned Junior

 

 

--

 

 

--

 

 

--

 

 

--

Participation First

 

 

--

 

 

--

 

 

--

 

 

--

Participation Junior

 

 

--

 

 

--

 

 

--

 

 

--

Total

 

 

 

$

1,291 

 

$

1,291 

 

$

1,291 























 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

Troubled Debt Restructurings (by class)

For the nine months ended September 30, 2016



 

 

 

 

 

 

 

 

 

 

 

 



 

Number of Loans

 

Pre-Modification Outstanding Recorded Investment

 

Post-Modification Outstanding Recorded Investment

 

Recorded Investment At Period End



 

 

 

 

 

 

 

 

 

 

 

 

Church loans:

 

 

 

 

 

 

 

 

 

 

 

 

Wholly-Owned First

 

 

 

$

944 

 

$

944 

 

$

939 

Wholly-Owned Junior

 

 

--

 

 

--

 

 

--

 

 

--

Participation First

 

 

--

 

 

--

 

 

--

 

 

--

Participation Junior

 

 

--

 

 

--

 

 

--

 

 

--

Total

 

 

 

$

944 

 

$

944 

 

$

939 



The Company restructured two loans and one loan during the nine month periods ended September 30, 2017 and 2016, respectively. For the two loans restructured during the nine months ended September 30, 2017, the Company modified payment terms but did not add any accrued interest or other amounts to either loan. For the one loan restructured during the nine months ended September 30, 2016, the Company added unpaid accrued interest

 

 

F-25

 


 

outstanding to the loan balance and offset this with a corresponding discount of the same amount. The Company also lowered the interest rate on the loan and extended the loan’s maturity date.









None of the loans restructured during the nine months ended September 30, 2017 defaulted during the period.





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



As of September 30, 2017,  no additional funds were committed to be advanced in connection with loans modified in troubled debt restructurings.    



5.  Investments



The Company’s investments at September 30, 2017 consist of an ownership interest in a joint venture, the Valencia Hills ProjectThe Company’s ownership interest is equal to the value of its initial investment in the joint venture which consisted of a $900 thousand property that was previously foreclosed on by the Company.  The joint venture incurred $6 thousand in gains for the nine months ended September 30, 2017As of September 30, 2017, the value of the Company’s investment in the joint venture is $897 thousand.  Management has conducted an evaluation of the investment as of September 30, 2017 and has determined that the investment is not impaired.  The Company’s investment in the joint venture was $892 thousand at December 31, 2016.  For the year ended December 31, 2016, property taxes paid on the real property owned by the joint venture was expensed on the 2016 financial statements, but was capitalized as an asset as of September 30, 2017.  As a result, the value of the investment was increased from $892 thousand at December 31, 2016 to $897 thousand as of September 30, 2017.



 

 

F-26

 


 



6.  Foreclosed Assets



The Company’s investment in foreclosed assets was zero at September 30, 2017 and at December 31, 2016The Company did not record any loss provisions on foreclosed assets during the nine months ended September 30, 2017. 



Foreclosed assets are presented net of an allowance for losses.  An analysis of the allowance for losses on foreclosed assets is as follows for the period ended December 31, 2016 (dollars in thousands):









 

 

 



 

 

 



 

 

Allowance for Losses on Foreclosed Assets for the year ended December 31, 2016



 

 

Balance, beginning of period

 

$

1,111 

Provision for losses

 

 

(6)

Charge-offs

 

 

(1,111)

Recoveries

 

 

Balance, end of period

 

$

--



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











 

 

 



 

 

 



 

 

Foreclosed Asset Expenses (Income) for the three months ended September 30, 2016



 

 

Net loss (gain) on sale of real estate

 

$

--

Provision for losses

 

 

--

Operating expenses, net of rental income

 

 

(8)

Net expense (income)

 

$

(8)



 

 

 



 

 

 



 

 

Foreclosed Asset Expenses (Income) for the nine months ended September 30, 2016



 

 

Net loss (gain) on sale of real estate

 

$

(278)

Provision for losses

 

 

(6)

Operating expenses, net of rental income

 

 

Net expense (income)

 

$

(281)



 

 

F-27

 


 



















7.  Loan Participation Sales



During the nine months ended September 30, 2017,  the Company sold participations in six church loans totaling $9.3 million while retaining servicing responsibilities on the loans.  As a result of these sales, the Company recorded servicing assets totaling $177 thousand.  During the year ended December 31, 2016, the Company sold participations in eight church loans totaling $14.3 million.  As a result of these sales, the Company recorded servicing assets totaling $155 thousand.  Servicing assets are amortized using the interest method as an adjustment to servicing fee income.  Amortization totaled $80 thousand for the nine months ended September 30, 2017



A summary of servicing assets for the nine months ended September 30, 2017 and 2016, and the year ended December 31, 2016 is as follows (dollars in thousands):









 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 



For the nine months ended

 

For the year ended



September, 30

 

December 31,



2017

 

2016

 

2016

Balance, beginning of period

$

258 

 

$

186 

 

$

186 

Additions:

 

 

 

 

 

 

 

 

Servicing obligations from sale of loan participations

 

177 

 

 

140 

 

 

155 

Subtractions:

 

 

 

 

 

 

 

 

Amortization

 

(80)

 

 

(66)

 

 

(83)

Balance, end of period

$

355 

 

$

260 

 

$

258 

















8. Premises and Equipment

Premises and equipment consist of the following at September 30, 2017 and December 31, 2016 (dollars in thousands):







 

 

 

 

 

 



 

 

 

 

 

 



 

As of September 30,

 

As of December 31,



 

2017

 

2016



 

 

 

 

 

 

Furniture and office equipment

 

$

484 

 

$

468 

Computer system

 

 

222 

 

 

222 

Leasehold improvements

 

 

25 

 

 

25 

Total premises and equipment

 

 

731 

 

 

715 

Less accumulated depreciation and amortization

 

 

(622)

 

 

(600)

Premises and equipment, net

 

$

109 

 

$

115 





Depreciation and amortization expense for the nine months ended September 30, 2017 and 2016 amounted to $25 thousand and $9 thousand, respectively.

 

 

F-28

 


 



9.  NCUA Borrowings

 

Members United Facility



On November 4, 2011, the Company and the National Credit Union Administration Board As Liquidating Agent of Members United Corporate Federal Credit Union (“Lender”) entered into an $87.3 million credit facility refinancing transaction (the “MU Credit Facility”).  The MU Credit Facility replaced the original $100 million CUSO Line entered into by and between the Company and Members United Corporate Federal Credit Union on May 7, 2008.  Accrued interest is due and payable monthly in arrears on the MU Credit Facility on the first day of each month at the lesser of the maximum interest rate permitted by applicable law under the loan documents or 2.525%. The term loan may be repaid or retired without penalty, but any amounts repaid or prepaid under the MU Credit Facility may not be re-borrowed.  On March 30, 2015, the Company and the NCUA entered into an agreement to amend to the Loan and Security Agreement (the “LSA Amendments”) for both the MU Credit Facility and the $23.5 million credit facility the Company has with the National Credit Union Administration as Liquidating Agent of Western Federal Credit Untion (the “WesCorp Credit Facility”).  The LSA Amendments altered the collateral requirements on both facilities, as well as some of the Company’s reporting requirements to the NCUA.  The balance of the MU Credit Facility was $64.3 million and $67.1 million at September 30, 2017 and December 31, 2016, respectively.  Effective as of November 30, 2016, the Company and the Lender agreed to amend the terms of the facility.  Under the amended terms of the facility, the required minimum monthly payment was increased to $450 thousand, and the facility will mature on November 1, 2026, at which point the final principal payment will be due. 



The MU Credit Facility includes a number of borrower covenants, including affirmative covenants to maintain the collateral free of liens, to timely pay the amounts due on the facility, to provide the Lender with interim or annual financial statements and annual and periodic reports filed with the U.S. Securities and Exchange Commission and maintain a minimum collateralization ratio of at least 110%  (120% for the MU Credit Facility and Wescorp Credit Facility combined).  If at any time the Company fails to maintain its required minimum collateralization ratio, it will be required to deliver cash or qualifying mortgage loans in an amount sufficient to enable us to meet its obligation to maintain a minimum collateralization ratio.  At September 30, 2017 and December 31, 2016, the collateral securing the MU Credit Facility had an aggregate principal balance of $73.4 million and $79.4 million, respectively.  The loan collateral securing the facility was sufficient at September 30, 2017 and December 31, 2016.



In addition to the minimum collateralization requirement, the MU Credit Facility also includes covenants which prevent the Company from renewing or extending a loan pledged as collateral under this facility unless certain conditions have been met and requires the borrower to deliver current financial statements to the Company.  Under the terms of the MU Credit Facility, the Company has established a lockbox maintained for the benefit of Lender that will receive all payments made by collateral obligors.  The Company’s obligation to repay the outstanding balance on this facility may be accelerated upon the occurrence of an “Event of Default” as defined in the MU Credit Facility.  Such Events of Default include, among others, failure to make timely payments due under the MU Credit Facility and the Company's breach of any of its covenants.  As of September 30, 2017 and December 31, 2016, the Company was in compliance with its covenants under the MU Credit Facility.



WesCorp Facility



On November 4, 2011, the Company and the National Credit Union Administration Board As Liquidating Agent of Western Corporate Federal Credit Union (previously herein defined as “Lender”) entered into a $23.5 million credit facility refinancing transaction (the “WesCorp Credit Facility Extension”).  The WesCorp Credit Facility Extension amends, restates and replaces a credit facility entered into by and between the Company and Western Corporate Federal Credit Union on November 30, 2009.  Under the WesCorp Credit Facility Extension, accrued interest is due and payable monthly in arrears on the first day of each month at the lesser of the maximum rate permitted by applicable law under the loan documents or 2.525%.  The term loan may be repaid or retired without penalty, but any amounts repaid or prepaid under the WesCorp Credit Facility Extension may not be re-borrowed.  The WesCorp Credit Facility Extension requires monthly principal and interest payments of $106 thousand.  As of September 30, 2017 and December 31, 2016,  $18.4 million and $19.2 million, respectively, was outstanding on the

 

 

F-29

 


 

WesCorp Credit Facility Extension. Effective as of November 30, 2016, the Company and the Lender agreed to amend the terms of the facility.  Under the amended terms of the facility, the required minimum monthly payment was increased to $129 thousand and the facility will mature on November 1, 2026, at which point the final principal payment will be due. 



The WesCorp Credit Facility Extension includes a number of borrower covenants, including affirmative covenants to maintain the collateral free of liens, to timely pay the amounts due on the facility, to provide the Lender with interim or annual financial statements and annual and periodic reports filed with the U.S. Securities and Exchange Commission and maintain a minimum collateralization ratio of at least 110% (120% for the MU Credit Facility and Wescorp Facility combined).  If at any time the Company fails to maintain its required minimum collateralization ratio, it will be required to deliver cash or qualifying mortgage loans in an amount sufficient to enable it to meet its obligation to maintain a minimum collateralization ratio.  As of September 30, 2017 and December 31, 2016, the collateral securing the WesCorp Credit Facility Extension had an aggregate principal balance of $27.0 million and $26.9 million, respectively. The loan collateral securing the facility was sufficient at September 30, 2017 and December 31, 2016.



As of September 30, 2017 and December 31, 2016, the Company was in compliance with its covenants under the Wescorp Credit Facility Extension.



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







 

 

 



 

 

 

2018

 

$

4,915 

2019

 

 

5,046 

2020

 

 

5,170 

2021

 

 

5,307 

2022

 

 

5,442 

Thereafter

 

 

56,832 



 

$

82,712 





Effective November 30, 2016, the Company and the Lender reached an agreement to amend both the MU Credit Facility and the Wescorp Credit Facility Extension to change the maturity date of the facilities from October 31, 2018 to November 1, 2026.  As part of this amendment, the required monthly payments on both facilities were increased.  The remaining principal owed on the facilities will be due and payable on November 1, 2026.









10Notes Payable

 

In addition to borrowings from financial institutions, the Company also relies on its investor notes to fund investments in mortgage loan assets and fund its general operations. Except for the Company’s private offering of secured notes, the notes are unsecured and are payable to investors who have purchased the securities, including individuals, churches, and Christian ministries, many of whom are members of ECCU and ACCU. Notes pay interest at stated spreads over an index rate that is adjusted every month. Interest can be reinvested or paid at the investor's option. The Company may repurchase all or a portion of these notes at any time at its sole discretion, and may allow investors to redeem their notes prior to maturity at its sole discretion.  The Company has offered its investor notes under registered public offerings with the SEC and in private placements exempt under the provisions of the Securities Act of 1933, as amended. 



Until December 31, 2014, the Company offered its Class A Notes in three series, including a Fixed Series, Flex Series and Variable Series pursuant to registration statements filed with the SEC. On June 24, 2011, the Company filed a Registration Statement with the SEC seeking to register an additional $75 million of its Class A Notes.  All of the Class A Notes are unsecured.  The offering included three categories of notes, including a fixed interest note, a variable interest note, and a flex note, which allows borrowers to increase their interest rate once a year with certain

 

 

F-30

 


 

limitations.  The interest rate the Company paid on the Fixed Series Notes and the Flex Series Notes are determined by reference to the Swap Index, an index that is based upon a weekly average Swap rate reported by the Federal Reserve Board, and is in effect on the date they are issued, or in the case of the Flex Series Notes, on the date the interest rate is reset. These notes bear interest at the Swap Index plus a rate spread of 1.7% to 2.5% and have maturities ranging from 12 to 84 months.  The interest rate the Company pays on a Variable Series Note is determined by reference to the three month LIBOR rate in effect on the date the interest rate is set plus a rate spread of 1.50% to 1.80%



The Class A Notes also contain restrictive covenants pertaining to paying dividends, making redemptions, acquiring, purchasing or making certain payments, requiring the maintenance of minimum tangible net worth, limitations on the issuance of additional notes and incurring of indebtedness.  The Class A Notes require the Company to maintain a minimum tangible adjusted net worth, as defined in the Class A Notes Trust Indenture Agreement, of not less than $4.0 million.  The Company’s other indebtedness, as defined in the Class A Notes Trust Indenture Agreement, and subject to certain exceptions enumerated therein, may not exceed $20.0 million outstanding at any time while any Class A Notes are outstanding.  The Company was in compliance with these covenants as of September 30, 2017





The Class A Notes have been issued under a Trust Indenture entered into between the Company and U.S. Bank National Association (US Bank).  The Class A Notes are part of up to $200 million of Class A Notes the Company may issue pursuant to the US Bank Indenture.  The Class A Note Offering expired on December 31, 2016 and the Company discontinued the sale of its Class A Notes as of that date.  At September 30, 2017 and December 31, 2016,  $13.3 million and $17.3 million of these notes were outstanding, respectively.



In January 2015, the Company registered with the SEC $85.0 million of new Class 1 Notes in two series, including a Fixed Series and Variable Series.  This is a "best efforts" offering and will continue through December 31, 2017.  The offering includes two categories of notes, including a fixed interest note and a variable interest note.  The interest rates the Company will pay on the Fixed Series Notes are determined by reference to the Swap Index, an index that is based upon a weekly average Swap rate reported by the Federal Reserve Board, and is in effect on the date they are issued. These notes bear interest at the Swap Index plus a rate spread of 1.7% to 2.5% and have maturities ranging from 12 to 60 months.  The interest rates the Company pays on the Variable Series Notes are determined by reference to the Variable Index in effect on the date the interest rate is set and bear interest at a rate of the Swap Index plus a rate spread of .20% to .65%.  Effective as of January 6, 2015, the Variable Index is defined under the Class 1 Notes as the three month LIBOR rate.  The Variable Series Notes will be repaid at the noteholder’s request at any time after the note has been outstanding with an unpaid principal balance of $10,000 or more.  At September 30, 2017 and December 31, 2016, the Company had $7.7 million and $6.6 million in outstanding Class 1 Variable Series Notes with an unpaid principal balance over $10,000. The Company also had $29.9 million and $26.2 million in outstanding Class 1 Fixed Series Notes at September 30, 2017 and December 31, 2016, respectively.



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



The Class 1 Notes were issued under a Trust Indenture between the Company and U.S. Bank National Association (“US Bank”).  The Class 1 Notes are part of up to $300 million of Class 1 Notes the Company may issue pursuant to the US Bank Indenture.  At September 30, 2017 and December 31, 2016,  $37.7 million and $32.9 million of Class 1 Notes were outstanding, respectively.

 

 

F-31

 


 



From time to time, the Company has also sold unsecured general obligation notes having various terms to ministries and ministry related organizations in private offerings under the Securities Act of 1933, as amended.  Except for a small number of investors (in total not exceeding 35 persons), the holders of these notes are accredited investors who meet the requirements of Regulation D under the Securities Act.



In January 2015, the Company began offering its Secured Notes under a new private placement memorandum pursuant to the requirements of Rule 506 of Regulation D.  Under this offering, the Company may sell up to $80.0 million in Secured Notes to qualified investors.  The certificates require as collateral either cash pledged in the amount of 100% of the outstanding balance of the certificates or loans receivable pledged in the amount of 105% of the outstanding balance of the certificates.  At September 30, 2017 and December 31, 2016,  $9.7 million and $3.4 million in Secured Notes were outstanding, respectively.



As part of this offering, the Company entered into a Loan and Security Agreement with MPF that appointed MPF as the collateral agent of any loans pledged as collateral for the Secured Notes.  At September 30, 2017 and December 31, 2016,  $10.4 million and $2.9 million in loans were pledged as collateral on the Secured Notes, respectively.  As the balance of the loans pledged as collateral at December 31, 2016 was not sufficient to meet the minimum collateral requirements, the Company pledged $600 thousand in cash to meet the requirements of the Secured Investment Certificates.  The outstanding balance of loans pledged as collateral at September 30, 2017 met the minimum collateral requirements of the Company’s Loan and Security Agreement.



In February 2013, the Company launched the sale of its Series 1 Subordinated Capital Notes pursuant to a limited private offering to qualified investors that meet the requirements of Rule 506 of Regulation D.  The Series 1 Subordinated Capital Notes have been offered with maturity terms from 12 to 60 months at an interest rate fixed on the date of issuance, as determined by the then current seven-day average rate reported by the U.S. Federal Reserve Board for interest rate swaps. A total of $5.2 million and $5.1 million in notes sold pursuant to this offering were outstanding at September 30, 2017 and December 31, 2016, respectively. 



In March 2013, the Company launched the sale of a new private offering of its 2013 International Notes.  This offering was made only to qualified investors that meet the requirements of Rule 902 of Regulation S. Under the Series 1 Subordinated Notes and 2013 International Notes offerings, the Company is subject to certain covenants, including limitations on restricted payments, limitations on the amount of notes that can be sold, restrictions on mergers and acquisitions, and proper maintenance of books and records.  The Company was in compliance with these covenants at September 30, 2017.  A total of $0 and $54 thousand of its 2013 International Notes were outstanding at September 30, 2017 and December 31, 2016, respectively.



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



 

 

 

 

 

 

 



 

 

 

 

 

 

 

SEC Registered Public Offerings

 

Amount

 

 

Weighted Average Interest Rate

 

Class A Offering

 

$

13,305 

 

 

3.93 

%

Class 1 Offering

 

 

37,701 

 

 

3.62 

%



 

 

 

 

 

 

 

Private Offerings

 

 

 

 

 

 

 

Special Offering

 

 

1,076 

 

 

4.10 

%

Special Subordinated Notes

 

 

5,283 

 

 

4.84 

%

Secured Notes

 

 

9,730 

 

 

3.77 

%

International Offering

 

 

--

 

 

--

%

Total

 

$

67,095 

 

 

3.80 

%

 

 

F-32

 


 



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







 

 

 



 

 

 

2018

 

$

15,718 

2019

 

 

12,052 

2020

 

 

13,468 

2021

 

 

10,041 

2022

 

 

15,816 



 

$

67,095 



Debt issuance costs related to the Company’s notes payable were $57 thousand and $78 thousand at September 30, 2017 and December 31, 2016, respectively.













11Preferred and Common Units Under LLC Structure

The Series A Preferred Units are entitled to receive a quarterly cash dividend that is 25 basis points higher than the one-year LIBOR rate in effect on the last day of the calendar month for which the preferred return is approved.  The Company has also agreed to set aside an annual amount equal to 10% of its net profits earned for any year, after subtracting from profits the quarterly Series A Preferred Unit dividends paid, for distribution to its Series A Preferred Unit holders.    

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

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



12Retirement Plans



401(k)



All of the Company’s employees are eligible to participate in the Automated Data Processing, Inc. (“ADP”) 401(k) plan effective as of the date their employment commences.  No minimum service is required and the minimum age is 21. Each employee may elect voluntary contributions not to exceed 60% of salary, subject to certain limits based on U.S. tax law. The plan has a matching program, which qualifies the plan as a Safe Harbor 401(k) plan. As a Safe Harbor Section 401(k) plan, the Company matches each eligible employee’s contribution, dollar for dollar, up to 3% of the employee’s compensation, and 50% of the employee’s contribution that exceeds 3% of their compensation, up to a maximum contribution of 5% of the employee’s compensation.  Company matching contributions for the nine months ended September 30, 2017 and 2016 were $70 thousand and $55 thousand, respectively.



 

 

F-33

 


 

Profit Sharing



The profit sharing plan is for all employees who, at the end of the calendar year, are at least 21 years old, still employed, and have at least 900 hours of service during the plan year. The amount annually contributed on behalf of each qualified employee is determined by the Company’s Board of Managers and is calculated as a percentage of the eligible employee's annual earnings. Plan forfeitures are used to reduce the Company’s annual contribution. The Company made no profit sharing contributions for the plan during the nine months ended September 30, 2016No profit sharing contribution has been made or approved for the nine months ended September 30, 2017.



13Commitments and Contingencies 

   

Unfunded Commitments

The Company is a party to credit-related financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include un-advanced lines of credit, and standby letters of credit. Such commitments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the balance sheet.

The Company’s exposure to credit loss is represented by the contractual amount of these commitments. The Company uses the same credit policies in making commitments as it does for on-balance-sheet instruments. At September 30, 2017 and December 31, 2016, the following financial instruments were outstanding whose contract amounts represent credit risk (dollars in thousands):







 

 

 

 

 

 



 

 

 

 

 

 



 

Contract Amount at:



 

 

 

 

 

 



 

September 30, 2017

 

December 31, 2016

Undisbursed loans

 

$

1,637 

 

$

2,073 

Standby letter of credit

 

$

764 

 

$

764 



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



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

Operating Lease Commitments

The Company has lease commitments covering its offices in Brea and Fresno, California. At September 30, 2017, future minimum rental payments for the twelve months ending September 30 are as follows:





 

 

 

 

 



 

 

 

2018

 

$

135 

2019

 

 

31 

Total

 

$

166 

 

 

F-34

 


 

Total rent expense, including common area costs, was $107 thousand for the nine months ended September 30, 2017 and $106 thousand for the nine months ended September 30, 2016. The Fresno office lease is scheduled to expire in 2018.  There are no options to renew in the lease extension.  The Brea office lease expires in 2018 and contains one additional option to renew for five years.



14Fair Value Measurements

Fair Value Measurements Using Fair Value Hierarchy

Measurements of fair value are classified within a hierarchy based upon inputs that give the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The fair value hierarchy is as follows:

·

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

·

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

·

Level 3 inputs are unobservable and reflect an entity’s own assumptions about the assumptions that market participants would use in pricing the assets or liabilities. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the level in the fair value hierarchy within which the fair value measurement in its entirety falls has been determined based on the lowest level input that is significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset or liability.

Fair Value of Financial Instruments



The carrying amounts and estimated fair values of the Company’s financial instruments at September 30, 2017 and December 31, 2016, are as follows (dollars in thousands):







 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

Fair Value Measurements at September 30, 2017 using



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

Carrying Value

 

Quoted Prices in Active Markets for Identical Assets Level 1

 

Significant Other Observable Inputs Level 2

 

Significant Unobservable Inputs Level 3

 

Fair Value

FINANCIAL ASSETS:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash 

 

$

8,537 

 

$

8,537 

 

$

--

 

$

--

 

$

8,537 

Loans, net

 

 

149,955 

 

 

--

 

 

--

 

 

151,031 

 

 

151,031 

Investments

 

 

897 

 

 

--

 

 

--

 

 

897 

 

 

897 

Accrued interest receivable

 

 

693 

 

 

--

 

 

--

 

 

693 

 

 

693 

FINANCIAL LIABILITIES:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NCUA borrowings

 

$

82,712 

 

$

--

 

$

 

 

$

80,363 

 

$

80,363 

Notes payable

 

 

67,037 

 

 

--

 

 

--

 

 

67,972 

 

 

67,972 

 

 

F-35

 


 

Other financial liabilities

 

 

442 

 

 

--

 

 

--

 

 

442 

 

 

442 







 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

Fair Value Measurements at December 31, 2016 using



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

Carrying Value

 

Quoted Prices in Active Markets for Identical Assets Level 1

 

Significant Other Observable Inputs Level 2

 

Significant Unobservable Inputs Level 3

 

Fair Value

FINANCIAL ASSETS:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash 

 

$

9,683 

 

$

9,683 

 

$

--

 

$

--

 

$

9,683 

Loans, net

 

 

144,264 

 

 

--

 

 

--

 

 

144,125 

 

 

144,125 

Investments

 

 

892 

 

 

--

 

 

--

 

 

892 

 

 

892 

Accrued interest receivable

 

 

657 

 

 

--

 

 

--

 

 

657 

 

 

657 

FINANCIAL LIABILITIES:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NCUA borrowings

 

$

86,326 

 

$

--

 

$

--

 

$

83,322 

 

$

83,322 

Notes payable

 

 

60,479 

 

 

--

 

 

--

 

 

60,759 

 

 

60,759 

Other financial liabilities

 

 

302 

 

 

--

 

 

--

 

 

302 

 

 

302 



Management uses judgment in estimating the fair value of the Company’s financial instruments; however, there are inherent weaknesses in any estimation technique. Therefore, for substantially all financial instruments, the fair value estimates presented herein are not necessarily indicative of the amounts the Company could have realized in a sales transaction at September 30, 2017 and December 31, 2016.  



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



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



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



Investments – Fair value is estimated by analyzing the operations and marketability of the underlying investment to determine if the investment is other-than-temporarily impaired.



Notes Payable – The fair value of fixed maturity notes is estimated by discounting the future cash flows using the rates currently offered for notes payable of similar remaining maturities.  The discount rate is estimated by Company management by using market rates which reflect the interest rate risk inherent in the notes.



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



Off-Balance Sheet Instruments – The fair value of loan commitments is based on fees currently charged to enter into similar agreements, taking into account the remaining term of the agreements and the counterparties' credit standing. The fair value of loan commitments is insignificant at September 30, 2017 and December 31, 2016.

 

 

F-36

 


 

Fair Value Measured on a Nonrecurring Basis

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





 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



Fair Value Measurements Using:

 

 

 

   

 

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

 

Significant Other Obervable Inputs (Level 2)

 

Significant Unobservable Inputs (Level 3)

 

Total

Assets at September 30, 2017:

 

 

 

 

 

 

 

 

 

 

 

 

Collateral dependent loans (net of allowance and discount)

 

$

--

 

$

--

 

$

5,313 

 

$

5,313 

Investments

 

 

--

 

 

--

 

 

897 

 

 

897 

Total

 

$

--

 

$

--

 

$

6,210 

 

$

6,210 

   

 

 

 

 

 

 

 

 

 

 

 

 

   

 

 

 

 

 

 

 

 

 

 

 

 

Assets at December 31, 2016:

 

 

 

 

 

 

 

 

 

 

 

 

Collateral dependent loans (net of allowance and discount)

 

$

--

 

$

1,062 

 

$

4,736 

 

$

5,798 

Investments

 

 

--

 

 

--

 

 

892 

 

 

892 

Total

 

$

--

 

$

1,062 

 

$

5,628 

 

$

6,690 



Activity in Level 3 assets is as follows for the nine months ended September 30, 2017 and for the year ended December 31, 2016 (dollars in thousands):





 

 

 



 

 

 



 

Impaired loans



 

(net of allowance and discount)

Balance, December 31, 2016

 

$

4,736 

Re-classifications of assets from Level 2 into Level 3

 

 

1,046 

Loan payments and payoffs

 

 

(469)

Balance, September 30, 2017

 

$

5,313 

















 

 

 



 

 

 



 

Investments



 

(net of allowance and discount)

Balance, December 31, 2016

 

$

892 

Pro rata share of joint venture gains

 

 

Balance, September 30, 2017

 

$

897 

 

 

F-37

 


 







 

 

 



 

 

 



 

Impaired loans



 

(net of allowance and discount)

Balance, December 31, 2015

 

$

5,940 

Re-classifications of assets from Level 3 into Level 2

 

 

(990)

Allowance and discount, net of discount amortization

 

 

(452)

Loans that became impaired

 

 

653 

Loan payments and payoffs

 

 

(415)

Balance, December 31, 2016

 

$

4,736 







 

 

 



 

 

 



 

Investments



 

(net of allowance and discount)

Balance, December 31, 2015

 

$

--

Transfer of foreclosed assets to investments

 

 

900 

Pro rata share of joint venture losses

 

 

(8)

Balance, December 31, 2016

 

$

892 







 

 

 



 

 

 



 

Foreclosed assets



 

(net of allowance and discount)

Balance, December 31, 2015

 

$

900 

Transfer of foreclosed assets to investments

 

 

(900)

Balance, December 31, 2016

 

$

--







Impaired Loans



Collateral-dependent impaired loans are carried at the fair value of the collateral less estimated costs to sell, incorporating assumptions that experienced parties might use in estimating the value of such collateral. The fair value of collateral is determined based on appraisals. In some cases, adjustments were made to the appraised values for various factors including age of the appraisal, age of comparables included in the appraisal, and known changes in the market and in the collateral. When significant adjustments were based on unobservable inputs, the resulting fair value measurement has been categorized as a Level 3 measurement. Otherwise, collateral-dependent impaired loans are categorized under Level 2.



Joint Venture Investments   



Joint venture investments are initially recorded at cost, and are subsequently analyzed for impairment on a nonrecurring basis by comparing fair value to carrying value. Fair value is based on the value of the underlying real property, which is determined by appraisal. In come cases, adjustments are made to the appraised value for various factors including age of the appraisal, age of comparable properties included in the appraisal, and known changes in the market or in the collateral. Subsequent valuations of the real property are based on management estimates or on updated appraisals. Joint venture investments are categorized under Level 3.



The valuation methodologies used to measure the fair value adjustments for Level 3 assets recorded at fair value on a nonrecurring basis at September 30, 2017 and December 31, 2016 are summarized below (dollars in thousands):













 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

F-38

 


 

September 30, 2017

Assets

 

 

Fair Value (in thousands)

 

Valuation Techniques

 

Unobservable Input

 

Range (Weighted Average)

Impaired Loans

 

$

5,313

 

Discounted appraised value

 

Selling cost

 

10% - 15%  (10.30%)



 

 

 

 

Internal evaluations

 

Estimated market decrease

 

0% - 41%  (20.04%)



 

 

 

 

 

 

 

 

 

Investments

 

$

897

 

Internal evaluations

 

Estimated future market value

 

0%  (0%)



 

 

 

 

Internal evaluations

 

Discount due to market decline

 

0% - 70%  (40.05%)







 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

December 31, 2016

Assets

 

 

Fair Value (in thousands)

 

Valuation Techniques

 

Unobservable Input

 

Range (Weighted Average)



 

 

 

 

Discounted appraised value

 

Selling cost

 

10% - 15%  (10.55%)

Impaired Loans

 

$

4,736

 

Internal evaluations

 

Estimated market decrease

 

0% - 41%  (24.77%)



 

 

 

 

Internal evaluations

 

Discount due to title dispute

 

0% - 57%  (5.58%)

Investments

 

$

892

 

Internal evaluations

 

Estimated future market value

 

0%  (0%)































15Segment Information



Reportable Segments



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



There are two reportable segments: finance company (the parent company) and broker-dealer (MP Securities).  The finance company segment uses funds from the sale of debt securities, operations, and loan participations to originate or purchase mortgage loans. The broker-dealer segment sells debt securities and other investment products, as well as providing investment advisory and insurance services, to generate fee income.



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

 

 

F-39

 


 



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



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







 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 



 

 

Finance Company

 

 

Broker Dealer

 

 

Total



 

 

 

 

 

 

 

 

 

External income

 

$

7,380 

 

$

735 

 

$

8,114 

Intersegment revenue

 

 

--

 

 

738 

 

 

738 

External non-interest expenses

 

 

2,789 

 

 

848 

 

 

3,637 

Intersegment non-interest expenses

 

 

491 

 

 

--

 

 

491 

Segment net profit (loss)

 

 

504 

 

 

617 

 

 

1,121 

Segment assets

 

 

159,880 

 

 

1,077 

 

 

160,957 







 

 

 



 

 

 

Revenue

 

 

 

Total revenue of reportable segments

 

$

8,852 

Inter-segment revenue

 

 

(738)

Consolidated revenue

 

$

8,114 



 

 

 

Non-interest expenses

 

 

 

Total non-interest expenses of reportable segments

 

$

4,128 

Inter-segment non-interest expenses

 

 

(491)

Consolidated non-interest expenses

 

$

3,637 



 

 

 

Profit

 

 

 

Total income of reportable segments

 

$

1,121 

Inter-segment profits

 

 

(247)

Consolidated net income

 

$

874 



 

 

 

Assets

 

 

 

Total assets of reportable segments

 

$

160,957 

Segment accounts receivable from corporate office

 

 

(66)

Consolidated assets

 

$

160,891 





 

 

F-40

 


 

Financial information with respect to the reportable segments for the nine month period ended September 30, 2016 is as follows (dollars in thousands):



 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 



 

 

Finance Company

 

 

Broker Dealer

 

 

Total



 

 

 

 

 

 

 

 

 

External income

 

$

6,857 

 

$

558 

 

$

7,415 

Intersegment revenue

 

 

--

 

 

443 

 

 

443 

External non-interest expenses

 

 

2,645 

 

 

883 

 

 

3,528 

Intersegment non-interest expenses

 

 

249 

 

 

--

 

 

249 

Segment net profit (loss)

 

 

801 

 

 

118 

 

 

919 

Segment assets

 

 

152,187 

 

 

331 

 

 

152,518 







 

 

 



 

 

 

Revenue

 

 

 

Total revenue of reportable segments

 

$

7,858 

Inter-segment revenue

 

 

(443)

Consolidated revenue

 

$

7,415 



 

 

 

Non-interest expenses

 

 

 

Total non-interest expenses of reportable segments

 

$

3,777 

Inter-segment non-interest expenses

 

 

(249)

Consolidated non-interest expenses

 

$

3,528 



 

 

 

Profit

 

 

 

Total income of reportable segments

 

$

919 

Inter-segment profits

 

 

(194)

Consolidated net income

 

$

725 



 

 

 

Assets

 

 

 

Total assets of reportable segments

 

$

152,518 

Inter-segment prepaid expenses

 

 

--

Segment accounts receivable from corporate office

 

 

(6)

Consolidated assets

 

$

152,512 











16Income Taxes and State LLC Fees



MPIC is subject to a California gross receipts LLC fee of approximately $12,000 per year.  MP Securities was subject to a California gross receipts LLC fee of approximately $6,400 for the year ended December 31, 2016.  MP Realty incurred a tax loss for the years ended December 31, 2016 and 2015, and recorded a provision of $800 per year for the state minimum franchise tax.



MP Realty, which is taxed as a C corporation under U.S. tax laws, has federal and state net operating loss carryforwards of approximately $319,000 and $316,000, respectively which begin to expire in 2030. Management

 

 

F-41

 


 

assessed the realizability of the deferred tax asset and determined that a 100% valuation against the deferred tax asset was appropriate at December 31, 2016 and 2015.



Tax years ended December 31, 2013 through December 31, 2016 remain subject to examination by the Internal Revenue Service and the tax years ended December 31, 2012 through December 31, 2016 remain subject to examination by the California Franchise Tax Board.





 

 

 

F-42

 


 

Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations

 

SAFE HARBOR CAUTIONARY STATEMENT



This Form 10-Q contains forward-looking statements regarding Ministry Partners Investment Company, LLC and our wholly-owned subsidiaries, Ministry Partners Funding, LLC, MP Realty, and MP Securities, LLC, including, without limitation, statements regarding our expectations with respect to revenue, credit losses, levels of non-performing assets, expenses, earnings and other measures of financial performance.  Statements that are not statements of historical facts may be deemed to be forward-looking statements as that term is defined in the Private Securities Litigation Reform Act of 1995.  The words “anticipate,” “believe,” “estimate,” “expect,” “plan,” “intend,” “should,” “seek,” “will,” and similar expressions are intended to identify these forward-looking statements, but are not the exclusive means of identifying them.  These forward-looking statements reflect the current views of our management.



These forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties that are subject to change based upon various factors (many of which are beyond our control).  Such risks, uncertainties and other factors that could cause our financial performance to differ materially from the expectations expressed in such forward-looking statements include, but are not limited to, the risks set forth in our Annual Report on Form 10-K for the year ended December 31, 2016, as well as the following:



·

We are a highly leveraged company and our indebtedness could adversely affect our financial condition and business;



·

we depend on the sale of our debt securities to finance our business and have relied on the renewals or reinvestments made by our holders of debt securities when their debt securities mature to fund our business;



·

our ability to maintain liquidity or access to other sources of funding;



·

the allowance for loan losses that we have set aside proves to be insufficient to cover actual losses on our loan portfolio; and



·

we are required to comply with certain covenants and restrictions in our primary credit facilities that, if not met, could trigger repayment obligations of the outstanding principal balance on short notice.



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



OVERVIEW



We were incorporated in 1991 as a credit union service organization and we invest in and originate mortgage loans made to evangelical churches, ministries, schools and colleges.  Our loan investments are generally secured by a first mortgage lien on properties owned and occupied by evangelical churches, schools, colleges and ministries.  We converted to a limited liability company form of organization on December 31, 2008.



The following discussion and analysis compares the results of operations for the three and nine month periods ended September 30, 2017 and September 30, 2016 and should be read in conjunction with the accompanying financial statements and Notes thereto.



 

 

 

3

 


 

Results of Operations

 

Three months ended September 30, 2017 vs. three months ended September 30, 2016 







 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



 

Three months ended

 

Comparison



 

September 30,

 

 

 

 

 

 



 

(dollars in thousands)

 

 

 

 

 

 



 

2017

 

2016

 

$ Difference

 

% Difference

Interest income:

 

 

 

 

 

 

 

 

 

 

 

 

Interest on loans

 

$

2,393 

 

$

2,154 

 

$

239 

 

 

11%

Interest on interest-bearing accounts

 

 

11 

 

 

 

 

 

 

57%

Total interest income

 

 

2,404 

 

 

2,161 

 

 

243 

 

 

11%

Interest expense:

 

 

 

 

 

 

 

 

 

 

 

 

NCUA borrowings

 

 

531 

 

 

560 

 

 

(29)

 

 

(5%)

Notes payable

 

 

632 

 

 

490 

 

 

142 

 

 

29%

Total interest expense

 

 

1,163 

 

 

1,050 

 

 

113 

 

 

11%

Net interest income

 

 

1,241 

 

 

1,111 

 

 

130 

 

 

12%

Provision for loan losses

 

 

32 

 

 

--

 

 

32 

 

 

100%

Net interest income after provision for loan losses

 

 

1,209 

 

 

1,111 

 

 

98 

 

 

9%

Non-interest income

 

 

 

 

 

 

 

 

 

 

 

 

Broker-dealer commissions and fees

 

 

503 

 

 

143 

 

 

360 

 

 

252%

Other lending income

 

 

96 

 

 

101 

 

 

(5)

 

 

(5%)

Total non-interest income

 

 

599 

 

 

244 

 

 

355 

 

 

145%

Non-interest expenses:

 

 

 

 

 

 

 

 

 

 

 

 

Salaries and benefits

 

 

695 

 

 

691 

 

 

 

 

1%

Marketing and promotion

 

 

81 

 

 

51 

 

 

30 

 

 

59%

Office operations

 

 

391 

 

 

357 

 

 

34 

 

 

10%

Foreclosed assets, net

 

 

--

 

 

(8)

 

 

 

 

(100%)

Legal and accounting

 

 

77 

 

 

97 

 

 

(20)

 

 

(21%)

Total non-interest expenses

 

 

1,244 

 

 

1,188 

 

 

56 

 

 

5%

Income before provision for income taxes

 

 

564 

 

 

167 

 

 

397 

 

 

238%

Provision for income taxes

 

 

 

 

 

 

--

 

 

0%

Net income

 

$

558 

 

$

161 

 

$

397 

 

 

247%



During the three months ended September 30, 2017, we reported net income of $558 thousand, as compared to $161 thousand in net income for the third quarter of 2016.  During the quarter ended September 30, 2017, we increased our provision for loan losses by $32 thousand as a result of loan portfolio growth totaling nearly $7 million.  MP Securities also earned $503 thousand in commissions and advisory fees for the three month period ended September 30, 2017 as compared to $143 thousand for the same quarter ended September 30, 2016.  During the third quarter of 2017, MP Securities closed several large institutional investments which generated substantial commissions for the quarter.  These large institutional sales generally require a significant period of time to cultivate and occur on an irregular basis.  The Company’s improved performance in its net earnings has benefited from strategic partnerships

 

 

 

4

 


 

it has been able to cultivate with ECCU, ACCU and other ministries that have made investments in the Company’s debt securities.



For the quarter ended September 30, 2017, total interest income was $2.4 million as compared to $2.1 million for the quarter ended September 30, 2016.  Our mortgage loan investments continue to show improvement in loan quality, generate a positive net interest margin and we have been able to successfully reduce the non-performing mortgage loan investments in our mortgage loan portfolio.  Although the Company’s unpaid balance of its impaired loans decreased from $11.4 million at September 30, 2016 to $8.3 million at September 30, 2017, the Company is closely monitoring the delinquency ratio of its mortgage loan investments.  Total past due loans have increased from $7.1 million at December 31, 2016 to $8.5 million at September 30, 2017.



Total interest expense increased by $113 thousand, or 11%,  as compared to the  third quarter of 2016, primarily due to higher interest rates payable on our investor debt securities.  This increase was offset by a $29 thousand decrease in interest expense on our NCUA borrowings resulting from regular monthly principal and interest payments we have made.  Total outstanding notes payable increased from $55.5 million at September 30, 2016 to $67.1 million at September 30, 2017.  Net interest income for the third quarter of 2017 was $1.2 million, as compared to $1.1 million for the same quarter in 2016.  Our gross loan portfolio at September 30, 2017 totaled $153.8 million, as compared to $142.9 million at September 30, 2016.  During the quarter ended September 30, 2017, five mortgage loans were paid off totaling $6.1 million.  While the Company’s pipeline of mortgage loan prospects and commitments remain strong, the Company expects a more modest increase in its loan orginations and fundings during the remainder of 2017.



For the three month period ended September 30, 2017, net interest income increased by $130 thousand, or 12%, to $1.24 million, as compared to the three month period ended September 30, 2016.  Net interest income after provision for loan losses was $1.2 million for the period ended September 30, 2017, an increase of $98 thousand for the quarter ended September 30, 2017 as compared to the three month period ended September 30, 2016, primarily due to a 12% increase in net interest income prior to taking an additional $32 thousand in general reserves in connection with the growth in the Company’s loan portfolio.



Over the course of the last two years, the Company has disposed of all of its real estate owned properties and has benefited by an improvement in the performance of its mortgage loan investments.  Due to the improved performance of the Company’s mortgage loan investments, the Company has not been required to record substantial new provisions for loan losses in its loan portfolio.



The Company reported $599 thousand in non-interest income for the quarter ended September 30, 2017, as compared to $244 thousand for the third quarter in 2016.  During the quarter ended September 30, 2017, MP Securities closed several major institutional and ministry investments in the Company’s debt securities, which generated significant commission income.  Our broker-dealer commissions and fees continue to show improvement as we have expanded our customer base and assets managed by MP Securities, our broker-dealer subsidiary.  Other income generated from lending activities, including servicing income and consulting fees, had a slight decrease of $5 thousand, a 5% decrease to $96 thousand for the quarter ended September 30, 2017, as compared to the quarter ended September 30, 2016.    



Non-interest operating expenses for the three months ended September 30, 2017 increased by $56 thousand over the same period ended September 30, 2016, an increase of 5%, in large part to additional networking fees paid by MP Securities during the third quarter.  We had a slight increase in salaries and benefits expense from $691 thousand for the quarter ended September 30, 2016 to $695 thousand for the quarter ended September 30, 2017, a 1% increase.  In addition, we had a  $30 thousand increase in marketing expenses for the third quarter of 2017, as compared to the same quarter in 2016 and we were able to reduce our professional expenses for legal and accounting by $20 thousand for the quarter ended September 30, 2017 as compared to the quarter ended September 30, 2016.  We have also made changes in our insurance programs and adopted a client relationship and loan management system for our loan operations that we expect will improve efficiency of our core operations and enable us to effectively manage our office and operations expense.

 

 

 

5

 


 

Nine months ended September 30, 2017 vs. nine months ended September 30, 2016 





 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



 

Nine months ended

 

Comparison



 

September 30,

 

 

 

 

 

 



 

(dollars in thousands)

 

 

 

 

 

 



 

2017

 

2016

 

$ Difference

 

% Difference

Interest income:

 

 

 

 

 

 

 

 

 

 

 

 

Interest on loans

 

$

7,014 

 

$

6,539 

 

$

475 

 

 

7%

Interest on interest-bearing accounts

 

 

37 

 

 

22 

 

 

15 

 

 

68%

Total interest income

 

 

7,051 

 

 

6,561 

 

 

490 

 

 

7%

Interest expense:

 

 

 

 

 

 

 

 

 

 

 

 

Borrowings from financial institutions

 

 

1,600 

 

 

1,686 

 

 

(86)

 

 

(5%)

Notes payable

 

 

1,805 

 

 

1,432 

 

 

373 

 

 

26%

Total interest expense

 

 

3,405 

 

 

3,118 

 

 

287 

 

 

9%

Net interest income

 

 

3,646 

 

 

3,443 

 

 

203 

 

 

6%

Provision (credit) for loan losses

 

 

180 

 

 

45 

 

 

135 

 

 

300%

Net interest income after provision for loan losses

 

 

3,466 

 

 

3,398 

 

 

68 

 

 

2%

Non-interest income

 

 

 

 

 

 

 

 

 

 

 

 

Broker-dealer commissions and fees

 

 

735 

 

 

558 

 

 

177 

 

 

32%

Other lending income

 

 

328 

 

 

297 

 

 

31 

 

 

10%

Total non-interest income

 

 

1,063 

 

 

855 

 

 

208 

 

 

24%

Non-interest expenses:

 

 

 

 

 

 

 

 

 

 

 

 

Salaries and benefits

 

 

2,053 

 

 

2,160 

 

 

(107)

 

 

(5%)

Marketing and promotion

 

 

123 

 

 

108 

 

 

15 

 

 

14%

Office operations

 

 

1,109 

 

 

1,121 

 

 

(12)

 

 

(1%)

Foreclosed assets, net

 

 

--

 

 

(281)

 

 

281 

 

 

(100%)

Legal and accounting

 

 

352 

 

 

403 

 

 

(51)

 

 

(13%)

Total non-interest expenses

 

 

3,637 

 

 

3,511 

 

 

126 

 

 

4%

Income (loss) before provision for income taxes

 

 

892 

 

 

742 

 

 

150 

 

 

20%

Provision for income taxes

 

 

18 

 

 

17 

 

 

 

 

6%

Net income (loss)

 

$

874 

 

$

725 

 

$

149 

 

 

21%



During the nine months ended September 30, 2017, we reported net income of $874 thousand, which was an increase of $149 thousand over the first nine months of 2016.  The increase in net income was primarily due to income received from broker dealer commissions and advisory fees and as well as other lending income.  During the first nine months of 2016, MP Securities successfully closed several large church and ministry purchases of the Company’s debt securities which generated significant commission income.  While these institutional investments are made on an irregular basis, MP Securities continues to market its products and services in the institutional markets, which should result in a higher volume of sales.  For the nine month period ended September 30, 2016, the Company earned $558 thousand in broker dealer commissions and fees, as compared to $735 thousand for the nine month period ended September 30, 2017.  The increase in earnings  also included a $31 thousand increase in other lending income, which primarily resulted from loan servicing and consulting income.  The Company believes that its net earnings of $874 thousand for the nine months ended September 30, 2017 represents continued improvement

 

 

 

6

 


 

in the performance of its mortgage loan investments as well as success in developing other income generating sources from its broker dealer subsidiary, MP Securities.



As compared to the first nine months of 2016, interest income increased by $490 thousand primarily due to an increase in performing mortgage loan assets held in our loan portfolio and an increase in cash balances (see “Management’s Discussion and Analysis of Financial Conditions and Results of Operations - Net Interest Income and Net Interest Margin” below for additional discussion).  Interest income earned on interest-bearing accounts with other institutions increased mainly due to an increase in cash from the sale of the Company’s investor notes and from loan participation sales.  Total interest income for the nine month period ended September 30, 2017 was $7.0 million, as compared to $6.5 million for the period ended September 30, 2016.



Total interest expense increased by $287 thousand for the period ended September 30, 2017, as compared to the first nine months of 2016 due to a $11.5 million increase in our investor notes.  Note interest expense increased by $373 thousand as our outstanding investor notes payable have increased. Interest expense on our NCUA borrowings decreased by $86 thousand for the period ended September 30, 2017, as compared to the first nine months of 2016 due to regular monthly principal payments made on our borrowings.



For the nine month period ended September 30, 2017, net interest income increased by $203 thousand, or 6%, to $3.6 million, as compared to $3.4 million for the nine month period ended September 30, 2016.  Net interest income after provision for loan losses increased by $68 thousand to $3.47 million for the nine months ended September 30, 2017 as compared to $3.40 million for the nine months ended September 30, 2016.  The primary reason for the increase relates to  the additional growth of the loan portfolio.  In the first nine months of 2016, we recorded $45 thousand in provisions related to general reserves as compared to $180 thousand in general and specific reserves recorded as provisions during the first nine months of 2017.  Over the course of the last two years, the Company has disposed of all of its real estate owned properties and has benefited by an improvement in the performance of its mortgage loan investments.  While the Company’s total impaired loans at September 30, 2017 was $8.4 million, as compared to $8.9 million at December 31, 2016, total past due loans have increased from $7.2 million at December 31, 2016 to $8.5 million at September 30, 2017.  The Company is closely monitoring these past due loans and has appointed portfolio managers to cover distinct geographical regions for the Company’s mortgage loan investments.



The Company had other income of $1.0 million in the first nine months of 2017 due to $735 thousand in advisory fees and commissions earned by MP Securities, and $328 thousand in servicing fee income and other lending income.  Income received from commissions and advisory fees can vary substantially due to the timing of sales of our debt securities to institutional investors, ministries and accredited investors.  Other income generated from lending activities increased by $31 thousand as compared to the first nine months of 2016 as a result of the Master Services Agreement and the Backup Servicer Agreement reached with ECCU in 2016.   

 

Non-interest operating expenses for the nine months ended September 30, 2017 increased by $126 thousand to $3.6 million as compared to the same period ended September 30, 2016, an increase of 4%.  During the nine month period ended September 30, 2016, the Company generated $278 thousand in income received from foreclosed assets which was offset against non-interest expense.  This gain was a non-recurring event.  For the nine months ended September 30, 2017, the Company has been able to achieve cost savings in its office operations and operating expenses as expenses for salaries and benefits have declined by 5%,  office operation expenses by 1% and professional expenses by 13%, as compared to 2016. Marketing and promotion expenses increased by 14% during that same timeframe.    The Company’s salaries and benefit expense for the nine month period ended September 30, 2017 takes into account bonuses for staff and management for the year ended December 31, 2017, to be determined and awarded based upon the Company’s financial performance for the year as well as individual employee performance relative to their role expectations.  The Company continues to closely monitor its expenses and take steps to improve efficiencies of its operations by reviewing its vendor contracts for insurance services, customer and loan management systems and outside vendors in order to improve its profitability.



 

 

 

7

 


 

Net Interest Income and Net Interest Margin



Historically, our earnings have primarily depended upon the difference between the income we receive from interest-earning assets, which consist principally of mortgage loan investments and interest-earning accounts with other financial institutions, and the interest paid on our debt securities and credit facility borrowings. This difference is net interest income. Net interest margin is net interest income expressed as a percentage of average total assets.



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











 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

Average Balances and Rates/Yields



 

For the Three Months Ended September 30,



 

(Dollars in Thousands)



 

2017

 

2016



 

Average Balance

 

Interest Income/ Expense

 

Average Yield/ Rate

 

Average Balance

 

Interest Income/ Expense

 

Average Yield/ Rate

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-earning accounts with other financial institutions

 

$

14,672 

 

 

$

11 

 

 

 

0.30 

%

 

$

16,066 

 

 

$

 

 

 

0.18 

%

Interest-earning loans [1]

 

 

135,009 

 

 

 

2,393 

 

 

 

7.03 

%

 

 

126,369 

 

 

 

2,154 

 

 

 

6.76 

%

Total interest-earning assets

 

 

149,681 

 

 

 

2,404 

 

 

 

6.37 

%

 

 

142,434 

 

 

 

2,161 

 

 

 

6.02 

%



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-interest-earning assets

 

 

10,246 

 

 

 

--

 

 

 

--

%

 

 

9,646 

 

 

 

--

 

 

 

--

%

Total Assets

 

 

159,927 

 

 

 

2,404 

 

 

 

5.96 

%

 

 

152,080 

 

 

 

2,161 

 

 

 

5.64 

%



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Public offering notes – Class A

 

 

13,759 

 

 

 

135 

 

 

 

3.89 

%

 

 

20,362 

 

 

 

194 

 

 

 

3.77 

%

Public offering notes – Class 1

 

 

35,741 

 

 

 

326 

 

 

 

3.62 

%

 

 

24,303 

 

 

 

190 

 

 

 

3.11 

%

Special offering notes

 

 

1,281 

 

 

 

13 

 

 

 

4.03 

%

 

 

1,800 

 

 

 

20 

 

 

 

4.31 

%

International notes

 

 

--

 

 

 

--

 

 

 

--

%

 

 

53 

 

 

 

 

 

 

3.61 

%

Subordinated notes

 

 

5,265 

 

 

 

64 

 

 

 

4.82 

%

 

 

5,340 

 

 

 

63 

 

 

 

4.69 

%

Secured notes

 

 

9,839 

 

 

 

93 

 

 

 

3.75 

%

 

 

2,652 

 

 

 

22 

 

 

 

3.31 

%

NCUA borrowings

 

 

83,511 

 

 

 

531 

 

 

 

2.52 

%

 

 

88,044 

 

 

 

560 

 

 

 

2.53 

%



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total interest-bearing liabilities

 

$

149,396 

 

 

 

1,162 

 

 

 

3.09 

%

 

$

142,555 

 

 

 

1,050 

 

 

 

2.92 

%



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income

 

 

 

 

 

$

1,242 

 

 

 

 

 

 

 

 

 

 

 

1,111 

 

 

 

 

 

Net interest margin [2]

 

 

 

 

 

 

 

 

 

 

3.29 

%

 

 

 

 

 

 

 

 

 

 

3.10 

%



 

 

 

8

 


 

[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 interest-earning assets.



Average interest-earning assets increased to $149.7 million during the three months ended September 30, 2017, from $142.4 million during the same period in 2016, an increase of $7.3 million. The average yield on these assets was 6.37% for the three months ended September 30, 2017 as compared to 6.02% for the three months ended September 30, 2016. The Company’s average yield on interest earning cash investments increased from .18% to .30% for the  three months ending September 30, 2017, as compared to the three months ended September 30, 2016.  Our average yield rate on our mortgage loan investments increased from 6.76% for the three months ended September 30, 2016 to 7.03% for the three months ended September 30, 2017.  This increase is due, in part, to a higher concentration of construction loans that were originated.    In addition, we sold $2.7 million in loan participations during the quarter ended September 30, 2017.  Due to a decline in loan participation sales, we recognized less amortization and deferred loan fees and costs during the quarter ended September 30, 2017.  Average non-interest earning assets increased to $10.2 million for the three months ended September 30, 2017 from $9.6 million for the quarter ended September 30, 2016.  This increase is primarily due to disposing of all of our foreclosed assets as of June 30,  2016, as well refinancing one of our impaired loans that allowed us to reclassify that loan as a performing loan.  Non-performing assets decreased from $11.8 million at September 30, 2016 to $8.7 million at September 30, 2017.

Average interest-bearing liabilities, consisting of notes payable and borrowings from financial institutions, increased to $149.4 million during the three months ended September 30, 2017, from $142.6 million during the same period in 2016 as we have increased our investor note sales over the last year. The average rate paid on these liabilities increased from 2.92% to 3.09% for the three months ended September 30, 2017 as the underlying base rates on the investor notes have increased over the previous 12 months, which has increased the average rates paid on our Class 1 Notes from 3.11% to 3.62%.



Net interest income for the three months ended September 30, 2017 was $1.24 million, which was an increase of $124 thousand, or 12%, for the same period in 2016.  Net interest margin increased 18 basis points to 3.29% for the quarter ended September 30, 2017, compared to 3.10% for the quarter ended September 30, 2016.





 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

Average Balances and Rates/Yields



 

For the Nine Months Ended September 30,



 

(Dollars in Thousands)



 

2017

 

2016



 

Average Balance

 

Interest Income/ Expense

 

Average Yield/ Rate

 

Average Balance

 

Interest Income/ Expense

 

Average Yield/ Rate

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-earning accounts with other financial institutions

 

$

15,811 

 

 

$

37 

 

 

 

0.32 

%

 

$

14,667 

 

 

$

22 

 

 

 

0.20 

%

Interest-earning loans [1]

 

 

134,802 

 

 

 

7,014 

 

 

 

6.96 

%

 

 

126,931 

 

 

 

6,539 

 

 

 

6.89 

%

Total interest-earning assets

 

 

150,613 

 

 

 

7,052 

 

 

 

6.26 

%

 

 

141,598 

 

 

 

6,561 

 

 

 

6.19 

%



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-interest-earning assets

 

 

10,257 

 

 

 

--

 

 

 

--

%

 

 

10,328 

 

 

 

--

 

 

 

--

 

Total Assets

 

 

160,870 

 

 

 

7,052 

 

 

 

5.86 

%

 

 

151,925 

 

 

 

6,561 

 

 

 

5.77 

%



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

9

 


 

Public offering notes – Class A

 

 

15,240 

 

 

 

434 

 

 

 

3.81 

%

 

 

22,476 

 

 

 

631 

 

 

 

3.75 

%

Public offering notes – Class 1

 

 

35,154 

 

 

 

907 

 

 

 

3.45 

%

 

 

22,231 

 

 

 

513 

 

 

 

3.09 

%

Special offering notes

 

 

1,616 

 

 

 

51 

 

 

 

4.22 

%

 

 

1,972 

 

 

 

62 

 

 

 

4.18 

%

International notes

 

 

15 

 

 

 

--

 

 

 

--

%

 

 

53 

 

 

 

 

 

 

3.62 

%

Subordinated notes

 

 

5,221 

 

 

 

186 

 

 

 

4.76 

%

 

 

4,539 

 

 

 

165 

 

 

 

4.87 

%

Secured notes

 

 

8,834 

 

 

 

227 

 

 

 

3.44 

%

 

 

2,407 

 

 

 

60 

 

 

 

3.33 

%

NCUA borrowings

 

 

84,701 

 

 

 

1,600 

 

 

 

2.53 

%

 

 

88,971 

 

 

 

1,686 

 

 

 

2.53 

%



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total interest-bearing liabilities

 

$

150,781 

 

 

 

3,405 

 

 

 

3.02 

%

 

$

142,649 

 

 

 

3,118 

 

 

 

2.92 

%



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income

 

 

 

 

 

$

3,646 

 

 

 

 

 

 

 

 

 

 

 

3,443 

 

 

 

 

 

Net interest margin [2]

 

 

 

 

 

 

 

 

 

 

3.24 

%

 

 

 

 

 

 

 

 

 

 

3.25 

%



[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 interest-earning assets.

Average interest-earning assets increased to $150.6 million during the nine months ended September 30, 2017, from $141.5 million during the same period in 2016, an increase of $9.10 million. The average yield on these assets was 6.26% for the nine months ended September 30, 2017 as compared to 6.19% for the nine months ended September 30, 2016. The average yield increase is due to several factors.  One reason is that our cash, which earns interest at a rate of 0.32%, comprises a higher portion of our interest earning assets than it did during the first nine months of 2016.  Another factor is that the weighted average rate of our loan portfolio has increased slightly from 6.89% at  September 30, 2016 to 6.96% at September 30, 2017.   In addition, the Company’s new loan originations included several construction loans during this period, which earn a higher loan yield.    

Average non-interest earning assets decreased to $10.2 million for the nine months ended September 30, 2017 from $10.3 million for the nine month period ended September 30, 2016.  This decrease is nominal for the comparative timeframe. Non-performing assets decreased from $11.8 million at September 30, 2016 to $8.7 million at September 30, 2017.

Average interest-bearing liabilities, consisting of notes payable and borrowings from financial institutions, increased to $150.8 million during the nine months ended September 30, 2017, from $142.6 million during the same period in 2016 as we have increased our investor note sales over the last year. The average rate paid on these liabilities increased from 2.92% to 3.02% for the nine months ended September 30, 2017 as the underlying base rates on the notes have increased over the previous 12 months, which has increased the average rates paid on our Class 1 Notes from 3.09% to 3.45%.

Net interest income for the nine months ended September 30, 2017 was $3.6 million, which was an increase of $204 thousand, or 5.9%, for the same period in 2016.  Net interest margin decreased one basis points to 3.24% for the nine month period ended September 30, 2017, compared to 3.25% for the quarter ended September 30, 2016.

 

 

 

10

 


 









 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

Rate/Volume Analysis of Net Interest Income



 

 

 



 

Three Months Ended September 30, 2017 vs. 2016



 

Increase (Decrease) Due to Change in



 

Volume

 

Rate

 

Total



 

(Dollars in Thousands)



 

 

 

 

 

 

 

 

 

Increase (Decrease) in Interest Income:

 

 

 

 

 

 

 

 

 

Interest-earning account with other financial institutions

 

$

(1)

 

$

 

$

Total loans

 

 

146 

 

 

92 

 

 

239 



 

 

147 

 

 

96 

 

 

242 



 

 

 

 

 

 

 

 

 

Increase (Decrease) in Interest Expense:

 

 

 

 

 

 

 

 

 

Public offering notes – Class A

 

 

(63)

 

 

 

 

(59)

Public offering notes – Class 1

 

 

90 

 

 

46 

 

 

136 

Special offering notes

 

 

(6)

 

 

(1)

 

 

(7)

Subordinated notes

 

 

(1)

 

 

 

 

Secured notes

 

 

60 

 

 

11 

 

 

71 

NCUA borrowings

 

 

(29)

 

 

-

 

 

(29)



 

 

51 

 

 

62 

 

 

113 

Change in net interest income

 

$

95 

 

$

34 

 

$

129 



 

 

 

 

 

 

 

 

 







 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

Rate/Volume Analysis of Net Interest Income



 

 

 



 

Nine Months Ended September 30, 2017 vs. 2016



 

Increase (Decrease) Due to Change in



 

Volume

 

Rate

 

Total



 

(Dollars in Thousands)



 

 

 

 

 

 

 

 

 

Increase (Decrease) in Interest Income:

 

 

 

 

 

 

 

 

 

Interest-earning account with other financial institutions

 

$

 

$

14 

 

$

16 

Total loans

 

 

405 

 

 

70 

 

 

475 



 

 

407 

 

 

84 

 

 

491 

 

 

 

11

 


 



 

 

 

 

 

 

 

 

 

Increase (Decrease) in Interest Expense:

 

 

 

 

 

 

 

 

 

Public offering notes – Class A

 

 

(203)

 

 

 

 

(196)

Public offering notes – Alpha Class

 

 

298 

 

 

96 

 

 

394 

Special offering notes

 

 

(11)

 

 

 -

 

 

(11)

International notes

 

 

(1)

 

 

                -

 

 

(1)

Subordinated notes

 

 

25 

 

 

(4)

 

 

21 

Secured notes

 

 

160 

 

 

 

 

167 

NCUA borrowings

 

 

(86)

 

 

 -

 

 

(86)



 

 

182 

 

 

106 

 

 

288 

Change in net interest income

 

$

225 

 

$

(22)

 

$

203 

Financial Condition



Comparison of Financial Condition at September 30, 2017 and December 31, 2016





 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

Comparison



 

2017

 

2016

 

$ Difference

 

% Difference



 

(Unaudited)

 

(Audited) 

 

 

 

 

 

 



 

(dollars in thousands)

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

Cash

 

$

8,537 

 

$

9,683 

 

$

(1,146)

 

 

(12%)

Pledged cash

 

 

--

 

 

600 

 

 

(600)

 

 

(100%)

Loans receivable, net of allowance for loan losses of $2,015 and $1,875 as of September 30, 2017 and December 31, 2016, respectively

 

 

149,955 

 

 

144,264 

 

 

5,691 

 

 

4%

Accrued interest receivable

 

 

693 

 

 

657 

 

 

36 

 

 

5%

Investments

 

 

897 

 

 

892 

 

 

 

 

1%

Property and equipment, net

 

 

109 

 

 

115 

 

 

(6)

 

 

(5%)

Other assets

 

 

700 

 

 

427 

 

 

273 

 

 

64%

Total assets

 

$

160,891 

 

$

156,638 

 

$

4,253 

 

 

3%

Liabilities and members’ equity

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

NCUA borrowings

 

$

82,712 

 

$

86,326 

 

$

(3,614)

 

 

(4%)

Notes payable, net of debt issuance costs of $57 and $78 as of September 30, 2017 and December 31, 2016, respectively

 

 

67,037 

 

 

60,479 

 

 

6,558 

 

 

11%

Accrued interest payable

 

 

195 

 

 

173 

 

 

22 

 

 

13%

Borrower deposits

 

 

895 

 

 

117 

 

 

178 

 

 

152%

Other liabilities

 

 

617 

 

 

736 

 

 

 -119

 

 

-16%

 

 

 

12

 


 

Total liabilities

 

 

151,456 

 

 

147,831 

 

 

3,625 

 

 

2%

Members' Equity:

 

 

 

 

 

 

 

 

 

 

 

 

Series A preferred units

 

 

11,715 

 

 

11,715 

 

 

--

 

 

--%

Class A common units    

 

 

1,509 

 

 

1,509 

 

 

 --

 

 

0%

Accumulated deficit

 

 

(3,789)

 

 

(4,417)

 

 

628 

 

 

(14%)

Total members' equity

 

 

9,435 

 

 

8,807 

 

 

628 

 

 

7%

Total liabilities and members' equity

 

$

160,891 

 

$

156,638 

 

$

4,253 

 

 

3%



GeneralTotal assets increased by $4.3 million, or 3%, between December 31, 2016 and September 30, 2017.  This increase was primarily due to an increase in loans receivable. 

During the nine month period ended September 30, 2017, we sold $15.3 million in new investor notes, which helped increase our investor notes payable balance by a net of $6.56 million.  We also sold $9.3 million in loan participations.  We funded $27.5 million in loans during the first nine months of 2017, thereby utilizing some of our cash reserves to originate and fund new loans throughout 2017 and reduce cash as a portion of our assets while continuing to maintain adequate liquidity.

Our portfolio consists entirely of loans made to evangelical churches, Christian schools and ministries.  Approximately 99% of these loans are secured by real estate, while three loans that represent less than 1% of our loans are unsecured.  The loans in our portfolio carried a weighted average interest rate of 6.32% at September 30, 2017 and 6.28% at December 31, 2016.

Non-performing Assets.  Non-performing loans include non-accrual loans, loans 90 days or more past due and still accruing, restructured loans, and other impaired loans where the net present value of estimated future cash flows is lower than the outstanding principal balance.  Non-accrual loans represent loans on which interest accruals have been discontinued.  Restructured loans are loans in which the borrower has been granted a concession on the interest rate or the original repayment terms due to financial distress. Non-performing loans are closely monitored on an ongoing basis as part of our loan review and work-out process.  The potential risk of loss on these loans is evaluated by comparing the loan balance to the fair value of any underlying collateral or the present value of projected future cash flows.  The following is a summary of the recorded balance of our nonperforming loans (dollars in thousands) as of September  30, 2017, December 31, 2016 and September 30, 2016: 





 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 



 

September 30,

 

December 31,

 

September 30,



 

2017

 

2016

 

2016



 

 

 

 

 

 

 

 

 

Impaired loans with an allowance for loan loss

 

$

4,068 

 

$

4,327 

 

$

9,680 

Impaired loans without an allowance for loan loss

 

 

4,294 

 

 

4,551 

 

 

1,723 

Total impaired loans

 

$

8,362 

 

$

8,878 

 

$

11,403 



 

 

 

 

 

 

 

 

 

Allowance for loan losses related to impaired loans

 

$

1,165 

 

$

1,072 

 

$

1,190 

Total non-accrual loans

 

$

8,362 

 

$

8,878 

 

$

8,344 

Total loans past due 90 days or more and still accruing

 

$

--

 

$

--

 

$

--

Some non-accrual loans are considered collateral dependent.  These are defined as loans where the repayment of principal will involve the sale or operation of collateral securing the loan.  For collateral dependent loans, any payment of interest we receive 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 collateral dependent, we do not accrue interest income, but we recognize income on a cash basis.  We had ten nonaccrual loans as of September 30, 2017 and December 31, 2016. 

 

 

 

13

 


 

We did not restructure or change the classification of any of our impaired loans during the nine months ended September 30, 2017.  During 2016, we were able to reclassify one of our impaired loans as performing when we refinanced the loan at a market rate and determined that the financial performance of the borrower warranted such a classification.  This reclassification is the primary factor behind the decrease in impaired loan balances from $11.8 million at September 30, 2016 to $8.7 million September 30, 2017.



The following table presents our non-performing assets:



 

 

 

 

 

 



 

 

 

 

 

 

Non-performing Assets

($ in thousands)



 

September 30, 2017

 

December 31, 2016



 

 

 

 

 

 

Non-Performing Loans:1

 

 

 

 

 

 



 

 

 

 

 

 

Collateral Dependent:

 

 

 

 

 

 

Delinquencies over 90-Days

 

$

1,752 

 

$

233 

Troubled Debt Restructurings2

 

 

--

 

 

6,544 

Other Impaired Loans

 

 

5,126 

 

 

453 

Total Collateral Dependent Loans

 

 

6,878 

 

 

7,230 



 

 

 

 

 

 

Non-Collateral Dependent:

 

 

 

 

 

 

Delinquencies over 90-Days

 

 

--

 

 

--

Troubled Debt Restructurings

 

 

1,484 

 

 

1,648 

Total Non-Collateral Dependent Loans

 

 

1,484 

 

 

1,648 



 

 

 

 

 

 

Loans 90 Days past due and still accruing

 

 

--

 

 

--



 

 

 

 

 

 

Total Non-Performing Loans

 

 

8,362 

 

 

8,878 

Foreclosed Assets3

 

 

--

 

 

--

Total Non-performing Assets

 

$

8,362 

 

$

8,878 







1 These loans are presented at the balance of unpaid principal less interest payments recorded against principal

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

3 Foreclosed assets are presented net of any valuation allowances taken against the assets.



At September 30, 2017 and December 31, 2016, we had nine restructured loans that were on non-accrual status.  Three of these loans were over 90 days delinquent at September 30, 2017.  In addition, we had one collateral dependent loan that has not been restructured that is also on non-accrual status.

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:

·

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

·

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

·

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

 

 

 

14

 


 

·

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

·

The effect of credit concentrations; and

·

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

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

We also examine our entire loan portfolio regularly to identify individual loans which we believe have a greater risk of loss than is addressed by the general reserves. These are identified by examining delinquency reports, both current and historic, monitoring collateral value, and performing a periodic review of borrower financial statements.  For loans that are collateral dependent, management first determines the 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.

The process of providing adequate allowance for loan losses involves discretion on the part of management, and as such, 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.   The Company’s allowance for loan losses was $2.01 million  as of September  30, 2017 and $1.87 million as of  December 31, 2016.  This represented 1.31% of our gross loans receivable at  September 30, 2017 and 1.27% as of December 31, 2016.   







 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



 

Allowance for Loan Losses

 



 

as of and for the

 



 

 

 

 

 

 

 

 

 

 

 

 



 

Nine months ended

 

Year ended

 



 

September 30

 

December 31,

 



 

2017

 

2016

 

2016

 

Balances:

 

($ in thousands)

 

Average total loans outstanding during period

 

$

146,629 

 

 

$

138,186 

 

 

$

140,379 

 

Total loans outstanding at end of the period

 

$

153,801 

 

 

$

142,964 

 

 

$

147,982 

 

Allowance for loan losses:

 

 

 

 

 

 

 

 

 

 

 

 

Balance at the beginning of period

 

$

1,875 

 

 

$

1,785 

 

 

$

1,785 

 

Provision charged to expense

 

 

180 

 

 

 

45 

 

 

 

113 

 

Charge-offs

 

 

 

 

 

 

 

 

 

 

 

 

Wholly-Owned First

 

 

40 

 

 

 

20 

 

 

 

20 

 

Wholly-Owned Junior

 

 

--

 

 

 

--

 

 

 

--

 

 

 

 

15

 


 

Participation First

 

 

--

 

 

 

--

 

 

 

--

 

Participation Junior

 

 

--

 

 

 

--

 

 

 

--

 

Total

 

 

40 

 

 

 

20 

 

 

 

20 

 

Recoveries

 

 

 

 

 

 

 

 

 

 

 

 

Wholly-Owned First

 

 

--

 

 

 

--

 

 

 

--

 

Wholly-Owned Junior

 

 

--

 

 

 

--

 

 

 

--

 

Participation First

 

 

--

 

 

 

 

 

 

(2)

 

Participation Junior

 

 

--

 

 

 

--

 

 

 

--

 

Total

 

 

--

 

 

 

 

 

 

(2)

 

Net loan charge-offs

 

 

40 

 

 

 

18 

 

 

 

18 

 

Accretion of allowance related to restructured loans

 

 

--

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

Balance

 

$

2,015 

 

 

$

1,807 

 

 

$

1,875 

 



 

 

 

 

 

 

 

 

 

 

 

 

Ratios:

 

 

 

 

 

 

 

 

 

 

 

 

Net loan charge-offs to average total  loans

 

 

0.03 

%

 

 

0.01 

%

 

 

0.01 

%

Provision for loan losses to average total loans1

 

 

0.12 

%

 

 

0.03 

%

 

 

0.08 

%

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

 

 

1.31 

%

 

 

1.26 

%

 

 

1.27 

%

Allowance for loan losses to non-performing loans

 

 

24.10 

%

 

 

15.85 

%

 

 

21.12 

%

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

 

 

1.99 

%

 

 

1.00 

%

 

 

0.96 

%

Net loan charge-offs to Provision for loan losses1

 

 

22.22 

%

 

 

40.00 

%

 

 

15.93 

%

Investments.  At September 30, 2017, we had one investment in a joint venture formed in January 2016 in which our initial investment was $900 thousand. The purpose of the joint venture is to develop and sell property acquired by us as part of a Deed in Lieu of Foreclosure agreement reached with one of our borrowers in 2014.  Our net investment value after accounting for our portion of the net losses of the venture was $897 thousand at September 30, 2017.

NCUA Borrowings.  At September 30, 2017, we had $82.7 million in borrowings from financial institutions.  This represents a decrease of $3.6 million from December 31, 2016.  This decrease is the result of regular monthly payments made on both the MU Credit Facility and the Wescorp Credit Facility Extension. 

Notes Payable.  Our investor notes payable consist of debt securities sold under a registered national offering as well as notes sold in private placements.  These investor notes had a balance of $67.0 million at September 30, 2017, which was an increase of $6.6 million from December 31, 2016.  Over the last several years, we have expanded our investor note sale program by building relationships with other financial institutions whereby we can offer our various note products to their clients.  In 2015, we reached networking agreements with both ECCU and ACCU to provide investment advisory services and sell our debt securities to investors they refer to us.  We have also developed relationships with other institutions that have enabled us to sell investor notes in larger amounts.  At the same time, we have continued to build our individual customer base through MP Securities and its staff of sales personnel. Our investor notes payable are presented net of of debt issuance costs, which have decreased from $78 thousand at December 31, 2016 to $57 thousand at September 30, 2017.

Other liabilities.  Our other liabilities include accounts payable to third parties and salaries, bonuses, and commissions payable to our employees.  Our other liabilities decreased by $119 thousand at September 30, 2017, as compared to December 31, 2016, mainly due to less accruals for 2017 employee bonuses, preferred dividends payable to our equity owners, compensation being accrued for our Board of Managers and accrued concessions

 

 

 

16

 


 

earned by MP Securities.  Borrower deposits increased $778 thousand for the period ended September 30, 2017, as compared to December 31, 2016, primarily due to funds held for the benefit of one of our ministry borrowers.  In September, 2017, we closed a $6.6 million loan with a ministry borrower which was conditioned upon the borrower meeting a minimum liquidity covenant.  Because the borrower experienced a temporary delay in opening a deposit account with a local credit union prior to the Company’s funding of the $6.6 million loan, the deposit was placed with the Company.  The funds were subsequently disbursed to the borrower’s credit union of record for the Company’s mortgage loan.  As a result, the borrower deposit for this loan is no longer a liability of the Company.

Members’ Equity.  Total members’ equity was $9.4 million at September 30, 2017, which represents an increase of $628 thousand from December 31, 2016.  We paid $246 thousand in dividends to the holders of our Series A Preferred Units, which require quarterly dividend payments.  We are also required to make a payment of 10% of our annual net income after dividends to our Series A Preferred Unit holders. This payment is made in the first quarter of the following year when annual net income has been finalized.  We accrue the income distribution amount throughout the year based on our year-to-date net income.  We did not repurchase or sell any ownership units during the nine months ended September 30, 2017.



Liquidity and Capital Resources



September 30, 2017 vs. September 30, 2016



Maintenance of adequate liquidity requires that sufficient resources be available at all times to meet our cash flow requirements. Desired liquidity may be achieved from both assets and liabilities. Cash, investments in interest-bearing time deposits in other financial institutions, maturing loans, payments of principal and interest on loans and potential loan sales are sources of asset liquidity. Sales of investor notes and access to credit lines also serve as sources of additional liquidity. We follow a liquidity policy that has been approved by our Board of Managers.  The policy sets a minimum liquidity ratio and contains contingency protocol if our liquidity falls below the minimum.  Our liquidity ratio was 11.59% at September 30, 2017, which is above the minimum set by our policy. Also as part of the policy, we review our liquidity position on a regular basis based upon our current position and expected trends of loans and investor notes. Management believes that we maintain adequate sources of liquidity to meet our liquidity needs.  Nevertheless, if we are unable to continue our offering of Class 1 Notes for any reason, we incur sudden withdrawals by multiple investors in our investor notes, a substantial portion of our notes that mature during the next twelve months are not renewed, and we are unable to obtain capital from sales of our mortgage loan assets or other sources, we expect that our business would be materially and adversely affected.

The sale of our debt securities is a significant component in financing our mortgage loan investments.  We have increased our marketing efforts related to the sale of Secured Notes and we believe that the sale of these notes will enable us to meet its liquidity needs for the near future.  We continue to sell debt securities filed under a Registration Statement with the SEC to register $85 million of Class 1 Notes that was deemed effective as of January 6, 2015. This Registration Statement expires on December 31, 2017 and we are in the process of preparing a new issue to continue selling public notes when the current Class 1 Notes registration expires. 

We have also entered into a Loan and Standby Agent Agreement pursuant to a Rule 506 offering to sell $40.0 million of Series 1 Subordinated Capital Notes and we are offering $80 million in our Secured Notes under a private placement memorandum.  By offering the Class 1 Notes and privately placed investor notes, we expect to fund new loans which can either be held for interest income or sold as participations to generate servicing income and gains on loan sales.  The cash from sales will be used to originate additional loan investments or to fund operating activities.  

Historically, we have been successful in generating reinvestments by our debt security holders when the notes that they hold mature.  During the nine months ended September 30, 2017, our investors renewed their debt securities investments at a 75% rate, which represented an increase from the 72% renewal rate over the nine months ended September 30, 2016.  We have stabilized our note renewal rate as MP Securities has adjusted its marketing efforts to the over-concentration of investment limitation restrictions placed on the sale of our investor notes.  New advisors MP Securities hired over the last several years has also enabled us to increase our client base, which has in turn increased our investor note sales.

 

 

 

17

 


 

The net decrease in cash during the nine months ended September 30, 2017 was $1.7 million, as compared to a net decrease of $605 thousand for the nine months ended September 30, 2016.  Net cash provided by operating activities totaled $1.0 million for the nine months ended September 30, 2017, as compared to net cash provided by operating activities of $52 thousand for the same period in 2016. This increase in cash provided by operating activities is attributable primarily to the timing of the release of borrower deposits and a large portion of income from the prior year that was attributable to gains on the sale of foreclosed assets.

Net cash used by investing activities totaled $5.4 million during the nine months ended September 30, 2017, as compared to $3.3 million used during the nine months ended September 30, 2016, a decrease in cash used of $2.1 million. The decrease in cash used is primarily due to not selling any foreclosed assets in 2017.  We anticipate using additional cash in investing activities throughout the remainder of 2017 to fund loan originations.

Net cash provided by financing activities totaled $2.6 million for the nine month period ended September 30, 2017, a decrease in cash provided of $55 thousand from $2.7 million provided by financing activities during the nine months ended September 30, 2016. This difference is primarily attributable to an increase in sales of our investor notes payable. We sold a net of $6.5 million in investor notes during the first three quarters of 2017 compared to net sales of $5.7 million in investor notes during the same period in 2016.

At September 30, 2017, our cash, which includes cash reserves and cash available for investment in mortgage loans, was $8.5 million, a decrease of $1.7 million from $10.2 million at December 31, 2016.



Item 3. Quantitative and Qualitative Disclosures About Market Risk



We are a smaller reporting company as defined by Rule 12b-2 of the Securities Act of 1934 and are not required to provide the information under this item.



Item 4.  Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

 

Our management, including our Senior Vice President  and Chief Financial Officer, supervised and participated in an evaluation of our disclosure controls and procedures as of September 30, 2017.  After evaluating the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a - 15(e) and 15d - 15(e)) as of the end of the period covered by this quarterly report, our Senior Vice President and Chief Financial Officer has concluded that as of the evaluation date, our disclosure controls and procedures were adequate and effective to ensure that material information relating to the Company would be made known to them by others within the Company, particularly during the period in which this quarterly report was being prepared.

 

Disclosure controls and procedures are designed to ensure that information required to be disclosed by us in the reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports filed under the Exchange Act is accumulated and communicated to our management, including the President and Principal Accounting Officer, as appropriate to allow timely decisions regarding required disclosure.

 

 

 

 

18

 


 

Changes in Internal Controls

 

We made a change in controls over our loan servicing, boarding, and review processes during the first three months of 2017.  Management believes that this change is sufficient to ensure that all information regarding our loans is properly reviewed and entered into our systems.  No other changes in internal controls were made during the nine months ended September 30, 2017.    



PART II - OTHER INFORMATION

 

Item 1.  Legal Proceedings

 

Given the nature of our investments made in mortgage loans, we may from time to time have an interest in, or be involved in, litigation arising out of our loan portfolio.  We consider litigation related to our loan portfolio to be routine to the conduct of our business.  As of September 30, 2017, we are not involved in any litigation matters that could have a material adverse effect on our financial position, results of operations or cash flows other than those discussed in Part I. Item 2. “Potential Recoveries of Reserves Established for Loan Losses.”



Item 1A.  Risk Factors



As of the date of this filing, there have been no material changes from the risk factors disclosed in the Company’s Annual Report on Form 10-K filed for the year ended December 31, 2016.

 

Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds

 

None

 

Item 3.  Defaults Upon Senior Securities

 

None





Item 4.  Mine Safety Disclosure



None 



Item 5.  Other Information

 

None.







Item 6.  Exhibits

 



 

Exhibit No.

Description of Exhibit

31.1

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

31.2

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

32.1

Certification of President and Chief Executive Officer pursuant to 18 U.S.C. §1350 as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002

32.2

Certification of Principal Accounting Officer pursuant to 18 U.S.C. §1350 as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002

 

 

 

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101*

The following information from Ministry Partners Investment Company, LLC’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2017, formatted in XBRL (eXtensible Business Reporting Language):  (i) Consolidated Statements of Income for the nine month periods ended September 30, 2017 and 2016; (ii) Consolidated Balance Sheets as of September 30, 2017 and  December 31, 2016; (iii) Consolidated  Statements of Cash Flows for the nine months ended September 30, 2017 and 2016; and (iv) Notes to Consolidated Financial Statements.



*  Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933 or Section 18 of the Securities Exchange Act of 1934 and otherwise are not subject to liability under those sections.

 



 

 

 

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SIGNATURE

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



Dated: November 14, 2017





 

 



 

MINISTRY PARTNERS INVESTMENT



 

COMPANY, LLC



 

 

(Registrant)

 

By: /s/ Joseph W. Turner, Jr.



 

Joseph W. Turner, Jr.,



 

Chief Executive Officer







 

 

 

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