Company Quick10K Filing
Quick10K
Ministry Partners Investment Company
10-K 2018-12-31 Annual: 2018-12-31
10-Q 2018-09-30 Quarter: 2018-09-30
10-Q 2018-06-30 Quarter: 2018-06-30
10-Q 2018-03-31 Quarter: 2018-03-31
10-K 2017-12-31 Annual: 2017-12-31
10-Q 2017-09-30 Quarter: 2017-09-30
10-Q 2017-06-30 Quarter: 2017-06-30
10-Q 2017-03-31 Quarter: 2017-03-31
10-K 2016-12-31 Annual: 2016-12-31
10-Q 2016-09-30 Quarter: 2016-09-30
10-Q 2016-06-30 Quarter: 2016-06-30
10-Q 2016-03-31 Quarter: 2016-03-31
10-K 2015-12-31 Annual: 2015-12-31
10-Q 2015-09-30 Quarter: 2015-09-30
10-Q 2015-06-30 Quarter: 2015-06-30
10-Q 2015-03-31 Quarter: 2015-03-31
10-K 2014-12-31 Annual: 2014-12-31
10-Q 2014-09-30 Quarter: 2014-09-30
10-Q 2014-06-30 Quarter: 2014-06-30
10-Q 2014-03-31 Quarter: 2014-03-31
10-K 2013-12-31 Annual: 2013-12-31
8-K 2018-11-07 Officers, Exhibits
8-K 2018-07-10 Other Events
8-K 2018-05-03 Other Events
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C130 2018-12-31
Part II
Note 1. Nature of Business and Summary of Significant Accounting Policies
Note 2. Pledge of Cash and Restricted Cash
Note 3. Related Party Transactions
Note 4. Loans Receivable and Allowance for Loan Losses
Note 5. Investments in Joint Venture
Note 6. Revenue Recognition
Note 7. Loan Sales
Note 8. Premises and Equipment
Note 9. Ncua Credit Facilities
Note 10. Notes Payable
Note 11. Commitments and Contingencies
Note 12. Office Operations and Other Expenses
Note 13. Preferred and Common Units Under Llc Structure
Note 14. Retirement Plans
Note 15. Fair Value Measurements
Note 16. Income Taxes and State Llc Fees
Note 17. Segment Information
Note 18. Condensed Financial Statements of Parent Company
Part III
EX-21.1 c130-20181231xex21_1.htm
EX-23.1 c130-20181231xex23_1.htm
EX-31.1 c130-20181231xex31_1.htm
EX-31.2 c130-20181231xex31_2.htm
EX-32.1 c130-20181231xex32_1.htm

Ministry Partners Investment Company Earnings 2018-12-31

C130 10K Annual Report

Balance SheetIncome StatementCash Flow

10-K 1 c130-20181231x10k.htm 10-K 2018 10-K Taxonomy2018

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, 2018



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

For the transition period from _________ to_________



Commission file number:  333-4028LA



MINISTRY PARTNERS INVESTMENT COMPANY, LLC

(Exact name of small business issuer in its charter)





 

CALIFORNIA

(State or other jurisdiction of incorporation or organization)

26-3959348

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



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

(Address of principal executive offices)



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



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



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



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



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



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



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



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





 

 

 

Large accelerated filer 

Accelerated filer 

Non-accelerated filer 

Emerging Growth Company 

Smaller reporting company filer 



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, 2018, was 146,522.



DOCUMENTS INCORPORATED BY REFERENCE:  None

 


 

MINISTRY PARTNERS INVESTMENT COMPANY, LLC

FORM 10-K

TABLE OF CONTENTS



 

 

 



 

 

Page No.



 

 

 

Part I

 

 

 



Item 1.

Business



Item 1A.

Risk Factors

15 



Item 1B.

Unresolved Staff Comments

35 



Item 2.

Properties

35 



Item 3.

Legal Proceedings

36 



Item 4.

Mine Safety Disclosures

36 



 

 

 

Part II

 

 

 



Item 5.

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

37 



Item 6.

Selected Financial Data

38 



Item 7.

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

38 



Item 7A.

Quantitative and Qualitative Disclosures About Market Risk

63 



Item 8.

Financial Statements and Supplementary Data

64 - F-49



Item 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

66 



Item 9A.

Controls and Procedures

66 



Item 9B.

Other Information

67 



 

 

 

Part III

 

 

 



Item 10.

Managers and Executive Officers and Corporate Governance

68 



Item 11.

Executive Compensation

75 



Item 12.

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

77 



Item 13.

Certain Relationships and Related Transactions, and Director Independence

79 



Item 14.

Principal Accounting Fees and Services

79 



 

 

 

Part IV

 

 

 



Item 15.

Exhibits and Financial Statements Schedules

81 



Item 16

Form 10-K Summary

83 



 

 

 

SIGNATURES

 

84 



 

 

 



 

 



 

 


 

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.

2


 





 

PART I

 

Item 1.

Business

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 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, a California state chartered 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 three wholly owned subsidiaries: Ministry Partners Funding, LLC, MP Realty Services, Inc., and Ministry Partners Securities, LLC.

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

3


 

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 formed on April 26, 2010. Through MP Securities, the Company provides investment advisory and financial planning solutions for 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.

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:

·

through interest income earned on our mortgage loan investments;

·

from the sale of securities, insurance products, and investment products;

·

by generating fees from originating and servicing church, schools, and ministry related mortgage loans;

·

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

·

from fee income received in exchange for providing services to credit unions.

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

4


 

business by offering investment services and products, and generating loan servicing income from our mortgage loan investments. We continue to seek and explore other revenue sources.

Services we provide

The Company provides three primary services to our clients. As a credit union service organization, we perform these services for the benefit of our credit union equity members.

·

We provide investment and insurance advisory services and products.

·

We provide commercial mortgage loans to evangelical Christian churches and ministries.

·

We provide a platform for Christian individuals and institutions to participate in funding those projects by investing in the Company’s debt securities.

The Company offers these services on a national basis.

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). The revenue this business line generates is a key component in our strategy to grow our non-interest income. Some of the services we provide our clients include offering:

·

financial plans;

·

investment advisory services; 

·

investments in mutual funds; 

·

client brokerage accounts;

·

life and disability insurance products; and

·

fixed and variable annuities.

Our lending services and products

Our lending services consist of originating, purchasing, selling, and servicing church, schools, and ministry mortgage loans. Our total loans receivable net of allowance at December 31, 2018 was $143 million or 92% of our total consolidated assets. For additional information regarding our Lending Activity, see the Section captioned “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 originate or purchase are real estate secured loans to Christian churches and ministries that have 10-year balloon maturities with a rate adjustment after five years and amortization periods up to thirty years. We secure the mortgage or trust deeds we

5


 

invest in by liens on church, school, and ministry owned real properties. We occasionally provide construction loans, lines of credit, and letters of credit for our customers.

Originating Loans

We utilize brokers, referrals, and rely on relationships the Company has cultivated to identify mortgage loan investment opportunities within our marketplace. This is a departure from the Company’s past practice of primarily using in-house loan originators. We believe this strategy will allow us to operate more efficiently and produce more value to our investors and owners. We typically receive origination fees on loans we originate. The Company amortizes the origination fee and estimated cost to originate the loans over the life of the loan. At times, we may better serve our customers by referring them to another church lending institution. In those cases, we may receive a finder’s fee. While we originate the majority of our new loan investments, from time to time, we may purchase a participation interest in a loan originated by a third party originator.

Loan Underwriting

We have developed underwriting criteria that we apply to loans we originate internally or loans we purchase. These criteria contain factors that we believe will lead to a profitable business. In general, the criteria we consider are similar to our competitors. However, we believe that how we apply the criteria and the specific metrics used are what gives us our competitive advantage. We use the same underwriting standards and evaluation whether we originate the loans ourselves, or purchase them from a third party originator.

Our Loan Servicing

We generate our loan servicing income by offering a lower interest rate to the purchaser of the loan 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

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

Funding our mortgage loans

We sell debt securities, issued by the Company, in public registered and private placement offerings to finance our mortgage loan investments. These public and private offerings serve as the dominant portion of our new funding sources. We market our debt securities primarily to

6


 

investors who are in or associated with the Christian community and have an interest in supporting Christian ministries, institutions, schools, and churches. Our investors include individuals, ministries, and other Christian organizations. MP Securities is our selling agent for these public and private placement notes. In addition, we also obtain funds by selling participation interests in our mortgage loan investments. Finally, in the past, we have raised funds by using lines of credit from various financial institutions. Our ability to originate and fund new mortgage loans is dependent on:

·

selling investor notes to institutional and high net-worth investors;

·

leveraging our mortgage loan investments through the sale of loan participation interests to other financial institutions;

·

expanding the sale of our debt securities; and

·

increasing the amount of non-interest income we generate.

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, 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:

·

specializes in identifying and creating a diversified portfolio of church mortgage loans that we or other credit unions originate;

·

preserves our capital base; and

·

generates consistent income for distribution to our note holders and equity investors.

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.  As of December 31, 2018, we had 15 full or part-

7


 

time employees.  We do not have a collective bargaining agreement with any of our employees and believe we have an excellent relationship with our employees.

Regulation

General

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

·

credit granting activities;

·

establishment of maximum interest rates;

·

disclosures to borrowers and investors in our equity securities;

·

secured transactions;

·

foreclosure, judicial sale, and creditor remedies that are available to a secured lender; and

·

the licensure requirements of mortgage lenders, finance lenders, securities brokers, and financial advisers.

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. Our equity owners that are regulated by the California Department of Financial Institutions (“DFI”) which is a part of the California Department of Business Oversight (“DBO”), in particular, must comply with DFI regulations that govern their investment in or loans they make to a CUSO.

Tax Status

Effective with our conversion from a corporate form of organization to a limited liability company organized under the laws of the State of California on December 31, 2008, we have chosen to be treated as a partnership for U.S. tax law purposes. 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 a partnership in any taxable year, we will be subject to federal income tax on our net taxable income at regular corporate tax rates. As a limited liability company organized under California law, we are also subject to an annual franchise fee and 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.

8


 

Regulation of Mortgage Lenders

As required by the California Finance Lender’s Law, we conduct our commercial lending activities under California Finance Lender License # 603F994 provided to us by the DBO.

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

Environmental Issues Associated with Real Estate Lending

The Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA”), a federal statute, generally imposes strict liability on all prior and current “owners and operators” of sites containing hazardous waste. However, Congress acted to protect secured creditors by providing that the term “owner and operator” excludes a person whose ownership is limited to protecting its security interest in the site. Since the enactment of the CERCLA, this “secured creditor exemption” has been the subject of judicial interpretations which have left open the

9


 

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



 

 

 

 

Arizona

Idaho

Minnesota

Oklahoma

Texas

California

Illinois

Missouri

Oregon

Washington

Colorado

Indiana

Nevada

Pennsylvania

 

Florida

Kansas

New York

Rhode Island

 

Georgia

Massachusetts

Ohio

South Carolina

 

MP Securities is subject to rules and regulations regarding:

10


 

·

net capital;

·

sales practices;

·

public and private securities offerings;

·

capital adequacy;

·

record keeping and reporting;

·

conflicts of interest involving related parties;

·

conduct of officers;

·

directors and employees;

·

qualification and licensing of supervisory and sales personnel;

·

marketing practices; and

·

supervisory and oversight of personnel to ensure compliance with securities laws.

MP Securities is also subject to the financial responsibility, net capital, customer protection, record keeping, and notification rule amendments adopted by the SEC on July 30, 2013. Because MP Securities does not carry or hold customer funds or securities and relies upon a clearing firm to conduct these transactions, Rule 17a-5 requires that it file an exemption report as well as reports prepared by an independent public accountant confirming that it meets the exemption provisions. As amended, the net capital rule requires that 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 and the SEC is authorized to review, if requested, the work papers of the broker dealer’s independent public accounting firm that conducts the audit. As required by amendments to Rule 17a-5 of the Exchange Act, MP Securities files an annual report with the SEC and FINRA that includes its audited financial statements, supporting schedules and its exemption report as a non-carrying broker-dealer. MP Securities is a member of the Securities Investor Protection Corporation (“SIPC”) and files a copy of its annual report with SIPC.

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

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

11


 

·

in determining whether MP Securities meets its net capital requirements;

·

in whether the allocation of costs is fairly treated in any expense sharing arrangements, or management services agreements entered into with the Company;

·

in regards to compensation paid to sales representatives in selling proprietary securities products offered by the Company; and

·

complying with the suitability, know your customer, and fair practices and dealings obligations under federal and state law and rules imposed by FINRA on broker dealer firms.

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

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

·

sales methods;

·

use of advertising materials;

·

arrangements with clearing firms or exchanges;

·

record keeping;

·

regulatory reporting; and

·

conduct of managers, officers, employees, and supervision.

To the extent MP Securities solicits orders from customers; it will be subject to additional rules and regulations governing sales practices and suitability rules imposed on member firms.

MP Securities 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

12


 

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.

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,

13


 

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:

·

incur additional compliance costs;

·

engage in further training initiatives;

·

undertake a thorough review of available transactional exemptions from the rule;

·

prepare agreements to comply with such rule; and

·

implement information technology revisions to our policies and procedures to comply with DOL’s fiduciary rule.

On 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 plans to issue a revised financial fiduciary rule in September 2019. The SEC has also announced that it is working on a proposed fiduciary rule that would govern the sale of securities products by brokers and investment advisers. We continue to monitor developments with the DOL fiduciary rule and have adopted an assets under management fee compensation model that will be applied to sales of our debt securities made by MP Security’s representatives. We believe that implementing this change will:

·

more closely align the compensation program used by MP Securities for its representatives with the interests of investors in our debt securities; and

·

reduce the offering costs of our securities offerings, thereby increasing the net proceeds received by the Company from the sale of such securities to further the Company’s strategic objectives.

Privacy Standards

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

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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 and is therefore not incorporated by reference unless such information is otherwise specifically referenced elsewhere in this report.







 

Item 1A.

RISK FACTORS

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:

·

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

·

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

·

the strength of the lenders from whom we borrow; and

·

borrowing limitations imposed under our credit facilities.

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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, corporate, and retail investors. 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.

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



 

2018

62%

2017

64%

2016

56%

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:

·

age,

·

investment experience,

·

net worth,

·

need for liquidity, and

·

the mix of the investor’s portfolio.

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

17


 

will be adequate to cover any future potential losses. As of December 31, 2018, our allowance for loan loss totaled $2,480 thousand or 1.68% 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:

·

changes in the economy,

·

events affecting specific assets,

·

events affecting specific borrowers,

·

mismanaged construction,

·

loss of a senior pastor,

·

rising interest rates,

·

failure to sell properties or assets,

·

or events affecting the geographical regions in which our borrowers or their properties are located.

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 “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:

·

We do not accrue interest on collateral-dependent, non-performing loans.

·

We are required to record allowances for probable losses as a current period charge on our income statement. This charge will show up either in the provision for loan losses or in the provision for other real estate owned assets.

·

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

·

There are legal and other professional fees associated with the resolution of problem real estate owned assets. Other real estate owned assets also incur carrying costs, such as taxes, insurance, and maintenance fees.

·

The resolution of non-performing assets requires active involvement of our management team, which can divert them from focusing on the Company’s core strategic objectives.

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If additional borrowers become delinquent and do not pay their loans and we are unable to successfully manage our non-performing assets, our losses and troubled assets could increase significantly, which could have a material, adverse effect on our results of operations and financial condition. At December 31, 2018, we had $13,601 thousand of non-performing assets or 8.8% of our total assets.

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:



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Debt Obligations by Year Payable as of December, 31 2018 (dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

2019

 

2020

 

2021

 

Thereafter

 

Total

Institutional Credit Facilities (NCUA Borrowings)

 

$

5,041 

 

$

5,203 

 

$

5,341 

 

$

60,930 

 

$

76,515 

Investor Debt Securities (Gross Notes Payable)

 

 

21,467 

 

 

16,332 

 

 

16,507 

 

 

14,086 

 

 

68,392 

Total Debt Obligations Payable

 

$

26,508 

 

$

21,535 

 

$

21,848 

 

$

75,016 

 

$

144,907 

Percent of Total Debt Obligation Due per Year

 

 

18% 

 

 

15% 

 

 

15% 

 

 

52% 

 

 

100% 

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, 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 NCUA 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

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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 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, 2018 (dollars in thousands):



 

 

 



 

 

 



 

Recorded Loan Balance

Collateral pledged to NCUA borrowings

 

$

92,516 

Collateral pledged to Secured Investor Notes

 

 

9,604 

Loan collateral not pledged

 

 

45,215 

Total loans

 

$

147,335 

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 NCUA 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, 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.

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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 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 variable annuities. 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 expanding the non-interest generating segment of our business, thereby adversely affecting our net earnings and financial condition.

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

In 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. While we have significantly improved our liquidity position through

22


 

·

successfully negotiating improved terms on our credit facilities;

·

selling of all of our foreclosed assets;

·

receiving payoffs on some of our mortgage loan investments; and

·

increasing note sales,

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.

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

·

unforeseen catastrophic events,

·

cyber-attacks,

·

human error,

·

change in operational practices of our system vendors,

·

or unforeseen problems encountered while implementing major new computer systems or upgrades to existing systems.

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

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

Under our code of business conduct, we have established procedures regarding the review, approval, and ratification of transactions 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 has taken extraordinary 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, 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:

·

interest rates and credit spreads;

·

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

·

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

24


 

·

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

·

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

·

unemployment rates.

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.

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.

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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 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.

26


 

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 DOL has delayed the fiduciary standards rule, 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.

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 institutional borrowings from the NCUA 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 had entered into, and may enter into in the future, interest rate hedging transactions that include, but are not limited to, interest rate caps and

27


 

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 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.

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:

·

changes in church leadership;

·

changes in church membership; 

·

local unemployment rates; 

·

credit conditions;

·

local real estate markets;  and

·

other local economic conditions.

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

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

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Because one of our managers holds a board position with our largest equity owner, he 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 between ECCU and us. 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:

·

decisions regarding our contract with ECCU for our office facilities;

·

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

·

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

·

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

·

decisions regarding agreements entered into with ECCU for loan underwriting, processing, marketing, and customer support and services.

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.

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

29


 

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.



 

 

 

 

 

 

 

 



 

California



 

(dollars in thousands)



 

2018

 

2017



 

 

 

 

 

 

 

 

Unpaid Balance of Loans  *

 

$

22,231 

 

 

$

25,658 

 

Percent of Total Loans

 

 

15.09 

%

 

 

16.80 

%

Number of Loans

 

 

37 

 

 

 

40 

 

Percent of Total Loans

 

 

22.02 

%

 

 

24.10 

%

*gross of principal variance, loan discounts, and specific reserves

 



 

 

 

 

 

 

 

 



 

Maryland



 

(dollars in thousands)



 

2018

 

2017



 

 

 

 

 

 

 

 

Unpaid Balance of Loans  *

 

$

32,015 

 

 

$

30,695 

 

Percent of Total Loans

 

 

21.73 

%

 

 

20.10 

%

Number of Loans

 

 

13 

 

 

 

13 

 

Percent of Total Loans

 

 

7.74 

%

 

 

7.83 

%

*gross of principal variance, loan discounts, and specific reserves

 



30


 

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

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

There is generally no publicly available information about the churches and ministries to which we lend. Therefore, we must rely on our borrowers and the due diligence efforts of our staff to obtain the information that we consider when making our credit decisions. To some extent, our staff depends and relies upon the pastoral staff to provide full and accurate disclosure of material information concerning their operations and financial condition. We may not have access to all of the material information about a particular borrower’s operations, financial condition, and prospects. 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 so as to prevent a loss of our loan to that church.

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

31


 

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, in each instance, resulting in the borrower being unable to meet its debt service obligations to us. Such non-performing loans may require a substantial amount of work-out negotiations and restructuring efforts by our management team. These restructuring efforts may involve modifications to the interest rate, extension, or deferral of payments to be made under the loan or other concessions. Even if a restructuring is successfully accomplished, a risk still exists that the borrower may not be able or willing to maintain the restructured payments or refinance the restructured mortgage at maturity.

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

In that event, the value of the real property security may prove insufficient, in which case we would not recover the amount of our investment. Even though we may obtain an appraisal of the

32


 

property at the time we originate the loan, the property’s value could decline as a result of a number of subsequent events, including:

·

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

·

a decline in the local real estate market;

·

undiscovered defects on the property;

·

waste or neglect of the property;

·

a downturn in demographic and residential trends;

·

a decline in growth in the area in which the property is located; and

·

churches and church-related properties are generally not as marketable as more common commercial, retail, or residential properties.

The occurrence of any of these factors could severely impair the market value of the security for our mortgage loan investments. In the event of a default under a mortgage loan held directly by us, we will bear the risk of loss of principal to the extent of any deficiency between the value of the collateral and the principal and accrued interest of the mortgage loan. Foreclosure of a church 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 or depressed periods typically occur on a cyclic basis by an unpredictable time and with uncertain lengths. In addition, such events can be triggered by terrorist acts, war, large-scale economic dislocations, or widespread and large corporate bankruptcies. The effects of these events cannot presently be predicted. We could incur losses as a result of borrower defaults and foreclosures on our mortgage loan investments. Also, during times of recession or depression, the demand for our mortgage loans, even in times of declining interest rates, is likely to decline. 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 do not hold any real estate owned assets as of December 31, 2018.

33


 

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.

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

34


 

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, 2018 and 2017, we held $4.3 million and $3.6 million, respectively in construction loans that we have disbursed.  As of December 31, 2018,  we have authorized a total of $6.0 million for construction loans, including previously disbursed funds.





 

Item 1B.  

UNRESOLVED STAFF COMMENTS

None.





 

Item 2.

PROPERTIES

Corporate Offices

As of December 31, 2018, the Company conducts its operations from its main corporate office at 915 West Imperial Highway, Suite 120, Brea, California. In addition, the Company has one branch office located in Fresno, California. All of our office spaces are under operating leases.

Investment Property

As of December 31, 2018, the Company had one investment in a joint venture that owns a property located in Santa Clarita, California. Additional information regarding the Company’s

35


 

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.





 

Item 3.

LEGAL PROCEEDINGS

Given the nature of our investments made in mortgage loans, we may from time to time have an interest in, or be involved in, litigation arising out of our loan portfolio. We consider litigation related to our loan portfolio to be routine to the conduct of our business. As of December 31, 2018 and subject to the matter described below, we are not involved in any litigation matters that could have a material adverse effect on our financial position, results of operations, or cash flows.

On November 11, 2017, Mr. Harold D. Woodall, former Senior Vice President and Chief Credit Officer, filed a suit against the Company and its Chief Executive Officer and President, Joseph Turner, Jr., in the Superior Court of Orange County, California.  Mr. Woodall’s employment arrangement with the Company terminated effective as of September 5, 2017.  Mr. Woodall’s suit alleges that the Company wrongfully terminated his employment and violated California’s Fair Employment and Housing Act of 1959, and the California Labor Code’s whistle blowing law.  Mr. Woodall had been seeking compensatory damages, punitive damages, attorney’s fees, and other relief as the court deems just.  The Court has set a trial date of no sooner than July 2019, along with a mandatory settlement conference. Mr. Woodall passed away on January 1, 2019 and further action on the case will depend on whether his heirs will pursue the litigation as a successor in interest to Mr. Woodall’s claim.  We believe the allegations in Mr. Woodall’s suit are groundless, without merit, and we intend to contest vigorously the allegations set forth in Mr. Woodall’s complaint.  Although we believe that it will prevail on the merits, the litigation could have a lengthy process, and we cannot predict the ultimate outcome. 





 

Item 4.

MINE SAFETY DISCLOSURES

Not applicable.

36


 

PART II

 



 

Item 5.

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

Price Range of Common Units

There is no public market for our Class A Units and Series A Preferred Units. As of December 31, 2018, 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 $11.3 thousand and $69.0 thousand in net profits to distribute to our Series A Preferred Units holders for the years ended December 31, 2018 and 2017, respectively. This increased the amount of distributions declared on our Series A Preferred Units for the fourth quarters of 2018 and 2017 by $0.096 per unit and $0.590 per unit, respectively.

The remaining balance of any profits will be allocated to all holders of our Class A Units based on their ownership percentage.

37


 

For 2018, we made no distributions to the holders of our Class A Units. During December 31, 2018 and 2017, we declared distributions on our Series A Preferred Units as follows:



 

 

 

 

 

 



 

 

 

 

 

 

SERIES A UNITS



 

 

 

 

 

 



 

Distributions Declared per Unit

Quarter

 

2018

 

2017



 

 

 

 

 

 

First

 

$

0.718 

 

$

0.506 

Second

 

 

0.755 

 

 

0.496 

Third

 

 

0.799 

 

 

0.512 

Fourth

 

 

0.921 

 

 

1.184 

Total distributions per Unit

 

$

3.193 

 

$

2.698 

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.





 

Item 6.

SELECTED FINANCIAL DATA

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.





 

Item 7.

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

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

38


 

Overview

The Company generates its revenue primarily through its church lending portfolio and secondarily through its broker-dealer operations. While we generate the majority of our revenue through interest income, our strategy is to increase revenue from non-interest income sources to diversify our revenue. 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 are also focusing on improving our efficiency by generating more revenue per expense dollar spent. Reducing expenses while maintaining or increasing revenue improves the Company’s capital position, which helps mitigate risk in economic down cycles. In addition, we have also spent considerable effort to reduce the risk to our lending revenue in the future by improving the quality of our loan portfolio and assessment of the financial strength of our borrowers.

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

·

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

·

increasing our revenue from broker-dealer related services by expanding our sales staff;

·

increasing revenue through the sale of loan participation interests;

·

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

·

managing costs through efforts to more efficiency originate and service loans,

·

increasing our capital through growth in earnings;

·

maintaining our balance sheet size as we utilize more of our resources on improving and strengthening the quality of our assets;

·

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

·

increasing the sale of our investor debt securities with the objective of maintaining a stable balance sheet by replacing pay downs on our credit facility borrowings;

·

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

·

maintaining liquidity levels.

39


 

Financial Performance Summary for the Two-Year Period: 2018 and 2017



 

 

 

 

 

 



 

 

 

 

 

 



 

2018

 

2017



 

 

 

 

 

 

Broker-dealer commissions and fees

 

$

523 

 

$

854 

Total income

 

 

10,652 

 

 

10,655 

Provision for loan losses

 

 

666 

 

 

262 

Total non-interest expenses

 

 

4,653 

 

 

4,844 

Net income

 

 

477 

 

 

937 

Cash and restricted cash

 

 

9,928 

 

 

9,965 

Loans receivable, net of allowance for loan losses of $2,480 and $2,097 as of December 31, 2018 and December 31, 2017, respectively

 

 

143,380 

 

 

148,835 

Total assets

 

 

155,439 

 

 

161,022 

Borrowings from financial institutions

 

 

76,515 

 

 

81,492 

Notes payable, net of debt issuance costs

 

 

68,300 

 

 

69,003 

Total equity

 

 

9,531 

 

 

9,429 

Summary of financial performance

For the year ended December 31, 2018, we recognized net income of $477 thousand and grew owners’ equity by $102 thousand. 2018 was our fourth consecutive year of profitability, including 16 consecutive profitable quarters. Total assets decreased by $5.5 million as the Company focused on improving the quality of its loan portfolio instead of portfolio growth.

For the year ended December 31, 2018, the primary items affecting our operating performance were the following:

·

a decrease in net interest income of $512 thousand due to a lower loan yields and higher cost on notes payable. The cost on our notes payable increased due to an increase in market interest rates;

·

a decrease in non-interest expense of $191 thousand as the Company focused on improving operating efficiency. We expect to see greater efficiency in 2019 as the Company reduced staff from 19 to 15 during the year ended December 31, 2018;

·

recording provisions for loan losses of $666 thousand, an increase of $404 thousand over 2017 mainly due to an increase of specific reserves on collateral-dependent loans as we implement more aggressive asset resolution strategies; and

·

an increase in non-interest income of $261 thousand due to an increase in other lending income of $592 thousand as offset by a decrease in broker-dealer commissions and fees of $331 thousand. Other lending income increased mainly due to a gain on the sale of a note related to a  non-performing loan. Broker-dealer commissions and fees decreased as the Company did not add as many institutional clients in 2018 as we did in 2017. Occasionally we will generate commissions on large transactions related to investments made by institutional clients but our budget and business model does not rely on these transactions for sustainability. In 2019, we intend to grow our broker-dealer revenue

40


 

through increasing our sales staff and therefore resulting in more fee generating transactions.

Progress on Strategic Objectives

While net income decreased $460 thousand from the year ended December 31, 2017, we made continued progress towards our strategic objectives of diversifying our revenue streams, improving our loan portfolio quality, 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 repeatable non-interest income are:

·

Revenue from our broker-dealer operations: In 2018, we generated fee and commission revenue of $523 thousand compared to $854 thousand in 2017. The $331 thousand decrease was due to not adding as many institutional clients in 2018 as we did in 2017. While we will occasionally close large transactions made by institutional investors, we do not plan for them in order to sustain our business. In 2019, we will look to increase our revenue from our broker-dealer operations by expanding our sales force with advisors who have already built a profitable book of business.

·

Loan participation sales: We sold $5.4 million in loans to credit unions and other investors during 2018, which was a decrease from $9.7 million sold in 2017. Participation sales decreased due to lower origination volume as we shifted our focus from growth to improving loan portfolio quality. These sales generated $13 thousand in gains during the year compared to $136 thousand in gains during 2017.

·

Loan servicing fee income: As of December 31, 2018, we serviced $36.7 million in loan participations for investors, a slight decrease from December 31, 2017 of $37.4 million in loan participations for investors due to lower participation sales as described above. The participation portfolio generated $160 thousand in servicing income in 2018 versus $90 thousand in 2017. The lower 2017 number was due to a $70 amortization for servicing asset in 2017 due to early payoffs on participated loans.

Loan portfolio quality

Historically the Company’s losses have been due to losses on our mortgage loan investments. Therefore, the resolution of non-performing loans will contribute either positively or negatively to the Company’s performance. As an example of a positive contribution, we recorded $640

41


 

thousand in gains on sale of a  note in 2018. 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 who are willing and able to find a compatible solution. In 2018, we had several positive results due to our efforts to be more aggressive in resolving our non-performing loans. Besides the sale of the note mentioned above, we had one impaired loan pay off in full and another put back on an accrual basis. The Company restructured two other loans with new terms that will allow them to be considered performing loans if they continue making payments. We will reassess these loans in 2019 to determine if they can be re-classified into performing loans.

However, despite the careful management of our mortgage portfolio, especially in regard to our impaired loans, our 90 days or greater delinquency ratio increased by 3.78% from 1.04% at December 31, 2017 to 4.82% at December 31, 2018. This was primarily due to one loan becoming delinquent. The Company has initiated foreclosure proceedings on this loan, as the borrower has not been cooperative in our attempts to resolve its delinquency.

We recorded $666 thousand in provisions for credit losses for the year ended December 31, 2018. We added most of the provision by taking reserves on seven collateral-dependent impaired loans. The Company believes that these additional reserves will enable the Company to implement work out or exit strategies for these impaired loans.

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 that are more favorable and avoid deteriorating our margins while reducing overall risk exposure to any one borrower with a smaller aggregate loan balance. 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) decreased from $920 thousand at December 31, 2017 to $877 thousand at December 31, 2018. 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, 2018, we originated $15.5 million in new loans compared to $30 million for the year ended December 31, 2017. This resulted in a decrease in loans receivable of $5.4 million due to payments on loans. Due to the lower originations indicated in 2018 and, in order to maintain a cost-effective balance of income producing assets as compared to our cost of funds, we kept our

42


 

investor notes payable flat at $68.3 million as of December 31, 2018 compared to $69.0 million at December 31, 2017. To maintain the total amount of our investor notes payable flat, we sold $10.5 million in new investor notes and renewed another $10.1 million in 2018. In 2019, if we have origination opportunities that exceed our balance sheet capacity we believe that we have created the capacity to originate, underwrite, and service a larger quantity of mortgage loans through loan participation sales.

Since the credit crisis of 2008, we have been unable to find a replacement for our institutional credit facilities. To maintain the total size of the Company’s assets in 2019 at substantially the same level as compared to 2018, the Company will need to increase the sale of investor notes by $5.0 million. In 2019, we expect that we will need $5.0 million to fund payment obligations that are maturing on our credit facility. See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – NCUA Borrowings.”

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 is down from our high watermark of 26 full-time employees in 2015. These reductions are in line with our desire to focus on making fewer but financially strong mortgage loan investments. We believe our loan pipeline is still capable of originating the volume of loans necessary to keep the total size of our balance sheet consistent with the December 31, 2018 figure. In 2018, we had non-interest expense of $4.65 million, a decrease of $191 thousand of 4.84 million in 2017. In the future, we will consider adding new expenditures and staff in areas where we can increase revenue. In 2019, we plan to make investments in our broker-dealer operations by adding new sales representatives and advisers in order to meet our objective of diversifying our revenue streams.

Financial Condition

This discussion focuses on the overall performance of our balance sheet. For our Company and most other financial institutions, the balance sheet is the primary driver of its net income.

The following discussion and analysis compares the results of operations for the twelve months ended December 31, 2018 and 2017 and should be read in conjunction with the accompanying consolidated financial statements and notes thereto.

43


 

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



 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

Comparison



 

2018

 

2017

 

$ Difference

 

% Difference



 

 

 

 

 

 

 

 

 

 



 

(dollars in thousands)

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

Cash

 

$

9,877 

 

$

9,907 

 

$

(30)

 

 

(0%)

Restricted cash

 

 

51 

 

 

58 

 

 

(7)

 

 

(12%)

Loans receivable, net of allowance for loan losses of $2,480 and $2,097 as of December 31, 2018 and December 31, 2017, respectively

 

 

143,380 

 

 

148,835 

 

 

(5,455)

 

 

(4%)

Accrued interest receivable

 

 

711 

 

 

742 

 

 

(31)

 

 

(4%)

Investments in joint venture

 

 

887 

 

 

896 

 

 

(9)

 

 

—%

Property and equipment, net

 

 

87 

 

 

103 

 

 

(16)

 

 

(16%)

Servicing assets

 

 

212 

 

 

270 

 

 

(58)

 

 

(21%)

Other assets

 

 

234 

 

 

211 

 

 

23 

 

 

11% 

Total assets

 

$

155,439 

 

$

161,022 

 

$

(5,583)

 

 

(3%)

Liabilities and members’ equity

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

NCUA borrowings

 

$

76,515 

 

$

81,492 

 

$

(4,977)

 

 

(6%)

Notes payable, net of debt issuance costs of $92 and $85 as of December 31, 2018 and December 31, 2017, respectively

 

 

68,300 

 

 

69,003 

 

 

(703)

 

 

(1%)

Accrued interest payable

 

 

249 

 

 

208 

 

 

41 

 

 

20% 

Other liabilities

 

 

844 

 

 

890 

 

 

(46)

 

 

(5%)

Total liabilities

 

 

145,908 

 

 

151,593 

 

 

(5,685)

 

 

(4%)

Members' Equity:

 

 

 

 

 

 

 

 

 

 

 

 

Series A preferred units

 

 

11,715 

 

 

11,715 

 

 

 —

 

 

—%

Class A common units

 

 

1,509 

 

 

1,509 

 

 

 —

 

 

—%

Accumulated deficit

 

 

(3,693)

 

 

(3,795)

 

 

102 

 

 

(3%)

Total members' equity

 

 

9,531 

 

 

9,429 

 

 

102 

 

 

1% 

Total liabilities and members' equity

 

$

155,439 

 

$

161,022 

 

$

(5,583)

 

 

(3%)

General

Total assets decreased by $5.6 million, or 3%, between December 31, 2018 and December 31, 2017. This decrease was primarily due to the decrease in loans receivable as described above.

Our loan funding comes from our members’ equity, our notes payable, and our credit facility borrowings. Since 2008, the Company has relied solely on the sale of investor notes to fund its mortgage loan investments and maintain the total size of its balance sheet assets. In 2018 borrowings on our credit decreased by $5.0 million and notes payable decreased by $703 thousand. We did not attempt to sell additional notes to replace the pay down of our credit

44


 

facilities in 2018, as we did not have additional mortgage loans to fund. If we replace borrowings by selling additional investor notes but do not have loans to fund, our cash would be earning a negative spread because the cost of funds we pay on our investor notes is higher than the yield we receive on short-term investments.

Loan Portfolio

Our loan portfolio is 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 6.44% at December 31, 2018 and 6.31% at December 31, 2017. The following discussion on our loan portfolio revolves around the credit risk to our loans and on how we account for and addresses 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 of 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.

45


 

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



 

 

 

 

 

 

 

 

 

 

 

 



 

Year Ended December 31, (dollars in thousands)



 

2018

 

2017

Loans to evangelical churches and related organizations

 

Amount

 

% of Portfolio

 

Amount

 

% of Portfolio

Real estate secured

 

$

142,728 

 

96.9 

%

 

$

147,661 

 

96.7 

%

Construction

 

 

4,333 

 

2.9 

%

 

 

3,553 

 

2.3 

%

Unsecured

 

 

274 

 

0.2 

%

 

 

1,500 

 

1.0 

%



 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

147,335 

 

100.0 

%

 

$

152,714 

 

100.0 

%

We consider loans individually material if a loan is 10% of net assets of greater. At December 31, 2018, we had no individually material loans.

The following table sets forth, as of December 31, 2018 and 2017, each state in which: (i) the unpaid balance of our mortgage loans was 10% or more of the total unpaid balance of our loan portfolio; and (ii) the number of our loans was 10% or more of our total loans:





 

 

 

 

 

 

 

 



 

California



 

(dollars in thousands)



 

2018

 

2017



 

 

 

 

 

 

 

 

Unpaid Balance of Loans

 

$

22,231 

 

 

$

25,658 

 

Percent of Total Loans

 

 

15.09 

%

 

 

16.80 

%

Number of Loans

 

 

37 

 

 

 

40 

 

Percent of Total Loans

 

 

22.02 

%

 

 

24.10 

%

*gross of principal variance, loan discounts, and specific reserves

 



 

 

 

 

 

 

 

 



 

Maryland



 

(dollars in thousands)



 

2018

 

2017



 

 

 

 

 

 

 

 

Unpaid Balance of Loans

 

$

32,015 

 

 

$

30,695 

 

Percent of Total Loans

 

 

21.73 

%

 

 

20.10 

%

Number of Loans

 

 

13 

 

 

 

13 

 

Percent of Total Loans

 

 

7.74 

%

 

 

7.83 

%

*gross of principal variance, loan discounts, and specific reserves

 



46


 

Loan Maturities

The following table sets forth the future maturities of our gross mortgage loan portfolio at December 31, 2018:



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

Dollar Amount of Mortgage Loans



 

Maturing During Year (in thousands)

Mortgage Loan Portfolio at:

 

2019

 

2020

 

2021

 

2022

 

2023

 

After 2024

 

Total

December 31, 2018

 

$

18,321 

 

 

2,868 

 

 

7,200 

 

 

15,540 

 

 

17,067 

 

 

86,339 

 

$

147,335 



Included in the table above are 115 adjustable rate loans totaling $108.3 million, or 74% 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, loans 90 days or more past due and still accruing, restructured loans, other impaired loans where the net present value of estimated future cash flows is lower than the outstanding principal balance, and foreclosed assets.

·

Non-accrual loans represent 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 collateral that we have repossessed through foreclosure and we now hold as an asset of the Company.

We closely monitor these non-performing assets on an ongoing basis as part of our loan review and workout process. Management evaluates the potential risk of loss on these loans by comparing the loan balance to the fair value of any underlying collateral or the present value of projected future cash flows.

We determine that certain non-accrual loans are collateral-dependent. These are loans where the repayment of principal will involve the sale or operation of collateral securing the loan. For collateral-dependent non-accrual 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-accrual loans we do not consider collateral-dependent, we do not

47


 

accrue interest income, but we recognize income on a cash basis. We had 11 non-accrual loans as of December 31, 2018 and 2017.

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

The following table presents our non-performing assets:



 

 

 

 

 

 



 

 

 

 

 

 

Non-performing Assets

(dollars in thousands)



 

December 31,

2018

 

December 31,

2017

Non-Performing Loans:1

 

 

 

 

 

 

Collateral-Dependent:

 

 

 

 

 

 

Delinquencies over 90-Days

 

$

7,096 

 

$

495 

Troubled Debt Restructurings2

 

 

2,706 

 

 

6,104 

Other Impaired Loans

 

 

3,799 

 

 

1,214 

Total Collateral-Dependent Loans

 

 

13,601 

 

 

7,813 

Non-Collateral-Dependent:

 

 

 

 

 

 

Delinquencies over 90-Days

 

 

 —

 

 

 —

Other Impaired loans

 

 

 —

 

 

 —

Troubled Debt Restructurings

 

 

 —

 

 

1,442 

Total Non-Collateral-Dependent Loans

 

 

 —

 

 

1,442 

Loans 90 Days past due and still accruing

 

 

 —

 

 

 —

Total Non-Performing Loans

 

 

13,601 

 

 

9,255 

Foreclosed Assets3

 

 

 —

 

 

 —

Total Non-performing Assets

 

$

13,601 

 

$

9,255 



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

2 Includes $3.2 million of restructured loans that were over 90 days delinquent as of December 31, 2018.

48


 

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

The following table summarizes the recorded balance of our non-performing loans and the corresponding allowance related to those loans (dollars in thousands):



 

 

 

 

 

 



 

 

 

 

 

 



 

December 31,

 

December 31,



 

2018

 

2017

Impaired loans with an allowance for loan loss

 

$

5,621 

 

$

3,999 

Impaired loans without an allowance for loan loss

 

 

7,980 

 

 

5,256 

Total impaired loans

 

$

13,601 

 

$

9,255 



 

 

 

 

 

 

Allowance for loan losses related to impaired loans

 

$

1,463 

 

$

1,260 

Total non-accrual loans

 

$

10,098 

 

$

8,363 

Total loans past due 90 days or more and still accruing

 

$

 —

 

$

 —

The increase in the balance of our impaired loans at December 31, 2018 as compared to December 31, 2017 is primarily due to reclassifying certain loans in our portfolio to non-performing status in 2018.

Allowance for Loan Losses

We maintain an allowance for loan losses that we consider adequate to cover both the inherent risk of loss associated with the loan portfolio as well as the risk associated with specific loans that we have identified as having a significant chance of resulting in loss.

General reserves are allowances taken to address the inherent risk of loss in the loan portfolio. We include various factors in our analysis and weight them on the level of risk represented and for the potential impact on our portfolio. These factors include:

·

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

·

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

·

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

·

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

·

The effect of credit concentrations; and

·

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

In addition, we include additional general reserves for our loans if the collateral for the loan is a junior lien or is unsecured. We segregate our loans into pools based on risk rating when we perform our analysis in order to determine more accurately the potential impact these factors have on our portfolio. We weight the risk factors differently depending upon the quality of the

49


 

loans in the pool. In general, we give risk factors a higher weighting for lower quality loans, which results in greater general reserves related to these loans. We evaluate these factors on a quarterly basis to ensure that we have adequately addressed the risk inherent in our loan portfolio.

We also examine our entire loan portfolio regularly to identify individual loans 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 value at risk on the investment, defined as the unpaid principal balance, net of discounts, less the collateral value net of estimated costs associated with selling a foreclosed property. This entire value at risk is reserved. For impaired loans that are not collateral-dependent, management will record an impairment based on the present value of expected future cash flows. We review loans that carry a specific reserve quarterly, although 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. These reserves are calculated as the difference in the net present value of payment streams between a troubled debt restructuring at its modified terms as compared to its original terms. We then discount these cash flows at the original interest rate on the loan. Management records these reserves at the time of the restructuring. We report the change in the present value of cash flows attributable to the passage of time as interest income.

The process of providing adequate allowance for loan losses involves discretion on the part of management, and as such, losses may differ from current estimates. We have attempted to maintain the allowance at a level that compensates for losses that may arise from unknown conditions.

50


 

The chart below details our allowance for loan loss:



 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 



 

Allowance for Loan Losses

 



 

as of and for the

 



 

Twelve months ended

 



 

December 31,

 



 

2018

 

2017

 

Balances:

 

(dollars in thousands)

 

Average total loans outstanding during period

 

$

145,617 

 

 

$

150,348 

 

Total loans outstanding at end of the period

 

$

147,335 

 

 

$

152,714 

 

Allowance for loan losses:

 

 

 

 

 

 

 

 

Balance at the beginning of period

 

$

2,097 

 

 

$

1,875 

 

Provision charged to expense

 

 

666 

 

 

 

262 

 

Charge-offs

 

 

 

 

 

 

 

 

Wholly-Owned First

 

 

(283)

 

 

 

(40)

 

Wholly-Owned Junior

 

 

 —

 

 

 

 —

 

Participation First

 

 

 —

 

 

 

 —

 

Participation Junior

 

 

 —

 

 

 

 —

 

Total

 

 

(283)

 

 

 

(40)

 

Recoveries

 

 

 

 

 

 

 

 

Wholly-Owned First

 

 

 —

 

 

 

 —

 

Wholly-Owned Junior

 

 

 —

 

 

 

 —

 

Participation First

 

 

 —

 

 

 

 —

 

Participation Junior

 

 

 —

 

 

 

 —

 

Total

 

 

 —

 

 

 

 —

 

Net loan charge-offs

 

 

(283)

 

 

 

(40)

 

Accretion of allowance related to restructured loans

 

 

 —

 

 

 

 —

 

Balance

 

$

2,480 

 

 

$

2,097 

 



 

 

 

 

 

 

 

 

Ratios:

 

 

 

 

 

 

 

 

Net loan charge-offs to average total loans

 

 

(0.19)

%

 

 

(0.03)

%

Provision for loan losses to average total loans

 

 

0.46 

%

 

 

0.17 

%

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

 

 

1.68 

%

 

 

1.37 

%

Allowance for loan losses to non-performing loans

 

 

20.50 

%

 

 

22.66 

%

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

 

 

(11.41)

%

 

 

(1.91)

%

Net loan charge-offs to provision for loan losses

 

 

(42.49)

%

 

 

(15.27)

%

Cash, Cash Equivalents, and Restricted Cash

Cash, cash equivalents, and restricted cash decreased by $37.0 thousand during the year ended December 31, 2018. The decrease in cash is primarily resulting from $5.0 million in proceeds received from contractual loan payments, loan prepayments, the sale of a note, and an outflow of $5.0 million in principal payments made on our NCUA borrowings.

51


 

Investments in Joint Venture

The investments in joint venture shown on the Comparison of Financial Condition above are one investment in a joint venture formed in January 2016. The purpose of the joint venture is to develop and sell property acquired by us as part of a Deed in Lieu of Foreclosure agreement reached with one of our borrowers in 2014. For additional information, refer to “Note 5. Investments in Joint Venture”, in the notes to consolidated financial statements included in this Annual Report beginning at page F-1.

NCUA Borrowings

As shown on the Comparison of Financial Condition above, our NCUA borrowings decreased by $5.0 million in 2018. This decrease is the result of regular monthly payments made on the credit facilities. For additional information, refer to “Note 9. NCUA Credit Facilities”, in the notes to consolidated financial statements included in this Annual Report beginning at page F-1.

Notes Payable

Our investor notes payable consist of debt securities sold under publicly registered security offerings as well as notes sold in private placements.  Over the last several years, we have expanded our note sale program by building relationships with other organizations whereby we can offer our various note products to their clients.  At the same time, MP Securities and its staff of sales personnel has increased our customer base through marketing efforts made to individual investors. In 2018, our investor notes payable decreased by $696 thousand, resulting from a reduction in sales activities as the Company did not need to raise additional funds to fund new mortgage loans. The total sum of notes payable on the balance sheet presents our notes payable net of debt issuance costs, which have increased from $85 thousand at December 31, 2017 to $92 thousand at December 31, 2018.

Other liabilities

Our other liabilities include accounts payable to third parties and salaries, bonuses, and commissions’ payable to our employees. At December 31, 2018, our other liabilities decreased by $46 thousand compared to the year ended December 31, 2017. This was primarily due to lower accrued bonuses at December 31, 2018 as compared to the year ended December 31, 2017.

Members’ Equity

For the year ended December 31, 2018 total members’ equity increased by $102 thousand due to an additional net income of $477 thousand and dividend expense of $375 thousand. We did not repurchase or sell any ownership units during the year ended December 31, 2018.

52


 

Liquidity and Capital Resources

Maintenance of adequate liquidity requires that sufficient resources are always available to meet our cash flow requirements. We require cash to originate and acquire new mortgage loans, repay indebtedness, make interest payments to our note investors, and pay expenses related to our general business operations. Our primary sources of liquidity are:

·

cash;

·

net income from operations;

·

investments in interest-bearing time deposits in other financial institutions;

·

maturing loans;

·

payments of principal and interest on loans;

·

loan sales; and

·

sales of investor notes.

Our management team regularly prepares liquidity 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 large note investors, ministries, and churches 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 fund our liquidity requirements for the next 12 months.  Should our liquidity needs exceed our available sources of liquidity, we believe we could sell a 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 NCUA credit facilities.

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 liquidity ratio was 13.4% at December 31, 2018, which is above the minimum set by our policy. We also review our liquidity position on a regular basis based upon our current position and expected trends of loans and investor notes. Management believes that we maintain adequate sources of liquidity to meet our liquidity needs. Some of the material liquidity events that would adversely affect our business are:

·

if we are unable to continue our offering of investor notes in public and private offerings for any reason;

·

we incur sudden withdrawals by multiple investors in our investor notes;

53


 

·

a substantial portion of our investor notes that mature during the next twelve months are not renewed; or

·

we are unable to obtain capital from sales of our mortgage loan assets or other sources.

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 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 memorandum. Through sales of the Class 1A Notes and privately placed investor notes, we expect to fund new loans, which we can either hold for 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 that they hold mature. Our note renewal rate has been stable over the last several years and new sal