Item 1. BUSINESS
Our Company
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We are a privately owned California limited liability company with 12 equity owners, 11 of whom are federal or state chartered credit unions and one of whom is the Asset Management Assistance Center of the National Credit Union Administration (“we”, “us”, “our” or the “Company”). We exist to help make evangelical ministries more effective by providing ministries with Biblically-based, value-driven financial services and by providing funding services to the credit unions who serve those ministries. We do this by investing in mortgage loans made to churches and ministries. These loans are typically originated by us and secured by church and church-related real property owned by and/or maintained for the benefit of evangelical churches or church-related organizations such as Christian schools and ministries. When the Company was formed, substantially all of the mortgage loans in our loan portfolio were purchased from our largest equity investor, the Evangelical Christian Credit Union of Brea,
			
		
California (“ECCU”), and ECCU acted as our underwriter and primary servicer for a significant portion of those loans.
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In 2010, we developed the capability to originate and service loans ourselves. Since that time, we have increased the proportion of our portfolio that is originated and serviced by us. As of December 31, 2016, we owned a total of 157 mortgage loans and four unsecured loans, with a recorded balance, net of allowance for losses, of $144.2 million. As of the date of this Report, we service 150 of these loans. The average loan balance for our loan investments is $919 thousand and our loans have a weighted average life to maturity period of 6.4 years at December 31, 2016. Substantially all of our business operations currently are conducted in California and, while we have more loan investments in California than in any other state, we own loan interests in 33 different states.
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We were incorporated under California law on October 22, 1991 under the name Ministry Partners Investment Corporation and established as a credit union service organization, or ("CUSO"), by ECCU for the purpose of providing mortgage loans to evangelical churches and ministry organizations. Effective as of December 31, 2008, we converted our form of organization from a California corporation to a California limited liability company. This conversion was a statutory conversion authorized under Section 1150 of the California Beverly Killea Limited Liability Company Act. Upon the conversion, we became, by operation of law, a California limited liability company. As a result of the conversion, our name changed to "Ministry Partners Investment Company, LLC.” Since the conversion became effective, we have been managed by a group of managers that carry out their duties similar to the role and function that the board of directors performed under our previous bylaws. Operating like a board of directors, the managers have full, exclusive and complete discretion, power and authority to oversee the management of our affairs.
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To finance our mortgage loan investments, we obtain funds from the sale of our debt securities. We also obtain funds from lines of credit provided by various financial institutions and, from time to time, sell participation interests in our mortgage loan investments to generate additional funds. We market our debt securities primarily to investors who are in or associated with the Christian community, including individuals, ministries and other organizations and associations. As a CUSO, we invest in and originate loans made to evangelical churches and ministry organizations, sell loan participation interests and offer complimentary securities products to our credit union members.
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In 2007, we created a wholly-owned special purpose subsidiary, Ministry Partners Funding, LLC (“MPF”), for the purpose of warehousing church and ministry mortgages purchased from ECCU or originated by us for subsequent securitization. Because of the collapse of the mortgage-backed securities market and severe credit crisis that adversely impacted global financial markets in the latter part of 2008, we did not securitize any of the mortgage loans that MPF purchased. We closed down the active operations of MPF effective December 31, 2009 but maintained MPF’s existence as a Delaware limited liability company to offer, manage, hold assets, sell debt securities and participate in debt financing transactions. On January 15, 2015, we modified the operating agreement of MPF to authorize MPF to serve as the custodian of the pledged assets held for investors in our Secured Investment Notes offering pursuant to the terms
			
		
and conditions of a Loan and Security Agreement entered into by and between the Company and MPF dated December 31, 2014.
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On November 13, 2009, the Company formed a wholly-owned subsidiary, MP Realty Services, Inc., a California corporation (“MP Realty”). MP Realty provides loan brokerage and other real estate services to churches and ministries in connection with the Company’s mortgage financing activities. On February 23, 2010, the California Department of Real Estate issued MP Realty a license to operate as a corporate real estate broker. MP Realty has conducted limited operations since its inception.
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On April 26, 2010, the Company formed Ministry Partners Securities, LLC, a Delaware limited liability company (“MP Securities”). MP Securities has been formed to provide financing solutions for churches, charitable institutions and faith-based organizations and act as a selling agent for securities offered by such entities. Effective as of July 14, 2010, MP Securities was qualified to transact business in the State of California. On March 2, 2011, MP Securities’ application for membership in the Financial Industry Regulatory Authority (“FINRA”) was approved. In October 2012 MP Securities began acting as a selling agent for the Company’s Class A Notes offering that has been offered under a registration statement declared effective by the U.S. Securities and Exchange Commission (“SEC”). In January 2015, MP Securities began acting as a selling agent for the Company’s Class 1 Notes offering. In November 2012, MP Securities also began selling investments in mutual funds.
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On July 11, 2013, MP Securities executed a new membership agreement with FINRA which authorized it to act on a fully disclosed basis with a clearing firm to expand its brokerage activities. In addition, on July 11, 2013, the State of California granted its approval for MP Securities to provide registered investment advisory services. Finally, on September 26, 2013, MP Securities entered into a clearing firm agreement with Royal Bank of Canada Dain Rauscher (RBC Dain), thereby enabling MP Securities to open brokerage accounts for its customers. On March 14, 2013, the Company received a resident license from the California Department of Insurance to act as an Insurance Producer under the name Ministry Partners Insurance Agency, LLC (MPIA). MPIA has reached agreements with multiple insurance companies to offer their life and disability insurance products, as well as fixed and variable annuities. MP Securities can now offer a broad scope of investment services that will enable it to better serve the Company’s clients and customers.
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We are a California limited liability company and our principal executive offices are located at 915 West Imperial Highway, Suite 120, Brea, California 92821. Our telephone number is (714) 671-5720 and our website address is www.ministrypartners.org.
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Our Business
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We are a non-bank financial services company that conducts business on a national scope. We were organized as a CUSO for the specific purpose of assisting evangelical Christian churches and organizations by providing financing for the acquisition, development and/or renovation of churches or church-related properties, and provide Christian investors the opportunity to
			
		
participate in funding those projects. As a CUSO, we perform these services for the benefit of our credit union equity members.
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The religious loan market segment has grown dramatically over the years since our inception and both the size of the loans and the number of qualified borrowers in this sector has steadily increased. Prior to the 2008 global financial crisis that adversely affected real estate values in certain regions of the United States, the size of the church and ministry mortgage financing market in the United States was estimated to range between $20 billion and $40 billion annually. While post-crisis estimates of the size of this market have been difficult to obtain, we believe that the demand for ministry loans originated and serviced by niche lenders to churches and ministries will continue to exceed available lending and financing sources for this sector. We base our belief on our past experience with making loans to this market segment and on information we have obtained through contact with sources in the industry. We believe that the availability of lenders serving this market has been somewhat unpredictable as larger financial institutions expand, contract or vacate this niche market during periods of expansion or contraction. As a financial services company that has specialized in assisting these organizations since we commenced operations in 1991, we believe that the lack of predictable financing sources for evangelical Christian churches and organizations presents us with a significant opportunity. In addition, we believe that lenders that are active in the market for church loans appear to have tightened their credit standards. As a result of improved market conditions, we have seen that the secondary market for church and ministry loans, including the sale of loan participation interests in mortgage loan investments we underwrite and originate, presents us with significant business opportunities. We have begun to take advantage of those opportunities by selling participations in loans to credit unions, other CUSOs, foundations, and banks.
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Because the financial base and resources of church and ministry organizations have grown larger and these organizations increasingly employ more sophisticated accounting and budgetary practices, financial institutions that do not normally originate religious loans are now willing to participate in or purchase loans in this market segment. As a result, a limited but robust secondary market for these loans has developed among financial institutions, especially credit unions, and we have expanded our operations in this market. We have accessed this market by developing relationships with several third party commercial mortgage broker networks as well as creating a direct participation network consisting of loan funds, credit unions and other financial institutions.
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Our general practice in past years has been to fund loan acquisitions and originations with borrowings under our credit facilities. We then repay borrowings on our credit facilities with proceeds from the sale of investor notes, mortgage loan prepayments and repayments, and from our operating income. Our ability to access capital to repay borrowings under our credit facilities is subject to variability based upon a number of factors, including volatility in the capital markets, our ability to demonstrate consistent earnings, regulatory constraints and limitations, the relative interest rates that we are prepared to pay for our investor debt obligations, the ability of our borrowers to access capital to repay or prepay their obligations to us, and our ability to sell our mortgage loan assets. Any occurrence that disrupts our ability to access capital from these sources may have a material adverse effect on our ability to grow our business, meet our
			
		
commitments, and make distributions or payments to our equity owners and debt securities investors.
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As we have undergone a transition from relying on financing from credit institutions to fund our mortgage loans, we have diversified our financing sources. In recent years we have primarily relied on sales of our debt securities to new investors, the purchase of our debt securities by repeat investors and sales of participation interests in our mortgage loans to fund a substantial portion of our loan investments. Our ability to originate and fund new loans is dependent on the sale of our investor notes to institutional and high net-worth investors collateralized by specific mortgage loans, expanded efforts to generate capital and leverage our mortgage loan investments through the sale of loan participation interests to other financial institutions, expanding the sale of our debt securities through the efforts of our wholly-owned broker-dealer firm, MP Securities, and increasing the amount of other income generated by both MP Securities and by our loan servicing department.
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Our net earnings are generated from:
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interest income earned on our mortgage loan investments;
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fee income generated from originating and servicing mortgage loans;
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gains realized on the sale of loans and loan participation interests to financial institutions;
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fee income from services provided to credit unions;
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successful efforts to manage, liquidate or sell real estate assets and maximize loan recoveries on delinquent loans in our loan portfolio;
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fee income generated from the sale of securities and investment products by our wholly-owned broker-dealer firm; and
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fees received by our registered investment advisor for managing financial assets.
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During 2016, we (i) funded $42.7 million in loans, which represents the largest amount of origination activity in our history; (ii) earned $70 thousand in other income related to agreements reached with ECCU to provide lending and loan servicing capabilities; (iii) transferred one of our foreclosed assets to a joint venture where the asset can be developed for sale and sold our remaining foreclosed assets for a gain of $278 thousand; (iv) utilized the networking agreements reached in 2014 with ECCU and America’s Christian Credit Union (“ACCU”) to continue to grow our client base, which resulted in an increase in investor notes payable of $10.6 million and increased fee revenue earned by our wholly-owned, broker-dealer subsidiary, MP Securities by 31%; (v) reached an agreement with the NCUA to re-amortize our borrowings, resulting in an increase in monthly principal payments on our borrowings, but also moving the maturity date of the facility from 2018 to 2026, which gives us eight additional years of funding under the facility at a rate of 2.53%; and (vi) continued to improve the efficiency of managerial and staffing resources and our technological capabilities to create efficiency for our lending and servicing
			
		
operations as well as expanding the services we offer to credit unions to generate non-interest related fee income.
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Our net income of $922 thousand for 2016 primarily results from an increase in interest income related to our lending activity, and an increase in other income generated by the loan-related services we provide and the success of our broker-dealer/investment advisory firm in selling non-proprietary products and services. Our lending activity was made possible by an increase in investor note sales facilitated by building relationships through MP Securities with credit unions and other Christian-oriented credit unions. We also used loan participation sales throughout the year to fund loan originations, address liquidity needs and generate other income. Our broker-dealer revenue increased through the sale of mutual funds and insurance products as well as the fees earned for providing investment advisory services to our clients. Finally, we were able to eliminate the remaining foreclosed real estate assets from our balance sheet, which had the dual effect of decreasing the management and maintenance costs of the properties as well as earnings generated when we were able to sell such properties at a gain. All of these gains were earned while keeping our operating expenses at approximately the same level as in 2015 and without incurring significant provisions for loan losses from our expanding loan portfolio.
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Lending Activities
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Loan Origination, Acquisition and Underwriting
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Over the last several years, we have expanded our in-house staff, improved our operational systems and underwriting resources which has enabled us to expand our ability to originate, underwrite and service our mortgage loan investments. From time to time, we also purchase mortgage loans and loan participation interests from other financial institutions. When we acquire a mortgage loan or loan participation interest, we apply our internally developed underwriting criteria and loan acquisition policies and review the underwriting procedures carried out by the financial institution that is selling the loan or participation interest. When we originate a loan, we rely entirely on our own underwriting capabilities and standards. Typically, we receive an origination fee and loan processing fee at the inception of each loan.
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As a result of our increased focus on originating our own loans, we have originated $128.0 million in loans over the last four years. As a result of our efforts to expand underwriting, servicing and loan administration services starting in 2010, the Company now has the capacity, capability and underwriting experience to originate and service all of our mortgage loan investments.
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Servicing
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Our core processing system along with our loan administration personnel give us the capability to service loans for ourselves and other institutions. As of December 31, 2016, we were servicing 150 loans out of a total of 161 loans in our portfolio, totaling approximately $135.0 million in loan principal outstanding, net of participations sold. These loans totaled approximately $177.1 million in gross loan principal balance outstanding at December 31, 2016.
			
		
By originating our own loans and servicing our own portfolio, we have reduced total servicing costs while earning additional lending and servicing fees.
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Our servicing capability also represents the operational foundation of our loan participation strategy, which will enable us to produce recurring servicing revenue from loan participations sold. We sold participations in 22 loans during the year ended December 31, 2016 for an aggregate amount totaling $14.3 million, which resulted in $135 thousand in gains on loan sales. For the year ended December 31, 2015, we sold participation interests in 8 loans totaling $6.0 million thereby generating $49 thousand in income. As of December 31, 2016, we serviced $39.9 million in loan participations sold to other financial institutions. Our technology platform enables us to process, record, transmit and account for all financial and operational data for the benefit of other credit unions, finance lenders, churches, financial institutions and investors. With these additional capabilities, we believe we will be able to continue to expand our loan servicing capabilities.
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In the past, we have purchased loans from other credit unions, primarily ECCU. Based upon ECCU’s experience in underwriting and servicing church and ministry related mortgage loans, we have entered into a servicing agreement with ECCU for some of our mortgage loan investments. As of December 31, 2016, ECCU was servicing nine loans for us, totaling approximately $11.2 million in loan principal outstanding. As of December 31, 2016, we also own approximately $1.8 million in mortgage loan investments which are being serviced by ACCU, a Glendora, California based credit union.
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Types of Loans
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We invest primarily in mortgage loans secured by liens on churches, church-related and/or ministry related properties. Generally, our loans are secured by first mortgage liens, but we may invest in loans secured by second liens or which are guaranteed junior secured obligations, or in unsecured loans, if such loans meet our loan criteria.
Permanent Loans
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We acquire or originate mortgage loans that may have an adjustable interest rate or fixed rate. The term for a mortgage loan may not exceed 30 years and the maximum loan to value ratio may not exceed 90% without approval from our Board of Managers. Subsequent to the funding of a loan, the loan to value ratio may increase beyond 90% as the real estate market fluctuates and we receive new valuations of the loan’s collateral. According to our loan policy, the maximum weighted average combined loan to value ratio for all loans in our portfolio secured by real property is 80%. Management monitors the loan to value ratios of loans in our portfolio. Our standard loan investments have ten year maturities with a rate adjustment after five years.
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Construction Loans
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Construction loans may be made to finance the construction or restoration of facilities for schools, worship facilities or ministry related purposes. These loans normally will have a final maturity that will not exceed ten years, with a construction draw period that will run from nine to 18 months. In most instances, construction loans are interest-only on the outstanding balance
			
		
drawn for construction. The interest-only period lasts until the loan converts to a commercial real estate loan. Under our Church and Ministry Loan Policy, the maximum loan to value ratio for a construction loan is 75% of the completed value of the collateral. Due to an increase in opportunities to fund church construction loans, we have increased our construction lending activity over the last two years. As of December 31, 2016, we had $11.8 million of construction loans outstanding and $2.1 million in unfunded construction loan commitments. We anticipate a significant portion of our outstanding construction loans to be completed in early 2017, when they will convert to commercial real estate loans. As of December 31, 2015, we had $1.9 million of construction loans outstanding and $5.1 million in unfunded construction loan commitments.
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Participation Interests
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From time to time, we also invest in participation interests in secured mortgage loans, whereby we own a participation interest in a mortgage with a credit union or other lender. By investing in a participation interest, we can participate in a larger loan investment and diversify our mortgage loans investment portfolio while minimizing our exposure to the aggregate amount of the loan. When we invest in a “participation interest”, we purchase an undivided interest in a loan that has been originated by a credit union or other financial institution and we share principal and interest payments received from the borrower in an agreed upon manner. When we purchase a participation interest, the purchase transaction is governed by a participation agreement entered into by the originator and the participant containing guidelines as to ownership, control and servicing rights. In most instances, the originator retains all rights with respect to enforcement, collection and administration of the loan. When we enter into a loan participation agreement to purchase a loan participation interest from a financial institution, we may have more limited access to the borrower and the lead lender is generally entitled to exercise discretionary power in administering performing loans and undertaking collection efforts in connection with any of its non-performing loans. If and when we decide to purchase a mortgage loan participation from another lender, our lending staff underwrites the participated loan to meet our Board-adopted loan policy requirements.
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Due to our enhanced ability to originate and service our own loans, our investment in loan participations has been significantly reduced. We have not purchased a loan or a loan participation interest since 2013. As of December 31, 2016, approximately $10.8 million, or 7% of our total loan portfolio, consisted of loan participations we purchased from other financial institutions, including ECCU. For the year ended December 31, 2015, approximately $12.4 million, or 9% of our total loan portfolio, consisted of loan participations we purchased from other financial institutions.
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Line of Credit
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We may make line of credit arrangements available to borrowers to meet their temporary working capital needs. The term of such arrangements typically will not exceed one year and will provide for minimum interest payments during the term of the loan. As of December 31, 2016, we had $75 thousand in unfunded line of credit commitments as compared to $155 thousand in unfunded line of credit commitments at December 31, 2015.
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Letters of Credit
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Under our Church and Ministry Loan Policy, we are authorized to issue letters of credit granting the person named in the letter the right to demand payment from us for up to a specified amount provided the conditions set out in the letter are met. We require that a letter of credit be fully secured by funds on deposit or restricted funds on a line of credit with a draw period on the line of credit that meets or exceeds the draw period on the letter of credit. As of December 31, 2016, we had $686 thousand in outstanding letter of credit commitments compared to $1.1 million as of December 31, 2015.
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Our Loan Policies
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Our managers establish our loan policies and review them periodically and, from time to time, have authorized designated loan officers and our President to make loans within certain limits established by our managers. Our managers adopted a Church and Ministry Loan Policy to support our expanded levels of acquisition and origination of loans and also appointed a Credit Review Committee to review and carry out our loan policy. The Credit Review Committee may approve loans up to 25% of our tangible net worth or 5% of our aggregate loan portfolio, whichever is less. For loans exceeding the threshold, our managers have established a Loan Committee that reviews our loans and loan requests which exceed certain prescribed limits under our loan policies. Upon approval, we issue a written loan commitment to the applicant that specifies the material terms of the loan. Any loan exceeding 50% of our tangible net worth, or 7% of our total loan portfolio, whichever is less, must be recommended by the Credit Review Committee and approved by the Board of Managers prior to funding. For any loan participation interest we acquire, the aggregate amount of such interest may not exceed 15% of our total net worth.
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Our Mortgage Loan Investment Standards
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Our policy is to require each of our mortgage loan investments to meet the following criteria:
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Demonstration of Ability to Pay. The borrower must support its overall ability to timely pay principal and interest by its operational and cash flow history. For these purposes, "cash flow" includes donations and other revenue which the borrower can demonstrate to be continuing. Generally, debt service payments of the mortgage loan may not exceed a reasonable percentage of the borrower's cash flow over the expected term of the loan.
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Term of Loan. The remaining term of each mortgage loan must be thirty (30) years or less from the date we acquire or originate the loan.
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Priority of Secured Interest. The mortgage loan must be evidenced by a written obligation and must be secured by a deed of trust on the mortgaged property.
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Funding Escrow. Mortgage loans must be funded through a formal escrow in a customary manner in order to assure that we receive good title to our security interest in the loan at the time the loan is funded.
			
		
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Value of Security. Each mortgage loan must be secured by real property for which there is available for review a recent independent appraisal or other independent valuation which supports the value of the property.
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Title Insurance. Each mortgage loan must be covered by a standard lender's title insurance policy.
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Application of Loan Proceeds. Procedures must be established to assure the loan proceeds will be used for the purposes authorized. Unless we waive the requirement for good cause, loan proceeds must be available only for expenditures on account of the project for which the loan was made.
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Inspection. We, the original lender, or the lender's representative must have made a personal on-site inspection of the property securing the loan.
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Insurance. We require our borrowers to obtain standard insurance protection customary in the industry, including title insurance (to insure against title defects and some forms of documentation), and liability and casualty insurance in customary amounts. We may also require special insurance in connection with particular mortgage loans, including earthquake, flood and environmental hazard insurance.
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Lines of Credit and Letters of Credit. Our typical mortgage loan investment is a conventional real estate loan. However, from time to time we may make a loan commitment or loan funds pursuant to a line of credit or a letter of credit. These commitments and loans are typically secured by real property or funds pledged by the borrower. We require that our Loan Investment Committee approve the transaction.
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Credit Union Members. Loans can be only made to credit union members or our investors, unless otherwise permitted by our Church and Ministry Loan Policy.
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Location of Collateral. Each mortgage loan must be secured by real property located in the United States. Unsecured loans may be made without a geographical limitation provided that all payments are made in U.S. dollars and the financial statements of the borrower are in English.
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Loan Limits. The aggregate total of all construction loans or loans secured by junior liens on real property may not exceed 200% of our tangible net worth. The maximum aggregate amount of any loan or loans made to one borrower (or to related entities) may not exceed 25% of our tangible net worth or 5% of our aggregate loan portfolio, whichever is less, at the time the loan is funded or acquired. The maximum aggregate amount of unsecured loans made to any one borrower may not exceed 10% of our tangible net worth at the time the loan is funded or acquired. For any loan that exceeds 25% of our tangible net worth or 5% of our loan portfolio, whichever is less, the loan must be approved by our Loan Committee prior to funding.
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Subject to the foregoing discussion, the following tables demonstrate and confirm our compliance with these loan limit policies:
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As of December 31, 2016 and 2015, respectively, we were in compliance with our policy on aggregate concentration limits for construction loans, junior liens and total unsecured loans. Our portfolio included 19 loans and 22 loans at December 31, 2016 and 2015, respectively, that exceeded our policy limits for loans made to one borrower. All of the aforementioned loans
			
		
exceeding policy limits were originated or purchased in compliance with our policy, which allows our managers or the Company’s Credit Review Committee to approve certain exceptions.
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Of the 19 loans that were out of compliance at December 31, 2016, 10 were approved as exceptions by our Board of Managers or our Credit Review Committee. The remaining nine loans migrated out of compliance solely due to a decline in our tangible net worth since the loans were purchased or originated, which is primarily due to increased provisions for loan losses and losses taken on our foreclosed assets in prior years. At December 31, 2016 we had one unsecured loan that exceeded our policy limit. This loan was participated to another financial institution. We were still waiting to collect the funds from the participating financial institution at the end of the year. Once these funds were collected in January 2017, the net balance of the loan brought it in compliance with our policy.
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We believe the risk presented by the loans that have migrated out of compliance with our policy on limiting loans to a single borrower which exceed 25% of our tangible net worth will be mitigated by focusing on efforts to successfully manage the impaired loans in our portfolio. Over the past several years, our lending team has placed an increased focus on originating small loans in addition to large loans, and plans to continue to originate a mix of loan sizes. The average outstanding balance of loans receivable in our portfolio has decreased from $1.1 million at December 31, 2013 to $919 thousand at December 31, 2016. We have also used loan participation sales to reduce the risk of originating relatively large loans and have sought to include credit unions located in the borrower’s local community to serve as the credit union of record when that credit union holds at least a 10% interest in the loan.
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All loan applicants must complete an application and provide suitable documentation demonstrating an ability to repay the loan and submit this application to our offices in Brea, California. For new loans greater than $500,000, we or our designated representative will conduct a site visit to inspect the collateral and conduct our due diligence review of the applicant. Each loan must meet our Church Ministry and Loan Policy guidelines.
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Based in part on the foregoing criteria, we have adopted a risk rating system for rating the risk of our mortgage loan investments. Our managers and management team monitor portfolio composition regularly and may, from time to time, establish guidelines for management regulating the fraction of the portfolio that may be invested in each risk category. We monitor the risk ratings of our mortgage loan portfolio on a regular basis.
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Our Loan Investment Portfolio
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We invest primarily in mortgage loans secured by liens on churches, church-related and/or ministry-related properties. Generally, our mortgage loans are secured by first liens, but under limited circumstances, we may invest in loans secured by junior liens. The payment of our mortgage loan investments is not insured and, in general, is not guaranteed by any person or by any government agency or instrumentality. We must, therefore, look to foreclosure on the property securing the loan as the primary source of recovery in the event the loan is not repaid as required. Some of our mortgage loan investments are partial participation ownership in a mortgage loan, whereby we own an undivided interest in the loan investments with other
			
		
institutions. Generally, the percentage of our ownership interest in our mortgage loans has ranged from 1% to 100%. Joint ownership allows us to participate in larger loans and in a greater number of loans than we would otherwise be able to afford, and therefore allows us to achieve greater diversification for our mortgage loan investment portfolio.
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Our cash and loan investments as of December 31, 2016 and 2015 are set forth below:
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Set forth below are the amounts we invested in each loan category for the years ended December 31, 2016 and 2015, respectively:
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At December 31, 2016, we had no loans that are considered individually material (10% of net assets or greater) to our financial operations.
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Our Net Interest Income and Interest Margin
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Our earnings depend largely upon the difference between the income we receive from interest-earning assets, which are principally mortgage loan investments and interest-earning accounts with other financial institutions, and the interest paid on our investor notes and lines of credit. This difference is net interest income. Net interest margin is net interest income expressed as a percentage of average total interest-earning assets.
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Please see the discussion under Item 7. “Management Discussion and Analysis of Financial Condition − Results of Operations” for information regarding our historical interest costs, interest income and yields realized on our mortgage loan investments for the years ended December 31, 2016 and 2015.
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Loan Maturities
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The following table sets forth the future maturities of our gross mortgage loan portfolio at December 31, 2016:
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Included in the table above are 124 adjustable rate loans. These loans, totaling approximately $109.1 million, are due in 2021 or later, with the exception of one participation interest that matures in 2018. All adjustable rate loans have one rate adjustment after five years.
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Diversification of our Loan Portfolio
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The following table sets forth, as of December 31, 2016 and 2015, 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:
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Our Loan Renewal Policies
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We offer to renew, re-underwrite or otherwise continue (i.e. renew) a maturing loan on a case-by-case basis, based on the terms of the maturing loan, the credit status of the borrower and our
			
		
liquidity needs at the time. Prior to maturity, each loan is analyzed and re-underwritten to determine if it is a possible rollover candidate. Management then reviews our liquidity needs and conditions in determining whether to recommend to our Credit Review Committee to renew the loan.
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Sale of Loan Participation Interests
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From time to time, we enter into loan participation purchase and sale agreements and we believe there is a robust demand for church and ministry loans in the credit union industry. When we sell a participation interest, a certificate is delivered and agreed upon which identifies the name of the borrower, the principal amount due under the loan, purchase price, interest rate, maturity date and participation percentage acquired under the loan. When we sell a loan participation interest, we generally enter into a loan participation interest purchase agreement which includes standard representations and warranties that are typical for a transaction of this nature. In addition, we are obligated to alert purchasers of such interests of certain material events which might affect the financial condition of the borrower and collectability of the loan.
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During 2016, we entered into loan participation agreements to sell $14.3 million of loan participations to several credit unions. During 2015, we entered into loan participation agreements to sell $6.0 million of loan participations.
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Performance and Monitoring of our Loan Portfolio
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Our credit, underwriting and servicing teams are responsible for reviewing and monitoring the performance of the loans in our portfolio. This involves regular communication with our borrowers, along with the collection of financial statements and other pertinent data. The review of financial data is done on at least an annual basis, and is often done more frequently as warranted. Based on the review of this information as well as the performance of the loan as compared to its terms, we will take additional action to ensure that that loan is properly classified.
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As of December 31, 2016, nine of our 161 mortgage loan investments are serviced by ECCU and subject to ECCU’s collection policies. Under the terms of our servicing agreement with ECCU, we monitor each mortgage loan or participation interest we acquire to ensure full payments are received as scheduled. We also receive monthly reports from ECCU regarding our mortgage loan investments, including delinquent loan status reports. For the loans that we service, we monitor payment receipts and delinquency. We produce status reports on these loans similar to those which we receive from ECCU. These status reports are included in monthly and quarterly reports management prepares for our Board of Managers.
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Impaired Loans
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An impaired loan is defined as a loan on which, based on current information and events, it is probable that we will be unable to collect the scheduled payments of principal and interest when due according to the contractual terms of the loan agreement. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Impaired loans include delinquent loans, loans on non-accrual status and all restructured loans, regardless of the
			
		
loans’ interest accrual status. We use the terms “impaired loan” and “non-performing loan” interchangeably in the discussion below.
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A "delinquent loan" is a loan which is 90 days or more past due. We treat a delinquent loan as an impaired loan. A "restructured loan" means a delinquent loan or an otherwise troubled loan for which we have given the troubled borrower concessions, generally with respect to payment accruals, interest rate reductions, and/or maturity date extensions, which we would not have given the borrower upon making the loan. A restructured loan may or may not be on non-accrual status. We treat a restructured loan as an impaired loan. While our Credit Review Committee closely monitors our loan portfolio performance, there have been no material changes in our practices, policies and procedures with regard to how we treat our non-performing loans that have been adopted over the past two years.
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We "charge off" or "write off" a loan against our allowance or reserve for loan losses when we believe the uncollectability of the loan balance is confirmed. In most cases, this directly correlates to the completion of foreclosure proceedings on the collateral. In 2015, we recorded $103 thousand in charge-offs against one impaired loan. In 2016, we recorded $20 thousand in a partial charge-off against one impaired loan when we wrote down the principal balance of that loan as part of an agreement with the borrower.
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Delinquent Loans
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When the U.S. encounters adverse economic conditions, credit contractions and declining real estate values, churches are often materially impacted by high unemployment rates, foreclosures on homes owned by their members, collapsing real estate values and diminished net worth of their congregations and members. Contributions to churches and ministries are especially sensitive to these economic trends.
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We report a mortgage loan as delinquent if it is 90 days or more in arrears. At December 31, 2016, 0.90% of our portfolio was delinquent. At December 31, 2015, 0.78% of our loan portfolio was delinquent. We have adopted a proactive approach in responding to delinquencies in our loan portfolio. For loans which we act as the lead lender, we make direct contact with the borrower within ten (10) days of an initial late payment. If the situation progresses to 30 days or more, we follow up with an onsite visit to discuss the borrower’s circumstances and how the borrower can bring the loan current.
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In the event that an acceptable workout of a delinquent mortgage cannot be reached, we, or ECCU for any loans it services for us, will generally proceed with a foreclosure proceeding on any collateral securing the loan. At December 31, 2016, we did not have any loan investments in which we or the lead lender in the loan was pursuing foreclosure. Since inception, we have had eight mortgage loan investment losses that resulted in charge-offs, one of which occurred during the year ended December 31, 2016.
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Non-performing Loans
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The table below sets forth the amounts and categories of non-performing assets in our portfolio. Loans are placed on non-accrual status when the collection of principal and/or interest becomes
			
		
doubtful or other factors involving the loan or the borrower’s financial condition warrant placing the loan on non-accrual status. Non-accrual loans represent loans on which interest accruals have been discontinued. Troubled debt restructuring arrangements (or “TDRs”) are loans which include renegotiated loan terms to assist borrowers who are unable to meet the original terms of their loans. Such modifications may include a lower interest rate, an extension of the maturity date or reduction in accrued interest. All TDRs (restructured loans) are initially placed on non-accrual status regardless of whether the loan was performing at the time it was restructured. During the past two years, there have been no material changes in our practices or policies governing how we handle a non-performing loan.
The following is a summary of our non-performing mortgage loans at December 31, 2016, and 2015, respectively (dollars in thousands):
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The Company had ten and eight nonaccrual loans as of December 31, 2016 and 2015, respectively. For the years ended December 31, 2016 and 2015, $468 thousand and $304 thousand, respectively, of gross interest income would have been recorded had the non-accrual loans been current in accordance with their original terms. Interest in the amount of $5 thousand and $22 thousand, respectively, was included in income for the years ended December 31, 2016 and 2015 on non-accrual loans through the accretion of loan discount related to the net present value of cash flows. We monitor our non-performing loans on an ongoing basis as part of our loan review and work-out process. The potential risk of loss on these loans is evaluated by comparing the loan balance to the fair value of any underlying collateral for collateral-dependent loans, or the present value of projected future cash flows. As of December 31, 2016 and 2015, the Company did not have any loans past due 90 days and still accruing.
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Restructured Loans
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From time to time, we have restructured a mortgage loan in light of the borrower's circumstances and capabilities. We review each of these cases on an individual basis, and approve any restructure based on the guidance stipulated in our Collections Policy. If we decide to accept a loan restructure, we generally will not forgive or reduce the principal amount owed on the loan; in addition, the typical maturity term for a restructured loan does not exceed five years. We classify a loan as a restructured loan when we make concessions we would not otherwise consider if offering a loan to a borrower. A restructuring of a loan usually involves an interest rate modification, extension of the maturity date, or reduction of accrued interest owed on the loan on a contingent or absolute basis.
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In order to properly evaluate a potential restructure, when we receive a request for a modification or restructure, we evaluate the strength of the borrower’s financial condition, leadership of the pastoral team and board, developments that have impacted the church and its leadership team, local economic conditions, the value of the underlying collateral, the borrower’s commitment to sound budgeting and financial controls, whether there is a denominational guaranty of any portion of the indebtedness, debt service coverage for the borrower, availability of other collateral and any other relevant factors unique to the borrower. While we have no written policy that establishes criteria for when a request for restructuring a loan will be approved, our Credit Review Committee reviews each request, solicits written reports and recommendations from management and summaries of the requests and actions taken by the Credit Review Committee are presented to the Company’s managers for their review at quarterly meetings throughout the year.
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The following table shows the number and balance of restructured loans in our mortgage loan portfolio, as well as the percentage of our total portfolio those loans represented and the amount of allowance for loan losses associated with restructured loans at December 31, (dollars in thousands):
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In the current economic market, loan restructures often produce a better outcome for our loan portfolio than a foreclosure action. Given our specialized knowledge and experience working with churches and ministries, entering into a loan modification often enables the borrower to keep their ministries intact and avoid foreclosure. With a successful loan restructure, we avoid a loan charge-off and protect the interests of our investors and borrowers we serve.
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The number of restructured loans as a percentage of our total loan portfolio, while higher than historical levels we incurred prior to the 2008 global economic crisis, are within manageable limits, and the delinquency rates on our mortgage portfolio have stabilized. We believe we have established adequate levels of reserves for any foreseeable losses, and we continue to evaluate the adequacy of such reserves in the light of current economic and operational conditions.
Allowance for Loan Losses
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We establish provisions for loan losses, which are charged to earnings, at a level reflecting estimated credit losses on our loan portfolio. In evaluating the level of the allowance for loan losses, we consider the type of loan, amount of loans in our portfolio, adverse situations that may affect our borrowers’ ability to pay and estimated value of underlying collateral and credit quality trends (including trends in non-performing loans expected to result from existing conditions).
			
		
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The allowance for loan loss is monitored by our senior management on an ongoing basis. We examine the performance characteristics of our portfolio loans, including charge-offs, delinquency ratios, loan restructurings and modifications and other significant factors that, in management’s judgment, may affect our ability to collect loans in the portfolio as of the evaluation date. Our senior executive team monitors these factors on a regular basis and reviews are conducted quarterly with our managers. We determine general reserves by segregating our loan portfolio into pools based on the risk rating of the loan and the position of the underlying collateral.
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Risk ratings are determined by grading a borrower on certain metrics, which include financial performance, strength of management, credit history, and condition of the local economy. These ratings are updated on an annual basis, or more frequently as necessary. By segregating the portfolio in this manner, our senior management team is better able to assess the potential effects of various risk factors depending on the quality of the loans in a particular pool. The potential impact of factors such as the risk of charge-offs, impairment, delinquency, restructuring, decreases in borrower financial condition, and continued low commercial real estate values throughout the country fluctuates depending on the quality of the loan. As a result, management increased the weight of these factors for loans with a higher risk rating.
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Our senior executive team also evaluates our allowance for loan losses based upon a review of individual loans in our loan portfolio. This evaluation is inherently subjective as it requires material estimates including the amounts and timing of future cash flows we expect to receive on an impaired loan that may be susceptible to significant change. Once a loan becomes delinquent or non-performing, the borrower reports a material adverse financial condition, or we determine that the value of the collateral underlying an impaired loan has substantially declined, we assess all information available to us to determine the estimated loss for a particular loan. We monitor these individual impaired loans on a regular basis.
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If we restructure a loan, we establish an allowance for loan loss for that individual loan based on the difference between the net present value of the future receipt of cash payments from the restructured loan as compared to the net present value of cash flows which we would have received from the original loan, discounted at the original interest rate of the loan. As time passes and the restructured loan performs according to its modified terms, the net present value of future cash flows of the restructured loan changes. The change in the present value of cash flows attributable to the passage of time is reported as interest income. If a loan is collateral-dependent, even if that loan has been restructured, we establish an allowance for loan loss based on the value of the collateral securing the loan less estimated costs to sell the collateral.
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At December 31, 2016 and 2015, our allowance for loan losses was $1.9 and $1.8 million, respectively, or 1.27% and 1.31%, respectively, of our total loan portfolio. The change in our allowance is due to several factors. The first is that we were able to recover allowances based on the net present value difference of one of our restructured loans when we refinanced the loan at a market rate. We no longer consider that loan impaired. We also decreased specific reserves on several collateral-dependent loans when appraisals indicated that the value of the underlying collateral had risen above our net interest in the loan. These decreases in our allowance were
			
		
offset by additional specific reserves taken based on management’s estimates of decreases in the collateral values of several collateral-dependent loans as well as an increase in general reserves due to the growth of our loan portfolio.
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Assessing the adequacy of our allowance for loan losses is inherently subjective as it requires us to make material estimates, including the amount and timing of future cash flows we expect to receive on impaired loans that may be susceptible to significant change. In the opinion of management, the allowance, when taken as a whole, reflects all known and inherent credit losses in our mortgage loan portfolio as of December 31, 2016.
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The following represents a breakdown of the components of our allowance for loan loss at December 31, (in thousands):
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In addition, we segregate the loan portfolio into classes for purposes of evaluating the allowance for loan losses. A portfolio class is defined as the level at which we develop and document a systematic method for determining its allowance for loan losses. The portfolio classes are segregated based on loan types and the underlying risk factors present in each loan type. Such risk factors are periodically reviewed by management and revised as deemed appropriate.
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Our loan portfolio consists of one segment, church loans, and is segregated into the following classes:
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Wholly-owned First Collateral Position. This portfolio class consists of the wholly-owned loans for which we possess a senior lien on the collateral underlying the loan.
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Wholly-owned Junior Collateral Position. This portfolio class consists of the wholly-owned loans for which we possess a lien on the underlying collateral that is superseded by another lien on the same collateral. This class also contains any loans that are not secured by any collateral. These loans present greater credit risk than loans for which we possess a senior lien due to the increased risk of loss should the loan enter foreclosure.
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Participations First Collateral Position. This portfolio class consists of the participated loans for which we possess a senior lien on the collateral underlying the loan. Loan participations have more credit risk than wholly-owned loans because we do not maintain full control over the disposition and direction of actions regarding the management and collection of the loans. The lead lender directs most servicing and collection activities and major actions must be coordinated and negotiated with the other participants, whose best interests regarding the loan may not align with ours.
			
		
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Participations Junior Collateral Position. This portfolio class consists of the participated loans for which we possess a lien on the underlying collateral that is superseded by another lien on the same collateral. Loan participations in the junior collateral position loans have greater credit risk than wholly owned loans and participated loans where we hold a senior lien on the collateral. The increased risk is the result of the factors presented above relating to both junior lien positions and participations.
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Classification of Loans. Our policies provide for the classification of loans that are considered to be of lesser quality as watch, special mention, substandard, doubtful, or loss assets. An asset is considered substandard if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Special mention assets exhibit potential or actual weaknesses that present a higher potential for loss under adverse circumstances, and deserve management’s close attention. If uncorrected, these weaknesses may result in deterioration of the repayment prospects for the loan at some future date. Substandard assets include those assets characterized by the distinct possibility that we will sustain some loss if the deficiencies are not corrected. Assets classified as doubtful have all of the weaknesses inherent in those classified substandard with the added characteristic that the weaknesses make collection or liquidation in full highly questionable and improbable, based on currently existing facts, conditions and values. Assets (or portions of assets) classified as loss are those considered uncollectible and of such little value that their continuance as assets is not warranted. Assets that do not expose us to risk sufficient to warrant classification in one of the aforementioned categories, but which possess potential weaknesses that deserve close attention, are designated as watch.
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Competition
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Although the demand for church financing is both broad and fragmented, no one firm has a dominant competitive position in the market. We compete with church bond financing companies, banks, credit unions, denominational loan funds, REITs, insurance companies and other financial institutions to service this market. Many of these entities have greater marketing resources, extensive networks of offices and locations, larger staffs and lower cost of operations due to their size. We believe, however, we have developed an efficient, effective and economical operation that (i) specializes in identifying and creating a diversified portfolio of church mortgage loans that we or other credit unions originate; (ii) preserves our capital base; and (iii) generates consistent income for distribution to our note holders and equity investors.
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We rely upon the extensive experience of our officers, management and managers in working with ministry related financing transactions, loan origination, and investment in churches, schools, ministries and non-profit organizations.
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Employees
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Effective as of January 1, 2013, we entered into a staffing agreement with Automated Data Processing, Inc., which provides us with payroll and staffing services. As of December 31, 2016, we had 20 full or part-time employees. None of our employees are covered by a collective
			
		
bargaining agreement, and we believe that we have an excellent relationship with our employees and staff.
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Regulation
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General
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We are organized as a credit union service organization and, as a result, are subject to the regulations promulgated by the National Credit Union Administration (“NCUA”) that apply to CUSOs. As a CUSO, we primarily serve the interests of our credit union equity holders and members of such credit unions. We are also subject to various laws and regulations which govern: (i) credit granting activities; (ii) establishment of maximum interest rates; (iii) disclosures to borrowers and investors in our equity securities; (iv) secured transactions; (v) foreclosure, judicial sale and creditor remedies that are available to a secured lender; and (vi) the licensure requirements of mortgage lenders, finance lenders, brokers and financiers.
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As a CUSO, we are limited in the scope of activities we may provide. In addition, our federal credit union equity investors are permitted to invest in or lend to a CUSO only if the CUSO primarily serves credit unions, its membership or the membership of credit unions contracting with the CUSO. While the NCUA lacks direct supervisory authority over our operations, our federal credit union equity owners are subject to regulations which govern the rules and conditions of an investment or loan they make or sell to a CUSO. In addition, state chartered credit unions must follow their respective state’s guidelines which govern investments by a state chartered credit union. Our equity owners that are regulated by the California Department of Financial Institutions (“DFI”) which is a part of the California Department of Business Oversight (“DBO”), in particular, must comply with DFI regulations that govern their investment in or loans they make to a CUSO.
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Tax Status
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Effective with our conversion from a corporate form of organization to a limited liability company organized under the laws of the State of California on December 31, 2008, we have chosen to be treated as a partnership rather than a corporation for U.S. tax law purposes. As a result, profits and losses will flow directly to our equity owners under the provisions of our governing documents. If we fail to qualify as a partnership in any taxable year, we will be subject to federal income tax on our net taxable income at regular corporate tax rates. As a limited liability company organized under California law, we are also subject to an annual franchise fee plus a gross receipts tax on our gross revenues from our California based activities if our gross revenues are in excess of $250 thousand per year.
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Regulation of Mortgage Lenders
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We conduct loan originating activities for churches and related ministry projects. Many states regulate the investment in or origination of mortgage loans. Under the California Finance Lender’s Law, no lender may engage in the business of providing services as a “finance lender” or “broker” without obtaining a license from the California Department of Business Oversight
			
		
(“DBO”), unless otherwise exempt under the law. We conduct our commercial lending activities under California Finance Lender License # 603F994.
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As a finance lender, we are licensed with the DBO and file reports from time to time with the DBO. Accordingly, the DBO has enforcement authority over our operations as a finance lender, which includes, among other things, the ability to assess civil monetary penalties, issue cease and desist orders and initiate injunctive actions. We also are subject to licensing requirements in other jurisdictions in connection with our mortgage lending activities. Various laws and judicial and administrative decisions may impose requirements and restrictions that govern secured transactions, require specific disclosure to our borrowers and customers, establish collection, foreclosure, and repossession standards and regulate the use and reporting of certain borrower and customer financial information.
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As we expand our loan originations outside of the State of California, we will need to comply with laws and regulations of those states. The statutes which govern mortgage lending and origination activities vary from state to state. Because these laws are constantly changing, due in part, to the challenge facing the real estate industry and financial institutions from residential lending activities, it is difficult to comprehensively identify, accurately interpret and effectively train our staff with respect to all of these laws and regulations. We intend to comply with all applicable laws and regulations wherever we do business and will undertake a best efforts program to do so, including the engagement of professional consultants, legal counsel, and other experts as deemed necessary by our management.
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Loan Brokerage Services
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In 2009, we created a new subsidiary, MP Realty, which provides loan brokerage and other real estate services to churches and ministries in connection with our mortgage financing activities. The California Department of Real Estate issued MP Realty Services, Inc. a license to operate as a corporate real estate broker on February 23, 2010. As we expand our loan brokerage activities to other states, we may be required to register with these states as a commercial mortgage broker if we are directly or indirectly marketing, negotiating or offering to make or negotiate a mortgage loan. We intend to monitor these regulatory requirements as necessary in the event MP Realty provides services to a borrower, lender, broker or agent outside the State of California.
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Environmental Issues Associated with Real Estate Lending
The Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA”), a federal statute, generally imposes strict liability on all prior and current “owners and operators” of sites containing hazardous waste. However, Congress acted to protect secured creditors by providing that the term “owner and operator” excludes a person whose ownership is limited to protecting its security interest in the site. Since the enactment of the CERCLA, this “secured creditor exemption” has been the subject of judicial interpretations which have left open the possibility that lenders could be liable for clean-up costs on contaminated property that they hold as collateral for a loan. To the extent that legal uncertainty exists in this area, all creditors that have made loans secured by properties with potential hazardous waste contamination (such as petroleum contamination) could be subject to liability for cleanup costs, which costs often
			
		
substantially exceed the value of the collateral property. In addition, state and local environmental laws, ordinances and regulations can also impact the properties underlying our mortgage loan investments. An owner or control party of a site may also be subject to common law claims by third parties based on damages and costs resulting from environmental contamination emanating from a site.
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Regulation of Financial Services
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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 continue to monitor and evaluate the impact the Dodd-Frank Act could have on our business and we believe that many of the provisions of the 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 (i) 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.
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Broker Dealer Registration
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U.S. broker dealers are subject to rules and regulations imposed by the SEC, FINRA, other self-regulatory organization and state securities administrators covering all aspects of the securities business. Our wholly-owned broker-dealer firm, Ministry Partners Securities, LLC, 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 U.S. Securities and Exchange Commission and regulation by state securities administrators in the states in which it conducts its activities. We have registered MP Securities in the states of Arizona, California, Colorado, Florida, Georgia, Idaho, Illinois, Indiana, Kansas, Minnesota, Missouri, Nevada, New York, Ohio, Oregon, Pennsylvania, Rhode Island, South Carolina, Tennessee, Texas, Washington, West Virginia and Wisconsin.
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As a small broker dealer that does not hold customer funds or securities, MP Securities is subject to rules and regulations regarding 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 liabilities the Company assumes as its parent entity.
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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.
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Much of the regulation of broker-dealers in the U.S. has been delegated to self-regulatory organizations, principally FINRA and the securities exchanges. FINRA adopts and amends rules (which are subject to approval by the SEC) for regulating the industry and conducts periodic examinations of member firms. The SEC, FINRA and state securities administrators may conduct administrative proceedings that can result in censure, fine, suspension or expulsion of a broker-dealer, its officers or employees.
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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 in determining whether MP Securities meets its net capital requirements, whether the allocation of costs are fairly treated in any expense sharing arrangements, or management services agreements entered into with the Company, review of 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.
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As a broker-dealer firm, MP Securities is subject to regulation regarding sales methods, use of advertising materials, arrangements with clearing firms or exchanges, record keeping, regulatory reporting, conduct of managers, officers and employees and supervision. To the extent MP Securities solicits orders from customers, it will be subject to additional rules and regulations governing sales practices and suitability rules imposed on member firms. MP Securities also acts as a selling agent for the Company’s privately offered debt securities. Because MP Securities participates in the offer and sale of the Company’s publicly and privately offered debt securities, it is required to comply with FINRA’s filing requirements for these offerings. We believe that MP Securities has fully complied with its filing obligations as required under applicable FINRA, SEC and state securities laws.
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Our wholly-owned subsidiary, MP Securities, is also required to maintain minimum net capital pursuant to rules imposed by FINRA. In general, net capital is the net worth of the entity (assets
			
		
minus liabilities) less any other imposed deductions or other charges. If a member firm fails to maintain the required net capital it must cease conducting business and, if it does not do so, it may be subject to suspension or revocation of registration by the SEC and suspension or expulsion by FINRA. Under its Membership Agreement entered into with FINRA, MP Securities is required to maintain minimum net capital of the greater of $5,000 or one fifteenth of its aggregate indebtedness. As required by the 2013 amendments adopted by the SEC, MP Securities is required to include any liabilities that have been assumed by the Company unless the Company is able to demonstrate that it has adequate capital to pay such expenses.
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Regulation of Investment Advisers
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On July 11, 2013, the State of California granted its approval for MP Securities to provide investment advisory services. As a California registered investment advisory firm, MP Securities is required to develop and maintain compliance procedures, record keeping procedures, comply with custody rules, marketing and disclosure obligations. MP Securities is also subject to the Investment Advisers Act of 1940, as amended, and related regulations. The SEC is authorized to institute proceedings and impose fines and sanctions for violation of the Investment Advisers Act. In addition to ensuring MP Securities’ compliance with federal and state laws governing its activities as a California registered investment advisory firm, the California DBO requires that representatives hired by MP Securities meet certain qualification requirements, including complying with certain testing requirements and examinations.
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Our failure to comply with the requirements of the Investment Advisers Act, related SEC rules or regulations and provisions of the California Corporations Code and Code of Regulations could have a material adverse effect on us. We believe we are in full compliance in all material aspects with SEC requirements and California laws and regulations. As MP Securities hires new registered investment advisers, it will be required to monitor its compliance with SEC and DBO regulations.
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Fiduciary Standards
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Under the Dodd-Frank Act, the SEC was authorized 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.
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With the issuance of the DOL fiduciary rule under ERISA, fiduciary status would be extended to investment advisors and investment professionals that have previously not been considered fiduciaries. If deemed a fiduciary, the representative is held to a strict standard requiring the representative to act solely in the interests of plan participants and beneficiaries. With the adoption of the fiduciary standard, the representative is subject to personal liability to the ERISA
			
		
plan for breaches of its actions under the rule. Implementation of the DOL fiduciary rule, especially in the context of an IRA rollover handled by a MP Securities adviser or sales representative and subsequent investment of such funds in 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.
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On February 3, 2017, President Trump issued a Memorandum to DOL requesting that it analyze whether the fiduciary rule with an effective date of April 10, 2017 will adversely impact the ability of Americans to gain access to retirement information and financial advice and further requested that DOL prepare an updated economic and legal analysis of the impact of the rule. By action taken on March 3, 2017, DOL requested comments as to whether to extend the applicability of the rule for sixty (60) days to June 9, 2017. We are continuing to monitor developments with the DOL fiduciary rule and are undertaking efforts to move away from compensating MP Securities and its representatives when engaged in the sale of our debt securities on a sales commission basis to a level asset under management fee structure. We believe that implementing this change will (i) more closely align the compensation program used by MP Securities for its representatives with the interests of investors in our debt securities; and (ii) 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.
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Privacy Standards
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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 MP Securities expands its investment adviser business operations, it will also need to monitor regulatory initiatives promulgated under Dodd-Frank that affect investment advisers.
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Item 1A
Item 1A
RISK FACTORS
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Our business, financial condition, and results of operations could be harmed by any of the following risks or other risks which have not been identified or which we believe are immaterial or unlikely. The risks and uncertainties described below are not the only risks that may have a material, adverse effect on us. Additional risks and uncertainties also could adversely affect our business, financial condition and results of operations. The risks discussed below include forward-looking statements, and our actual results may differ substantially from those discussed in these forward-looking statements. Investors should carefully consider the risks described below in conjunction with the other information in this Form 10-K and the information incorporated by reference in this Form 10-K.
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Risks Related to the Company
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We may be unable to obtain sufficient capital to meet the financing requirements of our business.
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Our ability to finance our operations and repay maturing obligations to our investors and credit facility lenders depends, to a substantial degree, on our ability to borrow money and raise capital from the sale of our debt securities. Our ability to borrow money and sell our debt securities is affected by a variety of factors including:
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quality of the mortgage loan assets we own and the profitability of our operations;
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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;
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strength of the lenders from whom we borrow; and
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borrowing limitations imposed under our credit facilities.
From 2008 until the fourth quarter of 2015, the size of the Company’s balance sheet steadily decreased as a result of deleveraging our assets, a reduction in the total amount of debt securities held on our balance sheet, and pay-downs and/or pay-offs of institutional credit facilities we have relied upon, in part, to fund our business. An event of default, lack of liquidity or a general deterioration in the economy that affects the availability of credit may increase our cost of funding, make it difficult for us to renew or restructure our credit facilities and obtain new lines of credit. Unexpected large withdrawals by investors that hold our debt securities that can negatively affect our overall liquidity.
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We are actively expanding our methods of raising capital, including seeking financing from institutional lenders, selling participations in our mortgage loan investments, and expanding the sales of our debt securities to institutional, corporate, and retail investors. For the year ended December 31, 2016, total assets increased to 156.6 million as compared to $149.0 million at December 31, 2015. If our strategy to raise additional capital through the sale of investor notes
			
		
and debt securities is not viable, we will need to find alternative sources of borrowing to finance our operations. To the extent we are unable to raise the capital we need to implement our strategic objectives, we may have to sell assets, further deleverage our balance sheet, and reduce operational expenses, thereby reducing cash available to distribute to our equity and debt securities investors.
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Our ability to raise capital and attract new investors in our debt securities depends on our ability to attract an effective sales force in our wholly-owned licensed broker-dealer firm.
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Our wholly-owned subsidiary, MP Securities, commenced operations as a FINRA member broker-dealer in 2012. Since that time, MP Securities has expanded the scope of services it provides to include acting as a selling agent for our notes offerings, insurance products, and investment advisory services. Our ability to attract new investors in our debt securities and increase the sale of our debt securities will depend, to a substantial degree, on our ability to assemble an effective advisory team and to strategically recruit, retain and compensate the required personnel to assist us in this effort. If we are unable to recruit, retain and successfully 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.
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We depend on repeat purchases by a significant number of investors in our debt securities to finance our business.
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A significant percentage of the investors who purchase our debt securities purchase new notes after we repay their notes. Historically, a substantial proportion of our investors have purchased a new debt security from us when their notes mature. For the years 2008 - 2011, 76%, 79%, 57% and 73% of the investors that purchased a Class A Note had previously purchased one of our debt securities. When regulatory constraints were imposed on investments made in our Class 1 Notes in 2014, this rate fell to as low as 34% due to suitability and concentration of investment restrictions that limit the amount of our debt securities that may be purchased by an investor. For the years ended December 31, 2015 and 2016, our renewal rate climbed to 55% and 56%, respectively. There is no assurance that historical patterns of repeat purchases made by investors will resume or that the recent improvement in our reinvestment rate will continue in the future. If the rate of repeat investments made by previous investors declines, our ability to maintain or grow our asset base could be impaired.
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Some of our debt securities investors may be unable to purchase our Class 1 Notes due to FINRA’s investor suitability standards.
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When handling sales of our investor notes, MP Securities and its sales advisors must comply with FINRA’s “know your customer” and “suitability” guidelines which are designed to ensure that investors make investments that are appropriate given the age, investment experience, net worth, need for liquidity and mix of investments owned by the investor. Some of our investors who have invested in our debt securities in the past may not be able to invest in our debt securities due to these regulatory constraints. If MP Securities is unable to offer such investors a suitable investment alternative, we could see a reduction in total amount of debt securities we
			
		
hold and rely upon, in part, to fund our mortgage loan investments, thereby making it difficult to grow our balance sheet.
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Deterioration in real estate values which collateralizes our mortgage loan investments could lead to losses and reduced earnings.
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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 when a borrower defaults on one of our mortgage loan investments, we could be required to write down the value of a real estate owned asset and record a charge to our earnings if the value of the property declines further after we take title to the property. Further deterioration could lead to an increase in non-performing assets, increased credit losses, and reduced earnings.
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Our growth is dependent on leverage, which may create other risks.
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Our success is dependent, in part, upon our ability to effectively manage our balance sheet assets through the use of leverage. A significant amount of our assets are pledged as collateral for borrowings. Our Board of Managers has overall responsibility for our financing strategy. Leverage creates an opportunity for increased net income, but at the same time creates risks. For example, leveraging magnifies changes in our net worth. We will incur leverage only when we expect that it will enhance our investment returns. To the extent that we fail to meet our debt service obligations, we risk the loss of some or all of our assets to satisfy these debt obligations. There can be no assurance that we will be able to meet our debt service obligations and, to the extent that we cannot, we risk the loss of some or all of our assets, or a financial loss if we are required to liquidate assets at a commercially inopportune time. At December 31, 2016, we had $146.9 million of total debt obligations on our balance sheet. Of this amount, we owed $86.3 million under our institutional credit facilities and $60.6 million on our investor debt securities. Approximately 19%, 12% and 12% of our total debt obligations is payable in the years ending December 31, 2017, 2018 and 2019, respectively.
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We have had fluctuating earnings.
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As a mortgage financing lender, our profitability may be adversely affected by increasing provisions for losses relating to our loan portfolio. While we remained profitable during calendar years 2008 and 2009, we incurred net losses of $1.6 million and $1.0 million in calendar years 2010 and 2011, respectively, primarily due to increases in our allowance for loan losses and deleveraging of our balance sheet. With the successful refinancing of our primary credit facilities in November 2011 and improvement in the performance of our mortgage loan portfolio during 2012, we realized a profit of $417 thousand for 2012. We realized a profit of $592 thousand in 2013 as our mortgage loan portfolio performance remained stable and we were able to sell three of our foreclosed assets for a gain during the year. Decreases in the value of collateral securing our collateral dependent loans and decreases in the value of some of our foreclosed real estate owned assets primarily accounted for the $1.9 million loss reported for the year ended December 31, 2014. Credits for loan losses and improvement in real estate values of some of our foreclosed assets resulted in net income of $357 thousand during the year ended December 31, 2015. Due
			
		
to the growth of investor note sales, loan originations, and broker-dealer fee income generated from non-proprietary products, we had net earnings of $922 thousand for the year ended December 31, 2016. While we believe that Company has strategically focused its core mission on serving our credit union owners, and members they serve, and is implementing its dual strategy of generating positive net interest margins and expanding the fee income we generate from non-interest bearing mortgage loan investments, we can give no assurances that we will be able to achieve and maintain consistent profits over the next few years.
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Our reserves for loan losses may prove inadequate, which could have a material adverse effect on us.
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For the year ended December 31, 2016, we recorded provisions for loan losses of $113 thousand. We recorded a credit for loan losses of $524 thousand for the year ended December 31, 2015. Although we regularly evaluate our financial reserves to protect against future losses based on the probability and severity of the losses, there is no guarantee that our assessment of this risk will be adequate to cover any future potential losses.
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Unanticipated adverse changes in the economy or events adversely affecting specific assets, borrowers, mismanaged construction, loss of a senior pastor, rising interest rates, failure to sell properties or assets, or geographical regions in which our borrowers or their properties are located may negatively impact our assessment of this risk and result in reserves that will be inadequate over time to protect against potential future losses. Maintaining the adequacy of our allowance for loan losses may require that we make significant and unanticipated increases in our provisions for loan losses, which would materially affect our results of operations and capital adequacy. Given the total amount of our allowance for loan losses, an adverse collection experience in a small number of loans could require an increase in our allowance.
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If our non-performing assets increase, our earnings will be adversely affected.
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At December 31, 2016 and December 31, 2015, our non-performing assets (which consist of impaired loans and other real estate owned) totaled $8.9 million and $15.4 million, respectively, or 5.7% and 10.3% of our total assets at each date, respectively. At December 31, 2014, and December 31, 2013, our non-performing assets were $15.9 million and $22.2 million, respectively, or 10.3% and 14.0% of total assets, respectively. Nonperforming assets adversely affect our net income in the following ways:
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We do not record interest income we receive on collateral-dependent, non-performing loans.
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We are required to record allowances for probable losses through a current period charge to the provision for loan losses or provision for other real estate owned assets.
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Non-interest expense increases when we write down the value of properties in our other real estate owned portfolio to reflect changing market values.
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There are legal and other professional fees associated with the resolution of problem real estate owned assets, as well as carrying costs, such as taxes, insurance and maintenance fees related to our other real estate owned assets.
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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.
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Our credit facilities require us to maintain excess collateral and to meet the minimum collateralization ratio requirements on these loans, our free assets may be materially reduced and our ability to meet our debt obligations materially impaired.
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Our $87.3 million credit facility refinancing transaction entered into with the National Credit Union Administration Board as Liquidating Agent of Members United Corporate Federal Credit Union (the “MU Credit Facility”) and $23.5 million credit facility refinancing transaction entered into with the NCUA (the “WesCorp Credit Facility Extension”), each dated November 4, 2011, require that we secure the facility with mortgage loans having an aggregate unpaid balance exceeding the unpaid balance of the credit facility. If at any time, we fail to maintain the required minimum collateralization ratio, we will be required to deliver cash or qualifying mortgage loans in an amount sufficient to enable us to maintain the minimum collateralization ratio that must be met under our credit facilities. We reached an agreement with the NCUA in March 2015 to provide for a more flexible minimum collateralization ratio. Under our MU Credit Facility and WesCorp Credit Facility Extension individually, we are now required to maintain a minimum collateralization ratio of at least 110%. We are required to maintain a collective minimum collateralization ratio of at least 120% for the two credit facilities in total. The NCUA retains all excess collateral until these credit facilities are repaid in full and any excess collateral will not be available to pay our other obligations including our secured notes, Class A Notes, Class 1 Notes and other debt securities until we repay or retire the MU Credit Facility and WesCorp Credit Facility Extension. However, we do have the ability to pledge cash on a one-to-one basis if there is a temporary deficit in the loan collateral pledged under these facilities.
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As of December 31, 2016, we had pledged approximately $79.4 million and $26.9 million of our mortgage loans to secure the MU Credit Facility and the WesCorp Credit Facility Extension, respectively. As of the date of this Report, we are in compliance with this covenant.
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Default under one credit facility will result in a default under our other credit facilities.
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Our credit facilities and debt securities generally provide for cross-default provisions whereby a default under one agreement will trigger an event of default under other agreements, giving our lenders the right to declare all amounts outstanding under their particular credit agreement to be immediately due and payable, and enforce their rights by foreclosing on or otherwise liquidating
			
		
collateral pledged under these agreements. For example, a default under one of our credit facilities would also constitute our default under our other credit facilities. Thus, to maintain these credit facilities, there cannot be a default under either one.
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In the event of our default under our secured credit facilities, we could lose assets in excess of our assets pledged as collateral.
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In the event of a default under our MU Credit Facility or our WesCorp Credit Facility Extension, the lender has the right to foreclose on its collateral pursuant to the respective credit facility agreement and applicable commercial law. These laws do not require, and the permissible foreclosure procedures do not assure, that the collateral securing these loans will be sold or otherwise liquidated for an amount equal to its fair market value. Thus, in the event of foreclosure, there is no assurance the lender will realize proceeds from the collateral sufficient to repay the debt we owe. Moreover, because these credit facilities are recourse against the borrower, the respective lender generally has the right to pursue the borrower for any deficiency between the amount the borrower owes on the defaulted loan and the value the lender realizes from its liquidation of the collateral for the loan. Thus, our assets remaining after a foreclosure by a lender under our credit facilities may not be sufficient to repay our other debt, including our investor notes.
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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.
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In recent years, we have relied upon short-term credit facilities to finance a substantial portion of our mortgage loan investments. When we acquire mortgage loans that have a maturity term that exceeds the term of our institutional credit facilities, we bear the risk of being unable to refinance, extend or replace our primary credit facilities or otherwise finance them on a long-term basis at attractive terms or in a timely manner, or at all. If it is not possible or economical for us to finance such investments on attractive terms, we may be unable to pay-down our credit facilities or be required to liquidate the assets at a loss in order to do so. Our reliance on financing provided by institutional credit facility lenders will require that we payoff our MU Credit Facility and WesCorp Credit Facility Extension on November 1, 2026. If we are unable to roll-over, extend, refinance or replace such credit facilities on attractive terms, we may have to rely upon less efficient forms of financing new investments, which may result in fewer loan acquisitions or originations of profitable mortgages and further deleveraging of our balance sheet and thereby reduce the funds available for distribution to our equity investors, for operations and meet our debt service obligations.
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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.
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Our financing arrangements contain restrictions, covenants and events of default. Failure to meet or satisfy any of these covenants could result in an event of default under these agreements. Any event of default may materially adversely affect us. In addition, these restrictions may interfere
			
		
with our ability to obtain financing or engage in other business activities. Furthermore, our default under any of our financing arrangements could have a material adverse effect on our business, financial condition, liquidity and results of operations and our ability to make distributions to our equity investors.
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We rely on the use of borrowed funds and sale of debt securities to finance a substantial part of our business.
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We have used borrowing facilities obtained from institutional lenders and relied upon offerings of debt securities in SEC registered offerings to fund the origination or acquisition of Mortgage Loans made to evangelical churches and ministries. Lending borrowed funds subjects us to interest rate risk which is largely determined by 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. 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.
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Loss of our management team or the ability to attract and retain key employees could harm our business.
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We are dependent on the knowledge, skills, institutional contacts and experience of our senior management team. We also rely on our management team to manage our mortgage loan investments, evaluate and attract new borrowers, make prudent decisions as they relate to work-outs, modifications and restructurings and develop relationships with institutional investors, lenders, financial institutions, broker-dealer firms, ministries and individual investors. We can give no assurances that we will be able to recruit and retain qualified senior managers that will enable us to achieve our core strategic objectives and continue to profitably grow our business.
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Our broker dealer and investment advisory business depends on fees generated from the distribution of financial products and advisory fees.
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One of our core strategic objectives is to increase non-interest earning revenues generated by our wholly-owned subsidiary, MP Securities. To that end, MP Securities receives a significant portion of its 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 the revenues and net earnings of our subsidiary, MP Securities. In addition, if these products experience losses or increased investor redemptions, MP Securities could generate lower fee revenues from the distribution and sale of mutual funds, annuities, and securities products offered to its clients and customers.
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The ability to attract and retain qualified financial advisors and associates is critical to MP Securities’ continued success.
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As we continue to expand the non-interest generating sources of revenues of our business, 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, our strategic goal of expanding the non-interest generating segment of our business could be jeopardized, thereby adversely affecting our net earnings and financial condition.
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As a small financial services company that operates in a niche market, we are subject to liquidity risk that could materially affect our operations and financial condition.
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In past years, the financial services industry, credit markets and financing sources for ministry loans have been materially and adversely affected by reduced availability of liquidity. Reduced liquidity can particularly affect smaller lenders that have relied on short-term institutional credit facilities to enhance their liquidity needs. While we significantly improved our liquidity position through the successful refinancing of our MU Credit Facility and WesCorp Credit Facility Extension in late 2011 and due to relief granted by NCUA from certain minimum collateralization requirements in 2015, we will need to monitor and successfully manage our liquidity requirements as necessary when redemption requests for our debt securities are received, or a debt security investment matures and is not re-invested in another debt security we may offer. We also depend on the sale of loan participation interests in our mortgage loan investments and sale of investor notes to manage our liquidity demands.
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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.
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We rely heavily on communications and information systems to conduct our business. While we have implemented safeguards and protocols that meet regulatory standards and provide security over our data and other assets, any failure, interruption or breach in security of these systems could result in failures or disruptions in our customer and investor relationship management, general ledger, deposit, loan and other systems. The secure transmission of confidential information over the Internet and other electronic transmission and communication systems is essential to maintaining customer confidence in certain of our services. Security breaches, computer viruses, acts of vandalism and developments in computer capabilities could result in a breach or breakdown of the technology we use to protect customer information and transaction data. We have policies and procedures designed to prevent or limit the effect of the possible failure, interruption, or security breach of our information systems; however, there can be no assurance that any such failure, interruption or security breach will not occur or, if they do occur, that they will be adequately addressed. The occurrence of any failure, interruption or security breach of our information systems could damage our reputation, result in a loss of a borrower, investor or customer’s business or expose us to civil litigation and possible financial liability. Our financial, accounting, data processing or other operating systems and facilities may fail to operate properly or become disabled as a result of events that are beyond our control, such as unforeseen catastrophic events, cyber attacks, human error, change in operational practices of our system vendors, or unforeseen problems encountered while implementing major new computer systems or upgrades to existing systems, potentially resulting in data loss and adversely affecting our ability to process these transactions.
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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.
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Under our code of business conduct, we have established procedures regarding the review, approval and ratification of transactions which may give rise to a conflict of interest between us and any employee, officer, trustee, their immediate family members, other businesses under their control and other related persons. In the ordinary course of our business operations, we have ongoing relationships and have engaged in transactions with several related entities, including our largest equity owner, ECCU. These procedures may not be sufficient to address conflicts of interest that may arise.
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Any negative changes in the financial capabilities of one or more of our equity owners could adversely affect our ability to raise additional capital.
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None of our equity owners are obligated to make additional contributions or loan us additional funds. However, they may do so on a voluntary basis and we may from time to time, in the future, request our equity owners to do so. In such event, one or more of our equity owners may be unwilling or unable to make voluntary additional capital contributions or loans because their financial capabilities are at the time impaired. Also, if an equity owner’s financial status is in the future deteriorated to the extent that they or their operations are ceased or otherwise come under the control of the Asset Management Assistance Center (“AMAC”), NCUA or other regulatory agency, it is unclear what rights, if any, that agency will have to exercise that owner’s membership rights in our company or, if it can exercise any such rights, the manner in which it will do so.
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Risks Related to the Financial Services Industry and Financial Markets
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Deterioration of market conditions could negatively impact our business, results of operations and financial condition, including liquidity.
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The market in which we operate is affected by a number of factors that are largely beyond our control but can nonetheless have a potentially significant, negative impact on our business. These factors include, among other things:
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interest rates and credit spreads;
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the availability of credit, including the price, terms and conditions under which it can be obtained;
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loan values relative to the value of the underlying real estate assets;
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default rates on special purpose mortgage loans for churches and ministries and the amount of the related losses;
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the actual and perceived state of the real estate markets for church properties and special use facilities; and
			
		
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unemployment rates.
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Our mortgage loan investments can be adversely affected by significant declines in the value of real estate and real estate related assets, impairment of the ability of many borrowers to repay their obligations, and illiquidity in the markets for real estate and real estate-related assets. In past years, these events 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.
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Declining real estate values generally reduce the level of new mortgage loan originations, since borrowers often use increases in the value of their existing properties to support the purchase of, or investment in, or renovation of their worship facilities. Borrowers may also be less able to pay principal and interest on our loans, and the loans underlying our securities, if the real estate economy weakens. Further, declining real estate values significantly increase the likelihood that we will incur losses on our foreclosed assets and on our loans in the event of default because the value of our collateral may be insufficient to cover our investment in such assets. Any sustained period of increased payment delinquencies, foreclosures or losses could adversely affect both our net interest income from loans as well as our ability to originate, sell and securitize loans, which would significantly harm our revenues, results of operations, financial condition, liquidity, business prospects and our ability to make distributions to our equity investors.
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Interest rate fluctuations and shifts in the yield curve may cause losses.
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Our primary interest rate exposures relate to our mortgage loan investments and floating rate debt obligations. Changes in interest rates, including changes in expected interest rates or “yield curves,” affect our business in a number of ways. Changes in the general level of interest rates can affect our net interest income, which is the difference between the interest income we earn on our interest-earning assets and the interest expense we incur in connection with our interest-bearing liabilities. Changes in the level of interest rates also can affect, among other things, our ability to originate and acquire mortgages and the market value of our mortgage investments.
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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.
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Our ability to execute our business strategy, particularly the growth of our mortgage loan investments portfolio, depends to a significant degree on our ability to obtain additional capital. Our financing strategy is dependent on our ability to obtain debt financing at rates that provide a positive net spread. We have used borrowing facilities obtained from institutional lenders and relied upon offerings of debt securities in SEC registered offerings to fund the origination or acquisition of mortgage loans made to evangelical churches and ministries. If spreads for such
			
		
liabilities widen or if availability of credit facilities ceases to exist, then our ability to execute future financings will be severely restricted.
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Our reputation, operating business and core strategic objectives could be adversely affected by regulatory compliance failures.
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We rely on publicly offered debt securities to fund a substantial portion of our operations and, as a result, are subject to U.S. securities laws, rules, and regulations promulgated by the SEC and applicable state securities statutes. Our subsidiary, MP Securities, is subject to oversight from the SEC, FINRA, 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 federal, state or other applicable regulatory authority binding on us or our subsidiaries or to maintain any of the licenses or permits required to be maintained by us could result in investigations, sanctions and reputation damage.
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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.
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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 carefully monitor the impact of regulatory changes on the broker dealer and investment advisory services provided by our wholly-owned subsidiary, MP Securities. Certain proposed revisions, including the adoption or revision of the proposed DOL fiduciary standard rule and enhanced regulatory oversight of incentive compensation paid to investment advisors, could affect our business. In particular, the adoption of the DOL fiduciary standard rule could materially affect IRA accounts, IRA rollovers, and the investment of funds rolled over from an IRA into other investments. We continue to monitor the impact of new regulations proposed and/or adopted by the SEC, DOL and FINRA on our broker dealer and investment advisory business.
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Risks Related to Our Mortgage Loan Investments
We are subject to risks related to prepayment of mortgage loans held in our portfolio, which may negatively impact our business.
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Generally, our borrowers may prepay the principal amount of their mortgage loans at any time. Due to the Federal Reserve Board’s accommodative monetary policies, there is intense competition from financial institutions that are looking to make commercial loans at competitive rates to qualified borrowers. In addition, approximately 14% of the principal balance of our total mortgage loans will need to be refinanced during the year ending December 31, 2017. If a significant number of borrowers refinance their loans with another lender, our business and profitability could be adversely affected.
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Increases in interest rates during the term of a loan may adversely impact a borrower’s ability to repay a loan at maturity or to prepay a loan.
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If interest rates increase during the term of our loan, a borrower may not be able to obtain the necessary funds to repay our loan at maturity through refinancing. Increasing interest rates may hinder a borrower’s ability to refinance our loan because the underlying property cannot satisfy the debt service coverage requirements necessary to obtain new financing or because the value of the property has decreased. If a borrower is unable to repay our loan at maturity, we could suffer a loss and we would not be able to reinvest proceeds in assets with higher interest rates. As a result, our financial performance and ability to make distributions to our equity owners could be materially adversely affected.
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Although we seek to favorably match the interest rate return on our mortgage loan investments with our debt financing commitments, we are subject to significant interest rate risk.
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Our investment and business strategy depends on our ability to successfully finance our investments in mortgage loans that provide a positive spread as compared to our cost of borrowing. A substantial portion of our loan investments provide for a fixed interest rate with a typical five year interest rate adjustment or maturity date. A significant portion of our borrowing arrangements with our note investors and credit facility lenders, however, provides for variable rates of interest that are indexed to short-term borrowing rates or fixed rates on short-term maturities. To mitigate our interest rate risks, we have entered into, and may enter into in the future, interest rate hedging transactions that include, but are not limited to, interest rate caps and interest rate swaps. The results of using these types of instruments to mitigate interest rate risks are not guaranteed, and as a result, the volatility of interest rates could result in reduced earnings or losses for us and negatively affect our ability to make distributions of earnings to our equity investors.
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We are subject to the risks associated with loan participations, such as less than full control rights.
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Some of our assets are participation interests in loans or co-lender arrangements in which we share the rights, obligations and benefits of the loan with other lenders. We may need the consent of these parties to exercise our rights under such loans, including rights with respect to amendment of loan documentation, enforcement proceedings in the event of default and the institution of, and control over, foreclosure proceedings. Similarly, a majority of the participants may be able to take actions to which we object but to which we will be bound if our participation interest represents a minority interest. We may be adversely affected by this lack of full control. As of December 31, 2016 and December 31, 2015, our investments included $10.8 and $12.4 million, respectively, in loan participations, representing 7% and 9% of our portfolio, respectively.
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Church revenues fluctuate and may substantially decrease during times of economic hardship.
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Generally, to pay their loans, churches depend largely on revenues from church member contributions. Donations typically fluctuate over time for a number of reasons, including, but not limited to, fluctuations in church leadership and membership, local economic conditions, including unemployment rates, credit conditions and local real estate markets.
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The quality of our mortgage loans depends on consistent application of sound underwriting standards.
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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. Even where the lender has sound underwriting standards, these standards must be properly observed and implemented in order to obtain the target loan risk levels, which may change depending on the state of the economy.
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Because two of our managers hold executive or board positions with our largest equity owner, they may, from time to time in their capacity as a manager of the Company, have a conflict of interest with the interests of that member.
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Two of our Managers hold executive or Board positions with ECCU, our largest equity owner. Conflicts of interest may arise for these Managers between our interests and those of their affiliated credit union. Moreover, conflicts of interest are inherent in any transactions involving mortgage loans between us and their affiliated credit union. Because of their relationships, these Managers will face conflicts of interest in connection with various transactions involving ECCU and the Company, including, but not limited to:
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decisions to acquire mortgage loan investments from or through ECCU;
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decisions regarding our contract with ECCU for our office facilities;
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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;
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decisions relating to shared marketing programs and use of ECCU’s facilities by MP Securities personnel to offer investment products to ECCU’s members;
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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
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decisions regarding agreements entered into with ECCU for loan underwriting, processing, marketing, and customer support and services.
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We have also implemented a Related Parties Transaction Policy to which all of our Managers and officers must adhere. It provides, among other things, that certain related party transactions be approved by a majority of those Managers who are unrelated to the parties in the transaction.
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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 can only be overridden, depending on the circumstances, by our Credit Review Committee or our Board Credit Committee.
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Because we invest only in specialized purpose mortgage loans, our loan portfolio is generally more risky than if it were diversified.
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We are among a limited number of non-bank financial institutions specialized in providing loans to evangelical churches and church organizations. Even though the number of institutions making and/or investing in mortgage loans to churches and church related organizations has increased in recent years, these loans are secured by specialized properties and the secondary market for these loans remains regional and limited. Our mortgage loan agreements require the borrower to adequately insure the property securing the loan against liability and casualty loss. However, certain types of losses, generally those of a catastrophic nature such as earthquakes, floods or storms, and losses due to civil disobedience, are either uninsurable or are not economically insurable. If a property was destroyed by an uninsured loss, we could suffer loss of all or a substantial part of our mortgage loan investment.
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Our loan portfolio is concentrated geographically and focused on loans to churches and religious organizations.
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We are among a limited number of non-bank financial institutions specialized in providing loans to evangelical churches and church organizations. Moreover, approximately 19.7% of our mortgage loan investments involve California borrowers or are secured by properties located in California. Although there are a number of national and regional institutions making and/or investing in mortgage loans to churches and church related organizations, these loans are secured by special purpose facilities. As a result, if the properties securing such mortgages must be sold, there may be a limited number of buyers available for such properties. Nevertheless, we believe that there is a great deal of diversity in the types of not-for-profit organizations and entities that could be potential acquirers of properties of this nature, including, but not limited to, other churches, schools, clinics, community development agencies, universities and educational institutions, day care, social services, assisted living facilities and relief organizations.
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We may need, from time to time, to sell or hypothecate our mortgage loan investments.
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Because the market for our mortgage loans is specialized, the prices at which our portfolio could be liquidated are uncertain. As a result, our mortgage loan investments are relatively illiquid investments and we may have difficulty in disposing of these assets quickly or at all in the event we need additional liquidity. The amount we would realize is dependent on several factors, including the quality and yield of similar mortgage loans and the prevailing financial market and
			
		
economic conditions. Although we have never sold a performing loan we own for less than par, it is possible that we could realize substantially less than the face amount of our mortgage loans, should we be required to sell or hypothecate them. Thus, the amount we could realize for the liquidation of our mortgage loan investments is uncertain and cannot be predicted.
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We may not have all of the material information relating to a potential borrower at the time that we make a credit decision with respect to that potential borrower or at the time we advance funds to the borrower. As a result, we may suffer losses on loans or make advances that we would not have made if we had all of the material information.
There is generally no publicly available information about the churches and ministries to which we lend. Therefore, we must rely on our borrowers and the due diligence efforts of our staff to obtain the information that we consider when making our credit decisions. To some extent, our staff depends and relies upon the pastoral staff to provide full and accurate disclosure of material information concerning their operations and financial condition. We may not have access to all of the material information about a particular borrower’s operations, financial condition and prospects, or a borrower’s accounting records may become poorly maintained or organized. The financial condition and prospects of a church may also change rapidly in the current economic environment. In such instances, we may not make a fully informed credit decision which may lead, ultimately, to a failure or inability to recover our loan in its entirety.
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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.
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Our borrowers may experience operational or financial problems that, if not timely addressed by us, could result in a substantial impairment or loss of the value of our loan to the church. We may fail to identify problems because our borrowers did not report them in a timely manner or, even if the borrower did report the problem, we may fail to address it quickly enough or at all. Although we attempt to minimize our credit risk through prudent loan approval practices in all categories of our lending, we cannot assure you that such monitoring and approval procedures will reduce these lending risks or that our credit administration personnel, policies and procedures will adequately adapt to changes in economic or any other conditions affecting our borrowers and the quality of our loan portfolio. As a result, we could suffer loan losses which could have a material adverse effect on our revenues, net income and results of operations.
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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.
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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, which could result in a material reduction in earnings in the period in which the loans are determined to be impaired and may adversely affect, perhaps materially, our financial condition, liquidity and ability to make debt service payments and distributions to our equity owners.
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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.
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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.
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In the event a borrower defaults on one of our mortgage loan investments, we will generally need to recover our investment through the sale of the property securing the loan.
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In that event, the value of the real property security may prove insufficient, in which case we would not recover the amount of our investment. Even though an appraisal of the property may be obtained at the time the loan is originated, the property’s value could decline as a result of a number of subsequent events, including:
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uninsured casualty loss (such as an earthquake or flood);
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a decline in the local real estate market;
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undiscovered defects on the property;
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waste or neglect of the property;
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a downturn in demographic and residential trends;
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a decline in growth in the area in which the property is located. Also, churches and church-related properties are generally not as marketable as more common commercial, retail or residential properties.
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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 further deteriorate. The properties also incur operating expenses pending their sale, including property insurance, management fees, security, repairs and maintenance. Any additional expenses incurred could adversely affect our ability to recover the full value of our collateral.
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There is a possibility that we could incur foreclosures and losses in connection with our mortgage loan investments during recessionary or depressed economic periods.
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Recessionary or depressed periods typically occur on a cyclic basis by an unpredictable time and with uncertain lengths. Also, such events can be triggered by terrorist acts, war, large scale economic dislocations, or widespread and large corporate bankruptcies. The effects of these events cannot presently be predicted. We could incur losses as a result of borrower defaults and foreclosures on our mortgage loan investments. Also, during times of recession or depression, the demand for our mortgage loans, even in times of declining interest rates, is likely to decline. Also, in connection with any sale or hypothecation of a mortgage loan, we would likely have to agree to be responsible in whole or in part for a limited period of time for any delinquencies or default. If we should experience significant delinquency rates, our revenues would materially decrease and, subject to our other available cash resources at the time, our ability to timely pay our debt securities obligations or our other indebtedness may be substantially impaired.
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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.
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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.
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Real estate taxes resulting from a foreclosure could adversely affect the value of our collateral.
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If we foreclose on a mortgage loan and take legal title to the real property, we could become responsible for real estate taxes levied and assessed against the foreclosed upon real property. While churches are normally exempt from real estate assessments on their worship and ministry related properties, once we acquire the real property after a foreclosure, any real estate taxes assessed would be our financial responsibility and could prevent us from recovering the full value of our investment.
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Competition may limit our business opportunities and our ability to operate profitably.
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We compete with church bond financing companies, banks, savings and loan associations, denominational loan funds, certain real estate investment trusts, insurance companies and other financial institutions to serve this market sector. Many of these entities have greater marketing resources, more extensive networks of offices and locations, and lower costs in proportion to their size due to economies of scale.
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We are exposed to environmental liabilities with respect to properties to which we take title.
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In the course of our business, we may take title to real estate through foreclosure on one of our mortgage loan investments or otherwise. If we do take title to a property, we could be subject to environmental liabilities with respect to these properties. In such a circumstance, we may be held liable to a governmental entity or to third parties for property damage, personal injury, and investigation and clean-up costs incurred by these parties in connection with environmental contamination, or may be required to investigate or clean up hazardous or toxic substances, or chemical releases, at a property. The costs associated with investigation or remediation activities could be substantial. If we ever become subject to significant environmental liabilities, our business, financial condition, liquidity and results of operations could be materially and adversely affected.
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Risks of cost overruns and non-completion of the construction or renovation of the mortgage properties securing construction loans we invest in may materially adversely affect our investment.
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The renovations, refurbishment or expansion by a borrower of a mortgage property involves risks of cost overruns and non-completion. Costs of construction or improvements to bring a mortgage property up to standards established for the market position intended for that property may exceed original estimates, possibly making a project uneconomical. Such delays and cost overruns are often the result of events outside both our and the borrower’s control such as material shortages, labor shortages and strikes and unexpected delays caused by weather and other acts of nature. Also, environmental risks and construction defects may cause cost overruns, and completion delays. If such construction or renovation is not completed in a timely manner, or if it costs more than expected, the borrower may experience a prolonged impairment of the borrower’s revenues making it unable to make payments on our loan. At December 31, 2016 and 2015, we held $11.8 million and $1.9 thousand, respectively, in construction loans.
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Item 1B.
Item 1B. UNRESOLVED STAFF COMMENTS
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None.
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Item 2.
Item 2. PROPERTIES
Our business offices are located at 915 West Imperial Highway, Suite 120, Brea, California 92821. Our telephone number is (714) 671-5720.
			
		
We currently rent our offices (approximately 4,970 square feet of rentable space) from ECCU under the terms of an Office Lease dated November 4, 2008. In November 2013, we renewed the lease for a five year period. The ECCU Office Lease agreement includes one additional option to renew for an additional five year term. The base rent escalates each year on the anniversary of the agreement. For 2016, our base rent began at $9,671 per month and escalated to $9,920 per month.
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On March 6, 2012, MP Securities entered into an office lease for approximately 1,358 square feet of office space to open a branch office in Fresno, California. The lease has a term of 36 months. In February 2015, we negotiated a renewal of the lease for an additional three year term. The lease extends through February 2018. The base rent escalates each year on the anniversary of the agreement. For 2016, the base rent for this branch office began at $2,064 per month and escalated to $2,176 per month.
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As of December 31, 2016, we had no foreclosed real estate assets as we had disposed of all but one of our foreclosed assets through sale agreements reached with third parties. One of our foreclosed properties, however, was transferred to a joint venture in which we hold an $892 thousand investment as described below.
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Tesoro Hills Joint Venture.
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In January 2014, we acquired 3 acres of vacant land in Santa Clarita, California as the result of a deed in lieu of foreclosure agreement we entered into with the borrower. On December 23, 2015, we executed a grant deed to the Santa Clarita property to Tesoro Hills, LLC, a California limited liability company formed by us and Intertex Property Management, Inc., a California corporation (“Intertex”). The limited liability company was established as a real estate joint venture to develop, market, sell, lease and manage the property for the benefit of the members. We hold a 30% interest in the Tesoro Hills joint venture. Under the terms of the Tesoro Hills Operating Agreement, Intertex agreed to make an initial $25,000 capital contribution, pay the costs of organizing the entity, pay certain development costs, provided, however, that it will not be required to contribute more than $300,000 to the development of the property. If additional capital contributions are required to develop the property for use as a school, church, not-for-profit facility or other special use, each member may elect to make a loan to the joint venture. The members have further agreed that no capital event to sell, dispose of, transfer, gift, encumber, or convey the property will occur for a period of two years after the joint venture was formed. Since the Santa Clarita property is vacant land which needs to be permitted, properly zoned, graded and substantially improved before the property may be sold, leased or conveyed to another party, we believe that conveying the property to the Tesoro Hills joint venture will maximize our chances of recovering our investment in the loan. The title to the Santa Clarita property was transferred to the Tesoro Hills, LLC joint venture in January 2016.
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The value of the property at the time we transferred it to the joint venture was $900 thousand. Operating losses of the joint venture allocated to us has decreased the value of our investment to $892 thousand at December 31, 2016.
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Item 3.
Item 3. LEGAL PROCEEDINGS
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Due to our investments made in mortgage loans, we may from time to time have an interest in, or be involved in, litigation arising out of our loan portfolio. We consider litigation related to our loan portfolio to be routine to the conduct of our business. In our opinion, we are not currently involved in any litigation matters that could have a material adverse effect on our financial position, results of operations or cash flows.
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Item 4.
Item 4. MINE SAFETY DISCLOSURES
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Not applicable.
			
		
PART II
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﻿Item 5.
Item 6.SELECTED FINANCIAL DATA
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We are a “smaller reporting company” as defined by Regulation S-K and as such, are not providing the information contained in this item pursuant to Regulation S-K.
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﻿Item 7.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Included herewith are the following financial statements:
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Report of Independent Registered Public Accounting Firm
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To The Members
Ministry Partners Investment Company, LLC
Brea, California
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We have audited the accompanying consolidated balance sheets of Ministry Partners Investment Company, LLC and subsidiaries (the Company) as of December 31, 2016 and 2015 and the related consolidated statements of income, equity and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
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We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
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In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Ministry Partners Investment Company, LLC and subsidiaries as of December 31, 2016 and 2015 and the results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.
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/s/ Hutchinson and Bloodgood LLP
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Glendale, California
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Ministry Partners Investment Company, LLC and Subsidiaries
Consolidated Balance Sheets
December 31, 2016 and 2015
(Dollars in Thousands except for Unit Data)
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The Notes to Consolidated Financial Statements are an integral part of these consolidated financial statements.
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Ministry Partners Investment Company, LLC and Subsidiaries
Consolidated Statements of Income
Years Ended December 31, 2016 and 2015
(Dollars in Thousands)
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The Notes to Consolidated Financial Statements are an integral part of these consolidated financial statements.
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Ministry Partners Investment Company, LLC and Subsidiaries
Consolidated Statements of Equity
Years Ended December 31, 2016 and 2015
(Dollars in Thousands)
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The Notes to Consolidated Financial Statements are an integral part of these consolidated financial statements.
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Ministry Partners Investment Company, LLC and Subsidiaries
Consolidated Statements of Cash Flows
Years Ended December 31, 2016 and 2015
(Dollars in Thousands)
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The Notes to Consolidated Financial Statements are an integral part of these consolidated financial statements.
			
		
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Note 1.Summary of Significant Accounting Policies
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Nature of Business
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Ministry Partners Investment Company, LLC (the “Company”) was incorporated in California in 1991 as a C corporation and converted to a limited liability company (“LLC”) on December 31, 2008. The Company is owned by a group of 11 federal and state chartered credit unions, as well as the Asset Management Assistance Center of the National Credit Union Administration (“NCUA”), none of which owns a majority of the voting equity units of the Company. The Asset Management Assistance Center owns only Series A Preferred Units, while our credit union equity holders own both our Class A Common Units and Series A Preferred Units. Offices of the Company are located in Brea, California. The Company provides funds for real property secured loans as well as unsecured loans for the benefit of evangelical churches and church organizations. The Company funds its operations primarily through the sale of debt securities, as well as through other borrowings. When the Company was formed, substantially all of the Company’s loans were purchased from its largest equity investor, the Evangelical Christian Credit Union (“ECCU”), of Brea, California. Currently the Company primarily originates church and ministry loans independently, and also from time to time purchases loans from credit unions other than ECCU. Nearly all of the Company’s business and operations currently are conducted in California and its mortgage loan investments cover approximately 30 states, with the largest number of loans made to California borrowers.
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In 2007 the Company created a wholly-owned special purpose subsidiary, Ministry Partners Funding, LLC (“MPF”). MPF was inactive from November 30, 2009 through November 2014. The Company plans to maintain MPF for use as a financing vehicle to offer, manage or sell debt securities, participate in debt financing transactions and serve as a collateral agent to hold mortgage loans for the benefit of our secured note investors. In December 2014, the Company reactivated MPF to hold loans used as collateral for i new Secured Investment Certificates.
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On November 13, 2009, the Company formed a wholly-owned subsidiary, MP Realty Services, Inc., a California corporation (“MP Realty”). MP Realty was formed to provide loan brokerage and other real estate services to churches and ministries in connection with the Company’s mortgage financing activities. On February 23, 2010, the California Department of Real Estate issued MP Realty a license to operate as a corporate real estate broker. MP Realty has conducted limited operations to date.
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On April 26, 2010, the Company formed Ministry Partners Securities, LLC, a Delaware limited liability company (“MP Securities”). MP Securities was formed to provide financing solutions for churches, charitable institutions and faith-based organizations and act as a selling agent for securities offered by such entities. Effective July 14, 2010, MP Securities was qualified to transact business in the State of California. On March 2, 2011, MP Securities’ application for membership in the Financial Industry Regulatory Authority (“FINRA”) was approved. In October 2012 MP Securities began acting as a selling agent for the Company’s Class A Notes offering offered under a registration statement declared effective by the U.S. Securities and Exchange Commission (“SEC”). In January 2015, MP Securities began acting as a selling agent for the Company’s Class 1 Notes offering. In November 2012, MP Securities also began selling investments in mutual funds.
			
		
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In March 2013, MP Securities began selling the Company’s Series 1 Subordinated Capital Notes and 2013 International Notes. On July 11, 2013, MP Securities executed a new membership agreement with FINRA which authorized it to act on a fully disclosed basis with a clearing firm to expand its brokerage activities. In addition, on July 11, 2013, the State of California granted its approval for MP Securities to provide registered investment advisory services. On September 26, 2013, MP Securities entered into a clearing firm agreement with Royal Bank of Canada Dain Rauscher (“RBC Dain”), thereby enabling MP Securities to open brokerage accounts for its customers. On March 14, 2013, the Company received a resident license from the California Department of Insurance to act as an Insurance Producer under the name Ministry Partners Insurance Agency, LLC (“MPIA). MPIA has reached agreements with multiple insurance companies to offer their life and disability insurance products, as well as fixed and variable annuities. MP Securities can now offer a broad scope of investment services that will enable it to better serve the Company’s clients and customers.
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Due to its broad offering of products and services, MP Securities is directly regulated by the following federal and state entities: the Securities and Exchange Commission (SEC), the Financial Industry Regulatory Authority (FINRA), the California Department of Business Oversight, and the California Department of Insurance. In addition, MP Securities is licensed with the state insurance or securities divisions in every state in which business is conducted. Through December 31, 2016, MP Securities was licensed for insurance in 13 states and for investments in 20 states.
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Principles of Consolidation
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The consolidated financial statements include the accounts of Ministry Partners Investment Company, LLC and its wholly-owned subsidiaries, MPF, MP Realty and MP Securities. All significant inter-company balances and transactions have been eliminated in consolidation.
Conversion to LLC
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Effective December 31, 2008, the Company converted its form of organization from a corporation organized under California law to a limited liability company organized under the laws of the State of California. With the filing of Articles of Organization-Conversion with the California Secretary of State, the separate existence of Ministry Partners Investment Corporation ceased and the entity continued by operation of law under the name Ministry Partners Investment Company, LLC.
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Since the conversion became effective, the Company is managed by a group of managers that provides oversight of the affairs and carries out their duties similar to the role and function that the Board of Directors performed under the previous bylaws. Operating like a Board of Directors, the managers have full, exclusive and complete discretion, power and authority to oversee the management of Company affairs. Instead of Articles of Incorporation and Bylaws, management structure and governance procedures are now governed by the provisions of an Operating Agreement that has been entered into by and between the Company’s managers and members.
Cash and Cash Equivalents
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For purposes of the statement of cash flows, cash equivalents include time deposits, certificates of deposit, and all highly liquid debt instruments with original maturities of three
			
		
months or less. The Company had no cash positions other than demand deposits as of December 31, 2016 and 2015.
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A portion of the Company’s cash held at credit unions is insured by the National Credit Union Insurance Fund, while a portion of cash held at other financial institutions is insured by the Federal Deposit Insurance Corporation (“FDIC”). The Company maintains cash that may exceed insured limits. The Company does not expect to incur losses in its cash accounts.
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Use of Estimates
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The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to, but are not limited to, the determination of the allowance for loan losses and the valuation of foreclosed real estate.
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Investments
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In December 2015, the Company finalized an agreement with Intertex Property Management, Inc., a California corporation, to enter into a joint venture to form Tesoro Hills, LLC (the “Valencia Hills Project”), a company that will develop and market property formerly classified by the Company as a foreclosed asset. In January 2016, the Company transferred ownership in the foreclosed asset to the Valencia Hills Project as part of the agreement and reclassified the carrying value of the property from foreclosed assets to investments. The Company’s initial investment in the joint venture was $900 thousand, which was equal to its carrying value in the foreclosed asset at December 31, 2015. The Company’s investment in the joint venture is analyzed for impairment by management on a periodic basis. Any impairment charges will be recorded as a valuation allowance against the value of the asset. The Company’s share of income and expenses of the joint venture will increase or decrease the Company’s investment and will be recorded on the income statement as realized gains or losses on investment.
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Loans Receivable
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Loans that management has the intent and ability to hold for the foreseeable future are reported at their outstanding unpaid principal balance adjusted for an allowance for loan losses, deferred loan fees and costs, and loan discounts. Interest income on loans is accrued on a daily basis using the interest method. Loan origination fees and costs are deferred and recognized as an adjustment to the related loan yield using the interest method. Loan discounts represent interest accrued and unpaid which has been added to loan principal balances at the time the loan was restructured. Loan discounts are accreted to interest income over the term of the restructured loan once the loan is deemed fully collectible and is no longer considered impaired. Loan discounts also represent the differences between the purchase price on loans we purchased from third parties and the recorded principal balance of the loan. These discounts are accreted to interest income over the term of the loan using the interest method. Discounts are not accreted to income on impaired loans.
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The accrual of interest is discontinued at the time a loan is 90 days past due. Accrual of interest can be discontinued prior to the loan becoming 90 days past due if management
			
		
determines the loan is impaired. Past due status is based on contractual terms of the loan. In all cases, loans are placed on nonaccrual or charged off at an earlier date if collection of principal or interest is considered doubtful.
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All interest accrued but not collected for loans that are placed on nonaccrual or charged off are reversed against interest income. The interest on these loans is accounted for on the cash basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.
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Allowance for Loan Losses
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The Company sets aside an allowance or reserve for loan losses through charges to earnings, which are shown in the Company’s Consolidated Statements of Operations as a provision for loan losses. Loan losses are charged against the allowance when management believes the uncollectability of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance.
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The allowance for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of the collectability of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the Company’s ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.
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The allowance consists of general and specific components. The general component covers non-classified loans and is based on historical loss experience adjusted for qualitative factors. In establishing the allowance for loan losses, management considers significant factors that affect the collectability of the Company’s loan portfolio. While historical loss experience provides a reasonable starting point for the analysis, such experience by itself does not form a sufficient basis to determine the appropriate level of the allowance for loan losses. Management also considers qualitative (or environmental) factors that are likely to cause estimated credit losses associated with our existing portfolio to differ from historical loss experience, including:
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-Changes in lending policies and procedures, including changes in underwriting standards and collection;
-Changes in national, regional and local economic and business conditions and developments that affect the collectability of the portfolio;
-Changes in the volume and severity of past due loans, the volume of nonaccrual loans, and the volume and severity of adversely classified loans;
-Changes in the value of underlying collateral for collateral-dependent loans; and
-The effect of credit concentrations.
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These factors are adjusted on an on-going basis. The specific component of the Company’s allowance for loan losses relates to loans that are classified as impaired. For such loans, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan.
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All loans in the loan portfolio are subject to impairment analysis. The Company reviews its loan portfolio monthly by examining delinquency reports and information related to the
			
		
financial condition of its borrowers and collateral value of its loans. Through this process, the Company identifies potential impaired loans. A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal and interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting future scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower's prior payment record, and the amount of the shortfall in relation to the principal and interest owed. A loan is generally deemed to be impaired when it is 90 days or more past due, or earlier when facts and circumstances indicate that it is probable that a borrower will be unable to make payments in accordance with the loan contract.
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Impairment is measured on a loan-by-loan basis by either the present value of expected future cash flows discounted at the loan's effective interest rate, the obtainable market price, or the fair value of the collateral if the loan is collateral-dependent. When the Company modifies the terms of a loan for a borrower that is experiencing financial difficulties, a troubled debt restructuring is deemed to have occurred and the loan is classified as impaired. Loans or portions thereof are charged off when they are determined by management to be uncollectible. Uncollectability is evaluated periodically on all loans classified as “Loans of Lesser Quality.” As the Company has an established practice of working to explore every possible means of repayment with its borrowers, it has historically not charged off a loan until the borrower has exhausted all reasonable means of making loan payments from cash flows, at which point the underlying collateral becomes subject to foreclosure. Among other variables, management will consider factors such as the financial condition of the borrower, and the value of the underlying collateral in assessing uncollectability.
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Troubled Debt Restructurings
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A troubled debt restructuring is a loan for which the Company, for reasons related to a borrower’s financial difficulties, grants a concession to a borrower that the Company would not otherwise consider. A restructuring of a loan usually involves an interest rate modification, extension of the maturity date, or reduction of accrued interest owed on the loan on a contingent or absolute basis.
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Loans that are renewed at below-market terms are considered to be troubled debt restructurings if the below-market terms represent a concession due to the borrower’s troubled financial condition. Troubled debt restructurings are classified as impaired loans and are measured at the present value of estimated future cash flows using the loan's effective rate at inception of the loan. The change in the present value of cash flows attributable to the passage of time is reported as interest income. If the loan is considered to be collateral-dependent, impairment is measured based on the fair value of the collateral.
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Loan Portfolio Segments and Classes
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Management segregates the loan portfolio into portfolio segments for purposes of evaluating the allowance for loan losses. A portfolio segment is defined as the level at which the Company develops and documents a systematic method for determining its allowance for
			
		
loan losses. The portfolio segments are segregated based on loan types and the underlying risk factors present in each loan type. Such risk factors are periodically reviewed by management and revised as deemed appropriate.
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Company’s loan portfolio consists of one segment - church loans. The loan portfolio is segregated into the following portfolio classes:
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Wholly-Owned First Collateral Position. This portfolio class consists of the wholly-owned loans for which the Company possesses a senior lien on the collateral underlying the loan.
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Wholly-Owned Junior Collateral Position. This portfolio class consists of the wholly-owned loans for which the Company possesses a lien on the underlying collateral that is superseded by another lien on the same collateral. This class also contains any loans that are not secured. These loans present higher credit risk than loans for which the Company possesses a senior lien due to the increased risk of loss should the loan default.
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Participations First Collateral Position. This portfolio class consists of the participated loans for which the Company possesses a senior lien on the collateral underlying the loan. Loan participations present higher credit risk than wholly owned loans because the Company does not maintain full control over the disposition and direction of actions regarding the management and collection of the loans. The lead lender directs most servicing and collection activities, and major actions must be coordinated and negotiated with the other participants, whose best interests regarding the loan may not align with those of the Company.
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Participations Junior Collateral Position. This portfolio class consists of the participated loans for which the Company possesses a lien on the underlying collateral that is superseded by another lien on the same collateral. Loan participations in the junior collateral position loans have higher credit risk than wholly owned loans and participated loans where the Company possesses a senior lien on the collateral. The increased risk is the result of the factors presented above relating to both junior lien positions and participations.
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Credit Quality Indicators
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The Company’s policies provide for the classification of loans that are considered to be of lesser quality as watch, special mention, substandard, doubtful, or loss assets. Special mention assets exhibit potential or actual weaknesses that present a higher potential for loss under certain conditions. An asset is considered substandard if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Substandard assets include those assets characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected. Assets classified as doubtful have all of the weaknesses inherent in those classified substandard with the added characteristic that the weaknesses make collection or liquidation in full highly questionable and improbable, based on currently existing facts, conditions and values. Assets (or portions of assets) classified as loss are those considered uncollectible and of such little value that their continuance as assets is not warranted. Assets that do not expose the Company to risk sufficient to warrant classification in one of the aforementioned categories, but which possess potential weaknesses that deserve close attention, are designated as watch. Loans designated as watch are considered pass loans.
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The Company has established a standard loan grading system to assist management and review personnel in their analysis and supervision of the loan portfolio. The loan grading system is as follows:
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Pass: The borrower has sufficient cash to fund debt services. The borrower may be able to obtain similar financing from other lenders with comparable terms. The risk of default is considered low.
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Watch: These loans exhibit potential or developing weaknesses that deserve extra attention from credit management personnel. If the developing weakness is not corrected or mitigated, there may be deterioration in the ability of the borrower to repay the debt in the future. Loans graded Watch must be reported to executive management and the Board of Managers. Potential for loss under adverse circumstances is elevated, but not foreseeable. Watch loans are considered pass loans.
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Special mention: These credit facilities exhibit potential or actual weaknesses that present a higher potential for loss under adverse circumstances, and deserve management’s close attention. If uncorrected, these weaknesses may result in deterioration of the repayment prospects for the loan at some future date.
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Substandard: Loans and other credit extensions bearing this grade are considered to be inadequately protected by the current sound worth and debt service capacity of the borrower or of any pledged collateral. These obligations, even if apparently protected by collateral value, have well-defined weaknesses related to adverse financial, managerial, economic, ministry, or environmental conditions which have clearly jeopardized repayment of principal and interest as originally intended. Furthermore, there is the possibility that some future loss will be sustained if such weaknesses are not corrected.
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Doubtful: This classification consists of loans that display the properties of substandard loans with the added characteristic that the severity of the weaknesses makes collection or liquidation in full highly questionable or improbable based upon currently existing facts, conditions, and values. The probability of some loss is very high, but because of certain important and reasonably specific factors, the amount of loss cannot be exactly determined. Such pending factors could include merger or liquidation, additional capital injection, refinancing plans, or perfection of liens on additional collateral.
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Loss: Loans in this classification are considered uncollectible and cannot be justified as a viable asset. This classification does not mean the loan has absolutely no recovery value, but that it is neither practical nor desirable to defer writing off this loan even though partial recovery may be obtained in the future.
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Foreclosed Assets
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Assets acquired through foreclosure or other proceedings are initially recorded at fair value at the date of foreclosure less estimated costs of disposal, which establishes a new cost. After foreclosure, valuations are periodically performed by management, and foreclosed assets held for sale are carried at the lower of cost or fair value, less estimated costs of disposal. Any write-down to fair value just prior to the transfer to foreclosed assets is charged to the allowance for loan losses. The Company’s real estate assets acquired through foreclosure or other proceedings are evaluated regularly to ensure that the recorded amount is supported by its current fair value and that valuation allowances to reduce the varying amount to fair value
			
		
less estimated costs of disposal are recorded as necessary. Revenue and expense from the operation of the Company’s foreclosed assets and changes in the valuation allowance are included in net expenses from foreclosed assets. When the foreclosed property is sold, a gain or loss is recognized on the sale for the difference between the sales proceeds and the carrying amount of the property.
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Transfers of Financial Assets
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Transfers of financial assets are accounted for as sales when control over the assets has been surrendered. Control over transferred assets is deemed to have been surrendered when (1) the assets have been isolated from the Company, (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and (3) the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity.
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The Company, from time to time, sells participation interests in mortgage loans it has originated or acquired. In order to recognize the transfer of a portion of a financial asset as a sale, the transferred portion and any portion that continues to be held by the transferor must represent a participating interest, and the transfer of the participating interest must meet the conditions for surrender of control. To qualify as a participating interest (i) each portion of a financial asset must represent a proportionate ownership interest in an entire financial asset, (ii) from the date of transfer, all cash flows received from the entire financial asset must be divided proportionately among the participating interest holders in an amount equal to their share of ownership, (iii) the transfer must be made on a non-recourse basis (other than standard representations and warranties made under the loan participation sale agreement) to, or subordination by, any participating interest holder, and (iv) no party has the right to pledge or exchange the entire financial asset. If the participating interest or surrender of control criteria is not met, the transaction is accounted for as a secured borrowing arrangement.
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Under some circumstances, when the Company sells participations in wholly owned loans receivable that it services, it retains a servicing asset that is initially measured at fair value. As quoted market prices are generally not available for these assets, the Company estimates fair value based on the present value of future expected cash flows associated with the loan receivable. The Company amortizes servicing assets over the life of the associated receivable using the interest method. Any gain or loss recognized on the sale of loans receivable depends in part on both the previous carrying amount of the financial assets involved in the sale, allocated between the assets sold and the interests that continue to be held by the Company based on their relative fair value at the date of transfer, and the proceeds received.
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Property and Equipment
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Furniture, fixtures, and equipment are stated at cost, less accumulated depreciation. Depreciation is computed on a straight-line basis over the estimated useful lives of the assets, which range from three to seven years.
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Debt Issuance Costs
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Debt issuance costs are related to borrowings from financial institutions as well as public offerings of unsecured notes, and are amortized into interest expense over the contractual terms of the debt using the straight-line method.
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Employee Benefit Plan
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Contributions to the qualified employee retirement plan are recorded as compensation cost in the period incurred.
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Income Taxes
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The Company has elected to be treated as a partnership for income tax purposes. Therefore, income and expenses of the Company are passed through to its members for tax reporting purposes. According to its operating agreement, Tesoro Hills, LLC, a joint venture in which the Company has an investment, has also elected to be treated as a partnership for income tax purposes.
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The Company uses a recognition threshold and a measurement attribute for the consolidated financial statement recognition and measurement of a tax position taken in a tax return. Benefits from tax positions are recognized in the financial statements only when it is more likely than not that the tax position will be sustained upon examination by the appropriate taxing authority that would have full knowledge of all relevant information. A tax position that meets the more-likely-than-not recognition threshold is measured at the largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate settlement. Tax positions that previously failed to meet the more-likely-than-not recognition threshold are recognized in the first subsequent financial reporting period in which that threshold is met. Previously recognized tax positions that no longer meet the more-likely-than-not recognition threshold are derecognized in the first subsequent financial reporting period in which that threshold is no longer met.
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Recent Accounting Pronouncements
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In January 2016, the FASB issued ASU 2016-01, “Financial Instruments - Overall (Subtopic 825-10) - Recognition and Measurement of Financial Assets and Financial Liabilities.” ASU 2016-01, among other things, (i) requires equity investments, with certain exceptions, to be measured at fair value with changes in fair value recognized in net income, (ii) simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment, (iii) eliminates the requirement for public business entities to disclose the methods and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet, (iv) requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes, (v) requires an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments, (vi) requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset on the balance sheet or the accompanying notes to the financial statements and (vii) clarifies that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale
			
		
securities in combination with the entity’s other deferred tax assets. ASU 2016-01 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. Early adoption is permitted. The guidance requires companies to apply the requirements in the year of adoption, through cumulative adjustment while the guidance related to equity securities without readily determinable fair values, should be applied prospectively. The adoption of this guidance is not expected to have a significant impact on our consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842).” ASU 2016-02 requires a lessee to recognize assets and liabilities for leases with lease terms of more than 12 months. Consistent with current GAAP, the recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee primarily will depend on its classification as a finance or operating lease. However, unlike current GAAP which requires only capital leases to be recognized on the balance sheet, the new ASU 2016-02 will require both types of leases to be recognized on the balance sheet. ASU 2016-02 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted. The guidance requires companies to apply the requirements in the year of adoption using a modified retrospective approach. We are currently evaluating the potential impact of the pending adoption of ASU 2016-02 on our consolidated financial statements.
In June 2016, the FASB issued ASU 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” ASU 2016-13 introduces an approach based on expected losses to estimate credit losses on certain types of financial instruments. ASU 2016-13 also modifies the impairment model for available-for-sale debt securities and provides for a simplified accounting model for purchased financial assets with credit deterioration since their origination. ASU 2016-13 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. The guidance requires companies to apply the requirements in the year of adoption through cumulative adjustment with some aspects of the update requiring a prospective transition approach. We are currently evaluating the potential impact of the pending adoption of ASU 2016-13 on our consolidated financial statements.
In August 2016, the FASB issued ASU 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (a consensus of the Emerging Issues Task Force).” ASU 2016-15 is intended to reduce diversity in practice in how certain transactions are classified in the statement of cash flows. ASU 2016-15 addresses eight classification issues related to the statement of cash flows: (i) debt prepayment or debt extinguishment, (ii) settlement of zero-coupon bonds, (iii) contingent consideration payments made after a business combination, (iv) proceeds from the settlement of insurance claims, (v) proceeds from the settlement of corporate-owned life insurance policies, including bank-owned life insurance policies, (vi) distributions received from equity method invitees, (vii) beneficial interest in securitizations transactions, and (viii) separately identifiable cash flows and application of the predominance principle. ASU 2016-15 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. Early adoption is permitted. The guidance requires companies to apply the requirements retrospectively to all prior periods presented. If it is impracticable for a company to apply ASU 2016-15 retrospectively, requirements may be applied prospectively as of the earliest date practicable. We are currently evaluating the potential impact of the pending adoption of ASU 2016-15 on our consolidated financial statements.
			
		
In December 2016, FASB issued ASU 2016-20, “Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers,” which is intended to provide clarification of aspects of the guidance issued in ASU 2014-09. ASU 2016-20 addresses (i) loan guarantee fees, (ii) impairment testing of contract costs, (iii) provisions for losses on construction-type and production-type contracts, and (iv) various disclosures. ASU 2016-20 is effective concurrently with ASU 2014-09 which we are required to adopt in the first quarter of fiscal year 2018. Early adoption is permitted. The guidance permits companies to either apply the requirements retrospectively to all prior periods presented, or apply the requirements in the year of adoption, through cumulative adjustment. We are currently evaluating the potential impact of the pending adoption of ASU 2016-20 on our consolidated financial statements, and we have not yet identified which transition method will be applied upon adoption.
In January 2017, the FASB issued ASU 2017-01, “Business Combinations (Topic 805): Clarifying the Definition of a Business.” ASU 2017-01 is intended to clarify the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. ASU 2017-01 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. Early adoption is permitted for (i) transactions which the acquisition date occurs before the issuance date or effective date of the ASU, only when the transaction has not been reported in financial statements that have been issued or made available for issuance, or (ii) for transactions in which a subsidiary is deconsolidated or a group of assets is derecognized that occur before the issuance date or effective date of the ASU, only when the transaction has not been reported in financial statements that have been issued or made available for issuance. The guidance requires companies to apply the requirements prospectively. ASU 2017-01 is not expected to have a significant impact on our consolidated financial statements.
Note 2.Pledge of Cash
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Some of the company’s cash is pledged as collateral for its borrowings and is considered restricted cash. At December 31, 2016, $600 thousand is pledged as collateral for the outstanding secured notes. At December 31, 2015, $686 thousand was pledged as collateral for the NCUA credit facilities.
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Note 3.Related Party Transactions
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The Company maintains a portion of its cash at ECCU. Total funds held with ECCU were $1.2 million and $163 thousand at December 31, 2016 and 2015, respectively. Interest earned on these funds totaled approximately $15 thousand and $14 thousand for the years ended December 31, 2016 and 2015, respectively.
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The Company leases offices from ECCU pursuant to an Office Lease dated November 4, 2009 and amended on October 11, 2013, and purchases other services from ECCU. Charges of approximately $109 thousand and $117 thousand for the years ended December 31, 2016 and 2015, respectively, were made primarily for rent, while charges for other services purchased from ECCU were immaterial. All of these charges are included in Office Occupancy or Office Operations expense. The method used to arrive at the periodic charge is based on the fair market value of services provided. Management believes that such method is reasonable.
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In the past, the Company has purchased mortgage loans, including loan participation interests, from ECCU, our largest equity owner. The Company did not purchase any loans from ECCU during the years ended December 31, 2016 and 2015. During the years ended December 31, 2016 and 2015, the Company recognized $602 thousand and $1.4 million of interest income on loans purchased from ECCU, respectively. ECCU currently acts as the servicer for nine of the 161 loans in the Company’s loan portfolio. Per the loan servicing agreement with ECCU, a servicing fee of 65 basis points is deducted from the interest payments the Company receives on the wholly-owned loans ECCU services for the Company. In lieu of a servicing fee, loan participations the Company purchases from ECCU have pass-through rates which are up to 75 basis points lower than the loan’s contractual rate. On loan participation interests purchased from ECCU, the Company negotiates the pass-through interest rates with ECCU on a loan by loan basis. At December 31, 2016 and 2015, the Company’s investment in wholly-owned loans serviced by ECCU totaled $899 thousand and $930 thousand, respectively. At December 31, 2016 and 2015, the Company’s investment in loan participations serviced by ECCU totaled $10.3 million and $11.9 million, respectively.
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On October 6, 2014, MP Securities reached an agreement with ECCU whereby ECCU will refer clients to MP Securities for investment advisory services. In exchange, the Company will remit to ECCU a solicitor fee allowable by the California Department of Business Oversight. The Company remitted $53 thousand and $34 thousand in fees during the years ended December 31, 2016 and 2015, respectively.
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On April 8, 2016, the Company and ECCU entered into a Master Services Agreement (the “Services Agreement”), pursuant to which the Company will provide marketing, member and client services, operational and reporting services to ECCU commencing on the effective date of the Services Agreement and ending on December 31, 2016; provided, however, that unless either party provides at least thirty (30) days written notice to the other party prior to its expiration, the agreement will automatically renew for successive one year periods. Either party may terminate the Services Agreement for any reason by providing thirty (30) days prior written notice. The Company has agreed to assign a designated service representative which must be approved by ECCU in performing its duties under the Agreement. Pursuant to the terms of the Services Agreement, the Company will make visits, deliver reports, provide marketing, educational and loan related services to ECCU’s members, borrowers, leads, referral sources and contacts in the southeast region of the United States. For the year ended December 31, 2016, the Company recognized $68 thousand in income as a result of this agreement.
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On October 5, 2016, the Company entered into a Successor Servicing Agreement with ECCU pursuant to which the Company has agreed to serve as the successor loan servicing agent for certain mortgage loans designated by ECCU in the event ECCU requests that the Company assume its obligation to act as the servicing agent for those loans. The term of the Agreement is for a period of three years. For the year ended December 31, 2016, the Company recognized $2 thousand in income as a result of this agreement.
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Other Related Party Transactions
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On April 15, 2016, Mendell Thompson was appointed to the Company’s Board of Managers. Mr. Thompson currently serves as President and Chief Executive Officer of America’s Christian Credit Union. The Company has sold $2.9 million in loan participations to ACCU since 2011. As of December 31, 2016, the outstanding balance of loan participations sold to
			
		
ACCU is $2.4 million. The Company has sold one loan to ACCU for $1.4 million since Mr. Thompson’s appointment to the Board of Managers.
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The Company maintains a portion of its cash at ACCU. Total funds held with ACCU were $4.8 million and $354 thousand at December 31, 2016 and 2015, respectively. Interest earned on these funds totaled approximately $7 thousand and $3 thousand for the years ended December 31, 2016 and 2015, respectively.
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In addition, the Company’s wholly-owned subsidiary, MP Securities, has a Networking Agreement with ACCU pursuant to which MP Securities will assign one or more registered sales representatives to one or more locations designated by ACCU and offer investment products, investment advisory services, insurance products, annuities and mutual fund investments to ACCU’s members. MP Securities has agreed to offer only those investment products and services that have been approved by ACCU or its Board of Directors and comply with applicable investor suitability standards required by federal and state securities laws and regulations. MP Securities offers these products and services to ACCU members in accordance with NCUA rules and regulations and in compliance with its membership agreement with FINRA. MP Securities has agreed to compensate ACCU for permitting it to use the designated location to offer such products and services to ACCU’s members under an arrangement that will entitle ACCU to be paid a percentage of total revenue received by MP Securities from transactions conducted for or on behalf of ACCU members. The Networking Agreement may be terminated by either ACCU or MP Securities without cause upon thirty days prior written notice. MP Securities paid $127 thousand and $73 thousand to ACCU under the terms of this agreement during the year ended December 31, 2016 and 2015, respectively.
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On August 14, 2013, the Company entered into a Loan Participation Agreement with Western Federal Credit Union, which has since changed its name to UNIFY Financial Credit Union (“UFCU”). UFCU is an owner of both the Company’s Class A Common Units and Series A Preferred Units. Under this agreement, the Company sold UFCU a $5.0 million loan participation interest in one of its mortgage loan interests. As part of this agreement, the Company retained the right to service the loan, and it charges UFCU 50 basis points for servicing the loan.
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From time to time, managers and management have purchased investor notes issued by the Company. Investor notes payable to related parties total $53 thousand and $51 thousand at December 31, 2016 and 2015, respectively.
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The Company also entered into a selling agreement with MP Securities pursuant to which MP Securities served as its selling agent in distributing its Class 1 Notes. Under the terms of the Class 1 Notes Offering, MP Securities received a selling concession for acting as a participating broker ranging from 1.25% to 5.0% on the sale of a fixed series note and an amount equal to .25% per annum on the average note balance for a variable series note. No comissions were paid on any accrued interest that is added to the principal of a Class 1 Note pursuant to an interest deferral election made by the investor.
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The Company has also entered into a Managing Participating Broker Agreement with MP Securities pursuant to which MP Securities will act as the managing broker for the offering of its Class 1 Notes. As the managing participating broker, MP Securities will maintain sales records, process and approve investor applications, conduct retail and wholesale marketing activities for sales of the Class 1 Notes and undertake its own due diligence review of the
			
		
offering. MP Securities does not serve as a lead underwriter or syndicate manager for the offering.
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Under the terms of the Managing Participating Broker Dealer Agreement (the “MPB Agreement”) entered into with MP Securities and possible participating brokers in the future, the Company will pay gross selling commissions ranging from 1.25% to 1.75% for the sale of Fixed Series Class 1 Notes and an amount equal to .50% of the amount of Variable Series Class 1 Notes sold plus an amount equal to .25% per annum on the average note balance of such Variable Series Class 1 Note. Both the gross commissions and managing participating broker commissions will be reduced by .25% of the total amount of each note sold in the offering to a repeat purchaser who is then, or has been within the immediately preceding thirty (30) days, an owner of one of the Company’s investor notes. No commissions are paid on the accrued interest deferred and added to the principal balance of a note when an investor elects to defer interest received on a note. In the event MP Securities provides wholesaling services in connection with the Class 1 Notes offering, the Company may reimburse MP Securities and any other selling group member up to $40 thousand in wholesaling expenses. As of the date of this Report, no wholesaling expenses have been paid to MP Securities or any other selling group member under the Class 1 Notes offering.
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In connection with the Company’s Secured Note offering, it has engaged MP Securities to act as its managing broker for the offering. Under the terms of a Managing Broker-Dealer Agreement entered into by and between the Company and MP Securities, it will pay selling commissions ranging from 2% on its Secured Notes with a 18-month maturity to 5% on Secured Notes with a 54-month maturity, with total selling commissions not to exceed 5%.
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In addition, the Company has signed an Administrative Services Agreement with MP Securities which stipulates that it will provide certain services to MP Securities. These services include the lease of office space, use of equipment, including computers and phones, and payroll and personnel services. In December 2015, the Company agreed to waive and abate MP Securities’ obligation to pay the Company for these services for a limited period of time not to exceed twelve months and subject to a maximum expense abatement of $250 thousand. For the year ended December 31, 2016, no abatements had been requested by MP Securities or made by the Company. Pursuant to resolutions adopted by the Board of Managers in November 2016, the Board authorized the officers of the Company to extend the terms of this agreement for an additional twelve month period.
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Pursuant to a Loan and Security Agreement, dated December 15, 2014, entered into by and among the Company, MPF and the holders of its Secured Notes (the “Loan Agreement”), MPF will serve as the collateral agent for the Secured Notes. The Company will pledge and deliver mortgage loans and cash to MPF to serve as collateral for the Secured Notes. As custodian and collateral agent for the Secured Notes, MPF will monitor the Company’s compliance with the terms of the Loan Agreement, take possession of, hold, operate, manage or sell the collateral conveyed to MPF for the benefit of the Secured Note holders. MPF is further authorized to pursue any remedy at law or in equity after an event of default occurs under the Loan Agreement.
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To assist in evaluating any related transactions the Company may enter into with a related party, its Board has adopted a Related Party Transaction Policy. Under this policy, a majority of the members of the Company’s Board and majority of its independent Board members must approve a material transaction that it enters into with a related party. As a result, all transactions that the Company undertakes with an affiliate or related party are on terms
			
		
believed by its management to be no less favorable than are available from unaffiliated third parties and are approved by a majority of its independent Board members.
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Note 4.Loans
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All of the loans are made to various evangelical churches and related organizations, primarily to purchase, construct or improve facilities. Loan maturities extend through 2031. The loans carry interest rates ranging from 3.00% to 8.50%, with a weighted average yield of 6.28% as of both December 31, 2016 and 2015. A total of $106.3 million in loans are pledged as collateral for borrowings from financial institutions as December 31, 2016. See Note 9. A total of $2.9 million in loans are pledged as collateral for notes payable at December 31, 2016. See Note 11. A summary of loans as of December 31 follows (dollars in thousands):
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The Company’s loan portfolio is comprised of one segment - church loans. The loans fall into four classes: wholly-owned loans for which the Company possesses the first collateral position, wholly-owned loans that are either unsecured or for which the Company possesses a junior collateral position, participated loans for which the Company possesses the first collateral position, and participated loans for which the Company possesses a junior collateral position.
Loans by portfolio segment (church loans) and the related allowance for loan losses are presented below. Loans and the allowance for loan losses are further segregated by impairment methodology (dollars in thousands).
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Allowance for Loan Losses
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Management believes that the allowance for loan losses as of December 31, 2016 and 2015 is appropriate. Changes in the allowance for loan losses by loan portfolio segment (church loans) as of and for the years ended December 31 are summarized as follows (dollars in thousands):
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The following table is a summary of the loan portfolio credit quality indicators by loan class. During the year ended December 31, 2016, the Company amended its credit policy to include the special mention category, which is presented in the table below. See the table below for balances at December 31, 2016 and 2015, which is the date on which the information was updated for each credit quality indicator (dollars in thousands):
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The following table sets forth certain information with respect to the Company’s loan portfolio delinquencies by loan class and amount at December 31, 2016 and 2015 (dollars in thousands):
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Non-Performing Loans
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Non-performing loans include non-accrual loans, loans 90 days or more past due and still accruing, and restructured loans. Non-accrual loans represent loans on which interest accruals have been discontinued. Restructured loans are loans in which the borrower has been granted a concession on the interest rate or the original repayment terms due to financial distress. Non-performing loans are closely monitored on an ongoing basis as part of management’s loan review and work-out process. The potential risk of loss on these loans is evaluated by comparing the loan balance to the fair value of any underlying collateral or the present value of projected future cash flows.
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The following tables are summaries of impaired loans by loan class at December 31, 2016 and 2015. The recorded investment in impaired loans reflects the balances in the financial statements, net of loan discounts, whereas the unpaid principal balance reflects the contractual balances before application of collected interest payments toward the recorded investment (dollars in thousands):
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A summary of nonaccrual loans by loan class at December 31, 2016 and 2015 is as follows (dollars in thousands):
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A summary of troubled debt restructurings by loan class that were modified during the year ended December 31 is as follows (dollars in thousands):
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The Company restructured one loan during the year ended December 31, 2016. The Company lowered the interest rate on this loan as part of the restructure, but did not add any amounts to the principal balance. This loan had been previously restructured during prior years. Interest was added to this loan as part of a prior restructuring transaction.
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The Company restructured four loans during the year ended December 31, 2015. For each of the loans, the Company added unpaid accrued interest outstanding to the loan balance and offset this with a corresponding discount of the same amount. For one of the loans, the Company added $88 thousand in additional principal related to advances made for property maintenance and taxes due on the property. Since the time of the restructure, each restructured loan has made payments as agreed.
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For all nine of the restructured loans at December 31, 2016, unpaid accrued interest at the time of the loan restructure was added to the principal balance. The amount of interest added was also recorded as a loan discount, so that the net loan balance did not change. For some restructured loans cash advances were made for maintenance costs and taxes that increased the loan balance. In addition, for each of the nine restructured loans, the interest rate was decreased. Each borrower involved in a troubled debt restructuring was experiencing financial difficulties at the time the loan was restructured. Several of the loans have been restructured multiple times since the initial restructure.
The loan that was modified during the year ended December 31, 2016 defaulted during 2016. No loans that were modified during the year ended December 31, 2015 defaulted in the same year they were modified.
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Loans modified in a troubled debt restructuring are closely monitored for delinquency as an early indicator for future default. If loans modified in a troubled debt restructuring subsequently default, the Company evaluates such loans for potential further impairment. As a result of this evaluation, specific reserves may be increased.
No additional funds were committed to be advanced in connection with impaired loans, including restructured loans, as of December 31, 2016 or 2015.
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Note 5. Investments
The Company’s investments at December 31, 2016 consist of an ownership interest in a joint venture, Tesoro Hills LLC. The Company’s ownership interest is equal to the value of its initial investment in the joint venture, which consisted of a $900 thousand property that was previously foreclosed on by the Company. The joint venture incurred $10 thousand in losses for the year ended December 31, 2016. $8 thousand of these losses were allocated to the
			
		
Company according to the terms of the operating agreement. As of December 31, 2016, the carrying value of the Company’s investment in the property is $892 thousand. Management has conducted an evaluation of the investment as of December 31, 2016 and has determined that the investment is not impaired. The Company did not have any investments at December 31, 2015.
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Note 6. Foreclosed Assets
The Company held $3.5 million of foreclosed assets at December 31, 2015. The Company owned one additional foreclosed asset at December 31, 2015 that had been written off. All of the Company’s remaining foreclosed assets were sold or transferred to a joint venture investment during the year ended December 31, 2016. The Company does not own any foreclosed assets at December 31, 2016.
Foreclosed assets are presented net of an allowance for losses. An analysis of the allowance for losses on foreclosed assets is as follows (dollars in thousands):
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Expenses and income applicable to foreclosed assets include the following (dollars in thousands):
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Note 7. Loan Participation Sales
During the year ended December 31, 2016, the Company sold participations in 22 church loans totaling $14.3 million. During the year ended December 31, 2015, the Company sold participations in eight church loans totaling $6.0 million. The Company retained servicing
			
		
responsibilities in these loans, and as a result, the Company recorded servicing assets totaling $155 thousand and $59 thousand during the years ended December 31, 2016 and 2015, respectively. These assets are being amortized using the interest method over the terms of the loans. The amortization of servicing assets is recorded as an adjustment to servicing fee income and totaled $83 and $57 thousand for the years ended December 31, 2016 and 2015, respectively.
A summary of servicing assets for the year ended December 31, 2016 and 2015 is as follows (dollars in thousands:
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For the years ended December 31, 2016 and 2015, the Company recognized gains of $135 thousand and $49 thousand, respectively, on the sales of loan participations.
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Note 8.Premises and Equipment
Premises and equipment consist of the following at December 31 (dollars in thousands):
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Depreciation and amortization expense for the years ended December 31, 2016 and 2015 amounted to $20 thousand and $45 thousand, respectively.
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Note 9.NCUA Credit Facilities
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Members United Facility
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On November 4, 2011, the Company and the National Credit Union Administration Board As Liquidating Agent of Members United Corporate Federal Credit Union (“Lender”) entered into an $87.3 million credit facility refinancing transaction (the “MU Credit Facility”). The MU Credit Facility replaced the original $100 million CUSO Line entered into by and between the Company and Members United Corporate Federal Credit Union on May 7, 2008. Accrued interest is due and payable monthly in arrears on the MU Credit Facility on the first day of each month at the lesser of the maximum interest rate permitted by applicable law under the loan documents or 2.525%. The term loan may be repaid or retired without penalty, but any amounts repaid or prepaid under the MU Credit Facility may not be re-borrowed. On March 30, 2015, the Company and the NCUA entered into an agreement to amend to the Loan and Security Agreement (the “LSA Amendments”) for both the MU Credit Facility and the WesCorp Credit Facility. The LSA Amendments altered the collateral requirements on both facilities, as well as some of the Company’s reporting requirements to the NCUA. The balance of the MU Credit Facility was $67.1 million and $70.2 million at December 31, 2016 and December 31, 2015, respectively. Effective as of November 30, 2016, the Company and the Lender agreed to amend the terms of the facility. Under the amended terms of the facility, the required minimum monthly payment was increased to $450 thousand in and the facility will mature on November 1, 2026, at which point the final principal payment will be due.
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The MU Credit Facility includes a number of borrower covenants, including affirmative covenants to maintain the collateral free of liens, to timely pay the amounts due on the facility, to provide the Lender with interim or annual financial statements and annual and periodic reports filed with the U.S. Securities and Exchange Commission and maintain a minimum collateralization ratio of at least 110% (120% for the MU Credit Facility and Wescorp Facility combined). If at any time the Company fails to maintain its required minimum collateralization ratio, it will be required to deliver cash or qualifying mortgage loans in an amount sufficient to enable us to meet its obligation to maintain a minimum collateralization ratio. At December 31, 2016 and December 31, 2015, the collateral securing the MU Credit Facility had an aggregate principal balance of $79.4 million and $81.9 million, respectively. In total, the collateral securing both facilities at December 31, 2015 did not satisfy the 120% minimum collateralization ratio required by the amended agreement. The Company pledged $686 thousand in cash to satisfy the deficit in loan collateral at December 31, 2015. The total collateral pledged, including loans receivable and cash, satisfies the requirements of the amended credit facility agreements. The loan collateral securing the facility was sufficient at December 31, 2016.
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In addition to the minimum collateralization requirement, the MU Credit Facility also includes covenants which prevent the Company from renewing or extending a loan pledged as collateral under this facility unless certain conditions have been met and requires the borrower to deliver current financial statements to the Company. Under the terms of the MU Credit Facility, the Company has established a lockbox maintained for the benefit of Lender that will receive all payments made by collateral obligors. The Company’s obligation to repay the outstanding balance on this facility may be accelerated upon the occurrence of an “Event of Default” as defined in the MU Credit Facility. Such Events of Default include, among others, failure to make timely payments due under the MU Credit Facility and the
			
		
Company's breach of any of its covenants. As of December 31, 2016 and December 31, 2015, the Company was in compliance with its covenants under the MU Credit Facility.
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WesCorp Facility
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On November 4, 2011, the Company and the National Credit Union Administration Board As Liquidating Agent of Western Corporate Federal Credit Union (previously herein defined as “Lender”) entered into a $23.5 million credit facility refinancing transaction (the “WesCorp Credit Facility Extension”). The WesCorp Credit Facility Extension amends, restates and replaces a credit facility entered into by and between the Company and Western Corporate Federal Credit Union on November 30, 2009. Under the WesCorp Credit Facility Extension, accrued interest is due and payable monthly in arrears on the first day of each month at the lesser of the maximum rate permitted by applicable law under the loan documents or 2.525%. The term loan may be repaid or retired without penalty, but any amounts repaid or prepaid under the WesCorp Credit Facility Extension may not be re-borrowed. The WesCorp Credit Facility Extension requires monthly principal and interest payments of $106 thousand. As of December 31, 2016 and 2015, $19.2 million and $20.0 million, respectively, was outstanding on the WesCorp Credit Facility Extension. Effective as of November 30, 2016, the Company and the Lender agreed to amend the terms of the facility. Under the amended terms of the facility, the required minimum monthly payment was increased to $129 thousand in and the facility will mature on November 1, 2026, at which point the final principal payment will be due.
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The WesCorp Credit Facility Extension includes a number of borrower covenants, including affirmative covenants to maintain the collateral free of liens, to timely pay the amounts due on the facility, to provide the Lender with interim or annual financial statements and annual and periodic reports filed with the U.S. Securities and Exchange Commission and maintain a minimum collateralization ratio of at least 110% (120% for the MU Credit Facility and Wescorp Facility combined). If at any time the Company fails to maintain its required minimum collateralization ratio, it will be required to deliver cash or qualifying mortgage loans in an amount sufficient to enable it to meet its obligation to maintain a minimum collateralization ratio. As of December 31, 2016 and 2015, the collateral securing the WesCorp Credit Facility Extension had an aggregate principal balance of $26.9 million and $25.7 million, respectively. In total, the collateral securing both facilities at December 31, 2015 did not satisfy the 120% minimum collateralization ratio required by the amended agreement. The Company pledged $686 thousand in cash to satisfy the deficit in loan collateral at December 31, 2015. The total collateral pledged, including loans receivable and cash, satisfies the requirements of the amended credit facility agreements. The loan collateral securing the facility was sufficient at December 31, 2016.
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As of December 31, 2016 and 2015, the Company was in compliance with its covenants under the Wescorp Credit Facility Extension.
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Future principal paydowns of borrowings from financial institutions are as follows at December 31:
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Amendments to our Credit Facility Agreements
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On March 30, 2015, the Company and the NCUA agreed to an Amendment to the Loan and Security Agreement (the “LSA Amendments”) for both the MU Credit Facility and the WesCorp Credit Facility Extension. Under the terms of the LSA Amendments, the following changes to our credit facility agreements were made:
			
		
Effective November 30, 2016, the Company and the lender reached an agreement to amend both the MU Credit Facility and the Wescorp Credit Facility Extension to change the maturity date of the facilities from October 31, 2018 to November 1, 2026. As part of this amendment, the required monthly payments on both facilities were increased. The remaining principal owed on the facilities will be due and payable on November 1, 2026.
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Note 10.Commitments and Contingencies
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Credit-Related Financial Instruments
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The Company is a party to credit-related financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include unadvanced lines of credit, and standby letters of credit. Such commitments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the balance sheet.
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The Company’s exposure to credit loss is represented by the contractual amount of these commitments. The Company uses the same credit policies in making commitments as it does for on-balance-sheet instruments. At December 31, 2016 and December 31, 2015, the following financial instruments were outstanding whose contract amounts represent credit risk:
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Undisbursed loans are commitments for possible future extensions of credit to existing customers. These loans are sometimes unsecured and may not necessarily be drawn upon to the total extent to which the Company is committed. Commitments to extend credit are generally at variable rates.
			
		
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Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loans to customers.
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Contingencies
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In the normal course of business, the Company may become involved in various legal proceedings. In the opinion of management, any liability resulting from such proceedings would not have a material adverse effect on the financial statements.
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Operating Lease Commitments
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The Company has lease commitments covering its offices in Brea and Fresno, California. At December 31, 2016, future minimum rental payments for the years ending December 31 are as follows:
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Total rent expense, including common area costs, was $147 thousand and $143 thousand for the years ended December 31, 2016 and 2015, respectively. The Brea office lease expires in 2018 and contains one additional option to renew for five years.
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The Fresno office lease is scheduled to expire in 2018. There are no options to renew in the lease extension.
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Note 11.Notes Payable
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Notes payable comprised unsecured and secured notes totaling $57.2 million and $3.4 million, respectively, at December 31, 2016. Notes payable comprised of unsecured and secured notes totaling $47.6 million and $2.3 million, respectively, at December 31, 2015. The notes are payable to investors who have purchased the securities, including individuals, churches, and Christian ministries, many of whom are members of ECCU or ACCU. Notes pay interest at stated spreads over an index rate that is adjusted every month. Interest can be reinvested or paid at the investor's option. The Company may repurchase all or a portion of notes at any time at its sole discretion, and may allow investors to redeem their notes prior to maturity at its sole discretion.
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In April 2008, the Company registered with the SEC $80.0 million of new Class A Notes in three series, including a Fixed Series, Flex Series and Variable Series. This was a "best efforts" offering and continued through April 30, 2010. The Company registered an additional $100.0 million of Class A notes on both June 3, 2010 and May 4, 2011. The offering included three categories of notes, including a fixed interest note, a variable interest note, and a flex note, which allows borrowers to increase their interest rate once a year with certain limitations. The Class A Notes contained restrictive covenants pertaining to paying dividends, making redemptions, acquiring, purchasing or making certain payments, requiring the maintenance of minimum tangible net worth, limitations on the issuance of additional notes and incurring of indebtedness. The Class A Notes required the Company to maintain a minimum tangible adjusted net worth, as defined in the Class A Notes Trust Indenture
			
		
Agreement, of not less than $4.0 million. The Company was in compliance with these covenants as of December 31, 2016 and 2015.
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The Class A Notes were issued under a Trust Indenture between the Company and U.S. Bank National Association (“US Bank”). The Class A Note Offering expired on December 31, 2015 and the Company discontinued the sale of its Class A Notes. At December 31, 2016 and 2015, $17.3 million and $25.4 million of these notes were outstanding, respectively.
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In January 2015, the Company registered with the SEC $85.0 million of new Class 1 Notes in two series, including a Fixed Series and Variable Series. This is a "best efforts" offering and will continue through December 31, 2017. The offering includes two categories of notes, including a fixed interest note and a variable interest note. The interest rates the Company will pay on the Fixed Series Notes are determined by reference to the Swap Index, an index that is based upon a weekly average Swap rate reported by the Federal Reserve Board, and is in effect on the date they are issued. These notes bear interest at the Swap Index plus a rate spread of 1.7% to 2.5% and have maturities ranging from 12 to 60 months. The interest rates the Company pays on the Variable Series Notes are determined by reference to the Variable Index in effect on the date the interest rate is set and bear interest at a rate of the Swap Index plus a rate spread of 1.50% to 1.80%. Effective as of January 6, 2015, the Variable Index is defined under the Class 1 Notes as the three month LIBOR rate.
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The Class 1 Notes also contain restrictive covenants pertaining to paying dividends, making redemptions, acquiring, purchasing or making certain payments, requiring the maintenance of minimum tangible net worth, limitations on the issuance of additional notes and incurring of indebtedness. The Class 1 Notes require the Company to maintain a minimum tangible adjusted net worth, as defined in the Class 1 Notes Trust Indenture Agreement, of not less than $4.0 million. The Company is not permitted to issue any Class 1 Notes if, after giving effect to such issuance, the Class 1 Notes then outstanding would have an aggregate unpaid balance exceeding $125.0 million. The Company’s other indebtedness, as defined in the Class 1 Notes Trust Indenture Agreement, and subject to certain exceptions enumerated therein, may not exceed $20.0 million outstanding at any time while any Class 1 Notes are outstanding. The Company was in compliance with these covenants as of December 31, 2016.
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The Class 1 Notes were issued under a Trust Indenture between the Company and U.S. Bank National Association (“US Bank”). The Class 1 Notes are part of up to $300 million of Class 1 Notes the Company may issue pursuant to the US Bank Indenture. At December 31, 2016 and 2015, $32.9 million and $15.9 million of Class 1 Notes were outstanding, respectively.
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In January 2015, the Company began offering Secured Investment Certificates under a new private placement memorandum pursuant to the requirements of Rule 506 of Regulation D. Under this offering, the Company may sell up to $80.0 million in Secured Investment Certificates to qualified investors. The certificates require as collateral either cash pledged in the amount of 100% of the outstanding balance of the certificates or loans receivable pledged in the amount of 105% of the outstanding balance of the certificates. At December 31, 2016, a total of $3.4 million in Secured Investment Certificates were outstanding. The collateral securing the Secured Investment Certificates had an outstanding balance that totaled $2.9 million, which is not sufficient to satisfy the minimum collateral requirement of the private placement memorandum. As a result, the Company pledged $600 thousand in cash to meet the minimum collateralization requirements of the Secured Investment Certificates.
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In February 2013, the Company launched the sale of its Series 1 Subordinated Capital Notes pursuant to a limited private offering to qualified investors that meet the requirements of Rule 506 of Regulation D. The Series 1 Subordinated Capital Notes have been offered with maturity terms from 12 to 60 months at an interest rate fixed on the date of issuance, as determined by the then current seven-day average rate reported by the U.S. Federal Reserve Board for interest rate swaps. At December 31, 2016 and 2015, a total of $5.1 million and $3.4 million in notes sold pursuant to this offering were outstanding, respectively.
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In March 2013, the Company launched the sale of a new private offering of its 2013 International Notes. This offering was made only to qualified investors that meet the requirements of Rule 902 of Regulation S. Including International Notes sold under previous private offerings, at December 31, 2016 and 2015, a total of $54 thousand and $52 thousand of its International Notes were outstanding, respectively.
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Under the Series 1 Subordinated Capital Notes and 2013 International Notes offerings, the Company is subject to certain covenants, including limitations on restricted payments, limitations on the amount of notes that can be sold, restrictions on mergers and acquisitions, and proper maintenance of books and records. The Company was in compliance with these covenants at December 31, 2016.
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A summary of notes payable at December 31 is as follows (dollars in thousands):
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The following are maturities of notes payable for each of the next five years ending December 31 (dollars in thousands):
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Note 12.Office Operations and Other Expenses
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Office operations and other expenses for the year ended December 31 comprise the following:
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Note 13.Preferred and Common Units Under LLC Structure
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The Series A Preferred Units are entitled to a cumulative Preferred Return, payable quarterly in arrears, equal to the liquidation preference times a dividend rate of 190 basis points through March 2013 and 25 basis points thereafter over the 1-year LIBOR rate in effect on the last day of the calendar month in which the Preferred Return is paid. In addition, the Series A Preferred Units are entitled to an annual Preferred Distribution, payable in arrears, equal to 10% of the Company’s profits, after subtracting from profits the Preferred Return. The Company accrued $72 thousand and $23 thousand as an annual Preferred Distribution at December 31, 2016 and 2015, respectively.
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The Series A Preferred Units have a liquidation preference of $100 per unit; have no voting rights; and are subject to redemption in whole or in part at the Company’s election on December 31 of any year, for an amount equal to the liquidation preference of each unit, plus any accrued and unpaid Preferred Return and Preferred Distribution on such units. The Preferred Units have priority as to earnings and distributions over the Common Units. The resale of the Company’s Preferred Units and Common Units are subject to the Company’s first right of refusal to purchase units proposed to be transferred. Upon the Company’s failure to pay a Preferred Return for four consecutive quarters, the holders of the Series A Preferred Units have the right to appoint two managers.
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The Class A Common Units have voting rights.
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Note 14.Retirement Plans
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401(k)
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Employees who are at least 21 years of age are eligible to participate in the ADP 401(k) plan upon the hire date. No minimum service is required and the minimum age is 21. Each employee may elect voluntary contributions not to exceed 60% of salary, subject to certain limits based on Federal tax law. The plan has a matching program, which qualifies as a Safe Harbor 401(k) plan. As a Safe Harbor Section 401(k) plan, the Company matches each eligible employee’s contribution, dollar for dollar, up to 3% of the employee’s compensation and 50% of the employee’s contribution that exceeds 3%, up to a maximum of 5% of the employee’s compensation. Company matching contributions for the plan years ended December 31, 2016 and 2015 were $73 thousand and $81 thousand, respectively.
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Profit Sharing
The profit sharing plan is for all employees who, at the end of the calendar year, are at least 21 years old, still employed, and have at least 900 hours of service during the plan year. The amount annually contributed on behalf of each qualified employee is determined by the managers, and is calculated as a percentage of the eligible employee's annual earnings. There were no contributions to the profit sharing plan for the years ended December 31, 2016 and 2015.
			
		
Note 15.Fair Value
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Fair Value of Financial Instruments
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The carrying amounts and estimated fair values of financial instruments at December 31 are as follows (dollars in thousands):
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Management uses judgment in estimating the fair value of the Company’s financial instruments; however, there are inherent weaknesses in any estimation technique. Therefore, for substantially all financial instruments, the fair value estimates presented herein are not necessarily indicative of the underlying value of the Company, or the amounts the Company could have realized in a sales transaction at December 31, 2016 and 2015.
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The following methods and assumptions were used to estimate the fair value of financial instruments:
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Cash - The carrying amounts reported in the consolidated balance sheets approximate fair value for cash.
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Loans - Fair value is estimated by discounting the future cash flows using the current average rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities.
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Investments - Fair value is estimated by determining the value of similar assets or the projected future cash flows from the investment.
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Accrued Interest Receivable - The carrying amounts reported in the consolidated balance sheets approximate fair value as these receivables are short-term in nature.
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Notes Payable - The fair value of fixed maturity notes is estimated by discounting the future cash flows using the rates currently offered for notes payable of similar remaining maturities.
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Borrowings from Financial Institutions - The fair values of borrowings from financial institutions are estimated using discounted cash flow analyses based on current incremental borrowing rates for similar types of borrowing arrangements.
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Other Financial Liabilities - The carrying amounts reported in the consolidated balance sheets approximate fair value as these payables are short-term in nature.
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Off-Balance Sheet Instruments - The fair value of loan commitments is based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties' credit standing. The fair value of loan commitments is insignificant at December 31, 2016 and 2015.
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Fair Value Measurements Using Fair Value Hierarchy
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The following section describes the valuation methodologies used for assets measured at fair value as well as the general classification of such instruments pursuant to the valuation hierarchy.
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Fair value hierarchy for valuation gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The fair value hierarchy is as follows:
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Level 1 inputs are quoted prices (unadjusted) for identical assets or liabilities in active markets.
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Level 2 inputs include quoted prices for similar assets and liabilities in active markets, quoted prices for identical assets and liabilities in inactive markets, inputs that are observable for the asset or liability (such as interest rates, prepayment speeds, credit risks, etc.), or inputs that are derived principally from or corroborated by observable market data by correlation or by other means.
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Level 3 inputs are unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the level in the fair value hierarchy within which the fair value
			
		
measurement in its entirety falls has been determined based on the lowest level input that is significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset or liability.
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The following section describes the valuation methodologies used for assets measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy.
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Fair Value Measured on a Nonrecurring Basis
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Certain assets are measured at fair value on a nonrecurring basis; that is, the assets are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment). The following table presents such assets carried on the balance sheet by caption and by level within the valuation hierarchy (dollars in thousands):
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Impaired Loans
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Collateral-dependent impaired loans are carried at the fair value of the collateral less estimated costs to sell. The fair value of collateral is determined based on appraisals. In some cases, adjustments were made to the appraised values for various factors including age of the appraisal, age of comparable properties included in the appraisal, and known changes in the market and in the collateral. When significant adjustments were based on unobservable inputs, the resulting fair value measurement has been categorized as a Level 3 measurement. Otherwise, collateral-dependent impaired loans are categorized under Level 2. Because of the uncertain market, fair value for collateral-dependent loans based on appraisals more than 30 days old were deemed to involve significant adjustments based on unobservable inputs.
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Joint Venture Investment
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Joint venture investments are initially recorded at the estimated value of the assets contributed to the joint venture. After the initial contribution, the recorded value of the joint venture is
			
		
adjusted by the Company’s prorated share of income and expenses earned and incurred by the joint venture. The Company also performs a periodic impairment analysis to determine whether the value of the joint venture based on the type of investment, the potential market for the investment, and the plan for disposing of the investment indicates is lower than the recorded value of the joint venture. An impairment charge will be recorded on the investment if the analysis reveals any impairment to the asset’s value.
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Foreclosed Assets
Real estate acquired through foreclosure or other proceedings (foreclosed assets) is initially recorded at fair value at the date of foreclosure less estimated costs of disposal, which establishes a new cost. After foreclosure, valuations are periodically performed and foreclosed assets held for sale are carried at the lower of cost or fair value, less estimated costs of disposal. The fair values of real properties initially are determined based on appraisals. In some cases, adjustments were made to the appraised values for various factors including age of the appraisal, age of comparables included in the appraisal, and known changes in the market or in the collateral. Subsequent valuations of the real properties are based on management estimates or on updated appraisals. Foreclosed assets are categorized under Level 3 when significant adjustments are made by management to appraised values based on unobservable inputs. Otherwise, foreclosed assets are categorized under Level 2 if their values are based solely on appraisals.
The following is a reconciliation of the assets for which significant unobservable inputs (Level 3) were used in determining fair value (dollars in thousands) for the years ended December 31, 2016 and 2015:
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The following tables present the valuation methodology and unobservable inputs for level 3 assets measured at fair value on a non-recurring basis at December 31:
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Note 16.Income Taxes and State LLC Fees
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The Company is subject to a California gross receipts LLC fee of approximately $12,000 per year. MP Securities is subject to a California gross receipts LLC fee of approximately $6,400 for the year ended December 31, 2016. MP Realty incurred a tax loss for the years ended December 31, 2016 and 2015, and recorded a provision of $800 per year for the state minimum franchise tax.
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MP Realty has federal and state net operating loss carryforwards of approximately $319,000 and $316,000, respectively which begin to expire in 2030. Management assessed the realizability of the deferred tax asset and determined that a 100% valuation against the deferred tax asset was appropriate at December 31, 2016 and 2015.
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Tax years ended December 31, 2011 through December 31, 2016 remain subject to examination by the Internal Revenue Service and the tax years ended December 31, 2010 through December 31, 2016 remain subject to examination by the California Franchise Tax Board.
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Note 17.Segment Information
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Reportable Segments
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The Company's reportable segments are strategic business units that offer different products and services. They are managed separately because each business requires different management, personnel proficiencies, and marketing strategies.
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There are two reportable segments: finance company and broker-dealer. The finance company segment uses funds from the sale of debt securities, operations, and loan participations to originate or purchase mortgage loans. The broker-dealer segment sells debt securities, mutual funds, and insurance products, and provides investment advisory services to generate fee income.
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The accounting policies applied to determine the segment information are the same as those described in the summary of significant accounting policies. Intersegment revenues and expenses are accounted for at amounts that assume the transactions were made to unrelated third parties at the current market prices at the time of the transactions.
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Management evaluates the performance of each segment based on net income or loss before provision for income taxes and LLC fees.
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Financial information with respect to the reportable segments is as follows (dollars in thousands):
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The following schedules are presented to reconcile amounts in the foregoing segment information to the amounts reported in the Company's consolidated financial statements (dollars in thousands).
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Note 18.Condensed Financial Statements of Parent Company
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Financial information pertaining only to the parent company, Ministry Partners Investment Company, LLC, is as follows:
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﻿Item 9.
Item 11. EXECUTIVE COMPENSATION
The following table sets forth certain information regarding compensation we paid for services rendered to us during the years ended December 31, 2016 and 2015 by our senior executive officers.
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Summary Compensation Table
Annual Compensation
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(1) We accrued amounts for each Manager for their service on the Board during 2016 which were paid in January 2017. The Board members elected not to receive any compensation for their service during the year ended December 31, 2015.
(2) We have paid or accrued a total of $233,898 for Mr. Overholt’s severance pay, 401(k) retirement plan, medical benefits and life and disability insurance for 2015. This includes $221,888 accrued for severance pay and medical benefits as stipulated in a severance agreement entered into in December 2015 as part of Mr. Overholt’s retirement.
(3) We contributed an aggregate amount of $18,111 for Ms. Reilly's 401(k) retirement plan, medical benefits and life and disability insurance for 2015. We contributed an aggregate amount of $31,902 for Mr. Woodall's 401(k) retirement plan, medical benefits and life and disability insurance for 2015. We contributed an aggregate amount of $40,958 for Mr. Turner’s 401(k) retirement plan, medical benefits and life and disability insurance for 2015. Per his employment agreement, we also compensated Mr. Turner $9,626 for moving related expenses incurred in 2015 when he moved to Brea, California.
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(4) We contributed an aggregate amount of $41,503 for Mr. Turner's 401(k) retirement plan, medical benefits and life and disability insurance for 2016. We contributed an aggregate amount of $31,723 for Mr. Woodall's 401(k) retirement plan, medical benefits and life and disability insurance for 2016. We contributed an aggregate amount of $3,438 for Mr. Flude's 401(k) retirement plan, medical benefits and life and disability insurance for 2016.
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(5) We contributed an aggregate amount of $11,687 for Ms. Reilly's 401(k) retirement plan, medical benefits and life and disability insurance for 2016. W paid Ms. Reilly $77,532 in severance payments in 2016 as a result of the Company’s management restructuring and reorganization plan which was announced in 2016.
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(6) Mr. Flude was not an executive officer of the Company for the year ending December 31, 2015.
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No options, warrants or other rights to purchase our equity securities have been issued to our officers.
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In February 2014, the Board approved the payment of compensation grants to Managers of the Board effective as of January 1, 2013. Under the grants approved by the Board, each Manager will receive a cash grant for serving on the Board, and will receive additional amounts for attendance at each Board meeting and for serving as a Chairperson of one of our Board Committees. Each Manager is also entitled to be reimbursed for expenses incurred in performing duties on our behalf. The Managers elected not to receive compensation awards for the year ended December 31, 2015. For the year ended December 31, 2016, we accrued $68 thousand in compensation awards for our Managers. These awards were paid in January 2017.
			
		
			
		
			
		
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﻿Item 12.
Item 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Before our principal accountant is engaged by us to render audit or non-audit services, where required by the rules and regulations promulgated by the Securities and Exchange Commission, such engagement is approved by our Audit Committee.
The aggregate fees billed by our accounting firm, Hutchinson and Bloodgood LLP, for the years ended December 31 were as follows:
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Our Audit Committee has considered whether the provision of the non-audit services described above is compatible with maintaining our auditors’ independence and determined that such services are appropriate.
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Item 15.
Item 15. EXHIBITS
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Exhibit No.
Description
3.1
Articles of Organization - Conversion of Ministry Partners Investment Company, LLC, dated as of December 31, 2008 (1)
3.2
Operating Agreement of Ministry Partners Investment Company, LLC, dated as of December 31, 2008 (1)
3.3
Plan of Conversion of Ministry Partners Investment Corporation, dated September 18, 2008 (1)
3.4
Series A Preferred Unit Certificate of Ministry Partners Investment Company, LLC, dated as of December 31, 2008 (1)
3.5
First Amendment to the Operating Agreement of Ministry Partners Investment Company, LLC, effective as of February 11, 2010 (2)
3.6
Amended and Restated Certificate of Designation of the Powers, Designations, Preferences and Rights of Series A Preferred Units, effective as of May 23, 2013 (3)
10.1
$10 Million Committed Line of Credit Facility and Security Agreement, dated October 8, 2007 (4)
10.2
$50 Million CUSO Committed Line of Credit Facility and Security Agreement, dated October 8, 2007 (4)
10.3
Loan and Security Agreement dated November 4, 2011, by and between Ministry Partners Investment Company, LLC and The National Credit Union Administration Board as Liquidating Agent of Western Corporate Federal Credit Union (5)
10.4
Loan and Security Agreement dated November 4, 2011, by and between Ministry Partners Investment Company, LLC and The National Credit Union Administration Board as Liquidating Agent of Members United Corporate Federal Credit Union (5)
10.5
CUSO Line of Credit Facility Note and Security Agreement, dated May 14, 2008, executed by Ministry Partners Investment Corporation in favor of Members United Corporate Federal Credit Union (5)
10.6
Office Lease, dated November 4, 2008, by and between Ministry Partners Investment Corporation and Evangelical Christian Credit Union (5)
10.7
Equipment Lease, dated as of January 1, 2009, by and between Ministry Partners Investment Company, LLC and Evangelical Christian Credit Union (6)
10.8
Professional Services Agreement, dated as of January 1, 2009, by and between Ministry Partners Investment Company, LLC and Evangelical Christian Credit Union (6)
			
		
			
		
			
		
10.9
Form of Individual Manager Indemnification Agreement (7)
10.10
Confidential Severance and Release Agreement by and between Ministry Partners Investment Company LLC and Billy M. Dodson, effective November 8, 2013 (8)
10.11
Interim CEO Employment Agreement by and between Ministry Partners Investment Company LLC and James. H. Overholt, effective November 12, 2013 (9)
10.12
Employment Agreement by and between Ministry Partners Investment Company, LLC and James H. Overholt, effective May 13, 2014 (10)
10.13
Loan and Security Agreement by and between Ministry Partners Investment Company, LLC and Ministry Partners Funding, LLC dated December 15, 2014 (10)
10.14
Managing Broker Dealer Agreement by and between Ministry Partners Investment Company, LLC and Ministry Partners Securities, LLC, dated January 6, 2015 (11)
10.15
Amendment to Loan and Security Agreement by and between The National Credit Union Administration Board As Liquidating Agent of Members United Corporate Federal Credit Union and Ministry Partners Investment Company, LLC dated March 30, 2015. (13)
10.16
Amendment to Loan and Security Agreement by and between The National Credit Union Administration Board As Liquidating Agent of Western Corporate Federal Credit Union and Ministry Partners Investment Company, LLC dated March 30, 2015. (13)
10.17
Employment Agreement by and between Ministry Partners Securities, LLC and Joseph Turner dated May 27, 2015. (14)
10.18
Severance and Release Agreement dated January 7, 2016. (15)
10.19
Employment Agreement by and between Ministry Partners Securities, LLC and Joseph Turner dated May 5, 2016. (16)
10.20
Separation and Release Agreement dated September 7, 2016. (17)
10.21
Amendment and Modification of Promissory Note by and between The National Credit Union Administration Board As Liquidating Agent of Members United Corporate Federal Credit Union and Ministry Partners Investment Company, LLC dated November 30, 2016. (18)
10.22
Amendment and Modification of Promissory Note by and between The National Credit Union Administration Board As Liquidating Agent of Western Corporate Federal Credit Union and Ministry Partners Investment Company, LLC dated November 30, 2016. (18)
14.1
Code of Ethics for Ministry Partners Investment Company, LLC, effective as of February 11, 2010 (2)
21.1
List of Subsidiaries (*)
			
		
			
		
			
		
23.1
Consent of Hutchinson and Bloodgood LLP (*)
31.1
Certification of Principal Executive Officer pursuant to Rule 13a-14(a) or Rule 15(d)-14(a) (*)
31.2
Certification of Principal Financial and Accounting Officer pursuant to Rule 13a-14(a) or Rule 15(d)-14(a) (*)
32.1
Certification of Principal Executive Officer and Principal Accounting Officer pursuant to 18 U.S.C. §1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (*)
101.ins
XBRL Taxonomy Extension Definition Linkbase Document **
101.sch
XBRL Taxonomy Extension Schema Document **
101.def
XBRL Taxonomy Extension Definition Linkbase Document **
101.cal
XBRL Taxonomy Extension Calculation Linkbase Document **
101.lab
XBRL Taxonomy Extension Label Linkbase Document **
101.pre
XBRL Taxonomy Extension Presentation Linkbase Document **
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(1)
Incorporated by reference to the Current Report on Form 8-K filed by the Company on December 22, 2008.
(2)
Incorporated by reference to the Report on Form 10-K filed by the Company on March 31, 2010.
(3)
Incorporated by reference to the Current Report on Form 8-K filed by the Company on May 23, 2013.
(4)
Incorporated by reference to the Report on Form 8-K filed by the Company on October 15, 2007, as amended.
(5)
Incorporated by reference to the Report on Form 10-K filed by the Company on April 14, 2009.
(6)
Incorporated by reference to the Report on Form 10-K/A filed by the Company on April 3, 2012.
(7)
Incorporated by reference to Exhibit 10.20 to the Registration Statement on Form S-1 filed by the Company on June 24, 2014.
(8)
Incorporated by reference to Exhibit 10.1 of the Report on Form 10-Q filed by the Company on November 14, 2013.
			
		
			
		
			
		
(9)
Incorporated by reference to the Current Report on Form 8-K filed by the Company on January 7, 2014.
(10)
Incorporated by reference to Exhibit 10.30 of the Report on Form 10-Q filed by the Company on May 15, 2014.
(11)
Incorporated by reference to Exhibit 1.0 to the Registration Statement on Form S-1 filed by the Company on June 24, 2014
(13)
Incorporated by reference to the Current Report on Form 8-K filed by the Company on April 9, 2015.
(14)
Incorporated by reference to the Current Report on Form 8-K filed by the Company on June 3, 2015.
(15)
Incorporated by reference to the Current Report on Form 8-K filed by the Company on January 12, 2016.
(16)
Incorporated by reference to the Current Report on Form 8-K filed by the Company on May 11, 2016.
(17)
Incorporated by reference to the Current Report on Form 8-K filed by the Company on September 13 2016.
(18)
Incorporated by reference to the Current Report on Form 8-K filed by the Company on December 5, 2016.
*
Filed herewith.
**
Furnished, not filed, herewith.
﻿
﻿
			
		
			
		
			
		
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
MINISTRY PARTNERS INVESTMENT
COMPANY, LLC
Dated: March 29, 2017By: /s/ Joseph W. Turner
Joseph W. Turner,
Chief Executive Officer
(Principal Executive Officer)
﻿
Dated: March 29, 2017By: /s/ Daniel A. Flude
Daniel A. Flude,
Vice President, Finance
(Principal Accounting Officer)
﻿
			
		
			
		
			
		
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed by the following persons on behalf of the Company and in the capacities and on the dates indicated.
﻿
﻿
/s/ Joseph W. Turner
Chief Executive Officer (Principal Executive Officer)
Date: March 29, 2017
﻿
/s/ Daniel A. Flude
Vice President, Finance (Principal Accounting Officer)
Date: March 29, 2017
﻿
/s/ R. Michael Lee
Chairman, Board of Managers
Date: March 29, 2017
﻿
/s/ Van C. Elliott
Secretary, Manager
Date: March 29, 2017
﻿
/s/ Mendell Thompson
Manager
Date: March 29, 2017
﻿
/s/ Juli Anne S. Lawrence
Manager
Date: March 29, 2017
﻿
/s/ Jeffrey T. Lauridsen
Manager
Date: March 29, 2017
﻿
/s/ Jerrod L.Foresman
Manager
Date: March 29, 2017
﻿
/s/ Abel Pomar
Manager
Date: March 29, 2017
﻿
﻿