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, 2019



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

For the transition period from _________ to_________



Commission file number:  333-4028LA



MINISTRY PARTNERS INVESTMENT COMPANY, LLC

(Exact name of small business issuer in its charter)





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

(Address of principal executive offices)



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



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



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





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



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



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



Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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). Yes ☑ No ☐.



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.





If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revise accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐



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



As of May 4, 2017 (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 estimated to have no value. As of June 29, 2018 (the last date any sale or exchange was made of our Series A Preferred Units), the market value of the Series A Preferred Units was estimated at $67.50 per share or $7,904,250. 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 December 31, 2019, was 146,522.



DOCUMENTS INCORPORATED BY REFERENCE:  None

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MINISTRY PARTNERS INVESTMENT COMPANY, LLC

FORM 10-K

TABLE OF CONTENTS





 

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

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

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General

Throughout this document, we refer to Ministry Partners Investment Company, LLC and its subsidiaries as “the Company,” “we,” “us,” or “our.” We are a credit union service organization (“CUSO”) organized as a California limited liability company. Our equity owners include 11 federal or state chartered credit unions. We operate as a non-bank financial services company.

Evangelical Christian Credit Union (“ECCU”) incorporated the Company under California law on October 22, 1991 under the name Ministry Partners Investment Corporation. We converted to a California limited liability company on December 31, 2008 and changed our name to Ministry Partners Investment Company, LLC.

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.

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 Subsidiaries

We have four wholly owned subsidiaries: Ministry Partners Funding, LLC, MP Realty Services, Inc., Ministry Partners Securities, LLC, and Ministry Partners for Christ, Inc.

Ministry Partners Funding, LLC

Ministry Partners Funding, LLC (“MPF”) is a special purpose subsidiary created in 2007. MPF’s original purpose was facilitating church mortgage securitizations by warehousing church and ministry mortgages. With the deleveraging of the Company’s loan investments commencing in 2009, MPF was dormant between December 31, 2009 and January 15, 2015. On January 15, 2015, MPF began serving as the custodian of assets pledged to

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investors in our secured investment notes. A Loan and Security Agreement governs the custodian relationship between the Company and MPF.

MP Realty Services, Inc.

We formed MP Realty Services, Inc., a California corporation, on November 13, 2009 (“MP Realty”). MP Realty Services has been operating as a corporate real estate broker since February 23, 2010 when it received a license from the California Department of Real Estate. MP Realty Services provides loan brokerage and other real estate services to churches and ministries. MP Realty Services has conducted limited operations since its inception.

Ministry Partners Securities, LLC.

Ministry Partners Securities, LLC (“MP Securities”) is a Delaware limited liability company we formed on April 26, 2010. Through MP Securities, the Company provides investment advisory and financial planning solutions for individuals, businesses, organizations, churches, charitable institutions, and faith-based organizations. MP Securities also serves as the selling agent for the Company’s public and private placement notes. MP Securities has been a member of the Financial Industry Regulatory Authority (“FINRA”) since March 2, 2011. The subsidiary also provides insurance products under the name Ministry Partners Insurance Agency, LLC through its resident license to act as an insurance producer. MP Securities received its resident license from the California Department of Insurance on March 14, 2013.

Ministry Partners for Christ, Inc.

The Company formed Ministry Partners for Christ, Inc. (“MPC”) on December 28, 2018 for religious and charitable purposes within the meaning of Section 501(c)(3) of the U.S. Internal Revenue Code of 1986. MPC is a not-for-profit corporation formed and organized under Delaware law that will make charitable grants to Christian education, and provide accounting, consulting, and financial expertise to aid evangelical Christian ministries. Although the Company has made an initial cash contribution to launch the foundation, MPC expects to start its grant making activities in the fourth quarter of 2020. On August 23, 2019, the Internal Revenue Service granted MPC tax-exempt status as a private foundation under Section 501(c)(3) of the Internal Revenue Code.

Our Business

How we generate revenue

We are a non-bank financial services company that provides financing to evangelical Christian churches, schools, and ministries and we offer investment products to our investors and clients. We generate our revenue:

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Business Strategy

Our strategy is to generate a stable and diverse flow of income.  Due to the concentration of our loan portfolio in evangelical Christian church and ministry loans, we seek other non-financing sources of revenue to provide a more diverse and stable flow of earnings than a traditional finance company.  We believe a more diverse revenue stream will enable us to be resilient in future economic downturns.  To that end, we have focused on generating recurring fee income business by offering investment services and products, and through loan servicing generating income from our mortgage loan investments.  We continue to seek and explore other revenue sources.

Services we provide

The Company provides three primary services on a national basis to our clients for the benefit of our credit union equity members.

Our investment and insurance advisory services and products

Through MP Securities, we offer a broad scope of investment and insurance advisory services and products for our clients, including opening customer brokerage accounts via a clearing firm agreement with the Royal Bank of Canada Dain Rauscher (RBC Dain). This business line revenue is a key component in our strategy to grow our non-interest income. Some of the services we provide our clients include offering:

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Our lending services and products

Our lending services consist of originating, purchasing, selling, and servicing mortgage loans made to churches, Christian ministries, faith based organizations, Christian schools and educational institutions. Our total loans receivable net of allowance at December 31, 2019 was $129 million or 82% of our total consolidated assets. For additional information regarding our Lending Activity, see the Section captioned “Part II. Financial Condition” in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

Loan Types

The majority of the loans we invest in are real estate secured Christian church and ministry loans. These loans typically have 10-year balloon maturities with a rate adjustment after five years. The loans may have amortization periods up to thirty years. We secure the loans we invest in by placing liens on church, school, and ministry owned real properties. In addition, we occasionally provide construction loans, lines of credit, and letters of credit for our customers.

Originating Loans

We utilize customer referrals, our sales staff relationships and experience, and outside loan brokers to identify loan investment opportunities within our marketplace. We typically receive origination fees on loans we originate. The Company amortizes the origination fee we receive and the estimated cost to originate the loan over the life of the loan. For some borrowers, we may better serve the ministry by referring them to another church lending institution. In those cases, we may receive a finder’s fee. From time to time, we may purchase a participation interest in a loan originated by a third party originator. However, we originate the majority of our new loan investments.

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Loan Underwriting

We have developed underwriting criteria that we apply to loans we originate or purchase. We believe our underwriting process will lead to a profitable business. In general, the criteria we consider are similar to methods used by other church mortgage lenders. We use the same underwriting standards and evaluation whether we originate the loans ourselves, or purchase the loan from a third party originator.

Our Loan Servicing

We generate our loan servicing income by passing through a lower interest rate to the purchaser of the loan as compared to the face rate on the note. As an example, we may sell a loan paying 6.00% interest at a 5.50% pass through rate to a participant. In this example, we would receive 0.50% servicing income on the portion of the loan sold.

Our Loan Revenue

Interest income on our mortgage loans generates the majority of our loan revenue. For additional information regarding our loan investments, see the Section captioned “Net Interest Income and Net Interest Margin” in the “Results of Operations section” of “Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

Funding our mortgage loans

We raise the majority of the funds for our loan investments through issuing and selling debt securities. We offer our debt securities in both registered public offerings and private placement offerings. We market our debt securities primarily to investors who are in or associated with the Christian community. Our investors include individuals, ministries, and other Christian organizations. MP Securities is our selling agent for these debt securities. In addition, we also obtain funds by selling participation interests in our mortgage loan investments. In the past, we have also raised funds by using lines of credit from various financial institutions. Our ability to originate and fund new mortgage loans is dependent on:

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Where we conduct our business

While we conduct most of our business in California, we own mortgage loan interests in 30 different states.

Competition

Although the demand for church financing is both broad and fragmented, we believe no one lender has a dominant competitive position in the market. We compete with church bond financing companies, banks, credit unions, denominational loan funds, real estate investment trusts, insurance companies, and other financial institutions. 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:

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

Employees

Effective June 1, 2017, we entered into a staffing agreement with Total HR, which provides us with payroll and staffing services. CoAdvantage, a portfolio company of Morgan Stanley Capital Partners, has subsequently acquired Total HR. The Company terminated its agreement with CoAdvantage effective December 14, 2019. Effective December 15, 2019 the Company entered into a professional employer organization agreement with ADP Totalsource DE IV, Inc. As of December 31, 2019, we had 19 full or part-time employees and four independent contractor relationships supporting business functions that were outsourced. We do not have a collective bargaining agreement with any of our employees and believe we have an excellent relationship with our employees.

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Regulation

General

As a CUSO, we are subject to the CUSO regulations publicized by the National Credit Union Administration (“NCUA”). We are also subject to various laws and regulations that govern:

As a CUSO, we are limited in the scope of activities we may provide. In addition, the NCUA permits our federal credit union equity investors 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 that 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 that govern investments by a state chartered credit union. The California Department of Financial Institutions (“DFI”) regulates several of our equity owners. The DFI is a part of the California Department of Business Oversight (“DBO”). These credit unions must comply with DFI regulations that govern their investment in or loans they make to a CUSO.

Tax Status

We have elected to have our tax authority treat us as a partnership for U.S. tax law purposes. This election became effective with our conversion from a corporate form of organization to a limited liability company. As a result, profits and losses flow directly to our equity owners under the provisions of our governing documents. If we fail to qualify as

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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 California limited liability company, we are subject to an annual franchise fee and, in addition, 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

The California Finance Lender’s Law requires that we obtain a license to conduct our commercial lending activities from the DBO. The license provided to us by the DBO is California Finance Lender License # 603F994.

Under this license, the DBO requires us to file reports from time to time. Accordingly, the DBO has enforcement authority over our operations as a finance lender. This includes, among other things, the ability to assess civil monetary penalties, issue cease and desist orders, and initiate injunctive actions. We are also 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 on a national basis, we will need to comply with laws and regulations of those states. The statutes that govern mortgage lending and origination activities vary from state to state. Because these laws are constantly changing, 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 subsidiary, MP Realty, which provides loan brokerage and other real estate services to Christian organizations in connection with our mortgage financing activities. 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 affect the properties underlying our mortgage loan investments. An owner or control party of a site may also be subject to common law claims by third parties based on damages and costs resulting from environmental contamination emanating from a site.

Regulation of Financial Services

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

Broker Dealer Registration

U.S. broker dealers are subject to rules and regulations imposed by the United States Securities and Exchange Commission (“SEC”), FINRA, other self-regulatory organization, and state securities administrators covering all aspects of the securities business. Our wholly owned broker-dealer firm, MP Securities, commenced operations in 2012. As a registered broker-dealer under Section 15 of the Securities Exchange Act of 1934 (the “Exchange Act”), MP Securities is subject to regulation by the SEC and regulation by

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state securities administrators in the states in which it conducts its activities. We have registered MP Securities in the following states:

MP Securities is subject to rules and regulations regarding:

MP Securities is also subject to the financial responsibility, net capital, customer protection, record keeping, and notification rule amendments adopted by the SEC on July 30, 2013. Because MP Securities does not carry or hold customer funds or securities and relies upon a clearing firm to conduct these transactions, Rule 17a-5 requires that it file an exemption report as well as reports prepared by an independent public accountant confirming that it meets the exemption provisions. As amended, the net capital rule requires that MP Securities take into account in its computation of regulatory net capital any liabilities the Company assumes as its parent entity.

MP Securities is also subject to routine inspections and examinations by the SEC staff under Rule 17(b) of the Exchange Act. The SEC is authorized to review, if requested, the work papers of the broker dealer’s independent public accounting firm that conducts the audit. As required by amendments to Rule 17a-5 of the Exchange Act, MP Securities files an annual report with the SEC and FINRA that includes its audited financial statements,

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supporting schedules and its exemption report as a non-carrying broker-dealer. MP Securities is a member of the Securities Investor Protection Corporation (“SIPC”) and files a copy of its annual report with SIPC.

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

Due to our close affiliation with MP Securities, we are subject to related party transaction disclosure issues under federal and state securities laws and rules adopted by FINRA. In particular, related party transactions can raise regulatory concerns:

MP Securities is also subject to FINRA’s review and policies governing disclosure practices when offering proprietary securities products, training its staff to identify and manage conflicts of interest and reporting on significant conflict issues, including the firm’s adopted measures to identify and manage conflicts, to the MP Securities Board of Managers and its Chief Executive Officer.

As a broker-dealer firm, MP Securities is subject to regulation regarding:

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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 acts as a selling agent for the Company’s public and private debt securities. Due to this role, MP Securities 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.

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

Regulation of Investment Advisers

On July 11, 2013, the State of California granted its approval for MP Securities to provide investment advisory services. As a California registered investment advisory firm, MP Securities is required to develop and maintain compliance and record keeping procedures. MP Securities must also comply with custody rules, and marketing and disclosure obligations. MP Securities is subject to the Investment Advisers Act of 1940, as amended and related regulations. The act authorizes the SEC 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.

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Fiduciary Standards

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

With the issuance of the DOL fiduciary rule under ERISA, fiduciary status would be extended to investment advisors and investment professionals that have previously not been considered fiduciaries. If deemed a fiduciary, the representative is held to a strict standard requiring the representative to act solely in the interests of plan participants and beneficiaries. With the adoption of the fiduciary standard, the representative is subject to personal liability to the ERISA plan for breaches of its actions under the rule. Implementation of the DOL fiduciary rule, especially in the context of a MP Securities adviser or sales representative rolling over an individual retirement account (“IRA”) into our proprietary debt securities, will require that we:

On March 15, 2018, the 5th U.S. Circuit Court of Appeals nullified the DOL’s fiduciary rule and upheld a sweeping challenge to DOL’s authority to enforce its fiduciary rule. Other courts, however, have reached a different conclusion. Individual states, in addition, may take a different approach and apply the fiduciary standard to transactions subject to that state’s regulatory authority. As a result of the Court’s decision, the DOL has announced that a new rule will be included on its regulatory agenda. On June 5, 2019, the SEC also issued its Final Interpretations to Enhance Protections and Preserve Choice for Retail Investors in Their Relationships With Financial Professionals. Under the SEC interpretation, the investment adviser has a duty to provide advice that is in the best interests of the client and requires a reasonable inquiry into the client’s objectives. The SEC interpretation permits the advisor to apply his or her judgment; provided, however,

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that there is fair disclosure and informed consent. We continue to monitor developments with the DOL fiduciary rule and the SEC’s Interpretations of the standard of conduct for investment advisers. We have adopted an assets under management fee compensation model that is applied to sales of our debt securities made by MP Security’s representatives. With this change, we believe that we will be able to:

Privacy Standards

We are subject to regulations implementing the privacy protection provisions of The Gramm-Leach-Bliley Financial Services Modernization Act of 1999 (“GLBA”). The GLBA established a comprehensive framework to permit affiliations among commercial banks, insurance companies, securities firms, and other financial service providers. These regulations require us to disclose our privacy policy. This includes 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 the Dodd-Frank Act that affect investment advisers.

Available Information

We file reports with the SEC, including annual reports on Form 10-K, quarterly reports on Form-10-Q, and current reports on Form 8-K. All of these reports are available to the public on the internet site maintained by the SEC at http://www.sec.gov. Our website address is www.ministrypartners.org. The information provided on our website is not part of this report. Therefore, we do not incorporate by reference our website information unless we specifically reference such information elsewhere in this report.





Any of the following identified risks, along with other unidentified risks, or risks we believe are immaterial or unlikely, could harm the Company. 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 substantially depends on our ability to borrow money and raise funds from the sale of our debt securities. Several factors affect our ability to borrow money and sell our debt securities including:

An event of default, lack of liquidity, or a general deterioration in the economy that affects the availability of credit may increase our cost of funding, make it difficult for us to renew or restructure our credit facilities, and obtain new lines of credit. Unexpected large withdrawals by investors that hold our debt securities can negatively affect our overall liquidity. As such, the Board of Managers has adopted a liquidity policy for executive management to follow.

We have expanded our methods of raising funds, including selling participations in our mortgage loan investments, and expanding the sales of our debt securities to institutional,

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corporate, and retail investors, as well as faith-based organizations and ministries. If this strategy is not viable, we will need to find alternative sources of borrowing to finance our operations. If we are unable to raise the funds we need to implement our strategic objectives, we may have to sell assets, deleverage our balance sheet, and reduce operational expenses.

Our ability to raise funds 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, a FINRA member broker-dealer, acts 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 substantially depend on our ability to assemble an effective advisory team. If we are unable to recruit, retain, and successfully equip a qualified group of advisors at MP Securities, we may not be able to increase sales of the Company’s debt securities, strengthen our balance sheet, and effectively utilize the investment in our core data processing and information systems we have implemented.

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

A significant percentage of the investors who purchase our debt securities roll their matured note into a new note. There is no assurance we will maintain our historical rate of reinvestments of maturing investor notes into new investor notes. If the rate of repeat investments declines, our ability to maintain or grow our asset base could be impaired.

The following table shows the investor renewal rate for the prior three years:



Some of our debt securities investors may be unable to purchase our public offering notes due to FINRA’s investor suitability standards.

When handling sales of our investor notes, we must comply with FINRA’s “know your customer” and “suitability” guidelines. Some investors may not qualify under these guidelines. These guidelines help ensure that investors make appropriate investments given the:

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The Company may experience losses or lower earnings if there is a drop in the real estate values that secure our mortgage loan investments.

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

We have had fluctuating earnings.

As a mortgage-financing lender, provisions for loan losses will have a significant impact on our profitability. In the past, the Company has incurred net losses due to loan loss provisions. In order to reduce the impact of these losses in the future, the Company has been diversifying its sources of revenue. Despite these improvements, we can give no assurances that we will be able to achieve and maintain consistent profits due to the uncertainties related to commercial real estate lending.

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

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. As of December 31, 2019, our allowance for loan loss totaled $1,393 thousand or 1.06% of our total loans

Unanticipated adverse events may result in reserves that will be inadequate over time to protect against potential future losses. Examples of these adverse events are:

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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. See the section captioned “Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” located elsewhere in this Report for further discussion related to our process for determining the appropriate level for the allowance for loan losses.

An increase in our non-performing assets will adversely affect our earnings.

Nonperforming assets adversely affect our net income in the following ways:

Our losses and troubled assets could increase significantly if additional borrowers become delinquent and we are not successful in managing our non-performing assets. This in turn could have a material, adverse effect on our results of operations and financial condition.

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At December 31, 2019, $9,144 thousand of our assets, 5.8% of our total assets, we considered non-performing. At December 31, 2018, $13,601 thousand of our assets, or 8.8%, were considered non-performing. 

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

We have used borrowing facilities obtained from institutional lenders and relied upon offerings of debt securities in SEC registered and private placement offerings to fund our mortgage loans investments. Lending borrowed funds subjects us to interest rate risk. The difference, or “spread,” between the interest rates we pay on the borrowed funds and the interest rates our borrowers pay on our mortgage loan investments largely determines our interest rate risk. An increase in our borrowing costs could decrease the spread we receive on our mortgage loan investments, which could adversely affect our ability to pay interest and redeem the outstanding debt securities on our balance sheet as they mature.

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

We use leverage to invest in mortgage assets, which creates net interest income for the Company. Our success is dependent, in part, upon our ability to manage our leverage effectively. We pledge a significant amount of our assets as collateral for our credit lines. 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 generate a quick sell on a non-cash asset, the asset often sells at a discount. There can be no assurance that we will be able to meet our debt service obligations; and, if we must quickly sell assets to meet our debt service obligations, we risk incurring a loss on of some or all of those assets.

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The table below shows our total debt obligations payable by year over the next three years:

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.

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, replace, 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 institutional credit facilities, shown in the table above as “Term-Debt,” mature on November 1, 2026. If we are unable to replace our credit facilities on attractive terms at maturity, we may have to rely upon less efficient forms of financing new investments. This in turn could result in fewer loan acquisitions or fewer originations of profitable mortgages, which would reduce the size of our balance sheet. A smaller balance sheet would lower the amount of earnings available to us. This would reduce funds available for debt payments, business expenses, and distributions to our equity investors.

A portion of our mortgage loans collateralizes our credit facilities; therefore, these pledged assets will be unavailable to meet our unsecured debt obligations.

Our credit facilities require that we secure the facilities with mortgage loans, maintaining a minimum collateralization ratio (“MCR”) of at least 120% for the two credit facilities in total. Loans pledged as collateral to the credit facilities will be unavailable for other cash flow purposes, including meeting our unsecured debt obligations. If at any time we fail to maintain the MCR requirements, we will be required to deliver cash or qualifying mortgage loans in an amount sufficient to meet the MCR requirements. If the Company has exceeded the MCR, we may request and receive a release of collateral up to the dollar amount sufficient for the Company to maintain the MCR requirements. As of the date of

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this Report, we are in compliance with our MCR covenants as required by our credit facilities.

The following table shows the recorded balance of loans pledged and not pledged as collateral as of December 31, 2019 (dollars in thousands):

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

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. A default under one agreement will trigger an event of default under the other agreements. This gives our lenders the right to declare all amounts outstanding under their particular credit agreement to be immediately due and payable. In this case, if not immediately paid, the lender may exercise its right to foreclose on or liquidate the collateral pledged to their credit facility. 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 term-debt credit facilities, the lender has the right to foreclose on its collateral pursuant to the respective credit facility agreement and applicable commercial law. In the event of foreclosure, there is no assurance the lender will realize proceeds from the collateral sufficient to repay the debt we owe. In that case,

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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.

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. We rely on our management team to develop relationships with institutional and faith-based ministry 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 grow our business profitably.

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

One of our strategic objectives is to increase non-interest revenues from fees generated from the distribution of financial products, such as mutual funds and annuity products. Changes in the structure or amount of fees paid by sponsors of these products could directly affect our non-interest revenue. In addition, if these products experience losses or increased investor redemptions, it could reduce the non-interest income we receive on these products.

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

As we continue to expand our non-interest revenue sources, we will need to attract, recruit, and retain qualified investment and financial advisors that complement the services we provide to our credit union equity owners and their members. Turnover in the financial services industry with broker dealer and advisory firms is high. If we are unable to recruit, attract, and retain qualified professionals, we could jeopardize our strategic goal of increasing non-interest income, thereby adversely affecting our net earnings and financial condition.

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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, reduced availability of liquidity adversely affected the financial services industry, credit markets, and financing sources for ministry loans. Reduced liquidity can particularly affect smaller lenders that have relied on short-term institutional credit facilities to enhance their liquidity needs. We have significantly improved our liquidity position through

However, we will need to monitor and successfully manage our liquidity requirements as necessary when we receive redemption requests for our debt securities, or a debt security investment matures and the investor does not reinvest 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 critical business systems. The secure transmission of confidential information over the Internet and other electronic transmission and communication systems is essential to maintaining customer confidence in 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.

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Our critical business systems may fail due to events out of our control, such as:

These events could potentially result in data loss and adversely affect our ability to conduct our business.

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

Under our code of business conduct, we have established procedures regarding the review, approval, and ratification of transactions that 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 engage in transactions with several related entities. These transactions include our largest equity owner, ECCU, and our newest equity owner, America’s Christian Credit Union (“ACCU”). While the Company believes that it has taken reasonable measures to mitigate any risks, these procedures may not be sufficient to address conflicts of interest that may arise.

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

None of our equity owners is obligated to make additional contributions or loan us additional funds. However, they may do so on a voluntary basis and, in the future, we may 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 at some time in the future is 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,

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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 affect our business, results of operations, financial condition, and liquidity.

A number of factors that we cannot control affect the market in which we operate. These factors can have a potentially significant, negative impact on our business. These factors include, among other things:

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

Specifically, a widespread health emergency such as a pandemic could cause economic disruptions that could adversely affect the ability of our borrowers to make their loan payments. Such an event could also cause note investors to withdraw funds at maturity or request redemptions if they lose confidence in the U.S. and world economy. In addition, a pandemic could have an adverse impact on our personnel and operations. Accordingly, the

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Company cannot reliably predict the ultimate impact on financial markets and the Company’s business operations and financial results. The Company has worked to mitigate the impact of a pandemic on its financial results by maintaining high levels of cash relative to historic needs, enabling employees to work remotely, and limiting travel during a pandemic. As of December 31, 2019, the Company held 30% of its assets, or $25,993 thousand ($26 million), in cash and cash equivalents on its balance sheet.

Declining real estate values could harm our operations.

Declining real estate values generally reduce the level of new mortgage loan originations, since borrowers often use increases in the value of their existing properties to support the purchase of, investment in, or renovation of their worship facilities. Borrowers may also have difficulty paying principal and interest on our loans 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. These events 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. Net interest income is the difference between the interest income we earn on our interest-earning assets and the interest expense we incur in connection with our interest-bearing liabilities. Changes in the level of interest rates also can affect, among other things, our ability to originate and acquire mortgages, and the market value of our mortgage investments.

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

Our ability to grow our mortgage loan investments portfolio depends to a significant degree on our ability to obtain additional funds. Our funding strategy is dependent on our

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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 and private placement offerings to fund our mortgage loans investments. Our ability to fund future investments will be severely restricted if spreads on debt financing widen or if availability of credit facilities ceases to exist.

Regulatory compliance failures could adversely affect our reputation, operating business, and core strategic objectives.

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

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

With the enactment of the Dodd-Frank Act and increased regulatory scrutiny of financial institutions, broker dealers, and investment advisory firms, we will need to monitor the impact of regulatory changes on the broker dealer and investment advisory services we provide. Certain proposed revisions, including the adoption or revision of the proposed DOL fiduciary standard rule and enhanced regulatory oversight of incentive compensation paid to investment advisors, could affect our business.

In particular, the adoption of the DOL fiduciary standard rule could materially affect IRA accounts, IRA rollovers, and the investment of funds rolled over from an IRA into other investments. Even though the initially proposed DOL rule has been shelved, the DOL has indicated that it will issue a revised fiduciary standards rule. Given the uncertainty of an election year, we will continue to monitor the impact of new regulations proposed and/or adopted by the SEC, DOL, and FINRA on our broker dealer and investment advisory business.



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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 affect our business.

Generally, our borrowers may prepay the principal amount of their mortgage loans at any time. There is intense competition from financial institutions that are looking to make commercial loans at competitive rates to qualified borrowers. If a significant number of borrowers refinance their loans with another lender, it could adversely affect our business and profitability.

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

Our mortgage loans typically have large balloon payments due at maturity. When the loan matures and the balloon payment is due, the borrower must either pay the loan balance or refinance the loan with us or another lender. If interest rates are higher when the loan matures, the borrower’s payment on new financing may be higher. The borrower may not be able to afford the higher debt service hindering its ability to refinance our loan. In addition, the borrower may not be able to refinance the loan because the value of the property has decreased. If a borrower is unable to repay our loan at maturity, we could suffer a loss and we would not be able to reinvest proceeds in assets with higher interest rates. As a result, it could adversely affect our financial performance and ability to make distributions to our equity owners.

Although we seek to create a favorable spread between the interest rate return on our mortgage loan investments and our debt financing commitments, we are subject to significant interest rate risk.

Our investment and business strategy depends on our ability to finance our investments in mortgage loans that provide a positive spread as compared to our cost of borrowing. A substantial portion of our loan investments provide for a fixed interest rate with a typical five-year interest rate adjustment or maturity date. Our term-debt borrowings are also at a fixed interest rate, providing a stable cost of funds from that source at 2.52%. A significant portion of our borrowing arrangements with our note investors, 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 previously and may in the future enter into interest rate hedging transactions that include, but are not limited to, interest rate caps and interest rate swaps. We cannot guarantee the results of using these types of instruments to mitigate interest rate risks, and as a result, the volatility of interest

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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. In addition to purchasing participation interests, we have sold participation interests in loans we have originated and service. 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 must comply with if our participation interest represents a minority interest. The lack of full control on participation interests purchased or sold may adversely affect our business.

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

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:

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

The quality of the mortgage loans in which we invest depends largely on the adequacy and implementation of sound underwriting standards as described in our Board adopted loan

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policy. In order to achieve our desired loan risk levels we must properly observe and implement our underwriting standards, which may change depending on the state of the economy.

Because one of our managers holds a board position with our largest equity owner, our managers occasionally may have a conflict of interest with the interests of that member in their capacity as a manager of the Company.

One of our Managers holds a Board position with ECCU, who is our largest equity owner. Conflicts of interest may arise for this Manager between our interests and those of ECCU. Additionally, conflicts of interest are inherent in any transactions involving mortgage loans purchased, sold, participated, or serviced in our dealings with ECCU. Because of these relationships, this Manager may face conflicts of interest in connection with various transactions involving ECCU and the Company, including, but not limited to:

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

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

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

We are among a limited number of non-bank financial institutions specialized in providing loans to evangelical churches and church organizations. Specialized properties secure our loans and the secondary market for these loans remains regional and limited. Our mortgage loan agreements require that the borrower adequately insure the property. This requirement secures the loan against liability and casualty loss. However, certain types of losses, generally those of a catastrophic nature such as earthquakes, floods, storms, and losses due to civil disobedience, are either uninsurable or are not economically insurable. If an uninsured loss destroys a property, 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. 

Specialized properties secure our loans and the secondary market for these loans remains regional and limited. As a result, if we must sell the properties securing such mortgages, 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, other educational institutions, day care, social services, assisted living facilities, and relief organizations. See “Part II, Item 7. Management Discussion and Analysis” for additional information on the loan portfolio concentrations.

The following table shows the two states with our highest concentration in loans.



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We may need, from time to time, to sell or pledge as security our mortgage loan investments.

The market for church mortgage loans is specialized and therefore not as liquid as a residential or commercial loan portfolio. As a result, in the event we need additional liquidity we may have difficulty in disposing of our mortgage loan portfolio quickly or at all. The amount we would realize is dependent on several factors, including the quality and yield of similar mortgage loans and the prevailing financial market and economic conditions. It is possible that we could realize substantially less than the face amount of our mortgage loans, should we be required to sell or hypothecate them. Thus, the amount we could realize for the liquidation of our mortgage loan investments is uncertain and unpredictable.

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. In addition, 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 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. We attempt to minimize our credit risk through prudent loan approval practices in all categories of our lending. However, we cannot assure you that

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such monitoring and approval procedures will reduce these lending risks. We also cannot assure you 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 that could have a material adverse effect on our revenues, net income, and results of operations.

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

Some loans in our investment portfolio have been restructured, or may otherwise be at risk, or under credit watch. We make various assumptions and judgments about the collectability of our loan portfolio, including the creditworthiness of our borrowers and the value of the real estate and other assets serving as collateral for the repayment of many of our loans. If we determine that it is probable that we will not be able to collect all amounts due to us under the terms of a particular loan agreement, we could be required to recognize an impairment charge or a loss on the loan unless the value of the collateral securing the loan exceeds the carrying value of the loan. If our assumptions regarding, among other things, the present value of expected future cash flows or the value of the collateral securing our loans are incorrect or general economic and financial conditions cause one or more borrowers to become unable to make payments under their loans, we could be required to recognize impairment charges. These charges could result in a material reduction in earnings in the period in which the loans are determined to be impaired. The impairment 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. These circumstances could result in the borrower being unable to meet its debt service obligations to us. Non-performing loans may require our management team to devote a substantial amount their resources to workout negotiations and restructuring efforts. These restructuring efforts may involve modifications to the interest rate, extension, or deferral of payments to be made under the loan or other concessions. For restructured loans, 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.

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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 to recover the amount of our investment. Even though we may obtain an appraisal of the property at the time we originate the loan, the property’s value could decline because of a number of subsequent events, including:

The occurrence of any of these factors could severely impair the market value of the security for our mortgage loan investments. In the event of a default under a mortgage loan held directly by us, we will bear the risk of loss of principal to the extent of any deficiency between the value of the collateral and the principal and accrued interest of the mortgage loan. Foreclosure of a church mortgage can be an expensive and lengthy process, which could have a significant effect on our anticipated return on the foreclosed mortgage loan. Such delays can cause the value of the mortgaged property to deteriorate further. 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 periods typically occur on a cyclic basis by an unpredictable time and with uncertain lengths. In addition, terrorist acts, war, large-scale economic dislocations, epidemics, pandemics, or widespread and large corporate bankruptcies can trigger such

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events. Management cannot predict the effects of these events. We could incur losses because of borrower defaults and foreclosures on our mortgage loan investments. In addition, during times of recession, the demand for our mortgage loans is likely to decline. 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 pay our debt securities obligations or our other indebtedness when due may be substantially impaired. We hold $301 thousand in real estate owned assets as of December 31, 2019.

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

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

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

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

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

We compete with church bond financing companies, banks, credit unions, savings and loan associations, denominational loan funds, certain real estate investment trusts, insurance companies, and other financial institutions. 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.

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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. In addition, we 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 have a material and adverse effect 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 might 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. In addition, environmental risks and construction defects may cause cost overruns, and completion delays. If the borrower does not complete such construction or renovation 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, 2019 and 2018, we held $5,277 thousand and $4,333 thousand, respectively in construction loans that we have disbursed. As of December 31, 2019, we have authorized a total of $7.9 million for construction loans, including previously disbursed funds.

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None.

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Corporate Offices

As of December 31, 2019,  the Company conducts most of its operations from its main corporate office at 915 West Imperial Highway, Suite 120, Brea, California. In addition, the Company has one primary branch office located in Fresno, California. The Brea corporate office and Fresno branch locations have operating leases. Ministry Partners Securities LLC also maintains networking agreement office locations in Glendora, CA and Elgin, IL.

Investment Property

As of December 31, 2019, the Company had one investment in a joint venture that owns a property located in Santa Clarita, California. Additional information regarding the Company’s investment in the joint venture is included in Note 5 of the Notes to the Consolidated Financial Statements in Part II, Item 8 of this Report.

Foreclosed Assets

As of December 31, 2019, we hold properties acquired through foreclosure with a net value of $301 thousand. Additional information on foreclosed assets is included in Note 8. Foreclosed Assets of the Notes to the Consolidated Financial Statements in Part II, Item 8 of this Report.

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Given the nature of our investments made in mortgage loans, we may from time to time have an interest in, or be involved in, litigation arising out of our loan portfolio. We consider litigation related to our loan portfolio to be routine to the conduct of our business. As of December 31, 2019 and subject to the matter described below, we are not involved in any litigation matters that could have a material adverse effect on our financial position, results of operations, or cash flows.

On November 11, 2017, Mr. Harold D. Woodall, former Senior Vice President and Chief Credit Officer, filed a suit against the Company and its Chief Executive Officer and President, Joseph Turner, Jr. in the Superior Court of Orange County, California. Mr. Woodall’s employment arrangement with the Company terminated effective as of September 5, 2017. Mr. Woodall’s suit alleges that the Company wrongfully terminated his employment and violated California’s Fair Employment and Housing Act of 1959, and the California Labor Code’s whistle blowing law. Mr. Woodall seeks compensatory damages, punitive damages, attorney’s fees and other relief as the court deems just. On January 1, 2019, Mr. Woodall passed away in Turlock, California. Plaintiff’s wrongful termination counsel filed a motion to withdraw from representing the Plaintiff in this matter and the matter is now being handled by counsel appointed for Mr. Woodall’s estate. The Company believes the allegations in Mr. Woodall’s suit are groundless and without merit and it has vigorously contested the allegations set forth in Mr. Woodall’s complaint. The Company has filed a Motion for Summary Judgment and the court has set a trial date of September 21, 2020. Because Mr. Woodall is deceased, the estate will be limited in the amount of recoverable damages that can be pursued.

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Not applicable.

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PART II

 

Price Range of Common Units

There is no public market for our Class A Units and Series A Preferred Units. As of December 31, 2019, a total of 146,522 Class A Units were issued, with 11 holders of record, and a total of 117,100 Series A Preferred Units were issued, with 11 holders of record.

Sale of Equity Securities by Issuer

None.

Purchases of Equity Securities by Issuer

None.

Dividends and Distributions

The Series A Preferred Unit holders are entitle to receive two types of dividend distributions. First, they are entitled to receive a quarterly cash dividend at the rate of one-year LIBOR plus 25 basis points (the “Series A Dividend”). Payment of the Series A Dividend will have priority over all other distributions to equity owners. In addition, the Company must pay any accrued and undistributed Series A Dividend before we can distribute other dividends.

Our Series A Preferred Unit holders are also entitled to receive 10% of our net profits after subtracting the amount of quarterly Series A Dividends paid earned for any fiscal year. This payment will be made to holders of the Series A Preferred Units on a pro rata basis. We accrued $171 thousand and $11 thousand in net profits to distribute to our Series A Preferred Units holders for the years ended December 31, 2019 and 2018, respectively. This increased the amount of distributions declared on our Series A Preferred Units for the fourth quarters of 2019 and 2018 by $1.461 per unit and $0.096 per unit, respectively.

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The remaining balance of any profits will be allocated to all holders of our Class A Units based on their ownership percentage. For 2019, we made no distributions to the holders of our Class A Units.

During December 31, 2019 and 2018, we declared distributions on our Series A Preferred Units as follows:

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 Preferred Units 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

None.

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We are a “smaller reporting company” as defined by Regulation S-K promulgated by the SEC. As a result, we are not providing the information contained in this item pursuant to Regulation S-K.

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

OVERVIEW

We generate our revenue primarily through our church lending portfolio and secondarily through fees generated from our investment and insurance products and services. While we generate the majority of our revenue through interest income, our strategy is to increase the diversification of our revenue sources. A diversified revenue stream may reduce the risk to the Company if economic factors, such as changes in interest rates, decrease our interest income. We also focus on improving our operating efficiency and capital position by increasing the revenue generated for each dollar of expense incurred to run the business. Increased capital helps mitigate risk in economic down cycles. In addition, we are focusing on reducing risk to our lending revenue by improving the quality of our loan portfolio, assessing the financial strength of our borrowers, and working with our impaired loans to restructure, refinance, and/or liquidate these investments when necessary.

In order to continue to achieve our objectives and maximize the value of our equity holders’ investment, we will continue to focus on:

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Financial Performance Summary for the Two-Year Period ended December 31:





Summary of Financial Performance

For the year ended December 31, 2019, we recognized net income of $2,001 thousand and grew owners’ equity by $1,540 thousand. 2019 was the Company’s most profitable year since inception due to a significant increase in revenue generated by broker-dealer commissions and fees and recoveries from previous nonperforming loans that paid off. Total assets remained relatively flat with a slight increase of $2,582 thousand.

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For the year ended December 31, 2019, the primary items affecting our operating performance were the following:

Progress on Strategic Objectives

In 2019, we made continued progress towards our strategic objectives of diversifying our revenue streams, improving the quality of our loan portfolio, maintaining our balance sheet size, and improving operating efficiency. The following discussion focuses on each of these strategic objectives.

Diversified revenue streams

Like most finance companies and banks, our primary source of revenue has come from the net interest margin we earn on our mortgage loan investments. We continue to develop sources of revenue outside our net interest income to make us less dependent on a favorable net interest rate margin from our mortgage loan investments. We believe this will make the Company less susceptible to unfavorable changes in interest rates. The Company’s management team believes that it will be able to use its capabilities in lending, servicing, and investment advisory services to supplement its net interest income with fee income.

Our primary sources of recurring non-interest income are:

Loan portfolio quality

Historically, when the Company has reported a net loss for the year, the primary reason for the loss has been due to losses on our loan investments or from reserves taken on our allowance for loan losses. In subsequent years, the Company has benefited from recoveries when the loan paid off, the Company disposed of the collateral properties, or when the Company has sold the promissory note and loan. Therefore, the resolution of non-performing loans will contribute either positively or negatively to the Company’s performance. In 2018, we recorded $640 thousand in gains on sale of a note in 2018. In 2019, two previously non-performing loans paid off resulting in a collection of interest income of $511 thousand.  

We continue to monitor our loan portfolio very closely and work with borrowers to minimize losses on mortgage loan investments. The Company can often find a solution for borrowers who are in distress, but who are willing and able to work out a compatible solution. As we did in 2018, in 2019, we had several positive results due to our efforts to be more aggressive in resolving our non-performing loans. As mentioned above, we collected interest on two non-performing loans that paid off during the year. Additionally, another loan that was an impaired collateral dependent loan paid off. Three additional loans that were impaired collateral dependent loans became performing TDRs and taken off non-accrual status. Additionally, we transferred one loan into foreclosed assets. Through these efforts, we saw our classified loans decrease by $4,758 thousand to $8,843 thousand at the end of December 31, 2019.

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

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that are more favorable and avoid deteriorating our margins while reducing overall risk exposure to any one borrower. However, we also have originated larger loans when we are able to find participants to purchase a participation interest in the loan. This generates servicing fee income while allowing us to minimize our risk exposure on the loan. We believe we have found a good mix in loan size that allows us to take advantage of quality lending opportunities. Our average net loan balance (recorded balance) was $921 thousand at December 31, 2019. In addition, over the past few years, we have substantially expanded our relationships with credit unions throughout the United States. We believe these relationships will enable us to increase the amount of loan participation interests we sell and service for others. 

Maintaining balance sheet size

Our current strategy is to maintain our balance sheet size rather than increase it as we direct more resources into improving the quality of our existing loan portfolio. For the year ended December 31, 2019, we funded originations of $7,951 thousand in new loans compared to $15,486 thousand for the year ended December 31, 2018.  This resulted in a decrease in loans receivable of $14,537 thousand due to contractual payments and prepayments on loans receivable in excess of loan originations.

Since the credit crisis of 2008, we have been unable to find a replacement lender for our institutional credit facilities. The company was able to maintain the total size of the balance sheet by replacing the contractual payments on term debt of $5,088 thousand with an increase in investor notes payable of $4,746 thousand. In 2020, we expect that we will need $5,164 thousand to fund payment obligations that are maturing on our credit facility.

Improved operating efficiency

In the last several years, we have worked on improving our operating efficiency. In 2018, we decreased our loan origination staff and reduced the number of full –time employees from 19 to 15. This was down from our high watermark of 26 full-time employees in 2015. In 2019, we added 4 additional full-time employees bringing the number back up to 19. Two of the employees are financial advisors hired to help the Company achieve its objectives of diversifying revenue. We hired two employees to work on loan portfolios, with the objective of improving loan quality and increasing loan originations. In 2019, we had non-interest expense of $5,185 thousand, an increase of $532 thousand from $4,653 thousand in 2018. The increase in 2019 was variable expense directly related to the additional revenue earned in 2019.

Financial Condition

This discussion focuses on the overall performance of our balance sheet. As we are a financial institution, the balance sheet is the primary driver of our net income.

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The following discussion and analysis compares the results of operations for the twelve months ended December 31, 2019 and 2018 and should be read in conjunction with the accompanying consolidated financial statements and notes thereto.

Comparison of Financial Condition at December 31:





General

Total assets remained relatively stable with a slight increase of 2%. Loans receivable decreased 10% due to loan payoffs and low origination volumes. The decrease in loans receivable created an inverse increase in cash, which positions the company with strong levels of liquidity as it enters 2020. Cash increased $16,116 thousand ($16 million) to $25,993 thousand ($26 million).

Our loan funding comes from our members’ equity, our notes payable, and our term-debt. Since 2008, the Company has relied solely on the sale of investor notes to fund its

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mortgage loan investments and maintain the total size of its balance sheet assets. In 2019 our term-debt decreased by $5,088 thousand and net notes payable increased by $4,746 thousand.

Loan Portfolio

Our loan portfolio provides the majority of our revenue, however, it also presents the most risk to future earnings through both interest rate risk and credit risk. Additional information regarding risk to our loans is included in “Part I, Item 1A, Risk Factors”.

Our portfolio consists entirely of loans made to evangelical churches and ministries with approximately 99% of these loans secured by real estate. The loans in our portfolio carried a weighted average interest rate of 6.59% at December 31, 2019 and 6.44% at December 31, 2018. The following discussion on our loan portfolio revolves around the credit risk to our loans and on how we account for and address that risk.

Our Loan Policies

Our managers establish our loan policies and review them periodically and, from time to time, have authorized designated loan officers and our President to make loans within certain limits established by our managers. Our managers adopted a Church and Ministry Loan Policy that supports our levels of acquisition and origination of loans. In addition, our managers 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 Board Credit Committee that reviews loan requests that 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. For any loan participation interest we acquire, with one borrower (or a group of financially related borrowers), the aggregate amount of such interest may not exceed 15% of our tangible net worth. The Company’s Church and Ministry Loan Policy defines “tangible net worth” as shareholder equity plus available operating lines of credit, calculated at the end of each month.

Loan Concentrations

A concentration of loans by category or geography can pose a risk if economic conditions or natural disasters affect that concentration of loans specifically.

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The table below shows the amounts we have invested in each loan category:





We consider loans individually material if a loan is 10% of the Company’s net assets or greater. At December 31, 2019, we had no individually material loans.

The following table sets forth, as of December 31, 2019 and 2018, 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:







Loan Maturities

The following table sets forth the future maturities of our gross mortgage loan portfolio at December 31, 2019:





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Included in the table above are 107 adjustable rate loans totaling $97,820 thousand, or 75% of the total balance. Adjustable rate loans reduce the interest rate risk compared to fixed rate loans with similar cash flow characteristics.

Non-performing Assets

Non-performing assets include:

Non-accrual loans are loans on which we have stopped accruing interest. Restructured loans are loans in which we have granted the borrower a concession on the interest rate or the original repayment terms due to financial distress. Foreclosed assets are real properties for which we have taken title and possession upon the completion of foreclosure proceedings.

We closely monitor these non-performing assets on an ongoing basis. Management evaluates the potential risk of loss on these loans and foreclosed assets by comparing the book balance to the fair value of any underlying collateral or the present value of projected future cash flows, as applicable.

From time to time, we determine that certain non-accrual loans are collateral-dependent. When a loan is deemed to be collateral-dependent, the repayment of principal will involve the sale or operation of collateral securing the loan. For these loans, we record any interest payment we receive in one of two methods. If the Company deems that the recorded investment of the loan is fully collectable, we will recognize income on the interest payment received on the cash basis. If we deem that the recorded investment is not fully collectable, we will record any interest payment we receive against principal. For non-collateral-dependent loans that are on non-accrual status, we recognize income on a cash basis.

We had 6 non-accrual loans as of December 31, 2019 and 11 as of December 31, 2018. Two of our non-performing loans paid off, one was on non-accrual status. Management transferred one non-accrual loan to foreclosed assets after judicial foreclosure proceedings

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were completed. Three of the non-accrual loans became performing TDRs and were moved to accrual status. One of the non-accrual loans as of December 31, 2018 was charged-off as part of an A/B restructure. We added one additional loan to non-accrual status for the year ended December 31, 2019. As detailed in the table below, these activities decreased the balance of our non-performing loans at December 31, 2019 as compared to December 31, 2018.

At December 31, 2019 and December 31, 2018, we had three and nine restructured loans, respectively, that were on non-accrual status. One of these loans was over 90 days delinquent at December 31, 2019. In addition, we have six performing restructured loans on accrual status as of December 31, 2019.

The following table presents our non-performing assets:



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

2 Includes $290 thousand of restructured loans that were over 90 days delinquent as of December 31, 2019.

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

Allowance for Loan Losses

We maintain an allowance for loan losses that we consider adequate to cover both the inherent risk of loss associated with the loan portfolio as well as the risk associated with specific loans.

General reserves are allowances taken to address the inherent risk of loss in the loan portfolio. We include several factors in our analysis. We weigh these factors for the level of risk represented and for the potential loss in our portfolio. These factors include:

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In addition, we include additional general reserves for our loans if the collateral for the loan is a junior lien or if a loan is unsecured. We segregate our loans into class based on risk rating when we perform our analysis in order to increase the accuracy when determining the potential impact these factors have on our portfolio. We weigh the risk factors based upon the quality of the loans in the class. In general, we give risk factors a higher weight 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 risks inherent in our loan portfolio.

We also examine our entire loan portfolio regularly to identify individual loans that 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 amount of the loan investment at risk, defined as the unpaid principal balance, net of discounts, less the collateral value net of estimated costs associated with selling a foreclosed property. The total amount of the loan investment 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. At a minimum, we review loans that carry a specific reserve quarterly. However, we will adjust our reserves more frequently if we receive additional information regarding the loan’s status or its underlying collateral.

Finally, for non-collateral-dependent trouble debt restructurings we use a net present value method for the allowance calculation. Reserves for these loans are determined by calculating the net present value of payment streams we expect to receive from a restructured loan compared to what we would have received from the loan according to its original terms. We then discount these expected cash flows at the original interest rate on the loan. Management records these reserves at the time of the restructuring. We report the

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change in the present value of cash flows attributable to the passage of time as interest income.

The process of providing an adequate allowance for loan losses involves discretion on the part of management. We strive to maintain the allowance at a level that compensates for losses that may arise from unknown conditions. As a result, losses may differ from current estimates made by management.

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The following chart details our allowance for loan losses:





The following table shows the Company’s allocation of loan loss by loan categories as of December 31, 2019.



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Cash, Cash Equivalents, and Restricted Cash

Cash, cash equivalents, and restricted cash increased by $16,117 thousand during the year ended December 31, 2019. The increase in cash was primarily due to $25,324 thousand in proceeds received from contractual loan payments and loan prepayments offset by cash used for loan purchased and loan originations totaling $10,206 thousand.

Investments in Joint Venture

The investment in the joint venture is described in “Note 5: Investments in Joint Venture” in Part I “Financial Information” of this Report. The purpose of the joint venture is to develop and sell property we acquired as part of a Deed in Lieu of Foreclosure agreement reached with one of our borrowers in 2014.

Term-debt

Term-debt decreased by $5,088 thousand during the year ended December 31, 2019. This decrease is the result of scheduled contractual payments.

Investor Notes Payable

Our investor notes payable consist of debt securities sold under publicly registered security offerings as well as notes sold in private placement offerings. Over the last several years, we have expanded our investor note sale program by building relationships with other faith-based organizations whereby we can offer our various investor note products to these organization and the ministries they serve. Concurrently, MP Securities and its staff of financial advisors have increased our customer base through marketing efforts made to individual investors. These efforts helped increase our investor notes payable by $4,746 thousand during the year ended December 31, 2019. The balance sheet presents our investor notes payable net of debt issuance costs, which have decreased from $92 thousand at December 31, 2018 to $55 thousand at December 31, 2019.

Other liabilities

Our other liabilities include accounts payable to third parties and salaries, bonuses, and commissions payable to our employees. At December 31, 2019, our other liabilities increased by $1,367 thousand as compared to the year ended December 31, 2018 due to both an increase in funds the Company held on behalf of borrowers for future lending transactions and the addition of a lease liability. Due to the implementation of ASU No. 2016-02, we added a lease liability of $680 thousand at January 1, 2019, which has amortized to $545 thousand at December 31, 2019.

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Members’ Equity

During the year ended December 31, 2019, total members’ equity increased by $1,540 thousand due to net income of $2,001 thousand earned by the Company as offset by dividend expense of $461 thousand. We did not repurchase or sell any membership equity units during the year ended December 31, 2019.

Liquidity and Capital Resources

Maintenance of adequate liquidity requires that sufficient resources are always available to meet our cash flow needs. We need cash to obtain new mortgage loans, repay term-debt, make interest payments to our note investors, and pay general operating expenses. Our primary sources of liquidity are:

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

We are also susceptible to withdrawal requests made by our note holders that have made large investments in our notes that can adversely affect our liquidity. We believe that our available cash, cash flow from operations, net interest income, and other fee income will be sufficient to meet our cash needs. Should our liquidity needs exceed our available sources of liquidity, we believe we could sell a portion of our 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 term-debt and secured notes.

Our Board of Managers approves our liquidity policy. The policy sets a minimum liquidity ratio and contains contingency protocol if our liquidity falls below the minimum. Our

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liquidity ratio was 32% at December 31, 2019, which is above the minimum set by our policy. This was an increase from 13% at December 31, 2018 primarily due to the increase in cash described above.

We review our liquidity position on a regular basis based upon our current position and expected trends of loan closings and sales of investor notes. Management believes that we maintain adequate sources of liquidity to meet our liquidity needs. Some of the material liquidity events that would adversely affect our business are:

Debt Securities

The sale of our debt securities is a significant component in financing our mortgage loan investments. We continue to sell debt securities filed under a Registration Statement with the SEC to register $90 million of our Class 1A Notes. The SEC declared the Registration Statement effective on February 27, 2018 and it expires on December 31, 2020. We have also entered into a Loan and Standby Agent Agreement pursuant to a Rule 506 offering to sell $40.0 million of Series 1 Subordinated Capital Notes and we are offering $80 million in our Secured Notes under a private placement offering. Through sales of the Class 1A Notes and privately placed investor notes, we expect to fund new loans, which we can hold to either receive interest income or sell to participants to generate servicing income and gains on loan sales. We also use the cash we receive from investor note sales to fund general operating activities.

Historically, we have been successful in generating reinvestments by our debt security holders when the notes they hold mature. Our note renewal rate has been stable over the last several years. MP Securities has also hired additional financial advisors that have enabled us to increase our client base, which has in turn positioned us to increase notes sales.

The table below shows the renewal rates of our maturing notes over the last three years.



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Credit Facilities

We have funded a significant portion of our balance sheet through our term-debt. Because the term-debt has a fixed rate until the facilities mature in 2026, it provides a stable cost of funds.

The table below is a summary of the Company’s credit facilities (dollars in thousands):





We cannot borrow additional funds on these facilities; therefore, we will need to replace any principal paid on the facilities through another source. If we cannot find an alternative source of funding, we will have to shrink our balance sheet, which may reduce our net interest income. As of the date of this Report, our only source of funds to pay down our term-debt are our earnings, the debt securities we sell, and net cash flow from our loans receivable portfolio.

The following table shows the maturity schedule on our credit facilities for the next five years and thereafter as of December 31, 2019 (dollars in thousands):





Debt Covenants

Under our credit facility agreements and our investor note documents, we are obligated to comply with certain affirmative and negative covenants. Failure to comply with our covenants could require all interest and principal to become due. As of December 31, 2019, we are in compliance with our covenants on our notes payable and term debt.

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Results of Operations:

For the year ended December 31, 2019

Net Interest Income and Net Interest Margin

Historically, our earnings have primarily depended upon our net interest income.

Net interest income is the difference between the interest income we receive from our loans and cash on deposit (“interest-earning assets”) and the interest paid on our debt securities and term debt.

Net interest margin is net interest income expressed as a percentage of average total interest-earning assets.

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The following table provides information, for average outstanding balances for each major category of interest earnings assets and interest bearing liabilities, the interest income or interest expense, and the average yield or rate for the periods indicated:







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







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Net interest income increased 16% during the year ended December 31, 2019.  Net interest margin increased 36 basis points to 3.29% for the year ended December 31, 2019. These improvements were mainly due to an increase in income on interest-earning assets.

The increase on total interest-earning assets was due to mainly to an increase in yield on interest-earning loans. The majority of this increase was due to the payoff of two previously non-performing loans. On payoff, the Company was able to collect $511 thousand of interest income previously allocated to principal when the loans were on non-accrual basis. The weighted average rate on the loan portfolio increased from 6.43% to 6.59% during the year ended December 31, 2019. The rate variance increase on interest-earning accounts with other financial was due to an increase in average yield on these accounts of 96 basis points. The increase was due to two factors. First, overall market interest rates have increased over the last twelve months. Second, we have allocated a higher percentage of our funds to higher interest-earning accounts.

Offsetting the increase in interest income somewhat, total interest expense increased by $227 thousand for the year ended December 31, 2019. This was mostly due to an increase in average balance on investor notes payable offset slightly by a decrease in average balance on term-debt. The average balance of our investor notes payable increased by $6,606 thousand due to the expanded efforts to market our investor notes to faith-based organizations, institutions, and ministries. The decrease in average balance on term-debt was due to contractual monthly principal payments made on the term-debt.

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Provision and non-interest income and expense









Provision

Net interest income after provision for loan losses increased by $1,929 thousand for the year ended December 31, 2019. This increase was primarily due to a credit in provision expense related to loan loss recoveries on loan payoffs.

Non-interest income

The increase in non-interest income shown above was the result of a robust increase in broker-dealer commissions and fees offset by a decrease in other lending income. Revenue from broker-dealer commissions and fees increase by $892 thousand during the year ended December 31, 2019 compared to the year ended December 31, 2018. This increase was the result of an increase in institutional business during the year ended December 31, 2019 compared to the year ended December 31, 2018. Offsetting the increase in broker-dealer commissions and fees, other lending income decreased by $767 thousand during the year ended December 31, 2019 This was mostly due to recording a gain on loan sale the year ended December 31, 2018 while we did not record any gains on loan sales during 2019.

Non-interest expenses

The increase in non-interest expenses of $532 thousand was due primarily to an increase in variable expenses directly related to the increase in non-interest income described above.

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Additionally, office operations expenses increased as we outsourced some credit management functions to outside contractors.



Results of Operations:

For the year ended December 31, 2018

Net Interest Income and Net Interest Margin

Historically, our earnings have primarily depended upon our net interest income.

The following table provides information, for average outstanding balances for each major category of interest earnings assets and interest bearing liabilities, the interest income or interest expense and the average yield or rate for the periods indicated:



[1] Loans are net of deferred fees and before the allowance for loan losses. This analysis considers non-accrual loans a non-interest earning asset.





Net interest income decreased 10%, or $512 thousand, to $4.4 million for the year ended December 31, 2018. Net interest margin decreased 35 basis points to 2.92% for the year ended December 31, 2018, compared to 3.27% for the year ended December 31, 2017. These decreases were due to the following factors.

Interest income on interest-earning assets decreased by $264 thousand for the year ended December 31, 2018 compared to the year ended December 31, 2017. A rate variance accounted for $396 thousand of this decrease due to a decrease in average yield on interest-earning loans of 33 basis points. The decrease in yield is primarily due to additional net deferred fees recorded for the year ended December 31, 2017 compared to the year ended December 31, 2018. However, the actual weighted average rate on the loan portfolio increased from 6.31% to 6.43% from December 31, 2017 to December 31, 2018. A positive volume variance of $132 thousand, which was due to an increase in average interest-earning loans of $2.0 million, partially offset the rate variance. Slightly higher rates on interest-earning accounts with other financial institutions partially offset the decrease in interest income.

Average interest-bearing liabilities, consisting of notes payable and borrowings from financial institutions, decreased $2.7 million to $148.1 million during the year ended December 31, 2018, as compared to $150.8 million during the same period in 2017. The decrease is attributable to a $4.9 million decrease in average term-debt offset by an increase in average notes payable of $2.2 million. The average rate paid on these liabilities, including debt issuance cost amortization, increased 23 basis points from 3.04% for the year ended December 31, 2017 to 3.27% for the year ended December 31, 2018 as the

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underlying base index rates on notes payable have increased over the previous twelve months.

Provision and non-interest income and expense

Twelve months ended December 31, 2018 vs. twelve months ended December 31, 2017



Provision

Net interest income after provision for loan losses decreased by $916 thousand for year ended December 31, 2018 over the year ended December 31, 2017 due to an increase in provision for loan losses of $404 thousand and a decrease in net interest income as discussed above. Provision for loan losses increased due to specific reserves taken for impaired loans that we expect to restructure or dispose of through foreclosure or sale.

Non-interest income

Non-interest income increased by 22% for year ended December 31, 2018 over the year ended December 31, 2017 due to several factors. Other lending income increased by $592 thousand related to the gain recognized on the sale of a note. This gain was offset by a $331 thousand decrease in broker-dealer commissions and fees due to fewer large institutional investment transactions consummated during the year ended December 31, 2018, as compared to the year ended December 31, 2017. The results for the year ended December 31, 2018 are typical for us in periods without large institutional investment transactions.

Non-interest expenses

Non-interest expenses for the year ended December 31, 2018 decreased by 4%, or $191 thousand, over the year ended December 31, 2017. This decrease is partially due to lower office operations and other expenses of $63 thousand due to lower referral fees paid

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to strategic partners in conjunction with a decrease in security transactions referred to our broker-dealer. In addition, salaries and benefits decreased by $59 thousand primarily due to a reduction in accrued bonuses. Legal and accounting expense decreased by $44 thousand due to a decrease in legal fees expensed related to our note sales.









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

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Included herewith are the following financial statements: