SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
☑ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2013
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________ to_________
Commission file number: 333-4028LA
MINISTRY PARTNERS INVESTMENT COMPANY, LLC
(Exact name of small business issuer in its charter)
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CALIFORNIA (State or other jurisdiction of incorporation or organization) | 26-3959348 (I.R.S. Employer Identification No.)
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915 West Imperial Highway, Suite 120, Brea, California 92821
(Address of principal executive offices)
Issuer’s telephone number: (714) 671-5720
Securities registered under 12(b) of the Exchange Act: None
Securities registered under 12(g) of the Exchange Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☑.
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes ☐ No ☑.
Indicate by check mark whether the issuer (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☑ No ☐. The Issuer has filed all Securities Exchange Act reports for the preceding twelve months.
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☑No ☐.
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☑.
Indicate by check mark whether registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
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Large accelerated filer ☐ | Accelerated filer ☐ | Non-accelerated filer ☐ | Smaller reporting company filer ☑ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☑.
As of December 31, 2008 (the last date any sale or exchange was made of our Class A common units), the aggregate market value of the registrant’s Class A common units held by non‑affiliates was $1,809,572. The registrant has sold no Class A common units within the past sixty days and there is no public market value for the registrant’s Class A common units. The number of Class A common units outstanding, as of March 28, 2014, was 146,522.
DOCUMENTS INCORPORATED BY REFERENCE
None
MINISTRY PARTNERS INVESTMENT COMPANY, LLC
FORM 10-K
TABLE OF CONTENTS
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Part I |
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| Item 1. | 2 | |
| Item 1A. | 28 | |
| Item 1B. | 46 | |
| Item 2. | 46 | |
| Item 3. | 48 | |
| Item 4. | 48 | |
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Part II |
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| Item 5. | Market for our Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities | 49 |
| Item 6. | 50 | |
| Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 51 |
| Item 7A. | 86 | |
| Item 8. | F-1 - F-43 | |
| Item 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure | 91 |
| Item 9A. | 91 | |
| Item 9B. | 92 | |
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Part III |
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| Item 10. | 92 | |
| Item 11. | 99 | |
| Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters | 101 |
| Item 13. | Certain Relationships and Related Transactions, and Director Independence | 102 |
| Item 14. | 104 | |
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Part IV |
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| Item 15. | 105 | |
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| 108 | ||
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EXHIBIT INDEX |
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Explanatory Note for Purposes of the “Safe Harbor Provisions” of Section 21E of the Securities Exchange Act of 1934, as amended
Certain statements in this report, other than purely historical information, including estimates, projections, statements relating to our business plans, objectives and expected operating results, and the assumptions upon which those statements are based, are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward‑looking statements are included with respect to, among other things, our current business plan, business strategy and portfolio management. These forward-looking statements generally are identified by the words “believe,” “project,” “expect,” “anticipate,” “estimate,” “intend,” “strategy,” “plan,” “may,” “should,” “will,” “would,” “will be,” “will continue,” “will likely result,” and similar expressions. Forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties which may cause actual results or outcomes to differ materially from those contained in the forward-looking statements. Important factors that we believe might cause such differences are discussed in the section entitled, “Risk Factors” in Part I, Item 1A of this Form 10-K or otherwise accompany the forward-looking statements contained in this Form 10-K. We undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise. In assessing all forward-looking statements, readers are urged to read carefully all cautionary statements contained in this Form 10-K.
MINISTRY PARTNERS ®, MINISTRY PARTNERS INVESTMENT COMPANY, LLC JOY IN INVESTING ® and the Ministry Partners logo and design of a flower with two shaded leaves are all trademarks or service marks owned by Ministry Partners Investment Company, LLC and registered with the U.S. Patent and Trademark Office.
PART I
Our Company
We are a privately owned California limited liability company with 12 equity owners, 11 of whom are federal or state chartered credit unions and one of whom is the Asset Management Assistance Center of the National Credit Union Administration (“we”, “us”, “our” or the “Company”). We exist to help make evangelical ministries more effective by providing ministries with Biblically-based, value-driven financial services and by providing funding services to the credit unions who serve those ministries. We do this by investing in mortgage loans made to churches and ministries. These loans are typically originated by credit unions and secured by church and church-related real property owned by and/or maintained for the benefit of evangelical churches or church-related organizations such as Christian schools and ministries. When the Company was formed, substantially all of the mortgage loans in our loan portfolio were purchased from our largest equity investor, the Evangelical Christian Credit Union of Brea,
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California (“ECCU”), and ECCU acted as our underwriter and primary servicer for a significant portion of those loans.
In recent years, we have developed the capability to originate and service loans ourselves and an increasing proportion of our portfolio is now originated and serviced by us. As of December 31, 2013, we owned a total of 138 mortgage loans, with an outstanding principal balance of $150.7 million. As of the date of this Report, we service 107 of these mortgage loan interests. The average loan balance for our mortgage loan investments is $1.1 million and our loans have a weighted average life to maturity period of 5.6 years at December 31, 2013. Substantially all of our business operations currently are conducted in California and our mortgage loan investments are primarily concentrated in California.
We were incorporated under California law on October 22, 1991 under the name Ministry Partners Investment Corporation and established as a credit union service organization, or ("CUSO"), by ECCU for the purpose of providing mortgage loans to evangelical churches and ministry organizations. Effective as of December 31, 2008, we converted our form of organization from a California corporation to a California limited liability company. This conversion was a statutory conversion authorized under Section 1150 of the California Beverly Killea Limited Liability Company Act. Upon the conversion, we became, by operation of law, a California limited liability company. As a result of the conversion, our name changed to "Ministry Partners Investment Company, LLC.” Since the conversion became effective, we have been managed by a group of managers that carry out their duties similar to the role and function that the board of directors performed under our previous bylaws. Operating like a board of directors, the managers have full, exclusive and complete discretion, power and authority to oversee the management of our affairs.
To finance our mortgage loan investments, we obtain funds from the sale of our debt securities. We also obtain funds from lines of credit provided by various financial institutions and, from time to time, sell participation interests in our mortgage loan investments to generate additional funds. We market our debt securities primarily to investors who are in or associated with the Christian community, including individuals, ministries and other organizations and associations. As a CUSO, we invest in and originate loans made to evangelical churches and ministry organizations.
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. The funds for these acquisitions came primarily from a $150 million line of credit provided by Fairway Finance Company, LLC as lender and BMO Capital Market Corp., as agent (the “BMO Facility”). 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. MPF’s loan purchasing activity continued through early 2009, after which its operations ceased and its assets, including loans, were transferred to us. All liabilities of MPF have been paid off. We closed down the active operations of MPF effective December 31, 2009 but we have maintained MPF’s existence as a Delaware limited liability company for possible
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future use as a financing vehicle to offer, manage or sell debt securities and participate in debt financing transactions.
On November 13, 2009, we 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 our 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.
On April 26, 2010, we formed Ministry Partners Securities, LLC, a Delaware limited liability company (“MP Securities”). On July 6, 2010, MP Securities became a registered broker-dealer firm under Section 15 of the Securities Exchange Act of 1934. Effective as of March 2, 2011, MP Securities’ application for membership in the Financial Industry Regulatory Authority (“FINRA”) was approved. 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. In May 2012, MP Securities began selling Secured Investment Certificates issued by the Company pursuant to an offering to qualified investors that meet the requirements of Rule 506 of Regulation D, promulgated by the U.S. Securities and Exchange Commission (“SEC”). On September 24, 2012, MP Securities received a no objections letter from FINRA, thereby authorizing MP Securities to act as a selling agent for the Company’s Class A Notes offering under a registration statement declared effective by the SEC on October 11, 2012. In November 2012, MP Securities also began selling investments in mutual funds. In addition to serving as a selling agent for the Company’s Class A Notes and other debt securities, MP Securities will distribute debt securities issued by religious organizations and business members of credit unions the Company serves and may act as a selling agent in placing mortgage backed business loans made by credit unions to institutional investors.
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. Finally, on September 26, 2013, MP Securities entered into a clearing firm agreement with Royal Bank of Canada Dain Rauscher (RBC Dain), thereby enabling it to open brokerage accounts for its customers. In March 2013, the State of California approved the formation of Ministry Partners Insurance Agency. MP Securities can now offer a broad scope of investment products that enable it to better serve the Company’s clients and customers.
We are a California limited liability company and our principal executive offices are located at 915 West Imperial Highway, Suite 120, Brea, California 92821. Our telephone number is (714) 671-5720 and our website address is www.ministrypartners.org.
Our Business
We are a non-bank financial services company that conducts business on a national scope. We were organized for the specific purpose of assisting evangelical Christian churches and
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organizations by providing financing for the acquisition, development and/or renovation of churches or church-related properties, and to provide Christian investors the opportunity to participate in funding those projects.
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 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 the economic climate in the U.S. improves and real estate values in markets that have been adversely impacted by global economic conditions continue to improve, we believe 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 a business opportunity we intend to pursue.
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, more 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 intend to be an active participant in that market.
Our general practice in past years has been to fund loan acquisitions 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, 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.
Although in recent years we have primarily relied on credit facilities made available by institutional lenders to fund our mortgage loan investments, we are pursuing a strategy over the
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next few years that we believe will enable us to transition to a more diverse mix of financing sources. Our strategy includes the sale of debt securities 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 and expanding the sale of our debt securities through the efforts of our wholly-owned broker-dealer firm, MP Securities.
Our revenue is generated primarily from:
· | interest income earned on our mortgage loan investments; |
· | fee income generated from originating and servicing mortgage loans; |
· | gains realized on the sale of loans and loan participation interests to financial institutions; |
· | successful efforts to manage, liquidate or sell real estate assets and maximize loan recoveries on delinquent loans in our loan portfolio; and |
· | fee income generated from the sale of securities and investment products by our wholly-owned broker-dealer firm and fees received by our registered adviser for handling assets under management. |
During 2013, we successfully (i) increased our net interest margin from 2.82% to 3.03% through both the origination of high quality loans and recognition of deferred loan fee income resulting from the sale of loan participations; (ii) sold three foreclosed assets for a total of $345 thousand in gains on the sale of these properties; (iii) recouped $252 thousand in cash recoveries on one of our delinquent loans for which we had previously recorded reserves for loan losses through the diligent efforts of our lending and real estate management team; (iv) engaged a clearing firm for our wholly-owned broker dealer and investment adviser firm in October, 2013, thereby enabling the firm to hire registered investment adviser representatives and brokers to service their client’s investment accounts; (v) obtained regulatory approval from the State of California and FINRA for our wholly-owned broker-dealer firm, MP Securities, to begin acting as a registered investment adviser enabling us to increase the fees we earn; (vi) reduced our recorded investment in impaired loans through improved collections; and (vii) continued the process of implementing a strategy designed to diversify our revenue sources through the hiring of skilled staff that will allow us to pursue expansion of the services and investment products that MP Securities will be able to offer.
Our net income of $592 thousand for 2013 is the second highest in the Company’s history and primarily resulted from successful efforts to sell certain real estate owned assets held on our balance sheet, record cash recoveries on a delinquent loan for which we had previously taken reserves for loan losses, improving our net interest margin on our mortgage loan investments, and increasing non-interest income by transitioning most of our mortgage loan investments to servicing retained assets and through the sale of loan participation interests in some of our mortgage loan investments. For 2014, we intend to expand our efforts to leverage our loan portfolio by selling loan participation interests in our mortgage loan portfolio, hire new
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investment advisers and improve the profitability of our broker-dealer and registered investment advisory firm, MP Securities, improve the profitability of our core business assets, ramp up our mortgage lending initiatives and continue our efforts to actively manage and monitor our real estate assets and delinquent loans in our loan portfolio.
Lending Activities
Loan Origination, Acquisition and Underwriting
Over the last several years, we have expanded our in-house staff, improved our operational systems and underwriting resources which has enabled us to expand our ability to originate, underwrite and service our mortgage loan investments. From time to time, we also purchase mortgage loans and loan participation interests from other financial institutions. When we acquire a mortgage loan or loan participation interest, we apply our internally developed underwriting criteria and loan acquisition policies and review the underwriting procedures carried out by the financial institution that is selling the loan or participation interest. When we originate a loan, we rely entirely on our own underwriting capabilities and standards. Typically, we receive an origination fee and loan processing fee at the inception of each loan.
As a result of our increased focus on originating our own loans, we originated $32.7 million in loans during the year ended December 31, 2013, as compared to $9.7 million and $4.7 million in loans during the years ended December 31, 2012 and 2011, respectively. As a result of the efforts of our lending professionals, the Company now has the capacity, capability and underwriting experience to originate substantially all of our mortgage loan investments. In 2013, we also purchased $1.1 million in loans from ECCU. In 2012, we purchased $3.3 million in mortgage loans from ECCU as well as $9.1 million in mortgage loans and mortgage loan participations from other financial institutions.
Servicing
ECCU has been making mortgage loans for ministry related projects for over 40 years and has originated and currently provides loan servicing arrangements for more than $1.5 billion in mortgages held by investors. Based upon ECCU’s successful record in underwriting profitable and performing mortgage loans, we have entered into a servicing agreement with ECCU for some of our mortgage loan investments. As of December 31, 2013, ECCU was servicing 26 loans for us, totaling approximately $33.0 million in loan principal outstanding. As of December 31, 2012, ECCU was servicing 59 loans for us totaling $76.1 million in loan principal outstanding. As of December 31, 2013, we also own approximately $5.3 million in mortgage loan investments which are being serviced by America’s Christian Credit Union, a Glendora, California based credit union.
In 2010, we implemented a new core processing system. This system, as well as an increase in support staff, has allowed us to take on the servicing of loans previously serviced by ECCU or originated by us. As of December 31, 2013, we were servicing 107 loans, totaling approximately $112.5 million in loan principal outstanding. Even accounting for the cost of adding new staff and systems to increase our loan servicing capacity, we expect to achieve significant decreases in costs by servicing our loan portfolio over the next several years. Our servicing capability also
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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 four loans during the year ended December 31, 2013, which resulted in $54 thousand in gains on loan sales as well as an increase in $17 thousand in servicing fee income. Our technology platform enables us to process, record, transmit and account for all financial and operational data for the benefit of other credit unions, finance lenders, churches, financial institutions and investors. With these additional capabilities, we believe we will be able to continue to expand our loan servicing capabilities.
Types of Loans
We invest primarily in mortgage loans secured by liens on churches, church-related and/or ministry related properties. Generally, our loans are secured by first mortgage liens, but we may invest in loans secured by second liens or which are guaranteed junior secured obligations, or in unsecured loans, if such loans meet our loan criteria.
Permanent Loans
We acquire or originate mortgage loans that may have an adjustable interest rate or fixed rate. The term for a mortgage loan may not exceed 30 years and the maximum loan to value ratio may not exceed 90% without approval from our Board of Managers. Historically, our standard loan investments have been limited to five year maturities. Recently, however, we have begun making offers of ten year maturities on newly originated loans.
Construction Loans
Construction loans may be made to finance the construction or restoration of facilities for schools, worship facilities or ministry related purposes. These loans normally will have a final maturity that will not exceed five years, with a construction draw period that will not exceed 12 months. In most instances, construction loans are interest-only on the outstanding balance drawn for construction. Under our Church and Ministry Loan Policy, the maximum loan to value ratio for a construction loan is 90%. As of December 31, 2013, we had $774 thousand of construction loans outstanding.
Participation Interests
From time to time, we also invest in participation interests in secured mortgage loans, whereby we own a participation interest in a mortgage with a credit union or other lender. By investing in 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
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purchase a loan participation interest from a financial institution, we may have more limited access to the borrower and the lead lender is generally entitled to exercise discretionary power in administering performing loans and undertaking collection efforts in connection with any of its non-performing loans.
Due to our enhanced ability to originate and service our own loans, our investment in loan participations has been significantly reduced. As of December 31, 2013, approximately $28.7 million, or 19% of our total loan portfolio, consisted of loan participations we purchased from other financial institutions, including ECCU. For the year ended December 31, 2012, approximately $47.6 million, or 30% of our total loan portfolio, consisted of loan participations we purchased from other financial institutions.
Line of Credit
We may make line of credit arrangements available to borrowers to meet their temporary working capital needs. The term of such arrangements typically will not exceed one year and will provide for minimum interest payments during the term of the loan. For loans made to members of credit unions that are secured by real property, accounts receivable, and/or inventory, the maximum loan to value ratio is 90% based upon the current value of the collateral. As of December 31, 2013, we had $802 thousand in unfunded line of credit commitments as compared to $75 thousand in unfunded line of credit commitments at December 31, 2012.
Letters of Credit
Under our Church and Ministry Loan Policy, we are authorized to issue letters of credit granting the person named in the letter the right to demand payment from us for up to a specified amount provided the conditions set out in the letter are met. We require that a letter of credit be fully secured by funds on deposit or restricted funds on a line of credit with a draw period on the line of credit that meets or exceeds the draw period on the letter of credit. As of December 31, 2013, we had $1.9 million in outstanding letter of credit commitments.
Our Loan Policies
When we launched the Company, we relied upon ECCU to originate and underwrite a sufficient supply of mortgage loans made to churches, schools, ministries and other non-profit corporations to purchase land, develop facilities, construct or renovate worship facilities or refinance existing indebtedness. Because ECCU has been making mortgage loans for ministry related projects for over 40 years and has a successful record in underwriting profitable and performing mortgage loans, through most of our history we have contracted with ECCU to service a substantial portion of the loans in our loan portfolio. In recent years we have expanded our operations to include our own independent loan origination and underwriting activities. Our loan underwriting process involves a review and analysis of the church or ministry’s financial operation, the strength of the organization’s leadership team, prior history, financial capability, value of collateral and general creditworthiness.
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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 an Investment 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.
Our Mortgage Loan Investment Standards
Our policy is to require each of our mortgage loan investments to meet the following criteria:
· | Demonstration of Ability to Pay. The borrower must support its overall ability to timely pay principal and interest by its operational and cash flow history. For these purposes, "cash flow" includes donations and other revenue which the borrower can demonstrate to be continuing. Generally, debt service payments of the mortgage loan may not exceed a reasonable percentage of the borrower's cash flow over the expected term of the loan. |
· | Term of Loan. The remaining term of each mortgage loan must be thirty (30) years or less from the date we acquire or originate the loan. |
· | Priority of Secured Interest. The mortgage loan must be evidenced by a written obligation and must be secured by a deed of trust on the mortgaged property. |
· | Funding Escrow. Mortgage loans must be funded through a formal escrow in a customary manner in order to assure that we receive good title to our security interest in the loan at the time the loan is funded. |
· | Value of Security. Each mortgage loan must be secured by real property for which there is available for review a recent independent appraisal or other independent valuation which supports the value of the property. |
· | Title Insurance. Each mortgage loan must be covered by a standard lender's title insurance policy. |
· | Application of Loan Proceeds. Procedures must be established to assure the loan proceeds will be used for the purposes authorized. Unless we waive the requirement for good cause, loan proceeds must be available only for expenditures on account of the project for which the loan was made. |
· | Inspection. We, the original lender, or the lender's representative must have made a personal on‑site inspection of the property securing the loan. |
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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. |
· | Lines of Credit and Letters of Credit. Our typical mortgage loan investment is a conventional real estate loan. However, from time to time we may make a loan commitment or loan funds pursuant to a line of credit or a letter of credit. These commitments and loans are typically secured by real property or funds pledged by the borrower. We require that our Loan Investment Committee approve the transaction. |
· | Credit Union Members. Loans can be only made to credit union members or our investors, unless otherwise permitted by our Church and Ministry Loan Policy. |
· | Location of 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. |
· | 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 to one borrower (or to related entities) may not exceed 25% of our tangible net worth at the time the loan is funded or acquired. The maximum aggregate amount of unsecured loans 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 managers prior to funding. |
· | Subject to the foregoing discussion, the following tables demonstrate and confirm our compliance with these loan limit policies: |
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AGGREGATE CONCENTRATION LIMITS | ||||||||||||||||||||||||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||||||||||||||||||||
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| Policy |
| Year Ended |
| Year Ended | ||||||||||||||||||||||||||||||||
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| Limit |
| December 31, 2013 |
| December 31, 2012 | ||||||||||||||||||||||||||||||||
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| % of Tangible Net Worth (TNW) |
| Number of Loans |
| Unpaid Balance |
| % of TNW |
| Number of Loans |
| Unpaid Balance |
| % of TNW | ||||||||||||||||||||||||
Construction Loans |
| 200 | % |
| 2 |
| $ | 774 |
| 7.8 | % |
| 1 |
| $ | 65 |
| 0.7 | % | |||||||||||||||||||
Junior Liens |
| 200 | % |
| 12 |
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| 9,930 |
| 99.9 | % |
| 9 |
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| 10,210 |
| 106.9 | % | |||||||||||||||||||
Unsecured Loans |
| 100 | % |
| 3 |
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| 109 |
| 1.1 | % |
| 1 |
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| 72 |
| 0.8 | % | |||||||||||||||||||
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SINGLE BORROWER CONCENTRATION LIMITS | |||||||||||||||||||
(dollars in thousands) | |||||||||||||||||||
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| Policy |
| Year Ended |
| Year Ended | |||||||||||||
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| Limit |
| December 31, 2013 |
| December 31, 2012 | |||||||||||||
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| % of Tangible Net Worth (TNW) |
| Number of Loans Over Limit |
| Unpaid Balance |
| % of Portfolio |
| Number of Loans Over Limit |
| Unpaid Balance |
| % of Portfolio | |||||
Unsecured Loans to One Borrower |
| 10 | % |
| -- |
| $ | 109 |
| 0.1 | % |
| -- |
| $ | 72 |
| 0.1 | % |
Loans to One Borrower |
| 25 | % |
| 17 |
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| 46,608 |
| 30.9 | % |
| 29 |
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| 70,786 |
| 44.8 | % |
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LARGEST SINGLE BORROWER EXPOSURES | |||||||||||||||
(dollars in thousands) | |||||||||||||||
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| Policy |
| Year Ended |
| Year Ended | |||||||||
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| Limit |
| December 31, 2013 |
| December 31, 2012 | |||||||||
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| % of Tangible Net Worth (TNW) |
| Aggregate Unpaid Balance |
| % of Portfolio |
| Aggregate Unpaid Balance |
| % of Portfolio | |||||
Largest Real Estate Secured Loan |
| 25 | % |
| $ | 4,395 |
| 44.2 | % |
| $ | 4,564 |
| 47.8 | % |
Largest Unsecured Loan |
| 10 | % |
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| 61 |
| 0.6 | % |
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| 72 |
| 0.8 | % |
Largest Single Borrower |
| 25 | % |
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| 4,395 |
| 44.2 | % |
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| 4,564 |
| 47.8 | % |
As of December 31, 2013 and 2012, respectively, we were in compliance with our policy on aggregate concentration limits for construction loans, junior liens and unsecured loans, as well as our policy limit for unsecured loans to one borrower. Our portfolio included 17 loans at December 31, 2013 and 29 loans at December 31, 2012 that exceeded our policy limits for loans made to one borrower. All of the aforementioned loans exceeding policy limits were originated or purchased in compliance with our policy, which allows our managers or the Company’s Loan Investment Committee to approve certain exceptions.
Of the 17 loans that were out of compliance at December 31, 2013, four were approved as exceptions by our Board of Managers or our Loan Investment Committee, one loan was purchased before the current policy was adopted, and one loan was purchased by MPF under a different policy that existed for MPF at the time and was subsequently transferred to us as part of the liquidation of one of our credit facilities. The remaining 11 loans migrated out of compliance solely due to a decline in our tangible net worth in the years since the loans were purchased or
12
originated, which was mainly the result of increased provisions for loan losses. Although the risk presented by these 11 loans will be mitigated by increasing our tangible net worth through generating consistent net profits for our equity owners, our lending team began to focus on originating smaller loans in 2013 and plans to continue to do so in the future. We have also used loan participation sales to reduce the risk of originating relatively large loans and have sought to include credit unions located in the borrower’s local community to serve as the credit union of record which holds at least a 10% interest in the loan.
All loan applicants must complete an application and provide suitable documentation demonstrating an ability to repay the loan and submit this application to our offices in Brea, California. For new loans greater than $500,000, we or our designated representative will conduct a site visit to inspect the collateral and conduct our due diligence review of the applicant. Each loan must meet our Church Ministry and Loan Policy guidelines.
Based in part on the foregoing criteria, we have adopted a risk rating system for rating the risk of our mortgage loan investments. Our managers and management team monitor portfolio composition regularly and may, from time to time, establish guidelines for management regulating the fraction of the portfolio that may be invested in each risk category. We monitor the risk ratings of our mortgage loan portfolio on a regular basis.
Our Loan Investment Portfolio
We invest primarily in mortgage loans secured by liens on churches, church-related and/or ministry-related properties. Generally, our mortgage loans are secured by first liens, but under limited circumstances, we may invest in loans secured by junior liens. The payment of our mortgage loan investments is not insured and, in general, is not guaranteed by any person or by any government agency or instrumentality. We must, therefore, look to foreclosure on the property securing the loan as the primary source of recovery in the event the loan is not repaid as required. Some of our mortgage loan investments are partial participation ownership in a mortgage loan, whereby we own an undivided interest in the loan investments with other institutions. Generally, the percentage of our ownership interest in our mortgage loans has ranged from 1% to 100%. Joint ownership allows us to participate in larger loans and in a greater number of loans than we would otherwise be able to afford, and therefore allows us to achieve greater diversification for our mortgage loan investment portfolio.
Our cash and loan investments for the years ended December 31, 2013 and 2012 are set forth below:
13
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| Year Ended | ||||
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| December 31, | ||||
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| (dollars in thousands) | ||||
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| 2013 |
| 2012 | ||
Assets: |
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Cash |
| $ | 7,483 |
| $ | 10,068 |
Loans receivable, net of allowance for loan losses of $2,856 and $4,005 as of December 31, 2013 and 2012, respectively |
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| 146,519 |
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| 152,428 |
Accrued interest receivable |
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| 607 |
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| 672 |
Set forth below are the amounts we invested in each loan category for the years ended December 31, 2013 and 2012, respectively:
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| Year Ended December 31, (dollars in thousands) | ||||||||||
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| 2013 |
| 2012 | ||||||||
Loans to evangelical churches and related organizations |
| Amount |
| % of Portfolio |
| Amount |
| % of Portfolio | ||||
Real estate secured |
| $ | 149,805 |
| 99.4 | % |
| $ | 157,259 |
| 99.9 | % |
Construction |
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| 774 |
| 0.5 | % |
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| 65 |
| 0.0 | % |
Unsecured |
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| 109 |
| 0.1 | % |
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| 72 |
| 0.1 | % |
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Total |
| $ | 150,688 |
| 100.0 | % |
| $ | 157,396 |
| 100.0 | % |
At December 31, 2013, we had no loans that are considered individually material (10% of net assets or greater) to our financial operations.
Our Net Interest Income and Interest Margin
Our earnings depend largely upon the difference between the income we receive from interest‑earning assets, which are principally mortgage loan investments and interest-earning accounts with other financial institutions, and the interest paid on our investor notes and lines of credit. This difference is net interest income. Net interest margin is net interest income expressed as a percentage of average total interest-earning assets.
Please see the discussion under Item 7. “Management Discussion and Analysis of Financial Condition − Results of Operations” for information regarding our historical interest costs, interest income and yields realized on our mortgage loan investments for the years ended December 31, 2013 and 2012.
14
Loan Maturities
The following table sets forth the future maturities of our gross mortgage loan portfolio at December 31, 2013:
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| Dollar Amount of Mortgage Loans | |||||||||||||||||||
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| Maturing During Year (in thousands) | |||||||||||||||||||
Mortgage Loan Portfolio at: |
| 2014 |
| 2015 |
| 2016 |
| 2017 |
| 2018 |
| After 2018 |
| Total | |||||||
December 31, 2013 |
| $ | 21,427 |
| $ | 12,987 |
| $ | 14,368 |
| $ | 11,056 |
| $ | 12,314 |
| $ | 78,536 |
| $ | 150,688 |
Included in the table above are 66 adjustable rate loans. These loans, totaling approximately $62.9 million, are due in 2021 or later.
Diversification of Our Mortgage Loan Portfolio
The following table sets forth, as of December 31, 2013 and 2012, 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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| California | ||||||
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| (dollars in thousands) | ||||||
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| 2013 |
| 2012 | ||||
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Unpaid Balance of Loans |
| $ | 44,652 |
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| $ | 51,395 |
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Percent of Total Loans |
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| 29.63 | % |
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| 32.65 | % |
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Number of Loans |
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| 44 |
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| 42 |
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Percent of Total Loans |
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| 31.88 | % |
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| 34.15 | % |
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| Texas | ||||||
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| (dollars in thousands) | ||||||
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| 2013 |
| 2012 | ||||
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Unpaid Balance of Loans |
| $ | 16,224 |
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| $ | 19,575 |
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Percent of Total Loans |
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| 10.77 | % |
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| 12.44 | % |
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Number of Loans |
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| 9 |
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| 12 |
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Percent of Total Loans |
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| 6.52 | % |
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| 9.76 | % |
15
Our Loan Renewal Policies
We offer to renew, re-underwrite or otherwise continue (i.e. renew) a maturing loan on a case-by-case basis, based on the terms of the maturing loan, the credit status of the borrower and our liquidity needs at the time. Prior to maturity, each loan is analyzed and re-underwritten to determine if it is a possible rollover candidate. Management then reviews our liquidity needs and conditions in determining whether to recommend to our Credit Review Committee to renew the loan.
Sale of Loan Participation Interests
From time to time, we enter into loan participation purchase and sale agreements and we believe there is a robust demand for church and ministry loans in the credit union industry. When we sell a participation interest, a certificate is delivered and agreed upon which identifies the name of the borrower, the principal amount due under the loan, purchase price, interest rate, maturity date and participation percentage acquired under the loan. When we sell a loan participation interest, we generally enter into a loan participation interest purchase agreement which includes standard representations and warranties that are typical for a transaction of this nature. In addition, we are obligated to alert purchasers of such interests of certain material events which might affect the financial condition of the borrower and collectability of the loan.
During 2013, we entered into loan participation agreements to sell $9.9 million of loan participations to several credit unions. We did not sell any loan participations during the year ended December 31, 2012.
Performance and Monitoring of our Loan Portfolio
As of December 31, 2013, 26 of our 138 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 managers.
Impaired Loans
An impaired loan is defined as a loan on which, based on current information and events, it is probable that we will be unable to collect the scheduled payments of principal and interest when due according to the contractual terms of the loan agreement. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Impaired loans include delinquent loans, loans on non-accrual status and all restructured loans, regardless of the loan’s interest accrual status. We use the terms “impaired loan” and “non-performing loan” interchangeably in the discussion below.
16
A "delinquent loan" is a loan which is 90 days or more past due. We treat a delinquent loan as an impaired loan. A "restructured loan" means a delinquent loan or an otherwise troubled loan for which we have given the troubled borrower concessions, generally with respect to payment accruals, interest rate reductions, and/or maturity date extensions, which we would not have given the borrower upon making the loan. A restructured loan may or may not be on non-accrual status. We treat a restructured loan as an impaired loan. While our Credit Review Committee closely monitors our loan portfolio performance, there have been no material changes in our practices, policies and procedures with regard to how we treat our non-performing loans that have been adopted over the past two years.
We "charge off" or "write off" a loan against our allowance or reserve for loan losses when we believe the uncollectability of the loan balance is confirmed. In most cases, this directly correlates to the completion of foreclosure proceedings on the collateral. Prior to June 2011, we had never had a loan charge-off. We recorded our first loan charge-off in June 2011 and recorded two additional charge-offs in 2012. In 2013, we recorded a $978 thousand charge-off against an impaired loan. In each of these instances, we incurred charge-offs immediately prior to the completion of foreclosure proceedings or sale of the impaired loans. We also recorded two partial charge-offs in 2013 totaling $98 thousand on loans where we wrote down the principal balance of those loans.
Delinquent Loans
When the U.S. encounters adverse economic conditions, credit contractions and declining real estate values, churches are often materially impacted by high unemployment rates, foreclosures on homes owned by their members, collapsing real estate values and diminished net worth of their congregations and members. Contributions to churches and ministries are especially sensitive to these economic trends facing the U.S.
We report a mortgage loan as delinquent if it is 90 days or more in arrears. At December 31, 2013, 3.02% of our portfolio was delinquent. At December 31, 2012, 2.11% of our loan portfolio was delinquent. We have adopted a proactive approach in responding to delinquencies in our loan portfolio. For loans which we act as the lead lender, we make direct contact with the borrower within ten (10) days of an initial late payment. If the situation progresses to 30 days or more, we follow up with an onsite visit to discuss the borrower’s circumstances and how the borrower can bring the loan current.
In the event that an acceptable workout of a delinquent mortgage cannot be reached, we, or ECCU for any loans it services for us, will generally proceed with a foreclosure proceeding on any collateral securing the loan. As of December 31, 2013, ECCU has initiated a foreclosure action on one mortgage loan in which we hold a participation interest, representing $817 thousand in outstanding indebtedness. Since inception, we have had six mortgage loan investment losses that resulted in charge-offs, three of which occurred during the year ended December 31, 2013. As of December 31, 2013, our real estate owned properties had a net value of $3.3 million, which includes a valuation allowance of $13 thousand on one of the properties.
Non-performing Loans
17
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, 2013, and 2012, respectively (dollars in thousands):
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| 2013 |
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| 2012 |
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Non-accrual loans |
| $ | 17,609 | (1) |
| $ | 18,338 | (2) |
Loans 90 days or more past due and still accruing |
|
| -- |
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| -- |
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Restructured loans on accrual status |
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| 1,308 |
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| 221 |
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Total non-performing loans |
| $ | 18,917 |
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| $ | 18,559 |
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Non-performing loans as a percentage of total loans |
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| 12.6 | % |
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| 11.8 | % |
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(1) Includes $15.1 million of restructured loans on non-accrual status. | ||||||||
(2) Includes $15.7 million of restructured loans on non-accrual status. |
The Company had 12 nonaccrual loans as of December 31, 2013, up from 11 nonaccrual loans at December 31, 2012. For the years ended December 31, 2013 and 2012, $621 thousand and $915 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 $82 thousand and $67 thousand, respectively, was included in income for the years ended December 31, 2013 and 2012 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, 2013 and 2012, the Company did not have any loans past due 90 days and still accruing.
As of December 31, 2013, we held a 64.8% loan participation interest in a $4.17 million bridge loan we acquired from ECCU. In 2009, ECCU commenced foreclosure proceedings against the church’s primary worship facility and its other property assets. As of the date of this Report, we hold a partial real estate owned interest in properties valued at $1.72 million obtained under a
18
foreclosure proceeding and still hold a loan participation interest on a 13.53 acre parcel valued at $949 thousand. On December 27, 2013, the Circuit Court in the foreclosure proceeding concluded that the holder of a mechanics lien for construction undertaken on the church property was entitled to priority over the mortgage loan interests we and ECCU held on the 13.53 acre parcel. As a result of this judicial decision, we have taken an additional allowance for loan loss of $288.2 thousand in 2013, with a total allowance of $342.2 thousand on this property. We are actively working with our lead lender, ECCU, in evaluating our property rights in the foreclosure proceeding in an effort to minimize any losses on this loan.
Since our inception in 1991, we have had three foreclosure sales or judicial sales ordered on loans we have acquired or originated. In addition, we have acquired three additional properties pursuant to deed in lieu of foreclosure agreements we entered into with a borrower. As of the date of this Report, our interest in real estate owned properties acquired in foreclosure proceedings is carried at a value of $3.3 million.
Restructured Loans
From time to time, we have restructured a mortgage loan in light of the borrower's circumstances and capabilities. We review each of these cases on an individual basis, and approve any restructure based on the guidance stipulated in our Collections Policy. If we decide to accept a loan restructure, we generally will not forgive or reduce the principal amount owed on the loan; in addition, the typical maturity term for a restructured loan does not exceed five years. We classify a loan as a restructured loan when we make concessions we would not otherwise consider if offering a loan to a borrower. A restructuring of a loan usually involves an interest rate modification, extension of the maturity date, or reduction of accrued interest owed on the loan on a contingent or absolute basis.
In order to properly evaluate a potential restructure, when we receive a request for a modification or restructure, we evaluate the strength of the borrower’s financial condition, leadership of the pastoral team and board, developments that have impacted the church and its leadership team, local economic conditions, the value of the underlying collateral, the borrower’s commitment to sound budgeting and financial controls, whether there is a denominational guaranty of any portion of the indebtedness, debt service coverage for the borrower, availability of other collateral and any other relevant factors unique to the borrower. While we have no written policy that establishes criteria for when a request for restructuring a loan will be approved, our Credit Review Committee reviews each request, solicits written reports and recommendations from management and summaries of the requests and actions taken by the Credit Review Committee are presented to the Company’s managers for their review at quarterly meetings throughout the year.
The following table shows the number and balance of restructured loans in our mortgage loan portfolio, as well as the percentage of our total portfolio those loans represented and the amount of allowance for loan losses associated with restructured loans at December 31, (dollars in thousands):
19
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| 2013 |
| 2012 | ||||
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Number of restructured loans |
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| 11 |
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| 11 |
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Balance of restructured loans |
| $ | 16,362 |
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| $ | 15,948 |
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Percentage of loan portfolio |
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| 10.86 | % |
|
| 10.13 | % |
Allowance for loan losses associated with restructured loans |
| $ | 1,757 |
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| $ | 2,987 |
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Discounts associated with restructured loans |
| $ | 679 |
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| $ | 580 |
|
In the current economic market, loan restructures often produce a better outcome for our loan portfolio than a foreclosure action. Given our specialized knowledge and experience working with churches and ministries, entering into a loan modification often enables the borrower to keep their ministries intact and avoid foreclosure. With a successful loan restructure, we avoid a loan charge-off and protect the interests of our investors and borrowers we serve.
The delinquency and default rates we are currently experiencing, while higher than historical levels we incurred prior to the 2008 global economic crisis, are within manageable limits, and the delinquency rates on our mortgage portfolio appear to have stabilized. We believe we have established adequate levels of reserves for any foreseeable losses, and we continue to evaluate the adequacy of such reserves in the light of current economic and operational conditions.
Allowance for Loan Losses
We establish provisions for loan losses, which are charged to earnings, at a level reflecting estimated credit losses on our loan portfolio. In evaluating the level of the allowance for loan losses, we consider the type of loan, amount of loans in our portfolio, adverse situations that may affect our borrowers’ ability to pay and estimated value of underlying collateral and credit quality trends (including trends in non-performing loans expected to result from existing conditions). Until 2011, we had never recorded a charge-off on our mortgage loan investments. As a result, we have a limited historical loss experience to assist us in assessing estimated future losses.
The allowance for loan loss is monitored by our senior management on an ongoing basis. We examine the performance characteristics of our portfolio loans, including charge-offs, delinquency ratios, loan restructurings and modifications and other significant factors that, in management’s judgment, may affect our ability to collect loans in the portfolio as of the evaluation date. Our senior executive team monitors these factors on a regular basis and reviews are conducted quarterly with our managers. We determine general reserves by segregating our loan portfolio into pools based on the risk rating of the loan and the position of the underlying collateral.
Risk ratings are determined by grading a borrower on certain metrics, which include financial performance, strength of management, credit history, and condition of the local economy. These
20
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. However, as we have originated new loans and increased the quality of our portfolio, our general reserves as a percentage of our loan portfolio collectively evaluated for impairment has decreased from 0.73% at December 31, 2012 to 0.56% at December 31, 2013.
Our senior executive team also evaluates our allowance for loan losses based upon a review of individual loans in our loan portfolio. This evaluation is inherently subjective as it requires material estimates including the amounts and timing of future cash flows we expect to receive on an impaired loan that may be susceptible to significant change. Once a loan becomes delinquent or non-performing, the borrower reports a material adverse financial condition, or we determine that the value of the collateral underlying an impaired loan has substantially declined, we assess all information available to us to determine the estimated loss for a particular loan. We monitor these individual impaired loans on a regular basis.
If we restructure a loan, we establish an allowance for loan loss for that individual loan based on the difference between the net present value of the future receipt of cash payments from the restructured loan as compared to the net present value of cash flows which we would have received from the original loan, discounted at the original interest rate of the loan. As time passes and the restructured loan performs according to its modified terms, the net present value of future cash flows of the restructured loans 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.
At December 31, 2013 and 2012, our allowance for loan losses was $2.9 and $4.0 million, respectively, or 1.90% and 2.54%, respectively, of our total loan portfolio for the period. The decrease in our allowance is due primarily to a $978 charge-off on two impaired loans when we entered into a deed in lieu of foreclosure agreement with a borrower. 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, 2013.
21
The following represents a breakdown of the components of our allowance for loan loss at December 31, (in thousands):
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| 2013 |
| 2012 | ||
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Specific allowance related to loans in foreclosure |
| $ | 342 |
| $ | 276 |
Specific allowance related to other impaired loans |
|
| 1,200 |
|
| 2,182 |
Allowance based on net present value differences of restructured loans |
|
| 570 |
|
| 529 |
General allowance |
|
| 744 |
|
| 1,018 |
Total allowance |
| $ | 2,856 |
| $ | 4,005 |
In addition, we segregate the loan portfolio into classes for purposes of evaluating the allowance for loan losses. A portfolio class is defined as the level at which we develop and document a systematic method for determining its allowance for loan losses. The portfolio classes are segregated based on loan types and the underlying risk factors present in each loan type. Such risk factors are periodically reviewed by management and revised as deemed appropriate.
Our loan portfolio consists of one segment, church loans, and is segregated into the following classes:
Wholly-owned First Collateral Position. This portfolio class consists of the wholly-owned loans for which we possess a senior lien on the collateral underlying the loan.
Wholly-owned Junior Collateral Position. This portfolio class consists of the wholly-owned loans for which we possess a lien on the underlying collateral that is superseded by another lien on the same collateral. This class also contains any loans that are not secured by any collateral. These loans present greater credit risk than loans for which we possess a senior lien due to the increased risk of loss should the loan enter foreclosure.
Participations First Collateral Position. This portfolio class consists of the participated loans for which we possess a senior lien on the collateral underlying the loan. Loan participations have more credit risk than wholly-owned loans because we do not maintain full control over the disposition and direction of actions regarding the management and collection of the loans. The lead lender directs most servicing and collection activities and major actions must be coordinated and negotiated with the other participants, whose best interests regarding the loan may not align with ours.
Participations Junior Collateral 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.
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The increased risk is the result of the factors presented above relating to both junior lien positions and participations.
Classification of Loans. Our policies provide for the classification of loans that are considered to be of lesser quality as watch, substandard, doubtful, or loss assets. An asset is considered substandard if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Substandard assets include those assets characterized by the distinct possibility that we will sustain some loss if the deficiencies are not corrected. Assets classified as doubtful have all of the weaknesses inherent in those classified substandard with the added characteristic that the weaknesses make collection or liquidation in full highly questionable and improbable, based on currently existing facts, conditions and values. Assets (or portions of assets) classified as loss are those considered uncollectible and of such little value that their continuance as assets is not warranted. Assets that do not expose us to risk sufficient to warrant classification in one of the aforementioned categories, but which possess potential weaknesses that deserve close attention, are designated as watch.
Competition
Although the demand for church financing is both broad and fragmented, no one firm has a dominant competitive position in the market. We compete with church bond financing companies, banks, credit unions, denominational loan funds, REITs, insurance companies and other financial institutions to service this market. Many of these entities have greater marketing resources, extensive networks of offices and locations, larger staffs and lower cost of operations due to their size. We believe, however, we have developed an efficient, effective and economical operation that (i) specializes in identifying and creating a diversified portfolio of church mortgage loans that we or other credit unions originate; (ii) preserves our capital base; and (iii) generates consistent income for distribution to our note holders and equity investors.
We rely upon the extensive experience of our officers, management and managers in working with ministry related financing transactions, loan origination, and investment in churches, schools, ministries and non-profit organizations.
Employees
As of January 1, 2013, we entered into a staffing agreement with Automated Data Processing, Inc., which will provide payroll and staffing services. As of December 31, 2013, we had 19 full- or part-time employees. None of our employees are covered by a collective bargaining agreement, and we believe that we have an excellent relationship with our employees and staff.
Regulation
General
We are organized as a credit union service organization and, as a result, are subject to the regulations promulgated by the National Credit Union Administration (“NCUA”) that apply to CUSOs. As a CUSO, we primarily serve the interests of our credit union equity holders and
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members of such credit unions. We are also subject to various laws and regulations which govern: (i) credit granting activities; (ii) establishment of maximum interest rates; (iii) disclosures to borrowers and investors in our equity securities; (iv) secured transactions; (v) foreclosure, judicial sale and creditor remedies that are available to a secured lender; and (vi) the licensure requirements of mortgage lenders, finance lenders, brokers and financiers.
As a CUSO, we are limited in the scope of activities we may provide. In addition, our federal credit union equity investors are permitted to invest in or lend to a CUSO only if the CUSO primarily serves credit unions, its membership or the membership of credit unions contracting with the CUSO. While the NCUA lacks direct supervisory authority over our operations, our federal credit union equity owners are subject to regulations which govern the rules and conditions of an investment or loan they make or sell to a CUSO. In addition, state chartered credit unions must follow their respective state’s guidelines which govern investments by a state chartered credit union. Our equity owners that are regulated by the California Department of Financial Institutions (“DFI”), in particular, must comply with DFI regulations that govern their investment in or loans they make to a CUSO.
Tax Status
Effective with our conversion from a corporate form of organization to a limited liability company organized under the laws of the State of California on December 31, 2008, we have chosen to be treated as a partnership rather than a corporation for U.S. tax law purposes. As a result, profits and losses will flow directly to our equity investors 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.
Regulation of Mortgage Lenders
We conduct loan originating activities for churches and related ministry projects. Many states regulate the investment in or origination of mortgage loans. Under the California Finance Lender’s Law, no lender may engage in the business of providing services as a “finance lender” or “broker” without obtaining a license from the California Department of Business Oversight (“DBO”), unless otherwise exempt under the law. We conduct our commercial lending activities under California Finance Lender License # 603F994.
As a finance lender, we are licensed with the DBO and file reports from time to time with the DBO. Accordingly, the DBO has enforcement authority over our operations as a finance lender, which includes, among other things, the ability to assess civil monetary penalties, issue cease and desist orders and initiate injunctive actions. We also are subject to licensing requirements in other jurisdictions in connection with our mortgage lending activities. Various laws and judicial and administrative decisions may impose requirements and restrictions that govern secured transactions, require specific disclosure to our borrowers and customers, establish collection,
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foreclosure, and repossession standards and regulate the use and reporting of certain borrower and customer financial information.
As we expand our loan originations outside of the State of California, we will need to comply with laws and regulations of those states. The statutes which govern mortgage lending and origination activities vary from state to state. Because these laws are constantly changing, due in part, to the challenge facing the real estate industry and financial institutions from residential lending activities, it is difficult to comprehensively identify, accurately interpret and effectively train our staff with respect to all of these laws and regulations. We intend to comply with all applicable laws and regulations wherever we do business and will undertake a best efforts program to do so, including the engagement of professional consultants, legal counsel, and other experts as deemed necessary by our management.
Loan Brokerage Services
In 2009, we created a new subsidiary, MP Realty, which provides loan brokerage and other real estate services to churches and ministries in connection with our mortgage financing activities. The California Department of Real Estate issued MP Realty Services, Inc. a license to operate as a corporate real estate broker on February 23, 2010. As we expand our loan brokerage activities to other states, we may be required to register with these states as a commercial mortgage broker if we are directly or indirectly marketing, negotiating or offering to make or negotiate a mortgage loan. We intend to monitor these regulatory requirements as necessary in the event MP Realty provides services to a borrower, lender, broker or agent outside the State of California.
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
The financial services industry in the U.S. is subject to extensive regulation under federal and state laws. The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (“Dodd-Frank Act”) was enacted on July 21, 2010. The Dodd-Frank Act resulted in sweeping changes in the regulation of financial institutions and created a new Consumer Financial Protection Bureau and Financial Stability Oversight Council with authority to identify institutions and practices that might pose a systemic risk. Because of the nature of our business, we do not expect this legislation to have a significant direct impact on our business. Because many of the implementing regulations have yet to be written by various regulatory agencies, we cannot give any assurances that the Dodd-Frank Act will have no material effect on our business.
Our wholly-owned broker-dealer firm, Ministry Partners Securities, LLC, commenced limited operations in the first quarter of 2012. As a registered broker-dealer under Section 15 of the Securities Exchange Act of 1934, MP Securities is subject to regulation by the U.S. Securities and Exchange Commission and regulation by state securities administrators in the states in which it will conduct its activities. We have registered MP Securities in the states of California, Colorado, Florida, Georgia, Idaho, Illinois, Minnesota, Nevada, New York, North Carolina, Ohio, Oregon, Pennsylvania, Rhode Island, South Carolina, Texas, Washington, West Virginia and Wisconsin.
Much of the regulation of broker-dealers in the U.S. has been delegated to self-regulatory organizations, principally FINRA and the securities exchanges. FINRA adopts and amends rules (which are subject to approval by the SEC) for regulating the industry and conducts periodic examinations of member firms. The SEC, FINRA and state securities administrators may conduct administrative proceedings that can result in censure, fine, suspension or expulsion of a broker-dealer, its officers or employees.
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 proprietary debt securities and Class A Notes under a registration statement filed with the SEC and FINRA has issued a “no objections” letter in connection with MP Securities’ request to act as a selling agent for the Company’s Class A Notes offering.
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 $5,000.
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Regulation of Investment Advisers
On July 11, 2013, the State of California granted its approval for MP Securities to provide investment advisory services. As a California registered investment advisory firm, MP Securities is required to develop and maintain compliance procedures, record keeping procedures, comply with custody rules, marketing and disclosure obligations. MP Securities is also subject to the Investment Advisers Act of 1940, as amended, and related regulations. The SEC is authorized to institute proceedings and impose fines and sanctions for violation of the Investment Advisers Act. In addition to ensuring MP Securities’ compliance with federal and state laws governing its activities as a California registered investment advisory firm, the California DBO requires that representatives hired by MP Securities meet certain qualification requirements, including complying with certain testing requirements and examinations.
Our failure to comply with the requirements of the Investment Advisers Act, related SEC rules or regulations and provisions of the California Corporations Code and Code of Regulations could have a material effect on us. We believe we are in full compliance in all material aspects with SEC requirements and California laws and regulations. As MP Securities hires new registered investment advisers, it will be required to monitor its compliance with SEC and DBO regulations.
Privacy Standards
The Gramm-Leach-Bliley Financial Services Modernization Act of 1999 (“GLBA”) modernized the financial services industry by establishing a comprehensive framework to permit affiliations among commercial banks, insurance companies, securities firms and other financial service providers. We are subject to regulations implementing the privacy protection provisions of the 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
RISK FACTORS
Our business, financial condition, and results of operations could be harmed by any of the following risks or other risks which have not been identified or which we believe are immaterial or unlikely. The U.S. economy is still recovering from an economic recession and we expect this to have a significant impact on our business and operations, including, without limitation, the credit quality of our loan portfolio, our liquidity and our earnings. The risks and uncertainties described below are not the only risks that may have a material, adverse effect on us. Additional risks and uncertainties also could adversely affect our business, financial condition and results of operations. The risks discussed below include forward-looking statements, and our actual results may differ substantially from those discussed in these forward-looking statements. Investors should carefully consider the risks described below in conjunction with the other information in this Form 10-K and the information incorporated by reference in this Form 10-K.
Risks Related to the Company
We may be unable to obtain sufficient capital to meet the financing requirements of our business.
Our ability to finance our operations and repay maturing obligations to our investors and credit facility lenders depends, to a substantial degree, on our ability to borrow money and raise capital from the sale of our debt securities. Our ability to borrow money and sell our debt securities is affected by a variety of factors including:
· | quality of the mortgage loan assets we own and the profitability of our operations; |
· | limitations imposed under our credit facility arrangements and trust indenture agreements that contain restrictive and negative covenants that may limit our ability to borrow additional sums or sell our investor debt securities; |
· | strength of the lenders from whom we borrow; and |
· | borrowing limitations imposed under our credit facilities. |
During the last five years, the size of the Company’s balance sheet has been reduced as a result of deleveraging our assets, a reduction in the total amount of our investor debt securities, and pay-downs and/or pay-offs of institutional credit facilities we have relied upon, in part, to fund our business. At December 31, 2009, our total assets were $208.7 million as compared to $158.4 million at December 31, 2013. An event of default, lack of liquidity or a general deterioration in the economy that affects the availability of credit may increase our cost of funding, make it difficult for us to renew or restructure our credit facilities and obtain new lines of credit. We are also susceptible to withdrawals by investors in our debt securities that can cause unexpected liquidity problems. The reduction in our total assets has also constrained our ability to originate and acquire profitable mortgage loans and serve borrowers who qualify under our loan policies and compliment our mission.
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We are actively expanding our methods of raising and leveraging our capital assets, including seeking financing from institutional lenders, selling loan participation interests in our mortgage loan investments and launching a broker-dealer subsidiary to assist us in increasing sales of our debt securities to institutional, individual, IRA and retail investors and offer other investment products. 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 and make profitable mortgage loans.
Our ability to raise capital and attract new investors in our debt securities depends on our ability to attract an effective sales force in our wholly-owned licensed broker-dealer firm.
Our wholly-owned subsidiary, MP Securities, has been accepted for membership in FINRA, and commenced sale of our proprietary debt securities in 2012. During 2012, MP Securities began selling our Class A Notes under a Registration Statement declared effective by the SEC on October 11, 2012 and also offers our proprietary debt securities in private offerings under federal and state securities laws. In July 2013, MP Securities was granted registration as a California investment advisor firm and FINRA approved a change in our Membership Agreement, thereby enabling us to offer non-proprietary securities products to our clients and investors. In September, 2013, MP Securities entered into a Clearing Agreement with a nationally recognized and diversified financial service provider which will provide our registered representatives the opportunity to offer a full range of investment products. Our ability to attract new investors in our debt securities and expand our assets under management will depend, to a substantial degree, on our ability to assemble an effective sales team and to strategically recruit, retain and compensate the required personnel to assist us in this effort. If we are unable to recruit, retain and successfully motivate a qualified investment advisers and representatives 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 implemented in 2010. As of December 31, 2013, MP Securities employed two full-time sales personnel and advisers.
We have devoted substantial resources to launching our wholly-owned broker-dealer and investment advisor firm in an effort to increase our capital, improve our liquidity and grow our total assets.
Over the last three years, we have devoted substantial capital and resources to gain regulatory approval from the SEC, FINRA and the California DBO to launch our broker-dealer and investment advisory firm, obtain appropriate licenses and training for our executive management team and key personnel, hire a qualified leadership team and obtain regulatory approval to sell our proprietary debt securities, offer mutual funds and other investment securities, annuities and insurance products. In July 2013, FINRA approved MP Securities’ request to broaden the scope of products and securities it could offer to its clients and the California DBO approved its request to become a registered investment advisory firm. In September 2013, MP Securities entered into a Clearing Agreement with a well known intermediary firm which will open up new
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opportunities to add profitable investment advisers and expand the products and offerings it may provide to its clients. The Company’s strategic plan for 2014 and 2015 relies, to a substantial degree, upon the ability of MP Securities to hire profitable investment advisers and securities brokers, increase sales of its proprietary debt securities and overcome the suitability and overconcentration hurdles that has led, in part, to a significant reduction in the renewal rate of our Class A Notes and decline in the total amount invested in our debt securities. If we are unable to make effective use of MP Securities in implementing our strategic plan, we will not be able to improve our net capital, liquidity, or originate and acquire profitable mortgage loans.
Deterioration in real estate values and general economic conditions could lead to losses and reduced earnings.
While we reported profits in 2012 and 2013, our net earnings were due, in part, to the sale of impaired loans and foreclosed assets and cash recoveries on one of our non-performing loans, which resulted in a credit to provisions for loans losses and gains on the sale of foreclosed assets. During the years ended December 31, 2012 and 2013, our nonperforming assets and credit metrics for our loan portfolio showed significant improvement. Credit metrics remained positive throughout most of 2013. While the improvement in performance of our loan portfolio was a substantial contributing factor in our profitability, if market conditions reverse and begin to deteriorate again, this could lead to an increase in nonperforming assets, increased credit losses, reduced earnings and potential losses.
Our growth is dependent on leverage, which may create other risks.
Our success is dependent, in part, upon our ability to grow our balance sheet assets through the use of leverage. Our organizational and governing documents do not limit the amount of indebtedness which we may incur. A significant amount of our assets are pledged as collateral for borrowings. Our managers have 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 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, 2013, we had $147.6 million of total outstanding debt obligations, of which approximately 18%, 10% and 7% of the principal amount of this debt is due and payable in the years 2014, 2015, and 2016, respectively.
We have had fluctuating earnings.
As a mortgage financing lender, our profitability may be adversely affected by increasing provisions for losses relating to our loan portfolio. While the United States continues to recover from an economic crisis that has been characterized by high unemployment figures, residential and commercial foreclosures and restricted access to credit, many churches have been adversely impacted in their ability to meet their financial obligations. While we remained profitable during calendar years 2008 and 2009, we incurred net losses of $1.0 million and $1.6 million in
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calendar years 2011 and 2010, 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 loan portfolio during the past two years, we realized a profit of $417 thousand and $592 thousand for 2012 and 2013, respectively. For 2013, we realized gains on the sale of real estate owned assets and obtained a cash recovery on one of our non-performing loans that represented a substantial portion of our net earnings for the year. Since we have had fluctuating earnings over the last several years, we can give no assurances that we will be able to achieve and maintain consistent net earnings over the next few years.
Our reserves for loan losses may prove inadequate, which could have a material adverse effect on us.
The continued effects of the economic recession that began in 2007 and subsequent deterioration in real estate values has adversely impacted the performance of our loan portfolio. Borrowers may be unable to repay their loans according to their terms and the collateral securing the payment of these loans may be insufficient to assure repayment. For the year ended December 31, 2013, we recorded a provision for loan losses of $9 thousand compared to a credit for loan losses in 2012 and provisions for loan losses of $1.5 million and $2.4 million provisions recorded for the years ended December 31, 2011 and 2010, respectively. Although we regularly evaluate our financial reserves to protect against future losses based on the probability and severity of the losses, there is no guarantee that our assessment of this risk will be adequate to cover any future potential losses.
Unanticipated adverse changes in the economy or events adversely affecting specific assets, borrowers, mismanaged construction, loss of a senior pastor, rising interest rates, failure to sell properties or assets, or geographical regions in which our borrowers or their properties are located may negatively impact our assessment of this risk and result in reserves that will be inadequate over time to protect against potential future losses. Maintaining the adequacy of our allowance for loan losses may require that we make significant and unanticipated increases in our provisions for loan losses, which would materially affect our results of operations and capital adequacy. Given the total amount of our allowance for loan losses, an adverse collection experience in a small number of loans could require an increase in our allowance.
If our nonperforming assets increase, our earnings will be adversely affected.
At December 31, 2013, our nonperforming assets (which consists of non-accruing loans, loans 90 days or more past due, and other real estate owned) totaled $22.2 million, or 14.0% of total assets. At December 31, 2012, and December 31, 2011, our nonperforming assets were $21.5 million and $24.3 million, respectively, or 12.8% and 13.5% of our total assets, respectively. Nonperforming assets adversely affect our net income in the following ways:
· | We do not record interest income on collateral-dependent loans. |
· | We may be required to account for and record probable losses through a current period charge to our provision for loan losses. |
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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. |
· | There are legal fees associated with the resolution of problem assets, as well as management fees, selling and carrying costs, such as taxes, insurance and maintenance fees related to our other real estate owned assets. |
· | The resolution of non-performing assets requires active involvement of our management, which can distract them from more profitable activity. |
If additional borrowers become delinquent and do not pay their loans and we are unable to successfully manage our nonperforming assets, our losses and troubled assets could increase significantly, which could have a material adverse effect on our results of operations and financial condition.
The U.S. financial markets that have in the past provided liquidity, securitization financing, short-term credit facilities and access to capital to fund investments in church mortgage loans have been adversely impacted by payment defaults of churches and ministries, increases in loan workouts and restructurings for churches and ministry related borrowers, and has reduced the availability of short-term financing facilities to finance our business.
Global recessionary economic conditions and adverse developments in the availability of credit to finance the acquisition or origination of church mortgage loans has substantially reduced the financing sources for the ministry related mortgage loans we originate or invest in. This has reduced and made it more difficult for us to secure short-term credit facilities from institutional lenders, reduced the amount of capital we have available to make new investments in mortgage loans and has reduced, and may continue to reduce, revenue and cash flow we receive from our investments. Our continued use of secured institutional bank financing facilities will depend upon our ability to generate and sustain consistent net earnings, refinance or obtain renewals of our primary credit facilities when they mature in 2018 and obtain new secured bank financing on acceptable terms.
Our secured debt facilities require us to maintain excess collateral and if we fail to meet our minimum collateralization ratio requirements, our cash flow would be materially reduced and decrease the amount of assets we have available to meet our debt obligations.
Our $87.3 million credit facility refinancing transaction (the “MU Credit Facility”) entered into with the National Credit Union Administration Board as Liquidating Agent of Members United Corporate Federal Credit Union 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. Under our MU Credit Facility and WesCorp Credit Facility Extension, we are required to
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maintain a minimum collateralization ratio of at least 128% and 150%, respectively. As of December 31, 2013, we have pledged approximately $101.5 million and $33.2 million of our mortgage loans to secure the MU Credit Facility and the WesCorp Credit Facility Extension, respectively. As a result, the NCUA will retain all excess collateral until these credit facilities are repaid in full and we will not have this excess collateral available to pay our other obligations including our secured notes, Class A Notes and other debt securities until we repay or retire the MU Credit Facility and WesCorp Credit Facility Extension. Under the terms of our agreement with the NCUA, we may request release of excess collateral if the collateralization ratio on either the MU Credit Facility or the Wescorp Credit Facility Extension rises above 150%. However, the release of collateral may not at any point cause the collateralization ratio on either facility to drop below the minimum collateralization ratios described above. For a further discussion of our borrowing facilities, see Item 7 “Credit Facilities Developments” below.
Default under one credit facility will result in a default under our other credit facilities.
Our credit facilities and debt securities generally provide for cross-default provisions whereby a default under one agreement will trigger an event of default under other agreements, giving our lenders the right to declare all amounts outstanding under their particular credit agreement to be immediately due and payable, and enforce their rights by foreclosing on or otherwise liquidating collateral pledged under these agreements. For example, a default under one of our credit facilities would also constitute our default under our other credit facilities. Thus, to maintain these credit facilities, there cannot be a default under either one.
In the event of our default under our secured credit facilities, we could lose assets in excess of our assets pledged as collateral.
In the event of a default under our MU Credit Facility and 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 the Class A Notes.
We may not be able to finance our investments on a long-term basis with an institutional lender on attractive terms, which may require us to seek more costly financing for our investments or to liquidate assets.
In recent years, we have relied upon short-term credit facilities to finance a substantial portion of our mortgage loan investments. When we acquire mortgage loans that have a maturity term that exceeds the term of our institutional credit facilities, we bear the risk of being unable to
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refinance, extend or replace our primary credit facilities or otherwise finance them on a long-term basis at attractive terms or in a timely manner, or at all. If it is not possible or economical for us to finance such investments on attractive terms, we may be unable to pay-down our credit facilities or be required to liquidate the assets at a loss in order to do so. Our reliance on financing provided by institutional credit facility lenders may subject us to an obligation to make significant balloon payments upon maturity of our $87.3 MU Credit Facility and $23.5 million WesCorp Credit Facility Extension on October 31, 2018. If we are unable to roll-over, extend, refinance or replace such credit facilities on attractive terms, we may have to rely upon less efficient forms of financing new investments, which will result in fewer loan acquisitions or originations of profitable mortgages and further deleveraging of our balance sheet and thereby reduce the amount of earnings available for distributions to our equity investors and funds available for operations and to meet our debt service obligations.
Our financing arrangements contain covenants that restrict our operations and any default under these arrangements would inhibit our ability to grow our business, increase revenue and make distributions to our equity investors.
Our financing arrangements contain restrictions, covenants and events of default. Failure to meet or satisfy any of these covenants could result in an event of default under these agreements. Any event of default may materially adversely affect us. In addition, these restrictions may interfere with our ability to obtain financing or to 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.
We have historically relied on repeat purchases by a significant number of our noteholders to finance our business.
A significant percentage of the investors who purchase our debt securities purchase new notes after we repay their notes. Historically, a substantial proportion of our investors have purchased a new debt security from us when their notes mature. For the years 2008 – 2011, 76%, 79%, 57% and 73% of the investors that purchased one of our publicly offered debt securities had previously purchased one of our debt securities. During 2012, only 45% of the investors in our Class A Notes were repeat purchasers of our debt securities primarily due to having to stop selling these notes for approximately six months while we sought approval from FINRA for MP Securities to sell our Class A Notes. While we were able to sell our Class A Notes throughout 2013, only 34% of our investors were repeat purchasers of our debt securities, due largely to investor suitability and overconcentration restrictions we follow on the sale of these notes. There is no assurance that historical patterns of rates of investments made by previous investors will continue in the future. If the rate of investments made by previous investors drops substantially, our ability to maintain or grow our asset base could be impaired.
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 and private 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. Any changes 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.
Loss of our management team or the ability to attract and retain key employees could harm our business.
We are dependent on the knowledge, skills, institutional contacts and experience of our senior management team. We also rely on our management team to manage our mortgage loan investments, evaluate and attract new borrowers, make prudent decisions as they relate to work-outs, modifications and restructurings and develop relationships with institutional investors, lenders, financial institutions, broker-dealer firms, ministries and individual investors. We can give no assurances that we will be able to recruit and retain qualified senior managers that will enable us to achieve our core strategic objectives and continue to profitably grow our business.
As a small financial services company that operates in a niche market, we are subject to liquidity risk that could materially affect our operations and financial condition.
In recent years, the financial services industry, credit markets and financing sources for ministry loans have been materially and adversely affected by reduced availability of liquidity. Reduced liquidity can particularly affect smaller lenders that have relied on short-term institutional credit facilities to enhance their liquidity needs. Due to the overconcentration and suitability restrictions placed on our Class A Notes note sales, we experienced a $4.9 million (10.2%) decline in our debt securities in 2013 that adversely affected our liquidity position. We will need to monitor and successfully manage our liquidity needs as needed 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. If we are unable to attract productive investment advisers with existing books of business, transition some of those investments into our proprietary investor notes, substantially increase the number of new investors in our debt securities and successfully leverage the investment in new mortgage loans through increased loan participation interests, our liquidity could be adversely impacted and growth in our balance sheet constrained by these limitations.
Our systems may experience an interruption or breach in security which could subject us to increased operating costs as well as litigation and other liabilities.
We rely heavily on communications and information systems to conduct our business and we converted to an enterprise resources planning system in 2010 that includes a core data processing system that is independent from the operating system of ECCU, our largest equity owner. 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
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systems. The secure transmission of confidential information over the Internet and other electronic transmission and communication systems is essential to maintaining customer confidence in certain of our services. Security breaches, computer viruses, acts of vandalism and developments in computer capabilities could result in a breach or breakdown of the technology we use to protect customer information and transaction data. While we have policies and procedures designed to prevent or limit the effect of the possible failure, interruption or security breach of our information systems, there can be no assurance that any such failure, interruption or security breach will not occur or, if they do occur, that they will be adequately addressed. The occurrence of any failure, interruption or security breach of our information systems could damage our reputation, result in a loss of a borrower, investor or customer’s business or expose us to civil litigation and possible financial liability. Our financial, accounting, data processing or other operating systems and facilities may fail to operate properly or become disabled as a result of events that are beyond our control, such as unforeseen catastrophic events, cyber attacks, human error, change in operational practices of our system vendors, or unforeseen problems encountered while implementing major new computer systems or upgrades to existing systems, potentially resulting in data loss and adversely affecting our ability to process these transactions.
We engage in transactions with related parties and our policies and procedures regarding these transactions may be insufficient to address any conflicts of interest that may arise.
Under our code of business conduct, we have established procedures regarding the review, approval and ratification of transactions which may give rise to a conflict of interest between us and any employee, officer, trustee, their immediate family members, other businesses under their control and other related persons. In the ordinary course of our business operations, we have ongoing relationships and have engaged in transactions with several related entities. These procedures may not be sufficient to address any conflicts of interest that may arise.
Any negative changes in the financial capabilities of one or more of our equity owners could adversely affect our ability to raise additional capital.
None of our equity owners are obligated to make additional contributions or loan us additional funds. However, they may do so on a voluntary basis and we may from time to time, in the future, request our equity owners to do so. In such event, one or more of our equity owners may be unwilling or unable to make voluntary additional capital contributions or loans because their financial capabilities are at the time impaired. Also, if one of our equity owners’ financial status is in the future deteriorated to the extent that they or their operations are discontinued or otherwise come under the control of the AMAC, NCUA or other regulatory agency, it is unclear what rights, if any, that agency will have to exercise that member’s membership rights in our company or, if it can exercise any such rights, the manner in which it will do so.
Risks Related to the Financial Services Industry and Financial Markets
Deterioration of market conditions could negatively impact our business, results of operations and financial condition, including liquidity.
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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:
· | interest rates and credit spreads; |
· | the availability of credit, including the price, terms and conditions under which it can be obtained; |
· | loan values relative to the value of the underlying real estate assets; |
· | default rates on special purpose mortgage loans for churches and ministries and the amount of the related losses; |
· | the actual and perceived state of the real estate markets for church properties and special use facilities; and |
· | unemployment rates. |
While there has been some improvement in U.S. real estate markets, our mortgage loan investments can be adversely affected by significant declines in the value of real estate and real estate related assets, impairment of the ability of many borrowers to repay their obligations and illiquidity in the markets for real estate and real estate-related assets. During the years 2010 and 2011, these events had significant adverse effects on our business resulting in significant increases in our provision for loan losses and unavailability of financing for the acquisition and warehousing of our mortgage loan investments. Due, in large part, to the stabilization of mortgage loan portfolio and efforts in managing the real estate owned assets we hold and non-performing loans, we have reported significant net earnings for both 2012 and 2013. Deterioration in U.S. economic conditions could harm our financial condition, income and ability to make distributions to our equity investors.
Declining real estate values could harm our operations.
We believe the risks associated with our business are more severe during periods similar to those which we have recently experienced in which an economic slowdown or recession is accompanied by declining real estate values. Declining real estate values generally reduce the level of new mortgage loan originations, since borrowers often use increases in the value of their existing properties to support the purchase of, or investment in, or renovation of their worship facilities. Borrowers may also be less able to pay principal and interest on our loans, and the loans underlying our securities, if the real estate economy weakens. Further, declining real estate values significantly increase the likelihood that we will incur losses on our loans in the event of default because the value of our collateral may be insufficient to cover our investment in such loans. 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,
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financial condition, liquidity, business prospects and our ability to make distributions to our equity investors.
Interest rate fluctuations and shifts in the yield curve may cause losses.
Our primary interest rate exposures relate to our mortgage loan investments and floating rate debt obligations. Changes in interest rates, including changes in expected interest rates or "yield curves," affect our business in a number of ways. Changes in the general level of interest rates can affect our net interest income, which is the difference between the interest income we earn on our interest-earning assets and the interest expense we incur in connection with our interest-bearing liabilities. Changes in the level of interest rates also can affect, among other things, our ability to originate and acquire mortgages and the market value of our mortgage investments.
In the event of a significant rising interest rate environment, default by our mortgage loan obligors could increase our losses and negatively affect our liquidity and operating results. Interest rates are highly sensitive to many factors, including governmental monetary and tax policies, domestic and international economic and political conditions, and other factors beyond our control.
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. If spreads for such liabilities widen or if availability of credit facilities ceases to exist, then our ability to execute future financings will be severely restricted.
Our subsidiary, MP Securities, is required to maintain licenses in the various jurisdictions in which it will conduct its activities.
FINRA has granted our membership application for a license for our broker-dealer subsidiary, MP Securities, which permits it to engage in the securities business and has issued a no objections letter thereby enabling it to sell our Class A Notes. We are also required to maintain licenses with the state securities regulators which have jurisdiction over broker-dealer firms that engage in securities transactions in such states. MP Securities was also approved in 2013 as a California registered investment advisory firm and is subject to the Investment Advisers Act of 1940. Failure to maintain such licenses would prevent us from effecting sales of securities in such states, supplementing our revenue with underwriting fees or commissions paid to MP Securities by the issuer of those securities, generate fee income on the sale of investment products or assets under management or act as a selling agent for the Company’s debt securities.
Some of our debt securities investors may be unable to purchase additional Class A Notes due to FINRA’s investor suitability standards.
When handling sales of our Class A Notes to an investor, MP Securities and its sales representatives must comply with FINRA’s “know your customer” and “suitability” guidelines which are designed to ensure that investors make investments that are appropriate given the age, investment experience, net worth, need for liquidity and mix of investments owned by the
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investor. In order to invest in our Class A Notes, an investor must meet certain net worth and annual income requirements and is further subject to certain limitation designed to ensure that the investor does not have an overconcentration of his or her net worth in our Class A Notes. Because of these suitability limitations, some of our investors who have invested in our debt securities in the past may not be able to invest in our Class A Notes 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 investor debt securities on our balance sheet, thereby making it difficult to grow our balance sheet.
Our reputation, operating business and core strategic objectives could be adversely affected by regulatory compliance failures.
We rely on publicly offered debt securities to fund a substantial portion of our operations and, as a result, are subject to U.S. securities laws, rules, and regulations promulgated by the SEC and applicable state securities statutes. Our subsidiary, MP Securities, is subject to SEC and FINRA oversight and is a California registered investment adviser. As a state registered investment advisory firm, it will be subject to regulatory review by the California DBO, SEC and will be required to comply with the applicable provisions of the Investment Advisers Act of 1940 and California laws and regulations affecting state registered investment advisory firms. To the extent MP Securities engages in securities activities in a particular state, state securities administrators will have jurisdiction over the activities of our broker-dealer affiliated entity. In addition, the real estate brokerage activities of MP Realty and our mortgage lending business are subject to various state regulatory authorities. The failure to comply with obligations imposed by any federal, state or other applicable regulatory authority binding on us or our subsidiaries or to maintain any of the licenses or permits required to be maintained by us could result in investigations, sanctions and reputation damage.
Risks Related to our Mortgage Loan Investments
We are subject to risks related to prepayment of mortgage loans held in our portfolio, which may negatively impact our business.
Generally, our borrowers may prepay the principal amount of their mortgage loans at any time. Due to the Federal Reserve Board’s accommodative monetary policies, there is intense competition from financial institutions that are looking to make commercial loans at competitive rates to qualified borrowers. If a significant number of borrowers refinance their loans with another lender, our business and profitability could be adversely affected.
Increases in interest rates during the term of a loan may adversely impact a borrower's ability to repay a loan at maturity or to prepay a loan.
If interest rates increase during the term of our loan, a borrower may not be able to obtain the necessary funds to repay our loan at maturity through refinancing. Increasing interest rates may hinder a borrower's ability to refinance our loan because the underlying property cannot satisfy the debt service coverage requirements necessary to obtain new financing or because the value of the property has decreased. If a borrower is unable to repay our loan at maturity, we could suffer
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a loss and we will 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 members could be materially adversely affected.
Although we seek to favorably match the interest rate return on our mortgage loan investments with our debt financing commitments, we are subject to significant interest rate risk.
Our investment and business strategy depends on our ability to successfully finance our investments in mortgage loans that provide a positive spread as compared to our cost of borrowing. A substantial portion of our loan investments provide for a fixed interest rate with a typical five year maturity. A significant portion of our borrowing arrangements with our note investors and credit facility lenders, however, provide for variable rates of interest that are indexed to short-term borrowing rates or fixed rates on short-term maturities. To mitigate our interest rate risks, we have entered into, and may enter into in the future, interest rate hedging transactions that include, but are not limited to, interest rate caps and interest rate swaps. The results of using these types of instruments to mitigate interest rate risks are not guaranteed, and as a result, the volatility of interest rates could result in reduced earnings or losses for us and negatively affect our ability to make distributions of earnings to our equity investors.
We are subject to the risks associated with loan participations, such as less than full control rights.
Some of our assets are participation interests in loans or co-lender arrangements in which we share the rights, obligations and benefits of the loan with other lenders. We may need the consent of these parties to exercise our rights under such loans, including rights with respect to amendment of loan documentation, enforcement proceedings in the event of default and the institution of, and control over, foreclosure proceedings. Similarly, a majority of the participants may be able to take actions to which we object but to which we will be bound if our participation interest represents a minority interest. We may be adversely affected by this lack of full control. As of December 31, 2013, our investments included $28.7 million in loan participations, representing 19.1% of our portfolio.
Church revenues fluctuate and may substantially decrease during times of economic hardship.
Generally, to pay their loans, churches depend largely on revenues from church member contributions. Donations typically fluctuate over time for a number of reasons, including, but not limited to, fluctuations in church membership, local economic conditions including unemployment rates and local real estate and market, changes in church leadership, and credit conditions.
The quality of our mortgage loans depends on consistent application of sound underwriting standards.
The quality of the mortgage loans in which we invest depends largely on the adequacy and implementation of sound underwriting standards used to make the loans. Even where the lender
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has sound underwriting standards, these standards must be properly observed and implemented in order to obtain the target loan risk levels.
Because two of our managers hold executive or board positions with ECCU, those managers may, from time to time in their capacity as a manager of the Company, have a conflict of interest with the interests of ECCU.
The Chairman of our Board of Managers is a full time employee of ECCU and another manager is a director of ECCU. Conflicts of interest are inherent in mortgage loan transactions between us, ECCU, and its affiliates. Because of these multiple relationships, these persons will face conflicts of interest in connection with various decisions they will make on our behalf, including, but not limited to:
· | decisions as to which mortgage loans ECCU will make available to us; |
· | decisions as to the price and terms of mortgage loans ECCU offers to us; |
· | determinations as to the creditworthiness of borrowers of mortgage loans ECCU offers to us; |
· | decisions to acquire mortgage loan investments from or through ECCU; |
· | decisions regarding our contract with ECCU for our office facilities; |
· | managing foreclosure actions and real estate owned properties acquired in foreclosure or other proceedings where ECCU and the Company each hold an economic interest; |
· | decisions regarding collection and enforcement actions taken by ECCU when it acts as primary lender of a loan participation interest or as servicer for one of our mortgage loan investments; and |
· | decisions regarding our contracts with ECCU for loan underwriting, processing and servicing services. |
We have also implemented a Related Parties Transaction Policy, to which all of our managers and officers must adhere. It provides, among other things, that certain related party transactions be approved by a majority of those managers who are unrelated to the parties in the transaction.
We have further mitigated these conflicts of interest by forming a Credit Review Committee, of which three out of the four members consist of our officers who are unrelated to ECCU. This committee makes most of the loan approval decisions under our Church and Ministry Loan Policy. Our Church and Ministry Loan Policy sets forth minimum credit quality standards for the loans we make or purchase, and can only be overridden, depending on the circumstances, by our Investment Committee or by our managers.
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Because we invest only in specialized purpose mortgage loans, our loan portfolio is generally more risky than if it were diversified.
We are among a limited number of non-bank financial institutions specialized in providing loans to evangelical churches and church organizations. Even though the number of institutions making and/or investing in mortgage loans to churches and church related organizations has increased in recent years, these loans are secured by specialized properties and the secondary market for these loans remains regional and limited. Our mortgage loan agreements require the borrower to adequately insure the property securing the loan against liability and casualty loss. However, certain types of losses, generally those of a catastrophic nature such as earthquakes, floods or storms, and losses due to civil disobedience, are either uninsurable or are not economically insurable. If a property was destroyed by an uninsured loss, we could suffer loss of all or a substantial part of our mortgage loan investment.
Our loan portfolio is concentrated geographically and focused on loans to churches and religious organizations.
We are among a limited number of non-bank financial institutions specialized in providing loans to evangelical churches and church organizations. Moreover, approximately 30% of our mortgage loan investments involve California borrowers or are secured by properties located in California, a market that has been negatively impacted by the collapse of the residential real estate market and decrease in real estate prices. Although there are a number of national and regional institutions making and/or investing in mortgage loans to churches and church related organizations, these loans are secured by special purpose facilities. As a result, if the properties securing such mortgages must be sold, there may be a limited number of buyers available for such properties. Nevertheless, we believe that there is a great deal of diversity in the types of not-for-profit organizations and entities that could be potential acquirers of properties of this nature, including, but not limited to, other churches, schools, clinics, community development agencies, universities and educational institutions, day care, social services, assisted living facilities and relief organizations.
We may need, from time to time, to sell or hypothecate our mortgage loan investments.
Because the market for our mortgage loans is specialized, the prices at which our portfolio could be liquidated are uncertain. As a result, our mortgage loan investments are relatively illiquid investments and we may have difficulty in disposing of these assets quickly or at all in the event we need additional liquidity. The amount we would realize is dependent on several factors, including the quality and yield of similar mortgage loans and the prevailing financial market and economic conditions. Although we have never sold a performing loan we own for less than par, it is possible that we could realize substantially less than the face amount of our mortgage loans, should we be required to sell or hypothecate them. Thus, the amount we could realize for the liquidation of our mortgage loan investments is uncertain and cannot be predicted.
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
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advance funds to the borrower. As a result, we may suffer losses on loans or make advances that we would not have made if we had all of the material information.
There is generally no publicly available information about the churches and ministries to which we lend. Therefore, we must rely on our borrowers and the due diligence efforts of our staff to obtain the information that we consider when making our credit decisions. To some extent, our staff depends and relies upon the pastoral staff to provide full and accurate disclosure of material information concerning their operations and financial condition. We may not have access to all of the material information about a particular borrower’s operations, financial condition and prospects, or a borrower’s accounting records may become poorly maintained or organized. The financial condition and prospects of a church may also change rapidly in the current economic environment. In such instances, we may not make a fully informed credit decision which may lead, ultimately, to a failure or inability to recover our loan in its entirety.
We may be unable to recognize or act upon an operational or financial problem with a church in a timely fashion so as to prevent a loss of our loan to that church.
Our borrowers may experience operational or financial problems that, if not timely addressed by us, could result in a substantial impairment or loss of the value of our loan to the church. We may fail to identify problems because our borrowers did not report them in a timely manner or, even if the borrower did report the problem, we may fail to address it quickly enough or at all. Although we attempt to minimize our credit risk through prudent loan approval practices in all categories of our lending, we cannot assure you that such monitoring and approval procedures will reduce these lending risks or that our credit administration personnel, policies and procedures will adequately adapt to changes in economic or any other conditions affecting our borrowers and the quality of our loan portfolio. As a result, we could suffer loan losses which could have a material adverse effect on our revenues, net income and results of operations.
Some of the loans in our investment portfolio are in the process of being restructured, have been restructured or may otherwise be at risk, which could result in impairment charges and loan losses.
Some loans in our investment portfolio have been restructured or may otherwise be at risk or under credit watch. Over the last four years, the number of churches that have requested or been granted loan modifications has been significantly higher than in our prior historical experience. Under current economic conditions, the credit performance of these modified loans may not conform to either historical experience or our expectations. We make various assumptions and judgments about the collectability of our loan portfolio, including the creditworthiness of our borrowers and the value of the real estate and other assets serving as collateral for the repayment of many of our loans. If we determine that it is probable that we will not be able to collect all amounts due to us under the terms of a particular loan agreement, we could be required to recognize an impairment charge or a loss on the loan unless the value of the collateral securing the loan exceeds the carrying value of the loan. If our assumptions regarding, among other things, the present value of expected future cash flows or the value of the collateral 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
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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 the ability to make debt service payments and distributions to our equity owners.
Some of our mortgage loan investments currently are, and in the future may be, non-performing loans which are subject to increased risks relative to performing loans.
Some of the loans in our mortgage loan portfolio currently are, or in the future may be, a non-performing loan. Such loans may become non-performing if the church falls upon financial distress, the community or congregation the church serves suffers financial hardship or there is significant change in leadership of the church, in each instance, resulting in the borrower being unable to meet its debt service obligations to us. Such non-performing loans may require a substantial amount of workout negotiations and restructuring efforts by our management team. These restructuring efforts may involve modifications to the interest rate, extension or deferral of payments to be made under the loan or other concessions. Even if a restructuring is successfully accomplished, a risk still exists that the borrower may not be able or willing to maintain the restructured payments or refinance the restructured mortgage at maturity.
In the event a borrower defaults on one of our mortgage loan investments, we will generally need to recover our investment through the sale of the property securing the loan.
In that event, the value of the real property security may prove insufficient, in which case we would not recover the amount of our investment. Even though an appraisal of the property may be obtained at the time the loan is originated, the property's value could decline as a result of a number of subsequent events, including:
· | uninsured casualty loss (such as an earthquake or flood); |
· | a decline in the local real estate market; |
· | undiscovered defects on the property; |
· | waste or neglect of the property; |
· | a downturn in demographic and residential trends; |
· | a decline in growth in the area in which the property is located. Also, churches and church-related properties are generally not as marketable as more common commercial, retail or residential properties. |
The occurrence of any of these factors could severely impair the market value of the security for our mortgage loan investments. In the event of a default under a mortgage loan held directly by us, we will bear the risk of loss of principal to the extent in 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
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on our anticipated return on the foreclosed mortgage loan. Such delays can cause the value of the mortgaged property to further deteriorate. The properties also incur operating expenses pending their sale, including property insurance, management fees, security, repairs and maintenance. Any additional expenses incurred could adversely affect our ability to recover the full value of our collateral.
There is a possibility that we could incur foreclosures and losses in connection with our mortgage loan investments during recessionary or depressed economic periods.
Recessionary or depressed periods typically occur on a cyclic basis by an unpredictable time and with uncertain lengths. Also, such events can be triggered by terrorist acts, war, large scale economic dislocations, or widespread and large corporate bankruptcies. The effects of these events cannot presently be predicted. We could incur losses as a result of borrower defaults and foreclosures on our mortgage loan investments. Also, during times of recession or depression, the demand for our mortgage loans, even in times of declining interest rates, is likely to decline. Also, in connection with any sale or hypothecation of a mortgage loan, we would likely have to agree to be responsible in whole or in part for a limited period of time for any delinquencies or default. If we should experience significant delinquency rates, our revenues would materially decrease and, subject to our other available cash resources at the time, our ability to timely pay our debt securities obligations or our other indebtedness may be substantially impaired.
When we acquire properties through the foreclosure of one of our mortgage loan investments, we may recognize losses if the fair value of the real property internally determined upon such acquisition is less that the previous carrying amount of the foreclosed loan.
Until 2011, we had never foreclosed on a real estate mortgage we owned. When we acquire a property through foreclosure, we value the real estate property and its related assets and liabilities. We determine fair value based primarily upon discounted cash flow or capitalization rate assumptions, the use of which requires assumptions including discount rates, capitalization rates, and other third party data. We may recognize a loss if the fair value of the property internally determined upon acquisition is less than the previous carrying amount of the foreclosed loan.
Real estate taxes resulting from a foreclosure could adversely affect the value of our collateral.
If we foreclose on a mortgage loan and take legal title to the real property, we could become responsible for real estate taxes levied and assessed against the foreclosed upon real property. While churches are normally exempt from real estate assessments on their worship and ministry related properties, once we acquire the real property after a foreclosure, any real estate taxes assessed would be our financial responsibility and could prevent us from recovering the full value of our investment.
Competition may limit our business opportunities and ability to operate profitability.
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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.
We are exposed to environmental liabilities with respect to properties to which we take title.
In the course of our business, we may take title to real estate through foreclosure on one of our mortgage loan investments or otherwise. If we do take title to a property, we could be subject to environmental liabilities with respect to these properties. In such a circumstance, we may be held liable to a governmental entity or to third parties for property damage, personal injury, and investigation and clean-up costs incurred by these parties in connection with environmental contamination, or may be required to investigate or clean up hazardous or toxic substances, or chemical releases, at a property. The costs associated with investigation or remediation activities could be substantial. If we ever become subject to significant environmental liabilities, our business, financial condition, liquidity and results of operations could be materially and adversely affected.
Risks of cost overruns and non-completion of the construction or renovation of the mortgage properties securing construction loans we invest in may materially adversely affect our investment.
The renovations, refurbishment or expansion by a borrower of a mortgage property involves risks of cost overruns and non-completion. Costs of construction or improvements to bring a mortgage property up to standards established for the market position intended for that property may exceed original estimates, possibly making a project uneconomical. Such delays and cost overruns are often the result of events outside both our and the borrower’s control such as material shortages, labor shortages and strikes and unexpected delays caused by weather and other acts of nature. Also, environmental risks and construction defects may cause cost overruns, and completion delays. If such construction or renovation is not completed in a timely manner, or if it costs more than expected, the borrower may experience a prolonged impairment of the borrower’s revenues making it unable to make payments on our loan. At December 31, 2013, we held $774 thousand in constructions loans.
Item 1B. UNRESOLVED STAFF COMMENTS
None.
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
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the lease for a five year period. The ECCU Office Lease agreement includes one additional option to renew for an additional five year term. For 2013, our base rent was $10,437 per month. In November 2013, under the terms of the renewal, our base rent decreased to $9,172 per month. On March 6, 2012, MP Securities entered into an office lease for approximately 1,358 square feet of office space to open a branch office in Fresno, California. The lease has a term of 36 months and includes an option to extend the lease for an additional two year term. For 2014, the base rent for this branch office will be $2,173 per month.
As of December 31, 2013, we hold properties acquired through foreclosure with a net value of $3.3 million, which includes a reserve of $13 thousand on one of the properties. Each property is valued based on its current listing price or most recent appraised value less anticipated selling costs, marketing costs and commissions.
A summary of the properties we have acquired through foreclosure is listed below:
· | Together with ECCU and another participating credit union, we acquired a school property in Palm Beach County, Florida pursuant to foreclosure proceedings. With the agreement of the lead lender and other participating lenders, the property has been leased back to the school for a period of two years and the school has an option to purchase the property at a price of $5.3 million or the appraised value of the property, whichever is greater. No reserves have been taken on this property. We have included our interest in this property as a property held for sale with a valuation of $1.4 million at December 31, 2013. |
· | We acquired an additional two real properties in February 2012 pursuant to a plan of reorganization that was approved by a U.S. Bankruptcy Court in North Carolina. We own a 19.9% interest in these properties pursuant to a loan participation interest agreement. One of these properties, which carried a reserve of $136 thousand, was sold in November 2013 at a gain of $88 thousand. The remaining property has been listed for sale through a local realtor and we have recorded the carrying value of the property at $205 thousand, which includes a reserve of $13 thousand taken against the property. |
· | In August 2013, together with ECCU, we acquired four church properties located in Rockford, Illinois pursuant to a foreclosure proceeding. These properties, along with one other which remains in foreclosure, secured a loan in which we own a 64.8% interest. The properties include several parcels of vacant land, an educational facility, and a training center. We have included these properties as real estate owned assets for sale at a cumulative carrying value of $1.7 million at December 31, 2013. No reserves have been taken against these properties. |
As of December 31, 2013, our foreclosed real estate properties are valued at $3.3 million and are presented net of any valuation allowances.
On January 31, 2014, we acquired another property as the result of a deed in lieu of foreclosure agreement we entered into with the borrower. This property is carried at a value of $1.2 million. For further information on this transaction, see Note 16, Subsequent Event.
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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 involved in any litigation matters that could have a material adverse effect on our financial position, results of operations or cash flows.
Item 4. MINE SAFETY DISCLOSURES
Not Applicable.
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PART II
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MARKET FOR OUR COMMON EQUITY, RELATED MEMBER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |
Price Range of Common Units
There is no public market for our Class A Units and Series A Preferred Units (the Series A Units). Effective as of December 31, 2008, we converted our form of organization from a California corporation to a California limited liability company. As a result of the conversion, each share of our common stock immediately outstanding prior to the conversion date was converted into one fully paid and non-assessable unit of our Class A Units and each holder of our Class I and Class II Preferred Stock received one Series A Unit for each share of Class I and Class II Preferred Stock exchanged. As of December 31, 2013, a total of 146,522 Class A Units were issued, with 11 holders of record, and a total of 117,100 Series A Units were issued, with 12 holders of record
Sale of Equity Securities by Issuer
During the year ended December 31, 2013, we did not sell Class A Units, Series A Units or equity units.
Purchases of Equity Securities by Issuer
During the year ended December 31, 2013, we did not purchase Class A Units or Series A Units.
Dividends and Distributions
Prior to our conversion from a corporation to a limited liability company, we paid regular dividends on our Class I and Class II Preferred Stock. For 2013, we made no distributions to the holders of our Class A Units.
During 2013 and 2012, we made distributions on our Series A Units as follows:
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|
SERIES A UNITS | ||||||
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|
|
| Distributions Declared per Unit | ||||
Quarter |
| 2013 |
| 2012 | ||
|
|
|
|
|
|
|
Fourth |
| $ | 0.585 |
| $ | 0.759 |
Third |
|
| 0.222 |
|
| 0.724 |
Second |
|
| 0.233 |
|
| 0.740 |
First |
|
| 0.649 |
|
| 0.735 |
Total distributions per Unit |
| $ | 1.689 |
| $ | 2.958 |
49
On May 14, 2013, the Series A Preferred Unit holders approved the adoption of an Amended and Restated Certificate of Powers, Designations, Preferences and Rights of Series A Preferred Units (the “Amended Series A Certificate”), pursuant to which holders of the Series A Preferred Units approved a reduction in the preferred dividend return payable to the Series A Preferred Unit holders. Under the Amended Series A Certificate, the Series A Preferred Unit holders are entitled to receive a quarterly cash dividend that is 25 basis points higher than the one year LIBOR rate in effect on the last day of the calendar month for which the preferred return is approved (the “Series A Dividend”).
Payment of the Series A Dividend will have priority over the distribution of profits or income to the Class A Unit holders and any series or class of common units that are hereafter issued. In the event that we accrue, but do not distribute, the Series A Dividend, no distribution of earnings may be made to the holders of our Class A Units until payment of the Series A Dividend has been made.
In addition to quarterly dividends to our Series A Preferred Unit holders, we have also agreed to set aside funds for payment to the holders of the Series A Units in an amount equal to 10% of our net profits earned for any fiscal year, after subtracting the amount of quarterly Series A Dividends paid during such year. This priority distribution of our net profits after payment of quarterly Series A Dividend will be made to holders of the Series A Units on a pro rata basis. The balance of any profits, taking into consideration the preferred distribution to the holders of Series A Units, will be allocated to all holders of our Class A Units in proportion to their percentage interests in our Class A Units. For the year ended December 31, 2013, we set aside $43.9 thousand in net profits to distribute to our Series A Unit holders. This increased the distributions declared per Series A Unit for the fourth quarter by $0.37 per unit.
In the event of a loss, our operating agreement provides that losses will be allocated first to the holders of common units and then to the Series A Unit holders until their respective capital accounts have been reduced to zero. If the capital accounts of the members cannot offset the entire loss, the balance will be allocated, pro rata, to the holders of common units in proportion to their respective ownership interest in our common equity units.
Equity Compensation Plans
We do not have an equity compensation plans which authorize the issuance of our equity interests to our managers, officers or employees.
Item 6.SELECTED FINANCIAL DATA
We are a “smaller reporting company” as defined by Regulation S-K and as such, are not providing the information contained in this item pursuant to Regulation S-K.
50
The following discussion regarding our financial statements should be read in conjunction with the financial statements and notes thereto included in this Annual Report beginning at page F-1.
Overview
We are a Brea, California-based business that was incorporated in 1991 as a credit union service organization whose mission is to make evangelical ministries more effective by providing ministries with Biblically-based, value-driven financial services and by providing funding services to the credit unions who serve these ministries. We do this by originating and investing in mortgage loans made to churches, most of which are secured by church and church-related real property owned by and/or maintained for the benefit of evangelical churches or church organizations, including Christian schools, ministries and related organizations.
We are continuing to position the Company for future growth in the areas where we have historically been successful through our investments in church and ministry mortgage loans, while diversifying the sources of revenue generated by our business. In order to take advantage of our market opportunities and maximize the value of our equity holders’ investment, we will continue to focus on:
· | improving our liquidity and strengthening our balance sheet; |
· | building our capital while developing new financing sources; |
· | increasing our revenue generating capabilities through the expansion of our loan origination and servicing capabilities, and selling loan participation interests; |
· | increasing our revenue from broker-dealer related services by offering a full array of wealth management products and services, including the offering of Registered Investment Advisor capabilities; |
· | continuing to recruit sales representatives, investment advisers and sales personnel that will help us make MP Securities a fee-generating source of revenue for the Company; |
· | substantially increasing the sale of our investor debt securities, thereby enabling us to grow our balance sheet and generate new investment capital; |
· | managing and strengthening our loan portfolio through aggressive and proactive efforts to resolve problems in our non-performing assets, increasing cash flows from our borrowers and ultimately realizing the benefit of our investments; |
· | prudently managing and carrying-out strategies for our real estate owned assets to minimize losses, or, realize a gain where possible on these properties; |
51
· | broadening the number of investors in our investor debt securities and effectively implementing strategies designed to ensure MP Securities’ compliance with FINRA’s suitability and regulatory standards; |
· | developing capital funding sources that are not dependent on the sale of mortgage-backed securities or institutional credit facilities; and |
· | managing the size and cost structure of our business to match our operating environment and capital funding efforts. |
For the year ended December 31, 2013, we generated net income of $592 thousand, which was the second highest year of earnings in the Company’s history. We achieved these results despite a decline in our total assets of $8.2 million (5.0% decline). We are aggressively building our pipeline of new loans, improving our ability to sell loan participation interests, closely monitoring our real estate owned assets and impaired loans and are continuing to make significant investments in our broker-dealer infrastructure through strategic recruitment of key personnel while expanding our offering of products and services.
For the year ended December 31, 2013, the primary items affecting our operating performance were the following:
· | recording $345 thousand in gains on loan sales, related to the sale of three of our foreclosed assets; |
· | we received cash payments on one of our impaired loans that enabled us to recoup $252 thousand of loan loss reserves previously accrued; |
· | we sold $4.9 million in loan participations resulting in gains on loan sales of $54 thousand; |
· | with the reduction in our preferred dividend commitment approved by our Series A Preferred Unit holders in May 2013, we were able to contribute an additional $146.3 thousand to our net capital; |
· | our return on assets went from .04% in 2012 to .25% in 2013, return on equity went from 4.6% in 2012 to 26.59 % in 2013 and our capital ratio increased from 5.73% in 2012 to 6.28% at December 31, 2013; |
· | we reported an increase in net interest margin from 2.82% to 3.03% due to an increase in interest income related to the recognition of deferred fee income resulting from loan participation sales as well as reduced interest rates on our investor notes; |
· | we reported an increase in other income from fees earned by MP Securities, gains on the sale of loan participations, and in increase in servicing fee income; |
52
· | we incurred an increase in salaries and benefits expenses as we hired an additional salesperson at MP Securities and additional personnel to assist in loan originations, as well as accruing severance payments made to former officers; |
· | we reserved an additional $288.2 thousand in our loan loss allowance for one of our non-performing loans as a result of an unfavorable court decision on a foreclosure action initiated by the lead lender in a loan in which we hold a 64% participation interest; |
· | operating expenses decreased due to reduced human resources costs as a result of our new contract with ADP as well as reduced expenses related to the management of our loan portfolio; and |
· | we reported a decrease in net expenses on foreclosed assets as we recorded only $13 thousand in provisions for losses on foreclosed assets as compared to $136 thousand in 2012. |
If we are able to implement the strategic plan and objectives outlined above, we expect to increase our core earnings on our total assets and improve the performance of our wholly-owned broker-dealer and investment advisory firm, MP Securities. We also expect to see continued improvements in our operating results for 2014 as we implement the core strategic objectives set forth above. We expect to see further improvements in the performance and stability of our church and ministry borrowers.
Financial Condition
We obtain funds for our mortgage loan investments from the sale of our debt securities, which are sold primarily to investors who are in or associated with the Christian community, including individuals, ministries and organizations associated with evangelical churches and their governing associations. We also have relied upon credit facilities with institutional lenders to increase the size of our balance sheet, improve our earnings and purchase mortgage loan assets.
During 2009, due to the termination of one of our credit facilities, we deleveraged our balance sheet by making principal reductions on our borrowing. During 2013, in additional to regular principal payments, we made several smaller principal reductions on our National Credit Union Administration Asset Management Assistance Center credit facilities. Our total assets as of December 31, 2013 decreased to $158.4 million, as compared to $166.6 million at December 31, 2012. Our total liabilities were $148.5 million at December 31, 2013, as compared to $157.1 million at December 31, 2012.
The following table sets forth selected measures of our financial performance for the years ended December 31, 2013 and 2012, respectively (dollars in thousands):
53
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 2013 |
| 2012 | ||
|
|
|
|
|
|
|
Total income |
| $ | 9,641 |
| $ | 10,106 |
Provision (credit) for loan losses |
|
| 9 |
|
| (9) |
Net income |
|
| 592 |
|
| 417 |
Total assets |
|
| 158,415 |
|
| 166,645 |
Borrowings from financial institutions |
|
| 99,904 |
|
| 103,833 |
Notes payable |
|
| 47,667 |
|
| 52,564 |
Total equity |
|
| 9,943 |
|
| 9,548 |
2013 Developments
Strengthen the Quality of our Loan Portfolio. Despite competition for church and ministry loans from financial institutions that aggressively sought to make inroads into this niche market by enabling churches to refinance their mortgage loans at historically low interest rates, we originated $32.7 million in net loans in 2013 and rolled over $30 million of mortgage loans in our portfolio. We added one additional underwriter as well as an additional support staff person to assist in the loan origination process. As part of our strategic decision to reposition our loan portfolio, originations consisted mainly of lower balance loans made to smaller ministries where we could achieve more favorable yields and avoid deteriorating our margins while reducing overall risk exposure to any one borrower. Our average loan balance decreased from $1.3 million at December 31, 2012 to $1.1 million at December 31, 2013. Due to focusing on originating high quality loans, the weighted average risk rating in our portfolio decreased from 0.73% at December 31, 2012 to 0.56% at December 31, 2013.
While the real estate market for church and ministry properties showed significant improvement during the last two years, our delinquency ratio increased from 2.2% at December 31, 2012 to 3.0% at December 31, 2013 and has fluctuated over the past few years as we worked with our non-performing loans. As of December 31, 2011, for example, we had fifteen delinquent loans with a total principal balance of $23.3 million (13.66% of the portfolio), as compared to nine delinquent loans at December 31, 2013 (7.67% of the portfolio). From time to time, borrowers who have previously been granted a mortgage modification may later default on their loan. During 2013, four mortgage loans we had previously restructured defaulted. However, we have been able to work with the borrower in each situation and we did not initiate any new foreclosure proceedings in 2013.
We continued to devote substantial attention and staff resources in 2013 on efforts to manage, restructure, liquidate or undertake foreclosure actions where necessary to protect our mortgage loan investments. For example, we entered into a deed in lieu of foreclosure agreement with a borrower in May 2013 and sold this property in September 2013 for a gain of $206 thousand. Our lending team also aggressively monitors our real estate owned properties and non-performing loans and works with our borrowers to minimize losses on any of these loans. In September 2013, we received a cash payment of $202 thousand on one of our non-performing
54
loans and applied the payment to outstanding principal and entered into a forbearance agreement to re-amortize the balance of the loan. As a result of these efforts, the borrower is now current on its restructured loan and we recovered $252,000 in loan loss reserves we had previously accrued. For 2013, we recorded a provision for loan losses of $9 thousand during the year ended December 31, 2013, as compared to a credit for loan losses of $9 thousand for the year ended December 31, 2012.
Enhancing our Capital Funding Sources. Since 2008, we have primarily relied upon institutional credit facilities to generate the capital sources needed to fund our mortgage loan investments. Our Members United and BMO Facility financing arrangements enabled us to rapidly increase our mortgage loan investments and benefit from favorable net interest rate margins on our mortgage loan investments. With the advent of the global credit crisis that commenced in 2008, our major institutional credit facility lenders sought to reduce their exposure on these facilities, thereby requiring us to undertake efforts to deleverage our balance sheet. While the refinancing transactions we entered into on November 4, 2011 with the NCUA to amend our Members United and WesCorp credit facilities have significantly contributed to our return to sustained profitability, these refinancing transactions are not sources of new funding and do not provide the resources we need to grow our business.
During 2013, we continued to take steps to develop capital funding sources that are not dependent on the sale of mortgage-backed securities or institutional credit facilities. In 2011, our wholly-owned subsidiary, MP Securities, was registered under the Securities Exchange Act of 1934 and was approved for membership by FINRA. In the first quarter of 2012, MP Securities launched its broker-dealer operations and began its efforts to develop a sales force of registered representatives dedicated to the distribution of our debt securities. Effective as of September 24, 2012, MP Securities received approval to sell our Class A Notes offered under a Registration Statement that was declared effective by the SEC on October 11, 2012. In March of 2013, MP Securities began selling our Series 1 Subordinated Capital Notes and 2013 International Notes in private offerings, thus opening up additional securities products to enable us to reduce the dependence on institutional credit facilities.
On July 11, 2013, MP Securities executed a new Membership Agreement with FINRA which authorized it to act on a fully disclosed basis with a clearing firm and expand the brokerage activities and types of investment products which can be sold. In addition, on July 11, 2013, the State of California granted its approval for MP Securities to provide registered investment advisory services. Finally, on September 26, 2013, MP Securities entered into a clearing firm agreement with Royal Bank of Canada Dain Rauscher (RBC Dain) thereby enabling it to open brokerage accounts for its customers. This enables MP Securities to offer a broad scope of investment products to better serve the Company’s clients and customers.
In March of 2013, the State of California approved the formation of Ministry Partners Insurance Agency. This enables the Company to sell a variety of insurance products. During the past two years, the Company has expended substantial resources and capital to broaden the sources of capital it relies on to fund its operations and enhance its ability to generate non-interest earning revenue sources. Undertaking this task has required us to meet and satisfy various regulatory approvals and licensing requirements. With the expansion of our Membership Agreement as
55
approved by FINRA, approval as a California registered investment advisory firm, formation and approval of a California insurance agency and entering into a clearing firm arrangement with RBC Dain, we have obtained the necessary approvals that will enable us to recruit qualified and profitable investment advisers and increase the number of clients, ministries and households we serve. An intended byproduct of this approach will be to increase funding through sales of our debt securities, reduce our dependency on large credit facilities provided by institutional lenders, enhance our liquidity and funding capabilities, and gain greater control over our asset / liability management process.
Diversify Our Revenue Sources. Since inception, our primary source of revenue has come from the net interest margin we earn on our mortgage loan investments. After the financial crisis of 2008 and a resulting lack of liquidity in credit markets, we deleveraged our balance sheet, which reduced the net interest income we receive on our investments. In response to these developments, over the past three years we have undertaken efforts to expand the scope of revenue generating services we offer in an effort to make us less dependent on a favorable net interest rate margin from our mortgage loan investments to make the Company less susceptible to unfavorable changes in interest rates. Because we possess the capability to service our own loans, we have significantly increased the portion of our wholly-owned loan portfolio that we service ourselves, thereby reducing the costs of third party servicers and increasing net interest earned on those loans. We now service 107 of the 138 loans in our portfolio. Our loan participation activity resulted in increased revenue from loan servicing of $17 thousand, which we expect to grow further in 2014 as a result of loan participation sales we entered into during the second half of 2013. We also continue to develop relationships with credit unions and CUSOs to enhance our capacity to sell additional loan participations into the secondary market for these participation interests.
As described above, in 2013, we continued our expansion of our broker dealer and investment advisory business with the restructuring of existing staff and the addition of our first investment adviser in our Fresno office. We also made staff reductions in our Company’s main offices in Brea, California in late 2013 and expect to hire additional personnel in our broker dealer and investment advisory subsidiary, MP Securities. By increasing the scope of the services it can offer, MP Securities is now able to recruit a sales forces of registered representatives dedicated to managing our clients’ wealth in a manner consistent with the principles of Biblical stewardship, and act as a selling agent in the distribution of our debt securities. If we are successful in implementing our strategic business plan for MP Securities, we will be able to (i) strengthen the profitability of our core operations; (ii) grow our balance sheet and ramp up the origination of profitable mortgage loans; (iii) introduce new clients to our proprietary investment products and address the challenges we have faced with the overconcentration and suitability standards imposed on the sale of our Class A Notes by regulatory authorities; (iv) increase fee income from assets under management; (v) improve client and investor retention and the renewal rate of our debt securities investors; and (vi) leverage the experience and intellectual capital of our management team through increased loan origination fees and servicing income.
56
Significant Accounting Estimates and Critical Accounting Policies
Critical Accounting Policies
Our discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and the related disclosures. On an on‑going basis, we evaluate these estimates, including those related to the allowance for loan losses, and estimates are based on historical experience, information received from third parties and on various other assumptions that are believed to be reasonable under the circumstances, which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under conditions different from our assumptions. We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements.
Valuation of Loans
All of our loans are held for investment and are carried at their outstanding principal balance, less an allowance for loan losses and loan discount, and adjusted for deferred loan fees and costs. We defer loan origination fees and costs and recognize those amounts as an adjustment to the related loan yield on the asset using the interest method. Loan discounts reflect an offset against accrued interest that has been added to a loan balance under a restructuring arrangement. They also represent the difference between the purchase price of a loan and the loan balance when a loan is purchased at a discount. Loan discounts are accreted to interest income as a yield adjustment using the interest method. Loan discounts on impaired loans are not accreted into income until repayment of the loan is reasonably assured.
Allowance for Loan Losses
Determining an appropriate allowance for loan losses involves a significant degree of estimation and judgment. The process of estimating the allowance for loan losses may result in either a specific amount representing the impairment estimate or a range of possible amounts. We accrue a loss when it is probable that an asset has been impaired and the amount of the loss can be reasonably estimated. A loss is recorded when the outstanding balance of an impaired loan is greater than either 1) the value of the underlying collateral less estimated selling costs for collateral-dependent loans, or 2) the present value of expected cash flows for non-collateral-dependent impaired loans.
When management concludes that a loan is uncollectible, a loan loss is charged against our allowance for loan losses. If there are subsequent recoveries, we credit such amounts to the allowance. We recognize the amount that is the best estimate within the estimated range of loan losses. The determination of an amount within the calculated range of losses is in recognition of the fact that historical charge-off experience, without adjustment, may not be representative of
57
current impairment of the current portfolio of loans because of changed circumstances. Such changes may relate to changes in the age of loans in the portfolio, changes in the creditor’s underwriting standards, changes in economic conditions affecting borrowers in a geographic region, or changes in the business climate in a particular industry.
Management regularly evaluates our allowance for loan losses based upon our periodic review of the collectability of the loans, historical experience, nature and volume of our loan portfolio, adverse situations that may affect the borrower’s ability to repay, value of the collateral and prevailing economic conditions. Since an evaluation of this nature is inherently subjective, we may have to adjust our allowance for loan losses as conditions change and new information becomes available.
Recent Accounting Pronouncements
ASU No. 2013-11, “Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists”. ASU No. 2013-11 eliminates the diversity in reporting an unrecognized tax benefit when a net operating loss carryforward or similar tax loss exists. ASU No. 2013-11 requires, in most circumstances, that an unrecognized tax benefit, or a portion of an unrecognized tax benefit, should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward or similar tax loss. The ASU will be effective prospectively for the Company for annual and interim periods beginning on January 1, 2014 and is not expected to have a material impact on the Company’s financial condition, results of operations, or cash flows.
ASU 2013-10 - Derivatives and Hedging (Topic 815) - Inclusion of the Fed Funds Effective Swap Rate (or Overnight Index Swap Rate) as a Benchmark Interest Rate for Hedge Accounting Purposes was issued. This standard permits the Fed Funds Effective Swap Rate to be used as a U.S. benchmark interest rate for hedge accounting purposes, in addition to U.S. Treasury and LIBOR. The standard also removes the restriction on using different benchmark rates for similar hedges. This standard is not expected to have a material effect on the Company’s consolidated financial statements.
ASU 2013-04 - Liabilities (Topic 405) - Obligations Resulting from Joint and Several Liability Arrangements for Which the Total Amount of the Obligation is Fixed at the Reporting Date was issued. This standard provides guidance for the recognition, measurement, and disclosure of obligations resulting from joint and several liability arrangements for which the total amount of the obligation within the scope of this guidance (e.g. debt arrangements, other contractual obligations and settled litigation and judicial rulings) is fixed at the reporting date. This standard is effective for the Company January 1, 2014 and is not expected to have a material effect on the Company’s consolidated financial statements.
ASU 2013-02, Comprehensive Income (Topic 220) Reporting Amounts Reclassified out of Accumulated Other Comprehensive Income. The amendments in this update supersede and replace the presentation requirements for reclassifications out of accumulated other comprehensive income in ASUs 2011-05 (issued in June 2011) and 2011-12 (issued in
58
December 2011) for all public and private organizations. The amendments require an entity to provide additional information about reclassifications out of accumulated other comprehensive income. For public entities, the amendments were effective for reporting periods beginning after December 15, 2012. This standard did not have an effect on the Company’s consolidated financial statements.
Consolidated Results of Operations
Our Balance Sheet for the Years Ended December 31, 2013 and 2012
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| Comparison | ||||
|
| 2013 |
| 2012 |
| $ Difference |
| % Difference | ||||
|
| (Audited) |
| (Audited) |
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|
| ||
Assets: |
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|
|
|
|
|
|
Cash |
| $ | 7,483 |
| $ | 10,068 |
| $ | (2,585) |
|
| (26%) |
Loans receivable, net of allowance for loan losses of $2,856 and $4,005 as of December 31, 2013 and 2012, respectively |
|
| 146,519 |
|
| 152,428 |
|
| (5,909) |
|
| (4%) |
Accrued interest receivable |
|
| 607 |
|
| 672 |
|
| (65) |
|
| (10%) |
Property and equipment, net |
|
| 120 |
|
| 216 |
|
| (96) |
|
| (44%) |
Debt issuance costs, net |
|
| 31 |
|
| 95 |
|
| (64) |
|
| (67%) |
Foreclosed assets, net |
|
| 3,308 |
|
| 2,914 |
|
| 394 |
|
| 14% |
Other assets |
|
| 347 |
|
| 252 |
|
| 95 |
|
| 38% |
Total assets |
| $ | 158,415 |
| $ | 166,645 |
| $ | (8,230) |
|
| (5%) |
Liabilities and members’ equity |
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Liabilities: |
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|
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|
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|
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|
|
Borrowings from financial institutions |
| $ | 99,904 |
| $ | 103,833 |
| $ | (3,929) |
|
| (4%) |
Notes payable |
|
| 47,667 |
|
| 52,564 |
|
| (4,897) |
|
| (9%) |
Accrued interest payable |
|
| 14 |
|
| 7 |
|
| 7 |
|
| 100% |
Other liabilities |
|
| 887 |
|
| 693 |
|
| 194 |
|
| 28% |
Total liabilities |
|
| 148,472 |
|
| 157,097 |
|
| (8,625) |
|
| (5%) |
Members' Equity: |
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|
|
|
|
|
|
|
|
Series A preferred units |
|
| 11,715 |
|
| 11,715 |
|
| -- |
|
| --% |
Class A common units |
|
| 1,509 |
|
| 1,509 |
|
| -- |
|
| --% |
Accumulated deficit |
|
| (3,281) |
|
| (3,676) |
|
| 395 |
|
| (11%) |
Total members' equity |
|
| 9,943 |
|
| 9,548 |
|
| 395 |
|
| 4% |
Total liabilities and members' equity |
| $ | 158,415 |
| $ | 166,645 |
| $ | (8,230) |
|
| (5%) |
General. The $8.2 million decrease in total assets from December 31, 2013 as compared to December 31, 2012 is due primarily to the scheduled principal paydowns on loans in our portfolio. A large portion of these payments could not be used to fund additional loans due to a decline in investor debt securities, payments we made on our NCUA borrowings, and operating costs.
59
During the year ended December 31, 2013, gross loans receivable decreased by $6.7 million, or 4%, to $150.7 million from $157.4 million at December 31, 2012. While we purchased or originated a total of $34.8 million in net loans receivable, we also experienced regular principal paydowns on our loan portfolio throughout the year and 13 mortgage loans totaling $18.4 million were refinanced with another lender or paid off. These payoffs represented both early payoffs of existing loans and non-renewals of maturing loans. In many cases, non-renewals occur because a loan has fallen outside our lending policies and cannot be refinanced by us. In addition, we sold one of our loans to ECCU at par, which represented $4.3 million in loans receivable, sold loan participations to other credit unions for $9.9 million, and transferred $4.3 million in loans to foreclosed assets. While we anticipate selling additional loan participations during 2014, none of the loans currently in our portfolio are being held for sale to other credit unions and institutional investors as we generally sell loans shortly after they are originated.
Our mortgage loan portfolio consists entirely of loans made to evangelical churches and ministries. All but three of these loans are secured by real estate collateral, while three loans that represent less than 0.1% of our portfolio are unsecured. Our portfolio carried a weighted average interest rate of 6.33% at December 31, 2013, as compared to 6.36% at December 31, 2012.
Non-performing Assets. Non-performing assets consist of non-accrual loans, restructured loans, and foreclosed assets, which include real estate properties we now own. Non-accrual loans include any loan that becomes 90 days or more past due, loans where terms have been modified in a favorable manner to the borrower due to financial difficulty (“troubled debt restructurings”), and any other loan where management assesses full collectability of principal and interest to be in question. Once a loan is put on non-accrual status, the balance of any accrued interest is immediately reversed. Loans past due 90 days or more will not return to accrual status until they become current. Troubled debt restructurings will not return to accrual status until they perform according their modified payment terms without exception for at least six months. Non-performing assets also include one troubled debt restructuring that has performed for six months but has not yet returned to its original terms.
Some of our non-accrual loans are considered collateral-dependent. A loan is construed to be collateral-dependent when repayment of principal and interest is expected to come solely from the sale or operation of the underlying collateral. For impaired collateral-dependent loans, any payment of interest we receive from a borrower is recorded against principal. As a result, interest income is not recognized until the loan is no longer considered impaired. For non-accrual loans that are not considered to be collateral-dependent, we do not accrue interest income, but we recognize income on a cash basis. We had 12 non-accrual loans with a recorded balance of $17.6 million as of December 31, 2013, as compared to 11 non-accrual loans with a recorded balance of $18.3 million at December 31, 2012. In addition to completing foreclosure proceedings on properties securing one of our mortgage loan investments in 2013, we entered into a deed in lieu of foreclosure agreement to acquire a worship facility with one of our borrowers. The loan had a carrying value, net of discounts and specific reserves, of $1.2 million. All reserves were charged off immediately prior to acquiring the property in the deed in lieu of foreclosure transaction. The property is now included in our financial statements with a value of
60
$1.2 million. These two transactions resulted in the transfer of $3.2 million of net mortgage loan interests to real estate owned assets during the year ended December 31, 2013.
The following table presents our non-performing assets:
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Non-performing Assets | ||||||
($ in thousands) | ||||||
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| December 31, 2013 |
| December 31, 2012 | ||
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Non-Performing Loans:1 |
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|
|
|
|
|
Collateral Dependent: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Delinquencies over 90-Days |
| $ | 2,000 |
| $ | 2,611 |
Troubled Debt Restructurings2 |
|
| 5,261 |
|
| 8,469 |
Other Impaired Loans |
|
| 555 |
|
| -- |
|
|
|
|
|
|
|
Total Collateral Dependent Loans |
|
| 7,816 |
|
| 11,080 |
|
|
|
|
|
|
|
Non-Collateral Dependent: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Delinquencies over 90-Days |
|
| 2,555 |
|
| -- |
Troubled Debt Restructurings |
|
| 8,546 |
|
| 7,479 |
|
|
|
|
|
|
|
Total Non-Collateral Dependent Loans |
|
| 11,101 |
|
| 7,479 |
|
|
|
|
|
|
|
Loans 90 Days past due and still accruing |
|
| -- |
|
| -- |
|
|
|
|
|
|
|
Total Non-Performing Loans |
|
| 18,917 |
|
| 18,559 |
Foreclosed Assets |
|
| 3,308 |
|
| 2,914 |
|
|
|
|
|
|
|
Total Non-performing Assets |
| $ | 22,225 |
| $ | 21,473 |
1 These loans are presented at the balance of unpaid principal less interest payments recorded against principal.
2 Includes $2.6 million and $814 thousand of restructured loans that were over 90 days delinquent as of December 31, 2013 and 2012, respectively.
At December 31, 2013, we had eleven restructured loans, nine of which were on non-accrual status. One of these loans was over 90 days delinquent. We had two non-restructured loans that were over 90 days past due. For nine of the 11 restructured loans in our portfolio at December 31, 2013, 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, which did not increase the net loan balance. Another restructured loan represents the modified loan balance
61
upon foreclosure on two of three underlying properties. In addition, for each of the 11 restructured loans, the interest rate was temporarily decreased. Each borrower involved in a troubled debt restructuring was experiencing financial difficulties at the time the loan restructured. As of December 31, 2013, we held six foreclosed real properties with a net amount of $3.3 million, which includes a $13 thousand valuation allowance against one of the properties.
At December 31, 2012, we had eleven restructured loans that were on non-accrual status. One of these loans was over 90 days delinquent. We had one non-restructured loan that was over 90 days past due. As of December 31, 2012, we held four foreclosed real properties with a net amount of $2.9 million, which includes a $136 thousand valuation allowance against two of the properties.
Allowance for Loan Losses. We maintain an allowance for loan losses we consider adequate to cover both the inherent risk of loss associated with the loan portfolio as well as the risk associated with specific loans we have identified as having a significant chance of resulting in loss. Allowances taken to address the inherent risk of loss in the loan portfolio are considered general reserves. We include various qualitative factors in our analysis which are weighted based on the level of risk represented and for the potential impact on our portfolio. These factors include:
- | Changes in lending policies and procedures, including changes in underwriting standards and collection; |
- | Changes in national, regional and local economic and business conditions and developments that affect the collectability of the portfolio; |
- | Changes in the volume and severity of past due loans, the volume of nonaccrual loans, and the volume and severity of adversely classified loans; |
- | Changes in the value of underlying collateral for collateral-dependent loans; and |
- | The effect of credit concentrations. |
While we have not added any new qualitative factors in the analysis of our loan portfolio since 2009, in March 2012 we refined our analysis by segregating our loans into pools based on the position of the underlying collateral and the risk rating of the loan. We modify the weight of the factors above depending on risk associated with the pool. 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 impact 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. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available. We evaluate the factors used in our general reserve analysis on a quarterly basis to ensure that we have adequately addressed the inherent risks present in our portfolio.
62
We also examine our entire loan portfolio monthly to identify individual loans which we believe have a greater risk of loss than is addressed by our general reserves. These are identified by examining delinquency reports, both current and historic, monitoring collateral value, and performing a periodic review of borrower financial statements. For loans that are collateral-dependent, management first determines the value at risk on the investment, defined as the unpaid principal balance less the collateral value net of estimated costs associated with selling a foreclosed property. This entire value at risk is reserved. For impaired loans that are not collateral-dependent, management will record an impairment based on the present value of expected future cash flows. Loans that carry a specific reserve are formally reviewed quarterly, although reserves will be adjusted more frequently if additional information regarding the loan’s status or its underlying collateral is received.
Finally, our allowance for loan losses includes reserves related to troubled debt restructurings. These reserves are calculated as the difference in the net present value of payment streams between a troubled debt restructuring at its modified terms as compared to its original terms, discounted at the original interest rate on the loan. These reserves are recorded at the time of the restructuring. The change in the present value of cash flows attributable to the passage of time is reported as interest income.
In May 2012, we entered into a Loan Purchase Agreement involving two mortgage loan interests which were the subject of foreclosure proceedings. In exchange for transferring all rights, title and interest in these two mortgage loan interests, we received $2.4 million in cash and were relieved of any further obligations regarding the mortgage loan interests sold. Both loans were considered impaired. The recorded investment in these loans was $2.5 million after discounts. The loans also carried a total of $300 thousand in specific reserves that had been recorded in prior periods and set aside as an allowance for loan losses. $35 thousand of these specific reserves were charged off against our allowance for loan losses. We reversed the remaining $265 thousand of specific reserves related to these two loans, reducing our provision and allowance for loan losses during the year ended December 31, 2012.
In September 2013, we received $206 thousand in principal payments on one of our collateral dependent impaired loans, which allowed us to reduce the specific reserves related to that loan. We also improved the overall quality of our portfolio through loan originations, and our gross loan portfolio decreased, which resulted in a decrease in our general reserves. During 2013, we charged off $978 thousand in related allowances pursuant to a deed in lieu of foreclosure transaction on one of the properties securing two of our impaired loans.
The process of providing adequate allowance for loan losses involves management discretions and as such, losses may differ from current estimates. We have attempted to maintain the allowance at a level which compensates for losses that may arise from unknown conditions. At December 31, 2013 and December 31, 2012, the allowance for loan losses was $2.9 million and $4.0 million, respectively. This represented 1.9% and 2.5% of our gross loans receivable at those respective dates.
63
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Allowance for Loan Losses |
| |||||
|
| as of and for the |
| |||||
|
|
|
|
|
|
|
|
|
|
| Year Ended |
|
| Year Ended |
| ||
|
| December 31, |
|
| December 31, |
| ||
|
| 2013 |
|
| 2012 |
| ||
Balances: |
| ($ in thousands) |
| |||||
Average total loans outstanding during period |
| $ | 150,828 |
|
| $ | 163,042 |
|
Total loans outstanding at end of the period |
| $ | 150,688 |
|
| $ | 157,396 |
|
Allowance for loan losses: |
|
|
|
|
|
|
|
|
Balance at the beginning of period |
| $ | 4,005 |
|
| $ | 4,127 |
|
Provision (credit) charged to expense |
|
| 9 |
|
|
| (9) |
|
Charge-offs |
|
|
|
|
|
|
|
|
Wholly-Owned First |
|
| 1,076 |
|
|
| 35 |
|
Wholly-Owned Junior |
|
| -- |
|
|
| -- |
|
Participation First |
|
| -- |
|
|
| 12 |
|
Participation Junior |
|
| -- |
|
|
| -- |
|
Total |
|
| 1,076 |
|
|
| 47 |
|
Recoveries |
|
|
|
|
|
|
|
|
Wholly-Owned First |
|
| -- |
|
|
| -- |
|
Wholly-Owned Junior |
|
| -- |
|
|
| -- |
|
Participation First |
|
| -- |
|
|
| -- |
|
Participation Junior |
|
| -- |
|
|
| -- |
|
Total |
|
| -- |
|
|
| -- |
|
Net loan charge-offs |
|
|
|
|
|
|
|
|
(recoveries) |
|
| 1,076 |
|
|
| 47 |
|
Accretion of allowance related to restructured loans |
|
| 82 |
|
|
| 66 |
|
|
|
|
|
|
|
|
|
|
Balance |
| $ | 2,856 |
|
| $ | 4,005 |
|
|
|
|
|
|
|
|
|
|
Ratios: |
|
|
|
|
|
|
|
|
Net loan charge-offs to average total loans |
|
| 0.71 | % |
|
| 0.03 | % |
Provision (credit) for loan losses to average total loans1 |
|
| 0.01 | % |
|
| 0.00 | % |
Allowance for loan losses to total loans at the end of the period |
|
| 1.90 | % |
|
| 2.54 | % |
Allowance for loan losses to non-performing loans |
|
| 15.10 | % |
|
| 21.58 | % |
Net loan charge-offs to allowance for loan losses at the end of the period |
|
| 37.68 | % |
|
| 1.17 | % |
Net loan charge-offs to provision (credit) for loan losses1 |
|
| 11956 | % |
|
| (522.22) | % |
1 We reversed $265 thousand of reserves against provision for loan losses during the year ended December 31, 2012 as a result of the sale of two impaired loans, which resulted in a net credit to provision expense.
64
Borrowings from Financial Institutions. The decrease in borrowings from financial institutions is the result of regular monthly payments we made on our NCUA credit facilities as well as $510 thousand in additional principal payments made in order to remain in compliance with the minimum collateralization ratio requirements of our NCUA credit facilities. The remaining balance on these facilities totals $103.8 million and bears interest at a rate of 2.525% pursuant to agreements entered into with the NCUA in November 2011. The maturity date for both facilities is October 31, 2018. For further discussion concerning our borrowings and credit facilities see Item 7, “Credit Facility Borrowings”.
Notes Payable. Our notes payable consist of debt securities sold under registered national offerings as well as notes sold to accredited investors in private offerings. Sales of our notes are now being handled by our wholly-owned subsidiary, MP Securities, which is a broker-dealer subject to regulation by FINRA, the SEC and applicable state regulatory authorities. The principal balance owed on these notes decreased by $4.9 million during 2013 primarily due to suitability and overconcentration restrictions placed on investments made in our Class A Notes, thereby preventing some of our existing investors from purchasing a new Class A Note when their currently held Class A Note matures. From time to time, some of our churches, institutional and individual investors also withdraw funds when cash is needed for working capital or other purposes.
Members’ Equity. Total members’ equity increased in 2013 due mainly to our net income of $592 thousand for 2013, offset by $197 thousand of dividend payments and net income distributions related to our Series A Preferred Units. We did not repurchase any ownership units during the years ended December 31, 2012 and 2013.
65
Results of Operations for the Years Ended December 31, 2013 and December 31, 2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Year ended |
| Comparison | ||||||||
|
| December 31, |
|
|
|
|
|
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 2013 |
| 2012 |
| $ Difference |
| % Difference | ||||
Interest income: |
|
|
|
|
|
|
|
|
|
|
|
|
Interest on loans |
| $ | 9,390 |
| $ | 9,913 |
| $ | (523) |
|
| (5%) |
Interest on interest-bearing accounts |
|
| 83 |
|
| 137 |
|
| (54) |
|
| (39%) |
Total interest income |
|
| 9,473 |
|
| 10,050 |
|
| (577) |
|
| (6%) |
Interest expense: |
|
|
|
|
|
|
|
|
|
|
|
|
Borrowings from financial institutions |
|
| 2,572 |
|
| 2,715 |
|
| (143) |
|
| (5%) |
Notes payable |
|
| 2,030 |
|
| 2,420 |
|
| (390) |
|
| (16%) |
Total interest expense |
|
| 4,602 |
|
| 5,135 |
|
| (533) |
|
| (10%) |
Net interest income |
|
| 4,871 |
|
| 4,915 |
|
| (44) |
|
| (1%) |
Provision (credit) for loan losses |
|
| 9 |
|
| (9) |
|
| 18 |
|
| (200%) |
Net interest income after provision for loan losses |
|
| 4,862 |
|
| 4,924 |
|
| (62) |
|
| (1%) |
Non-interest income |
|
| 168 |
|
| 56 |
|
| 112 |
|
| 200% |
Non-interest expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and benefits |
|
| 2,563 |
|
| 2,029 |
|
| 534 |
|
| 26% |
Marketing and promotion |
|
| 114 |
|
| 158 |
|
| (44) |
|
| (28%) |
Office operations |
|
| 1,146 |
|
| 1,357 |
|
| (211) |
|
| (16%) |
Foreclosed assets, net |
|
| (240) |
|
| 160 |
|
| (400) |
|
| (250%) |
Legal and accounting |
|
| 699 |
|
| 711 |
|
| (12) |
|
| (2%) |
Total non-interest expenses |
|
| 4,422 |
|
| 4,547 |
|
| (125) |
|
| (3%) |
Income before provision for income taxes |
|
| 608 |
|
| 433 |
|
| 175 |
|
| 40% |
Provision for income taxes |
|
| 16 |
|
| 16 |
|
| -- |
|
| 0% |
Net income |
| $ | 592 |
| $ | 417 |
| $ | 175 |
|
| 42% |
66
In 2013, we recognized net income of $592 thousand due in large part to an increase in non-interest income and a decrease in non-interest expenses. As further described below, the most significant factors influencing our consolidated results of operations for the year ended December 31, 2013, as compared to 2012 were:
· | While total interest income on our mortgage loan investments declined by $523 thousand in 2013 due to the reduction in our loans receivable, our interest expense decreased by $533 thousand due to a similar reduction in our borrowings and notes payable; |
· | our provisions for loan losses increased by $18 thousand as we reduced general reserves but increased specific reserves on several impaired loans in our portfolio; |
· | non-interest income increased by $112 thousand due to increases in fee-generated income by our subsidiary, MP Securities, and gains on loan sale and additional servicing fee income related to loan participations sold during 2013; |
· | we incurred a 26% increase in salary and benefits expenses as we hired a salesperson for our broker-dealer subsidiary, hired two additional staff members to assist in loan origination and management, and paid or accrued severance payments to our former Chief Executive Officer; |
· | we reduced office operations expense as we experienced decreases in non-personnel costs related to the management of our loan portfolio and in costs related to the management of our human resources by ADP; and |
· | we incurred a $400 thousand decrease in foreclosed asset expenses as we recognized $345 thousand in gains on sale of foreclosed assets and recorded $123 less in provisions for losses on foreclosed assets. |
Interest income on our mortgage loan investments decreased by 5% in 2013, as compared to 2012. While the average balance of our interest-earning loans decreased by 8% from $151.8 million for the year ended December 31, 2012, as compared to $140.4 million for the year ended December 31, 2013, we recognized additional interest income from deferred fees earned when we sold loan participations, improved collections on our non-collateral dependent loans, and realized a reduction in loans serviced by ECCU for which we receive lower interest rates. Due to increased loan originations and our loan participation sales, the amortization of net deferred loan fees increased by $169 thousand. Interest income recognized on interest-bearing accounts with other financial institutions decreased as our average cash balances on our accounts declined from $13.2 million in 2012 to $10.0 million in 2013.
Interest expense on our borrowings decreased during the year due to principal payments made on our NCUA borrowings and a decrease in investor note balances. The average balance of our borrowings from financial institutions decreased by $5.3 million from 2012 due to regular principal payments as well as $510 thousand of additional principal payments made during 2013. The weighted average interest rates of our investor notes decreased slightly, but interest expense on our notes payable decreased mainly because the average balance of our notes declined by $8.4
67
million from 2012 to 2013. Despite the 10% reduction in interest expense from 2012, the 6% decrease in interest income resulted in a 1% decrease in net interest income for the year.
We had a credit for loan losses of $9 thousand for the year ended December 31, 2012 as compared to a provision of $9 thousand for the year ended December 31, 2013. In 2013, we reduced our general reserves and reversed specific reserves on one impaired loan when the principal balance on this loan was paid down by $206 thousand. However, we also recorded additional specific reserves for some of our impaired loans throughout the year, which resulted in the $9 thousand provision. For 2012, we did not incur a material decrease in value of the real estate properties that secured our collateral-dependent impaired loans. As a result, we recorded no additional reserves for loan losses on these loans. While we increased reserves on several of our troubled debt restructurings based on new estimates of future cash flows, these provisions were offset by a $265 thousand credit that was taken when we sold two impaired loans in May 2012 at a price greater than our carrying value of the loan. Due to provisions and reduced net interest income, our net interest income after provisions decreased by $62 thousand.
We received other income of $168 thousand in the year ended December 31, 2013 which is an increase of $112 thousand from the year ended December 31, 2012. We recognized $54 thousand in gains on loan sales related to the sale of participation interests in four loans during 2013. We also earned $24 in fee income from the sale of investment products by our broker-dealer subsidiary. We recognized $17 thousand in additional servicing fee income as we increased the amount of loan participations we service for others during 2013.
Our non-interest expenses for the year ended December 31, 2013 decreased by 3% from the year ended December 31, 2012. Salaries and benefits expenses increased by $535 thousand as we hired two additional employees in 2013 to help manage and grow our loan portfolio. In addition, we incurred $196 thousand in severance costs in 2013 for salary related payments to our former Chief Executive Officer. With the Board of Managers approval, management also approved $183 thousand in bonuses for the year ended December 31, 2013, while $116 thousand in bonuses were approved for 2012. Finally, in February 2014, the Board of Managers approved compensation grants to the Managers retroactive to 2013, but to be paid in 2014. As approved by the Board, $52 thousand in cash awards were accrued for the Managers in 2013. Prior to these 2013 grants, no cash retainer or any type of compensation has ever been paid to the Managers for the services they render to the Company and its equity owners. Office operation expenses decreased by $203 thousand primarily due to reduction in human resources costs related to our new staffing agreement with ADP and fewer expenses related to managing our delinquent loans.
Net expenses related to foreclosed assets decreased by $400 thousand during 2013. We acquired five new real estate assets during 2013, and while this caused rental income from foreclosed assets to increase by $31 thousand, the costs of managing real estate owned assets increased by $100 thousand. However, we sold three properties during 2013 for a gain of $345 thousand. We did not recognize any gains on sale of real estate owned assets during 2012. We also recorded $123 thousand less in provisions for losses on foreclosed assets, as we did not experience a significant decline in value for any of our properties.
68
Results of Operations for the Years Ended December 31, 2012 and December 31, 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Year ended |
| Comparison | ||||||||
|
| December 31, |
|
|
|
|
|
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 2012 |
| 2011 |
| $ Difference |
| % Difference | ||||
Interest income: |
|
|
|
|
|
|
|
|
|
|
|
|
Interest on loans |
| $ | 9,913 |
| $ | 10,989 |
| $ | (1,076) |
|
| (10%) |
Interest on interest-bearing accounts |
|
| 137 |
|
| 88 |
|
| 49 |
|
| 56% |
Total interest income |
|
| 10,050 |
|
| 11,077 |
|
| (1,027) |
|
| (9%) |
Interest expense: |
|
|
|
|
|
|
|
|
|
|
|
|
Borrowings from financial institutions |
|
| 2,715 |
|
| 4,560 |
|
| (1,845) |
|
| (40%) |
Notes payable |
|
| 2,420 |
|
| 2,597 |
|
| (177) |
|
| (7%) |
Total interest expense |
|
| 5,135 |
|
| 7,157 |
|
| (2,022) |
|
| (28%) |
Net interest income |
|
| 4,915 |
|
| 3,920 |
|
| 995 |
|
| 25% |
Provision (credit) for loan losses |
|
| (9) |
|
| 1,487 |
|
| (1,496) |
|
| (101%) |
Net interest income after provision for loan losses |
|
| 4,924 |
|
| 2,433 |
|
| 2,491 |
|
| 102% |
Non-interest income |
|
| 56 |
|
| 162 |
|
| (106) |
|
| (65%) |
Non-interest expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and benefits |
|
| 2,029 |
|
| 1,555 |
|
| 474 |
|
| 30% |
Marketing and promotion |
|
| 158 |
|
| 119 |
|
| 39 |
|
| 33% |
Office occupancy |
|
| 132 |
|
| 115 |
|
| 17 |
|
| 15% |
Office operations |
|
| 1,357 |
|
| 1,268 |
|
| 89 |
|
| 7% |
Foreclosed assets, net |
|
| 160 |
|
| (20) |
|
| 180 |
|
| (900%) |
Legal and accounting |
|
| 711 |
|
| 701 |
|
| 10 |
|
| 1% |
Total non-interest expenses |
|
| 4,547 |
|
| 3,623 |
|
| 924 |
|
| 26% |
Income before provision for income taxes |
|
| 433 |
|
| (1,028) |
|
| 1,461 |
|
| (142%) |
Provision for income taxes |
|
| 16 |
|
| 16 |
|
| -- |
|
| 0% |
Net income |
| $ | 417 |
| $ | (1,044) |
| $ | 1,461 |
|
| (140%) |
69
In 2012, we recognized net income of $417 thousand due in large part to reductions in our cost of borrowings from financial institutions and a $1.5 million decline in our provision for loan losses as compared to 2011. As further described below, the most significant factors influencing our consolidated results of operations for the year ended December 31, 2012, as compared to 2011 were:
· | we reported a credit for loan losses of $9 thousand for 2012 as compared to provisions of $1.5 million for 2011, primarily resulting from the sale of two impaired loans at a price greater than our net investment in those loans and stabilization of our loan portfolio, leading to no new impaired loans that require significant reserves; |
· | total interest income on our mortgage loan investments declined by $1.1 million in 2012, a 10% decline, primarily resulting from a $13.5 million decrease in our mortgage loan investments; |
· | net interest income increased by 25% in 2012, primarily resulting from completing a refinancing transaction in 2011 which reduced our borrowing rates from a weighted average rate of 4.0% to 2.5% on approximately $110 million we owed on our credit facilities; |
· | borrowing costs on our investor debt securities declined by 7% due to the $6.5 million decrease in the total of our outstanding investor debt securities; |
· | we were unable to sell any loan participations in 2012, thereby resulting in a $106 thousand decrease in non-interest income we earned in 2011; |
· | we incurred a 26% increase in non-interest expenses primarily due to costs incurred in managing our real estate owned assets, legal fees and expenses incurred to protect our investments made in several impaired loans and regulatory related costs associated with obtaining approval from FINRA to permit MP Securities to sell our Class A Notes; and |
· | we incurred a 30% increase in salary and benefits expenses as we hired staff for our broker-dealer subsidiary and transitioned from selling investor debt securities through Company employees to a more robust platform that relies on MP Securities to sell investor debt securities, mutual funds and investment products. |
Interest income on our mortgage loan investments decreased by 10% from 2011. This corresponds to the 10% decrease in the average balance of our interest-earning loans of $168.5 million for the year ended December 31, 2011, as compared to $151.8 million for the year ended December 31, 2012. While the outstanding balance due on our non-accrual loans declined by $4.6 million for 2012 as compared to 2011, we recorded $379 thousand of interest payments we received against the principal balance of these collateral-dependent impaired loans instead of reporting the payments as interest income in 2012. In 2011, we recorded $275 thousand in interest payments against the principal balances of our collateral-dependent impaired loans. Interest income recognized on interest-bearing accounts with other financial institutions
70
increased as our average cash balance rose from $7.5 million at December 31, 2011 to $13.2 million at December 31,2012.
Interest expense on our borrowings decreased substantially during the year due to the refinancing transaction we completed with the NCUA in November, 2011. The weighted average interest rate paid on the NCUA credit facilities decreased from 4.0% for the year ended December 31, 2011 to 2.5% for the year ended December 31, 2012. While the weighted average interest rates on our investor notes stayed fairly constant, the average balance of our notes decreased from $60.9 million at December 31, 2011 to $57.0 million at December 31, 2012, causing the interest expense on investor notes to decrease by $177 thousand. Even though interest income decreased by 10%, net interest income increased by $995 thousand in 2012 as compared to 2011, primarily due to lower borrowing costs in 2012.
We reported a credit for loan losses of $9 thousand for the year ended December 31, 2012 as compared to a provision of $1.5 million for the year ended December 31, 2011. In 2011, we recorded $1.6 in additional reserves on four collateral-dependent impaired loans after management concluded that there had been a material decrease in the value of the real estate that secured these loans. For 2012, we did not incur a material decrease in the value of the real estate properties that secured our collateral-dependent impaired loans. As a result, we recorded no additional reserves for loan losses on these loans. While we increased reserves on several of our troubled debt restructurings based on new estimates of future cash flows, these provisions were offset by a $265 thousand credit taken when we sold two impaired loans in May 2012 at a price greater than our carrying value of the loan. As a result of reduced interest expense and $1.4 million reduction in our provision for loan losses, net interest income after provision for loan losses increased by 97% for the year ended December 31, 2012 over the year ended December 31, 2011.
We received other income of $56 thousand in the year ended December 31, 2012 which is a decrease of $106 thousand from the year ended December 31, 2011. We recognized $21 thousand in additional servicing fee income as we serviced loan participations we sold in 2011 for an entire year. However, we sold no loan participations during 2012 as we did in 2011, and our gains on loan sales decreased by $132 thousand.
71
Non-interest expenses for the year ended December 31, 2012 increased by 26% from the year ended December 31, 2011. Salaries and benefits expenses increased by $474 thousand as we experienced a full year of expenses from the four additional employees we hired in 2011 to help manage and grow our loan portfolio. In 2012, we hired two new employees to work for our wholly-owned broker-dealer as well as another staff member to assist in loan servicing. With the Board of Managers approval, management also approved $116 thousand in bonuses for the year ended December 31, 2012, while no bonuses were approved for 2011. Marketing expenses increased by $39 thousand as we engaged in new marketing efforts through our broker-dealer to sell our debt securities and lending department to originate new loans. Office operation expenses increased by $204 thousand primarily due to $33 thousand in additional human resources costs related to our new staff members, $31 thousand in additional insurance costs due to rising premiums, and $52 thousand in additional expenses related to managing our delinquent loans.
Net expenses related to foreclosed assets increased by $180 thousand during 2012. We acquired three new real estate assets during 2012, and while this caused rental income from foreclosed assets to increase by $30 thousand, the cost of managing foreclosed assets increased by $74 thousand. We also recorded a $136 thousand valuation allowance on one of the properties. Finally, legal and consulting related costs increased by $10 thousand in 2012. While we incurred $150 thousand less in consulting services related to the refinancing of our bank borrowings in 2011, we had $122 thousand in additional legal expenses and filing fees in 2012 resulting from efforts to launch MP Securities and obtain approval for it to sell our Class A Notes. We also experienced $22 thousand in additional audit fees due to the increased regulatory and reporting obligations of our operations primarily related to the broker-dealer. While we incurred significant additional legal fees and expenses in 2012 resulting from the launch of MP Securities and obtaining approval for it to sell our Class A Notes, we believe most of these costs are non-recurring in nature.
Net Interest Income and Net Interest Margin
Our earnings depend largely upon the difference between the income we receive from interest-earning assets, which are principally mortgage loan investments and interest-earning accounts with other financial institutions, and the interest paid on notes payable and lines of credit. This difference is net interest income. Net interest margin is net interest income expressed as a percentage of average total interest-earning assets.
The following tables provide information, for the periods indicated, on the average amounts outstanding for the major categories of interest-earning assets and interest-bearing liabilities, the amount of interest earned or paid, the yields and rates on major categories of interest-earning assets and interest-bearing liabilities, and the net interest margin:
72
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| Average Balances and Rates/Yields | ||||||||||||||||||||||
|
| For the Year Ended December 31, | ||||||||||||||||||||||
|
| (Dollars in Thousands) | ||||||||||||||||||||||
|
| 2013 |
| 2012 | ||||||||||||||||||||
|
| Average Balance |
| Interest Income/ Expense |
| Average Yield/ Rate |
| Average Balance |
| Interest Income/ Expense |
| Average Yield/ Rate | ||||||||||||
Assets: |
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-earning accounts with other financial institutions |
| $ | 10,044 |
|
| $ | 83 |
|
|
| 0.83 | % |
| $ | 13,218 |
|
| $ | 137 |
|
|
| 1.04 | % |
Interest-earning loans [1] |
|
| 140,363 |
|
|
| 9,390 |
|
|
| 6.69 | % |
|
| 151,804 |
|
|
| 9,913 |
|
|
| 6.53 | % |
Total interest-earning assets |
|
| 150,407 |
|
|
| 9,473 |
|
|
| 6.30 | % |
|
| 165,022 |
|
|
| 10,050 |
|
|
| 6.09 | % |
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|
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|
|
|
|
|
|
|
|
|
|
|
Non-interest-earning assets |
|
| 10,597 |
|
|
| -- |
|
|
| -- |
|
|
| 9,485 |
|
|
| -- |
|
|
| -- |
|
Total Assets |
|
| 161,004 |
|
|
| 9,473 |
|
|
| 5.88 | % |
|
| 174,507 |
|
|
| 10,050 |
|
|
| 5.76 | % |
|
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|
|
|
|
|
|
|
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Liabilities: |
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Public offering notes – Class A |
|
| 38,071 |
|
|
| 1,550 |
|
|
| 4.07 | % |
|
| 44,620 |
|
|
| 1,820 |
|
|
| 4.08 | % |
Public offering notes – Alpha Class |
|
| 776 |
|
|
| 29 |
|
|
| 3.74 | % |
|
| 3,670 |
|
|
| 204 |
|
|
| 5.56 | % |
Special offering notes |
|
| 7,191 |
|
|
| 339 |
|
|
| 4.71 | % |
|
| 8,454 |
|
|
| 387 |
|
|
| 4.58 | % |
International notes |
|
| 386 |
|
|
| 13 |
|
|
| 3.37 | % |
|
| 220 |
|
|
| 9 |
|
|
| 4.09 | % |
Subordinated notes |
|
| 1,996 |
|
|
| 94 |
|
|
| 4.71 | % |
|
| 6 |
|
|
| 0 |
|
|
| 5.73 | % |
Secured notes |
|
| 168 |
|
|
| 5 |
|
|
| 2.98 | % |
|
| 31 |
|
|
| 1 |
|
|
| 2.53 | % |
Borrowings from financial institutions |
|
| 101,866 |
|
|
| 2,572 |
|
|
| 2.53 | % |
|
| 107,210 |
|
|
| 2,714 |
|
|
| 2.53 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing liabilities |
| $ | 150,454 |
|
| $ | 4,602 |
|
|
| 3.06 | % |
| $ | 164,211 |
|
| $ | 5,135 |
|
|
| 3.13 | % |
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
|
|
|
| $ | 4,871 |
|
|
|
|
|
|
|
|
|
| $ | 4,915 |
|
|
|
|
|
Net interest margin [2] |
|
|
|
|
|
|
|
|
|
| 3.03 | % |
|
|
|
|
|
|
|
|
|
| 2.83 | % |
Average interest-earning assets decreased to $150.4 million during the year ended December 31, 2013, from $165.0 million, a decrease of $14.6 million or 9%. The average yield on these assets increased to 6.30% for the year ended December 31, 2013 from 6.09% for the year ended December 31, 2012. This increase is related mainly to the increase in interest earned on loans. As described above, we experienced an acceleration in the amortization of deferred fees related to participation sales and we increased collections on our non-collateral-dependent impaired loans. In addition, our interest earning loans had an average yield of 6.69% as compared to
73
6.53% for 2012, which increased the overall average yield. This shift in the balance of assets caused the slight increase in the average yield of both our interest-earning assets and total assets.
Average interest-bearing liabilities, consisting primarily of investor and credit facility notes payable, decreased to $150.5 million during the year ended December 31, 2013, from $164.2 million during 2012. The average rate paid on these liabilities decreased to 3.06% for the year ended December 31, 2013, from 3.13% for 2012. The decrease in the rate paid on interest-bearing liabilities was the result of lower interest rates paid on our notes payable. Many of the remaining Alpha Class notes matured during the year; the only ones remaining are variable rate notes which bear lower interest rates than the fixed notes that were outstanding during 2012. The rates on our subordinated notes also declined by 1% in 2013. The interest rate on our NCUA borrowings is fixed at 2.53% until the facility matures in 2018.
Net interest income for the year ended December 31, 2013 was $4.9 million, which was a decrease of $45 thousand, or 1% from the prior year. Net interest margin increased 20 basis points to 3.03% for the year ended December 31, 2013, as compared to 2.83% for 2012.
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|
| Average Balances and Rates/Yields | ||||||||||||||||||||||
|
| For the Year Ended December 31, | ||||||||||||||||||||||
|
| (Dollars in Thousands) | ||||||||||||||||||||||
|
| 2012 |
| 2011 | ||||||||||||||||||||
|
| Average Balance |
| Interest Income/ Expense |
| Average Yield/ Rate |
| Average Balance |
| Interest Income/ Expense |
| Average Yield/ Rate | ||||||||||||
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-earning accounts with other financial institutions |
| $ | 13,218 |
|
| $ | 137 |
|
|
| 1.04 | % |
| $ | 7,545 |
|
| $ | 88 |
|
|
| 1.17 | % |
Interest-earning loans [1] |
|
| 151,804 |
|
|
| 9,913 |
|
|
| 6.53 | % |
|
| 168,539 |
|
|
| 10,989 |
|
|
| 6.52 | % |
Total interest-earning assets |
|
| 165,022 |
|
|
| 10,050 |
|
|
| 6.09 | % |
|
| 176,084 |
|
|
| 11,077 |
|
|
| 6.29 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest-earning assets |
|
| 9,485 |
|
|
| -- |
|
|
| -- |
|
|
| 10,791 |
|
|
| -- |
|
|
| -- |
|
Total Assets |
|
| 174,507 |
|
|
| 10,050 |
|
|
| 5.76 | % |
|
| 186,875 |
|
|
| 11,077 |
|
|
| 5.93 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Public offering notes – Class A |
|
| 44,620 |
|
|
| 1,820 |
|
|
| 4.08 | % |
|
| 46,186 |
|
|
| 1,891 |
|
|
| 4.09 | % |
Public offering notes – Alpha Class |
|
| 3,670 |
|
|
| 204 |
|
|
| 5.56 | % |
|
| 4,991 |
|
|
| 287 |
|
|
| 5.75 | % |
Special offering notes |
|
| 8,454 |
|
|
| 387 |
|
|
| 4.58 | % |
|
| 9,088 |
|
|
| 379 |
|
|
| 4.17 | % |
International notes |
|
| 220 |
|
|
| 9 |
|
|
| 4.09 | % |
|
| 171 |
|
|
| 8 |
|
|
| 4.68 | % |
Subordinated notes |
|
| 6 |
|
|
| 0 |
|
|
| 5.73 | % |
|
| 506 |
|
|
| 32 |
|
|
| 6.32 | % |
Secured notes |
|
| 31 |
|
|
| 1 |
|
|
| 2.53 | % |
|
| -- |
|
|
| -- |
|
|
| -- | % |
74
Borrowings from financial institutions |
|
| 107,210 |
|
|
| 2,714 |
|
|
| 2.53 | % |
|
| 114,799 |
|
|
| 4,560 |
|
|
| 3.97 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing liabilities |
| $ | 164,211 |
|
| $ | 5,135 |
|
|
| 3.13 | % |
| $ | 175,741 |
|
| $ | 7,157 |
|
|
| 4.07 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
|
|
|
| $ | 4,915 |
|
|
|
|
|
|
|
|
|
| $ | 3,920 |
|
|
|
|
|
Net interest margin [2] |
|
|
|
|
|
|
|
|
|
| 2.83 | % |
|
|
|
|
|
|
|
|
|
| 2.10 | % |
Average interest-earning assets decreased to $165.0 million during the year ended December 31, 2012, from $176.1 million, a decrease of $11.1 million or 6%. The average yield on these assets decreased to 6.09% for the year ended December 31, 2012 from 6.29% for the year ended December 31, 2011. This decrease is related entirely to the composition of our interest-earning assets. In 2011, interest-earning accounts with other financial institutions, which earned average yields of 1.17%, only comprised 4% of our interest-earning assets. In 2012, as we sought to increase our liquidity, the average balance of our interest-earning accounts with other financial institutions increased to $13.2 million, which comprised 8% of our total interest-earning assets. This shift in the balance of assets caused the decrease in the average yield of both our interest-earning assets and total assets.
Average interest-bearing liabilities, consisting primarily of investor and credit facility notes payable, decreased to $164.2 million during the year ended December 31, 2012, from $175.7 million during 2011. The average rate paid on these notes decreased to 3.13% for the year ended December 31, 2012, from 4.07% for 2011. The decrease in the rate paid on interest-bearing liabilities was the result of refinancing our Members United and WesCorp credit facilities in November 2011 which reduced our average borrowing rate of 3.97% to an average rate of 2.53%. The average rate paid on our investor notes remained stable in total, as the average rates on our Class A Notes, which comprise a significant portion of our total notes, decreased by one basis point.
Net interest income for the year ended December 31, 2012 was $4.9 million, which was an increase of $995 thousand, or 25% from the prior year. The net interest margin increased 73 basis points to 2.83% for the year ended December 31, 2012, as compared to 2.10% for 2011. This increase was mainly related to the decrease in interest rates paid on borrowings on our credit facilities.
The following table sets forth, for the periods indicated, the dollar amount of changes in interest earned and paid for interest-earning assets and interest-bearing liabilities, the amount of change attributable to changes in average daily balances (volume), changes in interest rates (rate), and changes attributable to both the volume and rate (rate/volume):
75
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rate/Volume Analysis of Net Interest Income | |||||||||
|
|
|
| ||||||
|
| Year Ended December 31, 2013 vs. 2012 | |||||||
|
| Increase (Decrease) Due to Change in | |||||||
|
| Volume |
| Rate |
| Total | |||
|
| (Dollars in Thousands) | |||||||
|
|
|
|
|
|
|
|
|
|
Increase (Decrease) in Interest Income: |
|
|
|
|
|
|
|
|
|
Interest-earning account with other financial institutions |
| $ | (29) |
| $ | (25) |
| $ | (54) |
Total loans |
|
| (641) |
|
| 118 |
|
| (523) |
|
|
| (670) |
|
| 93 |
|
| (577) |
|
|
|
|
|
|
|
|
|
|
Increase (Decrease) in Interest Expense: |
|
|
|
|
|
|
|
|
|
Public offering notes – Class A |
|
| (267) |
|
| (2) |
|
| (269) |
Public offering notes – Alpha Class |
|
| (124) |
|
| (51) |
|
| (175) |
Special offering notes |
|
| (59) |
|
| 11 |
|
| (48) |
International notes |
|
| 6 |
|
| (2) |
|
| 4 |
Subordinated notes |
|
| 94 |
|
| -- |
|
| 94 |
Secured notes |
|
| 4 |
|
| -- |
|
| 4 |
Other |
|
| (135) |
|
| (7) |
|
| (142) |
|
|
| (481) |
|
| (51) |
|
| (532) |
Change in net interest income |
| $ | (189) |
| $ | 144 |
| $ | (45) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rate/Volume Analysis of Net Interest Income | |||||||||
|
|
|
| ||||||
|
| Year Ended December 31, 2012 vs. 2011 | |||||||
|
| Increase (Decrease) Due to Change in | |||||||
|
| Volume |
| Rate |
| Total | |||
|
| (Dollars in Thousands) | |||||||
|
|
|
|
|
|
|
|
|
|
Increase (Decrease) in Interest Income: |
|
|
|
|
|
|
|
|
|
Interest-earning account with other financial institutions |
| $ | 60 |
| $ | (11) |
| $ | 49 |
Total loans |
|
| (1,109) |
|
| 33 |
|
| (1,076) |
|
|
| (1,049) |
|
| 22 |
|
| (1,027) |
76
|
|
|
|
|
|
|
|
|
|
Increase (Decrease) in Interest Expense: |
|
|
|
|
|
|
|
|
|
Public offering notes – Class A |
|
| (64) |
|
| (7) |
|
| (71) |
Public offering notes – Alpha Class |
|
| (74) |
|
| (9) |
|
| (83) |
Special offering notes |
|
| (27) |
|
| 35 |
|
| 8 |
International notes |
|
| 2 |
|
| (1) |
|
| 1 |
Subordinated notes |
|
| (29) |
|
| (3) |
|
| (32) |
Secured notes |
|
| 1 |
|
| -- |
|
| 1 |
Other |
|
| (284) |
|
| (1,562) |
|
| (1,846) |
|
|
| (475) |
|
| (1,547) |
|
| (2,022) |
Change in net interest income |
| $ | (574) |
| $ | 1,569 |
| $ | 995 |
Credit Quality and Allowance for Loan Losses
We maintain an allowance for loan losses, through charges to earnings, at a level reflecting estimated credit losses on our loan portfolio. In evaluating the level of the allowance for loan losses, we consider the type of loan, amount of loans in our portfolio, adverse situations that may affect our borrowers’ ability to pay and estimated value of underlying collateral and credit quality trends (including trends in non-performing loans expected to result from existing conditions).
In comparison to 2012, provisions for loan losses increased by $18 thousand, while the allowance for loan losses decreased from $4.0 million at December 31, 2012 to $2.9 million at December 31, 2013. Several factors led to the decrease in the balance of our allowance for loan losses for the year ended December 31, 2013. In May 2013, we entered into a deed in lieu of foreclosure agreement with one of our borrowers. Immediately prior to this transaction, we charged off $978 thousand in reserves related to the loans held by this borrower. We charged off an additional $98 thousand in reserves on impaired loans throughout the year. Finally, our allowance decreased by $82 thousand related to the accretion of reserves based on net present value differences on non-collateral-dependent restructured loans. For 2013, we recorded $9 thousand in provisions for loan losses, which is the result of an increase in specific reserves on some of our impaired loans. However, the increase in specific reserves was mitigated by a decrease in general reserves due to the smaller balance in our loan portfolio and improvement in the weighted average risk rating of our non-impaired loans.
77
The activity in the allowance for loan losses for the years ended December 31, 2013 and 2012 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Year Ended |
| Year Ended | ||
|
| December 31, 2013 |
| December 31, 2012 | ||
|
|
|
|
|
|
|
Balance, beginning of period |
| $ | 4,005 |
| $ | 4,127 |
Provision (credit) for loan loss |
|
| 9 |
|
| (9) |
Chargeoffs |
|
| (1,076) |
|
| (47) |
Accretion of allowance related to restructured loans |
|
| (82) |
|
| (66) |
Balance, end of period |
| $ | 2,856 |
| $ | 4,005 |
Impaired Loans
As of December 31, 2013 and 2012, the principal balances of impaired loans were as follows:
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
| December 31 |
| December 31 | ||
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| 2013 |
| 2012 | ||
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|
|
|
|
|
|
Impaired loans with an allowance for loan loss |
| $ | 14,740 |
| $ | 11,128 |
Impaired loans without an allowance for loan loss |
|
| 4,177 |
|
| 7,431 |
Total impaired loans |
| $ | 18,917 |
| $ | 18,559 |
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|
|
|
|
|
|
Allowance for loan losses related to impaired loans |
| $ | 2,112 |
| $ | 2,987 |
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|
|
|
|
|
Total non-accrual loans |
| $ | 17,609 |
| $ | 18,338 |
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|
|
|
|
|
|
Total loans past due 90 days or more and still accruing |
| $ | -- |
| $ | -- |
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Information regarding interest income recognized on impaired loans for the years ended December 31, 2013 and 2012, is as follows:
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|
|
| 2013 |
| 2012 | ||
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|
|
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|
|
|
Average investment in impaired loans |
| $ | 21,125 |
| $ | 18,245 |
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|
|
|
|
|
|
Interest income recognize on impaired loans |
|
| 663 |
|
| 482 |
Interest income recognized on impaired loans attributable to their change in present value |
|
| 82 |
|
| 66 |
Total interest income recognized on impaired loans |
| $ | 745 |
| $ | 548 |
No additional funds were committed to be advanced in connection with impaired loans as of December 31, 2013.
Cash and Cash Equivalents
We experienced a decrease in our cash during the twelve months ended December 31, 2013 in the amount of $2.6 million, as compared to a net decrease of $1.1 million for the twelve months ended December 31, 2012. This decrease is primarily due to a $4.9 million decrease in our investor notes, pay down of our NCUA credit facilities and increase in loans originated in 2013.
Net cash provided by operating activities totaled $596 thousand for the twelve months ended December 31, 2013, a decrease of $300 thousand from $896 thousand provided by operating activities during the twelve months ended December 31, 2012. This is due to the fact that while our net income increased from 2012, much of that increase was related to non-cash income such as the amortization of deferred loan fees and gains on sales of loan participations. Our other assets also increased by $95 thousand from the prior year.
Net cash provided by investing activities totaled $5.9 million during the twelve months ended December 31, 2013, compared to $11.4 million provided during the twelve months ended December 31, 2012, a decrease of $5.5 million. This difference is attributable to an increase in cash used for loan originations and purchases from a total of $22.2 million in 2012 to $33.0 million in 2013 as our lending team successfully replaced loans that were paid off or sold.
Net cash used in financing activities totaled $9.1 million for the twelve-month period in 2013, an increase of $4.3 million from $13.4 million used in financing activities during the twelve months ended December 31, 2012. We experienced $1.6 million fewer in notes payable paydowns in 2013, and paid down $2.5 million less in borrowings from financial institutions as we did not need to make as many additional principal payments on our NCUA borrowings in 2013 in order to remain in compliance with the collateralization ratio covenants on those borrowings.
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Liquidity and Capital Resources
We rely on cash generated from our operations, cash reserves and proceeds from the sale of investor notes to meet our obligations as they arise. From time to time, we also generate funds from the sale of mortgage loans and loan participations and raise additional capital through the sale of debt and equity securities. In addition, we have begun to generate non-interest income, chiefly commissions on securities sales and fees earned from managing client investments through our wholly-owned broker-dealer, MP Securities. We require cash to originate and acquire new mortgage loans, repay indebtedness, make interest payments to our note investors and pay expenses related to our general business operations. We intend to continue our current liquidity plan which relies primarily on cash generated by operations, cash reserves and proceeds from the sale of debt securities. However, we intend to supplement this liquidity plan by expanding loan participation sales as well as through the generation of additional sources of non-interest income.
Our management regularly prepares liquidity forecasts which we rely upon to ensure that we have adequate liquidity to conduct our business. While we believe that these expected cash inflows and outflows are reasonable, we can give no assurances that our forecasts or assumptions will prove to be accurate, particularly in this recovering credit and financial environment. While our liquidity sources that include cash, reserves and net cash from operations are generally available on an immediate basis, our ability to sell mortgage loan assets and raise additional debt or equity capital is less certain and less immediate.
We are also susceptible to withdrawal requests made by large note investors, ministries and churches that can adversely affect our liquidity. We believe that our available cash, cash flow from operations, net interest and other fee income will be sufficient to fund our liquidity requirements for the next 12 months. Should our liquidity needs exceed our available sources of liquidity, we believe we could sell assets to raise additional cash. We may not be able to obtain desired financing on terms and conditions acceptable to us. If we are unable to obtain additional capital funding, our ability to grow our business and meet our strategic objectives will be constrained.
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Historically, we have experienced high rates of repeat investments or renewals by our debt security investors when their debt securities mature. During 2009 and 2008, for example, 79% and 76%, respectively, of our note investors renewed their investment. In 2010, the rate dropped to 57% of our note holders who purchased new debt securities. For the year 2011, 73% of note holders purchased new investments. However, in 2012, this renewal rate fell to 45% as we temporarily suspended the sale of our Class A Notes while we awaited an order of effectiveness for our registration statement from the SEC and a “no objections” letter from FINRA that would allow the notes to be sold by our wholly-owned subsidiary, MP Securities. We received the “no objections” letter on September 24, 2012 and the order of effectiveness from the SEC on October 11, 2012. While we are now able to distribute Class A Notes through MP Securities, these note sales are subject to certain suitability requirements that restrict the ability of some of our current investors to renew or make investments in our Class A Notes. Due to those restrictions, the renewal rate fell further to 34% in 2013. For the last two months of 2013, the renewal rate was 52% and we expect the renewal rate to increase in 2014 as we add new clients who qualify under the suitability restrictions and offer other investment products to investors who may need to diversify their investments. We are continuing to hire additional investment advisers and sales personnel at MP Securities and to develop other investment products, including private offerings of debt securities, annuities, mutual funds, IRA investments and, through MP Securities, the sale of off-balance sheet investment products that generate commission income.
Should sources of capital from the sale of our debt securities prove insufficient to fund our operations and obligations, we also own a portfolio of performing mortgage loans and believe that we can generate additional liquidity through the sale of participation interests and mortgage loan assets to make payments on our credit facilities, pay interest to our note investors and pay operating expenses.
We base this belief on the size and quality of our mortgage loan portfolio and on our management’s experience in finding purchasers for those loans on a timely basis. However, any sales transactions are dependent on and subject to market and economic conditions and our ability to consummate an acceptable purchase commitment. In addition, sales transactions could only be consummated if our loan balance after the transaction would continue to meet the minimum collateralization requirements of our credit facilities held with the NCUA. In order to enhance our ability to meet these requirements, we are currently discussing with a small number of financial institutions the possibility of obtaining an additional credit facility that would provide short-term financing for the funding of new loans which we would then offer for sale in the participation market. We are seeking to increase the sale of secured and unsecured debt securities and partner with other credit unions that may have an interest in originating or investing in new business loans that are made to churches and ministries that meet our underwriting guidelines. By developing new financing resources such as loan participations and institutional financing arrangements, we believe that we can attract new capital while generating profitable returns.
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Credit Facilities Developments
As of December 31, 2013, our credit facilities’ commitments, amounts available and principal amounts outstanding were as follows:
Members United Facilities
On October 12, 2007, we entered into two note and security agreements with Members United, a federally chartered credit union located in Warrenville, Illinois for a secured $10 million revolving line of credit and for a secured $50 million revolving line of credit, which was later amended on May 8, 2008 to allow us to borrow up to $100 million through the revolving line of credit. Both credit facilities were secured by certain mortgage loans as a recourse obligation.
On August 27, 2008, we borrowed the entire $10 million available on the $10 million. As a result of this financing, the $10 million facility was converted to a term loan with a maturity date of August 26, 2011 and we paid off this facility in 2011. We also have used our $100 million Members United credit facility to assist us in financing our business. For 2011, the weighted average interest rate we paid on the Members United facility was 3.98%.
On September 24, 2010, the NCUA Board of Directors placed Members United into conservatorship. When the NCUA initiates a conservatorship action, the board of directors and management of the credit union is replaced. To implement the Members United conservatorship, certain legacy assets and contributed capital accounts, including our Members United credit facilities, were placed into an Asset Management Estate established by the NCUA to administer the Members United conservatorship.
On November 4, 2011, we and the National Credit Union Administration Board As Liquidating Agent of Members United Corporate Federal Credit Union entered into an $87.3 million credit facility refinancing transaction which amended and restated the original $100 million credit line we entered into with Members United on May 7, 2008. Unless the principal amount of the indebtedness due is accelerated under the terms of the MU Credit Facility loan documents, the principal balance and any interest due on the MU Credit Facility will mature on October 31, 2018. Accrued interest is due and payable monthly in arrears on the MU Credit Facility commencing on December 1, 2011 and on the first day of each succeeding month thereafter 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.
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 SEC and maintain a minimum collateralization ratio of at least 128%. If at any time we fail to maintain our required minimum collateralization ratio, we will be required to deliver cash or qualifying mortgage loans in an amount sufficient to enable us to meet our obligation to maintain a minimum collateralization ratio. As of December 31, 2013, the collateral securing the MU Credit Facility had an aggregate principal balance of $101.5 million,
82
which satisfies the minimum collateralization ratio for this facility. As of December 31, 2013, the outstanding principal balance due on the MU Credit Facility was $78.4 million.
The MU Credit Facility also includes covenants which prevent us from renewing or extending a loan pledged as collateral under this facility unless certain conditions have been met and requiring the borrower to deliver current financial statements to us. Under the terms of the MU Credit Facility, we have established a lockbox maintained for the benefit of the NCUA that will receive all payments made by collateral obligors. Our obligation to repay the outstanding balance on 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, or our breach of any of our covenants.
WesCorp Facility
On November 30, 2009, we entered into a $28 million credit facility with WesCorp, a federally chartered credit union located in San Dimas, California. We used $24.6 million of the proceeds from the WesCorp credit facility to pay-off the BMO Facility. The WesCorp credit facility had a fixed interest rate of 3.95% and was initially secured by approximately $59.2 million of mortgage loans we previously pledged to secure the BMO Facility. Thus, the loan was initially secured by excess collateral of approximately $30.8 million.
On March 20, 2009, the NCUA assumed control of WesCorp under a conservatorship proceeding initiated by the NCUA under regulations adopted under the Federal Credit Union Act. Effective as of October 1, 2010, WesCorp was placed into liquidation by the NCUA. Pursuant to a letter dated October 25, 2010, we were advised that our WesCorp credit facility had been transferred to the Asset Management Assistance Center (AMAC), a facility established by the NCUA.
On November 4, 2011, we and the National Credit Union Administration Board As Liquidating Agent of Western Corporate Federal Credit Union entered into a $23.5 million credit facility which amended and restated the WesCorp credit facility. Unless the principal amount due on the WesCorp Credit Facility Extension is accelerated under the terms of the loan documents evidencing such credit facility, the principal balance and any interest due on the facility will be payable in full on October 31, 2018. Accrued interest on the WesCorp Credit Facility Extension is due monthly in arrears commencing on December 1, 2011 and on the first day of each succeeding month thereafter at the lesser of the maximum rate permitted by applicable law under the loan documents or 2.525%. As a result of this refinancing transaction, our interest rate was reduced from 3.95% to 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 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 NCUA with interim or annual financial statements and annual and periodic reports filed with the SEC and maintain a minimum collateralization ratio of at least 150%. If at any time we fail to maintain our required minimum collateralization ratio, we will be required to deliver cash or qualifying mortgage loans in an amount sufficient to enable us to meet
83
our obligation to maintain a minimum collateralization ratio. As of December 31, 2013, the collateral securing the WesCorp Credit Facility Extension had an aggregate principal balance of $33.2 million, which satisfies the minimum collateralization ratio for this facility. As of December 31, 2013, $22.5 million was outstanding on the WesCorp Credit Facility Extension.
For further information on our credit facilities, see Note 7, Borrowings from Financial Institutions, in our accompanying audited consolidated financial statements for the year ended December 31, 2013.
Investor Notes
We also rely on our investor notes to provide the funding for origination and purchase of mortgage loan assets and fund our general operations. As of December 31, 2013, a total of $47.7 million of our investor debt securities were issued and outstanding. For further information on our investor notes, see Note 9, Notes Payable in our accompanying audited consolidated financial statements for the year ended December 31, 2013. Historically, we have offered investor notes under offerings registered with the SEC and in private placements exempt under the provisions of the Securities Act of 1933, as amended. Our Alpha Class Notes were initially registered with the SEC in July 2001 and an additional $75.0 million of new Alpha Notes were registered with the SEC in May 2007. We discontinued the sale of our Alpha Class Notes in April 2008. As of December 31, 2013, $159 thousand of these notes remained outstanding.
In addition to our Alpha Class Notes, in April 2008, we registered with the SEC an offering of $80.0 million of new Class A Notes that consists of three series of notes, including a fixed series, flex series and variable series. We registered an additional $100.0 million in Class A Notes with the SEC in June, 2010. On June 24, 2011, we filed a registration statement with the SEC seeking to register an additional $75 million of our Class A Notes.
Effective as of May 15, 2012, we temporarily discontinued the sale of the Class A Notes and deregistered the securities remaining unsold under our registration statement on Form S-1, initially filed with the SEC on December 23, 2009 and declared effective on June 3, 2010. We subsequently filed a registration statement seeking to register $75 million of our Class A Notes with the SEC. This registration statement was declared effective as of October 11, 2012 and we resumed the sale of our Class A Notes. All of our Class A Notes are unsecured. The interest rates we pay on the fixed series notes and the flex 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, or in the case of the flex series notes, on the date the interest rate is reset. These notes bear interest at the swap index plus a rate spread of 1.70% to 2.50% and are issued in maturities ranging from 12 to 84 months. The interest rates we pay on the variable series notes are determined by reference to the variable index in effect on the date the interest rate is set and bear interest at a rate of the swap index plus a rate spread of 1.50% to 1.80%. Effective as of January 5, 2009, the variable index is defined under the Class A Notes as the three month LIBOR rate.
The Class A Notes are issued under a Trust Indenture we entered into with U.S. Bank National Association. Pursuant to the US Bank Indenture, we may issue up to a maximum of $200
84
million of our Class A Notes. The Trust Indenture covering the Class A Notes contains covenants pertaining to a minimum fixed charge coverage ratio, maintenance of tangible net worth, limitation on issuance of additional notes and incurrence of indebtedness. We were in compliance with these covenants at December 31, 2013. At December 31, 2013, $37.0 million of these Class A Notes were outstanding.
In addition to Class A Notes, we offer notes under several private placement offerings. In March 2013, we began offering Series 1 Subordinated Capital Notes and a new private placement of our International Notes. Investors have to meet certain criteria in order to purchase either of these notes and are also subject to suitability restrictions. At December 31, 2013, $4.0 million and $409 thousand of our Subordinated Capital Notes and our International Notes were outstanding, respectively.
Of the $47.7 million in investor notes that are outstanding at December 31, 2013, $7.8 million are available to be withdrawn at any time without penalty while an additional $15.1 million will mature in 2014. Historically, we have experienced a high rate of renewal or reinvestment by our note holders upon maturity of their notes. In 2011 and 2010, 73% and 57%, respectively, of our note investors renewed their investments by purchasing new notes. For the year ended December 31, 2012, largely due to the temporary suspension of our Class A Notes sales for six months, only 45% of our note investors renewed their investments. Due to suitability restrictions, the renewal percentage decreased further to 34% in 2013. For the last two months of 2013, the renewal rate was 52%, however, no assurances can be given that we will be able to restore investments made by repeat investors to pre-2012 rates. We believe the historical record of repeat purchasers by our debt security investors supports our confidence in the future viability of our investor note program.
Debt Covenants
Our investor notes require that we comply with certain financial covenants including, without limitation, minimum net worth, interest coverage, restrictions on the distribution of earnings to our equity investors and incurring other indebtedness that is not permitted under the provisions of our loan and trust indenture. If an event of default occurs under our investor notes, the trustee may declare the principal and accrued interest on all notes to be due and payable and may exercise other available remedies to collect payment on such notes. We are in compliance with our debt covenants under the investor notes.
The MU Credit Facility and WesCorp Credit Facility Extension agreements contain a number of standard borrowing covenants, including affirmative covenants to maintain good and indefeasible title to the pledged collateral free and clear of all liens, to maintain a lockbox for the benefit of the lender to collect payments from borrowers on the collateral notes and comply with customary covenants for a transaction of this nature. In addition, unless otherwise waived by the NCUA, we may not renew or extend an underlying mortgage loan unless a recent appraisal is completed for such mortgaged property, the loan continues to be amortized over the same period as the prior note and requires the borrower to submit quarterly financial statements in the event the borrower has negative annual net income or a debt service coverage ratio of less than 1.0 to 1.0. We are in compliance with these covenants as of December 31, 2013.
85
Market Risk Management
Market Risk Management
Market risk arises from changes in interest rates, exchange rates, commodity prices and equity prices. Our market risk exposure primarily consists of interest rate risk, which is mitigated by policies and procedures which monitor and limit our earnings and balance sheet exposure to changes in interest rates. In the past, we have also utilized various financial hedging instruments such as interest rate swaps and interest rate caps which allow us to diminish some of our interest rate risk associated with some of our variable rate assets and liabilities. Further, we do not have any exposure to currency exchange rates. Our earnings depend primarily upon the difference between the income we receive from our interest earning assets and our cost of funds, principally interest expense incurred on interest-bearing liabilities. Interest rates charged on our loans are affected principally by the demand for loans, the supply of money available for lending purposes, and competitive factors. In turn, these factors are influenced by general economic conditions and other constraints beyond our control such as governmental economic and tax policies, general supply of money in the economy, governmental budgetary actions, and the actions of the Federal Reserve Board.
Interest Rate Risk Management
In an effort to manage our exposure to interest rate risk, our Board has formed an Asset/Liability Management Committee (the “ALM Committee”) that meets on a regular basis. The core investment objectives of the ALM Committee are to coordinate, control and perform oversight of our portfolio consistent with our business plan and board approved policies. The ALM Committee establishes and monitors our mix of assets and funding sources, taking into account relative costs and spreads, interest rate sensitivity and cash flow requirements in an effort to produce results consistent with our liquidity, capital adequacy, level of risk and profitability goals.
The principal objective of interest rate risk management (often referred to as “asset/liability management”) is to manage the financial components of our statement of condition in a manner that will optimize the risk/reward equation for earnings and capital in relation to changing interest rates. We have adopted formal policies and standard industry practices to monitor and manage interest rate risk exposure. As part of this effort, we construct interest rate risk scenarios utilizing an asset/liability program from a third party provider of financial data monitoring and reporting systems, enabling us to better manage economic risk and interest rate risk.
Our fundamental asset and liability objective is to maximize our economic value while maintaining adequate liquidity and exposure to interest rate risk deemed by our Board to be acceptable. We believe an acceptable degree of exposure to interest rate risk results from the management of assets and liabilities through the maturities, repricing and mix of our mortgage loan investments, borrowing facilities and investor notes to attempt to neutralize the potential
86
impact of changes in market interest rates. Our profitability is dependent to a large extent upon our net interest income, which is the difference between our interest income on interest-earning assets such as loans and interest-bearing assets, and our interest expense on interest-bearing liabilities, such as our investor notes and financial institution borrowings. Unlike other financial institutions which have access to other sources of liquidity such as the Federal Reserve Discount Window or the Federal Home Loan Bank, we are dependent upon the issuance of investor notes, capital investments by our equity holders, the sale of mortgage assets and to a lesser extent, credit facilities. Further, we manage our maturity risk between assets and liabilities with the goal of limiting our exposure to interest rate risk, ensuring adequate liquidity. Interest income and interest expense are affected by general economic conditions and by competition in the marketplace. Our interest and pricing strategies are driven by our asset/liability management analyses and by local market conditions.
In connection with the above-mentioned strategy, we simulate the change in net interest income and net interest margin given immediate and parallel interest rate shocks over a 12-month horizon. Shown below are possible changes to net interest income and the net interest margin based upon the model’s program under a 200 basis point increase in the interest rates as of December 31, 2013:
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Change (in basis points) |
| Net Interest Income (next twelve months) |
| Change in Net Interest Income |
| % Change in Net Interest Income |
| Net Interest Margin | ||||
+200 |
| $ | 5,164 |
| $ | 135 |
| 2.69 | % |
| 3.30 | % |
These results indicate the effect of immediate rate changes and do not consider the yield from reinvesting in short-term versus long-term instruments. The above profile illustrates that, if there were an immediate and sustained increase of 200 basis points in interest rates, our net interest income would increase by $135 thousand over the “base case” (i.e., no interest rate change) and our net interest margin would increase from 3.22% to 3.30%. Our net interest margin will increase if rates rise. We did not consider a decrease in interest rates in our analysis as interest rates remain at low levels and no further decrease can be reasonably anticipated. Based upon the review of management and our Board, we consider the results indicated by the report to be acceptable.
The following table sets forth our maturity gap for interest-earning assets and interest-bearing liabilities as of the period indicated. For purposes of the following table, an asset or liability is considered to mature based on its contractual terms. Actual payment patterns may differ from contractual payment patterns.
87
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| Maturity Analysis | ||||||||||||||||||||||
|
| as of December 31, 2013 | ||||||||||||||||||||||
|
| Amounts Subject to Maturity Within (dollars in thousands) | ||||||||||||||||||||||
|
| Year 1 |
| Year 2 |
| Year 3 |
| Year 4 |
| Year 5 |
| After Year 5 |
| Non-Maturity |
| Total | ||||||||
Assets |
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Cash with financial institutions |
| $ | 7,483 |
| $ | -- |
| $ | -- |
| $ | -- |
| $ | -- |
| $ | -- |
| $ | -- |
| $ | 7,483 |
Loans, net of deferred fees |
|
| 32,867 |
|
| 22,153 |
|
| 19,623 |
|
| 16,390 |
|
| 9,930 |
|
| 49,155 |
|
| -- |
|
| 150,118 |
Allowance for loan losses and loan discount |
|
| -- |
|
| -- |
|
| -- |
|
| -- |
|
| -- |
|
| -- |
|
| (3,599) |
|
| (3,599) |
Noninterest earning assets |
|
| -- |
|
| -- |
|
| -- |
|
| -- |
|
| -- |
|
| -- |
|
| 4,413 |
|
| 4,413 |
Total assets |
| $ | 40,350 |
| $ | 22,153 |
| $ | 19,623 |
| $ | 16,390 |
| $ | 9,930 |
| $ | 49,155 |
| $ | 814 |
| $ | 158,415 |
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Liabilities |
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Borrowings from financial institutions |
| $ | 3,495 |
| $ | 3,591 |
| $ | 3,677 |
| $ | 3,777 |
| $ | 3,874 |
| $ | 81,490 |
| $ | -- |
| $ | 99,904 |
Notes payable |
|
| 22,938 |
|
| 11,399 |
|
| 6,106 |
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| 3,778 |
|
| 3,359 |
|
| 87 |
|
| -- |
|
| 47,667 |
Other liabilities |
|
| -- |
|
| -- |
|
| -- |
|
| -- |
|
| -- |
|
| -- |
|
| 901 |
|
| 901 |
Members' equity |
|
| -- |
|
| -- |
|
| -- |
|
| -- |
|
| -- |
|
| -- |
|
| 9,943 |
|
| 9,943 |
Total liabilities and members' equity |
| $ | 26,433 |
| $ | 14,990 |
| $ | 9,783 |
| $ | 7,555 |
| $ | 7,233 |
| $ | 81,577 |
| $ | 10,844 |
| $ | 158,415 |
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Maturity gap |
| $ | 13,917 |
| $ | 7,163 |
| $ | 9,840 |
| $ | 8,835 |
| $ | 2,697 |
| $ | (32,422) |
| $ | (10,030) |
| $ | -- |
Cumulative maturity gap |
| $ | 13,917 |
| $ | 21,080 |
| $ | 30,920 |
| $ | 39,755 |
| $ | 42,452 |
| $ | 10,030 |
| $ | -- |
| $ | -- |
The preceding table indicates that we have a positive one-year cumulative gap of $13.9 million at December 31, 2013. This indicates that funds expected to become available in the next year due to maturing assets are greater than interest-bearing liabilities coming due in the next year. Certain notes payable have contractual maturities of 72 months but can be withdrawn in whole or in part at any time prior to maturity without restriction. In our experience, investors tend not to withdraw these notes prior to maturity. Nonetheless, for purposes of the maturity analysis above, these notes are included in the Year 1 maturity column.
When an increase in interest rates will help the entity and a decrease in interest rates will hurt the entity, the entity is considered to be asset sensitive. Currently, our balance sheet is asset sensitive as the amount of assets maturing is greater than the amount of liabilities maturing over the next year. In the view of management, this sensitivity will not have a material adverse impact on the Company’s financial position and results of operations for 2014.
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Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Included herewith are the following financial statements:
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Table of Contents | ||
| Page | |
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Report of Independent Registered Public Accounting Firm | F-1 | |
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Financial Statements |
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Consolidated Balance Sheets | F-2 | |
Consolidated Statements of Operations | F-3 | |
Consolidated Statements of Equity | F-4 | |
Consolidated Statements of Cash Flows | F-5 | |
Notes to Consolidated Financial Statements | F-6 – F-43 |
89
Report of Independent Registered Public Accounting Firm
To The Members
Ministry Partners Investment Company, LLC
Brea, California
We have audited the accompanying consolidated balance sheets of Ministry Partners Investment Company, LLC and subsidiaries (the Company) as of December 31, 2013 and 2012 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.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Ministry Partners Investment Company, LLC and subsidiaries as of December 31, 2013 and 2012 and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.
/s/ Hutchinson and Bloodgood LLP
Glendale, California
March 28, 2014
F-1
Ministry Partners Investment Company, LLC and Subsidiaries
Consolidated Balance Sheets
December 31, 2013 and 2012
(Dollars in Thousands except for Unit Data)
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| 2013 |
| 2012 | ||
Assets: |
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Cash |
| $ | 7,483 |
| $ | 10,068 |
Loans receivable, net of allowance for loan losses of $2,856 and $4,005 as of December 31, 2013 and 2012, respectively |
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| 146,519 |
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| 152,428 |
Accrued interest receivable |
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| 607 |
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| 672 |
Property and equipment, net |
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| 120 |
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| 216 |
Debt issuance costs, net |
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| 31 |
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| 95 |
Foreclosed assets, net |
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| 3,308 |
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| 2,914 |
Other assets |
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| 347 |
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| 252 |
Total assets |
| $ | 158,415 |
| $ | 166,645 |
Liabilities and members’ equity |
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Liabilities: |
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Borrowings from financial institutions |
| $ | 99,904 |
| $ | 103,833 |
Notes payable |
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| 47,667 |
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| 52,564 |
Accrued interest payable |
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| 14 |
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| 7 |
Other liabilities |
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| 887 |
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| 693 |
Total liabilities |
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| 148,472 |
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| 157,097 |
Members' Equity: |
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Series A preferred units, 1,000,000 units authorized, 117,100 units issued and outstanding at December 31, 2013 and December 31, 2012 (liquidation preference of $100 per unit) |
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| 11,715 |
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| 11,715 |
Class A common units, 1,000,000 units authorized, 146,522 units issued and outstanding at December 31, 2013 and December 31, 2012 |
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| 1,509 |
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| 1,509 |
Accumulated deficit |
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| (3,281) |
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| (3,676) |
Total members' equity |
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| 9,943 |
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| 9,548 |
Total liabilities and members' equity |
| $ | 158,415 |
| $ | 166,645 |
The Notes to Consolidated Financial Statements are an integral part of these consolidated financial statements.
F-2
Ministry Partners Investment Company, LLC and Subsidiaries
Consolidated Statements of Income
Years Ended December 31, 2013 and 2012
(Dollars in Thousands)
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| 2013 |
| 2012 | ||
Interest income: |
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Interest on loans |
| $ | 9,390 |
| $ | 9,913 |
Interest on interest-bearing accounts |
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| 83 |
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| 137 |
Total interest income |
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| 9,473 |
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| 10,050 |
Interest expense: |
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Borrowings from financial institutions |
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| 2,572 |
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| 2,715 |
Notes payable |
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| 2,030 |
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| 2,420 |
Total interest expense |
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| 4,602 |
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| 5,135 |
Net interest income |
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| 4,871 |
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| 4,915 |
Provision (credit) for loan losses |
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| 9 |
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| (9) |
Net interest income after provision for loan losses |
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| 4,862 |
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| 4,924 |
Non-interest income |
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| 168 |
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| 56 |
Non-interest expenses: |
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Salaries and benefits |
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| 2,563 |
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| 2,029 |
Marketing and promotion |
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| 114 |
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| 158 |
Office occupancy |
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| 140 |
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| 132 |
Office operations and other expenses |
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| 1,146 |
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| 1,357 |
Foreclosed assets, net |
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| (240) |
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| 160 |
Legal and accounting |
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| 699 |
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| 711 |
Total non-interest expenses |
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| 4,422 |
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| 4,547 |
Income before provision for income taxes |
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| 608 |
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| 433 |
Provision for income taxes |
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| 16 |
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| 16 |
Net income |
| $ | 592 |
| $ | 417 |
The Notes to Consolidated Financial Statements are an integral part of these consolidated financial statements.
F-3
Ministry Partners Investment Company, LLC and Subsidiaries
Consolidated Statements of Equity
Years Ended December 31, 2013 and 2012
(Dollars in Thousands)
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| Series A Preferred |
| Class A Common |
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| Units |
| Units |
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| Number of Units |
| Amount |
| Number of Units |
| Amount |
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| Retained Earnings (Accumulated Deficit) |
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| Total | ||||
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Balance, December 31, 2011 |
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| 117,100 |
| $ | 11,715 |
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| 146,522 |
| $ | 1,509 |
| $ | (3,746) |
| $ | 9,478 |
Net income |
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| -- |
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| -- |
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| -- |
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| -- |
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| 417 |
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| 417 |
Dividends on preferred units |
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| -- |
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| -- |
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| -- |
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| -- |
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| (347) |
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| (347) |
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Balance, December 31, 2012 |
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| 117,100 |
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| 11,715 |
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| 146,522 |
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| 1,509 |
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| (3,676) |
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| 9,548 |
Net income |
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| -- |
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| -- |
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| -- |
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| -- |
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| 592 |
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| 592 |
Dividends on preferred units |
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| -- |
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| -- |
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| -- |
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| -- |
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| (197) |
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| (197) |
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Balance, December 31, 2013 |
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| 117,100 |
| $ | 11,715 |
| $ | 146,522 |
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| 1,509 |
| $ | (3,281) |
| $ | 9,943 |
The Notes to Consolidated Financial Statements are an integral part of these consolidated financial statements.
F-4
Ministry Partners Investment Company, LLC and Subsidiaries
Consolidated Statements of Cash Flows
Years Ended December 31, 2013 and 2012
(Dollars in Thousands)
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| 2013 |
| 2012 | ||
Cash Flows from Operating Activities |
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Net income |
| $ | 592 |
| $ | 417 |
Adjustments to reconcile net income to net cash provided (used) by operating activities: |
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Depreciation |
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| 101 |
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| 127 |
Provision (credit) for loan losses |
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| 9 |
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| (9) |
Provision for foreclosed asset losses |
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| 13 |
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| 136 |
Amortization of deferred loan fees |
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| (300) |
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| (131) |
Amortization of debt issuance costs |
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| 160 |
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| 167 |
Accretion of allowance for loan losses on restructured loans |
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| (82) |
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| (66) |
Accretion of loan discount |
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| (14) |
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| (6) |
Gain on sale of loans |
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| (54) |
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| -- |
Changes in: |
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Accrued interest receivable |
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| 65 |
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| 53 |
Other assets |
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| (95) |
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| 1 |
Other liabilities and accrued interest payable |
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| 214 |
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| 207 |
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Net cash provided by operating activities |
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| 609 |
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| 896 |
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Cash Flows from Investing Activities |
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Loan purchases |
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| (899) |
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| (12,397) |
Loan originations |
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| (32,141) |
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| (9,795) |
Loan sales |
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| 14,171 |
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| 2,425 |
Loan principal collections, net |
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| 22,984 |
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| 31,230 |
Foreclosed asset sales |
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| 1,828 |
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| -- |
Purchase of property and equipment |
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| (5) |
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| (40) |
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Net cash provided by investing activities |
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| 5,938 |
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| 11,423 |
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Cash Flows from Financing Activities |
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Net change in borrowings from financial institutions |
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| (3,929) |
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| (6,447) |
Net changes in notes payable |
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| (4,897) |
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| (6,467) |
Debt issuance costs |
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| (96) |
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| (158) |
F-5
Dividends paid on preferred units |
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| (210) |
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| (346) |
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Cash used by financing activities |
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| (9,132) |
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| (13,418) |
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Net increase (decrease) in cash |
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| (2,585) |
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| (1,099) |
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Cash at beginning of period |
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| 10,068 |
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| 11,167 |
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Cash at end of period |
| $ | 7,483 |
| $ | 10,068 |
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Supplemental disclosures of cash flow information |
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Interest paid |
| $ | 4,864 |
| $ | 5,143 |
Income taxes paid |
| $ | 14 |
| $ | 14 |
Non-cash Activities |
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Transfer of loans to foreclosed assets |
| $ | 4,384 |
| $ | 1,676 |
Loans made to facilitate the sale of foreclosed assets |
| $ | 1,000 |
| $ | -- |
The Notes to Consolidated Financial Statements are an integral part of these consolidated financial statements.
Note 1.Summary of Significant Accounting Policies
Nature of Business
Ministry Partners Investment Company, LLC (the “Company”) was incorporated in California in 1991 as a C corporation and converted to a limited liability company (“LLC”) on December 31, 2008. The Company is owned by a group of 11 federal and state chartered credit unions, as well as the Asset Management Assistance Center of the National Credit Union Administration (“NCUA”), none of which owns a majority of the voting equity units of the Company. The Asset Management Assistance Center owns only preferred units, while the credit unions own both common and preferred units. Offices of the Company are located in Brea, California. The Company provides funds for real property secured loans for the benefit of evangelical churches and church organizations. The Company funds its operations primarily through the sale of debt and equity securities and through other borrowings. Historically, most of the Company’s loans have been purchased from its largest equity investor, the Evangelical Christian Credit Union (“ECCU”), of Brea, California. The Company also purchases loans from other credit unions. In addition, the Company originates church and ministry loans independently. Nearly all of the Company’s business and operations currently are conducted in California and its mortgage loan investments cover approximately 31 states, with the largest number of loans made to California borrowers.
In 2007 the Company created a wholly-owned special purpose subsidiary, Ministry Partners Funding, LLC (“MPF”). MPF has been inactive since November 30, 2009. The Company plans to maintain MPF for possible future use as a financing vehicle to effect securitized debt transactions.
F-6
On November 13, 2009, the Company formed a wholly-owned subsidiary, MP Realty Services, Inc., a California corporation (“MP Realty”). MP Realty will provide loan brokerage and other real estate services to churches and ministries in connection with the Company’s mortgage financing activities. On February 23, 2010, the California Department of Real Estate issued MP Realty a license to operate as a corporate real estate broker. MP Realty did not provide any services in 2013 or 2012.
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. Effective as of March 2, 2011, MP Securities’ application for membership in the Financial Industry Regulatory Authority (“FINRA”) was approved. In May of 2012, MP Securities began selling Secured Investment Certificates on behalf of the Company. On September 24, 2012, MP Securities received a no objection letter from FINRA, thereby authorizing the Company to act as a selling agent for the Company’s Class A Notes offering that is offered under a registration statement declared effective by the U.S. Securities and Exchange Commission (“SEC”) on October 11, 2012. In November 2012, MP Securities also began selling investments in mutual funds.
In March 2013, MP Securities began selling the Company’s Series 1 Subordinated Capital Notes and 2013 International Notes. Also in March 2013, MP Securities received a license from the California Department of Insurance to act as a Resident Insurance Producer under the name Ministry Partners Insurance Agency. On July 11, 2013, MP Securities executed a new membership agreement with FINRA which authorized it to act on a fully disclosed basis with a clearing firm to expand its brokerage activities. In addition, on July 11, 2013, the State of California granted its approval for MP Securities to provide registered investment advisory services. Finally, on September 26, 2013, MP Securities entered into a clearing firm agreement with Royal Bank of Canada Dain Rauscher (RBC Dain), thereby enabling MP Securities to open brokerage accounts for its customers. MP Securities can now offer a broad scope of investment products that will enable it to better serve the Company’s clients and customers.
Conversion to LLC
Effective December 31, 2008, the Company converted its form of organization from a corporation organized under California law to a limited liability company organized under the laws of the State of California. With the filing of Articles of Organization-Conversion with the California Secretary of State, the separate existence of Ministry Partners Investment Corporation ceased and the entity continued by operation of law under the name Ministry Partners Investment Company, LLC.
Since the conversion became effective, the Company is managed by a group of managers that provides oversight of the affairs and carries out their duties similar to the role and function that the Board of Directors performed under the previous bylaws. Operating like a Board of Directors, the managers have full, exclusive and complete discretion, power and authority to oversee the management of Company affairs. Instead of Articles of Incorporation and Bylaws, management structure and governance procedures are now governed by the
F-7
provisions of an Operating Agreement that has been entered into by and between the Company’s managers and members.
Principles of Consolidation
The consolidated financial statements include the accounts of Ministry Partners Investment Company, LLC and its wholly-owned subsidiaries, MPF, MP Realty and MP Securities. All significant inter‑company balances and transactions have been eliminated in consolidation.
Cash and Cash Equivalents
For purposes of the statement of cash flows, cash equivalents include time deposits, certificates of deposit, and all highly liquid debt instruments with original maturities of three months or less. The Company had no cash positions other than demand deposits as of December 31, 2013 and 2012.
Through midnight on December 31, 2012, all of the Company’s cash held at credit unions was insured by the National Credit Union Insurance Fund, while all cash held at other financial institutions was insured by the Federal Deposit Insurance Corporation (“FDIC”). This unlimited insurance expired on January 1, 2013. The Company maintains cash that may exceed insured limits after December 31, 2012. The Company does not expect to incur losses in its cash accounts.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to, but are not limited to, the determination of the allowance for loan losses and the valuation of foreclosed real estate.
Loans Receivable
Loans that management has the intent and ability to hold for the foreseeable future are reported at their outstanding unpaid principal balance adjusted for an allowance for loan losses, deferred loan fees and costs, and loan discounts. Interest income on loans is accrued on a daily basis using the interest method. Loan origination fees and costs are deferred and recognized as an adjustment to the related loan yield using the interest method. Loan discounts represent interest accrued and unpaid which has been added to loan principal balances at the time the loan was restructured. Loan discounts are accreted to interest income over the term of the restructured loan once the loan is deemed fully collectible and is no longer considered impaired. Loan discounts also represent the differences between the purchase price on loans we purchased from third parties and the recorded principal balance of the loan. These discounts are accreted to interest income over the term of the loan using the interest method. Discounts are not accreted to income on impaired loans.
The accrual of interest is discontinued at the time a loan is 90 days past due. Accrual of interest can be discontinued prior to the loan becoming 90 days past due if management
F-8
determines the loan is impaired. Past due status is based on contractual terms of the loan. In all cases, loans are placed on nonaccrual or charged off at an earlier date if collection of principal or interest is considered doubtful.
All interest accrued but not collected for loans that are placed on nonaccrual or charged off are reversed against interest income. The interest on these loans is accounted for on the cash basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.
Allowance for Loan Losses
The Company sets aside an allowance or reserve for loan losses through charges to earnings, which are shown in the Company’s Consolidated Statements of Operations as a provision for loan losses. Loan losses are charged against the allowance when management believes the uncollectability of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance.
The allowance for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of the collectability of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.
The allowance consists of general and specific components. The general component covers non-classified loans and is based on historical loss experience adjusted for qualitative factors. In establishing the allowance for loan losses, management considers significant factors that affect the collectability of the Company’s loan portfolio. While historical loss experience provides a reasonable starting point for the analysis, such experience by itself does not form a sufficient basis to determine the appropriate level of the allowance for loan losses. Management also considers qualitative (or environmental) factors that are likely to cause estimated credit losses associated with our existing portfolio to differ from historical loss experience, including:
-Changes in lending policies and procedures, including changes in underwriting standards and collection;
-Changes in national, regional and local economic and business conditions and developments that affect the collectability of the portfolio;
-Changes in the volume and severity of past due loans, the volume of nonaccrual loans, and the volume and severity of adversely classified loans;
-Changes in the value of underlying collateral for collateral-dependent loans; and
-The effect of credit concentrations.
These factors are adjusted on an on-going basis and have been increased in recent years in light of the economic recession and credit crisis. 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.
F-9
All loans in the loan portfolio are subject to impairment analysis. The Company reviews its loan portfolio monthly by examining delinquency reports and information related to the financial condition of its borrowers and collateral value of its loans. Through this process, the Company identifies potential impaired loans. A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal and interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting future scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower's prior payment record, and the amount of the shortfall in relation to the principal and interest owed. A loan is generally deemed to be impaired when it is 90 days or more past due, or earlier when facts and circumstances indicate that it is probable that a borrower will be unable to make payments in accordance with the loan contract.
Impairment is measured on a loan-by-loan basis by either the present value of expected future cash flows discounted at the loan's effective interest rate, the obtainable market price, or the fair value of the collateral if the loan is collateral-dependent. When the Company modifies the terms of a loan for a borrower that is experiencing financial difficulties, a troubled debt restructuring is deemed to have occurred and the loan is classified as impaired. Loans or portions thereof are charged off when they are determined by management to be uncollectible. Uncollectability is evaluated periodically on all loans classified as “Loans of Lesser Quality.” As the Company has an established practice of working to explore every possible means of repayment with its borrowers, it has historically not charged off a loan until just prior to the completion of the foreclosure process. Among other variables, management will consider factors such as the financial condition of the borrower, and the value of the underlying collateral in assessing uncollectability.
Troubled Debt Restructurings
A troubled debt restructuring is a loan for which the Company, for reasons related to a borrower’s financial difficulties, grants a concession to a borrower that the Company would not otherwise consider. A restructuring of a loan usually involves an interest rate modification, extension of the maturity date, or reduction of accrued interest owed on the loan on a contingent or absolute basis.
Loans that are renewed at below-market terms are considered to be troubled debt restructurings if the below-market terms represent a concession due to the borrower’s troubled financial condition. Troubled debt restructurings are classified as impaired loans and are measured at the present value of estimated future cash flows using the loan's effective rate at inception of the loan. The change in the present value of cash flows attributable to the passage of time is reported as interest income. If the loan is considered to be collateral-dependent, impairment is measured based on the fair value of the collateral.
Loan Portfolio Segments and Classes
Management segregates the loan portfolio into portfolio segments for purposes of evaluating the allowance for loan losses. A portfolio segment is defined as the level at which the
F-10
Company develops and documents a systematic method for determining its allowance for loan losses. The portfolio segments are segregated based on loan types and the underlying risk factors present in each loan type. Such risk factors are periodically reviewed by management and revised as deemed appropriate.
Company’s loan portfolio consists of one segment – church loans. The loan portfolio is segregated into the following portfolio classes:
Wholly-Owned First Collateral Position. This portfolio class consists of the wholly-owned loans for which the Company possesses a senior lien on the collateral underlying the loan.
Wholly-Owned Junior Collateral Position. This portfolio class consists of the wholly-owned loans for which the Company possesses a lien on the underlying collateral that is superseded by another lien on the same collateral. This class also contains any loans that are not secured. These loans present higher credit risk than loans for which the Company possesses a senior lien due to the increased risk of loss should the loan default.
Participations First Collateral Position. This portfolio class consists of the participated loans for which the Company possesses a senior lien on the collateral underlying the loan. Loan participations present higher credit risk than wholly owned loans because the Company does not maintain full control over the disposition and direction of actions regarding the management and collection of the loans. The lead lender directs most servicing and collection activities, and major actions must be coordinated and negotiated with the other participants, whose best interests regarding the loan may not align with those of the Company.
Participations Junior Collateral Position. This portfolio class consists of the participated loans for which the Company possesses a lien on the underlying collateral that is superseded by another lien on the same collateral. Loan participations in the junior collateral position loans have higher credit risk than wholly owned loans and participated loans where the Company possesses a senior lien on the collateral. The increased risk is the result of the factors presented above relating to both junior lien positions and participations.
Credit Quality Indicators
The Company’s policies provide for the classification of loans that are considered to be of lesser quality as watch, substandard, doubtful, or loss assets. An asset is considered substandard if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Substandard assets include those assets characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected. Assets classified as doubtful have all of the weaknesses inherent in those classified substandard with the added characteristic that the weaknesses make collection or liquidation in full highly questionable and improbable, based on currently existing facts, conditions and values. Assets (or portions of assets) classified as loss are those considered uncollectible and of such little value that their continuance as assets is not warranted. Assets that do not expose the Company to risk sufficient to warrant classification in one of the aforementioned categories, but which possess potential weaknesses that deserve close attention, are designated as watch.
F-11
The Company has established a standard loan grading system to assist management and review personnel in their analysis and supervision of the loan portfolio. The loan grading system is as follows:
Pass: The borrower generates sufficient cash flow to fund debt services. The borrower may be able to obtain similar financing from other lenders with comparable terms. The risk of default is considered low.
Watch: These loans exhibit potential or developing weaknesses that deserve extra attention from credit management personnel. If the developing weakness is not corrected or mitigated, there may be deterioration in the ability of the borrower to repay the debt in the future. Loans graded Watch must be reported to executive management and the Board of Managers. Potential for loss under adverse circumstances is elevated, but not foreseeable.
Substandard: Loans and other credit extensions bearing this grade are considered to be inadequately protected by the current sound worth and debt service capacity of the borrower or of any pledged collateral. These obligations, even if apparently protected by collateral value, have well-defined weaknesses related to adverse financial, managerial, economic, ministry, or environmental conditions which have clearly jeopardized repayment of principal and interest as originally intended. Furthermore, there is the possibility that some future loss will be sustained if such weaknesses are not corrected.
Doubtful: This classification consists of loans that display the properties of substandard loans with the added characteristic that the severity of the weaknesses makes collection or liquidation in full highly questionable or improbable based upon currently existing facts, conditions, and values. The probability of some loss is very high, but because of certain important and reasonably specific factors, the amount of loss cannot be exactly determined. Such pending factors could include merger or liquidation, additional capital injection, refinancing plans, or perfection of liens on additional collateral.
Loss: Loans in this classification are considered uncollectible and cannot be justified as a viable asset. This classification does not mean the loan has absolutely no recovery value, but that it is neither practical nor desirable to defer writing off this loan even though partial recovery may be obtained in the future.
Foreclosed Assets
Assets acquired through foreclosure or other proceedings are initially recorded at fair value at the date of foreclosure less estimated costs of disposal, which establishes a new cost. After foreclosure, valuations are periodically performed by management, and foreclosed assets held for sale are carried at the lower of cost or fair value, less estimated costs of disposal. Any write-down to fair value just prior to the transfer to foreclosed assets is charged to the allowance for loan losses. The Company’s real estate assets acquired through foreclosure or other proceedings are evaluated regularly to ensure that the recorded amount is supported by its current fair value and that valuation allowances to reduce the varying amount to fair value less estimated costs of disposal are recorded as necessary. Revenue and expense from the operation of the Company’s foreclosed assets and changes in the valuation allowance are included in net expenses from foreclosed assets. When the foreclosed property is sold, a gain or loss is recognized on the sale for the difference between the sales proceeds and the carrying amount of the property.
F-12
Transfers of Financial Assets
Transfers of financial assets are accounted for as sales when control over the assets has been surrendered. Control over transferred assets is deemed to have been surrendered when (1) the assets have been isolated from the Company, (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and (3) the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity.
The Company, from time to time, sells participation interests in mortgage loans it has originated or acquired. In order to recognize the transfer of a portion of a financial asset as a sale, the transferred portion and any portion that continues to be held by the transferor must represent a participating interest, and the transfer of the participating interest must meet the conditions for surrender of control. To qualify as a participating interest (i) each portion of a financial asset must represent a proportionate ownership interest in an entire financial asset, (ii) from the date of transfer, all cash flows received from the entire financial asset must be divided proportionately among the participating interest holders in an amount equal to their share of ownership, (iii) the transfer must be made on a non-recourse basis (other than standard representations and warranties made under the loan participation sale agreement) to, or subordination by, any participating interest holder, and (iv) no party has the right to pledge or exchange the entire financial asset. If the participating interest or surrender of control criteria is not met, the transaction is accounted for as a secured borrowing arrangement.
Under some circumstances, when the Company sells participations in wholly owned loans receivable that it services, it retains a servicing asset that is initially measured at fair value. As quoted market prices are generally not available for these assets, the Company estimates fair value based on the present value of future expected cash flows associated with the loan receivable. The Company amortizes servicing assets over the life of the associated receivable using the interest method. Any gain or loss recognized on the sale of loans receivable depends in part on both the previous carrying amount of the financial assets involved in the sale, allocated between the assets sold and the interests that continue to be held by the Company based on their relative fair value at the date of transfer, and the proceeds received.
Property and Equipment
Furniture, fixtures, and equipment are stated at cost, less accumulated depreciation. Depreciation is computed on a straight-line basis over the estimated useful lives of the assets, which range from three to five years.
Debt Issuance Costs
Debt issuance costs are related to borrowings from financial institutions as well as public offerings of unsecured notes, and are amortized into interest expense over the contractual terms of the debt using the straight-line method.
Income Taxes
The Company has elected to be treated as a partnership for income tax purposes. Therefore, income and expenses of the Company are passed through to its members for tax reporting purposes. The Company is subject to a California gross receipts LLC fee of approximately $12,000 per year. The Company’s subsidiaries are LLCs except for MP Realty, a California
F-13
corporation. MP Realty incurred a tax loss for the years ended December 31, 2013 and 2012, and recorded a provision of $800 per year for the state minimum franchise tax.
MP Realty has federal and state net operating loss carryforwards of approximately $286,000 and $283,000, respectively which begin to expire in 2030. Due to the uncertainty of future taxable income, no deferred tax asset was recognized at December 31, 2013 and 2012.
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.
Tax years ended December 31, 2010 through December 31, 2013 remain subject to examination by the Internal Revenue Service and the tax years ended December 31, 2008 through December 31, 2012 remain subject to examination by the California Franchise Tax Board.
Employee Benefit Plan
Contributions to the qualified employee retirement plan are recorded as compensation cost in the period incurred.
Recent Accounting Pronouncements
ASU 2013-11 - Income Taxes (Topic 740) - Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists was issued. This standard provides that an unrecognized tax benefit, or a portion thereof, should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, as similar tax loss, or a tax credit carryforward, except to the extent that a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date to settle any additional income taxes that would result from disallowance of a tax position, or the tax law does not require the entity to use and the entity does not intend to use, the deferred tax asset for such purpose, then the unrecognized tax benefit should be presented as a liability. This standard is effective for the Company on January 1, 2014 and is not expected to have a material effect on the Company’s consolidated financial statements.
ASU 2013-10 - Derivatives and Hedging (Topic 815) - Inclusion of the Fed Funds Effective Swap Rate (or Overnight Index Swap Rate) as a Benchmark Interest Rate for Hedge Accounting Purposes was issued. This standard permits the Fed Funds Effective Swap Rate to be used as a U.S. benchmark interest rate for hedge accounting purposes, in addition to U.S. Treasury and LIBOR. The standard also removes the restriction on using different
F-14
benchmark rates for similar hedges. This standard is not expected to have a material effect on the Company’s consolidated financial statements.
ASU 2013-04 - Liabilities (Topic 405) - Obligations Resulting from Joint and Several Liability Arrangements for Which the Total Amount of the Obligation is Fixed at the Reporting Date was issued. This standard provides guidance for the recognition, measurement, and disclosure of obligations resulting from joint and several liability arrangements for which the total amount of the obligation within the scope of this guidance (e.g. debt arrangements, other contractual obligations and settled litigation and judicial rulings) is fixed at the reporting date. This standard is effective for the Company January 1, 2014 and is not expected to have a material effect on the Company’s consolidated financial statements.
ASU 2013-02, Comprehensive Income (Topic 220) Reporting Amounts Reclassified out of Accumulated Other Comprehensive Income. The amendments in this update supersede and replace the presentation requirements for reclassifications out of accumulated other comprehensive income in ASUs 2011-05 (issued in June 2011) and 2011-12 (issued in December 2011) for all public and private organizations. The amendments require an entity to provide additional information about reclassifications out of accumulated other comprehensive income. For public entities, the amendments were effective for reporting periods beginning after December 15, 2012. This standard did not have an effect on the Company’s consolidated financial statements.
Note 2.Related Party Transactions
The Company maintains most of its cash at ECCU. Total funds held with ECCU were $7.0 million and $9.5 million at December 31, 2013 and 2012, respectively. Interest earned on these funds totaled approximately $83.2 thousand and $136.6 thousand for the years ended December 31, 2013 and 2012, respectively.
The Company leases offices from ECCU pursuant to an Office Lease dated November 4, 2009 and amended on October 11, 2013, and purchases other services from ECCU. Charges of approximately $125.7 thousand and $118.2 thousand for the years ended December 31, 2013 and 2012, respectively, were made for these services. All of these charges are included in Office Occupancy or Office Operations expense. The method used to arrive at the periodic charge is based on the fair market value of services provided. Management believes that such method is reasonable.
From time to time, the Company purchases mortgage loans, including loan participation interests, from ECCU, our largest equity owner. The Company purchased $1.1 million and $5.1 million of loans from ECCU during the years ended December 31, 2013 and 2012, respectively. The Company recognized $2.4 million and $4.5 million of interest income on loans purchased from ECCU during the years ended December 31, 2013 and 2012, respectively. ECCU currently acts as the servicer for 26 of the 138 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.
F-15
At December 31, 2013 and 2012, the Company’s investment in wholly-owned loans serviced by ECCU totaled $8.2 million and $32.6 million, respectively. At December 31, 2013 and 2012, the Company’s investment in loan participations serviced by ECCU totaled $24.9 million and $43.5 million, respectively. From time to time, the Company pays fees for additional services ECCU provides for servicing these loans. These fees amounted to less than $1 thousand during both of the years ended December 31, 2013 and 2012, respectively.
ECCU has, from time to time, purchased or repurchased loans from the Company. Each sale or purchase of a mortgage loan investment or participation interest with ECCU was consummated under a Related Party Transaction Policy adopted by the Company’s Board. No gain or loss was incurred on these sales. The company sold $4.3 million in whole loans to ECCU during the year ended December 31, 2013. No whole loans or loan participations were sold to ECCU during the year ended December 31, 2012.
On August 15, 2013, the Company sold a $5.0 loan participation to Western Federal Credit Union (“WFCU”). The Company charges 50 basis points to service the loan for WFCU.
From time to time, managers and management have purchased investor notes from the Company. Investor notes payable to related parties total $311 thousand and $446 thousand at December 31, 2013 and 2012, respectively.
Note 3.Loans
All of the loans are made to various evangelical churches and related organizations, primarily to purchase, construct or improve facilities. Loan maturities extend through 2021. The loans earn interest at rates ranging from 4.50% to 10.50%, with a weighted average yield of 6.33% as of December 31, 2013. A summary of loans as of December 31 follows (dollars in thousands):
F-16
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| 2013 |
| 2012 | ||
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Loans to evangelical churches and related organizations: |
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Real estate secured |
| $ | 150,579 |
| $ | 157,324 |
Unsecured |
|
| 109 |
|
| 72 |
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|
|
|
|
Total loans |
|
| 150,688 |
|
| 157,396 |
|
|
|
|
|
|
|
Deferred loan fees, net |
|
| (570) |
|
| (366) |
Loan discount |
|
| (743) |
|
| (597) |
Allowance for loan losses |
|
| (2,856) |
|
| (4,005) |
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|
|
|
|
Loans, net |
| $ | 146,519 |
| $ | 152,428 |
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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| Loans and Allowance for Loan Losses (by segment) | ||||
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| As of | ||||
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| December 31, 2013 |
| December 31, 2012 | ||
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Loans: |
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|
|
Individually evaluated for impairment |
| $ | 18,917 |
| $ | 18,559 |
Collectively evaluated for impairment |
|
| 131,771 |
|
| 138,837 |
Balance |
| $ | 150,688 |
| $ | 157,396 |
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|
|
|
|
|
Allowance for loan losses: |
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|
|
|
|
Individually evaluated for impairment |
| $ | 2,112 |
| $ | 2,987 |
Collectively evaluated for impairment |
|
| 744 |
|
| 1,018 |
Balance |
| $ | 2,856 |
| $ | 4,005 |
F-17
Allowance for Loan Losses
Management believes that the allowance for loan losses as of December 31, 2013 and 2012 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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| Year Ended |
| Year Ended | ||
|
| December 31, 2013 |
| December 31, 2012 | ||
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|
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Balance, beginning of period |
| $ | 4,005 |
| $ | 4,127 |
Provision (credit) for loan loss |
|
| 9 |
|
| (9) |
Chargeoffs |
|
| (1,076) |
|
| (47) |
Accretion of allowance related to restructured loans |
|
| (82) |
|
| (66) |
Balance, end of period |
| $ | 2,856 |
| $ | 4,005 |
The following table is a summary of the loan portfolio credit quality indicators by loan class at December 31, 2013 and 2012, which is the date on which the information was updated for each credit quality indicator (dollars in thousands):
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Credit Quality Indicators (by class) | |||||||||||||||
As of December 31, 2013 | |||||||||||||||
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| Wholly-Owned First |
| Wholly-Owned Junior |
| Participation First |
| Participation Junior |
| Total | |||||
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Grade: |
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Pass |
| $ | 97,629 |
| $ | 2,597 |
| $ | 23,621 |
| $ | 966 |
| $ | 124,813 |
Watch |
|
| 4,027 |
|
| 2,930 |
|
| -- |
|
| -- |
|
| 6,957 |
Substandard |
|
| 9,035 |
|
| 3,438 |
|
| 3,110 |
|
| -- |
|
| 15,583 |
Doubtful |
|
| 2,314 |
|
| -- |
|
| 1,020 |
|
| -- |
|
| 3,334 |
Loss |
|
| -- |
|
| -- |
|
| -- |
|
| -- |
|
| -- |
Total |
| $ | 113,006 |
| $ | 8,965 |
| $ | 27,751 |
| $ | 966 |
| $ | 150,688 |
F-18
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Credit Quality Indicators (by class) | |||||||||||||||
As of December 31, 2012 | |||||||||||||||
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| Wholly-Owned First |
| Wholly-Owned Junior |
| Participation First |
| Participation Junior |
| Total | |||||
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Grade: |
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Pass |
| $ | 81,316 |
| $ | 1,780 |
| $ | 39,249 |
| $ | 966 |
| $ | 123,311 |
Watch |
|
| 11,405 |
|
| 3,644 |
|
| 4,515 |
|
| -- |
|
| 19,564 |
Substandard |
|
| 2,942 |
|
| 3,877 |
|
| -- |
|
| -- |
|
| 6,819 |
Doubtful |
|
| 4,866 |
|
| -- |
|
| 2,836 |
|
| -- |
|
| 7,702 |
Loss |
|
| -- |
|
| -- |
|
| -- |
|
| -- |
|
| -- |
Total |
| $ | 100,529 |
| $ | 9,301 |
| $ | 46,600 |
| $ | 966 |
| $ | 157,396 |
The following table sets forth certain information with respect to the Company’s loan portfolio delinquencies by loan class and amount at December 31, 2013 and 2012 (dollars in thousands):
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Age Analysis of Past Due Loans (by class) | |||||||||||||||||||||
As of December 31, 2013 | |||||||||||||||||||||
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| 30-59 Days Past Due |
| 60-89 Days Past Due |
| Greater Than 90 Days |
| Total Past Due |
| Current |
| Total Loans |
| Recorded Investment 90 Days or more and Accruing | |||||||
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Church loans: |
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Wholly-Owned First |
| $ | 5,558 |
| $ | 1,241 |
| $ | 1,183 |
| $ | 7,982 |
| $ | 105,024 |
| $ | 113,006 |
| $ | -- |
Wholly-Owned Junior |
|
| 61 |
|
| -- |
|
| -- |
|
| 61 |
|
| 8,904 |
|
| 8,965 |
|
| -- |
Participation First |
|
| 19 |
|
| 555 |
|
| 3,372 |
|
| 3,946 |
|
| 23,805 |
|
| 27,751 |
|
| -- |
Participation Junior |
|
| -- |
|
| -- |
|
| -- |
|
| -- |
|
| 966 |
|
| 966 |
|
| -- |
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Total |
| $ | 5,638 |
| $ | 1,796 |
| $ | 4,555 |
| $ | 11,989 |
| $ | 138,699 |
| $ | 150,688 |
| $ | -- |
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F-19
Age Analysis of Past Due Loans (by class) | |||||||||||||||||||||
As of December 31, 2012 | |||||||||||||||||||||
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| 30-59 Days Past Due |
| 60-89 Days Past Due |
| Greater Than 90 Days |
| Total Past Due |
| Current |
| Total Loans |
| Recorded Investment 90 Days or more and Accruing | |||||||
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Church loans: |
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Wholly-Owned First |
| $ | 1,260 |
| $ | 2,129 |
| $ | 814 |
| $ | 4,203 |
| $ | 96,326 |
| $ | 100,529 |
| $ | -- |
Wholly-Owned Junior |
|
| 3,865 |
|
| 436 |
|
| -- |
|
| 4,301 |
|
| 5,000 |
|
| 9,301 |
|
| -- |
Participation First |
|
| 2,555 |
|
| 2,632 |
|
| 2,611 |
|
| 7,798 |
|
| 38,802 |
|
| 46,600 |
|
| -- |
Participation Junior |
|
| -- |
|
| -- |
|
| -- |
|
| -- |
|
| 966 |
|
| 966 |
|
| -- |
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Total |
| $ | 7,680 |
| $ | 5,197 |
| $ | 3,425 |
| $ | 16,302 |
| $ | 141,094 |
| $ | 157,396 |
| $ | -- |
Non-Performing Loans
Non-performing loans include non-accrual loans, loans 90 days or more past due and still accruing, and restructured loans. Non-accrual loans represent loans on which interest accruals have been discontinued. Restructured loans are loans in which the borrower has been granted a concession on the interest rate or the original repayment terms due to financial distress. Non-performing loans are closely monitored on an ongoing basis as part of management’s loan review and work-out process. The potential risk of loss on these loans is evaluated by comparing the loan balance to the fair value of any underlying collateral or the present value of projected future cash flows.
The following tables are summaries of impaired loans by loan class at December 31, 2013 and 2012. 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):
F-20
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Impaired Loans (by class) | |||||||||||||||
As of and for the Year Ended December 31, 2013 | |||||||||||||||
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| Recorded Investment |
| Unpaid Principal Balance |
| Related Allowance |
| Average Recorded Investment |
| Interest Income Recognized | |||||
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With no related allowance recorded: |
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Church loans: |
|
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|
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|
|
Wholly-Owned First |
| $ | 3,037 |
| $ | 3,851 |
| $ | -- |
| $ | 3,133 |
| $ | 67 |
Wholly-Owned Junior |
|
| 211 |
|
| 218 |
|
| -- |
|
| 213 |
|
| 12 |
Participation First |
|
| 555 |
|
| 555 |
|
| -- |
|
| 560 |
|
| 31 |
Participation Junior |
|
| -- |
|
| -- |
|
| -- |
|
| -- |
|
| -- |
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With an allowance recorded: |
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Church loans: |
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|
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|
|
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|
|
|
|
|
Wholly-Owned First |
|
| 7,685 |
|
| 8,185 |
|
| 1,349 |
|
| 7,920 |
|
| 269 |
Wholly-Owned Junior |
|
| 3,175 |
|
| 3,220 |
|
| 326 |
|
| 3,192 |
|
| 161 |
Participation First |
|
| 3,575 |
|
| 3,748 |
|
| 437 |
|
| 6,106 |
|
| 122 |
Participation Junior |
|
| -- |
|
| -- |
|
| -- |
|
| -- |
|
| -- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Church loans |
| $ | 18,238 |
| $ | 19,777 |
| $ | 2,112 |
| $ | 21,125 |
| $ | 663 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired Loans (by class) | |||||||||||||||
As of and for the Year Ended December 31, 2012 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Recorded Investment |
| Unpaid Principal Balance |
| Related Allowance |
| Average Recorded Investment |
| Interest Income Recognized | |||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
With no related allowance recorded: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Church loans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wholly-Owned First |
| $ | 3,997 |
| $ | 4,466 |
| $ | -- |
| $ | 4,111 |
| $ | 115 |
Wholly-Owned Junior |
|
| 215 |
|
| 221 |
|
| -- |
|
| 216 |
|
| 12 |
Participation First |
|
| 2,611 |
|
| 2,744 |
|
| -- |
|
| 2,633 |
|
| -- |
Participation Junior |
|
| -- |
|
| -- |
|
| -- |
|
| -- |
|
| -- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-21
With an allowance recorded: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Church loans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wholly-Owned First |
|
| 7,339 |
|
| 7,860 |
|
| 2,595 |
|
| 7,444 |
|
| 153 |
Wholly-Owned Junior |
|
| 3,592 |
|
| 3,671 |
|
| 373 |
|
| 3,603 |
|
| 202 |
Participation First |
|
| 225 |
|
| 251 |
|
| 19 |
|
| 238 |
|
| -- |
Participation Junior |
|
| -- |
|
| -- |
|
| -- |
|
| -- |
|
| -- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Church loans |
| $ | 17,979 |
| $ | 19,213 |
| $ | 2,987 |
| $ | 18,245 |
| $ | 482 |
A summary of nonaccrual loans by loan class at December 31, 2013 and 2012 is as follows (dollars in thousands):
|
|
|
|
|
|
|
|
Loans on Nonaccrual Status (by class) | |||
As of December 31, 2013 | |||
|
|
|
|
Church loans: |
|
|
|
Wholly-Owned First |
| $ | 10,260 |
Wholly-Owned Junior |
|
| 3,220 |
Participation First |
|
| 4,129 |
Participation Junior |
|
| -- |
|
|
|
|
Total |
| $ | 17,609 |
|
|
|
|
|
|
|
|
Loans on Nonaccrual Status (by class) | |||
As of December 31, 2012 | |||
|
|
|
|
Church loans: |
|
|
|
Wholly-Owned First |
| $ | 11,846 |
Wholly-Owned Junior |
|
| 3,655 |
Participation First |
|
| 2,837 |
Participation Junior |
|
| -- |
|
|
|
|
Total |
| $ | 18,338 |
F-22
A summary of troubled debt restructurings by loan class that were modified during the year ended December 31 is as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Troubled Debt Restructurings (by class) | ||||||||||||
For the year ended December 31, 2013 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Number of Loans |
| Pre-Modification Outstanding Recorded Investment |
| Post-Modification Outstanding Recorded Investment |
| Recorded Investment At Period End | ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
Church loans: |
|
|
|
|
|
|
|
|
|
|
|
|
Wholly-Owned First |
|
| 2 |
| $ | 2,518 |
| $ | 2,541 |
| $ | 2,533 |
Wholly-Owned Junior |
|
| 1 |
|
| 3,175 |
|
| 3,175 |
|
| 3,175 |
Participation First |
|
| 1 |
|
| 2,555 |
|
| 2,555 |
|
| 2,555 |
Participation Junior |
|
| -- |
|
| -- |
|
| -- |
|
| -- |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
| 4 |
| $ | 8,248 |
| $ | 8,271 |
| $ | 8,262 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Troubled Debt Restructurings (by class) | ||||||||||||
For the year ended December 31, 2012 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Number of Loans |
| Pre-Modification Outstanding Recorded Investment |
| Post-Modification Outstanding Recorded Investment |
| Recorded Investment At Period End | ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
Church loans: |
|
|
|
|
|
|
|
|
|
|
|
|
Wholly-Owned First |
|
| 4 |
| $ | 6,782 |
| $ | 6,806 |
| $ | 6,593 |
Wholly-Owned Junior |
|
| 2 |
|
| 430 |
|
| 430 |
|
| 418 |
Participation First |
|
| 1 |
|
| 271 |
|
| 249 |
|
| 225 |
Participation Junior |
|
| -- |
|
| -- |
|
| -- |
|
| -- |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
| 7 |
| $ | 7,483 |
| $ | 7,485 |
| $ | 7,236 |
For nine of the 11 restructured loans in our portfolio at December 31, 2013, 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, which did not increase net loan balance. Another restructured loan represents the modified loan balance upon foreclosure on two of three underlying properties. In addition, for each of the 11 restructured loans, the interest rate was temporarily decreased. Each borrower involved in a troubled debt restructuring was
F-23
experiencing financial difficulties at the time the loan restructured.
A summary of troubled debt restructurings that defaulted during the years ended December 31 is as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Troubled Debt Restructurings Defaulted (by class) | ||||||
During the year ended December 31, 2013 | ||||||
|
|
|
|
|
|
|
|
| Number of Loans |
| Recorded Investment | ||
|
|
|
|
|
|
|
Troubled debt restructurings that subsequently defaulted: |
|
|
|
|
|
|
Church loans: |
|
|
|
|
|
|
Wholly-Owned First |
|
| 1 |
| $ | 1,665 |
Wholly-Owned Junior |
|
| -- |
|
| -- |
Participation First |
|
| 1 |
|
| 2,555 |
Participation Junior |
|
| -- |
|
| -- |
Total: |
|
|
|
|
|
|
Church loans |
|
| 2 |
| $ | 4,220 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Troubled Debt Restructurings Defaulted (by class) | ||||||
During the year ended December 31, 2012 | ||||||
|
|
|
|
|
|
|
|
| Number of Loans |
| Recorded Investment | ||
|
|
|
|
|
|
|
Troubled debt restructurings that subsequently defaulted: |
|
|
|
|
|
|
Church loans: |
|
|
|
|
|
|
Wholly-Owned First |
|
| 2 |
| $ | 3,256 |
Wholly-Owned Junior |
|
| 1 |
|
| 420 |
Participation First |
|
| 1 |
|
| 230 |
Participation Junior |
|
| -- |
|
| -- |
Total: |
|
|
|
|
|
|
Church loans |
|
| 4 |
| $ | 3,906 |
F-24
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 or adjustments may be made in the allocation of reserves.
No additional funds were committed to be advanced in connection with impaired loans, including restructured loans, as of December 31, 2013 or 2012.
Note 4. Foreclosed Assets
Foreclosed assets consist of six properties. The Company held $3.3 million and $2.9 million of foreclosed assets at December 31, 2013 and December 31, 2012, respectively.
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)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Allowance for Losses on Foreclosed Assets for the years ended December 31, | ||||
|
| 2013 |
| 2012 | ||
Balance, beginning of period |
| $ | 136 |
| $ | -- |
Provision for losses |
|
| 13 |
|
| 136 |
Charge-offs |
|
| -- |
|
| -- |
Recoveries |
|
| (136) |
|
| -- |
Balance, end of period |
| $ | 13 |
| $ | 136 |
Expenses applicable to foreclosed assets include the following (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Foreclosed Asset Expenses (Income) for the year ended December 31, | ||||
|
| 2013 |
| 2012 | ||
Net gain on sale of real estate |
| $ | (345) |
| $ | -- |
Provision for losses |
|
| 13 |
|
| 136 |
Operating expenses, net of rental income |
|
| 92 |
|
| 24 |
Net expense (income) |
| $ | (240) |
| $ | 160 |
F-25
Note 5. Loan Participation Sales
During the year ended December 31, 2013, the Company sold participations in four church loans totaling $9.9 million. The Company retained servicing responsibilities in these loans, and as a result, the Company recorded servicing assets totaling $66 thousand, which are being amortized using the interest method over the terms of the loans. The amortization of servicing assets is recorded as an adjustment to interest income and totaled $26 and $25 thousand for the years ended December 31, 2013 and 2012. The Company did not sell any participation interests during the year ended December 31, 2012.
A summary of servicing assets for the year ended December 31, 2013 and 2012 is as follows (dollars in thousands:
|
|
|
|
|
|
|
|
|
|
|
|
| 2013 |
| 2012 | ||
Balance, beginning of period | $ | 113 |
| $ | 138 |
Additions: |
|
|
|
|
|
Servicing obligations from sale of loan participations |
| 66 |
|
| -- |
Subtractions: |
|
|
|
|
|
Amortization |
| 26 |
|
| 25 |
Balance, end of period | $ | 153 |
| $ | 113 |
For the year ended December 31, 2013, the Company recognized gains of $54 thousand on the sales of loan participations. There were no gains on loan sales for the year ended December 31, 2012.
Note 6.Premises and Equipment
Premises and equipment consist of the following at December 31 (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 2013 |
| 2012 | ||
|
|
|
|
|
|
|
Furniture and office equipment |
| $ | 362 |
| $ | 357 |
Computer system |
|
| 221 |
|
| 221 |
Leasehold improvements |
|
| 25 |
|
| 25 |
|
|
|
|
|
|
|
Total premises and equipment |
|
| 608 |
|
| 603 |
Less accumulated depreciation and amortization |
|
| (488) |
|
| (387) |
|
|
|
|
|
|
|
Premises and equipment, net |
| $ | 120 |
| $ | 216 |
Depreciation and amortization expense for the years ended December 31, 2013 and 2012 amounted to $101 thousand and $127 thousand, respectively.
F-26
Note 7.Borrowings from Financial Institutions
Members United Facilities
On November 4, 2011, the Company and the National Credit Union Administration Board As Liquidating Agent of Members United Corporate Federal Credit Union (“Lender”) entered into an $87.3 million credit facility refinancing transaction (the “MU Credit Facility”). The MU Credit Facility replaced a $100 million line of credit entered into by and between the Company and Members United Corporate Federal Credit Union on May 7, 2008. Unless the principal amount of the indebtedness due is accelerated under the terms of the MU Credit Facility loan documents, the principal balance and any interest due on the MU Credit Facility will mature on October 31, 2018. Under the MU Credit Facility, accrued interest is due and payable monthly in arrears on the first day of each month at the lesser of the maximum interest rate permitted by applicable law under the loan documents or 2.525%. The term loan may be repaid or retired without penalty, but any amounts repaid or prepaid under the MU Credit Facility may not be re-borrowed. The balance of the MU Credit Facility was $78.4 million and $81.3 million at December 31, 2013 and 2012, respectively.
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 128%. If at any time the Company fails to maintain its required minimum collateralization ratio, it will be required to deliver cash or qualifying mortgage loans in an amount sufficient to enable it to meet its obligation to maintain a minimum collateralization ratio. At December 31, 2013 and 2012, the collateral securing the MU Credit Facility had an aggregate principal balance of $101.5 million and $104.2 million, respectively, which satisfies the minimum collateralization ratio.
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, 2013 and 2012, the Company was in compliance with its covenants under the MU Credit Facility.
WesCorp Facility
On November 4, 2011, the Company and the National Credit Union Administration Board As Liquidating Agent of Western Corporate Federal Credit Union (previously herein defined as “Lender”) entered into a $23.5 million credit facility refinancing transaction (the “WesCorp Credit Facility Extension”). The WesCorp Credit Facility Extension amends, restates and replaces a credit facility entered into by and between the Company and Western Corporate Federal Credit Union on November 30, 2009. Unless the principal amount due on the WesCorp Credit Facility Extension is accelerated under the terms of the loan documents
F-27
evidencing such credit facility, the principal balance and any interest due on the facility will be payable in full on October 31, 2018. Under the WesCorp Credit Facility Extension, accrued interest is due and payable monthly in arrears on the first day of each month at the lesser of the maximum rate permitted by applicable law under the loan documents or 2.525%. The term loan may be repaid or retired without penalty, but any amounts repaid or prepaid under the WesCorp Credit Facility Extension may not be re-borrowed. As of December 31, 2013 and 2012, $21.5 and $22.5 million, respectively, was outstanding on the WesCorp Credit Facility Extension.
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 150%. 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, 2013 and December 31, 2012, the collateral securing the WesCorp Credit Facility Extension had an aggregate principal balance of $32.3 million and $34.2 million, respectively, which satisfies the minimum collateralization ratio for this facility. As of December 31, 2013 and 2012, the Company was in compliance with its covenants under the Wescorp Credit Facility Extension.
Both the MU Credit Facility and WesCorp Credit Facility Extension are secured by certain of the Company’s mortgage loans previously held as collateral under the $100 Million CUSO Line and the WesCorp Facility. Future principal paydowns of borrowings from financial institutions are as follows at December 31:
|
|
|
|
|
|
|
|
2014 |
| $ | 3,495 |
2015 |
|
| 3,591 |
2016 |
|
| 3,677 |
2017 |
|
| 3,777 |
2018 |
|
| 3,874 |
Thereafter |
|
| 81,490 |
|
| $ | 99,904 |
In addition to regular principal payments, the Company also made $510 thousand in principal payments during the year ended December 31, 2012 in order to remain in compliance with the minimum collateralization ratio requirement of our credit facility borrowings.
Note 8.Commitments and Contingencies
Credit-Related Financial Instruments
The Company is a party to credit-related financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include unadvanced lines of credit, and standby letters of credit. Such
F-28
commitments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the balance sheet.
The Company’s exposure to credit loss is represented by the contractual amount of these commitments. The Company uses the same credit policies in making commitments as it does for on-balance-sheet instruments. At December 31, 2013 and December 31, 2012, the following financial instruments were outstanding whose contract amounts represent credit risk:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Contract Amount at: | ||||
|
|
|
|
|
|
|
|
| December 31, 2013 |
| December 31, 2012 | ||
|
|
|
|
|
|
|
Undisbursed loans |
| $ | 802 |
| $ | 425 |
Standby letter of credit |
| $ | 1,873 |
| $ | 1,873 |
Undisbursed loans are commitments for possible future extensions of credit to existing customers. These loans are sometimes unsecured and may not necessarily be drawn upon to the total extent to which the Company is committed. Commitments to extend credit are generally at variable rates.
Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loans to customers.
Contingencies
In the normal course of business, the Company may become involved in various legal proceedings. In the opinion of management, any liability resulting from such proceedings would not have a material adverse effect on the financial statements.
Operating Lease Commitments
The Company has lease commitments covering its offices in Brea and Fresno, California. At December 31, 2013, future minimum rental payments for the years ending December 31 are as follows:
|
|
|
|
|
|
|
|
2014 |
| $ | 137 |
2015 |
|
| 120 |
2016 |
|
| 117 |
2017 |
|
| 119 |
2018 |
|
| 122 |
Thereafter |
|
| -- |
|
| $ | 615 |
F-29
Total rent expense, including common area costs, was $140.3 thousand and $132.3 thousand for the years ended December 31, 2013 and 2012, respectively. The Company exercised one of its two five-year options on the Brea office lease. This lease now expires in 2018 and contains one additional option to renew for five years. The Fresno office lease expires in 2015 and contains one option to renew for two years.
Note 9.Notes Payable
Notes payable are comprised of unsecured and secured notes totaling $47.4 million and $302 thousand, respectively, at December 31, 2013. The notes are payable to investors who have purchased the securities, including individuals, churches, and Christian ministries, many of whom are members of ECCU. Notes pay interest at stated spreads over an index rate that is adjusted every month. Interest can be reinvested or paid at the investor's option. The Company may repurchase all or a portion of notes at any time at its sole discretion, and may allow investors to redeem their notes prior to maturity at its sole discretion.
The Alpha Class Notes contain covenants pertaining to limitations on restricted payment, maintenance of tangible net worth, limitation on issuance of additional notes and incurrence of indebtedness. The Alpha Class Notes require the Company to maintain a minimum tangible adjusted net worth, as defined in the Loan and Standby Trust Agreement, of not less than $4.0 million. The Company is not permitted to issue any Alpha Class Notes if, after giving effect to such issuance, the Alpha Class Notes then outstanding would have an aggregate unpaid balance exceeding $100.0 million. The Company’s other indebtedness, as defined in the Loan and Standby Trust Agreement, and subject to certain exceptions enumerated therein, may not exceed $10.0 million outstanding at any time while any Alpha Class Note is outstanding. The Company is in compliance with these covenants as of December 31, 2013. Effective April 18, 2008, the Company discontinued the sale of Alpha Class Notes.
Historically, most of the Company’s unsecured notes have been renewed by investors upon maturity. Because the Company has discontinued its sale of Alpha Class Notes effective April 18, 2008, the holders of such notes may, upon maturity, reinvest such sums by purchasing Class A Notes that have been registered with the Securities and Exchange Commission (see Note 10 below). For matured notes that are not renewed, the Company funds the redemption in part through proceeds from the repayment of loans, and issuing new notes payable. At December 31, 2013 and December 31, 2012, $159 thousand and $2.8 million of Alpha Class Notes were outstanding, respectively.
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 is 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 includes 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 interest rates the Company pays on the Fixed Series Notes and the Flex 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, or in the case of the Flex Series Notes, on the date the interest rate is reset. 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 84 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
F-30
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 5, 2009, the Variable Index is defined under the Class A Notes as the three month LIBOR rate.
The Class A 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 A Notes require 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 is not permitted to issue any Class A Notes if, after giving effect to such issuance, the Alpha Class Notes then outstanding would have an aggregate unpaid balance exceeding $100.0 million. The Company’s other indebtedness, as defined in the Class A Notes Trust Indenture Agreement, and subject to certain exceptions enumerated therein, may not exceed $20.0 million outstanding at any time while any Class A Notes are outstanding. The Company was in compliance with these covenants as of December 31, 2013.
The Class A Notes were issued under a Trust Indenture between the Company and U.S. Bank National Association (“US Bank”). The Class A Notes are part of up to $200 million of Class A Notes the Company may issue pursuant to the US Bank Indenture. At December 31, 2013 and 2012, $37.0 million and $40.5 million of these notes were outstanding, respectively.
Effective as of May 15, 2012, the Company temporarily discontinued the sale of the Class A Notes and deregistered the securities remaining unsold under the Company’s Registration Statement on Form S-1, initially filed with the SEC on December 23, 2009 and declared effective on June 3, 2010. The Company subsequently filed a Registration Statement seeking to register $75 million of its Class A Notes with the SEC. This Registration Statement was declared effective as of October 11, 2012, and the Company has resumed the sale of its Class A Notes.
In February 2012, the Company began the sale of its Secured Investment Certificates pursuant to a limited private offering to qualified investors that meet the requirements of Rule 506 of Regulation D. The Secured Investment Certificates require collateral to be pledged in the amount of at least 105% of the outstanding balance of the certificates. Collateral can consist of qualifying loans receivable or cash. The Secured Investment Certificates offering expired in August 2013. At December 31, 2013, a total of $302 thousand in Secured Investment Certificates were outstanding. A total of $318 thousand in cash was pledged as collateral on the certificates, which satisfies the minimum collateralization ratio required by the private offering memorandum.
In February 2013, the Company launched the sale of its Series 1 Subordinated Capital Notes pursuant to a limited private offering to qualified investors that meet the requirements of Rule 506 of Regulation D. The Series 1 Subordinated Capital Notes have been offered with maturity terms from 12 to 60 months at an interest rate fixed on the date of issuance, as determined by the then current seven-day average rate reported by the U.S. Federal Reserve Board for interest rate swaps. At December 31, 2013, a total of $4.0 million in notes sold pursuant to this offering were outstanding.
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
F-31
private offerings, at December 31, 2013, a total of $409 thousand of its International Notes were outstanding.
Under the Series 1 Subordinated 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, 2013.
A summary of notes payable at December 31 is as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Amount |
| Weighted Average Interest Rate | ||||||||
|
|
| 2013 |
|
| 2012 |
| 2013 |
| 2012 | ||
SEC Registered Public Offerings |
|
|
|
|
|
|
|
|
|
|
|
|
Class A Offering |
| $ | 36,986 |
| $ | 40,485 |
| 3.92 | % |
| 4.19 | % |
National Alpha Offering |
|
| 159 |
|
| 2,772 |
| 1.96 | % |
| 5.49 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
Private Offerings |
|
|
|
|
|
|
|
|
|
|
|
|
Special Offering |
|
| 5,793 |
|
| 8,954 |
| 4.98 | % |
| 4.78 | % |
Special Subordinated Notes |
|
| 4,018 |
|
| 6 |
| 4.63 | % |
| 5.45 | % |
Secured Notes |
|
| 302 |
|
| 56 |
| 2.87 | % |
| 2.49 | % |
International Offering |
|
| 409 |
|
| 291 |
| 3.47 | % |
| 3.78 | % |
Total |
| $ | 47,667 |
| $ | 52,564 |
|
|
|
|
|
|
The following are maturities of notes payable for each of the next five years ending December 31 (dollars in thousands):
|
|
|
|
|
|
|
|
2014 |
| $ | 22,939 |
2015 |
|
| 11,399 |
2016 |
|
| 6,106 |
2017 |
|
| 3,778 |
2018 |
|
| 3,358 |
Thereafter |
|
| 87 |
|
| $ | 47,667 |
F-32
Note 10.Office Operations and Other Expenses
Office operations and other expenses for the year ended December 31 are comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 2013 |
| 2012 | ||
|
|
|
|
|
|
|
FINRA fees |
| $ | 30 |
| $ | 12 |
Repair and maintenance |
|
| 256 |
|
| 244 |
Depreciation |
|
| 101 |
|
| 127 |
Insurance |
|
| 288 |
|
| 249 |
Travel expenses |
|
| 82 |
|
| 95 |
Human resources |
|
| 47 |
|
| 234 |
Software servicing |
|
| 55 |
|
| 44 |
Other |
|
| 287 |
|
| 352 |
|
|
|
|
|
|
|
Total |
| $ | 1,146 |
| $ | 1,357 |
Note 11.Preferred and Common Units Under LLC Structure
The Series A Preferred Units are entitled to a cumulative Preferred Return, payable quarterly in arrears, equal to the liquidation preference times a dividend rate of 190 basis points through March 2013 and 25 basis points thereafter over the 1-year LIBOR rate in effect on the last day of the calendar month in which the Preferred Return is paid. In addition, the Series A Preferred Units are entitled to an annual Preferred Distribution, payable in arrears, equal to 10% of the Company’s profits, after subtracting from profits the Preferred Return.
The Series A Preferred Units have a liquidation preference of $100 per unit; have no voting rights; and are subject to redemption in whole or in part at the Company’s election on December 31 of any year, for an amount equal to the liquidation preference of each unit, plus any accrued and unpaid Preferred Return and Preferred Distribution on such units. The Preferred Units have priority as to earnings and distributions over the Common Units. The resale of the Company’s Preferred Units and Common Units are subject to the Company’s first right of refusal to purchase units proposed to be transferred. Upon the Company’s failure to pay a Preferred Return for four consecutive quarters, the holders of the Series A Preferred Units have the right to appoint two managers.
The Class A Common Units have voting rights.
F-33
Note 12.Retirement Plans
401(k)
Employees who are at least 21 years of age are eligible to participate in the ADP 401(k) plan upon the hire date. No minimum service is required and the minimum age is 21. Each employee may elect voluntary contributions not to exceed 60% of salary, subject to certain limits based on Federal tax law. The plan has a matching program, which qualifies as a Safe Harbor 401(k) plan. As a Safe Harbor Section 401(k) plan, the Company matches each eligible employee’s contribution, dollar for dollar, up to 3% of the employee’s compensation and 50% of the employee’s contribution that exceeds 3%, up to a maximum of 5% of the employee’s compensation. Company matching contributions for the plan years ended December 31, 2013 and 2012 were $72.7 and $58.7 thousand, respectively.
Profit Sharing
The profit sharing plan is for all employees who, at the end of the calendar year, are at least 21 years old, still employed, and have at least 900 hours of service during the plan year. The amount annually contributed on behalf of each qualified employee is determined by the managers, and is calculated as a percentage of the eligible employee's annual earnings. There were no contributions to the profit sharing plan for the years ended December 31, 2013 and 2012.
Note 13.Fair Value
Fair Value of Financial Instruments
The carrying amounts and estimated fair values of financial instruments at December 31 are as follows (dollars in thousands):
|
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|
|
|
|
|
|
|
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Fair Value Measurements at December 31, 2013 using | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Carrying Value |
| Quoted Prices in Active Markets for Identical Assets Level 1 |
| Significant Other Observable Inputs Level 2 |
| Significant Unobservable Inputs Level 3 |
| Fair Value | |||||
FINANCIAL ASSETS: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash |
| $ | 7,483 |
| $ | 7,483 |
| $ | -- |
| $ | -- |
| $ | 7,483 |
Loans, net |
|
| 146,519 |
|
| -- |
|
| -- |
|
| 146,810 |
|
| 146,810 |
FINANCIAL LIABILITIES: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank borrowings |
| $ | 99,904 |
| $ | -- |
| $ |
|
| $ | 98,467 |
| $ | 98,467 |
Notes payables |
|
| 47,667 |
|
| -- |
|
| -- |
|
| 48,601 |
|
| 48,601 |
Other financial liabilities |
|
| 82 |
|
| -- |
|
| -- |
|
| 82 |
|
| 82 |
F-34
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Fair Value Measurements at December 31, 2012 using | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Carrying Value |
| Quoted Prices in Active Markets for Identical Assets Level 1 |
| Significant Other Observable Inputs Level 2 |
| Significant Unobservable Inputs Level 3 |
| Fair Value | |||||
FINANCIAL ASSETS: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash |
| $ | 10,068 |
| $ | 10,068 |
| $ | -- |
| $ | -- |
| $ | 10,068 |
Loans, net |
|
| 152,428 |
|
| -- |
|
| -- |
|
| 155,165 |
|
| 155,165 |
FINANCIAL LIABILITIES: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes payables |
| $ | 52,564 |
| $ | -- |
| $ | -- |
| $ | 54,120 |
| $ | 54,120 |
Bank borrowings |
|
| 103,833 |
|
| -- |
|
| -- |
|
| 106,614 |
|
| 106,614 |
Other financial liabilities |
|
| 96 |
|
| -- |
|
| -- |
|
| 96 |
|
| 96 |
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, 2013 and 2012.
The following methods and assumptions were used to estimate the fair value of financial instruments:
Cash – The carrying amounts reported in the consolidated balance sheets approximate fair value for cash.
Loans – Fair value is estimated by discounting the future cash flows using the current average rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities.
Notes Payable – The fair value of fixed maturity notes is estimated by discounting the future cash flows using the rates currently offered for notes payable of similar remaining maturities.
Borrowings from Financial Institutions – The fair values of borrowings from financial institutions are estimated using discounted cash flow analyses based on current incremental borrowing rates for similar types of borrowing arrangements.
Off-Balance Sheet Instruments – The fair value of loan commitments is based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties' credit standing. The fair value of loan commitments is insignificant at December 31, 2013 and 2012.
Fair Value Measurements Using Fair Value Hierarchy
The following section describes the valuation methodologies used for assets measured at fair value as well as the general classification of such instruments pursuant to the valuation
F-35
hierarchy.
Fair value hierarchy for valuation gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The fair value hierarchy is as follows:
· | Level 1 inputs are quoted prices (unadjusted) for identical assets or liabilities in active markets. |
· | Level 2 inputs include quoted prices for similar assets and liabilities in active markets, quoted prices for identical assets and liabilities in inactive markets, inputs that are observable for the asset or liability (such as interest rates, prepayment speeds, credit risks, etc.), or inputs that are derived principally from or corroborated by observable market data by correlation or by other means. |
· | Level 3 inputs are unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the level in the fair value hierarchy within which the fair value measurement in its entirety falls has been determined based on the lowest level input that is significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset or liability. |
The following section describes the valuation methodologies used for assets measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy.
Fair Value Measured on a Nonrecurring Basis
Certain assets are measured at fair value on a nonrecurring basis; that is, the assets are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment). The following table presents such assets carried on the balance sheet by caption and by level within the valuation hierarchy (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Fair Value Measurements Using: |
|
|
| ||||||||
|
| Quoted Prices in Active Markets for Identical Assets (Level 1) |
| Significant Other Obervable Inputs (Level 2) |
| Significant Unobservable Inputs (Level 3) |
| Total | ||||
Assets at December 31, 2013: |
|
|
|
|
|
|
|
|
|
|
|
|
Collateral dependent loans (net of allowance and discount) |
| $ | -- |
| $ | -- |
| $ | 6,029 |
| $ | 6,029 |
Foreclosed assets |
|
| -- |
|
| -- |
|
| 3,308 |
|
| 3,308 |
|
| $ | -- |
| $ | -- |
| $ | 9,337 |
| $ | 9,337 |
|
|
|
|
|
|
|
|
|
|
|
|
|
F-36
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets at December 31, 2012: |
|
|
|
|
|
|
|
|
|
|
|
|
Collateral dependent loans (net of allowance and discount) |
| $ | -- |
| $ | -- |
| $ | 8,262 |
| $ | 8,262 |
Foreclosed assets |
|
| -- |
|
| -- |
|
| 2,914 |
|
| 2,914 |
|
| $ | -- |
| $ | -- |
| $ | 11,176 |
| $ | 11,176 |
Impaired Loans
Collateral-dependent impaired loans are carried at the fair value of the collateral less estimated costs to sell. The fair value of collateral is determined based on appraisals. In some cases, adjustments were made to the appraised values for various factors including age of the appraisal, age of comparable properties included in the appraisal, and known changes in the market and in the collateral. When significant adjustments were based on unobservable inputs, the resulting fair value measurement has been categorized as a Level 3 measurement. Otherwise, collateral-dependent impaired loans are categorized under Level 2. Because of the uncertain market, fair value for collateral-dependent loans based on appraisals more than 30 days old were deemed to involve significant adjustments based on unobservable inputs.
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.
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets |
|
| Fair Value (in thousands) |
| Valuation Techniques |
| Unobservable Input |
| Range (Weighted Average) |
|
|
|
|
| Discounted appraised value |
| Selling cost |
| 10% (10%) |
Impaired Loans |
| $ | 6,029 |
| Internal evaluations |
| Discount due to age of appraisal |
| 0% - 5% (0.24%) |
|
|
|
|
| Internal evaluations |
| Discount due to title dispute |
| 0% - 57% (4.49%) |
|
|
|
|
|
|
|
|
|
|
Foreclosed assets |
| $ | 3,308 |
| Discounted appraised value |
| Selling cost |
| 10% - 20% (15.54%) |
F-37
Note 14.Segment Information
Reportable Segments
The Company's reportable segments are strategic business units that offer different products and services. They are managed separately because each business requires different management, personnel proficiencies, and marketing strategies.
There are two reportable segments: finance company and broker-dealer. The finance company segment uses funds from the sale of debt securities, operations, and loan participations to originate or purchase mortgage loans. The broker-dealer segment sells debt securities and mutual funds, as well as providing investment advisory services, to generate fee income.
The accounting policies applied to determine the segment information are the same as those described in the summary of significant accounting policies. Intersegment revenues and expenses are accounted for at amounts that assume the transactions were made to unrelated third parties at the current market prices at the time of the transactions.
Management evaluates the performance of each segment based on net income or loss before provision for income taxes and LLC fees.
Financial information with respect to the reportable segments is as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Finance Company |
|
| Broker Dealer |
|
| Total |
|
|
|
|
|
|
|
|
|
|
External income |
| $ | 9,616 |
| $ | 25 |
| $ | 9,641 |
Intersegment revenue |
|
| -- |
|
| 153 |
|
| 153 |
External non-interest expenses |
|
| 3,728 |
|
| 719 |
|
| 4,447 |
Intersegment non-interest expenses |
|
| 153 |
|
| -- |
|
| 153 |
Segment net profit (loss) |
|
| 1,134 |
|
| (542) |
|
| 592 |
Segment assets |
|
| 158,043 |
|
| 457 |
|
| 158,500 |
F-38
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).
|
|
|
|
|
|
|
|
Revenue |
|
|
|
Total revenue of reportable segments |
| $ | 9,794 |
Intersegment revenue |
|
| (153) |
|
|
|
|
Consolidated revenue |
| $ | 9,641 |
|
|
|
|
Non-interest expenses |
|
|
|
Total non-interest expenses of reportable segments |
| $ | 4,600 |
Intersegment non-interest expenses |
|
| (153) |
|
|
|
|
Consolidated non-interest expenses |
| $ | 4,447 |
|
|
|
|
Profit |
|
|
|
Total profit of reportable segments |
| $ | 592 |
Interesegment profits |
|
| -- |
|
|
|
|
Consolidated net income |
| $ | 592 |
|
|
|
|
Assets |
|
|
|
Total assets of reportable segments |
| $ | 158,500 |
Segment accounts receivable from corporate office |
|
| (85) |
|
|
|
|
Consolidated assets |
| $ | 158,415 |
F-39
Note 15.Condensed Financial Statements of Parent Company
Financial information pertaining only to the parent company, Ministry Partners Investment Company, LLC, is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheets |
| December 31 | ||||
|
| 2013 |
| 2012 | ||
Assets: |
|
|
|
|
|
|
Cash |
| $ | 7,051 |
| $ | 9,587 |
Loans receivable, net of allowance for loan losses |
|
| 146,519 |
|
| 152,428 |
Accrued interest receivable |
|
| 607 |
|
| 672 |
Property and equipment, net |
|
| 115 |
|
| 210 |
Investment in subsidiaries |
|
| 73 |
|
| 150 |
Due from subsidiaries |
|
| 425 |
|
| 355 |
Debt issuance costs, net |
|
| 31 |
|
| 95 |
Foreclosed assets, net |
|
| 3,308 |
|
| 2,914 |
Other assets |
|
| 290 |
|
| 230 |
Total assets |
| $ | 158,419 |
| $ | 166,641 |
|
|
|
|
|
|
|
Liabilities and equity: |
|
|
|
|
|
|
Borrowings from financial institutions |
| $ | 99,904 |
| $ | 103,833 |
Notes payable |
|
| 47,667 |
|
| 52,564 |
Accrued interest payable |
|
| 14 |
|
| 7 |
Other liabilities |
|
| 891 |
|
| 689 |
Total liabilities |
|
| 148,476 |
|
| 157,093 |
|
|
|
|
|
|
|
Equity |
|
| 9,943 |
|
| 9,548 |
|
|
|
|
|
|
|
Total liabilities and members' equity |
| $ | 158,419 |
| $ | 166,641 |
F-40
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statements of Income |
| Years Ended December 31 | ||||
|
| 2013 |
| 2012 | ||
Income: |
|
|
|
|
|
|
Interest income |
| $ | 9,473 |
| $ | 10,050 |
Other income |
|
| 143 |
|
| 122 |
Total income |
|
| 9,616 |
|
| 10,172 |
|
|
|
|
|
|
|
Interest expense: |
|
|
|
|
|
|
Borrowings from financial institutions |
|
| 2,572 |
|
| 2,715 |
Notes payable |
|
| 2,030 |
|
| 2,420 |
Total interest expense |
|
| 4,602 |
|
| 5,135 |
|
|
|
|
|
|
|
Provision (credit) for loan losses |
|
| 9 |
|
| (9) |
|
|
|
|
|
|
|
Other operating expenses |
|
| 3,822 |
|
| 4,043 |
|
|
|
|
|
|
|
Income before provision for income taxes |
|
| 1,183 |
|
| 1,003 |
|
|
|
|
|
|
|
Provision for income taxes and state fees |
|
| 14 |
|
| 15 |
|
|
|
|
|
|
|
|
|
| 1,169 |
|
| 988 |
|
|
|
|
|
|
|
Equity in undistributed net loss of subsidiaries |
|
| (577) |
|
| (571) |
|
|
|
|
|
|
|
Net income |
|
| 592 |
|
| 417 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statements of Cash Flows |
| Years Ended December 31 | ||||
|
| 2013 |
| 2012 | ||
Cash Flows from Operating Activities |
|
|
|
|
|
|
Net income |
| $ | 592 |
| $ | 417 |
Adjustments to reconcile net income to net cash provided (used) by operating activities: |
|
|
|
|
|
|
Equity in undistributed net loss of subsidiaries |
|
| 577 |
|
| 571 |
Depreciation |
|
| 100 |
|
| 126 |
Provision (credit) for loan losses |
|
| 9 |
|
| (9) |
Provision for foreclosed asset losses |
|
| 13 |
|
| 136 |
Amortization of deferred loan fees |
|
| (300) |
|
| (131) |
Amortization of debt issuance costs |
|
| 160 |
|
| 167 |
Accretion of allowance for loan losses on restructured loans |
|
| (82) |
|
| (66) |
F-41
Accretion of loan discount |
|
| (14) |
|
| (6) |
Gain on sale of loans |
|
| (54) |
|
| -- |
Changes in: |
|
|
|
|
|
|
Accrued interest receivable |
|
| 65 |
|
| 53 |
Other assets |
|
| (630) |
|
| (935) |
Other liabilities and accrued interest payable |
|
| 209 |
|
| 217 |
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
| 645 |
|
| 540 |
|
|
|
|
|
|
|
Cash Flows from Investing Activities |
|
|
|
|
|
|
Loan purchases |
|
| (899) |
|
| (12,397) |
Loan originations |
|
| (32,141) |
|
| (9,795) |
Loan sales |
|
| 14,171 |
|
| 2,425 |
Loan principal collections, net |
|
| 22,984 |
|
| 31,230 |
Foreclosed asset sales |
|
| 1,828 |
|
| -- |
Purchase of property and equipment |
|
| (5) |
|
| (33) |
|
|
|
|
|
|
|
Net cash provided by investing activities |
|
| 5,938 |
|
| 11,430 |
|
|
|
|
|
|
|
Cash Flows from Financing Activities |
|
|
|
|
|
|
Net change in borrowings from financial institutions |
|
| (3,929) |
|
| (6,447) |
Net changes in notes payable |
|
| (4,897) |
|
| (6,467) |
Debt issuance costs |
|
| (96) |
|
| (158) |
Dividends paid on preferred units |
|
| (197) |
|
| (346) |
|
|
|
|
|
|
|
Cash used by financing activities |
|
| (9,119) |
|
| (13,418) |
|
|
|
|
|
|
|
Net increase (decrease) in cash |
|
| (2,536) |
|
| (1,448) |
|
|
|
|
|
|
|
Cash at beginning of period |
|
| 9,587 |
|
| 11,035 |
|
|
|
|
|
|
|
Cash at end of period |
| $ | 7,051 |
| $ | 9,587 |
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information |
|
|
|
|
|
|
Interest paid |
| $ | 4,864 |
| $ | 5,143 |
Income taxes paid |
| $ | 14 |
| $ | 15 |
Non-cash Activities |
|
|
|
|
|
|
Transfer of loans to foreclosed assets |
| $ | 4,384 |
| $ | 1,676 |
Loans made to facilitate the sale of foreclosed assets |
| $ | 1,000 |
| $ | -- |
F-42
Note 16.Subsequent Event
On January 31, 2014, the Company entered into a Deed in Lieu of Foreclosure Agreement with one of its borrowers and received the real estate property securing one impaired loans. The loan had a carrying value of $1.2 million, net of discounts and specific reserves totaling $13 thousand, at December 31, 2013 and January 31, 2014, as no additional reserves were required in the valuation allowance through the date of acquisition of the real property. The reserve on this loan was charged off at acquisition and the property was recorded in foreclosed assets at $1.2 million.
F-43
None.
Evaluation of Disclosure Controls and Procedures
Our Principal Executive Officer and Principal Financial Officer have evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the fiscal period ending December 31, 2013 covered by this Annual Report on Form 10-K. Based upon such evaluation, our Principal Executive Officer and Principal Financial Officer have concluded that our disclosure controls and procedures were effective as of and for the year ended December 31, 2013. This conclusion by our Principal Executive Officer and Principal Financial Officer does not relate to reporting periods after December 31, 2013.
Changes in Internal Control Over Financial Reporting
There were no changes in internal control over financial reporting during the year ended December 31, 2013.
Management’s Report on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over our financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act). Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America.
Our internal controls over financial reporting include those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America, and that our receipts and expenditures are being made only in accordance with authorizations of management and the Board; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition our assets that could have a material effect on our financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
91
Management assessed the effectiveness of our internal control over financial reporting as of and for the year ended December 31, 2013. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission Internal Control‑Integrated Framework. Based on this assessment, management believes that, as of and for the year ended December 31, 2013, our internal control over financial reporting is effective.
This annual report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our registered public accounting firm pursuant to temporary rules of the SEC that permit us to provide only management’s report in this Annual Report on Form 10-K.
None.
PART III
Set forth below are the members of our Board of Managers and executive officers:
|
|
|
Name | Age | Managers/Executive Officers |
Mark G. Holbrook | 63 | Chairman of the Board, Manager |
Van C. Elliott | 76 | Secretary, Manager |
James H. Overholt | 66 | Interim Chief Executive Officer and President |
Susan B. Reilly | 57 | Senior Vice President and Chief Financial Officer |
Robert Schepman | 74 | Vice President, Lender Relations |
Harold D. Woodall | 67 | Senior Vice President and Chief Credit Officer |
Joseph W. Turner, Jr. | 46 | Chief Executive Officer and President, Ministry Partners Securities |
Arthur G. Black | 75 | Manager |
Juli Anne S. Callis | 61 | Manager |
Jerrod Foresman | 46 | Manager |
Jeffrey T. Lauridsen | 64 | Manager |
R. Michael Lee | 55 | Manager |
Randolph P. Shepard | 57 | Manager |
The following is a summary of the business experience of our executive officers and managers. With our conversion from a corporation to a limited liability company on December 31, 2008, we are governed by a Board of Managers that supervises our affairs (hereinafter referred to as the “Board”).
92
MARK G. HOLBROOK has served as Chairman of our Board since inception. Until February 17, 2011, Mr. Holbrook served as our Chief Executive Officer. Mr. Holbrook also serves as President and Chief Executive Officer of ECCU. He began his career with ECCU in 1975 and has served as its President since 1984. ECCU currently has assets under management of over $2.3 billion and more than 10,000 members in 50 states and 100 foreign countries. Mr. Holbrook has served as Chairman of the Board of Christian Management Association. He received his Bachelor of Arts degree from Biola University in 1973 and has completed post-graduate studies at Chapman College. Mr. Holbrook brings to our Board extensive experience in the credit union industry, a deep understanding of our business and our investments, and relationships with the credit unions which comprise our equity members.
VAN C. ELLIOTT has served as a member of our Board since 1991 as Secretary of Company. Mr Elliott served as our Interim Manager-in-Charge from September 19, 2013 through November 15, 2013 when Mr. Overholt assumed his duties as Interim CEO and President. Mr. Elliott also has served as a director for ECCU from April 1991 until the present (except for the periods from March 1997 to March 1998 and March 2004 to March 2005). Mr. Elliott served as associate director of the Conservative Baptist Association of Southern California from 1980 to 1994, where he was responsible for the general administrative oversight of the association’s activities. Since that time, he has been self-employed as a consultant providing financial and fund raising consultation services to church and church-related organizations. He received his Bachelor’s and Master’s degrees in mathematics and speech from Purdue University and spent seven years in the computer industry. Mr. Elliott holds a Master of Divinity from Denver Seminary and has spent fourteen years in local church ministries serving in the area of Christian education and administration. He has completed post-graduate instruction at the College for Financial Planning. Mr. Elliott is a member of the Financial Planning Association and holds the professional designation of Certified Financial Planner.® Mr. Elliott brings to our Board his extensive experience as a credit union board member, and intimate knowledge of church and ministry financial operations. He serves on our Executive Committee and on our Audit Committee.
JAMES H. OVERHOLT was appointed as our interim Chief Executive Officer in November 2013. Mr. Overholt has over 30 years of experience serving as a senior executive officer in the insurance, investment banking, brokerage and financial services industry. Mr. Overholt began his career at Harris Bank, a Chicago based bank that merged with and into the Bank of Montreal. During his 18 year term with Harris Bank, Mr. Overholt supervised and managed the bank’s underwriting, its investment banking division, primary securities dealer and discount brokerage operations. After Harris Bank’s merger with the Bank of Montreal, Mr. Overholt continued to serve in Chief Executive positions at major firms such as Wachovia Securities and Great Western Financial. At Great Western, he was appointed to head their nationally ranked Securities Company, and later named to the additional posts of Chief Executive of their Insurance Company and Chief Executive of their Capital Management Company. From 2006 through 2010, Mr. Overholt also served as Chief Operating Officer, then later President and Chief Executive Officer, at Strongtower Financial, a Fresno, California based broker dealer and investment advisory subsidiary of the California Baptist Foundation that specialized in providing direct lending and other financing solutions for churches and ministries.
93
SUSAN B. REILLY was appointed as our Vice President of Finance and Principal Accounting Officer in December 2007 and was appointed to serve as our Senior Vice President and Chief Financial Officer on August 18, 2011. Prior to joining us, Ms. Reilly served as Controller for Pacific Rim Capital, a private equity investment firm. Before joining that firm in 2007, she was Senior Vice President and Treasurer for East West Bank. Prior to joining East West Bank in 2004, Ms. Reilly served as Treasurer for Catalina Restaurant Group. Before joining that company in 2003, she worked for Parson Consulting Group. Ms. Reilly holds a Bachelor of Science Degree from the University of California Riverside. She completed post-graduate work at California State Fullerton and attended the University of Southern California - Marshall School of Business - East West Bank Leadership Program. In addition to holding a California life and disability insurance license, Ms. Reilly holds her Series 7 and Series 27 securities licenses.
ROBERT SCHEPMAN has served as our Vice President for Lender Relations since August of 2010. Mr. Schepman has originated church mortgages for twenty years, beginning with Christian Mutual Life in 1987 and served as a Ministry Development Officer for ECCU for 17 years until his retirement in 2009. From 1981 to 1987, Mr. Schepman originated commercial loans and commercial real estate syndications as a partner in Commercial Capital Resources. Prior to that time, Mr. Schepman owned and operated a commercial metal fabrications business for nine years and enjoyed earlier successes as a securities broker and in various other product sales capacities. Mr. Schepman earned his Bachelor of Business Administration degree from Woodbury University, Los Angeles, in 1960. He has held the California Real Estate Broker license since 1990.
HAROLD D. WOODALL has served as our Vice President for Lending since May 2007 and was appointed Senior Vice President and Chief Credit Officer on August 18, 2011. His responsibilities include the general management of development, underwriting and processing of loan origination and management of our mortgage investment portfolio. Mr. Woodall previously served as Vice President for Lending Services at the California Baptist Foundation from 1996 to 2006, where he was responsible for general management of a $130 million loan fund, including origination of over $500 million in church and ministry loans during that period. His previous experience also includes commercial lending, medical equipment manufacturing, real estate sales, oil and gas production and agribusiness consulting. Mr. Woodall is a graduate of Oklahoma State University in Stillwater Oklahoma with a B.S. in Agricultural Economics.
JOSEPH W. TURNER, JR. was appointed to serve as our Director of Investor Relations in August 2011. In February 2013, Mr. Turner was appointed to serve as Senior Vice President, Private Client Group for MP Securities. In October 2013, Mr. Turner was appointed Interim President and CEO of MP Securities and in February 2014 the Board officially appointed him was appointed to serve as President and Chief Executive Officer of MP Securities. Prior to joining the Company, Mr. Turner served in various capacities during the period February 2007 through June 2011 as a Regional Vice President, Chief Operating Officer and Chief Executive Officer and President of Strongtower Financial, Inc., a Fresno, California broker-dealer firm that specialized in providing financing assistance to churches and ministries. From 2005 through 2007, Mr. Turner served as Chief Operating Officer of ARB Advertising, Inc., a Fresno,
94
California marketing firm. During the years 1997 through 2005, Mr. Turner served as a Managing Director for Principal Financial Group, in Fresno, California where he recruited, trained, supervised and led a large financial advisory group that specialized in working with business owners to serve their insurance, retirement planning, investments, business and estate planning needs. Mr. Turner holds a Series 6, 7, 24, 51 and 63 securities licenses as well as a California life and disability insurance license. Mr. Turner has been actively involved in Kingdom Advisors, a nationwide group of Christian financial advisors and holds a B.S. degree in Business Administration Finance/Economics from California State University in Fresno, California.
ARTHUR G. BLACK has served as a member of our Board since 1997. He was a member of the Board of Directors for Haven Ministries for ten years beginning in 2002 and Chairman of that board from 2004 until 2012. Mr. Black previously served as Director of Ministry Support for Ambassador Advertising Agency from 1998 to 2007. Prior to joining that firm, he had served as a ministry development officer at ECCU. Mr. Black served as Executive Vice President of Truth For Life from 1994 to 1996. Truth For Life is a nationally-syndicated radio Bible teaching ministry. He held similar positions with the Biola Hour from 1981 to 1991 and Solid Rock Radio from 1991 to 1993 and he served as director of U.S. broadcasting for Insight For Living from 1993 to 1994. Mr. Black has been in Christian ministry management since 1974. Prior to that, he served in various corporate sales and marketing management positions and was for six years owner/President of two consumer product/service companies. He was a General Partner for Rancho Sierra Acres, Christian Investors, P/L Properties and Ocean View Investors. Mr. Black has completed the equivalent to two years of business courses towards a degree in business at UCLA. Mr. Black’s long history of working for and with evangelical ministries provides us with keen insights into the needs and operations of the ministries who are our borrowers and investors. Mr. Black serves as Chairman of our Investment Committee.
JULI ANNE S. CALLIS has served as a member of our Board since 2007. She is currently the Chairman of the Board of the George Washington Medical School Institute of Health. She was formerly the President and Chief Executive Officer of the National Institute of Health Federal Credit Union. Prior to that engagement, she was Executive Vice President and Chief Operating Officer of KeyPoint Credit Union and the President of its subsidiary, KeyPoint Financial Services. Before joining KeyPoint Credit Union, Ms. Callis served as Vice President for Business Development, Marketing and Legislative Affairs from 1988-1995 at Langley Federal Credit Union. Prior to joining the credit union industry, Ms. Callis served as the Director of Sales for the US Navy Mid-Atlantic Region, which included the direct responsibility for public relations and sales for all Navy Exchange and Commissary Operations in the Mid-Atlantic States, Europe, Iceland and Bermuda. Ms. Callis received her Bachelor of Science degree in Community Health and Education from East Carolina University and received a Master’s degree in Organizational Development from the University of San Francisco, where she is pursuing a Ph.D. She currently serves on the Board of Directors for the George Washington Institute of Health and Women in BIO. She also previously served as Chair for the Executive Committee of the Open Solutions, Inc. Client Association and currently serves as a Trustee of the International Mission board of the Southern Baptist Convention. Ms. Callis provides our Board with the benefit of her extensive experience in financial institution and credit union operations and technology and especially, her asset-liability management, loan underwriting and credit
95
management expertise. Ms. Callis serves as our Chair of the Asset-Liability Management Committee and is also a member of our Executive Committee.
JERROD FORESMAN has served as a member of our Board since May 2012. He was appointed as Corporate Secretary of MP Securities in February 2014. He is the President, Chief Compliance Officer and Financial Operations Principal of Bankers & Investors Company Inc., a Registered Broker/Dealer and Investment Advisor headquartered in Kansas City, KS. B&I is a non-bank affiliate of Valley View Bancshares, an entity that includes seven local community banks and 48 branches. Mr. Foresman has been serving Missouri and Kansas as a financial advisor since 1989 and has managed and owned financial advisory/marketing firms specializing in working with credit unions and community banks over the last seventeen years. Mr. Foresman attended Missouri State University and is currently studying for additional financial designations from the American College in Bryn Mawr, PA. He has been a member of the National Association of Insurance and Financial Advisors since 1997, a member of Society of Financial Services Professionals since 2000, and is a member of the Kansas City, Kansas Chamber of Commerce. Mr. Foresman holds the FINRA Series 7, 24, 27, 63, 65 and 66 securities licenses as well as life, health, property & casualty insurance licenses.
JEFFREY T. LAURIDSEN has served as a member of our Board since October 2007. He is an attorney in private practice with the Law Offices of Anh Quoc Duy Nguyen in Garden Grove, California. Before establishing his current practice, Mr. Lauridsen served with several other law firms in the Orange County area as a partner and senior associate. Mr. Lauridsen’s 17 years of law practice have focused on corporate law and encompassed both trial and appellate work in diverse areas of law, including business litigation, construction litigation, general liability, premises liability, products liability, medical malpractice, ERISA, insurance coverage, automobile liability, insurance bad faith, employment and labor law, sexual harassment, sexual molestation and others. Prior to entering into the practice of law, Mr. Lauridsen worked as a claim representative in the insurance industry for 19 years. Mr. Lauridsen received his Associate of Arts degree in Political Science from Fullerton College. He received his Bachelor of Science in Law and Juris Doctorate degrees from California Southern Law School. He has served as Elder at Grace Church in Orange, California for 18 years. Mr. Lauridsen brings to our Board the perspective of an experienced attorney, as well as intimate knowledge of ministry governance. Mr. Lauridsen serves on our Investment Committee and Audit Committee.
R. MICHAEL LEE has served as a member of our Board since January 2009. Mr. Lee currently serves as Chief Executive Officer and President for Kane County Teacher’s Credit Union. Previously, Mr. Lee served as President, Member Relations for Alloya Corporate Federal Credit Union, President of the Midwest Region for Members United Federal Credit Union, Chief Membership Officer for Mid-States Corporate Federal Credit Union, Senior Vice President US Central Federal Credit Union, SVP Corporate Network eCom, SVP Corporate One Federal Credit Union and Vice President of Sales for a national insurance agency. In the insurance industry, he spent 15 years in different positions and he managed a national sales force that served the needs of business owners. Mr. Lee currently serves on the boards of Illinois Credit Union Foundation and Illinois Credit Union Executive Society, and has served in the past on the boards of Credit Union Business Group, Credit Union Foundation of the Dakotas, and DuPage Credit Union. He attended Southern Illinois University, CUNA’s Financial Management School
96
and completed numerous industries training sessions throughout his career. Mr. Lee adds special expertise to our Board with his years of experience as an executive of a number of large financial institutions and his deep knowledge of the credit union and financial industries. Mr. Lee currently serves as Vice Chairman of the Board, member of our Executive Committee, Governance Committee, Asset-Liability Management Committee and serves as the Chairman of the Board for Ministry Partners Securities, LLC.
RANDOLPH (RANDY) P. SHEPARD has served as a member of our Board since January 2009. Mr. Shepard is currently the Senior Vice President/Investments and Subsidiary Companies of Western Federal Credit Union. Prior to assuming this position in 2003, Mr. Shepard was the Vice President and Chief Financial Officer of Western Federal Credit Union. He attended the University of Redlands and has a certificate of Executive Management from Claremont Graduate School. Mr. Shepard brings to our Board his long experience as both a Chief Financial Officer and a Chief Investment Officer of a large financial institution, providing deep knowledge of accounting, finance and credit management. Mr. Shepard serves as the Chairman of our Audit Committee and qualifies as a financial expert as defined in Item 401(e) of Regulation S-K.
Our Board of Managers
Under our Operating Agreement, our Board and officers are charged with governing and conducting our business and affairs. The Operating Agreement charges our Board with essentially the same duties, obligations and responsibilities as a board of directors of a corporation. The Board establishes our policies and reviews them periodically and has authorized designated officers and our President the authority to carry out those policies.
The Board has elected Mr. Holbrook as our Chairman every year since our inception in 1991. When initially formed, we were a wholly-owned subsidiary of ECCU. At that time, the Board consisted of ECCU executives and a number of independent directors. As of the date of this Report, our Board consists of seven managers, a majority of which are independent managers.
The Board has established the following committees to help oversee various aspects of our business:
· | Our Executive Committee is charged with responsibility for determining the Chief Executive Officer and President’s compensation and undertaking other matters of an executive and strategic oversight nature; |
· | Our Audit Committee is chartered to oversee the annual audit of our financial reports, oversee the establishment and maintenance of internal controls and oversee compliance with our Ethics Policy; |
· | Our Investment Committee is authorized to oversee compliance with our Loan Policy and to review the performance and management of our loan portfolio; |
· | Our Credit Review Committee reviews and implements our Loan Policy and reviews most of the loan applications we receive; |
97
· | Our Asset Liability Committee is chartered to oversee the maintenance of our asset liability strategy and process, as well as our asset liability, liquidity and other policies relating to the mitigation of risks to our earnings and capital; and |
· | Our Governance Committee is charged with responsibility for the board governance policies, including our Related Parties Transaction Policy, and with the periodic task of nominating persons for election to the Board. |
The Board is actively involved in and regularly meets with members of our senior management to discuss capital adequacy, use of leverage, asset liability management, strategic planning and liquidity issues we face. Our Asset Liability Committee regularly meets with the objective of performing oversight of interest rate risk, future net interest income and expense, capital and liquidity forecasts and review of trends impacting our balance sheet.
Our Board Chairman
Until February 17, 2011, Mr. Holbrook served both as our Chairman and our Chief Executive Officer. In his role as our Board Chairman and Chief Executive Officer, Mr. Holbrook has provided high level strategic leadership to our Company. He brings to his role a deep knowledge of ministry lending, financial institution management, and the credit union regulatory environment.
On February 17, 2011, at a regularly called meeting of the Board, Mr. Holbrook tendered his resignation from his position as Chief Executive Officer, effective immediately. He continues to serve as our Chairman of the Board.
Code of Ethics
On November 6, 2009, our Board adopted a Code of Ethics for our principal officers and members of the Board.
Audit Committee
In May 2005, our Board established a standing audit committee. For the year ended December 31, 2013, the Audit Committee was comprised of three members, including Randolph P. Shepard, Van Elliott and Jeffrey T. Lauridsen. Mr. Randolph P. Shepard serves as Chairman of the Committee and is an independent manager as defined in our Related Party Transaction Policy.
Our Board has adopted a formal charter for our Audit Committee. Under this charter, the Audit Committee oversees our accounting policies and practices, financial reporting procedures and audits of our financial statements.
98
Audit Committee Financial Expert
The Board has determined that Mr. Shepard is an “audit committee financial expert” as defined in Item 401(e) of Regulation S-K.
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, 2013 and 2012 by our senior executive officers. Mr. Dodson, our former Chief Executive Officer and President, resigned his positions as President and Chief Executive Officer of the Company and its subsidiaries on October 2, 2013. With Mr. Dodson’s departure, Van Elliott was appointed by the Board to serve as Manager-in-Charge until a new Chief Executive Officer was appointed. On November 7, James Overholt was appointed as Interim Chief Executive Officer.
Summary Compensation Table
Annual Compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Name and Principal Position |
| Year Ended |
|
| Salary |
|
| Bonus |
|
| All Other Compensation |
|
Mark Holbrook |
| 2013 |
| $ | -- |
| $ | -- |
| $ | 8,100 | (1) |
Chairman of the Board of Managers |
| 2012 |
|
| -- |
|
| -- |
|
| -- |
|
Billy Dodson |
| 2013 |
|
| 152,907 |
|
| -- |
|
| 232,170 | (5) |
President and Chief Executive Officer |
| 2012 |
|
| 190,049 |
|
| 30,000 |
|
| 42,599 | (3) |
James Overholt |
| 2013 |
|
| -- |
|
| -- |
|
| 28,462 | (6) |
Interim Chief Executive Officer |
| 2012 |
|
| -- |
|
| -- |
|
| -- |
|
Susan Reilly |
| 2013 |
|
| 149,673 |
|
| 41,000 |
|
| 22,742 | (4) |
Senior Vice President and Chief Financial Officer |
| 2012 |
|
| 147,378 |
|
| 17,517 |
|
| 22,641 | (3) |
Harold Woodall |
| 2013 |
|
| 142,295 |
|
| 51,142 |
|
| 28,489 | (4) |
Senior Vice President and Chief Credit Officer |
| 2012 |
|
| 144,757 |
|
| 16,653 |
|
| 28,037 | (3) |
Van Elliott |
| 2013 |
|
| -- |
|
| -- |
|
| 34,725 | (7) |
Secretary and Manager |
| 2012 |
|
| -- |
|
| -- |
|
| -- |
|
Juli Anne Callis |
| 2013 |
|
| -- |
|
| -- |
|
| 6,800 | (2) |
Manager |
| 2012 |
|
| -- |
|
| -- |
|
| -- |
|
Michael Lee |
| 2013 |
|
| -- |
|
| -- |
|
| 6,750 | (2) |
Manager |
| 2012 |
|
| -- |
|
| -- |
|
| -- |
|
Arthur Black |
| 2013 |
|
| -- |
|
| -- |
|
| 6,600 | (2) |
Manager |
| 2012 |
|
| -- |
|
| -- |
|
| -- |
|
Randolph Shepard |
| 2013 |
|
| -- |
|
| -- |
|
| 6,250 | (8) |
Manager |
| 2012 |
|
| -- |
|
| -- |
|
| -- |
|
Jeffrey Lauridsen |
| 2013 |
|
| -- |
|
| -- |
|
| 5,700 | (2) |
Manager |
| 2012 |
|
| -- |
|
| -- |
|
| -- |
|
Jerrod Foresman |
| 2013 |
|
| -- |
|
| -- |
|
| 5,600 | (2) |
Manager |
| 2012 |
|
| -- |
|
| -- |
|
| -- |
|
99
(1) Mr. Holbrook is a full-time employee of ECCU. During his tenure on the Board, Mr. Holbrook has expended, on the average, approximately 2% of his time as an officer or member of our Board. We accrued $8,100 for his service as Chairman of the Board and as a Board member during 2013.
(2) We accrued amounts for each Manager for their service on the Board, attendance at meetings, and chairing Board Committees during 2013.
(3) We contributed an aggregate amount of $42,599 for Mr. Dodson's 401(k) retirement plan, long-term retirement, medical benefits and life and disability insurance for 2012. We also contributed an aggregate amount of $22,641 for Ms. Reilly's 401(k) retirement plan, medical benefits and life and disability insurance for 2012. We contributed an aggregate amount of $28,037 for Mr. Woodall's 401(k) retirement plan, medical benefits and life and disability insurance in 2013.
(4) We contributed an aggregate amount of $22,742 for Ms. Reilly's 401(k) retirement plan, medical benefits and life and disability insurance for 2013. We contributed an aggregate amount of $28,849 for Mr. Woodall's 401(k) retirement plan, medical benefits and life and disability insurance for 2013.
(5) We contributed an aggregate amount of $35,815 for Mr. Dodson’s 401(k) retirement plan, medical benefits and life and disability insurance for 2014. We also accrued $196,355 as part of a severance compensation arrangement granted to Mr. Dodson after he resigned.
(6) We have paid or accrued a total of $28,462 for Mr. Overholt pursuant to an Interim CEO Agreement for services rendered in 2013.
(7) In addition to the amounts accrued for Mr. Elliott’s service on the Board, we also paid him an additional $27,875 for his service as our Manager-in-Charge during the period between Mr. Dodson’s resignation and Mr. Overholt’s appointment as interim Chief Executive Officer.
(8) This amount represents the accrued compensation for Mr. Shepard, however, in March 2014 he elected not to receive this compensation. The accrual was adjusted in March 2014 to reflect this election.
No options, warrants or other rights to purchase our equity securities have been issued to our officers.
At its February 2014 Board meeting, the Board approved the payment of compensation grants to Managers of the Board effective as of January 1, 2013. No compensation was paid to Board Managers in 2013, but were accrued as other liabilities in our financial statements to be paid out in 2014. Under the grants approved by the Board, each Manager will receive a cash grant of $4,000 for serving on the Board, and will receive additional amounts for attendance at each Board meeting and for serving as a Chairperson of one of our Board Committees. Each Manager is also entitled to be reimbursed for expenses incurred in performing duties on our behalf. For 2013, we accrued $52 thousand in compensation awards for our Managers.
100
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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS |
The following table sets forth information available to us, as of December 31, 2013, with respect to our Class A Units owned by each of our executive officers and our managers, and by our managers and executive officers as a group, and by each person who is known to us to be the beneficial owner of more than 5.0% of our Class A Units.
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| (1) |
Name |
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| Beneficial Ownership | Percentage Owned(1) |
Mark G. Holbrook 915 W. Imperial Hwy., Suite 120 Brea, CA 92821 |
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-- |
--% |
Van C. Elliott 915 W. Imperial Hwy., Suite 120 Brea, CA 92821 |
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-- |
--% |
Arthur G. Black 915 W. Imperial Hwy., Suite 120 Brea, CA 92821 |
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-- |
--% |
Juli Anne S. Callis 915 W. Imperial Hwy., Suite 120 Brea, CA 92821 |
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-- |
--% |
Jeffrey T. Lauridsen 915 W. Imperial Hwy., Suite 120 Brea, CA 92821 |
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-- |
--% |
Randolph P. Shepard 915 W. Imperial Hwy., Suite 120 Brea, CA 92821 |
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-- |
--% |
R. Michael Lee 915 W. Imperial Hwy., Suite 120 Brea, CA 92821 |
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-- |
--% |
Jerrod L. Foresman 915 W. Imperial Hwy., Suite 120 Brea, CA 92821 |
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-- |
--% |
All officers and members of the Board as a group |
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--
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--%
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Other 5% or greater beneficial owners (seven): |
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Name | Beneficial Ownership | Percentage Owned(1) |
Evangelical Christian Credit Union | 62,000 | 42.31% |
Financial Partners Credit Union | 12,000 | 8.19% |
Navy Federal Credit Union | 11,905 | 8.13% |
Western Federal Credit Union | 11,905 | 8.13% |
Wescom Credit Union | 11,905 | 8.13% |
Credit Union of Southern California | 11,900 | 8.12% |
Keypoint Credit Union | 8,000 | 5.46% |
(1)Based on 146,522 Class A Units outstanding.
ECCU continues to service most of our mortgage loans that it sells to us under a servicing agreement. Per this agreement, a servicing fee of 50 to 65 basis points is deducted from the interest payments we receive on the wholly-owned loans that ECCU services for us. In lieu of a servicing fee, the loan participations we purchase from ECCU generally have pass-through rates which are up to 100 basis points lower than the loan contractual rate. We negotiate the pass-through interest rates with ECCU on a loan by loan basis. At December 31, 2013, our investment in wholly-owned loans serviced by ECCU totaled $8.2 million, while our investment in loan participations serviced by ECCU totaled $24.9 million. From time to time, we pay fees for additional services ECCU provides for servicing our loans. These fees amounted to less than $1 thousand during the years ended December 31, 2013 and 2012, respectively.
From time to time, we purchase participation interests in mortgage loans from ECCU, our largest equity owner. During the year ended December 31, 2013, we purchased $1.1 million of loans from ECCU. We purchased $3.3 million in loans from ECCU during the year ended December 31, 2012. We recognized interest income on loans purchased from ECCU of $2.4 million and $4.5 during the years ended December 31, 2013 and 2012, respectively. Currently, ECCU services 26 of the 138 mortgage loans we own pursuant to the terms of a servicing agreement.
From time to time, ECCU has repurchased mortgage loans from us as part of our liquidity management practices. Although ECCU has accommodated us in responding to such repurchase requests, ECCU is under no contractual obligation to do so. In addition, federal credit union regulations require that a borrower must be a member of a participating credit union in order for a loan participation to be an eligible investment for a federal chartered credit union. ECCU has from time to time repurchased from us fractional participations in our loan investments which
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ECCU already services, usually around 1% of the loan balance, to facilitate compliance with National Credit Union Administration rules when we were selling participations in those loans to federal credit unions. Each sale or purchase of a mortgage loan investment or participation interest with ECCU was consummated under our Related Party Transaction Policy that has been adopted by our Board. We sold $4.3 million in loans to ECCU during the year ended December 31, 2013.
We maintain most of our cash balances with ECCU, our largest equity holder. Total funds held with ECCU at December 31, 2013 and 2012 were $7.0 million, and $9.5 million, respectively. We earned interest on these cash balances for the years ended December 31, 2013 and 2012 in the amount of $83.2 thousand, and $136.6 thousand, respectively.
Pursuant to an administrative services agreement, we purchase certain professional services from ECCU and we rent our administrative offices from ECCU pursuant to an office lease entered into on November 4, 2008. We paid ECCU $125.7 thousand and $118.2 thousand for the years ended December 31, 2013 and 2012, respectively, for these services and facilities. We negotiated these charges and terms of the office lease with ECCU based upon the fair market value of such services and rental rates for comparable office space in Brea, California.
Other Related Party Transactions.
From time to time, our Board and members of our executive management team have purchased investor notes from us. One of our Board members, Mr. Art Black, is the beneficial owner of a living trust that holds $224,276 of our Class A Notes. Another of our Board members, Mr. Van Elliott, holds $86,595 of our Class A Notes.
On August 15, 2013, we sold a $5.0 million in loan participation interest to Western Federal Credit Union, one of our equity owners. We charge 50 basis points to service the loan for Western Federal Credit Union.
We have entered into a selling agreement with our wholly-owned subsidiary, MP Securities, pursuant to which MP Securities will sell our Subordinated Capital Notes and our International Notes. The sales commissions and cost reimbursements paid to any broker-dealer firms that are engaged to assist in the distribution of such certificates will not exceed 3% of the amount of certificates sold. MP Securities earned $26 thousand on sales of Series 1 Subordinated Capital Notes and $305 on sales of our 2013 International Notes. We have also entered into a selling agreement with MP Securities pursuant to which MP Securities will act as selling agent in distributing our Class A Notes. Under the terms of the Class A Notes Offering, MP Securities will receive a selling concession for acting as a participating broker ranging from 1.25% to 5 % on the sale of a fixed series note, 5% on the sale of a flex series note and an amount equal to .25% per annum on the average note balance for a variable series note. Effective as of January 31, 2014, MP Securities became the managing broker of the Class A Note offering and will receive an additional 0.5% on all new note sales as well as 0.25% on note sales made to a repeat purchaser. No concessions are paid on any accrued interest that is added to the principal of a Class A Note pursuant to an interest deferral election made by the investor. For the year ended December 31, 2013, MP Securities earned $124 thousand in sales concessions on the sale of our
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Class A Notes. In addition, we have signed an Administrative Services Agreement with MP Securites which stipulates that we will provide certain services to the MP Securities. These services include the lease of office space, use of equipment, including computers and phones, and payroll and personnel services. The total expenses charged to MP Securities for these services were $491 thousand and $368 thousand for the years ended December 31, 2013 and 2012, respectively.
To assist in evaluating any related transactions we may enter into with a related party, our Board has adopted a Related Party Transaction Policy. Under this policy, a majority of the members of our Board and majority of our independent Board members must approve a material transaction that we enter into with a related party. As a result, we anticipate that all future transactions that we undertake with an affiliate or related party will be on terms believed by our management to be no less favorable than are available from unaffiliated third parties and will be approved by a majority of our independent Board members.
Item 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Before our principal accountant is engaged by us to render audit or non-audit services, where required by the rules and regulations promulgated by the Securities and Exchange Commission, such engagement is approved by our Audit Committee.
The aggregate fees billed by our accounting firm, Hutchinson and Bloodgood LLP, for the years ended December 31 were as follows:
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| 2013 |
| 2012 | ||
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Audit and audit-related fees |
| $ | 109,500 |
| $ | 128,400 |
Tax Fees |
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| 12,500 |
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| 12,000 |
All other fees |
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| 3,975 |
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| 13,610 |
Total |
| $ | 125,975 |
| $ | 154,010 |
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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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 | Loan Purchase Agreement, dated December 28, 2011, by and among Ministry Partners Investment Company, LLC, Ministry Partners Funding, LLC and Evangelical Christian Credit Union (5) (**) |
10.6 | 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 (6) |
10.7 | Office Lease, dated November 4, 2008, by and between Ministry Partners Investment Corporation and Evangelical Christian Credit Union (6) |
10.8 | Equipment Lease, dated as of January 1, 2009, by and between Ministry Partners Investment Company, LLC and Evangelical Christian Credit Union (6) |
10.9 | Professional Services Agreement, dated as of January 1, 2009, by and between Ministry Partners Investment Company, LLC and Evangelical Christian Credit Union (6) |
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10.10 | Form of Individual Manager Indemnification Agreement (7) |
10.27 | Confidential Severance and Release Agreement by and between Ministry Partners Investment Company LLC and Billy M. Dodson, effective November 8, 2013 (8) |
10.28 | Interim CEO Employment Agreement by and between Ministry Partners Investment Company LLC and James. H. Overholt, effective November 12, 2013 (9) |
10.29 | Amendment No. 1 to Managing Placement Agent Agreement dated January 30, 2014, by and between Ministry Partners Investment Company, LLC and Ministry Partners Securities, LLC (10) |
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. |
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(5) | Incorporated by reference to the Report on Form 10-K/A filed by the Company on April 3, 2012. |
(6) | Incorporated by reference to the Report on Form 10-K filed by the Company on April 14, 2009. |
(7) | Incorporated by reference to the Registration Statement on Form S-1 filed by the Company on June 24, 2011. |
(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 the Post-Effective Amendment No. 2 to Form S-1 filed by the Company on January 30, 2014 |
* | Filed herewith. |
** | Confidential treatment requested for certain portions of this exhibit, which portions are omitted and filed separately with the Securities and Exchange Commission. |
*** | Furnished, not filed, herewith. |
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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 28, 2014By: /s/ James H. Overholt
James H. Overholt
Interim Chief Executive Officer
(Principal Executive Officer)
Dated: March 28, 2014By: /s/ Susan B. Reilly
Susan B. Reilly,
Senior Vice President and Chief Financial Officer
(Principal Accounting Officer)
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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/ James H. Overholt
Interim Chief Executive Officer (Principal Executive Officer)
Date: March 28, 2014
/s/ Susan B. Reilly
Senior Vice President and Chief Financial Officer
(Principal Accounting Officer)
Date: March 28, 2014
/s/ Mark G. Holbrook
Chairman, Board of Managers,
Date: March 28, 2014
/s/ Van C. Elliott
Secretary, Manager
Date: March 28, 2014
/s/ Arthur G. Black
Manager
Date: March 28, 2014
/s/ Juli Anne S. Callis
Manager
Date: March 28, 2014
/s/ Jeffrey T. Lauridsen
Manager
Date: March 28, 2014
/s/ R. Michael Lee
Manager
Date: March 28, 2014
/s/ Randolph P. Shepard
Manager
Date: March 28, 2014
/s/ Jerrod L.Foresman
Manager
Date: March 28, 2014
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