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EX-32.2 - EX-32.2 - MINISTRY PARTNERS INVESTMENT COMPANY, LLCc130-20180331xex32_2.htm
EX-32.1 - EX-32.1 - MINISTRY PARTNERS INVESTMENT COMPANY, LLCc130-20180331xex32_1.htm
EX-31.2 - EX-31.2 - MINISTRY PARTNERS INVESTMENT COMPANY, LLCc130-20180331xex31_2.htm
EX-31.1 - EX-31.1 - MINISTRY PARTNERS INVESTMENT COMPANY, LLCc130-20180331xex31_1.htm
EX-10.34 - EX-10.34 - MINISTRY PARTNERS INVESTMENT COMPANY, LLCc130-20180331xex10_34.htm
EX-10.33 - EX-10.33 - MINISTRY PARTNERS INVESTMENT COMPANY, LLCc130-20180331xex10_33.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 March 31, 2018



OR



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

For the period from _____ to _____



333-4028la

(Commission file No.)

 

MINISTRY PARTNERS INVESTMENT COMPANY, LLC

(Exact name of registrant as specified in its charter)

 

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 13(a) of the Exchange Act.  



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



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

 

 


 

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 March 31, 2018 (unaudited) and December 31, 2017 (audited)

F - 1



 

Consolidated Statements of Income (unaudited) for the three months ended March 31, 2018 and 2017

F - 2



 

Consolidated Statements of Cash Flows (unaudited) for the three months ended March 31, 2018 and 2017

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

13



 

Item 4.  Controls and Procedures

13



 

PART II —OTHER INFORMATION

 



 

Item 1.  Legal Proceedings

14

Item 1A.  Risk Factors

14

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

14

Item 3.  Defaults Upon Senior Securities

14

Item 4.  Mine Safety Disclosures

14

Item 5.  Other Information

14

Item 6.  Exhibits

15



 

SIGNATURES

15



 

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 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 - FINANCIAL INFORMATION

 

Item 1.  Financial Statements

 

Ministry Partners Investment Company, LLC and Subsidiaries

Consolidated Balance Sheets

March 31, 2018 and December 31, 2017

 (Dollars in thousands Except Unit Data)







 

 

 

 

 

 



 

 

 

 

 

 



 

2018

 

2017



 

(Unaudited)

 

(Audited) 

Assets:

 

 

 

 

 

 

Cash

 

$

11,879 

 

$

9,907 

Restricted cash

 

 

56 

 

 

58 

Loans receivable, net of allowance for loan losses of $2,160 and $2,097 as of March 31, 2018 and December 31, 2017, respectively

 

 

144,492 

 

 

148,835 

Accrued interest receivable

 

 

725 

 

 

742 

Investments in joint venture

 

 

896 

 

 

896 

Property and equipment, net

 

 

95 

 

 

103 

Servicing assets

 

 

251 

 

 

270 

Other assets

 

 

345 

 

 

211 

Total assets

 

$

158,739 

 

$

161,022 

Liabilities and members’ equity

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

NCUA credit facilities

 

$

80,265 

 

$

81,492 

Notes payable, net of debt issuance costs of $72 and $85 as of March 31, 2018 and December 31, 2017, respectively

 

 

68,228 

 

 

69,003 

Accrued interest payable

 

 

206 

 

 

208 

Other liabilities

 

 

636 

 

 

890 

Total liabilities

 

 

149,335 

 

 

151,593 

Members' Equity:

 

 

 

 

 

 

Series A preferred units, 1,000,000 units authorized, 117,100 units issued and outstanding at March 31, 2018 and December 31, 2017 (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 March 31, 2018 and December 31, 2017; See Note 12

 

 

1,509 

 

 

1,509 

Accumulated deficit

 

 

(3,820)

 

 

(3,795)

Total members' equity

 

 

9,404 

 

 

9,429 

Total liabilities and members' equity

 

$

158,739 

 

$

161,022 

 

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

 

F-1

 


 

 Ministry Partners Investment Company, LLC and Subsidiaries

Consolidated Statements of Income (unaudited)

For the three months ended March 31, 2018 and 2017

(Dollars in thousands)







 

 

 

 

 

 



 

 

 

 

 

 



 

Three months ended



 

March 31,



 

2018

 

2017

Interest income:

 

 

 

 

 

 

Interest on loans

 

$

2,328 

 

$

2,327 

Interest on interest-bearing accounts

 

 

13 

 

 

13 

Total interest income

 

 

2,341 

 

 

2,340 

Interest expense:

 

 

 

 

 

 

NCUA Credit Facilities

 

 

499 

 

 

535 

Notes payable

 

 

687 

 

 

563 

Total interest expense

 

 

1,186 

 

 

1,098 

Net interest income

 

 

1,155 

 

 

1,242 

Provision for loan losses

 

 

63 

 

 

Net interest income after provision for loan losses

 

 

1,092 

 

 

1,237 

Non-interest income:

 

 

 

 

 

 

Broker-dealer commissions and fees

 

 

156 

 

 

146 

Other lending income

 

 

69 

 

 

148 

Total non-interest income

 

 

225 

 

 

294 

Non-interest expenses:

 

 

 

 

 

 

Salaries and benefits

 

 

714 

 

 

727 

Marketing and promotion

 

 

38 

 

 

19 

Office occupancy

 

 

37 

 

 

38 

Office operations and other expenses

 

 

302 

 

 

320 

Legal and accounting

 

 

161 

 

 

176 

Total non-interest expenses

 

 

1,252 

 

 

1,280 

Income before provision for income taxes

 

 

65 

 

 

251 

Provision for income taxes and state LLC fees

 

 

 

 

Net income

 

$

59 

 

$

245 



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

 

F-2

 


 

Ministry Partners Investment Company, LLC and Subsidiaries

Consolidated Statements of Cash Flows (Unaudited)

For the three months ended March 31, 2018 and 2017

(Dollars in thousands)





 

 

 

 

 

 



 

 

 

 

 

 



 

2018

 

2017

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

 

Net income

 

$

59 

 

$

245 

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

 

 

 

 

 

 

Depreciation

 

 

 

 

Amortization of deferred loan fees

 

 

(50)

 

 

(124)

Amortization of debt issuance costs

 

 

27 

 

 

27 

Provision for loan losses

 

 

63 

 

 

Accretion of loan discount

 

 

(5)

 

 

(9)

Gain on sale of loans

 

 

--

 

 

(80)

Changes in:

 

 

 

 

 

 

Accrued interest receivable

 

 

16 

 

 

(6)

Other assets

 

 

(115)

 

 

(129)

Other liabilities and accrued interest payable

 

 

(200)

 

 

(224)

Net cash used by operating activities

 

 

(197)

 

 

(288)

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

 

Loan originations

 

 

(426)

 

 

(4,100)

Loan sales

 

 

--

 

 

3,828 

Loan principal collections

 

 

4,761 

 

 

2,784 

Purchase of property and equipment

 

 

--

 

 

(10)

Net cash provided by investing activities

 

 

4,335 

 

 

2,502 

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

 

Net change in NCUA borrowings

 

 

(1,227)

 

 

(1,197)

Net change in notes payable

 

 

(788)

 

 

5,523 

Debt issuance costs

 

 

(14)

 

 

(21)

Dividends paid on preferred units

 

 

(139)

 

 

(129)

Net cash (used) provided by financing activities

 

 

(2,168)

 

 

4,176 

Net increase in cash and restricted cash

 

 

1,970 

 

 

6,390 

Cash, cash equivalents, and restricted cash at beginning of period

 

 

9,965 

 

 

10,336 

Cash, cash equivalents, and restricted cash at end of period

 

$

11,935 

 

$

16,726 

Supplemental disclosures of cash flow information

 

 

 

 

 

 

Interest paid

 

$

1,188 

 

$

1,091 

Income taxes paid

 

$

 

$

--



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

 

F-3

 


 

MINISTRY PARTNERS INVESTMENT COMPANY, LLC



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

The accounting and financial reporting policies of MINISTRY PARTNERS INVESTMENT COMPANY, LLC (the “Company”, “we”, or “our”) and its wholly-owned subsidiaries, Ministry Partners Funding, LLC, MP Realty Services, Inc., and Ministry Partners Securities, LLC, conform to accounting principles generally accepted in the United States and general financial industry practices.  The accompanying interim consolidated financial statements have not been audited.  A more detailed description of the Company’s accounting policies is included in its 2017 annual report filed on Form 10-K.  In the opinion of management, all adjustments (which include only normal recurring adjustments) necessary to present fairly the financial position, results of operations and cash flows at March 31, 2018 and for the three months ended March 31, 2018 and 2017 have been made.



Certain information and note disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. The results of operations for the periods ended March 31, 2018 and 2017 are not necessarily indicative of the results for the full year.

 

1.  Summary of Significant Accounting Policies

 

Nature of Business

 

Ministry Partners Investment Company, LLC (the “Company”) was incorporated in California in 1991 as a C corporation and converted to a limited liability company on December 31, 2008.  The Company is owned by a group of 11 federal and state chartered credit unions, as well as the Asset Management Assistance Center (“AMAC”) of the National Credit Union Administration (“NCUA”), none of which owns a majority of the voting equity units of the Company.  AMAC 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.  In addition, the Company from time to time purchases these types of loans from other financial institutions.  The Company funds its operations primarily through the sale of debt securities, as well as through other borrowings.  Nearly all of the Company’s business and operations currently are conducted in California and its mortgage loan investments cover approximately 30 states, with the largest number of loans made to California borrowers.



The Company’s wholy owned subsidiaries are, Ministry Partners Funding, LLC (“MPF”), MP Realty Services, Inc., a California corporation (“MP Realty”), and Ministry Partners Securities, LLC, a Delaware limited liability company (“MP Securities”). MPF was formed 2007 and was inactive from November 30, 2009 through November 2014.  In December 2014, the Company reactivated MPF to hold loans used as collateral for our new Secured Investment Certificates.  MP Realty was formed in November 2009, and obtained a license to operate as a corporate real estate broker through the California Department of Real Estate on February 23, 2010. MP Realty has conducted limited operations to date. 



MP Securities was formed on April 26, 2010 to provide investment and financing solutions for churches, charitable institutions and faith-based organizations.  MP Securities acts as the selling agent for the Company’s public and private placement notes.  MP Securities offers a broad scope of investment services including registered investment advisory services and the ability to sell various investment products including mutual funds and insurance products.  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 March 31, 2018, MP Securities was licensed to sell insurance products in 14 states and as a broker dealer firm in 24 states.



 

F-4

 


 

Principles of Consolidation



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

 

Conversion to LLC



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



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

 

Cash and Cash Equivalents



For purposes of the statement of cash flows, cash equivalents include time deposits, certificates of deposit, and all highly liquid debt instruments with original maturities of three months or less.  The Company had no cash positions other than demand deposits as of March 31, 2018 and December 31, 2017. 



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



Reclassifications



Certain reclassifications have been made to the 2017 financial statements to conform to the 2018 presentation.  Neither member’s equity nor net income for the three months ended March 31, 2017 were impacted by the reclassifications.



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 Joint Venture



The Company’s investment in a joint venture is analyzed for impairment by management on a periodic basis by comparing the carrying value to the estimated value of the underlying real property.  Any impairment charges will be recorded as a valuation allowance against the value of the asset.  The Company’s share of income and expenses of the joint venture will increase or decrease the Company’s investment and will be recorded on the income statement as realized gains or losses on investment. 



 

F-5

 


 

Loans Receivable



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



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



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



Allowance for Loan Losses



The Company sets aside an allowance or reserve for loan losses through charges to earnings, which are shown in the Company’s Consolidated Statements of Operations 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, collateral value, or observable market price of the impaired loan is lower than the carrying value of that loan.

 

F-6

 


 



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



Impairment is measured on a loan-by-loan basis by either the present value of expected future cash flows discounted at the loan's effective interest rate, the obtainable market price, or the fair value of the collateral if the loan is collateral-dependent.  When the Company modifies the terms of a loan for a borrower that is experiencing financial difficulties, a troubled debt restructuring is deemed to have occurred and the loan is classified as impaired.  Loans or portions thereof are charged off when they are determined by management to be uncollectible.  Uncollectability is evaluated periodically on all loans classified as “Loans of Lesser Quality.”  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 loans. The loan portfolio is segregated into the following portfolio classes:



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

 

F-7

 


 



Wholly-Owned Junior Collateral Position. This portfolio class consists of the wholly-owned loans and the retained portion of loans originated by the Company and sold 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 purchased from another financial entity for which the Company possesses a senior lien on the collateral underlying the loan. Loan participations purchased 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.



Participations Junior Collateral Position. This portfolio class consists of the participated loans purchased from another financial entity 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 purchased 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 sound worth and debt service capacity of the borrower or of any pledged collateral. These obligations, even if apparently protected by collateral value, have well-defined weaknesses related to adverse financial, managerial, economic, ministry, or environmental conditions which have clearly jeopardized repayment of principal

 

F-8

 


 

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.



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.



 

F-9

 


 

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.



Income Taxes



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



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



New accounting guidance

 

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, “Revenue from Contracts with Customers”, which supersedes existing accounting standards for revenue recognition and creates a single framework.  ASU 2014-09 and all subsequent amendments to the ASU (collectively "ASC 606") requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers and revises when it is appropriate to recognize a gain or loss from the transfer of nonfinancial assets such as other real estate owned..  This standard also specifies the accounting for certain costs to obtain or fulfill a contract with a customer.  The Company’s implementation efforts included a detailed review of revenue contracts within the scope of guidance and an evaluation of the impact on the Company’s revenue recognition policies.  No transition-related practical expedients were applied.  The Company adopted this ASU on its effective date, January 1, 2018, and it had no impact on the timing of the Company’s revenue recognition.



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

 

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



 

F-10

 


 

Recent Accounting Pronouncements



In February 2016, the FASB issued ASU No. 2016-02 “Leases (Topic 842).” ASU 2016-02 establishes a right of use model that requires a lessee to record a right of use asset and a lease liability for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. For lessors, the guidance modifies the classification criteria and the accounting for sales-type and direct financing leases. A lease will be treated as sale if it transfers all of the risks and rewards, as well as control of the underlying asset, to the lessee. If risks and rewards are conveyed without the transfer of control, the lease is treated as a financing. If the lessor doesn’t convey risks and rewards or control, an operating lease results. The amendments are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years for public business entities. Entities are required to use a modified retrospective approach for leases that exist or are entered into after the beginning of the earliest comparative period in the financial statements, with certain practical expedients available. Early adoption is permitted. Management is assessing the impact of ASU 2016-02 on its accounting and disclosures and expects this pronouncement will not have a material impact on the Company’s consolidated financial position or results of operation.

 

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. Management is currently evaluating the potential impact of the pending adoption of ASU 2016-13 on the consolidated financial statements.

  

2.  Pledge of Cash and Restricted Cash



Some of the Company’s cash may be pledged as collateral for its borrowings and is considered restricted cash.  At March 31, 2018 and December 31, 2017, the Company held no pledged cash.



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





 

 

 

 

 



 

 

 

 

 



2018

 

2017

Cash and cash equivalents

$

11,879 

 

$

9,907 

Restricted cash

 

56 

 

 

58 

Total cash, cash equivalents, and restricted cash shown in the statement of cash flows

 

11,935 

 

 

9,965 



Amounts included in restricted cash represent those required to be set aside with the Central Registration Depository ("CRD") account with FINRA as well as funds the Company has deposited with RBC Dain as clearing deposits.  The CRD funds may only be used for fees charged by FINRA to maintain the membership status of the Company, as well as fees related to registered and associated persons of the Company.  At March 31, 2018 and December 31, 2017, restricted cash held in the CRD account totaled $876 and $236, respectively.  At March 31, 2018 and December 31, 2017, restricted cash held with RBC Dain totaled $55,003 and $57,743.



 

F-11

 


 

3.  Related Party Transactions

 

Transactions with Equity Owners



Transactions with ECCU



Abel Pomar began serving as a member of the Company’s Board of Managers in February 2016. Mr. Pomar currently serves as the President, Chief Executive Officer of ECCU.



The Company maintains a portion of its cash funds at ECCU, its largest equity investor. Total funds held with ECCU were $907 thousand and $1.1 million at March 31, 2018 and December 31, 2017, respectively. Interest earned on funds held with ECCU totaled $1 thousand and $2 thousand for the three months ended March 31, 2018 and 2017, respectively.

 

The Company leases physical facilities and purchase other services from ECCU pursuant to a written lease and services agreement. Rent expense of $26 thousand during the three month periods ended March 31, 2018 and 2017 was paid to ECCU. Charges for other services purchased from ECCU were immaterial. All of these charges are included in Office Occupancy or Office Operations expense on the Company’s financial statements. The method used to arrive at the periodic charge is based on the fair market value of services provided. Management believes that such method is reasonable.

 

Ocasionally, the Company purchases loan participation interests from ECCU, its largest equity owner.  At March 31, 2018, the Company’s investment loan participations serviced by ECCU totaled $7.6 million, with ECCU servicing 6 of the Company’s 164 loans.  During the three months ended March 31, 2018 and 2017, the Company did not purchase any loans from ECCU.  The Company recognized $99 thousand and $152 thousand of interest income during the three months ended March 31, 2018 and 2017, respectively, on its investment in loans purchased from ECCU.  Loan participations the Company purchased from ECCU generally have pass-through rates which are up to 75 basis points lower than the loan’s contractual rate.  The Company has negotiated the pass-through interest rates with ECCU on a loan by loan basis. 



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 $4 thousand and $9 thousand to ECCU under the terms of this agreement during the three months ended March 31, 2018 and 2017, 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 renewed on March 1, 2018 for an additional six months. 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.  The agreement was amended on March 1, 2018 and now includes referral fee income paid by

 

F-12

 


 

either party on the successful closing of a referred loan.  For the three month periods ended March 31, 2018 and 2017, the Company recognized $14 thousand during each period 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 three months ended March 31, 2018 and 2017, the Company recognized $2 thousand and $3 thousand, respectively in income as a result of this agreement.



Transactions with ACCU



On May 4, 2017, America’s Christian Credit Union (“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 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 ACCU. 



Occasionally, the Company sells or purchases participation interests from ACCU. The Company sold no loans and $1.9 million of loans to ACCU during the three months ended March 31, 2018 and 2017, respectively.  As of March 31, 2018 and 2017, the outstanding balance of loan participations sold to ACCU was $2.7 million and $4.2 million, respectively. 



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 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 $15 thousand and $28 thousand to ACCU under the terms of this agreement during the three months ended March 31, 2018 and 2017, respectively



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 $253 thousand $250 thousand at March 31, 2018 and December 31, 2017.



Transactions with Other Equity Owners



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.



 

F-13

 


 

Transactions with Subsidiaries



The Company entered into a Managing Participating Broker Agreement (the “MPB Agreement”), amended effective May 24, 2017, with MP Securities pursuant to which MP Securities acted as the managing broker for the offering of its Class 1 Notes.  The Class 1 Note offering expired December 31, 2017.  Under the terms of a the MPB Agreement, it paid selling commissions ranging from 0.25% to a maximum of 5.50% over the life of a Class 1 Note.



Effective as of February 27, 2018, the Company commenced offering its Class 1A notes as a replacement for its Class 1 Notes.  Pursuant to the terms of the Managing Broker Agreement (the “Class 1A Notes Selling Agreement”), MP Securities serves as the managing broker for the Company’s Class 1A Notes Offering.  Under the terms of the Class 1A Notes Selling Agreement,  the Company will pay MP Securities a 1.50% initial sales commission on the sale of the Company’s Class 1A Notes.  MP Securities will receive an account servicing fee equal to 1% per annum of the principal balance of a Class 1A Note purchased, determined on a monthly basis, commencing one year after the purchase of a Note; subject however, to a maximum gross fee of 5.50% over the term of a Class 1A Note.  The Company reserves the right to waive, reduce, or suspend payment of this account servicing fee at any time.  In addition, no account servicing fee will be assessed on any Class 1A Note purchased once the total compensation paid to MP Securities resulting from the purchase of a Class 1A Note reaches 5.5%.  The account servicing fee will not be assessed on any outstanding Class 1 or Class A Notes.



For each sale of a Note, the Company will pay a 0.50% processing fee on the purchase of a Class 1A Note, payable at closing of a purchase of a Note. The Company reserves the right to waive, reduce or suspend payment of the processing fee at any time.



The Company has also 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%  per annum of the outstanding balances of the Subordinated Capital Notes and International Notes; subject, however, to a maximum gross dealer compensation of 2.5%No selling commissions will be paid to MP Securities on any new sales of the Company’s Subordinated Capital Notes and International Notes.  The Company reserves the right to waive, reduce, or suspend payment of the assets under management fee at any time. At no time will the compensation paid to MP Securities pursuant to 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 1, 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 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.



In connection with the Company’s Secured Note offering, it has engaged MP Securities to act as its managing broker for the offering.  Under the terms of a Managing Broker-Dealer Agreement entered into by and between the Company and MP Securities, it will pay selling commissions ranging from 2% to a maximum of 5% on Secured Notes. The Company will also pay MP Securities a .50% processing fee on the purchase of a Secured Note.  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.



The Company’s Secured Note Offering terminated effective on December 31, 2017.  On April 30, 2018, the Company launched a new secured note offering of up to $80 million of its Secured Notes to replace its previous Secured Note Offering.  The Company also entered into a Selling Agreement with MP Securities (the “Secured Notes Selling Agrement”) effective as of April 30, 2018, pursuant to which the Company has appointed MP Securities as its selling agent to market and distribute the Secured Notes.  Under the terms of the Secured Notes Selling Agreement, MP Securities will receive an assets under management fee equal to 1% of the principal balance

 

F-14

 


 

of the Secured Notes that are issued and outstanding, payable on a monthly basis.  In addition, the Company will pay MP Securities a 0.50% processing fee of the total amount of Secured Notes purchased, payable at the closing of such purchase.



The Company has also signed an Administrative Services Agreement with MP Securities which stipulates that it will provide certain services to MP Securities.  This agreement was updated in November 2017 and February of 2018.  These services include the lease of office space, use of equipment, including computers and phones, and payroll and personnel services.  The February 2018 amendment was updated to include an annual servicing fee of $250 thousand to be paid to MP Securities on a quarterly basis in 2018.  In exchange for  providing these services, MP Securities will provide ministerial, compliance, marketing, operational and investor relations related services regarding the Company’s investor note program.  In December 2016, the Board authorized the officers of the Company 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.  The expense abatement authorization agreement was not renewed at expiration in November of 2017.  Under this abatement agreement, no abatements had been requested by MP Securities or made by the Company. 



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

 

4.  Loans Receivable and Allowance for Loan Losses

 

The Company’s loan portfolio is comprised of one segment – church loans.  The loans fall into four classes, which include wholly-owned loans for which the Company possesses the first collateral position, wholly-owned loans that are either unsecured or for which the Company possesses a junior collateral position, participated loans purchased for which the Company possesses the first collateral position, and participated loans purchased for which the Company possesses a junior collateral position.  See “Note 1 – Loan Portfolio Segments and Classes” to Part I “Financial Information” of this Report.



All of our loans are made to various evangelical churches and related organizations, primarily to purchase, construct or improve facilities. Loan maturities extend through 2027. Loans yielded a weighted average of 6.35% and 6.31% as of March 31, 2018 and December 31, 2017, respectively. A summary of the Company’s mortgage loans owned as of March 31, 2018 and December 31, 2017 is as follows (dollars in thousands):







 

 

 

 

 

 



 

 

 

 

 

 



 

March 31,

 

December 31



 

2018

 

2017



 

 

 

 

 

 

Loans to evangelical churches and related organizations:

 

 

 

 

 

 

Real estate secured

 

$

148,110 

 

$

151,214 

Unsecured

 

 

269 

 

 

1,500 

Total loans

 

 

148,379 

 

 

152,714 



 

 

 

 

 

 

Deferred loan fees, net

 

 

(862)

 

 

(911)

Loan discount

 

 

(865)

 

 

(871)

Allowance for loan losses

 

 

(2,160)

 

 

(2,097)

Loans, net

 

$

144,492 

 

$

148,835 



 

F-15

 


 

Allowance for Loan Losses



The Company has established an allowance for loan losses of $2.2 million as of March 31, 2018 and December 31, 2017 for loans held in its mortgage portfolio. For the three months ended March 31, 2018 and the year ended December 31, 2017recorded no charge-offs and $40 thousand in charge-offs on its mortgage loan investments, respectively. Management believes that the allowance for loan losses as of March 31, 2018 and December 31, 2017 is appropriate.



Changes in the allowance for loan losses for the three months ended March 31, 2018 and the year ended December 31, 2017 are as follows (dollars in thousands):







 

 

 

 

 

 



 

 

 

 

 

 



 

Three months ended

 

Year ended



 

March 31, 2018

 

December 31, 2017



 

 

 

 

 

 

Balance, beginning of period

 

$

2,097 

 

$

1,875 

Provision for loan loss

 

 

63 

 

 

262 

Chargeoffs

 

 

--

 

 

(40)

Balance, end of period

 

$

2,160 

 

$

2,097 



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



 

 

 

 

 

 



 

March 31, 2018

 

December 31, 2017



 

 

 

 

 

 

Loans:

 

 

 

 

 

 

Individually evaluated for impairment

 

$

9,102 

 

$

9,255 

Collectively evaluated for impairment 

 

 

139,277 

 

 

143,459 

Balance

 

$

148,379 

 

$

152,714 



 

 

 

 

 

 

Allowance for loan losses:

 

 

 

 

 

 

Individually evaluated for impairment

 

$

1,293 

 

$

1,260 

Collectively evaluated for impairment 

 

 

867 

 

 

837 

Balance

 

$

2,160 

 

$

2,097 



 

F-16

 


 

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 March 31, 2018 and December 31, 2017, 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 March 31, 2018



 

Wholly-Owned First

 

Wholly-Owned Junior

 

Participation First

 

Participation Junior

 

Total



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Grade:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pass

 

$

111,067 

 

$

3,987 

 

$

7,891 

 

$

--

 

$

122,945 

Watch

 

 

16,123 

 

 

--

 

 

209 

 

 

--

 

 

16,332 

Special mention

 

 

3,100 

 

 

--

 

 

--

 

 

--

 

 

3,100 

Substandard

 

 

5,808 

 

 

194 

 

 

--

 

 

--

 

 

6,002 

Doubtful

 

 

--

 

 

--

 

 

--

 

 

--

 

 

--

Loss

 

 

--

 

 

--

 

 

--

 

 

--

 

 

--

Total

 

$

136,098 

 

$

4,181 

 

$

8,100 

 

$

--

 

$

148,379 









 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Credit Quality Indicators (by class)

As of  December 31, 2017



 

Wholly-Owned First

 

Wholly-Owned Junior

 

Participation First

 

Participation Junior

 

Total



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Grade:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pass

 

$

115,422 

 

 

5,269 

 

 

9,474 

 

 

--

 

$

130,165 

Watch

 

 

13,082 

 

 

--

 

 

212 

 

 

--

 

 

13,294 

Special mention

 

 

3,152 

 

 

--

 

 

--

 

 

--

 

 

3,152 

Substandard

 

 

5,907 

 

 

196 

 

 

--

 

 

--

 

 

6,103 

Doubtful

 

 

--

 

 

--

 

 

--

 

 

--

 

 

--

Loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

--

Total

 

$

137,563 

 

$

5,465 

 

$

9,686 

 

$

--

 

$

152,714 



 

F-17

 


 

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









 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Age Analysis of Past Due Loans (by class)

As of March 31, 2018



 

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

 

$

6,279 

 

$

--

 

$

2,810 

 

$

9,089 

 

$

127,009 

 

$

136,098 

 

$

--

Wholly-Owned Junior

 

 

194 

 

 

--

 

 

--

 

 

194 

 

 

3,987 

 

 

4,181 

 

 

--

Participation First

 

 

--

 

 

--

 

 

--

 

 

--

 

 

8,100 

 

 

8,100 

 

 

--

Participation Junior

 

 

--

 

 

--

 

 

--

 

 

--

 

 

--

 

 

--

 

 

--

Total

 

$

6,473 

 

$

--

 

$

2,810 

 

$

9,283 

 

$

139,096 

 

$

148,379 

 

$

--







 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Age Analysis of Past Due Loans (by class)

As of  December 31, 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

 

$

--

 

 

3,521 

 

 

1,587 

 

$

5,108 

 

$

132,455 

 

$

137,563 

 

$

--

Wholly-Owned Junior

 

 

--

 

 

196 

 

 

--

 

 

196 

 

 

5,269 

 

 

5,465 

 

 

--

Participation First

 

 

--

 

 

--

 

 

--

 

 

--

 

 

9,686 

 

 

9,686 

 

 

--

Participation Junior

 

 

--

 

 

--

 

 

--

 

 

--

 

 

--

 

 

--

 

 

--

Total

 

$

--

 

$

3,717 

 

$

1,587 

 

$

5,304 

 

$

147,410 

 

$

152,714 

 

$

--





Non-Performing Loans



Non-performing loans include non-accrual loans, loans 90 days or more past due and still accruing, and restructured loans.  Non-accrual loans represent loans on which interest accruals have been discontinued.  Restructured loans are loans in which the borrower has been granted a concession on the interest rate or the original repayment terms due to financial distress. Non-performing loans are closely monitored on an ongoing basis as part of management’s loan review and work-out process.  The potential risk of loss on these loans is evaluated by comparing the loan balance to the fair value of any underlying collateral or the present value of projected future cash flows.



 

F-18

 


 

The following tables are summaries of impaired loans by loan class as of three months ended March 31, 2018 and 2017, and the year ended December 31, 2017, 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 March 31, 2018



 

Unpaid Principal Balance

 

Related Allowance

 

Net Loan Principal Balance

 

Discount

 

Net Recorded Investment

With no allowance recorded:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Church loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Wholly-Owned First

 

$

4,876 

 

$

--

 

$

4,876 

 

$

443 

 

$

4,433 

Wholly-Owned Junior

 

 

216 

 

 

--

 

 

216 

 

 

11 

 

 

205 

Participation First

 

 

--

 

 

--

 

 

--

 

 

--

 

 

--

Participation Junior

 

 

--

 

 

--

 

 

--

 

 

--

 

 

--



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

With an allowance recorded:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Church loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Wholly-Owned First

 

 

6,758 

 

 

1,293 

 

 

5,465 

 

 

294 

 

 

5,171 

Wholly-Owned Junior

 

 

--

 

 

--

 

 

--

 

 

--

 

 

--

Participation First

 

 

--

 

 

--

 

 

--

 

 

--

 

 

--

Participation Junior

 

 

--

 

 

--

 

 

--

 

 

--

 

 

--



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Church loans

 

$

11,850 

 

$

1,293 

 

$

10,557 

 

$

748 

 

$

9,809 







 

 

 

 

 

 



 

 

 

 

 

 



 

For the three months ended March 31, 2018



 

Average Recorded Investment

 

Interest Income Recognized

With no allowance recorded:

 

 

 

 

 

 

Church loans:

 

 

 

 

 

 

Wholly-Owned First

 

$

4,885 

 

$

24 

Wholly-Owned Junior

 

 

216 

 

 

--

Participation First

 

 

--

 

 

--

Participation Junior

 

 

--

 

 

--

With an allowance recorded:

 

 

 

 

 

 

Church loans:

 

 

 

 

 

 

Wholly-Owned First

 

 

6,763 

 

 

--

Wholly-Owned Junior

 

 

--

 

 

--

Participation First

 

 

--

 

 

--

Participation Junior

 

 

--

 

 

--

Total:

 

 

 

 

 

 

Church loans

 

$

11,864 

 

$

24 



 

F-19

 


 





 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Impaired Loans (by class)

As of December 31, 2017



 

Unpaid Principal Balance

 

Related Allowance

 

Net Loan Principal Balance

 

Discount

 

Net Recorded Investment

With no allowance recorded:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Church loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Wholly-Owned First

 

$

6,395 

 

$

--

 

$

6,395 

 

$

443 

 

$

5,952 

Wholly-Owned Junior

 

 

216 

 

 

--

 

 

216 

 

 

11 

 

 

205 

Participation First

 

 

--

 

 

--

 

 

--

 

 

--

 

 

--

Participation Junior

 

 

--

 

 

--

 

 

--

 

 

--

 

 

--



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

With an allowance recorded:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Church loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Wholly-Owned First

 

 

5,271 

 

 

1,260 

 

 

4,011 

 

 

319 

 

 

3,692 

Wholly-Owned Junior

 

 

--

 

 

--

 

 

--

 

 

--

 

 

--

Participation First

 

 

--

 

 

--

 

 

--

 

 

--

 

 

--

Participation Junior

 

 

--

 

 

--

 

 

--

 

 

--

 

 

--



 

 

 

 

 

 

 

 

 

 

 

 

 

 

--

Total:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Church loans

 

$

11,882 

 

$

1,260 

 

$

10,622 

 

$

773 

 

$

9,849 







 

 

 

 

 

 



 

 

 

 

 

 



 

For the year ended   December 31, 2017



 

Average Recorded Investment

 

Interest Income Recognized

With no allowance recorded:

 

 

 

 

 

 

Church loans:

 

 

 

 

 

 

Wholly-Owned First

 

$

4,703 

 

$

--

Wholly-Owned Junior

 

 

200 

 

 

--

Participation First

 

 

--

 

 

--

Participation Junior

 

 

--

 

 

--

With an allowance recorded:

 

 

 

 

 

 

Church loans:

 

 

 

 

 

 

Wholly-Owned First

 

 

4,163 

 

 

--

Wholly-Owned Junior

 

 

--

 

 

--

Participation First

 

 

--

 

 

--

Participation Junior

 

 

--

 

 

--

Total:

 

 

 

 

 

 

Church loans

 

$

9,067 

 

$

--



 

F-20

 


 





 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Impaired Loans (by class)

As of March 31, 2017



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

Unpaid Principal Balance

 

Related Allowance

 

Net Loan Principal Balance

 

Discount

 

Net Recorded Investment



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

With no allowance recorded:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Church loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Wholly-Owned First

 

$

4,267 

 

$

--

 

$

4,267 

 

$

425 

 

$

3,842 

Wholly-Owned Junior

 

 

202 

 

 

--

 

 

202 

 

 

11 

 

 

191 

Participation First

 

 

--

 

 

--

 

 

--

 

 

--

 

 

--

Participation Junior

 

 

--

 

 

--

 

 

--

 

 

--

 

 

--



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

With an allowance recorded:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Church loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Wholly-Owned First

 

 

4,256 

 

 

1,072 

 

 

3,184 

 

 

319 

 

 

2,865 

Wholly-Owned Junior

 

 

--

 

 

--

 

 

--

 

 

--

 

 

--

Participation First

 

 

--

 

 

--

 

 

--

 

 

--

 

 

--

Participation Junior

 

 

--

 

 

--

 

 

--

 

 

--

 

 

--



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Church loans

 

$

8,725 

 

$

1,072 

 

$

7,653 

 

$

756 

 

$

6,898 







 

 

 

 

 

 



 

 

 

 

 

 



 

For the three months ended March 31, 2017



 

Average Recorded Investment

 

Interest Income Recognized



 

 

 

 

 

 

With no allowance recorded:

 

 

 

 

 

 

Church loans:

 

 

 

 

 

 

Wholly-Owned First

 

$

3,880 

 

$

--

Wholly-Owned Junior

 

 

192 

 

 

--

Participation First

 

 

--

 

 

--

Participation Junior

 

 

--

 

 

--

With an allowance recorded:

 

 

 

 

 

 

Church loans:

 

 

 

 

 

 

Wholly-Owned First

 

 

3,972 

 

 

--

Wholly-Owned Junior

 

 

--

 

 

--

Participation First

 

 

--

 

 

--

Participation Junior

 

 

--

 

 

--

Total:

 

 

 

 

 

 

Church loans

 

$

8,045 

 

$

--



 

F-21

 


 

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





 

 

 



 

 

 

Loans on Nonaccrual Status (by class)

As of March 31, 2018



 

 

 

Church loans:

 

 

 

Wholly-Owned First

 

$

8,013 

Wholly-Owned Junior

 

 

194 

Participation First

 

 

--

Participation Junior

 

 

--

Total

 

$

8,207 







 

 

 



 

 

 

Loans on Nonaccrual Status (by class)

As of  December 31, 2017



 

 

 

Church loans:

 

 

 

Wholly-Owned First

 

$

8,167 

Wholly-Owned Junior

 

 

196 

Participation First

 

 

--

Participation Junior

 

 

--

Total

 

$

8,363 



The Company restructured no loans during each of the three month periods ended March 31, 2018 and 2017.

 

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



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



As of March 31, 2018, no additional funds were committed to be advanced in connection with loans modified as troubled debt restructurings. 

 

5. Investments in Joint Venture



In December 2015, the Company finalized an agreement with Intertex Property Management, Inc., a California corporation, to enter into a joint venture to form Tesoro Hills, LLC (the “Valencia Hills Project”), a company that will develop and market property formerly classified by the Company as a foreclosed asset.  In January 2016, the Company transferred ownership in the foreclosed asset to the Valencia Hills Project as part of the agreement and reclassified the carrying value of the property from foreclosed assets to investments in joint venture.  The Company’s initial investment in the joint venture was $900 thousand, which was equal to its carrying value in the foreclosed asset at December 31, 2015.



The joint venture incurred $0 and $1 thousand in losses for the three months ended March 31, 2018 and 2017, respectively.  As of March 31, 2018 and December 31, 2017, the value of the Company’s investment in the property is $896 thousand and $896, respectively.  Management has conducted an evaluation of the investment as of March 31, 2018 and has determined that the investment is not impaired.

 

 

F-22

 


 

6. Revenue Recognition



Pursuant to the adoption of ASU 2014-09, the following disclosures discuss the Company's revenue recognition accounting policies. The Company recognizes two primary types of revenue: interest income and noninterest income.



Interest Income



The Company’s principal source of revenue is interest income from loans, which is recognized on an accrual basis using the effective interest method. Interest income is not within the scope of ASC Topic 606, Revenues from Contracts with Customers.



Noninterest Income



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







 

 

 

 

 

 



 

 

 

 

 

 



 

Three months ended



 

March 31,



 

2018

 

2017

Non-interest income

 

 

 

 

 

 

Wealth advisory fees

 

$

49 

 

$

37 

Investment brokerage fees

 

 

106 

 

 

109 

Lending fees (1)

 

 

41 

 

 

130 

Other non-interest income

 

 

29 

 

 

18 

Total non-interest income

 

$

225 

 

$

294 

(1) Not within scope of ASC 606

 

 

 

 

 

 



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

 

Wealth advisory fees

 

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

 

Investment brokerage fees



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



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



 

F-23

 


 

Trade execution commissions are earned and recognized on the trade date, when the Company executes a trade for a customer. Payment for the trade execution is due on the settlement date. 

 

7.  Loan Participation Sales



During the three months ended March 31, 2018, the Company sold no participations in church loans.  During the year ended December 31, 2017, the Company sold participations in 6 church loans totaling $9.7 million.  As a result of these sales, the Company recorded servicing assets totaling $203 thousand.  Servicing assets are amortized using the interest method as an adjustment to servicing fee income.  Amortization totaled $19 thousand and $20 thousand for the three months ended March 31, 2018 and 2017. 



A summary of servicing assets for the three months ended three months ended March 31, 2018 and 2017, and the year ended December 31, 2017 is as follows (dollars in thousands):









 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 



For the three months ended

 

For the year ended



March 31,

 

December 31,



2018

 

2017

 

2017

Balance, beginning of period

$

270 

 

$

258 

 

$

258 

Additions:

 

 

 

 

 

 

 

 

Servicing obligations from sale of loan participations

 

--

 

 

118 

 

 

203 

Subtractions:

 

 

 

 

 

 

 

 

Amortization

 

(19)

 

 

(20)

 

 

(191)

Balance, end of period

$

251 

 

$

356 

 

$

270 

 

8. Premises and Equipment



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







 

 

 

 

 

 



 

 

 

 

 

 



 

As of March 31,

 

As of December 31,



 

2018

 

2017



 

 

 

 

 

 

Furniture and office equipment

 

$

486 

 

$

486 

Computer system

 

 

222 

 

 

222 

Leasehold improvements

 

 

25 

 

 

25 



 

 

 

 

 

 

Total premises and equipment

 

 

733 

 

 

733 

Less accumulated depreciation and amortization

 

 

(638)

 

 

(630)



 

 

 

 

 

 

Premises and equipment, net

 

$

95 

 

$

103 



Depreciation and amortization expense for the three months ended March 31, 2018 and 2017 amounted to $8 thousand and $7 thousand, respectively.

 

9.  NCUA Credit Facilities

 

Items Applicable to Each NCUA Credit Facility



On November 4, 2011, the Company and the National Credit Union Administration Board As Liquidating Agent of Members United Corporate Federal Credit Union (“Lender”) entered into an $87.3 million credit facility refinancing transaction (the “MU Credit Facility”). 



Also 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”).



 

F-24

 


 

Accrued interest is due and payable monthly in arrears on both facilities 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 facilities may not be re-borrowed.  The facilities mature on November 1, 2026, at which point the final principal payment will be due.



Future principal contractual payments of the Company’s borrowings from financial institutions during the twelve month periods ending March 31 are as follows (dollars in thousands):







 

 

 



 

 

 

2019

 

$

4,977 

2020

 

 

5,105 

2021

 

 

5,240 

2022

 

 

5,374 

2023

 

 

5,511 

Thereafter

 

 

54,058 



 

$

80,265 



The NCUA credit facilities include 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 us to meet its obligation to maintain a minimum collateralization ratio.  In total, the collateral securing both facilities at March 31, 2018 and December 31, 2017 satisfied the 120% minimum.  In addition, the collateral securing both facilities at March 31, 2018 and December 31, 2017 separately satisfied the 110% minimum required collateralization ratio.



The NCUA credit facilities also include covenants which prevent the Company from renewing or extending a loan pledged as collateral under these facilities unless certain conditions have been met and requires the borrower to deliver current financial statements to the Company.  Under the terms of the facilities, the Company has established two separate lockboxes for each facility 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 NCUA credit facilities.  Such Events of Default include, among others, failure to make timely payments due under the NCUA credit facilities and the Company's breach of any of its covenants.  As of March 31, 2018 and December 31, 2017, respectively, the Company was in compliance with its covenants under each of the NCUA credit facilities.



Members United Facility



The balance of the MU Credit Facility was $62.4 million and $63.4 million at March 31, 2018 and December 31, 2017, respectively.  The required minimum monthly payment is $450 thousand. 



At March 31, 2018 and December 31, 2017, the collateral securing the MU Credit Facility had an aggregate principal balance of $72.7 million and $71.7 million, respectively.  The collateral securing the MU Credit Facility at March 31, 2018 and December 31, 2017 satisfied the 110% minimum required collateralization ratio.



WesCorp Facility



As of March 31, 2018 and December 31, 2017, $17.9 million and $18.1 million, respectively, was outstanding on the WesCorp Credit Facility Extension.  The required minimum monthly payment is $129 thousand. 



As of March 31, 2018 and December 31, 2017, the collateral securing the WesCorp Credit Facility Extension had an aggregate principal balance of $24.9 million and $26.9 million, respectively.   The collateral securing the WesCorp Credit Facility Extension at March 31, 2018 and December 31, 2017 satisfied the 110% minimum collateralization ratio required by the amended agreement.

 

 

F-25

 


 

10.  Notes Payable



SEC Registered Public Offerings 



Notes payable comprised unsecured and secured notes totaling $59.2 million and $9.1 million, respectively, at March 31, 2018.  Notes payable comprised of unsecured and secured notes totaling $59.3 million and $9.8 million, respectively, at December 31, 2017.  The notes are payable to investors who have purchased the securities, including individuals, churches, and Christian ministries, many of whom are members of ECCU or ACCU. Notes pay interest at stated spreads over an index rate that is adjusted every month. Interest can be reinvested or paid at the investor's option. The Company may repurchase all or a portion of notes at any time at its sole discretion, and may allow investors to redeem their notes prior to maturity at its sole discretion.



Class A Offering.  In April 2008, the Company registered with the SEC its Class A Notes.  The Class A Note Offering expired on December 31, 2015 and the Company discontinued the sale of its Class A Notes. The offering included three categories of notes, including a fixed interest note, a variable interest note, and a flex note, which allows borrowers to increase their interest rate once a year with certain limitations.  The Class A Notes contained restrictive covenants pertaining to paying dividends, making redemptions, acquiring, purchasing or making certain payments, requiring the maintenance of minimum tangible net worth, limitations on the issuance of additional notes and incurring of indebtedness.  The Company was in compliance with these covenants as of March 31, 2018 and December 31, 2017.  The Class A Notes were issued under a Trust Indenture between the Company and U.S. Bank National Association (“US Bank”). At March 31, 2018 and December 31, 2017, $11.7 million and $12.3 million of these notes were outstanding, respectively.



Class 1 Offering.  In January 2015, the Company registered with the SEC its Class 1 Notes.  The Class 1 Note Offering expired on December 31, 2017 and the Company discontinued the sale of its Class 1 Notes at that time.  The offering included two categories of notes, including a fixed interest note and a variable interest note.  The Class 1 Notes contain restrictive covenants pertaining to paying dividends, making redemptions, acquiring, purchasing or making certain payments, requiring the maintenance of minimum tangible net worth, limitations on the issuance of additional notes and incurring of indebtedness.  The Company was in compliance with these covenants as of March 31, 2018 and December 31, 2017.  The Class 1 Notes were issued under a Trust Indenture between the Company and U.S. Bank.  At March 31, 2018 and December 31, 2017, $37.0 million and $39.7 million of Class 1 Notes were outstanding, respectively.



Class 1A Offering.  In February 2018, the Company launched its Class 1A Notes Offering. The Company registered $90 million of its Class 1A Notes in two series – fixed and variable notes and the Company’s Registration Statement was declared effective on February 27, 2018. The Class 1A Notes are unsecured. The interest rate paid on the Fixed Series Notes is determined in reference to a Constant Maturity Treasury Index published by the U.S. Department of Treasury (“CMT Index”) in effect on the date that the note is issued plus a rate spread as described in the Company’s Class 1A Prospectus.  The interest rate paid on a Variable Series Note is determined by reference to the variable index in effect on the date the interest rate is set. The CMT Index is determined by the Constant Maturity Treasury rates published by the U.S. Department of Treasury for actively traded Treasury securities. The variable index is equal to the 3-month LIBOR rate.  The Class 1A Notes will be issued under a Trust Indenture entered into between the Company and U.S. Bank.  At March 31, 2018, $0.4 million of the Company’s Class 1A Notes were outstanding.



Private Offerings



Secured Investment Certificates (“Secured Notes”).  In January 2015, the Company began offering Secured Notes under a new private placement memorandum pursuant to the requirements of Rule 506 of Regulation D.  Under this offering, the Company may sell up to $80.0 million in Secured Notes to qualified investors.  The Notes require as collateral either cash pledged in the amount of 100% of the outstanding balance of the Notes or loans receivable pledged in the amount of 105% of the outstanding balance of the Notes.  At March 31, 2018 and December 31, 2017, a total of $9.1 million and $9.8 million in Secured Notes were outstanding.  At March 31, 2018 and December 31, 2017, the collateral securing the Secured Notes had an outstanding balance of $10.8 million and $10.9 million, respectively.  The March 31, 2018 and December 31, 2017 collateral balance was sufficient to satisfy the minimum collateral requirement of the Secured Notes offering. As of March 31, 2018 and December 31, 2017,

 

F-26

 


 

no cash was pledged in regards to the Secured Notes. The Company’s 2015 Secured Note offering terminated on December 31, 2017.  Effective as of April 30, 2018, the Company launched a new $80 million secured note offering.  The 2018 Secured Note offering will be issued pursuant to a Loan and Security Agreement and it will include the same terms and conditions previously set forth in its 2015 Secured Note offering.



Series 1 Subordinated Capital Notes (“Subordinated Notes”).  In February 2013, the Company launched the sale of its Subordinated Notes pursuant to a limited private offering to qualified investors that meets the requirements of Rule 506 of Regulation D.  The Subordinated Notes have been offered with maturity terms from 12 to 60 months at an interest rate fixed on the date of issuance, as determined by the then current seven-day average rate reported by the U.S. Federal Reserve Board for interest rate swaps. At March 31, 2018 and December 31, 2017, a total of $9.9 million and $6.8 million respectively in notes sold pursuant to this offering were outstanding.



Under the Subordinated Notes offering, the Company is subject to certain covenants, including limitations on restricted payments, limitations on the amount of notes that can be sold, restrictions on mergers and acquisitions, and proper maintenance of books and records.  The Company was in compliance with these covenants at March 31, 2018 and December 31, 2017. 



Special Offering Notes.  Special Offering Notes are unsecured general obligation notes having various terms we have issued over the past several years to ministries, ministry-related organizations, and individuals. Except for a small number of investors (in total not exceeding 35 idividuals), the holders of these Notes are accredited investors within the meaning of Regulation D under the 1933 Securities Act. We may continue to sell our debt securities to eligible investors on an individual, negotiated basis as we deem appropriate and in compliance with exemptions from registration or qualifications under federal and applicable state securities laws. At March 31, 2018 and December 31, 2017, a total of $114 thousand and $473 thousand respectively in notes sold pursuant to this offering were outstanding.



The Company has the following notes payable at March 31, 2018 (dollars in thousands):



 

 

 

 

 

 

 



 

 

 

 

 

 

 

SEC Registered Public Offerings

 

Amount

 

 

Weighted Average Interest Rate

 

Class A Offering

 

$

11,715 

 

 

4.05 

%

Class 1 Offering

 

 

37,014 

 

 

3.77 

%

Class 1A Offering

 

 

400 

 

 

5.88 

 



 

 

 

 

 

 

 

Private Offerings

 

 

 

 

 

 

 

Special Offering

 

 

114 

 

 

3.35 

%

Special Subordinated Notes

 

 

9,933 

 

 

4.63 

%

Secured Notes

 

 

9,124 

 

 

3.77 

%

Total

 

$

68,300 

 

 

3.55 

%



Future maturities for the Company’s investor notes during the twelve month periods ending March 31 are as follows (dollars in thousands):







 

 

 



 

 

 

2019

 

$

17,227 

2020

 

 

15,120 

2021

 

 

16,749 

2022

 

 

14,343 

2023

 

 

4,156 

Thereafter

 

 

705 



 

$

68,300 



Debt issuance costs related to the Company’s notes payable were $72 thousand and $85 thousand at March 31, 2018 and December 31, 2017, respectively.

 

 

F-27

 


 

11.  Commitments and Contingencies 



Unfunded Commitments



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



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







 

 

 

 

 

 



 

 

 

 

 

 



 

Contract Amount at:



 

 

 

 

 

 



 

March 31, 2018

 

December 31, 2017

Undisbursed loans

 

$

889 

 

$

1,199 

Standby letter of credit

 

$

384 

 

$

384 



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



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



Contingencies



In the normal course of business, the Company may become involved in various legal proceedings. As of March 31, 2018, the Company is a defendant in a wrongful termination of employment lawsuit.  The Company is contesting the claim and at March 31, 2018, the Company’s liabilities include an accrual of $30 thousand for litigation related expenses incurred in connection with this claim.  Although the Company believes that it will prevail on the merits, the litigation could have a lengthy process, and the ultimate outcome cannot be predicted.



Operating Lease Commitments



The Company has lease commitments covering its offices in Brea and Fresno, California. At March 31, 2018, future minimum rental payments for the twelve months ending March 31 are as follows:





 

 

 



 

 

 

2019

 

$

118 

2020

 

 

27 

Thereafter

 

 

--

Total

 

$

145 



Total rent expense, including common area costs, was $36 thousand and $35 thousand for the three months ended March 31, 2018 and 2017, respectively. The Brea office lease expires in 2018 and contains one additional option to renew for five years.



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

 

 

F-28

 


 

12.  Preferred 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.

 

13.  Retirement Plans



401(k)



All of the Company’s employees are eligible to participate in the Automated Data Processing, Inc. (“ADP”) 401(k) plan effective as of the date their employment commences. No minimum service is required and the minimum age is 21. Each employee may elect voluntary contributions not to exceed 86% of salary, subject to certain limits based on U.S. tax law. The plan has a matching program, which qualifies as a Safe Harbor 401(k) plan. As a Safe Harbor Section 401(k) plan, the Company matches each eligible employee’s contribution, dollar for dollar, up to 3% of the employee’s compensation, and 50% of the employee’s contribution that exceeds 3% of their compensation, up to a maximum contribution of 5% of the employee’s compensation.  Company matching contributions for the three months ended March 31, 2018 and 2017 were $28 thousand and $26 thousand, respectively.



Profit Sharing



The profit sharing plan is for all employees who, at the end of the calendar year, are at least 21 years old, still employed, and have at least 900 hours of service during the plan year. The amount annually contributed on behalf of each qualified employee is determined by the Company’s Board of Managers and is calculated as a percentage of the eligible employee's annual earnings. Plan forfeitures are used to reduce the Company’s annual contribution. The Company made no profit sharing contributions for the plan during the year ended December 31, 2017.  No profit sharing contribution has been made or approved for the three months ended March 31, 2018.

 

14.  Fair Value Measurements



Fair Value Measurements Using Fair Value Hierarchy



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



·

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.

 

F-29

 


 



·

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 March 31, 2018 and December 31, 2017, are as follows (dollars in thousands):







 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

Fair Value Measurements at March 31, 2018 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 

 

$

11,879 

 

$

11,879 

 

$

 

 

$

--

 

$

11,879 

Loans, net

 

 

144,492 

 

 

 

 

 

 

 

 

142,398 

 

 

142,398 

Investments in joint venture

 

 

896 

 

 

 

 

 

 

 

 

896 

 

 

896 

Accrued interest receivable

 

 

726 

 

 

 

 

 

 

 

 

725 

 

 

725 

FINANCIAL LIABILITIES:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NCUA borrowings

 

$

80,265 

 

$

 

 

$

 

 

$

74,628 

 

$

74,628 

Notes payable

 

 

68,228 

 

 

 

 

 

 

 

 

68,246 

 

 

68,246 

Other financial liabilities

 

 

290 

 

 

 

 

 

 

 

 

290 

 

 

290 







 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

Fair Value Measurements at December 31, 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 

 

$

9,907 

 

$

9,907 

 

$

--

 

$

--

 

$

9,907 

Loans, net

 

 

148,835 

 

 

--

 

 

--

 

 

146,732 

 

 

146,732 

Investments in joint venture

 

 

896 

 

 

--

 

 

--

 

 

896 

 

 

896 

Accrued interest receivable

 

 

742 

 

 

--

 

 

--

 

 

742 

 

 

742 

FINANCIAL LIABILITIES:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NCUA borrowings

 

$

81,492 

 

$

--

 

$

--

 

$

76,945 

 

$

76,945 

Notes payable

 

 

69,003 

 

 

--

 

 

--

 

 

69,264 

 

 

69,264 

Other financial liabilities

 

 

346 

 

 

--

 

 

--

 

 

346 

 

 

346 



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 March 31, 2018 and December 31, 2017.



 

F-30

 


 

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 March 31, 2018 and December 31, 2017.



Fair Value Measured on a Nonrecurring Basis



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





 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



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 March 31, 2018:

 

 

 

 

 

 

 

 

 

 

 

 

Collateral dependent loans (net of allowance and discount)

 

$

 

 

$

 

 

$

5,992 

 

$

5,992 

Investments in joint venture

 

 

 

 

 

 

 

 

896 

 

 

896 

Total

 

$

--

 

$

--

 

$

6,888 

 

$

6,888 

   

 

 

 

 

 

 

 

 

 

 

 

 

   

 

 

 

 

 

 

 

 

 

 

 

 

Assets at December 31, 2017:

 

 

 

 

 

 

 

 

 

 

 

 

Collateral dependent loans (net of allowance and discount)

 

$

--

 

$

--

 

$

6,135 

 

$

6,135 

Investments in joint venture

 

 

--

 

 

--

 

 

896 

 

 

896 

Total

 

$

--

 

$

--

 

$

7,031 

 

$

7,031 



 

F-31

 


 

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





 

 

 



 

 

 



 

Impaired loans



 

(net of allowance and discount)

Balance, December 31, 2017

 

$

6,135 

Allowance and discount, net of discount amortization

 

 

(37)

Loan payments and payoffs

 

 

(106)

Balance, March 31, 2018

 

$

5,992 









 

 

 



 

 

 



 

Investments in joint venture



 

(net of allowance and discount)

Balance, December 31, 2017

 

$

896 

Pro rata share of joint venture losses

 

 

--

Balance, March 31, 2018

 

$

896 







 

 

 



 

 

 



 

Impaired loans



 

(net of allowance and discount)

Balance, December 31, 2016

 

$

4,736 

Re-classifications of assets from Level 3 into Level 2

 

 

1,253 

Allowance and discount, net of discount amortization

 

 

(500)

Loans that became impaired

 

 

1,495 

Loan payments and payoffs

 

 

(849)

Balance, December 31, 2017

 

$

6,135 







 

 

 



 

 

 



 

Investments in joint venture



 

(net of allowance and discount)

Balance, December 31, 2016

 

$

892 

Pro rata share of joint venture income

 

 

Balance, December 31, 2017

 

$

896 



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.

 

 

F-32

 


 

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







 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

March 31, 2018

Assets

 

 

Fair Value (in thousands)

 

Valuation Techniques

 

Unobservable Input

 

Range (Weighted Average)

Impaired Loans

 

$

5,992

 

Discounted appraised value

 

Selling cost / Estimated market decrease

 

25% - 58% (35%)

Investments in joint venture

 

$

896

 

Internal evaluations

 

Estimated future market value

 

0% (0%)









 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

December 31, 2017

Assets

 

 

Fair Value (in thousands)

 

Valuation Techniques

 

Unobservable Input

 

Range (Weighted Average)

Impaired Loans

 

$

6,135

 

Discounted appraised value

 

Selling cost / Estimated market decrease

 

25% -58% (38%)

Investment in joint venture

 

$

896

 

Internal evaluations

 

Estimated future market value

 

0% (0%)

 

15.  Income Taxes and State LLC Fees



MPIC is subject to a California gross receipts LLC fee of approximately $12,000 per year.  MP Securities was subject to a California gross receipts LLC fee of approximately $6,400 for the year ended December 31, 2017.  MP Realty incurred a tax loss for the years ended December 31, 2017 and 2016, and recorded a provision of $800 per year for the state minimum franchise tax.



For the years ended December 31, 2017 and 2016, MP Realty has federal and state net operating loss carryforwards of approximately $407 thousand and $402 thousand, respectively which begin to expire in 2030. Management assessed the realizability of the deferred tax asset and determined that a 100% valuation against the deferred tax asset was appropriate at December 31, 2017 and 2016.



Tax years ended December 31, 2014 through December 31, 2017 remain subject to examination by the Internal Revenue Service and the tax years ended December 31, 2013 through December 31, 2017 remain subject to examination by the California Franchise Tax Board.

 

16.  Segment Information



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 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-33

 


 

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



Financial information with respect to the reportable segments for the three months ended March 31, 2018 is as follows (dollars in thousands):





 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 



 

 

Finance Company

 

 

Broker Dealer

 

 

Total



 

 

 

 

 

 

 

 

 

External income

 

$

2,409 

 

$

157 

 

$

2,566 

Intersegment revenue

 

 

--

 

 

131 

 

 

131 

External non-interest expenses

 

 

975 

 

 

283 

 

 

1,258 

Intersegment non-interest expenses

 

 

--

 

 

--

 

 

--

Segment net profit (loss)

 

 

(18)

 

 

 

 

(13)

Segment assets

 

 

157,641 

 

 

1,121 

 

 

158,762 





 

 

 



 

 

 

Revenue

 

 

 

Total revenue of reportable segments

 

$

2,697 

Inter-segment revenue

 

 

(131)

Consolidated revenue

 

$

2,566 



 

 

 

Non-interest expenses

 

 

 

Total non-interest expenses of reportable segments

 

$

1,258 

Inter-segment non-interest expenses

 

 

--

Consolidated non-interest expenses

 

$

1,258 



 

 

 

Profit

 

 

 

Total income of reportable segments

 

$

(13)

Inter-segment profits

 

 

72 

Consolidated net income

 

$

59 



 

 

 

Assets

 

 

 

Total assets of reportable segments

 

$

158,762 

Segment accounts receivable from corporate office

 

 

(23)

Consolidated assets

 

$

158,739 



 

F-34

 


 

Financial information with respect to the reportable segments for the three month period ended March 31, 2017 is as follows (dollars in thousands):



 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 



 

 

Finance Company

 

 

Broker Dealer

 

 

Total



 

 

 

 

 

 

 

 

 

External income

 

$

2,488 

 

$

146 

 

$

2,634 

Intersegment revenue

 

 

--

 

 

189 

 

 

189 

External non-interest expenses

 

 

1,011 

 

 

275 

 

 

1,286 

Intersegment non-interest expenses

 

 

138 

 

 

--

 

 

138 

Segment net profit (loss)

 

 

238 

 

 

59 

 

 

297 

Segment assets

 

 

160,357 

 

 

511 

 

 

160,868 







 

 

 



 

 

 

Revenue

 

 

 

Total revenue of reportable segments

 

$

2,823 

Inter-segment revenue

 

 

(189)

Consolidated revenue

 

$

2,634 



 

 

 

Non-interest expenses

 

 

 

Total non-interest expenses of reportable segments

 

$

1,424 

Inter-segment non-interest expenses

 

 

(138)

Consolidated non-interest expenses

 

$

1,286 



 

 

 

Profit

 

 

 

Total income of reportable segments

 

$

297 

Inter-segment profits

 

 

(52)

Consolidated net income

 

$

245 



 

 

 

Assets

 

 

 

Total assets of reportable segments

 

$

160,868 

Segment accounts receivable from corporate office

 

 

(6)

Consolidated assets

 

$

160,862 

 

17.  Subsequent Events



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 April 23, 2018, 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% per annum of the outstanding balances of our Secured Notes; provided, however, that the maximum amount of fees assessed will not exceed 5% over the life of the Secured Note investment.  The Company will also pay MP Securities a .50% processing fee on the purchase of a Secured Note.



Regarding the legal proceeding contingencies detailed in Note 11. Loan Commitments, a trial date has been scheduled for March 4, 2019, with a mandatory settlement conference set for February 1, 2019.

 



 

 

F-35

 


 

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, 2017, 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 need to sell loan participations in loans we originate in order to maintain liquidity and generate servicing fees;



·

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



·

because we rely on credit facilities to finance our investments in church mortgage loans, disruptions in the credit markets, financial markets and economic conditions that adversely impact the value of church mortgage loans can negatively affect our financial condition and performance; 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.

 

3


 

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 month periods ended March 31, 2018 and 2017 and should be read in conjunction with the accompanying financial statements and Notes thereto.



Results of Operations

 

Three months ended March 31, 2018 vs. three months ended March 31, 2017 







 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



 

Three months ended

 

Comparison



 

March 31,

 

 

 

 

 

 



 

(dollars in thousands)

 

 

 

 

 

 



 

2018

 

2017

 

$ Difference

 

% Difference

Interest income:

 

 

 

 

 

 

 

 

 

 

 

 

Interest on loans

 

$

2,328 

 

$

2,327 

 

$

 

 

0%

Interest on interest-bearing accounts

 

 

13 

 

 

13 

 

 

--

 

 

0%

Total interest income

 

 

2,341 

 

 

2,340 

 

 

 

 

0%

Interest expense:

 

 

 

 

 

 

 

 

 

 

 

 

NCUA borrowings

 

 

499 

 

 

535 

 

 

(36)

 

 

(7%)

Notes payable

 

 

687 

 

 

563 

 

 

124 

 

 

22%

Total interest expense

 

 

1,186 

 

 

1,098 

 

 

88 

 

 

8%

Net interest income

 

 

1,155 

 

 

1,242 

 

 

(87)

 

 

(7%)

Provision for loan losses

 

 

63 

 

 

 

 

58 

 

 

100%

Net interest income after provision for loan losses

 

 

1,092 

 

 

1,237 

 

 

(145)

 

 

(12%)

Non-interest income

 

 

 

 

 

 

 

 

 

 

 

 

Broker-dealer commissions and fees

 

 

156 

 

 

146 

 

 

10 

 

 

7%

Other lending income

 

 

69 

 

 

148 

 

 

(79)

 

 

(53%)

Total non-interest income

 

 

225 

 

 

294 

 

 

(69)

 

 

(23%)

Non-interest expenses:

 

 

 

 

 

 

 

 

 

 

 

 

Salaries and benefits

 

 

714 

 

 

727 

 

 

(13)

 

 

(2%)

Marketing and promotion

 

 

38 

 

 

19 

 

 

19 

 

 

100%

Office occupancy

 

 

37 

 

 

38 

 

 

(1)

 

 

(3%)

Office operations and other expenses

 

 

302 

 

 

320 

 

 

(18)

 

 

(6%)

Legal and accounting

 

 

161 

 

 

176 

 

 

(15)

 

 

(9%)

Total non-interest expenses

 

 

1,252 

 

 

1,280 

 

 

(28)

 

 

(2%)

Income before provision for income taxes

 

 

65 

 

 

251 

 

 

(186)

 

 

(74%)

Provision for income taxes and state LLC fees

 

 

 

 

 

 

--

 

 

0%

Net income

 

$

59 

 

$

245 

 

$

(186)

 

 

(76%)



During the three months ended March 31, 2018, we reported net income of $59 thousand, which was a decrease of $186 thousand over the first quarter 2017.  The decrease in net income was due primarily to an increase in interest expense related to notes payable, a decrease in non-interest income related to lending activities and $58 thousand of additional provisions for loan losses taken during the quarter ended March 31, 2018.



During the three months ended March 31, 2018, we reported interest income of $2.3 million, an increase of $1 thousand.  This marginal difference was due to the earning assets average balance and yield remaining the same in the first quarter of 2018 a compared to the same quarter in 2017.

 

4


 



Total interest expense increased by $88 thousand as compared to the first quarter 2017 due to an increase in interest expense on our investor notes.  Note interest expense increased by $124 thousand as the weighted average rate paid on our outstanding notes payable increased from 2.94% to 3.15%. Interest expense on our NCUA borrowings decreased by $36 thousand over the first quarter 2017 due to regular monthly principal payments made on our borrowings.



For the first quarter 2018, net interest income decreased by $87 thousand, from the first quarter 2017 due to the factors described above.  Net interest income after provision for loan losses decreased by $145 thousand for the quarter ended March 31, 2018 over the three months ended March 31, 2017.  An increase in provision for loan losses of $58 thousand contributed to the decrease in net interest income after provision for loan losses. 



We had total non-interest income of $225 thousand in the first quarter 2018 primarily due to $156 thousand in broker-dealer commissions and fees earned by MP Securities, $23 thousand in management service fees, and $41 thousand in servicing fee income.  Our broker-dealer commissions and fees increased slightly as we continue to expand our customer base and assets managed by MP Securities.  Our other income generated from lending activities decreased due to lower origination and loan sale activity in the first quarter 2018 as compared to the first quarter of 2017.   

 

Non-interest operating expenses for the three months ended March 31, 2018 decreased by $28 thousand over the same period ended March 31, 2017.  This decrease is due to several factors.  First, salaries and benefits decreased by $13 thousand due primarily to lower bonus accruals a compared to the first quarter of 2017. Office operations decreased by $18 thousand due to lower lending activity and human resource costs.  Finally, legal and accounting expenses decreased $15 thousand due to lower audit costs. Marketing and promotions expenses increased by $19 thousand somewhat offsetting the decreases in non-interest operating expenses described above. 



 

5


 

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 March 31,



 

(Dollars in thousands)



 

2018

 

2017



 

Average Balance

 

Interest Income/ Expense

 

Average Yield/ Rate

 

Average Balance

 

Interest Income/ Expense

 

Average Yield/ Rate

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-earning accounts with other financial institutions

 

$

11,951 

 

 

$

13 

 

 

 

0.44 

%

 

$

15,508 

 

 

$

13 

 

 

 

0.34 

%

Interest-earning loans [1]

 

 

137,547 

 

 

 

2,328 

 

 

 

6.86 

%

 

 

134,131 

 

 

 

2,327 

 

 

 

7.04 

%

Total interest-earning assets

 

 

149,498 

 

 

 

2,341 

 

 

 

6.35 

%

 

 

149,639 

 

 

 

2,340 

 

 

 

6.34 

%



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-interest-earning assets

 

 

10,893 

 

 

 

--

 

 

 

--

%

 

 

10,987 

 

 

 

--

 

 

 

--

%

Total Assets

 

 

160,391 

 

 

 

2,341 

 

 

 

5.92 

%

 

 

160,626 

 

 

 

2,340 

 

 

 

5.91 

%



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities: [2]

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Public offering notes – Class A

 

 

12,021 

 

 

 

120 

 

 

 

4.05 

%

 

 

16,937 

 

 

 

156 

 

 

 

3.74 

%

Public offering notes – Class 1

 

 

38,654 

 

 

 

359 

 

 

 

3.77 

%

 

 

33,924 

 

 

 

273 

 

 

 

3.26 

%

Public offering notes – Class 1A

 

 

69 

 

 

 

 

 

 

5.88 

%

 

 

--

 

 

 

--

 

 

 

--

%

Special offering notes

 

 

242 

 

 

 

 

 

 

3.35 

%

 

 

1,821 

 

 

 

19 

 

 

 

4.23 

%

International notes

 

 

--

 

 

 

--

 

 

 

--

%

 

 

40 

 

 

 

--

 

 

 

--

%

Subordinated notes

 

 

8,677 

 

 

 

99 

 

 

 

4.63 

%

 

 

5,180 

 

 

 

61 

 

 

 

4.78 

%

Secured notes

 

 

9,367 

 

 

 

87 

 

 

 

3.77 

%

 

 

7,091 

 

 

 

54 

 

 

 

3.09 

%

NCUA borrowings

 

 

81,071 

 

 

 

499 

 

 

 

2.50 

%

 

 

85,916 

 

 

 

535 

 

 

 

2.53 

%



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total interest-bearing liabilities

 

$

150,101 

 

 

 

1,167 

 

 

 

3.15 

%

 

$

150,909 

 

 

 

1,098 

 

 

 

2.95 

%



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income

 

 

 

 

 

$

1,174 

 

 

 

 

 

 

 

 

 

 

$

1,242 

 

 

 

 

 

Net interest margin [3]

 

 

 

 

 

 

 

 

 

 

3.18 

%

 

 

 

 

 

 

 

 

 

 

3.37 

%



[1] Loans are net of deferred fees and before the allowance for loan losses. Non accrual loans are considered non-interest assets for this analysis.

[2] Interest expense on notes are presented gross of debt issuance costs.

[3] Net interest margin is equal to net interest income as a percentage of average interest-earning assets.



Average interest-earning assets increased slightly to $149.5 million during the three months ended March 31, 2018, from $149.6 million during the same period in 2017, an increase of $141 thousand. The average yield on these assets increased by 1 basis point from 6.34% to 6.35% for the three months ended March 31, 2017 and 2018, respectively. Yield on interest-earning loans dropped from 7.04% to 6.86%.  This decrease was offset by a higher average balance on interest earning loans comprising a higher portion of our interest earning assets than it did during the first quarter of 2017.



Average non-interest earning assets decreased by $94 thousand for the three months ended March 31, 2018 as compared to  the quarter ended March 31, 2017.  Non-performing assets decreased by $0.2 million for the three months ended March 31, 2018 to $9.1 million.

 

6


 



Average interest-bearing liabilities, consisting of notes payable and borrowings from financial institutions, decreased to $150.1 million during the three months ended March 31, 2018, as compared to $150.9 million during the same period in 2017. The decrease is attributable to a $4.8 million decrease in borrowings and an increase in notes payable of $2.3 million. The average rate paid on these liabilities increased from 2.95% to 3.15% for the three months ended March 31, 2018 as the underlying base index rates on our publicly offered notes have increased over the previous twelve months, which has increased the average rates paid on our Class 1 Notes from 3.26% to 3.77%.



Net interest income, gross of debt issuance costs for the three months ended March 31, 2018 was $1.2 million, which was a decrease of $68 thousand, for the same period in 2017.  Net interest margin decreased 18 basis points to 3.18% for the quarter ended March 31, 2018, compared to 3.37% for the quarter ended March 31, 2017.







 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

Rate/Volume Analysis of Net Interest Income



 

 

 



 

Three Months Ended March 31, 2018 vs. 2017



 

Increase (Decrease) Due to Change in



 

Volume

 

Rate

 

Total



 

(Dollars in thousands)



 

 

 

 

 

 

 

 

 

Increase (Decrease) in Interest Income:

 

 

 

 

 

 

 

 

 

Interest-earning accounts with other financial institutions

 

$

(3)

 

$

 

$

--

Interest-earning loans [1]

 

 

59 

 

 

(58)

 

 



 

 

56 

 

 

(55)

 

 

Increase (Decrease) in Interest Expense: [1]

 

 

 

 

 

 

 

 

 

Public offering notes – Class A

 

 

(48)

 

 

12 

 

 

(36)

Public offering notes – Class 1

 

 

41 

 

 

45 

 

 

86 

Public offering notes – Class 1A

 

 

 

 

--

 

 

Special offering notes

 

 

(14)

 

 

(3)

 

 

(17)

International notes

 

 

--

 

 

--

 

 

--

Subordinated notes

 

 

40 

 

 

(2)

 

 

38 

Secured notes

 

 

20 

 

 

13 

 

 

33 

NCUA borrowings

 

 

(30)

 

 

(6)

 

 

(36)

Total interest-bearing liabilities

 

 

10 

 

 

59 

 

 

69 

Change in net interest income

 

$

46 

 

$

(114)

 

$

(68)



 

7


 

Financial Condition



Comparison of Financial Condition at March 31, 2018 and December 31, 2017





 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

Comparison



 

2018

 

2017

 

$ Difference

 

% Difference



 

(Unaudited)

 

(Audited) 

 

 

 

 

 

 



 

(dollars in thousands)

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

Cash

 

$

11,879 

 

$

9,907 

 

$

1,972 

 

 

20%

Restricted cash

 

 

56 

 

 

58 

 

 

(2)

 

 

(3%)

Loans receivable, net of allowance for loan losses of $2,160 and $2,097 as of March 31, 2018 and December 31, 2017, respectively

 

 

144,492 

 

 

148,835 

 

 

(4,343)

 

 

(3%)

Accrued interest receivable

 

 

725 

 

 

742 

 

 

(17)

 

 

(2%)

Investments in joint venture

 

 

896 

 

 

896 

 

 

--

 

 

--%

Property and equipment, net

 

 

95 

 

 

103 

 

 

(8)

 

 

(8%)

Servicing assets

 

 

251 

 

 

270 

 

 

(19)

 

 

(7%)

Other assets

 

 

345 

 

 

211 

 

 

134 

 

 

64%

Total assets

 

$

158,739 

 

$

161,022 

 

$

(2,283)

 

 

(1%)

Liabilities and members’ equity

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

NCUA borrowings

 

$

80,265 

 

$

81,492 

 

$

(1,227)

 

 

(2%)

Notes payable, net of debt issuance costs of $72 and $85 as of March 31, 2018 and December 31, 2017, respectively

 

 

68,228 

 

 

69,003 

 

 

(775)

 

 

(1%)

Accrued interest payable

 

 

206 

 

 

208 

 

 

(2)

 

 

(1%)

Other liabilities

 

 

636 

 

 

890 

 

 

(254)

 

 

(29%)

Total liabilities

 

 

149,335 

 

 

151,593 

 

 

(2,258)

 

 

(1%)

Members' Equity:

 

 

 

 

 

 

 

 

 

 

 

 

Series A preferred units

 

 

11,715 

 

 

11,715 

 

 

--

 

 

--%

Class A common units    

 

 

1,509 

 

 

1,509 

 

 

--

 

 

--%

Accumulated deficit

 

 

(3,820)

 

 

(3,795)

 

 

(25)

 

 

1%

Total members' equity

 

 

9,404 

 

 

9,429 

 

 

(25)

 

 

(0%)

Total liabilities and members' equity

 

$

158,739 

 

$

161,022 

 

$

(2,283)

 

 

(1%)



GeneralTotal assets decreased by $2.3 million, or 1%, between March 31, 2018 and December 31, 2017.  This decrease was primarily due to a decrease in loans receivable. 



During the three month period ended March 31, 2018, we sold  $1.5 million in new notes compared to $7.4 million in the first quarter 2017.  This decrease was due to the Company’s Class 1 Notes Offering expiring on December 31, 2017. The Company’s new Class 1A Notes Offering became effective February 27, 2018.  Prior to that date, no sales of the Company’s Class 1A Notes could be made.  Due to the nature of the church lending process, we only funded $426 thousand in loans during the first quarter of 2018.



Our portfolio consists entirely of loans made to evangelical churches and ministries.  Approximately 99% of these loans are secured by real estate, while four loans that represent less than 1% of our loans are unsecured.  The loans in our portfolio carried a weighted average interest rate of 6.35% at March 31, 2018 and 6.31% at December 31, 2017.



 

8


 

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 March 31, 2018, December 31, 2017 and March 31, 2017:





 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 



 

March 31,

 

December 31

 

March 31,



 

2018

 

2017

 

2017



 

 

 

 

 

 

 

 

 

Impaired loans with an allowance for loan loss

 

$

5,423 

 

$

3,999 

 

$

4,256 

Impaired loans without an allowance for loan loss

 

 

3,679 

 

 

5,256 

 

 

4,469 

Total impaired loans

 

$

9,102 

 

$

9,255 

 

$

8,725 



 

 

 

 

 

 

 

 

 

Allowance for loan losses related to impaired loans

 

$

1,293 

 

$

1,260 

 

$

1,072 

Total non-accrual loans

 

$

8,207 

 

$

8,363 

 

$

8,725 

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 11 nonaccrual loans as of March 31, 2018 and 10 as of  December 31, 2017. 



We did not restructure or change the classification of any of our impaired loans during the three months ended March 31, 2018.  The decrease in the balance of our impaired loans at March 31, 2018 as compared to December 31, 2017 is related entirely to payments made on these loans, all of which are taken against principal.



The following table presents our non-performing assets:



 

 

 

 

 

 



 

 

 

 

 

 

Non-performing Assets

($ in thousands)



 

March 31, 2018

 

December 31, 2017



 

 

 

 

 

 

Non-Performing Loans:1

 

 

 

 

 

 



 

 

 

 

 

 

Collateral Dependent:

 

 

 

 

 

 

Delinquencies over 90-Days

 

$

2,810 

 

$

495 

Troubled Debt Restructurings2

 

 

3,679 

 

 

6,104 

Other Impaired Loans

 

 

1,213 

 

 

1,214 

Total Collateral Dependent Loans

 

 

7,702 

 

 

7,813 

Non-Collateral Dependent:

 

 

 

 

 

 

Delinquencies over 90-Days

 

 

--

 

 

--

Other Impaired loans

 

 

1,400 

 

 

--

Troubled Debt Restructurings

 

 

--

 

 

1,442 

Total Non-Collateral Dependent Loans

 

 

1,400 

 

 

1,442 

Loans 90 Days past due and still accruing

 

 

--

 

 

--

Total Non-Performing Loans

 

 

9,102 

 

 

9,255 

Foreclosed Assets3

 

 

--

 

 

--

Total Non-performing Assets

 

$

9,102 

 

$

9,255 



 

9


 

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

2 Includes $2.3 million of restructured loans that were over 90 days delinquent as of March 31, 2018.

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



At March 31, 2018 and December 31, 2017, we had eight restructured loans that were on non-accrual status.  Three of these loans were over 90 days delinquent at March 31, 2018.  In addition, we had three collateral dependent loans that have not been restructured that are 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;

·

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.  At March 31, 2018 and December 31, 2017, the allowance for loan losses was $2.2 million and $2.1 million, respectively.  This represented 1.5% and 1.3% of our gross loans receivable at March 31, 2018 and December 31, 2017, respectively.   

 

10


 







 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



 

Allowance for Loan Losses

 



 

as of and for the

 



 

 

 

 

 

 

 

 

 

 

 

 



 

Three months ended

 

Year ended

 



 

March 31

 

December 31,

 



 

2018

 

2017

 

2017

 

Balances:

 

($ in thousands)

 

Average total loans outstanding during period

 

$

150,284 

 

 

$

146,856 

 

 

$

148,200 

 

Total loans outstanding at end of the period

 

$

148,379 

 

 

$

145,515 

 

 

$

152,714 

 

Allowance for loan losses:

 

 

 

 

 

 

 

 

 

 

 

 

Balance at the beginning of period

 

$

2,097 

 

 

$

1,875 

 

 

$

1,875 

 

Provision charged to expense

 

 

63 

 

 

 

 

 

 

262 

 

Charge-offs

 

 

 

 

 

 

 

 

 

 

 

 

Wholly-Owned First

 

 

--

 

 

 

--

 

 

 

40 

 

Wholly-Owned Junior

 

 

--

 

 

 

--

 

 

 

--

 

Participation First

 

 

--

 

 

 

--

 

 

 

--

 

Participation Junior

 

 

--

 

 

 

--

 

 

 

--

 

Total

 

 

--

 

 

 

--

 

 

 

40 

 

Recoveries

 

 

 

 

 

 

 

 

 

 

 

 

Wholly-Owned First

 

 

--

 

 

 

--

 

 

 

--

 

Wholly-Owned Junior

 

 

--

 

 

 

--

 

 

 

--

 

Participation First

 

 

--

 

 

 

--

 

 

 

--

 

Participation Junior

 

 

--

 

 

 

--

 

 

 

--

 

Total

 

 

--

 

 

 

--

 

 

 

--

 

Net loan charge-offs

 

 

--

 

 

 

--

 

 

 

40 

 

Accretion of allowance related to restructured loans

 

 

--

 

 

 

--

 

 

 

--

 



 

 

 

 

 

 

 

 

 

 

 

 

Balance

 

$

2,160 

 

 

$

1,880 

 

 

$

2,097 

 



 

 

 

 

 

 

 

 

 

 

 

 

Ratios:

 

 

 

 

 

 

 

 

 

 

 

 

Net loan charge-offs to average total  loans

 

 

0.00 

%

 

 

0.00 

%

 

 

0.03 

%

Provision for loan losses to average total loans1

 

 

0.04 

%

 

 

0.00 

%

 

 

0.18 

%

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

 

 

1.46 

%

 

 

1.29 

%

 

 

1.37 

%

Allowance for loan losses to non-performing loans

 

 

23.73 

%

 

 

21.55 

%

 

 

22.66 

%

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

 

 

0.00 

%

 

 

0.00 

%

 

 

1.91 

%

Net loan charge-offs to Provision for loan losses1

 

 

0.00 

%

 

 

0.00 

%

 

 

0.15 

%



Investments.  At March 31, 2018 and 2017, we had one investment in a joint venture formed in January 2016 in which our ownership interest is $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 $896 thousand at both March 31, 2018 and December 31, 2017. 



NCUA Borrowings.  At March 31, 2018, we had $80.3 million in borrowings from financial institutions.  This represents a decrease of $1.2 million from December 31, 2017.  This decrease is the result of regular monthly payments made on the credit facilities. 



Notes Payable.  Our investor notes payable consist of debt securities sold under publicly registered security offerings as well as notes sold in private placements.  These investor notes had a balance of $68.3 million at March 31, 2018, which was a decrease of $775 thousand from December 31, 2017.  As described above, this decrease was due to the timing gap when the Class 1 Notes Offering expired on December, 31 2017 and the new Class 1A Notes Offering Registration Statement became effective on February 27, 2018. Over the last several years, we have expanded our note sale program by building relationships with other financial institutions whereby we can

 

11


 

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 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 notes payable are presented net of of debt issuance costs, which have decreased from $85 thousand at December 31, 2017 to  $72 thousand at March 31, 2018.



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 $269 thousand, mainly due to the payment of accrued bonuses during the first quarter of 2017, dividends paid to our equity owners, and compensation paid to our Board of Managers during the first quarter of 2017 that had been previously accrued. 



Members’ Equity.  Total members’ equity was $9.4 million at March 31, 2018, which represents a decrease of $25 thousand from December 31, 2017.  This decrease comprises $59 thousand in net income for the three months ended March 31, 2018, offset by $84 thousand in dividends related to our Series A Preferred Units, which require quarterly dividend payments.  We are 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 payment of these dividends throughout the year based on our year-to-date net income.  No accrual was made for the quarter ended March 31, 2018 as net income after dividends was a loss of $25 thousand.  We did not repurchase or sell any ownership units during the three months ended March 31, 2018.



Liquidity and Capital Resources



March 31, 2018 vs. March 31, 2017



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 16% at March 31, 2018, which is above the minimum set by our policy. We also 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 1A 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, or 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 help us to meet our liquidity needs for the near future.  We also continue to sell debt securities filed under a Registration Statement with the SEC to register $90 million of Class 1A Notes that was declared effective as of February 27, 2018. This Registration Statement expires on December 31, 2020.



We have also entered into a Loan and Standby Agent Agreement pursuant to a Rule 506 offering to sell $40.0 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 1A 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 three months ended March 31, 2018, our investors renewed their debt securities investments at a 56% rate, which represented a decrease from a 76% renewal rate over the three months ended March 31, 2017.  The decrease was primarily due to the fact that we discontinued the sale of our Class 1 Notes on

 

12


 

December 31, 2017 and were unable to sell our new Class 1A Notes until February 27th, 2018 when our Class 1A Notes Registration Statement became effective.  We have stabilized our note renewal rate over the last several years as MP Securities has adjusted its marketing efforts to the over-concentration of investment limitation restrictions placed on the sale of our notes.  New salespeople MP Securities hired over the last several years has also enabled us to increase our client base, which has in turn increased our note sales.



The net increase in cash during the three months ended March 31, 2018 was $2.0 million, as compared to a net increase of $6.4 million for the three months ended March 31, 2017.  Net cash used by operating activities totaled $197 thousand for the three months ended March 31, 2018, as compared to net cash used by operating activities of $288 thousand for the same period in 2017. This decrease in cash used by operating activities is attributable primarily to two factors.  First, a large portion of income earned in the first quarter of 2017 was attributable to gains generated from the sale of loans.  Secondly, we had a decrease in amortization of deferred loan fees for three months ended March 31, 2018 as compared to the same period in 2017.



Net cash provided by investing activities totaled $4.3 million during the three months ended March 31, 2018, as compared to $2.5 million provided during the three months ended March 31, 2017, representing an increase in cash provided of $1.8 million. The increase in cash provided is due to loan payoffs and paydowns.



Net cash used by financing activities totaled $2.2 million for the three month period ended March 31, 2018, a decrease in cash provided of $6.3 million as compared to $4.2 million provided by financing activities during the three months ended March 31, 2017. This difference is primarily attributable to a decrease in sales of our notes payable of $6.3 million over the same period in 2017.



At March 31, 2018, our cash, which includes cash reserves and cash available for investment in mortgage loans, was $11.9 million,  which represented a decrease of $4.8 million from $16.7 million at December 31, 2017.

 

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 Chief Financial Officer, supervised and participated in an evaluation of our disclosure controls and procedures as of March 31, 2018.  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 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.



Changes in Internal Controls



No changes in internal controls were made during the three months ended March 31, 2018. 

 

 

13


 

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 March 31, 2018 and subject to the matter described below, we are not involved in any litigation matters that could have a material adverse effect on our financial position, results of operations or cash flows.



On November 11, 2017, Mr. Harold D. Woodall, former Senior Vice President and Chief Credit Officer, filed a suit against the Company and its Chief Executive Officer and President, Joseph Turner, Jr., in the Superior Court of Orange County, California.  Mr. Woodall’s employment arrangement with the Company terminated effective as of September 5, 2017.  Mr. Woodall’s suit alleges that the Company wrongfully terminated his employment and violated California’s Fair Employment and Housing Act of 1959, and the California Labor Code’s whistle blowing law.  Mr. Woodall seeks compensatory damages, punitive damages, attorney’s fees and other relief as the court deems just.  The Court has set a mandatory settlement conference on February 1, 2019 and a trial date of March 4, 2019. The Company believes the allegations in Mr. Woodall’s suit are groundless, without merit and it intends to vigorously contest the allegations set forth in Mr. Woodall’s complaint.  Although the Company believes that it will prevail on the merits, the litigation could have a lengthy process, and the ultimate outcome cannot be predicted.



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, 2017.

 

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.

 

14


 

Item 6.  Exhibits

 



 

Exhibit No.

Description of Exhibit

10.33

Loan and Security Agreement by and between Ministry Partners Investment Company, LLC and Ministry Partners Funding, LLC, dated April 30, 2018.(**)

10.34

Selling Agreement by and between Ministry Partners Investment Company, LLC and Ministry Partners Securities, LLC, date April 30, 2018.(**)

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 (**)

101*

The following information from Ministry Partners Investment Company, LLC’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2018, formatted in XBRL (eXtensible Business Reporting Language):  (i) Consolidated Statements of Income for the three month periods ended March 31, 2018 and 2017; (ii) Consolidated Balance Sheets as of March 31, 2018 and  December 31, 2017; (iii) Consolidated  Statements of Cash Flows for the three months ended March 31, 2018 and 2017; 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.

 

**     Filed herewith

 

(1)     Incorporated by reference to Exhibit 21.1 to Form 10-K filed by the Company on March 29, 2018.



 

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: May 11, 2018





 

 



 

MINISTRY PARTNERS INVESTMENT



 

COMPANY, LLC



 

 

(Registrant)

 

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



 

Joseph W. Turner, Jr.,



 

Chief Executive Officer

 





 

15