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EX-21.1 - EX-21.1 - MINISTRY PARTNERS INVESTMENT COMPANY, LLCc130-20151231xex211.htm
EX-32.1 - EX-32.1 - MINISTRY PARTNERS INVESTMENT COMPANY, LLCc130-20151231xex321.htm
EX-23.1 - EX-23.1 - MINISTRY PARTNERS INVESTMENT COMPANY, LLCc130-20151231xex231.htm
EX-31.1 - EX-31.1 - MINISTRY PARTNERS INVESTMENT COMPANY, LLCc130-20151231xex311.htm
EX-31.2 - EX-31.2 - MINISTRY PARTNERS INVESTMENT COMPANY, LLCc130-20151231xex312.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

 

(Mark One)

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

For the fiscal year ended December 31, 2015

 

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

For the transition period from _________ to_________

 

Commission file number:  333-4028LA

 

MINISTRY PARTNERS INVESTMENT COMPANY, LLC

 (Exact name of small business issuer in its charter)

 

 

 

CALIFORNIA

(State or other jurisdiction of

incorporation or organization)

26-3959348

(I.R.S. Employer Identification No.)

 

 

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

(Address of principal executive offices)

 

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

 

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

 

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

 

 

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

 

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

 

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

 

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

 

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

 

 


 

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

 

 

 

 

 

 Large accelerated filer 

 Accelerated filer 

 Non-accelerated filer 

Smaller reporting company filer 

 

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

 

As of December 31, 2008 (the last date any sale or exchange was made of our Class A common units), the aggregate market value of the registrant’s Class A common units held by non‑affiliates was $1,809,572.   The registrant has sold no Class A common units within the past sixty days and there is no public market value for the registrant’s Class A common units.  The number of Class A common units outstanding, as of March 30, 2016, was 146,522.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

None

 


 

MINISTRY PARTNERS INVESTMENT COMPANY, LLC

FORM 10-K

 

TABLE OF CONTENTS

 

 

 

 

 

 

 

 

 

Page No.

 

 

 

 

Part I

 

 

 

 

Item 1.

Business

2

 

Item 1A.

Risk Factors

27

 

Item 1B.

Unresolved Staff Comments

44

 

Item 2.

Properties

45

 

Item 3.

Legal Proceedings

47

 

Item 4.

Mine Safety Disclosures

47

 

 

 

 

Part II

 

 

 

 

Item 5.

Market for our Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

48

 

Item 6.

Selected Financial Data

50

 

Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

50

 

Item 7A.

Quantitative and Qualitative Disclosures About Market Risk

86

 

Item 8.

Financial Statements and Supplementary Data

90 - F-47

 

Item 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

91

 

Item 9A.

Controls and Procedures

91

 

Item 9B.

Other Information

92

 

 

 

 

Part III

 

 

 

 

Item 10.

Managers and Executive Officers and Corporate Governance

92

 

Item 11.

Executive Compensation

99

 

Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

101

 

Item 13.

Certain Relationships and Related Transactions, and Director Independence

102

 

Item 14.

Principal Accounting Fees and Services

105

 

 

 

 

Part IV

 

 

 

 

Item 15.

Exhibits and Financial Statements Schedules

107

 

 

 

 

SIGNATURES 

 

111

 

 

 

 

EXHIBIT INDEX

 

 

 

 

 

 

 


 

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

 

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

 

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

 

 

PART I

 

Item 1.   BUSINESS

 

Our Company

 

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

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

 

In 2010, we developed the capability to originate and service loans ourselves.  Since that time, we have increased the proportion of our portfolio that is originated and serviced by us.  As of December 31, 2015, we owned a total of 145 mortgage loans and two unsecured loans, with an recorded balance of $136.4 million.  As of the date of this Report, we service 135 of these loans.  The average loan balance for our loan investments is $928 thousand and our loans have a weighted average life to maturity period of 6.4 years at December 31, 2015.  Substantially all of our business operations currently are conducted in California and, while we have more loan investments in California than in any other state, we own loan interests in 33 different states.

 

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

 

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

 

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

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

 

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

 

On April 26, 2010, the Company formed Ministry Partners Securities, LLC, a Delaware limited liability company (“MP Securities”). MP Securities has been formed to provide financing solutions for churches, charitable institutions and faith-based organizations and act as a selling agent for securities offered by such entities. Effective as of July 14, 2010, MP Securities was qualified to transact business in the State of California.  On March 2, 2011, MP Securities’ application for membership in the Financial Industry Regulatory Authority (“FINRA”) was approved.  Since 2011, MP Securities has received approval to act as a Resident Insurance Producer d/b/a Ministry Partners Insurance Agency on a fully disclosed basis with a clearing firm and to provide registered investment advisory services.  MP Securities also acts as the selling agent for our various note offerings in addition to offering a broad scope of investment services. 

 

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

 

Our Business

 

We are a non-bank financial services company that conducts business on a national scope.  We were organized as a CUSO for the specific purpose of assisting evangelical Christian churches and organizations by providing financing for the acquisition, development and/or renovation of churches or church-related properties, and provide Christian investors the opportunity to participate in funding those projects.  As a CUSO, we perform these services for the benefit of our credit union equity members.

 

The religious loan market segment has grown dramatically over the years since our inception and both the size of the loans and the number of qualified borrowers in this sector has steadily increased. Prior to the 2008 global financial crisis that adversely affected real estate values in certain regions of the United States, the size of the church and ministry mortgage financing market in the United States was estimated to range between $20 billion and $40 billion annually.  While post-crisis estimates of the size of this market have been difficult to obtain, we believe that the demand for ministry loans originated and serviced by niche lenders to churches and ministries will continue to exceed available lending and financing sources for this sector. We base our belief on our past experience with making loans to this market segment and on information we have obtained through contact with sources in the industry.  We believe that the availability of lenders serving this market has been somewhat unpredictable as larger financial

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institutions expand, contract or vacate this niche market during periods of expansion or contraction.  As a financial services company that has specialized in assisting these organizations since we commenced operations in 1991, we believe that the lack of predictable financing sources for evangelical Christian churches and organizations presents us with a significant opportunity.  In addition, we believe that lenders that are active in the market for church loans appear to have tightened their credit standards.  As a result of improved market conditions, we have seen that the secondary market for church and ministry loans, including the sale of loan participation interests in mortgage loan investments we underwrite and originate, presents us with significant business opportunities.  We have begun to take advantage of those opportunities by selling participations in loans to credit unions, other CUSOs, foundations, and banks.    

 

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

 

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

 

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

 

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Our net earnings are generated from:

 

·

interest income earned on our mortgage loan investments;

 

·

fee income generated from originating and servicing mortgage loans;

 

·

gains realized on the sale of loans and loan participation interests to financial institutions;

 

·

successful efforts to manage, liquidate or sell real estate assets and maximize loan recoveries on delinquent loans in our loan portfolio;

 

·

fee income generated from the sale of securities and investment products by our wholly-owned broker-dealer firm; and

 

·

fees received by our registered investment advisor for managing financial assets.

 

During 2015, we (i) originated fewer loans during the first nine months of the year than we anticipated while maintaining the level of our note balances, causing our net interest margin to decrease to 2.64%; (ii) funded $14.3 million in church loans in the fourth quarter, re-establishing our loans receivable at a level that will improve our net interest margin in 2016; (iii) recovered  $524 thousand in loan loss provisions related to a settlement with a title insurance company reached on an impaired loan in which we held a 64.8% participation interest and the reclassification of another impaired loan; (iv) utilized the network selling agreements reached in 2014 with ECCU and America’s Christian Credit Union to grow our client base and substantially increase revenues generated by our wholly-owned, broker-dealer subsidiary, MP Securities; (v) increased other income by 148% through the sale of loan participations, the servicing of loans for other credit unions and CUSOs, and commissions and fee income generated by MP Securities; (vi) sold three of our foreclosed assets, wrote off another one, and entered into preliminary agreements to dispose of our remaining three real estate properties in 2016; (vii) appointed a new President and Chief Executive Officer, Joseph Turner, formerly the President of MP Securities after our previous President and Chief Executive Officer, James Overholt, retired; and (viii) continued to implement a strategy designed to diversify our revenue sources through the hiring of experienced staff that will allow us to pursue expansion of services and investment products that our wholly-owned affiliate, MP Securities, will be able to offer.    

 

Our net income of $357 thousand for 2015 primarily results from recoveries of previously taken provisions for loan losses and gains related to the disposal of some of our foreclosed assets.  We recovered $190 thousand in loan loss provisions related to a settlement reached by ECCU on an impaired loan in which we owned a 64.8% participation interest.  We recovered $400 thousand in provisions on an impaired loan that was reclassified from collateral-dependent to non-collateral-dependent.  We also recognized $132 thousand in gains on the sale of foreclosed assets and recovered a net of $11 thousand in provisions for losses on foreclosed assets based on expected selling prices of these assets. 

 

These gains offset a reduction in interest income for the year.  Due to liquidity issues in 2014, we delayed many of our planned loan originations until the last quarter of 2015.  While our loans

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receivable balance at December 31, 2015 is higher than at December 31, 2014, the average loan balance throughout 2015 was significantly lower than in 2014.  In addition, we maintained much higher cash balances throughout the year, which bear low interest rates.  Our yield on interest-earning loans increased slightly and our blended rates paid on our borrowings decreased, so we anticipate that the decline in our net interest income in 2015 and net interest margin is temporary.  We expect net interest margin to increase in 2016 as our loan originations increase.  We were able to mitigate some of the decrease in our net interest income by increasing our other income through commissions and fees received by our broker-dealer subsidiary and by continuing to grow our servicing portfolio and selling more loan participations. Our business plan for 2016 and beyond involves emphasizing the continuing growth of these lines of business. Finally, we sold several of our foreclosed assets in 2015 while recovering some reserves previously taken.  As of the date of this Report, we hold one real estate asset and we have written the value of this investment down to zero.

 

Lending Activities

 

Loan Origination, Acquisition and Underwriting

 

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

 

As a result of our increased focus on originating our own loans, we have originated $86.3 million in loans from 2013 through 2015, as compared to $19.1 million from 2010 through 2012.  As a result of our efforts to expand underwriting, servicing and loan administration services starting in 2010, the Company now has the capacity, capability and underwriting experience to originate substantially all of our mortgage loan investments.   

 

Servicing

 

ECCU has been making mortgage loans for ministry related projects for over 40 years.  Based upon ECCU’s experience in underwriting and servicing church and ministry related mortgage loans, we have entered into a servicing agreement with ECCU for some of our mortgage loan investments.  As of December 31, 2015, ECCU was servicing 10 loans for us, totaling approximately $12.8 million in loan principal outstanding.  As of December 31, 2014, ECCU was servicing 18 loans for us totaling $26.6 million in loan principal outstanding.  As of December 31, 2015, we also own approximately $1.8 million in mortgage loan investments which are being serviced by America’s Christian Credit Union, a Glendora, California based credit union (“ACCU”).

 

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Our core processing system along with our loan administration personnel give us the capability to service loans for ourselves and other institutions.  As of December 31, 2015, we were servicing 135 loans out of a total of 147 loans in our portfolio, totaling approximately $105.9 million in loan principal outstanding, net of participations sold.  These loans totaled approximately $151.5 million in gross loan principal balance outstanding at December 31, 2015.  By originating our own loans and servicing our own portfolio, we have reduced total servicing costs while earning additional lending and servicing fees. 

 

Our servicing capability also represents the operational foundation of our loan participation strategy, which will enable us to produce recurring servicing revenue from loan participations sold. We sold participations in eight loans during the year ended December 31, 2015, which resulted in $49 thousand in gains on loan sales as well as an increase of $59 thousand in servicing fee income.  Our technology platform enables us to process, record, transmit and account for all financial and operational data for the benefit of other credit unions, finance lenders, churches, financial institutions and investors. With these additional capabilities, we believe we will be able to continue to expand our loan servicing capabilities. 

 

Types of Loans

 

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

Permanent Loans

 

We acquire or originate mortgage loans that may have an adjustable interest rate or fixed rate.  The term for a mortgage loan may not exceed 30 years and the maximum loan to value ratio may not exceed 90% without approval from our Board of Managers. The maximum combined loan to value ratio for all loans in our portfolio secured by real property is 80%. Our standard loan investments have ten year maturities with a rate adjustment after five years.

 

Construction Loans

 

Construction loans may be made to finance the construction or restoration of facilities for schools, worship facilities or ministry related purposes.  These loans normally will have a final maturity that will not exceed five years, with a construction draw period that will not exceed 12 months.  In most instances, construction loans are interest-only on the outstanding balance drawn for construction.  Under our Church and Ministry Loan Policy, the maximum loan to value ratio for a construction loan is 75% of the completed value of the collateral.  As of December 31, 2015, we had $1.9 million of construction loans outstanding and $5.1 million in unfunded construction loan commitments.

 

Participation Interests

 

From time to time, we also invest in participation interests in secured mortgage loans, whereby we own a participation interest in a mortgage with a credit union or other lender.  By investing in

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

 

Due to our enhanced ability to originate and service our own loans, our investment in loan participations has been significantly reduced.  As of December 31, 2015, approximately $12.4 million, or 9% of our total loan portfolio, consisted of loan participations we purchased from other financial institutions, including ECCU.  For the year ended December 31, 2014, approximately $23.3 million, or 17% of our total loan portfolio, consisted of loan participations we purchased from other financial institutions.

 

Line of Credit

 

We may make line of credit arrangements available to borrowers to meet their temporary working capital needs.  The term of such arrangements typically will not exceed one year and will provide for minimum interest payments during the term of the loan.  For loans made to members of credit unions that are secured by real property, accounts receivable, and/or inventory, the maximum loan to value ratio is 90% based upon the current value of the collateral.  As of December 31, 2015, we had $155 thousand in unfunded line of credit commitments as compared to $575 thousand in unfunded line of credit commitments at December 31, 2014.

 

Letters of Credit

 

Under our Church and Ministry Loan Policy, we are authorized to issue letters of credit granting the person named in the letter the right to demand payment from us for up to a specified amount provided the conditions set out in the letter are met.  We require that a letter of credit be fully secured by funds on deposit or restricted funds on a line of credit with a draw period on the line of credit that meets or exceeds the draw period on the letter of credit.  As of December 31, 2015, we had $1.1 million in outstanding letter of credit commitments compared to $1.4 million as of December 31, 2014.

 

Our Loan Policies

 

When we launched the Company, we relied upon ECCU to originate and underwrite a sufficient supply of mortgage loans made to churches, schools, ministries and other non-profit corporations to purchase land, develop facilities, construct or renovate worship facilities or refinance existing

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indebtedness.  Because ECCU has been making mortgage loans for ministry related projects for over 40 years and has extensive experience in underwriting church and ministry related mortgage loans, for most of our history we purchased substantially all of our loans from ECCU.  However, in recent years we have expanded our operations to include our own independent loan origination and underwriting activities.  Our loan underwriting process involves a review and analysis of the church or ministry’s financial operation, the strength of the organization’s leadership team, prior history, financial capability, value of collateral and general creditworthiness. 

 

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

 

Our Mortgage Loan Investment Standards

 

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

 

·

Demonstration of Ability to Pay. The borrower must support its overall ability to timely pay principal and interest by its operational and cash flow history. For these purposes, "cash flow" includes donations and other revenue which the borrower can demonstrate to be continuing. Generally, debt service payments of the mortgage loan may not exceed a reasonable percentage of the borrower's cash flow over the expected term of the loan.

 

·

Term of Loan. The remaining term of each mortgage loan must be thirty (30) years or less from the date we acquire or originate the loan.

 

·

Priority of Secured Interest. The mortgage loan must be evidenced by a written obligation and must be secured by a deed of trust on the mortgaged property.

 

·

Funding Escrow. Mortgage loans must be funded through a formal escrow in a customary manner in order to assure that we receive good title to our security interest in the loan at the time the loan is funded. 

 

·

Value of Security. Each mortgage loan must be secured by real property for which there is available for review a recent independent appraisal or other independent valuation which supports the value of the property. 

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·

Title Insurance. Each mortgage loan must be covered by a standard lender's title insurance policy. 

·

Application of Loan Proceeds. Procedures must be established to assure the loan proceeds will be used for the purposes authorized. Unless we waive the requirement for good cause, loan proceeds must be available only for expenditures on account of the project for which the loan was made.

 

·

Inspection. We, the original lender, or the lender's representative must have made a personal on‑site inspection of the property securing the loan.

 

·

Insurance. We require our borrowers to obtain standard insurance protection customary in the industry, including title insurance (to insure against title defects and some forms of documentation), and liability and casualty insurance in customary amounts. We may also require special insurance in connection with particular mortgage loans, including earthquake, flood and environmental hazard insurance.

 

·

Lines of Credit and Letters of Credit. Our typical mortgage loan investment is a conventional real estate loan. However, from time to time we may make a loan commitment or loan funds pursuant to a line of credit or a letter of credit. These commitments and loans are typically secured by real property or funds pledged by the borrower.  We require that our Loan Investment Committee approve the transaction.

 

·

Credit Union Members.  Loans can be only made to credit union members or our investors, unless otherwise permitted by our Church and Ministry Loan Policy.

 

·

Location of CollateralEach mortgage loan must be secured by real property located in the United States.  Unsecured loans may be made without a geographical limitation provided that all payments are made in U.S. dollars and the financial statements of the borrower are in English.

 

·

Loan LimitsThe aggregate total of all construction loans or loans secured by junior liens on real property may not exceed 200% of our tangible net worth.  The maximum aggregate amount of any loan or loans made to one borrower (or to related entities) may not exceed 25% of our tangible net worth or 5% of our aggregate loan portfolio, whichever is less, at the time the loan is funded or acquired.  The maximum aggregate amount of unsecured loans made to any one borrower may not exceed 10% of our tangible net worth at the time the loan is funded or acquired.  For any loan that exceeds 25% of our tangible net worth or 5% of our loan portfolio, whichever is less, the loan must be approved by our Loan Committee prior to funding.

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

11


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

AGGREGATE CONCENTRATION LIMITS

(dollars in thousands)

 

 

Policy

 

Year Ended

 

Year Ended

 

 

Limit

 

December 31, 2015

 

December 31, 2014

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

% of Tangible Net Worth (TNW)

 

Number of Loans

 

Unpaid Balance

 

% of TNW

 

Number of Loans

 

Unpaid Balance

 

% of TNW

Construction Loans

 

200 

%

 

 3

 

$

1,930 

 

23.7 

%

 

 1

 

$

261 

 

3.3 

%

Junior Liens

 

200 

%

 

 9

 

 

8,137 

 

99.7 

%

 

11

 

 

8,166 

 

102.7 

%

Unsecured Loans

 

100 

%

 

 2

 

 

126 

 

1.5 

%

 

 5

 

 

158 

 

2.0 

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

SINGLE BORROWER CONCENTRATION LIMITS

(dollars in thousands)

 

 

Policy

 

Year Ended

 

Year Ended

 

 

Limit

 

December 31, 2015

 

December 31, 2014

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

% of Tangible Net Worth (TNW)

 

Number of Loans Over Limit

 

Unpaid Balance

 

% of Portfolio

 

Number of Loans Over Limit

 

Unpaid Balance

 

% of Portfolio

Unsecured Loans to One Borrower

 

10 

%

 

--

 

$

126 

 

0.1 

%

 

--

 

$

158 

 

0.1 

%

Loans to One Borrower

 

25 

%

 

22

 

 

59,016 

 

43.3 

%

 

22

 

 

56,148 

 

41.5 

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

LARGEST SINGLE BORROWER EXPOSURES

(dollars in thousands)

 

 

Policy

 

Year Ended

 

Year Ended

 

 

Limit

 

December 31, 2015

 

December 31, 2014

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

% of Tangible Net Worth (TNW)

 

Aggregate Unpaid Balance

 

% of TNW

 

Aggregate Unpaid Balance

 

% of TNW

Largest Real Estate Secured Loan

 

25 

%

 

$

4,938 

 

60.5 

%

 

$

5,016 

 

63.1 

%

Largest Unsecured Loan

 

10 

%

 

 

126 

 

1.5 

%

 

 

76 

 

1.0 

%

Largest Single Borrower

 

25 

%

 

 

4,938 

 

60.5 

%

 

 

5,016 

 

63.1 

%

 

12


 

 

As of December 31, 2015 and 2014, respectively, we were in compliance with our policy on aggregate concentration limits for construction loans, junior liens and unsecured loans, as well as our policy limit for unsecured loans to one borrower. Our portfolio included 22 loans at December 31, 2015 and 2014 that exceeded our policy limits for loans made to one borrower.  All of the aforementioned loans exceeding policy limits were originated or purchased in compliance with our policy, which allows our managers or the Company’s Loan Committee to approve certain exceptions.

 

Of the 22 loans that were out of compliance at December 31, 2015, 12 were approved as exceptions by our Board of Managers or our Loan Committee.  The remaining 10 loans migrated out of compliance solely due to a decline in our tangible net worth since the loans were purchased or originated, which is primarily due to increased provisions for loan losses and losses taken on our foreclosed assets.  We believe the risk presented by these 10 loans that have migrated out of compliance with our policy on limiting loans to a single borrower which exceed 25% of our tangible net worth will be mitigated by focusing on efforts to successfully manage the impaired loans in our portfolio.  Our lending team is also focusing on originating smaller loans and plans to continue to do so in the future.  The average outstanding balance of loans receivable in our portfolio decreased from $1.1 million at December 31, 2013 to $967 thousand at December 31, 2014 and further declined to $928 thousand at December 31, 2015.  We have also used loan participation sales to reduce the risk of originating relatively large loans and have sought to include credit unions located in the borrower’s local community to serve as the credit union of record which holds at least a 10% interest in the loan. 

 

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

 

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

 

Our Loan Investment Portfolio

 

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

13


 

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

 

Our cash and loan investments as of December 31, 2015 and 2014 are set forth below:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31,

 

 

(dollars in thousands)

 

 

2015

 

2014

Assets:

 

 

 

 

 

 

Cash

 

$

11,645 

 

$

17,251 

Loans receivable, net of allowance for loan losses of $1,785 and $2,454 as of December 31, 2013 and 2012, respectively

 

 

132,932 

 

 

131,586 

Accrued interest receivable

 

 

545 

 

 

562 

 

Set forth below are the amounts we invested in each loan category for the years ended December 31, 2015 and 2014, respectively:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year Ended December 31, (dollars in thousands)

 

 

2015

 

2014

Loans to evangelical churches and related organizations

 

Amount

 

% of Portfolio

 

Amount

 

% of Portfolio

Real estate secured

 

$

134,320 

 

98.5 

%

 

$

134,982 

 

99.7 

%

Construction

 

 

1,930 

 

1.4 

%

 

 

261 

 

0.2 

%

Unsecured

 

 

126 

 

0.1 

%

 

 

158 

 

0.1 

%

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

136,376 

 

100.0 

%

 

$

135,401 

 

100.0 

%

 

At December 31, 2015, we had no loans that are considered individually material (10% of net assets or greater) to our financial operations.

 

Our Net Interest Income and Interest Margin

 

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

 

Please see the discussion under Item 7. “Management Discussion and Analysis of Financial Condition −  Results of Operations” for information regarding our historical interest costs,

14


 

interest income and yields realized on our mortgage loan investments for the years ended December 31, 2015 and 2014.

 

Loan Maturities

 

The following table sets forth the future maturities of our gross mortgage loan portfolio at December 31, 2015:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dollar Amount of Mortgage Loans

 

 

Maturing During Year (in thousands)

Mortgage Loan Portfolio at:

 

2016

 

2017

 

2018

 

2019

 

2020

 

After 2020

 

Total

December 31, 2015

 

$

24,581 

 

$

20,868 

 

$

18,440 

 

$

10,742 

 

$

7,708 

 

$

54,037 

 

$

136,376 

 

Included in the table above are 105 adjustable rate loans.  These loans, totaling approximately $90.8 million, are due in 2021 or later.  All adjustable rate loans have one rate adjustment after five years.

 

Diversification of our Loan Portfolio

 

The following table sets forth, as of December 31, 2015 and 2014, each state in which: (i) the unpaid balance of our mortgage loans was 10% or more of the total unpaid balance of our loan portfolio; and (ii) the number of our loans was 10% or more of our total loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

California

 

 

(dollars in thousands)

 

 

2015

 

2014

 

 

 

 

 

 

 

 

 

Unpaid Balance of Loans

 

$

26,601 

 

 

$

32,257 

 

Percent of Total Loans

 

 

19.51 

%

 

 

23.82 

%

 

 

 

 

 

 

 

 

 

Number of Loans

 

 

36 

 

 

 

36 

 

Percent of Total Loans

 

 

24.49 

%

 

 

25.71 

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Maryland

 

 

(dollars in thousands)

 

 

2015

 

2014

 

 

 

 

 

 

 

 

 

Unpaid Balance of Loans

 

$

17,002 

 

 

$

8,503 

 

Percent of Total Loans

 

 

12.47 

%

 

 

6.28 

%

 

 

 

 

 

 

 

 

 

Number of Loans

 

 

10 

 

 

 

 

Percent of Total Loans

 

 

6.80 

%

 

 

5.00 

%

15


 

 

Our Loan Renewal Policies 

 

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

 

Sale of Loan Participation Interests

 

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

 

During 2015, we entered into loan participation agreements to sell $6.0 million of loan participations to several credit unions.    During 2014, we entered into loan participation agreements to sell $13.1 million of loan participations to several credit unions. 

 

Performance and Monitoring of our Loan Portfolio

 

As of December 31, 2015, 10 of our 147 mortgage loan investments are serviced by ECCU and subject to ECCU’s collection policies.  Under the terms of our servicing agreement with ECCU, we monitor each mortgage loan or participation interest we acquire to ensure full payments are received as scheduled.  We also receive monthly reports from ECCU regarding our mortgage loan investments, including delinquent loan status reports.  For the loans that we service, we monitor payment receipts and delinquency.  We produce status reports on these loans similar to those which we receive from ECCU.  These status reports are included in monthly and quarterly reports management prepares for our Board of Managers.

 

Impaired Loans

 

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

 

16


 

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

 

We "charge off" or "write off" a loan against our allowance or reserve for loan losses when we believe the uncollectability of the loan balance is confirmed. In most cases, this directly correlates to the completion of foreclosure proceedings on the collateral.  In 2014, we recorded $544 thousand in charge-offs against three impaired loans.  In 2015, we recorded $103 thousand in charge-offs against one impaired loan. We also recorded a partial charge-off against one impaired loan of $40 thousand in both 2014 and 2015 when we wrote down the principal balance of that loan as part of an agreement with the borrower.

 

Delinquent Loans

 

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

 

We report a mortgage loan as delinquent if it is 90 days or more in arrears. At December 31, 2015, 0.78% of our portfolio was delinquent.  At December 31, 2014, 1.35% of our loan portfolio was delinquent.  We have adopted a proactive approach in responding to delinquencies in our loan portfolio. For loans which we act as the lead lender, we make direct contact with the borrower within ten (10) days of an initial late payment. If the situation progresses to 30 days or more, we follow up with an onsite visit to discuss the borrower’s circumstances and how the borrower can bring the loan current.

 

In the event that an acceptable workout of a delinquent mortgage cannot be reached, we, or ECCU for any loans it services for us, will generally proceed with a foreclosure proceeding on any collateral securing the loan.  At December 31, 2015, we did not have any loan investments in which we or the lead lender in the loan was pursuing foreclosure.  Since inception, we have had eight mortgage loan investment losses that resulted in charge-offs, one of which occurred during the year ended December 31, 2015.  For the year ended December 31, 2015, the performance of the mortgage loans we hold has substantially improved.

 

Non-performing Loans 

 

The table below sets forth the amounts and categories of non-performing assets in our portfolio.  Loans are placed on non-accrual status when the collection of principal and/or interest becomes doubtful or other factors involving the loan or the borrower’s financial condition warrant placing

17


 

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

The following is a summary of our non-performing mortgage loans at December 31, 2015, and 2014, respectively (dollars in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2015

 

 

2014

 

 

 

 

 

 

 

 

 

 

Non-accrual loans

 

$

8,779 

(1)

 

$

8,805 

(2)

Loans 90 days or more past due and still accruing

 

 

--

 

 

 

--

 

Restructured loans on accrual status

 

 

3,113 

 

 

 

3,181 

 

Total non-performing loans

 

$

11,892 

 

 

$

11,986 

 

 

 

 

 

 

 

 

 

 

Non-performing loans as a percentage of total loans

 

 

8.7 

%

 

 

8.9 

%

 

 

 

 

 

 

 

 

 

(1) All non-accrual loans have been restructured.

(2) Includes $8.1 million of restructured loans on non-accrual status.

   

The Company had eight nonaccrual loans as of December 31, 2015 and 2014For the years ended December 31, 2015 and 2014, $304 thousand and $597 thousand, respectively, of gross interest income would have been recorded had the non-accrual loans been current in accordance with their original terms.  Interest in the amount of $22 thousand and $16 thousand, respectively, was included in income for the years ended December 31, 2015 and 2014 on non-accrual loans through the accretion of loan discount related to the net present value of cash flows.  We monitor our non‑performing loans on an ongoing basis as part of our loan review and work‑out process.  The potential risk of loss on these loans is evaluated by comparing the loan balance to the fair value of any underlying collateral for collateral-dependent loans, or the present value of projected future cash flows.  As of December 31, 2015 and 2014, the Company did not have any loans past due 90 days and still accruing.

 

Restructured Loans 

 

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

18


 

rate modification, extension of the maturity date, or reduction of accrued interest owed on the loan on a contingent or absolute basis. 

 

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

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2015

 

2014

 

 

 

 

 

 

 

 

 

Number of restructured loans

 

 

 

 

 

 

Balance of restructured loans

 

$

11,892 

 

 

$

11,235 

 

Percentage of loan portfolio

 

 

8.72 

%

 

 

8.30 

%

Allowance for loan losses associated with restructured loans

 

$

1,115 

 

 

$

1,378 

 

Discounts associated with restructured loans

 

$

742 

 

 

$

693 

 

 

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

 

The number of restructured loans as a percentage of our total loan portfolio, while higher than historical levels we incurred prior to the 2008 global economic crisis, are within manageable limits, and the delinquency rates on our mortgage portfolio appear to have stabilized. We believe we have established adequate levels of reserves for any foreseeable losses, and we continue to evaluate the adequacy of such reserves in the light of current economic and operational conditions.

 


19


 

Allowance for Loan Losses

 

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

 

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

 

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

 

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

 

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

20


 

At December 31, 2015 and 2014, our allowance for loan losses was $1.8 and $2.4 million, respectively, or 1.31% and 1.81%, respectively, of our total loan portfolio.  The decrease in our allowance is due to $123 thousand in net charge-offs we recorded during the year. We also recorded a net credit for loan losses of $524 related to changes in the status of two impaired loans.  We recovered $190 thousand when ECCU reached a settlement with the title insurance company relating to claims made under the policy in connection with a loan default on a loan in which we held a 64.8% participation interest. We reduced our allowances by an additional $400 thousand when we reclassified an impaired loan as non-collateral-dependent as a result of the borrower’s performance under the terms of a loan modification agreement.  The reclassification allowed us to record reserves based on the net present value of estimated loan payments rather than the value of the collateral securing the loan, leading to a reduction in specific reserves.

 

Assessing the adequacy of our allowance for loan losses is inherently subjective as it requires us to make material estimates, including the amount and timing of future cash flows we expect to receive on impaired loans that may be susceptible to significant change.  In the opinion of management, the allowance, when taken as a whole, reflects all known and inherent credit losses in our mortgage loan portfolio as of December 31, 2015.

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2015

 

2014

 

 

 

 

 

 

 

Specific allowance related to loans in foreclosure

 

$

--

 

$

293 

Specific allowance related to other impaired loans

 

 

338 

 

 

1,061 

Allowance based on net present value differences of restructured loans

 

 

777 

 

 

316 

General allowance

 

 

670 

 

 

784 

Total allowance

 

$

1,785 

 

$

2,454 

 

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

Competition

 

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

 

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

 

Employees

 

Effective as of January 1, 2013, we entered into a staffing agreement with Automated Data Processing, Inc., which provides us with payroll and staffing services.  As of December 31, 2015, we had 24 full or part-time employees.  None of our employees are covered by a collective bargaining agreement, and we believe that we have an excellent relationship with our employees and staff.

 

Regulation

 

General

 

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

 

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

 

Tax Status

 

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

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franchise fee plus a gross receipts tax on our gross revenues from our California based activities if our gross revenues are in excess of $250 thousand per year.

 

Regulation of Mortgage Lenders

 

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

 

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

 

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

 

Loan Brokerage Services

 

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

 

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Environmental Issues Associated with Real Estate Lending

 

The Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA”), a federal statute, generally imposes strict liability on all prior and current “owners and operators” of sites containing hazardous waste. However, Congress acted to protect secured creditors by providing that the term “owner and operator” excludes a person whose ownership is limited to protecting its security interest in the site. Since the enactment of the CERCLA, this “secured creditor exemption” has been the subject of judicial interpretations which have left open the possibility that lenders could be liable for clean-up costs on contaminated property that they hold as collateral for a loan. To the extent that legal uncertainty exists in this area, all creditors that have made loans secured by properties with potential hazardous waste contamination (such as petroleum contamination) could be subject to liability for cleanup costs, which costs often substantially exceed the value of the collateral property.  In addition, state and local environmental laws, ordinances and regulations can also impact the properties underlying our mortgage loan investments.  An owner or control party of a site may also be subject to common law claims by third parties based on damages and costs resulting from environmental contamination emanating from a site.

 

Regulation of Financial Services

 

The financial services industry in the U.S. is subject to extensive regulation under federal and state laws.  The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (“Dodd-Frank Act”) was enacted on July 21, 2010.  The Dodd-Frank Act resulted in sweeping changes in the regulation of financial institutions and created a new Consumer Financial Protection Bureau and Financial Stability Oversight Council with authority to identify institutions and practices that might pose a systemic risk.  Because of the nature of our business, we do not expect this legislation to have a significant direct impact on our business.  Because many of the implementing regulations have yet to be written by various regulatory agencies, we cannot give any assurances that the Dodd-Frank Act will have no material effect on our business.

 

Our wholly-owned broker-dealer firm, Ministry Partners Securities, LLC, commenced limited operations in the first quarter of 2012.  As a registered broker-dealer under Section 15 of the Securities Exchange Act of 1934, MP Securities is subject to regulation by the U.S. Securities and Exchange Commission and regulation by state securities administrators in the states in which it will conduct its activities.  We have registered MP Securities in the states of California, Colorado, Florida, Georgia, Idaho, Illinois, Minnesota, Nevada, New York, North Carolina, Ohio, Oregon, Pennsylvania, Rhode Island, South Carolina, Texas, Washington, West Virginia and Wisconsin.

 

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

 

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

 

Our wholly-owned subsidiary, MP Securities, is also required to maintain minimum net capital pursuant to rules imposed by FINRA.  In general, net capital is the net worth of the entity (assets minus liabilities) less any other imposed deductions or other charges.  If a member firm fails to maintain the required net capital it must cease conducting business and, if it does not do so, it may be subject to suspension or revocation of registration by the SEC and suspension or expulsion by FINRA.  Under its Membership Agreement entered into with FINRA, MP Securities is required to maintain minimum net capital of the greater of $5,000 or one fifteenth of its aggregate indebtedness.

 

Regulation of Investment Advisers

 

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

 

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

 

Privacy Standards

 

The Gramm-Leach-Bliley Financial Services Modernization Act of 1999 (“GLBA”) modernized the financial services industry by establishing a comprehensive framework to permit affiliations among commercial banks, insurance companies, securities firms and other financial service providers. We are subject to regulations implementing the privacy protection provisions of the

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GLBA. These regulations require us to disclose our privacy policy, including identifying with whom we share “non-public personal information” to our investors and borrowers at the time of establishing the customer relationship and annually thereafter. The State of California’s Financial Information Privacy Act also regulates consumer’s rights under California law to restrict the sharing of financial data.  In recent years, there has been a heightened legislative and regulatory focus on data security, including requiring customer notification in the event of a data breach.  Congress has held several hearings in the subject and legislation has been introduces which would impose more rigorous requirements for data security and response to data breaches.  As MP Securities expands its investment adviser business operations, it will also need to monitor regulatory initiatives promulgated under Dodd-Frank that affect investment advisers.

 

 

Item 1A

 RISK FACTORS

 

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

 

Risks Related to the Company

 

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

 

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

 

·

quality of the mortgage loan assets we own and the profitability of our operations;

·

limitations imposed under our credit facility arrangements and trust indenture agreements that contain restrictive and negative covenants that may limit our ability to borrow additional sums or sell our publicly and privately offered debt securities;

·

strength of the lenders from whom we borrow; and

·

borrowing limitations imposed under our credit facilities.

During the last five years, the size of the Company’s balance sheet has been reduced as a result of deleveraging our assets, a reduction in the total amount of debt securities we hold on our

27


 

balance sheet, and pay-downs and/or pay-offs of institutional credit facilities we have relied upon, in part, to fund our business. An event of default, lack of liquidity or a general deterioration in the economy that affects the availability of credit may increase our cost of funding, make it difficult for us to renew or restructure our credit facilities and obtain new lines of credit. We are also susceptible to withdrawals by investors that hold our debt securities that can cause unexpected liquidity problems.

 

We are actively expanding our methods of raising capital, including seeking financing from institutional lenders, selling participations in our mortgage loan investments, and expanding the sales of our debt securities to institutional, individual, IRA and retail investors. If our strategy to raise additional capital through the sale of investor notes and debt securities is not viable, we will need to find alternative sources of borrowing to finance our operations. To the extent we are unable to raise the capital we need to implement our strategic objectives, we may have to sell assets, further deleverage our balance sheet, and reduce operational expenses, thereby reducing cash available to distribute to our equity and debt securities investors.

 

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

 

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

 

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

 

A significant percentage of the investors who purchase our debt securities purchase new notes after we repay their notes. Historically, a substantial proportion of our investors have purchased a new debt security from us when their notes mature. For the years 2008 – 2011, 76%, 79%, 57% and 73% of the investors that purchased a Class A Note had previously purchased one of our debt securities. For 2012, only 45% of the investors in our Class A Notes were repeat purchasers of our debt securities, primarily due to having to stop selling our Class A Notes for approximately six months while we sought approval from FINRA for MP Securities to sell our Class A Notes. In 2013, this rate fell to 34% due to suitability and concentration of investment restrictions that limit the amount of our debt securities that may be purchased by an investor. For the years ended December 31, 2014 and 2015,  our renewal rate climbed to 53% and 55%, respectively.  There is no assurance that historical patterns of repeat purchases made by investors will resume or that the recent improvement in our reinvestment rate will continue in the future. If

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the rate of repeat investments made by previous investors declines, our ability to maintain or grow our asset base could be impaired.

 

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

 

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

 

Deterioration in real estate values for our real estate owned assets and mortgage loan investments could lead to losses and reduced earnings.

 

For the year ended December 31, 2014, we reported a net loss of $1.9 million. During 2014, several of our non-performing assets decreased in value, resulting in $2.4 million taken in provisions for losses on foreclosed assets and $252 thousand in provisions for loan losses. During 2015, we recorded $11 thousand in credits for losses recognized in prior years on foreclosed assets, which contributed to our net income of $357 thousand for the year.  However, we cannot assume that credits will be recovered in future years on our real estate owned assets due to the fact that, as of the date of this Report, we have only one remaining real estate owned asset.  If we take ownership of a property as part of a foreclosure action when a borrower defaults on one of our mortgage loan investments, we could be required to write down the value of a real estate owned asset and record a charge to our earnings if the value of the property declines further after we take title to the property.  Further deterioration could lead to an increase in non-performing assets, increased credit losses, and reduced earnings.

 

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

 

Our success is dependent, in part, upon our ability to grow our balance sheet assets through the use of leverage. Our organizational and governing documents do not limit the amount of indebtedness which we may incur. A significant amount of our assets are pledged as collateral for borrowings. Our Board of Managers has overall responsibility for our financing strategy. Leverage creates an opportunity for increased net income, but at the same time creates risks. For example, leveraging magnifies changes in our net worth. We will incur leverage only when we expect that it will enhance our investment returns. To the extent that we fail to meet our debt service obligations, we risk the loss of some or all of our assets to satisfy these debt obligations. There can be no assurance that we will be able to meet our debt service obligations and, to the extent that we cannot, we risk the loss of some or all of our assets, or a financial loss if we are required to liquidate assets at a commercially inopportune time. At December 31, 2015, we had $140.1 million of total debt obligations on our balance sheet. Of this amount, we owed $90.2 

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million under our institutional credit facilities and $49.9 million on our investor debt securities. Approximately 16%, 10% and 65% of our total debt obligations is payable in the years ending December 31, 2016, 2017 and 2018, respectively.

 

We have had fluctuating earnings.

 

As a mortgage financing lender, our profitability may be adversely affected by increasing provisions for losses relating to our loan portfolio. While we remained profitable during calendar years 2008 and 2009, we incurred net losses of $1.6 million and $1.0 million in calendar years 2010 and 2011, respectively, primarily due to increases in our allowance for loan losses and deleveraging of our balance sheet. With the successful refinancing of our primary credit facilities in November 2011 and improvement in the performance of our mortgage loan portfolio during 2012, we realized a profit of $417 thousand for 2012. We realized a profit of $592 thousand in 2013 as our mortgage loan portfolio performance remained stable in 2013 and we were able to sell three of our foreclosed assets for a gain during the year. Decreases in the value of collateral securing our collateral dependent loans and decreases in the value of some of our foreclosed real estate owned assets primarily accounted for the $1.9 million loss reported for the year ended December 31, 2014.  Credits for loan losses and improvement in real estate values of some of our foreclosed assets resulted in net income of $357 thousand during the year ended December 31, 2015.  Since we have had fluctuating earnings over the last several years, we can give no assurances that we will be able to achieve and maintain consistent profits over the next few years.

 

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

 

For the year ended December 31, 2014, we recorded provisions for loan losses of $252 thousand. We recorded a credit for loan losses of $524 thousand for the year ended December 31, 2015. Although we regularly evaluate our financial reserves to protect against future losses based on the probability and severity of the losses, there is no guarantee that our assessment of this risk will be adequate to cover any future potential losses.

 

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

 

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

 

At December 31, 2015 and December 31, 2014, our non-performing assets (which consist of impaired loans and other real estate owned) totaled $15.4 million and $15.9 million, respectively,

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or 10.3%  of our total assets at each date. At December 31, 2013, and December 31, 2012, our non-performing assets were $22.2 million and $21.5 million, respectively, or 14.0% and 12.9% of total assets, respectively. Nonperforming assets adversely affect our net income in the following ways:

 

·

We do not record interest income we receive on collateral-dependent, non-performing loans.

 

·

We are required to record allowances for probable losses through a current period charge to the provision for loan losses or provision for other real estate owned assets.

 

·

Non-interest expense increases when we write down the value of properties in our other real estate owned portfolio to reflect changing market values.

 

·

There are legal and other professional fees associated with the resolution of problem real estate owned assets, as well as carrying costs, such as taxes, insurance and maintenance fees related to our other real estate owned assets.

 

·

The resolution of non-performing assets requires active involvement of our management, which can distract them from more profitable activity.

 

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

 

The U.S. financial markets that have in the past provided liquidity, securitization financing, short-term credit facilities and access to capital to fund investments in church mortgage loans have been adversely impacted by payment defaults of churches and ministries, increases in loan work-outs and restructurings for churches and ministry related borrowers, and has reduced the availability of short-term financing facilities to finance our business.

 

In recent years, the availability of credit to finance the acquisition or origination of church mortgage loans has substantially reduced the financing sources for the ministry related mortgage loans we originate or invest in. This has reduced and made it more difficult for us to secure short-term credit facilities from institutional lenders, reduced the amount of capital we have available to make new investments in mortgage loans and has reduced, and may continue to reduce, revenue and cash flow we receive from our investments. Our continued use of secured institutional bank financing facilities will depend upon our ability to refinance or obtain renewals of our primary credit facilities when they mature in 2018 and obtain new secured bank financing on acceptable terms.

 

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

 

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

 

As of December 31, 2015, we had pledged approximately $81.9 million and $25.7 million of our mortgage loans to secure the MU Credit Facility and the WesCorp Credit Facility Extension, respectively.  This represented a collateral deficiency of $686 thousand according to the terms of our credit facility agreements.  We pledged cash in the amount of $686 thousand in order to satisfy this deficit at December 31, 2015.  As of the date of this Report, we are in compliance with this covenant.

 

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

 

Our credit facilities and debt securities generally provide for cross-default provisions whereby a default under one agreement will trigger an event of default under other agreements, giving our lenders the right to declare all amounts outstanding under their particular credit agreement to be immediately due and payable, and enforce their rights by foreclosing on or otherwise liquidating collateral pledged under these agreements. For example, a default under one of our credit facilities would also constitute our default under our other credit facilities. Thus, to maintain these credit facilities, there cannot be a default under either one.

 

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

 

In the event of a default under our MU Credit Facility or our WesCorp Credit Facility Extension, the lender has the right to foreclose on its collateral pursuant to the respective credit facility

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

 

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

 

In recent years, we have relied upon short-term credit facilities to finance a substantial portion of our mortgage loan investments. When we acquire mortgage loans that have a maturity term that exceeds the term of our institutional credit facilities, we bear the risk of being unable to refinance, extend or replace our primary credit facilities or otherwise finance them on a long-term basis at attractive terms or in a timely manner, or at all. If it is not possible or economical for us to finance such investments on attractive terms, we may be unable to pay-down our credit facilities or be required to liquidate the assets at a loss in order to do so. Our reliance on financing provided by institutional credit facility lenders may subject us to an obligation to make significant balloon payments upon maturity of our $87.3 million MU Credit Facility and $23.5 million WesCorp Credit Facility Extension on October 31, 2018. If we are unable to roll-over, extend, refinance or replace such credit facilities on attractive terms, we may have to rely upon less efficient forms of financing new investments, which will result in fewer loan acquisitions or originations of profitable mortgages and further deleveraging of our balance sheet and thereby reduce the amount of earnings available for distributions to our equity investors and funds available for operations and to meet our debt service obligations.  We intend to continue discussions with the NCUA to extend our credit facilities beyond the 2018 maturity date.

 

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

 

Our financing arrangements contain restrictions, covenants and events of default. Failure to meet or satisfy any of these covenants could result in an event of default under these agreements. Any event of default may materially adversely affect us. In addition, these restrictions may interfere with our ability to obtain financing or engage in other business activities. Furthermore, our default under any of our financing arrangements could have a material adverse effect on our business, financial condition, liquidity and results of operations and our ability to make distributions to our equity investors.

 

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

 

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

 

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

 

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

 

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

 

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

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encountered while implementing major new computer systems or upgrades to existing systems, potentially resulting in data loss and adversely affecting our ability to process these transactions.

 

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

 

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

 

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

 

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

 

Risks Related to the Financial Services Industry and Financial Markets

 

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

 

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

 

·

interest rates and credit spreads;

 

·

the availability of credit, including the price, terms and conditions under which it can be obtained;

 

·

loan values relative to the value of the underlying real estate assets;

 

·

default rates on special purpose mortgage loans for churches and ministries and the amount of the related losses;

 

35


 

·

the actual and perceived state of the real estate markets for church properties and special use facilities; and

 

·

unemployment rates.

 

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

 

Declining real estate values could harm our operations.

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

Risks Related to Our Mortgage Loan Investments

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

 

Generally, our borrowers may prepay the principal amount of their mortgage loans at any time. Due to the Federal Reserve Board’s accommodative monetary policies, there is intense competition from financial institutions that are looking to make commercial loans at competitive rates to qualified borrowers. In addition, approximately 7% of the principal balance of our total mortgage loans will need to be refinanced during the year ending December 31, 2016. If a significant number of borrowers refinance their loans with another lender, our business and profitability could be adversely affected.

 

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

 

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

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result, our financial performance and ability to make distributions to our equity owners could be materially adversely affected.

 

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

 

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

 

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

 

Some of our assets are participation interests in loans or co-lender arrangements in which we share the rights, obligations and benefits of the loan with other lenders. We may need the consent of these parties to exercise our rights under such loans, including rights with respect to amendment of loan documentation, enforcement proceedings in the event of default and the institution of, and control over, foreclosure proceedings. Similarly, a majority of the participants may be able to take actions to which we object but to which we will be bound if our participation interest represents a minority interest. We may be adversely affected by this lack of full control. As of December 31, 2015 and December 31, 2014, our investments included $12.4 and $23.3 million, respectively, in loan participations, representing 9% and 17% of our portfolio, respectively.

 

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

 

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

 

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

 

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

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

 

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

 

·

decisions as to which mortgage loans ECCU will make available to us as a loan participation interest or as a potential loan to be acquired;

 

·

decisions as to the price and terms of mortgage loans ECCU offers to us;

 

·

determinations as to the creditworthiness of borrowers of mortgage loans ECCU offers to us;

 

·

decisions to acquire mortgage loan investments from or through ECCU;

 

·

decisions regarding our contract with ECCU for our office facilities;

 

·

managing foreclosure actions and real estate owned properties acquired in foreclosure or other proceedings when ECCU and the Company each hold an economic interest;

 

·

decisions relating to shared marketing programs and use of ECCU’s facilities by MP Securities personnel to offer investment products to ECCU’s members;

 

·

decisions regarding collection and enforcement actions taken by ECCU when it acts as primary lender of a loan participation interest or as servicer for one of our mortgage loan investments; and

 

·

decisions regarding our contracts with ECCU for loan underwriting, processing and servicing services.

 

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

 

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

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

 

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

 

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

 

We are among a limited number of non-bank financial institutions specialized in providing loans to evangelical churches and church organizations. Moreover, approximately 24% of our mortgage loan investments involve California borrowers or are secured by properties located in California. Although there are a number of national and regional institutions making and/or investing in mortgage loans to churches and church related organizations, these loans are secured by special purpose facilities. As a result, if the properties securing such mortgages must be sold, there may be a limited number of buyers available for such properties. Nevertheless, we believe that there is a great deal of diversity in the types of not-for-profit organizations and entities that could be potential acquirers of properties of this nature, including, but not limited to, other churches, schools, clinics, community development agencies, universities and educational institutions, day care, social services, assisted living facilities and relief organizations.

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

Some loans in our investment portfolio have been restructured or may otherwise be at risk or under credit watch. Over the last several years, the number of churches that have requested or been granted loan modifications has been significantly higher than in our prior historical experience. Under current economic conditions, the credit performance of these modified loans may not conform to either historical experience or our expectations. We make various assumptions and judgments about the collectability of our loan portfolio, including the creditworthiness of our borrowers and the value of the real estate and other assets serving as collateral for the repayment of many of our loans. If we determine that it is probable that we will not be able to collect all amounts due to us under the terms of a particular loan agreement, we could be required to recognize an impairment charge or a loss on the loan unless the value of the collateral securing the loan exceeds the carrying value of the loan. If our assumptions regarding, among other things, the present value of expected future cash flows or the value of the collateral

41


 

securing our loans are incorrect or general economic and financial conditions cause one or more borrowers to become unable to make payments under their loans, we could be required to recognize impairment charges, which could result in a material reduction in earnings in the period in which the loans are determined to be impaired and may adversely affect, perhaps materially, our financial condition, liquidity and ability to make debt service payments and distributions to our equity owners.

 

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

 

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

 

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

 

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

 

·

uninsured casualty loss (such as an earthquake or flood);

 

·

a decline in the local real estate market;

 

·

undiscovered defects on the property;

 

·

waste or neglect of the property;

 

·

a downturn in demographic and residential trends;

 

·

a decline in growth in the area in which the property is located. Also, churches and church-related properties are generally not as marketable as more common commercial, retail or residential properties.

 

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

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

 

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

 

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

 

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

 

When we acquire a property through foreclosure, we value the property and its related assets and liabilities. We determine fair value based primarily upon discounted cash flow or capitalization rate assumptions, the use of which requires assumptions including discount rates, capitalization rates, and other third party data. We may recognize a loss if the fair value of the property internally determined upon acquisition is less than the previous carrying amount of the foreclosed loan. Until 2011, we had never foreclosed on a real estate mortgage we owned.

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

The renovations, refurbishment or expansion by a borrower of a mortgage property involves risks of cost overruns and non-completion. Costs of construction or improvements to bring a mortgage property up to standards established for the market position intended for that property may exceed original estimates, possibly making a project uneconomical. Such delays and cost overruns are often the result of events outside both our and the borrower’s control such as material shortages, labor shortages and strikes and unexpected delays caused by weather and other acts of nature. Also, environmental risks and construction defects may cause cost overruns, and completion delays. If such construction or renovation is not completed in a timely manner, or if it costs more than expected, the borrower may experience a prolonged impairment of the borrower’s revenues making it unable to make payments on our loan. At December 31, 2015 and 2014, we held $1.9 million and $261 thousand, respectively, in construction loans. 

 

 

 

Item 1BUNRESOLVED STAFF COMMENTS

 

None.

 

 

 

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Item 2PROPERTIES

 

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

 

We currently rent our offices (approximately 4,970 square feet of rentable space) from ECCU under the terms of an Office Lease dated November 4, 2008.  In November 2013, we renewed the lease for a five year period.  The ECCU Office Lease agreement includes one additional option to renew for an additional five year term.  For 2013, our base rent was $10,437 per month.  In November 2013, under the terms of the renewal, our base rent decreased to $9,172 per month.  On March 6, 2012, MP Securities entered into an office lease for approximately 1,358 square feet of office space to open a branch office in Fresno, California.  The lease has a term of 36 months.  In February 2015, we negotiated a renewal of the lease for an additional three year term.  The lease extends through February 2018.  For 2015, the base rent for this branch office was $2,064 per month.

 

As of December 31, 2015, we hold properties acquired through foreclosure with a net value of $3.5 million, which includes a total valuation allowance of $1.1 million on the properties.  Each property is valued based on its current listing price or most recent appraised value less anticipated selling costs, marketing costs and commissions. 

 

A summary of the properties we have acquired through foreclosure is listed below:

 

·

Together with ECCU and another participating credit union, we acquired a school property in Palm Beach County, Florida pursuant to foreclosure proceedings.  With the agreement of the lead lender and other participating lenders, the property was leased back to the school for a period of two years and the school was given an option to purchase the property at a price of $5.3 million or the appraised value of the property, whichever is greater.  On March 11, 2015, ECCU entered into a Purchase and Sale Agreement with a buyer to sell the property at a purchase price of $5.5 million.  No valuation allowance has been taken on this property. We have included our interest in this property as a property held for sale with a carrying value of $1.3 million at December 31, 2015.  The purchase transaction was completed on March 17, 2016 at a price of $5.5 million.  As the final selling costs were lower than estimated, we realized a $223 thousand gain on the sale of this property which will be included in our financial results for 2016.

 

·

In August 2013, together with ECCU, we acquired four church properties located in Rockford, Illinois pursuant to a foreclosure proceeding.  These properties, along with one other real estate asset acquired pursuant to a foreclosure action, secured a loan in which we owned a 64.8% loan participation interest. The properties include several parcels of vacant land, an educational facility, a radio tower, and a training center.  We sold three of these properties during 2015 and we recognized gains on sale of $132 thousand on two of these properties.  We took $182 thousand in additional allowance for losses on the third parcel before it was sold.  We continue to own the fourth property acquired in the foreclosure action, however, management has determined that the property is not

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marketable.  We recorded $78 thousand in additional allowances for losses on the property in 2015 prior to writing it off completely effective as of December 31, 2015. 

 

·

In January 2014, we acquired a property in Santa Clarita, California as the result of a deed in lieu of foreclosure agreement we entered into with the borrower.  The property is approximately 35 acres of vacant land.  This property has a carrying value of $900 thousand at December 31, 2015, which includes a valuation allowance of $270 thousand. 

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

 

·

In July 2014, together with ECCU and 11 other participants, we acquired a church property located in Arlington, Texas as a result of a foreclosure action.  The property includes land and a large church facility.  ECCU reached an agreement to sell this property in December 2015 and the sale closed on March 4, 2016.  The sale price allowed us to recover $271 thousand in provisions for losses on foreclosed assets previously taken.  Our portion of the property had a carrying value of $1.2 million at December 31, 2015, net of a valuation allowance of $841 thousand. 

 

Listed in the chart below is a summary of foreclosure properties we held as of December 31, 2015, the city and state in which the property is located; our net investment in the loan at the time of foreclosure; the reserve or write-down amount of the property; and the current value after estimated selling costs (dollars in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

46


 

Location of Real Estate Owned Asset

 

 

Net Investment in Loan at Time of Foreclosure

 

 

Valuation Allowance

 

 

Net Carrying Value

West Palm Beach, Florida

 

$

1,374 

 

$

--

 

$

1,338 

Rockford, Illinois

 

 

194 

 

 

194 

 

 

--

Santa Clarita, California

 

 

1,170 

 

 

270 

 

 

900 

Arlington, Texas

 

 

2,089 

 

 

841 

 

 

1,248 

Totals

 

$

4,827 

 

$

1,305 

 

$

3,486 

 

*  Prior to the date of this Report, three of the real estate owned assets listed above have been disposed of in sale transactions or in connection with the formation of a real estate joint venture investment.

 

As of December 31, 2015, our foreclosed real estate properties are valued at $3.5 million and are presented net of any valuation allowances.

 

 

 

Item 3.  LEGAL PROCEEDINGS

 

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

 

Item 4.  MINE SAFETY DISCLOSURES

 

Not applicable.

47


 

PART II

 

 

 

Item 5.

MARKET FOR OUR COMMON EQUITY, RELATED MEMBER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

 

Price Range of Common Units

 

There is no public market for our Class A Units and Series A Preferred Units (the “Series A Units”).  Effective as of December 31, 2008, we converted our form of organization from a California corporation to a California limited liability company.  As a result of the conversion, each share of our common stock immediately outstanding prior to the conversion date was converted into one fully paid and non-assessable unit of our Class A Units and each holder of our Class I and Class II Preferred Stock received one Series A Unit for each share of Class I and Class II Preferred Stock exchanged.  As of December 31, 2015, a total of 146,522 Class A Units were issued, with 11 holders of record, and a total of 117,100 Series A Units were issued, with 12 holders of record.

 

Sale of Equity Securities by Issuer

 

During the year ended December 31, 2015, we did not sell Class A Units, Series A Units or equity units.

 

Purchases of Equity Securities by Issuer

 

During the year ended December 31, 2015, we did not purchase Class A Units or Series A Units.

 

Dividends and Distributions

 

Prior to our conversion from a corporation to a limited liability company, we paid regular dividends on our Class I and Class II Preferred Stock.  For 2015, we made no distributions to the holders of our Class A Units.

 

During 2015 and 2014, we made distributions on our Series A Units as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

SERIES A UNITS

 

 

 

 

 

 

 

 

 

Distributions Declared per Unit

Quarter

 

2015

 

2014

 

 

 

 

 

 

 

First

 

$

0.260 

 

$

0.199 

Second

 

 

0.280 

 

 

0.198 

Third

 

 

0.302 

 

 

0.209 

Fourth

 

 

0.551 

 

 

0.228 

Total distributions per Unit

 

$

1.393 

 

$

0.834 

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

 

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

 

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

 

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

 

Equity Compensation Plans

 

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

 

 

 

 

 

 

49


 

Item 6.SELECTED FINANCIAL DATA

 

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

 

 

 

 

 

Item 7.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

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

 

Overview

 

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

 

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

 

·

maintaining liquidity, growing our balance sheet, and strengthening the quality of our assets;

 

·

building capital while developing new financing sources;

 

·

increasing revenues through efforts to expand loan originations and servicing income from loans we originate, and through the sale of loan participation interests;

 

·

increasing our revenue from broker-dealer related services by offering a full array of wealth management products and services, including the offering of registered investment advisor capabilities;

 

50


 

·

working with credit unions and other CUSOs to serve the needs of their clients and owners, expand our own client base, and increase our fee income from broker-dealer services as well as loan servicing and origination fees;

 

·

substantially increasing the sale of our investor debt securities, thereby enabling the growth of our balance sheet and the generation of new investment capital;

 

·

managing and strengthening our loan portfolio through aggressive and proactive efforts to resolve problems in our non-performing assets, increasing cash flows from our borrowers and ultimately realizing the benefit of our investments;

 

·

prudently managing and carrying-out strategies for our real estate owned assets to minimize losses, or realize a gain where possible on these properties;

 

·

broadening the number of investors in our investor debt securities and effectively implementing strategies designed to ensure compliance with FINRA’s suitability and regulatory standards for investments made in our debt securities;

 

·

developing capital funding sources that are not dependent on the sale of mortgage-backed securities or institutional credit facilities; and

 

·

managing the size and cost structure of our business to match our operating environment and capital funding efforts.

 

For the year ended December 31, 2015, we recognized net income of $357 thousand.  Due to liquidity issues throughout 2014, we limited the amount of loan originations we funded during the first nine months of 2015.  We reached an agreement with the NCUA in March 2015 to enable us to temporarily pledge cash in place of loans as collateral on our credit facilities.  This agreement allowed us to avoid making large principal paydowns on our credit facilities when the loan collateral we pledged fell short of the minimum collateralization ratio required by our original agreement with the NCUA.  As our liquidity stabilized, we were able to fund some of the loans in our pipeline during the fourth quarter of 2015. 

 

Because our note balances remained stable throughout the year while our loans receivable balance was low, our net interest income decreased significantly as compared to 2014.  This decrease was offset by changes in the status of two of our impaired loans which allowed us to record credits for loan losses of $524 thousand for the year.  These transactions increased our net interest income to the point where it covered our operating expenses, despite incurring salary and benefits expense arising from amounts due to our former Chief Executive Officer, James Overholt, pursuant to a severance agreement reached with him upon his retirement in December 2015. In addition, we realized a gain of $20 thousand from the recovery of certain expenses incurred in connection with the sale of our foreclosed assets in 2015.  Careful and diligent management of our real estate assets and impaired loans has substantially contributed to the gains we reported for the year, but we understand that these gains are not part of our core earnings and will not be sustainable as regular sources of income.

 

51


 

However, despite the decrease in net interest income in 2015, we believe that the loans we closed at the end of the year as well as the loans we have in our pipeline will restore our mortgage loan investments to a level that supports our operating expenses. We continue to develop a network of credit unions and CUSOs to whom we can sell loan participation interests on a servicing retained basis.  In addition, the agreement we reached with the NCUA and the improvement in note sales have combined to improve our liquidity.  Our wholly-owned subsidiary, MP Securities, has become an added source of revenue for the Company as it has expanded its sales force and client base.  We are continuing to make significant investments in our broker-dealer infrastructure through strategic recruitment of key personnel while expanding our offering of products and services. 

 

Key Factors in Assessing our 2015 Financial Results

 

For the year ended December 31, 2015, the primary items affecting our operating performance were the following:

 

·

a decrease in interest income due to lower than expected loan originations in the first part of the year;

 

·

a $15.7 million decline in the average interest-earning loans receivable, combined with a higher average balance in cash, causing a decrease in interest income and yield on interest-earning assets;

 

·

realizing credits for loan losses of $524 thousand related to a settlement reached by ECCU with a title company in connection with a title claim on one of our impaired loans in which we held a 64.8% loan participation interest;

 

·

an increase in non-interest income of $497 thousand due to increases in fees generated by our subsidiary, MP Securities, gains on loan sales and additional servicing fee income related to loan participations sold during 2014 and 2015;

 

·

a $473 thousand increase in salary and benefits expenses due to hiring three new lending staff to assist in originating and servicing loans, a new administrative staff person for MP Securities, a new sales representative for MP Securities, as well as $222 thousand accrued in severance payments resulting from our former CEO’s retirement;

 

·

the amendment to our credit facility arrangements reached with the NCUA which relaxed our required minimum collateralization ratio and allowed us to pledge cash rather than make principal paydowns on our borrowings, which stabilized our liquidity and facilitated a substantial improvement in both the funding of loans and sale of loan participations in the fourth quarter;

 

·

the registration of our Class 1 Notes with the U.S. Securities and Exchange Commission after the expiration of our Class A Notes offering, enabling us to continue to offer debt securities to our clients and maintain a key source of financing;

 

52


 

·

a $388 thousand increase in commissions and fees generated by our broker-dealer subsidiary through the hire of new sales representatives over the last two years and networking agreements reached with ECCU and ACCU;

 

·

a $109 thousand increase in other lending income from the expansion of our portfolio of mortgage loans we service and sale of $6.1 million in loan participations;

 

·

$2.4 million less in net foreclosed asset expenses due to large provisions taken in 2014;

 

·

net gains from foreclosed assets of $20 thousand, including taking $260 thousand in provisions for losses on foreclosed assets which were offset by $271 thousand in credits for losses on foreclosed assets;

 

·

the reduction in legal and consulting fees as we completed our Class 1 Notes offering, finalized our amended agreement with the NCUA, and reduced our reliance on outside consultants to handle compliance matters at our broker-dealer subsidiary; and

 

·

an increase in operations expenses due to the increased activity of our broker-dealer subsidiary, and increases in lending, human resources, and insurance costs.

 

If we are able to continue to implement the strategic plans and objectives outlined above, we expect to increase the core earnings on our total assets and improve the performance of our wholly-owned broker-dealer and investment advisory firm, MP Securities.  We do not expect to incur losses on our foreclosed assets in 2016 due to the fact that, as of the date of this Report, we have disposed of all but one of our real estate owned assets.  We also expect to see further improvements in the quality of our mortgage loan investments as we replace our foreclosed properties and impaired loans with high quality mortgage loans receivable that we originate and service and as we continue to implement our transition to a more fully diversified financial services firm.

 

Financial Condition

 

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

 

Our total assets as of December 31, 2015 decreased to $149.1 million, as compared to $153.9 million at December 31, 2014.  Our total liabilities were $141.0 million at December 31, 2015, as compared to $145.9 million at December 31, 2014. 

 

53


 

The following table sets forth selected measures of our financial performance for the years ended December 31, 2015 and 2014, respectively (dollars in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2015

 

2014

 

 

 

 

 

 

 

Total income

 

$

8,054 

 

$

9,086 

Provision (credit) for loan losses

 

 

(524)

 

 

252 

Provision for losses on foreclosed assets

 

 

(11)

 

 

2,431 

Net loss

 

 

357 

 

 

(1,895)

Total assets

 

 

149,144 

 

 

153,895 

Borrowings from financial institutions

 

 

90,237 

 

 

93,880 

Notes payable

 

 

49,915 

 

 

49,914 

Total equity

 

 

8,158 

 

 

7,950 

 

 

2015 Developments

 

Performance of Loan Portfolio.  Despite liquidity issues throughout 2014 that forced us to slow down our origination process for the first part of 2015, we originated $26.7 million in net loans during the year and rolled over $6.4 million of mortgage loans that matured in 2015While our average loan balance in 2015 showed a significant decrease when compared to 2014, our total outstanding loans were $136.4 million at December 31, 2015, up from $135.4 million at December 31, 2014. 

 

As part of our strategic decision to reposition our loan portfolio, we are focusing on originating lower balance loans made to ministries where we can achieve more favorable yields and avoid deteriorating our margins while reducing overall risk exposure to any one borrower.  However, we also have originated larger loans when we are able to find participants to purchase a percentage of the loan.  This generates servicing fee income while allowing us to minimize our risk exposure on the loan. Our average net loan balance decreased from $970 thousand at December 31, 2014 to $928 thousand at December 31, 2015Over the past few years, we have substantially expanded our relationships with credit unions throughout the United States and believe these relationships will enable us to increase the amount of loan participation interests we hold.

 

The careful management of our mortgage portfolio, especially in regard to our impaired loans, has resulted in a decrease in our delinquency ratio from 3.0% at December 31, 2013 to 1.4% at December 31, 2014 and then further to 0.8% at December 31, 2015.  As further evidence of improving conditions of our loan portfolio, our investment in non-performing loans has decreased from $18.9 million at December 31, 2013 to $12.0 million at December 31, 2014 and then to $11.9 million at December 31, 2015. We had three loans that were restructured in prior years default during in 2015; however, we have been able to work with each borrower to restructure these loans and we do not anticipate initiating foreclosure proceedings.  We had one loan that had not been previously restructured default during the year.  In addition, ECCU

54


 

reached a settlement agreement with a title insurance company regarding a title claim made in connection with a foreclosure action filed on a mortgage loan in which we held a 64.8% loan participation interest.  As a result of this settlement, we were able to remove it from our portfolio, recovering $190 thousand in previously taken loan loss provisions in the transaction

 

Foreclosed Asset Transactions.    At the beginning of 2015, we had seven foreclosed assets, six of which were managed by ECCU and in which we owned a partial investment.  Four of those properties were related to one loan made to a borrower in Rockford, Illinois.  We sold three of those properties during the year, realizing $132 thousand in gains on two of the properties.  Due to difficulties in marketing the third parcel, we recorded $182 thousand in provisions for losses on foreclosed assets prior to selling it for no gain.  Management determined that the fourth property acquired in the Rockford foreclosure action was unmarketable and we recorded $78 thousand in additional provisions for losses prior to writing it off completely effective as of December 31, 2015.

 

ECCU reached a selling agreement in December 2015 to sell one of our remaining properties in Palm Beach County, Florida in which we held an ownership interest.  The price agreed upon allowed us to reduce our valuation allowance on that property by $271 thousand.  The sale transaction closed in March 2016.  ECCU also reached an agreement to sell another of the properties in which we owned an interest in a real estate owned asset in Fort Worth, Texas.  This sale closed on March 4, 2016.  We recognized a gain of $223 thousand on the sale of this property.  Finally, we completed a transaction in January 2016 to dispose of a parcel of vacant land in Santa Clarita, California, which was a foreclosed asset by transferring ownership of the property to a real estate joint venture.  See “Item 2, Properties” on page 45 of this Report.  Our investment in the joint venture is $900 thousand, which is equal to the net investment we carried in the property at December 31, 2015.  As of the date of this Report, we hold one real estate owned asset but it has been written down to a balance of $0.

 

Enhancing our Capital Funding Sources.  Since 2008, we have primarily relied upon institutional credit facilities to generate the capital sources needed to fund our mortgage loan investments.  Our credit facility financing arrangements enabled us to rapidly increase our mortgage loan investments and benefit from favorable net interest rate margins on our mortgage loan investments.  With the advent of the global credit crisis that commenced in 2008, our major institutional credit facility lenders sought to reduce their exposure on these facilities, thereby requiring us to undertake efforts to deleverage our balance sheet.  While the refinancing transactions we entered into on November 4, 2011 with the NCUA to amend our Members United and WesCorp credit facilities have significantly contributed to our return to sustained profitability, these refinancing transactions are not sources of new funding and do not provide the resources we need to grow our business.

 

Over the past six years, the Company’s institutional credit facility has been reduced by $35.5 million and our investor debt securities have been reduced from $69.5 million at December 31, 2009 to $49.9 million at December 31, 2015.  While the Company does not expect to fully replace these sources of capital, we believe that we have created the capacity to originate, underwrite and service a larger quantity of mortgage loans and have developed new relationships that will enable us to sell loan participations and effectively leverage our capital assets in a

55


 

profitable manner.  During 2015, we continued our loan participation sales strategy and closed $6.1 million in new loan participation sales for the year.  Due to high cash balances at the beginning of the year, we did not pursue as many participation sales opportunities throughout the year.  Assuming our liquidity sources of capital remain intact, we  intend to increase our relationships with other credit unions and CUSOs to sell as much as 90% of each loan we originate and use these funds to originate additional loans.  We anticipate continuing this practice in the future to fund new loans.

 

A majority of the products sold by MP Securities consist of our debt securities.  During 2015, MP Securities sold $20.7 million of our publicly and privately offered debt securitiesIn January 2015, we registered $80 million of our Class 1 Notes pursuant to a Registration Statement filed with the SEC.  With this new Registration Statement, the Class 1 Notes replaced our Class A Notes.  On January 15, 2015, we also began to sell our Secured Investment Notes pursuant to a private placement memorandum under the provisions of Rule 506 promulgated under the Securities Act of 1933, as amended.  With the Company’s publicly and privately offered debt securities, along with sales networking agreements reached with ECCU and ACCU, we believe we have developed a viable program to offer debt securities for purchase by individuals, churches, institutional investors and as IRA type of investments to an expanded group of potential investors.  As a result of cultivating relationships with credit unions and other organizations, we believe that we will be able to increase the amount of our proprietary securities and non-proprietary securities products we sell to investors in 2016.

 

Diversify Our Revenue Sources.  Since inception, our primary source of revenue has come from the net interest margin we earn on our mortgage loan investments.  After the financial crisis of 2008 and a resulting lack of liquidity in credit markets, we deleveraged our balance sheet, which reduced the net interest income we receive on our investments.  In response to these developments, over the past several years we have undertaken efforts to expand the scope of revenue generating services we offer in an effort to make us less dependent on a favorable net interest rate margin from our mortgage loan investments to make the Company less susceptible to unfavorable changes in interest rates.  Because we possess the capability to service our own loans, we have significantly increased the portion of our wholly-owned loan portfolio that we service ourselves, thereby reducing the costs of third party servicers and increasing net interest earned on those loans.   We now service 137 of the 147 loans in our portfolio.  Our loan participation activity increased our revenue from loan servicing by $59 thousand in 2015 as compared to 2014. We expect this revenue to grow further in 2016 as a result of loan participation sales we have entered into over the past two years.  We also continue to develop relationships with credit unions and CUSOs to enhance our capacity to sell additional loan participations into the secondary market for these participation interests.

 

In 2011, our wholly-owned subsidiary, MP Securities, was registered under the Securities Exchange Act of 1934 and was approved for membership by FINRA.  In the first quarter of 2012, MP Securities launched its broker-dealer operations and began its efforts to develop a sales force of registered representatives dedicated to the distribution of our debt securities.  Effective as of September 24, 2012, MP Securities received approval to sell our Class A Notes offered under a Registration Statement that was declared effective by the SEC on October 11, 2012.  In March of 2013, MP Securities began selling our Series 1 Subordinated Capital Notes and 2013

56


 

International Notes in private offerings, thus opening up additional securities products to enable us to reduce the dependence on institutional credit facilities.  In January 2015, MPS received approval to sell our Class 1 Notes offered under a Registration Statement that was declared effective by the SEC on January 6, 2015.

 

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

 

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

 

MP Securities has also entered into networking agreements with our largest equity owner, ECCU and America’s Christian Credit Union, a Glendora, California based credit union, whereby those credit unions may refer their members to MPS Securities for investment services, insurance services, and financial planning assistance.  As part of this arrangement, MP Securities remits a portion of the gross commission received on any transactions consummated as a result of the relationships.  These arrangements have been beneficial to MP Securities in expanding its client base, further enabling us to offer Company debt securities to new investors and, we believe, should continue to lead to new sales opportunities.

 

By increasing the scope of the services it can offer and entering into networking arrangements with credit unions, MP Securities has been able to recruit a sales force of registered representatives dedicated to managing our clients’ wealth in a manner consistent with the principles of Biblical stewardship, and act as a selling agent in the distribution of our debt securities.  In 2015, MP Securities’ marketing and sales efforts resulted in an increase in fee and commission revenue of $388 thousand.  If MP Securities continues to successfully implement its strategy, we will be able to (i) strengthen the profitability of our core operations; (ii) grow our balance sheet and ramp up the origination of profitable mortgage loans; (iii) introduce new

57


 

clients to our proprietary investment products and address the challenges we have faced with the overconcentration and suitability standards imposed on the sale of our publicly offered debt securities by regulatory authorities; (iv) increase fee income from assets under management; (v) improve client and investor retention and the renewal rate of our debt securities investors; and (vi) leverage the experience and intellectual capital of our management team through increased loan origination fees and servicing income.

 

Significant Accounting Estimates and Critical Accounting Policies

 

Critical Accounting Policies

 

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

 

Valuation of Loans

 

All of our loans are held for investment and are carried at their recorded balance, less an allowance for loan losses and loan discount, and adjusted for deferred loan fees and costs.  We defer loan origination fees and costs and recognize those amounts as an adjustment to the related loan yield on the asset using the interest method.  Loan discounts reflect an offset against accrued interest that has been added to a loan balance under a restructuring arrangement.  They also represent the difference between the purchase price of a loan and the loan balance when a loan is purchased at a discount.  Loan discounts are accreted to interest income as a yield adjustment using the interest method.  Loan discounts on impaired loans are not accreted into income until repayment of the loan is reasonably assured.

 

Allowance for Loan Losses and Allowance for Losses on Foreclosed Assets

 

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

58


 

collateral-dependent loans, or 2) the present value of expected cash flows for non-collateral-dependent impaired loans.

 

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

 

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

 

Recent Accounting Pronouncements

 

In January 2016, Financial Accounting Standards Board ("FASB") issued Accounting Standards Update (ASU) 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities. ASU 2016-01 requires equity investments to be measured at fair value with changes in fair value recognized in net income; simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment; eliminates the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet; requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes; requires an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments; requires separate presentation of financial assets and financial liabilities by measurement category and form of financial assets on the balance sheet or the accompanying notes to the financial statements and clarifies that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity’s other deferred tax assets. ASU 2016-01 is effective for financial statements issued for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. The Company

59


 

is currently evaluating the impact that ASU 2016-01 will have on its statement of financial position or financial statement disclosures.

 

ASU 2014-09 Revenue from Contracts with Customers (Topic 606) provides a robust framework for addressing revenue recognition issues and, upon its effective date, replaces almost all existing revenue recognition guidance, including industry-specific guidance, in current U.S. GAAP. The revenue recognition policies of almost all entities will be affected by the new guidance in the ASU. For public business entities, the guidance is effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. The Company is currently evaluating the impact that ASU 2016-01 will have on its statement of financial position or financial statement disclosures.

 

ASU 2014-15, Presentation of Financial Statements—Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern provides guidance about management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and to provide related footnote disclosures. ASU 2014-15 is effective for annual periods ending after December 15, 2016, and for interim periods within annual periods beginning after December 15, 2016. The Company is currently evaluating the impact that ASU 2016-01 will have on its statement of financial position or financial statement disclosures.

 

ASU 2014-16, Derivatives and Hedging (Topic 815): Determining Whether the Host Contract in a Hybrid Financial Instrument Issued in the Form of a Share Is More Akin to Debt or to Equity (a consensus of the FASB Emerging Issues Task Force) clarifies how current U.S. GAAP should be interpreted in subjectively evaluating the economic characteristics and risks of a host contract in a hybrid financial instrument that is issued in the form of a share. Public business entities are required to implement the new requirements in fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. The Company is currently evaluating the impact that ASU 2016-01 will have on its statement of financial position or financial statement disclosures.

 

ASU 2015-01, Income Statement—Extraordinary and Unusual Items (Subtopic 225-20): Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items eliminates the concept of extraordinary items, but retains the presentation and disclosure guidance for items that are unusual in nature or infrequently occurring and expands the guidance to include items that are both unusual in nature and infrequently occurring. The ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. The Company is currently evaluating the impact that ASU 2016-01 will have on its statement of financial position or financial statement disclosures.

 

ASU 2015-02, Consolidation (Topic 810): Amendments to the Consolidation Analysis made certain targeted revisions to various areas of the consolidation guidance, including the determination of the primary beneficiary of an entity, among others. The ASU is effective for public business entities for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2015. The Company is currently evaluating the impact that ASU 2016-01 will have on its statement of financial position or financial statement disclosures.

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ASU 2015-03, Interest—Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Cost requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. Public companies must apply the new requirements in fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. The Company is currently evaluating the impact that ASU 2016-01 will have on its statement of financial position or financial statement disclosures.

 

ASU 2015-05, Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement helps customers determine whether a cloud computing arrangement includes a software license. For public business entities, the ASU should be applied in annual periods, including interim periods within those annual periods, beginning after December 15, 2015. The Company is currently evaluating the impact that ASU 2016-01 will have on its statement of financial position or financial statement disclosures.

 

ASU 2015-16, Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments simplifies the accounting for adjustments made to provisional amounts recognized in a business combination. For public business entities, the ASU is effective for fiscal years beginning after December 15, 2015, including interim periods within those fiscal years. The Company is currently evaluating the impact that ASU 2016-01 will have on its statement of financial position or financial statement disclosures.

 

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Consolidated Financial Condition and Results of Operations

 

Our Balance Sheet for the Years Ended December 31, 2015 and 2014

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comparison

 

 

2015

 

2014

 

$ Difference

 

% Difference

 

 

(Audited) 

 

(Audited) 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

Cash

 

$

11,645 

 

$

17,251 

 

$

(5,606)

 

 

(32%)

Loans receivable, net of allowance for loan losses of $1,785 and $2,454 as of December 31, 2015 and 2014, respectively

 

 

132,932 

 

 

131,586 

 

 

1,346 

 

 

1%

Accrued interest receivable

 

 

545 

 

 

562 

 

 

(17)

 

 

(3%)

Property and equipment, net

 

 

58 

 

 

87 

 

 

(29)

 

 

(33%)

Debt issuance costs, net

 

 

122 

 

 

112 

 

 

10 

 

 

9%

Foreclosed assets, net

 

 

3,486 

 

 

3,931 

 

 

(445)

 

 

(11%)

Other assets

 

 

356 

 

 

366 

 

 

(10)

 

 

(3%)

Total assets

 

$

149,144 

 

$

153,895 

 

$

(4,751)

 

 

(3%)

Liabilities and members’ equity

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

NCUA credit facilities

 

$

90,237 

 

$

93,880 

 

$

(3,643)

 

 

(4%)

Notes payable

 

 

49,915 

 

 

49,914 

 

 

 

 

0%

Accrued interest payable

 

 

141 

 

 

159 

 

 

(18)

 

 

(11%)

Other liabilities

 

 

693 

 

 

1,992 

 

 

(1,299)

 

 

(65%)

Total liabilities

 

 

140,986 

 

 

145,945 

 

 

(4,959)

 

 

(3%)

Members' Equity:

 

 

 

 

 

 

 

 

 

 

 

 

Series A preferred units

 

 

11,715 

 

 

11,715 

 

 

--

 

 

--%

Class A common units    

 

 

1,509 

 

 

1,509 

 

 

--

 

 

--%

Accumulated deficit

 

 

(5,066)

 

 

(5,274)

 

 

208 

 

 

(4%)

Total members' equity

 

 

8,158 

 

 

7,950 

 

 

208 

 

 

3%

Total liabilities and members' equity

 

$

149,144 

 

$

153,895 

 

$

(4,751)

 

 

(3%)

 

GeneralThe $4.8 million decrease in total assets at December 31, 2015 as compared to December 31, 2014 is due primarily to regular principal payments made on our borrowings from financial institutions and the payment of a loan participant’s portion of a mortgage loan payoff that was accrued at December 31, 2014.  Due to liquidity concerns during 2014 and the first six months of 2015, we were forced to temporarily delay the funding of our lending pipeline and could not use the full capacity of our lending team to originate new loans.  Due to the lead time necessary to complete the underwriting and closing of a mortgage loan, it took several months in 2015 to restart the pipeline and begin originating and selling loans.  Because we were able to close several loans in the fourth quarter of 2015, our aggregate total loan balances at December 31, 2015 increased by $1.34 million as compared to 2014.  While the Company was unable to

62


 

generate substantial increases in the sale of its debt securities in 2015, we believe that this resulted, in part, from the Company’s net loss of $1.89 million which was reported for the year ending December 31, 2014 and its effect on potential investors.  We expect that note sales will increase in 2016 and allow us to increase our loan originations and sale of loan participations.

 

During the year ended December 31, 2015, gross loans receivable increased by $975 thousand, or 1%, to $136.4 million from $135.4 million at December 31, 2014.  We originated a total of $26.7 million in net loans receivable, which was mitigated by loan principal collections of $4.3 million. In addition, 12 mortgage loans totaling $15.8 million were paid off or were refinanced with another lender.  These payoffs represented both early payoffs of existing loans and non-renewals of maturing loans.  In many cases, non-renewals occur because a loan has fallen outside our lending policies and cannot be refinanced by us.  During 2015, we sold participations in eight loans to other credit unions for a net of $6.1 million. 

 

Our mortgage loan portfolio consists entirely of loans made to evangelical churches and ministries.  All but two of these loans are secured by real estate collateral, while two loans that represent less than 0.1% of our portfolio are unsecured.  Our portfolio carried a weighted average interest rate of 6.33% at December 31, 2015, as compared to 6.28% at December 31, 2014.

 

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

 

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

 

We had eight non-accrual loans with a recorded balance of $8.8 million as of December 31, 2015 and 2014.  Seven of these loans are considered collateral-dependent while one was reclassified to non-collateral-dependent during the year ended December 31, 2015 due to the performance of the borrower under a loan modification agreement.  During 2015, ECCU reached a settlement with a title company on a title claim made in connection with a foreclosure action on one of our non-accrual loans and we charged the loan off.  The Company had one additional loan that defaulted during the year which was restructured and put on non-accrual status. 

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During the third quarter of 2015, ECCU completed real estate purchase agreements on three properties in which we held a participation interest and had recorded as foreclosed assets.  For 2015, we recorded gains on sale of $132 thousand on two of these properties.  We recorded $182 thousand in provisions for loan losses on the third parcel prior to its sale.  We charged off $1.1 million in allowances for loan losses on foreclosed assets related to these sales.  In the fourth quarter of 2015, management determined that a fourth property in which we held an interest was unmarketable.  As a result, we recorded $78 thousand in provisions for losses on this property before writing it off completely.  We charged off $194 thousand in allowances for losses on this property.

 

The Company did not foreclose on any additional properties during 2015.  As of the date of this Report, the Company has disposed of all but one of its remaining foreclosed real estate assets.

 

The following table summarizes our non-performing assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-performing Assets

($ in thousands)

 

 

 

 

 

 

 

 

 

December 31, 2015

 

December 31, 2014

 

 

 

 

 

 

 

Non-Performing Loans:1

 

 

 

 

 

 

Collateral Dependent:

 

 

 

 

 

 

Delinquencies over 90-Days

 

$

--

 

$

751 

Troubled Debt Restructurings2

 

 

6,951 

 

 

6,689 

Other Impaired Loans

 

 

--

 

 

--

Total Collateral Dependent Loans

 

 

6,951 

 

 

7,440 

Non-Collateral Dependent:

 

 

 

 

 

 

Delinquencies over 90-Days

 

 

--

 

 

--

Troubled Debt Restructurings

 

 

4,941 

 

 

4,546 

Total Non-Collateral Dependent Loans

 

 

4,941 

 

 

4,546 

Loans 90 Days past due and still accruing

 

 

--

 

 

--

Total Non-Performing Loans

 

 

11,892 

 

 

11,986 

Foreclosed Assets

 

 

3,486 

 

 

3,931 

Total Non-performing Assets

 

$

15,378 

 

$

15,917 

 

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

2  Includes $1.1 million of restructured loans that were over 90 days delinquent as of December 31, 2015 and 2014.

 

64


 

At December 31, 2015, the Company held had nine restructured loans, eight of which were on non-accrual status.  One of these loans was over 90 days delinquent.   For all nine of the restructured loans in our portfolio at December 31, 2015, unpaid accrued interest at the time of the loan restructure was added to the principal balance of the loan.  The amount of interest added was also recorded as a loan discount, which did not increase the net loan balance.  In addition, for each of the nine restructured loans, the interest rate was temporarily decreased and the payments were restructured to a weekly basis from a monthly basis.  Each borrower involved in a troubled debt restructuring was experiencing financial difficulties at the time the loan restructured. As of December 31, 2015, we held four foreclosed real properties with a net value of $3.5 million, which includes $1.1 million in valuation allowances against the properties.  Effective as of December 31, 2015, one of the foreclosed properties has been written off.

 

At December 31, 2014, we had seven restructured loans that were on non-accrual status.  One of these loans was over 90 days delinquent.  We had one non-restructured loan that was over 90 days past due.  As of December 31, 2014, we held seven foreclosed real properties in the amount of $3.9 million, net of $2.4 million in valuation allowances against the properties.

 

Allowance for Loan LossesWe 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.

65


 

 

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.

 

In June 2014, we made adjustments to the reserves on several of our impaired loans based on updated collateral valuations as compared to our recorded investment in the loans.  We charged off a $465 thousand reserve taken on one of our impaired loans and recorded $119 thousand in additional reserves due to foreclosure actions or principal write-downs on some of our non-performing loans.  We also reclassified $54 thousand in reserves related to a troubled debt restructuring to loan discounts when management determined that the loan was no longer impaired based on its historical performance and analysis of its future performance.  This discount will be amortized into interest income over the remaining life of the loan.  We also recorded $40 thousand in additional general reserves throughout 2014.

 

In September 2015, ECCU reached a settlement with a title company on a loan in which we held a 64.8% loan participation interest in connection with a foreclosure action on a mortgage loan.  As a result of the settlement agreement, we were able to reverse $190 thousand in specific reserves previously recorded on this loan. We also charged off $143 thousand in allowances related to the loan.  After charging it off, we also recovered $20 thousand in foreclosure related costs that were reimbursed to us.  Due to the performance of the borrower of one of our other impaired loans, we reclassified the loan from collateral-dependent to non-collateral-dependent.  As a result of this reclassification, we changed our reserve method on this loan from using the difference between the discounted collateral value and our investment in the loan to using the difference between the net present value of expected future cash flows on the loan and our investment.  With this change in the method we use to establish a reserve on this loan investment, we were able to record $400 thousand in credits for loan losses previously taken. In addition, we recorded specific reserves on several other loans which we restructured during the year.

 

66


 

The process of providing adequate allowance for loan losses involves management estimates and, as a result, future losses may differ from current estimates.  We have attempted to maintain the allowance at a level which compensates for losses that may arise from unknown conditions.  At December 31, 2015 and December 31, 2014, the allowance for loan losses was $1.8 million and $2.5 million, respectively.  This represented 1.3% and 1.8% of our gross loans receivable at those respective dates. 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for Loan Losses

 

 

 

as of and for the

 

 

 

 

 

 

 

 

 

 

 

 

Year Ended

 

 

Year Ended

 

 

 

December 31,

 

 

December 31,

 

 

 

2015

 

 

2014

 

Balances:

 

($ in thousands)

 

Average total loans outstanding during period

 

$

131,880 

 

 

$

145,002 

 

Total loans outstanding at end of the period

 

$

136,376 

 

 

$

135,401 

 

Allowance for loan losses:

 

 

 

 

 

 

 

 

Balance at the beginning of period

 

$

2,454 

 

 

$

2,856 

 

Provision (credit) charged to expense

 

 

(524)

 

 

 

252 

 

Charge-offs

 

 

 

 

 

 

 

 

Wholly-Owned First

 

 

40 

 

 

 

584 

 

Wholly-Owned Junior

 

 

--

 

 

 

--

 

Participation First

 

 

103 

 

 

 

54 

 

Participation Junior

 

 

--

 

 

 

--

 

Total

 

 

143 

 

 

 

638 

 

Recoveries

 

 

 

 

 

 

 

 

Wholly-Owned First

 

 

--

 

 

 

--

 

Wholly-Owned Junior

 

 

--

 

 

 

--

 

Participation First

 

 

(20)

 

 

 

--

 

Participation Junior

 

 

--

 

 

 

--

 

Total

 

 

(20)

 

 

 

--

 

 

 

 

 

 

 

 

 

 

Net loan charge-offs

 

 

123 

 

 

 

638 

 

Accretion of allowance related to restructured loans

 

 

22 

 

 

 

16 

 

 

 

 

 

 

 

 

 

 

Balance

 

$

1,785 

 

 

$

2,454 

 

 

 

 

 

 

 

 

 

 

Ratios:

 

 

 

 

 

 

 

 

Net loan charge-offs to average total  loans

 

 

0.09 

%

 

 

0.44 

%

Provision (credit) for loan losses to average total loans1

 

 

(0.40)

%

 

 

0.17 

%

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

 

 

1.31 

%

 

 

1.81 

%

Allowance for loan losses to non-performing  loans

 

 

15.01 

%

 

 

20.47 

%

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

 

 

6.89 

%

 

 

26.00 

%

Net loan charge-offs to provision (credit) for loan losses

 

 

(23.47)

%

 

 

253 

%

 

67


 

NCUA Credit Facilities.  The decrease in NCUA credit facilities is the result of $3.6 million in regular monthly payments we made on our NCUA credit facilities. We did not make any additional principal payments during the year.  The remaining balance on these facilities totals $90.2 million and bears interest at a rate of 2.525% pursuant to agreements entered into with the NCUA in November 2011.  The maturity date for both facilities is October 31, 2018.  For further discussion concerning our borrowings and credit facilities see Item 7, “Credit Facility Borrowings”.

 

Notes Payable.  Our notes payable consist of debt securities sold under publicly offered debt securities offerings as well as notes sold to accredited investors in private offerings.  Sales of the Company’s  notes are now being handled by our wholly-owned subsidiary, MP Securities, which is a broker-dealer firm subject to regulation by FINRA, the SEC and applicable state regulatory authorities.  The principal balance owed on these notes increased by $1 thousand during 2015.  MP Securities continues to expand its operations and transition into a more diversified financial services firm.  We continue to market our debt securities to new clients as a result of additional sales representatives hired in the last two years and networking agreements reached with ECCU and ACCU.

 

Members’ Equity.  Total members’ equity increased in 2015 due mainly to our net income of $357 thousand, which was offset by $126 thousand of regular dividend payments and $23 thousand of net profit distributions declared on our Series A Preferred Units. We did not repurchase any ownership units during the years ended December 31, 2015 and 2014.

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Years ended

 

Comparison

 

 

December 31,

 

 

 

 

 

 

 

 

 

          

 

 

          

 

 

            

 

 

            

 

 

2015

 

2014

 

$ Difference

 

% Difference

Interest income:

 

 

 

 

 

 

 

 

 

 

 

 

Interest on loans

 

$

8,034 

 

$

9,044 

 

$

(1,010)

 

 

(11%)

Interest on interest-bearing accounts

 

 

20 

 

 

42 

 

 

(22)

 

 

(52%)

Total interest income

 

 

8,054 

 

 

9,086 

 

 

(1,032)

 

 

(11%)

Interest expense:

 

 

 

 

 

 

 

 

 

 

 

 

NCUA credit facilities

 

 

2,328 

 

 

2,466 

 

 

(138)

 

 

(6%)

Notes payable

 

 

1,787 

 

 

1,895 

 

 

(108)

 

 

(6%)

Total interest expense

 

 

4,115 

 

 

4,361 

 

 

(246)

 

 

(6%)

Net interest income

 

 

3,939 

 

 

4,725 

 

 

(786)

 

 

(17%)

Provision (credit) for loan losses

 

 

(524)

 

 

252 

 

 

(776)

 

 

(308%)

Net interest income after provision for loan losses

 

 

4,463 

 

 

4,473 

 

 

(10)

 

 

(0%)

Non-interest income:

 

 

 

 

 

 

 

 

 

 

 

 

Broker-dealer commissions and fees

 

 

525 

 

 

137 

 

 

388 

 

 

283%

Other lending income

 

 

307 

 

 

198 

 

 

109 

 

 

55%

Total non-interest income

 

 

832 

 

 

335 

 

 

497 

 

 

148%

Non-interest expenses:

 

 

 

 

 

 

 

 

 

 

 

 

Salaries and benefits

 

 

2,871 

 

 

2,397 

 

 

474 

 

 

20%

Marketing and promotion

 

 

104 

 

 

96 

 

 

 

 

8%

Office occupancy

 

 

142 

 

 

143 

 

 

(1)

 

 

(1%)

Office operations

 

 

1,293 

 

 

1,109 

 

 

184 

 

 

17%

Foreclosed assets, net

 

 

(20)

 

 

2,362 

 

 

(2,382)

 

 

(101%)

Legal and accounting

 

 

527 

 

 

584 

 

 

(57)

 

 

(10%)

Total non-interest expenses

 

 

4,917 

 

 

6,691 

 

 

(1,774)

 

 

(27%)

Income (loss) before provision for income taxes

 

 

378 

 

 

(1,883)

 

 

2,261 

 

 

(120%)

Provision for income taxes and state LLC fees

 

 

21 

 

 

12 

 

 

 

 

75%

Net income (loss)

 

$

357 

 

$

(1,895)

 

$

2,252 

 

 

(119%)

 

69


 

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

 

Reduction in Interest Income on Our Mortgage Loan Investments.

 

Interest income on our mortgage loan investments decreased by 11% in 2015 as compared to 2014.  This is consistent with the 12% decrease in average interest-earning loans from $136.7 million for the year ended December 31, 2014 to $121.0 million for the year ended December 31, 2015.  Although our average balances in interest-bearing accounts with other institutions increased by 72%, the interest income recognized on those accounts decreased by 52% as the rates earned on those accounts decreased.  We moved much of our cash from ECCU to other institutions to avoid concentration risk, but it decreased the yield we earned on our interest-bearing accounts.

 

Reduction in Net Interest Income.

 

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

 

Credits in Provisions for Loan Losses.

 

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

 

70


 

Improvements in Non-Interest Related Income.

 

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

 

Decline in Non-Interest Expense.

 

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

 

Reduction in Office, Marketing and Other Expenses.

 

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

 

71


 

Results of Operations for the Years Ended December 31, 2014 and December 31, 2013

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Years ended

 

Comparison

 

 

December 31,

 

 

 

 

 

 

 

 

 

          

 

 

          

 

 

            

 

 

            

 

 

2014

 

2013

 

$ Difference

 

% Difference

Interest income:

 

 

 

 

 

 

 

 

 

 

 

 

Interest on loans

 

$

9,044 

 

$

9,390 

 

$

(346)

 

 

(4%)

Interest on interest-bearing accounts

 

 

42 

 

 

83 

 

 

(41)

 

 

(49%)

Total interest income

 

 

9,086 

 

 

9,473 

 

 

(387)

 

 

(4%)

Interest expense:

 

 

 

 

 

 

 

 

 

 

 

 

Borrowings from financial institutions

 

 

2,466 

 

 

2,572 

 

 

(106)

 

 

(4%)

Notes payable

 

 

1,895 

 

 

2,030 

 

 

(135)

 

 

(7%)

Total interest expense

 

 

4,361 

 

 

4,602 

 

 

(241)

 

 

(5%)

Net interest income

 

 

4,725 

 

 

4,871 

 

 

(146)

 

 

(3%)

Provision for loan losses

 

 

252 

 

 

 

 

243 

 

 

2700%

Net interest income after provision for loan losses

 

 

4,473 

 

 

4,862 

 

 

(389)

 

 

(8%)

Non-interest income

 

 

335 

 

 

168 

 

 

167 

 

 

99%

Non-interest expenses:

 

 

 

 

 

 

 

 

 

 

 

 

Salaries and benefits

 

 

2,397 

 

 

2,563 

 

 

(166)

 

 

(6%)

Marketing and promotion

 

 

96 

 

 

114 

 

 

(18)

 

 

(16%)

Office occupancy

 

 

143 

 

 

140 

 

 

 

 

2%

Office operations

 

 

1,109 

 

 

1,146 

 

 

(37)

 

 

(3%)

Foreclosed assets, net

 

 

2,362 

 

 

(240)

 

 

2,602 

 

 

1084%

Legal and accounting

 

 

584 

 

 

699 

 

 

(115)

 

 

(16%)

Total non-interest expenses

 

 

6,691 

 

 

4,422 

 

 

2,269 

 

 

51%

Income (loss) before provision for income taxes

 

 

(1,883)

 

 

608 

 

 

(2,491)

 

 

(410%)

Provision for income taxes

 

 

12 

 

 

16 

 

 

(4)

 

 

(25%)

Net income (loss)

 

$

(1,895)

 

$

592 

 

$

(2,487)

 

 

(420%)

 

In 2014, we experienced a net loss of $1.9 million due in large part to an increase in provisions on foreclosed assets.  As further described below, the most significant factors influencing our consolidated results of operations for the year ended December 31, 2014, as compared to 2013 were:

 

·

Due to decreases in the collateral value of several of our foreclosed assets, we recorded valuation allowances totaling $2.4 million on six of the seven properties we own;

 

72


 

·

total interest income on our mortgage loan investments declined by $346 thousand in 2014 due to the reduction in our total mortgage loan assets, while our interest expense only decreased by $241 thousand as our average balances of borrowings and notes payable balance decreased during the year;

 

·

provisions for loan losses increased by $243 thousand as we recorded specific reserves on an impaired loan in our portfolio and increased general reserves;

 

·

non-interest income increased by $167 thousand due to increases in fee-generated income by our subsidiary, MP Securities, and gains on loan sale and additional servicing fee income related to loan participations sold during 2014;

 

·

despite hiring a new salesperson and administrative staffperson for our broker-dealer subsidiary, we had a 6% decrease in salary and benefits expenses primarily due to delayed staff hirings and completing severance payments made to our former Chief Executive Officer that were accrued in 2013;

 

·

we reduced office operations expense as we experienced decreases in non-personnel costs related to the management of our loan portfolio and in depreciation expense as many of our fixed assets have fully depreciated;

 

·

we earned $75 thousand in additional rental income on our real estate owned assets, and incurred $81 thousand less in expenses related to managing those properties;

 

·

gains on real estate owned asset sales decreased by $340 thousand as we only sold one property during 2014 for a gain of $5 thousand; and

 

·

our professional fees decreased as many of our legal fees in 2014 were related to the registration of our new Class 1 Note offering and were capitalized as debt issuance costs.

 

Interest income on our mortgage loan investments decreased by 4% in 2014, as compared to 2013.  This is consistent with the 3% decrease in average interest-earning loans from $140.4 million for the year ended December 31, 2013 to $136.7 million for the year ended December 31, 2014.  Although our average balances in interest-bearing accounts with other institutions only decreased by 6%, the interest income recognized on those accounts decreased by 49% as the rates earned on those accounts decreased.

 

Interest expense on our borrowings decreased during the year due to principal payments made on our NCUA borrowings.  While the balances of our investor notes increased from December 31, 2013 to December 31, 2014, the average balance decreased from the prior year and the average interest rates paid on our investor notes decreased as compared to 2013 as well, leading to a $135 thousand reduction in interest expense on our notes payable.  Our average borrowings from financial institutions decreased by $4.2 million from 2013 due to regular principal payments as well as $2.5 million of additional principal payments made during 2014.   Despite the 5% reduction in interest expense from 2013, the 4% decrease in interest income resulted in a 3% decrease in net interest income for the year.

73


 

 

We had provisions for loan losses of $9 thousand for the year ended December 31, 2013 as compared to provisions of $252 thousand for the year ended December 31, 2014. In 2014, we increased our general reserves by $40 thousand and recorded $465 thousand in specific reserves on an impaired loan.  However, we also reduced some of the specific reserves on other impaired loans as our investment in those loans decreased relative to the collateral value of the properties which served as collateral for the loan.  For 2013, we did not incur a material decrease in value of the real estate properties that secured our collateral-dependent impaired loans.  As a result, we recorded only $9 thousand in additional reserves for loan losses on these loans.  Due to provisions and reduced net interest income, our net interest income after provisions decreased by $389 thousand for 2014, as compared to the year ended December 31, 2013.

 

We received other income of $335 thousand in the year ended December 31, 2014 which is an increase of $167 thousand from the year ended December 31, 2013.  We recognized an additional $17 thousand in gains on loan sales related to the sale of participation interests in thirteen loans during the year ended December 31, 2014.  We recognized $45 thousand in additional servicing fee income as we increased the amount of loan participations we service for others during 2014.  We also earned $113 thousand in additional income in 2014 from advisory fees and commissions on the sale of investment products by our broker-dealer subsidiary.   

 

Our non-interest expenses for the year ended December 31, 2014 increased by $2.3 million from the year ended December 31, 2013. This is entirely related to $2.4 million in additional provisions for losses on foreclosed assets taken on one of our loan participation interests that was foreclosed on and became one of our real estate owned properties.  Outside of those provisions, non-interest expenses decreased by $149 thousand.  Salaries and benefits expenses decreased by $166 thousand. Despite hiring an additional salesperson in 2014 to expand our broker-dealer business, our salary and benefits costs decreased from last year as we incurred a one-time expense of $196 thousand in 2013 for salary related payments to our former Chief Executive Officer.  Bonuses approved by management decreased by $31 thousand from 2013.

 

Marketing and promotions expenses decreased by $18 thousand in 2014 as we relied more on our salespeople and did not participate in as many large marketing events as we did in 2013.  Legal and accounting expenses decreased by $115 thousand as we did not incur as many legal expenses related to our impaired loans.  We also incurred significant consulting expenses in 2013 related to the hiring of a new Chief Executive Officer which were not incurred in 2014. 

 

We recorded $2.4 million in provisions for losses on foreclosed assets in 2014 as a result of valuation allowances recorded against six of our properties.  We recorded $13 thousand in provisions for losses on foreclosed assets in the prior year.  However, our net income from managing the properties increased by $156 thousand from 2013 as we earned additional rental income while incurring fewer management costs.  During the year ended December 31, 2013, we recognized $345 thousand in gains from the sale of foreclosed assets compared to $5 thousand in gains on sale in 2014.

 

74


 

Net Interest Income and Net Interest Margin

 

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

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average Balances and Rates/Yields

 

 

For the Years Ended December 31,

 

 

(Dollars in Thousands)

 

 

2015

 

2014

 

 

Average Balance

 

Interest Income/ Expense

 

Average Yield/ Rate

 

Average Balance

 

Interest Income/ Expense

 

Average Yield/ Rate

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-earning accounts with other financial institutions

 

$

16,323 

 

 

$

20 

 

 

 

0.12 

%

 

$

9,467 

 

 

$

42 

 

 

 

0.44 

%

Interest-earning loans [1]

 

 

120,951 

 

 

 

8,034 

 

 

 

6.64 

%

 

 

136,699 

 

 

 

9,044 

 

 

 

6.62 

%

Total interest-earning assets

 

 

137,274 

 

 

 

8,054 

 

 

 

5.87 

%

 

 

146,166 

 

 

 

9,086 

 

 

 

6.22 

%

Non-interest-earning assets

 

 

11,918 

 

 

 

--

 

 

 

 

 

 

 

10,007 

 

 

 

--

 

 

 

 

 

Total Assets

 

 

149,194 

 

 

 

8,054 

 

 

 

5.40 

%

 

 

156,173 

 

 

 

9,086 

 

 

 

5.82 

%

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Public offering notes – Class A

 

 

33,291 

 

 

 

1,246 

 

 

 

3.74 

%

 

 

38,444 

 

 

 

1,470 

 

 

 

3.82 

%

Public offering notes – Class 1

 

 

6,474 

 

 

 

203 

 

 

 

3.14 

%

 

 

--

 

 

 

--

 

 

 

--

%

Public offering notes – Alpha Class

 

 

--

 

 

 

--

 

 

 

--

%

 

 

31 

 

 

 

--

 

 

 

0.65 

%

Special offering notes

 

 

3,252 

 

 

 

112 

 

 

 

3.44 

%

 

 

3,825 

 

 

 

161 

 

 

 

4.21 

%

International notes

 

 

146 

 

 

 

 

 

 

2.74 

%

 

 

377 

 

 

 

13 

 

 

 

3.45 

%

Subordinated notes

 

 

3,502 

 

 

 

166 

 

 

 

4.74 

%

 

 

5,049 

 

 

 

242 

 

 

 

4.79 

%

Secured notes

 

 

1,660 

 

 

 

56 

 

 

 

3.37 

%

 

 

306 

 

 

 

 

 

 

2.94 

%

NCUA credit facilities

 

 

92,191 

 

 

 

2,328 

 

 

 

2.53 

%

 

 

97,638 

 

 

 

2,466 

 

 

 

2.53 

%

Total interest-bearing liabilities

 

$

140,516 

 

 

$

4,115 

 

 

 

2.93 

%

 

$

145,670 

 

 

$

4,361 

 

 

 

2.99 

%

Net interest income

 

 

 

 

 

$

3,939 

 

 

 

 

 

 

 

 

 

 

$

4,725 

 

 

 

 

 

Net interest margin [2]

 

 

 

 

 

 

 

 

 

 

2.64 

%

 

 

 

 

 

 

 

 

 

 

3.03 

%

 

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

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

 

75


 

Average interest-earning assets decreased to $137.3 million during the year ended December 31, 2015, from $146.2 million, a decrease of $8.9 million or 6%. The average yield on these assets decreased to 5.87% for the year ended December 31, 2015 as compared to 6.22% for the year ended December 31, 2014.  The yield on interest-earning loans increased to 6.64% from 6.62% due to an increase in the weighted average interest rate of our loan portfolio from 6.28% to 6.33%.  The yield on our interest-earning accounts with other financial institutions decreased to 0.12% for the year ended December 31, 2015 as compared to 0.44% for the year ended December 31, 2014.  For cash management purposes and in an effort to decrease concentration risk, we transferred much of our cash to accounts that produce a lower yield.  In addition, our cash balances comprised a much larger portion of our interest-earning assets in 2015 as we decided to increase our efforts to fund loans in our pipeline in the second half of 2015 after experiencing liquidity issues for much of 2014 and the first six months of 2015.  This shift in cash balances, the comparatively larger proportion of cash, and the decrease in loan yield caused our yield on interest-earning assets to decline.  Due to these factors, the yield on all of our assets decreased by 42 basis points from 5.82% for the year ended December 31, 2014 to 5.40% for the year ended December 31, 2015.

 

Average interest-bearing liabilities, consisting primarily of investor notes and credit facility borrowings payable, decreased to $140.5 million during the year ended December 31, 2015, from $145.7 million during 2014. The average rate paid on these liabilities decreased to 2.93% for the year ended December 31, 2015, from 2.99% for 2014. The decrease in the rate paid on interest-bearing liabilities was the result of lower interest rates paid on our investor debt securities.  While LIBOR rates steadily increased in 2015, we eliminated a class of notes in our Class 1 Notes offering that paid higher than average rates.  The average rates paid on our notes decreased from 3.82% during the year ended December 31, 2014 to 3.70% for the year ended December 31, 2015. The interest rate on our NCUA borrowings is fixed at 2.525% until the facility matures in 2018.

 

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

76


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average Balances and Rates/Yields

 

 

For the Years Ended December 31,

 

 

(Dollars in Thousands)

 

 

2014

 

2013

 

 

Average Balance

 

Interest Income/ Expense

 

Average Yield/ Rate

 

Average Balance

 

Interest Income/ Expense

 

Average Yield/ Rate

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-earning accounts with other financial institutions

 

$

9,467 

 

 

 

42 

 

 

 

0.44 

%

 

$

10,044 

 

 

$

83 

 

 

 

0.83 

%

Interest-earning loans [1]

 

 

136,699 

 

 

 

9,044 

 

 

 

6.62 

%

 

 

140,363 

 

 

 

9,390 

 

 

 

6.69 

%

Total interest-earning assets

 

 

146,166 

 

 

 

9,086 

 

 

 

6.22 

%

 

 

150,407 

 

 

 

9,473 

 

 

 

6.30 

%

Non-interest-earning assets

 

 

10,007 

 

 

 

--

 

 

 

 

 

 

 

10,597 

 

 

 

--

 

 

 

--

 

Total Assets

 

 

156,173 

 

 

 

9,086 

 

 

 

5.82 

%

 

 

161,004 

 

 

 

9,473 

 

 

 

5.88 

%

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Public offering notes – Class A

 

 

38,444 

 

 

 

1,470 

 

 

 

3.82 

%

 

 

38,071 

 

 

 

1,550 

 

 

 

4.07 

%

Public offering notes – Alpha Class

 

 

31 

 

 

 

 

 

 

0.65 

%

 

 

776 

 

 

 

29 

 

 

 

3.74 

%

Special offering notes

 

 

3,825 

 

 

 

161 

 

 

 

4.21 

%

 

 

7,191 

 

 

 

339 

 

 

 

4.71 

%

International notes

 

 

377 

 

 

 

13 

 

 

 

3.45 

%

 

 

386 

 

 

 

13 

 

 

 

3.37 

%

Subordinated notes

 

 

5,049 

 

 

 

242 

 

 

 

4.79 

%

 

 

1,996 

 

 

 

94 

 

 

 

4.71 

%

Secured notes

 

 

306 

 

 

 

 

 

 

2.94 

%

 

 

168 

 

 

 

 

 

 

2.98 

%

NCUA credit facilities

 

 

97,638 

 

 

 

2,466 

 

 

 

2.53 

%

 

 

101,866 

 

 

 

2,572 

 

 

 

2.53 

%

Total interest-bearing liabilities

 

$

145,670 

 

 

$

4,361 

 

 

 

2.99 

%

 

$

150,454 

 

 

$

4,602 

 

 

 

3.06 

%

Net interest income

 

 

 

 

 

$

4,725 

 

 

 

 

 

 

 

 

 

 

$

4,871 

 

 

 

 

 

Net interest margin [2]

 

 

 

 

 

 

 

 

 

 

3.03 

%

 

 

 

 

 

 

 

 

 

 

3.03 

%

 

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

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

 

Average interest-earning assets decreased to $146.2 million during the year ended December 31, 2014, from $150.4 million, a decrease of $4.2 million or 3% at December 31, 2013. The average yield on these assets decreased to 6.22% for the year ended December 31, 2014 from 6.30% for the year ended December 31, 2013.  The yield on interest-earning loans decreased to 6.62% from 6.69% due to a $66 thousand decrease in accretion of allowances related to restructured loans and a decrease in the weighted average interest rate of our loan portfolio from 6.33% to 6.28%.  The yield on our interest-earning accounts with other financial institutions decreased to 0.44% for the year ended December 31, 2014 as compared to 0.83% for the year ended December 31, 2013.  For cash management purposes, we transferred much of our cash to accounts that produce a lower yield.  This shift in cash balances and the decrease in loan yield caused our yield on interest-earning assets to decline.  However, due to the decrease in average non-interest-earning

77


 

assets, the yield on all of our assets only decreased by 6 basis points from 5.88% for the year ended December 31, 2013 to 5.82% for the year ended December 31, 2014.

 

Average interest-bearing liabilities, consisting primarily of investor and credit facility notes payable, decreased to $145.7 million during the year ended December 31, 2014, from $150.5 million during 2013. The average rate paid on these liabilities decreased to 2.99% for the year ended December 31, 2014, from 3.06% for 2013. The decrease in the rate paid on interest-bearing liabilities was the result of lower interest rates paid on our investor debt securities.  The decrease in LIBOR rates for most of 2014 as compared to 2013 had a significant effect on the rates paid on our publicly offered debt securities.  The average rates paid on these notes decreased from 4.07% during the year ended December 31, 2013 to 3.82% for the year ended December 31, 2014. The interest rate on our NCUA borrowings is fixed at 2.525% until the facility matures in 2018.

 

Net interest income for the year ended December 31, 2014 was $4.7 million, which was a decrease of $146 thousand, or 3%, from the prior year. Net interest margin remained at 3.03% for the year ended December 31, 2014 as compared to the year ended December 31, 2013.

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Rate/Volume Analysis of Net Interest Income

 

 

 

 

 

 

Year Ended December 31, 2015 vs. 2014

 

 

Increase (Decrease) Due to Change in

 

 

Volume

 

Rate

 

Total

 

 

(Dollars in Thousands)

 

 

 

 

 

 

 

 

 

 

Increase (Decrease) in Interest Income:

 

 

 

 

 

 

 

 

 

Interest-earning account with other financial institutions

 

$

19 

 

$

(41)

 

$

(22)

Total loans

 

 

(839)

 

 

(171)

 

 

(1,010)

 

 

 

(820)

 

 

(212)

 

 

(1,032)

Increase (Decrease) in Interest Expense:

 

 

 

 

 

 

 

 

 

Public offering notes – Class A

 

 

(193)

 

 

(31)

 

 

(224)

Public offering notes – Class 1

 

 

203 

 

 

--

 

 

203 

Public offering notes – Alpha Class

 

 

--

 

 

--

 

 

--

Special offering notes

 

 

(22)

 

 

(27)

 

 

(49)

International notes

 

 

(7)

 

 

(2)

 

 

(9)

Subordinated notes

 

 

(73)

 

 

(3)

 

 

(76)

Secured notes

 

 

46 

 

 

 

 

47 

NCUA credit facilities

 

 

(138)

 

 

--

 

 

(138)

 

 

 

(184)

 

 

(62)

 

 

(246)

Change in net interest income

 

$

(636)

 

$

(150)

 

$

(786)

 

 

 

 

 

 

 

 

 

 

78


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Rate/Volume Analysis of Net Interest Income

 

 

 

 

 

 

Year Ended December 31, 2014 vs. 2013

 

 

Increase (Decrease) Due to Change in

 

 

Volume

 

Rate

 

Total

 

 

(Dollars in Thousands)

 

 

 

 

 

 

 

 

 

 

Increase (Decrease) in Interest Income:

 

 

 

 

 

 

 

 

 

Interest-earning account with other financial institutions

 

$

(5)

 

$

(36)

 

$

(41)

Total loans

 

 

(263)

 

 

(83)

 

 

(346)

 

 

 

(268)

 

 

(119)

 

 

(387)

Increase (Decrease) in Interest Expense:

 

 

 

 

 

 

 

 

 

Public offering notes – Class A

 

 

15 

 

 

(95)

 

 

(80)

Public offering notes – Alpha Class

 

 

(16)

 

 

(13)

 

 

(29)

Special offering notes

 

 

(145)

 

 

(33)

 

 

(178)

International notes

 

 

--

 

 

--

 

 

--

Subordinated notes

 

 

147 

 

 

 

 

148 

Secured notes

 

 

 

 

--

 

 

NCUA credit facilities

 

 

(107)

 

 

 

 

(106)

 

 

 

(102)

 

 

(139)

 

 

(241)

Change in net interest income

 

$

(166)

 

$

20 

 

$

(146)

 

Credit Quality and Allowance for Loan Losses

 

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

 

The allowance for loan losses decreased from $2.5 million at December 31, 2014 to $1.8 million at December 31, 2015.  As previously enumerated, several factors led to the decrease in the balance of our allowance for loan losses for the year ended December 31, 2015.  We reversed $190 thousand in specific reserves previously recorded on one of our impaired loans.  We also charged off $103 thousand related to that loan when ECCU, the lead lender on the loan, reached a settlement agreement with the title company related to a title claim made under the policy.  We held a 64.8% loan participation interest in this mortgage loan.  We also charged off an additional $40 thousand related to an agreement entered into on one of our impaired loans.  We reversed $400 thousand in reserves we had taken on a loan when we determined that its impairment status

79


 

had changed.  In this instance, we entered into a modification agreement with the borrower and the borrower has continued to meet its obligations under this agreement.  We accreted $22 thousand to income on troubled debt restructurings as the present value of the loans changed with the passage of time.  Finally, we recorded $86 thousand in additional provisions, mainly related to increasing the principal balance of impaired loans that we restructured during the year; these provisions were related to cash advanced on these loans to assist the ministries and not to any interest or late fees capitalized on the loans.  A discount is recorded to offset those amounts.    

 

The activity in the allowance for loan losses for the years ended December 31, 2015 and 2014 was as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2015

 

2014

 

 

 

 

 

 

 

Balance, beginning of period

 

$

2,454 

 

$

2,856 

Provision (credit) for loan loss

 

 

(524)

 

 

252 

Chargeoffs

 

 

(143)

 

 

(584)

Recoveries

 

 

20 

 

 

--

Transfer to loan discount

 

 

--

 

 

(54)

Accretion of allowance related to restructured loans

 

 

(22)

 

 

(16)

Balance, end of period

 

$

1,785 

 

$

2,454 

 

Impaired Loans

 

As of December 31, 2015 and 2014, the balances of impaired loans were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31,

 

December 31,

 

 

2015

 

2014

 

 

 

 

 

 

 

Impaired loans with an allowance for loan loss

 

$

10,012 

 

$

8,696 

Impaired loans without an allowance for loan loss

 

 

1,880 

 

 

3,290 

Total impaired loans

 

$

11,892 

 

$

11,986 

 

 

 

 

 

 

 

Allowance for loan losses related to impaired loans

 

$

1,115 

 

$

1,670 

Total non-accrual loans

 

$

8,779 

 

$

8,805 

Total loans past due 90 days or more and still accruing

 

$

--

 

$

--

 

Information regarding interest income recognized on impaired loans for the years ended December 31, 2015 and 2014, is as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

80


 

 

 

2015

 

2014

 

 

 

 

 

 

 

Average investment in impaired loans

 

$

11,348 

 

$

13,593 

 

 

 

 

 

 

 

Interest income recognize on impaired loans

 

 

261 

 

 

250 

Interest income recognized on impaired loans attributable to their change in present value

 

 

22 

 

 

16 

Total interest income recognized on impaired loans

 

$

283 

 

$

266 

 

No additional funds were committed to be advanced in connection with impaired loans as of December 31, 2015.

 

Cash and Cash Equivalents

 

We experienced a decrease in our cash during the twelve months ended December 31, 2015 in the amount of $5.6 million, as compared to a net increase of $9.8 million for the twelve months ended December 31, 2014. The decrease is primarily due to regular payments made on our credit facilities and a large payment made to a participant in one of our loans when the loan was paid off. 

 

Net cash used by operating activities totaled $1.7 million for the twelve months ended December 31, 2015, a decrease of $3.5 million from $1.8 million provided by operating activities during the twelve months ended December 31, 2014.  This is due to the payment made to a participant in one of our loans when we received a loan payoff on the last day of 2014 and remitted the participant’s portion of the payoff in January of 2015.  In addition, much of our positive net income in 2015 was related to non-cash items such as credits for loan losses and credits for losses on foreclosed assets.

 

Net cash used by investing activities totaled $58 thousand during the twelve months ended December 31, 2015, compared to $12.0 million provided during the twelve months ended December 31, 2014, a decrease of $12.1 million. This difference is attributable to a decrease in loan sales as we had significant cash reserves and did not need to sell loans to fund new ones.  We also had fewer loan payoffs in 2015 as compared to 2014, which decreased the amount of principal we collected from borrowers.  We expected to originate more loans than we did in 2015; however, it took longer to move new loans through our loan pipeline after slowing down our loan funding efforts for most of in 2014 and for the first six months of 2015.  Our loan originations increased substantially in the fourth quarter of 2015, and we expect that trend to continue in 2016.  These fundings will rely on loan participation sales, which we also expect to increase in 2016.

 

Net cash used in financing activities totaled $3.9 million for the twelve-month period ended December 31, 2015, a decrease of $199 thousand used from $4.1 million used in financing activities during the twelve months ended December 31, 2014.  We did not increase our investor notes payable in 2015, while we received cash from additional sales of notes payable in 2014 of $2.2 million. We made $2.4 million less in principal payments on our borrowings as we were not required to make any additional principal paydowns during 2015. 

81


 

 

Liquidity and Capital Resources

 

We rely on cash generated from our operations, cash reserves and proceeds from the sale of loan participations and investor notes to meet our obligations as they arise.  From time to time, we also raise additional capital through the sale of debt securities.  In addition, we have begun to generate non-interest income, chiefly commissions on securities sales and fees earned from managing client investments through our wholly-owned broker-dealer, MP Securities.  We require cash to originate and acquire new mortgage loans, repay indebtedness, make interest payments to our note investors and pay expenses related to our general business operations.  We intend to continue our current liquidity plan which relies primarily on cash generated by operations, cash reserves and proceeds from the sale of debt securities.  However, we intend to supplement this liquidity plan by expanding loan participation sales as well as through the generation of additional sources of non-interest income.

 

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

 

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

 

We may not be able to obtain desired financing from an institutional lender on terms and conditions acceptable to us.  If we are unable to obtain additional capital funding to replace and/or supplement our NCUA Credit Facilities in 2018, our ability to grow our business and meet our strategic objectives will be constrained.  During the first six months of 2014, our ability to fund and originate loans was significantly impacted due to liquidity concerns.  Due to investor withdrawal requests and the repayment of matured notes, our liquidity ratio decreased to 7.49% at March 31, 2014.  We temporarily postponed the origination of loans in order to restore our cash balances to adequate levels.  This disrupted the timing of underwriting and funding for the loans in our origination pipeline and delayed the funding of new loans for several quarters.  We were able to increase our liquidity ratio to 31% at December 31, 2014 and resume our loan lending initiatives.  While these lending initiatives took longer to resume than we anticipated, we funded $14.3 million in loans in the fourth quarter of 2015.  Our liquidity ratio was 21.38% at December 31, 2015, which is well within our policy and operational comfort.  Our liquidity ratio is calculated as our cash balance divided by our total liabilities less the portion of our line of credit facilities due after one year.  Our target liquidity ratio was 16% at December 31, 2015.

82


 

 

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

 

Due to suitability and investment concentration limitations for investments made in our publicly offered debt securities, some of our investors were prevented from renewing or making investments in our publicly offered debt securitiesDue to those restrictions, the renewal rate fell to 34% in 2013.  The renewal rate increased to 53% for 2014 and 55% for 2015, as we added new clients that qualified under these suitability restrictions and offered other investment products to investors whom may need to diversify their investments.  We have also hired additional sales personnel at MP Securities in the last two years to improve our sales capabilities. We have also added our publicly offered Class 1 Notes and privately offered secured investment notes as additional investment options that we make available to our investors.  While we do not expect that our investor renewal rate will immediately return to the historic renewal rates we enjoyed prior to 2012, we expect continued improvement in our investor renewal rates over the next few years.    

 

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

 

We are also continuing to explore the possibility of obtaining a line of credit facility that would provide short-term financing for funding new loans which we would then offer for sale in the participation market.  We are seeking to partner with other credit unions that may have an interest in originating or investing in new business loans that are made to churches and ministries that meet our underwriting guidelines.  We are also negotiating with NCUA to extend the maturity date of our credit facilities to avoid any liquidity issues that might be creating by attempting to make a large balloon payment in October 2018.  By developing new financing resources such as loan participations and institutional financing arrangements, we believe that we can attract new capital while generating profitable returns.

 

Credit Facilities Developments

 

As of December 31, 2015, our credit facilities’ commitments, amounts available and principal amounts outstanding were as follows:

 

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National Credit Union Administration Facilities

 

On November 4, 2011, we and the National Credit Union Administration Board As Liquidating Agent of Members United Corporate Federal Credit Union entered into an $87.3 million credit facility refinancing transaction which amended and restated a $100 million credit line we entered into with Members United on May 7, 2008.  On the same date, we and the National Credit Union Administration Board As Liquidating Agent of Western Corporate Federal Credit Union entered into a $23.5 million credit facility which amended and restated a credit facility agreement we had previously reached with WesCorp.  Both NCUA Facilities and any interest due will mature on October 31, 2018.  Accrued interest is due and payable monthly in arrears at the lesser of the maximum interest rate permitted by applicable law under the loan documents or 2.525%.  The term loan may be repaid or retired without penalty, but any amounts repaid or prepaid under the facility may not be re-borrowed. 

 

The NCUA Facilities also include covenants which prevent us from renewing or extending a loan pledged as collateral under these facilities unless certain conditions have been met and requiring the borrower to deliver current financial statements to us.  Under the terms of the NCUA Facilities, we have established a lockbox maintained for the benefit of the NCUA that will receive all payments made by collateral obligors.  Our obligation to repay the outstanding balance on these facilities may be accelerated upon the occurrence of an “Event of Default” as defined in the agreement.  Such events of default include, among others, failure to make timely payments due under the NCUA Facilities, or our breach of any of our covenants.

 

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

 

Amendments to our Credit Facility Agreements

 

On March 30, 2015, we and the NCUA agreed toan Amendment to the Loan and Security Agreement (the “LSA Amendments”) for both the Members United Credit Facility and the WesCorp Credit Facility.  Under the terms of the LSA Amendments, significant changes were made, which are disclosed in a table in Note 8, NCUA Credit Facilities.  For further information, please see this note in our accompanying audited consolidated financial statements for the year ended December 31, 2015

 

Investor Notes

 

We also rely on the sale of our investor notes to provide the funding for origination and purchase of mortgage loan assets and fund our general operations.  As of December 31, 2015, a total of $49.9 million of our investor debt securities were issued and outstanding.  For further

84


 

information on our investor notes, see Note 9, Notes Payable in our accompanying audited consolidated financial statements for the year ended December 31, 2015Historically, we have offered investor notes under offerings registered with the SEC and in private placements exempt under the provisions of the Securities Act of 1933, as amended.  Our Alpha Class Notes were initially registered with the SEC in July 2001 and an additional $75.0 million of new Alpha Notes were registered with the SEC in May 2007.  We discontinued the sale of our Alpha Class Notes in April, 2008.  As of December 31, 2015, none of these notes remained outstanding.

 

In addition to our Alpha Class Notes, in April 2008, we registered with the SEC an offering of $80.0 million of new Class A Notes that consisted of three series of notes, including a fixed series, flex series and variable series.  We registered an additional $100.0 million in Class A Notes with the SEC in June, 2010, and on June 24, 2011, we filed a registration statement with the SEC seeking to register an additional $75 million of our Class A Notes.  The Class A Notes offering expired on December 31, 2014 and no additional Class A Notes were sold in 2015.  As of December 31, 2015, $25.4 million in Class A Notes were outstanding.

 

The Class A Notes offering was replaced in January 2015 with the Class 1 Notes offering.  We registered $85 million of our Class 1 Notes in two series – fixed and variable notes.  The registration was declared effective on January 6, 2015.  Similar to our Class A Notes, our Class 1 Notes are all unsecured debt securities. The interest rates we pay on the fixed series notes are determined by reference to the “swap index”, an index that is based upon a weekly average swap rate reported by the Federal Reserve Board, and is in effect on the date they are issued.  These notes bear interest at the swap index plus a rate spread of 1.70% to 2.50% and are issued in maturities ranging from 12 to 84 months.  The interest rates we pay on the variable series notes are determined by reference to the variable index in effect on the date the interest rate is set and bear interest at a rate of the swap index plus a rate spread of 1.50% to 1.80%.  Effective as of January 6, 2015, the variable index is defined under the Class 1 Notes as the three month LIBOR rate.  As of December 31, 2015, $15.9 million in Class 1 Notes were outstanding.

 

In addition to Class 1 Notes, we offer notes under several private placement offerings.  In March 2013, we began offering Series 1 Subordinated Capital Notes and International Notes to accredited investors, as that term is defined in Rule 501 promulgated under the Securities Act of 1933, as amended.  Effective as of January 15, 2015, we commenced the offering of our Secured Investment Notes under Rule 506 of Regulation D, promulgated under the Securities Act of 1933, as amended.  The Secured Investment Notes are secured by either 100% of their outstanding balance in cash or 105% of their outstanding balance in loans receivable.  Investors have to meet certain criteria in order to purchase these notes and are also subject to suitability restrictions.  At December 31, 2015, $2.3 million, $3.4 million, and $52 thousand of our Secured Investment Notes, Subordinated Capital Notes, and International Notes were outstanding, respectively.

 

Of the $49.9 million in investor notes that are outstanding at December 31, 2015, $7.5 million are available to be withdrawn at any time without penalty while an additional $11.0 million will mature in 2016.  Historically, we have experienced a high rate of renewal or reinvestment by our note holders upon maturity of their notes.  We believe the historical record of repeat purchasers

85


 

by our debt security investors supports our confidence in the future viability of our investor note program.

 

Debt Covenants

 

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

 

The MU Credit Facility and WesCorp Credit Facility Extension agreements contain a number of standard borrowing covenants, including affirmative covenants to maintain good and indefeasible title to the pledged collateral free and clear of all liens, to maintain a lockbox for the benefit of the lender to collect payments from borrowers on the collateral notes and comply with customary covenants for a transaction of this nature.  In addition, unless otherwise waived by the NCUA, we may not renew or extend an underlying mortgage loan unless a recent appraisal is completed for such mortgaged property, the loan continues to be amortized over the same period as the prior note and requires the borrower to submit quarterly financial statements in the event the borrower has negative annual net income or a debt service coverage ratio of less than 1.0 to 1.0.  We are in compliance with these covenants as of December 31, 2015.

 

 

 

 

 

 

Item 7A.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Market Risk Management

Market Risk Management

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

86


 

supply of money in the economy, governmental budgetary actions, and the actions of the Federal Reserve Board.

Interest Rate Risk Management

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

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

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

In connection with the above-mentioned strategy, we simulate the change in net interest income and net interest margin given immediate and parallel interest rate shocks over a 12-month horizon.  Shown below are possible changes to net interest income and the net interest margin based upon the model’s program under a 200 basis point increase in the interest rates as of December 31, 2015:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

87


 

Change (in basis points)

 

Net Interest Income (next twelve months)

 

Change in Net Interest Income

 

% Change in Net Interest Income

 

Net Interest Margin

+200

 

$

5,553 

 

$

170 

 

3.16 

%

 

3.67 

%

 

These results indicate the effect of immediate rate changes and do not consider the yield from reinvesting in short-term versus long-term instruments.  The above profile illustrates that, if there were an immediate and sustained increase of 200 basis points in interest rates, our net interest income would increase by $170 thousand over the “base case” (i.e., no interest rate change) and our net interest margin would increase from 3.56% to 3.67%.  Our net interest margin will increase if rates rise.  We did not consider a decrease in interest rates in our analysis as interest rates remain at relatively low levels and have been increasing in the last year.  Based upon the review of management and our Board, we consider the results indicated by the report to be acceptable. 

 

The following table sets forth our maturity gap for interest-earning assets and interest-bearing liabilities as of the period indicated.  For purposes of the following table, an asset or liability is considered to mature based on its contractual terms.  Actual payment patterns may differ from contractual payment patterns.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Maturity Analysis

 

 

as of December 31, 2015

 

 

Amounts Subject to Maturity Within (dollars in thousands)

 

 

Year 1

 

Year 2

 

Year 3

 

Year 4

 

Year 5

 

After Year 5

 

Non-Maturity

 

Total

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash with financial institutions

 

$

11,645 

 

$

--

 

$

--

 

$

--

 

$

--

 

$

--

 

$

--

 

$

11,645 

Loans, net of deferred fees

 

 

24,442 

 

 

20,733 

 

 

18,311 

 

 

10,619 

 

 

7,590 

 

 

53,831 

 

 

--

 

 

135,526 

Allowance for loan losses and loan discount

 

 

--

 

 

--

 

 

--

 

 

--

 

 

--

 

 

--

 

 

(2,594)

 

 

(2,594)

Noninterest earning assets

 

 

--

 

 

--

 

 

--

 

 

--

 

 

--

 

 

--

 

 

4,567 

 

 

4,567 

Total assets

 

$

36,087 

 

$

20,733 

 

$

18,311 

 

$

10,619 

 

$

7,590 

 

$

53,831 

 

$

1,973 

 

$

149,144 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Borrowings from financial institutions

 

$

3,743 

 

$

3,845 

 

$

82,649 

 

$

--

 

$

--

 

$

--

 

$

--

 

$

90,237 

Notes payable

 

 

18,504 

 

 

10,486 

 

 

8,374 

 

 

7,403 

 

 

5,148 

 

 

--

 

 

--

 

 

49,915 

Other liabilities

 

 

--

 

 

--

 

 

--

 

 

--

 

 

--

 

 

--

 

 

834 

 

 

834 

Members' equity

 

 

--

 

 

--

 

 

--

 

 

--

 

 

--

 

 

--

 

 

8,158 

 

 

8,158 

Total liabilities and members' equity

 

$

22,247 

 

$

14,331 

 

$

91,023 

 

$

7,403 

 

$

5,148 

 

$

--

 

$

8,992 

 

$

149,144 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Maturity gap

 

$

13,840 

 

$

6,402 

 

$

(72,712)

 

$

3,216 

 

$

2,442 

 

$

53,831 

 

$

(7,019)

 

$

--

Cumulative maturity gap

 

$

13,840 

 

$

20,242 

 

$

(52,470)

 

$

(49,254)

 

$

(46,812)

 

$

7,019 

 

$

--

 

$

--

 

The preceding table indicates that we have a positive one-year cumulative gap of $13.8 million at December 31, 2015.  This indicates that funds expected to become available in the next year due to maturing assets are greater than interest-bearing liabilities coming due in the next year.  Certain notes payable have contractual maturities of 72 months but can be withdrawn in whole or

88


 

in part at any time prior to maturity without restriction.  While historically our investors have not withdrawn all of these funds prior to their maturity, for purposes of the maturity analysis above, these notes are included in the Year 1 maturity column.

 

When an increase in interest rates will help the entity and a decrease in interest rates will hurt the entity, the entity is considered to be asset sensitive.  Currently, our balance sheet is asset sensitive as the amount of assets maturing is greater than the amount of liabilities maturing over the next year.  In the view of management, this sensitivity will not have a material adverse impact on the Company’s financial position and results of operations for 2016.

89


 

 

 

 

 

Item 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

Included herewith are the following financial statements:

 

 

 

Table of Contents

 

Page

 

 

Report of Independent Registered Public Accounting Firm

F-1

 

 

Financial Statements

 

 

 

Consolidated Balance Sheets

F-2

Consolidated Statements of Operations

F-3

Consolidated Statements of Equity

F-4

Consolidated Statements of Cash Flows

F-5

Notes to Consolidated Financial Statements

F-6 – F-47

 

 

90


 

 

Report of Independent Registered Public Accounting Firm

 

 

To The Members

Ministry Partners Investment Company, LLC

Brea, California

 

 

We  have  audited  the  accompanying  consolidated  balance  sheets  of  Ministry  Partners Investment Company, LLC and subsidiaries (the Company) as of December 31, 2015 and 2014 and the related consolidated statements of operations, equity and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

 

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Ministry Partners Investment Company, LLC and subsidiaries as of December 31, 2015 and 2014 and the results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.

 

 

 

 

/s/ Hutchinson and Bloodgood LLP     

 

Glendale, California

March 30, 2016

 

F-1


 

Ministry Partners Investment Company, LLC and Subsidiaries

Consolidated Balance Sheets

December 31, 2015 and 2014

(Dollars in Thousands except for Unit Data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2015

 

2014

Assets:

 

 

 

 

 

 

Cash

 

$

11,645 

 

$

17,251 

Loans receivable, net of allowance for loan losses of $1,785 and $2,454 as of December 31, 2015 and 2014, respectively

 

 

132,932 

 

 

131,586 

Accrued interest receivable

 

 

545 

 

 

562 

Property and equipment, net

 

 

58 

 

 

87 

Debt issuance costs, net

 

 

122 

 

 

112 

Foreclosed assets, net

 

 

3,486 

 

 

3,931 

Other assets

 

 

356 

 

 

366 

Total assets

 

$

149,144 

 

$

153,895 

Liabilities and members’ equity

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

NCUA credit facilities

 

$

90,237 

 

$

93,880 

Notes payable

 

 

49,915 

 

 

49,914 

Accrued interest payable

 

 

141 

 

 

159 

Other liabilities

 

 

693 

 

 

1,992 

Total liabilities

 

 

140,986 

 

 

145,945 

Members' Equity:

 

 

 

 

 

 

Series A preferred units, 1,000,000 units authorized, 117,100 units issued and outstanding (liquidation preference of $100 per unit)

 

 

11,715 

 

 

11,715 

Class A common units, 1,000,000 units authorized, 146,522 units issued and outstanding

 

 

1,509 

 

 

1,509 

Accumulated deficit

 

 

(5,066)

 

 

(5,274)

Total members' equity

 

 

8,158 

 

 

7,950 

Total liabilities and members' equity

 

$

149,144 

 

$

153,895 

 

 

 

 

The Notes to Consolidated Financial Statements are an integral part of these consolidated financial statements.

 

F-2


 

Ministry Partners Investment Company, LLC and Subsidiaries

Consolidated Statements of Operations

Years Ended December 31, 2015 and 2014

(Dollars in Thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2015

 

2014

Interest income:

 

 

 

 

 

 

Interest on loans

 

$

8,034 

 

$

9,044 

Interest on interest-bearing accounts

 

 

20 

 

 

42 

Total interest income

 

 

8,054 

 

 

9,086 

Interest expense:

 

 

 

 

 

 

Borrowings from financial institutions

 

 

2,328 

 

 

2,466 

Notes payable

 

 

1,787 

 

 

1,895 

Total interest expense

 

 

4,115 

 

 

4,361 

Net interest income

 

 

3,939 

 

 

4,725 

Provision (credit) for loan losses

 

 

(524)

 

 

252 

Net interest income after provision (credit) for loan losses

 

 

4,463 

 

 

4,473 

Non-interest income:

 

 

 

 

 

 

Broker-dealer commissions and fees

 

 

525 

 

 

137 

Other lending income

 

 

307 

 

 

198 

Total non-interest income

 

 

832 

 

 

335 

Non-interest expenses:

 

 

 

 

 

 

Salaries and benefits

 

 

2,871 

 

 

2,397 

Marketing and promotion

 

 

104 

 

 

96 

Office occupancy

 

 

142 

 

 

143 

Office operations and other expenses

 

 

1,293 

 

 

1,109 

Foreclosed assets, net

 

 

(20)

 

 

2,362 

Legal and accounting

 

 

527 

 

 

584 

Total non-interest expenses

 

 

4,917 

 

 

6,691 

Income (loss) before provision for income taxes

 

 

378 

 

 

(1,883)

Provision for income taxes and state LLC fees

 

 

21 

 

 

12 

Net income (loss)

 

$

357 

 

$

(1,895)

 

 

 

 

The Notes to Consolidated Financial Statements are an integral part of these consolidated financial statements.

 

F-3


 

 

 

Ministry Partners Investment Company, LLC and Subsidiaries

Consolidated Statements of Equity

Years Ended December 31, 2015 and 2014

(Dollars in Thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Series A Preferred

 

Class A Common

 

 

 

 

 

 

 

 

Units

 

Units

 

 

 

 

 

 

 

 

Number of Units

 

Amount

 

Number of Units

 

Amount

 

 

Accumulated Deficit

 

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2013

 

 

117,100 

 

$

11,715 

 

 

146,522 

 

$

1,509 

 

$

(3,281)

 

$

9,943 

Net loss

 

 

--

 

 

--

 

 

--

 

 

--

 

 

(1,895)

 

 

(1,895)

Dividends on preferred units

 

 

--

 

 

--

 

 

--

 

 

--

 

 

(98)

 

 

(98)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2014

 

 

117,100 

 

 

11,715 

 

 

146,522 

 

 

1,509 

 

 

(5,274)

 

 

7,950 

Net income

 

 

--

 

 

--

 

 

--

 

 

--

 

 

357 

 

 

357 

Dividends on preferred units

 

 

--

 

 

--

 

 

--

 

 

--

 

 

(149)

 

 

(149)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2015

 

 

117,100 

 

$

11,715 

 

 

146,522 

 

$

1,509 

 

$

(5,066)

 

$

8,158 

 

 

 

 

 

 

 

 

 

The Notes to Consolidated Financial Statements are an integral part of these consolidated financial statements.

 

 

 

 

 

 

 

 

 

 

F-4


 

 

Ministry Partners Investment Company, LLC and Subsidiaries

Consolidated Statements of Cash Flows

Years Ended December 31, 2015 and 2014

(Dollars in Thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2015

 

2014

Cash Flows from Operating Activities

 

 

 

 

 

 

Net income (loss)

 

$

357 

 

$

(1,895)

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

 

 

 

 

 

 

Depreciation

 

 

45 

 

 

49 

Provision (credit) for loan losses

 

 

(524)

 

 

252 

Charge-offs of allowances for loan losses

 

 

(143)

 

 

--

Recoveries of loan charge-offs

 

 

20 

 

 

--

Provision (credit) for foreclosed asset losses

 

 

(11)

 

 

2,431 

Amortization of deferred loan fees

 

 

(175)

 

 

(356)

Amortization of debt issuance costs

 

 

114 

 

 

84 

Accretion of allowance for loan losses on restructured loans

 

 

(22)

 

 

(16)

Accretion of loan discount

 

 

(44)

 

 

(24)

Gain on sale of loans

 

 

(49)

 

 

(71)

Gain on sale of foreclosed assets

 

 

(132)

 

 

(5)

Changes in:

 

 

 

 

 

 

Accrued interest receivable

 

 

17 

 

 

45 

Other assets

 

 

59 

 

 

52 

Other liabilities and accrued interest payable

 

 

83 

 

 

1,291 

Net cash provided (used) by operating activities

 

 

(405)

 

 

1,837 

Cash Flows from Investing Activities

 

 

 

 

 

 

Loan originations

 

 

(26,651)

 

 

(26,499)

Loan sales

 

 

6,057 

 

 

13,604 

Loan principal collections, net

 

 

18,703 

 

 

24,714 

Foreclosed asset sales

 

 

588 

 

 

210 

Purchase of property and equipment

 

 

(16)

 

 

(17)

Net cash provided by investing activities

 

 

(1,319)

 

 

12,012 

Cash Flows from Financing Activities

 

 

 

 

 

 

Change in NCUA credit facilities

 

 

(3,643)

 

 

(6,024)

Net changes in notes payable

 

 

 

 

2,247 

Debt issuance costs

 

 

(124)

 

 

(165)

Dividends paid on preferred units

 

 

(116)

 

 

(139)

Cash used by financing activities

 

 

(3,882)

 

 

(4,081)

F-5


 

Net increase (decrease) in cash

 

 

(5,606)

 

 

9,768 

Cash at beginning of period

 

 

17,251 

 

 

7,483 

Cash at end of period

 

$

11,645 

 

$

17,251 

 

 

 

 

 

 

 

Supplemental Disclosures of Cash Flow Information

 

 

 

 

 

 

Interest paid

 

$

4,132 

 

$

4,365 

Income taxes and state LLC fees paid

 

$

15 

 

$

14 

Non-cash Investing and Financing Activities

 

 

 

 

 

 

Transfer of loans to foreclosed assets

 

$

--

 

$

3,260 

 

The Notes to Consolidated Financial Statements are an integral part of these consolidated financial statements.

 

F-6


 

 

Note 1.Summary of Significant Accounting Policies

 

Nature of Business

 

Ministry Partners Investment Company, LLC (the “Company”) was incorporated in California in 1991 as a C corporation and converted to a limited liability company (“LLC”) on December 31, 2008.  The Company is owned by a group of 11 federal and state chartered credit unions, as well as the Asset Management Assistance Center of the National Credit Union Administration (“NCUA”), none of which owns a majority of the voting equity units of the Company.  The Asset Management Assistance Center owns only Series A Preferred Units, while our credit union equity holders own both our Class A Common Units and Series A Preferred Units.  Offices of the Company are located in Brea, California.  The Company provides funds for real property secured loans for the benefit of evangelical churches and church organizations.  The Company funds its operations primarily through the sale of debt securities and through other borrowings.  When the Company was formed, substantially all of the Company’s loans were purchased from its largest equity investor, the Evangelical Christian Credit Union (“ECCU”), of Brea, California. Currently the Company primarily originates church and ministry loans independently, and also from time to time purchases loans from credit unions other than ECCU. Nearly all of the Company’s business and operations currently are conducted in California and its mortgage loan investments cover approximately 30 states, with the largest number of loans made to California borrowers.

 

In 2007 the Company created a wholly-owned special purpose subsidiary, Ministry Partners Funding, LLC (“MPF”).  MPF has been inactive since November 30, 2009.  The Company plans to maintain MPF for use as a financing vehicle to offer, manage or sell debt securities, participate in debt financing transactions and serve as a collateral agent to hold mortgage loans for the benefit of our secured note investors.  In December 2014, the Company reactivated MPF to hold loans used as collateral for our new Secured Investment Certificates (see Note 16. Subsequent Event for further details).

 

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

 

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

 

F-7


 

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

 

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. Through December 31, 2015, MP Securities was licensed for insurance in 17 states and for investments in 25 states.

 

Principles of Consolidation

 

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

 

Conversion to LLC

 

Effective 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.

 

 

 

F-8


 

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 December 31, 2015 and 2014. 

 

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

 

Use of Estimates

 

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

 

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.

 

 

F-9


 

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 borrothe Companyr’s ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.

 

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

 

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

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

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

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

-The effect of credit concentrations.

 

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

 

All loans in the loan portfolio are subject to impairment analysis.  The Company reviews its loan portfolio monthly by examining delinquency reports and information related to the financial condition of its borrowers and collateral value of its loans.  Through this process, the Company identifies potential impaired loans.  A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal and interest when due according to the contractual terms of the loan agreement.  Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting future scheduled principal and interest payments when due.  Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired.  Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the

F-10


 

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 the wholly-owned loans for which the Company possesses a senior lien on the collateral underlying the loan.

 

F-11


 

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

 

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

 

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

 

Credit Quality Indicators

 

The Company’s policies provide for the classification of loans that are considered to be of lesser quality as watch, substandard, doubtful, or loss assets. An asset is considered substandard if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Substandard assets include those assets characterized by the distinct possibility that 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.

 

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 generates sufficient cash flow 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.

F-12


 

 

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 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

F-13


 

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

 

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

 

Property and Equipment

 

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

 

Debt Issuance Costs

 

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

 

Employee Benefit Plan

 

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

 

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.

 

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

F-14


 

recognized in the first subsequent financial reporting period in which that threshold is met. Previously recognized tax positions that no longer meet the more-likely-than-not recognition threshold are derecognized in the first subsequent financial reporting period in which that threshold is no longer met.

 

Recent Accounting Pronouncements

 

In January 2016, Financial Accounting Standards Board ("FASB") issued Accounting Standards Update (ASU) 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities. ASU 2016-01 requires equity investments to be measured at fair value with changes in fair value recognized in net income; simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment; eliminates the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet; requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes; requires an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments; requires separate presentation of financial assets and financial liabilities by measurement category and form of financial assets on the balance sheet or the accompanying notes to the financial statements and clarifies that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity’s other deferred tax assets. ASU 2016-01 is effective for financial statements issued for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. The Company is currently evaluating the impact that ASU 2016-01 will have on its statement of financial position or financial statement disclosures.

 

ASU 2014-09 Revenue from Contracts with Customers (Topic 606) provides a robust framework for addressing revenue recognition issues and, upon its effective date, replaces almost all existing revenue recognition guidance, including industry-specific guidance, in current U.S. GAAP. The revenue recognition policies of almost all entities will be affected by the new guidance in the ASU. For public business entities, the guidance is effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. The Company is currently evaluating the impact that ASU 2016-01 will have on its statement of financial position or financial statement disclosures.

 

ASU 2014-15, Presentation of Financial Statements—Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern provides guidance about management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and to provide related footnote disclosures. ASU 2014-15 is effective for annual periods ending after December 15, 2016, and for interim periods within annual periods beginning after December 15, 2016. The Company is currently evaluating the impact that ASU 2016-01 will have on its statement of financial position or financial statement disclosures.

 

ASU 2014-16, Derivatives and Hedging (Topic 815): Determining Whether the Host Contract in a Hybrid Financial Instrument Issued in the Form of a Share Is More Akin to Debt or to Equity (a consensus of the FASB Emerging Issues Task Force) clarifies how current U.S. GAAP should be interpreted in subjectively evaluating the economic characteristics and risks

F-15


 

of a host contract in a hybrid financial instrument that is issued in the form of a share. Public business entities are required to implement the new requirements in fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. The Company is currently evaluating the impact that ASU 2016-01 will have on its statement of financial position or financial statement disclosures.

 

ASU 2015-01, Income Statement—Extraordinary and Unusual Items (Subtopic 225-20): Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items eliminates the concept of extraordinary items, but retains the presentation and disclosure guidance for items that are unusual in nature or infrequently occurring and expands the guidance to include items that are both unusual in nature and infrequently occurring. The ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. The Company is currently evaluating the impact that ASU 2016-01 will have on its statement of financial position or financial statement disclosures.

 

ASU 2015-02, Consolidation (Topic 810): Amendments to the Consolidation Analysis made certain targeted revisions to various areas of the consolidation guidance, including the determination of the primary beneficiary of an entity, among others. The ASU is effective for public business entities for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2015. The Company is currently evaluating the impact that ASU 2016-01 will have on its statement of financial position or financial statement disclosures.

 

ASU 2015-03, Interest—Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Cost requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. Public companies must apply the new requirements in fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. The Company is currently evaluating the impact that ASU 2016-01 will have on its statement of financial position or financial statement disclosures.

 

ASU 2015-05, Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement helps customers determine whether a cloud computing arrangement includes a software license. For public business entities, the ASU should be applied in annual periods, including interim periods within those annual periods, beginning after December 15, 2015. The Company is currently evaluating the impact that ASU 2016-01 will have on its statement of financial position or financial statement disclosures.

 

ASU 2015-16, Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments simplifies the accounting for adjustments made to provisional amounts recognized in a business combination. For public business entities, the ASU is effective for fiscal years beginning after December 15, 2015, including interim periods within those fiscal years. The Company is currently evaluating the impact that ASU 2016-01 will have on its statement of financial position or financial statement disclosures.

 

 

F-16


 

Note 2.Pledge of Cash

 

Some of the company’s cash is pledged as collateral for its borrowings and is considered restricted cash.  At December 31, 2015, $686 thousand is pledged as collateral for the NCUA credit facility.

 

Note 3.Related Party Transactions

 

The Company maintains a portion of its cash at ECCU. Total funds held with ECCU were $163 thousand and $733 million at December 31, 2015 and 2014, respectively. Interest earned on these funds totaled approximately $14 thousand and $41 thousand for the years ended December 31, 2015 and 2014, respectively.

 

The Company leases offices from ECCU pursuant to an Office Lease dated November 4, 2009 and amended on October 11, 2013, and purchases other services from ECCU. Charges of approximately $117 thousand and $111 thousand for the years ended December 31, 2015 and 2014, respectively, were made primarily for rent, while charges for other services purchased from ECCU were immaterial. All of these charges are included in Office Occupancy or Office Operations expense. The method used to arrive at the periodic charge is based on the fair market value of services provided. Management believes that such method is reasonable.

 

From time to time, the Company purchases mortgage loans, including loan participation interests, from ECCU, our largest equity owner.  The Company did not purchase any loans from ECCU during the year ended December 31, 2015 and 2014.  The Company recognized $1.4 million and $2.0 million of interest income on loans purchased from ECCU during the years ended December 31, 2015 and 2014, respectively.  ECCU currently acts as the servicer for 10 of the 147 loans in the Company’s loan portfolio.  Per the loan servicing agreement with ECCU, a servicing fee of 65 basis points is deducted from the interest payments the Company receives on the wholly-owned loans ECCU services for the Company.  In lieu of a servicing fee, loan participations the Company purchases from ECCU have pass-through rates which are up to 75 basis points lower than the loan’s contractual rate.  On loan participation interests purchased from ECCU, the Company negotiates the pass-through interest rates with ECCU on a loan by loan basis.  At December 31, 2015 and 2014, the Company’s investment in wholly-owned loans serviced by ECCU totaled $930 thousand and $6.1 million, respectively.  At December 31, 2015 and 2014, the Company’s investment in loan participations serviced by ECCU totaled $11.9 million and $20.5 million, respectively.  From time to time, the Company pays fees for additional services ECCU provides for servicing these loans.  These fees amounted to less than $1 thousand during both of the years ended December 31, 2015 and 2014, respectively. 

 

ECCU has, from time to time, purchased or repurchased loans from the Company.  Each sale or purchase of a mortgage loan investment or participation interest with ECCU was consummated under a Related Party Transaction Policy adopted by the Company’s Board.  No gain or loss was incurred on these sales.  The Company sold $541 thousand in whole loans to ECCU during the year ended December 31, 2014.   The Company did not sell loans to ECCU during the year ended December 31, 2015.    

 

On August 15, 2013, the Company sold a  $5.0 million loan participation to Western Federal Credit Union (“WFCU”).  The Company charges 50 basis points to service the loan for WFCU.

F-17


 

 

From time to time, managers and management have purchased investor notes issued by the Company.  Investor notes payable to related parties total $51 thousand and $274  thousand at December 31, 2015 and 2014, respectively.

 

On October 6, 2014, MP Securities reached an agreement with ECCU whereby ECCU will refer clients to MP Securities for investment advisory services.  In exchange, the Company will remit to ECCU a solicitor fee allowable by the California Department of Business Oversight.  The Company remitted $34 thousand in fees during the year ended December 31, 2015.  No fees were remitted or accrued during the year ended December 31, 2014.

 

 

Note 4.Loans

 

All of the loans are made to various evangelical churches and related organizations, primarily to purchase, construct or improve facilities. Loan maturities extend through 2026. The loans earn interest at rates ranging from 4.13% to 8.50%, with a weighted average yield of 6.33% and 6.28% as of December 31, 2015 and 2014, respectivelyA total of $107.6 million in loans are pledged as collateral for borrowings from financial institutions as December 31, 2015. See Note 8.  A total of $3.6 million in loans are pledged as collateral for notes payable at December 31, 2015.  See Note 10.  A summary of loans as of December 31 follows (dollars in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2015

 

2014

 

 

 

 

 

 

 

Loans to evangelical churches and related organizations:

 

 

 

 

 

 

Real estate secured

 

$

136,250 

 

$

135,243 

Unsecured

 

 

126 

 

 

158 

 

 

 

 

 

 

 

Total loans

 

 

136,376 

 

 

135,401 

 

 

 

 

 

 

 

Deferred loan fees, net

 

 

(850)

 

 

(565)

Loan discount

 

 

(809)

 

 

(796)

Allowance for loan losses

 

 

(1,785)

 

 

(2,454)

 

 

 

 

 

 

 

Loans, net

 

$

132,932 

 

$

131,586 

 

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

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

 

 

 

 

 

 

 

 

F-18


 

 

 

 

 

 

 

 

 

 

Loans and Allowance for Loan Losses (by segment)

 

 

As of

 

 

 

 

 

 

 

 

 

December 31, 2015

 

December 31, 2014

 

 

 

 

 

 

 

Loans:

 

 

 

 

 

 

Individually evaluated for impairment

 

$

11,892 

 

$

11,986 

Collectively evaluated for impairment 

 

 

124,484 

 

 

123,415 

Balance

 

$

136,376 

 

$

135,401 

 

 

 

 

 

 

 

Allowance for loan losses:

 

 

 

 

 

 

Individually evaluated for impairment

 

$

1,115 

 

$

1,670 

Collectively evaluated for impairment 

 

 

670 

 

 

784 

Balance

 

$

1,785 

 

$

2,454 

 

Allowance for Loan Losses

 

Management believes that the allowance for loan losses as of December 31, 2015 and 2014 is appropriate. Changes in the allowance for loan losses by loan portfolio segment (church loans) as of and for the years ended December 31 are summarized as follows (dollars in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2015

 

2014

 

 

 

 

 

 

 

Balance, beginning of period

 

$

2,454 

 

$

2,856 

Provision (credit) for loan loss

 

 

(524)

 

 

252 

Chargeoffs

 

 

(143)

 

 

(584)

Recoveries

 

 

20 

 

 

--

Transfer to loan discount

 

 

--

 

 

(54)

Accretion of allowance related to restructured loans

 

 

(22)

 

 

(16)

Balance, end of period

 

$

1,785 

 

$

2,454 

 

 

F-19


 

The following table is a summary of the loan portfolio credit quality indicators by loan class at December 31, 2015 and 2014, 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  December 31, 2015

 

 

Wholly-Owned First

 

Wholly-Owned Junior

 

Participation First

 

Participation Junior

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Grade:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pass

 

$

102,845 

 

$

4,809 

 

$

10,813 

 

$

--

 

$

118,467 

Watch

 

 

4,387 

 

 

3,113 

 

 

1,630 

 

 

--

 

 

9,130 

Substandard

 

 

8,564 

 

 

215 

 

 

--

 

 

--

 

 

8,779 

Doubtful

 

 

--

 

 

--

 

 

--

 

 

--

 

 

--

Loss

 

 

--

 

 

--

 

 

--

 

 

--

 

 

--

Total

 

$

115,796 

 

$

8,137 

 

$

12,443 

 

$

--

 

$

136,376 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Credit Quality Indicators (by class)

As of  December 31, 2014

 

 

Wholly-Owned First

 

Wholly-Owned Junior

 

Participation First

 

Participation Junior

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Grade:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pass

 

$

89,708 

 

$

2,347 

 

$

19,981 

 

$

925 

 

$

112,961 

Watch

 

 

4,512 

 

 

2,637 

 

 

1,672 

 

 

--

 

 

8,821 

Substandard

 

 

9,472 

 

 

3,396 

 

 

--

 

 

--

 

 

12,868 

Doubtful

 

 

--

 

 

--

 

 

751 

 

 

--

 

 

751 

Loss

 

 

--

 

 

--

 

 

--

 

 

--

 

 

--

Total

 

$

103,692 

 

$

8,380 

 

$

22,404 

 

$

925 

 

$

135,401 

 

 

The following table sets forth certain information with respect to the Company’s loan portfolio delinquencies by loan class and amount at December 31, 2015 and 2014 (dollars in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

F-20


 

Age Analysis of Past Due Loans (by class)

As of December 31, 2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

$

3,433 

 

$

--

 

$

1,063 

 

$

4,496 

 

$

111,300 

 

$

115,796 

 

$

--

Wholly-Owned Junior

 

 

--

 

 

--

 

 

--

 

 

--

 

 

8,137 

 

 

8,137 

 

 

--

Participation First

 

 

1,377 

 

 

--

 

 

--

 

 

1,377 

 

 

11,066 

 

 

12,443 

 

 

--

Participation Junior

 

 

--

 

 

--

 

 

--

 

 

--

 

 

--

 

 

--

 

 

--

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

4,810 

 

$

--

 

$

1,063 

 

$

5,873 

 

$

130,503 

 

$

136,376 

 

$

--

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Age Analysis of Past Due Loans (by class)

As of December 31, 2014

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

$

2,783 

 

$

2,125 

 

$

1,082 

 

$

5,990 

 

$

97,702 

 

$

103,692 

 

$

--

Wholly-Owned Junior

 

 

--

 

 

--

 

 

--

 

 

--

 

 

8,380 

 

 

8,380 

 

 

--

Participation First

 

 

1,785 

 

 

--

 

 

751 

 

 

2,536 

 

 

19,868 

 

 

22,404 

 

 

--

Participation Junior

 

 

--

 

 

--

 

 

--

 

 

--

 

 

925 

 

 

925 

 

 

--

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

4,568 

 

$

2,125 

 

$

1,833 

 

$

8,526 

 

$

126,875 

 

$

135,401 

 

$

--

 

F-21


 

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. 

 

The following tables are summaries of impaired loans by loan class at December 31, 2015 and 2014.  The recorded investment in impaired loans reflects the balances in the financial statements, net of loan discounts, whereas the unpaid principal balance reflects the contractual balances before application of collected interest payments toward the recorded investment (dollars in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Impaired Loans (by class)

As of and for the Year Ended December 31, 2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Recorded Investment

 

Unpaid Principal Balance

 

Related Allowance

 

Average Recorded Investment

 

Interest Income Recognized

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

With no related allowance recorded:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Church loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Wholly-Owned First

 

$

1,720 

 

$

2,681 

 

$

--

 

$

1,829 

 

$

--

Wholly-Owned Junior

 

 

--

 

 

--

 

 

--

 

 

--

 

 

--

Participation First

 

 

--

 

 

--

 

 

--

 

 

--

 

 

--

Participation Junior

 

 

--

 

 

--

 

 

--

 

 

--

 

 

--

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

With an allowance recorded:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Church loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Wholly-Owned First

 

 

6,157 

 

 

7,471 

 

 

704 

 

 

6,215 

 

 

99 

Wholly-Owned Junior

 

 

3,272 

 

 

3,331 

 

 

412 

 

 

3,304 

 

 

162 

Participation First

 

 

--

 

 

--

 

 

--

 

 

--

 

 

--

Participation Junior

 

 

--

 

 

--

 

 

--

 

 

--

 

 

--

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Church loans

 

$

11,149 

 

$

13,483 

 

$

1,115 

 

$

11,348 

 

$

261 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

F-22


 

Impaired Loans (by class)

As of and for the Year Ended December 31, 2014

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Recorded Investment

 

Unpaid Principal Balance

 

Related Allowance

 

Average Recorded Investment

 

Interest Income Recognized

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

With no related allowance recorded:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Church loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Wholly-Owned First

 

$

2,873 

 

$

3,786 

 

$

--

 

$

3,208 

 

$

Wholly-Owned Junior

 

 

208 

 

 

214 

 

 

--

 

 

210 

 

 

12 

Participation First

 

 

--

 

 

--

 

 

--

 

 

--

 

 

--

Participation Junior

 

 

--

 

 

--

 

 

--

 

 

--

 

 

--

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

With an allowance recorded:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Church loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Wholly-Owned First

 

 

4,325 

 

 

5,207 

 

 

1,083 

 

 

4,409 

 

 

76 

Wholly-Owned Junior

 

 

3,136 

 

 

3,181 

 

 

295 

 

 

3,162 

 

 

160 

Participation First

 

 

751 

 

 

883 

 

 

292 

 

 

2,604 

 

 

--

Participation Junior

 

 

--

 

 

--

 

 

--

 

 

--

 

 

--

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Church loans

 

$

11,294 

 

$

13,272 

 

$

1,670 

 

$

13,593 

 

$

250 

 

A summary of nonaccrual loans by loan class at December 31, 2015 and 2014 is as follows (dollars in thousands):

 

 

 

 

 

 

 

 

 

 

Loans on Nonaccrual Status (by class)

As of December 31, 2015

 

 

 

 

Church loans:

 

 

 

Wholly-Owned First

 

$

8,564 

Wholly-Owned Junior

 

 

215 

Participation First

 

 

--

Participation Junior

 

 

--

 

 

 

 

Total

 

$

8,779 

 

 

 

 

F-23


 

 

 

 

 

 

 

 

 

 

Loans on Nonaccrual Status (by class)

As of December 31, 2014

 

 

 

 

Church loans:

 

 

 

Wholly-Owned First

 

$

7,840 

Wholly-Owned Junior

 

 

214 

Participation First

 

 

751 

Participation Junior

 

 

--

 

 

 

 

Total

 

$

8,805 

 

A summary of troubled debt restructurings by loan class that were modified during the year ended December 31 is as follows (dollars in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Troubled Debt Restructurings (by class)

For the year ended December 31, 2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Number of Loans

 

Pre-Modification Outstanding Recorded Investment

 

Post-Modification Outstanding Recorded Investment

 

Recorded Investment At Period End

 

 

 

 

 

 

 

 

 

 

 

 

 

Church loans:

 

 

 

 

 

 

 

 

 

 

 

 

Wholly-Owned First

 

 

 

$

2,932 

 

$

3,019 

 

$

3,004 

Wholly-Owned Junior

 

 

 

 

206 

 

 

206 

 

 

204 

Participation First

 

 

--

 

 

--

 

 

--

 

 

--

Participation Junior

 

 

--

 

 

--

 

 

--

 

 

--

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

 

$

3,138 

 

$

3,225 

 

$

3,208 

 

The Company restructured four loans during the year ended December 31, 2015. For each of the loans, the Company added unpaid accrued interest outstanding to the loan balance and offset this with a corresponding discount of the same amount.  For one of the loans, the Company added $88 thousand in additional principal related to advances made for property maintenance and taxes due on the property.  Since the time of the restructure, each restructured loan has made payments as agreed.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

F-24


 

Troubled Debt Restructurings (by class)

For the year ended December 31, 2014

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Number of Loans

 

Pre-Modification Outstanding Recorded Investment

 

Post-Modification Outstanding Recorded Investment

 

Recorded Investment At Period End

 

 

 

 

 

 

 

 

 

 

 

 

 

Church loans:

 

 

 

 

 

 

 

 

 

 

 

 

Wholly-Owned First

 

 

 

$

875 

 

$

930 

 

$

923 

Wholly-Owned Junior

 

 

--

 

 

--

 

 

--

 

 

--

Participation First

 

 

--

 

 

--

 

 

--

 

 

--

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

 

$

875 

 

$

930 

 

$

923 

 

For all nine of the restructured loans in our portfolio at December 31, 2015, unpaid accrued interest at the time of the loan restructure was added to the principal balance. The amount of interest added was also recorded as a loan discount, so that the net loan balance did not change.  For some restructured loans we made cash advances for maintenance costs and taxes that increased our investment in the loan.  In addition, for each of the nine restructured loans, the interest rate was decreased. Each borrower involved in a troubled debt restructuring was experiencing financial difficulties at the time the loan was restructured.

No loans that were modified during the years ended December 31, 2015 and 2014 defaulted in the same year they were modified.

 

 

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, the Company evaluates such loans for potential further impairment.  As a result of this evaluation, specific reserves may be increased.

No additional funds were committed to be advanced in connection with impaired loans, including restructured loans, as of December 31, 2015 or 2014.

 

Note 5.  Foreclosed Assets

Foreclosed assets consist of three properties. The Company held $3.5 million and $3.9 million of foreclosed assets at December 31, 2015 and December 31, 2014, respectively.  The Company owns one additional foreclosed asset that has been written off.

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

F-25


 

 

 

Allowance for Losses on Foreclosed Assets for the years ended December 31,

 

 

2015

 

2014

Balance, beginning of period

 

$

2,431 

 

$

13 

Provision (credit) for losses

 

 

(11)

 

 

2,431 

Charge-offs

 

 

(1,309)

 

 

(13)

Recoveries

 

 

--

 

 

--

Balance, end of period

 

$

1,111 

 

$

2,431 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreclosed Asset Expenses for the years ended December 31,

 

 

2015

 

2014

Net gain on sale of real estate

 

$

(132)

 

$

(5)

Provision (credit) for losses

 

 

(11)

 

 

2,431 

Operating expenses, net of rental income

 

 

123 

 

 

(64)

Net expense (income)

 

$

(20)

 

$

2,362 

 

 

 

 

 

 

 

Note 6.  Loan Participation Sales

During the year ended December 31, 2015, the Company sold participations in eight church loans totaling $6.0 million.  During the year ended December 31, 2014, the Company sold participations in 13 church loans totaling $13.1 million.  The Company retained servicing responsibilities in these loans, and as a result, the Company recorded servicing assets totaling $59 thousand and $83 thousand during the years ended December 31, 2015 and 2014, respectively. These assets are being amortized using the interest method over the terms of the loans.  The amortization of servicing assets is recorded as an adjustment to servicing fee income and totaled $57 and $52 thousand for the years ended December 31, 2015 and 2014, respectively

A summary of servicing assets for the year ended December 31, 2015 and 2014 is as follows (dollars in thousands:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

F-26


 

 

2015

 

2014

Balance, beginning of period

$

184 

 

$

153 

Additions:

 

 

 

 

 

Servicing obligations from sale of loan participations

 

59 

 

 

83 

Subtractions:

 

 

 

 

 

Amortization

 

(57)

 

 

(52)

Balance, end of period

$

186 

 

$

184 

 

For the years ended December 31, 2015 and 2014, the Company recognized gains of $49 thousand and $71 thousand, respectively, on the sales of loan participations. 

 

Note 7.Premises and Equipment

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2015

 

2014

 

 

 

 

 

 

 

Furniture and office equipment

 

$

392 

 

$

376 

Computer system

 

 

221 

 

 

221 

Leasehold improvements

 

 

25 

 

 

25 

 

 

 

 

 

 

 

Total premises and equipment

 

 

638 

 

 

622 

Less accumulated depreciation and amortization

 

 

(580)

 

 

(535)

 

 

 

 

 

 

 

Premises and equipment, net

 

$

58 

 

$

87 

 

Depreciation and amortization expense for the years ended December 31, 2015 and 2014 amounted to $45 thousand and $49 thousand, respectively.

 

Note 8.NCUA Credit Facilities

 

Members United Facility

 

On November 4, 2011, the Company and the National Credit Union Administration Board As Liquidating Agent of Members United Corporate Federal Credit Union (“Lender”) entered into an $87.3 million credit facility refinancing transaction (the “MU Credit Facility”).  The MU Credit Facility replaced a $100 million line of credit entered into by and between the Company and Members United Corporate Federal Credit Union on May 7, 2008.  Unless the principal amount of the indebtedness due is accelerated under the terms of the MU Credit Facility loan documents, the principal balance and any interest due on the MU Credit Facility will mature on October 31, 2018.  Under the MU Credit Facility, accrued interest is due and payable monthly in arrears on the first day of each month at the lesser of the maximum

F-27


 

interest rate permitted by applicable law under the loan documents or 2.525%.  The term loan may be repaid or retired without penalty, but any amounts repaid or prepaid under the MU Credit Facility may not be re-borrowed.  The MU Credit Facility requires monthly principal and interest payments of $393 thousand. The balance of the MU Credit Facility was $70.2 million and $73.1 million at December 31, 2015 and 2014, respectively.  The required minimum monthly payment on this facility is $393 thousand.

 

The MU Credit Facility includes a number of borrower covenants, including affirmative covenants to maintain the collateral free of liens, to timely pay the amounts due on the facility, to provide the Lender with interim or annual financial statements and annual and periodic reports filed with the U.S. Securities and Exchange Commission and maintain a minimum collateralization ratio of at least 110%  (120% for the MU Credit Facility and Wescorp Facility combined).  If at any time the Company fails to maintain its required minimum collateralization ratio, it will be required to deliver cash or qualifying mortgage loans in an amount sufficient to enable it to meet its obligation to maintain a minimum collateralization ratio.  At December 31, 2014, the collateral securing the MU Credit Facility had an aggregate principal balance of $92.0.  This represented a deficit of $1.6 million from the required collateral at December 31, 2014.  As a matter of expediency, the NCUA accepted a cash pledge in addition to the balance of loans pledged as collateral in satisfaction of the minimum collateralization ratio at December 31, 2014.  The Company was not required to make an additional principal payment to satisfy the deficit. See “Amendments to our Credit Facility Agreements” below for the amount of collateral securing the MU Credit Facility at December 31, 2015.

 

In addition to the minimum collateralization requirement, the MU Credit Facility also includes covenants which prevent the Company from renewing or extending a loan pledged as collateral under this facility unless certain conditions have been met and requires the borrower to deliver current financial statements to the Company.  Under the terms of the MU Credit Facility, the Company has established a lockbox maintained for the benefit of Lender that will receive all payments made by collateral obligors.  The Company’s obligation to repay the outstanding balance on this facility may be accelerated upon the occurrence of an “Event of Default” as defined in the MU Credit Facility.  Such Events of Default include, among others, failure to make timely payments due under the MU Credit Facility and the Company's breach of any of its covenants.  As of December 31, 2015 and 2014, the Company was in compliance with its covenants under the MU Credit Facility.

 

WesCorp Facility

 

On November 4, 2011, the Company and the National Credit Union Administration Board As Liquidating Agent of Western Corporate Federal Credit Union (previously herein defined as “Lender”) entered into a $23.5 million credit facility refinancing transaction (the “WesCorp Credit Facility Extension”).  The WesCorp Credit Facility Extension amends, restates and replaces a credit facility entered into by and between the Company and Western Corporate Federal Credit Union on November 30, 2009.  Unless the principal amount due on the WesCorp Credit Facility Extension is accelerated under the terms of the loan documents evidencing such credit facility, the principal balance and any interest due on the facility will be payable in full on October 31, 2018.  Under the WesCorp Credit Facility Extension, accrued interest is due and payable monthly in arrears on the first day of each month at the lesser of the maximum rate permitted by applicable law under the loan documents or 2.525%.  The term loan may be repaid or retired without penalty, but any amounts repaid or prepaid under the WesCorp Credit Facility Extension may not be re-borrowed.  The WesCorp Credit

F-28


 

Facility Extension requires monthly principal and interest payments of $106 thousand.  As of December 31, 2015 and 2014, $20.0 and $20.8 million, respectively, was outstanding on the WesCorp Credit Facility Extension. The required minimum monthly payment on this facility is $106 thousand.

 

The WesCorp Credit Facility Extension includes a number of borrower covenants, including affirmative covenants to maintain the collateral free of liens, to timely pay the amounts due on the facility, to provide the Lender with interim or annual financial statements and annual and periodic reports filed with the U.S. Securities and Exchange Commission and maintain a minimum collateralization ratio of at least 110% (120% for the MU Credit Facility and Wescorp Facility combined).  If at any time the Company fails to maintain its required minimum collateralization ratio, it will be required to deliver cash or qualifying mortgage loans in an amount sufficient to enable it to meet its obligation to maintain a minimum collateralization ratio.  As of December 31, 2014, the collateral securing the WesCorp Credit Facility Extension had an aggregate principal balance of $29.9 million. This represented a deficit of $1.3 million from the required collateral at December 31, 2014.  As a matter of expediency, the NCUA accepted a cash pledge in addition to the balance of loans pledged as collateral in satisfaction of the minimum collateralization ratio at December 31, 2015.  The Company was not required to make an additional principal payment to satisfy the deficit.  See “Amendments to our Credit Facility Agreements” below for the amount of collateral securing the Wescorp Credit Facility Extension at December 31, 2015.  As of December 31, 2015 and 2014, the Company was in compliance with its covenants under the Wescorp Credit Facility Extension. 

 

Future principal paydowns of borrowings from financial institutions are as follows at December 31:

 

 

 

 

 

 

 

 

 

 

2016

 

$

3,743 

2017

 

 

3,845 

2018

 

 

82,649 

 

 

$

90,237 

 

In addition to regular principal payments, the Company also made $2.5 million in principal payments during the year ended December 31, 2014 in order to remain in compliance with the minimum collateralization ratio requirement of our credit facility borrowings.  The Company did not make any additional principal payments during the year ended December 31, 2015.

 

Amendments to our Credit Facility Agreements

 

On March 30, 2015, the Company and the NCUA agreed to an Amendment to the Loan and Security Agreement (the “LSA Amendments”) for both the MU Credit Facility and the WesCorp Credit Facility Extension.  Under the terms of the LSA Amendments, the following changes to our credit facility agreements were made:

 

 

 

 

 

 

 

F-29


 

Members United and WesCorp Credit Facilities

 

Previous

Amended Facility

Minimum collateralization ratio and minimum combined collateralization ratio

128% on the Members United facility and 150% on the WesCorp facility

110% on each facility and 120% combined portfolio

Loan to value ratio at time loan is pledged

80%

80%

Minimum combined portfolio loan-to-value ratio, based on the loan-to-value at the time the loans are pledged

 

No requirement

70%

Minimum debt service coverage ratio at time loan is pledged

110%

110%

Minimum combined portfolio debt service coverage ratio, based on the debt service coverage at the time the loans are pledged

No requirement

115%

Permit cash collateral substitution

Not available

Yes, at 1:1 ratio

Maximum weighted average risk rating of notes held as collateral

No requirement

3.0 (“acceptable quality”) on each facility

and 2.85 on

combined portfolio

If the Company receives proceeds from the sale of a collateral loan, it will be required to prepay the credit facility in an amount sufficient to meet minimum collateralization ratio and combined minimum collateralization ratio

Company must meet the minimum

collateralization ratio for each facility

Company must meet the minimum collateralization

ratio requirement

and combined minimum

collateralization

ratio requirement

Ability to substitute collateral if a pledged loan is paid off or a loan no longer qualifies as eligible

Ability to substitute mortgage collateral

Ability to substitute cash in addition to mortgage collateral

Credit Manager’s Report

No requirement

On a quarterly basis, the Company must deliver a credit manager’s report

 

Collateral Securing Borrowings from Financial Institutions

 

At December 31, 2015, the collateral securing the Members United Credit Facility had an aggregate principal balance of $81.9 million and the collateral securing the Wescorp Credit

F-30


 

Facility Extension had an aggregate principal balance of $25.7 million.  In total, the collateral securing both facilities did not satisfy the 120% minimum collateralization ratio required by the amended agreement.  The Company pledged $686 thousand in cash to satisfy the deficit in loan collateral at December 31, 2015.  The total collateral pledged, including loans receivable and cash, satisfies the requirements of the amended credit facility agreements.

 

 

Note 9.Commitments and Contingencies

 

Credit-Related Financial Instruments

 

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 unadvanced 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 December 31, 2015 and December 31, 2014, the following financial instruments were outstanding whose contract amounts represent credit risk:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Contract Amount at:

 

 

 

 

 

 

 

 

 

December 31, 2015

 

December 31, 2014

 

 

 

 

 

 

 

Undisbursed loans

 

$

5,232

 

$

575

Standby letter of credit

 

$

1,071

 

$

1,440

 

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. In the opinion of management, any liability resulting from such proceedings would not have a material adverse effect on the financial statements.

 

F-31


 

Operating Lease Commitments

 

The Company has lease commitments covering its offices in Brea and Fresno, California. At December 31, 2015, future minimum rental payments for the years ending December 31 are as follows:

 

 

 

 

 

 

 

 

 

2016

 

$

142 

2017

 

 

146 

2018

 

 

129 

Total

 

$

417 

 

Total rent expense, including common area costs, was $143.5 thousand and $143.0 thousand for the years ended December 31, 2015 and 2014, respectively. The Brea office lease expires in 2018 and contains one additional option to renew for five years.

 

The Fresno office lease was scheduled to expire in 2015 and contained one option to renew for two years.  The Company negotiated an extension of this lease in February 2015.  The Fresno lease now expires in 2018.  There are no options to renew in the lease extension.

 

Note 10.Notes Payable

 

Notes payable are comprised of unsecured and secured notes totaling $47.6 million and $2.3 million, respectively, at December 31, 2015. Notes payable were comprised of unsecured and secured notes totaling $49.6 million and $310 thousand, respectively, at December 31, 2014.    The notes are payable to investors who have purchased the securities, including individuals, churches, and Christian ministries, many of whom are members of ECCU. 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.

 

In April 2008, the Company registered with the SEC $80.0 million of new Class A Notes in three series, including a Fixed Series, Flex Series and Variable Series.  This was a "best efforts" offering and continued through April 30, 2010.  The Company registered an additional $100.0 million of Class A notes on both June 3, 2010 and May 4, 2011.  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 Class A Notes required the Company to maintain a minimum tangible adjusted net worth, as defined in the Class A Notes Trust Indenture Agreement, of not less than $4.0 million.  The Company was in compliance with these covenants as of December 31, 2015 and 2014. 

 

The Class A Notes were issued under a Trust Indenture between the Company and U.S. Bank National Association (“US Bank”). The Class A Note Offering expired on December 31,

F-32


 

2014 and the Company discontinued the sale of its Class A Notes. At December 31, 2015 and 2014, $25.4 million and $41.1 million of these notes were outstanding, respectively.

 

In January 2015, the Company registered with the SEC $85.0 million of new Class 1 Notes in two series, including a Fixed Series and Variable Series.  This is a "best efforts" offering and will continue through December 31, 2017.  The offering includes two categories of notes, including a fixed interest note and a variable interest note.  The interest rates the Company will pay on the Fixed Series Notes are determined by reference to the Swap Index, an index that is based upon a weekly average Swap rate reported by the Federal Reserve Board, and is in effect on the date they are issued. These notes bear interest at the Swap Index plus a rate spread of 1.7% to 2.5% and have maturities ranging from 12 to 60 months.  The interest rates the Company pays on the Variable Series Notes are determined by reference to the Variable Index in effect on the date the interest rate is set and bear interest at a rate of the Swap Index plus a rate spread of 1.50% to 1.80%.  Effective as of January 6, 2015, the Variable Index is defined under the Class 1 Notes as the three month LIBOR rate. 

 

The Class 1 Notes also contain restrictive covenants pertaining to paying dividends, making redemptions, acquiring, purchasing or making certain payments, requiring the maintenance of minimum tangible net worth, limitations on the issuance of additional notes and incurring of indebtedness.  The Class 1 Notes require the Company to maintain a minimum tangible adjusted net worth, as defined in the Class 1 Notes Trust Indenture Agreement, of not less than $4.0 million.  The Company is not permitted to issue any Class 1 Notes if, after giving effect to such issuance, the Class 1 Notes then outstanding would have an aggregate unpaid balance exceeding $125.0 million.  The Company’s other indebtedness, as defined in the Class 1 Notes Trust Indenture Agreement, and subject to certain exceptions enumerated therein, may not exceed $20.0 million outstanding at any time while any Class 1 Notes are outstanding. The Company was in compliance with these covenants as of December 31, 2015. 

 

The Class 1 Notes were issued under a Trust Indenture between the Company and U.S. Bank National Association (“US Bank”).  The Class 1 Notes are part of up to $300 million of Class 1 Notes the Company may issue pursuant to the US Bank Indenture.  At December 31, 2015, $15.9 million of Class 1 Notes were outstanding.

 

In January 2015, the Company began offering Secured Investment Certificates 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 Investment Certificates to qualified investors.  The certificates require as collateral either cash pledged in the amount of 100% of the outstanding balance of the certificates or loans receivable pledged in the amount of 105% of the outstanding balance of the certificates.  At December 31, 2015, a total of $2.2 million in Secured Investment Certificates were outstanding.  The collateral securing the Secured Investment Certificates had an outstanding balance that totaled $3.6 million, which satisfies the minimum collateral requirement of the private placement memorandum.

 

In February 2013, the Company launched the sale of its Series 1 Subordinated Capital Notes pursuant to a limited private offering to qualified investors that meet the requirements of Rule 506 of Regulation D.  The Series 1 Subordinated Capital Notes have been offered with maturity terms from 12 to 60 months at an interest rate fixed on the date of issuance, as determined by the then current seven-day average rate reported by the U.S. Federal Reserve

F-33


 

Board for interest rate swaps. At December 31, 2015 and 2014, a total of $3.4 million and $4.7 million in notes sold pursuant to this offering were outstanding, respectively. 

 

In March 2013, the Company launched the sale of a new private offering of its 2013 International Notes.  This offering was made only to qualified investors that meet the requirements of Rule 902 of Regulation S. Including International Notes sold under previous private offerings, at December 31, 2015 and 2014, a total of $52 thousand and $346 thousand of its International Notes were outstanding, respectively.

 

Under the Series 1 Subordinated Capital Notes and 2013 International Notes offerings, the Company is subject to certain covenants, including limitations on restricted payments, limitations on the amount of notes that can be sold, restrictions on mergers and acquisitions, and proper maintenance of books and records.  The Company was in compliance with these covenants at December 31, 2015. 

 

A summary of notes payable at December 31 is as follows (dollars in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amount

 

Weighted Average Interest Rate

 

 

 

2015

 

 

2014

 

2015

 

2014

SEC Registered Public Offerings

 

 

 

 

 

 

 

 

 

 

 

 

Class A Offering

 

$

25,360 

 

$

41,058 

 

3.84 

%

 

3.72 

%

Class 1 Offering

 

 

15,933 

 

 

--

 

3.08 

%

 

--

%

 

 

 

 

 

 

 

 

 

 

 

 

 

Private Offerings

 

 

 

 

 

 

 

 

 

 

 

 

Special Offering

 

 

2,884 

 

 

3,476 

 

3.66 

%

 

3.36 

%

Special Subordinated Notes

 

 

3,425 

 

 

4,724 

 

5.05 

%

 

4.93 

%

Secured Notes

 

 

2,261 

 

 

310 

 

3.33 

%

 

2.87 

%

International Offering

 

 

52 

 

 

346 

 

3.62 

%

 

3.67 

%

Total

 

$

49,915 

 

$

49,914 

 

 

 

 

 

 

 

The following are maturities of notes payable for each of the next five years ending December 31 (dollars in thousands):

 

 

 

 

 

 

 

 

 

2016

 

$

18,504 

2017

 

 

10,486 

2018

 

 

8,374 

2019

 

 

7,403 

2020

 

 

5,148 

 

 

$

49,915 

 

 

 

 

 

 

F-34


 

Note 11.Office Operations and Other Expenses

 

Office operations and other expenses for the year ended December 31 comprise the following:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2015

 

2014

 

 

 

 

 

 

 

FINRA fees

 

$

15 

 

$

31 

Repairs and maintenance

 

 

262 

 

 

253 

Depreciation

 

 

45 

 

 

49 

Insurance

 

 

324 

 

 

309 

Travel expenses

 

 

72 

 

 

89 

Human resources

 

 

71 

 

 

52 

Software servicing

 

 

59 

 

 

55 

Referral fees

 

 

106 

 

 

Correspondent fees

 

 

64 

 

 

54 

Other

 

 

275 

 

 

213 

 

 

 

 

 

 

 

Total

 

$

1,293 

 

$

1,109 

 

 

 

 

Note 12.Preferred and Common Units Under LLC Structure

 

The Series A Preferred Units are entitled to a cumulative Preferred Return, payable quarterly in arrears, equal to the liquidation preference times a dividend rate of 190 basis points through March 2013 and 25 basis points thereafter over the 1-year LIBOR rate in effect on the last day of the calendar month in which the Preferred Return is paid.  In addition, the Series A Preferred Units are entitled to an annual Preferred Distribution, payable in arrears, equal to 10% of the Company’s profits, after subtracting from profits the Preferred Return.  The Company accrued $23 thousand as an annual Preferred Distribution at December 31, 2015.  The Company did not have any accrued Preferred Distributions at December 31, 2014.

 

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

 

The Class A Common Units have voting rights.

 

 

F-35


 

Note 13.Retirement Plans

 

401(k)

 

Employees who are at least 21 years of age are eligible to participate in the ADP 401(k) plan upon the hire date. No minimum service is required and the minimum age is 21. Each employee may elect voluntary contributions not to exceed 60% of salary, subject to certain limits based on Federal tax law. The plan has a matching program, 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%, up to a maximum of 5% of the employee’s compensation.  Company matching contributions for the plan years ended December 31, 2015 and 2014 were $80.8 thousand and $66.9 thousand, respectively.

 

Profit Sharing

The profit sharing plan is for all employees who, at the end of the calendar year, are at least 21 years old, still employed, and have at least 900 hours of service during the plan year. The amount annually contributed on behalf of each qualified employee is determined by the managers, and is calculated as a percentage of the eligible employee's annual earnings. There were no contributions to the profit sharing plan for the years ended December 31, 2015 and 2014.

F-36


 

Note 14.Fair Value

 

Fair Value of Financial Instruments

 

The carrying amounts and estimated fair values of financial instruments at December 31 are as follows (dollars in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurements at December 31, 2015 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 

 

$

11,645 

 

$

11,645 

 

$

--

 

$

--

 

$

11,645 

Loans, net

 

 

132,932 

 

 

--

 

 

--

 

 

136,468 

 

 

136,468 

Accrued interest receivable

 

 

545 

 

 

--

 

 

--

 

 

545 

 

 

545 

FINANCIAL LIABILITIES:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NCUA credit facilities

 

$

90,237 

 

$

--

 

$

 

 

$

90,258 

 

$

90,258 

Notes payable

 

 

49,915 

 

 

--

 

 

--

 

 

50,693 

 

 

50,693 

Other financial liabilities

 

 

178 

 

 

--

 

 

--

 

 

178 

 

 

178 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurements at December 31, 2014 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 

 

$

17,251 

 

$

17,251 

 

$

--

 

$

--

 

$

17,251 

Loans, net

 

 

131,586 

 

 

--

 

 

--

 

 

133,166 

 

 

133,166 

Accrued interest receivable

 

 

562 

 

 

--

 

 

--

 

 

562 

 

 

562 

FINANCIAL LIABILITIES:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NCUA credit facilities

 

$

93,880 

 

$

--

 

$

 

 

$

93,077 

 

$

93,077 

Notes payable

 

 

49,914 

 

 

--

 

 

--

 

 

50,603 

 

 

50,603 

Other financial liabilities

 

 

185 

 

 

--

 

 

--

 

 

185 

 

 

185 

 

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

F-37


 

necessarily indicative of the underlying value of the Company, or the amounts the Company could have realized in a sales transaction at December 31, 2015 and 2014.  

 

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

 

Cash – The carrying amounts reported in the consolidated 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.

 

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.

 

Borrowings from Financial Institutions – The fair values of borrowings from financial institutions are estimated using discounted cash flow analyses based on current incremental borrowing rates for similar types of borrowing arrangements.

 

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 terms of the agreements and the counterparties' credit standing. The fair value of loan commitments is insignificant at December 31, 2015 and 2014.

 

Fair Value Measurements Using Fair Value Hierarchy

 

The following section describes the valuation methodologies used for assets measured at fair value as well as the general classification of such instruments pursuant to the valuation hierarchy.

 

Fair value hierarchy for valuation gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The fair value hierarchy is as follows:

 

·

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

 

·

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

 

·

Level 3 inputs are unobservable inputs that are supported by little or no market activity and that are significant to the fair value of 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

F-38


 

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.

 

The following section describes the valuation methodologies used for assets measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy.

 

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 December 31, 2015:

 

 

 

 

 

 

 

 

 

 

 

 

Collateral dependent loans (net of allowance and discount)

 

$

--

 

$

--

 

$

5,940 

 

$

5,940 

Foreclosed assets

 

 

--

 

 

2,586 

 

 

900 

 

 

3,486 

 

 

$

--

 

$

2,586 

 

$

6,840 

 

$

9,426 

   

 

 

 

 

 

 

 

 

 

 

 

 

   

 

 

 

 

 

 

 

 

 

 

 

 

Assets at December 31, 2014:

 

 

 

 

 

 

 

 

 

 

 

 

Collateral dependent loans (net of allowance and discount)

 

$

--

 

$

--

 

$

5,672 

 

$

5,672 

Foreclosed assets

 

 

--

 

 

--

 

 

3,931 

 

 

3,931 

 

 

$

--

 

$

--

 

$

9,603 

 

$

9,603 

 

Impaired Loans

 

Collateral-dependent impaired loans are carried at the fair value of the collateral less estimated costs to sell. 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 comparable properties 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.  Because of the uncertain market, fair value for collateral-dependent loans based on appraisals more than 30 days old were deemed to involve significant adjustments based on unobservable inputs.

 

 

F-39


 

Foreclosed Assets  

 

Real estate acquired through foreclosure or other proceedings (foreclosed assets) is 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 and foreclosed assets held for sale are carried at the lower of cost or fair value, less estimated costs of disposal. The fair values of real properties initially are 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 or in the collateral. Subsequent valuations of the real properties are based on management estimates or on updated appraisals. Foreclosed assets are categorized under Level 3 when significant adjustments are made by management to appraised values based on unobservable inputs. Otherwise, foreclosed assets are categorized under Level 2 if their values are based solely on appraisals. 


The following is a reconciliation of the assets for which significant unobservable inputs (Level 3) were used in determining fair value (dollars in thousands) for the years ended December 31, 2015 and 2014:

 

 

 

 

 

 

 

 

 

 

 

Impaired loans

 

 

(net of allowance and discount)

Balance, December 31, 2014

 

$

5,672 

Allowance and discount, net of discount amortization

 

 

1,016 

Loans that became impaired

 

 

2,268 

Loan payments and payoffs

 

 

(3,016)

Balance, December 31, 2015

 

$

5,940 

 

 

 

 

 

 

 

 

 

 

 

 

Foreclosed assets

 

 

(net of allowance and discount)

Balance, December 31, 2014

 

$

3,931 

Re-classifications of assets from Level 3 into Level 2

 

 

(2,586)

Sale of foreclosed assets

 

 

(456)

Valuation allowances recovered on foreclosed assets

 

 

11 

Balance, December 31, 2015

 

$

900 

 

 

 

 

 

 

 

 

 

 

 

 

Impaired loans

 

 

(net of allowance and discount)

Balance, December 31, 2013

 

$

6,029 

Allowance and discount, net of discount amortization

 

 

156 

Transfer of loans into foreclosed assets

 

 

(3,260)

Loans that became impaired

 

 

3,962 

Loan payments and payoffs

 

 

(1,215)

Balance, December 31, 2014

 

$

5,672 

 

 

 

 

 

F-40


 

 

 

 

 

 

 

Foreclosed assets

 

 

(net of allowance and discount)

Balance, December 31, 2013

 

$

3,308 

Transfer of loans into foreclosed assets

 

 

3,260 

Sale of foreclosed assets

 

 

(205)

Valuation allowances taken on foreclosed assets

 

 

(2,432)

Balance, December 31, 2014

 

$

3,931 

 

The following tables present the valuation methodology and unobservable inputs for level 3 assets measured at fair value on a non-recurring basis at December 31:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2015

Assets

 

 

Fair Value (in thousands)

 

Valuation Techniques

 

Unobservable Input

 

Range (Weighted Average)

Impaired Loans

 

$

5,940

 

Discounted appraised value

 

Selling cost

 

10% - 15%  (10.61%)

 

 

 

 

 

Internal evaluations

 

Estimated market decrease

 

0% - 20%  (5.66%)

 

 

 

 

 

 

 

 

 

 

Foreclosed assets

 

$

900

 

Discounted appraised value or discounted listing price

 

Selling cost

 

8% - 10%  (9.30%)

 

 

 

 

 

Discounted appraised value or discounted listing price

 

Estimated market decrease

 

0% - 53%  (30.21%)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2014

Assets

 

 

Fair Value (in thousands)

 

Valuation Techniques

 

Unobservable Input

 

Range (Weighted Average)

Impaired Loans

 

$

5,672

 

Discounted appraised value

 

Selling cost

 

10%  (10%)

 

 

 

 

 

Internal evaluations

 

Discount due to title dispute

 

0% - 50%  (8.08%)

 

 

 

 

 

 

 

 

 

 

Foreclosed assets

 

$

3,931

 

Discounted appraised value or discounted listing price

 

Selling cost

 

10% - 20%  (15.54%)

F-41


 

 

 

 

 

 

 

 

Note 15.Income Taxes and State LLC Fees

 

The Company is subject to a California gross receipts LLC fee of approximately $12,000 per year.  MP Securities is subject to a California gross receipts LLC fee of approximately $6,000 for the year ended December 31, 2015.  MP Realty incurred a tax loss for the years ended December 31, 2015 and 2014, and recorded a provision of $800 per year for the state minimum franchise tax.

 

MP Realty has federal and state net operating loss carryforwards of approximately $319,000 and $316,000, 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, 2015 and 2014.

 

Tax years ended December 31, 2011 through December 31, 2015 remain subject to examination by the Internal Revenue Service and the tax years ended December 31, 2010 through December 31, 2015 remain subject to examination by the California Franchise Tax Board.

 

Note 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 and broker-dealer.  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 mutual funds, and provides 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.

 

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 is as follows (dollars in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

F-42


 

 

 

Financial Information by Segment for the Year Ended December 31, 2015

 

 

 

Finance Company

 

 

Broker Dealer

 

 

Total

 

 

 

 

 

 

 

 

 

 

External income

 

$

8,361 

 

$

525 

 

$

8,886 

Intersegment revenue

 

 

--

 

 

618 

 

 

618 

External non-interest expenses

 

 

3,581 

 

 

1,357 

 

 

4,938 

Intersegment non-interest expenses

 

 

125 

 

 

--

 

 

125 

Segment net profit (loss)

 

 

571 

 

 

(214)

 

 

357 

Segment assets

 

 

148,907 

 

 

241 

 

 

149,148 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial Information by Segment for the Year Ended December 31, 2014

 

 

 

Finance Company

 

 

Broker Dealer

 

 

Total

 

 

 

 

 

 

 

 

 

 

External income

 

$

9,284 

 

$

137 

 

$

9,421 

Intersegment revenue

 

 

--

 

 

651 

 

 

651 

External non-interest expenses

 

 

5,634 

 

 

1,057 

 

 

6,691 

Intersegment non-interest expenses

 

 

649 

 

 

--

 

 

649 

Segment net profit (loss)

 

 

(1,623)

 

 

(272)

 

 

(1,895)

Segment assets

 

 

153,442 

 

 

460 

 

 

153,902 

 

 

The following schedules are presented to reconcile amounts in the foregoing segment information to the amounts reported in the Company's consolidated financial statements (dollars in thousands).

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2015

Revenue

 

 

 

Total revenue of reportable segments

 

$

9,504 

Intersegment revenue

 

 

(618)

Consolidated revenue

 

$

8,886 

 

 

 

 

Non-interest expenses

 

 

 

Total non-interest expenses of reportable segments

 

$

5,063 

Intersegment non-interest expenses

 

 

(125)

Consolidated non-interest expenses

 

$

4,938 

F-43


 

 

 

 

 

Profit

 

 

 

Total profit of reportable segments

 

$

357 

Interesegment profits

 

 

--

Consolidated net income

 

$

357 

 

 

 

 

Assets

 

 

 

Total assets of reportable segments

 

$

149,148 

Segment accounts receivable from corporate office

 

 

(4)

Consolidated assets

 

$

149,144 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2014

Revenue

 

 

 

Total revenue of reportable segments

 

$

10,072 

Intersegment revenue

 

 

(651)

Consolidated revenue

 

$

9,421 

 

 

 

 

Non-interest expenses

 

 

 

Total non-interest expenses of reportable segments

 

$

7,340 

Intersegment non-interest expenses

 

 

(649)

Consolidated non-interest expenses

 

$

6,691 

 

 

 

 

Profit

 

 

 

Total profit of reportable segments

 

$

(1,895)

Interesegment profits

 

 

--

Consolidated net income

 

$

(1,895)

 

 

 

 

Assets

 

 

 

Total assets of reportable segments

 

$

153,902 

Segment accounts receivable from corporate office

 

 

(7)

Consolidated assets

 

$

153,895 

 

 

 

 

 

 

 

 

Note  17.Condensed Financial Statements of Parent Company

 

Financial information pertaining only to the parent company, Ministry Partners Investment Company, LLC, is as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

F-44


 

Balance Sheets

 

December 31

 

 

2015

 

2014

Assets:

 

 

 

 

 

 

Cash

 

$

11,420 

 

$

16,814 

Loans receivable, net of allowance for loan losses

 

 

132,932 

 

 

131,586 

Accrued interest receivable

 

 

545 

 

 

562 

Property and equipment, net

 

 

48 

 

 

75 

Investment in subsidiaries

 

 

(230)

 

 

13 

Due from subsidiaries

 

 

458 

 

 

438 

Debt issuance costs, net

 

 

122 

 

 

116 

Foreclosed assets, net

 

 

3,486 

 

 

3,931 

Other assets

 

 

275 

 

 

307 

Total assets

 

$

149,056 

 

$

153,842 

 

 

 

 

 

 

 

Liabilities and equity:

 

 

 

 

 

 

NCUA credit facilities

 

$

90,237 

 

$

93,880 

Notes payable

 

 

49,915 

 

 

49,914 

Accrued interest payable

 

 

141 

 

 

159 

Other liabilities

 

 

605 

 

 

1,939 

Total liabilities

 

 

140,898 

 

 

145,892 

 

 

 

 

 

 

 

Equity

 

 

8,158 

 

 

7,950 

 

 

 

 

 

 

 

Total liabilities and members' equity

 

$

149,056 

 

$

153,842 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Statements of Income

 

Years Ended December 31

 

 

2015

 

2014

Income:

 

 

 

 

 

 

Interest income

 

$

8,054 

 

$

9,086 

Other income

 

 

307 

 

 

197 

Total income

 

 

8,361 

 

 

9,283 

Interest expense:

 

 

 

 

 

 

NCUA credit facilities

 

 

2,328 

 

 

2,466 

Notes payable

 

 

1,787 

 

 

1,895 

Total interest expense

 

 

4,115 

 

 

4,361 

Provision (credit) for loan losses

 

 

(524)

 

 

252 

Other operating expenses

 

 

4,150 

 

 

6,251 

Income (loss) before provision for income taxes

 

 

620 

 

 

(1,581)

Provision for income taxes and state LLC fees

 

 

15 

 

 

 

 

 

605 

 

 

(1,590)

F-45


 

Equity in undistributed net loss of subsidiaries

 

 

(248)

 

 

(305)

Net income (loss)

 

 

357 

 

 

(1,895)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Statements of Cash Flows

 

Years Ended December 31

 

 

2015

 

2014

Cash Flows from Operating Activities

 

 

 

 

 

 

Net income (loss)

 

$

357 

 

$

(1,895)

Adjustments to reconcile net income to net cash provided (used) by operating activities:

 

 

 

 

 

 

Equity in undistributed net loss of subsidiaries

 

 

248 

 

 

305 

Depreciation

 

 

41 

 

 

47 

Provision (credit) for loan losses

 

 

(524)

 

 

252 

Provision (credit) for foreclosed asset losses

 

 

(11)

 

 

2,431 

Amortization of deferred loan fees

 

 

(174)

 

 

(356)

Amortization of debt issuance costs

 

 

114 

 

 

83 

Accretion of allowance for loan losses on restructured loans

 

 

(24)

 

 

(16)

Accretion of loan discount

 

 

(44)

 

 

(24)

Gain on sale of loans

 

 

(49)

 

 

(71)

Gain on sale of foreclosed assets

 

 

(132)

 

 

(5)

Changes in:

 

 

 

 

 

 

Accrued interest receivable

 

 

17 

 

 

45 

Other assets

 

 

(65)

 

 

229 

Other liabilities and accrued interest payable

 

 

51 

 

 

798 

Net cash provided by operating activities

 

 

(195)

 

 

1,823 

 

 

 

 

 

 

 

Cash Flows from Investing Activities

 

 

 

 

 

 

Loan originations

 

 

(26,651)

 

 

(26,499)

Loan sales

 

 

6,057 

 

 

13,604 

Loan principal collections, net

 

 

18,703 

 

 

24,714 

Foreclosed asset sales

 

 

588 

 

 

210 

Purchase of property and equipment

 

 

(14)

 

 

(17)

Sale of property and equipment

 

 

--

 

 

10 

Net cash provided by investing activities

 

 

(1,317)

 

 

12,022 

 

 

 

 

 

 

 

Cash Flows from Financing Activities

 

 

 

 

 

 

Net change in NCUA credit facilities

 

 

(3,643)

 

 

(6,024)

Net changes in notes payable

 

 

 

 

2,246 

Debt issuance costs

 

 

(124)

 

 

(165)

Dividends paid on preferred units

 

 

(116)

 

 

(139)

 

 

 

 

 

 

 

Cash used by financing activities

 

 

(3,882)

 

 

(4,082)

F-46


 

Net increase (decrease) in cash

 

 

(5,394)

 

 

9,763 

Cash at beginning of period

 

 

16,814 

 

 

7,051 

Cash at end of period

 

$

11,420 

 

$

16,814 

 

 

 

 

 

 

 

Supplemental Disclosures of Cash Flow Information

 

 

 

 

 

 

Interest paid

 

$

4,128 

 

$

4,720 

Income taxes and state LLC fees paid

 

$

12 

 

$

12 

Non-cash Investing and Financing Activities

 

 

 

 

 

 

Transfer of loans to foreclosed assets

 

$

--

 

$

3,260 

Loans made to facilitate the sale of foreclosed assets

 

$

--

 

$

--

 

 

 

 

 

 

Note 18.Subsequent Events

 

In December 2015, the Company finalized an agreement with Intertex Property Management to enter into a joint venture to form Tesoro Hills, LLC, 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 joint venture as part of the agreement and transferred the carrying value of the property from foreclosed assets to investments.  The Company’s investment in the joint venture is $900 thousand, which is equal to the Company’s carrying value in the foreclosed asset at December 31, 2015. 

 

In March 2016, ECCU closed sales on two foreclosed assets in which the Company owned a participation interest.  The Company’s interest in one of the sales was $1.2 million, which resulted in a gain on sale of $56 thousand.  The Company’s interest in the other sale was $1.3 million, which led to a gain on sale of $223 thousand

 

 

F-47


 

 

 

 

 

Item 9.

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

 

 

 

Item 9A.

CONTROLS AND PROCEDURES

 

Evaluation of Disclosure Controls and Procedures

 

Our Principal Executive Officer and Principal Financial Officer have evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the fiscal period ending December 31, 2015 covered by this Annual Report on Form 10-K. Based upon such evaluation, our Principal Executive Officer and Principal Financial Officer have concluded that our disclosure controls and procedures were effective as of and for the year ended December 31, 2015. This conclusion by our Principal Executive Officer and Principal Financial Officer does not relate to reporting periods after December 31, 2015.  

 

Changes in Internal Control Over Financial Reporting

 

There were no changes in internal control over financial reporting during the year ended December 31, 2015.

 

Management’s Report on Internal Control Over Financial Reporting

 

Management is responsible for establishing and maintaining adequate internal control over our financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act). Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America.

 

Our internal controls over financial reporting include those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America, and that our receipts and expenditures are being made only in accordance with authorizations of management and the Board; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition our assets that could have a material effect on our financial statements.

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Management assessed the effectiveness of our internal control over financial reporting as of and for the year ended

 

91


 

December 31, 2015.  In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission Internal Control‑Integrated Framework. Based on this assessment, management believes that, as of and for the year ended December 31, 2015, our internal control over financial reporting is effective.

 

This annual report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our registered public accounting firm pursuant to rules of the SEC that permit us to provide only management’s report in this Annual Report on Form 10-K.

 

 

 

Item 9B.

OTHER INFORMATION

 

None.

 

 

PART III

 

 

 

Item 10.

MANAGERS AND EXECUTIVE OFFICERS OF THE REGISTRANT

 

Set forth below are the members of our Board of Managers and executive officers: 

 

 

 

 

Name

Age

Managers/Executive Officers

R. Michael Lee

57

Chairman of the Board, Manager

Van C. Elliott

78

Secretary, Manager

Joseph Turner

48

Chief Executive Officer and President

Susan B. Reilly

59

Senior Vice President and Chief Financial Officer

Robert Schepman

76

Vice President, Lender Relations

Tyrus R. Salter, Jr.

56

Vice President, Lending

Harold D. Woodall

70

Senior Vice President and Chief Credit Officer

Arthur G. Black*

77

Manager

Juli Anne S. Callis

63

Manager

Jerrod Foresman

48

Manager

Jeffrey T. Lauridsen

66

Manager

Abel Pomar**

51

Manager

 

*Mr. Black has advised our Board Chairman that he intends to retire from the Board of Managers during 2016, but has not tendered notice of the effective date of his retirement.

 

** It should be noted that Robert McDougall served as a Manager from May 2015 until his resignation from the Board of Managers in February 2016.  Mr. McDougall accepted a new position with Santander Bank in Boston, Massachusetts. In February 2016, Abel Pomar was appointed by the Company’s Board of Managers to complete Mr. McDougall’s term of office as a Class III Manager

 

92


 

The following is a summary of the business experience of our executive officers and managers.  With our conversion from a corporation to a limited liability company on December 31, 2008, we are governed by a Board of Managers that supervises our affairs (hereinafter referred to as the “Board”).

 

R. MICHAEL LEE has served as a member of our Board since January 2009. He was appointed Chairman of the Board in May 2015.  Mr. Lee currently serves as Chief Executive Officer and President for Kane County Teacher’s Credit Union. Previously, Mr. Lee served as Vice President Member Relations for Alloya Corporate Federal Credit Union, President of Midwest Region for Members United Federal Credit Union, Chief Membership Officer for Mid-States Corporate Federal Credit Union, Senior Vice President US Central Federal Credit Union, SVP Corporate Network eCom, SVP Corporate One Federal Credit Union and Vice President of Sales for a national insurance agency.  In the insurance industry, Mr. Lee spent 15 years in different positions that lead him to managing a national sales force that served the needs of business owners. Mr. Lee currently serves on the boards of Illinois Credit Union Foundation and Illinois Credit Union Executive Society. He attended Southern Illinois University; CUNA’s Financial Management School and completed numerous industries training sessions throughout his career. Mr. Lee adds special expertise to our Board with his years of experience as an executive of a number of large financial institutions and with his deep knowledge of the financial industry. Mr. Lee currently serves as, Vice Chairman of the Board, member of our Executive Committee, Governance Committee, Asset-Liability Management Committee and serves as the Chairman of the Board for Ministry Partners Securities, LLC.

 

JOSEPH W. TURNER, JR. has served as Chief Executive Officer and President since December 3, 2015. Mr. Turner is also the Chief Executive Officer and President for Ministry Partners Securities LLC, the wholly-owned subsidiary of Ministry Partners Investment Company. Mr. Turner also held the position as Chief Compliance Officer of Ministry Partners Securities LLC until December 14, 2015. During his tenure with the Company, Mr. Turner has led the Company’s efforts in transitioning its wholly-owned broker dealer to a more robust and diverse financial services firm, launching its investment advisory and insurance company activities in addition to overseeing the capital raising efforts related to the Company’s proprietary products. Mr. Turner was also instrumental in formalizing strategic partnerships with Evangelical Christian Credit Union (the Company’s largest equity owner) and America’s Christian Credit Union to provide complimentary financial products and services to their collective members. Prior to joining the Company in 2011, Mr. Turner served as Regional Vice President, Chief Operating Officer, Chief Executive Officer and President for Strongtower Financial, Inc., a Fresno, California based broker dealer and advisory firm which specialized in providing investment banking services, mortgage financing for churches and ministries, and investment and insurance products and services. Prior to joining Strongtower in 2007, Mr. Turner served as Managing Director of Principal Financial Group where he led a financial advisory and insurance group. Mr. Turner began his career with Prudential Preferred as an investment advisor in 1990. Mr. Turner received his Bachelor of Science in Business Administration – Finance degree from California State University, Fresno. Mr. Turner has completed industry leadership training both at Drake University and the Wharton School of Business. Mr. Turner holds the FINRA Series 6, 7, 24, 63, 65, and 51 as well as life, health and disability licenses in over 23 states.

 

93


 

 

VAN C. ELLIOTT has served as a member of our Board since 1991. He has served as a director for ECCU from April 1991 until the present (except for the periods from March 1997 to March 1998 and March 2004 to March 2005). He serves on the Board of Vanguard Global Network, an organization that trains pastors internationally. Mr. Elliott served as associate director of the Conservative Baptist Association of Southern California from 1980 to 1994, where he was responsible for the general administrative oversight of the association’s activities. Since that time, he has been self-employed as a consultant providing financial and fund raising consultation services to church and church-related organizations. He received his Bachelor’s and Master’s degrees in mathematics and speech from Purdue University and spent seven years in the computer industry. Mr. Elliott holds a Master of Divinity from Denver Seminary and has spent fourteen years in local church ministries serving in the area of Christian education and administration. He has completed post-graduate instruction at the College for Financial Planning. Mr. Elliott is a member of the Financial Planning Association and holds the professional designation of Certified Financial Planner.®   Mr. Elliott brings to our Board his extensive experience as a credit union board member, and intimate knowledge of church and ministry financial operations. He serves on our Executive Committee and on our Audit Committee.

 

SUSAN B. REILLY has served as our Senior Vice President and Chief Financial Officer since August 18, 2011 and was previously appointed as our Vice President of Finance and Principal Accounting Officer in December, 2007. Prior to joining us, Ms. Reilly served as Controller for Pacific Rim Capital, a private equity investment firm. Before joining that firm in 2007, she was Senior Vice President and Treasurer for East West Bank. Prior to joining East West Bank in 2004, Ms. Reilly served as Treasurer for Catalina Restaurant Group. Before joining that company in 2003, she worked for Parson Consulting Group. Ms. Reilly holds a Bachelor of Science Degree from the University of California Riverside. She completed post-graduate work at California State University at Fullerton and attended the University of Southern California - Marshall School of Business - East West Bank Leadership Program. In addition to holding a California life and disability insurance license, Ms. Reilly holds her series 7, 24, 27, and 99 securities licenses.

 

ROBERT SCHEPMAN has served as our Vice President for Lender Relations since August of 2010. Mr. Schepman has originated church mortgages for twenty years, beginning with Christian Mutual Life in 1987 and served as a Ministry Development Officer for ECCU for 17 years until his retirement in 2009. From 1981 to 1987, Mr. Schepman originated commercial loans and commercial real estate syndications as a partner in Commercial Capital Resources. Prior to that time, Mr. Schepman owned and operated a commercial metal fabrications business for nine years and enjoyed earlier successes as a securities salesperson and in various other product sales capacities. Mr. Schepman earned his Bachelor of Business Administration degree from Woodbury University, Los Angeles, in 1960. He has held the California Real Estate Broker license since 1990.

 

TYRUS R. SALTER, Jr. has served as Vice President for Ministry Partners Investment Company since October 1, 2015. Mr. Salter’s primary areas of responsibilities revolve around business development activities, management of ministry relationships and strategic planning initiatives as part of the overall leadership team. Prior to joining Ministry Partners, Mr. Salter

 

94


 

held several key roles at the North American Mission Board (NAMB) from 2001 until 2015 including serving as the National Director  for Church Finance Ministry where he was responsible for management of a $155 million loan fund, a $39 million real estate acquisition fund, and helped in directing a $207 million professionally managed equities portfolio. Mr. Salter was also responsible for a team of professional financial consultants that from 2003 through 2014 completed over 500 church loans with aggregate amount financed in excess of $245 million.  Prior to his tenure with the North American Mission Board, Mr. Salter spent six years as the Church Services Team Leader for the State Convention of Baptist in Ohio. Prior to that, Mr. Salter served in the U.S. based airlines industry for nearly 15 years. Mr. Salter earned his Bachelor of Science in Business Administration from McNeese State University, Lake Charles, LA in 1983.

 

HAROLD D. WOODALL has served as our Vice President for Lending since May, 2007 and was appointed Senior Vice President and Chief Credit Officer on August 18, 2011. His responsibilities include the general management of development, underwriting and processing of loan origination and mortgage investment. Mr. Woodall previously served as Vice President for Lending Services at the California Baptist Foundation from 1996 to 2006, where he was responsible for general management of a $130 million loan fund, including origination of over $500 million in church and ministry loans during that period. His previous experience also includes commercial lending, medical equipment manufacturing, real estate sales, oil and gas production and agribusiness consulting. Mr. Woodall is a graduate of Oklahoma State University in Stillwater Oklahoma with a B.S. in Agricultural Economics.

 

ARTHUR G. BLACK has served as a member of our Board since 1997 and is retired. He served as Chairman of the Board of Directors for Haven Ministries from 2002 to 2012. Mr. Black served as Director of Ministry Support for Ambassador Advertising Agency from 1998 to 2007. He served as founding Executive Vice President of Truth For Life from 1994 to 1997 and served as director of U.S. broadcasting for Insight For Living from 1993 to 1994. He was Executive Vice President & COO for Solid Rock Radio from 1991 to 1993 and served as the Managing Director of the Biola Hour from 1981 to 1991. Mr. Black began his career in Christian ministry management with Biola University, joining that staff in 1974. Prior to that, he served in various corporate sales and marketing management positions and was the owner/President of two consumer product/service companies for a period of six years.  Mr. Black was a General Partner for Rancho Sierra Acres, Christian Investors, P/L Properties and Ocean View Investors covering a cumulative period of 30 years beginning in 1980. Mr. Black has completed the equivalent of two years of business courses towards a degree in business at UCLA. Mr. Black’s long history of working for and with evangelical ministries provides us with keen insights into the needs and operations of the ministries who are our borrowers and investors. Mr. Black serves as Chairman of our Loan Committee.

 

JULI ANNE S. CALLIS has served as a member of our Board since 2007. She is currently the Senior Vice President of Research and Development for Western Bancorp in San Jose, California.  Prior to her current engagement, she was President and Chief Executive Officer of the National Institute of Health Federal Credit Union. Prior to that, she was Executive Vice President and Chief Operating Officer of KeyPoint Credit Union and the President of its subsidiary, KeyPoint Financial Services. Before joining KeyPoint Credit Union, Ms. Callis

 

95


 

served as Vice President for Business Development, Marketing and Legislative Affairs from 1988-1995 at Langley Federal Credit Union. Prior to joining the credit union industry, Ms. Callis served as the Director of Sales for the US Navy Mid-Atlantic Region, which included the direct responsibility for public relations and sales for all Navy Exchange and Commissary Operations in the Mid-Atlantic States, Europe, Iceland and Bermuda. Ms. Callis received her Bachelor of Science degree in Community Health and Education from East Carolina University and received a Master’s degree in Organizational Development from the University of San Francisco, where she is pursuing a Ph.D.  Ms. Callis currently serves on the Board of Directors for the George Washington Institute of Health and Women in BIO. She also previously served as Chair for the Executive Committee of the Open Solutions, Inc. Client Association and serves currently as a Trustee of the International Mission Board of the Southern Baptist Convention. Ms. Callis provides our Board with the benefit of her extensive experience in financial institution operations and technology and especially, her asset-liability management expertise. Ms. Callis serves as our Chair of the Asset-Liability Management Committee and is also a member of our Executive Committee.

 

JERROD FORESMAN has served as a member of our Board since May, 2012. He is the President, Chief Compliance Officer and Financial Operations Principal of Bankers & Investors Company Inc., a registered broker/dealer and investment advisor headquartered in Kansas City, Kansas. B&I is a non-bank affiliate of Valley View Bancshares and its seven local community banks and 45 branches. Mr. Foresman has been serving as a financial advisor since 1990 and has managed and owned financial advisory/marketing firms specializing in working with credit unions and community banks since 1993. Mr. Foresman attended Missouri State University and is currently studying for additional financial designations from the American College in Bryn Mawr, PA. He is a contributing member of the Wealth Management RIA Board of Advisors, Advisor Confidence Index (ACI) from Rydex. Mr. Foresman holds the FINRA Series 7, 24, 27, 63, 65 and 66 as well as life, health, property & casualty insurance licenses.

 

JEFFREY T. LAURIDSEN has served as a member of our Board since October 2007. He is an attorney in private practice with the Law Offices of Jeffrey T. Lauridsen in Garden Grove, California. Before establishing his current practice, Mr. Lauridsen served with several other law firms in the Orange County area, as partner and senior associate. Mr. Lauridsen’s 17 years of law practice have focused on corporate law and encompassed both trial and appellate work in diverse areas of law, including business litigation, construction defects, general liability, premises liability, products, medical malpractice, ERISA, insurance coverage, automobile liability, insurance bad faith, employment and labor law, sexual harassment, sexual molestation and others. Prior to entering into the practice of law, Mr. Lauridsen worked as a claim representative in the insurance industry for 19 years. Mr. Lauridsen received his Associate of Arts degree in Political Science from Fullerton College. He received his Bachelor of Science in Law and Juris Doctorate degrees from California Southern Law School. He has served as Elder at Grace Church in Orange, California for 18 years. Mr. Lauridsen brings to our Board the perspective of an experienced attorney, as well as intimate knowledge of ministry governance. Mr. Lauridsen serves on our Loan Committee and serves as Chairman of our Audit Committee.

 

ABEL POMAR began serving as a member of our board in February 2016. Mr. Pomar currently serves as the President, Chief Executive Officer of Evangelical Christian Credit Union

 

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(“ECCU”). Prior to joining ECCU, Mr. Pomar served as Senior Vice President, Strategic Initiatives within the Global Compliance organization at Bank of America, where he was most recently responsible for leading the delivery of regulatory compliance change and transformation initiatives across the enterprise. During his nearly eight years at Bank of America, Mr. Pomar held various leadership positions, including roles in global marketing and corporate affairs, technology delivery and change management, strategic planning and continuous improvement, and finance. He holds a bachelor’s degree in operations management and a MBA with a concentration in finance from California State University, Los Angeles.

 

Our Board of Managers

 

Under our Operating Agreement, our Board and officers are charged with governing and conducting our business and affairs. The Operating Agreement charges our Board with essentially the same duties, obligations and responsibilities as a board of directors of a corporation. The Board establishes our policies and reviews them periodically and has authorized designated officers and our President the authority to carry out those policies.

 

When initially formed, we were a wholly-owned subsidiary of ECCU.  At that time, the Board consisted of ECCU executives and a number of independent directors.   As of the date of this Report, our Board consists of seven managers, a majority of which are independent managers.

 

The Board has established the following committees to help oversee various aspects of our business:

 

·

Our Executive Committee is charged with responsibility for determining the Chief Executive Officer and President’s compensation and undertaking other matters of an executive and strategic oversight nature;

 

·

Our Audit Committee is chartered to oversee the annual audit of our financial reports, oversee the establishment and maintenance of internal controls and oversee compliance with our Ethics Policy;

 

·

Our Loan Committee is authorized to oversee compliance with our Loan Policy, to review the performance and management of our loan portfolio, and to approve loan originations over a certain dollar amount or loans that have fallen outside of the parameters of the Loan Policy;

 

·

Our Credit Review Committee is appointed by the Board to review and implement our Loan Policy and to review most of the loan applications we receive;

 

·

Our Asset Liability Committee is chartered to oversee the maintenance of our asset liability strategy and process, as well as our asset liability, liquidity and other policies relating to the mitigation of risks to our earnings and capital; and

 

 

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·

Our Governance Committee is charged with responsibility for the board governance policies, including our Related Parties Transaction Policy, and with the periodic task of nominating persons for election to the Board.

 

The Board is actively involved in and regularly meets with members of our senior management to discuss capital adequacy, use of leverage, asset liability management, strategic planning and liquidity issues we face.  Our Asset Liability Committee regularly meets with the objective of performing oversight of interest rate risk, future net interest income and expense, capital and liquidity forecasts and review of trends impacting our balance sheet. 

 

Our Board Chairman

 

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

 

Code of Ethics

 

On November 6, 2009, our Board adopted a Code of Ethics for our principal officers and members of the Board.

 

Audit Committee

 

In May 2005, our Board established a standing audit committee. Our Board has adopted a formal charter for our Audit Committee.  Under this charter, the Audit Committee oversees our accounting policies and practices, financial reporting procedures and audits of our financial statements. For the year ended December 31, 2015, the Audit Committee comprised three members, including Arthur G. Black, Van Elliott and Jeffrey T. Lauridsen.  Mr. Black was appointed to serve on the Audit Committee effective as of February 10, 2015, when Randolph P. Shepard announced his retirement from the Board of Managers and as Chairman of the Audit Committee.  Arthur G. Black served as the Interim Chairman of the Audit Committee from February 2015 until May 2015.  Jeffrey T. Lauridsen was appointed as Chairman of the Audit Committee in May 2015.  Mr. Lauridsen continues to serve as Chairman of the Committee, which also includes Mr. Black and Mr. Elliott.

 

Audit Committee Financial Expert

 

Prior to Mr. Shepard’s retirement from the Board in February 2015, he served as Audit Committee Chairman and was considered a financial expert.  Since Mr. Shepard’s retirement, we have continued to look for a financial expert to replace him on the Audit Committee but have been unable to find and appoint a suitable candidate.

 

 

 

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Item 11. EXECUTIVE COMPENSATION

 

The following table sets forth certain information regarding compensation we paid for services rendered to us during the years ended December 31, 2015 and 2014 by our senior executive officers.  Mr. Overholt, our former Chief Executive Officer and President, retired from his positions as President and Chief Executive Officer of the Company and its subsidiaries on December 3, 2015.  We reached a severance agreement with Mr. Overholt, the compensation of which is included below.  Upon Mr. Overholt’s departure, Joseph Turner was appointed by the Board to serve as our President and Chief Executive Officer. 

 

Summary Compensation Table

Annual Compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Name and Principal Position

 

Year Ended

 

 

Salary

 

 

Bonus

 

 

All Other Compensation

 

Mark Holbrook

 

2015

 

$

--

 

$

--

 

$

--

(1)

Chairman of the Board of Managers

 

2014

 

 

--

 

 

--

 

 

8,750 

(1)

Michael Lee

 

2015

 

 

--

 

 

--

 

 

--

(2)

Manager/Chairman of the Board of Managers

 

2014

 

 

--

 

 

--

 

 

7,800 

(2)

James Overholt

 

2015

 

 

209,192 

 

 

--

 

 

233,898 

(5)

President and Chief Executive Officer

 

2014

 

 

206,923 

 

 

40,305 

 

 

7,242 

(4)

Joseph Turner

 

2015

 

 

191,263 

 

 

--

 

 

50,584 

(3)

President and Chief Executive Officer

 

 

 

 

 

 

 

 

 

 

 

(4)

Billy Dodson

 

2015

 

 

--

 

 

--

 

 

--

(6)

Former President and Chief Executive Officer

 

2014

 

 

--

 

 

--

 

 

13,867 

(6)

Susan Reilly

 

2015

 

 

153,412 

 

 

--

 

 

18,111 

(3)

Senior Vice President and Chief Financial Officer

 

2014

 

 

149,673 

 

 

21,000 

 

 

20,772 

(4)

Harold Woodall

 

2015

 

 

150,431 

 

 

--

 

 

31,902 

(3)

Senior Vice President and Chief Credit Officer

 

2014

 

 

146,111 

 

 

19,668 

 

 

30,856 

(4)

Van Elliott

 

2015

 

 

--

 

 

--

 

 

--

(2)

Secretary and Manager

 

2014

 

 

--

 

 

--

 

 

7,150 

(2)

Juli Anne Callis

 

2015

 

 

--

 

 

--

 

 

--

(2)

Manager

 

2014

 

 

--

 

 

--

 

 

7,800 

(2)

Arthur Black

 

2015

 

 

--

 

 

--

 

 

--

(2)

Manager

 

2014

 

 

--

 

 

--

 

 

7,550 

(2)

Randolph Shepard

 

2015

 

 

--

 

 

--

 

 

--

(2)

Manager

 

2014

 

 

--

 

 

--

 

 

--

(2)

Jeffrey Lauridsen

 

2015

 

 

--

 

 

--

 

 

--

(2)

Manager

 

2014

 

 

--

 

 

--

 

 

6,650 

(2)

Jerrod Foresman

 

2015

 

 

--

 

 

--

 

 

--

(2)

Manager

 

2014

 

 

--

 

 

--

 

 

6,400 

(2)

Robert McDougall

 

2015

 

 

--

 

 

--

 

 

--

(2)

Manager

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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(1) Until April 2015, Mr. Holbrook was a full-time employee of ECCU. During his tenure on the Board, Mr. Holbrook expended, on the average, approximately 2% of his time as an officer or member of our Board.  We accrued $8,750 for his service as Chairman of the Board and as a Board member during 2014.

 

(2) We accrued amounts for each Manager for their service on the Board during 2014.  The Board members elected not to receive any compensation for their service during the year ended December 31, 2015.  Mr. Shepard was not compensated for his services on the Board at any point prior to his resignation from the Board in February 2015.

 

(3) We contributed an aggregate amount of $18,111 for Ms. Reilly's 401(k) retirement plan, medical benefits and life and disability insurance for 2015.  We contributed an aggregate amount of $31,902 for Mr. Woodall's 401(k) retirement plan, medical benefits and life and disability insurance for 2015.  We contributed an aggregate amount of $40,958 for Mr. Turner’s 401(k) retirement plan, medical benefits and life and disability insurance for 2015.    Per his employment agreement, we also compensated Mr. Turner $9,626 in excess of moving related expenses.

 

(4) We contributed an aggregate amount of $7,242 for Mr. Overholt's 401(k) retirement plan, medical benefits and life and disability insurance for 2014.  We contributed an aggregate amount of $20,772 for Ms. Reilly's 401(k) retirement plan, medical benefits and life and disability insurance for 2014.  We contributed an aggregate amount of $30,856 for Mr. Woodall's 401(k) retirement plan, medical benefits and life and disability insurance for 2014.  Mr Turner was not considered to be a Company executive officer during 2014.

 

(5) We have paid or accrued a total of $233,898 for Mr. Overholt’s severance pay, 401(k) retirement plan, medical benefits and life and disability insurance for 2015.  This includes $221,888 accrued for severance pay and medical benefits as stipulated in the severance agreement entered into in December 2015.

 

(6) In 2014, we paid $13,867 in medical benefits expenses as part of a severance agreement reached with Mr. Dodson after he resigned in 2013. 

 

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

 

At its February 2014 Board meeting, the Board approved the payment of compensation grants to Managers of the Board effective as of January 1, 2013.  No compensation was paid to Board Managers in 2013, but these compensation awards were accrued as other liabilities in our financial statements to be paid in 2014.  Under the grants approved by the Board, each Manager will receive a cash grant of $4,000 for serving on the Board, and will receive additional amounts for attendance at each Board meeting and for serving as a Chairperson of one of our Board Committees.  Each Manager is also entitled to be reimbursed for expenses incurred in performing duties on our behalf.  For the year ended December 31, 2014, we accrued $53 thousand in compensation awards for our Managers.  These awards were paid in March 2015.  The Managers elected not to receive compensation awards for the year ended December 31, 2015.  No compensation awards were accrued at December 31, 2015.

 

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Item 12.

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

 

The following table sets forth information available to us, as of December 31, 2015, with respect to our Class A Units owned by each of our executive officers and our managers, and by our managers and executive officers as a group, and by each person who is known to us to be the beneficial owner of more than 5.0% of our Class A Units.

 

 

 

 

 

(1)

 

Name

 

 

Beneficial

Ownership

Percentage

Owned(1)

 

R. Michael Lee

915 W. Imperial Hwy., Suite 120

Brea, CA 92821

 

 

 

--

 

--%

 

Van C. Elliott

915 W. Imperial Hwy., Suite 120

Brea, CA 92821

 

 

 

--

 

--%

 

Arthur G. Black

915 W. Imperial Hwy., Suite 120

Brea, CA 92821

 

 

 

--

 

--%

 

Juli Anne S. Callis

915 W. Imperial Hwy., Suite 120

Brea, CA 92821

 

 

 

--

 

--%

 

Jeffrey T. Lauridsen

915 W. Imperial Hwy., Suite 120

Brea, CA 92821

 

 

 

--

 

--%

 

Abel Pomar

915 W. Imperial Hwy., Suite 120

Brea, CA 92821

 

 

 

--

 

--%

 

Jerrod L. Foresman

915 W. Imperial Hwy., Suite 120

Brea, CA 92821

 

 

 

--

 

--%

 

All officers and members of the Board as a group

 

 

 

--

 

 

--%

 

 

 

 

 

 

 

 

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Other 5% or greater beneficial owners (seven):

 

 

 

 

 

Name

Beneficial Ownership

Percentage Owned(1)

Evangelical Christian Credit Union

62,000  42.31% 

Financial Partners Credit Union

12,000  8.19% 

Navy Federal Credit Union (2)

11,905  8.13% 

Western Federal Credit Union

11,905  8.13% 

Wescom Credit Union

11,905  8.13% 

Credit Union of Southern California

11,900  8.12% 

Keypoint Credit Union

8,000  5.46% 

 

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

 

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

 

 

 

 

Item 13.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

 

ECCU Related Agreements.

 

From time to time, we purchase participation interests in mortgage loans from ECCU, our largest equity owner.  ECCU continues to service most of our mortgage loans that it sells to us under a servicing agreement.  Per this agreement, a servicing fee of 50 to 65 basis points is deducted from the interest payments we receive on the wholly-owned loans that ECCU services for us.  In lieu of a servicing fee, the loan participations we purchase from ECCU generally have pass-through rates which are up to 100 basis points lower than the loan contractual rate. We negotiate the pass-through interest rates with ECCU on a loan by loan basis.  At December 31, 2015, our investment in wholly-owned loans serviced by ECCU totaled $930 thousand, while our investment in loan participations serviced by ECCU totaled $11.9 million.  From time to time, we pay fees for additional services ECCU provides for servicing our loans.  These fees amounted to less than $1 thousand during the years ended December 31, 2015 and 2014, respectively.   

 

We did not purchase any loans from ECCU during the years ended December 31, 2015 and 2014.  We recognized interest income on loans previously purchased from ECCU of $1.4 million and $2.0 during the years ended December 31, 2015 and 2014, respectively.  Currently, ECCU services 10 of the 147 mortgage loans we own pursuant to the terms of a servicing agreement. 

 

102


 

 

In addition, ECCU has repurchased mortgage loans from us as part of our liquidity management practices. Although ECCU has accommodated us in responding to such repurchase requests, ECCU is under no contractual obligation to do so.  Furthermore, federal credit union regulations require that a borrower must be a member of a participating credit union in order for a loan participation to be an eligible investment for a federal chartered credit union. ECCU has from time to time repurchased from us fractional participations in our loan investments which ECCU already services, usually around 1% of the loan balance, to facilitate compliance with National Credit Union Administration rules when we sell participations in those loans to federal credit unions.  Each sale or purchase of a mortgage loan investment or participation interest with ECCU was consummated under our Related Party Transaction Policy that has been adopted by our Board.  We sold $541 thousand in loans to ECCU during the year ended December 31, 2014.  We did not sell any loans to ECCU during the year ended December 31, 2015.

 

Until the fourth quarter of 2014, we maintained most of our cash balances with ECCU, our largest equity holder.  Total funds held with ECCU at December 31, 2015 and 2014 were $163 thousand and $733 thousand, respectively.  We earned interest on these cash balances for the years ended December 31, 2015 and 2014 in the amount of $14.5 thousand and $41.3 thousand, respectively.  In 2014, we transferred a large portion of our cash to ACCU.

 

Pursuant to an administrative services agreement, we purchase certain professional services from ECCU and we rent our administrative offices from ECCU pursuant to an office lease entered into on November 4, 2008.  We paid ECCU $117.0 thousand and $111.1 thousand for the years ended December 31, 2015 and 2014, respectively, for these services and facilities.  We negotiated these charges and terms of the office lease with ECCU based upon the fair market value of such services and rental rates for comparable office space in Brea, California.

 

On October 6, 2014, our wholly-owned broker-dealer subsidiary, MP Securities, reached an agreement with ECCU whereby ECCU will refer clients to MP Securities for investment advisory services.  In exchange, we will remit to ECCU a solicitation fee allowable by the California Department of Business Oversight.  We remitted $34 thousand in fees during the year ended December 31, 2015.  No fees were remitted or accrued during the year ended December 31, 2014.

 

Other Related Party Transactions.

 

From time to time, our Board and members of our executive management team have purchased investor notes from us.  One of our Board members, Mr. Van Elliott, holds $51.4 thousand of our Class A Notes. 

 

On August 15, 2013, we sold a  $5.0 million loan participation interest to Western Federal Credit Union, one of our equity ownersWe charge 50 basis points to service the loan for Western Federal Credit Union.

 

We have entered into a selling agreement with our wholly-owned subsidiary, MP Securities, pursuant to which MP Securities will sell our Subordinated Capital Notes and our International

 

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Notes.  The sales commissions and cost reimbursements paid to any broker-dealer firms that are engaged to assist in the distribution of such certificates will not exceed 3% of the amount of certificates sold.  For the year ended December 31, 2015, MP Securities earned $25 thousand on sales of Series 1 Subordinated Capital Notes.  MP Securities did note sell any International Notes during the year ended December 31, 2015. 

 

We had also entered into a selling agreement with MP Securities pursuant to which MP Securities served as our selling agent in distributing our Class 1 Notes.  Under the terms of the Class 1 Notes Offering, MP Securities receives a selling concession for acting as a participating broker ranging from 1.25% to 5% on the sale of a fixed series note and an amount equal to .25% per annum on the average note balance for a variable series note.  We have also entered into a Managing Participating Broker Agreement with MP Securities pursuant to which MP Securities will act as the managing broker for the offering of our Class 1 Notes.  As the managing participating broker, MP Securities will maintain sales records, process and approve investor applications, conduct retail and wholesale marketing activities for sales of the Class 1 Notes and undertake its own due diligence review of the offering.  MP Securities does not serve as a lead underwriter, distribution manager or syndicate manager for the offering.

 

Under the terms of the Managing Participating Broker Dealer Agreement (the “MPB Agreement”) entered into with us and MP Securities and possible participating brokers in the future, we will pay managing broker commissions of .50% for the sale of Fixed Series Class 1 Notes and Variable Series Class 1 Notes sold.  The managing broker commissions will be reduced by .25% of the total amount of each note sold in the offering to a repeat purchaser who is then, or has been within the immediately preceding thirty (30) days, an owner of one of our investor notes.  No commissions are paid on the accrued interest deferred and added to the principal balance of a note when an investor elects to defer interest received on a note.  In the event MP Securities provides wholesale services in connection with the Class 1 Notes offering, we may reimburse MP Securities and any other selling group member up to $40,000 in wholesaling expenses.  As of the date of this Report, no wholesaling expenses have been paid to MP Securities or any other selling group member under the Class 1 Notes offering.  For the year ended December 31, 2015, MP Securities earned $437 thousand in sales concessions and $55 thousand in managing broker concessions on the sale of our Class 1 Notes.    

 

In addition, we have signed an Administrative Services Agreement with MP Securites which stipulates that we will provide certain services to MP Securities.  These services include the lease of office space, use of equipment, including computers and phones, and payroll and personnel services.  The total expenses charged to MP Securities for these services were $913 thousand and $680 thousand for the years ended December 31, 2015 and 2014, respectively.  At a Board of Managers meeting held on November 5, 2015, the Board approved a Resolution authorizing a capital contribution of up to $100,000 to be made by the Company in its wholly-owned subsidiary, MP Securities.  The Resolution further authorized the officers of the Company to amend the terms of the Administrative Services Agreement entered into by and between the Company and MP Securities thereby authorizing the Company to abate MP Securities’ obligation to pay the Company for providing those described services for a limited period not to exceed twelve months and up to an amount not to exceed $100,000.  MP Securities may

 

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discontinue the expense abatement at any time during the one year period by providing written notice to the Company.

 

In connection with our Secured Investment Note offering, the Company has engaged MP Securities to act as our managing broker for the offering.  Under the terms of a Managing Broker-Dealer Agreement entered into by and between us and MPS Securities, we will pay selling commissions ranging from 2% on our Secured Investment Notes with a 18-month maturity to 5% on Secured Investment Notes with a 54-month maturity, with total selling commissions not to exceed 5%.  For the year ended December 31, 2015, MP Securities earned $93 thousand in concessions on the sale of Secured Investment Notes.

 

Pursuant to a Loan and Security Agreement, dated December 15, 2014, entered into by and among the Company, MPF and the holders of our Secured Investment Notes (the “Loan Agreement”), MPF will serve as the collateral agent for the Secured Investment Notes.  The Company will pledge and deliver mortgage loans and cash to MPF to serve as collateral for the Secured Investment Notes.  As custodian and collateral agent for the Secured Investment 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 Investment 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.  We have pledged $3.6 million in loans receivable as collateral for the Secured Investment Notes at December 31, 2015.

 

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

 

Item 14.  PRINCIPAL ACCOUNTANT FEES AND SERVICES

 

Before our principal accountant is engaged by us to render audit or non-audit services, where required by the rules and regulations promulgated by the Securities and Exchange Commission, such engagement is approved by our Audit Committee.

The aggregate fees billed by our accounting firm, Hutchinson and Bloodgood LLP, for the years ended December 31 were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2015

 

2014

 

 

 

 

 

 

 

Audit and audit-related fees

 

$

132,245 

 

$

127,000 

Tax Fees

 

 

12,500 

 

 

12,500 

All other fees

 

 

--

 

 

12,250 

Total

 

$

144,745 

 

$

151,750 

 

105


 

 

 

Our Audit Committee has considered whether the provision of the non-audit services described above is compatible with maintaining our auditors’ independence and determined that such services are appropriate.

 

 

106


 

 

 

 

Item 15. EXHIBITS

 

 

 

Exhibit No.

Description

3.1

Articles of Organization - Conversion of Ministry Partners Investment Company, LLC, dated as of December 31, 2008 (1)

3.2

Operating Agreement of Ministry Partners Investment Company, LLC, dated as of December 31, 2008 (1)

3.3

Plan of Conversion of Ministry Partners Investment Corporation, dated September 18, 2008 (1)

3.4

Series A Preferred Unit Certificate of Ministry Partners Investment Company, LLC, dated as of December 31, 2008 (1)

3.5

First Amendment to the Operating Agreement of Ministry Partners Investment Company, LLC, effective as of February 11, 2010 (2)

3.6

Amended and Restated Certificate of Designation of the Powers, Designations, Preferences and Rights of Series A Preferred Units, effective as of May 23, 2013 (3)

10.1

$10 Million Committed Line of Credit Facility and Security Agreement, dated October 8, 2007 (4)

10.2

$50 Million CUSO Committed Line of Credit Facility and Security Agreement, dated October 8, 2007 (4)

10.3

Loan and Security Agreement dated November 4, 2011, by and between Ministry Partners Investment Company, LLC and The National Credit Union Administration Board as Liquidating Agent of Western Corporate Federal Credit Union (5)

10.4

Loan and Security Agreement dated November 4, 2011, by and between Ministry Partners Investment Company, LLC and The National Credit Union Administration Board as Liquidating Agent of Members United Corporate Federal Credit Union (5)

10.5

CUSO Line of Credit Facility Note and Security Agreement, dated May 14, 2008, executed by Ministry Partners Investment Corporation in favor of Members United Corporate Federal Credit Union (5)

10.6

Office Lease, dated November 4, 2008, by and between Ministry Partners Investment Corporation and Evangelical Christian Credit Union (5)

10.7

Equipment Lease, dated as of January 1, 2009, by and between Ministry Partners Investment Company, LLC and Evangelical Christian Credit Union (6)

10.8

Professional Services Agreement, dated as of January 1, 2009, by and between Ministry Partners Investment Company, LLC and Evangelical Christian Credit Union (6)

 

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10.9

Form of Individual Manager Indemnification Agreement (7)

10.10

Confidential Severance and Release Agreement by and between Ministry Partners Investment Company LLC and Billy M. Dodson, effective November 8, 2013 (8)

10.11

Interim CEO Employment Agreement by and between Ministry Partners Investment Company LLC and James. H. Overholt, effective November 12, 2013 (9)

10.12

Employment Agreement by and between Ministry Partners Investment Company, LLC and James H. Overholt, effective May 13, 2014 (10)

10.13

Loan and Security Agreement by and between Ministry Partners Investment Company, LLC and Ministry Partners Funding, LLC dated December 15, 2014 (10)

10.14

Managing Broker Dealer Agreement by and between Ministry Partners Investment Company, LLC and Ministry Partners Securities, LLC, dated January 6, 2015 (11)

10.15

Amendment to Loan and Security Agreement by and between The National Credit Union Administration Board As Liquidating Agent of Members United Corporate Federal Credit Union and Ministry Partners Investment Company, LLC dated March 30, 2015. (13)

10.16

Amendment to Loan and Security Agreement by and between The National Credit Union Administration Board As Liquidating Agent of Western Corporate Federal Credit Union and Ministry Partners Investment Company, LLC dated March 30, 2015. (13)

10.17

Employment Agreement by and between Ministry Partners Securities, LLC and Joseph Turner dated May 27, 2015. (14)

10.18

Severance and Release Agreement dated January 7, 2016. (15)

14.1

Code of Ethics for Ministry Partners Investment Company, LLC, effective as of February 11, 2010 (2)

21.1

List of Subsidiaries (*)

23.1

Consent of Hutchinson and Bloodgood LLP (*)

31.1

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

31.2

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

32.1

Certification of Principal Executive Officer and Principal Accounting Officer pursuant to 18 U.S.C. §1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (*)

101.ins

XBRL Taxonomy Extension Definition Linkbase Document **

101.sch

XBRL Taxonomy Extension Schema Document **

101.def

XBRL Taxonomy Extension Definition Linkbase Document **

 

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101.cal

XBRL Taxonomy Extension Calculation Linkbase Document **

101.lab

XBRL Taxonomy Extension Label Linkbase Document **

101.pre

XBRL Taxonomy Extension Presentation Linkbase Document **

 _____________________________

 

 

 

(1)

Incorporated by reference to the Current Report on Form 8-K filed by the Company on December 22, 2008.

(2)

Incorporated by reference to the Report on Form 10-K filed by the Company on March 31, 2010.

(3)

Incorporated by reference to the Current Report on Form 8-K filed by the Company on May 23, 2013 

(4)

Incorporated by reference to the Report on Form 8-K filed by the Company on October 15, 2007, as amended.

(5) 

Incorporated by reference to the Report on Form 10-K filed by the Company on April 14, 2009.

(6)

Incorporated by reference to the Report on Form 10-K/A filed by the Company on April 3, 2012.

(7)

Incorporated by reference to Exhibit 10.20 to the Registration Statement on Form S-1 filed by the Company on June 24, 2014.

(8)

Incorporated by reference to Exhibit 10.1 of the Report on Form 10-Q filed by the Company on November 14, 2013

(9)

Incorporated by reference to the Current Report on Form 8-K filed by the Company on January 7, 2014

(10)

Incorporated by reference to Exhibit 10.30 of the Report on Form 10-Q filed by the Company on May  15, 2014

(11)

Incorporated by reference to Exhibit 1.0 to the Registration Statement on Form S-1 filed by the Company on June 24, 2014

(13)

Incorporated by reference to the Current Report on Form 8-K filed by the Company on April 9, 2015

(14)

Incorporated by reference to the Current Report on Form 8-K filed by the Company on June 3, 2015

(15)

Incorporated by reference to the Current Report on Form 8-K filed by the Company on January 12, 2016

 

109


 

*

Filed herewith.

**

Furnished, not filed, herewith.

 

 

 

110


 

SIGNATURES

 

In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

MINISTRY PARTNERS INVESTMENT

COMPANY, LLC

 

Dated:  March 30, 2016By: /s/ Joseph W. Turner

  Joseph W. Turner,

  Chief Executive Officer

  (Principal Executive Officer)

 

 

Dated:  March 30, 2016By: /s/ Susan B. Reilly

  Susan B. Reilly,

  Senior Vice President and Chief Financial Officer

  (Principal Accounting Officer)

 

 

111


 

Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed by the following persons on behalf of the Company and in the capacities and on the dates indicated.

 

 

/s/ Joseph W. Turner

Chief Executive Officer (Principal Executive Officer)

Date:  March 30, 2016

 

/s/ Susan B. Reilly

Senior Vice President and Chief Financial Officer (Principal Accounting Officer)

Date:  March 30, 2016

 

/s/ R. Michael Lee

Chairman, Board of Managers 

Date:  March 30, 2016

 

/s/ Van C. Elliott

Secretary, Manager

Date:  March 30, 2016

 

/s/ Arthur G. Black

Manager

Date:  March 30, 2016

 

/s/ Juli Anne S. Callis

Manager

Date:  March 30, 2016

 

/s/ Jeffrey T. Lauridsen

Manager

Date:  March 30, 2016

 

/s/ Jerrod L.Foresman

Manager

Date:  March 30, 2016

 

/s/ Abel Pomar

Manager

Date:  March 30, 2016

 

 

 

 

112